Investment Options - Retirement "Bridge"

[madatrub]

Long Story short: I've been reworking my FIRE numbers looking to see if I can manage retirement sometime between 56 to 59 (Currently 51). My plan requires a bridge from Retirement to 65 that minimizes MAGI for max ACA subsidies. I have a significant capital loss carryforward that will likely reduce my capital gains to $0 MAGI across much of that bridge. My intention is to use ROTH conversions as the lever to maintain income for ACA purposes.

In order to do that successfully, I need to minimize Interest and Dividend income during that bridge such that my income sources are predominantly after tax capital gains.

Looking for some suggestions on investments that meet this criteria. I'm fairly risk adverse, and want to maintain some capital preservation in the event of a down market during the "bridge".

After tax nest egg will be in the 500-750k range. Anticipate yearly expenses to be roughly 75k/yr during the bridge

 

[SevenUp]

...I need to minimize Interest....

I'm fairly risk adverse....

Unfortunately those two positions usually work against each other: low risk investments such as CDs and bonds pay interest, while stocks are the things that generate capital gains.

Might be worthwhile for you to propose an asset allocation, along with the annual income of various types (ordinary income, qualified dividends, long term capital gains) you expect from it.

At the least it could be an enlightening self-study, but also might generate more specific suggestions from readers here.

 

[madatrub]

Unfortunately those two positions usually work against each other: low risk investments such as CDs and bonds pay interest, while stocks are the things that generate capital gains.

Might be worthwhile for you to propose an asset allocation, along with the annual income of various types (ordinary income, qualified dividends, long term capital gains) you expect from it.

At the least it could be an enlightening self-study, but also might generate more specific suggestions from readers here.

Thanks,

in a perfect world, I'd generate only $3k in dividends/interest that I'd use excess capital carryover losses to reduce back to $0, then use a max Roth conversion as a flywheel.

Id have to think about asset allocation, but these days nearly every vehicle exists as an ETF. For example, capital preservation could be ETFS like SHV, BIL, GSY, although in a lot of these examples, they'll could pay out divis. Just curious if people had some examples based on their own experiences.

 

[Sunset]

BRK.B pays zero dividends, just grows over time. Tends to NOT drop as far as the market when things are bad due to the conservative nature of most businesses that it owns, plus the large ~$150 Billion cash account.

 

[Koolau]

This is where the RIGHT financial planner would be good to have. A good fee-only FP would be able to model your situation using your numbers. How you find this person, maybe others here can help out. Be prepared to pay a couple hundred/hour.

 

[pb4uski]

It's been a while since I have looked at ACA subsidies but as I recall you don't need O-MAGI to be as low as $0 in order to get maximum benefits, so your first step should be to calculate the income to get maximum benefits ($0/mo premium) and then the income level to reduce premiums to a reasonable amount and only then look at the asset allocation for your taxable account money to achieve that goal.

You would want to have some MAGI to get on ACA rather than Medicaid and I think you could have as much as $45k of MAGI and still have a reasonable cost ACA policy.

Results
You are likely eligible for financial help
Based on the information you provided, your income is equal to 331% of the poverty level. This means you are likely eligible for financial help through the Health Insurance Marketplace. An estimate of your cost for coverage and amount of financial help in 2023 are provided below. To find out your actual amount of financial help and to get coverage, you must go to Healthcare.gov or your state’s Health Insurance Marketplace.

Estimated financial help:
$578
per month ($6,942 per year) as a premium tax credit. This covers 69% of the monthly costs.
Your cost for a silver plan:
$254
per month ($3,051 per year) in premiums (which equals 6.78% of your household income).
The most you have to pay for a silver plan:
6.78%
of income for the second-lowest cost silver plan
Without financial help, your silver plan would cost:
$833
per month ($9,993 per year)
Other Levels of Coverage
The costs above are for a silver plan in your area. Silver plans are one of four levels of coverage that you can buy with financial help. These levels – bronze, silver, gold, and platinum – tell you about how much financial protection the plan will offer you if you get sick. Bronze plans have the lowest monthly costs, but when you need medical care, you will pay more for your care. Gold and platinum plans offer more financial protection if you get sick, but these plans have higher monthly costs. You can receive financial help to purchase any of these levels of coverage.

For example, you could enroll in a bronze plan for about $47 per month ($561 per year), which is 1.25% of your household income, after taking into account $6,942 in subsidies). For most people, the Bronze plan represents the minimum level of coverage required under health reform. Although you would pay less in premiums by enrolling in a Bronze plan, you will face higher out-of-pocket costs than if you enrolled in a silver plan.

https://www.kff.org/interactive/sub...0][age]=56&adults[0][tobacco]=0&child-count=0

 

[pb4uski]

The other thing to keep in mind is that if you will be relying on this money for spending then you don't want to put it at risk. You could easily create a bond or CD ladder to find $75k a year for 6-9 years and the income would be low enough to result in a very reasonable net ACA premium.

 

[COcheesehead]

You are setting yourself up for return sequence risk unless you have a pile of cash. If you are willing to have some income do as pb4uski and I do and create a ladder. It’s a perfect combination of capital preservation and income.

I am risk adverse as well because I don’t need a ton of risk to make our plan work.

I built mine to get us to 70 and I still get a premium credit for ACA. The ladder throws off 143% of our budget requirements. We really don’t worry about income.

 

[FLSUnFIRE]

You are setting yourself up for return sequence risk unless you have a pile of cash. If you are willing to have some income do as pb4uski and I do and create a ladder. It’s a perfect combination of capital preservation and income.

I am risk adverse as well because I don’t need a ton of risk to make our plan work.

I built mine to get us to 70 and I still get a premium credit for ACA. The ladder throws off 143% of our budget requirements. We really don’t worry about income.

I feel like some risk is ok, especially if there is other income opportunities/flexibility which we all have some of. Using the high portfolio value ($750K) and $75K WD for 9 years (inflation adjusted in FIRECalc and otherwise default I get:


"FIRECalc looked at the 144 possible 9 year periods in the available data, starting with a portfolio of $750,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 144 cycles. The lowest and highest portfolio balance at the end of your retirement was $-196,674 to $1,438,553, with an average at the end of $359,220. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 9 years. FIRECalc found that 17 cycles failed, for a success rate of 88.2%."


A CD ladder would likely lose buying power due to inflation and even if not would leave a residual value of close to $75K (will consider the interest partial inflation adjustment for this back of envelope analysis and consider $750 to last 10 years). For me, I'd look at what I could do to mitigate the 12% chance of failure and would go for the residual average of $359K... $300K is a lot to leave on the table if I don't need 100% safety (ignoring inflation which is its own risk). Could probably back test a more favorable allocation but if I can manage liquidity I'd prefer my funds in the market especially in an inflationary environment. And if lucky and get the residual of $1.4M you can buy a boat and sail off in search of RobbieB!

 

[COcheesehead]

A ladder of CDs or bonds isn’t for inflation protection. It’s for current income with capital preservation. Have some equities, commodities or real estate for inflation. Saying a ladder would lose purchasing power is like complaining that cars don’t fly - it was never their intended purpose.

 

[pb4uski]

The OP is looking to invest to provide money for spending for a short term (9 year) need. A ladder is the best solution as the money will be there and the interest will at least partially provide for inflation.

I think a mixed portfolio is a poor choice in the OPs situation with a ~10% WR. If the OP had put a mixed portfolio in place at the beginning of 2022 they would be in a bad spot right now and their success rate for the next 8 years might not be so good.

Now if one is talking about a 20 or 30 year time horizon then a mixed portfolio would make more sense.

 

[Al18]

Building a CD or Bond ladder would be my recommendation. When it comes time to make withdrawals, you’ll be able to chose withdrawing money from the CD/bond or in the case of a good stock market, selling stocks. You can change you withdrawal plan on a year to year basis.

 

[skyking1]

It also looks like a good spot to go for an MYGA annuity. You know how long you need the money and you can arrange that payout to cross the bridge nicely.
We have one that's going to do just that for us. It started out as just a place for my wife to put some money after getting a drubbing in 2008.
I have worked it around to be a 6-year payout between my retirement and my drawing social security.

 

[Phroig]

If you want minimal income, capital gains, and safety, will buying discounted bonds with low coupons work?

 

[pb4uski]

It also looks like a good spot to go for an MYGA annuity. You know how long you need the money and you can arrange that payout to cross the bridge nicely.
We have one that's going to do just that for us. It started out as just a place for my wife to put some money after getting a drubbing in 2008.
I have worked it around to be a 6-year payout between my retirement and my drawing social security.

Yes, that would be a good option. You could use the 10% annual free withdrawal feature to generate spending money.

Or even an 8 or 10 year SPIA would provide monthly income for spending but would lock up the money.

 

[ncbill]

Can you borrow against your home via a HELOC?

 

[madatrub]

Great feedback, all. Thank you. Lots to consider.

To double back, one of the main reasons I want to stay away from Interest and Dividend income is that I want to take advantage of a significant capital loss carryover I have, and would like to use that to accomplish two things: 1) Erode that loss once and for all, and 2) If I can minimize interest/divi income and maximize capital gains, I can effectively reduce my MAGI to zero, then use Rollover roths to hit the income target for ACA subsidies. Like mentioned above, that may not be $30k, it might be higher. But either way, a maximum "free" Roth conversion will really help me out once I start tapping retirement accounts.

Thoughts?

 

[pb4uski]

The tax benefit of the loss carryover is probably not very significant. If you don't have capital gains then it can be used to offset ordinary income than capital gains even though you can only use $3,000 annually.

In 2023 a single person could have as much as $58,450 of LTCG and pay $0 in tax, so if you use $58,450 of capital loss carryover to negate those gains you are effectively throwing the loss carryover away since it isn't resulting in any tax benefits.

The amounts would be double for a married couple.

IOW, if you take $75k from your portfolio and it results in $50k of LTCG then your tax would be $0, so using $50k of loss carryover to reduce the tax to $0 still results in $0 tax.

 

[madatrub]

The tax benefit of the loss carryover is probably not very significant. If you don't have capital gains then it can be used to offset ordinary income than capital gains even though you can only use $3,000 annually.

In 2023 a single person could have as much as $58,450 of LTCG and pay $0 in tax, so if you use $58,450 of capital loss carryover to negate those gains you are effectively throwing the loss carryover away since it isn't resulting in any tax benefits.

The amounts would be double for a married couple.

IOW, if you take $75k from your portfolio and it results in $50k of LTCG then your tax would be $0, so using $50k of loss carryover to reduce the tax to $0 still results in $0 tax.

I understand that part, but in your example, doesnt that generate $58,450 in income that now puts me in a scenario where Im paying $300/mo for ACA and a $18,500 out of pocket max, while then being able to do no Roth conversion. Versus using the capital loss carryforward, reducing my income to zero, and then moving $58,450 in a roth conversion in the same year for the same ACA benefit?

In your example, I'd be able to perform no Roth conversion to capture that 0% tax rate (without pushing me into a higher tax bracket and/or minimizing how much roth conversion I could accomplish)

 

[SevenUp]

I understand that part, but in your example, doesnt that generate $58,450 in income that now puts me in a scenario where Im paying $300/mo for ACA and a $18,500 out of pocket max, while then being able to do no Roth conversion. Versus using the capital loss carryforward, reducing my income to zero, and then moving $58,450 in a roth conversion in the same year for the same ACA benefit?

In your example, I'd be able to perform no Roth conversion to capture that 0% tax rate (without pushing me into a higher tax bracket and/or minimizing how much roth conversion I could accomplish)

The article titled Roth Conversion and Capital Gains On ACA Health Insurance might have been written just for you.

One thing that may not be mentioned there is how to account for long term capital loss carryovers in the suggested tool: they go in cell M57.

 

[madatrub]

The article titled Roth Conversion and Capital Gains On ACA Health Insurance might have been written just for you.

One thing that may not be mentioned there is how to account for long term capital loss carryovers in the suggested tool: they go in cell M57.

Its an awesome tool. I also used Turbo Tax with some mock up numbers to verify how this type of plan would work out. It checked out.

 

[pb4uski]

I understand that part, but in your example, doesnt that generate $58,450 in income that now puts me in a scenario where Im paying $300/mo for ACA and a $18,500 out of pocket max, while then being able to do no Roth conversion. Versus using the capital loss carryforward, reducing my income to zero, and then moving $58,450 in a roth conversion in the same year for the same ACA benefit?

In your example, I'd be able to perform no Roth conversion to capture that 0% tax rate (without pushing me into a higher tax bracket and/or minimizing how much roth conversion I could accomplish)

You misunderstand. I wasn't suggesting that you do $58,450 of LTCG but was just using that example to illustrate that the 0% capital gains tax bracket is so large that it is hard to get much benefit from your big tax loss carryforward.

From what you wrote it sounds like just about all your LTCG will be offset by loss carryovers so I don't see much sense of purposely skewing your investments to generate LTCG... whatever LTCG occur will be offset and therefore not taxed.

I don't get your last paragraph. While I'm not recommending that you do $58,450 of LTCG, even if you did it would be offset by $58,450 of loss carryforward and you could still do whatever you want for Roth conversions given your ACA targets.

 

[madatrub]

You misunderstand. I wasn't suggesting that you do $58,450 of LTCG but was just using that example to illustrate that the 0% capital gains tax bracket is so large that it is hard to get much benefit from your big tax loss carryforward.

From what you wrote it sounds like just about all your LTCG will be offset by loss carryovers so I don't see much sense of purposely skewing your investments to generate LTCG... whatever LTCG occur will be offset and therefore not taxed.

I don't get your last paragraph. While I'm not recommending that you do $58,450 of LTCG, even if you did it would be offset by $58,450 of loss carryforward and you could still do whatever you want for Roth conversions given your ACA targets.

Sorry let me try to explain better, with an example:

If I have 750k after tax income invested in short term treasuries. I earn $37,500 in interest at 5% in a year. With a carryloss my AGI is $34,500. In this example, I convert $15,500 Roth. That puts me at $50k AGI, which qualifies me for a ACA plan in my state costing $205/mo with a $18,200 out of pocket max. In this scenario I pay $2,236 in federal tax.

Now assume If I have 750k after tax income invested in the market, lets assume I need to withdraw 75k to live in that year, and $37,500 of that is LTCG. I then convert $33,000 Roth. That puts me at $30k AGI, which qualifies me for an ACA plan in my state costing $14/mo with a $6,000 out of pocket max. In this scenario I pay $230 in federal taxes.

Scenario A = $4,696 cost (Tax + Medical), $18,200 OOPM, $15,500 roth conversion

Scenario B = $398 cost (Tax + Medical), $6,000 OOPM, $33,000 roth conversion

Does that make more sense?

 

[orbops]

My plan requires a bridge from Retirement to 65 that minimizes MAGI for max ACA subsidies. I have a significant capital loss carryforward that will likely reduce my capital gains to $0 MAGI across much of that bridge. My intention is to use ROTH conversions as the lever to maintain income for ACA purposes.

In order to do that successfully, I need to minimize Interest and Dividend income during that bridge such that my income sources are predominantly after tax capital gains.

Looking for some suggestions on investments that meet this criteria. I'm fairly risk adverse, and want to maintain some capital preservation in the event of a down market during the "bridge".

I retired at 50 (currently 56) and also try to keep my MAGI low for ACA purposes. I also am using the Roth conversions to set my MAGI. You need to keep your MAGI above around $25-$27K, otherwise you fall into the Medicaid range. This year I signed up my wife and I for an HSA Bronze plan, which can deduct $9,750 for both of us.

I also had a capital loss of $-19K to help offset my AGI. I used the overall money from that capital loss transaction, and just let it sit in the Vanguard Money Market Fund - which is currently offering an annualized rate of 5.03%. This is the primary money source that I access to minimize dividends.

Remember that the standard deduction for married is $27,700, so really you can have a MAGI just above $35,450 and you won't owe any federal taxes. By using CDs, you can get a 5% return right now, and many CDs that I've seen on Vanguard and Fidelity don't pay any interest until they mature.

My wife wanted to have a more conservative portfolio mix, so we've moved from 85%/15% down to 70%/30% by using T-bills, I-bonds, and CDs to make our portfolio more conservative.

 

[yclipse]

In your shoes I would put a good amount into Berkshire Hathaway B. It is likely to grow over the next five years, and it pays no dividend.