Retirement Strategy - 4-5 years out

[NgineER]

Hey all,

Looking for feedback and thoughts for my situation (beyond what I've been able to glean from the forum and what AI recommends).

We've got four kids, the first one college bound this year and the last one in eight years.

Our situation:
Me 51, DW 50
DD10, DD13, DS16 and DD18.

Income:
W2: $230k
Net rents: $90k

Expenses:
About $170k? Used to budget but stopped that seven years ago. We have a lot of payroll deductions, and we save about $10k on top of those annually based on recent year's investment statements.

Properties:
$1.35M mortgages (Primary, Cabin (in the woods)/STR, 5 duplexes/triplexes) (Dave Ramsey would not be happy with us )
$1M equity in rentals (56%), $450k equity in home and cabin

Investments	Total	Annual Contributions
t-IRA/401k	$1.44M	$43k incl. 8% match
Roth IRA/After Tax 401k	$1.54M ($400k of which are contributions)	$52k, 12% after-tax, 401(k) catch-up and Roths
Brokerage	$350k	$10k net ($37k contributions-$24k charitable giving)

At this point we are 97% equities, mainly VOO/VTI, some individual stocks <5% and the rest is in cash. We have a pretty strong cash flow which serves as my fixed income indexed for inflation.

I'm looking to retire at 55-ish. We'd like to add another cabin (on a lake)/STR before all kids leave the nest and before I retire. We'd use it for a total of two weeks a year and rent it out the rest of the time like we do with our cabin in the woods today. The STR gives us enough income to cover the expenses, and we get to enjoy it a bit as well, but it is a paper loss with depreciation which is valuable.

My plan was to do a Roth IRA ladder that combined with the rental income would cover our expenses $400k/5=$80k (five-year rule)) +$90k --> $170k for expenses. My plan is to convert $150k per year from the t-IRA upon retirement to hopefully knock the t-IRA down to manageable levels, but with an estimated $2M in pre-tax upon retirement I might have to up that some more.

I'd like to hold off on retirement until we have built up our reserves a bit more, purchased another cabin and seen some of the kids through college.

How should I divvy up my contributions in preparation for retirement? Should I change AA as I am getting closer?

Thanks!

 

[TickTock]

Assuming the net rents are reliable in the future, you have less of a need for fixed income in the portfolio. That said, I do think it's prudent to tilt more towards FI as you approach retirement. FWIW, we went from 80/20 to 60/40 prior to retirement - but keep in mind, we have no income source other than the portfolio (too young for SS, DW has a pension but we're holding off on taking it to let it grow).

Start tracking your expenses again! Then make your best guess at how they'll change in retirement - most likely, lower taxes and higher health insurance premiums.

From your numbers, you look to be in good shape to retire in 4 - 5 years. Assuming no market crash and prolonged recovery.

 

[NgineER]

Thanks TickTock, good insights. When did you switch from 80/20 to 60/40?

 

[TickTock]

We changed by 5% each year for four years.

 

[Koolau]

I'm guessing you're already run FIRECalc which is an excellent tool to determine if you have enough to retire - not as much how to deploy your funds.

You mentioned using depreciation to your advantage. Remember that there may (likely will) be depreciation recapture when you sell. You need to plan for that.

 

[COcheesehead]

I'm guessing you're already run FIRECalc which is an excellent tool to determine if you have enough to retire - not as much how to deploy your funds.

You mentioned using depreciation to your advantage. Remember that there may (likely will) be depreciation recapture when you sell. You need to plan for that.

Yep, depreciation is just like a loan. No free lunch. When I sold my last RE holding I had to cut a check to Uncle Sam for over $300,000

 

[Koolau]

Yep, depreciation is just like a loan. No free lunch. When I sold my last RE holding I had to cut a check to Uncle Sam for over $300,000

Gaaahhhhhhkkkk!

When we sold our only rental we had to cut a check for just over $30K. Unpleasant but not really painful like $300K must have been. Bummer!

 

[NgineER]

Yep, depreciation is just like a loan. No free lunch. When I sold my last RE holding I had to cut a check to Uncle Sam for over $300,000

Yeah - you've got to manage that, but doable I think... Definitely not a free lunch, but definitely helpful in the higher earnings year

 

[NgineER]

I've run firecalc, but what I don't have a good grip on is whether to save less in my traditional 401(k) and increase my brokerage accounts.

 

[Patience]

It is staggering to me how parallel our situations are.

The ladder is a good idea to start making some of that equity accessible. We stopped our tax advantaged contributions to relieve a mortgage burden. Not everyone's first choice, but we sleep better at night.

How are you holding together? Ever since I realized the rent income matches my w*rk income, I've been wanting to jump ship. Trying to hold on for two more years. A colleague of mine died recently, same age. I find myself worrying that I may not have two more years.

It is a daily battle.

 

[SnowballCamper]

Another option is the SEPP/72t plan. I would not be contributing any more to IRAs (except to get any matching funds) and put the rest in regular brokerage and 529s. Maybe look at the SEPP vs backdoor Roth ladder to see which is better for you. I'm doing a SEPP, but it's a marginal part of my income at this point.

 

[COcheesehead]

Yeah - you've got to manage that, but doable I think... Definitely not a free lunch, but definitely helpful in the higher earnings year

That’s when I got mine. Still stings when you sell.

 

[RxMan]

Four daughters, three of which are teenagers? Did I read that correctly? Your main strategy is maintaining your sanity as a parent.

Seriously, I’d recommend a couple of things. Now is the perfect time to start tracking your expenses to get a clear picture of what you need per month in retirement. This is the single most important piece of information needed to make an informed decision on when to retire.

I’d begin a gradual process of reducing your equity percentage. Comfort level and risk tolerance vary among different people but at almost 100% equities with a retirement timeframe of about 4-5 years I’d definitely start shifting to a more conservative asset allocation. It’s time to start shifting your mindset from offense to defense.

Think about your legacy wishes and how much and when you want to financially assist your children. This impacts your nest egg needs for retirement. College assistance- you mentioned that but how much help are you planning to provide them? Weddings? Home purchase assistance? Inheritance? There are a lot of ways to potentially help your children going forward. Think about what and how and when you want to do that for each of them individually.

I’d consider beginning a shift to focus savings in taxable brokerage accounts verses tax deferred accounts. You’ve already got a good mix of traditional/pre-tax 401k balance to Roth/aftertax 401k balance. The account that will give you extra flexibility in regards to retirement timing will be the brokerage account.

You didn’t mention whether or not you have an HSA. I’d recommend considering to fund that if you are saving extra each month anyway. That’s a powerful tax advantaged account that could come in handy in retirement if you start funding it now.

If it were me, I’d do the following:

Only contribute to a traditional 401k account at a level that is the minimum percentage to take full advantage of the matching contributions. Fully fund a Roth IRA each year. Consider a high deductible health plan to access the ability for HSA contributions if you aren’t already doing that now.

Then throw a lot of money into a taxable brokerage account to give you flexibility in those first few years of retirement before you reach 59.5 years old. I’d also maintain a larger than average cash reserve fund to be able to cover all of your mortgage debt in case of the unexpected downturn in rental income or unexpected repairs.

Congratulations! You’re doing well. Good luck with your retirement plans.

 

[pjigar]

I've run firecalc, but what I don't have a good grip on is whether to save less in my traditional 401(k) and increase my brokerage accounts.

Your aim is to equalize top-tax rate between now, during pre-RMD retirement and after RMD. You need to figure out which top-tax rate you will fall into when you retire AND at RMD. If the future tax rate is higher than today then contribute to brokerage instead or traditional 401k/IRA. Mind you, future growth and tax rates are unknown so this exercise can get tricky.

 

[NgineER]

thanks for all input so far. I’ll respond later today or this weekend. I will dig deeper into the marginal tax rate. 2024 was a high tax year, this year less so due to depreciation. I’ll need to investigate if it makes sense to switch to some Roth contributions for the match and then the rest in brokerage accounts.

Or do I just put it into a Roth 401(k)?

 

[pjigar]

thanks for all input so far. I’ll respond later today or this weekend. I will dig deeper into the marginal tax rate. 2024 was a high tax year, this year less so due to depreciation. I’ll need to investigate if it makes sense to switch to some Roth contributions for the match and then the rest in brokerage accounts.

Question you are trying to answer from tax-rate perspective is: Do I contribute to pre-tax account (traditional 401k/IRA) or a post-tax account (Roth 401k/IRA/brokerage)? I have created a spreadsheet that tries to project MAGI (you will have to eye-ball the top tax-rate based on MAGI: yellow cells) for different contribution/Roth conversion strategies. See if you can use it or customize it.

RMD Scenarios

docs.google.com

Or do I just put it into a Roth 401(k)?

If you can live off the brokerage balance in your ER period (i.e. before 55 or 59.5) then I prefer to contribute to Roth.

 

[SnowballCamper]

The thing I didn't learn is the much more lenient capital gains tax rates. They make it much more desirable to be able to live off capital gains from the regular brokerage account. especially in the early retirement years (before 59.5). pjigar is spot on with the appropriate goal, to equalize tax rates across retirement years because this is how you pay the least tax overall.

 

[Koolau]

I've run firecalc, but what I don't have a good grip on is whether to save less in my traditional 401(k) and increase my brokerage accounts.

Yes, I had way too much in 401(k) partially because our match was in company stock - which had a habit of "taking off" occasionally and swelling the 401(k) in comparison to taxable.

Only you can decide what to do, but I'm living proof that you can over-do the 401(k). Still dealing with the results some 20+ years later. Many worse problems to have, but it's frustrating to pay taxes when I could probably have avoided some of them with more judicious deployment of funds back in the day. Best luck with all this.

 

[SevenUp]

I will dig deeper into the marginal tax rate.

If you can use Excel, the case study spreadsheet could help you there. Might look imposing at first glance but you only have to enter what applies to you.

 

[NgineER]

It is staggering to me how parallel our situations are.

The ladder is a good idea to start making some of that equity accessible. We stopped our tax advantaged contributions to relieve a mortgage burden. Not everyone's first choice, but we sleep better at night.

How are you holding together? Ever since I realized the rent income matches my w*rk income, I've been wanting to jump ship. Trying to hold on for two more years. A colleague of mine died recently, same age. I find myself worrying that I may not have two more years.

It is a daily battle.

yes-when I crossed over into FI territory, much thanks to the rental property income work became easier. I still enjoy it, but it is nice that it is more optional. I have not considered death as reason for an early exit, but stuff happens. I’ve had a couple of friends have heart attacks at relatively young ages. It is impossible to know what is in your future, but one thing is certain-we are trading our best years now.

 

[NgineER]

Another option is the SEPP/72t plan. I would not be contributing any more to IRAs (except to get any matching funds) and put the rest in regular brokerage and 529s. Maybe look at the SEPP vs backdoor Roth ladder to see which is better for you. I'm doing a SEPP, but it's a marginal part of my income at this point.

Yes-I’ve considered that also, I’ve got to dig deeper into it. I feel you’d get more flexibility with the Roth rollover, but only if I have enough in the Roth.

 

[pjigar]

Yes-I’ve considered that also, I’ve got to dig deeper into it. I feel you’d get more flexibility with the Roth rollover, but only if I have enough in the Roth.

FWIW I consider Roth as a "use last" vehicle because it has the best tax treatment. Our spending plan order is: Differed comp -> brokerage -> pre-tax -> Roth. Which means we never even touch Roth if we underspend and then Roth would go to heirs tax-free.

 

[Koolau]

FWIW I consider Roth as a "use last" vehicle because it has the best tax treatment. Our spending plan order is: Differed comp -> brokerage -> pre-tax -> Roth. Which means we never even touch Roth if we underspend and then Roth would go to heirs tax-free.

This has always been my thinking as well. BUT there might be some exceptions - such as preventing going over cliffs like IRMAA or NIIT or entering a higher tax bracket. I would always try to figure out something else, but I can see a time when taking some Roth money (hopefully not a large amount) just might make sense.

I've w*rked hard over the years since retirement to tax-efficiently convert tIRAs to Roths. Having w*rked that hard, I thought I'd never consider using my Roths. But now I see that they can be used strategically in certain situations. I've only done it a couple of times now and the amounts have been relatively small.

I think the goal to keep Roths for passing on is a good one. Just be ready to consider deploying some Roth money if it's the best move. YMMV

 

[HarveyS]

Congrats on a well thought out approach and for asking for advice. You've made a good start and are in a position that would be seen by many as winning the race... at this point. I caution you there is a lot more race ahead.
Holding off retirement seems prudent.

My AA is 90 equities, 5 bonds, 5 cash/cash equivalent. 0 real estate. I'm retired over 10 years and have been moving to higher stock and lower bonds over that timeframe. Our living expenses come from dividends and selling equities taxed at LTCG rates. Not for everyone, but works for me and DW.

I wish I had invested more in Roth when younger and now find myself doing roth conversions.

What is your plan for kids college? I don't see a 529 mentioned. You are facing 16 years of college costs over 12 years. My kids went to state schools, got scholarships, worked, and I still saw 20k/kid/yr expense.

What's your plan for medical insurance when you quit working? May be upwards of $30k/yr. As mentioned, HSA is a great tool you should investigate.

You need to know your spend rate. You need to know it for several years to see what the baseline is. IANAAccountant; Rough calculation: 230+90=320 income. Less 40 tIRA+52Roth+10brokerage+64(20%inc tax withholding) = 154 spending, a bit lower than your estimate. Hooray!

 

[NgineER]

Question you are trying to answer from tax-rate perspective is: Do I contribute to pre-tax account (traditional 401k/IRA) or a post-tax account (Roth 401k/IRA/brokerage)? I have created a spreadsheet that tries to project MAGI (you will have to eye-ball the top tax-rate based on MAGI: yellow cells) for different contribution/Roth conversion strategies. See if you can use it or customize it.

RMD Scenarios

docs.google.com

If you can live off the brokerage balance in your ER period (i.e. before 55 or 59.5) then I prefer to contribute to Roth.

Thanks for the spreadsheet! I believe it is telling me that I should go for a mix of traditional and Roth 401(k) contributions now for the next four years. If I can map it out correctly, I should be able to stay in the 22% bracket now, do conversions up to 12% before Medicare and then probably do conversions up to 24% between Medicare and SS and then drop to 22% after SS before RMD. That should land me in the 22% bracket long term.

If I only do conversions up to the 12% bracket before RMD I will end up solidly in the 24% bracket ($5M t-IRA assets), if I do up to 22% only, I will just barely get into the 24% bracket whereas ($2M t-IRA assets) and if I do to the top of the 24% bracket, I won't have any RMDs and land in the 12% bracket.

Now do I do traditional 401(k) contributions and instead at year end do a Roth rollover when I better understand better what my ultimate tax situation will be?