Help a linear thinker with a pile of yarn

[secondcor521]

Hi all,

I am FI but not yet RE.

Now that I am FI, I thought I'd, you know, make a plan of some sort to RE.

I am a very linear and structured thinker.  I am most comfortable thinking about one thing at a time or one aspect at a time.  I prioritize a lot, and make a lot of lists.  I'm an INTJ and a firmware engineer.

In looking at my RE plan, it looks to me like a pile of yarn in that every aspect of my plan seems to depend on another aspect of my plan.  My withdrawal plan depends on my tax picture.  My tax picture depends on my spending needs.  My spending needs affect my tax picture.  My asset allocation depends on my withdrawal plan.  Etc. Etc.

For those who have successfully made an actual RE plan that covers spending (including kids' college, house/mortgage, car, etc.), taxes, asset allocation, rollover/conversion/SEPP/Roth pipeline, health care, and picking an actual retirement date in such a way that the whole plan works together and makes sense and meets your goals, where did you start and how did you work your way through the various aspects of things given the interdependency of things?

The only thing I've figured out so far really is I need to start by clearly articulating my retirement goals and priorities.  I've next thought about figuring out my spending plan first, then taxes, then withdrawal/rollover strategies, then retirement date.  I have some general ideas about each area - for example I'd prefer taxable withdrawals / Roth contribution withdrawals / Roth pipeline supplemented by IRA to Roth rollovers to adjust AGI.  I know I'll spend maybe $18K per year, so I'm thinking I may qualify for ACA subsidies and other tax goodies for low income folks.  Health care is probably a bronze plan combined with taking care of myself and the basics.

Any input welcome.

[footenote]

Something that worked for my INTJ brain is depicting all the factors in a spreadsheet. Each column is one year, left to right. Each row is either a plus (interest income, SS income) or a minus (one drawdown row for each expense). Bottom line is net assets at the end of that period.

(If you want to get really geeky, you could map it down to month granularity and add sensitivity modeling for scenario testing at different interest rates.)

[babysteps]

Something that worked for my INTJ brain is depicting all the factors in a spreadsheet.

YES :)
For a model with static relationships (income statement, for example), I also do years across and categories down.  Even if there are lots of assumptions.

But like many financial calculations, this is more iterative and interactive, rather than a simple solve-for-x kind of thing.  Of course if you fix all but a single item you *could* solve for x, but I don't think that's really what you want.

In such cases, I tend to put assumptions at the top, labeled so I can change them (say, spending levels, starting 'stache, tax rate(s), etc).  Not saying this is "the" way to do it, just my habit ;)  Then I do years going down.

Also in such cases I tend do several scenarios (that is, once I set up the model I copy it a few times over to the right and fill in the assumptions differently) - you could just change the assumptions without copying anything, but it's easier for me to be able to see/play with the impact of different assumptions (higher/lower spending, higher/lower/more volatile/less volatile assumed investment returns, etc.).

You can make it simple with as few as two columns (the year and your 'stache balance) - this means you use a single assumed rate of return, a static level of spending, same tax rate each year, ignore inflation.  You could also make it quite complicated with many columns, then you can vary some or all of your assumptions year by year if you want to get crazy (withdrawals, spending, investment return, asset allocation, sun spot cycles ;) etc.).  Taxes you may wish to do as column with a formula based on implied yearly investment income & capital gains (rather than a static assumption).

If you are torn between two approaches, try them both - as long as it doesn't take too long, I feel better if I can come to a similar conclusion via two separate paths!

*caveat* set a time limit, or the model can get more of your attention than actual FIRE ;)  Be mindful & you can avoid analysis paralysis!

[ASquared]

I think you might get more helpful direction if you can give a bit more info.  I know you mention kids college - how many kids do you have? Ages? Are you married, is spouse working or also going to RE?  House paid off?

Plan for paying for college or part of it?

Congrats on FI.  And doing it in Boise - a beautiful place to live with such a great lifestyle.  Slave wage state though so kudos to you figuring things out so well!!

[nawhite]

Step 1: What are your yearly expenses and how will those change year by year until you die? Inflation? College costs? Pay off mortgage? Health care premiums (note with ACA you know exactly how these will change over your lifetime)? All of these things are independent variables. You can say definitively "we will have to pay $30k/ year on college starting in 2017" or "our mortgage will be paid off in 2030 at which point our expenses will decrease by $1000/month." You should know, with fairly high certainty, all of these numbers.

If you don't have confident number for your normal spending, start using Mint.com today. I wouldn't feel comfortable picking a number unless I had over 3 years of expenses tracked because otherwise I wouldn't be able to guess the infrequent expensive things like car repairs, and appliance replacements. Without your expenses known with a high degree of certainty, all of the other information you are trying to derive is very difficult if not impossible to calculate (for instance taxes are entirely dependent on this number and very few others). This is where you plan starts: How much money will I need (or want) each year from now until I expect to die.

Step 2: What assets do you have that can be used to pay for living expenses? Include taxable accounts, retirement accounts, extra home equity available if you plan to downsize, your expectations for Social Security, healthcare subsidies (this and taxes are the only dependent variables here I can think of). There are ways to get at all of those things if you need to but some strategies have different time requirements.

Step 3: Identify how you will pay for each year's living expenses with what you have. Only now do things get complicated. Unfortunately without much more information about your answers to steps 1 and 2 it is hard to help.

Personal plan summary: use taxable accounts for living expense for the first 6 years while pumping into a ROTH pipeline starting in year 2 of retirement (can do better if I retire on January 1st but we'll see). ROTH pipeline runs for about 25 years (ish) before exhausting the original account at which point I should be within 5-10 years of SS kicking in. Before 59.5, I use more of the taxable accounts, after 59.5 I'll use the earnings that the ROTH earned and I couldn't touch. Things gets subsidized when SS kicks in. (Note: I generally withdraw from my IRA's and 401k before my taxable accounts because its the only way I can it all out of those accounts by the time I'm 70.5 without getting into higher tax brackets.)

That being said, I'm planning for 60-70 years, so I'm gonna have to roll with the punches. Tax rates will change. Inflation will change. Investment returns will change. Age limits will change. Be flexible.