OMY (sort of)... Asking advice

[rmcelwee]

I have OMY before I turn in my 90 days notice (55yo). My golden handcuffs (250K in retirement benefits) will keep me at my j*b of 32 years until then. My spreadsheet says I will make $3k per day for the 178 days I have to work until then (normal pay is $100k per year).

I have:
$1.3M in a 401K fixed fund paying 3% ($39K per year)
600K in leveraged ETF's (normal brokerage account 3xS&P, 3xDOW, 3xQQQ)
100K HSA in Vanguard S&P (will use this for healthcare)
0 dependents/heirs (except my wife)

Our normal household expenses are around $40k per year and I don't expect that to change (we are FRUGAL). This could easily be covered by our 401K. BUT, our game plan is to stay in the bottom two tax brackets ($74k) for 0% taxes and sell off our 3x ETF's for expenses to get in something a little safer (SPY?). I'll probably adjust us to a 60/40 and try to stay there.

Question #1 - Does this sound like a good game plan.

Question #2 - Does selling a 3xS&P and moving to SPY qualify as a sideways movement?

Question #3 - We have always talked about going to a fee only adviser when we were in our last year BUT you guys would probably do just fine. Do I need to visit one or just use GOOGLE?


Edit:
1) I believe staying below $74K (in profits on long term investments) means 0% taxes. I would have big gains on the 3x ETF's.
2) My employer will pay $1,000 per month for healthcare until 65 if I stay another 15 months (until 55). That is where my golden handcuffs come in to play.

 

[Montecfo]

Congrats! It should be an interesting year.

You appear to have plenty of assets.

I would prefer to sell the 3X ETFs now. Those are for day-trading, not long-term holding. But you probably have gains in them that make it costly.

Managing your taxes to a low level is a great goal if you are not sacrificing lifestyle. But what is strategy for 401k? Have you done any rudimentary tax estimates which contemplate RMDs SS, etc? Does the retirement benefit include health insurance? What is strategy if this falls by the wayside as many have?

Seeing a fee only FA is worth the peace of mind. Having said that, you will likely get some negative feedback on the portfolio composition. Do you want that or more general info like which funds to use first, SS strategy, Roth strategy etc? Choose.accordongly.

Asked differently, what perspective would you be seeking from an FA?

Overall, well done!

 

[DrRoy]

Question #2 - Does selling a 3xS&P and moving to SPY qualify as a sideways movement?

No.

 

[Time2]

I think you have plenty. I suspect the 3x funds have done great and you will have taxes due when you sell them. But if you don't over due it, you can pay 0% tax on them.
You mentioned $74k, I'm not sure where that came from, as I understand it, you can liquidate $80k of LTCGs. So if you have 50/50 split, LTGCs and your original investment, you could pull out $160k. You also get the $24,400 standard deduction and $8,100 HSA deduction, so there's a little more room for income. Put some numbers in Dinkytown tax calculator and see what you can do.
https://www.dinkytown.net/java/1040-tax-calculator.html
pb4uski seems to be on top of this tax planning, maybe he will chime in and
give head you in the right direction. It may help if you can come up with percentages of LTCGs vs your money in the 3X funds.

 

[rmcelwee]

I would prefer to sell the 3X ETFs now. Those are for day-trading, not long-term holding. But you probably have gains in them that make it costly.

general info like which funds to use first, SS strategy, Roth strategy etc? Choose.accordongly.

Yes, I will have gains in the ETF's. I would ask the FA about taxes and which fund (401K, roth, regular brokerage, HSA) to draw from first.

 

[rmcelwee]

Honestly, I really don't need more income. We don't spend much and if we did, it would not make me happier. I like a simple life.

 

[RunningBum]

So, right now you are at 35/65. That's pretty conservative, but the 3% guaranteed return seems too good to pass up. So you've juiced up the 35% equity part with 3x. I don't know enough about how much more volatile they are, and whether that's a sound choice.

Honestly, I really don't need more income. We don't spend much and if we did, it would not make me happier.

Where is this income coming from? Dividends on the 3x funds? I'm assuming you haven't been tapping the 401K yet, or is that your plan once you retire? Is it accessible to you before age 59.5?

Question #2 - Does selling a 3xS&P and moving to SPY qualify as a sideways movement?

Qualify in what respect? If you're talking taxes, you definitely owe cap gains tax upon selling those funds. I don't think wash sales are an issue for you, but if it is, I don't know whether they'd be considered essentially the same. If you're talking about your AA on your portfolio, I don't consider them the same as the 3x funds are more volatile.

Question #3 - We have always talked about going to a fee only adviser when we were in our last year BUT you guys would probably do just fine. Do I need to visit one or just use GOOGLE?

Your call. The quality of answers you get here is very related to the quality of questions you ask. Try to avoid vague questions like #2 above. A paid FA might do better at identifying the questions you should be asking. That would be a good one. A bad one might just steer you to investments they get a commission on. Or an FA might totally skip over issues they aren't familiar on, perhaps like tax and withdrawal strategy.

I just saw your edit additions.

1) I believe staying below $74K (in profits on long term investments) means 0% taxes. I would have big gains on the 3x ETF's.
2) My employer will pay $1,000 per month for healthcare until 65 if I stay another 15 months (until 55). That is where my golden handcuffs come in to play.

1) Be aware that LTCGs are only at 0% taxes to the extent that all other taxable income, minus deductions, stay under $80,800.

2) If you really can keep your income low (under $68,960 for 2021), you can qualify for an ACA subsidy on healthcare. This might remove those handcuffs. I suppose they'll give you that money whether your insurance costs you $10 or $2000. Just think of it as a $120K retention bonus. You say you don't need more income. If that's true, why continue to work? Go back to this statement you made:

Honestly, I really don't need more income. We don't spend much and if we did, it would not make me happier.

If that's true, why stay on to make money you apparently don't need? Have you run FIRECALC to see how you'd fare if you turned in your resignation today? A lot of people focus on those golden handcuffs as a goal, but IMO you should look at when you have enough, with a good buffer, to safely retire.

 

[rmcelwee]

So you've juiced up the 35% equity part with 3x. I don't know enough about how much more volatile they are, and whether that's a sound choice.

Where is this income coming from? Is it accessible to you before age 59.5?

You say you don't need more income. If that's true, why continue to work?

The 3x funds are volatile and high fees but make good returns in bull markets. Yes, I'm 35/65 but the 3x makes it more like 66/33 if you catch my drift.

I'm going to use the 55 rule on 401K's to access any money I need if I don't choose to live on the 3x funds.

I lost my original post (night shift and Southern Comfort caused me to close the window before I hit "submit") where I said I would hang around for the benefits that I EARNED. I cannot in good conscience let them keep my $250K handcuffs. My regular salary + my retirement benefits = $3k per day for the 178 days I have to work. No way I am going to leave that on the table.

 

[pb4uski]

Paying $0 taxes is an unwise goal.

From when you ER at 55 until when any pensions or SS start, you have a unique opportunity to be in a low tax bracket so you should use that opportunity to at a minimum do $0 cost LTCG or better yet low-cost Roth conversions from your tax deferred accounts.

In 2021, a married couple could have as much as $105,900 of qualified dividends/LTCG or as much as $25,100 of ordinary income and $80,800 of qualified dividends/LTCG and pay $0 tax. Or if you had $106,150 of ordinary income (for example Roth conversions) you would only pay $9,328 in tax... a very reasonable 8.8% of the conversion amount (a blend of 0% due to being offset by the standard deduction, 10% and 12%).

You might want to use that LTCG headroom in the first few years to sell off some of the 3x ETFs and reduce your downside risk on those gains... if you want to you could derisk even quicker by using the proceeds from those sales to buy some offsetting -3x ETFs and then later unwind the offsetting +3x and -3x ETFs and reinvest the proceeds in +1x ETFs. Or just sell all the +3x ETF and pay the 15% LTCG tax and consider it the cost of derisking your equity portfolio.

Once you are retired and SS is online what do you expect your marginal tax rate to be? Many people do Roth conversions to the top of that marginal tax bracket. It is better to pay now vs pay later because you avoid taxes on the future growth of the taxable account funds used to pay the taxes on the conversions so it is better to start avoiding those taxes sooner rather than later.

OTOH, that fixed fund (stable value fund?) of 3% in the 401k is pretty sweet and probably can't be replicated outside a 401k so you'd probably want to keep some of that... but even if it became your 40% in fixed that would be $800k so you would still have $500k available to do low tax-cost roth conversions. Your current low equity allocation along with the fixed fund position you well to do a rising equity glide path to reduce sequence of returns risk by living off of $40k of 401k withdrawals each year and doing LTCG on your 3x ETFs.

 

[RunningBum]

I lost my original post (night shift and Southern Comfort caused me to close the window before I hit "submit") where I said I would hang around for the benefits that I EARNED. I cannot in good conscience let them keep my $250K handcuffs. My regular salary + my retirement benefits = $3k per day for the 178 days I have to work. No way I am going to leave that on the table.

Well, that's up to you. I try not to let my emotions get in the way of financial decisions.

I thought you were talking about a year+90 days, when you said I have OMY before I turn in my 90 days notice. I'd take my freedom from work rather than money I'll probably never spend, and have no heirs to leave it to. Half a year, not as bad. It would depend on how much cushion I already have, plus it could be useful if you need more for memory or dependent care in your later years.

 

[Scrapr]

I have a question on your 3x accounts. How did you feel in March when the market tanked? Did you change any allocations? Or just hold?

I would have been looking for a bridge at that point.

 

[pb4uski]

I dunno. If you had $100,000 in SPY at the end of February it was worth $80,606 at the end of March and if you has $100,000 in a 33/67 blend of SPXL (a +3x S&P 500 ETF)/VSGDX (Vanguard ST Fed Fund) at the end of February it was worth $81,296 at the end of March.

Down ~19% either way.

 

[rmcelwee]

I thought you were talking about a year+90 days

Yes, I only work 178 days in the next 455 days (12 hour shift work with tons of vacation). My last day is worth $250K because if I leave before then I will lose ten years of retirement healthcare and my pension. I don't want to go to work for another 15 months but I know I will regret it for the rest of my life if I leave that money on the table.

 

[rmcelwee]

I have a question on your 3x accounts. How did you feel in March when the market tanked?

I wasn't too worried about it. TQQQ dropped from $114 to $35 but I was pretty confident that it would come back. It is currently $166.

What keeps my wife happy (meaning what keeps me happy) is the 401K being all in stable value fund and paying 3%. If that stays at 3% or higher and the market flatlines for the rest of my life we would not starve (not talking inflation, COL, etc - just talking my emotional mindset on market fluctuations).

 

[bada bing]

Not making financial advice, just noting something you may or may not have considered. 3x (and 2x) ETF's are generally considered to be poor long term investments because of volatility decay. For the whole of 2020 you certainly didn't get 3x the underlying performance of the indexes, but you did assume 3x the risk. If you want to juice returns with leverage over a longer time frame, you'll do much better opening a margin account and directly levering your investments (and I'm certainly not advising leverage, just making an observation).

https://www.investopedia.com/articles/financial-advisors/082515/why-leveraged-etfs-are-not-longterm-bet.asp

 

[Bamaman]

You know, investment decisions are especially difficult when the stock market is at an all time high and interest rates are at an all time low.

I inherited substantial money that had been in ultra conservative funds for 10 years. I hate to think how much $ it would have been had the funds been invested in middle risk equities from 2008 until 2015.

 

[CSdot]

Congrats. I would stay 15 months for the $250,000, especially if my COL was $39K/yr.

Can you explain this part a little more: $1.3M in a 401K fixed fund paying 3% ($39K per year)?

Are you saying your entire 401k with a balance of $1.3M is in some sort of annuity paying out $39,000.00 per year or $3,250.00 per month? I ask because 3%, while a nice safe number, seems low compared to what the market has been returning for the past decade (or since the bottom fell out in 2008). Then again, we might be in for a down decade.

DJIA Annual Returns 2009 - 2019:

2019 22.34%
2018 -5.63%
2017 25.08%
2016 13.42%
2015 -2.23%
2014 7.52%
2013 26.50%
2012 7.26%
2011 5.53%
2010 11.02%
2009 18.82%

 

[rmcelwee]

Can you explain this part a little more: $1.3M in a 401K fixed fund paying 3% ($39K per year)?

I have $1.4M in my 401K and it is entirely invested in their stable value fund which is currently paying 3.0%. It was 3.79% at some point in the past few yeas. Could have been higher, I just don't remember what it was. Actually, I currently only have $1.1M in the fixed fund and $250k in a Vanguard S&P fund. That is an 18.5/81.5 AA (only talking 401K). I move about $50K each quarter from the S&P to Fixed so 15 months from now when I retire I will have all $1.4M in the fixed.

Since my other money is in such risky investments I don't mind the "small" 3% return.

I just looked and the fixed fund paid $93.15 yesterday (everyday) on my $1.1M. Some quick cross multiplication says if all $1.371M was in the fixed it would return $114.37/day or $41,746/yr. I am very comfortable with that.

I also looked at what my 401K has returned YTD = 5.39% It sucks that there is a fund in there that has paid 51% but I am ok with that. I've got a game plan and I am sticking to it.

 

[rmcelwee]

Not making financial advice, just noting something you may or may not have considered. 3x (and 2x) ETF's are generally considered to be poor long term investments because of volatility decay.

Thanks. The plan is to get out but I can't do it right now for tax reasons. I'll only work for two months in 2022 and do it then.

 

[Ready2Go]

My last day is worth $250K because if I leave before then I will lose ten years of retirement healthcare and my pension.

I understand the loss of retiree medical but what would be the loss on the pension. Just curious.

 

[rmcelwee]

I understand the loss of retiree medical but what would be the loss on the pension. Just curious.

I have to work until the age of 55 to receive a pension. It is only ~ $500/mth if taken at 55 and ~ $735/mth if taken at 65 but I still want it.

FWIW, the medical is $1K / mth from 55 to 65 for me and $700 for 2.5 years for my wife once I hit 65. There is some other stuff thrown in there but it doesn't add up to much.

 

[pb4uski]

Not making financial advice, just noting something you may or may not have considered. 3x (and 2x) ETF's are generally considered to be poor long term investments because of volatility decay. For the whole of 2020 you certainly didn't get 3x the underlying performance of the indexes, but you did assume 3x the risk. If you want to juice returns with leverage over a longer time frame, you'll do much better opening a margin account and directly levering your investments (and I'm certainly not advising leverage, just making an observation).

https://www.investopedia.com/articles/financial-advisors/082515/why-leveraged-etfs-are-not-longterm-bet.asp

It looks to me like over long periods that the 3x lags the index by about 1-1.3% so the actual average long term performance is 2.7-2.8x rather than 3.0x.

Rolling returns for 33% SPXL/67% cash vs 100% SPY

3 years.... 12.19% vs 13.39%... 1.20% difference... 2.7x
5 years.... 12.70% vs 13.69%... 0.99% difference... 2.8x
7 years.... 12.67% vs 13.65%... 0.98% difference... 2.8x
10 years.. 11.94% vs 13.22%... 1.28% difference... 2.7x

https://www.portfoliovisualizer.com...llocation2_1=67&symbol3=SPY&allocation3_2=100

 

[rmcelwee]

It looks to me like over long periods that the 3x lags the index by about 1-1.3% so the actual average long term performance is 2.7-2.8x rather than 3.0x.

This is a 5 year chart of what most of my money is in. I don't like talking about it online because it usually ends up in an argument. Again, I am trying to get out of it but won't start for 13 months due to taxes. It is easiest to show a 5 year trend. This is vs the Nasdaq (100?). That huge dip doesn't make me nervous, but should, so I will get out.

 

[pb4uski]

I think you want to compare TQQQ to QQQ. I get TQQQ as being 285% of QQQ for the 5 years ended November 30, 2020 using Portfolio Visualizer.

https://www.portfoliovisualizer.com...location1_1=100&symbol2=QQQ&allocation2_2=100