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Old 09-05-2013, 06:22 PM   #21
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Hi pb4uski, yes the funds would probably come from taxable accounts. I would probably pay about 20 percent tax on these accounts.

One person suggested that I not sell the taxable accounts until after I lose my job, when my tax rate would be lower. Makes some sense, but liquidity would be important at that time too. However, I do have a good sized emergency fund account that could be used for living expenses after the job ends.
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Old 09-05-2013, 06:25 PM   #22
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This is essentially the inverse of holding long term bonds. Your mortgage obligation is a long term bond, created by you and help by someone else. 30 year fixed mortgages are a unique gift of our politics and out very deep bond markets which seem to have an inexhaustible demand for mortgage product. I believe that the decision to forgo a mortgage at todays rates only makes sense under particular conditions- for example, trying to avoid income that might push you over some of sharp margins in the Obamacare subsidy packages. Another would be if you have considerable job insecurity that could lead you to miss mortgage payments.

Ha
Considering this to be a long term bond holding is a good analogy.
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Old 09-05-2013, 09:01 PM   #23
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I think the key is what you mean by "as soon as possible" in your post:

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I am trying to retire early and I am trying to figure out how to maximize the likelihood of being able to do it as soon as possible. Thank you.
The way to maximize the probability of retiring early is by keeping your investments in high risk assets and hope they have generous returns in the next few years. However this is also the way maximize the probability of getting delayed a few extra years if there is a slump instead.


It sounds like you have about 20 years of expenses in your portfolio? How many years of expenses are you shooting for? How many more years of savings do you think you have to meet your number?
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Old 09-05-2013, 09:12 PM   #24
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I think the key is what you mean by "as soon as possible" in your post:



The way to maximize the probability of retiring early is by keeping your investments in high risk assets and hope they have generous returns in the next few years. However this is also the way maximize the probability of getting delayed a few extra years if there is a slump instead.


It sounds like you have about 20 years of expenses in your portfolio? How many years of expenses are you shooting for? How many more years of savings do you think you have to meet your number?
Hi photoguy:

I am approaching FIRE in a different way, I am trying to save and invest enough so that I could pull four percent from my investment portfolio and that the four percent would approximate my annual living expenses.

My investment portfolio will need to grow about another 20 percent in order to get to the point described above.

I would guestimate it would take another 4 to 5 years to get to this point.
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Old 09-05-2013, 10:39 PM   #25
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Hi pb4uski, yes the funds would probably come from taxable accounts. I would probably pay about 20 percent tax on these accounts.

One person suggested that I not sell the taxable accounts until after I lose my job, when my tax rate would be lower. Makes some sense, but liquidity would be important at that time too. However, I do have a good sized emergency fund account that could be used for living expenses after the job ends.
FWIW, if your taxable income is in the 15% tax bracket (~$72k for a couple filing jointly) then capital gains are 0% tax for federal tax purposes.
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Old 09-05-2013, 10:46 PM   #26
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FWIW, if your taxable income is in the 15% tax bracket (~$72k for a couple filing jointly) then capital gains are 0% tax for federal tax purposes.
Hi. My understanding is that the short-term holding period is one year or less. Short-term capital gains are taxed at ordinary income tax rates, which range from 10% to 39.6% for the year 2013.

The long-term holding period is more than one year. Long-term capital gains are taxed at long-term capital gains rates, which is usually less than ordinary tax rates. The long-term capital gains tax rate is either zero percent, 15%, or 20%, depending on your marginal tax bracket.

Unfortunately, I do not qualify for the 0 percent category.
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Old 09-05-2013, 10:49 PM   #27
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Your understanding is correct. I should have been more specific that the gains need to be long-term capital gains.

What I was suggesting is that if you get laid off and the reduction in income brings you down to the 15% tax bracket for a tax year, then your LTCG would be 0% federal.
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Old 09-05-2013, 10:52 PM   #28
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Your understanding is correct. I should have been more specific that the gains need to be long-term capital gains.

What I was suggesting is that if you get laid off and the reduction in income brings you down to the 15% tax bracket for a tax year, then your LTCG would be 0% federal.
Now I understand what you mean, and I agree. Thank you.
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Old 09-05-2013, 11:24 PM   #29
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In some ways this is another pay off the mortgage question.

If over the last 10 years you made 7.24% and your mortgage is 3.5% and if the next ten years was like the previous 10 years than clearly you'd be better off keeping a mortgage. In fact if you go back to 2003 the average mortgage rate in 2003 was 5.83%. In the 10 years since then the S&P returned 7.12% and total stock market was 7.84 and psst Wellesley 7.21% , Wellington 8.29% so your returns are very much average. Now the last 10 years has been a below average decade for stocks and above average decade for bonds.

Now in any of these calculations the taxes matter a lot, and every case is individual. But as general rule the deductible of mortgage interest is most beneficial when you are working and in a higher tax bracket. The mortgage interest deduction is less valuable when you are retired.

ERD50 has done some pretty thorough analysis of this. His conclusion is doesn't matter much but on balance in makes sense to maintain a mortgage even in retirement. In your situation where you are planning on continuing to work for 4 or 5 years, and you face uncertain job prospects, and you have a below market interest rate of 3.5% (30 year are about 4.5-4.75% now), you have a solid investment record, I think it makes no sense to pay it off.
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Old 09-05-2013, 11:28 PM   #30
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Nico -- 20% is within spitting distance to your goal. With a high equity portfolio you could easily hit this within a year or two (but of course not guaranteed). Staying in the market would maximize the probability of doing this (but also maximizes losses if a downturn occurs).

My strategy has been to determine what my target AA should be at my ER date and then gradually move toward that (generally by reallocating new savings) starting from a few years out.
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Old 09-08-2013, 02:20 PM   #31
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This notion of "locking in gains" is, in my opinon, wall-street fiction to get their customers to churn their accounts.

Putting that money in your home isn't risk free, as many learned rather painfully just a few years ago. Asset classes other than equity just have varying levels of risk.

If I were in your situation, I would look at my asset allocation (including equity in your home). Pick something that has a (historical) return close to what you need to meet your goals AND has a volatility you can stomach. I would have to compromise between those two and would probably lean more towards lower volatility. Then stick to that asset allocation until there is a significant change in your living situation (marriage/divorce, ER, kids, unemployment etc) & then readjust it.

You have a "good to have" problem. All the best.
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Old 09-08-2013, 02:52 PM   #32
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This notion of "locking in gains" is, in my opinon, wall-street fiction to get their customers to churn their accounts.
If you termed it as rebalancing it doesn't sound so bad.

If you rebalanced in 2009 it is definitely time to rebalance now and "lock in gains"
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