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What should we be doing at two years away from retirement?
Old 01-05-2010, 01:13 PM   #1
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What should we be doing at two years away from retirement?

Hi , I am new to this board.

My husband and I are 53 and he is on track to retire in 2 years at age 55. I worked early in our married life, but took the pregnancy route to retirement at age 30.

He has worked for the same aerospace company his entire career in planning, finance, and/or administration. He worked at a remote field site the majority of his career as it was a great place to raise a child. Unfortunately, it was not so great for career advancement.

In spite of that and thanks to a relocation and promotion 4 years ago (which since then has increased his salary by 86% providing a great boost to his pension), I think we're on track so that he can take early retirement at age 55. We will live off of his pension (which will be less than 30% of his gross), his 401K, and what I call our "Retirement Emergency Fund".

I joined this board to make sure that I am doing everything that I should be doing during these last two years before he actually says goodbye to his career.

Any information on what we should be doing in these last two years would be greatly appreciated.
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Old 01-05-2010, 02:28 PM   #2
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I started keeping a detailed spreadsheet of our expenses about four years before DH retired. Understanding where the money went and what I could cut back on in lean years was imperative.

Since we've decided to stay in our home for the long term, we paid our mortgage off three years before he retired.

Oh...and I ran Firecalc every other day.
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Old 01-05-2010, 02:33 PM   #3
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Welcome to the board. With only two years to go, the main issues which would come to my mind include assuring good health insurance through age 65, and really crunching your numbers using Firecalc or something like it.

As a rule of thumb, you might shoot for a portfolio around 20-25 x the amount you expect to draw from it annually, including taxes on the qualified account withdrawals.
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Old 01-05-2010, 03:48 PM   #4
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You could start moving your investments into a more conservative "retiree" type of asset allocation before you actually retire.

Often people move to warmer climates or nearer relatives when they retire. If you are planning on moving after retirement, you could investigate places that appeal to you. Start taking vacations there, read newspapers from the area, read articles online about that location, and so on.

Study any information on his retirement plan closely, to make sure that you fully understand all the details. Will he have health insurance? Can he start collecting his pension at 55? Will he be able to withdraw what he plans to withdraw from his 401K at 55 without the 10% penalty? And so on.

Think of whether or not you will need a new car soon, and if so set money aside for it.

And I think that BbbamI had an excellent idea in suggesting that you track every penny that you spend for a while, not necessarily to cut back but so that you can get a good idea of what you want and need in retirement.

Good luck! And welcome to the Early Retirement Forum.
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Old 01-05-2010, 03:56 PM   #5
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Some things I'd do to prepare are financial and some aren't.

The financial things I would do is make sure I had a secure and (relatively) affordable health insurance package locked up, and make sure I had at least several years of non-stock investments in my retirement portfolio (so I can liquidate those for income if the market tanks again; you don't want to be *forced* to sell stock for income in February 2009, for example).

Another thing I'd start doing is tracking my budgets. Look at what you can safely pull from your retirement income and make sure that it (plus any other income sources) are enough to meet expenses, keeping in mind that some expenses may go up (possibly health care, travel and leisure for example) and some may go down (commuting costs, clothing, taxes).

The non-financial thing I'd do is simply self-examination. Are you the type who needs to be "doing something" to avoid boredom? If so, think about lining some of that up (whether a hobby, volunteering, reading, whatever) to make sure "slacking" (used affectionately in this context) doesn't get old really fast.
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Old 01-05-2010, 04:04 PM   #6
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One thing that we decided to do prior to ER was to try and live on the reduced amount of expenses that we thought we would have to live on in a few years when we retired. It was a pretty bare-bones budget, but we stuck with it pretty closely even though we had much more income that we were not spending monthly.

This did two things ~1. It showed us that we could easily live on much less than we thought we could by just reducing our daily expenses (do we really need this?). 2. We increased our immediate savings rate because we were not spending much cash, but continued to make a good wage and saved what was left over.

P.S. When we actually did retire, our income was much higher that we had expected so we did not have to live on that bare-bones budget, but we now know that we can do it in the future if we are forced to do so. We sleep very well.
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Old 01-05-2010, 04:15 PM   #7
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I would echo what others have said. Know your expenses! Most people seem to concentrate on how much income, but IMHO, knowing your expenses, what, when, how and where you spend money Is the real key. You will see many people sign on here and list their income in retirement, few lead with their expenses.
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Old 01-05-2010, 08:05 PM   #8
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Dancinmama, I think the common thread so far has been "expenses". The only way to know if you have enough is to know how much you need. Since you know what your pension will be, then you should start tracking expenses to see if the pension is large enough to support your lifestyle. If it is, then great. If not, then either work longer or cut back.
Also, a good idea is to know "what you are going to do" every day. I didn't retire at 55 because I personally thought it was to young (for me). Your situation may be different. You're doing the right thing by planning early. Good luck with your decision.
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Old 01-05-2010, 09:32 PM   #9
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Along the line of what W2R said, I would be building a CD or TIPS ladder right now.

During a recent rumination, I figured that a ladder 7 or 8 years long (each year being 4% of your total pot, for a total of about 7*4 = 28% or 8 * 4 = 32% of your total, with the remainder in equities) would be optimal. You could also consider as much as a 10 year ladder (40% of your total, for a 60/40 split).
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Old 01-06-2010, 07:36 AM   #10
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Originally Posted by W2R View Post
You could start moving your investments into a more conservative "retiree" type of asset allocation before you actually retire....
Good luck! And welcome to the Early Retirement Forum.
I'll second W2R's suggestion about reviewing your asset allocation. It might be less of an issue with your defined benefit pension, but two years out is a great time to be making sure that, say, a 40% drop in stock values between now and then won't derail your plans.

And a second on the good luck and welcome!

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Old 01-06-2010, 11:57 AM   #11
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Thanks to everyone for the warm welcome and suggestions. Many I have already done; some I have not.

We have been fairly frugal throughout our lives. We always wait for a great sale on anything that we want/need (things like electronics and appliances) and I use coupons like crazy for the every day stuff. We have always paid cash for everything - no credit card debt or car loans. The only interest we've ever paid in our life is on the mortgage.

I have done an income to expense analysis, but I think I should look at that Fire calc and revisit our asset allocation. Right now all the 401K $$ is in pretty safe investments cuz my husband doesn't want anything in the market to derail his retirement. I just have to continue to make sure that the $$ is going to last 30 years.

Also, he does have the option of going back to work for the company as a consultant at the salary that he made upon retirement. He has to wait 6 months to do it, but it's always an option.

We will both have health insurance through his retirement plan. It is not as good as it once was (we need to be prepared to pay a $3K deductible every year) and who knows what it will be in 2 years, but that IS definitely a factor.

One thing that I forgot to mention. One reason that he is retiring is that I have nothing - no pension, no health insurance etc. If anything should happen to him, I would get his life insurance, but it doesn't even come close to the value of his pension. If he retires I will get full pension and health benefits if anything should happen to him. We are unable to increase his life insurance at this time as he was a smoker (recently quit), so we'll see if they will let him increase it when he has been off cigs for a year. The other issue is that in early '09 he was diagnosed with Chrones disease. He has not had any problems since the incident that took him to the hospital and led to the diagnosis (he's not on any meds), so we're not ABSOLUTELY sure that he has it, but it was enough of a health scare to make him want to retire ASAP and do some of the things that we want to do before our health deteriorates.

DH has a lot of interests - fishing, golf, and music, so I don't think he'll be bored. In earlier years when his career was not so demanding, we did a lot of volunteer work and I see that happening again. We also want to do some traveling - both in the U.S. and abroad.

When he took a transfer with his company 4 years ago we were lucky that they had a work site very near to where we wanted to retire (close to family and in a great climate). We were able to sell a home and buy our retirement home at that time and his company picked up the tab (real estate expenses, moving expenses, etc.). That alone saved us a ton of money.

One thing that I have been thinking about is how and at what rate to draw down the 401K. I understand that it will continue to grow tax free, but the prospects of tax rates increasing dramatically in the near and not so near future is really a concern to me. Even though we wouldn't need to even touch the money in the early years of retirement (we could draw needed cash from our retirement EF), I've been thinking of withdrawing the max that I can while keeping us in the 15% tax bracket. And ideas/comments about that?

I feel very fortunate because we have a lot of options. Unless we have to sell to move into a retirement community, we will be leaving the house to our son (equity of over $400K right now), but we plan to spend the savings and investments on ourselves - so we just want to make the $$ last for us without too much concern about leaving a big inheritance behind.
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Old 01-06-2010, 04:15 PM   #12
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Originally Posted by dancinmama View Post
One thing that I have been thinking about is how and at what rate to draw down the 401K. I understand that it will continue to grow tax free, but the prospects of tax rates increasing dramatically in the near and not so near future is really a concern to me. Even though we wouldn't need to even touch the money in the early years of retirement (we could draw needed cash from our retirement EF), I've been thinking of withdrawing the max that I can while keeping us in the 15% tax bracket. And ideas/comments about that?
Yeah, don't do that. Roll the 401(k) to an IRA then do Roth conversions up to the top of the 15% bracket. Solves the worry on taxes going up AND allows for tax free earnings within Roth.

Note: in order to have $ between 55 and 59-1/2 you may need to take a distribution from the 401(k) first then do the rollover. Or do 72(t) from the IRA.
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Old 01-06-2010, 07:15 PM   #13
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chemist: I like your strategy, but can we do a Roth conversion AFTER we retire? In addition, I'm not sure doing 72(t) withdrawals would work for DH's 401K (rolled into an IRA) because I think the calculations for the 72(t) withdrawals would exceed the bridge we would need between pension income and the top income amount to stay in the 15% tax bracket. His 401K is currently about $1.13M. I haven't really looked into it, but I think the withdrawal might push us up into the 25% tax bracket.

However, I have an IRA (about $82K) and maybe at age 55 we could do a 72(t) with that and xfer that money to a Roth. Although the withdrawal/xfer rate would be very small on that.

We also have a retirement EF of after-tax money. Currently that is at $160K with the goal of increasing it to $250K before DH retires.

I've been really good at the accumulation phase, but this next phase really has me stumped, especially when it comes to income taxes.

Any suggestions or articles to read would be a great help!!
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Old 01-06-2010, 07:43 PM   #14
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Perhaps this thread will help....

An updated FIRE recommended reading list (with a military twist)
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Old 01-06-2010, 09:14 PM   #15
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That's quite the reading list (some of them I've already read). I wonder if I can get through it in two years!! ha ha ha

My all-time favorite and the book that probably describes us best is The Millionaire Next Door. I would say the only difference is that we do live in a more expensive neighborhood, but other than that we fit the description to a T.
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Old 01-12-2010, 09:49 AM   #16
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chemist: I like your strategy, but can we do a Roth conversion AFTER we retire? In addition, I'm not sure doing 72(t) withdrawals would work for DH's 401K (rolled into an IRA) because I think the calculations for the 72(t) withdrawals would exceed the bridge we would need between pension income and the top income amount to stay in the 15% tax bracket. His 401K is currently about $1.13M. I haven't really looked into it, but I think the withdrawal might push us up into the 25% tax bracket.

However, I have an IRA (about $82K) and maybe at age 55 we could do a 72(t) with that and xfer that money to a Roth. Although the withdrawal/xfer rate would be very small on that.
I am pretty sure that you can roll the 401-k into two or more smaller IRA accounts & just do a 72(t) from one of those accounts.
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Old 01-12-2010, 10:19 AM   #17
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Originally Posted by dancinmama View Post
chemist: I like your strategy, but can we do a Roth conversion AFTER we retire? In addition, I'm not sure doing 72(t) withdrawals would work for DH's 401K (rolled into an IRA) because I think the calculations for the 72(t) withdrawals would exceed the bridge we would need between pension income and the top income amount to stay in the 15% tax bracket. His 401K is currently about $1.13M. I haven't really looked into it, but I think the withdrawal might push us up into the 25% tax bracket.
However, I have an IRA (about $82K) and maybe at age 55 we could do a 72(t) with that and xfer that money to a Roth. Although the withdrawal/xfer rate would be very small on that.
This mixes some vocabulary.

You can convert a conventional IRA to a Roth IRA just about anytime, even up to the point where you're required to take RMDs. Most ERs convert a little every year up to the top of the 10-15% tax brackets. The reasons for choosing to do a Roth conversion are complex and it's not always worth converting, but Fairmark has a good article as does Ed Slott. Their links are all balled up together in this FAQ archive post:

(FAQ archive) Should I convert my IRA/401(k) to a Roth or not?

You have to roll a 401(k) into a conventional IRA before it can be converted to a Roth.

I'm not an expert on 72(t)s, but I believe that they can be taken from a conventional IRA whether or not it's being converted to a Roth. I'm not sure but I think 72(t)s can also be taken from a 401(k) without having to roll over to a conventional IRA, but it gets tricky if the 401(k) has before-tax and after-tax dollars. Here's a basic link on 72(t)s:
Retire Early: Can I withdraw money from my IRA before age 59 ?

It looks like an old article but Greaney last updated it about 15 months ago.

Quote:
Originally Posted by dancinmama View Post
Any suggestions or articles to read would be a great help!!
There's post #9 in this thread (as well as the rest of the thread):
How do/did you prepare for ER?

FIRE Recommended Reading List
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Old 01-12-2010, 10:33 AM   #18
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Just for fun - The Fidelity website has a 72T calculator to show what kind of penalty-free income you get from your stash before age 59.5. Their calculator shows the results from 2 (of the 3 IRS allowed) methods of withdrawal.

https://web.fidelity.com/seqp/application/SEQPIntro
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