Work Less, Live More Questions?

[PsyopRanger]

I just finished reading Work Less, Live More and have some questions.

1. I understand the Rational Investing portfolio as a great tool for those in ER but what are the best allocations for those of use who are still young dreamers and in the accumulation process? Certainly index funds but more towards a 75/25 mix with a value and growth lean?

I got some great answers here http://early-retirement.org/forums/index.php?topic=8962.0 but was looking for more of a consensus?

2. I understand the 4% withdrawal rate using the rational investing portfolio and dividends, capital gains, sell shares, etc. However, for those of us who hold are funds in 401(k)s or IRA, how do withdraw 4% annually prior to age 591/2 without triggering the 10% early withdrawal penalty?

 

[slepyhed]

I just finished reading Work Less, Live More and have some questions.

1. I understand the Rational Investing portfolio as a great tool for those in ER but what are the best allocations for those of use who are still young dreamers and in the accumulation process?  Certainly index funds but more towards a 75/25 mix with a value and growth lean? 
     
I got some great answers here http://early-retirement.org/forums/index.php?topic=8962.0  but was looking for more of a consensus?

There are tools out there that help you determine your risk tolerence and suggest an appropriate asset allocation. That would be a good place to start. Personally I'm willing to put up with a 90/10 asset allocation, with a lot of international funds included in there. I'm too young to know when I can retire, so I see little reason to play it "safe". If things don't work out, I'll just work longer.

2. I understand the 4% withdrawal rate using the rational investing portfolio and dividends, capital gains, sell shares, etc.  However, for those of us who hold are funds in 401(k)s or IRA, how do withdraw 4% annually prior to age 591/2 without triggering the 10% early withdrawal penalty?

Look up rule 72t. That's how you do it. If you're as young as me, all you need to know is that there is a way. Things change over time, so there's not much point in making up a detailed plan for what you want to do 10+ years from now. Just invest the money, let it grow, then someday you'll have the option of figuring out how to retire early.

 

[Nords]

1. I understand the Rational Investing portfolio as a great tool for those in ER but what are the best allocations for those of use who are still young dreamers and in the accumulation process?  Certainly index funds but more towards a 75/25 mix with a value and growth lean? 

I forget where you are in your career but as a Warrant it's probably safe to say that you're going to stay around for a military pension with TRICARE, right?

In that case you could look at your future pension (with its COLA) as a huge steaming pile of 30-year TIPs or I bonds against retirement expenses that are probably not going to be rising very quickly (stable cheap healthcare). With that cash flow as guaranteed as guarantees can get, you can choose a very high equity allocation in your retirement portfolio. That will make your portfolio much more volatile (which is only bad if you're trying to take money out) while enabling it to beat inflation (which you'll need to do for at least four or five decades).

Dimson's "Triumph of the Optimists", Bernstein, and others have found a premium in small-cap and in value stocks. OTOH the growth stock premium hasn't materialized. There will be periods of outsize performance & reversion to the mean but in the long term there is a small-cap and a value premium.

2. I understand the 4% withdrawal rate using the rational investing portfolio and dividends, capital gains, sell shares, etc. However, for those of us who hold are funds in 401(k)s or IRA, how do withdraw 4% annually prior to age 591/2 without triggering the 10% early withdrawal penalty?

Perhaps it's best to draw down the after-tax funds and let the tax-deferred funds compound.

While you're liquidating after-tax portfolios, your earned income will plummet in ER. This will give you plenty of room under the 25% income-tax bracket, which will enable you to roll over 401(k)s to IRAs and then to convert the conventional IRA to a Roth. (We're doing this a bit every year to the top of the 15% tax bracket and it'll take us six or eight years to complete the process.) Roth contributions can be withdrawn anytime without penalty and there are other special situations permitting penalty-free withdrawals.

 

[PsyopRanger]

slepyhed,

I understand both of these. I am currently more like 100/0 in my allocations but after reading Bernstein I should prbably be 90/10.

I understand the 72t, just thought there might be an easier way and according to the 72t's SEPP, that may be much higher than 4% annually?

 

[Nords]

I understand both of these.  I am currently more like 100/0 in my allocations but after reading Bernstein I should prbably be 90/10. 

It's frustrating that Bernstein has a full analysis of a stock/bond mix but that he hasn't done the same for cash.

You may actually get more from a 90 stock/10 cash portfolio than a 90 stock/10 bonds portfolio... but I haven't seen an analysis of that yet.

 

[PsyopRanger]

I forget where you are in your career but as a Warrant it's probably safe to say that you're going to stay around for a military pension with TRICARE, right?

In that case you could look at your future pension (with its COLA) as a huge steaming pile of 30-year TIPs or I bonds against retirement expenses that are probably not going to be rising very quickly (stable cheap healthcare). With that cash flow as guaranteed as guarantees can get, you can choose a very high equity allocation in your retirement portfolio. That will make your portfolio much more volatile (which is only bad if you're trying to take money out) while enabling it to beat inflation (which you'll need to do for at least four or five decades).

Dimson's "Triumph of the Optimists", Bernstein, and others have found a premium in small-cap and in value stocks. OTOH the growth stock premium hasn't materialized. There will be periods of outsize performance & reversion to the mean but in the long term there is a small-cap and a value premium.
Perhaps it's best to draw down the after-tax funds and let the tax-deferred funds compound.

While you're liquidating after-tax portfolios, your earned income will plummet in ER. This will give you plenty of room under the 25% income-tax bracket, which will enable you to roll over 401(k)s to IRAs and then to convert the conventional IRA to a Roth. (We're doing this a bit every year to the top of the 15% tax bracket and it'll take us six or eight years to complete the process.) Roth contributions can be withdrawn anytime without penalty and there are other special situations permitting penalty-free withdrawals.

Nords,

This was my thoughts in that my pension is a big chunk and I can be more aggressive with the rest and lower the risk slightly as I get closer to ER age.

I am also going to have to check on converting TSP funds into a Roth? I would love to be able to roll over funds yearly while I am still contributing but not sure if I can do that? I may have to wait until ER and then as you said, roll over my TSP to my Roth a little yearly and then withdrawal my 4% solely from my Roth.

 

[Scrooge]

I understand the 72t, just thought there might be an easier way and according to the 72t's SEPP, that may be much higher than 4% annually?

There are multiple ways to calculate SEPPs. Have you checked online calculators like this one yet?

 

[Nords]

I am also going to have to check on converting TSP funds into a Roth?  I would love to be able to roll over funds yearly while I am still contributing but not sure if I can do that?  I may have to wait until ER and then as you said, roll over my TSP to my Roth a little yearly and then withdrawal my 4% solely from my Roth. 

Yeah, that's a long-term project with spouse and me too, I haven't really figured out the rules, and we haven't made a decision yet.

TSP came along too late in my career and I only had about $1800 in it at retirement. I was promptly ejected (the check came with their pronouncement) and I rolled it over to my IRA where we've been converting it. It's a pain having to track before-tax TSP contributions, deductible IRA contributions, and non-deductible contributions but pushing the "I believe" button on Form 8606 works OK. It's certainly better than having to calculate RMD taxes.

Spouse has put a little more into the TSP but won't retire until June 2007 (the earliest) and won't start drawing a pension until 2022. I'm extremely reluctant to leave an index fund that has an expense ratio of only 5-7 basis points, but if we decide to roll over & convert then we need to finish that before 2022. I guess we'll figure out the rules before she retires, leave it in there as long as possible, and then start the rollover/conversion process when we're done with the kid's college FAFSAs.

Notice how much of that financial plan was tied to government subsidies & taxes?