54 and asking for a review of retirement plans - can you help?

[Zuma]

Hello,

I would really appreciate a critique of our thinking about retiring at the end of this year. Here's our situation:

Age, Health & Longevity
At year end I will be 54.5 and DH will be 47. I have some relatives who have lived well into their 90s and even 100. DH's family's track record isn't so strong, but we are both in good health presently. My retirement forecasting has been built around assumptions that we will both live to 95.

Major Assets/Income Sources:

My 401k/IRA: $630,000 - I plan put this all into the IRA when I leave my job to lower expenses and not withdraw from it for 5 years, when I will be 59.5. Investments are largely in Vanguard and Schwab index funds and will continue to consolidate in this direction.
DH 401K/IRA: $375,000 - Same plan here. All into IRA at end of year, and leave untouched for at least 13 years when he will be 59.5.
Taxable Accounts (Cash/Brokerage): $300,000 - This is the pool of money we are planning to live on from Jan 2015 - Dec 2019. In this we will have 2 years of expenses in cash to protect against market volatility.
House: Estimated market value of $325,000.
Social Security: I can get partially-useful estimates from the SSA site. The estimates show $16,680/yr if I stop working at year end and begin collecting at 62. I actually plan to wait until later, but the calculator tool on-line doesn't handle that exact scenario, so I assume this is a conservative number. (I worked in state government for 9 years, which reduced what I paid in, but I won't have a government pension).
DH's SS estimate is $15,570/yr at age 62. Again, we would probably wait until he is 67 or 70.

Liabilities:

None. Mortgage was paid off last year. No CC debt or loans.

Budget:

I have been tracking our actual spending for a year. We have been "practicing" living on our targeted retirement expense budget for the last 4 months and have been pretty successful. We have cut out services provided by others, including snow removal, yard care, and house cleaners. We have eliminated cable TV and land phone line. Our data leaves me feeling pretty confident we can live on between $40,000 year (frugal level, including ACA Bronze plan) - $45,000 year (luxurious level, more spending on travel, hobbies).

With this spending level, and the $300K set aside for the first five years, we will have a cushion of somewhere between $75,000 - $100,000 before I reach 59.5 and start to draw on my tax-deferred investments. But, my back-up plan would be to return to work/do consulting if necessary during this period.

Family:

We have no children.

My mother/step-father: Living on a limited income, but are making it work with no debt, etc. They both have chronic health conditions which will probably mean that we will need to play a bigger role in helping them in the future, whether that is money, housing, or other types of care. Today I pay a home care service to clean their home every other week. They live 4 hours away and are in their 70s.

My In-Laws: Poor financial management. We don't know all of the details, but can see a mortgaged house, 2 leased cars, and suspect substantial credit card debt. In their late 60s and retired recently. My FIL had a decent income, but they lived at or above their means for years, and we haven't seen a reduction in spending since he retired. They live close to my parents.

Key Changes after Retirement:

We are planning to sell our home and build a small, energy efficient (solar/geothermal) home in a lower-tax community closer to the aforementioned family members. We pay $4,200 yr today in property taxes and I would like to cut that by close to 50%. We will avoid taking on a mortgage, assuming we can get around $300K out of the sale of our house.

In the building plans we are considering an additional living unit, MIL apartment or duplex design for a few reasons:

1. Expected need to provide help to one or both sets parents over the next 5 - 10 years as their age and/or financial condition deteriorates. We don't plan to ask for rent money from them, but will ask that they cover their food and utility costs.
2. Opportunity to generate a bit of income with a tenant when we don't have family members in the additional unit.
3. Opportunity to have a home care person live in the unit for free/low cost to help us out when we reach the point of needing assistance ourselves.

I am thinking of our retirement financial situation in three phases:
1. The first five years - live off the taxable accounts.
2. Years 6 - 13 - live off what is left in the taxable accounts, and begin drawing on my retirement savings.
3. Years 13 and beyond - DH's retirement savings become available to us as well.
SS becomes available to us during phases 2 and 3 as we both reach 67 or 70.

FIREcalc shows almost no chance of failure if I am understanding the output correctly.

Any thoughts on defects in this plan? I am trying to be very thorough in thinking this through, but this is (obviously) a big decision for us and outside perspective would be much appreciated.

[Ready]

Hello Zuma and welcome to the ER forum. Your post is very well thought out and I can tell you have given much thought to your retirement plan. The main thing that I noticed is that you are using SS numbers based on claiming at 62. Have you obtained what the numbers would be if you wait until 70? With longevity running in your family, it may be a costly mistake to take early SS. The difference between 62 and 70 can be quite substantial.

If you can obtain what those numbers are, try running the scenario through Firecalc and see how things look. I think you will be fine, but let's see how things change with the revised figures.

[Gumby]

This calculator, courtesy of InParadise in another thread, may be helpful.

Social Security calculator: retirement planning for you and spouse.

[Theseus]

Ditto on the welcome, and it certainly looks to me like you have done a thorough bit of planning. Great job! Story is similar to mine and DW, although you've done a bit better at saving for retirement, but we both have modest pensions so it's probably roughly even in the end.

Quote:

Originally Posted by Zuma Budget: I have been tracking our actual spending for a year. We have been "practicing" living on our targeted retirement expense budget for the last 4 months and have been pretty successful. We have cut out services provided by others, including snow removal, yard care, and house cleaners. We have eliminated cable TV and land phone line. Our data leaves me feeling pretty confident we can live on between $40,000 year (frugal level, including ACA Bronze plan) - $45,000 year (luxurious level, more spending on travel, hobbies).

No doubt you have done your homework here too, although that spending level does seem a bit more "frugal" than I'd be comfortable with - perhaps your location provides some lower living cost advantages and/or you are both generally conservative spenders. Our plan is pushing $60k annual withdrawal, although that is covering an estimated $7k in taxes, as the majority of our income will be taxable, I also plan on a fully funded HSA to cover out-of-pocket health costs, a wash if it doesn't get spent, but if needed for healthcare costs it helps drive down AGI to qualify for greater subsidy.

Quote:

Originally Posted by Zuma Key Changes after Retirement: We are planning to sell our home and build a small, energy efficient (solar/geothermal) home in a lower-tax community closer to the aforementioned family members. We pay $4,200 yr today in property taxes and I would like to cut that by close to 50%. We will avoid taking on a mortgage, assuming we can get around $300K out of the sale of our house.

Seems like a smart move to reduce future utility bills; although I'm thinking of moving to a warmer climate to do that and cut the property tax bill :-)

Quote:

Originally Posted by Zuma In the building plans we are considering an additional living unit, MIL apartment or duplex design for a few reasons: 1. Expected need to provide help to one or both sets parents over the next 5 - 10 years as their age and/or financial condition deteriorates. We don't plan to ask for rent money from them, but will ask that they cover their food and utility costs. 2. Opportunity to generate a bit of income with a tenant when we don't have family members in the additional unit. 3. Opportunity to have a home care person live in the unit for free/low cost to help us out when we reach the point of needing assistance ourselves.

This is an interesting way to justify the expense of adding the additional living unit, but just to offer a counterpoint: do you really want to have to deal with tenants? The reasoning behind having a potential living quarters for parents, or live in help down the road is certainly thoughtful - but again, things can change really fast when health issues arise and I'd be asking myself if it is worth it to essentially have a second residence to pay for and maintain.

Quote:

Originally Posted by Zuma FIREcalc shows almost no chance of failure if I am understanding the output correctly.

I've not run your numbers in FIREcalc, but from the similarity to our situation and your low spending assumption - I'd guess you could be pretty confident in your retirement plans. Enjoy!

[Zuma]

Thanks so much for the responses. You've given me some good food for thought. I'll try to rework the SS numbers in hopes this firms up my projections. I do believe waiting until 70 will be the way to go.

[stieve76]

One consideration in converting 100% of your 401k's to IRAs is that you would either have to incur the 10% penalty or start SEPP (72t) withdrawals for 5-years if you should need any of those IRA funds prior to 59-1/2. Where maintaining a 401k would allow penalty-free withdrawals assuming you are 55 when you retire.

[TimSF]

Quote:

Originally Posted by Theseus No doubt you have done your homework here too, although that spending level does seem a bit more "frugal" than I'd be comfortable with

+1.

I too sense that your estimated expenses may be on the low side. Have you adequately factored in medical expenses? That ACA Bronze plan may require you to go out-of-pocket quickly for any medical care. That said, you clearly have enough retirement income to cover additional expenses, so you look to be in really good shape.
Congratulations, and welcome.

[hpnutty]

Quote:

Originally Posted by TimSF +1. I too sense that your estimated expenses may be on the low side. Have you adequately factored in medical expenses? That ACA Bronze plan may require you to go out-of-pocket quickly for any medical care. That said, you clearly have enough retirement income to cover additional expenses, so you look to be in really good shape. Congratulations, and welcome.

My thoughts also. Recent study shows that average American will spent $240k on medical expenses until they die.

[NanoSour]

Again, welcome Zuma and congratulations on your successful planning.

Remain flexible on when to take SS. Yes, you get more $$ the longer you wait, but you are sacrificing the earlier years for money later on. I don't know a lot of 75 year olds who really care much about having more money. Philosophically, I'd rather have the $$ when I'm more physically and mentally able to enjoy it; even if it means I'll have less if I live much longer than average.

[Ready]

Quote:

Originally Posted by NanoSour Remain flexible on when to take SS. Yes, you get more $$ the longer you wait, but you are sacrificing the earlier years for money later on. I don't know a lot of 75 year olds who really care much about having more money. Philosophically, I'd rather have the $$ when I'm more physically and mentally able to enjoy it; even if it means I'll have less if I live much longer than average.

Every situation is different. If you would be depriving yourself in years 62-70 by not taking social security, then you may not have much choice. But for me, I look at delaying until age 70 as a good alternative to buying an annuity to protect against longevity. I would much rather have a bit less in the early years but know that if I do live to be 100, I will have a solid amount of income coming in to pay the higher costs of health care, nursing care, and other getting old expenses that come along with living that long.

If you realistically would not spend any more in years 62-70 whether you have SS or not, that makes a good case for delaying it. Some of us are living on SWR rates of 3% or less, so I doubt that having SS at 62 would cause those individuals to spend any more, even if they had the SS income to spend.

[pb4uski]

Welcome. Great second post - well thought out. Some additional things to consider.

Does either of your 401ks offer a stable value fund that pays a reasonable rate of interest (say 2.5-3.0%)? If so, you should consider keeping the 401k and utilizing the SV fund for your fixed income allocation to mitigate interest rate risk associated with bond funds. As you may know, you can;t get access to a stable value fund outside the 401k.

If you employer allows penalty-free withdrawals for employees terminating service after age 55, you may want to consider staying on until you are 55 and keeping that 401k as a plan B if you deplete your taxable funds before you turn 59.5.

Does your budget include provisions for periodic car replacements, new house furniture if applicable, health care deductibles and copays and income taxes? These are items that are often overlooked.

Have you considered if it would be favorable to do tIRA>Roth conversions between ER and when you begin SS or RMDs.

I am planning to defer taking SS, but if my taxable account investment results are poorer than planned and my taxable account balances get uncomfortably low, I can always start anytime I want after age 62.

[PERSonalTime]

Zuma,

I think you've got this well thought out. You're ready. Take the RE plunge and don't look back.

Congratulations!

[rodi]

Hi Zuma -
We went down the road of building a granny flat on our property for my in laws. They used it for about 5 years till FIL needed to go into a home. FIL was in a wheelchair so the entire 700sf home was designed to be accessible (roll in shower, etc.) We also kept in mind our longterm goal of renting out our main house when we become empty nesters, and using the granny flat for ourselves... so we designed it with things I couldn't do without - laundry, storage, outdoor space.

Like you we did not charge rent to my in-laws, but we gained peace of mind knowing that if my FIL fell during a transfer, or if my MIL had any issues, we could be there in 20 secs.

Now we're in the rent phase. We're still keeping it in our extended family, my step-mom's grand-daughter is renting it and is an ideal tenant. We give her a break in rent, but it still brings in $12k/year... which definitely helps our retirement forecasts.

For figuring out taking SS later, when you stop working earlier - you put the age you stop working as the later age... then put in earnings for the years between when you *actually* stop working and the SS stop working age as '0'. Then keep doing the "add estimate" for 62, 67, 70... with zero income going forward.

[Zuma]

Thanks again for your replies. I have taken a second look at planned expenses and do see one gap, which is to plan for contributions to a HSA for DH, so will be tweaking the plan with that. Regarding tenants, I completely agree they can be a gamble so am also thinking of limiting to extended family. It was encouraging it read about someone whose similar planning regarding the granny flat is working out well. I really appreciate the generous input you've provided.

[pb4uski]

I don't really consider HSA contributions to be an expense (assuming that the contribution is retained in the HSA to grow rather than spent). To me it is just a transfer of funds from my taxable account pocket to my HSA pocket.

If it goes into the HSA and it spent on medical bills then I get it.

[38Chevy454]

It seems that you have a good plan and understanding of the requirements to make it happen. I think your idea to downsize and lower housing taxes is a good one. Caring for aging parents can be a lot of work. The extra on-site housing can be a great way to cover some of the expected needs for care and being able to stay on top of their health and other needs.

I agree with the others that the bronze plan is potential for some high out of pocket costs, but being good health for you and spouse may make that a risk worth taking. Your monthly expenses have been tested and you are doing good with that limit, so it does not seem to be unrealistic.

I say go for it and enjoy the ride!

[Live And Learn]

Hi and welcome ! You have a very well thought out plan.

I back-tested my budget for 2 years by collecting all my credit card and bank statements and detailing the expenditures on them. It took a couple of hours each day over a long weekend, but it gave me peace of mind that I could really live with the final budget.

Like other posters I do wonder if the 40k / year is enough (or even the 45k). My ER budget covers a full unsubsidized cost of an ACA policy plus the full Out of Pocket maximum annually - my healthcare budget is therefore 28k / year. You may not to be that conservative but its something to think about. My theory is what I don't spend on healthcare in Year 1 I can spend on travel in Year 2 ! Not a bad problem to have. I'm also assured that if I do have to pay that much for healthcare that I won't need to go into debt for the care I need.

Someone also mentioned budgeting for non-recurring expenses. My budget includes an average of $9k / year for those: 1/15th the cost of a replacement used car, 1/8th the cost of a new HVAC unit, 1/17th the cost of a new roof, 1/8th the cost of a new hot water heater, 1/10th the cost of a new water softener, 1/15th the cost of new living room furniture, 1/10th the cost of a new TV, 1/10th the cost of exterior paint for the house, and a couple of smaller items. As you can see, I tend to overthink things but I want Plan B of returning to w*rk to be only a remote possibility. When I reach 65 (I am currently 51) if it looks like I can spend a lot more than I budgeted then I'll add a few more trips to the bucket list and take care of that "problem" !

BTW - I live in a 1500 sq ft, 30 year old home - nothing extravagant, just typical middle income as most of my belongings are.

I don't want to discourage you - I just want to make sure that you have both eyes open. I think you have a very solid plan and can achieve your goal.

[volfan]

Hi Zuma,
Great detailed post and so helpful for a newbie like myself who is trying to determine if and when we can ER!

I have a question that adds another piece to the puzzle--what is your asset allocation in your IRA and 401k accounts or for your entire portfolio? What numbers do you use on the FIREcalc page asking about your asset allocation for investments? 60% stocks appears to be their default.

We are both 53 and I have been using FIREcalc also to see what we need to do to be able to retire in the next 2-3 years. It seems that when I leave FIREcalc on 60% stocks as a default, we have a very high success rate. But when I lower it to 40 or 30% or so, my success rate does change, not dramatically, but it changes enough to make me hesitate. So I am trying to see if I can find a comfort level in increasing my market exposure as we are about 1/3 in cash at this point, earning practically nothing and I know we are losing to inflation there! Know I should at least look into I-bonds, but I've been procrastinating.

I have been trying to use that same approach with "this money is for the years leading up to 59 1/2, this account is for up to the age we take SS, etc." We will both have pensions as soon as we retire, but we did make accounts on the Social Security website to see what our options might be with what we will be able to collect there--you can just put in the age you will stop working and the age you might collect and you get an estimate. It is quite interesting, and of course there are all those scenarios about claiming and delaying until 70 while taking half your spouse's, etc.

Best wishes to you and again, I really appreciate your informative post!

[Hermit]

Hi Zuma,

After 8 months of RE, I have just completed an update to my budget. I thought I would be living on about 50K per year. I have revised that to 65k. The biggest changes were in medical, cars, and rent. I am also building a house this summer. I am not as confident on the total cost as I was 8 months ago. Fortunately, I have plenty of wiggle room in my numbers so I will be fine.

My point is leave yourself a little breathing room for estimates that are not quite right on.

[Fermion]

Sell your house and rent. This will free up $300,000 of tax free money that you can live on while you let your retirement accounts grow. By using this $300,000 instead of selling stocks, you can keep spending $50,000 or so each year and yet have a MAGI of $23,000. You can then qualify for a silver plan with near full subsidy and substantial cost sharing. I think the actuarial value is near 96%.

So, say you were going to pay $3000 a year or whatever for a bronze plan with big out of pocket costs. Now you can pay $1500 a year and have very little out of pocket costs because of the cost sharing. This will more than make up for any extra expenses renting a house (actually I bet renting is somewhat cheaper when you calculate not having to pay real estate tax and home maintenance).

Work the system!