Best way to use after tax accounts until 59.5

[nun]

I plan on ER at 52 when the mortgage will be paid off and I estimate that I'll have the following balances and outgoings

Monthly expenses $2500

Monthly rental income $1200
After tax account balance $150k
Tax deferred 457 balance $50k
Tax deferred 401k/IRA $500k
At age 55 I'll get a small monthly pension of $500

How would you guys use/allocate the after tax and 457 money to get me to 59.5? I realize I'll have to spend down my principal.

My initial thoughts are to have a mix of bond index and TIPS funds in the 457 and in the after tax account a year's expenses in cash and the rest in equity index funds. I'll take dividends and sell some of the equity funds from the after tax to keep my cash bucket full and hopefully I won't have to tap the 457.

I have some fall back options if I run out of after tax and 457 funds before 59.5. I can swap apartments and increase the rental income to $2400/month, I could get a part time job, and I could tap the 401k/IRA accounts and pay the penalty.

What do you think?

 

[teejayevans]

I plan on ER at 52 when the mortgage will be paid off and I estimate that I'll have the following balances and outgoings

Monthly expenses $2500

Monthly rental income $1200
After tax account balance $150k
Tax deferred 457 balance $50k
Tax deferred 401k/IRA $500k
At age 55 I'll get a small monthly pension of $500

How would you guys use/allocate the after tax and 457 money to get me to 59.5? I realize I'll have to spend down my principal.

My initial thoughts are to have a mix of bond index and TIPS funds in the 457 and in the after tax account a year's expenses in cash and the rest in equity index funds. I'll take dividends and sell some of the equity funds from the after tax to keep my cash bucket full and hopefully I won't have to tap the 457.

I have some fall back options if I run out of after tax and 457 funds before 59.5. I can swap apartments and increase the rental income to $2400/month, I could get a part time job, and I could tap the 401k/IRA accounts and pay the penalty.

What do you think?

If you think you'll fall short, you can do a 72t on the IRA and get money
out before 59.5, without paying a penalty, you of course will have to
pay taxes (I assume it's not a Roth IRA).
TJ

 

[LOL!]

You might wish to use this tool: Optimal Retirement Calculator and Retirement Decision Support System

It reads like you are talking about ($2500-$1200) x 12 ~= $16K in annual withdrawals. If you use your taxable account, this will put you in 0% tax bracket because return of capital is tax-free and selling equities at a loss helps reduce your taxes. Thus you can convert some of your tax-sheltered funds to a Roth at a very low tax rate each year.

I myself would not have a year's worth of expenses in cash in the taxable account. I would have it in a tax-sheltered account. Sure, cash is not earning any kind of interest nowadays, so any interest earned will hardly change your taxes. But if you have any equities in tax-sheltered, you will not be able to do the tax loss harvest thing when they drop in value. Thus, I recommend nearly 100% equities in taxable if you fit all your cash and fixed income in your tax-sheltered accounts. I have posted before on how to get access to that cash in tax-sheltered accounts without any problems or penalties.

 

[nun]

You might wish to use this tool: Optimal Retirement Calculator and Retirement Decision Support System

It reads like you are talking about ($2500-$1200) x 12 ~= $16K in annual withdrawals. If you use your taxable account, this will put you in 0% tax bracket because return of capital is tax-free and selling equities at a loss helps reduce your taxes. Thus you can convert some of your tax-sheltered funds to a Roth at a very low tax rate each year.

I'll have $14400 in annual rental income so once the standard deductions and exemptions are taken I'll be in the 10% bracket, but I'll probably still do the IRA to ROTH conversion up to the top of the 10% bracket.

I myself would not have a year's worth of expenses in cash in the taxable account. I would have it in a tax-sheltered account. Sure, cash is not earning any kind of interest nowadays, so any interest earned will hardly change your taxes.

So do you keep say a month's cash in the bank, selling after tax equities once a month to keep it topped up and rebalance by buying some equities in your tax deferred accounts?

 

[LOL!]

First, I am not retired. I work part-time and my spouse works, so we have income. Second, the index funds in our taxable accounts pay dividends, so that brings in more cash each quarter. Third, I use a broker where I get free trades, so selling shares every month would not incur extra charges.

So if I was fully retired, I would probably not start off by selling every month, but would probably end up keeping 2 to 3 months of cash in checking at first and then seeing how it went.

 

[nun]

So if I was fully retired, I would probably not start off by selling every month, but would probably end up keeping 2 to 3 months of cash in checking at first and then seeing how it went.

That sounds like a good approach, but as my cash requirements are pretty small at $16k a year I think I'll keep that in the bank and top it up by selling some equities every quarter. So in my after tax I'll have

cash - $16k
mix of Vanguard index equity funds - $134k

If I get say 2% dividends that will only be $2.5k so I'll need to sell some funds to get me up to my $16k expenses. Even if the funds increase in value by 5% I'll only have about $7k in gains so I'll have to liquidate $6.5k of my $134k principal. But I'll only have to do that for 3 years until 55 when I get my $6k/year pension.

This is all a bit tight, so I'll either trim my expenses of just move downstairs and rent out the big apartment I live in right now and increase my monthly rental income from $1200 to $2400. That way I'll only need $6k/year from my after tax money and that should be doable without eating into principal.