Am I on track for early retirement?

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Am I on track for early retirement?

Postby caffeinefree » Sat Mar 23, 2013 1:02 pm

I am trying to get a handle on my retirement investment. I would like to retire or semi-retire early (~45 years old), and I want to do a portfolio check and make sure that I am on track to meet my goals.

Emergency Funds: Six months of expenses
Debt: $163k mortgage @ 4.0% (29 years left)
Tax Filing Status: Single
Tax Rate: 25% Federal, 4% State
State of Residence: Ohio
Age: 27
Desired AssetAallocation: 80% stocks / 20% bonds
Desired International Allocation: 30% of stocks

Current Retirement Assets (~$150k total)

Taxable
24% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.16%)
8% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.06%)
7% International Business Machines Corp (IBM)
7% Microsoft Corp (MSFT)
6% Merck & Co Inc (MRK)
2% Home Depot Inc (HD)
1% Walt Disney Co (DIS)
1% Wal-Mart Stores Inc (WMT)

401(k) at Fidelity
10% Aggregate Bond Index Fund (no ticker – intermediate bonds) (0.03%)
9% U.S. TIPS Index Fund (no ticker) (0.03%)

Roth IRA at Vanguard
7% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.06%)

Rollover IRA at Vanguard
9% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.06%)
9% Vanguard REIT Index Fund Admiral Shares (VGSLX) (0.10%)

Contributions

New Annual Contributions
$17,500 401(k) (+$2,700 company match)
$5,500 Roth IRA
$2,500 HSA (plan to increase this to max next year – may decrease 401k contributions to do this if necessary)

Comments

The individual stocks in my taxable portfolio are the remnants of college funds from my parents that came to me when I turned 21. I have slowly been selling off the stocks at a rate of about $10k/year and rolling them into my taxable investment account at Vanguard.

My 401(k) has an option for Roth contributions. As of right now, about 70% of that account is Roth, the rest are company contributions and a small amount of pre-tax from when I first started working.

edit: I forgot to mention that if I stay with my current employer for 5+ years (which is my plan), I will be receiving some form of pension in addition to my 401(k). I am not counting on this money because we've seen a lot of funny business with pensions in recent years, but it will be a nice additional benefit if I get it. Current projections say I will receive $200/month starting at 65 (not sure if there's a limit on how many years this runs?). This dollar amount increases each year I remain with the company.

Questions:
1. My current plan is to contribute as much as I can on a Roth basis, my thoughts being that when I retire early I will still be able to withdraw my contributions penalty-free. Is this a good plan? I know about the early distributions option, but I’d rather not be forced to withdraw a certain percentage every year if I don’t need it.

2. Right now I have my portfolio arranged as a Core Four Portfolio (http://www.bogleheads.org/wiki/Lazy_Por ... portfolios), but I am beginning to doubt whether I should have so much of my portfolio in real estate. Any thoughts on this?

3. I am qualified for the Vanguard Voyager $250 portfolio analysis from a Certified Financial Planner. I have been considering doing this, but was wondering if it’s really worth the money or if they will mostly tell me what I already know. Any opinions?

4. Are there any resources or rules of thumb to estimate what I will need for medical expenses in retirement? I have a pretty good handle on what I will need for general living expenses and have a detailed retirement calculator laid out for myself in Excel, but the one big question mark for me is healthcare.
Last edited by caffeinefree on Sat Mar 23, 2013 6:45 pm, edited 2 times in total.
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Re: Am I on track for early retirement?

Postby momar » Sat Mar 23, 2013 1:15 pm

How much do you spend?

Do you plan to have kids?

Probably the two most important questions.

And no, you should probably not do roth 401k. Do a traditional, then when your income is low convert it to a roth ira in steps.
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Re: Am I on track for early retirement?

Postby hoppy08520 » Sat Mar 23, 2013 1:26 pm

Hello and welcome to the forum. You seem to have a pretty good handle on what you're doing. My only comment is that since you anticipate retiring early, then I wouldn't do Roth 401(k) contributions today. After early retirement, your income will go down and you'll be able to convert some of your Traditional balances each year into Roth at a low or even zero percent tax rate. With that in mind, why pay a 29% tax on your Roth 401(k) contributions today when you could pay much less as an early retiree? Take the extra amount you're paying in taxes today for Roth contributions and put that into your taxable investments. For example, today you're paying $14,084 to put $10,000 into the Roth 401(k). Instead put $10,000 into the Traditional 401(k). With the remaing $4084, you'll pay some tax on that and then invest the rest in taxable.
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Re: Am I on track for early retirement?

Postby KyleAAA » Sat Mar 23, 2013 1:30 pm

I agree with the advice on skipping the Roth 401k option. You can easily access traditional 401k assets penalty-free using SEPP anyway (google it). The tax deduction is much more valuable now, in your case, since your income and tax rate will likely go down in retirement.
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Re: Am I on track for early retirement?

Postby gt4715b » Sat Mar 23, 2013 1:42 pm

A quick back of the envelope calculation shows that starting at 150k today and adding 22.5k yearly with increases due to inflation shows final account values (in today's dollars) in 18 years of:

2% Real return: 696k (27k yearly income with 4% withdrawal)
3% Real return: 782k
4% Real return: 881k (35k yearly income with 4% withdrawal)
5% Real return: 994k
6% Real return: 1.12 million (45k yearly income with 4% withdrawal)
7% Real return: 1.27 million
8% Real return: 1.44 million (57k yearly income with 4% withdrawal)

This doesn't take into account taxes and other considerations, but gives a general idea. Seems like a stretch for full retirement unless we have a great 18 years of equity returns. Also note if you fully retire at 45 your SS benefits will be lower because it takes 35 years of work into account.
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Re: Am I on track for early retirement?

Postby caffeinefree » Sat Mar 23, 2013 1:52 pm

momar wrote:How much do you spend?


With frivolous spending on vacations and such, I'm living off about $35k/year right now.

momar wrote:Do you plan to have kids?


That is up in the air right now. My SO wants kids, so I imagine we'll end up having at least one eventually, but that would be several years down the line. We have roughly the same income and both expect 10% raises (in addition to ordinary 3-4% annual raises) in the next year once we have our Masters degrees. My thought is that 20% increased income plus the anticipated decrease in social activities that comes with having kids should cover the costs.

hoppy08520 wrote:My only comment is that since you anticipate retiring early, then I wouldn't do Roth 401(k) contributions today. After early retirement, your income will go down and you'll be able to convert some of your Traditional balances each year into Roth at a low or even zero percent tax rate.


Are you talking about doing a rollover from a Traditional 401(k) to a Roth IRA? Or something else?

KyleAAA wrote:I agree with the advice on skipping the Roth 401k option. You can easily access traditional 401k assets penalty-free using SEPP anyway (google it).


So I know about SEPP, but (as I mentioned in my post) I'm not sure this would be the right choice for me, because I'm not sure I want to withdraw the same amount each year. There is a good chance that the first 10-15 years of my retirement I will be semi-retired, which is to say I will quit my 9-5 desk job and go do something I really enjoy but doesn't pay very much. If I'm doing this, I may need smaller distributions in my early years of retirement and larger ones in my later years. Being locked into taking the same distribution every year doesn't make much sense to me in this case, but maybe there is something I am not understanding about SEPP.
Last edited by caffeinefree on Sat Mar 23, 2013 9:24 pm, edited 1 time in total.
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Re: Am I on track for early retirement?

Postby stan1 » Sat Mar 23, 2013 2:01 pm

What you have control over right now is expenses and income. You are investing in your education which hopefully will lead to higher income after graduation as well as in future years. Your spending seems to be in check as you are saving a lot.

I'd say you are off to a good start that will give you flexibility in 20 or 30 years. The key challenge for the next decade will be maintaining the discipline to manage your expenses after you get married and have children, as well as making sure your skills/value to employer stay high to preserve your income.
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Re: Am I on track for early retirement?

Postby hoppy08520 » Sat Mar 23, 2013 2:26 pm

caffeinefree wrote:
hoppy08520 wrote:My only comment is that since you anticipate retiring early, then I wouldn't do Roth 401(k) contributions today. After early retirement, your income will go down and you'll be able to convert some of your Traditional balances each year into Roth at a low or even zero percent tax rate.


Are you talking about doing a rollover from a Traditional 401(k) to a Roth IRA? Or something else?

What I'm trying to say is that supposing you make only Traditional 401(k) contributions during your working life, you'll eventually roll all of this over to a Traditional IRA. Once you transition into a low/no-income phase, you can then convert a portion of your Traditional IRA balance each year from Traditional into a Roth IRA. You would convert enough up to the 0% or maybe into the 10% bracket. Today, the MFJ 10% tax bracket starts at $17,850. With your standard deductions ($12,000) and exemptions ($3,900 per person), and assuming $0 ordinary income, you could convert ~$20,000 $30,000 - $40,000 each year from traditional to Roth at 0% tax. Each year, just keep converting enough to stay below the 10% bracket. After a number of years, you'll have moved all (or at least a lot) of your Traditional account into a Roth account without paying any taxes. Quite a bit better than 29% tax rate you're paying now.

Plus, for the money you convert into Roth, after 5 years you can withdraw that portion without penalty (just the conversions, not the earnings) to provide for income before age 59.5 and before you can start taking Social Security. See http://www.mrmoneymustache.com/2011/11/ ... your-401k/ for more on this tactic, specially the part in "Strategy 2" in the linked page.

BTW, have you seen the Mr Money Mustache site on early retirement? You'll love it.

EDIT: strikethrough mistake on tax brackets and add correct amount.
Last edited by hoppy08520 on Sun Mar 24, 2013 3:30 pm, edited 1 time in total.
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Re: Am I on track for early retirement?

Postby momar » Sat Mar 23, 2013 3:38 pm

caffeinefree wrote:
momar wrote:How much do you spend?


With frivolous spending on vacations and such, I'm living off about $35k/year right now.

momar wrote:Do you plan to have kids?


That is up on the air right now. My SO wants kids, so I imagine we'll end up having at least one eventually, but that would be several years down the line. We have roughly the same income and both expect 10% raises (in addition to ordinary 3-4% annual raises) in the next year once we have our Masters degrees. My thought is that 20% increased income plus the anticipated decrease in social activities that comes with having kids should cover the costs.

You can check out the post above to see how much you might have in 18 years. It is probably not enough even under optimistic real return scenarios. You should be thinking 2% withdrawal as a margin of safety.

Check out http://www.firecalc.com/
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Re: Am I on track for early retirement?

Postby caffeinefree » Sat Mar 23, 2013 6:54 pm

hoppy08520 wrote:What I'm trying to say is that supposing you make only Traditional 401(k) contributions during your working life, you'll eventually roll all of this over to a Traditional IRA. Once you transition into a low/no-income phase, you can then convert a portion of your Traditional IRA balance each year from Traditional into a Roth IRA. You would convert enough up to the 0% or maybe into the 10% bracket. Today, the MFJ 10% tax bracket starts at $17,850. With your standard deductions ($12,000) and exemptions ($3,900 per person), and assuming $0 ordinary income, you could convert $30,000 - $40,000 each year from traditional to Roth at 0% tax. Each year, just keep converting enough to stay below the 10% bracket. After a number of years, you'll have moved all (or at least a lot) of your Traditional account into a Roth account without paying any taxes. Quite a bit better than 29% tax rate you're paying now.

Plus, for the money you convert into Roth, after 5 years you can withdraw that portion without penalty (just the conversions, not the earnings) to provide for income before age 59.5 and before you can start taking Social Security. See http://www.mrmoneymustache.com/2011/11/ ... your-401k/ for more on this tactic, specially the part in "Strategy 2" in the linked page.

BTW, have you seen the Mr Money Mustache site on early retirement? You'll love it.


Ah, I understand now. So I could either live off my taxable accounts or my existing Roth IRA for the first 5 years, until I can take penalty-free disbursements from the rollover Roth. This is an interesting thought, and I will have to look into it more (thanks for the link to MMM, it was very clear-cut there). I had previously thought that you had to roll over your ENTIRE 401(k) at once, but if you can do it in chunks, that makes sense.

I have generally steered clear of MMM's blog, because he's a little OVERLY extreme in many of his views, but I admit there are probably a lot of things I could learn from it. The problem I've run into is that most of the personal finance books out there are written with the assumption that you are retiring at 60+, not earlier, so my understanding of the investment vehicles out there for earlier retirement is a bit hazy.
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Re: Am I on track for early retirement?

Postby caffeinefree » Sat Mar 23, 2013 7:00 pm

momar wrote:You can check out the post above to see how much you might have in 18 years. It is probably not enough even under optimistic real return scenarios. You should be thinking 2% withdrawal as a margin of safety.

Check out http://www.firecalc.com/


2%, really? Pretty much any literature I've read on the subject recommends 4% as a safe withdrawal rate, which is why I figure 20ish years is a reasonable shot.

I actually have a much more sophisticated calculator built for myself in Excel (including mortgage amortization, etc.), so I've got the numbers down and I've played with them pretty extensively. I am making an assumption of 4% real returns (which may or may not be realistic, but who can tell) and 4% withdrawal rate, and it spits out 45-48 as being a reasonable estimate for when I could retire. Of course, I don't think I will want to retire outright, so if I decide to do something part-time that makes $20k/year, I could probably "retire" even sooner with these assumptions.

edit: Also, using my spending/portfolio worth assumptions plugged into Firecalc, I have a success rate of 98.9% if I live to be 100. I'd say that's erring on the side of safety.
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Re: Am I on track for early retirement?

Postby hoppy08520 » Sat Mar 23, 2013 8:18 pm

caffeinefree wrote:So I could either live off my taxable accounts or my existing Roth IRA for the first 5 years, until I can take penalty-free disbursements from the rollover Roth. This is an interesting thought, and I will have to look into it more (thanks for the link to MMM, it was very clear-cut there). I had previously thought that you had to roll over your ENTIRE 401(k) at once, but if you can do it in chunks, that makes sense.

Yes, that's the gist of it.

I just want to clarify a couple of terms and make sure you understand the "penalty-free disbursement" part.

After separating from a company, you can "rollover" a traditional 401(k) to a traditional IRA; depending on the 401(k) plan, you might be able to rollover just a portion, or all. When you do this correctly, the pre-tax balance stays pre-tax so there's no taxable event. You're really just changed custodians and put the money into a different type of account (IRAs and 401(k), while similar, have some different rules). When you do this, depending on what funds you had in the 401(k), you typically wind up transferring (rolling over) the 401(k) balance into cash (money market) in the new custodian, and then you're free to pick the funds you want.

You might wind up doing this a few times in your life, once for each job, and rollover your 401(k) into your traditional IRA after you leave the job. Or, some people will rollover their old 401(k) into their new 401(k). And sometimes people just leave their money in the 401(k) with their former employers (depending on the rules of the 401(k) plans).

Once you have money in a traditional IRA, then you can do Roth "conversions" to move all or part of the traditional IRA balance into a Roth IRA. So I wouldn't technically call that a "rollover Roth"; it's just a Roth IRA to which you've added funds that were converted from a traditional IRA. Technically, you can also "rollover" a Roth 401(k) to a Roth IRA -- this would be be a "rollover Roth". But, since you already have a Roth IRA, and you might wind up converting Traditional IRA money into that same Roth IRA, there's really not much point in calling it a "rollover" IRA -- the term really doesn't matter.

Finally, the penalty-free disbursements are based on each "lot" that you convert. So, suppose you convert $10,000 to Roth in year 2023, and $13,000 in 2024. Once 2028 rolls along, then you can take out that $10,000 without penalty, but the $13,000 you converted in 2024 is still locked up for one more year until 2029. When you start making conversions, you'll need to keep good records of these conversions (unless future tax laws change) so you can file your taxes correctly. This is what the MMM article described as a "Roth ladder", as you just keep converting some each year, and then 5 years later, you have that money if needed...like climbing a ladder.
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Re: Am I on track for early retirement?

Postby caffeinefree » Sat Mar 23, 2013 8:37 pm

hoppy08520 wrote:I just want to clarify a couple of terms and make sure you understand the "penalty-free disbursement" part.

After separating from a company, you can "rollover" a traditional 401(k) to a traditional IRA; depending on the 401(k) plan, you might be able to rollover just a portion, or all. When you do this correctly, the pre-tax balance stays pre-tax so there's no taxable event. You're really just changed custodians and put the money into a different type of account (IRAs and 401(k), while similar, have some different rules). When you do this, depending on what funds you had in the 401(k), you typically wind up transferring (rolling over) the 401(k) balance into cash (money market) in the new custodian, and then you're free to pick the funds you want.

You might wind up doing this a few times in your life, once for each job, and rollover your 401(k) into your traditional IRA after you leave the job. Or, some people will rollover their old 401(k) into their new 401(k). And sometimes people just leave their money in the 401(k) with their former employers (depending on the rules of the 401(k) plans).

Once you have money in a traditional IRA, then you can do Roth "conversions" to move all or part of the traditional IRA balance into a Roth IRA. So I wouldn't technically call that a "rollover Roth"; it's just a Roth IRA to which you've added funds that were converted from a traditional IRA. Technically, you can also "rollover" a Roth 401(k) to a Roth IRA -- this would be be a "rollover Roth". But, since you already have a Roth IRA, and you might wind up converting Traditional IRA money into that same Roth IRA, there's really not much point in calling it a "rollover" IRA -- the term really doesn't matter.

Finally, the penalty-free disbursements are based on each "lot" that you convert. So, suppose you convert $10,000 to Roth in year 2023, and $13,000 in 2024. Once 2028 rolls along, then you can take out that $10,000 without penalty, but the $13,000 you converted in 2024 is still locked up for one more year until 2029. When you start making conversions, you'll need to keep good records of these conversions (unless future tax laws change) so you can file your taxes correctly. This is what the MMM article described as a "Roth ladder", as you just keep converting some each year, and then 5 years later, you have that money if needed...like climbing a ladder.


Thanks for taking the time to clarify this. I am clear on the rule differences between 401(k)s and IRAs (I've done my homework there!), I guess the only part I need to do more reading on is the actual conversion process. I've already rolled over a 401(k) from a previous employer to a Traditional IRA, but it was Vanguard to Vanguard and I was young and financially naive and didn't do much more than click the "convert" button. I think was given the option to convert to Roth during that process, but opted to go Traditional because I wasn't prepared to take the tax hit. That's what I was thinking you meant - converting the funds at the time of the rollover - which is why I phrased it that way.

I did just read this post on the Bogleheads wiki (http://www.bogleheads.org/wiki/Roth_IRA_conversion), so now I understand what you are saying: 1) roll over 401(k) to Traditional IRA, 2) convert some amount each year (however much I think I'll need 5 years down the road), 3) wait 5 years and make the penalty-free withdrawal, 4) repeat each year until everything is converted OR I reach 59 1/2.

This makes perfect sense, and I do see the ultimate tax benefits of doing this. I will adjust my 401(k) contribution strategy accordingly. Thanks again - I'm so glad I came on here and asked the question!
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Re: Am I on track for early retirement?

Postby Savvy » Sat Mar 23, 2013 9:18 pm

Are you on track for early retirement? Yes.

Will you retire early? Maybe.
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Re: Am I on track for early retirement?

Postby hoppy08520 » Sat Mar 23, 2013 9:50 pm

caffeinefree wrote:I did just read this post on the Bogleheads wiki (http://www.bogleheads.org/wiki/Roth_IRA_conversion), so now I understand what you are saying: 1) roll over 401(k) to Traditional IRA, 2) convert some amount each year (however much I think I'll need 5 years down the road), 3) wait 5 years and make the penalty-free withdrawal, 4) repeat each year until everything is converted OR I reach 59 1/2.

One last thing...regarding (2) and even (4).

If/when your income drops in early retirement, you should convert at much to Roth as you can each year while still staying under the 10% Federal income tax bracket, taking state income tax into consideration as well. This really has nothing to do with whether you will or won't need it in five years; if you can convert at a 0% rate to get the money into a Roth, then do it even if you won't need the money in five years, in ten years, or ever---you might as well get it into a Roth because then you'll never pay taxes on the withdrawal and you won't have paid taxes on the contribution -- the best deal you can get.

That being said, if you feel like you'll need considerably more in five years, then this might indicate that you should convert some even into the 10% bracket. Although, if you're at the point where you feel like you need to pull so much money from your IRAs that you're converting into the 10% tax bracket, then that says your early-retirement forecasts might be too rosy.

Regarding #4, you can still make Roth conversions even after 59.5, and indeed even after 70.5 when RMDs are required to be taken from traditional IRA balances (under current law). There are some scenarios when this can be the right move, mostly regarding estate planning (another topic...).
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Re: Am I on track for early retirement?

Postby rickmerrill » Sat Mar 23, 2013 11:47 pm

You are doing all of the right things right, just know that in the movie of life the plot changes. You'll know when the time is ripe because you are have put yourself in a position financially to be the director. Keep up the good work!
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Re: Am I on track for early retirement?

Postby slow n steady » Sun Mar 24, 2013 6:26 am

hoppy08520 wrote:
caffeinefree wrote:
hoppy08520 wrote:My only comment is that since you anticipate retiring early, then I wouldn't do Roth 401(k) contributions today. After early retirement, your income will go down and you'll be able to convert some of your Traditional balances each year into Roth at a low or even zero percent tax rate.


Are you talking about doing a rollover from a Traditional 401(k) to a Roth IRA? Or something else?

What I'm trying to say is that supposing you make only Traditional 401(k) contributions during your working life, you'll eventually roll all of this over to a Traditional IRA. Once you transition into a low/no-income phase, you can then convert a portion of your Traditional IRA balance each year from Traditional into a Roth IRA. You would convert enough up to the 0% or maybe into the 10% bracket. Today, the MFJ 10% tax bracket starts at $17,850. With your standard deductions ($12,000) and exemptions ($3,900 per person), and assuming $0 ordinary income, you could convert $30,000 - $40,000 each year from traditional to Roth at 0% tax. Each year, just keep converting enough to stay below the 10% bracket. After a number of years, you'll have moved all (or at least a lot) of your Traditional account into a Roth account without paying any taxes. Quite a bit better than 29% tax rate you're paying now.

Plus, for the money you convert into Roth, after 5 years you can withdraw that portion without penalty (just the conversions, not the earnings) to provide for income before age 59.5 and before you can start taking Social Security. See http://www.mrmoneymustache.com/2011/11/ ... your-401k/ for more on this tactic, specially the part in "Strategy 2" in the linked page.

BTW, have you seen the Mr Money Mustache site on early retirement? You'll love it.



I could be wrong (it's happened at least once or twice, but don't tell my wife :D ) But I think hoppy might have those tax brackets incorrect. I believe $0-17,850 is the 10% bracket for MFJ, not below it. $17,850-72,500 is the 15% bracket. So to have a 0% Fed tax, you would have to convert an amount lower than your exemptions and deductions ($20,000 if using the standard deduction). I wouldn't argue that converting in the 10-15% bracket would be all that bad of a deal compared to your current 25%.

Depending on how large the pension is, (if you receive on) it could make sense to convert to the top of 15% bracket. That's what I plan on doing when I retire around 45. I currently will receive a pension starting at age 50 that will easily place me in the 15% bracket anyways, so I may as well convert in the years I'm not receiving it. I'm a couple years younger than caffeinefree, but I'm sure nothing will change my plans between now and retirement :oops: :shock: :oops:
Ehh, I think I'll just toss it all in a Target Retirement Fund... seriously.
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Re: Am I on track for early retirement?

Postby hoppy08520 » Sun Mar 24, 2013 6:48 am

Slow n steady, yes you're right, thanks for the correction. Got mixed up with my brackets. I corrected my early reply.
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Re: Am I on track for early retirement?

Postby RobInCT » Sun Mar 24, 2013 8:59 am

I would honestly not worry about this question yet. Your entire working life to date has been less than 10 years. Possibly less than 5? You are trying to project an event almost 20 years off. You just don't have enough information, frankly. Marriage? Kids? Home ownership? Promotions? Career changes? All huge events with significant financial repercussions whose existence is hard to predict for most 27 year olds.

If early retirement is your goal, the best advice for your 20s is to save as aggressively as you can and work on getting your salary up as much as possible. I would not bother crunching numbers for specific retirement targets for at least another 8-10 years. Speaking at the age of 34, I can promise you you'll have a much better idea of your life landscape at 35 than you do a 27.

I understand goals are important and number crunching is a bit of a hobby for many, but I would concentrate on number crunching your current budget, seeing opportunities to cut expenses, seeing if you can cut expenses from one year to the next, getting generic advice about the best ways to save and best savings vehicles to use, etc.
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Re: Am I on track for early retirement?

Postby STC » Sun Mar 24, 2013 9:25 am

caffeinefree wrote:
momar wrote:You can check out the post above to see how much you might have in 18 years. It is probably not enough even under optimistic real return scenarios. You should be thinking 2% withdrawal as a margin of safety.

Check out http://www.firecalc.com/


2%, really? Pretty much any literature I've read on the subject recommends 4% as a safe withdrawal rate, which is why I figure 20ish years is a reasonable shot.

I actually have a much more sophisticated calculator built for myself in Excel (including mortgage amortization, etc.), so I've got the numbers down and I've played with them pretty extensively. I am making an assumption of 4% real returns (which may or may not be realistic, but who can tell) and 4% withdrawal rate, and it spits out 45-48 as being a reasonable estimate for when I could retire. Of course, I don't think I will want to retire outright, so if I decide to do something part-time that makes $20k/year, I could probably "retire" even sooner with these assumptions.

edit: Also, using my spending/portfolio worth assumptions plugged into Firecalc, I have a success rate of 98.9% if I live to be 100. I'd say that's erring on the side of safety.


The 4% withdrawal rate "rule of thumb" is based on a 30 year retirement. Not a 50 year retirement. To have your money last the full 50 years you are hoping it will last you need to have the principle keep pace with inflation and live off of the remainder, with lower volatility. A heck of a trick. Some annualized scenario's:

Bad Case:
Inflation 3%
Returns on a 50/50 portfolio: 4.5% nominal
Safe withdrawal rate: 1.5%

Average Case:
Inflation 2.5%
Returns on a 50/50 portfolio: 5.5% nominal
Safe withdrawal rate: 3%

Good Case:
Inflation 2.5%
Returns on a 50/50 portfolio: 6.5% nominal
Safe withdrawal rate: 4%

Even with a 50/50 portfolio you are looking at a standard deviation of 9-10%. So the annualized picture gets even more dubious as you account for the order of your returns. You lose a lot of social security benefits. You will have to pay a lot for health care from 45 till medicare age. Frankly, I think you have a 1 in 10,000 chance of pulling it off. And that is BEFORE life happens. Have a kid, its now 1 in 10,000,000. I think its time you be more realistic.

For comparative purposes, my stretch goal is to retire at 50. I am 33, with a $500k portfolio and am able to save $100k - $150k per year currently (income up from $120k per year in 20's to > $300k now). According to my estimates, 50 is a long shot with 1 kid planned. 55 is pretty solid. I wouldn't even think of 45...
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Re: Am I on track for early retirement?

Postby caffeinefree » Sun Mar 24, 2013 10:03 am

STC wrote:Even with a 50/50 portfolio you are looking at a standard deviation of 9-10%. So the annualized picture gets even more dubious as you account for the order of your returns. You lose a lot of social security benefits. You will have to pay a lot for health care from 45 till medicare age. Frankly, I think you have a 1 in 10,000 chance of pulling it off. And that is BEFORE life happens. Have a kid, its now 1 in 10,000,000. I think its time you be more realistic.

For comparative purposes, my stretch goal is to retire at 50. I am 33, with a $500k portfolio and am able to save $100k - $150k per year currently (income up from $120k per year in 20's to > $300k now). According to my estimates, 50 is a long shot with 1 kid planned. 55 is pretty solid. I wouldn't even think of 45...


I see your point, and obviously this is a play-it-by-ear plan - if my portfolio has worse returns than I expect, if I have 3 kids and can't save as much as I expect, if I get injured or become ill and can't work, etc., these things will all change the plan. However, both of my parents retired between 45 and 50 years old, went through the "Great Recession" after retiring, and are still withdrawing significantly less from their portfolios than what they are making (my dad is 72 now). They were in the same profession I am and saved at about the same rate, hence my belief that this is ultimately do-able for me. I am also making my calculations with the assumption of no pension and no inheritance, both of which I have at least a 50/50 chance of receiving, nor am I including the fact that my envisioned retirement is not sitting around doing bupkiss, but just switching to part-time work doing something that I love (rather than something I tolerate).

So your point is noted, but I respectfully decline to take up your negative outlook on life. :)

edit: I feel like I should also point out that based on your savings rate and your income, you will want/need a lot more money than I will in retirement, so your $500k in savings so far is not particularly comparable to my $150k in savings. The best way to assure early retirement to is live simply and cheaply, IMO. I'm no Mr. Money Mustache, but I am pretty frugal, and that is something that will continue whether I have kids or retire or what-have-you. I live very comfortably on $35k/year of spending right now, and if I had extra time on my hands I could almost certainly reduce that to $30k, because currently I pay for a lot of things out of convenience.
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Re: Am I on track for early retirement?

Postby STC » Sun Mar 24, 2013 10:52 am

caffeinefree wrote:So your point is noted, but I respectfully decline to take up your negative outlook on life. :)

edit: I feel like I should also point out that based on your savings rate and your income, you will want/need a lot more money than I will in retirement, so your $500k in savings so far is not particularly comparable to my $150k in savings. The best way to assure early retirement to is live simply and cheaply, IMO. I'm no Mr. Money Mustache, but I am pretty frugal, and that is something that will continue whether I have kids or retire or what-have-you. I live very comfortably on $35k/year of spending right now, and if I had extra time on my hands I could almost certainly reduce that to $30k, because currently I pay for a lot of things out of convenience.



A teaching moment! I am very interested in why you think a realistic view of finances equates to any position on life? My grandfather always said "do what you love and you'll never work a day in your life." I don't know if I will ever retire. I enjoy my job that much. I also dont know if my perspective will change, so I save and keep all options open. Being hell-bent on retiring at 45 indicates that you have 18 years of indentured servitude in front of you, THEN you can "enjoy" life. Otherwise, there is absolutely no reason to retire at 45. What kind of life is it to retire at 45, but without finances to explore all life has to offer? Assuming you can eek out $30k per year (inflation adjusted) withdrawal from your retirement portfolio, what kind of life is waiting? $2k per month in food, taxes, gas, utilities, car, home repair, and other living expenses. $5-7k per year in healthcare. So on a good year you can drive down to florida for the weekend, and once a decade you can make that super-special trip to Europe you had always wanted. Personally, I expect more out of my life. I expect to enjoy my career and family. I expect to be able to experience 99% of what I want to experience that involves finances.

It is a laudable goal to want to be in a position to retire at 45. It is a rookie mistake to close the door on thousands of lifes options over the next 18 year, and the 50 subsequent years, to achieve that goal. My advice to you is to find something you enjoy doing. Do it well. Take pride in it. Life has a way of rewarding those that reward themselves. Good luck to you. :sharebeer
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Re: Am I on track for early retirement?

Postby caffeinefree » Sun Mar 24, 2013 11:34 am

STC wrote:A teaching moment! I am very interested in why you think a realistic view of finances equates to any position on life? My grandfather always said "do what you love and you'll never work a day in your life." I don't know if I will ever retire. I enjoy my job that much. I also dont know if my perspective will change, so I save and keep all options open. Being hell-bent on retiring at 45 indicates that you have 18 years of indentured servitude in front of you, THEN you can "enjoy" life. Otherwise, there is absolutely no reason to retire at 45. What kind of life is it to retire at 45, but without finances to explore all life has to offer? Assuming you can eek out $30k per year (inflation adjusted) withdrawal from your retirement portfolio, what kind of life is waiting? $2k per month in food, taxes, gas, utilities, car, home repair, and other living expenses. $5-7k per year in healthcare. So on a good year you can drive down to florida for the weekend, and once a decade you can make that super-special trip to Europe you had always wanted. Personally, I expect more out of my life. I expect to enjoy my career and family. I expect to be able to experience 99% of what I want to experience that involves finances.

It is a laudable goal to want to be in a position to retire at 45. It is a rookie mistake to close the door on thousands of lifes options over the next 18 year, and the 50 subsequent years, to achieve that goal. My advice to you is to find something you enjoy doing. Do it well. Take pride in it. Life has a way of rewarding those that reward themselves. Good luck to you. :sharebeer


Well, considering that on $35k/year I live very comfortably and can still afford to do things like take a 2-week vacation a foreign country every year or so (this year it's Japan!), I'd argue that I'm not sacrificing much by living small. I live in a low cost of living area and own a modest but comfortable house in a nice neighborhood. I am able to travel as much as I want (vacation days permitting!), I go out with friends, eat well, and go see Broadway plays or go to theme parks, etc., essentially whenever I want. But I save by living modestly and not buying expensive clothes or cars, because those are not things that bring me fulfillment. If I had more time on my hands, I feel could learn some additional skills to save me an extra $3-5k/year (or bring that in as earned income). I may be able to do that as early as next year, since I will be finishing school and no longer be doing 20+ hours of classwork on top of working a 40 hour job.

And I don't hate my career - it is challenging and mentally fulfilling, and I like my company and my coworkers, but it is a desk job. I've seen what happens to people who work desk jobs into their 50s and 60s. It's bad for your health to sit for 8-9 hours a day in a room lit only by flourescent light bulbs and computer screens. Ultimately, I would like to move to a job that allows me to be outdoors and moving around and to have plenty of free time for other hobbies and interests. Maybe I'll find an option for that in my current career path, but maybe I'll need to change careers. Either way, if/when I decide to change career paths, I'd like to be able to do it without having to consider the financial benefits/detriments. It's great that you found something that pays $500k that you love, but not everyone has interests that lead them into careers like that.

Ultimately, I think you and I have different views on how much money is enough and what retirement actually means. I appreciate you sharing your views (and maybe in time one or both of us will change our views - life tends to do that), but I think we'll need to agree to disagree. I wish you good luck as well. :sharebeer
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Re: Am I on track for early retirement?

Postby STC » Sun Mar 24, 2013 11:43 am

I actually don't think we disagree at all. Your number is your number. And reguardless of the differences in our respective numbers, the point remains the same. Enjoy what you do, while you work towards making progress on your number. The information you had shared up until the last post indicated a "tolerable" job that did not seem to be fulfilling. Many in that situation look at retirement as a "way out." This is a mistake in my opinion. The "way out" is to do what you enjoy doing, while you work towards making progress on your number. I was clearly a bit hasty in projecting that profile onto you, and you seem to have some clear plans on getting to where you want to be. Thats the right move. So we do agree. Have fun in Japan!

edit: The reason I was projecting out the negative view of retiring at 45 was to dispel the myth that "if I can just get to retirement, my life will be so much better" - and the use of that myth to paralyze yourself into staying "enslaved" to a crap job for the next 18 years.
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Re: Am I on track for early retirement?

Postby caffeinefree » Sun Mar 24, 2013 9:03 pm

STC wrote:I actually don't think we disagree at all. Your number is your number. And reguardless of the differences in our respective numbers, the point remains the same. Enjoy what you do, while you work towards making progress on your number. The information you had shared up until the last post indicated a "tolerable" job that did not seem to be fulfilling. Many in that situation look at retirement as a "way out." This is a mistake in my opinion. The "way out" is to do what you enjoy doing, while you work towards making progress on your number. I was clearly a bit hasty in projecting that profile onto you, and you seem to have some clear plans on getting to where you want to be. Thats the right move. So we do agree. Have fun in Japan!

edit: The reason I was projecting out the negative view of retiring at 45 was to dispel the myth that "if I can just get to retirement, my life will be so much better" - and the use of that myth to paralyze yourself into staying "enslaved" to a crap job for the next 18 years.


Fair enough! Thanks for taking the time to discuss!
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Re: Am I on track for early retirement?

Postby Jfet » Mon Mar 25, 2013 8:11 am

What we will probably do is convert IRA funds to ROTH in some years and not in others, depending on what assets we sell.

One year perhaps convert $15,000 to $20,000 of IRA to Roth in the 0% bracket (after standard deduction) and live off cashed in CDs or stock sales with high basis.

Next year sell stocks with long term capital gains and pay 0% tax but don't convert Roth...use cash to buy more CDs.

Something like that.

After paying over $56K this year just in federal tax and having only $12,400 in deductions vs 11,900 standard, I will feel some pleasure at sticking it to the man, even if it is sort of cutting off one's nose to spite one's face.
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