‘I would appreciate your feedback on whether my wife and I are on track for retirement and making the best investment choices’: My wife and I dream of retiring at 55, but is that realistic with our current investments? How can we secure our future?

Hi Money Minder,

How can I assist you with your financial needs today?

Need some advice on whether my wife and I are on track for retiring early and making smart investment moves. We’re thinking about retiring at 55, though we know that might be pushing it. We’ve got a 5-year-old and don’t plan on having more kids.

Here’s what we’re working with:

Wife (36 y/o) rakes in about $130,000/year

403B – chipping in 5% – $6,500/year
Employer Chipping in – 10% – $13,000/year
Extra 403B – about 11% – $14,400/year
Current 403B total: ~$213,000

Me (36 y/o) pulling down around $185,000/year

403B – putting in 5% – $9,000/year
Employer Chipping in – 10% – $18,000/year
Extra 403B – about 7.3% – $13,000/year
Current 403B total: ~$151,000

Other stuff:

529 plan for our 5-year-old: current value $4,055; adding $175/month

Home #1 (worth around $425,000, owe $220,000)

Home #2 (worth about $450,000, no mortgage)

My student loans ~$220,000 – Doing PSLF and should be done with it in 6 years.

We think we’d like to have $150,000/year for living expenses during retirement (assuming no mortgage).

Got some questions:

With the $150,000/year retirement goal, how much should we adjust for inflation?
When we get raises, should we pump that extra dough into the 403b as much as possible? Or should we start a backdoor Roth IRA?
We’re planning to buy another home soon, and keep Homes #1 and #2 as rentals. They’re next to each other in a nice area, could bring in about $2,000/month each. Is it worth the hassle? Or should we just sell and invest the funds elsewhere or use it for our ‘forever home’ to dodge a bigger mortgage?
What other investments should we consider?
Any tips on minimizing taxes when we retire?
How should we figure out how much we’ll need to live on when we retire? Just look at current spending, subtract mortgage and contributions, then add in healthcare costs?

Thanks for the help!

– Planning Ahead

Response from THE MONEY MINDER:

Hello There,

Congratulations on building a robust foundation for your retirement plans. It’s evident that you both have been dilligent with your investments. Now, addressing your specific concerns:

Firstly, regarding the goal of $150,000 per year for living expenses in retirement, inflation is an important factor to consider. Historically, average inflation rates have hovered around 2-3% per annum. To make a conservative estimate, let’s assume a 3% inflation rate. Using the rule of 72, which is a simple way to determine how long it will take for inflation to double your expenses, you can expect your costs to double approximately every 24 years. Given you plan to retire in about 19 years, inflating your target by 60-70% would be a cautious approach. Thus, you might need around $240,000 in today’s dollars annually to cover your living expenses in the future.

As for increasing your voluntary contributions, prioritizing maxing out your 403(b) is a sensible approach given the tax benefits it offers. En routes to maxing out, consider initiating a backdoor Roth IRA. Roth IRAs offer tax-free growth, which can be invaluable in retirement, especially when tackling required minimum distributions from traditional retirement accounts. Hence, balancing contributions to both accounts can optimize tax advantages.

The decision on whether to hold onto Homes #1 and #2 as rental properties should hinge not only on potential income but also on your capacity to manage the logistic and administrative obligations involved in being landlords or the cost of outsourcing those tasks. Rental property can be a good additional income stream and potentially appreciate in value, but it generally requires significant oversight. If the hassle and risks outweigh the benefits for your lifestyle, you might consider selling one or both properties and investing the proceeds in diversified asset classes, such as index funds or other real estate investments that require less hands-on involvement.

In terms of other investment options, diversifying your portfolio with bonds, REITs, or even some exposure to international markets can help mitigate risks. It’s crucial to have a mix of assets that can provide steady growth while hedging against any market volatility.

Minimizing the tax impact at retirement can be approached with a blend of Roth and traditional accounts, taxable accounts, and considering timing for withdrawals strategically. Utilizing tax-loss harvesting, where applicable, is also beneficial. Consulting with a tax advisor can help tailor a tax-efficient retirement strategy based on your personal circumstances.

Lastly, planning for retirement expenses involves more than just subtracting current expenses like your mortgage and adding potential new ones like healthcare. Consider other variables such as travel, possible future home maintenance costs, and any new hobbies or endeavors you plan to undertake. It’s practical to periodically review this plan and update it based on your evolving circumstances.

Be reassured, your current financial habits set a solid course towards a comfortable retirement. Keep adjusting as you move forward, and consider professional advice to fine-tune your strategies as necessary.

Best regards,

THE MONEY MINDER