Asset Allocation and Fund Location for Early Retirement

[REIJM]

My wife and I will be turning 35 this year, with the goal to RE at 46. My spreadsheet forecast has us with a total portfolio value of ~$5M at the time of retirement (in today's dollars). That portfolio is forecasted to be split 45/45/10 between taxable brokerage, traditional 401k, Roth IRA. Currently, we're 80/20 VTI/VXUS in the taxable brokerage and Roth IRA's, and 70/20/10 in the 401k's domestic/international/bond.

My fear is SORR, or retiring into a bear market, where those first few years are really critical for the long term success of retirement. The solution to hedge against this risk seems to be increasing your cash and bond positions as you approach retirement/in early retirement so you're not forced to sell equities at a massive loss, which becomes a drag on your portfolio in the future years.

My question is, for implementing a strategy like this, where should those funds be allocated? Below are my thoughts/what my current plan is, but I encourage the community to critique and correct my assumptions.

For the taxable brokerage:

• About 3-5 years before retirement, look in to selling some equities and setting up a bond ladder, so that as each bond ends that amount would be our annual income in retirement and could be rolled over into a HYSA/MMF or CD to cover the first ~3-4 years of retirement.
• If done 5 years before retirement, this could be done by buying a 5-year T-Note to cover 2 years of expenses, and a 7-year T-Note to cover another 1-2 years of expenses, which would get us through the first 3-4 years of retirement without needing to touch equities.

For the Roth IRA:

• Keep the all-equity position, since the plan is not to touch these funds for a while, while simultaneously doing Roth conversions from our traditional 401k's (which will be rolled over into a traditional IRA upon retirement).

For the traditional 401k's:

• 5 years before retirement, convert 100% of the funds in to a 2035 target date fund (we plan on retiring in 2035), so that we increase our bond position to help protect the funds that exist in those accounts (which will be used for Roth conversions once retired).
• Once retired, roll both 401k's into a combined traditional IRA with a 60/40 of equities/bonds, where the bonds could be a rolling T-Note ladder until we reach a point where we want to begin increasing the equity position in the account, and as the T-Notes mature, use those funds to buy the desired equity ETF.

Does that sound right? Is that the general gist of it, or have I overlooked something? Like I said, I encourage those who are more knowledgeable about this than I am to critique my plan, I'm definitely looking to learn what to do (and what not to do) when it comes to switching from a purely accumulation mode (where we are now), to beginning to plan for what retirement will actually look like, and where your income will be coming from (particularly in those early retirement years).

Thank you in advance.

 

[JohnnyBGoode]

REIJM - I think I must be missing something, but if you are planning on funding years between 46 and 59.5, then the taxable brokerage is your only option unless you want to pay penalties.

Personally, I think converting 4-5 years' worth of income into bonds seems too conservative. You could be missing out on a lot of potential gains, especially as you could be looking at a 50+ year retirement horizon. You are also young enough that you could work another year or two and ride out a stock market trough. YMMV.

 

[OldShooter]

Man plans. God laughs.

It is good that you are thinking about this stuff and undoubtedly you will continue to do so. But to get into the weeds and details is almost certainly a waste of your time. You have 10 years of life changes ahead of you.

 

[REIJM]

REIJM - I think I must be missing something, but if you are planning on funding years between 46 and 59.5, then the taxable brokerage is your only option unless you want to pay penalties.

Personally, I think converting 4-5 years' worth of income into bonds seems too conservative. You could be missing out on a lot of potential gains, especially as you could be looking at a 50+ year retirement horizon. You are also young enough that you could work another year or two and ride out a stock market trough. YMMV.

Correct, we'll be living off of the brokerage account for the first ~15 years (my understanding is that you can touch Roth conversions 5 years after they've been made, even if it's before 59.5, but the plan is not to do so). The t401k/IRA will just be used for Roth conversions.

I'm curious your thoughts behind 4-5 years being in bonds is too conservative? Maybe scale it back to 3-4 years? I don't want to be forced to sell equities in a bad year when they're down 20-30%, and that's where maturing bonds would be beneficial (at the expense of some growth with a higher equity portion).

 

[REIJM]

Man plans. God laughs.

It is good that you are thinking about this stuff and undoubtedly you will continue to do so. But to get into the weeds and details is almost certainly a waste of your time. You have 10 years of life changes ahead of you.

100%.

With 10+ years to go, a lot will change. I hope that most of it is for the better, but I'd like to have a plan to work towards through the years, than have no plan at all.

 

[TheWizard]

Part of the answer depends on how over funded your retirement turns out to be.
That $5M target at start of retirement equates to around $200k per year with a 4% WR.
But if you only withdraw/spend $100k per year, then you've got a lot of wiggle room to deal with occasional stock market declines.

That would allow you to keep more funds fully invested and not have an overly large cash bucket...

 

[REIJM]

Part of the answer depends on how over funded your retirement turns out to be.
That $5M target at start of retirement equates to around $200k per year with a 4% WR.
But if you only withdraw/spend $100k per year, then you've got a lot of wiggle room to deal with occasional stock market declines.

That would allow you to keep more funds fully invested and not have an overly large cash bucket...

Very true.

Given the length of the planned retirement (40+ years), we'd likely start by pulling out 3.5% of the total invested portfolio (~$175k) and see how we get along on that before adjusting annually (our child would be in middle school at that point, so it's not like we're going to be taking multiple month-long vacations each year), but all of it would come from the taxable brokerage account (7.5% of that account's value).

But it sounds like you think moving 3-4 years worth of income in to bonds right around the time of retirement is too conservative, am I understanding your post correctly (in regards to the overly large cash bucket comment)?

 

[TheWizard]

My situation was different in that I annuitized sufficient funds with TIAA to cover my basic expenses from start of retirement.
On top of that, I withdrew $3000 per month for seven years prior to starting SS at age 70.
I did those monthly withdrawals pro rata from the mix of funds in my 403(b), something over 60% stocks.

Your situation is quite different...

 

[mrfeh]

Man plans. God laughs.

It is good that you are thinking about this stuff and undoubtedly you will continue to do so. But to get into the weeds and details is almost certainly a waste of your time. You have 10 years of life changes ahead of you.

+1

Too early to think about specific plans.

 

[mrfeh]

Very true.

Given the length of the planned retirement (40+ years), we'd likely start by pulling out 3.5% of the total invested portfolio

I would not be comfortable with a 3.5% WR at 46 years of age. My ceiling would be 3%.

You might be looking at 50 years of retirement.

 

[CardsFan]

+1

Too early to think about specific plans.

But not too early to be thinking about plans.

 

[REIJM]

I would not be comfortable with a 3.5% WR at 46 years of age. My ceiling would be 3%.

You might be looking at 50 years of retirement.

firecalc puts me at a 96.4% chance of success for 45 years (would put us to 91). It’s over 97% for 40 years.

Even at 3%, the net withdrawals after tax would still cover our spending needs (and I’m not accounting for any social security or windfalls from our parents), and we know that nobody pulls the same percentage out every single year (which is why being conservative with withdrawals in early retirement is advantageous).

 

[SecondCor521]

55M single retired at 46.

Here's how I approached the question:

Zeroth, I figured out my goals and priorities. For me it was (a) FIRE more or less as soon as I didn't like my job, (b) then have a safe WR, then a few other goals such as (c) legacy for my kids and (d) financial simplicity.

First, I figured out what lifestyle I wanted and what that would cost. I decided I'd be happy with my then current lifestyle and so I could pretty much just look at Quicken and adjust for things like lower taxes and OOP healthcare. It wasn't, but for argument's sake let's say $40K.

I then figured out what 25x that number was and aimed for that in my FIRE stash. So that was $1M.

I then ran FIREcalc sensitivity to figure out what I wanted my overall AA to be. For me that turned out to be about 90/10. 90/10 was the AA that had 100% historical safety given my assumed planning period of ~40 years (goal B) and had the largest average remaining balance (goal C).

I then looked at the Bogleheads' asset location article at Tax-efficient fund placement - Bogleheads. In my case it was easy - the 10% bonds goes in my traditional IRA, and everything else is stocks.

I then decided how to fund my 46 to 59.5 lifestyle. I chose to spend from taxable for regular expenses, and Roth convert to have a conversion ladder if I ran out of taxable before then. Because I ran into some unplanned extra income, I haven't and won't run out of taxable before then, but I still do Roth conversions for tax rate arbitrage between now and my 80s.

I didn't worry about SORR because I overshot my mark and retired with a 2.x% WR, which is historically safe by a wide margin. If SORR is playing Russian roulette, a 2.x% WR means there are no bullets in the gun. It sounds like your 3.5% has wiggle room, which means there are probably no bullets in your SORR gun either.

So:

1. If that assessment is correct, I wouldn't worry about the bond tent that all the cool kids are talking about these days.

2. I wouldn't bother with bonds in taxable at all. I would look at your allocation overall, then put whatever bonds you want in your 401(k)/IRAs. You can rebalance inside your IRAs with zero tax consequences as you adjust to retirement and see how things are working. This approach does have a side effect risk to be aware of - if your bonds are all in your IRAs and your taxable is all stocks, then you might risk depleting your taxable portfolio sooner if you have bad SORR luck in your pre-59.5 period. I considered this risk, and to me all it meant was I'd start on my Roth conversion ladder at that point which might be sooner than I wanted. But the allocation tax benefits were good enough that I decided that the risk wasn't very likely or very high. I retired in 2016 and as mentioned above, my taxable account still has a solid balance even after 8 years of spending from it, and my Roth IRA pipeline has 12 years of expenses available in it, or 46 years if you account for side income I can pretty reasonably expect.

 

[REIJM]

55M single retired at 46.

Here's how I approached the question:

I appreciate the detailed response, thank you.

Yes, we definitely have flexibility in our budget (even at a 3.0% WR, we'd still have $70k a year beyond our normal budgeted expenses to cover our healthcare needs, general spending, travel/vacation (our child will still be in middle school at this point, so for a while it's likely just going to be normal summer vacations), etc.

I'm aware of wanting to keep bonds in a tax-advantaged space due to how they are taxed, but having them all in a traditional IRA/401k means that they're not accessible until 59.5 if you hit a down market and need to sell, and do not want to sell equities at a severe loss. But I'm guessing that comes back to your very low WR, where you would just sell equities out of your taxable account, even at a loss, to cover what you needed for that year.

Last question for you is on the Roth conversions and healthcare. Assuming that your coverage is coming from the healthcare marketplace, between conversions and what you pull from your taxable account, that you're not eligible for any subsidies for healthcare coverage, correct? If that's the case, did you run the numbers and saw that it was more beneficial to do the Roth conversions and pay full price for healthcare, versus no doing the conversions to keep MAGI lower to receive any subsidies?

 

[RunningBum]

...

I'm aware of wanting to keep bonds in a tax-advantaged space due to how they are taxed, but having them all in a traditional IRA/401k means that they're not accessible until 59.5 if you hit a down market and need to sell, and do not want to sell equities at a severe loss. But I'm guessing that comes back to your very low WR, where you would just sell equities out of your taxable account, even at a loss, to cover what you needed for that year.

Last question for you is on the Roth conversions and healthcare. Assuming that your coverage is coming from the healthcare marketplace, between conversions and what you pull from your taxable account, that you're not eligible for any subsidies for healthcare coverage, correct? If that's the case, did you run the numbers and saw that it was more beneficial to do the Roth conversions and pay full price for healthcare, versus no doing the conversions to keep MAGI lower to receive any subsidies?

If you need to sell in a down market and all of your bonds are in your IRAs, you can sell stocks in taxable and buy the equivalent amount in one of your IRAs. That way you aren't really selling stocks low, you are just moving them to a new account. You may even be able to do some tax loss harvesting in taxable--if you do, don't buy the same holding in your IRA or you forever lose the loss in a wash sale.

Regarding the ACA subsidy, I do a small amount of conversions but still get a subsidy. Treat the subsidy loss like an extra tax. In the 0% tax space, your total tax on the conversion is the subsidy loss %. In the 10% bracket, it's 10% + subsidy loss % of the conversion.

You mentioned SORR, but at 46 it's not the same as retiring in your 60s. Typically I think people who worry about SORR go conservative for about 5 years before ramping back up the stocks. You could go heavy in bonds for 5 years and not take much advantage of a bull market, and you'd only be 51 and still very much at risk of SORR. Are you going to stay heavy in bonds for 15-20 years? I retired at 49 and my defense against SORR was a buffer rather than a conservative AA.

 

[pb4uski]

I would set up a bond ladder for 100% of planned withdrawals for the first 3-5 years and 50% of planned withdrawals for next 12-10 years. Then you can use income from the rest of the portfolio to fill in the other 50% of the ladder over time.

So at 3.5% WR that would be a bond allocation of 30-35% in fixed income.

The bond ladder could be in your tax-deferred if you prefer, then just sell equities in taxable for spending and invest maturity proceeds in the tax-deferred account in the same equities... it's a wash.

Once you stop working you may want to look at low-tax cost Roth conversions.

 

[REIJM]

You mentioned SORR, but at 46 it's not the same as retiring in your 60s. Typically I think people who worry about SORR go conservative for about 5 years before ramping back up the stocks. You could go heavy in bonds for 5 years and not take much advantage of a bull market, and you'd only be 51 and still very much at risk of SORR. Are you going to stay heavy in bonds for 15-20 years? I retired at 49 and my defense against SORR was a buffer rather than a conservative AA.

No, when I think about increasing cash or bond holdings, it would be for the 3-5 years prior to, and after retirement, before returning to higher equity positions. That window around retirement would just be to help preserve some of the wealth that has been created if we were to unfortunately hit a turbulent market right around the time of retirement.

Let's say I retire at 46 with a $5M portfolio, and for the next 5 years the portfolio sees an average annual real return of +6%, and I take 3% ($150k) out as the withdrawal rate for those 5 years, my portfolio balance is $5.9M (+18% from its initial balance). But if those same 5 years have an average real return of -6% and I still pull out the same $150k a year, the balance is $3.0M (-40% from the initial balance).

So those first ~5 years can make a big difference on the stability of a long retirement when retiring early, which is why I asked the question about accounting for SORR with one's AA in my original email.


As for your situation, you said you had a buffer as your hedge against SORR. What does that mean? You were holding a larger than normal portion of your portfolio in cash? You had enough flexbility in your budget that if a year or two was bad in the market, you'd just cut back on how much you would withdraw, but still be able to cover all of your obligations?

 

[RunningBum]

No, when I think about increasing cash or bond holdings, it would be for the 3-5 years prior to, and after retirement, before returning to higher equity positions. That window around retirement would just be to help preserve some of the wealth that has been created if we were to unfortunately hit a turbulent market right around the time of retirement.

Let's say I retire at 46 with a $5M portfolio, and for the next 5 years the portfolio sees an average annual real return of +6%, and I take 3% ($150k) out as the withdrawal rate for those 5 years, my portfolio balance is $5.9M (+18% from its initial balance). But if those same 5 years have an average real return of -6% and I still pull out the same $150k a year, the balance is $3.0M (-40% from the initial balance).

So those first ~5 years can make a big difference on the stability of a long retirement when retiring early, which is why I asked the question about accounting for SORR with one's AA in my original email.


As for your situation, you said you had a buffer as your hedge against SORR. What does that mean? You were holding a larger than normal portion of your portfolio in cash? You had enough flexbility in your budget that if a year or two was bad in the market, you'd just cut back on how much you would withdraw, but still be able to cover all of your obligations?

So what happens if years 6-10 are bad? Especially if years 1-5 are neutral? My point is that at age 51 SORR isn't over unless those first 5 years are really good, and if you increase cash/bond holdings for years 1-5 you're less likely to get that 6% real return. You still probably have to plan for ~40 or so years more.

Look at it this way. Should a 51 year old new retiree worry about SORR? What is the difference between that new retiree and you having been 5 years retired but with pretty flat returns the first 5 years of your retirement? There isn't anything special about the first 5 years after which you can stop worry about SORR. IMO if you are concerned about SORR you should stay concerned until you have estimated XX number of years or have enough overall buffer in your portfolio that you can weather a poor sequence of returns.

I don't know what XX # of years is, or exactly how to determine how poort of a sequence of returns you need to weather. SORR wasn't a topic I was aware of when I ER'd. My buffer was to have an overall portfolio that allowed me about a 3% WR, if I recall correctly, as opposed to 4% which is considered safe over a 30 year time period. Since it looks like you are talking 3% I would say you probably also have a sufficient buffer. If you want to cut your equities holding for the first 5 years that's your business and maybe it will work out, but I don't think it's any guarantee of safety.

I also use a VPW strategy which cuts back on the next year's target spending if returns are poor or I overspend for some reason. It also lets me ramp up spending when returns are good. I like this because it makes the changes more gradually and automatically, as opposed to having a couple of bad years and counting on a rebound that may or may not come.

 

[SecondCor521]

I appreciate the detailed response, thank you.

Yes, we definitely have flexibility in our budget (even at a 3.0% WR, we'd still have $70k a year beyond our normal budgeted expenses to cover our healthcare needs, general spending, travel/vacation (our child will still be in middle school at this point, so for a while it's likely just going to be normal summer vacations), etc.

I'm aware of wanting to keep bonds in a tax-advantaged space due to how they are taxed, but having them all in a traditional IRA/401k means that they're not accessible until 59.5 if you hit a down market and need to sell, and do not want to sell equities at a severe loss. But I'm guessing that comes back to your very low WR, where you would just sell equities out of your taxable account, even at a loss, to cover what you needed for that year.

Last question for you is on the Roth conversions and healthcare. Assuming that your coverage is coming from the healthcare marketplace, between conversions and what you pull from your taxable account, that you're not eligible for any subsidies for healthcare coverage, correct? If that's the case, did you run the numbers and saw that it was more beneficial to do the Roth conversions and pay full price for healthcare, versus no doing the conversions to keep MAGI lower to receive any subsidies?

My pleasure.

If you want to, you can view your low WR% and budget flexibility as your SORR defense rather than bonds.

If you hit a downturn before 59.5 and keep bonds in your IRA (as I do), you can sell stocks in taxable to fund your expenses then reallocate from bonds to stocks in your IRA. This has pretty much the same effect as selling bonds from your IRA to fund your expenses, with the added bonus of a capital loss which would reduce your taxes somewhat for a while because the capital loss would offset capital gains or ordinary income, depending on the specifics of your circumstance.

And yes, the low WR% helps tremendously. You're right, I did sell stocks in my taxable while they were temporarily low in 2022. But at a 1% WR (me) or a 3% WR (you), selling a year's worth of expenses at a 20% loss (2022) means a overall loss of portfolio value of 1% (or 3%) of 20%, or 0.2% or 0.6% of the portfolio.

So if you had been retired in 2022, you would have lost 0.6% of your portfolio due to SORR. That would leave you with 99.4%. So instead of a 3% WR, you're now up to a 3% * 100% / 99.4% = 3.02% WR. Which is still 100% historically safe.

Yes, it gets worse if the market is down for 50% instead of 20%, and if you're pulling 4% or 5% instead of 1% or 3% and if the market stays down for years. (Cue other people bringing up Japan and lost decades.) And it's psychologically tough to face, because the nominal value of the portfolio *is* down 20%.

But with a small enough WR% and only pulling your expenses as you need them, and some spending flexibility, it isn't as damaging as I think people worry about and talk about.

Also, for me, who retired in 2016 and has seen my portfolio essentially double, I'm now playing with house money, so to speak. I didn't even have capital losses when I sold my stock in 2022, because I had bought it for half price 6 years prior.

On your question about Roth conversions and ACA, I consider the loss of ACA subsidy as a parallel third tax system (next to federal income and state income taxes). What I do is estimate what my marginal tax rate will be later (personally I use my age 85 predicted marginal tax rate), let's say that's 25%. I then use the Case Study Spreadsheet over on the MMM forums in December to see what my marginal tax rate would be for a broad range of Roth conversion amounts including the ACA subsidy impacts. I then convert up to an amount that makes sense to me, which generally means I try to convert as many dollars as I can without paying more than about a low 20-ish rate. I rerun my analysis each year.

There are lots of Roth conversion / ACA threads here already, but bottom line is that I convert based on the balance of risks and benefits. There are lots of considerations; for me the trump card is the asymmetric risk argument, which is that it is better overall to make the mistake of converting too little rather than too much. Because if you convert too much and are wrong, you're in a much worse situation because you would have a lot of marginal utility lost on those tax dollars you paid unnecessarily; if you convert too little and are wrong, you just end up wealthy and paying somewhat more in taxes. I also like to think that by rerunning the analysis each year, I can course correct over time.

 

[Gumby]

But not too early to be thinking about plans.

As Dwight Eisenhower said, "Plans are worthless, but planning is everything.”

 

[SecondCor521]

Let's say I retire at 46 with a $5M portfolio, and for the next 5 years the portfolio sees an average annual real return of +6%, and I take 3% ($150k) out as the withdrawal rate for those 5 years, my portfolio balance is $5.9M (+18% from its initial balance). But if those same 5 years have an average real return of -6% and I still pull out the same $150k a year, the balance is $3.0M (-40% from the initial balance).

The way you write this, it sounds like you are thinking that there is a 50-50 chance of these two outcomes.

Two things to think about:

1. The historical likelihood of a +6% 5 year period compared to a -6% 5 year period is probably more like 90-10 or even 100-0 if you include interest and dividends. Which you should, because interest and dividends are real. Whether you want to rely on historical likelihoods is, of course, a religious skirmish that people engage in from time to time.

2. The kind of person you are, in year 2 or 3 of the -6% 5 year period, you won't be pulling out $150K per year, and you won't in years 4 or 5 either. You'll either cut back to $100K or even $75K a year, and you may even go back to work and earn $100K a year and stop drawing from your portfolio until it recovers.

Cutting expenses and going back to work for a few years isn't ideal maybe, but (A) there's almost no chance of it happening, and (B) it's arguably better than worrying about it for the next 20 years of your life and sacrificing some upside.

In this context, it does sort of matter, I think, how old you are when you initially FIRE and what kind of career you have. A doctor looking to retire at 50 would be wise to be more cautious than a manager or consultant in their early 40s because it's arguably harder for the former to go back to work than the latter because of age and licensing considerations. Similarly, budget flexibility and backup plans are worth thinking about - if your attitude is that you could pick up teaching English as a foreign language in Indonesia and that might be a fun thing anyway, that's different from someone who really really never wants to work again.

Keep in mind this is all coming from someone who retired with a 2% WR in 2016 and is now about 1% WR and trying to find ways to spend more in a healthy way. If I had retired on 4% in January 2022, it's likely I would be singing a different tune.

 

[AlabaMalaysia]

55M single retired at 46.

Here's how I approached the question:

Zeroth, I figured out my goals and priorities. For me it was (a) FIRE more or less as soon as I didn't like my job, (b) then have a safe WR, then a few other goals such as (c) legacy for my kids and (d) financial simplicity.

First, I figured out what lifestyle I wanted and what that would cost. I decided I'd be happy with my then current lifestyle and so I could pretty much just look at Quicken and adjust for things like lower taxes and OOP healthcare. It wasn't, but for argument's sake let's say $40K.

I then figured out what 25x that number was and aimed for that in my FIRE stash. So that was $1M.

I then ran FIREcalc sensitivity to figure out what I wanted my overall AA to be. For me that turned out to be about 90/10. 90/10 was the AA that had 100% historical safety given my assumed planning period of ~40 years (goal B) and had the largest average remaining balance (goal C).

I then looked at the Bogleheads' asset location article at Tax-efficient fund placement - Bogleheads. In my case it was easy - the 10% bonds goes in my traditional IRA, and everything else is stocks.

I then decided how to fund my 46 to 59.5 lifestyle. I chose to spend from taxable for regular expenses, and Roth convert to have a conversion ladder if I ran out of taxable before then. Because I ran into some unplanned extra income, I haven't and won't run out of taxable before then, but I still do Roth conversions for tax rate arbitrage between now and my 80s.

I didn't worry about SORR because I overshot my mark and retired with a 2.x% WR, which is historically safe by a wide margin. If SORR is playing Russian roulette, a 2.x% WR means there are no bullets in the gun. It sounds like your 3.5% has wiggle room, which means there are probably no bullets in your SORR gun either.

So:

1. If that assessment is correct, I wouldn't worry about the bond tent that all the cool kids are talking about these days.

2. I wouldn't bother with bonds in taxable at all. I would look at your allocation overall, then put whatever bonds you want in your 401(k)/IRAs. You can rebalance inside your IRAs with zero tax consequences as you adjust to retirement and see how things are working. This approach does have a side effect risk to be aware of - if your bonds are all in your IRAs and your taxable is all stocks, then you might risk depleting your taxable portfolio sooner if you have bad SORR luck in your pre-59.5 period. I considered this risk, and to me all it meant was I'd start on my Roth conversion ladder at that point which might be sooner than I wanted. But the allocation tax benefits were good enough that I decided that the risk wasn't very likely or very high. I retired in 2016 and as mentioned above, my taxable account still has a solid balance even after 8 years of spending from it, and my Roth IRA pipeline has 12 years of expenses available in it, or 46 years if you account for side income I can pretty reasonably expect.

This is basically how we have looked at our setup. Wife and I will retire in 2 yrs at 41 and 38 yo and basically over saved to get to a SWR of 2.5% solves these uncertainties IMO. IF everyone that is in a position to FIRE in 40s has a 2.5% SWR mindset it makes things less complicated I think.

 

[AlabaMalaysia]

My pleasure.

If you want to, you can view your low WR% and budget flexibility as your SORR defense rather than bonds.

If you hit a downturn before 59.5 and keep bonds in your IRA (as I do), you can sell stocks in taxable to fund your expenses then reallocate from bonds to stocks in your IRA. This has pretty much the same effect as selling bonds from your IRA to fund your expenses, with the added bonus of a capital loss which would reduce your taxes somewhat for a while because the capital loss would offset capital gains or ordinary income, depending on the specifics of your circumstance.

And yes, the low WR% helps tremendously. You're right, I did sell stocks in my taxable while they were temporarily low in 2022. But at a 1% WR (me) or a 3% WR (you), selling a year's worth of expenses at a 20% loss (2022) means a overall loss of portfolio value of 1% (or 3%) of 20%, or 0.2% or 0.6% of the portfolio.

So if you had been retired in 2022, you would have lost 0.6% of your portfolio due to SORR. That would leave you with 99.4%. So instead of a 3% WR, you're now up to a 3% * 100% / 99.4% = 3.02% WR. Which is still 100% historically safe.

Yes, it gets worse if the market is down for 50% instead of 20%, and if you're pulling 4% or 5% instead of 1% or 3% and if the market stays down for years. (Cue other people bringing up Japan and lost decades.) And it's psychologically tough to face, because the nominal value of the portfolio *is* down 20%.

But with a small enough WR% and only pulling your expenses as you need them, and some spending flexibility, it isn't as damaging as I think people worry about and talk about.

Also, for me, who retired in 2016 and has seen my portfolio essentially double, I'm now playing with house money, so to speak. I didn't even have capital losses when I sold my stock in 2022, because I had bought it for half price 6 years prior.

On your question about Roth conversions and ACA, I consider the loss of ACA subsidy as a parallel third tax system (next to federal income and state income taxes). What I do is estimate what my marginal tax rate will be later (personally I use my age 85 predicted marginal tax rate), let's say that's 25%. I then use the Case Study Spreadsheet over on the MMM forums in December to see what my marginal tax rate would be for a broad range of Roth conversion amounts including the ACA subsidy impacts. I then convert up to an amount that makes sense to me, which generally means I try to convert as many dollars as I can without paying more than about a low 20-ish rate. I rerun my analysis each year.

There are lots of Roth conversion / ACA threads here already, but bottom line is that I convert based on the balance of risks and benefits. There are lots of considerations; for me the trump card is the asymmetric risk argument, which is that it is better overall to make the mistake of converting too little rather than too much. Because if you convert too much and are wrong, you're in a much worse situation because you would have a lot of marginal utility lost on those tax dollars you paid unnecessarily; if you convert too little and are wrong, you just end up wealthy and paying somewhat more in taxes. I also like to think that by rerunning the analysis each year, I can course correct over time.

If I remember right the math is even if US market pukes -50% during first 10 years and doesn't even come back to par for another 10 yrs that a 2-2.5% SWR still gets one to a 60 year retirement at almost 100%. Anything worse than that is bad for everyone anyways.

 

[FedRetired50]

the taxable brokerage is your only option unless you want to pay penalties.

You can withdraw from one or more retirement accounts, penalty-free, using SEPP/72t.

 

[RunningBum]

There are lots of Roth conversion / ACA threads here already, but bottom line is that I convert based on the balance of risks and benefits. There are lots of considerations; for me the trump card is the asymmetric risk argument, which is that it is better overall to make the mistake of converting too little rather than too much. Because if you convert too much and are wrong, you're in a much worse situation because you would have a lot of marginal utility lost on those tax dollars you paid unnecessarily; if you convert too little and are wrong, you just end up wealthy and paying somewhat more in taxes. I also like to think that by rerunning the analysis each year, I can course correct over time.

It depends on why you are paying more in taxes later. If it's because tax rates have increased, there's no correlation with being more wealthy. You may in fact be in that "much worse" situation because you are paying higher taxes when you'd have been better off paying taxes at a lower rate earlier.

I think you probably based the above paragraph on returns in your tIRA. If you have good returns you may pay more in taxes but it's fine because you have more money. I don't disagree, but I only keep fixed income investments in my tIRA, so I expect my results to be unspectacular and fairly stable, depending on interest rates.

My point is that future returns aren't the only factor in how much you pay in taxes in the future. Maybe I misunderstood your point.