Help us simpletons

[JungYo]

We are a couple of financial simpletons looking for critique and advice.

I say simpletons because we do not understand all of the tax consequences, IRA conversions, etc. That's why I'm posting this, and hopefully if anyone responds it is something anyone can understand. For more context: I work, get paid bi-weekly with a 15% pre-tax 401k contribution, the remainder goes toward expenses and savings. My approach to savings isn't too smart: We sock money into our credit union, then a couple of times a year transfer into Roth and ETF.

Many years ago, I realized everything in the US is based on the stock market going up and to the right. So I put all of my IRA/Roth money into index funds. I moved the money to something safer (i.e. lower rate of loss) during the 2008 meltdown, but kept buying index funds. This strategy seems to have worked.

Goal: I want to quit having to work asap. Post-tech career, I'd be happy to take on part-time work, volunteer at the local animal shelters, and just do whatever we want.

Life Situation: Married, filing jointly. No dependents/no children. Reside in the Raleigh, NC area (MCOL?). 56(me)/57(spouse), single income.

Gross Salary/Wages: $117,600

Individual amounts of each Pre-tax deductions: 15% pre-tax into employer's 401k, with a small match that vests over time. No other pre-tax accounts.

Other Ordinary Income: None.

Qualified Dividends & Long Term Capital Gains: None?

Rental Income, Actual Expenses, and Depreciation: None.

Adjusted Gross Income: ~$74k.

Taxes: This is bi-weekly:

• Federal Income Tax: $314.33
• Social Security Tax: $274.53
• Medicare Tax: $64.21
• NC State Income Tax: $176.00

Current expenses:

• Mortgage: $1334/mo, $993 in P&I, $341 to escrow for insurance and property taxes. Currently refinancing to get down to $1025/mo. Mortgage payoff is $125k.
• Utilities (gas, water, electric): $200/mo.
• Internet + Mobile + Subscriptions: $225/mo.
• Food + Beer: $700/mo (crazy, I know)
• Auto Loan: $355/mo, 3 yrs remaining @ 1.9%, roughly $10.5k balance.
• Credit cards, consumer debt: None.
• Auto, exclusive of loan above but includes insurance: $300/mo.
• Misc: Too much! Easily $800/mo for gifts to nieces and nephews, hobbies, prescriptions, clothing, personal care.

Total Monthly Expenses: Round up to $4000.

Expected ER expenses: This is the great unknown to us. We would like to maintain our current standard of living, knowing we need to cut down on Food and Misc yet increase to take road trips, annual or bi-annual big trip. Mortgage will drop $300/mo shortly. I've run through several scenarios of different spending amounts above and below our current rate and various timelines via firecalc, and virtually all of them say I have a 100% success rate (except for spending $65k/yr for 40 more years).

Assets:

• Employer 401k: $37,000 (approx. $32k vested)
• Fidelity Rollover IRA: $1,300,000.
• Fidelity Roth: $156,000.
• ETF: $15,000.
• Spouse Rollover IRA: $3800.
• CU Savings: $28,000.
• House: $350,000 (minus the $125k outstanding note)

Total Vested Assets minus the house: $1,538,664

Liabilities:

• Mortgage: Financed $178,000 30 years @ 4.75% (thank you 2008 meltdown), $125,432 is payoff. Monthly payment is $1334. Unknown time remaining as we made several extra payments over the years.
• Wife's car: Financed ~$22k for 5 years at 1.9%, approx. $10k remaining over 3 years.
• No other loans, debts, liabilities.

Specific Question(s): Again, I want to quit having to work as soon as practical, maintain a level of spend close to current, and mitigate risks of running out of money as much as possible - we would like to enjoy life and hopefully leave a little something to nieces and nephews. Health care is obviously a huge concern - we are in generally good health, but wife has a condition which requires an expensive prescription; my family has a history of cancer and heart problems. I had intended to take SS as soon as I can to help offset expenses (at least $2k/mo even with taking it early).

One thing we're considering is selling our home and buying a less expensive home in a LCOL area. We'd have approx. $200k in our pockets after a sale, and I'd been thinking about buying a $200k house; putting $100k down, investing the remainder. But this is not carved in stone, just an idea.

I really dislike complexity and prefer to not micro-manage. We don't count every penny (and to that end, some of our Spending above is likely a bit inflated).

Where I'm stuck: Getting access to Rollover and Roth money for 3.5 more years, until I reach 59.5. O, and any holes you all see.

Thank you for any input, advice, criticism; and I am happy to provide more details.

[dandarc]

Since you're so close to 59.5 - if you want to stop working today (you have enough based on stated spending & assets), then probably just set up a 72(t) withdrawal (also known as Substantially Equal Periodic Payments - SEPP). After the minimum 5 years has passed, stop the payments and then just draw whatever you need every year.

If the maximum you can get that way is not enough, perhaps look at using Roth IRA regular contributions + savings, or cash-out refinance the house to obtain a few bucks. Although if this is the case it seems likely your spending shown here is lower than your actual spending.

[maisymouser]

Hey fellow Triangle resident!!

On my mobile so can't post a full reply, but my concern would be expense tracking. Have you factored in house maintenance/property taxes/insurance? Gas, auto maintenance, bad other one off expenses like new phones/computers? I know you said you don't like to micromanage but have you used personal capital to try and do a historical expense review? I found it pretty painless despite also loathing spending tracking. See my case study for inspiration.

Oh, and health care. I saw no budget or expenses for that and it is a biggie. Y'all are getting up there in years and will want to factor this into your planning.

[JungYo]

@dandarc and @maisymouser thank you both for the replies!

When I used the firecalc tool, I put in $5k/mo for spending as the lowest amount. Which is more than what we currently spend, based upon 1 year of purchases downloaded from our credit union. The taxes and insurance on our home are represented in our mortgage amount; but yeah, I have not factored in home repairs and improvements.

I tend to do all of my own auto maintenance and smaller repairs, which is also accounted for. It's actually a hobby. We buy expensive things infrequently, our $200 phones work well for 2-3 years; I have a 6-yr old laptop and if it dies, I don't need a top-shelf replacement. The only looming frivolous purchase I envision is a new kayak perhaps next year ($3k). Both of our cars should be good for at least another 10 years or longer.

A cash-out on our home is not something I've considered. Here again, my simple mind is geared towards - I don't want to have a payment for 20-30 years. I know I could invest, but then that's another thing I have to manage. It may be worth it, I'll play with that tonight.

Health care is what scares the bejeesus out of me, and I realize that could empty out our savings much sooner than anticipated. I'm really kind of stuck on that, and have spent some time learning about ACA but obviously need to explore this in much greater detail.

Aside from drawing down via SEPP, are there any other caveats with that approach?

[getmoneyeatpizza]

Good job on the refi. Go for a breakeven from day one, even if it requires a slightly higher interest rate to get lender credits.

We don't know how much ROTH contribution you can draw.

As mentioned, I guess if you don't want to mess with SEPP you could cash out refi for a few years to get living expenses to get to 59.

But look the tax implication and the effect of having that higher income to pay that mortgage and what that does to health insurance, fed and state taxes.

[MDM]

Specific Question(s):  had intended to take SS as soon as I can to help offset expenses (at least $2k/mo even with taking it early).

Where I'm stuck: Getting access to Rollover and Roth money for 3.5 more years, until I reach 59.5.

For the SS benefit start question, see Open Social Security: Free, Open-Source Social Security Calculator.

If your current 401k allows both
- incoming rollovers now
- partial withdrawals after you retire
then you get all the access flexibility you should need by rolling your IRA into your 401k now, then withdrawing whatever amount/yr you want from the 401k after retirement.

[Bird In Hand]

I came here to say "Rule of 55!" but I see @MDM already alluded to it above.

OP, if your employer's 401k is set up as MDM's describes, you can retire starting Jan 1 of the year you turn 55 and start withdrawing from your 401k immediately without the 10% IRS penalty.  Since you've already passed that date, you could (in theory) roll your IRA into your current 401k and retire the following day with penalty-free access to that $1.3M.

[Sandi_k]

I would refi that mortgage. Current rates are 2-3%. And I'd make it a 10 year loan, if possible.

[JungYo]

Appreciate the additional insights!

Mortgage refinance is just about complete @ 2.125%, so our ongoing expenses just dropped $300/mo.

I'm starting to get a handle on the IRA/401k options. I suppose I should talk to our adviser at Fidelity.

Is this correct: If I roll my $1.3m IRA to Roth, I have to pay tax on it; and still cannot touch it w/o taxes or penalties until 59.5? But if I roll it into my employer's 401k (if permitted), we don't incur taxes or penalties and would have access to it if I retired?

A seriously dumb question: Suppose I want to FIRE now. What is the difference between resigning my current position vs "retiring?"

[Bird In Hand]

Is this correct: If I roll my $1.3m IRA to Roth, I have to pay tax on it; and still cannot touch it w/o taxes or penalties until 59.5?

Please don't convert your traditional IRA to Roth IRA all at once.  You'll have an enormous tax burden in the year of the conversion for no good reason.  What you can/cannot withdraw from your Roth IRA without tax or penalty will depend on many things (has it been open for 5+ years?  does it contain any funds that were previously converted from traditional IRA's?  does it have any funds that you rolled over from a previous employer's 401k? etc.).

Yes, if you convert and then wait until 59.5 to withdraw anything, you will avoid taxes and penalties on any withdrawals.  But the huge tax you'll pay upfront would be a very expensive mistake.  With your #'s, you should be able to pay very little $$ in income taxes, perhaps for most of the rest of your life.

But if I roll it into my employer's 401k (if permitted), we don't incur taxes or penalties and would have access to it if I retired?

Almost.  There are no taxes or penalties associated with rolling it into your employer's 401k.  Once you start withdrawing it under the Rule of 55, you will not pay a 10% penalty, but you will pay ordinary income taxes.

A seriously dumb question: Suppose I want to FIRE now. What is the difference between resigning my current position vs "retiring?"

The manner in which you leave your employer post-55 does not matter to the IRS vis a vis the Rule of 55.  You can retire, quit, get laid off, or get fired.

One more note about the Rule of 55: just make sure that you are able to take periodic distributions from your 401k after separation.  Some plans are set up to only allow lump sum distributions after separation, and that wouldn't do you any good since you'd just have to roll it right back into your IRA again.

[Tucandream]

Maybe a little late but in regards to:

Mortgage refinance is just about complete @ 2.125%, so our ongoing expenses just dropped $300/mo.

Have you considered a HELOC? I'm doing one right now, no fees. Yes it is a variable rate but for the fee savings worthwhile (I could pay it off tomorrow if I wanted to with a stock sale or two). Since you mention you're considering selling your home those home equity refinance fees that get wrapped up in the refinance are a deadloss.

I wrote an article about when to refinance and when not to: https://tucandream.com/when-should-you-refinance-your-mortgage/

[stoaX]

Hey fellow Triangle resident!!

On my mobile so can't post a full reply, but my concern would be expense tracking. Have you factored in house maintenance/property taxes/insurance? Gas, auto maintenance, bad other one off expenses like new phones/computers? I know you said you don't like to micromanage but have you used personal capital to try and do a historical expense review? I found it pretty painless despite also loathing spending tracking. See my case study for inspiration.

Oh, and health care. I saw no budget or expenses for that and it is a biggie. Y'all are getting up there in years and will want to factor this into your planning.

Yes, the health insurance issue is huge.  I make sure my taxable income is in the range that allows for ACA subsidies.  So when planning Roth conversions and other things that produce taxable income, keep that in mind.   

Getting health insurance through the ACA has worked well for me.  I'm on a silver plus plan which has excellent Rx coverage and copays for doctor visits. 

[Bird In Hand]

Regarding healthcare, @JungYo have you looked at the ACA plans/prices in your area?

You can enter your info and get a good idea of how much ACA subsidy you'll get, and how much premiums/deductibles/out-of-pocket would cost.  On the results page if you click 'Add Filters' and then 'Add Drugs' you should be able to enter your wife's expensive prescription and see how it is covered by the various plans.

Bear in mind that your premium subsidy depends on your AGI.  You could choose the AGI you want in order to achieve a certain subsidy level; pull that amount from your 401k each year, and then make up the difference in your living expenses with Roth withdrawals.

[Villanelle]

Is that ~$4000 what you have *actually* spent in total for the last several years, or is it the number you came up with when you sat down and wrote out all the things you can think of and estimated what you spend?  It seems like there is a lot missing.

One way to tell if you are even close is to look at your after tax (and 401k) pay for the last 3 years, and subtract $144,000 from it.  If you haven't actually saved at least that amount (before interest or other growth), you are spending more than $4k/mo.  Even if you have saved that amount, if you haven't had major repairs on your home and car during that time, your average expenses over time have been/will likely be higher. 

I see that you say that your 4-5k number is based on a download from your credit union.  Do you ever spend cash?  And you mentioned it was one year of expenses.  Some years you buy a new car, the house needs a new roof and a/c unit, and your BFF gets married and you give generously, and you go on a fancy vacation.  Other years... Covid keeps you home so no travel and little eating out and very little gas or car expenses, no special gifting occasions, and nothing extraordinary happens on any other category.  That difference can easily be $10,000+.  So one year of expenses may be safe for averaging groceries and even holiday gifts, but it is not enough from which to safely extrapolate all expenses going forward.  I would never feel comfortable just looking at 1 year, especially if that year was a weird year (aka Covid).

Have you considered 'barista' FIRE, in some form?  That can either be leaving your FT gig and doing some consulting, seeing if you can go to PT at your current job, or something more like the name suggests--just getting a flexible, low-stress but fairly low-pay job like barista-in or substitute teaching. 

[JungYo]

Have to admit, I'm either not seeing the option for multi-Quote or it doesn't exist, so I'll try and respond and provide some updates:

First off, I can roll over my Rollover IRA into my employer 401k, however my employer's plan does not allow me to take periodic withdrawals while still actively employed - I can only take lump sum withdrawals.

I have no intention whatsoever of rolling any of the money such that I create a taxable event.

We don't use cash a whole lot, just for small incidentals such as a $4 lotion, a toothbrush, the occasional beer. I think I withdrew $80 from an ATM early this month and still have at least $40 in my wallet.

I only looked at our spending for the past year. Based on so many responses being incredulous about the low amount per month, I clearly need to carefully re-examine and go back to pre-COVID days as well. The $4k number is actually a bit inflated based on the past year's spending, but obviously spending went down on going out to dinner, gas, etc.

We are the original owners of our home, and it is approaching 14 years old. I suspect some major expenses will be coming the next few years if we remain in the house - AC, roof. Which is part of my rationale for wanting to sell, invest half the proceeds and use that as emergency home fund.

I have been playing with different ACA scenarios, but really need to buckle down.

This has been a huge learning experience for me, and I cannot thank you all enough for the insight and questions! I can read case studies all day, but each is unique and I have learned so much more about our situation already.

For that reason, I am going to remain in the workforce a bit until I get all of this sorted 100%, understand the tax implications, nail down our real-world ACA options/pricing, etc. We're just waiting on closing the refi, and I set up a meeting with my Fidelity Advisor. I will post updates to this as I learn, have questions, or experience epiphanies. :)

[Bird In Hand]

First off, I can roll over my Rollover IRA into my employer 401k, however my employer's plan does not allow me to take periodic withdrawals while still actively employed - I can only take lump sum withdrawals.

The question is whether you can take periodic withdrawals after you've separated from service.  If so, you're golden to quit before 59.5 and avoid the 10% penalty on 401k withdrawals.

Anyway...it's definitely a good idea to educate yourself and make sure you understand the ins-and-outs (esp as related to healthcare considerations) before pulling the plug.

That said, your numbers look decent to me.  As a quick sanity check: assuming 70%/30% equities/bonds, 3% inflation, $1.5M portfolio, $2,000/mo SS starting in 7 years...FIRECalc shows 95% success @ $57k/yr for 30 years, leaving at least $250k in the account at all times.  That doesn't take into consideration the possibility of your mortgage eventually falling off the books.

If you start to feel more confident with all the details, I certainly think SEPP is worth considering as an option (assuming Rule of 55 is not available) if you want out before 59.5.  Of course if you take until you're 57+ to feel confident in your plan, then SEPP becomes less and less appealing since you have to stick with it for at least 5 years.

[MDM]

First off, I can roll over my Rollover IRA into my employer 401k, however my employer's plan does not allow me to take periodic withdrawals while still actively employed - I can only take lump sum withdrawals.

Good to know, but the more pertinent question for you is whether partial 401k withdrawals are allowed after you retire (as Bird in Hand just posted...).

[GodlessCommie]

You are so close to 59 1/2, and you seem to be fine with the size of your stash. It's really a question of bridging the gap. If the Rule of 55 pans out - great, problem solved! If not, HELOC and/or a series of 0% interest credit cards should carry you through.

On the expense side... since none of you will commute to work, do you think one car would work for you? We went from two to one after switching to remote work, and haven't found it to be even a minor inconvenience.

[Bird In Hand]

First off, I can roll over my Rollover IRA into my employer 401k, however my employer's plan does not allow me to take periodic withdrawals while still actively employed - I can only take lump sum withdrawals.

Good to know, but the more pertinent question for you is whether partial 401k withdrawals are allowed after you retire (as Bird in Hand just posted...).

Ah, that's an excellent and important distinction...partial withdrawals vs the word I used, 'periodic'.  It's certainly possible that his plan has no provision for regular/periodic withdrawals, but allows arbitrary lump sum withdrawals at his convenience.  So long as the plan doesn't mean "lump sum" as "you must withdraw the entire balance in one lump sum", then Rule of 55 is still on the table.

...though I guess "lump sum" in the context of 401k distributions does often mean just that: take the whole thing at once.

[JungYo]

I will ask about all withdrawal options and consequences when we meet with our Fidelity Adviser. I put this #2 on the list for our meeting (#1 is "I wanna quit working, HALP!").

Going down to 1 car, in our current location, is not an option for a whole host of reasons (most are valid reasons, 1 or 2 are contrived).

I'll report back soon!

[Bird In Hand]

You are so close to 59 1/2, and you seem to be fine with the size of your stash. It's really a question of bridging the gap. If the Rule of 55 pans out - great, problem solved! If not, HELOC and/or a series of 0% interest credit cards should carry you through.

Hah, I didn't even think of 0% CC's!

I don't think OP ever mentioned the constituency of his $156k Roth IRA.  There very well could be $50k+ of contributions in there -- enough to buy him a year or more of freedom if he were inclined to use it.  Me?  I'm allergic to withdrawing Roth, but maybe I'd change my mind were I in OP's shoes.

[ericrugiero]

You have gotten lots of good advice already.  One thing I will add is that you only have about 3 years to bridge between now and 59 1/2.  Even if you end up paying the 10% penalty on a year's expenses it's only ~$5000.  That's a very small portion of your net worth and wouldn't hold me back from retiring. 

You do have several options I would consider before paying the penalty.  I'm just pointing out that 10% for a short time isn't that much $$.
-  Pull your Roth IRA contributions (growth is not penalty free, just contributions)
-  Use your ETF money
-  Use some or all of you CU funds (if you want to maintain an emergency fund)
-  Use you wife's IRA once she turns 59.5
-  Use home equity via either refinance or HELOC
-  Work part time doing something you enjoy to "coast fire"

Does the SS income include anything for your wife?  Even if she didn't work she still gets spousal SS benefits.  I believe that's typically 50% of your benefit so it could add another $1000/month once she is eligible. 

[JungYo]

Hi All, yesterday (after my last post) was a very strange day. Net of it is: I'm not going to quit working asap and will keep building, getting educated, and positioning myself to retire within 2 years.

I got an unexpected job offer and accepted. It's a large, exciting project, 18-24 months, WFH (which my current employer abhors and is requiring us to be in the office) or work from anywhere, modest raise. I was really hoping they'd offer it to me but didn't expect it, and am happy to remain working while strengthening my financial position.

One of the lures of this is the WFH/anywhere. Wife and I planned to go to different areas to "live" for 2-4 weeks via AirBnB/VRBO to, hopefully, figure out where we want to ride things out when we grow up. (That, of course, will make tracking spending a whole new adventure!)

Sorry for the false alarm, and I cannot thank you all enough for all of the wisdom shared and questions raised. I'll keep hanging out here, learn, ask some questions, and who knows - maybe even contribute something at some point!

[GodlessCommie]

Congratulations! Sounds like a perfect win-win situation for you!

[ericrugiero]

Sounds great.  Do something you like for a couple years while traveling, getting closer to 59.5 and strengthening your financial position.  You should be in great shape financially when this project ends. 

[Bird In Hand]

I got an unexpected job offer and accepted. It's a large, exciting project, 18-24 months, WFH (which my current employer abhors and is requiring us to be in the office) or work from anywhere, modest raise. I was really hoping they'd offer it to me but didn't expect it, and am happy to remain working while strengthening my financial position.

Congrats!  But before you quit, you could potentially still roll your IRA into your current 401k and have that Rule of 55 in your back pocket just in case.

Best of luck either way.

[maisymouser]

Hi All, yesterday (after my last post) was a very strange day. Net of it is: I'm not going to quit working asap and will keep building, getting educated, and positioning myself to retire within 2 years.

I got an unexpected job offer and accepted. It's a large, exciting project, 18-24 months, WFH (which my current employer abhors and is requiring us to be in the office) or work from anywhere, modest raise. I was really hoping they'd offer it to me but didn't expect it, and am happy to remain working while strengthening my financial position.

One of the lures of this is the WFH/anywhere. Wife and I planned to go to different areas to "live" for 2-4 weeks via AirBnB/VRBO to, hopefully, figure out where we want to ride things out when we grow up. (That, of course, will make tracking spending a whole new adventure!)

Sorry for the false alarm, and I cannot thank you all enough for all of the wisdom shared and questions raised. I'll keep hanging out here, learn, ask some questions, and who knows - maybe even contribute something at some point!

That is WONDERFUL news!! A change of pace will do you good. Just make sure to prioritize tracking those expenses so you are *really* sure when you decide to truly pull the trigger on FIRE.

And, as a MMM-er, my curiosity is piqued about the reasons you can't go down to 1 car. Not saying you should (we also can't drop down to one car) but I am genuinely interested in the top 3 reasons you have with only one of you working (and now WFH/traveling!!!). It's only natural on the MMM forums to get challenged a bit here and there on these kinds of things...

I'm in the area if you want to link up in person (outdoors) anytime before you go off on some fun adventures. :)

[JungYo]

And, as a MMM-er, my curiosity is piqued about the reasons you can't go down to 1 car. Not saying you should (we also can't drop down to one car) but I am genuinely interested in the top 3 reasons you have with only one of you working (and now WFH/traveling!!!). It's only natural on the MMM forums to get challenged a bit here and there on these kinds of things...

I'm in the area if you want to link up in person (outdoors) anytime before you go off on some fun adventures. :)

Hey Maisy! We'll have to meet up some time soon - when it's not 95* and humid. :)

We are sticking with 2 cars for the following reasons:

• There really isn't anything within walking distance, and if I go out/away, my wife would not be able to go out. We don't (and won't) use Uber and Lyft.
• My wife frequently travels to VA to spend time with her parents. That'd leave me with no way to get outside our 'hood or engage in certain hobbies while she's gone.
• My little truck is essential to some of my hobbies, and is a hobby itself.
• There is no public transport down here.
• 'Merica, freedom, and s**t.

Doing my own vehicle maintenance, little projects and modifications, and using a truck as a truck has been a primary hobby of mine since the 90's. We've actually had 3 cars at times, one of which was purely a hobby vehicle (old Land Cruisers), but those days are over.

[dandarc]

I'm with you on the 2 cars. 1 car worked great for us in California, but not so much in North-Florida. We have 2 cars mostly because we're heading opposite directions on a near daily basis (well, pre-pandemic anyway, and we're slowly getting back to that), both tend to be going far-enough that we're not walking (we tried biking seriously a few years back, we didn't like it. Maybe an e-bike would make that better, although the car that will off-set is the electric one for us). Uber and Lyft are not that much better than public transit here, at least the couple of times I've used it here in North Florida. Not quite as inconvenient as the bus, but the times I've used it, the wait was 20 minutes or more for the Lyft driver to show up, plus travel time to wherever I was going. At least in the places I normally need to get to.