30 years in Corporate America is nearing an end

[Cobra9777]

Hi to all. What a great forum I seem to have stumbled upon! I just spent the last 5 or 6 hours reading and searching here, and I've already learned a ton. Much more "usable" content here than reading commercial websites. Need some advice...

After 30 exhausting years in the corporate world, my wife and I plan to retire near the end of this year or early next. We are currently 51 and 52. We are empty-nesters... last of the offspring will finish college soon. The plan is to spend our time doing all the things we never had time for before: traveling, hobbies, volunteer work, perhaps teaching part-time at the local community college, etc.

The financial status... We each have small defined-benefit pensions that will pay $47K/yr combined, if we retired now. In addition, we have $1.4M in financial assets: $0.8M in tax-deferred accounts (401K, IRA), and the remaining $0.6M in after-tax accounts. The portfolio right now is about 30% stock (mainly large-cap, high-dividend stuff) and 70% bonds and other fixed income. The 70% includes 15% REIT and high-yield corporates, which behave a lot like stocks. So, you could argue the allocation is ~45/55. In any case, this mix currently spins off 3.5-4.0% cash, and we were planning to continue this into retirement.

We'd like to generate $100K/yr pre-tax income to start. This is a sizable reduction from our current working income, but after much analysis, we believe it will comfortably cover our basic living expenses and also allow for some travel and hobby-related spending. However, that means we need the $0.8M tax-deferred to generate income immediately, even though we are a long way from age 59.5. We have no SS for at least a decade, and the $0.6M after-tax is needed for liquidity.

We have a large house that could sell for $450K (no mortgage). We'd like to stay in it if possible, but if we sold and downsized, we could free up at least another $200-250K to generate income, plus reduce our expenses by as much as $10-15K/yr (mainly Texas property taxes!).

A few areas we need advice on:

1. Generally speaking, does it appear that we have enough resources to pull this off?
2. What's the best way to avoid the 10% penalty tax? We're leaning toward a SPIA over self-managed 72t, but that would freeze-up a lot of liquidity pretty early on.
3. Any recommendations on the house? We'd love to stay if the math works, and we think it does, although Costa Rica looks pretty darn good.
4. We're both on the steepest part of the pension curve, so if we continued working 3-4 years, the $47K goes up considerably, which fundamentally changes all the math. Do you think it is advisable to forgo that kind of growth for a few extra years of retirement in our early 50s?
5. Regarding the portfolio mix, generally speaking, does this allocation sound too aggressive? Too conservative? Or about right?
6. Assuming we go the SPIA route with the tax-deferred stuff, what are your thoughts about doing this while interest rates are so low?
7. How complicated is it "really" to comply with 72t for 8-9 years?

Sorry for all the questions on an intro thread. Thanks in advance to anyone who has an opinion on any of them.

 

[Nodak]

Welcome aboard, my situation is so much different from yours I haven't a clue what to advise.

 

[REWahoo]

The standard two questions asked to first time "can we do it" posters are:

1. What about health insurance?
2. Have you run your numbers through FIRECalc?

At a quick glance, I don't think your long-term chances of pulling $53K from your $1.4M nest egg are favorable. You are looking at longer than 30 years and the odds are against you.

My advice would be to downsize the house, work 2-3 more years, cut your living expenses, maximize your savings and build your pension. Those actions should put you in excellent shape financially.

 

[WestLake]

Personally I am 54 1/2 (almost). I really planned to retire at 50, but I'm glad I didn't. Now I can really feel it's almost the time to do so emotionally, physically and financially. My goal is to retire one month short of 56. That will put me into 2014 with insurance regardless of pre-existing conditions (maybe). If you stay until 55 you may be able to withdraw from your 401K if you leave it with your employer (not convert to IRA in a rollover). You should check that.

 

[rescueme]

Welcome aboard, my situation is so much different from yours I haven't a clue what to advise.

Kudos to you for saying you don't have advice. Too many people (of course not on this forum ), give "advice" without total knowledge or who are in a completely different situation.

I'll just respond to #6 as regards to the SPIA.

IMHO, you must show a "need" of how an SPIA can be incorporated into any total retirement income plan. It should not be considered as a "singular answer" for retirement (especially at a much younger age, as you are) but might be a puzzle piece that might be added, if it is warranted considering all your other assets and possible current/future income sources.

As to purchasing (or not) an SPIA (and yes, I/DW have one) based just on interest rates? That's not the the only way to look at it. If you want more info (based upon my experience) feel free to PM me. Don't need to clutter this thread with detail that was covered elsewhere...

BTW, welcome to the forum...

 

[MichaelB]

The standard two questions asked to first time "can we do it" posters are:

1. What about health insurance?
2. Have you run your numbers through FIRECalc?

At a quick glance, I don't think your long-term chances of pulling $53K from your $1.4M nest egg are favorable. You are looking at longer than 30 years and the odds are against you.

My advice would be to downsize the house, work 2-3 more years, cut your living expenses, maximize your savings and build your pension. Those actions should put you in excellent shape financially.

+1

Social Security may make a difference. Running FIRECalc will give a clearer picture of the numbers.

 

[arky]

In case you are not aware, some 401Ks allow withdrawals, without a penalty, at 55, if you are retired. Check with the outfit that administers your 401K.

 

[Cobra9777]

Thanks to all. I appreciate the great input.

The standard two questions asked to first time "can we do it" posters are:

1. What about health insurance?
2. Have you run your numbers through FIRECalc?

Health insurance is comprehended in the $100k/yr spending plan. My company offers subsidized health insurance for pre-medicare retirees. The subsidy is based on years of service. Basic PPO plus dental for my wife and myself will be just under $10K per year. We also have $15K in a HSA that will hopefully fund several years of copays and the like.

I have run all the numbers through FIRECalc, and the system says I'm good-to-go. My own spreadsheets are less optimistic about the ending portfolio value, but at least conclude we will not run short of our inflation-adjusted spending needs though age 90. In both cases, I am not assuming we downsize the house, although that (or an HECM) is always an option if things get tighter than expected down the road.

At a quick glance, I don't think your long-term chances of pulling $53K from your $1.4M nest egg are favorable. You are looking at longer than 30 years and the odds are against you.

+1

Social Security may make a difference. Running FIRECalc will give a clearer picture of the numbers.

Yes, social security makes a big difference. That's the reason we don't need to rely solely on the $1.4M nestegg to create $53K/yr (plus inflation) for the next 40 years.

My advice would be to downsize the house, work 2-3 more years, cut your living expenses, maximize your savings and build your pension. Those actions should put you in excellent shape financially.

Up until a few months ago, I agreed with you. I thought our financial situation was very "borderline" for early retirement. I had concluded that I needed to "be responsible", "bite the bullet", and keep working until at least age 55 or so. Emotionally and physically, however, I honestly think it would be a mistake to continue working. I've reached that point in my career where I'm mostly just bored and unsatisfied. The pay is very good, but the stress level is extremely high, and the sense of purpose and accomplishment is very low. My health and emotional well-being have deteriorated as a result. Seems like an exit plan is in order.

So, I started scrubbing the numbers much more carefully and comprehensively a few months ago. FIRECalc seems to validate my conclusion, which is that this is do-able now, and not really borderline at all. I think the tradeoff for working 2-3 more years would be to subtract 8-10 from the backend. That's not a good tradeoff when the math says I'm good-to-go now.

I welcome any and all opinions. Thanks again.

 

[pb4uski]

Seems to me that you are all set as you have more than enough in your taxable accounts to cover the $53k gap between $100k of living costs and $47k pension until you get to 59 1/2. After that you can start drawing on tax deferred until you elect to draw SS (be it at 62, 70 or in between).

arky's suggestion will not work for you as you need to be 55 prior to leaving service (if you 401k plan allows it - not all do).

I would downsize rather than continue to carry a big house, and I would be a bit more aggressive in my investments, but you seem to be fine nonetheless.

 

[retiredncolorado]

Hello Cobra,

I retired at age 50 for many of the same reasons you state in your above post. After almost three years of not working, it was still the right decision for me. There is risk in every thing we do in life. For me I weighed the cost in mental and physical health against the positive financial impact of continuing to work. I decided that the cost was too high, and left. In retrospect, it has been some of the best times of my life. As an empty nester I have found new things to satisfy my life. Whether it is time to visit with family(I didn't have this while working) or new hobbies and activities.

Hope it works out in your situation as well as it has for me.

 

[Cobra9777]

Seems to me that you are all set as you have more than enough in your taxable accounts to cover the $53k gap between $100k of living costs and $47k pension until you get to 59 1/2. After that you can start drawing on tax deferred until you elect to draw SS (be it at 62, 70 or in between).

Thanks. Your comment got me thinking... For whatever reason, I never considered the possibility of only drawing down the after-tax account until age 59.5. It has always been my sacred cow, or liquidity "security blanket." I always assumed I needed to generate spendable income immediately from the tax-deferred accounts as well, using 72t or an SPIA. I just ran the numbers on this new approach and it works fine. The after-tax balance decreases from $0.6M to $0.3M by age 59.5, which is a little uncomfortable. But the tax-deferred account grows by the same amount, or more, depending on my investment return assumptions. An added benefit is lower taxable income during this period since I'll be consuming my own after-tax funds for a portion of my spending needs.

I've now concluded that the SPIA is not a great idea at this early age, and that I was considering it for the wrong reason. For bridging the gap to age 59.5, I'll either use the above approach of drawing down after-tax only, or some combination of that approach and 72t. Thanks again! Great forum.

Any other input on my situation is welcome.

 

[xyz]

That was my first thought as I read your first post (draw from the after tax acct). Also why not keep a good part of that .6M invested and your balance should be better than .3M at age 59.5? You have alot to fall back on (pension, SS, pre-tax) so I would not just keep those dollars in places where you would not earn much.

 

[AnIntentionalRoad]

I had concluded that I needed to "be responsible", "bite the bullet", and keep working until at least age 55 or so. Emotionally and physically, however, I honestly think it would be a mistake to continue working. I've reached that point in my career where I'm mostly just bored and unsatisfied.

I think this pretty definitively answers your question about whether you should put a few more years in to boost the pension. Since you are open to downsizing the house at some point, if needed, it seems you have plenty of cushion.

And, if that wouldn't be enough there is the option to cut other expenses from your 100k/yr spending budget or picking up a few low-stress PT w*rk shirts here and there. Definitely beats the heck out of killing yourself at your current job.

--AIR

 

[pb4uski]

Seems to me that you are all set as you have more than enough in your taxable accounts to cover the $53k gap between $100k of living costs and $47k pension until you get to 59 1/2. After that you can start drawing on tax deferred until you elect to draw SS (be it at 62, 70 or in between).

arky's suggestion will not work for you as you need to be 55 prior to leaving service (if you 401k plan allows it - not all do).

I would downsize rather than continue to carry a big house, and I would be a bit more aggressive in my investments, but you seem to be fine nonetheless.

Thanks. Your comment got me thinking... For whatever reason, I never considered the possibility of only drawing down the after-tax account until age 59.5. It has always been my sacred cow, or liquidity "security blanket." I always assumed I needed to generate spendable income immediately from the tax-deferred accounts as well, using 72t or an SPIA. I just ran the numbers on this new approach and it works fine. The after-tax balance decreases from $0.6M to $0.3M by age 59.5, which is a little uncomfortable. But the tax-deferred account grows by the same amount, or more, depending on my investment return assumptions. An added benefit is lower taxable income during this period since I'll be consuming my own after-tax funds for a portion of my spending needs.

I've now concluded that the SPIA is not a great idea at this early age, and that I was considering it for the wrong reason. For bridging the gap to age 59.5, I'll either use the above approach of drawing down after-tax only, or some combination of that approach and 72t. Thanks again! Great forum.

Any other input on my situation is welcome.

Glad to hear that worked out for you. You may want to take a look at your AA at some point as described it is a bit conservative. As an example, I'm 5 years older than you, and my AA is 60% stock/40% bond (excluding pensions and SS as bond equivalents).

 

[Cobra9777]

Also why not keep a good part of that .6M invested and your balance should be better than .3M at age 59.5? You have alot to fall back on (pension, SS, pre-tax) so I would not just keep those dollars in places where you would not earn much.

You may want to take a look at your AA at some point as described it is a bit conservative. As an example, I'm 5 years older than you, and my AA is 60% stock/40% bond (excluding pensions and SS as bond equivalents).

Regarding asset allocation, I'm quickly learning that most posters in this forum are much more aggressive than my current plan, which is 30% stock, 70% fixed income. It seems contrary to everything I've been taught about being conservative in retirement. But I'm always open to challenging what I've been taught in the past. So, I'm warming up to the idea, in part because I don't like holding 70% bonds when interest rates are likely to increase in the near future. After looking at some of the historic market performance data in FIRECalc and elsewhere, and thinking more long-term, I'm definitely considering this.

One question though... My models say 4% gets me to my actuarial life expectancy with the nest egg intact. It also gets me to age 91 before I start running short of inflation-adjusted spending. My current conservative portfolio generates 3.5-4.0%; and that's in a time of historically low interest rates. It only gets higher from here. I could actually get MORE conservative in the future and still get where I need to go. Under that scenario, and assuming my models are correct, why would I want to get more aggressive and risk the whole thing? Late 2008 is still fresh in my memory.

 

[Danmar]

Many people here view their DB pensions as bond equivalents, thus allowing for a higher equity AA than otherwise. This is my approach. My pension covers over half of our spending requirement so I keep our portfolio in equities.other than a couple years of spending in cash.

 

[Alan]

Regarding asset allocation, I'm quickly learning that most posters in this forum are much more aggressive than my current plan, which is 30% stock, 70% fixed income. It seems contrary to everything I've been taught about being conservative in retirement. But I'm always open to challenging what I've been taught in the past. So, I'm warming up to the idea, in part because I don't like holding 70% bonds when interest rates are likely to increase in the near future. After looking at some of the historic market performance data in FIRECalc and elsewhere, and thinking more long-term, I'm definitely considering this.

One question though... My models say 4% gets me to my actuarial life expectancy with the nest egg intact. It also gets me to age 91 before I start running short of inflation-adjusted spending. My current conservative portfolio generates 3.5-4.0%; and that's in a time of historically low interest rates. It only gets higher from here. I could actually get MORE conservative in the future and still get where I need to go. Under that scenario, and assuming my models are correct, why would I want to get more aggressive and risk the whole thing? Late 2008 is still fresh in my memory.

Many people here view their DB pensions as bond equivalents, thus allowing for a higher equity AA than otherwise. This is my approach. My pension covers over half of our spending requirement so I keep our portfolio in equities.other than a couple years of spending in cash.

I am like Danmar with pensions currently covering more than half of our spending needs. However, I do not count the pensions as bonds when calculation the AA of our investments. I also am more conservative with a 40/50/10 AA.

Neither approach is right or wrong imo. You need to do what makes you feel comfortable. In the 3 calculators I use (including FIRECALC) I get 100% success rate with a sizeable chunk of change left at the end, so I don't feel the need to have a higher equity allocation.

 

[pb4uski]

Regarding asset allocation, I'm quickly learning that most posters in this forum are much more aggressive than my current plan, which is 30% stock, 70% fixed income. It seems contrary to everything I've been taught about being conservative in retirement. But I'm always open to challenging what I've been taught in the past. So, I'm warming up to the idea, in part because I don't like holding 70% bonds when interest rates are likely to increase in the near future. After looking at some of the historic market performance data in FIRECalc and elsewhere, and thinking more long-term, I'm definitely considering this.

One question though... My models say 4% gets me to my actuarial life expectancy with the nest egg intact. It also gets me to age 91 before I start running short of inflation-adjusted spending. My current conservative portfolio generates 3.5-4.0%; and that's in a time of historically low interest rates. It only gets higher from here. I could actually get MORE conservative in the future and still get where I need to go. Under that scenario, and assuming my models are correct, why would I want to get more aggressive and risk the whole thing? Late 2008 is still fresh in my memory.

The reason that so many of use include a generous dose of equities is as a hedge against inflation. While your portfolio may be generating a 3.5-4% nominal return, the real return (after inflation) is much less, and the 4% WR you are relying on anticipates that each year's withdrawal is increased for inflation (100 in year 1, 103 in year 2, 106 in year 3, 109 in year 4, etc).

Given today's interest rates and the likelihood of higher interest rates once the recovery starts, my 40% bond allocation is much more frightening to me than my 60% stock allocation. If a bond portfolio has a duration of 5 and interest rates return to normal levels, I would expect that value of bonds to decrease ~15% (or more) and take years to recover as the increased yield makes up for the decline in value. So I'm skewing my portfolio to less interest sensitive bonds these days.

I guess that I have been investing in stock long enough that I know they will zig and zag but that the overall path will likely be upward.

That said, I do note that the AA of the Vanguard Retirement Income Fund is ~30% stock/70% bonds, but I suspect that the fund's AA is targeted more to a 60-70 year old than a 50 year old. Vanguard's 2020 target date fund is 65/35 and their 2010 fund is 45/55.

That said, I agree with Alan and have seen some people whose pensions are a significant part of their retirement income needs skew their AA more aggressively like Danmar since they can afford to take the risk and others like Alan skew their AA more conservatively since they don't need to take the risk so at the end of the day it is personal preference. My DB pension is only ~20% of our living expenses so my situation is a bit different.

 

[pb4uski]

Many people here view their DB pensions as bond equivalents, thus allowing for a higher equity AA than otherwise. This is my approach. My pension covers over half of our spending requirement so I keep our portfolio in equities.other than a couple years of spending in cash.

Just curious - do you include SS as a bond equivalent as well in assessing your AA?

 

[Danmar]

My Gov't pension is insignificant(I am Cdn) so I ignore it. I agree that your attitude to risk will determine whether you increase your equity allocation due to DB pension or not. I personally achieved my current financial success by assuming significant equity risk and therefore feel pretty comfortable continuing this way. To each their own on this one.

 

[Mulligan]

Regarding asset allocation, I'm quickly learning that most posters in this forum are much more aggressive than my current plan, which is 30% stock, 70% fixed income. It seems contrary to everything I've been taught about being conservative in retirement. But I'm always open to challenging what I've been taught in the past. So, I'm warming up to the idea, in part because I don't like holding 70% bonds when interest rates are likely to increase in the near future. After looking at some of the historic market performance data in FIRECalc and elsewhere, and thinking more long-term, I'm definitely considering this.

One question though... My models say 4% gets me to my actuarial life expectancy with the nest egg intact. It also gets me to age 91 before I start running short of inflation-adjusted spending. My current conservative portfolio generates 3.5-4.0%; and that's in a time of historically low interest rates. It only gets higher from here. I could actually get MORE conservative in the future and still get where I need to go. Under that scenario, and assuming my models are correct, why would I want to get more aggressive and risk the whole thing? Late 2008 is still fresh in my memory.

There are a lot of informed and risk tolerant investors on this forum and I certainly respect their opinion. But, there are many risk averse investors on this forum also. " Why fight another battle win you already won the war" definitely resonates with me. Each persons ultimate goal and situation are of course unique. My pension is about $75,000 and has a 2% annual COLA. I don't view it as a bond fund, I view at as a stock fund since that is where most of its assets are at. If my pension ever got in trouble its because the stock market tanked. Why would I want my personal money tanking with my pension? I Bonds and CDs, and a couple hundred a month kicked into total stock index is what I do. Conservative? ya throw me in the widows and orphans investment club but I need my safe money!

 

[Danmar]

I respect Mulligan's approach. I like the excitment associated with my equity portfolio, though. This would be a monority view, I think. I may need a little excitment to offset the "excitment" I experienced while working, don't know. In any event inflation worries me and my pension is not cola'd although paid by one of Canada's largest and most secure companies. As I said, to each their own on this one.

 

[texasdiver]

Regarding asset allocation, I'm quickly learning that most posters in this forum are much more aggressive than my current plan, which is 30% stock, 70% fixed income. It seems contrary to everything I've been taught about being conservative in retirement. But I'm always open to challenging what I've been taught in the past. So, I'm warming up to the idea, in part because I don't like holding 70% bonds when interest rates are likely to increase in the near future. After looking at some of the historic market performance data in FIRECalc and elsewhere, and thinking more long-term, I'm definitely considering this.

One question though... My models say 4% gets me to my actuarial life expectancy with the nest egg intact. It also gets me to age 91 before I start running short of inflation-adjusted spending. My current conservative portfolio generates 3.5-4.0%; and that's in a time of historically low interest rates. It only gets higher from here. I could actually get MORE conservative in the future and still get where I need to go. Under that scenario, and assuming my models are correct, why would I want to get more aggressive and risk the whole thing? Late 2008 is still fresh in my memory.

Conceptually you could think of your portfolio in terms of four separate pools of money for each of the next four decades.

Pool #1 covers your 50s and will need to be somewhat conservatively invested to withstand any deep market dips in the next decade

Pool #2 covers your 60s (10-20 years out) so you need to think about inflation and what kinds of asset allocation is most appropriate for a 10-20 year time horizon.

Pool #3 covers your 70s (20-30 years out). Equities have generally been the strongest performers for any 20-30 year time horizon in the past.

Pool #4 covers your 80s (30-40 years out). Again, inflation is your big concern (especially things like health care inflation). And there probably aren't any 40-year time periods going back to the 1700s when equities didn't produce the highest returns compared to fixed income investments.

For someone looking to make a portfolio last 40+ years you probably need to think more about generating higher rates of return for the pools of money that you are setting aside for the last decades of your life. If you were to invest pools 3 and 4 into mainly equities knowing that money is set aside for 20-40 years in the future it might be easier to conceptualize and that would bring you closer to 50% equities. For example, Vanguard's Target Retirement 2010 is 47% in equities and their Target Retirement 2015 is 55% in equities.

As for whether you are in a position to ER, I don't really have any advice except to ask how easy would it be for you and or your wife to pick up extra income on the side by returning to work or doing something different. You are still young Would you have the means to get back in the workforce in say 5 years if some catastrophe wiped out part of your portfolio? For example, I teach school here in Texas and my wife is a physician. We aren't planning to ER now but if we did it would be relatively easy to hop back in the workforce 5 years down the road. Science teachers can always find work and so can doctors. But if you are in some corporate field that will move on without you and make it very difficult to get back in then it is something to think about.

 

[obgyn65]

Hello and welcome. I am one of the mot conservative investors on this forum. To answer your question, IMHO there is no valid reason why you would need to be more aggressive and "risk the whole thing". I would much prefer to spend less while in retirement than becoming less conservative with my investments.

My current conservative portfolio generates 3.5-4.0%; and that's in a time of historically low interest rates. It only gets higher from here. I could actually get MORE conservative in the future and still get where I need to go. Under that scenario, and assuming my models are correct, why would I want to get more aggressive and risk the whole thing? Late 2008 is still fresh in my memory.