Author Topic: Case Study: Optimal target FIRE date & tax strategy  (Read 2080 times)

fartface

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Case Study: Optimal target FIRE date & tax strategy
« on: April 19, 2015, 08:38:11 AM »
Life Situation
ME: 40
DH: 44

Married with three dependent children & annual household income of ~$100K {$8400/month gross}

Annual pre-tax deductions:
403b:    $17,400
Pension:    $  5,000
H. Ins:   $  2,200
FSA:    $  1,200

Roth IRA's: $11,000 (after tax)

Qualified Dividends: ~$2000/year (taxable accounts)

Current expenses:
Mortgage: 1640
Prop Taxes: 550
Home & Auto Ins: 100
Utilities:  200
4 Cell Phones: 100
Internet: 40
Groceries: 570
Transportation: 300
Miscellaneous: 500
TOTAL = $4000/month

++++++++++++++++++++++++++++
Here's a breakdown of miscellaneous expenses:
sports & school fees $100
clothing & sundries $50
Netflix & Amazon Prime $17
Pet food & care $25
Restaurants $50
Home maint. $50
Home brew hobby $50 
Travel expenses $150

Mortgage payments: $1515/principal + $125 towards interest

Expected ER expenses: 
$2500/month with a paid off mortgage (2 years to go)

Assets
Stock:    $24,300
529:      $21,400
Cash:    $15,000
Brokerage: $55,000
Real Estate:$340,000
Roth IRAs: $63,400
IRA/403b:   $190,000
Pension:    $125,000 (see scenarios below)

Liabilities
Mortgage: $50,000 @ 2.875% (15 year term) with Dec. 2017 set as final payment date

Pension scenarios
If I work another 5 years…
Pension benefit = $32K/year @ age 55

If I work another 10 years…
Pension benefit = $40K/year @ age 55

My kids will be done with high school in six years. At that time, we’d like to sell the house and downsize/rent.

Given all this, what would you determine to be a reasonable target FIRE date?

Am I underestimating my ER expenses? Healthcare is always the big “what if” but both my parents retired at 50 and purchased high deductible plans for reasonable amounts.

Only two of my kids may attend college (one is disabled and will likely live w/us as an adult).

Is my tax strategy optimal? We currently choose Roth over traditional IRA’s because we’re in the 15% bracket, and I won’t have enough time between FIRE and collecting my pension to convert all tIRA’s.

Should I be converting some tIRA’s to Roth this year to ‘fill up’ my 15% bracket?

I'm probably forgetting other relevant information so feel free to ask questions. Appreciate feedback.

Thanks!

bacchi

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Re: Case Study: Optimal target FIRE date & tax strategy
« Reply #1 on: April 19, 2015, 12:42:11 PM »
For the pension, you can work until 45, retire, and then collect $32k at 55? Is it a stable pension fund?

Your expenses post-mortgage will be ~$2400/month so your pension will cover that. After your mortgage is paid off, you can plow the $1600 into savings.

The real question is how to bridge the gap between ER and 55. With the additional savings, you could just withdraw what you need at around 5.5% from 45 to 55. That's too high to be sustainable but it can be done. If you downsize the house, it's much easier.

If the market cooperated, personally I'd quit when the last kid leaves, downsize the house, and then withdraw from 46 until 55.

fartface

  • Bristles
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Re: Case Study: Optimal target FIRE date & tax strategy
« Reply #2 on: April 19, 2015, 03:51:21 PM »
Thanks.

RE: Pension, I started my career at age 22...so at 45 I'll have 23 years in; 28 years at age 50. Additionally, in 1997, the state gave us the option to invest 50% of our pension contributions into the stock market & the other 50% had to stay in the state managed core fund. For many years my account earned more in interest/gains than I contributed. Of course 2008-09 it wasn't good, but overall, smoothed over time...it's been a good move. I can opt out of this when I get older and put 100% into the core fund, but once you leave the variable fund, you can't get back in.

MDM

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Re: Case Study: Optimal target FIRE date & tax strategy
« Reply #3 on: April 19, 2015, 06:33:42 PM »
Expected ER expenses: $2500/month with a paid off mortgage (2 years to go)
Given all this, what would you determine to be a reasonable target FIRE date?
Are taxes included in that $2500/mo?

Quote
Am I underestimating my ER expenses? Healthcare is always the big “what if” but both my parents retired at 50 and purchased high deductible plans for reasonable amounts.
They are similar to your expenses today, so that's a reasonable guess.

Quote
Is my tax strategy optimal? We currently choose Roth over traditional IRA’s because we’re in the 15% bracket, and I won’t have enough time between FIRE and collecting my pension to convert all tIRA’s.
The house is the big wildcard - depends how much you might extract as net spendable money from selling it and purchasing another.

Quote
Should I be converting some tIRA’s to Roth this year to ‘fill up’ my 15% bracket?
Good question.  Note that if you get a pipeline going and are converting $35K/yr as your only income, the marginal tax bracket is still only 10%. 

So that brings us back to the "can you bridge from retirement to pension?" question.  I'd suggest using a year-by-year planner such as www.cfiresim.com, Quicken's Lifetime Planner, etc., because the superficial view gives a definite maybe.
« Last Edit: April 28, 2015, 03:07:54 AM by MDM »