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June 27, 2014


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I've been giving this lots of thought lately, as I am about 7 years from retirement. I'm ignoring social security and pension income, because I will use this for my fun money - travel and gifts. I'm hoping we can live on $48,000 after tax, which means we need a pre-tax income of $60,0000 or 1.2 million investment portfolio.

I like the "simple number" as a guide to bracket what you're looking at, a good tool to give you a ballpark estimate.

One thing you mentioned and I'm wondering about is what you mean by "retirement healthcare"? Health care is out there for individuals and families not covered by an employer, was there before Obama and is there now. It may be more expensive, especially if you're covering kids, than a typical company plan, but it's there. Also, I'm not certain if you work part time with a lot of companies that they are likely to help with healthcare, but that's something you can probably negotiate.

I'm also wondering why you're so quickly discounting the "equal payments" from the 401K's and IRA's. If they lose value, but you've got a good means of minimizing taxes on the withdrawl or it lets you gain substantially in other financial areas such that your overall cash flow or future worth get better, why not?

My point is sometimes we focus too much on not touching principal, even though it may be the better solution in the long run if you look at the big picture. A simple example may be taking more from an IRA up front early in retirement to gain a delay in SS to allow for a bigger payout and taking out significantly less from the IRA later, to the point that it can grow substantially. Nothing wrong with deciding you like your preference better, it's your own money after all, but at least you're aware of it and can make the choice.

getagrip --

1. I mean that the healthcare is expensive, or so I think. Haven't explored it yet. Good thought on asking companies to fund it if I work part time.

2. Equal payments locks you into just that, EQUAL payments, right? I usually tend to want more flexibility than a structured plan offers.

You may already be aware of this, this link talks about accessing 401k funds penalty free at 55

It's easy to discount the need for medicare when you are young (i.e. under 65) and feel very healthy. However there are many people that develop serious health issues before they reach medicare age and they may be shocked when they find out the cost of surgeries, consulting with specialists, and the need to purchase some of the medications that do not have generic equivalents.

Often the ability to be able to afford expensive drugs, doctors, hospital stays, expensive surgeries and tests can have a profound effect upon one's longevity.

My wife who is 81 was recently prescribed a very new drug and I was shocked when I looked up its retail cost. However her doctor told her that if it was approved by Medicare the price would be very reasonable. It was quickly approved and her price is only $50 for a 3 month supply through United Healthcare's mail order supplier.

The generic alternative to this new drug is an inexpensive one that has been around for a very long time but requires a monthly visit to the lab for readjustment of the dosage.

When I retired at 52 and my wife at 54 I never realized that being under Medicare was such a great advantage. However when you are young you tend to think you are so healthy you are never going to have any major problems. I haven't, but my wife has needed 5 serious surgeries since retiring but they all had great outcomes. All I have needed have been two lens implants for cataracts that have given me far better vision than I ever had as a child.

Young Limey --

That's for company plans only, correct? Most of my retirement funds are in IRAs (I've rolled several 401ks into one IRA).

On the issue of health care, the best answer to me is to max out your HSA every year and never withdrawal from it prior to retirement. The HSA has a "triple tax benefit" (deductible going in, sheltered as it grows, tax-free coming out), so for these reasons, it is my favorite investment vehicle. I am lucky that my employer's custodian lets us invest our HSA (above a small cash threshold) in equities and mine has done well over the past few years. If your employer doesn't offer a good HSA, then I propose you ask them to provide one. When you retire early, you can purchase your own low cost, high deductible insurance with an HSA and if you have a catastrophic event, you'll be better than fine.

FMF, yes that's what it looks like. Perhaps there would be opportunity with your current 401k at your new employer, assuming you stay with them until 55 and leave the company.
Once it's rolled over in an IRA, it looks like it's not an option.

What I don't see here (explicitly, anyway) is provision for unevenness of cash flow. That is (as I'm sure you know), even if you get an average return of 8% over retirement, you are very unlikely to be getting 8% each and every year. Indeed, the volatility in your yearly income is likely to be considerable. If your plan is based on getting the full average return every year (which it seems to be), how do you manage without tapping into your principal if you have some low-return years early on?

This question is of particular interest to me as my mom approaches retirement (with, let's say, rather fewer assets than you have) and I'm trying to figure out how to cushion her from drops in income as much as possible.

I'd like to see a whole post covering Sarah's question. That's of interest to me, too. I know bonds can help a lot with that, but 8% is not a realistic return, so other vehicles have to be considered ...

RE: Young Limey -- IRS Publication 590 lists some exceptions to IRA withdrawals that will not incur the 10% early withdrawal penalty before age 59-1/2. One of them involves "annuitizing the IRA." Of course, withdrawals will be taxable. The following came from Pub. 590 ( ) under "When Can You Withdraw or Use Assets?", then "Exceptions", then "Annuity"

¶ Annuity - You can receive distributions from your traditional IRA that are part of a series of substantially equal payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary, without having to pay the 10% additional tax, even if you receive such distributions before you are age 59-1/2.

You must use an IRS-approved distribution method and you must take at least one distribution annually for this exception to apply. The “required minimum distribution method,” when used for this purpose, results in the exact amount required to be distributed, not the minimum amount.

There are two other IRS-approved distribution methods that you can use. They are generally referred to as the “fixed amortization method” and the “fixed annuitization method.” These two methods are not discussed in this publication because they are more complex and generally require professional assistance. For information on these methods, see Revenue Ruling 2002-62, which is on page 710 of Internal Revenue Bulletin 2002-42 at ¶

The following came from a article in 2005 -- Once the annuity-like withdrawals start, you must stick with it for at least 5 years, or until you reach age 59-1/2 (whichever comes later). NOTE: If you have several retirement plan accounts, you need not annuitize them all. Instead, you can annuitize one or more accounts for enough annual annuity-like withdrawals to cover living expenses. You can leave all your other retirement accounts untouched to preserve or maximize their tax advantages.

Sarah --

I manage that issue by having a good margin of safety, so even in the worst case scenario, I still have enough income to cover my needs.

This post might give you some more insight into the margin of safety issue:

This assumes you would have the entire amount invested, right? i.e. in the first example to get $96,000 return (8%) you need 1.2 mil invested. I'd say that's not wise and so your retirement number should be higher so that you truly don't have to dip in to your principal in a pinch or if the market is down. The formula should probably be:

((Retirement Income Needs - Social Security and Pension Income) / Investment Return after Inflation) + 3 year emergency fund = Simple Retirement Number

Retirement Income Needs = $100,000
Social Security Income = $20,000
Pension Income = $20,000
Investment Return = 8%
Inflation = 3%
Emergency Cash = $300,000 (3 yrs expenses)

Simple retirement number = $1.5 million

FMF, re: age 55 for 401(k) withdrawal. This was a consideration for me at one point, and the workaround is to keep all IRA Rollover money segregated. Any big fund family has a code designation and it is in the title of the account (i.e. you can have an IRA for Total Stock Market, and an IRA-Rollover for Total Stock Market with the same fund; they have different account numbers). Most 401(k) plans allow fund transfers and IRA conversions if they are administrated by a larger fund family. If not, you can always ask HR to work on making that option available.

In any event, if you get close to 55 (or have enough after-tax money to tide you over until 55) you may consider this strategy.

Great responses from everyone......One big assumption that Old Limey mentioned since he has been living the dream is that Medicare comes to great use with the unknowns. For folks like me who are NOT retired but considering it, I am not sure what my expenses are going to be like.

So, I am doing everything I can to generate wealth, but I am giving more importance to getting my Virtual Age lowered as much as I can, to tolerate the damages that come from older organs.

Simply speaking, getting all thresholds below the required levels, including some tough ones like TC/HDL, Height to Waist Ratios, BMI under 21 etc.

Retirement number crunching is something I have been doing for 10 years, and the assumptions in each of the models varies, but all of them point to 50% to 80% of the pre-retirement expense. And, as Old Limey might say, if all debt is paid off, and the balances in the banks are decent, then the total expense after retirement is not that high, with the wild card (looking forward) being Inflation and Health Care. In my case, I have two kids in the University, and I want to get them married and buy them a home (with my down payment $). So, I have a bit more than normal, but those are one time hits.

So, finally, I devised my own simple spreadsheet like the one FMF mentioned, and separated out my One Time Expenses for 20 years (approx) and On Going Expenses for 20 years (approx), and came up with $2M as the number required at a decent 6% before tax return.

I added fudge factor for Medicare, and Inflation, and it moved to $2.4M.

So, there you have the bottom line results, but I would advice everyone to come up with your own spreadsheet with simple math and see how your numbers work out.


You are right on about placing a very high priority on one's personal health. However the absolutely most important factor in one's health occurs at the time you were conceived, i.e. it's genetic.

In my own case it's clear to me that I inherited almost all of my genetic qualities from my father and fortunately hardly any that I know of from my mother. My father's brothers were all very healthy except for one that was a heavy smoker and died as a young man leaving behind a wife and children.

There's also so much more knowledge available now than in my father's time and with modern medicine available it's much easier to have regular checkups to ensure that all of your important health parameters are where they should be. Other than quite a few nutritional supplements I take three pills daily, to lower cholesterol, lower blood pressure, and boost thyroid level. My wife and I are also very healthy eaters and avoid many foods completely as well as all hard liquor. We also do all we can to avoid processed food that is high in saturated fat and sugar.

The availability and access to high quality healthcare is far superior in this country to most of the world, and is especially good in most of America's big cities that have top notch universities with medical schools.

Year round climate also plays a role in one's health, there are many areas that I would not choose to live in because of various climatic problems such as tornadoes and high humidity to name just a couple.

You can also tap your 401 early without penalty by doing the IRA/Roth IRA conversion ladder. I think Mad Fientist has a detailed explanation. Check it out. You do need 5 years of living expenses before accessing your conversion, though.

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