goal: zero to retirement in 7 years?

[KTP]

Gosh that is a nice tax calculator. I think. For two people earning $50k it's 9% federal taxes. Then state income taxes. So definitely around 15% maybe?

For medical expenses you can use a HSA. So if you assume you'll hit the $10k/year in OOP medical you have $40k to live on. Then the budget doesn't really work right?

Can you really withdraw 8%?

No state taxes. We don't pay them now, and would be pretty stupid to register the boat in a state with income taxes while we are sailing around the world

Good question. I guess you can't draw 8% without a drawdown on your principle. I need to run the numbers, but I am going to guess that 700k would last longer than 17 years even with a significant yearly drawdown.

[KTP]

Long term tax planning can be futile. I would look to maximize current deductions (use a 401k or IRA) and save now (you have a high bracket NOW, so save $$ NOW with deductions NOW).

If money is in a 401k or IRA, then the capital gains tax rates DO NOT apply and ordinary income rates do apply.

Hmmm...we are already at max contribution to get the matching funds for my wife's 401k, but might be able to increase that more. I could also open an IRA for myself, since I am self employed...

Good ideas. But we really really want to do this retire early thing, and before we get too old to handle the strains of deep ocean sailing. Possibly consider a large increase in our 401k/IRA contributions and a smaller investment pool? If we had 2 million or more in our 401k at age 59.5 then we could certainly draw down principle and interest on our sailing nest egg...

Or is there a sneaky way of getting 401k and IRA money in your early 50s?

[jIM_Ohio]

A few flaws in your analysis of my analysis but I do apreciate the comments:

1) How can three years of not getting 8% returns wipe out a 700k nest egg when you are only drawing 50k a year??? Was that a miscalc on your part?

Here it goes.

700k invested
take out year 1 income
650k left
market takes away 50%
left with 325k
take out year 2 income
275 left
market takes away 50%
138k left
take out year 3 income
88k left
market takes away 50%
You have 44k left and not enough for year 4.

You have 13 years of needing money. If you even just ran calculations on just ONE YEAR of 50% loss then minimal gains of 4-6% the following years that one down year is going to kill the plan.


700k
take out 50k for year 1
650k left
market takes away 50%
325k left
you move all of the money to a CD
you have 6 years worth of income left (when you needed 16).

You don't even make it half way with an 8% withdraw rate

2) Everyone seems to be forgetting that we will have another million dollars or more in a separate 401k account that we can access around age 62. So instead of thinking of it as needing 30 or 40 years of retirement out of the 700k we only need it to last 17 years. It can be virtually zero when we hit 62 and we should be able to live off the 401k plus SS.

I missed this until another poster pointed it out. This still does not change your "8% withdraw rate" issue and the risks associated with it.

You have one retirement and you need to look at all monies and the risk profile of all that money at once.

For example if you expect 401k+IRA+taxable accounts to be "together", and those have a $2 M balance in 7 years... you need that $2 M to generate an income of 56k (2.8% withdraw rate).

Because I know that a 4.25% withdraw rate might work (SS gets added in later in life, expenses go down once sailing stops, bond funds exist which yield 4%... maybe another factor or two I don't know about) I could divide the money into buckets and use the bucket approach. In your case I would use 4 buckets.

Bucket 1- cash- keep X years of expenses in cash. Probably 5-9 years depending on risk tolerance. The more cash you have, the more likely the rest of the plan will work. If you have 2 M to invest and expenses are 56k, 9*56=504k. There is 1.5M left for remaining buckets.

Bucket 2- enough money to replenish bucket 1 with interest once per year. If expenses are 56k and you think you can get a 4.25% yield, then you need 56k/.0425=1.31 M to generate the 56k you need. This bucket might be 40-60 in allocation- designed primarily to generate interest for bucket 1.

You have 200k left for remaining buckets. I would put 150k into an equity based investment. This is bucket 3. Bucket 3 is designed to grow and be volatile- 100% stocks. In any year where bucket 3 has a return higher than A%, put the difference into bucket 1 (basically take profits out of bucket 3 and put them into income producing investments in bucket 2).

Put remaining 50k into another investment which over 17 years should grow enough to buy a condo (50k should turn into 200k with an 8% return over 18 years).

3) When we need a house again, we will be selling the sailboat, which will probably fetch 200,000 or so considering we will have kept up the maintenance by spending 20k a year on it.

Still, I understand all of the points and it may be that we would want to take some contract work or something down the road to supplement our income. Both of us are engineers (software and hardware) so it probably would not be too hard to get a few 6 month contracts here and there if we decide the main fund is getting a bit low.

let me edit this: Ok, if we have another depression like we are in now, I guess the portfolio could take a 50% hit in a really bad scenario. So the 700k would drop to 250k + 200k = 450k. Even still, drawing 50k a year off that would last 9 more years. And you would not pay any taxes considering the huge capital losses you could claim each year.

I don't think you have a good enough plan yet. "sell a boat to buy a house" has lots of risks- the boat could depreciate in value, the boat could sink, housing prices could sore much higher, taxes go up with the house, and this is just a partial list.

[KTP]

Hey, thanks for the bucket analysis. I have read about that method but had not had a clear example set out like you did.

For the cash bucket. You don't really mean cash right? Investing in 30 year inflation indexed T bonds or something would be wise for this bucket? If I understand them correctly (still researching them) they pay a fixed interest portion and a variable portion that is adjusted twice a year for inflation. So you may have say a 1.5% fixed rate plus another 4% for inflation. Thus the bond is paying 5.5% but is totally safe (well, as safe as the US government, which can always print money). So this bucket is going to grow at 1.5% if you replenish it with bucket 2 as you described. Not a lot of growth, but 1.5% of 500k compounded over 15 years is $125k.

It would almost seem as if the overflow from bucket 1 would pay for half of a house when we decide to quit sailing!

Problems: I think we can only buy 10k a year in paper and 10k a year in electronic format of the I bonds.....

[KTP]

Uhg, I just found out we are up against the limit for 401k contributions. I had no idea it was a set limit ($16,500) rather I thought it was a percentage of your income.

[Russell]

I think he can do it. OK, a very simplistic view but worst case senario:

70k x 7 years = $490k
$490k / 30k = 16 years

So if you did nothing but saved your 70k for 7 years you should be OK *IF* your yearly expenses are $30k. Even if you put that money in a savings account paying 2%-4% on avg you at least take care of the inflation part.

You also have several options:

- You can work one additional year now for another $70k and that becomes your 'emergency fund' for unexpected medical expenses

- You can work odd jobs etc to supplement

- Say you're 13 years into it and you're running short on money you end your expedition 4 years early...big deal!

I think it's doable if you play it smart.

EDIT: My question is what's your currently yearly living expense? Are you sure you can save $70k consistently every year?

[ksluis62]

KTP, I would also consider real estate as an investment that will pay out during sailing retirement and beyond. This is part of my plan.

As an example, you could roll your $360k house into a 4-plex that you hire someone to manage. In my area, a 4-plex in this price range will bring at least $2400 a month ($600 per unit). Figuring around 30% expenses for management, maintenance, vacancy, and reserves, that gives you $1700 per month, $20k per year income, which will generally rise with inflation. It might be worth considering as a portion of your future income.

[Russell]

But at $20k per year income wouldn't it take him 18 years just to re-coup his original investment of $360k.

[jIM_Ohio]

Hey, thanks for the bucket analysis. I have read about that method but had not had a clear example set out like you did.

For the cash bucket. You don't really mean cash right? Investing in 30 year inflation indexed T bonds or something would be wise for this bucket? If I understand them correctly (still researching them) they pay a fixed interest portion and a variable portion that is adjusted twice a year for inflation. So you may have say a 1.5% fixed rate plus another 4% for inflation. Thus the bond is paying 5.5% but is totally safe (well, as safe as the US government, which can always print money). So this bucket is going to grow at 1.5% if you replenish it with bucket 2 as you described. Not a lot of growth, but 1.5% of 500k compounded over 15 years is $125k.

It would almost seem as if the overflow from bucket 1 would pay for half of a house when we decide to quit sailing!

Problems: I think we can only buy 10k a year in paper and 10k a year in electronic format of the I bonds.....

If I did 9 years in cash, I might have 5 years in TIPs or I-bonds. If I did 5 years cash, nothing in TIPs and just use a CD ladder. Part of the issue here is liquidity... you may or may not be able to sell the bond you hold for face value if you need the money, so you need to hold the bonds until maturity. Can you buy 56k of bonds as an individual investor each year?

Two issues- you have "IRA" issues and "tax" issues because you will access this before age 59.5. I would probably do just a simple CD ladder for bucket 1 (3-4 years expenses), maybe 5 years in a TIPs ladder (depends on limits and taxes) then load up the bucket 2 with I-bonds in an effort to meet the 4.25% goal.

Keep in mind in your original post you suggested you can get a 5%+ return on bonds and I want those bonds which yield 5%+ right now- where are they? Over short periods of time (like now) getting more than a 2% real return on bonds would be impressive (probably 4-5% overall return, and 2% real return after inflation). Most bond funds I track yield close to 4% when times are good.

[ksluis62]

But at $20k per year income wouldn't it take him 18 years just to re-coup his original investment of $360k.

I was meaning the $20k per year was just one portion of the retirement income. The accumulated $490k plus interest/earnings would make up the rest of it. This just diversifies more, including real estate in the asset portfolio, rather than just equities, bonds, interest-bearing accounts, etc.

[KTP]

Oh, I was thinking Series I bonds instead of TIPS. I know we could only buy $20000 a year of the Series I bonds, but they have a great advantage in that they are naturally tax defered (if I understand them correctly).

They seem to yeild 1% to 4% real return and the remainder matches inflation. These would seem to beat out CDs by a long shot, since they have a much smaller real return, correct? A 1 year CD paying 4% in an inflation environment of 4% nets you 0% real return.

Also, it seems that after 5 years there is no penalty for cashing in the Series I bonds, although you can hold them for 30 years? You don't pay tax on the compounded interest until you cash them in.

If we started buying $20k this year, then in 7 years we could start cashing in the first bonds with no penalty?

Obviously this would only fufill part of our need. I am willing to take some larger amount of risk with a portion of our investment with the knowledge that if things continue bad in the equity market for more than the next 5 years we may have to stretch our work out to 10 years instead of 7.

[LivingAlmostLarge]

The maximum you can save in retirement account is $21.5/per person. If above a roth you can do a non-deductible IRA.

But if you are saving right now how can you count on 9% gains this year and maybe even next year? What if gains are negative again this year, and next year 3%?

How will that eat into your 9% return planned?

[KTP]

Oh, I know, I just pulled the numbers out of my rear. Still, I think the averaged expected return on the S&P500 is at least 9%. Some years it might be zero or even negative (as in recently), some years it might be 25% or more. The real rate of return counting inflation is going to be less obviously...probably more around 4 to 6%. This still beats out most everything else in the very long run I think.

I think I will stick to the current plan of 70% into the S&P500 and 30% into Series I bonds and cross my fingers for the market to muddle around for a few years then shoot back up to 2007 levels as we approach the end of 7 years. Worst case, we continue working for another 2 to 4 years to bring us up to a liveable income. I guess 48 or 49 isn't too much different than 45 agewise

[jIM_Ohio]

KTP- instead of "pulling numbers out of rear" or "crossing fingers" you need a plan.

There is another forum to look at early-retirement.org which might help you more than the people here...

You should do the following
1) make a list of goals you want (sailing or other)
2) make a list of all the money you have invested
3) make a list of the money you can invest
4) calculate expenses right now for your lifestyle right now
5) estimate expenses for the goals listed in #1

It can all happen. My first comment is do not contrain it by time (when creating the plan). See where the plan takes you. As it becomes a short term goal, put a timeline on it (I have 7-19 years as a mid term goal).

In addition educate yourself. Taxes, withdraw rates and investing strategy would be at top of list.

It can all happen. My plan is to retire at 53- that is 17 years from now. Most of the above was the delta I needed to have a solid plan for now, immediate future, mid term and long term.

[LivingAlmostLarge]

KTP do you have kids? Will that affect the decision to retire?