Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

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Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by Random Poster » Wed May 27, 2020 12:01 pm

Main Questions:

1) Based on the below, what is a reasonable housing budget?

2) Are the below cash sub-allocations reasonable?

These two questions are sorta intertwined, but hopefully they make sense after reading the below commentary.


General Background:

I am 43. My wife is 40.

I was laid-off in March.

To be completely honest, I wasn't particularly happy at my job. I think that I was a bit burned-out and I had been considering leaving my job for a while. Aside from the financial benefits of the job, I don't think that I am going to miss it very much.

It is possible, but highly improbable, that I will get another job in the same career area (oil and gas legal work). The industry is going through some rough times at the moment and jobs are getting scarce where I currently live. And, in any event, I don't see a long-term future for my wife and I in our current location.

So I am giving some strong consideration to just calling it a day, moving somewhere else within a year, and trying out early retirement.

Where would we move to? I wish that I knew. I'm looking for a place that combines the food and housing prices of Las Cruces, New Mexico, the weather of Santa Fe, New Mexico, the access to the outdoors and scenery of Bozeman, Montana, the bike-ability and cleanliness of Bentonville, Arkansas, the friendliness and closeness to good ice cream of Brookings, South Dakota, and with an HEB and Trader Joe's grocery store nearby. If anyone knows of a place like that, please let me know.

Financial Background:

My wife and I have roughly $3,800,000 in investments, with an overall allocation of roughly 40% US stock, 10% International stock, and 50% domestic bonds.

About $2,750,000 of the investments are in a taxable account (about 65% stocks, 35% bonds), and the remainder is in retirement accounts (all bonds).

We also have around $775,000 in cash saved up, and an additional $75,000 in a checking account that I will use to support us for the next year (so this $75K can be ignored for the purpose of this post).

Going forward, due to the layoff, the general lack of jobs in my career area (and, well, my lack of immediate desire to work in one of them), and my interest in trying out the early retirement life, the only income that we will have will have to come from our investments.

I anticipate that this will translate into roughly $30,000 a year in dividends and $22,500 in interest, all from the taxable account--or roughly $52,500 a year. It might be more, and I guess it could be less, but I'll just go with that number.

I really do not want to have to sell any of our investments to survive, but if we have to, then I guess that we won't have much choice but to do so.

Our expenses, pre-layoff, have been below $50,000 a year, but we've always rented and now we have to pay for health care, so I'm budgeting $75,000 a year. Again, it might be less, and I guess it could be more, but I'll just go with that number.

Clearly, if the expenses are $75,000 a year but the dividend and interest income is only $52,500, we've got a problem. I haven't fully thought out how to handle that yet, aside from generating more income by selling some investments from the taxable account, but I really do not want to have to do that.

Housing Budget and Cash Sub-Allocations Query

As a result of the layoff and a better-than-expected severance, and some diligent saving over the years, we have $775,000 in cash.

My wife and I have a bit of a disagreement regarding how the cash should be sub-allocated. Generally speaking, she thinks that we can reduce our "living expenses set aside" amount, and I would rather not.

But if the "living expenses set aside" amount is decreased, then the amount of cash available for a house increases.

In any event, here is a proposed sub-allocation for the current cash holdings:

Living Expenses: $225,000 (i.e., 3 years worth at $75,000 a year)
Travel Fund: $45,000 ($250 a day for 180 days; mainly there so we can travel without feeling guilty about the cost)
Car Replacement: $30,000
Moving Expenses: $10,000 (actual moving costs, drivers license and car registration fees, etc.)
Furniture and Outdoor Tools for New House: $40,000 (beds, washer/dryer, hoses, patio furniture, grill, etc.)
Immediate Housing Upgrades: $15,000 to $25,000 (paint, curtains, flooring, etc., for any house that we buy)
Long-Term Housing Maintenance Fund: $50,000 (roof replacement, HVAC repair, etc.)
Housing Budget: $325,000 to 350,000
Leftover: Up to $35,000

Does the above seem reasonable?

Should the housing budget be decreased? Increased?

Should the living expenses amount be reduced to only 2 years? Or even below that? If it is decreased, so the "unused" amount go towards increasing the housing budget? Or towards making additional investments? Or something else?

The recent mini-crises and stock market collapse reiterated to me the value of having cash on hand, if only for the emotional comfort that it provides, but recent threads here have suggested that such comfort comes with costs. And is it better to be comfortable with one's cash holdings or with one's house?

I guess that I'm asking because although a $325K to $350K house budget does provide us with some options, a higher house budget---say, up to $400K or even $450K---provides us with even more, and in other locations. But, again, that would be at the expense of having 2 or 3 years' worth of living expenses on hand.

I find that our housing budget keeps creeping up as we have saved more cash, but the idea of actually spending it on a house (or, well, anything, really) becomes increasingly more difficult to accept.

So, in conclusion, based on the above, what is a reasonable housing budget, especially for a couple that may never have any income other than what comes from their investments, and are the above cash sub-allocations reasonable?

Thank you.

magicrat
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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by magicrat » Wed May 27, 2020 12:33 pm

You are doing some unnecessary mental gymnastics. First, try to simplify your thinking. Cash sub allocations are irrelevant - the cash is part of your portfolio. Limiting your spending to the dividends and interest from your taxable portfolio is arbitrary.

You have $4,575k. You will have some fixed costs in transitioning to early retirement. Looks like around $500k for the housing items above, let's round to $575k for simplicity. Now you have $4,000k. You think you will spend $75k. That is a sub 2% withdrawal rate. No problem there.

The biggest problem that I see is having an AA that is <50% equities. Pretty conservative for a long retirement and exposes you to inflation risk.

Another potential problem is that you haven't estimated your expenses accurately (need to include healthcare, taxes, and annual value of large periodic expenses).

HomeStretch
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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by HomeStretch » Wed May 27, 2020 12:38 pm

Based on your numbers, your withdrawal rate is very reasonable for house purchase/early retirement. As long as you have an accurate expense number. It’s a lot easier to earn a good salary now if you need to work for a few more years than to try to re-enter the work force when older and no recent job history.

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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by bloom2708 » Wed May 27, 2020 12:47 pm

Is the total $3.8M or $4.5M. Can't tell from the wording on investments/vs cash.

Don't get stuck trying to live off dividends. Use a reasonable (3%) withdrawal rate. Dividends are just dollars you have to pay tax on. Same as share dollars.

I would look at the total cost of the house. Purchase price + ongoing taxes + insurance + maintenance. $300k is less than $500k. What can you live with but not bust the budget.

3% of $3.2 million is $96k. Can you get health insurance, have a $500k house and pay taxes with roughly $100k (give or take to stay under 3.5%)?

If so, you can be retired. I might rent for one year where you are planning. Get a feel for the area, neighborhoods. Give yourself an exit plan.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead

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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by Random Poster » Wed May 27, 2020 1:07 pm

bloom2708 wrote:
Wed May 27, 2020 12:47 pm
Is the total $3.8M or $4.5M. Can't tell from the wording on investments/vs cash.
Investment total is $3.8M.

The cash for housing, car replacement, living expense set-aside (essentially, money that is just "there" but ideally isn't touched unless the market tanks for 2 years straight) totals $775K.

So, yes, the total amount of money on hand is roughly $4.5M, but I prefer to think of it as $3.8M---with the housing costs not coming out of the $3.8M.

Said slightly differently, I guess, is this: I hope for my wife and I to live off of the $3.8M for 40/50 years, and to buy a house and car and furniture and so on from the $775K.

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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by Random Poster » Wed May 27, 2020 1:17 pm

magicrat wrote:
Wed May 27, 2020 12:33 pm
The biggest problem that I see is having an AA that is <50% equities. Pretty conservative for a long retirement and exposes you to inflation risk.
Well, the AA is 50% equities, give or take a tad based on any given day's market movements.
magicrat wrote:
Wed May 27, 2020 12:33 pm
Another potential problem is that you haven't estimated your expenses accurately (need to include healthcare, taxes, and annual value of large periodic expenses).
Understood, but:

1) Health care expenses is what causes the annual expenses to jump to $75K, presuming no ACA-subsidy availability. We currently spend around $1700 a month on rent, and I find it hard to believe that, if we were buy a house outright, the house insurance, monthly maintenance, HOA dues (if any), and property taxes would be $1700 a month. So, in my mind, our annual budget would remain the same, or---more likely--decrease---by buying a house, but for the health insurance, and I figure $25K a year is a reasonable budget for that.

2) If all of the income is from interest (even if not from tax-exempt bonds, as is currently the case), dividends, and long-term capital gains, the federal income tax is going to be sub-$1,000 a year.

3) Other than a car, I don't know what other "large periodic expenses" there might be, particularly with the other $50K housing maintenance fund in place, and we've already got $30K budgeted for a car replacement, which, if once bought, should last another 10 years. Surely over the span of another 10 years we could up another $30K or its equivalent.

bloom2708
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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by bloom2708 » Wed May 27, 2020 1:52 pm

Random Poster wrote:
Wed May 27, 2020 1:07 pm
bloom2708 wrote:
Wed May 27, 2020 12:47 pm
Is the total $3.8M or $4.5M. Can't tell from the wording on investments/vs cash.
Investment total is $3.8M.

The cash for housing, car replacement, living expense set-aside (essentially, money that is just "there" but ideally isn't touched unless the market tanks for 2 years straight) totals $775K.

So, yes, the total amount of money on hand is roughly $4.5M, but I prefer to think of it as $3.8M---with the housing costs not coming out of the $3.8M.

Said slightly differently, I guess, is this: I hope for my wife and I to live off of the $3.8M for 40/50 years, and to buy a house and car and furniture and so on from the $775K.
Thanks. 3% of $3.8M is $114,000. Not sure if 3% is safe for 50 years. You have to be able to meter spend based on the results of the previous year.

Research property taxes and insurance for the areas. $75k budget with a $500k house seems light. But, you have some buffer up to $115k.

Map out to 59.5. Then to 62 (lesser earner claims at 62). Then to Medicare. Then to 70 (higher earner claims at 70). You likely want to do Roth Conversions during the retired to 62 years. Probably to top of 22% bracket.

I think you are good if you don't buy too much house. Good luck!
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead

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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by Random Poster » Wed May 27, 2020 2:03 pm

bloom2708 wrote:
Wed May 27, 2020 1:52 pm
Research property taxes and insurance for the areas. $75k budget with a $500k house seems light. But, you have some buffer up to $115k.

***

I think you are good if you don't buy too much house. Good luck!
Sorry, but where are you getting a $500k house from? The highest I proposed in my post was $450k (in the commentary), with a $325k-$350k in the cash sub-allocation breakdown.

And, with respect to your latter point, that is essentially my question: how much is too much house?

bloom2708
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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by bloom2708 » Wed May 27, 2020 2:08 pm

Random Poster wrote:
Wed May 27, 2020 2:03 pm
Sorry, but where are you getting a $500k house from? The highest I proposed in my post was $450k (in the commentary), with a $325k-$350k in the cash sub-allocation breakdown.

And, with respect to your latter point, that is essentially my question: how much is too much house?
Hard to answer. Would you live in the $325k houses you have looked at? Very personal decisions. I don't know the area. Some places $325k is a very nice house. Other places you wouldn't step foot in one. It probably depends neighborhood to neighborhood even.

We are a few blocks from houses that are $1 million to $3 million. Our house is maybe $400k. Plenty nice, but we are in a pretty LCOL area.

You have plenty of cash dedicated, so I think you will be fine if you stick under $500k. $450k would fit that bill. :D
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead

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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by Random Poster » Wed May 27, 2020 2:11 pm

bloom2708 wrote:
Wed May 27, 2020 2:08 pm
You have plenty of cash dedicated, so I think you will be fine if you stick under $500k. $450k would fit that bill. :D
Okay.

But, to be clear in case there is some confusion, I am not planning on getting a mortgage to buy a house. It would be an all-cash purchase.

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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by curmudgeon » Wed May 27, 2020 3:45 pm

The expense ratio on buying/selling houses is pretty steep (and quite a bit of hassle as well). I wouldn't jump into doing that for ER until you've got a clear picture that: 1) you've found a location that you will be likely to stick with for a few years, and 2) you aren't going to get bored and want to go back to work (though doing something different and less well-paid in your new location could be an option that wouldn't require a move). I would take some time and do extended airbnb or vrbo stays in a couple of likely locations first, and then maybe rent for a year in your likeliest location. This lets you try it all out without making a major commitment other than the year off work.

I was in a somewhat similar position in my mid-40s, though with a bit less saved. I had more entanglements in my local area (owned a house with mortgage, last kid finishing college). I took a year off and did nothing work-related. At the end of that time, I decided to look for another job, but I placed people and personal satisfaction way above compensation, prestige, and company potential in my weighting. It worked out very well for me, helped along by the fact that I was working because I wanted to, not because I needed to. I did retire for good in my later 50's; I think that was a better timeframe (at least for me).

As far as cash goes, $100K more or less in the house purchase isn't likely to make a significant difference given your overall financial position. Getting down to specific expense/budget, there is a common saying "all real estate is local", and that can be quite true. There can be quite large variations in operating costs for different houses at the same purchase price. Property taxes have quite large variations. Insurance can be quite variable as well. Maintenance and utilities can be all over the map depending on whether you have a newish modest sized house, an aging mcmansion, or have unique features (acreage, waterfront/dock, spanish/adobe, colonial, etc).

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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by Watty » Wed May 27, 2020 4:10 pm

Random Poster wrote:
Wed May 27, 2020 1:07 pm
So, yes, the total amount of money on hand is roughly $4.5M, but I prefer to think of it as $3.8M---with the housing costs not coming out of the $3.8M.
You are way overthinking this.

I did not follow all your numbers but it sounds like a year from now you could easily end up somewhere with a paid off house with about $4 million in the bank. Just with dividends and interest if you get 2% then that is $80K a year which is more than your $75K budget.
Random Poster wrote:
Wed May 27, 2020 12:01 pm
The recent mini-crises and stock market collapse reiterated to me the value of having cash on hand, if only for the emotional comfort that it provides, but recent threads here have suggested that such comfort comes with costs. And is it better to be comfortable with one's cash holdings or with one's house?
Another way to get to your "sleep well at night" point would be to buy a ladder of individual TIPS where you have $50K mature each year for the next 20 years until you are 63 and 60. That would cost you one million dollars. You could also just spend some of your dividends each year to fund the rest of your $75K budget.

You would likely want to own the TIPS in a retirement account because of the way they are taxed.

A nice thing about this is that you do not need to designate that as being some sort of separate investing bucket since the TIPS could just be included in your normal bond asset allocation.

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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by FishTaco » Wed May 27, 2020 5:33 pm

Random Poster wrote:
Wed May 27, 2020 12:01 pm
Main Questions:

Where would we move to? I wish that I knew. I'm looking for a place that combines the food and housing prices of Las Cruces, New Mexico, the weather of Santa Fe, New Mexico, the access to the outdoors and scenery of Bozeman, Montana, the bike-ability and cleanliness of Bentonville, Arkansas, the friendliness and closeness to good ice cream of Brookings, South Dakota, and with an HEB and Trader Joe's grocery store nearby. If anyone knows of a place like that, please let me know.
If you find this place, please let me know. i go through these same gymnastics re: relocation.

Why don't you and your wife think about getting a campervan or small RV and just spend a year or so travelling around the country? You definitely have the funds for it and if you're moving out of a rental, you don't even need to worry about keeping your housing up. I know this isn't everyone's cup of tea, but it would let you audition all sorts of places before making a decision.

rich126
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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by rich126 » Wed May 27, 2020 5:40 pm

Seems like you have plenty of money even if it means withdrawing 1-2% a year. I would note that depending on where you move to and whether you plan to do most of the moving yourself, $10K may be low and it could be more like $15-20K depending on what you do vs the movers and the distance involved.

itaos
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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by itaos » Wed May 27, 2020 6:28 pm

Have you taken a look at firecalc.com or similar sites to project your retirement?

At your estimated expenses you could live 100 additional years and never bottom out barring a countrywide meltdown,etc Buy whatever house makes you happy within reason. You've done great, congratulations

Is there a family or charitable reason you do not want to sell any investments? I am genuinely curious

marcopolo
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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by marcopolo » Wed May 27, 2020 7:05 pm

As others have mentioned, the desire to live off dividends is quite arbitrary. Dividend payouts have been steadily declining due to tax and compensation approaches. What will you do if more companies decide to do more buybacks instead of dividends to return cash to shareholders?
Focus on total return and associated spending.

You have plenty of money to support the spending you are describing. Enjoy your retirement audition, hope you like it as much as i have been enjoying ours.

By the way, I completely understand segregating the house purchase dollars from the rest of the portfolio. Sure, it is mental accounting, but you want to make sure your remaining portfolio will support your spending needs after you have purchased your home and associated start up costs. We did the same when we transitioned to our retirement home/location.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Early Retirement Audition; House Budget; Cash Sub-Allocation Queries

Post by Random Poster » Wed May 27, 2020 8:49 pm

itaos wrote:
Wed May 27, 2020 6:28 pm
Have you taken a look at firecalc.com or similar sites to project your retirement?

At your estimated expenses you could live 100 additional years and never bottom out barring a countrywide meltdown,etc Buy whatever house makes you happy within reason. You've done great, congratulations

Is there a family or charitable reason you do not want to sell any investments? I am genuinely curious
Yes, and they all seem to indicate that we will be fine at our expected spend rate, or even at a slight increase of it. Based on that and my own personality of being more interested in not losing what we’ve got than getting more of it, I see very little reason to increase my equity exposure.

My rationale for not wanting to sell any investments is based purely on fear. Fear of not having enough and the fear that by selling a share, I will never again be able to earn a dividend or interest payment or capital appreciation from that sold share.

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