Non-standard FIRE

[Nobodyinparticular]

So I was late to the idea of FIRE.  While my wife and I started contributing to retirement accounts as soon as we started working and have been good about tracking our spending, we never thought about retirement in anything other than the work until 67 sense.  A few years ago, a friend introduced me to this entirely different way of looking at retirement.  This has lead to a lot of blog reading, forum lurking, spreadsheet making, and long conversations about what could be.

Next year we will pay of our mortgage and that is the last of our financial obligations.  So, assuming we don't have another beating like last year, we are thinking of pulling the plug on the jobs at that point.  The issue is that we are in our early 50s and 99% of our savings are in retirement accounts.  The plan is to make use of the SEPP/72(t) process to take the bulk of what we need from one of the accounts and then just bite the bullet and pay some penalties for a few years to make up the balance of what we need from other accounts.

Accounting for taxes and penalties we will probably be withdrawing about 5% per year.  So, assuming 4% returns, we will likely have knocked down our principal by 10% in the first 10 years.  At that point we can look at one of us taking social security and we drop to a less than 4% withdrawal rate.  That still leaves the other one's social security as a reserve if something has gone sideways or if the government has chopped the benefit level.  Obviously we also could spend less, but these are the numbers we think we want to go with.

I've done all manner of plotting and planning and monte carlo analysis and whatnot and they all say that even though we are "spending too much" the first few years, it will all be fine in the long term and that at age 100 we will still have a lot of money in the bank.  My question is if you all think this seems excessively risky.  Any comments are appreciated.

[chevy1956]

Accounting for taxes and penalties we will probably be withdrawing about 5% per year.  So, assuming 4% returns, we will likely have knocked down our principal by 10% in the first 10 years.  At that point we can look at one of us taking social security and we drop to a less than 4% withdrawal rate.  That still leaves the other one's social security as a reserve if something has gone sideways or if the government has chopped the benefit level.  Obviously we also could spend less, but these are the numbers we think we want to go with.

I've done all manner of plotting and planning and monte carlo analysis and whatnot and they all say that even though we are "spending too much" the first few years, it will all be fine in the long term and that at age 100 we will still have a lot of money in the bank.  My question is if you all think this seems excessively risky.  Any comments are appreciated.

Risk is a little bit subjective. I would be completely fine with what you are detailing.

I think the biggest risk to my retirement in terms of running out of money is probably the same as your retirement in terms of running out of money and that is divorce.

I think a bigger risk is actually dying. Sure I'll die with money but I'd prefer to live a lot longer.

I retired 3 years ago and my WR is a little less than 5%. I feel this gives a false impression though because it's only relevant for say 20 years. I can receive social security at that point which would fund our lifestyle. I also have other back-ups.

The problem with discussing a WR is that it's just one part of your plan. To me 5% is a really low WR if other parts of your plan are pretty good back-ups.

[Bird In Hand]

The issue is that we are in our early 50s and 99% of our savings are in retirement accounts.  The plan is to make use of the SEPP/72(t) process to take the bulk of what we need from one of the accounts and then just bite the bullet and pay some penalties for a few years to make up the balance of what we need from other accounts.

How close are you to Jan 1 of the year you turn 55?  If your employer retirement plans support it, it could be worth hanging on until then to avoid the 10% penalty (look up IRS "rule of 55"), without the hassle and risk of 72(t).

[lhamo]

Do you by any chance have any of your accounts at Fidelity?  I have found their Retirement Income Planner (now may be called something else -- they have changed their system several times since I started using it under that name) to be extremely helpful in showing how -- assuming you don't get hit too hard by SORR in the early years -- a slightly higher WR at the beginning of retirement is not an issue at all if you are looking at extremely low WR after SS kicks in.  In our case, we retired quite early (me 46, SO 56) and in the early years our projected "withdrawals" were in the 5-6% range.  But due to a windfall we had 10+ years of expenses in cash accounts to live off of, with a retirement portfolio of over 1mill to let ride the markets in the meantime.  Even with delaying the start of SS to age 70 to both of us, the Fidelity model (which you can set to be ultra conservative in terms of projected returns) had us leveling out at about a 3-4% WR after the first couple of years, then dropping to a 2% ish WR once SO started SS at age 70, and a 1% or less rate once I did.

The crazy market returns between 2015-early 2022 meant our retirement accounts ballooned to nearly 2mill,  now at around 1.6-1.7 after dropping below 1.5 a couple of times last year.  Not really a huge issue as we still have cash to live off of for a few more years.

I would be inclined to say give it a go, but maybe think about some gig work or some other way to cover basic living expenses as opposed to 72t, which can get complicated.  Do you have any Roths you could tap?  If you are close to 55 it is definitely worth considering hanging on just a little longer so you can tap at least the employer-based accounts penalty free (assuming your plan allows it in a tax efficient way)

[Sandi_k]

Accounting for taxes and penalties we will probably be withdrawing about 5% per year.  So, assuming 4% returns, we will likely have knocked down our principal by 10% in the first 10 years.  At that point we can look at one of us taking social security and we drop to a less than 4% withdrawal rate.  That still leaves the other one's social security as a reserve if something has gone sideways or if the government has chopped the benefit level. 

My concern is - what if you have a 50% decline in the stock market, a la 2001? What is your asset allocation? I do think this is where thinking through your AA and year-by-year withdrawal plan is important.

For example, if we are choosing an asset allocation of 70/30 for the first 10 years of retirement; we can spend 5% for 6 years (the 30% of the pot), and not have to worry about what the stock market does. After Year 6, it gets dicier. And if we have a 50% decline in the market, that 70% is now 35% of the original sum. Which means things might fail in the long run.

You are assuming that returns will be linear - and they are not.

Also - how are you handling medical coverage? That is the other big variance.

Thinking about these things means that we our plan has shifted a bit. The plan, assuming a $1M portfolio for illustration:

25% - set aside into a "spending bucket" in cash, TIPs, bonds. $250k
75% - the "investment bucket", with AA of 65/35. $750k

Spend $35k per year, in Years 1-6 from the "spending bucket", PLUS
3.5% of initial value of investment bucket (750k * .035 = $26,250).

In Year 3: DH files for Social Security = +$20k
In Year 6: House is paid off = + $29k freed up.

Now, in Year 7, we can continue to take the 3.5% SWR on a 65/35 portfolio, and FireCalc says we have a 97% success rate.

In Year 10, I file for SS at age 70 - and we can reduce our portfolio w/d as needed, if it needs to rebound after 10 years of withdrawals. With RMDs now moved to age 75, that means we can stop using the portfolio in Years 11-15.

I would recommend you figure out a plan that is drawn out like this - year by year, assuming no more than a 5% WR until one or the other gets SS, and then reducing it to 3.5%. That plan needs to include SWR, Asset Allocation, and a plan to "wall off" your spending from the portfolio in case of catastrophic declines.

[FIRE 20/20]

Your plan sounds reasonable, but there are just too many pieces of information missing for us to really provide very good go/no go advice. 

Do you have a real budget?  "Real" as in you've tracked it for at least a year so you know what you actually spend in a year?  It's one thing to say you'll spend $400 / month on groceries and another to do it.  Without a solid understanding of your expenses (taxes? health insurance? roof replacement?  car replacement?  tires?  etc.) any plan is worthless.  On the other hand, if you have a very solid budget with a long history of staying within that budget then I'd feel much more comfortable. 

Do you have any back-up plans?  For instance, maybe your budget is a spendy $60k / year, but you could cut travel and gifts to get down to $40k if the SHTF.  Or maybe you could do some consulting, youth sport refereeing, Walmart greeting, or selling things on Etsy to make up any shortfalls.  The best thing my partner and I did was set out a series of triggers and plans if the markets crashed or inflation skyrocketed during FIRE.  Being on the same page about this was critical in being comfortable pulling the plug. 

What's your asset allocation? 

How much of your spending will Social Security cover after you're both taking it?  If S.S. will eventually cover all of your spending needs, then you are in fantastic shape.  It sounds like your money should easily get you to S.S. if one of you plans to start taking it in just 10 years.  If both of your S.S. checks will just cover half of your expenses, then you will need significant assets remaining after you reach that point. 

Which do you see as your biggest risk - running low on money or dying early?  In just a few replies to this topic you can see two very different ideas of what constitutes a risk.  I am in the camp that sees working extra years as a bigger risk than worrying about a chance of major drops in the market.  But you may be someone who prefers a bulletproof plan that will survive another bout of stagflation.  Or you might worry more about one and your spouse the other. 

With the caveat that I don't think I have enough to really make a firm call, it looks to me like your plan is a good on as long as you have real hard data on your spending the past few years and you have a plan in case things start to look bad during the first few years of your retirement. 

One last thing - if you go up one level in the forum tree, you'll see a Case Studies section.  If you post there you'll probably get better insight.  There is a Case Studies template that you could fill out that would allow us to provide better feedback. 

[Alternatepriorities]

I'm strongly in the "risk it relative" camp. I think the "Rich, Broke, or Dead" calculator at engaging data is a great way to visualize why.

https://engaging-data.com/will-money-last-retire-early/

If your jobs are to the point where they are draining you a little each week and you have dreams you'd like to chase by pulling the plug now then do it. You can always work a lower paying job for a couple of years and cutting spending to the bone if you have to during a bad market, but you can't get the years back. Obviously if you find work invigorating and fun it's not as urgent to spend your time elsewhere.

[Nobodyinparticular]

Thank you all for your thoughtful responses, I GREATLY appreciate them.  I'll try to combine my responses into one message.

I'm highly motivated to leave my current job so that heavily influences my planning.  My wife is less motivated to quit, but we want to do this in a way that she has the option to work or quit or so something in between, so our planning assumes we both pull the plug.   We have talked about this a lot and are pretty aligned on spending and other things.  I probably have a higher risk tolerance than her, so we have worked and discussed and compromised during this process in order that we are both comfortable.  That's one of the reasons I'm here a good year out as opposed to saying "what about today?"

As to the budgeting, I have more than 8 years of detailed records.  So I know where we did good and where we did bad and why.  So, while I'm sure retired life will be different than current life, I feel I have a reasonable expectation of what our spending will look like.  I'm not sure there is an exact demarcation point for "lean FIRE" vs "fat FIRE", but I'm going to describe our plans as "chubby FIRE."  So there are plenty of places in the budget where we could cut back if we had a setback of some sort.  And part-time work would be an option too.

I'm aware of the Rule of 55, but that would be another of couple years working beyond my target of next year.  So, it is possible, but not ideal (to me).  From what I have read about the 72(t) option, you have to follow the rules, but they seem fairly straightforward.  I'm always willing to learn, if someone disagrees.  We're keeping several different accounts so if things go off plan, we can still stick with the defined amounts for the 72(t) and use the other accounts to adjust.  By the way, other accounts includes Roth IRAs and I am planning on taking out some or all of our contributions (and leaving the rest for 59.5).

For medical, we're going to go the ACA route.  We don't have another means to get health insurance at this point.  I'm looking into a couple things with a professional society, but I think that may be limited to things like dental.  The friend I mentioned in my first post retired a few years ago and we have discussed the in's and out's of signing up for the ACA and paying for those plans.  This is actually one of the places where my having to withdraw money from retirement accounts gets painful.  It's all income as opposed to capital gains.

As someone mentioned, saying, "we'll have 4% returns every year," is not accurate.  I realize this, but I'm using that as a baseline.  Trinity study and all that.  I have  spent a fair amount of time looking at FireCalc and CFireSim.  They indicate success rate ranging from 70-100% (depending on how much of social security I want to count on) and that I am more likely to end up richer rather than running out of money over 50 years.

Currently we have a roughly 80/20 stock/bonds asset allocation.  I had figured on withdrawing in a way that would maintain that ratio, but there were a number of suggestions here for different ways to look at things.  I'll have to think about those.

Again, thank you all for your time and comments.

[FIRE 20/20]

Based on what you've written, it looks like you're almost ready to go.  It seems like you understand your spending, your withdrawal and health insurance options, and the online calculators give you a green light.  I'd like to see you develop a detailed withdrawal plan, because sometimes it's possible to make small changes that really reduce some costs - for example if you can limbo under one of the ACA cliffs or stay just under a tax bracket transition to minimize capital gains taxes you might be able to save significant amounts of money.  If you haven't done the research on those things I'd suggest doing that well before you FIRE.  In my case, by keeping our Roth ladder rungs small enough we were able to really minimize our ACA spending.  I don't remember the exact details, if we had increased our spending by a few hundred $ / year we would have increased our ACA costs by a few thousand $.  I think to increase the amount we could spend by roughly $2,000 we would need to withdraw something like $8,000 more!  The other $6k would have gone to taxes, premiums, and OOP health insurance costs. 

It sounds like your approach won't offer that kind of optimization, but there are other ways you might be able to reduce costs.  Just spitballing, if you were able to build up a year or more's worth of spending before you quit, you might be able to reduce ACA costs for a that amount of time and save thousands until you start your 72(t) withdrawals at a higher income level.  Or if your wife likes her job and you could live off her income for a few years, maybe you could have a deal where you do ALL of the housework while she covers living expenses and maybe health insurance through her job.  Some people like their jobs but don't like how their life is outside work because of all the other tasks.  If she's in that camp, then she might like working if when she gets home the pantry is stocked, the house is clean, and dinner is on the table. 

My point isn't about the specific details, just that having a detailed plan for withdrawals might allow you to find optimizations you weren't aware of.  It would suck to find out after the fact that by cutting withdrawals by $500 you could have saved $5,000.  I found that was the case for us at the last moment. 

[Nobodyinparticular]

Thanks for the follow-up.  Those sound like good things to consider.

I do have a spreadsheet I've been using to model drawdown plans.  I'm using to try to answer different questions like:

• What happens if I take things from this account more than that account?
• Can I minimize penalties?
• What about taxes?
• What happens if we make a big purchase like a car after 3 years?

In some cases I've seen some noticeable differences, but I've been surprised that a lot of the things I thought would have a big impact, well, don't.  I guess since I'm basically either drawing from a "penalty paying bucket" or a "non-penalty paying bucket" that both pay taxes there aren't actually that many tricks I can play.  I'm hoping that we can adjust our spending some to help out, but I figure it is better to plan on spending more and finding out we actually spend less rather than find it's the other way around.

[reeshau]

This might be a minor point, but given that you are planning a near-term move, and that you are over-subscribed to retirement accounts for your ideal needs, what are you doing for your savings this year?  If you are saving in your tax-deferred accounts beyond the company match, have you considered moving to all Roth contributions (if available) or even putting them in a taxable account?

In the long term, it doesn't maximize your numbers.  But the concern you expressed in your post is about the first 10 years, not the last 10.  Adding to your flexibility in that period with Roth contributions or a taxable brokerage to tap could be worth the extra tax dollars this year.

Also, do you have an HSA?  I retired at 48, and am 51 now.  I'm playing the balance game between managing my ACA costs and doing partial Roth conversions.  I don't use the HSA for routine medical costs (you could use it for your ACA premiums) but rather view this as a "slush fund" that I can use if we have a major medical event, without totally derailing the ACA / tax planning.  Also, rather than planning to drain your Roth contributions, you may want to view them as an "emergency fund +" to have a tax-free way to handle large lump sum events.  Once I have full access to the IRA's, I'll draw down the HSA.

It sounds like you are excited to have this revelation--good luck, and pass the word on to someone else!

[Sandi_k]

Also, do you have an HSA?  I retired at 48, and am 51 now.  I'm playing the balance game between managing my ACA costs and doing partial Roth conversions.  I don't use the HSA for routine medical costs (you could use it for your ACA premiums)

My understanding is that you cannot use the HSA for premiums, unless and until it is Medicare premiums.

[Telecaster]

Without knowing the details, this sounds pretty reasonable.   Social Security is a pretty good backstop to an early poor sequence of returns and typically increases the SWR.

A lot of people don't count on it, but I believe it is safe current retirees and people nearing retirement.   Too many people depend on the benefits for Congress to cut them. 

[Nobodyinparticular]

A couple of years ago I stopped all retirement savings beyond what is required for company money.  That has been diverted to help clear the way for pulling the plug.  Things like finishing funding the college account for the kids, replacing the windows in the house with energy efficient ones, and working to pay the mortgage off a couple years early.  I've always felt a little weird about that, but I felt like like I needed some cash now, not more when I'm 80.  So it makes me happy to see somebody else make that point.

Unfortunately, I didn't have access to an HSA, so I couldn't avail myself of any of those perks. 

I appreciate all of the comments.  It is one thing for me to think this is workable and another thing to see other people who think about FIRE say it is workable.  Also, if I talked through all the details with my wife one more time, let's just say I wouldn't have to worry about outliving my money.  My kids have also had to listen to some version of my "it's all about having options" speech a few too many times.  That being said, a copy of JL Collins' book "The Simple Path to Wealth" is a standard Christmas present for the senior year of college.

[Telecaster]

On thing I forgot to mention, if you haven't already, look at the effects of delaying SS.   In my case, it improved the SWR.   I suspect that is true in most cases as well. 

[bmjohnson35]

I retired a little over 3 years ago at age 50.  I am still VERY happy with that decision, but I will point out three areas where I could have been better prepared:

1. A didn't have a defined withdrawal plan. Since I had always saved for retirement, I didn't have any experience at withdrawing money strategically.

2.  A better understanding of taxes.  I have learned a lot in the past 3 years, but I would have been better prepared if I had understood tax rules better.  I'm still learning.

3. We bought our townhouse cash to make sure we were debt free. I thought it would be our last home for a long time.  It has very low costs and we love the neighborhood.  Unfortunately, the spouse doesn't like the townhouse, so we will be selling and buying in the future.  This is a major expense I didn't account for.  We have the resources to do it, but it will have long-term implications.

It sounds like you have put a fair amount of thought into this and understand the general risks. It also looks like the economy will be a bit wild over the next year or so. If you still decide to take the plunge at your planned departure point, it's likely you will be prepared for the bumps along the way.

[reeshau]

Also, do you have an HSA?  I retired at 48, and am 51 now.  I'm playing the balance game between managing my ACA costs and doing partial Roth conversions.  I don't use the HSA for routine medical costs (you could use it for your ACA premiums)

My understanding is that you cannot use the HSA for premiums, unless and until it is Medicare premiums.

Yes, I was convoluting a couple things.  You cannot use an HSA for ACA premiums, but they are tax deductible if you are self-employed, including retired.

As you say, you can use the HSA for Medicare premiums.

https://www.wageworks.com/employees/support-center/support-and-faq/healthcare/hsa/can-i-use-my-hsa-to-pay-for-health-insurance-premiums/

[Fru-Gal]

A super useful thing you can do for SEPP is to partition your IRA and only do SEPP on one part. I might do that.

[Nobodyinparticular]

A super useful thing you can do for SEPP is to partition your IRA and only do SEPP on one part. I might do that.

My current plan is to rollover my 401(k) into a brand new IRA at Vanguard and do the SEPP from there.  That way other retirement savings are in different accounts and that should minimize any concerns about following the rules and/or having flexibility if I do need to tap other resources.