Going from FI to FIRE next year

[Retireatee1]

I gave my employer notice that I'm going to retire at the end of the year at age 53.  I've been FI for several years and have been in the OMY mode.  I still enjoy my job as software engineer, but it has evolved over the years into one that has more pressure and isn't a good long-term fit.  So, I'll be taking a break and maybe looking at the gig economy for some fun money.  I've been super-saving for the past 20 years and have a comfortable stache.  I've done extensive modelling but don't wish to divulge my financials here.  I will say my mortgage was paid off six years ago and represents 25% of my net worth.  I'll have six gap years to get to 59 1/2 and 17 gap years to get to the delayed SS age of 70.  My portfolio is currently 70/30 stocks/bonds, but I may rebalance back to 60/40 (got crushed in 2022).  My house is high maintenance and more than I need (single/no family), and I would like to downsize into an apartment.  Instead of increasing my exposure to the stock/bond market, I believe my best option is to roll the proceeds from the sale into a 20-year inflation-adjusted annuity.  This covers the SS gap years, and the monthly income will cover my basic expenses which I have worked out.  So, I'll only need to dip into the retirement accounts for discretionary spending or emergencies.  The annuity acts as a hedge similarly as real estate and avoids the mental anguish of watching my portfolio balances dwindle exponentially every month during those gap years.

Any feedback would be appreciated, I have a lot of time to work out any kinks.

[Baguettestache]

Congratulations!

I have no feedback as I still have a long way to go before FI but as a 31 years old Software Engineer who's always heard about ageism in this industry, and how it was almost impossible to still be a developer after 35-40, I'd love to know more about your story, how you managed to do it for so long, what were the obstacles on your path...

That said, from my experience, the job can be so different from a company to another! Maybe you could still do it part-time, do it in a friendlier company,...

PS: What does OMY stand for?

[Retireatee1]

Congratulations!

I have no feedback as I still have a long way to go before FI but as a 31 years old Software Engineer who's always heard about ageism in this industry, and how it was almost impossible to still be a developer after 35-40, I'd love to know more about your story, how you managed to do it for so long, what were the obstacles on your path...

That said, from my experience, the job can be so different from a company to another! Maybe you could still do it part-time, do it in a friendlier company,...

PS: What does OMY stand for?

OMY = One More Year

In my experience the ageism thing is real but a bit overstated for software development.  I haven't seen that for 50-somethings to the point where I'd be highly concerned.  60-somethings, maybe.  It might be more of an issue in Silicon Valley and startup companies.  A few of my middle-aged coworkers went to interview at Red Ventures here a while back and were uncomfortable with all the young faces.  MegaCorps have been known to round up higher-income individuals at all positions for layoffs and try to replace them with more junior level or offshored employees, so there will be a correlation with age.  But it's not like you can't find a job when you turn 50.

I've worked steadily for 30 years without a gap, software engineering opportunities have always been plentiful.  I've had four long tenures and one short one and started off doing contract work in the 1990s.  I'm actually on the young side of the team I'm currently on, so go figure.

[lhamo]

Do you really need to tie the money up into an annuity?

It wasn't financially optimal, and lots of people here would not have made the same choice, but when we had a large windfall from a property sale in 2017 shortly after FIREing we elected to just live off the liquid cash while allowing retirement savings and other investments to continue to ride the market.  It was a pretty cushy cushion, but it had minimal earnings because we didn't want to risk it to the market -- so that allowed us to have a very low taxable income and keep our tax/health care costs to a minimum. 

That money has now mostly been spent down, and I am in the final stages of an amicable divorce.  I bought my own house a few months ago and am renovating it.  I should have JUST enough in my non-retirement funds to pay for this first stage of renovations + my living expenses for the next 4 years up to age 59.5.  If necessary I will get a PT job to help cover living expenses, but market willing I shouldn't have to do that unless I really want to.  I do have Roth contributions I could tap if necessary, though trying to avoid that.  Could also do a 72t SEPP withdrawal, but that also seems to be more hassle than it is worth.

Within my retirement accounts one thing I have been doing lately to reduce my anxiety about potential losses has been to move my Roth contributions into MM funds.  Mentally those buckets are my emergency fund for the next 4 years.  Once I hit 59.5 I will probably adopt a strategy of having 2-5 years of living expenses in cash- or cash-like buckets within the retirement funds.  Then let the rest ride the market (though I will probably keep the 5-10 year projected needs in more conservative funds like a target retirement fund).  This may reduce my returns overall, but hopefully the reduced anxiety about where my immediate living expenses are going to come from will be worth it.

Anyway, you do you, but annuities tend to have high fees and with interest rates on CDs and MM accounts (and 10 year treasuries) being in the 4-5% range currently there might be ways to get the financial outcome you desire at a much lower cost without too much extra hassle. 

[Retireatee1]

Do you really need to tie the money up into an annuity?

It wasn't financially optimal, and lots of people here would not have made the same choice, but when we had a large windfall from a property sale in 2017 shortly after FIREing we elected to just live off the liquid cash while allowing retirement savings and other investments to continue to ride the market.  It was a pretty cushy cushion, but it had minimal earnings because we didn't want to risk it to the market -- so that allowed us to have a very low taxable income and keep our tax/health care costs to a minimum. 

That money has now mostly been spent down, and I am in the final stages of an amicable divorce.  I bought my own house a few months ago and am renovating it.  I should have JUST enough in my non-retirement funds to pay for this first stage of renovations + my living expenses for the next 4 years up to age 59.5.  If necessary I will get a PT job to help cover living expenses, but market willing I shouldn't have to do that unless I really want to.  I do have Roth contributions I could tap if necessary, though trying to avoid that.  Could also do a 72t SEPP withdrawal, but that also seems to be more hassle than it is worth.

Within my retirement accounts one thing I have been doing lately to reduce my anxiety about potential losses has been to move my Roth contributions into MM funds.  Mentally those buckets are my emergency fund for the next 4 years.  Once I hit 59.5 I will probably adopt a strategy of having 2-5 years of living expenses in cash- or cash-like buckets within the retirement funds.  Then let the rest ride the market (though I will probably keep the 5-10 year projected needs in more conservative funds like a target retirement fund).  This may reduce my returns overall, but hopefully the reduced anxiety about where my immediate living expenses are going to come from will be worth it.

Anyway, you do you, but annuities tend to have high fees and with interest rates on CDs and MM accounts (and 10 year treasuries) being in the 4-5% range currently there might be ways to get the financial outcome you desire at a much lower cost without too much extra hassle.

Thanks for the reply.  Having that much cash just parked gives me pause, I believe in putting every last dollar to work passively.  Stocks and bonds mostly outperform annuities, but not always (I do stress-testing of the different scenarios).  The rate of return on life annuities can soar past stocks when you get into your 80's and I am looking at that option to address longevity risk.  It seems to result in too much income later in life when expenses are generally declining and not enough early on though.  Perhaps a 20-year annuity at 53 and then a deferred life annuity starting at age 73 would be best.

[ixtap]

Inflation adjusted annuities are not easy to find these days. Have you considered a TIPS ladder?

Will you be doing Roth conversions while your income is lower? Between taxes and ACA subsidies, gig income might be counter productive unless you find something that actually inspires you.

[Retireatee1]

Inflation adjusted annuities are not easy to find these days. Have you considered a TIPS ladder?

Will you be doing Roth conversions while your income is lower? Between taxes and ACA subsidies, gig income might be counter productive unless you find something that actually inspires you.

I usually stick with mutual funds and ETFs but might consider a laddering strategy based on buying bonds directly.  I will likely employ some Roth laddering as well to take advantage of lower tax brackets where appropriate.  That said, I wish to preserve my Roth balances as much as possible and not draw them down during those gap years.

[Retireatee1]

Inflation adjusted annuities are not easy to find these days.

Why do you say that?  This option seems common on the research I've done so far.

[tj]

Inflation adjusted annuities are not easy to find these days.

Why do you say that?  This option seems common on the research I've done so far.

There's literally no inflation adjusted annuity avaiable - except for social security.

You can run quotes at blueprintincome.com - the only options that produce results are no COLA, 1% COLA, 2% COLA, 3% COLA - the inflation adjusted COLA option produced no results because all of the insurers who offered them in the past pulled out.

[tj]

Inflation adjusted annuities are not easy to find these days. Have you considered a TIPS ladder?

Will you be doing Roth conversions while your income is lower? Between taxes and ACA subsidies, gig income might be counter productive unless you find something that actually inspires you.

I usually stick with mutual funds and ETFs but might consider a laddering strategy based on buying bonds directly.  I will likely employ some Roth laddering as well to take advantage of lower tax brackets where appropriate.  That said, I wish to preserve my Roth balances as much as possible and not draw them down during those gap years.

http://tipsladder.com

[bacchi]

Inflation adjusted annuities are not easy to find these days. Have you considered a TIPS ladder?

Will you be doing Roth conversions while your income is lower? Between taxes and ACA subsidies, gig income might be counter productive unless you find something that actually inspires you.

I usually stick with mutual funds and ETFs but might consider a laddering strategy based on buying bonds directly.  I will likely employ some Roth laddering as well to take advantage of lower tax brackets where appropriate.  That said, I wish to preserve my Roth balances as much as possible and not draw them down during those gap years.

http://tipsladder.com

Best to do it in an IRA if you can to avoid phantom taxes.

A 30 year ladder has a 4.66% yield. A 20 year ladder is around 6%.

[tj]

Inflation adjusted annuities are not easy to find these days. Have you considered a TIPS ladder?

Will you be doing Roth conversions while your income is lower? Between taxes and ACA subsidies, gig income might be counter productive unless you find something that actually inspires you.

I usually stick with mutual funds and ETFs but might consider a laddering strategy based on buying bonds directly.  I will likely employ some Roth laddering as well to take advantage of lower tax brackets where appropriate.  That said, I wish to preserve my Roth balances as much as possible and not draw them down during those gap years.

http://tipsladder.com

Best to do it in an IRA if you can to avoid phantom taxes.

A 30 year ladder has a 4.66% yield. A 20 year ladder is around 6%.

How would you use it in an IRA in practice? If you put it in a Roth, you limit growth. If you put it in traditional - it might make conversions messy?

[Retireatee1]

There's literally no inflation adjusted annuity avaiable - except for social security.

You can run quotes at blueprintincome.com - the only options that produce results are no COLA, 1% COLA, 2% COLA, 3% COLA - the inflation adjusted COLA option produced no results because all of the insurers who offered them in the past pulled out.

We're getting into definitions but the 1%-3% examples are a type of inflation-adjusted annuity (ones with "level increases").

I don't necessarily need the "CPI-adjusted" feature, 2% or so should be adequate.

[tj]

There's literally no inflation adjusted annuity avaiable - except for social security.

You can run quotes at blueprintincome.com - the only options that produce results are no COLA, 1% COLA, 2% COLA, 3% COLA - the inflation adjusted COLA option produced no results because all of the insurers who offered them in the past pulled out.

We're getting into definitions but the 1%-3% examples are a type of inflation-adjusted annuity (ones with "level increases").

I don't necessarily need the "CPI-adjusted" feature, 2% or so should be adequate.

You should compare the nominal SPIA to the 2% one and see how long you'd have to live to catch up.  The reduction in payout is massive.

[bacchi]

Inflation adjusted annuities are not easy to find these days. Have you considered a TIPS ladder?

Will you be doing Roth conversions while your income is lower? Between taxes and ACA subsidies, gig income might be counter productive unless you find something that actually inspires you.

I usually stick with mutual funds and ETFs but might consider a laddering strategy based on buying bonds directly.  I will likely employ some Roth laddering as well to take advantage of lower tax brackets where appropriate.  That said, I wish to preserve my Roth balances as much as possible and not draw them down during those gap years.

http://tipsladder.com

Best to do it in an IRA if you can to avoid phantom taxes.

A 30 year ladder has a 4.66% yield. A 20 year ladder is around 6%.

How would you use it in an IRA in practice? If you put it in a Roth, you limit growth. If you put it in traditional - it might make conversions messy?

That's an exercise left to the reader. ;)

Individual bonds in a traditional IRA can be converted to a Roth IRA. Any major broker can handle it.

Personally, we're at the withdrawal stage and the bond allocation is set by how the market does (skimming anything over +20%/year into bonds). That's used to buy rungs on the ladder. Given our large tax deferred balances, conversion can wait until many of the rungs mature. That does set up a 5 year cooling off period but we have/had enough in our tax exempt to handle that.

We're also only putting 50% of our yearly spend in each rung.