We’ve Got $2 Million In Our 401(k), and $120k Per Year in Guaranteed Income. Is Retirement realistic?

The topic of FIRE (Financial Independence Retire Early) and fatFIRE (FIRE with a high 7-8 figure nest egg) has become increasingly popular of late, especially as Gen-X enters its 50’s and the tail end of the Baby Boomer generation enters retirement. Aggressive savings and investment, prudent thrift, and proactive investment portfolio management are some of the hallmarks of fatFIRE adherents. 

A previous article published in 24/7 Wall Street touched upon those who are pursuing a fatFIRE agenda that also have the benefit of a substantial lifetime pension. While a pension can help make a fatFIRE strategy become a reality much sooner, there is a litany of other concerns and expenses that also must be taken into consideration when planning for an earlier and longer retirement.

HowRetirement Math Changes With a Pension

As per the previous article, the mid 50s aged fatFIRE couple in question had the following assets already:

• $2.5 million in a brokerage account
• $2 million in a 401-K account
• A lifetime $120,000 pension with COLA (Cost Of Living Adjustments).

Provided that $120,000 was going to be more than sufficient for the lifestyle the couple were planning to have post-retirement, there were a number of timeline and strategy changes that they would likely need to account for, such as:

• Portfolio Growth: The luxury to diversify the portfolio towards a longer timeline growth trajectory, since drawdown requirements could be delayed by design – paying attention to market trends and other growth opportunities should be a higher priority, since switching to an income focus can be put off for the next 2 decades or possibly more.
• Roth Conversion for 401-K Account: Flexibility in choosing the timing on a Roth conversion of the 401-K account. 
• Asset Diversification: Build sufficient fatFIRE growth to reach $10 million, at which point diversification into real estate or other steady income assets might be a more prudent step to take.
• Insurance: As retirement would be starting roughly 10 years earlier, a recalculation of expenses for Health Saving Accounts, and additional insurance premiums for life insurance, property insurance, medical insurance (unless employer pension compensation includes medical coverage), as required. 
• Estate Management:  Estate management topics, depending if the couple has children or grandchildren, should be addressed, especially if the couple plans to do a larger degree of foreign travel, which increases their risks, especially if travelling together. 

Navigating Taxes

Income taxes are an obvious concern for any couple relying on passive income and how other factors can unexpectedly bump them into a higher tax bracket that can eat into their cash flows and annual income.

• Social Security and Medicare: Although the couple should certainly apply for Social Security and Medicare once they meet eligibility requirements, gauging when to file for benefits will lock in the amount for life, which is higher each year one delays from age 62 to age 67 by roughly 8% each year. Therefore one should calculate the math to determine what impact, if any, that Social Security will have on a declared tax bracket for federal income taxes.
• Tax Management Strategies: Keeping portfolios more focused on growth for a longer duration may necessitate the deployment of tax savings strategies, especially for capital gains, qualified dividends, or other types of tax liabilities that may be created. Tax loss harvesting and other techniques are just some of the tools that fatFIRE retirees with a pension may wish to avail themselves.
• Side Hustle Deductions: One strategy that some FIRE early retirees may consider is creating a side hustle now to be declared a full-time occupation after one officially takes retirement. The side hustle can be a hobby or pastime with the ability to generate income. By turning it into an official business, the retiree can avail him or herself of business deductions and other expenses that are often calculated against other ordinary income, such as dividends, bond coupon payments, and retirement income. The IRS currently allows for such a declared business to be legitimate if it makes a profit in 2 out of 5 years. This means that expenditures one might make anyway for their hobby can potentially be categorized as legitimate deductions that can drastically reduce or even eliminate taxes for 3 out of every 5 years. Obviously, keeping accurate bookkeeping records is crucial for this strategy to succeed, but it can result in significant tax savings.
• Survivor’s Tax Concerns: A number of pension plans extend their payments to a surviving spouse if the original pension holder passes away. In such circumstances, proactive contingency plans to minimize probate issues, such as changing bank and brokerage accounts to Joint With Rights Of Survivorship category or establishing transfer-upon-death assignments for financial assets will be extremely beneficial.

While President Trump has proposed on several occasions the notion of abolishing federal income tax to be replaced with a combination of consumption tax and tariffs for revenues, such a bill has yet to be officially drafted and ratified by Congress. While millions of Americans await such an event, tax mitigation strategies will continue to find favor with the many who are paying those taxes. 

This article was written solely from an informational perspective. Anyone wishing to obtain more comprehensive financial advice should seek the counsel of a professional retirement financial planner. 

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