Newbie Ken says hello and thanks

[kb56]

Hi, newbie Ken here.

A year and a half ago, I was moved from a line management position to a staff position. Looked like a do nothing job of limited time. Really did not want to change jobs at the age of 55. Found this site, and it eased my pain. This site gave me more options than I had ever considered (thanks). Bottom line - Job was eliminated last month and I am probably looking at FIRE – hope I can make it.

Positions:
Stocks 480K
401(K) 350K
House (+) 200K

Need to last to (hopefully) 88. Social Security kicks in at 62 somewhere around 16K. Most calculators give me a positive outlook (comments are welcome). Need to live - 36K/yr, but would like 48K/yr at least starting out. Most calculators still look positive here.

Problems – have all my money in stocks, and have very little in cash. I can currently get a line of credit from the house (150K approved as of now) for cash as needed.

Any Pitfalls with the above?

Again, thanks for a great site.

Ken

 

[Nords]

Welcome to the board, Ken.

Bottom line - Job was eliminated last month and I am probably looking at FIRE – hope I can make it.
Positions:
Stocks 480K
401(K) 350K
House (+)                 200K
Need to last to (hopefully) 88.  Social Security kicks in at 62 somewhere around 16K.  Most calculators give me a positive outlook (comments are welcome).  Need to live - 36K/yr, but would like 48K/yr at least starting out.  Most calculators still look positive here.
Problems – have all my money in stocks, and have very little in cash.  I can currently get a line of credit from the house (150K approved as of now) for cash as needed.
Any Pitfalls with the above?

For the next five-six years (until SS kicks in) your 4% SWR would be $33,200/year. $48K/year is nearly 6% which might work out OK for a high-equity portfolio for a short time, but if it's all in telcoms and GM then you might easily be an unhappy cubicle dweller in another few years. Most of us would hesitate to recommend that you follow this course.

Another reason for caution is health insurance and living expenses. If your COBRA coverage or other healthcare doesn't work out the way you expect then your costs could quickly balloon and drive your portfolio into the ground. You may have a handle on that already, but again we'd hesitate to recommend such an aggressive withdrawal without knowing the details.

Have you tried running the numbers in all the different versions of FIRECalc? How do the success rates work out? Financial Engines or RiskGrades might give you a feel for how volatile your high-equity portfolio is and how likely it'd be to survive a few years at 6% before SS lets you cut back on your burn rate.

Your best strategy, until you hit SS, would be to put at least two years' expenses in cash to live on if your portfolio is losing money. If you have no other income (pensions, part-time salary) then maybe you'd want to bump that to three or four years' expenses.

Here's some other thoughts:
As you're rolling that 401(k) over into your IRA, read Bernstein's "Four Pillars" and make sure that your equity portfolio is diversified. Volatility is only good if your returns reward you for the extra risk. Then you might want to consider moving assets around in the IRA (no taxes to pay) to get to a more balanced allocation while you draw down your stock portfolio.

Have you read Bob Clyatt's "Work Less, Live More"?

Another option would be to cash in a portion of the IRA and draw it down via a 72(t) for the years you have left until SS, but you're so close to age 59.5 that a 72(t) might be more trouble than it's worth.

Can one of you 401(k) experts help me out? Is there a provision allowing 401(k) withdrawals after age 55? Maybe Ken wants to leave the 401(k) with the company for a while to allow that.

 

[samclem]

Ken,

Howdy! .
- For what it is worth:
-- I think if I was in your position, I'd want to increase my holdings in bonds and have some $$ in a money market account or CDs. If the market drops 20%+ for a few years, you'll want to have enough of a cushion to avoid selling those shares before they come back. It will also allow you to rebalance annually and buy stocks when they are depressed (if this downturn happens). As a wag: 20-25% bonds, 10-15% CDs/MM
-- Stocks: I think I'd want tilt my allocation to favor mutual funds composed of stocks having a history of paying strong dividends (this keeps $$ rolling in even if share prices are down). I'd just tilt it this way, not skew it entirely in that direction.
-- If you've got flexibility in the amount you spend, I'd recommend that you base your annual withdrawals on the value of your portfolio at the end of each year. Some others disagree with ths approach, but I think it is the best way to avoid running short of cash.
-- Any chance of additional $$ from the company as a severence package? I don't have any experience in these matters, maybe others can offer some food for negotiations/thought.

Best of luck

 

[Cut-Throat]

1 word for you -

Diversify!

 

[Ed_The_Gypsy]

Welcome, Ken,

I can currently get a line of credit from the house (150K approved as of now) for cash as needed.

You are looking at being unemployed. Do you REALLY want to borrow money now? Still, it is good that you have a LOC in place.

If I got it right, you are about 56.5 today. Early SS is about 65 years off.

According to our patron saint, John P. Greaney (aka intercst), you can take penalty-free withdrawalls from your 401k at age 55 (but there are reasons that you may not want to). See this link and read it all--there are gotchas:
http://www.retireearlyhomepage.com/wdraw59.html

If your 401K does not have the problems that intercst pointed out, you are free to set up a program like Galeno uses:

Yes I am following the same mechanical withdrawal plan. In short, it goes like this:

FI = 25%
2y living expenses in MMF
2y living expenses in 2y CD (maturing in 1y)
2y living expenses in 2y CD (maturing in 2y)

Stocks = 75%

At the end of the year I sell 4% of the value of my stock portfolio and buy a 2y CD. I let half of the maturing 2y CDs go to MMF and I buy another 2y CD with the other half. I then divide the entire FI balance by 72 and that's my monthly draw for the year. At year end, I repeat the process.

Even with this three year bear market, my monthly FIRE income fluctuates very little thanks to my FI buffer. It's a similar approach to intercst's inflation adjusted withdrawals but slightly different in that I let the long term growth of my stock portfolio indirectly take care of any inflation or deflation in the economy.

You have 350k+480k=830k total available assets.

If you work Galeno's program backwards, assuming you need a minimum of 36k/yr, that is 72k in each of Galeno's 2-year fixed income pots, or a total of about 216k in FI. That leaves you with 830k - 216k = 614k in 'stocks', for a ratio of about 26% FI, 74% equities. 36k/yr is only about 4.5% of the total per year. Galeno moves only 4% to FI each year, but considering how close you are to SS, that shouldn't make any difference.

Now you would be secure. Now you could consider selling the house outright and adding to your pot. Travel or rent.

If you can manage, you might delay taking SS and get higher payments when you eventually do.

Or, get a token job or one you really might like.

You are a free man. Have fun!

(NOTE: I am assuming that your portfolio is adequately diversified.)

Cheers,

Ed

 

[jdw_fire]

Positions:
Stocks 480K
401(K) 350K
House (+)                 200K

Need to last to (hopefully) 88.  Social Security kicks in at 62 somewhere around 16K.  Most calculators give me a positive outlook (comments are welcome).  Need to live - 36K/yr, but would like 48K/yr at least starting out.  Most calculators still look positive here.

Ken, Welcome aboard.  When I run your portflio and SS thru FIRECalc I get a 95% success rate for an annual W/D of $42,116 (note: 95% success rate has been the bench mark for a safe withdraw rate for some time on this and other boards, however that doesn't mean everyone agrees).  Dropping the equities down to 75% of your portfolio bumps the 95% success rate W/D to $44742, so by all means diversify into some FI.  This last number is getting close to your desired $48k and maybe you can get there by delaying your SS to NRA or even 70.  You should get the numbers for SS at those 2 ages and rerun FIRECalc.