Need advice! Want to RE, but not sure if I can!

[Erbragg1]

Hi all,
I am new to the forum and looking for some advice.
I have $1.9M in IRA, 401(k) and brokerage accounts.
I owe $185K on house worth $500K.
My wife and I are both 48. One kid in college and one is junior in HS.
We have $60k left in 529 plan for them and the rest we expect to pay with cash savings, so effectively college for the kids is covered.
My thoughts are that we will end up taking SS at 62 and expect $1800 or so per month benefit. We also have a Long Term Care policy and expect somewhere around $250K inheritance in 10-15 years.

I would love to retire in a little over 3 years. I think we can live on $110k per year pre-tax. We think we theoretically have enough, but I am concerned that we will have trouble bridging the gap before SS kicks in. Most (80%) of the $1.9M is in Traditional IRA and 401(k). Firecalc says we have enough, but I fear I would have to prematurely hit the tax advantaged accounts and pay penalties.

Anyone have similar experiences or advice?

Thanks!

 

[Blue Collar Guy]

Hi all,
I am new to the forum and looking for some advice.
I have $1.9M in IRA, 401(k) and brokerage accounts.
I owe $185K on house worth $500K.
My wife and I are both 48. One kid in college and one is junior in HS.
We have $60k left in 529 plan for them and the rest we expect to pay with cash savings, so effectively college for the kids is covered.
My thoughts are that we will end up taking SS at 62 and expect $1800 or so per month benefit. We also have a Long Term Care policy and expect somewhere around $250K inheritance in 10-15 years.

I would love to retire in a little over 3 years. I think we can live on $110k per year pre-tax. We think we theoretically have enough, but I am concerned that we will have trouble bridging the gap before SS kicks in. Most (80%) of the $1.9M is in Traditional IRA and 401(k). Firecalc says we have enough, but I fear I would have to prematurely hit the tax advantaged accounts and pay penalties.

Anyone have similar experiences or advice?

Thanks!

Yeah, I had a similar situation. Like an idiot I worked 5 more years. Run out the door. You cant plan for every what if.

 

[DrRoy]

Your WR before SS is 5.8% and even after is 4.6%. That would be too high to be comfortable for me.

 

[pb4uski]

Is the $1,800/month in SS for you or combined? You say that you expect to pay for college out of "cash savings"... is that cash savings included in the $1.9 million or a separate fund that you have set aside?

I don't see how you can retire in 3 years without paying penalties for early withdrawal from your retirement plans since you don't have enough taxable savings to carry you from ER at ~51 to 59 1/2.

You might be able to get ~$75k a year from your retirement accounts in SEPP distributions without penalty but that is far short of the $110k you need and your ~$200k of taxable account funds would be insufficient to make up the difference.

I'm somewhat surprised that Firecalc says that you have enough. You would need to put aside ~$238k to substitute for $22k a year in SS from ER at 51 to 62, leaving $1,662k for withdrawals. Your gap between your $110k spending and $22k in SS is $88k, so your ultimate WR from your $1,662k is 5.3%.... to high to retire unless you reduce your spending.

 

[Totoro]

I'd also recheck firecalc - doesn't seem to add up fully or are you saving like crazy right now?

Also careful with inheritances, as long as it isn't in the bank. Nasty surprises do happen.

What I'd do (since you asked for advice) is build a cashflow model first with a focus on cash out, from today up to ~70 or so when you are stable in SS, kids are out the door etc .. put the cash needed in rough buckets (e.g. housing, kids, healthcare), especially when they will vary alot in the coming periods. Make special consideration for taxes.

Throw in some scenarios then to check for robustness. Once you know roughly how much money goes out do the 180 and see where it will have to come from.

Main reason for a DIY model vs. firecalc is a) to get better insight and b) firecalc is less than perfect in my view if you have big swings in your lifestyle/situation.

 

[Erbragg1]

Is the $1,800/month in SS for you or combined? You say that you expect to pay for college out of "cash savings"... is that cash savings included in the $1.9 million or a separate fund that you have set aside?

I don't see how you can retire in 3 years without paying penalties for early withdrawal from your retirement plans since you don't have enough taxable savings to carry you from ER at ~51 to 59 1/2.

You might be able to get ~$75k a year from your retirement accounts in SEPP distributions without penalty but that is far short of the $110k you need and your ~$200k of taxable account funds would be insufficient to make up the difference.

I'm somewhat surprised that Firecalc says that you have enough. You would need to put aside ~$238k to substitute for $22k a year in SS from ER at 51 to 62, leaving $1,662k for withdrawals. Your gap between your $110k spending and $22k in SS is $88k, so your ultimate WR from your $1,662k is 5.3%.... to high to retire unless you reduce your spending.

Pb4uski, the money for college is outside the $1.9M. I am putting aside roughly $50K per year in taxable savings this year and plan to for the next 3 years as well. That drops $200k more to cover the gap between 51 and 62. I am also maxing out 401(k) at $18k per year plus I get roughly $9k per year in company match. One thing I left out of my details was that I will have about $40k in my HSA by the time I retire which will be used to cover a good chunk of medical costs after ER.

 

[Erbragg1]

I'd also recheck firecalc - doesn't seem to add up fully or are you saving like crazy right now?

Also careful with inheritances, as long as it isn't in the bank. Nasty surprises do happen.

What I'd do (since you asked for advice) is build a cashflow model first with a focus on cash out, from today up to ~70 or so when you are stable in SS, kids are out the door etc .. put the cash needed in rough buckets (e.g. housing, kids, healthcare), especially when they will vary alot in the coming periods. Make special consideration for taxes.

Throw in some scenarios then to check for robustness. Once you know roughly how much money goes out do the 180 and see where it will have to come from.

Main reason for a DIY model vs. firecalc is a) to get better insight and b) firecalc is less than perfect in my view if you have big swings in your lifestyle/situation.

Tortoro, I am saving quite a bit right now. I will put away about $200k in a taxable account before 51 and another $100k into my 401(k). I forgot to add that I also will have about $40K in my HSA by 51. The number I used for inheritance is actually pretty conservative.

Great advice on the cash flow DIY cash flow model. Firecalc can't really take into account changes in expenses. Mine will drop from $115k pretax to $95k pretax once I finish off the mortgage at age 57. When I checked using firecalc, I played around with a couple scenarios of planned expenses. At $115k forever, it fails, but at $100k it passed.

 

[bradaz2488]

IMHO your ER plan carries too much risk for a +40 year plan. I do not see any buffer in your plan if something goes south. Healthcare costs, Big market drop early in ER, Un-planned kid costs until they are standing on their own feet, Cuts in SS and Medicare benefits, inheritance turns out to be much lower and higher inflation are just some of the risks that could cater your plan. You have done a great job accumulating wealth at you age and are way better off then most people much older then you. Your expenses are on the high side for what you will have saved and success of your plan is hinged on collecting SS at 62 and receiving a sizable inheritance. If I were in your shoes I would look at reducing "total" expenses (including HC + taxes) to equal 3-3.5% WR until SS and inheritance are realized. Then increase expenses and enjoy spending more money. Just my 2 cents...

 

[euro]

I'm usually on the "time is more important than money" side and encourage pulling the plug sooner than later. That said, I must admit, your numbers strike me as tight.
Do you have room in the 110K budget to cut back significantly, if needed? Do you have retiree health benefits that you may be qualifying for? Those would ease the strain a bit, in my mind

 

[Erbragg1]

IMHO your ER plan carries too much risk for a +40 year plan. I do not see any buffer in your plan if something goes south. Healthcare costs, Big market drop early in ER, Un-planned kid costs until they are standing on their own feet, Cuts in SS and Medicare benefits, inheritance turns out to be much lower and higher inflation are just some of the risks that could cater your plan. You have done a great job accumulating wealth at you age and are way better off then most people much older then you. Your expenses are on the high side for what you will have saved and success of your plan is hinged on collecting SS at 62 and receiving a sizable inheritance. If I were in your shoes I would look at reducing "total" expenses (including HC + taxes) to equal 3-3.5% WR until SS and inheritance are realized. Then increase expenses and enjoy spending more money. Just my 2 cents...

Bradaz, Thanks for your honest input. How much of a "buffer" do you think I should have to protect against something going south?

I can reduce my expenses in ER. The $115k number includes $10k in travel/vacations and $5k for entertainment. If things were not going well, I could certainly cut way back on those areas. However, the whole reason I want to retire early is to be able to travel while we are young enough and healthy enough to do it. If the numbers do not work, I think I would rather work a couple more years than to risk having to scrimp...

 

[Erbragg1]

I'm usually on the "time is more important than money" side and encourage pulling the plug sooner than later. That said, I must admit, your numbers strike me as tight.
Do you have room in the 110K budget to cut back significantly, if needed? Do you have retiree health benefits that you may be qualifying for? Those would ease the strain a bit, in my mind

Euro, first off, I love the Calvin and Hobbes... I am a big fan!

Yes, I could knock out a lot of travel/entertainment from my expenses, but As I mentioned in another post, I think I would rather work a couple more years to not have to cut back.

 

[Aerides]

First, you need to get a real understanding of your expenses. Not "i think" but "i know" - including estimated tax and health insurance post-RE as those two can easily be $20k per year.

Second, completely remove inheritance from your plans or thoughts. They could live 30 years, or go into a slow decline with massive medical/long-term expenses. So much could happen there.

Third, yes you need to shore up significant taxable savings to bridge to 59.5 at least for one of you if not both.

$110k per year means having total savings of $2.75M to meet the 4% rate and most here would say that's still risky - especially for 48 (or 50/51). And you will want to travel more in retirement, not less.

You're close, within a few years if you are saving aggressively, but need a robust plan and understanding of your expenses before you can set a firm date (IMO).

 

[bradaz2488]

Bradaz, Thanks for your honest input. How much of a "buffer" do you think I should have to protect against something going south?

I can reduce my expenses in ER. The $115k number includes $10k in travel/vacations and $5k for entertainment. If things were not going well, I could certainly cut way back on those areas. However, the whole reason I want to retire early is to be able to travel while we are young enough and healthy enough to do it. If the numbers do not work, I think I would rather work a couple more years than to risk having to scrimp...

Well, buffers come in all shapes and sizes. For us we are 4 years into a 48 year ER plan. I'm 53 and DW is 51. Here are what I call buffers in our plan:
1) Conservative WR: Plan "start" WR rate was 2.6% and increases w/ inflation each year.
2) Made my "planned" ER expenses 10% higher to account for unexpected expenses.
3) Keep 4 years of expenses in cash to ride out a bear market. Not forced to sell at market lows.
4) We assumed no SS or Medicare benefits. I will start increasing spending 5-7 years before taking these benefits. IMO these are too far out in time for us to count these benefits not to change significantly.
5) Downsize house
6) Our plan has us living until age 95.

I know some of the members of this forum will consider these buffers way too conservative, but it comes down to what ever make you sleep at night. How much risk are you willing to take and do you have risk mitigation plans in place to handing the possible speed bumps down a +40 year ER plan.

 

[Erbragg1]

First, you need to get a real understanding of your expenses. Not "i think" but "i know" - including estimated tax and health insurance post-RE as those two can easily be $20k per year.

Second, completely remove inheritance from your plans or thoughts. They could live 30 years, or go into a slow decline with massive medical/long-term expenses. So much could happen there.

Third, yes you need to shore up significant taxable savings to bridge to 59.5 at least for one of you if not both.

$110k per year means having total savings of $2.75M to meet the 4% rate and most here would say that's still risky - especially for 48 (or 50/51). And you will want to travel more in retirement, not less.

You're close, within a few years if you are saving aggressively, but need a robust plan and understanding of your expenses before you can set a firm date (IMO).

Thanks Aerides. I appreciate the input. Health expenses are my biggest concern since there is no way to tell what it will cost in 30 years. I am not worried about the inheritance piece because it is a quite conservative estimate even if I assume a long illness on both sides. From all of the responses so far, it is looking like 54 or so is a more likely scenario for me than 51...

 

[Erbragg1]

Well, buffers come in all shapes and sizes. For us we are 4 years into a 48 year ER plan. I'm 53 and DW is 51. Here are what I call buffers in our plan:

1) Conservative WR: Plan "start" WR rate was 2.6% and increases w/ inflation each year.

2) Made my "planned" ER expenses 10% higher to account for unexpected expenses.

3) Keep 4 years of expenses in cash to ride out a bear market. Not forced to sell at market lows.

4) We assumed no SS or Medicare benefits. I will start increasing spending 5-7 years before taking these benefits. IMO these are too far out in time for us to count these benefits not to change significantly.

5) Downsize house

6) Our plan has us living until age 95.



I know some of the members of this forum will consider these buffers way too conservative, but it comes down to what ever make you sleep at night. How much risk are you willing to take and do you have risk mitigation plans in place to handing the possible speed bumps down a +40 year ER plan.

Thanks for the response. You clearly have planned to ensure there is no possibility of running out of money! In my estimates, I used a fairly modest assumption for SS, but not zero! Although I did not mention it, one of my buffers is that we would likely move back east to a lower cost state and downsize the house. We live in CA now and can probably pocket $200k or so if we downsize and move to NC, VA or SC. Great point in having large cash stash to ride out a market downturn.

 

[Cobra9777]

I think 3 to 4 more years sounds about right. Your youngest will be almost done with college. Taxable savings will have grown to the point that you can use that to bridge the gap to 59.5 or even SS. Also, for us, expenses dropped quite a bit as the kids moved out and I stopped working... mortgage paid off, income taxes dropped to almost nothing, no more payroll tax, commuting costs, work clothes, dry cleaning, teenage grocery bills, etc. Once they graduate you can kick them off the car insurance, health insurance, cell phone plan, etc. We still plan to downsize the house at some point.

I'm also a believer that expenses moderate significantly as we age. So I think you have to be careful not to simply inflate your current expenses into the future. It's more complicated than that. I agree with the suggestion to build your own cash-in/cash-out spreadsheet by year and really focus on expenses... what goes up and what goes down at various stages.

Your story is pretty similar to mine. When I was 48, our eldest had just started college and the youngest was a junior in HS. That's also the age I started seriously analyzing our numbers to see if ER was possible and when. Like you, the numbers were a bit "tight" at that point. But 4 years later at 52, the taxable account had grown to a very significant number, kids were all out of the house, and the youngest was in her last year of college. It's amazing how much you can save once you can smell ER. I probably over-shot the goal a bit as we currently spend 30% less than the FIRECalc 95% number. But that's my insurance for LTC, inflation, longevity, etc.

Good luck and welcome to the forum.

 

[Erbragg1]

I think 3 to 4 more years sounds about right. Your youngest will be almost done with college. Taxable savings will have grown to the point that you can use that to bridge the gap to 59.5 or even SS. Also, for us, expenses dropped quite a bit as the kids moved out and I stopped working... mortgage paid off, income taxes dropped to almost nothing, no more payroll tax, commuting costs, work clothes, dry cleaning, teenage grocery bills, etc. Once they graduate you can kick them off the car insurance, health insurance, cell phone plan, etc. We still plan to downsize the house at some point.



I'm also a believer that expenses moderate significantly as we age. So I think you have to be careful not to simply inflate your current expenses into the future. It's more complicated than that. I agree with the suggestion to build your own cash-in/cash-out spreadsheet by year and really focus on expenses... what goes up and what goes down at various stages.



Your story is pretty similar to mine. When I was 48, our eldest had just started college and the youngest was a junior in HS. That's also the age I started seriously analyzing our numbers to see if ER was possible and when. Like you, the numbers were a bit "tight" at that point. But 4 years later at 52, the taxable account had grown to a very significant number, kids were all out of the house, and the youngest was in her last year of college. It's amazing how much you can save once you can smell ER. I probably over-shot the goal a bit as we currently spend 30% less than the FIRECalc 95% number. But that's my insurance for LTC, inflation, longevity, etc.



Good luck and welcome to the forum.

Thanks Cobra. I am really enjoying this forum because everyone here can relate to the goal of ER. I am growing very weary of the long days and stress from work and I am socking away whatever I can so I can exit the rat race ASAP. I may opt to work part time or "downsize" my job into a lower paying, but lower stress position to ease into retirement.

 

[pb4uski]

Pb4uski, the money for college is outside the $1.9M. I am putting aside roughly $50K per year in taxable savings this year and plan to for the next 3 years as well. That drops $200k more to cover the gap between 51 and 62. I am also maxing out 401(k) at $18k per year plus I get roughly $9k per year in company match. One thing I left out of my details was that I will have about $40k in my HSA by the time I retire which will be used to cover a good chunk of medical costs after ER.

One thing that you might consider to cover the 51 to 62 gap is to put college savings in taxable accounts and then have your kids borrow as much as they can for their college while you use the taxable account funds for the gap years... then once you turn 59.5 and have penalty free access to your tax-deferred funds you can tap those to pay off the college loans.

What you are doing essentially is borrowing the money for those gap years, but through your kids.

Another alternative to fund those gap years would be a cash out refinance of your home (but only if you expect to stay in it during the gap years) while you are still working... bank the proceeds from the refinance and use it to finance the gap years and then pay off the loan once you get penalty free access to your tax deferred funds.

 

[Erbragg1]

One thing that you might consider to cover the 51 to 62 gap is to put college savings in taxable accounts and then have your kids borrow as much as they can for their college while you use the taxable account funds for the gap years... then once you turn 59.5 and have penalty free access to your tax-deferred funds you can tap those to pay off the college loans.

What you are doing essentially is borrowing the money for those gap years, but through your kids.

Another alternative to fund those gap years would be a cash out refinance of your home (but only if you expect to stay in it during the gap years) while you are still working... bank the proceeds from the refinance and use it to finance the gap years and then pay off the loan once you get penalty free access to your tax deferred funds.

College loan rates are stupid high. I would be better off with a cash out re-fi but not really crazy about that option either. I want to get debt free before ER and the mortgage is the only thing left that I owe on. I would be more inclined to wait for another couple years to build up my taxable reserves. Thanks for your input!

 

[Scratchy]

Hi all,


I think we can live on $110k per year pre-tax.

Thanks!

I am also new to the forum so please excuse me if this reply is naive. When you say you can live on $110k/year pre-tax, what effective tax rate are you assuming? It may be less than what you would pay based on your pre-retirement situation where most of your income is earned, especially if you are drawing from principal in non IRA accounts. So there may be some buffer there.

 

[Erbragg1]

I am also new to the forum so please excuse me if this reply is naive. When you say you can live on $110k/year pre-tax, what effective tax rate are you assuming? It may be less than what you would pay based on your pre-retirement situation where most of your income is earned, especially if you are drawing from principal in non IRA accounts. So there may be some buffer there.

I am assuming total tax (state +Fed) will be 23%. Honestly, I really need to research this more. I am not sure if my assumption is pessimistic or optimistic.

 

[travelover]

I am assuming total tax (state +Fed) will be 23%. Honestly, I really need to research this more. I am not sure if my assumption is pessimistic or optimistic.

You can do a free simplified sample tax estimate on several sites including Taxcaster to see how various factors influence your actual total taxes.

 

[Scratchy]

I am assuming total tax (state +Fed) will be 23%. Honestly, I really need to research this more. I am not sure if my assumption is pessimistic or optimistic.

So basically you need to fund $85k expenses a year. My guess would be a drawdown of $110k/year is a realistic to slightly conservative estimation, especially in the period before you start drawing from your IRA accounts, but this would depend on a lot of things.

 

[Erbragg1]

You can do a free simplified sample tax estimate on several sites including Taxcaster to see how various factors influence your actual total taxes.

Thanks. I will check in to Taxcaster!

 

[bradaz2488]

Thanks for the response. You clearly have planned to ensure there is no possibility of running out of money! In my estimates, I used a fairly modest assumption for SS, but not zero! Although I did not mention it, one of my buffers is that we would likely move back east to a lower cost state and downsize the house. We live in CA now and can probably pocket $200k or so if we downsize and move to NC, VA or SC. Great point in having large cash stash to ride out a market downturn.

You would think we would not run out of money. However, I'm assuming 7.5%/year increase in HC cost and this leave us with ~50% of starting portfolio (today's $) at age 95. If I increase this to 10%/year then we run out of money at age 93 (DW 90)... So far HC cost for us have average 16%/year increase for the last 4 years. I assume this will settle down, but who really knows... That's were one of our "buffers" will be there to save us from this possible speed bump ...