Final Review Before the Plunge

[MarcusAurelius]

Happy New Year to all.

Long time, first time. I've been preparing for retirement for many years, I think I'm finally ready. Countdown timer on my phone has been set for a few months.

This is my scenario:

Single, turning 57 in autumn. No children or dependents.

* Traditional IRAs from employment (SEP/SIMPLE) - $1.2M
* Roth IRA - $385K
* Roth 401K - $14K (just started)
* Taxable Accounts: $1.2M (about $300K is in cash)
* HSA: $85K (used as essentially as investment)

Total: $2.8M

The breakdown of investments (all in mutual funds, mostly Fidelity/Vanguard):

Stock: 60%, Bond: 10%, Balanced: 15%, Cash: 15%

Home mortgage has $85K remaining (final payment in early 2027), worth at least $450K now.

Auto was purchased last year and paid in full. Less than 5000 miles put on it in the last 18 months.

Estimated Monthly Expenses:

Mortgage (thru 2027): $2200-$2500 (included likely tax increases)
Other Expenses: $1500 (this has been the average for last 2 years, this includes almost everything actually spent for food, credit cards, utilities)
Health Insurance (on ACA plan): $700 (w/out subsidy), $250-$600 (w/subsidy). For the past few years, mostly routine checkups (<$1000/year OOP). BP, Sugar, and weight in normal range past 5 years.

The only income that I would show for ACA purposes will come from dividends / capital gains in the taxable accounts. This has averaged about $40K for last few years, but this year is around $70K (ouch!). I've already sold funds in the past few years to try to reduce this amount to more tax efficient index funds.

Social Security Estimates (doesn't include 2021 income yet): $1900 (62), $2650 (67), $3300 (70). Thanks to those who have recently posted the link to the SS site that provides the benefits.

Our small company was purchased last year by a much larger organization, so my mostly influential role is much more subservient to their wishes. I've been mostly remoting for past 5 years, I expect that this will mostly end in the next 3 months. Commute would be about 1 hour each way to new office (right now it's 90 minutes each way).

Fidelity Planner / Firecalc (using 40 years, $60K expenses, $2.8M portfolio) - 100% success, leaving at least $1M on table.

I would greatly appreciate any thoughts and ideas. One thing that I'm unsure of is the best way to withdraw required money. I probably have enough for next 2 years just in traditional bank type accounts, so it would be after that.

 

[HI Bill]

Welcome! Sounds like you're well-educated, and well-prepared for ER! Rather than starting off by essentially eliminating most taxes for two years (withdrawing only from traditional bank accounts), I'd recommend pulling $ from your taxable accounts each year, at least up to the 12% tax bracket, especially when the markets are up; if you don't need the extra $, you can reinvest them, resetting the tax basis for LTCGs. I'd aim to maximize your 0% LTCGs tax bracket. You want to pay less in lifetime taxes, and deferring taxes now won't help once you get to the RMD age. I'm not good on managing income for ACA, as I'm still on COBRA insurance, but others will chime in there. Since you're down to only a few months, I'd suggest maximizing your 401(k) and catch-up contributions for the year (I maxed mine out in just two months last year before retiring). That way, you can get more in tax-deferred accounts, with little in the way of extra taxes.

 

[finnski1]

I think you're in fine shape. < 2%WR with a good AA and less when the mortgage goes away.
Congratulations.

 

[Dash man]

Look ahead to what you might expect your RMDs to be when you turn 72. You may find that it’ll be to your advantage to do Roth conversions, at least to fill up to the 12% bracket when you retire. If you do nothing you may be pushed into a higher bracket later on when you begin RMDs.

 

[Kork13]

I'd just focus all of your withdrawals from the traditional retirement accounts, though Roth conversions also work. You'll have some pretty hefty RMDs come 72 (~$47k/yr if they started today), so if you can reduce that balance faster than it continues to grow, you can get them down to where you won't end up with a dramatically higher income once you're drawing both SS & RMDs. You're forecasting fairly low spending relative to your available assets, so you're going to end up with alot of excess somewhere -- either more income than you need or assets well beyond what you plan to spend.

 

[MarcusAurelius]

I'd like to thank those who provided the above advice, lots to think about! It's been a long ride from negative net worth and paying off student loans in the early 90s to now, most of done on fairly moderate salary and just investing every month for the last 20 years. First thing I want to do is sign up for health insurance coverage before the Jan. 15 deadline for open enrollment. Then I'll feel safe to give my notice. At least there appears to be many more plans available than I saw a few years ago.

 

[MarcusAurelius]

Welcome! Sounds like you're well-educated, and well-prepared for ER! Rather than starting off by essentially eliminating most taxes for two years (withdrawing only from traditional bank accounts), I'd recommend pulling $ from your taxable accounts each year, at least up to the 12% tax bracket, especially when the markets are up; if you don't need the extra $, you can reinvest them, resetting the tax basis for LTCGs. I'd aim to maximize your 0% LTCGs tax bracket. You want to pay less in lifetime taxes, and deferring taxes now won't help once you get to the RMD age. I'm not good on managing income for ACA, as I'm still on COBRA insurance, but others will chime in there. Since you're down to only a few months, I'd suggest maximizing your 401(k) and catch-up contributions for the year (I maxed mine out in just two months last year before retiring). That way, you can get more in tax-deferred accounts, with little in the way of extra taxes.

We switched from SIMPLE plan in the fall to 401K plan (my first). I picked the Roth option and dumped almost my entire net salary from the rest of the year to maximize to the allowable limits. I'll probably do the same for the 1-3 months remaining.

 

[MarcusAurelius]

I'd just focus all of your withdrawals from the traditional retirement accounts, though Roth conversions also work. You'll have some pretty hefty RMDs come 72 (~$47k/yr if they started today), so if you can reduce that balance faster than it continues to grow, you can get them down to where you won't end up with a dramatically higher income once you're drawing both SS & RMDs. You're forecasting fairly low spending relative to your available assets, so you're going to end up with alot of excess somewhere -- either more income than you need or assets well beyond what you plan to spend.

I guess I'd have to wait about 3 years to start withdrawals from the traditional retirement accounts without penalty, so I certainly appreciate your advice as that is quite a large RMD in 15 years.

 

[Kork13]

I guess I'd have to wait about 3 years to start withdrawals from the traditional retirement accounts without penalty, so I certainly appreciate your advice as that is quite a large RMD in 15 years.

I'm not terribly familiar with them yet, but I believe you could actually start doing Roth conversions (from Trad IRA to Roth) at any time, so you could potentially start that process sooner.

To get you to 59½, you could simply live off of your taxable dividends & capital gain distributions, augmenting with done of your cash pile. Really, no matter what path you follow, you'll be just fine. There are ways to optimize for taxes, but I'd lean toward working with a pro for some of that.

 

[MarcusAurelius]

Look ahead to what you might expect your RMDs to be when you turn 72. You may find that it’ll be to your advantage to do Roth conversions, at least to fill up to the 12% bracket when you retire. If you do nothing you may be pushed into a higher bracket later on when you begin RMDs.

So if I was $10K less than the 12% tax bracket upper range, I should convert $10K from traditional to Roth IRA?

 

[MarcusAurelius]

I'm not terribly familiar with them yet, but I believe you could actually start doing Roth conversions (from Trad IRA to Roth) at any time, so you could potentially start that process sooner.

To get you to 59½, you could simply live off of your taxable dividends & capital gain distributions, augmenting with done of your cash pile. Really, no matter what path you follow, you'll be just fine. There are ways to optimize for taxes, but I'd lean toward working with a pro for some of that.

Yes, you're correct. I was thinking of the withdrawal penalty before 59 1/2, not the Roth conversion. Thanks for clarifying.

 

[MarcusAurelius]

Update - Countdown is On

Thanks for the advice I've received since I first posted, so I wanted to update. Last month, I made the official announcement to management last month! Definitely surprised them. We agreed that I would continue for a few months to ease the transition, but by mid-spring I would leave. I'll save a few months of extra health insurance costs, get some extra money, and put as much as possible into Roth 401K. I probably will also wind up doing some consulting work for them, but it will be at my discretion.

For information and fun, I'm reading some books on retirement planning, along w/the ER forum. Right now, I have at least 4-5 years expenses in cash in taxable accounts. I still contribute about $800 to 7-8 taxable mutual funds each month, but I'm thinking of tapering off for some of them. Almost all of the taxable funds have the dividends and CG reinvested automatically, so I'm thinking of stopping that (about $40K/year for last 6 years) and using combination of cash + dividends/CG for expenses. I would only touch taxable accounts for the next 3 years as I wouldn't be eligible to withdraw from IRAs w/out penalty.

 

[Ronstar]

Congrats! Nice update! Good idea on having 4-5 years expenses in cash. Gives you flexibility in future withdrawals. I did the same thing. Thought it might be dumb when I did it, but it worked out for the best.

You're prepared for launch - enjoy the ride!

 

[RxMan]

It looks like you are good to go with your savings and estimated expenses. Congrats! I do have one question out of curiosity- have you thought about what age you will start collecting SS?

 

[pacergal]

Congratulations! Your last day of work will be here before you know it. Then you can enjoy your retirement.

 

[MarcusAurelius]

It looks like you are good to go with your savings and estimated expenses. Congrats! I do have one question out of curiosity- have you thought about what age you will start collecting SS?

Right now, I would target 70 (or whatever age full retirement may be at that time).

 

[MarcusAurelius]

Congratulations! Your last day of work will be here before you know it. Then you can enjoy your retirement.

The transition process is already underway in my head. I was actually more stressed about deciding how to announce retirement. Once I did that, I started retirement mode. Countdown timers have been set.