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Old 05-22-2013, 08:35 PM   #1
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Ready for free time? I sure hope so.

I am so glad I stumbled along this website while doing research on early retirement. I have already found some very useful information. I would like to share our situation with you and find out what you think. I want to make sure I have not missed anything.

During a period of unemployment 4-5 years ago, I received an opinion from a financial expert that with minor changes, I would not need to return to work. I was a bit concerned and returned to work. We implemented many of the changes in hopes of really being ready when the time was right. We are now living in a less expensive home and are working on paying off our RE loan over the next several years. The balance is about $265,000 at 2.85%. I have a plan penciled out to pay off the loan by the end of 2014. We have no other debt. We did establish a HELOC for any future emergencies.

Over the last 2 years, we have been living with expenses generally as we will during retirement with the exception of several onetime expenses. One of the non-repeating expenses is finishing up some (significant) home improvements and another is the expense for a second home we maintain for DH's w*rk. When DH stops working out of the area, the expenses related to that location will end. DW is going to be 50 this year. He is working for a company that has gone through many layoffs. He is just riding it out for severance or until the rest of our home improvements are done and loan is paid off.

I am 46 and plan to w*rk at least until June 2014. A couple of things are happening that make it worth the time-but that could change.

I have been using Quicken since the early '90's. I know what we are spending our money on. By looking at our last 10 years (adjusted for inflation and removing several not repeating expenses), our living expenses are between $70,000 and 80,000. I also have a zero based budget that confirms that the $80,000 is very comfortable. I have estimated taxes and health care and included both in our expense figure. Taxable income is projected to be below 400% of FPL for two.

We have a rental unit in our home. At 85% occupancy, it brings in $14,000 per year. All related expenses are all ready in our living expenses and it provides a nice tax benefit. We will count on the income to offset some of our discretionary spending.

Current investment holdings: $1.65M, 80% stock and 20% bonds. $1.085M is qualified/retirement and about $565,000 is non-qualified/taxed. I am projecting we will between $1.5 and $1.6M at the end of 2014 (with loan paid and home improvements completed).

As for modeling, Quicken has us making it to over 100 years old. FIRECalc has us at 100% (retiring now) at various years from 30 to 60 years in retirement. Models include 80% of SS projections.

Several concerns:
Health care costs: I sure don't want to pull the plug now and find out 2014 just brings a bunch of messes for us. Current health insurance is through my employer so no concerns with DH separation.

Income from investments: Many of our investments are generating regular income. The income is close to what we need, however, if the value does not grow or does not return what I am planning, we will need to withdraw from the principle. I need to get a better handle on withdrawals. Withdrawal rate rounds nearly to 4% at the high end of our estimated expenses. The low end is at 3.4%.

Section 72 t: With such a high portion of our investments in qualified plans, we will need to make SEPPs. I really need to make sure I have the plan all worked out so there are no surprises. The requirement minimum distribution (RMD) method will provide enough income without the risk that comes along with the other two methods. Without 72 t, we would be years from retirement.

Generally, I feel like we are in good shape. I should note, it is ME that is 100% responsible for our finances and I really don't have anyone to compare notes with. I am looking forward to your questions/concerns to help me develop some confidence in my plan.
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Old 05-22-2013, 08:42 PM   #2
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Welcome Snowcat! Looks like you have a good handle on the finances. You say you anticipate a withdrawal rate of 3.4 to 4%. That's one item to flag. The 4% "SWR" may no longer apply if market yields in the future do not match those in the past. Most of us are now targeting 2-3% especially if we are ERing quite early, as you are planning to do. There are many discussions on this which can be found using the Search feature.
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Old 05-22-2013, 08:51 PM   #3
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Welcome.

I see no holes in your plan, only opportunities for fine tuning on withdrawal strategies re: taxes. Take some time to put away the calculator and pick up some cruise brochures to see what destinations you like for June 2014.
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Old 05-23-2013, 04:43 PM   #4
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Welcome Snowcat! Looks like you have a good handle on the finances. You say you anticipate a withdrawal rate of 3.4 to 4%. That's one item to flag. The 4% "SWR" may no longer apply if market yields in the future do not match those in the past. Most of us are now targeting 2-3% especially if we are ERing quite early, as you are planning to do. There are many discussions on this which can be found using the Search feature.
Hi Snowcat. Can you explain the 3.4 - 4% WR a little more. Is that the percent of your current portfolio, before social security (ie: the present value of any social security you've included in your plan) ?

Meadbh - is the 2 - 3% you quote the amount that would be needed after social security / pensions (incl their present value equivalents) ?

Snowcap - my numbers are close to yours and I plan to ER this year. I feel like its a bit risky but I keep reminding myself that with a 10% failure rate there is a 90% upside potential. (Having said that , the 10% risk eats away at me as I question my decision).
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Old 05-23-2013, 05:13 PM   #5
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Meadbh - is the 2 - 3% you quote the amount that would be needed after social security / pensions (incl their present value equivalents?
I live in Canada. Social Security does not apply. There is CPP (Canadian Pension Plan), which is much lower than US Social Security, and OAS (Old Age Security), which will most likely be clawed back in my case due to investment income. Pensions.......what are these pensions that you speak of
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Old 05-23-2013, 05:17 PM   #6
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Welcome. Does the $80 k of expenses include the expenses for the second home for DHs work? That expense should go away after he leaves.
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Old 05-23-2013, 06:47 PM   #7
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Meadbh, Thank you for the alert. I will take a look at the discussions on the withdrawal rates. I was thinking I was on tracking with less then 4%-but I understand the risk of the unknown rates in the future.

Live and Learning, I calculated the WR by taking my forecasted expenses ($70 -$80K) less $14K rental income, divided by $1.650M. (80-14)/1650=4%. or (70-14)/1650=3.4% The $1.65M will change a bit due to loan pay off, but should grow during the next year and possible some additions from earning, as well. I felt comfortable with the adjustment for the rental income. In the future, SS will replace it.

I too am questioning the numbers and the time in retirement. I am glad I am not alone.

David1961, the $70-80 number does not include them as of the second home expense. It has already been adjusted. If you think the number is high...we live in California and my DH has some expensive activities that will need to be maintained for a while longer (okay, I do too).

Snowcat
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Old 05-24-2013, 09:14 AM   #8
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I don't think a budget of 70-80k is high at all, and I'm pretty frugal and pretty much a homebody. My budget is 88k but that includes 29k of Healthcare. I have budgeted for the Silver plan (with no subsidy) plus 7500 in out of pocket (out of a potential OOP max of 12.3k). DH and I both have pre-existing conditions so I'm thankful for Obamacare. For the next 5 or 6 years I'm hoping to get less expensive insurance through DH's work (as I do now) but I didn't want to count my chickens !

Thanks for explaining your calculation of your WR. It looks reasonable to me. My projected WR is 3.26% at current market values and 3.61% if I assume an 11% drop in the market. The 11% drop still gets me to a 100% success rate in FIRECalc, which is why I used that number specficially. In my calculations I am assuming a 40 year timeframe (gets me to age 90). As you've done, I do not assume any value for Social Security in my % calculations, but I do include 65% of what SSA says I will get when I use retirement planners (FIRECalc and FIDO's RIP).
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Old 05-24-2013, 09:15 AM   #9
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Pensions.......what are these pensions that you speak of
I dunno but I see others on the forum discussing them.
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Old 05-24-2013, 07:51 PM   #10
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Welcome, snowcat.
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Old 05-24-2013, 09:00 PM   #11
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Welcome! What caught my eye wasn't the swr, but rather your concern about health insurance expenses combined with you needind to implement 72t. The HI on the state exchanges are not priced yet, but many worry that the cost will be really a lot higher than if you were healthy and were able to buy like the old days. But those with expensive diseases, they now are able to get insurance. But the point I was going to make is that you may want to model your 72t at somewhat less than 46,000 annually, so that stream, plus rental, and any other income, comes to less than 62,500, which is the place where the healthcare subsidy cuts out. You would make up the rest with your taxable or heloc funds.

Maybe someone here can chime in on how COBRA works with the state exchanges going into operation. Most states have granted employees the right to stay in their former employers group health coverage for at least 18 months, even if you leave voluntarily. But I'm not sure how that rule will play-out with the new HI laws.
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Old 05-24-2013, 11:01 PM   #12
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Originally Posted by Live And Learn View Post
I don't think a budget of 70-80k is high at all, and I'm pretty frugal and pretty much a homebody. My budget is 88k but that includes 29k of Healthcare. I have budgeted for the Silver plan (with no subsidy) plus 7500 in out of pocket (out of a potential OOP max of 12.3k). DH and I both have pre-existing conditions so I'm thankful for Obamacare. For the next 5 or 6 years I'm hoping to get less expensive insurance through DH's work (as I do now) but I didn't want to count my chickens !

Thanks for explaining your calculation of your WR. It looks reasonable to me. My projected WR is 3.26% at current market values and 3.61% if I assume an 11% drop in the market. The 11% drop still gets me to a 100% success rate in FIRECalc, which is why I used that number specficially. In my calculations I am assuming a 40 year timeframe (gets me to age 90). As you've done, I do not assume any value for Social Security in my % calculations, but I do include 65% of what SSA says I will get when I use retirement planners (FIRECalc and FIDO's RIP).
why are you using 65% of ss income, vs 100% of it?
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Old 05-24-2013, 11:07 PM   #13
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sengsational, The cost of healthcare is sure a big unknown. And is a big part of why we are waiting at least until more becomes clear. Time will tell. We will be able to go on COBRA for up to 18 months. Timing to switch will probably be 1/1 after we retirement.

As for the 72t and income, I think I understand what you are getting at. I have started to model out the different sources of income to meet income needs while following 72t requirements and keeping the MAGI under $62,500. My expense estimate does include a healthcare subsidy. I need to balance qualified and taxed funds. About 1/2 of the income will be from qualified dividends so the taxes should be low. We do have some carry forward losses to offset income.

I see I still have some work to do.
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Old 05-25-2013, 09:43 AM   #14
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why are you using 65% of ss income, vs 100% of it?
I've read that in a worst case scenario SSI will be able to fund 70% of payouts in the future. I am using 65% to hedge my bets that the rules for SSI will change over the next twenty years before I start collecting at age 70. Because ER is a one way ticket I have built conservative estimates for SSI and Healthcare into my planning. If I end up wit too much money in my old age as a result I am sure I will find a way to spend or donate it.
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Old 05-25-2013, 10:30 AM   #15
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We will be able to go on COBRA for up to 18 months. Timing to switch will probably be 1/1 after we retirement.
Sounds like you've already got the answer to the question I asked my state insurance folks about...which is if the whole COBRA thing will still be allowed/used in the same way once the PPACA gets into action. That's good news since that will put me on the PPACA sidelines the first year; I have a feeling things will shake out and settle down after the first few years. One thing I expect is that the 400% FPL cliff will change, probably for the worse, so I'd go conservative on the 72(t) initiations. I've got 4 different 72(t)-able accounts, so can mix and match to get the amount I want. But alternatively and probably better, if I can hang in there with megacorp for another 7 months (55), I will have penalty free access to the 401(k)!
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Old 05-25-2013, 10:39 PM   #16
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Sounds like you've already got the answer to the question I asked my state insurance folks about...which is if the whole COBRA thing will still be allowed/used in the same way once the PPACA gets into action. That's good news since that will put me on the PPACA sidelines the first year; I have a feeling things will shake out and settle down after the first few years.
Well, I suppose that could change. I was basing my response on the current COBRA requirements. Since the continuation is provided through my employer, I would think it would still be available. I am currently covered under a low deductible ($200) plan (very expense and 100% employer paid). COBRA could be more expensive than a high deductible plan through the exchanges. Once pricing is available, I will determine how to proceed.
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