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How to combine funds for income?
Old 03-27-2014, 11:42 AM   #1
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How to combine funds for income?

Hi,

I have the following situation.

About 1.03K in total savings, stocks, bonds, cash.

192K is in Roth/401K.
400K is in an inherited IRA, which I have to pay tax on the withdrawals.
447K is in common stock, bonds and cash.

Because of illness I have been considering retiring early, or at least
getting out of FT and going PT, and I want to consolidate these funds into more income producing investments.

Would it be prudent to cash out the retirement, pay the tax, lump it all together for an annuity or some other method of combination?

As the situation is now, the investments are just sitting there, not producing much.

Thanks for any help on this, I am going to talk to some professional advisers, [ie: Prudential, a local office, Schwab] but I value other input just as much.

Illness is not expensive, own home, kids moved out, happily divorced,
debt free for now. Frugal lifestyle.

Mike
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Old 03-27-2014, 11:51 AM   #2
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Quote:
Originally Posted by Mike93 View Post
..........As the situation is now, the investments are just sitting there, not producing much.............Mike
Welcome Mike.

It might help if you said what investments you had inside each vessel, i.e., the Roth, the IRA and the stocks, bonds and cash.
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Old 03-27-2014, 12:39 PM   #3
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Quote:
Originally Posted by Mike93 View Post
...Would it be prudent to cash out the retirement, pay the tax, lump it all together for an annuity or some other method of combination? ....
No, it would not be prudent, it would be foolish to accelerate the income and pay a large percentage of it to the government and then have less for yourself. And annuities are IMO poor values with today's low interest rates.

If these accounts are restructured tax-efficiently, you should be able to take out $35-40k a year to live on and pay little in taxes.

Qualified dividends and capital gains are tax-free if your total income is below the top of the 15% tax bracket ($47,050 of income for 2014 for a single assuming standard deduction and one exemption). So the taxable investments should be all equities assuming that there is no significant tax cost to making such a change.

Not sure what you mean by "sitting there, not producing much". A well balanced portfolio (60/40) should have grown over 30% over the last two years so please elaborate.
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Old 03-27-2014, 01:48 PM   #4
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No, it would not be prudent, it would be foolish to accelerate the income and pay a large percentage of it to the government and then have less for yourself. And annuities are IMO poor values with today's low interest rates.

If these accounts are restructured tax-efficiently, you should be able to take out $35-40k a year to live on and pay little in taxes.

Qualified dividends and capital gains are tax-free if your total income is below the top of the 15% tax bracket ($47,050 of income for 2014 for a single assuming standard deduction and one exemption). So the taxable investments should be all equities assuming that there is no significant tax cost to making such a change.

Not sure what you mean by "sitting there, not producing much". A well balanced portfolio (60/40) should have grown over 30% over the last two years so please elaborate.
+1. Do not just take it all out. That will have huge tax costs. If you want to buy an annuity, just buy two or more, one with taxable funds and one or more in IRA's/401k. You want to dribble it out as needed so you don't pay too much in taxes. Save your Roth especially for later. It's your most tax advantaged account.

If you want to simplify, you could choose one target retirement date fund in each of your accounts and invest in that.

You can also stick with what you have (if you like it). To generate income beyond dividends you can sell whatever you have too much of. As long as the total dollars (dividends and sales) you remove from all of your accounts doesn't exceed roughly 4% of their total value you should be pretty safe for 30 years. Try running FIRECalc (one of the links on the right side of the page) to test this out.

Read what you can here before doing anything major!
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How to combine funds for income?
Old 03-27-2014, 02:05 PM   #5
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How to combine funds for income?

Knowing your age and how much you plan to spend would help. Is social security or pension in the mix?

We have an inherited IRA, and since we have to take RMDs, we keep a fairly even mix of stocks and bonds there, so we can choose the best asset to withdraw from every year. Our taxable accounts are equities, and our retirement accounts mixed to make our 60s/40b AA. We take the RMDs and then the rest of our annual withdrawal comes from the taxable account. The retirement accounts grow for possible future use.

Start thinking total return, rather than income. Annuities are costly by comparison and, while they have their place for some, it's mostly for ease of mind - knowing there's a fixed income as long as you live. On the average one can generate better returns with a well thought out AA, and appropriate rebalancing.
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Old 03-28-2014, 10:49 AM   #6
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Hey thanks for the responses. I've combined them into one post for ease of review.

-------
Travelover:

Welcome Mike.

It might help if you said what investments you had inside each vessel, i.e., the Roth, the IRA and the stocks, bonds and cash.

Mike:

Right now I'm a bit concerned about a correction, so the Roth is a bond aggregate, the 401 similar. The IIRA is a mix of stocks and bonds, more bonds than cash.
When I received the IIRA, the media/news was screaming 'correction', so the last thing I wanted was to take a big hit right in the first year, so I've kept it fairly conservative for now.
--------------------------

Seraphim:
Knowing your age and how much you plan to spend would help. Is social security or pension in the mix?

Mike:
Mid fifties, so no SS for awhile and no pension.

[...]

Seraphim:
Start thinking total return, rather than income. Annuities are costly by comparison
[...]

Mike:
I'll have to add up the RMD with the dividends from the bonds, but that's nowhere near 30K a year, especially since the Roth/401 are not yielding any real 'money' I can use presently.
--------------------------
Animorph:

. Do not just take it all out. That will have huge tax costs. [...]


If you want to simplify, you could choose one target retirement date fund in each of your accounts and invest in that.

Mike:
Yes the taxes are an issue. I have looked at some retirement target date funds and they didn't look too good. At least T.Rowe Price's didn't look that good for now. However there are probably others out there.

Animorph:
You can also stick with what you have (if you like it). To generate income beyond dividends you can sell whatever you have too much of. [...]
Try running FIRECalc (one of the links on the right side of the page) to test this out.
Read what you can here before doing anything major!

Mike:
I guess I could just withdraw more from the IIRA if it surges, too bad I can't add to it and use that for a lump. That would really be convenient.

-------------

pb4uski:

No, it would not be prudent, it would be foolish to accelerate the income and pay a large percentage of it to the government and then have less for yourself. And annuities are IMO poor values with today's low interest rates.

If these accounts are restructured tax-efficiently, you should be able to take out $35-40k a year to live on and pay little in taxes.

Mike:
I will bring this target goal up with the financial advisor and see what he says.

pb4uski:

Qualified dividends and capital gains are tax-free if your total income is below the top of the 15% tax bracket ($47,050 of income for 2014 for a single assuming standard deduction and one exemption). So the taxable investments should be
all equities assuming that there is no significant tax cost to making such a change.

Not sure what you mean by "sitting there, not producing much". A well balanced portfolio (60/40) should have grown over 30% over the last two years so please elaborate.

Mike:
The IIRA is fairly new in my account, way under two years. I guess it has gained a little so far.
By not producing much, I mean I haven't structured any payments to get any income yet, and the Roth/401 I can't touch for quite awhile. I guess I am idealizing the total value of all my accounts as if they were in one big lump, in one account that could yield a certain payment, but I am realizing that is not as easy as it sounds.

I will discuss the IIRA account with the company that holds it, a local LLC, which bothers me a little bit since I've always dealt with Fidelity, Schwab, T. Rowe Price-
big companies. But they seem fairly safe. I asked them what would happen if they dissolved, or if one of them got killed in an accident, and they have a plan for that. Maybe they are better than big companies.

The IIRA is a Nationwide account. Can those be transferred to other companies? Anyone have a good recommendation for a company that structures retirement accounts, or are all the big national companies about the same in quality?

By that I mean Fidelity, Schwab, T.Rowe Price, Ed Jones, Prudential, those types.

Mike
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Old 03-28-2014, 01:55 PM   #7
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You never answered how much your yearly expenses are. I'd hope it's $35K or less, $40K at most, or else retiring early is very risky.

I don't think you need to consolidate into one account. I think it would be foolish to take a big tax hit on the IRA just so you can get everything in one account. I also don't think you need to generate income to cover all of your expenses. Look at a total return for your accounts. By that I mean, say you spend 3% of your invested assets: rather than looking to generate 3% income with a plan that might only increase your portfolio by 1% on average, you would be better off generating 1% income and increasing your portfolio by 5%. Even if you sold off 2% of your portfolio for additional money, you'd still be 2% ahead. Those numbers are just for example and not based on any reality, rather just to make a point. Your taxable account may not generate enough income to live on now, but you can also make withdrawals from it for the next few years until you can tap SS and retirement accounts. Meanwhile the retirement accounts will (hopefully) grow in value so you'll have more in those accounts when they are available.

I don't know if an inherited IRA can be converted to a Roth but you might look at doing partial conversions each year while keeping your income in a very low tax bracket.
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How to combine funds for income?
Old 03-28-2014, 07:41 PM   #8
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How to combine funds for income?

As others have stated, about $40k is about the limit for beginning withdrawals if you want the portfolio to last about 30 years. About $13k of that will come from your inherited account as an RMD ( I used a 30 year life expectancy, not knowing your actual age or how long you've had the IRA ). About $27k from your taxable account until you take SS, then reduce that figure by the amount of your SS. ( those numbers will shift as your RMD increase and COL changes).

Don't take any contributions from retirement accounts except the RMD. Don't cash anything in. You can change the custodian as we did, rolling almost everything over to Vanguard. You would end up with three accounts: inherited IRA, IRA and taxable. It doesn't have to be Vanguard - that was merely our choice.

Whatever AA you choose, make sure there's enough in equities to generate returns. With a 60s/40 bond AA, our personal return was over 20% on the portfolio last year - about the same size portfolio as yours. (And that was not unusual for last year). I was curious why you said your investments were not earning much. Sounds like you may have insufficient money in stocks.

Just my $.02
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Old 03-29-2014, 01:52 AM   #9
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Ok, I'll check the account allocations, thanks for the ideas,

Mike93
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Old 03-29-2014, 06:53 AM   #10
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Quote:
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Hi,

.....Thanks for any help on this, I am going to talk to some professional advisers, [ie: Prudential, a local office, Schwab] but I value other input just as much....
Hi Mike,
Be careful about choosing a financial adviser! Some are only salesmen/women for the company they work for. They are likely to benefit more from the relationship than you will! Here's one link to get you started on researching 'financial advisers': http://retireplan.about.com/od/inves...isors-Paid.htm . There are other links at the bottom of that page to check, too.
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Old 04-06-2014, 10:06 PM   #11
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+1000 on what racy posted. Many FAs will steer you wrong and sell you turkey financial products so they can make big commissions for themselves. Before you say yes to anything a FA suggests it would be wise to come back here with the details and see what the smart people here think. Perhaps the most important question for you to figure out first is how much you will need to live on in retirement.
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Old 04-06-2014, 10:23 PM   #12
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Yes, be very careful of "financial advisors" especially when they're associated with large insurance and annuity firms. IMO, annuities and VULs are stinkers that sound good in the pitch but do nothing but drain your account.
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Old 04-08-2014, 11:35 AM   #13
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The FA I have now is with the company that originally handled
the IIRA, so I kept it with them, however if I choose to transfer all the accounts, it will likely be with TRPrice. My living expenses
should be below 30K, unless something weird happens. Plus I plan to work part time and play the market a bit, I have had decent luck channeling stocks, but it's not a substantial amount of money, maybe 4K a year.

I did want to point out an article I read in the doc's office last week from MONEY March 2014 issue. The title is "The New Retirement". The gist is that you draw 3% instead of 4%, gains will likely be smaller in the future, and retiring with a small amount of stocks and then increasing your equity after you figure
out if you're in a bear phase is safer than just having the standard 50/50 split. The subtext of the article seemed to be hinting at a major pullback, but it never said that.

It basically said save more, spend less, don't rely on 'target funds', that sort of thing.

Mike
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