Fixed income question

[Koolau]

It seems we've met the $2,000/month shortfall for the most part. My question for pampanobeach would be whether that $7k/month actually covers everything - for the rest of his/her life. $350K savings seems a bit thin to cover all eventualities going forward. Not trying to be overly critical. Just suggesting OP needs to be certain everything is in place (for instance medical and potential long-term-care, etc.) before pulling the plug. As always, YMMV.

 

[pompanobeach]

It seems we've met the $2,000/month shortfall for the most part. My question for pampanobeach would be whether that $7k/month actually covers everything - for the rest of his/her life. $350K savings seems a bit thin to cover all eventualities going forward. Not trying to be overly critical. Just suggesting OP needs to be certain everything is in place (for instance medical and potential long-term-care, etc.) before pulling the plug. As always, YMMV.

Thank you Koolah. Yes, I have very good life benefits for Health Insurance. The $7k covers all my expenses plus some cushion. It includes small mortgages on two condos. I have CT condo and FL comdo. If figure if things get messy, I can always just sell one of the condos. Plus, my pension does have a 2%-7% annual COLA depending on inflation, etc..

I know the $350k isn’t a big number but I will be making a minimum of $5k per month, plus whatever interest I can pull in from my $350k per month for 7 years until I start collecting the $2k from my SS.

It’s kind of simple but it should work...right? Do you think I am making a mistake?

 

[pompanobeach]

Seems to me that you have two good options. One would be to invest your $350k in equities or in something like Wellesley and set up a $2,000 per month automatic redemption. The other it to put $140k in a CD ladder, the rest in equities and see how the next 7 years go.

Hi PB4uski. How would you go about setting up the CD ladder?

 

[copyright1997reloaded]

OP, you don't specify if the 350K (in equities) has accumulated capital gains or if it is in taxable accounts vs tax deferred. If it is in taxable accounts and you sell appreciated securities (say to swap into a fund such as Wellington), then you will have tax consequences on the sale. If it is in a tax deferred account, then no consequences from the trade.

On the other hand, when you remove the money from the account (e.g. Take the $1,000 per month to live on), then money coming from a traditional tax deferred account (non Roth) is ordinary income, while a sale of a long term appreciated stock in a regular account has a lower capital gains rate.

What I am trying to point out here is that taxes can be an important consideration for your optimal strategy, and Internet advice on what you should do can be incorrect without knowing more detail.

 

[Koolau]

pampanoebeach, it does sound like you are in good shape for FIRE. It's nice to have monthly income which is pretty much set in stone (and especially COLA'd!!) Having at least one good back-up (selling a property if it would come to it) is the kind of planning that can make you golden. Now, for me, heh, heh, I want back-ups to my back-ups.

 

[Dawg52]

Seems to me that you have two good options. One would be to invest your $350k in equities or in something like Wellesley and set up a $2,000 per month automatic redemption. The other it to put $140k in a CD ladder, the rest in equities and see how the next 7 years go.

+1. I would probably lean to the 2nd option but either would work. But I know nothing about nothing.......

 

[pb4uski]

Hi PB4uski. How would you go about setting up the CD ladder?

Set up the high yield savings account or MM fund with $24k to do an automatic transfer of $2k to your local checking account each month (High yield savings accounts are currently ~1.75% or more and VMMXX currently yields ~2%).

Buy $24k CDs that mature 1,2,3,4,5 and 6 years out... when each CD matures roll it into a high yield savings account or a MM fund (they currently pay ~2%).

Assuming rates of 2.35%, 2.80%, 3.00%, 3.18%, 3.35% for 1-5 year CDs, you ladder should yield ~ 3%.

https://personal.vanguard.com/us/FixedIncomeHome

One thing to beware of.... with many pundits expecting interest rates to rise this may not be the best time to lock into current CD rates but if those yields satisfy you then great.

 

[Ed B]

My situation is very similar to yours with the exception that I will turn 62 in a little less than 4 years now; Thus, I have a shorter glidepath to my social security decision.

I have two of the four years of pre-SoSec revenue sitting in a liquid Stable Value Fund and the 2nd two years, plus some extra in BIV. The rest is in VTI.

I need about 1800/month between now and SoSec and once I start SoSec I will get a slight raise and can give my portfolio a rest.

I have also considered Wellington, Wellesley or a combination of the two but for now I am comfortable with my setup. And it is working as planned.

 

[pompanobeach]

OP, you don't specify if the 350K (in equities) has accumulated capital gains or if it is in taxable accounts vs tax deferred. If it is in taxable accounts and you sell appreciated securities (say to swap into a fund such as Wellington), then you will have tax consequences on the sale. If it is in a tax deferred account, then no consequences from the trade.

On the other hand, when you remove the money from the account (e.g. Take the $1,000 per month to live on), then money coming from a traditional tax deferred account (non Roth) is ordinary income, while a sale of a long term appreciated stock in a regular account has a lower capital gains rate.

What I am trying to point out here is that taxes can be an important consideration for your optimal strategy, and Internet advice on what you should do can be incorrect without knowing more detail.

Oh I understand! Thanks. I will not do anything without going through a professional. I just want some ideas. I see from the forum that you all have thought these issues through. Thank you for the advice!

 

[pompanobeach]

pampanoebeach, it does sound like you are in good shape for FIRE. It's nice to have monthly income which is pretty much set in stone (and especially COLA'd!!) Having at least one good back-up (selling a property if it would come to it) is the kind of planning that can make you golden. Now, for me, heh, heh, I want back-ups to my back-ups.

Ok. Good. I feel a little better. Yes, the pension does help my decision....that’s why I want to retire before contract changes come through!

 

[pompanobeach]

Set up the high yield savings account or MM fund with $24k to do an automatic transfer of $2k to your local checking account each month (High yield savings accounts are currently ~1.75% or more and VMMXX currently yields ~2%).

Buy $24k CDs that mature 1,2,3,4,5 and 6 years out... when each CD matures roll it into a high yield savings account or a MM fund (they currently pay ~2%).

Assuming rates of 2.35%, 2.80%, 3.00%, 3.18%, 3.35% for 1-5 year CDs, you ladder should yield ~ 3%.

https://personal.vanguard.com/us/FixedIncomeHome

One thing to beware of.... with many pundits expecting interest rates to rise this may not be the best time to lock into current CD rates but if those yields satisfy you then great.

Great info! Thank you!

 

[COcheesehead]

OP, you don't specify if the 350K (in equities) has accumulated capital gains or if it is in taxable accounts vs tax deferred. If it is in taxable accounts and you sell appreciated securities (say to swap into a fund such as Wellington), then you will have tax consequences on the sale. If it is in a tax deferred account, then no consequences from the trade.

On the other hand, when you remove the money from the account (e.g. Take the $1,000 per month to live on), then money coming from a traditional tax deferred account (non Roth) is ordinary income, while a sale of a long term appreciated stock in a regular account has a lower capital gains rate.

What I am trying to point out here is that taxes can be an important consideration for your optimal strategy, and Internet advice on what you should do can be incorrect without knowing more detail.

The cap gains might be taxable. It depends on other income and what tax bracket the OP ends up in.

 

[pompanobeach]

My situation is very similar to yours with the exception that I will turn 62 in a little less than 4 years now; Thus, I have a shorter glidepath to my social security decision.

I have two of the four years of pre-SoSec revenue sitting in a liquid Stable Value Fund and the 2nd two years, plus some extra in BIV. The rest is in VTI.

I need about 1800/month between now and SoSec and once I start SoSec I will get a slight raise and can give my portfolio a rest.

I have also considered Wellington, Wellesley or a combination of the two but for now I am comfortable with my setup. And it is working as planned.

Hi Ed B. I see that you are on your way! Yes very similar to my situation. Thank you for the info. It seems like you are saying to get a safe yield somewhere and between that and the principle cash, I can withdraw comfortably for the years needed. I like that!

 

[OldShooter]

View from 10,000 feet: @pompanobeach, you seem to have a view that your expenses in retirement will be constant, probably increasing slightly with inflation.

That is very unlikely to be the case. Cars and home furnaces and ACs break down and need to be replaced. Travel might be high one year and zero the next. Medical & drug expenses are not evenly distributed.

All this discussion is just fine, but IMO the financial aspects of retirement are more like driving a car than like sitting on a train. You will be constantly reacting to things you see coming, dodging potholes and, yes, paying for mistakes. Just a caution: Be ready for it.

 

[corn18]

View from 10,000 feet: @pompanobeach, you seem to have a view that your expenses in retirement will be constant, probably increasing slightly with inflation.

That is very unlikely to be the case. Cars and home furnaces and ACs break down and need to be replaced. Travel might be high one year and zero the next. Medical & drug expenses are not evenly distributed.

All this discussion is just fine, but IMO the financial aspects of retirement are more like driving a car than like sitting on a train. You will be constantly reacting to things you see coming, dodging potholes and, yes, paying for mistakes. Just a caution: Be ready for it.

How does one "Be ready for it"? I have a base budget of $75k. I added 20% just to be safe, so base budget is $90k. Then I add travel of $25k and taxes of $15k (per iORP). That's $130k. Then I target $150k for FIRE. Eeeghads! I have a lot of slop in there.

 

[Dtail]

My situation is very similar to yours with the exception that I will turn 62 in a little less than 4 years now; Thus, I have a shorter glidepath to my social security decision.

I have two of the four years of pre-SoSec revenue sitting in a liquid Stable Value Fund and the 2nd two years, plus some extra in BIV. The rest is in VTI.

I need about 1800/month between now and SoSec and once I start SoSec I will get a slight raise and can give my portfolio a rest.

I have also considered Wellington, Wellesley or a combination of the two but for now I am comfortable with my setup. And it is working as planned.

How is your Stable Value rate? I ask in that mine is at 4.24% currently and wouldn't think of touching this (401k) money until RMD's.

 

[copyright1997reloaded]

The cap gains might be taxable. It depends on other income and what tax bracket the OP ends up in.

Correct. That is why I said we don't really have enough information here to make recommendations like sell it all and put it in fund X. [But we do know they will have 5K in monthly income which *is* most likely taxable (at least at the federal level). ]

Case in point: I had my largest non-mutual holding bought out, mostly for cash, causing me to have a large capital gain, which cost more than the LT Cap gain rate because of AMT, etc.

 

[pompanobeach]

How is your Stable Value rate? I ask in that mine is at 4.24% currently and wouldn't think of touching this (401k) money until RMD's.

My stable fund is currently 2.75%

 

[Ed B]

How is your Stable Value rate? I ask in that mine is at 4.24% currently and wouldn't think of touching this (401k) money until RMD's.

Mine is drawing much less. It is on track for about 2.25% this year.

And for me, using 401k money especially until I start SoSec is part of what allowed me to retire this June.

 

[Dtail]

How does one "Be ready for it"? I have a base budget of $75k. I added 20% just to be safe, so base budget is $90k. Then I add travel of $25k and taxes of $15k (per iORP). That's $130k. Then I target $150k for FIRE. Eeeghads! I have a lot of slop in there.

Yes some slop in there, but not that unusual on this site.
I personally would rather keep adding discretionary but realistic expenses to the budget and try for a realistic overall budget that can be cut if needed.

Perhaps we are doing the same thing in different ways.

 

[Ed B]

Hi Ed B. I see that you are on your way! Yes very similar to my situation. Thank you for the info. It seems like you are saying to get a safe yield somewhere and between that and the principle cash, I can withdraw comfortably for the years needed. I like that!

A safe yield for the gap to SoSec but I am willing to be aggressive with most of the remainder understanding the risk of a significant drop in equities sometime in the next 4 years. This will allow me to leave my equities alone while I wait out a recovery.

If I were 7 years from SoSec I might not have 7 years expenses invested the same way I am doing it, but I would probably have at least four years worth like this and rebalance every year. Then again I might.

I certainly don't have all this figured out. How much you place in fixed income investments leading to your SoSec decision depends on your appetite for risk and your crystal ball regarding the next bear.

 

[Dtail]

My stable fund is currently 2.75%

Mine is drawing much less. It is on track for about 2.25% this year.

Okay those are more typical current SV rates.
I guess at those levels it is in line with CD type ladders and thus could be interchangeable acknowledging the deferred status aspect.

 

[pompanobeach]

Okay those are more typical current SV rates.

I guess at those levels it is in line with CD type ladders and thus could be interchangeable acknowledging the deferred status aspect.

Yep. I agree. And if rates go higher even better to just use that?

 

[Dtail]

Mine is drawing much less. It is on track for about 2.25% this year.

And for me, using 401k money especially until I start SoSec is part of what allowed me to retire this June.

Understand. I got "lucky" that my partner is already getting SSDI plus we have some cash pymts coming in until I turn 62, plus a decent amount of cash to tide us over and help manage ACA.
I say lucky coz none of this was planned pre retirement.

 

[pompanobeach]

Understand. I got "lucky" that my partner is already getting SSDI plus we have some cash pymts coming in until I turn 62, plus a decent amount of cash to tide us over and help manage ACA.

I say lucky coz none of this was planned pre retirement.

[emoji120]