Retiring two years earlier than planned

[No_Drama]

Hi everyone

I have been lurking here on the forum for many years and it is finally happening! Last summer, I updated my plan and targeted 2026 (age 57). However, last week I was RIFed, but from how I see it, the severance package and other good news is covering the gap.

About us:
Age: 55 / DW 55 / Son 18 year old freshman in college
Income: was $200k / DW $60k

Financial Assets: $2.6M
Taxable: $150k
Roth: $675k
Current 401k: $500k
Other IRA/401k: $1200k
529: $100k.

Retirement Income:
SS: Plan is $51k / $16k at age 70 / 62
Pension: $5k at age 65

Spending:
Base pretax spending: $101k including $14k for medical, $18k for travel and entertainment

College Expenses: $40k for three more years, but $28k is covered by scholarships. Planning to convert $35k to our son’s Roth. This was another favorable change from my Summer plan. Spring tuition is already paid.

Housing: $18k annual P&I on a 3.25% mortgage paid off in 2045. Included in the base expenses above. House is worth $700k per Zillow.

The Plan:
DW wants to keep working at least until 2025. She is a teacher and started a new job at a refreshingly well-administered school, so she does not feel an immediate need to quit.

This year: Expenses covered by DW’s job and my severance
Next Year: $60k DW + $28k 529 (no penalty due to scholarships) + $42k 401k rule of 55.
57-61: Mix of remaining excess 529 funds, 401k, and Roths to stay below the ACA limit.
62-69: DW starts collecting $16k social security. Our small pensions start at 65.
70+: My $51k social security starts

I am planning to increase involvement with volunteer activities I am already doing, run a ½ marathon in the fall, and clean out the closets. If I get bored, I may take on a low-stress part time job but that is not the preferred plan.

Concerns:
I’ve ran this plan through Firecalc with spending grossed up to $130k for taxes and got a 100% success rate, Fidelity’s retirement score is 120, and the various other online tools I’ve been obsessively checking also report a 95%+ success rates.

My biggest concern is that I am over a 5% withdrawal rate at ages 58-61. It then drops to the mid 4% range until I take my SS at age 70 and it drops to 2%, falling to under 1% near the end of the plan.

I also plan to meet with Fidelity and get their feedback and give DW another point of reference.

Am I missing anything? How concerned do you think I should I be about those high withdrawal rates?

 

[street]

I far more an expert and no one knows what the markets and future will bring. I also after looking at your numbers I personally would not be concerned with that bridging of 5%. After saying that if push comes to shove, I would have a plan that you could shave some expenses someplace to rest your mind.

A backup plan and what if this happens is a good thing to have in your back pocket.
Good luck but I really don't think you have a problem with your options over the bridging time frame.

 

[pacergal]

Welcome to the forum.

I think you will be fine, but there are far more financially savvy folks here who will most likely chime in.

 

[MarieIG]

Welcome to the forum.

I would not panic about the initial high withdrawal rate in light of the expense which will fall off, i.e. your son's college; and the income which will be triggered in the future - pension and SS (in particular saving yours until age 70). Also, if you do feel uncomfortable you can look for a side gig for a year or two. What I would look at would be how your funds are allocated, and how you would deal with a market drop.

 

[RetiredHappy]

When we retired, 53 (wife) / 67 (husband), we bucketized our retirement fundings by phases/ages. Our expenses are very high (about $240K before taxes per year), we set aside $1M for the first 7 years and did not count them towards our withdrawal rate.

The income stream varies based on ages/years. I have a spreadsheet which projects various rates of withdrawals. For instance:
- Age 60 (wife), an annuity starts payment
- Age 62 (wife) starts SS
- Age 65 (wife) medical expenses drop going from full price private insurance to Medicare.
- Age 70 (wife), gets a bump in annuity payment
- Age 70 (husband) starts SS
- Age 70.5 (husband) starts RMD
- Ongoing Withdrawal of dividends from taxable accounts.

When income streams have all started, our withdrawal rate drops to about 2%.

 

[pb4uski]

...How concerned do you think I should I be about those high withdrawal rates?

Not at all... high early withdrawal rates are typical for many of us who retire early before pensions or SS start... it is just a reality.

I retired at 56 and had a similiar approach... WR was higher early as we had no income when I first retired at 56... my small pension kicked in when I was 62... DW's SS based on her own work record started when she was 66 + 2 months and the final piece is that I'll start my SS when I am 70. Our WR was initially high and notches down with each addition of income. Our current WR is about 4% but will drop to 2.5% when I start SS.

In such cirumstances I think it best to focus on what I call the "ultimate" withdrawal rate once all pensions and SS are "online".

 

[audreyh1]

Awesome news for you! Thanks for sharing and decloaking.

 

[savory]

The headline of your post made me think about beating our planned retirement timing by 2 years. The short story is things came together and we (DW), joined the Peace Corps which provided a bridge to a more confident retirement timing.

10% of the Corps is 50+. Some state side preparation medical costs are required but living expenses at your destination are taken care of. You would still need to pay mortgage, taxes, etc and anything you own stateside while serving. We sold our house before joining but most 50+ did not

Anyway, a long shot that anyone will decide this is right for them but we never would have considered it if DD did not ask us to explore it with her. (She did not join BTW). Suffice it to say, it was an experience well beyond our expectations which is one reason I am sharing it here.

 

[38Chevy454]

Seems you are pretty good shape to just retire now. I would not worry about the 5% withdrawal. Worse case you can cut some discretionary expenses, or get a part time job for yourself, to reduce the withdrawal amount. Or since your withdrawal rate is low once SS starts, you could consider starting SS earlier than 70 as another source of income once you hit 62 or anytime after that.

Have you also considered unemployment as a source for some money? Being RIF'd you should be eligible, even with your severance package. Depending on how the severance is set up, the worse case is you have to delay unemployment claims until after the severance is over. I think depends on your state laws.

Good job preparing for retirement. Welcome to the forum.

 

[athena53]

I'm assuming that the "Medical" bucket includes health insurance, maybe from DW's employer? For me, that was a big issue when I retired at age 61. Fortunately, DH was eligible for Medicare.

It sounds like you're in a good position with a good margin you could trim if you had to (T&E - not a happy option, though).

One thing to consider is your mix of assets. I sure wish I could tell you what the market is going to do over the next few years but I haven't a clue. You may want to have a decent chunk in cash or CDs for 2025 since it looks like 2024 is covered. That way you won't have to sell at fire-sale prices in a down market. Even binds might be less risky than equities; interest rates are more likely to go down (sometime) than up so the value to the bonds will rise.

 

[livingalmostlarge]

Yay congratulations!

 

[Cassius King]

Congrats on the severance. Everything looks lined up and good.

Enjoy!

 

[No_Drama]

Thanks everyone for the feedback!


I appreciate everyone's input on the 5% withdrawal. I do have some expenses in the budget like a $5k annual allocation to replace our vehicles that I could postpone, our auto and health insurance costs will probably drop when our son graduates, $8k of annual charitable contributions, etc. I really do not want to cut the T&E budget. DW would not be happy if our early retirement was at the expense of the fun stuff we are looking forward to.



I am invested 70% stocks (mostly S&P 500 index) 24% Bonds (mostly BND -- ughh) 6% International. Firecalc is giving me a 100% success score between 30%-70% stocks. Some of the other models show I could improve my success factor by reducing stocks, but I feel pretty comfortable taking the risk for higher average returns. It is comforting to know that I have a pretty good base SS and the small pension to cover the basics.


My healthcare budget does include our premiums and the actual expenses for doctors, prescriptions, dental, etc. over the past three years. We are both in good health but we have had some minor but expensive issues where we hit our out of pocket max for the last three years. I expect our healthcare spending will actually drop the next two years because the family out of pocket max on her plan is much lower than the combined individual max out of pocket we had up until now. The ACA options I see in the portal look close to what I have budgeted when I type in the data for my 58 year old future self, assuming I can manage our income successfully to get the subsidy.


I don't think I will qualify for unemployment since I won't be seeking employment but I will check that out. My severance isn't a lump sum so it will be paid out over several months, so I have plenty of time to research that.



Good suggestion on the CDs. I have a small five year CD ladder with $12k and about $22k in I-bonds. I never owned any CDs before last August. Maybe that could also be a buffer against the upcoming high withdrawal rates too. I saw a couple of good CD options in another thread that I will check out.


Thanks again!

 

[flybynight]

Thanks everyone for the feedback!


I appreciate everyone's input on the 5% withdrawal. I do have some expenses in the budget like a $5k annual allocation to replace our vehicles that I could postpone, our auto and health insurance costs will probably drop when our son graduates, $8k of annual charitable contributions, etc. I really do not want to cut the T&E budget. DW would not be happy if our early retirement was at the expense of the fun stuff we are looking forward to.



I am invested 70% stocks (mostly S&P 500 index) 24% Bonds (mostly BND -- ughh) 6% International. Firecalc is giving me a 100% success score between 30%-70% stocks. Some of the other models show I could improve my success factor by reducing stocks, but I feel pretty comfortable taking the risk for higher average returns. It is comforting to know that I have a pretty good base SS and the small pension to cover the basics.


My healthcare budget does include our premiums and the actual expenses for doctors, prescriptions, dental, etc. over the past three years. We are both in good health but we have had some minor but expensive issues where we hit our out of pocket max for the last three years. I expect our healthcare spending will actually drop the next two years because the family out of pocket max on her plan is much lower than the combined individual max out of pocket we had up until now. The ACA options I see in the portal look close to what I have budgeted when I type in the data for my 58 year old future self, assuming I can manage our income successfully to get the subsidy.


I don't think I will qualify for unemployment since I won't be seeking employment but I will check that out. My severance isn't a lump sum so it will be paid out over several months, so I have plenty of time to research that.



Good suggestion on the CDs. I have a small five year CD ladder with $12k and about $22k in I-bonds. I never owned any CDs before last August. Maybe that could also be a buffer against the upcoming high withdrawal rates too. I saw a couple of good CD options in another thread that I will check out.


Thanks again!

You look in great shape and I like your asset allocation with 70% stocks. Congratulations!!

 

[USGrant1962]

...

My biggest concern is that I am over a 5% withdrawal rate at ages 58-61. It then drops to the mid 4% range until I take my SS at age 70 and it drops to 2%, falling to under 1% near the end of the plan.

...

Am I missing anything? How concerned do you think I should I be about those high withdrawal rates?

Welcome to the Forum.

Your biggest concern is normal, and not a concern. Your own analysis shows why. A high withdrawal (and 5% is not very high) for a few years is fine when you have what we call "reinforcements" coming later. As you did, building a model in FIRECalc that includes these cash flows proves this.

You are in great shape - welcome to FIRE!

 

[cathy63]

Planning to convert $35k to our son’s Roth.

This caught my eye. I think you mean from the 529 to your son's Roth? I assume you know it will take several years to do this. You're limited to the annual contribution amount and he also has to have sufficient earned income.

It looks like next year (maybe also in 2024?) your income would be in the range where you can take advantage of the American Opportunity Tax Credit. You might want to research whether it's worth paying some of the education expenses with after-tax money to maximize that credit. You'd end up with more in the 529, but the portion that can't be rolled to a Roth is good for grad school if that's in the cards.

 

[TickTock]

I appreciate everyone's input on the 5% withdrawal. I do have some expenses in the budget like a $5k annual allocation to replace our vehicles that I could postpone, our auto and health insurance costs will probably drop when our son graduates, $8k of annual charitable contributions, etc. I really do not want to cut the T&E budget. DW would not be happy if our early retirement was at the expense of the fun stuff we are looking forward to.

I am invested 70% stocks (mostly S&P 500 index) 24% Bonds (mostly BND -- ughh) 6% International. Firecalc is giving me a 100% success score between 30%-70% stocks. Some of the other models show I could improve my success factor by reducing stocks, but I feel pretty comfortable taking the risk for higher average returns. It is comforting to know that I have a pretty good base SS and the small pension to cover the basics.

+1 to others who said the initial 5% WR is not a cause for concern given the additional income coming in later years. And you know in advance where you cut spending if needed. Your plan is well thought out.

Where I would caution you is SORR (sequence of returns risk) is real. What happens to your plan if the S&P 500 takes a large hit early in your retirement? Just going back through 1988 there have been one year total returns of -18.1% (2022), -37.0% (2008), -22.0% (2002), and -11.9% (2001). What happens to the plan if 70% of the portfolio drops 37% in one year or 31,3% in two back-to-back years while you are taking 5% withdrawals?

Because of that risk I suggest a more conservative AA earlier in retirement. Kitces has a good article (he calls it "The Bond Tent") here [summary - just before retirement and the first decade of retirement mitigate SORR with lower equity and higher bond exposure]:

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

I'm not suggesting you keep w*rking, just re-consider SORR. You should also be aware that AA opinions vary and there are folks here who are 100% equities. You're aware of the risk/tradeoff and only you and your DW can decide what's right for you.

 

[The Cosmic Avenger]

Agreed, as long as you are prepared to mitigate SORR somewhat you should be able to go well over 4% some years. My Fidelity Retirement Analysis report, in a significantly below average market, has us withdrawing a bit over 7% at first in the Medicare and SS bridge years (I've put in assumptions that we won't get ACA tax credits, just to be safe), but then it drops. But our essential expenses are only about 1/3 of our total retirement budget, so if there's a big drop we may just cut back or spend down cash reserves.

 

[LateToFIRE]

Echoing others on the high early WD rate question. I have a similar profile in that WD early on will be as high as 6-7% first couple years before downsizing housing situation, paying off mortgage debt, and receiving net proceeds from various liquidity events. Once that is done, annual operating expenses will drop by about half and portfolio will be boosted by at least 25%, and then in a few years SS will kick in, so WD eventually rate drops to as low as 1.2% on a base line non-discretionary basis, and just about 4% on a fully loaded FatFIRE basis (incl. luxury travel, extensive dining out, charitable giving, gifts, etc.). I like to look at it this way because it gives me some comfort to know just how much could trim the fat if things were not going according to plan.

 

[LateToFIRE]

+1 to others who said the initial 5% WR is not a cause for concern given the additional income coming in later years. And you know in advance where you cut spending if needed. Your plan is well thought out.

Where I would caution you is SORR (sequence of returns risk) is real. What happens to your plan if the S&P 500 takes a large hit early in your retirement? Just going back through 1988 there have been one year total returns of -18.1% (2022), -37.0% (2008), -22.0% (2002), and -11.9% (2001). What happens to the plan if 70% of the portfolio drops 37% in one year or 31,3% in two back-to-back years while you are taking 5% withdrawals?

Because of that risk I suggest a more conservative AA earlier in retirement. Kitces has a good article (he calls it "The Bond Tent") here [summary - just before retirement and the first decade of retirement mitigate SORR with lower equity and higher bond exposure]:

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

I'm not suggesting you keep w*rking, just re-consider SORR. You should also be aware that AA opinions vary and there are folks here who are 100% equities. You're aware of the risk/tradeoff and only you and your DW can decide what's right for you.

OP's numbers already look really conservative to me, eventually getting to 1-2% WD rate after SS income; I would see no reason to be concerned about SORR by utilizing a conservative AA, especially if there is some flexibility in their budget to trim back a bit in really bad market years [realize this is a subjective area of much debate].

 

[No_Drama]

This caught my eye. I think you mean from the 529 to your son's Roth? I assume you know it will take several years to do this. You're limited to the annual contribution amount and he also has to have sufficient earned income.

I plan to "reserve" $35k to convert to our son's Roth + $36k to pay for his next three years of college. We have already been putting 100% of our son's W-2 earnings from his high school job away in a roth, and he already has $10k saved.

The balance of the 529 will be used to fund our retirement expenses in 2025 and 2026. We can withdraw up to $28k annually without penalty due to his scholarships. This eliminates the 10% penalty risk going forward and we still have options to help pay for a master's degree later from other buckets.

 

[No_Drama]

Where I would caution you is SORR (sequence of returns risk) is real. What happens to your plan if the S&P 500 takes a large hit early in your retirement? Just going back through 1988 there have been one year total returns of -18.1% (2022), -37.0% (2008), -22.0% (2002), and -11.9% (2001). What happens to the plan if 70% of the portfolio drops 37% in one year or 31,3% in two back-to-back years while you are taking 5% withdrawals?

Because of that risk I suggest a more conservative AA earlier in retirement. Kitces has a good article (he calls it "The Bond Tent") here [summary - just before retirement and the first decade of retirement mitigate SORR with lower equity and higher bond exposure]:

https://www.kitces.com/blog/managing-portfolio-size-effect-with-bond-tent-in-retirement-red-zone/

Thanks for the link.


But isn't this what the Firecalc is simulating? Doesn't the 100% score mean we [-]will[/-] will probably be OK even with a terrible initial return?


I've been through the same bad markets everyone else here endured going back to 1987. I did OK with the risk at the time, but I certainly anticipate it is going to feel a lot more real when I am relying on our investments to pay the bills.


Firecalc did say I am 100% with a stock allocation from 30-70%. If I reduced stocks to 50% and put the 20% into CDs, that would cover 5-7 years of expenses. I have to mull that over a while.


I have meeting with Fidelity in March. I wonder what they will advise.

 

[pb4uski]

.... But isn't this what the Firecalc is simulating? Doesn't the 100% score mean we [-]will[/-] will probably be OK even with a terrible initial return?


I've been through the same bad markets everyone else here endured going back to 1987. I did OK with the risk at the time, but I certainly anticipate it is going to feel a lot more real when I am relying on our investments to pay the bills.


Firecalc did say I am 100% with a stock allocation from 30-70%. If I reduced stocks to 50% and put the 20% into CDs, that would cover 5-7 years of expenses. I have to mull that over a while.


I have meeting with Fidelity in March. I wonder what they will advise.

Yes, if FIRECalc says 100% then what it is saying is that your retirement is well funded and based on historical data it woud never fair so no need to fret about SORR.

 

[LateToFIRE]

^^^

Echoing what others have said, FIRECalc should incorporate SORR risk in its analysis. I score between 90-100% depending on how I tweak the variables, especially spending. If absolutely had to, could cut our spending by as much as 50% - point being that spending flexibility is a powerful tool. Having run FIRECalc and some other fairly detailed, sophisticated calc tools, what gives me some comfort is that the failures when/if they occur generally happen well down the road. I expect that if things are going off the rails, would be able to see it coming well enough in advance to take some corrective actions.

 

[Sue J]

You mentioned that DW is a teacher. In some states teachers pay into a pension system and do not pay into Social Security. If your state does this make sure you understand how this will impact her SS benefit.

Good luck to you!