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57, 2 school-age kids, retiring this summer
Old 04-19-2012, 07:21 AM   #1
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57, 2 school-age kids, retiring this summer

Hi, folks!

I'm 57, have two kids in school (13, 9), had a health scare in Jan, so decided to eliminate the stress of work (includes LOTS of travel) by retiring this summer before my daughter starts high school. We currently live in northern VA and plan to move to northern FL (Gainesville area). My wife is 45 and plans to quit work with me. Here's our situation and the questions I have for this experienced group:

My current 401k: ~$2M (we did very well with an ESOP)
Receiving ~$21K/year from USAF retirement
Receiving TriCare benefits for health coverage for family until Medicare kicks in.
Wife's 401k: ~$900K (same ESOP)
VA pre-paid education plans for kids (need to research how to convert to FL or sell out)
Expect to clear ~$120K from sale of home in VA
Plan to purchase home in FL for ~$300-350K
Plan to roll my 401k into self directed IRA and use it to purchase 30 year treasury bonds (currently around 3.5%) yielding ~$70K/year on interest
Plan to roll wife's 401k into self directed IRA and use it to:
- purchase $500K in 30 year treasury bonds yielding ~$17,500/year
- purchase $300K in short term T-bonds for liquidity (negligible return)
- "loan" $200K to ourselves to fund home in FL

The income generated should be more than enough for us in FL. My real question is: can we "loan" ourselves money from a self directed IRA at a low interest rate (lower than current mortgage rates) to purchase our primary residence in FL? As I understand it, using a self directed IRA to purchase a primary residence is a "prohibited transaction" but it looks like that's intended for people working and contributing to the fund. Is it also prohibited for people living off the fund, as we will be?

And another question is who you would recommend to administer this self directed IRA? I'm currently a member of USAA and have our 401k accounts with T. Rowe Price.

Thanks in advance for any advice you can provide! We're going to make this happen, but answers to these questions will make a big difference in how we do it.

Marsh
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Old 04-19-2012, 09:33 AM   #2
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Wow, where to begin?

First, if you want to borrow to buy the house in Florida, I would strongly suggest that you buy before you move and retire. That way you can show lenders your income, buy it as a second home and not have to fool with likely illegal and definitely more complex attempts to borrow from your IRA.

Second, fergawdsakes, don't invest your IRAs as you have stated. In fact, don't do anything with them until you take the time to educate yourself. You could very easily do irreparable damage to yourself by leaping into the wrong investment portfolio. Take your time. Your almost $3MM portfolio should throw off something around 110k annually on a reasonably sustainable basis if invested properly. Do it right.

USAA and T Rowe are both reputable shops that would be fine to use. Other "usual suspects" are Vanguard, Fidelity and Schwab. I use Schwab primarily and have been real happy, but the Fidelity account we have makes me think they would be an equally good choice.
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Old 04-19-2012, 09:37 AM   #3
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Congratulations!!! You've done well.

You left off the most important piece of information needed to assess your situation. How much do you and your family need to live once you are settled into FL?

I don't think your idea of loaning yourself money from your wife's 401k will work, but given low mortgage rates you might accomplish the same thing by getting a 15 year mortgage (I refied in January for 3.375%) and your interest earned on the funds left in the 401k and the interest paid on the mortgage will offset so the economic effect will be about the same.

Are you planning on just paying the under 59.5 10% early withdrawal penalties or doing a 72t?

I would check out whether your 401k plan allows penalty free withdrawals for employees who terminate after age 55 (some do, some don't). If your plan allows these, you may be best to leave your $2m in the 401k (or at least enough to fund your expenses between 57 and 59.5).

Another thing to consider is whether inflation will erode the purchasing power of your withdrawals given how conservative your investments are.
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Old 04-19-2012, 10:43 AM   #4
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Wow, You done real good. Unless your planned future expenses are way up there you are well beyond FI. I only have a couple thoughts for you. The first is that I think you will not be able to easily (if at all) loan yourself money from a self directed IRA. With mortgage rates so low right now this does not have to be a problem. What you will pay in mortgage interest should be in the neighborhood of equivalent to what the money would earn staying in the IRA. Another issue is how to get money out of the sheltered accounts to live on between now and when you are 59.5 years old. Do as much research as you can on 72t distributions. I think they are the answer to that question but there are lots of small details to consider. Final thought is that your planned asset allocation is possibly too conservative. It may seem safe and it is probably very safe from everything except inflation. Inflation compounded over many years can bite us big time. I like the Gainseville area. But, get ready to hear seemingly everyone saying.........GO GATORS!!!!
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Old 04-19-2012, 10:44 AM   #5
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I can't answer the IRA/mortgage questions, but wanted to say welcome.
I recently joined, and am in a semi-similar situation to you. Husband is 60, I'm 50, we have a 9 yo and an 11 yo. So the challenges of trying to retire early with grade school children are interesting to me.

Congrats on your sizable nest egg. Mine isn't quite as large, but has the advantage that part of it is from an inherited IRA that was already receiving RMDs... so I can withdraw the tax deferred money, penalty free, if I need to. I don't have the same pension/healthcare as you - so I'm super envious of that. It's a great reward for military service. And it will make whatever budget you work up, work much better.

Welcome.
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Ultra conservative, I know...
Old 04-19-2012, 05:08 PM   #6
Confused about dryer sheets
 
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Ultra conservative, I know...

... but frankly I don't like the way either the economy or world politics are going, so want to make sure the principle is safe. That's why the T-bonds. I may back off of 100% of my plan going there, but will have a large chunk there.

Am speaking with company HR tomorrow so will find out if current plan allows me to retain funds in the 401k, but most likely will be doing 72t.

And good advice on purchasing the home before quitting, if possible. We'll need the proceeds from the sale of our existing home to purchase, though, at least that's my perception. Could probably qualify for a "second home" in the $300K range, but if our current home fails to sell for a while I'm afraid we'd be pretty strapped...

I like USAA and will approach them first, but also have seen good performance from TRP.

And you're all right about the current mortgage rates - hard to beat, but was hoping to "pay myself first", if it was at all possible. After all, the money's there for investing - why not in our own home!

Thanks to all that have responded so quickly!

Marsh
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Old 04-19-2012, 05:28 PM   #7
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Quote:
Originally Posted by swampd View Post
... but frankly I don't like the way either the economy or world politics are going, so want to make sure the principle is safe. That's why the T-bonds. I may back off of 100% of my plan going there, but will have a large chunk there.


Marsh
Like I said, get educated first. 30 year treasuries are actually quite risky.
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Old 04-19-2012, 06:22 PM   #8
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"Like I said, get educated first. 30 year treasuries are actually quite risky."

I totally agree with this statement. I personally think there is more overall risk with having your money invested in 30 year bonds at the current low interest rate yields vs having your money invested in equities.

You can check out this free calculator to see what happens to a $1 million portfolio of 30 year bonds if the interest rates goes from the current yield of approximately 3% to 10 %, the yield that was in effect back in 1985 when I graduated from college. You lose 2/3 of the market value of your portfolio if I entered all of the figures correctly.

Bond Value Calculator for Bond Valuation or Pricing
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Old 04-19-2012, 09:09 PM   #9
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Quote:
Originally Posted by KMyer View Post
"Like I said, get educated first. 30 year treasuries are actually quite risky."

I totally agree with this statement. I personally think there is more overall risk with having your money invested in 30 year bonds at the current low interest rate yields vs having your money invested in equities.

You can check out this free calculator to see what happens to a $1 million portfolio of 30 year bonds if the interest rates goes from the current yield of approximately 3% to 10 %, the yield that was in effect back in 1985 when I graduated from college. You lose 2/3 of the market value of your portfolio if I entered all of the figures correctly.

Bond Value Calculator for Bond Valuation or Pricing
+1 It is true that the value of 30 year bonds will take a beating if interest rates rise. OP could see his $2m 401k decline to $1.4m if rates increased a couple hundred bps - and a 200 bps increase in rates is very possible. But OP seems to be more focused on income so the significant decline in value may not bother him.

That said, OP's "conservative" portfolio is more risky to me that my 60 equities/40 fixed income portfolio.
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