Retirement - Bridge the Income Gap For 4 years – How to Invest the $220K needed?

[G-Man]

I plan to retire next year (2024) and I need at least $55K per year from my portfolio to bridge the gap for 4 years until other income sources kick in. Currently, I have allocated a portion ($220k) of my 401k portfolio investment in the Interest Income fund with a rate of return around 3%. The Interest Income fund is the safest investment fund in our 401k. I will be using the Rule of 55 to drawn down on these dollars in my 401k. At age 59 ½ (2 yrs. from now), I could move these funds to a TIRA.

Over the next 4 years, how should I invest the $220K to achieve my goal. I would like to get some annual return (at least 6%) on my money as well.

For example, would this strategy work.
1. Year 1 – Leave $55K in Interest Income Fund. Invest the remaining $165K in 100% equity.
2. Year 2 – Leave $55K in Interest Income Fund. Invest the remaining $110K in 100% equity.
3. Year 3 – Leave $55K in Interest Income Fund. Invest the remaining $55K in 100% equity.
4. Year 4 – Invest $55K in Interest Income Fund. Leave the remaining balance in the Equity fund to grow.

The investment options in our 401k are limited. Would love to hear your approach and strategy.

 

[OldShooter]

IMO this is too short a time period to be putting the money into equities unless you have other financial resources that you could tap to avoid an SORR situation.

Remember, "$165K, $110K, and $55K' are guaranteed to not happen. Some other numbers will happen. Nice chart here: https://www.businessinsider.com/long-term-stock-return-variability-2015-8

 

[G-Man]

IMO this is too short a time period to be putting the money into equities unless you have other financial resources that you could tap to avoid an SORR situation.

Remember, "$165K, $110K, and $55K' are guaranteed to not happen. Some other numbers will happen. Nice chart here: https://www.businessinsider.com/long-term-stock-return-variability-2015-8

Great chart. Then I guess leaving the $220K in the Interest Income fund with at a rate of return around 3% makes the most sense. Unfortunately, our 401k plan is very limited in the investment choices we have.

 

[pb4uski]

What do you expect the tax rate on those withdrawals will be? If you can take more than $55k out without bad tax consequences then you could invest the excess in short term CDs in a taxable account... currently more than 5%.

 

[joesxm3]

Can the 401k be rolled to a TIRA that can buy treasuries?

 

[latexman]

Does your 401k offer a money market (MM) fund? The one in mine is paying 5.25% right now.

 

[G-Man]

What do you expect the tax rate on those withdrawals will be? If you can take more than $55k out without bad tax consequences then you could invest the excess in short term CDs in a taxable account... currently more than 5%.

I will be in the 22% marginal tax bracket due to other income sources during the 4 year period. However, I would have room to fill up the 22% marginal tax bracket. I need to figure out what the overall effective tax rate will be each year.

So, your strategy would be to based on marginal tax brackets and effective tax rate:

1. Year 1 - Take $110K from 401k. Put $55K in a taxable account (invest in short term (1 yr. or less) fixed income funds.
2. Year 2 - Take $110K from 401k. Put $110K in a taxable account (invest in short term (1yr and 2 yr) fixed income funds. Use the $55K from taxable account in Step 1 to pay for Year 2 expenses.
3. Year 3 - Take $55K from taxable account in Step 2 (1yr short term fixed income fund) to pay for Year 3 expenses.
4. Year 4 - Take $55K from taxable account in Step 2 (2yr short term fixed income fund) to pay for Year 4 expenses.

At the end of year 4, there should be some extra dollars based on the growth from Year 1 -3.

 

[G-Man]

Can the 401k be rolled to a TIRA that can buy treasuries?

Unfortunately, not until I reach age 59 1/2 which would another 2 years. Then I can roll over the 401k funds to a TIRA.

 

[G-Man]

Does your 401k offer a money market (MM) fund? The one in mine is paying 5.25% right now.

Unfortunately, no. That would be great option to park money in for the next 4 years.

 

[teej1985]

Unfortunately, not until I reach age 59 1/2 which would another 2 years. Then I can roll over the 401k funds to a TIRA.

I have never heard of an employee who has separated from employment not being allowed to rollover from a 401k to TIRA.

 

[G-Man]

I have never heard of an employee who has separated from employment not being allowed to rollover from a 401k to TIRA.

Sorry. I need the funds in the 401k to use the Rule of 55. At age 59 1/2 I could rollover the remaining balance of the $220K into a TIRA and make withdrawals from the TIRA without a penalty.

 

[latexman]

Sorry. I need the funds in the 401k to use the Rule of 55. At age 59 1/2 I could rollover the remaining balance of the $220K into a TIRA and make withdrawals from the TIRA without a penalty.

+1. That makes sense.

 

[Al18]

Leave 66K in the interest income fund, because you will be withdrawing the entire amount within weeks of retiring. There is an IRS rule that 20% federal taxes (11K) must be withheld and you will receive 55K.

The rest of the money should remain invested at the same stocks/bonds/cash ratio stated in your financial plan.

 

[Al18]

Sorry, my math was wrong in the post above. 55000/.80=$68750 is the amount you need to withdraw from your 401K to receive $55000.

 

[G-Man]

Leave 66K in the interest income fund, because you will be withdrawing the entire amount within weeks of retiring. There is an IRS rule that 20% federal taxes (11K) must be withheld and you will receive 55K.

The rest of the money should remain invested at the same stocks/bonds/cash ratio stated in your financial plan.

Would listing the investment choices in my 401k help in determining an investment strategy. Once again, the plan is to retire early next year.

 

[pb4uski]

I will be in the 22% marginal tax bracket due to other income sources during the 4 year period. However, I would have room to fill up the 22% marginal tax bracket. I need to figure out what the overall effective tax rate will be each year.

So, your strategy would be to based on marginal tax brackets and effective tax rate:

1. Year 1 - Take $110K from 401k. Put $55K in a taxable account (invest in short term (1 yr. or less) fixed income funds.
2. Year 2 - Take $110K from 401k. Put $110K in a taxable account (invest in short term (1yr and 2 yr) fixed income funds. Use the $55K from taxable account in Step 1 to pay for Year 2 expenses.
3. Year 3 - Take $55K from taxable account in Step 2 (1yr short term fixed income fund) to pay for Year 3 expenses.
4. Year 4 - Take $55K from taxable account in Step 2 (2yr short term fixed income fund) to pay for Year 4 expenses.

At the end of year 4, there should be some extra dollars based on the growth from Year 1 -3.

Yes, that was what I had in mind, particularly if as you write it is 22% later or 22% now... at least you will get it out of the 401k where you have better investment options.

If you can do a partial rollover, you might also consider rolling over any 401k that you don't need to use the Rule of 55 withdrawals for to a rollover IRA at a brokerage house that will have more/better investment options.

 

[G-Man]

Any other recommendations?

 

[mrfeh]

IMO this is too short a time period to be putting the money into equities unless you have other financial resources that you could tap to avoid an SORR situation.

+1

Funds needed in 4 (or less) years should definitely not be in equities.

 

[pb4uski]

+1



Funds needed in 4 (or less) years should definitely not be in equities.

+2. Brokered CD or bond ladder with maturities aligning when the money is needed.

 

[G-Man]

+2. Brokered CD or bond ladder with maturities aligning when the money is needed.

Well the only suitable choices in my 401k would be:

-Balanced Fund - 50/50 allocation - Very good return over 3 yrs.
-US Govt Obligations - Bond Fund
-US Diversified - Bond Fund
-Interest Income - Bond Fund - Best Performance out of Bond Choices