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Old 12-03-2011, 02:28 PM   #1
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Analyze Now!

I was reading Nords latest (outstanding) post in the Military Retirement & Financial Independence blog about Retirement Planners and Calculators (part 2 of 2). Some of the calculators Nords writes about are in Bud Hebeler's Analyze Now website. I was working through Bud's Free Retirement Planner as I inputted various different scenarios to help target the right age to RE.

Some brief background; I will have 2 COLA adjusted (military) pensions, one at 60 and the other at around 65. In addition to these 2 pensions, I have a small non-COLA adjusted pension and of course (hopefully) Social Security at 67. I also have a 401k, IRA, and Roth. As I work the calculator, I can create a scenario in which I RE at 58 and end up spending down most of my nest egg as I wait for the pensions at 60, 65, 65, and 67. What concerns me about this tactic is that my nest egg gets eroded to around one year of expenses, before it starts to grow again following the kick in of the various pensions.

I would like to hear your opinions on spending down nest eggs (well in excess of 4%/year) while waiting for pensions to start. I'm very confident the 2 military pensions will be there, a little less confident in Social Security, and not terribly confident of the small corporate pension (company has gone in and out of bankruptcy). Similarly, others may be looking to more aggressively spend down their nest eggs while waiting for their social security to increase at 67 or 70. Any advice/opinions are greatly appreciated. Thanks!
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Old 12-03-2011, 02:47 PM   #2
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Your early access to tax-protected accounts (401k and IRA) is penalized.

I would consider dramatically reducing your spending and/or taking an interim job.
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Old 12-03-2011, 08:32 PM   #3
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Good point. Prior to 60 I would need to pull from traditional and Roth accounts.
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Old 12-04-2011, 09:37 AM   #4
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I'm going to be doing something similar. I have 457, 403b, IRA and ROTH accounts and will be getting SS and UK state pensions (at 66 or 67) as well as a small company pension. I'm 50 so need to fund any ER until I get to 59.5. I can spend down my taxable accounts, have no penalty access to my 457 and of course the principal in the ROTH. I don't want to use the ROTH early, but I will spend the 457 and taxable accounts and I'll ER when my projections say I can do that and reach 59.5 with a couple of years of expenses still in after tax. There's also always the 72t option and you have to judge the impact of using your tax deferred accounts early while you still have taxable funds available, but you can organize things so they'll be no 10% penalty on early retirement fund withdrawals. If I was to do a 72t I could easily ER right now and still see growth in my net worth which would accelerate significantly once the state pensions kick in.
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Old 12-04-2011, 02:12 PM   #5
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Bud Hebeler's stuff is the first thing I came across (after quite a few years of retirement) to tell me about sutainable withdrawals etc. I like it, because he focuses on what could deliver financially lethal hurts, not precision estimates of survival.

I think that size of hurt is often more important than probability of hurt. Although the world is usually a benign or at least neutral agent, it can pay to ask yourself "If the universe knew my weaknesses, and wanted to exploit them, how good are my defenses against this well informed enemy?"

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Old 12-04-2011, 02:59 PM   #6
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Quote:
Originally Posted by Rowdy View Post
As I work the calculator, I can create a scenario in which I RE at 58 and end up spending down most of my nest egg as I wait for the pensions at 60, 65, 65, and 67. What concerns me about this tactic is that my nest egg gets eroded to around one year of expenses, before it starts to grow again following the kick in of the various pensions.
I'd be cautious about spending down too much of your investments. I like Ed the Gypsy's idea of working some hours to avoid a high draw rate.

FYI, you can draw from your 401k after age 55 without penalty as long as your plan offers this provision. Most plans have this option but you'd have to check it out. Also, if your IRA is a rollover IRA from an old 401k, you could roll that back into your current 401(k) if the plan allows it so you can get access to those funds as well. I won't have any pensions (sniff) but I plan to live off the 401k for a couple years until age 59 1/2.
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Old 12-04-2011, 03:43 PM   #7
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You plan to retire in 10 years time so I would proceed with your plan, and save, and LBYM towards that goal, then re-evaluate closer to the time. You may exceed your goals and have no worries, or you may have to work an extra year or 2. 10 years is a long time in today's economic and political climate so I would try not to over-analyze and what-if yourself too much.

Set your course, engage, and enjoy the journey.
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Old 12-04-2011, 09:54 PM   #8
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Quote:
Originally Posted by Rowdy View Post
I was reading Nords latest (outstanding) post in the Military Retirement & Financial Independence blog about Retirement Planners and Calculators (part 2 of 2).
And thank you!
Retirement planners and calculators (part 2 of 2) | Military Retirement & Financial Independence

Quote:
Originally Posted by Rowdy View Post
What concerns me about this tactic is that my nest egg gets eroded to around one year of expenses, before it starts to grow again following the kick in of the various pensions.
I would like to hear your opinions on spending down nest eggs (well in excess of 4%/year) while waiting for pensions to start. I'm very confident the 2 military pensions will be there, a little less confident in Social Security, and not terribly confident of the small corporate pension (company has gone in and out of bankruptcy). Similarly, others may be looking to more aggressively spend down their nest eggs while waiting for their social security to increase at 67 or 70. Any advice/opinions are greatly appreciated. Thanks!
You may be venturing into territory where financial advisers fear to tread.

One option would be to buy a short-term annuity designed to bridge the gap. However interest rates are very low which means that you'd pay a high price for the annuity's monthly payment, and you'd probably pay more in fees & commissions than is worth the surety of the 2-3 years of payments.

A second option would be a bare-bones budget designed to get you through the gap. But you may have already done that.

A third option would be to see if you could get a lump sum for your shaky corporate pension. You'd hope that it would be guaranteed by PBGC, and that some pension-buying company would offer you a lump sum now in exchange for giving up that stream of cash.

A fourth option would be various "Plans B": you could execute your plan (that takes you down to that one year of expenses) and hope that everything works out. If it doesn't then you could tap a home equity line of credit (which you should probably arrange during your working years) or even (ouch) contemplate living on credit-card debt.

I would advise this sort of "planning" only for federal pensions like civil service, the military, or Social Security. And you'd want to have good health insurance to avoid spending over your deductible!
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Old 12-05-2011, 02:13 PM   #9
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Sounds risky to me, as you may become less employable as you age. Better to have a bit of a cushion. I'd look into the 72t option or perhaps selling an asset like an expensive car, vacation home, etc. to get you through (assuming you have one of those assets). Good luck.

One other option is to have a two-section budget.

1) absolute needs - food, lights, shelter

2) wants - vacation, hobbies, gifts

Start out spending only #1. If you get to the end of the year and things are going well, you can start spending on item #2. Continue this habit until you get your pensions...this may give you the needed wiggle room.
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