More advice for BigLaw Survivor, please?

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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Interestingly, I just now went back to my checking account and calculated exactly what I spent in the last six months through today excluding federal and state income taxes but including absolutely everything else. The total: $108,267. In the past six months we've made virtually no effort to cut our expenses, keeping the cleaning service, the gardener, etc., plus we took two pretty expensive vacations including three plus weeks in Europe with our youngest daughter helping her get settled in grad school (and spending too much money on her). The bottom line is that I do think I could live forever like I've lived for the last six months, and the question is: can I do that with the portfolio that I have?

Edit: I've now gone back for the last 12 months and the total is $212,888 . . .
Last edited by BigLaw Survivor on Thu Oct 22, 2015 6:53 pm, edited 1 time in total.
Carefreeap
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Re: More advice for BigLaw Survivor, please?

Post by Carefreeap »

btenny wrote:Big. Congrats on your situation. You are good to go into full retirement mode IMO. As far as obtaining a new mortgage sometime in the future, watch out. Banks and mortgage companies now days a big PIA and mostly not responsive to us non working folks. They almost will not lend to someone with no firm "monthly income". The just do not care if we have assets. They want paychecks or SS or similar "income". So your thoughts on refinancing or getting a new mortgage are not likely correct. So think hard about that payoff in advance.

Good Luck.
Agree. You've done really well given you didn't do much planning!

I also agree with btenny's observation about it being more difficult to refinance (especially cash-out refi) if you don't have "regular" annual income. You will eventually find someone but it's likely to take longer and cost more-not the situation you want to be in if you need to raise funds quickly and/or in a down market.

FWIW we are in a similar NW situation but different kinds of assets. We are (almost) 57 and 54. We did refi two rental properties after retirement (in 2013) and had no serious issues but that's only because we had some decent oil royalty income the two years before. Now with the drop in oil prices our royalty income has also dropped and I think we'd have a hard time doing a cash-out refinance of our paid-off personal residence despite our NW.

Sure, we could probably get a HELOC in a real fix to cover a couple of years of living expenses but I'd hate to be forced to sell equities in a down market. I think you have a justifiable concern in using liquid assets to further concentrate your holdings in a couple of illiquid assets.

One more question; when you acquired the condo did you plan on it becoming a future residence for yourself?
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

We acquired the condo as a possible future residence but like everything else didn't give it too much thought . . .
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Riprap
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Re: More advice for BigLaw Survivor, please?

Post by Riprap »

BigLaw Survivor wrote:Interestingly, I just now went back to my checking account and calculated exactly what I spent in the last six months through today excluding federal and state income taxes but including absolutely everything else. The total: $108,267. In the past six months we've made virtually no effort to cut our expenses, keeping the cleaning service, the gardener, etc., plus we took two pretty expensive vacations including three plus weeks in Europe with our youngest daughter helping her get settled in grad school (and spending too much money on her). The bottom line is that I do think I could live forever like I've lived for the last six months, and the question is: can I do that with the portfolio that I have?
I think you're pushing the limit assuming $216k is your annual burn rate. You really need to look back for a full year, or maybe several years. Budget for multiple one time expenses: car replacement, roof replacement etc. etc.

I strongly suggest carefully rereading Magellan's posts and then doing a little research on sequence of returns risk. Read today's post "Bogle: Tough Decade Ahead for Equity Investors." I personally think you're being too optimistic. If your burn rate was 2% of investable assets, then I wouldn't worry too much.

Go to Jim Otar's website, retirementoptimizer.com and then download his book "Unveiling the Retirement Myth" in .pdf format for $5.99. I'm convinced you need a basic education on portfolio management, survivability etc. and this book is as good as any to start with. It seems clear to me you haven't done any basic research. Bill Bernstein has a fantastic series of eBooks you can pick up from Amazon that are must reads too.

I hate to sound too harsh, but it is time for you to hit the books!
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Not sure if you saw it, but I did go back and look at the full year, and we spent $212k . . .
AZAttorney11
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Re: More advice for BigLaw Survivor, please?

Post by AZAttorney11 »

BigLaw Survivor wrote:Not sure if you saw it, but I did go back and look at the full year, and we spent $212k . . .
That is insane, especially considering your mortgage is interest only. You do realize this is almost $600 per day for an entire year, right?
skjoldur
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Re: More advice for BigLaw Survivor, please?

Post by skjoldur »

'Insane' is a bit strong.

But yeah, your desired expenses sound like they might be pretty aggressive for your assets. You might want to take a hard look at that (think about your clients who were resistant to legal advice they didn't really want to hear -- how did you try to get through to them? Try using those tactics on yourself as the reluctant receiver of good advice).

I would echo RipRap's advice to hit the books. There is no rush or emergency. Congrats on pulling the plug, congrats on getting out with a nice nest egg. I think you can take 6 months or a year to get a handle on how you want to handle all of these decisions.

Good luck. Thanks for sharing a little window into the world of big law.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Thanks. The point I was trying to make was that I spent 212k last year without even thinking about it, meaning that if I do think about it, which I will, we can cut back and make this work. I don't think the cutbacks need to be dramatic, just smart . . .
J295
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Re: More advice for BigLaw Survivor, please?

Post by J295 »

Congrats to BLS! I transitioned 3 years ago at age 53 after 30 years with the same firm (went from partner to of counsel, which is now about 10 hours per week and dwindling). We (my wife of 33 years and I) absolutely love this new adventure, and I hope it develops nicely for you also.

A couple of random thoughts to add to the good input you've already received .....

Financial -- If you are eligible and choose to use the exchange for insurance, and can keep your MAGI low enough, you can qualify for tax credits. The Kaiser site has a good calculator to estimate eligibility. If you have self employment income (which I do as of counsel), you can reduce MAGI with a solo 401k (health insurance premiums are also deductible, and without getting into the weeds on how these dove tail with the ACA tax credits just know that there is a Rev Rule that your accountant/the tax software handles).

Financial -- Also if you keep you income low enough (something you couldn't do while working) remember the 0% tax on long term capital gains if you can keep yourself in the 15% or lower tax bracket.

Financial -- It's a bit silly celebrating low income, but we really love low tax bills after so many years of self employment and income taxes and high health insurance premiums (which as a law firm partner we paid directly out of draws back in the day).

Practical -- I developed a few short responses I used when friends/acquaintances would comment about retirement (like I'm too young). You have probably already experienced this dialogue and perhaps refined your responses. My responses were designed to keep the conversation going, and I found (not surprisingly) that my close friends (many of whom also intentionally explore non-traditional journeys) really engaged in what this next adventure was all about, and the larger pool of acquaintances really weren't that interested in the deep personal drivers and just wanted to engage in some basic conversation (which is completely understandable and fine with me).

Financial -- We have an IPS that we are very comfortable with and most on this forum would support you having one too (Investment Policy Statement). It may take you a while to settle in on something, and that's probably a good thing. Although ours is just 5 sentences I spent a great amount of time settling in on it.

Practical -- From our IPS just as an FYI, which you may find valuable regardless of your faith tradition ....
To retain awareness that there are two risks impacting our financial choices. One, the risk that we could someday run out of money. The other, more subtle, that we die without living fully because we are unduly inhibited by the first risk. We shall strike a balance and retain flexibility. Phil. 4:12


Financial -- Interestingly, we watched our expenditures like hawks most of our married life. Then, when I transitioned we basically stopped. We annually transfer a year's worth of expenses into a separate account and used the coffee can/silo method and just spend out of there (we also have a charitable fund at Fidelity we give out of, and if you are charitably inclined and not already using a donor advised fund there are tax advantages).

Best of luck. I hope you post some of your insights and experiences going forward.
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matjen
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Re: More advice for BigLaw Survivor, please?

Post by matjen »

^+1 Very nice post.

Congrats BigLaw Survivor on doing it your way and the early retirement. I was wise enough to get out of law after 7 years and go into technology. Glad I have the training and the experience though.

Although the devil is always in the details, I would suggest you take a long look at the variable withdrawal method which really just sort of formalizes what most humans do anyways. Spend more in good times and tighten the belt in bad times. This makes more sense than a 3% or 4% flat withdrawal figure...though I understand the wisdom of just getting in the ballpark at this stage.

Also, you may find some interesting uses over at a newer site called Portfolio Charts. It is very well done and pretty interesting.

VPW: https://www.bogleheads.org/wiki/Variabl ... withdrawal

Variable percentage withdrawal (VPW) is a withdrawal method that adapts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of his portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

Thread: viewtopic.php?f=10&t=120430

Portfolio Charts:

http://portfoliocharts.com/portfolio/withdrawal-rates/
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magellan
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Re: More advice for BigLaw Survivor, please?

Post by magellan »

matjen wrote:Although the devil is always in the details, I would suggest you take a long look at the variable withdrawal method which really just sort of formalizes what most humans do anyways. Spend more in good times and tighten the belt in bad times. This makes more sense than a 3% or 4% flat withdrawal figure...though I understand the wisdom of just getting in the ballpark at this stage.
I agree with matjen. That 3% analysis was only intended to provide a big picture view. It said to me that your plan isn't a slam dunk if you need $200k per year, especially if you aren't prepared to be flexible with your spending or downsize your home. OTOH, don't read that rough analysis as saying that you should go back to work either. Your plan falls somewhere between a slam dunk and a pipe dream.

In this case, it's essential to have your eyes wide open and for everyone in your family to be on-board with the big picture plan, the risks, and with the contingencies that might be needed. If unlikely but very possible bad stuff happens, it shouldn't come as a shock or a failure, and it shouldn't cause a panic. Instead, it'll mean that some contingency plans might need to get activated. Maybe you'll need to knock back spending some following a multiyear stretch of really bad market returns, or maybe you'll need to downsize, say when you hit age 75. This is all a lot less stressful and less likely to cause panic if it was discussed ahead of time and is viewed as part of the plan.

Below are some screenshots from a retirement calculator tool that shows this in action. The wiki has a great list of retirement calculators at this link (many are free):
https://www.bogleheads.org/wiki/Retirem ... d_spending

The tool shows a 69% likelihood of success with a plan that spends down your taxable account between now and age 65, lets that $2.4m in tax deferred grow for 11 years, assumes you keep your current house forever, and assumes you have no flexibility in your spending (It also assumes $25k for basement apt rental income and $36k in SS benefits which may or may not be realistic). You'll notice that even with its lowish probability of success, the plan's median ending portfolio value is $2.3 million. So half the time you'll die with more than $2.3 million (plus your house), yet still, there's a decent chance that you could run out of money before you die. Such is the challenge of long range planning.

Image

For the next run, I changed the spending model to assume you'd cut back spending by as much as 25% if times got really tough. That means that if there's a bad market stretch, you might only be able to spend $150k for several years, instead of a constant $200k. If you can accept that as a contingency, the chances of success go up to 85%.

Image

Finally, if you'd be willing to downsize your primary residence at age 75 and pull $800k out to use toward spending if needed, your plan's chances of success go up to 91%.

Image

Please keep in mind what I said before about how fragile and rough these tools are. Their results look solid but in reality they're just very rough guesses, plus I probably made a bunch of mistakes in trying to capture the details of your exact plan. In general it's best to compare the results from a handful of tools and use them to better understand the contours of your plan and how various contingencies might impact the likelihood that your plan will succeed.

Finally, I'd second (or third?) Riprap's suggestion to hit the books. These tools are almost a little dangerous if they're used without a basic understanding of the fundamentals of retirement planning.
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Re: More advice for BigLaw Survivor, please?

Post by JDCarpenter »

Good post by Magellan.

On the topic of withdrawal rates and the need/benefit of flexibility in spending, whitecoatinvestor (EmergDoc on this board) had a good post last month (and it is worth reading the solid comments following it): http://whitecoatinvestor.com/how-much-w ... -die-with/

If you want to get a good handle on the sequence of returns risk that drives discussions of withdrawal rates/strategies, read that discussion and follow the links.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Good morning! Sure is nice to wake up to such helpful, encouraging, and thoughtful advice. Magellen is a godsend, and I'm looking hard at those numbers. The one thing that jumps out at me from the analysis is that it doesn't appear to take into account the condo rental; it only mentions the basement rental. The condo currently generates $30k a year in revenue, or $24k after expenses (assuming I pay off the mortgage). I'm inclined to keep it for the foreseeable future for the reasons I've already outlined, and if I still have it 11 years from now at 65 that would add at least another $30k to $35k in annual income (assuming only modest rent increases over the course of 11 years), or if I sold it at 65 I'd have at least $500k more to add to my retirement fund. That's a help, right?
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magellan
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Re: More advice for BigLaw Survivor, please?

Post by magellan »

BigLaw Survivor wrote:The one thing that jumps out at me from the analysis is that it doesn't appear to take into account the condo rental; it only mentions the basement rental... That's a help, right?
Yes, I think so. But then again, that $36k in SS starting at age 65 is probably optimistic because you'll have 10 years with no contributions since you retired early. Also, the default rates of return in this tool are probably optimistic. As an aside, the SS website can give a decent estimate of your expected benefits (a forum search will show how).

Many people spend hours and hours with these tools trying to capture as much of the big stuff as possible and just playing around with the numbers. After a while you'll get an intuitive feel for how things stand and which contingencies offer the biggest impact. Again the key is to understand the risks and be ready with a sensible plan if things don't turn out the way you hope.
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Re: More advice for BigLaw Survivor, please?

Post by crake »

On the condo rental, at least from my perspective, it's an entirely different story. Not only is it appreciating nicely while enjoying a positive cash flow, I don't consider it a "450k" investment because I only put 10 percent down when I bought it (I paid 375, putting down only 37.5k). Again, I'm no financial guru, but by my math the return on what I've put in is more than 6.6 percent.

Make sense?
The question you need to ask yourself is "If I had 450k, would I buy I condo that pays 2500 per month in rent." The method in which you accumulated that 450k is irrelevant to the discussion. I again need to caution you to think hard about all the expenses of owning the condo. Add up taxes, maintenance, condo fees, utilities, management fees and try to get a handle on what you are really making off of this investment. I know you may think that there is a good chance that this Condo will appreciate and add additional return but that is purely speculation. From your description of the vacation rental that you lost a lot of money on you should understand that real estate prices can swing either way and it is hard to predict which direction they will go.
BigLaw Survivor wrote:Thanks. The point I was trying to make was that I spent 212k last year without even thinking about it, meaning that if I do think about it, which I will, we can cut back and make this work. I don't think the cutbacks need to be dramatic, just smart . . .
212k spending with a networth of 4.8m is a pretty aggressive withdrawal rate, especially at the age 54. The fact that a large chunk of your networth is also tied up in leveraged real estate makes it even more risky.

As for cutbacks being dramatic vs smart, sometimes it might make sense to make one or two dramatic cuts rather than dozens of "smart" cuts. Optimizing your living arrangements could be enough to not have to sweat the small stuff and keep living the life you want in perpetuity. I am definitely not in the go back to work camp. You should have enough saved to afford a retirement most could only dream of. You just have to be smart about it.

Congrats again on a great career and for providing well for your family.
crake
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Re: More advice for BigLaw Survivor, please?

Post by crake »

BigLaw Survivor wrote:The one thing that jumps out at me from the analysis is that it doesn't appear to take into account the condo rental; it only mentions the basement rental. The condo currently generates $30k a year in revenue, or $24k after expenses (assuming I pay off the mortgage).
I saw this after I posted my last reply. I really think you need to get a detailed accounting of what your condo is costing. It does not seem plausible that a 450k Condo could only have 6k of expenses per year. How much tax do you pay per year on it? Is there a condo fee? Do you account for vacancy? Do you manage it yourself or do you have a management company? Do you ever have to provide maintenance on the condo? Will you ever update appliances/fixtures?
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Re: More advice for BigLaw Survivor, please?

Post by SQRT »

I was in a similar position. Retired as senior exec at 56 from big Canadian Bank. Had to fund about 6 years of spending until pension started at 62. Did this through incentive comp cash outs (options and DSU's) and cash on hand. The key for me was a very good understanding of my expenses. I kept detailed spreadsheets for about 15 years and knew where every cent went. I was then able to adjust these figures for my retirement spending plan. Magellan's post was right on re SWR's. You must know your projected expenses. I think you might be a little light on spending levels in retirement and your assets may not support your spending. Spending $200k per year seems low to me.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Crake,

I understand why you would question the desirability of the condo as an investment in the abstract. Here is some additional information.

We are talking about a small (640 square feet) unit in a recently renovated and very well run boutique building in a long-established and highly desirable downtown area -- especially for young professionals. I do not believe there is a better location in the city. We bought the unit six years ago, after the housing crisis, for what I think was a good price, and I could easily see us moving there ourselves someday. In the meantime, we've now had the same tenants for over four years, they are absolutely meticulous -- and we often go months without hearing from them except for the automatically deposited rent check. Knock on wood, but maintenance has thus far been almost a non-issue.

The condo fee is currently $287 a month (fees are assessed on the basis of square footage, and we have the advantage of owning one of the smallest units), and have only increased $24 a month over the last six years. The owners of the larger units actually live in the building and run the condo association, and they have every incentive to keep the fees down because increases hurt them the most. Annual real estate taxes jumped dramatically this year, from $3000 to $3600, after the city raised assessments in the building by 25 percent in one year (further proof that the building is appreciating nicely) but taxes are actually going to drop by 5 percent next year because the building successfully challenged the 2015 assessments as too aggressive.

We probably could charge a couple hundred dollars more a month for rent, but like our tenants and want to keep them. They take better care of the place than we ever would.

Finally, I'm the last person you need to remind of how risky real estate investments can be. I've learned the hard way, as you've pointed out. But a small condo in a nice downtown area in a major East Coast city is a far cry from beachfront property in North Carolina. You'll never see me make that mistake again . . .
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magellan
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Re: More advice for BigLaw Survivor, please?

Post by magellan »

BigLaw Survivor wrote:$895k mortgage on primary residence in the form of a 10/1 interest only mortgage at 3.25 percent with 7 years remaining on interest only period and a minimum monthly payment of $2200.
$244k mortgage on condo at 3.0 percent with principal interest payments of $1198 a month
$100k balance on unsecured personal line of credit at prime rate
I want to take a step back and mention that your plan has a lot of moving parts and you shouldn't put too much stock in the exact details of my (our) back of the envelope calculations. They're good for big picture stuff, but it's easy to miss stuff in a quick 10 minute analysis when painting with broad brush strokes.

My post was intended to show the importance of flexibility and doing contingency planning. In addition to not considering your condo income, it also doesn't take into account that around $42k of your $200k+ in spending is debt service that's not exactly part of your standard of living. Without the condo and house loans, I think your spending would be around $150-160k. Of course, if you pay off those loans your investment portfolio will be smaller.

Edited to fix typo
Last edited by magellan on Sat Oct 24, 2015 10:30 am, edited 1 time in total.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

SQRT wrote:I was in a similar position. Retired as senior exec at 56 from big Canadian Bank. Had to fund about 6 years of spending until pension started at 62. Did this through incentive comp cash outs (options and DSU's) and cash on hand. The key for me was a very good understanding of my expenses. I kept detailed spreadsheets for about 15 years and knew where every cent went. I was then able to adju st these figures for my retirement spending plan. Magellan's post was right on re SWR's. You must know your projected expenses. I think you might be a little light on spending levels in retirement and your assets may not support your spending. Spending $200k per year seems low to me.
Thanks for this advice. You're right that I need to take a hard look, and I will do that. Here's why I don't think 200k is too low for us, though. As you may have seen, I calculated yesterday that I spent $212,000 over the last twelve months. For the bulk of the last year I didn't plan to stop working and I made no effort to monitor or control my spending. I will now do that. The bottom line is that I've had enough self-discipline over the years to make partner in a big law firm, and I'll now re-channel that discipline into making sure I don't have to go back!
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

magellan wrote:
BigLaw Survivor wrote: My post was intended to show the importance of flexibility and doing contingency planning. In addition to not considering your condo income, it also doesn't take into account that around $42k of your $200k+ in spending is debt service that's not exactly part of your standard of living. Without the condo and house loans, I think your spending would be around $150-160k. Of course, if you pay off those loans your investment portfolio will be smaller.
Thanks again. This is what I really need to think about.
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Re: More advice for BigLaw Survivor, please?

Post by globalexpat »

I'm 36 and (hopefully) decades away from these decisions, but I've found this discussion to be really interesting and extremely helpful. Thanks Bogleheads!
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Re: More advice for BigLaw Survivor, please?

Post by travellight »

^ on the contrary, I would hope to be imminently close to considering retiring at the age of 36 with a net worth of 4.8 million, lol.
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Re: More advice for BigLaw Survivor, please?

Post by LadyGeek »

^^^ Good point. While the OP is very fortunate to have enough funds for an early retirement, investing early will significantly reduce the amount you need - compared to starting later in life. Take a look at this graph: What does it take to catch up if you start late?

That's (hopefully) the point travellight is making. Having 4.8 million at age 36 is certainly much better than having 4.8 million at age 54. However, there's another really big caveat: You can't predict what will happen in the next 5 years, let alone 30 years out.
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Re: More advice for BigLaw Survivor, please?

Post by btenny »

Big. There are some other things to look at in detail when you start doing the detailed spending and income analysis. What happens to you and your income if your wife passes away early? What happens to your wife in you pass away early? These are hard questions but must be looked at in some detail as there are just as likely as both of you making it to very old age together. This is key as I have friends of both sexes who have lost spouses early and some are OK and some are not. I know in my case we rent a second home (in lieu of buying) and carry some expensive whole life insurance to cover loss of SS and pensions early. But your situation may be different.

Does your plan work if you only have one SS check? Who will do property management? Who will do upkeep of the rental? Do you have some life insurance on one or both of you to cover expenses for XX years? How does your income from your old firm change if you pass way early? Can your wife still live OK? Can your wife handle the rentals? Can you take care of the house if you are suddenly single? Please add a few what ifs to your analysis to make sure you have covered all the conditions.

Good Luck and Have fun.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Thanks again for all the advice. This is the first web forum I've ever been on that's actually been helpful . . .
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

btenny wrote:Big. There are some other things to look at in detail when you start doing the detailed spending and income analysis. What happens to you and your income if your wife passes away early? What happens to your wife in you pass away early? These are hard questions but must be looked at in some detail as there are just as likely as both of you making it to very old age together. This is key as I have friends of both sexes who have lost spouses early and some are OK and some are not. I know in my case we rent a second home (in lieu of buying) and carry some expensive whole life insurance to cover loss of SS and pensions early. But your situation may be different.

Does your plan work if you only have one SS check? Who will do property management? Who will do upkeep of the rental? Do you have some life insurance on one or both of you to cover expenses for XX years? How does your income from your old firm change if you pass way early? Can your wife still live OK? Can your wife handle the rentals? Can you take care of the house if you are suddenly single? Please add a few what ifs to your analysis to make sure you have covered all the conditions.

Good Luck and Have fun.
So I've now gone back to my checking account and analyzed my spending over the last 18 months, which would have included more than a full year while I was still working, and after again removing federal and state tax payments I'm seeing the same pattern that I reported before. I spent $325,000, or around $21,000 a month. A previous poster noted that this was an "insane" amount of money, and it is, but one thing that occurred to me when I expanded the analysis from 12 to 18 months is that, while I included all of my credit card payments in the analysis, I used the same credit card for personal and business expenses -- and all of my business expenses were reimbursed by my firm. It would take a lot to go back and determine exactly how much we are talking about in business expenses, but I did travel regularly and entertain regularly on behalf of the firm. So I'm very comfortable assuming that over the last 12 months our personal, non-reimbursed expenses have been no more than $20,000 a month. I'm sure I can cut this down substantially now that I'm actually paying attention to what I'm spending.

To answer Smilies' questions above, nothing happens to my income if my wife passes away early because neither of us makes any money anymore; SS is not a large part of my income assumptions; I have $1.5 million in term life insurance now but would likely not renew it or if I did would cut it back; yes, my wife can and in fact does handle the rentals (she's the landlord, not me); and if I were suddenly single god forbid I'd just sell the house because I wouldn't need it.

My taxable brokerage account and my retirement accounts are all with Schwab. I've never talked to anyone there. One thing I'm now considering is shifting my brokerage account to something known as the "Schwab Intelligent Portfolio," which is described as an "automatic, all-electronic advisory solution" where it takes your inputs and implements an investment strategy involving all ETFs and cash. I entered my inputs -- basically, that I have a little over $1 million that I won't need to touch for four years but then will want to spend from four years from now through ten years from now to live on -- and it came up with a recommended portfolio that is obviously much more diversified and conservative than the 100 percent in stocks that I have now and that projects (and I know that projections don't mean much) that using its allocation my slightly over $1 million now could be worth $1.25 million four years from now. Does anyone have any expereince with these "automatic"
programs?

I enjoy this board very much because, while I wouldn't describe myself as an aggressive or reckless investor, I've also never been careful or conservative and now that I'm not working it's good to get a conservative "reality check."

So, to sum things up, here is my current thinking:

I just quit my job at 54. I have five sources of income to live on moving forward: (1) $60,000 in gross rental income, which basically covers my housing (including mortgages, real estate taxes, and insurance), (2) slightly more than $600,000 in cash, (3) slightly more than $1 million in a taxable brokerage account, (4) 2.5 million in retirement accounts, primarily 401k and IRAs, and (5) $2500 a month in SS starting at 67.

I want to live off of the cash and rents for the next four years or so (total: $840k); live off of the brokerage account and rents for six years after that (assuming no gain on the brokerage account and no rent increases: $1.36 million); and live off of the retirement accounts after that. As several posters have suggested, I wouldn't sell my holdings in the brokerage account until next year (or start the "intelligent portfolio" until then) for tax reasons, and I'd look into Roth conversions over the next few years for tax reasons as well. Bottom line, I will talk to a professional about taxes.

Can I reasonably expect to support my current lifestyle through retirement on this plan, assuming that I make modest adjustments to my current spending now that I'm actually paying attention?
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Re: More advice for BigLaw Survivor, please?

Post by Rob Bertram »

BigLaw Survivor wrote:Schwab Intelligent Portfolio...Does anyone have any expereince with these "automatic" programs?
We call them "robo advisers", and you will find many BH threads on them. Betterment and Personal Capital are two others that come to mind. They are good for people who don't know much about investing and don't care to learn. Their management fee of 0.3% or so is excessive for people who know what they are doing. Most of us hard-core forum members would rather keep the money ourselves and spend the 5-10 minutes a year managing our portfolios instead. For your $1m portfolio, that's $3000/year that goes to the robo adviser or $30k over the 10 years you expect to have that account.

One thing that you really need to consider is your pre-tax spending and not just for one year at a time but over your entire retirement. You might pat yourself on the back for paying no taxes for one year or two only to realize that you are setting yourself up to pay 40% in taxes once you begin collecting your social security and RMDs. There are tools like http://www.i-orp.com/ that can give you a "big picture" of how to maximize your after-tax income from your different accounts.

Here is an example, there are advantages to postponing social security until age 70. For starters, the payout increases by 8% for every year. (Where else can you find a guaranteed 8% return on an investment?) You could do Roth conversions during this time and reduce your RMD potentially putting you into a lower tax bracket.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Rob --

Really helpful. Thanks again. Schwab's website says their "intelligent portfolios" charge no "advisory fees, commissions, or account servicing fees." So I'm sure I'm missing something. What's the catch?

Oh, and if any of you smart folks need any more proof that I don't measure up to you, I just realized that my math was wrong: $325k spent in 18 months isn't 21k a month, it's $18k a month. Man do I need help!
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matjen
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Re: More advice for BigLaw Survivor, please?

Post by matjen »

BigLaw,

I believe Rob was just giving a general cost that many "Robo-Advisers" may have. Usually 20-30 basis points. Vanguard has a fine service that is 30 basis points where you work with an adviser like the Schwab service. Schwab's Intelligent Portfolios is a fine service. They do not charge a direct fee but they tend to keep a higher percentage of your portfolio in cash which they can then use to make some money, etc. Here is a decent overview.

https://investorjunkie.com/39634/schwab ... os-review/

If you aren't into managing your own finances then you can do much, much worse than a decent roboadviser. I would say Schwab is decent. Combine that with some higher fee tax/estate planning and you will be set.
A man is rich in proportion to the number of things he can afford to let alone.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Thanks, matjen. I really appreciate it. It's funny that you mention that they tend to keep a lot of the fund in cash. In running the simulations they keep recommending that I keep around 15 percent in cash. That seemed really high to me, especially since I already have 600k+ in cash. Now I know why . . .
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Re: More advice for BigLaw Survivor, please?

Post by john94549 »

OP, when you meet with your tax person/financial advisor, keep an open mind. For example, remember my comment above about Form 8582. The "rule of thumb" is MAGI as close to (but not over) $100,000 as possible. Accordingly, you might be advised to "harvest" some of the tax-deferred earlier than planned so as to generate MAGI and obtain the benefit of the Form 8582 "negative".

In addition, it would appear that your basement rental should be addressed. Remember, depreciation, whether actually taken or not, is imputed and re-captured when a property is sold. I suspect the IRS might take the position that you have "partitioned" your abode*, and might seek to re-capture depreciation on the basement, should you sell.

*Much like an owner-occupied duplex, where the owner lives on one side, and a tenant on the other.
Last edited by john94549 on Sun Oct 25, 2015 7:35 pm, edited 1 time in total.
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

john94549 wrote: In addition, it would appear that your basement rental should be addressed. Remember, depreciation, whether actually taken or not, is imputed and re-captured when a property is sold. I suspect the IRS might take the position that you have "partitioned" your abode, and might seek to re-capture depreciation on the basement, should you sell.
Thanks for the advice. Our accountant has in fact "partitioned" our abode, treating two thirds as our primary residence and one-third as a rental. We treat 2/3 of the mortgage interest as deductible mortgage interest on our primary residence and 1/3 as a deductible expense that offsets the rental income, etc., and we also depreciate 1/3 of the value of the house (not the land) as a business expense. (I think the depreciation expense taken is about 8k a year.) This is how we manage to incur a paper loss on the basement rental each year.
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Re: More advice for BigLaw Survivor, please?

Post by john94549 »

BigLaw Survivor wrote: This is how we manage to incur a paper loss on the basement rental each year.
Excellent. Put those paper losses "to work", and those on the other property (which I assume is being depreciated as well). The potential issue I see with your funding program is that (if implemented as you currently relate) you will have little to no MAGI against which the "negative" on line 17 would apply for a number of years. Then, as you transition into tapping your tax-deferred and/or taxable brokerage accounts (capital gains must be considered), your MAGI might exceed $150,000, thus wiping out any benefit from Form 8582. It's somewhat counter-intuitive, but something to consider.
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

EXACTLY right, thanks.
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Re: More advice for BigLaw Survivor, please?

Post by curmudgeon »

If you go talk to the folks at Schwab, they will try really hard to sell you on one of their various "Wealth Management Services" (or similar named product) which have costs at around 1% per year of your assets with them (whether you gain or lose). While I use Schwab, and I even own some of their stock, I don't recommend letting any financial adviser take that much of your expected return (in your situation, there can be cases where it might make sense).

I'm in a somewhat similar situation as I look at retirement possibilities, though we have a bit less assets and I still (mostly) enjoy my work. Looking at your numbers, my biggest problem is that they depend too much on economic conditions staying about the same as they have in recent years. You want your plan to be resilient against some of the less positive scenarios. This is tricky, because you don't want to end up bankrupt as happens to so many lottery winners, but at the same time, the object is not to leave the biggest estate to your heirs.

Some years ago, I quit a very high stress job that I hated. I sat down and looked at our financials; what we had in investable assets, what our expenses were. I went back over the previous 10 years, and looked at my returns on personally managed investments (in IRA and taxable accounts); not projections, but actual year over year returns. They ranged from around -5% to +25%. During that time, I had averaged over 10% yearly return. A back of the envelope calculation would say "if my expenses are less than 10% of our assets, I could quit working indefinitely". That was in 2007. In 2008/2009, my aggressive investing style had a peak-to-trough loss of around 50%. If I had been truly dependent on drawing out large fixed amounts, it would have knocked a huge hole in my nest egg, and prevented me from making the recovery that I did. That is called "sequence of returns" risk; it's not such a problem when you have a long time horizon, but a much bigger issue when the expenses have a fixed timeline that isn't tied to the market returns.

In your case, you've got quite a bit of leverage in those mortgages for a retirement scenario. Say 30-year mortgage rates go from 3.5% to 6% over the next five years, to more typical historical rates. This could make a significant dent in the cash value of your house, as prices tend to often tie to "how much payment can I afford" as much as to a specific dollar amount; the price that a given payment will support at 6% is a lot less than what can be afforded at current rates. You could run into situation where you couldn't refi (because of no regular income), and you would have a hard time selling. While you were working, paying down extra principal was a form of saving; when you are retired, it is just moving money from one pocket to another.

I would definitely spend some more time getting to understand your expense side. An example would be if you are making significant principal payments on a mortgage. While this is a cash flow out of your pocket, it is really effectively going into another pocket of yours - a reduced balance on the mortgage. Real estate taxes and interest, on the other hand, are real expenses. If you find that 50% of your expenses are discretionary, and could be cut back without a lot of pain, you are a lot more secure for retirement than you would be in 90% of the expenses were fixed and couldn't be easily adjusted if economic conditions get stormy.
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Re: More advice for BigLaw Survivor, please?

Post by traineeinvestor »

Congratulations from one "big law" survivor/early retiree to another. :beer

Before I pulled the plug on my career, we took a long hard look at our expenses starting with tracking them in detail for several years. We cut a few things even before retirement and drew up a list of things that could be cut if we ever started to lose sleep over the long term sustainability of our finances.

The two things that were cut immediately were (1) life insurance - on the theory that if we have enough money to support the family with me being still around, then there is more than enough to support my wife and children without me (there is no estate duty where I live) (2) choosing cheaper holidays (e.g. staying in Asia instead of going further afield). I also made the uncomfortable decision to shift our charitable contributions - reducing cash donations and giving more of my time instead - at least until we have a few years of retirement under our belt.

With interest rates below both the local rate of inflation and below the yield on local index funds, we elected not to make early repayments on the mortgages on our home or rental properties. All the mortgages are P+I and the rental units are cash flow positive so we should (in theory) experience rising cash flow some years down the line when the mortgages are paid off.

It seems absurd now, but I was concerned that boredom in retirement would lead to a blow out in expenses so I made sure I had plenty of low cost activities to keep me occupied. I also continue(d) to do some very part time consulting.
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Re: More advice for BigLaw Survivor, please?

Post by john94549 »

BigLaw Survivor, remember the two most basic rules: (a) leave the house and rental property to the kids (think step-up in basis and no re-capture) and (b) repeat rule (a). Even our local real estate diva, who makes money by churning homes in a fairly robust real estate market here in the Bay Area, opined we'd be "nuts" to sell. Capital gains, even after the exclusion, would be pushing seven figures. It's crazy.
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

john94549 wrote:BigLaw Survivor, remember the two most basic rules: (a) leave the house and rental property to the kids (think step-up in basis and no re-capture) and (b) repeat rule (a). Even our local real estate diva, who makes money by churning homes in a fairly robust real estate market here in the Bay Area, opined we'd be "nuts" to sell. Capital gains, even after the exclusion, would be pushing seven figures. It's crazy.
Thanks. This is something else that I hadn't known before joining this forum -- and I'm now going to make it a priority.
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Re: More advice for BigLaw Survivor, please?

Post by LadyGeek »

The wiki has some background info: Step-up in basis
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

curmudgeon wrote:

In your case, you've got quite a bit of leverage in those mortgages for a retirement scenario. Say 30-year mortgage rates go from 3.5% to 6% over the next five years, to more typical historical rates. This could make a significant dent in the cash value of your house, as prices tend to often tie to "how much payment can I afford" as much as to a specific dollar amount; the price that a given payment will support at 6% is a lot less than what can be afforded at current rates. You could run into situation where you couldn't refi (because of no regular income), and you would have a hard time selling. While you were working, paying down extra principal was a form of saving; when you are retired, it is just moving money from one pocket to another.

I would definitely spend some more time getting to understand your expense side. An example would be if you are making significant principal payments on a mortgage. While this is a cash flow out of your pocket, it is really effectively going into another pocket of yours - a reduced balance on the mortgage. Real estate taxes and interest, on the other hand, are real expenses. If you find that 50% of your expenses are discretionary, and could be cut back without a lot of pain, you are a lot more secure for retirement than you would be in 90% of the expenses were fixed and couldn't be easily adjusted if economic conditions get stormy.
I hear you on the mortgages. Currently half my monthly payment on the condo is for principal and the balance on the loan (244k) is relatively small compared to my overall picture, so I'm not worried about it. Plus I don't live there so if push ever came to shove I could part with it without any heartburn.

The house is another issue, and I have to think about it more carefully. Over the last few months I've only been paying the interest, although I do plan on going back to making regular principal payments as well. I don't think I need to have the whole thing paid off before the rate readjusts and principal payments become mandatory seven years from now, and that paying a few hundred thousand off between now and then should do the trick. Respectfully, I don't buy the doomsday scenario where I wouldn't be able to sell the house if interest rates go up, because you can always sell if your price is right and I can't envision any scenario where seven years from now I won't be able to sell the house for more than what I owe on it ($895k). I say this because if I put the house on the market tomorrow, I have no doubt that it would sell in a week for $1.3 million rock bottom, without my having to do a thing to it, and with a little work put into the place before putting it on the market I'd easily get 1.4 or 1.5 or more. So we are talking about my having a minimum 30 to 40 percent equity right now, which I just can't see evaporating to zero or less in another seven years even if I don't pay another dime in principal the whole time. In the meantime, again, I am paying $2400 a month to live in a house worth $1.3 to $1.5 million that is located in one of the best parts of the city. And while I understand that the bank gets all $2400 and I get nothing, I do get the appreciation and, even if I didn't (or even if it weren't appreciating), well, my wife and I have to live somewhere, right? If I didn't have a mortgage on my house, I'd be sitting on a $1.3 to $1.5 million illiquid asset that I couldn't make any money on unless I sold it.
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Re: More advice for BigLaw Survivor, please?

Post by john94549 »

BigLaw Survivor wrote: In the meantime, again, I am paying $2400 a month to live in a house worth $1.3 to $1.5 million that is located in one of the best parts of the city.
I had to chuckle, as in San Francisco, that $2400 "might" get you a one-bedroom with no parking. And, most assuredly, not in "one of the best parts of the city." I must admit I did a double-take some weeks back when a poster in San Francisco noted rents of upwards of $4000 for a 2BR/2BA, with no parking. Of course, these days, if you park your car on the street in San Francisco, it will be broken into. The joke is to keep at least one window down, so the miscreants don't have to break it. Nice idea, until it starts to rain.
Last edited by john94549 on Sun Oct 25, 2015 11:43 pm, edited 1 time in total.
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

My point exactly. Our tenants in the condo, for example, are paying us $2500 a month to rent a 640 square foot 1BR/1BA unit with no outdoor space and no parking in the same neighborhood where we are paying the bank $2400 a month for a 2000 square foot 3BR/3BA rowhome with a backyard patio and two car parking and a basement apartment that rents for $2400. You can see why it's a sweet deal that I'm finding difficult to part with . . .
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Re: More advice for BigLaw Survivor, please?

Post by john94549 »

BigLaw Survivor wrote: You can see why it's a sweet deal that I'm finding difficult to part with . . .
Taxes aside, you seem open to the concept of "status quo ante", which is, by definition, a good starting point for discussion. From time-to-time, doing nothing is better than doing anything else. As Jack Bogle once said (or is reputed to have said, in so many words) "don't do something, just stand there."

You are newly retired, and might feel obligated to "do something" with your portfolio, your rentals, and so forth. I must admit it took me a while after I retired to stop feeling guilty about a static portfolio, but I got over it.
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Re: More advice for BigLaw Survivor, please?

Post by cherijoh »

travellight wrote:I am in a very similar position to you but have not retired yet and will not for about 4 more years.

I chose option 2: "2. Chip away at it regularly by voluntarily adding principal payments now, so that I do in fact substantially reduce the size of the loan by 2022, which I can do and in fact have done in the past (the original loan was for about $1.1 million)."

I am working to understand the 3 to 1 ratio described above. For me, I ran these calculations: based on a loan amount of 300k, mortgage interest rate of 3%, and income tax rate of 45% (assuming if one was in a highest tax bracket, this is federal and state taxes), rental net income of 30k/year, depreciation of 4000 for the year:
borrowing money is 9K per year.
Paying off the mortgage and therefore paying taxes on rental income of 30k/year is 11,700 in the 45% tax bracket. If you lower your income and are in the 15% tax bracket, that amount becomes 3900.
Do these calculations seem right? If so, someone who is still in a high income tax bracket should keep the mortgage but once you lower your tax rate, you do better paying off the mortgage as described above?
Travellight, you seem to have come up with 9K of mortgage interest/year by multiplying $300K by 0.03. Sorry, but that isn't how mortgages work! You have to follow an amortization schedule with the interest front loaded. Initially, almost all the payment is interest. I'm not sure OP has given enough info to calculate his mortgage interest, but I guarantee you it isn't as low as $9K unless he is many years into the mortgage, which is unlikely with a $300K balance.
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

OP here. Here is more detail on the mortgages and the cash flow on the rental properties.

1. The rental properties and primary residence combined have a current market value of $2.0 million and combined mortgages of $1.139

2. I am currently paying $3000 a month in mortgage interest. For IRS purposes, $1400 a month in mortgage interest is allocated to servicing the debt on the rental properties, and the remaining $1600 is allocated to my primary residence.

3. The rental properties currently command $4900 a month. In addition to the $1400 a month in mortgage interest, other fixed monthly expenses are $550 a month in real estate taxes, $287 in condo fees, and $120 in insurance. We also pay utilities on the basement rental that average $180 a month (including a monthly cleaning service). This results in a positive monthly cash flow of $2363 before maintenance expenses, which as I've said haven't been high.
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Re: More advice for BigLaw Survivor, please?

Post by Riprap »

john94549 wrote:
BigLaw Survivor wrote: You can see why it's a sweet deal that I'm finding difficult to part with . . .
Taxes aside, you seem open to the concept of "status quo ante", which is, by definition, a good starting point for discussion. From time-to-time, doing nothing is better than doing anything else. As Jack Bogle once said (or is reputed to have said, in so many words) "don't do something, just stand there."

You are newly retired, and might feel obligated to "do something" with your portfolio, your rentals, and so forth. I must admit it took me a while after I retired to stop feeling guilty about a static portfolio, but I got over it.
Perhaps one of the more insightful comments in this thread. Conquering behavioral aspects is a challenge unto itself.
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Re: More advice for BigLaw Survivor, please?

Post by magellan »

BigLaw Survivor wrote:... before maintenance expenses, which as I've said haven't been high.
Estimating maintenance costs from actual recent experience is unreliable because these costs are usually very lumpy. You may go several years with minimal expenses then get hit with something that costs tens of thousands of dollars.

Many people analyze rental property profitability using rule-of-thumb estimates for maintenance. Maybe something like 1-2% of property value or 10-20% of the gross rental income annually. So for $1m of rental property value producing $5k per month, a reasonable allocation for maintenance could be anywhere between $5k and $20k per year depending on the property.

Many landlords don't understand that even though depreciation is a non-cash item on your taxes, it actually is a very real expense for a landlord. Each year, your tenants 'use up' part of the life of your property. This doesn't just mean things like the roof, the paint job, the heating system, and other typical maintenance items. It also applies to things like the kitchen and bath(s). A kitchen renovation easily costs $50-100K and kitchens over 30 years old look dated and worn out. So just covering the amount of kitchen that gets 'used up' each year could cost $1,500-3,000. Imo, a good estimate of your true annual expenses will have some accounting for this, even if it's very rough.
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

magellan,

I hear you, I really do, and I appreciate the push back and how you're getting me to think hard but I just have to say that my personal situation probably falls outside of your rule of thumb. Take the basement rental, for example. It's not a typical rental. Basement rentals in row homes in our city are both common and considered highly desirable -- thereby adding to a row home's market value. After all, all things being equal, isn't it better to have an apartment in your basement that produces income than not to have one? Yes, the appliances down there eventually have to be replaced, etc., but the only other options are to let the basement apartment sit there empty or to buy a row home that doesn't have one. I just don't believe that I'd be better off owning a row home in this city without a basement rental than I am with one.

In the case of the condo, again, it's very small -- and that necessarily leads to lower than average maintenance. I did have to replace the HVAC system a couple years ago, which ran me around $4000, but the HVAC system is the single most expensive item in the apartment. I could also sell the condo in a minute if I had to, which of course I would do if your scenario became reality.

Then there's appreciation, which is definitely happening with my real estate investments right now. Of course, I know I can't count on it forever, but I also can't count on stocks appreciating forever.

Then there's the cash flow issue for my personal situation. Here's my math for the next ten years, conservatively assuming no increase in rents, no appreciation of the value of my brokerage account, and no mortgage repayment.

CASH: 600k
BROKERAGE ACCOUNT: 1 million
TEN YEARS RENT: 588k

Total: 2.18 million, or $218k annually

Here's the math with the mortgage paid off:

CASH: 461k
BROKERAGE ACCOUNT: zero
TEN YEARS RENT: 588k

Total: 1.049 million, or 104.9k annually.

This leaves me with no cushion whatsoever. As others have suggested, if I got into a cash crunch after paying off the mortgages I might have trouble refinancing because I'd have no income, leaving me with no alternative but to sell one or both properties. I like having alternatives and peace of mind.
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Re: More advice for BigLaw Survivor, please?

Post by SQRT »

You seem to have a reasonable handle on your current spending, but do you think this might change in retirement? Certainly did for me. More travel, new homes, new hobbies? Some expenses related to working might reduce as well. Is a $210k lifestyle optimal in retirement for you? Or just status quo? If you started with a clean slate what would you do?
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