What would you do? Early Retirement Strategy

[traineeinvestor]

Quote:

Originally Posted by Katsmeow The point is that for me I felt that having a no equities portfolio was way more risky than having a portfolio with equities.

+ 1

I lose more sleep worrying about inflation than I do worrying about market volatility (with the caveat that inflation is generally higher where I live than in the US and I am planning for the money to last 50 years).

For that reason, most of our savings are either in real estate or equities.

[daylatedollarshort]

Quote:

Originally Posted by Debinnov a Well the $90K spending is pretax, correct? So if I have $2M and $500K of that will be taxed (401K) and the rest is tax free withdrawals - and then social security will come a few years down the road which will be taxed, what would you use as the tax percentage to use in the scenarios? I usually put in 20% to be safe but if alot of the withdrawals have already been taxed, can I lower that 20%? To what number? Deb

How low you can go depends on your individual tax situation, but there are many threads here and other ER forums on how to pay zero taxes in ER and semi-ER.

I don't know the exact number for other households, but the number I see kicked around is that many households with a taxable income of $50K or less will not pay any federal income tax at that level because of tax credits, exemptions and deductions available to the middle class and below. Add in capital gains and Roth strategies, and that can help, too.

$90K - $20K in ACA subsidies - $18K in state and federal income taxes = $52K left over. So if you can figure out how to get your MAGI low enough to not pay much if any in income taxes or much in your portion of health care premiums, you don't end up with that much difference in leftover spendable income than if you start with a much higher MAGI and don't do any tax or ACA planning.

Most posters here are Boglehead followers and are big on equities and mutual funds, and are looking for higher returns on their portfolios than I am willing to settle for. I have been more influenced by Zvi Bodie, who more a fan of TIPS and I bonds for inflation protection -

http://www.zvibodie.com/

Added -

There is a good, short summary of his investing style here -

http://www.aarp.org/money/budgeting-...etirement.html

[seraphim]

Just for starters, Vanguard has been mentioned several times; their managed funds Wellington and Wellesly, but also their total stock and bond funds. Our retirement portfolio is 60% equities, in Vanguard funds (vTSAX and VTIAX international). They are inexpensive, we'll diversified, and take no maintenance other than occasionally rebalancing. Look into them.

Also look to Morningstar.com for a free account. They don't sell stocks and bonds - only data - but the free account provides tons of information, tools and they have a free classroom which walks you through stocks bonds and funds in short five minute online tutorials. It gets as advanced as you want it to be.

Just a couple of thoughts. Welcome to the club.

[robnplunder]

I'd keep between 30 - 50% of my asset in equities to protect my investment but still beat inflation. That will give me more spending budget and live a little in my retirement.

[Katsmeow]

Quote:

Originally Posted by Debinnov a Thanks for the great explanation! I know that everyone is right about that and I will definitely have at least probably 30% or 40% in some sort of equity funds.. Do stock index funds count as equities or are they too "tame"?

Stock index funds definitely count as equities. Many people have all their equities in index funds. I have the vast majority in index funds but do have a relatively small part of our portfolio in Wellesley which is a managed fund, that has about 1/3 equities in it.

[ShokWaveRider]

Is it wise to go All In (40 - 60% depending on allocation) into equities right now when the stock market is at an all time high?

[RE2Boys]

If it's adding to your equity allocation, I'm a chicken and would dollar cost average in over some period of time.

If it is money already in equities but your changing funds or companies, I'd go all in ASAP.

[ShokWaveRider]

Quote:

Originally Posted by RE2Boys If it's adding to your equity allocation, I'm a chicken and would dollar cost average in over some period of time. If it is money already in equities but your changing funds or companies, I'd go all in ASAP.

Based on OP scenario I am making an assumption NONE is currently in any equity (Perhaps the 401k), only CDs for guaranteed income. Please confirm. So I assume we are talking about a $2m lump sum at business sale (today for our purposes). If the stock market crashes between now and the sale of the business, that would be a different scenario.

[seraphim]

I think I'd invest in the equity portion of the allocation, but withhold a hefty portion of the fixed income in some sort of cash account - at least enough to cover several years worth of living expenses - in case of a recession. Then use any extra I may have for the buying opportunity of a recession.

So if we we were looking at a 60/40 AA (just for example), I might put 1.2 in low cost equity funds, 200k in a short term bond (investigate munis for any taxable accounts), and 800k in cash. When bonds drop after the QE, or should stock values plummet, there would be money left in the cash account - minus projected living expenses - to make some undervalued purchase.

Just another thought.

Side note on munis - I know there has been discussion of eliminating the federal tax benefit, but I really don't see that happening unless the house loses it's Rep majority. Even then... But funds like Vgs Ohio municipal fund still provides state tax relief for Ohio residents. Not sure what's available for your region, but it's at least worth researching. Good luck.


http://quotes.morningstar.com/fund/vohix/f?t=VOHIX

[RetiringAt55]

Quote:

Well the $90K spending is pretax, correct? So if I have $2M and $500K of that will be taxed (401K) and the rest is tax free withdrawals - and then social security will come a few years down the road which will be taxed, what would you use as the tax percentage to use in the scenarios? I usually put in 20% to be safe but if alot of the withdrawals have already been taxed, can I lower that 20%? To what number? Deb

The way I handle tax in FireCalc is to add it on to my spending assuming I am paying a certain amount of taxes based on SS and assumed RMDs. So if I assume 20% average tax rate (not marginal) for federal and state taxes, and $90K real spending, then the actual spending I enter on the first page of FireCalc might be closer to $110K. Is this correct?

My situation is similar to yours. We will have around $1.8M but we have a non-COLA pension which will help for a while. We are trying to do Roth conversions to get the RMD hit down. It sounds like you are in good shape as you do not have a high percentage in tax deferred.

[pb4uski]

The idea of including taxes in spending for Firecalc is sensible, but 20% is probably way too much. What I would suggest is inputting your expected no discretionary income in Taxcaster, then add IRA distributions until your income less taxes is equal to your annual spending, then use the IRA distribution amount as your annual withdrawal amount in Firecalc.

For example, in the example you outlined, if $30k is SS and you need $90k to live, the tIRA withdrawal would only be $101k rather than $110k (assuming no state taxes, both under 65, standard deduction, etc.) OTOH, if SS as $50k, then the total withdrawal would only be $98k.

I think the above approach works great if your only sources are SS, pension and tax-deferred accounts. If you have taxable accounts you have to make some adjustments to reflect the fact that most of any amount withdrawns are principal.

[daylatedollarshort]

I do see a lot of statements on needing equities for growth posted here. Perhaps I am wrong or I am missing something, but I believe bonds generally have real returns after taxes and inflation as well, perhaps at a lower long term real return, but without the big peaks and valleys -

http://www.thornburginvestments.com/pdfs/TH1401.pdf

It seems from most papers I have looked at stocks have higher returns with greater risk, but long term bonds, as in a bond ladder, would not lose real returns to inflation. Is this not true?

[Katsmeow]

Quote:

Originally Posted by pb4uski The idea of including taxes in spending for Firecalc is sensible, but 20% is probably way too much. What I would suggest is inputting your expected no discretionary income in Taxcaster, then add IRA distributions until your income less taxes is equal to your annual spending, then use the IRA distribution amount as your annual withdrawal amount in Firecalc.

That is basically what I do to determine taxes but for Firecalc I do add back in SS (and would add in any other source of income). That is Firecalc doesn't ask you to tell it what your annual withdrawal will be from retirement sources. It asks you what your spending will be. So if you plan to spend $50,000 a year and SS is $30,000 of it and you will be withdrawing $20,000 from your portfolio, you tell Firecalc your spending is $50,000 a year, not $20,000.

FWIW, I've projected out taxes and spending for the next several years and I find that it usually works out that income taxes will be about 10% of overall spending. It would probably be less if we had a large taxable account, but our taxable account is relatively small. This is with a 25% marginal tax bracket. We also have no state income tax.

[pb4uski]

Good point on the math of what to include in the addback. My tax rate is pretty low (0% last year but that won't last forever) so I haven't really bothered, I just input my spending.

[Debinnov a]

Okay, alot of good information here. I still have SO MUCH to learn. So if the actual "spend" I'm shooting for is around $75,000 yearly, me putting $90,000 in the spend category will allow for about 18% taxes. So if my taxes will be much lower than that - due to withdrawing monies already taxed and no state income on social security in Florida, I can lower my "spend" figure. I'm trying to net around $72K yearly.

Now, I'm curious as to how some of you have such low taxes.... I think maybe I'm missing something. A big portion of my withdrawals will have already been taxed. So I will pay tax on any withdrawals from my 401K (about 1/4 of my portfolio) and any social security, right?

I think I need to find some posts on what taxes I will likely pay in retirement.

Deb

[galeno]

Galeno's fixed income (bonds and cash) allocation recommendations: Conservative = age. Moderate = age-10. Aggressive = age - 20.

E.g. moderate allocation for a 40 y/o would be 30% FI + 70% equities.

Since bonds are so expensive (low yields) we have allowed ourselves to be pushed into the aggressive allocation. We are 56 y/o with a 35% allocation to FI.

[galeno]

Our expense rate = 0.34%. Tax rate = 0.42%. Total expense rate (ER+TR) = 0.76%. This is the number we use for the "expense box" in fire_calc.

Many times, I'll use 1.00% in the "expense box". The additional 24 bps should more than cover the additional portfolio "hidden costs" (e.g. portfolio turnover rate) that are so difficult to quanitfy.

[daylatedollarshort]

Quote:

Originally Posted by Debinnov a Now, I'm curious as to how some of you have such low taxes.... I think maybe I'm missing something. A big portion of my withdrawals will have already been taxed. So I will pay tax on any withdrawals from my 401K (about 1/4 of my portfolio) and any social security, right? I think I need to find some posts on what taxes I will likely pay in retirement. Deb

We bought turbo tax and spend a of of time looking at different scenarios between 401K / business draw downs, health insurance premiums, financial aid for college and income taxes / tax credits looking for the best intersection. There is a lot of good tax advice on this forum.

Here is one article from the Wall Street Journal on how not to legally pay any income tax. it isn't geared toward retirees but there may still be some tidbits you can use -

ROI: How to Avoid Paying Income Taxes - WSJ.com

[photoguy]

Quote:

Originally Posted by ShokWaveRider Is it wise to go All In (40 - 60% depending on allocation) into equities right now when the stock market is at an all time high?

Sure why not. Lots of people are effectively making this decision (anybody who has a big chunk of equity in tax deferred accounts and chooses not to sell them).

Right now I'm 73% equity and could drop to 35% tomorrow by selling all my stock funds in 401k/ira.

Edit: if you are worried about valuations, you could always start by buying equities in categories with better metrics.

[Animorph]

Quote:

Originally Posted by Debinnov a Okay, alot of good information here. I still have SO MUCH to learn. So if the actual "spend" I'm shooting for is around $75,000 yearly, me putting $90,000 in the spend category will allow for about 18% taxes. So if my taxes will be much lower than that - due to withdrawing monies already taxed and no state income on social security in Florida, I can lower my "spend" figure. I'm trying to net around $72K yearly. Now, I'm curious as to how some of you have such low taxes.... I think maybe I'm missing something. A big portion of my withdrawals will have already been taxed. So I will pay tax on any withdrawals from my 401K (about 1/4 of my portfolio) and any social security, right? I think I need to find some posts on what taxes I will likely pay in retirement. Deb

Just a few comments.

Even when I was well into the 25% tax bracket, our average tax rate was about 18%. In your case a 10%-15% average rate + state taxes should be good.

My early research into retirement investing indicated that 15% equities gave better and smoother returns than all bonds (inflation adjusted). That should be your absolute minimum. FIRECalc will show its best success rates with, I think, 40% or more equities. The highest success rate is actually your lowest risk approach, so as has been said already, think of retirement risk, not portfolio ups and downs.

Add this to your stack of things to look at.
You have years with no income, lots of taxable funds, and a healthy 401k. That's a perfect situation for Roth conversions. No entry for that in FIRECalc, but it's a good way to lower your taxes and allow a little more spending. This is something you can think about after retiring, unless you need a little extra safety margin before then.