Withdrawal strategy when 9 year age gap between spouses?? Case study.

[Trudie]

My husband just turned 54.  I will be 45 later in the year.  We would like to be FIRE by early 2021, when he turns 59 1/2.  I am currently puzzling over how we should be allocating our investments (mine v. his; qualified v. non-qualified) and develop a "laddered" withdrawal strategy to accomplish retirement for both of us at that time since I will not be able to tap my investments until much later.  I would like some input.

Net worth:  1,264,617

Broken down as follows:
Checking:  $2077
Money Market (emergency fund):  $19,075

Equity in personal residence:  $217,157 (340,000 FMV - 122,843 Mortgage; Mortgage is at 3.25% interest; 11/1/2026 payoff)

Non qualified investments:
Vanguard Index Funds/Inherited bank stock:  $54,427

Retirement investments:
Husband is 59 1/2 in 2/2021.  I am 59 1/2 in 6/2030.
401K - Fidelity (me):  $153,333
Roth - TIAA-CREF (me):  $125,012
Trad IRA - TIAA-CREF (me):  $63,653
403B - TIAA-CREF (spouse):  $477,939
Roth - TIAA-CREF (spouse):  $106,949

"Off-balance sheet" items:
Term life insurance policy (spouse):  $100,000
Employer-provided life insurance (spouse):  $112,500
Employer-provided life insurance (me):  $30,000
Home Equity LOA:  Draw limit of $75,000 at 5.95%  (we've never had to use it)

Other Important Information:
(1)  We have no dependents.
(2)  We both max our qualified accounts (including catch up contributions) annually.  Both employers contribute 10% of our earnings to our qualified accounts.  Annual retirement contributions.  This comes out to about $65,000 in contributions annually.  My "quick and dirty calculation" is that with simple interest of 6% on today's balance, plus $422,500 in projected additional contributions we will have $1.7 Million in retirement accounts by my husband's retirement date.  Approximately $1,050,244 of this will be in my husband's accounts.
(3)  We also are almost assured of getting another $105,000 in unqualified stock gifts between now and my husband's retirement.
(4)  Another big unknown is the timing of substantial inheritance, conservatively valued at $500,000.  I would say within the next ten years for sure, timing uncertain.  (Obviously this would be a game-changer.)
(5)  I have not seriously thought about the implications of tapping my Roth before age 59 1/2.  I have held it more than 5 years.
(6)  We will move when we retire.  The plan is to pay cash for a house valued roughly the same in today's dollars.
(7)  I've eeked out a retirement budget and know that we could live like kings on $80,000/year.  I am going to develop two other budgets with smaller spending limits ($70K and $60K) to allow for other possibilities.  We would like to travel quite a bit.
(8)  This does not take Social Security into consideration.

Projected net worth at 2/21 retirement date (without inheritance):  $1.87 million ($270K home equity; $1.7 retirement accounts; $20K cash; $170,000 non qualified investments)

The same (with inheritance) would be $2.27 (give or take) and increase our non-qualified investments to $670,000.

[CheapskateWife]

Wow, you guys are in great shape!  Following as my DH and I are 7 years difference, and the idea of having to ladder our withdraws is something we've discussed also. 

I have nothing to add as far as "strategy" goes...unless of course it is to recommend that your sequence will be determined by your tax strategy.  Are you planning to front load your tax burden or space it out over the long life of your retirement?

[Trudie]

@Cheapskatewife - Haven't really considered the tax effects of it all either!  Other things we need to weigh -- hitting the "sweet spot" for ACA subsidies.

My inclination is to say that we'd spread out the tax burden.

I wanted others to weigh in on what they see as options... we have a (free) advisor through TIAA-CREF who can run numbers for us.  TIAA-CREF is great and I'm glad to have them.  Right now I'm considering if we should take a higher withdrawal rate on part of my husband's stuff in the early years, then back off.  But, one thing I'm wondering is if I should be putting more money into current investments instead of my own Roth for flexibility.  I really would like someone to weigh in on early withdrawal options for my Roth (held more than 5 years).

[Gin1984]

I'm not sure why you would need to tap your Roth with the amount in your husband's but, if you do, as long as you have kept records of how much you deposited and withdraw less than that, it should not be an issue at all.

[Jesstache]

My husband and I are 15 years apart (31 and 46), so I feel your pain.  We plan on retiring in 10 years or so and have a similar scenario to reconcile.

[seattlecyclone]

I see no reason why you would need to do anything fancy with withdrawing your money, given your plan to retire in 2021. Your husband will already be 59½ by the time you retire, and his account balances are higher. You should have no problem living off of those accounts and your taxable stock until you hit 59½, at which point you can withdraw from whatever accounts you wish.

If you decide that you don't actually need $80k/year plus social security to live, you'll be able to retire even earlier. If that happens then some of the other strategies may come into play. In your case I might suggest you consider starting SEPP distributions from your husband's traditional IRA for the first five years of retirement, supplementing with your taxable accounts as necessary. Run the numbers on that and see if it could provide enough money for the first five years. After that you have a lot more flexibility with regard to how much you withdraw from your husband's accounts. Spend those down until you get to 59½, then everything is in play.

[Trudie]

I'm not sure why you would need to tap your Roth with the amount in your husband's but, if you do, as long as you have kept records of how much you deposited and withdraw less than that, it should not be an issue at all.

The issue as I see it is that with a 4% withdrawal rate, we will only bring in $40-50K in the early years of retirement just drawing on his retirement accounts and unqualified investments.  We would need to move some other "chess pieces" first -- like moving -- since we will still have a mortgage.  This is in the cards anyway, but we'd need to get the deal done and be able to cash flow it as well because we don't intend to have a mortgage in retirement.

The other big "iffy" thing is buying health insurance on the exchange. Currently, I estimate it will take $12-14K per year.  I haven't factored any subsidies or what it would take to hit the "sweet spot" to get them.

It's the costs related to home ownership and health care that will make or break us on the budget.  All of the other stuff can flex.

[seattlecyclone]

You don't need to apply the 4% SWR on a per-account basis. If you have $1.7 million total investments, 4% of that is $68k. It's fine to withdraw this entire amount from your husband's retirement accounts, knowing that your other accounts will still be there in the future when you can access that money more cheaply.

As to the ACA question, lower income is better. Remember that Roth withdrawals don't count as income for ACA purposes, nor does the cost basis of your taxable account withdrawals. If you can get below 200% of the federal poverty level (~$30k), you can qualify for some pretty nice "cost sharing subsidies" that let you essentially buy a platinum plan for the cost of a silver plan. Given your expected spending and your current Roth/traditional/taxable mix, you could probably do this for several years, but it may not be sustainable until you both qualify for Medicare. As always, consider the big picture of how deferring your traditional withdrawals to get better ACA subsidies will affect your overall long-term financial health. It's possible that the additional taxes you would pay later in retirement from this strategy would be worth it to get a better ACA subsidy, but the opposite is also possible.

[Trudie]

You don't need to apply the 4% SWR on a per-account basis. If you have $1.7 million total investments, 4% of that is $68k. It's fine to withdraw this entire amount from your husband's retirement accounts, knowing that your other accounts will still be there in the future when you can access that money more cheaply.

As to the ACA question, lower income is better. Remember that Roth withdrawals don't count as income for ACA purposes, nor does the cost basis of your taxable account withdrawals. If you can get below 200% of the federal poverty level (~$30k), you can qualify for some pretty nice "cost sharing subsidies" that let you essentially buy a platinum plan for the cost of a silver plan. Given your expected spending and your current Roth/traditional/taxable mix, you could probably do this for several years, but it may not be sustainable until you both qualify for Medicare. As always, consider the big picture of how deferring your traditional withdrawals to get better ACA subsidies will affect your overall long-term financial health. It's possible that the additional taxes you would pay later in retirement from this strategy would be worth it to get a better ACA subsidy, but the opposite is also possible.

Thanks Seattle Cyclone... very helpful.  But I should expect it from a fellow Cyclone!  :-)  BTW, we're currently debating Ames versus Denver or Fort Collins, Colorado as a retirement destination.  (I'm not wanting to own two places outright.)  Colorado may win out due to good weather year-round.  (We're outdoorsy/active people.)