Personal Investments • Re: Retirement plan checkin

I am 53, wife is 55 ... we plan to quit our current jobs in 4 years once I qualify for the federal pension and health insurance.

Annual expenses are $100k once we pay off a car and house and finish supporting last of three children in college in next couple years.

We have saved $1,350,000 in tax deferred accounts... My SS will be $27,000 at 62, and wife’s will be $11,000 at 62. I will have a pension of $18,000 if I retire at age 57.

We plan to draw in excess of 4% from tax deferred accounts until each of our SS kicks in, then 4% after that time.

It was all looking reasonable until I saw the part highlighted in red. There are two significant issues with your portfolio withdrawal plan.
1) The 4% rule is predicated on a 30y withdrawal phase (retire at 65, insolvent or die by 95)
- Retiring at 57 means a 38y withdrawal phase so the 4% Trinity Study SWR is reduced to 3.5%

2) If you withdraw more than 4% early in the sequence you have to draw less than 4% once your bridge to another income source is achieved
- If you draw more than 3.5% before SS, then you probably need to draw less than 3.5% after SS kicks in, or you portfolio survival would be <90% (typical risk acceptance level)

Additionally, you should verify the expenses with @KlangFool's formula:
Annual Expenses = Gross Income - Taxes (1040, Line 24) - Annual Savings

Now having given the "doom and gloom" warnings, let's see what likelihoods are associated with your current plan. You didn't say how your TSP and her Trad 401k are invested (asset allocation among stocks & bonds), so I'm going to assume 60/40 just for an initial analysis. You also didn't mention your contribution levels for the next 4 years, so let's assume the max of $30.5K/yr for both of your Tax-Deferred plans with an additional $8K/yr to both of your Roth IRAs (you didn't mention these, but you should absolutely be putting this amount away towards them either direct or by Backdoor Roth Contribution). Let's also assume your contributions increase by +3%/yr for wage increases/inflation. Under those assumptions your $1,350K grows to something like this:

End-BalPercentile
$1,607.9K 5th
$1,950.7K 25th
$2,248.4K 50th
$2,551.6K 75th
$3,146.5K 95th

An image of the Accumulation Monte Carlo I ran is below.


We'll use the 5th percentile outcome as a conservative balance-at-retirement (95% chance of a higher balance) for starting the Withdrawal Model.
You didn't quantify "how much in excess of 4% until SS kicks in", but let's assume you need $100K/yr expenses adjusted for +3%/yr inflation over 4 years less the pension of $18K/yr (also adjusted upwards), so the initial draw is $93.3K (5.74%). The 4% initial draw would have been $64,320 in year-1 and $74,565 in year-6, so that's the "drop-back" value when SS kicks in at age 62 per your plan (technically you could drop back further because of the SocSec income, but your plan called for a drop to 4%). Your plan as is seems to have a high chance of failure, since the success rate for the portfolio not running out early is typically desired to be >90% but your plan is 78.2±1.3% (a failure chance near 22%). That might be acceptable for your risk-tolerance if you think 10% chance of failure is too conservative.

An image of the Withdrawal Monte Carlo I ran is below.


Now if you draw less than that 4% number, say an offset by the inflation-adjusted SS amount of $38K at year 6 (an offset of $45,374), then your success rate increases to 87.7±1.0% (a failure chance near 12%). That seems much more acceptable.



If you have an Excel license and are interested in playing with these models, the links are below along with others I like that have public-facing website interfaces (no Excel required).

Data and Models I use for Monte Carlo:
NYU Data Set 1928-2017 with Model Fits
Accumulation Monte Carlo
Withdrawal Monte Carlo

You'll need a MS Excel license; download to your local machine and enable macros (required for the 1,000 random trials and results aggregation).

I'm using my own model as I like to know what's under the hood, but there are other models I like that have public facing website interfaces:
Portfolio Visualizer's Monte Carlo (with distribution modeling rather than the historical returns array),
FiCalc (easy interface, but only historical data array),
TPAW (historical data, but adjusted to avoid limitations of a random index into the historical array),
and many others here seem to like FireCalc (also historical data, but lots more inputs to tailor to your situation).

I don't care for a random index into the historical array of returns, compared to distribution modeling, as noted in this thread HERE.

We each have high stress jobs and want to try out not working for a year focusing for the first time on our non work activities, mountain biking, skiing, hiking and visiting our adult children more. We would consider seasonal or part time work after that first year until we can each claim SS. We plan to sell house in CA and buy a home in NV where cost of living is a little lower. We just wanted to check in with the collective wisdom of this forum and see what folks have to say? Thanks

My Fed job was never constant high-stress, but it did have spikes and I think I did more business traveled in the last 3 years before retiring, than in the prior 35 years combined. If you don't hate what you do and would just like less stress, consider a part-time consulting effort with a contractor your current gov't office is already working with. I went from 40-50 hr/wk to 18 hr/wk (6 hr/d Tue-Thu) with zero managerial responsibility and my former code was only too happy to arrange that so they would not completely lose my expertise (that amazingly they still very much wan 6y later).

Alternatively, you could "do something completely different" a few days a week, but still earn some income to ease the draw on your portfolio until SS kicks in.

Statistics: Posted by Jeepguy — Mon Jun 03, 2024 10:13 pm