Retiring in your 40s

[hoosier83]

As gauss said, your budget has to include everything (taxes, medical insurance, new roof, ...). If it does, you are good to go.

You have ~$2M in MMFs. MMFs historically lose to inflation. I would deploy most of that $2M to something that would at least meet inflation. Beating inflation would be better. You will hopefully have a very long retirement. Inflation is something you need to be aware of. Your 66% equity should do the job, but I would not hold that much "cash".

This is a valid point. I am a conservative person by nature so I struggle with a more aggressive allocation even though most studies show a future benefit.

I used mmf because it seemed like bond funds were losing value over the past few years. I realize this is likely temporary and that future rate cuts should cause bond fund gains.

My thought process was that if that if the market crashes 50%, then my balance would change from 6mil (4mil stocks + 2mil mmf) to 4mil (2 mil stocks + 2 mil mmf). This would still be ok for us with 3%swr if we cut our discretionary spending in half. If i held a bond fund in this same scenario it could lose 25% of value leaving us with 3.5mil which is still doable but not optimum.

 

[Koolau]

Most "experts" suggest 40% to 60% equities will w*rk in most situations. You can keep several years of cash on the side (MM or CDs, MYGAs, etc.) to cover the down turns so you don't have to sell equities at a loss. Only you can decide what you feel safe with in terms of cash.

Best luck!

 

[RetiredHappy]

This is a valid point. I am a conservative person by nature so I struggle with a more aggressive allocation even though most studies show a future benefit.

I used mmf because it seemed like bond funds were losing value over the past few years. I realize this is likely temporary and that future rate cuts should cause bond fund gains.

My thought process was that if that if the market crashes 50%, then my balance would change from 6mil (4mil stocks + 2mil mmf) to 4mil (2 mil stocks + 2 mil mmf). This would still be ok for us with 3%swr if we cut our discretionary spending in half. If i held a bond fund in this same scenario it could lose 25% of value leaving us with 3.5mil which is still doable but not optimum.

Or the optimist in me says $6M will go to $10M if you are 100% equities, and then if it suffers a 50% drop, you still end up ahead with $5M.

 

[engineernerd]

This is a valid point. I am a conservative person by nature so I struggle with a more aggressive allocation even though most studies show a future benefit.

I used mmf because it seemed like bond funds were losing value over the past few years. I realize this is likely temporary and that future rate cuts should cause bond fund gains.

My thought process was that if that if the market crashes 50%, then my balance would change from 6mil (4mil stocks + 2mil mmf) to 4mil (2 mil stocks + 2 mil mmf). This would still be ok for us with 3%swr if we cut our discretionary spending in half. If i held a bond fund in this same scenario it could lose 25% of value leaving us with 3.5mil which is still doable but not optimum.

I think you are fine. Your portfolio is large enough that FIRECalc probably shows 100% success over a fairly wide range of asset allocations. Have you tried the "Investigate changing my allocation" option that produces a graph of your odds of success for stock allocations from 0% to 100%? And as I recall, which of the four fixed-income portfolio components available in FIRECalc you pick doesn't affect the outcome much.

I don't think you need to change a thing if you don't want to, but if it were me I would diversify out of the total U.S. stock market index a bit, especially since it seems to be heavily concentrated in just a few large tech firms lately. We have modest holdings in both a small-cap index EFT and a few international index ETFs.

 

[hoosier83]

You’re not alone. We’re 43/37 and similar situation.

Agreed with others, 1.5m in money market, that too in 401k that you’re not going to touch for the foreseeable future is a bit too conservative. I wouldn’t do it.

Our current total asset allocation is around 65/35. For those of you who have FIRED what is your ratio, keeping in mind we hopefully will have a 50 year retirement?

In regards to the mmf allocation, it has been mentioned by several that this is too conservative. What are recommendations for alternatives (bond funds, tips, cds)?

 

[imjustawarrior]

Our current total asset allocation is around 65/35. For those of you who have FIRED what is your ratio, keeping in mind we hopefully will have a 50 year retirement?

In regards to the mmf allocation, it has been mentioned by several that this is too conservative. What are recommendations for alternatives (bond funds, tips, cds)?

I retired 2.5 years ago. I was 55 and DW was 48. We planned a 50 year retirement. We have been at 75/25 (only 1-2 months expenses in cash) since I was 50. We plan on staying at 75/25 for a long time. From my studying, 75/25 is historically a sweet spot for a 50 year retirement when using broad market index funds.

 

[RetiredHappy]

We bucketize our portfolio, sort of a mix of conservative and aggressive investments. My IRA is in fixed term annuities and some of my spouse's IRA is in MYGA. The rest of our money is invested entirely into equities (ETFs). When I calculate our mix, we are at 80-20 (equities to fixed income).

 

[FLSUnFIRE]

Numbers look great, especially with $4.4M in taxable... lots of flexibility and nice CG tax rates. As long as you've got identities outside of work, jump on in the water is fine. I'd have jumped at 40 if the numbers worked. Once you're on the other side, it's a different world and there's a good chance that you'll find yourself doing and enjoying things you hadn't even considered.... real freedom is weird that way. -I don't think FI but not RE really gives that feeling of complete liberation that lets opportunities flourish.

 

[hoosier83]

I think you are fine. Your portfolio is large enough that FIRECalc probably shows 100% success over a fairly wide range of asset allocations. Have you tried the "Investigate changing my allocation" option that produces a graph of your odds of success for stock allocations from 0% to 100%? And as I recall, which of the four fixed-income portfolio components available in FIRECalc you pick doesn't affect the outcome much.

I don't think you need to change a thing if you don't want to, but if it were me I would diversify out of the total U.S. stock market index a bit, especially since it seems to be heavily concentrated in just a few large tech firms lately. We have modest holdings in both a small-cap index EFT and a few international index ETFs.

Excellent recommendation! I have played around with the different options in firecalc as well as other retirement calculators. This has helped ease my anxiety about finally pulling the trigger.

I like the idea of diversifying away from us big tech companies. I prefer to hold everything with vanguard except my 401k which unfortunately got transferred to ascensus. Do you have any specific ETFs or funds you would recommend for international exposure (vtwax or vtiax)?

 

[hoosier83]

It seems everything comes in "threes." It never seems to fail that we go for weeks, months, even years with no major out-lays and then BOOM! Last year we had to pay for water damage - our HOA rules demand it, even though "their" insurance would have covered it. Same year our HOA dues went up 40% then niece doubled our rent on the Old Homestead. Total easily exceed $15K and $10K of that are now baked in to yearly expenses. It happens.

100% agree. These expenses are not something that I even think about UNTIL there is a problem. New ac units, water leaks, roof issues are now a part of my budget because everything has been breaking lately.

 

[engineernerd]

Excellent recommendation! I have played around with the different options in firecalc as well as other retirement calculators. This has helped ease my anxiety about finally pulling the trigger.

I like the idea of diversifying away from us big tech companies. I prefer to hold everything with vanguard except my 401k which unfortunately got transferred to ascensus. Do you have any specific ETFs or funds you would recommend for international exposure (vtwax or vtiax)?

Neither of those were available when we started out, so what we have are VGK, VPL, and VWO. In your shoes I would choose the ETF version of VTIAX (VXUS), to minimize portfolio change and keep things clear. We like ETFs because you can protect yourself from extreme within-day volatility by placing limit orders. Rarely needed, it's true, but you never know when another "flash crash" could happen, nor whether it would affect close-of-day values.

 

[DrRoy]

With a 2.5% WR you should be good. That being said, we thought our budget would be $100K/yr, we have averaged $150, and may hit $200 this year. That is due to the unexpected generosity of Mr. Market, and we are choosing to BTD.

 

[hoosier83]

We retired - me 39, DH 44, no kids. Well funded investment nest egg, no debt. But no pensions either and SS a very long time in the future. Our motivations were doing a lot of leisure travel plus other things we wanted to do and our time being our own.

It’s been 26 years now, I started Medicare last year and DH just started SS this year at 70.

You look well funded to me based on your annual budget. I assume that includes income taxes. I think you’ll find your federal income taxes will drop once you are both not employed. Welcome to the forum and I encourage you to take that leap.

ETA: having so much in taxable accounts means that you can easily fund such an early retirement since you won’t be able to tap into retirement accounts until age 59.5 without penalty. At the same time you have a lot of flexibility to do Roth conversions before RMD age which for you will be 75!

Is it possible that we could pay no federal taxes? I put our info in dinkytown.net which has an estimated 1040 tax calculator and that was the result. Since we live in Florida, there are no state income taxes to worry about.

Projected total $150k annual withdrawal:
1-Ordinary dividends- $70k ($45k qualified dividends included in ordinary dividends)
2-Stock sale- $80k (includes $40k long term capital gains)
3-Standard deduction- $31.5k

In the past, I have only sold equities for tax loss harvesting purposes and never realized gains. If I am selling a lot that is up 100%, does that basically mean 1/2 of the sale is taxed at capital gains rate and the other 1/2 is not taxed at all since its just my cost basis?

 

[hoosier83]

I get no subsidies and for one person, it costs me $16K to $20K a year. 2 more years to go before I get to Medicare age. When you are younger, it is cheaper. It goes up as you get towards 65.

Wow! That's more than double our combined annual premiums. I struggled with budgeting for healthcare because the premiums seem to increase more than inflation each year. Any advice on how to factor that into the budget?

 

[RetiredHappy]

Wow! That's more than double our combined annual premiums. I struggled with budgeting for healthcare because the premiums seem to increase more than inflation each year. Any advice on how to factor that into the budget?

If you are just budgeting for yourself, use $20K year, assuming you get no ACA subsidies like me. For 2, plan for $35k to $40k.

Our taxable income is high, into the first tier of IRMAA (my spouse is of Medicare age). If your income is over 400% of poverty, you won't get subsidies next year.

 

[imjustawarrior]

Is it possible that we could pay no federal taxes? I put our info in dinkytown.net which has an estimated 1040 tax calculator and that was the result. Since we live in Florida, there are no state income taxes to worry about.

Projected total $150k annual withdrawal:
1-Ordinary dividends- $70k ($45k qualified dividends included in ordinary dividends)
2-Stock sale- $80k (includes $40k long term capital gains)
3-Standard deduction- $31.5k

In the past, I have only sold equities for tax loss harvesting purposes and never realized gains. If I am selling a lot that is up 100%, does that basically mean 1/2 of the sale is taxed at capital gains rate and the other 1/2 is not taxed at all since its just my cost basis?

Sounds correct to me.

 

[imjustawarrior]

Wow! That's more than double our combined annual premiums. I struggled with budgeting for healthcare because the premiums seem to increase more than inflation each year. Any advice on how to factor that into the budget?

Go on your state or federal ACA exchange and see how much plans cost. Then add in oop, dental, and vision.

We budget $40k/yr for our family of 5. It is what it is.

 

[audreyh1]

Is it possible that we could pay no federal taxes? I put our info in dinkytown.net which has an estimated 1040 tax calculator and that was the result. Since we live in Florida, there are no state income taxes to worry about.

Projected total $150k annual withdrawal:
1-Ordinary dividends- $70k ($45k qualified dividends included in ordinary dividends)
2-Stock sale- $80k (includes $40k long term capital gains)
3-Standard deduction- $31.5k

In the past, I have only sold equities for tax loss harvesting purposes and never realized gains. If I am selling a lot that is up 100%, does that basically mean 1/2 of the sale is taxed at capital gains rate and the other 1/2 is not taxed at all since its just my cost basis?

Yes, it’s possible.

You only pay tax on your gain when selling a stock/asset, never the cost basis.

For healthcare - your taxable income may be low enough to get some ACA subsidies. If you have accessible funds you don’t really have to budget the Max OOP for every year. You’ll be unlikely to use much of it unless you or your wife have non-stop major health issues.

 

[Semi-Retyrd]

There are a few posters on this forum (including myself) that are advocates of alternative investment funds both as core investments and as diversifiers. These posts are spread on several threads. I recommend you check out those of FD1000.
These funds tend to be long-short and may be considered riskier by your brokerage due to their derivative and short positions even though they are not when measured by volatility and risk adjusted return statistics.
As an alternative to a MM fund HOSIX yields significantly more with the highest Sharpe ratio of all funds sold by Fidelity. It's a short duration multisector bond fund that has little interest rate sensitivity while currently paying nearly 6%.
In my own portfolio I own QLENX (nearly 30%) as my core equity investment and EGRIX as my core fixed income investment (nearly 50%) along with ATLCZ, PDI, and SCEPRM as other fixed income investments that are modestly riskier than EGRIX. QLENX and EGRIX are global funds, so I have significant international exposure from them.
These funds are likely new to you, so I would recommend if interested you start with a modest allocation to get comfortable with any of them.
The bottom line here is based on their strategies and statistics I believe they are much less risky than an index fund like VOO or VTI while offering better risk adjusted returns.

 

[gauss]

Thanks for the detailed response. I included one-off expenses like home repairs and new cars but did not think to add oop max for medical expenses. Do most project for this on their annual budget?

DW and I are healthy. We each pay about $10,500/year for high-deductible HSA compliant health plans. We are both over 60 now, but have a few years to go until Medicare.

Since our health plans are "high-deductible", I think if one of us incurred $8,000 in coinsurance, then the health insurance starts to start to pay for that individual. This 8,000 limit applies individually as required by Federal regulations.

I typically plan on paying the OOPmax once every 5 years or so for each of us. A planned outpatient surgery, where I had anesthesia, put me over the max in January this year.

-gauss

 

[hoosier83]

Welcome to the ER Forum.

Two links that many have found helpful with their retirement planning process are Frequently Asked Questions and FireCalc. I would recommend looking them over and drilling down on the nuts and bolts of withdrawals, how you would deal with market downturns, etc.

With your available assets, it is a matter of budgeting, desired life-style, and actually being mentally ready to retire from your current positions.

I have listed our proposed budget for next year. Please let me know what you think. Is there anything we are missing? Obviously, we have some flexibility with our vacation budget if other unexpected expenses pop up.

EXPENSE​	ANNUAL $​
mortgage​	0​
property tax​	9000​
home ins​	5500​
flood ins​	600​
umbrella ins​	700​
hoa​	4000​
landscaping​	1000​
water​	600​
electricity​	2400​
home repairs​	4000​
​	​
internet (included with hoa)​	0​
cellphone​	800​
tv/netflix​	500​
​	​
health ins​	20000​
other medical oop/copays​	5000​
dental cleanings​	500​
dental surgery​	1000​
​	​
auto ins​	2500​
auto registration​	100​
gas (we drive ev mostly)​	300​
new car​	6000​
auto repairs​	1000​
​	​
grocery​	6000​
restaurant​	15000​
​	​
cosmetics​	500​
clothing​	3000​
toiletries​	500​
haircut​	500​
​	​
vacation/discretionary​	54000​
gifts​	5000​
​	​
federal/state taxes​	0​
​	​
TOTAL​	150000​

 

[MarieIG]

@hoosier83 - while your emergency dental, home owners repairs, new car(s) might exceed the budget you have listed - but you shouldn't have them every year - and your taxable account and flexible travel budget should IMHO provide sufficient funds. Your grocery budget looks low, but the food bill seems to be covered under restaurants which is easy enough to shift back and forth as required.

I would also look into setting up Roths for both you and your DW. You don't have to fully fund them, but having some accounts later on which can generate tax free income is not necessarily a bad thing.

 

[gauss]

1) Assuming that the new car (6,000) is an annual accrual for this (ie reserve fund) and not the full cost?

2) $0 Fed income tax?

Other than these two items, IMHO the rest looks reasonable.

I think the only time when DW and I would spend more than 150k per year is when we Roth Convert to the top of the 24% bracket.

 

[hoosier83]

@hoosier83 - while your emergency dental, home owners repairs, new car(s) might exceed the budget you have listed - but you shouldn't have them every year - and your taxable account and flexible travel budget should IMHO provide sufficient funds. Your grocery budget looks low, but the food bill seems to be covered under restaurants which is easy enough to shift back and forth as required.

I would also look into setting up Roths for both you and your DW. You don't have to fully fund them, but having some accounts later on which can generate tax free income is not necessarily a bad thing.

Yes, we both work full-time right now so there is a lot of take-out and ubereats . That will likely change after retirement as I do enjoy cooking.

I just started backdoor roth iras for each of us a couple years ago. There is only about 16k in each so I forgot to add to our NW. Do we have to have earned income to contribute to regular Roth ira each year after retirement?

 

[hoosier83]

1) Assuming that the new car (6,000) is an annual accrual for this (ie reserve fund) and not the full cost?

2) $0 Fed income tax?

Other than these two items, IMHO the rest looks reasonable.

I think the only time when DW and I would spend more than 150k per year is when we Roth Convert to the top of the 24% bracket.

1- Yes, that is an annual accrual towards a new car every 10 years. That number is probably on the low side, but we are not really car people.

2- I did a 1040 estimate calculator, and the result was 0 federal tax liability. We live in Florida so no state tax. I am not fully confident with this, but we have never filed a return with income from only dividends and capital gains. I did read several articles that indicated this was possible.