Ready for golf and grandbaby

[coop]

Hi, I’m a lurker and first-time poster in Texas. My first grandchild is now 18 months old, I’m an avid golfer who hasn’t played since Halloween, and I’m feeling the call of that grandbaby and the first tee.

I am 59, DW is 64. We live in central Texas, and have two married sons in the Midwest. They are 1,100 miles from us and 250 miles from each other. Wife is retired. We would like to sell our home here, which we own free and clear, and move to where one of our sons lives (the one with the baby). We have spent most of our lives in the Sunbelt and don’t relish the thought of Ohio winters, so my retirement budget includes a provision to be a 3-month snowbird.

I have spent a great deal of time writing a DIY financial plan and would like the perspective of this board on whether I am financially ready. I will confess that I’m blessed to have a good paying j*b and my boss and employer like me and the work I do. But more and more, I just feel like to live out my purpose, I should exit the w*rkforce and structure my life around spending time with my family. But it’s hard to walk away from that paycheck.

Here are the financial facts, with an eye toward the “important questions” sticky to be sure I’ve covered the bases:

I have tracked my expenses carefully for the past 3 years. I have added and subtracted real-world projected expenses that will change in retirement. I have built a retirement expense budget for the first 10 years of retirement on a year by year basis, using “baseline” expenses not including health insurance and income taxes, and then built in carefully projected year by year expenses for these two big items.

Budget: $104,000 in 2017, $110,000 in 2018, then $113-$118K in 2019-2024, then it drops to $110K in 2025. From then on, I have used a straight 3% inflation factor. The reason for the up-and-down is due to pre-Medicare insurance premiums for me, along with income taxes from converting TIRAs to Roths.

My wife is retired from the Arizona state retirement system. I have access to a good, but expensive, health insurance plan through them. It is a PPO with a good national network. I have tracked premiums for that plan for the past 5 years so I have a good idea of what this plan will cost. My wife can also get a Medicare Supplement plan through them if we want. I have used the costs for this plan to build my expense budget.

Based on some extensive spreadsheet work I’ve done, it makes great sense for both of us to delay taking Social Security until age 70. My PIA at full retirement age (66 and 2 months) is $2,507/month in 2014 dollars. Her PIA at full retirement age (66 and 0 months) is $1,219/month.

Pensions: she currently receives a non-COLA $11K pension. I will receive a $6K non-COLA pension beginning at age 62 in 2017.

Portfolio: Currently is $1.15 million, with a plan to pull $100,000 out of home equity by downsizing our paid-off home. So for planning purposes I’m counting the portfolio as $1.25 million. We have no debt. Portfolio breaks down as follows:

Taxable accounts: $355K (counting the expected infusion of home equity) with only about $4K of unrealized cap gains. Traditional IRAs (TIRAs): $690K. Roth IRAs: $205K.

My plan is to live off taxable account $/Roth early in retirement, and manage taxes to the top of the 15% marginal tax bracket with conversions from TIRAs to Roths. I did a spreadsheet that estimates I should be done with this by the time I turn 70 and start drawing Social Security on my PIA. Therefore, our taxes in 2025 will drop from about $11,000 a year to near zero, which will drop my budget at that age.

I have run the numbers through FIREcalc, based on a 26 year retirement starting in 2016 (ages 86 and 91 for end of retirement). FIREcalc shows a 90% success rate, assuming I maintain a 50/50 asset allocation.

My issue is this: my plan means that we would be pulling 7-8% of our nest egg out to live on for 10 years. But then, once we are both on Social Security in 2025, then I would only need to pull 2-3% of the remaining nest egg in 2025—if that much, as my budget does not factor in reduced spending late in retirement.

So, do you think this is “doable?” If so, should I consider “walling off” about 3-5 years of living expenses early in retirement to safeguard against adverse sequence of returns?

My heart is ready to pull the plug and retire in the next year. My head tells me that maybe I should keep working, that my savings might not be enough to withstand a bear market early in retirement during a time when we are making large withdrawals. But what do you think?

 

[Meadbh]

Welcome to the forum, coop.

I think your plan has a high probability of failure for several reasons.
1. Your initial withdrawal rate of 7-8% will lead to a high risk of failure in most retirement calculators, even the most liberal.
2. Your plan would be very vulnerable in the event of a market crash early in retirement.
3. Your annual expenses are over $100K while your wife's pension is $11K. None of the other income streams have yet materialized. What if they don't?
4. You are planning for a 26 year retirement to age 86 (you) and 91 (DW). What happens if one or both of you lives longer?
5. Your success rate on FireCalc is 90%. Presumably you are comfortable with that. What are your contingency plans if you are one of the other 10%?

Well, you did ask.

 

[Big_Hitter]

can you win some money on the golf course?

 

[coop]

Meadbh, thank you for the welcome and for sharing your thoughts and questions.

I'm not sure I have responses to every one of your points, but a couple of things perhaps merit additional discussion:

Regarding the withdrawal rate, it would be this high for 8-9 years. But then when we start taking Social Security, particularly when my PIA at age 70, assuming COLAs that are the same as what's built into my budget, then at ages 70/74 we will have income streams of $11K pension for her, $6K pension for him, $47K SS for him, $25K SS for her. That means only $25K withdrawals from savings from that point forward--maybe less if we spend less at that stage of retirement. My spreadsheets indicate that I would spend down about $700K of the $1.25M during those first 8-9 years. If the nest egg did not grow at all during that period, in theory at least, we would be left with about $500K in savings. I am interested to learn if it makes sense to delay Social Security to get a bigger guaranteed COLA-adjusted pension later in retirement. If we grabbed Social Security as soon as we retire then obviously our initial withdrawal rate drops, but would be higher later in retirement. So if delayed Social Security claiming is the route to go, does that require also delaying the onset of retirement?

Regarding the questions around the topics of "what happens if 90% isn't good enough/what if one of you lives longer?" I am not sure anyone has an answer for that. On the latter, my assumption is that expenses will drop considerably, but cushioned by having a considerably larger Social Security check to cover basic living expenses.

Thanks again for your frank response. Guess it's back to the grindstone.

 

[pb4uski]

Welcome coop!!

While it is typical for an ER to have a higher WR before SS and pensions start, 7-8% is on the high side and I pause at the 90% success rate and limited planning horizon (not to age 100). OTOH, a projected 2-3% WR once pensions and SS start seems reasonable and after just a few years you always have the option to start SS anytime after you turn 62 if investment results are poor.

You mention health insurance. Have you priced out any ACA plans for you from ER until you are 65? We are paying a lot less than my prior employer's COBRA using ACA HDHI plans.

Also, how have you factored in taxes? If you're using a % of income then it is likely too high. I suggest that you do a trial tax return for your first full year retired to get an idea as to what your taxes will be including a trial Ohio return since you plan to reside there in retirement.

How much flexibility is there in those expenses? If we had a 2008-2009 again, could you tighten your belt a bit and dial down expenses? If you have some flexibility then that would make things more comfortable.

Finally, while spreadsheets are nice, I suggest that you use something like Quicken Lifetime Planner as it is easy to have spreadsheet errors and they are a bugger to find.

 

[MichaelB]

Hi coop, welcome aboard, even if you are from Texas. j/k, many fond memories from my time there.

While you find your way around the forum here are a few questions you want to be sure you have asked yourself and answered. http://www.early-retirement.org/for...re-asking-can-i-retire-69999.html#post1399715

 

[Bestwifeever]

Do the pensions have survivor benefits? The smaller SS will disappear when one of you passes away (I know expenses will go down somewhat but probably not enogh to offset the $25k annual loss); will one of the pensions disappear too?

What if the market goes down 8 percent every year you are collecting 8 percent of your portfolio?

I think you are very close but not quite there given your projected expenses.

 

[ivinsfan]

That a fairly generous budget for a couple that already has a paid for home.

With the new health care laws you can shop for any kind of health care plan, you don't have to use the one offered to you by your DW ex-employer.If the budget can't be trimmed at all, you have a lot of risk loaded on the front end, in my opinion. You haven't sold your home or purchased a new one, yet you added 100 grand to your portfolio which might not happen.

Would you care to share some of your budget info, and as far as you estimating your health care costs as far as 10 years into the future that's a total guesstimate unless you are willing to downgrade some of your coverage.

And awful lot has to go "just right" for this to be a stress free retirement plan.Are you both willing to cut your lifestyle a little for this dream?

 

[ivinsfan]

You do realize that you will pay taxes on most of your SS income and your pension which be over the 60K mark....what your SS number for age 70.. I think your taxes will be more then "near zero"...in 2025.

 

[coop]

Welcome coop!!


You mention health insurance. Have you priced out any ACA plans for you from ER until you are 65? We are paying a lot less than my prior employer's COBRA using ACA HDHI plans.

Also, how have you factored in taxes? If you're using a % of income then it is likely too high. I suggest that you do a trial tax return for your first full year retired to get an idea as to what your taxes will be including a trial Ohio return since you plan to reside there in retirement.

How much flexibility is there in those expenses? If we had a 2008-2009 again, could you tighten your belt a bit and dial down expenses? If you have some flexibility then that would make things more comfortable.

Finally, while spreadsheets are nice, I suggest that you use something like Quicken Lifetime Planner as it is easy to have spreadsheet errors and they are a bugger to find.

pb4uski, thank you for your perspective and the additional questions. I've looked at ACA plans but am a little concerned about how extensive the in-network providers are. From what I can discern, some state ACA plans have quite good plan networks, others not so much. The Arizona plan I referenced earlier is a PPO plan with a premium of $945/month, with a $500 deductible and $3,500 out of pocket maximum/year. I know that's higher than what I can buy on the exchange, but I am using the Arizona plan for budget purposes somewhat as a worst-case scenario.

Second question--taxes. Yes, I have actually done pro-forma federal and state tax returns for 10 years. I have basically built in an assumption that I will manage my taxable income to the top of the 15% marginal tax bracket. I have calculated my income tax exposure using real-world tax returns and tax tables, and that is factored into my budget. By doing TIRA conversions early in retirement, then living on SS and Roth withdrawals after age 70, my budget drops by about $11K/year at age 70 just due to the income tax load coming off.

Flexibility in expenses: there is plenty of flexibility. There's at least $10K-$15K there of totally discretionary spending for snowbirding and travel that can come off.

Finally, thanks for the tip on Quicken. I will definitely investigate. I have found errors in my calcuations in Excel, and totally agree, they are a bear to find and I often fear I have made a boo-boo in a formula somewhere as I make tweaks to things.

 

[coop]

Do the pensions have survivor benefits? The smaller SS will disappear when one of you passes away (I know expenses will go down somewhat but probably not enogh to offset the $25k annual loss); will one of the pensions disappear too?

Yes, both of the pensions will pay 75% to the survivor when one passes away.

What if the market goes down 8 percent every year you are collecting 8 percent of your portfolio?

Good question. One that keeps me awake at night. One thought: viewing the portfolio as "split". I will need about $700K while withdrawing 7-8% a year. We might look at doing a CD ladder for that chunk, in essence, self-annuitizing. Keep the remainder in a 50/50 mix of low ER stock and bond index funds, since that chunk won't be needed for 10 years. If the second chunk of $550K flat-lines for 10 years, I will still only need to pull 2-3% of it out to live on after age 70.

 

[coop]

You do realize that you will pay taxes on most of your SS income and your pension which be over the 60K mark....what your SS number for age 70.. I think your taxes will be more then "near zero"...in 2025.

I have run (yet another) spreadsheet using the three tests described in this article: http://research.prudential.com/documents/rp/InnovativeSocialSecurityNov2012.pdf

Based on 2014 PIA, my SS number at age 70 will be $40,000, plus any COLA picked up between now and then. DWs SS number at age 70 (she will be 74 then) will be roughly $20,000. Following the method illustrated in Example 4, page 11 of the article, at age 70 only about $600 of Social Security income would be taxable, and my combined pension income would only be another $17K, making my AGI then less than $18K. My itemized deductions would pretty much wipe that out, leaving me with no taxable income. Rest of the living expenses would come from Roth IRA withdrawals.

 

[coop]

That a fairly generous budget for a couple that already has a paid for home.

With the new health care laws you can shop for any kind of health care plan, you don't have to use the one offered to you by your DW ex-employer.If the budget can't be trimmed at all, you have a lot of risk loaded on the front end, in my opinion. You haven't sold your home or purchased a new one, yet you added 100 grand to your portfolio which might not happen.

Agreed. I wouldn't retire until after we sell the house at a price that yields a $100K addition to savings. I have done some homework on house prices in new location and feel confident we can find what we want and still bank $100K. But I'm not betting my job on it.

Would you care to share some of your budget info, and as far as you estimating your health care costs as far as 10 years into the future that's a total guesstimate unless you are willing to downgrade some of your coverage.

Sure. Agree totally that the farther out we go, the tougher it is to budget health insurance premiums. But DW will turn 65 in a year and go on Medicare. She can get a Senior Supplement from AZ State Retirement, which I have used in my budget estimates (A Med Supp plan F and Part D might be cheaper, but the Senior Supplement is the coverage equivalent of Plan F/Part D).

So if I retire April 1 of 2016, I will have COBRA at an average of $675/month for 9 months (premium changes July 1, so it's 3 months of lower premium plus 6 of higher), total of $6,075. She will have Part B at $110/month for 9 months, plus Senior Supplement at $260/month for 9 months, total of $3,330. Combined total of $9,405 for the year.

2017: COBRA for 9 more months at $725/month, plus 3 months of AZ State plan at $1,050/month for me. DW has $400/month x12 for Part B and Senior Supp. Combined total of $14,490 for the year.

2018: Him: $1,100/month; her: $420/month; total $18,240
2019: Combined total $19,200
2020: He turns 65 in September and goes on Medicare and Senior Supp for 3 months. Combined total $18,000
2021: Both 65+ full year. Estimated total goes down to $12,500 combined.

For the years after that, I have included health insurance premiums for Medicare and Med Supp to be part of my COLA-adjusted expenses, thus guesstimating premium increases of 3% a year.

The AZ Senior Supplement policy is a group plan offered to all retirees and is not age-rated, as many individual Med Supp policies are.

And awful lot has to go "just right" for this to be a stress free retirement plan.Are you both willing to cut your lifestyle a little for this dream?

I have shared your feeling about it having to go "just right" during a period of large withdrawals, and agree. That's why I wanted the perspective of others. Yes we are willing to cut the lifestyle for sure.

 

[ivinsfan]

Reading your earlier answer about health insurance, you might want to think about raising your deductible to over 500 dollars, this should save you some money if you are a generally healthy person. Your wife's costs might remain fairly stable due to the medicare coverage. However, we have bought our own insurance thru our business for the last 35 plus year and after being in one group for the first 30 plus, we have now switched groups 3 times in the last 3 years because of rising costs, still BCBS...but different plans with different options. I was trying to say having those numbers is nice, but probably not something set in cement...you have a ways to go yet before you hit Medicare.

I have a great BCBS plan with a little higher deductible then you, I'm past 60 and pay half of what you are budgeting in the long term and quite a bit cheaper then your Cobra quote...

 

[robnplunder]

Hi, I’m a lurker and first-time poster in Texas. My first grandchild is now 18 months old, I’m an avid golfer who hasn’t played since Halloween, and I’m feeling the call of that grandbaby and the first tee.

Welcome to the forum.

The bold statement above is oxymoronish. Are you sure you are an avid golfer? *I* am one and I play 2 - 3 times a week and I still have a full time job. "Since Holloween" means you haven't played in this calendar year!

Forget the baby and concentrate on golf unless you want to start training the baby early on.

 

[pb4uski]

I agree with you on the importance making sure an ACA plan has a network that you can live with. Luckily, ours is the same carrier and network as when I was working.

One aspect of your taxes response confused me... the part where you said that your taxes drop at age 70... I would think that they increase at age 70 (or 71) due to SS starting and RMDs... our taxes increase dramatically when that happens which is why I am doing Roth conversions to the top of the 15% tax bracket now to minimize the impact. Also, from what you have described I suspect that your tax calculation uses a 0% rate on qualified dividends and LTCG since it is based on real-world tax returns and tax tables.

QLP is included in Quicken Deluxe and higher if you have access to Quicken. In looking at the age 70 taxes in my retirement spreadsheet I found a formula glitch from a change I made a little while ago that luckily didn't have a significant impact. I compare the QLP trendline with my retirement spreadsheet as a reasonableness check.

....From what I can discern, some state ACA plans have quite good plan networks, others not so much. ....

Second question--taxes. Yes, I have actually done pro-forma federal and state tax returns for 10 years. I have basically built in an assumption that I will manage my taxable income to the top of the 15% marginal tax bracket. I have calculated my income tax exposure using real-world tax returns and tax tables, and that is factored into my budget. By doing TIRA conversions early in retirement, then living on SS and Roth withdrawals after age 70, my budget drops by about $11K/year at age 70 just due to the income tax load coming off.....

Finally, thanks for the tip on Quicken. I will definitely investigate. I have found errors in my calcuations in Excel, and totally agree, they are a bear to find and I often fear I have made a boo-boo in a formula somewhere as I make tweaks to things.