Author Topic: Can I Retire Yet? Here’s My Situation  (Read 3280 times)

MMMVisitor59

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Can I Retire Yet? Here’s My Situation
« on: October 19, 2018, 07:37:05 AM »
I’m interested in the perspectives of people who have been working toward and living through FIRE on whether I can retire yet?

My Situation
Age: 59, married
Annual income: $120,000
Annual spending: $90,000
Annual savings: $30,000 into IRAs and investment accounts
Retirement accounts: $600,000 IRA + $600,000 investment account, invested in a diversified portfolio of 50-50 stocks and bonds
Home: Own my own home, valued at $300,000
Debt: None
Location: Suburban area in the South with below average cost of living. No plans to move.

The Plan
Retire at age 60, at the end of 2019
Annual spending plan: $90,000
Income plan (ages 60 to 67): $18,000 in part-time work + $72,000 (6%) from portfolio
Income plan (68 to 69): $34,000 from Social Security + $53,000 (5%) from portfolio
Income plan (70+): $51,000 from Social Security (includes spousal benefit) + $40,000 (4%) from portfolio

Assumptions
The math above works in Excel, but Excel is not real life. Here are the assumptions I included:
1. I didn’t factor in inflation. I know. It’s a killer.
2. Average annual growth of portfolio: 5% above inflation
3. Looking at the cash flow, the portfolio is reduced from $1,200,000 to $1,000,000 before taking Social Security at age 67. At that point, my expected SSI benefit + 4% SWA gets me to my target income.

Other Options
1.   Continue working a few more years to significantly improve my odds. This is possible, but I have other things I want to work on and do while I am young enough to have the energy.
2.   Reduce my living expenses. There are comforts, conveniences, and expenses I could eliminate and live more frugally, but I like my lifestyle.

Conclusion
I think this could work. What do you think?

Freedomin5

  • Handlebar Stache
  • *****
  • Posts: 1248
  • Location: China
Re: Can I Retire Yet? Here’s My Situation
« Reply #1 on: October 19, 2018, 09:23:15 AM »
It looks like it could work. Don’t forget to factor in a 2-3 year Cash Cushion that you need to put in place before you retire to reduce sequence of returns risk. For your spending level, that will be $216,000 ($72K x 3).

Laura33

  • Handlebar Stache
  • *****
  • Posts: 2083
  • Location: Mid-Atlantic
Re: Can I Retire Yet? Here’s My Situation
« Reply #2 on: October 19, 2018, 09:55:23 AM »
Personally, that would a little too tight for me.  Is your $90K assumption accurate -- e.g., what is medical insurance going to cost, are you going to travel more, etc.?  What happens if your spouse dies and you don't get two SS benefits?  What if the market crashes year 1-2, or right after you have quit the part-time job, or doesn't return 5% over inflation (which IMO is an aggressive target, especially for a 50/50 portfolio)?

All that said, you have a lot of flexibility built in to manage those downside risks -- if you're willing and able to continue working part-time for another 2-3 years, that would help you ride out an early market downturn; if you're willing to cut that $90K/yr lifestyle if the market doesn't meet expectations or you lose the spousal SS benefit (or have life insurance to make up the difference), then you can handle those risks.

So really, it comes down to how happy you would be if some of those rosy projections don't pan out.  If you could live happily on $60K or even $70K, for ex., I think you're in like Flynn.  Just take off the rose-colored glasses and look hard at that outcome before you jump from that nicely-paying job.

Watchmaker

  • Stubble
  • **
  • Posts: 244
Re: Can I Retire Yet? Here’s My Situation
« Reply #3 on: October 19, 2018, 11:07:00 AM »
The numbers as they are are a bit tighter than I would fell comfortable with, but if you could reduce spending by a modest amount you would be in a much better position. How well do you actually know your expenses? Care to share a model budget?

CCCA

  • Bristles
  • ***
  • Posts: 496
  • Location: Bay Area, California
  • born before the 80's
    • FI programming
Re: Can I Retire Yet? Here’s My Situation
« Reply #4 on: October 19, 2018, 11:19:06 AM »
try putting your numbers into the Will My Money Survive Early Retirement calculator. 


But I would echo others to think about the spending plan and the flexibility you have early in your retirement to deal with a downturn.



Unique User

  • Pencil Stache
  • ****
  • Posts: 508
Re: Can I Retire Yet? Here’s My Situation
« Reply #5 on: October 19, 2018, 11:27:35 AM »
I'd plug those numbers into firecalc to model it out.  I'd be really nervous to do 5-6% withdrawal for 10 years, but it may be fine at age 60.  Situation is improved as long as you were flexible enough to work more or spend less if you need to. 

MustacheAnxiety

  • 5 O'Clock Shadow
  • *
  • Posts: 93
Re: Can I Retire Yet? Here’s My Situation
« Reply #6 on: October 19, 2018, 02:51:34 PM »
Your numbers look concerning in http://cfiresim.com/ if you want to be assured of 90K spending every year of retirement. 

I get about a 94% success rate of having your money last to 90 years old but only a 79% success rate of having your money last until 100.

Have you considered a rising equity glidepath during your first 10 years of retirement to help avoid sequence of return risk?  Since you plan to start with such a high withdrawal rate your plan is particularly susceptible to being derailed by an early series of bad years.

When planning for the a 30 or 40 year horizon the models also indicate you are better off with a heavier equity weight than 50%.  But given current high equity valuations I would be more inclined to do the rising equity glidepath than to put a bunch more in stocks immediately.

If I were you I would raise my equity weight and either lower expenses by around 5K a year or work another year.  At 85K your success rate is just over 95% while 1 more year of work pushes you up to 93.5% success of having your money last to 100.

Nickel

  • 5 O'Clock Shadow
  • *
  • Posts: 8
  • Location: Portland
Re: Can I Retire Yet? Here’s My Situation
« Reply #7 on: October 23, 2018, 07:02:48 PM »
First impression:  Yes.  But how flexible is your spending?   With a paid off house in a relatively low cost of living area, I would find it hard to spend $90K per year, and would avoid doing so because it would probably put you over the ACA subsidy cliff.

If it were me, I'd find a way to lower the spend rate to maximize flexibility and success.

firestarter2018

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Can I Retire Yet? Here’s My Situation
« Reply #8 on: October 23, 2018, 09:16:29 PM »
I'm kind of interested in your expenses too, since it seems the most logical place to start: cutting expenses even modestly could increase your chances of success quite a bit depending on the specifics.

No mortgage in a lower COL city and let's assume you have wisely budgeted $20K for health insurance for you + wife (could be more could be less but that's a reasonable ballpark for a 60-year old couple on ACA plans). Where's the other $70K going? 

nereo

  • Walrus Stache
  • *******
  • Posts: 8659
  • Location: la belle province
    • Here's how you can support science today:
Re: Can I Retire Yet? Here’s My Situation
« Reply #9 on: October 24, 2018, 02:29:22 PM »
As MustacheAnxiety pointed out, sequence of return risk could be the big derailer for this plan.  As others have said, the plan has a high probability of working *if* there isn't a deep recession between 2019-2022(ish). Personally I think that's a hard bet to make given that we're in year 10 of this economic expansion.  Still, having 50% in bonds will help.

Three things jump out at me
#1) these are clearly very rounded out approximations.  What are the actual numbers you are dealing with?
#2) $90,000 is a crap ton of spending for someone that owns their own home in a LCOL area.  Your plan could easily be a lot more safe if you could lower expenses to $80,000 (96% success rate) or $75,000 (100%).  Alternatively how much wiggle room is available for earning $18k/year for the first 17 years?  Could that be bumped up to $28k/year if necessary?
#3) taxes.  There's no mention about your taxable burden or whether the $90k/year is post or pre-tax.

Regarding your assumptions:
Most WR assume a withdraw which increases with inflation.
You did not provide your excel spreadsheet, but from what I gather you are assuming a constant 5% return above inflation each year?  This obviously won't happen. Using historical models, after 7 years your portolio could be anywhere from $2,1MM to a mere $420k.  That low value is sequence-of-returns risk.

Bottom line:  yeah, this could work, but it could fail in the first 7 years.  If you could provide yourself with another 10-15k/year in flexibility (either reduced spending or increased earnings) your plan becomes almost bulletproof, baring any massive liabilities.  Spending $75k/year still sounds like an incredible lifestyle when you have no mortgage payments.

MMMVisitor59

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Can I Retire Yet? Here’s My Situation
« Reply #10 on: October 24, 2018, 03:34:27 PM »
Thank you all for the thoughtful and though-provoking replies.

I hear you loud and clear on some important points:

1. Take off the rose-colored glasses. As outlined, retiring at 60 with this investment plan and this spending plan is overly optimistic to ensure a high probability of success.

2.  Gotta work the numbers. My figures are round numbers that need to be broken out. I have all of the data in big buckets, but need to drill down to inform good decision-making and avoid nasty surprises. Applies to both spending and projections about future returns.

3. Plan for the long-term. I need to migrate my allocation to include more equities for better long-term growth potential during a long retirement. And, I need to temper my expectations to achievable levels.

4. How much you spend is as important as how much you make. I need to look at the spending and trim the excess. A big chunk of the (pre-tax) $90K goes to taxes and health insurance. After that, I’m budgeting for lots of travel, which can be scale up or down as is financially feasible.

So, to answer my original question, “Can I retire yet?” The short answer is, “No, not yet.”

However, based on your considerate guidance and my research, I do think I can do the work outlined above to finish strong and enter retirement in a few years with a financial footing that will allow us to pursue our dreams.

Thank you for helping me as I work through this important decisions.

Watchmaker

  • Stubble
  • **
  • Posts: 244
Re: Can I Retire Yet? Here’s My Situation
« Reply #11 on: October 24, 2018, 04:16:28 PM »
So, to answer my original question, “Can I retire yet?” The short answer is, “No, not yet.”

However, based on your considerate guidance and my research, I do think I can do the work outlined above to finish strong and enter retirement in a few years with a financial footing that will allow us to pursue our dreams.

Thank you for helping me as I work through this important decisions.

I don't think it even has to be a few years out. Nailing down some of these numbers and tightening down on your spending just a little bit could get you there now. But you're absolutely right that what you really need to do is collect data on your real spending.

nereo

  • Walrus Stache
  • *******
  • Posts: 8659
  • Location: la belle province
    • Here's how you can support science today:
Re: Can I Retire Yet? Here’s My Situation
« Reply #12 on: October 24, 2018, 05:24:18 PM »
So, to answer my original question, “Can I retire yet?” The short answer is, “No, not yet.”

However, based on your considerate guidance and my research, I do think I can do the work outlined above to finish strong and enter retirement in a few years with a financial footing that will allow us to pursue our dreams.

Thank you for helping me as I work through this important decisions.

I don't think it even has to be a few years out. Nailing down some of these numbers and tightening down on your spending just a little bit could get you there now. But you're absolutely right that what you really need to do is collect data on your real spending.

Agreed.  Right now you have 1.2MM in investments and a paid off home.  You are only 8 years from full SS payouts. 

You could quit right now and have a very comfortable lifestyle, but it would mean trimming that budget a bit.

Your taxes will be a small fraction of what you are paying now, as most of it will be LTCG at either 0% or 15% (from what you've described you could pay ~$1,800 per $90k/year in investments sold.

Another thing to consider is that expenditures typically go down for retirees.  See here.

I wouldn't get discouraged - I'd look at this as an easily surmountable challenge to figure out what expenses really bring meaning to your life and to adjust accordingly.

Ben Kurtz

  • Stubble
  • **
  • Posts: 124
Re: Can I Retire Yet? Here’s My Situation
« Reply #13 on: October 25, 2018, 10:13:00 AM »
I suspect you'll be fine if you retired at 60, but to get greater comfort on the matter you really should complete the spending report that is part of the usual case study.

Based on your existing statements, I would guess that your current income & payroll tax bill is in the $15,000 range. That puts your family consumption spending at around $75,000 per year (real estate and sales tax is I consider part of your consumption spending, not tax budget). With a little planning, you can consistently pull that kind of spending money out of a part time job, plus withdrawals from your IRA and taxable portfolios, and generate a tax liability of less than $6,000 per year. Your exact numbers will confirm this, but on my estimates you really only need to plan on generating $80,000 per year once you tax engineer your situation, without touching a cent of your actual consumption spending. That already boosts your odds of your money lasting to age 100.

The next big nut to crack, at your age, is your health care budget. Lower taxable income in retirement means that you may be able to qualify for subsidies on the Obamacare exchanges until you hit Medicare age (not that far away!) and so it might cut your yearly out of pocket here. Greater free time might allow you to take a quarterly trip to Canada to fill expensive prescriptions for cheap, saving thousands (I personally know people who have done this). You might be able to find another $5,000 or even $10,000 per year of savings here, without really affecting your standard of living, which would juice your success projections hugely. But this is a highly variable element so you need to post your figures so we can analyse them.

The meat and potato stuff I won't bore you with here. Even though you are a millionaire, you should still cut cable, get books from the library, meal plan frugally, shop around for internet and cell phone plans, and drive a sensible used car sparingly. Read the blog and the forum for details; I endorse all that stuff here because it is good for the soul as well as the pocketbook.

You have the resources to retire now quite comfortably. And anyone with the skill and self-discipline to amass a $1.5 million net worth probably has what it takes to live off that nest egg happily and safely. That said, if you want our full endorsement you'll have to provide the backup data.

Nickel

  • 5 O'Clock Shadow
  • *
  • Posts: 8
  • Location: Portland
Re: Can I Retire Yet? Here’s My Situation
« Reply #14 on: October 25, 2018, 05:05:56 PM »
Get out the ACA calculator.  There is a sweet spot for you just before you get to the ACA cliff (~$64K married).  Shoot for that.  It could save you $10K every year.  Once you turn 65 on Medicare, you'll have more flexibility.  Also, get an HSA compatible plan so that you can use it to lower your modified adjusted gross income (MAGI) (up to ~$7K married).  Try to have plenty of post-tax cash on the side to work with to keep your MAGI from running over the ACA cliff during the first 5 years (pre-Medicare) of retirement.

To avoid sequence of returns risk, I'd have a conservative asset allocation to help you arrive safely on the shores of social security.


MillyMoney

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Can I Retire Yet? Here’s My Situation
« Reply #15 on: October 26, 2018, 04:51:08 PM »
Have you considered a rising equity glidepath during your first 10 years of retirement to help avoid sequence of return risk? 

What does this mean?

kpd905

  • Handlebar Stache
  • *****
  • Posts: 1607
Re: Can I Retire Yet? Here’s My Situation
« Reply #16 on: October 27, 2018, 08:26:12 PM »
Have you considered a rising equity glidepath during your first 10 years of retirement to help avoid sequence of return risk? 

What does this mean?

You start retirement with a higher percentage of bonds, then gradually reduce the percentage of bonds over time.  This is because the first 10 years of retirement are very important in regards to sequence of returns risk.  If your portfolio takes a big dip in those years, your retirement could be in trouble.  Having the higher bonds drops the volatility during that time.

MustacheAnxiety

  • 5 O'Clock Shadow
  • *
  • Posts: 93
Re: Can I Retire Yet? Here’s My Situation
« Reply #17 on: October 29, 2018, 08:22:31 AM »
Have you considered a rising equity glidepath during your first 10 years of retirement to help avoid sequence of return risk? 

What does this mean?

You start retirement with a higher percentage of bonds, then gradually reduce the percentage of bonds over time.  This is because the first 10 years of retirement are very important in regards to sequence of returns risk.  If your portfolio takes a big dip in those years, your retirement could be in trouble.  Having the higher bonds drops the volatility during that time.

Here is a great post explaining both the rising equity glidepath and its benefits: https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

I know we can't time the market, but at the same time I would be afraid to move a large chunk of retirement savings immediately from bonds into stocks.  Especially if I was looking at imminent retirement.  The rising equity glidepath helps out in worst case sequence of return scenarios because you are buying more stocks while the market is down early in retirement.   

Nickel

  • 5 O'Clock Shadow
  • *
  • Posts: 8
  • Location: Portland
Re: Can I Retire Yet? Here’s My Situation
« Reply #18 on: October 29, 2018, 01:07:24 PM »
Have you considered a rising equity glidepath during your first 10 years of retirement to help avoid sequence of return risk? 

What does this mean?

You start retirement with a higher percentage of bonds, then gradually reduce the percentage of bonds over time.  This is because the first 10 years of retirement are very important in regards to sequence of returns risk.  If your portfolio takes a big dip in those years, your retirement could be in trouble.  Having the higher bonds drops the volatility during that time.

Exactly this.  The decision to have a higher percentage of bonds on the eve of retirement always makes sense if you want to reduce sequence of returns risk and stabilize your retirement plan. 

If you are lucky enough to retire towards the end of a bull market (one never knows until time tells), you are more likely to be able buy stocks on sale with your bond money during the "glide" phase, i.e., your first 5-10 years of retirement.

On the other hand, if the market continues to rise during the glide phase, you should have enough growth in your portfolio (in spite of the bonds) that by the time the next bear market comes, you can weather the storm.

This is not market timing.  It is retirement/asset allocation timing. 


Acastus

  • Bristles
  • ***
  • Posts: 344
  • Age: 56
Re: Can I Retire Yet? Here’s My Situation
« Reply #19 on: October 31, 2018, 02:19:06 PM »
You would have a better sense of your budget if you learn your current spending, then add some assumptions about how much tax you will owe to get that spending. Some of the money will come from taxable accounts, and that money will only be partially taxed, or untaxed if you have capital gains and stay in the 12% bracket.

Say your real spending is &70k and taxes are $20k. You will no longer pay the $10k in FICA taxes.. at all. You now only need 80k in withdrawals, and maybe 20k is not taxable. The numbers needed will all shrink. I think you will find you are close, but you need to do a little more math.