Planning early retirement from IT

[FarAway401]

I just registered here, but have been interested in ER for a while now.

Both my spouse and I are working in IT: software development and ERP consulting. Our combined gross is ~250K, although it's a little hard to estimate accurately, as I receive performance base bonuses and he is self-employed.
We are 39/40. For a while now I've been thinking that it is only for so long that we can stay competitive in this field: I don't see that many 50+ people working with me. I'm on my 5th programming language/system over my 15 year career, and every time it is harder to switch. 40 year old brain is not as flexible as 25 year old brain, and I can imagine it will get only harder from here.

All of this makes me think we need a plan if we HAVE to retire or switch to lower paying job in our 50s.

Our stats:
2 kids - 18 and 12. 18 year old is going to college, it will cost us ~20k/year over the next 4 years. We only have 9k saved, but we can mostly cashflow the rest. Still need to start a college fund for 12 year old.

320K in combined retirement accounts (almost all of it is pre-tax - 401k, SEP IRA)

Two properties: primary residence (owe 318k, valued at ~520K) and a "rental property" which is not a true rental property (owe 165K, valued at ~240K). The plan is to eventually sell primary residence, pay off the other property and live mortgage free.

We have two HSA accounts: one has 6K and we won't touch it, hopefully, ever, and another one that we contribute to the max, but also use for all the medical needs, so I won't count it as assets.

We are doing terribly on "Rainy day fund" - only have 6K there.

The only debt we have is a car loan, where we owe <8K.

The plan is to continue contributing max to pre-tax accounts (18k for me, ~25K for hubby) for the next 10 years, but also come up with an account which we can draw from before turning 59 1/2.
The priority for now, though, is to build rainy day fund to at least 20K (should be able to do it before end of this year).

Looking forward to participating in this forum and learning a lot.

 

[eta2020]

I don't see that many 50+ people working with me. I'm on my 5th programming language/system over my 15 year career, and every time it is harder to switch. 40 year old brain is not as flexible as 25 year old brain, and I can imagine it will get only harder from here.

I am 17 years with same company still using C and assembler, still writing Operating System with far superior skills/pay in 50s then ever before.

But I am tired of it and tired of politics.

 

[FarAway401]

I am 17 years with same company still using C and assembler, still writing Operating System with far superior skills/pay in 50s then ever before.

But I am tired of it and tired of politics.

Well, FWIW, I'm still enjoying learning new skills.
8 years ago I got into ERP for the first time, and it was a lot of fun to learn this new field. Was also very easy, I was laughing at 40+ yo colleagues who'd been in a field for 5+ years, and I knew the system better than them after only a year or two. I was 32 then.
Switched jobs to another ERP 6 months ago, and the learning curve is quite a bit steeper. Not sure if this has to do with age, or other circumstances.

So far I'm thinking this will be last platform change for me.

 

[ivinsfan]

Where does all your money go? a 250 gross and no college money set aside for either child?

How will you"cash flow" 20K a year in college costs when you have only 6K in cash around, plus 9K saved that 9K is literally one semester of school and you need to fund a minium of 16 semesters. an 8K car loan on that income you should be able to pay cash for a car. Have you been paying off large student loans for you and your DH. So you think you can add 14K to your rainy day fund and come up with 11K in college costs in 6 months how is that going to happen?

I think you need to take a serious look at your yearly expenses.

 

[eta2020]

It is not that the job is boring or there is lack of job safety if you are in 50s in our field.


But you see your face in a morning and you know you are no longer young kid and you may feel that you would like to experience something else. You understand more that time when you are in full health is limited.


I look forward to go in few years...

 

[Sojourner]

Welcome to the forum. I semi-retired from IT a few years ago, in my mid-40s, and, like you, I was making a pretty hefty salary (including bonuses) over my final 8-10 years of full-time employment. I started saving and investing aggressively in my 30s, and it seems like you're starting to do that (or have recently started) but still have a fairly long way to go. Have you been tracking your spending to see where all your disposable income has been going? Once you know your spending patterns and can identify some areas where you can cut back without too much pain, your goal should be save, save, save and invest like crazy. I was living on about 30% of my income for many years, and you'll need to do this, too, in order to FIRE... as I'm sure you're aware. Good luck!

 

[FarAway401]

Where does all your money go? a 250 gross and no college money set aside for either child?

How will you"cash flow" 20K a year in college costs when you have only 6K in cash around, plus 9K saved that 9K is literally one semester of school and you need to fund a minium of 16 semesters. an 8K car loan on that income you should be able to pay cash for a car. Have you been paying off large student loans for you and your DH. So you think you can add 14K to your rainy day fund and come up with 11K in college costs in 6 months how is that going to happen?

I think you need to take a serious look at your yearly expenses.

250K is only past year income. 180K for several years before that, and 80-100K for the preceding 10 years. We moved from the lower COL area 5 years ago, where our pay was also significantly lower. Also, I took 4 years of part-time when younger son was born, and the income then was only 60K combined.
We only started saving seriously 5 years ago. Bought the primary residence and second property, both with 20% downpayment, saved both over these past 5 years. So, this is where money have been going primarily.
Now looking to replenish the rainy day fund, part of which was used when we bought property #2.

We are able to put aside 2k every month from net. So, 14K into rainy day fund is not going to happen before the end of the year. Perhaps, we need to target 6/2017 for 20K, while accounting for 10k that needs to be payed for the second semester.

I have stock grants that start vesting early 2017, and then every 3 months for the next 3 years. Planning on selling right away, those should cover education for child #1, should we not be able to come up with money from salary.

The car loan is at 2.8%, not worth to pay it off early.

I know we look like big spenders, but in reality, we save 15-20% of gross in tax-deferred accounts, pay two mortgages (total payment is ~28% of net), and can afford to save or spend additional 10-15% of net towards education.

So, while a little behind, I don't think we are doing terribly. We had kids very early in life, but they both will be out of college by the time we are 50.

 

[Aerides]

Given your income vs. savings, I'd say you start by taking a hard look at expenses and seeing where your money really goes. With gross income of $250k, even with maximum pre-tax 401k savings, benefits coming out, etc., your joint take home is north of 10k per month.

Besides mortgages - see what that's going towards now (look at your last 2-3 years of actuals). You want to get yourself to have a large margin of that take-home going directly to savings and reducing discretionary expenses.

 

[Katiek]

I'd add to the recommendation to track spending. I did a good job saving, so I always felt comfortable spending without tracking. But once I started tracking I was amazed at how much I spent on areas that I didn't realize. Tracking spending for a couple years is good for at least two reasons - (1) helps identify areas to cut back that won't impact lifestyle too much and (2) gives you an accurate basis for determining how much you need to live (and therefore how much you need to save).

You're off to a good start, and it's nice that you have an opportunity to ramp things up even more with your newly increased income and stock grants!

 

[FarAway401]

Welcome to the forum. I semi-retired from IT a few years ago, in my mid-40s, and, like you, I was making a pretty hefty salary (including bonuses) over my final 8-10 years of full-time employment. I started saving and investing aggressively in my 30s, and it seems like you're starting to do that (or have recently started) but still have a fairly long way to go. Have you been tracking your spending to see where all your disposable income has been going? Once you know your spending patterns and can identify some areas where you can cut back without too much pain, your goal should be save, save, save and invest like crazy. I was living on about 30% of my income for many years, and you'll need to do this, too, in order to FIRE... as I'm sure you're aware. Good luck!

Thanks!
The problem is - it is tough to cut spending drastically while raising kids. Hubby and I can live on 2K/ month with food, transportation and entertainment (which would mostly be skiing on a ski pass, hiking (free!) and occasional travel), but kids-related expenses are probably at least another 3K.

 

[ivinsfan]

So what is the cash flow on the second property? The expenses for that should be coming out of the rent.

You gave a good earning history which does explain your savings numbers.However you still need to start with an accounting of your daily spending...if you are pulling in a net of 10K where is the other 8K going.until you do this your savings numbers for the future are just guesses.

 

[FarAway401]

Given your income vs. savings, I'd say you start by taking a hard look at expenses and seeing where your money really goes. With gross income of $250k, even with maximum pre-tax 401k savings, benefits coming out, etc., your joint take home is north of 10k per month.

Besides mortgages - see what that's going towards now (look at your last 2-3 years of actuals). You want to get yourself to have a large margin of that take-home going directly to savings and reducing discretionary expenses.

I'd add to the recommendation to track spending. I did a good job saving, so I always felt comfortable spending without tracking. But once I started tracking I was amazed at how much I spent on areas that I didn't realize. Tracking spending for a couple years is good for at least two reasons - (1) helps identify areas to cut back that won't impact lifestyle too much and (2) gives you an accurate basis for determining how much you need to live (and therefore how much you need to save).

You're off to a good start, and it's nice that you have an opportunity to ramp things up even more with your newly increased income and stock grants!

Thank you both! I know our spending is the next thing to attack - I feel like we became a little lax with spending only in the last several months.
I used to cook all our meals. I work more hours now, and I can see us slip into more take out/eating out. Also, need to shop for better insurance rates. Luckily, 18 year old will not need the same coverage (paid a LOT over the past 2 years since he started driving) while he is on campus without a car!

 

[FarAway401]

So what is the cash flow on the second property? The expenses for that should be coming out of the rent.

You gave a good earning history which does explain your savings numbers.However you still need to start with an accounting of your daily spending...if you are pulling in a net of 10K where is the other 8K going.until you do this your savings numbers for the future are just guesses.

Second property is negative cash flow. 400 in rent, 900 mortgage payment plus 190 HOA. It is a conscious move - my elderly parents live there.

Got it about the spending! Will start tracking it right away.

 

[ivinsfan]

Thanks!
The problem is - it is tough to cut spending drastically while raising kids. Hubby and I can live on 2K/ month with food, transportation and entertainment (which would mostly be skiing on a ski pass, hiking (free!) and occasional travel), but kids-related expenses are probably at least another 3K.

This isn't really true, which kids expenses are necessary and which are discretionary. If your kids want college with little or no student loans you need to talk to them about this item. I am not a fan of people pushing off their spending habits on "the children".

 

[FarAway401]

This isn't really true, which kids expenses are necessary and which are discretionary. If your kids want college with little or no student loans you need to talk to them about this item.

_I_ want college with little or no student loans for my children. So far, the older one will take 5k of subsidized federal loans a year. This can change over the next 4 years. He may need to take on more debt, or not.

I am not a fan of people pushing off their spending habits on "the children".

Can you explain what you mean by this? Children eat and need clothes, that's necessary expenses. My children also do sports, music lessons and summer camps. These are discretionary, of course, but I'm not ready to cut these unless we are in a difficult financial situation. If anything, I consider these my most important discretionary expenses. They don't have expensive electronics or fancy clothes, and when they want them, they pay themselves. However, my child's music lessons will only be cut in a dire situation. And I spend a lot on these.

I hope I don't sound like I make excuses. There are items that can be cut, and I fully acknowledge we have waste in our budget. But certain things are non-negotiable while these two people (soon to be one) still live under my roof.

 

[daylatedollarshort]

We found it helpful to compare our spending to the number in the Consumer Expenditure Survey:

Consumer Expenditures Survey (CEX)

We were frugal compared to co-workers, but the CES was a real eye opener on how and where we could cut back.

 

[MichaelB]

Looking forward to participating in this forum and learning a lot.

Faraway401, welcome to our Forum. Looks like y'all are doing pretty well, hopefully you can continue to save while you put your children through college. It'll make you remember back to when you were just getting started. Once past that, though, it gets easier again.

It helps to have think skin when discussing financial matters and children online. One good suggestion you're bound to get here - it is a strong advantage to have a good detailed understanding of your expenses. It makes managing the finances easier and more effective.

 

[bingybear]

Thanks!
The problem is - it is tough to cut spending drastically while raising kids. Hubby and I can live on 2K/ month with food, transportation and entertainment (which would mostly be skiing on a ski pass, hiking (free!) and occasional travel), but kids-related expenses are probably at least another 3K.

OK... 5k a month for all of you. So 60k/year. Where is the other $190k going.

We had 2 kids without spending that $3k/month on them exclusively.

If you need $200k a year in retirement, they you likely should target $5MM nest egg.

Get out your spreadsheet and track your expenses, sources of income and growth of investments.

 

[ivinsfan]

Can you explain what you mean by this? Children eat and need clothes, that's necessary expenses. My children also do sports, music lessons and summer camps. These are discretionary, of course, but I'm not ready to cut these unless we are in a difficult financial situation. If anything, I consider these my most important discretionary expenses. They don't have expensive electronics or fancy clothes, and when they want them, they pay themselves. However, my child's music lessons will only be cut in a dire situation. And I spend a lot on these.

Sorry if that sounded sharp, I just meant that when looking at spending everything needs to be addressed, including music lessons, sports, etc. In some cases I've have parents tell me without batting an eye, that they built a brand new house "for the children".
You sounds like a person that cares a lot about family from special lessons for your kids to subsiding your parents. These things are important but will definitely make ER more difficult to achieve. Only you can pick the right balance for your family.

 

[shortstop14]

For a while now I've been thinking that it is only for so long that we can stay competitive in this field: I don't see that many 50+ people working with me. I'm on my 5th programming language/system over my 15 year career, and every time it is harder to switch. 40 year old brain is not as flexible as 25 year old brain, and I can imagine it will get only harder from here.

A big part of retiring in my mid-50s was to avoid learning yet another set of development tools. After transitioning through so many tools over a 30+ year career, I just couldn't muster up the enthusiasm for doing it again. Not so much lack of brain flexibility as it was lack of motivation. When I think back about the evolution of systems from the late 70s into the 2000s, it's pretty amazing - but also pretty exhausting.

And watching friends lose jobs as the mega-corp systematically offshored development jobs or hired younger programmers to replace the older more expensive developers added some incentive to get out on my own terms.

So making plans that don't assume continuing high income in IT makes sense from a self-preservation point of view.

Tracking and getting expenses under control, so that I knew I was prioritizing and getting the best personal value for the money, was a big key to investing more and accelerating financial independence. (Of course, a lot was also the dumb luck of being invested in technology stocks in the 90s.)

 

[FarAway401]

OK... 5k a month for all of you. So 60k/year. Where is the other $190k going.

Um, 250K is gross, sorry, if I wasn't clear. We net 11k/month after taxes and retirement contributions. So 132K net, not 190k.
2.5K for both mortgages (after accounting for 400 received in rent), 5K food/household items/insurance/cell phones/cable. $200 for water and gas, $335 car payment, $195 HOA.
In theory, we should have 2.5-3K left every month, but we don't. So yeah, it's going somewhere. Not to mention, it's been a while since I dissected the 5K in the paragraph above to see what's what.

So, point taken about tracking spending. I'm pretty sure hubby and I can live on 30% of our current income in retirement, so no 5MM will be necessary, but it's good to know for sure how much we need.

 

[FarAway401]

So making plans that don't assume continuing high income in IT makes sense from a self-preservation point of view.

Yes, that's exactly my thinking.

 

[FarAway401]

Sorry if that sounded sharp, I just meant that when looking at spending everything needs to be addressed, including music lessons, sports, etc. In some cases I've have parents tell me without batting an eye, that they built a brand new house "for the children".
You sounds like a person that cares a lot about family from special lessons for your kids to subsiding your parents. These things are important but will definitely make ER more difficult to achieve. Only you can pick the right balance for your family.

No worries, I wasn't really on the defensive (I hope), I just wanted to clarify what you meant . My plan is to stop supporting my kids once they graduate with undergraduate degree. I can't see straddling them with debt. After all, when our EFC came back from FAFSA at ~55K, it wasn't their fault. The older one picked a state school, while being admitted to a few better private ones. He also got maximum merit award that was possible, with the exception of some unlikely full scholarships. He had not applied to every additional scholarship possible, and therefore, I thought it was fair for him to take whatever federal loans we were eligible for. Private loans is highway robbery .

 

[Closet_Gamer]

In addition to seriously getting your arms around the spending, I would make two suggestions:

1) Revisit the 2nd home situation. If you are subsidizing your parents home b/c there is no alternative, that's generous and appropriate. If its more than that, you should recognize that its in direct opposition to your desire to FIRE. Absent the parent situation, my first piece of advice would be to shoot the second house in the head. Two mortgage payments are incredibly damaging to the ability to put aside cash for near term expenses and suck down cash that be invested in higher return areas such as stocks.

2) Do the math to figure out your target date and the amount you will need to have saved assuming a 3% SWR. This is a sobering exercise -- $125k gross income implies a net egg of over $4M. Use FireCalc to get an initial look. Then you can build a real plan towards that goal. Rough math on what you posted above your net worth is <$600k. The inescapable conclusion will be that if you want to retire in 10-12 years you need to CRANK both absolute savings rate and return on that portfolio.

Once you have the numbers in hand, you can work with three variables (savings rate, portfolio design, target date) to hopefully arrive at a plan that balances your objectives.

Good luck.

 

[MRG]

So, point taken about tracking spending. I'm pretty sure hubby and I can live on 30% of our current income in retirement, so no 5MM will be necessary, but it's good to know for sure how much we need.

Great.

Tracking and understandingthe numbers for me was huge. I'd have been retired sooner if we'd done that and been strict with ourselves.

You mentioned options earlier, they're great but.... They can go underwater or Megacorp can get stingy or.....the the video surfaces of the COO with goats...