49, may have an option for a package. Is it Time?

[Time]

Hi there!

I have been lurking for years and learned a lot from this forum. Thank you for all the past contributions that helped me along the way. DW and I have been thinking about ER and saving for many years, living below our means. I am 49 and a C-suite exec with a high stress job that keeps me up at night. I was not planning to RE for at least two more years but things have gotten worse lately. I see the writing on the wall and likely a package. My BS bucket is full and I am not interested in another job but concerned I may not have enough to retire.

Married, DW a homemaker, 2 kids who will attend college in a few years. 529 college savings of $280K total which may cover them for in-state schools but not out of state/private schools. Home mortgage was paid off this year. Have been able to save $150K/year for the past several years and it's hard to think this income stream may be coming to an end although the idea of retiring sounds wonderful. I enjoy exercising, researching investments, trading stocks, traveling etc. I have been a member of a few volunteer boards and may continue them. I'd also be more involved with our kids and their school. If I had to, I could possibly find a similar job given enough time but it will likely pay less than now and require a move. Hoping to avoid that.

Total Investments: $2,210,000
Taxable Accounts: $950,000:
$400K in rental properties which bring on average 6% or $24K annually after taxes and expenses. No mortgage. This $400K is included in the total investments of $2.21M, so the $24K annual income from rentals should not be considered as additional income.
$180K in Stocks
$50K in i-Bonds
$80K in Cash/Savings
$100K in commercial properties (tied up for 2-3 years, expected IRR of 6%-15%)
$140K in P2P lending and alternative investments. These bring on average 6%-8% annually. Most of the funds are tied up for months but can be withdrawn as loans/equities mature or are sold off.

Tax-deferred Accounts: $1,260,000:
$1.2M Portfolio (60/40) in Vanguard and Fidelity index funds
- Traditional IRA: $930K
- Roth: $30K
- 401K: $300K

Home value: $500K - not included in any of the numbers. Paid off. If you add all of the above, we have about $3M total net-worth including home and 529s.

I have been tracking our expenses for years using Mint. The big question for me is health insurance. I did some research on ACA and it looks like our monthly premiums will be between $1,300-$1,800 based on our current income and no credits. This will go down considerably if/when I qualify for credits when RE. Retirement expenses will be $80K annually at a minimum. Our desired expenses are more likely around $100K but I know we can keep things tight when needed.

Monthly expenses:
Groceries/Restaurants: $1,000
Property tax: $350
Car insurance: $400 (includes expected increase for teenage driver)
Health Insurance: $1,500. This will go down with credits.
Federal tax: $1,000 (I wonder if this is too high?)
Utilities/TV/Phone: $600
HOA and Home insurance: $350
Auto/Gas: $150
Travel/vacation: $250
Repairs/Home supplies: $400
Gifts/donations/kids activities: $500
Shopping / clothing: $200
Total above: $6,700 * 12 = $80,400 annual

Discretionary monthly expenses if possible:
More Restaurants: $400 (DW likes to eat out a lot)
Save for cars: $300 (replace every 10-15 years)
More travel/Vacation: $1,000 (DW and I love traveling and will spend more when we know we can afford)
More Shopping/Kids: $300
Total above: $2,000 * 12 = $24,000 annual

With my current income, we are able to save around $150K/year but that is about to end. If I get a package of 1 year income, I'll be able to add that to the taxable portfolio mentioned above and help bridge spending between now and age 55.

Using Firecalc, 40 years of living, no Social Security income:
$80K spending, $2.21M portfolio 96.4% success
$80K spending, $2.36M portfolio (with package) 99.1% success
$90K spending, $2.36M portfolio (with package), 92.7% success

With Social Security of $36K/year at age 67 ($24K mine and $12K DW):
$80K spending, $2.21M portfolio 100% success
$90K spending, $2.21M portfolio 95.5% success
$100K spending, $2.36M portfolio (with package), 93.6% success

Ideally, I'd continue to work at least 6 more months to a year, earn and save some more before taking a package. But the option to take a package may not be there if I go down that path. The amount of liquid assets in taxable accounts is what stresses me and although they may cover our minimum expenses between now and age 55, it may be too tight. Look forward to your responses and thank you in advance!

 

[Retireby45ish]

Your numbers (total NW, expenses) are very very close to mine. I know because I stress test firecalc in almost the same ways and get very similar numbers.

My only comment is that the ACA at $1500/mo. is the full price...but do you know how much of a subsidy you would get? It seems to me that this could save you 1k a month which is $12k per year which is 1/7th of your 80k yearly spending.

The big thing I have to drill down to as well (I’m still 2-3 years from firing) is structuring investments and other items (Roth rollover, etc) while balancing/maximize that ACA subsidy since it’s such a big piece of your total spend. I think it’s all about getting your AGI number down. With your real estate and other investments I’m not sure how that might hurt you on that front.

 

[Ready]

Welcome!

Only you can decide if spending $80K/year in retirement is going to work for you. Keep in mind that you will have a lot of free time and you may want to take on some new hobbies that could cost money. And there can be a lot of unexpected and unbudgeted expenses along the way given your young age and number of years until SS kicks in.

If $80K is your budget, I would personally want to know that I could spend at least $100K at 100% success before pulling the plug. If you get the package you will have a decision to make. If you don’t, I would stay stick around another year or two and keep putting away that $150K into savings. That is a lot of money to save each year and will go a long way toward having some buffer in case we have a downturn or you have some major unexpected expenses.

 

[Ian S]

529 college savings of $280K total which may cover them for in-state schools but not out of state/private schools.

I don't see any provision for augmenting that if your kids want to go out of state or to a private school. Has any decision been made on what you will contribute to the kids' college apart from the 529 plan?

 

[finnski1]

You mentioned twice about carrying your expenses to age 55.
The rule of 55 only lets you withdraw without the 10% early withdrawal penalty if you leave your employer at 55 or older. If you withdraw from them at 55 and you had already left the company before age 55 (i.e. 50)you are still subject to the 10% penalty up to age 59 1/2.
At least this is how I have read it in the past.
Check that out to make sure.

 

[Time]

Thank you everyone for all your comments! This is a wonderful forum! I'll try to answer each question/comment as I learn how to do this!

Your numbers (total NW, expenses) are very very close to mine. I know because I stress test firecalc in almost the same ways and get very similar numbers.

My only comment is that the ACA at $1500/mo. is the full price...but do you know how much of a subsidy you would get? It seems to me that this could save you 1k a month which is $12k per year which is 1/7th of your 80k yearly spending.

The big thing I have to drill down to as well (I’m still 2-3 years from firing) is structuring investments and other items (Roth rollover, etc) while balancing/maximize that ACA subsidy since it’s such a big piece of your total spend. I think it’s all about getting your AGI number down. With your real estate and other investments I’m not sure how that might hurt you on that front.

You're right. I will be able to save around $800/month on ACA credits. I just don't know how long we can count on the ACA credits.

Welcome!

Only you can decide if spending $80K/year in retirement is going to work for you. Keep in mind that you will have a lot of free time and you may want to take on some new hobbies that could cost money. And there can be a lot of unexpected and unbudgeted expenses along the way given your young age and number of years until SS kicks in.

If $80K is your budget, I would personally want to know that I could spend at least $100K at 100% success before pulling the plug. If you get the package you will have a decision to make. If you don’t, I would stay stick around another year or two and keep putting away that $150K into savings. That is a lot of money to save each year and will go a long way toward having some buffer in case we have a downturn or you have some major unexpected expenses.

Agree, that's my preference as well. If I can, I will work for at least one more year or two but it may not be an option.

I don't see any provision for augmenting that if your kids want to go out of state or to a private school. Has any decision been made on what you will contribute to the kids' college apart from the 529 plan?

One or both of the kids may be eligible for some scholarships. I won't count on that but if I can save money on health insurance with ACA credits of $800/month, those savings will be added to the 529s.

You mentioned twice about carrying your expenses to age 55.
The rule of 55 only lets you withdraw without the 10% early withdrawal penalty if you leave your employer at 55 or older. If you withdraw from them at 55 and you had already left the company before age 55 (i.e. 50)you are still subject to the 10% penalty up to age 59 1/2.
At least this is how I have read it in the past.
Check that out to make sure.

I was considering taking advantage of the 72(t) rule to start taking equal payments from some of the tax advantaged accounts at age 55 and avoid the 10% penalty. Did I get this wrong?

 

[38Chevy454]

Welcome out of the lurking shadows. Just rough figuring, 4% of $2.2M is approx $88K. So it seems your estimated expenses are near that, without the additional discretionary. You can also juggle between some 72t withdrawals from your pretax money (avoid the 10% early withdrawal penalty) and after tax money, such that you can keep income low enough for ACA subsidy and having your effective tax rate on the 72t to be quite low or zero. You can start 72t before 55 if you want. You also have SS that will be available to supplement your income sometime age 62 or after.


Given your pending potential package, and that you are close for the 4% withdrawal target, it seems you can likely make it fine. Just do as you have done already with watching budget and adjusting discretionary expenses as needed.

 

[RunningBum]

My understanding is that not all 401(k) plans let you use the 72(t) rule. Maybe I missed if you said it does, otherwise you will want to ask.

I think a lot depends on how accurate your budget is, and how willing you'd be to cut it to the $80K if you have to. I wouldn't just up and leave a job with your numbers, but with a package I would probably give it a try, and not upend the family with a move for another job.

 

[rodi]

I think your spending numbers are probably correct. Similar to mine (family of 4).

With your 24k/year rental income and a 3.5% withdrawal rate ($77k/year), you're set for the $100k/year spend.

Welcome to the forum. Congratulations on a job well done.

 

[finnski1]

I was considering taking advantage of the 72(t) rule to start taking equal payments from some of the tax advantaged accounts at age 55 and avoid the 10% penalty. Did I get this wrong?



No I don't think you did I was only trying to point out the "rule of 55" which is different than the SEPP (72t) rule.

Also with the 72t rule you do not have to wait until 55. You only have to keep taking equal payments from whenever you start until you turn 59 1/2 or a minimum of 5 years. If you start after age 55 I believe you must take them for a minimum 5 years which puts you past age 59 1/2.

 

[OldShooter]

Are you senior enough/have enough leverage to negotiate the package a little bit? When DW retired at 57 as an SVP at a megabank, the health care deal was a fixed contribution/$400 per month towards megabank's health care insurance until we were on Medicare (our birthdates are only 7 weeks apart.)

The deal didn't turn out to be quite as sweet as it looked because the risk pool was limited to other retirees who had similar deals, so the premiums climbed more than we expected. But we were still happy to have it.

I'm not sure how taxability worked but I don't recall that we got 1099-ed for the contribution either.

Maybe you can cook up and sell something along these lines? Maybe stay on the company plan and they pick up part or all of the cost?

 

[Aerides]

What does the package look like - how much extra of that can you sock away? Mine covered HI through serial severance for over a year and I wasn't as high level as you. That + COBRA helped kick the HI issue down the road for about 2.5 years.

 

[Time]

I think your spending numbers are probably correct. Similar to mine (family of 4).

With your 24k/year rental income and a 3.5% withdrawal rate ($77k/year), you're set for the $100k/year spend.

Welcome to the forum. Congratulations on a job well done.

Thank you Rodi! Just to clarify, the value of the rental homes of $400K is actually included in the $2.21M investments. So my withdrawal ratio for $100K would be 4.5% and it is 3.6% for $80K.

 

[Dtail]

It sounds like you are in fairly good shape, perhaps not top of the line shape, but time is more valuable than money and I would go for it.

 

[Time]

Are you senior enough/have enough leverage to negotiate the package a little bit? When DW retired at 57 as an SVP at a megabank, the health care deal was a fixed contribution/$400 per month towards megabank's health care insurance until we were on Medicare (our birthdates are only 7 weeks apart.)

The deal didn't turn out to be quite as sweet as it looked because the risk pool was limited to other retirees who had similar deals, so the premiums climbed more than we expected. But we were still happy to have it.

I'm not sure how taxability worked but I don't recall that we got 1099-ed for the contribution either.

Maybe you can cook up and sell something along these lines? Maybe stay on the company plan and they pick up part or all of the cost?

Thanks for the insight OldShooter! As a Chief Officer, I’m as senior as you can get but there may not be as much negotiating in regards to the health coverage. Definitely good to know and find out!

 

[Time]

What does the package look like - how much extra of that can you sock away? Mine covered HI through serial severance for over a year and I wasn't as high level as you. That + COBRA helped kick the HI issue down the road for about 2.5 years.

That’s great to know Aerides! Don’t have much info on the package yet, only assuming a 1 year salary plus HI coverage during that time but frankly not sure. Will definitely negotiate though. Spending will likely be less than normal and thus savings likely more than the normal $150K, knowing there will be an end to the regular paychecks at some point.

 

[pb4uski]

I think you will be fine in terms of having enough.... your gap at $100k spending net of $24k of rental income is only $76k and a 3.4% WR ignoring SS.

So 10 1/2 years of $76k gap is only $800k and you have $550k of taxable accounts excluding the rental properties so you'll probably need to do some withdrawals from tax-deferred or tax-free accounts.

I'd probably milk the taxable accounts for all they are worth (about 7 years?) and during those years do Roth conversions... then when the taxable account money runs out you can either withdraw Roth contributions and Roth conversion principal that are over 5 years old without penalty... and/or consider 72t on any remaining tax-deferred money.

In short, you have enough and you have ways to access that money penalty-free until you turn 59 1/2 with a little planning.... and you'll have plenty of time to pull a plan together... so congratulations!

https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/

 

[Bamaman]

Your attention to detail is astounding. I don't know how you've done so well, and obviously you have very marketable job skills. We all know that so easy to get burned out in the high pressure jobs.

But if you're offered a package, just say "Adios!' You don't have to put up with that job garbage any longer.

 

[ivinsfan]

Thank you Rodi! Just to clarify, the value of the rental homes of $400K is actually included in the $2.21M investments. So my withdrawal ratio for $100K would be 4.5% and it is 3.6% for $80K.

On your commercial property 100K and your private lending, you would either count the income or the value not both. Are you planning on selling the commercial property?

How do you see yourself funding the income gap until 55, I think it's pretty tight. Say it takes all your taxable assets. From 55 until medicare you will have a heck of a time staying under the ACA cliff. Have you tried penciling that out? The minute you go over the cliff you lose all subsidies and pay rack rate. As you kids drop off your policy your cliff number will get smaller.

Even with a subsidy, you have high deductibles, med costs, and dental costs so it's going to take cash. Don't count on having extra leftover money to fund private school for your kids.

On your expenses side, I'm curious that you listed car replacement cost as an add on expense. How are you planning on paying for replacement vehicles? That has to get added to your number of 80K.

You added the value of your rental homes to your portfolio and double dipped by adding back in the income. Or how did you figure it..I'm not clear on that.
I know about this issue, we own farmland which jacks up our net worth considerably, but generate land rent, so we remove the land value and enter the rent as annual income for planning purposes.

Good luck, but I'm not sure you are ready to quit work...

 

[ivinsfan]

I think you will be fine in terms of having enough.... your gap at $100k spending net of $24k of rental income is only $76k and a 3.4% WR ignoring SS.

So 10 1/2 years of $76k gap is only $800k and you have $550k of taxable accounts excluding the rental properties so you'll probably need to do some withdrawals from tax-deferred or tax-free accounts.

I'd probably milk the taxable accounts for all they are worth (about 7 years?) and during those years do Roth conversions... then when the taxable account money runs out you can either withdraw Roth contributions and Roth conversion principal that are over 5 years old without penalty... and/or consider 72t on any remaining tax-deferred money.

In short, you have enough and you have ways to access that money penalty-free until you turn 59 1/2 with a little planning.... and you'll have plenty of time to pull a plan together... so congratulations!

https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/

Won't roth conversions drastically lower his ACA subsidy? This poster has a ton of moving parts in his posts. With a family of four and HI, it might be in his interest to figure that out first.

 

[Time]

On your commercial property 100K and your private lending, you would either count the income or the value not both. Are you planning on selling the commercial property?

How do you see yourself funding the income gap until 55, I think it's pretty tight. Say it takes all your taxable assets. From 55 until medicare you will have a heck of a time staying under the ACA cliff. Have you tried penciling that out? The minute you go over the cliff you lose all subsidies and pay rack rate. As you kids drop off your policy your cliff number will get smaller.

Even with a subsidy, you have high deductibles, med costs, and dental costs so it's going to take cash. Don't count on having extra leftover money to fund private school for your kids.

On your expenses side, I'm curious that you listed car replacement cost as an add on expense. How are you planning on paying for replacement vehicles? That has to get added to your number of 80K.

You added the value of your rental homes to your portfolio and double dipped by adding back in the income. Or how did you figure it..I'm not clear on that.
I know about this issue, we own farmland which jacks up our net worth considerably, but generate land rent, so we remove the land value and enter the rent as annual income for planning purposes.

Good luck, but I'm not sure you are ready to quit work...

Regarding my commercial and rental investments, I’m only counting their property values in the total investments. I only mention the expected return for awareness. The returns are not double dipped. The return from the $2.21M investments will include those from the rental properties and need to cover all expenses which is $80K. Hope this helps clarify some of the questions.

Regarding the cars...we have two paid off cars that are 6 years old. We’re not looking to replace them any time soon. By saving an extra $300/month, we’ll be able to buy a replacement every 10-15 years. I agree that we’ll need to start these savings soon. Maybe not so much a discretionary expense and the $80K may need to be $84K.

I need to read a bit more about the ACA cliff to understand your question and be able to answer.

 

[Time]

Your attention to detail is astounding. I don't know how you've done so well, and obviously you have very marketable job skills. We all know that so easy to get burned out in the high pressure jobs.

But if you're offered a package, just say "Adios!' You don't have to put up with that job garbage any longer.

Thank you for your compliments Bamaman!

 

[RunningBum]

The ACA cliff for a family of four is $104,800 in 2021. When liquidating taxable assets, only the capital gain counts as MAGI. If they are only looking to spend $80K-$100K, income should be lower than that unless they generate more income than they need.

 

[ivinsfan]

The ACA cliff for a family of four is $104,800 in 2021. When liquidating taxable assets, only the capital gain counts as MAGI. If they are only looking to spend $80K-$100K, income should be lower than that unless they generate more income than they need.

The problem will start when they are drawing tax deferred income for regular living expenses. It's 100% taxable. I agree they are probably fine with ACA while using taxable monies.


But my question was, the lower the taxable income the higher the ACA subsidy. Is it worth doing a Roth conversion if it lowers your ACA subsidy? A subsidy with a four person household can be a big number.

 

[RunningBum]

The problem will start when they are drawing tax deferred income for regular living expenses. It's 100% taxable. I agree they are probably fine with ACA while using taxable monies.


But my question was, the lower the taxable income the higher the ACA subsidy. Is it worth doing a Roth conversion if it lowers your ACA subsidy? A subsidy with a four person household can be a big number.

That was a later question you asked in a different post. I was commenting on your question about the ACA cliff, which is a real and valid concern.

Regarding your question about Roth conversions vs. amount of subsidy, you lose something like 9.86% (that was my number in 2019) of your subsidy as you add income. So if you can later save 10% on taxes by converting now, doing the Roth conversion is better. It might also help them when kids start leaving, if they can withdraw the Roth for some living expenses at 0% taxes. Might not be able to do that until they are 59.5.