Retirement Plan 2.0 Stress Test

[Max Valerion]

Sounds better! FWIW - might want to check those hvac replacement costs as $12k doesn't buy what it used to.

Understood. I have the $100k for immediate needs and if things really go sideways it will give me time to adjust my plans.

 

[Al18]

Having 5 years of expenses in CD's at the beginning of your retirement and actually spending 5 years of CD's in a row are two different things. You have the 5 years of CD's to lessen the SORR. But the chances of the stock market values dropping 5 years in a row are small.

I'm just suggesting for the first 5 years, to redeem about $60K in CD, and sell $40K in stocks from your taxable brokerage account each year. For example, let's say you own $250K of VT that you purchased more than a year ago. VT has a CAGR of 11.5% over the past 10 years. You could sell 16% of VT each year - which is $40K. Based on past history, you will still have about $200K of VT at the end of 5 years and 200K in CD's. If you plug that into a 1040 tax calculator and you file MFJ, you will probably not owe any federal taxes for each of those 5 years.

 

[SecondCor521]

If you plug that into a 1040 tax calculator and you file MFJ, you will probably not owe any federal taxes for each of those 5 years.

Probably true, but OP's low cost ACA health insurance plans could be impacted. The tax cost of breaching certain FPL levels on a marginal rate basis can be pretty high.

I would encourage OP to reconsider some of their planning assumptions:

1. SORR. I'm not that familiar with GK, but a 4.6% WR at age 52 with lots of budget padding probably doesn't have much SORR. I understand the idea behind SORR and the bond (or CD in this case) tent approach to address it, but if it's not a real risk then the bond/CD tent approach can represent excessive conservatism which could have a high opportunity cost.

2. CSR94. It's super cheap decent quality insurance, but the loss of flexibility may be costly. I was on a Silver plan for the first few years of FIRE because of the CSRs, but then I realized that I don't use that much health care, so I was getting a good deal but it was more insurance than I needed. I switched to a Bronze HSA plan and generally aim for higher FPL% targets which makes my cash flow easier to tax manage over the years.

3. There may be reasons for the two stage approach of living solely off CDs then switching to a mixture of CDs and Roth contributions, but personally I'd probably blend the two stages together as Al18 suggested: live off a combination of CDs, taxable LTCG, and Roth contributions each year. It's not exactly clear if OP intends to be on CSR94 in the first 5.5 years of their plan, but Roth converting up to their chosen FPL% level each year would work well I think.

 

[Max Valerion]

Probably true, but OP's low cost ACA health insurance plans could be impacted. The tax cost of breaching certain FPL levels on a marginal rate basis can be pretty high.

I would encourage OP to reconsider some of their planning assumptions:

1. SORR. I'm not that familiar with GK, but a 4.6% WR at age 52 with lots of budget padding probably doesn't have much SORR. I understand the idea behind SORR and the bond (or CD in this case) tent approach to address it, but if it's not a real risk then the bond/CD tent approach can represent excessive conservatism which could have a high opportunity cost.

2. CSR94. It's super cheap decent quality insurance, but the loss of flexibility may be costly. I was on a Silver plan for the first few years of FIRE because of the CSRs, but then I realized that I don't use that much health care, so I was getting a good deal but it was more insurance than I needed. I switched to a Bronze HSA plan and generally aim for higher FPL% targets which makes my cash flow easier to tax manage over the years.

3. There may be reasons for the two stage approach of living solely off CDs then switching to a mixture of CDs and Roth contributions, but personally I'd probably blend the two stages together as Al18 suggested: live off a combination of CDs, taxable LTCG, and Roth contributions each year. It's not exactly clear if OP intends to be on CSR94 in the first 5.5 years of their plan, but Roth converting up to their chosen FPL% level each year would work well I think.

Yeah CSR94 is a core part of my plan probably all the way to Medicare. With the amount of money I will have into CD's and SPAXX I am estimating I will have to do roth conversions of $5,000.00 - $10,000.00 to get to CSR94 level. Once I run out of cash / CD's (and hit 59.5) I will continue to lean on my roth account to keep CSR94 until 65.

I think some of what you guys are talking about is probably too complicated for me. If I can just buy 5 1/2 years worth of CD's and let my IRA(s) rip in the market and not have to think too much I will be pretty happy.

 

[Max Valerion]

Having 5 years of expenses in CD's at the beginning of your retirement and actually spending 5 years of CD's in a row are two different things. You have the 5 years of CD's to lessen the SORR. But the chances of the stock market values dropping 5 years in a row are small.

I'm just suggesting for the first 5 years, to redeem about $60K in CD, and sell $40K in stocks from your taxable brokerage account each year. For example, let's say you own $250K of VT that you purchased more than a year ago. VT has a CAGR of 11.5% over the past 10 years. You could sell 16% of VT each year - which is $40K. Based on past history, you will still have about $200K of VT at the end of 5 years and 200K in CD's. If you plug that into a 1040 tax calculator and you file MFJ, you will probably not owe any federal taxes for each of those 5 years.

$40k of income puts me out of CSR94. I need to be closer to $32k and with interest from SPAXX / CD's I am probably around $28k right off jump street.

 

[SecondCor521]

$40k of income puts me out of CSR94. I need to be closer to $32k and with interest from SPAXX / CD's I am probably around $28k right off jump street.

$40K of selling stocks is not equal to $40K of income. Only the capital gain or loss impacts AGI. But you're right in that you don't have a lot of wiggle room if you're going to insist on CSR94.

You might consider CSR87. It's almost as good as CSR94, but you can go up to 200% FPL which would be about $43,280 for you (2026, MFJ, living in the lower 48). That would give you more flexibility and breathing room in terms of cash flow and taxes. I'm not sure what the premium and OOP look like these days. CSR87 is what I did in my first few years of FIRE.

 

[Al18]

If you spent $155K on VT 3 years ago, it would now be worth $250K. You would pay taxes at 0% on the $95K gain. I don’t know about ACA - didn’t need it.

 

[ncbill]

$40k of income puts me out of CSR94. I need to be closer to $32k and with interest from SPAXX / CD's I am probably around $28k right off jump street.

move some fixed income into MYGAs (w/ 10% withdrawal option) that mature when you hit 65?

covered call ETFs where the distributions are primarily return of capital (ROC) are another option in taxable.

though you have to be careful to use those which have avoided NAV erosion (e.g. QQQI)

 

[Koolau]

This is getting dangerously close to happening lol.

Couple of updates (thanks to everyone that has offered advice).

Looks like I will start out with slightly more than I originally anticipated - I should be somewhere between $2.4m and $2.5m to start out.

I will not be changing my planned withdrawal rate at all. I am going to end up 70/30 with my existing Roth and Traditional 401k money (which will end up IRA money) invested 100% in equities since I will not need to touch them until 2032. I will have CD ladder to cover the remainder of this year plus 2027 - 2031 so 5 1/2 years or so before I need to touch my actual retirement accounts (and sell any equities). I assume this is plenty conservative to cover SOR risk and 5 1/2 years should hopefully allow for some significant growth without worrying about drops.

With the "extra" money in my plan I am going to fund a $100,000.00 cash (SPAXX) account for unforeseen issues that might come up. It occured to me that with 5 1/2 years of money tied up in CD's I could have a liquidity issue if I need to suddenly replace HVAC or vehicle or whatever so I think this $100,000.00 will give me a good buffer for unforeseen expenses.

Fingers crossed here but looks like everything is falling into place.

Yeah, I don't typically keep quite $100K cash (equivalents) but not far from it. I just feel safer that way and there have been times in my early part of FIRE that I would have been better off with even MORE!! (Who knew?).

 

[RetiredHappy]

Yeah, I don't typically keep quite $100K cash (equivalents) but not far from it. I just feel safer that way and there have been times in my early part of FIRE that I would have been better off with even MORE!! (Who knew?).

I just looked at our checking account and money sitting as cash in the brokerage and it is pretty close to $150K. Of course some of the money sitting in the IRA has been earmarked for the remaining RMD that has to be taken. Then we just bought HOSIX, so that is another $100K.

 

[Al18]

I don’t understand keeping $100K in your checking account, unless you get a special interest rate on checking - mine pays 0%. If you keep $10K in checking and $90K in savings, paying 3.25% - that’s $2925 in interest per year.

 

[RetiredHappy]

I don’t understand keeping $100K in your checking account, unless you get a special interest rate on checking - mine pays 0%. If you keep $10K in checking and $90K in savings, paying 3.25% - that’s $2925 in interest per year.

We keep about $50K in our checking/savings which earn nothing but we keep it at that level to get max cash back with our BOA cc. The rest of the money is kept in the money market with Fidelity, earning 3+%.

 

[Texas Proud]

We keep about $50K in our checking/savings which earn nothing but we keep it at that level to get max cash back with our BOA cc. The rest of the money is kept in the money market with Fidelity, earning 3+%.

It can be in any BOA account including ML... put in a CD or something and you still get that max cash back..

 

[RetiredHappy]

It can be in any BOA account including ML... put in a CD or something and you still get that max cash back..

I know. ML used to manage our investments and we hit the max incentive on the BOA card. Our expenses are very high so the $50K that is held in the account goes out quickly before it gets replenished.

 

[HI Bill]

Spending cash and CDs in the first 7 years of ER is not a sound method for mitigating SORR. One keeps cash/MM/CDs to draw on only in market down years/bear markets, or possibly to help with managing tax rates. You’ll want to draw from equities when the are up. Otherwise, what if, in 7 years, you’ve depleted cash/MM/CDs, and you encounter a 30%+ market rout? If you look at the curves from Firecalc, you can see that (with a 4% WR), the risk of running out of money occurs from 13-20 years from the present. All that said, the OP has a low WR, and a travel budget that could be cut. Just not the ideal way of mitigating SORR.

 

[Out-to-Lunch]

Not exactly what you asked, but here is the Bogleheads book chapter on managing a windfall: https://www.bogleheads.org/wiki/Managing_a_windfall

 

[Max Valerion]

Spending cash and CDs in the first 7 years of ER is not a sound method for mitigating SORR. One keeps cash/MM/CDs to draw on only in market down years/bear markets, or possibly to help with managing tax rates. You’ll want to draw from equities when the are up. Otherwise, what if, in 7 years, you’ve depleted cash/MM/CDs, and you encounter a 30%+ market rout? If you look at the curves from Firecalc, you can see that (with a 4% WR), the risk of running out of money occurs from 13-20 years from the present. All that said, the OP has a low WR, and a travel budget that could be cut. Just not the ideal way of mitigating SORR.

Would you suggest I take the proposed $600,000.00 and split it between stock market and CD / money market?

My thought is if in year 7 the stock market drops by 30% isn't it highly likely that years 1-6 gained me at least 50% anyway? I obviously need to plan a lot more as time goes by also to make sure I have not depleted funds without sellings some stocks in good times to keep my cash reserves enough to cover 2-3 years of expenses?

 

[RetiredHappy]

Spending cash and CDs in the first 7 years of ER is not a sound method for mitigating SORR. One keeps cash/MM/CDs to draw on only in market down years/bear markets, or possibly to help with managing tax rates. You’ll want to draw from equities when the are up. Otherwise, what if, in 7 years, you’ve depleted cash/MM/CDs, and you encounter a 30%+ market rout? If you look at the curves from Firecalc, you can see that (with a 4% WR), the risk of running out of money occurs from 13-20 years from the present. All that said, the OP has a low WR, and a travel budget that could be cut. Just not the ideal way of mitigating SORR.

It depends. We set aside a 7-figure sum as cash-like to draw down during our first 7 years of retirement but depleted in 5 years. We did that because we have income from various sources coming after 7 years. Our investments were never at risk because of that.

 

[ncbill]

Spending cash and CDs in the first 7 years of ER is not a sound method for mitigating SORR. One keeps cash/MM/CDs to draw on only in market down years/bear markets, or possibly to help with managing tax rates. You’ll want to draw from equities when the are up. Otherwise, what if, in 7 years, you’ve depleted cash/MM/CDs, and you encounter a 30%+ market rout? If you look at the curves from Firecalc, you can see that (with a 4% WR), the risk of running out of money occurs from 13-20 years from the present. All that said, the OP has a low WR, and a travel budget that could be cut. Just not the ideal way of mitigating SORR.

Yes, the 'never refilled' cash bucket is a better approach to mitigate SORR as outlined here:

The Ultimate Guide to Safe Withdrawal Rates – Part 25: More Flexibility Myths - Early Retirement Now

 

[Max Valerion]

Yes, the 'never refilled' cash bucket is a better approach to mitigate SORR as outlined here:

The Ultimate Guide to Safe Withdrawal Rates – Part 25: More Flexibility Myths - Early Retirement Now

Can you guys give me some suggestions on how to handle this?

+,- $1.3m in traditional I cannot touch without doing SEPP which creates forced withdrawals

+,- $460,000.00 in Roth I can touch about 1/2 of this but I don't really want to because I want it to continue to grow tax free over the next 6 years

+,- $600,000.00 I have available to do with what I please

Instead of doing $500k CD's and $100k Cash should I mix in $250k or so into equities that I can sell at the end of the year if they are up? Should I create the forced SEPP withdrawals and do CD's inside of the traditional account? Not sure if I can choose which portion of the traditional the forced withdrawal comes from?

Overall wouldn't the simpler approach just be to start moving portions of my Roth or Traditional into cash 1-2 years before needing it? Basically refill my bucket smartly? Say 2027 is up 30% maybe I take another year off of the table and put into CD's. Or if the next two years are down I just stay the course and don't refill any buckets? Being that my buckets last 5 1/2 years don't I have plenty of flexibility on when to fill years 6 and 7?

 

[Max Valerion]

Ok so +,- $1.8m that will be invested in equities for +,- 5 years without touching. I need simple and easy to manage. I am thinking VOO and SCHD? What allocation would you guys suggest?

Also would it make sense to spend SCHD dividends to make cash / CD reserves last longer?

What if I put $500,000.00 in SCHD in traditional IRA and setup SEPP withdrawals of $15,000.00 per year to spend the dividends? That would make my reserves last longer and help avoid SORR later? Would the dividends be tax free for married couple with low MAGI?

 

[Surewhitey]

Ok so +,- $1.8m that will be invested in equities for +,- 5 years without touching. I need simple and easy to manage. I am thinking VOO and SCHD? What allocation would you guys suggest?

Also would it make sense to spend SCHD dividends to make cash / CD reserves last longer?

What if I put $500,000.00 in SCHD in traditional IRA and setup SEPP withdrawals of $15,000.00 per year to spend the dividends? That would make my reserves last longer and help avoid SORR later? Would the dividends be tax free for married couple with low MAGI?

Pretty sure withdrawals from an T-IRA is taxable as income and adds to the MAGI number. Favorable taxation on dividends only apply in taxable brokerages.

 

[TheWizard]

Pretty sure withdrawals from an T-IRA is taxable as income and adds to the MAGI number. Favorable taxation on dividends only apply in taxable brokerages.

Correct.
All withdrawals from tIRA are Ordinary Income...

 

[dobig]

Ok so +,- $1.8m that will be invested in equities for +,- 5 years without touching. I need simple and easy to manage. I am thinking VOO and SCHD? What allocation would you guys suggest?

Also would it make sense to spend SCHD dividends to make cash / CD reserves last longer?

What if I put $500,000.00 in SCHD in traditional IRA and setup SEPP withdrawals of $15,000.00 per year to spend the dividends? That would make my reserves last longer and help avoid SORR later? Would the dividends be tax free for married couple with low MAGI?

We're getting ready to retire this July at 55. Our plan is to use only dividends from our $2 mil taxable that will throw off around $93k/year at around a 4.5% yield. Our MAGI will be below $63,000 by using some higher quality covered call income funds (GPIX, GPIQ, QDVO mixed with some SPYi and QQQi) along with a broadly diversified dividend etf basket with SCHD, DGRO, FDVV, DIVB, GCOW, DTD, VTV, FELV, VYMI, VPU, DIVO, TDVI. Dividend growth should be somewhere around 6 - 7%/year taking inflation risk off the table. Our retirement accounts hold our growth and alternative investments and will not be touched until 59 1/2.

If this is a route you may want to consider I'd suggest using Snowball Analytics free version to model out different allocations to fit your income and MAGI needs. At one time we were considering a similar path as you holding a large cash reserve but when we started figuring what we would get with dividend growth it made more sense to us to put that money to work. As mentioned previously, according to Goldman Sachs in 13 of the past 14 recessions since the 1940's the average S&P dividend drawdown is less than 1%. Exception being the GFC where dividends fell 23%. In multiple recessions dividends actually went up.

 

[RetiredHappy]

We're getting ready to retire this July at 55. Our plan is to use only dividends from our $2 mil taxable that will throw off around $93k/year at around a 4.5% yield. Our MAGI will be below $63,000 by using some higher quality covered call income funds (GPIX, GPIQ, QDVO mixed with some SPYi and QQQi) along with a broadly diversified dividend etf basket with SCHD, DGRO, FDVV, DIVB, GCOW, DTD, VTV, FELV, VYMI, VPU, DIVO, TDVI. Dividend growth should be somewhere around 6 - 7%/year taking inflation risk off the table. Our retirement accounts hold our growth and alternative investments and will not be touched until 59 1/2.

If this is a route you may want to consider I'd suggest using Snowball Analytics free version to model out different allocations to fit your income and MAGI needs. At one time we were considering a similar path as you holding a large cash reserve but when we started figuring what we would get with dividend growth it made more sense to us to put that money to work. As mentioned previously, according to Goldman Sachs in 13 of the past 14 recessions since the 1940's the average S&P dividend drawdown is less than 1%. Exception being the GFC where dividends fell 23%. In multiple recessions dividends actually went up.

I am a confused. If your taxable account throws off $93K a year in income, how can your MAGI be below $63K? Is it because $93K includes ROC for some of these funds?