Please sanity check my retirement plan

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Topic Author
tallgrass
Posts: 3
Joined: Wed Apr 07, 2021 10:59 am

Please sanity check my retirement plan

Post by tallgrass »

First of all, thank you to all the contributors to this forum. I started following boglehead investing principles in the early 2000's and used to frequent the old Vanguard Diehards forum on Morningstar. I've been a reader of this forum for many years and have always found wonderful advice to any financial or investing questions I've had using the search function. This time however, I have a specific question regarding my personal situation and would appreciate any advice on my pending retirement plans, so I'm creating my first post. :D

Here is our situation:

Emergency funds: Six months of expenses. Not included in total below.

Debt: Car loan at 0% interest will be paid off in September 2021.

Tax Filing Status: Married Filing Jointly

Tax Rate: current 22% Federal, after retirement 12% Federal.

Age: 53
Spouse Age: 54

Current Asset allocation: 60% stocks / 40% bonds
Current International allocation: 35% of stocks

Total Portfolio size: $1.33m

My 401k:
Target Date 2065 (93% equity/7% fixed): $675k
Stable Value fund: $351k
(I will consolidate to an appropriate TD fund, but right now stable value is paying 3% so utilizing it until the interest rate falls on it.)

My Roth:
Fidelity Freedom Index 2030: $106k

Spouse Roth:
Fidelity Freedom Index 2030: $68k

HSA:
Vanguard total US: $39k
Cash: $10k

Taxable:
Fidelity Total Market Index: $15k
Bank/CD: $80k

Company pension: $8k/yr at 65. No inflation adjustment.

My SS at age 67 if I quite working now: $34k/yr
Spousal benefit at 68: $17k/yr

Home Equity: $220k No mortgage.

Contributions

New Contributions until 2022
$19.5k my 401k
$15k taxable

Current Expenses: $52k/yr (before taxes)
Desired Retirement Expenses: $55k/yr (before taxes)

I am planning to retire in early 2022 at age 54. I will be 55 in late 2022, so plan on using rule of 55 to access company 401k.

Total portfolio is about $1.33m. Plan to save another 35k before retiring. I'm not especially looking to reallocate assets or choose different funds, although I'm open to suggestions. I've more or less settled on target date funds for the simplicity. We will aim to keep about 60% equity, switching funds as needed. We may start gradually decreasing equity to 40% equity or so once we get closer to age 70.

Our current expenses are about $52k/yr. I'm estimating $55k/yr in retirement to allow for some extra unplanned medical expenses each year. I expect to use a marketplace plan with tax subsidy for health insurance until Medicare is available.

Once SS and my small pension kick in, I think most of our expenses will be covered by those. Our plan is to take social security when I am 67/spouse 68.

I've run our plan through several of the online calculators (firecalc, etc) and those indicate a high success rate (90%+). We do have some spending flexibility to temporarily reduce spending by 3-4k/yr if stocks have a big pullback. Worst case, we are both open to a part time job or whatever, but I'd rather not go in having that be a requirement. :D

Questions:
1. Does this seem like a sound plan? Are we on track for early retirement in 2022?
2. What am I not considering?
lakpr
Posts: 7311
Joined: Fri Mar 18, 2011 9:59 am

Re: Please sanity check my retirement plan

Post by lakpr »

Please check your 401k plan Summary Plan Description very carefully. It could be that the "Rule of 55" means you should retire from the company after you ACTUALLY attain the age of 55, not earlier in the year that you do turn 55. You would not want your retirement plans thrown for a loop and the money inaccessible until age 59.5 without penalties (or resorting to SEPP Withdrawals arrangement)
KlangFool
Posts: 20064
Joined: Sat Oct 11, 2008 12:35 pm

Re: Please sanity check my retirement plan

Post by KlangFool »

OP,

A) You may or may not want to use the Rule of 55. The reason is some employer may only allow one lump sum withdrawal.

B) I do not see a reason why you want to use the Rule of 55. It is better and more flexible to rollover the 401K to IRA and do Roth Conversion.

C) To bridge the gap, you can spend taxable account and Roth IRA contribution.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Topic Author
tallgrass
Posts: 3
Joined: Wed Apr 07, 2021 10:59 am

Re: Please sanity check my retirement plan

Post by tallgrass »

lakpr wrote: Wed Apr 07, 2021 1:03 pm Please check your 401k plan Summary Plan Description very carefully. It could be that the "Rule of 55" means you should retire from the company after you ACTUALLY attain the age of 55, not earlier in the year that you do turn 55.
Ok, this is a good catch. I'm pretty sure the IRS definition says, you can do it in the calendar year you turn 55, but I haven't looked to see if my 401k has a different requirement.
KlangFool wrote: Wed Apr 07, 2021 1:11 pm OP,

A) You may or may not want to use the Rule of 55. The reason is some employer may only allow one lump sum withdrawal.

B) I do not see a reason why you want to use the Rule of 55. It is better and more flexible to rollover the 401K to IRA and do Roth Conversion.

C) To bridge the gap, you can spend taxable account and Roth IRA contribution.

KlangFool
I was thinking rule of 55 because I don't quite have enough between my taxable and Roth contributions for 5 years of living expenses until the Roth conversions are available. (Plus I'd be 59.5 after those 5 years anyway, so everything is available at that point). I verified with employer that they don't require a lump sum.
KlangFool
Posts: 20064
Joined: Sat Oct 11, 2008 12:35 pm

Re: Please sanity check my retirement plan

Post by KlangFool »

tallgrass wrote: Wed Apr 07, 2021 1:38 pm
I was thinking rule of 55 because I don't quite have enough between my taxable and Roth contributions for 5 years of living expenses until the Roth conversions are available. (Plus I'd be 59.5 after those 5 years anyway, so everything is available at that point). I verified with employer that they don't require a lump sum.
tallgrass,

One of the option to bridge the gap is to take a home equity loan. And, that option does not generate income that may affect your ACA subsidy.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
backpacker61
Posts: 625
Joined: Wed May 20, 2020 6:36 am

Re: Please sanity check my retirement plan

Post by backpacker61 »

tallgrass wrote: Wed Apr 07, 2021 11:22 am 2. What am I not considering?
Have you considered if one or both of you require assisted living/skilled nursing care at some point?
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
Topic Author
tallgrass
Posts: 3
Joined: Wed Apr 07, 2021 10:59 am

Re: Please sanity check my retirement plan

Post by tallgrass »

backpacker61 wrote: Wed Apr 07, 2021 5:10 pm Have you considered if one or both of you require assisted living/skilled nursing care at some point?
My stepmother is in memory care, so yeah, that's something I've considered and I don't have a perfect answer. When I've run my simulations with firecalc and other tools, I've factored in an extra $50k/yr for 2 years for a long term care situation when we're in our 80's. Those scenarios still work with a high success rate.

I realize costs could run longer than 2 years, and they could easily exceed $50k, but it does give us a little extra to work with if needed. I think I could work another 10 years and still not have enough to cover all contingencies with healthcare, so it's hard to have a full proof solution.
KlangFool wrote: Wed Apr 07, 2021 4:34 pm tallgrass,

One of the option to bridge the gap is to take a home equity loan. And, that option does not generate income that may affect your ACA subsidy.

KlangFool
I have thought of the home equity loan, but wasn't sure if I wanted to pay the interest.

Is there something inherently bad about Rule of 55 withdrawals that maybe I've misunderstood? To be clear, I'm not planning to do a SEPP where you're locked into a fixed withdrawal amount for 5 years or until 59.5. I thought rule of 55 allowed you to withdraw from your current employer's 401k without penalty, essentially just like you were age 59.5.

Thanks everyone for the feedback so far.
KlangFool
Posts: 20064
Joined: Sat Oct 11, 2008 12:35 pm

Re: Please sanity check my retirement plan

Post by KlangFool »

tallgrass wrote: Wed Apr 07, 2021 6:15 pm
I have thought of the home equity loan, but wasn't sure if I wanted to pay the interest.

Is there something inherently bad about Rule of 55 withdrawals that maybe I've misunderstood?
tallgrass,

<<I have thought of the home equity loan, but wasn't sure if I wanted to pay the interest.>>

You don't have to use it. It is a backup/ Emergency fund.

<<Is there something inherently bad about Rule of 55 withdrawals that maybe I've misunderstood? >>

The 401K withdrawal = taxable income. What if you have an emergency that require you to spend extra 20K? Do you want to withdraw extra 20K plus losing your ACA subsidy for the year? That extra 20K will cost you 10K of ACA subsidy.

If you have a home equity loan, you can borrow 20K for one year. That is cheaper than losing the ACA subsidy. That loan generates ZERO taxable income.

I do not have your problem. I keep 3 years of expense in my emergency fund, 7 years of expense in the taxable account, and 4 years of expense in Roth IRA contribution. I have plenty of money to bridge the gap.

KlangFool
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