Retirement Strategy - 4-5 years out

[NgineER]

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.

We have limited amounts in 529's at this point, about $30k per older kid and about $10k for the younger ones. My oldest has two years of college taken care of through AP testing and post-secondary education option (took university classes in high school). I believe all the kids are going down the same path. They will be going to state schools and working on savings now. They both have about $20-30k in Roth IRAs from their own work/businesses that they consider using for school expenses. I'm trying to guide them to keep it in there, but we will see.

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.

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.

As far as HSAs, we have about $50k in it. We moved from HSA eligible plans when my wife was diagnosed with cancer and have stayed with PPO plan to make sure we have access to her original doctors. She is five years out now thankfully, so probably not as critical anymore.

 

[G POP]

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.

You aren't going to believe this but there is no requirement for parents to pay college costs for their children. I know, right. Who knew. All kidding aside, no solid research out there but there are small bits of evidence that college students do better contributing to their own education. I'm a huge proponent of #1. Taking college courses while still in HS, #2. Going to CC or cheaper colleges before/if then going to more expensive (Ivy league) so you have a great name on your diploma., #3. Having someone else pay (scholarship, military, etc...)

I'm exposed to teenagers continually via officiating baseball and volleyball. In this area many are going blue collar. My DSIL is an EE and is high level at the local Electrical Co op. He has kids coming out of HS and attending a 3-4 month electrical course through the local union. These kids are stepping into 60-70K starting jobs at 18-19 with zero student debt. Same with many other trades.

 

[Koolau]

We have limited amounts in 529's at this point, about $30k per older kid and about $10k for the younger ones. My oldest has two years of college taken care of through AP testing and post-secondary education option (took university classes in high school). I believe all the kids are going down the same path. They will be going to state schools and working on savings now. They both have about $20-30k in Roth IRAs from their own work/businesses that they consider using for school expenses. I'm trying to guide them to keep it in there, but we will see.

Sounds like you're in pretty good shape, college wise. I always point out the (economic) advantage of using your state's Junior College system where possible/appropriate.

Our youngest did this and saved a real bundle. She could live at home, take the required courses that are all transferable and then she transferred to the "Name" university to take her degree.

No one need ever know that her first couple of years were filled at Jr College. Heh, heh, mom and dad know - and they appreciate it!

 

[NgineER]

We've told the kids that we'd cover tuition at University of Minnesota. We'll use their tuition rate as our inflation index for our future college students. There could be a large increase over the next eight years between current high school graduate and our youngest.

 

[TheWizard]

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.

That's one way to look at it.
I look at my Roth IRA as a slush fund for infrequent large expenses, depending partly on how my recent investments in my taxable account are doing.

Time for a new F-150 or Mustang? No problem, the money is ready when needed...

 

[pjigar]

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?

In that case, both direct Roth 401k contributions and/or conversions up to the top of 22% bracket today. Use dinky town calculator to figure out which tax bracket you will belong to:

1040 Tax Calculator

Use this 1040 tax calculator to help estimate your tax bill for the current tax year's rates and rules.

www.dinkytown.net

 

[ILikeStarTrek]

You didn't mention the possibility of using the 401k Rule of 55 for retirement withdrawals from age 55 to 59.5. Is that option open to you? That can only apply to your current 401k, not any old 401ks or IRAs. Also, even though the IRS allows it, some 401k plans do not allow it or do not allow partial 401k distributions at all but force a single lump sum withdrawal/rollover combination. (Check your 401k plan rules.)

 

[NgineER]

You didn't mention the possibility of using the 401k Rule of 55 for retirement withdrawals from age 55 to 59.5. Is that option open to you? That can only apply to your current 401k, not any old 401ks or IRAs. Also, even though the IRS allows it, some 401k plans do not allow it or do not allow partial 401k distributions at all but force a single lump sum withdrawal/rollover combination. (Check your 401k plan rules.)

I do have the option of the rule of 55 and is also the age when I can cash out whatever stock options I have on my own timeline. If I retire before then it would force exercise within 90 days. Rule of 55 allows me to take one withdrawal per year.

 

[NgineER]

I do have the option to use the rule of 55 for withdrawals, it allows one distribution per year. Retiring at 55 also enables me to exercise my one and only remaining stock option at my schedule vs. being forced to exercise within 90 days of separation.

 

[NgineER]

In that case, both direct Roth 401k contributions and/or conversions up to the top of 22% bracket today. Use dinky town calculator to figure out which tax bracket you will belong to:

1040 Tax Calculator

Use this 1040 tax calculator to help estimate your tax bill for the current tax year's rates and rules.

www.dinkytown.net

I will have to dig deeper into that. You are correct, if I would have to go up to 24% at any point in retirement, it would behoove me to get deeper into the 22% now to avoid it. Thanks for that reminder.

 

[junkanoo]

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!

You're doing great.

As someone who had significant real estate investments, I would ask, do you have an exit strategy for your real estate ventures? I ask, because, as you get older, you may not want to do the work required to maintain/improve those properties or deal with tenant issues. It sounds great to hang on and gift those assets to your heirs who will get the step-up, but that might not be until you're well into your 80s. Sure, you can get someone to manage those rentals for you, but that reduces your gains. Maybe you'll get lucky with one of your children wanting to take that over for you, but with three daughters (likely to follow their husbands) that's not a given. Real estate is not for everyone.

A reasonable plan of attack is to have some long-term losses to minimize long-term gains for when you might sell some of these properties. And to get those long-term losses, you'll need to own the underlying stocks in your taxable account (as opposed to ETFs). Long/short direct indexing is how many who own businesses/real estate do it these days.

Tax-Aware Long-Short Investing: Risk-Managed Active Strategy

Tax-Aware Long-Short (TALS) investing involves adding leverage to existing portfolio to buy more positions and increase number of potential losses to harvest.

www.kitces.com

Anyway, food for thought.

 

[richardf]

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!

Get your money out of IRAs and 401Ks period. The IRMMA and RMDs will drive you nuts or you will lose your Medicare and income tax benefits. Take the big hit now and convert all to Roths or brokerage accounts. I didn’t see or understand the the implications of IRAs and am now in a mindless financial punishing Tax mess.

 

[TheWizard]

Get your money out of IRAs and 401Ks period. The IRMMA and RMDs will drive you nuts or you will lose your Medicare and income tax benefits. Take the big hit now and convert all to Roths or brokerage accounts. I didn’t see or understand the the implications of IRAs and am now in a mindless financial punishing Tax mess.

Careful!
Mindlessly Roth converting large amounts from tax-deferred can put you in a much high marginal tax bracket for that year compared to keeping your AGI level with inflation over coming decades.

Paying excess income tax is generally not the best idea...