Looking for some feedback

[Jerry1]

Looking for a gut check on my logic. Realize that I see this as a worst case scenario and a simple framework to satisfy myself that everything will be fine financially if I retire early.

I’m looking to retire in two years. I have 401K’s of $880K plus an IRA with about $225K. I think I’m able to live on less than $100K per year so I did the following simple analysis. It assumes no growth or loss in my portfolio.
In the first 5 years I take out $100K per year from my 401K. In years 6, 7, 8, my SS (and wife’s) kicks in so I only need to take out a little over $50K to hit my $100K. At this time, my 401K/IRA balance is $450K plus I have about $125K in cash.

At this point, I have a pension that will kick in for $37K per year and mine and my wife’s SS is $70K. Also at this point, my wife and I are 70 and 65 respectively.

So basically, I could go into years 70/65 with over a half million and SS and a pension will provide over $100K which I think is plenty to live on. I also have about $20K using a 4% withdrawal rate on the IRA/Cash. We have no debt and are well able to live below our means. I used $100K to capture the taxes and high end of the assumption, but I think we could live on $50K and the rest is discretionary.

Am I over simplifying this?

 

[kaudrey]

Well, I think I'd question how your SS is going to go from somewhere in the $45K range to $70K in a few years. The COLA is usually less than 2%.

But, other than that, you have the right idea. My plans definitely take into account that I'll start off with a pension, and later add SS for DH and I.

 

[ivinsfan]

You used the word "think" twice when talking about your projected number for expenses. And you also use the nice round numbers 50K and 100K...so yes you are oversimplifying the expense number. Maybe you should nail down your expenses in a little more detail.

 

[rodi]

It's a good starting point for your retirement plan. I started simple like that, as well... then iteratively refined the plan.

For a simple SWAG at retirement budget - take your current income from all sources: remove out SS contributions, medicare tax contributions, 401k contributions, ESOP (if applicable purchases)... Also take out money you're saving after tax... That's what you're spending now.

Now add in increased health insurance (most employees health insurance is subsidized), increased travel (if applicable) or golf fees (if applicable)...

That was how I came to my original retirement SWAG spend amount. It assumes similar taxes (which may not be the case - but might be if you're tapping tax advantaged accounts like IRAs/401k). That's a top down approach to retirement spending needs.

The bottoms up approach takes all your expenses... It helps if you have a history of what you spend (like in Quicken)... I did my bottoms up budget and got a number within a few thousand of my top down. That gave me confidence.

Knowing what you'll spend (including taxes and insurance) is the biggest component in retirement planning.

Lots of calculators let you model. Quicken Lifetime Planner is a good way to model - if you already have quicken. It's deterministic (fixed market increases, fixed inflation, etc.) but if you go through the exercise it reminds you to account for everything. A historical markets calculator is Firecalc - very useful for modelling when different income sources come online or offline. It tests your plan against previous market performance and inflation (what-iffing if you'd retired every possible year with market returns.) I found running both tools really helped me find the 'gotcha's' in my plan

 

[aida2003]

For a simple SWAG at retirement budget

What's SWAG? I sort of thought "Sleep well at" what, but it's SWAN.

BTW, Rodi, the outline of your planning is the 'simple' planning or 'in depth'? If the former, then what else should one plan for? If the latter, then I'm doing pretty well in the planning department.

 

[aida2003]

Jerry1, you didn't specify your or your wife's age at the time you retire. If you retire early there're certain rules to follow re withdrawals from 401k and IRA.

 

[rodi]

SWAG is scientific wild a$$ed guess. Used a lot in engineering for a first pass rough guesstimate... then it gets refined as more data is available.

My top down budget was simple... I wasn't trying to determine where money was spent - just figuring out how much I had spent vs saved... then making simple adjustments (healthcare increases, payroll taxes going away, savings going away.)

My bottoms up (how much money spent in each category, defining the categories, making sure I didn't forget something big...) that's a detailed estimate.

As I said - I approached it iteratively... with each pass getting a little more detail and substance. I was a nervous nelly about retiring in my early 50's and wanted to be SURE I wouldn't have to go back to work.

 

[heeyy_joe]

You can do as you describe and you'll be fine. Just make sure you have 450-500K to fall back on -that might mean you have to position your portfolio for capital preservation over the first 5-7 years you are retired. Cheers.

 

[Jerry1]

Well, I think I'd question how your SS is going to go from somewhere in the $45K range to $70K in a few years. The COLA is usually less than 2%.

Thanks for your reply.

The calculator we used has me starting at 62 and my wife filing and suspending. At that point, she's taking half of my SS. The jump from $45K to $70K comes when my wife turns 70 and switches from taking half of my SS to taking her full retirement.

To me, this is one of the major variables. I'm not comfortable starting at 62 so as long as the funds hold out, I'll wait until later to file. The calculator maximized total payout over our life span which was estimated to be 85. I will analyze that and give more focus to maximizing annual income later in life. I read a comment that I've come to like - SS is insurance for living long.

 

[Jerry1]

Jerry1, you didn't specify your or your wife's age at the time you retire. If you retire early there're certain rules to follow re withdrawals from 401k and IRA.

It's a beautiful thing. I married my wife at 20 and little did I know how great it would be that she is exactly 4.5 years older than me. So, when I'm 55, she'll be . . . 59 1/2

We've both worked all our adult lives and her 401k is close to mine in value. I did better because I secured a pension which I can take as a lump sum or an annuity. In this example, I've used the annuity. If I don't take the annuity, I would get a lump sum of about $550K. I've not committed to how I would handle that, but I've researched annuities and it has a pretty good return and the $37K per year is with surviving spouse at 100%.

 

[Jerry1]

It's a good starting point for your retirement plan. I started simple like that, as well... then iteratively refined the plan.

For a simple SWAG at retirement budget - take your current income from all sources: remove out SS contributions, medicare tax contributions, 401k contributions, ESOP (if applicable purchases)... Also take out money you're saving after tax... That's what you're spending now.

Now add in increased health insurance (most employees health insurance is subsidized), increased travel (if applicable) or golf fees (if applicable)...

That was how I came to my original retirement SWAG spend amount. It assumes similar taxes (which may not be the case - but might be if you're tapping tax advantaged accounts like IRAs/401k). That's a top down approach to retirement spending needs.

The bottoms up approach takes all your expenses... It helps if you have a history of what you spend (like in Quicken)... I did my bottoms up budget and got a number within a few thousand of my top down. That gave me confidence.

Knowing what you'll spend (including taxes and insurance) is the biggest component in retirement planning.

Lots of calculators let you model. Quicken Lifetime Planner is a good way to model - if you already have quicken. It's deterministic (fixed market increases, fixed inflation, etc.) but if you go through the exercise it reminds you to account for everything. A historical markets calculator is Firecalc - very useful for modelling when different income sources come online or offline. It tests your plan against previous market performance and inflation (what-iffing if you'd retired every possible year with market returns.) I found running both tools really helped me find the 'gotcha's' in my plan

Thank you and every one for your responses.

Regarding expenses. We've done a lot of work on the expense side. I over simplified it for the example. I don't like the framework that takes current spending because, frankly, I'm living a little large right now. There's no way I'm going to spend anywhere near what I'm spending now in retirement. For example, I lease two new cars. One I swap out every two years and the other every three years. Before I got my kids out of college, I drove cars into the ground and was proud to get my cost per mile as low as possible. I will return to that in retirement.

I know living more frugal in retirement may create some withdrawal issues, but I'm more than willing to give up some spending in order to give up working. It's time. I'm not Mr. Money Mustache, but I'm moving in that direction and feeling very good about it. I really think $100K can provide a very good life and I'd rather adjust to that amount than work longer. There's a ton of people that would love to live on that. Note from original post, my wife and I are debt free home owners. I've done the bottom up approach to estimating and I'm under $50K for essentials. Hard to believe, but if MMM can live on $25K, I can live on $50K and have fun with whatever's left after taxes.

 

[Rick_Head]

I'd like your opinion on our retirement Jerry. Your answer may affect your question.

We have a no debt, nice house (will eventually downsize), spend about $100K per year, pretax. Our assets are ~4KK. Will we make it? Oh, BTW, we are Canadian and may get as much as $1k/mo in "ss".

My point is, only you can determine if you have enough and if you screw up you can only blame yourself. Have a few contingency plans.

 

[ivinsfan]

Thank you and every one for your responses.

Regarding expenses. We've done a lot of work on the expense side. I over simplified it for the example. I don't like the framework that takes current spending because, frankly, I'm living a little large right now. There's no way I'm going to spend anywhere near what I'm spending now in retirement. For example, I lease two new cars. One I swap out every two years and the other every three years. Before I got my kids out of college, I drove cars into the ground and was proud to get my cost per mile as low as possible. I will return to that in retirement.

I know living more frugal in retirement may create some withdrawal issues, but I'm more than willing to give up some spending in order to give up working. It's time. I'm not Mr. Money Mustache, but I'm moving in that direction and feeling very good about it. I really think $100K can provide a very good life and I'd rather adjust to that amount than work longer. There's a ton of people that would love to live on that. Note from original post, my wife and I are debt free home owners. I've done the bottom up approach to estimating and I'm under $50K for essentials. Hard to believe, but if MMM can live on $25K, I can live on $50K and have fun with whatever's left after taxes.

Here's a suggestion for you, for the next 2 years split the difference between 50 and 100K and trying living on 75K a year. See what that feels like to the 2 of you..suddenly getting "more frugal" and doing retirement at the same time is a lot of change . You say you are debt free, but your cars are not payed off and you have payments every month, I'd quibble with your assertion you are debt free. What's your time line for getting rid of the lease payments and are you going to have the expense of 2 new cars? Where have you accounted for that? Does that 50K include vehicle expense?

I'm confused on the way you explained your SS plan..why would your DW file and suspend at FRA..did you mean she will take a spousal at her FRA? Remember, this spousal strategy is one that is under fire and might be eliminated before you reach 62...I don't think you can be certain it will still be available to you.

 

[marko]

I'm still stuck on "and mine and my wife’s SS is $70K". Do you mean that each of you plan on a SS payment of $45K? I thought the max was lower than that.

 

[Spudd]

I'm still stuck on "and mine and my wife’s SS is $70K". Do you mean that each of you plan on a SS payment of $45K? I thought the max was lower than that.

35x2 = 70

 

[marko]

35x2 = 70

Oh. Yeah. Right. Numbers is hard.

 

[Jerry1]

Here's a suggestion for you, for the next 2 years split the difference between 50 and 100K and trying living on 75K a year. See what that feels like to the 2 of you..suddenly getting "more frugal" and doing retirement at the same time is a lot of change . You say you are debt free, but your cars are not payed off and you have payments every month, I'd quibble with your assertion you are debt free. What's your time line for getting rid of the lease payments and are you going to have the expense of 2 new cars? Where have you accounted for that? Does that 50K include vehicle expense?

I'm confused on the way you explained your SS plan..why would your DW file and suspend at FRA..did you mean she will take a spousal at her FRA? Remember, this spousal strategy is one that is under fire and might be eliminated before you reach 62...I don't think you can be certain it will still be available to you.

It's hard to live on less money ($75K per year) while still working but I can adjust out the work expenses and yes, I'm under $100K in spending. I will have to tighten up but base living expenses are $50K. As for the cars, yes, one lease comes to an end early next year and the other a year later. We plan on buying the one that comes due later. We only leased it because they were running good lease deals and it was an opportunity to try it before we buy it. We like it and it will be our "nice" car, the one we take on trips and such. My other car will be a used car cheap enough to not have to insure it for collision.

Yes, I did explain my SS plan incorrectly. Yes, she will file and restrict her application and receive 50% of my FRA benefit.

Asked in another post ($70K = $31K for me and $39K for wife). Again, I'm not convinced this is the best plan but the calculator has me starting at 62 so my number is smaller than my wife's. The calculator maximizes total payout for your life expectancy. I'll probably hold off on filing until FRA or maybe even later but I have time to let that decision mature.

 

[Animorph]

You can do as you describe and you'll be fine. Just make sure you have 450-500K to fall back on -that might mean you have to position your portfolio for capital preservation over the first 5-7 years you are retired. Cheers.

+1

Your withdrawal rate will demand a conservative portfolio for those initial years, although 50/50 might do it, with withdrawals coming all from the bond/cash allocation and leaving all stocks for your later no withdrawals portfolio. Not that I listen to my own advice...

 

[bmcgonig]

Probably worthwhile considering the fact that one will obviously predecease the other. By how much no one knows, but then the SS goes down either 31 or 39k. Just make sure that the extra SS is not necessary for essentials. Advice I've seen here is to rely on one SS check only, and spend the other on non essentials.


Sent from my iPad using Early Retirement Forum

 

[mrfeh]

I suggest you do the following:
- get a firm grip on what your expenses will be in retirement, and be prepared to adhere to a budget
- go over to firecalc.com and plug in your number to see what your success rate is
- check your asset allocation to be sure that money you are counting on using in the next few years is not in equities

 

[ivinsfan]

I'm still stuck on your SS numbers. I'm curious about the SS system so I plugged a few number in. First, have you and your DW both earned the absolute maximum payments possible...? You would need to both pretty high earnings records. If you had max earnings and considering your birthday, you number of 70K seems to be off by at least 10K, the main issue being the 31K number you keeping posting for yourself. Are you certain you are including an age deduction for taking at 62, for someone your age it would be at least a 25% reduction.

This brings up another point,you have after tax money of 125K and paid off house and no personally owned cars, where does all your money go? If you both are maximum earners and have both worked the entire marriage you have some money leakage somewhere. Just saying you can live on less money doesn't make it happen...do you have a massive amount of equity tied up in your home? Do you use Quicken or some other method of tracking spending?

 

[Jerry1]

I'm still stuck on your SS numbers. I'm curious about the SS system so I plugged a few number in. First, have you and your DW both earned the absolute maximum payments possible...? You would need to both pretty high earnings records. If you had max earnings and considering your birthday, you number of 70K seems to be off by at least 10K, the main issue being the 31K number you keeping posting for yourself. Are you certain you are including an age deduction for taking at 62, for someone your age it would be at least a 25% reduction.

This brings up another point,you have after tax money of 125K and paid off house and no personally owned cars, where does all your money go? If you both are maximum earners and have both worked the entire marriage you have some money leakage somewhere. Just saying you can live on less money doesn't make it happen...do you have a massive amount of equity tied up in your home? Do you use Quicken or some other method of tracking spending?

Let's start with SS:

This is why I posted this question. Thank you for being stuck with the assumption. I used a online calculator where you put in your FRA benefit and some other assumptions and it does the calculations. Now that I've looked closer at the output, I have your same concern about my side of the SS income. Some of the difference is inflation (cola). The $30K is a 2027 number and I'll be about 66 years old. My SS statement says that at 62 I will get about $20,500/yr. The calculator starts out at $25,000 per year. So I'll have to go back and understand their assumptions better. Thank you.

As for the money we make, yes, we make decent money. However, the last several years, we've spent a lot of money. I wouldn't call it leakage - it's been more like a full on flood. We put one child through college, we bought the other child a house, we've made major improvements to our existing house (basically rebuilt it) and paid off our mortgage, all with current income and no debt. We've also maxed out both our 401k's, taken some nice trips and lived better than we ever hoped. The thing is though that the income and the spending all came within the last ten years. So we remember what it is to live on less and we know we've prepaid a lot of maintenance on the house so living on less really isn't that big of a stretch. Obviously some of the other expenses are also non-recurring.

Again, I appreciate your input. Those are the kind of questions that will highlight something I might be missing. Thank you.

 

[hnzw_rui]

Don't consider COLA when looking at SS benefits. Presumably, prices will have also increased so the COLA is just to make-up for inflation.

 

[ivinsfan]

Don't consider COLA when looking at SS benefits. Presumably, prices will have also increased so the COLA is just to make-up for inflation.

+1...only applying COLA to one side of the equation will really not give you a complete picture.


As to your spending, it's your money do what you want with it. You seem to be parents that are very generous with money to adult children. College, pretty common, new house, not so common. Will you be buying houses for all your children now? What about things like wedding expenses and money and funding you might want to give to future grandchildren. I suggest you and your DW have a serious talk about this before you retire and see if you agree on this subject.

I know more then a few friends and family that have good incomes and like to spend on their kids and "fun" stuff. They always tell me, "We spend too much money", "we don't save enough", We need to cutback and add to our savings", but it never happens. Figure out where you fit into this spending model before you actually quit work.

A lot of the points I just mentioned come up for discussion frequently on this website. We have a lot of one question posters who just ask "Can I do it this way" and not "What do I have to do to make this happen" Do yourself a favor and hang around here for the next couple of years.

 

[Jerry1]

You seem to be parents that are very generous with money to adult children. College, pretty common, new house, not so common. Will you be buying houses for all your children now? What about things like wedding expenses and money and funding you might want to give to future grandchildren.

Wife and I are on the same page. Only two children. One went to college and the other got a house. Both got weddings so that expense is done as well. Grandkids are already here (3 of them) and while we have some interest in helping them with college, we've been telling ourselves that the cost of college is going to be something we share in depending on our financial situation. If we have it, we'll help. If not, they will have to figure it out on their own and with the help of their parents.

For sure, we could have saved more, but we have no regrets. I appreciate the insight on this board and have been reading quite a bit, but the biggest challenge we face is transitioning back to where we were (spending wise) about ten years ago. Thankfully, I don't think it will be that hard. Timing was great in that I made my best money at the time I needed it most for those one time expenditures. We know how to live within our means but I don't minimize the fact that it will be different and a challenge. I look forward to it and think it's a lot better alternative than working longer.