Personal Financial Review Can We Retire? The D.I.N.K.S

[Matt]

Background: DINKS (Double Income, No Kids).
No debt except for revolving credit.
Age (him/her) - 39/37
Marital Status (tax filing): Married, filing jointly
Income (You): 135k
Income (Significant Other): 76k
Tax Bracket: 28%
Residency: WI
Expenses (Monthly): 2.5k per month, including couple of local travels per year, one international travel per year, expenses for elderly dependents (non-deductible), real estate taxes, condo fees, utilities, entertainment and groceries.

Assets
Home: 175k (fully paid)
Personal property: 25k
Emergency Fund: 225k (CapitalOne360, MangoMoney accounts)
Taxable Brokerage Account Asset Allocation: 33k (all stocks)
Tax Advantaged Account: 300k (40% stocks, 10% bonds, 50% money market)

Other Real Estate Other Assets Liabilities Credit Card Debt Personal Loans Student Loans Mortgage HEL/HELOC Other Debt Goals: Zero

Tell us what you are looking to achieve:

1. When can we retire? Is 2020 doable?
2. Avenues for Capital appreciation over the next 10 years.
3. How to invest 10k bonus received from the company each year.
4. Been waiting for market correction since Dec 2013.

Risk Tolerance/ Financial Savvy: Low to Medium (Husband), Very high (wife)

Let us know how you feel about risk, for example, if the market was to drop 20% this month would you:
Hold + Buy More

Follow up questions from Matt

What's the deal with the $225K in 'Emergency Fund'? An EF is supposed to be 3-6 months of expenses, so maybe $15K for you guys.

• 225k because we were waiting for a correction to get into the market but even then, wouldn't invest more than 50k. Don't know where else to park the money.

How much are you both putting into tax deferred accounts at this time? Are you funding 401Ks fully, and do you have access/are funding HSAs?

• Both 401ks maxed out. HSA - none, but seems like a good idea and will look into it.

 

[Matt]

Caveating that I have only this information to go on at this time, I'd like to propose the following thoughts:

You have a lot of assets, but a very conservative asset allocation at this time. While you are saving a good amount of money, its may be too conservative to work out for early retirement. The reason I say that is that if you were to pull the plug on careers and find out in say 10-15 years your math didn't work out, then you would be in a lot of trouble, as the key earning years are behind you. It is also hard to be employable after such a leave of absence.

With that in mind we need to project very conservatively to calculate if you will have enough money or not. I would propose that in doing so we use a forward inflation rate of 4%. I know that this seems high, but the consequences of shooting too low are disastrous. Let's see how the numbers play out with that in mind.

Current Financial Position

The reason that I include your personal residence in asset allocation is to help you see real estate exposure, this will help you decide if you wish to get involved in more rate related investments (REITs, M-REITS etc)



Future Expenses

Note that this is simplified in that I haven't added in additional healthcare costs that you would require without employer coverage, nor have I included Long Term Care. These are simply using current numbers and simply inflation.

Life Expectancy 90
Annual Expenses 30K today, inflated at 4% for 53 years:

2015	$30000
2016	$31200
2017	$32448
2018	$33746
2019	$35096
2020	$36500
2021	$37960
2022	$39478
2023	$41057
2024	$42699
2025	$44407
2026	$46184
2027	$48031
2028	$49952
2029	$51950
2030	$54028
2031	$56189
2032	$58437
2033	$60774
2034	$63205
2035	$65734
2036	$68363
2037	$71098
2038	$73941
2039	$76899
2040	$79975
2041	$83174
2042	$86501
2043	$89961
2044	$93560
2045	$97302
2046	$101194
2047	$105242
2048	$109451
2049	$113829
2050	$118383
2051	$123118
2052	$128043
2053	$133164
2054	$138491
2055	$144031
2056	$149792
2057	$155784
2058	$162015
2059	$168495
2060	$175235
2061	$182245
2062	$189534

In terms of investments, the taxable accounts are likely averaging 1% (higher for mango, but they are capped low I believe?) at this time. As such, you are basically losing money on this against inflation, as the actual annual rate is between 1-2% at the moment.

The tax advantaged account we should project at about a 3.5-4% growth rate (it is pulled sharply down by the money market position). Here's how it would grow at that level:


As you can see, we have a 2020 number of $625,942.

Is it enough?

We should note that it is possible to take distributions from the retirement accounts prior to regular retirement age using 72(t) regulations, however the obvious concern with that is that if you withdraw sooner your money will run out sooner, so.. is it enough?

Simplified Model
In a simple world, you would draw down on your taxable accounts until depleted, and then kick in retirement accounts. In a realistic model this wouldn't be tax efficient. However, it might give you a broad vision of success ratio to think like this for the purpose of the exercise.

With your current investment policy regardless of the market movement your taxable accounts would remain 100% in cash/equivalents. As such, your $225K would grow only as much as your contributions, plus around 1%. You can decide how much you might be able to add to those accounts by 2020, but here is a way to look at how much you need to sustain a $30K living expense:

Starting in 2020 with an expense of $36,500.
Using an inflation rate of 4% and an interest rate of 1% would give you inf/adjusted interest of -2.88%

• $417,765 would keep you going for 10 years
• $1,042,806 would keep you going for 21 years (taking 'him' to 65, regular retirement age)

If you were to have enough to take you to the 65 age shown above, your retirement accounts would be growing at 3.5% and would be worth $1,289,084. However, if we keep with a 4% inflation rate that would actually be equivalent to $565,693 in today's money. Remember, by 2041 your monthly expenses have risen to $83,174, which will pull down that $1,289,084 quickly.

Without SSI it would likely run out within 14.98 years, by the time he is 80 and she is 78. SSI would push it further, but we need to consider that the SSI payment would be reduced quite considerably if retiring early, and that is assuming it started at the regular age.

Conclusion

You're damn close! But the thing that you are missing is the 'repair ratio'. Right now you have the opportunity to take on more risk, if you were to put more money into stocks at this time and then use your stated policy of 'Hold and Buy More' should the market drop you would be able to dollar cost average your way out of trouble.

Your biggest 'asset' at this time is income. You have a strong channel here and it can afford you to put more of your accumulated wealth on the table. When you retire, this vanishes. It means that your risk profile needs to change because you can't 'repair' your investment accounts by dollar cost averaging via your salary stream.

Note that I intentionally made it a bit harder to 'win' in this scenario by making inflation 4% but I think if you are truly as conservative as your asset allocation implies this should be a welcome thing. With the amount of assets you have, I would recommend meeting with a fee only financial planner and getting them to really dive into your numbers more than I could with the data I have here, that will give you a bit of a clue as to how much more you need in stocks.

 

[Sesq]

I would have them both log in to SSA.gov and get an estimated benefit based on current to date earnings, then again with five years of earnings. You need to dig a bit on the website to make sure you are getting the calculator that doesn't assume you will work until you draw benefits, but its in there. I would then take that figure and multiply it by .75, which is the current estimate of how underfunded the plan is when it flips to cashflow negative and exhausts the accumulated "surplus" owed by the general fund. I suspect they may find that their benefits are already at $2,500, at least at age 70 or 67. Maybe even at a draw at 62. In that case the nest egg may need to last a shorter period of time. A little known thing is many high earners essentially frontload their benefit since much of one's benefit is made by contributions before the first two bend points. I am slated to pass the second bend (takes about a cumulative 19 max years, partial years stack) point this year (age 42), and from there I'll have "earned" about 75% of the maximum possible benefit. If I work to 50 I will be at 87% (and would need to work 17 more years to move the needle the remaining 13%). We all in our twenties like to bemoan that SSA will go bust before we collect. Reality is that society can handle some trimming, but it isn't going to go away.

Second, in their shoes they should be contemplating in the early retirement years to either do Roth Conversions and/or 0% LTCG harvesting. They may want to watch the intersection with the ACA to optimize that. To that end, I am skeptical of the ACA beneficiaries who get put into medicaid or expanded medicaid (from a care perspective, medicaid reimbursement rates are political and easy to underfund) so Roth conversions may be a way to exceed the 1.33x poverty line and stay off medicaid and in the subsidized ACA exchange plans.

In the remaining years, as substantial savers, they should be looking at HSA's (with no distributions during earning years) as well as both the backdoor Roth (any traditional IRA's? if not, go for it) and even the "Mega" backdoor Roth.

 

[Paul]

What kills all long term planning is minor changes in basic assumptions that compound over time. I don't think there's a chance that we will see 4% inflation over the long term. Not in the developed world with declining birthrates and lower consumption due to fast aging populations. The model we can look to is Japan...30 years of low or negative inflation...a fast aging population with plummeting birth rates (will lose half their population in the next century - leading to huge excess capacity, falling asset prices and a huge debt that will require drastic action once the financial market tipping point is reached - like the PIIGS suffered). The rest of the developed world is following the same demographic path so there's few places hide.

Methinks an asset mix that doesn't rely on inflation for growth (and protects against deflation, ie cash) is reasonable outlook for the long-term.

Early retirement for this couple seems a bit dubious unless they continue to live frugally. And are they likely to want to spend their Golden Years in WI? - $175K in real estate won't go very far unless they are willing to retire to a cultural wasteland like Florida or Texas...

I think they should work another 10 years at a minimum.

FWIW, my 88 yr old In-Laws spend $5800 a month in their SFO area retirement community - an upscale ~1000 SF unit in a cradle to grave development - which required a $650K buy in (guaranteed 75% resale value). SO and I had to kick in $450K so they could afford the buy-in and expect their remaining ~$650K liquid assets wouldn't run out before they died. Their expected life span is 95, so they are cutting it close at current spend rate of $70K a year (and hence why we helped out - psychologically its better they feel they have enough cash in the bank rather than using most of their assets to buy-in and then rely on us for the monthly payments). The good part about their community is they have onsite assisted living facility, so when it gets to that point their payments won't change. The point of this information is to show you need substantial assets late in life if you wish that comfortable retirement most of us desire - way more than many people realize.

Reality is you'll likely need multiple millions to live comfortably in retirement...one million doesn't cut it any more.

 

[MickiSue]

If they take some of that cash and invest in rental RE, which is still undervalued in WI, they can further protect their current income, have a source of ongoing income from rents that should, from the start, offer a tiny, but growing, cashflow over expenses, and the potential for a chunk of cash upon sale. Over time, RE grows. It's the short window holdings that can cause trouble...if you buy RE and expect to hold it for a short time, the danger of losing value increases.

 

[smittytabb]

If they take some of that cash and invest in rental RE, which is still undervalued in WI, they can further protect their current income, have a source of ongoing income from rents that should, from the start, offer a tiny, but growing, cashflow over expenses, and the potential for a chunk of cash upon sale. Over time, RE grows. It's the short window holdings that can cause trouble...if you buy RE and expect to hold it for a short time, the danger of losing value increases.

But you could also end up with property worth less than you expected over time, and an illiquid asset that cannot easily be unloaded when you need to. The generation coming into adulthood now is not buying like their parents did, so there are more renters, but not more buyers either.

 

[MickiSue]

You have a point, smitty, but what they're doing now, and what they'll be doing in 10 or 15 years...who knows? They're delaying having kids, and that's a factor in the renting/owning decision. As is the fact that, in their recent history, real estate has been a terrible short term (3 to 5 year) investment.

I'm talking about using it as a VERY long term investment, though...a horizon of 10, 20 or more years. To retire, you need both ongoing income (which can be obtained from rents) and infusions of income to counter inflation. RE can function as that, as well.

 

[JoeK]

It's one thing to be conservative - it's another thing to have 2/3 of your investable cash in money market type accounts.

Emergency Fund: 225k (CapitalOne360, MangoMoney accounts)
Taxable Brokerage Account Asset Allocation: 33k (all stocks)
Tax Advantaged Account: 300k (40% stocks, 10% bonds, 50% money market)

That's 375k out of 558k of their total nest egg basically acting as dead weight. This is way beyond just being conservative IMO. Why not go 50/50 stock/bond in the tax advantaged account, and take 125k (or more) out of the emergency fund and invest in stocks in the taxable account? Don't try to time the market - you've missed out on loads of gains in the meantime. No one can time the market. Just get your money in and in the long run, you will be fine.