Excited to Secure Our Two-Part FI Number for Age 59+

Financial Independence (FI) and Possible Retirement Actions in Two-Parts:  Part I is from Age 59 and a half to Age 65.  Part II is from Age 65 and beyond. 

This strategy is based upon a two-part FI Number. Part I FI Number for Age 59 and a half to Age 65. Plus another FI Number for Part II for age 65 and beyond. I want to make it clear at the outset that this two-part strategy is unique to our situation. This plan is also psychologically comforting for us. Our two-part plan does not align with traditional retirement strategies. I am sharing this because personal finance is personal. FI Numbers are also very personal (or should be) based on your situation and desired goals. Our goal is to elude the Retirement Police and make “paid work optional” in less than 100 Months.

Disclaimer: The following is not intended to be investment or life advice. Readers should consult with their legal, financial, and accounting specialists and spiritual and/or life coaches to provide insight on their personal and specific circumstances as each situation is unique. The following is written for entertainment.

Financial Independence (FI) and Possible Retirement Actions in Two-Parts:  Part I is from Age 59 and a half to Age 65 and Part II is from Age 65 and beyond

In the past few months, the concept of thinking about retirement in two separate time-periods has gained traction with me.  We intend to begin “paid work optional” or what some would consider “retirement” at age 59.5. At age 59 and a half we will have access to pre-tax retirement accounts, such as 401(k), 403(b), etc.   This will be before we have access to health care under Medicare, assuming Medicare remains as we know it.  At the time of this writing, Medicare eligibility begins at age 65.

Assumptions regarding Part I Age 59 and a half to Age 65 FI Number

This plan is based on accessing pre-tax and post-tax accounts at age 59 and a half . We assume the federal government does not plan to modify the age eligibility to access pre- and post-tax retirement accounts.  My father’s retirement accounts were classified as “pre-1986” funds and “1986 and later funds”— given changes in the law.

For the purposes of our classifications this includes certain “sources” of money 

We outline the Part I FI Number types of accounts below.

Cash-like accounts

We have an “emergency fund” in a savings account. However, we are debating the amount needed for an “emergency fund” once we officially make “paid work optional”. Right now, we hold less than six months of our after-tax income in cash-like accounts.  However, we acknowledge interesting “paid” projects may earn W-2 income. 

Smaller-based Individual Retirement Accounts (IRA)

Our accounts include IRAs through various employers or trying to help friends who had entered the financial services industry. We have multiple smaller IRA accounts.  Admittedly, this is dumb. We hear the Retirement Police sirens coming. The Retirement Police will charge us with “operating like an FI idiot” and we will plead “guilty as charged.” We realize it would have been wiser to roll all of these over into one account. Honestly this is pure laziness.  Our plan is to cash out these smaller accounts first. We know cashing out these accounts will save our children the “time-suck” of dealing with these accounts later in life.

Random individual stocks

It’s hard to part with gifted or inherited some individual stocks from deceased persons.  t’s clear it would be best to cash these out since the dividends are $100 or less.

Smaller 401(k) and 403(b) accounts

Our smaller 401(k) and 403(b) accounts are with short-lived employers. Rolling over such accounts with new employers is a better option but it’s pretty late to d so. It’s time for the Retirement Police to charge us with “operating like an FI idiot”– guilty as charged. We definitely did not learn this Psychology of Money lesson from my financially clueless father.

Roth IRA Accounts

We will detail how we plan to utilize these Roth IRA accounts in the next section. Ultimately, we would not draw down funds from any Roth IRAs. We view Roth IRAs like “insurance” or an “emergency fund” in that we could tap if we really needed money.

We are technically Coast FI by age 59 and a half for our Part II Age 65 and beyond goals

The FIONEERS coined “Coast FI” = “the point at which you no longer need to save or invest for your traditional retirement.” Achieving Coast FI is an important aspect of our plan. When we are no longer working, we cannot contribute to an employer based 401(k) or 403(b) account . Further, we will miss the bonus of an employer match). Our Part II FI Number for Age 65 and beyond requires compound interest and market gains.

The Part I FI Number assumes that no gains when we begin withdrawals

Yes, you read that correctly. Our Part I FI Number assumes once we start withdrawals we will not have any funding increases during these 5.5 years. It’s like having Part I FI Number funds stuffed under your mattress for 5.5 years without earning interest. See more below regarding how w e intend to spend our Part I funds. We know that we have less that 100 Months to achieve this first Part I FI Number goal.

How we intend to utilize Part I Age 59 and half to Age 65 funds

Our Part I Age 59 and a half to Age 65 plan is not elegant. Further, our Part I plans goes against the 4% rule. We plan to have 5.5 years worth of income in our accounts to cover all our living expenses.

Our 100 Months to Financial Independence (FI) plan admittedly has “one more year syndrome” built into it. Given our psychology with money, we do not trust ourselves not to work for one more year. We are cheating because 100 months gives us until age 60 and a half. Our plan means we will have 5.5 years worth of funds saved to use over 4.5 years.

Our plan is built on cash-like accounts. We will withdraw funds from pre-tax retirement accounts or IRAs to control our tax situation. We plan to convert pre-tax retirements into Roth IRA accounts, known as the Roth Conversion Ladder. Financial Independence Retire Early (FIRE) Movement guru The Mad Fientist has outlined the Roth Conversion strategy in the US. Please note that the Mad Fientist’s example is done to access the funds before Age 59 and a half. Whereas we are seeking to utilize the funds after age 59 and a half assuming the five year waiting period. Why would we do this? Our plan is to build in inheritance for our children from tax-free Roth IRA accounts. Unfortunately, given current law, our children could not rollover an inherited Roth IRA into their own Roth IRA. But we have already been focused on incentivizing our children to have their own Roth IRAs.

Here are some major factors for us:

Access to Health Insurance

A key aspect of our plan is to insure that we still have access to health insurance during the age 59 and half to age 65 time period. Again, we are assuming that Medicare eligibility remains starting at age 65 or that there is access to the Affordable Care Act (otherwise known as Obamacare, with the potential for tax-credits (which would be another reason to “control” our taxable income). We may also be eligible to continue healthcare coverage via an employer plan, albeit at a much higher cost, either through COBRA or certain “retiree benefits” through one of our employers. if we qualify. Going without insurance is not an option we are willing to consider.

Controlling Taxable Income

The United States tax situation is likely to become more clear in 2025 given the expiration of the 2017 Tax Cuts and Jobs Act (TCJA). Congress and the President must work together to retain these provisions related to tax brackets and tax-benefits/provisions. We will likely do a deeper dive into this topic in a future post, but for our purposes, it would be beneficial if the lower level tax brackets remain in place.

Controlling Taxable Income as it relates to Future Required Minimum Distributions (RMDs)

Per the IRS, RMDs (as of March 2023) “are minimum amounts that IRA and retirement plan account owners generally must withdraw annually starting with the year they reach age 72 (73 if you reach age 72 after Dec. 31, 2022).” The starting age for RMDs is age 75 for those who turn 74 after December 31, 2032. You can delay RMDs payments until the year you retire, unless they’re a 5% owner of the business sponsoring the plan. Owners of traditional IRA, SEP, and SIMPLE IRA accounts must begin taking RMDs once the account holder is age 72 (73 if you reach age 72 after Dec. 31, 2022), even if they’re retired. If we delay RMDs until age 75, it will likely place us in a higher tax-bracket later. Utilizing a Roth Conversion Ladder at age 59 and a half, is likely make our longer-term RMD payments more tax advantageous.

We will have significant levels of spending

Age 59+ will be filled with lots of travel and doing enjoyable things as long as we can. Again, while it may be financially “stupid” to have so much money in cash-like positions, we are building in a guard against market downturns because we are in race against our physical and mental capabilities. We’d like to think we will be super active and in great shape in our 60’s, 70’s, 80’s and 90’s but the odds may not be in our favor. The COVID pandemic significantly hindered our ability for several years to take international and domestic trips. We do not want to be held back by “can we afford it” financially when based on life factors “we cannot afford to go and do what we want to do.”

Assumptions regarding Part II based on Age 65 and beyond

The sources of funding for our “paid work optional” Part II Age 65 and beyond plan are based on the traditional 4% rule. This funding included in our Part II FI Number is based upon the following factors:

Utilizing Pre-tax retirement accounts

Our Part II FI Number based on age 65 and beyond would utilize withdrawals from our traditional 401(k) and 403(b) accounts.  We will need to pay taxes on withdrawals. Depending on the tax laws at the time, we may find it advantageous to take out funds earlier than the Required Minimum Distribution (RMD) rate as noted above.

Roth IRA Accounts

We view such accounts as part of a ladder strategy in concert with shifting funds from pre-tax retirement accounts over to the Roth IRA accounts. Our true annual spend is a bit unclear at this points. The flexibility to withdraw funds from our Roth IRA based upon our true spending needs allows us to treat some of the funds as “insurance” or an “emergency fund” on an as needed basis.

Social Security Funds

We are close to fulfilling the 35 years of working eligibility requirement related to Social Security. Please note that you can be eligible for Social Security without working 35 years. We believe that Social Security will undergo changes given the future fiscal cliff. We also believe that Congress and the President will not act until they really need to do so, which will probably be within 95 months from now (as of this writing in September 2024). Since there is no certainty on how Social Security will be structured in the future, we think it best not to factor it into our FI Number calculations. Whether we take Social Security early at a reduced rate (if that is still possible) or delay taking Social Security until full retirement age (currently age 67) it will be an “added bonus” to our FI Number.

Pension Payments

It feels odd to write that each of us would be eligible for a small pension payment since pensions are a rare breed in the era of 401(k)s and 403(b)s. However, each of us worked for a very short period of time for organizations that offered a pension. In each case, we think these funds would total less than $100 per month, per pension.

Under Part II, we assume that all of our Part I funds have been spent down (though it’s possible this will not be the case if we continue to work “one more year” and in the process, do not spend 5.5 years worth of savings in 4.5 years. Additionally, we assume that since we are on track to Coast FI at the present moment, that we would have hit our Part II FI Number by the time we reached age 65. If this is, in fact, the case, we would utilize the traditional 4% Rule to fuel our paid work optional activities.

Conclusion

We admit that this two-part plan seems to meet our needs both financially and psychologically. We certainly reserve the right to change course. Any changes made to the plan will be outlined to keep us accountable.

Please continue with us on our journey as we countdown these final 100 months to Financial Independence (FI). Truth be told, we are now 95 months away from our journey to FI.