Planning for the GAP

[Bigjones]

Hey everyone,

Im looking for advice on trying to fill the gap.  Im fairly new and just starting my journy to FIRE.  Recently got rid of all my CC debts and other small debts, im on schedule to have my home paid for in 5 years.

Details:  Im 44yrs old, wife is 42.
Trying to retire by 55/56 yrs old

Current savings - $36000 these are totals in all tax deferred accounts.

Current contributions - Him: Maxing IRA & HSA, putting in $180 biweekly into 401k with a $72 bi weekly match from employer
                                     Her: Maxing IRA & HSA, putting $208 biweekly into 401k with $64 bi weekly employer match.

We are slowly ramping up Her 401k quarterly so by the end of 2015 she will be maxing her 401k.

Currently we are putting $2492 away in all tax deferred accounts.

Now here is where I need help.....The goal is to try and FIRE at 55 or 56yrs old.  That leaves me 6 or 7 years before I can get my SSI which will be $1000 for HIM and $1000 for HER. 

Would like to pull $32000 at retirement annually.  But how to make this work or figure out how much I need to mind that 6 or 7 year gap before SSI comes in to help supplement my frugal retirement.

[frugalman]

Congratulations on getting rid of your CC debt, and on track to pay off your home in 5 years!
It sounds like you are doing all the right things.

I think you are asking what do you do with the gap in time between when you retire (say 56) and draw social security (say 62).
If your projected and actual stash is at least 25*32000 ($800,000) by then - no problem, just draw 4 percent a year on it and you'll have your $32,000 needed. If it's less by one or two hundred thousand, I'd just draw a little more, until your start social security, then back it down so that the sum of your draw + SSI equals $32,000. In the latter scenario, let's say you had $640,000, draw 5 percent and you have $32,000 a year. The stash will probably get smaller in the 6 years you are waiting, because you are overdrawing on it, but what the heck, that's a small price to pay to quit the rat race 6 years early.

[Bigjones]

Thats almost exactly what im trying to figure out...

How much do i need to cover me from 54-62 when taking out the full 32k.  But once i turn 62, and my wife and I can both draw SS that will be 24k of 32 needed so i would only have to draw roughly 8k.

[MDM]

Now here is where I need help.....The goal is to try and FIRE at 55 or 56yrs old.  That leaves me 6 or 7 years before I can get my SSI which will be $1000 for HIM and $1000 for HER. 

Would like to pull $32000 at retirement annually.  But how to make this work or figure out how much I need to mind that 6 or 7 year gap before SSI comes in to help supplement my frugal retirement.

You can get at all the 401k/IRA money at 59.5 (actually, the 401k is available as soon as you retire if you retire at 56).  But for example's sake:
 - if you retire at 55 you need 4.5 * $32K = $144K in taxable and/or Roth contribution funds to get to 59.5.
 - then you need 2.5 * $32K = $80K to get to age 62.
 - then you need 25 * ($32K - $24K) = $200K to support 30 years of $8K spending per Trinity Study assumptions.

Or thereabouts....

[index]

If you need 32k in retirement and you are getting 24k SSI at 62; you need enough savings to generate 8k a year at 62. At a 4% withdraw rate this is a 200k stache needed at 62.

To figure out how to have 200k left in your stache at 62 after withdrawing 32k per year from 55 to 62 you need the following two financial formulas:

For the present value of 200k at 62 when you are 55 use:



C1 = 200k
r= lets use 4% to be conservative
n =  7 years

So you need 152k at 55 to grow into 200k by the time you are 62 to support the 8k you need per year.

To bridge the gap, you need 32k per year for 7 years before SSI kicks in. Use this formula:



P = 32k
r = 4%
n = 7 years

The result of this formula indicate you need 192k at 55 in order to withdraw 32k a year at a 4% growth rate for 7 years.

Add the two together and you need to save 344k in order to FIRE at 55 and perpetually live off of 32k per year.

Feel free to change the rate (r) (I used 4% to be conservative), and the number of years (n) to see the effects of retiring at a different age. 

[HipGnosis]

What return are you averaging on your tax deferred accounts?
What interest are you paying on the mortgage and what are your minimum mortgage payments?

[Bigjones]

My tax deferred accounts are pretty new but have been getting roughly 5-6%

Mortgage total is about 58k @ 4.25% and ive been paying $229 per week to have it paid off in 60ish months left.

[index]

Don't forget about taxes though! Do you need 32k per year before or after taxes?

[Bigjones]

Reevaluated over the weekend, I think I need 35k AFTER taxes to make this work.

[index]

Here is a google spreadsheet to tell you how much money you need to FIRE:

https://docs.google.com/spreadsheets/d/1BekOC8RNV7vK0ngqt5KAk_ZayGU0BEcDvJCgFG11pAY/pubhtml

[Bigjones]

Index, is there any way you should share that with me so i can make adjustments and play with the numbers?

[Iron Mike Sharpe]

Reevaluated over the weekend, I think I need 35k AFTER taxes to make this work.

Do you need $35K in today's dollars or will the $35K in dollars 11 years from now work?  In other words, have you factored in 11 years worth of inflation on your current expense level?

[TheAnonOne]

Don't forget about taxes though! Do you need 32k per year before or after taxes?

I've not personally made that lower level of income in quite a while but, I would imagine that the taxes are pretty negligible assuming a two person household. The standard deductions alone cover half.(or more?)

It is a valid point, you may need a few thousand more yearly but not a whole lot.