Funding Early Retirement

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Cyclist2
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Funding Early Retirement

Post by Cyclist2 »

With the new ACA subsidies my wife and I have decided to retire this year at age 62. We will delay drawing SS. Now I must decide how to fund this. We are fortunate to have retirement accounts and a brokerage account and no debt. We also each have 30 year old Whole LIfe Policies with a cash value of around $80,000 between the two policies. Each policy has just over $100,000 death benefit. We no longer need life insurance and are considering surrendering these policies for the cash to help fund retirement. If we do this we should be able to have enough funds for at least 2 years between this money and dividend income we receive from our brokerage account. We will have to pay income tax on the gains, which will be on about half of the amount. I figure we can surrender one policy this year and the other later next year.

Is this strategy reasonable? I’m sure it would be wiser to leave the insurance policies as is and draw additional income from our other accounts. I just think psychologically I will feel better not having to draw funds for our other investment accounts as long as possible.

Several years ago I realized that these policies were not a smart purchase. Since we kept them this long I think I will feel okay about this purchase if it helps fund our early retirement.
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David Jay
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Re: Funding Early Retirement

Post by David Jay »

Cyclist2 wrote: Tue Apr 13, 2021 8:31 pm...retire this year at age 62. We will delay drawing SS.
Have you used various tools (opensocialsecurity.com in particular) to evaluate this?

In the vast majority of cases for a married couple:
1. It makes sense for the spouse with the larger benefit to delay to age 70, as the larger benefit becomes the benefit amount for the survivor, regardless of which spouse passes.
2. It makes sense for the spouse with the smaller benefit to claim early as this provides some cash-flow for the intervening years, and because that benefit will "go away" earlier - when the first spouse passes. The reduced amount is collected for a much longer duration than the larger benefit from waiting when the lower-earning spouse's benefit will end sooner. That is the evaluation for the spouse with the lower benefit.
Last edited by David Jay on Wed Apr 14, 2021 7:18 am, edited 1 time in total.
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JoeRetire
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Re: Funding Early Retirement

Post by JoeRetire »

Cyclist2 wrote: Tue Apr 13, 2021 8:31 pm Is this strategy reasonable?
It's reasonable to get rid of insurance when it's not needed.
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hammockman
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Re: Funding Early Retirement

Post by hammockman »

It seems reasonable. As you're obviously aware you need to keep your taxable income in the "sweet range" to obtain max tax credits for how you file your taxes. My wife and I retired last year at 60 and had pre-planned to use after tax savings from our standard savings account for the next 4 yrs (so no taxable income) and do ROTH conversions to generate enough taxable income to get us above the poverty level for ACA and hit the sweet spot. So far so good ($247 mth for both) Any combination of after tax cash but with enough taxable to get above the poverty level is the aim here, just watch the taxable income level for how you estimated income or else you'll need to adjust your predicted taxable income for the credits during the year. There's an IRS form for this but the number escapes me at the moment
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AllMostThere
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Re: Funding Early Retirement

Post by AllMostThere »

David Jay wrote: Tue Apr 13, 2021 9:09 pm Have you used various tools (opensocialsecurity.com in particular) to evaluate this?

In the vast majority of cases for a married couple:
1. It makes sense for the spouse with the larger benefit to delay to age 70, as the larger benefit becomes the benefit amount for the survivor, regardless of which spouse passes.
2. It makes sense for the spouse with the smaller benefit to claim early as this provides some cash-flow for the intervening years, and because that benefit will "go away" earlier - when the first spouse passes. The reduced amount is collected for a much longer duration than the larger benefit from waiting when the lower-earning spouse's benefit will end sooner. That is the evaluation for the spouse with the lower benefit.
Wow! I have never seen anyone put this so simplistically. Makes total sense. DW and I are still years away from SS, but this is a good starting point with the analysis. Thanks.
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David Jay
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Re: Funding Early Retirement

Post by David Jay »

AllMostThere wrote: Wed Apr 14, 2021 8:02 am
David Jay wrote: Tue Apr 13, 2021 9:09 pm Have you used various tools (opensocialsecurity.com in particular) to evaluate this?

In the vast majority of cases for a married couple:
1. It makes sense for the spouse with the larger benefit to delay to age 70, as the larger benefit becomes the benefit amount for the survivor, regardless of which spouse passes.
2. It makes sense for the spouse with the smaller benefit to claim early as this provides some cash-flow for the intervening years, and because that benefit will "go away" earlier - when the first spouse passes. The reduced amount is collected for a much longer duration than the larger benefit from waiting when the lower-earning spouse's benefit will end sooner. That is the evaluation for the spouse with the lower benefit.
Wow! I have never seen anyone put this so simplistically. Makes total sense. DW and I are still years away from SS, but this is a good starting point with the analysis. Thanks.
A couple still needs to go through the evaluation, but I have not looked at a situation where it was optimal for both spouses to delay to 70 when both spouses worked in SS covered careers (WEP type situations are more complicated).
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Newby61
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Re: Funding Early Retirement

Post by Newby61 »

Thanks for starting this thread. It is reassuring to hear your thoughts and plans for funding the early retirement years and it sounds very reasonable. I plan to early retire next year at age 61. Like your situation, we have retirement accounts but we do not want to rely on 401K and IRAs by withdrawing over 1-2% annually until we reach age 65. I do not plan to start pension payments until age 65 and ss until 67-70 so we need another form of income during these gap years. Our goal is to leave the retirement accounts mostly untouched until age 65 to better ensure them lasting throughout our life expectancy at a 4%+ withdrawal level.

Our plan has been to have other sources of income to replicate my salary for the years leading up to age 65. In my case, I am planning on using a taxable account and deferred compensation payments in the early retirement years. I think your plan of using the cash value of the whole life policies as a 'paycheck' for the years leading up to traditional retirement age is a good idea. I do not believe life insurance is needed once you are FI. I also am happy to see the ACA income levels for subsidies moving up for the next couple years as I worry about managing income to the cliff as you start retirement. It sounds like you have good plan. Good luck and keep us posted of how it works out as you go from the planning phase to the implementation phase.
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Cyclist2
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Re: Funding Early Retirement

Post by Cyclist2 »

hammockman wrote: Wed Apr 14, 2021 6:01 am It seems reasonable. As you're obviously aware you need to keep your taxable income in the "sweet range" to obtain max tax credits for how you file your taxes. My wife and I retired last year at 60 and had pre-planned to use after tax savings from our standard savings account for the next 4 yrs (so no taxable income) and do ROTH conversions to generate enough taxable income to get us above the poverty level for ACA and hit the sweet spot. So far so good ($247 mth for both) Any combination of after tax cash but with enough taxable to get above the poverty level is the aim here, just watch the taxable income level for how you estimated income or else you'll need to adjust your predicted taxable income for the credits during the year. There's an IRS form for this but the number escapes me at the moment
With the latest Covid relief package there are not the limits on taxable income for the ACA for 2021 and 2022 as there were before. In the past we did not qualify for subsidies, but we do now with this new law. This is what helped us decide to retire early. I do like your planning and if these subsidies look like they will go away after 2022, then I will need to look at doing things differently to reduce our taxable income.
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Cyclist2
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Re: Funding Early Retirement

Post by Cyclist2 »

David Jay wrote: Tue Apr 13, 2021 9:09 pm
In the vast majority of cases for a married couple:
1. It makes sense for the spouse with the larger benefit to delay to age 70, as the larger benefit becomes the benefit amount for the survivor, regardless of which spouse passes.
2. It makes sense for the spouse with the smaller benefit to claim early as this provides some cash-flow for the intervening years, and because that benefit will "go away" earlier - when the first spouse passes. The reduced amount is collected for a much longer duration than the larger benefit from waiting when the lower-earning spouse's benefit will end sooner. That is the evaluation for the spouse with the lower benefit.
Yes, I am aware of this and appreciate you refreshing my memory about this. I know it makes sense to wait until 70 for the bigger benefit, but I just don't see us waiting until 70. We will definitely wait for our full retirement age of 66 years, 11 months for the higher benefit. It seems like a risk waiting until age 70 based on how long it would take to break even. I don't always do things that make the most sense and prefer going with what works best for me psychologically. Luckily I don't have to make that decision at this time.

We are just thrilled over the new ACA subsidies for the next 2 years. Just a couple of months ago we had no plans to retire this year, this just came up out of no where and was a game changer for us to retire early. Every friend and family member I have talked to about these new subsidies are totally unaware of this. We will both retire at the end of June this year when my wife's contract expires where she teaches. Both our employers are happy for us!
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David Jay
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Re: Funding Early Retirement

Post by David Jay »

Cyclist2 wrote: Wed Apr 14, 2021 8:31 pmLuckily I don't have to make that decision at this time.
Yup, and the benefit increases 8/12 of 1% every month after FRA, so just keep deferring until you can’t stand it anymore.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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Watty
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Re: Funding Early Retirement

Post by Watty »

David Jay wrote: Tue Apr 13, 2021 9:09 pm Have you used various tools (opensocialsecurity.com in particular) to evaluate this?
One nice thing about that website is that you can also use it to compare the optimal strategy to an alternative strategy to see what it calculates ad the difference in value.

For me the difference between the optimal strategy and starting at my full retirement age(FRA) was only about $23K. I will decide when I get there but I may start Social Security at my FRA because the difference is not all that big.

My Social Security is a lot higher than my wifes so when I start mine my wife will get more based on my earnings. My wife started her SS when she turned 62 based on her earnings history. One thing I did not realize was that once I reach my FRA that will determine the maximum amount that my wife will get as a spousal benefit based on my account. If I delay starting my SS until I am 70 I will get more but my wife would then get the same as if I started at my FRA but she will have missed out on over three years of getting the higher spousal benefit.
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