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I think I figured out how I can retire next year!
Old 01-24-2019, 08:55 AM   #1
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I think I figured out how I can retire next year!

All,

I’m a 54 year old single woman with no children turning 55 next year. I want to take advantage of the Rule of 55 to tap my 401K early without the 10% tax penalty. I earn $110,000 a year and have no debt. My home is paid for and my car is a 2015 model with $37,000 miles.

My 401K is in all cash earning a guaranteed 4%. (That's not a typo!) I’ll have $550,000 next year in my 401K. My plan is to withdraw $1,400 a month interest income. (The monthly interest income will be $1,833 so it will continue to grow a little.) A $1,400 monthly income would qualify me for a low cost medical, dental, and vision insurance plan through the Indiana HIP 2.0.

I have $55,000 in company stock that will be be sold back when I retire. I also have $45,000 cash in the bank and another $9,000 in a HSA. I’ll be increasing my savings this year and until I retire.

My monthly expenses average $2,000 after factoring in my expected federal and state taxes. My plan is to pull from my savings to offset the deficit until age 62. Withdrawing $600 a month until I'm 62 would burn through around $50,000 leaving me with another $50,000 in cash reserve for the unexpected and inflation needs. At 62, I hope to start taking Social Security which is forecast to be $1,800 if I retire at 55. I won't retire rich, but I think I will be comfortable.

I've been noodling on this for a few months, and the health insurance piece was that last nut I recently cracked.

I'm finally allowing myself to get excited. I would very much appreciate a reality check or just general feedback from this informed group!

Thank you.
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Old 01-24-2019, 09:10 AM   #2
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First thing you need to do is determine your company's 401k rules when it comes to the IRS Rule of 55. Yes, the IRS says you can withdraw tax free but your 401k may not support anything approaching the monthly withdrawal you are contemplating. Many only allow a one-time or annual withdrawal. Check with whoever administers your 401k to see what your plan allows.

Here is some additional good info on the Rule of 55. https://tickertape.tdameritrade.com/...hdrawals-15977
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Old 01-24-2019, 09:25 AM   #3
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I am assuming your guaranteed cash is in a Stable Value type of fund. Is it truly guaranteed for an unlimited time frame, or is it adjusted every 6 months or so to a new guaranteed rate for a set period of time?

Your monthly interest of $1,833 is based on the full 550,000 amount, but that number will fall as you start taking distributions.

Your 1,400 monthly income will be larger once you hit 62 with the addition of the SS. Will you still qualify for the lower cost medical insurance?
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Old 01-24-2019, 09:28 AM   #4
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I had asked our 401k administrator if the Rule of 55 applies to our 401k plan and was told yes.

I will follow up on possible withdrawal restrictions. Thanks for pointing that out.
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Old 01-24-2019, 09:36 AM   #5
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Dtail, Yes, it is a Stable Value fund truly guaranteed. My company's 401k Plan started decades ago, and this 4% cash fund has been grandfathered.

I was planning on just taking a portion of the interest income so the 550,000 would not fall, but actually go up. (If this is allowed.)

Wow, this is why I posted for advice from this group! I would not qualify for the lower cost medical insurance with SS. I would need to wait until 65 to take SS distributions and continue to tap in to my cash savings. Thank you!
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Old 01-24-2019, 09:53 AM   #6
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I look forward to reading about your journey into retirement. Good luck with it all.
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Old 01-24-2019, 10:07 AM   #7
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How do you expect to deal with inflation over the next 7 years? Are you planning on Social Security at 62? What is your plan should the low income insurance you are counting on disappear? Are there any doctors in your area that are actually accepting new patients under the medical plans you are counting on? Do you have any special medical needs that require consulting a specialist? If so, do your current doctors accept this medical plan or can you find a nearby specialist that will accept the plan? These are all items to consider. Good luck.
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Old 01-24-2019, 10:21 AM   #8
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My question would be how realistic that $2000/month is. Probably accurate in a normal month, but what about unusual expenses--house and car repairs, eventual car replacement, vacations and hobbies (now that you have more time on your hands), medical expenses beyond insurance (no idea how high the deductible and max out of pocket cost on your policy would be).

The company stock sale will result in taxable income and might mess up your first year. Is $1400 a hard limit? You'll have income from interest & divs on any other taxable investments, like the money in the bank.
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Old 01-24-2019, 10:34 AM   #9
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OP - I would be concerned about your low savings rate compared to your income of $110K.
It seems like pretty low savings, which means you either started saving recently, or normally spend most of the $110K income.

Have you been tracking your spending carefully for the past 3 years ?
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Old 01-24-2019, 10:36 AM   #10
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I have a car and vacation buckets in the $2,000/month. I will have capital gains tax to pay, and I also earn 2.25% interest on my savings account. The low cost insurance has very low out of pocket costs.

Good point on the first year being messed up. A better option maybe cobra the first year which would run about $650/month. It's a high deductible plan, but I do have a HSA. Thanks for your thoughts!
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Old 01-24-2019, 10:39 AM   #11
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Originally Posted by Sunset View Post
OP - I would be concerned about your low savings rate compared to your income of $110K.
It seems like pretty low savings, which means you either started saving recently, or normally spend most of the $110K income.

Have you been tracking your spending carefully for the past 3 years ?
Good point, however the low savings is because of a high spend paying off my 15 year mortgage in 9 years. I just got that done a year ago, and earlier this year, I had some remodeling costs that bit in to what I could set aside.

I have been tracking spending. Thanks!
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Old 01-24-2019, 10:42 AM   #12
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I've been retired for 14 years (retired at 45) with almost the exact same nestegg as you. I withdraw $1500/month, and it's been easily sustainable for me, so I think your plan is reasonable.
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Old 01-24-2019, 10:43 AM   #13
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Originally Posted by marinauser View Post
How do you expect to deal with inflation over the next 7 years? Are you planning on Social Security at 62? What is your plan should the low income insurance you are counting on disappear? Are there any doctors in your area that are actually accepting new patients under the medical plans you are counting on? Do you have any special medical needs that require consulting a specialist? If so, do your current doctors accept this medical plan or can you find a nearby specialist that will accept the plan? These are all items to consider. Good luck.
If the low cost insurance plan goes away, then I could take SS at 62, and use the extra money to pay the higher health premium.

I think I have enough padded in my budget to handle inflation - as long as it doesn't get out of control.

I do not know if doctors are accepting patients in the plan, and will look in to that. I use a health clinic and do not have any doctors I would want or need to stick with.

Thank you for your feedback!
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Old 01-24-2019, 10:48 AM   #14
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So you have about $650K + what you save over the next year, with $24K spending. That's about a 3.7% WR rate, which might sound high for a 55 year old but when you start taking SS, probably at 65 because of the insurance, it will cover nearly all of your expenses. Sounds good to me!

Marinauser's questions about what doctors actually accept that insurance are good ones. If you're generally healthy you could roll the dice until medicare, but I thought I was healthy and I've had some issues the last 2-3 years, so don't rely on that.
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Old 01-24-2019, 10:50 AM   #15
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Oh, about health insurance--have you looked into what a regular ACA policy will cost you? With your generally low income, you could probably qualify for a very low cost silver policy with cost sharing reductions. I'd see if that works better than that other plan.
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Old 01-24-2019, 11:02 AM   #16
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Originally Posted by RunningBum View Post
So you have about $650K + what you save over the next year, with $24K spending. That's about a 3.7% WR rate, which might sound high for a 55 year old but when you start taking SS, probably at 65 because of the insurance, it will cover nearly all of your expenses. Sounds good to me!

Marinauser's questions about what doctors actually accept that insurance are good ones. If you're generally healthy you could roll the dice until medicare, but I thought I was healthy and I've had some issues the last 2-3 years, so don't rely on that.
I'm a newbie here. What is a WR rate? And I will price out healthcare options. I'm not one to roll the dice!
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Old 01-24-2019, 11:15 AM   #17
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WR = withdrawal rate

Here are a couple of links that may help:

* Acronyms and Slang Frequently Used on the Forum *

Some Important Questions to Answer Before Asking - Can I Retire?
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Old 01-24-2019, 11:35 AM   #18
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I'm a newbie here. What is a WR rate? And I will price out healthcare options. I'm not one to roll the dice!
Just to note, you can find good healthcare pricing information on Healthcare.gov and Healthsherpa.com
You would most likely qualify for a tax subsidy from the ACA, while receiving the same exact plan and services that one would receive by going directly to an insurance provider, but for less dollars.
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Old 01-24-2019, 01:28 PM   #19
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Your finances are similar to mine and I like how you've thought this through. Good luck!
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Old 01-24-2019, 01:59 PM   #20
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Originally Posted by LooRoo View Post
At 62, I hope to start taking Social Security which is forecast to be $1,800 if I retire at 55.
LooRoo - your plan seems to be just barely adequate, assuming SS pays the benefit they're estimating.

Three questions:

1) If SS benefits are cut by 25% in 15 years due to the funding shortfall (assuming they don't fix the structural problems), would you still be ok?

2) If inflation takes off, and we see much greater than 3-4% inflation, will you still be ok with all of your assets in fixed income? For inflation and longevity risk, most of us here would recommend keeping at least 40 to 60% of your invested assets in index funds, to reduce the inflation risk.

3) What if the ACA is repealed or significantly altered in the future? Would you still be able to afford medical insurance until you qualify for Medicare?

Best wishes!
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