Our 30:30 Plan – Targeting ER at Age 55 (detailed)

[obgyn65]

I haven't read the answers from other forum participants above, but to the OP : you are all set. Congratulations. Enjoy your retirement.

 

[Sandman62]

I just realized I'd made a mistake in calculating our retirement spending and income needs: I had calculated our pension benefits knowing what we'll get when we retire in 5 years. However, that's in "5 years from now" dollars, so don't I have to adjust for inflation?

So, taking our current $75/yr (after-tax) spending and adding 3% inflation for 5 years makes that ~$86k. Adding federal and state taxes onto that means we'll need more like $115k pretax income.

Does that make sense? If so, then for the 15 years until SS (unless we do so spousal benefits earlier), we'd need to either withdraw $15k/yr from our portfolio or tighten up our budget.

That said, when entering Spending in Firecalc, is that today's dollars or as of retirement date?

 

[MichaelB]

FIRECalc will add inflation to your spending. It will not add taxes, you have to include that. It will apply a COLA to the pension ony if you indicate that.

So, taking our current $75/yr (after-tax) spending and adding 3% inflation for 5 years makes that ~$86k. Adding federal and state taxes onto that means we'll need more like $115k pretax income.

In this case, you would need to gross up to the $75k what you need to pay for taxes for the first year. FIREcalc will apply inflation from that point.

 

[REWahoo]

Have you used TurboTax or some other tax program to check your estimated tax bite on your proposed income? Your estimated 25% seems to be high to me, but then I'm not familiar with what your state might hit you with.

 

[Sandman62]

Sorry Michael, but I don't quite follow your recommendation. What does "gross up to the $75k" mean? Do I enter in Firecalc's Spending the amount we spend NOW or WILL SPEND in the first year of retirement.

ReWahoo, I'm using TaxCut, and thought I'd calculated estimated tax rates from our 1040, but looking closer at TaxCut now, I probably messed that up. I had used 20% federal and 5% state. Upon further review though, TaxCut shows:

Gross Income: 168,322 (obviously excludes retirement savings)
AGI: 168,134
Taxable Income: 134,774
Federal tax: 25,054, 14.9% of AGI
State tax: 6,235, 3.7% of AGI
Total tax: 18.6% of AGI
Is it correct to calculate tax rate based on AGI or should I be using Taxable Income?

If this is more accurate, then unfortunately, I think our retirement spending goal will be higher because our current consumption is evidently higher. I'm estimating current spending as "Pretax income, minus taxes, and what we save for retirement and savings, pay for college and other child expenses". So if I was calculating too high on income tax rates, that means we actually spend more.

Revised estimates based on 18.6% total income tax rate:
Current spending: 85,220 (not $75k, as originally thought)
Inflation rate: 3.00%
Inflation-adjusted ret. spending: 98,793
Inflation-adjusted ret. inc.: 121,381

Pensions will total $100k, meaning need to withdraw the difference or tighten up budget.

You see? This is why I'm out here getting input on our plan. Just because I'm handy with Excel doesn't mean I'm using the right numbers and formulas.

Much appreciate the help folks.

 

[REWahoo]

I wouldn't use the effective tax rate (18.6%) on your current income to estimate taxes in retirement since you know you'll have a lower income. Do some 'what if' runs in TaxCut using your projected retirement income and I think you'll find the effective rate will be less.

 

[MichaelB]

Sandman, for spending, use the amount it is now. Make sure it includes taxes.

I also agree with REW's suggestion. If you need $85k of net spending, use TurboTax to see what gross income you need to produce that net amount.

 

[REWahoo]

Also, if you aren't already doing so I would strongly urge you to use your Excel skills track your actual spending. We did this for three years prior to retiring and it was a huge help in our planning.

You don't have to track every penny, just get granular enough to understand where your money is going every month. This will show you that you probably have the ability to 'tighten the budget' with very little real impact to your standard of living.

 

[REWahoo]

Sandman, for spending, use the amount it is now. Make sure it includes taxes.

+1

 

[Sandman62]

Ohhhh, so Firecalc's "Spending" is meant to be BEFORE-tax? I thought it meant actual money spent.

As for tracking actual expenses, I can probably get a good start from our Discover card, seeing we use it for almost everything (and pay the balance every month) except the monthly bills, which my wife pays from our checking. I know we've charged over $48k in the last 4 years on it, and they nicely break down by categories. Thanks for the suggestion.

 

[REWahoo]

Ohhhh, so Firecalc's "Spending" is meant to be BEFORE-tax? I thought it meant actual money spent.

When you are getting pensions, SS benefits and withdrawing $ from your IRAs, you'll be paying taxes on them. That's an expense - and money spent (buying all the things govt provides ).

FIRECalc ignores taxes so you need to include ALL expenses, including taxes, in your "spending".

 

[Surewhitey]

Also, if you aren't already doing so I would strongly urge you to use your Excel skills track your actual spending. We did this for three years prior to retiring and it was a huge help in our planning.

+1 also; we use Mint on this and it works quite well, even on the small spendings...

 

[aida2003]

Reading OP's first post, his financial situation sounded very enviable: great household income, no student loans for children, everything is COLA'd....wonderful, but just this one tidbit of information that he doesn't really know his current spending and what's that for shows that he lacks some basic skills on budgeting. Without this knowledge, you might not even realize how quicky you might overspend the $75k that even COLA'd benefits won't be able to cover it. Will your children be all set after college and no more financial help from you expected anymore? What about future grandkids and 'spoiling' budget for them?

I'd suggest starting tracking your current spending for the next few years and see if you'll have any wiggle room for cuts if needed in the future. You are planning to do 'catch-up' for your 401k, what about doing the same for your DW or would it really scrimp your current lifestyle?

Your current financial picture is truly wonderful, but this lack of knowledge of spending and reluctance to cut it (maybe you won't need it, I don't know) raises a red flag for me.

 

[Sandman62]

Thanks for pointing out the concern. Honestly, we've never really tracked our budgets because we live below our means. We've never really scrutinized our spending for "Where else can we tighten up?" because we really haven't needed to. I'm not trying to be flippant; just being honest. We save for retirement, pay our bills, eat, live, etc, and bank the rest. We don't take annual extravagant vacations or have other expensive hobbies. We put one kid through college with no loans and we don't anticipate any for DS. No car payments. No mortgage.

I actually thought I was being conservative by arriving at our curent annual spending by simply starting with our income, then deducting taxes, what we save, what we currently spend on college and other kid costs - all things (except for taxes) that will go away before retirement (notwithstanding the chance of college grad kids possibly still needing some support). Then I just assumed that "We spend the rest". Yes, we can probably cut some fat in areas like dining out or some of my high-stakes fantasy football habit, but I thought that it might be more accurate (or at least a "worst case" scenario) to see what we actually spend instead of just poring over bills to try to see what I think we spend - and risking leaving some things out.

But I do agree with taking a look at our spending over the next few years. I just updated some numbers in Fidelity's Retirement Planner, but over the next couple weeks, I'll obtain more accurate numbers from credit cards and check register.

I have started thinking about catchup on DW too. I'm leaning toward getting through a year of that for me first, then revisiting to see how it felt. Still have one kid in college for 3 more years.

BTW, our pensions do NOT include COLAs. DW's "may" get one every 5 years, but mine won't.

Thanks again for the warning.

 

[REWahoo]

I have started thinking about catchup on DW too.

You might try some mustard on her once in a while to spice things up.

 

[Alan]

I also have non-COLA pensions and I plan on using the investments (40/50/10) to cover inflation going forward. Currently, into our 4th year of ER and this year we expect to withdraw 2.4% from retirement stash to supplement pensions. That % will slowly increase until SS adds to the income stream.

As for self insuring for LTC, I have been setting aside money every year for the last 10 years and not counting it as part of the retirement money to draw on. It is now at ~$270k in an IRA so I'm not going to set any more money aside. If we need LTC in 10, 20, 30 years time then I'm hoping that pot plus our current income stream will suffice.

 

[Mulligan]

I just realized I'd made a mistake in calculating our retirement spending and income needs: I had calculated our pension benefits knowing what we'll get when we retire in 5 years. However, that's in "5 years from now" dollars, so don't I have to adjust for inflation?

So, taking our current $75/yr (after-tax) spending and adding 3% inflation for 5 years makes that ~$86k. Adding federal and state taxes onto that means we'll need more like $115k pretax income.

Does that make sense? If so, then for the 15 years until SS (unless we do so spousal benefits earlier), we'd need to either withdraw $15k/yr from our portfolio or tighten up our budget.

That said, when entering Spending in Firecalc, is that today's dollars or as of retirement date?

It is definitely prudent to plan for inflation, and I applaud you for doing that. However, with a little fortune, you may find that the compounded inflation rate of the next 5 years may not take an $11k toll on your budget. If many of your base costs are " fixed " such as a mortgage payment, that part of your budget would be immune to inflation. For example, in my situation, I spend roughly $3500 a month, but a full third of my monthly budget (mortgage and child support ) is immune to inflation. FWIW, I have been retired 3 years and my monthly expenses are actually lower than 3 years ago. Mostly because of taking some of my free time to rate shop all my insurance, Internet, and cable. My travel expenses have declined too because I now travel when I can go on dates when the true "fire sales" occur.

 

[cinman2000]

I'd suggest starting tracking your current spending for the next few years and see if you'll have any wiggle room for cuts if needed in the future. You are planning to do 'catch-up' for your 401k, what about doing the same for your DW or would it really scrimp your current lifestyle?

I have seen this advice in many places on this site and think it is one of the most important things one can do to prepare. Every person will budget a different way from conservative to aggressive. It's a great way to see where you fall. I think we are very conservative and we have been tracking closely the last three months. So far we are tracking about 15% ahead of target. Things stay this way for the entire year and my RE may be moving up from Jan 2015 to Jan 2014

 

[HFWR]

...I'm hoping that pot plus our current income stream will suffice...

Heh

 

[Alan]

Heh

The grass is always greener .....

.....when you smoke it

 

[Sandman62]

You might try some mustard on her once in a while to spice things up.

 

[aida2003]

You might try some mustard on her once in a while to spice things up.

At the beginning I didn't understand what REWahoo meant, but then I read Sandman62's quote and cracked me up

 

[aida2003]

Honestly, we've never really tracked our budgets because we live below our means. We've never really scrutinized our spending for "Where else can we tighten up?" because we really haven't needed to. I'm not trying to be flippant; just being honest. We save for retirement, pay our bills, eat, live, etc, and bank the rest. We don't take annual extravagant vacations or have other expensive hobbies. We put one kid through college with no loans and we don't anticipate any for DS. No car payments. No mortgage.

I actually thought I was being conservative by arriving at our curent annual spending by simply starting with our income, then deducting taxes, what we save, what we currently spend on college and other kid costs - all things (except for taxes) that will go away before retirement (notwithstanding the chance of college grad kids possibly still needing some support). Then I just assumed that "We spend the rest".

My italics and underline....This is the flaw of your planning which I understand. Your and your DW's jobs have been totally safe (your company sounds exceptional in today's private sector), so it was easy to start calculations from the income. When planning for the retirement is other way around. You would start with your annual expenses, add wedding expenses for your DD (maybe some for DS too), charity, grandchildren's gifts, etc.(e.g. savings for LTC in case you're planning to self-insure would be addn'l expense) and then state/Fed taxes on top. That's the income you need in retirement. Compare this amount to what your pensions and SS will cover. The difference will have to come from your retirement savings. See, your retirement is a totally different vocation.....Mr. Market is not a stable "employer" like your employers. In addition, hopefully nothing changes with your companies over the next 40 years and pensions are not cut and continue to offer you health insurance at favorable rates.

I liked FUEGO's planning here: http://www.early-retirement.org/forums/f28/my-plan-to-retire-at-35-a-65265.html You don't need to read the thread. His first post shows retirement planning mathematically that I liked.

 

[friar1610]

With $100K in pensions annually and a million in cash, you are golden. Quit over thinking it.

Although the details of my/our situation were different, I was basically aiming for $100K in pre-tax income (pension plus draw from portfolio until SS eligibility, then pension plus SS and draw from portfolio only for luxuries.)

I found this was more than enough with kids out of college, no debt except for a small mortgage.

 

[Sandman62]

Aida, I'm trying to understand. Are you suggesting that our desired spending would likely be LOWER or HIGHER vs starting from current income?

For example, using convenient rounded numbers: if a couple makes $200k and saves $50k, and other soon-to-vanish expenses like mortgage, college costs, etc. are another $50k, then aren't they SPENDING $100k (besides those vanishers)?

Yes, some expenses will go up and some down once in retirement. But as a starting point, what is the big difference in approaches?