Funding from 52.5 to 59.5

[nun]

Like many potential ER'ers I have most of my money tied up in tax deferred retirement accounts that aren't easily accessible until 59.5. So my ER schedule is driven by not wanting to do a 72t and saving enough into accounts that I can get at without penalty before 59.5. Early next year I'm going to ER , but I wanted to see what you make of my AA and strategy for the years up to 59.5

I have $775k in retirement accounts that I don't want to touch until 59.5 and $230k in funds that I can access with no penalty.

I own a two family, have no debt or mortgage and get $1200/month in rent. My monthly expenses are $3k so I have to produce $1800/month from a combo of principal and gains from the following:

Cash
$20k

Taxable equities
$30k in Vanguard Total Stock Market
$30k in Vanguard International Stock market

457 funds (tax deferred and available with no penalty, but withdrawals taxed as income)
$30k stable value fund
$40k US equity index
$40k International equity index
$40k REIT

assuming 3% inflation, 2% return from the stable value fund and 5% from the equities and REIT things look good on my spreadsheet. I plan to spend from the cash account and whenever it gets down to $10k sweep gains and some principal from my taxable equities into my cash account. Once the taxable equities are down to $20k I'll do the same using the 457 equities. If there is a market down turn and I don't want to sell equities I'll use the stable value fund.

My emergency fall back position would be to move into the downstairs apartment I currently rent out for $1200/month and rent out the larger upstairs apartment I live in now for $1800/month, I could always use my ROTH which has $50k in it, 72t some funds and lastly there's always part time w*rk.

 

[heeyy_joe]

Don't forget that if you decide to hang in there until age 55 you are able to withdrawal from 401K at present employer without going 72T or paying 10% penalty.

Based on your post I think you can swing it as long as you stay healthy.

 

[omni550]

Have you run i-orp to get another perspective?

omni

 

[nun]

Don't forget that if you decide to hang in there until age 55 you are able to withdrawal from 401K at present employer without going 72T or paying 10% penalty.

Based on your post I think you can swing it as long as you stay healthy.

I don't have a 401k and don't have that option in my 401a plan.

The health thing is a worry. I'm in good health now, but who knows? I've budgeted $500/month for insurance with increases going at twice inflation. That will buy me a "silver plan" with $1k/$2k annual deductible and out of pocket max. However, given my relatively low income I might qualify for a state subsidy, I don't know if they take assets into account. As I'm a UK citizen I also have the option to move back to the UK and use the NHS at zero cost to me so that's a fall back situation as long as I have enough time to plan.

 

[nun]

Have you run i-orp to get another perspective?

omni

Yes, it agrees pretty well with my spreadsheet. i-orp has me running out of money at 61.

 

[walkinwood]

Funding 7 years from an equity heavy portfolio is risky in my opinion. What happens if you model a 2002 to 2008 scenario or a 2006-2012 or if you started in 2008, what would your current situation be?

I haven't thought of this in depth because it is very different from my personal case. But, I would be thinking of a more conservative portfolio with a cash/short-term bond allocation that covered a couple of years of expenses. I'd also research period-certain annuities (though I haven't)

You are wise to have multiple back-up plans.

 

[nun]

Funding 7 years from an equity heavy portfolio is risky in my opinion. What happens if you model a 2002 to 2008 scenario or a 2006-2012 or if you started in 2008, what would your current situation be?

I haven't thought of this in depth because it is very different from my personal case. But, I would be thinking of a more conservative portfolio with a cash/short-term bond allocation that covered a couple of years of expenses. I'd also research period-certain annuities (though I haven't)

You are wise to have multiple back-up plans.

The $20k in cash and $30k in stable value will cover just over 2 years of spending, but I could add to them a bit and still succeed. I could get the $1800/month by using $200k to buy a 10 year annuity, but I could get a similar result by putting the $200k into my stable value fund and I'd keep access to the principal in case of emergencies. I wouldn't want to go into ER with just $25k in accessible reserves.

I also have the option to get an extra $600/month in rent, there is some room for me to economize, I can tap the ROTH or do a 72t. Another variable is health insurance. Right now if I retire next year I would get a "Cadillac" employer sponsored health insurance after 55 for $100/month. There was a proposal to eliminate this, so I am currently budgeting $500/month towards premiums. But it now looks like I might get grandfathered in so that would be another big bonus if it works out. I think I have enough options to make this work. Once I get to 59.5 I can use the tax deferred money, which should be close to $1M. Then I will also get a $500/month pension and $4k/month in SS at 66.

 

[daylatedollarshort]

Have you thought about having a mortgage for awhile? That way you could increase your after tax savings and have money to draw down those funds in your pre-SS years without increasing your MAGI to stay under health care subsidy limits. The health care subsidies can be worth a lot between the lower premiums and out of pocket maximums. The lower the MAGI the lower your premiums and OOP max.

I think if you arrange your income correctly you won't need $500 a month for exchange insurance, if the calculator estimates we have now are close to what actual rates will be.

Personally I would not be equity heavy with money I absolutely had to have to live on, but your risk tolerance may be greater than what I could stomach. If it were me I would move to the smaller flat and get a part time job if needed and put less in equities. You can control part time work and rental income better than you can control what happens in the stock market.

 

[nun]

Have you thought about having a mortgage for awhile? That way you could increase your after tax savings and have money to draw down those funds in your pre-SS years without increasing your MAGI to stay under health care subsidy limits.

Well I worked hard to pay off the mortgage just so that I don't need to generate the income to cover it. Right now I max out 401a, 403b, 457 and ROTH accounts. I have considered stopping the 403b and saving more into taxable accounts, but the massive reduction in my taxable income that deferring so much income produces is hard to give up.

The health care subsidies can be worth a lot between the lower premiums and out of pocket maximums. The lower the MAGI the lower your premiums and OOP max.

I think if you arrange your income correctly you won't need $500 a month for exchange insurance, if the calculator estimates we have now are close to what actual rates will be.

The $500/month premium is for a mid range plan on the MA health exchange. I could get a basic one for $325 and I might even qualify for the state subsidized plan, but I feel bad about applying for that because I'd be controlling my income to game the system and there are plenty of people out there who really need the subsidy.

Personally I would not be equity heavy with money I absolutely had to have to live on, but your risk tolerance may be greater than what I could stomach. If it were me I would move to the smaller flat and get a part time job if needed and put less in equities. You can control part time work and rental income better than you can control what happens in the stock market.

I figure than my ER AA is 40% real estate in the form of rental income, 5% cash, 8% stable value and 47% equities. I could actually replace the equities with stable value and assuming 2% return still make things work. In fact looking at this I think I will increase the stable value component up to 20% and reduce the equities to 35%. That way I'll have 4.3 years of spending in cash and stable value.

 

[Animorph]

#1 Never count on equities over a short 7 year period. I'd be more conservative in your taxable accounts, lots of cash or bonds. However, see #2.

#2 I'd start withdrawing from your 457 accounts up to maybe the 10% tax bracket (you are in the US right?). Or maybe whatever you can withdraw tax free (after deductions and exemptions), since your income needs may be low enough. Fill in the 15% bracket with 0% capital gains from your taxable account.

Anything you can get out of the 457 account tax free is as good as waiting to 59.5 I would think. And you can't beat 0% capital gains.

Once you can get 0% capital gains, you might swap the stable value fund for equities and your taxable equity funds for cash or bonds. Same total AA, but now your taxable account won't suddenly drop if the market falls.

 

[nun]

#1 Never count on equities over a short 7 year period. I'd be more conservative in your taxable accounts, lots of cash or bonds. However, see #2.

#2 I'd start withdrawing from your 457 accounts up to maybe the 10% tax bracket (you are in the US right?). Or maybe whatever you can withdraw tax free (after deductions and exemptions), since your income needs may be low enough. Fill in the 15% bracket with 0% capital gains from your taxable account.

Anything you can get out of the 457 account tax free is as good as waiting to 59.5 I would think. And you can't beat 0% capital gains.

Once you can get 0% capital gains, you might swap the stable value fund for equities and your taxable equity funds for cash or bonds. Same total AA, but now your taxable account won't suddenly drop if the market falls.

Whether to take money from the 457 during years when my taxable income is low is always a trade off between a low tax rate and loosing the tax deferred compounding.

 

[daylatedollarshort]

but I feel bad about applying for that because I'd be controlling my income to game the system and there are plenty of people out there who really need the subsidy.

Aren't you maximizing your retirement savings now to game the system to pay as little taxes as possible? You have to do what works for you but I don't see a difference. It is not like if you get a higher subsidy a single mother with three kids loses hers.

 

[daylatedollarshort]

Whether to take money from the 457 during years when my taxable income is low is always a trade off between a low tax rate and loosing the tax deferred compounding.

If you take money out of your house you can borrow at historically low rates, not increase your MAGI (if you work the numbers right) which helps qualify for health care subsidies, and you can let your retirement accounts continue their tax deferred compounding.

 

[nun]

Aren't you maximizing your retirement savings now to game the system to pay as little taxes as possible? You have to do what works for you but I don't see a difference. It is not like if you get a higher subsidy a single mother with three kids loses hers.

I see the logic, but I own a house and have $1M in assets and I simply feel that I can afford to pay for medical insurance and so I probably will.

 

[nun]

If you take money out of your house you can borrow at historically low rates, not increase your MAGI (if you work the numbers right) which helps qualify for health care subsidies, and you can let your retirement accounts continue their tax deferred compounding.

I'll save the home equity until I'm old and my employment options (in an emergency) are minimal - right now I could easily find a job if I had to. After running my numbers I can easily generate $36k/year from 52.5 to 59.5 from rent and the $225k I have. My task now becomes AA and withdrawal strategies - how much should I put in cash/stable value fund/equities.

 

[shotgunner]

FIRECALC gives a 100% chance of success for $21,600 annually for 7 years on a starting balance of $230,000, using 50% in equities, 5 year treasury rate for fixed and standard CPI inflation. Worst case scenario leaves $14K balance which might be nerve wracking.

 

[nun]

FIRECALC gives a 100% chance of success for $21,600 annually for 7 years on a starting balance of $230,000, using 50% in equities, 5 year treasury rate for fixed and standard CPI inflation. Worst case scenario leaves $14K balance which might be nerve wracking.

If I was to just put $230k into a stable value fund and get a 2% return and assuming 3% inflation I could take out an inflation adjusted $21.6k for 7 years and still have $86k left.

 

[Animorph]

If I was to just put $230k into a stable value fund and get a 2% return and assuming 3% inflation I could take out an inflation adjusted $21.6k for 7 years and still have $86k left.

Yeah, that works for 30 years too. According to a simple spreadsheet I was doing for life expectancy based withdrawal rates it only takes a 1.5% real return to provide an annuity-like 4% withdrawal for 31 years. Though that's with $0 left.

I looked at something very similar for college funding for my kids. I could keep the money very conservative and spend it all. Or I could hold it in stocks and, best case, pay for college entirely off investment gains without touching the principal (so to speak). I figured it wasn't much different from normal retirement spending levels and went with the equities. No complaints so far.

I just can't resist the non-worst case ending values from FIRECalc with lots of equities. There is safety in having a good sized portfolio, and I don't mind passing it on to my kids.

 

[tuixiu]

Don't forget that if you decide to hang in there until age 55 you are able to withdrawal from 401K at present employer without going 72T or paying 10% penalty.

Interesting thought = I wonder if anyone has ever taken a job at age 55 just long enough to play the IRA->401k shuffle, then quit.

 

[nun]

Any further suggestions for AA and and withdrawal strategies to generate a 0.03% inflation adjusted $21.6k income from $230k for 7 years?

 

[twolfy]

Might want to toss that question out to the folks at: bogleheads.org also.

 

[photoguy]

Any further suggestions for AA and and withdrawal strategies to generate a 0.03% inflation adjusted $21.6k income from $230k for 7 years?

To minimize risk (at the expense of returns) you can just put everything in cash (or cash equivalent). At 3% inflation you won't run out.

To maximize returns (at the expense of risk) you can go 100% equities.

To go a middle ground, just interpolate between the two according to your risk tolerance. Given that the drawback of poor equities returns is minimal (you have to tap 72t), I would probably take a chance and go with a higher equity portion.

Stable value doesn't seem attractive to me because it sounds like even less risk than bonds (and hence less return).

 

[postepy]

It looks like like your Asset Allocation is already close to supporting this, if you can keep up with inflation with your stable value, CDs, etc. If this math is correct.

Spending needs are about $150,000. Plus inflation.

$1,800/month * 12 months * 7 years = $151,200. There will also be dividends from the other $80,000 in equities. Even if dividends are cut in half and then rise with inflation, they would provide about $5,500, providing $1,200 and some cushion.

Now there is 5% cash and 8% stable value, but some is in retirement accounts. If that could be “moved” to taxable cash accounts and/or 475 accounts, by swapping cash and equity in both cases, this would already bring the asset allocation close to the spending needs in cash.

Only a few percent more equity would need to be sold to reach $150,000.

If spending needs are larger than expected, there are several backups:
- Withdrawal from retirement accounts often do not carry such a terrible penalty
- 72t with no penalty, but a nuisance and opportunity cost
- As you say, back to UK for free health care
- As you say, downstairs for higher rent income
- As you say, get a job
- As others say, a mortgage
- What most people do. cut back on expenses

Because you have so many choices, there is less need to be extremely conservative.

How can you keep up with inflation?

If you also have U.S. citizenship, you can obtain $10,000 or $15,000 of Series I Savings Bonds per year for 0% return, less 3 months inflation if redeemed before 5 years. Can't redeem first year.

You can also buy 5 year CDs for the last two years of spending, from somewhere with high yield but that lets you break the CD early without too high of a fee. If inflation rises much, you can switch to a bank account or a shorter term CD.

For the first 5 years, it could be more difficult. If your stable value fund only pays 2% and is dropping, it might not keep up. If you don’t want to withdraw from it, or wish to be conservative, you could add some percentage for inflation failure for the first five years, and sell a little more equity. The dividends can also help for, I don’t know, about ¾% inflation loss. $4,300 applied to 5 years expenses, if no help from I bonds.

 

[nun]

Looks like I have my plan to generate the inflation adjusted $21.6k for 7 years.

$20k cash

$60 in taxable Vanguard Total Stock Market

$150k 457 Stable Value fund currently paying 2.66%

As I spend down those assets I'll rebalance the rest of my portfolio.

 

[sengsational]

Interesting thought = I wonder if anyone has ever taken a job at age 55 just long enough to play the IRA->401k shuffle, then quit.

You can do that? Move traditional IRA money into you current employer 401k? That would be awesome! I had resigned myself that I had to go the 72t route. I wouldn't need to move it all, just enough to get me from 55 to 59.5.

I have only a few years worth of contributions in the current employers 401k, but I've kept my former employers 401k intact (super low fees). That one is off the table for age 55 withdrawls, isn't it?