How to invest 15 years of living expenses

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north2016
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How to invest 15 years of living expenses

Post by north2016 »

Hi, first post but I have lived the BH philosophy for a long time.

Retiring at age 55 with $1,125,000 in taxable assets to get me to age 70. After that, SS, Roth and T IRAs will be more than enough.

I have no debt and house is paid. Annual expenses will be $75,000 (55,000 essential, 20,000 discretionary travel, recreation). No state tax and hopefully won't pay much federal tax.

I can spend down the 1,125,000 to zero over 15 years and just need it to keep up with inflation. I am not planning on doing any Roth conversions for now to maximize ACA subsidies.

The 1,125,000 includes a rental condo (Net market value $325K, no mortgage) It is slightly cash flow positive, on autopilot and currently in a poor sales environment. I hope/expect condo value to keep up with inflation and will sell in the next 5-15 years.

So, what to do with the remaining $800K (1,125k-325k)? I am thinking 30-35% equity and the rest in mid duration bond funds, ibonds (currently have 70K), CDs and cash.

Your input is appreciated.
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digarei
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Re: How to invest 15 years of living expenses

Post by digarei »

Welcome to the forum, north2016  

The Bogleheads Wiki contains an estimable number of articles and spending calculators, discussion of retirement models, safe withdrawal rates, etc. If you haven't already done so, you may want to verify your spending plan using one of the calculators referenced. The section begins with Retirement Spending.
I can spend down the 1,125,000 to zero over 15 years and just need it to keep up with inflation.
Of course, you can hope that a portion of this nest egg earns a return that keeps up with or surpasses inflation—but in that you've decided to draw down this amount to fund your annual expenses, a sizable percentage should be in insured accounts. The good news is that the probability for high inflation in the near future is low.

The portion of this sum represented by the rental condo may or may not beat inflation. If the market is down when you sell... well, don't sell. :(
what to do with the remaining $800K (1,125k-325k)? I am thinking 30-35% equity and the rest in mid duration bond funds, ibonds (currently have 70K), CDs and cash
This sounds like the beginning of a reasonable plan... you may want to run the numbers from year to year (see, the calculators referenced in the wiki) to come up with a withdrawal plan that would accomodate a down (stock) market that lasts 4-5 years (it could happen and has before), higher tax rates, [...] Run different scenarios, varying the percentages allocated to each of the financial instruments available (from your list above) to determine your optimum starting point. Your spending plan may include one or more intermediate changes in your investments along the way and be subject to certain criteria, e.g., change asset allocation from 25% stocks / 30% bonds / 45% cash to [some other allocation XXX] if YYYY event happens.

There are so many variables involved that I would urge you to compare results of different calculators and get advice from multiple sources, including perhaps, a CFP. Congratulations on your retirement. :happy
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asset_chaos
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Re: How to invest 15 years of living expenses

Post by asset_chaos »

If it were me, I'd consider having three investments. One year of expenses ($75k) I'd put in a money market fund or online checking account, whichever paid better and was more convenient for paying my bills. Four years of expenses ($300k) I'd put in a short term bond fund (short term bond index, short term treasury, short term TIPs, depending on risk tolerance). The rest ($425k) I'd put in a conservative balanced fund (lifestrategy income, 20:80 stocks:bonds, or conservative growth, 40:60, for example, again choosing on risk tolerance). In years that stocks did well, I'd replenish the money market to pay for that year's expenses from the balanced fund. In years that stocks did poorly, I'd replenish the money market from the short bond fund. In years that stocks were middlin, maybe I'd replenish the account from a mixture of both other funds. Of course, many variations on the theme of conservative investment abound, but you really have no need to take any more risk than it takes to keep up with inflation after costs for 15 years---as long as your estimate of expenses is accurate.
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Dandy
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Re: How to invest 15 years of living expenses

Post by Dandy »

You don't have 1,125,000 in spendable assets - you can't spend the condo until you can sell it and you don't know when that will be and how much that will add to your taxable account.

800k/70k = about 11.5 years worth of funding without considering interest, taxes or inflation. 800k/50k = 16 years worth of funding.

Investing a significant portion of the $800k exposes you to bad sequence of return risk - markets are at or near record highs.

I don't like taking any chances with funding to age 70 SS collection or for securing my retirement. You seem to feel once you get to collect SS at age 70 your retirement will be secure. To secure the route to SS at age 70 you probably need to spend closer to 50k than 70k or plan to sell the condo good market or bad at some point.

I'd probably secure 50k x 15 or $750k in: CD ladder (600k)and maybe $150 in Savings. This would provide a relatively secure base and then invest the rest in say the Balanced Index fund. I'd plan to sell the condo in the next couple of years and add that to the Balanced Index fund. Use the Balanced Index fund to support your travel/fun plans as you can afford/supplement the CD ladder/savings as needed.
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archbish99
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Re: How to invest 15 years of living expenses

Post by archbish99 »

TIPS would guarantee you against losses to inflation, though obviously you'll pay an insurance premium in the form of negative yield on the short term ones. TIPS in combination with as many I-Bonds as you're allowed to purchase might be worthwhile, though. Looks like a 15-year TIPS ladder at that income level is around $1.1M, so in the right neighborhood. (Obviously, you'll need the condo to fill in some of that when you sell.)
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livesoft
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Re: How to invest 15 years of living expenses

Post by livesoft »

north2016 wrote:Hi, first post but I have lived the BH philosophy for a long time.

Retiring at age 55 with $1,125,000 in taxable assets to get me to age 70. After that, SS, Roth and T IRAs will be more than enough.
Why not work on a better plan that also allows you to spend the tIRA and Roth after you reach age 59.5?

But here is a thread about a retired 55-year-old with a couple million in assets and how to structure retirement income:
http://www.bogleheads.org/forum/viewtopic.php?t=87471

I do understand that you are trying to have very little income in order to look poor for ACA subsidies.
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Topic Author
north2016
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Re: How to invest 15 years of living expenses

Post by north2016 »

livesoft wrote:
north2016 wrote:Hi, first post but I have lived the BH philosophy for a long time.

Retiring at age 55 with $1,125,000 in taxable assets to get me to age 70. After that, SS, Roth and T IRAs will be more than enough.
Why not work on a better plan that also allows you to spend the tIRA and Roth after you reach age 59.5?
Yes, that is the other way to approach this. My thoughts were to spend the taxable first before touching the IRAs.

I appreciate all the responses so far.

I guess the crux of my question is: If you assume a retirement investment portfolio that needs to last for 15 years and keep up with inflation, and some of it (325/1125=29%) is in real estate, what should the stock allocation be for the rest of it?
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Aptenodytes
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Re: How to invest 15 years of living expenses

Post by Aptenodytes »

I think you are making your life unnecessarily complicated. I think you will find it easier to consider your taxable accounts and IRAs as a single portfolio. You can start withdrawing from the IRAs penalty-free at 59.5. So you just have 5 years during which only the taxable accounts are available; after that the whole thing is in play. Age 70 only matters for SS.
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Aptenodytes
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Re: How to invest 15 years of living expenses

Post by Aptenodytes »

north2016 wrote:
livesoft wrote:
north2016 wrote:Hi, first post but I have lived the BH philosophy for a long time.

Retiring at age 55 with $1,125,000 in taxable assets to get me to age 70. After that, SS, Roth and T IRAs will be more than enough.
Why not work on a better plan that also allows you to spend the tIRA and Roth after you reach age 59.5?
Yes, that is the other way to approach this. My thoughts were to spend the taxable first before touching the IRAs.

I appreciate all the responses so far.

I guess the crux of my question is: If you assume a retirement investment portfolio that needs to last for 15 years and keep up with inflation, and some of it (325/1125=29%) is in real estate, what should the stock allocation be for the rest of it?
But that's not the right crux. Look at the whole portfolio. Setting up artificial barriers just makes things complicated and probably lowers your returns without offsetting benefits.
ralph124cf
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Re: How to invest 15 years of living expenses

Post by ralph124cf »

When you hit 65, you will no longer need to artificially reduce income since you will be on Medicare. You may want to withdraw/convert to Roth up to whatever tax bracket you are comfortable with.

Also, you say you have no mortgage on your $325 condo, and that it is slightly cash flow positive. Your other condo expenses must be extremely high not to be earning a decent profit on a paid off $325k property. Are you sure you mean cash flow, or do you mean taxable profit after non-cash depreciation expense? Is your rent high enough?

Ralph
Chadnudj
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Re: How to invest 15 years of living expenses

Post by Chadnudj »

Keep in mind, too, that you may want to convert some of those traditional IRAs/401ks to Roths in order to avoid/reduce RMDs at age 70. Careful planning could allow you to do this by filling up your tax bracket as necessary each year from now until 70 with conversions.
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market timer
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Re: How to invest 15 years of living expenses

Post by market timer »

I'd use a liability matching portfolio, roughly:

5 years in a high-yield savings account or CDs: $375K
5 years in intermediate corporate bonds: $375K
5 years in long duration assets: Rental condo ($325K), Long term corporates ($50K)

After each year, replenish the short term cash account back to five years of living expenses, as well as the intermediate account (as needed).

The retirement accounts could be invested much more aggressively.
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Watty
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Re: How to invest 15 years of living expenses

Post by Watty »

north2016 wrote:The 1,125,000 includes a rental condo (Net market value $325K, no mortgage) It is slightly cash flow positive, on autopilot and currently in a poor sales environment. I hope/expect condo value to keep up with inflation and will sell in the next 5-15 years.

How much would it cost you in taxes if you sold it now?

You might hope that it will keep up with inflation but if mortgage interest rates go back up to 7% + like they were a few years ago, before all the Fed drove down interest rates, the real estate markets could get slammed. Do not underestimate how much the current low interest rates are supporting high real estate prices and at least in some area may be creating a new housing bubble

You have something like a quarter of your net worth in the condo and you also have another house which may even be in the same city so even a higher percentage of your net worth might be in real estate. Just from an asset allocation and diversification point of view selling it might be a good idea.

Unless you can write down a compelling reason to keep it then you should sell it and you can use the money to live off and not spend down your other investments.
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Watty
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Re: How to invest 15 years of living expenses

Post by Watty »

So, what to do with the remaining $800K (1,125k-325k)? I am thinking 30-35% equity and the rest in mid duration bond funds, ibonds (currently have 70K), CDs and cash.
You should look at your overall asset allocation combining your taxable, Roth, and IRA accounts as one large portfolio then decide where you should hold your stocks and bonds to get the most tax efficient holdings.

http://www.bogleheads.org/wiki/Principl ... _placement

That could very well mean that your taxable account is mostly stocks but that is OK since you can make use of the 0% long term capital gains and qualified dividends tax rate up to the top of the 15% tax bracket and also take any capital losses as a $3,000 a year deduction against your ordinary income.
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