Hi I'm Tilly & Need Advice!

[Tilly]

My husband and I are considering possible early retirement.
His Co. is offering 1 yrs pay to leave in the next two weeks
About ($110k).
Or wait for possible termination with the same severance package next year.
We are not sure how to split things up as we are both 51 yrs old.
And would like to avoid penalties if possible.
Home is paid off. No debt other than rental loan. Would get 80% paid medical to 65.
Curious how much we would have monthly to spend? 4k? 5k?
Thanks for taking it easy here, am new at this.
Here is the bulk of our ret.

Roth IRA's $125k
401k $450k
Pension $225k lump or $1150 monthly now or 340k lump /$1550 monthly at 55
Cash 15k Have been adding to the rental mortgage with any extra funds.
Rental $1900 monthly. 225k equity, 75k loan.


We both could work part time if need be.
Just looking for opinions as this just arrived out of the blue.

Thanks,
Tilly

 

[copyright1997reloaded]

My husband and I are considering possible early retirement.
His Co. is offering 1 yrs pay to leave in the next two weeks
About ($110k).
Or wait for possible termination with the same severance package next year.
We are not sure how to split things up as we are both 51 yrs old.
And would like to avoid penalties if possible.
Home is paid off. No debt other than rental loan. Would get 80% paid medical to 65.
Curious how much we would have monthly to spend? 4k? 5k?
Thanks for taking it easy here, am new at this.
Here is the bulk of our ret.

Roth IRA's $125k
401k $450k
Pension $225k lump or $1150 monthly now or 340k lump /$1550 monthly at 55
Cash 15k Have been adding to the rental mortgage with any extra funds.
Rental $1900 monthly. 225k equity, 75k loan.


We both could work part time if need be.
Just looking for opinions as this just arrived out of the blue.

Thanks,
Tilly

Tilly, I'm sure others will jump in to give advice. The first thing I would advise is to read here, use the firecalc calculator FIRECalc: A different kind of retirement calculator, and sit down to really understand your expenses and expected budget. One big advantage you have is the 80% paid medical, but even with that you need to budget for the 20% portion.

Regarding how much you would have monthly to spend, it depends on what you think you can "safely" take from investment income. This is further complicated in the you are under 59 1/2, and thus subject to the 10% penalty on 401k and IRA distributions. There are exceptions to the penalty, called Substantially Equal Periodic Payments (SEPP), but the rules are somewhat complicated.

As a very rough [-]guess[/-] rule of thumb, many people use 4% as a safe withdraw percentage. That is, take 4% of your assets (including interest and dividends), adjusted for inflation. On the asset side, including the severance, you have 700k. That results in $28,000/year or $2333/month. This plus the pension of $1150 puts you at $3,483.33. So this is lower than your 4k to 5k question. Also, you need to consider taxes as you will be using (somewhat) tax deferred accounts and you will have taxes taken out on the $110k as if you earned it in a single year.

Personally, I would also be hesitant in assuming a 4% SWR given the state of interest rates. I was also want to have a set-aside cash cushion for emergencies that I would not include in the 4% calculation.

You don't state what your income is from the rental, that can also be considered.

As I mentioned first, you need to have a really good understanding of your current expenses and likely budget post retirement.

Welcome to the forum!

 

[samclem]

Tilly,
- I agree with CR1997RL's comments. Get familiar with FIRECALC and see how your portfolio will hold up with various withdrawal rates and strategies. A couple of questions/comments:
1) If your husband decides to retire now, can the severance money be paid to you next year instead of this year (maybe by putting him on the books as "on unpaid leave" until Jan 2013)? That might reduce your tax bill by a lot.
2) What will your Social Security checks look like, and when will you start drawing them? You can go to the Social Security web site and check this out using their calculators and your/your husband's work history. If you'll be getting SS, then you can use those to help fund your living expenses and cut back on your withdrawals from savings.
3) There's no tax penalty for withdrawing, at any time, the >>contributions<< you made to your Roth IRA. You don't have to wait until you are 65 1/2 YO. As CR1997RL noted, to take the >>earnings<< from the Roth IRA or any money at all from the 401K before 65 1/2, you must take the money under the "72T" rule ("Substantially Equal Periodic Payments") or you'll owe heavy penalties.
4) Waiting 4 years for the increased lump-sum or monthly pension looks like a much better deal than taking the money right now. Is his company (more specifically, the pension fund) in good financial shape? If so, waiting to take the money looks like the smart move.

Unless the mortgage on that rental is at a high rate (if so--get a new mortgage), if I were in your shoes I'd definitely stop making any extra payments into it. Just leave it in the bank (even at today's paltry rates) or put it into a money market fund. It looks like you guys are going to need some liquid assets to live on for awhile, and right now you've just got $15K that's not in a retirement account of some type. You guys are going to need spending money for the years until you've got unfettered access to your 401Ks (65 1'2 YO) and until your SS checks start. The dollars you are sending to the bank to pay down the loan on that rental are going through a one-way door, and you'll only see them again when you sell that place (or refinance it). When you're both retired, lenders see that as "unemployed" and you'll find it tougher to get a conventional mortgage or other loan, so you need to have some in reserves. In fact, one thing you guys might consider right now before he accepts any payout offer and retires is to get a new mortgage on your house. I know that likely sounds crazy to you, but you may need spending money until SS starts and you don't want to pay a >>very big<< tax penalty for breaking into your 401K. Mortgage rates are very low right now--artificially low--and they won't stay there. You can always pay the mortgage off if you don't need the money. Once he quits work, getting a conventional mortgage at today's low rates will likely not be practical.

You'll need to crunch the numbers yourself, but right now, as a rough WAG, if you take the lump sum it looks like you guys could probably safely withdraw about $2500 to $3000 from your savings every month without being at significant risk of depleting your assets, but you'll have to check into the 72T withdrawal limitations to see if you can make this work without paying big penalties. In addition to these funds, you'd also have any proceeds from the rental you own.

 

[Tilly]

Thanks you!

Yes, we can accept the 52 weeks pay in 2013.

"You don't state what your income is from the rental"

It rent's for $1900 mo./ $22800 yr., Prop tax & Ins $3900 yr / loan 4 1/2%
$73k loan balance. Making extra payments to be paid off in 4 yrs.

I thought it was 59 1/2 on the 401k? What happens at 65 1/2?

SS should be $1750 at 62.

Can do OK with $4500-$5000 monthly

 

[target2019]

About the offer being available next year also, that sounds attractive. You take another year to add things up, run calculators, and get your house in order.

Problem is that the company does not really have to offer the package again. They could change their minds.

Good luck with the decision. Lots to think about.

 

[David1961]

Welcome - you will learn a lot from reading this forum. I'll just chime in and say I think it all depends on what your expenses are/will be. From the information you have provided, it looks like you are in good shape. Also, since you are so young, I'd be more inclined to use no more than a 3% withdrawal rate (instead of 4%), to be cautious.

 

[pb4uski]

Tilly,

You'll have to crunch some numbers but I think it will be difficult to generate $4500 a month, particularly since most of your retirement nestegg is in funds that you can't tap in any meaningful way until you are 59 1/2.

You might be able to make it work with part time work filling in any gaps.

Also, the growth in your husband's pension from now to agee 55 would seem to me to make it attractive to wait until he is 55.

 

[samclem]

I thought it was 59 1/2 on the 401k? What happens at 65 1/2?

Yes, sorry. It's 59 1/2.

 

[Dave C.]

Lots of good solid advice on this thread. Waiting an extra year, and not taking the offer sounds like a good idea.....but it is not. The best intentions in the world can change, and often do, in a heartbeat!

It's not science, but the best retirement offers seem to be the first offers....normal for them to go downhill from there. A bird in the hand........

 

[militaryman]

I would take the 110K and the $1550/mo @ 55

I would use the ROTH to payoff the mortgage leaving about 1/2 mil in retirement funds to grow for awhile

I would use the $110k payout to get me from age 51-55 ( $2300 / mo ) and add that to the rent income of net $1800/mo to generate $4100/mo --- I would make up any gap with a parttime job until 55

@ 55 I would have the $1800/mo rent income plus the $1550/mo pension = $3350/mo

I would start drawing via 72t off the apprx $550K retirement account (550 after 4 years modest growth) @ a rate of about 2.5% withdrawl ( $1150/mo ) to get a total of $4500/mo

I should be able to sustain the retirement account balance for a long haul @ 2.5% withdrawl rate and the SS @ 62 would more than offset any inflation degradation when it kicks in.

Wish the offer came my way.....

 

[smileydog]

Just a note on the 72T angle. If you go to 72t.Net |IRC Section 72(t) | 72t Distribution | 72t Calculators | SEPP Plans you will find a wealth of info about this withdrawal plan. The biggest problem with that plan for now is that the amount that you can withdraw is tied to 120% of the Federal mid-term interest rate (which is now at 1.12%).

I took a similar offer from my megacorp job in 2002 and was able to switch to another job and let my funds grow until I was ready. I ended up waiting until I was 55 then started a 72t SEPP after growing the IRA to where I needed it. As was said earlier - read all you can on this forum and check out some of the reading lists.

You are well ahead of the masses and you should be proud! Like they said about the dog with his tail chopped off... won't be long now!