Early Retirement Help - Allocation Plan

[erhelp]

Hi I am a 43 years old, single with no spouse or kids. I am located in NYC and looking at ‘retiring’ at 45. For me early retirement does not mean I quit working and never earn another dime. It just means that I work, where, how and with whom I want. I would mostly do freelance work on interesting projects.

However, any work income is considered a bonus and not required to make the retirement plan work. It just pays for expensive toys and adds a little buffer to the retirement plan.

I will be relocating to Florida to be closer to family and to escape NY state income taxes. I plan on taking the first two or three years completely off and then do interesting work as I find it. If there is a financial crisis that threatens the retirement plan I will simply go back to the grindstone until things are back in balance.

My father was in the military so started out with investing with USPAA/IRA straight out of college. Basic dollar cost averaging. I left everything on autopilot until about 5 years ago when I discovered John C Bogle and index funds and consolidated all my accounts with Vanguard. I like index funds because they make sense to me from a mathematical and rational viewpoint.

Up to now I’ve been a very aggressive with a total balance of 85% stocks and 15% bonds and need some help re-balancing the portfolio to a more conservative approach.

It seems to me that I actually am dealing with two portfolios early retirement (45-60/15 years) and retirement (60-90/30 years) I am thinking that the early retirement portfolio should be more conservative and the retirement portfolio be more aggressive.

Portfolio Goals:
1) Match general market returns.
2) Create simple allocation plan with a minimum of Vanguard index funds.
3) Portfolios should only need to be adjusted on a yearly basis.
4) Produce gross income of $40,000 in 2012 dollars cost adjusted for inflation with 90% success rate using firecalc.com

Current 2012 Early Retirement Portfolio - $473,977.98
$23,002.00 - Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
$275,690.45 - Vanguard Total Stock Market Index Fund Admiral Shares(VTSAX)
$177,220.70 - TEMPLETON GROWTH FUND CLASS A (TEPLX) (international-USPAA/IRA)
$24,569.13 - Pioneer A (PIODX)
$21,000 - Cash Reserves (EmigrantDirect.com)

Current 2012 Retirement Portfolio - $476,208.25
$8,542.83 - Vanguard Growth Index Fund Investor Shares (VIGRX) - ROTH IRA

$40,199.19 - Vanguard Growth Index Fund Admiral Shares (VIGAX) - Standard IRA
$118,956.89 - Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) - Standard IRA
$211,620.76 - Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) - Standard IRA
$13,600.84 - Vanguard Extended Market Index Fund Admiral Shares (VEXAX) - Standard IRA

$1,887.42 - PIMCO Total Return Inst CL (PTTRX) - Fidelity 401k
$20,441.55 - Spartan International Index Fund (FSPSX) - Fidelity 401k
$37,662.42 - Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) - Fidelity 401k
$13,825.42 - Vanguard Mid-Cap Index Fund Institutional Shares (VMCIX) - Fidelity 401k
$9,470.93 - Vanguard Small-Cap Index Fund Institutional Shares (VSCIX) - Fidelity 401K

Expected 2014 Early Retirement Portfolio - $614,654.58
Expected 2014 Retirement Portfolio - $549,746.84

A few specific questions I have are:

Does it make sense to gradually convert my IRA to ROTH. I’m thinking partial conversions to keep me in the 25% bracket?

As is the Early retirement (first 15 years) would not be enough without either lowering the annual payout or by having some side income. I plan on having some side income but if I come up a year or two short would I be able to access my ROTH IRA penalty fee?

If I end up with extra money would I be able to still contribute to the ROTH IRA?

Any ideas or help with would be greatly appreciated.

 

[LOL!]

Another forum is the place for these kinds of questions:
Bogleheads • View topic - Asking Portfolio Questions
Although, I would suggest that you use percentages and not actual dollar amounts when presenting your portfolio.

Why convert to Roth at 25%? Why not convert at 0%?

I do not like the idea of 2 buckets: early retirement and late retirement. Why not just one portfolio with the weighted average allocation of the two portfolios? It would be much simpler and much more flexible.

 

[MichaelB]

Hi I am a 43 years old, single with no spouse or kids. I am located in NYC and looking at ‘retiring’ at 45. For me early retirement does not mean I quit working and never earn another dime. It just means that I work, where, how and with whom I want. I would mostly do freelance work on interesting projects.

However, any work income is considered a bonus and not required to make the retirement plan work. It just pays for expensive toys and adds a little buffer to the retirement plan.

I will be relocating to Florida to be closer to family and to escape NY state income taxes. I plan on taking the first two or three years completely off and then do interesting work as I find it. If there is a financial crisis that threatens the retirement plan I will simply go back to the grindstone until things are back in balance.

My father was in the military so started out with investing with USPAA/IRA straight out of college. Basic dollar cost averaging. I left everything on autopilot until about 5 years ago when I discovered John C Bogle and index funds and consolidated all my accounts with Vanguard. I like index funds because they make sense to me from a mathematical and rational viewpoint.

Up to now I’ve been a very aggressive with a total balance of 85% stocks and 15% bonds and need some help re-balancing the portfolio to a more conservative approach.

It seems to me that I actually am dealing with two portfolios early retirement (45-60/15 years) and retirement (60-90/30 years) I am thinking that the early retirement portfolio should be more conservative and the retirement portfolio be more aggressive.

Portfolio Goals:
1) Match general market returns.
2) Create simple allocation plan with a minimum of Vanguard index funds.
3) Portfolios should only need to be adjusted on a yearly basis.
4) Produce gross income of $40,000 in 2012 dollars cost adjusted for inflation with 90% success rate using firecalc.com

Current 2012 Early Retirement Portfolio - $473,977.98
$23,002.00 - Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
$275,690.45 - Vanguard Total Stock Market Index Fund Admiral Shares(VTSAX)
$177,220.70 - TEMPLETON GROWTH FUND CLASS A (TEPLX) (international-USPAA/IRA)
$24,569.13 - Pioneer A (PIODX)
$21,000 - Cash Reserves (EmigrantDirect.com)

Current 2012 Retirement Portfolio - $476,208.25
$8,542.83 - Vanguard Growth Index Fund Investor Shares (VIGRX) - ROTH IRA

$40,199.19 - Vanguard Growth Index Fund Admiral Shares (VIGAX) - Standard IRA
$118,956.89 - Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) - Standard IRA
$211,620.76 - Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) - Standard IRA
$13,600.84 - Vanguard Extended Market Index Fund Admiral Shares (VEXAX) - Standard IRA

$1,887.42 - PIMCO Total Return Inst CL (PTTRX) - Fidelity 401k
$20,441.55 - Spartan International Index Fund (FSPSX) - Fidelity 401k
$37,662.42 - Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) - Fidelity 401k
$13,825.42 - Vanguard Mid-Cap Index Fund Institutional Shares (VMCIX) - Fidelity 401k
$9,470.93 - Vanguard Small-Cap Index Fund Institutional Shares (VSCIX) - Fidelity 401K

Expected 2014 Early Retirement Portfolio - $614,654.58
Expected 2014 Retirement Portfolio - $549,746.84

A few specific questions I have are:

Does it make sense to gradually convert my IRA to ROTH. I’m thinking partial conversions to keep me in the 25% bracket?

As is the Early retirement (first 15 years) would not be enough without either lowering the annual payout or by having some side income. I plan on having some side income but if I come up a year or two short would I be able to access my ROTH IRA penalty fee?

If I end up with extra money would I be able to still contribute to the ROTH IRA?

Any ideas or help with would be greatly appreciated.

Hi Erhelp, and welcome to the forum. You've done a great job getting ready for early retirement. No doubt you can get some help here to fine tune your plan. Have you run your numbers through FIRECalc? That can help assess the feasibility of your plan as well.

Regarding asset allocation, I'm sure others will give you feedback. At a glance, it looks like you have very little international and emerging market equity exposure. Vanguard has very good options for both those and I would urge you to consider them.

For your questions, yes, it makes sense to convert gradually from IRA to ROTH when you have a low tax rate. If your first retirement bucket should last longer than plan, you don't want to be forced to withdraw funds you don't need, and the ROTH will allow that. Yes, you should also be able to withdraw a few years early if needed. If you retire at age 45 you can begin to withdraw in 12 1/2 years penalty free. Finally, you can also still contribute, as long as you have earned income.

Good luck!

 

[erhelp]

I couldn't edit my original post which is annoying. I re-worked it to follow the "Asking Portfolio Questions" format that the bogleheads use.

Hi I am a 43 years old, single with no spouse or kids. I am located in NYC and looking at ‘retiring’ at 45. For me early retirement does not mean I quit working and never earn another dime. It just means that I work, where, how and with whom I want. I would mostly do freelance work on interesting projects.

However, any work income is considered a bonus and not required to make the retirement plan work. It just pays for expensive toys and adds a little buffer to the retirement plan.

I will be relocating to Florida to be closer to family and to escape NY state income taxes. I plan on taking the first two or three years completely off and then do interesting work as I find it. If there is a financial crisis that threatens the retirement plan I will simply go back to the grindstone until things are back in balance.

My father was in the military so started out with investing with USPAA/IRA straight out of college. Basic dollar cost averaging. I left everything on autopilot until about 5 years ago when I discovered John C Bogle and index funds and consolidated all my accounts with Vanguard. I like index funds because they make sense to me from a mathematical and rational viewpoint.

Up to now I’ve been a very aggressive with a total balance of 85% stocks and 15% bonds and need some help re-balancing the portfolio to a more conservative approach.

It seems to me that I actually am dealing with two portfolios early retirement (45-60/15 years) and retirement (60-90/30 years) I am thinking that the early retirement portfolio should be more conservative and the retirement portfolio be more aggressive.

Portfolio Goals:
1) Match general market returns.
2) Create simple allocation plan with a minimum of Vanguard index funds.
3) Portfolios should only need to be adjusted on a yearly basis.
4) Produce gross income of $40,000 in 2012 dollars cost adjusted for inflation with 90% success rate using firecalc.com

Emergency funds: $21,000
Debt: $0
Tax Filing Status: (Single/No dependents)
Tax Rate: 28% Federal 6.85% State NY - Retiring to FL in order to ditch State taxes
Age: 43
Desired Asset allocation: unsure - but more conservative as I enter early retirement
Intl allocation: x% of stocks
Current portfolio: $996,000 (total)

Taxable
2% - Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
28% - Vanguard Total Stock Market Index Fund Admiral Shares(VTSAX)
18% - TEMPLETON GROWTH FUND CLASS A (TEPLX) (international-USPAA/IRA)
3% - Pioneer A (PIODX)
2% - Cash Reserves (EmigrantDirect.com)

Roth IRA
1% - Vanguard Growth Index Fund Investor Shares (VIGRX) - ROTH IRA

Standard IRA
4% - Vanguard Growth Index Fund Admiral Shares (VIGAX)
12% - Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) $211,620.76 (44%) - 21% - Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
1% - Vanguard Extended Market Index Fund Admiral Shares (VEXAX)

Fidelity 401k
0.1% - PIMCO Total Return Inst CL (PTTRX)
1.9% - Spartan International Index Fund (FSPSX)
4% - Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)
1% - Vanguard Mid-Cap Index Fund Institutional Shares (VMCIX)
1% - Vanguard Small-Cap Index Fund Institutional Shares (VSCIX)

By Asset Class
2% - Cash
83.9% - US Stocks
64% - International Stocks
14.1% - Bonds

A few specific questions I have are:

Does it make sense to gradually convert my IRA to ROTH after I have retired? If so how should I calculate the amount to be converted for a given year in order to keep taxes low. All taxes would be paid out of my taxable accounts.

Originally I had posted my accounts as if they where two portfolios. I did this because I thought that I could not touch any money in the IRAs before 59.5 without incurring penalties.

In addition I had read somewhere that all your bonds should be in your IRA accounts in order to reduce taxes. But if I did that the taxable accounts would have more variance without the bonds and could potential exhaust my taxable accounts before 59.5. Is there any guidance on how to balance these two requirements?

I had asked whether or not I could add extra money to my ROTH IRA in case things went really well. The answer was I could as long as I had earned income. Do dividends/captal gains count as earned income? Or is it just W2/1099 wages.

Any ideas or help with would be greatly appreciated.

 

[erhelp]

Another forum is the place for these kinds of questions:
Bogleheads • View topic - Asking Portfolio Questions
Although, I would suggest that you use percentages and not actual dollar amounts when presenting your portfolio.

I re-worked the post to follow the boglehead format and posted it to their forum as well. I could not edit my original post so just added it to this thread.

Why convert to Roth at 25%? Why not convert at 0%?

I should have stated that I would not do any conversions until after I had retired and had 0 income. I had seen some threads talking about 0% conversions but I had not seen any actual calculations showing how it was done. I thought the lowest tax bracket was 10%? I'll search some more on this. Are there any links you feel explain this well?

I do not like the idea of 2 buckets: early retirement and late retirement. Why not just one portfolio with the weighted average allocation of the two portfolios? It would be much simpler and much more flexible.

Originally I had posted my accounts as if they where two portfolios. I did this because I thought that I could not touch any money in the IRAs before 59.5 without incurring penalties.

In addition I had read somewhere that all your bonds should be in your IRA accounts in order to reduce taxes. But if I did that the taxable accounts would have more variance without the bonds and could potential exhaust my taxable accounts before 59.5. Is there any guidance on how to balance these two requirements?

 

[erhelp]

Have you run your numbers through FIRECalc? That can help assess the feasibility of your plan as well.

I've been using firecalc a lot to test things out. I feel pretty confident about meeting my goals if I take the lump some and run it over 45 years. However, I am not as confident for the first 15 years. What do I do if my taxable accounts run dry before I hit 59.5?

Regarding asset allocation, I'm sure others will give you feedback. At a glance, it looks like you have very little international and emerging market equity exposure. Vanguard has very good options for both those and I would urge you to consider them.

All of of my international funds is in the Templeton account which I started before I learned about index funds. I'd like to move it over to a vanguard international index fund but am not how to do that without incurring a big tax bill.

I plan on draining the non-vanguard funds as I start my withdrawals.

For your questions, yes, it makes sense to convert gradually from IRA to ROTH when you have a low tax rate. If your first retirement bucket should last longer than plan, you don't want to be forced to withdraw funds you don't need, and the ROTH will allow that. Yes, you should also be able to withdraw a few years early if needed. If you retire at age 45 you can begin to withdraw in 12 1/2 years penalty free. Finally, you can also still contribute, as long as you have earned income.

Do dividends/captal gains count as earned income? Or is it just W2/1099 wages.

Thanks for the help

 

[MichaelB]

In addition I had read somewhere that all your bonds should be in your IRA accounts in order to reduce taxes. But if I did that the taxable accounts would have more variance without the bonds and could potential exhaust my taxable accounts before 59.5. Is there any guidance on how to balance these two requirements?

When you are working and your marginal tax rates are high it makes sense to keep your fixed income in the IRA. After you stop working your tax rate falls and you can move some fixed income into a taxable account. You can also invest in tax exempt muni funds, which are quite good at Vanguard. Finally, keeping a cash reserve of one year budget in CDs gives you a additional buffer to withstand volatility.

 

[MichaelB]

I've been using firecalc a lot to test things out. I feel pretty confident about meeting my goals if I take the lump some and run it over 45 years. However, I am not as confident for the first 15 years. What do I do if my taxable accounts run dry before I hit 59.5?

You definitely want to avoid early IRA withdrawal, because your greater risk is running out of money when you are too old to work. In your original post you wrote you were planning on free lance or part time work. How does that figure in your calculation?

Do dividends/captal gains count as earned income? Or is it just W2/1099 wages.

Thanks for the help

Only w2 wages count as earned income.

 

[LOL!]

Free-lance or contract compensation that appears on a 1099 (and not on a W2) also is earned income that can be contributed to an IRA. But dividends, interest and realized capital gains is not earned income. There are a few other instances of earned income, so consult the IRS publication on this.

 

[erhelp]

In your original post you wrote you were planning on free lance or part time work. How does that figure in your calculation?

I left freelance work and social security out of the calculations. In both cases I know I will get something and sometime but am planning for the worst and hoping for the best.