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Old 06-27-2012, 10:52 PM   #1
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Hi all, I've been reading the forums for quite a while and have finally decided to register and participate more actively. I'm sure this is just the tip of the proverbial iceberg, but I'm trying to figure out the best thing to do with retirement-oriented savings.

Basic stats: I'm mid-thirties and the DW is 1.5 years younger. DW is all W2 and I run a small business. Her W2 gets us a substantial portion of the way to the FICA cutoff, so the DW holds all the units of the small business (LLC). There is a solo/individual 401(k) set up under the biz and it includes both standard and Roth (post-tax) 401(k) options. I am 1099'd an adjustable amount to cover my biz expenses plus make 401(k) contributions. DW contributes to the biz, too, so she is also eligible to contribute to the 401(k).

So far, we've been both maxing the standard 401(k) contribution (33K/year combined). In addition, we are saving $5.5-8K/mo "after tax" and it's currently piling up in a money market account paying ~1%.

Based on our core expenses (which is most everything except our current massive travel budget -- more on this later) and our existing cash and investments, FireCalc says we are 9-12 years from being able to FIRE. It's likely DW will work a part-time passion job with health insurance and decent pay for at least 20 years past the FIRE date. After the FIRE date, it's also likely my small business will generate substantial (possibly six figure) income with little or marginal work on my part. But neither of these are factored into the FIRECalc timing I mentioned before -- my assumption is these incomes will cover our travel desires and fund other "fun". In short, I don't want to count on these incomes in terms of drawdown plans.

So, my issue is that obviously piling up cash making 1% isn't smart, but I'm not sure where to put it instead. We could use the profit-sharing provision of the solo 401(k) to absorb maybe half of the cash savings flow, but then it may be inaccessible for (too long?) a stretch between FIRE and 59.5.

The Bogleheads' Guide to Investing doesn't really cover this scenario! For taxable accounts, Bogleheads recommend tax-efficient funds (e.g., Vanguard Total Stock Index), but my timeframe seems too short for stock-based funds. What do folks recommend?
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Old 06-28-2012, 09:13 AM   #2
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Welcome someguy.

You need to look at your overall AA across all of your accounts. One way to decide a target AA is to look at the AA of target date funds with a target date commensurate with your retirement date (2025 or so in your case). The Vanguard 2025 fund has an AA of roughly 50% domestic equities, 20% international equities and 305 fixed income, so that would be one place to start in thinking about your AA.

Once you have decided a target AA, look at your current AA across all of your accounts (M*'s instant x-ray tool is useful in doing this) and see where the gaps are between your current holdings and your AA and what your new money should be going into.

From what you described, it seems to me that the fixed income part of you AA will be filled by your tax-deferred accounts (like your 401k) and your taxable accounts will be equities (which are tax efficient).
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more of what container vs. AA
Old 06-28-2012, 09:51 AM   #3
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more of what container vs. AA

Hi pb4uski, thanks for the welcome and response.

I think I have a pretty good handle on what overall AA mix I'm targeting.

Where I'm having trouble is, what "containers" should get what percentage. The primary two containers are the solo 401(k) and the taxable, both at Vanguard. I should add that I am basing all this on the assumption that anything we put in the 401(k) won't be accessible during the first 15 years we are FIREd (from target FIRE age of 45 until 59.5).

So we've got, say, $110K/year to go into these containers. Up to around $60K/year could go into the 401(k), but I'm not sure if that makes sense based on the accessibility.

Am I completely off in left field here?

Quote:
Originally Posted by pb4uski View Post
Welcome someguy.

You need to look at your overall AA across all of your accounts. One way to decide a target AA is to look at the AA of target date funds with a target date commensurate with your retirement date (2025 or so in your case). The Vanguard 2025 fund has an AA of roughly 50% domestic equities, 20% international equities and 305 fixed income, so that would be one place to start in thinking about your AA.

Once you have decided a target AA, look at your current AA across all of your accounts (M*'s instant x-ray tool is useful in doing this) and see where the gaps are between your current holdings and your AA and what your new money should be going into.

From what you described, it seems to me that the fixed income part of you AA will be filled by your tax-deferred accounts (like your 401k) and your taxable accounts will be equities (which are tax efficient).
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Old 06-28-2012, 10:13 AM   #4
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Originally Posted by someguy View Post
Hi pb4uski, thanks for the welcome and response.

I think I have a pretty good handle on what overall AA mix I'm targeting.

Where I'm having trouble is, what "containers" should get what percentage. The primary two containers are the solo 401(k) and the taxable, both at Vanguard. I should add that I am basing all this on the assumption that anything we put in the 401(k) won't be accessible during the first 15 years we are FIREd (from target FIRE age of 45 until 59.5).

So we've got, say, $110K/year to go into these containers. Up to around $60K/year could go into the 401(k), but I'm not sure if that makes sense based on the accessibility.

Am I completely off in left field here?
I don't worry about accessibility. Here's why.

Let's say my target AA is 50/50 and I start out my retirement with 50 fixed income in a 401k and 50 of equities in a taxable account and my first year of living expenses of 3.5 are in cash in a side account. Let's also assume that by the end of that first year that the fixed income in the 401k has grown to 51.5 and the 50 of equities in the taxable account are still 50 because it was a bad year for equities.

Then at the end of the first year, I would sell 3.5 of equities in the taxable account to raise cash for my living expenses, leaving my taxable account at 46.5 and all equities. Since my total nestegg is now 98 and I want to maintain a 50/50 AA, I want 49 of equities in total, so in the 401k I would sell 2.5 of bonds and buy 2.5 of equities.

That would leave 46.5 of equities in the taxable account and 2.5 of equities in the 401k (49 in total or 50% of the total investments of 98) and 49 of fixed income in the 401k.

Note that this assumes no ER Roth conversions, but I think you get the idea.

So there is not real need to worry about liquidity because you can shuffle money around in your tax deferred accounts as needed to maintain your target AA as the taxable account dwindles with spending.
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Old 06-28-2012, 10:24 AM   #5
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I am quite impressed by your financial planning, someguy, and welcome to the forums.

You're smart to plan for the gap and PB's given you a good resolution for how to finance it.

Quote:
It's likely DW will work a part-time passion job with health insurance and decent pay for at least 20 years past the FIRE date. After the FIRE date, it's also likely my small business will generate substantial (possibly six figure) income with little or marginal work on my part.
It sounds like you'll have it covered anyway but I understand not counting those chickens as you plan.
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Old 06-28-2012, 11:29 AM   #6
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I'm slow but friendly!

pb, duh! Functional fixedness (on my part) at its best!

So, then it looks like I really need to have two FireCalc simulations -- one for FIRE through 59.5 and another for 59.5 through death? Although how much we put into the taxable doesn't matter so much from an AA standpoint, it obviously does matter if we don't put enough in there and empty the taxable before we hit 59.5.

Assuming we are clearing the bar of putting enough into taxable to make it to 59.5, then it seems we want as much of the rest as possible to go into the tax deferred since our income in early FIRE will be lower than now and in later FIRE will definitely be lower. Right?

And as Bestwifeever pointed out, if our early FIRE period goes according to plan, our reduced income will still easily cover our expenses, allowing us to keep the taxable account untouched, and potentially even continue contributing to the 401(k). But I would much rather plan for the worst and hope for the best.
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Old 06-28-2012, 11:30 AM   #7
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someguy, welcome to the forum. Looks like good planning is underway and armed with this foresight, I'm sure you will be successful in your plan to be FIRE. Personally, I am done with all that and I'm just enjoying retirement. Best wishes for a great future.
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Old 06-28-2012, 11:49 AM   #8
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See below.

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Originally Posted by someguy View Post
pb, duh! Functional fixedness (on my part) at its best!

So, then it looks like I really need to have two FireCalc simulations -- one for FIRE through 59.5 and another for 59.5 through death? Although how much we put into the taxable doesn't matter so much from an AA standpoint, it obviously does matter if we don't put enough in there and empty the taxable before we hit 59.5. I don't think so since to me it is all one pot, but I guess you could do a separate FireCalc with just your taxable account to see the likelihood that it would last to 59.5 without having to dip into tax deferred accounts. Also note that for some 401k plans allow penalty free withdrawals after 55 for employees who retire after 55 which can be a big benefit to some ERs.

Assuming we are clearing the bar of putting enough into taxable to make it to 59.5, then it seems we want as much of the rest as possible to go into the tax deferred since our income in early FIRE will be lower than now and in later FIRE will definitely be lower. Right? Yes, unless you enjoy paying an extra 10% penalty to the feds Also, if your income in ER is low enough you may want to convert some 401k money to a Roth IRA. While it is true that you will need to pay tax on the converted amounts, the tax might be higher later on when SS starts.

And as Bestwifeever pointed out, if our early FIRE period goes according to plan, our reduced income will still easily cover our expenses, allowing us to keep the taxable account untouched, and potentially even continue contributing to the 401(k). But I would much rather plan for the worst and hope for the best. I think that is prudent, but keep in mind that it could cause you to end up dying rich and perhaps regretting not having spent more earlier when you could enjoy it more.
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Old 06-29-2012, 12:23 AM   #9
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Welcome to the forum, someguy.
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thanks
Old 06-29-2012, 07:39 AM   #10
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thanks

Thanks everyone, especially pb4uski! I'm looking forward to continuing on these forums!
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Old 06-29-2012, 04:02 PM   #11
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Someguy:

Welcome to the board.

Just a note of caution. You mentioned you receive a 1099 for a variable amount. If you have not already done so, you may want to look at the independent contractors vs employee standards to see if the IRS may try to treat you as an employee. In addition, compensation for an IC should be at arm's length, so if it is variable to suit your tax status, rather than variable based on services rendered for that year, they may treat you as receiving an arm's length amount (since ultimately it flows into the MFJ return but would increase your SE tax). It is even possible that the IRS may treat you as owning an equity interest, making the SMLLC a partnership and the payments not IC payments but guaranteed payments to a partner (since presumably you would not have made a qualified JV election for spouses).

Again, I don't have anything but the slightest details so don't take my words as anything but words from a well wisher but you may want to seek competent tax advice.

In accordance with U.S. Treasury Circular 230, thse comments were not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that the Internal Revenue Service could attempt to impose.
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five-year update
Old 07-18-2017, 03:48 PM   #12
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five-year update

Well, hat tip to Nash031 and others whose updates have encouraged me to look at my introductory post and give an update. That post was almost exactly five years ago!

We've been fortunate. The business has done better than I expected and I've increasingly focused on making it work for me. It's simpler now and smaller in terms of number of workers, but income has increased. We now only take on projects that are both interesting and lucrative and I have almost complete day-to-day autonomy. I work almost entirely from home and the benefit of that -- cost and stress reduction -- has been bigger than I would have guessed. Most of my work now doesn't feel like work. Plenty of it I would do any way just because it's interesting and challenges me in a way that's well-suited to my abilities and personality.

DW has nearly tripled her pay and loves her work. She also now has high autonomy and works almost entirely from home and concurs that the benefits are tremendous.

With both of us home most of the time and autonomous, there is no doubt that we could happily FIRE. It has also allowed us to indulge in as much travel as we want.

We've each maxed the individual and employer solo 401(k) portions and then contributed even more than that post-tax. Our NW is now more than 5x what it was at my introductory post and that is excluding any potential value the business has. Of course some of this is the up market.

We increased our number by around 35%. By the end of this year we should be 2/3 to our increased number and at it three years from there. My estimate 5 years ago was 9-12 years; at current trajectories it looks like 8-9 total and that is even with the substantial increase.

There are two big questions now. First, do we consider buying a second home in an area with much better weather or wait until we hit and exceed our number? We've bounced around a lot on this and are currently thinking just rent whenever we feel like it. The second big question is to have kids or not. We don't have a lot of time left to decide and I struggle with it. Interestingly, in my mind years ago it seemed as much a financial consideration as a desire question. Now it's mostly the latter.
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Old 07-19-2017, 01:18 PM   #13
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Congrats on the progress. Why did you increase your FIRE number? Did your expenses go up? Want more cushion? Reason I ask is that with your original number maybe you could FIRE in 4-5 years instead of 8-9
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Old 07-19-2017, 01:32 PM   #14
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Congrats on the progress. Why did you increase your FIRE number? Did your expenses go up? Want more cushion? Reason I ask is that with your original number maybe you could FIRE in 4-5 years instead of 8-9
Thanks.

The increase was mainly the combination of hoping to have some extra options combined with finding work increasingly enjoyable and remunerative. One thing I've definitely come to realize is that the situation is always fluid so this is subject to change either way at any time
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Old 07-19-2017, 02:11 PM   #15
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Having kids is a very very personal decision.... From my perspective (having raised 3) I think you will regret not having any. They will change your life forever and for the better. They bring meaning to life. JMHO
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Old 07-19-2017, 02:31 PM   #16
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... Just a note of caution. You mentioned you receive a 1099 for a variable amount. ...
Yes, those words raised a concern for me, too. If you are active in the business it is not just a matter of following the independent contractor rules. The IRS is well aware that a business owner is better off not taking a salary and instead taking money out in a more tax-efficient way. So they want to see you taking a market rate salary so they and the state can hit you with withholding, payroll taxes, etc.

If you don't already have your scheme blessed by a sharp, tax-oriented, CPA, I suggest that you bite the bullet and pay for one. Fighting with the IRS can be both expensive and futile. You don't want to go there.
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