52 with rental income, job, and healthcare

[oompfh]

Hi! After perusing many, many sites, I am excited to join this forum for what I hope will be a long run.

I have been reading blogs and articles and books over the last yr on retirement and have been unable to apply the calculations as specifically as I would like to my situation. Any help would be much appreciated. Here's my info:

52, single
two grown children--one gainfully employed, one in a full scholarship doctoral program.
two young children (4,8)--adopted and who I'm co-parenting with my best friend, so we split expenses for them.
Roth IRAs--75k and plan on continuing to make maximum contributions of 6500 a yr.
Rentals holding--no mortgages, 6000 gross a month
Rentals selling--will yield 400k
Cash--30k (building this up by about 1500 a month)
Career--about 43k a year for a 24 hr work week. I'd like to retire from it in 2016, will be able to keep my healthcare and small pension will be about 12k a year before taxes.
Home--my only expense: 2300 a month (will be paid off in 15 yrs)--not planning on paying off early as it's at a 3.25% interest rate.
Social Security--at 67 I'm hoping it's gravy

How much do I need in retirement--I'd say 60k net.

So mostly on posts I see net worth and then people will calculate the 3-4% withdrawal rate. I think I already have the withdrawal built into the rentals, right? ROI is about 11% so I don't think I want to liquidate any of it.

My questions are

1. Does it look okay to retire next year? Btw, I do have the option of returning to consult part time.
2. What to do with that 400k? If I roll it over into another property (part vacation rental, part second home) I can defer taxes. If I don't, I have to pay capital gains.

Thanks in advance for your thoughts!

 

[Senator]

Am I missing something?

You have $75K in a Roth and $30K in cash. Only $12k a year in pension, likely no COLA. The rentals gross is $6K a year, which typically means $3K after expenses. $36K a year.

And you want to net $60K after taxes, which means ~$70K+ needs to be produced by the portfolio?

I am not sure where you can invest the $400K and get $36K in return. Keep the rentals for a while.

So, you have ~$36K + $12K = $48K before taxes. Maybe you can take another $4K a year from the Roth and cash account. Assuming you would be old enough to take from the Roth.

You are still $18K short. And you want to retire next year?

If you have a $2,300 mortgage now, taxes will increase over the years. That's almost $28K a year. It is almost 50% of your total income if you have $60K coming in. That is a lot.

I do not see it happening with the numbers you posted.

 

[oompfh]

clarifications

Thank you for your reply, Senator!

I did not clarify:

--I have 6000 a month in rental income (over the last several years the expenses come out to about 30%)

--the 400k is from properties I'm selling, which are separate from the ones that provide the income I listed

--I pay 1/2 the mortgage

 

[Dash man]

When you sell the rentals you'll also have to pay 25% on recaptured depreciation unless you do a 1031 exchange. It's not an insignificant amount if you've owned the rentals for a significant period. How much of the $400k will be left after cost of selling and taxes are paid?


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[Senator]

I have 6000 a month in rental income (over the last several years the expenses come out to about 30%)

My expenses, across 24 multifamily rentals, are ~45%. I include 7% for management, 5% for vacancy, and 10% for maintenance.

Since I manage them myself, I can add the 7% back in. I also do my own maintenance, so I can typically beat the maintenance numbers, but I do spend a bit on capital improvements.

If you have single family rentals, managed by someone else, you are very to be a bit higher expenses.

Do not mistake rental profitability for deferred maintenance.

 

[Another Reader]

I agree with Senator. Over time, your remaining net income from the rentals will be much closer to 50 percent than 70 percent. You will have large, unexpected capital improvement costs over your holding period. The $400k you expect to net from selling some of the rentals has to be invested to provide income, and is not really available to pay for these costs. In my view, you are under reserved for these capital costs with your meager cash savings. A couple of $10,000 roofs in a one or two year period will turn your plans upside down.

In addition, you state that you pay half the mortgage. That sounds like you are a 50 percent partner in these properties and do not have full control. There is risk associated with that situation. What if your partner flakes and ends up in bankruptcy? Or the IRS liens the properties? What if you simply cannot agree to invest in the properties instead of pulling out the cash for spending and rents decline, vacancy increases, and your net income drops?

What about these young children you are raising with a co-parent? What provision have you made for their education? Is there life insurance to pay their expenses through college if something were to happen to you?

Retirement calculators are not generally very helpful when the bulk of your income is in rentals. I don't think you have told us the whole story here, and I wonder if you are being reasonable in your own understanding of your situation. In your shoes, I would lay out a more complete picture of your income and expenses and be realistic in evaluating both.

 

[Dash man]

I agree with Senator. Over time, your remaining net income from the rentals will be much closer to 50 percent than 70 percent. You will have large, unexpected capital improvement costs over your holding period. The $400k you expect to net from selling some of the rentals has to be invested to provide income, and is not really available to pay for these costs. In my view, you are under reserved for these capital costs with your meager cash savings. A couple of $10,000 roofs in a one or two year period will turn your plans upside down.

In addition, you state that you pay half the mortgage. That sounds like you are a 50 percent partner in these properties and do not have full control. There is risk associated with that situation. What if your partner flakes and ends up in bankruptcy? Or the IRS liens the properties? What if you simply cannot agree to invest in the properties instead of pulling out the cash for spending and rents decline, vacancy increases, and your net income drops?
.

I think he means half the mortgage for the home he lives in, since he states he has no mortgage on the rentals.


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[Another Reader]

Ooops, I saw the second post and missed the statement in the first post. Strike my comments about the rental partnership risks if you own these properties by yourself. However, if half the primary home mortgage is $2,300, that's an expensive home. How secure is your situation? Owning half of a house like that on your income would concern me.

 

[VFK57]

Welcome to the Forum. My rental income gross is reduced by 21.5% property tax (does a state you live in has it?), community Assn fee 17.5% and maintenance/vacancy fund 9% = 48%. I think that in order to meet your retirement goal you should downsize if it reduces your mortgage by 50% or pay off your loan before retiring.

 

[oompfh]

When you sell the rentals you'll also have to pay 25% on recaptured depreciation unless you do a 1031 exchange. It's not an insignificant amount if you've owned the rentals for a significant period. How much of the $400k will be left after cost of selling and taxes are paid?


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Ah, good point. I am in escrow on one of the properties and ready to sign 1031 exchange docs. I had thought it would be a better idea to roll all the proceeds from the properties I am selling into another property b/c of the cap gains. But was then wondering if maybe some diversification is in order. The depreciation factor is important.

The 400k is after taxes, escrow, and commissions.

 

[oompfh]

Ooops, I saw the second post and missed the statement in the first post. Strike my comments about the rental partnership risks if you own these properties by yourself. However, if half the primary home mortgage is $2,300, that's an expensive home. How secure is your situation? Owning half of a house like that on your income would concern me.

Hi Another Reader,

Thanks for your comments.

I pay 1/2 of the 2300--so, 1150. That's with impounded taxes and insurance.

I also do general repairs on the properties and manage them myself. I don't do roofs though, so I think you're totally correct about being under reserved. I should probably do the consulting work part time for sure then to beef up the savings more.

 

[oompfh]

Welcome to the Forum. My rental income gross is reduced by 21.5% property tax (does a state you live in has it?), community Assn fee 17.5% and maintenance/vacancy fund 9% = 48%. I think that in order to meet your retirement goal you should downsize if it reduces your mortgage by 50% or pay off your loan before retiring.

Hi VFK57,

Thanks for the reply. Property tax is 1.25%. No HOAs/community assn fee--they're all single family residences. Tenants pay their own utilites, including water and only one of the properties has a gardener.

I am in California where homes are outrageous, so I'm not sure I could downsize any further--it's a pretty modest home. I could turn refi the 15 yr into a 30 yr, I guess. It's only 1150 a month I'm paying now though.

 

[Another Reader]

It's very difficult to give "advice" when we don't have all of the facts.

I retired at about your age. I had two small pensions and pre-medicare retiree medical from public agency employers. The pensions are COLA'd and the health insurance, while very expensive, is partially subsidized with a low deductible and out of pocket cap. I'm eligible to start collecting Social Security next year, so my "base" income covers most expenses. I'm fairly confident these income streams will continue.

However, I have tax deferred and taxable paper accounts that provide at least the same level of income under the 4 percent rule. I also have rentals. I'm "over prepared" from a retirement planning perspective. For these reasons, I am comfortable carrying a large mortgage in retirement.

I would be extremely reluctant to let go of the job in your shoes, especially with two small children. It sounds like these kids are your responsibility alone, although you have a co-parent. You have said nothing about your younger kids, other than they are adopted. Children are expensive to raise. Often adopted kids have special needs. My concern is what happens financially if something were to happen to you, your partner, or the co-parent. Would your kids be ok?

Like you, I'm in California. I own rentals out of state as well as here. I have been lucky here, in that I have had good tenants. Evictions are not easy here, and you can lose several months worth of rent if a tenant fights the eviction. Bankruptcy can extend the eviction, and then there are the rehab costs. Reserves are very important if you get into this situation, especially if your rent is generated by a few houses. Losing a quarter to a third of your income for six months plus shouldering $15-$20k in rehab costs can significantly damage someone in your position.

In your shoes, I would plan for things not to go as well as they are now. Based on what you have said, I would continue to work and to maximize your retirement savings vehicles, such as a 401(k), 403(b), and/or 457. Use those to reduce your income and taxes to something close to the income you think you will have in retirement and see if you can be comfortable with that over an extended time.

I would also consider the possibility that I might at some point only have my own assets and income for support. Personally, I would only retire if I concluded that I could succeed in that scenario.

 

[rodi]

Welcome oompfh.

I agree with the others that counting on 100% of gross rental income is not realistic. I plan on 60% of my rental income AND have reserves set aside for maintenance. At least the property taxes in CA are fixed and known... (outside of bond issues of course.)

I added up your non rental (and equity in the soon to be sold rentals) assets and got $505k. It's probably less than that because you'll need to pay taxes when you sell the rentals and all of the brokerage fees, etc, when you sell.

I assumed 43k for net rental income - using a 60% of gross income.

You need 70k gross income - less the 43k rental income - or 27k needs to come from your stash.

That's a withdrawal rate of over 5%. That's a pretty high rate of failure, especially over a longer retirement than 30 years.

If you want to model it in firecalc, I put my (60%) rental income in as an inflation adjusted pension.

 

[Cobra9777]

...I agree with the others that counting on 100% of gross rental income is not realistic. I plan on 60% of my rental income AND have reserves set aside for maintenance. At least the property taxes in CA are fixed and known... (outside of bond issues of course.)

I added up your non rental (and equity in the soon to be sold rentals) assets and got $505k. It's probably less than that because you'll need to pay taxes when you sell the rentals and all of the brokerage fees, etc, when you sell.

I assumed 43k for net rental income - using a 60% of gross income.

You need 70k gross income - less the 43k rental income - or 27k needs to come from your stash.

That's a withdrawal rate of over 5%. That's a pretty high rate of failure, especially over a longer retirement than 30 years...

I think you left out OP's $12K/yr pension. Subtracting that from your $27K results in a 3% WR, which seems reasonable to me, especially as a pre-SS figure. OP also mentioned that the $400K was net of taxes, commissions, etc, although this isn't entirely clear WRT depreciation recapture.

What makes me nervous about this plan is the 2 young kids combined with a low level of financial assets overall. Kids can get expensive in high school and then there's college. OTOH, OP seems relatively comfortable managing the rentals and controlling expenses. With SS on the radar, and the ability to do consulting work if needed, I'm not nearly as negative as some others that have posted.

 

[rodi]

You're right - I missed the pension. Does it start immediately upon end of work?

 

[Cobra9777]

You're right - I missed the pension. Does it start immediately upon end of work?

I assumed it did based on the quote below, but OP can clarify if that's wrong.

Career--about 43k a year for a 24 hr work week. I'd like to retire from it in 2016, will be able to keep my healthcare and small pension will be about 12k a year before taxes.