Can I retire early? 38 y/o

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goodyear35
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Can I retire early? 38 y/o

Post by goodyear35 » Fri Jan 09, 2015 2:56 pm

Happy Friday!

I have been running a successful business over the past few years - the landscape has changed drastically and it's time to close the doors. Would love some insight from fellow Bogleheads on if I have enough to "retire"? Retirement to me will be the ability to pick and choose what I wish to do with my time. Whether its spend time with my family, enjoy a hobby, read books, travel, or even run a side business (although I don't want to factor this in).

Age: 38, + wife and daughter
Debt: None
Taxable Accounts: $3.8M (need to buy home, see below)
Allocations: 75% stocks / 25% bonds (is this a good mix?)
Non-taxable Account (401K): 200K
529-plan: $10K (Daughter is 8 months old. We plan on contributing to this each month and is included in our monthly expenses going forward)
Commercial Building: I own a commercial building that brings in $2K per month in rental income after taxes and reserves (newly remodeled, roof, etc)
Home: We will be buying a home shortly, paying all cash using money from the $3.8M Taxable account listed above. That brings up another question, how much can we spend on our home? Would like to spend up to $900K but we could definitely lower it if needed. At $900K, that would bring our Taxable Account to $2.9M. Again, we are flexible on this amount but $900K seems to be about what it will take to find what we are looking for.
Monthly Expenses: $8,000

The one big concern I have is lets say our SWR is 4% on $2.9M, that is roughly $116K per year before taxes, and about $98K after taxes assuming 15% capital gains taxes (is that a safe assumption?). What happens if the market drops 50% within the next few years and now our $2.9M taxable account is $1.45M. If this did happen, I am assuming we would withdraw our living expenses from our bond holdings and not touch the stocks until the market goes back up? How is that situation best handled?

Hopefully this provides enough information to answer the question, can I retire?

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Zapped
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Re: Can I retire early? 38 y/o

Post by Zapped » Fri Jan 09, 2015 3:17 pm

Congratulations on cashing out of your business and amassing a nest egg of $3.8M in cash after taxes! If you're haven't already do so, you can run your scenario through online retirement calculators like Firecalc or the retirement estimator at Fidelity Investments.

You don't mention your spouse's income so I'll assume that's not part of the equation now or later. Since you have a reasonable concern about whether you can make this nest egg last for the next (possibly) 50+ years, I wondered why you feel the need to buy a $900K home and pay the associated annual maintenance, insurance, and taxes. For my family, I only accept paying a high cost per square foot because I need to live near where my work is, and that means the suburbs of a (few/expensive) major metropolitan areas. Seems like you could live anywhere comfortably at a much lower price if you're not tied to a commute.

The commercial property that brings in $24K/yr net - you mentioned "rental income after taxes and reserves". Does that really mean the true net income, after not just taxes and all reserves for forseeable future repairs, but also after any other expenses like utilities? If so, I'd think an important question would be the value of the property. If a property value at $240K is bringing in 10% profit year after year that's one thing, but if it's, say, a $1.2M property bringing in 2% net I'd consider selling it and adding the proceeds to your taxable account. Unless you want the diversification, expect it to appreciate significantly, or just like owning commercial property.

Do you have a breakdown on the $8K of monthly expenses? Maybe they're too high if you're including your current income taxes or your current rent, but maybe their too low if you haven't added the cost of health care for your family. If you're certain about them, then disregard this question.

Aside from our interest as spectators, we can only help you allocate your portfolio based on Boglehead principles. Whether you can safely retire at such a tender age is a very personal decision for you & your family.
- Jim in Austin, TX

letsgobobby
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Re: Can I retire early? 38 y/o

Post by letsgobobby » Fri Jan 09, 2015 3:22 pm

You need $100k in income. The building provides 1/4 of it or $24,000 per year. So you only need $76,000 from your $4.0 M total portfolio ($3.8M taxable, $200k 401k).

For 50+ years let's go with a 3% SWR. You need a $2.5M portfolio to generate $76,000 at a 3% SWR. That implies you could buy a $1.5M house, and you only need a $900k house. It seems like you are good to go.

(I'll assume you've got a plan for health care, college savings, insurance/liability protection, etc).

Yes, I think you can retire.

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Fri Jan 09, 2015 3:33 pm

Zapped wrote:Congratulations on cashing out of your business and amassing a nest egg of $3.8M in cash after taxes! If you're haven't already do so, you can run your scenario through online retirement calculators like Firecalc or the retirement estimator at Fidelity Investments.

You don't mention your spouse's income so I'll assume that's not part of the equation now or later. Since you have a reasonable concern about whether you can make this nest egg last for the next (possibly) 50+ years, I wondered why you feel the need to buy a $900K home and pay the associated annual maintenance, insurance, and taxes. For my family, I only accept paying a high cost per square foot because I need to live near where my work is, and that means the suburbs of a (few/expensive) major metropolitan areas. Seems like you could live anywhere comfortably at a much lower price if you're not tied to a commute.

The commercial property that brings in $24K/yr net - you mentioned "rental income after taxes and reserves". Does that really mean the true net income, after not just taxes and all reserves for forseeable future repairs, but also after any other expenses like utilities? If so, I'd think an important question would be the value of the property. If a property value at $240K is bringing in 10% profit year after year that's one thing, but if it's, say, a $1.2M property bringing in 2% net I'd consider selling it and adding the proceeds to your taxable account. Unless you want the diversification, expect it to appreciate significantly, or just like owning commercial property.

Do you have a breakdown on the $8K of monthly expenses? Maybe they're too high if you're including your current income taxes or your current rent, but maybe their too low if you haven't added the cost of health care for your family. If you're certain about them, then disregard this question.

Aside from our interest as spectators, we can only help you allocate your portfolio based on Boglehead principles. Whether you can safely retire at such a tender age is a very personal decision for you & your family.

Thank you for the quick response! To address your questions:

- I did run my scenario through FireCalc and it was a 100% success rate, although I am not naive by any means

- $900K is on the high end, we could get by on $700K. But $900K in our area is about what we would like to have. What we would like and what we can afford, we are flexible on. Neither my wife or I had much when growing up as kids, so we are flexible.

- The $2K per month is true net income. The building is worth about $750K but I am only a 1/3rd partner, so my equity is $250K. The building rents out for about $10K, however we have a loan of $2,500/mo.

- I've factored everything into my expenses including health insurance, etc. I also did not include income taxes or rent going forward. The expenses should be pretty accurate and actually on the high side. I inflated things a bit to be conservative.

subham
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Re: Can I retire early? 38 y/o

Post by subham » Fri Jan 09, 2015 3:34 pm

I am curious to know how this thread evolves as early retirement is a worthy option to pursue.

Did you consider Life Insurance, Disability Insurance, Umbrella Insurance, LTC, property taxes, house expenses etc?

Also if you pay for the house in full cash, what precautions are you taking in hiding your networth from public records?
Last edited by subham on Fri Jan 09, 2015 3:38 pm, edited 1 time in total.

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Fri Jan 09, 2015 3:34 pm

letsgobobby wrote:You need $100k in income. The building provides 1/4 of it or $24,000 per year. So you only need $76,000 from your $4.0 M total portfolio ($3.8M taxable, $200k 401k).

For 50+ years let's go with a 3% SWR. You need a $2.5M portfolio to generate $76,000 at a 3% SWR. That implies you could buy a $1.5M house, and you only need a $900k house. It seems like you are good to go.

(I'll assume you've got a plan for health care, college savings, insurance/liability protection, etc).

Yes, I think you can retire.
Appreciate your input, letsgobobby!

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Fri Jan 09, 2015 3:36 pm

subham wrote:I am curious to know how this thread evolves as early retirement is a worthy option to pursue.
If I am Suzi Orman "approved", I will update this thread for you all. Otherwise, I better get back to work :happy

For me, it really comes down to my health. Running a business over the past several years took a HUGE toll on my well-being. I really need to take back a more healthy lifestyle from a stress related perspective. Also would love to spend time with my daughter during the crucial years of her life.

BlueNote
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Re: Can I retire early? 38 y/o

Post by BlueNote » Fri Jan 09, 2015 3:37 pm

I'll try to phrase this as delicately as possible. If you can't retire with 3.8 million, at ANY age, it's time for some serious self reflection. Most Americans will never earn 3.8 million total in their lifetime. A toddler could retire on 3.8 million.

subham
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Re: Can I retire early? 38 y/o

Post by subham » Fri Jan 09, 2015 3:39 pm

Did you consider Life Insurance, Disability Insurance, Umbrella Insurance, LTC, property taxes, house expenses etc?

Also if you pay for the house in full cash, what precautions are you taking in hiding your networth from public records?

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Fri Jan 09, 2015 3:43 pm

subham wrote:I am curious to know how this thread evolves as early retirement is a worthy option to pursue.

Did you consider Life Insurance, Disability Insurance, Umbrella Insurance, LTC, property taxes, house expenses etc?

Also if you pay for the house in full cash, what precautions are you taking in hiding your networth from public records?
Umbrella, property taxes and house expenses are included in monthly expenses.

I'm not sure how to answer the question about hiding net worth from public records. I do have Trusts and asset protected vehicles in place for my assets, however, home ownership info is a public record as you stated, not sure there is any way around that.

subham
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Re: Can I retire early? 38 y/o

Post by subham » Fri Jan 09, 2015 3:46 pm

Why not retire in one of those cities like Dallas where you can get mansions for under 300k and use the 600k as part of your AA?

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Fri Jan 09, 2015 3:48 pm

subham wrote:Why not retire in one of those cities like Dallas where you can get mansions for under 300k and use the 600k as part of your AA?
Family. Our family is here, and moving is just not an option.

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bertie wooster
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Re: Can I retire early? 38 y/o

Post by bertie wooster » Fri Jan 09, 2015 3:51 pm

Living in Dallas for the rest of your life would be awful. I do not recommend that option.

clacy
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Re: Can I retire early? 38 y/o

Post by clacy » Fri Jan 09, 2015 3:56 pm

Have you thought about semi-retirement, or a sabbatical type thing?

As successful as you have been previously, I'd be shocked if you couldn't fairly easily find another job or career where you can make a reasonably stress free $50-70k. Heck, just knowing you can walk out the door of a job at any time is a comfort. As a business owner/operator, I often long for the good old days when I was just an employee. Inherently less stress when you don't have to manage employees, company finance, HR, marketing, planning and operations (and the many other duties that fall to the business owner).

You could always retire and if 1-2 years down the road, your cashflow needs change or you get bored, you could probably figure out a way to earn a living to support yourself or at least contribute significantly to your monetary needs.

Congrats!! It's a great question to have to figure out.

BlueNote
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Re: Can I retire early? 38 y/o

Post by BlueNote » Fri Jan 09, 2015 3:58 pm

bertie wooster wrote:Living in Dallas for the rest of your life would be awful. I do not recommend that option.

As a resident of Fort Worth, I couldn't agree more. Now Fort Worth on the other hand...

staythecourse
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Re: Can I retire early? 38 y/o

Post by staythecourse » Fri Jan 09, 2015 4:06 pm

goodyear35 wrote:For me, it really comes down to my health. Running a business over the past several years took a HUGE toll on my well-being. I really need to take back a more healthy lifestyle from a stress related perspective. Also would love to spend time with my daughter during the crucial years of her life.
Congrats on understanding what you want and what is important at your current state of life. What you want is to spend time with family and what you need is to take better care of yourself.

With that type of attitude I think you will be fine. I do, however, doubt one can be so successful at your age and retire and not have the urge to work again for 60+ years of their life. Your biggest challenge will not be financial, but to figure out what to do with all your time. Your kid will be in school and everyone else your age, i.e. friends will be busy working so better find some serious hobbies you can do alone!! One can only do so much traveling if they have children because of school so you are limited there.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

3FundFan
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Re: Can I retire early? 38 y/o

Post by 3FundFan » Fri Jan 09, 2015 4:19 pm

BlueNote wrote:I'll try to phrase this as delicately as possible. If you can't retire with 3.8 million, at ANY age, it's time for some serious self reflection. Most Americans will never earn 3.8 million total in their lifetime. A toddler could retire on 3.8 million.
Thank you for confirming I'm not insane. :D

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Re: Can I retire early? 38 y/o

Post by sesq » Fri Jan 09, 2015 4:42 pm

subham wrote: Did you consider Life Insurance, Disability Insurance, Umbrella Insurance, LTC, property taxes, house expenses etc?
If one retired early, with a $4M NW (incl the building), I don't think one needs life insurance or disability insurance. In the first case, his departure would be one less mouth to feed (stated harshly), and in the latter, there is no income to replace.

I might not rush into the house. Coming off the sale of the biz and before the kid(s) are in school would strike me as prime adventure time. I'd plan a few longer excursions, with resets coming back to home so the grand parents can see the kid.

subham
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Re: Can I retire early? 38 y/o

Post by subham » Fri Jan 09, 2015 4:51 pm

sesq wrote:
subham wrote: Did you consider Life Insurance, Disability Insurance, Umbrella Insurance, LTC, property taxes, house expenses etc?
If one retired early, with a $4M NW (incl the building), I don't think one needs life insurance or disability insurance. In the first case, his departure would be one less mouth to feed (stated harshly), and in the latter, there is no income to replace.
.
thats an interesting way to look at it. Never thought about it. So why wouldn't this same argument extend to someone who is not retired with 4M assets in a similar situation?

In other words is there a rule of thumb to tell when to drop these?

amoeba
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Re: Can I retire early? 38 y/o

Post by amoeba » Fri Jan 09, 2015 4:58 pm

subham wrote:
sesq wrote:
subham wrote: Did you consider Life Insurance, Disability Insurance, Umbrella Insurance, LTC, property taxes, house expenses etc?
If one retired early, with a $4M NW (incl the building), I don't think one needs life insurance or disability insurance. In the first case, his departure would be one less mouth to feed (stated harshly), and in the latter, there is no income to replace.
.
thats an interesting way to look at it. Never thought about it. So why wouldn't this same argument extend to someone who is not retired with 4M assets in a similar situation?

In other words is there a rule of thumb to tell when to drop these?
In both cases you are insuring against the loss of future income. If you don't care about the loss of future income then don't get the insurance. If you do then get the insurance.

cherijoh
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Re: Can I retire early? 38 y/o

Post by cherijoh » Fri Jan 09, 2015 5:50 pm

goodyear35 wrote:Happy Friday!

I have been running a successful business over the past few years - the landscape has changed drastically and it's time to close the doors. Would love some insight from fellow Bogleheads on if I have enough to "retire"? Retirement to me will be the ability to pick and choose what I wish to do with my time. Whether its spend time with my family, enjoy a hobby, read books, travel, or even run a side business (although I don't want to factor this in).

Age: 38, + wife and daughter
Debt: None
Taxable Accounts: $3.8M (need to buy home, see below)
Allocations: 75% stocks / 25% bonds (is this a good mix?)
Non-taxable Account (401K): 200K
529-plan: $10K (Daughter is 8 months old. We plan on contributing to this each month and is included in our monthly expenses going forward)
Commercial Building: I own a commercial building that brings in $2K per month in rental income after taxes and reserves (newly remodeled, roof, etc)
Home: We will be buying a home shortly, paying all cash using money from the $3.8M Taxable account listed above. That brings up another question, how much can we spend on our home? Would like to spend up to $900K but we could definitely lower it if needed. At $900K, that would bring our Taxable Account to $2.9M. Again, we are flexible on this amount but $900K seems to be about what it will take to find what we are looking for.
Monthly Expenses: $8,000

The one big concern I have is lets say our SWR is 4% on $2.9M, that is roughly $116K per year before taxes, and about $98K after taxes assuming 15% capital gains taxes (is that a safe assumption?). What happens if the market drops 50% within the next few years and now our $2.9M taxable account is $1.45M. If this did happen, I am assuming we would withdraw our living expenses from our bond holdings and not touch the stocks until the market goes back up? How is that situation best handled? <-- if you are 75/25 stocks to bonds then a 50% drop in stock would result in a 37.5% drop in your portfolio

Hopefully this provides enough information to answer the question, can I retire?
Be sure to figure in home expenses - Insurance, property taxes, utilities, reserve fund for maintenance (new roof, new appliances), a budget for furnishing new home, etc. The more you spend on your house, the more money you need to plan on for these items. So until you figure out how much house you are going to buy, you can't finalize your annual spending estimates.

Also your cars won't last for 50 years, so throw some money in for replacement vehicles and vacations to Disney with your daughter (plus her other expenses). Any more kids in the plans?

The thing I would worry about is lifestyle creep. I would recommend reading the wiki article on Managing a Windfall. While you could definitely afford to retire now, you should pay attention to the cautionary tales about people who blew through larger nest eggs than yours. Also be wary of Financial Advisors looking for a cut for managing your money.

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vitaflo
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Re: Can I retire early? 38 y/o

Post by vitaflo » Fri Jan 09, 2015 9:42 pm

The only real difference between us is your net worth, the rest (age, expenses, etc) match. And if I had your net worth, I would definitely retire, but with two conditions:

1) Buy a modest home you can live with. To me this is important because people get way too carried away with purchases when they're sitting on so much money. Pretend you have $380k in taxable and want to buy a house instead of $3.8m and you'll have the right mindset going in.
2) Use a 3% SWR. 4% is too aggressive with a 50+ year time horizon, imho. In a decade see how your portfolio looks and adjust then.

Congrats on your success.

Confused
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Re: Can I retire early? 38 y/o

Post by Confused » Fri Jan 09, 2015 9:48 pm

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Watty
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Re: Can I retire early? 38 y/o

Post by Watty » Fri Jan 09, 2015 10:31 pm

BlueNote wrote:I'll try to phrase this as delicately as possible. If you can't retire with 3.8 million, at ANY age, it's time for some serious self reflection. Most Americans will never earn 3.8 million total in their lifetime. A toddler could retire on 3.8 million.

+1,

But is isn't as easy as it sounds many people like lottery winners and athletes with a lot more quickly to run into trouble by spending too much.

After having done well with a business there is also a tendency to try to do it again and some people in that situation invest too much in their next business venture and run into trouble when it does not do well.

On the plus side eventually the kid(s) will grow up and move out, and Social Security and Medicare will start, you may even want to downsize to a smaller house when you are older so your budget 25 years from now might look much different than today.

There is a wiki about how to manage a windfall and one of the main points is to take your time to figure out what to do. There is nothing wrote with putting the money into something ultra safe for six months or more while you make your plans.

http://www.bogleheads.org/wiki/Managing_a_windfall

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Blue
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Re: Can I retire early? 38 y/o

Post by Blue » Fri Jan 09, 2015 10:38 pm

I think the biggest risk is lifestyle creep. In a $900k home, how many of your neighbors are living on high five figures?

From personal experience, raising a family with kid(s) in an upscale community is not a cheap endeavor.

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Fri Jan 09, 2015 10:52 pm

cherijoh wrote:
goodyear35 wrote:Happy Friday!

I have been running a successful business over the past few years - the landscape has changed drastically and it's time to close the doors. Would love some insight from fellow Bogleheads on if I have enough to "retire"? Retirement to me will be the ability to pick and choose what I wish to do with my time. Whether its spend time with my family, enjoy a hobby, read books, travel, or even run a side business (although I don't want to factor this in).

Age: 38, + wife and daughter
Debt: None
Taxable Accounts: $3.8M (need to buy home, see below)
Allocations: 75% stocks / 25% bonds (is this a good mix?)
Non-taxable Account (401K): 200K
529-plan: $10K (Daughter is 8 months old. We plan on contributing to this each month and is included in our monthly expenses going forward)
Commercial Building: I own a commercial building that brings in $2K per month in rental income after taxes and reserves (newly remodeled, roof, etc)
Home: We will be buying a home shortly, paying all cash using money from the $3.8M Taxable account listed above. That brings up another question, how much can we spend on our home? Would like to spend up to $900K but we could definitely lower it if needed. At $900K, that would bring our Taxable Account to $2.9M. Again, we are flexible on this amount but $900K seems to be about what it will take to find what we are looking for.
Monthly Expenses: $8,000

The one big concern I have is lets say our SWR is 4% on $2.9M, that is roughly $116K per year before taxes, and about $98K after taxes assuming 15% capital gains taxes (is that a safe assumption?). What happens if the market drops 50% within the next few years and now our $2.9M taxable account is $1.45M. If this did happen, I am assuming we would withdraw our living expenses from our bond holdings and not touch the stocks until the market goes back up? How is that situation best handled? <-- if you are 75/25 stocks to bonds then a 50% drop in stock would result in a 37.5% drop in your portfolio

Hopefully this provides enough information to answer the question, can I retire?
Be sure to figure in home expenses - Insurance, property taxes, utilities, reserve fund for maintenance (new roof, new appliances), a budget for furnishing new home, etc. The more you spend on your house, the more money you need to plan on for these items. So until you figure out how much house you are going to buy, you can't finalize your annual spending estimates.

Also your cars won't last for 50 years, so throw some money in for replacement vehicles and vacations to Disney with your daughter (plus her other expenses). Any more kids in the plans?

The thing I would worry about is lifestyle creep. I would recommend reading the wiki article on Managing a Windfall. While you could definitely afford to retire now, you should pay attention to the cautionary tales about people who blew through larger nest eggs than yours. Also be wary of Financial Advisors looking for a cut for managing your money.
Yes indeed, home expenses of insurance, property tax, utilities and reserve funds are included in our monthly expenses. We also have a budget of $1K per month for vehicles which we won't even need the full amount. Vacations is a good one to add in for sure. We are unsure on having a second child.

Also to be clear, I am not selling my business and didn't receive a windfall. I am closing my business. The money I have made was over several years of running the business. I saved roughly 80-90% of everything I made. So it didn't all come at once.

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Fri Jan 09, 2015 10:54 pm

vitaflo wrote:The only real difference between us is your net worth, the rest (age, expenses, etc) match. And if I had your net worth, I would definitely retire, but with two conditions:

1) Buy a modest home you can live with. To me this is important because people get way too carried away with purchases when they're sitting on so much money. Pretend you have $380k in taxable and want to buy a house instead of $3.8m and you'll have the right mindset going in.
2) Use a 3% SWR. 4% is too aggressive with a 50+ year time horizon, imho. In a decade see how your portfolio looks and adjust then.

Congrats on your success.

Appreciate the insight!

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Fri Jan 09, 2015 10:57 pm

Blue wrote:I think the biggest risk is lifestyle creep. In a $900k home, how many of your neighbors are living on high five figures?

From personal experience, raising a family with kid(s) in an upscale community is not a cheap endeavor.
Point well taken. Keeping up with the Jon(es) I suppose. Our friends and family are low or middle income, so most of the people we choose to spend our time with don't live upscale lifestyles. I don't think this will be a problem for us but I certainly see your point.

steltz
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Re: Can I retire early? 38 y/o

Post by steltz » Fri Jan 09, 2015 11:10 pm

I know this was not asked or posed as an option but I am wondering what the community thinks in terms of financing the house. I know we all hate debt, but cheap money is wonderful and it doesn't get much cheaper than it is now.

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obgyn65
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Re: Can I retire early? 38 y/o

Post by obgyn65 » Sat Jan 10, 2015 4:00 am

To the OP : if you google this website, you will see that many participants (me included) believe that 4% SWR at age 38 is too high. I would go for 2 or 3% SwR. It does mean that you cannot retire, just try to reduce expenses a bit if you want to have enough until the age of 95 for example.
"The two most important days in someone's life are the day that they are born and the day they discover why." -John Maxwell

Valuethinker
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Re: Can I retire early? 38 y/o

Post by Valuethinker » Sat Jan 10, 2015 7:28 am

obgyn65 wrote:To the OP : if you google this website, you will see that many participants (me included) believe that 4% SWR at age 38 is too high. I would go for 2 or 3% SwR. It does mean that you cannot retire, just try to reduce expenses a bit if you want to have enough until the age of 95 for example.
At current interest rates, real returns after tax are negative.

4% SWR is therefore a nonsense (it's a nonsense at 65 too, in fact at current interest rates and projected rates of return).

OP should look at 2% SWR *or less*. 60 years is a very long time to live off a lump sum of capital. Remembering OP won't even get full Social Security?

Americans also do not have universal state medical insurance? Therefore there's always the risk of some titanic medical bill for self or family.

Look over 60 year periods in history and what can happen-- inflation, depression, stagflation. Imagine retiring at 38 in 1968 and where you would have been in 1980 with stocks and bonds both returning c. -40% in real terms? At 4% SWR you would have eaten your capital (unless you kept taking out a fixed 4% nominal and therefore had a declining standard of living over much of the period).

Tanelorn
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Re: Can I retire early? 38 y/o

Post by Tanelorn » Sat Jan 10, 2015 8:48 am

I just want to add to obgyn65 and ValueThinker's comments that the SWR numbers are based on spending down principle together with estimated investment returns. This means it matters a lot how long you need the money to last, and so it's going to be a very different answer for a typical 65 year old retiree than a 40 year old entrepreneur.

I also agree with VT that you have to take risk to get any real return these days. The top rate 5 year CDs might earn 2.25%, which after taxes and ~2% inflation is basically zero. (For good CD rates, see here: http://www.fatwallet.com/forums/finance/682884/). Any real return is going to have to come from equities, perhaps a typical 3% real return over inflation, so with a 75:25 AA you might hope to earn 1.5% real per year after taxes on the whole thing. Remember 75/25 might be aggressive if you're not prepared to go back to work, although the more fixed income you have, the less prospects for getting any real returns.

In short, if you want to be safe in today's zero rate environment, just count your principle and divide by how many years you think you'll live and that's your annual budget. For someone who's 38, conditional forward life expectancies are 40-45 years depending on gender. Let's say you want to cover 55 years, just to be safe. $3M (post house)/55 years = $55k/year from principle spending. If you add in the 1.5% real return expectation from the equity in the investment portfolio, that's $45k per year now, but let's call is half that since over the 55 year time period the portfolio is shrinking to zero so the time-weighted average portfolio size is half the starting value (compounding on the frond end will make this a slightly conservative assumption).

Target $96k annual spending budget (real/inflation adjusted dollars)
$24k net rental income (should adjust with inflation)
$55k spending $3M principle over 55 year horizon
$22k in average portfolio real earnings
=====
$101k annual budget, or $5k/year surplus

So I think it's probably fine, also remembering that the house still has value in excess of it's implied rent that could be tapped towards the end of their lives via a reverse mortgage, sale/downsizing, HELOC, etc. There will also be some SS support at some point down the road as well, although it may not be as large as typical retirees given OPs shorter work history.

Happy retiring!

ramsfan
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Re: Can I retire early? 38 y/o

Post by ramsfan » Sat Jan 10, 2015 9:37 am

This might be oversimplified, but you should definitely retire, but drop the "forever" decision as part of it. I have neglected my health due to work stress as well, and this is heavy on my mind, so in your position, definitely do this for now, get healthy, spend time with your daughter, new house, etc...

I would just guess that at a certain point you will get bored with that, and venture back into the workforce, but you are clearly in a great position to do whatever is best for you.

On the allocation side, you don't seem to have a great NEED to take risk, so I would flip that allocation to something like 30% stock/70% Fixed Income, or 40/60.

JLJL
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Re: Can I retire early? 38 y/o

Post by JLJL » Sat Jan 10, 2015 9:38 am

letsgobobby FTW
letsgobobby wrote:You need $100k in income. The building provides 1/4 of it or $24,000 per year. So you only need $76,000 from your $4.0 M total portfolio ($3.8M taxable, $200k 401k).

For 50+ years let's go with a 3% SWR. You need a $2.5M portfolio to generate $76,000 at a 3% SWR. That implies you could buy a $1.5M house, and you only need a $900k house. It seems like you are good to go.

(I'll assume you've got a plan for health care, college savings, insurance/liability protection, etc).

Yes, I think you can retire.
Plus I bet OP would actually grow his nest egg in "retirement" by picking up a few bucks along the way even though he's stated not to consider side income.

Congrats!

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Re: Can I retire early? 38 y/o

Post by ubermax » Sat Jan 10, 2015 10:17 am

OP , skimmed your initial post & didn't read many of the responses , we have roughly the same monthly expenses , less expected future lifetime , much less house value , withdrawal rate < 4% , yaada, yaada, yaada - with the way the markets have performed over the last few years we feel very comfortable with less assets than you - but I have the same concerns and what ifs with the markets .

But we could adapt to a significant market change and live on Social Security , expenses would naturally be prioritized , food , shelter at the top .

If you can and are willing to adapt to change , then yes IMO you can retire now .

randomguy
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Re: Can I retire early? 38 y/o

Post by randomguy » Sat Jan 10, 2015 10:40 am

goodyear35 wrote:Happy Friday!


The one big concern I have is lets say our SWR is 4% on $2.9M, that is roughly $116K per year before taxes, and about $98K after taxes assuming 15% capital gains taxes (is that a safe assumption?). ?
Your federal taxes should be about 0%. If you have 30k of OI and 90k of LTGC your federal taxes would be 3.3k (family of 3 standard deduction). But you have no need for such a high income. You have 3 million in assets that you have already paid taxes on. Spend 20k/yr of that money and you income drops to 100k and your federal taxes drop to 0. You would have to run the math to see if it is worth really dropping your income in order to get a ACA subsidy.

The math works out that suggests you will be fine (you effectively need like 80k of income off just under 3 million after factor in the rental) but 50 years is a heck of a long time for things like tax laws, live style changes, family changes, and so on to mess up plans.

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siamond
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Re: Can I retire early? 38 y/o

Post by siamond » Sat Jan 10, 2015 10:47 am

goodyear35 wrote:The one big concern I have is lets say our SWR is 4% on $2.9M, that is roughly $116K per year before taxes, and about $98K after taxes assuming 15% capital gains taxes (is that a safe assumption?). What happens if the market drops 50% within the next few years and now our $2.9M taxable account is $1.45M. If this did happen, I am assuming we would withdraw our living expenses from our bond holdings and not touch the stocks until the market goes back up? How is that situation best handled?
Doesn't seem that anybody answered this question of yours. Yes, in case of a big crash, you would start prioritizing you withdrawals from bonds for a while. More precisely, I would suggest that, irrespective of market conditions, you 'reverse-balance' when doing a withdrawal (say at the beginning of the year, moving annual $$ to checking & savings accounts). By 'reverse-balance', I mean that you sell assets which exceed your AA. If your AA is 75/25, but the current portfolio is 85/15, then sell stocks. If the current portfolio is 60/40 (e.g. market crash), then sell bonds. Not only this is a good application of 'buy low/sell high', but this helps in restoring your AA.

PS. oh, and sure, you can retire, you're in great shape. I'd set aside more 529 money though if I were you (colleges are wicked expensive, yours kids will not get financial aid given your assets, and... you might plan for a couple of more kids...). And stay reasonably aggressive with your AA (you're fine at 75/25), bonds are nice for short-term risks (e.g. market volatility), but this isn't a real problem with your assets. While bonds can be quite damaging on the long-term (low returns plus inflation risk), and here you're planning real long-term. Going 30/70 or anything like that would be a severe mistake. Many advices about bonds & retirement make an implicit assumption of a life expectancy of less than 30 years... Not at all your situation.

Compound
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Re: Can I retire early? 38 y/o

Post by Compound » Sat Jan 10, 2015 11:00 am

goodyear35 wrote: Also to be clear, I am not selling my business and didn't receive a windfall. I am closing my business. The money I have made was over several years of running the business. I saved roughly 80-90% of everything I made. So it didn't all come at once.
This is the only aspect that has given me any pause about the OP going ahead with retirement. It made me wonder, has the OP been through a major market downturn with significant assets at risk?

Seems to me that sequence of returns is very important in this scenario. If there is a 50% drop in equities and you lose $1M of your nest egg right off the bat, can you say with confidence that you will stay the course?

If you haven't been through a major downturn with those levels of assets, maybe consider delaying retirement until you're sure how you will behave.

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Re: Can I retire early? 38 y/o

Post by cherijoh » Sat Jan 10, 2015 11:44 am

[quote ="cherijoh"]
The thing I would worry about is lifestyle creep. I would recommend reading the wiki article on Managing a Windfall. While you could definitely afford to retire now, you should pay attention to the cautionary tales about people who blew through larger nest eggs than yours. Also be wary of Financial Advisors looking for a cut for managing your money.[/quote]
goodyear35 wrote:
Also to be clear, I am not selling my business and didn't receive a windfall. I am closing my business. The money I have made was over several years of running the business. I saved roughly 80-90% of everything I made. So it didn't all come at once.
But some of the issues are still the same - you have a pile of money and you are trying to figure out what you can spend to make it last for the next 50- 60 years. FYI the wiki article makes specific reference to selling a business.

When you ran your scenarios through Firecalc how many years of retirement did you use? I'm pretty surprised it gave you a 100% success rate with 4% SWR and a period of 45+ years. I definitely wouldn't go with the default 30 years.

bb
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Re: Can I retire early? 38 y/o

Post by bb » Sat Jan 10, 2015 2:14 pm

Seems like the potential responses are going to depend on a couple of basic assumptions:

- to what extent is spending flexible
- is it ok to spend down principle

Is a 50 year retirement automatically in the perpetual portfolio category where
as a 30 year retirement is not? There is uncertainty in retirement assets lasting
if principal is ever spent. I wonder if the folks that would suggest spending
2% or less have difficulty with defining how much money is enough. Presumably
most people with money invested in the stock market risk a lower standard of
living if returns turn out poorly.

MoonOrb
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Re: Can I retire early? 38 y/o

Post by MoonOrb » Sat Jan 10, 2015 3:04 pm

ubermax wrote:OP , skimmed your initial post & didn't read many of the responses , we have roughly the same monthly expenses , less expected future lifetime , much less house value , withdrawal rate < 4% , yaada, yaada, yaada - with the way the markets have performed over the last few years we feel very comfortable with less assets than you - but I have the same concerns and what ifs with the markets .

But we could adapt to a significant market change and live on Social Security , expenses would naturally be prioritized , food , shelter at the top .

If you can and are willing to adapt to change , then yes IMO you can retire now .

Well, but you're not going to get much in the way of social security if you retire at 38, really.

The biggest issues here from my perspective are the desire to own a $900k house and the idea of a SWR in the 4% range. You're trying to stretch money potentially over 60 years, not 30, so a lower withdrawal rate would seem to be crucial.

If going back to work is an option for you at pretty much anytime then this becomes a lot easier. You can always fall back on that if the market plummets. Although going back to work when the market plummets isn't a sure bet, either, because that also will likely coincide with a contraction in the job market. Maybe that's an issue in your line of work, maybe it's not. I'd wager for most people that it is.

The people who suggest that $3.8M is enough for anyone to retire on are addressing the question as if you're willing to retire anywhere and reduce your lifestyle to a substantial degree, and your question clearly implies that you're not. So while a Notional Person With $3.8M can of course afford to retire because they can choose a more modest lifestyle, the actual question is whether you can retire with the lifestyle you want.

I actually think this is a close call, and I'd consider seeing if in the next several years you can find work in a much less stressful, time consuming role, a sort of consulting or semi-retirement role, maybe, that would allow you to meet most of your expenses with the combined income from your work and the commercial real estate interest you have. This would allow your account to grow, and even a few years of growth would push this from "close call" to "easily safe."

On the other hand, if you will always have the option to go back to work if you need to, then, yes, you can retire now because the worst thing that will happen is you have to go back to work.

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smegal
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Re: Can I retire early? 38 y/o

Post by smegal » Sat Jan 10, 2015 3:29 pm

From my perspective 3.8M is plenty but as previous post suggests it of course depends on spending. Two things might help. A pretty detailed plan using FIREcalc as suggested with real SS estimates and all spending including real child expenses like college. Another thing might be to reconsider if the current spending rate is necessary for happiness of your family. I found an interesting website that discusses issues with early retirement and living a lower cost life, google money mustache (I am not affiliated). I found alot of it interesting. I am not giving up my SUV just yet, but some of the ideas I do plan to incorporate.

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Re: Can I retire early? 38 y/o

Post by freebeer » Sat Jan 10, 2015 3:33 pm

Valuethinker wrote:...
At current interest rates, real returns after tax are negative, 4% SWR is therefore a nonsense (it's a nonsense at 65 too, in fact at current interest rates and projected rates of return).
VT, i''m sure you meant that risk-free real returns after tax are negative. But so what? Look what the stock market has done during this same period where we've had negative risk-free bond returns! To me it's crazy to argue that 4% SWR for someone 65 is "nonsense" given the total returns we've seen (real returns after tax of a balanced portfolio) are still fully consistent with successful decumulation via such a strategy, even through the last major crash (we've now seen in the other thread that Wade Pfau's claim otherwise was based on the very bad assumption of a 1% advisor fee which cripples real returns esp. in low-inflation times). Sure there is risk, but for someone 65 let's face it the bigger risks are losing health or dying.

For someone age 38 I agree that's another story, 4% may not be the right general idea, 3% or less may be better. Anyway the specific plan for any individual is unlikely to be an inflation-adjusting 4% but rather some type of variable withdrawal strategy and in the OP's case it seems they have some flex in living costs (e.g. $900K home not being a true necessity of life).

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Sun Jan 11, 2015 11:20 am

Valuethinker wrote:
obgyn65 wrote:To the OP : if you google this website, you will see that many participants (me included) believe that 4% SWR at age 38 is too high. I would go for 2 or 3% SwR. It does mean that you cannot retire, just try to reduce expenses a bit if you want to have enough until the age of 95 for example.
At current interest rates, real returns after tax are negative.

4% SWR is therefore a nonsense (it's a nonsense at 65 too, in fact at current interest rates and projected rates of return).

OP should look at 2% SWR *or less*. 60 years is a very long time to live off a lump sum of capital. Remembering OP won't even get full Social Security?

Americans also do not have universal state medical insurance? Therefore there's always the risk of some titanic medical bill for self or family.

Look over 60 year periods in history and what can happen-- inflation, depression, stagflation. Imagine retiring at 38 in 1968 and where you would have been in 1980 with stocks and bonds both returning c. -40% in real terms? At 4% SWR you would have eaten your capital (unless you kept taking out a fixed 4% nominal and therefore had a declining standard of living over much of the period).
Point taken. 2% SWR seems a little low to me (unless you are not willing to eat into the principal balance, but 3% seems conservative enough. Just my thoughts, I am sure everyone will have a different opinion on this.)

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Sun Jan 11, 2015 11:21 am

Tanelorn wrote:I just want to add to obgyn65 and ValueThinker's comments that the SWR numbers are based on spending down principle together with estimated investment returns. This means it matters a lot how long you need the money to last, and so it's going to be a very different answer for a typical 65 year old retiree than a 40 year old entrepreneur.

I also agree with VT that you have to take risk to get any real return these days. The top rate 5 year CDs might earn 2.25%, which after taxes and ~2% inflation is basically zero. (For good CD rates, see here: http://www.fatwallet.com/forums/finance/682884/). Any real return is going to have to come from equities, perhaps a typical 3% real return over inflation, so with a 75:25 AA you might hope to earn 1.5% real per year after taxes on the whole thing. Remember 75/25 might be aggressive if you're not prepared to go back to work, although the more fixed income you have, the less prospects for getting any real returns.

In short, if you want to be safe in today's zero rate environment, just count your principle and divide by how many years you think you'll live and that's your annual budget. For someone who's 38, conditional forward life expectancies are 40-45 years depending on gender. Let's say you want to cover 55 years, just to be safe. $3M (post house)/55 years = $55k/year from principle spending. If you add in the 1.5% real return expectation from the equity in the investment portfolio, that's $45k per year now, but let's call is half that since over the 55 year time period the portfolio is shrinking to zero so the time-weighted average portfolio size is half the starting value (compounding on the frond end will make this a slightly conservative assumption).

Target $96k annual spending budget (real/inflation adjusted dollars)
$24k net rental income (should adjust with inflation)
$55k spending $3M principle over 55 year horizon
$22k in average portfolio real earnings
=====
$101k annual budget, or $5k/year surplus

So I think it's probably fine, also remembering that the house still has value in excess of it's implied rent that could be tapped towards the end of their lives via a reverse mortgage, sale/downsizing, HELOC, etc. There will also be some SS support at some point down the road as well, although it may not be as large as typical retirees given OPs shorter work history.

Happy retiring!

Appreciate the detailed insight. Your numbers look relatively accurate to me.

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Sun Jan 11, 2015 11:23 am

siamond wrote:
goodyear35 wrote:The one big concern I have is lets say our SWR is 4% on $2.9M, that is roughly $116K per year before taxes, and about $98K after taxes assuming 15% capital gains taxes (is that a safe assumption?). What happens if the market drops 50% within the next few years and now our $2.9M taxable account is $1.45M. If this did happen, I am assuming we would withdraw our living expenses from our bond holdings and not touch the stocks until the market goes back up? How is that situation best handled?
Doesn't seem that anybody answered this question of yours. Yes, in case of a big crash, you would start prioritizing you withdrawals from bonds for a while. More precisely, I would suggest that, irrespective of market conditions, you 'reverse-balance' when doing a withdrawal (say at the beginning of the year, moving annual $$ to checking & savings accounts). By 'reverse-balance', I mean that you sell assets which exceed your AA. If your AA is 75/25, but the current portfolio is 85/15, then sell stocks. If the current portfolio is 60/40 (e.g. market crash), then sell bonds. Not only this is a good application of 'buy low/sell high', but this helps in restoring your AA.

PS. oh, and sure, you can retire, you're in great shape. I'd set aside more 529 money though if I were you (colleges are wicked expensive, yours kids will not get financial aid given your assets, and... you might plan for a couple of more kids...). And stay reasonably aggressive with your AA (you're fine at 75/25), bonds are nice for short-term risks (e.g. market volatility), but this isn't a real problem with your assets. While bonds can be quite damaging on the long-term (low returns plus inflation risk), and here you're planning real long-term. Going 30/70 or anything like that would be a severe mistake. Many advices about bonds & retirement make an implicit assumption of a life expectancy of less than 30 years... Not at all your situation.
Thanks siamond, this makes sense to me. Was really hoping someone would answer that question!

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Sun Jan 11, 2015 11:25 am

Compound wrote:
goodyear35 wrote: Also to be clear, I am not selling my business and didn't receive a windfall. I am closing my business. The money I have made was over several years of running the business. I saved roughly 80-90% of everything I made. So it didn't all come at once.
This is the only aspect that has given me any pause about the OP going ahead with retirement. It made me wonder, has the OP been through a major market downturn with significant assets at risk?

Seems to me that sequence of returns is very important in this scenario. If there is a 50% drop in equities and you lose $1M of your nest egg right off the bat, can you say with confidence that you will stay the course?

If you haven't been through a major downturn with those levels of assets, maybe consider delaying retirement until you're sure how you will behave.
I had investments in the market in 2008 and left them in the market throughout. Would I like a 50% downturn, no. Would I stay the course? Absolutely. I understand clearly the worst thing you can do when your investments are down is to cash them out.

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Sun Jan 11, 2015 11:33 am

cherijoh wrote: The thing I would worry about is lifestyle creep. I would recommend reading the wiki article on Managing a Windfall. While you could definitely afford to retire now, you should pay attention to the cautionary tales about people who blew through larger nest eggs than yours. Also be wary of Financial Advisors looking for a cut for managing your money.
goodyear35 wrote:
Also to be clear, I am not selling my business and didn't receive a windfall. I am closing my business. The money I have made was over several years of running the business. I saved roughly 80-90% of everything I made. So it didn't all come at once.
cherijoh wrote: But some of the issues are still the same - you have a pile of money and you are trying to figure out what you can spend to make it last for the next 50- 60 years. FYI the wiki article makes specific reference to selling a business.
cherijoh wrote: When you ran your scenarios through Firecalc how many years of retirement did you use? I'm pretty surprised it gave you a 100% success rate with 4% SWR and a period of 45+ years. I definitely wouldn't go with the default 30 years.
The scenario I ran through FireCalc was expenses of $8K per month, over 55 years with a $2.9M portfolio. This doesn't include my rental income each month or even the little bit of social security I will be receiving down the road.

goodyear35
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Re: Can I retire early? 38 y/o

Post by goodyear35 » Sun Jan 11, 2015 11:36 am

bb wrote:Seems like the potential responses are going to depend on a couple of basic assumptions:

- to what extent is spending flexible
- is it ok to spend down principle

Is a 50 year retirement automatically in the perpetual portfolio category where
as a 30 year retirement is not? There is uncertainty in retirement assets lasting
if principal is ever spent. I wonder if the folks that would suggest spending
2% or less have difficulty with defining how much money is enough. Presumably
most people with money invested in the stock market risk a lower standard of
living if returns turn out poorly.

I am OK spending down some of the principal. Would rather not but realize that might be the case.

noco-hawkeye
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Re: Can I retire early? 38 y/o

Post by noco-hawkeye » Sun Jan 11, 2015 11:42 am

Re: 529 plan

I would place more money in the 529 right now. There is no advantage in doing some kind of $250/month contribution. You have the money right now, go ahead and get it in a tax advantaged place and let it grow without worrying about it. You have plenty to work with, I'd probably try to hit 100k in the 529 as soon as you can.

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