can I pull the plug

[perinova]

I haven't posted in a while but I have recently been out of a job and I need opinion whether I can pull the plug definitely or go back to work.

Neither DW or I are working so income is now $0. We are both about 52yo.
Total assets (50% 401k and 50% taxable) $2.4M give or take the market fluctuations.
Total expenses $100k (with DS college, with obamacare, with rent, without taxes).

I am thinking I need $400k more in assets to sustain the whole budget, which would mean working Two more years and hoping for good stock market. But the biggest line item is $30k for DS' college and I am expecting this to last Four more years. Expenses will go down to $70k thereafter.

- Can pull the plug on w*rking? and how?
- Would I have to shift money to income producing mutual funds?
- How much taxes should I factor in on $100k income and cap-gain? Maybe about 20%?
- Do I need to move to lower cost of living? Right now rent in $2k/mo or $25k/yr

So what do you think?

 

[daylatedollarshort]

We started our retirement planning with questions like these using our own spreadsheets and by running the Fidelity Retirement Income Planning online program on a very conservative asset allocation. The output includes year by year tax estimates.

You can add in variable expenses like paying for college, plus additional income like Social Security and pensions. The only change I made was I think their medical expenses are too high so I just lumped those in with some generic household spending category.

 

[big-papa]

Your situation is very similar to mine. We're mid-50's, around $2.1M in investement assets and 4 years from college start. We do have the Texas Tomorrow fund for our kiddo, so at least the tuition part of college is already taken care of. I was out of work for about 10 months before I went back again and have been re-employed for about 1 1/2 years.


Anyway, when I did my first posting, I got some great responses. Some things have changed since then (Work is good now, we did the buyout offer on my wife's pension, and we sold a piece of property in another state).


We're in the "total return" camp instead of the dividend camp by the way and I'm still researching all of the various withdrawal methods (and there are plenty) including some I've made up on my own.


Anyway, because of the similarity of our situations, you might want to look at the thread from my initial posting:
http://www.early-retirement.org/forums/f26/can-we-and-should-we-74467.html


Good luck!

 

[tulak]

I would take DS's college costs out of the portfolio. You'll need 120k for his college costs, which leaves you with 2.28mil. That leaves you with ~3.1% withdrawal rate. With a well diversified portfolio, that looks reasonable to me.

But that's assuming a 70k/year withdrawal and your not including taxes. I would expect taxes to be low in your case. I would try using a tax program to estimate your tax liability and see how much it increases the 70k/year. Based on my experiences with firecalc, anything around and below a 3.4% WR will give you a 100% success and 3.4% would give you 77k/year. That could be enough to cover taxes.

Good luck!

 

[RenoJay]

I would take DS's college costs out of the portfolio. You'll need 120k for his college costs, which leaves you with 2.28mil. That leaves you with ~3.1% withdrawal rate. With a well diversified portfolio, that looks reasonable to me.

Kiki, I am not the original poster, but wanted to thank you for framing his/her situation with college costs in this way. I have alimony costs for a fixed duration and they were putting my SWR into slightly uncomfortable territory. But I just did an equation of what life looks like if I simply deduct the total cost of the alimony from my assets and calculate my new SWR, and things looked much better!

 

[tulak]

Kiki, I am not the original poster, but wanted to thank you for framing his/her situation with college costs in this way. I have alimony costs for a fixed duration and they were putting my SWR into slightly uncomfortable territory. But I just did an equation of what life looks like if I simply deduct the total cost of the alimony from my assets and calculate my new SWR, and things looked much better!

You're welcome!

I have a good friend that does/did the same thing. For my planning, this never made sense, because you end up being more conservative.

A practical way to handle this is to move the money elsewhere, that way there's a clean break from the overall portfolio. A good option would be to take the money and build a 4year Cd ladder. You should be able to earn at least 1% on this money in safe investments.

 

[pb4uski]

..... Total assets (50% 401k and 50% taxable) $2.4M give or take the market fluctuations.
......Expenses will go down to $70k thereafter.

- Can pull the plug on w*rking? and how?
- Would I have to shift money to income producing mutual funds?
- How much taxes should I factor in on $100k income and cap-gain? Maybe about 20%?
- Do I need to move to lower cost of living? Right now rent in $2k/mo or $25k/yr

So what do you think?

I think that you can and agree with others suggestions. First, your college costs will only last for a few years, so as others have suggested, just take them out of the $1.2 million of taxable rather than include them in your ongoing expenses. Once you do that you are looking at 3.1% WR which is quite reasonable assuming your AA is somewhere between 30/70 and 70/30.

You'll probably have trouble believing this, but your tax on $100k of withdrawals from your taxable accounts is probably going to be close to zero rather than 20%. In other words, let's say you sell $100k of taxable investments and the gain is $20k because your basis is $80k. The tax on that $20k will be nothing since your total incoem will be in the 15% tax bracket (where qualified dividends and LTCG are taxed at 0%) and you'll still have headroom to do Roth conversions from tax-deferred to tax-free at a low rate (mine has been ~7% the last 2 years). Play around with Taxcaster as if you were retired (take the earnings out of your last year's tax return since you won't be working) to get a feel for it.

$24k a year for housing isn't that expensive. We own and our PITI is about the same, so do as you wish.

Also, you haven't included SS which makes you plan even safer.

 

[Live And Learn]

I am 53 (DH is 57) and our WR is 3.1% and I am comfortable with that. This is where you are once you pull the college costs out of the assets and calculation of WR. As others have said, your taxes will be very low and you haven't included social security which means you are actually going to be a little better than that.

You say you included Obamacare in your expenses. May I ask how much you included ? For sanity sake in additional to non subsidized premiums I have included the out of pocket maximum of $12.6k for 2 people in my budget. Whatever I don't spend will go into the travel budget the subsequent year.

 

[rodi]

Hi Perinova -

When I was figuring out if I *could* retire I ran my numbers through multiple calculators. What was nice is that different calculators offered different insight into things I needed to consider. The calculators I used (and the value they offered) were as follows.

firecalc (link at bottom of this page). Very flexible if you fill out every tab. Allows you to add income streams as they come online (pension, ss, etc). A little kludgier for expenses that go away after a few years (like college expenses, alimony, etc). Does a great job of testing against all previous market returns. Flexible in your asset allocation - so make sure you input the percentage equities vs fixed.

Fidelity Retirement Income Planner - allows you to fill out actual budget data or expected costs. Made me think of some expenses I'd missed - so it improved my spending data.

Financial Engines (available if you have vanguard accounts, and through some employer/401k sites.)

Quicken Lifetime Planner. Downside - uses a fixed rate of return and inflation. Upside, like Fidelity RIP, it helped me flesh out my spending (and it's changes) through the years as kids go off to college, as SS starts, etc. If you go through the exercise of filling out all the different categories, you get a more accurate view of your spending/expenses.

I-Orp - great tool for figuring out how much income you can get from your portfolio - and looks specifically at when to draw from tax advantaged accounts vs taxable accounts to minimize your taxes... Can help you figure out your Roth conversions to pay the least amount of taxes over time.

As I said - each calculator had it's pros and cons... Firecalc is my goto, now that I am confident in my budget and spending numbers. But when I was still figuring all that out, the other calculators each provided different insights into things I needed to consider when I was planning.

 

[perinova]

I am 53 (DH is 57) and our WR is 3.1% and I am comfortable with that. This is where you are once you pull the college costs out of the assets and calculation of WR. As others have said, your taxes will be very low and you haven't included social security which means you are actually going to be a little better than that.

You say you included Obamacare in your expenses. May I ask how much you included ? For sanity sake in additional to non subsidized premiums I have included the out of pocket maximum of $12.6k for 2 people in my budget. Whatever I don't spend will go into the travel budget the subsequent year.

Budgeting Obamacare is not easy because the premiums will end up varying with income.(MAGI). When I ran the numbers about Six months ago I budgeted the Silver plan for Three people $13.2K in premiums, $4500 deductible. (I concluded that the Gold plan was never as good as the Silver plan. Not sure if others came to the same conclusion). The numbers were drawn with high income (so no subsidies). They look a lot better with subsidies.

It is difficult to plan ahead because:
1) With subsidies and income in the $50k range or lower it seems the premiums are the same for insuring all Three of us or just me and my wife The premium would go down to maybe about $3k.
2) Without subsidies insuring just the Two of us is about 2/3 of the above mentioned $13.2k premium (DS would be insured through SHIP at $200/mo with no deductible).
If I start working again next year we will go from situation 1) to situation 2).

 

[perinova]

Thank You for all the suggestion. 3.1% WR after removing the $120k college cost is probably doable. I need to go back to the mentioned financial engines and plug the numbers to verify.

 

[Live And Learn]

Budgeting Obamacare is not easy because the premiums will end up varying with income.(MAGI). ....

It is difficult to plan ahead because....

Yep, that's why I gave up and went with a "worst case" scenario and budgeted unsubsidized premiums and the full OOP maximum when determining my WR. My HC budget is $28k for 2 people. I also budgeted premiums as if we are both 63. (Can you tell that I am conservative in my budgeting ?). In my budget I've kept travel budget low (5k) and (in theory) will supplement it with anything that I don't spend on HC from the prior year.

 

[dallas27]

I would retire. I'd have the kid take out loans too, get that off you current expense sheet. Even if you paid the debt for him, spreading it out over time could be advantageous.

Once you get that expense mitigated, you have hit your number. Time for the kid to take responsibility in my book.


Sent from my iPhone using Early Retirement Forum

 

[braumeister]

I need to go back to the mentioned financial engines and plug the numbers to verify.

Just be aware that each calculator has its own pros and cons, as rodi pointed out.

In my case, I set my budget up using my own methods. I tend to be very conservative based on two factors:
A. There is apparently a longevity gene in my family that lets many live to their late 90s.
B. I watched my grandfather actually run out of money (aside from SS). He was well off when he retired, but did so in 1960 at the start of a long run of high inflation. I am seriously afraid of that happening to me, hence my conservative bias.

By coincidence, I ran some calculators recently and here's what I came up with:

FIRECalc: I can spend 21% more than my budget.

I-ORP: I can spend 24% more.

ESPlanner: I can spend 15% more.

Fidelity RIP: I can spend 15% more.

So looking at those, I feel very secure in my own personal spending plan. But obviously the differences are large.

 

[NanoSour]

I would retire. I'd have the kid take out loans too, get that off you current expense sheet. Even if you paid the debt for him, spreading it out over time could be advantageous.

Once you get that expense mitigated, you have hit your number. Time for the kid to take responsibility in my book.


Sent from my iPhone using Early Retirement Forum

Even if you plan to pay off the loans, don't let the kid know that. He'll most likely apply himself better if he believes it's his dime he's paying with.

You don't mention SS or a possible pension later on; but regardless, certainly seems like you're in great shape. I started my ER more than 2 years ago on considerably less with an initial WR of 5.1%. With SS and a pension waiting for me I'm not concerned….yet

I too ran all the calculators that RODI mentioned above, but also will add in ESPlanner. To be honest, this is the calculator that sealed the deal for me. Maybe because it cost me a couple hundred dollars, and therefore, I gave it more credence; but without it, I wouldn't be sitting here enjoying a nice Churchhill with a fine afternoon cup of joe.

 

[perinova]

Thanks for the great encouragement everyone.

BTW I just figured out that regarding financial aid parents income and assets are considered only for undergraduate students. Which means that, for sure, we won't need to consider more than 2 1/2 additional years or about $80k.

 

[cyber888]

Yeah, you can retire with no problems. $2.4 M and $100K spending .. that's like 24 years. And you said $70K after a few years. Definitely. No problem. Go ahead

 

[2017ish]

Thanks for the great encouragement everyone.

BTW I just figured out that regarding financial aid parents income and assets are considered only for undergraduate students. Which means that, for sure, we won't need to consider more than 2 1/2 additional years or about $80k.

True, but if you intend to pay for DS grad school, be aware that outside of phD programs (and their stipends), there tends not to be much in the way of need-based aid.

 

[retire2020]

But the biggest line item is $30k for DS' college and I am expecting this to last Four more years. Expenses will go down to $70k thereafter.

So what do you think?

Well...Don't forget American Opportunity Tax Credit...you pay 4K and get 2.5K back when you file tax return. Also, anyone is eligible for stafford loan which is 5.5K for Freshmen, 6.5K for Sophomore and 7.5K for remaninf two years. This will bring your burden down from 30K to about 20-22K/year.

Even though, I've full tuition saved in 529 for my daughter, I'm still making her take stafford loan just to keep her in the responsibility game.

 

[perinova]

True, but if you intend to pay for DS grad school, be aware that outside of phD programs (and their stipends), there tends not to be much in the way of need-based aid.

Are you saying that I can't rely on the FAFSA indicating EFC=0 when doing the calculation? I have to contact the school?

 

[perinova]

Well a resume is still out there but every inch of my body aches at the thought of going back to w*rk.
I am not sure what is plan A or plan B. And I am gearing up to complete FIRE. Of course I have thoughtabout that for a while but it now feels like I am checking a parachute gear before jumping).

Portfolio is invested approximately in
40% - total stock index
20% - total international index
40% - intermediate bond fund (Tax free for the non-tax deferred portion)

My plan would be to leave the tax deferred portion alone, go to distributed dividends and draw from the Taxable portion to maintain constant allocation.

Assuming I want to maximize total return I should be OK?

 

[pb4uski]

For the second time... you should be ok. As you draw from taxable you periodically rebalance using your tax-deferred accounts.

 

[NanoSour]

Are you saying that I can't rely on the FAFSA indicating EFC=0 when doing the calculation? I have to contact the school?

Good luck with an EFC of $0 if you have $1.2M in taxable assets. You have to be able to file 1040A or 1040EZ at tax time to meet the Simplified Means Test. Doable, but not an easy task given you will probably be selling financial assets which must be reported on a Schedule D.

 

[2017ish]

Are you saying that I can't rely on the FAFSA indicating EFC=0 when doing the calculation? I have to contact the school?

EFC=0 is irrelevant if the school isn't "need blind and meets 100% of need." Vanishingly few grad schools are in this category. (If memory serves, there are only about 100 undergrad programs that do so.)

 

[perinova]

Good luck with an EFC of $0 if you have $1.2M in taxable assets. You have to be able to file 1040A or 1040EZ at tax time to meet the Simplified Means Test. Doable, but not an easy task given you will probably be selling financial assets which must be reported on a Schedule D.

nanosour: EFC=0 is under the assumption that the a student is above 24. or already in grad school. In those cases, as I learned recently, the parents assets and income will not be looked at.