Assessing the Final Five Year Plan

[ReadySetGo]

This forum is great, and after lurking for awhile, I'd like to get involved in the discussions to learn and contribute. My husband and I turn 53 at the end of the year and hope to retire in 4 1/2 years at 57. Here is our rundown:

401Ks----------------$1,350,000, with about 27% in Roth
IRAs------------------$469,500
Deferred Comp------$150,000
HSA------------------$31,600
Brokerage Acct------$285,000 non-retirement brokerage account, with small amount in crowdsourced RE investments (Lending Club and Realty Shares)

We will continue to max out 401Ks, including catch up. With company matches, annual joint contribution is around $55,000

We will contribute between $100-$120K to deferred comp each year, and are trying to determine best payout schedule moving forward (upon termination, I will receive 50K in lump sum, 30K over 7 years, and 80K over five years).

We will continue to max out HSA contributions each year; this year will be $6900

We have three kids, one graduating college a semester early next month, a freshman at an out-of-state university, and a junior in high school. Our 529s and scholarships cover about 70% of costs.

We own two houses, with about $350K in equity and $386K in mortgage remaining. We are trying to sell the secondary home, but will rent it out seasonally in the coming year, with an expected income of $8,000. We consider leveraging our houses as swaps for future travel or moving to the second house while renting the first, which would more than cover both monthly mortgage payments.

At this point, we consider waiting to collect social security until we are 70, and the SS.gov calculator says we will collect over $80K/yr. combined. I believe this will decrease, as we won't work until we are 70, but I'm not sure by how much.

We have been tracking our expenses for almost 20 years, and know exactly what we spend. Our biggest expenses are food, education, taxes, mortgages, and a shared lease on a horse (will go away when the youngest goes to college in August of 2019).

We are estimating annual expenses of $150K in retirement.

I have run firecalc, but have a hard time figuring out how to add the deferred comp over time. We use mint and personal capital and have an extensive spreadsheet with previous budgets and future estimates. All are on the positive side for retirement in 2 years or beyond.

Here are some of the things I am thinking through:

1) I was originally going to collect the new deferred comp (4.5 years-about $440K in addition to existing) over ten years, to minimize amount needed from 401Ks in early retirement. Now I'm wondering if I should set payout to five years, as expected amount will be over $100K annually for five years, which may be just about all we need between 57-62, and would allow the 401Ks to earn more by sitting longer. We are likely to do some kind of part-time work in early retirement. Ideal would be some kind of seasonal work at a national park, so not a big income generator. And who knows what we will decide.

2) I'm wondering what we can do now to minimize taxes when we are required to collect RMDs and factor in social security, as the income at age 70 could be well over $100K, and much more than we will need at that age.

3) We have not been in the camp to pay down the mortgage, as our money earns more by being invested, and our interest rate is low. Would it make sense, though, to put more money over the next five years towards eliminating the mortgage, while adding less to the deferred comp?

4) I don't yet understand the MAGI/ACA/tax connection, but will investigate resources and welcome advice. I believe our income in retirement will still be relatively high, so am interested in the best strategies to reduce our outflow.

We appreciate any advice. If we can build confidence in the plan, we can better tackle the "retire to what" concept. Thanks!

 

[DrRoy]

You need to add what you spend, including taxes, medical, etc.

 

[Ronstar]

Looks like a solid plan. And you are well set for retirement.

I would start tracking expenses and start whittling down any unnecessary expenses in preparation for retirement.

I don't know what you can do to avoid the big tax hit when you start drawing SS and RMD's. Taking your deferred comp over a 5 year period instead of 10 may make some sense. There may be some time prior to 70 that you can do some roth conversions to lessen your post 70 taxes.

The 4-1/2 years will go by fast. Your financial plan is sound, but what will you do for fun? You need to plan your retirement activities unless you plan just to sit around the house.

 

[pb4uski]

.....We will contribute between $100-$120K to deferred comp each year, and are trying to determine best payout schedule moving forward (upon termination, I will receive 50K in lump sum, 30K over 7 years, and 80K over five years).

..... I have run firecalc, but have a hard time figuring out how to add the deferred comp over time. ....

I would add the $50k lump sum n the Portfolio Changes page in the year you expect to receive it. Then on the Other Income/Spending tab in the Pensions section add the $30k as a pension starting the year you expect to first start receiving annual payments and an additional $50k pension starting 7 years later, then off-chart spending of $80k starting 13 years after retirement.

This should add the following cash flows:

	1	2	3	4	5	6	7	8	9	10	11	12	13	14+
Pension 1	30	30	30	30	30	30	30	30	30	30	30	30	30	30
Pension 2								50	50	50	50	50	50	50
Off-chart spending													-80	-80
Total	30	30	30	30	30	30	30	80	80	80	80	80	0	0

Your deferral of compensation in tax-deferred accounts was predicated on an assumption that your tax rate in retirement would be lower than when the compensation was deferred... this is a reasonable assumption for many people.... as it turns out, you have been successful so you will not win as much on the deferred comp bet that you made as you thought you would.... welcome to the club. I suspect that you'll still come out ahead (the taxes on your withdrawals will be lower than when the income was deferred) but just not as much ahead as you originally thought... a tax on success.

 

[gayl]

For most:

start tracking expenses and start whittling down any unnecessary expenses (I'll add: nondeductible debt) in preparation for retirement.

+1

 

[ReadySetGo]

I would add the $50k lump sum n the Portfolio Changes page in the year you expect to receive it. Then on the Other Income/Spending tab in the Pensions section add the $30k as a pension starting the year you expect to first start receiving annual payments and an additional $50k pension starting 7 years later, then off-chart spending of $80k starting 13 years after retirement.

This should add the following cash flows:

1234567891011121314+

Pension 13030303030303030303030303030

Pension 250505050505050

Off-chart spending-80-80

Total30303030303030808080808000

Your deferral of compensation in tax-deferred accounts was predicated on an assumption that your tax rate in retirement would be lower than when the compensation was deferred... this is a reasonable assumption for many people.... as it turns out, you have been successful so you will not win as much on the deferred comp bet that you made as you thought you would.... welcome to the club. I suspect that you'll still come out ahead (the taxes on your withdrawals will be lower than when the income was deferred) but just not as much ahead as you originally thought... a tax on success.

Thanks so much. I will try this. I only get the distributions for a set period of time, so was not sure I could enter them as pensions, as they won’t continue indefinitely. Do you have experience with personal capital? It seems quite flexible, allowing for these types of payments, purchases such as cars, weddings, etc. I appreciate your help-I love the firecalc tool, as it’s easy to run many different scenarios.

 

[ReadySetGo]

Looks like a solid plan. And you are well set for retirement.

I would start tracking expenses and start whittling down any unnecessary expenses in preparation for retirement.

I don't know what you can do to avoid the big tax hit when you start drawing SS and RMD's. Taking your deferred comp over a 5 year period instead of 10 may make some sense. There may be some time prior to 70 that you can do some roth conversions to lessen your post 70 taxes.

The 4-1/2 years will go by fast. Your financial plan is sound, but what will you do for fun? You need to plan your retirement activities unless you plan just to sit around the house.

Thanks. We are really monitoring expenses and are happy to have “almost” launched one young adult. We see several opportunities to reduce expenses in the coming years. We have started some new activities so we can prepare to transition from the busy work environment. We are certainly hoping to find a renewed purpose and have some fun. I appreciate your reply.