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Pre-retirement strategies for retiring in high housing cost area
Old 05-28-2018, 07:29 AM   #1
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Pre-retirement strategies for retiring in high housing cost area

My DH and I plan to retire in 3-5 years and with pensions and savings, we think that we could retire now (110k in non-COLA pensions, 2mil in savings, mostly tax deferred, but we actually enjoy our jobs). We are considering moving to a high housing cost area when we retire for weather, quality of life, and/or family reasons. We are wondering what savings vehicles would be best these last few years of working to achieve our goal of a paid-off house when we begin retirement (or within the first year of retirement, say). We realize that we can buy a cheaper house in a similar or in an outlying area, but we want to position ourselves to be able to buy what we really desire if we want to (e.g., a house close to the ocean).


Current Ages: DH: 55, Me: 53
Current house value: 500k, paid off
Future House up to 1.2mil
Taxable 200k
Roth IRAs DH: 30k, Me: 210k (all converted many years ago)
401ks: DH: 600k, Me: 270k
Rollover IRAs DH: 560k, Me: 320k



What we are saving per year:
24,500 each in 401ks.

40,000 to taxable
We both work for the same mega-corp which just this year started offering in-plan Roth conversions, so we are contributing up to the 61k limit after tax (DH: 27k, Me 31k). I plan to convert these once per year


Options:
  • Leave as-is: I'm unclear on the roth conversion rules. Is it basically each conversion must meet the 5 year rule unless you are 59.5 yrs old? If so, we aren't going to have access to much of that unless we wait until DH is 59.5
  • Reduce 401k to just what is required to get the company match, which would free-up ~25k/yr total. Put that in 401k roth conversion or taxable?
  • Stop 401k after-tax contributions and convert DH's rollover IRA to Roth? We can convert roughly 50k per year before maxing out the 24% tax bracket. Is the 5 year rule the same for this type of conversion?
We feel very fortunate to be able to consider this and I really appreciate any help with this - you all are very generous with your time to help strangers out!

Linda
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Old 05-28-2018, 07:50 AM   #2
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Quote:
Originally Posted by lindalou View Post
My DH and I plan to retire in 3-5 years and with pensions and savings, we think that we could retire now (110k in non-COLA pensions, 2mil in savings, mostly tax deferred, but we actually enjoy our jobs). We are considering moving to a high housing cost area when we retire for weather, quality of life, and/or family reasons. We are wondering what savings vehicles would be best these last few years of working to achieve our goal of a paid-off house when we begin retirement (or within the first year of retirement, say). We realize that we can buy a cheaper house in a similar or in an outlying area, but we want to position ourselves to be able to buy what we really desire if we want to (e.g., a house close to the ocean).



Current house value: 500k, paid off
Future House up to 1.2mil
Taxable 200k
Roth IRAs DH: 30k, Me: 210k (all converted many years ago)
401ks: DH: 600k, Me: 270k
Rollover IRAs DH: 560k, Me: 320k



What we are saving per year:
24,500 each in 401ks.

40,000 to taxable
We both work for the same mega-corp which just this year started offering in-plan Roth conversions, so we are contributing up to the 61k limit after tax (DH: 27k, Me 31k). I plan to convert these once per year


Options:
  • Leave as-is: I'm unclear on the roth conversion rules. Is it basically each conversion must meet the 5 year rule unless you are 59.5 yrs old? If so, we aren't going to have access to much of that unless we wait until DH is 59.5
  • Reduce 401k to just what is required to get the company match, which would free-up ~25k/yr total. Put that in 401k roth conversion or taxable?
  • Stop 401k after-tax contributions and convert DH's rollover IRA to Roth? We can convert roughly 50k per year before maxing out the 24% tax bracket. Is the 5 year rule the same for this type of conversion?
We feel very fortunate to be able to consider this and I really appreciate any help with this - you all are very generous with your time to help strangers out!

Linda
Hi Linda,
I don't believe you mentioned your current ages. See below link for an article for some in depth language on Roth IRA's.

www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/
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Old 05-28-2018, 07:55 AM   #3
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Thanks for pointing out that I forgot our ages, Dtail! I edited my OP, but here they are anyway:


Current Ages: DH: 55, Me:53


I'll go re-read your link - I've tried to slog through it before. Thanks!
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Old 05-28-2018, 08:06 AM   #4
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Half the length of the article is comments from others, so less bulky than it appears. Take it piece by piece. It does explain the Roth IRA concepts quite well.
Roth IRA is a popular topic here and I am sure you will receive additional comments.

Additionally, if you wish to receive thoughts on the overall retirement plans, it would be good to list expected retirement expenses and Social Security.
Unless you just wish to receive comments on the Roth....
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Old 05-28-2018, 08:11 AM   #5
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If it were me, I would stop after tax contributions and put that into your taxable. You have plenty in deferred and not a lot in taxable. I would find a way to reduce taxes on the taxable like using index ETF’s, muni’s and start to up your short term investments. I would not do anymore rollovers until you can drop down into the 12% bracket possibly in your first few years of retirement tapping muni’s and short term.
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Old 05-28-2018, 09:19 AM   #6
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OK - I got through the Kitces article and I *think* I understand the Roth 5-yr rules. We will have penalty-free access to my DH's converted principle in 4.5 years (when he turns 59.5, in June of 2022), approximately when we are thinking of retiring. We would also have penalty-free access to any $$ I convert this year in Jan 2022 when the 5-yr rule is satisfied.


Given that, I think we will continue to do the after-tax contributions/conversions for my DH, but end those for me at the end of this year and divert that to our taxable savings (I will look into the investing approach suggested by COcheesehead). If we decide to retire (or buy our retirement house) before 6/2022, we will probably have to take a mortgage out for a few years.



Thanks again for your input!
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Old 05-28-2018, 11:23 AM   #7
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DH & I live in a high COL area and we knew we wanted to RE, so we maxed out 401K sufficiently to get match and funneled other savings into taxable portfolio. When we ER’d at 56/57, about two-thirds of our assets were in taxable, giving us a lot of flexibility. We couldn’t qualify for Roth’s while we were working, and so far post-ER our tax bracket has been high enough that Roth conversions haven’t made sense. At least, not yet.
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Old 05-28-2018, 12:02 PM   #8
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OP-

This is not aimed directly at your question but, important to consider nonetheless I think. I didn’t see children mentioned so, I’m assuming you all have none.

1. Purge & downsize: We relocated to a high COL area for retirement & did this out of necessity. But, purging is a very cathartic process; most of us have more ‘crap’ than we really need or want. And, we found that we actually need less space than we’ve previously had.

2. Consider Renting instead of owning: This may be a non-starter for you but, I highly recommend doing the math anyway. Even if you choose to buy for non-financial reasons, you should know the cost/savings of each approach (own vs rent). Here are a couple of good links to help do the evaluation.

Rent v. Owning Your Home, opportunity cost and running some numbers

https://www.nytimes.com/interactive/...alculator.html
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Old 05-28-2018, 02:07 PM   #9
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Quote:
Originally Posted by Huston55 View Post
OP-



This is not aimed directly at your question but, important to consider nonetheless I think. I didn’t see children mentioned so, I’m assuming you all have none.



1. Purge & downsize: We relocated to a high COL area for retirement & did this out of necessity. But, purging is a very cathartic process; most of us have more ‘crap’ than we really need or want. And, we found that we actually need less space than we’ve previously had.



2. Consider Renting instead of owning: This may be a non-starter for you but, I highly recommend doing the math anyway. Even if you choose to buy for non-financial reasons, you should know the cost/savings of each approach (own vs rent). Here are a couple of good links to help do the evaluation.



Rent v. Owning Your Home, opportunity cost and running some numbers



https://www.nytimes.com/interactive/...alculator.html


I agree with renting, especially when moving to a new area. Even if you’ve visited a place on vacation, I think it’s hard to know where you want to live more permanently until you’ve spent significant time in the area.
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Old 05-28-2018, 02:10 PM   #10
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If you really want to own, have you considered buying your retirement home now and renting it out until you're ready to occupy it? If housing costs in your target area are rising faster than your investments are growing, the sooner you can get into the market the better. Also, if your high COL area happens to be in California, the earlier you buy, the more you benefit from the property tax system that's pegged to purchase price rather than current value.
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Old 05-29-2018, 08:00 AM   #11
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I think the saving grace will be the $110k/ year in pensions. This works out to over $9,000/month. If you sell your current home for $500k and buy a new one for say $1.0 million I assume you will take on a mortgage? I say this because your total in taxable is $200K and you may need this for moving costs, new furniture ,etc.Currently a 30 year note at 4.5% will run about $2,500/month not counting PMI or insurance.


When can you both claim your pensions?



If you can continue to put $40,000/year in taxable accounts ( assuming this does not include paying for other expenses but all goes to savings), you could reduce the mortgage to say a $300k note.



I would say that with the pensions (which are generous) and future SS you should be fine. If you retire pre 65, do you get any continuing employer healthcare benefits? Are children and their future college costs accounted for ( if you have children of course)? Just be sure all bases are covered before you pull the trigger. Good luck.
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Old 05-29-2018, 05:13 PM   #12
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Originally Posted by lindalou View Post
We are considering moving to a high housing cost area when we retire […] we want to position ourselves to be able to buy what we really desire if we want to (e.g., a house close to the ocean)[…]
Current house value: 500k, paid off
Future House up to 1.2mil
Gosh, I sure hope that in 3-5 years you will be able to find a habitable single family home close to the ocean in a high COL area for just $1.2 million or less. I guess I am a bit of a pessimist. At any rate, my best advice would be to save as much as you can between now and then, just in case.
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