My Plan: 52-100 ..with lotsa details

[WantOutAt55]

Hi All. I've been lurking for a few months, and simply love it here (you are all so good at this stuff). So here I am, hoping to get some advice on my plan. The following plan was started in 1999 and has been on track so far. Here we go ....

PROFILE:
- Current Stock, cash, Bonds, Other: $405K
- Plan to have about $730K at 55 based on our track record of saving and investment performance.
- NY Condo (current value $650K, less about $25K owed), paid in full by 2015, my age 55 when I want to retire
- Second Country house (owe about $100K, still have 25 year mortgage remaining) current value about $125K
- Current monthly expenses about $4500-$5000
- Current age: 52 (wife 50). Want to retire at 55 (maybe wait until 56 .. But don't want to wait much longer)
- Pension will be about $1300 per month starting @ 55.
- Will have no medical after I retire at 55. I must cover it until age 65 (medicare, etc)
- I think we can live on about $60K annually starting at 55 or 56 (+2.5% inflation added per year)
- After 55 income will come from: $60K annually (+inflation): (NOTE: Need to cover medical, age 55-65):
-----> INCOME: Age 55-62, my pension + pull % from investments; At age 62 add my Social Security; At age 65 add wife Social Security, and now have medical from Medicare, etc.
- MAYBE: We can move to country house, and rent condo ONLY if needed. Current condo rental value probably $2300 per month (condo common charge, etc $300 month, net $1800 to $2000 rental income)
- Estimate that we'll need about 6% growth from investments from age 55 to…. (my calculations see a negative balance starting about age 91 … but still working on details).

Current Accounts Composition:
- Stock 51%
- Cash 21% (about $68K in MM, Savings, Checking)
- REIT 19% (pays 7% annual)
- Bonds 9%
- Investments within two 401K's, and a few individual accounts:

DIS
VWELX
SEQUX
VEXPX
SOAVX
VFINX
FFTWX
FDCAX
RYLPX
DGRIX
DNLDX
SOAAX

The Questions:
- Q: How should I start to tweak my portfolio?
- Q: Any recommendations for a conservative (safer) 6% return?
- Q: Who can I go to for the right advice?
- Q: Am I nuts to believe that this can work (please be gentle)

Thanks SOOOOOO much in advance.....

 

[nun]

I'm in a similar situation to you and planning to ER in 5 years when I'm 55. Right now I'm readjusting my portfolio to be a bit more conservative and I'm particularly looking at what to do with my cash holdings when I increase them to be 2 years worth of expenses; I don't want that much just sitting in a MM loosing value because of inflation. So think about what to do with your cash. I'm looking at I-bonds and short term bond funds, but will probably go with a stable value account I have in my 457 account as it currently generates 4%.

I notice your bond holdings are pretty small, you might look at increasing those.

6% is a bit aggressive for me, I use a 4% return for planning and know that I could economize for a few years if necessary.

 

[67walkon]

A safe withdrawal from $730,000 is about $29,000. Your pension is $15,600. The total will be $44,600. There will be some taxes, so your net won't be $44,600.

Your expenses are paid with after tax dollars, so you probably need a little more than $5,000 a month income to cover them.

If the condo is worth around $600,000 and you're not going to live there, you could either rent it or wait until the market gets better and sell it. You should be able to get another $24,000 or al ittle more from that asset, whether your rent it or sell it and invest the proceeds. That gets you close.

Like nun said, you might take a look at bonds. We've been really, really pleased with shifting investments over to bonds in the last few years. Right now, we're getting right at a 5% or maybe slightly better from bonds, and some of them are tax free. I don't think you can get bonds in that range right now, but maybe. We have enough of them that if a few default, it won't matter. You're pretty close to debt free, so you can control inflation a little better than most.

Good luck!

 

[Midpack]

A safe withdrawal from $730,000 is about $29,000.

Conventional wisdom for age 65, but the OP is targeting age 55. $29K might be a little optimistic statistically, a significantly lower probability of success based on past history at least, but there's no absolute answer. Many early retirees here (and elsewhere), closer to the OP's age, seem to plan on a 2-3% WR FWIW.

I would also suggest you enter your info in FIRECalc: A different kind of retirement calculator to get a sense how you'd fare, it's a helpful place to start. As for portfolio recommendations, you'd have to tell us a lot more about your expectations, there's just no stock answer. Are you more likely to follow Jack Bogle or Jim Cramer?

 

[pb4uski]

I've been through a lot of planning recently in preparation for pulling the trigger on ER. There are some great tools out there that you should take advantage of. If you use Quicken, it has a very good planner IMO, albeit a static analysis. Also try out Firecalc and OMP. If you are a VG customer you would have access to Financial Engines and above a certain amount they offer a free financial plan (though it is a bit elementary and similar to Firecalc and OMP). Guided Choice also has a quick advice tool that is similar. I ran all of these using the same assumptions and while they differ, as would be expected, they are all in the same range and exceed what I need to live on.

While the historical rate of return for my 60% stock/40% bond portfolio is 8.7%, I only use a 5.5% investment return assumption in my static calculations in the interest of conservatism.

I think you can probably make it work if you move to the country house and sell or rent the NY condo. One thing to keep in mind is that if you sell the condo then any gain is tax free (up to certain amounts) whereas if you rent it for a few years and then sell it then it works differently. Not sure of the details since I wasn't in that situation.

 

[Koolau]

I think you can probably make it work if you move to the country house and sell or rent the NY condo. One thing to keep in mind is that if you sell the condo then any gain is tax free (up to certain amounts) whereas if you rent it for a few years and then sell it then it works differently. Not sure of the details since I wasn't in that situation.

Not an expert, but we did go this route ourselves (in reverse - rent, then live there before sale). IIRC you must live in a dwelling for 2 of the past 5 years to be eligible for the $250K/$500K tax exemption upon sale of a "primary" dwelling. One thing we ran into is that IIRC the law in 1997 changed such that any depreciation associated with the "business" of renting out your condo is "recaptured" at time of sale (that made us look very "rich" last year - with some unforeseen consequences!) Don't forget you need to do your tax planning in advance of retiring to get this as close to "right" as possible. Hire a "tax guy - or girl".

One other thing - 67walkon alluded to "taxes" in your case. More specifically, you will owe at least Federal taxes (maybe state) when you cash in part (or all) of your 401(k)s or tIRAs. So, you might want to think of these vehicles in terms of their "net value after tax" not what the quarterly statement says they are worth. Realistically, you could loses 1/3 at the time you cash in, but there are lots of tricks to play to keep that much lower. Again, your tax "person" can help you plan this - it is quite important. Good luck.

Don't forget - YMMV

 

[fisherman]

Are you including reasonable healthcare costs for your age group if you can qualify or is that an issue in NY? If qualification is an issue and you can qualify now you might want to go ahead and buy it now. That is what I did.

 

[Leon44]

Just a few thoughts:
Carefully review your expenses. 60K doesn't seem like enough to me if you plan on owning two properties without at least renting out one to cover costs. I'm not sure a "safe" gaurenteed 6% rate of return exists anymore. I would plan on less return. I also agree with Midpack on the withdrawel rate....don't count on 4% at age 55...go more conservative at 2% to 3%. You only get one chance at this so you want to have some cushion. I do think if you adjust your plan you should be able to retire at 55 or 56. I could be wrong but I doubt that there are too many folks on this board that owns two properties or even one valued at over 750K. If need be you could reduce your housing costs big time. Your doing the right thing. "measure twice and saw once".

Good Luck!

 

[obgyn65]

hello - have you entered your values in this free tool :

Merrill Edge| See Where You Stand

- Q: Am I nuts to believe that this can work (please be gentle)

 

[Spanky]

hello - have you entered your values in this free tool :

Merrill Edge| See Where You Stand

That's nice tool! Thanks.

 

[walkinwood]

Your post ER expenses seem to be the same as your pre-ER expenses. Have you accounted for health insurance spending?

Taking SS at 62 means you give up a lot. If you haven't investigated this, you should. In essence, each year you defer, you would be increasing your payout by about 8% (IIRC).

Try putting your numbers though ESPlanner. There is a free version online. I find it great to see the 'relative' differences between various scenarios.

All the best.

 

[Huston55]

Lots of good advice here already. I'll add a few additional things to consider.

1. You say you "think" you can live on $60k/yr. You need to be much more certain. Suggest using one of the online calculators that enable you to include detailed expenses; Fidelity Retirement Income Planner will do this for you. The other option is to do a detailed expenses estimate elsewhere, then use this in FIRECalc or similar tool.

2. When building your retirement expenses estimate, divide expenses into "essential" and "discretionary" to give you a good feel for how you will spend in retirement and how much potential 'slack' there is in your budget.

3. Do enough research to know how much medical coverage will cost you from 55-65. Don't want to get such a large expense wrong.

4. Since you get about the same annual income from your condo (~$24k/yr), as pointed out by an earlier post, you can take a little time to decide what to do because of the way the cap gains rule works. The cap gains rule is: live in it 2 of the past 5 yrs, and you and DW can avoid tax on up to $500k of gain (gain does include any recaptured depreciation, as posted earlier). So, if you live in it now, you have a 3 yr window from the day you move out and could rent it for 2+ yrs, waiting on market recovery, before putting it on the market, and still have a year to sell. Also, the cap gain exclusion is prorated, in other words it doesn't go from $500k to $0 on the first day past 3yrs after you've moved out; it's prorated based on time you lived in it during the past 5yrs.

4. One last comment regarding SWR. You will get a lot of views on this here (do a search and read some of the threads, very useful). IMO, using a SWR as low as 2% for your circumstances is overly conservative. While it's true that the 4% SWR is based on a 30 yr period (and a specific AA), and you need to plan on ~40 yrs if you FIRE at 55, there is a lot of research to support 3%+ SWR for that length of time.

Hope this is helpful. Good [-]luck[/-] planning!

 

[WantOutAt55]

Based on your response, I see that I really need to cross my 'T's and dot my I's to get this plan to work. Some very good info here as always (the rental rule with regard to cap gains when ready to sell; the various tools; SWR, etc).

I also see that I need to do a little work on my SWR plan as well. The health plan thing does make it complicated. My origianl plan was to use my actual pension to fund a plan, but now that my estimated "at 55 NEST EGG" is reduced, I'm still floundering a bit on how to handle the health coverage from 55-65.

Finally, I'm still a little confused as to how I should tweak my current protfolio (Stock 51%, Cash 21% w/about $68K in MM, Savings, Checking; REIT 19% (pays 7% annual); Bonds 9%). I must say, I'm a little less optimistic now .... which means I need to work harder on getting the details clearer.

Thanks again to all of you for the great info

 

[REWahoo]

That's nice tool! Thanks.

Spanky, as usual, the devil is in the details when it comes to retirement calculators. Note the fine print regarding the Merrill calculator:

Assumes annual rate of return of 7.71% on a non-FDIC insured brokerage investment and tax-deferred compounding in an IRA.

How realistic is this fixed number regarding future returns? You be the judge.

IMPORTANT: The projections or other information generated by the PRN Calculator regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.

How much confidence should you place in a calculator that says it is inconsistent?

Once again, you be the judge...

 

[nun]

I also see that I need to do a little work on my SWR plan as well. The health plan thing does make it complicated. My origianl plan was to use my actual pension to fund a plan, but now that my estimated "at 55 NEST EGG" is reduced, I'm still floundering a bit on how to handle the health coverage from 55-65.

The 55 to Medicare gap is a big unknown given the uncertainty with health care reform. I have issues with what Romney did for health insurance in MA but at least he took away uncertainty. The MA Connector website gives me an easy way to compare plans and I know I can get a 2000/5000 plan for $350 a month and can't be refuse or charged extra for pre-existing conditions.

Finally, I'm still a little confused as to how I should tweak my current protfolio (Stock 51%, Cash 21% w/about $68K in MM, Savings, Checking; REIT 19% (pays 7% annual); Bonds 9%). I must say, I'm a little less optimistic now .... which means I need to work harder on getting the details clearer.

Thanks again to all of you for the great info

IMHO you have too much in cash and REIT. I'd look at reducing those each to 10% and buying some intermediate term investment grade bonds, or just a bond market fund. Also if you rent out the condo you will dramatically reduce the amount you'll need to take from your investments.

 

[Finance Dave]

But you were smart enough to ask, so at least you know now rather than later.

As for the bond comments, be careful. The longer the duration of a bond, the more sensitive it's value will be to changes in interest rates. In other words, a 30 year bond will decrease more in value due to an increase in rates than a 10 year bond. Given that we're in a position of historically low interest rates, the prospect of owning long term bonds is very scary to me until rates increase.

Also, I'd be leary of having a mortgage on a fixed income. I plan to pay off all mortgages prior to FIRE'ing.

As for your portfolio, IMO 6% is fairly aggressive for someone in your life place....you're going to see some wild swings in the market over time, and if you are loaded up enough on equities to achieve 6%, you'll want to be sure you can sleep well when the market drops a few hundred points.

I'd also recommend securing your health insurance BEFORE you quit working, even if it means double-paying for some time (through work and a private policy). If you quit work, and then try to get insurance while on COBRA, only to find you're not insurable for some "pre-existing condition" found during your physical...you may regret your decision.


Good luck!

Based on your response, I see that I really need to cross my 'T's and dot my I's to get this plan to work. Some very good info here as always (the rental rule with regard to cap gains when ready to sell; the various tools; SWR, etc).

I also see that I need to do a little work on my SWR plan as well. The health plan thing does make it complicated. My origianl plan was to use my actual pension to fund a plan, but now that my estimated "at 55 NEST EGG" is reduced, I'm still floundering a bit on how to handle the health coverage from 55-65.

Finally, I'm still a little confused as to how I should tweak my current protfolio (Stock 51%, Cash 21% w/about $68K in MM, Savings, Checking; REIT 19% (pays 7% annual); Bonds 9%). I must say, I'm a little less optimistic now .... which means I need to work harder on getting the details clearer.

Thanks again to all of you for the great info

 

[LOL!]

You specifically asked how to tweak your portfolio and where to go for the right advice. One of the best places to ask for a portfolio review is Bogleheads • View forum - Investing - Help with Personal Investments but be sure to read lots before posting and follow the "rules" found in Asking Portfolio Questions.

 

[RetireBy90]

Congrats on your savings and paying down the mortgages. I plan to retire in 4 years so I'm in a similiar time frame.

First comment - One thing I'm doing is funding a 5yr cd ladder to provide income my first 5 or 6 years of retirement. It should provide about 1/2 of my needed draw. I have found Pentagon Credit union gives a 2.25% rate for 5 yeas which seems great compared to rates publicized from others. This could also provide a cushion if I can draw my needs above pensions. I'm planning on a 4% draw for 6 years, till I can get some SS at 67 then drop to between 2.5 and 3%.

2nd comment - Plan, read, study, like your doing, but at some point I have said here is what I have, live with it. I plan to retire, not go from current work to spending my waking time worried about $$.