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female age 57; 401k, would like to retire early
Old 07-19-2008, 04:01 PM   #1
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female age 57; 401k, would like to retire early

I have been very impressed with the knowledge and helpfulness I've seen on this forum. :-)

57 years old, female, $65,000 in 401k at work, fully vested, $15,000 in savings. No other retirement plan available at work so far as I know. (very small company, about 50 employees)

Full retirement would be age 66. If there is any way that I can figure out how to retire before then, I'd like to do so.

Salary $56,000/year now, which was a *big* raise over last year. I'm used to getting by on $35,000 to $40,000. I think if I really cut back, I can get by quite comfortably on $20,000 a year (assuming I'm not paying tax on that). House is paid off, 2 cars are paid off, one is a classic in desperate need of repair, so I'm probably going to sell it for what I can get rather than try to restore it myself. Credit cards all paid off every month. Don't owe anyone anything. :-) No husband, no kids, live alone, no responsibilities besides myself.

I come from a family of very short-lived people. Mother died at 60, her only sibling, a sister, had a heart attack at 59, father had heart attack at 55 (but survived), his mother died at 40. Mother's father retired at 65, which he had been looking forward to for decades....nine months later he came down with cancer, and suffered terribly until he died 9 months after that.

I have a formal diagnosis of Asperger Syndrome, which is part of the Autistic Spectrum. Spectrum people have many, many health issues, aside from the social, economic, and work issues. I am gluten intolerant, and had ricketts as a child. I also have type 2 diabetes, high blood pressure, and high cholesterol. Which is precisely why I don't want to wait until 66...I may not make it. I've had to work hard all my life just to keep up with my minimum bills...I desperately need to retire and tend to my health.

First issue: I'm on very expensive drugs. I can't get by without a prescription plan. I see I am not able to apply for Medicare until I am 65. It occured to me that I might be able to use COBRA to retire a year earlier, at 64, however, I see that there is a lot of bad feeling about COBRA. Any suggestions for alternatives, since I don't have another retirement plan at work that would include insurance?

Second issue: Every dollar in my 401k is pre-tax. (!) Not my choice, I assure you. Is it correct that I will have to pay full income tax on the entire amount, at going rates, when I take it all out? (I can do so at 59 1/2.) And that the tax rate will include both the amount that I take out and any other income that I have for that year? Can anyone suggest calculators (on the Internet) that can help me work the figures? I need to check the amount of taxes paid if:

1. I take everything out in one year, *after* I retire and have no income except SocSec,

2. I take everything out over a period of several years after I retire,

3. I take everything out at one time while I am still working,

4. I take everything out over a period of several years while I am still working.

And obviously, this will change in unforseeable ways due to changes in income taxes over the next few years, but I at least need to get some guesses before I can plan what I should do, and when I can afford to retire.

Suggestions, advice, pointers to calculators and other resources, all cheerfully accepted.
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Old 07-19-2008, 06:10 PM   #2
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Welcome to this board Linuial. As regards Cobra, there is nothing wrong with it other than it is expensive. But it is expensive. Also, there are rules about what companies have to offer it- be sure that yours does.

I may be missing something, but it appears to me that you have some amount of SS to come, and $65,000 in a 401k and $15,000 in savings. Plus a paid off house and 2 cars. And a job paying $65,000. You need to check to be sure that there is no other retirement plan there.

This suggestion is not sensitive to your individual situation, but if I were in your shoes I would sell the extra car and house, continue working and at 65 or 64 before applying for SS I would apply for entry into a senior subsidized apartment if you live in a city that offers these. They are not like the usual section 8 situation with lots of delinquents running around, because face it the residents are mostly too old for crime. There are nice ones around here, with very nice amenities that I really tried to shoehorn myself into but I really didn't qualify no matter how I tried to polish it.

But without your job and SS, you will qualify. Once in, you are A-OK. I suppose you have pretty good SS- do you know what it will be at age 66? The rents in these places are set at some percentage of your income, or of the median income in the city, and are always below market rents and less subject to large increases.

Also, you should know that Medicare and a medigap policy and a drug Plan are a long way from free-a minimum of $300/month and up, and it grows every year.

It appears to me that you will need to keep working, at least until Medicare and perhaps longer. I might have missed something which others I sure will make up for.

Best of luck.

Ha
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Old 07-19-2008, 07:00 PM   #3
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Thank you for your reply, Haha.

I don't know of any such housing as you talk about in Houston, Texas. There is no such thing as a "good part of town". ALL parts of town are prone to massive crime in apartments. Houston has no zoning.

My house is tiny, only 2 bedrooms. I tried for years to sell it, and couldn't. Most people didn't want it because it's so small. The few people who did want it had such bad credit they couldn't float a loan. At all. A couple of them wanted me to sell them the house, and carry the loan myself. If a bank is not willing to take a chance on them, there is no way that I could risk losing the only asset that I have (to fire, damage, etc) while transfering the title to them (which is what they wanted).

It isn't worth much anyway. The housing market is going bad again, but it's been bad in Houston for a long, long time. There are million dollar houses going like hotcakes...but small inexpensive houses like mine just won't sell. I couldn't get enough out of it to make any kind of down payment on anything else. One of my biggest problems is trying to eliminate stress. Being Asperger, I am extremely hypersensitive to noise, and suffer from chronic insomnia. There is no way that I could live in any kind of housing that involved sharing walls with anyone else.

When the housing market was at its worst, the 3-bedroom house across the street from mine sold for $7,000. (sigh) Another one sold for $9,000. I'd get more than that, certainly, but not enough to make any appreciable difference.

SS breakdown:
Age 62 $1,372
63 1,474
64 1,591
65 1,726
66 1,843

As I said...I really don't expect to live to 66. Frankly, I'm not sure I'll even make it to 62. My health is obviously worse than my mother's, and she died at 60.

A very good friend of mine worked all her life, and at age 62 she had $400,000 in her retirement fund. She died of a heart attack 2 months before her retirement date that year. She had big plans to tour the world and take a couple of her friends with her.

I made myself a promise I wouldn't wait if there was any way that I could swing retirement before age 66.

Thank you for the comment about COBRA...I'll check with my employer Monday, I hadn't thought about the fact that they might not make it available, as I had COBRA from my previous job when I first starting working here (and I thought that any company with 50 employees had to have COBRA).
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Old 07-19-2008, 07:46 PM   #4
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Quote:
Originally Posted by Linuial View Post
Thank you for the comment about COBRA...I'll check with my employer Monday, I hadn't thought about the fact that they might not make it available, as I had COBRA from my previous job when I first starting working here (and I thought that any company with 50 employees had to have COBRA).
I see your situation. I think you are right about Cobra, but best to check.

Ha
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Old 07-19-2008, 10:38 PM   #5
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[quote=Linuial;686360]

SS breakdown:
Age 62 $1,372
63 1,474
64 1,591
65 1,726
66 1,843

As I said...I really don't expect to live to 66. Frankly, I'm not sure I'll even make it to 62. My health is obviously worse than my mother's, and she died at 60.

quote]

Hi there - welcome to the board.

The 'cookie-cutter advice' is for single women to work as long as possible - you can see why, when you look at the difference in the 62 and the 66 SS figures, and add in the average greater longevity of women.

However, the other half of that is the statistics, and you as an individual.

Have you talked to your doctor about your life expectancy? I know several people in what I would call 'not great health' who are doing ok due to their, and their doctor's, aggressive management of various conditions.

S/he won't be comfortable having this conversation, and probably you won't be either. But if the conclusion is that you probably shouldn't invest in 20-year bonds, you should know this!

In the meantime, it wouldn't hurt to max out your 401-k, and if eligible (check income requirements) put some into an indexed IRA you control. You could do an after-tax ROTH IRA, so that portion isn't taxed in your retirement. That is the magic of raises - if you ignore some of them, and shift them into your 401-k or IRA, it's free money - we don't miss what we never saw.

ta,
mew
[ research!! I'm not a financial expert - just another woman in her 50's who wants to bail out early.]
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Old 07-19-2008, 11:57 PM   #6
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Quote:
Originally Posted by mews View Post
Hi there - welcome to the board.

The 'cookie-cutter advice' is for single women to work as long as possible - you can see why, when you look at the difference in the 62 and the 66 SS figures, and add in the average greater longevity of women.

However, the other half of that is the statistics, and you as an individual.

Have you talked to your doctor about your life expectancy? I know several people in what I would call 'not great health' who are doing ok due to their, and their doctor's, aggressive management of various conditions.

S/he won't be comfortable having this conversation, and probably you won't be either. But if the conclusion is that you probably shouldn't invest in 20-year bonds, you should know this!
Life expectancy depends on the law of large numbers. It doesn't really apply well to individual lives, although I realize that insurance companies do individually rate applicants. They have many applicants though, so large numbers applies.

My Dad had enough chronic diseases to keep his Doc in Cadillacs, but he lived in basically good health until age 88. I think it is very risky to quit early with scant resources because you think you may die soon.

I would look for ways to make life with a job more appealing, because you sure don't want to be down to your last dime hoping you die pronto. And without kids, you don't have much to fall back on.

Ha
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Old 07-20-2008, 12:38 AM   #7
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Hi Linuial,

Welcome to the board.

I will try to tackle your tax questions:

1) "I take everything out in one year, *after* I retire and have no income except SocSec." Let's assume you cash your 401K at once, at age 62, after you start collecting early SS: You would pay almost $14,000 in federal income taxes to cash out your 401K. (Based on the current tax code which might change anytime. I assume you take the standard deduction, you file as single).

2) "I take everything out over a period of several years after I retire". Let's assume that starting at age 62 you start taking $13,000 a year out of your 401K (in 5 equal payments between age 62 and 66) in addition to your early SS: Your would pay just a little $400 a year in federal income taxes. Over a five year period you will have paid just over $2100 in taxes to cash out your 401K (as opposed to the $14,000 you would have paid in the previous case).

3) "I take everything out at one time while I am still working". That's by far the worse case scenario. You would pay $17300 in federal taxes just to cash out your 401K. With the taxes you would have to pay on your paychecks you are looking at a tax bill exceeding $25,000 for the year.

4) "I take everything out over a period of several years while I am still working". Not as bad as 3), but still expensive. Let's assume that you start taking $13,000 a year out of your 401K (in 5 equal payments) in addition to your paycheck: Your would pay about $3250 a year in federal income taxes on the $13,000 income coming from your 401K. Over a five year period you will have paid just over $16250 in taxes to cash out your 401K.

So total federal taxes paid on the $65,000 in your 401K:
1) $14,000
2) $2,100
3) $17,300
4) $16,250

So the best situation, by far, is 2).

I used the HR BLock Tax calculator available here:
Tax Calculator - Tax Tools and Calculators - H&R Block
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Old 07-20-2008, 07:32 AM   #8
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Let me also welcome you to the board, Linuial. Here are my thoughts:

Since you can be on COBRA for 18 months, you can retire at 63.5 and use COBRA to bridge the gap until Medicare. While COBRA will be fairly expensive depending upon your particular plan, it will likely be less (perhaps considerably less) than what someone with your "pre-existing conditons" would pay for individual insurance with comparable coverage, since you would likely have to purchase a policy under HIPAA or go into a state risk pool. So I would plan on going the COBRA route.

Once you retire, you should probably directly rollover your 401k to an IRA, to avoid the nuisance of the mandatory 20% withholding (not tax) on 401k distributions.

So long as your provisional income (one-half of SS + other income) is less than $25,000, none of your SS will be taxed. In 2008, as a single filer, you get a standard deduction of $5,450 plus one exemption of $3,500 which total $8,950.

You say you can live comfortably on $20,000 if you pay no taxes. If you take $8,950 from your IRA/401k each year and add it to your age 63.5 SS benefit of $18,390 (from your table), that's a total of $27,340 with no Federal tax due. This can be further increased by dipping into your $15,000 after-tax savings. These numbers are in today's dollars. The tax brackets, standard deduction, exemption, as well as SS are all automatically indexed to the CPI. The only number that isn't is the $25,000 SS provisional income cap.

If your particular allowed medical expenditures (insurance premiums plus out-of-pocket expenditures) and other itemized deductions (e.g. property taxes, charitable deductions, etc.) exceed the standard deduction, then you can increase the $8,950 by itemizing your deductions which will offset higher IRA/401k withdrawals. The applicable rule here is that the medical expenses which can be itemized are those that exceed 7.5% of your adjusted gross income. In your case, so long as none of your SS is taxed, this will be a pretty low threshold, so you may well benefit from itemizing on Schedule A.

In summary, the basic strategy is to use the standard/itemized deduction plus exemption to offset ordinary income, and add this amount to your SS, being careful not to exceed the $25,000 SS provisional income test. I believe Texas has no state income tax, so you would owe no income taxes of any kind.

While you are still working, I would echo the recommendations of others to max out your 401k deductions to lower your current tax liability, and if possible, contribute to a Roth IRA.

As a final thought, in the next few years, this whole health insurance fiasco may be changed in a way that would make it possible for you to obtain decent coverage at a reasonable cost, in which case you could retire earlier than 63.5 and still have a bridge to Medicare.
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Old 07-20-2008, 08:15 AM   #9
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Maybe you could look into SS disability . Sometimes it's almost impossible to get and sometimes I'm shocked at the people who get it easily . You might as well try and Welcome !
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Thank you all
Old 07-21-2008, 04:40 PM   #10
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Thank you all

Wow. Thank you all for your comments. Fired@51, you had some particularly helpful suggestions that I hadn't run across yet.

Yes, I confirmed with my HR person that we are (or the company is) subject to COBRA, and the current payment is $450/ mo. Steep, but nowhere near what a private policy would cost, and since I've already reported all my conditions, including the Asperger Syndrome, they can't add any riders to it.

Having found the income tax rate figures for 2007 and 2008, I ran some of those numbers, but not all. I'm going to print this off and study it carefully.

Here's the funniest part of my situation; if I keep working, stress alone is likely to keep my life on the short side (autistics don't cope well with stress, and we're already stressed to the max just dealing with our situation), but if I could retire and get the stress of the job off of me, it's entirely possible that it might lengthen my life considerably. This is the reason I was looking at putting my retirement savings into a simple immediate annuity, because once I do retire, the life predictions take on a whole other color.

This gives me a lot to think about. You've all been very helpful, thank you.
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