Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
What to spend first?
Old 04-01-2023, 09:34 AM   #1
Dryer sheet wannabe
 
Join Date: Jul 2015
Location: Trinity
Posts: 14
What to spend first?

So I am about 3 months from officially retiring at age 55. 28+ years in the same career/same company. Itís been great money and leaving the high paycheck is scary for sure. But- the stress, the 24/7 contact, I know itís time to go.

My question is since my company does not offer ďthe rule of 55Ē and signing up for a SEPP would not give me enough of the needed funds for the next 5 years- where do I draw first, and how much cash to I hold on to, or spend before drawing from 401k funds?

A little more info- Iím fortunate to have a decent pension, which if I let grow until 62/67, along with SS should give me enough to cover all my living expenses. So my 401k money is really only needed to fund my bridge from say 55-65. My needed income for those 10 years will be high, $120,000 a year max. At 65, and with a planned moved- no house payment- expenses will drop to 80-90k. Cash from current home will pay for new home outright. Itís the current mortgage and taxes that create the spend gap right now. Staying in big house now for parents near by who are self sufficient, financially stable, but want to stay close (84/87yo). Iíll stay in this house 5 years max- but could go sooner if funds require. Our move will be to NC where we lived 20+ years before moving to Florida to be closer to my parents. I can always travel back and forth if needed and stay with them- but wonít have the ďBig house costĒ to deal with when the move becomes financially necessary.

Iíll have cash on hand in savings, and after company separation/stock pay outs, etc to cover 18-24 months. But should I use all this cash first before drawing any taxable income?

My 401k is just under 1m. Non-taxable is only just under 60,000.

Just donít know how much ďpenalty fundsĒ to take. Only when I use everything else- or take some right away in smaller batches to avoid a big hit when I am 57/58 and still not reaching 59 1/2?

So much good information and advice on this site- just donít want to make the wrong decisions, or order of withdrawals/spend funds.
Beachbound is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-01-2023, 11:02 AM   #2
Recycles dryer sheets
BrianB's Avatar
 
Join Date: Jul 2011
Location: Minneapolis
Posts: 332
I think you need to spend some time with FIREcalc or Fidelity's Retirement Planner to give yourself a plan, but a $120k / yr spend rate will empty your retirement accounts by the time you are ready to take your SS & pension.

There are some gaps in the information you have given that make it really hard to make specific recommendations. Can you reduce that $120k annual spending over the next 5 years? Will your pension & SS really provide the full $80-90k per year that you will need after moving? Is the pension inflation adjusted? Will you have money left from your current home sale after you buy your new home? What about the "lumpy" expenses like replacing car(s), travel, and enjoying life?

Remember that your fully paid retirement home will still create ongoing costs - taxes, insurance, utilities and maintenance.

Also remember that in any 10 year period there will likely be two or more market corrections that can be brutal when you are counting on continuous withdrawals.

If I were you I would seriously cut spending now (-30%?), get a different job to create some cushion in your draw-down, or both.

Sorry I can't be more optimistic.

Edit to add:

Have you read this post from this forum, it raises some really important issues you need to consider: https://www.early-retirement.org/for...ire-69999.html

BrianB
__________________
Good, Fast, Cheap: Pick 2
BrianB is offline   Reply With Quote
Old 04-01-2023, 11:20 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,768
I'd look for other ways than taking that 10% early withdrawal penalty. No Roth, or HSA with eligible expenses to use for tax-free withdrawals?

How much equity do you have in the house? How close does a SEPP get you? How about a HELOC, to supplement the SEPP? Or downsize the house now. Or figure out how to cut your expenses. Everything BrianB said above.

I realize this means you can't pay for your retirement house outright, but using a SEPP you'd have extra income to make mortgage payments later.

Not that you should count on an inheritance, but is it likely you'll get a fairly sizeable one at some point? That could influence my choices.

Have you factored in income taxes (fed, and state when you move) on that pension & SS?

I hear you about getting away from the job stress, but there's a lot of stress with retiring on a plan that's perhaps not well thought out.

If you want to stick with your idea, I'd say you want to spread out your income between now and 59.5. I'd also stop any 401K contributions (except for company match) you are making now so you keep it available in taxable.
RunningBum is offline   Reply With Quote
Old 04-01-2023, 11:21 AM   #4
Thinks s/he gets paid by the post
 
Join Date: Apr 2015
Posts: 4,699
How will you pay for insurance? I think you need to show some income for the ACA, so using "all cash" from your payout might not be best for the next two years, unless your state qualifies you for medicaid or free insurance for low income.

What does Firecalc say about your finances and spend plan?
Have you answered the questions in the forum under Early retirement FAQs: : Some Important Questions to Answer Before Asking - Can I Retire?
__________________
Give a Man a fish, he will eat for a day.
Teach a Man to fish, he will eat for a lifetime.
pacergal is offline   Reply With Quote
Old 04-01-2023, 01:58 PM   #5
Thinks s/he gets paid by the post
Finance Dave's Avatar
 
Join Date: Mar 2007
Posts: 1,762
You've received some good comments already, but one thing to consider once you get your strategy is to take from the 401k only enough to get you to a low tax bracket, and try to come up with the rest in some "after tax" fashion such as Roth (you didn't mention one, perhaps don't have one) or your $60k after tax.

Like you, I got burned out on the long hours and 24/7 contact working for a Fortune 500 multinational company...so I left at 51 y.o. and took a job as a home inspector making 60% less...but I enjoyed it and made good enough money for 5 years that we kept saving and building our retirement funds. It has worked out well for us, and I now do small handyman jobs for "beer and sports car" money...I make about $9k/year now (I work about 200 hours/year) and will do this for another 2 years or so.

Good luck
__________________
"Live every day as if it were your last, and one day you'll be right" - unknown
Finance Dave is offline   Reply With Quote
Old 04-01-2023, 02:18 PM   #6
Full time employment: Posting here.
SnowballCamper's Avatar
 
Join Date: Aug 2019
Posts: 633
Not really enough info to answer... But my guess is that a SEPP needs to be party of the plan to get you from 55 to 60. It's my understanding that if you're over 59.5 and the plan has been in effect for five years you can change it...
__________________
--At what age does spending less now in order to have more later stop making sense?
SnowballCamper is offline   Reply With Quote
Old 04-01-2023, 02:23 PM   #7
Moderator
 
Join Date: Jul 2017
Location: Long Island
Posts: 3,588
Can you find a less stressful job to cover medical, expenses and get you to 57 1/2?
__________________
Use it up, wear it out, make it do or do without.
MarieIG is offline   Reply With Quote
Old 04-01-2023, 02:30 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 4,880
You don't mention retiree medical so I assume you won't have any which means you need to go on ACA. That requires you to have taxable income so you can't use all the cash, you will need to use some 401K money and pay a penalty. I would take $20K from the 401K or maybe a little more if married and then use cash for the rest. That way you get basically free health insurance premiums for the first couple years.

Can you take your pension right away or in a couple years? Is it COLA'd? That could be a better option than paying thousands in 401K penalties.
aaronc879 is offline   Reply With Quote
Old 04-01-2023, 02:42 PM   #9
Moderator
Aerides's Avatar
 
Join Date: Nov 2015
Posts: 12,251
You have 18-24 months of expenses, and a 401k you can't tap without penalties for 4.5 years - do I have that right?

I think you need to find a creative plan to cover the extra 2.5 years, as 401k penalties will be ugly.
Aerides is offline   Reply With Quote
Old 04-01-2023, 03:39 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,259
There is a recently implemented rule that says you can use up to a 5% interest rate when calculating an SEPP payment. Depending on the method you use and the balance you have, that might work.

You could also, of course, roll the 401(k) into an IRA and then do an SEPP.

While SEPP rules are rigid, they have become more flexible over time (like the 5% interest rate rule above). And for someone who's 55 or so and knows their numbers, they can work well.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is online now   Reply With Quote
Old 04-01-2023, 03:55 PM   #11
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 20,966
Quote:
Originally Posted by SecondCor521 View Post
There is a recently implemented rule that says you can use up to a 5% interest rate when calculating an SEPP payment. Depending on the method you use and the balance you have, that might work.

You could also, of course, roll the 401(k) into an IRA and then do an SEPP.

While SEPP rules are rigid, they have become more flexible over time (like the 5% interest rate rule above). And for someone who's 55 or so and knows their numbers, they can work well.
That's what I was thinking - roll the 401k into a tIRA, set up 72(t) withdrawals to generate income sufficient to qualify for the ACA and do any kind of work that strikes your fancy to cover the gap until the pension/SS kicks in. Once the stress of mega-corp is gone, you might find you actually don't mind working, just not there.
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Old 04-01-2023, 04:57 PM   #12
Thinks s/he gets paid by the post
DrRoy's Avatar
 
Join Date: Dec 2015
Location: Michigan
Posts: 4,259
I understood the rule of 55 to be an IRS regulation, not subject to your company to say yes or no. Why don't you look into that.
__________________
"The mountains are calling, and I must go." John Muir
DrRoy is offline   Reply With Quote
Old 04-01-2023, 05:01 PM   #13
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 4,880
Quote:
Originally Posted by DrRoy View Post
I understood the rule of 55 to be an IRS regulation, not subject to your company to say yes or no. Why don't you look into that.
It's up to your companies 401K administrator. I have only worked at one place that allowed the 'rule of 55'.
aaronc879 is offline   Reply With Quote
Old 04-01-2023, 05:14 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,259
Quote:
Originally Posted by DrRoy View Post
I understood the rule of 55 to be an IRS regulation, not subject to your company to say yes or no. Why don't you look into that.
I think the rule of 55 is actually a federal law. But all it says is that the company must permit withdrawals after the age of 55 to which the employee will not be subject to the 10% penalty. It does not require employers to offer any sort of payment schedule or periodic distribution arrangement. Merely permitting the employee to completely cash out their 401(k) without penalty meets the requirements of the law, but still may not meet the employee's cash flow and tax preferences satisfactorily.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is online now   Reply With Quote
Old 04-01-2023, 05:42 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
NW-Bound's Avatar
 
Join Date: Jul 2008
Posts: 35,018
Quote:
Originally Posted by Beachbound View Post
... I’ll have cash on hand in savings, and after company separation/stock pay outs, etc to cover 18-24 months. But should I use all this cash first before drawing any taxable income?

My 401k is just under 1m. Non-taxable is only just under 60,000...

I believe there's some confusion here about nomenclatures.

IRA and 401k are actually called nontaxable accounts, because capital gains and dividends generated in the accounts are not taxed. Yes, the whole balance of the accounts will be taxed later at withdrawal. These accounts are also called pre-tax.

On the other hand, when you take the money that you already paid income taxes on and deposit in a brokerage account to invest, the account is called "taxable", although the tax liability of these accounts is only levied on the gains, and not also on the principal like the pre-tax accounts are.

I used to mis-name these account types too, but the above are the commonly accepted definitions.

A quick search on the Web on the terms "taxable account" and "non-taxable account" will provide further elaboration.
__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)

"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
NW-Bound is offline   Reply With Quote
Old 04-02-2023, 04:39 AM   #16
Recycles dryer sheets
 
Join Date: Apr 2016
Posts: 106
I agree with the above comments, the Rule of 55 is a federal law. Administrators do not get to pick and choose whether you participate. Our company changed administrators last year and I specifically asked if they allow it and the response was that they have no authority to deny it - since it is a federal law.
Flyfish1 is offline   Reply With Quote
Old 04-02-2023, 05:30 AM   #17
gone traveling
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 34,002
^^^ That's correct, but as mentioned in post 14 above there is no requirement to allow partial withdrawals and that becomes the sticking point, so OP should inquire as to what their withdrawal options are if they leave the employer after 55.
pb4uski is offline   Reply With Quote
Old 04-02-2023, 06:47 AM   #18
Full time employment: Posting here.
 
Join Date: Oct 2020
Posts: 686
If the pension is not COLA'ed then I vote that you can't retire yet at this spending level. In the OP, there was one use of "our", the rest is "I". Is there a spouse and if so, does the pension include benefits to the survivor? Does the statement that expenses will be covered by pension + SS include spousal SS benefits that will disappear when the first spouse passes?

The assets seem kind of skinny to me for the spending desired, I wouldn't be able to handle the risk that the market stays down for the whole 10 years I am trying to draw from savings (there are several decade-plus time frames in the historical data where the markets are down for over a decade). Maybe heavy use of TIPS for the portion you are going to spend would get rid of market risk, but that also eliminates market growth possibilities.

From a "I'm happy with my plan, how do I execute it" standpoint, the 72(t) option might help. Dinkytown.net has a calculator showing how much you can withdraw each year penalty free-looks like the max is over $60K/year. That is about right with your cash plus your Roth (I assume the term non-taxable means Roth). You need to start that when you retire and make withdrawals for at least 5 years. I have always heard this is very complicated to get the amounts exactly right and there are very severe penalties for doing it wrong, so you need a pro to set it up.
Exchme is offline   Reply With Quote
Old 04-02-2023, 07:12 AM   #19
Dryer sheet wannabe
 
Join Date: Jul 2015
Location: Trinity
Posts: 14
Thank you all for the comments- I appreciate the advice. To clarify a few of the questions-

- budget for max of 4 years would be 120 max. That is based on current spending and definitely has some fluff that could be cut if needed. But I want to plan for the worse.

- current home is worth 1.1 million with 480,000 still owed. Move planned in 3-5 years (58-60) to downsize home to NC. New home budget 400,000 which will be plenty for where we choose to live. Timing is based on parents health, how retirement spend is going etc. I want to at least stay out for 1-2 years after first retirement. But the current home is expensive. Only 5 years old- so no major expenses expected soon. The house between mortgage and high taxes is 45,000 a year of that spent.

- pension (non-cola), ss self and spouse at 62 = 94,000. At 67 = 134,000.

- inheritance will be maybe 100,000 each, plus parents home in Florida. 2 siblings not close by.

- company does not participate in rule of 55, so any 401 k withdrawals with have 10% penalty and 22% initial federal tax.

- cash is currently $130,000. When I separate from company, another $60,000 in stock options paid, $160,000 in esop paid and taxed, and a supplemental pension paid 13 months later at $55,000 lump sum.

- health insurance would come from ACA beginning 2024, so yes, would like to keep my income as low as possible for subsidies.

- I can start my pension at anytime after 55, but like SS, it grows the longer I wait. At 55 itís $27,468. At 65 itís 53,100. I can start whenever I choose.

- I will show large income for 2023, so will be on cobra for Aug-Dec. Jan 2024 go to ACA, but will show income of 53,100 with supplemental pension payroll. 2025 and beyond- income would only be from whatever 401k withdrawals are needed. Only $60,000 of that 401k is in a ďRoth 401kĒ and has been taxed. All other is pre-taxed.

Thank you again for the comments- I learn so much from this forum and everyoneís advice and experiences.
Beachbound is offline   Reply With Quote
Old 04-02-2023, 08:47 AM   #20
gone traveling
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 34,002
I think you have enough to retire but not by a long shot based on what you have written. The bigger problem is penalty-free access to your 401k money from ER at 55 to 59-1/2.

You'll need to do a cash flow schedule to see if you can cover 55 to 59-1/2. If you can't or it is uncomfortabley close, then you might consider a cash out refinancing or HELOC to get you from 55 to 59-1/2. What is your current home mortgage interest rate? Another alternative to solve the liquidity problem would be to roll the 401k into an tIRA and then do a SEPP/72t.

Des your employer allow partial withdrawals from your 401k? Does it allow 401k loans? If so, are 401k loans required to be repaid when you leave?

Can you downshift to part -time?
pb4uski is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Real Estate: Sell first; buy later. Or Buy First Sell later Livin Large in MT Life after FIRE 39 07-31-2021 02:37 PM
How do you spend your first two hours of the day? redduck Life after FIRE 99 07-07-2014 11:25 PM
First time....First Post...Am I seeing the Forest through the Trees lovinglife1 Hi, I am... 26 12-27-2010 10:31 AM
Which account should I spend first? nun FIRE and Money 0 10-23-2008 09:32 PM
America can afford to spend more on healthcare?!? Nords FIRE and Money 23 10-13-2004 06:07 PM

» Quick Links

 
All times are GMT -6. The time now is 01:41 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2023, vBulletin Solutions, Inc.