Preparing to RE - looking for advice on best preparatory steps

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Topic Author
struva
Posts: 10
Joined: Thu May 06, 2021 8:30 pm

Preparing to RE - looking for advice on best preparatory steps

Post by struva »

High wage earner looking to retire early to enjoy healthy years. Currently 50, married, healthy, kids in college with expenses already planned, and will retire in next 1-4 years. Have concerns about how to best position portfolio for tax purposes and to support a high withdrawal rate to enjoy early retirement.

Emergency funds: Covered. Generally keep 12 months of expenses in cash accounts.

Debt: $200K mortgage ($550K appraisal) about to refi to 2.25% 15-year. Do not carry balances on any credit cards. No current car loans.

Tax Filing Status: Married.
Tax Rate: Current 35% federal, 5.75% state. Post-retirement hope to drop down significantly.

State of Residence: VA (no intention to relocate after retirement)

Age: 50

Desired Asset allocation: ??? - have 30-40 year horizon, currently 74/24/2 (stocks/bonds/cash)

Total portfolio is ~$4M, approximately half in taxable and half in tax-advantaged.

Tax-advantaged: Total 52% of portfolio
401k (bulk of tax-advantaged): Fidelity Freedom 2030 (FGTKX, 0.47% expense ratio) - 50% of total portfolio, targeted fund currently at 70/30 AA
within targeted 401k fund: 35% of total portfolio in equities, 15% of total portfolio in bonds (50% x 70/30 AA)
Traditional and Roth IRAs his and hers (much smaller): Fidelity Total Market Index (FSKAX, 0.015% expense) - 2% of total portfolio combined
Currently contributing maximum with company match to 401k. No contributions to IRAs in over 10 years due to maxing on 401k.

Taxable: Total 48% of portfolio
Taxable Cash: 2% (aside from emergency)
Taxable Bonds: 9% of total
Fidelity US Bond Index (FXNAX, 0.025% expense) - 3%
Fidelity Total Bond (FTBFX, 0.45% expense) - 4.5%
Fidelity Inflat-Prot Bonds (FIPDX, 0.05% expense) - 1.5%
Taxable Intl Equities: 12% of total
Fidelity Intl Growth Fund (FIGFX, 1.01% expense) - 6%
Fidelity Global Ex US Index (FSGGX, 0.055% expense) - 4%
American Funds Europacific Fund (AEPGX, 0.84% expense, 5.75% load) - 2%
Taxable US Equities: 25% of total
Fidelity Total Market Index (FSKAX, 0.015% expense) - 12%
American Funds Growth Fund (AGTHX, 0.64% expense, 5.75% load) - 3%
American Funds Smallcap Fund (SMCWX, 1.06% expense, 5.75% load) - 3%
Company Stock (Single Large US Equity) - 7%

Current AA summary: US Equities 62% (37% in tax-advantaged, 25% in taxable), Intl Equities 12% (taxable), Bonds 24% (15% tax-advantaged, 9% taxable), 2% cash

Expenses: Can live within 2-3% withdrawal rate once kids finish college under current lifestyle. Want to support a much higher rate (4-5%) during first 5-10 years post-retirement to enjoy current health and mobility.

Questions:
1. Concerned that too much of my portfolio is in my 401k (~50%). Using retirement portfolio planner shows my taxable accounts becoming pinched if I ramp up spending too much in first 10 years. Should I be switching my contributions during my final working years into a Roth 401k instead of my traditional 401k (I believe this is an option but I am currently in a very high tax bracket)? How much post-retirement can I reasonably convert from 401k to Roth annually?

2. I have these ancient American Funds loaded mutuals that were set up from an inheritance over 25 years ago. They are now 8% of my portfolio. I have mostly left them alone and can reinvest dividends without the front-end load, but my basis on them is only about 20% of their current NAV so I will incur major capital gains if I ever sell them. Am I right to just sell these last and leave them for my kids? I was considering doing a DAF to try to bleed them down that way with my annual charitable giving. Any other suggestions?

3. I already plan to sell my company stock soon and use it to balance my AA as needed. If I am planning to retire soon but with a 30-40 year horizon, how risky is my current 74/26 AA and how should I reallocate that 7% I have in company stock? Any other issues with my fund selections? I don't really care much if I leave an inheritance, my goal is to minimize taxes while living a bit higher on the hog during early retirement (more travel primarily, but also gifting my kids with maxed out starter Roths during their first 5+ earning years so I won't feel guilty spending the rest of their inheritance after that).

4. I am currently in a very high tax bracket, but once I retire I have no defined income - just portfolio returns until SS kicks in. Are there certain adjustments I should really be doing now or while I am still working (next 1-4 years) and others I really should wait until after I retire?

5. Should I be considering products like annuities or income-generating bonds once I retire, or just plan on selling taxable assets as needed for withdrawals before I can start withdrawing from my 401k?

6. I do not have any sort of trust set up. My wife is healthy like me, no baggage on either side nor plans for it. Should someone with our level of assets have a trust anyway? I am fine if our entire estate divides to our kids immediately - they all have level heads. But maybe there is some tax reason we should be putting our assets in a trust?

Thanks for any helpful advice!
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David Jay
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Location: Michigan

Re: Preparing to RE - looking for advice on best preparatory steps

Post by David Jay »

Welcome to the forum! You have come to the right place, we are a bunch of DYI retirement planners.

Let me tackle #5, the question of income products. The general problem with annuities is that insurance companies need to have earnings and those earnings come from your annuity product. There is one style of annuity that makes sense as retirement income longevity insurance, the Single Premium Income Annuity (SPIA). The issue is that the payout enhancement comes from mortality credits, those who pass earlier fund those who live to extremes ages. Mortality credits don’t become significant until into your 70s so even this annuity is not appropriate in early retirement.

Pretty much every other income annuity product is “exploitive” (trying to use polite language here...), the appropriate method to fund your living expenses in early retirement is selling portfolio,holdings.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
newventurer
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Re: Preparing to RE - looking for advice on best preparatory steps

Post by newventurer »

Not sure this will apply to you as you look pretty set, but if you are the only wage earner you could take out a HELOC before you retire (without income you may not qualify, even with significant assets) To some a HELOC helps with expenses in the pre-SS years and some use to manage income limits to qualify for ACA credits (healthcare credits)
WyomingFIRE
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Re: Preparing to RE - looking for advice on best preparatory steps

Post by WyomingFIRE »

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Last edited by WyomingFIRE on Sun May 16, 2021 4:16 pm, edited 2 times in total.
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Preparing to RE - looking for advice on best preparatory steps

Post by lakpr »

You have 9% in taxable bonds = $360k, whereas your home mortgage is only $200k. Treat your mortgage as a negative bond. Given that the mortgage interest is not tax deductible, even if you were to refinance it to 2.25%, paying it down is the equivalent of earning 2.25% / (1 - 35% - 5.75%) = 3.8%.

I think earning 3.8% on 15 year term is a good deal. It is twice-to-thrice the yield that you might be getting on the taxable bond funds (they are yielding only in the vicinity of 1.3% for intermediate term bonds and 1.7% for long term bonds).

Sell those taxable bonds (surely the capital gains aren't that much, these are bond funds!) and pay down the mortgage, and enjoy your home free and clear.
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David Jay
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Location: Michigan

Re: Preparing to RE - looking for advice on best preparatory steps

Post by David Jay »

Let me take a shot at withdrawal rates:

The often quoted sustainable withdrawal rates (SWRs) are developed in consideration of poor market conditions, especially in the first few years of retirement. Retirees are most concerned about running out of money so the quoted SWRs are usually for a 90% or 95% success rate using a range of historic financial conditions. This “worst case” financial planning is necessary because the future is unknown. Because most of us will not retire right into a 40% or 50% market downturn, many (most?) folks who retire with a 30-year window and limit withdrawals to something under 4% will leave an estate portfolio larger than their portfolio at retirement.

I do not think there is any issue planning to pull 4% - 5% from your portfolio for the first, say, 15 - 20 years only because you know you can get by on less (2%-3%) if necessary and you have Social Security as a backstop. Just monitor things and adjust if those “worst of times” were to actually happen.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
struva
Posts: 10
Joined: Thu May 06, 2021 8:30 pm

Re: Preparing to RE - looking for advice on best preparatory steps

Post by struva »

David Jay wrote: Sun May 09, 2021 7:29 pm Welcome to the forum! You have come to the right place, we are a bunch of DYI retirement planners.

Let me tackle #5, the question of income products. The general problem with annuities is that insurance companies need to have earnings and those earnings come from your annuity product. There is one style of annuity that makes sense as retirement income longevity insurance, the Single Premium Income Annuity (SPIA). The issue is that the payout enhancement comes from mortality credits, those who pass earlier fund those who live to extremes ages. Mortality credits don’t become significant until into your 70s so even this annuity is not appropriate in early retirement.

Pretty much every other income annuity product is “exploitive” (trying to use polite language here...), the appropriate method to fund your living expenses in early retirement is selling portfolio,holdings.
Thanks - that was what I sort of gleaned from reading this site.
Topic Author
struva
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Joined: Thu May 06, 2021 8:30 pm

Re: Preparing to RE - looking for advice on best preparatory steps

Post by struva »

lakpr wrote: Sun May 09, 2021 8:32 pm You have 9% in taxable bonds = $360k, whereas your home mortgage is only $200k. Treat your mortgage as a negative bond. Given that the mortgage interest is not tax deductible, even if you were to refinance it to 2.25%, paying it down is the equivalent of earning 2.25% / (1 - 35% - 5.75%) = 3.8%.

I think earning 3.8% on 15 year term is a good deal. It is twice-to-thrice the yield that you might be getting on the taxable bond funds (they are yielding only in the vicinity of 1.3% for intermediate term bonds and 1.7% for long term bonds).

Sell those taxable bonds (surely the capital gains aren't that much, these are bond funds!) and pay down the mortgage, and enjoy your home free and clear.
Thanks, but this highlights one of my confusion points. On the one hand, I am supposed to cash-out refi or HELOC my home to tap my $300K in home equity and get superior returns in equities, but on the other I should just pay off the house. I am stuck in the middle on inertia but leaning more towards paying off the house just because.
Topic Author
struva
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Joined: Thu May 06, 2021 8:30 pm

Re: Preparing to RE - looking for advice on best preparatory steps

Post by struva »

WyomingFIRE wrote: Sun May 09, 2021 8:29 pm Welcome aboard!

A few observations:

1. You suggest you may retire in the next 1-5 years. That four-year span may yield dramatically different outcomes depending on the specific year in which you pull the trigger, particularly given SORR. I think your plan has too much wiggle in it to enable a more specific analysis.

2. I would never be comfortable with a 5% SWR on your facts. And actually, I would never be comfortable with a 4% SWR. If you retired at age 51 then ramp up spending, you have a long way to go. I don't know what "ramp up spending" means.

3. How are you going to fund health care until you get to age 65?

4. Aspects of your post I didn't really understand. You suggest a lifestyle spend pre/post paying for children's college.

5. You are carrying a fair amount of debt.

6. I don't understand your question about a potential trust. A trust is a legal vehicle that may or may not address specific scenarios. Getting a trust for the sake of a trust puts the cart before horse, in contrast. What problem(s)/risk(s) are you trying to address with a trust? It may be helpful for you to consult a lawyer.
1. I am probably going to retire in 1-2 years but if a big bear market shows up before I pull the trigger I will wait. I really do want to retire though.
2. I am only considering a 4-5% SWR for my first 10-15 years of retirement in that I do not want to put myself on a 3% budget while my wife and I are healthy and mobile. My current spend if I ignore college tuition for the kids (which is ending in a few years and is mostly being paid by 529s) is 2%.
3. I have no idea on the health care - probably a high-deductible ACA plan.
6. Regarding trust we have no unusual scenarios other than FOMO (is there some tax avoidance?). I am pretty sure if I talk to a lawyer they will tell me it is a good idea to pay them $5K to set up a trust. I am concerned they are conflicted on this topic.
SnowBog
Posts: 1398
Joined: Fri Dec 21, 2018 11:21 pm

Re: Preparing to RE - looking for advice on best preparatory steps

Post by SnowBog »

struva wrote: Mon May 10, 2021 9:29 pm
lakpr wrote: Sun May 09, 2021 8:32 pm You have 9% in taxable bonds = $360k, whereas your home mortgage is only $200k. Treat your mortgage as a negative bond. Given that the mortgage interest is not tax deductible, even if you were to refinance it to 2.25%, paying it down is the equivalent of earning 2.25% / (1 - 35% - 5.75%) = 3.8%.

I think earning 3.8% on 15 year term is a good deal. It is twice-to-thrice the yield that you might be getting on the taxable bond funds (they are yielding only in the vicinity of 1.3% for intermediate term bonds and 1.7% for long term bonds).

Sell those taxable bonds (surely the capital gains aren't that much, these are bond funds!) and pay down the mortgage, and enjoy your home free and clear.
Thanks, but this highlights one of my confusion points. On the one hand, I am supposed to cash-out refi or HELOC my home to tap my $300K in home equity and get superior returns in equities, but on the other I should just pay off the house. I am stuck in the middle on inertia but leaning more towards paying off the house just because.
I think the recommendation on HELOC was more "get one while employed" (as it's harder to get loans when retired). I don't think the intent was "use it"... But not to have it available should an "emergency" pop up (or just to manage "income" and this taxes if you need some extra funds but would incur higher taxes if you sell from your taxable).

And on paying off the loan, the thinking goes two fold. First, by not having a mortgage in retirement, you lower your expenses. Second, many view that selling your low yield bonds to pay off a higher interest mortgage (which is arguably a negative bond) is a benefit. I'm not sure I fully agree with the second part (I do on paper, but not to the point of changing my AA), but agree that ideally you enter retirement without any mortgage (or any other) debt.
SnowBog
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Re: Preparing to RE - looking for advice on best preparatory steps

Post by SnowBog »

struva wrote: Mon May 10, 2021 9:47 pm 6. Regarding trust we have no unusual scenarios other than FOMO (is there some tax avoidance?). I am pretty sure if I talk to a lawyer they will tell me it is a good idea to pay them $5K to set up a trust. I am concerned they are conflicted on this topic.
From "your" point of view, there is basically no benefit (that I'm aware of) regarding taxes/trusts.

They usually have more benefits in "estate" planning. Which is more meaningful if you have intent on leaving behind a sizable inheritance to your heirs.

If you live in a state that has a lower "estate tax" trusts can be especially useful.
SnowBog
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Re: Preparing to RE - looking for advice on best preparatory steps

Post by SnowBog »

struva wrote: Mon May 10, 2021 9:47 pm 3. I have no idea on the health care - probably a high-deductible ACA plan.
For many, myself included, healthcare in early retirement is a major variable.

If you haven't yet, recommend pricing out insurance plans from Healthcare.gov (or your state health exchange if applicable).

I'm using roughly $35k/year as an estimate for premiums and out-of-pocket expenses.

The other major factor is if you can "engineer your income" such that you can get ACA subsidies, which can dramatically reduce the costs. There's entire threads and better resources for that discussion...
jdstripling
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Joined: Tue Mar 30, 2021 7:56 pm

Re: Preparing to RE - looking for advice on best preparatory steps

Post by jdstripling »

To me it looks like your inherited funds in your taxable account have rather high fees. I know a large portion of the total value will be taxable because of your low cost basis but wouldn't you be better off trying to sell some of these funds and eliminate the highest cost funds from your portfolio first in retirement? To look at it a different way - if you were going to purchase funds today for your brokerage account would you still purchase those funds? There are lots of threads on here talking about proper asset allocation for your taxable accounts to maintain tax efficiency.

After retirement, another thing you may want to consider is using a backdoor roth conversion to convert some of your 401k funds to roth in order to avoid some RMDs. Since you are currently in the 35% tax bracket it doesn't make sense to start that until after you income drops in early retirement.

I think you are set up pretty good regarding your withdrawal rate. As long as you have flexibility to adjust your withdrawal rate should there be a large market downturn you shouldn't have any problems using 4 to 5 percent early on in retirement knowing that your current expenses while working are roughly 2% and you know you can make that work. Not to mention between your emergency fund and cash holdings you could live for two years without having to sell any assets. That should cover a large portion of a market downturn. Based on this I think your 74/24 ratio could work well for you. If market risk is causing you stress you can always rebalance to a more conservative AR.
SnowBog
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Re: Preparing to RE - looking for advice on best preparatory steps

Post by SnowBog »

Overall, looks like you are doing great! We are 45, with less saved, but on a similar path.

Couple of other thoughts:

Double check to make sure you are making any "catch up" contributions since you are 50+.

I don't recall seeing an HSA mentioned. If eligible, start one ASAP!

Recommend looking into "Backdoor Roth" for while you are still employed. Between you and spouse (assuming they are 50+ as well) you can get $14k/year into a Roth. Maybe even for 2020 if you haven't filled your taxes yet... Also see if your 401k allows "after tax" contributions, and if so look into a "Mega Backdoor Roth" which could drastically increase your Roth. IMHO Roth is always better than taxable, as you'll never pay taxes on it again. This gives you more options for tax efficient withdrawals

Personally, I hold separate funds in my tax-advantaged (like 401k) vs. taxable accounts. This let's me "tax loss harvest" without worrying about a "wash sale" conflict in another account.
struva wrote: Sun May 09, 2021 5:22 pm 1. Concerned that too much of my portfolio is in my 401k (~50%).
There are ways to tap into retirement accounts penalty free. The main two are SEPP (rule 72t) and Roth conversion.

With a SEPP, you are locked until specific withdrawals (kinda like early RMDs).

With Roth conversions, you can do as much or little as you want. But you need to let them "season" for 5 years before spending them to avoid penalties. So you are basically building a 5 year Roth conversion ladder.
struva wrote: Sun May 09, 2021 5:22 pm How much post-retirement can I reasonably convert from 401k to Roth annually?
Completely depends on how much you want to pay in taxes!

While you can often pay little to no taxes in early retirement, doing so with a large pre-tax balance will likely push you into high tax brackets when RMDs kick in. Even more so when the first spouse dies, and the survivor is left with the same RMD but taxed at the single rate.

When you also add our "progressive" tax system, it's generally advantageous to pay some taxes throughout retirement. For example, maybe doing Roth conversions up to the first or second tax bracket will keep you in the first or second tax brackets when RMDs and social security kick in. This will likely mean far less taxes paid over your retirement. So even if you don't "need" to tap into your retirement accounts before 59.5, you might pay less taxes by doing so...

The challenge though is figuring out how to balance Roth conversions with conflicting other priorities.

As mentioned in prior post, ACA subsidies can be sizable, but would limit how much Roth conversions you could do.

Likewise, in early retirement, you may have the ability to sell long term gains while in the 0% LTCG bracket. Which can be a great way to unwind positions you no longer want and/or "tax gain harvest" to pay lower taxes later when you need to sell.

struva wrote: Sun May 09, 2021 5:22 pm 2. I have these ancient American Funds loaded mutuals that were set up from an inheritance over 25 years ago.
DAF is a great option. If it works, selling while in the 0% LTCG might be an option as well. And if you'll never need the funds, leaving them to heirs with the stepped up basis is another option.
struva wrote: Sun May 09, 2021 5:22 pm 3. I already plan to sell my company stock soon and use it to balance my AA as needed.
If you haven't yet, turn off dividend reinvestments and sell all new shares gained via ESPP and RSU vests. You are already taxed on those when they happen, so no reason to hold for "long term" tax rates. (Assuming you can sell nearly immediately.)

Personally, I let my employer stocks grow too big... At this point, I'd be happy to get them to 7% of my portfolio! My goal is to reduce them to at least 10% before retirement (primarily by not adding more and instead growing other investments, but I've been selling off chunks to keep their growth in check).

When I retire, I'll probably "spend" up to the 0% LTCG to get these down into the 5% range. But 7% might be "good enough" if it's holding up Roth conversions/etc.
struva wrote: Sun May 09, 2021 5:22 pm 4. I am currently in a very high tax bracket, but once I retire I have no defined income - just portfolio returns until SS kicks in. Are there certain adjustments I should really be doing now or while I am still working (next 1-4 years) and others I really should wait until after I retire?
For myself, I'm trying to minimize recognition of taxable gains while working, so I continue to maximize all tax-advantaged accounts (and plan to use 50+ catchup when I can). I figure I'll have more flexibility in low income retirement years...

Maybe not "portfolio" related, but think about making the most of your benefits and "employed" status. As mentioned in a prior post, get a HELOC "just in case". If you want to switch credit cards, or anything else tied
your credit rating, do so while employed. Get caught up on any dental/medical/etc. while covered under your employer.
marcopolo
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Re: Preparing to RE - looking for advice on best preparatory steps

Post by marcopolo »

struva wrote: Sun May 09, 2021 5:22 pm High wage earner looking to retire early to enjoy healthy years. Currently 50, married, healthy, kids in college with expenses already planned, and will retire in next 1-4 years. Have concerns about how to best position portfolio for tax purposes and to support a high withdrawal rate to enjoy early retirement.

Emergency funds: Covered. Generally keep 12 months of expenses in cash accounts.

Debt: $200K mortgage ($550K appraisal) about to refi to 2.25% 15-year. Do not carry balances on any credit cards. No current car loans.

Tax Filing Status: Married.
Tax Rate: Current 35% federal, 5.75% state. Post-retirement hope to drop down significantly.

State of Residence: VA (no intention to relocate after retirement)

Age: 50

Desired Asset allocation: ??? - have 30-40 year horizon, currently 74/24/2 (stocks/bonds/cash)

Total portfolio is ~$4M, approximately half in taxable and half in tax-advantaged.

Tax-advantaged: Total 52% of portfolio
401k (bulk of tax-advantaged): Fidelity Freedom 2030 (FGTKX, 0.47% expense ratio) - 50% of total portfolio, targeted fund currently at 70/30 AA
within targeted 401k fund: 35% of total portfolio in equities, 15% of total portfolio in bonds (50% x 70/30 AA)
Traditional and Roth IRAs his and hers (much smaller): Fidelity Total Market Index (FSKAX, 0.015% expense) - 2% of total portfolio combined
Currently contributing maximum with company match to 401k. No contributions to IRAs in over 10 years due to maxing on 401k.

Taxable: Total 48% of portfolio
Taxable Cash: 2% (aside from emergency)
Taxable Bonds: 9% of total
Fidelity US Bond Index (FXNAX, 0.025% expense) - 3%
Fidelity Total Bond (FTBFX, 0.45% expense) - 4.5%
Fidelity Inflat-Prot Bonds (FIPDX, 0.05% expense) - 1.5%
Taxable Intl Equities: 12% of total
Fidelity Intl Growth Fund (FIGFX, 1.01% expense) - 6%
Fidelity Global Ex US Index (FSGGX, 0.055% expense) - 4%
American Funds Europacific Fund (AEPGX, 0.84% expense, 5.75% load) - 2%
Taxable US Equities: 25% of total
Fidelity Total Market Index (FSKAX, 0.015% expense) - 12%
American Funds Growth Fund (AGTHX, 0.64% expense, 5.75% load) - 3%
American Funds Smallcap Fund (SMCWX, 1.06% expense, 5.75% load) - 3%
Company Stock (Single Large US Equity) - 7%

Current AA summary: US Equities 62% (37% in tax-advantaged, 25% in taxable), Intl Equities 12% (taxable), Bonds 24% (15% tax-advantaged, 9% taxable), 2% cash

Expenses: Can live within 2-3% withdrawal rate once kids finish college under current lifestyle. Want to support a much higher rate (4-5%) during first 5-10 years post-retirement to enjoy current health and mobility.

Questions:
1. Concerned that too much of my portfolio is in my 401k (~50%). Using retirement portfolio planner shows my taxable accounts becoming pinched if I ramp up spending too much in first 10 years. Should I be switching my contributions during my final working years into a Roth 401k instead of my traditional 401k (I believe this is an option but I am currently in a very high tax bracket)? How much post-retirement can I reasonably convert from 401k to Roth annually?

2. I have these ancient American Funds loaded mutuals that were set up from an inheritance over 25 years ago. They are now 8% of my portfolio. I have mostly left them alone and can reinvest dividends without the front-end load, but my basis on them is only about 20% of their current NAV so I will incur major capital gains if I ever sell them. Am I right to just sell these last and leave them for my kids? I was considering doing a DAF to try to bleed them down that way with my annual charitable giving. Any other suggestions?

3. I already plan to sell my company stock soon and use it to balance my AA as needed. If I am planning to retire soon but with a 30-40 year horizon, how risky is my current 74/26 AA and how should I reallocate that 7% I have in company stock? Any other issues with my fund selections? I don't really care much if I leave an inheritance, my goal is to minimize taxes while living a bit higher on the hog during early retirement (more travel primarily, but also gifting my kids with maxed out starter Roths during their first 5+ earning years so I won't feel guilty spending the rest of their inheritance after that).

4. I am currently in a very high tax bracket, but once I retire I have no defined income - just portfolio returns until SS kicks in. Are there certain adjustments I should really be doing now or while I am still working (next 1-4 years) and others I really should wait until after I retire?

5. Should I be considering products like annuities or income-generating bonds once I retire, or just plan on selling taxable assets as needed for withdrawals before I can start withdrawing from my 401k?

6. I do not have any sort of trust set up. My wife is healthy like me, no baggage on either side nor plans for it. Should someone with our level of assets have a trust anyway? I am fine if our entire estate divides to our kids immediately - they all have level heads. But maybe there is some tax reason we should be putting our assets in a trust?

Thanks for any helpful advice!

Your situation sounds quite similar to mine about 4 years ago. I was age 50 and planning a couple more years, ended up getting a very generous exit package and retired at age 51. So far, 3+ years later, do not regret it one bit.

As i try to answer some of your questions, I am going to assume you do not have a pension, or other sources of income aside from your portfolio.

1) At your tax bracket I would not switch to a Roth 401k. You should take the tax savings now. If you are able to roll your Trad IRA into your 401k (check with plan sponsor to see if that is allowed), I would do that so you can make backdoor Roth contributions. You will have plenty of time to convert some (don't convert all) of your Trad IRA to Roth at much lower tax rates between retirement and when RMDs become a factor. Do not worry about your taxable accounts being pinched during early years of retirement (assuming overall portfolio is on track), there are numerous ways to efficiently access your retirement funds without penalties (see Roth conversion ladder). But with something like $2M in taxable, you really should not get pinched any time soon.

2) I would leave these alone for now, but would look for opportunities to unload them at 0% Cap Gains rate once your salary income goes away. It would also simplify your portfolio. Charitable giving through a DAF is also a great way to unload these assets, if you were planning to give anyway.

3) At 7% it is not too much concentration, but i would look to get out of it just to consolidate holdings. There is no correct AA, it is really a matter of what you are comfortable with. I use a 60/40 allocation, your 74/26 is fine as well, just need to pick a range you are comfortable, and try to stick with it. I think you have more funds that you need, i would look for opportunities to consolidate, as long as it was not costing too much in taxes. Goal should not be to minimize taxes, but rather to maximize spendable income, they are not the same. Focusing on the former can be detrimental to the later. Love the idea of gifting Roth contributions to kids.

4) Since you will be in a much lower tax bracket in retirement, you should defer taxes as much as you can so you can pay at a lower rate later. Filling your Roth buckets should wait until you can do so at a lower rate.

5) I would rely on dividends from taxable accounts, and selling investments to fund expenses. Consider some amount of SPIA at a (much) later date to provide longevity insurance.

6) A trust seem unnecessary for your situation, certainly no need for one now. There really are no tax savings from most of them. They do provide things like creditor and spousal protection for the heirs, if that is desired. If so, you can set them up as a part of your will, that is there is no trust now, but when the money is transferred to beneficiaries, trusts are created at that time under the term specified in the will.

Enjoy your retirement!
Once in a while you get shown the light, in the strangest of places if you look at it right.
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FrankLUSMC
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Re: Preparing to RE - looking for advice on best preparatory steps

Post by FrankLUSMC »

I agree with the above post by marcopolo, especially:

a>Keep maxing 401K and catchup to minimize current taxes, then
b> Use your already taxed and taxable to pay expenses for the first couple years (or more if needed) to convert ~80k to Roth and still be able to take capital gains rate at 0% to get rid of your high fee funds and company stock.
printer86
Posts: 275
Joined: Mon Apr 25, 2016 8:45 am

Re: Preparing to RE - looking for advice on best preparatory steps

Post by printer86 »

Marco hits on a lot of key points, but I will add my experience for the OP as we also followed a similar path.

I early retired last year in my mid 50's from my MegaCorp sales job. My approach as I turned 50 was to keep my head down and keep earning/building my portfolio until I turned 55 and became retiree eligible (no retirement benefits tho). At 55, I knew I was done. I privately informed my manager that I wanted to retire later that year. We worked out a plan where they got to hire my replacement and I assisted in training him. I've been retired a little over 6 months now and I barely think back at my working days. It's like it was another life a long time ago.

More specific to the OP's question. We are living off our taxable accounts until we become Medicare eligible. We also manage our taxable income (MAGI under $69K) in order to maximize the ACA subsidy. Since we are healthy, and have a high HSA balance, we chose a high deductible ACA plan for 2021 that costs us $0 per year in premiums. We also contribute $8,200 to our HSA, which helps lower our MAGI too.

As I said above, we keep our income below the ACA limit by living off of our taxable accounts. Out taxable accounts consist of index stock funds, a couple of long owned individual stocks, company stock and laddered CD's.

Our early retirement income consists of the following:

Interest: From online savings accounts
Dividends: From taxable equities
Small inherited IRA RMDs: It's a minimal amount.
Roth Conversions: I do Roth conversions up to the standard deduction limit, plus HSA contribution amount.
Long term capital gains: I sell enough equities that will still keep me in the 0% LTCG bracket.

A couple of items for the OP. I too had about 7% of my portfolio in company stock. Now that I'm retired, and in a lower tax bracket, I'm selling off my company stock in annual chunks while still in the 0% long term capital gains bracket.

The HELOC recommendation listed in posts above was not to get a home equity line LOAN, but to get a home equity LINE. The point being that its easier to apply for a this line of credit while still being employed. You may never need to access these funds, but it's just another safety net in your tool box.

I would also recommend that you pay off the mortgage with your taxable bond funds. That's just double debt taxation in my mind.

If you plan to spend a bit more in your early retirement years, you could simply separate the additional amount from your portfolio and treat it as a separate income source. You could create a series of laddered CD for such expenses as travel. Create 5 $100k annually maturing CD's. When each comes due, roll $50k into a new 5 year CD and use the other $50k for travel. That gets you 10 years of safe spending money outside your SWR.
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struva
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Joined: Thu May 06, 2021 8:30 pm

Re: Preparing to RE - looking for advice on best preparatory steps

Post by struva »

Thank you to everyone for the detailed replies and attention to a newbie. Speaks very well of this forum (I have been lurking on and off the past 5 years and was hoping for if not exactly deserving of this level of experience). Special thanks to marcopolo, printer86, and SnowBog though I am going to be digesting it all for a while.

My takeaways:
1) I really need to understand Roth conversions a lot better than I do now to make sure I take full advantage of them during my early retirement years. And I need to investigate catch-up contributions.
2) I need to engineer my annual income to keep it at or very close to a target like $80K while I convert my traditional 401k and IRAs to Roth, and pay attention to those buckets (once I finish digesting the articles).
3) Still not sure about the HELOC.
4) Definitely going to set up Roths for my kids as they start out post-college. Maybe gift them some of my low-basis stock that they could safely sell at 0% LTCG.
5) I do plan to simplify my holdings, I have no idea what three different type of bond funds are doing for me, so it is probably better to have little idea what just one bond fund is doing.
6) I am in the middle of doing a refi on my home (have not signed yet) but you all have me seriously considering giving my mortgage broker some bad news and just paying off the mortgage instead. I certainly don't want to pay closing costs on a refi than pay it off a few years later so if I do this refi I am committing to the mortgage for the next 10-15 years. It just felt like with interest rates so low I should have a mortgage.
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climber2020
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Re: Preparing to RE - looking for advice on best preparatory steps

Post by climber2020 »

struva wrote: Mon May 10, 2021 9:47 pm 2. I am only considering a 4-5% SWR for my first 10-15 years of retirement in that I do not want to put myself on a 3% budget while my wife and I are healthy and mobile.
What do you plan on doing during that first decade that will require you to more than double your current spending (minus college expense)? And once you do that, do you really think you'll be able to cut that in half after living large for 15 years?

The problem with having a 5% withdrawal rate is that if you get unlucky and have a bad sequence of years with poor stock returns early on, you're at a high risk of depleting your portfolio. Those first several years are what will likely make or break your retirement plan.

One option that may suit you well is to do a variable percentage withdrawal described here. That'll start you off at 4.5% and you'll never run out of money.
SnowBog
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Re: Preparing to RE - looking for advice on best preparatory steps

Post by SnowBog »

Only thing I'd re-enforce from my prior post (but now where I can easily add links) - assuming you have "extra" savings going into taxable right now - for your remaining working years - look into Backdoor Roth https://www.bogleheads.org/wiki/Backdoor_Roth and if your plan supports it Mega Backdoor Roth (aka after-tax 401k) https://www.bogleheads.org/wiki/After-tax_401(k).

In particular, the Backdoor Roth could be done for you and spouse - regardless of income (provided you have enough "earned" income). But you need to get rid of any Traditional IRA accounts you have (or deal with pro-rata taxes), so if your plan allows it - rolling over existing Traditional IRA's into your existing 401k might be a consideration.

The "Mega" version is 100% dependent on if your employer plan supports "after-tax" (not to be confused with Roth) contributions. Its unlikely your employer/administrator would know what a "Mega Backdoor Roth" is... But you want to ask if you can contribute [and then convert] "after-tax" funds that are in-excess of your $19,500 [and 50+ Catchup amount]. These are far less common, but if you have access to one - its a great way to quickly grow Roth space without paying more in taxes [you'd be using the same "after-tax" dollars that would have otherwise gone into a taxable investment].

I just started doing these maybe 2-3 years ago - and have > $150k saved in Roth now - that [under current law] is tax free for life. By no means are these "required" - but a nice way to maybe provide more options and save on future taxes with a little bit of effort. (And if you are like I was 3 years ago - I figured "I made too much" to use Roth's and once I found out about the "Backdoor" versions - I realized I was wrong...)
Topic Author
struva
Posts: 10
Joined: Thu May 06, 2021 8:30 pm

Re: Preparing to RE - looking for advice on best preparatory steps

Post by struva »

climber2020 wrote: Tue May 11, 2021 6:22 pm What do you plan on doing during that first decade that will require you to more than double your current spending (minus college expense)? And once you do that, do you really think you'll be able to cut that in half after living large for 15 years?
Right now we are both thankfully still healthy and can take month-long sailing trips, ski the Alps, go on hiking tours, learn to scuba, walk the capitals of Europe, and generally still do a lot of the things (at least in principle) we could do when we were young but have mostly only done in bits and pieces in between raising our family.

My biggest risk right now is not doing what I can with these years. I could burn an extra $1M over the next decade and still have a safe retirement. So that is my plan. I doubt we succeed at spending an extra $1M (we are naturally modest spenders), but I don't want to feel financially constrained not to try, and I still want to make sure the other $3M is doing the right things so that I can survive a bear market or two. So I want to plan for that extra spend even if we end up chickening out and being homebodies.
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