Portfolio review: Thinking about early retirement?

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cockersx3
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Portfolio review: Thinking about early retirement?

Post by cockersx3 » Thu May 21, 2020 7:02 pm

Hello,

My wife and I have decided that we kinda like being home and in charge of our own schedule, rather than working all the time and being exhausted when we finally get back home. As a result, we’re considering quitting our jobs sometime next year as a “trial” early retirement, while my kids are still at home. Wanted to get some BH wisdom on whether this is a good idea, or if we’re just daydreaming too hard.

Been meaning to pull together a “portfolio review” post for awhile, just never found the time. Figured I had no excuse now after all this time at home :-)
-------------------------
Emergency fund: Yes, about 6 months.
Tax Filing Status: Married Filing Jointly
Marginal Tax rate: 24% Federal, 8% State
State of Residence: Mid-Atlantic, HCOL area
Age: 48 (my wife and I). Also have two kids, both in high school - oldest graduates next year.
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 30-40% of stocks

Current expenses, excluding income taxes: Approx $80K, of which around $40K is non-discretionary. Rest can be adjusted up and down as needed.
Social Security: $36K/yr at 70, wife would get $15K/yr spousal at current formula. Assuming 20% haircut in current planning.

Debt: None
Total assets: Approx $2.7MM. Breakdown is as follows:

Home equity: $550K (no mortgage)

401(k): $675K:
VANG EXT MKT IDX TR 16%
VANG TOT BD MKT IDX 12%
VANG INST INDEX CIT 46%
VG INST TOT INTL STK 26%

Annuity: $631K.
Payout#1: $73K/yr (lump sum) for 4 years, starting 2021
Payout #2: $82K/yr (lump sum) for 4 years, starting 2023

Vanguard brokerage (after tax): $575K
Vanguard Total Stock Market Index Fund Admiral Shares 58%
Vanguard FTSE All-World ex-US Index Fund Admiral Shares 42%

529 Plan: $65K
VANG TOT BD MKT IDX 20%
VANG TOT STK IDX 80%

Roth IRA #1: $70K
Fidelity ZERO Total Market Index Fund 100%

Roth IRA#2: $30K
Fidelity ZERO Total Market Index Fund 100%

Current 403(b) : $16K
Vanguard Total Bond Market Index Fund Admiral Shares 100%

Current 457: $16K
Vanguard Total Bond Market Index Fund Admiral Shares 100%

Old 403(b): $26K
Fidelity Spartan International Index Fund Fidelity Advantage Class 62%
Fidelity® Total Market Index Fund: 38%

Old 457: $30K
Vanguard(R) Institutional Index Fund - Institutional Shares: 50%
Vanguard Total International Stock Index Fund - Institutional Shares 50%

Contributions: Total of approx $180K / yr:
$73K taxable
$57K 401(k). Approx $6K/yr of this gets rolled over as a “mega backdoor Roth”
$19K 403(b)
$19K 457
$12K backdoor Roth (wife and I combined)

------------------
Drawdown plans for retirement:
  • Leave work in approx 1 year. (Want to wait till bonuses vest in Q2/2021, also would like to get to the other side of COVID-19 and possibly DCA into whatever is coming in the markets).
  • Use ACA for health insurance. Timing gives enough time for SCOTUS to rule on it
  • Would do Roth conversions to at least the top of the 12% bracket through my 50’s to minimize RMD’s later on
  • Would draw down 457 plans early since they can be accessed before age 59.5
  • Can consider going back into my field as a contractor, if this doesn't work out. Also could consider going into a different field if needed - teaching & software development are achievable I think, although my pay would be dramatically lower.
  • Would sell home & downsize to a lower cost-of-living area once youngest is out of high school. Strongly considering becoming slow-travelling expats - have been to Mexico several times and definitely see moving down there eventually. I have moved several times for work before, which (despite its drawbacks) makes nomad living a bit easier for us.
----------------
Questions:

1) So, what say you of our plan? My BS bucket at work has been approaching overflow level over the last year, but I have been holding off on leaving earlier since I wasn’t sure if I could handle not being at work. However, since my workload during this shutdown has been light, I’ve been able to reconnect with old hobbies (especially around coding, which I loved to do as a kid) during the lockdown that I can definitely see continuing post work. Definitely seems do-able now that I’ve had a taste of it!

2) Any recommendations on how to count the annuity in my calculations? For now I am counting this as a bond / cash. This was originally intended for my kids’ college (purchased pre-Bogleheads before I knew better), but in retrospect these numbers are higher than what the kids will get. (We have committed to spend up to $30K/yr for each kid for college, max 4 years, which should get our kids into state schools here or some OOS publics with merit aid. Kids are strong academically so hoping for some merit aid.)

3) Any other recommendations on our portfolio to share? Although I have a lot of holdings, it’s mainly low-cost index funds spread across several accounts that are (I think) hard to consolidate. I see this as a “three fund portfolio” but using funds from multiple companies.

Thanks everyone for the feedback!

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Re: Portfolio review: Thinking about early retirement?

Post by retired@50 » Thu May 21, 2020 7:08 pm

The basic math seems to work out okay.

Using $2.7 mil portfolio and $80k per year withdrawal you're drawing just under 3%.

Do you really feel confident that you can run the whole show on $80k per year and not feel like you're depriving yourself? If so, enjoy retirement.

Regards,

EDIT: portfolio value is actually not 2.7 mil. This number includes house, etc. We need a good number to work with for spendable retirement assets, not "total assets".

Regards,
Last edited by retired@50 on Thu May 21, 2020 7:47 pm, edited 1 time in total.
This is one person's opinion. Nothing more.

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Horton
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Re: Portfolio review: Thinking about early retirement?

Post by Horton » Thu May 21, 2020 7:12 pm

You appear to be in really good shape financially. Healthcare and kids in school are the wild cards.

Before retiring, I would be inclined to ask for my dream working conditions - work from home, part time, etc.

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Re: Portfolio review: Thinking about early retirement?

Post by Random Poster » Thu May 21, 2020 7:37 pm

retired@50 wrote:
Thu May 21, 2020 7:08 pm
The basic math seems to work out okay.

Using $2.7 mil portfolio and $80k per year withdrawal you're drawing just under 3%.

Do you really feel confident that you can run the whole show on $80k per year and not feel like you're depriving yourself? If so, enjoy retirement.

Regards,
I’m not seeing a $2.7M portfolio.

Take out the house value and the annuities (as they apparently only pay out for 4 years each), and I get $1.5M and a bit, but there is some odd accounting going on with the “after tax” valuation of the brokerage account, so who knows what the actual portfolio value is?

I guess you could live off of one of the annuities for the four years that it pays out, invest the other annuity payout during the overlapping two years, and then run your numbers again.

The annuities certainly help things in the short term, but without them I would not feel comfortable trying out retirement.

With them, all I can say is “maybe, see how things look when they stop paying out.”

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Re: Portfolio review: Thinking about early retirement?

Post by jcoll1 » Thu May 21, 2020 7:39 pm

"of which around $40K is non-discretionary." This seems to be the key. If this is your required base then financially it is quite possible. If you're willing to adjust lifestyle as needed to fit within what your funds provide then it's not just a dream. However that decision is not to be taken lightly. The college funds do seem light for 2 children but you have other options and it depends on how you look at who pays for college. There's no law that says parents must provide 100% of college tuition. Health care is an unknown because who knows where it's going...
jcoll1

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Re: Portfolio review: Thinking about early retirement?

Post by retired@50 » Thu May 21, 2020 7:46 pm

Random Poster wrote:
Thu May 21, 2020 7:37 pm
retired@50 wrote:
Thu May 21, 2020 7:08 pm
The basic math seems to work out okay.

Using $2.7 mil portfolio and $80k per year withdrawal you're drawing just under 3%.

Do you really feel confident that you can run the whole show on $80k per year and not feel like you're depriving yourself? If so, enjoy retirement.

Regards,
I’m not seeing a $2.7M portfolio.

Take out the house value and the annuities (as they apparently only pay out for 4 years each), and I get $1.5M and a bit, but there is some odd accounting going on with the “after tax” valuation of the brokerage account, so who knows what the actual portfolio value is?

I guess you could live off of one of the annuities for the four years that it pays out, invest the other annuity payout during the overlapping two years, and then run your numbers again.

The annuities certainly help things in the short term, but without them I would not feel comfortable trying out retirement.

With them, all I can say is “maybe, see how things look when they stop paying out.”
Good catch. I didn't deduct the value of the house. 529 plans shouldn't be counted either. They don't really belong to the retirees for spending. I don't think the annuity payout schedule is an issue. If the annuity pays out more than they need, just re-invest the remainder. It's really about spending relative to the retirement assets available. If we knock out the house and 529 plan, it should still be over $2 mil...???

OP? What are your spendable assets?

Regards,
This is one person's opinion. Nothing more.

HomeStretch
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Re: Portfolio review: Thinking about early retirement?

Post by HomeStretch » Thu May 21, 2020 7:53 pm

I am not sure that your portfolio balance in 1 year will be sufficient to both retire completely at age 49. See rough calculation, below. But it’s always hard to predict real portfolio earnings/losses over a long retirement. Have you run any retirement projections using i-ORP or FireCalc to see if your portfolio balance lasts to age 90/95?

- Are you sure that SS income of $36k per year (in today’s $) for you at age 70 reflects retiring at age 49?

- Will you use any of your portfolio to fund college expenses above the 529 balance of $65k?
——————————-

$2,069k portfolio today (excludes home equity and 529)
+ 180k one more year of contributions
- ? $ for 2 kids college above $65k in 529
————
$2,249k portfolio at retirement at age 49

$ 80k annual living expenses excluding income taxes
15k estimated federal and state income taxes
———-
$ 95k total annual expenses
x 21 # years to SS at age 70
———-
$1,995k portfolio withdrawals to age SS

$ 254k portfolio remaining at age 70 (excludes earnings)

$ 51k SS annual income (excludes 20% haircut)
10k portfolio withdrawal (4% x $254k)
————-
$ 61k annual income age 70+
$ 90k annual expenses ($80k + $10k income taxes)
————-
($ 29k) shortfall /year

The above excludes portfolio earnings/losses and any portfolio withdrawals for education expenses above the 529 balance of $65k. You could also tap the $550k house equity to cover potential long-term care expenses and to cover annual expenses shortfall.

JamesJonesJrJr
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Re: Portfolio review: Thinking about early retirement?

Post by JamesJonesJrJr » Thu May 21, 2020 8:11 pm

I count the spendable, income-producing assets to be worth $2.069MM. Given some conservative assumptions about the growth of your income-producing assets, I estimate you can safely take a pre-tax income of $90k. I generated a report for your review.

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Re: Portfolio review: Thinking about early retirement?

Post by rockAction » Fri May 22, 2020 8:54 am

I'm was in a fairly similar situation last year. I was in my early 40s with 3 children still at home, and had around $3MM.

I used Vanguard's PAS to create a profile that included all of my accounts in and outside of Vanguard, my expected expenses, Social security expectations etc to put together a retirement plan. Based on the plan, PAS used the Monte Carlo simulations to provide me a 90-ish% success rate that my wife and I could retire now and live to age 100 and still have money left over.

I was looking to retire in order to have more time with my kids before they leave for college, and the PAS analysis gave me at least some level of comfort that it was feasible. Although I do stress sometimes about the upcoming college costs, I don't regret my decision one bit. Having more time with my kids has been invaluable, and I am thoroughly enjoying life. I do spend my mornings learning as much as I can about investing (often on this site) so that I'm as prepared as possible to make good decisions throughout retirement, but it's fun and I love it.

If you do decide to retire, one thing to consider is getting a part-time job or doing a bit of consulting on the side to still have some income coming in. That way, you can continue to fully contribute to IRAs (my understanding is you can only contribute to them up to the amount you have in income from salary/wages). Also, make sure to use ACA for the premium tax credits. It will reduce your monthly premiums immensely.

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Re: Portfolio review: Thinking about early retirement?

Post by cockersx3 » Fri May 22, 2020 9:50 am

retired@50 wrote:
Thu May 21, 2020 7:08 pm

EDIT: portfolio value is actually not 2.7 mil. This number includes house, etc. We need a good number to work with for spendable retirement assets, not "total assets".

Regards,
Thanks. I guess it depends on what you mean by "spendable." All assets are spendable if you wait long enough I guess. :D

What makes it hard for me is this stupid annuity - hard for me to tell how to value it as a possible retirement asset. In retrospect I should have just kept it and invested it, but this was pre-BH for me and it seemed like a good idea at the time. I am characterizing the annuity as "spendable" starting next year when it begins to pay out. Part of the annuity will go for my kids' college (2 kids x 4 years x $30K per year per kid = $240K in net commitments). This means that each year the annuity pays out, I should be able to keep approx $40K per year through the end of my kids' college career.

On the proposed retirement date, I will have about $1.7MM in invested assets. This is $2.7MM total - $550K home equity - $631K in the annuity + $180K in additions. Of this, I would spend about $40K while the kids are in college (ie$80K - $40K leftover from annuity, see above). I would also sell the house when youngest goes to college, and downsize to purchase a smaller house in a lower-cost area. I figure we'd get approx $250K of that equity, with the balance invested in another home. So, "spendable assets" once this happens will be $1.7MM + $250K home equity - $40K/year spend x 3 years + whatever appreciation we get in the markets between now and then.

Because the numbers go up & down and becuase of the annuity, I have been using cFiresim rather than doing the standard withdrawal rate ballpark estimation. Calculation I get is >90% confidence at a static spend level, or 100% if we allow for flexibility on the spend. So I do think this is OK based on the numbers, but was looking for a "sanity check" on this before we get too far in planning.

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Re: Portfolio review: Thinking about early retirement?

Post by cockersx3 » Fri May 22, 2020 9:54 am

Horton wrote:
Thu May 21, 2020 7:12 pm
You appear to be in really good shape financially. Healthcare and kids in school are the wild cards.

Before retiring, I would be inclined to ask for my dream working conditions - work from home, part time, etc.
Thanks. Totally agree, and already thinking the same thing. For example, the parts of my job that I hate the most are 1) the commute, 2) the high level of business travel, and 3) a boss that doesn't really understand or care about what my group does. When we are released from lockdown, I'm thinking about asking for 1) permanent work-from-home (or at least 3-4 days a week), 2) a stop on business travel, and 3) if possible, move to a department where my business function is better understood and appreciated. On (3), I have also been looking internally for different opportunities, but no luck so far. I can probably get a great opportunity if I was willing to relocate my family, but with two kids in HS I think that is a non-starter.

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Re: Portfolio review: Thinking about early retirement?

Post by cockersx3 » Fri May 22, 2020 9:56 am

jcoll1 wrote:
Thu May 21, 2020 7:39 pm
"of which around $40K is non-discretionary." This seems to be the key. If this is your required base then financially it is quite possible. If you're willing to adjust lifestyle as needed to fit within what your funds provide then it's not just a dream. However that decision is not to be taken lightly. The college funds do seem light for 2 children but you have other options and it depends on how you look at who pays for college. There's no law that says parents must provide 100% of college tuition. Health care is an unknown because who knows where it's going...
Thanks. For what it's worth, the spend will be $30K per year per kid, which would get both of them 4 years of in-state college tuition & room / board without a single student load. My kids' GPA and SAT score would bring them strong merit aid at some OOS state publics using the charts they provide, and combining that with a small student loan would allow them to go four years there as well. (Depending on how our portfolio does then, I may pay off those student loans when they graduate.)

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Re: Portfolio review: Thinking about early retirement?

Post by cockersx3 » Fri May 22, 2020 9:59 am

retired@50 wrote:
Thu May 21, 2020 7:46 pm
Random Poster wrote:
Thu May 21, 2020 7:37 pm
retired@50 wrote:
Thu May 21, 2020 7:08 pm
The basic math seems to work out okay.

Using $2.7 mil portfolio and $80k per year withdrawal you're drawing just under 3%.

Do you really feel confident that you can run the whole show on $80k per year and not feel like you're depriving yourself? If so, enjoy retirement.

Regards,
I’m not seeing a $2.7M portfolio.

Take out the house value and the annuities (as they apparently only pay out for 4 years each), and I get $1.5M and a bit, but there is some odd accounting going on with the “after tax” valuation of the brokerage account, so who knows what the actual portfolio value is?

I guess you could live off of one of the annuities for the four years that it pays out, invest the other annuity payout during the overlapping two years, and then run your numbers again.

The annuities certainly help things in the short term, but without them I would not feel comfortable trying out retirement.

With them, all I can say is “maybe, see how things look when they stop paying out.”
Good catch. I didn't deduct the value of the house. 529 plans shouldn't be counted either. They don't really belong to the retirees for spending. I don't think the annuity payout schedule is an issue. If the annuity pays out more than they need, just re-invest the remainder. It's really about spending relative to the retirement assets available. If we knock out the house and 529 plan, it should still be over $2 mil...???

OP? What are your spendable assets?

Regards,
See above for my dissertation (ha ha) on "spendable assets." On the 529 plan specifically, I have committed to paying up to $30K/yr/kid for college, so I would use those funds to pay for college rather than the annuity, until the 529 plans are emptied at which point I would switch over to the annuity. In that way the money is fungible...

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Re: Portfolio review: Thinking about early retirement?

Post by cockersx3 » Fri May 22, 2020 10:01 am

JamesJonesJrJr wrote:
Thu May 21, 2020 8:11 pm
I count the spendable, income-producing assets to be worth $2.069MM. Given some conservative assumptions about the growth of your income-producing assets, I estimate you can safely take a pre-tax income of $90k. I generated a report for your review.
Wow - this is a great site. Thanks for sharing!

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Re: Portfolio review: Thinking about early retirement?

Post by cockersx3 » Fri May 22, 2020 10:09 am

rockAction wrote:
Fri May 22, 2020 8:54 am
I'm was in a fairly similar situation last year. I was in my early 40s with 3 children still at home, and had around $3MM.

I used Vanguard's PAS to create a profile that included all of my accounts in and outside of Vanguard, my expected expenses, Social security expectations etc to put together a retirement plan. Based on the plan, PAS used the Monte Carlo simulations to provide me a 90-ish% success rate that my wife and I could retire now and live to age 100 and still have money left over.

I was looking to retire in order to have more time with my kids before they leave for college, and the PAS analysis gave me at least some level of comfort that it was feasible. Although I do stress sometimes about the upcoming college costs, I don't regret my decision one bit. Having more time with my kids has been invaluable, and I am thoroughly enjoying life. I do spend my mornings learning as much as I can about investing (often on this site) so that I'm as prepared as possible to make good decisions throughout retirement, but it's fun and I love it.

If you do decide to retire, one thing to consider is getting a part-time job or doing a bit of consulting on the side to still have some income coming in. That way, you can continue to fully contribute to IRAs (my understanding is you can only contribute to them up to the amount you have in income from salary/wages). Also, make sure to use ACA for the premium tax credits. It will reduce your monthly premiums immensely.
Thanks - this is really useful. At this point I think the numbers generally work, with the uncertainties that are just inherent to retiring early. I was mainly looking for a "sanity check" from others to see if this was totally insane or not, and so getting first-hand experience from someone in this exact same situation is invaluable. So, thanks!

The one thing that scares me a bit is the idea of walking away from a job without another one lined up. Again, even though the math seems to work, it's just so different from anything my family and I have ever done before.

Also, totally agree about getting some part-time work. My thinking is that I would take a few months off and decompress, and then potentially look at consulting a little just to keep my skills fresh in case I do need to go back to work. Also thinking seriously about getting into software development, either as a career (lots of job opportunities in this area near where I live) or as a side hustle. It would be nice to finally have time to do some of this - very tough to do during a normal day when 50+ hrs a week are gone due to work. It's been nice to reconnect with this during the downtime from this lockdown, and I'm looking forward to exploring this a bit more.

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Re: Portfolio review: Thinking about early retirement?

Post by Jack FFR1846 » Fri May 22, 2020 10:31 am

I think you've nailed the college payment thing, which is very unusual. Good job. (I looked up VT and U Maryland and both are easily under $30k in state). I'd have each kid take stafford loans for their portion of investment into their education and because the average time to graduate from a 4 year program is now 5 years. Nice job with that.

The house is always the wild card. Selling costs can be high and what you get for it depends on the market at the time of the sale. Also, moving expenses, which you should know pretty well. I always advocate to "sell everything" that can't fit in your car and buy new at the new destination. Be very careful with where you go and what you buy. Of course, rent for at least a year in the new location. I can't tell you how many stories I hear about people picking up in Mass or NY in super high cost areas, selling their house for $700k, paying $40k to move and then because it's sooooo cheap in Texas, they buy a 6500 sq foot house on a golf course for $900k. The move to save completely escapes me.

I'd triple check the social security numbers based on a bunch of zeros in the 35 years. If you plan a "retirement" job, then of course you'll have some non-zero, but low numbers in there.

My gut tells me to work till your youngest is done with high school and safely away at college. It's only a few more years and can make all the annuity stuff clear up plus add some liquid assets to the savings.
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Re: Portfolio review: Thinking about early retirement?

Post by retired@50 » Fri May 22, 2020 10:38 am

cockersx3 wrote:
Fri May 22, 2020 9:50 am
So, "spendable assets" once this happens will be $1.7MM + $250K home equity - $40K/year spend x 3 years + whatever appreciation we get in the markets between now and then.
This is as clear as mud.

Home equity doesn't play much of a role in my opinion. It should only be considered as a last resort for a reverse mortgage.

My suggestion is to not enter into an early retirement if your withdrawal rate exceeds 3.25%. If you can swing it on 3.25%, not including home equity, then great. Otherwise, you run the risk of trying to find a job in your 70s. If you wait until you're closer to Social Security FRA / and or RMD time, then 4% withdrawal is fine.

Regards,
This is one person's opinion. Nothing more.

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Re: Portfolio review: Thinking about early retirement?

Post by rockAction » Fri May 22, 2020 10:50 am

cockersx3 wrote:
Fri May 22, 2020 10:09 am

The one thing that scares me a bit is the idea of walking away from a job without another one lined up. Again, even though the math seems to work, it's just so different from anything my family and I have ever done before.
Yeah, that is the scariest part, and very understandable. I guess where I landed on that is that I am confident enough in my skills to where, if worst came to worst, I could always go back and find another job. I felt I might look back and regret not making the move when I could have while my kids were still around.
cockersx3 wrote:
Fri May 22, 2020 10:09 am
Also, totally agree about getting some part-time work. My thinking is that I would take a few months off and decompress, and then potentially look at consulting a little just to keep my skills fresh in case I do need to go back to work. Also thinking seriously about getting into software development, either as a career (lots of job opportunities in this area near where I live) or as a side hustle. It would be nice to finally have time to do some of this - very tough to do during a normal day when 50+ hrs a week are gone due to work. It's been nice to reconnect with this during the downtime from this lockdown, and I'm looking forward to exploring this a bit more.
That's awesome that you have another passion you are wanting to explore. Having additional time opens up so many things, and I think you'll be surprised at the opportunities that become available.

I would just really make sure to do your due diligence around the numbers so that you can feel confident with it. You don't want to be stressing every day about not having enough. For me, PAS was a really simple and affordable way (I only have them manage the min $50K of my portfolio, which costs about $150 a year) to give me a good level of confidence, and I use it as a pulse check to see where I stand as things change.

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Re: Portfolio review: Thinking about early retirement?

Post by cockersx3 » Sun May 24, 2020 4:39 pm

Jack FFR1846 wrote:
Fri May 22, 2020 10:31 am
I'd have each kid take stafford loans for their portion of investment into their education and because the average time to graduate from a 4 year program is now 5 years.
Good idea - my wife and I have talked and this is now on our radar. Both my wife and I saw a number of our college peers make poor choices in college (ie non-marketable majors, lots of partying vs studying, etc) which led many to either drop out prematurely or get jobs for which a college degree was probably not a requirement. The one thing all of those kids had in common is the complete absence of any financial ownership - all loans/ college bills for these kids went directly to their parents. I know that correlation does not equal causation, but it raised enough alarms that we want to do something. This seems like a good middle ground.
Jack FFR1846 wrote:
Fri May 22, 2020 10:31 am
My gut tells me to work till your youngest is done with high school and safely away at college. It's only a few more years and can make all the annuity stuff clear up plus add some liquid assets to the savings.
Yeah, I know. This was our original plan pre-COVID, and it seemed like such a long ways away even then given the never-ending artificial-emergency, ridiculous international travel, ugly commute, out-of-touch boss, etc at work. Now that I've been home with the family for months and gotten what I think a "taste" of retirement feels like, I'm not sure that I'll be able to make it that long. Hence the exploration of our options :-)

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