May be retiring earlier than I thought

[MaryContrary]

I am a 49 year old woman, single, and my employer of almost 20 years is going out of business, filed bankruptcy. They are in run-off and I am told that I am slated to be kept on until the end which is projected to be 2016.

I currently have $250k in 401k, ROTH, CDs, and taxable brokerage. I max out my 401k at $17k, ROTH at $5k, and another $3600 in taxable. My employer contributes 3% of my $96k salary to 401k since the beginning of this year because they froze the pension plan. I did not start seriously saving untiil 2005 and well... you know what happened after that.

I have done a lot of figuring based on a cost of living raise each year of ~2.5%, catch-up contributions in 401k and ROTH starting next year at $23.5k and $6k. In addition there is a severance package of two weeks pay for each year of service so in 2016 that would be around $85k lump sum.

I was just informed that they are dissolving the pension plan and if the bankruptcy court approves it, we will receive a packet this month to decide on a lump sum or an annuity. Based on modeling I did with the online tool at the pension provider, using the scenario of leaving employment now and taking a lump sum in September, that comes up to $119k.

Taking ALL of that into consideration through 2016, added to what I have now, I come up with $618k at that time. This is based ONLY on what I and my employer contribute, NOT including any loss or gain.

I live very simply and have no debt other than mortgage. ALL of my monthly bills comes up to $500, no car payment. I bought a small house two years ago to retire to closer to my children and the mortgage is only $650 per month. It's being rented out now for an additional $325 per month income, after paying for a property manager. My current home is under water and whether I am able to sell it, rent it, or something else is a decision to be made when I need to.

I am torn between staying in the market or going to almost all cash. If I believe that I can retire on the $618k at age 53 there doesn't seem to be a compelling reason to put any of it at risk (other than inflation risk). It may be a very close thing but even a part-time job would certainly make it possible... that is if I could find a job.

I don't like the current market and political situation and every single day I am tempted to sell everything. I lost a lot in 2008 and can't go through that again with maybe no time to make it up.

 

[mickj]

In addition there is a severance package of two weeks pay for each year of service so in 2016 that would be around $85k lump sum.

If they are going out of business what incentive do they have to actually pay this severance?

 

[MaryContrary]

If they are going out of business what incentive do they have to actually pay this severance?

Nothing other than their word, I suppose. They have been laying people off since the beginning of the year and have been paying the severance. My closest co-worker of 20 years was let go and received it.

ETA: The company was taken over by a government agency, all the officers let go. It is their word, not just "the company". It is also their doing that we are receiving the 401k contributions.

 

[pb4uski]

Have you run your numbers through FireCalc? Your expenses sound fairly modest but I think you need to develop a more refined retirement budget. Also, what about health insurance and health care? Another possibility might be to do some part time or contract work and still have significant time off.

 

[MaryContrary]

Have you run your numbers through FireCalc? Your expenses sound fairly modest but I think you need to develop a more refined retirement budget. Also, what about health insurance and health care? Another possibility might be to do some part time or contract work and still have significant time off.

Yes, I did. Very little is below the line, I'd say over a 90% probablity of success but would need to run it again to refresh myself. That's the same as what I get through the Fidelity retirement planner. There is a lot higher chance of success with just a part time job. I wouldn't mind working at Walmart or something.

My current allocation is 45% bonds (Gov, Muni, and Corp bond funds), 30% cash, and 25% stock. A Conservative portfolio. I'm getting chicken because it's just a few years away (at most) and I can't afford to lose.

 

[obgyn65]

Welcome, Mary. Sorry you have to face this situation.

I am a 49 year old woman, single, and my employer of almost 20 years is going out of business, filed bankruptcy. They are in run-off and I am told that I am slated to be kept on until the end which is projected to be 2016. (...) I lost a lot in 2008 and can't go through that again with maybe no time to make it up.

 

[mickj]

Nothing other than their word, I suppose. They have been laying people off since the beginning of the year and have been paying the severance. My closest co-worker of 20 years was let go and received it.

ETA: The company was taken over by a government agency, all the officers let go. It is their word, not just "the company". It is also their doing that we are receiving the 401k contributions.

Good to know! Best of luck to you.

 

[Lazarus]

I don't understand about your bills. Isn't a mortgage a bill? What are you actually spending each month? Mortgage, utilities, food, property tax, gas ect.

 

[eytonxav]

It seems to me you have plenty of breathing room to look for another job while you evaluate whether you can afford to FIRE. In any event, its unpleasant to be caught in this situation, but hopefully everything will work out the best for you.

 

[rodi]

Not sure if you turned 49 in 2012, or 2011, and will be turning 50 in 2012...
If it's the latter - you can do the catch up contributions (5.5k more in the 401k) now.
I'm 50 - did catch up contributions last year - because I turned 50 late in the year.
In other words - you can do catch up contributions for the ENTIRE year that you turn 50 - even if most of the year, you're 49.

I would not plan on/count on the severance... I've had several friends go through similar situations - and the severance kept shrinking as time went on. Eventually it disappeared altogether.

My megacorp updates their formal severance policy every few years. It is *never* to the advantage of long term employees. It's about 1/2 of the payout of the policy that was in place when I originally hired on, 18 years ago. Severance policies can and do change.

 

[MaryContrary]

I just turned 49 so I will be starting the catch-up in January 2013.

My mortgage payment in the house I will move to is $650. All of my other bills like cable, internet, water, trash, electric, cell phone, car insurance... EVERYTHING is usually under $500 per month.

I am not even figuring in my current home mortgage because I WILL NOT pay one more month than I have to when I am let go. I will not get my $70k down payment back let alone the amount I am in the hole now. I will not throw good money after bad, spend $1800 per month on it. I know that comparable 5-bedroom houses rent for much more than that. At the time I bought it there were still children at home but it's just me now.

I got the pension payout docs and it's $120,600 or annuity of $631 per month. The annuity would start on 12/1/2012. I would be paying a pretty high tax rate on that until at least 2016 and taking it all into consideration I think it would be best to roll it over into an IRA. It is tempting to have a "guaranteed" income that would about cover my mortgage. There really is no guarantee on anything though.

 

[MasterBlaster]

MaryC:

If you are considering walking away (defaulting) on your current house...

In California if you have ever refinanced the mortgage, the bank holding the mortgage can come back at you for any deficiencies (negative equity/selling/holding costs etc). Their fees can be very steep. Much steeper than a reasonable person would suspect.

What this means is that if you default, then all of your other (non-qualified,non-retirement) assets are at risk to bank judgements.

If the home still has the original (trust-deed) mortgage on it then (as I understand things) they cannot get a deficiency judgement from you.

You need to understand how all of this can effect you and your assets. Perhaps speaking with a professional accountant or attorney is warranted before anything drastic happens.

 

[Katsmeow]

My mortgage payment in the house I will move to is $650. All of my other bills like cable, internet, water, trash, electric, cell phone, car insurance... EVERYTHING is usually under $500 per month.

By bills do you mean monthly bills or do you mean your expenses?

I find it hard to fathom that all of your expenses other than mortgage payment are only $500 a month. Some things to include in expenses, other than those you mention:

Health insurance
Health copay, deductibles
Dental insurance/expenses
Computer and peripherals repair/replacement. It does happen and should be prepared for (just a couple of days ago my 11 month old computer just abruptly quit and would not power on).
Software purchases
Any online or software memberships or registrations -- you may not have any but these are easy to overlook
Automobile fuel
Automobile repair and maintenance
Automobile tolls/parking
Food
Clothing
Personal care items
Homeowner's insurance
umbrella insurance
Pets (assume you have none but if you do...)
Fitness expenses - whether gym, fitness clothes, fitness equipment
Entertainment - movies, travel, books, hobbies, etc.
Household repair/maintenance
Yard maintenance
Furniture/appliance repairs/replacement/maintenance

 

[MaryContrary]

MaryC:

If you are considering walking away (defaulting) on your current house...

QUOTE]

That is one option. It would be a last resort and since the house could be rented for more than the mortgage, that is most likely what I will do.

 

[MaryContrary]

By bills do you mean monthly bills or do you mean your expenses?

I find it hard to fathom that all of your expenses other than mortgage payment are only $500 a month. Some things to include in expenses, other than those you mention:

My starting point is my set expenses of mortgage (the $650 does include property taxes and homeowner's insurance) and monthly bills that I listed, ones that I know are always payable each month. I know what I spend now on all of those other items and I have modeled retirement income of $3k per month, which I know is sufficient for me. Because of all of the money that I am already putting away each month I have a real take-home pay of around $4100 right now. When I retire I (hopefully) won't be commuting anymore, I won't be having lunch out, I won't be paying for monthly parking at work, etc. Without the burden of the other mortgage of $1800 I don't think there would be much sacrifice.

I am also a quiltmaker (award winning) and I have a longarm quilting machine. I know that I can make a simple queen-sized quilt top in 3 days working full time, add a couple days for quilting, binding, and other finishing, and I could sell them. A quilt that I made for my daughter that took a month to make was appraised for $4500. That doesn't mean it would sell for that much, it's worth what someone will pay for it but, there is that possibility too.

I know I need to be realistic but I also need to be optimistic.

 

[Running_Man]

Hello Mary,
The amount of the annual annuity versus the cash payout seems to really favor the annuity to me. Being a conservative person you might really gain a peace of mind knowing you have that monthly income coming in. The pension plan must be pretty well funded if they are allowing cash outs and that amount to me is worth keeping the annuity.

 

[MaryContrary]

Hello Mary,
The amount of the annual annuity versus the cash payout seems to really favor the annuity to me. Being a conservative person you might really gain a peace of mind knowing you have that monthly income coming in. The pension plan must be pretty well funded if they are allowing cash outs and that amount to me is worth keeping the annuity.

It is attractive, the relative % of income with the annuity. I've tried looking at this several ways. One way is...

Deposit the $120k in an IRA. Assuming a 4% rate of return it would grow to $177,600 at age 60. I then start withdrawing the same amount that I would have had in an annuity, $7560 per year. Assuming a tax rate of 25% at that time (big assumption but have to start somewhere) that is a net of $5670. Up to the age of 85 this comes up to $147,420 in after-tax income and a remaining balance of $157,475.

If I take the annuity starting this year at age 49, I will be paying 38% taxes on it through age 53. For the remaining years to age 85 the assumed tax rate is 25%. This comes up to $200,188 in after-tax income and no remaining balance.

That's a difference of $53k in income versus $157k remaining. That's $100k on the side of taking the lump sum. Of course, there's the market risk but, interest rates won't be this low forever either and it could pay more than 4% to get rid of all risk and go to cash/CDs for income.

Unless I'm totally figuring this up wrong, which is also possible.

 

[MaryContrary]

Another thing I just thought of... if I do not find a job then my unemployment benefits would be reduced by the amount of the pension annuity.

Department of Labor and Workforce Development | Pensions

I would receive the max amount of $450 per week x 4 = $1800.

 

[Bestwifeever]

...
I am also a quiltmaker (award winning) and I have a longarm quilting machine. I know that I can make a simple queen-sized quilt top in 3 days working full time, add a couple days for quilting, binding, and other finishing, and I could sell them. A quilt that I made for my daughter that took a month to make was appraised for $4500. That doesn't mean it would sell for that much, it's worth what someone will pay for it but, there is that possibility too....

Whether or not your quilt is worth that much, your skill and machine are definitely valuable; I have friends who quilt and they always pay someone else (like you ) to do the actual finishing on their quilts.

 

[rodi]

MaryC:

If you are considering walking away (defaulting) on your current house...

In California if you have ever refinanced the mortgage, the bank holding the mortgage can come back at you for any deficiencies (negative equity/selling/holding costs etc). Their fees can be very steep. Much steeper than a reasonable person would suspect.

What this means is that if you default, then all of your other (non-qualified,non-retirement) assets are at risk to bank judgements.

If the home still has the original (trust-deed) mortgage on it then (as I understand things) they cannot get a deficiency judgement from you.

You need to understand how all of this can effect you and your assets. Perhaps speaking with a professional accountant or attorney is warranted before anything drastic happens.

This is true. If you've refied it's technically a recourse loan.
But CA is a "one action" state - and they can either come after you, or foreclose - not both. The banks prefer the auction on the courthouse step to judicial action. I know of zero cases where they've gone after the defaulted borrower. The issue of recourse vs non-recourse loans has turned out to be a non-issue in reality.

But another factor if you short sell or are foreclosed is the "difference" in what you owe vs what the bank gets, is taxable income. Even though you never see a penny. People are surprised to get 1099's after a short sale - but it happens often. I live in SoCal where the bubble crashed hard - I had friends who had to short sell when their jobs changed. They had not counted on the tax burden.

But it sounds like Mary is going to rent the place - so no short sale or foreclosure.

 

[MaryContrary]

I have wondered about the 1099 issue on a short sale. I originally paid $347k with 20% ($69,400) down. It is currently valued at around $200k (I believe) and I have a mortgage of $245k. I did refinance with HARP to lower my interest rate.

If the bank issues a 1099 for the "profit" of the difference, how does the down payment amount that I lost come into it? Would it off-set that amount totally? If I write off that loss on taxes to off-set the "gain" of the short sale it seems to me that would totally wipe it out PLUS another $3k write-off per year of excess loss.

 

[Chuckanut]

. If I believe that I can retire on the $618k at age 53 there doesn't seem to be a compelling reason to put any of it at risk (other than inflation risk).

At your age, inflation is a very great risk, IMHO.

Have you looked as various asset allocation scenarios that can buffer your investments when (not if) the market turns down? Diversification is the key to minimizing - not eliminating - risk. Think about it. But, if you are really fearful of a down market and might panic and sell at the bottom, then you probably should not be in the market.

In any event take your time, no need to rush that I see. You need to be comfortable with your decisions.

 

[MaryContrary]

At your age, inflation is a very great risk, IMHO.

Have you looked as various asset allocation scenarios that can buffer your investments when (not if) the market turns down? Diversification is the key to minimizing - not eliminating - risk. Think about it. But, if you are really fearful of a down market and might panic and sell at the bottom, then you probably should not be in the market.

In any event take your time, no need to rush that I see. You need to be comfortable with your decisions.

Yes, inflation is a big risk. I'm not usually a timid investor but with this development I feel better about not taking unnecessary risk. I'm currently at 45% bonds, 30% cash, and 25% stock. That's a conservative portfolio and some "conventional wisdom" says to have as much bonds as your age.

I got a call from an advisor at Fidelity asking if I needed investment advice because of the amount of cash that's not invested. I told him my situation and that I'd set up an appointment. I'll see what he has to say and recommend, then take it into consideration. I'm not naive enough to blindly take their word for things and I am aware of management fees, loads, etc. that could be charged on mutual funds. MorningStar helps with that too.

My co-worker that was let go did a dumb thing, IMO. We still talk on the phone and he told me that he met with the 401k provider we have now. The investments ARE NOT anything that I would ever choose on my own except for a PIMCO bond fund. They talked him into keeping his money there AND they charged an up-front fee of $5k! They said if he did that then they he would never again have to pay transaction fees. WTF!?!? How many thousands of mutual funds are there at Fidelity and other places that have no transaction fees? Are they also putting him in high cost, loaded funds? I don't know and he doesn't either because "they are managing it" for him.

I told him that he just paid them for the privaledge of keeping his money there.

 

[rodi]

I have wondered about the 1099 issue on a short sale. I originally paid $347k with 20% ($69,400) down. It is currently valued at around $200k (I believe) and I have a mortgage of $245k. I did refinance with HARP to lower my interest rate.

If the bank issues a 1099 for the "profit" of the difference, how does the down payment amount that I lost come into it? Would it off-set that amount totally? If I write off that loss on taxes to off-set the "gain" of the short sale it seems to me that would totally wipe it out PLUS another $3k write-off per year of excess loss.

I'm not sure. That's a question for an accountant.
I'm not sure if loss of the downpayment and principal payments made is considered a loss for tax purposes.

 

[Running_Man]

It is attractive, the relative % of income with the annuity. I've tried looking at this several ways. One way is...

Deposit the $120k in an IRA. Assuming a 4% rate of return it would grow to $177,600 at age 60. I then start withdrawing the same amount that I would have had in an annuity, $7560 per year. Assuming a tax rate of 25% at that time (big assumption but have to start somewhere) that is a net of $5670. Up to the age of 85 this comes up to $147,420 in after-tax income and a remaining balance of $157,475.

If I take the annuity starting this year at age 49, I will be paying 38% taxes on it through age 53. For the remaining years to age 85 the assumed tax rate is 25%. This comes up to $200,188 in after-tax income and no remaining balance.

That's a difference of $53k in income versus $157k remaining. That's $100k on the side of taking the lump sum. Of course, there's the market risk but, interest rates won't be this low forever either and it could pay more than 4% to get rid of all risk and go to cash/CDs for income.

Unless I'm totally figuring this up wrong, which is also possible.

You are forgetting that 62% of $7,560 would be able to be saved between age 49 and 60. Assuming a 4% return that leaves $70K at age 60 when you could then start taking the annuity, if that is the plan, and @ 4% that 70K since it is not in the spending plan will grow to 188K by age 85: