Author Topic: Almost done? Think I'm getting close to pulling the plug.  (Read 2916 times)

AlmostDone

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Almost done? Think I'm getting close to pulling the plug.
« on: November 04, 2015, 09:27:30 PM »
Hello all, new to the forums.

Originally, this was going to be a post where I describe my situation and you tell me if I can make my move or not. It still is to some degree.  Digging into some of your stories and how efficient you guys/girls are with what you have to spend, living life your way is both inspiring and will make me look like an idiot with the numbers I'll have.  So more than that, there are a couple of financial management questions that have arrived that I'd love some advice on how they can best be handled. 

All financial amounts will be approximated (but close)

Work as a civil servant with a defined benefit pension earned after 20 years of service.  I'll have 20 years in 18 months.  It projects to be about 82k per year.

You are allowed to deliberately over pay your pension by a few thousand a year gaining a locked in 8.25%.  I'll have about 87k in that account.  It can be distributed 2 ways:
1) Take it out upon separation of service where it will be taxed.
2) It can be turned into an annuity, and 7100 per year is added to my pension.

What way do you like better?

My other investments as they project when I leave:
250k in a 457 plan.  Set to a 2035 target.
30k in a roth
27k in a prudential index fund account that I can't transfer till I leave.   
50k cash
200k in home equity.

Should I be moving some of this money around?

I live in a EXTREMELY high COL area.  This is largely offset by the fact that my wife is an teacher and makes probably 1.5-2x more per year here than she would in a lower COL area.
I have 350k left on the mortgage.  Pay 13k per year in property taxes.  Zero debt.
2 children 5 and 2.
One dog.
One wife with an Amazon habit.  . .

One last Q while you are hopefully still reading.  Do you include your home equity when figuring out how much 4% withdrawal on your investments actually is?
Do you re-calibrate the 4% number every year?

I'm sure I have many more but that's quite enough for now.

Thank you in advance, really enjoy learning from this forum.





Mother Fussbudget

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Re: Almost done? Think I'm getting close to pulling the plug.
« Reply #1 on: November 05, 2015, 10:12:31 AM »
Welcome, and congratulations on taking control of your financial destiny!
Some feedback...
Quote
... defined benefit pension earned after 20 years of service ... about 82k per year.
87k in (pension overpay) account.  It can be distributed 2 ways:
1) Take it out upon separation of service where it will be taxed.
2) It can be turned into an annuity, and 7100 per year is added to my pension.
Take the annuity, and spread the tax hit over 12.25 years.

Quote
My other investments as they project when I leave:
250k in a 457 plan.  Set to a 2035 target.
30k in a roth
27k in a prudential index fund account that I can't transfer till I leave.   
50k cash
200k in home equity.

Should I be moving some of this money around?
The $50K cash is high.  Move half into tax deferred savings (IRA / Backdoor Roth IRA).
Transfer the Prudential Index fund once you FIRE.

Quote
I have 350k left on the mortgage.  Pay 13k per year in property taxes. 
Have you thought about paying down the mortgage, or do you want to keep the mortgage interest tax deduction?
Property taxes are high - I paid nearly that on a lakefront property I owned in 2000.  I moved to a nearby lower COL area to a) cut my tax bill, and b) withdraw some equity from the house - bought a house with cash, and put the rest in the market.  But by then my kids were school aged...

Quote
Do you include your home equity when figuring out how much 4% withdrawal on your investments actually is?
Do you re-calibrate the 4% number every year?
I *do* include the home equity figure in my "FIRE number" calculations.  However, it is an illiquid asset - you can't buy groceries/utilities/taxes with your home.  The only ways to get money out are to sell it, or rent it out.  I think of my 3.75% mortgage rate as a long-term yield "virtual real-estate bond" that will pay off in 20+ years.  I'm paying in, and will hopefully get more than 3.75% return on the equity of the home in the long-term. 

Once you FIRE, your primary expenses will be: 1) mortgage, 2) utilities, 3) taxes, 4) insurance and 5) groceries/staples.  If you reduce the expenses you can control NOW (i.e. mortgage, taxes, utilities) you can stretch your FIRE dollars further in the future.   

In any case... welcome aboard!  You're on the right track.  If you want detailed analysis of your situation, consider posting a detailed 'Case Study'.

Axecleaver

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Re: Almost done? Think I'm getting close to pulling the plug.
« Reply #2 on: November 05, 2015, 11:47:34 AM »
You didn't say what your expenses are, but I get the impression that your expenses are 100% covered between your pension and your wife's teaching job? You're all set to retire, and should probably plan on stashing away more of your wife's income (to the extent possible), and deferring use of your portfolio, letting it grow until she retires.

Since you're both covered by lifetime defined benefit pensions, which is extremely rare today, you don't really need any investments to produce income.

Quote
You are allowed to deliberately over pay your pension by a few thousand a year gaining a locked in 8.25%.  I'll have about 87k in that account.  It can be distributed 2 ways:
1) Take it out upon separation of service where it will be taxed.
2) It can be turned into an annuity, and 7100 per year is added to my pension.
What a great deal! Definitely take the annuity. You're getting a guaranteed 8.25% return on that money, I assume for the rest of your life. Rough estimate is that on the private market, it would be a little over twice that amount to buy an annuity like that. The only risk factors are what the terms of the annuity are (what happens if you die, does your wife inherit it, is there a guaranteed payout amount), but looks like a really nice feature of your plan.

Quote
Do you include your home equity when figuring out how much 4% withdrawal on your investments actually is?
No. You include home equity in your net worth, but not in your income-generating investment portfolio, because your home doesn't generate income.

Quote
Do you re-calibrate the 4% number every year?
Generally, no. The 4% number is based on the Trinity study, and in that study the assumption they used was to set the amount at retirement, and only take 4% of that amount per year, plus inflation, regardless of what happened with the investments. Some folks use a modified version of this approach. If you take 4% of current value, you'll never run out, but you could get progressively smaller income from your investments over time. Some folks use a 4% with limits (like, no less than 95% of last year's income) to keep their income within a predictable range.

But in your case, your investments are a small portion of your income:

You: 82k
Annuity: 7k
Teacher estimate: 90k
4% of 360k investment portfolio: 14.4k

You're set for life at this point, enjoy!

AlmostDone

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Re: Almost done? Think I'm getting close to pulling the plug.
« Reply #3 on: November 05, 2015, 06:41:04 PM »
Axecleaver and Mother Fussbudget, thank you so much for your input! Did a little research today and will be able to expand/clarify things.  It may change one of the items in my investment portfolio.

The roughly 87k i'll have as excess contributions to my pension:
Sadly, I can't keep it there and keep getting 8.25%.  It comes with me.  I can. . .
Make it a yearly 7100 annuity.  If I die, it goes with me.
Get a check and pay the tax or as I found out today roll it into a IRA.  How does that change the math? BTW, I'll be 44 years old when I FIRE.

Yes 50k is too much.  20 of it I don't have now, I'll get a check when I leave.  I keep 30 around now, which I fully admit is stupid considering you can bet your last dollar that me and my wife have a check coming to us next week, next month and next year.  I'll grind the research on where to put at least 15 of it in the next few days.  Thanks for the kick in the butt!

I gave a half thought about paying down the mortgage.  There is value in it but with me and my wife's income even after I retire, we could sure use the tax write off.  I very much detest debt but I detest giving away value more and if I can take that money I would use to pay down a mortgage and throw it in a investment that pays a greater % of interest than my mortgage than that's what I do.  Is there any good articles you have found with the pro's and con's of this?

As for my expenses, they are ok, could always be better.  I'm lucky in that I never really wanted for anything material.  I want less stuff, not more.  I have 2 kids however.  The little girl likes her gymnastics and the boy will eventually find activities that he likes to do.  I'm confident that there will be money for that.  In any case, at 44 I'll certainly be open to doing something for only the right reasons that may be able to put a few extra quid in my pocket.  Not too concerned about that.

I will have an additional expense the next 2 years.  Getting my wife more masters credits.  Your salary can be increased by taking additional classes.  The bump in pay makes it a no brainer.  Currently looking for the most cost effective way of doing this.  Any ideas?

My wife paid her dues in a challenging district and just got a job in teaching nirvana.  No FIRE anytime soon but a rewarding work atmosphere and excellent pay.

All clear on how much I can take out of my investments if need be.  Actually will probably take out what I can to go on cool trips with the family. What good is FIRE without enjoying it anyways . . .

Thanks again for the help!









Axecleaver

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Re: Almost done? Think I'm getting close to pulling the plug.
« Reply #4 on: November 10, 2015, 09:43:57 AM »
Well, the annuity of $7100 is 8.16% of $87,000, so it's pretty close to 8.25% anyway. That's a pretty easy decision to make. I did a quick quote on the annuity you'd get for $87k at age 44 with no period certain - it came out to $4744 a year. If you apply the 4% rule to the lump sum (which is what you'd get if you put it in your IRA), $87,000 will earn you an average of $3480 a year.

So the annuity option of $7100 seems like the best deal. That plus your pension gives you a guaranteed income forever, and you don't need a big pile of cash to get it.

Regarding masters credits, have you looked into distance learning like University of Phoenix? If the quality of the education is secondary to the degree, you may be able to find even cheaper options. Your state may also let you do 529 contributions to make the school tax deductible (for your state, not fed taxes).

Mother Fussbudget

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Re: Almost done? Think I'm getting close to pulling the plug.
« Reply #5 on: November 10, 2015, 12:00:26 PM »
One note:  please realize that $30k in CASH is earning nothing. On the contrary it is LOSING money since it's not keeping up with inflation.  Since your month-to-month expenses won't be coming out of your FI fund, you should invest that today.

Portfolio allocation is a personal thing - everyone has an opinion on the allotment - some in a Total Stock Index Fund (VTSAX, SCHB or similar), a Total Bond Fund (VBTLX or similar), and whatever else you want exposure to - foreign markets, REIT's, etc.  Traditional investment advisors suggest you invest X% in bonds, and the rest in equities, where X is your age.  For myself, I use bonds as a hedge against a down market (insurance if you will), and I keep that % lower than recommended [~12%].  YMMV.