Warning - Long PostI've been lurking on this board for the last couple of months and I'm fascinated by the knowledge found here. I read "Your Money or Your Life" many years ago as well as "The Wealthy Barber" and others. I just finished "The Joy of Not Working" because the recommendations of this board. I really like the ideas presented here and wish they were available 30 years ago. I wouldn't be in the predicament I'm in. I have been reading the messages on this board from the beginning but have had to jump ahead because of the events of the past week. If I'm going over ground already covered, I apologize.BackgroundI'm a 53-year-old engineer who has generally LBMM although I haven't actively pursued RE. (Where was REHP, Intercst, Hocus, etc. back in 1974 when I needed them?) A divorce in 1992 de-railed plans to retire at age 56. A subsequent reassignment and salary reduction in 1993 further delayed retirement plans of any kind, much less the RE variety. In my locality, jobs in my specialty are scarce and, since I refused to move away from my school-aged children, I sucked it up and made do. I gradually worked my way back into good graces and am currently making about $75K which is pretty good for this area.2001Company fortunes have declined because of the bad economy and mismanagement at the top. We were told last week that a 20% reduction in workforce is required. We gray-beards meeting the company's 80 plan (age + years of service = 80) have been offered an "early out" package. Health insurance will continue in early retirement and funding of the ESOP will be guaranteed. About half of the required work force reduction could be accomplished if everyone took advantage of it. Of course, not everyone will. If I pass on the offer, I take my chances along with everyone else. At my age and salary level, I feel especially vulnerable.I have until May 16 to decide.The deal is further complicated by the fact that even though employment ends in May, only a small portion will be made available in August and the remainder will be paid in April of 2002. Since I will be 54 in April, I will have to put it all into an IRA and set up a SEPP to avoid the 10% penalty.BTW our retirement plan is an ESOP and not a 401k.In April I will have $614K in the ESOP. In addition I have and IRA with $50K and mutual funds and individual stocks of $75K. The expense side of the equations is as follows.I will have to get from June to April using my mutual funds and stocks.I have a mortgage payment of $730 (including taxes and insurance). I still pay child support on my 14 year old son. My two older children are in college on good scholarships.My retirement goal had been to have $5000/mo after tax. That would pay for traveling and finance other hobbies and interests. Some will say that's too much and some say not enough, but hey, it was a goal to shoot for.After the offer I met with my financial planner. She said that I could set up a SEPP for $56K/yr. This calculates to about $3500/mo after taxes. I can live on this if I cut out some of the frills. However, this is a far cry from the 4% safe withdrawal.She also suggested that I set up a home equity line of credit to act as a safety net to pay for expenses between now and April. She doesn't want me digging into my stocks right now.As I see it, I have the following options.Do nothing. Suck it up. Wait it out. Take my chances. Keep my job and ride this out. This seems like a dangerous strategy with too much downside potential and little upside potential. Company stock to fund the ESOP keeps going down.orTake the deal and try ER on $56K/yr. This doesn't seem sustainable but would give me the chance to evaluate ER.orTake the deal and take the time to find something better. I live in a university town and I'm qualified to teach on the undergraduate level. So "something better" doesn't have to be restricted to the kind of job I have. But it might be awhile before something turned up. Then I could continue on my path to a satisfactory, if not early, retirement.orTake the deal and a find a less challenging, albeit, lower paying job and supplement my income with a SEPP. I've already pursued this idea this weekend and think I've found an emergency backup job. This would lessen the need to drain savings until April but,long term,it jeopardizes satisfactory retirement.If there is anyone out there who has read this far, I congratulate you and would ask for your thoughts and advice.TRNT
TheRoadNotTaken writes,After the offer I met with my financial planner. She said that I could set up a SEPP for $56K/yr. This calculates to about $3500/mo after taxes. I can live on this if I cut out some of the frills. However, this is a far cry from the 4% safe withdrawal.Since you'll only be taking SEPP withdrawals for 6 or 7 years, a $56k withdrawal has little chance of depleting your IRA before age 59-1/2. However, the safe withdrawal research assumes a diversified portfolio (i.e., S&P500 index fund and cash or CDs). You obviously don't want to go into retirement holding too much (if any?) company stock.Do nothing. Suck it up. Wait it out. Take my chances. Keep my job and ride this out. This seems like a dangerous strategy with too much downside potential and little upside potential. Company stock to fund the ESOP keeps going down.I agree that this is a "dumb" alternative. When a company begins its last purge, it's best to reach for the top of the bowl and an escape before you get completely flushed down the toilet.intercst
I have until May 16 to decide.Whew, lots of choices. some points to keep in mindIf your ESOP plan puts company shares of stock in your account, you have the option when you leave to take the ESOP as stock. If you do not roll it over, you can take the shares of stock and pay regular income tax on the price the company paid for the shares when they were purchased. If you have highly appreciated shares, you can get them for a fraction of what the market value is (by paying tax only on the actual purchase price), keep them a year, and then sell them, paying cap gains tax on the additional gain. If you roll them over into an IRA, you instantly lose that benefit, and pay regular income tax on the entire amount!IF it is an ESOP plan, at age 55, you can move, by federal law, 25% of the ESOP into something other than company stock. In many companies, you can leave part/all of your ESOP stock in the employee plan, sometimes forever, sometimes for 5 years, which might get you to 59.5, which would eliminate the extra 10% penalty in taking the ESOP stock as stock.If you get 'laid off', or accept voluntary layoff, most states will give you unemployment. Won't provide $3500/month, but helps defer biting into nest egg. I'd really really try hard not to hit more than 4% withdrawal rate....working as college prof (even part time) might go a long way to helping out. Would the kids want to go there (maybe discount/free tuition if you teach???)? If you get health coverage as part of layoff package, that may be tough deal to turn down. If you had to provide on your own, can be very expesive as you have probably have read. For family, maybe $5000-8000/yr in benefit.
I'd tend toward the proactive approach "reach for the top of the bowl" as intercst so eloquently put it <g>.The SEPP issue raises a point I've been struggling with regarding the size of the distributions. Whilst conventional wisdom says 4 - 5 % is effectively good for ever, I would think a slightly higher rate (during the SEPP time) would be OK for someone in their 50s, but how much higher ? After all the idea is to RE but not damage the longer term outlook by drawing too much too soon. I'm thinking 6 or possibly even 7.0 ought to be OK for five years- but I haven't had the guts to do it yet !!Regarding your adviser's $56K/yr plan, was this because you'd said you were aiming for $60K and this was as close as she could reasonably get, probably using the annuity factor method ?Whatever you decide, the best of luck to you.p.
Regarding your adviser's $56K/yr plan, was this because you'd said you were aiming for $60K and this was as close as she could reasonably get, probably using the annuity factor method ?It all comes down to *** after tax *** income. You need to figure out what your after tax income has to be....there won't be any FICA or FICA2 right off the bat. Then you need to figure out what income tax bracket you will be in (using TaxCut or similar computer program will help you figure out your typical scenarios easily using your typical deductions), and reverse engineer what your current and 'in retirement' after tax income has to be. You can be off by 15 or 20% if you don't take tax considerations into account.Other things to watch out for...do you have mutual funds in taxable accounts and do they pay big cap gains distributions? (you need to figure on paying that 'income tax' too even though you might not take money from the mutual fund). Do you have CDs/Bonds in taxable accounts paying interest (which you might be rolling over)? You will have 'income tax' on that to pay, too. Where does your 'income' come from? You need to figure out whether you will be paying cap gains tax (selling stocks/funds) or taking from 401K/IRA and paying regular tax rates on it. 6-7% for a few years, depending upon what the market does, can be "OK" or really hurt. I think Peter Lynch proposed you can take somewhere around 8-9% of your nest egg (in stock) forever....he was shot down - that scenario falls apart. If I were in your shoes, I would first of all move at least five years living expenses(56K/yr) into guaranteed return instruments (ie, CD ladder or bond ladder). Or 6 or 7 years if that is what your bridge would be. Subtract that money from your 'nest egg'. It really is outside the nest egg if you need it within 5 years. I would then run retirement scenarios using the rest of the nest egg, starting in 6-7 years when it will provide income for the entire rest of your life. For example, if you had 1 million total, I would take out 6x56K immediately (and put into CDs maturing each year needed). That is 336K, or if you count the interest, maybe 300K you subtract from nest egg. Then run retirement scenarios based upon the 700K remaining in your nest egg. Also, if you have college expenses/wedding expenses etc budgeted and expect them to total tens of thousands of dollars (and not out of current income), then that money also needs to come out of the retirement fund. Of course, the good news should be that in 7 years your nest egg should grow. The planners let you pick your retirement year ,so that should work fine - after you set aside your 6-7 years, just tell the planners you will retire in 7 years based upon the remainer of the nest egg. The planners of the web allow you to put in the extraordinary expenses (wedding, college, etc) in many cases, so you can plan them.
If there is anyone out there who has read this far, I congratulate you and would ask for your thoughts and advice.Carefully verify whether any part of your ESOP contains after-tax contributions. If so, you can get those back when you leave without tax consequence.It sounds like your company might be circling the drain, so you'll want out of any company stock you hold ASAP.Understand that you can split your IRA into multiple IRAs and begin SEPPs on just one of them. This allows you to keep the others in reserve to supplement your income when needed. Maybe take half of $56K via SEPPs from a half-sized IRA and try to live on that for a while.Review all your assumptions. Do you need to stay in your current house? Your house might be a cash cow if it is larger than you need or in a high status neighborhood.Your monthly budget is more than twice mine and I am happily RE'd. Separate it into discretionary and non-discretionary. Avoid the dicretionary expenses until you raise your confidence with either other employment or an improved financial picture.If it were me, I would take the deal and try cutting expenses before looking for work.1HappyFool
Take the deal. If you don't, later on the "deal" may get much much worse. You sound very smart and will find something else you like.
Getting paid to retire early sounds GREAT to me. See if they will sweeten the offer any. I would take it for sure. Then hustle for a new job. I bet that within a couple years when the economy improves a bit (And it really isn't that bad now) that you will end up with a better job than you have now and will be able to keep all that they gave you. Try hiring yourself back to the same company as a consultant. Laugh that they paid you to leave and then paid you MORE to come back. Or be a consultant somewhere else. Hustle it up and you will clean up. With what they are giving you, you can get by without working so you can be selective when you look for work. Have an attitude. You have tons of experience to back it up. You should easily be able to get 125 to 150 an hour as a consultant if you are willing to push for it and turn away work that isn't as good. If you work 1000 hours a year at that rate (on average) you will still be better off than you are now. Good luck to you!
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