Can we retire early?

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saulg
Posts: 6
Joined: Sun Jun 25, 2017 10:10 pm

Can we retire early?

Post by saulg » Sun Jun 25, 2017 10:36 pm

We would like to retire early and are seeking advice on how to adjust our portfolio to support this goal. As we itemized this per the forum posting template, we realized what a mess our portfolio is - spread all over the place with an aggressive asset allocation that is too heavily concentrated in one asset and one sector. We have been selling down the concentrated position but are sensitive to the associated tax consequences.

We recently opened a Vanguard account and started moving funds there and would like to build a base there outside of our employer tax advantaged accounts.

We have been reading a lot here and on /r/financialindependence/ lately to get educated and appreciate any guidance this community might be willing to provide.

Questions
  1. Are our retirement goals/plans viable?
  2. How should we have our portfolio allocated to support our goals? What should we be doing to mitigate against "sequence of return risk" and handle living expenses over the next 7-10 years? Right now our AA is 70/30 all-up (65/35 in taxable, 75/25 in tax advantaged). We are thinking desired allocation is 65/35 or 60/40 all up.
  3. How should assets be best allocated between taxable and tax advantaged accounts? It seems like our total investment balance is well-distributed across the two (about 50/50), but unsure what asset classes (equities, bonds, etc) should best go where given short-term income and long-term growth needs of this plan.
Annual Expenses: $110k
Debt: Zero debt, own our primary residence worth about 900k.
Tax Filing Status: Married Filing Jointly, no children
Tax Rate: 33% Federal (based on 2016 Tax Year)
State of Residence: WA
Age: DH 49, DW 47

Assumptions
DH wants to retire this year, does not have a pension.
DW wants to retire at age 60 and will start collecting a pension (25k/yr).
DH start collecting SS at age 70 (37k/yr)
DW start collecting SS at age 62 (20k/yr)
DW salary 90k/yr, contributes mandatory 15k/yr to 401a DCP and 5k/yr to Roth IRA.

Total Investment Assets - 2.7M

Short Term Reserves/Emergency Fund - 165k
115k Discover Bank High-Yield Savings Account (1.10%)
25k Checking/Savings bank account
25k 1-year CD Ladder

Joint Taxable Account - 1.14M
122k Vanguard Wellesley Income Fund Adm (VWIAX)
111k Vanguard Total Stock Market Index Adm (VTSAX)
100k Vanguard Intermediate Term Tax Exempt Fund (VWITX)
65k Vanguard Limited Term Tax Exempt Fund (VMLUX)
38k Vanguard Total International Stock Index Fund Adm (VTIAX)

396k Microsoft (MSFT)
58k Berkshire Hathaway (BRKB)
49k Alphabet Class A (GOOGL)
48k Alphabet Class C (GOOG)
36k Johnson & Johnson (JNJ)
23k AT&T (T)
19k Cisco (CSCO)
15k Facebook (FB)
10k Energy Transfer Equity LP (ETE)
11k Realty Income Corp (O)
11k Handful of misc speculative stocks

25k Groundfloor Real Estate Lending Marketplace

DH 401k - 680k
128k Fidelity Growth Pool Account
128k Pimco Total Return Account
104k Fidelity Contrafund Pool Account
99k Vanguard Russell 1000 Value Account
60k Russell International Value
47k Russell International Growth
46k Vanguard Short Term Bond Index (VBIPX)
35k Vanguard Russell 2000 Growth Account
33k Artisan Mid Cap

DH Roth IRA - 331k
100k T.Rowe Price Retirement 2030 Fund (TRRCX)
82k Apple (AAPL)
28k Hershey (HSY)
25k Wells Fargo (WFC)
24k Fidelity Four-In-One Index (FFNOX)
20k Vanguard High Dividend Yield Index Fund (VYM)
20k Pimco Income Fund Class D (PONDX)
16k Fidelity Strategic Dividend & Income (FSDIX)
16k iShares Core US Aggregate Bond (AGG)

DW 401a (Defined Contribution Plan) - 257k
105k US Large Cap Equity Index Fund
76k Washington State Bond Fund
40k Global Equity Index Fund
25k US Small Cap Value Equity Index Fund
11k Northern Emerging Markets Equity Index Fund

DW Roth IRA - 115k
50k Vanguard Total Stock Market Index Fund Adm (VTSAX)
39k Vanguard Dividend Appreciation Index Fund (VIG)
16k Vanguard Total Bond Market Index Fund (BND)
10k Vanguard Consumer Discretionary (VCR)

DH HSA - 12k
12K Vanguard Wellesley Income Fund

invst65
Posts: 388
Joined: Thu Nov 27, 2014 11:04 am

Re: Can we retire early?

Post by invst65 » Mon Jun 26, 2017 7:10 am

On any other forum when someone asks the question of "Can we retire early" I think of the saying that "if you have to ask, you can't afford it". On Bogleheads however, it's usually the case that they could probably retire right now if they wanted to.

I definitely agree that your investments are "all over the place".

The one thing I see that would make me very uncomfortable if I'm reading it right is that you have WAY too much riding on Microsoft. $396k directly held? And then just taking a cursory glance at funds I can see several that are also probably highly invested in MSFT (like Fidelity Contrafund).

Edit: I see you in live WA. Maybe that explains why so much MSFT. Employer stock plan?

The Wizard
Posts: 11347
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Can we retire early?

Post by The Wizard » Mon Jun 26, 2017 7:37 am

OP's annual expenses ($110k) seem a bit high given no debt and no offspring.
I prefer to see basic expenses along with desired income, especially when aiming at retirement.
So basic expenses after income taxes might be $60k and desired income after income taxes might be $90k, which gives the retiree resources to travel, etc.

Anyhow, OP can probably retire now but with his wife continuing to work for 13 more years it could be awkward...
Attempted new signature...

saveinvestbecomefree
Posts: 32
Joined: Thu Jan 05, 2017 8:06 am

Re: Can we retire early?

Post by saveinvestbecomefree » Mon Jun 26, 2017 8:00 am

I think you're in the range but DW will have to keep working as planned because your expenses are high for the portfolio you have. For early retirees, I recommend a 3% withdrawal rate. At $110K in expenses, this means a portfolio of $3.7MM. However, your DW will work until 60 so you'll be fine. Plus with a pension and SS kicking in soon after, you have plenty. In your case, a 3.5% or even 4% withdrawal rate would be fine.

You also have a lot of active mutual funds that are likely high fee. This makes a huge difference. It's typical to have a 1% fee on funds like this (vs 0.05% for an S&P 500 index fund). This is 1/3 of you annual spending money if you follow the 3% withdrawal rule! You also have a lot of individual stocks, particularly Microsoft so that adds some risk. I would put at least 80% of your stock holdings in core index funds. Play with the other 20% in individual stocks if you want. I also think your 75/25 stocks/bonds split is fine. 60/40 is also fine. You don't have a lot of sequence of returns risk since DW will keep working and you'll have a pension and SS soon after she stops.

If DW wants to retire much sooner, I would recommend cutting expenses and getting down to a 3.5% withdrawal rate based on your portfolio. With $2.7MM, this means $94,500 in withdrawals (subtract taxes to get spending money).

Good luck. You're in really good shape for what you want to do!

Nowizard
Posts: 1304
Joined: Tue Oct 23, 2007 5:33 pm

Re: Can we retire early?

Post by Nowizard » Mon Jun 26, 2017 8:19 am

You do need to clean up your portfolio but appear in good shape. Retiring is at least two-fold. This is an excellent place to discuss the financial aspects of the decision. However, it is equally important to at least have a general sense of what you are going to in addition to what you are leaving behind with work. Would this be a complete retirement, going to PT work? What would you do with your time, particularly if your SO is continuing to work? You may have answers, and this may not be the place for an extended discussion of the topic, but it is suggested you consider a discussion board where the topic of early retirement is discussed from perspectives other than finances.

Tim

ryman554
Posts: 860
Joined: Sun Jan 12, 2014 9:44 pm

Re: Can we retire early?

Post by ryman554 » Mon Jun 26, 2017 9:00 am

You are not supporting a $110k/year retirement on a $2.7M portfolio.

I'm not going through your entire taxable situation, but it's not a stretch for you to need 15-20k of money to cover taxes, given you likely live in a HCOL area. Now you are talking about a $125k/year need, which puts you between 3.0 and 3.5M, depending on how aggressive you want to be and how much you can cut back your lifestyle.

Yes, the pension will help, but we have no idea how long you need to get there. With the 25k/year pension, you are are just about there to being able to pull the trigger with 2.7M. You had better be able to cut back expenses if needed and still tilt a bit toward equities, but if you make it to DW62, you'll be fine.

smitcat
Posts: 991
Joined: Mon Nov 07, 2016 10:51 am

Re: Can we retire early?

Post by smitcat » Mon Jun 26, 2017 9:59 am

Simplification will help the picture but you should be fine based upon your post and a few guess's on items that you did not include.
Assumptions/ guess's ...
- Your retire ages will be 50/48
- Your tax situation will lower when DH retires this year
- The max funds required pre tax will be $130K/year (likely less with deductions and mfj)
- DW salary usable is $70K (90-20)

If those are true then these should be the results ...
- You will need $60K after DW salary income for 12 years (2.2% WR) = $720K
- Then $105K for 2 years (3.8% WR) = $210K
- Then $85K for 8 years (3.14%) = $680K
- And then $48 for every year after that ( 1.7%) so lets say till 90/88 years of age = $960K

Withdrawal rate never exceeds 4% and is mostly at or below 3% - total funds needed in todays dollars are $2.570 so funded ratio is 1.05 without the home figured in and a life expectancy well above actuary tables.
The ability to be flexible as time goes by would ensure the results.

supersharpie
Posts: 640
Joined: Wed Dec 22, 2010 1:28 pm

Re: Can we retire early?

Post by supersharpie » Mon Jun 26, 2017 10:10 am

saulg wrote:We would like to retire early and are seeking advice on how to adjust our portfolio to support this goal. As we itemized this per the forum posting template, we realized what a mess our portfolio is - spread all over the place with an aggressive asset allocation that is too heavily concentrated in one asset and one sector. We have been selling down the concentrated position but are sensitive to the associated tax consequences.

We recently opened a Vanguard account and started moving funds there and would like to build a base there outside of our employer tax advantaged accounts.

We have been reading a lot here and on /r/financialindependence/ lately to get educated and appreciate any guidance this community might be willing to provide.

Questions
  1. Are our retirement goals/plans viable?
  2. How should we have our portfolio allocated to support our goals? What should we be doing to mitigate against "sequence of return risk" and handle living expenses over the next 7-10 years? Right now our AA is 70/30 all-up (65/35 in taxable, 75/25 in tax advantaged). We are thinking desired allocation is 65/35 or 60/40 all up.
  3. How should assets be best allocated between taxable and tax advantaged accounts? It seems like our total investment balance is well-distributed across the two (about 50/50), but unsure what asset classes (equities, bonds, etc) should best go where given short-term income and long-term growth needs of this plan.
Annual Expenses: $110k
Debt: Zero debt, own our primary residence worth about 900k.
Tax Filing Status: Married Filing Jointly, no children
Tax Rate: 33% Federal (based on 2016 Tax Year)
State of Residence: WA
Age: DH 49, DW 47

Assumptions
DH wants to retire this year, does not have a pension.
DW wants to retire at age 60 and will start collecting a pension (25k/yr).
DH start collecting SS at age 70 (37k/yr)
DW start collecting SS at age 62 (20k/yr)
DW salary 90k/yr, contributes mandatory 15k/yr to 401a DCP and 5k/yr to Roth IRA.

Total Investment Assets - 2.7M

Short Term Reserves/Emergency Fund - 165k
115k Discover Bank High-Yield Savings Account (1.10%)
25k Checking/Savings bank account
25k 1-year CD Ladder

Joint Taxable Account - 1.14M
122k Vanguard Wellesley Income Fund Adm (VWIAX)
111k Vanguard Total Stock Market Index Adm (VTSAX)
100k Vanguard Intermediate Term Tax Exempt Fund (VWITX)
65k Vanguard Limited Term Tax Exempt Fund (VMLUX)
38k Vanguard Total International Stock Index Fund Adm (VTIAX)

396k Microsoft (MSFT)
58k Berkshire Hathaway (BRKB)
49k Alphabet Class A (GOOGL)
48k Alphabet Class C (GOOG)
36k Johnson & Johnson (JNJ)
23k AT&T (T)
19k Cisco (CSCO)
15k Facebook (FB)
10k Energy Transfer Equity LP (ETE)
11k Realty Income Corp (O)
11k Handful of misc speculative stocks

25k Groundfloor Real Estate Lending Marketplace

DH 401k - 680k
128k Fidelity Growth Pool Account
128k Pimco Total Return Account
104k Fidelity Contrafund Pool Account
99k Vanguard Russell 1000 Value Account
60k Russell International Value
47k Russell International Growth
46k Vanguard Short Term Bond Index (VBIPX)
35k Vanguard Russell 2000 Growth Account
33k Artisan Mid Cap

DH Roth IRA - 331k
100k T.Rowe Price Retirement 2030 Fund (TRRCX)
82k Apple (AAPL)
28k Hershey (HSY)
25k Wells Fargo (WFC)
24k Fidelity Four-In-One Index (FFNOX)
20k Vanguard High Dividend Yield Index Fund (VYM)
20k Pimco Income Fund Class D (PONDX)
16k Fidelity Strategic Dividend & Income (FSDIX)
16k iShares Core US Aggregate Bond (AGG)

DW 401a (Defined Contribution Plan) - 257k
105k US Large Cap Equity Index Fund
76k Washington State Bond Fund
40k Global Equity Index Fund
25k US Small Cap Value Equity Index Fund
11k Northern Emerging Markets Equity Index Fund

DW Roth IRA - 115k
50k Vanguard Total Stock Market Index Fund Adm (VTSAX)
39k Vanguard Dividend Appreciation Index Fund (VIG)
16k Vanguard Total Bond Market Index Fund (BND)
10k Vanguard Consumer Discretionary (VCR)

DH HSA - 12k
12K Vanguard Wellesley Income Fund
Yes, of course you can! My wife and I hope to be in a similar place financially by the time we hit 50.

User avatar
Watty
Posts: 12483
Joined: Wed Oct 10, 2007 3:55 pm

Re: Can we retire early?

Post by Watty » Mon Jun 26, 2017 10:41 am

saulg wrote:Annual Expenses: $110k
...
Age: DH 49, DW 47

Assumptions
DH wants to retire this year, does not have a pension.
DW wants to retire at age 60 and will start collecting a pension (25k/yr).
DH start collecting SS at age 70 (37k/yr)
DW start collecting SS at age 62 (20k/yr)
It was not clear if the $110k expense figure includes income taxes or not.

It would be good to make a spreadsheet with your expected expenses and income at different ages. When I was looking at retirement I did this (very roughly) out until I would be 100. By the time I will be 70 and on Medicare and getting Social Security my needed income was dramatically lower so my main challenge was to fund my retirement up until the age of 70.

You also need to consider your lifestyle expenses at different ages. I agree that $110K with a paid off house is a pretty high, but I can can see some people could spend that. The big factor is that as people get older they often spend less on things like travel, cars, and shopping.

I saw several older relatives naturally slow down by the time they were in their mid 70's and since they lived in a paid off house and their health was relatively good there were many months when they didn't even spend their entire Social Security check even though they could have afforded to spend a lot more. Their main expenses were just food, utilities, taxes, and paying for a housekeeper to come in a few days a week.
saulg wrote:DW wants to retire at age 60
Going for more than ten years with one spouse retired and the other working will not work for everyone. Once you are both retired there is a lot more opportunity to do things like travel or even just spending the morning together reading or doing things around the house together.

If possible one thing you might try doing is taking a sabbatical from work for a few months to see how it works for you to be staying at home while your wife is working.

invst65 wrote:The one thing I see that would make me very uncomfortable if I'm reading it right is that you have WAY too much riding on Microsoft. $396k directly held? And then just taking a cursory glance at funds I can see several that are also probably highly invested in MSFT (like Fidelity Contrafund).
+1 on having way too much Microsoft stock.

The long term gains tax rate is likely 15% and I see little chance that you could sell much in a lower tax bracket since your wife will be working for another 10+ years and you have a lot of other taxable investments. I would take a hard look at selling a lot of that ASAP. MSFT is pretty much at a high right now and it could easily drop more than 15% in a market correction.

saulg
Posts: 6
Joined: Sun Jun 25, 2017 10:10 pm

Re: Can we retire early?

Post by saulg » Mon Jun 26, 2017 9:13 pm

Thanks to everyone for the feedback. It has given us a lot to think about and is much appreciated. Some follow up answers:

The concentrated stock position was indeed from an employer plan and we are working to diversify out of that. The viewpoint that the risk this presents offsets the tax implications of selling in context of our current plan is helpful.

We are using Personal Capital to get an idea of cash flow and expenses. This pretty much just extracts everything from our bank accounts, credit cards, etc to arrive at total expenses. We need to find a better way to think about current and projected expenses through retirement as suggested. We based the 110k in annual expenses on our spend over the past year which included about 20k in taxes (quarterly estimated tax payments and property tax only).

We like the concept of the "bridges" to get to the "income event milestones" leading into/through retirement. That is helpful to think about breaking it down into "milestone goals" and how asset allocation supports each.

We need to put more thought into the non-financial aspects of early retirement. DH working part-time with better work/life balance is something we will think about more. DW works in the education field which affords the ability of a lot of time together during the school breaks like summer vacation. We feel this would allow for some longer-term travel experiences together that we have been unable to do thus far.

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Watty
Posts: 12483
Joined: Wed Oct 10, 2007 3:55 pm

Re: Can we retire early?

Post by Watty » Mon Jun 26, 2017 9:47 pm

saulg wrote:The concentrated stock position was indeed from an employer plan and we are working to diversify out of that. The viewpoint that the risk this presents offsets the tax implications of selling in context of our current plan is helpful.
When looking at possible selling strategies one thing to consider is how much taxes you will pay when you do sell them. I would suspect that it would be 15% in long term capital gains taxes either now or later so you may not be saving any taxes by delaying the sale.

One option if you support a charity is to give them shares of stock instead of cash.

J295
Posts: 1323
Joined: Sun Jan 01, 2012 11:40 pm

Re: Can we retire early?

Post by J295 » Mon Jun 26, 2017 10:30 pm

Haven't drilled down on the numbers, but wanted to chime in to say we have been at "early retirement" for about 5 years and love it! The great thing for us has been it has opened up so many adventures that we never saw coming ..... H went part time and now works less and less .... W wasn't working outside the home but decided to get into a new business venture and loves it .... and now we have an opportunity to live elsewhere for the last three months of the year and we're going to jump on that adventure .... so, I guess I'm just saying dig in and find a way to make it work if you feel the call .... good luck

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Bogle_Feet
Posts: 826
Joined: Tue Jan 14, 2014 6:56 pm

Re: Can we retire early?

Post by Bogle_Feet » Tue Jun 27, 2017 5:22 am

I've never seen such a mess of funds. Looks like you went to an asset manager who (of course) aimed to make investing seem complex and complicated in order to justify his fee and keep you in need of him as he charges you year after year. Investing is simple. Just invest in a total bond market index fund and an S&P 500 index fund.

Bacchus01
Posts: 1377
Joined: Mon Dec 24, 2012 9:35 pm

Re: Can we retire early?

Post by Bacchus01 » Tue Jun 27, 2017 5:40 am

I'm going to go against the grain and say you most definitely could retire early if you want. Couples live on one income all the time, and it seems like you could as well.

Like others have said, when looking at early retirement you have to think in chunks of time. From the first retirement to the second one at age 60 is one of them. This is a time where you expect to have income coming in and so your investment income needs are less. I'd suggest you try to find a way to live off just that income and not touch your retirement investments at all.

The second chunk is from 60 until drawing a pension/SS and Medicare. This is the hardest period to manage as you have no income coming in, you have not yet tapped your pension and SS according to your plan, and you most likely still have higher expenses as well as medical expenses before hitting Medicare. The good news is that it's only 5 years and if you were able to live off your one income for the last 10 years, your investment portfolio at this point is likely $4M+. Then consider a chunk of time at age 65 on. There you can use some of the rules of thumb like a 4% swr less SS/Pension income.

I think if you break those down, and especially if you can find a way to live off the one income for the next 10 or so years, you'll be fine.

fundseeker
Posts: 672
Joined: Mon Dec 24, 2007 9:02 am

Re: Can we retire early?

Post by fundseeker » Tue Jun 27, 2017 5:56 am

With all of those investments, how do you know what you're really invested in? Is that what financial advisors do to people, make it so complicated that the investor thinks they need his/her help? I'm not even sure that Morningstar x-ray can decipher that mix. I'm thinking your investing life will get much simpler if you take the guidance offered here. And BTW, you've saved a ton of money! Congratulations!

saulg
Posts: 6
Joined: Sun Jun 25, 2017 10:10 pm

Re: Can we retire early?

Post by saulg » Wed Jun 28, 2017 9:27 pm

No asset manager, I have only myself to thank for this fund mess. :)

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Can we retire early?

Post by livesoft » Wed Jun 28, 2017 9:44 pm

ryman554 wrote:You are not supporting a $110k/year retirement on a $2.7M portfolio.

I'm not going through your entire taxable situation, but it's not a stretch for you to need 15-20k of money to cover taxes, given you likely live in a HCOL area.
I disagree. One can calculate the taxes easily and see the taxes would be nowhere near that high.
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ryman554
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Re: Can we retire early?

Post by ryman554 » Thu Jun 29, 2017 8:11 am

livesoft wrote:
ryman554 wrote:You are not supporting a $110k/year retirement on a $2.7M portfolio.

I'm not going through your entire taxable situation, but it's not a stretch for you to need 15-20k of money to cover taxes, given you likely live in a HCOL area.
I disagree. One can calculate the taxes easily and see the taxes would be nowhere near that high.
Both federal AND state? I'm taking them from my estimates of taxes, weighted 50/50 pre/post tax and estimated federal exemptions. Those are the numbers I'm getting. They might be conservative, but they are not far off. Depending on if all of the retirement money is pre-tax, and one lives in CA, yeah, you get there pretty quickly. Is a ~15% tax rate overall on 125k income really outlandish?

livesoft
Posts: 59173
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Re: Can we retire early?

Post by livesoft » Thu Jun 29, 2017 8:39 am

ryman554 wrote:Both federal AND state?
Yes, I am personally in a similar situation to the OP's scenario. My spouse still works and makes decent money, but less than 6 figures. Our income taxes are below $4,000 a year despite gross income above 6-figures and adjusted gross income above 6-figures.

As for the OP's assumptions, the OP and spouse can live off of taxable account while spouse contributes $24,000 (once age 50 by year-end) to retirement plan and both OP and spouse can contribute to IRAs to the max. So the OP's assumption was costing him in taxes that he didn't have to pay.
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