Author Topic: Opinions sought about retiring now  (Read 1455 times)

Body Surfer

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Opinions sought about retiring now
« on: May 07, 2019, 04:53:11 PM »
Hello. I have learned so much in this forum. Thank you for your contributions to my financial education. I would like to seek your opinions about retiring now. My wife and I are 58. She retired in the autumn.

Finances: approx $930,000 total...including:
Sep-ira: $270,000
Roth's: $70,000
HSA's: $11,000
Taxable liquid: $570,000
 AA: 55% cash CD's; 45% index stocks
pensions: $30,000/yr
SS- wife at 62: $15,000, me at 67: $26,500
house paid for- no debts
kids on their own now

Yearly expenses: $55-60K including health ins premiums thru ACA ( that is the goal)- this figure includes vacations expenses too

I will draw down savings next 3 yrs: $30k/yr ages 59-61; then $15k/yr from ages 62-66. When my SS starts at age 67 we might not need to use our savings nearly as much.

By the way just bought new HVAC system.

Am I safe to retire?- your opinions are greatly appreciated. Thanks


 

ysette9

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Re: Opinions sought about retiring now
« Reply #1 on: May 07, 2019, 05:56:40 PM »
When can you collect your pension? Is it indexed for inflation?

Id recommend putting all of your numbers into cFIREsim and seeing what kind of success probability you get. My gut reaction without running any modeling is that you are probably fine, but run it yourself to be sure.

FIREstache

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Re: Opinions sought about retiring now
« Reply #2 on: May 07, 2019, 06:42:18 PM »
Yes, what ysette9 said, and think about how long at least one of you expect to live, and whether you would eventually sell your house and rent or get a reverse mortgage.  Everything looks good, especially with pension and SS ahead.

Body Surfer

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Re: Opinions sought about retiring now
« Reply #3 on: May 07, 2019, 06:59:58 PM »
Thank you for your replies. We can start collecting the pensions immediately, but they are not indexed for inflation. Concerning our house, we are considering moving closer to the mountains- which will be moderately more expensive (perhaps $100,000 more). But probably staying put.


lhamo

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Re: Opinions sought about retiring now
« Reply #4 on: May 07, 2019, 07:39:00 PM »
What is the logic behind your wife taking SS at 62?  In a couple of ways -- both tax-wise and in terms of ensuring later income -- she/you would probably be better off waiting until full retirement age or later.  SS is basically an annuity you don't have to pay extra for.  And you have plenty in the taxable accounts to play with in tax-favorable ways (as cashing out 20-30k from taxable will only be partially made up of capital gains, and you should be in the 0% bracket on those).

But yes, I would say you look pretty good given the pension and SS factor on top of your nest egg -- even at max withdrawal rates to meet your budget on top of pension you should be in the 3% SWR range.  Do be careful with how much you sink into the next house, though -- that could throw a wrench in things if you splurge too much.


SwordGuy

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Re: Opinions sought about retiring now
« Reply #5 on: May 08, 2019, 12:16:14 AM »
Sorry to be morbid, but what happens if one of you dies early?

The lowest of the two social security payments will disappear.
What happens to the pension that belonged to the deceased spouse?  Does it vanish as well? 

Run the scenarios with this situation in mind also.

Body Surfer

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Re: Opinions sought about retiring now
« Reply #6 on: May 08, 2019, 07:22:37 AM »
Sorry to be morbid, but what happens if one of you dies early?

The lowest of the two social security payments will disappear.
What happens to the pension that belonged to the deceased spouse?  Does it vanish as well? 

Our pensions will be taken as 'joint survivors'- meaning if a spouse dies the other spouse still receives the pension. Concerning SS if I die first my wife will receive my higher $ monthly payment

Dicey

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Re: Opinions sought about retiring now
« Reply #7 on: May 08, 2019, 07:33:37 AM »
Why so much cash?

Body Surfer

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Re: Opinions sought about retiring now
« Reply #8 on: May 08, 2019, 08:05:00 AM »
Concerning my AA: I have been considering going to a 60/40 stock to cash ratio. I am comfortable with a high cash position.

Laura33

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Re: Opinions sought about retiring now
« Reply #9 on: May 08, 2019, 08:43:38 AM »
First, you are probably fine.  But there are things you should consider to improve your odds.

The primary issue is that the 4% rule is based on an 80/20 asset allocation.  With so much of your funds in cash, you will not have sufficient return to pull the full 4% every year, so keep that in mind with planning -- you should assume more like a 3% draw.  I get that you are risk-averse and cash-prone, but have you considered that your SS is basically a guaranteed US bond, and your pension is basically a corporate bond?  In your situation, given how close you are to eligibility to claim that $$$, I would consider the "value" of those benefits as bonds in your portfolio and base your asset allocation on that.  I.e., how much of your $$ would you need to have invested in government and corporate bonds to throw off the @$70K you are expecting from those sources?  It will be a lot -- like on the order of $2M!  So add that to your current portfolio as a bond allocation -- now how does the picture look?  Turns out that in terms of portfolio risk, you have about, what, 12% in stocks, meaning that almost 90% of your portfolio is in assets that will not grow over time.  Is that where you want to be?

The second issue is longevity.  Right now you are fine.  But you need to look at your scenarios for after one of you dies.  At that point, one of the SS goes away.  And what happens to the pension?  There are all sorts of options, from no survivor benefits to 100% survivor benefits.  But assuming that you've chosen the most common 50% survivor option, that means instead of over $70K/yr in guaranteed assets, the survivor is down to about $40K.  And with your current asset allocation, your portfolio may well not have grown enough to cover the difference.  One way to counter this risk somewhat is to postpone your taking SS until 70 -- that way, whoever survives longest will at least have a higher SS payment to count on.

Finally, consider @lhamo's note about taxes and SS timing.  You have a varied enough asset pool that you will be able to manage your income each year in tax-favorable ways.  For example, up until your DW takes SS, the only income you will realize is dividends/interest from your taxable investments and whatever you withdraw from your IRA.  And you can currently pay 0% tax on income below $24K/yr (and the next $18K is only taxed at 10%); meanwhile, if you keep your income below around $78K, you will pay 0% tax on any capital gains you incur.  So you can play with your withdrawal strategy to basically pay no tax for those first few years.

You can also shift your assets around to position your assets more favorably for future needs.  In particular, you can convert some of your IRA to a Roth every year, and you will pay no taxes on that conversion as long as your total dividends/interest/conversion doesn't exceed $24K/yr -- so, perhaps, live off of your cash deposits (because taking cash out of a bank is not a taxable event), and use your "free"/low-rate tax space to convert as much as you can from your IRA to your Roth, so that when your income is higher (pension + 2 SS + RMDs), you can rely more on your Roth for extras to keep your tax burden as low as possible.

Finally, note that this strategy is highly dependent on when your DW claims SS, because once the SS begins coming in, that will eat up some of your "no income tax" space and therefore significantly reduce your ability to convert $$ from your IRA into your Roth.*  If I were you, I would focus on maximizing that conversion over the first few years, and then claim her SS only once you have most or all of it converted.  Note also that the more you convert, the lower your future RMDs, because Roths do not require RMDs, so that again gives you a better option to let your money grow completely tax-free so that the survivor will have enough s/he needs it.

*Note that the SS program is treated differently for tax purposes, but once your income exceeds @$25K/yr, you have to start paying income taxes on at least half of your SS.

Body Surfer

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Re: Opinions sought about retiring now
« Reply #10 on: May 08, 2019, 05:12:14 PM »
Laura: thank you for such a thorough and detailed analysis of my situation. Very much appreciated.

I realize I will have to navigate both Sep to Roth ira conversions and MAGI to qualify for ACA HI

FIREstache

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Re: Opinions sought about retiring now
« Reply #11 on: May 08, 2019, 06:53:32 PM »
The primary issue is that the 4% rule is based on an 80/20 asset allocation.

I've never seen anyone state that before.  Usually, the reference is to 50/50, 40/60, 60/40.  And the supposed 4.5% rule:

https://forum.mrmoneymustache.com/investor-alley/asset-allocation-draft/msg2360543/#msg2360543

I wouldn't consider your pension or SS a bond.  I didn't.  Consider it for what it is.  Just put the numbers into FIREcalc, including your SS income for the period you will start drawing that.   That's what I did, and with a 4.7% SWR, I had the highest success rate with 43% equities and the rest in fixed interest investments due to the short 10 year retirement window before SS covers about half my expenses.

https://forum.mrmoneymustache.com/welcome-to-the-forum/3-years-out-recommended-allocation/msg2365565/#msg2365565

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meanwhile, if you keep your income below around $78K, you will pay 0% tax on any capital gains you incur.

Taxable income, so add $24K for a couple to that figure for total income that can be earned.

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*Note that the SS program is treated differently for tax purposes, but once your income exceeds @$25K/yr, you have to start paying income taxes on at least half of your SS.

It's your income but including only "half" of your SS in calculating the combined income for determining taxation of SS benefits.  Taxing of SS only "begins" at that threshold, so once you hit it, you aren't immediately taxed on 50% of your total SS income.  It starts low and goes up with the combined income calculation.  Rather than $25K, it is $32K for a couple.  But worse, those dollars aren't indexed to inflation each year, so more SS dollars are getting taxed every year, and potentially up to 85%, which gets easier to reach each year due to typical increases in actual combined income year to year.
« Last Edit: May 08, 2019, 07:37:27 PM by FIREstache »