Lay-off ahead

[BrianB]

As they say in radio, "Long time listener, first time caller". After knowing for two years that my wife's job would be going away, it just became official that Jan 3, 2014 is her last day. We've been working to get finances in order and both FireCalc and Fidelity RIP are thumbs-up, but there's always that nagging fear. I like the supportive but blunt approach forum members have. I'll try to be concise and complete, but this will be a long post. So here goes:

I am 55 and own a small business that could be expanded but I've been content with the $2k/mo net I get for the limited time it requires. Unfortunately it requires just a couple hours EVERY day, making travel difficult. DW is 54 and been with the same company for 26 years. DD is 20 and a Jr. at State University. We have fully paid (modest) townhome, two fully paid late model cars, and zero debt.

Megacorp is being (we think) quite generous: 52 week severance, two months continuing insurance, $400 / mo pension starting 1/2015 & $500 / mo (for life)to pay for health insurance starting 3/2014. Neither of these is indexed for inflation. By putting her final date in 2014 the severance will not impact our 2013 taxes, and her separation date will be after her 55th birthday.

We want to be able to close my business, maybe work flexible or seasonal part-time jobs, and live off our earnings. We've got:
$435k TIRA (mine from previous career)
$360k 401k (DW's, will use the out-at-55 exclusion to tap this before 59.5)
$130k ROTHs (total both of us)
$100k after-tax investments, dividend stocks now DRIP'ping about $350 / mo
$20k cash
$18k HSA

We've always been frugal but not extreme. Our averaged per month spending based on Quicken history:
$850 fixed (taxes, utilities, insurance, association fees, etc)
$900 daughter's college (ends 5/2015!). We've told her we will get her through a BA without loans, then she is on her own!
$1650 everything else (groceries, gas, entertainment, dining out, etc)
$850 for ACA Health insurance (based on a quick scan of policies on our state-run exchange). Don't know if we will be under the cut-off for subsidy in 2014 - forecasting is difficult this year.
So, $4250 / mo expenses if we do not change our ways. I'm thinking as follows:

Net severance will be about $35k. Put $20k into more dividend stocks & $15k to savings. Goal is to get to $600 / mo dividends over coming months then ending DRIP and taking income.

Until 6/2015 that gives us my $2k plus $500 health care plus $600 dividends plus $1150 from savings to cover our expenses. The $400 pension after 1/2015 should reduce the burn rate further but if I close my business it could increase.

For 7/2015 & beyond our costs drop to $3350 (no college)and we get: $400 pension plus $500 health care plus $600 dividends plus $1850 from savings / investments. With low earned income I anticipate we can take $4k / mo from 401K at low tax rate with no penalty; half of that would be for current spending, and half into ROTH or after tax dividends account.

My TIRA and our ROTH's wouldn't be touched until 401k is drained. I anticipate taking SS in 2020 at age 62, about $1k / mo. DW will start in 2021 and get about $1.2k / mo.

Our dream is to travel several months each year with extended return visits. While selling the townhome would provide cash for more income, I don't think we are ready yet to be total vagabonds. Our travel style isn't 4-star, our cost to keep the townhome is relatively low. and our dream destinations are places that our money will hopefully go further than in the US.

So, are we crazy? Will we be eating cat food in our 80's? Are there glaring omissions or errors that we should correct before we start on this?

Thanks in advance for your comments; if there are questions I'll try to get back with clarifications.

[daylatedollarshort]

We have pretty much the same retirement plans as you. Low cost home base and extensive, long term travel to exotic but reasonably priced places.

Do you have a retirement budget that includes your travel? Is the pension indexed to inflation? Do you have a plan for LTC? Have you run the numbers through Firecalc or another planner?

Also I would have a plan in place / specific skill you know you could work the hours you want in semi-retirement. If you end up having to take a minimum wage job, you'd be working full time to make less than what you make in 2 hours a day now.

[dtbach]

Well, if you take 4% you will only get about $45K a year. After health insurance payments, house taxes and utilities, food, clothing, etc. you aren't going to have much left for traveling several months per year.

I'd continue to work until you have at least 50% more than you have at present.

[Bestwifeever]

I think you both should find at least part-time jobs and keep beefing up the nest egg at least until your DD graduates from college. You will be in better shape financially and will have a year plus left to finance in retirement. If your business takes such little time on your part to generate $20k, you should keep it as long as it is that profitable.

[ziggy29]

I was just laid off in April at 47. Our assets (total and the overall mix) are eerily similar to yours though I have a bit more cash and you have a bit more in the TIRA. So this scenario looks pretty familiar to me!

Frankly, this looks tight to me. My wife is still working and earning about $30K. Plus, we have free "rent" and paid utilities since she is clergy and we are living in the parsonage. And even then, despite also having a pretty simple lifestyle, we don't really see being able to pull more than about $20K a year safely out of FIRECalc (maybe $25K if I weren't conservative to the point of paranoia about my assumptions).

That said, you'll be reaching SS in 2020 (compared to 2027 at the earliest for me) so perhaps your assets are more "survivable" to than point than mine. Even so, I don't see this plan easily generating, say, $50K overall, at least not with the paranoid level of safety that lets me sleep.

What kind of business is it that you want to close? Is it one that can be sold? Or is it something that can just be transformed into a little bit of part-time or contract work from time to time?

One significant concern I see here is for a market crash right as you want to use the "out at 55" for the 401K.

[BrianB]

DLDS: I guess I look at the $1650 "Everything Else" item as being at home or in another place. Can we live on that when away, I don't know, but could try to average the costs over time. No LTC. I'm not convinced any of the policies out there are worth it. Pension is not indexed. The problem with my business is it doesn't allow me to be away long enough to stop thinking about it. To reach that stage I would really have to grow it, and I don't think I have the ambition left…
DTBACH: Ouch. You propose we get to $1.5 M before we cut the cord? That would require a few years of FT w*rk, I think I'm ready to start the move sooner.
BWE: Yes, PT jobs for both of us are an option. As I said above, the problem with owning a business is when it owns you - even if it's just a couple hours a day. Maybe we can work part-time, part-year for our "fun money" to travel on the rest of the year?

[BrianB]

ZIGGY: The "Out-At-55" rule lets a person who leaves a j*b @ 55 or older take 401k withdrawals before 59.5 yrs. I expect to manage the withdrawals year by year to minimize taxes. Moving the entire amount from pre-tax to post-tax investments is the goal - minus the amount we need. Doing it over 5-7 years should reduce the risk of short term market swings. Having said that, PT w*rk is looking more necessary.

[dtbach]

Quote:

Originally Posted by BrianB DTBACH: Ouch. You propose we get to $1.5 M before we cut the cord? That would require a few years of FT w*rk, I think I'm ready to start the move sooner.

Well, it depends on how well you want to live traveling several months/year. I guess if you crash in hostels and heat up soup cans over a bunsen burner you could do it. Otherwise I just don't see the budget to sustain a reasonable multi-month travel regime.

[BrianB]

...for a bigger egg.

Thanks for the eye-opener. We're not really hostel-type people anymore.

Our problem (like many others?) is the need to "bridge" to SS, which should cut our WR almost in half, to about 3%. It's the time between now and then (2020) that is difficult.

Right now we don't fret over going out to eat, and we don't stress about the cost of things. We're both happier without too much "stuff" so when we buy something it is for long term and truly needed / wanted. That's why I based future expenses on 100% of the past - to include a margin of safety.

[sailor]

Quote:

Originally Posted by BrianB With low earned income I anticipate we can take $4k / mo from 401K at low tax rate with no penalty;

Make sure your 401k plan and its administrator allows partial withdrawals after separation. Some plans only allow full withdrawal, some have more arcane rules (like withdrawals based on life expectancy)

I think your plan is definitely doable
Have you run it through Firecalc?

[BrianB]

SAILOR: Thanks for the comments. We already confirmed - Megacorp allows early 401k withdrawals per their plan details. Firecalc gives over 95% and Fidelity RIP shows a healthy outcome although the WR peaks at 5% just before SS kicks in.

[daylatedollarshort]

Quote:

Originally Posted by BrianB DLDS:No LTC. I'm not convinced any of the policies out there are worth it.

For LTC, if you don't have insurance you still need a plan if you are married. A single person can always spend down to Medicaid, but if you or your wife needed LTC, do you know how much in income and assets the healthy spouse would be left to live on? People with a much higher net worth than you have can self fund and much less will go straight to Medicaid, but in your NW bracket you have to plan how to cover the cost of LTC without leaving the healthy spouse impoverished. That might mean leaving more in savings for a LTC cushion if you do not pursue the insurance option.

[Running_Man]

I think if your spending is contained to the 41K per year (3350/mo) that you already have far more assets than you need. One item to insure long term success would be your wifes social security, I would take yours at 62 but let your wife's continue to accrue to age 70. She could I believe claim 1/2 of yours at age 66 to 67 as a spousal benefit and would probably have SS of 2.2K/mo in todays dollars at age 70 for you as survivor in case she passes first, which I think would be a great advantage.

You have $1.063 million right now, would draw down by 45K in 2014 so would still have over a million when in 2015 you start inflation increasing withdrawls of 41K per year less 11K of non inflation income. Your withdrawl rate is going to be in the 3-4 percent range until you reach age 62 when the additional 13K of your SS will drop the withdrawls to 2.5 percent or less. When your wife reaches age 70 your and her social security and the non inflation pension will be almost all of your required 41K per year. By this time with luck, you would actually be able to withdraw an additional 4% of your portfolio which by then should still, if historical precedents are met would mean you'd have another 40K per year in todays money available.

As each year goes by this plan should become more and more apparent and quite safe assuming spending stays in your anticipated range. If the future is kind you will be able to participate in nicer trips as you would be able to take larger drawdowns, if history is unkind you will have to insure you stay on budget.

Why tie yourself down to a job for 20K no matter how easy? Enjoy life, there is not that many more years for you really.

[Katsmeow]

If it was me I would run Firecalc using year by year spending (requires you to be a supporter) and see how it comes out. DH and I are older than you and your wife so our time horizon is different. However, due to kids still in school we have high spending for the next few years (way in excess of 4%), however, Firecalc gives us a good result (as does Fidelity's planner) because our withdrawals go down substantially once DH and I are both on SS.

To make that kind of plan work you have to be comfortable with the possibility (certainty in our case) that the portfolio will go down during the period of high withdrawals. We are comfortable with that but not everyone is.

Given that your wife's SS is slightly higher than yours you might run both Firecalc and the Fidelity planner modeling what happens if one you doesn't take any SS until full retirement age and then takes a spousal benefit from then until age 70 and then takes the much larger benefit. The reason to consider doing this is so that when one of you is a widow or widower the benefit left is larger.

[BrianB]

DLDS: maybe I'm in denial. I know many say that LTC insurance is for the spouse who doesn't use it. I just don't understand the financial model the insurance companies have used to determine premiums. We know several people (already retired) who felt secure with their LTC insurance then got notices that their premiums were increasing 20-50% or more - just when they are getting near needing the benefit! Also, even many advisors who are in favor of LTC insurance recommend getting it in one's 60's rather than 50's (as we are now).
RUNNING MAN & KATSMEOW: Managing SS is one area I haven't studied in depth (yet). Do I understand you correctly that I can take my SS @ 62 (at reduced level), DW can take spousal 50% of mine when she is 67 (not earlier?), then get her full max amount @ 70? That would change the dynamic of our plan a little - even greater withdrawals early (5-6% WR after 2020), but less dependence on IRA in later years. Something we will consider.

[daylatedollarshort]

Quote:

Originally Posted by BrianB DLDS: maybe I'm in denial. I know many say that LTC insurance is for the spouse who doesn't use it. I just don't understand the financial model the insurance companies have used to determine premiums. We know several people (already retired) who felt secure with their LTC insurance then got notices that their premiums were increasing 20-50% or more - just when they are getting near needing the benefit! Also, even many advisors who are in favor of LTC insurance recommend getting it in one's 60's rather than 50's (as we are now).

I am not necessarily suggesting to buy LTC insurance, but if you don't buy it, then you might need to reserve some of your savings to cover long term care costs out of pocket, or come up with a plan to have your assets and income situated properly so the healthy spouse has enough to live on. This might mean having assets in Medicaid exempt asset classes, which might mean tying more of your savings up in a house, business or other potentially Medicaid exempt asset classes.

If you work out your retirement plan, and say your wife needs long term care at age 70, what happens to your combined assets and income? Do you spend down her assets to Medicaid? If so, then what are you left with? What are your assets and income sources? Is it enough if you live another 20 years?

[Katsmeow]

Quote:

Originally Posted by BrianB Do I understand you correctly that I can take my SS @ 62 (at reduced level), DW can take spousal 50% of mine when she is 67 (not earlier?), then get her full max amount @ 70? That would change the dynamic of our plan a little - even greater withdrawals early (5-6% WR after 2020), but less dependence on IRA in later years. Something we will consider.

Basically, yes. She can take spousal of 50% whenever she reaches her full retirement age (whatever that might be). If she tries to take spousal before FRA she is deemed to have applied for her own benefit and gets her benefit first. However, it is different at FRA. She can apply just for spousal.

I'm not an expert on SS so check it out yourself:

Retirement Planner: Benefits For Your Spouse

[omni550]

BrianB,

Are you familiar with ORP? Retirement Calculator - Parameter Form

ORP is free online. It is an industrial grade linear programming optimizer which computes the plan that maximizes your annual retirement spending.

You may find it useful, as I did.

omni