Hopeful to RE and bridge the gap

[FIRE_hopeful]

This forum is precisely what I’m looking for!

I’m in my mid 50s, married, with 31 years of employment at megacorp behind me. Some particulars on our household situation:

• Pretax Retirement funds = $1.8M
• Roth Retirement funds = $150K
• Equity in primary home ~ $400K
• Equity in vacation home (1.5 hrs away in the mountains) = $150K
• Misc non-retirement funds (mostly cash) = $170K
• Pension plan of current cashout value of $167K, estimated benefit of $1667/mo @ age 65.
• All vehicles paid for, with the first one likely needing to be replaced in 10 years
• 1 child in private university, self-financing (blessed to have a full ride + well paid summer internships)
• Wedding to fund in 2016 = $15K (can’t convince them to elope)
• Current salary = $136K/yr
• Current income from my consulting business = $40K/yr
• Anticipated comfortable spend rate (post tax $$) = $60K (current lifestyle), $80K/yr (aspirational)

I’ve certainly made all sorts of screw-ups: Not figuring out how cool Roth is until just a few years ago, not doing Roth conversions when my traditional accounts were in the tank, investing too heavily in HP stock . . . even so, I feel blessed to have what we have.

I’m just beginning to try to figure out a game plan. At my age, there’s a reasonable chance of layoff and an aspirational chance of an early retirement package being offered in the next year or so. For my years of service, a layoff might garner an approximately $84K payout, and an early retirement package might mean a similar payout with additional benefits like 2 years of health benefits at employee rates. While I enjoy my job, either a layoff or early retirement package would be enough for me to happily launch into something different. So, my preliminary thoughts on the game plan:

• Primary home goes up for sale in mid-July. Would want to put the proceeds in a relatively low risk investment for 2 yrs.
• Vacation home becomes primary home – in 2 years, sell with primary home tax advantages on the gains.
• In 2017, use the combined proceeds to pay cash for FRP, including any remodeling that we’d want to do.
• After megacorp, leave the retirement funds alone until I'm 65 or so to allow for some additional growth. I launched my consulting business 16 months ago as a proof of concept, to learn the ropes, and to make contacts. All indications are that I should be able sustain 20 billable hrs/wk and gross $150K/yr for the 1st couple years to establish the business, and then drop to 10 hrs/wk to make a go of living on $75K/yr gross, and during this time, do roth conversions like mad. I’ll need to augment finances with non-retirement funds to bridge prior to finally drawing on retirement funds.
• One of the best "investments" I can make is in my own health and fitness. With the aggressive career and trying to "do it all", I'm really out of shape and about 40 lbs overweight.
• With the extra time, I really need to achieve and maintain some fitness goals, and up my relaxation game, spend more time with family . . . it won’t slow down for me one bit.

There are many holes in the plan that I need to resolve. I’m looking forward to learning from all of you en route to accomplishing that. Any comments will be greatly appreciated.

 

[bingybear]

I'm a little confused by your post. You talk about a spend rate of $60k to $80k per year, but it looks like you are "retiring" to a self employed job with $150k gross. I would assume this would cover your expenses with some to spare. So are you just changing to self employment with shorter hours?
Others will post a like to a page of things to think about when you retire. But I would ask if your spending estimates include health insurance if you have to get your own plus some for HI deductibles?
You mentioned pension amount (cash or as annuity), but did you include SS? If you need $60k to $80k total, you pension + SS can be a significant part of it, thus reducing the amount to take from your assets over the long term.
Have you run your assets and needs through FIRECALC? This will give you some idea how likely you are to succeed based on historical market data. It is a good place to start.
Welcome to the forum. It is a wealth of information for ER.

 

[RunningBum]

Welcome to the forum.

In 2017, use the combined proceeds to pay cash for FRP, including any remodeling that we’d want to do.

What is FRP?

 

[soupcxan]

Sounds to me like you have plenty of assets and a well thought out plan.

 

[Live And Learn]

Welcome to the forum. The income from the consulting gig if awesome and will do alot to reduceyour risk of portfolio ffailure if you can keep it going just a few short years. I always admire folks who can live on $60k. My ER budget has $25k / year for healthcare (premium plus out of pocket max for two). Will you get subsidize HC from HP?

 

[ERD50]

...

What is FRP?

From Wikipedia, the free encyclopedia
FRP can refer to:
Fibre-reinforced plastic, consists of fiberglass, carbon, aramid, hybrid or other fabric reinforced plastic
Final resting place, as in Cemetery
Franco-Provençal language
Functional reactive programming
Free radical polymerization
Gaming[edit]
Fantasy role-playing
Politics[edit]
Progress Party (Denmark) (Fremskridtspartiet)
Progress Party (Norway) (Fremskrittspartiet)
Federal Republic of the Philippines
Military[edit]
Fleet Response Plan - U.S. Navy operational contingency plan to support Sea Power 21

The cemetery definition is the closest I can come up with. Or is FRP some megacorp lingo?


-ERD50

 

[Katiek]

As Bingybear and others have pointed out, your projected consulting income will more than cover expenses for the next few years With your savings, pension and presumably SS (although you may not be including that in your estimates), you should be more than fine.

My only question is whether cutting the consulting to 10 hours a week is practical. I don't know the nature of your consulting, but in some areas, the very nature of the projet work would indicate that a minimum amount of time is required to really participate and that if you're only willing to commit 10 hours, that may not be enough for some customers. But at that point, it sounds like your fine even without that income, so I'm not sure it matters in any event.

 

[FIRE_hopeful]

I'm a little confused by your post. You talk about a spend rate of $60k to $80k per year, but it looks like you are "retiring" to a self employed job with $150k gross. I would assume this would cover your expenses with some to spare. So are you just changing to self employment with shorter hours?
Others will post a like to a page of things to think about when you retire. But I would ask if your spending estimates include health insurance if you have to get your own plus some for HI deductibles?
You mentioned pension amount (cash or as annuity), but did you include SS? If you need $60k to $80k total, you pension + SS can be a significant part of it, thus reducing the amount to take from your assets over the long term.
Have you run your assets and needs through FIRECALC? This will give you some idea how likely you are to succeed based on historical market data. It is a good place to start.

Well, if I could RE now and 1) had enough non-R funds to cover me between now and 59.5, and 2) had enough in retirement funds to confidently draw at 59.5, I’d rather not do the self-employment. Unfortunately, I clearly don’t have the funds in pocket to bridge for 5 years, and as for 2), well, we’ll see what kind of growth the next 5 years brings.
Yes, the health insurance is one item that “keeps me up at nite”. I’ve got to figure out that one, for sure, and I’m guessing that this forum has a great knowledge base on that topic.
SS – I have a quite uneducated approach to that topic. Part of me doesn’t want to even plan for SS being there for fear of SS reform that could possibly happen. Another part of me wants to wait until 70 to start drawing SS to maximize my benefit. Having very active parents into their mid-80’s and early-90’s, I’m anticipating a long life as well.
I haven’t used FIRECALC. Sounds like a nice modeling tool. Looking forward to running the numbers.

Welcome to the forum.
What is FRP?

FRP = Final Resting Place = perhaps the first home we’ll have with no significant compromises, and old-age lifestyle compatible.

Welcome to the forum. The income from the consulting gig if awesome and will do a lot to reduce your risk of portfolio failure if you can keep it going just a few short years. I always admire folks who can live on $60k. My ER budget has $25k / year for healthcare (premium plus out of pocket max for two). Will you get subsidize HC from HP?

Our projected spend rate is highly flexible. My DW and I have lived a relatively frugal life, but we have expensive tastes. After so much bargaining, waiting for the great deal, DIYing, etc., if we can afford it, that $60K/yr will be significantly surpassed.  $25K/yr on HC – that’s a great data point for me. Thx! On the subsidized HC front, if I had started at HP just a few years prior, I would have been eligible for such a program . . . alas, that’s not to be for me.

 

[FIRE_hopeful]

My only question is whether cutting the consulting to 10 hours a week is practical. I don't know the nature of your consulting, but in some areas, the very nature of the projet work would indicate that a minimum amount of time is required to really participate and that if you're only willing to commit 10 hours, that may not be enough for some customers. But at that point, it sounds like your fine even without that income, so I'm not sure it matters in any event.

Katiek,

The 10 hrs/wk that I state is an average. Right now while I'm full time with the megacorp, I've throttled the work by only taking on one client. It's working out to be ~20 hrs per month, but when I commit to a project, it's nites and weekends (and occasionally I take a megacorp vacation day) to push it through. Then, I wait, sometimes for several weeks, for the next assignment to come up.

Once I leave the megacorp, the trick will be to cautiously take on an incremental couple of clients to establish the business more broadly, w/o committing to too many hours. It will be a real balancing act.

 

[bingybear]

Fire_hopeful,
If you luck out and stretch out you time at megacorp so you leave after turning 55, you could possible use your pre-tax retirement money if it is in a 401k without penalty. You would still have to pay taxes on the withdraws. If it is in IRAs, then you could look at using rule 72T to withdraw some between now and 59.5 without penalty. The 72T has some rules to follow, once started, you can't stop it until you're 59.5. The 401k withdraw when leaving an employer after 55 I know little about.
This assumes that you are willing to withdraw some tax deferred or tax exempt money to bridge your ER.
Waiting until your 59.5 is not a hard and fast rule. There are some ways to avoid penalties.
I did mine a bit differently, I saved more in after tax accounts than tax deferred accounts.

 

[Al18]

Concerning 401K withdrawals, "The 10% additional income tax does not apply to the following payments from the Plan:
• Payments made after you separate from service if you will be at least age 55 in the year of the separation" from my companies 401K Distribution Plan

 

[Markola]

...and during this time, do roth conversions like mad. I’ll need to augment finances with non-retirement funds to bridge prior to finally drawing on retirement funds.


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[Markola]

Just food for thought, and everyone's situation is different, but here is an informed contrarian view on one type of Roth conversions from an early retiree: http://www.caniretireyet.com/roth-iras-roth-conversions-needs/



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[eroscott]

... If it is in IRAs, then you could look at using rule 72T to withdraw some between now and 59.5 without penalty...

Convert 401K to Rollover IRA then use 72t. I've done one so far (Fidelity came up with a little lower annual amounts than the calcs below did).

Great sites. First with a lot of details.
72t.net SEPP Payment Calculator
bankrate 72t Distribution Calculator

 

[kramer]

Convert 401K to Rollover IRA then use 72t. I've done one so far (Fidelity came up with a little lower annual amounts than the calcs below did).

Great sites. First with a lot of details.
72t.net SEPP Payment Calculator
bankrate 72t Distribution Calculator

And my understanding is that you can divide any existing IRA up and only 72-T one or a subset of them. So you can calculate ahead of time how much money per year you will need and make a suitable size IRA to 72T from.

 

[ArkTinkerer]

Check your 401K plan. The year you turn 55 you may be able to retire and begin pulling from the 401K without penalty. Run the numbers and see if that will meet your minimum requirements. You may be able to retire this year or next.

 

[papadad111]

54 and hopeful to RE and bridge the gap

Sounds like you are in a relatively low cost of living area..

I think you have a good plan - I would see if there is a way to do this without the consulting gig by tapping funds smartly.

Numerically you are at approx 3 percent on withdrawal rates excluding houses, for the not so frugal budget of 75-80k per year and excluding eventual SS.

So. To me, you are paying a lot (time consulting) for what might be unnecessary insurance (some extra money) especially considering you have not included any Soc Security at all in your scenario.

You have 320k between cash and Roth that can be tapped . Add the 84k + two years of health care if you get a package... ignores any market gains over the next several years.

So to review ... I think u have 400k of accessible cash that u can stretch in an austere 65-70k spending level for 6 years. Age 52+6= 58

About that house.. Do you intend to spend 550k on an FRP house or is 400k enough and use that additional 150k cash for living expenses ? That extra 150k would get you well past 59.5 at that not so austere spending rate and allow 59.5 penalty free access to retirement funds.

This assumes you don't do a 72t along the way to tap some money early

Then At 60, you have approx 2.0M ( retirement account and lump sum pension money) plus 8 years of growth on those accounts to tap... and u have a paid off FRP house, and looking ahead to you and DW getting SS coming in as soon as ~3 years if needed. Gains could easily grow that portfolio to 2.3-2.5M by then and you could defer SS for a while.

That portfolio gives you beyond austere/yr spending at a fairly conservative 3 percent WD rate and figure another 24k/yr total ( you and wife ) for SS ... In total that's between $85k and $100k/yr in tomorrow's money. ...

 

[Theseus]

Just food for thought, and everyone's situation is different, but here is an informed contrarian view on one type of Roth conversions from an early retiree: Roth IRAs and Roth Conversions: Who Needs Them? - Can I Retire Yet?

+1

Good article, in my opinion. I certainly realize everybody's mileage may vary, but I think the author of that article and I are getting about the same MPG. Paying a certain tax now to avoid paying an uncertain tax many tomorrows from today. So many variables to consider, and all of them [-]subject to[/-] quite likely to change. Rate of return, inflation, tax rates (if not the code itself), etc.

It was interesting reading Kirkpatrick's thought on modeling the Roth conversion impacts, such as stating results in today's dollars as I had recently done just that. For our situation it showed some potential, but the nagging variability of future changes cast a shadow on the results. His analogy sums up my thoughts pretty well; "A salesman knocks on your door. He’s hawking a sophisticated new tax shelter. Pay thousands of dollars in extra taxes now. Then, if you live into your 80’s and 90’s, and a dozen other variables hold true, you will possibly increase your net worth by a few percent."

 

[RunningBum]

Just food for thought, and everyone's situation is different, but here is an informed contrarian view on one type of Roth conversions from an early retiree: Roth IRAs and Roth Conversions: Who Needs Them? - Can I Retire Yet?

Some cherry picking of numbers there. He takes an example of where someone has $5000 to invest for retirement, and (correctly) points out that since Roth is after tax, you can only put $4250 in the Roth because $750 goes to taxes that year. Thus Roth and tIRA comes out the same.

But what if you have a little more than $5000 to invest for retirement, enough to invest the full $5000 in a Roth plus pay taxes? For tIRA, you can still only put $5000 in that account, so the excess is kept in a taxable account. Where any gains will eventually get taxed as you sell. Unless you can keep cap gains at 0% tax, the Roth will come out ahead assuming your investments grow, and tax rates stay the same.

Even so, he still quotes a 5-10% increase in net worth doing Roth conversions according to retirement calculators and consultants, though he says he can't figure out all the complexities and claims with his own spreadsheet he only gets 2-3% better, admitting he doesn't consider everything.

He says that doing Roth conversions add paperwork and complexity and he doesn't like that. They really don't add much at all. Sure, you have to open an account. Then, at least at Vanguard, you do a simple exchange between accounts for the conversion. At the end of the year you get a pretty simple tax form that you plug into Turbo Tax. Done. If you don't fully convert your tIRA, you have to do RMDs at 70 1/2. Guess what, paperwork and complexity!

So his argument is that doing Roth conversions add a little bit of work and don't make a major impact on your finances. Fine by me. A lot of us have FIREd by doing a lot of little things like this that add up to a big enough impact to enable us to FIRE, or maybe to be FIREd with more buffer.

 

[FIRE_hopeful]

Sounds like you are in a relatively low cost of living area..

I think you have a good plan - I would see if there is a way to do this without the consulting gig by tapping funds smartly.

Numerically you are at approx 3 percent on withdrawal rates excluding houses, for the not so frugal budget of 75-80k per year and excluding eventual SS.

So. To me, you are paying a lot (time consulting) for what might be unnecessary insurance (some extra money) especially considering you have not included any Soc Security at all in your scenario.

You have 320k between cash and Roth that can be tapped . Add the 84k + two years of health care if you get a package... ignores any market gains over the next several years.

So to review ... I think u have 400k of accessible cash that u can stretch in an austere 65-70k spending level for 6 years. Age 52+6= 58

About that house.. Do you intend to spend 550k on an FRP house or is 400k enough and use that additional 150k cash for living expenses ? That extra 150k would get you well past 59.5 at that not so austere spending rate and allow 59.5 penalty free access to retirement funds.

This assumes you don't do a 72t along the way to tap some money early

Then At 60, you have approx 2.0M ( retirement account and lump sum pension money) plus 8 years of growth on those accounts to tap... and u have a paid off FRP house, and looking ahead to you and DW getting SS coming in as soon as ~3 years if needed. Gains could easily grow that portfolio to 2.3-2.5M by then and you could defer SS for a while.

That portfolio gives you beyond austere/yr spending at a fairly conservative 3 percent WD rate and figure another 24k/yr total ( you and wife ) for SS ... In total that's between $85k and $100k/yr in tomorrow's money. ...

Really appreciate all the feedback on my emerging plan! I can see that this forum is filled with a lot of very knowledgeable, and very supportive folks.

papadad111 -- your analysis is really helpful, and causing me to think through my options more carefully. Thanks so much for wrapping your mind around both my objectives and numbers well enough to formulate such a thoughtful response. As many of us that are potentially close to pulling the trigger on ER plans, there's some anxiety around doing so. Your analysis takes my concerns down a couple of notches.

 

[papadad111]

54 and hopeful to RE and bridge the gap

Thanks. I understand the anxiety. I pulled the switch at age 45 after a long tech career too.

Helps to think about the "buckets" of money.

And I inherently applied a conservative approach to yours too - market gains, social security for you and wife, Medicare kicking in at 65 etc etc all potential upsides.

Another option if you didn't want to factor in the option to leave a lot of inheritance to your daughter is to annuitize your assets. likely a 2M dollar annuity will toss off 10k per month in today's crazy low interest rate environment. Maybe put half in an annuity to toss off a guaranteed 5-6k per month ... Plus SS at age 62 giving another 2k per month. The other million keep it invested in stocks /bonds etc- between dividends ( maybe 25k per year) cap gains ( sky is the limit) and your real estate ( frp home) you have some longevity - inflation /COLA hedges too.

FIRE - It's scary but totally worth it

 

[Rothman]

Some cherry picking of numbers there. He takes an example of where someone has $5000 to invest for retirement, and (correctly) points out that since Roth is after tax, you can only put $4250 in the Roth because $750 goes to taxes that year. Thus Roth and tIRA comes out the same.

But what if you have a little more than $5000 to invest for retirement, enough to invest the full $5000 in a Roth plus pay taxes? For tIRA, you can still only put $5000 in that account, so the excess is kept in a taxable account. Where any gains will eventually get taxed as you sell. Unless you can keep cap gains at 0% tax, the Roth will come out ahead assuming your investments grow, and tax rates stay the same.

Even so, he still quotes a 5-10% increase in net worth doing Roth conversions according to retirement calculators and consultants, though he says he can't figure out all the complexities and claims with his own spreadsheet he only gets 2-3% better, admitting he doesn't consider everything.

He says that doing Roth conversions add paperwork and complexity and he doesn't like that. They really don't add much at all. Sure, you have to open an account. Then, at least at Vanguard, you do a simple exchange between accounts for the conversion. At the end of the year you get a pretty simple tax form that you plug into Turbo Tax. Done. If you don't fully convert your tIRA, you have to do RMDs at 70 1/2. Guess what, paperwork and complexity!

So his argument is that doing Roth conversions add a little bit of work and don't make a major impact on your finances. Fine by me. A lot of us have FIREd by doing a lot of little things like this that add up to a big enough impact to enable us to FIRE, or maybe to be FIREd with more buffer.

+1 not that complicated and when your safe withdraw rate is 3-4% the tax free forever growth provides tremendous upside opportunity when the market returns are large! and also provide for the best wealth transfer to heirs.


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