5 more years...I hope.

[Da Nag]

Greetings,

I stumbled upon this place like so many others, and let me add my appreciation for all the great info you folks have provided.

My wife and I first thought of retiring early a few years ago, and after crunching some numbers I think I'm starting to get a good handle on it. Here's what I've come up with - I'd sure appreciate anyone pointing out obvious errors or omissions I might have made.

Our stats are virtually identical in all regards, so planning seems pretty straightforward. We're the same age, are both public employees working at the same place (identical retirement and benefit plans/investment options), and will both leave at the same time with similar service - 21 and 23 years in.

Details:

Ages: 44
ER Ages: 50 (early 2011)

Assets:

Current combined pre-tax plans (401k's, 457b's, 401a's): $300K
Anticipated pre-tax plans at ER age: $850K (continuing with maximum contributions, assuming 7% rate of return)

Home equity won't be huge; we've leveraged it pretty heavily to do some remodeling and acquire our retirement property. We'll probably have around $200K equity at ER age, but that will need to be used to build a home on our new property. It won't need to happen right away...we'll have an in-law unit that we could live in initially.

Both of our pensions kick in at 54, so the most critical area for planning seems to be the 50-54 window. Of the three types of pre-tax plans, we can withdraw funds from the 457b's with no tax penalty, so it seems to make sense to primarily rely on those funds from age 50-54.

Health insurance is a bit of a concern. If I understand things correctly, we can continue our existing group coverage under COBRA for 18 months after leaving, which in today's dollars is between $750 and $950 per month, depending on the plan. At 54, our retirement plans give us each a health insurance benefit (currently $450 each per month), so I'm guessing we'll be OK at 54. What we'll do for the 2 1/2 years between COBRA and retirement benefits is the main concern - I don't really know what expenses to plan for there. We're currently both healthy, with no serious family health issues. We currently live in CA, will be retiring to WA if that makes a difference.

I've plugged the above details into FIRECalc, and the numbers look really good at success rates of 90%, and acceptable at 95%.

Thanks for any comments and/or suggestions...I expect to be a knowledge drain around here for a while.

 

[Martha]

Welcome to the board, wgiese. You seem to have your planning well in hand--that is probably why you haven't had any reponses yet to your post. There are a number of people on this board who retire from public employment, so you are in good company.

Though a lot can change in six years, you might want to look at the consumer guides on the Georgetown University web site for information on different health insurance options in different states. www.healthinsuranceinfo.net.

 

[MooreBonds]

Health insurance is a bit of a concern. If I understand things correctly, we can continue our existing group coverage under COBRA for 18 months after leaving, which in today's dollars is between $750 and $950 per month, depending on the plan. At 54, our retirement plans give us each a health insurance benefit (currently $450 each per month), so I'm guessing we'll be OK at 54. What we'll do for the 2 1/2 years between COBRA and retirement benefits is the main concern - I don't really know what expenses to plan for there. We're currently both healthy, with no serious family health issues. We currently live in CA, will be retiring to WA if that makes a difference.

Welcome wgiese,

Regarding Health Insurance, if you're both relatively healthy, I'd strongly recommend reading the various Health Savings Account (HSA)-related posts. It's a tax-free savings account for health care, with contributions being tax-deductible (regardless of your income level). And, if for some reason you don't use up your account on qualified medical expenses when you turn 65, you can withdraw the money after age 65 and use it on anything and only pay income taxes on it with no penalty. (if you withdraw it before 65 and don't have qualified medical expenses, then you owe income taxes plus a 10% penalty).

I have only priced HSA plans for myself (age 29: $2,650 deductible, 100% coinsurance above that, for $57.19/month), so I have no idea what they'd run for someone age 50...but if your retirement plans offer a stipend of $450/month/person, that should be enough to buy a decent high-deductible plan for each of you, and also allow you to start making a few contributions now to start building up your HSA.

Try http://www.hsainsider.com/ (the best website - helps locate HSA insurance plans, and tells you everything you need to know about the HSA account)

Also - you mentioned you used FireCalc...but your anticipated $850 stash in 5 years is about $740 in todays dollars (assuming simple 3% annual inflation) - what withdrawal rate were you assuming?

Also, you mentioned that you only will have about $200k equity when you retire at 50, which you will then soon tap to build your house. I don't know what annual income rates you were assuming, or what interest rates off of your mortgage...but I don't know if your retired status might give you a more difficult time to find a mortgage or bank to offer you a construciton loan when you're retired.
--Peter

 

[Da Nag]

Thanks for the tips.

Regarding Health Insurance, if you're both relatively healthy, I'd strongly recommend reading the various Health Savings Account (HSA)-related posts.

Haven't read those yet - thanks for the pointer.

Wondering out loud here...one of our current benefits are pre-tax medical reimbursement accounts. I'm not very familiar with it, but here are the basic details.

Our employer provides about $750 a year, which we can either use for medical expenses not covered by our health plans, or take as a taxable distribution. I always take the cash, as my current health plan covers pretty much everything I need. We can also contribute more to this account, and the contributions are pre-tax. The catch: It's a use it or lose it benefit. Any money left in the account at the end of the year is forfeited - I believe I've read this is an IRS regulation, but I'm a bit out of my league here.

Question: Anyone know if these plans can be used to pay into an HSA?

Also - you mentioned you used FireCalc...but your anticipated $850 stash in 5 years is about $740 in todays dollars (assuming simple 3% annual inflation) - what withdrawal rate were you assuming?

I'm assuming you are referring to the "Starting Portfolio" field? I assumed that field was the value of our pre-tax plans at age 50 when we quit, and that all the fields in FIRECalc were supposed to be in today's dollars. If so, here's how I came up with the $850K number - it's quite possible I don't know what I'm doing...

Currently, we 're contributing just under $70K a year to our pre-tax plans - $14K for each 401k and 457b, and a fixed salary percentage for the 401a's. That number will go up over the next 5.5 years, as the contribution limits are increased, and our salaries go up. So basically, I stuck our current $300K into a savings calculator, with $70K in annual contributions over 5.5 years at 4% - thinking this was a pretty conservative estimate (I mistakenly typed 7% in my original post.) My guess is, returns will be quite a bit higher, but I tried to go with a very conservative number. So...did I misunderstand what the "Starting Portfolio" should reflect?

I don't know what annual income rates you were assuming, or what interest rates off of your mortgage...but I don't know if your retired status might give you a more difficult time to find a mortgage or bank to offer you a construciton loan when you're retired.

Here's what I entered in FIRECalc.

Sell Your House: $200K in year 0
Buy Your Retirement Home: $300K in year 4

Again...best guesses on my part, but I assume the $200K amount reflects expected equity (in today's dollars) at time of sale of our current residence. The $300K (also in today's dollars) reflects construction cost incurred in year 4 - we can live "for free" from 50-54 in our in-law unit (land and building owned free and clear.) I thought it wise to wait until our pensions kicked in to build.

I also assumed that the additional $100K needed for construction would come out of our portfolio, negating the need for a mortgage.

So...how many bad assumptions are above?

 

[Nords]

I'm assuming you are referring to the "Starting Portfolio" field? I assumed that field was the value of our pre-tax plans at age 50 when we quit, and that all the fields in FIRECalc were supposed to be in today's dollars. If so, here's how I came up with the $850K number - it's quite possible I don't know what I'm doing...

Currently, we 're contributing just under $70K a year to our pre-tax plans - $14K for each 401k and 457b, and a fixed salary percentage for the 401a's. That number will go up over the next 5.5 years, as the contribution limits are increased, and our salaries go up. So basically, I stuck our current $300K into a savings calculator, with $70K in annual contributions over 5.5 years at 4% - thinking this was a pretty conservative estimate (I mistakenly typed 7% in my original post.) My guess is, returns will be quite a bit higher, but I tried to go with a very conservative number. So...did I misunderstand what the "Starting Portfolio" should reflect?

Here's what I entered in FIRECalc.

Sell Your House: $200K in year 0
Buy Your Retirement Home: $300K in year 4

Again...best guesses on my part, but I assume the $200K amount reflects expected equity (in today's dollars) at time of sale of our current residence. The $300K (also in today's dollars) reflects construction cost incurred in year 4 - we can live "for free" from 50-54 in our in-law unit (land and building owned free and clear.) I thought it wise to wait until our pensions kicked in to build.

I also assumed that the additional $100K needed for construction would come out of our portfolio, negating the need for a mortgage.

So...how many bad assumptions are above?

Welcome to the board, WG. It looks like you have a handle on the numbers, although FIRECalc's most frequent error is forgetting the negative sign.

The nice thing about conservative numbers is that you have more chances for pleasant surprises than for bitter disappointments.

Although on the subject of building a house I've heard many people say "Never again." My family's experience is that it took nearly twice as long and could have cost twice as much if parents hadn't pulled the project out of the builder's hands. Stick built from scratch might be a much more frustrating project than going with a manufactured home that's built in a warm indoor environment and then delivered onsite for final assembly?