3 years to go and I need $150k CASH. Help...

[rmcelwee]

I would like to do a three bucket strategy in retirement. We only have about $40K in cash now and would expect that to be about the same in three years. I'd like $120K-$150K cash to fund my first bucket. As far as I see it, the only options to raise cash are:

1) Drop 401K contributions except for employer match:
Adds only around $65K in three years after taxes.

2) Wait until retirement and withdraw big $$$ from 401K:
(not sure what tax problems are associated with that)

3) Sell off some of my long term taxable investments:
Try to stay in the lower two tax brackets to take advantage of 0% tax.

We will have about $2M net worth when I retire:
401K - $1.5M (half stocks / half fixed)
Roth - $150K
Taxable - $250K
HSA - $100K

I make around $90K per year and invest more than half of it. I don't really see how to get my $150K cash without a huge tax hit. Maybe I can't get there in the next three years but it doesn't hurt to try.

Suggestions

 

[Al18]

You could reduce your 401K contributions to just get the full employer match. Put the rest in a 3 year CD ladder.


An alternative is to withdraw this amount from your 401K if your plan allows you to withdraw in the year your reach 55 or later. Check you 401K Summary Plan Description (SPD) or Distribution Notice. If your plan allows this, then you can simply withdraw 150K and pay normal income tax. To reduce the tax hit - you can spread this out over 2-3 years.

 

[aaronc879]

Not sure what the point is to have so much cash. I would continue to max your 401K for the tax benefits(assuming you will be in a lower tax braket in retirement since you live on half of your current income). When you retire you should have enough in your taxable account to bridge the gap to age 59.5. Then you can start taking from your 401K. If you are living on <$50K/yr as it seems from your post then you should be perfectly fine.

 

[pb4uski]

....Suggestions

Yes, here is a suggestion... get yourself past the notion that you need $150k of cash as there is no need to carry that much cash in retirement.

Keep putting it to the 401k to get the tax benefit. Then once you retire and have no earned income you can take out 401k money at low tax rates (assuming that you can take money out without penalty).

It looks like you have plenty to retire now if you have close to $2m now and only spend $45k a year.... what are you waiting for?

 

[rmcelwee]

Not sure what the point is to have so much cash. I would continue to max your 401K for the tax benefits(assuming you will be in a lower tax braket in retirement since you live on half of your current income). When you retire you should have enough in your taxable account to bridge the gap to age 59.5. Then you can start taking from your 401K. If you are living on <$50K/yr as it seems from your post then you should be perfectly fine.

I'm worried about a downturn in the market. This is a peace of mind thing for us. I'd like my 3rd bucket to be high risk / high reward so some cash would be really nice to have.

 

[pb4uski]

If your reason for having cash is worry about a downturn and the impact on your whole portfolio, you can accomplish that same objective by putting $150k in your 401k into cash.. in fact you can do that now... better yet, perhaps your 401k has a good stable value fund... better than cash.

 

[rmcelwee]

Keep putting it to the 401k to get the tax benefit of less income. Then once you retire and have no income you can take out 401k money at low tax rates (assuming that you can take money out without penalty).

It looks like you have plenty to retire now if you have close to $2m now and only spend $45k a year.... what are you waiting for?

Rule of 55 allows me to pull 401K without penalty. Waiting three years gets me a little pension and some healthcare. Around $300K in lifetime benefits would be lost by leaving now (as well as $300K in salary). We could do it now but I just can't pass up that money. We only have $1.5M now. The other $500K will come from $150K in further investments and market growth over the next 3 years.

 

[rmcelwee]

If your reason for having cash is worry about a downturn and the impact on your whole portfolio, you can accomplish that same objective by putting $150k in your 401k into cash.. in fact you can do that now... better yet, perhaps your 401k has a good stable value fund... better than cash.

As I said, I am not sure what the tax ramification on a withdraw of cash from 401K. I guess it is just like regular income? Hmmm, maybe I am making more out of this than I should.

 

[pb4uski]

As I said, I am not sure what the tax ramification on a withdraw of cash from 401K. I guess it is just like regular income? Hmmm, maybe I am making more out of this than I should.

You don't withdraw it from your 401k... you just move it into cash within your 401k!

The ballast from market volatility that you seek will be the same if the cash is in your 401k or if it is in your taxable account.

 

[aaronc879]

You don't withdraw it from your 401k... you just move it into cash within your 401k!

The ballast from market volatility that you seek will be the same if the cash is in your 401k or if it is in your taxable account.

Yes, this!

Don't withdraw anything from your 401K while you are still working. You would pay at least 22% in taxes instead of paying 12% in retirement based on your stated spedning level. You can move investments into cash within your 401K though. I don't think I have ever heard of a 401K that didn't have some kind of money market account or stable value fund.

 

[Al18]

According to your initial post, in your 401K you have 750K in stock and 750K in fixed income. Assuming a 50K/year spending plan, you already have 15 years in cash. Historically, bear markets typically last about 3 1/2 years - so you've already got your cash position covered.

 

[Lakewood90712]

I would like to do a three bucket strategy in retirement. We only have about $40K in cash now and would expect that to be about the same in three years. I'd like $120K-$150K cash to fund my first bucket. As far as I see it, the only options to raise cash are:

1) Drop 401K contributions except for employer match:
Adds only around $65K in three years after taxes.

2) Wait until retirement and withdraw big $$$ from 401K:
(not sure what tax problems are associated with that)

3) Sell off some of my long term taxable investments:
Try to stay in the lower two tax brackets to take advantage of 0% tax.

We will have about $2M net worth when I retire:
401K - $1.5M (half stocks / half fixed)
Roth - $150K
Taxable - $250K
HSA - $100K

I make around $90K per year and invest more than half of it. I don't really see how to get my $150K cash without a huge tax hit. Maybe I can't get there in the next three years but it doesn't hurt to try.

Suggestions

I don't see home equity in net worth. Do You rent ? This is a big ? IMO

Drawing off the tax def accounts before 59 1/2 huge hit on penalty. Some 457 plans allow penalty free w/d between 55 and 59 1/2 , but not 401 or IRA IIRC.

There is the Hail Mary method : Take $30k to Las Vegas, put it all on 23 Red at the roulette wheel.

 

[Dtail]

Are you intending to use any of the cash to manage MAGI for ACA purposes?

 

[bada bing]

JMO, but "buckets" are a concept with limited usefulness and detrimental to
optimal planning if carried too far. Money is fungible. I would get used to looking
at the portfolio globally to set your allocation, then work out the best strategic
asset placement for taxes within that allocation.

It does appear that you need to work up a tax strategy for tax deferred distributions. Like a lot of us, you have a hefty percentage in tax deferred. I'd make planning for that a priority that will have more utility than worrying about satisfying a self imposed bucket requirement.

 

[rmcelwee]

I don't see home equity in net worth. Do You rent ? This is a big ? IMO

Drawing off the tax def accounts before 59 1/2 huge hit on penalty. Some 457 plans allow penalty free w/d between 55 and 59 1/2 , but not 401 or IRA IIRC.

There is the Hail Mary method : Take $30k to Las Vegas, put it all on 23 Red at the roulette wheel.

House is paid for, maybe worth $275k - $300k. My understanding is that when I retire at 55 I can withdraw from the 401K.

 

[rmcelwee]

Are you intending to use any of the cash to manage MAGI for ACA purposes?

Yes, I believe the last time I looked at it I could get some assistance if I made under $60k per year or something like that. It would be nice to get assistance but I don't want to "starve ourselves" (in my DW's words) in the process.

 

[brucethebroker]

If it makes you feel better, borrow $150k against your house. Make mortgage payments until you are more comfortable with the entire retirement thing. Pay it off at will. Much cheaper than taking early withdrawals from qualified plans.....

Or just set up a HELOC for your "emergency fund".

 

[Dtail]

Yes, I believe the last time I looked at it I could get some assistance if I made under $60k per year or something like that. It would be nice to get assistance but I don't want to "starve ourselves" (in my DW's words) in the process.

Understood.
Then building up a cash reserve in your 401k account and then pulling out that money would not be helpful, as it would just get taxed as ordinary income.
You would need to build the cash reserve in a taxable account.

 

[Col. Klink]

Check with your tax advisor

Rule of 55 allows me to pull 401K without penalty. Waiting three years gets me a little pension and some healthcare. Around $300K in lifetime benefits would be lost by leaving now (as well as $300K in salary). We could do it now but I just can't pass up that money. We only have $1.5M now. The other $500K will come from $150K in further investments and market growth over the next 3 years.

The rule of 55 you may be referring to is, I think, IRS rule 72b covering 401K distributions under the age of 59.5. I am not an expert, but I do recall from reviewing this with my tax advisor that you can take money out so long as you are separated from employment in or later than the year in which you turn 55 or are separated from some classed of military / public service. Then you have to take equal payments for, (I think) a period of five years thereafter.

In my case, after this review with my tax guy, I decided just to pull as required from our taxable account. Largely drawing on cash reserves as well as interest and dividends generated on the taxable side. We continued to reinvest on the tax deferred side. When I hit 59.5 at the end of the year, we will start using interest and dividends generated from the 401K as well as taxable. Also consider, run a projection, on how much you may have to pull as an RMD at age 70.5. Between SS and RMD, you could put yourself in a high tax bracket and potentially increase Medicare costs.

 

[audreyh1]

The rule of 55 you may be referring to is, I think, IRS rule 72b covering 401K distributions under the age of 59.5. I am not an expert, but I do recall from reviewing this with my tax advisor that you can take money out so long as you are separated from employment in or later than the year in which you turn 55 or are separated from some classed of military / public service. Then you have to take equal payments for, (I think) a period of five years thereafter.

In my case, after this review with my tax guy, I decided just to pull as required from our taxable account. Largely drawing on cash reserves as well as interest and dividends generated on the taxable side. We continued to reinvest on the tax deferred side. When I hit 59.5 at the end of the year, we will start using interest and dividends generated from the 401K as well as taxable. Also consider, run a projection, on how much you may have to pull as an RMD at age 70.5. Between SS and RMD, you could put yourself in a high tax bracket and potentially increase Medicare costs.

No, rule of 55 on 401Ks is not the IRS Rule 72T. Diffrent rules, different constraints.
https://www.thebalance.com/what-is-the-rule-of-55-2894280

 

[RunningBum]

I'm worried about a downturn in the market. This is a peace of mind thing for us. I'd like my 3rd bucket to be high risk / high reward so some cash would be really nice to have.

Yes, I believe the last time I looked at it I could get some assistance if I made under $60k per year or something like that. It would be nice to get assistance but I don't want to "starve ourselves" (in my DW's words) in the process.

I don't understand if you "need" the cash because you are afraid of a downturn, or to manage income for an ACA subsidy.

If it's just fear of a downturn, you can reduce your market exposure in any account. This is what people are talking about with going cash or stable value in a 401K. This doesn't affect taxability when withdrawing, but just reduces your market exposure.

If it's also to manage income, you need to do your own math or provide a lot more info. What is your marginal tax rate now, that you are saving by deferring income in a 401K, vs. what your tax bracket will be later plus the value of the subsidy? Can you get the subsidy anyway, perhaps by selectively selling investments that don't have a large capital gain? You need a better understanding of taxes, so that you aren't confused by things like whether taking cash out of a 401K is taxed differently than selling equities and taking the proceeds out of a 401K (it isn't). Your goal should be to pay the fewest taxes over your lifetime, which usually means trying to smooth out taxable income over your lifetime as much as you can. Paying huge taxes one year and 0 the next usually isn't the best, if it can be avoided. There can be exceptions, like bunching income and deductions in alternate years.

You don't say how much cash you need for living on once you retire, but say you need $60K. That doesn't equate to $60K of income, because if you sell $60K of stock in taxable that has a 20% gain, you have just $12K of LTCG income that is probably taxed at 0%, and keeps you will within the income limit to get a subsidy. In fact you probably want to generate more income to stay out of medicaid. Many of us go through fairly complex calculations to take enough income both for living expenses, and to set ourselves up for the future by doing Roth conversions or taking 0% capital gains up to 400% FPL to still get a subsidy, or 250% to get a bigger subsidy plus cost sharing.

There are other minor things you can do like not reinvesting dividends in your taxable account so you can use those for living expenses and not have to sell an equivalent amount of investments. If you get into a year that for some reason you'd go over the ACA subsidy cliff you could get cash without tax by tapping your HSA or Roth.

Tools like i-orp might help but in my opinion the best thing is to put together your own spreadsheet and run some sample tax returns for the next few years. If you don't like doing this, you can hire a tax expert to help, and make sure they look at the long picture. You can also keep asking questions here, but the quality of answers will rely on the quality of questions. If you just talk about having a cash bucket you're going to be confused as to whether answers help your tax situation or just reduce your equity exposure. I see both in the replies so far, because you aren't clear about what you're trying to do.

 

[rmcelwee]

you can hire a tax expert to help, and make sure they look at the long picture.

That is something we definitely need to do. We have talked about it for years but I think it is close to time to actually do it. I think it would be $500 (or whatever it costs) very well spent.

 

[RunningBum]

That is something we definitely need to do. We have talked about it for years but I think it is close to time to actually do it. I think it would be $500 (or whatever it costs) very well spent.

I think so too. It's probably been a good plan to just save as much as you can and defer as much income as you can, but now is a great time to start positioning assets, if needed, for a long term retirement strategy.

 

[imoldernu]

I ran a "go fund me" here on ER, with great results!

 

[pb4uski]

Rule of 55 allows me to pull 401K without penalty. Waiting three years gets me a little pension and some healthcare. Around $300K in lifetime benefits would be lost by leaving now (as well as $300K in salary). We could do it now but I just can't pass up that money. We only have $1.5M now. The other $500K will come from $150K in further investments and market growth over the next 3 years.

You're in the catbird seat. You could probably retire now with your $1.5m using a 72t if you want to or get forced out, but more is better and $2m at 55 will be nicer if you can stick it out for three more years.