I will officially be announcing my “Help a Reader” category in a couple weeks, but here’s one to get us started.
This reader wrote to me suggesting I offer a way for those who are considering retiring to share their information and ask questions of ESI Money readers. I thought it was a great suggestion and wanted to post it ASAP.
I sent him some questions to get us started (in black italics below) but you may need more info. If so, you can ask in the comments below.
If not, then simply leave your suggestions for him as I know he’ll appreciate the feedback.
Here goes…
Tell us about yourself.
I am 43, married with three kids below the age of 10. I live in a suburb of a major city in the northeast. I am currently working in the finance department, executive level, of a subsidiary of a large corporation.
I have always spent significantly less than I earned and I always invested that aggressively in the stock market.
I married a woman in my late 20’s who spent less than I did and for a time, we had dual six-figure incomes. Although the dual income stopped as we had more kids, the approach to saving and aggressive investing did not.
My wife and I always maxed out 401K contributions, IRA contributions, employer match, etc.
I had accumulated over $1M net worth by the time I was 33 or so. 10 years later this figure is over $6M. This is driven by aggressive investing, modest spending and an income that has exceeded $500K a year for a few years now.
The assets as of today:
- Cash – $70,000
- Investment accounts – individual equities, ETFs, Funds – $4,500,000. Note $1M of this is in 3 stocks AAPL, FB and AMZN with a combined $400K unrealized gain. I know concentration isn’t good, but it’s hard to not invest where the growth is. The balance of the allocation is 95% US equities.
- Retirement accounts – 401K, IRA – $1,690,000 – US Equity index funds primarily
- 529 College Plans – $370,000 – US equity index fund. I always viewed the 529 as one of the best deals available. Tax free growth of assets.
- Lending Club – $20,000 – just started
- House Equity – $220,000
- Net worth $6.8M
Why are you considering retirement?
To really just be free from work. To be independent. To do the things I want to do after doing things I have to do for the majority of my life thus far.
I have small kids, I’d love to be with them more. I can’t remember the last time I read a book, a magazine, worked on music, volunteered, had a hobby, exercised.
Things are frantic on a good day with many competing priorities and I am usually not on the list. This is with even having a very flexible job.
I just question to what degree I should really continue this route or just stop.
Every year I continue to work, however, I would save another $200K+.
What’s your estimated annual retirement spending?
I have modeled my future spending based on today’s spending. The unknown for me is how much my spending habits will actually change. I can’t bring myself to buy a depreciating asset…so my car is a ten year old Toyota. Is that approach going to change when I retire? Possibly if I have to shift to a lower risk tolerance in my investing, now I am just all about opportunity cost of any purchases.
Spending: Currently monthly spending is between $9-11K.
$2,200 is a $400K mortgage on a $620K valued house. I’ve used this spending as my basis for retirement. Rounding up to $12K a month. That is more than I spend now.
For as long as the kids are eating everything in sight under my roof, that cost will continue. Perhaps 10 years from now it begins to be replaced with other activities/spending of my own.
In my model, I inflate this spending by 2.8% a year until death.
I’m dying at age 92 by the way, in case you’re wondering and I don’t want to have a penny left over. Just enough to bury me.
I haven’t modeled/budgeted any changes to current spending habits. There is an inherent assumption that whatever I save from kids moving out will be offset by incremental spending by my wife and me.
The Kids: They go to public school, I expect that to continue.
I pay $12K a year in property taxes. College is naturally a big variable. Currently my model takes a tuition today at $49,170 annual cost and inflates it by 3.5% a year until the year 2035 when my youngest will be out of college. In future dollars my outflows are estimated to be $923K for all 3 kids.
My current $370K 529 Plan will get me partially there at 5-7% growth assumptions. It’s invested in the lowest cost Index option. I would have to put aside about another $120K to fund this assumption completely.
I have been putting in $2K a month into the 529 Plan and just stopped. Not sure I want to keep doing that in the 529 plan and not have access to it or run risk of not using it.
My kids are not going to college to “find themselves” and I’m very comfortable with the in-state option. It is the basis for the $40K cost.
Insurance: Not entirely sure what to estimate here.
I did a quick searching in my state and found plans ranging from $1K a month to $3K a month.
In my model, I used $24K a year to cover insurance, starting now. I inflate that by 2.8% a year until I am 65. Then I cut that figure in half and continue to age 92.
This provisioning creates $716K in future dollars to cover healthcare needs until 65. Then another $918K to cover supplemental insurance and other healthcare needs from 65 to 92.
Taxes: I provided for capital gains taxes assuming that the difference between uses and sources of funds in a given year would be comprised 50% of taxable gains.
I applied 20% tax rate to this figure. I applied a 20% tax rate to any assumed dividend income not tax sheltered as well.
What sources of retirement income do you have?
- Income from investments – The assets outside of retirement accounts ($4.5M) can conceivably generate 4%+ income to me. This would be approximately $180K a year, $144K after tax. That’s roughly $12K a month. I’d have to shift the investments around. As it is now, it yielded over $50K of dividends last year. But I am not investing for dividend yield at the moment.
- Social Security – I don’t recall the support for this calculation, but I estimated $59K a year for myself starting at age 70 and another $55K a year for my wife. Roughly $174K a year in social security. I assumed 20% tax provision on the entire amount.
- Job In Retirement – Haven’t thought too much about this. I think I would like to teach. My wife is considering working again in 3 years or so when my youngest is older. I would like to take a few years off and focus on my kids.
In my model I have my investment balances above growing at 4.5% a year. This growth, plus social security less the funding of all assumed outflows (taxes, spending, healthcare, etc) is my net change each year. At 92 years of age there is a $2.5M residual balance.
What questions do you have for ESI Money readers about your ability to retire or related issues?
- What can you advise me about Social Security income assumptions?
- Health insurance in retirement is totally unknown to me. What are your thoughts on the assumptions I built into the above?
- What is your input on my college costs assumptions? Should I keep putting into the 529 or not?
- I have approximately $1.2M of unrealized capital gains in the non-retirement accounts. How should that impact my scenario planning? How can I unwind it most efficiently?
- What are your thoughts on the asset allocation? I have concentration risk the way it is now. There is a significant tax impact in moving it around though.
- Shifting my investments to high yielding type may boost income assumptions but lower appreciation assumptions? If so, what assumptions should I use?
- I would love to get into property rentals, but know nothing about it and am in a part of the country where prices are very high. How viable is this for me?
Lastly – Can I retire? If yes, why? If not, why? What advice do you have for me, risks or opportunities I am missing? Thank you!
Like many of us, healthcare is the great unknown.
Thanks for reading my fact pattern. Yes healthcare is a bit of a mystery to me and with 3 small kids it is an area of concern that I would need to nail down if I were to proceed down this path.
Thanks for your input.
KBC
If your estimates are close to accurate you should be able to retire now. Personal Capital has a free retirement calculator on their website that allows you to change assumptions and run different scenarios. It also shows money run out rates year by year using different investment growth percentages. There are a lot of estimating programs out there, but I find this one to be particularly useful.
Thanks Karen for reviewing my data. I will check that out. I haven’t tried that estimating piece of their platform. I used Personal Capital’s site to model “target” portfolio allocation. I like the back look data they seem to have. I haven’t checked the accuracy of it. What I struggle with is that the site and other similar site tell you the standard allocation for stocks/bonds/domestic/intl, this site though compares your current allocation to that recommendation – forward and backward in time. It showed that my allocation does better in both cases. So I am left wondering why I would change my allocation to their recommended target allocation? Thanks for your input. KBC
KBC Freedom,
The Personal Capital allocation recommendations aren’t only based on raw portfolio performance. They also consider the “efficient frontier” (EF) risk calculations — https://en.wikipedia.org/wiki/Efficient_frontier. Under the assumptions of the efficient frontier, you can build portfolios that perform better than the optimal EF portfolio, but those portfolios will have more risk than the optimal portfolio. If you agree that the assumptions founding the efficient frontier hypothesis are valid, that is the reason why you would adjust your allocation.
Hi Olive P, Thanks for that. I did see the efficient frontier arc in their analysis and it was the first time I had seen that. I do understand the risk relative to return concept. I have always used time however as the variable that kept me outside the equilibrium and stayed high risk allocation. Difficult for me to reconcile back down to “optimal” when optimal seems to under perform historically and forward. How is that optimal then? Isn’t that then saying that risk is overstated? KBC
Interesting situation, and one I venture most people would love to be in. What about your location? Is there anything keeping you where you are, or are there other – perhaps less-costly – geographies you would prefer, enjoy or consider? You might find a higher quality of life for your whole family, at lower cost, in a different area.
Thanks for reading Jay. Yes it is a fortunate situation. The ESI principles in full effect. Location is a great mystery to me. I feel rooted because of history, my friends and family near by, in an area of the country I have always lived, kids just starting out establishing relationships, a job I may hang on to a little longer. I can say however the more I have time to be outdoors, the more I am going to desire a different climate. This is an open item for me. Certainly has financial benefits to moving. However, I am trying to assess this decision based upon staying put where I am as a worse (?) case scenario! Thanks for your input. KBC
I’m looking forward to watching this one play out.
1) SS-create an account and look at the projections. Read about the inflection points and how your benefit is averaged over 35 years. If you retire now many of those years will be$0.
3) your kids will be able to go to college. They will not get aid. You can probably quit funding and have more discretion with your use of your money
4) Start talking to your accountant. Show him what you have and what will come in as dividends etc. if I read correctly you are married filing jointly with 5 exemptions. Your below the line deductions are more than $40k. That is $0 tax on your first $40 K of income. Your earned income will be 0 or low. Your qualified dividends and long term capital gains will not be taxed at 20%. Depending on what you need to live and which investment income is qualified you might be in the 0% capital gains bracket with room to realize capital gains and “update” your basis. The tax code is very biased toward wealthy low income people like you hope to be. Please find a CPA who can tax forecast with you and with whom you can share your whole picture.
Also – yes. Retire. Let go.
Oops. $30K below the line. My bad. My point remains- if you need $144 K to live and you can sell high yielding assets, you can winnow down your interest and non qualified dividend income and be in the 0-15% LTCG bracket.
Great response and spot on!
For the original poster:
Don’t be locked in to your tax basis!
I’ll add that those are great stocks you own but I got completely out of individual stocks, except my employer stock which is a hard choice for me to sell or not. I took the hit this past year on some gains that I didn’t want to be locked into, painful yes but I don’t see income dropping for at least 5 – 6 years maybe 9 – 10.
We are the same age, I haven’t been as diligent saving but income is higher. I plan on going until 52, I think retiring now would be fun but I also think a lot more security comes out of the next few years. If I ever get sick of it then that’s a different story.
For the 529s do you have nieces and nephews? I ask because you may be fine there unless you want to give more to the kids or have others that you might want to give that money too. I have 5 529s, one for my kids and three for nieces and nephews. I know they will need help and I am putting time on my side.
Could you retire? I think yes. Do you have a plan on what you will do with your time? If you have a plan of what you would like to do go for it!
Thanks for your comments GT, I do have nieces and nephews and contribute gifts to their own accounts. In the event I don’t use my 529 entirely it would be used for them, but I wasn’t thinking of that as being a gift, more of a way to get it out of the account without penalty.. ie. Sis I will pay your daughter’s bill, you pay me back. This kind of gets filed in with I don’t want to leave behind an inheritance either! Good for you for doing that for your family. How do you take the hit now on the exit of those individual stocks and pay 20% tax at your marginal tax rate? That is a real struggle for me. I have to weigh that against the risk of unrecoverable decline don’t I? I am going to deep dive into the stocks a bit further down the line in this thread and look forward to your advice. As you are the same age as me, we are supposedly in the prime earning time of our lives – the income figure above can nearly double in a good commission year. I sock all of that away. Tough to walk away from that. And no, I don’t have a plan for what to actually do in retirement as someone rightly honed in on down the thread line… Thanks for your feedback. KBC
Thanks ArmyDoc, I do need to investigate this further. I am not as familiar with the benefits of zero earned income and need to research further. Is that the only way I can unwind the large capital gains that I have? Wait until I am retired, no income, start selling my largest gains? Yet at the same time aren’t I accumulating dividend paying assets to fund retirement? How do I accomplish both? Not an area I know anything about. Any other options? On the kids front, I also don’t know what goes into the aid calculation, I always just assumed it excludes people in my situation. Is that the case or are the options there? I will look into the accountant, I don’t have one. Thanks for your thoughtful response. KBC
KBC
Thanks for reply. Plz forgive if I sound too pedantic – one of my many faults! Google the capital gains tax brackets and learn what a “qualifying dividend” is. Obviously this depends on your specific situation but imagine having no earned income and selling some stock to cover your annual expenses one year. Your stock basis isn’t taxed so if you get $50K of qualified dividends, $50K of stock ‘basis’ and $50K of capital gains on the stock you sold.You have $100K to figure tax on. Your standard deduction and exemptions are $32K, leaving $68 K of capital gains to worry about. Now look at your tax bracket for Married Filing Jointly for $68K and then look at the capital gains tax bracket for your income tax bracket. You will be amazed. Obviously all made up numbers but play with Taxcaster and see you accountant to dig into this. You will not be paying 20% in taxes. Find a passion (could be your new passion is “full time Dad/Husband” ) and the retire while you can still be in your family’s life.
Great write-up! Really enjoyed reading through your strategy and approach. For college, one thing I’ve considered is using some money earmarked for college as a downpayment on a rental property that will be run by the kid and what they earn is what they use to pay for college.
Sure, you’ll need to help them out, but I think it’s a great way to teach them about money.
Think about it – they learn about the RE industry, how to run a rental property, income and expenses, taxes, hard work, dedication, etc. Of course you’d have to do this at a young age, or maybe even wherever they do to college and use it as spending and savings money.
Thanks Lance and thanks for reading all of my info. That’s an interesting idea you have. I like the tax free appreciation aspect of the 529 Plans. And not sure of what better saving vehicle there is. If i have 200K appreciating for say 18 years at 7% a year. I’ll have 430K of gains and will not have to pay 170,000 of taxes on those gains. If I have that concept correct that is a huge benefit. I am a big believer in teaching kids about money and that is a topic I can go into further. Maybe another take on your idea would be a franchise of some kind where you can employee them while they are going to school. I don’t hear a lot about franchises in the FI community thus far… but I’m only a week or two in, but anticipate it’s probably the work involved! Thanks for your input. KBC
Yes, you can retire. I would suggest 450k for college and put more in 401k. 401k becomes your growth area in which you don’t touch until later years, 62 plus. The money is there….you will need to do something personally satisfying as there will be a point the kids won’t want you around. Teenagers! ?
Hi 5SR thanks for reviewing my info. Tell me how you come up with the 450K and is that in today’s money? What assumptions are you using? Do you have an appreciation rate that you’re comfortable with that I can inflate that by? I max out on my 401K and put in 5,500 each year into IRAs for my wife and I, although I don’t get a tax break on the contribution because of my income level, but I get the benefit of tax deferred growth. I have not worked teenagers, empty nest syndrome or my personal time into my model… thus far this has entirely been a math exercise! If we pass that test… To be continued… Thanks. KBC
Looks like you’re in great shape. I’d consider a few things to boost your chances at leaving your family a larger inheritance, though:
1. It looks like you’re willing to work (you mention teaching) just in a different capacity. Maybe explore going to a part-time/flexible hours schedule/consulting position with your current employer?
2. If you do retire, consider doing it early in a calendar year. The reason for this is that you can potentially max out your 401k and IRAs with your first month or two of paychecks.
3. Look into building up the cash portion of your funds a bit more to cover 2 or more years (ideally up to the first 5 years) of retirement, and turn off the re-investment of dividends in your taxable accounts (if these are even still turned on). The reason for this is that you can/should look into making some Roth conversions early up to the top of some of the lower brackets.
4. I wouldn’t stress too much on the 529s — you actually may be eligible for financial aid for your kids with your low wage income if you are retired when they go to college, believe it or not. And you can probably cash flow it….and what you can’t is good for the kids to maybe take out in (reasonably small) student loans so that they have skin in the game.
5. I’d consider buying a new car right around retirement, and/or doing any other big time expenses (new roof/water heater/home renovations, etc.) that might need to be done while you’re still working right before you retire — if a lot of those things are taken care of and in place right when you start your retirement, you not only can push out having those expenses until 10+ years into retirement, but they also reduce your sequence of returns risk.
But seriously, you’re probably in great shape. Nothing wrong with working a little longer if it helps you sleep at night, but you should be in pretty awesome shape.
Nobody is obligated to leave an inheiritance….
No, but it seems reasonable that he’ll be in a position to do so if he optimizes things a bit more (even Kitces reports that many of those following the 4% rule end up with more money — even factoring in inflation — than they started with), so why not go for it. He/they can always leave it to a deserving charity if they don’t want to burden their kids with an inheritance.
If he is retired for 30 year, there will always be maintenance on the house and vehciles. Buy used cars once you are living on a fixed income. Buy a $5,000 car every 4 years.
Yes, but the biggest risk to your retirement, generally speaking, is sequence of returns risks. Taking care of big maintenance expenses early BEFORE saying you’ve had enough pushes out the NEXT time you have to pay for those big expenses, thereby reducing the likelihood that sequence of returns effects (i.e. big losses early in retirement) deplete your accounts too quickly.
Chadnudj great comments. Thank you. Lets go through each one!
1. Inheritance – Don’t want to leave one! I am not driving a toyota because I like it! I am laying the ground work for my kids to repay me for college as a retirement stream! That may be tough and I’m not baking it into my model, but we have had some preliminary discussions about appropriate interest rate!
2. I can’t do part time at work or change structure there in any way. Frankly thus far in the posts I think I may have to not work for several years just to deal with my capital gains challenges. If the only way to do that is have no or little income?
3. I know nothing about roth conversions – just listened to the first podcast on that today. I think you’re saying build cash to live off of, cut investment income down so I can convert? Need to research this further.
4. Interesting on the financial aid. I don’t know anything about this. For skin in the game, from the time they were 2 I have told them I finance the state school level, you pay me back. If I don’t agree with the path or like their grades, deal is off. Framework in place in between playing with tinker toys.
5. Sequence of returns risk is not something I am familiar with. You’re saying make purchases sooner? I have generally been operating under the premise of defer cash outflows keep cash invested etc. hence the toyota.
Good tip on beginning of the year. I do max out 401K in my first paycheck and often get my commission for prior year in the first month or so. Thank you for your time. KBC
Once you figure out what bracket you end up in after your first year of little income, you would convert a portion of the IRAs to Roths. The cost of taxes will be on the total amount of money in the IRAs, so if you have 500K in IRAs and you want to convert 100K, you pay taxes on the whole 500K at whatever bracket you are in. If you have enough saved and the money grows sufficiently, you could have RMDs of over $60K-$100K. RMDs increase each year based on longevity. If you see you will be put into a higher bracket, convert as much as you can before you turn 70.5. Or withdraw money from the IRAs at your low bracket and just invest the money into a Brokerage account.
I used CFiresim and Firecalc to determine if I had enough to retire. Check them out.
You have a very high net worth so I’d be shocked if you don’t have enough to retire.
Mr. Freaky Frugal – great. Thank you, I will check them out. KBC
I agree with leaving at 92 pennyless. Consider contributing the max amount to Roth IRA/IRA for your kids as soon as they start earning $$. Assuming they start earning in their teens this can add up by the time they want to retire. Don’t forget you can tap your retirement account w/o penalty way before your are 59 1/2, there are plenty of write ups on that on the IF sites.
Matt thanks for the info. I am not familiar with this. They own stocks and earn dividends is that sufficient to start the process? I will research.
Thanks. KBC
I think this person is doing just fine with retirement savings. If he wants to retire, then he can figure out his expenses and reduce what is possible. $370 K in 529s before the kids are 10 is pretty good. If this grows over the next 8 years it will hopefully be able to fund all of the kids tuitions. Home costs are what they are but at $2200 in mortgage a month, he is doing pretty well. If he really wants to retire he can make it happen easily enough.
Thanks DDD for the comment. I think the kids are in good shape with college. Just never know how things will be in 10-16 years when faced with the “but I really want to go to Princeton” conversation… KBC
If you truly believe that the in-state school is good enough, then I think you should say, “If you get accepted, we’ll figure out how to make it work, but you may have to help pay the premium for a premium school.”
They should go to the school for which you have the money saved. They shouldn’t go to Harvard if there isn’t money in the account for them. They might have to attend state college or a community college for a year to save the money. There are no studies that show kids do better in life going to private vs in state public colleges.
Nope – you are not ready to retire. The primary reason being – you have no plan on how to fill your days. Some nebulous idea of possibly teaching isn’t going to cut it. If you can, take two to four weeks off from work as a pre retirement. Have nothing planned during that time. See how you spending changes. See how quickly you get bored or the little side projects get worked. If you can successfully get through that, and the money still works out, then you can retire.
There are always places to volunteer.
John thank you for this one that stopped me in my tracks… if how I spend my money is the 800 lb gorilla in this equation, how I spend my time is its 700 lb cousin. I’d be interested in how to explore this more. So far in my two weeks of exploration of the FIRE community and assets, I have zeroed in more on the financial variables. I have seen some things on real estate, running a blog, crowdsourced funding, etc. I have to zero in on my passion – outside of my family. Which likely is buried beneath a couple decades of employment. If the finances in this scenario work out for those I am responsible for then perhaps I then turn my attention to me. Love to hear what others did and more importantly how they zeroed in on it. KBC
It all depends. We plan on doing extensive traveling and I am budgeting $3k-$4k a month for renting an apartment/hotel etc. I don’t think a month is enough time to know how much you will spend, but think about what you want to do. Not everyone likes to travel or do woodworking. Volunteering might burn some gas money, but not enough to make a difference. You will start to find things to do once you know you aren’t going to work. It might take a few years until you find a volunteer organization you give more than 10 hours a week to. But if you have no desire to travel or go to numerous sporting events, you might end up spending less than your portfolio is making. In that case, take a nice trip each year and stay in nice places and fly first class. We are going to have the problem of more money coming in than we can normally spend.
He can always go back to work. If he can keep spending to $150K a year, he will be fine.
Thanks Jeff. Going back to work could be an option. But trying to make that unnecessary. Spending levels are tough to estimate though since I have not had much free time to spend money! Perhaps I should run some spending scenarios and create fictitious hobbies I don’t currently pursue (golf) or skills I don’t currently have (golf). Spreadsheet is getting pretty long though. KBC
Very nice job living well below your means and building a sizable portfolio!
One thing no commentators have addressed is the fact that almost 25% of your taxable net worth is in 3 equities. That would scare the #$%$@# out of me. what is your plan to rotate that money into more diversified holdings?
Thanks Jason… I am going to dive into this aspect of it. Please jump in with your thoughts. KBC
I think you have enough to retire just fine. The X factor is you may be able to consult, post retirement to bring in additional income. It’s not like you will be totally unproductive.
In the meantime, is there any way you can dial back your efforts at work and maybe start to phone it in every couple of days? Use this flexibility to start an exercise program (early morning is best, get up before everyone else is up and be done when they get up, also go to bed earlier which is easy if you already exercised that morning!), play with your children and bring a bit more balance into your life. That will make it easier to tolerate the job which is the either / or statement you opened with for the need to early retire.
I’m a year older than you but with a net worth of a few million short of where you are but am going through the same mental dialogue to some extent.
-Mike
Mike, thanks for the comment. You touch on some important things here. No, mailing it in at work is not going to work for me. But getting up earlier and exercising has been a new change recently. Maximizing flexibility by working odd hours so I can be present when the kids need me has also worked. It’s just a lot of juggling and creates a lot of uncertainty and rushing around to manage. Constant change, constant exercise to maximize the situation. That’s the cycle i want to break if I can. Early retirement seemed like a press of the reset button. Change all of those rules at once and redefine what you “juggle” and how you do it from this point forward. Curious to hear what your mental dialog is yielding. Thanks. KBC
KBC,
For me that challenge, the uncertainty and the discomfort are also markers of a time of personal growth, at least from my reflection to my own similar situations in the past. Now when you are in the think of things it doesn’t feel like that, it feels uncomfortable, uncertain and unpleasant. The way to organize, develop and manage this through the control of your own mind and feelings is what leads to personal growth. If it isn’t and the situation is too unbearable and has been like this for too long, then it’s probably time to engineer your own layoff.
I tend to give it a bit more time as good reflection and hindsight comes in the fullness of time.
I also realize that the feelings will likely be the same regardless of whatever number I’m at (so i’m about 2-2.5 M behind you in net worth) so in that sense it’s knowing when you are ready to move to something else, or knowing when you have enough ‘enoughness’. Sometimes it takes an event to get you to that point, like what ESI experienced at the end of his last role (and I’m inclined to follow a similar path as ESI on this one). Sometimes it’s more proactive like the decision that you are considering to make.
Do keep us all posted on what you decide to do- there are a lot of sub-threads in this post and plenty of great information being shared.
-Mike
I think most here agree:
1. Financially you have enough.
2. Figure out how you would spend your time
3. Asset allocation changes.
So for me, having 20%-25% in 3 stocks is fine. I believe you stay active in following. If not, then you need to, but like I said I think you do. In average these are 6.7% to 8.3% each of the portfolio. I have one that is 8.8% and if I combine some similar type stocks I get a few more that are high. I do most of my own investing except for 401k. I dont earn nearly as much as you, but have attained $3.5M at age 53 and can retire.
Your position is very high and hopefully you have networked well. If so, please consider reaching out and possibly joining some BOD. This is a great way to continue to be involved in business but much less stressful, gain income and additional equity. My prior CFO did this and loved it.
I love investing and I know when I retire, I will be doing some of this everyday as well as volunteer, cycle, golf and seeing more of this wonderful planet. I am intentionally way too conservative right now (waiting for the equity pullback to use some of my dry powder), but still generate investment income (dividends and interest) after tax to cover approximately 60% of cashflow needs. This % goes up if I retire as my tax bracket will be lower. The big unknown as others have stated is Insurance. My assumption is $20k a year for me, which I equate to catastrophic insurance, but whatever. So I know if I am there at my conservative level then I know you have attained a level of financial assets that will provide for the future you want.
I would never have only 3 stocks. Mutual Funds and ETFs provide much more diversification. Average people should not own individual stocks. I don’t care if it is P&G or Exxon. They all have the potential to go away. Our tax bracket will only go up in retirement. I don’t plan on micromanaging too much to stay below 25%.
This may be a good place to deep dive into the taxable investments. I made a mistake a long time ago and allowed a service to manage my money. That tax harvesting was to more than pay for the less than 1%. It did the first couple of years. Then when the market just goes up, no losses to harvest and I started looking deeper into the investments and seeing index funds and funds with higher expense ratios, I jumped in and pulled the assets back. I did well with them, probably could have done a little bit better, but now had work to do. I unwound expensive funds and moved to ETF indexes for mostly all. Since then I have only been putting money into broad index US funds with exp ratios of .04 and .03 I have some legacy mutual funds with big gains still at exp ratios of 1%. Will convert as I am able to harvest losses. But here is the current snap shot –
Mutual Funds and ETFs – There are 26 of them. about 2.3M current value. 645K Gains.
Individual Stocks – There are 41 of them. about 2M current value. $560K capital gain. Most of these I set and forget. I do not trade in and out of them. 8 of these stocks are now in a loss position totaling 9K capital loss on 260K of current value. I could unwind these. I could dig deeper into the individual lots and probably pull out more loss and leave some of the gains in these stocks to bring some of my FB, AMZN, AAPL exposure down.
But in total of the 560 capital gains, 460K is in FB, AMZN, AAPL and NFLX. I don’t like having this much exposure at this point – These positions are valued at 1.1M. But I don’t want to take a cap gains hit now. What to do? If I don’t stop work, it would be 39.5% tax on these gains. Then part of me says I accumulated Apple in 2008. It’s up over 500% since my first purchase. I started buying Facebook in 2015, up 100% to over 30% thru last October. If you hone in on three or four significant investments – is there room for this kind of risk? Yes the top three are each 4% to 6.5% of my net worth. Risk. What if I got out of the individual stock picking game otherwise and wound down every other position?
So these questions. Also I am not sure about how to shift into dividend producers, what dividend producers those would be and what is the balance between low growth dividend funds and your regular total market ETF/Mutual fund. And also, while we”re on the subject is an ETF better than a Mutual Fund that tracks that same index with the same expense ratios? I like the real time repricing of the ETF so have always been using those since I started managing my own money years ago.
Thank you all for your time and feedback. KBC
If the 2008 crash happens again, 40% of your net worth will be gone thanks to your heavy stock portion. I will sleep tight when my portfolio is well balanced.
That is why you have two years worth of cash to live off of to ride out a downturn.
Hi Ling Yun, thanks for your comment. How is your portfolio balanced? Thanks. KBC
Duuuuuude, what are you waiting for? You are free. If it was me I’d sell that house with the super high real estate taxes and move somewhere more affordable. Then I’d buy a big RV and take the family on the road. You can home school them on the road. Live a little and show the kids our beautiful country.
Laurel, that sounds like an awesome idea! Unfortunately, I have a beter chance of navigating healthcare uncertainty, stock market volatility and a post-retirement career in ballet before I’d even have a prayer of getting my wife and kids into an RV. Would do wonders for my saving rate though. Is this your lifestyle? Sounds great to me. KBC
A flaw is there is a maximum on SS of about $36K a year at 70. Nobody gets over $40K in SS.
Social Security increases with inflation. If he is talking about future dollars his estimates are reasonable.
I don’t think COLA will be that much, but I would rather underestimate. You can go to ssa.gov and get your estimates.
Thanks for zeroing in on SS here. I have to go back but I pulled off some inflation rates from somewhere. I originally ran an estimate of payment, but in the website there are certain assumptions around retirement age that I need to revisit. I am not clear on if I retire now vs. 10 years from now how that impacts my SS 27 years from now. Appreciate any input on that. I will log onto the site and run a new estimate and update the model. Thanks for the review. KBC
Buy a high-deductable insurance plan with a Health Savings Account and begin to convert some of your taxable income into the HSA. While you said the 529 is a great deal, I think an HSA is even better. You can roll medical spending through your HSA and pay medical bills with pre-tax money. Since you can bankroll most of your medical spending you can buy a major medical high-deductable plan to protect your assets and pay the smaller bills yourself.
Speaking of insurance, if you don’t have an umbrella policy I would recommend it; once your kids start driving you want to protect your assets and if you aren’t working it might be hard to recover after a major judgment against you. It doesn’t have to be your kids, either, but they are probably your greatest risk.
Get a hobby/hobbies–something that feeds your soul. Plenty of organizations need good people who will work cheap.
Don’t you have to work at a company with an HSA in order to have one?
No, HDHP with HSA are available to individuals. I admit I haven’t shopped in that market, but I just did a search to confirm individual plans are still out there. Hard to tell after Trump-o-care, though. And, honestly, given this person’s assets, I’d do a good cost/benefit analysis before buying at non-subsidized rates; if he declared even 10% of his net worth as his medical worst-case set-aside it would cover a huge majority of possible large medical expenses, and the premium he wouldn’t pay is likely to cover even the worst routine annual medical costs. Insurance is a tough call sometimes–how do you want to place your bets?
Rick thanks for this eye opener. If I follow, I basically self insure with my taxable income, saving tax, offsetting what otherwise would be a more expensive premium. So kind of like the equivalent of paying for healthcare through my employer with pre tax funds? In a retirement scenario is it income that is set aside or assets or what? Is this a way to drive down cap gains? Not sure I have this right, first time I am hearing about it. Thanks very much. KBC
We are entering the IRS twilight zone here, and I would create both an average and worst-case scenario and run the numbers. Unsubsidized insurance is likely to be expensive, but buying a high deductible plan “could” cut those premium costs and keep you out of the Obamacare penalty box. HSA contributions are not taxable, nor are payments out of the HSA for medical care–a win-win. So, that might be an average-year solution. But if your taxable income falls (no wages and only long-term gains) and you have significant assets, you might want to self-insure and even book-keep the avoided premiums as a medical “set-aside.” These are just ideas I would play with on a spreadsheet after getting insurance quotes, etc., remembering that premiums would have to be paid by making additional taxable withdrawals from your assets–a double whammy. Honestly, I’m just geeky enough to think this sounds like a fun spreadsheet experiment; is that a sad statement of my life? What does a “nightmare” medical expense sound like? $250k? $1M? If losing 10-20% of someone’s net worth (reduced as net worth climbs) is a risk worth taking, perhaps self-insuring makes sense.
Thanks for this info. Much to research in this area. Almost seems like work may be easier than doing that research. KBC
Yes HSA’s are available to individuals but not just based on taxable income. They are only available to people with EARNED income. Earned income comes from a JOB. You can be self employed, or own and operate a business that creates salary income for you or 1099 income but you cannot use interest income, dividend income, capital gains income or passive income such as rental income. Think about it this way. If the income you earned doesn’t get taxed for FICA (Social security and Medicare), then it cannot be used to contribute to an HSA even if paired with a HDHP.
Actually I just realized I was confusing HSA deductions with medical insurance premium deductions. I was going over this with my CPA a few months ago and got the two concepts mixed up in my head just now so I had to go back and check our conversation. The premiums require earned income in order to deduct them. An HSA contribution does not, so what I said above does not apply to HSA contributions.
What are everyone’s thoughts on him moving out of “growth” stocks and into dividend paying stocks and then living off the dividends? 2-3% of $4MM each year gets him pretty close to where he needs to be. I know a lot of folks aren’t into individual stocks around here but he seems like he might have the skill set for it.
I wouldn’t move out totally, but moving allocations to a Dividend Paying mutual fund/ETF. If he is retiring early, he will still need growth funds. Even something like VTI pays out dividends each quarter.
Thanks Guys, I struggle with this one, see above post. When to move out, how to move out, what to move into. KBC
As far as when and how to move out, I don’t think I can answer that, I would suggest talking to a good financial planner to help with that. As far as what to move into, I would start with research on the dividend aristocrats – companies that have increased payouts for 25 years. This gives you good income that increases every year, with lower risk than growth stocks. It will also reduce your need to sell stocks, which as you’ve pointed out is a difficult thing to figure out. There’s probably some decent dividend ETF’s/mutual funds out there, though depending on the costs I’m not sure they’d be worth it. There’s plenty of info out there on dividend investing, just need to find it.
You have enough assets to either cut back or take time off and see what you want to do with the rest of your life. With that portfolio it is irrational to feel like you have to work so hard you can’t read a book or spend time with you kids. This is your one life. Enjoy it now. You don’t need to stop all work completely and forever. Just make some more space for what you enjoy. You can change your work hours and work duties. You have more leverage than you realize. If all else fails that is ok. You have “F-U Money”
Thanks Doc. I think if I get more comfortable with the financials I may start to explore changes in approach to life and perhaps experiment with some of that leverage. Is that the path you took? If so, how did you make the transition? KBC
I give you a lot of credit for being prepared in most if not with all of your earned income. I think you know whether or not you’re ready for retirement. My guess is that you can at least live off your investments comfortably for several years.
Before pulling the trigger on retirement you’d need to define clearly what that means to you. Often times people tend to believe that not working and playing golf every day is the dream life. Most of the time this isn’t the case.
Maybe you can spend time investing in real estate and grow a business doing so? You should spend time learning more about real estate investments and start applying what you learn as soon as possible. Most people get held back because of the money they don’t have, but even then there are different options available.
A great resource to have is Biggerpockets.com where they cover everything there is to know about real estate. You have the capital, you can make the time to learn real estate so there’s nothing holding you back other than yourself.
If investing in your location is challenging you can try looking at foreclosed rental properties or consider investing out of state. There are many companies that offer “turn key” rental properties. This means that you’ll be able to purchase an investment property while it is managed for you. Of course, you’ll still have to do research.
You’re in an ideal scenario to retire if you decide to do so. After learning about your investment portfolio I realized that I have a long way to go myself.
Good luck!
Thanks for reading my case Chris. Some of my recent research has brought me to biggerpockets.com. I will definitely explore it further. Definitely looking to avoid replacing one high paying full time job with lower paying full time job though. Thanks and Good luck to you. KBC
Exactly!
Would your work allow you to take a sabbatical? If so, I would take a month or two and see how not working affects your spending habits. The first few weeks will allow you to do other things that you have been too busy to get to. Afterwards you will get bored and that’s when you find a hobby or something to keep your time. After the two months or so reevaluate your finances and see if you are in line with your projections. Don’t feel you have to cannon ball into the vast swimming pool, take the steps and test the water.
As far as the 529 plan, I would check with an accountant or your financial gurus and see if you can spend any of the left over funds on yourself to go back to school. I have been told that there are certain golf schools that you can enroll into that can be covered by 529 funds. I don’t know the credibility on this but worth finding out from resources that do.
Best of luck on your decision, I am gonna keep trudging along until I can say I am at or near your level.
Thanks for sharing.
Thanks Gregg. 529 for golf school might be the only way to get me to pick up the sport! Unfortunately the sabbatical is not likely an option. I have a pretty good imagination though and probably could model some scenarios of what a month off would look like. That would be one interesting spreadsheet. Good luck in your journey. Spending less than I earned, regardless of what I earned was the start for me. KBC
Listen to Bigger Pockets for some great ideas, advice, motivation on Real Estate Investing…It would bring you some more passive income and give you something to do in Retirement. You look like you are in great shape to me…I would retire right away if I were in your position!
Thanks Laura, I will check it out. KBC
Can you retire? Sure! Should you? Probably not. It might be best to wait 3-4 more years until the net worth hits 9-10 million and the house is paid off. Why? Well, I had a few reasons I delayed mine a few years.
1) I wanted my kids to see and experience my work ethic. At under 10 years old, retiring now would likely mean that they’ll never remember their dad working.
2) healthcare…I didnt see anything in your figures for deductibles or OOPs. That can hit you very hard. For the two of us, we spend over $1000 per month, but still have deductibles of $6,800 each, and total OOP cost incl deductibles of $15k for both of us. If we both have a bad year, total medical would be over $27k, for just two of us. BTW, she had a bad year last year…I’m having a bad year this year.
3) I know, I know, it’s hard to get rid of a mortgage that costs less than you earn in gains, divvies, and bond interest (if you bought munis during the recession, you know what I’m talking about). But, if (actually “when”) the market tanks again, having the house paid for is a tremendous comfort.
4) 10 year old toyotas are fine. I love them. But they do need to be replaced sometimes. I suggest budgeting replacements every 5-6 years instead of 10. Why? Some time down the road, you may get hit, or sideswiped or crushed in the parking lot when you aren’t even in the car. The insurance will not give you much of anything for a 10 year old card that is mostly worn out. You’ll want to buy something newer than a 10 y.o. car when that happens.
5) Hobbies? Do you have any? Do you RV? Will you when the kiddos are out of the nest? Do you have a budget to buy one (or boat or other travel that you do not have in your budget?). We bought a trailer when I retired…then found out our truck wasn’t sufficient to pull it…another upgrade. Then, we liked it so much we bought a $300k motorhome. We had a trailer and the Motorhome in the budget, but not the truck upgrade. This year, we downgraded the truck, and I got enough out of the F-350 to pay for the Honda Ridgeline, except for the sales tax. Still…
6) just another datapoint: we easily spend $12k per month, and that does not include taxes and a few big ticket things, like the $12k property tax on home #1, or 4K property tax on home #2, or the $1600 property tax on the Motorhome, nor the car insurance nor the house insurance, nor the umbrella policy (by the way, with 6.8M net worth, get one of these umbrella policies…!!!). Altogether we are in for about $220k per year, incl fed, state, property, vehicle etc taxes, and a trip or two each year to Hawaii, plus a few weeks in the RV.
All of the above are reasons I held on for a few extra years. I kind of felt the timing was about perfect. I retired at 51. My second kid graduated college shortly after I retired but her tuition was already paid for, and she was married, so she was on her own for living expenses. First kid graduated a year later, but with only $7k in tuition and books left to pay when I bailed, so not much at all…and he was also married and on his own for living expense. I was also C-suite in a division of a global megacorp, and executive council of the global concern. I get the pressure, the “how much do I really need” questions in your head, etc. I really do get it…been there, done that, got the t-shirt. At the end of the day, only you can decide, but do know that if you bail now, you could probably jump back in within a year or so. After 3-5 years out of it though, there’s no going back. If you make it back, at all, it will be at a much lower level. Things change fast in business…you can’t keep up when you’re out of the game.
Good luck.
Thanks Rambler, sounds like we’re on the same wavelength. My oldest will just be starting college when I am 51 so I will have a lot more ahead of me. I get what you’re saying about point #1. That has crossed my mind. I am pretty open with my kids about money. I think that they will be in good shape regarding work ethic given the foundation/education we have created. The risk of time off vs. ability to re-enter has also weighed on me. I probably could hit $9M by 48 or 49. It would certainly add that buffer you are talking about that it seems you have benefited from. Why pay off the house? That requires cash out of the market, limits my growth. I do need better assumptions around healthcare. Thank you for that detail. I do not have much in the way of hobbies. Are these hobbies you always had? Or you discovered them post retirement? Did you consult or work at all in retirement? If so, how did you come upon those opportunities? Thanks again. KBC
I worked overseas for my megacorp and with the role I had I traveled 2-3 weeks out of the month. Due to the location (Asia) and the role, I essentially had no hobbies, other than running most every day. I was happy just to be home with my family. That said, I had always wanted an RV or travel trailer. We started with a travel trailer, thinking that if we liked it we’d upgrade. We liked it so much that we upgraded within 2 years.
I’m 4.5 years into retirement, and was headhunted a few times during the first couple of years but I didnt accept any of the offers. I would have taken the first one as it entailed the one thing I wanted to do during my career that I never had an opportunity to do, and it would have been incredibly lucrative. But, I agreed not to compete for a year when I retired, with some quid pro quos, and I was not about to lose my integrity to take a new job. The offers after that were not interesting, so I didn’t pursue them. These offers all came from people I knew: one from the chairman of a competitor who I’d known for a few years, others from head hunters I’d met either as a client or at economic forums throughout Asia. After a while, the thought of going back to work became unpleasant, I had enough already, and enjoyed my freedom. So no, I’ve never done any consulting since I retired, even though that had been my intention when I first retired.
The hobby I did discover in retirement is shooting. I’d always wanted a rifle and a pistol, both for sport as well as home defense, but I never imagined I’d love it so much that I’d end up going from 0 to 15 in three years. Guns cost quite a bit, and they eat a lot of ammo, also not cheap.
Have you developed any hobbies? Have you thought about what you will do with your free time? Have you budgeted for it?
All the best!
Not that you keep a mortgage for the tax deduction, but I guess if the mortgage interest isn’t that much, the amount decreases each month. With charity/property taxes, you probably stay over the standard deduction. You could pay off mortgage and free up that money to invest, or if you think you are going to get a better return, just make the monthly payment and go on down the road. It will get paid off eventually and you have enough money to cover the mortgage. Some like the house paid off for security reasons, but you have enough money to cover any issues.
This is a very candid reply from a high earner / high spender which likely aligns way better with KBC’s lifestyle vs the many (including ESI’s) modest $50-80k/yr spending.
Excellent feedback Rambler and hits home with me as well. I can absolutely relate to your number one comment, I want my kids to know how hard I work to provide the life we have. I worry about them having the same work ethic their mother and I have.
I am thinking 52 is my spot but that means one in college and one still in high school. 55 would see them both in college but not sure I will want to keep in the rat race that long if my savings are where I expect them to be.
I think it comes down to what is retirement? I would really like to be on a couple of corporate boards when I retire, still have the professional connection and some income but really have a lot more freedom.
Very interesting situation. I think he has plenty of money to retire if his goals are just to stay at home and read. If it was me, I would spend a lot of time with my tax accountant running through various scenarios to efficiently unwind the capital gains. I don’t think we have enough information.
Two thoughts:
1. If he leaves his job next year, he can probably start selling off portions of his unrealized gains at more favorable rate over time and replace the investment with real estate.
2. Is his company stable and does if offer a deferred compensation plan? He can defer most if not all of his income and possibly qualify for a lower tax bracket.
Something doesn’t add up though, a 4.5M taxable account with only 50k dividend income. That means its only yielding only 1.1%? Pretty low.
Also, maybe consider some municipal bonds to help with tax rate and increase investment income.
Congrats on getting to $6M by 43!
Hi Turning Point, Thanks for the analysis. There is no deferred comp plan that I can leverage earnings into. The 50K rough dividend # was last year, the balance was closer to 3M on average with a high % in growth stocks not yielding dividends and others less than 2% yield. Without digging further, that is probably the driver. It’s not set up for yield. Part of my question above where I unpacked the investments a bit more gets into that question of how to transfer the allocation and actually if I should. Appreciate the insight. KBC
You will take a tax hit re-allocating from growth to dividend, but you might want to wait until you are in the lower bracket to make the change. You can always contribute more money to dividend paying funds to start to boost the balances.
How does $59k +$55k in social security total $174k?
As someone above mentioned, those individual numbers likely aren’t real anyway. I’m 49 and have maxed out contributions for over 20 years and my social security statement projects a max monthly payment of about $2900 at full retirement age, assuming I continue to max out till I retire. I would imagine they build in inflation in the model?
Hi Gary, that is a typo in my write-up. I have $114K in the model. I have to revisit the ss.gov site and refresh this assumption though. Thanks for pointing that out. KBC
I think you are over-estimating the cost of college for your kids (which isn’t a bad thing – except for the 529 penalties if you don’t use the money – but I see you have a plan for that too from one of the comments). I wouldn’t put more in a 529. I know your kids are younger – but my son is going to an out-of-state public university for $20,650 this fall. He did get some grants and scholarships – but all three of the schools he was looking at in the end were under $25,000 (and we don’t get financial aid). His costs shouldn’t go up much when he can move off campus year 2 and not pay the meal plan, etc. too. He also plans to finish in 3 years after AP credits/a few community college classes. My daughter just did the same thing and is in grad school – getting paid to do her 2 year MS degree. There are a lot of lower cost options out there – at good schools. My kids are smart – top 10% of their class, but also not valedictorians. They also have to pay $5,000/year toward college from part-time work (no loans here!) You’ve done amazing with your money! Looking forward to following the comments here.
Also – we live in upstate NY and own multiple rental properties. We have one for sale and a number of the people looking live in California. They would use a local property manager and some even manage on their own. It can definitely be done 🙂
Thanks Vicki that was helpful insight. My instate school costs about 27K a year including room and board. In today’s dollars for 3 kids that’s 324K. I have 370K in the account. I do believe in the community college options and transferring. Plus it seems like more high schools are joining up with the local community colleges to offer college credit worthy courses with kids graduating with associates degrees out of high school. I agree that I am probably okay here… just until they are all off to school… i will fear the princeton/harvard dilemma presenting itself. Thanks for the time. KBC
I have been putting in $2K a month into the 529 Plan and just stopped. Not sure I want to keep doing that in the 529 plan and not have access to it or run risk of not using it.
… my gut says a 529 is a great way to pass money along without tax consequences and it “forces” that inheritance to go towards education vs lifestyle.
Worst case, you take a 10% penalty, best case your kids don’t use it all and part of your estimated $2M leftover is in 529 being passed down tax efficiently and towards your grandkids education.
One other thing … my inlaws will pass some money on to our family ($100k’s), I wish they’d fund a 529 for my kids today so that money goes towards my kids college and it grows for the next 10 years tax free. I don’t feel comfortable asking them to tie up their money to do so, but I’m 99% sure they won’t need/touch that money.
I like that view on the 529. We’ll see how that plays out. As far as your in laws inheritance… perhaps there is a way for the 529 conversation to come up, not as it relates to their estate planning, but as it relates to your education planning for your kids. I recall having a conversation in a group about 529s, a couple days later someone in that group asked me if they could set one up and contribute to their nephew’s. Good luck. KBC
FYI, for what it is worth, I think you are too heavily invested in 3 tech stocks. I would get a tech ETF or mutual fund to diversify the sector if you like technology and keep it to less than 10% of the portfolio value. 2000-2001 can happen again.
I agree with you Jeff, I’m not that comfortable with the uncertainty around that concentration. Yet I am also not comfortable with the certainty of the 39.5% hit on 460K of cap gains. How do I weigh that vs. the risk. There is a % drop in value equivalency to that cap gains hit. I’d have to calculate what that is and then determine a probability of that happening. I think the value of those 4 stocks would have to drop permanently by more than 16.5% for it to be more cost effective for me to sell and take the tax hit. Open to other ways to look at it. Thanks for your input. KBC
It is a conumdrum. Obviously it is being held in a taxable account. Isn’t it a capital gains hit for taxes and not an ordinary income hit? Give a bunch to charity to offset the gains? Or donate the stock to charity? Put in a ton of money in the other investments to reduce the percentage? I hate the tax code….
If that 16.5% number is right I would definitely sell, that isn’t all that unlikely. But did I mention I am a pessimist, or as I like to say very risk averse.
You could do a charitable trust take the tax break now and give from the trust for years to come.
As a point of reference, you are 5 years younger than me and have roughly double my net worth (but I’m also single with no kids and a paid-off mortgage, so some differences in expenses). I “retired” this year and have no plans to go back to the corporate workforce (but I may contract or perform some other work later). I agree with the rest of the responders that given your spending projections and current savings, you can safely get $150,000 in spending indefinitely (and adjusted for inflation) on your pre-tax savings without ever touching the principal investment. So your 401K and other savings are just icing on the cake.
Here are some things I would consider given your numbers:
* Why not pay off the mortgage? Based on your income/mortgage interest, the deduction is probably partially phased out and you’ll be paying about $400K in interest over 30 years. For me, I’d pay off all or a portion of that amount to dramatically reduce the interest paid to the bank and refinance to a 15-year fixed or 5-7 year ARM for a lower rate.
* Depending on your state (and risk tolerance), you may want to shift some of your after-tax portfolio to a state-specific municipal bond fund. If you want to reduce risk, a good way to do that is through bonds, and if your state has a high income tax, in-state muni bonds provide fed and state tax-free income. The return is less, but the return is 100% tax free. I’ve invested in my state’s muni bond funds and it provides a steady stream of income that I can rely on without having to increase my tax burden.
* Regarding the last point, you want to start reducing the tax burden of your 401K immediately. If you survive to age 70, you will be forced to take out required minimum distributions. If you stop contributing today, Vanguard’s calculator (https://personal.vanguard.com/us/insights/retirement/estimate-your-rmd-tool) estimates you will be pulling out between $300K-$800K every year after you reach 70. Others have commented on ROTH conversions… you should consider stopping work for this reason alone! Once you start making zero work income, you can start thinking about moving as much as you can each year into a ROTH IRA to avoid your ticking RMD time bomb.
* Health care is the biggest question mark for everyone. However, you are in a very good position to have it not matter for you. You have enough resources that if health care becomes untenable in the US, you can use geographic arbitrage to move anywhere you want where it’s not a problem (Canada, Ecuador, Spain… you have a lot of options). Yes, citizenship/residency will be a bit of a hassle, but you and your family should not have to worry about health care.
I echo the other commenters that you really should have a post-work retirement plan (draining your Netflix queue is one plan… but may not be satisfying for you). If you have a passion you’d like to pursue, do it now, while you’re still young.
He will need about $7.5M in his IRAs to have an RMD of 300K, but even so, you are in the highest tax bracket at that point. You can manage the IRA by pulling out money once you turn 59.5, up to the 25% bracket level, but at some point, if you have $8M, just pay the taxes. It was deferred for 40 years. 🙂 If you assume the same tax bracket, the IRA and Roth come out the same in the long run, one is just deferred taxes one is taxes already paid. Which one hurts less?
We are going to have about $300K a year in RMD if I don’t pull money out early, but it will just be reinvested in the taxable account. I have 100K a year coming out for about 8 years before I turn 70.5. Even then, RMDs are going to be about $150K a year.
Great job saving. You have a great net worth. My two cents– I suggest you pay off the mortgage. And diversify. Three stocks- like you have- is VERY risky. No company is too big to fail.Figure out a way to buy very low cost index funds for your upside ( explained below). One way to learn-Read the book ” How a 2nd grader beats wall street” by Allan Roth. I Just read it— great read. it will give you a simple portfolio to beat wall street- teach you to allocate by both asset and by location –more like 50% stocks ( 20% of this international) and 50% bonds ( keep the bonds in the retirement accounts) for your stage of life— wanting to retire and all. . But what is key is simply to reevaluate your risk tolerance. There comes a point- in my humble opinion, where you no longer need to take the risk of 95% equities. If you want to retire soon– its time to start thinking ” protect what i got” rather than “shoot for the stars”. This will protect your down side. increase your upside by the fees you save and everything will be great.
Honestly, Why risk having your $6M net worth cut in half? You have already “made it”– meaning you have reached the goal allowing you to retire. Risk is a necessity for those with not enough money ( hoping to get it) — or those with so much it matters not. Think about that. You are neither of those things….. ( assuming what you have now affords you the desired lifestyle—which i think is a no brainer).
Let’s think this through– you could take $3M and put it in a nice safe bond investment and get say—5%. That is $150K in income. If you buy the bond direct and hold to maturity— you are almost guaranteed to get your investment back plus your interest rate. If its a treasury— there is no less risky income source. Like others said– your taxes will go way down when you retire– and the $150K income will give you more net than if that were your salary. That is your FLOOR. With that you will always have your expenses covered. With the rest of the money do the low fee index portfolio. discussed above. I think with 50% equities tops. That will give you a market return— allow you to keep up with inflation. grow your net worth etc. If it does well— you spend more– or start giving it away. If it does not so well– you still have your FLOOR to live on and you have time to let it recover– no matter how long it takes.
All the stuff about roth conversions and social security are great things to learn and can increase your net worth and potential retirement income— continue learning. Get a good accountant or financial planner and pay them hourly. not a percentage of assets. Learn learn learn. Read the blogs out there— Can I retire yet? is a good one— very much on target for your questions. The bloggers has two great books he wrote ( see amazon) as well. I say read them. I found them facinating- well written and informative. Your wife and you may / probably will get $50K or more in annual SS benefits. OVER and above the $150 we just discussed. Now you have $200k Annual income. Or you can drop the bond /floor investment down to $2M rather than $3M and keep it at $150. Safe. No Risk. Meets your needs. Perfect.
Looks to me like $2-3M as your floor gives you the safety of lifetime income ( do it in a ladder so you take advantage of rising rates). The other $3M is your upside 3 index fund 2nd grader low fee portfolio.
You are good. retire. Do it. Sorry I went on and on— hope i mwas of some help.
Congrads!
There isn’t much paying 5% that isn’t risky, but even at 3%, 120K a year is a good chunk of change coming in. The other money will still grow over time.
Thanks for the input. The rationale for paying of the mortgage is what? After tax that is costing me less than 4%, I earn more than that leaving the 400K invested. Why should I change that? Thanks. KBC
Hi
Because of the risk! You do
Not need the risk of the arbitrage. You seem to think it’s always going to go up. But that is not what history shows. The stock market does go down. Often by 10-20% and sometimes like 2008. If I were you I would cash in and protect the money you were fortunate enough to save to this point.
It seems that you are stuck on the fact that it has worked so far so why change things. That could be s very costly and sad decision. Are you a gambler? Because you are basically gambling with the large net worth you have achieved. I still say you have achieved your goal and it’s time to protect your net worth. But ultimately it’s your money and your life and family that needs to make this call.
Good luck.
I’m in the same boat. I know I need to ratchet it down but it is hard to sell when you’ve been addicted to the “momentum drug” for so long. But I do see the signs of a bubble and it does worry me. S&P P/E is 24 when the historical average is 16 so you could argue when we get the reversal to the mean, we’ll be in for a 30% correction at some point, which sounds a lot like 2008.
As an example, my daughter heads to college this fall and I just moved her 529 out of the S&P fund and into a laddered CD fund. For 15 years I invested $800/mo. and it grew to over 300K but I decided that continuing to chase upside in this market didn’t justify the potential downside of a correction that has to be coming at some point.
I do think we are still in a secular bull market that will continue as long as inflation remains at bay, interest rates remain fairly low, employment stays low and there are no significant geopolitical “nasties” around the corner. However, anyone thinking about retiring should be planning accordingly and begin to position your portfolio from accumulation to preservation.
Yes, I agree with that. If I were to choose to retire, I’d have to shift my allocations. KBC
Thanks Jnew, but fundamentally if I have 400K in a vehicle that yields lets say 6-7% growth on average for the next 20 years and I’m paying 3% for that, that continues to look like a good deal. The 6-7% growth assumes the periodic 30% drop, recovery, etc. Now, if I were to retire and shift to a lower risk profile with my investments, I could see your point because the alternate use for that cash is yielding close if not less than the mortgage cost. However even if a shifted a fair amount to more conservative investments, I’d likely still have at least 400K invested more aggressively at the 6-7% suggesting I should still keep the mortgage shouldn’t I? I think I do have to protect my net worth if I choose to retire now. Thanks KBC
KBC, I think the consensus is most of the advice you hear is to pay off the mortgage before you stop the steady paycheck and I think that is probably good advice for 95+% of the people. However, you are in such a good financial position with your savings and investments and your mortgage balance and interest rate are low in relation to your savings and other debts that the common rule really doesn’t have to apply to you in your situation. You really do have the luxury of going either way without any real material downside.
One point of view is that you can make “more” from a higher return investment than you would be paying in mortgage interest. Another point of view is that you are paying $200-300 (after tax deductions) over 30 years for living in your house. That extra should be taken away from your gain if you are evaluating the ROI on your home as an investment. There is no right answer, but I personally don’t like paying extra money to anyone for no reason, but it’s also not an all or nothing deal–you can pay off $100k of your mortgage and get a huge acceleration in principal paid per month.
No need to pay off the whole thing, but just an option to consider.
KBC, I think you have gotten some solid opinions and financial advice so pretty much anything I would add along those lines would be duplicative. My advice is more along the lines of figuring out if you can afford to do it, mentally and emotionally, because I think, financially speaking, you are there if you really want to be.
This is dime store psychology but hey, you get what you pay for, right? I’m giving you some advice that I am considering for myself, and that would be to hire a Life Coach for 90 days or so. I read some desperation in your words and I’ve been there. You seem a bit frustrated and burned out by work. You are asking yourself why you are throwing everything into your job and getting so little in return for yourself. Intellectually, you know why you do it (for your family, financial security, ego, etc.) but you still feel a bit empty inside because YOUR needs aren’t being fully met. In short, you don’t sound like you are having a lot of fun right now, you know there has to be more to life than this and you are wondering if you can just go ahead and jump out of the plane, pull the ripcord and enjoy the glide down to earth.
Am I close?
This is where a good life coach can help you determine your priorities and most importantly make sure your reasons for retiring align with your true desires. And then, they help you start to map out the rest of your life and what that might look like. Now, you start to create a real retirement plan for what you are going to do with yourself which is just as important as having a plan for the financial part of your retirement.
I hope this doesn’t come across as me being too much of a busy body or know it all but I share many of your challenges and frustrations and these are some of the things I am considering for myself. Best of luck, I know you have more than enough intellectual and emotional capacity to figure this out and make the right calls for you and your family.
Paper Tiger, I think you are on point and I appreciate the perspective. What you say rings true and the thought of – are you running towards something, or are you running from something – cycles through my head. It’s hard to say exactly what the motivation is but frustration and burnout seem likely contributors. I will give some thought to the life coach. Thanks for the input. KBC
I’m a bit suprised by your statement that you don’t have an accountant yet don’t understand a lot of tax issues. You have been doing your own taxes all these years right? With a 6+ million net worth you have probably come across lots of tax issues over the years.
My tax return is not complex. I have W2 Income and the activity in my investment accounts. Aside from harvesting losses there does not seem like many tax issues for me to see a CPA about. The tax rules I don’t understand thus far seem to be the ones about benefits afforded to you when you have a lower to zero tax income and how that may help my capital gains issue. This is not going to be relevant for awhile. KBC
Your desire to teach is the same pull that I felt 10 years before I finally made it happen. I have now been teaching in a public school for 3 years and loving it. Financially it is clear that you have the assets to make the transition to teaching but it is one thing to feel like you want to do it and another to actually make it happen. You did not specify what you want to teach but if it is children than here are some thoughts. Once I knew that I was there financially I did several things to make sure that I was truly ready to teach. 1) Find out what you need to do to be certified in the state you want to teach in. I had to go back to school to get my certification and I had to take a specialty test to (Praxis) to demonstrate proficiency in the subject. I also had to student teach (unpaid). This training however was crucial to help me learn what it was like to truly be in a classroom. 2) Get in touch with local teachers and ask them if you can shadow them. Spend time in the classroom and see what happens on a daily basis. 3) Ask local principals if they know of anyone who has made a similar transition and see if you can meet with them. 4) Make sure your family is 100% on board that teaching is going to take a lot of your time and energy. Yes you have summers off but you are going to work as hard if not harder as a teacher than almost any career.
I was an executive VP with responsibility for a major industrial brand across all of the Americas. Great money but nothing compared with he satisfaction of teaching young men and women.
I wish you the best.
Hello! This post I made back in 2017 turned out to be very helpful for me. It is now 7 years later. I am curious how many of the original commenters are still active on the forum. If so, if there is interest in my posting an update… I will do so. KBC
I would love to hear an update!!!
Absolutely would love to hear an update.