Friday Reader Case: Retire in our 40s with 3 kids to Travel the World?

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FIRECracker

FIRECracker is Canada's youngest retiree. She used to live in one of the most expensive cities in Canada, but instead of drowning in debt, she rejected home ownership. What resulted was a 7-figure portfolio, which has allowed her and her husband to retire at 31 and travel the world. Their story has been featured on CBC, the Huffington Post, CNBC, BNN, Business Insider, and Yahoo Finance. To date, it is the most shared story in CBC history and their viral video on CBC's On the Money has garnered 4.5 Million views.
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Hey peeps,  it’s Friday again and time for another reader case! This intrepid reader wrote to us after listening to our interview on ChooseFi. Let’s all say hi and welcome them to the Millennial Revolution.

And now take it away, Ann and David:

“Hello, we heard you on the Choose FI podcast. We had a personal plan made with someone from Vanguard back in May 2017. He suggested 60-40 stocks/bonds with the 60% broken down as 60% US large, mid, and small cap, and 40% in international. Once we put my wife’s 401K money into the overall picture we are more at 75-25, and we are fine with the additional risk.

What we are currently contributing:
18,000 traditional 401k
10% of pay in wife’s after-tax 401k to eventually roll over to roth IRA
6750 HSA
5500 wife IRA
5500 husband IRA

Overview of finances:

Ann David Kid1 Kid2 Kid3
Age 42 42 19 17 13
Salary $123,900
Bonus 7% of salary
RSUs (company stock options) 180-200 shares/year (at $49 currently). Vested so far = $19,093
Debt 0
Expenses 30,000/year (to be increased to 50,000/year in retirement) Navy Estimated $10,000/year college for 2 years Estimated $10,000/year college costs for 2 years
Investible Assets $71,500 (Cash) +$34,000 (HSA) + $533,029 (401K) + $28,700 (IRA) +$11,859 (Roth) + $216,816 (IA) + $19,093 (RSUs)= $914,997 $142,011 (IRA) + $11,859 (Roth) = $153,870 $9664 (529 account) $8543 (529 account)
Other Assets $3000 (car 1) + $3000 (car 2) + $315,000 (home) = $305,250 (after 5% real-estate agent's commission)
Pension $28,000 (at age 43) | $40,000 (at age 47) | $51,000 (at age 50)

We are looking for any advice on tax efficiency and a plan for withdrawal when we are both retired. Wife will stay employed anywhere from the next 1-8 years depending on kids in school and job outlook. We would like to plan to spend about $50,000 per year in retirement. We may sell the house and travel for several years. Also, considering becoming renters after that.

Thank you both for your time and consideration
Ann & David”

Well, A & D, just from first glance you’re can pretty much retire right the Hell now! On top of having a ridiculously healthy amount of assets, Ann also has a friggin PENSION! Say what? People have those these days?

And also for some reason this pension is considerably more flexible than most. If she were to retire at 43, she would get $28k a year. At 47, $40k a year, and at 50, $51k a year. Pensions like these also tend to be inflation indexed, which is great.

So let’s run some scenarios. Should we wait 1 year, 5 years, or 8 years? Let’s…MATH SHIT UP! God, I never get tired of saying that.

Retire in 1 year:

With a $28K/year pension, if Ann were to retire in just 1 year, the pension would be enough to cover your expenses at your current spending level. If you were to raise that spending amount to $50K in retirement like you’re planning to, you could cover the $50k – $28 = $22K/year shortfall with a portfolio size of $22k x 25 = $550,000.

And since you have 1 year of work to go, you should easily be able to save enough during that time to cover the rest of your kids college expenses. You have expected expenses of $40k for the both of them, and you currently have $18,207 saved in your 529s. That means you need to save an additional $18,203 over the year to cover this cost. Given your high earnings and low expenses of just $30k, you should be able to do this without breaking a sweat. Jam it into the 529s and forget about it.

As for the rest of it, you have more than enough in total to cover this $550k, but as you may have noticed most of that is in 401(k)’s, IRA’s, and Roth IRA’s, all of which have an age limit for withdrawals. Fortunately, we know how to get that money out. Once you leave your workplace, rollover all your 401(k)’s into your Traditional IRA, then create a 5-year Roth IRA conversion ladder.

However, in that article we advise withdrawing only the amount equal to your standard deduction of $24k. This will allow you to rollover your IRA tax free. You can’t do that because you’ll have a $28k pension eating up your standard deduction *sad tiny violin sound*.

You will have to therefore pay some tax on your portfolio as you do your rollover. Fortunately, your state (Florida) has no state income tax, so all you have to worry about is the federal tax brackets, which are here.

Rate Individuals Married Filing Jointly
10% Up to $9,525 Up to $19,050
12% $9,526 to $38,700 $19,051 to $77,400
22% $38,701 to $82,500 $77,401 to $165,000
24% $82,501 to $157,500 $165,001 to $315,000
32% $157,501 to $200,000 $315,001 to $400,000
35% $200,001 to $500,000 $400,001 to $600,000
37% over $500,000 over $600,000

So by looking at that, you can see we want to target the 12% tax rate. You should be able to convert $77,400 – $28k (pension) = $49,400 a year as a married couple assuming no other income and pay 12% tax on that conversion. At that conversion rate, you’ll have a total tax liability of 12% on your 401(k) + IRA balance, which would be $703,740 x 12% = $84,448.80.

So that means your total investable net worth, after minusing off taxes owed, would be $1,068,867 – $84,448 = $984,419. Which is still WAY over your target of $550,000. So you win!

Now, and I can’t stress this enough, CONSULT A TAX PROFESSIONAL BEFORE YOU IMPLEMENT THIS. I’ve made a number of assumptions based on your email (you live in Florida, you plan to retire in Florida, you have no other income, etc.) which may not be actually true, so you’re gonna want to go to an accountant with all your tax returns in hand and have them draw up a detailed withdrawal plan.

That being said, considering how far ahead you are, I’d be extremely surprised if they concluded anything different than what I just did: You should be able to retire easily in 1 year.

Retire in 5 years:

Retiring in 5 years changes a few things: How much your pension would be, how much extra you’ve saved during that time, and the withdrawal tax bracket the higher pension may push you into.

In 5 years, your pension goes up to $40,000/year, so you only need to generate $10,000/year from the portfolio. Using the 4% rule, this would only require a $250,000 portfolio.

Already, I’m predicting a win but just for the Hell of it, let’s math shit up anyways.

In 5 years, based on your contribution numbers, your 401K will grow by $18,000 * 5 = $90,000, your HSA by $6750 * 5 = $33,750, your IRAs by $11,000 * 5 = $55,000 just from contributions. This increases their existing portfolio of $1,068,867 to $1,247,617. Yeah, I think you’ll be fine.

But now let’s see what the higher pension does to their conversion strategy. A $40k pension means they’ll have less room in that 12% bracket to do your IRA conversions, but that’s still $77400 – $40k = $37,400 a year, which is still pretty good. That means your new higher 401k/IRA balance of $848,740 will be subject to a tax rate of 12%, or $101,848. So their total after-tax net investable assets will be $1,247,617 – $101,848 = $1,145,769.

So that means that in addition to that $40k pension, as per the 4% rule they can safely withdraw $1,145,769 x 4% = $45,830, resulting in a spend rate of $85,830.

You can see at this point, they’ve saved WAY more than they need. I don’t know, put it towards the kid’s inheritance? Blow on booze and space cakes? And this is BEFORE selling the house and cars and running off to travel. If they were to actually sell the house and cars, that would be an additional $305,250 to play with, or an additional $305,250 x 4% = $12,210 per year.

Retire in 8 years:

And with $51,000/year from her pension, you wouldn’t even need a portfolio at all at this point because your pension covers your projected spend. In fact, you would be SAVING $1000/year.

After 8 years, you would end up with an extra $18,000 x 8 = $144,000 in your 401K, $6750 x 8 = $54,000 in HSA and $11,000 x 8 = $88,000 in IRAs. This increases their existing pre-tax portfolio of $1,068,867 to $1,354,867, and you wouldn’t need it at ALL.

The only wrinkle (and this is a REALLY minor one) is that at this pension rate you’re starting eat up most of the 12% tax bracket and you may end up pushing into the 22% one, so your tax liability on this portfolio is higher. But since you don’t need it at ALL, who cares? Just pay whatever amount of tax you’re comfortable with, and go live it up. You’re done.

Guys, you are winning SO hard at life right now. Technically, at your current spending of $30k you could retire today and be done. But since the pension kicks in next year and you want to increase your spending to $50k, it makes sense to at least wait until then. If you retire next year, you win. And if you retire in 5 or 8 years, you’ll barely even need to withdraw because you can just rely on the pension.

But again, CONSULT A TAX PROFESSIONAL before you actually do anything. Off the top of my head, something I haven’t done is take into account dividends and capital gains in your after-tax investment accounts since I don’t have that information. That would raise your gross income levels and reduce the amount you could withdraw each year inside the 12% bracket. So sit down with an accountant and have a proper tax plan written up.

What do you think readers? Should Ann & David retire in 1, 5, or 8 years?



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49 thoughts on “Friday Reader Case: Retire in our 40s with 3 kids to Travel the World?”

  1. Hmm, only two years of college for the two kids? Most young people I know go to college for four or five years, and spend more than $10k on housing/food costs alone.

    I’m assuming those kids would be living at home? If this couple sells the house to travel then that plan might not work out so well.

    At any rate, they’re clearly doing very well.

    1. My parents didn’t give me anything for school (granted I am in Canada so it’s cheaper). I would be very appreciative to even be given two years by my parents. When I have kids I will certainly save for their education but no guarantee it will cover all of it.

    2. Our 17 yr old was able to finish part of his college during his last two years of high school and then has scored some state university scholarships to cover much of the costs. Florida is great for that. We are planning on the same path for our youngest.

  2. I would say that the two years consideration may be optimistic. On the other hand, you can educate your kids to be independent, so they can work and study at the same time.

    Great post, very useful.

    1. As someone how worked during college to pay off my tuition and costs, I would say learning to be independent is one of my best life lessons. If parents make it too comfortable by paying for everything, you’d be less likely to develop that independence.

  3. Booze + space cakes + pension = winning at life. Even without the pension, I hope my wife and I come close to being as well-prepared as these folks are in four years when I hit 42. Well done! I hope US health care policy has settled down favorably by the time they pull the trigger.

    1. They are definitely winning at life 🙂 US healthcare costs is one of the biggest concerns of early retirees, but so far ACA is holding. Expat insurance is always an option if they’re willing to travel.

  4. Good post.

    My question regards college.

    $10,000/yr for 2 years seems low to me for a few reasons. For instance, the average yearly cost at University of Florida is $21,131/yr (https://www.collegedata.com/cs/data/college/college_pg03_tmpl.jhtml?schoolId=943)

    It definitely seems reasonable for a community college tuition and then one could transfer to a larger university, and maybe that is the reasoning…

    Further, college is usually four years, unless a child has really racked up the AP credits. I guess the final 2 years of college along with any financial deficit not covered for the first 2 years would be paid by the children. However, if the cost is $21k/year that could potentially leave the children with a large debt at the end (21k * 4 years = 84k – 20k supplied by parents=64K).

    Am I missing something?

    Thanks!

    1. Other readers have also asked about this, and Ann and David had this response:

      “Our 17 yr old was able to finish part of his college during his last two years of high school and then has scored some state university scholarships to cover much of the costs. Florida is great for that. We are planning on the same path for our youngest.”

      Hope that answers your question.

  5. Is the husband retired already?
    I would work another 5 years (as long as I like my job) to get to $40K pension. I wish I had a pension! By then the youngest will be 18 and could pretty much take care of himself if he had to.

    1. Yes David is retired. May work again if something interesting comes up, but nothing planned currently.

  6. Over a million saved, 42, and a $50k a year pension… how nice. I say retire now and start a blog.

    How about 57, $150K saved, and 35k a year pension at 62. (wife has no pension) oh and 2 kids to get thru University… but I will be fine, all my money is in WEED, and Bitcoin… what could go wrong?

  7. The advantages of having low expenses/cost of living = kickass retire early!

    Totally retire as early as possible – one crazy high level important thing in life you can never get back is your time (and assuming they are healthy now – things can change in an instant – go live the best you can now and enjoy it)…

    1. And just totally realized – they’re asking you for TAX EFFICIENCY plan – no wonder you kept saying talk to tax professional cause without detailed specifics, despite the fact you do amazing math for free, wrong assumptions can have big swings!

      1. Exactly. Always consult a professional when it comes to taxes. You don’t want the IRS breaking down your door!

    2. Definitely considering it, but I have a pretty sweet gig working remotely full time and we don’t really want to move or travel much until our youngest is done with high school. Four more years may be the sweet spot.

    3. Low cost of living has been really key for us. Who needs so much junk anyway? Simple living is the best, a lot less to worry about.

      1. 30,000/year (to be increased to 50,000/year in retirement)

        Ann, you really have to tell us how you accomplish this, I have a 17, and 19 yr old, but my spending is more like $50-60K/year, and that is not including tuition for the older, as we have an RESP to draw from.

    4. Yup. You said it! Time is our most precious commodity. Once we lose it, it’s gone forever. And as we age, good health is not guaranteed. Sure, it’s always more practical to wait for more pension money, but you never know what could happen with your health.

  8. Great post. Thanks for mathing shit up. One correction. For 2018, the contribution limits for 401(k)s goes up to $18,500 and for HSAs the family contribution goes from $6750 to $6900. It changes the math slightly, but not the conclusion: these folks have set the gearshift for the high gear of their souls. They’re kickin’ ass!

  9. Their kids are almost grown up… So they can travel the world while doing a side gig of teaching… In about 5 years. it needs is some teaching qualification or qualification for teaching English… you can teach across the world in universities International schools and English schools… CPO… From the far side of the planet

  10. May I just say how refreshing it is to watch you Mathing Shit Up and see all of the options this family has for their financial independence. I get so frustrated with the “mainstream” articles telling folks that are in crappy jobs that they should plan on working until they are 70.
    Choose Independence!! Love y’all.
    Renee

    1. Yeah, I hear you. It annoys the hell out of me whenever I see articles about how you need 85% of your income in retirement. Um, no you don’t. That’s all just coming from crappy advisors who want to incentivize you to work longer so they can get paid more.

  11. I think they are in a great position. I guess what it seems like they have to choose is to figure out how much travel they will do after a certain time. They might actually think about doing a trial run of what it might look like post-retirement and see if their plan works?

    1. A trial run is a great idea. Negotiating a sabbatical and then doing some long term travel would be a great way to test it out.

      1. Don’t think the company would be to open to a sabbatical, they are allowing her to work remote from home, and we are thrilled, and thankful for that. We will have to jump into retirement with both feet, if the water is to cold we can always explore other options for income or cut expenses. The beauty of the combination of a FI, and frugal lifestyle is that we have a little more room for error and exploration.

        1. You’re absolutely right. If you can control your costs and are FI, even if you don’t end up liking retirement, you can always explore options (like passion projects, travel, teaching, volunteering, etc etc) to see what works for you.

  12. Just want to mention that the biggest influence we had on our path has been Clark Howard, he’s a consumer advocate talk show host, second to him is Dave Ramsey, his style is a bit more simplistic, with a focus on getting out of debt, but both of these men have been huge influences on us. We have more recently discovered the FI community, and have loved learning about FI hacks like, tax hacks, drawn down strategies, and travel hacks.

    1. Wow, looks like Clark Howard has build a massive online presence. I wonder why I’ve never heard of him before.

      Glad, you found the FI community!

  13. That pension is worth a lot. It might sound small at $28,000 yearly but look at the invested assets required to duplicate that. Young people usually have a hard time with this concept but it looks like their kids are also on the right path.

    Great Job!

  14. Congrats A&D on achieving financial independence! I would definitely wait until 43 to retire given that your job appears to be relatively low stress (given you can work from home I’m assuming that, but of course no job is stress free!). For an extra four years in the workforce you get an extra $1,000 of pension income each MONTH for the rest of your life. Plus your salary and benefits in the interim. So that’s $536k in salary/RSUs, plus whatever your benefits and 401k match amount to for four years, plus a retirement bonus that is the equivalent of about $360,000 ($12k per year additional pension x 30 years which is a very simplistic calculation of course).

    So is four more years working from home worth $896k to you? I think it would be for me, especially given you have kids – and probably future grandkids you may enjoy spending some extra on (vacations, education, etc.). That extra money gives you the ability to increase your spending if/when life doesn’t go according to plan as well (illness, disability, healthcare cost uncertainty, and most significantly, the possibility your lifestyle preferences/needs may evolve over the coming decades). This cushion is even more significant if the pension disappears or decreases when Ann dies.

    One thing I just wanted to highlight is that you can pay for quite a few years of living without even touching retirement assets from the sale of your house and cars, then from spending down your Roths and RSUs. You could also consider shifting ongoing savings from the 401k to taxable accounts to minimize the problem of getting at money to live prior to turning 59.5. By my calculation you are probably just a HAIR over the 12% bracket now, so you could contribute just enough to the 401k to get into the 12% bracket and then invest the rest in taxable.

    People think tax deferred accounts are the best of the best, but the truth is that taxable accounts can be incredibly tax efficient, especially when you are in lower tax brackets (the capital gains tax rate is 0% when you are in the 10-12% brackets, which you will easily be in early retirement if you’re not making IRA distributions). Sure you’ll lose the tax deduction on your contribution now (12-22% of $18,000) but you’ll be taxed at 22% in retirement anyway if you have to tap the 401ks early to convert funds to a Roth.

    1. Thanks for the feedback. We agree that four more years is probably worth it. The job is not stress free, but no longer having a commute and the relief of knowing we would be ok even if it ended now helps a lot. Tax efficiency is something we are trying to figure out for both current and future. We will definitely take advantage of the Roth conversions after retirement.

  15. Everyone’s congratulating Ann and David….

    And congratulations you two, this is a huge accomplishment. I am happy for you.

    But I’m just sitting here wondering what profession Ann is in to earn that much money…
    WITH a pension…
    a REALLY NICE pension….
    a pension that allows her to retire at 50…
    with David staying at home…
    with 3 kids…
    and paying for said children’s educations…

    Man, am I in the wrong profession…

    1. Ann has a science background and is currently a project manager. The company she works for does offer great retirement benefits, assuming you work at the company for many years which she has (since college). Our plan is to delay drawing the pension and social security as long as we can and live off of our other sources of money like investment account, Roth money, and the money made on sale of our home if we decide to pursue full time travel. David has only recently retired and we have one kid in the military so no costs there, one who is getting merit scholarships, and another we are trying to guide on the scholarship path. Our kids work starting at age 15 and use their own money for most of the things they want to buy. Having a nice income and retirement benefits is great but if you establish a low cost of living lifestyle, save, and guide your kids to do the same, early retirement can be a reality even with a lower income and less benefits.

      1. Ah, STEM. You can’t beat it for earning potential. You must be really proud of your children. Sounds like you taught them well, and they are applying the knowledge accordingly!

        You are obviously well on your way to living your dreams. Good luck with your plans, and congrats again!

  16. What would you guys do for healthcare? And how much would that cost your family?

    My wife and would love to retire but healthcare costs are holding us back….I’m curious to learn how you plan on covering your family and how much that will cost.

    Hopefully it’s something I could apply to my situation and retire early!

    Thanks.

    1. We are not quite sure about health care, and I think it’s one of the reasons many people do not pull the trigger on early retirement. If we retire at 50, we will have health care coverage through the employer. If not, we will be looking at some sort of health care in the marketplace. Our expenses are low therefore our income will be low, so hopefully the cost for a high deductible policy will not be outrageous. We have a nice chunk of cash in the HSA, so that will help as well. This is one of the main issues we need to get better educated. At some point you just have to jump in, and roll with the punches.

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