Three year plan to 59.5

[jschner]

Looking to bounce this three year plan off the board here.

Retire Target date: Feb 2022 at 56. Turn 59.5 in Nov 2024.

Current household income $130k gross / $75K net. Expect about $30K in income in 2022. No work income after that, unless I decide to work somewhere part time.
Currently no debt, own home. Retirement base living expenses $60k/yr + HC guestimate of $25k/yr. Total $85K

Accounts:
Cash Brokerage Acct: $638k in a single stock, If sold, total LTCG would be $495K about $93k in taxes.
401K: $950K, will have access using Rule 55.
ROTH: $2.1M - growth
Planning to take SSI at age 70, $50k/yr combined.

Retire Feb 2022 to Nov 2024 Plan
-2022 401k Acct: Move 100% to something like Wellington fund. Use this account for small amount of income around $25k and as a backup.
-2022 CASH Brokerage Acct: Use brokerage acct for income by regularly selling shares up to $75K/year. LTCG rate 0%. With cost basis of 80% this would provide up to $93k a year, $30k + 93K = $123K Fed tax rate 0%, AZ tax ~$2000.

-2023/24 401K account: pull out $25k/yr
-2023/24 Cash Brokerage Acct: Pull out $80K for income of up to $125k/ yr in total. Fed tax rate 0%, AZ tax ~$2000.

Withdrawal rate is about 2.3% to 3.4% with this plan for three years.

While the CASH Acct is at risk of a major drop, I prefer not to sell it all at once and take a $95K+ tax hit. The account can drop 50% with maximum income still being sustained. Obviously if it does not come back from such a drop which is unlikely at the moment, but not impossible, this plan would fully deplete the CASH Brokerage account. I would also have the 401K account as a backup. The account could also rise significantly, and that would be a plus. Not bad from an account that started with $37k in it in 2017.

After 30 years of working and accumulating I guess I'm looking for confirmation if this is realistically doable? Other alternatives to get to 59.5? Thanks.

 

[SecondCor521]

Yes, your plan sounds perfectly fine to me.

Generally anything in the 3% range is probably fine, and you're going to have SS in about 14 years that will cover more than half of your expenses, so as long as you believe SS will be there, your plan is actually pretty conservative.

Also, your planned spend is reasonable compared to your current net, so you're probably in the ballpark there.

What are your plans for HC? $25K actually sounds like a pretty generous amount. I'm single 52M and my plan is about $6500 a year. If ACA is OK with you, you could try checking out what your subsidized plan costs would be - you could put in your estimated 2022 AGI and your age(s) and get a decent estimate.

You probably want to check to make sure your 401(k) custodian will do the plan you're talking about. Some custodians place restrictions on their "rule of 55" offerings.

Personally it would make me nervous owning that much of a single stock, so if I were in your shoes I'd just retire and sell some of that single stock periodically. It'll fund your living expenses and also lower your risk. Selling enough to fund your living expenses, assuming you're MFJ, would still be $0 in federal taxes it looks like.

Personally I try to have my overall AA match what I want, and I don't really try to have specific accounts with specific targets. So your idea of shifting your 401(k) to Wellington, presumably to support your withdrawals over the next four years, doesn't particularly resonate with me. The likelihood is that your 401(k) will be around for over a decade and provide you with more money after 59.5, so it would be typical to invest over that time frame, not just the next four years or so.

HTH.

 

[jschner]

Still looking into HC options, my spouse had a lot of Dr appts this year, I'm expecting the same next year. Cheapest Bronze HMO around $56/mo w $8700 ded. First Silver PPO is $1212/mo with $3100 ded and allows us to see our current doctors. Add Dental and Eye expenses and I figure around $25k.

Good call on the Rule 55, I read it in the plan, but need to double check if there are any strings attached. I could continue with the same plan, just up the stock sales minus the 401k distributions. That would add a little more risk for the next three years, but I can cut back if needed or take an unplanned tax hit.

My thinking for the 401k was due to RMDs switch that account from growth to income and sort of a safety net and put it in an investment that would grow enough to break even with income, maybe even draw it down a little. I would still have the much larger ROTH account hardly being touched. And my cash account that I can still trickle out the stock on.

It's a weird feeling thinking of how steady my income was for 30 years to how fluid and the amount of flexibility I'll have in retirement, but still need to balance everything out from income to taxes to continued growth and safety. It's a lot to think about.

 

[Flyfish1]

I would second the statement to check on the 401K. I placed a call and learned quite a bit in 5 min on the phone with a rep.Not all plans are the same.

Anyways, Congrats and you are in good shape to retire.
I was going to retire in 2022, but got snagged in the one more year syndrome.

 

[chassis]

Seems reasonable at a high level. Congrats!

I would not hold as high a percentage of NW in one stock as you mentioned. I would pare that down. Subjective view.

 

[mrfeh]

Cash Brokerage Acct: $638k in a single stock

This is extremely risky, and it's a risk you don't need to take.

I'd put exiting this position as #1 on your todo list.

 

[teetee]

Does it make sense to start converting 401k to Roth IRA during those 3 gap years with low/no work compensation to get the tax out of the way and avoid RMD down the road?

 

[jschner]

I called Fidelity who holds my 401k funds for the company I work for and they said the Rule55 is effective the moment I stop work. They made it clear, it is an IRS rule not a Fidelity 401k benefits rule that I would qualify under. So are there any strings attached to the IRS rule that I am not aware of? Certain withdrawal rates or amounts? Curious what stipulations or limitations others had run into with Rule 55.

My sequence of withdrawals will be:
Brokerage Acct: Trickle the single stock down. I acknowledge this will be a highly volatile account.
401K: Slow growth, Some income from here to minimize RMDs later. flat or drawdown a little is fine by the time I hit RMD years.
ROTH: Use for additional Income to minimize taxes and add growth. I was also thinking about steady income stream from this. Maybe take $1.5M and put in 75% NUSI / 25% SCHG, the rest in other growth.

What do you think of Trailing Stop Loss say 10% or 15% being used in some growth accounts as a one-way bail mechanism if things shoot down? Those accounts would go to cash, then when the dust settles get back in or tweak the investment strategies? While it locks in a drop if the account did not go up which is not great, I think it might add a little safety net in the retirement accounts, especially if they did grow, they would take profits. I probably would not do it in the brokerage account due to tax implications. I'd ride that one out like I have numerous times before.

I wondered about the ROTH conversion too but I think I can trickle funds out of tbe 401k acct and the tax rate stay fairly low. Lower than if I took a huge block out at once. My plan would hit a tax snag if it grew really fast, but then who would not want that problem? Is this the last year for ROTH conversions like that?

 

[SecondCor521]

I called Fidelity who holds my 401k funds for the company I work for and they said the Rule55 is effective the moment I stop work. They made it clear, it is an IRS rule not a Fidelity 401k benefits rule that I would qualify under. So are there any strings attached to the IRS rule that I am not aware of? Certain withdrawal rates or amounts? Curious what stipulations or limitations others had run into with Rule 55.

My sequence of withdrawals will be:
Brokerage Acct: Trickle the single stock down. I acknowledge this will be a highly volatile account.
401K: Slow growth, Some income from here to minimize RMDs later. flat or drawdown a little is fine by the time I hit RMD years.
ROTH: Use for additional Income to minimize taxes and add growth. I was also thinking about steady income stream from this. Maybe take $1.5M and put in 75% NUSI / 25% SCHG, the rest in other growth.

What do you think of Trailing Stop Loss say 10% or 15% being used in some growth accounts as a one-way bail mechanism if things shoot down? Those accounts would go to cash, then when the dust settles get back in or tweak the investment strategies? While it locks in a drop if the account did not go up which is not great, I think it might add a little safety net in the retirement accounts, especially if they did grow, they would take profits. I probably would not do it in the brokerage account due to tax implications. I'd ride that one out like I have numerous times before.

I wondered about the ROTH conversion too but I think I can trickle funds out of tbe 401k acct and the tax rate stay fairly low. Lower than if I took a huge block out at once. My plan would hit a tax snag if it grew really fast, but then who would not want that problem? Is this the last year for ROTH conversions like that?

While the IRS says your company 401(k) must allow access if you separate in the year you turn 55, the company can place restrictions. One common restriction is that you must withdraw all of your 401(k) in one lump sum withdrawal. If you don't mind a bit of challenging reading, you can request a copy of your Summary Plan Description (SPD) for your 401(k) and read it. That really should be the controlling document for what you can or can't do. Another resource might be your HR department. Fidelity can be generally helpful but they have to manage thousands of 401(k) plans all that could have different rules in this area, so it might be difficult for them to get specific.

I know about trailing stops but have never used them. First, there is the risk, as you note, of being stopped out (and having unexpected / unplanned taxes in a taxable account). Second, they require managing and monitoring and adjustments. Third, they require judgment based on individual asset volatility. If I feel my portfolio is too risky, I adjust my AA downwards. It's old school, but it works without all the other negatives of trailing stops.

There are a few provisions in the BBB Act that could affect Roth conversions - I know there is a provision in there currently that precludes Roth conversions if you have any after-tax contributions in your traditional IRA. (There may also be a provision related to Roth conversions for high income individuals, but that limit is high enough that I and probably you don't need to worry about.) But that bill is still in the legislative process, so it may change before it gets done.

 

[Alex The Great]

I called Fidelity who holds my 401k funds for the company I work for and they said the Rule55 is effective the moment I stop work. They made it clear, it is an IRS rule not a Fidelity 401k benefits rule that I would qualify under. So are there any strings attached to the IRS rule that I am not aware of? Certain withdrawal rates or amounts? Curious what stipulations or limitations others had run into with Rule 55.

You need to ask Fidelity do they allow partial distributions from your 401K, under 55 age rule. This is not regulated by IRS, this is a matter of contract between your employer and Fidelity 401K administrator. If they do not allow partial distributions, then you have to convert the entire amount which would be painful from tax prospective.
One problem may be that representative may not be educated enough to answer this question, or simply reluctant to answer. Then call again, until you get a definitive answer. Normally Fidelity representatives are good at what they do, but as always there are exceptions.

 

[jschner]

Thanks for the info, very helpful. I called Fidelity again this time armed with the SPD plan.

Rule 55 can be activated if I terminate. There are a couple rules though.

"Partial Withdrawal
Effective January 1, 2018, once you terminate employment with the company and all Affiliates, you may request partial withdrawals of your Plan account provided that:
 The withdrawal amount requested is a minimum of $1,000 per withdrawal request
 No more than four withdrawals are allowed per year. A transaction fee of $25 per withdrawal request will be deducted from your account."

I can also rollover some or all of the account into an IRA, but those rollover funds would no longer qualify for Rule55.

At this point it looks like I can do up to quarterly withdrawals as a reasonable plan. Very doable.