Thoughts and concerns about a high SWR

[Carpediem]

Hello...

I am 58 (married - DW retired) and still working at mega corp. Our retirement savings are a bit over $1.1MM and are currently in a couple of traditional IRAs and an employer 401k. I am looking at the possibility of hanging it up in 2017. However, if I do, my WR for the first 7-8 years will be fairly high - 7-8%. But after SS kicks in, it will drop to around 2.5% for the remainder of our lives. I've run lots of scenarios and calculations using both Firecalc and Flexible Retirement Planner and results are in the 95-100% success range.

What are your thoughts/concerns about this scenario? Would you be comfortable calling it a career if you were in my shoes?

I know all about the '4% rule of thumb' but I'd have to keep working for 7-8 more years before I could reach that level.

Thank you in advance for the feedback.

 

[Walt34]

What about health insurance?

The premium increase numbers in the threads on that topic are scary. http://www.early-retirement.org/forums/f28/preview-2017-aca-plans-now-active-83899.html

 

[Carpediem]

Yes, I've definitely considered health insurance and I've budgeted appropriately for it at this point. Of course, who knows what 2018 and beyond have in store.

Thank you.

P.S. Based on the estimates I'm seeing, the monthly prem would be covered almost completely by the subsidy for the lowest level bronze plan.

 

[RunningBum]

If those planners work, you are probably ok. But before I gave any assurances I'd want to know how realistic your expense figures are. Do they account for things like major irregular repairs and replacements, travel, and yes, increased medical costs? The planners are only as accurate as the data you put into them.


Another way to look at this is to annuitize SS and any pension and figure your SWR on that value + your $1.1M.

 

[euro]

Hello...

I am 58 (married - DW retired) and still working at mega corp. Our retirement savings are a bit over $1.1MM and are currently in a couple of traditional IRAs and an employer 401k. I am looking at the possibility of hanging it up in 2017. However, if I do, my WR for the first 7-8 years will be fairly high - 9-10%. But after SS kicks in, it will drop to around 2.5% for the remainder of our lives. I've run lots of scenarios and calculations using both Firecalc and Flexible Retirement Planner and results are in the 95-100% success range.

What are your thoughts/concerns about this scenario? Would you be comfortable calling it a career if you were in my shoes?

I know all about the '4% rule of thumb' but I'd have to keep working for 7-8 more years before I could reach that level.

Thank you in advance for the feedback.

A lot will depend on the specific circumstances, but if you really need THAT kind of withdrawal rate for the first 8 years you better hope there isn't a serious market correction in the first few years or else you'll bust. That is, unless you are accounting for plenty of discretionary expenses that you could drastically cut, if needed.
Have you considered taking SS at age 62? That way you only need to "deep-draw" 3 years? Also, when can your DW draw SS?

 

[haha]

Even without health insurance issues, this is a very high risk plan. Say the market doesn't break, but neither does it go on a tear. Say your expenses turn out to be as estimated with no emergencies. You could still mortally depleted your portfolio in the period before you can tap the non-portfolio cash flows.

Ha

 

[zinger1457]

P.S. Based on the estimates I'm seeing, the monthly prem would be covered almost completely by the subsidy for the lowest level bronze plan.

You expect to get an ACA subsidy with an income of ~$100K?

 

[big-papa]

Have you looked a VPW as a withdrawal method? It's described over on bogleheads, along with a spreadsheet. I created my own spreadsheet because their spreadsheet is restrictive as to which investments you can backtest with. It is a variable withdrawal method, so you have to be able to still live with lower withdrawals in some of the worst case historical scenarios. But it can never completely run out of money before N years of retirement (where you choose N at the beginning of retirement).

There is also a thread over there started by the guy (longinvest) who came up with VPW who advocates a SS "bridge" between the start of early retirement and the time you take SS. He advocates a TIPs ladder as a bridge to SS. The stream from the bridge would match what you get in SS once it starts. Since it's TIPs, you have built in inflation adjustments though with interest rate risk. Alternatively, you could try and build a CD ladder.

I once backtested just withdrawing the SS amount, increased by inflation each year, from my portfolio with the remaining amount withdrawn using VPW and that also seemed to provide decent results for my particular case. Of course for some there will be combinations of #years of bridging coupled with amount of SS being bridged that might not work out so well for some.

 

[Silver]

Hello...

But after SS kicks in, it will drop to around 2.5% for the remainder of our lives. I've run lots of scenarios and calculations using both Firecalc and Flexible Retirement Planner and results are in the 95-100% success range.

I always run Firecalc with the loss of my own or my DH's social security for the final 15 years of the plan assuming that one of us will live at least 15 years longer than the other.(DH is 18 months younger than I) We believe that the remaining one of us will probably spend a huge amount in those last 10-15 years because of required care, probably the bulk of our investments.

If you haven't run the calculators assuming that only one social security amount will be available for a period of time, it may be a helpful insight.

 

[bbbamI]

I always run Firecalc with the loss of my own or my DH's social security for the final 15 years of the plan assuming that one of us will live at least 15 years longer than the other. We believe that the remaining one of us will probably spend a huge amount in those last 10-15 years because of required care, probably the bulk of our investments.

If you haven't run the calculators assuming that only one social security amount will be available for a period of time, it may be a helpful insight.

I agree. At some point, one will be left alone without the additional social security payment.

Personally, having to take 9 or 10 percent out for a few years (especially if the majority of the expenses are essential) would scare the crap out of me.

 

[Cap_Scarlet]

Hello...

I am 58 (married - DW retired) and still working at mega corp. Our retirement savings are a bit over $1.1MM and are currently in a couple of traditional IRAs and an employer 401k. I am looking at the possibility of hanging it up in 2017. However, if I do, my WR for the first 7-8 years will be fairly high - 9-10%. But after SS kicks in, it will drop to around 2.5% for the remainder of our lives. I've run lots of scenarios and calculations using both Firecalc and Flexible Retirement Planner and results are in the 95-100% success range.

What are your thoughts/concerns about this scenario? Would you be comfortable calling it a career if you were in my shoes?

I know all about the '4% rule of thumb' but I'd have to keep working for 7-8 more years before I could reach that level.

Thank you in advance for the feedback.

so 9-10% over 7-8 years means somewhere between $690k and $880k before SS kicks in which would look ugly if the market drops by 20%. Are you really saying your average expenses are between 100 and 110k per annum? That seems very high to me.

 

[JoeWras]

Yes, I've definitely considered health insurance and I've budgeted appropriately for it at this point. Of course, who knows what 2018 and beyond have in store.

Thank you.

P.S. Based on the estimates I'm seeing, the monthly prem would be covered almost completely by the subsidy for the lowest level bronze plan.

Don't see how you'll get the subsidy with that SWR from an IRA.

Something is wrong here.

You are playing with fire with that SWR on many levels.

 

[Texas Proud]

You expect to get an ACA subsidy with an income of ~$100K?

Just because you spend $100K does not mean you have a $100K taxable income... or even MAGI...

 

[zinger1457]

Just because you spend $100K does not mean you have a $100K taxable income... or even MAGI...

The OP stated his income stream for the first few years will be from a tIRA and 401K so more than likely it is taxable.

 

[JoeWras]

The OP stated his income stream for the first few years will be from a tIRA and 401K so more than likely it is taxable.

OK, OK. I'll calm down. Sounds like OP is thinking clearly. I'm not. A little panicking for the OP on my part.

 

[MikeWillRetire]

Look at it this way. You need two buckets of money. The first bucket needs to last 7 years, so the 4% rule of thumb doesn't apply to that bucket. That bucket should be invested very conservatively. The second bucket contains the remainder of your money, and it needs to last until you pass, and should be invested accordingly. That bucket needs to meet the 4% rule of thumb.

 

[GalaxyBoy]

Although less pronounced, this is similar to my scenario as well. Thanks for the idea to model various scenarios involving stopping SS early for either partner, and I'll be sure to study the VPW concept over at Bogleheads. I find interesting the idea of an inflation-protected, fixed-income investment to create an income stream to bridge the SS gap.

But, that said, is it necessarily a bad thing that the withdrawal rate is high for the years bridging ER and SS, IF there's enough capital saved to accommodate that? Presumably, tools like FireCalc model the worst-case, historical market cases.

 

[Carpediem]

Okay, sorry. I need to correct some info from my first post.

I have a 'legal obligation' that will go away in 2021. Expenses will drop by over $1000 per month at that point. Expenses for the first 4 years will be around $6500 and will drop to around $5500 in 2021. All healthcare expenses have been accounted for and there is obviously some discretionary spending included in the budget, such as travel.

It's difficult to show this type of spending pattern in the retirement tools but I did use the 'off chart spending' in Firecalc to simulate the 'legal obligation' going away.

Thanks for all the feedback so far.

P.S. This 'legal obligation' is completely tax deductible and will immediately reduce MAGI.

 

[Texas Proud]

The OP stated his income stream for the first few years will be from a tIRA and 401K so more than likely it is taxable.

I saw where he said his money is mostly in those accounts, but I did not see where he said all his income will be coming from them... but, I can see how that can easily be read into his post... I just did not jump to that conclusion....


Edit... just saw OP posted his expenses are less... $78K for now...

 

[Carpediem]

Apologies again.....one more piece of info - We have some rental properties bringing in around $7-8k per year. We might sell them eventually which would add around $75k to the nest egg.

If it helps any, current approximate NW is around $1.4MM.

 

[Taxman59]

I was in a similar position, a high WD (6-7%) for about 4-5 years, then a drop for 3-4 years (4-5%), then a 1.5-2% or lower for the remainder of our lives. I ran the numbers in 3 comprehensive programs, as well as 4 or 5 "quickie" programs, then looked at it from a reasonable man perspective and concluded that the 95-100% success rate (through 95 years old) was a reasonable answer. The biggest concern I had was a major correction in the first 2-3 years, but with the actual spending down somewhat from the budget, a correction wouldn't affect me too much (plenty of cushion from what I would like to do down to what we really want to do, with the ability to hunker down further).

 

[walkinwood]

Look at it this way. You need two buckets of money. The first bucket needs to last 7 years, so the 4% rule of thumb doesn't apply to that bucket. That bucket should be invested very conservatively. The second bucket contains the remainder of your money, and it needs to last until you pass, and should be invested accordingly. That bucket needs to meet the 4% rule of thumb.

Exactly how I would approach the problem if I were in the OP's shoes.

 

[nun]

A high SWR is sort of a misnomer.....anyway the OP is risking some nasty sequence of returns issues if they need an initial 8% and there's a protracted market correction. So asset allocation is going to be important and the OP should probably accept a smaller potential ending capital to minimize risk.

 

[brucethebroker]

If you are close on the numbers, and REALLY want to FIRE early, can you cut some expenses? Can you downsize to a less expensive home? Get down to one car?

Or, increase your income. How about taking out a reversible mortgage to provide more income? Or find a part time job for next few years-something you would enjoy that would give the flexibility to travel, etc?

As to the rental properties, consider 1031 exchanges to a single new rental in a place where you want to live and a home you want to live in (eventually). Rent it out for a year or two (see your CPA for advice), then give notice to the renters and move in yourself. Sell your current residence and take the gain (all or mostly) tax free. It's legal, although it does get a bit complicated when you decide to sell the converted rental home though. But you may never do that anyway.

How about working part time until SS kicks in? Find something you might enjoy.

 

[brucethebroker]

Should have cut out last sentence.............oh well, it's early.