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Am I missing anything?
Old 12-06-2009, 10:13 PM   #1
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Am I missing anything?

Not very long ago I assumed I was a few year's away from retirement. However, with some more up to date numbers and information my calculations keep saying that both DH and I could retire sometime during 2010. Just a check to see if I am missing anything. I have run everything through Firecalc (checking both with a 35 and a 40 year plan) and Financial Engines.

Situation:

DH - 62
At retirement will take lump sum in lieu of pension (for variety of reasons feel lump sum is better than his non-COLA pension). If he retired in January, the lump sum would be $910,000.

The amount of the lump sum is heavily weighted based upon his last 3 years of employment. There is a likelihood he will receive a large bonus in the first quarter of the year. If it was the same as this year's bonus, the lump sum will probably be at least $975,000 perhaps a bit more.

His 401(k) - $220,000. Contributions between now and mid-2010 between him and company matching is probably about $18,000

He has subsidized retiree medical for him and dependents. Unclear at this point if, when he turns 65 and goes on Medicare, the dependents lose coverage. If they do, would have COBRA for 3 years.

He can convert his life insurance ($660,000) when he retires.

We have 3 children. One is 18 and is graduating high school in May. Will be attending community college (living in dorm) for 2 years -- very cheap about $6k per year. After that, we will pay state residential for last 2 years.

Another is 15 (would be just turning 16 if DH retires mid-2010). He will receive SS benefits (if DH retires) of about $1070 a month for 2 years until he turns 18. He is graduating high school early and will be in community college until he turns 18. That will be paid for by the SS benefits as will some of his other expenses.

Another child is 13 (turning 14 in mid-2010). She will receive SS benefits of $1070 until her brother turns 18. Then her benefits will increase to roughly $1125 a month until she turns 18. Her benefits will go to pay some of her expenses over hte next 4 years with the remainder to fund college (well she could spend it however she chose but from our standpoint it would be to meet college expenses).

Me - 55 (56 at likely time of retirement)

No pension or retiree medical.

401(k) - $150,000. Between now and time retirement - expected contributions of my employer and me is about $39,000

SS - $22,000 at age 62.

So, using the $975,000 lump sum and contribution and assuming no investment returns or losses in the 401(k) in the next 6 months total is just over $1.4 million.

We have negligible assets outside of retirement funds, roughly $100k.

Biggest negative - Right now we have an expensive house with a large mortgage. We are listing in spring as soon as we can get house ready for sale. Difficult to know right now if we will clear anything from sale, break even or have to bring money. We don't live in a bubble area and prices in our specific area have stayed fairly steady. However, we have a home on acreage and those can take a long time to sell in our area (or can sell very quickly). Current house is very large and expensive to maintain.

Once we sell, we want to buy a house that is much smaller and costs no more than $250k. Undecided whether to take a mortgage or to withdraw funds and pay cash. The negative to withdrawing funds is that we are in 33% tax bracket and so the taxes would be high. The negative to a mortgage is that we may not be able to get one after we retire so going that direction may mean buying the house before retirement which might limit us in location.

Possible negative - health insurance. DH's company could eliminate retiree coverage or the subsidy (the subsidy has been eliminated for many, DH is grandfathered in with a soft cap subsidy). It is possible that when he turns 65 that the kids and I lose coverage and 3 years of COBRA would take me to 62. Under current law, it looks like I would be eligible for the Texas High Risk insurance pool at that time. I don't like this uncertainty but it doesn't seem reasonable for me to stay employed for the next 7 years just so I can have health insurance at 62 particularly when there is no guaranty that my small employer will still provide health insurance in 7 years or will even still exist.

Spending - In all spending plans I have not included spending that would be paid for out of the two younger children's social security benefits.

If we were in the smaller house we want to buy, with a mortgage of $1200 a month, for the next 4 years, project spending at about $83,000 a year. This has generous discretionary spending and could easily be cut. Spending goes down once all children are no longer in house.

One option is sell current house, buy new house and then retire with above spending. The negative is that if we want to avoid withdrawing the money at one time to pay cash for new house we probably have to get a mortgage before retiring and are locked into staying in this area. We have considered moving a couple of hundred miles away but that probably means going the cash route rather than a mortgage and we would prefer to retire first.

So second option is to retire while this house is still on market, sell it and then buy elsewhere. In that option, even if retired, our expenses are roughly $35k more annually.

Firecalc

I ran it with several options. I ran level spending of $90,000 showing my SS at age 62. I ran it with 35 and 40 year plans, 60% equities and was 100%.

I also ran it with spending of $118k for 2 years, $96k for 2 years. For a 35 year plan, future spending to still stay at 100% was $92k. For a 40 year plan it was $90k. I did this to model what would happen if we retired still in this house and it took 2 years to sell.

Financial Engines

I ran it with desired spending of $90k. It said that had over 95% chance of $105,000 spending (median results). Lower results were $103,000 and higher $107,000.

So -- everything looks OK -- but am I missing anything?

Of course selling this house is a must (actually I can run a plan where we keep this house. However, we have to significantly cut discretionary spending for it to be sustainable long term and we don't like this house enough to want to spend that much on living here long term).

The issue will be whether to sell this house first or not. Because of how lump sums are calculated, DH's lump sum will likely never be higher than it will be during 2010. Also, every month he doesn't retire it is true he has income from work -- however, the social security benefits the children can receive is a very finite amount and every month he isn't retired those benefits are not being received. So there is a case to be made for retiring in mid-2010 regardless of whether the house has sold or not.
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Old 12-07-2009, 07:34 AM   #2
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$1.4million x 4% is $56k/year SWR.

I don't know much about SS - kids get SS benefits of over $1,000/month ?

Teenagers, expensive house, $80k+ burn rate, medical insurance uncertainties, and high SS dependency all would not make a comfortable ER situation for me.

EDIT: Didn't realize there are SS benefits for unmarried children of 62+ retirees - maybe our new plan is to have additional children when I'm 60 to get the SS benefit....
http://www.ssa.gov/pubs/10024.html#yourfamily
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Old 12-07-2009, 08:01 AM   #3
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I thought children only received those benefits under the survivors clause ?
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Old 12-07-2009, 10:35 AM   #4
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Nope, my neighbor went down to SS a few weeks ago to sign up at 62 for SS. He was shocked when the lady asked him if he had any children under 18. Turns out that he has a 9 year old and his wife makes under 15K a year PT both of which qualifies him for additional benefits.

Well, he gets a benefit for his child and also his wife for a grand total of about 4K a month. He's a happy camper.
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Old 12-07-2009, 10:38 AM   #5
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Kids do receive benefits until the age of 18 (actually 19 if still in high school) if a parent retires. They receive 1/2 of the retiree's full retirement age benefit. Survivor benefits are 3/4 of that amount. All of this is subject to a family maximum which in DH's case is roughly $4k a month.

Quote:
Teenagers, expensive house, $80k+ burn rate, medical insurance uncertainties, and high SS dependency all would not make a comfortable ER situation for me.
Here is how I see it:

Teenagers -- taken care of through the SS benefits

Expensive house -- Selling as quickly as possible

$80k burn rate -- Firecalc and Financial engines put our SWR well above what will produce this. Once our older son is out of college in particular (no SS benefits for him) the burn rate is well below this.

Regardless Firecalc says that $90k for the next 35 to 40 year is 100%. Financial Engines estimates $104k.

Also the spending I have shown has a lot of discretionary spending in it. Cutting it, if necessary, would be easy.

Medical insurance uncertainties -- Well, we have less uncertainty than most people. DH has retiree medical which does cover kids and me. It is possible I might have to get coverage from 62 to 65 but that could happen even if I continued working. Is it reasonable to continue working just because of this small amount of uncertainty, particularly since there is no guarantee that continuing working provides any more security?

high SS dependency - DH is eligible for SS now. I think it is highly likely it will be there for him. I won't be eligible for 7 more years so there is more uncertainty for me. I think it is likely it will be there for me. However, I have run calculations that projected my having no SS. We could still make it but would have to cut more discretionary expenses.

Quote:
all would not make a comfortable ER situation for me.
I guess I'm not sure why. Firecalc says 100%. Financial Engines says it is fine. I don't want to be imprudent. At the same time, if I for example don't retire because DH's retiree medical might go away that almost says that no one under 65 can ever retire because any retiree medical could always go away....
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Old 12-07-2009, 11:41 AM   #6
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Objectively, your analysis looks sound/logical/correct, and the yes the "boat floats" with the house/cost reductions (which also appear reasonable / doable).

Subjectively, I have two biases that, for me, override the objective conclusion:

1. Retiring with teenagers would make me very nervous
. I hope plan to keep my "earnings engine running" until kids have graduated college. Unforeseen costs in around heathcare, private schooling, post-college support, etc are the reasons. There's a lot of different views about "entitlement" responsibilities as a parent - don't want to get into that in this thread.

2. SS means testing. Maybe I have a "tin hat" on, but I really think SS will be "diluted" for folks with any substantial assets/income - so I am trying to have 90% of my retirement budget funded by non-SS.

Above may be great aspirations, and they may be doable for me. However, your DH situation is much more different than mine - he is more than a dozen years older, with a child 3 years younger than my youngest.

For him to work until youngest is done with college would put him at 72(ish) - something certainly wanting to avoid.

Good luck !
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Old 12-07-2009, 11:58 AM   #7
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Personally, I would be afraid to RE at 56/62 on a nest egg of $1.4 million with children still in high school and expenses as high as yours have been (even though you predict cutting them, selling your house and downsizing, etc.).

But you have been running scenarios so if you and your DH are comfortable with it, go for it.
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Old 12-07-2009, 02:31 PM   #8
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Well, retiring with one child in high school. My 15 year old graduates next month. My 18 year old graduates in May. They plan to attend community college followed by state college. Perhaps as a product of a good state university and law school, I think that state schools are fine. Private universities are not on my nickel. I realize others feel differently but that is how I strongly feel.

With regard to the one child who will be in high school. She will receive 4 years of Social Security benefits so I'm not that worried for her college costs (not the least of which is she is not academically inclined and has yet to show much interest in college). Without the SS benefits this would be a closer call of course.
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Old 12-07-2009, 03:19 PM   #9
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Quote:
Originally Posted by Katsmeow View Post
Kids do receive benefits until the age of 18 (actually 19 if still in high school) if a parent retires. They receive 1/2 of the retiree's full retirement age benefit. Survivor benefits are 3/4 of that amount. All of this is subject to a family maximum which in DH's case is roughly $4k a month.



...

Would the family maximum be affected by any ex wives claims ?
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Old 12-07-2009, 03:46 PM   #10
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Would the family maximum be affected by any ex wives claims ?
I am be no means an expert on Social Security so don't rely on me. Going to the SS website I found:

Answer

This states that benefits paid to a former spouse don't affect the benefit amount paid to other family members on the same record.

If you need to know though for sure I would suggest contacting Social Security.
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Old 12-07-2009, 05:10 PM   #11
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Without running numbers,etc, I would not retire until the house downsizing process was complete. Having just 'downsized' into out ER home last year, its nice to have a healthy cash flow while this is going on. New furniture, appliances, etc. are easier and more enjoyable purchases to make when the employment cash is still flowing.

I'm probably old school, but I would never retire unless the house was paid in full and I was debt free. Its just an adjustment I would make.

I have college age teenagers as well. The only ER adjustment I had to make was me sleeping in while they were grinding their way into school. It actually took some time to get over that, and it still feels strange. Financial commitment wise, I feel very similiar to you. We will/are providing a 'budget' undergrad degree opportunity, but they are expected to contribute as well. Skin in the game is important,

So, other than the housing adjustment, seems reasonable.
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Old 12-07-2009, 05:21 PM   #12
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Yes, definitely, the housing part is a must. I would not want to have to give up the things I would have to give up to stay in current house. Just not worth it to me.

We are inclined to withdraw enough money to pay for new house in cash. However, given high tax bracket it may make more economic sense to take a mortgage and then pay it off over a few years taking money out at a lower tax rate. Haven't decided on that part yet.
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Old 12-07-2009, 09:42 PM   #13
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Originally Posted by Katsmeow View Post
Firecalc says 100%. Financial Engines says it is fine. I don't want to be imprudent. At the same time, if I for example don't retire because DH's retiree medical might go away that almost says that no one under 65 can ever retire because any retiree medical could always go away....
Based strictly on sketchy recall and subjective evaluation on my part, I've noted a change in outlook on this board from my pre-recession join date to now. When I first began following threads on this board, many folks seemed to be emphasizing the need to avoid the waste of working too long in order to accumulate too much and thus reduce your years of retirement enjoyment only to die with significant amounts of unused resources. Today, post-recession (I hope!) talk seems to have drifted towards being sure to have extra "cushion," backup plans, huge cash reserves, WR's well under 4% and very conservative AA's.

Perhaps the change is due to the feeling that if zillions of people covet your job, maybe working isn't so bad! High levels of unemployment will do that.

No plan is without risk. But yours does not seem excessively risky. If you vision FIRE as the lifestyle for you and that the risk of living life with less income is offset by the freedom of not working, go for it!
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Old 12-07-2009, 10:04 PM   #14
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Withdrawing from your IRA to buy a house does not sound like a good idea to me. You can't put it back .... ever! Personally I would rather rent where I would like to move until the McMansion is sold, at least. You might clear enough from the sale to make the down payment if you just have to buy a house.

Good luck and Cheers,

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Old 12-07-2009, 10:43 PM   #15
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Youbet

Good points. I tend to be risk averse. However, there is always risk in choosing not to do something. There is always a risk (regardless of 100% Firecalc) of retiring too early or things going dreadfully wrong. On the other hand, if you don't retire there are other risks as well. DH and I both recently have seen several examples of people near our age who unexpectedly died or developed serious health problems.

Charlie

We have very little equity in our current house. So we either buy a house through withdrawing some of the funds to do it from our retirement funds (we don't have enough in taxable accounts to buy it solely from those accounts...we will probably have between 1/3 and 1/2 from non-retirement funds), or we get a mortgage and pay it off over 3 to 5 years, or we continue working.

By the way, we don't intend to buy the new house until the current house is sold.
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Old 12-07-2009, 11:01 PM   #16
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I tend to be risk averse. .
That's clear from your posts.

But, although you haven't been specific, you seem to also be dissatisified with your and your DH's current lifestyle as well. Balancing your willingness to assume some level of financial risk in retirement vs. spending time working when you'd prefer to spend time doing something else is something only you can do. Time vs. money: an unending tradeoff.

You've asked a number of interesting questions in various threads concerning details of retirement financial planning and retirement portfolio survivability. I wonder though if the real struggle in your decision making isn't over the value of your time being spent working vs. being spent with DH, family, friends and in pursuit of your own interests.
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Old 12-08-2009, 12:31 AM   #17
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That's clear from your posts.

But, although you haven't been specific, you seem to also be dissatisified with your and your DH's current lifestyle as well. ...... I wonder though if the real struggle in your decision making isn't over the value of your time being spent working vs. being spent with DH, family, friends and in pursuit of your own interests.
I think you are very perceptive. I do want a different lifestyle. And I am sold on the value of time versus money (within prudence, of course).
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Old 12-08-2009, 09:19 AM   #18
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If you are determined to buy a new home rather than rent, I think you might be better off to use your taxable account to put up a minimum down payment and take a 30 year loan. Today's low mortgage rates won't be seen again in your life time (IMHO) and you might be able to charge off the interest and property tax if you itemize your taxes.

Edit: The reason for using a minimum down is to
save your taxable account for emergencies.

Don't underestimate the power of tax deferred compounding in your IRA. I strongly encourage you to explore the consequences of using your IRA to buy a house vs. the option I suggested above. After all, even if you start down the road, you can always change your mind later and pay off the mortgage with your IRA later if that seems wise.

You seem very confident in your ability to analyze your financial affairs, but it might be wise to bounce your findings off of a good accountant.

That's what I would do.

Cheers,

charlie
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Old 12-08-2009, 09:32 AM   #19
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I should have mentioned that I live in Canada, so there is no tax advantage whatsoever in keeping a mortgage. The piece of mind no mortgage offers is very important to me when you see stock market downturns hammer down retirement savings.

Obviously, the USA tax situation is very different.
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