Please critique our plan to retire this year

[dobig]

Age both 55. Current assets $2.95. Brokerage account $1.2. Cash on hand $240,000. Retirement accounts $760,000. Home $750,000. Pension $1,500/month. No debt. Goal for retirement is around $80,000/year (overestimating) which is above our current spend of $60,000 (over estimating). SS at 66 should be around $55k.

Our brokerage is mainly dividend growth etfs (SCHD, DGRO, DGRW, VYMI) with some Cefs and individual bonds mixed in that should give us around $54,000/year in income. The $240,000 is for 4 years expenses and to protect against a bad market downturn. We also have an emergency fund of $15,000.

Are we being overly opimistic or naive relying so heavily on an income based portfolio and are we keeping to much cash on hand? Or would a more balanced approach with a traditional 60/40 split give us a better chance of success? Our goal is this Sept and of course we're going into panic mode over thinking everything.

 

[stepford]

At a glance the numbers look OK. Expenses of $80K - pension of $18K means you need to come up with $62K/yr. Outside of your house you have assets of $2.2M which works out to a 2.8% annual withdrawal rate. Most folks around here would probably say that's good enough, but if you haven't already you should run these numbers through one (or more) of the usual retirement income calculators under various scenarios with various asset allocations. Among other things that will address your question of inflation risk with a heavily income weighted portfolio.

Our opinions can be helpful but they're no replacement for running the numbers yourself.

 

[Koolau]

I always ask: Have you run FIRECalc yet? I believe it will show you are in great shape. Best luck going forward.

 

[AZsniper]

I think the numbers are fine. Are you mentally ready to retire?

 

[Aerides]

Goal for retirement is around $80,000/year (overestimating) which is above our current spend of $60,000 (over estimating).

Don't estimate, know. Pull your actual expenses - every outgoing penny - for the past 3 years, or longer. And then figure in healthcare (not just premiums, but copays and a reasonable dig into your deductibles even if "we've been healthy" as you are now 55 and that starts to change. Does that allow for the increased travel you might want to do? And taxes?

If 80k is real, you are in very good shape. And yes I like cash on hand, a few years of expenses, so you aren't forced to sell in a downturn and take a loss at the wrong time.

 

[dobig]

I always ask: Have you run FIRECalc yet? I believe it will show you are in great shape. Best luck going forward.

FIRECalc numbers look good. But man is it unsettling the closer you get to The Day. I'm the one who handles our investments while my wife does our month to month. I never use to be so uncertain but the closer we get the more I start fretting how we're invested, if we'll have enough, if we should be doing more Roth conversions and on and on. And the ironic part is when someone else posts their numbers I pretty much can see if they're good or not. But as soon as I start thinking about our own numbers I start over thinking everything or worse my head goes blank.

I envy those who have already made the jump and are relaxed with where they stand.

 

[whatnot]

Do your expenses include health care insurance and out of pocket expenses.
i think this is a significant cost once you leave employer sponsored insurance. You have 10 years before you qualify for Medicare.

 

[dobig]

I think the numbers are fine. Are you mentally ready to retire?

Depends on what part of the day it is.

 

[dobig]

Do your expenses include health care insurance and out of pocket expenses.
i think this is a significant cost once you leave employer sponsored insurance. You have 10 years before you qualify for Medicare.

We've run the numbers for our state's marketplace and it looks pretty good. We're using max out of pocket in network as our base. Max out of pocket for out of network would be an additional $21k. Should we be allocating for this?

 

[pb4uski]

Change is hard. That is what make you unsettled. IF $80k of spending is a good number then you're all set financially, but what are you going to do all day?

If your financial institution supports it, I would advise carving out 18 months of spending in a money market fund or high-yield savings account and have an automatic transfer to the checking account that you use to pay your bills on the xth of each month... your monthly "paycheck". Given your spending is $80k or $6,700/mo and your pension is $1,500/mo that would be an automated monthly withdrawal of $5,200. The other thing that might do is mitigate the anxiety in shifting from saving to spending.

Also, model out your taxes for your first full year of retirement. You may find between when you retire and when you start SS to be an ideal time to do low tax cost Roth conversions.

 

[pb4uski]

We've run the numbers for our state's marketplace and it looks pretty good. We're using max out of pocket in network as our base. Max out of pocket for out of network would be an additional $21k. Should we be allocating for this?

I wouldn't. Unless you are unhealthy, even max OOP in network is conservative.

 

[MBAustin]

I agree with everything said above, and you may also want to check out this helpful list of things to consider:
Some Important Questions to Ask
Good luck!

 

[pacergal]

I agree. If Firecalc is good and you have answered the questions posted by MBAustin, you are good to go.
Start planning what retirement will look like for you. A good book, often referenced on the forum, is Ernie Zelinski's "How to Retire Happy, Wild and Free".

 

[Exchme]

You have enough to retire, so you can rest easy on that strategic point and get to work on the tactical parts of risk management, tax efficiency, ACA premium credits, Roth Conversions, withdrawal strategy, SS claim strategy, estate planning and the portfolio construction that supports that.

From what you described, I'm not a fan of your portfolio, it's not tax efficient and will be harder to get ACA premium credits or have room for Roth Conversions. You are worrying about "income", when you should worry about total return.

A tax efficient portfolio would not seek out dividends, those just increase your taxes or reduce ACA premium credits or room for Roth Conversions. Unless you have a specific short term need for cash (like maximizing ACA or the next few months of spending), then cash/bonds belong in your tax deferred. That matches the taxation of the asset returns (ordinary income) to the taxation of the account, and leaves the maximum space in taxable for low dividend ETFs. When you need money, you simply sell something and pay the capital gains taxes.

A one-time fee planner might be helpful (stay far, far away from the ones that want a % of assets under management, their fees go on year after year and so end up costing you a fortune, you only need guidance for the first few years, after that, things go on auto-pilot but the advisor still charges the fee, adding up to dozens of times as much as paying for a plan once.)

 

[dobig]

You have enough to retire, so you can rest easy on that strategic point and get to work on the tactical parts of risk management, tax efficiency, ACA premium credits, Roth Conversions, withdrawal strategy, SS claim strategy, estate planning and the portfolio construction that supports that.

From what you described, I'm not a fan of your portfolio, it's not tax efficient and will be harder to get ACA premium credits or have room for Roth Conversions. You are worrying about "income", when you should worry about total return.

A tax efficient portfolio would not seek out dividends, those just increase your taxes or reduce ACA premium credits or room for Roth Conversions. Unless you have a specific short term need for cash (like maximizing ACA or the next few months of spending), then cash/bonds belong in your tax deferred. That matches the taxation of the asset returns (ordinary income) to the taxation of the account, and leaves the maximum space in taxable for low dividend ETFs. When you need money, you simply sell something and pay the capital gains taxes.

A one-time fee planner might be helpful (stay far, far away from the ones that want a % of assets under management, their fees go on year after year and so end up costing you a fortune, you only need guidance for the first few years, after that, things go on auto-pilot but the advisor still charges the fee, adding up to dozens of times as much as paying for a plan once.)

This is where I may have a misunderstanding. I thought having a portfolio where the majority of dividends were qualified dividends made it tax efficient since you pay $0 in taxes until $94,000 for a married couple filing jointly. Are there other considerations we're not thinking about?

 

[pb4uski]

^^^ I think you are both correct. OP is right that most of the $54k of income from the taxable accounts are qualified dividends and therfor 0% tax since when he is managing income for ACA.

However, he will have less flexibility in managing income since many of his holding are higher dividend yields than a total stock fund which has lower dividend yield and income can be managed by discretionary LTCG.

While Echme make a vaild point in general, but IF the total dividends and interest from the taxable account funds is below the OP's income target for ACA then I don't think it is a big deal.

OP is lucky that tax-deferred is a low percentage of their total retirement savings compared to most people. Hopefully OP has some room for low tax cost Roth conversions between ER and Medicare at 65, and then can do even more Roth conversions from 65 to 70 if they defer SS.

 

[CaliKid]

As long as you can spend so little you should be good but is that realistic in retirement? Health insurance? Deferred maintenance on house? Cars? Big ticket "one-offs" (that come up all the time it seems)? I would really drill down on your expenses to be confident.

 

[FlaGator]

We've run the numbers for our state's marketplace and it looks pretty good. We're using max out of pocket in network as our base. Max out of pocket for out of network would be an additional $21k. Should we be allocating for this?

Maybe, at least a portion, or for some years. Can't predict what might happen, and if the medical expenses jump, you don't want to figure out how to pay them become another source of anxiety.

I would look at the networks of your likely ACA providers to better estimate the O-O-N risk.

I also recommend you look closely at the plan options. I had been on a HD/HSA plan for years, and it was advantageous until deductibles increased, and 3 of the 4 of us had problems. With high individual and family deductibles, there was a lot of money paid OOP for a couple of years that was not part of the initial forecasted expenses.

 

[dobig]

^^^ I think you are both correct. OP is right that most of the $54k of income from the taxable accounts are qualified dividends and therfor 0% tax since when he is managing income for ACA.

However, he will have less flexibility in managing income since many of his holding are higher dividend yields than a total stock fund which has lower dividend yield and income can be managed by discretionary LTCG.

While Echme make a vaild point in general, but IF the total dividends and interest from the taxable account funds is below the OP's income target for ACA then I don't think it is a big deal.

OP is lucky that tax-deferred is a low percentage of their total retirement savings compared to most people. Hopefully OP has some room for low tax cost Roth conversions between ER and Medicare at 65, and then can do even more Roth conversions from 65 to 70 if they defer SS.

We weren't even thinking about Roth conversions so we'll have something else to work on. Currently only $120,000 of our $760,000 in retirement accounts are in Roth. We'll have to figure the optimal timing to do more conversions while also paying attention to MAGI for ACA. Ughh,...more things to hurt my brain.

 

[dobig]

As long as you can spend so little you should be good but is that realistic in retirement? Health insurance? Deferred maintenance on house? Cars? Big ticket "one-offs" (that come up all the time it seems)? I would really drill down on your expenses to be confident.

Excellent point. We've been discussing if we should use our income between now and Sept to boost our cash, invest or do some home projects. We've already priced out HVAC ($15k), windows ({$15k), water conditioner ($8k). Maybe do those and put more money into our emergency fund.

 

[Sunset]

There are other lumpy expenses, you could plan in your estimating of expenses.
Roof age ? and how old are your vehicles as they will need replacement someday.

We also estimated our expenses, and after retirement I finally started really tracking spending. Mostly because of discussions here, so I knew how much I spent on Groceries, travel, restaurants, etc.

One thing that got us was I bought a new vehicle shortly after retirement in cash. Then fell victim to a cash flow shortage time for a few months as hadn't really planned well.

While it all worked out fine, I'll admit, had I tracked spending before retirement, there would have been a little less angst.

 

[dobig]

Metal roof last year. New car '22. Was thinking of upgrading our Toyota and getting the 7 year warranty but I thought there were better uses for $25k.

We've budgeted for 30 years but I know we don't track the way we should. Starting Jan 1 we decided to put all expenses between 1 card and the bank account the pension goes into. After 6 months we think we should have a better handle on what our needs will be.

 

[pb4uski]

We weren't even thinking about Roth conversions so we'll have something else to work on. Currently only $120,000 of our $760,000 in retirement accounts are in Roth. We'll have to figure the optimal timing to do more conversions while also paying attention to MAGI for ACA. Ughh,...more things to hurt my brain.

Welcome to our world, but it is a first-class problem to have. For many of us our tax deferred balances are a lot more of the total and when RMDs start in our early/mid 70s they will push us into higher tax brackets so the incremental tax on RMDs are significant.

Roth conversions are just a tax arbitrage play. You estimate what your incremental taxes on RMDs will be. If you can do Roth conversions now at a lower incremental tax (including lost ACA credits where applicable) then it is worthwhile. If not, just wait for the RMDs.

 

[CoAndy]

I think it's time to enjoy your retirement.

 

[engineernerd]

Age both 55. Current assets $2.95. Brokerage account $1.2. Cash on hand $240,000. Retirement accounts $760,000. Home $750,000. Pension $1,500/month. No debt. Goal for retirement is around $80,000/year (overestimating) which is above our current spend of $60,000 (over estimating). SS at 66 should be around $55k.

Our brokerage is mainly dividend growth etfs (SCHD, DGRO, DGRW, VYMI) with some Cefs and individual bonds mixed in that should give us around $54,000/year in income. The $240,000 is for 4 years expenses and to protect against a bad market downturn. We also have an emergency fund of $15,000.

Are we being overly opimistic or naive relying so heavily on an income based portfolio and are we keeping to much cash on hand? Or would a more balanced approach with a traditional 60/40 split give us a better chance of success? Our goal is this Sept and of course we're going into panic mode over thinking everything.

I very much agree with others here that you don't need to worry. FIRECalc shows that unless the next 40 years turn out worse than any past 40-year sequence, you can safely withdraw from your $2.2k portfolio an inflation-adjusted $66k every year for 40 years, for any asset allocation ranging between 30% and 100% stocks. And all your mentioned ETFs are stock funds. They may grow in value at a different rate than the stocks represented in FIRECalc, but since you won't need anything like $66k once you start SS, that won't make any difference.

Given that your dividend growth ETFs are stock funds, you may have a lot of unrealized capital gains in your taxable brokerage account, in which case you may prefer to start realizing those gains in the 0% bracket rather than to do Roth conversions.