Can I Afford to Retire in June 2024?

[Sandi_k]

I just discovered that the survivor benefit calculations for my pension are changing – and I cannot imagine the changes would be to our benefit (currently, my spouse and I would have only a 7% decrease in my full monthly pension amount, with 100% survivor benefits).

So I am now confronting the thought that I need to retire in June 2024, instead of Sept. 2025, as I’ve been planning. I am therefore laying out our numbers to see – do we have enough in place to pull the plug in June? Please advise....

Note that my spouse is already age 60; I turn 59.5 next March, but both my 403(b) and my 457(b) allow distributions prior to age 59.5 without penalty.

Here we go!

Emergency funds: Eight+ months of expenses

Debt:

1 – Mortgage. Balance $195k, house value $1.2M. Rate: 2.625% Fixed, done by October 2031.

2 – HELOC, $100k, interest only now, balance of ~ $100k. Interest rate just re-set to ~ 8%. We plan to pay it off using a lump sum from my Roth account, after I turn 59.5, and can access retirement funds without penalty.

Tax Filing Status: MFJ

Tax Rate: 22% Federal, 9.3% State

State of Residence: CA

Age: 58F, 60M

Desired Asset allocation:
80% stocks / 20% bonds and cash
Desired International allocation: 0%

Current retirement assets

Portfolio: $1.1M
Pension Paying $160k annually, with COLA.
His SS, at age 62: $20k (Beginning in 2026)
Her SS, at age 70: $55k (Beginning in 2035)

Taxable – Emergency funds, in HYSA

His SEP-IRA, 5%
100% Fidelity Total Market (FSKAX, .015% ER)

His Roth IRA, 11.5%
45% Fidelity Total Market (FSKAX, .015% ER)
55% Fidelity NASDAQ fund (FNCMX, .36% ER)

Her 403(b,)52%
16% Fidelity Government Cash Reserves (FDRXX, .35% ER)
9% USFR, US Treasury ETF
75% Fidelity Total Market (FSKAX, .015% ER)

Her 457(b), 14.5%
74% Fidelity Total Market (FSKAX, .015% ER)
26% Fidelity Cash Reserves(SPAXX, .42% ER)

Her 401(a)/DCP, 4%
95% Fidelity Total Market (FSKAX, .015% ER)
5% Fidelity Cash Reserves(SPAXX, .42% ER)

Her Roth, 7%
100% Fidelity Total Market (FSKAX, .015% ER)

Her Employer Annuity, 6%
100% Annuity, pays 6%-8% annually until retirement age (in lieu of raise). Must be rolled over upon retirement into an IRA.
_______________________________________________________________

Contributions:

New annual Contributions
$26,000 to a Roth 457.

I also have an employer match of ~ 14% of salary into a Defined Benefit pension, which will have a COLA.

Questions:

1.Current estimates show that we’ll have pension + 3% SWR equaling $190k annually, starting in July 2024. This does not include Social Security.

Our estimated basic living expenses are approximately $140k (before taxes), and could reach $160k with more travel, more eating out, more leisure time. Given the high value pension plus Social Security, we’re expecting taxes to be as much (or more) than we pay now, estimating $34k in Federal taxes, and another $12k in CA state taxes, on top of the $140k for expenditures.

We’ve focused in recent years on Roth IRA conversions, using cash that would have gone to after-tax accounts, all while staying within the 22% bracket. I am assuming we’ll be over the first IRMAA cliff, no matter what, but this prepares us for the reversion to the 2016 tax brackets in 2026, *and* it will help with RMDs when we have a singleton survivor.

Are we missing anything in our thoughts here?

2. We still have the benefit of retiree health care, so assuming it stays in place, medical costs will be reasonable. I am estimating $10k per year in premiums, prescriptions and co-pays, plus another $5k in vision and dental care. Any thoughts on that? We'll have 4 and 6 years to Medicare coverage.

3. We are using a modified bucket approach, and are setting aside a chunk for the “go-go” years, 1-6 of retirement – outside of the investment portfolio itself. I’m estimating $35k each for Years 1-6 ($210k total), leaving $900k in the investment bucket.

Once the "go-go" chunk is expended, the house will be paid off, freeing up another $30k annually – so pretty equivalent in terms of income and outgo.

4. We’re assuming a “sustainable withdrawal rate” of 3% for years 1-6 (age 59-65); 3.5% for years 6-10; and 4% after age 70. Then RMDs will kick in at age 75, but we should have more than 30% of the investments in the Roth at that point. We plan to pull living expenses only from tax-deferred accounts for Years 1-10, which should decrease RMDs.

5. The house will be paid off after Year 6 of retirement, if not before. Interest rate is 2.625%, ending in 2031, so we don’t have a huge desire to pre-pay on it; we’d rather pay for Roth conversions as possible.

6. We’re considering having DH pull Social Security beginning in Year Three/age 62 (rather than delaying to FRA), to offset the loss of 15 months of employment and additional conversions if I were still working.

As the lower earner, Open Social Security suggests he should file at age 65; I am afraid, however, of using up our liquidity too quickly, given the accelerated retirement timeline. So we’re considering him electing to claim in early 2026, instead of FRA in late 2030.

As the higher earner, I plan to delay until Year 11/age 70, so he has higher survivor benefits should he last longer than I do.

His benefit at FRA is $2600; mine at age 70 is estimated as $4680, before any anticipated haircut due to insolvency.

So that means we’ve planned for:

- Higher spend in Years 1-6, while we’re still mobile.
- Roth conversions and spend-down of retirement funds, to bring down RMDs.
- A SWR between 3%-4% from investments.
- A lump sum payoff of the HELOC from excess SWRs, and possibly a portion of our Roth accounts.
- Taxes of a similar amount to our employment years.
- Medical costs, regardless of retiree health care from the employer.
- Optimizing our SocSec claiming strategy, with the lower earner claiming first, and the higher earner delaying until age 70.

Are we missing anything? Does it look like a reasonable plan for me to pull the plug now?

Note that it's possible both of us will have some family money in the next decade; we have not counted on that at all. For DH, it is likely to be in the low seven figures, given the parental real estate holdings.

It's also likely that if I wanted to work 2 days per week for another year or two, I could do so. I'd prefer to pull the plug and be done with it - but that was assuming a retirement date of late 2025. Having the option to pull a retirement check, AND a 40% paycheck? That would significantly reduce our need to pull from the investment pot, and could be a very effective bridging choice for the next couple of years.

Let me have it!

[BiggerFishToFI]

Your expenses are high, how large is your mortgage? Or do you live in a high property tax state?

To answer your question, can you “afford” to retire. Yes, yes you can and have for a while now. If you want to continue to work into your 60s to be able to spend even more, go for it, but this is MMM. If you can’t figure out a way to live with a paid off house, 160k pension and another 750k buffer maybe you should go ask over at Bogleheads

[lhamo]

If you were in a financial pinch -- either you as a couple or either of you as a surviving spouse -- would you be able to find adequate housing in a location you would like to live in (not necessarily current city/state) for less than 50% of current house value?  If you would be willing/able to sell the house if circumstances pointed that way, I would probably go ahead and take the risk.  I know California is expensive, but DS was living just fine on his grad student stipend a few blocks from you -- I know you probably wouldn't want to go back to grad student style living, but you have a lot of fluff you could cut if necessary. 

For me, selling the big expensive house shared with STBX, each of us buying our own places with our share of the equity (though mine will cost me more than that after renovation costs) and spending MUCH less annually (I'm estimating 40-50k/year outside renovation spending as my "flush" budget including travel and occasional splurges, could probably cut down to 30k in a pinch) is what is making staying FIREd possible for me.  I'm funding the renovations and the next few years of living expenses from my 400kish brokerage, and currently have about 1 mill in retirement that I can tap in about 4 years when I hit 59.5.  Have substantial Roth contributions if I need them in a pinch before then.  I bought the house for cash, have no mortgage.  On paper income is low enough that I qualify for Medicaid and DD is getting a full ride for her bachelors.  Living mostly off LTCG at the moment so minimal taxes. 

Will you know what the actual changes to the pension plan are before you have to give notice? 

[MaybeBabyMustache]

Agree with the other posters. How much flex is there in your $160K budget? If there's a lot that could be cut (should you need to), I think you're fine.

[Sandi_k]

Your expenses are high, how large is your mortgage? Or do you live in a high property tax state?

To answer your question, can you “afford” to retire. Yes, yes you can and have for a while now. If you want to continue to work into your 60s to be able to spend even more, go for it, but this is MMM. If you can’t figure out a way to live with a paid off house, 160k pension and another 750k buffer maybe you should go ask over at Bogleheads

Expenses are high: $45k to income taxes, and $10k on property taxes. Income taxes can't change much, due to the fixed income pension. The mortgage is a 15 year term, so the payments are compressed; $30k annually. So $85k annually of a $160k income is already committed. Thus my fretting.

The plan was to retire *at* 60, still 18 months away; the house isn't paid off until 2031.

And yes - I did also ask the Bogleheads last night, who will probably tell me I need to work for another decade.  (I haven't logged on there yet). :-)

[Sandi_k]

If you were in a financial pinch -- either you as a couple or either of you as a surviving spouse -- would you be able to find adequate housing in a location you would like to live in (not necessarily current city/state) for less than 50% of current house value?  If you would be willing/able to sell the house if circumstances pointed that way, I would probably go ahead and take the risk.  I know California is expensive, but DS was living just fine on his grad student stipend a few blocks from you -- I know you probably wouldn't want to go back to grad student style living, but you have a lot of fluff you could cut if necessary.

Yes - the house is worth 7 figures now - it's more than doubled in value since we bought it in 2011. That means we have ~ $900k in equity. DH doesn't want to move, until we're 80 - this is his preferred location. So no, we won't sell the house unless we have to.
 

For me, selling the big expensive house shared with STBX, each of us buying our own places with our share of the equity (though mine will cost me more than that after renovation costs) and spending MUCH less annually (I'm estimating 40-50k/year outside renovation spending as my "flush" budget including travel and occasional splurges, could probably cut down to 30k in a pinch) is what is making staying FIREd possible for me. 

Yep. Once the house is paid off, we'll be fine.It's just that the pension multiplier goes vertical the last 18 months leading up to age 60. So the income differential is almost exactly the house P&I payment, for the next 7 years.

I'm funding the renovations and the next few years of living expenses from my 400kish brokerage, and currently have about 1 mill in retirement that I can tap in about 4 years when I hit 59.5.  Have substantial Roth contributions if I need them in a pinch before then.  I bought the house for cash, have no mortgage.  On paper income is low enough that I qualify for Medicaid and DD is getting a full ride for her bachelors.  Living mostly off LTCG at the moment so minimal taxes. 

Yeah, we don't have much outside of retirement accounts. DH can tap his, so we can stay afloat with the current commitments, until next spring, when I turn 59.5. And the pension means we cannot control our income, aside from staying inside the 22% bracket.

Will you know what the actual changes to the pension plan are before you have to give notice?

Yes - the new formulas are supposed to be loaded into the Retirement Estimator on April 1. You can bet I'll be logged on that day. ;)

Not optimal to leave with such short notice in my job, and it will mean problems for my unit. But there is no question - I'm not sacrificing our retirement survivor benefits if the new formula is massively different than current projections.

[Sandi_k]

Agree with the other posters. How much flex is there in your $160K budget? If there's a lot that could be cut (should you need to), I think you're fine.

Most of the current flex is tied to being employed: savings into mandatory retirement plan; voluntary Roth 457 contributions; ST and LT disability; parking, legal insurance, and over-withholding due to the IRA conversions we've been doing since 2019. Those categories are $50k per year, on a $200k salary.

If I strip all of that out? It's about neutral, I think. I haven't had a chance to map out a current budget, with the newest figures, assuming June 2024. That's now my weekend project. :-)

[Dicey]

I hate the idea of using [non-renewable] Roth funds to pay off the HELOC. Can you think of any other options?

Next, could you recharacterize that lovely mortgage in your head as a bond in your AA?

If you mentioned it, I missed it. How much of an actual change would there be to the survivor benefit if you stay? If there's only one of you left (sorry), your spending needs should also decrease. DH's survivor benefit is strangely high. I keep saying to him, "What would I do with that much money? Stay alive!"

Could you retire now to lock in the benefit, then go back as a contractor?

[Sandi_k]

I hate the idea of using [non-renewable] Roth funds to pay off the HELOC. Can you think of any other options?

Next, could you recharacterize that lovely mortgage in your head as a bond in your AA?

If you mentioned it, I missed it. How much of an actual change would there be to the survivor benefit if you stay? If there's only one of you left (sorry), your spending needs should also decrease. DH's survivor benefit is strangely high. I keep saying to him, "What would I do with that much money? Stay alive!"

Could you retire now to lock in the benefit, then go back as a contractor?

Yeah, the Roth spend-down isn’t optimal.

And yes, there is a middle ground that DH and I were just discussing. I could retire in June, take the 31 day required break, and then be “recalled” at two days per week, if the boss is willing.

It’s attractive as an option for several reasons: we could leave the investments alone, and use the PT income to pay down a large chunk of the HELOC immediately. It also allows me to exit gracefully in terms of my team of 10; two are due for a promotion, and I’m the right person to do it. It also gives my unit substantial savings, since they’d only be paying me for 2 days per week, and I wouldn’t be benefits eligible (an overhead charge equal to 48% of my salary). And finally, it would give me the option of hiring and training a replacement next spring.


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[Sandi_k]

And I forgot to add: the new formulas aren’t available for review until early April; so I’ll need to move quickly if the forecast is negative.


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[evanc]

And I forgot to add: the new formulas aren’t available for review until early April; so I’ll need to move quickly if the forecast is negative.


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You mentioned that the new formula hasn't been announced yet, which makes me wonder if there is any possibility that the change could be applied immediately and/or retroactively. Are you absolutely certain that, even if you retired immediately, it couldn't be applied to you as a new/prospective retiree?

[Sandi_k]

And I forgot to add: the new formulas aren’t available for review until early April; so I’ll need to move quickly if the forecast is negative.


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You mentioned that the new formula hasn't been announced yet, which makes me wonder if there is any possibility that the change could be applied immediately and/or retroactively. Are you absolutely certain that, even if you retired immediately, it couldn't be applied to you as a new/prospective retiree?

Yes - the board's minutes are clear - the vote in July 2023 was to apply the new formulas to retirees from July 1, 2024 and later.

And they load in the new forumulas on April 1, 2024, so that prospective retirees have 60+ days to elect retirement, and another 60 days before the first paycheck would be due and paid from the Retiree Center, instead of the campus.

[Laura33]

IMO you need to wait until you see the new formulas and can run the real numbers.

I think your priority should be ensuring your DH will be fine if you pass first.  Remember, it's not just losing the max value of your pension, it's also losing one SS payment -- he could take yours, as it's higher than his, but that still means he loses the $2Kish/month that he will draw before you die.  So the real key is how much the survivor benefit will be cut, and how that affects his long-term needs.  OTOH, if you retire now, how would that affect your pension?  If it's $160K in 2025, how much less would it be in 2024? 

I very much suspect he will be fine either way; with your savings and SS, even if the survivor benefit is only half your pension value, he should have more than enough, particularly once the house is paid off.  Why not run the numbers now assuming different projections for survivor benefits?  I suspect the survivor benefit won't be cut below 50%, so if he will be fine at that level, then you can make your decision based on what you want to do instead of finances. 

[Sandi_k]

@Laura33 - thanks for weighing in.

The $160k pension amount is for June 2024 retirement; it would be at least $23k more in Sept. 2025 (my recent promotion is not yet reflected in the calculations). So yeah - we're gonna be fine. $200k gross income from pension and retirement withdrawals, before adding in Social Security? First world problem for sure. But that $23k+ was what we planned to use for additional travel, and for home improvements. Can we still do it? Yes, but it just means less latitude to do frivolous things.

So the question for me is - will the cutting of the survivor benefit be MORE than $23k? If so, I retire now.

The regret for me is that I have an "offramp" planned in terms of my team, and I have some intellectual handoffs that are in process, but not yet completed.

[jeroly]

1.  I suspect that the change in survivor benefits won't be very significant.  It's likely related to changes in life expectancies or a change towards unisex pricing.  It's not like an actual cut in benefits - with a formula change, if it was really bad, then more folks would just opt for a single life annuity.  If anything, there's a swing towards incentivizing people to take J&S pensions to protect spouses, so the benefit might actually increase.  In any event, while it's all well and good to prepare, don't make decisions until you see the actual numbers.  I would be amazed if the change (assuming it works against you, which is far from a foregone conclusion) is greater than the 12% boost to your pension that you'd get by working an extra year.

2.  I'd strongly recommend prioritizing paying off that 8% HELOC - that's far enough above the risk-free rate that you are unlikely to be making more by investing it vs. paying it off.  I'd even cut back on the 457 contributions (above whatever gets a match, that is) until it's paid off, but even better would be to also cut back on other expenses to pay the HELOC down as fast as you can.
2a. I agree with @Dicey that using Roth funds to pay off the HELOC is a bad idea.

3.  While you may have expenses that approach your pension+SS in the short term, you'll have a paid-off mortgage soon so when you look at the longer term picture, you should be fine.

4. When I add up your numbers it looks like you've got ~16% in fixed income investments. Given that you don't have a huge margin for error if the market tanks, that seems a bit overly aggressive. I would look to something more like a 60/40 AA, and then look at a reverse glidepath that ramps up to perhaps 75/25 over time. 

5.  Your 'employer annuity' is a rather unusual arrangement, and the idea of it getting rolled into an IRA (or even being eligible to be rolled into an IRA) upon retirement is unclear (to me, at least).  It sort of sounds like it might be a cash balance retirement account except that you separately mention that your employer is putting 14% of your salary into a 'defined benefit' pension.
5a. I think you mean a 'defined contribution' pension - if your employer is putting a fixed dollar amount in, rather than an actuarially calculated amount into a pension that has a defined benefit based on, say, final salary and years of employment, then it's a defined contribution plan not defined benefit.

[Sandi_k]

Thanks for the reply, @jeroly - much appreciated.

1.  I suspect that the change in survivor benefits won't be very significant.  It's likely related to changes in life expectancies or a change towards unisex pricing.  It's not like an actual cut in benefits - with a formula change, if it was really bad, then more folks would just opt for a single life annuity.  If anything, there's a swing towards incentivizing people to take J&S pensions to protect spouses, so the benefit might actually increase.  In any event, while it's all well and good to prepare, don't make decisions until you see the actual numbers.  I would be amazed if the change (assuming it works against you, which is far from a foregone conclusion) is greater than the 12% boost to your pension that you'd get by working an extra year.

I think I made it pretty clear that I am not making decisions until I see the actual numbers, and have a chance to model multiple retirement dates in the estimator. And I agree - the multiplier is damn near vertical the last 2 years, from age 58 to age 60. Which is why age 60 has aleays been my target. I don't want to leave "easy money" on the table.

2.  I'd strongly recommend prioritizing paying off that 8% HELOC - that's far enough above the risk-free rate that you are unlikely to be making more by investing it vs. paying it off.  I'd even cut back on the 457 contributions (above whatever gets a match, that is) until it's paid off, but even better would be to also cut back on other expenses to pay the HELOC down as fast as you can.

It is on deck to be paid off. We've been holding onto some cash as a few issues have arisen, including some potential medical issues that might have required some out-of-pocket choices. Happily, that seems to be resolving. There is no match for any of the retirement plans, so that is not a consideration.

2a. I agree with @Dicey that using Roth funds to pay off the HELOC is a bad idea.

I agree - unless it triggers IRMAA or larger tax hits when the TCJRA brackets revert in 2026. I need to know what the tax hit will be before we decide how that will be paid. I am strongly considering ripping off the bandaid, and converting six figures in 2025, which would be at the lower 24% federal bracket. Better than 25/28/32%, for sure, and so I've modeled that over the past week; the good news is that the money seems to last to age 100, even if we pull a chunk out at the start of retirement.

3.  While you may have expenses that approach your pension+SS in the short term, you'll have a paid-off mortgage soon so when you look at the longer term picture, you should be fine.

I agree; that's one of the advantages of having the 15 year mortgage; getting it paid off sooner is a big help in later years.

4. When I add up your numbers it looks like you've got ~16% in fixed income investments. Given that you don't have a huge margin for error if the market tanks, that seems a bit overly aggressive. I would look to something more like a 60/40 AA, and then look at a reverse glidepath that ramps up to perhaps 75/25 over time. 

Your calcs are wrong. It's at 80/20 without the employer annuity, and 75/25 with the annuity included. Given the substantial pension plus 2 Social Security incomes, we're comfortable with that asset allocation for the first 10 years; we'll have COLAs on those sources, which will also be helpful. At age 75 and RMDs, we plan to move entirely into Wellington funds, at a 65/35% mix.

5.  Your 'employer annuity' is a rather unusual arrangement, and the idea of it getting rolled into an IRA (or even being eligible to be rolled into an IRA) upon retirement is unclear (to me, at least).  It sort of sounds like it might be a cash balance retirement account except that you separately mention that your employer is putting 14% of your salary into a 'defined benefit' pension.

Its a Capital Accumulation Plan, and must be removed within 6 months of separation from service. It can be rolled into an IRA without tax consequences, which I plan to do.

5a. I think you mean a 'defined contribution' pension - if your employer is putting a fixed dollar amount in, rather than an actuarially calculated amount into a pension that has a defined benefit based on, say, final salary and years of employment, then it's a defined contribution plan not defined benefit.

I do NOT mean a DCP; I understand the difference.

My pension is indeed a DB plan. It is an "actuarially calculated amount into a pension that has a defined benefit based on (3 years average) final salary, and years of employment." It's not a fixed dollar amount - it's a fixed percentage of my salary - 14% of my gross pay.

[Turtle]

@Sandi_k now that it's past April 1st, I hope they have released the new info on time so that you can make your decision.

[Sandi_k]

@Sandi_k now that it's past April 1st, I hope they have released the new info on time so that you can make your decision.

Thanks for asking!

OK, so I did the calcs with the new values, and it's not significant. I'm not sure if it's because I make less money than the older faculty (the prime target), or if it's because the primary worker is a woman, so the survivor is a man (with a shorter life span from an actuarial stance). In any case, it's a difference of only 1.7% or so.

Since waiting until Sept. 2025 gives me a 15% increase in the pension, AND gives another 20 months for our investments to grow/have additional contributions, I am sticking with the Sept. 2025 date.

Now, the question is - do I start funneling cash into a "brokerage account" for future 403(b)/457 account conversions to Roth? Or do I stick with Roth 457 contributions for THIS year, and then stop them in 2025, and simply over-withhold up the wazoo for the future conversions in October-December 2025?

I have to be alert to IRMAA tiers, as well as the NIIT additional 3.8%, because I'll be getting a big payout of unused vacation time, with a gross value of ~ $35k. So I think that's why contributing to the Roth this year makes sense - I cannot withdraw funds while "in service," unless I am 59.5 - which happens in March 2025.

So the plan is for me towait until late in 2025 to see if the TCJRA does get repealed as planned, AND if tax brackets revert to 25%/28%33% levels.

With the higher pension amount, and Vacation Leave payout, unless those brackets are inflation-adjusted, we could be looking at 33% Federal, plus 9.3% CA, plus 3.8% NIIT for any conversion dollars that push us to a taxable income over $250k. I don't think it's worth converting at 46% tax rates, so I want to do as much as we can now.

At any rate, I plan to work until September 2025. The best part for my decision is that IF I need to pull the plug at any time, after August 2024, every month will be a better-paid choice than going in June 2024, due to the increasing multiplier, and the increasing months of service credit.

The most likely reason would be elder care issues with one of the moms - and in that case, I can take FMLA leave, and delay the official retirement month to even closer (or at!) age 60.

[ToughMother]

@Sandi_k  - I was thinking of you when April 1 hit. Glad to know that the impact of the survivor benefits wasn't as large as concerned you and that you'll have the flexibility to execute your original plan or make changes as needed. Good news!

[Sandi_k]

@Sandi_k  - I was thinking of you when April 1 hit. Glad to know that the impact of the survivor benefits wasn't as large as concerned you and that you'll have the flexibility to execute your original plan or make changes as needed. Good news!

Thanks for the encouragement!

[MaybeBabyMustache]

It's great to hear that the change was smaller than you'd envisioned, and you can stay to your desired & better optimized end date! Congrats.

[Turtle]

Good to hear it, and I'm sure that the actuarial difference female vs male is indeed part of it.

It must be good not to have the uncertainty hanging over your head anymore.