Hi folks,
I've been hanging around here for a few years now, but have never really run my FIRE plan by the forum before. The plan has me jumping ship around the end of 2017/beginning of 2018, so I figured maybe it's time to get a second opinion, just to make sure.
I hope you don't mind that I'm not doing a full case study. DW and I have our lifestyle and spending pretty well dialed in, so I'm not really looking for feedback on that aspect of the plan. Also, I'm a bit paranoid about posting every detail about our investments. But I'll tell you how I've handled all the major considerations, and hopefully that will be enough for you to see whether I've missed something critical. On to the givens:
Simulation tool of choice: cFiresim.
Me: Late 40's, employed by Uncle Sam.
DW: Early 60's, retired SAHM.
Debt: About 82k owed on the house, set to be paid off in late 2027.
Current base annual spend: A little over $30k, plus P&I on the mortgage, which brings it to about $40k currently.
Desired FIRE spend: $45k, to allow a little buffer for occasional travel and unexpected large expenses.
Stash: about 57% of it is in taxable accounts plus DW's Roth IRA, all of which can be accessed immediately. The remainder is divided among my TSP, tIRA and Roth IRA accounts. 75/25 stock/bond breakdown.
Strategy for funding FIRE spend: Pull from taxable accounts and/or DW's Roth while doing a Roth pipeline on my qualified accounts. In theory, the pipeline conversions should not generate any federal income tax liability due to our MAGI being very low ($45k spend funded by a combination of principal, capital gains, and qualified Roth distributions).
Social Security: Expected benefits estimated using SS's on line estimator. DW is planning to start taking benefits as soon as I FIRE (she worked before she was a SAHM), and I'm planning to take them at 62. cFiresim projects a higher maximum annual spend if we take SS as soon as possible, likely because this strategy reduces the initial withdrawal amount from the stash, thereby mitigating sequence of return risk.
Pension: I'll have a small FERS pension coming. I'm planning to take it at 57, for the same reason outlined above for SS. I used my current high 3 to estimate the amount I would receive at 62, reduced that by 25% to reflect taking it at 57, then further reduced for inflation at 3%/yr for every year between my FIRE date and the date I start receiving benefits. That amount was put in as a non-inflation adjusted extra income amount for the years from ages 57 through 61. Then I reduced the amount by 3%/yr for 5 more years to reflect the fact that I lost 5 more years of inflation adjustments between 57 and 62, and plugged the resulting amount in as an inflation-adjusted pension starting at age 62.
Income taxes: Assuming essentially none, given low annual income and everything being funded by capital gains, qualified withdrawals, and SS (should be non-taxable at our income level). In reality, the pension income will generate a small tax liability, and we will owe some state income tax. But the pension will be so small and our state income tax rate will be so low that together those taxes might amount to a thousand dollars or so. I consider that negligible enough to be covered by the spending buffer.
Strategy for health care: This is still a bit of wild card given the current shit show in DC. If the ACA survives, our total health care expenditures will go down due to subsidized insurance premiums. If something like the recently deceased Senate bill passes, our insurance premiums will go down due to the subsidies, but our max out of pocket would be higher, so I'll call that one a wash. If everything is still up in the air come the end of the year, such that implosion of the individual health care market looks like a real possibility, I will not pull the plug because a $15k/yr increase in premiums would blow the whole plan out of the water. So, I'm assuming that health care costs are covered under our base annual spend.
Mortgage: I plugged in the P&I part of the mortgage as a non-inflation-adjusted extra expense starting on my FIRE date and ending when the house is paid off.
Extra savings: I plugged in projected savings for the rest of this year, along with my expected payout for unused annual leave.
Length of simulation: I used our life expectancies at age 62 according to the Social Security actuarial table. This puts us expiring in our early to mid 80's, which generates a run of 30-some years.
RESULTS
I plugged the particulars into cFiresim and chose the option to explore the maximum initial spend with a 100% success rate. It spat out $49,500 (mortgage included), which gives us a 24% buffer on the $40k base annual spend (almost twice the buffer I was shooting for). I've also done runs where both DW and I live to 95; these also produce a 100% success rate, although with a lower spending buffer. So I should be golden, right?
POTENTIAL RISKS
-- Our SS benefits might get cut by about 25% when the SS trust fund runs out, if Congress doesn't do anything to fix it. I modeled full benefits, because no previous SS fix has ever made substantial cuts to benefits for people who are as close to claiming them as we are.
-- Congress might reduce my FERS pension, which they are currently threatening to do. But it's a fairly small part of my overall strategy.
-- We don't have long term care insurance. Once the house is paid off, I figure we could downsize and extract 60-70k of equity. Or sell the house outright for $160-$170k if neither of us are in good enough shape to stay in it. That won't go very far at a nursing home, but Medicaid should serve as a backstop if our assets are exhausted. Not an ideal outcome, but not the end of the world, either. Unless the republicans succeed in gutting Medicaid, as they are currently threatening to do.
-- Tax laws could change, potentially screwing up my Roth pipeline and low income/no tax strategy.
SAFETY FACTORS
-- 100% cFiresim success rate would be considered excessively conservative by many folks on this forum. I chose it because I'm keenly aware of the fact that the current bull market is getting long in the tooth and stock valuations are stretched. Something worse than the 1970s stagflation era would have to happen to derail my FIRE plan.
-- I likely will receive a modest inheritance at some point. Currently I have no idea of the timing or amount, so I did not attempt to account for it.
-- I'm considering the potential for side gig, such as part time consulting, monetizing one of my hobbies, or even PT work like substitute teaching. Not sure if I'll do this or not, and I don't have a good idea of how much money I could make at these activities, so I did not account for the possibility.
-- Our portfolio contains some international equity diversification (about 25-30%), which should, in theory, lead to a smoother sequence of returns than the all-US equity scenario that is modeled by cFiresim.
-- By the time I reach 62, SS plus pension will cover the basic spend (but see potential SS/pension cutting above). So even if the stash is exhausted less than 15 years into retirement, we should be mostly o.k., except we would no longer have a spending buffer. But SS and pension are already accounted for in the simulation, so I guess this doesn't really count as a safety factor.
-- Given the age difference between DW and me, I am likely to be spending the last decade or so of retirement alone (morbid thought, but I need to consider these things). I ended her SS benefit according to life expectancy, but did not factor in any decrease in spending.
O.K., what did I miss?
