Nervous about ER with $5.5 million

[rodi]

Welcome to the forum.

On the surface - it looks like a clear case of "you're good to go". The only concerns I have are whether you would panic during another downturn. Panic is a normal, human reaction and it takes cojones to just rebalance and move forward during a downturn. Like you - I sold (some) during the downturn... but only for a short window... (a few months)... I was panicking and wanted to catch my breathe and gather my wits... Fortunately, I held my breathe and jumped back in early enough to enjoy most of the recovery. Next time I hope to not panic at all... just keep rebalancing.

Again - welcome to the forum and congrats on saving such a nice nest egg.

 

[slv1]

You are not nuts, but I do believe your issue is more psychological than financial. To make it simple:

$15,000 per month x 12 = $180,000 per year

Put $1.8M in 10 federally insured bank CDs. You can live until 65

At 65 take your pension and social security - at $96k you are in the top 25% of households in the US. No longer in the top 10%, but don't think you will be begging anytime soon.

That leaves you with an additional $3.7M plus a million dollar house to cover inflation and anything that comes up. Even a 50% loss still leaves you a lot of money.

If the US defaults on its debt and goes Venezuela your job is not going to protect you. Buy some guns, ammo, food, etc and set up a secure location.

If you love your job then keep it, if it is hurting your health I would not let fear rob me.

I like your post. It's a good way of breaking it down. Thinking about it. Let 3.7 million grow, use the rest now. What happens with inflation in the next few years.

 

[happy8]

Your numbers look very similar to mine. I'm 51 yo have about $6.2 million in investable assets. No pension. My assets are about 50/50 in tax advantaged and regular brokerage accounts. Expenses for me about $12.5k/month, I posted more detail previously. Like you, most people gave an enthusiastic thumbs up to retiring now but I remain very nervous. There are a couple of things that I see some do not take into account in their projections:

1) In your case, to end up with $14k/month cash to spend, you will have to withdraw quite a bit more because taxes may be assessed as capital gains or as regular income, depending on what type of account you are drawing from. In the case of your non tax-advantaged accounts, the amount of tax will obviously be higher if you have a lot of capital gains. I do not have a good handle at all on what a typical effective combined federal and state tax rate actually would be on the amount needed to generate in your case $14k/month and in my case $12.5k/month. I'm guessing it might be in the range of 30 % in California, which taxes capital gains as regular income. If you are in a similar situation, you could be looking at needing to withdraw $240k/year to net $14k/month? If this is the case you are looking at a SWR of 4 % which to me is by no means a very comfortable margin of safety. I would love to hear comments that give insight into the issue of effective tax rates during retirement.

2) In any projection model, I think that you should factor in 2-3% increase a year for inflation in expenses. Perhaps you anticipate your expenses going down because of changes in your spending and you can account for that separately but I suggest that you not ignore the inevitable inflation creep for known expenses. Firecalc I believe does this automatically but there have been some comments offering rough projection models which do not account for inflation and I think that may be unrealistic.

I would love to retire now but for now I'm planning on hanging in there, perhaps at reduced hours, another five years and then reassess.

Very good luck to you!

 

[Senator]

My assets are not that far from yours, although heavily in real estate. It produces an income in excess of $16K a year and my spend is considerably less than yours, although less liquid.

I am closer to $5K a month in spending. I also get free healthcare and a small pension. It should have been be a no-brainier for me. I was saving 2x my gross income for 3 years before I quit.

For me, it was nerve racking. When I quit my job, it was the first job I ever quit without having another higher-paying job to go to.

In the end, you just have to realize that so many people leave their jobs with so much less. At the end, we are all dead, and you do not want to die while waiting to accumulate more. I also did not want to keep paying as many taxes to people hat did not work at all.

 

[brucethebroker]

Congratulations on a well executed savings plan.

Others have done an excellent job commenting on the financial aspects of early retirement. I think the item that often gets overlooked is the risk you take if you don't retire early. You will never be younger than you are today and you may not be as healthy in the future. So you are potentially giving up youth and health to continue w*rking. IMHO, there are risks on either side of the decision. Only you can decide which risks are more acceptable.

FN

+1.
There are many who have successfully retired on $500,00-$1m by managing their expenses. Knowing that it is possible should ease your "worst case senario". I had breakfast with a lifetime friend in another state, recently. He is one of those people. He asked me "do you find that once you retire, you seem to spending even less, and your savings continue to grow?" "Yes, it surprises me also."
You may not be "ready" to downsize, but you would do it to survive, right? That should be your answer to many of the "what if" questions.

 

[SAtoUS]

You will be just fine. As Andy said in 'The Shawshank Redemption'

"I guess it comes down to a simple choice, really. Get busy living or get busy dying."

 

[street]

I would like to say you have done well with a stash of 5.5M. If it were me with that kind of money I would have NO problem making it. I say you are in good shape and it may come to that you have to cut spending but that is in your control.

 

[tomc5179]

1) In your case, to end up with $14k/month cash to spend, you will have to withdraw quite a bit more because taxes may be assessed as capital gains or as regular income, depending on what type of account you are drawing from. In the case of your non tax-advantaged accounts, the amount of tax will obviously be higher if you have a lot of capital gains. I do not have a good handle at all on what a typical effective combined federal and state tax rate actually would be on the amount needed to generate in your case $14k/month and in my case $12.5k/month. I'm guessing it might be in the range of 30 % in California, which taxes capital gains as regular income. If you are in a similar situation, you could be looking at needing to withdraw $240k/year to net $14k/month? If this is the case you are looking at a SWR of 4 % which to me is by no means a very comfortable margin of safety. I would love to hear comments that give insight into the issue of effective tax rates during retirement.

I'd encourage you to spend a little cash for an hour or two with an accountant or tax attorney for them to give you an idea of your tax liability after retirement. If the majority of your money in the non tax advantaged portion of your portfolio is in index funds, you probably won't have too many capital gains from activity in that. I'm guessing half or more of what you'll withdraw will be dividends. Also, depending on what state you live in, tax on dividends are treated more favorably than cap gains. I was pleasantly surprised with my tax bill after I retired.

 

[Ronstar]

Yes you should be concerned. But your concern is good in that it helps you implement a solid retirement plan. That said, it looks to me like you're good to go. I'd said retire as soon as possible given your DH's job is quite stressful.

 

[kimcdougc]

DH and I retired with a fifth of what you have. We do what we want when we want. No bills beside health insurance (on the aca) and daily living expenses. Travel is our biggest expense.

Still give a couple of thousand to charity annually too.

Life is good.

You look good to go to me.

Good luck with your decisions.

 

[Foxtails]

Thank you for taking the time to reply. I received a lot of good suggestions and also some posts that made me think a little deeper than I have been. To answer a few of the questions - if necessary we could easily trim the monthly budget down to around $10,000. There is quite a margin built into the original $14,000 per month. If things got really bad we could probably find other costs to cut or downsize the house. If we downsize we could take some profit since the house is paid off and also cut the property taxes in half to $10k from $20k. Also I realize the healthcare costs should go down once we go on Medicare in about 12 years.

We're still unsure about the pension. I think there are pros and cons with both the lump sum and the monthly payout option. If I remember correctly the financial plan we had run 2 years ago said the break even point was around 85 years old. Longevity on either side is a mixed bag. We have some relatives that have lived into their late 90s while others from the same family have passed in their 60s. Lifestyle has something to do with it so I try to factor that in. The pension is with a mega Corp but we are concerned if they sell off the monthly obligation to an insurance company what happens if the insurance company goes bankrupt. Is the monthly pension still protected by the pension benefit guarantee corp?

 

[pb4uski]

....The pension is with a mega Corp but we are concerned if they sell off the monthly obligation to an insurance company what happens if the insurance company goes bankrupt. Is the monthly pension still protected by the pension benefit guarantee corp?

That should be the least of your concerns as most insurance companies are financially stronger than most Megacorps. Additionally, they are monitored by the rating agencies (S&P, Moody's and Fitch) and regulated by state insurance regulators who would likely step in and take over the company long before the company's assets would decline to a point where they could not pay their liabilities. Finally, there are state guaranty funds that would pay in the event the insurer was unable to.

In short, your pension is much more secure with an insurer than with a megacorp even with PBGC coverage because the PBGC is in poor financial shape with a deficit of almost $80 billion (yes, that is billion with a B).

 

[jollystomper]

We're still unsure about the pension. I think there are pros and cons with both the lump sum and the monthly payout option.

In my opinion I believe it is good to have a steady income stream as part of retirement income, so I would opt for the monthly payout. I will be getting a pension and that is the route I am choosing. You have more than enough in your other assets to balance it out. But this is a more conservative approach; others who have a higher risk tolerance would likely lean towards the lump sum.

 

[tdv2]

I'm in a similar, albeit slightly less, boat WRT investable assets. With DW's lump sum we are a hair over $5MM investable. Got this number up from$3.1MM in 4 years. House worth close to $600k. Have a spending plan of $13,000 / month. Budgeted HC at $27k/yr---will be less if we don't hit max out of pocket. Tracked spending for 5 years and average around $75k without HC. In the $13,000 monthly spend half is discretionary.....planning large travel budget.

Still struggling with decision myself....will be 54 at year end....DW is 61.
What to do
I know the answer.....pull the plug.

BTW Fidelity RIP is my go to calculator.

 

[happy8]

I'd encourage you to spend a little cash for an hour or two with an accountant or tax attorney for them to give you an idea of your tax liability after retirement. If the majority of your money in the non tax advantaged portion of your portfolio is in index funds, you probably won't have too many capital gains from activity in that. I'm guessing half or more of what you'll withdraw will be dividends. Also, depending on what state you live in, tax on dividends are treated more favorably than cap gains. I was pleasantly surprised with my tax bill after I retired.

Thanks for the suggestion and I will plan to do so with my accountant at tax planning later this year. I do know that unfortunately California taxes both capital gains and dividends as regular income, and the tax rates are high. Once you pass AGI 40k the marginal rate is already 8 %.

 

[MarieIG]

I think your numbers are good, however I would totally take the pension at age 65 with the 100 % joint and survivor option. It is not necessarily about the highest possible income if everything goes perfectly. It is a safety net, and should help reduce your nervousness. If you go to a financial planner, remember the more liquid assets you have, the more he has to manage.

Think what would have happened to your pension if you had it as a lump sum in 2008?

You can also postpone the SS of the higher earner. SS may not be fully funded but it should be paying something for those in their 50s now.

To manage nervousness, you can also keep your withdrawal rate to 3%.

As far as selling your house and downsizing, of course that's fine. However, if you intend sell due to taking a hit from an economic downturn, most likely everyone else is in the same boat, which may cause the value of the house to go down and become harder to sell, at the same time as your taxable account value drops. (In other words, I would set yourself up to weather the storm without having to sell your house in a bad market.)


Good luck.

 

[StuckinCT]

As someone with a similar net worth and similar expenses, I can sympathize with your concerns. It sounds to me like you are on track and a 3% withdrawal rate in your early 50's is pretty much on the money in my book. I am 46 and my withdrawal rate is about 3.33% but I am fully invested and only spend dividends and interest with 70% in equities, 10% in alternatives and REITs and 20% fixed income. I am at 92% on the fire calc and it sounds like you would be little higher, maybe 95%.

$5.5- 6.25 mm, depending on what you do with the pension, sounds like a lot of money and it is, but you have to still be careful about your withdrawal rate as it relates to the income your portfolio is generating. It sounds to me like you have thought it through, but I agree you are just at the threshold of being able to retire in my opinion.

 

[Doc0]

I'm older than you but similar in circumstance. I have 2 kids in college which is a significant expense but can be planned for. IMHO tax planning is NECESSARY. During my career I harvested about 700K of LT capital loss and I consider that as one of my asset classes. I've used it over the years to re-balance tax free and in retirement I'm using it as a homebrew Roth since I always made too much money to subscribe to a Roth. I'm not going to take SS til 70 since I want to move money from IRA's to Roth's so I'm living off cash for 5 years while moving the money which allows me to control the tax bite. My 5 year cash is in VWSUX a short term Muni fund which again controls my taxes but has some yield. My monthly is about 10K which can easily expand to 13K as needed, but I'm trying to impose some budgeting discipline on my situation. It's actually less painful than I thought it would be

My wife is 9 years younger so that plays in as a longer time horizon and her family is very long lived. My post tax equities are tuned for maximum tax efficiency. I'm controlling medical cost with a Concierge plan which costs $399/mo for my wife and kids, is ACA compliant, has a $500 deductible per individual, they all are healthy with no pre-existing. I finally made it to medicare, so my costs are about $400 a month since they charge me double for Part B and I have a supplemental, so about $800 per month for top tier coverage. Before I retired I did all the capital upgrades to my property like a new Broward certified roof 140 mph windows and garage doors etc. My cars are 2 years old or newer low millage so I shouldn't have that as an expense any time soon. In other words I paid ahead a lot of my knowable retirement costs during my career.

I took out 5 years of living expense from my post tax acct and used my LT cap loss against it. For college I'm using FL prepaid and paying housing out of pocket about 1k per month, and the expense of 3 cars. My goal is to reduce my RMD to something that does not bracket creep my income which should be 42K/yr plus the RMD at my age 70 until my wife turns 67 when it will jump to 63k per year plus the RMD. By then the kids should be done with college. I'm not really counting on SS but it's in the plan. I intend to spend down my LT cap loss by converting post tax equities into Roth's which will allow money to flow through to my kids efficiently if I never use it and allows diversity into things like dividend paying stocks without worrying about tax consequence. I have no debt, though the write-off might be useful depends on what congress does.

The point is you simply need to make a rational plan and keep combing through it getting out all the tangles and planning for alternative eventualities. I work through a financial adviser, a guy named Phil DeMuth, you can google him. He writes for Forbes and has published 10 books. He is a fixed expense kind of adviser and does not sell anything. I got him because I read a couple of his books and bought into the concepts, and just called him up to see what we could do together. The advantage is I get access to institutional grade funds like DFA and ARQ funds and others which are designed for very high efficiency and low cost, as opposed to retail funds. The buy-in to ARQ funds is like 10 million minimum so I get access to pension fund grade funds with only a 50k or 100k stake. So I have a different take on diversity and risk management compared to a bogle style 50:50 or 75:25 account. A few extra tenths over a long time make a difference. The real advantage for me is in diversification. If you loose 33% instead of 50% you only have to make back 66% instead of 100% in a severe downturn. My account was setup like that in 2008 and I made it back to black in good time. I was 18% ahead when the S&P got back to even. My plan is largely my creation, customized for my lifestyle, and tax situation and investing style, but I have access to the thinking of people like Eugene Fama, Cliff Arness ,and Buffet through my manager. I did it myself for 20 years and personally for me working with a manager is better. My risk is less and I've made more money and sleep better at night and I'm a heck of a lot smarter about my choices. Not dissing anybody else's choices, just saying.

I was also in a high stress job, and thought I would miss it, but I wouldn't go back on a bet. This morning I woke up just predawn looked out my bedroom window which overlooks the Atlantic and watched Venus 15 minutes before the sun started to emerge on the horizon, you know that period when the sky is all baby blue and pink. Venus was massive in the morning sky, amazing. I had nothing else to do or worry about except be in the moment. In my old life I would have glanced at Venus as I rushed to take my shower and get out the door, missing the beauty.

Good luck or should I say Fare Well

 

[Elbata]

Bill Bengen, the creator of the "Safe Withdrawal Rate/4% Rule did a AMA on Reddit just this Tuesday.

It was a fascinating AMA and one of the things he said is that he revised his SWR from 4% to 4.5%. He said 4% with 50/50 allocation would last forever.

https://earlyretirementdude.com/summary-tuesdays-reddit-interview-inventor-4-rule/

So I did the calculation--$5.5MM X's .045=~$250K. With no debt, I think I could live on that.

 

[pb4uski]

.....During my career I harvested about 700K of LT capital loss and I consider that as one of my asset classes..... I intend to spend down my LT cap loss by converting post tax equities into Roth's ...

Your approach has many similarities to mine other than your numbers are a lot bigger and I don't have a big, honking LT capital loss carryforward to use. $700k loss.... ouch!

How does converting post tax equities into Roth's utilize your LT capital loss carryforward? When I do Roth conversions from my tax-deferred accounts to my Roth the conversion income is ordinary income (pension income), not LT capital gain.

I guess I could see perhaps a second-order effect that would utilize the LT capital loss carryforward if you then sell taxable account securities at a gain to pay the tax, but that is it (other than the $3k in LT capital losses that can be offset agains ordinary income annually which you will get whether you do a Roth conversion or not).

 

[jim584672]

Hi,
Am I nuts to be so concerned? Any thoughts would be appreciated.

Yes, you are nuts. Why hasn't he retired already?

 

[Doc0]

My LT Cap loss was partially mined. It wasn't hard given the 2000 and 2008 decimation. There are IRS rules to worry about and some of it was real loss, so it's not as eye popping as it looks. Basically if you have a 1M LT asset with a small profit (near it's basis) and it drops in half, sell it, book the loss and reinvest in something that fits the IRS definition of legal reinvestment and have a nice day. You have just acquired 500K of LT cap loss and you still have the same 500K of assets invested. How easy it is to do depends on how you manage your diversification, and mine was accumulated over many years of smaller booked losses. Every time you book a loss it resets your basis. Early on I realized loss was a virtual asset class. It allowed me to re-balance post tax stocks for diversification and it allows me to carve off pieces of cash essentially tax free much like the Roth I could never qualify for. My adviser has a program which looks at my portfolio based on cap gain and allows us to choose which assets are most tax efficient to sell. It's probably closer to a 400K asset now, and becomes of more or less value depending on tax law.

I will have RMD on the IRA's at age 70 which is treated as regular income for tax purposes, not LT cap gain. I will use that RMD money to fund Roth's every year as well as my MSA. If I need more money to live on, the LT cap loss will be paired against cap gain sales which will fund my yearly living expense or allow me to buy a new car etc. So after age 70 this is a dollar cost average strategy into the Roth using it as a simple tax deferred vehicle, not as a conversion strategy. My conversion strategy covers only the years till I'm 70 and is designed to pull conversion money out of the IRA's at 15% taxes and reduce my RMD when 70 hits, again as a way to control my tax bite. I can choose which LT cap gain assets to sell that yields the best tax efficiency. My home brew annuity (the cash I have stashed in VWSUX) covers my living expense while all of these moving parts are moving to equilibrium. I see no reason to die with a lot of cap loss. You can't eat it and my heirs can't spend it, so it is better to gradually convert it to an asset which generates net worth. Eventually all of my assets will have cap gains (at least that is my plan) and I will suffer the tax bite like everyone else. More likely I'll be dead, but my wife will still be kicking.

My safety valves are I can take SS any time between now and 70 if it hits the fan, my wife can take it at 62 instead of 67, I can not fund the Roth, as needed and not fund the MSA, I can tighten my belt. Each of those are doable.

Best

 

[pb4uski]

Thanks for the response. I'm quite familiar with mining capital losses.... been there, done that, used them all and don't have any losses in my taxable account portfolio right now to repeat it.

One the other part, sorry to be the bearer of bad news but you but you can't count Roth conversions towards your RMDs or even put RMD money (or any taxable funds for that matter) in your Roth unless you have earned income. If you have earned income then you could use some of your RMD proceeds to make a Roth contribution subject to the annual limitation which is limited ($6,500 for those over 50 in 2017). Or if you do not have earned income then you can do your RMD and pay tax on it and then do Roth conversions and pay taxes on that.

See Roth IRA: Can I Put My Required Distribution in a Roth? | Money

You can fund HSAs even if you do not have earned income, but you need to have HSA-qualified health insurance (if that is what you mean by MSA).

 

[Another Reader]

It's interesting you call this a virtual asset class. Never thought of it that way. I have a lot of unused depreciation from 15-20 years ago that I am slowly using up as I sell the less productive rentals at substantial profits. Also sold a couple at a loss in the downturn and turned right around and bought four well located foreclosures that have performed much better than the ones that were sold. Haven't had to pay any taxes on the profitable sales yet.

 

[Doc0]

Pb,

This is what I am doing and why there are 2 parts. Part 1 before RMD is Roth conversion. Part 2 after RMD is 13K per year in perpetuity into Roths to convert LT cap loss into net worth using that small sliver of RMD money as the vehicle. I don't expect to have need for Roth money for many years if ever, and I will only get about 300K into the Roths before RMD hits, but it's tax and inheritance efficiency going forward adds another aspect of diversity without IRA bracket creep.

Interesting discussion

Best