51 yo and thinking about ER, how secure am I?

[happy8]

I am a 51 yo professional in Los Angeles, single, have no dependents. Early on in my investing career I had a somewhat disorganized investing strategy but for the last 15 years have invested solely in ETFs, self managed.

Here is a snapshot of my finances:

Current income: $300,000/year
Yearly expenses including everything except taxes: $150,000
Debt: None.
Own primary residence worth $1.8 million free and clear
Tax Rate (marginal): 28% Federal (AMT), 9.3% State
State of Residence: CA

Total funds including taxable, retirement, ROTH is $6,124,000 Breakdown is as follows:
Taxable account: Total is $2,865,000 of which $450,000 would be subject to capital gains tax if shares sold
Individual 401k: Total is $3,062,000
Roth IRA at Schwab Total is $197,000

Allocation:
Large Cap equity 36.3 %
Small Cap equity 11.1 %
International Equity 16.1 %
Fixed income 35.2 %
Cash 0.3 %
Other 1.0 %

Questions:
1. Any thoughts on my asset allocation? Right now its 65/35 stocks/fixed income. I could move to 80% bonds for extra safety but it seems I can afford some risk. I would love to hear thoughts on this.

3. Best guesses and comments on how safe I am cutting back to $200k/year until age 60? Or, what about retiring completely now? If I stop working now, I am probably unable to return to any decent working situation, so I do not want to toss in the towel prematurely. One thing that is a concerning unknown for me is healthcare costs, as I have no health insurance benefits and have to purchase an individual policy.

4. Any comments on how I should plan to take SS benefits, and general strategy for how I would plan to use funds for living expenses in the event I retire even earlier than 60, for example next year?

Many thanks in advance.

[euro]

You have amazing reserves even considering the unknown healthcare situation. You are good to go TODAY! Unless you really like your job, start thinking about the rest of your life in retirement. Congrats and best wishes!

[RunningBum]

Welcome, happy8, you've done very well.


I wouldn't go 80% bonds at your age. It's not as safe as you think, as inflation could erode the value. You have to determine your own risk level, but my feeling is to use some number minus your age. Others here (not me) advocate more bonds in your first few years of retirement to mitigate sequence of returns risk, then increase stocks once that has passed.


$150K expenses now, but what would they be in retirement? Would you travel more, adding to those expenses? Might you move to where the cost of living is less? Current expenses is a good starting point, but only a starting point. Once you have a good handle, use Firecalc to see how you stand now. You probably could pull the trigger whenever you want unless you really see expenses rising. One key to that is how much you'd be willing to cut back just in case things did go bad.


Cutting back to $200K income, which I assume means part time or reduced stress, seems like it could be a nice transition to retirement if you don't think you're ready either mentally, or financially. You may not add to the nest egg, but you wouldn't be pulling much, if any, from it now. But you may not even have to do that if you don't want.


Social security seems like it'd be such a small part of what your retirement income that I wouldn't sweat it. Take it at 62 if you want some now, or wait til 70 if you like. IMO the best advice is to wait for a downturn so you aren't selling off as much from your investments when the market is low, but like I say, I don't think this is a big factor for you.


You have a lot in a taxable account to live on until you can start taking from the retirement accounts. You can probably control taxes by selecting which shares you want to sell. If they are dividend producing, take the dividends in cash rather than reinvesting so you don't have to sell as much of the appreciated stock. You may also want to try to convert some of the tax deferred money to a Roth each year. Check out I-orp.com and see if that helps decide where to take funds from, and how much to convert.

[2017ish]

RunningBum beat me; This isnt' entirely redundant, so I'll post it anyway.

Second Euro's post; DW and I are a few years older (57/56) with a more work income and a bit smaller portfolio. Nonetheless, we are comfortable going out the door at the end of July with little chance of ever stepping back in at the same level (doctor/lawyer). We also are ballparking to spend a bit more than your expenses--albeit with a great deal of flexibility on the down side....

As for health insurance, that is also a concern for us. But, if you stay in LA, you have access to a decent individual health insurance pool compared to many/most parts of the country (like ours!). The population density should assist in keeping that pool deep.

Even without much spending flexibility, you should be good. At a 3% withdrawal rate, you have over 180,000 a year and your effective tax rate on funds withdrawn should be considerably less than your present marginal rates. Run a dummy tax return or two to see what happens during drawdown. For us (MFJ, so different brackets) even doing sufficient Roth Conversions to put income at 250K a year, the rates are much more attractive than we currently pay.

As for your questions:
1. We are at 70/30, planning on DW living past 100. What is your life expectancy? You say you can "afford more risk," but do you "need" more risk? How did you sleep in early 2009 when your portfolio tubed? Will that change when you are in draw down mode?

2/3. No need to work any more, if that 150K is your retirement spending. Will that spending change? Ours is going to go up; others have it go down. Figure out that likely number.

3/4. Social--to the extent that it is available to us, we will have the higher wage earner take at 70, just in case something unprecedented happens and wipes us out. Still don't know about our secondary earner. In your case, taking at 70 gives you longevity (and dementia) insurance with the best possible annuity contract. I personally think that is more important than having the money in hand early; others disagree. Again, what is your likely life expectancy?

Congrats at getting to where you are at by age 51!

[Sunset]

OP -> you are good to retire now, run fireCalc to double check.

Since you have individual 401K, perhaps you are self employed ? , if so and are going to work another year or two, how about opening an individual 401K ROTH and deposit into that, although your marginal rate is probably high enough that the deduction for normal 401K is worth it.

[CRLLS]

Not so fast on retiring just yet. I'm sure someone else here will run the numbers more accurately than I, but retiring now on what you have saved (very commendable BTW), and considering your early age, maybe 3% withdrawals might be reasonable. I hope someone else can fill in the "best" rate to make your assumptions with. I have no real idea. but assuming that, you would have annual withdrawals of 72,450 from the taxable retirement account taxed at normal income rates, 13,500 from your long term capital gains, and 91860 taxed a normal rates from the 401K. for a total of 177,810 taxable, Added to that is 5,910 tax free from the Roth for a total "annual income" of 183,720

Is it safe to assume a 20% "Average" tax rate on the taxable accounts? You would lose ~ 35K of that gross income in federal taxes. That would leave you about 149K to live on. Your expenses are 150k so it is close. Oh wait, California tax will take some more of your hard saved money, leaving less than enough to make ends meet. Unless you move to another state where income taxes don't exist, lower your expenses, or work a few more years, I would be very cautious. Run thru several of the online calculators to be sure.

Firecalc, I-Orp and Fidelity's on line calculator seem to be some of the favorites here.

I find it difficult to grasp someone with your amount of savings is marginal at successfully retiring. I hope I am wrong.

Cutting back work to 200k/yr would certainly give you a lot more cushion. I would bet that if you follow that plan, that you do not make it to 60 yrs before pulling the plug. Once you can smell the finish line, working 9 more years will be tough to follow thru on.

[Whisper66]

Would be good for you to get familiar with FIRECalc: A different kind of retirement calculator . Running a few simple cases would help you put some perspective on your situation. A quick run using your $6.1M of assets, living to a VERY ripe old age of 95 and collecting ZERO social security suggests you could retire today and still spend 218,000 / yr and never have an issue. Basically you don't need to be overly concerned with your asset allocation, working any longer than you want to or exactly when you take SS .... it's not really important.

But since you asked for opinions:

Asset allocation - I don't see a reason to change what you have unless you are uncomfortable with a market dip that may last say 3 yrs. You have plenty of fixed assets to wait out a market dip without having to sell off equities at a loss. That's the main thing I would try to avoid.

Social Security - I personally would take it sooner rather than later but that just reflects my lack of confidence in our governments stewardship of these assets. Others prefer to wait a few years to collect more per year. It's neither here nor there in your case....wont' change your lifestyle whichever way you go.

Continued working - if you enjoy it, continue at whatever level (full or part time) that works for you. Otherwise, feel free to retire.

[happy8]

Thanks for all the replies already! This is a wonderful forum and I'm excited to explore more and hopefully contribute in the future!

Euro- Thanks, your encouragement gives me a little more courage to take the plunge, though I will probably not jump right away!

Runningbum- Regarding allocation, my gut is with you not to overinvest in bonds. I was previously 100 % equities for many years, I only recently shifted to 65/35, and my inclination is to stay there for the foreseeable future. I know one is not supposed to panic in downturns but if there is a real market rout and my nestegg reaches a certain level, I may feel the need to switch to more bonds. I'm glad I did not do that in 2009 but at that point I knew I could always work to keep my finances in good shape. Without that option I don't know what I would do. Regarding expenses, I do fear they may go up a bit as I spend the least when I am at work! But, part of why they are high is because of pricey vacations I tend to take which I imagine will increase at first, but wane after a few years. It's really hard to account for this. As you say, cutting back to 200k income will be less stress and I think is the best choice for me for a few more years, and then reassess. I really appreciate your thoughtful comments about SS and tax planning. I have a lot to learn with respect to that I will explore the Roth option and the I-oro.com website, which I did not know about.

2017ish- Appreciate your sharing your situation, which is somewhat similar to mine. I hope you don't mind my saying I'm strangely gratified to hear your expenses are as high, or higher than mine. I have read quite a few posts here and see most people manage on considerably less, so now I feel less embarrassed! For me, living in a HCOL area, expensive vacations, hiring household help are what drive things up. I also have insanely high utility bills, which is mysterious to me . You are right that California offers relatively some sane choices for individual health insurance, but who knows what will happen with that? I will speak to my accountant to run some scenarios to get a sense of what taxes will be during drawdown. I'll be very happy if they are less as you suggest they may be. Life expectancy for me? Average in my family I think. 92 strikes me as a reasonable planning number. I appreciate your answers to the questions. In 2009 I weathered things by staying put 100 % in equities but as you intimate, I strongly suspect I will panic if I'm in draw down mode!

Sunset- I have run fireCalc and things do look very solid, though the big variable is how much to enter for expenses. My expenses as I mention are $150k/year but I would have to draw down more than that to net $150k. If I push things up to $225k/year withdrawals, things look less firm. I have not known or thought about an individual 401k Roth (I am self employed.)-another thing for me to investigate. Thank you!

[happy8]

Wow, more insightful replies as I was typing my own!

CRLLS- Yes, you certainly hit home with me when you say it is difficult to grasp that with my savings, retirement is by no means a slam dunk and requires careful analysis. Big factors are obviously age and relatively high expenses. Believe it or not, I cannot see myself easily reducing my expenses. I feel I am getting my full moneys worth out of almost every penny I spend and do not want it any other way! I really appreciate your analysis of tax scenarios, as that is what I trying to grasp myself and I like the way you have mapped out how to approach this. California has certainly never met a tax or spending proposal it did not love so the price for living here is very high but unfortunately I have no connection to any other location so cannot imagine moving. For example, California taxes capital gains as regular income so that could realistically be at about 9 %, in addition to federal capital gains. One bright spot is I enjoy relatively low property taxes having lived in my home for two decades. I knew about Firecalc and Fidelity (Fidelity is quite good I think) but not I-Orp so more homework for me. And yes, another chord struck with your prediction about my not remaining employed to 60...very safe bet I think!

Whisper66- I have been playing around with Firecalc and agree the results are encouraging but I do think their model seems limited to me as it ignores taxes both in the sense of paying them, and tax-advantaged vs taxes accounts (unless I am missing something). So, I don't feel I can rely on this too much. Appreciate your comments on asset allocation (I do like the idea of sticking at 65/35 for the foreseeable future). As for my work, I cannot complain as I am compensated and treated well but it is a source of stress for me and I find myself relishing and looking forward to my days off so much. Hence my growing obsession with planning for early retirement!

[FlaGator]

Quote:

Originally Posted by happy8 I am a 51 yo professional in Los Angeles, single, have no dependents. Early on in my investing career I had a somewhat disorganized investing strategy but for the last 15 years have invested solely in ETFs, self managed. Here is a snapshot of my finances: Current income: $300,000/year Yearly expenses including everything except taxes: $150,000 Debt: None. Own primary residence worth $1.8 million free and clear Tax Rate (marginal): 28% Federal (AMT), 9.3% State State of Residence: CA Total funds including taxable, retirement, ROTH is $6,124,000 Breakdown is as follows: Taxable account: Total is $2,865,000 of which $450,000 would be subject to capital gains tax if shares sold Individual 401k: Total is $3,062,000 Roth IRA at Schwab Total is $197,000 Allocation: Large Cap equity 36.3 % Small Cap equity 11.1 % International Equity 16.1 % Fixed income 35.2 % Cash 0.3 % Other 1.0 % Questions: 1. Any thoughts on my asset allocation? Right now its 65/35 stocks/fixed income. I could move to 80% bonds for extra safety but it seems I can afford some risk. I would love to hear thoughts on this. 3. Best guesses and comments on how safe I am cutting back to $200k/year until age 60? Or, what about retiring completely now? If I stop working now, I am probably unable to return to any decent working situation, so I do not want to toss in the towel prematurely. One thing that is a concerning unknown for me is healthcare costs, as I have no health insurance benefits and have to purchase an individual policy. 4. Any comments on how I should plan to take SS benefits, and general strategy for how I would plan to use funds for living expenses in the event I retire even earlier than 60, for example next year? Many thanks in advance.

Here's some bar napkin math:

1. Taxable portfolio turns into ~2.6 million net of tax if you sell today - enough to last for 17-ish years at your $150K burn rate. You're 68 then.
2. At that point, your IRA would have nearly doubled 2x, so figure $8-10 million + SS to get you to the end.
3. Once you start living off your portfolio, taxes drop dramatically, and can be managed down even further through selective sales of your holdings.
4. SS probably doesn't matter much - you're likely to have had enough high earning years that a few more won't move the needle a lot. Take it early, and your taxable portfolio will last a little longer than otherwise.

I use the calculators too, primarily for peace of mind. If it doesn't work out on a bar napkin, though, I ain't doing it

Plenty of time to address Roth conversions to reduce balances subject to RMDs and the associated tax hit.

To the point about tapering off instead of stopping - financially, it looks like you could stop now. You're a high clock speed person, so I second the recommendation to think through that before you commit yourself (formally or emotionally) to stopping on short notice.

Congratulations on creating such great choices for yourself!

[RunningBum]

Quote:

Originally Posted by happy8 Runningbum- Regarding allocation, my gut is with you not to overinvest in bonds. I was previously 100 % equities for many years, I only recently shifted to 65/35, and my inclination is to stay there for the foreseeable future. I know one is not supposed to panic in downturns but if there is a real market rout and my nestegg reaches a certain level, I may feel the need to switch to more bonds. I'm glad I did not do that in 2009 but at that point I knew I could always work to keep my finances in good shape. Without that option I don't know what I would do. Regarding expenses, I do fear they may go up a bit as I spend the least

If you think you'd do that, maybe 80% bonds is better for you. Seriously. Selling equities low is the worst thing you can do. Especially since you are in your 50s, the market will tend to smooth out over time, but if you panic sell and then get back in after the recovery, you are taking the downside without getting the upside of the swings. This would by far be the biggest risk to your retirement. Find an asset allocation you can live with in good times and bad. Maybe 50/50 would be better? In down times you can use some of the bonds and fixed income so you aren't selling low, and in good times you can take money off the table selling off some of your winners, keeping the allocation 50/50 (or whatever number you'll stick to).

[socca]

Quote:

Originally Posted by happy8 As for my work, I cannot complain as I am compensated and treated well but it is a source of stress for me and I find myself relishing and looking forward to my days off so much. Hence my growing obsession with planning for early retirement!

If dropping to $200k/yr means less stress & more time to pursue alternative interests, I suspect that most folks on this board would agree that you've earned it. I consider myself fortunate that I have the opportunity to work part-time from my home office.

BTW: if someone forced me to spend $150k in a year, I'd be hard-pressed to do it. I obviously have a lot to learn about living the good life. 😁

[2017ish]

Quote:

Originally Posted by happy8 ... 2017ish- Appreciate your sharing your situation, which is somewhat similar to mine. I hope you don't mind my saying I'm strangely gratified to hear your expenses are as high, or higher than mine. I have read quite a few posts here and see most people manage on considerably less, so now I feel less embarrassed! For me, living in a HCOL area, expensive vacations, hiring household help are what drive things up. ...

One key in our case is that the fixed expenses are less than half of our anticipated spending--thus, we can go with a fixed percentage withdrawal rate (i.e., take x% of the portfolio as of Date X each year) and still be happy campers. We'll live very high (by our standards) when portfolio is high, and decently well even when stocks are down 50%. (We spend quite a bit less now than we plan to spend in early retirement.)

In your case, it sounds like your spending is less flexible. But is it? Do you need household help when retired? Will your vacations be as expensive if you can do long, slow travel--or at least take better advantage of your newfound flexibility?

Look before you leap. Run your numbers. Spending is the key. A few months back, someone posted in a bogleheads thread about being unable to retire with, if memory serves, a 10 or 20 million dollar portfolio; it drew some catcalls, but he was cleareyed about his spending....

I think you are probably solid now, but be as certain as reasonably possible.

[Blue Collar Guy]

Quote:

Originally Posted by happy8 I am a 51 yo professional in Los Angeles, single, have no dependents. Early on in my investing career I had a somewhat disorganized investing strategy but for the last 15 years have invested solely in ETFs, self managed. Here is a snapshot of my finances: Current income: $300,000/year Yearly expenses including everything except taxes: $150,000 Debt: None. Own primary residence worth $1.8 million free and clear Tax Rate (marginal): 28% Federal (AMT), 9.3% State State of Residence: CA Total funds including taxable, retirement, ROTH is $6,124,000 Breakdown is as follows: Taxable account: Total is $2,865,000 of which $450,000 would be subject to capital gains tax if shares sold Individual 401k: Total is $3,062,000 Roth IRA at Schwab Total is $197,000 Allocation: Large Cap equity 36.3 % Small Cap equity 11.1 % International Equity 16.1 % Fixed income 35.2 % Cash 0.3 % Other 1.0 % Questions: 1. Any thoughts on my asset allocation? Right now its 65/35 stocks/fixed income. I could move to 80% bonds for extra safety but it seems I can afford some risk. I would love to hear thoughts on this. 3. Best guesses and comments on how safe I am cutting back to $200k/year until age 60? Or, what about retiring completely now? If I stop working now, I am probably unable to return to any decent working situation, so I do not want to toss in the towel prematurely. One thing that is a concerning unknown for me is healthcare costs, as I have no health insurance benefits and have to purchase an individual policy. 4. Any comments on how I should plan to take SS benefits, and general strategy for how I would plan to use funds for living expenses in the event I retire even earlier than 60, for example next year? Many thanks in advance.

wow, you have arrived. Id run out the door as soon as you dont like your job anymore. I would never go below 25 % equities. I read that from one of the legendary investors IDK right now which one.

[happy8]

Quote:

Originally Posted by FlaGator Here's some bar napkin math: 1. Taxable portfolio turns into ~2.6 million net of tax if you sell today - enough to last for 17-ish years at your $150K burn rate. You're 68 then. 2. At that point, your IRA would have nearly doubled 2x, so figure $8-10 million + SS to get you to the end. 3. Once you start living off your portfolio, taxes drop dramatically, and can be managed down even further through selective sales of your holdings. 4. SS probably doesn't matter much - you're likely to have had enough high earning years that a few more won't move the needle a lot. Take it early, and your taxable portfolio will last a little longer than otherwise. I use the calculators too, primarily for peace of mind. If it doesn't work out on a bar napkin, though, I ain't doing it Plenty of time to address Roth conversions to reduce balances subject to RMDs and the associated tax hit. To the point about tapering off instead of stopping - financially, it looks like you could stop now. You're a high clock speed person, so I second the recommendation to think through that before you commit yourself (formally or emotionally) to stopping on short notice. Congratulations on creating such great choices for yourself!

Your bar napkin test makes me think of when my friend insisted on taking a wrong turn, when destination was in plain view, because his GPS told him to. Reality can sometimes be obvious, but obscured by the tools we use! I appreciate all your comments and thoughts. From your and other replies, I am starting to appreciate that taxes can be managed to some advantage during draw down and I have to start thinking and learning more about that, as that will change my basic assumption about how much I will need to draw down to net $150k/year. Many thanks.

[happy8]

Quote:

Originally Posted by RunningBum If you think you'd do that, maybe 80% bonds is better for you. Seriously. Selling equities low is the worst thing you can do. Especially since you are in your 50s, the market will tend to smooth out over time, but if you panic sell and then get back in after the recovery, you are taking the downside without getting the upside of the swings. This would by far be the biggest risk to your retirement. Find an asset allocation you can live with in good times and bad. Maybe 50/50 would be better? In down times you can use some of the bonds and fixed income so you aren't selling low, and in good times you can take money off the table selling off some of your winners, keeping the allocation 50/50 (or whatever number you'll stick to).

I think I have to give this some serious thought. At 50/50 I can weather the downturns more comfortably. As I read in one of these forums, why risk what you can't afford to make money you don't need? Thanks.

[happy8]

Quote:

Originally Posted by Blue Collar Guy wow, you have arrived. Id run out the door as soon as you dont like your job anymore. I would never go below 25 % equities. I read that from one of the legendary investors IDK right now which one.

I have read similar in "The Intelligent Asset Allocator" by William Bernstein. It's a little dated (2001) but its message and tenets are timeless. The full math and logic escape me now, but the author asserts that although bonds have less risk than equities, at some point risk actually increases rather than decreases as one allocates extremely toward bonds. Like you, he says the inflection point is around 25 %, and therefore the least aggressive, least risky portfolio is 75 % bonds, 25 % equities.

[bradaz2488]

Nothing to add to other's great advice on this forum. Maybe you can teach us something. You have done an amazing job accumulating $8M in NW at age 51. Even with a $300K/year income and if your expenses are $150K/year w/o taxes that is even more amazing. Can you provide more details on how you were able to accumulate such a high NW?

[happy8]

Quote:

Originally Posted by bradaz2488 Nothing to add to other's great advice on this forum. Maybe you can teach us something. You have done an amazing job accumulating $8M in NW at age 51. Even with a $300K/year income and if your expenses are $150K/year w/o taxes that is even more amazing. Can you provide more details on how you were able to accumulate such a high NW?

Sorry no great "teaching" points to offer.. My net worth is not the result of good fortune or acumen in my investments. In fact, my overall returns early on were below average, probably typical for the individual investor. For the past 15 years I have bought ETF's in equities and done better, but certainly no more than anyone else doing the same. The driver behind my current net worth is simply that my income for many years until about 2 years ago was significantly higher, due to added responsibilities and consulting work that I have since elected to cut back. The balance in my 401k is largely due to sizable contributions to a defined benefit plan, which were eventually rolled over to my 401k.

[bradaz2488]

Quote:

Originally Posted by happy8 Sorry no great "teaching" points to offer.. My net worth is not the result of good fortune or acumen in my investments. In fact, my overall returns early on were below average, probably typical for the individual investor. For the past 15 years I have bought ETF's in equities and done better, but certainly no more than anyone else doing the same. The driver behind my current net worth is simply that my income for many years until about 2 years ago was significantly higher, due to added responsibilities and consulting work that I have since elected to cut back. The balance in my 401k is largely due to sizable contributions to a defined benefit plan, which were eventually rolled over to my 401k.

Very well done and welcome to a great forum with lots of smart people. I'm still a newbie at retirement and have learned a lot from this site. When you are ready to pull the trigger you will not regret it.