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Am I Trying To Over Simplify Draw Down Too Much?
Old 08-25-2014, 09:55 AM   #1
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Am I Trying To Over Simplify Draw Down Too Much?

So as we move closer to trying to pull off some form of early retirement I am realizing the draw down strategy seems to be way harder then the accumulation phase.

So here is where we are currently

401K's .....mine 485K, Hers 275K for a total of 760K

Roth IRA's 110K

Taxable accounts, Co Stock, Cash - 225K

No debt, with house value around 400K. Annual household income $120K. We are both 43 and the plan is at 50 for my wife to leave her job and I will do something part time. I will zero in on the exact amount as we get closer but we will want somewhere between 50K - 65K a year and of course medical insurance is the big unknown cost.

So here is my plan and my question. I hope to have the non qualified portion up to at least 500K at 50. As we approach that age I will keep most, if not all in cash. We will then draw down 50K a year and I will work a few days a week to supplement 10K- 15K per year.

If we don't add anymore to our 401K's as they stand now they would grow to around 1.7 M with a 5% return, 2.4M with a 7% return, and 3.8M with a 10% return. So then at 59.5 we could start tapping into the 401K's.

The Roth IRA money is also there as a back up.

Do you think I am trying to over simplify this?
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Old 08-25-2014, 11:13 AM   #2
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Quote:
Originally Posted by Wishin 2B Fishin View Post
So as we move closer to trying to pull off some form of early retirement I am realizing the draw down strategy seems to be way harder then the accumulation phase.

So here is where we are currently

401K's .....mine 485K, Hers 275K for a total of 760K

Roth IRA's 110K

Taxable accounts, Co Stock, Cash - 225K

No debt, with house value around 400K. Annual household income $120K. We are both 43 and the plan is at 50 for my wife to leave her job and I will do something part time. I will zero in on the exact amount as we get closer but we will want somewhere between 50K - 65K a year and of course medical insurance is the big unknown cost.

So here is my plan and my question. I hope to have the non qualified portion up to at least 500K at 50. As we approach that age I will keep most, if not all in cash. We will then draw down 50K a year and I will work a few days a week to supplement 10K- 15K per year.

If we don't add anymore to our 401K's as they stand now they would grow to around 1.7 M with a 5% return, 2.4M with a 7% return, and 3.8M with a 10% return. So then at 59.5 we could start tapping into the 401K's.

The Roth IRA money is also there as a back up.

Do you think I am trying to over simplify this?
I don't think you're over simplifying. In fact, I think simplification at FIRE is a good thing. I just semi-FIREd this June and that's what we are doing; not your exact plan but simplifying.

Here are some initial thoughts based on the limited info in your post.

You currently have ~$1.1M in investable assets. Using the conservative end of your forecasts, which I'd do for planning, and normalizing for inflation (at 3%/yr), your 401Ks will be worth ~$1.1M in today's $. I know that's very conservative (5% total return per year minus 3%/yr for inflation) but, it's the conservative end of your forecast, and you can use the mid-range if you like.

$1.1M will generate $44,000 @ 4%/yr (a good starting point for forecasting), which is ~$10-$15k/yr short of your stated need. Use 7%-3% for inflation, and you'll be able to generate the $50-$65k/yr you desire.

Your plan for using the taxable funds first follows conventional wisdom, and allocating it separately the way you describe first is a time segmentation approach (sometimes called "buckets"). Thoughts here are: (1) you should not put it all in cash, it's a big chunk of your portfolio and you can likely find more return with acceptable risk over a ~10yr period (age 50-59.5) and, (2) you should consider using these funds as a "cash cushion" that you decide/adjust each year depending on overall market returns (several threads on this but, the best is probably one by Nords).

I like the idea of using the Roth as back-up. But, as part of the annual evaluation/adjustment discussed above, you should consider back-door Roth conversions btwn age 50-59, depending on your tax situation.

Also, you've not mentioned your $400k home. The equity you have, or will have, can also be a back-up source of funds, which may influence your thoughts on AA/risk with the remainder of your portfolio.

You've also said nothing about pensions or SS, which are significant in your decision making. If I assume SS for you both (you both work) and no pensions, you should be fine with moderate portfolio returns and spending in the range you forecast.

This is just off the top of my head so, hope it helps.
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Old 08-25-2014, 12:14 PM   #3
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Originally Posted by Huston55 View Post
I don't think you're over simplifying. In fact, I think simplification at FIRE is a good thing. I just semi-FIREd this June and that's what we are doing; not your exact plan but simplifying.

Here are some initial thoughts based on the limited info in your post.

You currently have ~$1.1M in investable assets. Using the conservative end of your forecasts, which I'd do for planning, and normalizing for inflation (at 3%/yr), your 401Ks will be worth ~$1.1M in today's $. I know that's very conservative (5% total return per year minus 3%/yr for inflation) but, it's the conservative end of your forecast, and you can use the mid-range if you like.

$1.1M will generate $44,000 @ 4%/yr (a good starting point for forecasting), which is ~$10-$15k/yr short of your stated need. Use 7%-3% for inflation, and you'll be able to generate the $50-$65k/yr you desire.

Your plan for using the taxable funds first follows conventional wisdom, and allocating it separately the way you describe first is a time segmentation approach (sometimes called "buckets"). Thoughts here are: (1) you should not put it all in cash, it's a big chunk of your portfolio and you can likely find more return with acceptable risk over a ~10yr period (age 50-59.5) and, (2) you should consider using these funds as a "cash cushion" that you decide/adjust each year depending on overall market returns (several threads on this but, the best is probably one by Nords).

I like the idea of using the Roth as back-up. But, as part of the annual evaluation/adjustment discussed above, you should consider back-door Roth conversions btwn age 50-59, depending on your tax situation.

Also, you've not mentioned your $400k home. The equity you have, or will have, can also be a back-up source of funds, which may influence your thoughts on AA/risk with the remainder of your portfolio.

You've also said nothing about pensions or SS, which are significant in your decision making. If I assume SS for you both (you both work) and no pensions, you should be fine with moderate portfolio returns and spending in the range you forecast.

This is just off the top of my head so, hope it helps.
Thanks for the reply.

We do have SS (no pension) but I know it is projected to fall short around 2033 which is the year we may began drawing it. Based off the current projection if we were to draw it at age 62 it would be around 34K additional per year combined but if we stop working early then I don't know how much less it will be plus it will probably be a reduced amount anyway to the projected shortfall.

Your right the house could be a "plan B" option too.
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Old 08-25-2014, 12:40 PM   #4
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You say: "As we approach that age I will keep most, if not all in cash".

If you mean "cash-cash", I'd find a way to make that $500K earn some kind of growth...inflation will eat it up faster than anything.

Other than that, it sounds like a decent plan and as Huston said, "simple" is good.
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As a matter of fact, just the other day I heard a financial guy say something like "...it's like tennis; if you try to do what the pros do and hit the ball within a millimeter of the line, you're only going to hurt yourself...leave the fancy stuff to the pros"
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Old 08-26-2014, 08:04 PM   #5
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Originally Posted by Wishin 2B Fishin View Post
Thanks for the reply.

We do have SS (no pension) but I know it is projected to fall short around 2033 which is the year we may began drawing it. Based off the current projection if we were to draw it at age 62 it would be around 34K additional per year combined but if we stop working early then I don't know how much less it will be plus it will probably be a reduced amount anyway to the projected shortfall.

Your right the house could be a "plan B" option too.
I reread one of your old posts, and it looks like you will be close to owning your $400K house outright when you retire. Given your numbers, that's one heck of a 'Plan B.' I'd suggest folding that into your calculus regarding: AA, spending, SWR, withdrawal source/sequence, Roth IRA conversions, etc.

And, we all need a 'Plan B' because, like Yogi said about the FIRE journey, "It's pretty far, but it doesn't seem like it."
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Old 08-26-2014, 09:31 PM   #6
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For SS running out of cash in 2033, the projected inflows from FICA taxes from current workers should be able to pay around 70% of current benefits. To be conservative, I take what I have currently accrued in SS benefits and scale it by 2/3. It is still a significant chunk of change (ie $20k per year vs $30k per year for each of us if we delay draw until age 70).

You can go to ssa.gov and go their retirement estimator page. Be sure to put in '0' for last years wages to have the model show what you have accrued to date. The '0' forces the model to assume 0 earnings in future years.

Social Security is very front weighted early in your career so you may have already earned the majority of your benefits already. As an experiment put a non-0 number in the second time and it will assume that you continue to work and then give you the slightly higher estimate.

-gauss
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