August 14, 2014

Could I Retire Today?

This blog is about my eventual goal of retiring early at the age of 50.  I'm now 43 years old.  Every year I get closer and closer to being able to retire.  I figured it would be a good exercise to check in and do a rough estimate of my ability to retire right now.      My original stated goal for retirement was $50,000 income and a paid off house.   How close am I to maybe hitting that goal?

First off... when I say 'retire', I mean that I would quit my day job and then manage some rental properties.   I'd still be working on those rentals but I'd otherwise be retired in the true sense of not working for an employer.   Maybe you could call it semi-retired if you want.

We own rental properties and our own primary home.   I figure if we retired, then we'd sell some and keep others.   Some of the rentals are in my home city where I grew up and my family all still lives.   It would be financially better to move back to my home city since its cheaper to live there and the rental investment returns are better there too.   If we stayed here in my current town housing would cost more, taxes are higher and rentals would return less.    A very quick estimate in my head tells me we probably couldn't really afford to live in our current city with our current assets so I'm really only looking at moving to the cheaper home town.    Note that we're not planning to move and this really isn't a preferred option but this is just a 'what if' exercise to see how or if we might be able to retire now with our current asset level.

We jointly own two properties with my dad in my home city.  We would keep those properties. 
We could sell our properties here and generate around $300,000 total.   We could use that money along with most of our cash on hand to buy a home to live in and more rental investment properties.   Using 1031 exchanges we could also avoid paying taxes on the sale of our current property.  We've also got a lot of assets in retirement accounts right now and we could tap that using a 72t distribution.

New rental purchases : 

We could buy a couple single family homes and rent them out and net around $16,000 a year after expenses roughly.   We could probably get closer to $18,000 or $20,000 profit off of multi-units.    Thats pretty rough estimating on my part based on quick search of whats for sale now on Realtor, and skimming over current rent rates on Craigslist.   I'd also assume ~40% expense rate on multi-units and about 25% on single family.   Generally I'd say something in the $15,000 to $20,000 is a reasonable guess with margin built in.

Existing rentals in home town:

The rentals we currently own generate about $6000 a year in profit right now.  But if I were living there I could help my dad and we could renovate some units and increase that a lot actually.    I think it is realistic to expect that we could increase the profit from those properties up to $9,000 a year or maybe $10,000.

Retirement accounts :  $300,000

This amount would generate approximately $1000 a month in income using a 72t distribution.   I figured this with the 72t distribution calculator and a current 'reasonable interest rate' figure of 2.25% based on recent AFR  
In summary the retirement plan would be :
1. start taking ~3.7% distributions from retirement accounts via 72t
2. sell properties in our current city
3. buy a home to live in free and clear in my home town
4. buy a couple more SFH to use as rentals
5. keep rentals in home town

This would net us annual income of about :

Retirement = $12,000
Current rentals = $6000 to $10,000
New Rentals = $15,000 to $20,000

Total estimated income = $33,000 to $42,000

We would then own a home free and clear and have around $33,000 to $42,000 of income.      I have high confidence I could get it up to $36,000.    This is short of my original old retirement goal of a house and $50k.


To know if we can retire on that kind of income I have to have an idea of a rough budget.   I'm going to run down the various expense categories we'd have and then try to ballpark some estimates on what we'd spend.    The numbers I'm using here are very rough and this is not meant to be too precise.

Housing While we'd own the home outright we would of course have to pay property taxes, insurance and budget some money for repairs and maintenance.   I'd put this number around $3,500 a year.  Of course thats a rough guess and I might want to allocate more for future repairs to be safer.

Our taxes would be very low if not zero.   Given a relatively low income and deductions for the rentals our income tax rate would be close to zero if not zero.   We would not have to pay for SS/Medicare taxes since that isn't required on rental income.  I'm going to figure taxes as negligible.   Note this is a pretty big assumption on my part and of course it would be subject to change if tax rates went up in the future.    If I were doing this for real I'd probably build in some margin in the budget somewhere to account for potential future tax changes.

Healthcare would be a potentially high cost but with the new ACA law (Obamacare) we'd be capped at around 10% of our income in expenses so I could just assume spending roughly  10% of our income on health insurance.   I'd also want to allocate some money towards out of pocket costs since the insurance plans generally have high deductibles.   I could be conservative and figure 10% of income plus $4000 out of pocket annually.   Though I don't think we'd average $4k a year out of pocket.   I'm going to guess a total of $8,000 year assuming we get ACA subsidies.  

Utilities would cost us a fair amount for electricity, natural gas, water, garbage.   I'd estimate those to add up to something in the ballpark of $4000.   Could be more or less.

Food would be a large expense for us I'd guess.   We have always tended to spend more on food. I'm not analyzing this one much but I think a reasonable guess on a food budget would be around $5,000 a year.

Transportation.   We'd need car insurance, money for gasoline, repairs and maintenance.  Plus I'd want to set aside some more money to buy replacement cars down the road.    All in I think we'd be spending around $4,000 on cars per year assuming about half of that would go to a fund to buy new replacement cars.   This is also based on owning two cars so if we wanted we could easily cut this figure in half by owning just one car.   We could also cut the spending down by having one nicer car and one backup beater.   I could do that for closer to $3,000.

Other items I'm not listing.   There are other spending categories that I'm not listing as expenses as I figure them mostly in the discretionary / luxury pile.   Things like vacations, cable television, gifts, etc.   

Very rough estimate of basic expenses :

Home : $3500
Taxes : $0
Healthcare : $8000
Utilities : $4000
Food $5,000
Cars : $4000

The sum of these expenses are just shy of $25,000 at $24,500.   

Based on the income range of $33,000 to $42,000 we'd be left with somewhere between $700 and $1,450 a month to spend on other things like clothing and entertainment and travel.    We could also give us more room in the budget by being more frugal on the expenses I estimated above.    With the high confidence income level of $36,000 and expenses of $25,000 that would give us over $900 a month of margin or to spend on luxuries.

Comparing the expenses I'm figuring now versus what I budgeted for retirement 6 years ago there are some big differences.   Back then I had nearly $10,000 a year for food between groceries and eating out.   I also had nearly $10,000 for health insurance.   Between those two categories I've dropped my spending estimates by nearly $6000.   I also assume that I had some assumption of taxes costing me more previously.

If I retired now our assets could generate roughly $33,000 to $42,000 of income based on investing in rental properties and buying a home outright.    A rough guess at basic expenses would be in the neighborhood of $25,000.

There are a lot of unknowns not accounted for here and most of my numbers are very rough estimates so the figuring here is all pretty inexact. 

Bottom Line :   I feel that I could retire today and we could do pretty well.   If we were more frugal I don't think it would be bad at all to make ends meet.


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