Hi I Am - 42, Contemplating Retirement in ~3-5 yrs

[djfiii]

Hi All -

New to the forum, and mostly plan to read / absorb info for a while. I don't really have any specific questions at the moment. I think my biggest unknown is what my annual income number should be for the desired lifestyle (simply because I haven't bothered to estimate that yet).

In summary, it's just my wife and I - we don't have kids, and don't plan to have kids (although we have two dogs that we spoil like they are our kids). We're not extravagant by my estimation, certainly not relative to our income, but we do appreciate not having to worry much about how much we spend on the little stuff - we generally just buy what we want, when we want it (and I fully acknowledge and appreciate what a luxury that is - I grew up in a lower middle class household where every dollar mattered).

We currently live in SoCal and are very high income earners. W/ base, bonus, stock etc. we are @ about a combined $950k/yr. If you add projected earnings from a few real estate investments I have, it definitely tops $1M/yr. This has really ramped up dramatically in the past 5 years as we both really hit prime earning territory in our careers; the numbers below would presumably be higher if we had been earning like that for a longer period.

Current Asset snapshot is approximately:

$1M - primary house
$400k - land where we plan to build a second home.
$500k - various real estate investments
$150k - Cash / Brokerage (non-retirement)
$1.5M - Retirement Accounts (IRAs, SD-IRAs, 401k, etc.)
Total - $3.55M

Current Liability snapshot is approximately:
$400k - primary home mortgage
$130k - primary home HELOC balance
$230k - land mortgage
Total - $760k

Net = ~$2.8M

There are a few smaller items I left out for simplicity (cars, etc.) but the above is a fair ballpark.

With no real basis, my thought right now is that $200k/yr (after all debt being paid) would let us continue to live a pretty care-free lifestyle. That's us in a nutshell - looking forward to participating in the forum.

Edit: one question I thought of immediately is what others do to leverage assets held in retirement accounts, given early withdrawal penalties etc. A large percentage of our net worth is tied up there, so I'll definitely have to figure out the optimal path. I saw references to Roth-IRA conversions - I'll go snooping in that direction, but any other tips are welcome.

 

[pb4uski]

$200k/yr excluding debt service is a lot to spend while retired. We live rather simply but do have 2 homes and 2 newish cars, boats, etc. and spend less than half of that. Since we pretty much do as we want on less than half of that I'm not sure if I could figure out a way to spend $200k a year.

What you might do is do some analysis of what you spend now and what it is on.... it is probably a good time to do so as the major credit cards often provide annual statement of what you spent with them. And then think about how that might change if you were retired. And perhaps set up some easy tracking of 2020 spending to get a more solid baseline.

You also might want to spend some time with Quicken Lifetime Planner (included in Quicken Deluxe and higher versions) or FIRECalc or some of the other retirement planning tools. While you've no doubt hear of the 4% rule, if one is retiring as early as you plan to 4% is probably too high... I would go no higher than 3.5% and lower would be better. $200k/3.5% is $5.7m... but that is on the high side because it excludes any potential defined pension or social security. But my point is that if your really NEED $200k a year in retirement in your mid-40s that you need a sizeable nestegg to do it.

Sorry to be a debbie-downer. Good luck.

 

[djfiii]

Thanks for the response - and that's not really a debbie downer answer; just the opposite, if you're getting by on $100k/yr with two homes etc, then it's likely my $200k estimate is high.

If I bring my number down to, say, $150k/yr @ 3.5% the net asset number comes down to $4.3M, which is much closer to where I currently stand. Given our current income levels and savings / investment rates, it seems reasonably likely that I can accumulate another $1.5M inside of 5 years.

Anyway, all data points are good in my view. Appreciate the tips!

 

[Bamaman]

I remember when $1 million was really a million dollars. And living the Southern California lifestyle can take a truly wealthy person to their knees quickly when the incomes dwindle.

If you continue to live where you are presently, you should be prepared to either keep on working--or start another line of work. Because there, you're still middle class.

My cousin lived in a palatial mansion in Woodland Hills and had 4 townhouses on the sand in Newport Beach. After a divorce and ex-husband's suicide, she finds herself living in someone's guest house in Palos Verdes Estates. The money didn't last long.

 

[djfiii]

Thx - also a fair and sobering point. I'm always a pragmatist and the second home is being built in Montana, so we could always bail on SoCal and set up permanent residence in MT. I enjoy it here, but not so much that I'm willing to throw away all the years of hard work. If it ever comes to that, SoCal is definitely in the rear-view.

I'm also in a line of work that lends itself well to working from anywhere, and is in very high demand (Cyber Security). So even in retirement, it's likely that I can earn quite a bit doing individual contract work on my own terms, and in a less stressful way.

 

[pb4uski]

....If I bring my number down to, say, $150k/yr @ 3.5% the net asset number comes down to $4.3M, which is much closer to where I currently stand. Given our current income levels and savings / investment rates, it seems reasonably likely that I can accumulate another $1.5M inside of 5 years. ...

You would not count your home(s) since they are not income producing assets.... so I have you with only $2.15M ($1.5m retirement accounts, $500 real estate investments and $150k taxable accounts)... half way to $4.3m.

So with some good investment results and that $1.5m of savings you should be close within the next 5 years.

I ran FIRECalc assuming a current portfolio of $2.15m (75/25) and an additional $300k a year for the next 5 years ($1.5m in total) and it comes up with spending of $152k at the 95% success level.... $136k at 100% success.
YMMV.

 

[Aerides]

Do not count your home or anything else that you don't really expect to sell (land, 2nd home, etc.), not for firecalc anyways.

As far as expenses, rather than guestimate, most of us would say just go by your past couple years actual data. If you pay all your cards and expenses out of one or three main accounts, add those up, line by line. Include property taxes, insurance, look back a couple of years for big ticket items to spread out. In a high COL area with a bigger home, and other properties, $200k might not be as high as it sounds to most of us, especially if you don't really budget at all, and travel well. Then factor in health insurance - I'd swag in $20k per year if I had nothing else to go by right now.

Since you don't mention a planned retirement date, you have time to work that out, and the income to clear liabilities. And as far as savings, given the annual caps on 401ks, you should have plenty left to build up your taxable accounts so that early withdrawals becomes a non-issue.

 

[Exit 2024]

Hi All -


Current Asset snapshot is approximately:

$1M - primary house
$400k - land where we plan to build a second home.

Hi, djfiii,
and welcome!

Will those listed above produce any income in retirement? if not - you should exclude them from calculations. 3.5% applicable only to investments, investments in markets.
Same goes for cars and any other personal use items - unless you plan to sell them.
RE investments that produce cash flow should reduce your investments income needs, if that make any sense. For example if you need $200k/year but your RE conservatively will provide $50k/year free cash flow after all expenses, then your investable assets need to generate only $150k, at 3.5% you will need about $4.3M.

 

[djfiii]

Great additional tips everyone, thanks!

Regarding primary residence - good point on excluding it. I'll have to noodle on the exact logistics a little, but I definitely don't plan to leave both residences idle. I'm thinking we might alternate - maybe live in MT for a year while we lease out the SoCal house for a year, and then switch back and live in SoCal for a bit. Our SoCal house could rent for $4500/mo right now, so maybe $5000/mo by the time I call it quits; net of property taxes, insurance, and some reserve for maintenance I'll probably have $3500/mo. The MT house is on a ski mountain in a resort area, so that would be more of a weekly or weekend type audience throughout the year, as opposed to an annual lease. I'll have to do more research on annual income for that one.

Also, I'm currently tracking my real estate investments @ my cost basis. I know that the $500k is already worth roughly $850k and targeting exit at or around that number by the end of 2020. So that's a bit more toward that additional $1.5M that's likely already there (I like to play things relatively conservatively).

Anyway, thanks much for the perspectives!

 

[WyomingLife]

Welcome aboard!

As such a high earner, you obviously know these things already, but I just wanted to flag them.

1. Be cognizant of the tax rules regarding multiple residences and state income tax. I think the latter nets out via crediting, but I'm not a tax lawyer. The former could be relevant upon sale of either/both and other aspects (income taxes, etc.).

2. Be sure to include in your budget fly fishing gear (seriously). Drift boats aren't all that expensive, but, well, there is more than skiing in these parts. And there isn't snow on the ground between June-August (most years).

3. I was somewhat taken aback by your question, which seems to be "How much do I need to make to maintain my lifestyle?" with your lifestyle being two homes, etc.

It isn't clear to me that you have a precise handle on either your income or your expenditures.

The following is going to sound like sour grapes, and I don't mean it as such. Applying Thomas Stanley metrics, you arguably are an "Under Accumulator of Wealth." With an income of $1M at age 42, your NW should be $4.2M. Granted, that metric has a lot of problems, including the fact, in your situation, you apparently only started to hit that income number recently.

Still, your burn rate seems to be quite high. And you don't seem to have a firm handle on either income or expenditures, and now you want to pull the ripcord at age 45. You could go through a lot of money quickly from age 45 until SS, and thereafter.

If I were you, I'd get a firm handle on the household finances even (or especially if) I was making $1M a year.

 

[djfiii]

Thanks much. Your observations are fair; I have the data to really analyze our spending (my wife plugs everything in to Quicken every Monday night like clockwork, but I haven't spent the time to isolate what will persist after retirement, vs. what is just superfluous today). Seems obvious now that it's been pointed out.

I guess I wasn't asking others (or intending to) to tell me what my number should be, but rather, looking for number / lifestyle combinations that others might be willing to share, so I could start to triangulate what might work for us. Perhaps a naive approach, but that was the thinking. But you're right, probably best to just use my own data and go from there.

Regarding under-accumulating, I think that's definitely skewed because of the rapid advances my wife and I have both experienced recently. As recently as five years ago (so me 37, her 36) we were probably just over $400k in combined income. Maybe $500k the year after that, $600k, then $750k, and pushing $950k for 2019.

We have both maxed out our 401ks since we started working at 22, rolled those over into IRAs along the way, invested in real estate, purchased a fix-up home in a nice area to build the most equity via upgrades, etc. We don't have super fancy cars - my wife sold a 12 year old 2005 Toyota Rav4, and bought a 2017 Subaru Outback. I just bought a Jeep Wrangler. Also, the $2.8M NW is really more like $3.15M NW if I value my real estate investments @ market rates. At minimum, it feels like I've always been hyper focused on growing the net worth number, but I'm sure I've squandered some opportunities along the way.

I suspect we also spend more than needed on vacations and *stuff*, though, and taxes have always been very high where we live (Chicago, and then Los Angeles) so that takes a decent % out of the totals. We also live in an area where housing on the low end is $1M, and I probably haven't optimized every tax strategy either.

45 would be the very earliest; based on input thus far, it seems more likely that 47/48 would be safer and more realistic. I would also likely generate income doing contract work at a pace / schedule that doesn't interfere with my fishing, snowboarding, rock climbing, and other activities

 

[StuckinCT]

Thanks much. Your observations are fair; I have the data to really analyze our spending (my wife plugs everything in to Quicken every Monday night like clockwork, but I haven't spent the time to isolate what will persist after retirement, vs. what is just superfluous today). Seems obvious now that it's been pointed out.

I guess I wasn't asking others (or intending to) to tell me what my number should be, but rather, looking for number / lifestyle combinations that others might be willing to share, so I could start to triangulate what might work for us. Perhaps a naive approach, but that was the thinking. But you're right, probably best to just use my own data and go from there.

Regarding under-accumulating, I think that's definitely skewed because of the rapid advances my wife and I have both experienced recently. As recently as five years ago (so me 37, her 36) we were probably just over $400k in combined income. Maybe $500k the year after that, $600k, then $750k, and pushing $950k for 2019.

We have both maxed out our 401ks since we started working at 22, rolled those over into IRAs along the way, invested in real estate, purchased a fix-up home in a nice area to build the most equity via upgrades, etc. We don't have super fancy cars - my wife sold a 12 year old 2005 Toyota Rav4, and bought a 2017 Subaru Outback. I just bought a Jeep Wrangler. Also, the $2.8M NW is really more like $3.15M NW if I value my real estate investments @ market rates. At minimum, it feels like I've always been hyper focused on growing the net worth number, but I'm sure I've squandered some opportunities along the way.

I suspect we also spend more than needed on vacations and *stuff*, though, and taxes have always been very high where we live (Chicago, and then Los Angeles) so that takes a decent % out of the totals. We also live in an area where housing on the low end is $1M, and I probably haven't optimized every tax strategy either.

45 would be the very earliest; based on input thus far, it seems more likely that 47/48 would be safer and more realistic. I would also likely generate income doing contract work at a pace / schedule that doesn't interfere with my fishing, snowboarding, rock climbing, and other activities

I think you are on the right track, having just turned 48 and been lurking here for two years - things feel a little different with 50 in site. I think a 3.5% WR is safe at 50, even perhaps 4%, though my comfort level is around 3.5%.

One big unknown is health insurance which is a bit of a wildcard, I budget $30k a year for my family of five, for you probably $20k. So if this figure is high relative to your liquid assets, your safe WR rate is probably a little lower than 3.5%.

I think anything less than 3% you are building wealth over time in real terms. Some of it depends on your goals, i.e. how much wealth you would like to build over time but at 45 or even 50, you are still a ways from Medicare and Social Security so health costs can change the SWR slightly if you have a lot of illiquid assets.

It also sounds like a lot of your income producing assets will be non qualified, so you can achieve better tax treatment than with retirement assets in a qualified plan. Definitely doable.