What would you do? Early Retirement Strategy

Is it wise to go All In (40 - 60% depending on allocation) into equities right now when the stock market is at an all time high?
 
If it's adding to your equity allocation, I'm a chicken and would dollar cost average in over some period of time.

If it is money already in equities but your changing funds or companies, I'd go all in ASAP.
 
RE2Boys said:
If it's adding to your equity allocation, I'm a chicken and would dollar cost average in over some period of time.

If it is money already in equities but your changing funds or companies, I'd go all in ASAP.
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Based on OP scenario I am making an assumption NONE is currently in any equity (Perhaps the 401k), only CDs for guaranteed income. Please confirm. So I assume we are talking about a $2m lump sum at business sale (today for our purposes). If the stock market crashes between now and the sale of the business, that would be a different scenario.
 
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I think I'd invest in the equity portion of the allocation, but withhold a hefty portion of the fixed income in some sort of cash account - at least enough to cover several years worth of living expenses - in case of a recession. Then use any extra I may have for the buying opportunity of a recession.

So if we we were looking at a 60/40 AA (just for example), I might put 1.2 in low cost equity funds, 200k in a short term bond (investigate munis for any taxable accounts), and 800k in cash. When bonds drop after the QE, or should stock values plummet, there would be money left in the cash account - minus projected living expenses - to make some undervalued purchase.

Just another thought.

Side note on munis - I know there has been discussion of eliminating the federal tax benefit, but I really don't see that happening unless the house loses it's Rep majority. Even then... But funds like Vgs Ohio municipal fund still provides state tax relief for Ohio residents. Not sure what's available for your region, but it's at least worth researching. Good luck.


http://quotes.morningstar.com/fund/vohix/f?t=VOHIX
 
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Well the $90K spending is pretax, correct? So if I have $2M and $500K of that will be taxed (401K) and the rest is tax free withdrawals - and then social security will come a few years down the road which will be taxed, what would you use as the tax percentage to use in the scenarios? I usually put in 20% to be safe but if alot of the withdrawals have already been taxed, can I lower that 20%? To what number?

Deb
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The way I handle tax in FireCalc is to add it on to my spending assuming I am paying a certain amount of taxes based on SS and assumed RMDs. So if I assume 20% average tax rate (not marginal) for federal and state taxes, and $90K real spending, then the actual spending I enter on the first page of FireCalc might be closer to $110K. Is this correct?

My situation is similar to yours. We will have around $1.8M but we have a non-COLA pension which will help for a while. We are trying to do Roth conversions to get the RMD hit down. It sounds like you are in good shape as you do not have a high percentage in tax deferred.
 
The idea of including taxes in spending for Firecalc is sensible, but 20% is probably way too much. What I would suggest is inputting your expected no discretionary income in Taxcaster, then add IRA distributions until your income less taxes is equal to your annual spending, then use the IRA distribution amount as your annual withdrawal amount in Firecalc.

For example, in the example you outlined, if $30k is SS and you need $90k to live, the tIRA withdrawal would only be $101k rather than $110k (assuming no state taxes, both under 65, standard deduction, etc.) OTOH, if SS as $50k, then the total withdrawal would only be $98k.

I think the above approach works great if your only sources are SS, pension and tax-deferred accounts. If you have taxable accounts you have to make some adjustments to reflect the fact that most of any amount withdrawns are principal.
 
I do see a lot of statements on needing equities for growth posted here. Perhaps I am wrong or I am missing something, but I believe bonds generally have real returns after taxes and inflation as well, perhaps at a lower long term real return, but without the big peaks and valleys -

http://www.thornburginvestments.com/pdfs/TH1401.pdf

It seems from most papers I have looked at stocks have higher returns with greater risk, but long term bonds, as in a bond ladder, would not lose real returns to inflation. Is this not true?
 
pb4uski said:
The idea of including taxes in spending for Firecalc is sensible, but 20% is probably way too much. What I would suggest is inputting your expected no discretionary income in Taxcaster, then add IRA distributions until your income less taxes is equal to your annual spending, then use the IRA distribution amount as your annual withdrawal amount in Firecalc.
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That is basically what I do to determine taxes but for Firecalc I do add back in SS (and would add in any other source of income). That is Firecalc doesn't ask you to tell it what your annual withdrawal will be from retirement sources. It asks you what your spending will be. So if you plan to spend $50,000 a year and SS is $30,000 of it and you will be withdrawing $20,000 from your portfolio, you tell Firecalc your spending is $50,000 a year, not $20,000.

FWIW, I've projected out taxes and spending for the next several years and I find that it usually works out that income taxes will be about 10% of overall spending. It would probably be less if we had a large taxable account, but our taxable account is relatively small. This is with a 25% marginal tax bracket. We also have no state income tax.
 
Good point on the math of what to include in the addback. My tax rate is pretty low (0% last year but that won't last forever) so I haven't really bothered, I just input my spending.
 
Okay, alot of good information here. I still have SO MUCH to learn. So if the actual "spend" I'm shooting for is around $75,000 yearly, me putting $90,000 in the spend category will allow for about 18% taxes. So if my taxes will be much lower than that - due to withdrawing monies already taxed and no state income on social security in Florida, I can lower my "spend" figure. I'm trying to net around $72K yearly.

Now, I'm curious as to how some of you have such low taxes.... I think maybe I'm missing something. A big portion of my withdrawals will have already been taxed. So I will pay tax on any withdrawals from my 401K (about 1/4 of my portfolio) and any social security, right?

I think I need to find some posts on what taxes I will likely pay in retirement.

Deb
 
Galeno's fixed income (bonds and cash) allocation recommendations: Conservative = age. Moderate = age-10. Aggressive = age - 20.

E.g. moderate allocation for a 40 y/o would be 30% FI + 70% equities.

Since bonds are so expensive (low yields) we have allowed ourselves to be pushed into the aggressive allocation. We are 56 y/o with a 35% allocation to FI.
 
Our expense rate = 0.34%. Tax rate = 0.42%. Total expense rate (ER+TR) = 0.76%. This is the number we use for the "expense box" in fire_calc.

Many times, I'll use 1.00% in the "expense box". The additional 24 bps should more than cover the additional portfolio "hidden costs" (e.g. portfolio turnover rate) that are so difficult to quanitfy.
 
Debinnov a said:
Now, I'm curious as to how some of you have such low taxes.... I think maybe I'm missing something. A big portion of my withdrawals will have already been taxed. So I will pay tax on any withdrawals from my 401K (about 1/4 of my portfolio) and any social security, right?

I think I need to find some posts on what taxes I will likely pay in retirement.

Deb
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We bought turbo tax and spend a of of time looking at different scenarios between 401K / business draw downs, health insurance premiums, financial aid for college and income taxes / tax credits looking for the best intersection. There is a lot of good tax advice on this forum.

Here is one article from the Wall Street Journal on how not to legally pay any income tax. it isn't geared toward retirees but there may still be some tidbits you can use -

ROI: How to Avoid Paying Income Taxes - WSJ.com
 
ShokWaveRider said:
Is it wise to go All In (40 - 60% depending on allocation) into equities right now when the stock market is at an all time high?
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Sure why not. Lots of people are effectively making this decision (anybody who has a big chunk of equity in tax deferred accounts and chooses not to sell them).

Right now I'm 73% equity and could drop to 35% tomorrow by selling all my stock funds in 401k/ira.

Edit: if you are worried about valuations, you could always start by buying equities in categories with better metrics.
 
Debinnov a said:
Okay, alot of good information here. I still have SO MUCH to learn. So if the actual "spend" I'm shooting for is around $75,000 yearly, me putting $90,000 in the spend category will allow for about 18% taxes. So if my taxes will be much lower than that - due to withdrawing monies already taxed and no state income on social security in Florida, I can lower my "spend" figure. I'm trying to net around $72K yearly.

Now, I'm curious as to how some of you have such low taxes.... I think maybe I'm missing something. A big portion of my withdrawals will have already been taxed. So I will pay tax on any withdrawals from my 401K (about 1/4 of my portfolio) and any social security, right?

I think I need to find some posts on what taxes I will likely pay in retirement.

Deb
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Just a few comments.

Even when I was well into the 25% tax bracket, our average tax rate was about 18%. In your case a 10%-15% average rate + state taxes should be good.

My early research into retirement investing indicated that 15% equities gave better and smoother returns than all bonds (inflation adjusted). That should be your absolute minimum. FIRECalc will show its best success rates with, I think, 40% or more equities. The highest success rate is actually your lowest risk approach, so as has been said already, think of retirement risk, not portfolio ups and downs.

Add this to your stack of things to look at.
You have years with no income, lots of taxable funds, and a healthy 401k. That's a perfect situation for Roth conversions. No entry for that in FIRECalc, but it's a good way to lower your taxes and allow a little more spending. This is something you can think about after retiring, unless you need a little extra safety margin before then.
 
Animorph said:
The highest success rate is actually your lowest risk approach, so as has been said already, think of retirement risk, not portfolio ups and downs.
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Portfolio risk is a matter of individual comfort level. The Dow went down 54% in the great recession. Some people are okay with that. Others are not.

Personally, with a $2.1M portfolio with Social Security and a paid for house, I would call that already having won the game and not risk a 54% loss or greater with a large equity position.

I would say to think of ups and downs, and how much income do you really need to live on to be happy and live relatively worry free?

As Bill Bernstein put it, "When you've won the game, why keep playing it? How risky stocks are to a given investor depends upon which part of the life cycle he or she is in. For a younger investor, stocks aren't as risky as they seem. For the middle-aged, they're pretty risky. And for a retired person, they can be nuclear-level toxic....Interest rates usually more than keep up with inflation. It's true that real yields right now are historically low, but as a student of financial history I have to believe that's not going to last forever. "

http://money.cnn.com/2012/09/04/retirement/investing-mistakes.moneymag/

Bill Bernstein kind of started channeling Zvi Bodie after the last meltdown.
 
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Debinnov a said:
....I think I need to find some posts on what taxes I will likely pay in retirement.

Deb
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Think if it this way. Let's say you retire with $1,600k in taxable accounts and $400k in 401k Your target AA is 30% stocks and 70% fixed income and you invest tax efficiently so your 401k is all fixed income and your taxable accounts have $600k of equities and $1,000k of fixed income. Your SS is down the road a few years.

Also, let's say your investments generate 3% dividends and 3% interest - so you'll have $60k of income - $18k of dividends and $30k of interest in your taxable account and $12k of interest in your 401k.

Your spend of $70k but your income on your tax return is only $48k. If you are MFJ, have standard deduction then your tax is only ~$1k a roughly 2% average tax rate and a marginal tax rate of 15%.

Part of the reason for the low tax rate is that the $18k in dividends is not taxed. If your portfolio is 50/50 rather than 30/70 your tax would be zero.

See https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
 
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daylatedollarshort said:
Portfolio risk is a matter of individual comfort level. The Dow went down 54% in the great recession. Some people are okay with that. Others are not.

Personally, with a $2.1M portfolio with Social Security and a paid for house, I would call that already having won the game and not risk a 54% loss or greater with a large equity position.

I would say to think of ups and downs, and how much income do you really need to live on to be happy and live relatively worry free?
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The Dow going down 54% and having a 54% loss are two very different things. The only people who would have a 54% loss from that would be those foolish enough to sell at the bottom. I doubt that many here would advocate that. If you don't sell at the bottom and simply buy and hold (rebalancing as called for) then someone whose equities went down 54% would not have ever actually realized any loss whatsoever. That it, it isn't a loss until you sell....

I'm also not sure I find it helpful to talk about how much income some "needs" to live on. Retirement is not solely about need, but also about what you want. In her case, she wants to net $72k a year and what someone thinks she might "need" is beside the point.

Of course, I do agree that if, for example, she felt that she would be happy on living on $40k with a $2.1 million portfolio then needing to do much to protect against inflation is unnecessary so long as you don't care about preserving the value of your estate.
 
Katsmeow said:
The Dow going down 54% and having a 54% loss are two very different things. The only people who would have a 54% loss from that would be those foolish enough to sell at the bottom. I doubt that many here would advocate that. If you don't sell at the bottom and simply buy and hold (rebalancing as called for) then someone whose equities went down 54% would not have ever actually realized any loss whatsoever. That it, it isn't a loss until you sell....

I'm also not sure I find it helpful to talk about how much income some "needs" to live on. Retirement is not solely about need, but also about what you want. In her case, she wants to net $72k a year and what someone thinks she might "need" is beside the point.

Of course, I do agree that if, for example, she felt that she would be happy on living on $40k with a $2.1 million portfolio then needing to do much to protect against inflation is unnecessary so long as you don't care about preserving the value of your estate.
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The OP says she wants to downsize, live more simply and will have a paid for house. She is selling her business so that isn't likely to be a reversible decision if she finds she need more money in retirement.

I don't usually use Firecalc, so perhaps I am not doing it right, but I put in $70K a year total spending with her SS numbers and portfolio number, 20 percent large stocks and 80 percent long commercial bonds. There is no TIPS option in Firecalc so that would have to be calculated with a spreadsheet.

The results I saw were 100% success rate, lowest balance $1.1M and highest $7.8M, avg of $2.6M.

If you want to take more risk with your portfolio for higher returns, so be it. That is certainly your choice. But large equity positions are not a sleep well at night option for everyone, as Bill Bernstein found out with his clients. The OP is retiring now due to stress. She has said she is risk averse.

Bernstein is the one who called stocks in retirement nuclear-level toxic, not me.

Also, the OPs risk averse retirement income with a very conservative portfolio is around the amount where current happiness research says spending more won't make her any happier -

"But no matter how much more than $75,000 people make, they don't report any greater degree of happiness."

 
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daylatedollarshort said:
The OP says she wants to downsize, live more simply and will have a paid for house. She is selling her business so that isn't likely to be a reversible decision if she finds she need more money in retirement.

I don't usually use Firecalc, so perhaps I am not doing it right, but I put in $70K a year total spending with her SS numbers and portfolio number, 20 percent large stocks and 80 percent long commercial bonds. There is no TIPS option in Firecalc so that would have to be calculated with a spreadsheet.

The results I saw were 100% success rate, lowest balance $1.1M and highest $7.8M, avg of $2.6M.

If you want to take more risk with your portfolio for higher returns, so be it. That is certainly your choice. But large equity positions are not a sleep well at night option for everyone, as Bill Bernstein found out with his clients. The OP is retiring now due to stress. She has said she is risk averse.
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One of the things that is important to note is that portfolio which is heavily fixed income is very sensitive to life expectancy. The joint life expectancy for a 57 year old couple is 34 year. I thought the OP wanted 90k in order to spend 75K after taxes. (That seems right to be me since there is no 0% tax rate on interest income unlike cap gains or dividends.)

Running Firecalc with a 34 years and 20% portfolio there is 92% success rate and there is 50% chance that one of them will live beyond 91.
Using a more conservative 40 year life expectancy the success rate drops to 75%. Moving the portfolio up to 50/50 increases the success rate to 99%.

Finally, I just got to comment that altough Debinnov considers herself risk adverse. Anybody that runs a small business isn't all that risk adverse, something like 95% of all small business fail in the first 5 years.
 
Each person will have to decide for himself when or if they have already "won the game" and the level of risk they are comfortable with. I think I have "won the game" but still keep a lot in equities. I could spend less but would rather spend more, although current levels are fine also. With SWR around 3.6% , representing only divs, I think my risk of running out of money virtually zero. Agree that inflation is a bigger risk than equity losses over a long retirement.
 
Debinov a - One other source of data for you to consider in your portfolio allocation is info from IRS estate data from the Thomas Stanley blog: What are the top ten assets owned by millionaires with gross estates of $2M or more -

The Top Ten Assets Owned by Millionaires

And for spending comparisons the Consumer Expenditure Survey is also interesting -

http://www.bls.gov/cex/2011/Standard/age.pdf

How much you need to spend in retirement to be happy vs how much risk you are willing to take on in your portfolio and how big an allocation to put toward equities vs other asset classes has to fit in with your own comfort level.
 
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I can't add or improve much to all the good advice that you've already gotten from the board. I will tell you that I'm in a similar situation. I'm 54 with just under 2MM in assets and a retirement target of 2014. Normally I'd be approximately 50/40/10 (equity/bond/MM), but I dropped the equities to 30% when all the govt shutdown started a few weeks ago. Nice gains this year and I wanted to lock some in.
 
Thanks everyone... alot of good advice. I think my taxes will be much lower than I thought, between taxable accts, no state tax in Florida, standard deduction, etc. Im so used to paying much higher taxes, I didnt realize earning under the 73k threshold (more like only $50k taxed before deduction) would keep my taxes so much lower. I will probably put 30 percent in stock index funds, ? Percent in bond funds and keep the balance in cd ladder or similar. Again thanks!
 
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