49 with 2 young kids hoping to retire soon

[ST_FIRE]

Hi there! Thank you for allowing me to share my story. I am thankful for all your help and feedback. This is a great community! I am married, both of us 49 this year, and have 2 children in middle and high schools. Here's our financial picture:
- 401K & IRA: 1.6m
- 529K (both): 200k
- Taxable investments: 340k
- Cash (checking & high yield savings): 150k

Real estate:
- Home (no mortgage): 510k
- 7 rental properties (with mortgage): 340k in equity (30k net cash flow per year)

Our expenses are estimated at 9k/month but it has been fluctuating over the past 2 years due to multiple changes (covid, job change, move to LCOL state). We are still getting a better handle on what a stable state looks like. In addition, a couple more concerns holding us back from FIRE are seeing kids through college, as well as health care (we are both in good health but not great history with parents dying of heart issue and cancer).

We are quite tired of our stressful corporate jobs, looking to get into volunteer or social work, as well as doing travel / outdoor and getting involved with our kids. Do you think we are ready for retirement any time soon?

 

[Biker_on_FIRE]

You've done a really nice job of saving into your retirement accounts, but I would be concerned about your ability to support your expenses until you have access to them until you turn 59.5 without paying the 10% penalty. It looks like you would need to live on $30k/year in rental income plus $500k in aftertax money. At $9k/month expenses (is that including taxes), that corresponds to $108k/year. So after accounting for rental income, you will need to draw $78k/year from your aftertax savings/investments for 10 years. If markets are down, it may not be enough. But since you have equity in your rental properties, selling them might be an option if you are running short. Also, how will you pay for medical insurance? If it is currently paid by an employer, then you may need to add that into your expense calculations.


I'm not saying that it isn't possible, but you should run a year-by-year cash flow analysis and see if you can make the numbers work. It isn't super-obvious to me that you can or can't make it happen.

 

[ST_FIRE]

Thanks Biker_on_FIRE! We do need to add taxes and medical insurance into our expense. We're hoping to use ACA for health insurance. We're not sure how significant those additional expenses will be, esp taxes, given that we would have stopped working and our main income is rent.

We're also thinking of tapping into retirement account through Roth conversion ladder. Any thoughts on that?

 

[MichaelB]

Do you think we are ready for retirement any time soon?

Here are some questions that you may find helpful. https://www.early-retirement.org/fo...-answer-before-asking-can-i-retire-69999.html

Most members here would agree you really need to have a good, solid understanding of your expenses, current and future, before making a retirement decision.

 

[Dtail]

Welcome to our wonderful forum.
Have you looked at Healthsherpa.com to try and get some information on the types of plans and costs of healthcare?
You will also need to get some estimate of taxes, so you can have an all in number for expenses.
Any estimates of Social Security future income, even though it is somewhat in the distance?

 

[someguy]

Others have posted good info, but addressing numbers directly, I would say you are substantially short.

Rough math since you gave rough numbers:

$108K/year expenses now
retirement
+$15K/year health insurance (guesstimate)
+15% effective tax rate in retirement (guesstimate)
= $145K/year gross needed

$145K
-$30K rental incomce
=$115K/year needed from portfolio

With kids/etc, I would use 3% safe withdrawal rate which works out to just under $4mm portfolio required. You're currently at $2.1mm. If you use a riskier 4% SWR, that's around $2.9mm.

 

[JohnnyBGoode]

Good analysis someguy. And just to tie that back to what Biker_on_fire said, any shortfall incoming from IRA/401K needs to be discounted by yet another 10% to account for the early withdrawal penalty.

If OP is committed to FIRE before 59.5 they may want to leverage a HELOC or something off their paid off residence - the low interest rates currently would be much better than the 10% early withdrawal penalty.

But I tend to agree with Someguy that with your current expense rate, comfy FIRE is probably 5+ years away. Plus at that point, you would have a much better idea about kids college expenses (if you are contributing anything to them).

 

[pb4uski]

You have two important question to answer.... do you have enough? and if so, do you have enough access to it before 59-1/2?

On the first question, it looks like you have enough. I put $78k spending($9k/month less $30k/year real estate cash flow) for 50 years and a $2.3m portfolio in FIRECalc and it suggested a 96% success rate, and that doesn't include SS so I assume that SS would put you over 100%.

So the next question is access. Assuming $78k/year gap, you'll need $390k available until your Roth conversion ladder starts paying and you have $490k so you should be all set there.

I would create a spreadsheet model and run it out year by year for the next 10 years but it looks like FIRE is possible.

 

[pb4uski]

....15% effective tax rate in retirement (guesstimate) ...

15% for taxes is way high.... if OP tops up his real estate and taxable investment income/gains with Roth conversions to the top of the 12% tax bracket... total income of $106,150 in 2021.... then his tax with 2 kids will only be $5,328 (5.02%)... and without the kiddos it would only be $9,328 (8.79%).

And since he is in FL then no state income taxes.

 

[FLSUnFIRE]

Good analysis someguy. And just to tie that back to what Biker_on_fire said, any shortfall incoming from IRA/401K needs to be discounted by yet another 10% to account for the early withdrawal penalty.

If OP is committed to FIRE before 59.5 they may want to leverage a HELOC or something off their paid off residence - the low interest rates currently would be much better than the 10% early withdrawal penalty.

But I tend to agree with Someguy that with your current expense rate, comfy FIRE is probably 5+ years away. Plus at that point, you would have a much better idea about kids college expenses (if you are contributing anything to them).

If interest rates rise, I don't think there are any fixed rate HELOCs locked into today/s rates so the math on paying interest to avoid 10% one time may not be favorable. There are other strategies to avoid early withdrawal. For me it will be a SEPP eventually.



I established a HELOC for immediate liquidity/emergencies and especially to have available to manage taxable income if needed but don't plan to carry balances for any significant period of time. It is great peace of mind that I can log on anytime and transfer money to my checking if I really had to and it would be immediately available since I established it at my primary credit union. Any big expense can be paid and I can take a bit of time to figure out how best to pay for it to manage my realized income and/or push the income into the next tax year. If the market really tanked quickly, I might consider drawing on it for living expenses but the purpose is not for leverage/market timing as I'm generally against those strategies.

 

[someguy]

On the first question, it looks like you have enough. I put $78k spending($9k/month less $30k/year real estate cash flow) for 50 years and a $2.3m portfolio in FIRECalc and it suggested a 96% success rate, and that doesn't include SS so I assume that SS would put you over 100%.

What about health care for a family of four?

 

[Biker_on_FIRE]

ST_FIRE, here is how I would approach figuring out if you have enough:
1. Get a firm grasp of what your annual expenses will be, including taxes, medical, etc. Make sure you include one-time only large expenses (car replacement, home maintenance like new roof, water heater, etc.).
2. Based on your expenses, figure out how much you will need to draw down from your after-tax accounts to get you to age 59.5, the age when you will be able to access your retirement accounts without penalty. If you plan to do a Roth conversion ladder, then that will need to figure into how much you will convert each year and the impact on your tax expenses.
3. If you have a shortfall before 59.5, you will need to figure out how to cover that shortfall (pay the 10% penalty for early withdrawal, work part time, HELOC, sell off assets, etc.).
4. Based on the above, estimate how much you will have left when you are 59.5 and use the 4% rule and other retirement calculators (FireCalc, NewRetirement, etc.) to get a feeling on if you have sufficient funds to support your expenses. You will probably want to include social security income, but make sure you calculate how much you will get based on stopping contributions at age 49 (not at 67).

Some other thoughts:
Besides doing the Roth conversion ladder, to get to your retirement assets before 59.5 without penalty, I can think of a couple of other options:
1. Utilize 72t SEPP
2. Utilize the 'rule of 55' where you can withdraw 401k funds from the 401k plan of the company you retire from in the year that you turn 55. So you could start work for an employer that you can roll over your current 401k into and retire from that employer in the year that you turn 55 (or later) and you would have access to those 401k funds without penalty.

Or could one or both of you work part-time and stick it out until you are 55 so you could then access your 401ks?

Btw, I am in a similar situation to you, my wife and I are 51 and have accumulated a significant amount in retirement accounts but not enough in aftertax accounts to comfortably cover us until 59.5. Work is ok for us to stick it out until 55 when we will have full access to our 401ks. And we lose retiree medical and our pensions are significantly reduced if we retire before 55 so there is significant incentive for us to stay.

 

[Koolau]

The devil is in the details - especially paying for health care. THAT needs to be rock solid before pulling the plug. Would it be possible to find less stressful (more enjoyable j*bs - perhaps at less money) for a few more years? Just asking, so YMMV.

 

[RetireeRobert]

Others have posted good info, but addressing numbers directly, I would say you are substantially short.

Rough math since you gave rough numbers:

$108K/year expenses now
retirement
+$15K/year health insurance (guesstimate)
+15% effective tax rate in retirement (guesstimate)
= $145K/year gross needed

$145K
-$30K rental incomce
=$115K/year needed from portfolio

With kids/etc, I would use 3% safe withdrawal rate which works out to just under $4mm portfolio required. You're currently at $2.1mm. If you use a riskier 4% SWR, that's around $2.9mm.

Yes, I agree, I think you are on the short side right now.

You do not mention your current incomes, perhaps five more years with concerted saving/investing and some favorable outcomes in asset valuations in five years you could re-evaluate and perhaps be able to do it then.

 

[StuckinCT]

Agree with some of the other comments, kids, healthcare and tax hurdle with qualified accounts prior to 59.5 make it too much of a reach, but you are close, perhaps 55?

I just turned 50 DW 40 3 kids 12, 10 & 8 and currently there is a more generous ACA benefit from the Recovery Act that expires next year, it cut our hypothetical health insurance premium 60%. I am waiting to see if this is extended, my guess it will be extended in some form but not quite as generous.

My other concern is asset values and interest rates. If asset values normalize a bit without a massive give back I would feel better about a 100% on the fire calc.

That is the silver lining of this mess in Congress, we may find out where we really are and for the next ten years.

 

[WestUniversity]

Here are some questions that you may find helpful. https://www.early-retirement.org/fo...-answer-before-asking-can-i-retire-69999.html



Most members here would agree you really need to have a good, solid understanding of your expenses, current and future, before making a retirement decision.

+1

Download a couple of years of banking transactions and credit card data. Go through everything item by item and determine what will go away, what will stay and what will change. Also adjust for any “lumpy” odd expenses that might be non-recurring. Additionally you might have some pass through expenses that need to be adjusted out, such as company travel that was reimbursed, as an example.

You will most certainly be surprised and much better informed. Best of luck!

 

[RxMan]

ST_FIRE, I’m curious. Is your plan to continue to hold those rental properties in retirement for the rental income or do you plan to sell them to boost your nest egg?