Crash Course Guide on ER Income Strategies?

[bearkeley]

Hi all - just RE at 47 and DH is 2 months from doing the same at 49. We have been on this board for years and have found it very helpful, but I'm starting to get overwhelmed with all the info so hoping to get advice on resources to prioritize (tools, posts, sites, etc).

DH has been the one handling our investments and would feel better if I learned more about them so we can both make decisions. I've been able to use the 'I'm too busy' card this whole time to avoid it (not the most fun thing to learn!), so links to good articles or cliff notes would be nice!

A little about us and where I need help (pls let me know if there's something I'm missing too!)

- 1/3 of assets in rental RE, rest in diversified investments (about 60 percent in deferred taxable accounts)

- Rental income funding about 1/3 of our monthly expenses, 1/4 funded by taxable interest ( mortgage backed loan), rest from investment account currently in Vanguard. (Plan to live on 3.2 percent of net worth). No need to touch 401k until 10-15 yrs. Also have a small pension expected in the future (10 yrs out) and maybe SS if still solvent.

I have been very involved with our RE investments for nearly 15 years so aside from tax minimization strategies long term, I think I got this part covered. However, here's what I find very overwhelming:

1) Vanguard account (taxable) - This is our pot of money we plan to live on for the next 10 - 15 years until 401 k kicks in and we have exited from rentals...how do I know where to invest it? High dividend and LTCG are best for tax minimization, but do we invest to diversify this account (vs total portfolio) or invest to best minimize taxes (while earning conservatively). Guessing the second, but where do I go to learn more? Do I research bond ladders, retirement income accounts, high yield?

2) Tax minimization....zero tax on early retirement income. I saw some good posts here already and even played with the turbotax calc. I get the basics but certainly need more help here. Want to try to get Obamacare subsidies but any cheat sheets out there explaining more about the basics but also touches on HSAs, 72t, self employment, etc?

Anything else I need to learn? I appreciate the help! Want to be efficient so I can enjoy being retired!




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[Senator]

If you live on 3.2% of your net worth, how much of your liquid investments (stocks, etc.) will you be drawing?

The Rental property might be net worth, but other than rent it's hard to spend.

 

[MBAustin]

Congratulations on your ER and we all applaud you for getting more involved financially!

There are a number of threads in the FAQ forum which might be useful, including one on the ACA:
Early Retirement FAQs - Early Retirement & Financial Independence Community

For basic investing books, many here have recommended
"The Four Pillars of Investing" and "The Intelligent Asset Allocator" by William Bernstein and
"The Boglehead's Guide to Investing" by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf

Is there a reason you are keeping your 401K rather than rolling over to an IRA? If you consolidated your investments to Vanguard, would that give you Flagship status? You can get some basic advice from them, and run lots of scenarios on their website as well.

Most of us here would first settle on an overall asset allocation and then sort out the taxable vs. tax-deferred accounts based on the overall plan.

 

[bearkeley]

We figure we need about 8k per month on average to fund our life. We are assuming approximately $2,000 per month from the mortgage interest and $3,000 per month net income from the rentals. Leaving a $3,000 per month short fall to be funded from our taxable accounts until my husband reaches 59.5 in approximately 10 years. Those accounts have approximately $560,000 in them with $160,000 in cash and the rest in vanguard mutual funds with roughly 50 percent Bonds, 40 percent stock and 10 percent REIT.

So in theory we could just put the money in a savings account pull out 36,000 a year and still have $200,000 available for an emergency. But that is probably not the wisest move. Every dollar after tax that the money earns is one less that we have to take from the principal.

So what we are struggling with is what is a reasonable way to deploy the $560,000 that would preserve some cash for emergencies, provide income through interest, dividends, and capitol gains without too much exposure to capital loss.




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[akck]

Here's the book I recommend for investing:

http://www.amazon.com/Investment-An...wer&qid=1462571548&ref_=sr_1_1&s=books&sr=1-1

It basically covers what I learned in graduate school and gives asset allocations for various risk levels. The returns might be high in the current market (only time will tell), but should scale accordingly.

When I was years away from retirement, I thought I'd be actively investing in individual stocks. As I got closer, it felt like it would be too much work, so I moved/moving to index fund investing, selling individual stocks and reinvesting in index funds. My only tweaking is I weight my allocation towards segments that will hopefully increase my return.


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[Markola]

I am not FIREd but I think the Vanguard LifeStrategy funds-of-index funds are hard to beat for simplicity, global diversification, auto-rebalancing, low fees and results. There is just a lot of good keep-it-simple-and-inexpensive Vanguard index fund thinking baked into those particular funds. My ideal in FIRE is to have everything in one of these 5 funds, and we currently have most of our assets in the Growth fund since we are still working. We're saving up in the LifeStrategy Income Fund to pay off the house in 6 years. Saving pure cash seems too conservative for that goal and I want a little interest and compounding to happen. Given your goal to spend down your taxable accounts over 10 years while earning some returns, you might wish to be in the LifeStrategy Income Fund or the Conservative Growth Fund. My $.02 based on what you posted.

 

[papadad111]

Broadly speaking dividends will return about 2.5-3 percent. On 560k that's about 15k pretax in income per year, not enough to close your gap.

I think knowing how large the reinforcements will be come age 59.5 helps to decide how to handle the taxable account over the next decade or so.

I think you can assume some level of SS at 62. Probably 70 percent is a good starting point. What else will you have at 59.5 ? Home value ? Total net worth?

Seeing the total asset allocation picture is important too.

Otherwise, spend about 6 percent of the portfolio per year , 36k per year , for a decade and have 200k for emergencies. Put it in something balances like Wellington or Wellesley and let it ride. Keep 200k in cash to cover emergencies and/or down market periods til 59.5

I won't say cut expenses til we can understand total NW... That's an option but maybe not relevant or desired in your situation. Not enough info.

 

[brucethebroker]

Obamacare subsidies end at +/- $64k for a couple. It is based upon Modified AGI, and they have their own formula. Rental income is discounted by depreciation. Self employment income is based on net. IRA's, HSA's and SEP's all reduce the income number. The interesting thing is that net worth does not affect your qualification-only income.

I don't know about cap. gains and dividends. But I do know that if you make even a dollar over the $64k number, you can lose the entire (about $5k-10K) tax credit.

IRA, HSA, etc., allow you to have a last minute adjustment to your income at tax time. One year you might need to make a contribution, the next year not.

Your Accountant should know how project your qualification for subsidies. (We recently sold a small rental, and considered 1031 exchange to save our subsidy. But CPA told us we would be OK to take the tax hit-we had room for the extra income. That was a relief since we really did not want to replace that rental.)

Also, having the tax credit does Not affect your ability to take your "net" health care payment off your self employed business.

 

[pb4uski]

......So what we are struggling with is what is a reasonable way to deploy the $560,000 that would preserve some cash for emergencies, provide income through interest, dividends, and capitol gains without too much exposure to capital loss. ...

A bulletproof way would be to put ~$345k in an online savings account earning ~1% and then just set up an automatic $3k per month transfer to your bank account. And then invest the remainder Total Stock (or in a combination of Total Stock/Total International Stock) for tax efficiency (I'm assuming that you can use your 401ks to balance out to your target AA). The present value of $3k/month for 126 months @ 1% is $342k and should be able for fund $3k/month withdrawals from 49 to 59.5.

Another option would be to put the $560k in Total Stock (or a combination of Total Stock/Total International Stock) and set up a $3k/month redemption and transfer to your local bank account.

With domestic and international equities you'll get good tax efficiency, mostly qualified dividends and foreign tax credits and you can balance out to your target asset allocation through your 401ks.

One thing to keep in mind is that a fixed $3k/month assumes no inflation in your expenses which is probably unrealistic so if your want to incorporate inflation the allocation to the online savings account would be higher... about $400k with 3% inflation.

YMMV

 

[MrLoco]

First congratulations on what you have accumulated to date. It's never easy. As others have mentioned, one of the problems is we do not know how much money is in the "total pot." If you were to say that the 401k currently has $2M with the potential to be worth $3M + in ten years, then I would say you have a viable plan. If the amount in the 401k is $500,000.....then not so much.

Just to keep things simple....if in your taxable account....you keep $60,000 in cash for emergencies and $500,000 in any asset allocation you chose....a 4% withdrawal still only yields $20,000/ year .... a shortfall of $16,000 from what you desire on an annual basis. Plus, even if this money does last for ten years....at 59+ any withdrawals from the 401k/IRA will be taxed as ordinary income. Unless you plan to sell the rentals in 10 years to refill your taxable account?

Also, what is your back up plan for empty rentals, tenant evictions, etc. where there is reduced rental income that you were depending on to reach that $8,000/month goal? Also, you will need health insurance. And that is a completely separate issue especially if you want an ACA subsidy and need to manipulate your income. Not trying to be negative. Just think you need to cover all possible scenarios.

Best of luck to both of you and let us know what you decide.




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[bearkeley]

Thanks guys. The FAQ stickies have a ton of info....not sure how I missed them!

According to Personal Capital today we have a net worth of approximately $3.3 million. With approximately $1.1 million equity in real estate rentals and $2.2 million in paper investments with $650k in hubby's 401k and 50k in his IRA, I have $450 in my 401k plus another 50k in my IRA for a total of $1.2million in retirement accounts. Plus the $560k already discussed with the remaining $440k held in mortgages on commercial property.

The $3,000 a month is a pretty conservative number we have had rentals for over 10 years and understand vacancies and repairs. When full like now our gross rents are around $9,500 with $5,500 left after mortgages and taxes and other fees. We understand the rental income and expenses are lumpy which is why we want higher than normal savings and have a HELOC. One nice thing about some rents is they tend to increase with inflation along with property values.

In 10 years my husband will reach the magical age of 59.5 giving him penalty free access to his retirement accounts, two years later I will have access to mine. At 62 my husband will begin to receive a small pension worth $2,500 a month with social security kicking in at the normal age.

The asset allocation in our retirement accounts is 60 percent stocks (broad index funds) 40 percent bonds (G fund and total market funds).

We are pretty comfortable that we will be okay in 10 years, especially with the RE investments and additional income streams at that we have. The immediate concern is what is the best way to bridge the gap and utilize the $560 k.


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[pb4uski]

..... The immediate concern is what is the best way to bridge the gap and utilize the $560 k.....

Here's another option: Invest your taxable funds for tax efficiency in equities and your plan B could be to start 72(t) distributions from your 401ks or IRAs if investment results are adverse and you exhaust your taxable funds.

Or perhaps a mix where you keep $100k in an online savings account for liquidity, the remainder in equities but with dividends taken in cash. Assuming the equities yield 2% then the $100k in cash should cover close to 4 years of withdrawals with a plan B of 72(t) from one of your 401k or IRAs.

 

[cyber888]

NW of $3.3 M ? $2.2 M investments ? You'll be OK. No need to worry. Do a 72t if your $560K runs out, which I doubt.

Thanks guys. The FAQ stickies have a ton of info....not sure how I missed them!

According to Personal Capital today we have a net worth of approximately $3.3 million. With approximately $1.1 million equity in real estate rentals and $2.2 million in paper investments with $650k in hubby's 401k and 50k in his IRA, I have $450 in my 401k plus another 50k in my IRA for a total of $1.2million in retirement accounts. Plus the $560k already discussed with the remaining $440k held in mortgages on commercial property.

The $3,000 a month is a pretty conservative number we have had rentals for over 10 years and understand vacancies and repairs. When full like now our gross rents are around $9,500 with $5,500 left after mortgages and taxes and other fees. We understand the rental income and expenses are lumpy which is why we want higher than normal savings and have a HELOC. One nice thing about some rents is they tend to increase with inflation along with property values.

In 10 years my husband will reach the magical age of 59.5 giving him penalty free access to his retirement accounts, two years later I will have access to mine. At 62 my husband will begin to receive a small pension worth $2,500 a month with social security kicking in at the normal age.

The asset allocation in our retirement accounts is 60 percent stocks (broad index funds) 40 percent bonds (G fund and total market funds).

We are pretty comfortable that we will be okay in 10 years, especially with the RE investments and additional income streams at that we have. The immediate concern is what is the best way to bridge the gap and utilize the $560 k.


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