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I have this friend who is afraid of not having enough, even though I think he has enough....I told him that I am not a financial planner, but would check in with others...

He wants to retire early. He is 42. married with two kids, and owns his own home (he owes something like 400K remaining...

What can I do to convince him?

He and his wife make a gross income of about 160K...

He has a Roth IRA of about 900k, a taxable brokerage account of about 1.7 million, and a tax deferred retirement account of 1.2 million....His wife has a TSP of about 700k....

He is eligible to get a pension at 55 years old depending on how long he works....If he were to quit today, the pension would pay about 3K a month when he turned 55....

He would like a passive income of about 15k a month or about 150K a year to survive for the rest of his life...This amount would be able to pay the current mortgage, property taxes, children's education funds, and current lifestyles....

What do you guys think? Does he have enough????
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I think so, but what HE (and his wife) thinks is what really matters. Which can be affected by what he thinks he'd like to do post-retirement.

At age 45, a lot of his withdrawals from those investment accounts will be taxable as ordinary income. And he'll have to pay his own medical-care insurance. Some of his current regular expenses will go down... he may adopt new regular expenses to replace them, or may not.

So as a first guess, he needs to at least come close to all of his current income. He'll have an initial withdrawal rate of probably between 3% and 3.5%. According to the calculator at https://thepoorswiss.com/fire-calculator/ the historically 100% safe withdrawal rate for a 50-year time frame is 3.28% (and the median balance after 50 years is over 16 times the starting balance...)

He would like a passive income of about 15k a month or about 150K a year

I will admit that this 10-month year worries me...
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He would like a passive income of about 15k a month or about 150K a year to survive for the rest of his life...This amount would be able to pay the current mortgage, property taxes, children's education funds, and current lifestyles....

What do you guys think? Does he have enough????What do you guys think? Does he have enough????


With a current gross income of $160k and having been able to build their investment accounts to $4.5MM, I kind of doubt that they would actually need $15k/month (which is actually $180k/year, not $!50k). That said, I don't know that I would suggest anything higher than an initial 3% withdrawal rate for a potential 55 year retirement. A 3% withdrawal rate on his current portfolio would allow him $135k/year, which is less than he wants to have available. So I would suggest that he needs to do more planning around what he thinks his actual expenditures will be, including, but not limited to - medical coverage and income taxes.

I would also point out that if they retire now, they're both likely to have a lot of $0 years for SS, which will decrease their SS benefits.

They also need to consider how they plan to access the tax-deferred money - are they going to use SEPP to withdraw prior to 59 1/2, or are they going to live off of Roth contribution withdrawals and the taxable account?

AJ
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Thanks for the input....

I think I am going to refer him to Motley Fool's Rule your Retirement Service...I think he can ask his specific questions over there....

For him, I think he just needs to figure out how much he would need from his current age of 42 to age 55.....After 55, he can tap his retirement account via 72T if needed, and start his pension....

He also keeps asking me if he should pay off his house with his funds from his brokerage account....I told him he needs to do what makes him sleep best at night...For me, I have a low interest rate and rather invest my money instead of paying off my mortgage.....He is somewhat more conservative, and even is worried that the stock market may drop 20-30% this year....lol

I have steadied him to keep him fully invested when he gets nervous, through market ups and downs, and it has worked out for him. He is an index fund investor and can't handle the stress of picking individual companies....


Any good retirement books that you recommend that cover these topics that I can point him to?

Thanks....
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For him, I think he just needs to figure out how much he would need from his current age of 42 to age 55.....After 55, he can tap his retirement account via 72T if needed, and start his pension....

Actually, he can use 72(t) now. But he would have to keep using it until he's 59 1/2. If he taps his retirement account via 72(t) at 55, he will have to keep using it until he's 60 (5 years).

He is somewhat more conservative, and even is worried that the stock market may drop 20-30% this year....lol

That's actually not a unreasonable fear to have, IMO. It's less likely (although still possible) that this year the market will drop 20% - 30% from where it started 2021, but it's well within the realm of possibility that this year it will drop 20% - 30% from recent record highs.

AJ
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Just to play devil's advocate here.

My Dad "retired" early - somewhere in his 50s. Although he liked it, he had not planned on his friends not being able to "play" whenever he wanted to. It made the first 10 years of retirement a bit challenging.

My first retirement was at 44 - I wanted to beat my Dad. Although it was my choice, I was not ready and went back to work a year later - only PT though. Second retirement was at 61 and the final was this year. And, I am considering volunteering because I am bored.

The point of all this is to encourage your friend to really ponder what he/wife are going to do with all the free time. Unless he plans to hang out with people who are 20 yrs older, he is going to find it lonely.

Some of the decision is about money. Most of it will end up being about the way you spend your time.

Good Luck.
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I have this friend who is afraid of not having enough, even though I think he has enough....I told him that I am not a financial planner, but would check in with others...

He wants to retire early. He is 42. married with two kids, and owns his own home (he owes something like 400K remaining...

What can I do to convince him?



Part of successful Early Retirement is confidence that your plan can weather the various storms that life and chaos will throw at you--protracted stock market decline, inflation, large rise in costs of necessities like health insurance, increased volatility of investments, etc. If your friend needs someone else to "convince him" and even hold his hand in obtaining information, it seems like FI/ER is more a dream than a goal. That is, he likes the idea but isn't serious enough about it to learn enough to accomplish it.

I'm not talking about filling in details, like the "4% rule" that someone might not know but would be useful pillar in building his long term plan. I mean the fact that you have to "convince" him of anything.

I also can't fathom knowing how much a friend:
-Owes on his home
-His and wife's gross income
-Roth IRA and taxable brokerage account balances
-Tax deferred retirement account and wife's has a TSP balances
-Pension at age 55 amount

The straightforward thing to do would be to create a spreadsheet and chart out his annual expenses, known income (pension, etc.), growth of current investments, and account for inflation by only growing asset value by a reasonable return minus anticipated inflation. His annual expenses will go up when his kids turn 16 (car insurance and maybe another family car) and even more when they get to college age, then go down when the kids aren't in the parent's budget.

That spreadsheet can get really complicated (mine did) but you get to see if, by making reasonable assumptions, you either fall way short or end up with more money than you retire with. You can also structure equations to make it easy to see the effect of various factors. For example, what if your portfolio returns only 2.5% rather than 3.5%? (Think 3.5% is too low? Remember, your portfolio isn't 100% stocks, the number is after inflation, and stocks are volatile enough to require a low assumed return when withdrawing due to being on the "bad side" of dollar cost averaging.)

For the "spreadsheet averse:" The inflows, growth and outflows are too irregular from age 42 to whatever age you want to plan to (lots of 40-ish couples will have one of them live into their 90s). So, there won't be one simple calculation like
(Needs) - (Social Security + Pension + Medicare) = (4% x portfolio).

What if all that work takes as much as 20 hours, spread over a couple weeks? If that's too much work to be able to find out when you'll be Financially Independent, then you'll have to pay an advisor to do the work (which may be a much better analysis than the spreadsheet I described). You'll also need to put a certain amount of trust in that advisor, both in his competence and his trustworthiness. Mine wanted to manage my portfolio..for a 1.2% annual fee, which might not seem like much but is a huge chunk of the 4% to 6% one can expect to take for a 30-40 year period and not run out of money. Luckily, I have my own plan and know how my investments performed along with reasonable and also worst case performance going forward. I used the advisor's analysis to confirm what I thought I already knew. His analysis also confirmed my assessment of the best time to take social security.

Another thing about advisors--they use the info you give them. So, even when you use an advisor, he'll want you to supply your budget numbers, anticipated social security, etc. So, you're already doing a lot of the work anyway such that creating your own spreadsheet might not be that much more. There's also satisfaction in knowing the assumptions the calculations are based on. Starting this process in my 40s allowed me to be comfortable with ER in my late 50s so that I pulled the trigger at 60 despite being a one-income family with several kids.

Finally, I'm using the genderless "he" above, so the advisor might be a she. Hope this is enough to address some of what you were hoping to know.
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