Stepping into the FIRE waters...

[DroopyDog]

Hello folks,

I've been lurking on this site for a few months now, and I figured it was probably time to get registered and say hi. I left my job in January and am now exploring the idea of semi/early retirement. Discovering this site and the Bogleheads Diehards site has been giving me a great education.

I'm 42, single, with about $2.7M in cash and $300K in 401K/IRAs. (Hey, that would make a great intro for a personals ad ). I paid off my house in December, so I have no debt. The reason I'm in cash is that I sold off most of my company stock/options and am now looking to reinvest in a more diversified manner.

I've been reading a lot of financial/investment books over the past year, so I think I have a reasonable grounding in the basic approaches. Currently I'm looking at an asset allocation plan similar to what ESRBob suggests in Work Less, Live More (the sandwich portfolio), though I will probably go with ETFs because I can invest in lump sums.

With the market/economy as it is, I don't feel bad about sitting out for a bit until I figure out a good investment plan, but I'm nervous because I don't know how long this downturn will last.

One question I have is about asset allocation between taxable and tax-deferred accounts. Some people say your allocations should be between both types of accounts, but if I am really planning to ER that doesn't seem to make sense. Putting specific allocations in an IRA (such as REITS) might diversity my overall investments, but it won't diversify the money I need to rely on *now* for income. It seems like I should have two mini portfolios: A moderate return/moderate volatility portfolio for the taxable account (e.g. Bob's sandwich portfolio), and a more aggressive portfolio for the tax-deferred (since I won't be able to touch that for 20-odd years).

What do you think?

DD

 

[Rambler]

Welcome Droopy
I think if I were you I would DCA your cash pile into around 70% equities and 20% bonds, and 10% into a mixture of CDs/MMFs (laddered) and cash from which you would withdraw your living expenses for the next several years. In the equities pile, I would make sure to invest in plenty of dividend payers such that you had a nice flow of cash to re-fill your cash buckets. If you had dividend returns and interest at about 3%, that would be pre-tax cash of 81k in your taxable account. If you are still working FT or PT, re-invest it or as much of it as you can. If not, use what you need and re-invest the rest.

For your tax-deferred, I would probably stick with nearly 100% equities, letting it build itself as much as possible over time. There are ways to get at that money earlier, but with 2.7m starting balance in the taxable, you should be fine to FIRE now if you wanted. But that depends also on other things that may happen in your life over time. You are in a very enviable position. Congratulations and good luck!

R

 

[LOL!]

Money is money. I think that you don't need to think of buckets or accounts because all your money is the same, so use your accounts effectively to reduce your taxes and costs.

Here's a description of one way to pay your utility bills:

http://www.early-retirement.org/forums/f28/index-retirement-fund-33306.html#post614571

See also the pdf file linked here: http://www.early-retirement.org/forums/showpost.php?p=612101&postcount=131

 

[DroopyDog]

Thanks for the responses and the links. I think both methods have some merit, and it probably depends on what tax bracket I expect to be in. I like the idea of getting cash in dividends (because I don't have to do anything), but not if I'm going to pay more in taxes.

I think LOL!'s approach may be the most efficient, but it does seem to add some bookkeeping complexity. I had thought about rebalancing assets between taxable and IRA accounts before, but it seems that with the disparity in size between my taxable and tax-deferred accounts, a sizeable portion of my tax-inefficient assets will have to stay outside the IRA/401K no matter what.

Which brings up another question: Assuming I can't deduct them on my taxes, is it worth continuing contributions to the tax-deferred accounts? If I want to juggle funds between the two account types, then the answer seems to be yes. (Edit: Oops, just found the thread in FIRE and Money discussing this issue...)

DD