What % should be in each account type?

[dukebound85]

What have you all found to be a good % for account types?

For reference, I have the following breakdown:

Investable Assets = ~$1,000,000 broken down as follows:
Cash = 10%
Roth = 12%
Pretax (ie 401k + pension cash value) = 54%
HSA = 4%
Taxable Brokerage = 20%

Real Estate Equity = ~$600,000 broken down as follows:
Primary = 52%
Rental - 48%

Age = 40

Do any of you have a reccomendation for an ideal account type allocation for early retirement? Any adjustments advised?

 

[SecondCor521]

Impossible to say with the information given. Marital status, spending, SS benefits, kids, goals, charitable giving, inheritance plans, risk tolerance, health, and more could affect things.

I think there is a wide range of account types that people make work for them. The best suggestion I can make is that you sit down and try to work out where you're going in your life, what those things cost, and what the plan looks like, including taxes. That will then inform you as to what you need to do.

Personally, for example, I don't have a rental, I'm taking from my traditional IRA, adding to my Roth and HSA, have essentially zero cash, and am draining my taxable. But there are very specific reasons for me to do those things, and since your situation is different your solution is going to look different than mine.

 

[equakesfan]

I agree with above that you have too much in cash unless you have a job that makes more than $200k/year and you don't think you can get a new job in less than 6 months.

 

[FlaGator]

My compliments on what you have accumulated at 40 and for seeking outside opinions as you look to the future.

No thoughts on a specific "ideal" distribution across account/asset types, but a few things you may want to consider:

-Building the cash/taxable brokerage gives you a lot of flexibility, ER or not. That's a source of funds you'll need if pull the plug early to bridge from your last paycheck to 59.5 (typically).
-Look hard at the rental property. Periodic maintenance is easier to cash flow when working, but when that stops you want to have the property be self-supporting and have positive cash flow, after allowing for major items like roof and AC replacements.
-Right now real estate is 1/3+ of you NW and 2x your non-tax deferred investable assets. RE equity can fluctuate over time and you can't trade a bedroom for a year's worth of groceries. Again, don't know what the "right" allocation should be. The longer you live after the last paycheck, the more readily available cash you need, and "net worth" alone isn't sufficient - you want liquidity, and at the lowest tax-cost possible.

 

[Sunset]

A problem with a rental is, it will appreciate (hopefully) in price, and one day you will sell it as you are tired of being on call or fixing stuff, or being ripped off by a rental management company.

When you sell, you will have a huge recapture of depreciation and capital gain on top of your regular income amount. Pushes you into a higher bracket + IRMMA, etc if you hold it too long.

 

[bada bing]

One nuance I've seldom seen discussed is that the tax deferred bucket has RMD tax effects based on balance, not on percentage of assets. Growing your eventual tax deferred balance, either through active contributions or time appreciation or both, will influence your tax situation in retirement after RMD age. What you have in tax deferred today isn't an issue, it needs to be part of a strategy for arriving at RMD age without too much positioned there. You can grow your tax deferred balance to the point you actually loose on the tax arbitrage that governs the benefits of pre-tax contributions. Seems good at 40 to take the tax deduction, but with another 30 years of market appreciation you may undo all the benefits plus some.

You don't put a balance amount on it, but depending on where you are now and what your plans and predictions are, you may already have more than optimal in pre-tax for your age. The best years to make pre-tax contributions are highest tax bracket and latest in career. Everybody gets the high tax bracket concept, but fewer understand the timing and relative balance part. If you predict you'll arrive at RMD age in a higher bracket than today, consider going all Roth. And don't forget to include employer matching in your modelling, even if you are 100% Roth contributions.

 

[Dtail]

Having a decent amount in taxable will definitely help to bridge early retirement until 59.5 y.o.
I wish I had more in a Roth from early on, but no Roth 401k available to me plus was earning too much back then.

 

[target2019]

What have you all found to be a good % for account types?

For reference, I have the following breakdown:

Investable Assets = ~$1,000,000 broken down as follows:
Cash = 10%
Roth = 12%
Pretax (ie 401k + pension cash value) = 54%
HSA = 4%
Taxable Brokerage = 20%

Real Estate Equity = ~$600,000 broken down as follows:
Primary = 52%
Rental - 48%

Age = 40

Do any of you have a reccomendation for an ideal account type allocation for early retirement? Any adjustments advised?

Which account type can you draw from without penalty given the age at which you need the money?

 

[COcheesehead]

I had about half in my taxable account just based on maxing everything else out and not being able to contribute to deferred. That helped a lot. We live strictly off our taxable account.
I also buried some funds in what Fidelity used to call a retirement annuity which is just really a deferred annuity, but with a whole bunch of investment options and only a .25% fee. The advantage is there are no RMDs. I have those funds earmarked for LTC.

 

[VanWinkle]

What have you all found to be a good % for account types?

For reference, I have the following breakdown:

Investable Assets = ~$1,000,000 broken down as follows:
Cash = 10%
Roth = 12%
Pretax (ie 401k + pension cash value) = 54%
HSA = 4%
Taxable Brokerage = 20%

Real Estate Equity = ~$600,000 broken down as follows:
Primary = 52%
Rental - 48%

Age = 40

Do any of you have a reccomendation for an ideal account type allocation for early retirement? Any adjustments advised?

At retirement, I would want to have the million split evenly between TIRA, Roth IRA, and taxable brokerage accounts. That gives the most flexibility for the Affordable Care Act, and minimizing taxes in retirement. I am currently 47% taxable, 20% Roth, and 33% TIRA after 9 years in retirement.

 

[Dash man]

After many Roth conversions, we are now heavier in Roth than pre-tax accounts. As some have stated above, we live off our taxable accounts which we very helpful in paying taxes on our Roth conversions. We’ll start tapping into our tIRAs in 2027 for Qualified Charitable Distributions. Our taxable accounts will likely last us the rest of our lives, leaving the Roth IRAs to grow for our boys. We also have five properties that will go to our sons. We may eventually sell our Florida condo, and the house we live in if we need to live somewhere without stairs.
This has worked out well for us, so I agree with those suggesting an even split in accounts. Just don’t go too heavy in Pre-tax accounts if you can avoid it.

 

[RunningBum]

100% Roth would be ideal, assuming you are of age to tap it, because there is no tax on withdrawals But the tax pain to get there might be too much.

My point is, having a target % for each asset location doesn't make good sense. You have to decide while working if deferring income is better than contributing to a Roth or saving in taxable. And then decide if and when Roth conversions are worthwhile. And whether you want to save some in tax deferred to use for possible LTC that you may be able to write off against withdrawals, or for charitable contributions. Just because Roths are great to have doesn't mean you do an immediate 100% conversion of your tIRA.

Your goal should be to maximize your wealth and spending power over your lifetime. Concentrate on that rather than which account type your money is in. Besides, your asset location % will vary over time. While working, and early in ER, you may have very little in a Roth, but if you're able to do Roth conversions the % you have there will increase, and your taxable account % may drop as you pull from it as a bridge to when you can access retirement accounts, SS, and pensions.

Finally, your ideal mix may not match anyone else's. Most of my money is in taxable, because it came from stock option income which could not be deferred. And I would like to get to 0% tax deferred, because I have plenty of unrealized gains in taxable I can use for LTC if needed. But it looks like I won't quite get there at the rate I can do conversions efficiently, and that's ok.

 

[sengsational]

I agree that it's the wrong question. You want a 50 year model that includes taxes, investment income, spending and everything. Then start making one change at a time and see what it does to available spending plus residual estate. You'll probably find some strategies that pay off better than others. The goal I use is NOT to minimize taxes or to maximize Social Security, it's to maximize available spending. The problem with a long plan like that is that your assumptions can really drive the results. If you believe that it's NOT different this time, your job is easier (but not easy). Starting with historical rates of return, inflation rates, and tax rates is probably your best option.

 

[imjustawarrior]

Using the different account types is about trying to maximize wealth usually through minimizing taxes. Everyone's situation is different.

If you retire early, you will have time for Roth conversions. You really have to look at tax rates today vs. tax rates when you withdraw money. Tax rates need to include ACA subsidies, IRMAA, and whatever else that is impacted by income. It's a bit of guessing since we don't know future tax rates.

 

[SnowballCamper]

If you want to retire early, significantly before 59.5, you probably want more in taxable brokerage. It's a mess to figure out what would be optimal with all the insurance subsidy rules, unknown future taxes, and not knowing when you'll actually start spending down. The best way to minimize taxes is to focus on maximizing money.

 

[PlayinwithFIRE]

Its funny, I just began contemplating this myself recently, though I'd asked the question long ago.

I'm 56, considering if I'm retired or not and have been thinking along the lines of "how much liquid $ do i have to bridge the gap to 59.5 and IRA access?"

Here's where we are :

Cash 17%
Brokerage 20%
IRA 62%
Roth 1% =(

As I view it, the cash+brokerage would be used to bridge the gap (for me 3.5 years) to IRA first, then to SS (whenever that is).

pwf

 

[Al18]

Looks like you’re well on your way - great progress. I wouldn’t change your allocation - looks like a great mix. Going forward, you may want to slightly change your retirement savings to favor more Roth contributions - but you’ll need to determine how this will affect your current taxes first.

 

[mrfeh]

The equity you have in your primary home is not part of your portfolio.

 

[dukebound85]

My compliments on what you have accumulated at 40 and for seeking outside opinions as you look to the future.

No thoughts on a specific "ideal" distribution across account/asset types, but a few things you may want to consider:

-Building the cash/taxable brokerage gives you a lot of flexibility, ER or not. That's a source of funds you'll need if pull the plug early to bridge from your last paycheck to 59.5 (typically).
-Look hard at the rental property. Periodic maintenance is easier to cash flow when working, but when that stops you want to have the property be self-supporting and have positive cash flow, after allowing for major items like roof and AC replacements.
-Right now real estate is 1/3+ of you NW and 2x your non-tax deferred investable assets. RE equity can fluctuate over time and you can't trade a bedroom for a year's worth of groceries. Again, don't know what the "right" allocation should be. The longer you live after the last paycheck, the more readily available cash you need, and "net worth" alone isn't sufficient - you want liquidity, and at the lowest tax-cost possible.

Thanks for the reply!

Regarding the rental, the home is 9 years old and has been fairly mtce free so far. I am sitting at about 50% equity on the rental and I do cash flow about 800/mth after paying PM fees.

My goal would be to be able to gift the home to my now 4 year old daughter when she is a young adult to try and give her as much a leg up as possible as well as allow her to live in the place she grew up if she wanted to.

I do try to keep my FIRE ambitions geared more towards my investible assets

 

[dukebound85]

If you want to retire early, significantly before 59.5, you probably want more in taxable brokerage. It's a mess to figure out what would be optimal with all the insurance subsidy rules, unknown future taxes, and not knowing when you'll actually start spending down. The best way to minimize taxes is to focus on maximizing money.

True, I have been trying to build my taxable up to be a bridge until the 59.5 date when I do.

 

[imjustawarrior]

In general, I would not pass up tax advantaged accounts to put money in a taxable account. There are ways to tap a retirement account penalty free before 59.5.

How to access funds early

 

[bada bing]

In general, I would not pass up tax advantaged accounts to put money in a taxable account. There are ways to tap a retirement account penalty free before 59.5.

How to access funds early

Yes. Tax advantaged account annual contribution limits are "use it or loose it". With respect to choosing between taxable brokerage or tax advantaged for long term savings, usually tax advantaged come out ahead. It's more of an advanced topic, but it's worth studying up on backdoor Roth, mega-backdoor Roth and how HSA account qualified withdrawal rules work. You may qualify for unused maneuvers that would allow moving significant money into Roth over time for no net tax cost. Remember that money is fungible and you don't necessarily have to have the current income to max out limits if you have taxable savings on the side.

I max'ed out the mega-backdoor Roth for my last 11 years working, which resulted in moving almost 1/2 mil from what would have been taxable savings into Roth.

 

[Mulligan]

Its funny, I just began contemplating this myself recently, though I'd asked the question long ago.

I'm 56, considering if I'm retired or not and have been thinking along the lines of "how much liquid $ do i have to bridge the gap to 59.5 and IRA access?"

Here's where we are :

Cash 17%
Brokerage 20%
IRA 62%
Roth 1% =(

As I view it, the cash+brokerage would be used to bridge the gap (for me 3.5 years) to IRA first, then to SS (whenever that is).

pwf

I never really thought of actually segregating my funds in above manner. But mine is probably not typical. Mine is 30% Roth, and about 20% HSA with the rest in taxable account. All the above are in some brokerage account. If I assume like PB has mentioned in a different thread that CDs are not cash, my cash level is probably less than 1%.
I dont access any of these funds in retirement, just live off of my pension.

 

[imjustawarrior]

The equity you have in your primary home is not part of your portfolio.

It depends.

If one is planning on downsizing, the excess equity is part of the portfolio. A lot of people consider their home to be LTC insurance. I know I do. If the sh*t hits the fan, I would sell my house and live off of the proceeds.

If one would never tap the equity to live on, then it is fine to not consider it as part of the portfolio. If one is willing to tap the equity, then it is part of the portfolio.