Case Study -- Am I FIRE'd?

[azcardsfan]

Short-term lurker and first time poster.  First, thank you for all the great info and support on here.  Second, wanted to do a sanity check if I can walk away from the Corporate grind and wife doesn’t have to go back to teaching.

SITUATION:  Wife and I are both 50 with no kids and live in Phoenix.  Wife has $40K salary but has taken last couple of years off to take care of her father.  My salary is $135K.

MONTHLY EXPENSES

Primary Homes Prop Tax/Insur/HOA    $400
Vacation Home PITI                            $815
Prim/Vac Homes Utilities                     $500
Mobile/Internet/Cable                         $300
Insurance (2 cars and $2M umbrella)   $185
Groceries/Household Items                   $500
Entertainment/Eating Out                   $500
Cars Gas/Maint                                   $200
Vacation Fund                                    $800
Prim/Vacation Home Maint                  $300

Total Monthly Expenses                     $4,500
Monthly Take Home Income (Salary)  $6,000
Monthly (3) Rentals Net Income         $2,000

ASSETS/INVESTMENTS

401K                                                 $965K
2 Roth IRAs                                       $260K
Inherited IRA*                                   $150K
HSA                                                  $  25K
=============================
Total Investments                               $1.4M

*Grandfathered in Oct ‘19 so can still do Stretch Inherited IRA but will have to take about $3K/yr in RMDs starting in 2021

REAL ESTATE                                     EQUITY
Primary (No mort)                              $350K
Vacation ($100K mort at 4%)              $  80K
Rental #1 ($275K mort at 3.5%)          $200K
Rental #2 (No mort)                           $200K
Rental #3 (No mort)                           $110K
=============================
Total Real Estate                                $940K

Cash                                                  $ 60K

Total Net Worth                                 $2.40M
Net Worth w/o Primary Home             $2.05M            


RETIREMENT PLAN

Planned monthly expenses in retirement   $5,000 (2 notes below increase expenses in retirement by $500/mo from the current $4,500 mo expenses)
-   Estimate of increased $1,000 monthly expense for ACA which includes ACA premiums, Dr visits/labs while under the deductible and separate dental costs
-   Reduce current monthly expense by $500/month from reduce mobile/cable bill (haven’t done due diligence on these yet), reduce car insurance with no commutes, less eating out

To have $5K monthly during retirement: 
-   3 rentals              $2,000/mo
-   Investment accts    $3,000/mo (one of my questions below) as will do a ultra conservative 2.6% WR of the $1.4M (I'm concerned about SORR) 

To account for upcoming spikes in costs in a given year (e.g., have to buy a used car, have a surgery/broken bone to pay up to ACA deductible, pay for major expense at a rental), plan to pull from savings and/or Roth IRA contributions to avoid penalties

SS & Wife’s Pension will kick-in at 62:   $3.5K/mo
-   Includes SS assumption of taking both SS at 62 (may delay my SS until later if not needed) and factored in zeros for salaries from 2021 until we reach 62;
-   Includes wife’s monthly pension starting at 62

QUESTIONS:
-   To tap retirement accounts before 59.5, I’m leaning toward doing the 72(t) SEPP payouts after moving 401k to traditional IRA, but I know the Roth Conversion Ladder is an option too so going back and forth (or maybe do a combo of both).
-   If I do a Roth Conversion Ladder where is the best bucket to pay off the taxes when doing the conversion from Trad to Roth IRA
-   Is my ACA cost estimate a good estimate as I did a quick look at ACA for 2021 in AZ and with a $60K income ACA premiums are looking to be betw $500-600/mo.  Admittedly I need to do more research on “threading the needle” on ACA subsidies & Roth Conversions (if I go that route)

Well……can we FIRE, like now??? :)


Thanks in advance for reading thru this and your comments/suggestions……..

[zolotiyeruki]

Yes, you have more than enough assets to FIRE.  That said...

1) You have $5k/mo listed as your expenses (and the amount you pull from your accounts) but you haven't accounted for taxes.  Where's that money going to come from?
2) You talk about building a Roth Pipeline, but I don't see where you'd get the money to fund the first five years.  If we assume $3.5k/mo plus your rental income, that's $210k.  You don't have that much total in your Roth IRAs, let alone accessible contributions there, and you have no taxable accounts to draw from, either.
3) You won't be able to cover $3500/mo from a SEPP.  That's about 4.3%, and the max allowable is 120% of the Applicable Federal Mid-term rates, which currently hover around 0.46%.  Maybe 2 years ago, when it was 3.6%, but not now.
4) If you sold Rental #2 ($200k), it, plus your cash, would almost certainly be enough to give you the time you need to build your Roth Pipeline.

[ericrugiero]

As I understand the rules, you can use the $150K in the inherited IRA to cover much of your first 5 years expenses while you set up the Roth pipeline.  There should be no penalty but you have to pay income taxes on what you withdraw.  You could also sell a rental property OR take a mortgage on one to pull equity to fund the first 5 years. 

Looks like you have plenty of money to FIRE but need to figure out the details of how to fund the first few years most efficiently. 

[ysette9]

I’m on a phone and don’t have time to write out a full response, so I’ll just throw in a few quick comments.

First, IRA contributions is not an expense and should not be counted towards yours  monthly spending.

Secondly, for ACA subsidies what matters is not your income/spending, but your MAGI. If you have real estate income then that will fill that bucket up quickly, but if you are living off of investments then that will be your basis. So if you have a stepped-up basis due to inheritance and you are only living off of investments then your “income” could end up being really low on paper. So consider that when deciding whether it makes sense to keep real estate investment properties or not.

[azcardsfan]

Thanks for the comments especially zolotiyeruki on not really being able to use the 72(t) SEPP method so Roth Pipeline it is. 

I agree with ericrugiero on mainly using the Inherited IRA which will get us most of the way there and can withdrawal Roth regular contributions penalty free to make up the shortfall.  I'm trying to bridge the gap by not using any real estate sales if I can but can always fall back on that as Plan B.

Thanks ysette9 for the ACA insight and the reminder ACA subsidies are based on MAGI and I also updated current expenses in my original post to exclude Roth

Also, I decided to apply the full 2K/mo net rental income to my retirement income so will only need to use investments to fill in 3K/mo in retirement.

Here's the draft plan until 59.5
- Assume 3% inflation every year for income needed
- Used rounded numbers
- All numbers are 000s

               Income     Withdrawal    Inherit      Withdrawal       Actual Take         Convert to    Tax Hit (assume 20%)
               Needed      Inhert IRA    IRA Tax     Roth Contrib      Home Pay         Roth IRA      take from savings

Dec-20     Move 401k to Trad IRA, start convert to Roth IRA so 2020 is Year1      41                  8
2021        36              45                9             N/A                     36                   42                  8
2022        37              46                9             N/A                     37                   43                  9
2023        38              48                10           N/A                     38                   44                  9
2024        39              11                 2            30                       39                   45                  9
2025        41                                                                           41
2026        42                                                                           42
2027        43                                                                           43
2028        44                                                                           44
2029        45                                                                           45

Notes/Questions:
- If I can start the move of 401K to Trad IRA and start year 1 of Roth Conversions in Dec 2020 then assuming I can use these funds starting in 2025 thru 2029 (when we hit 59.5)
- Vanguard will withhold 20% tax when I withdrawal from inherit IRA and for the Roth Conversion tax will dip into savings to cover those taxes.
- For ACA, I assume these Roth Conversions will be included in my MAGI so they will greatly reduce or eliminate any subsidies
- This $5K budget planned for retirement will probably closer to $4K/mo in the initial 4 to 5 years as will not be travelling much until 2022.  When we do travel we plan to use credit card pts/freq flier miles for a couple of years as have close to 800K in pts/miles from years of travel/credit card hacking.

Any gaps in my draft plan here or something I'm missing.....thanks

[ericrugiero]

You only show $30K Roth IRA contributions to withdraw.  I would have expected that to be higher for a $260K balance.  Is there more money available there?  If not, it must have been sitting there earning interest for a long time. 

The $60K cash you have can be used to fund the last ~18 months of expenses before 59.5.  If you want to keep cash in your overall net worth you can transition some of the 401K/IRA to cash as you draw down the $60K and it will be available as soon as you hit 59.5. 

Your income the first 4 years are shown as $80-$90K and then it drops to half that when you stop converting to Roth.  You might be better off paying the 10% penalty on a little bit of money to keep the income lower and more even across years.  I don't know this for sure but it's worth running the numbers. 

[azcardsfan]

There is approx $100K of Roth contributions in the $260K that I could pull from penalty/tax free but was thinking of first zeroing out the Inherit IRA to let the tax free Roth continue to grow.  Is there an advantage to drawing down both at the same time in a more even fashion?

I'm not a fan of the higher income initially for 4-5 yrs either from the Roth Conversions.  I've stayed away even looking at paying the 10% penalty as it's more a mental thing to do anything to avoid paying any sort of "penalty".  To your point, I'll have to run the numbers to see what ends up costing less.

[zolotiyeruki]

Your current plan shows 80-90k of taxable income for the first four years of your retirement, then 57k in year 5.  Because of progressive tax rates, you'd be better off withdrawing 20k of Roth contributions in each of years 1-5, so that your taxable income is only 16-20k (inherited IRA withdrawals to cover your living expenses) + $41-45k (Roth conversions) = $57-65k.   If you're Married Filing Joint, you want to keep under about $80k taxable income--that's where the marginal rate jumps from 12% to 22%.  If you have $20k in rental income, withdraw $35k from the inherited IRA, and convert $45k, you're at $100k of taxable income, with the top $20k being taxable at 22%

Withdrawal of Roth contributions (or gains after 59.5) is NOT included in MAGI (or reported on 1040 at all, since you've already paid taxes on that money), and will not affect you with regards to ACA.

[ericrugiero]

There is approx $100K of Roth contributions in the $260K that I could pull from penalty/tax free but was thinking of first zeroing out the Inherit IRA to let the tax free Roth continue to grow.  Is there an advantage to drawing down both at the same time in a more even fashion?

I'm not a fan of the higher income initially for 4-5 yrs either from the Roth Conversions.  I've stayed away even looking at paying the 10% penalty as it's more a mental thing to do anything to avoid paying any sort of "penalty".  To your point, I'll have to run the numbers to see what ends up costing less.

So you need about $40K X 9years = $360K to reach 59.5

You have $100K in Roth contributions, $150K in inherited IRA, and $60K in cash which would add up to $310K.  You don't need to convert $40K/yr from traditional to Roth because you only need $50K total conversion. 

Here is one possible plan:
1.  Use the $100K Roth contributions the first 2.5 years.  That money will grow but the growth can't be used till 59.5 and the $100K contribution amount won't change so it doesn't hurt to use it first.  The Roth contribution withdraw won't count as income so you can convert ~$100K from traditional to Roth during this time and keep your taxable income around $40K/year. 

2.  Use the $150K inherited IRA for years 2.5-7.  It counts as income when withdrawn so you won't want to convert a lot to Roth during this time.  Hopefully this $150K grows some before you use it. 

3.  Use Roth conversions and the $60K in cash to live till 59.5 when you can access the rest of your money penalty free.  The $100K contributions, $150K inherited and $100K conversions might get you there without even touching the $60K.  Any shortfall should be minimal and the potential 10% penalty won't be much.  As a backup plan, you can tap into real estate equity via HELOC, refinance, etc. 

[azcardsfan]

Thanks guys for the input and analysis.  Really appreciate to get fresh eyes looking at it.....

[azcardsfan]

Thanks again for the input before in November.  I'm currently on leave of absence from my Corporate job as wanted to take a break and get a feel for retirement including buying ACA health insurance.  I've learned that my motivation to get back to the Corporate grind has gone from low to really low, so I'm 99% sure I'm leaving my job when the leave is over next month.  I wanted to update our numbers from last post, increase our planned retirement costs to "stress test" it and also layout the plan to fund our years 51-59 as both wife and I are turning 51 this year

ASSETS/INVESTMENTS

401K                                              $1,074K
2 Roth IRAs*                                     $325K
Inherited IRA*                                   $159K
HSA                                                  $  29K
=============================
Total Investments                            $1.587M

*$110K of Roth IRAs are contributions
*Grandfathered in Oct ‘19 so can still do Stretch Inherited IRA but will have to take about $3K/yr in RMDs starting in 2021

REAL ESTATE                                     EQUITY
Primary (No mort)                              $375K
Vacation ($100K mort at 4%)              $  90K
Rental #1 ($275K mort at 3.5%)         $225K
Rental #2 (No mort)                           $210K
Rental #3 (No mort)                           $125K
=============================
Total Real Estate                             $1.025M

Cash                                                  $ 30K

Total Net Worth                               $2.642M
Net Worth w/o Primary Home           $2.267M

RETIREMENT PLAN

To have $6K monthly during retirement (this is very high side of our retirement plan but want to stress test it):
-   3 rentals              $2,000/mo
-   Investment accts  $4,000/mo as will do a ultra conservative 3.0% WR of the $1.587M

SS & Wife’s Pension will kick-in at 62:   $3.5K/mo
-   Includes SS assumption of taking both SS at 62 (may delay my SS until later if not needed) and factored in zeros for salaries from 2021 until we reach 62;
-   Includes wife’s monthly pension starting at 62

To bridge our years in the 50s, here's our draft plan to generate $48K yearly from retirement accts as efficient as possible.  Assuming inflation by adding $1K more needed per year

              Income     Withdrawal    Withdrawal    Withdrawal       Withdrawal          Convert Trad IRA  Tax from Roth Conv
              Needed    Inherit IRA    Roth Convrsn  Roth Contrib    HSA for medical    to Roth IRA          (assume 12%)
                                               
Apr-21     Move 401k to Trad IRA, start convert some to Roth IRA so 2021 is Year1
2021        48              21                0                 22                    5                        48                       6                 
2022        49              22                0                 22                    5                        49                       6                 
2023        50              23                0                 22                    5                        50                       6                 
2024        51              24                0                 22                    5                        51                       6
2025        52              25                0                 22                    5                       TBD--see note   TBD
2026        53               5                48                 0                     5                       TBD--see note   TBD
2027        54               5                49                 0                     0                       TBD--see note   TBD     
2028        55               5                50                 0                     0                       TBD--see note   TBD
2029        56               5                51                 0                     0                       TBD--see note   TBD

Notes: aim to keep taxable income in the 12% bracket
           for later yrs when most of taxable income is low starting in 2025, we'll continue to make Roth conversions to make sure we don't fall in Medicaid
           assuming every year we'll have $5K in medical expenses that I'll pay from HSA but obviously this will vary yearly and will adjust Inherit IRA's accordingly

QUESTIONS:
- Assume we can FIRE now, but just wanted to double check again
- any feedback/suggestions to make the withdrawal strategy over the next 9 years more efficient

Thanks in advance for reading this and providing feedback...