What Next? Advice to setup finances for ER

[RE-Fin-54321]

Hi All - Very long time lurker seeking advice from the brilliant folks here. DW and I set our finance plans on auto pilot when joining the workforce 16 years ago and it has served us well during the accumulation phase. Your standard Bogglehead investing principles and LBYM lifestyle.

We are starting to hit the point where we are [maybe] FI, but struggling with how to think about financially transitioning out of accumulation mode to setup a portfolio that could support our version of ER. It’s a weird feeling like we’ve “won the game”, but don’t have a good strategy to lock things in.

Two primary questions looking for advice:

#1 Recommended research topics/sources about setting up post accumulation phase and ER? What should I be thinking about now while we still have working years in front of us? E.g things that run through my mind but I struggle with a starting point are: structuring portfolio for early withdrawals & tax efficiency ... Roth conversions (now or just hold to salary’s are lower)... asset allocations that de-risk but account for longer time horizon, other things I need on my radar?

#2 We’ve recently paid off mortgage and have kids moving out of daycare soon. This will open $3-$4K per month in cash flow. I don’t want to overthink the Bogglehead approach, but I can’t shake the thought I should consider diversifying completely outside the markets (yes high values scare me) and use extra cash flow to fill up on something totally different (e.g. gold, crypto, real estate, etc)

Our key facts are:

1. DW and I are 38. 2 younger kids 4 & 6
2. 2 mega Corp jobs - stable. Combined $350k. Happy, but neither of us are overly motivated at this point - starting to look at options for cutting back and/or improving flexibility to take advantage of financial situation.

• 401ks = $1.35M
• Roths = $340K
• Taxable Brokerage = $360K (VG Emerging Markets + Value Index funds to balance asset allocation weights across entire portfolio)
• Company Stock = $440K ($40K in DH F100 stock; $400k with DW employee owned company shares - grows significantly every year)

Overall AA of Retirement accounts : 77% equity / 23% fixed income. Held in low cost index, target date, or FI funds available in our plans.

• HSA = $132K (Save it, target date funds, never spend - how high do people let these accounts get?)
• 529s = $148K (plan to go to about $250 in total for our kids)
• Cash = $300K (online savings accounts)

• No debt/mortgage. Own ~$450K home. High annual RE tax unfortunately
• Spending: ~$6500-7,000/mos + 1-2 vacations per year ($8-10k total)

 

[teetee]

Which one is it? Emergency room or early retirement? The later has been answered many times and a faq was created for it. The former relies on emergency fund but after my first ER visit I swear I will set up a regular appointment with my PCP in the future even when I feel I am dying and it will likely be faster and cheaper than going to ER in my local hospital.

 

[EastWest Gal]

38 is pretty young to FIRE, as you need to plan for a very long time-50-55 years. Your spending does not include taxes or what you will pay in health insurance. With your current income, you could aim for a Fat FIRE target long before most of us could dream of it. You can't touch your 401Ks until 59.5.

In today's dollars, in our 60s, we would have to spend $20K/year on health insurance premiums alone except for ACA subsidies. Insurance premiums go up as you age. You will need to plan for that. You also need to plan on home maintenance, replacement cars as your current cars age, etc.


A couple of questions:
1. How can you have Roths at your income level? Unless the money is in Roth 401Ks?
2. Have you tracked your spending to check its accuracy? I never could keep a budget very well, but I did a 3 year look back and found ways to cut unecessary spending.
3. What will you do with your time? That is a very important question for both of you to answer.

 

[RE-Fin-54321]

A couple of questions:
1. How can you have Roths at your income level? Unless the money is in Roth 401Ks?
2. Have you tracked your spending to check its accuracy? I never could keep a budget very well, but I did a 3 year look back and found ways to cut unecessary spending.
3. What will you do with your time? That is a very important question for both of you to answer.

Thanks EWG for thoughts. On your questions...
1. Roths we started at a lower income but continue to fund each year with a ~$6000 backdoor IRA->Roth conversion
2. Spending we track to a fairly accurate level. For years we used Yodlee/Mint and captured every single transaction. Don’t do that now, but our expenses are stable and have taken big shifts down with mortgage retirement and childcare costs dropping. Our upshifts are vacations.

3. Not necessarily looking to ER now. Kids are too young and need to stay in workforce a few more years to offset the “unknowns” that can pop in life. More trying to strategize how I can start to setup portfolio and finances to support ER say 5-8 years from now and protect our financial position. In the short term, we are considering options to throttle back careers (4 days week, remote, and/or shifting one of us to contracting)

 

[SecondCor521]

Questions:

1. Does the $7K per month include or exclude the childcare costs that are dropping off soon?
2. Does the $7K per month include or exclude the additional 1-2 vacations?

Answers to your questions:

Here and Bogleheads are the best places I've found for advice and the smartest people about FIRE. As you think of specific questions, just start new threads on those specific questions and you'll get good high-quality answers.

You talk about portfolio setup for ER a couple of times. If you end up FIREing in 5-8 years, you probably don't need to do much except turn off any dividend reinvestment and figure out how you're going to access your portfolio early. Remember, you'll have most of your money invested for 30-50 years. Regarding accessing funds, there are several choices at your young age: Roth conversion ladder, SEPPs, live off taxable, pay the 10% early withdrawal penalty, or work just to fund living expenses (so maybe one of you quits completely and the other works half time, or you both quit and do consulting a few months each year).

With your numbers, retiring early, starting to take dividends instead of reinvest, then live off taxable/cash/company stock for five years while priming a Roth conversion ladder probably would work just fine and give you the flexibility you'll probably need if you have young kids. (Kids tend to cause changes in plans, at least in my life they do.)

You'll be retired a long time, and living off a portfolio that long means you will need a healthy slug of equities. Run FIREcalc and use the investigate tab to see what AA works best for your situation. It'll probably be somewhere between 30/70 and 70/30.

Make sure your assets are allocated across your portfolio properly - see the Bogleheads article or web page talking about asset allocation across portfolios and follow that advice. I just have stock and bond index funds, and all the bond funds are in my traditional IRA. That's about it.

If you're scared about SORR you can either do a reverse bond tent thing, or just have a low enough withdrawal rate where it doesn't matter. The cool kids think the former is better; I think the latter is better. (It's simple, easy, and what I did.)

While you're working, continue to max out your retirement accounts and fund the kids' college accounts to whatever level you want. Retirement account contributions generally require earned income.

I'd wait until your income is much lower before doing Roth conversions, especially if you're going to completely stop working for a while and will have a much lower income for several years. Do it then, not now. If you do it now, you'll be paying high enough marginal rates on the conversion between federal income tax (plus NIIT and AMT if those apply to you) where it doesn't make any sense to do so.

There's a current thread on HSAs and how big to let them get. Yours is getting pretty big for your age - unless you've got an expensive health condition or situation or you want to use it to fund LTC, you might already have too much. But take a look at that thread.

Additional comments you didn't ask for:

I'd strongly recommend evaluating DW's employer stock and establishing a program to diversify away from that position. Take into consideration your income plans, how stable the stock is, and how much is accumulating. I never had more than 5% of my NW in my employer stock because that was the risk/reward ratio I was comfortable with. That's probably conservative, but most people will say not more than 10% in employer stock, and you're over that right now.

$300K in cash with two stable jobs and a paid off house is probably at least three years of expenses in your case. Most would suggest deploying at least some of that into whatever investments you have rather than sitting around earning not much interest.

EWG's comment about not being able to access your 401(k) until 59.5 is not accurate. You can roll your 401(k) into a traditional IRA and then start a Roth conversion ladder and have access to the funds about five years later. You can also do SEPPs as I mentioned earlier, although I wouldn't start an SEPP at your young age because of the lack of flexibility.

 

[RE-Fin-54321]

SecondCor -

So many great ideas and follow-ups here. Exactly the sort of guidance I was looking for. I’ve got some reading and research to-do’s!

Spending - $7k takes out recent mortgage payoff, but includes monthly allocation of property taxes ($1,400). It still includes childcare, but we’ll lose $750/mos come August and another $750 the following August (I’m sure some of that will come back in kids activities and the changes to plan you reference). It did not include the 1 time vacations so if I spread that monthly we’d add back $600-700/mos

Thanks for the pointers on early withdrawal strategies - many bread crumbs there for me to research. I’ll read up on the HSA - don’t want to overextend there. Thanks for input on Roth conversion - this has been my inclination as well (even though tax rates may increase, I see much higher probability of income decreasing).

DW Employee stock - she works for a private employee owned company. Really no way to diversify away until you leave the company as there isn’t actually a market for these shares. We do feel safe though - a very conservative stable medical company ($1B-$2B) that has been returning 10-15% annual growth on their employee shares for several decades. As her tenure in company gets up there she is nearing the point that annual employee stock increases exceed her salary - a good problem and means some of our RE plans will center on her decreasing hours, but retaining employment status and benefits. With this corporate structure and nature of business it would be more a black swan type risk that could hurt this position.

 

[SecondCor521]

Glad to help.

Here's the HSA thread I alluded to:

https://www.early-retirement.org/fo...y-hsa-when-do-i-start-withdrawals-108567.html

It sounds like you're at about $75K annual spending. At your young ages some people might suggest a 3% WR - which would mean a nut of about $2.5M. Which is about where you are. If you want to work to pad, you certainly could.

Understood about the private stock. If she can ask about alternative compensation instead of company stock without rocking the boat, maybe that's something to explore. If she just says she's worried about having too much concentrated in company stock they may be empathetic.

 

[Retired Expat]

Seems you are doing great so far! I would only add that many of us never transition well to the withdrawal phase. I know I have a real issue with it. So I geared my half of my investments to be income generating versus growth or and avoided auto reinvestment of some interest and dividends as once it hits the investment accounts I am loath to touch it. So real estate with rental income that goes to my checking as well as some dividend stocks that auto deposit to my checking and created passive income replacement. Pretty much live off the income streams and only take out money from investments for things like buying a car or house or a big trip. Just can’t stand to see a steady decline in that savings/investment account!

 

[RE-Fin-54321]

Seems you are doing great so far! I would only add that many of us never transition well to the withdrawal phase. I know I have a real issue with it. So I geared my half of my investments to be income generating versus growth or and avoided auto reinvestment of some interest and dividends as once it hits the investment accounts I am loath to touch it. So real estate with rental income that goes to my checking as well as some dividend stocks that auto deposit to my checking and created passive income replacement. Pretty much live off the income streams and only take out money from investments for things like buying a car or house or a big trip. Just can’t stand to see a steady decline in that savings/investment account!

Retired Expat - thanks for sharing your experience and approaches. I like the purposeful steps and tweaks to create income and avoid drawing down - I could certainly envision DW and I benefiting from similar strategies for the psychological components. All our investments have been on auto-reinvest for so long, I’ll have to play with some different scenarios and allocations to see what this could look like. Thanks!