Gap strategy for late 50s

[Almostthere]

Hello,

I am looking for a reality check on my retirement transition framework and any suggestions how I might shore up. I was recently laid off from the tech industry. I have enough in severance package through the end of the year. What I’m hoping is to work optional retire next year. This forum seems geared towards younger folks who have a long horizon; most advice on the internets is geared toward traditional mid-60s retirement. In my late 50s, I’m trying to come up with a gap strategy that will get us through until SS, pensions and Medicare kick in.

Situation: I’m 57 and my wife is 58, a retired teacher. We live in HCOL area on W. Coast. Grown child is not expecting inheritance (but would be nice).

Spending: Base budget of $75K; target budget of $100K. We can definitely scale back if needed, but want room for home improvement, travel and fun. We are finding that already we are spending less than anticipated and not experiencing CPI rate.

Assets/debt: Home worth $1.1M; owe $225K. $2,000 payment at 2.5%. Paid off in 10 years. Newer autos are paid off.

Savings: ~$1.6M. I am bucketing into two categories.
Bucket A - Available now:
* Brokerage account: $280k (mostly company stock)
* My 401K (available via rule of 55): $825K (including $150k in Roth)
* Cash: $75K
* HSA: $70K

Bucket B - Available at 59 1/2
* Wife’s 403Bs: $350K

AA: Overall, about 65/35 stocks/bonds+cash. My 401K is heavily weighted in bonds (FTBNX) to counterbalance brokerage account. Roth portion is entirely in equities (zero US and intl index funds). Wife’s accounts are in target date low cost index funds. My company stock continues to do well, but realize I am overexposed.

Pensions/SS:
Self: SS $40K @ 67; Pension: $6k @65
Wife: SS $16k @ 62; Pension: @9k @62

Other income:
Wife: $10k-15K from substitute teaching
Me: Potential part-time/gig income of anywhere from $5k-20k.

Other: Likely six-figure inheritances in the next 5-10 years. If these come through, we would likely pay off house.

Transition Strategy:
Years 1-4: Live off bucket A
~ Draw down brokerage account. Preserve my 401K with ~5% withdrawal rate. Work part time.
~ Minimize MAGI to avoid income/capital gains tax and maximize ACA subsidies by managing work income, 401k distributions, brokerage cap gains, Roth distributions, HSA and cash.
~ Shift asset allocation to 60/40 and get out of company stock.
~ Consider shifting more to HSA or Roth if there is room under the income cap.
~ Walk-forward reevaluation annually and cut back spending/take on work if market falters.

Years 5-8: Bridge the gap
~ Wife begins SS and pension at 62.
~ Continue distributions of my 401K and begin distributions from wife’s accounts. Aim for ~5% SWR, but have some flex to go higher if needed.
~ Phase out part-time work.
~ We will have less flexibility in income sources and may need to pay higher insurance and some taxes.

Year 9+: Secure retirement
~ House paid off; Medicare eligibility.
~ I take SS and pension at full retirement age or later.
~ Likely, but not guaranteed, inheritances by this point.
~ Downsizing, HELOC or reverse mortgage a backup option.
~ Wary of RMD and tax bite at 72+.

I’ve run numbers and scenarios through FireCalc, cFIRESim, Ultimate RC and Fidelity tools and everything seems solid. The one scenario that worries me is a sustained down market in early years. I think it will help that we are flexible to work more/spend less and have a variety of sources and assets to draw from.

[Telecaster]

Looks pretty good.   I didn't run cFIRESIM or anything, but that bit of part time work in the early years really tends to help portfolio survivability a lot.  And then you have the backups from SS and your pensions that come at good times.   

[MDM]

e.
~ Minimize MAGI to avoid income/capital gains tax and maximize ACA subsidies by managing work income, 401k distributions, brokerage cap gains, Roth distributions, HSA and cash.

Harry Sit's Roth Conversion and Capital Gains On ACA Health Insurance might be helpful.

For when to take SS, see Open Social Security: Free, Open-Source Social Security Calculator for a good start.  If you expect less-than-average lifespans, you could start earlier.  If you want to do more Roth conversions, you could start later (but there is no good reason to delay beyond age 70).

In any case, you should be in good shape - congratulations!

[zolotiyeruki]

Does your $75/100k budget include the $24k of mortgage payments?  If it does, then your budget shrinks dramatically in 10 years.

When your SS/pensions kick in, that income alone will cover $70k/year of spending.  That means your personal investments need to cover you for ten years, and then provide a smaller income for the rest of your life.

Let's run some numbers, working backwards. 
Year 10: your spending will be $76k ($100k -$24k mortgage).  Your pension and SS will cover $71k of that, so you need to withdraw $4k/year from your own assets.  By the 25x rule, you'll need $100k invested to cover that $4k/year.
Years 8-9: spending is $100k, pensions and SS cover $31k of that, and you'll withdraw $69k/year
Years 4-7: spending is $100k, your wife's SS and pension cover $25k, you'll withdraw $75k/year
Years 1-3: spending is $100k, you'll withdraw that much each year

Totalling that up, you need ($100k + (2x$69k) + (4x$75k) + (3*$100k)) = $838k total invested.  You have roughly double that, so you have enough in assets, even if you only assume keeping-up-with-inflation returns.

That said, your asset allocation needs prompt attention
1) As you already recognize, a huge percentage of your portfolio is in a single company that just laid you off.  I'd strongly suggest you sell that stock and plow the proceeds into an index fund ASAP.
2) The above calculation on how much money you need assumes that the $100k that's still invested at age 67 is in index funds.
3) You're really heavy on bonds, way beyond conservative.

My conclusions?
1) Yes, you have more than enough to pull the plug today.  And you have plenty of backup options.
2) Mandatory: shift that company stock into an index fund ASAP
3) Suggestion: shift a significant portion of your bond holdings into index funds.  Maybe leave enough in bonds to cover your first 3 years of expenses?
4) Suggestion: stocks are better long-term, so don't sell them in the short term to cover your expenses.  For the first several years, sell the bonds to cover your spending, so that your index funds can do what they do best: long-term growth.

[crowinghen]

 Your numbers aren't that different than ours were. We are very happily retired, 2 years now, hubby is 60, I'm almost 59. We are spending way less than what we allowed for, and still doing everything we want to do.
 One thing your post made me think about is your  wife drawing SS at 62. How will that affect your ACA subsidy? We're thinking it might be better to wait until Medicare age to draw Hubby's SS, so that the SS doesn't just go directly to health insurance costs, but I haven't thoroughly investigated it. We'll wait until I'm full retirement age to draw mine.
 I'm no expert, but it looks to me that you have a sound plan! Congrats!

OOPs I see you already mentioned possibly higher insurance rates!

[former player]

Congratulations, you are good to go - your company has done you a favour by ensuring you haven't worked for longer than you needed to!

One point on asset allocation: I treat my occupational pension and social security entitlement as the "bonds" part of my allocation (they both come from the UK government and are index linked).  So that means that investments all go into equities through an index fund, in order to get the potential for capital growth that will mean my living standard can keep up with an expanding economy (should that happen, I'm in the UK, so who knows).  You might look at moving all, or nearly all, of your 401k into index funds on the same basis: a fair proportion of your wealth is effectively already bonds through your pensions and social security so there is no need to duplicate that with your investments.