Where to put bridge funds until SS at 70?

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cyclist
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Where to put bridge funds until SS at 70?

Post by cyclist »

We now find ourselves able to spend the next 5 years living exclusively from funds in our taxable portfolio while also using them to pay the tax on significant Roth conversions.

I’m trying to think through whether to stash money we expect to consume within the next 5 years in cash/CDs/mm funds, leave them invested per our AA, or to follow some other approach altogether.

Any thoughts on efficient strategies for managing these funds that we are so lucky to have?

Cyclist
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Eagle33
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Re: Where to put bridge funds until SS at 70?

Post by Eagle33 »

General guideline on this forum is if you need to spend the money within 5 years, then that money should not be in stocks.
NancyABQ
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Re: Where to put bridge funds until SS at 70?

Post by NancyABQ »

Well, it depends. I am in a similar situation, having just retired and living mainly off my taxable for the next 6 years.

Is that money for the next 5 years critical for you, so that you are concerned about sequence-or-returns-risk? If that's your situation, then you should probably move the money out of equities to somewhere safe (High Yield Savings Account, CDs, Money Market). This would probably cause you some capital gains taxes if it's current invested in equities, but it is your safest move to cover the next 5 years until Social Security.

However, if you are talking about sizeable Roth conversions it seems more likely that you have "plenty" of funds and are just trying to optimize things. If that's your situation, I'd suggest leaving the taxable where it is and just withdrawing as you go to pay your expenses. This is the riskier approach in theory, but we're assuming you have plenty of funds, so if there's a huge market correction you will be fine and will probably be doing fewer (lower value) Roth conversions, right?

For my situation, I have plenty of funds. I keep most of my Fixed Income in my Tax-deferred TIRA and I don't intend to change that.
I actually wish I had more in cash right now, just so I could do more Roth conversions without incurring Capital Gains to get the money from my brokerage accounts to pay the taxes. However, it isn't a huge problem. I will just deal with it as it is. So I will spend the cash first (about 2 years living expenses in cash) but the money for years 3-6 will remain in the brokerage account until just before I need it. I will do any re-balancing in the TIRA.

So, the best strategy depends on your specific situation. If you want a more complete answer you should edit your original post with more details about that situation. An optimal solution would probably require some spreadsheet work or other modeling.
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JoeRetire
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Re: Where to put bridge funds until SS at 70?

Post by JoeRetire »

cyclist wrote: Fri Jul 23, 2021 9:12 pm I’m trying to think through whether to stash money we expect to consume within the next 5 years in cash/CDs/mm funds, leave them invested per our AA, or to follow some other approach altogether.
If you were to experience a significant market crash in the next 5 years, how bad would that be for you?

If it's a significant worry, then stash it in cash/CDs/mm funds.
If not, leave it invested as is.
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dogagility
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Re: Where to put bridge funds until SS at 70?

Post by dogagility »

Is your question whether or not you should change your asset allocation by moving money from equities to fixed income? Do you think you need to change your overall portfolio asset allocation at this point?

If not, then I don't think it matters too much what you do. You can always use the fixed income portion of your asset allocation as bridge funds... whether or not these are placed into a distinct mental accounting bucket.
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Mando19
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Re: Where to put bridge funds until SS at 70?

Post by Mando19 »

Eagle33 wrote: Fri Jul 23, 2021 10:01 pm General guideline on this forum is if you need to spend the money within 5 years, then that money should not be in stocks.
Good comment, is this consensus or is there a Boglehead guideline on this topic?
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cyclist
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Re: Where to put bridge funds until SS at 70?

Post by cyclist »

We’ll have more than ample funds, so protecting against market drops isn’t really an issue. Our taxable funds are almost entirely from inheritance, so there are no capital gains as yet.

My concern (if you can really call it that) is that if markets continue to climb our ability to do Roth conversions would be limited by any gains when selling equities for living expenses and for the taxes on conversions.

One solution would be to leave those funds in bond fund shares, but to this point I’ve been planning to follow the usual Boglehead approach of holding those within our traditional IRAs.

Thanks everyone!
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retiredjg
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Re: Where to put bridge funds until SS at 70?

Post by retiredjg »

cyclist wrote: Fri Jul 23, 2021 9:12 pm We now find ourselves able to spend the next 5 years living exclusively from funds in our taxable portfolio while also using them to pay the tax on significant Roth conversions.

I’m trying to think through whether to stash money we expect to consume within the next 5 years in cash/CDs/mm funds, leave them invested per our AA, or to follow some other approach altogether.

Any thoughts on efficient strategies for managing these funds that we are so lucky to have?

Cyclist
To me, it would depend on how you would/could handle a significant market downturn. For example, can you take money from an IRA without paying the 10% early withdrawal penalty?

If your taxable account is just large enough for 5 years and the Roth conversions and there is no other option for living expenses in those 5 years, the money probably needs to be in cash and short term bonds.

If your taxable account is twice the size you need for 5 years of living expenses and conversions, I think you could leave the money invested in stocks. In a bad downturn, you would still have enough for 5 years and could maintain your asset allocation by selling bonds and buying stocks in tax-advantaged accounts....so that you are not selling stocks (net) during the downturn.

I think a lot of the answer depends on whether you are over 59.5 or can use the so-called 55 rule for a 401k.
LookinAround
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Re: Where to put bridge funds until SS at 70?

Post by LookinAround »

I've been in a somewhat similar situation. Though I started drawing SS early at 62. (age 69 now).

- I keep a little over 2 years living expenses available
>>> 1 year in a mix of High Yield Savings, CD, and I-bonds
>>> 2nd year in Vanguard Intermediate-Term Tax Exempt to get a decent and tax exempt return which helps reduce my NIIT MAGI.

I'll continue Roth conversions to age 72. My Roth conversion target is to approach (but stay under) the NIIT MAGI. At 72 I'll re-evaluate Roth conversions considering my IRA RMDs.
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ram
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Re: Where to put bridge funds until SS at 70?

Post by ram »

cyclist wrote: Fri Jul 23, 2021 9:12 pm

I’m trying to think through whether to stash money we expect to consume within the next 5 years in cash/CDs/mm funds, leave them invested per our AA,

Cyclist
These do not have to be exclusive options. You can keep whatever is your AA AND keep cash in taxable account which will be part of the bond/cash portion of your AA.
Ram
NancyABQ
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Re: Where to put bridge funds until SS at 70?

Post by NancyABQ »

cyclist wrote: Sat Jul 24, 2021 7:00 am We’ll have more than ample funds, so protecting against market drops isn’t really an issue. Our taxable funds are almost entirely from inheritance, so there are no capital gains as yet.

My concern (if you can really call it that) is that if markets continue to climb our ability to do Roth conversions would be limited by any gains when selling equities for living expenses and for the taxes on conversions.
So the question is whether to pull 5 years of the money that's in taxable with minimal gains, out into either cash or a bond fund, or leave it in equities?

If it's in equities, the main "risk" is that you pay more in capital gains to withdraw it to pay for Roth conversions. If the market goes down, you will actually pay less in taxes and could presumably convert even more Roth with the difference if there is a capital loss.

If it's in bonds/cash you will have reduced returns (which could be balanced by increasing the equities in your TIRA), but slightly higher taxes because the interest (probably minimal) is taxed as ordinary income.

Really, it's all just making your best guess. I doubt the choice will matter much in the long run.

I guess if it was me I'd increase my cash position a bit if you can do it without incurring significant capital gains, but probably not to the whole 5 years. Maybe 2-3 years worth and just revisit each year?
One solution would be to leave those funds in bond fund shares, but to this point I’ve been planning to follow the usual Boglehead approach of holding those within our traditional IRAs.
The approach of holding Bonds in TDA and equities in taxable is just a guideline. There can be many valid reasons for "violating" it, and your case could certainly qualify.

I'd invest it in a mix of CDs (only if the yield is more than a HYSA for an appropriate term) and HYSA. You can also invest it in bonds if you prefer. Choose something with a short effective duration -- I like VCSH (Vanguard Short-Term Corporate Bond), or a short-term treasury fund.

Increase equities in the IRA to balance any significant withdrawal from taxable, and just make sure the Roth is always 100% equities as you do your conversions.
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Re: Where to put bridge funds until SS at 70?

Post by ruralavalon »

cyclist wrote: Fri Jul 23, 2021 9:12 pm We now find ourselves able to spend the next 5 years living exclusively from funds in our taxable portfolio while also using them to pay the tax on significant Roth conversions.

I’m trying to think through whether to stash money we expect to consume within the next 5 years in cash/CDs/mm funds, leave them invested per our AA, or to follow some other approach altogether.

Any thoughts on efficient strategies for managing these funds that we are so lucky to have?

Cyclist
Are you currently retired, and what is your age?

We are age 75, retired, our overall asset allocation is 50% stocks/50% bonds, no CDs or money market funds.

The money to cover our expenses during the early years of retirement was in our joint taxable account invested in very tax-efficient stock index funds. We sold shares of the stock index funds in our joint taxable account as needed to cover our retirement living expenses. All necessary rebalancing was then done inside my rollover IRA.

There have been no withdrawals from our Roth IRAs so far.
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David Jay
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Re: Where to put bridge funds until SS at 70?

Post by David Jay »

I held all funds for age 62 to 69 in cash (one year), short term bonds (years 2-3) or intermediate bonds (years 4-7).
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Leif
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Re: Where to put bridge funds until SS at 70?

Post by Leif »

I used a combination of CDs, I & E-Bonds for my bridge. I had 20 years before retirement, so E-Bonds were a good investment back then. For < 5 years I suggest CDs, HYS, and I-Bonds. I think stocks & bonds (other then I) for < 5 years are risky now with their current valuations.
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Re: Where to put bridge funds until SS at 70?

Post by OffGridder »

In our taxable account we have 1.5x the dollar amount needed to bridge our expenses until starting Social Security at age 70. This expense includes the income taxes on Roth Conversions. Our taxable account is 100% in VTSAX (Vanguard Total Stock Market Index Fund). We sell shares as needed to cover our expenses. We rebalance as necessary in a Roth Account. My TIRA is 100% Intermediate Bond Fund. In the event our taxable account is cut in half due to a stock market crash, we will tax loss harvest and rebalance in the Roth Account by buying a stock index fund. We will withdraw from the TIRA for some of our expenses instead of Roth Conversions, thus continuing to reduce our future RMDs.
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Re: Where to put bridge funds until SS at 70?

Post by Nestegg_User »

Cycle

since you said you had five years before SS... that presumes you are ~65 now, so obviously you can pull from IRA if you wish w/o penalties

depending upon your overall allocation and situation vis-a-vis future tax/IRMAA etc you may want to partially pull from IRA to near top of 12% (with rest of CG etc getting you to the top) and get the rest from your taxable. {although since if I remember, you're in the bay area, so you're probably already in the 22% bracket, you have to figure out how to stay below the IRMAA threshold.}. (IMO, tax optimization often requires pulling from multiple sources to balance yield, growth, and ultimately the taxes paid.)

You DO have cap gains reinvested OFF, right? Siphon off those for a while to help build up CD ladder or short term bond funds. We'd retired early enough that we could actually get something when we had a five year CD ladder; nowadays it'll probably take a short or intermediate bond fund to get anywhere near the yield.
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cyclist
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Re: Where to put bridge funds until SS at 70?

Post by cyclist »

Thanks, but we’re in the East ;)

We should be able to devote substantially all of the space in the tax bracket of our choice to Roth conversions for the next several years. (We may actually end up just below the NIIT threshold.) We’re both retired and our only income for the next 5 years will be interest, dividends, and gains on our taxable holdings.

Interest right now is negligible as are non-qualified dividends. If we don’t sell equities for gains we can maximize our Roth conversions. What’s less clear is whether the “risk” of having gains (with corresponding reductions in our Roth conversions) is worth mitigating by keeping some or all of the money we expect to need in after-tax cash or other FI instead. Falling equity prices are not a concern here - we will have enough to sell at steep losses in taxable and enough flexibility to buy similar shares within our IRAs by selling bonds as needed.

Thanks everyone. This is new territory for me and I really appreciate all of your perspectives.

Cyclist
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Nestegg_User
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Re: Where to put bridge funds until SS at 70?

Post by Nestegg_User »

cyclist wrote: Sat Jul 24, 2021 1:17 pm Thanks, but we’re in the East ;)

We should be able to devote substantially all of the space in the tax bracket of our choice to Roth conversions for the next several years. (We may actually end up just below the NIIT threshold.) We’re both retired and our only income for the next 5 years will be interest, dividends, and gains on our taxable holdings.

Interest right now is negligible as are non-qualified dividends. If we don’t sell equities for gains we can maximize our Roth conversions. What’s less clear is whether the “risk” of having gains (with corresponding reductions in our Roth conversions) is worth mitigating by keeping some or all of the money we expect to need in after-tax cash or other FI instead. Falling equity prices are not a concern here - we will have enough to sell at steep losses in taxable and enough flexibility to buy similar shares within our IRAs by selling bonds as needed.

Thanks everyone. This is new territory for me and I really appreciate all of your perspectives.

Cyclist
I'd been doing some "tax gain harvesting" earlier... especially when at 0% LTCG... and have then done Roth conversions (in our case to top of 12%, after all other income etc). We also have a lot in our taxable, probably like most BH, so can pull as needed w/o taxes (that's where our CD ladder was)

When I eventually start SS there's no way to stay out of 22%, hence why I was doing tax gain and then conversions... but I'm only doing conversions on the current rollover...I've still got my 401k that I'll rollover after I'm finished with this one.
That's the one I'll be siphoning off of, in addition to SS and pension, to supplement other gains from the portfolio. I'd targeted a 3.5% wr... still haven't come anywhere near that in our years of retirement. [admittedly, we're on the lower BH end, with just shy of $3 M (plus a pension) ... so we don't hit the upper taxable brackets (unlike when we both pulled a paycheck) and should be able to stay out of IRMAA-land for awhile]
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Re: Where to put bridge funds until SS at 70?

Post by SGM »

When I was 62 i bought a savings annuity. It was a glorified tax deferred CD. It started paying 4 percent yearly and went down slowly. After 2 years I recall one could take out 10 percent yearly without penalty. The plan was to use it if I needed additional funds while waiting for SS at 70. These days savings annuity products pay lower interest. I never did annuitize this product and I took it all out a few years ago and invested it in the stock market. I never took out the 10 percent yearly amount. We lived off our taxable accounts and farm rental income before taking SS at 70.

I thought the interest was low, but after buying the product interest rates on cash decreased considerably. I had intended to use the unspent funds for an annuity for DW who has excellent health and extreme longevity in her family. However, the sales people kept trying to add bells and whistles to the annuity that increased their income and decreased the monthly payment.
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Re: Where to put bridge funds until SS at 70?

Post by BolderBoy »

cyclist wrote: Fri Jul 23, 2021 9:12 pmAny thoughts on efficient strategies for managing these funds that we are so lucky to have?
I retired at age 61 and took SS at 70. Had $400k saved in taxable to carry me through. Put it all in VG Intermediate Term Tax-Exempt Bond fund. At age 70 I still had $250k-ish remaining. Annual expenses were about $40k including the taxes on Roth conversions done every year. No regrets.
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Re: Where to put bridge funds until SS at 70?

Post by rj49 »

If you're torn between the no-return prospects of cash versus the prospect of a market crash for stocks that are at historical highs, I take a middle road with part of my portfolio, getting high income at the cost of low-liquidity, meaning significant penalties if you well within 5 years. I invest in Fundrise for income and some growth, and in 5 years have had income from 5-7%, with another 2-3% in gains from properties sold. You can structure a portfolio based on income vs growth needs, by geography, and other parameters, with wide diversification. My underlying eREIT funds own a lot of apartments, some commercial, and lately they've been heavily investing in single-unit rental home communities in Sunbelt cities, where they believe there's the most growth potential. It might be a way for you to get income with some growth, without the volatility and historical market highs of bonds and stocks, and thus potential for loss or lower future gains. Definitely don't stake your future on it, but I find it a good diversifier, source of income for money I won't need for some time, and a mental comfort that doesn't have negative returns (just lower returns, such as last year, when they sat on a lot of cash). If you have the urge to become a landlord and invest in properties, this is a way to get income benefits and diversification without the headaches and hassles.
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Re: Where to put bridge funds until SS at 70?

Post by Godot »

Mando19 wrote: Sat Jul 24, 2021 6:51 am
Eagle33 wrote: Fri Jul 23, 2021 10:01 pm General guideline on this forum is if you need to spend the money within 5 years, then that money should not be in stocks.
Good comment, is this consensus or is there a Boglehead guideline on this topic?
Other BHs say 10 years.
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Eagle33
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Re: Where to put bridge funds until SS at 70?

Post by Eagle33 »

Godot wrote: Sat Jul 24, 2021 4:30 pm
Mando19 wrote: Sat Jul 24, 2021 6:51 am
Eagle33 wrote: Fri Jul 23, 2021 10:01 pm General guideline on this forum is if you need to spend the money within 5 years, then that money should not be in stocks.
Good comment, is this consensus or is there a Boglehead guideline on this topic?
Other BHs say 10 years.
Based on Boglehead Philosophy Rule #3 - Never bear too much or too little risk, I believe there are some on this forum that would say 15 or 20 years! I decided on 10 years myself.

OP, take a look at the Rule 3 video and specifically the 1/5/10/20 Year Rolling Period graphic and make up your own mind. link
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