Can I make it till ESOP?

[Dwhit]

I will be turning 55 next month. I have always wanted to retire at 55. I have about $310,000 in a 401k and about 2.3 million in the company's ESOP.

Currently I making $150,000 a year, which is plenty for us. My youngest child will be starting college this fall,but she has a scholarship to cover most all of that.

I found out that I can withdraw from my 401k without penalty, but the problem is my ESOP says retirement age is 59 1/2. So I don't think I can stretch the 401k over the 5 or 6 years till I can withdraw from the ESOP.

So my question is there any chance of getting the ESOP early, or finding a way to borrow against it, or something like that.

Thanks!

 

[youbet]

I'm not an expert on the rules regarding withdrawing from ESOPs, so I'll let others comment on that. But I am wondering if you're addressing the risk of the company stock in your ESOP falling in value between when you retire at 55 and when you can withdraw and diversify at 59.5. How comfortable are you that the lack of diversity in your wealth might not result in a significant value drop before 59.5 comes around?

And welcome to the FIRE board! I see you're a male from Oklahoma, but why not introduce yourself including a little more detail so folks know just a bit about who they're addressing.

 

[Dwhit]

Shot answer is Ok for the next couple of years, but it is a concern past that. If I stay another year or two, I can diversify my ESOP, which I believe will be a 25 percent sale of ESOP company stock, distributed to my 401k.

 

[youbet]

It seems to me that the issue of stretching your 401k dollars out until you reach 59.5 is the minor one. And I'm sure other posters will arrive to advise you on how to get expenses down to less than $150k/yr. My concern would be how you ensure that the current $2.3M value of your ESOP stock is there in the 4 years between an age 55 retirement and the 59.5 ESOP withdrawal age.

Staying another year or two eliminates the "stretch the 401k funds" problem and would allow you to diversify the ESOP.

Also, at a spending clip of $150k/yr, you'll need additional retirement funding beyond the ESOP money. Anything else, beyond SS, in your future? Or do you have plans for lower expenses when DD is through college?

 

[scrabbler1]

It is too bad your company has not done what my former company did in the mid-2000s which was to consolidate the two plans including the streamlining of the rules to make them the same where applicable, such as age eligibilities and vesting rules.

 

[ronocnikral]

Shot answer is Ok for the next couple of years, but it is a concern past that. If I stay another year or two, I can diversify my ESOP, which I believe will be a 25 percent sale of ESOP company stock, distributed to my 401k.

Many people at Enron said the same thing. Don't discount what those at the top will do to gain every penny at the expense of those below them, especially when the crap hits the fan.

I'd be very nervous retiring with that portfolio considering 88% of your portfolio is with your company's stock.

and yes, you'll need to figure out your expenses.

 

[Dwhit]

Also, at a spending clip of $150k/yr, you'll need additional retirement funding beyond the ESOP money. Anything else, beyond SS, in your future? Or do you have plans for lower expenses when DD is through college?

To tell you the truth, I had calculated the ESOP would be enough. Very new to this, but I had made a spreadsheet to calculate it out. I assumed the ESOP would be at $2.5 mil when I start drawing on it at age 60. I assumed a rate of return at 6% with inflation at 3.5% giving me a ROR of 2.5%.

I put in income drops to $135,000 when I turn 70; $120,000 when I turn 76 and $100,000 when I hit 83. I also did assume we would be getting our social security. That gave me enough to make it to 100 years old (I stopped after that).

After your comment, I went back and looked at it with no social security – that only gets me to 80 years old. That was kind of a surprise and I am not sure what to make of that yet.

 

[Dwhit]

I'd be very nervous retiring with that portfolio considering 88% of your portfolio is with your company's stock.

Yes, I am a little worried. That is another factor in the desire to retire early. At present, my company cashes your ESOP out of company stock when you leave as a matter of policy, but they do not have to do that. They can just set aside the account and leave it in company stock until they pay out, which is what they used to do.

 

[ronocnikral]

general consensus used to be 4% SWR, based on the trinity study or whoever did it. I believe there is a thing in the FAQ section about the 4% SWR.

recent "breakthroughs" (aka as the recession and the lost decade) leave people thinking that is aggressive. you have $2.5MM @ 4% is $100k. Or 2/3. $150k seems high, considering that is what you gross?

you may want to play with firecalc (link below). Instead of you throwing darts to pick return rates, it takes actual historical data. The problem with picking your own return rate, is you tend to anchor on what you need and since we dislike seeing negative returns, we tend to omit those as well. each method has it's pros and cons though....

on top of that, there are many pieces to this puzzle that we don't have, mortgage, other debt etc. But all that can be filled into firecalc. good luck.

 

[Animorph]

You are definitely on the optimistic side with total portfolio versus income, though dropping income will help. FIRECalc will give you an idea of how market fluctuations during your withdrawal period might affect your portfolio value.

Your ESOP is the big danger, as several have already commented on. It is subject to much more severe fluctuations than the market in total. You would be counting on its value to at least stay stable for the next 4-5 years, but it could just as well lose half its value. Until you can diversify the ESOP into multiple companies (more like 75% somewhere else, not just 25%), you will be at high risk of having to go back to work if your company stock disapoints. Two big risks: one company's stock, and a short time frame.

I'd wait until you can achieve some diversification.

 

[Dwhit]

Thanks for the info. I tried using the Firecalc, and it seemed to tell me the same thing as my spreadsheet, I need the Social Security (or to cutback the equivalent income), or I will not have enough.

What do most people assume about Social Security? I have always thought its a 50/50 proposition at best as far as me actually getting anything from it. But as the time gets nearer, I am beginning to think it could happen.

With regards to diversification, its a tough issue for me to accomplish. Unless I quit, the most I can diversify is 25%. I would have to quit my company to get the stock converted to cash and put in an account similar to the 401K that I could manage, but still not have access to till I am 60.

Its hard for me to justify quitting this job and finding another one. I think it would be hard for me to get another job at the same compensation level locally, and I really only have to hang on a year and 1/2 here, I think, to have enough to retire with. Plus I have been working here a long time, and psychologically its hard for me to think about another job

What I was thinking, if I could find a way to "access" the ESOP, I could leave sooner, and kill two birds with one stone, cash out the ESOP stock shares and meet my goal of retiring at 55.

 

[youbet]

Thanks for the info. I tried using the Firecalc, and it seemed to tell me the same thing as my spreadsheet, I need the Social Security (or to cutback the equivalent income), or I will not have enough.

I plugged your numbers in (guessing at what your SS would be) and agree. You'd be cutting it close if you retired now even if the ESOP shares hold value OK and you solve the access to the money issue.

What do most people assume about Social Security? I have always thought its a 50/50 proposition at best as far as me actually getting anything from it. But as the time gets nearer, I am beginning to think it could happen.

SS viability has been discussed here quite a bit. Do a search. My feeling is that at your age, you'll get your SS although the taxed portion may increase to 100% or some other means test may creep in.

With regards to diversification, its a tough issue for me to accomplish. Unless I quit, the most I can diversify is 25%. I would have to quit my company to get the stock converted to cash and put in an account similar to the 401K that I could manage, but still not have access to till I am 60.[/quote] The lack of diversification issue is definitely a risk.......

With fewer responsibilities and a lower anticipated budget, you'd certainly be good to go. But with your family and a desire to have a fairly generous retirement budget, I think you're cutting it close. And that's even if the ESOP value risk works out OK.

It sounds a bit like you're just starting to look into this seriously. Why not take the next year and study the subject and do additional planning while continuing to work? (Yeah, yeah....... easy for me to say. I'm retired. ) It looks like things should swing significantly in your favor within the next 1 - 2 - 3 years.

 

[Backpacker]

Also lots of discussion here about reducing expenses. I have to think you can drop expenses lower than $150k (or in your example $135k at age 70.)

But I have a reputation for being a tightwad

 

[Dwhit]

It sounds a bit like you're just starting to look into this seriously. Why not take the next year and study the subject and do additional planning while continuing to work? (Yeah, yeah....... easy for me to say. I'm retired. ) It looks like things should swing significantly in your favor within the next 1 - 2 - 3 years.

Also lots of discussion here about reducing expenses. I have to think you can drop expenses lower than $150k (or in your example $135k at age 70.)

But I have a reputation for being a tightwad

I guess I do need to get into this a bit more, and figure out what kind of things I don't know. This site looks like a great resource, so I guess I need to just dive in.

 

[mh]

I guess I do need to get into this a bit more, and figure out what kind of things I don't know. This site looks like a great resource, so I guess I need to just dive in.

If you haven't done the allowable 25% diversification of the ESOP, that you mentioned above, I would do that ASAP.

 

[Chuckanut]

Yes the specific stock risk in the ESOP is a problem. I have not used options, but is there a way this person could use options to limit his losses if the ESOP stock heads downhill before he can cash it in

 

[Dwhit]

The diversification process is defined in the ESOP plan and is very strictly defined. I can diversify up to 25 percent in the year after I turn 55 (next year for me). After that, each year I can further diversify a small bit to keep the total percentage at 25 percent (this is assuming the stock goes up). I think that if I wait till 60 years old, I can diversify another 25 percent to a total of 50 percent.

What I am thinking at this moment is i will do the diversification next year. I think they will put the money in my 401k, and if I can access that account, it will give me plenty of funds to bridge to I am sixty. If I see that is where they put my diversification, then I can go ahead and retire, and they will then convert all the stock to cash. Then I can diversify the cash fund ino various things.

 

[Dwhit]

Nm