Breathing down our neck

[Bestwifeever]

I've been reading this forum for more than a year and learned so much from so many--thanks! I have a couple of stupid question that I haven't seen the answers to within this forum (and haven't done much research outside of it!), so here goes, oh masters of the FIREverse:

Retirement is looming in the next two years, close enough to start the worrying machine. DH (now 58 ) and I (57) now have just over $1.2mil in 401k, all before tax: 25% in bonds/moneymarket, 75% in several stock funds. Also have a pension that would pay $20K/year in two years, and also plan to collect SS at 62 for each of us. Mortgage would be $225K. Health ins. would be continued through DH's employer (we pay 100% but expect it would be more reasonable as a group plan--and have a couple of pre-existing conditions). We plan to sell our current house and move to a small town in the midwest, buying a replacement house with the equity from the current house. We will move the 401k for the most part into Vanguard or Fidelity funds (which is where the 401K is invested right now anyway).

With 4% withdrawal rate on $1.2mil (at today's value) and pension and eventual SS, I don't anticipate any problem living below our retirement income, which will be pretty much equal to our current income--so here come the stupid questions.

We have never had stocks or bonds outside of retirement accounts, so we are blissfully ignorant about the mechanics of how they work in terms of generating income instead of gains being reinvested. Do typical retirement funds (not funds for saving for retirement, but for using in retirement) generate dividends that are sent to you periodically? Or do you have to sell holdings to generate income? If you start out with a couple of years' worth of $ in a money market fund, how do you replenish that? And in terms of taxes--are they withheld as or do you make quarterly payments? Are taxes due only on withdrawals as we take them? Is there a book you could recommend about how to access your retirement $?

Thank you in advance--

[bssc]

Welcome to the boards.

Glad you are well along your way to retirement. You have done well.

I am afraid that I don't know your answer since my portfolio is not set up that way. But I am sure that there are people who can. Anyway look around and welcome.

[AltaRed]

Originally Posted by Bestwifeever

We have never had stocks or bonds outside of retirement accounts, so we are blissfully ignorant about the mechanics of how they work in terms of generating income instead of gains being reinvested. Do typical retirement funds (not funds for saving for retirement, but for using in retirement) generate dividends that are sent to you periodically? Or do you have to sell holdings to generate income? If you start out with a couple of years' worth of $ in a money market fund, how do you replenish that? And in terms of taxes--are they withheld as or do you make quarterly payments? Are taxes due only on withdrawals as we take them? Is there a book you could recommend about how to access your retirement $?

I am not certain on what you are really asking. IF you are talking about regular assets, e.g. stocks, bonds, mutual funds, and ETFs, held in a taxable account outside your IRA, you can structure them any way your wish in a brokerage account. If you want to receive/use the income from these investments, then set them up without the dividend re-investment programs. That way, the income generated from the investments (dividends and interest) will simply be deposited to your brokerage account and you can EFT them out of the brokerage account monthly, quarterly, or however you wish. Depending on brokerage, you might be able to set it up so they EFT the income to your bank account automatically monthly or quarterly.

If this is not sufficient income, you then decide on what portion of what investments you sell on a regular basis to provide the income you wish. Those sales will generate capital gains and/or capital losses. All income you receive is taxable in the year you receive it and the tax rate depends on whether it is qualified dividend income, interest income, or captal gains. Some one else will have to respond on withholding taxes and/or quarterly installment payments since I am not familiar with the US tax system.

[Rich_in_Tampa]

Best,

Nice going on your early retirement plan. Sounds like you are very close to the finish line.

I think you should buy some books to learn the basics. Pond, Quinn, Lucia are a few popular authors. Head to the book store and browse around. Investing and retirement planning are not the same thing bookstore-wise so you may want to look at both.

To answer your questions best I can as a non-expert, I determined my personal asset allocation (stocks v bonds v cash; and within stocks just a few more slices). Then I set it up making sure that after-tax dollars stay in stocks for the most part (or my low-yielding cash funds). Bonds (and esp inflation bonds) stay in tax-deferred accounts.

Stay aware that there is a tax consequence upon withdrawal of your deferred money. So if you need $4k a month to meet expenses, you can reach that by withdrawing $4k of after-tax holdings, but you need to withdraw $5k in tax deferred withdrawals (if you are in a 20% hypothetical tax bracket) to allow for the tax. (Sorry if that's obvious, but it's easy to overlook in the frenzy of setting all this up.)

For a couple of approaches, read Armstrong or consider Lucia's "Buckets of Money" book (I use a modification of the latter myself). Hope that helps get you started, and good luck.

[Nords]

Welcome to the board, BestWife.

Originally Posted by Bestwifeever

Do typical retirement funds (not funds for saving for retirement, but for using in retirement) generate dividends that are sent to you periodically?

Yes, you could buy into a mutual fund (or ETF or individual stocks or bonds) producing dividends that are distributed, not reinvested. It doesn't have to be a "retirement" fund-- there are many types of "income" or "dividend" or "blend" funds.

When you're older than 59.5 you can also stop reinvesting the dividends in your tax-deferred retirement accounts and take those as distributions.

Originally Posted by Bestwifeever

Or do you have to sell holdings to generate income?

You could do that too. You could also mix the two methods... your choice.

Originally Posted by Bestwifeever

If you start out with a couple of years' worth of $ in a money market fund, how do you replenish that?

Most people sell off other fund assets to refill the money-market fund, and they typically do it by annual rebalancing. This tends to sell off the winners and let the "losers" recover but you could also liquidate a loser if you're ready to replace it with another asset-- or to remove it from your asset allocation.

We've started keeping a year's cash in a money market and a second year's cash in CDs. A CD matures and is dumped into the money market account while we look around for a good replacement CD (typically from a credit union like PenFed or NFCU). We've been moving toward a long-term CD ladder (say, five years) but we keep the individual CD amounts small enough that if we need more than what's maturing then the penalties for breaking an extra CD or two are small.

You may also want to keep more than a couple years' expenses in a money market. It's a personal choice.

Originally Posted by Bestwifeever

And in terms of taxes--are they withheld as or do you make quarterly payments?

Yeah, good luck with that. I guess some brokerages or fund companies could withold taxes but I bet it'd be awfully hard to adjust it to the correct amount every year.

You could have taxes withheld from a pension and maybe even from a regular distribution (like a 401(k) or an IRA RMD). Personally we find it more convenient to pay quarterly estimated taxes-- see IRS Pub 505 (http://www.irs.gov/pub/irs-pdf/p505.pdf) and the EFTPS website (https://www.eftps.gov/eftps/).

Originally Posted by Bestwifeever

Are taxes due only on withdrawals as we take them?

Generally yes.* There may be complaints from tax preparers (or tax-prep software) but the "annualized installment income" method of calculating the tax payments will eliminate penalties/interest. However Form 2210AI is not exactly the most stimulating exercise and some people would elect to pay the penalty rather than fill in all its blanks.

Originally Posted by Bestwifeever

Is there a book you could recommend about how to access your retirement $?

Ed Slott's IRA books, especially his Retirement Savings Time Bomb.

*I'm not going to get into the subject of "imputed interest" or "phantom taxes", but this is why advisors recommend holding TIPS in tax-deferred accounts. So don't put TIPS in a taxable account and you won't have to worry about this.

[Bestwifeever]

Thank you all so much for your comments and also your suggestions on the literature!! Simplicity has worked for us up to a point but that may need to change. To paraphrase Seinfeld re car rental reservations, we knew how to accumulate and hold the $$ but were unclear on the mechanics of accessing it thereafter. It's exciting but scary to look ahead as we get closer to leaping off the cliff.

Thanks for the reminder on including taxes in the withdrawal process--for our own ballpark comparisons on where we're at, I've just been comparing gross income today vs. anticipated gross income after retirement.

[travelover]

Originally Posted by Bestwifeever

..... Is there a book you could recommend about how to access your retirement $?.....

I use the Nolo book, IRAs, 401(k)s& other Retirement Plans - Taking your Money Out.

Amazon.com: IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out: Books: Twila Slesnick,John C. Suttle,Amy Delpo

[Bestwifeever]

Thanks, Travel Lover--that subtitle ("Taking Your Money Out") is exactly where I feel weakest in the retirement $ arena. I can see I'll be spending several hours at the bookstore in the near future! I really appreciate the responses to my initial post.

[freeline]

Congratulations to retiring soon!

(still have quite a long way to go myself, & am finding literature & internet suggestions extremely useful! Thanks to all for posting them!)

[unclemick]

I play with ORP, Optimal Retirement Planner - which gives me some ideas on how to take the money out. I put different amounts of residual estate and cap the portfolio returns or adjust my federal and state tax rates.

heh heh heh - in the end I take out what I need and let the rest ride. But playing with the calculator is fun.

[Fred333]

Welcome to the boards. Retirement is great let me tell you.