Final Approach Planning for Retirement

[Route246]

Question: For those who never really had a household budget, how did you prepare for no longer receiving a paycheck? How did you manage cash flow, replenishing the checkbook with funds from savings? How did you manage your tax withholdings, assuming you liquidated assets that required quarterly estimates being filed, etc.?

There are new financial chores and considerations. The ones I can think of are benefits (mostly covered by Medicare) like medical, dental, etc., quarterly estimated tax payments and dealing with capital gains that will require new out-of-pocket expenses. Most of our savings (equities side) have tax consequences when I sell to generate cash to deposit into checking for household expenses. This will involve disciplined quarterly tax payments, whereas currently my W-2 withholdings takes care of most of our tax payments.

I plan to go back to our checking account statements and map them into a spreadsheet so we can get an idea of how much cash goes in and out of our household budget. That's all I have now.

BTW, I'm FI, just turned 67, employed full-time with $$ handcuffs and beginning the planning required to switch from W2-employed to SS-self-unemployed. Time horizon is 0-2+ years depending on $$ escape considerations. $$ would involve leaving 7-figures of RSU on the table, meaning retirement would be a little expensive and it would also mean leaving a role with prestige and satisfaction. If I had any job dissatisfaction I would have been out of here but I enjoy the work, the intensity and satisfaction but I also know I'm giving up productive and healthy retirement years as the clock ticks.

 

[jebmke]

Dividends in taxable sent to MM fund and spent. If more needed, sold something. If less needed, eventually bought something.

Cash sent from MM to checking account monthly based on needs for the following month. Most of our expenses were on credit cards or direct debit. DDs scheduled for beginning of the month. Cards closed at end of the month so fairly soon after the cards closed I had a pretty good idea of cash needs for the upcoming month.

 

[TheWizard]

I wanted ruffly the same amount of net income hitting my checking account each month. This was maybe double my basic expenses but allowed me more to spend on discretionary stuff.

So I annuitized a portion of my TIAA accumulation while delaying SS to age 70. It all worked out swimmingly and now at 74 I have a negative withdrawal rate...

 

[RetiredHappy]

I annuitized my IRA to provide an income stream from age 60 to 85, through 2 term deferred fixed income annuities. Because we retired when I was only 53, we set aside 7 figures fairly liquid assets to draw on until I turned 60 but we blew through it after 5 years.

We pull all dividends out of taxable accounts and sell losers when we need more money. We only take RMD out of my husband's IRA.

We normally need an extra $50K in December as many lumpy payments come due then or in January, - timeshare maintenance fees, insurances and expensive winter vacations. Summer is another period that we need another lump sum infusion.

We just look at all the buckets and decide what we need to sell etc. We did have a large post tax investment account to support our somewhat frivolous spending. Right now we are down to about 50-50 in taxable and tax deferred accounts.

 

[pb4uski]

I keep a little over a year of spending in an online savings account that yields 4.3% currently. I have an automatic transfer monthly from that account to the credit union checking account that I use to pay our bills... my monthly "paycheck".

I replenish the online account periodically when I rebalance my investments, usually annually towards the end of the year.

 

[DrRoy]

Question: For those who never really had a household budget, how did you prepare for no longer receiving a paycheck? How did you manage cash flow, replenishing the checkbook with funds from savings? How did you manage your tax withholdings, assuming you liquidated assets that required quarterly estimates being filed, etc.?

Every Dec. I prepare an amount of cash in a MM fund to cover the next year's expected spending. It comes from accumulated interest, dividends, cap gains distributions, matured bonds, and equity sales when needed. I have a modest pension and have taxes withheld from that. After taxes and med. insurance, there's not much left. If the equity sales are limited, I do Roth conversion up to the ~21% tax bracket, so our taxable amount from the two does not change a lot from year to year. Over the course of the year, I keep an eye on the checking account balance and transfer into it from the MM as needed to keep a $5000 balance or so.

 

[socca]

... How did you manage your tax withholdings, assuming you liquidated assets that required quarterly estimates being filed, etc.? ..

Federal tax withholding is easy for "routine" tax years. Take 100% (or 110% for higher income folks) of the previous year's tax liability and divide by 4. That's the quarterly estimated tax payment required to avoid an underpayment penalty. If you create an EFTPS account you can schedule the automatic withdrawal of these payments from your bank account.

For years in which you can't use the IRS safe harbor method (for example, you have a large tax liability in year X and don't want to make estimated tax payments based on that liability in year X+1) things are a little trickier. This is my situation this year (seven figure 2023 federal tax liability - ouch! ) I'm planning to create a pro-forma 2024 tax return in TurboTax and use the resulting estimated 2024 tax liability to calculate my 2024 estimated tax payments.

 

[LateToFIRE]

Route246, if I recall some of your earlier posts, I think maybe you're an eight-figure guy, so something tells me you don't have much to worry about financially. That said, I kinda get it - we have some similarities. I'm a bit younger, but in that upper 7-digit quadrant of NW, so I do get how you might fret over the numbers even if that might seem silly to other folks. Like you, really enjoyed my work, was proud of being at the top of my game, career came with prestige, excitement, intensity, high stakes drama, etc. I would have liked to work a few more years, which would have put me over that extra digit on NW, but the paycheck vs the sacrifices were just not adding up to a positive figure. So, I pulled the plug, class of 2024, now wading through that first phase of FIRE.

For a workaholic adrenaline junkie like myself, being suddenly unplugged from the intensely competitive rat race I've been running practically my entire life has been disconcerting to say the least. I do feel like a huge part of my life is suddenly missing. Fortunately, I have some other things to keep me busy - winding up some work-related affairs, managing near-term liquidity events such as selling off investment real estate, consolidating into what has been our vacation home, engaging with charitable board work, etc.

Leading up FIRE, I took the following steps:

1) Exactly as you described, we never really had a household budget, so I downloaded all bank account data for 2022/2023 and did a thorough scrub of expense data to arrive at a go-forward budget I could feel confident about. From that I separated out discretionary expenses (roughly 50% of base case plan) which gave me some idea how much flexibility we could have if we adopted a variable WD approach with an eye towards possibly blowing a lot more dough in the early innings while we're still physically capable of some things. Fortunately base case plan is well below 4% SWR rate, and even aggressive case is more like 5%.

2) I ran our numbers through a dozen calculators, especially FIRECalc, I-ORP, RPM, and Fidelity. Sat down with a Fidelity private client rep to review/verify good to go indicator. Created detailed spreadsheets for tracking assets, NW, social security and pension estimates, etc.

3) Reviewed employer retirement (medical) benefits (not yet Medicare age), leaving policies, non-compete policies, RSU's, etc. Like you, I will be leaving some $$$ on the table, but that's just always going to be the case. You can't take it with you, as the saying goes.

4) Lined up new tax accountant, been DIY past few years. First couple FIRE years will involve some big tax hits from liquidity events. Consolidating all investment accounts to Fidelity Private Client.

5) Planned nice vacation to celebrate newfound freedom.

I'm sure I'll think of more after I post this.

P.S.

6) Made sure had at least two years expenses in cash, so don't have to worry about creating a WD scheme right away.

 

[kgtest]

18month to 24 month cash pile is key, to avoid SORR and any selling during a pullback. Typical corrections only last 18 months I believe maybe less, so if you can weather the storms and get the sails trimmed up during low tide, when high tide comes you will be flying again!

I need to work on getting the 2yrs cash liquidity and about 1/6 of our assets into broker...I've got a few years but I think its time to switch my PLOW money into IRAs and do Roth Conversions strategy to plow money into brokers...and pay more tax for a bit in the lead-up to ER. I've largely avoided taxable dividends since I've had most of it in tax deferred and sheltered, and RE. But no more RE and all in the markets now but those dividends in the broker are coming in now lol...tax...torpedo.

 

[LateToFIRE]

18month to 24 month cash pile is key, to avoid SORR and any selling during a pullback. Typical corrections only last 18 months I believe maybe less, so if you can weather the storms and get the sails trimmed up during low tide, when high tide comes you will be flying again!

I need to work on getting the 2yrs cash liquidity and about 1/6 of our assets into broker...I've got a few years but I think its time to switch my PLOW money into IRAs and do Roth Conversions strategy to plow money into brokers...and pay more tax for a bit in the lead-up to ER. I've largely avoided taxable dividends since I've had most of it in tax deferred and sheltered, and RE. But no more RE and all in the markets now but those dividends in the broker are coming in now lol...tax...torpedo.

FYI, my 2 year cash pile was less about SORR, and more about convenience with a touch of paranoia. I've always kept about 2 years of cash as my work income could be lumpy and as a "hedge" against possibility of job loss. When i think about SORR, I'm thinking in terms of the first 10-15 years, the dreaded retirement "red zone" from which there is no easy way to recover, though supposedly, the 4% (really the 4.5%) SWR is supposed to protect against that.

 

[Route246]

Wow, you nailed it, completely. Thank you. I have a friend's wife who grew up very modestly and she is also greedy (not in a negative way, more as a survival instinct given her background) and she is always complaining that she cannot leave her position at the company that makes phones, tablets and laptops because her RSU, like mine is in the 7 figures. I joke with her to stop complaining so much because nobody, literally nobody, has any sympathy for our quandary LOL. I told her I'm good for 2 more years, max and am planning for my exit now. She will probably stay there into her 90's if she can still show up for work LOL.

I've been a workaholic my entire life, my mother instilled that in us to put in an honest day's work for whoever is paying you. I work about 10 hours a day on average, always been this way so it is not something out of the ordinary for me. I've always been a high achiever and my technical skills are still useful or I would have exited the profession already.

Having behaved sloppily with respect to budgeting my entire adult life, including single and married times I now feel intimidated having to actually look at a budget/income statement, at least for the sake of tax planning.

It is what you characterized as a huge part life suddenly missing, that is perhaps the most intimidating prospect. I seriously doubt it but muse about if I resign and leave, what if I have buyer's remorse? The thought does enter into this, although I want to believe it is a silly thought.

I really appreciate all of the input here to my inquiry. It is all appreciated and I'm taking notes on this and will combine most of it into an action plan.

Regarding cash, we have a couple of years of reserve in our zero-interest checking account. My conservative wife likes it that way as it makes her feel very comfortable when she pays bills. Both of us came up from modest means and remember where we came from.

Route246, if I recall some of your earlier posts, I think maybe you're an eight-figure guy, so something tells me you don't have much to worry about financially. That said, I kinda get it - we have some similarities. I'm a bit younger, but in that upper 7-digit quadrant of NW, so I do get how you might fret over the numbers even if that might seem silly to other folks. Like you, really enjoyed my work, was proud of being at the top of my game, career came with prestige, excitement, intensity, high stakes drama, etc. I would have liked to work a few more years, which would have put me over that extra digit on NW, but the paycheck vs the sacrifices were just not adding up to a positive figure. So, I pulled the plug, class of 2024, now wading through that first phase of FIRE.

For a workaholic adrenaline junkie like myself, being suddenly unplugged from the intensely competitive rat race I've been running practically my entire life has been disconcerting to say the least. I do feel like a huge part of my life is suddenly missing. Fortunately, I have some other things to keep me busy - winding up some work-related affairs, managing near-term liquidity events such as selling off investment real estate, consolidating into what has been our vacation home, engaging with charitable board work, etc.

Leading up FIRE, I took the following steps:

1) Exactly as you described, we never really had a household budget, so I downloaded all bank account data for 2022/2023 and did a thorough scrub of expense data to arrive at a go-forward budget I could feel confident about. From that I separated out discretionary expenses (roughly 50% of base case plan) which gave me some idea how much flexibility we could have if we adopted a variable WD approach with an eye towards possibly blowing a lot more dough in the early innings while we're still physically capable of some things. Fortunately base case plan is well below 4% SWR rate, and even aggressive case is more like 5%.

2) I ran our numbers through a dozen calculators, especially FIRECalc, I-ORP, RPM, and Fidelity. Sat down with a Fidelity private client rep to review/verify good to go indicator. Created detailed spreadsheets for tracking assets, NW, social security and pension estimates, etc.

3) Reviewed employer retirement (medical) benefits (not yet Medicare age), leaving policies, non-compete policies, RSU's, etc. Like you, I will be leaving some $$$ on the table, but that's just always going to be the case. You can't take it with you, as the saying goes.

4) Lined up new tax accountant, been DIY past few years. First couple FIRE years will involve some big tax hits from liquidity events. Consolidating all investment accounts to Fidelity Private Client.

5) Planned nice vacation to celebrate newfound freedom.

I'm sure I'll think of more after I post this.

P.S.

6) Made sure had at least two years expenses in cash, so don't have to worry about creating a WD scheme right away.

 

[LateToFIRE]

^^^
I had a feeling we were kinda cut from the same career-obsessed, workaholic, burn the candle at both ends, don't know how to get off the treadmill, needs to get a life cloth.

Probably the biggest challenge for guys like us is that while we might have been really successful in a career context, we're often under-developed in creating friends and social networks unrelated to work, much less having nurtured any passion hobbies (where do people find time to work AND golf). So, we're not just walking away from the career, we're walking away from an entire way of life - one in which for better or worse, we had achieved a certain stature. We don't automatically have the skills to recreate what we had spent decades developing in the career. Which is why a lot of my peers, even if they leave the main stage, continue to work (albeit less intensively) for a few years after retirement - not because they need the money, because it's the only way of life they know.

Anyhow, I get what you mean about buyers remorse. I'm having a bit of that. So, I'm telling myself that this is a trial run. I'll see how it takes. See what directions I'm drawn towards. Rest up, work on my memoirs, take up some hobbies, maybe do a bit of consulting, a bit of advising (but not enough to violate any noncompetes), mess with my investments, focus on retooling our housing situation for the long-run, etc. plenty now to occupy time/energy. We'll see how much I miss the career in a few months.

I'm approaching this all as me time. I am now working for LateToFIRE, LLC. I'm my own man now, I don't work for the man. I bow to no one, I am king of my own destiny.

 

[Closet_Gamer]

Before I pulled the pin we did a hard crawl through the year's spending to make sure we had a sense of how much money was really going out the door and where. There weren't many surprises but it was an important check.

For the first time him 20 years, we've now built a budget in Quicken and are tracking everything each month. We don't face any practical financial pressures but I think good housekeeping is in order as we enter this new phase of life. This also helped ensure DW and I were on the same page in terms of translating that retirement plan into retirement reality.

Perhaps a good exercise for you as well?

 

[TickTock]

Full disclosure: DW retired from megacorp 18 months ago, with a 12 month severance package. My last day of paid employment will be 3/7/24. So this is theoretical.

We never budgeted, but always did LBYM. I have spreadsheets tracking monthly and yearly spending (excluding taxes) going back to 2008; that's what we're using to estimate future expenses along with expected changes - the big one being ACA costs (we're not yet Medicare age) and adding in expected taxes.

All dividends and distributions from the after-tax account have been changed to the sweep account. This is where money will be transferred to our checking accounts. There are also individual bond holdings; as they mature they will be re-invested or partially used to fund living expenses.

Tax-deferred withdrawals will be managed to minimize total taxes over time and maximize ACA tax credits. Likely $0 in 2024.

 

[brett]

I found it to be a lot less complicated that I thought that it would be. We have never really had a household budget-either before or after retirement.

We need to fund the gap between our fixed retirement income items and our spending/projected spending. This includes estimated tax payable and the following year tax installments for each of us.

At the end of November each year I do pro forma tax returns and review our equity accounts from a performance and a tax perspective by plugging the estimates into our prior year's tax program. I use the YTD equity accounts to ball park what monies will become taxable. The only ss that we use are the equity account activity/summary ss's and then only for the applicable bottom line numbers.

After that it is just a matter of looking at our cash balances, our projected spend, estimated tax installments, and what I would refer to as our desired HISA cash on hand 'float'.

So far this has worked well for us over the past 13 years. It is not complicated, not onerous, and does not take a great deal of time.

The only other thing I do is take a monthly tape from our current account on our after tax spend. That takes about all fo 5 minutes flat since most items flow through our credit cards or are autopayments. Not concerned with the breakdown of the spend or the amount. Just want to confirm that we have reasonably accurate on estimating our burn rate the 'gap'. Back of envelope style.

It comes down to (for us) a little common sense and a bit of arithmatic.

 

[Route246]

^^^
I had a feeling we were kinda cut from the same career-obsessed, workaholic, burn the candle at both ends, don't know how to get off the treadmill, needs to get a life cloth.

Probably the biggest challenge for guys like us is that while we might have been really successful in a career context, we're often under-developed in creating friends and social networks unrelated to work, much less having nurtured any passion hobbies (where do people find time to work AND golf). So, we're not just walking away from the career, we're walking away from an entire way of life - one in which for better or worse, we had achieved a certain stature. We don't automatically have the skills to recreate what we had spent decades developing in the career. Which is why a lot of my peers, even if they leave the main stage, continue to work (albeit less intensively) for a few years after retirement - not because they need the money, because it's the only way of life they know.

Anyhow, I get what you mean about buyers remorse. I'm having a bit of that. So, I'm telling myself that this is a trial run. I'll see how it takes. See what directions I'm drawn towards. Rest up, work on my memoirs, take up some hobbies, maybe do a bit of consulting, a bit of advising (but not enough to violate any noncompetes), mess with my investments, focus on retooling our housing situation for the long-run, etc. plenty now to occupy time/energy. We'll see how much I miss the career in a few months.

I'm approaching this all as me time. I am now working for LateToFIRE, LLC. I'm my own man now, I don't work for the man. I bow to no one, I am king of my own destiny.

Thanks for the inspiration. I realized long ago that workaholism is an addiction that is tough to cure. I have some hobbies and activities lined up and I envy those who enjoy travel but I'm just too burned out on it from my road warrior days. I've been more places than I can remember so the novelty is not there, other than Cuba and North Korea, just to see it for the novelty. I prefer to visit after diplomatic relations (i.e. embassy in place with ambassador) are setup.

Although I consider my career successful it really wasn't enjoyable or pleasurable as some might perceive as compensation packages are made to compensate for the stress and misery, too. It is and was very satisfying and something I'm very content about. Some people don't get this part of it and think the compensation is wonderful (which it is) but that stress and misery does take its toll, along with the lack of work/life balance.

Being married and a family man does take its toll regarding friendships. I only have one true friend in the world now, at least one that I see and meet regularly. Others have drifted apart, had similar commitments and otherwise just don't have time to get together. High school reunions are always fun but that's only every five years. My best friends are my family so I'm blessed from that standpoint, but to be honest I don't have much of a social life.

I'm trying to align everything now for retirement and many suggestions and ideas have been described here for which I am eternally grateful for. I know what I have to do in terms of the cash flow planning. I just haven't spent enough time with the tax planning, that much I know.