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59 planning to retire at 62 with an unconventional? withdrawal strategy
Old 01-09-2017, 06:31 AM   #1
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59 planning to retire at 62 with an unconventional? withdrawal strategy

What a great board - I found it a few days ago and have been doing lots of reading and have learned a lot. There are clearly many intelligent and well spoken people here. I'm mainly checking in and saying hi but I would appreciate any comments on what to me seems like an obvious but perhaps uncommon planning scenario.

Background: married, both are 59, planning to retire at 62. Will have two pensions, a lot of 401k and IRA money and virtually zero non retirement savings. We are debt free. I've spent a lot of time with Fidelity's retirement planner, and also recently the Pralana retirement calculator.

After retirement we could cover all essential expenses with the pensions and social security if I chose to start it. We want to travel extensively for 8-10 years after retirement, meaning high non-essential expenses, and then expect to slow down. Hopefully our health will support this - we are both healthy with no medical conditions now and good family health histories, but since everyone's health declines with age we want to enjoy ourselves sooner rather than later.

If we withdraw heavily, 8-10%+ per year, from our 401k/IRAs and defer social security to age 70 the calculators show we are better off than taking SS earlier and reducing our withdrawal rate. Once SS kicks in, the withdrawal rate would go down to 1-2%. I know that 10% per year for 8 years would leave almost nothing left, unless we get reasonable market returns, but if the market goes south we can always change strategy. The calculators show we'd have about 40-50% of savings left at age 70, assuming balanced investments in a significantly below average market. This seems to make sense, but is much different than the 3-4% safe withdrawal rates many seem to suggest. Again it is a dynamic situation so I can always adjust real time if it doesn't work out.

A side benefit is getting the IRA/401k balances spent down by age 70 the MRD isn't more than needed. Also I may do some Roth Conversion between 62 and 70 to optimize taxes.

Comments?
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Old 01-09-2017, 08:03 AM   #2
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That is not a plan that I would be comfortable with but then I can only comment from my perspective. My plan had too little in investments when I retired to make any withdrawals so I took my pension right away at 55 and SS at 62 to give the assets time to grow. At the time I retired, 14 yrs ago, the plan showed we would have little money left at life expectancy. But I was conservative on asset growth and by age 60 it was clear there would be significant assets, so I started doing Roth conversions and to date have moved slightly more than 50%, so RMD is not a terrible issue going forward.

Anyway, I have never understood the value of delaying SS (unless working). Why draw down assets that you can control where they are invested to avoid tapping SS which is basically a fixed asset? The cross-over point is close to life expectancy, so unless you expect to live 5-10 yrs longer than LE based on family health history (and high confidence you will avoid unexpected accidental death), only if all that happens will you come out significantly better by delaying SS.

Finally, by using the pension and SS to cover as much of our expenses as possible, my plan never has us getting close to the SWR number to cover normal living expenses. It is projected to never even hit 1%. So, I feel very comfortable making large withdrawals whenever I want for whatever (and I have done that). I know I would not enjoy major travel using 8-10% of my assets all the time wondering if there would be money left in the end.
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Old 01-09-2017, 08:11 AM   #3
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conversationalphrase, have you run your numbers through FIRECalc?
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Old 01-09-2017, 09:20 AM   #4
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I would not plan to draw down your investments so heavily. I am guessing that the pensions have no COLA and you need some investments for inflation protection.
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Old 01-09-2017, 09:43 AM   #5
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Make sure your plans also leave enough in investments for unexpected expenses such as house repairs, big medical bills, car replacement and other one time expenses that might not be picked up in your annual budget.

And welcome to the Forum! Obviously people make their own decisions about what plan is right for them, but this is a good place with a lot of helpful people.
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Old 01-09-2017, 09:55 AM   #6
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Originally Posted by REWahoo View Post
conversationalphrase, have you run your numbers through FIRECalc?
+1.

OP, this question has come up before both here and at Bogleheads, and there are extensive threads discussing it. It might be useful for you to run site specific searches of "Social security delay and withdrawal rate." The top few hits on both sites have some good analysis/discussion.

Basically, this is just a variant on the "delay to 70" discussions. I could see your approach working well, particularly if your pensions are COLA'd. You are setting up two distinct time periods, one of which is only 8 years long. In theory you could just put 80% of your portfolio in CDs/Cash (totalling "80X") and spend 10X+ interest each year until 70. The question then is whether the 20X, invested for 8 years before being needed, would suffice along with the income streams.

We, like anyone delaying to 70, are effectively going to be doing something similar--in theory we'll be withdrawing a smaller amount from portfolio once we start receiving whatever social is available. Since we have no pensions (and are mentally earmarking social $ for hypothetical grandkids), however, we won't be approaching the percentages you are talking about.

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E.T.A.--also the discretionary nature of your spending and the willingness/ability to adopt a dynamic approach is a definite plus factor.
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Old 01-09-2017, 10:03 AM   #7
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We did the opposite but for different reasons.

The first was psychological. Our feeling was the the more we drew down our asset base the more we would worry about outliving it. This would impact how we felt about spending money on the things like travel. We felt better about having a large percentage of our spend covered by a pension income and then using asset draw down to supplement.

The second is rear window. Our investments, net of inflation, have performed considerably better than the imputed return on our pension had we delayed over this past four years.
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Old 01-09-2017, 10:27 AM   #8
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Originally Posted by conversationalphrase View Post
If we withdraw heavily, 8-10%+ per year, from our 401k/IRAs and defer social security to age 70 the calculators show we are better off than taking SS earlier and reducing our withdrawal rate. Once SS kicks in, the withdrawal rate would go down to 1-2%.
This is the exact situation we're facing too and I've been trying to get comfortable with the idea. So far, I haven't been able to - mostly due to the fear / possibility of sequence of returns risk. Well, there is also the unknown of what healthcare will cost after the repealing of ACA. (We don't have the option of any retiree healthcare.)

I will be following this thread closely and thank you for posting it. I wish you the best with whatever you decide to do.
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Old 01-09-2017, 10:39 AM   #9
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Welcome conversationalphrase! You might want to go through this list to see if you've covered everything in your planning:

http://www.early-retirement.org/foru...ire-69999.html

As you've already seen, this isn't a conventional strategy but that certainly doesn't mean it won't work for you, especially if you are willing to be very flexible in the early years. If you aren't already, tracking your actual expenses in detail for the next couple of years would be advisable. Also I would assume you both are maxing out your 401Ks for the remaining time you are working and that you are comfortable with your asset allocations in your retirement accounts.

Good luck and we hope you'll keep us posted!
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Old 01-09-2017, 10:46 AM   #10
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Originally Posted by conversationalphrase View Post
........ I know that 10% per year for 8 years would leave almost nothing left, unless we get reasonable market returns, but if the market goes south we can always change strategy. ....Comments?
Sounds like more risk than I would take but would need to see Firecalc numbers to get a better feel for it. Risk comes from possible changes to your future required income (social security) and expenses (potential major changes to health care costs).
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Old 01-09-2017, 10:52 AM   #11
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Originally Posted by conversationalphrase View Post
....If we withdraw heavily, 8-10%+ per year, from our 401k/IRAs and defer social security to age 70 the calculators show we are better off than taking SS earlier and reducing our withdrawal rate...
Could you quantify how much better your calculations show you to be with this plan and what life expectancy you are using relative to IRS life expectancy tables?

From past discussions here, I'm wondering if you are assuming a life expectancy quite a bit longer than the IRS life expectancy tables. And if so, wondering what the % increase in value of your portfolio would be using your plan. Just curious as eventually I'll need to consider when to take SS.
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Old 01-09-2017, 10:54 AM   #12
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Fyi - this is an excellent tool for analyzing SS options:

SSAnalyze - Bedrock Capital Management
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Old 01-09-2017, 12:35 PM   #13
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Wow - thank you for all prompt and detailed responses. I hope I can contribute in the future to this board. Already some good perspectives I haven't thought of.

Quote:
Originally Posted by larrytbm View Post
Anyway, I have never understood the value of delaying SS (unless working). Why draw down assets that you can control where they are invested to avoid tapping SS which is basically a fixed asset? The cross-over point is close to life expectancy, so unless you expect to live 5-10 yrs longer than LE based on family health history (and high confidence you will avoid unexpected accidental death), only if all that happens will you come out significantly better by delaying SS.

... So, I feel very comfortable making large withdrawals whenever I want for whatever (and I have done that). I know I would not enjoy major travel using 8-10% of my assets all the time wondering if there would be money left in the end.
You are correct, I ran my numbers for a long life expectancy - 90 for me and 94 for my wife. My thinking is if the money is good for that long, then it will certainly be good if we die younger. But it does effect how you look at deferring social security. I need to do some what if's with shorter life expectancies and see how much changes.

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Originally Posted by REWahoo View Post
conversationalphrase, have you run your numbers through FIRECalc?
No I haven't. I haven't spent much time with Firecalc but I didn't see a way to enter the detail I need. I have a number of steps of income and expenses throughout retirement and I didn't see the flexibility to enter all these. For example, I budgeted much more for health insurance before 65 then reduced it after when medicare kicks in. There is also the aforementioned change in spending habits, a spike for some planned home improvements, etc. I only saw a way to add 3 events in Firecalc.

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Originally Posted by Katiek View Post
Make sure your plans also leave enough in investments for unexpected expenses such as house repairs, big medical bills, car replacement and other one time expenses that might not be picked up in your annual budget.

And welcome to the Forum!
I believe I've accounted for everything - but I know there is always something unexpected so I've got a fairly generous miscellaneous expense reserve too. Thank you!

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Originally Posted by Carpediem View Post
This is the exact situation we're facing too and I've been trying to get comfortable with the idea. So far, I haven't been able to - mostly due to the fear / possibility of sequence of returns risk. Well, there is also the unknown of what healthcare will cost after the repealing of ACA. (We don't have the option of any retiree healthcare.)

I will be following this thread closely and thank you for posting it. I wish you the best with whatever you decide to do.
Sounds like we are in similar places. I'm trying to get comfortable with it or make the decision for a different approach. The ACA is a big unknown and one I don't think we can plan well for until we see what the current Congress does. I don't have retiree healthcare either.

Quote:
Originally Posted by MBAustin View Post
Welcome conversationalphrase! You might want to go through this list to see if you've covered everything in your planning:

http://www.early-retirement.org/foru...ire-69999.html

As you've already seen, this isn't a conventional strategy but that certainly doesn't mean it won't work for you, especially if you are willing to be very flexible in the early years. If you aren't already, tracking your actual expenses in detail for the next couple of years would be advisable. Also I would assume you both are maxing out your 401Ks for the remaining time you are working and that you are comfortable with your asset allocations in your retirement accounts.

Good luck and we hope you'll keep us posted!
Thank you - and yes I found that list of questions when I was browsing the forum. It is very good. I have maxed my 401k for as long as I can remember, and before that IRAs. My asset allocation is on the conservative side of a balanced portfolio, I think I am at about 42% equities right now.

Quote:
Originally Posted by Whisper66 View Post
Could you quantify how much better your calculations show you to be with this plan and what life expectancy you are using relative to IRS life expectancy tables?

From past discussions here, I'm wondering if you are assuming a life expectancy quite a bit longer than the IRS life expectancy tables. And if so, wondering what the % increase in value of your portfolio would be using your plan. Just curious as eventually I'll need to consider when to take SS.
Yes, as I noted above, I am considering a longer that standard life expectancy. I'm thinking that is the conservative approach. My measure is how much money the Fidelity or Paraplan calculators show remain at the end of life with a substantially worse than average market. In other words having a few $100k savings at death is better than having it depleted before death, assuming a constant spending profile.

Quote:
Originally Posted by Carpediem View Post
Fyi - this is an excellent tool for analyzing SS options:

SSAnalyze - Bedrock Capital Management
I agree, and in fact it was the one I used to help with my decision plan. It actually showed my wife should start SS withdrawal at 67 and myself at 70. I didn't go into that detail initially, but that is what my latest projections are based on. When I start SS my wife will get a bump because the spousal benefit will be higher than her SS alone. By the way this is another nuance I couldn't see how to enter into FireCalc.


Thanks to all for the input - please keep the dialogue going - I really appreciate it!
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Old 01-09-2017, 12:38 PM   #14
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Without knowing any numbers few would agree to a 8-10% withdrawal rate. Why can't you plan travel budget based on 4-6% withdrawal rate.? How much can you reduce your daily living cost before you travel i.e. no mortgage/rent, no car insurance, no utilities, etc. Perhaps travel won't be such a big difference in living expenses.
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Old 01-09-2017, 12:44 PM   #15
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Originally Posted by conversationalphrase View Post
I agree, and in fact it was the one I used to help with my decision plan. It actually showed my wife should start SS withdrawal at 67 and myself at 70. I didn't go into that detail initially, but that is what my latest projections are based on. When I start SS my wife will get a bump because the spousal benefit will be higher than her SS alone. By the way this is another nuance I couldn't see how to enter into FireCalc.
Based on the SSA tool, I too was leaning toward my wife taking SS at 67, however, when I ran it again with wife taking it at 62, it wasn't too much of a difference to not consider it a vaiable option. One thing taking it early does is reduce your early withdrawals a bit.

I've used FireCalc to run our numbers but I also use the Flexible Retirement Planner tool. It provides more flexibility for testing different scenarios and the evaluation version is free and pretty much fully functioning. I ran the scenario with my wife taking SS at 62 instead of 67 and it still came out with 100% success.

The Flexible Retirement Planner | A financial planning tool powered by Monte Carlo Simulation
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Old 01-09-2017, 12:48 PM   #16
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Welcome conversationalphrase! I agree with you and everyone else that this is an excellent forum to obtain retirement information.

The group is biased toward LBYM people who tend to be what I call "financially responsible." You won't hear from many "the government owes me" or "it's not fair that I don't have enough money" people here. If you want to have some fun read this thread: http://www.early-retirement.org/foru...ngs-81651.html

Like you, I used many retirement calculators when doing my planning. Did not use Pralana because I did not hear of it back when I was seriously crunching numbers. Looks like a nice calculator!

Our biggest issue was estimating our future SS benefits if we retired early. I tried using the SS site and their calculators gave me inconsistent results. So finally I bought ESPlanner because the authors of that program spend a lot of effort, and have the access to be able to, give the most probable SS estimates.

We used ESPlanner to model Roth rollovers. We plan to leave as much money as possible to our kids, with the taxes paid and no RMD till we croak. So part of our game is to spread the rollovers in such a way as to minimize taxes and maximize return.

Since our goals are different from yours, it's likely the optimum scenario we find will also be different. But our experience may be useful.

Welcome and best wishes!!
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Old 01-09-2017, 01:31 PM   #17
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Quote:
Originally Posted by larrytbm View Post
......
Anyway, I have never understood the value of delaying SS (unless working). Why draw down assets that you can control where they are invested to avoid tapping SS which is basically a fixed asset? The cross-over point is close to life expectancy, so unless you expect to live 5-10 yrs longer than LE based on family health history (and high confidence you will avoid unexpected accidental death), only if all that happens will you come out significantly better by delaying SS.

...
The cross-over point is the median life expectancy, meaning 50% of people will live longer than that cross-over point.

So if you are healthy, female, a couple, don't do risky things like sky-diving, odds are you will live past the cross-over point.
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Old 01-09-2017, 01:55 PM   #18
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******** (Crowdsourced Financial Independence and Early Retirement Simulator/Calculator) is like firecalc but has the ability to enter lots more than three changes in spending. When you go to the default screen, you'll have slots for two pensions, two savings, and two spendings, but you can just click on the "Add pension", "Add Savings", and "Add Spending" buttons and you'll get more slots to use. Might be helpful to you.

My opinion on your original question is that delaying SS to 70 is fine, but as others have already said, the relatively high withdrawal rates early on is risky. Being willing to cut down discretionary expenses if the portfolio tanks is one way to mitigate the risk. Another would be to dial back on the risk of your portfolio - say, more cash - although this helps protect you against sequence-of-returns risk, it increases the risk of inflation eating away at your spending power.

I think asking yourself what you would do if your portfolio tanked by 40% for two years when you are age 65 and being honest with your answer can help inform your plan. Will you hunker down and hope it recovers? Will you continue spending a lot and risk ruin? Will you go back to work? Will you be OK with a lower standard of living here on out?

Good luck!
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Old 01-09-2017, 01:58 PM   #19
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I am in a similar position. Our WD is about 8% for the first 8 years, then 5% 2 for years then the plan is for SSI to kick in at FRA then an annuity (he old pension money) which will leave the WD at about 1%. We have a fair amount of discretionary $$ which will help, and we expect some inheritances at some point (the later the better, Mom is more valuable than the $), so there is room for a market turn. I used Fidelity Retirement Planner as well as FIRECalc and another program, and they all gave me a green light. Make sure you look at planners that use Monte Carlo and historical returns to make sure you are covered, each has their benefits and each has gaping flaws. Using both types will cover your bases. Welcome and good luck!
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Old 01-09-2017, 02:22 PM   #20
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MegaCorp retired me at 58 1/2 and I received 1 year's severence pay. I also have a defined pension, but not enough to live on. I continued to invest in a moderate risk but diversified portfolio and began drawing 4% yearly from the IRA Rollover at age 59 1/2.

I took Social Security at age 62, and have continued to take $40K per year from the IRA Rollover. And 8 years later, I have 20% more in my IRA Rollover account than I had originially.

I suggest you just live conservatively and try to minimize taking more than 4% from the 401K until you get to be 62 years old--and then start your Social Security. Your Social Security is there for life, however your 401K can quickly disappear and then you won't have a backup.
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