I am going to outline my retirement plan below. I would like your feedback. Do you see any problems with it? Let me know.

I currently have $58,500 invested and add $725/mo. I have a goal of acheiving 16% overall return. In 4.5 years my house will be paid off, at that point that $800/mo. payment will also be added. In 8 years this will grow to $390,000. At this point I think I could retire and live off the interest indefinitly. We (my wife Laura and two children) currently live on about $25K/yr not counting house payment, taxes, and monthly savings. No, Laura doesn't work.

Currently 85% of the investments are in tax deferred IRA and 401K. I plan on paying the 10% early withdrawal penaly and taxes as I draw my living expenses from the IRA and 401K. (Although there may be a way around the 10% penalty.)

I would need to provide my own health insurance after quitting my job. I figure a major medical policy say with a $10K deductable will protect us from a major illness that would threaten to kill our net worth. We have low health care costs, so I don't see a large expense here.

Naturally, I will adjust my retirement date depending on how my actual returns pan out or if something unforeseen happens. If after retiring it doesn't work out or I get bored, I can always get a job again.
Any thoughts? Did I overlook anything?

Retirebyage40,

<<I am going to outline my retirement plan below. I would like your feedback. Do you see any problems with it? Let me know.

I currently have $58,500 invested and add $725/mo. I have a goal of acheiving 16% overall return. In 4.5 years my house will be paid off, at that point that $800/mo. payment will also be added. In 8 years this will grow to $390,000. At this point I think I could retire and live off the interest indefinitly. We (my wife Laura and two children) currently live on about $25K/yr not counting house payment, taxes, and monthly savings. No, Laura doesn't work.

Currently 85% of the investments are in tax deferred IRA and 401K. I plan on paying the 10% early withdrawal penaly and taxes as I draw my living expenses from the IRA and 401K. (Although there may be a way around the 10% penalty.)

I would need to provide my own health insurance after quitting my job. I figure a major medical policy say with a $10K deductable will protect us from a major illness that would threaten to kill our net worth. We have low health care costs, so I don't see a large expense here.

Naturally, I will adjust my retirement date depending on how my actual returns pan out or if something unforeseen happens. If after retiring it doesn't work out or I get bored, I can always get a job again.
Any thoughts? Did I overlook anything?>>

Many thoughts. And, yes, you did overlook some things. You didn't say how long the money and income must last nor did you mention how you intend to cope with inflation. I see no indication of how long the children will be around to support either. I suspicion by your screen name you desire to retire at age 40 in eight years. But let's say you'll be age 55 instead. Reasons for that will become clearer later. Also, let's say you'll need an income for 35 years, that inflation will average 4% between now and then, you want your buting power to stay even with inflation, you will use up all your money by age 90, and all taxes are paid from other resources today and income in retirement. Further assume you get the 16% return before taxes that you want. With that as a starting point, how much will you have at retirement in eight years and how much do you need to maintain a $25K income in today's dollars?

At 16%, your starting stash comes to $395,285. You need to have a first year income of $34,214 to equal today's $25K, and that must be $135,012 some 35 years later to buy the same amount of goods then as it does today at $25K. If you get your 16% return, you would need to start retirement with $323,497. Based on this scenario, you might make it. But if your return averaged only 13%, you would need $406,054. At 10%, the amount jumps to $539,179. Retire at age 40, and the sum must last 50 years. Regardless of which return you use, the sums needed at retirement jump enormously.

The lesson here is to ask yourself some questions and then rerun your numbers. How long will you live? What should be used for inflation? What should you use for a return? What's the worst case scenario? Assumptions are just that, and if one changes your results will change -- often dramatically. One model just isn't enough. You should run a best case, expected case and worst case to see the differences. IMHO the best plan is the one that uses the worst case. If things turn out better, you're home free. If they don't, at least you're prepared.

Regards.....Pixy

Pixy's points are well taken. A thought that may or may not have been taken into consideration. When you calculated the amount you would need to live on, did you use the old financial planning standby of 85% of what you live on today? If you did, I would suggest that you reevaluate it. I took an early retirement in 1996, and I found that I needed at least the same amount of take home pay as before, in fact, I needed more because we took extra vacations, I played more golf (I took a part-time job at a country club to cut these costs), and I generally got bored and spent money to keep busy.

How did you factor in your insurance costs? For a family policy (even with a comp Major Medical policy) you are probably looking at 5-6 thousand a year, and you can expect 10% minimum increases per year, and 20% may not be unreasonable.

I don't get overly excited about inflation estimates, because they include some very big items that you don't purchase many times: Homes, cars, and boats. Things to look at are food, clothes, and entertainment, and these are not necessarily increasing at the inflation rate. insurance is greatly exceeding the inflation rate.

Also, the 16% average return is pretty high to maintain, you might want to lower that a bit to be on the safe side. You also did not mention liquidity in you plan. I always recomend keeping 1-2 years of liquidity in my client's financial plans. The return is not that great, but the client should be able to handle a turn down in the economy without selling security when the price is down, and 2 years should be plenty of time to see a recovery of prices after a downturn.

Regards, Jim