Seeking Advice - for retiring at 52.5

[Retiremeyes]

Hi – I’m new to this group. Looking forward to joining the many of you already retired. I’ve run my numbers through the fire calculator, and it shows I’m in good shape, but if you disagree, please let me know why. My reason for posting here is to see if there are any tips you can provide for the next several years. I’m particularly interested in how to handle the next 7 years with a deferred income payout coming in. More later on that. I’ll provide what I think are all of the pertinent details, but feel free to ask if I’m leaving anything out. I’ve invested on my own over the years and don’t use a financial advisor at this time – nor ever have, but not dead set against it either.
I’m 52, married (wife 50) & both are in good health & planning to enter early retirement at the end of Q1-2024. No retiree medical benefits or extended insurance of any kind other than my option to pay Cobra to extend.
Total net worth including house ($1MM) is $7MM.
My spending for past 3 years has increased from about 9K/month up to 10K/month. I’m thinking after retiring I’ll want $14K/month (168K/yr) to allow for health insurance and some additional travel & that will need to increase by rate of inflation at least while healthy enough to travel etc.
401K: $2.3MM, Brokerage Acct $2.1MM (about $270K of unrealized gains that I’ll owe taxes on when positions are closed which I plan to do since most of the unrealized gains are in two positions that are 100%+ returns (wanting to be more diversified and get out of these two stock positions) Other savings: $800K (short term <1yr savings/treasuries/CD’s). Unqualified deferred income ($700K) that will pay out over next 7 years with first check starting in 2025, so starting at 100K/yr, but increasing to 125K by year 7 with 5% market returns. Lastly, $200K Roth IRAs combined total for DW and me.
DW doesn’t work and has no pension & will take the social sec of half of mine when she starts drawing.
I have a frozen pension that doesn’t enjoy any COLA which will pay 36K/yr starting when I’m 65. I have $2.3MM in my 401K mostly regular 401K with small portion (5%) in Roth 401K. I have separate Roth accounts that total $175K. House is paid for and no debt of any kind. I will likely downsize houses in 3-4 years which should net about $400K. SS shows to be $96K combined (me +1/2me for wife). That’s using 1.5% COLA and starting it when I am 70.
Questions: 1) Can I or should I try to get my income down to get health subsidies? I’m thinking it just wouldn’t make sense, but I’m open to suggestions & if yes – what methods would you recommend deferring income out a few years while drawing down savings?
2) Should I be trying to reduce taxable income by opening HSA and funding that along with IRA contributions for the next 7 years with that deferred income still streaming in?
3) Where should I prioritize pulling money for expenses to supplement the deferred income over the next 7 years?
4) What %stock would you recommend I should maintain going forward. I’ve always been 90+% stocks guy, but have recently positioned to 75% fixed income – all short term 1-yr or so with about 5.3% current returns (mix of CD’s and treasuries – this 75% allocation is now same for 401K & for Brokerage/savings combined. I’m feeling like 25% is too low for stock positions, but also concerned markets may not return the historical 7-10% historical due to the national debt situation escalating, and I'm pretty sure I could make it with 5% returns, so why risk it?
5) For the fixed portion that I do maintain, what is the best way to get returns better than what treasuries/CD’s offer. I’m thinking corporate bonds but have never purchased one and could use advice as to what to look for there. I usually read bad things about any annuities, but am I missing something here? Should I consider any portion for annuities of any kind?

 

[rodi]

Hi and welcome to the forum.

I read your post and rearranged it a bit so that I could think about it in a way that made sense for me.

First - I took out your home equity and your deferred income and added up the investable assets under your control. Then I looked at income streams, and when they come online (and go away).

Investable income: $5.4M

Home $1M

Income streams:
SS at age 70 (18 years from now): $96k
Deferred income: 100-125K (2025 through 2031)

Desired income: $168k/year.

You need to fund $168k for 2024.
You need to fund between $43k and $68k between 2025 through 2031.
In 2031 you need to fund $168k/year till SS kicks in (10 years)
Then in 2041 you need to fund $72k because SS will kick in.

But the step I should have started with is a conservative 3.5% withdrawal rate * your investable $5.4M... you can withdraw $189k/year. More than your $168k.

Now for some of your specific questions:

- Questions 1 & 2: Managing income for ACA. Any money you pull from your brokerage is already taxed... although obviously you have to pay cap gains and dividends on these holdings. If you are cashing out some big positions, you'll probably not qualify for ACA tax credits since you'll have significant cap gains. Doing an high deductible health plan with HSA only gets you around $4k/year/person of taxable income reduction... So, you're right... It doesn't really make sense to try and manage income for subsidies.
3) You'll have to do the analysis of your own tax situation. You might want to pull from brokerage for your additional expenses... and consider Roth conversions from your 401k up to the top of your taxable bracket.
4) Asset allocation is a personal thing. Some people want all fixed so they can sleep at night. Others want all stock so they can sleep at night. Personally, I split the bird and do 60% equities, and 40% fixed. It dampens the swings in the market and seems to be my personal "sleep at night" ratio.
5) There are several lengthy threads on the forum about buying bonds. I'll defer to them. Personally I've got some I-bonds, and a bunch of CDs. CDs are paying similar to government bonds these days.

 

[LateToFIRE]

Well, I found that kinda hard to follow and I have a short attention span (good thing rodi rearranged it for us). I'll just say that my NW profile is very similar to yours and I'm targeting ~$250K annual spend (+/- $50K depending on hobbies, travel, etc.). I've run a dozen calculators plus my own home grown and its all coming up green, so I don't think you have anything to worry about.

My big caveat however is that I've got almost a decade on you, so somewhat less runway to worry about. My mantra is that you can push the envelope on SWR so long as there is plenty of flexibility in your budget to cut back if you encounter early adverse market conditions (i.e. SORR risk). Family longevity and health issues for DW and I suggest we should live it up now, worry later. But, if you've got a lot of centenarians in your family history, of course, take my views with a grain of salt.

 

[Retiremeyes]

Thanks for the feedback. I now realize I didn't structure it very well. I wrote it and then started adding in info. that I've seen others ask for before, realizing some of this is irrelevant, but figured to err on the side of too much info. rather than too little, so I botched it a bit. I do like Rodi's structure much better. Thanks Rodi!

 

[pacergal]

Welcome to the forum.
You have done well, with a net worth of 7 million. I don't think you have any worries. Congratulations.

Look forward to hearing more from you. What are your plans for retirement life?

 

[Fermion]

You have done VERY well.

They always said that those who had a pension would give up some earnings for the security of said pension, but you have both a pension AND $7M.

I'd say go for it.

 

[obsessed]

A couple of random thoughts/notes:

1) I would be careful using future dollars for your social security amounts. Most models start with current values. For instance, Firecalc uses current values and applies inflation based on the input into the model.
2) You might not be able to get ACA subsidies based on your deferred comp income and any interest, dividends and capital gain distributions off of your taxable portfolio. Particularly if you are heavy in fixed income.
3) Did you account for income taxes in your spending figures?
4) I don't think you can you deferred comp income to qualify for IRA contributions. I couldn't.
5) You have a long runway in which to consider Roth conversions, likely after your deferred comp ends. Whether it makes sense for you, I don't know considering your 401K/IRA balance is less than half of your investable assets.

 

[HI Bill]

"2) Should I be trying to reduce taxable income by opening HSA and funding that along with IRA contributions for the next 7 years with that deferred income still streaming in?
3) Where should I prioritize pulling money for expenses to supplement the deferred income over the next 7 years?"

I'd consider using IRS Rule 72(t) to take Substantially Equal Periodic Payments (SEPP) from your tax-deferred accounts, along with making IRA contributions, HSA contributions, and ROTH conversions.

You're underspending based on your asset level now, and when the pension and SS kicks in, along with SS, you'll have be bumped into (or continue) a high tax bracket.

 

[FREE866]

Welcome to the forum , but yeah you gotta tighten that whole post up a bit


Only thing that jumped out at me is you have 7 million dollars, have an expense need of $170,000, and have no issue having 90% stock.



Keep doing what you're doing. You're set for life.

 

[Surewhitey]

No ACA for you unfortunately... At least you have a deferred comp in a no income tax state. That's a nice bonus. Didn't you already pay FICA & Ss on this? If so, only federal to worry about.

Since you are locked into taking this first, I'd probably draw from the taxable account for the difference & maybe backdoor some Roth to the top of the 22% bracket.

 

[InsertCleverHandle]

Not related to your post (with the information you provided you should be good to go) but if you have not already done so I would consult an estate attorney on how to manage Washington's relatively low estate tax. I live very close to you...

 

[Retiremeyes]

Welcome to the forum.
You have done well, with a net worth of 7 million. I don't think you have any worries. Congratulations.

Look forward to hearing more from you. What are your plans for retirement life?

Thanks,
My first main goal is to get into better shape. Never could make that a priority while working. Not suggesting I couldn't, just didn't. My wife is in great shape and exercises daily. I've been on a minimum 3-mile walking routine once or twice a week and no weights, so priority #1 get into better physical shape. Both my wife and I luckily still have both parents alive, but aging and neither live close by, so planning to see them a lot more. Taking a cruise to Alaska next summer. More pickleball! & the rest is yet to be decided.

 

[Retiremeyes]

A couple of random thoughts/notes:

1) I would be careful using future dollars for your social security amounts. Most models start with current values. For instance, Firecalc uses current values and applies inflation based on the input into the model.
2) You might not be able to get ACA subsidies based on your deferred comp income and any interest, dividends and capital gain distributions off of your taxable portfolio. Particularly if you are heavy in fixed income.
3) Did you account for income taxes in your spending figures?
4) I don't think you can you deferred comp income to qualify for IRA contributions. I couldn't.
5) You have a long runway in which to consider Roth conversions, likely after your deferred comp ends. Whether it makes sense for you, I don't know considering your 401K/IRA balance is less than half of your investable assets.

Thanks,
1) My personal excel model didn't use any COLA for SS at first, but since I increase my withdrawals at the rate of inflation or at least at the factor I plugged in of 2.75%, I figured I would plug in a more moderate rate for SS COLA of just 1.5%. I thought I should wait until 70 to take it, but when doing the math figured I wanted the most accurate reasonable amount that it would actually be to help make that timing decision.
2) I'm of the same thinking that you are here. Would have to under $90K or so for it to start supplementing and currently that's not possible, but in time I figure I could go less fixed and perhaps structure some of the fixed to pay out at later dates rather than annually, but again was just looking for thoughts from others like yourself to help make sure I wasn't missing something here.
3) I did in my own excel model. Before doing so, I figured I wouldn't draw out any 401K before RMD's kicked in, but when the RMD's start, it immediately bumps me to a higher tax bracket, so I then adjusted and started pulling out around 45K per year at 59-60, while my fed bracket is in the 17% range. That is about when the deferred ends as well.
4) I wasn't sure about that and sounds like I incorrectly assumed I could as it would come in, I thought, as earned income. Thanks for the heads up, I'll research that a bit more. I did already know I couldn't put any of it into a 401K, which I would have liked to have done.
5) Yes agree, time to think about this one for a few years I think. My tax bracket is going to be average 19% starting in 2025 for 7 years then for 5-yr window, will drop to 15% if I don't take any 401K money and 17% overall if I take that 45K/yr. that window will last for about 5 years. I'm now questioning if I factored in the standard deduction when generating overall tax rates. I'll need to review that some more. The tax tables I used I don't think already factored in any standard deduction, so I could be overestimating my tax brackets a bit.

Thanks again for your comments and you spurred some more thoughts for me to research.

 

[Retiremeyes]

Welcome to the forum , but yeah you gotta tighten that whole post up a bit


Only thing that jumped out at me is you have 7 million dollars, have an expense need of $170,000, and have no issue having 90% stock.



Keep doing what you're doing. You're set for life.

Thanks FREE866, I do have an issue being 90% stock now, so didn't mean to imply otherwise. I'd initially planned on retiring around 55 & historically I've been more risk tolerant with a good steady flow of income from my job. As I researched the ability to retire a bit sooner and modeled it out, I think I overreacted to the upcoming stop of job income by going to only 25% stocks. I think I may move back towards 40-50% depending on what I can get in the fixed markets. I'm not disappointed with 5+% returns as they work in my model well, but I also know 5% returns are relatively short term right now & inflation can do a lot to destroy what would have looked like a good plan, so willing to stay in stocks for some protection that may provide.

Thanks

 

[Retiremeyes]

No ACA for you unfortunately... At least you have a deferred comp in a no income tax state. That's a nice bonus. Didn't you already pay FICA & Ss on this? If so, only federal to worry about.

Since you are locked into taking this first, I'd probably draw from the taxable account for the difference & maybe backdoor some Roth to the top of the 22% bracket.

Thanks Surewhitey,
I'm now sold on the fact that I'll be paying for my own insurance without any assistance. Correct that the FICA was paid and while no SS was paid on it, I won't owe any on it. Reason it wasn't paid on it was that the deferred amount was always above the SS income caps, so yes just federal to worry about. My model shows I'll be paying around 19% for the starting in 2025 for about 7 years until the deferred stops paying, then it drops a bit.

So, currently I don't have any pre-taxed IRA's to back door over to Roth. I've done the back door for past few years, so familiar with that, but I've simply contributed and converted all in the same year to what my limits were. So with this suggestion, are you suggesting rolling some of the 401K into an IRA and then converting it up to the top of that 22% bracket? Or are you suggesting putting more into an IRA and continuing to back door Roth it? I'd previously thought I'd be able to do that with my deferred income stream, but another forum member just informed me that he wasn't able to do so.

Thanks

 

[Retiremeyes]

Not related to your post (with the information you provided you should be good to go) but if you have not already done so I would consult an estate attorney on how to manage Washington's relatively low estate tax. I live very close to you...

Thank you for the advice. I have not done so yet. I'd just recently was surprised to learn of how low that limit was for Washington and the state is happy to take a pretty large cut when you go. I plan to move out of state to get closer to family, but haven't decided on timing for that just yet. I like the absence of a sate income tax, so I'll be here at least until 2025 due to income still being received in 2024.

Thanks again for your sound advice.

 

[Retiremeyes]

"2) Should I be trying to reduce taxable income by opening HSA and funding that along with IRA contributions for the next 7 years with that deferred income still streaming in?
3) Where should I prioritize pulling money for expenses to supplement the deferred income over the next 7 years?"

I'd consider using IRS Rule 72(t) to take Substantially Equal Periodic Payments (SEPP) from your tax-deferred accounts, along with making IRA contributions, HSA contributions, and ROTH conversions.

You're underspending based on your asset level now, and when the pension and SS kicks in, along with SS, you'll have be bumped into (or continue) a high tax bracket.

Admittedly, this is the first I've heard of IRS Rule 72, so will have to look into that. I assume this will be an option only when I'm 59.5, but will research this a bit. Thanks

 

[HI Bill]

Admittedly, this is the first I've heard of IRS Rule 72, so will have to look into that. I assume this will be an option only when I'm 59.5, but will research this a bit. Thanks

Through taking SEPP payments, you can access tax-deferred accounts early without penalty. But the rules are rigid, and you have to follow them precisely to avoid draconian penalties. Still, it might be worth it in your case. Check out https://72tnet.com/ which has some great info on the topic.

 

[ERhoosier]

Retiring at 52 1/2 leaves a HUGE cone of uncertainty. I would build in a big fudge factor in your projections. Financially.....and personally.



I failed retiring in my 50's though quite secure financially. Thought I had it all figured out but within months was a bit bored. Got sucked into consulting then back to FT w#rk for a few years. Now fully retired in my 60's and hope to make it stick this time


Good luck whenever you decide to FIRE!

 

[pb4uski]

...I'm now sold on the fact that I'll be paying for my own insurance without any assistance....

Think of it as the cost of freedom from work.

 

[pb4uski]

Admittedly, this is the first I've heard of IRS Rule 72, so will have to look into that. I assume this will be an option only when I'm 59.5, but will research this a bit. Thanks

No, it is an option now. It is a way for people who are under 59-1/2 to get early withdrawal penalty-free access to their tax-deferred savings.

 

[Retiremeyes]

Through taking SEPP payments, you can access tax-deferred accounts early without penalty. But the rules are rigid, and you have to follow them precisely to avoid draconian penalties. Still, it might be worth it in your case. Check out https://72tnet.com/ which has some great info on the topic.

Thank you for the advice and link.

 

[Fermion]

It isn't a all or nothing thing with the 72t.

You could put $800,000 in a IRA from your 401K and take $50k a year from it via 72t. If you decide that is not enough, you can put $400,000 in another IRA, set up a 72t and take $25k from that one also.

 

[Retiremeyes]

Retiring at 52 1/2 leaves a HUGE cone of uncertainty. I would build in a big fudge factor in your projections. Financially.....and personally.



I failed retiring in my 50's though quite secure financially. Thought I had it all figured out but within months was a bit bored. Got sucked into consulting then back to FT w#rk for a few years. Now fully retired in my 60's and hope to make it stick this time


Good luck whenever you decide to FIRE!

Thanks & I've tried to be conservative with my financial estimates going forward on both the return end using a combined fixed and stock return of about 4.75% and also on my spending side. We've never spent more than 10K per month before now (not counting house / car purchases), so I know I could get by in that range if need be (I also increase take-outs by 2.75% annually for inflation. I have it modeled as well if i were only to spend 10K/month but still increasing for inflation, I'd end up at 90 with $11MM, but inflation adjusted it's only worth about $3.8MM. I'll admit, it's a bit disheartening to realize at least model-wise with my plugged 4.75% returns that my real net worth drops almost in half from now to 90 even if I keep my spending in the 10K/month inflation adjusted rates for the remainder of life & only 2+MM inflation adjusted if I spend the higher 14K rates through 90. Math makes sense, just never really thought about how impactful the inflation piece was 30+ years out until I modeled it out.

As to your last comment, that is really my biggest fear, that I won't adjust well at this age. I'm still committed to giving it a try at least for a couple of years. I'm not dead set against going back to work again, but if I did, I'd be thinking of something part time or even seasonal. I've got my fingers crossed that this fear won't be an issue. My wife has been happy exiting her working career a few years ago and she does some volunteer work now. I may venture down that path as well especially if boredom sinks in.

Thanks for you advice.

 

[Retiremeyes]

It isn't a all or nothing thing with the 72t.

You could put $800,000 in a IRA from your 401K and take $50k a year from it via 72t. If you decide that is not enough, you can put $400,000 in another IRA, set up a 72t and take $25k from that one also.

Thanks, good to know. I haven't had a chance to research any of this 72t stuff yet, but good knowing it doesn't have to be an all or none type deal.