unbalanced?

[Bullwinkle]

Hi, I stumbled across the whole FIRE concept a few years ago, but it took a while to sink in that it's maybe a thing I could do. Only this year have I really started to look at concrete numbers and either I could just do it right now, or my powers of wishful thinking are strong. But even if right now is ok, I will still probably wait to wait a year or two. In addition to FireCALC, I put some numbers in Vanguard's automatic system, and it thinks if I really want to retire in the next year or so I need to rebalance. I've never balanced anything, so it's time to make a plan. I only started keeping track of expenses 3 years back, and I'm glad I did. Here are the stats. Writing this down has been good for me as a first step!

My life situation is: 41, married, no kids, wife doesn't work.

Income is 220k, which post-tax is around 12.5k/mo, then 2k goes to the 401k, so total is 14.5k / mo (174k / year).

Monthly expenses over the last 3 years have been roughly 2.3k mortgage, + 2.5k everything else, so round up for travel and one-offs, and say 70k / year. There is likely up to 20k of house repair lurking in the near future.

So in theory savings winds up 174 - 70 = 94k / year, and in practice over the last 7 years it's ranged from 60k to 110k (and a -130k for the "bought a house" year), so actual savings are more or less agreeing with the theory. For 2017, 2019, 2020, gains from interest has apparently outpaced gains from saving by 3x up to 7x, which is still boggling my mind. Did I even read that right?

Assets are:
- 1.3m vanguard total stock market index
- 750k vanguard 401k 70/30 stocks to bonds, tuned for 2045, I guess this means
it'll rebalance itself on its own, assuming 2045 retirement.
- 50k money market / cash
- 145k tech company RSUs, plan to sell once I'm in a lower tax bracket
- 5k HSA, this was an ex-employer plan. We have no medical expenses yet, so it
depletes very slowly.
- 855k supposed house value, but in the CA Bay Area, so volatile.

Liabilities are:
- 396k left on the house, at 2.75% interest. I could pay it off, but with the low interest I feel no hurry.

So assets minus liability is 2.7m, subtract the supposed house value and I'm at 1.8m of savings.

I'm enjoying the job currently, and I've told myself I'll give it a year or so to see where it goes. It's a startup so either it will evaporate on its own and save me the trouble of deciding when to leave, or it will stay alive and maybe the options will be worth something some day. Even if it stays alive, it's unlikely the options will be liquid within the next few years, so I'll have to make a "exercise or abandon" decision if I leave before that. I hate that kind of gamble.

FireCALC says 99% success if I retire in 2021 (I assume it means the end of 2021), with a constant withdrawal of 95k/year. The SS site estimated 1,890/mo starting in 2041, but they may be assuming I'll keep working until official retirement age, so maybe the real number will be quite a bit lower. I've worked steadily for some 20 years so there should be something at least. Regardless, 95k/year is already way more than our current expenses, so maybe we don't need to count on SS at all. And that 95k was where we run out of money in 50 years in the single worst possible scenario, and assuming we're still spending 95k in our 90s, which surely we're not (mortgage is gone after 30 years, for one) so it's real conservative. Right?

Anyway, what we would probably do is move to Taiwan, where we speak a few of the languages and have family. Taiwan has good national health care (and has proven competent when it comes to pandemics), and countryside living expenses are low. I haven't estimated expenses, but a rough rule of thumb is 1/3. Even accounting for increased travel (we travel cheap), it's hard to imagine spending anywhere close to 95k in a year. There will be expenses for house/car/scooter, though I would think we would then be selling the US versions of those things, so shouldn't lose money on it. As usual, health care in our dotage is the big unknown (no kids to take care of us), though we're trouble-free at the moment.

The most expensive possibility is that we want to spend significant time in both countries, because that's basically 2 houses and 2 cars, and private health insurance for the US. I don't think we'd want to do that for very long though, seeing how expensive it would be.

I'm pretty financially clueless, and I don't really get along well with numbers. I just maxed the 401k and dumped the rest in the Vanguard total stock market index over the last 20 years, and let all those scary numbers slip out of my mind. It's turned out well all the same. No IRA, no backdoor Roth, just that 401k. I think I make too much for tIRA and Roth? Maybe I should have tried the backdoor Roth, but it seems a bit late now. I guess there's a lot of other things I could have done if I were more sophisticated. I probably could have been much more tax efficient... that seems like something I ought to start paying attention to now (well, should have 20 years ago, like everything financial).

Anyway, the standard advice seems to be that you should move to more conservative funds as you get closer to retirement, and I've been feeling like I should start rebalancing. My current thought is I won't do that while I'm working, because I'm in a high tax bracket. Once I'm no longer working, I can slowly start shifting things over in the low risk direction, maintaining a multi-year cushion to wait out recessions. But these would all be long term capital gains which is taxed differently so maybe the income tax bracket doesn't matter? I'm pretty stupid about taxes too. I started leaving more in the money market account since all the pandemic stuff got started, maybe if I just leave all savings there for this year, I'll naturally accumulate a few years of cushion. I know there are a whole bunch of intermediate steps on risk/reward line, that might offer a little interest (MM I think is effectively 0) and still be non-volatile... but my impression is that nowadays those (CDs? Mutual Funds?) are all pretty much at the 0 interest level too, so don't bother.

Speaking of taxes, I'm unclear on the tax implications of living abroad. I assume my income would all be coming out of long-term capital gains. Assuming the country has no tax treaty with the US, does that count as taxable income? Apparently Taiwan has no treaty, but there's also a mention of "...uses the credit method to avoid double taxation of income." And then some indication that only capitals gains from local institutions is taxed. But! When I plug in 90k in long term capital gains to the US federal tax estimate, it comes out at 0. Well, it's no problem double-paying taxes in that case, everyone is welcome to a slice of my zero. Of course, when the 401k kicks in I gather that will be taxed as plain income, but that's quite a while from now. I know the real answer is to consult a tax specialist, and I definitely will when the time comes, but meanwhile maybe some people can clear up my basic confusions?

Thanks in advance for any advice, encouragement, or corrections!

 

[Dtail]

Will comment more later, but just one minor point is that the retirement year stated in Firecalc refers to the beginning of the year not the end of the year as you referenced.

 

[Aerides]

Anyway, the standard advice seems to be that you should move to more conservative funds as you get closer to retirement, and I've been feeling like I should start rebalancing.

Welcome,

You've got a lot to unpack here, so I'll focus on this part. The standard advice for retirement rebalancing is talking to folks in their early 60's. Many of us here don't subscribe to that even after retiring.

Most here, especially in their 40's or 50's, are going to stick with a 60/40 ish allocation, or even riskier. They mitigate short term volatility with a cash position to last a couple of years in a downturn.

As you mention - never count the house value in your NW, but do count the costs in your expenses. Maintenance, a new roof/furnace, stuff that isn't annual but hits the budget every now and then.

 

[pb4uski]

You're probably a lot better off than you think since you included your mortgage in expenses. If you do that FIRECalc will increase the amount included in your spending input for inflation despite the fact that your mortgage payments are fixed, and FIRECalc will never stop whereas your mortgage payments will stop when your mortgage is paid off.

There are two ways to adjust for this... one is easy and the other is a bit more complex.

The easy way is to reduce the amount that you input as your portfolio in FIRECalc by the amount of your mortgage and similarly exclude your mortgage payments from the spending number that you input into FIRECalc.... it will be as if you used some portfolio assets to payoff your mortgage just when you retired.

The more complicated way of factoring in a mortgage is to 1) exclude mortgage payments from your spending and 2) enter an off-chart spending item on the Other Income/Spending tab for the amount of your annual mortgage payments starting in 2020 and 3) enter a pension on the Other Income/Spending tab equal to your annual mortgage payments beginning the year after your mortgage is paid off. In both cases the items should not be inflation adjusted since your mortgage payments are fixed. FIRCalc will include the mortgage payments off-chart spending in annual withdrawals starting now and the pension item will nullify the off-chart spending once your mortgage is paid off.

You'll likely find that this adjustment will push you to 100%. Then you can use the Investigate tab to see the spending level at a given success rate and I think you'll see a big difference.

 

[pb4uski]

You'll need to do some research but if you're US citizens even if you live outside the US you will be taxed by the US on your global income... but if you end up having to pay incoem tax to another country you usually get a tax credit for any taxes paid on your US tax return up to the amount that you would have paid in the US on that income. Most other countries do not tax your global income. But it gets compicated quick and varies depending on where you live outside the US.

The concept is similar to the way many states tax income for residents who have income in other states... you get a tax credit for taxes paid to non-resident states up to the tax on that income in your resident state.

 

[Bullwinkle]

Dtail: thanks for the info, I adjusted to 2022 or 2023 since it's pretty much already 2021.

Aerides: Indeed, I've noticed that the "standard advice" often doesn't apply. For instance the calculators that say "how much will you save" and then they have a percent, not an absolute value, and then the percent maxes out at 40% or something. Anyway, the "several years cushion" approach makes sense to me! I guess it's how long do you think a bad recession will last and can you avoid being forced to sell those down stocks? I was coming around to that idea when thinking maybe I should just accumulate into MM this year, instead of the usual dump everything in total stock index. For the one-offs, it's hard to guess, but I suppose a house is like a car in that the "parts" inside all have their own lifespan and replacement cost. And cost would vary widely depending on where you live and how much you do yourself. And of course once retired theoretically there's time to do more house tinkering... it would uphold honorable tradition to leave my questionable jury-rigs to the next generation just as the previous owners left theirs to us. So it's hard to say because we're not totally sure where we'll live, but can take CA Bay Area as the ceiling, and Taiwan as the floor.

pb4uski: Thanks, yeah I realized about the mortgage mistake while writing. I did the complicated way and adjusted down the initial portfolio (since I erroneously included house value), and now we're at about 65k/year constant withdrawal. Our most expensive year minus mortgage was 38k, so add back 8.5k for land tax and I've still got plenty of headroom until that 65, for all those one-offs.

For the taxes, my understanding is for the US to give the tax credit there has to be a tax treaty. But for the other country to give a credit... uhh maybe some do some don't? The thing that muddles me up is that it's called "foreign income tax credit" and well, if my income is from long term capital gains on US stock index at a US broker, that's not exactly foreign income, right? The implication in the stuff I've found about capital gains tax in Taiwan is that it's for "local institutions", which lines up with what you say about most places not taxing "global income." So given that I likely wouldn't be working (not for money at least) then Taiwan income tax would be zero? To be clear, if I'm taking advantage of their health care then it's only fair that I pay them taxes, just... how much? Agreed that I'll have to talk to a professional, this is too complicated for moose and squirrel.

 

[HI Bill]

Assets are:
- 1.3m vanguard total stock market index
- 750k vanguard 401k 70/30 stocks to bonds, tuned for 2045, I guess this means
it'll rebalance itself on its own, assuming 2045 retirement.
- 50k money market / cash
- 145k tech company RSUs, plan to sell once I'm in a lower tax bracket
- 5k HSA, this was an ex-employer plan. We have no medical expenses yet, so it
depletes very slowly.
- 855k supposed house value, but in the CA Bay Area, so volatile.

Liabilities are:
- 396k left on the house, at 2.75% interest. I could pay it off, but with the low interest I feel no hurry.

So assets minus liability is 2.7m, subtract the supposed house value and I'm at 1.8m of savings.

Welcome! Since you've included your mortgage in your expenses, you don't need to subtract it from your total 'Invested assets" or Investable Assets. Most of us here don't use NAV (net asset value), but use net invested assets, and deal with any debt as part of one's expenses.

You therefore have about $2.2M invested. You have both a 'target date' retirement funds and VTI. So there is a lot of overlap between the two, but assuming roughly, that your target date fund has 70% VTI (/equivalent), it looks like your AA overall is >82% equities and <18% cash/bonds. While this is a bit high when nearing RE, many of us had up to 100% equities nearing RE. The large risk of this is that if you RE and the market crashes, you face a large psychological battle when attempting to RE in the face of large losses. If you can, I'd sell the RSUs over a period of several years (when up) to minimize taxes.

The VG Target Date retirement funds have higher fees than individual funds, so I'd suggest looking up the "Vanguard 3-fund portfolio", which is cheaper and can be rebalanced more easily.

https://www.bogleheads.org/wiki/Three-fund_portfolio

 

[Bullwinkle]

Hi Bill, yes I muddied the waters by including mortgage. Even so, I would think my mortgage liability would cancel out assets and leave me with the 1.8m? Of course that extra 396 is actually in there earning interest, but on the other hand, it's also in the mortgage costing interest... just a lot less. But ok, point taken, I'll use 2.2.

I would indeed like to avoid selling on a down market, so I'm liking the idea of a multi-year cash security blanket, and then keep that topped up and widen it gradually, while avoiding big tax bumps. And yes I agree with getting rid of the RSUs gradually over several years to avoid the tax bump, hence let's do it post-RE.

Good tip on the fees for the 401k, I'll check out my options there. I actually have two of them, one from megacorp and one from minicorp (still active). I might be limited since I didn't roll the megacorp one into an IRA when I left. But actually, none the material I can find will say how long after leaving megacorp can you do the rollover, maybe that means at any time?

However, when I look at the megacorp 401k, 70% is in a fund with no fees and 0.04% expense ratio and 90/10 stocks/bonds, while the rest is one with no fees and 0.16% expense ratio and 40/60. 0.04% is what I expect from the total stock market index, and indeed that's what it mostly is. So... maybe this is already ok where it is? It seems like it's all the same Vanguard stuff that I would be buying anyway if it were in my IRA. Apparently I can pipe funds between those two, so I could dump it all in the 0.04% ratio one. I guess that's not a taxable event since it's all in 401k-land?

Thanks for the input!

 

[ut2sua]

I might be limited since I didn't roll the megacorp one into an IRA when I left. But actually, none the material I can find will say how long after leaving megacorp can you do the rollover, maybe that means at any time?

You can rollover to an IRA or another 401K (with current employer) anytime. I believe leaving the fund in 401K gave additional protection against liability claims (vs an IRA account). Having the fund in an IRA gave more investment flexibility, so that is the basic pros vs cons there.

 

[Bullwinkle]

That's good to hear about the IRA conversion. That means I can wait until I have specific ideas about how I want to change the investment before I go do any converting.