AA going into ER

[nun]

ER is fast approaching for me. I have $750k in tax deferred accounts and $230k in accounts that I can access without penalty before I reach 59.5. I don't want to 72k so my question is how would you arrange the $230 to fund ER from 53.5 to 59.5.

The $230k is made up of:

After tax accounts

$20k cash in bank account
$40k Vanguard TSM
$40k Vanguard International Equity Index

457b Plan

$70k Stable Value earning 2.6%
$40k US equity index
$20k international equity index

My annual living expenses are $36k and I get $14.4k rental income. So I need to fund $21.6k for 6 years and I assume 3% inflation. I have fall back positions as I realize I don't have much of a cushion.

What percentage of cash would you carry? What AA would you choose to fund the 6 years?

 

[2B]

I would move all of the 457b plan into Stable Value and then take out what you need every year. Readjust other accounts as necessary to achieve your target AA.

You don't mention any possible pensions or SS. Is anything coming that would help you? What sort of ROI are you getting on your rental property? Is it practical to sell your rental property?

Are you looking at smoothing your tax rate by transferring from your tax deferred accounts to a Roth?

 

[walkinwood]

Here's my - decidedly inexpert - take on your question.

Assumption: Over the next 6 years, you can only access your taxable accounts.

Six years is a very short time, so I would stay away from equities for the amount you require over the next 6 years. Use a conservative discount rate in a NPV calculation in a spreadsheet to see how much you need to set aside. (I used .5% and got $137,215 or 132,500 for a 1.5% discount rate) Put the required money in laddered CDs or a conservative short-term bond fund.

Please share what you decide to do.

The rest can fit into your overall AA.

 

[nun]

I would move all of the 457b plan into Stable Value and then take out what you need every year. Readjust other accounts as necessary to achieve your target AA.

You don't mention any possible pensions or SS. Is anything coming that would help you? What sort of ROI are you getting on your rental property? Is it practical to sell your rental property?

Are you looking at smoothing your tax rate by transferring from your tax deferred accounts to a Roth?

Thanks,
I'm currently at 50/50 AA across my entire portfolio so if I move everything in the 457b to Stable Value I'll sell some fixed income in my retirement accounts and buy some equities to say at 50/50 overall.

If I assume, staring values of $130 for Stable Value and $100k for After tax account, 3% inflation, 2.6% return from the SV and 5% from taxable accounts here is how things look

Year Stable Value Balance After Tax balance Annual Withdrawal
1 111980 105000 21400
2 92849 110250 22042
3 72560 115763 22703
4 51063 121551 23384
5 28304 127628 24086
6 4232 134010 24808

]I'll be getting both UK and US SS at age 66 and a small $5k/year non-COLA pension at 62. Those will cover my expenses.

The rental is a 2 family and I live in the larger of the two apartments. I could move into the smaller flat and rent out my current apartment for $2k/month or I could sell, so I have options there. I do plan on doing ROTH conversions so I'll have to manage where my income comes from; either after tax accounts of 457b tax deferred.

 

[2B]

The rental is a 2 family and I live in the larger of the two apartments. I could move into the smaller flat and rent out my current apartment for $2k/month or I could sell, so I have options there. I do plan on doing ROTH conversions so I'll have to manage where my income comes from; either after tax accounts of 457b tax deferred.

I've seen this sort of rental plan before and it frequently doesn't work out well. You are very non-diversified. If you get a bad tenant you may have to spend serious money and months to evict them. If you don't have a tenant there goes your rental income you are counting on. When getting a regular paycheck, this isn't as bad. In retirement it could be a disaster. Almost half of your income could disappear in a flash.

You didn't say what you could sell your unit for or what other expenses and/or benefits you might have. Without a paycheck, the depreciation may not have much value. Have you looked at your total return and effective rate of return? How will it change in retirement?

 

[nun]

I've seen this sort of rental plan before and it frequently doesn't work out well. You are very non-diversified. If you get a bad tenant you may have to spend serious money and months to evict them. If you don't have a tenant there goes your rental income you are counting on. When getting a regular paycheck, this isn't as bad. In retirement it could be a disaster. Almost half of your income could disappear in a flash.

You didn't say what you could sell your unit for or what other expenses and/or benefits you might have. Without a paycheck, the depreciation may not have much value. Have you looked at your total return and effective rate of return? How will it change in retirement?

The rental has never been empty in the 15 years I've owned it. I live in a very strong rental market so I'm not concerned about the place ever being empty.

The rental apartment is worth $250k

 

[pb4uski]

FWIW, we are similar age and I am living off my taxable accounts now in ER.

I carry 18-24 months in cash (a combination of Discover Bank online savings account earning 0.8% and Vanguard MM and ST bond funds). I periodically replenish the Discover Bank account annually and have an automatic monthly "paycheck" from Discover to our checking account. Given your rental and its vacancy history, i think i would design my cash to cover 18-24 months net of the rental income.

I consider my cash to be part of my bond allocation, so my target AA is 60/40 or 60/34/6 depending on how you look at it.

I wish I had access to a stable value fund. I would max that out and put the rest of my fixed income allocation (excluding the 6% cash) in tax deferred accounts to optimize tax efficiency. As you may know, it is best to carry all your international in taxable accounts in order to use any foreign tax credits they generate.

 

[nun]

FWIW, we are similar age and I am living off my taxable accounts now in ER.

I carry 18-24 months in cash (a combination of Discover Bank online savings account earning 0.8% and Vanguard MM and ST bond funds). I periodically replenish the Discover Bank account annually and have an automatic monthly "paycheck" from Discover to our checking account. Given your rental and its vacancy history, i think i would design my cash to cover 18-24 months net of the rental income.

I consider my cash to be part of my bond allocation, so my target AA is 60/40 or 60/34/6 depending on how you look at it.

I wish I had access to a stable value fund. I would max that out and put the rest of my fixed income allocation (excluding the 6% cash) in tax deferred accounts to optimize tax efficiency. As you may know, it is best to carry all your international in taxable accounts in order to use any foreign tax credits they generate.

Thanks,
I think I'll go into ER with $20k in my day to day bank account (0% interest), $130 in stable value and $80k in after tax equity index funds.
I'll spend down my bank account for about 6 months when the balance should be about $10k. Then I'll transfer $10k from my SV and/or after tax accounts so that I try to keep their ratio as close to the starting 130/80 as possible with the proviso that I won't sell equities if they have negative return. I'll keep doing that until I reach 59.5.

 

[pb4uski]

Is there a reason that you aren't looking at this across all your accounts? (tax-deferred, taxable and 457b)? IOW, the way I would approach AA is across the $980k, not the $230k. Perhaps that is what you do but you are just focused on the taxable and 457b right now.

I don't worry much about liquidity of what is in taxable accounts compared to tax-deferred accounts because if needed I can easily sell taxable investments and buy the same asset class in my tax deferred accounts to maintain my target AA.

 

[nun]

Is there a reason that you aren't looking at this across all your accounts? (tax-deferred, taxable and 457b)? IOW, the way I would approach AA is across the $980k, not the $230k. Perhaps that is what you do but you are just focused on the taxable and 457b right now.

I don't worry much about liquidity of what is in taxable accounts compared to tax-deferred accounts because if needed I can easily sell taxable investments and buy the same asset class in my tax deferred accounts to maintain my target AA.

I'll keep my overall AA at 50/50, but I want to be very conservative in my AA for the $230k I'll be using to fund my spending up to 59.5. $130k in the SV is enough to just fund my spending on it's own. I'll put the rest in equities and spend some of that in good years.

 

[brewer12345]

nun, I am following a similar strategy. I am keeping my overall allocation at 65% equity, but the after tax portion is far more conservatively structured since it will eb drawn on in the near term.

 

[nun]

nun, I am following a similar strategy. I am keeping my overall allocation at 65% equity, but the after tax portion is far more conservatively structured since it will eb drawn on in the near term.

Yeah, if I stick with my current 50/50 overall allocation I'll be 65/35, cash and fixed income/equity in the money I can access without penalty prior to 59.5 and 45/55 in the longer term retirement accounts.

 

[nun]

...also I'm using i-orp to give me an idea about tax optimization. I'm not going to spend down my after tax assets as quickly as i-orp recommends just because I like having a some money that I can get at immediately without having to deal with an administrator. But I am going to follow the IRA to ROTH rollover advice and fill up the 15% tax bracket. I'll also stop automatic reinvestment of dividends and capital gain distributions and just have them deposited into MM.

 

[brewer12345]

...also I'm using i-orp to give me an idea about tax optimization. I'm not going to spend down my after tax assets as quickly as i-orp recommends just because I like having a some money that I can get at immediately without having to deal with an administrator. But I am going to follow the IRA to ROTH rollover advice and fill up the 15% tax bracket. I'll also stop automatic reinvestment of dividends and capital gain distributions and just have them deposited into MM.

For me this is more complicated because I will try to qualify for PPACA subsidies and DW has a business that she will continue to run. My bogey is to stay just a hair under 200% of the FPL for 4 people. If we go over, I will true it up with solo 401k contributions. If it looks like we will be under, I will do coversions to Roth. I am expecting to get disqualified for PPACA subsidies at some point when an asset test is put in place, so in the meantime I intend to get what I can out of it.

 

[Jackanory]

... I am expecting to get disqualified for PPACA subsidies at some point when an asset test is put in place, so in the meantime I intend to get what I can out of it.

Is this pessimism, or did you hear something concerning this? No asset tests have been discussed anywhere AFAIK.

 

[brewer12345]

Is this pessimism, or did you hear something concerning this? No asset tests have been discussed anywhere AFAIK.

Just my personal expectation and trying to be conservative in my planning. If I am wrong, its a plus. If I am right, at least I have planned for it and then I can do more Roth coversions to get to the top of the 15% bracket.

 

[nun]

For me this is more complicated because I will try to qualify for PPACA subsidies and DW has a business that she will continue to run. My bogey is to stay just a hair under 200% of the FPL for 4 people. If we go over, I will true it up with solo 401k contributions. If it looks like we will be under, I will do coversions to Roth. I am expecting to get disqualified for PPACA subsidies at some point when an asset test is put in place, so in the meantime I intend to get what I can out of it.

Yes I was also looking a qualifying for MA Commonwealth care. The income limit for that is currently $34476, although things will change when ACA comes in and MA is negotiating some of the implementation. Still I'll probably go onto COBRA until things sort themselves out as the plan is fantastic, ie no deductible and max out of pocket $250, for $400/month. Then if I can qualify for a subsidy I'll look into whatever replaces Commonwealthcare until 55 when, as it stands right now, I'll qualify for that cadillac health insurance from my employer at the employee rates..ie $100/month. However, that could well change in the next 3 years. But living in MA I'm less uncertain/worried about access to healthcare than in a lot of places as MA has mandated health insurance for quite a while and the exchange is very familiar.

 

[pb4uski]

For me this is more complicated because I will try to qualify for PPACA subsidies and DW has a business that she will continue to run. My bogey is to stay just a hair under 200% of the FPL for 4 people. If we go over, I will true it up with solo 401k contributions. If it looks like we will be under, I will do coversions to Roth. I am expecting to get disqualified for PPACA subsidies at some point when an asset test is put in place, so in the meantime I intend to get what I can out of it.

Brewer, why 200% FPL rather than 400% FPL?

 

[brewer12345]

Brewer, why 200% FPL rather than 400% FPL?

Bigger subsidy plus if you are under 200% you get lower max out of pocket limits.

 

[clifp]

Thanks,
I think I'll go into ER with $20k in my day to day bank account (0% interest), $130 in stable value and $80k in after tax equity index funds.
I'll spend down my bank account for about 6 months when the balance should be about $10k. Then I'll transfer $10k from my SV and/or after tax accounts so that I try to keep their ratio as close to the starting 130/80 as possible with the proviso that I won't sell equities if they have negative return. I'll keep doing that until I reach 59.5.

That seems very sensible, especially given a competitive stable value fund.
You have ~5k in interest and dividend income and it look like you'll need to withdraw 17K a year.

One thing you might want to consider is some strategies to give you more control of your taxable income since you are right on the border of getting a good subsidy. My suggestion would be to split up your 2 funds into 4 funds say small cap, TSM or SP and emerging markets and everything else.

Or perhaps at the beginning of the year make a small $5K investment in 4 funds in Dec you sell the loser(s) and harvest the tax loss,and let the winner become long term capital gain depending on tax and subsidies.