Your thoughts on my FIRE plan...

[jimbohoward69]

Hello there everyone,

I'm not a newbie per se...I've posted many times on various forums here. But wanted to get your thoughts and insights on my current plan. I just turned 50 this month. I'm single, retired military, went back to work for the federal government for seven years, and then left that job back in December of 2019. Live in the Midwest and have been a renter my whole life (but would like to buy one of these days). My goal has always been to "retire for good" at some point in my fifties...just wasn't sure when.

Here are my details:

Assets:

• $41K in taxable MM account (earning 1.3%)...emergency/down payment fund
• $46K in TD/Ameritrade account (500 shares of Abbott Labs)
• $38K in Vanguard taxable brokerage (just liquidated to cash)
• $306K in Thrift Savings Plan (Traditional)
• $1.2K in Thrift Savings Plan (Roth)
• $124K in Vanguard Roth IRA
• Total: $556K (Allocation of stocks/bonds/cash: 48/37/15)

Current/Future Annual Retirement Income:

• $26.8K (current military pension - net after taxes)
• $19.9K (current VA pension - tax free)
• $18.3K (SS at age 62)
• $5.5 K (deferred civil service pension at age 62)
• Annual Total: $47K annually now / $71K annually at age 62 (all four adjusted for inflation (CPI-W))
  

Regarding expenses, I've kept track of them in Quicken since 2001. I'm using $70K per year as my benchmark (last year's expenses...but I made almost $130K in salary/pensions). The $70K included basic things like rent, utilities, etc...plus lots of discretionary spending such as lunches/dinners in which I paid the entire bill, 3-4 vacations, lots of concerts, etc. Bottom line, I don't plan on spending that much annually going forward but would rather be more conservative than not.

Other than a $350/month car payment (0.9% interest / paid off in 2022), I have zero debt. My FICO score is 800+. I also have great health insurance through Tricare.

FIRECalc:

Due to family history, I'm using 30 years as my benchmark. Of course, I COULD live past 80 but you never know. Here's the link to mine: https://www.firecalc.com/index.php?...oor=0&callprocess=Submit&FIRECalcVersion=3.0&

So, with all that said, it LOOKS like I am/will do OK going forward...if I choose not to work again. If it turns out that way, there will be a few scenarios to ponder:

• If, hypothetically, my expenses were to stay at $70K/annually, where would I get the additional income between now and age 62? Go through savings first then think about a 72(t) distribution until I turn 59 1/2?

• Could Roth conversions (Traditional TSP -> Traditional IRA -> Roth IRA) be a "tool in my toolbox" going forward?

• While I currently have enough credits to qualify for SS, if I don't contribute between now and age 62, will I no longer qualify for the benefit? Or maybe I will...but at a reduced rate than what's currently on my SS statement? (My statement says I've earned enough credits to qualify but then adds "At your current earnings rate, if you continue to work until...". That part has me a tad worried.

Sorry for the long post...I've been wanting to do this for a while (get feedback/advice on my current situation & plans for the future). Everyone I've encountered on here has been more than generous with their advice and feedback. Thank you in advance!!

 

[brokrken]

Hi Jim,

It looks like the biggest hurdle for you is your first point about how to bridge the gap between when you retire and 59.5. With a $23K gap each year to cover you'd run through your $125k in a little over 5 years and that would nearly exhaust any sort of emergency fund. I'd work for 3-4 more years and really hammer your after tax savings to both increase that amount and reduce the time that you need to cover a gap. 72t is an option, but as many on here will tell you, it really should be a last resort as there are many ways that a small calculation error could end up really costing you.

On your SS question, you can go to the SS website and enter your information, including years of $0 income to calculate how much you could expect to get under such a scenario.

 

[brewer12345]

I think you are about there, although if you had a better handle on your real expenses you would have a little more confidence. You get 47k now and think your expenses are 70k (that include taxes?). So you need to bridge 23k/year for 12 years. If SWR holds, you are right at the edge of having enough money for an inflation adjusted withdrawal "forever" to make up the 23k. Since you only need it for 12 years, that means you are inherently safer. The one caveat is that you are somewhat exposed to sequence of returns risk.

In answers to your specific questions:

- Easiest and least complicated would be to use savings and roth contributions first and then move on to 72t or a strategy involving debt. Most tax efficient might be something else.
- Roth conversions are purely a tax optimization move. This will require you to do a bunch of modelling/planning.
- You will still get SS, just a slight reduction in the amount. Probably not enough to worry about.

Just another thought: if you want to hedge your bets a bit, perhaps you could find some part time or contract work to make up the 23k or part of it.

 

[pb4uski]

On the last part there are calculators out on the SSA website that will tell you your estimated benefits if your remaining earnings are zero. Start here... https://www.ssa.gov/planners/calculators/ ...it looks like the Detailed Calculator may be what you need.

You definitely have enough... what is the challenge for you is penalty-free access to money from now until you have penalty-free access at 59 1/2.

If I understand you correctly, your gap between now and 59 1/2 is $23.3k annually... times 9.5 years is $221k. You have $125k in taxable accounts that you can access penalty-free plus whatever your Roth contributions have been in the $124k Roth. This may get you pretty close.. plus you have plenty of fluff in your $70 spending target so you may not need that much... plus you can always opt to do a 72t or just do some withdrawals and pay the 10% penalty.

So for example, let's say that your Roth contributions are 1/2 of your $124k balance... that plus your taxable accounts are $187k towards the $221k gap so you're short $34k... so $3.4k might not be a horrible price to pay to retire at 50 and it may well not ever come to that.

Alternatively, let's say you have penalty free access to $187k.... that would be $19.7k a year for 9.5 years and when added to your pensions is $66k a year.... and it sounds like you could live well on that if you wanted or needed to.

Roth conversions will probably make sense... in which case you'll probably want to do a 72t to make things more comfortable and provide funds to pay the taxes on Roth conversions.

 

[HI Bill]

What portion of the ROTH IRA is your contribution? You can always spend the contribution portion tax and penalty-free at any time, since it's already been taxed. While I agree that you're very close, getting to 59.5 is your biggest challenge. 72(t) might be your ticket to bridge the gap. My biggest concern is that you're renting, and don't have enough extra funds to buy a place, until you hit age 62. I'd work and save in ROTH accounts a few more years.

 

[cnocmmz]

I think you are about there, although if you had a better handle on your real expenses you would have a little more confidence. You get 47k now and think your expenses are 70k (that include taxes?). So you need to bridge 23k/year for 12 years. If SWR holds, you are right at the edge of having enough money for an inflation adjusted withdrawal "forever" to make up the 23k. Since you only need it for 12 years, that means you are inherently safer. The one caveat is that you are somewhat exposed to sequence of returns risk.

In answers to your specific questions:

- Easiest and least complicated would be to use savings and roth contributions first and then move on to 72t or a strategy involving debt. Most tax efficient might be something else.
- Roth conversions are purely a tax optimization move. This will require you to do a bunch of modelling/planning.
- You will still get SS, just a slight reduction in the amount. Probably not enough to worry about.

Just another thought: if you want to hedge your bets a bit, perhaps you could find some part time or contract work to make up the 23k or part of it.

Yep agree with all. The SS will be based on your highest 35 years I believe and so you may be slighted a little. It seems with that mil pension and disability you have already won in the long run. The actual gap is a great time to work part time and to make up the 23K. Since you have most of the money in TSP, I do believe you can make systematic withdrawals prior to 59.5 if you are fully retired (something to look into). Thank you for serving your country, you make us proud!

 

[jimbohoward69]

On the last part there are calculators out on the SSA website that will tell you your estimated benefits if your remaining earnings are zero. Start here... https://www.ssa.gov/planners/calculators/ ...it looks like the Detailed Calculator may be what you need.

- I used the SSA calculator and you're right...the difference is negligible

If I understand you correctly, your gap between now and 59 1/2 is $23.3k annually... times 9.5 years is $221k. You have $125k in taxable accounts that you can access penalty-free plus whatever your Roth contributions have been in the $124k Roth. This may get you pretty close.. plus you have plenty of fluff in your $70K spending target so you may not need that much... plus you can always opt to do a 72t or just do some withdrawals and pay the 10% penalty.

So for example, let's say that your Roth contributions are 1/2 of your $124k balance... that plus your taxable accounts are $187k towards the $221k gap so you're short $34k... so $3.4k might not be a horrible price to pay to retire at 50 and it may well not ever come to that.

- Regarding Roth contributions vs. current market value, I will probably need to do some research. I've transferred accounts throughout the years starting in 1999 (Janus Funds -> USAA-> Scottrade-> Vanguard) so my current cost basis with Vanguard is more than likely not correct. And now I wonder if I still have my Janus/USAA/Scottrade statements that show my annual contributions since I started. I've kept a spreadsheet but will that suffice with the IRS if I can't find the statements?

Alternatively, let's say you have penalty free access to $187k.... that would be $19.7k a year for 9.5 years and when added to your pensions is $66k a year.... and it sounds like you could live well on that if you wanted or needed to.

I'm sure I can reduce my single, playboy lifestyle...hopefully Plus, marriage isn't off the table just yet lol.

Roth conversions will probably make sense... in which case you'll probably want to do a 72t to make things more comfortable and provide funds to pay the taxes on Roth conversions.

Roth conversions continue to be an enigma for me. I assume I would first need to transfer my Traditional TSP (401K) to a Traditional IRA and then go from there. But would then need to figure out how much per year to convert...which is where I become dumbfounded.

My taxable income will be MUCH lower going forward if I choose to continue not working, so I wonder if a conversion would make any sense at this point? My average taxable income from 2013-2019 was ~$100K.

 

[pb4uski]

First thing that you want to do is to figure out what your tax bracket would be if you don't do any Roth conversions... while you have a long time to go a rough approximation would be to add SS (actually 85% of SS) and your pension and ~4% of your tax-deferred balances to your current tax return. I'm guessing that you'll likely be in the 22% tax bracket if you did nothing. So any opportunity to do Roth conversions at 22% or less would be worthwhile.

So for 2020 the top of the 12% tax bracket for a single is $40,125 and the standard deduction is $12,400 so one could have as much as $52,525 of income and still be in the 12% tax bracket. Similarly, the top of the 0% qualified dividends tax bracket is $40,000 so one could have as much as $52,400 of income and still be in the 0% qualified dividends tax bracket.

So let's say that if you did no Roth conversions that you'd have $700 of qualified dividends and $700 of interest income... you could do $51,000 of Roth conversions. You would have $51,700 of ordinary income and $39,300 of ordinary taxable income. Your tax would be $4,519 or 8.9% of the amount converted. Much less than the 22% later... for a savings of $6,681. YMMV, but that's the idea.

 

[jimbohoward69]

What portion of the ROTH IRA is your contribution? You can always spend the contribution portion tax and penalty-free at any time, since it's already been taxed.

I went to my spreadsheet and my total Roth IRA contribution to date is $92K...so I guess I do have that as a fall back if need be.

My biggest concern is that you're renting, and don't have enough extra funds to buy a place, until you hit age 62. I'd work and save in ROTH accounts a few more years.

Yeah, that's been my biggest regret (not buying a home). On the flip side, renting allowed me to move around the country during my military career "stress free", i.e...not having to worry about selling, closing costs, etc. Will it bite me in the a$$ going forward? We shall see I guess

 

[HI Bill]

Regarding Roth contributions vs. current market value, I will probably need to do some research. I've transferred accounts throughout the years starting in 1999 (Janus Funds -> USAA-> Scottrade-> Vanguard) so my current cost basis with Vanguard is more than likely not correct. And now I wonder if I still have my Janus/USAA/Scottrade statements that show my annual contributions since I started. I've kept a spreadsheet but will that suffice with the IRS if I can't find the statements?

I'm partially in the same boat as you. From Vanguard, I could only obtain historic statements back to 2006, so I'm missing documentation from 2002-2005. I may be mistaken, but I believe you have to tell the IRS the basis. If that's the case, unless you're audited, you wouldn't have a problem. Anyone...please let me know if my bolded statement is correct. Thanks!

 

[jimbohoward69]

First thing that you want to do is to figure out what your tax bracket would be if you don't do any Roth conversions... while you have a long time to go a rough approximation would be to add SS (actually 85% of SS) and your pension and ~4% of your tax-deferred balances to your current tax return. I'm guessing that you'll likely be in the 22% tax bracket if you did nothing. So any opportunity to do Roth conversions at 22% or less would be worthwhile.

So for 2020 the top of the 12% tax bracket for a single is $40,125 and the standard deduction is $12,400 so one could have as much as $52,525 of income and still be in the 12% tax bracket. Similarly, the top of the 0% qualified dividends tax bracket is $40,000 so one could have as much as $52,400 of income and still be in the 0% qualified dividends tax bracket.

So let's say that if you did no Roth conversions that you'd have $700 of qualified dividends and $700 of interest income... you could do $51,000 of Roth conversions. You would have $51,700 of ordinary income and $39,300 of ordinary taxable income. Your tax would be $4,519 or 8.9% of the amount converted. Much less than the 22% later... for a savings of $6,681. YMMV, but that's the idea.

Wow...you've given me a lot to think about regarding Roth Conversions. If you're OK with it, may I PM you with my contact info so that I may ask additional questions/pick your brain offline?

 

[jimbohoward69]

Since you have most of the money in TSP, I do believe you can make systematic withdrawals prior to 59.5 if you are fully retired (something to look into). Thank you for serving your country, you make us proud!

Thank you so much for those kind words!

I've researched systematic withdrawals from the TSP and unfortunately I don't fall into that camp. You can only do so IF you retire from the federal government at age 55 or later.