Hi and this is my plan.. What I'm missing?

[perez99]

Hello to All!
I joined the forum some years ago, but never got to write an introduction and ask for feedback on my situation. Too much great material to read and assimilate before I understand where my questions should be about. My appreciation for this community is very high!

I am 57 years old and planning to retire by the end of this year after 35 years in two (2) different Megacorps. Wife has always been a stay at home. One kid is full launched, while the other has 6 more months in a PhD program (I provide some financial support).
I live in Puerto Rico and will retire here. Most of the retirement elements are the same as those in USA (e.g., Social Security, Medicare, etc) while others are “modeled” as per the USA, but have different limits or other nuances (e.g., 401K, IRAs)
With that said, here are my numbers:
Bond $1,003,816 31%
Stock $1,576,808 49%
CASH $269,472 8%
RSU $378,022 12%
Total is $3.2MM, mostly in index funds with the big exception the megacorp RSUs.

I will probably put in another $200K by year end (~100K in RSU)

I will have access two (2) Non-COLA pensions with estimated a) $15K annual income @ age 62 and b) $60K annual income @ age 62.

For social security, I am assuming $48K for myself and 19K for my wife at age 70. I will have access to Megacorp health retirement program.

I feel myself very blessed by being able to save, invest and work with good employers over the years, particularly the last 10 years where most of the savings and investment performance came from.

My goal is to be able to afford about $150K in yearly expenses with 30%-50% of them to be discretional (travel, hobbies, etc).
Firecalc tells me that I can do $156K @ 100% confidence. Not sure if 100% translate to less than 4% withdrawal rate as I would like to plan for something like 3%-3.5%. Its not clear to me how to confirm this as the two pensions and social security needs to be neutralized somehow. I’m going to try some other calculators in case I made a mistake when loading Firecalc.

My plan is as follows:
-Age 58-62: live from taxable
-Age 63: initiate pensions (the major one don’t have penalties for age 62 start date, the other one does)
-Age70: initiate Social security

Some areas where I’m not sure how to manage yet:
1) About $1.3MM of the $3.2 are in 401k “like” programs for which the way you withdraw money is quite peculiar: you designed in how many years you want the withdrawals to be done (up to 20). After that you cannot change it. The payment will be based on fund value at the time of payment and remaining years. So, they will be obviously variable. Will you select the maximum years (20) or try to get the funds out before a certain age? I have done some modeling and its likely I will have to pay taxes on the withdrawal and then reinvest a good portion of the withdrawal once I start social security. If it matters, Currently I use the 401K to hold intermediate bonds and stable value funds. I do not plan to initiate withdrawals until ages 62.

2) My RSUs vest after 3 years and I can keep the ones granted upon retirement. The expire after 10 years. I want to reduce dependency on my megacorp (+$100B Revenue, health care sector, good defensive stock)), but having a mental challenge to “cash” them until they grow more in value. Seems like a wasted opportunity if cashed out too early. How much risk (as % of total investable assets) do you consider your max?

Of course, the bigger concern is “what I don’t know that I don’t know” … so anything I am missing?

Much appreciated!

 

[OldShooter]

Someone will be along shortly to crank your numbers in FireCalc.

Your RSU $ are about 12% of the total. That is not crazy high; Depending on the fiduciary institution, anything over 10-15% is considered to be an "imprudent" concentration. We were there when we were in our early 50s because DW's megabank 401K match was in megabank stock that could not be sold prior to her turning 55. The first thing we did after her birthday was to sell down to the 15% number, which was her bank's trigger number.

Your sorta-annuity 401K situation is interesting. I would suggest talking to HR to see if there is or has been any talk of eliminating the sorta-annuity option. If changes are possible or likely those should be factored into your thinking. I am a huge believer in inflation insurance via TIPS. Really high inflation is a ow probability, high impact event. But I consider the cost to mitigate, TIPS' lower yield, to be reasonable. So our fixed income tranche is about 90% in TIPS. From that point of view, I see your sorta-annuity 401K as a good place to consider 100% TIPS if you have that option.

Re the pensions and SS, if you like you can run a net present value calculation and use those NPVs as part of your AA as fixed income. You'll have to make some assumptions but the ballpark numbers might be interesting to you.

Any international stock? Try: "Global equity investing:The benefits of diversification and sizing your allocation" https://www.vanguard.com/pdf/ISGGEB.pdf

Re "what I don’t know that I don’t know” welcome to the club. I think retirement finances are more like rugby than chess. "Man plans, God laughs." So I don't plan at a very detailed level.

 

[perez99]

Your RSU $ are about 12% of the total. That is not crazy high; Depending on the fiduciary institution, anything over 10-15% is considered to be an "imprudent" concentration. .

Yes, I'm not completely uncomfortable as I don't expect to be exposed to an Enron type of situation where value suddenly disappears. I'm sure I will trim some, but taxes are a concern in the short-term due to my income. So a risk vs reward concern.

Your sorta-annuity 401K situation is interesting. I would suggest talking to HR to see if there is or has been any talk of eliminating the sorta-annuity option.

I can also take a lump-sum with 20% tax. The funds inside the 401k include low cost indexes so that does not drive a need to move out. However TIPS is not an option.
I have not analyzed the lump sum approach yet. One advantage of the annuity like payments is that I get tax free the first $15K in yearly distributions.

Re the pensions and SS, if you like you can run a net present value calculation and use those NPVs as part of your AA as fixed income. You'll have to make some assumptions but the ballpark numbers might be interesting to you.

Will do. Sounds interesting. Also will do the immediate annuites.com comparison

Any international stock? Try: "Global equity investing:The benefits of diversification and sizing your allocation" https://www.vanguard.com/pdf/ISGGEB.pdf

I have ~$110K in Vanguard Total International Stock Index Fund ETF, plus the international impact of the stock index funds. Seems good enough for me, but will check the link.

Thanks for taking the time to reply!

 

[OldShooter]

@perez99, you mention taxes as a concern. Agreed. True for all of us, I think. But remember this rule as you plan: Do not let the tax tail wag the investment dog.

IOW, the objective is maximum money in your pocket, not minimum money paid in income tax. The classic example is someone in a low tax bracket gleefully buying muni bonds so he doesn't have to pay taxes on the income -- never noticing that, taxes paid, a corporate or government bond might net more money in his pocket.

 

[perez99]

@perez99, you mention taxes as a concern. Agreed. True for all of us, I think. But remember this rule as you plan: Do not let the tax tail wag the investment dog.

Agree, and I got some, not too big scars to prove it

In my case It was in the third quarter of a given year and I didn't need the money but wanted to reduce the dependence on my employers RSU's, so waited for the next calendar year to cash out to reduce taxes. Of course the price declined in Q4 and that resulted in me holding on it for much more than that I wanted.

 

[Dtail]

I played around with your numbers in Firecalc and come up with a max spending of 183k when using a 100% success rate.
I used a 50/50 AA and living to 95 and wife the same age.
IIRC, if one wishes to achieve a 100% success rate for 30 years, the max WR% is ~3.58%.

 

[Finance Dave]

Have you modeled a different withdrawal order? you mention using taxable first from 58-62, but this will leave your tax-deferred buckets growing and potentially subject to higher brackets later on. You might try modeling during 58-62 withdrawing from tax-deferred up to the lowest bracket, THEN take any more that you need from taxable.

Congrats, looks like you've done well and have a good plan!

 

[perez99]

I played around with your numbers in Firecalc and come up with a max spending of 183k when using a 100% success rate.
I used a 50/50 AA and living to 95 and wife the same age.
IIRC, if one wishes to achieve a 100% success rate for 30 years, the max WR% is ~3.58%.

Thanks for doing this. Its my first confirmation that I was entering the data in Firecalc correctly.
I'm getting somewhat lower numbers, but its because I was using 75% of estimated social security and also telling Firecalc not to allow the balance drop below $1MM

 

[perez99]

Have you modeled a different withdrawal order? you mention using taxable first from 58-62, but this will leave your tax-deferred buckets growing and potentially subject to higher brackets later on. You might try modeling during 58-62 withdrawing from tax-deferred up to the lowest bracket, THEN take any more that you need from taxable.

Congrats, looks like you've done well and have a good plan!

I may be able to do some of that that starting from age 60 as my local rules don't allow access to the 401k like program until such age. However once I start this it wont stop until the funds are completely withdrawn as per the number of years I select. Really can't just withdraw to any particular tax bracket. The only other option is to do a lump sum for the total $1.3MM in those plans.
The good thing it will add another two years of withdrawal before the tax impact once social security starts...

It sounds as a better plan (still need to model)
My updated plan is as follows:
-Age 58-60: live from taxable
-Age 60: initiate 401k withdrawals. Annuity model with payments for the next 20 years
-Age 63: initiate pensions (the major one don’t have penalties for age 62 start date, the other one does)
-Age70: initiate Social security

Thanks!

 

[Dtail]

Thanks for doing this. Its my first confirmation that I was entering the data in Firecalc correctly.
I'm getting somewhat lower numbers, but its because I was using 75% of estimated social security and also telling Firecalc not to allow the balance drop below $1MM

Using your parameters, I get 166k max spending, but either way sounds like you are fine especially since there is a decent amount of discretionary.

 

[Dash man]

Have you discussed an estate plan with an attorney? If not, find an attorney that spec in estate planning so you can get a will, trust if needed, Healthcare POAs, financial POAs and such. We chose to use Charles Schwab as a corporate trustee after my wife and I are gone.

 

[pb4uski]

You may want to visit opensocialsecurity.com, especially since you seem to want to assume a haircut beginning in 2034 which is they year when you would turn 70. Check the additional input checkbox at the top of the page. I usually use the 2017 CSO Nonsmoker preferred mortality tables and a 0% disount rate. If you select the haircut scenario I think it will likely suggest that you take SS before 70.

Also, with respect to the sorta-annuity you said

... I can also take a lump-sum with 20% tax. ...

. Be careful there... is it 20% withholding but the tax will really be based on the marginal tax rate that you are in when you receive those benefits (which is likely higher than 20% depending on your other sources of income) or is it really that that income is subject to a 20% tax rate? I suspect the former and that the tax bite is likely higher than 20%.

And I would trim back on the RSUs as soon as practicable to avoid concentration risk to that single ticker.

 

[perez99]

Have you discussed an estate plan with an attorney? If not, find an attorney that spec in estate planning so you can get a will, trust if needed, Healthcare POAs, financial POAs and such. We chose to use Charles Schwab as a corporate trustee after my wife and I are gone.

In the To-Do list. Thanks

 

[perez99]

Also, with respect to the sorta-annuity you said . Be careful there... is it 20% withholding but the tax will really be based on the marginal tax rate that you are in when you receive those benefits (which is likely higher than 20% depending on your other sources of income) or is it really that that income is subject to a 20% tax rate? I suspect the former and that the tax bite is likely higher than 20%.

Its a one-time tax @ withholding time with a 20 tax % rate. One of those local things...

 

[pb4uski]

So 20% tax is withheld and when you file your tax return the tax rate on that income is limited to 20% even if you are in a highr marginal tax bracket before considering that income? So if before that income you are in the 22% tax bracket then the maximum tax on that additional income is 20%?

 

[perez99]

So 20% tax is withheld and when you file your tax return the tax rate on that income is limited to 20% even if you are in a highr marginal tax bracket before considering that income? So if before that income you are in the 22% tax bracket then the maximum tax on that additional income is 20%?

I'm not yet sure how the tax form will reflect the lump-sum payment, but my understanding is as you describe, the tax is 20% flat on that amount.

My initial thinking is that a lump-sum is not the best way, but will absolutely confirm the tax impact before modeling it. I look at the annuity as an RMD situation with the benefit that the first $15K/year are tax free. I can start this at anytime from 59 1/2 to 70 years of age.