Author Topic: Case Study: Converting $1M savings to $30k income  (Read 1992 times)

MoMan

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Case Study: Converting $1M savings to $30k income
« on: August 02, 2017, 02:10:23 PM »
I could use some analysis from the engineering types who frequent the forum.

I am 26 months from FIRE and Iíd like some opinions on converting my $1M assets into a sustainable $30k income stream.

Iím a 52-year old English major who has been working for some large companies in the financial industry for the past two decades. I write marketing material. Yeah, the crap that brokers use to try and separate workers from their paychecks. OK, itís not really that bad: I actually write material that encourages workers to enroll in their employersí retirement plan, bump up contributions, diversify, meet with an advisor, etc. Lots of general, educational saving/budgeting/investing stuff.

Iím knowledgeable about investing, but I suck at the nitty gritty of number crunching. I barely donít know how to use Excel. Spreadsheets make me tune out. Also, taxes are not my forte; my CPA wife does ours using TurboTax. Standard deduction. No dependents. My wife makes more than me, is financially self-sufficient and not interested in retiring early.

I monitor my investments via the T.Rowe Price FuturePath calculator, as well as one from Financial Engines. Both say I am on track for more than $40k/year income, which should be more than enough for my needs (no big travel plans, LOTS of time in my woodworking hobby and hanging around at/near home). So Iím not especially concerned about covering my needs.

Assets:
Gross salary: $68,000 (+ annual bonus of $3,000 - $5,000, paid in Feb.)
Current 401(k) $241,000
Roth IRA $131,000
Trad. IRA #1 $18,000
Trad. IRA #2 $479,000
Pension $29,000 (lump sum) OR $350/mo. (starting at age 65, no COLA)
HSA $3,000 ($1,500/year contributions) (just blew $8k on dental work!)
Taxable account $98,000
Grand total: $1M, excluding $350k home.

(I also share a $25k emergency/ home improvement savings account with my wife, but I donít count it in my FIRE calcs)
Current saving rate is 37% of gross.

Debt:
Mortgage ($9,500) retires in 12 months. No car, credit card, etc. debt.

Question 1:
My portfolio is currently about 81% stocks, 12% bonds and 7% money market. Too aggressive? As soon as the house is paid off, I will divert that money to cash to use during the first year(s).

Question 2:
I will FIRE in 2019 ó the year I turn 55. Beginning in January of 2019, I can access my current 401(k) without penalty (after quitting). But, I canít take partial withdrawals; itís all or nothing. So Iím thinking of converting that into a 10-year period certain immediate annuity. According to ImmediateAnnuities.com, that gives me about $30k/year until age 65. Let the remaining investments ride the tax-deferred train for a decade before tapping them. If I need more than the $30k, I can dip into the taxable account or the Roth without penalty, or the IRAs starting at age 59.5. Is the annuity route a good plan? I realize itís a bit scaredy-pants, but if I took the lump sum without the annuity route, wouldnít I get hit with a big tax bill?

Question 3:
A couple of years ago, MyCompany froze our pensions. To partially compensate, they are now adding a 3% contribution to our 401(k)s (this in addition to the 6% matching contributionópretty sweet). I wish they had done this 10 years ago. So my lump sum pension value is currently about $29,000, or I can take the lifetime annuity payments of $350 or so (no COLAs) starting at age 65. Which would you take? I could lump it in with the period certain annuity (see Q2).


My company offers healthcare for retirees after age 55 if you have 10 years of service (which happens this year). I wonít be able to get an estimate of what the premiums will be until 6 months before I turn 55. Worst case scenario, I get added to my wifeís plan or see what the current administration comes up with to replace the ACA.

Thanks in advance for your responses!


"He is richest who is contented, for content is the wealth of nature."

MDM

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Re: Case Study: Converting $1M savings to $30k income
« Reply #1 on: August 02, 2017, 02:33:15 PM »
Question 1:
My portfolio is currently about 81% stocks, 12% bonds and 7% money market. Too aggressive? As soon as the house is paid off, I will divert that money to cash to use during the first year(s).
Unless you plan separate lives, it would be better to look at the portfolio combined between the two of you.

Quote
Question 2:
I will FIRE in 2019 ó the year I turn 55. Beginning in January of 2019, I can access my current 401(k) without penalty (after quitting). But, I canít take partial withdrawals; itís all or nothing. So Iím thinking of converting that into a 10-year period certain immediate annuity. According to ImmediateAnnuities.com, that gives me about $30k/year until age 65. Let the remaining investments ride the tax-deferred train for a decade before tapping them. If I need more than the $30k, I can dip into the taxable account or the Roth without penalty, or the IRAs starting at age 59.5. Is the annuity route a good plan? I realize itís a bit scaredy-pants, but if I took the lump sum without the annuity route, wouldnít I get hit with a big tax bill?
At least you aren't talking about any form of indexed annuity.

Even the "not completely bad" annuities (e.g., Single Premium Immediate Annuities, or SPIAs) are usually unfavorable until you are somewhat older (e.g., age 70 or so).  A big tax on the lump sum is unnecessary because you can roll it over to an IRA.

Quote
Question 3:
A couple of years ago, MyCompany froze our pensions. To partially compensate, they are now adding a 3% contribution to our 401(k)s (this in addition to the 6% matching contributionópretty sweet). I wish they had done this 10 years ago. So my lump sum pension value is currently about $29,000, or I can take the lifetime annuity payments of $350 or so (no COLAs) starting at age 65. Which would you take? I could lump it in with the period certain annuity (see Q2).
The $350 is per month, correct?  Assuming so, reasonable arguments could be make either way.

MoMan

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Re: Case Study: Converting $1M savings to $30k income
« Reply #2 on: August 02, 2017, 03:18:53 PM »
A big tax on the lump sum is unnecessary because you can roll it over to an IRA.
But if I roll it over to an IRA, I can't touch it until 59.5 w/o a 10% penalty, correct?
"He is richest who is contented, for content is the wealth of nature."

MDM

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Re: Case Study: Converting $1M savings to $30k income
« Reply #3 on: August 02, 2017, 03:36:21 PM »
A big tax on the lump sum is unnecessary because you can roll it over to an IRA.
But if I roll it over to an IRA, I can't touch it until 59.5 w/o a 10% penalty, correct?
How to withdraw funds from your IRA and 401k without penalty before age 59.5 :)

mxt0133

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Re: Case Study: Converting $1M savings to $30k income
« Reply #4 on: August 02, 2017, 03:53:18 PM »
A big tax on the lump sum is unnecessary because you can roll it over to an IRA.
But if I roll it over to an IRA, I can't touch it until 59.5 w/o a 10% penalty, correct?

Remember you can start doing a IRA to Roth conversion which you can then access penalty free.

You could also withdraw any Roth contributions without penalty.  If you have enough between taxable and Roth contributions you have made in the past to cover expenses to get you from 55 to 59 1/2 you should be good.

One thing you could still take advantage of when you stop working but your wife keeps working is to continue to contribute to your Roth IRA via the spousal IRA provision with any saving you have to let it grow tax free.