Can I Retire At 51 ?

[ownyourfuture]

Hi,
my name is Steve.

I discovered this sight last week & I'm very impressed.
Thanks to all those responsible.


Here's my situation.
My job is taking a huge physical & mental toll on me.

More specifically, it's the hours I work. (I'd rather not be anymore specific than that)


My investing background/experience:
I started an IRA in 1986 & added to it in 87-88-90
For whatever reason, I never added anymore after 1990.

In 1994, I opened an account at small brokerage firm in a bank in my hometown. I did alright there, but by 1998 was fed up with the ridiculous commission amounts & the fact that half the time I'd call 'my guy' was out of the office, or away for one reason or another.

I transferred the account to Fidelity & have been there ever since.

On January 1st 1995, I began contributing 5.00% each to my Employee Stock Purchase Program & 401-k. In early 2000 I upped it to 10.00% each, & in 2003 upped it to 15.00% each, where it remains today.


Current Assets:

Fidelity brokerage account: $ 314,000.00 **Taxable**
Vanguard 401-k $ 177,000.00
ESPP $ 79,000.00
IRA $ 15,000.00
Checking Account $ 15,000.00

Total: $600,000.00


Current Debt: Owe 10k on my home that's worth around 130k



The 1st part of my plan covers the 3.5 year period beginning July 1st 2013, & ending January 1st 2017 when I will begin collecting a pension.



My plan: Quit job & gradually sell all of my company stock & other non-income producing investments.

Take proceeds & add as evenly as possible to my basket of 16 dividend paying stocks.

Roll my 401-k into an IRA & begin the 72(t) SEPP program.

Write 'out of the money' covered calls on my stocks for extra income.
(I've been writing calls on my holdings since September 2010 & have done very well)


My (Approximate) monthly income would be as follows:

Dividends: $ 1,518.00
Call Premiums: $ 877.00
SEPP payment $ 700.00

$3,095.00 Per Month $37,140.00 Per Year

This is not a lot of money, but I live a very simple life & I've ran monthly budgets that show I could do it.
My biggest expense will be the COBRA insurance of $581.00 per month.

It's a very good plan & covers medical, dental, & vision.
I can carry this for 18 months after I quit, which would take me to January 1st 2015.


Hopefully by that time the 'Affordable Care Act' will have 'some' of the bugs worked out & I'll be able to buy a decent plan. I'm in reasonably good health & I'm almost positive I'll improve on that if/when I quit.

**Quit smoking 3 years ago**



Now we can fast forward to January 2017. God willing, I'll be 55 & eligible to begin collecting approximately $1,800.00 per month from a pension.

Assuming the 'powers that be' haven't destroyed the world by this this time, my income would look like this:

Pension: $ 1,800.00
Dividends: $ 1,518.00
Call Premiums: $ 877.00
SEPP payment $ 700.00

$4,895.00 Per Month $58,740.00 Per Year


If I'm still around five years later in 2022, (Age 60) I'll begin collecting another smaller pension of about $280.00 per month.

**I may or may not still be participating in the 72(t) program at this time**
As I understand it, once started, it must be continued for 5 years, or until you turn 59.5 whichever is last. This could effect the following income numbers.


Pension: $ 1,800.00
Dividends: $ 1,518.00
Call Premiums: $ 877.00
SEPP payment: $ 700.00
Pension B $ 280.00

$5,175.00 Per Month $62,100.00 Per Year



Finally, In 2024 I'll turn 62 & hopefully be able to begin drawing social security.

I realize a lot can happen between now and 2024. I may not even be allowed to draw @ that time, or could be 'means tested' heavily if I can.

I'll just have to wait & see.


At this point I'd be a couple years away from being medicare eligible.
Many questions about this program also.

I'll be glad to list the the stocks in my portfolio, or go into more detail about the covered calls if the questions arise, but I don't want my 1st post to be any more drawn out than it already is

Thanks for taking the time

Steve

 

[Malcolm2]

Steve, very detailed post. Some thoughts:

First of all, if your job is taking that much of a toll - you must go. Health (mental and physical) is more important!

Second, what are your expenses? That is more important to compare against income. Include taxes.

Third, small amounts in tax advantaged accounts could be a long term issue. Would need to see more details about the covered calls, but not usually a good thing to rely on in ER, and high on the risk scale. You mentioned you plan to exit from the company stock, which is a good thing. Would not the call premiums end?

Medical is an uncertain area. I do not suggest relying on the ACA at all at this point due to many uncertainties about costs, likely major changes/repeal etc. Perhaps you could grab a part time job with low stress and medical coverage until things work themselves out? That would also enable you to perhaps increase the tax sheltered accounts.

Congrats on the detailed plan so far!

 

[Running_Man]

in reviewing the situation, your plan on the surface sounds a little on the risky side, between the dividends and the call premiums it seems you are planning on almost 7% from your taxable portfolio. However, based on if you are single and you can live on what you say you can, the upcoming pension and social security and the stress your job is placing on your that has so infected you that it seems to be radiating from your posting, I think you should go for it. whatever happens down the road won't be as bad as what is happening right now to you i think

 

[pb4uski]

Steve,

It looks like you have things pretty well thought out but I agree with others that it is risky to rely on covered call premiums for your existence. If we slipped back into a recession what would happen to your plan? Have you run your plan through Quicken Lifetime Planner or Firecalc or Financial Engines or some other planner to see the decay of your retirement stash and how long it will last?

Given your large taxable portfolio, if you do move forward I wonder if you might be better off forgoing the SEPPs from your tax-deferred accounts and instead just withdraw $700 a month from your taxable portfolio. Your income and taxes would be much lower and you might be able to receive more generous Obamacare health insurance subsidies that would help offset your health insurance costs. Also, you would not be shackled by the SEPP rules.

How much do you need to live on? Usually, this planning is defining first what is needed to live on annually and any other special expenses (college, kid's weddings, etc) and seeing if your nestegg will last. How much do you live on now and what changes would happen as a result of retirement? For us, our costs are similar to when I worked other than higher travel and entertainment costs as a result of having more time for fun.

Finally, it sounds like maybe you are FI and in need of a different job that doesn't tear you up as much rather than all out retiring. IOW, retirement is something that you go to rather that fleeing from work. You are lucky that you have the financial resources to be able to change jobs. A close friend of mine changed jobs in his mid-50s and loves his new job so much he is still working.

 

[Meadbh]

Welcome Steve! I agree with what others have said so far. You really need to understand you current and future expenses before you pull the plug. You say that you work insane hours. When you have more time on your hands you may find that spending increases, on travel, recreation, sports and entertainment. For example I am in my first year of ER and have budgeted $8000 for vacations. I expect to use all of it.

 

[ERhoosier]

Welcome aboard!

Your post shows you are detail-oriented & know your finances well. However past results (e.g. success with options) are not a guarantee of future outcomes. Currently you have little margin for error. At your age you have a long life expectancy (80-85yrs+/-), so hopefully 30+yrs as your cone of financial uncertainty. Over that time, health care costs are likely to rise (copays/deductibles/ACA changes, etc), SS is likely to change (e.g. proposals to raise 62 start date, decreased benefits, etc.), and investment climate could turn (remember Japan since '89??).

Is it possible to transfer to a lower-stress job in your company? Hanging on 'til 55, or taking another job for few yrs, would improve your bottom line & improve your chances of success in ER.

Good luck & keep us posted.

 

[dunkelblau]

Hi Steve, I'd agree with the others that if I were in your situation, I'd want more margin so would prefer to work until that first pension kicks in. I would use my FI situation to reduce my load if possible, or switch jobs into one that suits me better even if the pay is lower. It's only a few years so the money difference won't matter (and if you think it does, then you're probably not really ready to give up that paycheck entirely).

In my case right now it seems easy to live on 3K per month, even after adding full freight on my health insurance, but like you I have a job that takes up a lot of my time and energy so I don't get much opportunity to spend. I'm expecting that when I quit working my expenses will probably double or triple compared to now. It's another factor to add to the "uncertainty bars" around those future projections.

 

[Midpack]

What probability of success is acceptable to you? Though folks are giving you answers, presumably they are based (at least in part) on a probability of success that's acceptable to them. That may/not match your expectations.

95% is a popular prob of success goal, but not universal. There are people here who have retired with an 80% or lower prob of success, and others who were not comfortable until they reached 200% (a nest egg twice the size of the 100% theoretical prob of success).

 

[Willers]

What probability of success is acceptable to you? Though folks are giving you answers, presumably they are based (at least in part) on a probability of success that's acceptable to them. That may/not match your expectations.

95% is a popular prob of success goal, but not universal. There are people here who have retired with an 80% or lower prob of success, and others who were not comfortable until they reached 200% (a nest egg twice the size of the 100% theoretical prob of success).

+1 I think you'll find that we are a pretty conservative bunch when it comes to probabilities of success. You need to determine your financial risk tolerance vs. your desire to increase your happiness.

Signed: A 200%'er trying to going through "rehab" to something more reasonable.

 

[Live And Learn]

+1 I think you'll find that we are a pretty conservative bunch when it comes to probabilities of success. You need to determine your financial risk tolerance vs. your desire to increase your happiness.

Signed: A 200%'er trying to going through "rehab" to something more reasonable.

ER is likely a one-way street, so you need to really weigh the pro's and con's. It may be hard to go back and get a job at your salary if you find out you've jumped ship too soon. I'm at 104% success in FIRECalc and that thought scares me enough that I am very likely to succumb and continue working beyond my August 2013 target date.

 

[travelover]

....... It may be hard to go back and get a job at your salary if you find out you've jumped ship too soon........

But there are other options. One is "retire" on less and work at a lower paying, but tolerable job - maybe even part time. Maybe even on and off as needed.

 

[Midpack]

+1 I think you'll find that we are a pretty conservative bunch when it comes to probabilities of success. You need to determine your financial risk tolerance vs. your desire to increase your happiness.

Signed: A 200%'er trying to going through "rehab" to something more reasonable.

I retired at 200%, because I know a market meltdown could easily make me a 100%'er or worse...but hopefully not in the long run.

 

[1st Tee]

Steve, It's very very difficult to always count on call option premiums to generate constant monthly income. It can be done over short periods of time but over a 3 year time period......that will put a lot of pressure on you and most likely you will need to take more risk. Writing calls in a down market or when a stock is dropping isn't fun either. Focus on your monthly expenses. Min income needed every month. Then how much extra do you need to enjoy living life. Also remember about the unexpected. Car breaks down, AC goes out, etc. Like all the others have said, it all comes down to your expenses. Your lucky that you have a Pension in the future! Also in your model, you are not showing dividends increasing over time.

 

[Willers]

I retired at 200%, because I know a market meltdown could easily make me a 100%'er or worse...but hopefully not in the long run.

I agree completely and that is what keeps me in the game. Time will tell if it is necessary, but it will help me sleep better at night. If only we could predict the future...

 

[Independent]

Lots of detail, that helps.

As others have mentioned, the important thing is your expenses. If you can really live "comfortably" on $37,140, you should be able to make it.

You didn't mention Social Security amounts. Yes, many people are conservative in their plans, but I'd be comfortable assuming that I could get 75% of the currently scheduled benefits. I'll make a wild guess and say you have a PIA of $20,000 based on earnings so far. That means your reduced benefit @62 is $14,000, and 75% of that is $10,500.

I assumed your spending target would be $40,000 in constant dollars. If you can cover your COBRA premium inside the $37,000, it seems like you'll cover PPACA and later Medicare and MedSupp costs with $40,000.

I did a simple, deterministic spreadsheet that assumed your non-COLA'd pensions would lose 3% of their value every year, and that you could earn inflation plus 1.5% on your $600,000 of assets. With those assumptions, your money runs out at age 96. (Deferring SS gives slightly better results.)

I'd suggest that you set up a simple FireCalc spreadsheet and see if you get the same result.

It seems likely that you'll find a way to earn more than inflation plus 1.5% over time. Your biggest risk is near term with low current yields on bonds and the possibility that both bonds and stocks could lose a lot of market value in the first few years that you'd be retired.

I won't comment on selling calls as an investment strategy. That could be a thread of its own.

 

[haha]

Steve, you clearly have an organized mind, and you laid out the situation well. You don't mention it, but I assume you are single with no dependents. The value you assign to your home suggests you live in an inexpensive area. I take it you are satisfied there?

Only other thing I might mention is something that puzzles me. You are evidently not troubled by using your call writing program to fund your expenses in retirement. Yet would you, or almost anyone else, propose funding retirement expenses by selling naked puts?

Not likely; yet this is identical to what you are proposing, in terms of exposures.

Can you retire? Very likely; see the thread currently running of people who have retired on<$500,000. Some without a pension. OTOH, there is another fresh thread about a guy who on the face of it could retire and buy his own smallish Caribbean Island, who says he can live on $15,000 p.a., who nevertheless is not quite ready. So a lot depends on your own attitudes.

Ha

 

[joebloe]

OTOH, there is another fresh thread about a guy who on the face of it could retire and buy his own smallish Caribbean Island, who says he can live on $15,000 p.a., who nevertheless is not quite ready. So a lot depends on your own attitudes.

Where's this thread? I wanna buy my own island too...cause most mansion are $15K a nite!

 

[obgyn65]

To the OP : have you run your numbers in FIREcalc or other retirement calculators?

 

[ownyourfuture]

Thanks for all the replies

All of you are incredibly knowledgeable & straightforward.

I really appreciate that.

I just finished going through the 17 replies.
I copied all the questions/observations & will address them tomorrow.

Sorry, but I don't have the time today.

Thanks Again!

Steve

 

[clifp]

Age 51 not too young check
Investment experience check
House paid off (close enough) check
Assets 600K primarily taxable and invested in equities check
Present value of $1,800 month pension at 55 ~$370,000
Present value of $280 pension @60 ~$30,000
Total assets ~$1,000,000
overall AA 60/40

Assuming you can get by on ~40K you should be fine.

 

[Live And Learn]

Age 51 not too young check
Investment experience check
House paid off (close enough) check
Assets 600K primarily taxable and invested in equities check
Present value of $1,800 month pension at 55 ~$370,000
Present value of $280 pension @60 ~$30,000
Total assets ~$1,000,000
overall AA 60/40

Assuming you can get by on ~40K you should be fine.

Assumes a 4% WR lasts 40 or more years. Conventional wisdom says 30 years and many assume that 4% over 30 years is too aggressive.

 

[clifp]

Assumes a 4% WR lasts 40 or more years. Conventional wisdom says 30 years and many assume that 4% over 30 years is too aggressive.

Not at all I assume a SS payment of $1,000 month @62 which shows a 92.1% rate for either 35 or 40 year retirements. Moving SS up to $1500 month @62 brings a success rate of 98%+.

When evaluating retirements with less than $1 million, social security is huge factor. Even if the OP doesn't tell us what it is you have to make some reasonable assumptions. Now if somebody is <40 and they want to discount social security I can't blame them but at 50+, I think you assume that will remain substantially the same as today, although probably taxed higher and some form of modest reduction to due to means testing for higher income folks, but somebody making 30-50K no change.

 

[ownyourfuture]

Thanks for all the replies!

Before going any further, I think it might help to mention this:
In my original post I mentioned that "I live a very simple life"

You have to take this literally. I'm single, have no dependents, drive very modest vehicles (see below) live in a small, unbelievably energy efficient home, buy affordable clothing, (I've even been known to buy used columbia jackets at the goodwill store!), use coupons for groceries, rarely eat out, rarely travel, etc.

Home. New roof, siding, windows, furnace & air conditioner in the last 3 years.





Since many of you questioned the 'covered call income' portion of my plan.
I'll do my best to address that 1st.

When I've finished selling my company stock & transferred it to my Fidelity account, I'll have approximately 400k. *Might be a little less after today* OUCH!!

My covered call goal has always been simple:
A minimum return of 0.25% (**after commissions & fees**) per month on the total value/principal of the underlying shares the day I write the calls. **I realize I'll owe short term cap. gains on the premiums**

I plan to be fully invested. If I apply this to a 400k account, it would equal 1k income per month.

Since I've started selling CC'S, I've averaged 0.62% a month.

Maybe I've just been lucky.
But here's 2 important points.

1- Let's say it's been 50% luck & going forward, I only manage 0.31% (half my previous returns)
That's still a nice amount & one I would be more than happy with.

2- Since I'm lucky enough to have a substantial pension in the near future, If necessary, I could become even more conservative with the CC'S, or maybe even forgo them at times in the future until conditions became more favorable.




Individual questions/suggestions


Malcolm2 Question #1

What are your expenses? That is more important to compare against income. Include taxes.

Answer: I've been watching what I spend (expenses) very closely & came up with the following monthly budget.

The following stipulations apply:

Taxes: I figured a 20% tax rate. I'm hoping this will be lower. I met with a Tax/Financial pro last week. He's going to do a hypothetical tax return for me. This way I'll know for sure.

Property Taxes & Insurance:
This assumes I've paid off my remaining mortgage of 10k

Car payment & insurance: I haven't had a car payment in about 5 years. I have a 2002 Olds Intrigue that I bought for $12,400.00 in 2003. Been a great car, but developing some minor problems now. Hope it lasts another year or 2. Also, my insurance isn't anywhere near the $70 a month I budget here, but since I'll be buying something newer, I figure it will go up considerably.

Utilities: I plan on getting rid of my smart phone $70 (only use at work) and my landline $33 (tripled in last 20 years) & about 70% of the bill is taxes. Buy a simple trac-phone



Plan A Monthly Cash Flow/Expense Summary:
3,095.00 - 20% Taxes ($619.00) = 2,476.00
2,476.00 - 200 Property Taxes & Homeowners Ins = 2,276.00
2,276.00 - 581 Health Ins COBRA = 1,695.00
1,695.00 - 370 Car Pmt 300 & Ins 70 = 1,325.00
1,325.00 - 320 Groceries 80$ per week = 1,005.00
1,005.00 - 300 *Utilities* = 705.00
705.00 - 50 **Personal Items** = 655.00
655.00 - 500 ***Miscellaneous*** = 155.00

*Utilities* (Gas, Electric,Cable & Internet,Phone,City (Sewer, Water, Garbage)

**Personal Items** This includes, razors, toilet paper, tooth paste, dental floss, paper towels
shampoo, dish-soap, cleaning supplies, monthly haircut, etc

***Miscellaneous*** This includes, Christmas presents, B-Day presents, wedding gifts, magazines,
co pays, car maintenance/repair, appliances, movies, casino gambling, Etc.




Malcolm2 Question #2
Would need to see more details about the covered calls, but not usually a good thing to rely on in ER, and high on the risk scale.

Answer: As I see it, the only risk with writing (out of the money) calls is if the underlying stock soars.
Here's an example of when & why I'll choose to write calls.

On May 17th 2013, I wrote covered calls on 500 shares of JNJ.
I chose Jul 19 - 2013 $90.00

The premium was $ .77 per share.

500 x .77 = $385.00
- $11.88 commissions & fees
Net $373.12

The stock was trading at 87.75 that day & I wrote the calls because I thought J&J' (along with the entire market) had gotten well ahead of themselves.

JNJ closed at 82.62 today & the last trade on the call option was .04
Of course they don't always go this smooth. Wish they did

Tomorrow, covered calls I wrote on CNK & COG will expire worthless.




Malcolm2 Question #3
You mentioned you plan to exit from the company stock, which is a good thing. Would not the call premiums end?

Answer: The company stock I purchased through the ESPP is held at Harris bank in Chicago. I can't write calls on the shares. As I sell shares, I transfer cash to fidelity & add to my core holdings.
But 'ONLY' when they're on sale.


Malcolm2 Question #3

Medical is an uncertain area. I do not suggest relying on the ACA at all at this point due to many uncertainties about costs, likely major changes/repeal etc.

Perhaps you could grab a part time job with low stress and medical coverage until things work themselves out? That would also enable you to perhaps increase the tax sheltered accounts.

Answer: I've considered working a part time job after I quit, but I doubt I'd be able to get one that offers health benefits. I'll look into this further.


Running_Man

"I think you should go for it. whatever happens down the road won't be as bad as what is happening right now to you i think"

Thanks for the motivation Running Man!



pb4uski Question #1

"If we slipped back into a recession what would happen to your plan? Have you run your plan through Quicken Lifetime Planner or Firecalc or Financial Engines ?

Answer: No I haven't. I'll look into that. BTW: I'm not sure we were ever 'out' of a recession.


pb4uski Question #2

"Given your large taxable portfolio, if you do move forward I wonder if you might be better off forgoing the SEPPs from your tax-deferred accounts and instead just withdraw $700 a month from your taxable portfolio. Your income and taxes would be much lower and you might be able to receive more generous Obamacare health insurance subsidies that would help offset your health insurance costs. Also, you would not be shackled by the SEPP rules.

Answer: Very interesting observation, & one I had never thought of.
One downside. Since I'll be very close to 'fully' invested in my 'taxable' account, taking out $700 a month would eventually force me to start selling shares & trigger cap. gains taxes.

Maybe someone else can offer input on this.



Meadbh
"Is it possible to transfer to a lower-stress job in your company?

Unfortunately, that's not an option.


1st Tee
"Your lucky that you have a Pension in the future! Also in your model, you are not showing dividends increasing over time"

I am very lucky & thankful to have a pension. FYI: I work in the 'private sector'
Good point about the dividends.
Many of the companies I own have a long history of raising them.
I'm just erring on the side of caution.



Independent

"As others have mentioned, the important thing is your expenses. If you can really live "comfortably" on $37,140, you should be able to make it"

I'm confident I can & that will go up substantially in 3.5 yrs when my pension starts.

"You didn't mention Social Security amounts. Yes, many people are conservative in their plans, but I'd be comfortable assuming that I could get 75% of the currently scheduled benefits. I'll make a wild guess and say you have a PIA of $20,000 based on earnings so far. That means your reduced benefit @62 is $14,000, and 75% of that is $10,500"

Spot on!

I did a simple, deterministic spreadsheet that assumed your non-COLA'd pensions would lose 3% of their value every year, and that you could earn inflation plus 1.5% on your $600,000 of assets. With those assumptions, your money runs out at age 96. (Deferring SS gives slightly better results.)

I'd suggest that you set up a simple FireCalc spreadsheet and see if you get the same result.

Thanks!
I'll give FireCalc a try

My core dividend holdings

Apple AAPL
American Water Works AWK
B & G Foods BGS
Cinemark Holdings CNK
Compass Diversified CODI *MLP*

Emerson Electric EMR
Exelon Corp EXC My 'Dog'
Hickory Tech HTCO
Intel Corp INTC
Johnson & Johnson JNJ

Kinder Morgan KMP *MLP*
Kraft Foods KRFT
Lilly (Ely) LLY
MMM MMM
Student Transportation STB

Verizon VZ
Village Supermarket VLGEA
Yum Brands YUM

 

[clifp]

I have many of the same dividend stocks as you and also write covered calls on occasion. While I think you maybe a tad optimistic on the income from covered calls. I think the essential strategy of using them to reduce volatility of your stock portfolio is sound. I.e. you'll give up some money during bull markets as the stocks get called but gain the extra income during a bear or flat market.

I second PB4 recommendation of skipping the 72(t) they are a PITA to set up, and the penalties for a mistake are significant. You only need the additional cash until the pension kicks in a few years. I wouldn't be overly concerned with spending down your principal in the next few year until the 1800/pension kicks in. So for instead if you JNJ stock gets called rather than reinvesting the whole $45 K (500 shares @90) keep back $9000 to fund your withdrawals for the next year.

I also urge to spend some time with FIRECalc it is great tool to give you some idea how much you can spend. So for instance I think you probably spend an extra $300 month comfortably but you get better feel doing some FIRECalc runs.

 

[pb4uski]

If you stay within the 15% tax bracket (taxable income of $36,250 or lower) any LT capital gains would be at a 0% federal tax. Since the amount you would be harvesting from your taxable accounts in lieu of SEPP would be modest ($8,400 a year IIRC) the gains would be modest as well so taxes are unlikely to be a problem.

Also, many of us whose income before LTCG is below the top of the 15% bracket are selling shares with CGs and then buying them back the same day. What this does is recognize the gain (but at 0% tax) and step up our basis. Note state taxes may apply.

Your tax rate will probably be closer to 0% than 20%. You can get a good idea by entering your estimated post retirement numbers into Taxbrain® | 2012 FREE Tax Calculator

We ported our landline to Ooma and our landline bill went from ~$30 a month to ~$4 a month for unlimited US calls. If your cellphone use is modest, there are numerous prepaid plans available in the $8-10/month range. Upfront cost of ~$180 for the box but it can be as low as $150 when on sale.