estimating potential yearly income after FIRE

[simple girl]

OK, DH and I are several years away from ER (current NW ~$500K, ages 38 & 43), but we are trying to track what our potential yearly income would be if we FIRED "today"...and how it changes as time goes on.

We did some research this morning on the SEPP method from IRA's. We figure we would probably use the amortization method, but plan on choosing an interest rate for withdrawal that would equal no more than 4% of the account balance (since you can choose less than 120% of the mid-term applicable Federal rate).

Do these numbers make sense?

4% of IRA's (including 401k's rolled over, currently ~ $235K) = $9400/yr
4% of taxable account plus cash, CD's (~141K) = $5640/yr
yearly net income from rental property = $1277

So total potential yearly income as of today = $16,317


We don't plan to FIRE on this, but want to track it to see when we feel we'll be ready. Thoughts?

thanks,
simple girl

P.S. Can you work part-time (if we so choose) once you start SEPP's from IRA's

P.S.S. We also have Roth's, but thought it makes sense to wait as long as possible to tap these, so they aren't included in the calculations. Also, we didn't include pension that will be received later.

 

[retire@40]

I doubt you will be able to sustain a 4% SWR with about 40% of your non-real estate assets sitting in cash accounts probably earning around 5%. So, I'd bring the cash SWR down to 2% if you plan on keeping it there.

And yes, you can still work while SEPPing. And yes, it doesn't make sense to draw from your Roths if you don't need to at a zero or 10% tax bracket.

 

[Gone4Good]

Do these numbers make sense?

4% of IRA's (including 401k's rolled over, currently ~ $235K) = $9400/yr
4% of taxable account plus cash, CD's (~141K) = $5640/yr
yearly net income from rental property = $1277

So total potential yearly income as of today = $16,317

4% IRA, only if you plan on drawing 4% from the IRA. Given the fact that you have $141K in taxable assets, I'm not sure why you want to draw anything from the IRA unless you are forced to.

4% of taxable account doesn't sound right. Your taxable account will generate taxable income, and potentially taxable gains. Excluding gains, your income from your taxable account will be something like [bond/cash principal] * [bond interest rate] + [equity principal] * [equity yield]. If all of your holdings are in cash, you'll probably have more than 4% income whereas if it is invested mostly in equities your income will probably be a lot lower than 4%.

 

[simple girl]

I doubt you will be able to sustain a 4% SWR with about 40% of your non-real estate assets sitting in cash accounts probably earning around 5%. So, I'd bring the cash SWR down to 2% if you plan on keeping it there.

Good point. We do have some of our $$ in taxable accounts (not all in cash accounts)...but we are heavy in cash and working on converting more to our taxable account. We are heavy in cash b/c we sold our house recently and the new house we bought is cheaper.

 

[simple girl]

4% IRA, only if you plan on drawing 4% from the IRA. Given the fact that you have $141K in taxable assets, I'm not sure why you want to draw anything from the IRA unless you are forced to.

Well, I guess we were just thinking we'd have to take $ from both the taxable and IRA accounts at the same time, as the $ in the taxable account would only last a few years. It sounds like what you are saying is draw down your taxable accounts first, then set up the SEPP when you need to start drawing down them. Is that right?

OK, so how does this work with rebalancing? Our taxable account is composed of Vanguard tax-advantaged large cap index funds. So our withdrawal amount would be 4% based upon our networth (minus equity in rental property). We would take this amount by selling off the proper amount of index funds. Then, to keep our overall asset allocation, we would transfer funds within our IRA's to regain our large cap holdings

 

[Gone4Good]

Well, I guess we were just thinking we'd have to take $ from both the taxable and IRA accounts at the same time, as the $ in the taxable account would only last a few years. It sounds like what you are saying is draw down your taxable accounts first, then set up the SEPP when you need to start drawing down them. Is that right?

OK, so how does this work with rebalancing? Our taxable account is composed of Vanguard tax-advantaged large cap index funds. So our withdrawal amount would be 4% based upon our networth (minus equity in rental property). We would take this amount by selling off the proper amount of index funds. Then, to keep our overall asset allocation, we would transfer funds within our IRA's to regain our large cap holdings

Yes and yes. Generally speaking you want to prolong your tax deferral as long as possible, which means drawing down the taxable accounts first. If that means you have to reallocate the IRA account to maintain your desired investment allocation, that's fine. You won't owe any capital gains taxes on sales in the IRA, so the IRA is the perfect vehicle for rebalancing transactions.

Also keep in mind that your large cap mutual funds are probably throwing off a yield of 1.5%-1.75% and your cash & CDS could be yielding in the 5% area. If you stop reinvesting those dividends, that income should reduce the amount of principal you have to sell and take taxable gains on.