Ready To FIRE! Advice needed

[AlyssaMM]

Happy new year everyone! I am Alyssa. Long time lurker and have learned tons of valuable knowledge from this forum over the years. After 20 years of a highly stressful career and 60-hr/wk (no)life in finance, I am ready to leave the industry (and the workforce altogether) by mid this year.

In the next six months, I would like to accomplish the following:

1. Set up/rebalance my investable asset portfolios so it can provide enough cash flows to live on (plan to live off dividend income before SS kicks in).
2. An optimized tax structure on my post-FIRE income, and for the longer term.
3. Research the best places to FIRE (would like to move out of my current high COL city).
4. Look into hobbies and perhaps some part-time gigs to fulfill my FIRE'd life.

A bit about myself:

47-yr old female, divorced with no kids.

Assets:

Traditional 401K: $1.7M (60% in growth stocks/ETFs, 30% in high-yield dividend ETFs, 10% in bond ETFs)
Brokerage accounts: $3.2M (60% in VOO/VUG/QQQ type of ETFs, 20% in individual stocks, 20% in bond ETFs)
Cash: $1M

House worth about $2M, no debt (will sell in the next 2 years and move to a lower COL/lower tax area. Budget to buy a new house: $1M).

SS: haven't checked recently. Assuming $2500/M if start to collect at 67.

No retirement health insurance. Will go on Cobra for 18 months before ACA.

Current expenses (averaged over the past three years): $150K. Can lower to $120K when moving to a lower COL area. I do plan to travel a lot when COVID risk eases. Have been to many countries for work, which means I have been there without "being there".

I will continue learning from the very knowledgeable people on this forum. Will also have many questions for you guys. My imminent question is:

How should I restructure my investable asset portfolios to generate $150K/yr income (at the same time minimize my tax obligations)? I am thinking to allocate a higher % of the portfolios in my brokerage accounts to HY ETFs or stocks, but raise the % of growth stocks in my 401K (since I won't touch it for the next 10+ yrs)?

Thank you and it is so great to be on this forum. I am filled with joy when I think of my soon to be FIRE'd life!

Alyssa

 

[Out-to-Lunch]

Welcome to E-R.org!

Opinions will differ. However, my opinion is that there is no advantage to constructing a portfolio that produces dividends vs. one that optimizes total return. TANSTAAFL and all that. This is an oft-discussed (and sometimes contentious) topic that you can learn more about by googling "dividends vs. total return," especially here or on Bogleheads.

 

[lucky2030]

I agree, stick to broad market indices and just sell as needed. Selling from your brokerage account will be tax efficient.

You have way too much cash. I would buy a bond fund with it. I generally avoid bonds, but you need stable value to cushion the pain of sequence risk if markets drop just as you start to spend. Read ERN’s blog for more detailed analysis, or Google “bond tent”.

Very impressive stash for your age. Congrats! Go enjoy your payoff from all those long hours.

 

[FlaGator]

Welcome, and congratulations on putting yourself in a comfortable position at your age. Great to have choices, and you have created many for yourself.

A few thoughts:
1. Get yourself a really good tax accountant before you bail. Might take a few interviews to ensure you have found one that really understands your goals. Review your plans with them. A good one can help you map out the next several years to estimate the tax impact of your planned spending. You have multiple sources to draw from, each with their own tax implications. Understand that before you give up the paycheck.

2. If the stars align (see #1), you might be able to manage your income to the point you qualify for health insurance subsidies. Will likely involve taking some capital gains to meet your spending needs. May not be worth it, but worth exploring.

3. You've been in a pressure cooker world, and you may find a hard stop, or even tapering down, is difficult. Was for me, and I didn't run at the pace I think you have. Don't have any advice on how to handle that, because I haven't solved that one. Be aware it might happen, don't be surprised if it does, and start looking for a resolution if you find yourself wondering "what now". Don't dawdle if that happens.

Again, congratulations on what you have achieved. Don't be embarrassed by your success and don't feel like you have to explain anything. Most importantly, know yourself, your motivations and weaknesses. The latter may surface soon after you step back from the adrenaline-fueled world you made your mark in.

 

[pb4uski]

I would not focus on income... a common byproduct is increasing investment risk chasing income and you don't want to do that... set up a balanced portfolio and if it results in less than $150k of income then just sell some appreciated shares as part of your annual rebalancing.

I would restructure your portfolio to be more tax efficient. 401k should be all fixed income... does your 401k have a stable value fund? If so, does it credit a decent rate of interest? If so, go with that to mitigate interest rate risk. If not, then stay short at least for now. Don't forget that qualified dividends and long-term capital gains in taxable accounts get preferrential tax rates... 0% and then 15% so that is a good place to be.

Check out https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

You can keep part of your cash in a municipal bond fund, again staying on the short side for now to mitigate interest rate risk.

Why so much cash? Dry powder for a market crash or it just happened? Probably way too much cash... I'd pare it down to a year of spending or so.

If you are healthy, look into ACA now... it is often a lot less expensive than COBRA. Check out healthsherpa.com

 

[AlyssaMM]

Thank you all for your advice! Points well taken, particularly on the dividend vs. total return. I agree with the fundamentals behind the argument -- on average total returns from the broad market have been greater than the income from 2-4% dividend yields.

Also great advice on getting a good accountant. I have an accountant who is very skillful, but in the past has always talked me out of retiring... He will have to treat it more seriously or I will go with a new accountant.

Regarding the oversized cash reserve: it is a result of a sold property last year, a few good bonus years, plus no time/nowhere to spend in the past two years... And just a bad habit from my end not to pay more attention to my own finances.

 

[AlyssaMM]

@pb4uski: why do you prefer to have all fixed income in a 401K? For my 401K portfolio I was thinking to either go with total market stock ETFs or growth ETFs, and thought I could take higher risks since I won't be touching the account for another 10 years. I am not a big fan of bonds, particularly now (and I see you agree on the long duration ones). From what I understand, they are also tax inefficient?

Any reason you like all fixed income in 401K BEFORE one reaches retirement age?

 

[AlyssaMM]

3. You've been in a pressure cooker world, and you may find a hard stop, or even tapering down, is difficult. Was for me, and I didn't run at the pace I think you have. Don't have any advice on how to handle that, because I haven't solved that one. Be aware it might happen, don't be surprised if it does, and start looking for a resolution if you find yourself wondering "what now". Don't dawdle if that happens.

Again, congratulations on what you have achieved. Don't be embarrassed by your success and don't feel like you have to explain anything. Most importantly, know yourself, your motivations and weaknesses. The latter may surface soon after you step back from the adrenaline-fueled world you made your mark in.

Thank you. Fully anticipating some "side effects" will emerge once the honeymoon period of FIRE is over. I plan to do some gigs for my post-pressure cooker years. I have many hobbies/interests which for years I was never able to pursue, and I am hoping to turn some of those hobbies into projects - they may or may not be financially rewarding, but will at least give me something to retire to.

 

[HI Bill]

Welcome! There are lots of withdrawal strategies out there, and most focus on buckets, or tax efficiency. Rather than trying to create an automatic income stream via dividends, I'd set up a separate brokerage account in which to place the proceeds of sales. Ensure that taxable account dividends are set NOT to reinvest, otherwise you'll be paying taxes twice on those $. What I do, is sell the highest-flying stocks when the markets are up, or draw from cash and bond funds when the markets are down. I manually sell as close to January 2nd as possible (when the markets are up), with the intent of creating enough cash to make it through the year. I then move the proceeds from the sale into my separate brokerage account, where they sit in a money market ETF. They earn virtually nothing, but I don't have to worry about market timing or performance for the remainder of the year. I've set up automatic transfers monthly from this account to my checking account, just like receiving a monthly paycheck. FWIW, if I were you, I'd bump up my WR to 3 or 3.5 percent. Cheers!

 

[Surewhitey]

Put the $1mil to work, maybe some hedge investments & keep doing what you are. Way more success than most here.

$2 mil house sounds excessive without knowing where you are. Maybe downsize?

 

[Major Tom]

$2 mil house sounds excessive without knowing where you are. Maybe downsize?

She is planning to sell, relocate, and buy another house in a LCOL area for around $1M. It's in the original post.

 

[CardsFan]

@pb4uski: why do you prefer to have all fixed income in a 401K? For my 401K portfolio I was thinking to either go with total market stock ETFs or growth ETFs, and thought I could take higher risks since I won't be touching the account for another 10 years. I am not a big fan of bonds, particularly now (and I see you agree on the long duration ones). From what I understand, they are also tax inefficient?

Any reason you like all fixed income in 401K BEFORE one reaches retirement age?

I think pb4uski is recommending that, if possible with the asset allocation you want, put your bonds in the 401k, and your stocks in after tax. This tends to be more tax efficient.

 

[AlyssaMM]

Welcome! There are lots of withdrawal strategies out there, and most focus on buckets, or tax efficiency. Rather than trying to create an automatic income stream via dividends, I'd set up a separate brokerage account in which to place the proceeds of sales. Ensure that taxable account dividends are set NOT to reinvest, otherwise you'll be paying taxes twice on those $. What I do, is sell the highest-flying stocks when the markets are up, or draw from cash and bond funds when the markets are down. I manually sell as close to January 2nd as possible (when the markets are up), with the intent of creating enough cash to make it through the year. I then move the proceeds from the sale into my separate brokerage account, where they sit in a money market ETF. They earn virtually nothing, but I don't have to worry about market timing or performance for the remainder of the year. I've set up automatic transfers monthly from this account to my checking account, just like receiving a monthly paycheck. FWIW, if I were you, I'd bump up my WR to 3 or 3.5 percent. Cheers!

Good point about being double taxed on reinvested dividends! Just realized dividends are taxed even without cashing the gains.

I will bump up my WR if needed. But to be honest I don't have many expensive hobbies. Don't know much about cars and have little interest in toys or jewelry... The biggest expense in my budget now is traveling, which I will be more than happy to spend as much $$ as needed.

 

[AlyssaMM]

She is planning to sell, relocate, and buy another house in a LCOL area for around $1M. It's in the original post.

That is correct. Housing in where I live now is expensive, and the taxes are terrible. I thought about keeping the housing for price appreciation (once I leave I will probably be priced out of the area permanently), but the taxes and carrying costs are just not worth the trouble.

 

[AlyssaMM]

I think pb4uski is recommending that, if possible with the asset allocation you want, put your bonds in the 401k, and your stocks in after tax. This tends to be more tax efficient.

I see! That makes sense. Thanks for explaining it!