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Nervous about ER with $5.5 million
Old 08-14-2017, 06:26 AM   #1
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Nervous about ER with $5.5 million

Hi,

As the title says I am nervous about early retirement with approximately $5.5 million. We are in our early 50s and have two children that we put through college. I am concerned about starting retirement with the market at an all-time high and what a drastic drop could do to our long-term retirement prospects. During the 2008 meltdown we did panic and sold thereby locking in our losses. I know we can't do that if the market goes down again.

Of the $5 million approximately $1 million is in IRA/401(k) the rest is after tax accounts. Currently we are shooting for 50/30/20 asset allocation. The 20% is because we would probably put a good five years plus worth of living expenses into CDs so we wouldn't have to touch the money in the market if there is a correction. Most of the stock is in S&P 500 index funds and individual blue chip dividend stocks. We still need to ramp up the bond portion but what we do have is in bond funds. Right now we are still a little heavy in cash but with the rates increasing I'm not comfortable putting too much in bonds right now.

After looking through the other posts of what people spend post retirement I am kind of shocked at how low it is. We figured about $13,500 - $14,000 per month but this includes a lot of extras that we could reign in if necessary. For example, we budgeted $1000 a month for travel for the rest of our lives. Also about $1500 a month is budgeted for charity. Our home is worth about $900,000 and it's paid off but the property taxes run about $20,000 a year. We are not interested in downsizing at this point but may in the future if necessary. Also I have heard from family members that health insurance costs can run $30,000 a year until Medicare kicks in. We have zero debt but with the property taxes and health insurance that alone could be $50,000 a year.

DH has a pension from a previous job. At 55 the lump sum would be around $450,000, at 65 about $750,000. If we take the annuity it would be approximately $4100 per month at 65 for 100% survivor. We are leaning towards the lump sum but haven't decided yet. Any suggestions on which is a better option? SS would be approximately $4k a month total but I'm not confident it will be there for us so I don't like including it in calculations.

DH's job is very stressful so I completely understand why he's ready to pack it in. We had a financial plan run last year and we targeted retiring in 2019 and it showed we were on track. He would like to retire now.

Am I nuts to be so concerned? Any thoughts would be appreciated.
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Old 08-14-2017, 07:05 AM   #2
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Go for it! Life is short. Your withdrawal rate is just over 3% and that is a number many (although not ALL) around here are quite comfortable with. Looks like you do have significant slack in your budget (travel, house) that you can rein in if absolutely necessary, and then you have the pension (and likely SS) to bridge some gaps as well.
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Old 08-14-2017, 07:12 AM   #3
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You are right to be concerned but you probably have enough as you could always cut some costs. Does the $5.5m include the house and the pension? I assume not but it's not clear. Go for it and then update the thread so I know if I can retire! I am having a hard time pulling the plug myself.
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Old 08-14-2017, 07:23 AM   #4
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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.
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Old 08-14-2017, 07:37 AM   #5
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Welcome aboard. It took me quite awhile to get comfortable with the idea of money out without a paycheck coming in (though DH does still work part time but he could never ramp it up to make what he used to make). Our budget is almost as high as yours, mainly because we spend much more for travel (less for charity, though, and I applaud you for that) and still have fairly high housing costs (mortgage and property taxes).

We did downsize some and I do still peruse local real estate ads to see what I might like at an even lower cost. Fortunately I qualified for my company’s retiree med plan when I left at 50 so we didn’t have that uncertainty. We’re now under medicare (company plan is now a supplement).

There are a lot of uncertainties out there but looks like you are in good shape to weather them. Hope you can find your way, whatever. (I tell myself what DJRR said - if things get that bad the job won't help or even be there and I refuse to buy a place in the middle of nowhere and stock it with gold, guns, and a year's worth of food. Sometimes I think I've read too many dystopian novels).
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Old 08-14-2017, 07:48 AM   #6
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It's not nuts to be concerned....You have big assets, but also big expenses.

I'm not sure if you're including your house in your net worth or not - If you are not, you are describing a withdrawal of about 3% a year in your early 50's. That might make me a little nervous at that age.

However, I was in a similar position as you and was ready to get out of my job. It really does eat at you and your health both physically and mentally. That must be weighed into your decision.

What worked for me was to add to the pile until I could live on dividends alone along with some extra padding. My investments are a little different ratio than yours - 70/25/5 with the 5 being a CD ladder as you describe. I average just a smidgen over 2% in dividends on the entire portfolio.

If your 5.5m does not include the house, that would give you about 110k+ a year to live off of. Can you trim expenses back that far? I'm roughly the same age as you and sleep pretty well with my arrangement. Some may think I have a little too much on the equity side, but I still have enough room I can trim expenses a little more.

I would recommend spending some time with FIRECALC and doing some detailed projections with it. Get detailed with your projected expenses. Donate a few bucks to it so you can use the yearly projected expenses feature. Work with it till you get results that you can be comfortable with and then see if that works with your portfolio and expenses.

And for sure - Get your investments set to a point where you're comfortable enough with them that you don't think that you would panic sell. I know - easier said than done, but the CD ladder should help with that a bit.

I retired a few years ago from running a construction business and my opinion is that your health is worth a LOT of cash that may need to be left on the table. I wasn't sure I was doing the right thing at the time, but the further I get into retirement, I realize it was the correct thing for me. Good luck and we all here sincerely wish you well.
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Old 08-14-2017, 07:54 AM   #7
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To clarify the $5.5 mill does not include the house or the pension. It is just investable assets.
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Old 08-14-2017, 08:01 AM   #8
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Quote:
Originally Posted by Foxtails View Post
To clarify the $5.5 mill does not include the house or the pension. It is just investable assets.
In that case, I think you are in pretty good shape. If I was your husband, I'd probably get out now and then you can adjust the portfolio and expenses to where you feel pretty comfortable.
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Old 08-14-2017, 08:01 AM   #9
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Welcome! I had planned to retire at 65 and ended up throwing in the towel at age 61 due to toxic politics and I've never looked back. I retired with $2.6 million, which would have been at least $1 million higher if I'd worked another 4 years (saved a big % of income plus income on existing assets). My net worth is now brushing up against $3 million, with assets heavily weighted towards equities.

Your housing expenses are much higher than mine ($700/month mortgage plus another $350/month property taxes) but travel and charity are comparable. In my own case I have 2 pensions of about $900 each and took them as annuities- people in my family live a long time so it was a good bet.

As you mentioned, there are things you can pare back in dire straits. You're also unlikely to be traveling as much after a certain age. I'm 64 and was clambering up hills and down a glacier in Greenland yesterday but I doubt I'll be doing that in 20 years. My main charitable contribution is my church pledge and that would likely stop if I entered long-term care. You could tweak your plans to reduce expenses in those areas after a certain age.

Health insurance will be your biggest unknown, IMO. I've been fortunate in that I have few out-of-pocket expenses because I'm very healthy. I hope that's the case for you, too.
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Old 08-14-2017, 08:04 AM   #10
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Of course you should be concerned. Retirement is a big decision and it's not all financial. In your case, from a financial perspective, you have more assets than most so retirement is certainly doable. Just make sure you are comfortable with your asset mix and match your spending to your assets at a fairly conservative WR. Maybe 3-3.5% at the most to start. This seems to be well within your current spending requirements, especially when/if the pensions kick in. Welcome and good luck. Retirement really is pretty simple from a financial perspective.
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Old 08-14-2017, 08:11 AM   #11
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BTW - for me, the pension would be a toss up. If your health is good and your family history is living to a ripe old age, maybe go for the annuity. If you are worried about the pension being there in the future or family health is not so good, take the lump sum and add it to the investments.
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Old 08-14-2017, 08:16 AM   #12
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We are like you and would like to continue to be generous in our charitable giving in retirement.

May I suggest you look into a donor advised fund NOW while you may have a few working years left? You can build up this account while working to help with your charitable giving in retirement.

Additionally, you can take a nice deduction now while you are making the dough.
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Old 08-14-2017, 08:21 AM   #13
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I don't see any reason to be nervous financially.

Retirement assets 5,500
Carveout from ER to 65 for pension (65-50)*(4.1*12) = (738)
Subtotal 4,762

Spending (14*12) = 168
Pension (4.1*12) = (49)
Gap = 119

Ultimate WR = 119/4762 = 2.5%... and that ignores any SS plus you have lots of room to tighten your belt if need be.

Think of it this way... even if you took an immediate haircut of $1 million and it never came back then your WR would be 3.2% which IMO is prudent for a couple in their early 50s with as much flexibility in spending as you have (less travel and charitable giving if the SHTF).

Besides, what does FIRECalc say?
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Old 08-14-2017, 08:33 AM   #14
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Welcome to the forum.

Our situation in terms of age and assets is very similar, except that our expenses are closer to 17k a month and our house more expensive so higher expense there. But we don't look at the high nut as being forever, so our calculations are based on three phases, the "Early ER" more expensive one for 10 years, then downsizing the house and yearly number for another n years, then a more settled phase. Essentially a tweaked version of "Bernicke's Reality Retirement" plan.

Your estimate for health care is spot on for what we are actually paying in our situation.

An important mental comfort factor is that so much of our expenses are discretionary it would be easy to trim if push came to shove. But of course the goal is to keep enjoying or current lifestyle.

And you have a pension in the picture, that would take the edge off in my head.

Congrats on getting where you are and best of luck with your planning.
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Old 08-14-2017, 08:34 AM   #15
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Quote:
Originally Posted by Foxtails View Post
.... I am concerned about starting retirement with the market at an all-time high and what a drastic drop could do to our long-term retirement prospects. ....
Any drastic drop in the market will occur (or not) whether you are retired or not.

The only difference is if you retire, you will be drawing down, rather than adding. But if your WR is fairly low, that's not a huge difference. A 50% market drop is a 50% market drop, and only 25% to you at 50% equities. Another 3% for a few years is almost a drop in the bucket, and your fixed/cash will carry you through.

Solution: work until you die, you won't need to worry about any of this.

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Old 08-14-2017, 08:58 AM   #16
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I think your asset allocation is too aggressive for your needs and your comfort level with market risk. You really don't need much by way of returns to meet your expense estimates.
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Old 08-14-2017, 08:59 AM   #17
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You've won the game. Your expenses to NW ratio should give you comfort rather than concern, and your approach is very sound with a cushion in CD/Cash that will ride through most any market storm.
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Old 08-14-2017, 09:06 AM   #18
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The fact that you sold into a downturn in 2008 is a clear sign you aren't psychologically ok with volatility - that's the big negative with your plan. The numbers look terrific and sustainable but you won't be happy if you get upset at dips - the dips WILL come and they may be severe. Your numbers will let you handle the dips but ONLY if you are able to stay invested in, say, 50% equities even when the markets are a sea of red. If you sell into lows again you will be hurting yourself badly as you won't be ready for the upturn when it eventually comes. Make a sensible plan and swear to stick with it and you should be fine. But if you honestly can't bear the thought of losses, don't torture yourself. Keep working.
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Old 08-14-2017, 09:19 AM   #19
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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.

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Old 08-14-2017, 10:15 AM   #20
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We used to spend more than you and at one point just realized most households got by fine on a lot less and we could, too. We use a mainly a matching strategy for investing, so there is not a lot of chance for growth but also not much worry about market drops. We cut our MAGI enough to get ACA subsidies for health insurance so our current premiums are under $200 a month.
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