Aquatic CEO Verdict ⋆ XRAYVSN

Johanna’s Take:

So far, our analyses have focused on people wondering whether they can afford dreams ranging from a new Tesla to a move to the Caribbean to a destination vineyard.

Over 75% of our applicants plan on retiring early and 100% have been physician families.

This week’s story finally changes the metrics as a hospital CEO, who is himself planning for early retirement, becomes our first non-physician to go through the CYAI analysis!

We want more!

Mr. Walt R Wings (WRW) hopes to buy a ski boat.

It’s “only” $40k, he has cash to pay for it, and no debt – this review seemed to be an easy lap around the pool.

At least that was my first impression when I skimmed through his original submission.

I put it on the schedule and moved on to other things.

But when I began to really pay attention during my review over the weekend, my interest grew.

Yes, the cash is there to pay for the boat, but Mr. WRW is retiring in 4 years and currently has a portfolio of under $1M.

Quite different from what I normally see, but that’s when it hit me that Mr. WRW’s situation is closer to average middle class American than typical physician families.

Not anything to be alarmed at, necessarily, but definitely more modest.

The WRWs live frugally and plan to continue to do so in retirement.

Mr. WRW plans to invest heavily in a taxable account for the next 4 years.

Is a very low 7-figure portfolio enough for the typical American to rely on to get through retirement?

The positives:

* All except $15k of college savings in place (expects scholarships for 2 oldest children, which could bump up the retirement portfolio)

* Low COL

* No debt

The negatives:

* Less than $1M saved (just now starting a taxable account)

* If they stay healthy, must plan for a 40 – 50 year retirement (sounds nice, but that’s a long way to stretch a portfolio)

* No health insurance until Medicare age – 14 years after retirement. Mrs. WRW is 2 years younger, so 16 years for her. Planning to do p.t. consulting to pay for health insurance.

Assumptions (I use conservative estimates wherever there is an uncertainty.)

* 6% average long-term returns on savings (Assuming no emotional mistakes in upcoming bear markets and corrections)

o By my calculations, they will have between $1.5M and $1.6M at retirement

* Average inflation

* Retirement in 4 yrs

* Plenty of appropriate life in place; disability insurance until retirement.

* No divorce

* No other college tuition beyond what you’ve saved

* No significant financial assistance for other family members

* Reasonably good health

I’m being asked whether the WRWs can afford a ski boat.

But my answer, as always, has go way beyond a boat purchase to be relevant.

Let’s assume the WRW’s have $1.6M in their portfolio at retirement with another $200k in cash.

According to the 4% rule, they can withdraw exactly $64k annually from their portfolios and not run out of money.

But, according to my calculations, the brokerage account will have only about $140k in it at retirement (assuming 6% growth).

This is about 2 years of living expenses or just over 5 years if we include the cash savings of $200k.

My rule of thumb is to keep a buffer in 2 years’ living expenses in cash at retirement ($128k).

Then, draw from the portfolio as long as the market is not in decline and turn to cash when it is.

I recommend the WRWs keep an additional “emergency fund” of a year of living expenses in addition to their 2-year withdrawal buffer.

Using those amounts, I estimate they will begin Roth withdrawals at ages 55 and 53.

Buying a ski boat will mean they begin a year earlier.

In my opinion, that’s very early to begin using a Roth IRA for living expenses.

Given the low long-term happiness factor along with the fact that they might end up living in a higher COL area than where they currently live, I’m simply not sure that a ski boat is going to be worth the short-term pleasure they will get from it.

Should they decide to continue working while saving heavily until the children are out of college and the WRWs have a better idea where they will live (this is what I’d recommend), I might be more inclined to ok the ski boat.

But, given that they have no wiggle room with the “safe” projected withdrawals from investment portfolios along with the early Roth withdrawals, my decision for this particular middle-class all-American family is…

Xrayvsn’s Take:

They say the happiest days in a boat owner’s life is the day he or she buys it and the day he or she sells it.

I fell trap to the allure of a boating lifestyle and consider it one of my financial mistakes.

I was thrilled when I was able to get rid of it for a loss.

So can WRW buck the trend and be a happy boat owner?

Or should both feet remain on terra firma?

When I analyzed this case I primarily analyzed if WRW could indeed retire early at the age of 51 and have enough assets to survive a $64k/draw without any help from the retirement accounts.

Although WRW could technically start cannibalizing the retirement accounts without penalty earlier than the age of 59.5 (using the Substantially Equal Periodic Payments), I think it would be an unwise decision to do so as the portfolio would then be severely compromised to support a potential 4 decade retirement.

I was therefore not a fan of the suggestion by WRW to withdraw from the ROTH account to potentially support early retirement living expenses.
In addition, this would also take away a major benefit of the ROTH by not allowing the holdings to grow completely tax free.

On to the numbers:

If WRW was to buy the ski boat out of the savings fund as stated, it would be reduced from $120k to $80k.

According to the email exchanges, Johanna projects what additional savings WRW will add to his nest egg.

It is never a good idea to project what you may save in the future.

The future is up in the air and who knows what life events may alter that course.

But let’s just say that WRW does indeed hit the goal and his non-retirement portfolio has an additional $202k.

Throw in the growth from the current brokerage account of $5k in 4 years adds just another $6.3k total to the pot (assuming 6% interest compounded annually).

Without selling off the other assets (home, collectibles, etc), this gives us a “usable portfolio” total of $288.3k.

At a 4% SWR, this will allow WRW to withdraw $11.5k/yr, well short of the $64k/yr desired.

That creates a balance of $52,500 that erodes into the “usable” non-retirement accounts portfolio

This shortfall therefore requires another 18.2% withdrawal rate on top of the 4% SWR for a whopping 22.2% non-safe withdrawal rate.

Sticking with a 6% expected growth (again not guaranteed) means there will be a net negative 12.2% effect on this component of the nest egg.

This non-retirement component is therefore expected to last a little over 8 years before completely being depleted, just as WRW crosses into the age where retirement accounts can be withdrawn penalty free.

So what would kind of lifestyle would those remaining retirement accounts provide as the sole income source from age 60 and beyond?

Currently WRW has $910k in retirement accounts with a future value of $1.8M in 12 years (6% compounded annually).

Add the $187k additional value at age 51 that Johanna projected and allow an additional 8 years of growth results in a future value of $298k and raises the grand total to $2.1M.

Fortunately for WRW a 4% SWR does indeed have an amount ($84k/yr) greater than what is desired ($64k/yr (which is actually a much safer 3% SWR)).

There are so many things that have to go right (namely year over year 6% gains) in a financial world where so many things can go wrong, for a dream scenario like this to truly play out like this.

A bad Sequence of Return Risk in the beginning would completely do WRW’s plans in.

Being as conservative as I am, I would feel uncomfortable to try and pull this off if this was my financial situation.

As I see it, even without purchasing the ski boat, WRW may still be on shaky ground for early retirement when adding these additional concerns.

A ski boat purchase would therefore only serve to add a heavier anchor to this financial Titanic.