We've hit our number, problem is the budget doesn't fit in it

[Ronnieboy]

Hello everyone,

Been awhile since I posted but I wanted to get some comments/insight on the current situation.

Original plan: Drop down to PT work at 55YO where there is less stress and job demand yet still an excellent salary and most importantly benefits.
Throwing out fictional round numbers: $2m in savings to produce $100k/yr in spending money.
House: expected to be paid off or having the 'extra $$' to be able to pay it off if wanted.

Reality: Current age 53.5YO. Have passed our number by 10%, but 85% is in tax deferred. House not close to being paid off. Getting tired of the grind and would love to drop to PT now. Annual expenditure is 125-150% of want we want/need (<$100k/yr)

Thoughts....should I stop maxing out 401(k), the match is non existent (50% on the first $1k), it will cause the tax hit vs the deferment I am getting now.
Put the equivalent in regular savings/brokerage to make up the % imbalance between tax deferred and non?

Drop to PT and let the chips fall where they may? What I mean by this is that we have never budgeted and I know we aren't about to start but we have been good at fitting our spending into what we have available. I would be worried about continuing funding the max equivalent $$ of 401(k) if we did this though.

Or just try our best to max saving for the next year and a half till I get to 55yo assuming I live that long ha, ha

Thanks for any comments

 

[qwerty3656]

There is a concept where if you leave your job at 55 (the IRS rule of 55) that you can get access to your 401k money w/o a penalty. If you leave early, I don't think it works

 

[Surewhitey]

If I were in your situation, I'd learn to live within the PT + 15% not in tax deferred until 59.5 & then tap into the 401ks. You'll likely see it's not that difficult.

I went PT 2.5 years ago and even without DW income, we could live our lifestyle on mine.

 

[Ronnieboy]

There is a concept where if you leave your job at 55 (the IRS rule of 55) that you can get access to your 401k money w/o a penalty. If you leave early, I don't think it works

I don't think I would qualify for this since I wouldn't be leaving my job just going to part time, while it is still possible to do, the employers 401(k) has to offer it as one of their 'rules' and I had looked into mine and they don't

 

[Golden sunsets]

There seems to be a disconnect between having hit your number and your budget. "Your number" needs to support a 3.5% withdrawal rate to support your spending, after factoring in pensions and ss, when they come on line. Your spending doesn't seem to fit into this model, although if you run Firecalc you can determine this. So it appears that your number might be inadequate. How did you arrive at your number?

 

[disneysteve]

There seems to be a disconnect between having hit your number and your budget.

This.

How can you have hit your “number” if you don’t have enough to cover your spending? Isn’t that what the number means?

 

[pb4uski]

Put your original plan aside and run your current situation through FIRECalc and see if you can retire or go part-time now or in the near future.

Exclude your mortgage principal and interest payments from your spending and out them as a fixed off-chart spending on the Other Income/Spending tab and then enter a pension for the same amount starting the year your mortgage ends.

Also, visit the Not Retired tab if you plan to work fo a while.

 

[RunningBum]

OP is not looking to leave now, they are looking to go part-time, right?

Are you able to cover your expenses on your part time salary? If so, that seems good since your savings should continue to grow, for when you want to fully retire.

Dropping the 401(k) might make sense if PT pay would put you in a lower tax bracket. Impossible for us to say without really seeing the numbers. A 401k is a tax arbitrage play, you defer taxable income if you are in a higher tax bracket now than when you'll be in retirement. If that's not the case, don't defer.

Since 85% of your savings is in tax deferred, don't ignore the tax liability. I prefer to discount my tax deferred savings by the tax rate I expect to pay when I withdraw from it or convert to Roth. Or you need to put those taxes in your budget. Your call, but one way or another, account for the taxes. $1M in tax deferred does not give you as much spending power as $1M in a Roth or $1M in an after tax account.

 

[jollystomper]

There seems to be a disconnect between having hit your number and your budget.

This.

How can you have hit your “number” if you don’t have enough to cover your spending? Isn’t that what the number means?

I agree with these statements. Based on what the Op posted my view would be to tough it out for 18 months as per the original plan, the OP will have a better chance of hitting the "real" number that will cover the desired spending level. This might be a case of "you can't have it all" for now.

 

[NW-Bound]

If the number and the budget do not match, one of them has to change.

Perhaps the OP meant that he should have sufficient fund, but much of it is still locked up in 401k that he cannot yet touch.

 

[Alex The Great]

There is a concept where if you leave your job at 55 (the IRS rule of 55) that you can get access to your 401k money w/o a penalty. If you leave early, I don't think it works

It really depends on company you work for. My latest employer allow one time 401K distribution only which still follow federal 55 rule but either cover just one year or trigger a high tax bracket if there is a single distribution for all funds.

 

[Aerides]

Are you able to cover your expenses on your part time salary?

Annual expenditure is 125-150% of want we want/need (<$100k/yr)

I would say no, or that's one heckuva part time gig.

OP, as others have said, if your plan was based on a budget of $100k, but reality is you spend $150k, then your plan needs to change. You won't retire and suddenly drop spending, no matter how much you think you'll save on commuting and work clothing.

 

[RobbieB]

Yeah 50 grand is a pretty big gap. Better keep working.

 

[rodi]

RonnieBoy - congrats on hitting your *first* number... Unfortunately, it doesn't sound like the final number.

PT might be a glide path... especially if you can trim your budget a bit to live on the PT income. Your other savings will grow. Too bad your employer's 401k plan doesn't offer the rule of 55. Not all of them do, unfortunately.

When you hit your final number and switch to fully retired, even if most of your funds are in tax deferred, you can do a 72T if you roll your 401k to an IRA.

I understand not wanting to work full time. If you can make part time work through trimming spending do it.

 

[Markola]

Where is your money invested? Get that company to do a financial plan for you, which includes your goals, future Social Security, all your assets, everything. Often these plans are free. What could it hurt? Putting every dollar you spend into categories over the next three months will be necessary for the planning process. It will also identify places to trim or even whack. Good luck.

 

[JRon]

Sounds like working full time another 18 months is the way to go. Budgeting expenses for retirement is really a good thing to do. Do you have a complete record of where your spending has been the last few years so you can project your expenses for the next few years?

 

[ivinsfan]

What do you say to someone who says, we have never budgeted and aren't about to start budgeting? OP put yourself in the penalty box...


You hit your number, were you throwing darts?

 

[Sunset]

OP - I don't budget, but I do record every penny spent.
There is a simple phone app that is free called Spending Tracker (wish I got paid for telling folks about it).
Once you know EXACTLY what you spend, you have a much better knowledge of whether or not PT work will support your lifestyle that you WANT.

 

[RetiredHappy]

I understand the want/need vs. actual. If the numbers cannot support actual, then you don't have enough saved.

We retired in 2016 and have gone over budget by about $50K each year. Every year something comes up. For instance, my husband wanted a new car, in less than a year we hated that new car, bought another new car. We moved this year from our "forever" home to another forever home. It is a more expensive home and we have already spent another $120K in renovation. We were going on 2 international cruises a year which was never in our budget. Oh, let's get us brand new golf clubs, and my husband gets a new driver a year,. Little things add up. Fortunately we have saved enough that these surprises have not gone beyond the 2% WR. I am still keeping my eyes on the spending though. I have not shopped for new clothes in 8 months, which is a record.

 

[RobbieB]

You are over "budget" by 50 grand a year yet have a 2% WR?

Why do you even have a budget?

 

[LarryMelman]

Throwing out fictional round numbers: $2m in savings to produce $100k/yr in spending money.

Have passed our number by 10%, but 85% is in tax deferred. House not close to being paid off.

Annual expenditure is 125-150% of want we want/need (<$100k/yr)

Your "number"
a) was based on a 5% withdrawal rate, which no one here would recommend,
b) is supposed to generate $100K/yr "spending money" so you didn't consider taxes at all, making your withdrawal rate more like 7% or 8%,
c) you spend much more than you thought, requiring a withdrawal rate of perhaps 12%.

What kind of plan is that?

we have never budgeted and I know we aren't about to start but we have been good at fitting our spending into what we have available.

I don't expect that many people on this forum can relate to that attitude at all. You spend "what you have available" and have very little savings outside of tax-deferred. How do you sleep at night?

 

[Blue531]

The typical general target is to get to a minimum of 25x your annual expenses in terms of reaching basic financial independence. That is the amount for a 4 percent swr. $100K (annual expenses) times 25 equals $2.5 mil needed, at minimum. Most seem to add a cushion to that before retiring by getting at least 30x. But since you live on $150K and you don't see a need to budget, the amount you need is at least $3.75 mil. To be on a safer side, multiply $150K x 33, you would need $4.95 mil $2 mil is only enough to live on $80K.

Life is about choices. You get to choose. If you still want to live on $150K a year, keep working and investing until you get the amount you need. If you really wish to stop working altogether, make the necessary changes to do so. This would require budgeting, sizing down possibly, moving to a cheaper area maybe, learning to live on less, not having everything you want, etc. Depends on which choice you want more. When you decide that, then you will know what to do.

You may very well have to keep working up until 59 and a half on a full time basis even. Or perhaps work full time for two or three more years and then cut back to part time. If all I had was in tax deferred investments, I would begin asap chucking as much of my income as I could into taxable investments until I thought it was safe to go part time, assuming that is before 59 and a half. It helps to have a sizable taxable brokerage account and/or a significant amount of cash if you want to leave the workforce before 59 and a half.

 

[pjigar]

Hello everyone,
Throwing out fictional round numbers: $2m in savings to produce $100k/yr in spending money.

$100K spend from $2M is truly fictional. Try to run your numbers in Firecalc and get a better picture. Get a count of your accurate current and future expenses before you run Firecalc.

 

[RetiredHappy]

You are over "budget" by 50 grand a year yet have a 2% WR?

Why do you even have a budget?

Because I love sitting in front of my Excel spreadsheet each day. I have done that for 20 years or so.

 

[pacergal]

OP--as others have mentioned, you haven't hit your number if your budget does not fit in!
Either adjust your budget to fit what you have saved, or work longer and save more.