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Help me defeat Dr. Evil
Old 03-13-2012, 02:39 PM   #1
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Help me defeat Dr. Evil

Hi All -
Allow myself to introduce...myself.

Former Navy Submarine officer, current Federal Employee, approaching age 41 with DW and 2 boys (born 1999 and 2008). Some parts of my Federal career are rewarding, but I'm rapidly tiring of the commute and beaurocracy. I will soon be retired from the Navy Reserve ("Gray Area" Retired, with pension/health benefits commencing at age 60).

Current Retirement Savings and expenses-
-----
IRA/401k/TSP - $154K ($31K is in DW IRA)
Roth - $190K (Basis is $26K, 1st contribution 1998)
Taxable Accounts - $193K
FERS Annuity participant, start date (SCD) is 1997.

Marginal Tax Bracket is 25% Fed/~10% State (CA).

Portfolio mix is split 5 ways between SP500, REIT, Overseas, Bond, Energy/other. Tax-deferred accts are more tilted towards income-generating funds, Taxable acct tilted more in favor of stocks/CG assets.

Currently saving about $14k/yr in TSP (includes match), 0-10K/yr in Roth (depending on eligibility).

Only debt is $300k 30-yr fixed mortgage, recently refi'd to 3.875%. Plan to pay-as-scheduled. Our expenses all-in run ~$75k/yr.

Retirement Plan is in 3 phases:
-------
Ultimate Plan- Phase I: Age 50-55. Early Retire at age 49 or 50 and live off of Taxable accounts and Roth BASIS for 5 years to age 55 (Brokerage plus Roth BASIS should be >$500k). DW may or may not work Part-Time to keep busy/supplement our income. Draw Brokerage acct and Roth BASIS down to zero or near zero in 5 years.

Ultimate Plan- Phase II: 401k withdrawals from age 55-60 (401k/IRA/TSP balance should accumulate to ~$650k). At age 54, DW and I will take a seasonal (Christmas) full-time employment gig and roll our TSP/401k/Traditional IRA balances in to a new employer's 401k. In January of the next calendar year (in tax code parlance, 'the calendar
year of attaining your 55th birthday'), we quit our new jobs and are eligible for penalty-free 401k withdrawals. Draw 401k accts down to zero or near zero in 5 years.

Ultimate Plan- Phase III: Age 60+, Live off $40K FERS Pension w/COLA, $40K Navy Pension w/COLA and HC Benefits,
plus Roth Earnings balance (~$1.2M) at SWR.

Thoughts/Input requested:
-------
1) Federal Employees will soon be eligible for 'Roth' TSP. I'm considering sliding Brokerage (taxable) $$ in to this, which will (legally) shield some of my ER funds from FAFSA college cost calculations. Upside is that growth in the Roth is tax-deferred and I avoid the roughly 6% per college year FAFSA Parental Asset 'Tax'. Downside is that in Phase I, I will have to live of of just the Roth BASIS/Contributions and not the earnings/capital gains I could have left alone in the brokerage acct.

2) At age 54, Will have to find an employer who has a 401k that allows 401k withdrawls at age 55. Not sure how to sniff this out in advance- Do most Fortune 500 companies provide this? We DON'T want to get our entire 401k balance returned to us in 1 lump sum!

3) Waiting until after 2012 election to see what happens with CG rates... this will push me one way or the other on moving Brokerage $$ to Roth accts.

4) Will be eligible for Severance/RIF/VERA (FERS pension plus FEHB health benefits) if it is offered at age 50, but I'm certainly not counting on it. Providing my family with Health Care on an individual HDHP/HSA policy from
age 50-60 scares the crap out of me.

5) I read Bob Clyatt's book a little over a year ago. Another option is to try and convince my employer to reduce my position/hours to Part Time at age 45+ and start a quasi-Phase I a bit early...

Hopefully my plan will defeat Dr. Evil's uneccesarily-slow-but-easily-escapable-death-mechanism. Would love to hear recommendations or encouragement!
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Old 03-13-2012, 02:44 PM   #2
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Originally Posted by ejw93 View Post
2) At age 54, Will have to find an employer who has a 401k that allows 401k withdrawls at age 55. Not sure how to sniff this out in advance- Do most Fortune 500 companies provide this? We DON'T want to get our entire 401k balance returned to us in 1 lump sum!
I don't believe tax law allows this one.

While most retirement accounts require you to wait until the year you turn 59 1/2, there is a 401K exception for age 55 but only if you have separated from service. I believe in-service withdrawals from 401K plans can't be done without penalty until the year you turn 59 1/2.

Having said that, if you roll your 401K/TSP into an IRA once you've separated from their service, you can use Rule 72(t) until age 59 1/2 (or for five years, whichever is later).
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Old 03-13-2012, 03:02 PM   #3
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Hi All -
Allow myself to introduce...myself.

Former Navy Submarine officer...
Oh crap, another one!
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Old 03-13-2012, 05:56 PM   #4
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I don't believe tax law allows this one.

While most retirement accounts require you to wait until the year you turn 59 1/2, there is a 401K exception for age 55 but only if you have separated from service. I believe in-service withdrawals from 401K plans can't be done without penalty until the year you turn 59 1/2.

Having said that, if you roll your 401K/TSP into an IRA once you've separated from their service, you can use Rule 72(t) until age 59 1/2 (or for five years, whichever is later).
As mentioned, I fully intend to work just long enough to rollover the 401k money, let the calendar year progress to the same calendar year as my 55th birthday, then QUIT and start taking 401k withdrawals.

Family can't eat on 3.8% of $650K = $24,700 per year. This is the whole reason I cooked up the 401k 'rollover-and-quit' strategy.
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Old 03-13-2012, 06:00 PM   #5
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As mentioned, I fully intend to work just long enough to rollover the 401k money, let the calendar year progress to the same calendar year as my 55th birthday, then QUIT and start taking 401k withdrawals.

Family can't eat on 3.8% of $650K = $24,700 per year. This is the whole reason I cooked up the 401k 'rollover-and-quit' strategy.
OK, maybe I misinterpreted what you said. I thought you meant you needed to find a job at 54 with an employer that allows 401K withdrawals at 55.

I don't know that the employer-sponsored plan can stop you from withdrawing at 55 if you are separated from service. I'm not really well-versed in that aspect of law yet, I just know that my current plan talks about the option to withdraw at 55 if you are separated from service, but I don't know if that's actually a legal requirement.
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"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
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Old 03-13-2012, 08:18 PM   #6
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Oh crap, another one!
If enough of us show up, we just might be able to get this place squared away.
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Old 03-13-2012, 09:04 PM   #7
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Welcome! There are several Boat Schoolers on this site and at least one other nuke.

Looks like you have put some serious thought into your various scenarios. A couple of questions/comments:

- What's the plan for health care between RE and 60?

- With respect to the $40k Navy retirement, I'm assuming that is future value? {unless you spent a lot of years AD}. Note that the Stay Navy Retirement calculator gives you figures in future value, which is kind of useless. Make sure you discount everything back to present value (PV). As a point of reference, I'm at 5,400 points, O6 (30 yrs); my yearly PV will be $47.5k before SBP and $44.4 after SBP. Future value (in 9 years at 3.6% historical pay raise) is $87.8/year.

- Get Nords book, The Military Guide to Financial Independence and Retirement; it's awesome.

Looking forward to reading your future posts.

Rowdy
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Old 03-13-2012, 09:14 PM   #8
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Boat school (I know the OP didn't say that) AND a submariner? Two things that together could make anyone crave ER. Welcome to the boards.
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Old 03-13-2012, 10:21 PM   #9
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Quote:
While most retirement accounts require you to wait until the year you turn 59 1/2, there is a 401K exception for age 55 but only if you have separated from service. I believe in-service withdrawals from 401K plans can't be done without penalty until the year you turn 59 1/2.

Having said that, if you roll your 401K/TSP into an IRA once you've separated from their service, you can use Rule 72(t) until age 59 1/2 (or for five years, whichever is later).
The big difference between a 401k and an IRA is that after 55 and separated from previous employer, withdrawals from the 401k are not limited. As noted, the w/ds from an IRA before 59 1/2 are strictly limited to the 72(t) table.

I kept my 401k until rolling it over at 60 to an IRA specifically to have that option (never exercised).
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Old 03-14-2012, 06:48 AM   #10
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Originally Posted by Ed_The_Gypsy View Post
The big difference between a 401k and an IRA is that after 55 and separated from previous employer, withdrawals from the 401k are not limited. As noted, the w/ds from an IRA before 59 1/2 are strictly limited to the 72(t) table.

I kept my 401k until rolling it over at 60 to an IRA specifically to have that option (never exercised).
Ed,
Can you clarify the difference between the two withdrawal strategies, please. Is there a 10% penalty for withdrawal from a 401k at 55?
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Old 03-14-2012, 07:02 AM   #11
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WB52, info on withdrawing from a 401k at age 55 (note: SEPP = 72t):
Quote:
  • You can make penalty-free withdrawals from a 401(k) at age 55. You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA. While this seems like a big break for a 55-year-old retiree, there are several things to consider; (1) Your employer must make it convenient for an ex-employee to make retirement withdrawals, many employers can't be bothered, (2) Rolling over your 401(k) funds to an IRA may increase the variety of investments available to you and lower your fees. If that's the case, the hassle of SEPP withdrawals from an IRA may be worth it.

    Note: There is one fine point that many people miss in taking penalty-free withdrawals from a 401k at age 55. To do so, you must terminate your employment no earlier that the year in which you turn age 55. (See IRS Notice 87-13) If you retired at age 54 and waited until age 55 to make withdrawals from your 401k, you would not be able to make unlimited penalty-free withdrawals. You could only make penalty-free withdrawals by using SEPP.
Retire Early: Can I withdraw money from my IRA before age 59 ?
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Old 03-14-2012, 07:16 AM   #12
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If enough of us show up, we just might be able to get this place squared away.

There goes the neighborhood.
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Old 03-14-2012, 07:24 AM   #13
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REWahoo,
Thanks for the follow up. I have two 401k plans that I need to tap in order to bridge the gap between 52 (now) and 62 (SS). Looks like I need to roll them into a low cost IRA and then take SEPP. Too bad a 55 year old retiree gets a break, but a 52 year old does not.
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Old 03-14-2012, 07:36 AM   #14
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Too bad a 55 year old retiree gets a break, but a 52 year old does not.
You need to keep working to support my Medicare and SS.

Hey you kids! Get off my lawn!

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Old 03-14-2012, 08:50 AM   #15
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Originally Posted by Rowdy View Post
Welcome! There are several Boat Schoolers on this site and at least one other nuke.

Looks like you have put some serious thought into your various scenarios. A couple of questions/comments:

- What's the plan for health care between RE and 60?

- With respect to the $40k Navy retirement, I'm assuming that is future value? {unless you spent a lot of years AD}. Note that the Stay Navy Retirement calculator gives you figures in future value, which is kind of useless. Make sure you discount everything back to present value (PV). As a point of reference, I'm at 5,400 points, O6 (30 yrs); my yearly PV will be $47.5k before SBP and $44.4 after SBP. Future value (in 9 years at 3.6% historical pay raise) is $87.8/year.

- Get Nords book, The Military Guide to Financial Independence and Retirement; it's awesome.

Looking forward to reading your future posts.

Rowdy
Rowdy -

Thanks for the gouge.

1) HC Plan in ER is either individual HC policy or TricareRetiredReserves. I understand Tricare for "Gray Area" retirees is $1200/month (premiums only), PLUS your co-pays. Would love to hear what other ER "Gray Area" retirees are doing for HC. At $1200/month for premiums, I think that in most states an individual HDHP/HSA policy would be more cost effective.

2) Yes, NR pension calc is based on my points and Rank, with base pay inflated forward @ ~2.5% for ~19 yrs to age 60.

3) Will grab Nords book.

-E
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Old 03-14-2012, 09:00 AM   #16
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Ed,
Can you clarify the difference between the two withdrawal strategies, please. Is there a 10% penalty for withdrawal from a 401k at 55?
WB52 -
There's no 401k 10% early withdrawal penalty if you wait to leave/quit/retire/RIF in the calendar year of your 55th birthday. It's just a question of whether or not your employer's plan will let you keep the money there and allow you to withdraw as you please, or if they will force a lump sum check on you when you punch out.

For all, I highly recommend Twila Slesnick's book "IRAs, 401k's and retirement plans... getting your money out". I grab the latest version from our library every time it gets updated.
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Old 03-14-2012, 07:20 PM   #17
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Welcome EJW.
Quote:
Originally Posted by REWahoo View Post
Oh crap, another one!
Quote:
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If enough of us show up, we just might be able to get this place squared away.
Getting scary visions of bubbleheads in charge...but around here that would be like Rickover trying to herd cats.
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Old 03-15-2012, 12:13 AM   #18
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Former Navy Submarine officer, current Federal Employee, approaching age 41 with DW and 2 boys (born 1999 and 2008). Some parts of my Federal career are rewarding, but I'm rapidly tiring of the commute and beaurocracy. I will soon be retired from the Navy Reserve ("Gray Area" Retired, with pension/health benefits commencing at age 60).
Providing my family with Health Care on an individual HDHP/HSA policy from
age 50-60 scares the crap out of me.
Would love to hear recommendations or encouragement!
Welcome to the board, EJW! Are you a shipmate with any of us? By any chance did you ever get paroled from Subase Pt. Loma to attend FCTCPAC OTH-T classes between 1994-97?

While you're waiting for the book, you can read the blog (URL's in my profile). You might also want to check the interlibrary loan to see if a copy's been donated-- I don't have a record of it but WorldCat.org is months behind the reality. Please let me know (or post here on the board) any comments or suggestions you have. If you're interested, you're welcome to contribute your story to the second edition.

I may be preaching to the choir, but have you calculated your Reserve pension based on the max pay longevity for your rank? And have you looked into Tricare Retired Reserve health insurance? The premiums aren't exactly cheap but they might be competitive. It's possible that your asset plans will bridge your gap from ages 50-60 quite well. The spend-down may be scary but with two COLA pensions and your IRA earnings you may be just fine. It's working for us.

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Originally Posted by REWahoo View Post
Oh crap, another one!
REW's just being sarcastic. You should see what he did for a military paycheck, but for some reason he considers submarining a dangerous job...

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If enough of us show up, we just might be able to get this place squared away.
Yet another dolphin-wearer shows up with a clue and a detailed plan. And somehow the other posters are surprised?

Outside of Linkedin, this has to be the Internet's highest concentration of nukes. I wonder how many it takes to achieve critical mass...
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