New Member

[SoClose]

Hello - A new member here, but have been thinking about ER for a few years now.

Husband 46, Wife 45 - DINKS

Current pretax accounts $1.4 mil, after tax $255k, own home, no debt. Planning on receiving an estimated $1 mil in a profit share plan from employer in 2015. We intend to save and additional $250k, until ER in 2016.

Our 5 year average annual expenses are $60,000. This includes everything a new car purchase, major home repairs, and toys. I expect our costs to increase $39k in ER - due to Health insurance, entertainment, and taxes to cover income.

Every scenario I run in Firecalc says 100% success. I'm confused though when I consider a SWR. Due to retiring so early I read it should only be 3.5%. But to cover our annual ER expenses of $100, we would need $2.8 mil. I put in $120 a year in FIRE and it still says no problem, but a SWR would need $3.4mil?

I'm not counting on any SS or inheritance, just using the monies I estimate us to have right now. Not counting any monies from potential home sale, as we'd need the cash to buy another home.

Due to all the money being in pretax account, ER will require us to 72t our income. Which we want to do in order to stay in the 15% tax bracket. It's a bit scary to lock in 72t for 10+ years, but I don't see any other option.

Lots to consider and plan for, but it's so close I need to delve into the real nitty gritty.

 

[Accidental Retiree]

From what I recall, if your pretax money is in various accounts, then you don't have to 72(t) all of it, only the portion you want to use to generate your income. You may have to roll some money over into new accounts to get some separate funds that are not part of the 72(t).

However, unless things have changed, a 72(t) must last for 5 years or until you are 59-1/2, whichever comes later, so it may be longer than 10 years, depending on when you start.

 

[pb4uski]

You might want to take another look at the taxes. That has been one of the big pleasant surprises of ER for many of us. In order to net $72k after tax ($60k for living and $12k for HI) your federal taxes would only be about $8k assuming that all your income is tax-deferred withdrawals. In reality, it will be lower because of qualified dividneds on your after-tax investments. You can get a good idea by taking your 2013 return, stripping out earned income, adding in pension income sufficient to get to your total after-tax income to equal your budgeted retirement expenses.

One ER problem I see for you is lack of diversification in tax attributes of your retirement savings (too much tax-deferred and insufficient taxable savings). If the tax hit isn't too much you might consider increasing taxable savings from now until ER so you can reduce or avoid 72t withdrawals.

One option that is unusual that you might consider is refinancing your retirement home just before you retire - that will provide additional after-tax funds to help get you from ER to 59.5.

 

[SoClose]

Yes AR you are correct, we would split up the pretax monies into IRA(s) that would 72t an amount we require. And I said we would have to 72t for ten plus years.

PB - my additional $38k a year isn't just for taxes, it also includes increased entertainment and health ins. I'm estimated taxes to be $11,000. The 2014 married 15% bracket goes up to $82,000 if you add back standard deduction and personal exemption, a couple can make up to $102,000. My number is a little high as I then just used 15%, but with the graduated brackets it would be less.

I have NO idea why we would take a loan on our home and pay interest. That sounds ridiculous, when we have plenty of cash in our pretax accounts per all the FIRE scenarios.

Our accounts are fully diversified, but correct all in pretax accounts. But I'm not going to refuse $1 mil of my employers money or pay my current 24% tax rate on it.

On our 2013 tax return we paid 24% of our income in taxes, so there is no way I want to give up our current tax free saving.

 

[pb4uski]

.....PB - my additional $38k a year isn't just for taxes, it also includes increased entertainment and health ins. I'm estimated taxes to be $11,000. The 2014 married 15% bracket goes up to $82,000 if you add back standard deduction and personal exemption, a couple can make up to $102,000. My number is a little high as I then just used 15%, but with the graduated brackets it would be less.

I have NO idea why we would take a loan on our home and pay interest. That sounds ridiculous, when we have plenty of cash in our pretax accounts per all the FIRE scenarios.

Our accounts are fully diversified, but correct all in pretax accounts. But I'm not going to refuse $1 mil of my employers money or pay my current 24% tax rate on it.

On our 2013 tax return we paid 24% of our income in taxes, so there is no way I want to give up our current tax free saving.

I get that you don't want to reduce pre-tax savings because of your high tax bracket. In that case your only options are increasing after-tax savings from now until ER or accept that you'll have to do some 72t.

Before you reject the refi idea you need to look at both sides of the equation, not just the expense side. Don't forget that the proceeds from the refi would earn income (and probably tax free income assuming that your taxable funds would be in equities) and you would reduce your tax-deferred withdrawals and allow those funds to continue to grow tax deferred. I refied 2 years ago just before I retired and my mortgage interest rate is 3.375% pre-tax and ~2.7% after-tax. My investment earnings rate for the two years has been 10% (higher than the historical average of 8.7%) so I am way ahead of the game.

The refi would add to your taxable account money that you need to help carry you from ER to 59.5 and allow you to reduce your 72t.

Just another option to consider.

 

[SoClose]

PB - I'd really have to do number crunching before I'd commit to a mortgage again. The idea is probably mute anyway as our current plan is sell our home and move to FL. Renting for at least a year. So we'd have the equity of about $470,000 available after tax. Which would have to pay for rent.

We are big DIY'ers so I'm not sure renting is for us. A lot of time now is spent on house projects. But I'm also not sure I can handle the FL summers or want a home that could blow away in a hurricane. Hubby is all in and wants FL badly. I agreed to try it for a year and he understands.

On another note do banks give loans to folks without jobs? Would they consider our 72t withdrawals as income?

 

[pb4uski]

I purposefully did my refi just before I retired to avoid that question. They didn't ask if I planned to continue to work and I didn't volunteer that I didn't plan to continue to work.

I view my mortgage as really just plain leverage, borrowing money at a 3.375% rate to invest in the hope of earning more, and fully cognizant of the risk that there is a small chance it might not work out favorably. However, it does help boost my taxable accounts that we are relying on for living for the next couple years.

 

[wingfooted]

Just a question - the $1MM profit share in 2016. Isn't that immediately considered as income in 2016 and subject to the highest marginal tax rate (39.6%) ?

I have a similar situation and just wondering how to defer the income recognition / highest marginal tax rate treatment.

 

[SoClose]

Just a question - the $1MM profit share in 2016. Isn't that immediately considered as income in 2016 and subject to the highest marginal tax rate (39.6%) ?

I have a similar situation and just wondering how to defer the income recognition / highest marginal tax rate treatment.

No, mine is all pretax like a 401(k), which I'd could roll it over into an IRA.

The company has been putting monies into the account for several years. I just can't access it until termination, death, disability or retirement age of 65. I would be using the termination clause to roll over into a personal IRA.

 

[wingfooted]

No, mine is all pretax like a 401(k), which I'd could roll it over into an IRA.

The company has been putting monies into the account for several years. I just can't access it until termination, death, disability or retirement age of 65. I would be using the termination clause to roll over into a personal IRA.

Could you expand a bit on how these funds are treated as IRA eligible ? What is the program called ? What happens to these funds when you terminate / retire ? You can just roll over into an IRA without paying any tax until withdrawal ?

As mentioned, I have a similar situation expected in 2016. Big lump sum payout termed as a bonus and I am thinking I have to pay tax on the entire amount in that same year.

 

[SoClose]

My employer plan falls under IRC section 401(s) qualified defined contribution plan , it is not a one time windfall. My employer has been investing monies into it annually. I can just assess it when I terminate.

As I stated, yes I can roll my balance into an IRA.

If yours is counted as a bonus then yes you'd have to pay taxes right away. If your employer had invested the current 415 max of $51,000 a year into a 401 plan you too could then rollover your monies to a IRA. But your payment sounds like a one time windfall so you couldn't be under any limits to keep it tax deferred.

 

[SoClose]

My thread has gone a little off course. Back to two of my original questions? Anyone have additional input?

Every scenario I run in Firecalc says 100% success. I'm confused though when I consider a SWR. Due to retiring so early I read it should only be 3.5%. But to cover our annual ER expenses of $100, we would need $2.8 mil. I put in $120 a year in FIRE and it still says no problem, but a SWR would need $3.4mil?

Due to all the money being in pretax account, ER will require us to 72t our income. Which we want to do in order to stay in the 15% tax bracket. It's a bit scary to lock in 72t for 10+ years, but I don't see any other option.

 

[REWahoo]

Every scenario I run in Firecalc says 100% success. I'm confused though when I consider a SWR. Due to retiring so early I read it should only be 3.5%. But to cover our annual ER expenses of $100, we would need $2.8 mil. I put in $120 a year in FIRE and it still says no problem, but a SWR would need $3.4mil?

For a 4% WR you'll need 25x your annual spending - $2.5M for $100k spend or $3.0M for a $120k spend.

As others have said, FIRECalc doesn't use the 4% SWR to calculate success. I'd suggest you spend a little time learning how the calculator determines success/failure: FIRECalc: How it works

 

[sengsational]

Every scenario I run in Firecalc says 100% success. I'm confused though when I consider a SWR. Due to retiring so early I read it should only be 3.5%. But to cover our annual ER expenses of $100, we would need $2.8 mil. I put in $120 a year in FIRE and it still says no problem, but a SWR would need $3.4mil?

I can't answer that directly, but if you can figure out how to get your assets into the input form on i-orp Retirement Calculator - Parameter Form, I'd take that as another input into your situation (that tool tells you what to withdraw...you don't ask it if withdrawl rate X% will work).

Due to all the money being in pretax account, ER will require us to 72t our income. Which we want to do in order to stay in the 15% tax bracket. It's a bit scary to lock in 72t for 10+ years, but I don't see any other option.

Well since you're asking about 'any other option', I'll go for a long-shot . Because of your age and as an alternate to 72t, another option would be to leave it with your current employer (even though you've left them). This may offer more flexibility because you could join another company when you were, say, 54 years old. You would stay just long enough to transfer it over. Then, if you quit that second employer "in the year you turn 55 or later", you have penalty free access without 72t, essentially giving you access to the money 5 years earlier.

 

[pb4uski]

He would need to make sure that the employer that he quits from at age 55 allows penalty free withdrawals for employees leaving service after age 55 because not all employers allow it.

 

[wingfooted]

Sorry So Close for jacking your thread

$2.7MM, retiring at age 50, most of your bankroll pre-tax and expenses indicating about a 4% withdrawal rate.

You are literally so close.

But not much margin for error and I suspect that one or both you will have to start looking at 'one more year' scenarios as 2016 draws closer to reality.

 

[sengsational]

He would need to make sure that the employer that he quits from at age 55 allows penalty free withdrawals for employees leaving service after age 55 because not all employers allow it.

I've heard that the rule is in the IRS tax code, but maybe all employers are not required to follow it. Worth checking if one were to make this play. Hehe, that would be an awkward conversation...Mega: Yes Mr. SoClose, we do have a 401k plan and it matches X%!! Mr SC: After I quit in a month, can I have penalty free access? Mega:

 

[Letj]

No, mine is all pretax like a 401(k), which I'd could roll it over into an IRA.

The company has been putting monies into the account for several years. I just can't access it until termination, death, disability or retirement age of 65. I would be using the termination clause to roll over into a personal IRA.

How does that work? My understanding is that the maximum amount a company can contribute in deferred profit sharing for an employee in any given year is 15% of salary, no?

 

[walkinwood]

Every scenario I run in Firecalc says 100% success. I'm confused though when I consider a SWR. Due to retiring so early I read it should only be 3.5%. But to cover our annual ER expenses of $100, we would need $2.8 mil. I put in $120 a year in FIRE and it still says no problem, but a SWR would need $3.4mil?

With very long retirement timeframes, Firecalc has very few time periods to work with, so results get a bit screwy. There are threads that address this someplace in these forums. Try a 30 year timeframe & increase from there & consider using the worst case that Firecalc comes up with.

 

[SoClose]

How does that work? My understanding is that the maximum amount a company can contribute in deferred profit sharing for an employee in any given year is 15% of salary, no?

Matching contributions from the employer are limited to 25% of your salary. Matched funds are always contributed to the tax-deferred portion of your 401(k) plan. The total of your elective salary deferral plus employer matching contributions is limited to $52,000 for the year 2014, to $51,000 for the year 2013, and to $50,000 for the year 2012.

He would need to make sure that the employer that he quits from at age 55 allows penalty free withdrawals for employees leaving service after age 55 because not all employers allow it.

Correct, Hubby's mega only allows for 55 withdrawals if you retire from them in or after reaching 55. If he leaves now at 47, we can't get monies distributed by mega before 59 1/2. (unless rolled into IRA and 72t)

 

[SoClose]

Hehe, that would be an awkward conversation...Mega: Yes Mr. SoClose, we do have a 401k plan and it matches X%!! Mr SC: After I quit in a month, can I have penalty free access? Mega:

More like, Hiya Mega, does your 401(k) allow for over 55 withdrawals? Yes, OK I'm 55 and haven't worked for 8 years. I want to work for you for 3 weeks, just long enough to transfer my IRA and other company 401(k) monies into your 401(k) then I'm retiring.

But then of course I'm stuck keeping my funds invested in their choices for 4.5 years, which are VERY, VERY rarely low cost Vanguard EFT funds.

 

[seraphim]

Using the general information you provided ( and there may be more detailed information you used that I don't have) FireCalc gave me a successful return of 99% for 30 years and 96% for 35 years. This assumes no expensive emergencies or long term health care problems that might erode principle. If one of you has a life expectancy of 40 years beyond retirement, that percentage will drop significantly more.

That 4% guideline is just - a guideline, dependent on factors different for each person. A lot of analysts suggesting now it should be the 3% guideline! giving current economic expectations lol.

IMO, you're at the balance point. Barring unforeseen circumstances odd are you probably won't outlive your money, unless someone in the family is long lived, or there are genetics which predispose health problems of an extended nature. Any major expenses you're planning on? College for children? Planning on leaving an inheritance?

Options? What can you do to reduce spending? I would personally be more comfortable with annual expenditures of $80000 with those assets. I am more conservative on my comfort level. But that $20k a year - if left invested - could help cover some unforeseen circumstances. Seniors are expected to pay something along the lines of $280k in health expenses - on average (don't quote the exact figure).

Just my thoughts. The longer your retirement lasts, the more padding necessary to cover any problems early in retirement, such as the economy going into recession a year or so after you retire.


Good luck.

 

[SoClose]

Thank you for the input. I've padded our expenses quite a bit so we "could" live
on less. But yes the big healthcare cost unknown! as my name says so close.

I've since read about using only 3% due to our young age. It is a tough decision as I've not counted receiving any SS or inheritance which should be at least 500k but really can't count on it. I'm a saver but don't want to scrimp so much now that I end up passing and leave a bunch of cash.

No kids and no one gets an inheritance except some charity yet to be found if there's anything left when we're both gone.

 

[SoClose]

Quote:
Originally Posted by Fermion
You can do a 72T to get money early or if you have five years expenses of other money in your taxable account you can pipeline your IRA money through a Roth IRA with conversions and then start taking that money out of the Roth after five years with no tax and no penalty.

From another Post - this is an excellent way I could avoid having to 72t. I'm very excited. Thanks Fermion!!!!

I could decide each year how much to convert and manage my tax bill, while living off my after tax or previously contributed Roth money. ))))))

 

[NW-Bound]

I could decide each year how much to convert and manage my tax bill, while living off my after tax or previously contributed Roth money.

Be careful there with Roth withdrawal. The law regarding this is a bit screwy, as explained in this article: Distributions After a Roth IRA Conversion - Fairmark.com.