Plan for Exit 2024

[Exit 2024]

Quote:

Originally Posted by NgineER Do you have any Roth accounts with enough contributions to carry you for five years? If so, then start a Roth conversion ladder, it is pretty straight forward...

I am not sure that I am getting it, how do I access Roth before 59.5? We do have enough money overall there but very little of that are contributions, majority are conversions from non-deductible IRA as our income have been above contribution limit for many years already, and I am under impressions that conversions will carry penalties same ways as earnings, am I wrong?

Looked up in Quicken our Roth IRAs structure:
$22k - contributions, can take those out any time
$124k - conversions from non-deductible IRA (back door Roth), do I have to pay penalties to take it out before 59.5?
$236k-gains, can not take out without penalties

Also what I can covert to Roth? 401ks are not accessible, and we do not have any traditional IRAs.
Also we are trying to minimize taxes, conversions would not be any better then just saving cash by reducing 401k contributions, at least I do not see any extra benefits.
I may be missing a point here

[Exit 2024]

brokrken, The Cosmic Avenger, thanks for details on rule 55, that is what I was afraid of, sure will try to contact 401k providers.

[The Cosmic Avenger]

I have to run, Exit 2024, but I thought that gains can be withdrawn any time without penalties, the principal has to stay in for 5 years to avoid a penalty. All my contributions have been after taxes, so I'm not expecting to have trouble with that, but if your contributions were NON-deductible, that means you already paid taxes on the income, therefore there is no complication; the complication only comes up when you deduct for contributions, IIRC.

[NgineER]

Quote:

Originally Posted by Exit 2024 I am not sure that I am getting it, how do I access Roth before 59.5? We do have enough money overall there but very little of that are contributions, majority are conversions from non-deductible IRA as our income have been above contribution limit for many years already, and I am under impressions that conversions will carry penalties same ways as earnings, am I wrong? Looked up in Quicken our Roth IRAs structure: $22k - contributions, can take those out any time $124k - conversions from non-deductible IRA (back door Roth), do I have to pay penalties to take it out before 59.5? $236k-gains, can not take out without penalties Also what I can covert to Roth? 401ks are not accessible, and we do not have any traditional IRAs. Also we are trying to minimize taxes, conversions would not be any better then just saving cash by reducing 401k contributions, at least I do not see any extra benefits. I may be missing a point here

I believe the conversions are subject to the five year rule, but that the conversion amounts can be withdrawn without penalty after five years.

401ks can be rolled over to IRAs, either partial amounts or the full amount and then you can convert from the IRA to a Roth IRA.

[Exit 2024]

Quote:

Originally Posted by NgineER I believe the conversions are subject to the five year rule, but that the conversion amounts can be withdrawn without penalty after five years. 401ks can be rolled over to IRAs, either partial amounts or the full amount and then you can convert from the IRA to a Roth IRA.

Thanks, NgineER, for clarifications.
I need to look more closely at tax treatment of conversions, that may add good chunk to our cash and carry us over those 4 years.

[Out-to-Lunch]

Quote:

Originally Posted by Exit 2024 Thanks, NgineER, for clarifications. I need to look more closely at tax treatment of conversions, that may add good chunk to our cash and carry us over those 4 years.

Here are a couple of the "standard references" for this kind of thing:

https://fairmark.com/retirement/roth...tion-overview/

https://www.madfientist.com/how-to-a...t-funds-early/

[Exit 2024]

Out-to-Lunch, thanks for the links, especially second one - explains very well 5 year Roth conversion ladder approach.

[RxMan]

Exit,

I’m in a similar situation as you with the vast majority of my savings in tax deferred accounts. Thankfully my DW has more in taxable accounts but she’s much younger than I am.

Step one in my opinion is to check with you 401k plan to see if you have the Rule of 55 option. At least you will know if this will be possible.

Next, I would get a good estimate of your expenses for those first few years to see how much you’ll need to cover yourself until you reach 59.5 if deferred account access is an issue.

I asked a similar question about shifting my savings to taxable and received negative responses. It would be ideal to maintain current deferred retirement savings and just bump up your taxable/cash investments. Will your taxable funds carry you to 59.5 if necessary?

[Exit 2024]

Quote:

Originally Posted by RxMan Step one in my opinion is to check with you 401k plan to see if you have the Rule of 55 option. At least you will know if this will be possible.

Agree, will need to call Fidelity about spouse's 401k, mine does not allow.

Quote:

Next, I would get a good estimate of your expenses for those first few years to see how much you’ll need to cover yourself until you reach 59.5 if deferred account access is an issue.

Original estimate was $90k/year including Health Insurance(~$7k/year after $12k subsidy - apprised as of today for age 55)
Budget for 4 years = $360k, to be safe want to round it to $400k. We have good records of all our expenses in Quicken for last 20 years, so I believe that estimate should do, with some fluff for extra travel included.
Other thing that we need cash for - we want to do Roth conversions up to HC subsidy cliff each year, starting in 2025. If we convert $68K - tax will be ~5k/year, rounded $400k target should cover that also.

Quote:

I asked a similar question about shifting my savings to taxable and received negative responses. It would be ideal to maintain current deferred retirement savings and just bump up your taxable/cash

Need to see by how much each year we can bump saving in taxable without reducing our contributions to max out 401ks, Roths and HSAs.

Quote:

Will your taxable funds carry you to 59.5 if necessary?

At this point we are short, need to work on saving in taxable in next 3.5 years. How to invest it? Cash/bonds? If that pile will be designated for spending in 2024 - 2028, just 3.5 years away and we can not afford to risk it without access to other funds.

Thanks for all your input, RxMan.

[RxMan]

Sounds like you are on top of everything and you are following your plan. As far as where to invest that money it depends. If your timetable for needing it is 2024-2028 I probably would say limit stock exposure to a minimum or none at all. You really want a longer holding period for stocks.

Bonds are an option but interest rates could go up so that would drop their value. Cash is always an option but yields are low for savings accounts and/or CDs. Does your 401k plan have a good money market account that has a bit higher yield?

I think you have to determine how much cash you will be comfortable to hold during your retirement. Some have much less than one year’s worth of expenses and sleep fine while others wouldn’t dream of having less than three or more years worth of expenses in cash.

I’ve thought of what amount of cash I’d be comfortable with in retirement and I haven’t settled on an amount yet. My thinking would be to carry enough cash to withstand the average downturn in the markets so I’m not selling stocks while they are discounted.

Keep in mind, not counting the COVID related bear market of 2020 there has been 26 down markets of at least -10% since WWII. They averaged a -13.7% decline in stock values and took 4 months. The recovery from those 26 down markets also averaged 4 months. That’s an average total time from beginning until end of 8 months.

If you look at the severe market downturns since WWII, again excluding the 2020 bear market, there have been 12 bear markets (declines of at least 20%). The average decline in stocks in these 12 worst bear markets was -32.5% from close to close. Those bear markets have lasted on average 14.5 months and then averaged two years to recover. So you’re looking at an average total time of just over three years or 38.5 months from the beginning of the drop to full recovery in stock values.

Given that data the argument could be made that holding enough cash and/or cash equivalents equal to anywhere from 8 months of expenses to three and a half years of living expenses. This would be a good idea to insulate yourself as much as possible from being forced to sell equities in the middle of a significant down market.

I used to think I’d be fine with one year’s worth of cash or less but after looking at the data from down markets I may be convinced to hold more. Think of it this way, WWII ended 75 years ago. Even if you don’t count last year’s major but shorter lived bear market there have been 12 bear markets in the 75 years since the end of that war for an average of one bear market of roughly 30% every 6.25 years. Even if you think your retirement will only last twenty years you can expect on average to see three bear markets during that retirement. If you include downturns of at least 10% that frequency is reduced to one down market in a little more than every three years.

I would be much more concerned with selling stocks in one of those severe -30% bear market events. And to protect myself from that on average I’ll need about three and a half years of living expenses or the cash flow from other sources besides selling stocks to last that long to keep myself from selling at a deep discount. This naturally can lower your average overall returns on your portfolio by holding more cash but this mental exercise isn’t about maximizing returns- in retirement it’s about protecting assets and minimizing risk.

I’m sorry this was a long winded response. I’ve thought a lot about portfolio risk management in retirement lately and looking up the frequency and average length of down markets was an eye opener for me. I hope this helps.

[Exit 2024]

Thanks, RxMan, for such detailed and thoughtful response. What are you are saying actually makes a lot of sense. I did not do as detailed research as you did, so really appreciate all info that you provided, will need to digest it and think about it more.

So far my line of thoughts was to put some money (~$400k) in the combination of Cash/Bonds and designate it for period of 2024-2028, while other retirement accounts are not easily accessible. That should cover all of our needs with limited amount of the risk.

About long term retirement and money needs during bear markets - thought was to maintain 60/40 portfolio and at that time of bear market with stocks down - rely on selling bonds only, should do it anyways to bring balance to 60/40 again, but part of the sold bonds will go to the checking to feed us, and rest will be reinvested into stocks. I assume this approach will spare us of selling stocks at lows if at highs I will be diligent to re-balance back into bond.

That plan is very critical till we get to claim Social Security - for about 7 years till age 67. After that our reliance on portfolio will be replaced by combination of SS as main source of income (estimated $56k for two of us at FRA) and rest will come from portfolio. SS should pay for almost all our essential needs, so biggest risk to portfolio I assume will be in period of 2029-2036, before SS starts.

A lot of things to think about... Thanks one more time for your insights!

[RxMan]

There are lots of considerations Exit. It sounds like you are working through a carefully developed plan for your financial future. Good luck to you!

I’m hoping I don’t have too many more working years myself. I look forward to driving off into the retirement sunset. I’ll definitely have to factor a fun budget!

[The Cosmic Avenger]

Whew! Since my last post here, I've gone back to work, so I'm back on track for a 2024 exit! (That's when our only kid finishes college.) Now we just need to start saving to pay some tuition out of pocket, as there's not enough in the 529 for all four years, and we want to give our kid a big boost by graduating without any debt.

[Exit 2024]

Q1 2021 update

- We finished Q1 at $2,099k, 69.97% of the target, which rounds to 70.0%!!! Plus $71k for last three months. We were just $700 short of nice round number of $2100K, but April 1 run up put us way above that
- Investable assets went up due to market gains plus we are adding new money to our $401ks and HSAs, will fund Roth IRA through backdoor during Q2.
- My 401k limitations was finally removed as based on 2020 earnings I am not HCE anymore. Upped contributions to hit $26k by end of the year.
- Cash position went up as we continue to pad saving account.
- Started our "Countdown to FIRE" - for each $100k gain in NW we are going to local restaurant to celebrate and leaving $100 tip,
thanks for idea, brokrken, we loved it. Started in December with passing $2M mark, this weekend will celebrate $2.1M
- Curious to see what 2021 will be like, markets at all time highs - hard to believe that bull will continue to run.

- We have 13 Qs to go...

[brokrken]

Great quarter, Exit, and glad I could help with your celebration idea!

[Don46]

Your net investment assets appear to be around .7 mil and you want to get to 3 mil in the next three years? How will you do that?
3m would throw off about 120k using the 4% model.
That seems sound. But to get to that target is going to take more time unless you strike gold or have a great day at the track.

[Golden sunsets]

Quote:

Originally Posted by Don46 Your net investment assets appear to be around .7 mil and you want to get to 3 mil in the next three years? How will you do that? 3m would throw off about 120k using the 4% model. That seems sound. But to get to that target is going to take more time unless you strike gold or have a great day at the track.

.7mil? How do you get to that number? Net investment assets look like 1.668mil. Getting from 1.668 to 3.0 between now and 2024 seems a bit aggressive, but without reading the whole thread I don't know how much new money 2024 is investing each year. If it's substantial, it's certainly possible.

[Exit 2024]

Don46, I am surprised by $0.7mil number, is that a typo?
Total investment as of Q1 $1.67mil, if we add cash - $1.8mil.

If you read my first post - target is $3.0mil including RE, and $2.7mil not including RE, and we projecting $90k annual spending which is conservative 3.3% rate on all excluding RE.
RE include second property that we plan to sell, we currently account for it at purchase price of $140k, but it is sure appreciated as we hold it since 2010. It is our reserve to close the gap to $2.7 mil.

So we need about $0.9mil increase over 3 years, or $300k per year average. We are adding about $100k of new money/year, that leaves investment growth of $200k/year to book.

Is that aggresive on 1.7mil? Sure yes!
Will we cry if we will not get to the target on time - sure not!
No one knows what markets will bring in next 3 years, but there are always plan B - semi FIRE, and Plan C - OMY
Will see, it is a game

[Exit 2024]

Q2 2021 update

- We finished Q2 at $2,216k, 73.9% of the target!
Plus $117k for last three months and passes $2.2M mark - way above our expectation.
- Investable assets went up due to market gains plus we continue to add new money to our $401ks and HSAs, also both Roth IRAs were fully funded during this quarter.
- Cash position is stable, do not plan on adding to it.
- Contemplating to add some I-bonds as inflation risk keeps me worried.
- Filed our tax returns, no refunds and had to pay some more for both Federal and State.
- So far 2021 was good for us, will see if that continue to be the case for second half of the year.

- We have 12 Qs to go...

[Love This Community]

Way to go exit. Beautiful to see the plan falling in place. I look forward to your qtrly updates.