56 Atlanta FIRE Plan review

[money4wells]

Hi! Long time reader, ready to retire early in 2022. Since I always get good ideas here, wanted to run my situation by the group for feedback and ideas:
• Divorced male, 56 turning 57 in March. Empty nest, 2 kids in college(mostly if not all covered by 529 plan)
• $900k in 401ks/IRA's/HSA
• $200k in Cash
• The above invested in 70% Stock and 30% Cash/Bond/iBond/online savings/real estate
One rental that easily nets $1000/month or $12k/year, and will grow with inflation - paid off worth $200k
• Social Security - $2231/mo or $26,772/year at age 62 - that is what statement says. How do I re-calculate without the auto-projection SS does that my salary will continue till 62?
• Already downsized the large house in the burbs to a condo in MCOL.
• Have a beach condo that is about worth what I owe, but has started going up again finally. I about break even on it.

Plan:
• Live off the $200k cash for 2.5 years till age 59.5. This reduces SORR risk. I kept a mortgage on my condo, but at only 2.99% 30 yr fixed, payment only $1000/mo including tax/insurance. Might pay off later if market stays up.
• 59.5 to 62 - Any remaining from cash bucket, or start from 401k/traditional IRA.
• 62 start SS.
• Doesn't include any earnings or inheritance.
• Company has Retirement Health Care, but the cost is basically Cobra rates. $1500/month to cover myself and two kids for a few years! So will likely do ACA plans, and manage Roth Conversions as income accordingly to stay under ACA cliffs but above Medicaire(assuming I don't consult or otherwise earn income).
• Use Beach condo to "Exchange" using HomeExchange.com to move around during the winter and summer. Ideally, 2-3 months in Florida in winter, 1-2 months in New England(where I am from) in summer, and I love spring and fall in Atlanta. I have already started doing this, 22 exchanges in the last 2 years, more short term while still working(though I have worked remote for 10 years). It has been great during Covid, all driving trips!


Planned Expenses:
• $6k/month, $72k/year. A large portion is discretionary, Single so I can cut as needed.

Firecalc and Fidelity planner even at "significantly below average" say I am 95-100%.

Right before the Holidays, my Megacorp group informed me I have to cut my budget by 60% soon after I return from the Holidays. This won't be layoffs, the people will go to "the bench", which is mostly empty, and end up on other projects. But I have spent a year building the team and getting it rolling, not excited about dismantling it. I was planning on going until the end of August 2022, when the project would end. But now I am thinking of doing it sooner, partly due to above, also in seeing some family and colleagues having health issues. And I saw a statement on here recently that really hit home: "If you work another year, you will have given up the healthiest remaining year of your life".

I would probably retire with some interim steps:

1) Full time till about my birthday in March.
2) Go to part time 20 hours for some period after that. I would get half my pay, but full benefits. I would need to get approval of both the project and my company. I think I can get it approved, but certainly no guarantee. Alternately I could stay at full time pay, since it is all remote and probably averages 30 hours anyways and I have 5 weeks of vacation and accumulating rapidly.
3) The company has a 3-month sabbatical. You don't get paid, but do keep your benefits during the 3 months, and you are guaranteed your job back. So if I was bouncing off walls after 3 months I could go back in theory. It also delays taking ACA. Almost positive I will do this before retiring regardless.
4) If somewhere in there I was let go, I would get about 6 months of severance. But in IT they are desperately trying to keep everyone and hire like crazy, so I doubt this will happen right now.

Any holes anyone can see, or suggestions to improve the plan? I will probably be negotiating this steps when I return to w*rk next week. Thanks!

 

[ExPatKiwi]

Looks good. I’m similar to you but still married. Instead of all that cash for the first 2 years to manage the SORR you can use your 401k. If you separate service after age 55 you can take distributions from your 401k without penalty so I’m planning to take cash from my 401k and brokerage account to optimize my tax’s so I minimize taxes. I’ve created a spreadsheet to age 70 that has all my withdrawals, growth estimates, social security, and tax’s etc. it’s fine tuned to ensure I pay the minimal amount of tax and maximize conversions.

 

[money4wells]

Looks good. I’m similar to you but still married. Instead of all that cash for the first 2 years to manage the SORR you can use your 401k. If you separate service after age 55 you can take distributions from your 401k without penalty so I’m planning to take cash from my 401k and brokerage account to optimize my tax’s so I minimize taxes. I’ve created a spreadsheet to age 70 that has all my withdrawals, growth estimates, social security, and tax’s etc. it’s fine tuned to ensure I pay the minimal amount of tax and maximize conversions.

Yeah, my understanding is it depends on the companies plan documents. I was going to research that, but that would be taking from my stock allocation inside my 401k. Maybe I am missing part of your point, but isn't that increasing SORR risk, by selling stock when things are potentially down?

By doing it from the cash(bucket method basically), I can keep my 401k assets invested no matter what for as long as possible, and at least past 59.5. And it isn't income, so I stay under ACA, and can do Roth conversions at low tax brackets. I could also do 72T IRA withdrawals, but the same concept applies.

What am I missing?

 

[ExPatKiwi]

Yeah, my understanding is it depends on the companies plan documents. I was going to research that, but that would be taking from my stock allocation inside my 401k. Maybe I am missing part of your point, but isn't that increasing SORR risk, by selling stock when things are potentially down?

By doing it from the cash(bucket method basically), I can keep my 401k assets invested no matter what for as long as possible, and at least past 59.5. And it isn't income, so I stay under ACA, and can do Roth conversions at low tax brackets. I could also do 72T IRA withdrawals, but the same concept applies.

What am I missing?

So I’m keeping some of my cash within my 401k plan in the stable fund and the balance in my brokerage link 401k account fully invested, I’ll use the stable fund cash in the first couple of years of retirement. I also have my brokerage account fully invested in total stock market fund. I can draw both cash from my 401k and cash along with long term capital gains from the brokerage account to minimize my taxes.

 

[money4wells]

So I’m keeping some of my cash within my 401k plan in the stable fund and the balance in my brokerage link 401k account fully invested, I’ll use the stable fund cash in the first couple of years of retirement. I also have my brokerage account fully invested in total stock market fund. I can draw both cash from my 401k and cash along with long term capital gains from the brokerage account to minimize my taxes.

Understood. And I have cash in a Stable Value Fund and stocks in brokerage link both inside my 401k also. But if you withdraw the cash in the Stable Value fund from the 401k for spending, it would still be income(and thus taxes and thus less Roth conversions), and your "tax deferred" total comes down, no longer deferring taxes on that cash.

For me, it seems better to use the post-tax cash first. I will keep the 70/30 allocation, just have most or all cash in post-tax bucket. Am I missing something there?

If I didn't have the post-tax cash option, I agree with what you are saying. And in fact I was planning that a few months ago, before I recently sold two houses to load up the post-cash bucket.

 

[militaryman]

"How do I re-calculate without the auto-projection SS does that my salary will continue till 62?"
I am interested in the responses to this question.
I am under the impression that if you have 35 years of earnings paid into SS that they just use your highest 35 (adjusted for inflation) and taking early retirement would not effect their projections much unless you were "averaging in" some $0 years by retiring before you had 35 years of earnings. The other scenario I thought that would dramatically effect their calculation is if you recently got a much higher paying job that they were calculating in those higher salary years for your final stretch to 62.

THe first scenario happened to my DW's SS age 62 estimate on her statement when she stopped working at 50 years old and having had only about 20 years of earnings the estimate went down +25% after she had a complete year of no earnings. I think her estimate is based on 20 years of inflation adjusted earnings and 15 years of zero earnings.

 

[ExPatKiwi]

Understood. And I have cash in a Stable Value Fund and stocks in brokerage link both inside my 401k also. But if you withdraw the cash in the Stable Value fund from the 401k for spending, it would still be income(and thus taxes and thus less Roth conversions), and your "tax deferred" total comes down, no longer deferring taxes on that cash.

For me, it seems better to use the post-tax cash first. I will keep the 70/30 allocation, just have most or all cash in post-tax bucket. Am I missing something there?

If I didn't have the post-tax cash option, I agree with what you are saying. And in fact I was planning that a few months ago, before I recently sold two houses to load up the post-cash bucket.

Your plan sounds good to me as I’m more heavily invested in my 401k.

 

[ChristineE]

Regarding calculating your SS based on an earlier retirement age, you can register at https://www.ssa.gov/myaccount/index2.html to view all your earnings and you can use their calculator to adjust anticipated future earnings.

 

[money4wells]

"How do I re-calculate without the auto-projection SS does that my salary will continue till 62?"
I am interested in the responses to this question.
I am under the impression that if you have 35 years of earnings paid into SS that they just use your highest 35 (adjusted for inflation) and taking early retirement would not effect their projections much unless you were "averaging in" some $0 years by retiring before you had 35 years of earnings. The other scenario I thought that would dramatically effect their calculation is if you recently got a much higher paying job that they were calculating in those higher salary years for your final stretch to 62.

THe first scenario happened to my DW's SS age 62 estimate on her statement when she stopped working at 50 years old and having had only about 20 years of earnings the estimate went down +25% after she had a complete year of no earnings. I think her estimate is based on 20 years of inflation adjusted earnings and 15 years of zero earnings.

Yeah, I have more than 35 years earnings. So the question for me is if the projection they are using is based off the highest 35 years? Or I saw somewhere that they filled in the years between current year and retirement age with your current earnings each year. Hopefully that is only unless as you said not having 35 years. Can anyone confirm that? I don't see anything on the site for the SS estimates, or a way to change it, or how to manually calculate.

 

[militaryman]

I think this link will let you put your actual earnings for each year you want included in the calculation --- even future earnings or $0
https://www.ssa.gov/benefits/retirement/planner/AnypiaApplet.html

 

[Kork13]

Overall, you've got a solid plan -- the $900k should provide the remaining $3k/mo of your planned expenses under the 4% rule, once you start pulling SS. But it sounds like you're misinterpreting the SORR mitigation plan. If you plan to go all cash the first 2-3 years then start withdrawing investments, you're merely delaying your sequencing risks by that time, subjecting yourself fully to SORR once your cash is tapped & you're drawing mostly from investments. (Unless I'm misunderstanding your plans?)

Rather, I'd recommend you use your cash to moderate your investment withdrawals based on market performance. Live out of your cash, but every so often (quarterly, semiannual, or otherwise), assess market performance. If your assets are up (say, above 4% or above inflation) sell investments to refill your cash bucket. If your assets are down, defer the sale until markets come back up above your cutoff line. Once everything is back nicely in the black, you can sell as required to refill your cash bucket.

Given your strong cash position (enough for multiple years of "down markets"), that method would mitigate SORR by ensuring you don't have to sell investments heavily during a down market, especially in your early years of retirement.

Minor note to also consider: because you'll be 57 when you retire, the "Rule of 55" will allow you to access your 401k immediately (though your IRAs have to wait until 59½, and the HSA until 65). So with that in mind, I'd say pack your 401k as full as you can while you're still working, including maxing it out in 2022 if possible.

 

[HI Bill]

…it sounds like you're misinterpreting the SORR mitigation plan. If you plan to go all cash the first 2-3 years then start withdrawing investments, you're merely delaying your sequencing risks by that time, subjecting yourself fully to SORR once your cash is tapped & you're drawing mostly from investments. (Unless I'm misunderstanding your plans?)

Rather, I'd recommend you use your cash to moderate your investment withdrawals based on market performance. Live out of your cash, but every so often (quarterly, semiannual, or otherwise), assess market performance. If your assets are up (say, above 4% or above inflation) sell investments to refill your cash bucket. If your assets are down, defer the sale until markets come back up above your cutoff line. Once everything is back nicely in the black, you can sell as required to refill your cash bucket.

+1. OP - think of it this way. If you spend down all the cash over 3 years AND THEN the markets tank, you’ll be forced to sell at a loss to fund your ER. Also, you would not be taking full advantage of minimizing LTGC tax rate of 0%.

 

[money4wells]

I think this link will let you put your actual earnings for each year you want included in the calculation --- even future earnings or $0
https://www.ssa.gov/benefits/retirement/planner/AnypiaApplet.html

Thanks for the SS calculator spreadsheet Militaryman! Great stuff!

I put in my info, and it does make a difference. It does appear the online site makes the assumption you will continue your current salary until whatever age you put in for starting to take SS. So in my case it was filling my high salary in from 57 to 61. It made a difference of about 6.3% or my monthly SS estimated payment.

i put the new info into Firecalc, and it didn't move the needle, still 100%. But worth knowing, and a good catch for others.

 

[money4wells]

Overall, you've got a solid plan -- the $900k should provide the remaining $3k/mo of your planned expenses under the 4% rule, once you start pulling SS. But it sounds like you're misinterpreting the SORR mitigation plan. If you plan to go all cash the first 2-3 years then start withdrawing investments, you're merely delaying your sequencing risks by that time, subjecting yourself fully to SORR once your cash is tapped & you're drawing mostly from investments. (Unless I'm misunderstanding your plans?)

Rather, I'd recommend you use your cash to moderate your investment withdrawals based on market performance. Live out of your cash, but every so often (quarterly, semiannual, or otherwise), assess market performance. If your assets are up (say, above 4% or above inflation) sell investments to refill your cash bucket. If your assets are down, defer the sale until markets come back up above your cutoff line. Once everything is back nicely in the black, you can sell as required to refill your cash bucket.

Given your strong cash position (enough for multiple years of "down markets"), that method would mitigate SORR by ensuring you don't have to sell investments heavily during a down market, especially in your early years of retirement.

Minor note to also consider: because you'll be 57 when you retire, the "Rule of 55" will allow you to access your 401k immediately (though your IRAs have to wait until 59½, and the HSA until 65). So with that in mind, I'd say pack your 401k as full as you can while you're still working, including maxing it out in 2022 if possible.

I like the concept of extending the period of protecting from SORR risks from 2.5 years. If I could get it to 5 years that would get me to 62, and SS. And of course the worst of the SORR risk. I am going to explore ways to do that, or most of it anyways.

I did look up the Rule of 55 in my 401k documents. It isn't very specific, but does mention it, so I don't think the plan specifically disallows it, as some do. But I will need to call and try and find the specifics, is it a one time lump sum, or can I do periodic withdrawals, etc... I was surprised that wasn't in the plan docs. I believe it is because it is part of the companies "Retirement" policy, rather than the 401k itself. The plan itself mentioned "in kind" withdrawals, and all those scenarios. But nothing about Rule of 55. It was just mentioned in the boilerplate document about rollovers after retirement. So I will need to follow up and make sure it can be done, and what the rules are. If I have to take a 10% penalty to withdraw, that is almost as bad as selling in a down market.

HSA is another interesting point. I could use the HSA for health related items, I will have most of a years expenses in it.

I also just realized I have $82k and growing in Stable Value fund. So that amount plus my cash balance outside 401k, plus what I am adding, almost gets me to the five years. With any income or less expenses, or use HSA, I should be good. Worst case, I sell some relatively small amount of stock in the 401k, but only to replenish cash bucket and only when markets are not down.

 

[money4wells]

+1. OP - think of it this way. If you spend down all the cash over 3 years AND THEN the markets tank, you’ll be forced to sell at a loss to fund your ER. Also, you would not be taking full advantage of minimizing LTGC tax rate of 0%.

Could someone please explain what is meant by:
"Also, you would not be taking full advantage of minimizing LTGC tax rate of 0%."

If I sold stocks inside the 401k and then withdrew those funds, wouldn't I owe income tax and not LTGC? Isn't LTGC for assets outside 401ks/IRA's? What am I missing?

 

[HI Bill]

..."Also, you would not be taking full advantage of minimizing LTGC tax rate of 0%."

If I sold stocks inside the 401k and then withdrew those funds, wouldn't I owe income tax and not LTGC? Isn't LTGC for assets outside 401ks/IRA's? What am I missing?

Sorry, you are correct. I didn't catch the fact that you don't hold any taxable investments.

 

[Kork13]

I like the concept of extending the period of protecting from SORR risks from 2.5 years. If I could get it to 5 years that would get me to 62, and SS. And of course the worst of the SORR risk. I am going to explore ways to do that, or most of it anyways.

Maybe I wasn't clear... Your original plan doesn't really do anything for SORR, because you're not drawing down from your investments. My suggestion allows you to go far beyond simply combating SORR, and actually insulates you from market losses indefinitely, as long as you don't hit a 7-year bear market. You'd only sell investments during "up" markets, never in "down" markets. You always live out of your cash, and always replenish your cash by selling investments during "up" market periods. Goal would be to keep that $200k cash account indefinitely (though $200k is probably more than is needed to make this plan work -- you'd probably be fine with half that).

I did look up the Rule of 55 in my 401k documents. It isn't very specific, but does mention it, so I don't think the plan specifically disallows it, as some do. But I will need to call and try and find the specifics, is it a one time lump sum, or can I do periodic withdrawals, etc... I was surprised that wasn't in the plan docs. I believe it is because it is part of the companies "Retirement" policy, rather than the 401k itself. The plan itself mentioned "in kind" withdrawals, and all those scenarios. But nothing about Rule of 55. It was just mentioned in the boilerplate document about rollovers after retirement. So I will need to follow up and make sure it can be done, and what the rules are. If I have to take a 10% penalty to withdraw, that is almost as bad as selling in a down market.

The Rule of 55 is an IRS rule, not a 401k plan rule or policy. To your 401k administrator, you're simply taking disbursements from your account. It's the IRS that would levy the 10% penalty, but because you qualify for the exception, there would be no penalty. Talk to your HR or plan administrator -- they should be able to ease your mind about it.

HSA is another interesting point. I could use the HSA for health related items, I will have most of a years expenses in it

Sorry, when I referred to HSA @ 65, I meant for ANY purpose, not restricted to health care expenses. It's one of the great things of the HSA -- once you hit age 65, it becomes totally accessible, basically acting like a Roth IRA (all growth is tax-free).

 

[money4wells]

Maybe I wasn't clear... Your original plan doesn't really do anything for SORR, because you're not drawing down from your investments. My suggestion allows you to go far beyond simply combating SORR, and actually insulates you from market losses indefinitely, as long as you don't hit a 7-year bear market. You'd only sell investments during "up" markets, never in "down" markets. You always live out of your cash, and always replenish your cash by selling investments during "up" market periods. Goal would be to keep that $200k cash account indefinitely (though $200k is probably more than is needed to make this plan work -- you'd probably be fine with half that).


The Rule of 55 is an IRS rule, not a 401k plan rule or policy. To your 401k administrator, you're simply taking disbursements from your account. It's the IRS that would levy the 10% penalty, but because you qualify for the exception, there would be no penalty. Talk to your HR or plan administrator -- they should be able to ease your mind about it.


Sorry, when I referred to HSA @ 65, I meant for ANY purpose, not restricted to health care expenses. It's one of the great things of the HSA -- once you hit age 65, it becomes totally accessible, basically acting like a Roth IRA (all growth is tax-free).

RE Rule of 55 - That is interesting if it is just an IRS thing. I would love it. But I have seen others on this forum say it is specific to the 401k plan, and not all allow it. Does anyone know the answer for sure?

 

[Kork13]

RE Rule of 55 - That is interesting if it is just an IRS thing. I would love it. But I have seen others on this forum say it is specific to the 401k plan, and not all allow it. Does anyone know the answer for sure?

https://www.irs.gov/taxtopics/tc558
About half-way down. Different 401k plan administrators may give you more or less heartache trying to implement it (ex: trying to withhold the penalty when it's not actually required), but it would all get sorted when you file your taxes.

 

[swaneesr]

RE Rule of 55 - That is interesting if it is just an IRS thing. I would love it. But I have seen others on this forum say it is specific to the 401k plan, and not all allow it. Does anyone know the answer for sure?

I researched the withdrawal methods for my 401k plan. According to the summary of plan documents, you are allowed distribution of funds at age 55 and older if you retire from my employer without penalty.

I think it is allowed by the IRS but your plan also needs to allow it.

Also, only funds in my employers 401k are accessible. Any other older 401ks from previous employers are not accessible under rule of 55.

 

[pb4uski]

... Sorry, when I referred to HSA @ 65, I meant for ANY purpose, not restricted to health care expenses. It's one of the great things of the HSA -- once you hit age 65, it becomes totally accessible, basically acting like a Roth IRA (all growth is tax-free).

Not totally true. An important distinction to make is while you can withdraw funds from a HSA after age 65 without the 10% penalty, if the withdrawals are used for qualified medical expenses then they are tax free... but if the withdrawals are not used for qualified medical expenses then the withdrawals are taxable income.

So it is like a Roth only if withdrawals are for qualified medical expenses. Of course, one can withdraw for any reimbursed qualified medical expenses... even ones from many years ago as long as you didn't use the qualified medical expense in itemized deductions.

 

[cat4ever]

, one can withdraw for any reimbursed qualified medical expenses... even ones from many years ago as long as you didn't use the qualified medical expense in itemized deductions.

And as long as you have proper documentation of said medical expenses being paid with non-HSA funds. So start saving those receipts. ICYDK, COBRA payments, unlike other health insurance payments, are qualified medical expenses so that’s a big one not to miss.
DISCLAIMER: Others here are much more knowledgeable on this stuff than me, but the above is my understanding.

 

[money4wells]

I researched the withdrawal methods for my 401k plan. According to the summary of plan documents, you are allowed distribution of funds at age 55 and older if you retire from my employer without penalty.

I think it is allowed by the IRS but your plan also needs to allow it.

Also, only funds in my employers 401k are accessible. Any other older 401ks from previous employers are not accessible under rule of 55.

So it sounds like it is allowed by the IRS, and some companies might give grief that should get sorted at tax time.

It also sounds like I would need to leave my current 401k at my employer after retirement, at least until age 59.5, if I want to make any withdrawals without penalty. I have other old 401ks all rolled into one at Fidelity, had planned to roll the current 401k into the others at Fidelity after retirement. But in order to do the Rule of 55, it sounds like it is only from the 401k at the company you retire from after age 55. I guess I could make one big withdrawal, and then rollover the rest, but that defeats some of the purpose. And not too bad a price to pay to offset SORR risks.

 

[swaneesr]

If I understand correctly, I think you are correct. You need to leave your 401k at your employer to access funds using rule of 55.

It appears my plan allows a annual or quarterly or monthly withdrawals.

In late 2021 I moved about 4% into cash. I was considering retirement on July 1, 2022. I thought perhaps setting up monthly payments from age 56 until 59.5 simulating my monthly paycheck. I also get nonCOLA pension.

I need to discuss this with someone in HR.

Swanee

 

[Exchme]

SORR is with you no matter what. You can shift it around a bit by playing games with cash, but that merely makes you more vulnerable when your cash is spent down. Continuing to hold large cash reserves for a long time doesn't work either as that means you have fewer $ at work for you over time.

Last time I was on the SS site, it was quite easy to get rid of future earnings from your estimate, just look around a bit, there is a place to enter future earnings. Since you've already worked 35 years, it won't make much difference.

The numbers thrown around make it hard to understand your situation.
-How much do you owe on your house?
-How much do you owe on your beach condo?
-Do your expenses include those payments plus estimates of income & property taxes?
-Do your expenses include healthcare? Even after Medicare age, it isn't free.
-If you need ACA, have you looked at your plan options?- sometimes the choices aren't very good, regardless of cost.


On the surface, it sounds like you are OK, but I recommend you do some modeling and look at options like delaying SS, paying off the house and/or condo, the order of accounts to draw on, whether any Roth conversions would make sense, how much easier the finances will be if you stay on a bit longer, etc.