50 Years old - Plan to retire in 5 years - Need help in AA

[38Chevy454]

You are doing good in building up the savings to this point. The big question is what to do going forward for 5 years, and then for the time after you quit having working income. That time being retired can be thought of as two timeframes: age 55 to start of SS, and then receiving SS and beyond. The 55 to SS is where you potentially need the highest withdrawal rates. So needing to have an allocation that works for you in this time is for you to figure out.

I was 100% equities up until about 3 years out when I started adding more fixed income. I still run high equities compared to many (my target is 75-80% equities), but have a small pension to help offset about 20% of my budget. Also have high risk tolerance so more equities works for me.

In your case, it is good to increase some of the after tax savings to provide cash flexibility for that 55 to SS time period. Check and make sure your company 401k plan allows the rule of 55 withdrawals. You might open a Roth and fund it with a bit now, in addition to the std after tax brokerage. I don't see any problem staying with 100% equities for a little while now while still in accumulation mode, but you would be advised to consider going a bit more conservative once you retire.

 

[Time2]

I'll take a little different tack on this. You have $1M now, if the market acts right and averages 10% a year and you add $10,000 a year to savings, you will have $1,675,000, That will comfortably supply your $50,000 with great portfolio success. This $1,675,000 will be reduced of you go 60/40 in the above scenario. (opps, I should inflated that $50,000 5 yrs)

Now, if the market stagnates, you will only have $1,135,000, now your $50,000 withdrawal rate has a 14% failure rate over 30 years. Same $10,000 a year invest and 1.6% dividend added. This may be a little better at 60/40. (again, I should inflated that $50,000 5 yrs, that makes the outcome worse!)
I don't want to think about the market being lower in 5 years.
Also note: 5 years at 3% inflation (if we could be so lucky) Brings the spending power of $50,000 down to $43,200. So, in 5 years you need $58,000 to have the buying power of $50,000 today. To have a 95% chance of 30 year portfolio survival, you would need $1,450,000. My conclusion rather than figure 5 years to retirement, I would think adding $600,000 to my net worth.

I have never regretted over saving.

I used this compound calculator,
Compound Interest Calculator


and



https://firecalc.com/

 

[tulak]

I’m in a similar situation, in that I’m planning to retire once I can use the rule of 55. I have most of my assets in tax sheltered/deferred accounts. I’m continuing to max 401k contributions, since I’m in a high tax bracket now. I expect to be in a lower bracket when I retire. If I retire at 55, I’ll start depleting my tax deferred accounts, both for income and Roth conversions. My goal is to (hopefully) completely deplete tax deferred accounts in favor of tax sheltered accounts before RMDs.

Others have touched on AA, so I won’t add much there, except be careful of SORR with a 100% equity allocation. I’ll keep about 5 years in fixed income to minimize this risk.

Regarding rule of 55, you can access your account penalty free the year you turn 55. For me, that’s late in the year, so I can retire shortly after turning 54. Something to keep in mind, depending on when you and DW have birthdays.

 

[TheWizard]

You don't leave money in equities that you'll be needing for expenses in 5 years.

Such advice is putting this person at risk of a sequence of returns tragedy...

That depends partly on how big one's nest egg is in comparison to annual expenses.
I do agree that this particular OP should have more fixed income allocation, perhaps 60/40 overall...

 

[TheWizard]

I'm a bit concerned that $50k per year won't be enough for two people.
Examine your expense numbers carefully and include new appliances, new roof, new bedding, new cars, etc.
Also include additional travel and other recreational expenses...

 

[Time2]

I'm a bit concerned that $50k per year won't be enough for two people.
Examine your expense numbers carefully and include new appliances, new roof, new bedding, new cars, etc.
Also include additional travel and other recreational expenses...

Especially if he is high income (as he said) and not living on $50k now!

 

[weester]

Those are really helpful. Thank you. lot of choice and info to take into consideration. We are planing to leave outside of US where the cost of living is less than 50K/year, some where in Asia. What would you think about this plan?

Well, after discussed with my wife. Here is what we come up with our plan. Our annualy income for both of us is $130K. We are hoping to get 5% return in S&P 500 in next 5 years.

Husband:
----------
Current 401k balance: 500K
Max contribution for next 5 years: 20K/year ( 100k for 5 years)

Open : Roth IRA , annualy contribution 6k/year for next 5 years ( 30k in years)

Bank save acct: 12k/year for next 5 years ( 60K in 5 years, this is our bucket #1))


Wife:
-----
Current 401k balance: 500K
Max contribution for next 5 years: 20K/year ( 100k for 5 years)

Open : Roth IRA , annualy contribution 6k/year for next 5 years ( 30k in years)

Bank save acct: 12k/year for next 5 years ( 60K in 5 years, this is our bucket #1))

 

[Time2]

Those are really helpful. Thank you. lot of choice and info to take into consideration. We are planing to leave outside of US where the cost of living is less than 50K/year, some where in Asia. What would you think about this plan?

Well, after discussed with my wife. Here is what we come up with our plan. Our annualy income for both of us is $130K. We are hoping to get 5% return in S&P 500 in next 5 years.

Husband:
----------
Current 401k balance: 500K
Max contribution for next 5 years: 20K/year ( 100k for 5 years)

Open : Roth IRA , annualy contribution 6k/year for next 5 years ( 30k in years)

Bank save acct: 12k/year for next 5 years ( 60K in 5 years, this is our bucket #1))


Wife:
-----
Current 401k balance: 500K
Max contribution for next 5 years: 20K/year ( 100k for 5 years)

Open : Roth IRA , annually contribution 6k/year for next 5 years ( 30k in years)

Bank save acct: 12k/year for next 5 years ( 60K in 5 years, this is our bucket #1))

Well going to a lower cost of living country makes a huge difference. I know there are some places you can live high on less than 50% of what you would spend here. With the calculators you can run that scenario, but more important, can you get a good handle on what your expenses will be in Asia?

 

[weester]

Well going to a lower cost of living country makes a huge difference. I know there are some places you can live high on less than 50% of what you would spend here. With the calculators you can run that scenario, but more important, can you get a good handle on what your expenses will be in Asia?

I would say about 30k to 40K /year

 

[Bigdawg]

Those are really helpful. Thank you. lot of choice and info to take into consideration. We are planing to leave outside of US where the cost of living is less than 50K/year, some where in Asia. What would you think about this plan?

Well, after discussed with my wife. Here is what we come up with our plan. Our annualy income for both of us is $130K. We are hoping to get 5% return in S&P 500 in next 5 years.

Husband:
----------
Current 401k balance: 500K
Max contribution for next 5 years: 20K/year ( 100k for 5 years)

Open : Roth IRA , annualy contribution 6k/year for next 5 years ( 30k in years)

Bank save acct: 12k/year for next 5 years ( 60K in 5 years, this is our bucket #1))


Wife:
-----
Current 401k balance: 500K
Max contribution for next 5 years: 20K/year ( 100k for 5 years)

Open : Roth IRA , annualy contribution 6k/year for next 5 years ( 30k in years)

Bank save acct: 12k/year for next 5 years ( 60K in 5 years, this is our bucket #1))

Back of the napkin math: Combined 130K
-20K x 2 for 401k is 130-40=90K
90k-24k (combined savings for the year) =66k
66k-12k(combined ROTH IRA contributions) =54K
Minus Taxes (estimate 8k SS and 4k medicare) =42k
-income tax estimated 10k=32k that you would live on.

Is this what you are living on now? Seems like not much.

Good luck OP.

 

[rodi]

I'd like to commend the OP for saving so much. I have no doubt they are living on much less than the combined $130k - because they are maxing 401k, etc.

We had a family of 4 with two incomes, combined to about $120k. We were living (inclusive of taxes,healthcare, etc, but exclusive of savings and extra mortgage principal payments) on about $55k. We live(d) a comfortable life, travelled abroad every couple of years, live in a nice neighborhood, and managed to save for our kids college... All the saving reduced our available spending - but we were still very comfortable.

That's one way to get to ER... frugality - divert saved money to savings/debt reduction. Other folks get there with larger salaries, and less frugality.

OP - is your 50k budget inclusive of healthcare and taxes. If you use retirement calculators like firecalc it has to be your entire budget, including taxes. A lot of people tend to think in terms of net income for spending and forget things like healthcare.

 

[weester]

Back of the napkin math: Combined 130K
-20K x 2 for 401k is 130-40=90K
90k-24k (combined savings for the year) =66k
66k-12k(combined ROTH IRA contributions) =54K
Minus Taxes (estimate 8k SS and 4k medicare) =42k
-income tax estimated 10k=32k that you would live on.

Is this what you are living on now? Seems like not much.

Good luck OP.

We have no kids and live in a mobile home . It is paid off and we don't have alot of expenses .

 

[werdone]

retire at 555

We have total of 50k in saving and planning to save 1k each month for the next 5 years after we have contributed max out 401k/IRA . Would you think changing our 100% stock to 60/40 is wise to do now so we can protect our retirement when we both hit 55 ?

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I retired at 54 in 2019. I had switched to an HSA plan just a couple years before retiring. I wish I had done it sooner and maxed it out. We keep a little over 2 years of expenses in the bank to avoid selling in a down market. The rest is in a brokered cd ladder in a taxable account. We are doing Roth conversions to the top of the 12% every year. Roth/IRA are 85% stock 15% in a CD ladder. Wife started SS at 62, mine is planned at 70 for now. We live in an RV and do a lot of traveling so our expenses are low. (except for gas right now). Congrats on looking ahead..

 

[werdone]

retiring at 55

We have total of 50k in saving and planning to save 1k each month for the next 5 years after we have contributed max out 401k/IRA . Would you think changing our 100% stock to 60/40 is wise to do now so we can protect our retirement when we both hit 55 ?

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Since we do not pull from the Roth or IRA 85% stock and 15% in cd ladders is a comfortable position for us. The stock is in Vanguard index ETF(s) (hers) and Fidelity index ETF(s) (mine). I am ok with making a little less with a more "hands off" approach. This website has been a treasure trove for me in the last 6 years, lots of good advice/experience here. Good luck

 

[eytonxav]

As was previously mentioned, get a good handle on your expenses, and especially pay attention to healthcare which may now be covered by your employers to some extent. In terms of allocation, I lean more conservative than many, but if I was in your shoes, I'd opt for something in the range of 60/40 - 75/25 using low cost index funds/etfs.

 

[weester]

-------------------------------------------------------------------------------------
I retired at 54 in 2019. I had switched to an HSA plan just a couple years before retiring. I wish I had done it sooner and maxed it out. We keep a little over 2 years of expenses in the bank to avoid selling in a down market. The rest is in a brokered cd ladder in a taxable account. We are doing Roth conversions to the top of the 12% every year. Roth/IRA are 85% stock 15% in a CD ladder. Wife started SS at 62, mine is planned at 70 for now. We live in an RV and do a lot of traveling so our expenses are low. (except for gas right now). Congrats on looking ahead..

Thank you for your advice

 

[weester]

As was previously mentioned, get a good handle on your expenses, and especially pay attention to healthcare which may now be covered by your employers to some extent. In terms of allocation, I lean more conservative than many, but if I was in your shoes, I'd opt for something in the range of 60/40 - 75/25 using low cost index funds/etfs.

What would you think which way is better? Would we start to do AA from our new 401k contribution from now on or do our AA from our current portfolio?

 

[eytonxav]

What would you think which way is better? Would we start to do AA from our new 401k contribution from now on or do our AA from our current portfolio?

This might be a bit of market timing which is generally frowned upon, but I think it's likely interest rates will continue to rise given the state of inflation and that will depress bond prices, so maybe average into bonds after a period of time. How much time is impossible to predict, but I would probably wait until the FED gives off a signal of improving conditions and then average in over several months to get to the allocation you want. I treat non-equity positions simply as fixed income, so it does not need to be all bonds, but could include CDs, etc. YMMV.

 

[SnowballCamper]

It is probably good to try lots of asset allocation online calculators. The simplest one is, bond allocation = 100 - age, but this is an oversimplification.

A good calculator takes into account your risk aversion...how you react to stock market pricing noise.

I especially enjoyed the perspective at https://www.aacalc.com/about but the author took down the AA calculator in favor of some more complicated modeling. The key insight was that social security, pensions, and even home value can count as part of a bond allocation in that they stabilize the value you own.

In the end, the specific number you choose for an asset allocation isn't terribly important. You can be 10-20% or more away from whatever the (unknown) optimal number is for you. What is more important is that you don't change the AA as a reaction to the current market situation.

Of course, a few here may participate in market timing strategies, but most don't.

And the AA should account for all assets across all account types.