Ready to leave, need clarity with withdrawals/investments

[steady saver]

Okay. We've done analysis by paralysis until I'm ready to cry "uncle!"
My DH and I had hoped to retire next summer and "wouldn't a package be great?"...well, that time has come. Packages are being offered so we had to get nitty gritty about the reality of pulling the plug.

Oh my.

We have beat this dead horse to death.

Bottom line. FIRECALC wavers between 95% and 100% but our anxiety was high when new factors came in to play (for example, we forgot to account for income tax in our spending initially). We're past that now. My DH is just completely done with the corporate life. He'll be 55 next year and, of course, if he worked 3 more years then all would be rosier financially. But it makes no sense to either of us to walk away from a generous severance, even if he is walking away from future bonuses and better health insurance benefits, etc. because he is SO READY to do something else, (perhaps even something that earns a bit of money)!

So now the questions are about how to best manage the money we'll have. We have 8 months until he pulls the plug and we need to be clear on our options and decisions.

Background info:

1. Our 401K at work is through Fidelity.
2. DH will turn 55 in the year he retires, but will be 54 on the day he retires.
3. We have money in 401K, individual investments, money market, too much in checking account. That's a dumb reality of just not having used it to work for us.
4. We have a pretty good pension. Still, it provides a little over half of our monthly expenses. That will need to come from withdrawals from our investments.
5. I've ironically started a business this year and it is slowly growing. Not a lot of income yet, but I love what I do and the need is there, along with the clients willing and able to pay for my services. I don't want to plan on having to work all the time, though, while my best friend is retired...

Questions:

1. Does it make sense to roll the 401K into an IRA to prevent a penalty? Will he get the 10% penalty if he's turning 55 the same year he leaves?

2. Should we leave enough money in the 401K for cash withdrawals to supplement the pension until he's 59 1/2 since my (vague) understanding is that those withdrawals don't carry a penalty?

3. Our return on the 401K investments has always irritated me - it's always been ridiculously low. Our personal investments have done way, way better. That's why I'd like to roll them over into an IRA that I can control. Question: now I have to figure out my allocation and I'm so burned out from even deciding to pull the plug that my mind isn't thinking straight or strategically. No question there. Just a whine. That's where I'm going to have more questions as we go.

Okay, I needed to at least get that out there. I know I need to provide more details and I'm painfully aware that my questions may not even be on target. I'm literally brain dead right now, gee. But it's a start for now and I know this forum is a place to go for good ideas and varied advice. Also wanted to share the good news with a group that "gets it". We are SO EXCITED!! We've been so busy belaboring the whole thing, and now it's time to back up and celebrate this long anticipated event!!

Thanks!

 

[Senator]

Congrats!

I cannot answer all of the questions, but your DH may be eligible for unemployment benefits after the severance runs out. Check into that.

 

[Sunset]

Questions 1) and 2) seem to contradict themselves or are not clearly expressed.

You can roll a 401K over to a rollover IRA (really just a separate IRA from your normal IRA) , and as long as it's a direct rollover to the IRA brokerage and (you don't get paid the money) there is zero tax and zero penalty.

You need to check into his 401K SPD about withdrawals, if they are allowed or not , and can you rollover some and leave some to withdrawal later.
Honestly the age you leave the work could have a big effect on touching the 401K.

The 401K might be in expensive funds, which is why it has done poorly, along with fees.

 

[pb4uski]

.....Questions:

1. Does it make sense to roll the 401K into an IRA to prevent a penalty? Will he get the 10% penalty if he's turning 55 the same year he leaves?

2. Should we leave enough money in the 401K for cash withdrawals to supplement the pension until he's 59 1/2 since my (vague) understanding is that those withdrawals don't carry a penalty?

3. Our return on the 401K investments has always irritated me - it's always been ridiculously low. Our personal investments have done way, way better. That's why I'd like to roll them over into an IRA that I can control. Question: now I have to figure out my allocation and I'm so burned out from even deciding to pull the plug that my mind isn't thinking straight or strategically. No question there. Just a whine. That's where I'm going to have more questions as we go. ....

On leaving money in the 401k vs rollover to an IRA, does the 401k plan offer a stable value fund? If so, what rate does it pay? If the plan offers a stable value fund that pays a decent rate of interest (say, 1.5% to 2%) then you may want to stay because you can not get a stable value fund in an IRA.

Does the 401k plan offer any index funds? If so, what are the expense ratios of those funds? If the plan offers some index funds that have decent ERs you could invest in those and then balance things out in your IRA and other investments.

Does the plan allow penalty-free withdrawals to those who leave in the year that they turn 55? (many do, some don't). Also, if it does, what restrictions are there on the frequency and amounts of withdrawals?

If your taxable account funds are sufficient to carry you until he reaches 59 1/2 and can take penalty free withdrawals and the 401k plan does not offer a stable value fund then to me keeping the 401k doesn't make a lot of sense.

 

[Bamaman]

Many companies' 401K's are open to just a few different type of investments. They often protect employees by offering mutual funds that are "middle of the road" and not really the best mutual funds. If you had been offered Fidelity's full supermarket of funds, your 401K would possibly be much larger today.

My Megacorp had been paying Fidelity's 401K fees throughout the years, and they require all 401K's to be liquidated and rolled over upon retirement. Mutual fund fees really do mount up over a 30 year time period.

If your husband has to withdraw 401K funds prior to 59 1/2 years old, he'll probably be looking at 10% penalties and paying income taxes on those funds. It could cost you as much as 40% to do early withdrawals.

I too found myself in your husband's position, however I was 58 1/2 years old. And I was able to draw unemployment which helped greatly. I was also very thankful to have had a retiree healthcare savings account that covered my health insurance premiums all but 3 months before I got Medicare at 65.

You've not given many details, and a really good defined pension is virtually a thing of the past. My question is do you have the cash flow to get you to 59 1/2 without tapping into any IRA Rollover accounts?

 

[Senator]

1. Does it make sense to roll the 401K into an IRA to prevent a penalty?

In general, it is nearly always wise to rollover a 401K to an IRA. You will likely have access to more funds, and can have a more flexible account. Most likely lower account fees.

Your money will be in fewer places. Less administrative work in regards to tracking, rolling over to yet another IRA, beneficiaries, etc. Higher balances at other institutions gets you better benefits.

You can begin to move funds to a Roth as your tax bracket allows. A Roth has many benefits.

There are benefits to waiting. If you have an IRA with after-tax funds in it, and you want to roll it over to a Roth, co-mingling the 401K funds dilutes your after-tax ratio.

Possible some asset protection benefits, as 401K funds may be out of reach of creditors. Some IRA are too.

 

[steady saver]

Thank you all for your responses to my somewhat vague post.

Here are some numbers that will help clarify things:

1. Fidelity account:
401K - $1,268,000
Individual account, stocks - $754,000

2. Another stock portfolio - $48,000

3. Random DRIPS - I need to check; I'm out of town now but not more than $20,000 I don't think

4. Remainder in college fund account - $23,000

5. Severance will be $387,000, before tax

6. Pension, monthly:$5,974 Lump sum: $204,405

7. Social security in 2029 - $1,825 a month

8. Current cash: $229,000

9. Money Market: $69,900

Most importantly, our expenses:

1. College expenses remaining: $80,000

2. Monthly expenses (now): $12,500

Other pertinent information:
~We will have access to health insurance and that additional cost we'll have to pay is included in the above monthly expenses.
~We have a home in the city and a small fixer upper farm. It is having these two places (and crazy high property taxes in the city) that make up the bulk of our expenses. We are otherwise not big consumers.
~No mortgages; all property paid off
~We anticipate that in another 10 years we'll have decided which property to sell. We just can't make that decision now. Maybe we'll sell it all and do something completely different
~We're not historically big travelers (thus, the farm). We're homebodies for the most part
~I've started up my own practice which is bringing in modest income at the moment but I'm choosing not to include that here b/c I can't project future income on it. And I may decide at some point to close shop and raise chickens. Or get the travel bug...

Questions:

I am HAPPY to hear any thoughts on strategies for managing and moving this money for withdrawals now. Earlier in our marriage I was very much on top of our finances but too much going on these past few years and I'm afraid I've neglected the strategy part. I just need a leg up and a direction to go in from here. We need to make decisions about where to put our money, which money to use for cash until DH turns 59 1/2 (again, he'll be 54 when he retires but will turn 55 that same year), and I know I need to revisit AA b/c we are heavily invested in equities. I always loved investing but have not done much of anything in that arena in the past several years.

Thank you all for taking time out of your busy retirement schedules to offer any guidance. I'm just trying to get back in the groove of thinking this through.

 

[steady saver]

Forgot to add:
We have quite a few options in our 401K - including index funds but I didn't see any stable value funds. My comment about not liking our options earlier is that I just have always enjoyed individual stocks myself.
Does it make sense to keep even some money in the 401K?
I need to find out if we can make penalty free withdrawals from the 401K since he'd be 55 in the year he left.
We don't have any IRAs.

 

[pb4uski]

You're fine. Between your severance, cash, MM and stocks you have plenty to carry you until you have penalty free access to your tax-deferred accounts. Plus, once your severance is done, your income may be low enough to do some Roth conversions at a low tax rate.

As you may know, qualified dividends and long-term capital gains are tax-free if your taxable income is in the 15% tax bracket or lower. You may want to do a tax calculation on tax-rates.org income tax calculator and I think you will be pleasantly surprised at the result.

Also check out https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement .... you'll most likely want to put your fixed income allocation in your tax-deferred accounts and equities in taxable and then equities as needed in tax deferred to get to your target AA.

The nice thing about being retired is that you'll have plenty of time to sort these things out an optimize your portfolio.

 

[GravitySucks]

I left w*rk under similar circumstance.
At age 54.5 I was able to access the 401k under the rule of 55. Check your plan SPD for any restrictions on disbursements. Mine is quite flexible.
What seems to be working for me is I left an estimated 5 years expenses in the 401K and transferred the rest to a FIDO IRA. That keeps me in check on withdraws and keeps my spending in line (Looks like I'll make through another June without buying a sailboat.) while giving me penalty free access to funds.

Looks like you have this pretty well thought out.
Best of luck.

 

[steady saver]

Pb4uski - If I were to withdraw $150,000 each year from my 401K (assuming there's not 10% penalty), wouldn't I still be in the 28% tax bracket? How do I minimize my taxes when figuring out where to put the money so that I can then withdraw it when needed?

Senator - your comment made the consider staying at Fidelity rather than putting some of that money at Vanguard. I'm still pondering that one.

Gravity Sucks - my husband wants to know what kind of sailboat you'd buy =D. Also, I appreciate your thoughts. It seems simple to leave 5 years of money in the 401K and transfer the rest to an IRA. I guess my only caveat is that I "think" I want different options in that 401K. But realistically, I likely don't need more options for that money. That is "safe" money that needs to be, well, safe...or at least safer than individual stocks. What mix of funds do you use in your 401K?

Thanks to everyone.

I need to figure out AA. How would you suggest I begin to try to determine the best AA for us at this point? And how do you divide that up amongst investment vehicles. Right now I just have cash, MM, individual stocks and 401K.

I guess I need to decide which money to use for that 5 years prior to 59 1/2.

 

[RobLJ]

Before rolling over the 401k into an IRA (which usually is preferred for the reasons other posters state), be sure to do what Gravity suggests, to make sure DH will not qualify as "retired" and able to withdraw from his 401k without penalty.
One factor in my early semi-retirement at 57 (I work about 15 hours online for my former employer) was that I qualified to withdraw from my 403b, under their "rule of 85" (i.e., age + years of service). I have not yet needed to to withdraw funds, but can whenever needed. At 59&1/2, I'll consider moving it to an IRA but I'm lucky in that it is a Fidelity Brokerage account in which I can invest in almost any Fidelity mutual and many other mutual funds.
If he does not qualify for retirement, take the money and run and consider moving it to an IRA. There is also the possibility of early withdrawals under the 72t rule, although that is filled with minefields if you do it incorrectly.

I left w*rk under similar circumstance.
At age 54.5 I was able to access the 401k under the rule of 55. Check your plan SPD for any restrictions on disbursements. Mine is quite flexible.
What seems to be working for me is I left an estimated 5 years expenses in the 401K and transferred the rest to a FIDO IRA. That keeps me in check on withdraws and keeps my spending in line (Looks like I'll make through another June without buying a sailboat.) while giving me penalty free access to funds.

Looks like you have this pretty well thought out.
Best of luck.

 

[pb4uski]

Pb4uski - If I were to withdraw $150,000 each year from my 401K (assuming there's not 10% penalty), wouldn't I still be in the 28% tax bracket? How do I minimize my taxes when figuring out where to put the money so that I can then withdraw it when needed?....

Yes, if you withdrew $150,000 from your 401k you would be in the 25% tax bracket and your tax would be ~$24k.

But, let's say your taxable investments earn $17k a year in qualified dividends and you withdrew $78k from 401k..... your tax bill would be ~$8k... 0% on the $17k in dividends and ~10% effective tax rate on the 401k distribution because some of the distribution is offset by deductions and exemptions and some is taxed at 10%. Then take $55k out of your taxable accounts to get the $150k you want to spend. By using some of your taxable funds you save $16k in tax... not chicken feed.

Or another strategy that I have been using over the last several years is totally living off taxable funds (I retired at 56) so our income before Roth conversions is only qualified dividends and long-term capital gains (0% tax) and doing Roth conversions to the top of the 15% tax bracket and I pay ~10% effective on those Roth conversions. IMO slightly better because I'm shifting money into a Roth where the earnings will never be taxed.

 

[pb4uski]

....I need to figure out AA. How would you suggest I begin to try to determine the best AA for us at this point? And how do you divide that up amongst investment vehicles. Right now I just have cash, MM, individual stocks and 401K. ....

Your target AA is a function your your risk appetite. Around here, retiree AA tend to range from 70/30 to 30/70, though there are some outliers. 50/50 and 60/40 are quite popular.

My target is 60/34/6 stocks/fixed income/cash. In my case, my taxable accounts have my cash and the remainder, along with our tax-free accounts (Roths and HSAs) are in stock (mostly Vanguard Total Stock and Total International Stock). My tax-deferred accounts hold our fixed income investments and some stock to get us to our AA. The cash, along with dividends on taxable accounts, could cover 2-3 years of expenses.

Each year, I replenish the cash back up to 6% by selling some stock in our taxable accounts which generates LTCG which are tax-free and then do a Roth conversion to the top of the 15% tax bracket and then finish rebalancing within my tax-deferred IRA.

 

[steady saver]

RobLJ, thank you! Yes, we'd like to avoid the 72T if possible.

pb4uski, thank you for your thoughts. I woke up early this morning thinking of this and that's NOT something I want to be doing once DH is retired!

I'm guessing that we'll be able to make that penalty free withdrawal from our 401K since he'll be 55 in the year he quits and the company benefits regarding things like that have historically been generous. But we will talk to our Fidelity rep associated with the company tomorrow, and HR, to find out for sure.

Otherwise, I do like your thoughts about using our cash, MM and stocks for the $ we'd need until DH turns 59 1/2. If we CAN make those withdrawals from the 401K penalty free, would you leave the money in there and make withdrawals from there? Or would you move it into a FIDO IRA? Or move part of it into a FIDO IRA? And if we can't make those withdrawals from the 401K penalty free, then how would you suggest structuring that cash? I've hated having over 200K in a checking account - makes me cringe to think about it - but now quite frankly if we need that cash I'm glad it's not stuck somewhere that's harder to get to.
Last question (for now). We are currently still contributing 7% of pretax money to the 401K. Should we keep doing that? I'm guessing that if we can't make penalty free withdrawals, then we should stop doing that and use that for cash. But if we can, then I'm thinking it makes sense to continue doing that. What do you think?

I appreciate all of the handholding with this group. I know some of my questions sound basic but I just want to get this as right as I can.

Is there anything else that you can think of off the top of your head that we might want to discuss with both our employee benefits person or Fidelity tomorrow?

Thank you all!

 

[steady saver]

As for AA, we've always been fairly aggressive. (like I think about 93/7). I know I need to rethink that!

I'd like to always have some money for individual stock picking. Only with money I feel comfortable taking that kind of risk with but, quite honestly, it's that stock picking money that's making retirement a more possible event at this time. And I've always enjoyed doing so in the past. But for the rest, yes, we need to rethink our AA. Even within our 401K.

 

[pb4uski]

Since your DH's 401k doesn't seem to have a stable value fund, I would roll it over to an IRA (unless you get sued frequently and live in a state that does not protect IRAs). Even if he can take withdrawals I would live off taxable and do Roth conversions to the top of the 15% tax bracket. I'm guessing that you could convert ~$75k a year and only pay 10% tax so you can extract a good portion of your tax-deferred money at low tax rates which will reduce your tax bill once SS starts.

Our dimensions are relatively similar and that is what I am doing but YMMV.

If you rollover the 401k to an IRA you can address your post working AA at that time.

I would continue doing 401k contributions as long as you are in a high tax bracket, I'm guessing until your severance ends.

 

[Slow But Steady]

Something sounds out of balance with the pension you mentioned.

I'm older than you, and my lump sum of $376,000 would get me a single life payment of $2500 per month or 100% joint/survivor of about $2,000 per month.

You may want to verify your numbers. It sounds to me like it might be too good to be true.

 

[GravitySucks]

Gravity Sucks - my husband wants to know what kind of sailboat you'd buy =D. Also, I appreciate your thoughts. It seems simple to leave 5 years of money in the 401K and transfer the rest to an IRA. I guess my only caveat is that I "think" I want different options in that 401K. But realistically, I likely don't need more options for that money. That is "safe" money that needs to be, well, safe...or at least safer than individual stocks. What mix of funds do you use in your 2.

Probably one that would be at the bottom of one of the Finger Lakes by August. Those wineries are simply beautiful.

I did not consider Roth conversions like pb4uski is discussing, so that may make this moot but:

I draw up to the 15% tax bracket from the 401k and pull anything above and beyond from after tax accounts. My overall AA is 60/40 but the 401k is 40/60. Next year I might move the 401k AA to 20/80 keeping the overall at 60/40 as the risk is not worth the reward.