Plan for Exit 2024

[Out-to-Lunch]

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-accounts/roth-distributions/distribution-overview/

https://www.madfientist.com/how-to-access-retirement-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]

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.

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.

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.

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]

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.

 

[Exit 2024]

Thanks LTC, watching your updates also

 

[Exit 2024]

But to get to that target is going to take more time unless you strike gold or have a great day at the track.

That comment after Q1 update kept me thinking if our target date is too aggressive or not, are we really on that track or falling off?
I used Q1 as starting point and plotted straight lines to 2 targets $2.7M (original from first post) and $3M (just nice round number), both excluding RE. That gave me 2 targets for each quarter to achieve - HIGH an LOW. Going forward I plan to add actual and variation vs.targets for each quarter.
It is a little bit of OCD but on other hand with exactly 3 years to go till planned exit I hope to get better view if we on track or not.
If we will be:
-Falling below Red line - we may go for plan B (semi-exit) or plan C (OMY).
-Between Blue and Red- we should be ok on target date.
-Above Blue - will be happy to exit earlier
Here is our Q2 standing - no complaints we above LOW target by $46K and above HIGH target by $23K

 

[tulak]

Congrats Exit. This thread inspired me to track in a similar way. I have 27 quarters to go (2028) and I’m at 69% of target.

I may have a large outlay for RE in the future, which is going to require more savings. Either way, everything is trending nicely so far. Let’s hope this decade is a repeat of the roaring 20s.

 

[Errollyn]

EDIT: I thought this was the "Race to 2024" thread, so forgive me for posting here. I'll delete my post and move it to that thread.

 

[Exit 2024]

Q3 2021 update

- We finished Q3 at $2,233k, 74.4% of the target.
Plus only $17k for last three months - very soft quarter for us.

- Quarter high was $2289 but September booked negative $56k.
- We continue to add new money to our $401ks and HSAs.
- Cash position went down as we added some money to taxable during September lows, plan to keep adding if market will continue to correct.
- So far 2021 is still good for us, +$205k for the first 9 months, will see how we will close full year.

- We have 11Qs to go...

 

[Exit 2024]

Actuals without RE vs High and Low targets.

Softness in Q3 definitely shows here, we are closed below Low target by $8K and below High target by $54k.
Hope we can catch up by end of the year and not fall further below red line.

 

[Luvtoride]

Exit, that’s a very concise spreadsheet to track your overall positions and performance.
Is there a way that you differentiate between new money contributions ie 401k and HSA monies vs performance related changes in value?
Your HSA total is very impressive. I only chose the high deductible plan for my company health insurance last year to begin contributing the max into HSA which I am not spending currently. Are you’re investment options decent which has helped to grow your balance that high? Otherwise that’s like 20 years of max contributions (for 1 person…maybe your spouse has one too?). Our investment options thru Optum Financial aren’t great.

If you reach your 200% goal sooner than 2024 will you consider exiting sooner?

Thanks for the good idea to track.

Brian

 

[Exit 2024]

Hi Brian

Is there a way that you differentiate between new money contributions ie 401k and HSA monies vs performance related changes in value?

Yes, I can easily differentiate between new money and growth as all our contributions to 401ks and HSAs are evenly spread out across 12 months.
we are maxing out both for 2 of us, so per quarter we are adding
- $13k total of our money plus $1k Employer match to 2 401ks
- $1.8k to 2 HSAs

Your HSA total is very impressive....
Are you’re investment options decent which has helped to grow your balance that high? Otherwise that’s like 20 years of max contributions (for 1 person…maybe your spouse has one too?)

That is both actually, we are maxing out 2 our HSAs since 2006, that helped to grow balance for sure, but also we started to invest money through HSAbank into Vanguard funds in around 2012 - that eventually propelled balances even higher.

Our investment options thru Optum Financial aren’t great.

Our investments through both employers also not that great but we delightedly rollover accumulated balances to HSAbank every year and then invest them there.

If you reach your 200% goal sooner than 2024 will you consider exiting sooner?

Not clear about 200% but yes, if we reach our High goal of $3M excluding RE sooner - we will sure consider exiting at that point.

Thanks for the good idea to track.

Anytime and thanks for stopping by and asking questions

 

[Luvtoride]

Exit,
Sorry I meant 100% of your goal! Good luck getting there sooner!

I took a look at HSA Bank and their web site. Can Any HSA balances be rolled over to them or does it have to be “allowed” by your employer plan or only if you change employers (take it with you option).
The investment arrangements there seem pretty flexible including the TD Ameritrade brokerage option.

It sounds like you’re on the right track maxing out your contributions and Employer matches.

Let’s all hope 4th quarter will be historically strong.

 

[Exit 2024]

I took a look at HSA Bank and their web site. Can Any HSA balances be rolled over to them or does it have to be “allowed” by your employer plan or only if you change employers (take it with you option).

Yes, any amount once every 12 months, you need to fill out Rollover Form and send check with it. I have checkbooks for our Employer HSA accounts to use to pay for services if we want, but I just write one of those checks to HSAbank and send it with Form.

If you do not have check book, you can either request one (may charge fee) or ask current HSA holder to send you check for specific amount (they may charge fee) or send them form for Direct Transfer (also may charge fee).

Here is the link to the page that has both forms and instructions.

https://www.hsabank.com/hsabank/Members/transfer-rollover-hsa-funds

Also you may want to consider Fidelity instead of HSAbank, they also offer HSAs and you can use it same way as I do HSAbank.
That may be even better option.