Financial trajectory for someone looking to retire in 17 years

[sergio]

Hello all!

I haven't seen a suggested "financial trajectory" for someone looking to retire early. Here's a bit about my situation: I'm 28, make around $93k/yr in a low COL area in the US. My only major expenses are rent ($800/month) and my car ($1k/yr). I max out my 401k, Roth IRA, and HSA. All of those allocations are 54% US / 36% Int'l / 10% Bond.

I also opened a taxable account this April with Vanguard and have around $15k in there. It's currently split 65% VTI (total US market) and 35% VXUS (total int'l market).

My goal is to semi-retire by age 45. I'd like to be an adjunct instructor + do consulting in my field (I have a STEM PhD), so my income would be maybe $25k (in today's dollars) by then. My question is:

How do I structure the taxable brokerage account as time goes on? This is my early retirement account with a ~17 year horizon. Would you recommend keeping the 65% VTI / 35% VXUS breakdown? Should I start adding high dividend stocks (eg XOM, PG, etc...) as time goes on? Ideally, I'd like to get $40k/yr from this account (in today's dollars), preferably from dividends. But the VTI/VXUS yields are quite low (around 2% & 3% respectively.) Are there any types of bonds I should be looking at?

Thanks so much for your help guys.

 

[Big_Hitter]

I like VASGX - I have a chunk after-tax in that and my 401k new money goes into 3 funds that closely mirror it. You can convert it to an income fund after you retire.


It's a pretty aggressive fund but you have a long-term horizon.


(Please do not construe this as investment advice.)

 

[sergio]

I like VASGX - I have a chunk after-tax in that and my 401k new money goes into 3 funds that closely mirror it. You can convert it to an income fund after you retire.


It's a pretty aggressive fund but you have a long-term horizon.


(Please do not construe this as investment advice.)

Thanks for the feedback! I had heard about the lifestyle funds before but never really looked into them all that deeply.

Just a point about VASGX: Does it make sense to have 20% bonds in a taxable account 17 years before retirement? Also, instead of VASGX, wouldn't it just be cheaper to hold VTI + VXUS + BND, and slowly put more into BND as time goes on? The overall expense ratio would be lower.

Another approach I was thinking was to maintain VTI/VXUS in a roughly 2:1 ratio, but slow start adding some some VIG (dividend growth) or VYM (high dividend yield) as time goes on.

For anyone else reading this, are there any suggested early retirement trajectories out there? For example, at X years before early retirement, do Y... I know that everyone's case is different, but some (very) general guidelines would be much appreciated.

 

[pb4uski]

Hello all!

I haven't seen a suggested "financial trajectory" for someone looking to retire early. ....

How do I structure the taxable brokerage account as time goes on? This is my early retirement account with a ~17 year horizon. ...

A financial trajectory is very situational... I suggest that you work through Quicken's Lifetime Planner (retirement planning tool included in Quicken Deluxe and higher) and it will show you your personal trajectory based on your situation. Once you have a base case established, you can do what-if comparisons using different assumptions.

If you want to retire at 45, you'll need taxable account funds to carry you from 45 to 59 1/2, perhaps along with SEPP distributions from your tax-deferred accounts (tIRA, 401k, 403b or whatever).

I think the reality is that if you want to retire that early that it will have to be from total return rather than from income, and you'll need about 33x your annual living expenses (including provisions for taxes, health insurance and health care, car replacements, roof replacements, etc.)

I don't see bonds as making sense for someone until they are in their 40s, but if you are on track to retire at 45 you may want to start using new money (contributions) to buy bonds in your late 30s.

Also see http://www.early-retirement.org/for...-answer-before-asking-can-i-retire-69999.html as background on some details.

 

[Totoro]

Read the blogs of ERE (early retirement extreme) - he isn't active anymore but has alot of basic stuff covered.

Also mr. moneymustache (the early stuff) could be helpful. Both are STEM guys, ERE has a Phd. So you might be able to relate Both are focused also on keeping expenses low.

If you are looking for a measurement stick (I hope you aren't) : The Average Net Worth For The Above Average Person | Financial Samurai

Have no tax or structuring advice for you.

In a nutshell, get your savings rate up as far as you can. Then get a decent cash cushion going (anywhere from three months to two years), invest the rest via dollar cost averaging in equities as you are doing already. In my opinion I see no role for bonds in the first ten years of accumulation, but it's your stash and life! Regret and emotions are the hardest part.

Read up on investing if you haven't: the intelligent investor (I like the edition with annotations from Zweig), one or two Bogle books. Look around in the forum here for other suggestions.

Don't fret too much about fine-tuning allocations of xx% to VTI or VXUS. The main thing is getting started, which you have. And don't forget to live while acquiring your financial independence.

Good luck!

 

[dunkelblau]

If you are looking to withdraw 40K per year in current dollars from a taxable account for the rest of your life starting in 17 years, assuming a safe withdrawal rate of 3% per year, that account would have to grow to 1.33 million in today's dollars in 17 years. How much you need to put in every year to reach this level depends on your after-tax inflation-adjusted return rate. For example if it's zero, 1.33M/17 is 78K/yr of contributions in today's dollars. For return of X the divisor rises to sum of (1+X)^(1,2,3,...,16,17) so for 3% it's ~60K/yr, 5% it's ~50K/yr, and 7% it's ~40K/yr. Again these are annual after-tax contributions in today's dollars.

I realize your question is directed towards asset allocation, but I think the bigger challenge is reaching the savings rate target in your taxable account to be able to support the amount of withdrawal you are aiming for. IMO it would be much easier if you could get by withdrawing less.

 

[sergio]

Read the blogs of ERE (early retirement extreme) - he isn't active anymore but has alot of basic stuff covered.

Also mr. moneymustache (the early stuff) could be helpful. Both are STEM guys, ERE has a Phd. So you might be able to relate Both are focused also on keeping expenses low.

If you are looking for a measurement stick (I hope you aren't) : The Average Net Worth For The Above Average Person | Financial Samurai

Have no tax or structuring advice for you.

In a nutshell, get your savings rate up as far as you can. Then get a decent cash cushion going (anywhere from three months to two years), invest the rest via dollar cost averaging in equities as you are doing already. In my opinion I see no role for bonds in the first ten years of accumulation, but it's your stash and life! Regret and emotions are the hardest part.

Read up on investing if you haven't: the intelligent investor (I like the edition with annotations from Zweig), one or two Bogle books. Look around in the forum here for other suggestions.

Don't fret too much about fine-tuning allocations of xx% to VTI or VXUS. The main thing is getting started, which you have. And don't forget to live while acquiring your financial independence.

Good luck!

Thanks for the suggestions, I'll definitely check them out!!

 

[sergio]

A financial trajectory is very situational... I suggest that you work through Quicken's Lifetime Planner (retirement planning tool included in Quicken Deluxe and higher) and it will show you your personal trajectory based on your situation. Once you have a base case established, you can do what-if comparisons using different assumptions.

If you want to retire at 45, you'll need taxable account funds to carry you from 45 to 59 1/2, perhaps along with SEPP distributions from your tax-deferred accounts (tIRA, 401k, 403b or whatever).

I think the reality is that if you want to retire that early that it will have to be from total return rather than from income, and you'll need about 33x your annual living expenses (including provisions for taxes, health insurance and health care, car replacements, roof replacements, etc.)

I don't see bonds as making sense for someone until they are in their 40s, but if you are on track to retire at 45 you may want to start using new money (contributions) to buy bonds in your late 30s.

Also see http://www.early-retirement.org/for...-answer-before-asking-can-i-retire-69999.html as background on some details.

If you are looking to withdraw 40K per year in current dollars from a taxable account for the rest of your life starting in 17 years, assuming a safe withdrawal rate of 3% per year, that account would have to grow to 1.33 million in today's dollars in 17 years. How much you need to put in every year to reach this level depends on your after-tax inflation-adjusted return rate. For example if it's zero, 1.33M/17 is 78K/yr of contributions in today's dollars. For return of X the divisor rises to sum of (1+X)^(1,2,3,...,16,17) so for 3% it's ~60K/yr, 5% it's ~50K/yr, and 7% it's ~40K/yr. Again these are annual after-tax contributions in today's dollars.

I realize your question is directed towards asset allocation, but I think the bigger challenge is reaching the savings rate target in your taxable account to be able to support the amount of withdrawal you are aiming for. IMO it would be much easier if you could get by withdrawing less.

Thanks a lot for the guidance! Here are some rough calculations, all using a post-inflation return of 5.5%. For simplicity, I'm doing all calculations in terms of today's dollars:

1. 401k: Max out until 45 years old at $23k/yr (includes employer contribution.) This means that in 17 years, it should reach about $712k. Suppose that between 45 and 59, I just let it sit there. By 59.5 I will have around $1.5m.

2. Roth IRA: Max out until 45 years old at $5.5k/yr. In 17 years, it'll grow to $170k, and if I let it sit there until 59, I will have around $360k in there. I realize I could continue to contribute from part-time work.

So by semi-retiring at 45, I should have close to $2m in my Roth IRA and 401k when I'm 59. Now for my taxable account, If I contribute $20k/yr for 17 years, at the 5.5% rate of return I should have $620k in there to get me through 45 to 59.5. I also may live overseas for a few years, in which case I'd probably need to withdraw closer to $20k/yr rather than $40k/yr. Even in the US I may be able to get by with $35k/yr, or try aiming for semiretirement at 47 instead of 45. I could probably also up the contribution to $22k instead of $20k/yr. Of course with a higher rate of return this all becomes much easier

I also have an HSA which is expected to be worth around $100k by the time I'm 45 (assuming I max it out each year and don't take anything out), but since it's such an uncertainty (i.e. I may switch to an employer who doesn't offer a HDHP, huge medical emergencies etc...), I'm leaving that out of the calculations.

Am I looking at this the right way? Again these are just some rough calculations - I'm trying to get the hang of all this. Thanks again!!

 

[pb4uski]

That is an ambitious savings plan, but seems plausible. I don't quite get to your numbers, but you may be able to contribute more than $23k and $5.5k because contribution limits will grow with inflation.

The 5.5% real return is probably aggressive as well... but who knows.

 

[sergio]

That is an ambitious savings plan, but seems plausible. I don't quite get to your numbers, but you may be able to contribute more than $23k and $5.5k because contribution limits will grow with inflation.

The 5.5% real return is probably aggressive as well... but who knows.

Thanks.

Those were some pretty rough calculations. I actually went back did the calculations using a real calculator. Assuming a 7% return, and 3% inflation my 401k should be worth right around $1.05m pretax (in today's dollars) if I max it out for 17 years, and leave it alone until 59.5. This assumes limits increase with inflation.

My Roth IRA would be worth around $276,000 (in today's dollars) under a similar setup. My HSA would be worth around $88k.

The taxable account would be worth around $525k pretax, which means my withdrawal rate from 45 to 59.5 would be between 6-7%, which seems quite high even for an account that's supposed to last 14 years.

I may have to go back to the drawing board

I really appreciate the feedback though!!

 

[dunkelblau]

If the only purpose of your taxable account is to bridge to age 59.5 from 45, then I think it pencils out, although with little margin. If this account returns 5.5%/yr after-inflation and taxes, that's doubling every 14 years, so each 20K annual deposit gets doubled in real terms when pulled out 14 years later. Your numbers for your retirement accounts add up to ~1.4M in today's dollars at age 59.5. At a 3% safe withdrawal rate, this should maintain your 40K/year drawdown after your taxable account depletes.

If I were in this situation I would try to trim my expenses by 5K/yr and add it to the taxable account for margin. It could come in handy if your projected return rate falls short by a point or two.

 

[sergio]

If the only purpose of your taxable account is to bridge to age 59.5 from 45, then I think it pencils out, although with little margin. If this account returns 5.5%/yr after-inflation and taxes, that's doubling every 14 years, so each 20K annual deposit gets doubled in real terms when pulled out 14 years later. Your numbers for your retirement accounts add up to ~1.4M in today's dollars at age 59.5. At a 3% safe withdrawal rate, this should maintain your 40K/year drawdown after your taxable account depletes.

If I were in this situation I would try to trim my expenses by 5K/yr and add it to the taxable account for margin. It could come in handy if your projected return rate falls short by a point or two.

Thanks a lot!! I've been running the numbers now for a while and it's great to have an independent confirmation. I'm going to try to up the taxable contribution to $22k/yr, as well as look for additional income sources to beef up the account even more. Thanks again!