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How do you overcome fear, uncertainty and doubt?
04-13-2012, 04:28 PM
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#1
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Thinks s/he gets paid by the post
Join Date: Aug 2010
Posts: 1,440
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How do you overcome fear, uncertainty and doubt?
I just ran the ORP calculator and got quite a surprise, which I'm not sure I'm comfortable with.
The plan paramaters are for the plan to end at 105 years old (so we'll basically never outlive our money). The plan shows that we can spend $97k/year before taxes which is well above a 4% SWR for the first 12 years of the plan before SS kicks in. Firecalc shows a similar spending ability.
What I'm not sure I'm comfortable with is that we run out of after tax money when I'm just 63 years old. I know that ORP is great at optimizing spending to reduce taxes, but how do you get over the fear of seeing a source of income hit zero so early in retirement?
__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
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04-13-2012, 04:41 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,376
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I think the terminal WR is most important (once SS kicks in). I think it is common for WR to be higher from ER to SS than after SS. If your terminal WR is less than 4% then i suspect that Firecalc and OMP would both show high projected survivorship.
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04-13-2012, 04:51 PM
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#3
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Thinks s/he gets paid by the post
Join Date: Aug 2010
Posts: 1,440
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Quote:
Originally Posted by youbet
Is that $97k real or nominal?
Think of how nice it will be when you start spending post tax dollars at 63 and therefore have lower tax bills to pay. It'll be like getting a raise!
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It is 'today's' dollars. And you're right, at 63 our taxes drop from $15k/year to $3k per year. In those first 12 years it's recommending to roll-over about $100k/year to a RothIRA, so the taxes are super low and RMDs are low as well once we get into our 60s/70s.
__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
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04-13-2012, 05:16 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2005
Posts: 10,252
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Quote:
.... I know that ORP is great at optimizing spending to reduce taxes, but how do you get over the fear of seeing a source of income hit zero so early in retirement?
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Uh, by having other sources of income such as IRAs, 401(k)s, social security benefits, etc.
Or are you falling into the behavioral finance trap of mental accounting and not thinking that the money in your Roth IRA is not as good as money in your taxable account?
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04-13-2012, 05:20 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Aug 2010
Posts: 1,440
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Quote:
Originally Posted by LOL!
Uh, by having other sources of income such as IRAs, 401(k)s, social security benefits, etc.
Or are you falling into the behavioral finance trap of mental accounting and not thinking that the money in your Roth IRA is not as good as money in your taxable account?
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That's exactly right, it's a mental glitch that tells me no account should go to zero. I know it isn't rational, but I can bet money when the time comes to retire I won't feel comfortable spending anywhere near what we're 'told' we can.
__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
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04-13-2012, 05:49 PM
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#6
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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It's far, far better to have all that value moved from your taxable accounts to your Roth account. It's still accessible, without tax problems as needed. I'd be a little worried if all your portfolio was in traditional IRAs only because of the taxes if you had a large unexpected expense. Roth is like a taxable account only better, so no problem.
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04-13-2012, 08:10 PM
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#7
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Thinks s/he gets paid by the post
Join Date: Mar 2007
Posts: 1,860
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But when you transfer it from TIRA to Roth you have to pay taxes, right? So you don't want to convert a lot at one time, right? What's the strategy most of you use for this?
I'm in a very high marginal bracket now...and still working..so I cannot (nor would I want to for tax reasons) convert my 401k to a TIRA, and then to a Roth now.....but after FIRE I may want to do this.
Suggestions on the process?
__________________
"Live every day as if it were your last, and one day you'll be right" - unknown
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04-13-2012, 08:31 PM
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#8
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Moderator Emeritus
Join Date: Dec 2002
Location: Oahu
Posts: 26,860
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Quote:
Originally Posted by Lisa99
I just ran the ORP calculator and got quite a surprise, which I'm not sure I'm comfortable with.
What I'm not sure I'm comfortable with is that we run out of after tax money when I'm just 63 years old. I know that ORP is great at optimizing spending to reduce taxes, but how do you get over the fear of seeing a source of income hit zero so early in retirement?
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Quote:
Originally Posted by Lisa99
That's exactly right, it's a mental glitch that tells me no account should go to zero. I know it isn't rational, but I can bet money when the time comes to retire I won't feel comfortable spending anywhere near what we're 'told' we can.
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It sounds like you're saying that you're going to retire and end up spending less money than you could actually spend.
Now, what exactly seems to be the problem here?
Which would you prefer:
1. Being uncomfortable in ER, or
2. Being comfortable in the workplace...
__________________
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Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
Author of the book written on E-R.org: "The Military Guide to Financial Independence and Retirement."
I don't spend much time here— please send a PM.
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04-13-2012, 08:45 PM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,228
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I got thru the FUD stage by looking over my budget again and again to make sure I didn't miss anything. At first I had failed to account for things like house and car repairs and other buffers, but it didn't take long before I felt it was as solid as I could make it given there's never going to be total certainty.
As far as running out of after tax money at 63, I don't see the issue. You can either start taking SS then, or start slowly draining your IRA, or both. Sounds like you have a huge chunk in your IRA, and once you account for the taxes, it's just like any other money at that point. Just because you don't have to take it doesn't mean you can't.
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04-14-2012, 04:56 AM
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#10
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Thinks s/he gets paid by the post
Join Date: Dec 2010
Location: USA
Posts: 1,050
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Added bold... not yet ER, but...
How is longevity in your family and your personal health? I've played with ages 85 - 100 as no one in my family lived pass 84 or so, no males beyond 70, but I don't want to run out of funds.
Compare the can spend to your expected retirement budget? Is it close or will you have a surplus? When I pull the plug, I'm targeting a 'comfortable' budget, but have a reasonable 'barebone' budget, the gap allows me to be ok. Also, you'll have options with SS if need be.
Still uncomfortable, have a few adult beverages, but your 'can spend' amount listed can result in a good lifestyle for many, YMMV base on your expenses.
Quote:
Originally Posted by Lisa99
... The plan paramaters are for the plan to end at 105 years old (so we'll basically never outlive our money). The plan shows that we can spend $97k/year before taxes which is well above a 4% SWR for the first 12 years of the plan before SS kicks in. Firecalc shows a similar spending ability.
What I'm not sure I'm comfortable with is that we run out of after tax money when I'm just 63 years old. I know that ORP is great at optimizing spending to reduce taxes, but how do you get over the fear of seeing a source of income hit zero so early in retirement?
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04-14-2012, 04:58 AM
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#11
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Thinks s/he gets paid by the post
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
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1) I would run other online calculators and see where and why the differences in analyses are 2) build a year by year, month by month WR analysis (especially around 62, 67, and 85+) 3) if I am still not comfortable, I continue working.
Quote:
Originally Posted by Lisa99
I just ran the ORP calculator and got quite a surprise, which I'm not sure I'm comfortable with.
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__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
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04-14-2012, 08:08 AM
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#12
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Moderator
Join Date: Jul 2010
Posts: 7,945
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You may want to look at your asset allocation across your taxable/tax-deferred accounts and see if you would be comfortable with the remaining allocation once you spend down your taxable accounts. If not, starting to adjust that now rather than later might help you feel more comfortable with the spending level. The source of income is the financial asset, not whether it is in a taxable or tax-deferred account.
__________________
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute." William Feather
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ER'd Oct. 2010 at 53. Life is good.
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04-14-2012, 08:20 AM
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#13
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Thinks s/he gets paid by the post
Join Date: Mar 2006
Location: Houston
Posts: 4,337
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Quote:
Originally Posted by Lisa99
I just ran the ORP calculator and got quite a surprise, which I'm not sure I'm comfortable with.
The plan paramaters are for the plan to end at 105 years old (so we'll basically never outlive our money). The plan shows that we can spend $97k/year before taxes which is well above a 4% SWR for the first 12 years of the plan before SS kicks in. Firecalc shows a similar spending ability.
What I'm not sure I'm comfortable with is that we run out of after tax money when I'm just 63 years old. I know that ORP is great at optimizing spending to reduce taxes, but how do you get over the fear of seeing a source of income hit zero so early in retirement?
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I've found that the basic ORP result is slightly more optimistic (generous?) than FIRECalc. That is before adjusting for taxes since FIRECalc is before taxes. When I run the Monte Carlo feature ORP gives a different median (50% of cases greater than that value) and to get 95% confidence the spending level is significantly below FIRECalc's 95% confidence value. After all this, I don't know how to compare the two calculators and I'm not sure what ORP is really telling me.
Bottom line to your question -- We all get one chance in this life to "buy your ticket and hold on for the ride." You will never know all the variables that will make your plan fail or succeed. You and any significant other needs to decide when the time is right and go for it.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
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04-14-2012, 08:44 AM
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#14
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Thinks s/he gets paid by the post
Join Date: Jul 2005
Posts: 4,366
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Quote:
Originally Posted by Finance Dave
But when you transfer it from TIRA to Roth you have to pay taxes, right? So you don't want to convert a lot at one time, right? What's the strategy most of you use for this?
I'm in a very high marginal bracket now...and still working..so I cannot (nor would I want to for tax reasons) convert my 401k to a TIRA, and then to a Roth now.....but after FIRE I may want to do this.
Suggestions on the process?
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1) Save to traditional IRA now, saving taxes at your current high marginal rate.
2) After you retire (early is best), and before other income sources kick in, convert enough to Roth to bring you up to a lower tax bracket. Your average tax rate will be below even that lower tax bracket marginal rate, and should be well below the marginal rate you saved in 1. You'll need to pay living expenses and conversion taxes with taxable accounts to work this efficiently.
3) After you can't convert any more (I run out of taxable funds before I run out of IRA), keep withdrawing from the IRA up to the lower tax bracket. Use the Roth account to fill in additional income as needed.
4) You may finally overrun your lower tax bracket when RMDs start (as well as other income sources). Not a whole lot you can do then, but it may be that you can improve your tax efficiency by converting a little over the lower tax bracket during 2 and 3 and lowering your RMD during this period.
You have to run your own numbers, since your income during any period may be closer or farther from a tax bracket, or your income may mean you're going to use a higher "lower" tax bracket than most. But those are the basic principles. ORP does after tax calcs that generally optimize the process.
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04-15-2012, 08:54 AM
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#15
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Thinks s/he gets paid by the post
Join Date: Aug 2010
Posts: 1,440
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Quote:
Originally Posted by Aiming_4_55
Added bold... not yet ER, but...
How is longevity in your family and your personal health? I've played with ages 85 - 100 as no one in my family lived pass 84 or so, no males beyond 70, but I don't want to run out of funds.
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On dad's side, both grandparents and so far all of my aunt's and uncles, have made it to mid-late 80s. On mom's side, all have passed before 60 (except mom).
For planning purposes, I'm planning to 90, but I ran ORP to 105 to guarantee we wouldn't run out of money.
__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
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04-15-2012, 09:09 AM
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#16
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Thinks s/he gets paid by the post
Join Date: Aug 2010
Posts: 1,440
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Thanks everyone for your input. The more I study the ORP results, the more thankful I am that we have as large of an after tax acct as we do since we'll be able to use the after tax funds to pay the taxes on the RothIRA conversion.
One question though. I thought if one converted any amount from IRA to RothIRA then you had to pay taxes immediately on the full amount of all your IRAs combined. This is what our tax guy told us when I wanted to do a conversion in 2011.
__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
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04-15-2012, 10:08 AM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,228
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Quote:
Originally Posted by Lisa99
One question though. I thought if one converted any amount from IRA to RothIRA then you had to pay taxes immediately on the full amount of all your IRAs combined. This is what our tax guy told us when I wanted to do a conversion in 2011.
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Huh? No, you just pay tax on the amount you convert. Fire your tax guy.
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04-15-2012, 10:44 AM
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#18
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Full time employment: Posting here.
Join Date: May 2010
Posts: 862
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Quote:
Originally Posted by Lisa99
One question though. I thought if one converted any amount from IRA to RothIRA then you had to pay taxes immediately on the full amount of all your IRAs combined. This is what our tax guy told us when I wanted to do a conversion in 2011.
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Absolutely untrue. Taxes are payable ONLY on the amount being transferred from the Traditional IRA into the ROTH.
I did this last year to bring my taxable income right up to the 15% tax bracket ceiling. I intend to continue to do this each year.
The benefits are that eventually, you have a smaller IRA balance from which to calculate RMDs. A smaller RMD might allow you to remain in a lower tax bracket, plus it might just allow your SS benefits to be taxed a little less if you meet guidelines.
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04-15-2012, 12:39 PM
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#19
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Administrator
Join Date: Jul 2005
Location: N. Yorkshire
Posts: 34,130
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Quote:
Originally Posted by RunningBum
Huh? No, you just pay tax on the amount you convert. Fire your tax guy.
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.. or listen to him more carefully. He probably told you that taxes are calculated based on all your IRA money. (You can't choose just the after tax IRA money to convert or withdraw)
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Enough private pension and SS income to cover all needs
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04-15-2012, 12:48 PM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,305
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Quote:
Originally Posted by Alan
.. or listen to him more carefully. He probably told you that taxes are calculated based on all your IRA money. (You can't choose just the after tax IRA money to convert or withdraw)
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With 4 IRA's, I am still trying to reconcile this. I've read many places that say taxes are calculated based on all your IRA money, and all the online calculators ask to input ALL your IRA money and then what's deductible. Consistent with what Alan has said here.
But I also read over and over again about partial IRA conversions to hold taxes down, presumably you convert each year right up to the next marginal tax rate threshold until all the funds have been converted.
I have to pay taxes on all of it, but I don't have to convert it all.
I've Googled for Roth Conversion guides and FAQ's and haven't found one that speaks to me yet...
But I've run this calculator http://www.archimedes.com/vanguard/r...Consumer.phtml and even though I expect taxes to be higher later, altogether our IRA's are over 90% nondeductible and it tells me I'd lose money converting.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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