Our future ER budget (and Hi!)

[Fermion]

Hello everyone. I guess this will be my intro post.

I am married and we have plans to retire in 2014 (if things look ok)

We are not where I would really like to be right now, but we are saving every penny and hopefully will get there. We have $420K in 401Ks, $55K in traditional IRA, $30K in Roths for a total of $505K in tax deferred (50% stock, 50% bond). In taxable we have $200K in cash (bank saving account), $200K in VTI, $100K in VXUS, and $30K in Ibonds, for a total of $530K. We have a house that we will sell for a $150K profit (hopefully). We have two new cars and no debt other than the house.

Income is about $200K a year, of which we save about $105K (including the 401K contribution). Taxes are reasonably heavy because we have no kids and a small mortgage, few deductions.

The 200K in cash we have is from a company stock sale and has already been taxed. It needs to go into some investment soon.

I guesstimate that we will look like this in 2 years after selling the house(retiring fall 2014):

tax deferred total: $560K
taxable total: $800K

Ok, here is where it gets tricky. We will only be 45 years old when we want to ER. That is a long ways away from SS. We do live fairly cheaply, but want to move around a bit, enjoying an area for 3 months to a year then try something different. Initially we thought RV, but now I am thinking we buy a Fuso box van (which can hold our enduro motorcycles) and use it to move from point to point, possibly with some extended camping trips in the southwest (I love Nevada and Utah). We want to rent a tiny place in the Florida keys for 3 monthsduring the winter, spend a summer in Maine, spend summer in Alaska, etc.

$1.36M portfolio. Sounds like a lot to some, not much at all to others. I am not sure it can last us until 85 or 90 unless we go with a really really low SWR, like 1.5% or maybe 2%.

Let us be optimistic and take 2% SWR and further assume that it allows the portfolio to keep up with inflation. That would give us a yearly income of $27,200 (ouch). Because a lot of our money has already been taxed (the 200K in cash we have now and the 150K from the house), we will pay no federal tax. I will choose a home base state that has no income tax or tax on capital gains. So we can use the full $27,200 figure for our budget.

$27,200 annual income
$2266 monthly income

Monthly expenses:

$800 housing + utilities
$400 healthcare (the great big unknown, may keep us from retiring)
$400 food
$100 vehicle insurance, fees
$100 vehicle maint.
$300 gas
$166 everything else

I think we will have to do some supplemental work (software contract work) during some years because this is very tight. If we camp out in Nevada for a summer, housing might be cheaper, but it will be more expensive in places like the Florida keys even in a tiny 1bd.

I do wonder if the $400 for healthcare is high or low. $400 is 17.6% of our income, which is much higher than the Obamacare calculators say it will be. I actually worry that we will be forced onto medicaid and few doctors will take us. As mentioned in my other thread, I will have no good clue about all of this until 2014, and I need to start selling our house in 2013.

Thanks for reading. I am open to any suggestions. Great forum!

 

[ShortInSeattle]

Hi there!

It sounds like you're starting to think through the numbers. Going from 200k in income to 27k sounds like a very steep dive! Have you thought about doing a trial run on that budget for a year or so before giving up your cushy income? From my perspective, camping to save money and taking side gigs doesn't sound like a fun retirement. I might stick around another 3-5 years to build up the portfolio further. You could earn a million in five years, and have a much better financial situation.

But that's just me. . If you're comfortable with that income and level of risk, it sounds like a reasonable plan.

SIS

 

[photoguy]

Personally, I would consider 2% WR to be far too conservative. If you put your money into TIPS, you can guaranteed get to 50 years of withdrawal. I obsess about all the ways things can go wrong, and I feel like 3% is itself a very conservative WR. You should definitely play with FIRECALC and examine the outcomes. Even at a 4% WR, many portfolios end up with far money than at the initial start.

Also consider that if you are looking at 2% WR on 1.3M dollars, that is only about 28k as you calculated. However, I'm guessing that with an income of 200k you should pull in about 30k from social security when you hit full retirement age. So if you can live on 30k, you only need your portfolio to last 22 years or so (from 45 to 67).

I do wonder if the $400 for healthcare is high or low. $400 is 17.6% of our income, which is much higher than the Obamacare calculators say it will be. I actually worry that we will be forced onto medicaid and few doctors will take us. As mentioned in my other thread, I will have no good clue about all of this until 2014, and I need to start selling our house in 2013.

I'd just wait until the election -- that should remove the remaining uncertainty about PPACA one way or the other.

Why do you need to start selling your house in 2013?

 

[Fermion]

It sounds like you're starting to think through the numbers. Going from 200k in income to 27k sounds like a very steep dive! Have you thought about doing a trial run on that budget for a year or so

Thanks for the reply. Yes, a pretty steep dive, but maybe not as steep as it seems. 200K - 42K federal tax - 10K SS and medicare tax - 105K saving = our current budget of 43K

Now granted this is still a pretty big change, going from a budget of 43K to 27K, and our healthcare now is fully covered by work, but it isn't some order of magnitude change. I think we may do some supplemental odd jobs when we need extra luxury spending money. With 25+ years in software engineering at several major companies, we should be able to get contract work in some locations (maybe even remote work, which would be ideal) I would at least like to work enough to contribute to Roth and get the savers credit each year. That is a 50% investment return!

Also consider that if you are looking at 2% WR on 1.3M dollars, that is only about 28k as you calculated. However, I'm guessing that with an income of 200k you should pull in about 30k from social security when you hit full retirement age. So if you can live on 30k, you only need your portfolio to last 22 years or so (from 45 to 67).

SS looks pretty sweet yes. We are set to get about 3.7K a month based on a recent report sent out. SS is going to change though...big unknown.

I used 2% SWR because bonds are in the toilet and we could get stock stagnation. 3% and we could live pretty much as we do now. Maybe 2014 will be a little clearer on the economy.

I said start selling the house in 2013 because it could take a year in this market. We live in a area where houses just don't move fast.

Thanks again!

 

[eytonxav]

Congrats on what you have managed to put away at your age. Honestly, if it were me, I would keep going for at least another 7-10 years to let your port grow and to reduce your time to SS.

Disclosure - I FIRED at 54, but decided to go back to work due to boredum and am still at it at 63 (to the end of this year before permanent retirement).

 

[Fermion]

Congrats on what you have managed to put away at your age. Honestly, if it were me, I would keep going for at least another 7-10 years to let your port grow and to reduce your time to SS.

Disclosure - I FIRED at 54, but decided to go back to work due to boredum and am still at it at 63 (to the end of this year before permanent retirement).

I wonder if we could get back into the software engineering business after 3 or 4 years of the retirement lifestyle if we got bored? Probably.

Maybe we could take a year off and then start a software consulting business and do various contract work with large chunks of time off. I have no idea how to start this type of business or get the consulting work though.

We just want a change. 25 years doing the same thing gets kind of old, even if you are only 45.

 

[Live And Learn]

SS looks pretty sweet yes. We are set to get about 3.7K a month based on a recent report sent out. SS is going to change though...big unknown.

Be careful - that 3.7 probably assumes that you earn your current annual salary until your full retirement age.

To be sure go to the Social Security retirement estimator and create a scenario that assumes you stop work at 45 years old

https://secure.ssa.gov/acu/ACU_KBA/main.jsp?URL=/apps8z/ARPI/main.jsp?locale=en&LVL=4

 

[Fermion]

Be careful - that 3.7 probably assumes that you earn your current annual salary until your full retirement age.

To be sure go to the Social Security retirement estimator and create a scenario that assumes you stop work at 45 years old

https://secure.ssa.gov/acu/ACU_KBA/main.jsp?URL=/apps8z/ARPI/main.jsp?locale=en&LVL=4

I did the quick calculator (which assumes you take benefits at 62) and put in jan 2015 as the retirement date and got (in todays dollars):

Your estimated monthly benefit amount, beginning at age 62 and 1 month in 2031, is $1,563.00. For your estimate, we assumed no future increases in prices or earnings.

My spouse has similar earnings, so we are around $3100 per month if we start taking at 62. We probably will delay and so it might be closer to that estimate of $3.7K I posted. I bet there is a cap if we kept working at this income for another 20 years...probably we would not get $8K a month or something ridiculous from SS.

Truth, I would be happy with $2500 a month and delighted if they have not reduced benefits and we get anywhere close to $3700. I am not holding my breath...

 

[photoguy]

SS looks pretty sweet yes. We are set to get about 3.7K a month based on a recent report sent out. SS is going to change though...big unknown.

I used to discount SS completely, but the numbers are not that bad. Even without changes, SS is still supposed to be able to payout something like 75% of the benefits 20 years from now.

I used 2% SWR because bonds are in the toilet and we could get stock stagnation. 3% and we could live pretty much as we do now. Maybe 2014 will be a little clearer on the economy.

Do a google search on equity risk premium. I believe most economists are projecting something like 4-5%. What this means is that as long as you don't sell out in the troughs (i.e. have enough cash/bonds so that you don't have tell sell at a bad time), you should be able to do far better than 2%.

This article suggests that the ERP is 6%:

What will stocks earn in the future? - CBS News

Also consider that the S&P 500 has a 2% yield from dividends alone.

 

[ziggy29]

I wonder if we could get back into the software engineering business after 3 or 4 years of the retirement lifestyle if we got bored? Probably.

Hard to say. That field changes quickly as do the skill sets employers are demanding there. If you were (say) a plumber, chances are good you could find work in 3-4 years since plumbing really doesn't change much over time, and decades of experience are still marketable. But someone in the tech field who has "rusted" for 3-4 years? Much less likely. It's possible but I wouldn't count on this as a reliable Plan B.

 

[Fermion]

Hard to say. That field changes quickly as do the skill sets employers are demanding there. If you were (say) a plumber, chances are good you could find work in 3-4 years since plumbing really doesn't change much over time, and decades of experience are still marketable. But someone in the tech field who has "rusted" for 3-4 years? Much less likely. It's possible but I wouldn't count on this as a reliable Plan B.

Software actually doesn't change quite as rapidly as one may think. Sure, new languages and standards come out (C# .Net being somewhat recent examples), but if we keep up on our skills by maybe doing a few smartphone apps or a little side project here and there...

If the last time you worked in the field you were using Pascal...all bets are off

Age bias or being unemployed would probably be more of a risk. I have heard when you get near/over 50 it becomes much harder to land a full time salaried position. Contracting (from what we see in software contractors we work with) doesn't seem to have as much difficulty moving in and out as if you wanted a full time salary position. Who knows though.

 

[ziggy29]

Age bias or being unemployed would probably be more of a risk. I have heard when you get near/over 50 it becomes much harder to land a full time salaried position. Contracting (from what we see in software contractors we work with) doesn't seem to have as much difficulty moving in and out as if you wanted a full time salary position. Who knows though.

It may well be true that age discrimination, as well as the general tendency of hiring managers to dislike long gaps in the resume, are also major factors. There may be pockets of opportunity in various places for "old" technology, as there was for COBOL programmers just before Y2K. But for the most part they are few and far between, and yes, almost all of them would be contract positions. This, of course, means you have to have your own health insurance situation secured because you ain't gonna get it from Megacorp.

 

[Amethyst]

Lots of good thinking here, yet your budget still seems rather tight to me. Are you an optimist, a pessimist, or something between the 2? What if there are sudden sharp cost increases, not matched by your income/returns on investments?

For example, back in the mid 2000's, MD utility co's raised rates 70% all at once. Ack! People suddenly had the choice of living hotter/cooler than they liked, or cutting back somewhere else in their budgets.

Not trying to discourage your ER plan, just suggesting that cost increases can and do occur, which no one could have predicted. Psychologically, you are somewhat protected against this right now, because you know you can ratchet back your huge savings if you must. But what about when the big income goes away for real? Have you built a "cost increase cushion" into your retirement budget?

Amethyst

Hello everyone. I guess this will be my intro post.

I am married and we have plans to retire in 2014 (if things look ok)

We are not where I would really like to be right now, but we are saving every penny and hopefully will get there. We have $420K in 401Ks, $55K in traditional IRA, $30K in Roths for a total of $505K in tax deferred (50% stock, 50% bond). In taxable we have $200K in cash (bank saving account), $200K in VTI, $100K in VXUS, and $30K in Ibonds, for a total of $530K. We have a house that we will sell for a $150K profit (hopefully). We have two new cars and no debt other than the house.

Income is about $200K a year, of which we save about $105K (including the 401K contribution). Taxes are reasonably heavy because we have no kids and a small mortgage, few deductions.

The 200K in cash we have is from a company stock sale and has already been taxed. It needs to go into some investment soon.

I guesstimate that we will look like this in 2 years after selling the house(retiring fall 2014):

tax deferred total: $560K
taxable total: $800K

Ok, here is where it gets tricky. We will only be 45 years old when we want to ER. That is a long ways away from SS. We do live fairly cheaply, but want to move around a bit, enjoying an area for 3 months to a year then try something different. Initially we thought RV, but now I am thinking we buy a Fuso box van (which can hold our enduro motorcycles) and use it to move from point to point, possibly with some extended camping trips in the southwest (I love Nevada and Utah). We want to rent a tiny place in the Florida keys for 3 monthsduring the winter, spend a summer in Maine, spend summer in Alaska, etc.

$1.36M portfolio. Sounds like a lot to some, not much at all to others. I am not sure it can last us until 85 or 90 unless we go with a really really low SWR, like 1.5% or maybe 2%.

Let us be optimistic and take 2% SWR and further assume that it allows the portfolio to keep up with inflation. That would give us a yearly income of $27,200 (ouch). Because a lot of our money has already been taxed (the 200K in cash we have now and the 150K from the house), we will pay no federal tax. I will choose a home base state that has no income tax or tax on capital gains. So we can use the full $27,200 figure for our budget.

$27,200 annual income
$2266 monthly income

Monthly expenses:

$800 housing + utilities
$400 healthcare (the great big unknown, may keep us from retiring)
$400 food
$100 vehicle insurance, fees
$100 vehicle maint.
$300 gas
$166 everything else

I think we will have to do some supplemental work (software contract work) during some years because this is very tight. If we camp out in Nevada for a summer, housing might be cheaper, but it will be more expensive in places like the Florida keys even in a tiny 1bd.

I do wonder if the $400 for healthcare is high or low. $400 is 17.6% of our income, which is much higher than the Obamacare calculators say it will be. I actually worry that we will be forced onto medicaid and few doctors will take us. As mentioned in my other thread, I will have no good clue about all of this until 2014, and I need to start selling our house in 2013.

Thanks for reading. I am open to any suggestions. Great forum!

 

[Fermion]

Agree that the budget is tight, but I think keeping open our option of doing some contract work will help things.

By using a 2% SWR and noting that this should easily allow our portfolio to grow and match inflation, we have somewhat covered your scenario of things like utility rates increasing. At least according to the government inflation data, these things average out and we are left with the CPI number. (I guess in your example the utility rates went up 70% but other things went up much less, leading to an average increase that matched CPI).

We are an optimist. We are going to trust we can stick to our budget and trust that market returns will generally follow historical trends over the longer term. We accept that there are real market risks in life.

We are a pessimist. We are not going to trust that our health and ability to do some demanding outdoor activities will be the same in our middle 50s as it is in our middle 40s. We accept that there are real health risks in life.

Lots of good thinking here, yet your budget still seems rather tight to me. Are you an optimist, a pessimist, or something between the 2? What if there are sudden sharp cost increases, not matched by your income/returns on investments?

For example, back in the mid 2000's, MD utility co's raised rates 70% all at once. Ack! People suddenly had the choice of living hotter/cooler than they liked, or cutting back somewhere else in their budgets.

Not trying to discourage your ER plan, just suggesting that cost increases can and do occur, which no one could have predicted. Psychologically, you are somewhat protected against this right now, because you know you can ratchet back your huge savings if you must. But what about when the big income goes away for real? Have you built a "cost increase cushion" into your retirement budget?

Amethyst

 

[Omalley]

We are in a very similar position (age, assets, and plans). The primary difference is that we we expect our annual spending to be a little over 2X's your amount. Due to our expected spending level, we plan on working until 2017 to complete funding our taxable accounts.

We have also started investigating high-deductable insurance coverage beginning at age 45, and have budgeted $430/month as well. I agree with other comments stating that the health insurance landscape will become more clear in the next couple of years.

It appears that your $800k taxable fund has the ability to provide a little more than the $28k you are budgeting for 15 years until you can access the tax-deferred funds. I think you will be able to absorb some unexpected costs (vehicle replacement, health costs) during that time.

 

[Bryan Barnfellow]

"If the last time you worked in the field you were using Pascal...all bets are off "

Ruh roh.....glad I also have Fortran as a back up!

 

[WestLake]

Howdy Fermion,

Man if I were bringing in $200K, I would be "making hay while the sun shines".

I almost retired at 50 but really, that was too young. Also I would have missed the stock run up after the 2009 bottom. Now at 54 1/2 I know I'm ready soon and have $350K more.

I too am waiting until after the election to make sure of getting insurance with pre-existing conditions (HBP). I think your insurance estimate is way too low. I'm figuring $800 to $1000 per month for a single guy.

 

[Live And Learn]

There are a couple of estimators out there for potential costs under the Affordable Health Care act. I just did it for me and my husband (ages 50 and 55) and premiums will be 18k / year with max out of pocket of 12k / year if all my annual spend comes from taxable sources. That a potential spend of 30k per year. My annual spend including income tax is 84k (see thread http://www.early-retirement.org/forums/f28/why-is-my-budget-so-high-62455.html) and I have 20k budgeted and am now rethinking the timing of my retirement.

Of course, if your AGI is less than 400% of the Federal Poverty Level you'll get a subsidy so you may be ok if your really only spending 27k / year. I did the calculator for 2 people age 45 and assumed that 100% of your 27k is from taxable sources. Came out at annual spend of 1.4k for premiums with max out of pocket of 4k. Your $400 actually looks like a good number !

Here's a linkt to the calculator: http://laborcenter.berkeley.edu/healthpolicy/calculator/index.shtml

 

[Mulligan]

Howdy Fermion,

Man if I were bringing in $200K, I would be "making hay while the sun shines".

I almost retired at 50 but really, that was too young. Also I would have missed the stock run up after the 2009 bottom. Now at 54 1/2 I know I'm ready soon and have $350K more.

I too am waiting until after the election to make sure of getting insurance with pre-existing conditions (HBP). I think your insurance estimate is way too low. I'm figuring $800 to $1000 per month for a single guy.

My humble opinion goes with WestLake. If you were 55, maybe not, but sucking it up for a few years with the low lifestyle you live really could swing the net worth from figuring out how to get by until SS, to having some breathing room in retirement. You are still only 45, Just think what 2 or 3 years might do for you. Any way you could take some time off to recharge the batteries and make one last hard push? Just throwing a thought out there. I know how it is to stay the course when another way to get to the finish line is quicker. Best of luck in your decision!

 

[Fermion]

Some good arguements for staying at the 200K job, but we have set a deadline and plan to stick with it. What I think we may do is take off a year, then spend 5 years doing 3 months of contract work, 9 months off, and living entirely off of this income (so similar to living off of our $27,000 budget). This would allow our nest egg to grow from 1.3 million to probably well over 1.5 million during that 5 years even with no extra contributions (but would probably do the $10,000 to Roths and get the $2000 savers credit).

Then with 1.5 million and only 16 years until age 67 and full SS bennies, we could easily withdraw 3% and have a budget of $45,000. We probably would still have over $1 million by the time we reach 67 with even marginal investment returns.

What do you think would be a decent stock/bond ratio for our situation? If we truely are going to do the part time work for 5 years, maybe I should go 70% stocks 30% bonds right now instead of my current 50% stocks 50% bonds.

 

[Live And Learn]

I hear you about wanting to stick to the plan - I'm trying to do the same thing.

You are currently spending 43k with no HI costs. Add in 5k HI and you get 48k. You will be going down to 27k (a 44% reduction). I'm sure you've run the numbers and know exactly which expenses will be coming down. I suspect alot of the reduction will be in housing. I would never be happy spending only $166 a month for DH and I. I'm generally a tightwad, but an "allowance" of $20/wk each for each of us would be a challenge for sure.

More power to you for being able to do that !

 

[obgyn65]

Welcome, Fermion.

 

[dvalley]

Curious how your plans are coming along. I came here because elsewhere you posted where you started about 10yrs ago which is kinda where I'm at right now with a 10yr FI horizon. Additionally I too enjoy offroading/camping/traveling/off-the-grid sort of living.

 

[Fermion]

Curious how your plans are coming along. I came here because elsewhere you posted where you started about 10yrs ago which is kinda where I'm at right now with a 10yr FI horizon. Additionally I too enjoy offroading/camping/traveling/off-the-grid sort of living.

Our plans are coming along nicely, although we are going to be class of 2015 instead of 2014. It has taken longer than I thought to build our own RV expedition vehicle and I need time to fix up the house to sell.

Current estimates if the stock market holds present gains is that we will have around $1,450,000 to $1,500,000 in taxable and tax deferred. This will be split up as $550,000 in 401K, $70,000 in IRA, $50,000 in Roth, and around $800,000 in taxable. Of that $800,000 there will be at least $500,000 that can be accessed with no tax because it is from the sale of our home and various assets.

I have looked into health insurance and it seems our payment for a family of 2 nonsmokers age 46 and 47 will be $775 a year for a silver plan with a 94% actuarial value. Because of additional cost sharing subsidy the max out of pocket other than premium will be 1/3 of $4500 or $1485.

Thus the worst case for health insurance per year is $2260, or about $200 a month.

We have designed our expedition vehicle with 1300 watts of solar and 200 gallons of fresh water. We plan to spend quite a bit of time in remote areas on government land for free (mostly out west but also in Alaska during the spring/summer). Our major costs will be food, gas, and insurance (health, possessions, liability, umbrella)

Based on a portfolio of $1,450,000 and a 3% SWR we should be able to draw $43,500 per year and that will be tax free (half of that amount will come from the already taxed $400,000).

Our monthly budget during boondocking might look like this:

$800 food
$600 fuel
$200 health insurance
$300 other insurance
$500 vehicle maintenance + registrations

total $2400

If we boondock for 6 months out of the year we will spend $14,400 during that time and have $29,100 left for the remaining 6 months, or $4850 per month. During these months we plan to do things like rent a house in the Florida Keys so the budget might look like this:

$2500 rent
$100 utilities
$200 fuel
$200 health insurance
$300 other insurance
$300 vehicle maintenance
$500 entertainment
$750 food

If we decide we need a bit more money or want to continue funding Roths (and get the combined $2000 in saver's credit!) we might take up a little software contract work over a winter period (Nov to Feb for example) which would fund two full years of Roths for both of us.

 

[dvalley]

Great info and congrats on reaching your dreams! You sound like you've done the homework and have a good plan in place. Boondocking out west huh? then my screen name should have a familiar ring to it

I'm also on a few expedition related boards and enjoy the adventure of the whole being out in the middle of nowhere and exploring some cool stuff. I usually travel with others and haven't made the switch to solo traveling (not too far off the main trails anyway) yet but eventually when I get closer to retirement in 10yrs and have a new(er) expedition truck I probably will. Right now I have a built SUV but later it'll be a full size pickup with a FWC - or a Sportsmobile.

Keep us posted on the progress!