How do you set your money up so you can take the 4%?

[kbst]

Hi everybody,
I've introduced myself before as kbsharkstooth. We plan to retire in 4 years. My wife will be 62 and we will get monies from her pension and from ss totaling ~ 60k per year with the pension not tied to inflation. BTW I'll be 50.
We have a net worth of ~ 1.5 mil. 250k equity in the house we live in that's in my wife's name. 200k equity in my beach condo. 550k in my wife's 401k. 225k in stocks and MF's in my wife's name. 20k in my wife's roth. 60k stock and mf's in my name. 110k in sep and roth for me. 85k in a joint account with stocks and VFINX. We also have ~ 80k in cash.
We will have both properties paid of at retirement and plan to keep them.
How do we set up our monies so that we can take 4% or 40k every year from our accounts. Please don't tell me not to worry where it will come from. I need to know how to set our accounts up to collect the 40K.

Thanks kbst

 

[REWahoo]

Have you run your numbers through ORP to see what it says about how to withdraw your $?

http://www.i-orp.com/index.html

 

[Spanky]

Guidelines for Withdrawal:
http://personal.fidelity.com/planning/retirement/content/withdrawal_guidelines.shtml?refpr=tw1

Do you really need $100K (60K + 40K) per year?

 

[db]

Taking your question literally, unlike the other replies, I start the year with 5% in Vanguard's prime money market fund, which deposits monthly into my checking account.  I buffer that with 10% in the short-term corporate bond fund, which feeds the money market fund as necessary.

My allocation to fixed income securities is aimed at reducing the risk that money will not be available when I need it, or that I might need to sell equities in a down market.  Thus, I keep 10 years of expected future income in fixed income assets.  If you use an inflation adjusted 4% withdrawal rate, that amounts to a 60/40 split.  I choose not to adjust for inflation.

db

 

[BUM]

kb,

Set up a routine withdrawl (taxable $$$ first) into your regular checking. Electronic Funds Transfer perhaps with automatic bill pay if you want to get fancy. Maybe we should have an eyeball. The pier opens in 3 weeks.

 

[dunc0029]

As the previous few posters said, most brokerages/banks will provide a means to have automatic transfers. Depending on how fancy you want to get, you could layer stock sale transfers to a money market/savings to your checking account. You'll probably want to draw down non-retirement accounts first to continue the tax-advantaged gains on those accounts. If needed, you could do a 72t withdrawal on your retirement assets.

 

[Nords]

I need to know how to set our accounts up to collect the 40K.

At the beginning of the year we sell a year's expenses' worth of shares from a taxable account.  It's usually the fund that's had a blockbuster year and is busting out of its asset allocation, so that takes care of an imprecise rebalancing too.

If equities had a down year, we'd dig into a five-year CD that holds another year's expenses in cash.

We put our spending money into our Fidelity brokerage money-market account and spend it via billpay or EFT to our checking account. 

We don't plan to tap our tax-deferred accounts until we need the money. We're trying to spend down the taxable accounts first.

The spending part pretty much takes care of itself!

 

[Rich_by_the_Bay]

Taking your question literally, unlike the other replies, I start the year with 5% in Vanguard's prime money market fund, which deposits monthly into my checking account.  I buffer that with 10% in the short-term corporate bond fund, which feeds the money market fund as necessary.

DB,

Do you count your 10 year "buffer" as part of your investment allocation, or do you keep a 60/40 allocation with your non-buffer funds, and count the buffer as a separate pool?

Stated another way, if I choose to buffer 5 years worth of anticipated necessary income in a MMF or safe bonds, would that buffer count as part of my 40% in the overall 60/40 mix?

 

[db]

Rich,

The fixed income buffer that makes me feel comfortable defines my allocation to fixed income securities.  So the answer is yes.  I want to protect against the risk of having to sell equities in a down market that could last 10 years.  Of the 10 years of future income, a bit over 3 years is held in money market and short-term corporate bond funds as a hedge against rising interest-rates.  If you are willing to put up with the fuss, a ladder of CDs or bonds held to maturity would serve as well, but not be as easily managed.

I think you may be thinking of the notion of setting aside an emergency fund outside your allocation, but I do not do that.

I should probably disclose that I am very likely to inherit a 7- figure trust within the next 10 years from my 93 year old mother -- we celebrated her sister's 100th birthday recently.  I manage my mother's trust in much the same way, although with a 15-year fixed income buffer.

db

 

[SteveR]

These are all good pointers and I am watching closely to learn more about this part of ER.

My biggest "problem" is my after tax account is 80% individual stocks. Two of them account for over 60% of the value of the account. Tapping into these will be expensive from a tax perspective since our income in early ER will still be in the higher brackets. We have been creating some additional cash accounts to allow us to tap into these before we have to deal with the tax issues with the stocks. Some of the low performers will be sold off to offset income in our last working year but that will really screw up our allocations. We have about 2-3 years of basic expenses covered in MM or CDs.

I am still looking for the best way to do all this with the least tax hit. My IRA can be tapped at anytime and will most likely be used for a few years while whe ratched down our income over the next 5-10 years. After that it can sit it out until we hit RMDs on them while we tap the after tax accounts which will have been slowly sold off and reallocated by then. At least that is what I am thinking for now.

I keep running the expense numbers against income and on paper it looks close. We are looking at every $ we spend now and evaluating why we feel we need to. DW is new to this kind of evaluation but is generally "on board" with the concepts. She is trying and understands the need to be a smart shopper and she is a quick study. 8)

In the meantime...I continue to read, listen and learn.

 

[brewer12345]

My biggest "problem" is my after tax account is 80% individual stocks.  Two of them account for over 60% of the value of the account. 

Wow, you have balls! No other way to say it. You have about half your portfolio in two stocks?! I consider myself pretty aggressive as an investor (I can afford to be), but I wouldn't even consider that kind of concentration. If I were you, I'd be more worried about the concentration than withdrawal mechanics.

 

[SteveR]

Wow, you have balls!  No other way to say it.  You have about half your portfolio in two stocks?!  I consider myself pretty aggressive as an investor (I can afford to be), but I wouldn't even consider that kind of concentration.  If I were you, I'd be more worried about the concentration than withdrawal mechanics.

It sort of happened by accident.
I started the account out in 1991; after my divorce to dip my toe into the market for the first time. I did some research and decided that personal computers were going to be a hot item; especially from the less mainstream sources. Ergo.......I bought 100 shares of DEll and 100 shares of Gateway...one of them was bound to survive. The other stock was from my stock options on an option that experienced 3 splits within a couple or years. I bought long and still have some of them left.

My basis for the Dell stuff is around $0.54 per share so selling them would be a huge cap. gain. The other has not gone up that much and would be the one I would sell except it is spinning of $5k in dividends per year so why sell? The other stuff is a collection of cats and dogs (mostly dogs) that have resulted from mergers and other company ownership changes that are now different from where I started. The gain on these is over 100%. The other dogs are sleeping but are not worth much so selling them will not be as painful. Think MOT, KKS, GE, WMT, CD, etc. Yawn. :

 

[cute fuzzy bunny]

No wonder you cant sleep!

New drug on the market by the way...Rozerem...supposedly Lunesta without any of the minor side effects, and not a controlled substance so you can buy it from one of the goofy online pharmacies that 'consult' with you over the phone and then sell it to you...http://www.sun-pharmacy.com/rozerem.shtml Unlikely that blue cross is going to cover this anytime soon.

 

[brewer12345]

It sort of happened by accident.   
I started the account out in 1991; after my divorce to dip my toe into the market for the first time.  I did some research and decided that personal computers were going to be a hot item; especially from the less mainstream sources.  Ergo.......I bought 100 shares of DEll and 100 shares of Gateway...one of them was bound to survive.  The other stock was from my stock options on an option that experienced 3 splits within a couple or years.  I bought long and still have some of them left. 

My basis for the Dell stuff is around $0.54 per share so selling them would be a huge cap. gain.  The other has not gone up that much and would be the one I would sell except it is spinning of $5k in dividends per year so why sell?  The other stuff is a collection of cats and dogs (mostly dogs) that have resulted from mergers and other company ownership changes that are now different from where I started.  The gain on these is over 100%.  The other dogs are sleeping but are not worth much so selling them will not be as painful.  Think MOT, KKS, GE, WMT, CD, etc.  Yawn.   :

Have you thought about at least hedging some of these outsized exposures? Buying some puts or a costless collar might be a good idea.

 

[SteveR]

No wonder you cant sleep!

CFB, Thanks for the sleeping pill update. So far so good on Lunesta 3mg.

Brewer,

If you think my current situation is bad..........when I married my second wife I started looking deeply into her 401k and found that she had been buying nothing but company stock....for 25 years.

The first thing I did was start moving into different funds but the plan was very limited so my choices were not very good. Long story short...shortly after I moved about 30% of her stock to a fund the company stock took a 50% drop and has not come back yet.
Add to that our combined stock options (we both worked for the same company) and my 401k holdings.

Needless to say... the options are still underwater and are starting to expire so there is little hope I will get a dime from them. The 401ks were both rolled over into IRAs and there is no company stock in them and I have most of my diversification in them and my current 401k.

My current wife...she had 100% of her 401k in a stable income fund. :

Not anymore.

As for puts and calls and collars.....I might look into that once I educate myself on them a bit. Thanks for the input.

 

[Nords]

The other stock was from my stock options on an option that experienced 3 splits within a couple or years.  I bought long and still have some of them left. 

Lemme make sure I understand the issue here.

You've accumulated a relatively huge amount of paper worth in a relatively small number of stocks. You're reluctant to sell because of long-term cap gains tax issues.

You believe in the theories of diversification & rebalancing (you're just currently a lapsed practitioner unless it can be done in a tax-deferred account).

You're not selling because you don't want to pay taxes but you're contemplating spending money on options strategies to hedge some of the downside.

In other words, aside from the dividend payers, you haven't really benefited (other than on paper) from owning the growth stocks. Even from my volatilty-embracing perspective you're facing a stunning level of single-stock risk. This reminds me of the Nifty Fifty investors, or the ones who felt that Xerox (GE, Microsoft, Berkshire Hathaway, Enron, etc) was the only stock you really needed to own. The risk you're facing is much higher than any further growth that could be expected from the stock, and you have plenty of downside.

Why not harvest some long-term cap gains, even if the cost basis is pennies, up to a commission break or a tax bracket? Rebalance & diversify into unloved sectors or QQQQs or small-cap value indexes. There are other tax issues to consider in the sell calculation, but even skipping a Roth conversion or paying a $30 commission seems like a good deal compared to the amount of money you're at risk of losing.

Unless you don't think you'll miss it...

 

[SteveR]

Lemme make sure I understand the issue here.

You've accumulated a relatively huge amount of paper worth in a relatively small number of stocks.  You're reluctant to sell because of long-term cap gains tax issues.

You believe in the theories of diversification & rebalancing (you're just currently a lapsed practitioner unless it can be done in a tax-deferred account). 

You're not selling because you don't want to pay taxes but you're contemplating spending money on options strategies to hedge some of the downside.

The options were ISOs and were exercised and the shares held long. I have sold off a lot of them but still have some left. These are not my real issue. I have AMT credits to cover some of the tax on the sale of these shares.

In other words, aside from the dividend payers, you haven't really benefited (other than on paper) from owning the growth stocks.  Even from my volatilty-embracing perspective you're facing a stunning level of single-stock risk.  This reminds me of the Nifty Fifty investors, or the ones who felt that Xerox (GE, Microsoft, Berkshire Hathaway, Enron, etc) was the only stock you really needed to own.  The risk you're facing is much higher than any further growth that could be expected from the stock, and you have plenty of downside.

The issues for me are:
1. Too much tied up in a single stock or two and no real growth potential for now.
2. Taking a serious tax hit (marginal rate is 30%) upon the sale of these. Why give the money away if I don't have too?
3. Want to create some additional upside potential over the next 5-10 years to fund future income from these assets.

Why not harvest some long-term cap gains, even if the cost basis is pennies, up to a commission break or a tax bracket?  Rebalance & diversify into unloved sectors or QQQQs or small-cap value indexes.  There are other tax issues to consider in the sell calculation, but even skipping a Roth conversion or paying a $30 commission seems like a good deal compared to the amount of money you're at risk of losing.

Not worried about commissions. The issue is one of giving up a lot in taxes due to my current income level. After ER my income will be lower and the resulting tax bite will also be lower. If comes down to a balance between knowing I will "lose" a large chunk to taxes now....vs.....the "potential" gain by moving what is left after the tax payment. This assumes that these major companies are still around in a couple of years (which I believe to be very likely). My real down side is if these companies tank and I lose all my current paper gains. Life is not without risk.

Unless you don't think you'll miss it...

I would indeed miss it. I am FI but losing $300k-500k from this account would put a serious dent in my FI.

My plan is to sell off some of the high flyers along with the dogs to balance out some of the LT gains but only after I ER at a lower tax rate. If I am missing something I would appreciate a swift kick in the rear.

Thanks for the advice...it is welcome.

 

[brewer12345]

I must be missing something because if these arre LT holdings, I would expect the tax rate to be 15% plus state taxes on the gains, not 30%.

If you plan on selling in a couple of years, for heaven's sake buy some protective puts or put on a collar. If you want the gory details I will be happy to type them out.

 

[Rich_by_the_Bay]

The fixed income buffer that makes me feel comfortable defines my allocation to fixed income securities. So the answer is yes...

Sounds like you are both fortunate and wise.

I plan a buffer fund of about 5 yrs income (MMF, bonds, CDs, or maybe a 5 y annuity), with the rest in investments at whatever ratio makes my TOTAL assets come out about 50/50.

Like you I like the idea of having enough cash that I can avoid withdrawing from stocks even for years if there is a prolonged bear market.

 

[Nords]

I must be missing something because if these arre LT holdings, I would expect the tax rate to be 15% plus state taxes on the gains, not 30%.

Yeah, what he said. I don't think even Gates or Buffett pay more than 15% on long-term cap gains.

Regardless, I'd hate to have my investments driven by that sort of tax planning. Even if you had to pay the 30% rate you're diversifying and rebalancing away from volatility that could be twice or even (*shudder*) thrice the tax rate. Did Enron teach us nothing about single-stock risk?

Essentially for every trading day between now and the year your ER income drops to the 10-15% income tax bracket and you start selling, you're planning to put TH's paper bag over your head and run across a four-lane highway. Nothing bad has happened yet. Nothing bad may ever happen, but it only has to happen once...

I fancy myself a guy who tolerates high volatility in an aggressive 100%-equity portfolio, but I think we've just crowned a new risk-embracing king.

 

[astromeria]

I'm having flashbacks to a former boss who waited to sell her big wad of company stock until she retired to Florida. Well, the stock melted down while she avoided those big bad California taxes. And then she was laid off.

 

[kbst]

Thanks to everyone for the advice. I will take it into account and then ask more questions.

Thanks,
kbst

BUM, just got back. I always look for you at Food Lion, gotta eat.  I'm at an advantage as you don't know what I look like. I go down ~ every other weekend.

 

[BUM]

I always look for you at Food Lion, gotta eat. I'm at an advantage as you don't know what I look like. I go down ~ every other weekend.

I'm getting that "Uh, oh feeling". How do you know what I look like, or do you just eyeball all the handsome beachbums on isle 5

PM me and maybe we can bust a sandwich.