Retire early at the age of 48?
This is my second post as part of the chain about drawdown plan. This is a post started by Physician On Fire and taken and catapulted by Fritz at The Retirement Manifesto. There are now 13 people on the chain, and I will make lucky number 14.
My first post found here discussed retiring with a pension. This would require me to work until I am 60, which kind of sounds lame. So now it is off to discussing how I could retire by 48.
If you did not read my post found here, let me give you a quick recap. I am fortunate to work for a company that offers a pretty sweet pension. If I work until 60, then I get full early retirement, but what if I want to retire early.
Time to vesting
First off, it takes 10 years to be vested in our pension with payments being taken out at age 65. If I place 10 years of service, then I can expect a pension income of $57,000 at age 65. At minimum I want to be vested in my retirement before I retire. I would like to go to part time work (at 80%) as soon as I am vested in my 401k (at the 5 year mark), then ride out my career until I am at least vested in the pension.
Thus the earliest I expect to retire is 11 years (5 full years of work and then 80% work until age 48 when my son will be 13 years old. This will be 2028. Man that seems like a long time from now) and this age is what I will use for my calculations. So let’s go with an 11 year plan.
Planning for early retirement
I plan on being debt free at retirement. This means paying off my $170,000 student loans ($15,455 per year or $1,288 per month for 11 years if I choose not to do it sooner) and my mortgage.
My mortgage is a beast currently. If I do not retire early we can continue with the mortgage with no problem. At the 5 year mark we will have to reassess if we should downsize when I go to 80%. Then if I decide to retire at 11 years, we will definitely downsize. So let’s plan on no debt at the time of early retirement (very much a possibility).
I plan on having $100,000 in 529 plans for my son by age 10. I will then let this ride in a target fund until he is 18. This will cost me $10,000 a year or $833 a month).
Caveat: The below calculations are assuming today’s tax laws and do not take into account appreciation of my assets. Which also means it does not take into account depreciation of my assets.
Drawdown of retirement accounts
Current value of our Roth IRA contributions are at approximately $40K combined with an expected contribution of $11,000 combined per year x 11 years ($121,000). This gives me a total of $161,000 of just investments. Who knows how this will grow (or shrink, but hopefully grow) over the next 10 to 20 years, but that is the likely minimum. I suspect it will be closer to $218,000 at a 5% expected rate of return within 11 years and $349,000 by the time I am 59.5 years old if I don’t contribute any more after age 48. (FYI, I used Physician on Fire’s compound interest calculator to figure out these numbers.)
401K value at $130,293 with an expected contribution of $35,500 per year x 11 years ($390,500). This gives me a total of $520,793 which will hopefully increase to $708,367 by age 48 and $1,136,000 at a conservative 5% growth by the time I withdraw it at 59.5 years old if I don’t contribute anymore after age 48.
I will have maxed out Social Security payments for my entire physician career (16 years) and lot’s of contributions with various jobs before that. My wife will also have Social Security coming to her, but let’s leave that out for now. We can expect $3,600 money and will try and hold out to age 70 for withdrawal (though we can consider starting it as early as age 62 at $2,000).
I will be 48 years old at this point and have 11 years until I can touch my Roth account at 59.5 years old, 14 years until I get Social Security at age 62 (unless I can hold out until 70), and 17 years until I can take out money from my pension. There is also the 401K to access at age 59.5.
I calculate I will need approximately $60,000 post taxes and debt free for retirement. This is approximately $70,000 pre-tax (15% long term capital gains tax rate). If I count on the pension, then I need much less with only 11 years of spending. That is $770,000 that I will need in taxable accounts to get me from age 48 to age 59.5 when I can start withdrawing from my 401k awaiting for my pension and social security to kick in and finally use my IRA accounts. This possibility leaves less for post-retirement giving such as grandchildren’s 529 plans (if we have any as nothing in life is certain) or significant charitable giving.
So in total, that means over the next 11 years I need to put $1,288 to my student loans, $833 to my son’s 529 plan, and $916 between my wife and I’s IRA plans post- 401k contribution. We will also need to put an additional $5,833 a month in taxable accounts to reach $770,000 at age 48. So the total savings I need is $8,870 a month from now until 2028 to cover all of my retirement needs post taxes and 401K contributions. This is wild to see on paper but doable if we had a smaller mortgage.
Okay so finally for the DrawDown Strategy!
Here is my timeline assuming we are living on $60,000 a year post-taxes and all our debts are paid and 529 plan is maxed.
- Work from now full time until 2021 (age 41)
- Go to 80% in 2021 and work for 7 more years to 2028 (age 47)
- Retire and live off of taxable accounts from age 47 to 59.5.
- I will need to acquire a total of $770,000 in a taxable accounts to support a lifestyle of $60,000 without debt at a 15% long term capital gains tax bracket. That is $5,000 monthly budget. Seems a bit bare but with no debt it is very doable. I would also likely supplement this with locums work 1 month a year (so yes, not true retirement but always good to have a life vest).
- At age 59.5 my 401K is accessible for draw down valued at $1.13 million. Withdraw 60k a year until age 65. I will need $70,000 x 5 years for a total of $350,000 for this 5 year gap. I am already close to this mark and will be much higher if there is no crash in the system. Per my calculations I will have $780,000 left at age 65 without any capital gains growth.
- At age 65 my work pension will be available with an annual income of $57,000 taxed at a ordinary income rate leaving approximately $45,670 after taxes ( I would gain $2K annually by moving from California). To reach my $60,000 budget I will continue to use my 401K savings to supplement the $14,330. Per my calculations I have 54 years of 401k savings for this small supplement ($780,000 left at age 65 / $14,330 = 54).
- At age 70 begin taking Social Security ($3,600 a month) in addition to my pension ($4,750 a month) both pre-taxes.
- This will leave our two Roth IRAs which are growing tax free. How these will come into play has yet to be seen but I will leave them as the last bucket to partake in.
- Per these calculations the tough part will be age 48 to 59.5. After that I will have plenty of cash between my 401K, company pension, and social security to live a good life of between $5000 to $7,000 a month. The IRA will continue to grow without being touched and can be used for medical emergencies (long term care anyone) if needed or for charity and inheritance.
So this is all dreaming for now. Writing it out has been helpful though.
- I now see that going to 80% part time work in 2021 is very feasible and I should make this change at that time. Is their a financial benefit to staying at full time? Sure, but who wants to do that.
- If I work until 60, then my retirement is fully funded. I can easily live off of my pension and save a ton of cash.
- If I am serious about retiring in 11 years, then I need to begin saving $8,870 a month starting now. I will not be able to do this currently due to my mortgage, but with bonuses I can likely supplement this taxable account I will call “Retirement 2028”.
- Retirement and drawdown becomes much more complicated when you start discussing doing it early, but not impossible
- My Roth IRA is the last thing touched and left over on either drawdown plans for inheritance and charitable giving.
There you have it, another drawdown strategy. Two from me, but that is the reality I am facing. Stick with the golden handcuffs until 60 or try to fly the coup at 48.
Now for the chain thread:
- Anchor: Physician on Fire- Our drawdown plan in early retirement
- Catalyst: Fritz at The Retirement Manifesto- Our retirement investment drawdown strategy
- Othalafehu – Retirement Master Plan
- Plan Invest Escape – Planning for success: Drawdown versus wealth preservation in early retirement
- Freedom is Groovy- The Groovy drawdown strategy
- The Green Swan- The nastiest, hardest problem in finance: Decumulation
- My Curiosity Lab- Show me the money: My retirement drawdown plan
- The Financial Journeyman- Early retirement portfolio and plan
- Cracking Retirement- Our drawdown strategy
- Retire by 40- Our unusual early retirement withdrawal strategy
- Early Retirement Now- The ERN Family early retirement capital preservation
- 39 Months – Mr. 39 Months “Drawdown” Plan
- 7 Circles- Drawdown strategy- Joining the chain gang
- Ms. Liz Money Matters- How I’ll fund my retirement
- a. Dads Dollars Debts: DDD Drawdown Part 1: Living With a Pension
- b. Dads Dollars Debts: DDD Drawdown Part 2: Retire at 48?
Also published on Medium.