Early Retirement Check Up - Looking for Direction

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Topic Author
bryaninDC
Posts: 45
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Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

Cash/CDs: $61,000

Debt: Mortgage ($361k owed @3.75%, 30 year, worth $515k, paying $600/month extra toward principal)

Tax Filing Status: Married Filing Jointly

Tax Rate: I don't know. Salary is about $145k/year. Tax rate is much lower than expected because of deductions and maxing out retirement accounts.

State of Residence: VA

Age: 35

Desired Asset allocation: 75% stocks / 25% bonds
Desired International allocation: whatever Vanguard recommends

Current retirement assets (~$282k)

No taxable investments yet

His TSP - 73% L2040 (about 1/3 Roth; 2/3 Traditional)
Company match? Yes, up to 5%.

His Roth IRA at Vanguard
12% Vanguard Target Retirement 2040 (VFORX) (0.14% ER)

His Qualified Pension Plan (after tax)
3% Total Stock Market Fund

Her Traditional IRA at Vanguard
12% Vanguard Target Retirement 2040 (VFORX) (0.14% ER)

Non-retirement: About $14k (5 year old) and $9k (2 year old) held in 529 plans for college. Invested in moderate target-date index funds.
_______________________________________________________________

Contributions

New annual Contributions
$19k his TSP (with agency 1% automatic and 5% match)
$6k his Roth IRA
$7800 his qualified pension plan
$6k her IRA

non-retirement: $4200/year to each 529 plan (2x).

Total assets: $905k; Total Liabilities (Mortgage Only): $364k

Questions:
1. I would like to retire before 50 (45 maybe?) and plan to start receiving a pension of about $40k/year (inflation adjusted) starting at age 50. Current SS estimate--for whatever it's worth--is $28k/year starting at age 67. Am I on track or what should I be doing to improve our chances of meeting the goal? I feel like we have a lot of cash sitting around. I'm also not sure if I should start taxable investing or contribute more to my qualified pension plan at work (or something else entirely). Should we continue paying extra (or even more) on the mortgage.

2. Should I be trying to break up the target date funds in my TSP and IRA(s) into their component funds to place things more tax-efficiently, especially if I start taxable investing? If so, how would you recommend doing it? I like the target date funds, however, so I'm sort of reluctant to change without a compelling reason.

3. What else should i be asking about that isn't obvious to me?

Thank you!
abracadabra11
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Re: Early Retirement Check Up - Looking for Direction

Post by abracadabra11 »

Some of the first questions you should be asking yourself if you're contemplating early retirement are:
1. How much am I currently spending?
2. How much do I plan to spend in retirement?

Once you've answered those two questions, then you can start working backwards to figure out what your savings rate should be given your current portfolio size, allocation, and future return expectations.
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geerhardusvos
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Re: Early Retirement Check Up - Looking for Direction

Post by geerhardusvos »

Nice work. With Social Security and pension, you are on a good path, but it will take some continued saving. What percentage of your after-tax income are you able to save per year? That will help with the calculation if you can retire at age 45 or 50 or whatever. I would recommend saving 40% or more of your income if you want to hit that. I’m only seeing that you’re saving roughly 35,000 to 40,000 per year. Keep that up, and start up your taxable account with any other extra money you can save. Just calculate what your desired retirement budget will be and subtract your pension from that and see where you land. If you want to spend $80,000 per year in retirement, you need about $1 million saved in your portfolio, and then Social Security is gravy once that kicks in.

For your retirement accounts, meaning the tax advantage accounts, target date funds are great as long as they meet your asset allocation needs. I would recommend having individual index funds in your taxable account once you start that (like VTSAX). You don’t typically want target date funds in your taxable account so that you can do some tax loss harvesting, and you may not want the bonds in your taxable account depending on your approach.

I would consider paying off your house more aggressively too before you retire, but that’s up to you. VA is a high cost of living area in general, so might be tough to do, but doable. Just focus on saving a large percentage of your income each month over the next 10 years, and you seem to be well positioned
Last edited by geerhardusvos on Sat Jul 04, 2020 6:07 pm, edited 2 times in total.
VTSAX and chill
02nz
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Re: Early Retirement Check Up - Looking for Direction

Post by 02nz »

bryaninDC wrote: Sat Jul 04, 2020 4:51 pm Current SS estimate--for whatever it's worth--is $28k/year starting at age 67.
Note that this assumes you work and make your current income until that age. If you retire early, your benefits will be lower. How much lower depends on where you are in relation to Social Security benefit "bend points."

You can do a lot better now than 3.75% on a 30-year, so I'd definitely look into refinancing.
sailaway
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Re: Early Retirement Check Up - Looking for Direction

Post by sailaway »

Your post is missing an important factor in determining if you are on track: your current expenses, or moreover, your expected expenses in retirement. Consider health care, any new retirement expenses, such as a new hobby or more travel, and what you hope to be able to do for your children or grandchildren in that calculation.
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retired@50
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Re: Early Retirement Check Up - Looking for Direction

Post by retired@50 »

bryaninDC wrote: Sat Jul 04, 2020 4:51 pm
Tax Filing Status: Married Filing Jointly
Tax Rate: I don't know. Salary is about $145k/year. Tax rate is much lower than expected because of deductions and maxing out retirement accounts.
State of Residence: VA

Thank you!
You can look up your marginal tax rates here:

Federal: https://www.nerdwallet.com/blog/taxes/f ... -brackets/
State: https://www.tax-brackets.org/virginiataxtable

Based on my read, it would appear you're in the 22% Federal and 5.75% State brackets. Check your taxable income amount from 2019 taxes to verify when referring to the linked charts.

I wouldn't worry about breaking up the target date funds into the individual components unless you enjoy the idea of re-balancing.

If you really want to retire early, having some money set aside in a taxable account could come in handy, although there are ways to navigate around the early withdrawal rules for some retirement accounts. The real puzzle for early retirement is getting a solid handle on what your expenses will be. Many people overlook income tax payments and health care costs.

Paying off the mortgage is also appealing, especially if you're not itemizing your mortgage interest on your tax return.

Regards,
This is one person's opinion. Nothing more.
Jain82
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Re: Early Retirement Check Up - Looking for Direction

Post by Jain82 »

You should consider having an emergency fund equal to at least 6 months expenses. You could also consider re-financing your mortgage as a 15 or 20 year mortgage rates are lower than 30 year rate.

If you plan to retire at 50 then you need to plan for 40 years retirement. Excluding pension from expenses, I would personally comfortable with assets with withdrawal rate below 3%.
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Watty
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Re: Early Retirement Check Up - Looking for Direction

Post by Watty »

bryaninDC wrote: Sat Jul 04, 2020 4:51 pm Debt: Mortgage ($361k owed @3.75%, 30 year, worth $515k, paying $600/month extra toward principal)
You should really look into refinancing your mortgage. I have not been following rates closely but I would suspect you could get a new 30 year mortage in the low 3% range or a 15 year mortage for less than 3%. With a 15 year it would be paid off when you are 50 and would like to retire.
Topic Author
bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

abracadabra11 wrote: Sat Jul 04, 2020 5:03 pm
1. How much am I currently spending?
2. How much do I plan to spend in retirement?
These are good questions, and I've had varying answers to them over time. For #1, We are currently living in a temporary situation where we don't have to pay rent and are renting out our house, so the numbers are skewed and I'm trying to nail down our spending habits more accurately. Question #2 is more of a black box for me. We plan to move upon retirement to a lower cost of living area, and it would depend on what age my pension kicks in (there are a couple different options depending on which direction my career goes). For the purposes of this exercise, let's say $80k/year: $40k from investment income and $40k from pension.
Last edited by bryaninDC on Sun Jul 05, 2020 5:17 am, edited 1 time in total.
Topic Author
bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

geerhardusvos wrote: Sat Jul 04, 2020 5:03 pm Nice work. With Social Security and pension, you are on a good path, but it will take some continued saving. What percentage of your after-tax income are you able to save per year? That will help with the calculation if you can retire at age 45 or 50 or whatever. I would recommend saving 40% or more of your income if you want to hit that. I’m only seeing that you’re saving roughly 35,000 to 40,000 per year. Keep that up, and start up your taxable account with any other extra money you can save. Just calculate what your desired retirement budget will be and subtract your pension from that and see where you land. If you want to spend $80,000 per year in retirement, you need about $1 million saved in your portfolio, and then Social Security is gravy once that kicks in.
Thank you for the suggestions and affirmation. I'm not exactly sure how much we are saving per year but I'd estimate it's at least $50k/year. About $39k of that is going into retirement accounts, and then the rest is into 529s (not retirement, I know), and just staying in the checking account. 40% of gross or net income? And do you mean saving 40% in general or 40% specifically for retirement? If we are planning on moving upon retirement, should we account for the sale price/rental income in that $1 million, or do you mean $1 million in non-real estate investments only?
geerhardusvos wrote: Sat Jul 04, 2020 5:03 pm For your retirement accounts, meaning the tax advantage accounts, target date funds are great as long as they meet your asset allocation needs. I would recommend having individual index funds in your taxable account once you start that (like VTSAX). You don’t typically want target date funds in your taxable account so that you can do some tax loss harvesting, and you may not want the bonds in your taxable account depending on your approach.
Okay, makes sense. Do you just buy and hold 100% VTSAX and kind of forget about asset allocation (bonds, etc.) because it's taxable and you want the biggest potential accumulation in the shortest period of time?
geerhardusvos wrote: Sat Jul 04, 2020 5:03 pm I would consider paying off your house more aggressively too before you retire, but that’s up to you. VA is a high cost of living area in general, so might be tough to do, but doable. Just focus on saving a large percentage of your income each month over the next 10 years, and you seem to be well positioned
Is that still true if we are planning to move upon retirement? Is the point just to save money on the interest?
Topic Author
bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

02nz wrote: Sat Jul 04, 2020 5:07 pm
Note that this assumes you work and make your current income until that age. If you retire early, your benefits will be lower. How much lower depends on where you are in relation to Social Security benefit "bend points."

You can do a lot better now than 3.75% on a 30-year, so I'd definitely look into refinancing.
Good point, thanks for highlighting. I'm not really taking SS into account for planning purposes anyway. I think it gets reduced by my pension somehow as well.

Will definitely look into refinancing. Hadn't thought about that b/c we didn't buy the house very long ago. 30 year or 15 year? Wouldn't a 15 year allow us to save more money in the long run?
Topic Author
bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

sailaway wrote: Sat Jul 04, 2020 5:10 pm Your post is missing an important factor in determining if you are on track: your current expenses, or moreover, your expected expenses in retirement. Consider health care, any new retirement expenses, such as a new hobby or more travel, and what you hope to be able to do for your children or grandchildren in that calculation.
True. Let's say $80k/year expenses in retirement for the sake of discussion. I find it difficult to extrapolate living expenses into the future since we living in high cost of living area now and plan not to in the future.
Topic Author
bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

retired@50 wrote: Sat Jul 04, 2020 5:11 pm Based on my read, it would appear you're in the 22% Federal and 5.75% State brackets. Check your taxable income amount from 2019 taxes to verify when referring to the linked charts.
Thanks for the push in the right direction on tax rates. Our taxable income in 2019 was $75,600, so 5.75% VA and 12% Federal.
retired@50 wrote: Sat Jul 04, 2020 5:11 pm If you really want to retire early, having some money set aside in a taxable account could come in handy, although there are ways to navigate around the early withdrawal rules for some retirement accounts. The real puzzle for early retirement is getting a solid handle on what your expenses will be. Many people overlook income tax payments and health care costs.
Good point on the taxes and health care. I'll have to look into that more. Would you recommend putting money into a taxable account over contributing more to my qualified pension plan? I think I can still contribute something like $600/month more to that, which is currently 100% total stock market fund.
Topic Author
bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

Jain82 wrote: Sat Jul 04, 2020 5:15 pm You should consider having an emergency fund equal to at least 6 months expenses. You could also consider re-financing your mortgage as a 15 or 20 year mortgage rates are lower than 30 year rate.

Yeah, we definitely have the emergency fund squared away. We probably have a good year at least of expenses in cash at the moment.
Jain82 wrote: Sat Jul 04, 2020 5:15 pm If you plan to retire at 50 then you need to plan for 40 years retirement. Excluding pension from expenses, I would personally comfortable with assets with withdrawal rate below 3%.
Can you please elaborate a bit on what you mean by the withdrawal rate at 3% and what the implications of that are?
Topic Author
bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

Watty wrote: Sat Jul 04, 2020 7:57 pm
You should really look into refinancing your mortgage. I have not been following rates closely but I would suspect you could get a new 30 year mortage in the low 3% range or a 15 year mortage for less than 3%. With a 15 year it would be paid off when you are 50 and would like to retire.
Good call, hadn't considered that. Does having the mortgage paid of when you retire matter? Is the only advantage of a 15 year over a 30 year paid off like a 15 year that the interest rate will be a bit lower?
grettman
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Re: Early Retirement Check Up - Looking for Direction

Post by grettman »

bryaninDC wrote: Sun Jul 05, 2020 5:29 am
retired@50 wrote: Sat Jul 04, 2020 5:11 pm Based on my read, it would appear you're in the 22% Federal and 5.75% State brackets. Check your taxable income amount from 2019 taxes to verify when referring to the linked charts.
Thanks for the push in the right direction on tax rates. Our taxable income in 2019 was $75,600, so 5.75% VA and 12% Federal.
retired@50 wrote: Sat Jul 04, 2020 5:11 pm If you really want to retire early, having some money set aside in a taxable account could come in handy, although there are ways to navigate around the early withdrawal rules for some retirement accounts. The real puzzle for early retirement is getting a solid handle on what your expenses will be. Many people overlook income tax payments and health care costs.
Good point on the taxes and health care. I'll have to look into that more. Would you recommend putting money into a taxable account over contributing more to my qualified pension plan? I think I can still contribute something like $600/month more to that, which is currently 100% total stock market fund.
If I am not mistaken, you are a Federal employee right? When you say "qualified pension plan" (as it relates to contributions) you are referring to TSP right? That is different from FERS pension (and have no choice in how much you contribute).
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bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

grettman wrote: Sun Jul 05, 2020 5:41 am
If I am not mistaken, you are a Federal employee right? When you say "qualified pension plan" (as it relates to contributions) you are referring to TSP right? That is different from FERS pension (and have no choice in how much you contribute).
No, not the TSP. There is a separate IRS qualified pension plan (Section 401a) with no employer contributions. It’s tax sheltered and not part of the FERS system. I can contribute up to 10% of my salary per pay period. It basically functions like a Roth and has various investment options.
Last edited by bryaninDC on Sun Jul 05, 2020 8:31 am, edited 1 time in total.
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Tamarind
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Re: Early Retirement Check Up - Looking for Direction

Post by Tamarind »

The pension is the linchpin of your strategy as it stands right now, so you should do anything you can to protect and increase it.

It feels like your savings are just a little light for your goal to me. You're saving 26% of gross income for retirement, and the usual target for retirement before 50 would be over 30%. You are a year older than me, with a slightly more aggressive retirement goal, sightly higher salary, less invested, and a lot more debt. Saving rate is how you make up the difference.

It's not a big gap, necessarily. What would you need to do to reduce spending enough to, for example, max out contributions to your qualified pension plan?

A taxable account would also be a great bridge for the time period before your pension starts.

Another thought would be to see how far you are from the second social security bend point. That is the amount of lifetime contributions after which each additional dollar earned yields only half as much social security benefit. Might be worth working an extra year to put a higher floor under the later years of your plan.
Outer Marker
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Re: Early Retirement Check Up - Looking for Direction

Post by Outer Marker »

bryaninDC wrote: Sun Jul 05, 2020 5:33 am
Watty wrote: Sat Jul 04, 2020 7:57 pm
You should really look into refinancing your mortgage. I have not been following rates closely but I would suspect you could get a new 30 year mortage in the low 3% range or a 15 year mortage for less than 3%. With a 15 year it would be paid off when you are 50 and would like to retire.
Good call, hadn't considered that. Does having the mortgage paid of when you retire matter? Is the only advantage of a 15 year over a 30 year paid off like a 15 year that the interest rate will be a bit lower?
Having the mortgage paid off before you retire makes a huge difference because you've eliminated your single largest expense, and need to draw much less from your other assets. Rates on 15 year money are around 2.5% vs. 3% on a 30. That's significant in my mind. Refing to a 15 year from your current 3.75% 30 will save you an immediate $4,500 a year in interest expense on your current outstanding balance, and set you up for a more secure early retirement. Just make sure you can comfortably handle the payments.
Cousin Eddie
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Re: Early Retirement Check Up - Looking for Direction

Post by Cousin Eddie »

bryaninDC wrote: Sun Jul 05, 2020 5:33 am
Watty wrote: Sat Jul 04, 2020 7:57 pm
You should really look into refinancing your mortgage. I have not been following rates closely but I would suspect you could get a new 30 year mortage in the low 3% range or a 15 year mortage for less than 3%. With a 15 year it would be paid off when you are 50 and would like to retire.
Good call, hadn't considered that. Does having the mortgage paid of when you retire matter? Is the only advantage of a 15 year over a 30 year paid off like a 15 year that the interest rate will be a bit lower?
If you are eventually going to be moving from the area, I wouldn't make extra contributions towards the mortgage, but I would check into refinancing to see if you can get a lower 30 year mortgage rate.

Here are things I would be doing:
  • 1. Track expenses. This will help not only with current spending, but also aid in estimating future expenses. Some expenses will remain, others will not, and there may even be new expenses.
    2. Will you continue to receive health care benefits at age 45 and 50? If not check the ACA website for the area you will retire to get an estimate of these costs, bearing in mind that health care may change between now and then. Health care costs are high if you exceed the 400% FPL threshold. If benefits will continue, that is a major plus since you know what these costs will be.
    3. Check the cost of living and housing prices in the area you plan to retire. What sort of house and standard of living do you envision for yourself in this area? What will be your discretionary expenses (travel, entertainment, gifts, donations, etc.).
    4. Your kids will be college age when you expect to retire and that could have a large impact on your expenses at that time. How much will it cost to send your kids to college and where will that money come from? Will you pay for the entire amount?
    5. Start investing in a taxable account. If you plan on doing Roth conversions from your TSP/Qual Pension plan, you will need 5 years of expenses when you retire. Of course, selling your house and buying/renting in a LCOL area should help a lot.
    6. Use Firecalc, CFireSim, and other financial planning websites to analyze different tactics and scenarios.
You're on a good path right now, I think you will find that when you get to age 50 you will need less than you thought, but what you want to live on will be key to whether or not you decide to retire.

Best of luck!
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retired@50
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Re: Early Retirement Check Up - Looking for Direction

Post by retired@50 »

bryaninDC wrote: Sun Jul 05, 2020 5:29 am
retired@50 wrote: Sat Jul 04, 2020 5:11 pm If you really want to retire early, having some money set aside in a taxable account could come in handy, although there are ways to navigate around the early withdrawal rules for some retirement accounts. The real puzzle for early retirement is getting a solid handle on what your expenses will be. Many people overlook income tax payments and health care costs.
Good point on the taxes and health care. I'll have to look into that more. Would you recommend putting money into a taxable account over contributing more to my qualified pension plan? I think I can still contribute something like $600/month more to that, which is currently 100% total stock market fund.
I guess it might depend on the pension rules and regulations, etc. If you have direction and influence over the pension investments and the payout formula suits you (age for eligibility), then I don't see much of a downside. In my case, I used a taxable account because I was putting the max into a 401k and Roth IRA so I had no place else to go.

Many people who dream of early retirement don't seem to be too interested in navigating rules about withdrawals, etc. so using a taxable account is the simple answer, but it may not be optimal from a tax perspective. I wish I could be more clear-cut about what to do, but it seems every case is different.

Regards,
This is one person's opinion. Nothing more.
02nz
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Re: Early Retirement Check Up - Looking for Direction

Post by 02nz »

bryaninDC wrote: Sun Jul 05, 2020 5:15 am I'm not really taking SS into account for planning purposes anyway. I think it gets reduced by my pension somehow as well.
Look on your pay stub, if you are paying Social Security payroll taxes (FICA) then your SS benefits will NOT be reduced because of the pension.
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Watty
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Re: Early Retirement Check Up - Looking for Direction

Post by Watty »

bryaninDC wrote: Sun Jul 05, 2020 5:33 am
Watty wrote: Sat Jul 04, 2020 7:57 pm
You should really look into refinancing your mortgage. I have not been following rates closely but I would suspect you could get a new 30 year mortage in the low 3% range or a 15 year mortage for less than 3%. With a 15 year it would be paid off when you are 50 and would like to retire.
Good call, hadn't considered that. Does having the mortgage paid of when you retire matter? Is the only advantage of a 15 year over a 30 year paid off like a 15 year that the interest rate will be a bit lower?
There are lots of opinions and endless threads about the "Should I pay off the mortgage?" and "15 or 30 year?" questions with good points on all sides but no one size fits all answer.

One big factor is if you would would still be able to max out all your retirement accounts if you had a higher payment with a 15 year mortgage.

For me having a paid off house when I retired made my retirement numbers work a lot better since that lowered the amount of income we need and allows us to me in a lower retirement tax bracket. Since our expenses are lower that also means that with a paid off house we could pretty much get by and just live on Social Security if we really needed to.

Not having a mortgage payment can also lower your sequence of returns risk since you will not need to withdraw money to make your mortgage payment during a long bear market when you investments are low.

If you could get your house paid off by the time your kids are in college that would also help your cash flow then if you are still working since you could use your "mortgage payment" to pay for some college expenses.
Last edited by Watty on Sun Jul 05, 2020 10:18 am, edited 2 times in total.
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geerhardusvos
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Re: Early Retirement Check Up - Looking for Direction

Post by geerhardusvos »

bryaninDC wrote: Sun Jul 05, 2020 5:13 am
geerhardusvos wrote: Sat Jul 04, 2020 5:03 pm Nice work. With Social Security and pension, you are on a good path, but it will take some continued saving. What percentage of your after-tax income are you able to save per year? That will help with the calculation if you can retire at age 45 or 50 or whatever. I would recommend saving 40% or more of your income if you want to hit that. I’m only seeing that you’re saving roughly 35,000 to 40,000 per year. Keep that up, and start up your taxable account with any other extra money you can save. Just calculate what your desired retirement budget will be and subtract your pension from that and see where you land. If you want to spend $80,000 per year in retirement, you need about $1 million saved in your portfolio, and then Social Security is gravy once that kicks in.
Thank you for the suggestions and affirmation. I'm not exactly sure how much we are saving per year but I'd estimate it's at least $50k/year. About $39k of that is going into retirement accounts, and then the rest is into 529s (not retirement, I know), and just staying in the checking account. 40% of gross or net income? And do you mean saving 40% in general or 40% specifically for retirement? If we are planning on moving upon retirement, should we account for the sale price/rental income in that $1 million, or do you mean $1 million in non-real estate investments only?
geerhardusvos wrote: Sat Jul 04, 2020 5:03 pm For your retirement accounts, meaning the tax advantage accounts, target date funds are great as long as they meet your asset allocation needs. I would recommend having individual index funds in your taxable account once you start that (like VTSAX). You don’t typically want target date funds in your taxable account so that you can do some tax loss harvesting, and you may not want the bonds in your taxable account depending on your approach.
Okay, makes sense. Do you just buy and hold 100% VTSAX and kind of forget about asset allocation (bonds, etc.) because it's taxable and you want the biggest potential accumulation in the shortest period of time?
geerhardusvos wrote: Sat Jul 04, 2020 5:03 pm I would consider paying off your house more aggressively too before you retire, but that’s up to you. VA is a high cost of living area in general, so might be tough to do, but doable. Just focus on saving a large percentage of your income each month over the next 10 years, and you seem to be well positioned
Is that still true if we are planning to move upon retirement? Is the point just to save money on the interest?
OK, with that additional information I can give my opinion. If you were planning to move upon retirement, then I would not pay off the house quickly, in fact I would pay it off as slow as possible. This is assuming that you would be moving to a lower Cost of living area. You can’t count your eggs before they hatch, but yes, you can definitely invest the proceeds of your house as a boost to your overall nest egg as you budget your retirement at the new location. I did something similar, I am not in retirement yet, but we just sold a home in a high cost of living area and it definitely boosted our net worth and savings goals since we also will move to a lower cost of living area 5-10 years from now. Again, no need to pay off the house at all, just slowly get it ready for sale to maximize your gains. If you wanted to pay off some as a form of bond or stable place to put your money, it’s probably reasonable, but you know your housing market and if it’s impacted by a potential recession.

In terms of tax efficiency for placing your investments in the various accounts, there is some debate about this, chiefly if bonds belong in the taxable accounts or in the tax deferred accounts. I personally don’t have enough bonds to make a difference, and I also recommend you do something similar. You want to have some bonds, but you don’t wanna have too much since you have these other sources of income. The idea of holding a high equity portfolio is that you will get gains over time, not in the short term necessarily, but you will more than likely have multiples of what you had initially saved upon retirement.

Check this out from the wiki: https://www.bogleheads.org/wiki/Tax-eff ... _placement

I have a tax exempt and a muni bond fund at Vanguard in my taxable brokerage, but they are a very small portion of my overall investments. I also have some total bond index fund in my pretax 401(k), but again, it’s a small portion of my portfolio. Everything else I own is essentially total US stock market index, and non-US stock market index. Most of my international is in my tax deferred 401(k) as well. Roth has a mixture of US and international stock. Taxable I mostly just have VTSAX.

To answer your question, yes, I go hogwild with VTSAX in my taxable account. In fact, when I sold the house, I put over $300,000 into it (I got lucky in that we closed in mid March). It’s a very tax efficient way to invest in the taxable account. We also will have some other sources of income, so I can afford to seek those big gains and take on the massive volatility of stock portfolios. The idea is, if there is a big fat dip (see 2008), we will be able to draw money from elsewhere to fund our retirement expenses, and I won’t have to touch the stocks for a long time. We do plan to live on our taxable account (at least in part) between retirement and Social Security age, but we also plan to do multiple Roth conversions. So my taxable account isn’t a super long time horizon since I plan to spend it first. But for me, my taxable account is going to be my largest account by far, so it will probably also serve us long-term as well. But with a 3.5% to 4% withdrawal rate, it’s very good over a 30 to 40 retirement. I would love to leave my heirs multiple millions of dollars, so I am not interested in bonds to be honest. Have some, but you don’t need more than 5 to 15%. And don’t let anyone on here bully you otherwise given your other income sources. Your portfolio could have huge ups and downs over a 25 to 30 years, but that’s ok, you’ll be way up by then.

:sharebeer
Last edited by geerhardusvos on Sun Jul 05, 2020 11:05 am, edited 1 time in total.
VTSAX and chill
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rterickson
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Re: Early Retirement Check Up - Looking for Direction

Post by rterickson »

02nz wrote: Sun Jul 05, 2020 9:08 am
bryaninDC wrote: Sun Jul 05, 2020 5:15 am I'm not really taking SS into account for planning purposes anyway. I think it gets reduced by my pension somehow as well.
Look on your pay stub, if you are paying Social Security payroll taxes (FICA) then your SS benefits will NOT be reduced because of the pension.
Also look at the details of your pension plan.

Some pensions have a "Level Social Security" option that has a higher initial payment in early retirement. The problem is they make an overly optimistic estimate of your social security benefit, and then permanently reduce your pension payment by this amount at age 62. There is rarely the option (with respect to the benefit calculation) to delay SS to full retirement age or further to age 70.
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Re: Early Retirement Check Up - Looking for Direction

Post by 02nz »

rterickson wrote: Sun Jul 05, 2020 10:46 am
02nz wrote: Sun Jul 05, 2020 9:08 am
bryaninDC wrote: Sun Jul 05, 2020 5:15 am I'm not really taking SS into account for planning purposes anyway. I think it gets reduced by my pension somehow as well.
Look on your pay stub, if you are paying Social Security payroll taxes (FICA) then your SS benefits will NOT be reduced because of the pension.
Also look at the details of your pension plan.

Some pensions have a "Level Social Security" option that has a higher initial payment in early retirement. The problem is they make an overly optimistic estimate of your social security benefit, and then permanently reduce your pension payment by this amount at age 62. There is rarely the option (with respect to the benefit calculation) to delay SS to full retirement age or further to age 70.
Just to be clear, we're talking about different things. I understood OP's remark "I think [Social Security] gets reduced by my pension somehow as well" as a reference to the Windfall Elimination Provision, which applies to those who didn't pay into Social Security, such as those on the old Civil Service Retirement System. If OP is paying into Social Security in the current job, then pension benefits will not cause SS benefits to be reduced. That's entirely separate from the pension benefits.
scubadiver
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Re: Early Retirement Check Up - Looking for Direction

Post by scubadiver »

bryaninDC wrote: Sat Jul 04, 2020 4:51 pm Cash/CDs: $61,000

Debt: Mortgage ($361k owed @3.75%, 30 year, worth $515k, paying $600/month extra toward principal)

Tax Filing Status: Married Filing Jointly

Tax Rate: I don't know. Salary is about $145k/year. Tax rate is much lower than expected because of deductions and maxing out retirement accounts.

State of Residence: VA

Age: 35

Desired Asset allocation: 75% stocks / 25% bonds
Desired International allocation: whatever Vanguard recommends

Current retirement assets (~$282k)

No taxable investments yet

His TSP - 73% L2040 (about 1/3 Roth; 2/3 Traditional)
Company match? Yes, up to 5%.

His Roth IRA at Vanguard
12% Vanguard Target Retirement 2040 (VFORX) (0.14% ER)

His Qualified Pension Plan (after tax)
3% Total Stock Market Fund

Her Traditional IRA at Vanguard
12% Vanguard Target Retirement 2040 (VFORX) (0.14% ER)

Non-retirement: About $14k (5 year old) and $9k (2 year old) held in 529 plans for college. Invested in moderate target-date index funds.
_______________________________________________________________

Contributions

New annual Contributions
$19k his TSP (with agency 1% automatic and 5% match)
$6k his Roth IRA
$7800 his qualified pension plan
$6k her IRA

non-retirement: $4200/year to each 529 plan (2x).

Total assets: $905k; Total Liabilities (Mortgage Only): $364k

Questions:
1. I would like to retire before 50 (45 maybe?) and plan to start receiving a pension of about $40k/year (inflation adjusted) starting at age 50. Current SS estimate--for whatever it's worth--is $28k/year starting at age 67. Am I on track or what should I be doing to improve our chances of meeting the goal? I feel like we have a lot of cash sitting around. I'm also not sure if I should start taxable investing or contribute more to my qualified pension plan at work (or something else entirely). Should we continue paying extra (or even more) on the mortgage.

2. Should I be trying to break up the target date funds in my TSP and IRA(s) into their component funds to place things more tax-efficiently, especially if I start taxable investing? If so, how would you recommend doing it? I like the target date funds, however, so I'm sort of reluctant to change without a compelling reason.

3. What else should i be asking about that isn't obvious to me?

Thank you!
Maybe this was already addressed and I just missed it, but from what you posted above, I am inferring that you are contributing to a traditional IRA for your spouse rather than a Roth IRA. Is that correct? And if so, why?
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bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

Cousin Eddie wrote: Sun Jul 05, 2020 7:40 am
Here are things I would be doing:
  • 1. Track expenses. This will help not only with current spending, but also aid in estimating future expenses. Some expenses will remain, others will not, and there may even be new expenses.
    2. Will you continue to receive health care benefits at age 45 and 50? If not check the ACA website for the area you will retire to get an estimate of these costs, bearing in mind that health care may change between now and then. Health care costs are high if you exceed the 400% FPL threshold. If benefits will continue, that is a major plus since you know what these costs will be.
    3. Check the cost of living and housing prices in the area you plan to retire. What sort of house and standard of living do you envision for yourself in this area? What will be your discretionary expenses (travel, entertainment, gifts, donations, etc.).
    4. Your kids will be college age when you expect to retire and that could have a large impact on your expenses at that time. How much will it cost to send your kids to college and where will that money come from? Will you pay for the entire amount?
    5. Start investing in a taxable account. If you plan on doing Roth conversions from your TSP/Qual Pension plan, you will need 5 years of expenses when you retire. Of course, selling your house and buying/renting in a LCOL area should help a lot.
    6. Use Firecalc, CFireSim, and other financial planning websites to analyze different tactics and scenarios.
Thanks for the ideas. Definitely need to look into health care costs and start doing taxable investing as a tie-over.
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bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

retired@50 wrote: Sun Jul 05, 2020 8:54 am
I guess it might depend on the pension rules and regulations, etc. If you have direction and influence over the pension investments and the payout formula suits you (age for eligibility), then I don't see much of a downside. In my case, I used a taxable account because I was putting the max into a 401k and Roth IRA so I had no place else to go.

Many people who dream of early retirement don't seem to be too interested in navigating rules about withdrawals, etc. so using a taxable account is the simple answer, but it may not be optimal from a tax perspective. I wish I could be more clear-cut about what to do, but it seems every case is different.

Regards,
Okay, that makes sense to me. I need to look into the particulars about withdrawal rules to see if it makes sense to put more into it vs a taxable account. It had low-cost index funds as options, so that's good news.
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

02nz wrote: Sun Jul 05, 2020 9:08 am
Look on your pay stub, if you are paying Social Security payroll taxes (FICA) then your SS benefits will NOT be reduced because of the pension.
Okay, yes I pay FICA out of my paycheck.
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

Watty wrote: Sun Jul 05, 2020 10:05 am
For me having a paid off house when I retired made my retirement numbers work a lot better since that lowered the amount of income we need and allows us to me in a lower retirement tax bracket. Since our expenses are lower that also means that with a paid off house we could pretty much get by and just live on Social Security if we really needed to.

Not having a mortgage payment can also lower your sequence of returns risk since you will not need to withdraw money to make your mortgage payment during a long bear market when you investments are low.

If you could get your house paid off by the time your kids are in college that would also help your cash flow then if you are still working since you could use your "mortgage payment" to pay for some college expenses.
I think I understand that, but it seems most relevant to someone who plans to live in that same house upon retirement, isn't it (instead of moving and selling it or renting it out)? We would almost certainly move to a LCOL area. So, say we sell the house for$700k (or whatever) and then move somewhere else and buy one for $200k, or rent something using the money from the sale. Am I thinking about that the right way?
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

geerhardusvos wrote: Sun Jul 05, 2020 10:12 am
OK, with that additional information I can give my opinion...
Thanks for the advice and taking the time to write it all out. I need to think about the mortgage thing more. There's definitely the appeal of the immediate savings on interest from a shorter mortgage and the corresponding lower interest rate. I realize that comes at the cost of not being able to invest the different in (theoretically higher) equities, whether tax-advantaged or otherwise.

I think I'd just hold VTSAX in my taxable and keep the bonds, etc. in my retirement account(s). I guess you just look at overall asset allocation across accounts, but it's hard to adjust that without breaking up the target date funds into their individual components.
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bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

scubadiver wrote: Sun Jul 05, 2020 10:00 pm
Maybe this was already addressed and I just missed it, but from what you posted above, I am inferring that you are contributing to a traditional IRA for your spouse rather than a Roth IRA. Is that correct? And if so, why?
Not sure I have a great answer to that question. Basically, to get some immediate tax reduction benefit. I don't have any idea where tax rates will be in the future--in general or where we will be living, which is TBD, so we basically split the difference and do some Roth, some traditional (for the IRAs and the TSP). All employer contributions in the TSP are traditional.
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Re: Early Retirement Check Up - Looking for Direction

Post by Outer Marker »

bryaninDC wrote: Mon Jul 06, 2020 4:50 am
Watty wrote: Sun Jul 05, 2020 10:05 am
For me having a paid off house when I retired made my retirement numbers work a lot better since that lowered the amount of income we need and allows us to me in a lower retirement tax bracket. Since our expenses are lower that also means that with a paid off house we could pretty much get by and just live on Social Security if we really needed to.

Not having a mortgage payment can also lower your sequence of returns risk since you will not need to withdraw money to make your mortgage payment during a long bear market when you investments are low.

If you could get your house paid off by the time your kids are in college that would also help your cash flow then if you are still working since you could use your "mortgage payment" to pay for some college expenses.
I think I understand that, but it seems most relevant to someone who plans to live in that same house upon retirement, isn't it (instead of moving and selling it or renting it out)? We would almost certainly move to a LCOL area. So, say we sell the house for$700k (or whatever) and then move somewhere else and buy one for $200k, or rent something using the money from the sale. Am I thinking about that the right way?
Why would it matter whether you stay in the same house or move to a different one? You've eliminated your single largest living expense either way and need to draw less from your portfolio. Just sell house A and buy house B in your new area. You'll almost certainly qualify for a tax-free exchange. If you have money left over, so much the better.

Some will say you could do better in the market than paying down the mortgage. But, with stock valuations and bond yields where they are, I'll take the sure thing . . .
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Re: Early Retirement Check Up - Looking for Direction

Post by Watty »

bryaninDC wrote: Mon Jul 06, 2020 4:50 am
Watty wrote: Sun Jul 05, 2020 10:05 am
For me having a paid off house when I retired made my retirement numbers work a lot better since that lowered the amount of income we need and allows us to me in a lower retirement tax bracket. Since our expenses are lower that also means that with a paid off house we could pretty much get by and just live on Social Security if we really needed to.

Not having a mortgage payment can also lower your sequence of returns risk since you will not need to withdraw money to make your mortgage payment during a long bear market when you investments are low.

If you could get your house paid off by the time your kids are in college that would also help your cash flow then if you are still working since you could use your "mortgage payment" to pay for some college expenses.
I think I understand that, but it seems most relevant to someone who plans to live in that same house upon retirement, isn't it (instead of moving and selling it or renting it out)? We would almost certainly move to a LCOL area. So, say we sell the house for$700k (or whatever) and then move somewhere else and buy one for $200k, or rent something using the money from the sale. Am I thinking about that the right way?
That would work, the problem is that you might not actually move to a low cost of living area when you retire since you may have strong ties to the area you currently live in by then.

I moved to Atlanta when I was in my late 40s during a corporate merger and the plan was I would work there until we retired then we would move somewhere else. We were even working on a list of possible retirement locations. By the time I retired my son had grown up and was married with kids and they live near us. Moving would have meant leaving our kid and grandkids so we ended up retiring here. That has actually worked out well for us but it is not what we were planning on.

You could also downsize to a less expensive house when you retire even if you stay where you are at.

$200k is also likely on the low side for a house even in a low cost of living area. There are nice areas where you can buy a nice modest house for $200K but when you are looking for a retirement area that limits you choices since things like good medical care and things to do will be on your list of criteria which might make a medium cost of living area a more logical retirement destination. As long as you don't spend it though it does not matter a lot if the extra money to be able to pay cash for a retirement house is in home equity or invested in something else.
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Re: Early Retirement Check Up - Looking for Direction

Post by Cousin Eddie »

Outer Marker wrote: Mon Jul 06, 2020 5:17 am Why would it matter whether you stay in the same house or move to a different one? You've eliminated your single largest living expense either way and need to draw less from your portfolio. Just sell house A and buy house B in your new area. You'll almost certainly qualify for a tax-free exchange. If you have money left over, so much the better.

Some will say you could do better in the market than paying down the mortgage. But, with stock valuations and bond yields where they are, I'll take the sure thing . . .
I can understand the thought behind that. I paid off my house several years ago by doubling payments and while I could have done better in the market in the early 2010s, it did free up a lot of funds to invest once it was paid off. A paid-off house will definitely help if you are buying health insurance through the ACA and is a no-brainer if you early retire. Pocketing $250k after selling and buying a new house would effectively solve the 5 year Roth conversion waiting period. Now one just needs to find the best way to come up with the other million or so to see their way through the rest of retirement.

I'm of the mindset to hedge your bets and spread the risk out as much as possible, so my strategy today would be to do both at the same time, make extra payments and contribute to a taxable account. I'd definitely analyze my expenses to see how much I could contribute on a yearly basis, make some economic assumptions, and from there run test scenarios to see how close financially I can get to FI by 50.
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Re: Early Retirement Check Up - Looking for Direction

Post by geerhardusvos »

bryaninDC wrote: Mon Jul 06, 2020 5:01 am
geerhardusvos wrote: Sun Jul 05, 2020 10:12 am
OK, with that additional information I can give my opinion...
Thanks for the advice and taking the time to write it all out. I need to think about the mortgage thing more. There's definitely the appeal of the immediate savings on interest from a shorter mortgage and the corresponding lower interest rate. I realize that comes at the cost of not being able to invest the different in (theoretically higher) equities, whether tax-advantaged or otherwise.

I think I'd just hold VTSAX in my taxable and keep the bonds, etc. in my retirement account(s). I guess you just look at overall asset allocation across accounts, but it's hard to adjust that without breaking up the target date funds into their individual components.
You are welcome. If you were on the fence, just use some of your savings each month to pay off the mortgage, and the other part for investing. It’s OK to split it up.

If you have Roth accounts, make sure you keep high growth items in there, because that will be the last account that you spend typically. So keep VTSAX or your other stock indexes in Roth as well. Shouldn’t be a problem with your high equity asset allocation. With target date funds you get a little less control as you seek to rebalance and maintain an asset allocation, so might be worth trying to replicate the three fund portfolio and simply rebalancing every 6 to 12 months, or when there is a 30+ percent change in the market. Keep up the good work!
VTSAX and chill
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Re: Early Retirement Check Up - Looking for Direction

Post by scubadiver »

bryaninDC wrote: Mon Jul 06, 2020 5:03 am
scubadiver wrote: Sun Jul 05, 2020 10:00 pm
Maybe this was already addressed and I just missed it, but from what you posted above, I am inferring that you are contributing to a traditional IRA for your spouse rather than a Roth IRA. Is that correct? And if so, why?
Not sure I have a great answer to that question. Basically, to get some immediate tax reduction benefit. I don't have any idea where tax rates will be in the future--in general or where we will be living, which is TBD, so we basically split the difference and do some Roth, some traditional (for the IRAs and the TSP). All employer contributions in the TSP are traditional.
What tax benefit are you getting by contributing to a traditional IRA for your spouse? Unless I am missing something, you don't qualify for a deductible IRA. Or did I miss something and you do in fact qualify?

Because if you don't qualify for a deductible IRA, it makes no sense for you to contribute after tax dollars to an account that's going to be taxed again when you could contribute the same after tax dollars to a Roth IRA with no future tax liability.
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bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

Outer Marker wrote: Mon Jul 06, 2020 5:17 am
Why would it matter whether you stay in the same house or move to a different one? You've eliminated your single largest living expense either way and need to draw less from your portfolio. Just sell house A and buy house B in your new area. You'll almost certainly qualify for a tax-free exchange. If you have money left over, so much the better.
Because whether the house is paid off or not, I can still sell it for whatever it's worth and go buy a less-expensive house somewhere else. The only difference is how much "left over" there will be. In other words, it doesn't really matter if I owe $1000 or $0 when I sell it. I think maybe we are trying to say the same thing in different ways.
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bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

Watty wrote: Mon Jul 06, 2020 6:44 am
That would work, the problem is that you might not actually move to a low cost of living area when you retire since you may have strong ties to the area you currently live in by then.

I moved to Atlanta when I was in my late 40s during a corporate merger and the plan was I would work there until we retired then we would move somewhere else. We were even working on a list of possible retirement locations. By the time I retired my son had grown up and was married with kids and they live near us. Moving would have meant leaving our kid and grandkids so we ended up retiring here. That has actually worked out well for us but it is not what we were planning on.

You could also downsize to a less expensive house when you retire even if you stay where you are at.

$200k is also likely on the low side for a house even in a low cost of living area. There are nice areas where you can buy a nice modest house for $200K but when you are looking for a retirement area that limits you choices since things like good medical care and things to do will be on your list of criteria which might make a medium cost of living area a more logical retirement destination. As long as you don't spend it though it does not matter a lot if the extra money to be able to pay cash for a retirement house is in home equity or invested in something else.
All good points. The point is downsizing, no matter where we live I suppose. I understand family ties, but moving even two hoursin the right direction would have significant financial benefits.
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bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

scubadiver wrote: Mon Jul 06, 2020 3:46 pm
What tax benefit are you getting by contributing to a traditional IRA for your spouse? Unless I am missing something, you don't qualify for a deductible IRA. Or did I miss something and you do in fact qualify?

Because if you don't qualify for a deductible IRA, it makes no sense for you to contribute after tax dollars to an account that's going to be taxed again when you could contribute the same after tax dollars to a Roth IRA with no future tax liability.
We do qualify up to a certain point, at least we did last year.
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Re: Early Retirement Check Up - Looking for Direction

Post by scubadiver »

bryaninDC wrote: Mon Jul 06, 2020 5:10 pm
scubadiver wrote: Mon Jul 06, 2020 3:46 pm
What tax benefit are you getting by contributing to a traditional IRA for your spouse? Unless I am missing something, you don't qualify for a deductible IRA. Or did I miss something and you do in fact qualify?

Because if you don't qualify for a deductible IRA, it makes no sense for you to contribute after tax dollars to an account that's going to be taxed again when you could contribute the same after tax dollars to a Roth IRA with no future tax liability.
We do qualify up to a certain point, at least we did last year.
You may want to take a closer look at the benefits of contributing to the Roth TSP and deductible IRA vice Traditional TSP and Roth IRA. I'm inclined to thin that the latter would be a better deal for you.

Think about it like this. You contribute $1K to traditional TSP and get full tax benefit at marginal rate. Or you can contribute $1K to deductible IRA and get a portion of the tax benefit that you would have received for contributing to traditional TSP.

I think you would be better off maxing contributions to Roth IRAs for you and spouse, along with maxing traditional TSP. If you want to put more money into a Roth account, then you change some of your traditional TSP contributions to Roth contributions.

Anyway, that's my two cents. Good luck. :)
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Re: Early Retirement Check Up - Looking for Direction

Post by Outer Marker »

bryaninDC wrote: Mon Jul 06, 2020 4:59 pm
Outer Marker wrote: Mon Jul 06, 2020 5:17 am
Why would it matter whether you stay in the same house or move to a different one? You've eliminated your single largest living expense either way and need to draw less from your portfolio. Just sell house A and buy house B in your new area. You'll almost certainly qualify for a tax-free exchange. If you have money left over, so much the better.
Because whether the house is paid off or not, I can still sell it for whatever it's worth and go buy a less-expensive house somewhere else. The only difference is how much "left over" there will be. In other words, it doesn't really matter if I owe $1000 or $0 when I sell it. I think maybe we are trying to say the same thing in different ways.
Yes, we are saying the same thing in different ways.
Housing is an absolute, unavoidable expense. Getting rid of that liability puts you ahead of the game in retirement IMO because you have less need to draw on a more volatile investment portfolio. You can trade House A for House B. The more paid off house A is, the more you have to invest in House B. If House B is less, great! Add that to your portfolio. In today’s upside down market, there are no guaranteed 100 percent safe investments than getting a 15 year mortgage at rock bottom rates and banking that equity for future needs. Whether you stay in the current house or not.
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bryaninDC
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Re: Early Retirement Check Up - Looking for Direction

Post by bryaninDC »

Thanks everyone for the input and discussion. Figured I should probably leave a final note with what I intend to do, if nothing else for the potential benefit of those who might come across this thread in the future. These are my takeaways:

1. Get a better handle on current spending/saving patterns and try to create a more concrete plan about potential post-FI expenses. Set a savings goal (40 – 50%?) and track it every month.
2. Look into refinancing the mortgage. Not sure about term length (30 year @ ~3% vs 15 year @ ~2.5% etc). It's a matter of minimizing interest paid and building equity while maintaining some flexibility in cash flow and maxing out my retirement investments.
3. Once I've figured out the mortgage and goal savings rate, I will probably end up just splitting up any extra money every month across a new taxable account (VTSAX), paying down the mortgage, and contributing to my 401(a). I'll continue to max out my TSP and our IRAs.
4. Keep using target date funds in my tax-advantaged accounts (don't break them up at this point).
5. Review Roth vs traditional contribution rules/limits and re-adjust, if needed. To me, this part just feels like fortune telling, so I'm inclined to just split things 50/50 until/unless a more definite need for one or the other becomes clear.

Please let me know if I've mangled anything in trying to summarize. Thanks again.
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