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Will this work- Retire in 5 years
Old 11-22-2005, 10:07 AM   #1
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Will this work- Retire in 5 years

I am 44 and my wife is 51 and we make a total gross of $275K annually.
She has $90K in her 401K plan and I have* $170K in my 401K plans. I have $350K in a deferred compensation program that is in a low risk balanced fund ( monies must be left in this balanced fund per the program)* w/ 1-2% return. If I leave the company, the Deferred Compensation program* will automatically payout in the following January in ten yearly payments. I continue to put 25% in the EDC and 401K plan combined because of the high tax bracket we are in (33%).We have no children and no plans for children.

We owe $150K on our house with a 10 year 4.75% interest rate worth ( on the low end)* $650K. There's less than 8 years left on this mortgage. We just purchased with cash 2 acres on a lake in South Carolina. We would like to eventually sell our home we have now and pay cash to build a house to retire to. The retirement home we build in South Carolina will cost between $250-$325K.

We have $90K in an ING acount getting 3.50 interest as kind of an emergency fund

With the equity in our home, this type of money invested in 401K,the deferred plan, and ING acount, is it possible to retire in 5 years? Any suggestions with how to lower our tax burden or save better? Should I put every dollar I can in the deferred plan to pay taxes later versus now?

Thanks
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Re: Will this work- Retire in 5 years
Old 11-22-2005, 11:03 AM   #2
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Re: Will this work- Retire in 5 years

You have about 700K in liquid assets now.* If you save 100K/year for 5 years, plus figure about 400K from the house trade-down, you get to 1600K (plus a little for growth, maybe).* Can you live on 4% of that = 64K/year?* You have to get some handle on what your living expenses are/will be.

Since most of your assets will be in tax-deferred accounts, you'll have to pay tax on the withdrawals, but at a lower rate than the 33% + CA tax you pay now.* You have to figure in health insurance (10K/year?).* Presumably you'll pick up SS when your wife hits 62, 7 years after retirement, so you might be able to spend a little more, figuring that this little bit (and your, 7 years later) will kick in.

My wife and I are in a roughly similar situation to yours.* I personally would/will be comfortable with 1700K in liquid assets, but that's based on our expenditures.
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Re: Will this work- Retire in 5 years
Old 12-09-2005, 11:31 AM   #3
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Re: Will this work- Retire in 5 years

I don't know what sort of company you work for, but I would be hesitant to put too much money in your EDC. Right now you have 30% of your net worth there, and I wouldn't want to put much more than that at risk. Even if you feel good about the credit worthiness of your employer today, it may be very different 10-15 years from now. Remember that you are counting on your employer for your salary for the next 5 years as well, so you are magnifying your risk there. If you go into retirement with even 30% of your worth in your EDC, and your employer defaults, then things will look pretty dicey. More than that, and you could be completely cooked. Also, the tax savings may not be as much as you think. For me, pretty much everything over 150k is taxed at the same high rate, so once I push my future EDC withdrawals over that amount there is not much savings. Many people also think that future tax rates will be higher than todays, and you may someday have to deal with income causing the taxation of social security which can push your effective tax rate up to 60-70%. Lastly, if you can only get 1-2% on your EDC money, then you are not getting much savings on investment income taxation and you may be giving up the potential for larger returns in other investments. If you lose out on 3-5% of investment returns each year because you are forced to use money market accounts, then that might more than kill any tax savings you are getting.

When you are retired and withdrawing money, you will also want to have some after-tax savings (and Roth, but you don't qualify) to give you future tax flexibility. Who knows what the future tax system will look like, and you may need to, in some years, spend money off of after-tax accounts in order to reduce your taxes.

On your general question on the feasability of a 5 year retirement plan, it sounds like you are spending well over $100k a year ($275 - 30 EDC - 30 401k - 80 taxes = 135). If you want to retire in 5 years you will need to cut that level of spending substantially, and start some after-tax savings.
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Re: Will this work- Retire in 5 years
Old 12-13-2005, 02:34 PM   #4
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Re: Will this work- Retire in 5 years

Bongo2,
Thanks to you and Robert th Red for the advice but I have a few more questions.

If I cannot invest in Roth IRAs due to too high an income level, and the EDC is putting too many eggs in one basket, what would you invest in?

We have already paid cash for our property on the lake to retire to in South Carolina, but we thought we would not build for another 3 years so we could semi-retire in 5 years ( my wife and I* will work part-time to get* Health insurance coverage).

We are in the 33% tax bracket as well
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Re: Will this work- Retire in 5 years
Old 12-13-2005, 10:10 PM   #5
 
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Re: Will this work- Retire in 5 years

Hardest wild cards to get your mitts around.

Inflation rate and what age will you die?

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Re: Will this work- Retire in 5 years
Old 12-14-2005, 01:47 PM   #6
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Re: Will this work- Retire in 5 years

Quote:
Originally Posted by Foodeefish
If I cannot invest in Roth IRAs due to too high an income level, and the EDC is putting too many eggs in one basket, what would you invest in?
You know that you can still invest in a conventional IRA, right?

Someday your tax bracket will drop below 25% and that's when you can convert the conventional IRA to a Roth. We were in your situation when you were working but now we're in the low end of the 15% bracket and we convert a little of our conventional IRAs each year (to the top of the 15% bracket). It'll take us about eight years but we're already two years into it and we have plenty of time.

Or you can just continue enjoying the conventional IRA's tax-deferred accumulation via 72(t) until age 59 1/2, whatever you want after than, and via RMDs after age 70.

Either way, instead of investing in the EDC, you can put some of your asset allocation into a conventional IRA. The tax deferral makes an IRA a great place for a tax-inefficient investment that throws off lots of dividends, cap gains, or other distributions.
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Re: Will this work- Retire in 5 years
Old 12-15-2005, 11:18 AM   #7
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Re: Will this work- Retire in 5 years

If you are going to work part-time then your financial picture is a lot rosier!

I also like non-deductible IRAs, but some people hate them (because of the paperwork, and the conversion of capital gains into ordinary income). If you do a non-deductible IRA then put your bond investments there.

In addition to the Traditional IRA you should put some money in taxable accounts. You could put it all in equity index funds (like 50% VTSMX 50% VTGSX) or tax-managed funds (such as Vaguard tax-managed growth and income, tax-managed international, or tax-managed balanced). The equity funds generate little taxable income, and tend to be "lightly" taxed capital gains or qualified dividends (this, of course, depends heavily on your situation -- I pay 31% marginal on my "15%" items because of state taxes and federal phase-outs). If you want bonds you could put some in municipal bonds or bond funds. You could also use one of the life-cyle or balanced funds, but the tax treatment won't be quite as good.

You may also want to consider moving your ING money to a Vanguard tax-exempt money market (especially if you're in CA, NJ, NY, OH, or PA where Vanguard has a state-specific fund). They yield around 2.7%, which after-tax should be better than the taxable 3.5%.
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Re: Will this work- Retire in 5 years
Old 12-15-2005, 04:52 PM   #8
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Re: Will this work- Retire in 5 years

Thanks for all the feedback but one challenge I have is we make over $150K so we cannot do IRAs.

The good news is I work for a healthy company that continues to grow with the ups and downs of the economy'
I currently do not have any bonds. With interest rates climbing , is now the time to balance my portfolio with bonds?

Would a Vanguard tax-exempt money market fund really be better than the ING account? I live in Maryland and I am in the 33% tax bracket.
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Re: Will this work- Retire in 5 years
Old 12-15-2005, 07:19 PM   #9
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Re: Will this work- Retire in 5 years

Quote:
Originally Posted by Foodeefish
Thanks for all the feedback but one challenge I have is we make over $150K so we cannot do IRAs.
Oh, hogwash. I've contributed to an IRA every year that I've had earned income since 1986.

Perhaps another way to look at it is that you can't contribute to a Roth IRA now, but you CAN contribute to a conventional IRA and start the tax-deferral process. Then someday your income may drop way down below the top of the 15% bracket and you'll be able to convert that conventional IRA to a Roth.
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Re: Will this work- Retire in 5 years
Old 12-19-2005, 12:00 PM   #10
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Re: Will this work- Retire in 5 years

3.5% * (1-0.33) = 2.35% < 2.7% so yes it is better. Check your marginal tax rate, though, it may be different from your tax bracket. For example, I'm also in the 33% federal bracket but because of phase-outs my marginal rate is 35%. For you it may be higher or lower than 33%.

While you can't contribute to a Roth, you can still fund a traditional IRA at any income level. You just won't be able to deduct the contributions, and you'll have to keep track of your basis for when you withdraw or convert.
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