60 year old, in quest of a balanced discussion

[Efun2024]

Hi, I'm a 60 year old chemist in quest of a balanced discussion, and/or evaluation of strengths, weaknesses or noteworthy features of my FIRE plan...

I have a disability (haven't applied for permanent disability yet) but it's becoming difficult to continue working day by day. Spouse 54 yo (non-working spouse, eligible for 50% SS). Two kids, both graduated, one married.

Thinking of retiring at 62 - would like to do it now if possible!



Assets and expenses as follows:

A) $600k in 401k

B) Pension: fully vested and eligible for pension even at present (around $1900 with joint-and-survivor 75% option.

C) SS at 62 is around $2200 and FRA is around $3200.

D) rental property (paid off) $2800 pm rental income.

E) about 400k mortgage balance on primary home (15 years to go @ 2700pm)

F) expected expenses $8500 pm

G) would like to delay 401k withdrawals as far out as possible, but...

H) crazy idea - is it wise/advisable to use 401k withdrawals to pay for the mortgage balance?


Don't want to fall in the 'one-more-year' trap.

What to expect and what are the issues I should be watching closely?
Any and all comments are welcome and appreciated.

Thank you

 

[Midpack]

Maybe begin by entering all your inputs A thru F in https://firecalc.com/, with a couple variations, and you’ll have a good place to start?

Does your spending account for health care expenses before Medicare? That’s an obstacle for many early retirees.

 

[Dtail]

Does your pension have a COLA?
Is your rental income net of expenses, or are the expenses included in the 8500?

 

[Jerry1]

Maybe begin by entering all your inputs A thru F in https://firecalc.com/, with a couple variations, and you’ll have a good place to start?

Input your data into FireCalc then come back and ask questions. Do this a few times and you will get far more comfortable with your situation. At first glance, I think you’d be cutting it too close but it’s best to go through the exercise. One of the most important things the process yields is figuring out the things you haven’t thought of yet.

 

[The Cosmic Avenger]

Just from what you've posted, assuming you included your mortgage in your monthly expenses, you would have a $1600/month shortfall to make up, either by withdrawals, budget cuts, or elsewhere. As others have said, you should check FireCALC to see if that's sustainable. As to the mortgage, what's the rate? Assuming you've lived there a while, you should have a rate below 4%, so I would say keep that money invested.

Also, is the rental property income you list the net income? If so, is it managed, or do you manage it, and if you do, how do you feel about that being your primary job once you retire? Have you run the numbers for selling your rental and investing the proceeds? RE is still high, and if you don't think you'll be up to managing the rental, this might be a good time to get out.

 

[RunningBum]

H) crazy idea - is it wise/advisable to use 401k withdrawals to pay for the mortgage balance?

Are you talking about taking a large withdrawal and paying off the mortgage? I doubt that makes sense because you'd be hit very hard with income taxes. What's your mortgage rate?

 

[Gumby]

1) Does your item F (expenses) include E (mortgage payment)? If yes, as mentioned, that will require drawing $1600/month from your 401k ($19,200 per year or 3.3% withdrawal rate). But if not, you're looking at a shortfall of $4300 per month ($51,600 per year or an 8.6% withdrawal rate). Yes, you will have more breathing room when your wife starts collecting a spousal social security benefit, but that won't occur for at least 6 years after you've retired if you are now 60 (planning to retire in two years) and she is 54. You will also get more margin once you've paid off the mortgage 13 years after retirement. But in the interim, you will be extremely exposed to sequence of return risk (SORR), which is the risk that we have a multi year bear market starting right after you retire, while you are making heavy draws from your 401k.

2) Does item F (expenses) include all taxes? Don't forget the taxes you will need to pay as you withdraw from your 401k. FIRECalc does not do taxes; you need to estimate them and add that to your spending.

3) If your mortgage rate is decent, I would not pay it off from the 401k. First, your portfolio is likely to perform better than your house as an investment. In my experience, residential real estate historically keeps pace with inflation but not much better. Second, and more importantly, you will seriously compromise your liquidity. You cannot sell off a room of your house if an unexpected expense arises. And, third, you will pay heavy taxes to withdraw that money from your 401k. You don't pay taxes when you increase your net worth by paying down debt.

 

[Exchme]

To your question about paying off your mortgage, you didn't share your interest rate, but in general, it doesn't sound right to make a giant withdrawal from you 401K as the tax rate on getting the money out of your 401k all at once would be higher than any tax rate you will otherwise owe in your lifetime.

Since you are several years older than your spouse and in declining health, I would be working the plan around the idea of maximizing guaranteed income for my spouse and minimizing the hardships of life going forward:


- Especially given the large age and health difference, I would want to maximize the SS benefit, it's the only inflation adjusted annuity you can get. Look at opensocialsecurity.com for a plan on optimizing claim dates. Make sure you scroll to the bottom and click different points on the graph, that will show you how much the lifetime benefits change at different claim age combinations. If your spouse lives a long time, waiting to claim will be the best gift you can give.

- Is there a 100% survivor benefit option on the pension? Given your age and health, that would probably be a better deal than a 75% survivor option.

- How much does your pension increase with each additional year you work?

- As others mentioned, your plan works a lot better if your pension has a COLA. Since the end of 2020, we've had 20% inflation, that kind of thing will wipe out the value of a non-COLA pension in a hurry. If, say, your spouse reaches 90+, 3% inflation would wipe out about 2/3 of the value of a non-COLA pension.

- I'm not sure being a landlord makes sense as your disability worsens, plus rentals have risks - major repairs, tenant from hell, deteriorating neighborhood, etc. Personally, I would sell it and be happy to have more flexibility to use the money to defer taking SS. If you need ACA, drawing expenses from a taxable account gives you more control on your income to maximize your premium credit. If the interest rate on your home mortgage was over 4-4.5%, I'd be thinking about using some cash from selling the rental to pay that down.

 

[Efun2024]

Maybe begin by entering all your inputs A thru F in https://firecalc.com/, with a couple variations, and you’ll have a good place to start?

Does your spending account for health care expenses before Medicare? That’s an obstacle for many early retirees.

Will do the calculations.
...provided the SSDI kicks in.

 

[Efun2024]

Will do, thanks.

 

[RetiredHappy]

At a glance, I would sell off the rental property and use the money to pay off your mortgage. Since rental income is about equal to your mortgage payment, it simplifies your finances. If your sold property for more than $400K, then you will have extra money to invest and grow.

If your expenses of $8,500 include mortgage, you can take $2,700 off it once your mortgage is paid off. Now expenses is only $5,800 and it's alot more manageable. If your expenses do not include mortgage, can you find a way to reduce your expenses to match your retirement income?

 

[TheWizard]

I'll just say that most people would be better off drawing down tax-deferred accounts (401(k), tIRA) starting the year they retire.
If you don't need all that $$ for expenses, then Roth convert part of it...

 

[Closet_Gamer]

A couple other questions:

1 - what this your current income and how much are you saving?
2 - Is your $8500/mo a pre- or post-tax figure? You need to ensure you account for taxes.

#1 is important because helps understand how much you can plow into the pot over the next two years and its a sanity check on the $8500/mo expense figure.

 

[Dash man]

At a glance, I would sell off the rental property and use the money to pay off your mortgage. Since rental income is about equal to your mortgage payment, it simplifies your finances. If your sold property for more than $400K, then you will have extra money to invest and grow.

If your expenses of $8,500 include mortgage, you can take $2,700 off it once your mortgage is paid off. Now expenses is only $5,800 and it's alot more manageable. If your expenses do not include mortgage, can you find a way to reduce your expenses to match your retirement income?

^^^^
This what I would do.

 

[rodi]

If you haven't read it, there is a FAQ on evaluating whether you are financially ready to retire.
https://www.early-retirement.org/forums/f47/some-important-questions-to-answer-before-asking-can-i-retire-69999.html

 

[pacergal]

At a glance, I would sell off the rental property and use the money to pay off your mortgage. Since rental income is about equal to your mortgage payment, it simplifies your finances. If your sold property for more than $400K, then you will have extra money to invest and grow.

If your expenses of $8,500 include mortgage, you can take $2,700 off it once your mortgage is paid off. Now expenses is only $5,800 and it's alot more manageable. If your expenses do not include mortgage, can you find a way to reduce your expenses to match your retirement income?

If you haven't read it, there is a FAQ on evaluating whether you are financially ready to retire.
https://www.early-retirement.org/forums/f47/some-important-questions-to-answer-before-asking-can-i-retire-69999.html

++ on both of these.
I found the exercise of going through the questions posted by rodi very helpful and eye opening.

 

[JDARNELL]

I think If you get SSDI for your disability it is or close to the FRA amount no matter when it starts.

 

[Dtail]

I think If you get SSDI for your disability it is or close to the FRA amount no matter when it starts.

FRA amount was correct for my fiance.

 

[FlaGator]

No, don't draw down your 401(k)), pay the taxes and penalties to pay off your mortgage.

Not the most popular question - have you thought about selling your CA Real Estate and moving out of state somewhere with a lower cost of housing and living overall??

Not for everyone, may spring some cash and give you more flexibility. Understand there may be reasons this isn't a good option for you.

 

[Efun2024]

Just from what you've posted, assuming you included your mortgage in your monthly expenses, you would have a $1600/month shortfall to make up, either by withdrawals, budget cuts, or elsewhere. As others have said, you should check FireCALC to see if that's sustainable. As to the mortgage, what's the rate? Assuming you've lived there a while, you should have a rate below 4%, so I would say keep that money invested.

Also, is the rental property income you list the net income? If so, is it managed, or do you manage it, and if you do, how do you feel about that being your primary job once you retire? Have you run the numbers for selling your rental and investing the proceeds? RE is still high, and if you don't think you'll be up to managing the rental, this might be a good time to get out.

Thank you Cosmic Avenger - ROI on rental is at 14% (based on the original purchase price; and rental income has paid for it over again - do not wish to sell it). Self managed, been doing it for over 10 years. Feel comfortable doing it together with my spouse.

 

[Efun2024]

Are you talking about taking a large withdrawal and paying off the mortgage? I doubt that makes sense because you'd be hit very hard with income taxes. What's your mortgage rate?

Thank you,
I guess, it's not such a great thing to do - I'll drop the idea. Never thought of comparing the mortgage rate v/s returns on the 401k.

 

[Efun2024]

1) Does your item F (expenses) include E (mortgage payment)? If yes, as mentioned, that will require drawing $1600/month from your 401k ($19,200 per year or 3.3% withdrawal rate). But if not, you're looking at a shortfall of $4300 per month ($51,600 per year or an 8.6% withdrawal rate). Yes, you will have more breathing room when your wife starts collecting a spousal social security benefit, but that won't occur for at least 6 years after you've retired if you are now 60 (planning to retire in two years) and she is 54. You will also get more margin once you've paid off the mortgage 13 years after retirement. But in the interim, you will be extremely exposed to sequence of return risk (SORR), which is the risk that we have a multi year bear market starting right after you retire, while you are making heavy draws from your 401k.

2) Does item F (expenses) include all taxes? Don't forget the taxes you will need to pay as you withdraw from your 401k. FIRECalc does not do taxes; you need to estimate them and add that to your spending.

3) If your mortgage rate is decent, I would not pay it off from the 401k. First, your portfolio is likely to perform better than your house as an investment. In my experience, residential real estate historically keeps pace with inflation but not much better. Second, and more importantly, you will seriously compromise your liquidity. You cannot sell off a room of your house if an unexpected expense arises. And, third, you will pay heavy taxes to withdraw that money from your 401k. You don't pay taxes when you increase your net worth by paying down debt.

Thank you,
Yes, I have included the mortgage (@2.5%) in the expenses. However, I must include taxes...

 

[Efun2024]

To your question about paying off your mortgage, you didn't share your interest rate, but in general, it doesn't sound right to make a giant withdrawal from you 401K as the tax rate on getting the money out of your 401k all at once would be higher than any tax rate you will otherwise owe in your lifetime.

Since you are several years older than your spouse and in declining health, I would be working the plan around the idea of maximizing guaranteed income for my spouse and minimizing the hardships of life going forward:

... (declining health or disability in terms of severe hearing loss)...

- Especially given the large age and health difference, I would want to maximize the SS benefit, it's the only inflation adjusted annuity you can get. Look at opensocialsecurity.com for a plan on optimizing claim dates. Make sure you scroll to the bottom and click different points on the graph, that will show you how much the lifetime benefits change at different claim age combinations. If your spouse lives a long time, waiting to claim will be the best gift you can give.

- Is there a 100% survivor benefit option on the pension? Given your age and health, that would probably be a better deal than a 75% survivor option.

No such option...

- How much does your pension increase with each additional year you work?

About $90 - 100 {per month}

- As others mentioned, your plan works a lot better if your pension has a COLA. Since the end of 2020, we've had 20% inflation, that kind of thing will wipe out the value of a non-COLA pension in a hurry. If, say, your spouse reaches 90+, 3% inflation would wipe out about 2/3 of the value of a non-COLA pension.

No COLA for pension.


- I'm not sure being a landlord makes sense as your disability worsens, plus rentals have risks - major repairs, tenant from hell, deteriorating neighborhood, etc. Personally, I would sell it and be happy to have more flexibility to use the money to defer taking SS. If you need ACA, drawing expenses from a taxable account gives you more control on your income to maximize your premium credit. If the interest rate on your home mortgage was over 4-4.5%, I'd be thinking about using some cash from selling the rental to pay that down.

Mortgage rate is 2.5%. ROI on rental is about 14%

 

[Efun2024]

I think If you get SSDI for your disability it is or close to the FRA amount no matter when it starts.

That would be helpful, but it's a long process from what I hear.

 

[Efun2024]

Thank you all for your responses - has given me a lot of points to consider and still think about before making a decision.
Really helpful and sincerely appreciate it.