Now what

[AreWeThereYet0]

Hello,
I am 46 years old and recently retired, not exactly by choice, more by circumstance. I have roughly 2.1M in retirement accounts and 1.1M in non retirement accounts. I have found the accumulation phase to be a lot easier to manage than the post retirement period.

My question is how exactly is it suggested I should handle this money (the 1.1M from now at age 46 to age 59.5 when I can start cashing out of my IRAs penalty free? 518K of the 1.1M is already invested in various stocks and mutual funds in a brokerage account but the rest is cash. How should I manage the 582K cash? I will need money to live off of this year in addition to future years and I have no pension or any other income. My family of two (me and my partner) spend roughly 80K a year. I currently have 28% of my IRA in SGOV, which is the iShares 0-3 Month Treasury Bond ETF, would it be a good idea to put some more cash there? Is now when I should implement the 3 bucket strategy? If so, should I use the 3 bucket strategy on all the dough I have for the next 13.5 years? Any direction would be helpful. I am mostly a do it yourselfer when it comes to finances and just occasionally check in with fee only financial advisors to bounce ideas off of and respect your opinions.
Thank you.
-AreWeThereYet0

Retired as of January 2024

 

[38Chevy454]

Are you trying to minimize taxes, or keep income below a certain threshold? You can do some Roth conversions and use the cash to pay for the taxes on that, beside your living expense needs. Do you have a good understanding of your budget needs? Do you have any other income sources beside your savings? Do you understand your risk tolerance and use that to help guide your investment asset allocations?

You can also tap your pretax accounts using 72t withdrawals, there are some definite rules and reqts to follow, so if you want to do that learn what is needed. I would suggest make that a less than your budget needs, something like 50% max, and use after tax money to fill in as needed; if you use the 72t option.

You've done a great job on the accumulation, it now requires a change in mindset to be in withdrawal and future planning mode.

 

[Closet_Gamer]

Is the $80k pre- or post-tax?

 

[mrfeh]

First thing to do is determine if you can retire.

You need an accurate picture of your expenses. Don't forget health insurance.

 

[Surewhitey]

You say "I" a lot. Does your partner have anything or are you combining? You mentioned we only when referring to the spending.

If insurance & taxes are included in the $80k, your cash is throwing out $30k annually to start, so the cash will last you maybe 8 years "if" rates are higher. Otherwise you will eat up more principal earlier.

Then you can do some cap gains harvesting by selling your investments along the way to get through the other few years. Then, at 59.5, slowly using the retirement funds (& rollovers) to manage ACA health insurance reasonably. Lots of moving parts in your case.

$.02

 

[Toocold]

Purely from a cash management perspective, I would withdraw 80k on a quarterly basis to live on. I am presuming that this figure is pre-tax, your total figures include expenses like healthcare premiums, and your partner doesn't work.

Make sure you have the right allocations across your pre- and post-tax funds, so that it will outlive you.

I am not sure what you mean by 3 bucket strategy. I would think it's pre-59 and post-59, but not sure.

 

[AreWeThereYet0]

To clarify, I have already retired. Neither my partner nor I work. The 80K is post tax, since we are married filing jointly and our income is capital gains only we won't be paying any taxes. (other than state) I have tracked my expenses for several years and know how much we spend and the 80K includes health insurance expenses. I am trying to keep our income such that we pay no capital gains taxes until 59 1/2. We have enough money to get to 59 1/2, I just need to figure out how to allocate it. Thank you.

 

[Surewhitey]

To clarify, I have already retired. Neither my partner nor I work. The 80K is post tax, since we are married filing jointly and our income is capital gains only we won't be paying any taxes. (other than state) I have tracked my expenses for several years and know how much we spend and the 80K includes health insurance expenses. I am trying to keep our income such that we pay no capital gains taxes until 59 1/2. We have enough money to get to 59 1/2, I just need to figure out how to allocate it. Thank you.

Cap gains tax doesn't matter regardless of 59.5. 59.5 has more bering on withdrawal of your 401k and IRA's. You have plenty to get to 59.5 if you include your post tax account. As you use the first cash amount you can slowly sell & move more to the cash account as you get clarity of your needs over time.

 

[pb4uski]

Hello,
I am 46 years old and recently retired, not exactly by choice, more by circumstance. I have roughly 2.1M in retirement accounts and 1.1M in non retirement accounts. I have found the accumulation phase to be a lot easier to manage than the post retirement period.

My question is how exactly is it suggested I should handle this money (the 1.1M from now at age 46 to age 59.5 when I can start cashing out of my IRAs penalty free? 518K of the 1.1M is already invested in various stocks and mutual funds in a brokerage account but the rest is cash. How should I manage the 582K cash? I will need money to live off of this year in addition to future years and I have no pension or any other income. My family of two (me and my partner) spend roughly 80K a year. I currently have 28% of my IRA in SGOV, which is the iShares 0-3 Month Treasury Bond ETF, would it be a good idea to put some more cash there? Is now when I should implement the 3 bucket strategy? If so, should I use the 3 bucket strategy on all the dough I have for the next 13.5 years? Any direction would be helpful. I am mostly a do it yourselfer when it comes to finances and just occasionally check in with fee only financial advisors to bounce ideas off of and respect your opinions.
Thank you.
-AreWeThereYet0

Retired as of January 2024

To clarify, I have already retired. Neither my partner nor I work. The 80K is post tax, since we are married filing jointly and our income is capital gains only we won't be paying any taxes. (other than state) I have tracked my expenses for several years and know how much we spend and the 80K includes health insurance expenses. I am trying to keep our income such that we pay no capital gains taxes until 59 1/2. We have enough money to get to 59 1/2, I just need to figure out how to allocate it. Thank you.

A lot there. Cash management, tax management and investment management.

Your $1.1m in taxable accounts is sufficient to carry you from 46 to 59-1/2 at $80k of withdrawals annually so you should be all set there. The $582k of cash should carry you for 7-8 years. You could invest that cash in a bond or brokered CD ladder with $80k rungs that mature annually and use the maturity money to fund your expenses. Then at the end of 7-8 years start redeeming the $518k in various stocks and mutual funds.

For a MFJ couple capital gains taxes will be $0 as long as you manage your income to be less than $123,250 (in 2024... will increase a little each year as the 0% preferenced tax bracket increases for inflation and the standard deduction increases for inflation).

You likely have a great opportunity to do low tax cost Roth conversions. While you have to be 59-1/2 to do penalty free withdrawals, you can do penalty-free Roth conversions at anytime and from that point forward that money is not taxed if the conversion has been in the Roth for at least 5 years. So if you do a conversion in 2024 you'll pay tax on the conversion amount but you can withdraw that money tax and penalty free 5 or more years later if you wish to.

A MFJ couple in 2024 could haves as much as $123,250 of qualified dividends and LTCG or $29,200 in ordinary income and $94,050 in qualified dividends and LTCG
and pay $0 in tax.

What I suggest is that you do your best estimate of your 2024 taxes on https://www.irscalculators.com/tax-calculator or the What-If Worksheet if you use TurboTax. Then add Roth conversion to bring your total income up to $123,250 and compare the change in tax to the Roth conversion. It'll probably be between 10%-12%. Then try to estimate what your tax bracket will be when RMDs are required at 75. For most of us, the tax rate on RMDs will be much higher than the 10-12% so it is better to pay 10%-12% now than 22% later.

So as you do low-tax cost Roth conversions you'll be building a pile of money that can later be tapped if your taxable money runs out before you make it to 59-1/2.

 

[HI Bill]

I am trying to keep our income such that we pay no capital gains taxes until 59 1/2.

You should try to maximize the 0% LTCG tax bracket for as many years as you can. In years when I had less spending, I sold ETFs, using up my 0% LTCG tax bracket (currently at $94,050 for MFJ). Then I repurchased the same or similar ETFs with the surplus funds. This effectively reset the basis for those shares, lowering my future taxes without costing me anything. Eventually, you'll need to tap your tax-deferred accounts, and eventually, RMDs will hit. It would be favorable to have as many funds with reset basis (or converted to backdoor ROTH IRA) to minimize future taxes.

P.S. What pb4uski said!

 

[cyber888]

Do you have kids ? or just you and wife ? It seems like no problem getting to 59.5

 

[mrfeh]

You should try to maximize the 0% LTCG tax bracket for as many years as you can. In years when I had less spending, I sold ETFs, using up my 0% LTCG tax bracket (currently at $94,050 for MFJ). Then I repurchased the same or similar ETFs with the surplus funds. This effectively reset the basis for those shares, lowering my future taxes without costing me anything. Eventually, you'll need to tap your tax-deferred accounts, and eventually, RMDs will hit. It would be favorable to have as many funds with reset basis (or converted to backdoor ROTH IRA) to minimize future taxes.

The decrease in ACA subsidies may make this approach sub-optimal.

 

[pb4uski]

Perhaps, but the OP has yet to mention ACA subsidies. He only said that the $80k spending includes health insurance.

 

[DrRoy]

You should be able to get about $30K/yr interest off the $582K of cash. Also, I believe that you can withdraw from retirement accounts at 55 if you are fully retired.

 

[pb4uski]

You should be able to get about $30K/yr interest off the $582K of cash. Also, I believe that you can withdraw from retirement accounts at 55 if you are fully retired.

No on the last part. You can withdraw from 401ks but not traditional IRAs without penalty if you leave service after age 55. Has nothing to do with being "fully retired".

Besides, OP is 46.

 

[orbops]

I retired at 50 back in 2017 with 1.7M total (1.2M in retirement & 0.5M in taxable). It's just my wife and I and we spend about $75K/year. We keep about 30% in CDs & T-bills that earn about 5% annually.

After looking up what the 3 bucket strategy is, we essentially follow buckets 1 & 3, and not worry about medium term. Bucket 1 is all in the taxable accounts. In bucket 1, I'm trying to minimize dividends and/or selling only my lowest long term capital gain investments - this is so that I can try to make the largest Roth conversion as possible each year. Bucket 3 is all the retirement accounts with the goal of withdrawing from bucket 3 from IRA 1st and Roth last. In bucket 3, I also keep the 70/30 stock to CD/T-bill ratio.

I have been doing small Roth conversions every year to keep me in the 12% bracket and I think that should be your focus until you can touch your retirement accounts. The goal should be to move as much of your IRA into a Roth account so that by 59.5, your Roth could be used to ensure you stay in the 12% bracket until you start getting Social Security.

One other item to consider on the health insurance side if you're healthy, you may consider signing up for an HSA account so that would give you a $4,150/person deduction off your AGI. I did that last year to reduce my AGI - unfortunately it turned out to be a bad decision since we ended up paying the full $15K max out of pocket due to car accident and unexpected medical.

 

[skyking1]

^ What Pb4ski said. CD ladder plus conversions to the top of the bracket.

 

[engineernerd]

Hello,
I am 46 years old and recently retired, not exactly by choice, more by circumstance. I have roughly 2.1M in retirement accounts and 1.1M in non retirement accounts. I have found the accumulation phase to be a lot easier to manage than the post retirement period.

My question is how exactly is it suggested I should handle this money (the 1.1M from now at age 46 to age 59.5 when I can start cashing out of my IRAs penalty free? 518K of the 1.1M is already invested in various stocks and mutual funds in a brokerage account but the rest is cash. How should I manage the 582K cash? I will need money to live off of this year in addition to future years and I have no pension or any other income. My family of two (me and my partner) spend roughly 80K a year. I currently have 28% of my IRA in SGOV, which is the iShares 0-3 Month Treasury Bond ETF, would it be a good idea to put some more cash there? Is now when I should implement the 3 bucket strategy? If so, should I use the 3 bucket strategy on all the dough I have for the next 13.5 years? Any direction would be helpful. I am mostly a do it yourselfer when it comes to finances and just occasionally check in with fee only financial advisors to bounce ideas off of and respect your opinions.
Thank you.
-AreWeThereYet0

Retired as of January 2024

[FONT=&quot]One thing you could do for a while, especially if you have significant unrealized capital gains in your taxable (non retirement) accounts, is to take advantage of the 0% tax on capital gains and qualified dividends for taxpayers whose total taxable income is below a certain threshold, which for married filing jointly in 2023 was $89,250.[/FONT]

[FONT=&quot]To get the best benefit you'd want to minimize sources of taxable income other than capital gains and qualified dividends, so it might not make sense to do a Roth conversion in the same year (the entire amount of the Roth conversion is taxable income taxed as ordinary income in the year you do the conversion).[/FONT]

[FONT=&quot]If you do a Roth conversion before age 59.5, you will need to pay the taxes on that out of your non-retirement accounts or pay the 10% early-withdrawal penalty on the amount withheld for taxes. For that reason I would hesitate in your shoes to jump right into Roth conversions. Maybe small ones would be OK, you can probably figure that out.[/FONT]

[FONT=&quot]Unless they change the rules (which of course is possible), you will be able to benefit from Roth conversions if you do them at any time before your tax bracket goes up due to Social Security benefits and/or IRA distributions (and/or legislative changes to tax rates), so IMHO you can afford to wait a bit.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Note: the $89,250 for 2023 is after deductions (standard or otherwise) so pb4uski said the same thing in a different way.
[/FONT]

 

[Exchme]

OP has over a million in cash and equivalents, about 1/3 of everything. Historically, that's been a poor choice. There's an interesting thread, started by Professor Ed McQuarrie (McQ) over at Bogleheads.org where he pieced together available past data to be able to compare different types of bonds and different durations at various asset allocations over a historical time period that included both a bond bull market and a bear market.

Gauging performance by how it helped the overall portfolio, the winner was not the traditionally recommended Total Bond Market and certainly not cash, but rather Intermediate Term Treasuries. As I understood it, they came out on top by giving a good mix of their own return and good de-correlation from stock returns.

https://www.bogleheads.org/forum/viewtopic.php?p=7793819#p7793819

 

[engineernerd]

To the OP:

I just ran FIRECalc to explore optimal asset allocations for a 14-year retirement with a $1.1 million starting portfolio and $80k annual withdrawals, and the odds of success maxed out at 82% (with 75% to 85% stocks). With your current 47% stock allocation the success rate was a bit lower at 79% (and the worst historical series of years would have had your $1.1 million fully spent in 10 years).

To me the message this sends is that ideally you'd find ways to reduce your spending a bit, or at least be aware that depending how your non-retirement portfolio does over the next few years you might need to make adjustments to avoid having to tap your IRAs before age 59.5.