51M, Single, $1.2M, Ready to FIRE?

[pb4uski]

..... The $25k annual expenses is correct and does include taxes on the $20k/annual income + subsidized ACA costs. Since ACA subsidies could change, I was budgeting $30k annually to account for any changes there, or other unexpected expenses, but not both scenarios. ...

What is your current level of spending? Say, for 2019?

 

[daylatedollarshort]

The other thing I have told people for years is this: "I have never gotten to the end of a project, looked back, and said: 'Gee, we planned that too carefully.' "

The main reasons most large projects failed at my last megacorp job, and few went in smoothly, were simply overly optimistic budget and time estimates.

 

[Scratchy]

Thanks everyone for the comments & advice!

The $25k annual expenses is correct and does include taxes on the $20k/annual income + subsidized ACA costs. Since ACA subsidies could change, I was budgeting $30k annually to account for any changes there, or other unexpected expenses, but not both scenarios.

Your numbers look good given your inputs and expenses. But don't marry or partner up with someone who brings no assets or income and wants to live on more than $55k/year. Stranger things have happened.

 

[tb001]

Based on the numbers provided, as others have said, you look like you’re in good shape. That said, your budget is pretty minimal. There are some great threads here on finding those ‘what did I miss’ items that often get overlooked if you’re not tracking expenses for a long time. Dental is the one we forgot about. It’s worth digging around just to make sure there’s nothing you’re missing, though I agree with pb4uski, you have room for a decent margin of error.

 

[Rianne]

So for any reasonable scenario he is in good shape. Now if his pension goes kaput and the PBGC fails and SS is haircut and his convoluted and unique housing arrangement blows up and ACA is overturned and some draconian plan put in its place then he'll be hurting... but he'll still be in better shape than the vast majority of people out there who will also be in a world of hurt.

...and the Covid pandemic creates a worldwide economic crash and we all go back to gardening for our food and learning to live without A/C or heat and using candles at night, and healthcare is a luxury, and 8 people (family) live in a 2 bedroom house...hey wait a minute...my mom grew up on that scenario.

 

[OldShooter]

In my consulting field, we either call these costs "Contingency", or just bury them in the estimate. We have to competetively bid most of our work, and Contingency can't be included, generally, either obviously or not. We lose bids all the time, the 10-30% contingency kills a bidder's chances. I've found that when preparing estimates, the most detailed estimates are the most accurate. If one bids with no contingency, then the project manager has to run a really tight project, and change management becomes of paramount importance. Jeez, I'm glad I'm almost RE and won't have to deal with this much longer!

Yes. "Contingency" is a good camouflage word for sure. The technique you describe is often called "bid to win and get well on the change orders." Unfortunately that is not really an option in retirement planning.

Years ago I was bidding a big project and I had a few-million $$ task assigned to a team member. I kept asking them for their cost estimates and they kept asking me what number I wanted. Younger and more naive, it took me a while to figure out their bid strategy. We didn't win the job and in some respects I was glad. Managing that subcontract would have been a nightmare.

 

[OldShooter]

The main reasons most large projects failed at my last megacorp job, and few went in smoothly, were simply overly optimistic budget and time estimates.

So it is everywhere. Enumerations just does not get you there and "overly optimistic" is only detectable in the rear view mirror. Daniel Kahneman, in "Thinking Fast and Slow" has some very insightful material on behavioral aspects of project estimating and project management.

 

[jmmec]

Hi everyone, my account was preventing me from replying until now.

When did you set up your Roth account and are you familiar with the Roth rules if you use it before age 59.5?

I haven't set up a Roth IRA yet: I was planning to do that once I FIRE and then do conversions from my Traditional IRA --> Roth IRA to generate $20k ordinary income to qualify for ACA subsidies.

(A question was raised about being more aggressive in the conversion to Roth IRA, so that is something I'd have to think about once the time came.)

I need to look more into the benefits of starting a Roth IRA now, rather than later, along with better understanding the distribution rules. But this year my income will -- unexpectedly -- exceed the max $137k for a single person, so I don't think I can fund it outright AFAIK apart from doing a conversion.

Responding to others & raising a new point:

Housing (contingencies):

Yes, point taken. This is a known risk that I should have mentioned. Worst case I'll need to take money to buy a place (less than $200k should be sufficient), or else rent, but I'm good where I'm at for at least the next 10 years and possibly indefinitely (time will tell).

Although this changes as people age, I've always done my own maintenance when I've owned houses in the past, and continue to do maintenance on the small cabin in which I now live.

Rough Spending Plan:

This is what I was thinking, so is this naive or too simplistic?

Ages 51-61:

Spend up to $30k annually, so up to $330k of the $1.2M savings, leaving around $870k by age 62 (realizing that the $870k would be impacted by inflation & market by that time so would be worth whatever it is worth then).

One risk is depending on ACA subsidies to continue, or to be replaced with something that is affordable.

Ages 62-65:

Start receiving SS and the PBGC pension at $41.8k/year along with whatever the $870k is worth. Unless things change drastically - such as needing to take $200k to buy a house - the $41.8k/year should continue cover expenses, probably even if I had to rent.

Ages 65+:

Start Medicare, continue collecting $41.8k/year from SS and the PBGC pension, along with whatever remains from the $870k.

SS & Disability:

I don't remember reading about this on this forum? Maybe it is common knowledge.

If I should become disabled right now, the SS website says that I would be eligible for $3136/month payments.

I didn't know that SS disability eligibility could change once you stop working. From the SS website:

In addition to meeting our definition of disability, you must have worked long enough — and recently enough — under Social Security to qualify for disability benefits.

..etc.etc..

Remember that whatever your age, you must have earned the required number of work credits within a certain period ending with the time you become disabled. If you qualify now but you stop working under Social Security, you may not continue to meet the disability work requirement in the future.

https://www.ssa.gov/planners/disability/qualify.html

So if I generate $20k income a year (from dividends + conversions to a Roth IRA) then when I file my taxes, I would have to pay the FICA tax, right? Continuing to pay FICA on $20k income should keep me eligible for SS disability over the next number of years it seems.

Thanks

 

[pb4uski]

...So if I generate $20k income a year (from dividends + conversions to a Roth IRA) then when I file my taxes, I would have to pay the FICA tax, right? Continuing to pay FICA on $20k income should keep me eligible for SS disability over the next number of years it seems.

Thanks

No, you only have to pay FICA taxes on earnings and self-employment income.... not on dividends or Roth conversions.

$20k of income that is $7k of dividends and $13k of Roth conversions would have negligible taxes... 0% on dividends and 10% on any Roth conversions that exceed the standard deduction of $12,400 (in 2020).... so ~$60 by my calculations. Surprise! Welcome to early retirement.

If it were me I would at least do Roth conversions to the top of the 10% tax bracket... so $7k of dividends and $15,275 of Roth conversions.... that would be $22,275 of total income and $9,875 of taxable income... and $7,000 at 0% and $2,875 at 10% for a total tax bill of $288. So on $15,275 of conversions you only pay $288 (1.9%) in tax. Cool, eh?

Alternatively, you could do Roth conversions to the top of the 0% capital gains bracket or $40,000. In that case your Roth conversion would be $45,400 and your tax bill would be $3,903... $2,875 at 10% and $30,125 at 12%.... or a modest 8.6% of the Roth conversion.

How much did you build in for income taxes in your $25k of expenses?

 

[Dtail]

I assume you would just use your money market account until age 59.5 out of the 1.2m you mentioned, although you can possibly use your 401k account without penalty.
Just easier to use your mm accounts, although would need to monitor changes in your AA if the Roth conversions are put into stocks.

 

[Montecfo]

OP: I am not commenting on your plan. It may be adequately conservative, but you'd better make sure! FIRECalc is not a forecasting tool.

Hey OldShooter-
I think I know what you meant here. But FIRECALC is in fact a forecasting tool. But it does not contemplate all possible future results, and as you have stated it does not predict the future, not does it assure you will not run out of money.

 

[OldShooter]

Hey OldShooter-
I think I know what you meant here. But FIRECALC is in fact a forecasting tool. But it does not contemplate all possible future results, and as you have stated it does not predict the future, not does it assure you will not run out of money.

Well, I guess its in the eye of the beholder. Any sort of inductive reasoning is based on the premise that the future will be (at least to some degree) like the past. That premise is the forecast. The rest, Firecalc, etc. is just filling in details. To the extent that the forecast is wrong, those details will be wrong too.

We live most of our lives by inductive reasoning because we have no choice. But there is a concept in risk management called "normalization of risk." It happens when we have tolerated a risk so frequently that we forget it is a risk. It is normal. Hence our comfort with inductive reasoning.

I'll bet you can guess who this inductive reasoner was: “... in all my experience, I have never been in any accident … of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort.”

In the case of the OP here, my gut says his planning numbers are based on a risky sense of inflation, that history from the last 20-30 years of inflation applies, about 2.7% IIRC. Over 100 years the number is like 3.11% and if you begin your averaging in the late 1970s, that 2.7% becomes well over 4%. At just 3% inflation over his 14 years to 65, a dollar will be down to about 65 cents of purchasing power.

 

[pb4uski]

.... In the case of the OP here, my gut says his planning numbers are based on a risky sense of inflation, that history from the last 20-30 years of inflation applies, about 2.7% IIRC. Over 100 years the number is like 3.11% and if you begin your averaging in the late 1970s, that 2.7% becomes well over 4%. At just 3% inflation over his 14 years to 65, a dollar will be down to about 65 cents of purchasing power.

But if he is uncomfortable with that risk it is very easy to mitigate with TIPS or a rising equity glidepath, et al.

Besides, the FIRECalc run is based on only 31% equities and he has lots of redundancy.

 

[daylatedollarshort]

So it is everywhere. Enumerations just does not get you there and "overly optimistic" is only detectable in the rear view mirror. Daniel Kahneman, in "Thinking Fast and Slow" has some very insightful material on behavioral aspects of project estimating and project management.

I didn't do that on my projects. Maybe I'm just not an optimist, but it wasn't too hard to put projects in on time and on budget if the initial estimates weren't unrealistic. I wanted to spend my weekends outside, not working overtime to meet some unrealistic deadlines in a dreary office building.

 

[jmmec]

No, you only have to pay FICA taxes on earnings and self-employment income.... not on dividends or Roth conversions.

$20k of income that is $7k of dividends and $13k of Roth conversions would have negligible taxes... 0% on dividends and 10% on any Roth conversions that exceed the standard deduction of $12,400 (in 2020).... so ~$60 by my calculations. Surprise! Welcome to early retirement.


...snip...

How much did you build in for income taxes in your $25k of expenses?

Ah, didn't know that.

I used an online calculator which was estimating $2477 in income taxes on the $20k income: $780 federal, $167 state, $1530 FICA. I was accounting for the $2477 taxes within my $25k/annual expenses, but now realize that was a mistake, so this frees up quite a bit of cash.

I was hoping to be able to pay FICA in order to maintain SS disability eligibility.

... snip ...

In the case of the OP here, my gut says his planning numbers are based on a risky sense of inflation, that history from the last 20-30 years of inflation applies, about 2.7% IIRC. Over 100 years the number is like 3.11% and if you begin your averaging in the late 1970s, that 2.7% becomes well over 4%. At just 3% inflation over his 14 years to 65, a dollar will be down to about 65 cents of purchasing power.

That's scary. Thanks for the dose of reality.

But if he is uncomfortable with that risk it is very easy to mitigate with TIPS or a rising equity glidepath, et al.

Besides, the FIRECalc run is based on only 31% equities and he has lots of redundancy.

This is interesting. Just read some things about TIPS, and will read more on the rising equity glidepath.

 

[pb4uski]

.... So if I generate $20k income a year (from dividends + conversions to a Roth IRA) then when I file my taxes, I would have to pay the FICA tax, right?...

Ah, didn't know that.

I used an online calculator which was estimating $2477 in income taxes on the $20k income: $780 federal, $167 state, $1530 FICA. I was accounting for the $2477 taxes within my $25k/annual expenses, but now realize that was a mistake, so this frees up quite a bit of cash.

I was hoping to be able to pay FICA in order to maintain SS disability eligibility. ...

Someone else can weigh in but I don't think you have to pay FICA taxes to maintain SSDI eligibility.... it doesn't make much sense... if you are disabled and can't work how would you be paying FICA taxes. Can you elaborate?

To be clear though, in order to get the 0% tax rate the dividends need to be "qualified" dividends... which are dividends from US corporations or US equity funds or ETFs... dividends from a money market or bond fund don't qualify. If the $7k in dividends were not qualified, then the $780 in federal tax that you came up with seems about right... but the $1,530 in FICA doesn't make sense since there is no FICA on dividends or Roth conversions.

If your $7k in current taxable account income doesn't qualify for the 0% tax rate, you could sell non-qualifying assets and buy qualifying assets in your taxable account and sell qualifying assets and buy non-qualifying assets in your tax-deferred account... your asset allocation ends up the same but your portfolio is more tax-efficient because it takes advantage of the 0% rate for qualified dividends.... so in your case you would save $700 a year.

This is why many of us here hold US equities in our taxable accounts and fixed income in our tax-deferred accounts.

Also see: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

 

[Dtail]

Someone else can weigh in but I don't think you have to pay FICA taxes to maintain SSDI eligibility.... it doesn't make much sense... if you are disabled and can't work how would you be paying FICA taxes. Can you elaborate?

To be clear though, in order to get the 0% tax rate the dividends need to be "qualified" dividends... which are dividends from US corporations or US equity funds or ETFs... dividends from a money market or bond fund don't qualify. If the $7k in dividends were not qualified, then the $780 in federal tax that you came up with seems about right... but the $1,530 in FICA doesn't make sense since there is no FICA on dividends or Roth conversions.

If your $7k in current taxable account income doesn't qualify for the 0% tax rate, you could sell non-qualifying assets and buy qualifying assets in your taxable account and sell qualifying assets and buy non-qualifying assets in your tax-deferred account... your asset allocation ends up the same but your portfolio is more tax-efficient because it takes advantage of the 0% rate for qualified dividends.... so in your case you would save $700 a year.

This is why many of us here hold US equities in our taxable accounts and fixed income in our tax-deferred accounts.

Also see: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

That is correct that one doesn't have to pay FICA taxes to maintain SSDI eligibility. My DGF does not work and continues to receive SSDI.

 

[OldShooter]

I didn't do that on my projects. Maybe I'm just not an optimist, but it wasn't too hard to put projects in on time and on budget if the initial estimates weren't unrealistic. I wanted to spend my weekends outside, not working overtime to meet some unrealistic deadlines in a dreary office building.

My projects ranged up to a max of about $150M in 2020 dollars and a couple of hundred people. My working weekends wasn't much help when big problems arose. Though I did plenty of it from time to time.

... That's scary. Thanks for the dose of reality. ... This is interesting. Just read some things about TIPS, and will read more on the rising equity glidepath.

Yes. Inflation is scary and IMO almost all retirees, including me, do not adequately consider it when looking ahead. In your case, the actuaries would probably give you a planning horizon of maybe 35 years. Over that period using 3% inflation, your 2020 dollar will be worth about 35 cents. At 4%? 24 cents.

A real crime, IMO, is selling naive people "fixed" annuities which could easily have deteriorated in purchasing power by 50% at the time the annuitant really needs the money.

Re TIPS, I am pretty much the outlier here I think, but 90% of our fixed income AA is in TIPS. High inflation is really the only financial event that could seriously wreck our retirement. Probability is arguably low; no body knows for sure. But impact is high, so it is worth worrying about. Maybe even a little paranoia.

 

[Sarah S]

Once you get ssdi you don’t need to continue to work but to qualify you need a certain number of recent work credits ( obtained by working in a job where you pay into the system). The number of credits varies by age but a rule of thumb unless quite young is 5 out of the last 10 years. So when you have been not contributing for 5 years once that 6 th year starts you would get no new ssdi nor would you qualify for early medicare

My sister stayed home with her daughter and although she had lots of work credits from before did not have enough current when she was diagnosed with ALS ( otherwise an automatic qualifying illness)

 

[Sunset]

....

I haven't set up a Roth IRA yet: I was planning to do that once I FIRE and then do conversions from my Traditional IRA --> Roth IRA to generate $20k ordinary income to qualify for ACA subsidies.

(A question was raised about being more aggressive in the conversion to Roth IRA, so that is something I'd have to think about once the time came.)

I need to look more into the benefits of starting a Roth IRA now, rather than later, along with better understanding the distribution rules. But this year my income will -- unexpectedly -- exceed the max $137k for a single person, so I don't think I can fund it outright AFAIK apart from doing a conversion.

....

I'm a BIG fan of ROTH's (in Canada it would be TFSA and is even better) and the importance of getting the clock going on both types of accounts. Because nobody can predict the future, and maybe you will need/want it sooner than expected.

OP - you can set up a ROTH with zero dollars, and then as long as you have an IRA, do a conversion of $2.00 to put money into it right away.

Do this conversion each year of $2.00 to be sure the account is active, or if your earnings are low actually contribute instead.

 

[jmmec]

Thanks everyone for all the helpful advice and comments!

SS Disability Eligibility:

Regarding my question about SS disability:

I'm not collecting SSDI right now, but if I were to become disabled today, then I would be able to collect $3136/month payments since I have enough accumulated work credits.

However, if I were to quit working today (and so stop paying FICA taxes) then my eligibility for SSDI -- should I become disabled at a future date -- would eventually cease since I would have stopped accumulating work credits. I didn't know this.

From the SS website:

In addition to meeting our definition of disability, you must have worked long enough — and recently enough — under Social Security to qualify for disability benefits.

..etc.etc..

Remember that whatever your age, you must have earned the required number of work credits within a certain period ending with the time you become disabled. If you qualify now but you stop working under Social Security, you may not continue to meet the disability work requirement in the future.

https://www.ssa.gov/planners/disability/qualify.html

This is also what Sarah sadly pointed out:

...snip... So when you have been not contributing for 5 years once that 6th year starts you would get no new ssdi nor would you qualify for early medicare

My sister stayed home with her daughter and although she had lots of work credits from before did not have enough current when she was diagnosed with ALS (otherwise an automatic qualifying illness)

Summary:

I'm going to continue working for as long as I can until shown the door. If it comes this year, then I'll have to seek other employment opportunities, which is rough in my industry at 51 years old. Failing that, I'll try to "retire" on a $25k to $30k annual spend as discussed in this thread and hope for the best.

In the mean time I'll try to work on a less riskier AA but one that isn't too risky. I know so little about finances, and there is so much to learn.

 

[pb4uski]

I guess that I'm confused. I thought you were planning to retire.

You never really disclosed how much you spend now.

.... I'm in the software industry and the writing is on the wall that my career is unlikely to last much longer, so I've been in the severe savings mode for many years now. I'm ready to retire, especially since I have several low-cost hobbies and other interests to pursue. Travel doesn't interest me since I love the mountains where I live where life and history is affordable and rich!

Here is my plan for funding retirement for the next 11 years before I can take SS & pension at age 62. ....

 

[Aerides]

I guess that I'm confused. I thought you were planning to retire.

Me too. It sounds like he's now saying "but if I stay working and become disabled I'll get paid more" vs. retire now, become disabled and no longer qualify for SSDI? Well ok yeah but if you can retire then lack of SSDI potential is not a factor (I've literally never read anyone with that in the "reasons not to retire" column")

 

[jmmec]

Well, comments from the past few days has helped me think of things I hadn't considered.

Although some comments + firecalc suggests otherwise, it seems too risky to proactively quit my job while there is still money on the table. Better to wait to be laid off, which seems most likely this year, if not next.

I need time to think about risks involved in formally retiring: i.e. points made about inflation severely eating away at my savings & unknown risks of ACA / medical & risks of losing SSDI eligibility due to lack of work credits (should I become disabled). These are pretty serious considerations.

Hope this is clear!

 

[Bob_Walter]

$25k/yr spending, are you sure what is correct? What if you don't stay single?