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How do I pay myself?
Old 04-30-2019, 07:32 AM   #1
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How do I pay myself?

Hi There,

I just found this forum. What a wealth (pun intended) of information!

Wife and I are 57. We've got several 401Ks @ about 1.5M. We've also got two rentals, and a fair chunk of cash so I think we're (or I'm, wife wants to continue to work) on my way to 59 1/2 retirement. Not the earliest of early retirement, but it'll work.

Anyway the thing I struggle with is what to sell and when, when I'm living off my retirement money. For example I just read an interesting book where he presents an all-weather retirement portfolio that has a magic mix of stocks and bonds guaranteed to last your lifetime and that kind of makes sense. But what they don't talk about is what assets to sell to live off of.

The bucket strategies have a cash bucket, so that makes sense, but even that, when you go to move from a not-cash bucket to the cash bucket, same question, what are the right assets to sell?

I have a few years to figure it out, but the forum suggests not just posting a I "Hi I'm Bob from Sacramento!" introduction, so I figured I'd share where I am.

Thanks!

DC
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Old 04-30-2019, 08:27 AM   #2
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All depends on your taxes and thats unique to each individual. When retired, managing your taxes has a higher rate of return than managing your income.
In general, "sell what ever is at an all time high".
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Old 04-30-2019, 08:51 AM   #3
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Just to be clear, when you say you have 401(k)s, rentals, and cash, does that mean you have no taxable investment accounts? So, no brokerage account at Vanguard or Fidelity containing mutual funds, ETFs, etc. that you could sell (or pull dividends from) to generate income prior to full retirement? If you could provide a more detailed picture of all your assets and cash flow, I think you will get more helpful answers.

Welcome to the forum.
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Old 04-30-2019, 09:11 AM   #4
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DC, Welcome to the ER community! Good first post.


Your question is a common one and has dozens of answers, based on the reality of your situation and, more problematical, what you believe the future will bring, your disposition, and goals.


The usual goal is maximize available spending through "end of plan", and a tool that does that well is called i-orp. It will take many hours of work to generate a few likely scenarios, but it will offer some good options that will change as you change the assumptions (life expectancy, when to take SS, Roth conversion or not, etc).



If you're lucky, most of the likely scenarios will have the same "first move". That's the only actionable thing anyway... what to do now to pay yourself.


Oh, BTW, keep equity percent the same in all tax buckets no matter what reality is...that way, it will optimize on taxes, not expected rate of return. I'm presuming setting and sticking to an asset allocation across all assets.
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Old 04-30-2019, 09:14 AM   #5
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Welcome DenverCraig! If you haven't found them already, we have a helpful list of things to think about before you make the leap:

Some Important Questions to Answer

Once you have a good handle on your cash needs for normal spending, and what will be generated from known sources (such as your rentals), then you know how much you need to generate from your investments. DH and I started taking dividends and capital gains from our taxable accounts several years before we retired to build up our cash "bucket" and we continue to rely on those for a significant portion of our spending.

As mentioned above, watching for the tax consequences of selling assets in taxable accounts is very important.

When it comes to taking assets from your retirement accounts (no tax consequences) I try to focus on maintaining our asset allocation.

We look forward to having you join in our friendly discussions here!
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Old 04-30-2019, 10:07 AM   #6
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Welcome to the forum, DenverCraig. The folks here are amazing. You'll enjoy being part of the community!
Oh, and in my opinion, any retirement before SS is an early one! You'll love retirement. As an old friend told me - every day is a weekend and every night is Friday night!
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Old 04-30-2019, 11:46 AM   #7
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Welcome and a nice introduction.

You might want to track your actual spending, as it will provide a clearer picture of needs and then you can see how much income your savings need to produce. I found the amounts I spent on, was different than what I had guessed.

It will help clarify the big picture of affordability. Health insurance is always the big question and concern.

As for the income, understand that at some point you can turn off re-investment of mutual funds, so if in general they throw off 2% dividends, then that money can be withdrawn for spending without selling anything. So it's not like you have to sell the full amount of a yearly budget each year.
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Old 04-30-2019, 12:54 PM   #8
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I am on the doorstep on starting to pay myself as well.
My plan is to first turn off reinvestments in my taxable account letting those flow into cash.
Two, not reinvesting muni's as they mature.
Then rebalance tax efficiently. Rinse and repeat until I hit some lower tax years when I might dip into IRA's to reduce future RMD's. That is sort of the framework for me.
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Old 04-30-2019, 01:20 PM   #9
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Welcome to the forum. Plenty of very smart people on here. I've learned a ton in the short time I've been here. Just marking the thread for answers as well.

Coz
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Old 04-30-2019, 01:29 PM   #10
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Thanks for asking. I was wondering the same thing.
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Old 04-30-2019, 01:41 PM   #11
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Welcome DenverCraig. DH/me are not paying ourselves yet. The very subject you bring up has me searching for answers all over this forum. From when to take SS (many and very long threads on this topic) to tIRA W/D early to avoid tax hell. The masterminds of finance live here. So much of this depends on your spending habits and lifestyle/debt and how your assets are allocated.

To attempt an answer to your question from strictly my point of view:

-A solid cash bucket on the side
-Gradually W/D from tIRA to soften the tax burden when RMD hits-can re invest in Roth if you don't need the funds

-Keep after tax funds for later in life (stay 50% in the market for as long as possible)
-Take SS for higher earner at 70 to have good spouse survivorship benefits just in case
-DH has a pension at 65 that covers 1/3 of our spending habits-so pensions help.

-We also have a nice bucket of I bonds and EE bonds making @ 4% and some CD's making 2.5-3%. Won't touch those until way later. The tax burden is manageable with those and can cash out a little at a time.

Keep searching for the threads that discuss anything close to this topic. Most of the time they are at least 10 pages long, so look for those threads. So many different opinions, strategies and calculations. Good luck. This a great source and has taught me much!
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Old 04-30-2019, 01:43 PM   #12
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Hi DC, welcome.

The answer to your question depends on a lot of things, like what type of accounts your funds are in, how to manage distributions tax effectively over your remaining time (ideally having pretty even income each year in most cases), when to take SS, and whether you are trying to manage for an ACA subsidy.

IMO, first thing to do is to figure out your asset allocation (stock%/bond%/cash%/anything else) and organize your accounts tax effectively. I use https://www.bogleheads.org/wiki/Asse...tiple_accounts as a model.

In my taxable account I've turned off reinvestment of dividends, so that gives me some cash for expenses.

At some point I'll have a small pension and social security, so that's more cash for expenses.

The rest has to be done thru liquidation. You can do this yearly, or on whatever time basis you like. I do it as needed. As I see I'm going to need more money within a month or two, I'll liquidate enough for a few more months. I look at how my actual asset allocation lines up with my target, and liquidate whichever is over target.

First thing is to decide which account to tap. Taxable account sales generate capital gains, tIRAs are fully taxable, and Roth distributions are untaxed. So this is where long term tax planning comes into play. Decide how much taxable income you want this year, and pull from the appropriate account to make that happen.

If you're lucky, the account matches up with what you want to sell. I have most of my taxable account in equities, so if I'm overweight in equities and want to sell from my taxable account, I just sell equities from there. But if bonds are overweight, and I still want to use the taxable account, I can still sell equities from taxable, and then in my tIRA or Roth I would sell some bonds and buy back the equities (taking care to avoid a wash sale on a loss).

Things are a little more complex for me with the ACA subsidy but that's the general strategy.
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Old 04-30-2019, 02:20 PM   #13
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Besides all of the solid advice above, many here decide which bucket to draw from, judgementally, depending on whether their assets are worth more than they were when you retired. If they are, sell equities. If they've dropped, use the cash bucket. There are many distributions threads here. It's a little like catching a falling knife. You don't know which way it will land. So, some folks here take a single annual distribution, some do it quarterly, some monthly, and some as needed. The annual distribution takes the stress off of one trying to 'time the market' / distribution too closely for too long. I'm not in the ditribution mode yet, but anticipate either monthly or quarterly distributions. Reverse dollar cost averaging....with a little market evaluation thrown in.
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Old 04-30-2019, 02:53 PM   #14
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Welcome to the forum! Glad to have you here, and look forward to seeing your posts.

I found these two articles very down to earth and helpful for us when we retired last year. I printed them off and refer to both of them often for reassurance and tweaks I need to make:

https://www.theretirementmanifesto.c...ment-paycheck/

https://www.theretirementmanifesto.c...down-strategy/

Good luck!
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Old 04-30-2019, 07:00 PM   #15
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This is what I do. My target AA is 60/35/5. During the year, I do monthly transfers of $x per month from my cash allocation to a checking account that I use to pay our bills... my monthly "paycheck". Between the $x per month, my pension and taxable dividends that I take in cash I can cover my spending. In December, I replenish cash to 5% via either selling taxable investments or tIRA distributions and rebalance by shifting funds between fixed income and equities within my tIRA.
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