Author Topic: Reader Case Study - Simple Finances, Simple Life, But Still Confused  (Read 2979 times)

MacAttack7

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Reader Case Study - Simple Finances, Simple Life, But Still Confused
I've read over this stuff numerous times but now that I'm really buckling down trying to figure out my plan I realize I'm quite confused.

Here's my very simple background:
Single, no kids, 46 1/2 years old, live in Oregon

Gross Salary: $70,000
Annual expenses: $20,000
Annual savings: $43,500 (includes net pay, 401K contributions, HSA contributions, tax refund)

Net Worth: $175,220
401K: $134,000
HSA: $3,120
Traditional IRA: 11,000
Bank Checking Acct: $27,100


Pension: $179 per month (At 62 yrs of age…..does not rise with inflation)
Social Security: $1,927 (At 70 yrs of age…..I completed worksheet going thru 2018. Not really concerned with this right now other than as a safety margin.)

Other info:
No valuable assets other than what's listed above, no debt.
I work for a typical big corporation so I have good benefits & hopefully good security………..but I'll admit I absolutely hate my job………..but lucky to have it.
My car is 7 years old, so it's still ok for now (Mazda 2).
Health insurance is my biggest concern……………..no idea what that'll do to my expenses.

My goal:
I'm just trying to figure out what I need to do so that I can retire & be able to spend $20,000 inflation-adjusted dollars until I'm 90 years old.
I'd like to know the earliest age I could possibly do this.


Questions:
How much should I put into my 401K, Traditional IRA, Checking Account?
Should I open a taxable investment account to invest my money that is currently sitting in a checking account?
At what age can I retire (using the 4% withdrawal rate, ignoring social security), so that I can spend $20,000 per year (inflation-adjusted) until I'm 90?

MDM

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Re: Reader Case Study - Simple Finances, Simple Life, But Still Confused
« Reply #1 on: March 24, 2018, 12:42:02 PM »
Questions:
How much should I put into my 401K, Traditional IRA, Checking Account?
401k and tIRA: as much as possible.
Checking account: just enough to avoid worry about bouncing checks.

Quote
Should I open a taxable investment account to invest my money that is currently sitting in a checking account?
Yes, or, at the least, move some or all to higher interest saving accounts.

Quote
At what age can I retire (using the 4% withdrawal rate, ignoring social security), so that I can spend $20,000 per year (inflation-adjusted) until I'm 90?
What does the simple "time to FI" section in the case study spreadsheet tell you?


MacAttack7

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Re: Reader Case Study - Simple Finances, Simple Life, But Still Confused
« Reply #2 on: March 24, 2018, 01:44:55 PM »
Questions:
How much should I put into my 401K, Traditional IRA, Checking Account?
401k and tIRA: as much as possible.
Checking account: just enough to avoid worry about bouncing checks.

Quote
Should I open a taxable investment account to invest my money that is currently sitting in a checking account?
Yes, or, at the least, move some or all to higher interest saving accounts.

Quote
At what age can I retire (using the 4% withdrawal rate, ignoring social security), so that I can spend $20,000 per year (inflation-adjusted) until I'm 90?
What does the simple "time to FI" section in the case study spreadsheet tell you?
That case_study spreadsheet is a beast. I filled it out & kept tweaking until it looked mostly correct, but it's just too complicated. It says 9.9 years, but it doesn't take my current stash into account. I have a spreadsheet I made myself though. It's very simple, but it doesn't use inflation rate or investment returns. I guess that would make it more conservative if I get lucky & investment returns do better than inflation.

According to my spreadsheet:
I have $175,000 net worth today.
My goal is $500,000 in today's dollars.
I included my $179 pension & reduced to $132 for inflation.

So it would take 6.6 years to make my net worth $460,500.
I'm 46.7, so I'd be 53.2.
Ugh.....too long.

I doubt if I'm understanding things perfectly, so hopefully it won't really take 6.6 years.
I also don't understand what to do if I retire at 53 for example.
I'll have 6 or 7 years before I can withdrawal from my IRA, so does that mean I need to save an extra $140,000 in a taxable account (7 years worth of spending).
But if I do that then my IRA will be $140,000 short & it will no longer cover $20,000 annual expenses at a 4% withdrawal rate.

This is confusing..............good thing I didn't try to become an accountant.


MDM

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Re: Reader Case Study - Simple Finances, Simple Life, But Still Confused
« Reply #3 on: March 24, 2018, 01:59:17 PM »
That case_study spreadsheet is a beast. I filled it out & kept tweaking until it looked mostly correct, but it's just too complicated. It says 9.9 years, but it doesn't take my current stash into account.
It may well be too simplistic. :)

But, seriously, please advise on what parts are particularly obscure, so it might be improved for you and others.

Note that the 9.9 years is an input (it's in a green-background cell) not a calculation.  Where the curve on the graph to the right goes through the x-axis is the estimated "years to FI."

Quote
I have a spreadsheet I made myself though. It's very simple, but it doesn't use inflation rate or investment returns. I guess that would make it more conservative if I get lucky & investment returns do better than inflation.

According to my spreadsheet:
I have $175,000 net worth today.
My goal is $500,000 in today's dollars.
I included my $179 pension & reduced to $132 for inflation.

So it would take 6.6 years to make my net worth $460,500.
I'm 46.7, so I'd be 53.2.
Ugh.....too long.

I doubt if I'm understanding things perfectly, so hopefully it won't really take 6.6 years.
I also don't understand what to do if I retire at 53 for example.
I'll have 6 or 7 years before I can withdrawal from my IRA, so does that mean I need to save an extra $140,000 in a taxable account (7 years worth of spending).
But if I do that then my IRA will be $140,000 short & it will no longer cover $20,000 annual expenses at a 4% withdrawal rate.

This is confusing..............good thing I didn't try to become an accountant.

See rows 46-67 of the 'Misc. calcs' tab in the case study spreadsheet, and adjust as appropriate:
Quick calculation of "Time to FI"
Planned Withdrawal RateWR4.0%
Annual Savings InvestedS43,500$/yr
Annual Expenses in RetirementE20,000$/yr
Current Assets InvestedA175,000$
Investment returnr_5.0%
Time to FIt5.6yr
Desired time to FIt5.0yr
Annual Savings NeededS50,067$/yr

Ben Kurtz

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Re: Reader Case Study - Simple Finances, Simple Life, But Still Confused
« Reply #4 on: March 26, 2018, 06:30:48 PM »
You've also got your full living budget covered by Social Security starting at age 70, which you've simply ignored for unclear reasons. That should really change the way you think about things. Or at least explain why you've chosen to ignore it.

Meaning if you had $340,000 in a checking account at age 53, you could quit work, never earn another penny, spend $20,000 per year and just barely run out of funds by the time you put in for Social Security which will fully replace your planned spending level. Maybe you'd want to increase that number a little bit to account for inflation, but it's not a lot.

For purposes of planning withdrawals, look up the permanent post in the Investments section about how to move money from 401ks and IRAs into more useful spaces during early retirement while avoiding most tax hits and penalties. This requires a bit of advance planning, so read that post now.

Finally, have you thought about semi-retirement? If you built up your savings to something like $300,000 or $400,000 you could probably drop down to some kind of enjoyable seasonal or part-time work that pays $20,000 per year instead of $70,000. You would not be adding any more to your savings, but you would be giving it more time to grow and reducing the amount of time you need to rely on it. Maybe set $350,000 by age 50 as your semi-retirement goal, and spend the next few years figuring out what you might enjoy doing that would bring in $20,000 a year. Teach a few courses at the local community college? Freelance writing / editing / graphic design jobs you can do over the internet? Walmart greeter?

On your 50th birthday, quit your day job, take a long vacation, and when you get back start on your "fun" career. Maybe that's good for 5 more years, which will provide time for your $350,000 nest egg to hopefully grow past $400,000, while reducing your cash needs until Social Security arrives. You'd be looking at a 5% withdrawal rate instead of the 4% "safe" withdrawal rate, but since you are only relying on these investments for 15 years, instead of 30+, you'll still have an excellent margin of safety.

MacAttack7

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Re: Reader Case Study - Simple Finances, Simple Life, But Still Confused
« Reply #5 on: March 27, 2018, 04:16:32 PM »
You've also got your full living budget covered by Social Security starting at age 70, which you've simply ignored for unclear reasons. That should really change the way you think about things. Or at least explain why you've chosen to ignore it.

Meaning if you had $340,000 in a checking account at age 53, you could quit work, never earn another penny, spend $20,000 per year and just barely run out of funds by the time you put in for Social Security which will fully replace your planned spending level. Maybe you'd want to increase that number a little bit to account for inflation, but it's not a lot.

For purposes of planning withdrawals, look up the permanent post in the Investments section about how to move money from 401ks and IRAs into more useful spaces during early retirement while avoiding most tax hits and penalties. This requires a bit of advance planning, so read that post now.

Finally, have you thought about semi-retirement? If you built up your savings to something like $300,000 or $400,000 you could probably drop down to some kind of enjoyable seasonal or part-time work that pays $20,000 per year instead of $70,000. You would not be adding any more to your savings, but you would be giving it more time to grow and reducing the amount of time you need to rely on it. Maybe set $350,000 by age 50 as your semi-retirement goal, and spend the next few years figuring out what you might enjoy doing that would bring in $20,000 a year. Teach a few courses at the local community college? Freelance writing / editing / graphic design jobs you can do over the internet? Walmart greeter?

On your 50th birthday, quit your day job, take a long vacation, and when you get back start on your "fun" career. Maybe that's good for 5 more years, which will provide time for your $350,000 nest egg to hopefully grow past $400,000, while reducing your cash needs until Social Security arrives. You'd be looking at a 5% withdrawal rate instead of the 4% "safe" withdrawal rate, but since you are only relying on these investments for 15 years, instead of 30+, you'll still have an excellent margin of safety.
Interesting......this gives me some things to think about, thanks.
I'll have to put some figures in a sheet & play around with the things you mentioned.

I played around with the other massive spreadsheet some more & about 6 years would be my time-to-FI if I want to ignore social security.

As far as SS I was treating it as a safety margin for a few reasons:
1. My planned spending of $20,000 per year doesn't leave much wiggle room for the unexpected.

2. I'm stressed about health insurance......I need to study that subject. I don't really understand the monthly cost or what I'll pay if I need some kind of treatment or what I"ll pay for the dentist. Totally confused in this area. I sure wish we had a better health care system.

3. I'd be quite mentally uncomfortable relying on nothing but social security, although I could probably get over this.

I guess health insurance is my biggest concern. I have an auto-immune problem that may or may not cause problems in the future.....hopefully not. I've torn up my knee, so maybe I'll need
a new knee someday...hopefully not. My father had prostate cancer which he had treated, so maybe I'll need the same.........hopefully not.

MacAttack7

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I’m trying to finalize a plan (subject to change of course since I can’t tell the future), and I was just wondering if it makes sense.
This is just a baseline plan. I know I could quit earlier & work part-time, or place more reliance on social security, or get a new job, etc, etc, etc.
My income goes from $20,000 to $31,285 as I get older which I think is probably a good idea to make life a little easier. I can always stick the excess in a taxable account if I don’t spend it.

So here it is (I’m ignoring interest & investment return to keep it simple because I’m not all that smart when it comes to this stuff):
I guess this is all heavily dependent on health insurance costs which is another confusing subject.

Retire at 53 (I’m 47 right now).
Taxable Account: $140,000
IRA/HSA: $360,000

Years 53-59:
Withdrawal $20,000 from taxable account.
This leaves the taxable account at $0.
IRA/HSA is still at $360,000 (plus interest/investment return hopefully)

Years 60-61:
Collect $20,000 from IRA/HSA
This results in a balance of $320,000 (plus interest/investment return hopefully)

Years 62-69:
Collect $22,148 from IRA/HSA & Pension
(IRA/HSA: $20,000)
(Pension $2,148)
This results in a balance of $160,000 (plus interest/investment return hopefully)

Years 70-90:
Collect $31,285 from IRA, Pension, & Social Security
(Social Security: $23,100)
(RMD: $6,037 for the first year…….too confusing to guess the rest of the years)
(Pension: $2,148)
This results in a balance of $33,223 (plus interest/investment return hopefully)

MDM

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It would probably be worthwhile to convert at least ~$12K/yr (your standard deduction amount) from traditional to Roth.

MacAttack7

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It would probably be worthwhile to convert at least ~$12K/yr (your standard deduction amount) from traditional to Roth.
Should I do that in the 53 to 59 period?

MDM

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It would probably be worthwhile to convert at least ~$12K/yr (your standard deduction amount) from traditional to Roth.
Should I do that in the 53 to 59 period?
I would guess at least then and at least that much.

Converting higher amounts and/or for more years may also be worthwhile.  What marginal rates do you expect to be paying once the pension and SS kick in?

MacAttack7

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Re: Reader Case Study - Simple Finances, Simple Life, But Still Confused
« Reply #10 on: May 29, 2018, 12:50:34 PM »
It would probably be worthwhile to convert at least ~$12K/yr (your standard deduction amount) from traditional to Roth.
Should I do that in the 53 to 59 period?
I would guess at least then and at least that much.

Converting higher amounts and/or for more years may also be worthwhile.  What marginal rates do you expect to be paying once the pension and SS kick in?
Based on the current numbers I'll be in the lower 2 tax brackets (looks like 12% for the highest).
My pension is only $179 per month & will not change.

MDM

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Re: Reader Case Study - Simple Finances, Simple Life, But Still Confused
« Reply #11 on: May 29, 2018, 01:29:31 PM »
It would probably be worthwhile to convert at least ~$12K/yr (your standard deduction amount) from traditional to Roth.
Should I do that in the 53 to 59 period?
I would guess at least then and at least that much.

Converting higher amounts and/or for more years may also be worthwhile.  What marginal rates do you expect to be paying once the pension and SS kick in?
Based on the current numbers I'll be in the lower 2 tax brackets (looks like 12% for the highest).
My pension is only $179 per month & will not change.
If you will be in the 12% bracket, then converting ~$21.5K/yr (to the top of the 10% bracket) and paying the tax from your taxable account makes sense.  If after converting that much you still expect to be in the 12% bracket, then converting even more (provided you can pay the tax from your taxable account) is also favorable because this allows you to "take money from taxable and put it in Roth".