Thoughts on this early retirement plan?

[wincrasher]

I think that he could be more successful as a "part-time" independant contractor than he thinks. I've known plenty that have cut their hours in half, yet maintained thier income. Your friend may end up in that situation.

If he's going to make a big move, say down south, then I'd also advise on renting for awhile. Many retirees move down to Florida only to decide they can't stand the heat, or miss their family or friends or whatever. He's taking on alot of changes all at once.

So I'd advise going part time first. See how that goes and if there is demand for him and he likes it. Then take on the big move. Rent first, then after he decides he likes it, shop for a great deal.

[Snodog]

I see no flaw in his plan. In fact I'de do it in a heartbeat!

[scfr]

I think it sounds like a great plan overall, but he may want to tweak it a bit.

I second the recommendation to rent for awhile before buying for a few reasons:
- Not only may he decide he does not like the city he moves to, even if he decides to stay, he may decide to buy in a different part of town than where he originally thought he would. The house we bought after relocating to Austin is in a completely different part of town than the areas we originally targeted. After living here for awhile (renting), we changed our target areas based on traffic patterns and how they meshed with our lifestyle, localized property tax quirks, scenery, general neighborhood "feel," and of course proximity to excellent public golf courses.
- Closing on a mortgage is not guaranteed. Low appraisals have been the snag in this area, and I'm sure it's the same situation in other parts of the country. Doesn't matter how good your relative's credit is (and I'm sure it's top-notch); if the appraisal comes in under the contracted price, the sale is not going to close.
- If he pays cash (rents 'til he reaches 60 if that's the magic number for him and then buy), he may be able to get a better deal on the house. After we bought our house, we found out that the builder had rejected an offer that was 2.8% higher than ours just before ours came in, and the only difference was that we were paying cash.
- As others have said, the "over 3% return" may not be guaranteed unless he ties up his cash for longer than he would like to.

On the notion of working part-time, working when & how much you WANT to feels a heck of a lot different than working full-time because you HAVE to, so the per diem (or some other part-time work) is something he should definitely consider.

I hope everything works out as well for him as it has for us!

[jIM_Ohio]

DS- plan looked good

consider other options like
a) work 1 more year, bank more cash to live on for years 1-4 of retirement (you did not give the specific amount of the gap, this might or might not be reasonable).
b) other methods to generate income needed (such as an annuity)
c) work part time ages 55-60
d) doing roth conversions for ages 55-70 while working part time

My suggestion is to put more options on the table, all at the same time, then rule them out for personal reasons later.

If there is "an income gap", it is very possible an annuity might plug the hole with less risk (would you rather take risk to generate a portfolio return, or take on the risk an annuity company go belly up)? Its a personal choice, to me the annuity has bigger upside than the house...

[PetMom]

We know of some (people that come around and tell of their retirement plans gone awry) who have retired in mid fifties.

When they tell of how they have ended up paying so much for health insurance - up to $1,000.00 per month plus the decuctibles/oop's - and will need to do so until medicare kicks in - many would be reitrees plan on working as long as possible.

These early retirees planned what they thought was plenty for living expenses but the cuts in benefits after they retired has hit some of them hard and they are now are looking for work in this economy.

Healthcare costs and potential healthcare costs need to be figured in a reitree's budget.

Housing expenses are a little more predictable and were what people were told to plan for years ago - now though some are ending up with ins. costs that are equal to a monthly mortgage payment. Sure they have a paid for house, but take out HELOCs for expenses, charge up expenses and get into debt as seniors.

[LivingAlmostLarge]

I like either the work one more year or work part time options.

[Inkstain82]

In a retirement situation, you should probably be looking to cover most of your own medical expenses out of cost and only have insurance for catastrophic events.

Well, we should all be doing that, but retirees especially so.

[simpletron]

Here is some things I think have either been overlooked or left out entirely:
1. Transaction costs: When buying a house, taking out a mortgage has a cost over paying with cash and buying 100K+ in bonds also has a cost. These costs have to be cover by a higher bond interest rate, which when spread over 5 years will probably add .25% to .5%.

2. Taxes: It sounds like your relative is going to be relying heavily on the home sale difference, taxable savings and possibly a part-time job for 55 to 60, so how much of that is taxable income(aka is he really in the 25%+ tax bracket)? Also would he use the standard deduction or itemize without the mortgage, because if it is the first you can't claim that the mortgage is fully deductible for calculating the equivalent rate. Finally munis may or may not be exempt from state taxes, generally states don't tax their own and tax other states, but this isn't always true.

3. Principle payment: Unless the mortgage is interest only, some portion of the payment goes to principle and there are 3 ways to cover this: higher bond interest rate, periodic selling or maturing of bonds, and other income. Periodic selling or maturing is the best choice in this case. I only point this out because it should be planned ahead of time.

You pointed out 3.3% munis while borrowing at effectively 3% or a margin of .3%. .3% on a 200K mortgage would be $600 more income per year, it that really the difference maker? Also with razor thin margins, one goof could change it from profitable to unprofitable like the mortgage costing too much upfront, standard deduction increases, tax law changes, and/or bond defaults.

Given the thin margin, I wouldn't recommend doing this. If the margin was at least 1%, then I'll would be singing a different tune, but I don't see that happening with munis. You might be able to get it to work with corporate bonds or annuities.