Time to play Can I Retire?

[disneysteve]

Okay boys and girls, it's time to play everyone's favorite game, Can I Retire? The grand prize is (hopefully) a few decades of freedom for me.


Me: 56y, 6m
DW: 57y, 2m


Current income: 240K
Current (pre-COVID) spending: 84K


Portfolio:
tIRAs: 300K
Roths: 385K
401k: 160K
Taxable accounts: 840K
Total: 1.685M


Current asset allocation: 69% stock/22% bond/9% cash
We have zero debt.


Unfortunately, I will be receiving an inheritance this year. I am conservatively using 700K as the amount for planning purposes. That would bring us basically to 2.4M.


I was originally thinking I'd work FT until 60 but the more I run the numbers, the more I wonder if I could get out sooner. Right now, I have my eye on year-end 2022 when I'd be 58y, 4m.


If things stay on track, between now and then our portfolio could grow by an additional 400-500K taking us to 2.8-2.9M.


I've run FIRECalc using 100K as the spending amount to account for taxes. I have not factored in healthcare. If I stop working completely, we would need to pay for it. If I drop to part time, it would still be covered, just at a slightly higher premium than we currently pay. Dropping to PT would also provide enough income to cover all of our spending without having to touch savings at all. That could give the nest egg an extra year or two to grow until I stop for good.


Anyway, FIRECalc with 100K of spending starting with 2.8M for 32 years shows us at 99.2% success. Add in SS at FRA for each of us and we're at 100% easily.


What say you? I don't know what I don't know so hit me with questions or concerns or things I'm not thinking of. I'm new here, so be gentle.

 

[skyking1]

You had me at "easily"

 

[Ready]

I would be cautious to count on future returns before they happen, or inheritance money before it’s received. But in general you seem to have a good understanding of your savings and expenses and have thought everything through. Have you looked at the cost of private health insurance? Have your factored in unexpected expenses like a new car, new roof, home repairs, etc?

 

[Dtail]

Can you manage your income for large tax subsidies for ACA purposes, since you have a large taxable account?

 

[Out-to-Lunch]

Can I Retire?

No, I don't think so. At $84k expenses, and ~$1.7m assets, you are looking at a ~5% withdrawal rate, AND you are young. It could work out for you, but it is risky. What is your fallback plan.

You then go on to project changes in the next few years in your financial situation. *IF* those come to pass, then I may opine differently.

 

[Dash man]

How comfortable would you be if your portfolio shrunk by $400,000-500,000 instead of growing by that much? That growth projection is pretty optimistic considering the current high valuations of the market.

 

[mrfeh]

How comfortable would you be if your portfolio shrunk by $400,000-500,000 instead of growing by that much? That growth projection is pretty optimistic considering the current high valuations of the market.

+1

Also, health insurance expenses need to be accounted for. What I would do:

1. determine what your expenses would be if you retired today (including health insurance and taxes)
2. using your current portfolio value, run the numbers on firecalc (or your favorite tool)

See what the results are. If/when inheritance occurs, repeat the process.

 

[Golden sunsets]

How comfortable would you be if your portfolio shrunk by $400,000-500,000 instead of growing by that much? That growth projection is pretty optimistic considering the current high valuations of the market.

++1

 

[Surewhitey]

I could if you were me. My spending is closer to $50k/yr though. I'd manage my "income" to maximize the ACA subsidies and do Roth conversions to stay around $25-30k income for the 2 of us. My calculations show insurance would then be minimal.

I would at least wait for the "guaranteed" inheritance if I were you. This gives you a much better chance of success.

 

[Aerides]

Not yet, but at YE 2022 as you have planned it's probably...if:

The inheritance becomes an actual final thing
and
You have a HI plan besides going PT. Go to Healthsherpa and figure out what HI would really cost, in case the PT thing didn't pan out. PT coverage became very iffy once the ACA was passed, and a lot of places require at least 30 hours for coverage.

 

[USGrant1962]

At a high level and assuming the inheritance is realized, you look good to retire at the end of 2022. I'd recommend a more detailed and accurate FIRECalc model, though. Not so much for the results, but to help you think through your plan. Go through each of the tabs and think about what it is asking you.

My observations:

• You shouldn't assume "our portfolio can grow...", but rather enter your current portfolio, retirement year, and planned savings in FIRECalc. Then it will include cases where there is a bear market starting yesterday.
• Health insurance is tricky, but assuming you mostly will live off of taxable accounts you should be able to stay under the ACA cliff, which is good. But...
• Is your expected inheritance in taxable accounts or tIRA/401(k)? If the latter you will be required to empty the accounts in 10 years, as taxable income. But as I understand it that doesn't have to be in equal amounts or anything so you can defer that until you are on Medicare to retain ACA subsidies. That could cause IRMAA surcharges, but that's peanuts compared to potential ACA subsidies. If it is mostly step-up basis stuff you are golden.
• Decide your comfort level on the SS trust fund - many folks 10 years or more from SS assume a 20% or 25% haircut to their benefit.
• Common advice is to defer Roth withdrawals, but earlier use of that money may also be a strategy to secure ACA subsidies.
• How much will you save each of the next two years? I'm guessing $120K/year?
• Be careful estimating your taxes - especially state taxes. One year after retirement I liquidated a large long-term stock holding and was surprised to find my state income taxes exceeded my Federal because states do not generally provide favorable treatment for capital gains.
• And remember if you are living off withdrawals, your withdrawals for spending including health insurance and taxes may be taxable!

I think this FIRECalc case models your situation. I entered the national average SS for you and your spouse, $120K spending to include health insurance and tax, and guessed you were saving $120K/year. It is 100% for 2023 (FIRECalc assumes you are retired at the start of the year you enter on the Not Retired tab).

https://www.firecalc.com/index.php?...oor=0&callprocess=Submit&FIRECalcVersion=3.0&

Good luck!

 

[tn3sport]

I bet your situation is very common. It certainly is similar to mine... (Assets, retirement timing, expenses, AA, etc)
I'm optimistic on your plan.



I'd bet your a little scared to leave jobs paying a quarter million annually... to start spending down your savings..


Barring a huge market correction or a return to Carter era inflation, I think your plan is golden.


Plus, if you show very little income by living off your taxable investments until you bridge to Medicare, you can get HI supplements to offset your cost.


Do it!

 

[Gumby]

If it were me, I would model out actual spending, taxable income and associated taxes for the first few years of anticipated retirement. A lot will depend on where your money is located (after tax, tIRA, Roth), how it is invested, and your strategy for drawing down to support your spending.

The conventional wisdom is that you'll draw from after tax or Roth accounts to support your spending while capturing the ACA subsidy. If you lose that subsidy, it is likely to cost you an additional $25K + per year for health insurance between retirement and Medicare.

However, if I presume your inheritance is post-tax, then that puts you at around $1.5 million in after tax accounts. Unless it is invested solely in non-dividend paying stocks and you resolve never to sell, then you will have some taxable income. This year, the ACA subsidy cliff for a family of two is $68,960. That's only a 4.6% realized return on a $1.5 million portfolio, which sort of ties your hands if you decide a stock is overvalued and you should sell it. And if you are inheriting an IRA of $700k, then you are required to drain it in 10 years, which is $70k+ per year if you do it evenly. (although as USGrant points out, you can backload the withdrawals - but then you'll be in a much higher tax bracket when you do withdraw, so you'll need to account for that.)

If your real, out the door spending number is accurate, and if you have a good handle on how and where to draw money to minimize taxes and keep the ACA subsidy, then you are probably good to go. But I'd build my own model just to be sure.

 

[Cobra9777]

No, I don't think so. At $84k expenses, and ~$1.7m assets, you are looking at a ~5% withdrawal rate, AND you are young. It could work out for you, but it is risky...

A pre-SS WR of 5% is not unusual at all. Even without the inheritance or future growth, the OP seems to be in good shape.

I went to FIRECalc, put in expenses of $84K, portfolio of $1.685M, 32 years, and some modest SS figures starting in 10 years... success rate is 100%, with spending level of $91K at 95.8%.

Like others, my concern would be pre-medicare health insurance. There may be other spending increases as well such as travel. Also, whether the $84K includes an allowance (or sinking fund) for occasional large expenses like a new car, major home repair, etc. There may be offsetting decreases as well once no longer working. Also, a lot of early retirees are surprised at how low income taxes can be.

So my advice to OP would be to really study how expenses will change after retirement and even how they are likely to change THROUGHOUT retirement. At 100K for example, the success rate drops quite a bit. So if that's the real number, you might consider waiting until the inheritance is in your account. But if you can make it work at $84K, I think you're good to go today.

 

[disneysteve]

I want to respond to a bunch of questions asked and points raised but I'm working at the moment. I'll do that later today. I just wanted to pop in and say thanks to everyone who has taken the time to respond.

 

[TimSF]

Yes. I think you're good to go. Your situation closely mirrors mine when I FIRE'd in 2013.

 

[disneysteve]

I'm home now. Let me respond to a few things, answer some questions, and provide more details. I won't bother quoting everyone. I'll just go in the order they were posted.

I totally agree about not counting on future returns, though ultimately that's how we all do projections. I understand that the market could crash tomorrow or next week or next year and that could significantly impact all of this.

I haven't fully educated myself on the ACA subsidy issue. I need to do that. I also haven't priced out coverage as I wasn't quite sure how to do that. I'll check out Healthsherpa for that.

Switching to PT work will still get me coverage. We only need 20 hours for that. I was doing that a few years ago before I went full time. We have many 20-hr PT employees who have coverage.

The inheritance is in a mix of things, and it's actually well over 700K. I've just been using that number to be conservative.
As of last week, the inheritance will consist of the following: (edited post for clarity)
IRAs 547K
Home 425K
Cars 100K (2 antique show cars, one new car)
Stocks (not in retirement accounts) 135K
Cash accounts 16K
--------------------
Total assets $1,223,000
Total debts $49,700
Net $1,173,300

There will be burial costs, expenses from selling the house, some carrying costs until it is sold, and assorted other things (travel as I'm out of state). The final number should still exceed the 700K I've been working with.

As for the IRAs, there is an exception to the 10-year rule if the person inheriting the account is less than 10 years younger than the deceased. That applies here so I believe I'll actually be able to stretch those withdrawals over my life expectancy, not the 10-year period. I have to confirm that with my CPA.

We currently save about 105K/year.

Taxes are a big question mark. After tax season, I'll sit down with our CPA and run some numbers to see what we will likely face in that department. Of course, I'll also be working with him once the inheritance actually happens to make sure it's all handled the best way possible.

Keep the comments and questions coming. I greatly appreciate them all.

 

[mrfeh]

The inheritance is in a mix of things, and it's actually well over 700K. I've just been using that number to be conservative.
As of last week:
IRAs 547K
Home 425K
Cars 100K (2 antique show cars, one new car)
Stocks (not in retirement accounts) 135K
Cash accounts 16K
--------------------
Total assets $1,223,000
Total debts $49,700
Net $1,173,300

Unless you're planning on downsizing (moving to a less expensive home), the value of your house is not relevant here. Nor are the cars (unless you plan on selling and investing those funds).

First step: knowing your expenses and knowing your current portfolio value.

 

[disneysteve]

Unless you're planning on downsizing (moving to a less expensive home), the value of your house is not relevant here. Nor are the cars (unless you plan on selling and investing those funds).

First step: knowing your expenses and knowing your current portfolio value.

Sorry. That list is everything I'll be inheriting. That's not my house and cars. It's his.

 

[HI Bill]

Assuming your inheritance amount is correct, and assuming the market doesn't crash between now and 2022, then it looks like you'll be good to go, for about a $100K annual WR, event without projected gains. I agree with others, as to the gains, you can't count on them, you'll have to 'wait and see'. It does seem like you'll be close to the edge (without much buffer for emergencies, car replacements, added hobbies, etc.). Good luck!

 

[CRLLS]

Maybe it is just me. I look at the delta of income minus expenses, your savings so far, the recent market gains and your current age and see a major disconnect. Too little savings compared to reported data. Are you absolutely sure of your expenses over the long term? This last year's is an anomaly for many of us.

 

[disneysteve]

Assuming your inheritance amount is correct, and assuming the market doesn't crash between now and 2022, then it looks like you'll be good to go, for about a $100K annual WR, event without projected gains. I agree with others, as to the gains, you can't count on them, you'll have to 'wait and see'. It does seem like you'll be close to the edge (without much buffer for emergencies, car replacements, added hobbies, etc.). Good luck!

And if that's the case, I'll just keep working, at least part time. I currently work 36 hrs/wk. If I drop to 24 hrs/wk, I'd make 158K which would completely cover our spending with about 30K to spare. Then the nest egg could sit untouched for a few more years.


My original plan had been to work FT until 60. It has only been just recently that it occurred to me that I might be able to get out sooner.

 

[disneysteve]

Maybe it is just me. I look at the delta of income minus expenses, your savings so far, the recent market gains and your current age and see a major disconnect. Too little savings compared to reported data. Are you absolutely sure of your expenses over the long term? This last year's is an anomaly for many of us.

Are you saying what we have is low relative to my income? If so, I can explain that. I changed jobs in late 2017 and essentially doubled my income. Our current portfolio was largely built while I was making about 120K, not 250K. I've only been at that income since November 2017.


Our total spending for 2020, thanks to COVID, was about 67K. Pre-COVID in 2019, it was about 81K.

 

[livingalmostlarge]

You can pull the trigger and be fine. It makes more sense to pull the trigger and minimize taxes.

With the inheritance you can probably look at full retirement, using taxable for next 10 years to 70 and then doing roth conversions of your IRA, inherited IRA and 401k. This will allow you to control your taxes at 70. Also you only medical at the expensive premium until 65. So it's not like the $30k/year is till 70. It's only from 58 to 65. So let's assume a 7 year window of $30k + 81k (90K) spending. Looking at $120k spending I assumed includes taxes. 120k X 7 = $840k which you have, plus you are going to work another year so you are covered until 65 with taxable and paying taxes on conversions. You might even get the ACA break.

 

[Golden sunsets]

I'm confused about the Inherited IRA. If the decedent is not your spouse, the 10 year rule applies.