Request Review of Retirement Readiness

[BernardShakey]

Hi All-

I've been a BH Forum reader for a little while now and am so glad to have found this community! I'm seriously considering retiring from Mega Corp in about 3.5 years and am looking for a retirement readiness review from my favorite BH experts. I've got a few questions below and would appreciate any insights as to what I should be doing differently. I'm sure I am doing some things that are considered "un-Boglehead." Thanks!

Emergency funds: Yes, 7-8 months. In cash and short-term CD's.

Debt: No debt other than mortgage on primary residence. $225k, 30-yr fixed, 3.125%, at current rate will pay off in 2038 Market value = $975k.

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 9.3% State

State of Residence: CA

Age: 56 (DW is 55, essentially SAHM and some part-time work)

Desired Asset allocation: 50% stocks / 35% bonds / 15% Cash (at start of retirement)
Desired International allocation: 20% of stocks

His Defined Benefit Pension (frozen): $58k annually (100% joint sure) at age 60 (2023) no COLA.
Lump sum option - $835k at 60.

SS: He plans to take at age 70. Estimate $62k annually ($3650/mo for him, $1550 DW spousal benefit).

Education Savings (these are non-retirement assets reserved for kids' remaining higher education discussed below)
$137k in 18-mo CD (matures 3/2020)
$146k in 529 plan (about 25/75 stocks/bonds)
$132k in 529 plan (about 25/75 stocks/bonds)

No significant taxable retirement savings (<$15k - Vanguard). Expecting about $125k in bonus money (after tax) over next 3.5 years which will be thrown at taxable retirement savings (Vanguard).

Current retirement assets (totals to 100%):

His 401k - $1.1M
11.1% Lifecycle Retirement Fund (0.28) - about 50/50 stocks/bonds
8.0% Bond Market Index Fund (0.03)
5.6% S&P 500 Index Fund (0.03)
3.9% International Index Fund (0.09)
5.3% Russell 2000 Index Fund (0.03)
6.5% US Large Companies Fund (0.27)
19.5% Stable Value Fund (0.29)
5.0% Mega Corp Company Stock

His Rollover tIRA - $398k (Actively managed, 0.7% AUM)
0.4% Fidelity Advisor Strategic Income Fund - FSRIX (0.74)
0.9% Fidelity Low-Priced Stock Fund - FLPSX (0.62)
0.3% Fidelity Magellan Fund - FMAGX (0.67)
0.1% Fidelity Select Gold Portfolio - FSAGX (0.86)
1.8% SEI Core Fixed Income Fund-Y - SCFYX (0.41)
0.9% SEI Emerging Markets Equity Fund-Y - SEQFX (1.44)
2.4% SEI Global Managed Volatility Fund-Y - SGLYX (0.86)
1.0% SEI International Fixed Income Fund-Y - SIFIX (0.82)
1.2% SEI Large Cap Value-Y - SVAYX (0.64)
4.1% SEI Multi-Asset Income Fund-Y - SLIYX (0.96)
1.3% SEI Short Duration Government Fund-Y - SDGFX (0.33)
4.8% SEI U.S. Managed Volatility Fund-Y - SUSYX (0.65)
1.6% Vanguard Growth Index Fund - VIGAX (0.05)
2.6% Vanguard Wellesley Income Fund - VWIAX (0.16)

His Roth IRA #1 - $107k - via Mega BD from 401k (Actively managed, 0.7% AUM)
1.6% American Balanced Fund - AFMBX (0.29)
1.5% Lazard Global Listed Infrastructure Portfolio - GLIFX (0.96)
1.5% Principal Global Diversified Income Fund - PGDIX (0.69)
1.7% Vanguard Consumer Staples Index Fund - VCSAX (0.10)

His Roth IRA #2 - $46k - via Mega BD from 401k
2.7% Vanguard Growth Index Fund - VIGAX (0.05)

Her 457 plan - $28k
1.6% Fixed Income Fund (?)

His HSA - $19k
1.1% (invested in about 60/40 stocks/bonds, not using for medical expenses at this time)

New annual Contributions
$62k to his 401k (pre-tax, comp match, post tax (for MBDR), catch-up, employer defined contrib. pension)
$7.9k (max) to his HSA account
$2k to her 457 plan

Current Situation: Two kids in college. One has 2 years of undergraduate left at big private. Other will start medical school next fall (don't know where yet). My plan is to leave both kids debt free upon completion. In today's dollars, after tax expenses in retirement are estimated at $9500/month for first 15 years. Maybe $8000/month later on.

Questions:
1. Feasibility of retiring in March 2023 ?
2. Suggestions on the two actively managed accounts ? I feel like I'm getting good advice on how to take distributions, do Roth conversions, etc. which is helpful leading up to retirement. But I'm paying more than I should...(DW likes idea of having someone to go to for advisement, taxes, estate planning, etc. if I were to pass suddenly - all services under one roof in this case).
3. Thoughts on lump sum pension vs. the annuity ? Both reasonably healthy with mid-to-late-80's longevity on both sides of family.
4. Suggestions on proposed portfolio AA now and upon start of retirement ?
5. Thoughts on paying off mortgage at expense of curtailing investments ?

[Peter Foley]

With your savings and a defined benefit pension you could certainly retire in 3.5 years. Retiring in March of 2020 would be pushing it. At a minimum I would wait for the youngest to graduate from college.

I would start with a great deal of simplification. One point you make is that if something happens to you then ???? Simplification would help greatly. The complexity of your actively managed accounts would likely force your wife to continue along that expensive path.

[BernardShakey]

Thanks Peter. Typo on my part, I meant "retire in March 2023" which is about 3.5 years from now. 2020 would be wishful thinking! Simplification does seem to be something I need to look at.

Anyone else out there have any advice on proposed AA in retirement and lump sum vs. annuity pension options ?

[abonder]

I’m not a pension vs. lump sum expert, but I would start by seeing what you would get monthly if you took the lump sum and purchased a SPIA. At least it will give you a sense of the pension value vs. the lump sum....doesn’t give you an answer, just part of the puzzle. Do you have any information about the health of the pension - funding levels, etc? This would help in the process of trying to decide lump sum vs monthly payment. I’ll leave the other questions to those better suited to weigh in.

[lakpr]

I have not run the numbers, but $835k lumpsum at age 60 seems attractive. I assume it can be rolled over into your IRA? Given that the pension is non-COLA, and assuming you earn a modest 4% real return on the lumpsum, you will have $1.5 million in today's dollars in 15 years ( $835k/$58k per year pension '= 14.4 years worth of pension being paid up front ). It also frees you up to plan your own withdrawals from the IRA, and avoid the Windfall Elimination Provision of SS.

I am not sure if it is possible to roll that lumpsum into your 401k plan? At least first to IRA then into your 401k plan, if it can be accomplished in the same month of your retirement? Since you are in CA, the worst state in the country when it comes to protecting IRA assets from creditors, and given that you are dependent on this for your living expenses, I advise you to shelter it via ERISA protections of a 401k plan. Perhaps take a temporary job at another employer that has a 401k and allows incoming rollovers from IRAs

[Stinky]

I’m not a pension vs. lump sum expert, but I would start by seeing what you would get monthly if you took the lump sum and purchased a SPIA. At least it will give you a sense of the pension value vs. the lump sum....doesn’t give you an answer, just part of the puzzle. Do you have any information about the health of the pension - funding levels, etc? This would help in the process of trying to decide lump sum vs monthly payment. I’ll leave the other questions to those better suited to weigh in.

+1

And, is the lump sum to be received in 2023 fixed, or will it be adjusted based on then-current interest rates?

If the lump sum is fixed, then OP should be hoping for an increase in interest rates between now and then, which will make monthly payouts from newly purchased SPIAs go up. In turn, that would allow him to take the lump sum and roll it into a SPIA that may be more attractive than the monthly payout from the pension plan.

[Mr.BB]

What is your yearly living expenses? That is half of your retirement equation.

[msk]

The question of lump sum vs pension comes up often. Just my experience from having been a member of the board of trustees of a pension fund at a Fortune 10 megacorp: Those options have been derived by experts at both investing and actuaries. The pension fund is totally agnostic as to what you go for. The only reason you should opt for one or the other should be on the basis that you and/or your spouse do not expect "average" longevity or you have serious doubts as to whether your megacorp is robust enough to survive the next few decades, or you perceive that the pension fund is grossly underfunded. Most people (non BHs) are awfully incapable at investing and will fail to match the returns that the pension fund is counting on. Yes, they also know all about indexing, but the pension funds are nevertheless still chasing slight out performance. They are all humans after all

[BernardShakey]

OP here...Appreciate the thoughtful comments. It's a scary prospect going from a solid paycheck and established career to drawing down one's life savings and relying on pensions and SS knowing you won't ever make that kind of money again. Looking back, the accumulation part has been the easier phase.

Pension is from a Fortune 100 company, little concern regarding long-term viability. We're reasonably healthy at the moment but have had our share of health scares over the years.

abonder, I will look into SPIA options. I suspect I won't be able to beat what the company is offering but will check.

Stinky, we no longer earn service credits, only a very small interest credit each year. The 835k payout is the value for 2023 draw date. If earlier, it'll be a little less, if later a little more. Seems simply based on the date of draw as I've observed that the projected value doesn't change as interest rates move.

lakpr, thanks for the insight regarding IRA protection. I believe I can roll pension to an IRA, not sure about 401k - will check.

Mr. BB, living expenses buried in my original post. "In today's dollars, after tax expenses in retirement are estimated at $9500/month for first 15 years. Maybe $8000/month later on."

Appreciate any further guidance...you folks are awesome

[Stinky]

Stinky, we no longer earn service credits, only a very small interest credit each year. The 835k payout is the value for 2023 draw date. If earlier, it'll be a little less, if later a little more. Seems simply based on the date of draw as I've observed that the projected value doesn't change as interest rates move.

Your comment makes sense.

My point is that, if interest rates go up between now and 2023, you will have two effects. One is that the $835k payout will be higher because of higher interest credits.

The second, and maybe more important, is that your $835+k payout may buy your more monthly income than it would today if you were 60, simply because insurance companies will make their SPIA payout rates more favorable due to the higher interest rates. You should at least check with an agent or a site like immediateannuities.com at that time to see how much monthly income you can buy with your payout, and compare it to what you can get from the pension plan.

[lakpr]

lakpr, thanks for the insight regarding IRA protection. I believe I can roll pension to an IRA, not sure about 401k - will check.

As I tried to mention in my original post, if you are not able to roll the pension amount into your 401k plan for now, that is ok. Roll to an IRA, then roll from IRA to a 401k plan. Your existing 401k plan might accept the incoming funds from an IRA, if you are still working at the same company. Or work at another job temporarily that offers 401k and accepts rollovers in from IRAs. Retire for real once that rollover is accomplished.

Lastly, if none of the above works, move to either Colorado or Ohio, about the best states in the nation when it comes to protecting IRA assets from creditors. Both have the strongest protections, about on par with ERISA.

Just do not leave the money within your IRA and stay in California. Cancel out either of those conditions: move the money out of IRA into a 401k, or you move out of California.

[BernardShakey]

Stinky, we no longer earn service credits, only a very small interest credit each year. The 835k payout is the value for 2023 draw date. If earlier, it'll be a little less, if later a little more. Seems simply based on the date of draw as I've observed that the projected value doesn't change as interest rates move.

Your comment makes sense.

My point is that, if interest rates go up between now and 2023, you will have two effects. One is that the $835k payout will be higher because of higher interest credits.

The second, and maybe more important, is that your $835+k payout may buy your more monthly income than it would today if you were 60, simply because insurance companies will make their SPIA payout rates more favorable due to the higher interest rates. You should at least check with an agent or a site like immediateannuities.com at that time to see how much monthly income you can buy with your payout, and compare it to what you can get from the pension plan.

Stinky, got it, thanks. At today's rate it would cost me about $1.05M to get the monthly amount the company is offering. In three years, the 835k might buy me more. Very good point, will revisit.

[BernardShakey]

lakpr, thanks for the insight regarding IRA protection. I believe I can roll pension to an IRA, not sure about 401k - will check.

As I tried to mention in my original post, if you are not able to roll the pension amount into your 401k plan for now, that is ok. Roll to an IRA, then roll from IRA to a 401k plan. Your existing 401k plan might accept the incoming funds from an IRA, if you are still working at the same company. Or work at another job temporarily that offers 401k and accepts rollovers in from IRAs. Retire for real once that rollover is accomplished.

Lastly, if none of the above works, move to either Colorado or Ohio, about the best states in the nation when it comes to protecting IRA assets from creditors. Both have the strongest protections, about on par with ERISA.

Just do not leave the money within your IRA and stay in California. Cancel out either of those conditions: move the money out of IRA into a 401k, or you move out of California.

Well lakpr, I love living in California so that rules out one of your conditions . I was not aware of the reduced IRA protections in California, and have always presumed my umbrella policy would be sufficient to protect my assets. Seems like having say a $2M umbrella for a few hundred bucks a year should be enough when one is in retirement and young drivers are on their own. Most BH's prefer IRA to 401k for investment flexibility, right ?

[lakpr]

Well lakpr, I love living in California so that rules out one of your conditions . I was not aware of the reduced IRA protections in California, and have always presumed my umbrella policy would be sufficient to protect my assets. Seems like having say a $2M umbrella for a few hundred bucks a year should be enough when one is in retirement and young drivers are on their own. Most BH's prefer IRA to 401k for investment flexibility, right ?

I can certainly relate to that I live in NJ, and seriously I can't imagine living anywhere else either, even though it's a high tax state. That said, the umbrella policy does help a great deal in protecting your assets, but I assume you are only one way that you can be sued (at-fault liabilities in auto accidents, or someone slipping and falling on your property, etc.). There could be other ways you could be held liable that umbrella insurance won't cover (not that these apply to you specifically ever; examples are intentional or unintentional bodily injury to others, crimes of passion, defamation, etc.

As to preferring IRAs instead of 401k ... I prefer 401k because the contributions don't even show up in the Wages box on W-2, and therefore preferable where something depends on AGI thresholds, but that's a discussion topic for another day