Tons of ???'s

[TheFlyingScot]

New here, although I am a frequent reader and lurker. This is my first post and I have a LOT of questions.

Situation:
Me: early 30's, work full time: make 60K/yr with 40k in TIAA-CREF
Wife: Late 20's, works full time: makes 55k/yr with 20k in 403b
have about 4 months expenses in liquid savings and some more in more non-liquid holdings
Both very happy and settled in our jobs, not looking to go anywhere else until retirement.
Living expenses (everything, including housing (mortgaged house)): 3000/mnth with 2k of that being mort/prop tax/insurance
We are putting away 50%+ of our income after tax and contributing to employer-matched retirement plans. (I know we can maximize this to our benefit with a nice mix of 401k/IRA and HSA, but we're not there yet)

Will be inheriting a large (to us) sum of between 350-450k in the next few months.
According to FIRECalc, we should be 100% good once we hit 450-500k, but we want to play it safe and work a few more years to pad that number closer to 600-700k to account for health issues and travel more rather than less, as well as buy property elsewhere and build ourselves a nice little homestead

Challenge:
We want to sit with someone (one time fee-based financial planner who actually gets it) to discuss where all the money should go/how to draw it out. By where it should go I don't mean portfolio allocation in the traditional sense.
-Whats the best way to keep the tax-man from knocking, bonds/stocks/money into tax-deferred every year? Split bonds/stocks between taxable and tax deferred?
-Where should our current income derived savings go? should we be maxing the Roths?traditional IRA every year and the rest stays taxable with the traditional becoming a roth once we ar FI Or just keep it all taxable since we'll be pulling from it for the next 25+ years until we can collect from retirement funds?

I'm obviously leaving out quite a large chunk of the picture, but I would absolutely say we are not the typical people who walk into most planners or cpa's offices. We live extremely frugally, 110% agree we aren't having kids, and will be able to live under the 19k federal max/minimum and still travel once we move out of our current area.
Even over on morningstar and the boggleheads boards people say we can't retire anytime soon!!! I don't want the same opinion from the person we are paying to help solve some of these challenges!

Advice? Comments?
Looking forward to learnign as much as possible and have a very open mind/ears!

[Ready]

Welcome to the forum.

Once you inherit this money, if you deposit it in a brokerage firm such as Vanguard or Fidelity, you will have access to some free financial advisory services through the firm. I would suggest you try that first before paying an FA for advice. You may not get much more expertise than you will get either from this forum or from the FA at your brokerage. I had better experiences with Vanguard than Fidelity but both are widely used.

In general this forum favors investing in index funds in taxable accounts because they tend to minimize dividends and capital gains. Inside your 401K or IRA you can hold bonds that pay dividends because they will be shielded from taxes until you withdraw them at retirement age.

Your FA can help you to establish an asset allocation you are comfortable with. I keep my portfolio simple, keeping 60% in equities and 40% fixed income. Within my equity holdings, I keep 70% in a domestic index fund and 30% international index fund. At your age, some would suggest 70-80% equities may be fine, but you will have to decide what you are ultimately comfortable with.

If you have any other specific questions, go ahead and post them and I'm sure the folks here will be happy to respond.

[jclarksnakes]

Welcome to the forum.

I think you need to ask yourself where the money has gone. If you have been making a combined 115K for any length of time and saving 50% of your after tax income you should have way more than 40K in TIAA CREF and 20K in a 401 and around 12K in liquid savings. If FIRECALC says you will be 100% good with a portfolio of 450K to 500K then you must be planning on expenses of less than 20K per year. Many people can live on that amount but the amount that you have saved so far would indicate that you are in the habit of spending a lot more than that. IMO you need to spend some time tracking your actual expenses.

[TheFlyingScot]

^^^ my wife just started at a dream job

We are now starting to save her entire income plus the 12k/yr we put away just on mine, plus i don't have everything listed above, as I didn't feel it's really necessary. I listed our retirement account balances to show what we already have in locked up in retirement accounts only.
Should I list everything
Like I said, we live extremely frugally, so 1k-1.5k/mnth for us if you take the house out of it is more than enough for the foreseeable future. We like to travel, and spend time outdoors with our dogs, that's it's, no fancy toys needed.
I am realistic and took that into account when I messed with FIRECalc for hours on end. 2k-2.5k/mnth is what I'd like to plan for, which will allow us to travel extensively, but planning to spend more than that a month is unreasonable and not in fitting with our lifestyle at all!

[Midpack]

These might be helpful reading...

Quote:

Originally Posted by TheFlyingScot -Whats the best way to keep the tax-man from knocking, bonds/stocks/money into tax-deferred every year? Split bonds/stocks between taxable and tax deferred?

This should help with your first question Principles of Tax-Efficient Fund Placement - Bogleheads

Quote:

Originally Posted by TheFlyingScot -Where should our current income derived savings go? should we be maxing the Roths?traditional IRA every year and the rest stays taxable with the traditional becoming a roth once we ar FI Or just keep it all taxable since we'll be pulling from it for the next 25+ years until we can collect from retirement funds?

And this maybe with the second question https://www.fidelity.com/viewpoints/...e-reasons-roth

[TheFlyingScot]

Midpack-
That chart is very quick, concise and helpful, Thanks!

[hlfo718]

I agree with tracking your expenses. I thought our monthlies were 3k but after I started tracking, it was about 40% higher, not including subsidized healthcare from employers either. If you want to retire early, track ALL your expenses for a few years.

[jclarksnakes]

Quote:

Originally Posted by TheFlyingScot ^^^ my wife just started at a dream job We are now starting to save her entire income plus the 12k/yr we put away just on mine, plus i don't have everything listed above, as I didn't feel it's really necessary. I listed our retirement account balances to show what we already have in locked up in retirement accounts only. Should I list everything Like I said, we live extremely frugally, so 1k-1.5k/mnth for us if you take the house out of it is more than enough for the foreseeable future. We like to travel, and spend time outdoors with our dogs, that's it's, no fancy toys needed. I am realistic and took that into account when I messed with FIRECalc for hours on end. 2k-2.5k/mnth is what I'd like to plan for, which will allow us to travel extensively, but planning to spend more than that a month is unreasonable and not in fitting with our lifestyle at all!

After you take the house out of the expenses do you still have someplace to live within that 1K to 1.5K per month? Hope I don't seem to be giving you a hard time. I actually greatly admire people who can be extremely frugal but some who come to this forum claiming frugal lifestyles either have not actually lived a frugal lifestyle or at best have only done so for a short period of time.

[TheFlyingScot]

So bonds, reit, etc are all in a roth/ira and stocks in taxable which I get (I have bogleheads books and have read several times)

After mulling it over for the past hour, I guess my REAL questions are:

Is it possible to take inheritance and put some of it into an IRA/Roth? I don't know the allocation of the funds whatsoever at this moment. If it's an inherited ira/roth that answers it right there, but i don't think it is.

Would I want to do this with a portion and invest it in bonds?

With the full inheritance amount in a taxable account, I'll turn my 401a and my wifes 403b into bonds/REIT to get a good mix since inheritance will be in taxble as equities, correct?

How much should I pull from taxable and convert to ira every year? Does is make sense whatsoever to max a ira/roth if I we will be living off the taxable account for essentially 30 years? what would be the benefit? Only thing I can see is pulling from taxable to max a roth and we pull below 19k/year additional and we'd still pay no fed income tax? Seems fuzzy to me.

What should we be pulling (selling stock, claiming div, etc) from the taxable account (everything will be through vanguard btw) to live off every year?

Thanks in advance!!

[nash031]

Welcome!

Seems like you're doing a great job LBYM, better than me!

A couple of things I'd caution:

My wife and I met with her in her late 20's and me in my early 30s. We also agreed on no kids at the time. Sometimes, those things change. As you and DW really approach the age when kids are no longer possible, and that decision is out of your hands and truly final, just be aware that your minds may start to wander a little bit.

The other caution would be your spending level. Based on what you said you like to do, it looks like you might be underestimating your expenses. While I don't begrudge anyone FI/RE, I would be very skeptical about making it 60+ years (and some of those years being ones where most people change their minds about what they want out of life - late 30s, early 40s) on ~$500K with travel involved.

Good luck!

[TheFlyingScot]

Quote:

Originally Posted by jclarksnakes After you take the house out of the expenses do you still have someplace to live within that 1K to 1.5K per month? Hope I don't seem to be giving you a hard time. I actually greatly admire people who can be extremely frugal but some who come to this forum claiming frugal lifestyles either have not actually lived a frugal lifestyle or at best have only done so for a short period of time.

Your not giving me a hard time at all, and I greatly appreciate all the input. Thats why I'm here: this forum has people that get it and make sure all the i's are dotted and t's are crossed.
We have tracked expenses like you wouldn't believe for the past 8 years.
We really spend 1-1.5k/month on living minus housing and have for the past 7 years we have lived together. Avg would be right at 1189/mnth I can break it down for you if you think it would be helpful.
We will be buying a modest piece of land outright and building our own small efficient house (we live in 500sqft now and it's more than enough) I have the skills and knowledge/experience to do such. Other than property tax and minimal upkeep (counting on 2k/year) we will have nothing as far as housing.

Yes I agree that having healthcare subsidized through work is nice currently, but my inputs into FIRECALC account for more than a HDHCP and actually something closer to what I have now.
Healthcare is, and will always be the biggest hurdle to our early retirement.
Reading over MMM blog, I think we may lean that way.

[Accidental Retiree]

Quote:

Originally Posted by TheFlyingScot Is it possible to take inheritance and put some of it into an IRA/Roth? I don't know the allocation of the funds whatsoever at this moment. If it's an inherited ira/roth that answers it right there, but i don't think it is. ....

IRAs, whether traditional or Roth, must come from earned income, so unless there is something I'm forgetting -- and someone will be along shortly to let us all know if I did forget -- then you can't put the inheritance into an IRA.

[TheFlyingScot]

Quote:

Originally Posted by Accidental Retiree IRAs, whether traditional or Roth, must come from earned income, so unless there is something I'm forgetting -- and someone will be along shortly to let us all know if I did forget -- then you can't put the inheritance into an IRA.

Thats what I'd gathered but I just wanted to make sure.

Does it make sense, then, to pull out of taxable every year to fund a roth/traditional ira to get the mix of stocks in taxable and bonds in retirement accounts to a good balance or for tax purposes?
I havent got my spreadsheet advanced enough yet to calculate the benefit of that strategy, if it's really even necessary in the first place

What I'm envisioning, which is at this stage a certainly open for criticism/comment:

Years 1-5
2013-2018ish

-Put entire inheritance into taxable account with vanguard, lets say it's 350k (hoping more, but I don't know how the taxes will be/estate was set up stated amount was 500k)

-Continue working, while putting 8% (3%me5%employer) into 401A TIAACREF and start switching that to bonds and other instruments that should be in retirement account over the next 5 years so $5k/yr for 5 years=25k+40k currently=65k which will be switched entirely to bonds/reits, and other instruments that belong in retirement acct. This doesnt account for growth, but is a gross simplification!

-Wife continues working and puts 6% (3%her 3%employer) into 403b. Same strategy for allocation as mine (bonds, reit, etc) so 3500/yr=16500ish over 5 years+20k current balance=36.5k, again, not accounting for growth in this sample

-Combined we'd have roughly just over 100k in retirement accounts at the end of 2018 plus whatever growth they would see.

-Put roughly 50-60k year into taxable accn't minus 150k needed for future property/house so say 50k*5years=250k-150k=100k into taxable on top of the 350k=450k in taxable with emphasis on equities.

-buy property where we want+build house on property (budgeting 150k total)

-sell house here (will most likely just break even or negligible profit)

-Leave jobs with 100k in retirement accts and 450k in taxable.
-living expenses will be 30k/year (2500/mth) at the upper upper limit including travel and other life choices (house maintenance, new car every 10 years, etc etc)
years 5-"retirement age"
2019-2043me 2045wife

-purchase reasonable health insurance policy that accounts for catastrophic events as can be read about here:

Our New $237/month Health Insurance Plan | Mr. Money Mustache


-pull living expenses from taxable at a variable amount as needed, but not to exceed 4% or so in the beginning, thereby limiting us to roughly 20k the first few years until the amount invested has grown to a healthier amount. How we pull this theroretical $ out is yet to be determined to minimize taxes. If its sale of stock and therefore short term capital gains yet under the minimum required to pay federal tax it doesnt matter right?

-retirement accounts grown untouched

-Collect 90k return on 30 yr return of premium life insurance policy in 2039


I know I'm leaving out a bit here and it is grossly simplified but is there anything wrong with this?
-I'd honestly feel better if that amount was higher than $550k

[TheFlyingScot]

I think I am safely not counting on SS at my age either

[Midpack]

Quote:

Originally Posted by TheFlyingScot I think I am safely not counting on SS at my age either

I didn't plan on SS either, though I am sure there will be something there even when you choose to retire. It's not going to disappear completely, but I'd be very surprised if today's projections come to pass for generations to come...

[mpeirce]

Quote:

Originally Posted by TheFlyingScot -purchase reasonable health insurance policy that accounts for catastrophic events as can be read about here: Our New $237/month Health Insurance Plan | Mr. Money Mustache

This portion of your plan is a wild card. Depending on how things go over the next few years, this type of health insurance option may not exist.

[jclarksnakes]

Quote:

Originally Posted by mpeirce This portion of your plan is a wild card. Depending on how things go over the next few years, this type of health insurance option may not exist.

+1. I do understand that SS may have to be changed so much that we will lose some of it due to means testing or limiting the COLA. What I do not understand is how people can completely discount the value of their future SS and at the same time plan that the ACA will keep their HC insurance costs flat over a long retirement.

[pb4uski]

If I were in your situation I would use the inheritance to supplement your living if needed after maxing our your tax-deferred (401k, 403b, etc) and tax-free savings opportunities (Roth IRA if you qualify, HSA if you have a HDHI plan, etc). By doing so you are over time able to "transfer" a substantial portion of your taxable account inheritance into tax deferred and have a balance of taxable and tax deferred when your retire.

Second, sketch out your situation in Quicken's Lifetime Planner and then have Vanguard (or Fidelity of you go with them) do a financial/retirement plan for you. It will likely be free but will be well worth it even if you have to pay something for it.

Also, continue to use Quicken to manage your finances and track your living expenses and repeat the Vanguard financial plan every few years.

The work the plan, enjoy life and ultimately RE!

[kmccutcheon]

Make sure you maximize your qualified accounts contributions. I would maximize contributions over the next several years to take advantage of tax deferral until you reach a comfortable level in your taxable account to meet spending requirements.