Asset Threshold for Early Retirement

[Bayou George]

Hello all,

First time poster, long time lurker. Love this board, learned a great deal here, and wanted to add something as part of my ongoing education, and hopefully for the benefit of others.

I've been looking at my retirement and I've come to the conclusion that there is a financial threshold where I am confident in taking the plunge with my retirement practically guaranteed.

I base the day I can retire on these factors:

• Average annual expenses over the past 5 years.
• ACA Health Insurance annual cost.
• Estimate of federal and state taxes in retirement.
• 25% reduction in SS.
• Taxable and Roth IRA accounts large enough to last the first 5 years.
• 5-year Roth Conversion Rule.
• 100% Success rate as determined by firecalc.com using SS as part of calculation.

I feel confident that given a 100% success rate above my retirement will be fine. I base this on several reasons:

• Firecalc says it has never failed in the past 100+ years.
• I am in my early 50s and can always take a part time job to supplement income if things got really bad.
• My yearly expenses are Mustachian, I can survive on little more than SS.
• If I get a catastrophic illness, that's what my savings are for.
• A large proportion of my expenses are lumpy. I have a lot of control on when to execute major purchases.

My annual expenses, not including taxes or health insurance, range from $26k to $42k per year, with an average of $34k. I spend $40k when I take more expensive vacations and/or schedule major house repairs. These expenses I have a great deal of control as to when I execute them. Vacations I can change, house repairs I can delay and/or do them myself because I'm a DIY'er who will have plenty of time to do most of the work on my own. If there is a downturn in the market I am confident I can reduce expenses for a few years if necessary.

My assets are split 75/25 between my 401k and my Taxable/Roth accounts. The plan is to do Roth Conversions while using my Taxable/Roth for expenditures for the first 5 years. After 5 years I will use the Roth Conversions until my full 401k is available at 59.5. At 62 I will start SS.

Since the Roth Conversions are taxed as earned income, my estimated taxes for both federal and state are $4k per year. A silver plan in my state will cost another $4k, so my total average annual expenses will be $42k. If I take SS at 62 with a 25% cut, I can expect $16.5k per year.

Using these numbers in firecalc and solving for the minimum portfolio needed for a 100% success rate for 40 years, I arrive at the following portfolio needed:

Roth/Taxable			401k		Total
210k			708k		918k

This is much less than I had thought what I needed 5 years ago, and in fact, I already have more than that. It also gives me peace of mind knowing that if I so choose I could retire now and feel confident that I could go on living exactly as I have been.

[Ricochet]

There is a great reward in the feeling that you're going to have a comfortable retirement. Good work in planning it right.  I don't know if your home is paid off, but you can look forward to that expense dropping when the last mortgage bill is sent.  There's always downsizing options if finances get tough. It seems like some folks on this board have seen their investments go up faster than they are drawing down. 

[jeroly]

Two additional things to consider...

1. You assume that ACA type coverage will continue to be available.  In our current political environment that may be a big assumption.

2.  You don’t leave anything for end of life care.  If you’re happy with being dumped in a nursing home that accepts Medicaid payment then fine, otherwise maybe you want to put aside an extra $200k or so for that.

[Catbert]

Two additional things to consider...

2.  You don’t leave anything for end of life care.  If you’re happy with being dumped in a nursing home that accepts Medicaid payment then fine, otherwise maybe you want to put aside an extra $200k or so for that.

If OP is single and has significant equity in his home this really shouldn't be much of an issue.  He'll have enough to fund end of life care for...awhile.  Get into a good facility that will keep you on Medicaid after the money runs out.  OTOH if there is a spouse involved you have a good point.

[Catbert]

OP also look at 72t withdrawals.  That could allow you to withdraw from your 401k assets early and let the Roth continue to grow tax free.   I would never recommend it for someone younger, but since you're in your early 50s  and sound like you plan to work for awhile it's an option.  Also if you continue to work (not that I'm encouraging you to wait) until the year you turn 55 you can get to 401k money with your current employer without penalty.

Both these options are very rule bound so investigate carefully if they sound of interest.

[Bayou George]

There is a great reward in the feeling that you're going to have a comfortable retirement. Good work in planning it right.  I don't know if your home is paid off, but you can look forward to that expense dropping when the last mortgage bill is sent.  There's always downsizing options if finances get tough. It seems like some folks on this board have seen their investments go up faster than they are drawing down.

Thanks, it does feel good after close to 30 years of work. I didn't think I'd get anywhere close by my early 50s, but I finally paid off my house and got hold of my spending about 5 years ago. The market has been extraordinarily good the last few years after I saw almost no returns through the 2000s.

I was rechecking my total assets needed in the OP and I made an error in the amount. It should be $918k and I'll have to edit the post to reflect that.  Thankfully I still have enough assets to cover it. In essence, adding in SS increases the effective safe withdrawal rate at the start of my retirement to about 4.6%, given the starting parameters and assumptions.

I think that firecalc is a good model to stress test your assets. I know the past doesn't guarantee future results, but if my portfolio and planned spending would never have failed in all the poor markets of the past, then I will take that as confirmation that I'm FI - especially since I can modify my spending habits if I need to.

Two additional things to consider...

1. You assume that ACA type coverage will continue to be available.  In our current political environment that may be a big assumption.

2.  You don’t leave anything for end of life care.  If you’re happy with being dumped in a nursing home that accepts Medicaid payment then fine, otherwise maybe you want to put aside an extra $200k or so for that.

Yes, I assume ACA will still be available. I could be wrong, but uncertainty in the ACA would not keep me from retiring. I am single and own my home, so I could use my house for my end of life needs. An extra $200k would come in handy, both for end of life or as a general emergency fund! Right now I'm over $100k of my baseline FI, but how big of an emergency fund I need/want is what keeps me working.

I do have kids, but their education expenses are already taken care of separate from my retirement assets. This will actually help me because as they leave the nest my expenses will go down - another built in safety factor.

More importantly though, I don't see me retiring and doing nothing. I've worked too long to just sit around all day long. I envision taking a year or so off to do things I want to do and then going back to work. I look at the assets built up as giving me the opportunity to pursue other interests. It's more burnout that I'm retiring from, not work. Knowing that my finances are taken care of and I can be choosy in what I do in the future is what really motivates me.

OP also look at 72t withdrawals.  That could allow you to withdraw from your 401k assets early and let the Roth continue to grow tax free.   I would never recommend it for someone younger, but since you're in your early 50s  and sound like you plan to work for awhile it's an option.  Also if you continue to work (not that I'm encouraging you to wait) until the year you turn 55 you can get to 401k money with your current employer without penalty.

Both these options are very rule bound so investigate carefully if they sound of interest.

Thanks for the tip Catbert. I have looked into 72T but as I understand it I could not stop taking it if I wished to go back to work, which I probably will. I know I would be losing a lot of Roth space by using the principal in my 50s, but right now it looks to be the best alternative. I definitely would use my taxable investments prior to using the Roth. 

I am aware of the 55 rule and that is another thing I keep in the back of my mind. There are a lot of dates and milestones that I am keeping track of right now, but the bottom line for me is making the most of the rest of my life.   

I am really thankful for all the information that is available here and on the internet in general. I read MMM's blog the first time about 5 years ago and that was one of the main motivators for me, especially the 4% blog post. That was like a light bulb going off in my head when I read that!

Also, keeping a detailed expense spreadsheet for the last 5 years gives me confidence that the numbers I'm using are good. I think I have enough alternatives right now so that I can do whatever I choose from here on out and money will not be the deciding factor. Yay!