56 yr old ER passive income question

[supernova72]

I'm looking for options in creating a passive income stream. I've posted before pre-ER but some details below. I didn't have a lot of time to prepare for ER due to Megacorp downsizing and severance buyout (layoff) event in July of 2016. So I'm 8 months into *retirement* and have 95% of my investment income (outside of my pension) in the Megacorops 401K. Cheers and thanks in advance.


A bit about me:

• 56 yrs old
• Single
• 725K in 401K with 68%/32% asset allocation
• $15K in cash. $12K in Brokerage acct (realize this is not large)
• Pension (non cola) at $43K a year
• Expenses are 55K a year (includes taxes, vacations)
• Home value is $575K (small home in Seattle WA, no mortgage)
• I get retiree medical for $17 a month. Very thankful.

So I checked my 401K and there is not an option that I can see to have dividends paid to me directly. Beyond my pension I'm looking to get about $1000 a month in passive income. For whatever reason I don't want to draw down my 401K yet?

I can probably skate by in 2017 without a draw down but in 2018 things will change as my savings will be mostly drawn down (property taxes, fed taxes). Thanks in advance!

 

[Z3Dreamer]

Passive income comes from assets you own. You only have 2 assets. House and 401k. So, some mutually exclusive creative ideas:

If you have a separate entrance, rent out a portion of your house.
Airbnb part of your house.
Downsize ($575k) would buy something really nice in other towns and use the excess to buy a rental property. Oh, maybe $350k for your principal residence and $200k for that rental.
If you retire at age 55 and over distributions from 401k are not subject to the penalty. Some plans allow only one post retirement distribution, others bunches. You could take $12k or more in 2018 (you said you didn't need until 2018). You could then roll over the balance to an IRA (depending on whether 401k allows multiple post retirement distributions) and begin taking penalty free distributions at 59 1/2.

 

[RunningBum]

Take out a mortgage or home equity loan if you can. This is the case I mentioned in another thread: http://www.early-retirement.org/for...ge-or-keep-investing-86041-3.html#post1858069

Otherwise you are going to have to take withdrawals (not dividends) from your 401K, if your plan lets you. You said you looked at taking dividends, but didn't want to take withdrawals. Why is that? Money is money. You reinvest dividends, and take withdrawals. Do you have a real reason not to do it, or is just "whatever"? Is "whatever reason" a valid reason for a shortfall?

 

[supernova72]

Passive income comes from assets you own. You only have 2 assets. House and 401k. So, some mutually exclusive creative ideas:

If you have a separate entrance, rent out a portion of your house.
Airbnb part of your house.
Downsize ($575k) would buy something really nice in other towns and use the excess to buy a rental property. Oh, maybe $350k for your principal residence and $200k for that rental.
If you retire at age 55 and over distributions from 401k are not subject to the penalty. Some plans allow only one post retirement distribution, others bunches. You could take $12k or more in 2018 (you said you didn't need until 2018). You could then roll over the balance to an IRA (depending on whether 401k allows multiple post retirement distributions) and begin taking penalty free distributions at 59 1/2.

Thanks for the reply. I can take distributions without a 10% penalty yes. On the house the value seems high but in Seattle it's just one step up from an entry home believe it or not. Crazy increase in pricing. I'd love to keep this house and the ABNB option is appealing. I have an extra bed and bath downstairs that could be doable with a bit of upgrading (adding a door).

On the IRA I go back and forth on the advantage of doing that. I'd be paying taxes on withdraw either way from what I understand (401K or IRA at 59.5).

 

[youbet]

For whatever reason I don't want to drawn down my 401K yet?

You're letting some silliness interfere with FIRE. Shame on you!

Enjoyment of your time in retirement is your primary objective. Your pension plus a modest/conservative annual withdrawal from your 401k covers your budget. Smile when your pension checks arrive and grin and bear it when you make the dreaded 401k withdrawal. Making a conservative annual withdrawal from your portfolio shouldn't be keeping you from focusing on enjoying your time!

 

[supernova72]

Take out a mortgage or home equity loan if you can. This is the case I mentioned in another thread: http://www.early-retirement.org/for...ge-or-keep-investing-86041-3.html#post1858069

Otherwise you are going to have to take withdrawals (not dividends) from your 401K, if your plan lets you. You said you looked at taking dividends, but didn't want to take withdrawals. Why is that? Money is money. You reinvest dividends, and take withdrawals. Do you have a real reason not to do it, or is just "whatever"? Is "whatever reason" a valid reason for a shortfall?

Thanks and good point. I established a line of credit a few years back at $150K. It's at 4.24% right now. My plan was to be debt free from now on so that is there for emergencies the way it stands.

However yes on the 401K withdraw it's just a weird "me thing" of drawing down at my age but then again I see your point money is money and that annual $12K would be a withdraw rate of 1.7% ish. There is no penalty but of course it's taxable income. Bottom line is I'm still adjusting to this non-work and fixed income thing!

 

[supernova72]

You're letting some silliness interfere with FIRE. Shame on you!

Enjoyment of your time in retirement is your primary objective. Your pension plus a modest/conservative annual withdrawal from your 401k covers your budget. Smile when your pension checks arrive and grin and bear it when you make the dreaded 401k withdrawal. Making a conservative annual withdrawal from your portfolio shouldn't be keeping you from focusing on enjoying your time!

Thanks for the voice of reason and good points. Transitioning to ER and starting withdrawing has been a big adjustment for me. I've been saving like most of us on this forum for 30+ yrs. But yea, I get your point about enjoyment. I started getting cabin fever in January so started booking travel (Nicaragua, Columbia, SE Asia).

That has been eye opening meeting folks who don't mention work (ex-pats) and others who do some on-line stuff which only requires a WiFi connection and a laptop : )

 

[RunningBum]

I think you can safely afford $12K, even with inflation, from a $720K account almost indefinitely, and presumably you'll get SS in 6-14 years too, right? Taxes? You're going to pay them on the money at some point, unless you want to die with a big balance for some reason. Have a long term plan based on reason, not some mind set that makes no financial sense. You're no longer in saving mode, you are in now in a slow spend-down mode.

 

[broadway]

I would look at it this way.
If you put the $725K of your 401(k) into a money market account that pays 1%, it would be throwing off $7,250 in interest. Taking an additional $4,750 in principal from it to get you to $12,000 each year is not going to make that much of a dent. Your actual portfolio in the 401(k) is on average going to give you better than 1% in returns.

 

[youbet]

Transitioning to ER and starting withdrawing has been a big adjustment for me. I've been saving like most of us on this forum for 30+ yrs.

It seems like switching from the savings mode to the withdrawal mode is tough for most of us. I'm almost 11 years into FIRE and still enjoy seeing my assets grow instead of shrink.

But here's the issue....... A time may come when you'll wish you had done things (you could have easily afforded) sooner instead of procrastinating in favor of watching the FIRE portfolio grow. For example, we've been struggling with the health issues DW developed about 9 months ago. When she was diagnosed, one of the first things I thought of was the list of activities we hadn't done yet (and could have easily afforded to do) and now we may never do them.

You can't live capriciously without taking a chance on going broke. But you also can't tenaciously hang onto all your savings and still do all the things you'd like to do. You need balance. The numbers you threw out look like you're set to cover your expenses and focus on enjoying your time and I hope you do! Congratulations BTW.

 

[supernova72]

I think you can safely afford $12K, even with inflation, from a $720K account almost indefinitely, and presumably you'll get SS in 6-14 years too, right? Taxes? You're going to pay them on the money at some point, unless you want to die with a big balance for some reason. Have a long term plan based on reason, not some mind set that makes no financial sense. You're no longer in saving mode, you are in now in a slow spend-down mode.

Thanks again. It looked good on FireCalk too even when I put in some on-time spending for a car every 5 yrs or so.

The way my pension works it would be best to take SS at 62 for me. My pension will drop by $9K annually at 62 and then my plan is to "offset" it by starting SS which will be ~$20K.

On your point regarding taxes I need to remember taxes are taxes and just get over it!!

 

[supernova72]

I would look at it this way.
If you put the $725K of your 401(k) into a money market account that pays 1%, it would be throwing off $7,250 in interest. Taking an additional $4,750 in principal from it to get you to $12,000 each year is not going to make that much of a dent. Your actual portfolio in the 401(k) is on average going to give you better than 1% in returns.

Thanks and that is a good way to look at it. I definitely need to change my mindset from being realistic about the spend down. YTD return in 2017 is just over 4% but I realize we are in unusual times post election.

 

[supernova72]

It seems like switching from the savings mode to the withdrawal mode is tough for most of us. I'm almost 11 years into FIRE and still enjoy seeing my assets grow instead of shrink.

But here's the issue....... A time may come when you'll wish you had done things (you could have easily afforded) sooner instead of procrastinating in favor of watching the FIRE portfolio grow. For example, we've been struggling with the health issues DW developed about 9 months ago. When she was diagnosed, one of the first things I thought of was the list of activities we hadn't done yet (and could have easily afforded to do) and now we may never do them.

You can't live capriciously without taking a chance on going broke. But you also can't tenaciously hang onto all your savings and still do all the things you'd like to do. You need balance. The numbers you threw out look like you're set to cover your expenses and focus on enjoying your time and I hope you do! Congratulations BTW.

Thanks and sorry to hear about health issues with DW. I recently started doing some international travel and that was eye opening and also got me out of the wet and colder weather.

But yea seeing the portfolio sort of hover in the same zip code is a change but I'm adjusting. Actually since the election it's up $55K but that's another topic for another time!

Appreciate you insight and feedback. Take care!

So far these are cheap trips to Central America and next is Columbia. A nice room is < than $30 a night and a local beer is $1. So even if my home sits empty I can almost live there for half the year for the same as living in Seattle WA. Cheers.

 

[copyright1997reloaded]

Thanks and good point. I established a line of credit a few years back at $150K. It's at 4.24% right now. My plan was to be debt free from now on so that is there for emergencies the way it stands.

However yes on the 401K withdraw it's just a weird "me thing" of drawing down at my age but then again I see your point money is money and that annual $12K would be a withdraw rate of 1.7% ish. There is no penalty but of course it's taxable income. Bottom line is I'm still adjusting to this non-work and fixed income thing!

After you retire you may find it harder to get loans, so having the LOC now and available is a good thing (even if you don't use it).

I retired in 2009 (age 51) and didn't want to touch my 401k. Since then I've got back to work (teaching, first part time and then full time) and wish I had started 401k withdraws when my income was lower post "retirement" and pre "new full time job". I'm starting to worry about the eventual size of my 401k RMD's in another 11 years.

 

[GTFan]

Heh, RMDs are easy to fix with QCDs. You just have to be willing to let the money go to something you believe in.

 

[supernova72]

After you retire you may find it harder to get loans, so having the LOC now and available is a good thing (even if you don't use it).

I retired in 2009 (age 51) and didn't want to touch my 401k. Since then I've got back to work (teaching, first part time and then full time) and wish I had started 401k withdraws when my income was lower post "retirement" and pre "new full time job". I'm starting to worry about the eventual size of my 401k RMD's in another 11 years.

Thanks for the heads up and I have not ruled out PT work in the future. My taxes in 2016 and 2017 will be a bit challenging (severance, sick leave, vacation payout) so I appreciate your insight about drawing down.

I ended up short on withholding for 2016 but for reasons that are good vs bad. Taxes are taxes!

 

[pb4uski]

....For whatever reason I don't want to draw down my 401K yet?

Ergo the problem. You're thinking about it all wrong. You have $725k in your 401k saved for retirement.

One thing to find out is what restriction your plan has on 401k withdrawals... how frequently, how many a year, any minimum or maximums, etc. Then design a withdrawal plan and execute it.

$12k a year is only 1.7% of your $725k balance... while in certain years your $725k will grow by less than $12k... in most years it will grow by $12k or much more.

I would set up $12k annual withdrawals (or even more if you prefer) and monitor the balance... most likely it will remain north of $725k... if we have a bad spell and it slips below $675k then reevaluate the situation.

Then, once you turn 59 1/2 consider rolling it over into an IRA so you will have more flexibility and can do Roth conversions until you start SS.

 

[45th Birthday]

I think the most important questions have not been addressed here: What are the costs of your 401(k), what investment options do you have, and what has been the performance of these. Many plans are subpar in this area and I'm not sure you have to wait to roll it into an IRA to someplace like FIDO where you can manage it yourself with low-cost options.

 

[pb4uski]

You're missing a more important point 45 ... the OP is 56 and can't get penalty-free access to his 401k money until he is 59 1/2 if he rolls it into an IRA (other than a 72t)... and he needs some of that money between now and when he turns 59 1/2 in 3 1/2 years....if he leaves it in the 401k he can access those funds without the 10% penalty.

So irrespective of fees and investment choices he is best staying with the 401k until he turns 59 1/2. Then he can transfer it to Vanguard or Fido... but not before.

 

[45th Birthday]

I see, thanks, I didn't know that crucial difference. Still probably worth checking into the 401(k) investment options to make sure he is not invested in a stinker.

 

[supernova72]

I think the most important questions have not been addressed here: What are the costs of your 401(k), what investment options do you have, and what has been the performance of these. Many plans are subpar in this area and I'm not sure you have to wait to roll it into an IRA to someplace like FIDO where you can manage it yourself with low-cost options.

It's a solid 401K plan and when I looked up the ranking it's rated fairly high (fee's, options, fund choices).

2016 performance was 8.2%
YTD 2017 is 4.2% through 3/25

It's one of the Megacorp 401K's with nice low fee's. I can withdraw without the 10% penalty since I quality for the IRS rule of "55" (pub 475). I'm officially retired from the company after 31 yrs. We made really big airplanes and fighter jets, missiles, satellites etc. Workforce is 160,000 folks. Revenue is $100B (with a B).

 

[supernova72]

Ergo the problem. You're thinking about it all wrong. You have $725k in your 401k saved for retirement.

One thing to find out is what restriction your plan has on 401k withdrawals... how frequently, how many a year, any minimum or maximums, etc. Then design a withdrawal plan and execute it.

$12k a year is only 1.7% of your $725k balance... while in certain years your $725k will grow by less than $12k... in most years it will grow by $12k or much more.

I would set up $12k annual withdrawals (or even more if you prefer) and monitor the balance... most likely it will remain north of $725k... if we have a bad spell and it slips below $675k then reevaluate the situation.

Then, once you turn 59 1/2 consider rolling it over into an IRA so you will have more flexibility and can do Roth conversions until you start SS.

OP here. Thank you very much for the insight. I like the idea of withdrawing once a year and Jan 1st 2018 would be good timing for the first draw down of $12K. Definitely need to change my mindset of saving vs using it for some living expenses. Ironically enough the $12K will be covering fed/prop taxes, homeowners insurance, and vacations. I'm covering those in 2017 from other savings. Had not thought far enough ahead on the IRA element.

 

[supernova72]

You're missing a more important point 45 ... the OP is 56 and can't get penalty-free access to his 401k money until he is 59 1/2 if he rolls it into an IRA (other than a 72t)... and he needs some of that money between now and when he turns 59 1/2 in 3 1/2 years....if he leaves it in the 401k he can access those funds without the 10% penalty.

So irrespective of fees and investment choices he is best staying with the 401k until he turns 59 1/2. Then he can transfer it to Vanguard or Fido... but not before.

Cheers and that plan will most likely be the direction I go. Most of our funds area managed by State Street. YTD performance 2017 is 4.2% through 3/24 with a 68/32 AA. S&P being 25% of the overall. Stable value fund is 20% (2.1% return). I'm treating that as cash or "bond" type stuff of the 32%. Cheers.

 

[pb4uski]

Actually, if the fund choices and costs are good like you say and you have access to a SV fund that pays 2.1% you may want to just stay with the 401k and forget a rollover.... you can't get a SV fund in an IRA and 2.1% with no interest rate risk is pretty good in this low interest rate environment (I wish I had a SV fund like that available to me).

 

[euro]

Actually, if the fund choices and costs are good like you say and you have access to a SV fund that pays 2.1% you may want to just stay with the 401k and forget a rollover.... you can't get a SV fund in an IRA and 2.1% with no interest rate risk is pretty good in this low interest rate environment (I wish I had a SV fund like that available to me).

I agree - I still have my 401k with mega and intend to leave it there for the foreseeable future. Choices and expenses are good - SV is at 3%