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41 looking to retire 45
Old 03-23-2013, 06:41 AM   #1
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41 looking to retire 45

Age 41, wife age 39. Both of us are in high paying professions and our yearly compensation is around 1 million. We live in Scarsdale NY. I am in software and she is in investment banking. We have one two year old child.

https://www.networthiq.com/people/kmt is our link for net worth.

As of Jan 1 2013. We have

401K: 700K
House: 650K
529: 35K
Various assets: 2.6 million

Both of us are in stressful jobs and both want to make as much as we can over the next 4 years and move to retirement or semi-retirement.

Our plans are to get to mid 2018 (in 2013 dollars)

401k: 1 million
House: 700K
529: 88K
Various assets: 5.3 million

At that stage we will retire or go into semi-retirement around the time our child goes to elementary school. Both of us might just go to our respective company and say something like

"look, I am not sure I can sustain the work/life balance of my current role, I want a much more junior role where I can work 8:30am to 2:30pm that way I can see my kid off to school and be back at home when he comes back from school. I will be glad to take a pay cut for this junior role."

We will do this mostly to get medical care coverage. This then can continue for a few years for me to transition our assets in a way that the taxable income generated is below the threshold so we qualify for subsidies for Obamacare. Then we will just retire and get Obamacare to pay for the high cost of health insurance.

One major decision point eventually will be:

1) Stay in Scarsdale paying high real estate and NY state taxes but have our kid go to a very good school and then move to PA (where social security, 401k are not taxed, as well as much lower state income taxes) when our child goes to college

or

2) Move to fairly good school district in PA when our child is about to go to junior high.



2) might make sense as my asset might be so high that I can no longer to stay below the threshold for Obamacare subsides. In which case PA health insurance is a lot cheaper than NY health care insurance. Of course the entire cost structure of healthcare might be different in 2014 so we will see.


Future assumptions I am making is

1) We will draw on 401K at age 59.5
2) We will draw social security at 62 and I assume we will get 75% of the predicted value as I suspect there will be haircuts there
3) We assume we cannot start medicare until we are 67
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Old 03-23-2013, 08:12 AM   #2
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Sounds like you have been doing well. Based on the information you provided, I would choose option 1. Welcome to the forum.
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Old 03-23-2013, 08:25 AM   #3
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Welcome, kmt. That's pretty good compensation. I think your plan and assumptions are sound assuming you properly factor in the correct withdrawal rate, which I don't see addressed too clearly in your post.

My question to you guys would be to really examine if you are ready for the downshift. Please examine your current spending in detail. When you are highly compensated, it is easy to spend quite a bit and not realize it. You will have to spend less, even with 5M in the bag. This will be a HUGE change for you. Have some deep soul searching with DW on this. For example: if you currently are used to buying the fancy Lexus with all the bells and whistles, what do you think about a Camry instead? I'm not trying to stereotype you, but the investment bankers I know seem to, ahem, like nice cars and first class travel. But to your credit, I have a friend from High School who did exactly what you plan on got out at 45 after a career in investment banking. They live a nice middle of the road life very well. He dabbles in seasonal summer work now at parks.

Also, with that 5M, don't count on the ACA 400% poverty goal. It may not happen with those taxable assets. I would not make that an overriding goal in my mind. This factors into your #2, however, don't forget your kids. Changing a kid's school at jr high can be very traumatic for them. It isn't all financial.

Good luck.
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Old 03-23-2013, 10:18 AM   #4
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Quote:
Originally Posted by kmt1972 View Post
We will do this mostly to get medical care coverage. This then can continue for a few years for me to transition our assets in a way that the taxable income generated is below the threshold so we qualify for subsidies for Obamacare. Then we will just retire and get Obamacare to pay for the high cost of health insurance.
As JoeWras mentioned, with your asset level, you can likely forget about health insurance subsidies, unless you move 90% of your assets into Muni bond funds (and I don't even know if the ACA 400% poverty level test takes into account muni interest) and things like publicly traded Master Limited Partnerships (which spin off mostly non-taxable cash flow, in exchange for lowering your cost basis) ....at which point, you'd be highly concentrated and (IMO) not diversified enough.

Quote:
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Future assumptions I am making is
2) We will draw social security at 62 and I assume we will get 75% of the predicted value as I suspect there will be haircuts there
By retiring at 45, you'll have approximately half zeros in your history. Did you do an actual estimated benefit on the SS website, given your actual earnings history, with $0 entered from age 45 to 62?

Also, the current maximum SS benefit you can get at age 62 is roughly $1,800/month (courtesy of a few Google search results), and that's if you max out all of your 35 years of SS credits.With half of your earnings history at $0, that roughly $1,800 (in current dollars) will be even less. Either way, that SS benefit won't amount to too much in your annual budget.
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Old 03-23-2013, 11:11 AM   #5
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The ACA income tests uses Modified AGI which does in fact add back non taxable foreign and muni interest. I think with your level of assets you will not be able to keep your income low enough unless you move it all to Roths and pure cash.

At 45 I think you might want to look at a 2.5% WR - giving you spendable dollars (including income tax) of $125k per year. I would see if I could live on that amount, without feeling that your style was cramped, for a couple of years before making your decision and choosing your option. If you feel that 125k isn't enough then option 1 sounds fantastic. I actually worked 3 days per week (24 hrs) in my current position for a couple of years before going back full time and having those extra 2 days a week made all the difference in the world to my stress levels.
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Old 03-23-2013, 11:29 AM   #6
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Thanks a bunch for all your thoughts. I agree that pulling out my kid out of his school district is not the best and ideally I would want to avoid that.

As for SS, we for sure took into account that retiring early means the money we will get would be less. I did the SS website calculations for what we contributed and zeros when we retire. I assumed we started withdrawing at 62 and then figured that we get 75% of that. I agree it is not much but it does help in getting a somewhat bigger estate that we can leave to our child.

As for how I would qualify for Obamacare subsidies. My math is the following. We are a family of 3 so 400% of the poverty level would be $78K and indexed to inflation. We will have assets of over $5 million I agree it would be hard to have an income lower than 78K. But here is how I will do it. Both my wife and I saw this coming (not Obamacare subsidies but high taxes on interest/dividend income after we retire.) So starting 10 years ago, we started to give $13K (or what was the legal limit at the time because it did change as it used to be $12K) annually each to many (think 8+ as we can each give this amount) of our retired trusted relatives in low income brackets including our parents for them to put in a separate account that we actually control. We will continue doing this for the next 4 years and 2-3 years of semi-retirement after that. This means that by the time we retire and needing to get medical insurance, only about $2 million of our $5+ million assets will be under our name. Of course doing eats into the estate we can leave to our child but the plan was always to leave around $2 million or so so it should be ok. Then I do plan to invest in low risk assets which will generate income of less than $78K per year. Oh yeah, once we really retire our relatives will start gifting us $13K annually as needed to supplement our income from the said accounts which are also invested in various assets, some more risky than those in our name. Look, we are going to get hammered by Obamacare and Obama tax increases so we want to get money back in the form of Obamacare subsidies.

Our spending assumptions are that with medical insurance/costs, taxes, plus living expenses will be around $120K a year. We plan to spend around $30K annually on vacations across the world but that would wind down a bit when we hit 55.

NY state health insurance is really expensive due to horrible regulations so eventually as our assets that are held in our relatives names are given back to use when they pass away (all under the estate tax limit) we do plan to move to PA where taxes are lower and healthcare insurance costs are lower.
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Old 03-23-2013, 11:56 AM   #7
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kmt1972...welcome aboard. I am also planning to retire in four years with 120K retirement income per year and counting on obamacare. We'll be family of five until 2018 and then will be family of 4 until 2026 - so keeping MAGI around 100K will be ideal. My portfolio will be around 3M when I retire.
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Old 03-23-2013, 01:26 PM   #8
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Shhh!! You better quit talking out loud about these plans or every high income young person in America will follow your lead. The politicians will quickly notice the big drop in tax revenues and start taxing net worth.
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Old 03-23-2013, 01:50 PM   #9
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Shhh!! You better quit talking out loud about these plans or every high income young person in America will follow your lead. The politicians will quickly notice the big drop in tax revenues and start taxing net worth.
Ironically, I think taxing wealth is better than taxing income. Even though that hurts me more, as a matter of principle I think that is a better policy. Of course if they come up with that system I will work within the law to game that system too. That is the way I am.
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Old 03-23-2013, 01:55 PM   #10
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Only one of you needs a junior work role, not both of you. Mitigate risk by only having one of you take this action. Reevaluate each year. Bravo on your savings!
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Old 03-23-2013, 02:04 PM   #11
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I guess that welfare cheats are not the only ones scheming.
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Old 03-23-2013, 02:25 PM   #12
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What you describe may fall under the category of a sham transaction. Tread carefully.

http://www.law.cornell.edu/wex/sham_transaction

SIS
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Old 03-23-2013, 02:26 PM   #13
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Troll?

You make a million a year. You have millions in assets and will top 5 million soon. You are hiding more than half of it with complicit relatives to evade taxes and qualify for poverty assistance programs. This doesn't sound right.
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Old 03-23-2013, 02:27 PM   #14
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Another scheme I have (and this is thinking very much ahead) is when we do move to PA, most after our child goes to college, the location will make a difference.

Before I get to my scheme, lets be clear, moving to PA is to take advantage of the 3.07% state income tax versus the 5%+ in NY state. Also, social security and more importantly 401K will not be taxed in PA. Also we can get a condo with fairly low taxes since it does not have to be in a good school district.

Now on to the scheme, which is really not that much of scheme. PA has high sales tax which is a downer. But the choice of the condo we will buy will be right on the DE border. In DE there are no sales tax but 401K and SS are taxed and the state income tax rate is also above 5%. Yet by getting a condo right on the border I can get the best of both worlds. Go shopping for everything in DE with zero tax and enjoy low income taxes in PA. One can also say a place like NV with zero state income tax is also a good place to retire. But NV has a sales tax of above 6%. Of course this scheme is well known. Lots of people I know that live in PA does this. But they often take long commutes to DE. I am planning to skip that commute and be just on the border.
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Old 03-23-2013, 02:37 PM   #15
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Here in Michigan, a supreme court justice "sold" her house to her daughter for $1, did a short sale on another property and then took back her house from her daughter for $1. She confidently said it was all legal. She may end up in prison.

Diane Hathaway, Ex-Michigan Supreme Court Justice, Pleads Guilty To Bank Fraud
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Old 03-23-2013, 02:53 PM   #16
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What you describe may fall under the category of a sham transaction. Tread carefully.

Sham transaction | LII / Legal Information Institute

SIS
Thanks for the advice. We did talk to our tax lawyer about this years ago. He was actually more aggressive than we were. He said there is no reason we cannot give our parents an amount less than $1 million dollars any given year and that should be fine. He said the main constraint was really over our lifetime it cannot be more than $5 million which really is because this cannot be used to get around the estate tax. We thought it was too aggressive do it that way despite what he said exactly because of the concerns you raised ergo we went with the 13K (or 12K) rule. But thanks for alerting me to this. This will make me go ask other tax lawyers for their opinion.
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Old 03-23-2013, 04:03 PM   #17
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wow - you actually call your methods a "scheme" .... how sad that someone who has done so well will resort to such measures so they can spend $30k per year on travel when there are hungry children within 30 miles of their home.
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Old 03-24-2013, 06:35 AM   #18
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I don't get it. With that kind of income you are worrying about whether you can suck a subsidy for healthcare out of the tax pockets of regular people who have to work for 4 decades at fractional pay? The 1% must really be trolls. How about this -- work for one year more and put the savings aside to pay health insurance for the rest of your life. At least you are guaranteed coverage and then the rest of the country won't have to finance your ER.
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Old 03-24-2013, 10:19 AM   #19
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As trustworthy as those 8 relatives may be some of those 8 relatives will not let you have access to your own money when the time comes......some of those 8 relatives may suddenly have had an urgent and real need to spend your money........some of those 8 relatives may die and your money is now part of their estate.......some of those 8 relatives may put your money at risk by listing it as part of their net worth to qualify for a large purchase.
Something to think about......that's why these $13,000 amounts are called gifting, as the intent is to give it away forever.
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Old 03-24-2013, 11:35 AM   #20
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Welfare cheats in the 1%? Who woulda thunk it?

I suggest you get a better tax lawyer. A gift is not a gift if you control it and get it back.

Frequently Asked Questions on Gift Taxes



(But I'm more inclined to think this is a troll.)
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