49 year old, needs clarity on ER!

[cfran]

Just a huge shout out for what is by far my favorite website, the collective wisdom here is amazing and I'm grateful for having access to all of it!

I'm a 49 year old Husband/Father, DW(stay home mom) with two kids - 17/14. I'd really like to take myself out of the rat race sooner than later and I can't tell how quickly I can get there. My head is spinning with all the figures but do know I'd like to generate $170k/year (inclusive of taxes). So conservatively speaking I'd like to have $4.85m (3.5% = $170k). So here is my situation . . .

Taxable/Brokerage: $2.02m
401k / Roth / ESOP: $1.20m
Trust: $400k payable in 2020 and $400k payable in 2022 (due to business sale). This is basically $725k in cash now that is earning about 2% / year.

Total investable assets: $4m
No debt (home and secondary residence paid for).
Saving about $200k / year - mostly in taxable bucket
529's fully funded.

So I'm thinking I might be able to get there in 2019, but perhaps 2020 is the safer bet. Anyone have any initial thoughts on any of the above? On target?

Unrelated: how does one best figure out their retirement tax situation, especially if I'm to live of my brokerage account until I can touch the tax deferred dollars?

 

[braumeister]

Have you worked through these:
Some Important Questions to Answer Before Asking - Can I Retire


Have you run FIRECalc?

 

[pj.mask]

Taxes for brokerage would be LTCG most likely and 15% on your gain so maybe 10% tax?

You’re basing this on no market crash in the next 2 years - good luck. Look into after tax 401k or Roth conversion options

 

[cfran]

Thanks. For what it's worth I'm a low cost index investor with about 55% of my portfolio in equities. If the market crashes I suspect I work longer, but in the end my AA is pretty conservative - and I am about 20% into cash.

Any other thoughts?

 

[hilltide]

The only thought I have is Nice Work!! You are ready to go. Curious, What about health insurance?

 

[DawgMan]

It sounds like you are definitely tracking. Only thing I would say is you are hitting the expensive years for the kids... cars, insurance, college. I have 4 kids and did all the pre planning I could (I.e. 529), but still experienced larger “other” kid expenses than originally planned. I’m 53 and and have a Jr and Sr left in college and have made the decision to launch when last one graduates in 2yrs for that reason. To me, that just feels like a safer time to launch when most of the heavy lifting is done. My targeted RE income is almost double yours so that also keeps me a little motivated. Oh, and don’t forget the weddings... that can hit your wallet!

None the less, you are tracking well.

 

[pb4uski]

....Unrelated: how does one best figure out their retirement tax situation, especially if I'm to live of my brokerage account until I can touch the tax deferred dollars?

Use either TaxCaster or preferably TurboTax to do a faux tax return as if you were retired.... either now or at age 51 or 52... eliminate earnings from work and make any other appropriate adjustments.

If your experience is anything like many of us you'll find your taxes are very low if you are living off taxable savings because your only income are qualified dividends and long-term capital gains, both of which are preferenced income (0% if your total taxable income (after deductions and exemptions) is $75,900 or under and generally 15% if your total taxable income is above that).

Remember... a lot your taxable account withdrawals will be "principal" and not income. It would not be totally surprising from what you wrote that your tax bill in early retirment might be a gooseegg depending on how your taxable funds are invested.

 

[pb4uski]

Work through FIRECalc... including SS... and I think you'll be in good shape to retire soon. Also, take a hard look at your expenses and if some will eventually diminish... like taxes, kids, college.

 

[Sojourner]

My head is spinning with all the figures but do know I'd like to generate $170k/year (inclusive of taxes). So conservatively speaking I'd like to have $4.85m (3.5% = $170k).

Also, take a hard look at your expenses and if some will eventually diminish... like taxes, kids, college.

+1

Once the kids are out of college, would you still expect to need $170k/year pre-tax to fund your ER? If so, I'd be curious to see some details of your budget. By way of example, I'm also 49 and FIRE'd, have a paid off house, no debts, live in a "medium" cost-of-living area, but I'm single with no kids or other dependents. My ER budget is $55-60k/year, and I live a very comfortable lifestyle. So if you actually do need (or want) $170k, maybe you have unusually high anticipated healthcare expenses, and/or plan to do lots of expensive travel, and/or want to make large charitable donations, etc.? Regardless, I would reiterate and reinforce what pb4 said above... take a really hard look at your expenses and see if maybe that $170k has some fat that can be trimmed.

 

[slv1]

Good work.

So I'm in a similar situation. One thing I would ask is are you going to spend 170K pre tax for the rest of your life?

Lets say you retire at 50 and live to be 100. Most studies show that spending goes down after 75. Lets say your are in perfect shape and stay that way. Better shape than Jack lelane (spelling sorry). He live to about 89. Lets say your genes are such that you live to longer even though you smoke and drink everyday (ex: George Burns the cigar smoker). No matter which one of those people you are, either you will dies sooner or you will stop spending as much as you get further from 75.

So lets say you start at 170K for the first 25 years. Then 150, then 130. This is all assuming zero SS.

 

[retired1]

For 49 you seem to have done really well. Congratulations !! I'll let other experts provide you more concrete answers since I'm in the same boat as you are (I'm 49). My monthly expenses are minimal and so are my account balances. I'd love to read others' answers. Yes this site is great place to exchange ideas.

 

[cfran]

So I'm in a similar situation. One thing I would ask is are you going to spend 170K pre tax for the rest of your life?

This is a good question, probably not but I need more room because of the kids, given their ages and all. Truth be told it's the amount we live on now and have done so for 3 years in a row. But we could trim at least 25% from the figure and be fine. But on the flip side I need to budget at least $20k for health care, unless others think that's too aggressive for a family.

Secondarily, from an expense standpoint I'd like to buy another farm and sell the one I have. So net/net it's probably about a $500k one time expenditure that I will face, that could also change things.

Someone else brought up some thought regarding taxes, hugely helpful. In totality I've got about $400k in LTG in a $2.0m brokerage account. Plenty of areas for me to harvest dollars with minimal tax implications.

Thank you all very much and keep the thoughts coming, very helpful.

 

[pb4uski]

If you have no other sources of income and are living on brokerage money and it is invested mostly in equities, you could probably take over $100k of qualified dividends/LTCG each year (depending on how much your itemized deductions are) and pay $0 in federal tax. Keep state taxes in mind though if they apply.... the year that I retired was the first time ever that my state income tax bill exceeded my federal income tax bill.

 

[cfran]

Thanks - I'd say from 2020 to 2024 (or a bit longer) we'll live off the $800k in trust dollars that will be 100% in cash. That will give me time to let the clock continue to run on my brokerage account and hopefully add value over that 4-5 year period. Not sure if that's a better strategy than immediately harvesting dollars from the brokerage account?? But I will start taking dollars from the brokerage account once the trust is depleted.


I'd just like to know when I can pull the plug and be reasonably confident that I can pull $170k / year out . . .

 

[pb4uski]

During that timeframe what you might be able to do some "gains trading".

As an example, let's say that qualified dividend and LTCG are still 0% as long as your total income is in the 15% tax bracket. That is ~$76k in 2017 + ~$8k for exemptions plus deductions. Let's say your itemized deductions are $20k. That would mean you could have as much as $104k of income and still be in the 15% tax bracket.

Let's also say that your qualified dividends are $40k. Then you could liquidate equities and realize up to $64k in LTCG at $0 in federal taxes. Assuming that your gains are 20% on average, that would mean that you could sell as much as $320k of securities and recognize $64k in gains and not pay tax. You can also reinvest the $320k in the same securities that day if you wish to... so you pay $0 to reset your basis from $256k to $320k so when you sell those securities later on you have a lower taxable gain.

.... I'd just like to know when I can pull the plug and be reasonably confident that I can pull $170k / year out . . .

What does FIRECalc say?

 

[cfran]

What does FIRECalc say?

It says I have 100% chance of success if I go in 2018 and 96.6% for right now. I'm not sure what I'm missing, social security, pension, trust, budget all accounted for . . .

 

[slv1]

This is a good question, probably not but I need more room because of the kids, given their ages and all. Truth be told it's the amount we live on now and have done so for 3 years in a row. But we could trim at least 25% from the figure and be fine. But on the flip side I need to budget at least $20k for health care, unless others think that's too aggressive for a family.

Secondarily, from an expense standpoint I'd like to buy another farm and sell the one I have. So net/net it's probably about a $500k one time expenditure that I will face, that could also change things.

Someone else brought up some thought regarding taxes, hugely helpful. In totality I've got about $400k in LTG in a $2.0m brokerage account. Plenty of areas for me to harvest dollars with minimal tax implications.

Thank you all very much and keep the thoughts coming, very helpful.

Well you changed the equations a little. (buying another farm). Any large purchase will change your status for retirement. So I would say find out what you want most. Early retirement or a new farm or both. If it's both then the early part won't be as early as previously planned. But you are still in great shape so no worries. You have a good problem.

As far as the kids go. Once they are grown up then your expenses should go down. So 170K will not be as needed to keep your lifestyle. If 170K is your current income before taxes (minus any profits from business) then your taxes should reduce after retirement.

Healthcare is the big void. But you have some time and in the next couple of years it should be worked out one way or another. By that I mean national care vs. something else or some hybrid system etc. (not trying to start a healthcare or political debate, just pointing out the basic options).

 

[HarveyS]

I plan on HC cost of $25k/yr. That's premium and max out of pocket. TG I have not hit that number yet...but that's what I plan for.
Also, what about kids weddings? I see that as a big nut in my future. Maybe they'll opt for something small, but I want to be prepared.

 

[cfran]

So 2.5 years later a quick update with new figures in (xxx):

Taxable/Brokerage: $2.02m ($2.25m)
401k / Roth / ESOP: $1.20m ($1.675m)
Trust: $400k ($435k) payable in 2020 and $400k ($435k) payable in 2022 (due to business sale). Business sale delayed payment.

Total investable assets: $4.0m ($4.8m)

Still would like to live off $14k per month including taxes and healthcare (budgeting 2k a month). Firecalc says 100%, what am I missing? Thanks!

 

[euro]

The only thought I have is Nice Work!! You are ready to go. Curious, What about health insurance?

Yes, that would be my question too. Health Insurance and how solid is the 170k number (I.e. do you have a couple of year's worth of good data to support that?).
Other than that, looks to me like you are good to go NOW.

Edit: OK, didn't realize your first set of numbers were 2 years ago.... well, I thought you were ready THEN, so I think you are EVEN MORE READY NOW!

 

[HI Bill]

... what am I missing?

Retirement?

 

[cfran]

Thanks to the last few posters, just a few more questions:

The trust dollars due to me are taxed at LTCG rates, so I’m showing gross figures not net. Would that change your view of my situation?

A little better than half of my ESOP dollars ($650k)will be paid out in 5 annual installments, $130k per year once I pull the plug.

So you all think I’m ready? I’m nervous.

 

[HI Bill]

A little better than half of my ESOP dollars ($650k)will be paid out in 5 annual installments, $130k per year once I pull the plug./QUOTE]I believe you can have the ESOP distributions transferred into an IRA if you don't want to use them right away...deferring taxes.

 

[cfran]

Actually I don’t think that’s an option, ie distributions pushed into an IRA. Appreciate the input however!

 

[HI Bill]

Actually I don’t think that’s an option, ie distributions pushed into an IRA. Appreciate the input however!

You should check. An ESOP is a qualified plan, if the company is run as a Subchapter S corporation. If not, then likely taxable.