So I get this email from John:
I’ve been in my COJ nearly 20 years and I desperately want to take my pension and find part time work close to home and later in the day so I can sleep bc I have sleep disorder.
my pension will only be about $1200 a month. If I take SS at 62 in July , it would only be $1643 a month . I have a car payment at 1.9% with a year left to pay off, $430/mo
I have a $116k mortgage on my condo at 2.75%, about $1019 a month plus hoa of $240 in (XYZ town), a great small town but very high taxes embedded in my mortgage.
I have close to $300k cash invested in T bills , CD’s and $100k in qualified investments. My condo has about $120k of equity . Am I crazy to assume I can retire now before paying off my car . I have a part time job that brings me in around 7k annually . I’m nervous about spending down my cash.
As I normally do when I get emails like this I responded back and said:
Hey John, appreciate your email. But you made a fundamental mistake in asking me this “Am I crazy to assume I can retire now”? How would anyone ever know the answer to this without knowing the one fundamental thing you didn’t provide?
Let’s stop for a moment and think about my response. Why did I say this? Anyone wanna guess? Why do we not know the answer to whether or not John is “crazy” for wanting to leave his COJ? Anyone?
EXACTLY! We don’t know his expenses! Folks, for the millionth time, expenses are everything when it comes to retirement. There is no “plan” until there is an idea of what your retirement will cost. Let me state this again, but even more forcefully:
NO EXPENSES = NO RETIREMENT PLAN
KNOW EXPENSES, KNOW YOUR RETIREMENT PLAN
John writes back:
Honestly, I just took a shot in the dark, I didn’t think you would respond! Thank you for responding although perhaps I should buy your book first bc I don’t know what it was that I didn’t provide!
At this point, I’m about ready to jump off a bridge into a sea of starving great white sharks after slicing my arms with a straight razor. I want to help this guy, really I do, but man alive, don’t make it too hard on me, or yourself.
I email him back, I mean what else am I gonna do, right? I’m still in Youtube time out.
expenses, John! Expenses! That’s the ONLY thing that matters. how much does it cost for you to live the life you want!
And finally we get the answer we need:
Lol jeez louise. I’ve calculated $2800 a month which includes my car payment of $430 which ends in a year. Let’s say $3k a month then. Sorry to have emailed you like that and forgetting what you are always talking about in your videos. I hope you get back on the YT soon!!
Allright, NOW we’re getting somewhere and the fun starts. Let’s break this down.
John’s mortgage is $1019 a month. He lives in a high property tax state so I’m going to assume that of the $1019 $300 goes to escrow, which is property tax and homeowners insurance.
Thus we’re going to say he’s paying $719 on his Principal and Interest (P&I). We take our trusty calculator and use $719 as the payment (PMT), 2.75% as the interest (I/Y), $116,000 as present value (PV), 0 as future value (FV) and we solve (CPT) for N (number of payments left). I get 201 months left on this mortgage or about 17 years left.
(Side note, it’s actually easy to calculate how much he’ll need to pay if he wants his mortgage paid off in a certain time frame. Pay $787, principal and interest, and the mortgage will be paid off in 15 years. Pay $1106 and it will be paid off in 10.)
We know that when his mortgage is paid he’ll still have an HOA fee of $240 plus another $300 or so in property tax and homeowners insurance. Thus he’ll always have about $540 going towards housing costs.
Okay, on top of that he needs about $3000 a month for day-to-day living, which includes a car payment of $430. Now that car payment is gone next year so we certainly don’t want to include that in LONG TERM retirement planning expense projections. We’ll just say he needs about $2600 a month, once the car is paid for.
But that $2600 doesn’t include health insurance. If he keeps his income low enough he’ll qualify for “cheap” insurance until he’s on Medicare. But once he’s on Medicare we can assume his insurance will be $500 a month. Let’s just go ahead and throw that into expenses NOW to be on the conservative side.
Okay, so now we’re back up to $3100 a month in expenses PLUS the $540 in housing costs which will remain once the mortgage is paid. Essentially he will have about $3650 a month in baseline expenses. But remember he still has a mortgage of about $700 a month for the next 17 years. So, his TOTAL expenses right now and for the next 17 years will be about $4300 a month or $52,000 a year.
Everyone with me so far? Good to go?
Great, so now we calculate how he meets those expenses. Well, first off he’ll get a “small” pension of $1200 and at 62 his Social Security will be $1643. I don’t even need my “trusty calculator” to figure out how much this will be combined. He’ll have $2843 of GUARANTEED income. Or $34,000 a year.
So we simply take his expenses, $52,000 and subtract by his guaranteed income, $34,000 and we get a deficit of $18,000 a year that has to be made up from someplace.
He has about $400k total in investment assets. $18,000/$400,000 = 4.5%. That means if he withdrew 4.5% a year from his investments he’d cover his income needs. That doesn’t assume taxes though, so let’s increase his distributions to $20,000 to cover taxes. Wow. That’s all of a 5% distribution rate. Wow. So scary.
Definitely shouldn’t “retire”.
Remember he also said he has a part time job that pays $7,000 a year. I’m not even using that in this back-of-the-envelope plan. Remember too his mortgage will be paid off in 17 years and thus his expense will drop from $52,000 to around $44,000.
Oh and also remember he’s going to get cheap health insurance before he’s on Medicare under his state’s exchange. Again, I’m not including any of that either.
Oh, and lastly, he does have equity. At some point he can take a reverse mortgage should he so desire to pay the remaining of his mortgage or to just open a line of credit as an emergency account.
So let’s get to the crux of the matter. Can John Retire?
You tell me. If you’ve been following my channel long enough you know how I feel. The guy is literally working himself to death. Why? Because he’s ignorant about his prospects for retirement. Remember ignorant doesn’t mean stupid, it just means he doesn’t know. Well he now knows and it’s up to him to make the call.
Lastly, I know, I KNOW, there are a million people right now gnashing their teeth screaming “what about inflation?”. I literally don’t understand these folks.
Tell me, what inflation rate should we use? Historical CPI? Why? His mortgage is FIXED! CPI uses Owner Equivalent Rent (OER) as around 35% of total change in consumer prices, i.e., inflation. He has NO inflation on his OER because he owns his home and his mortgage is fixed. Inflation on his property tax and homeowners? Sure. But that’s only a $540 budget item to begin with. Inflation on health care, I use 5.5% but again that’s all of $500 a month budget item. So, of the biggest aspects of inflation for retirees, housing costs and health care, these represent only about 25% of his budget.
Food? Great. Just tell me what inflation rate to use for food. Go on. If you want to say 10% by all means do that. I find that silly. But whatevs. If you want to continue to work yourself to death because of a worry about a 10% inflation from now until you die, that’s on you.
Energy costs? Sure. How much is the energy cost of his total budget?
But this whole conversation is stupid to begin with because the 4% “rule” used linear spending increases adjusted for CPI ANYWAY! Show me any, yes ANY!, evidence that as people age their spending INCREASES with inflation. Where is this evidence??? Again, I don’t even need to go there because the 4% rule already does and in John’s case we’re using a 5% distribution percentage which is already probably more than he’ll realize anyway, given the other things we discussed, his part time job, mortgage being paid off, no decrease in spending as he ages, etc.
Let me be clear, I’m not trying to convince anyone to do anything. I just call it as I see it. Could I be wrong? Absolutely. So the solution to my possibility of being wrong is to what exactly? Keep working in a job that’s killing you?
That’s your choice. But don’t make a decision based on ignorance. Make it based on knowledge.