More advice for BigLaw Survivor, please?

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BigLaw Survivor
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More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

So I've officially become addicted to this forum now that I really need to get my act together. Everyone's advice has been really helpful. With my apologies to those who have already read and advised on my previous post, which contains much but not all of what follows, I'm now going to put it all out there, all of it, and ask that folks fire away. I'm a total novice at financial planning and need all the advice and reactions I can get.

Background: right before I turned 54, and after 27 years at BigLaw in a major East Coast law firm, the last ten years or so as a partner, I finally decided in June to walk away. I just couldn't do it anymore. The kids are grown and self-sufficient, college is all done and paid for, and, well, I was just done. But I didn't do any real long term planning before making my exit other than try and accumulate as much cash as I could, and after taking a rest for a few months I now need to think more carefully about how to move forward.

First, my full financial disclosure and second my basic thinking for moving forward.

My net worth is $4.8 million, broken down as follows:

ASSETS:

Cash: $66k

Law Firm Capital due and owing over the next three years: $551k (non-taxable but also earning nothing; basically cash under a mattress)

Taxable brokerage account (outside of retirement): $1.001 million (nearly 100 percent invested in US stocks/mutual funds and including about $142k in unrealized gains)

401k: $1.64 million (52% US stock funds, 17% international stock funds, 31% bond funds)

Traditional IRA: $608k (100 percent US stocks and US mutual funds)

Defined Benefit Retirement Plan: $167k (no discretion on how to invest)

Real estate: $2 milion (primary residence of $1.55 million, which includes a separate basement rental apartment that rents at $2400 a month, and a condo valued at $450k that rents at $2500 a month)

LIABILITIES:

$895k mortgage on primary residence in the form of a 10/1 interest only mortgage at 3.25 percent with 7 years remaining on interest only period and a minimum monthly payment of $2200.

$244k mortgage on condo at 3.0 percent with principal interest payments of $1198 a month

$100k balance on unsecured personal line of credit at prime rate

BASIC PLAN:

Next four to five years: live off of the $617k in cash savings/law firm capital, with an additional estimated $59k a year in rental income, or an average of $200k in after tax income, with virtually no income tax being due as I wouldn't have an income after rental expenses are factored in;

Years five/six through ten/eleven: live off of brokerage account and rental income, which conservatively should provide the same amount of money, and selling the house and or/condo in year seven or eight to reduce mortgages;

Years eleven to 40 (I hope!): collect social security starting at 65 and tap into retirement accounts, which estimating a fairly conservative 5 percent return over the next 10-11 years should be worth $3.9-$4.1 million, which again should produce roughly the same income.

CAVEATS: Folks will suggest either paying off the mortgages early or moving to a place with a lower cost of living. This obviously makes sense in the abstract. On the first point, though, please keep in mind that paying off the mortgages would deplete half the cash that I currently have on hand to live for the next ten years, that the rents that I am collecting offset the mortgages completely (and, for that matter, also the real estate taxes and condo fees), basically meaning that my housing is completely covered, and that both properties are located in highly desirable areas in a major East Coast city and are appreciating nicely. I do realize, though, that it will be decision time in 2O22, when the interest only period on the house ends and the payment presumably will increase dramatically. We will either need to sell the house and move to the condo, sell the condo and pay down the house with the proceeds, or cut back on expenses to continue owning both properties. On the second point, our children and grandchildren are all here so we aren't going anywhere.

How realistic is this plan? How might you modify it? What am I missing? Thanks.
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whatusername?
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Re: More advice for BigLaw Survivor, please?

Post by whatusername? »

With no earned income, this would be a very good time to look at doing some Roth conversions from your tax-deferred accounts. You can fill in lower brackets and reduce the future RMDs.

Also, you will probably want to take pen to paper and map out what you want/think your expenditures will be over the next 10-20 years, and what your income sources will be. You don't say what your pension will pay, and you may or may not find it useful to delay SS to 70. Without knowing your expected annual expenditures, it's difficult to come up with an efficient way to strategize.

Also, congratulations! :beer

Edited to fix: *tax-deferred, not taxable.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Thanks for responding so quickly. Other than the obvious and unpredictable expense of health care (we are both in good health), I don't know what other expenses to anticipate. There's housing, which as I said for a while at least will be covered by the rentals. We don't have debt beyond the mortgages and the relatively small LOC, and the kids all have nest eggs and are pretty self-sufficient. I'm having trouble understanding how we couldn't live off of 200k or so a year under these circumstances. Obviously in recent years we've spent more than that but we had college, etc. and paid as we went.

One more thing: on the defined benefit plan, I honestly don't know what it will pay or whether it can be rolled over to the 401k, but in either event with a balance of $167k it's only 4 percent of my holdings (or 3 percent if real estate equity is included), so I don't think it's very material.
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Duckie
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Re: More advice for BigLaw Survivor, please?

Post by Duckie »

BigLaw Survivor wrote:Taxable brokerage account (outside of retirement): $1.001 million (nearly 100 percent invested in US stocks/mutual funds and including about $142k in unrealized gains)
Specifically what do you hold here?
401k: $1.64 million (52% US stock funds, 17% international stock funds, 31% bond funds)
Transfer this to a Rollover/Traditional IRA at Vanguard for excellent low-cost options.
Traditional IRA: $608k (100 percent US stocks and US mutual funds)
Unless this is held at Vanguard or Fidelity combine it with the Rollover IRA at Vanguard for simplicity.
Defined Benefit Retirement Plan: $167k (no discretion on how to invest)
Is this like a pension? If so when does it start and how much is it? If not can you transfer it out and combine it with the above Rollover IRA?
$100k balance on unsecured personal line of credit at prime rate
3.25% isn't much but I'd still pay that off.
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whatusername?
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Re: More advice for BigLaw Survivor, please?

Post by whatusername? »

When you're living off cash, matters are simple. When you're dealing with investments and retirement accounts, it takes more planning to make sure you're being tax efficient.

As far as expenses, you'll want to know generally what you will have to spend and what you'll want to spend so that you know how much you'll need to draw down (you won't want to pull more and gratuitously pay tax, will you?). Housing, insurance, "normal expenditures", charitable giving, trips, expected emergencies and "extraordinary expenditures*" should give you an idea of your annual expense number.

* Vehicle replacements, home repairs/improvements, and other irregular spending

Once you have an idea of what you'll want to actually spend each year, you can plan for the best way to minimize taxes and make your nest egg last for the next 40 years.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Thanks again. One thing I know is that we'll never buy a car again. After moving into the city bought a Toyota Corolla and have put virtually no miles on it. When it's done, we are done with cars. One of the advantages of downtown living . . .
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Re: More advice for BigLaw Survivor, please?

Post by whatusername? »

BigLaw Survivor wrote: Years eleven to 40 (I hope!): collect social security starting at 65 and tap into retirement accounts, which estimating a fairly conservative 5 percent return over the next 10-11 years should be worth $3.9-$4.1 million, which again should produce roughly the same income.
This part stuck with me: either this isn't as conservative as you think it is, or you're not factoring in inflation. What's your target asset allocation?
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Right now it's $2.4 million basically allocated 75/25 stocks/bonds plus the $167k in the defined benefit account.
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whatusername?
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Re: More advice for BigLaw Survivor, please?

Post by whatusername? »

That's a healthy dose of risk for a portfolio you will start drawing from in the next 5-10 years. You might want to think about increasing your fixed income allocation to help dampen some of the volatility you'd expect on the equity side.

If it were my funds and future, I'd probably shift to a 60/40 portfolio unless the rental income covered most of my annual spending. The sequence of returns would concern me otherwise.
drawpoker
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Re: More advice for BigLaw Survivor, please?

Post by drawpoker »

BigLaw Survivor wrote:
BASIC PLAN:

......Years eleven to 40 (I hope!): collect social security starting at 65 and .....

..... modify it? What am I missing? Thanks.
Are you sure you meant to say collect "starting at 65" ? If you are now around 54 or 55 years old, your FRA is going to be either 66 or 67 (67 if you were born in 1960 (?)

You wouldn't want to start drawing early and leave a lot of money on the table, would you.

If you don't think you can hang on to age 70 for the SS draw, at least reconsider drawing early at 65.
crake
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Re: More advice for BigLaw Survivor, please?

Post by crake »

Congrats on getting out and amassing a sizable net worth!

A net worth of 4.8m should be more than enough to retire comfortably. My only word of caution is to make sure you have a good understanding of what your expenses are. Given the description of your career I would assume you were making at least a high six figure salary for a good number of years. With a salary that high and a net worth of "only" 4.8m your expenses must have also been very high.

It also seems that the Condo is not a good investment. A 450k condo with rents of 30k per year is only returning 6.6% and this isn't even considering expenses. With expenses (taxes, condo fee, maintenance, vacancy, management costs) I would guess this investment is returning under 4% per year.
curmudgeon
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Re: More advice for BigLaw Survivor, please?

Post by curmudgeon »

You seem to be in good shape, where lots of options will work reasonably. A few thoughts:

1) As some others noted, the US tax system often (though not always) makes it worthwhile to do "tax smoothing". Paying no taxes for several years sounds great, but you may be wasting low tax-bracket space which will cause you to be paying even more taxes later.

2) Think about where your medical coverage will come from. It can be pretty expensive in your late 50's. IF you can find an Obamacare plan you can live with, you can get a substantial subsidy by keeping your MAGI (roughly taxable income, but with some caveats) under about $60K.

3) Seriously consider doing Roth conversions of your IRA during the low-tax years. Push your taxable income up to 60K, or maybe even more if point 2 doesn't apply. You can fine-tune the amount of the conversion; you don't want to to the whole thing at once.

4) Again, in balancing the income levels, you may want to take your returned capital and use it for investment purposes, while drawing down on your 401K (you can draw from your last employer 401K at an earlier age than you can draw from an IRA).

5) If you don't have one, create at least a *little* Roth IRA this year by doing a conversion of a small amount from your regular IRA. Roth IRAs that have been open for at least 5 years are more flexible for withdrawals even if most of the money came in later.

6) Keep in mind state/local income taxes, along with federal, especially if you might be moving to a lower/higher income tax locale in retirement.

7) I've found this retirement modeling system to give some interesting insight into strategies for managing withdrawals and taxes:
http://www.i-orp.com/

8) You may find after a few more months that you would enjoy doing some lower-key work, maybe in another city to avoid conflicts with your former firm. Even if the compensation is a lot lower, sometimes you can find the interest and satisfaction to be worthwhile.

9) Many folks in similar situations here would choose to delay claiming Social Security for the primary earner until age 70, living off investments and IRA/401K until then. You can read up on various SS claiming strategies in the wiki or board threads.
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Re: More advice for BigLaw Survivor, please?

Post by john94549 »

I would do everything possible to avoid selling those properties. Your heirs will appreciate. As an attorney, you are no doubt familiar with step-up in basis upon death. In addition, wrap your arms around IRS Form 8582. Even with $100K in MAGI (Social Security doesn't count), you might get a tremendous tax benefit from those rental properties on line 17, Form 1040 (as in, a negative number). Think depreciation and other expenses. With a step-up in basis, all those depreciation "expenses" you take go "poof" when you die. There is no re-capture.

As a fellow survivor of BigLaw, it pained me to seek "professional advice" on taxes, since I was still operating under the assumption that, if it was in English, I could figure it out. I soon learned why tax attorneys commanded much more per hour than litigators. Not to suggest a skilled CPA would not suffice, but I would spring for some tax and estate planning.

We've been able to max out our 8582 negative ($25,000) on line 17 with a modicum of effort. The trick is to have one's MAGI as close to, but not over, $100,000. We did that by having my wife elect the "catch-up" in her 401k. YMMV.
Last edited by john94549 on Wed Oct 21, 2015 9:05 pm, edited 2 times in total.
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Re: More advice for BigLaw Survivor, please?

Post by LadyGeek »

BigLaw Survivor wrote:...But I didn't do any real long term planning before making my exit other than try and accumulate as much cash as I could, and after taking a rest for a few months I now need to think more carefully about how to move forward. ...
Based on your questions and responses, let's take a step back. You need a roadmap to get everything organized. Slow down, take your time.

The wiki has an excellent roadmap: Financial planning

Get organized and follow each step in detail. Pay extra attention to the first step, "Establish goals and gather data," which implies a very important point - investing is just one aspect of your financial picture.

- How's your estate planning? If something bad happens now, who has the legal capacity to pay the bills when you are incapacitated? Get your will, living will (advanced health care directive), medical power of attorney, durable power of attorney up to date.
- Do you need any insurance, such as life or long-term care insurance? Remember that insurance's sole purpose is to provide income when needed, never use it as an investment.

The rest of the wiki article is focused on saving for retirement, so skip the parts that don't apply (but pay attention to what it says). You may, however, be interested to plan your Retirement spending, which includes Withdrawal methods.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
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Re: More advice for BigLaw Survivor, please?

Post by MikeZ »

This has been a very interesting thread to read indeed.

I would say that your post is missing a sort dream list. Statistically speaking, you're on the extreme right of the bell curve--people who have time, energy, and money. Usually you can only have two at any given time. So here is my general advice I would give my self:

I would make a retirement plan based on having a net worth of $3.8 million, then I would make a plan to take the remaining $1 million and blow it before you turn 65.

I mean it. Really. You are going to be so far ahead of the rest of the population with $3.8 million, the remaining million is going to be noise.

I want you to take a million dollars and have a ball with it. Start a business, take a couple of month long trips a year, take an RV trip across New Zealand, learn to fly/sail/whatever, Give it away to a charity.

If your retirement plan does not include some amazing experiences, you're doing it wrong.


Now one other thing I would say. I'm not sure your condo is a good rental property. A general rule of thumb for rental properties is that a rental property should have a monthly rent of at least 1% of its value to be considered a good investment. For reference, we have a rental townhouse that we paid $94k for and rents for $1100/mo. You may have appreciation to hope for, but I would not suggest investing based upon appreciation of values being the major component of the return.
Last edited by MikeZ on Wed Oct 21, 2015 10:07 pm, edited 1 time in total.
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Re: More advice for BigLaw Survivor, please?

Post by Rager1 »

How realistic is this plan? How might you modify it? What am I missing? Thanks.
One issue to consider is that your tax deferred accounts will continue to grow during the next 16 years (and beyond) when you'll reach age 70. This post states that your deferred accounts are currently valued at $2,248,000. (Your earlier post indicated $2,400,000). Using the lower deferred account balance and a conservative growth rate of 5% means that at age 70 when required minimum distributions (RMD) kick in, your account balance will be at $4,907,100.

So, at age 70 1/2, when you must start taking distributions, your first RMD will be $179,100. The dirty little secret with RMDs is that they are back loaded, meaning as you get older, you have to take out more. This is inconsistent with normal spending patterns. Using these assumptions, when you're age 75, your RMD will be 25% higher than your age 70 1/2 RMD. At age 80, again using these assumptions, your RMD will be 53% higher than your age 70 1/2 RMD. The older you get, the worse it gets.

Others have recommended that you consider Roth conversions to reduce your deferred accounts subject to RMDs. I suggest that you also consider starting distributions from your IRA now with a 72t distribution. Under a 72t distribution, you must take the same distribution for 5 years, or, until you reach age 59 1/2 whichever is longer. In your case, you'd need to take the same distribution until you reach age 62. Google "72t distributions" and research the method of distribution that works best for you. There are no penalties for taking distributions under 72t provisions, regardless of your age at the start of the distributions.


Ed
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Re: More advice for BigLaw Survivor, please?

Post by skibum »

With the ability to live off of after tax funds in early retirement, there are unique opportunities to take advantage of the tax code and convert IRA to Roth IRA as suggested.

The post below from Livesoft opened my eyes to how low the tax rate can be without W2 income, and the opportunity to convert pre-tax funds to Roth with minimal taxes before pensions, SS, and RMDs kick in. There are additional posts and calculators to project and optimize lifetime benefits. These strategies seem more common among Bogleheads than financial advisers.

Your situation may suggest converting up to the top of the 15% or 25% bracket, with the rental income likely consuming some conversion space. The second link is an article that clearly illustrates the taxation of income, capital gains, and dividends in and above the 15% bracket. In addition to the Boglehead advice and Wiki, Michael Kitces and Wade Pfau are excellent authors on retirement planning, spending, SS, etc.

Congrats.

viewtopic.php?t=87471

https://www.kitces.com/blog/understandi ... -in-basis/
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Re: More advice for BigLaw Survivor, please?

Post by SgtSlaughter »

If you are looking at converting any money to a Roth I would do so with the intention of ear marking it for inherited funds for children and grand children. I don't think converting any 401k funds would be advantageous at age 54 for retirement investing.

You have good cash flow from your law firm and your basement rental. I would also consider putting 250-350 to work in a lending club account or an additional rental property. I do think it would be fun to consider a residence in Florida and becoming a snow bird. If you maintain residence in Florida for the majority of the year you would eliminate east coast income taxes on future withdrawals. I am also told Orlando is amazing.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

whatusername? wrote:That's a healthy dose of risk for a portfolio you will start drawing from in the next 5-10 years. You might want to think about increasing your fixed income allocation to help dampen some of the volatility you'd expect on the equity side.

If it were my funds and future, I'd probably shift to a 60/40 portfolio unless the rental income covered most of my annual spending. The sequence of returns would concern me otherwise.
What if I told you the target period for beginning to start drawing is ten years, not five? The plan is to first draw from the taxable brokerage account, where the current balance is 1 million. Perhaps that's the account that I should be reallocating, but not until next year where I will be in a lower tax bracket for capital gains?
Rob Bertram
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Re: More advice for BigLaw Survivor, please?

Post by Rob Bertram »

BigLaw Survivor wrote:BASIC PLAN:

Next four to five years: live off of the $617k in cash savings/law firm capital, with an additional estimated $59k a year in rental income, or an average of $200k in after tax income, with virtually no income tax being due as I wouldn't have an income after rental expenses are factored in;

Years five/six through ten/eleven: live off of brokerage account and rental income, which conservatively should provide the same amount of money, and selling the house and or/condo in year seven or eight to reduce mortgages;

Years eleven to 40 (I hope!): collect social security starting at 65 and tap into retirement accounts, which estimating a fairly conservative 5 percent return over the next 10-11 years should be worth $3.9-$4.1 million, which again should produce roughly the same income.

CAVEATS: Folks will suggest either paying off the mortgages early or moving to a place with a lower cost of living. This obviously makes sense in the abstract. On the first point, though, please keep in mind that paying off the mortgages would deplete half the cash that I currently have on hand to live for the next ten years, that the rents that I am collecting offset the mortgages completely (and, for that matter, also the real estate taxes and condo fees), basically meaning that my housing is completely covered, and that both properties are located in highly desirable areas in a major East Coast city and are appreciating nicely. I do realize, though, that it will be decision time in 2O22, when the interest only period on the house ends and the payment presumably will increase dramatically. We will either need to sell the house and move to the condo, sell the condo and pay down the house with the proceeds, or cut back on expenses to continue owning both properties. On the second point, our children and grandchildren are all here so we aren't going anywhere.

How realistic is this plan? How might you modify it? What am I missing? Thanks.
Would you consider picking up a part-time job doing something that you enjoy. It doesn't have to be in your primary profession. For example, you could be a clerk at a local library. This does two things -- 1) it eases you out of a full-time routine with structure to a part-time retirement, and 2) you will have some earned income allowing you to put more into your Roth IRAs. It also reduces the burden on your cash.

I encourage you to reconsider the advantages and disadvantages of paying off your loans. Calculate your net worth over the next 20 years and see which scenario comes out ahead. Sure, the income from your rent offsets the mortgage and tax payments, but you will still be getting the rent if you pay off the loans. Instead, your expenses will be lower. And it is very hard to find 3% guaranteed return right now.

Here is something else to consider: You can use leverage in your taxable brokerage account at lower rates than you are currently paying on your loans. The implied financing on an e-mini S&P 500 future is less than 0.5% right now. A single e-mini S&P 500 future represents about $100k of stock right now (it is the equivalent of 50 shares of the S&P 500 index). For example, you could sell about $300k of stocks in your taxable account and replace with 3 e-mini contracts. You can then take some of that cash and pay down your loans. As you collect cash from rent, you can begin buying your stock funds again and eliminating the futures contracts. The goal isn't to increase your liabilities but to shift them to lower rates.
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

crake wrote:Congrats on getting out and amassing a sizable net worth!

A net worth of 4.8m should be more than enough to retire comfortably. My only word of caution is to make sure you have a good understanding of what your expenses are. Given the description of your career I would assume you were making at least a high six figure salary for a good number of years. With a salary that high and a net worth of "only" 4.8m your expenses must have also been very high.

It also seems that the Condo is not a good investment. A 450k condo with rents of 30k per year is only returning 6.6% and this isn't even considering expenses. With expenses (taxes, condo fee, maintenance, vacancy, management costs) I would guess this investment is returning under 4% per year.

I was only a partner for the last 10 years of my 27 year career. I spent about 8 or 10 years in an intermediate "counsel" position before the promotion, where I earned a good salary but not at a partner level. As a partner, my share of the profits (my salary) ranged from 450k to 850k, averaging somewhere in the middle. But the "take home" numbers each year were much lower because of taxes, typically at the highest bracket and including self-employment taxes (like double social security, etc.), very large retirement plan contributions (in the higher income years maybe 200k a year if not more), plus of course the required post tax capital contributions (the $551k that I now have in my law firm capital account probably represents close to $1 million in pre-tax income earned during my partnership years that went straight from my salary and back to the firm and that I never saw until now despite having to pay taxes on it).

On the expense side, I put four kids through college during this time period, typically at least two at a time, on a pay-as-you-go plan (meaning I had no college savings plan and just wrote the checks). I also foolishly invested in a beachfront vacation rental the year after I made partner, which was a disaster in terms of cash flow for virtually the entire time that I was a partner and dropped in value by 40 percent after the financial crisis (specifically, I paid 893k in 2005 and sold the place in 2013 for $525k, having to write a six-figure check at closing to make up the underwater mortgage).

On the condo rental, at least from my perspective, it's an entirely different story. Not only is it appreciating nicely while enjoying a positive cash flow, I don't consider it a "450k" investment because I only put 10 percent down when I bought it (I paid 375, putting down only 37.5k). Again, I'm no financial guru, but by my math the return on what I've put in is more than 6.6 percent.

Make sense?
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whatusername?
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Re: More advice for BigLaw Survivor, please?

Post by whatusername? »

BigLaw Survivor wrote:
whatusername? wrote:That's a healthy dose of risk for a portfolio you will start drawing from in the next 5-10 years. You might want to think about increasing your fixed income allocation to help dampen some of the volatility you'd expect on the equity side.

If it were my funds and future, I'd probably shift to a 60/40 portfolio unless the rental income covered most of my annual spending. The sequence of returns would concern me otherwise.
What if I told you the target period for beginning to start drawing is ten years, not five? The plan is to first draw from the taxable brokerage account, where the current balance is 1 million. Perhaps that's the account that I should be reallocating, but not until next year where I will be in a lower tax bracket for capital gains?
It's all one big portfolio, and the ten years is still a bit short to be 75/25 IMO, but your risk tolerance may be different. My personal IPS has my glide path 10 years out at 65/35 but I also will likely have a separate sizeable cash cushion outside my portfolio that will cover approximately 5 years of planned spending (making it a 10-15 year horizon instead).

Perhaps a way to gauge things is whether you would feel comfortable drawing from a portfolio that has lost 40% of its value versus one that is down 30%. (This builds on the tolerance question of whether you would be okay if an all-equity portfolio declined 50%). Depending on your level of planned spending, you may not need all of your assets and have more leeway; if you plan to spend $200K per year, though, I think it'll be closer than you think if you draw a bad sequence of returns and you should dial back the risk.

One of the Boglehead principles is to never bear too much or too little risk. In practice, this means that if you have sufficient funds to meet your goals, dial back the risk going forward. Having watched people retire into bear markets, this makes a lot of sense to me. Your mileage may vary.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Rob Bertram wrote:I encourage you to reconsider the advantages and disadvantages of paying off your loans. Calculate your net worth over the next 20 years and see which scenario comes out ahead. Sure, the income from your rent offsets the mortgage and tax payments, but you will still be getting the rent if you pay off the loans. Instead, your expenses will be lower. And it is very hard to find 3% guaranteed return right now.
Part of my thinking behind not paying off the loans is that they fall on the expense side of the ledger for the rental income and without them I'd be paying taxes on my rental income. And, of course, there's the write-off of mortgage interest on the portion of the mortgages allocated to my personal residence (2/3 of the larger mortgage). Up to and including this year that means half the rental income would have gone to the IRS and state taxes because of my high tax bracket. Beginning next year this would no no longer be such a big deal because I won't be earning any other income, so I understand the need to re-think this. But here's the thing: paying off the mortgages altogether would deplete more than half my current liquid assets (again, I have about 1.7 million in cash/stocks/law firm capital outside of retirement), leaving me with a hefty $2 million worth of real estate holdings but only $500k-$600k in savings and the $60k or so in now taxable rental income to live on for the next ten years. That comes out to around $120k a year, as opposed to a projected $200k or more if I keep the mortgages, even after making the mortgage payments.

This is why I'm so hesitant to cancel the mortgages right now . . .
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Riprap
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Re: More advice for BigLaw Survivor, please?

Post by Riprap »

BigLaw Survivor wrote:I was only a partner for the last 10 years of my 27 year career. I spent about 8 or 10 years in an intermediate "counsel" position before the promotion, where I earned a good salary but not at a partner level. As a partner, my share of the profits (my salary) ranged from 450k to 850k, averaging somewhere in the middle. But the "take home" numbers each year were much lower because of taxes, typically at the highest bracket and including self-employment taxes (like double social security, etc.), very large retirement plan contributions (in the higher income years maybe 200k a year if not more), plus of course the required post tax capital contributions (the $551k that I now have in my law firm capital account probably represents close to $1 million in pre-tax income earned during my partnership years that went straight from my salary and back to the firm and that I never saw until now despite having to pay taxes on it).
Thanks for sharing this information.

This really drives home the idea "it's not what you earn, it's what you keep." Also illustrates that building wealth (big wealth) is difficult with the tax drag on a high salary, whereas building equity in a business and selling that equity for a large gain can put one way ahead after taxes, especially when the long term rate was still 15% and there was no Obama care tax. Couple the tax drag with the added accoutrements and lifestyle creep of a BigLaw partner, the Boglehead philosophy of investing for a lawyer seems like a must.
SouthernCPA
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Re: More advice for BigLaw Survivor, please?

Post by SouthernCPA »

BigLaw Survivor wrote:
Rob Bertram wrote:I encourage you to reconsider the advantages and disadvantages of paying off your loans. Calculate your net worth over the next 20 years and see which scenario comes out ahead. Sure, the income from your rent offsets the mortgage and tax payments, but you will still be getting the rent if you pay off the loans. Instead, your expenses will be lower. And it is very hard to find 3% guaranteed return right now.
Part of my thinking behind not paying off the loans is that they fall on the expense side of the ledger for the rental income and without them I'd be paying taxes on my rental income. And, of course, there's the write-off of mortgage interest on the portion of the mortgages allocated to my personal residence (2/3 of the larger mortgage). Up to and including this year that means half the rental income would have gone to the IRS and state taxes because of my high tax bracket. Beginning next year this would no no longer be such a big deal because I won't be earning any other income, so I understand the need to re-think this. But here's the thing: paying off the mortgages altogether would deplete more than half my current liquid assets (again, I have about 1.7 million in cash/stocks/law firm capital outside of retirement), leaving me with a hefty $2 million worth of real estate holdings but only $500k-$600k in savings and the $60k or so in now taxable rental income to live on for the next ten years. That comes out to around $120k a year, as opposed to a projected $200k or more if I keep the mortgages, even after making the mortgage payments.

This is why I'm so hesitant to cancel the mortgages right now . . .
If having the access to liquid assets vs. real estate equity helps you sleep at night, then by all means, keep the mortgages in place - there's no need to be stressed about your liquid reserve balance if you can survive with the mortgages in place (and it appears you can without much sweat).

That said, if paying off the mortgages pushes your rental income into the positive (thus taxable) all that means is that you're paying uncle sam a smaller share than you were paying the banks in interest. You're going to be reducing your taxable bracket so much without the W2 income that the tax on the rental income will be minimal. You'll still have your expenses for depreciation, repairs/maintenance, insurance, etc so the only incremental change is mortgage interest as far as the rental income goes. I'd rather pay Uncle Sam $1 than the bank $3 (oversimplified, I know). Another thing to consider is you probably have some Passive Activity Loss carryforwards from disallowed passive losses when you were a law partner that you can now use up to offset any positive net income from the rentals after you payoff the mortgage. Hopefully your CPA/tax advisor has been keeping up with these carry forwards.

For Schedule A itemized, I would want that interest only mortgage to be gone. It would make me sick writing a check for $2000+ a month to the bank - all interest. Again, spending $3 to save $1 isn't all it's cracked up to be.

All in all, paying down the mortgages isn't a permanent move, if you pay them off and end up hating it, you can always go borrow the money again and be back where you are today.
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alec
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Re: More advice for BigLaw Survivor, please?

Post by alec »

Perhaps I missed something, but what happens in 7 years with your mortgage. If it's interest only until then, you still would owe $895,000 right? Do you then take out o conventional mortgage, and your monthly payment more than doubles?
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

john94549 wrote:I would do everything possible to avoid selling those properties. Your heirs will appreciate. As an attorney, you are no doubt familiar with step-up in basis upon death. In addition, wrap your arms around IRS Form 8582. Even with $100K in MAGI (Social Security doesn't count), you might get a tremendous tax benefit from those rental properties on line 17, Form 1040 (as in, a negative number). Think depreciation and other expenses. With a step-up in basis, all those depreciation "expenses" you take go "poof" when you die. There is no re-capture.

As a fellow survivor of BigLaw, it pained me to seek "professional advice" on taxes, since I was still operating under the assumption that, if it was in English, I could figure it out. I soon learned why tax attorneys commanded much more per hour than litigators. Not to suggest a skilled CPA would not suffice, but I would spring for some tax and estate planning.

We've been able to max out our 8582 negative ($25,000) on line 17 with a modicum of effort. The trick is to have one's MAGI as close to, but not over, $100,000. We did that by having my wife elect the "catch-up" in her 401k. YMMV.
Extremely helpful, fellow survivor!
SouthernCPA
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Re: More advice for BigLaw Survivor, please?

Post by SouthernCPA »

john94549 wrote:I would do everything possible to avoid selling those properties. Your heirs will appreciate. As an attorney, you are no doubt familiar with step-up in basis upon death. In addition, wrap your arms around IRS Form 8582. Even with $100K in MAGI (Social Security doesn't count), you might get a tremendous tax benefit from those rental properties on line 17, Form 1040 (as in, a negative number). Think depreciation and other expenses. With a step-up in basis, all those depreciation "expenses" you take go "poof" when you die. There is no re-capture.

As a fellow survivor of BigLaw, it pained me to seek "professional advice" on taxes, since I was still operating under the assumption that, if it was in English, I could figure it out. I soon learned why tax attorneys commanded much more per hour than litigators. Not to suggest a skilled CPA would not suffice, but I would spring for some tax and estate planning.

We've been able to max out our 8582 negative ($25,000) on line 17 with a modicum of effort. The trick is to have one's MAGI as close to, but not over, $100,000. We did that by having my wife elect the "catch-up" in her 401k. YMMV.
This. The stepped up basis on depreciated property is one of the few examples of "having your cake and eating it too" in the tax code. You get to benefit from the depreciation write off, while your heirs get the property without capital gains or built in recapture tax.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Rager1 wrote:


Others have recommended that you consider Roth conversions to reduce your deferred accounts subject to RMDs. I suggest that you also consider starting distributions from your IRA now with a 72t distribution. Under a 72t distribution, you must take the same distribution for 5 years, or, until you reach age 59 1/2 whichever is longer. In your case, you'd need to take the same distribution until you reach age 62. Google "72t distributions" and research the method of distribution that works best for you. There are no penalties for taking distributions under 72t provisions, regardless of your age at the start of the distributions.


Ed
Ed - thank you. More excellent advice. Man there is a lot to think about. It's overwhelming!
Rob Bertram
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Re: More advice for BigLaw Survivor, please?

Post by Rob Bertram »

Taxes definitely change when your income goes to zero, so keep that in mind when you are planning. On top of that, you need to consider Roth conversions. As others have suggested, run your plans through tax software to get a full impact. Here are a few scenarios to consider:
  1. Keep loans, use rent to offset mortgage payments
  2. Pay off loans with current cash, rent income goes back into your cash savings
  3. Pay off loans using leverage in your taxable account, rent income goes back into your taxable account and reduces leverage
  4. A combination of the above three
As SouthernCPA points out, you might be paying the bank $3 to save $1 in taxes. Running these scenarios for the next 20 years will give you a good idea of which one produces the largest net worth. You can also see which one has the least impact on your cash reserves which will give you peace of mind.

I would caution you about doing a 72t (aka SEPP) distribution if you do not need the money. That will remove cash from a tax-advantaged account forever. In your case, do Roth conversions and pay the taxes out of your savings account. This keeps the money in a tax-advantaged account. In addition, you are not required to take distributions from a Roth IRA if you do not need to unlike a Traditional IRA which starts RMDs at age 70.5.
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

alec wrote:Perhaps I missed something, but what happens in 7 years with your mortgage. If it's interest only until then, you still would owe $895,000 right? Do you then take out o conventional mortgage, and your monthly payment more than doubles?
You didn't miss anything. In November 2022 I have to start paying principal, meaning that if I don't reduce the size of the loan substantially by then the monthly payment will double.

This leaves me with several options.

1 Pay it all off now, and cut my liquid assets in half.

2. Chip away at it regularly by voluntarily adding principal payments now, so that I do in fact substantially reduce the size of the loan by 2022, which I can do and in fact have done in the past (the original loan was for about $1.1 million).

3. Pay no principal before 2022, then pay the whole thing off at the time of readjusting, and over the next seven years invest the money in something that does better than 3.25 percent with, which doesn't sound that easy for me, especially now that I won't have enough income for a sizable mortgage interest deduction. (Again, 1/3 of the expense is allocation to the basement rental.)

Again, in the back of my mind there's also the possibility (1) moving to the condo in 2022 (which is only a couple blocks away) and selling the house, in which case I have no doubt we'd realize way more than enough proceeds from the sale to pay off any remaining condo mortgage and leave us mortgage free, or (2) if we decide to stay put sell the condo and use the proceeds to pay down the bulk of the mortgage on the house.

Basically, at this point I treat the house as if I'm renting it from the bank for the next seven years with my basement tenants paying the rent for me. Is that a silly way of looking at it?
SouthernCPA
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Re: More advice for BigLaw Survivor, please?

Post by SouthernCPA »

Another angle to look at the mortgage situation. If you owned the house/condo free and clear, would you borrow against them to fill up your cash/taxable accounts?
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Re: More advice for BigLaw Survivor, please?

Post by travellight »

I am in a very similar position to you but have not retired yet and will not for about 4 more years.

I chose option 2: "2. Chip away at it regularly by voluntarily adding principal payments now, so that I do in fact substantially reduce the size of the loan by 2022, which I can do and in fact have done in the past (the original loan was for about $1.1 million)."

I am working to understand the 3 to 1 ratio described above. For me, I ran these calculations: based on a loan amount of 300k, mortgage interest rate of 3%, and income tax rate of 45% (assuming if one was in a highest tax bracket, this is federal and state taxes), rental net income of 30k/year, depreciation of 4000 for the year:
borrowing money is 9K per year.
Paying off the mortgage and therefore paying taxes on rental income of 30k/year is 11,700 in the 45% tax bracket. If you lower your income and are in the 15% tax bracket, that amount becomes 3900.
Do these calculations seem right? If so, someone who is still in a high income tax bracket should keep the mortgage but once you lower your tax rate, you do better paying off the mortgage as described above?
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Re: More advice for BigLaw Survivor, please?

Post by travellight »

I would keep the rental. I am trying to understand how it is a bad investment. I read earlier that you should get 1% for the amount paid for the property in rent. I find this hard to do and it is a high bar to reach to consider something a good investment, imo.

The way I look at it: you have your tenants paying the mortgage. You happen to have leveraged which is even better but let's assume that you paid cash for the place. You are earning "dividends" of 30k/year. What amount/nest egg would you have to have to get that? Assuming a 4% SWR on that other nest egg, this would be 750,000 by my calculation. (.04 x 750,000 = 30,000). I think you got the equivalent of a 750k nest negg in your rental property which you only paid 400k? for.... and on top of that, you only really paid the down payment and the tenants are paying off the rest. That seems like a good investment to me.
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SouthernCPA
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Re: More advice for BigLaw Survivor, please?

Post by SouthernCPA »

travellight wrote:I am in a very similar position to you but have not retired yet and will not for about 4 more years.

I chose option 2: "2. Chip away at it regularly by voluntarily adding principal payments now, so that I do in fact substantially reduce the size of the loan by 2022, which I can do and in fact have done in the past (the original loan was for about $1.1 million)."

I am working to understand the 3 to 1 ratio described above. For me, I ran these calculations: based on a loan amount of 300k, mortgage interest rate of 3%, and income tax rate of 45% (assuming if one was in a highest tax bracket, this is federal and state taxes), rental net income of 30k/year, depreciation of 4000 for the year:
borrowing money is 9K per year.
Paying off the mortgage and therefore paying taxes on rental income of 30k/year is 11,700 in the 45% tax bracket. If you lower your income and are in the 15% tax bracket, that amount becomes 3900.
Do these calculations seem right? If so, someone who is still in a high income tax bracket should keep the mortgage but once you lower your tax rate, you do better paying off the mortgage as described above?
The only possible change in rental income that should be compared when you are looking at a pay off vs keep mortgage situation is the interest. Assuming all things stay equal (same depreciation, same insurance, same property tax) the only impact to net income is the mortgage deduction or lack thereof.

In your example, this mortgage interest would be $9k/year. If you keep the mortgage and pay the $9k to the bank, then you only "save" $9k in taxable income. If this incremental income savings was taxed at 45%, this would save $4,050 in taxes. So you sent $9k to the Bank to keep from sending $4,050 in taxes to Uncle Sam. You are still down a net $4,950 by having the mortgage.

If all the net income is in the 15% bracket, then the $9k reduction of taxable income would only save you $1,350 in taxes ($9k x .15) so you are still down $7,650 by paying the bank the $9k.

In both of these calculations, the underlying assumption here is that ALL of the mortgage interest deduction is being realized - which is highly unlikely when you consider possible passive activity loss limitations (especially in the high income bracket).

Hope this helps.
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Previous post has me thinking: at a minimum I should pay off the mortgage on the condo after in 2016, when I won't have any income. The balance is 244k, and the monthly payment of $1198 is evenly divided between interest and principal. I could part with that amount of cash without too much heartburn, secure in the knowledge that in a real crunch I could borrow against it again or even sell it since I don't live there. It doesn't seem to make a lot of sense to pay $7000 in interest next year on the condo to avoid paying taxes on a very small income at a very low tax rate, right?
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Re: More advice for BigLaw Survivor, please?

Post by bigred77 »

travellight wrote:I would keep the rental. I am trying to understand how it is a bad investment. I read earlier that you should get 1% for the amount paid for the property in rent. I find this hard to do and it is a high bar to reach to consider something a good investment, imo.

The way I look at it: you have your tenants paying the mortgage. You happen to have leveraged which is even better but let's assume that you paid cash for the place. You are earning "dividends" of 30k/year. What amount/nest egg would you have to have to get that? Assuming a 4% SWR on that other nest egg, this would be 750,000 by my calculation. (.04 x 750,000 = 30,000). I think you got the equivalent of a 750k nest negg in your rental property which you only paid 400k? for.... and on top of that, you only really paid the down payment and the tenants are paying off the rest. That seems like a good investment to me.
I don't necessarily agree with this analysis. There are expenses involved with this condo, you can't just use gross rental receipts.

What are the monthly HOA fees, insurance, property taxes, allowances for vacancy, maintenance, etc? If you factor these expenses in and deduct them from the rental income, the analysis changes dramatically.
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Expenses outside of the mortgage are $566 a month (condo fee and taxes) plus the occasional maintenance item but since it's a small space and relatively new these items have been minimal.

We've had the same tenants for four years and they have no plans on going anywhere. If/when they do, there is an oversupply of good tenants as the condo is in a very desirable part of downtown for young professionals and is a nice place. That's why we bought it.
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Re: More advice for BigLaw Survivor, please?

Post by btenny »

Big. Congrats on your situation. You are good to go into full retirement mode IMO. As far as obtaining a new mortgage sometime in the future, watch out. Banks and mortgage companies now days a big PIA and mostly not responsive to us non working folks. They almost will not lend to someone with no firm "monthly income". The just do not care if we have assets. They want paychecks or SS or similar "income". So your thoughts on refinancing or getting a new mortgage are not likely correct. So think hard about that payoff in advance.

Good Luck.
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Re: More advice for BigLaw Survivor, please?

Post by travellight »

@scpa: isn't the net rental income subject to taxation ? In my analysis that would be about $26,000 . I am working on the assumption that $30,000 is income after costs such as repairs vacancies taxes insurance.
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Re: More advice for BigLaw Survivor, please?

Post by magellan »

One number I don't see here is how much you need or want or plan to spend each year during the next 40 or so years. Regardless of the exact investing decisions you make (real estate vs stocks vs bonds, etc), you have a given level of wealth and you'd like that wealth to sustain a certain standard of living over the course of your retirement.

A decent rule of thumb for someone your age is that if you're willing to consume your wealth over the course of your retirement (no bequest), you can spend about 3% of your starting wealth level, and maintain that standard of living until you die (eg the initial spending amount is adjusted for inflation each year). Some say 2% is a better number, while others say 3.5% or even 4% might possibly work. In any case, this framing can be a good way to see the big picture.

So for example, let's assume you'll stay in your house until you die and you plan to bequest the house afterwards so you can't count on it for spending. The rest of your assets, I think around $3.3 million net, could be invested and consumed over your retirement years. If those assets are wisely invested they can probably sustain a standard of living somewhere around $100k per year (3% of starting wealth). Again, this approach assumes that at the end of 40 years the $3.3 million in assets will have been consumed. Also, because this example has you keeping the house indefinitely, you can add the ~$25k per year for the expected income from your basement apartment. That gets you to around $125k of sustained spending. This spending amount would be adjusted each year to keep up with inflation. Another approach is to assume that you will sell your primary residence and spend the proceeds. Then we can use the $4.8m number and get a sustained standard of living somewhere around $144k (3% of starting wealth).

Obviously this is very very rough. It unrealistically assumes a flat standard of living, while research shows most retirees slow down and spend much less in their later years. Also, it ignores social security. Still, I think it says that planning to spend $200k a year indefinitely without spending down the value of your primary residence might be optimistic. Obviously SS will help once you hit retirement age, but it may not get you to $200k and even if it does, you'll have to spend a lot of extra wealth before it begins.
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Re: More advice for BigLaw Survivor, please?

Post by SouthernCPA »

travellight wrote:@scpa: isn't the net rental income subject to taxation ? In my analysis that would be about $26,000 . I am working on the assumption that $30,000 is income after costs such as repairs vacancies taxes insurance.
Yes, the net rental income is subject to taxation. I'm just saying that the only difference between the two scenarios (free and clear vs. mortgaged) as far as the rental properties go is the mortgage interest. So to compare the two, you only need to look at the change in taxable income with or without the deduction.
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Magellan, thanks for your thoughts. Maybe I'm being too simplistic and naive about this, but my basic thinking is that I'd finance the next 11 years, until I'm 65 by (1) the 1 million in my brokerage account that's outside of retirement, (2) the 617k that I have in cash/capital, and (3) an assumed 600k in rents (assuming no rent increase in either rental for 11 years, which is unlikely). Taken together, we're at $2,217,000 or a little over $200,000 a year -- virtually none of which is subject to any tax of any kind. This also assumes that my brokerage accounts earns no money.

In the meantime, the $2.4 million that I have in the various retirement accounts would be allowed to just sit there and presumably grow for 11 years before I even tapped into them. Even assuming a conservative 4 percent average growth rate over 11 years, that's $3.7 million in retirement accounts when I'm 65, plus I'd still have the rents (or a lot more cash if I sold one or both properties) and SS on top of that. Under this admittedly oversimplified scenario, why exactly can't my current portfolio reasonably be expected to support me at $200k a year through retirement? Drawing down at 3 percent at $3.7 million is $111,000 a year, plus $60,000 in rents (and probably more with rent increases) and SS on top of that . . .
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magellan
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Re: More advice for BigLaw Survivor, please?

Post by magellan »

BigLaw Survivor wrote:In the meantime, the $2.4 million that I have in the various retirement accounts would be allowed to just sit there and presumably grow for 11 years before I even tapped into them. At that point I'd still have the rents and SS on top of that. Under this admittedly oversimplified scenario, why can't my current portfolio not support me at $200k a year through retirement?
It probably can. It all depends on how much chance of not having enough money in the later years you're willing to accept. This type of planning is mostly about risk management and determining your comfort level with various types of risk. The math always appears more certain than it really is. This type of projection has a huge amount of uncertainty built into it and the tools often blur that uncertainty by presenting solid looking results. Using the best planning tools available for these projections is a little like trying to measure the thickness of a hair with a yardstick. Everyone wishes there were better tools, but they just don't exist.

The 3% withdrawal amount comes from research that's colloquially referred to as the 4% maximum safe withdrawal rate (4% is for a 30 year timeframe, 3% is for 40 years). The theory says that if you want to have a very high degree of confidence that you won't run out of money, this is the maximum percent of your starting portfolio that you can safely withdraw. There's a ton of information about this approach on the wiki here:
https://www.bogleheads.org/wiki/Safe_withdrawal_rates

The potential problem with your logic is that in the past, some 11 year periods have delivered truly terrible investment results. For example, there's likely historical data that shows cases where $2.4 million invested for 11 years declined in value to just $1m at the end of the period. Let's say in history, 90% of the time the $2.4 million grew to something that could support $200k (with SS), but the other 10% of the time it didn't. The question then becomes, are you ok with a 1 in 10 chance of running out of money during retirement? (again though, we don't know the odds for sure, we can only guess at them).
Last edited by magellan on Thu Oct 22, 2015 7:26 pm, edited 1 time in total.
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whatusername?
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Re: More advice for BigLaw Survivor, please?

Post by whatusername? »

Please, at least think about maybe trying to come up with a strategy to minimize your tax hit. There are easy ways to smooth the taxes you'll pay over the years, and whether you DIY, have the forum give you advice, or actually use a strategy developed with a financial planner, there are ways that you can keep more of your money than your stated strategy of using all of the cash, then using all of the taxable, then using retirement funds will allow.

Then again, someone's going to have to pay down the national debt eventually. I'd rather it be you than me. :D
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

whatusername? wrote:Please, at least think about maybe trying to come up with a strategy to minimize your tax hit. There are easy ways to smooth the taxes you'll pay over the years, and whether you DIY, have the forum give you advice, or actually use a strategy developed with a financial planner, there are ways that you can keep more of your money than your stated strategy of using all of the cash, then using all of the taxable, then using retirement funds will allow.

Then again, someone's going to have to pay down the national debt eventually. I'd rather it be you than me. :D
Believe me, I will -- and I appreciate the advice!
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Re: More advice for BigLaw Survivor, please?

Post by Rob Bertram »

BigLaw Survivor wrote:Basically, at this point I treat the house as if I'm renting it from the bank for the next seven years with my basement tenants paying the rent for me. Is that a silly way of looking at it?
It would be best to look at the big picture and how much your portfolio is affected by the mortgage payments. Sure, you can think of the incoming rent as going to your mortgage payments. On the other hand, that rent can be paying your living expenses -- something that your taxable portfolio will be doing.

For example perhaps your budget looks like this pre-tax when you keep the mortgages:

Code: Select all

Taxable
Portfolio Value     Income     Expenses    Deficit    % Draw  Year
$1.5m               $60k       $240k       $180k      12.0%    1
$1.32m              $60k       $240k       $180k      13.6%    2
$1.14m              $60k       $240k       $180k      15.8%    3
$0.96m              $60k       $240k       $180k      18.8%    4
$0.78m              $60k       $240k       $180k      23.1%    5
Say you pay off the mortgages and pick up some futures to maintain your stock position in your taxable account:

Code: Select all

Taxable
Portfolio Value     Income     Expenses    Deficit    % Draw  Year
$1.5m               $60k       $160k       $100k      6.7%     1
$1.4m               $60k       $160k       $100k      7.1%     2
$1.3m               $60k       $160k       $100k      7.7%     3
$1.2m               $60k       $160k       $100k      8.3%     4
$1.1m               $60k       $160k       $100k      6.7%     5
Don't analyze these numbers too hard. They are a blind guess based on information that has been posted so far.
afan
Posts: 8168
Joined: Sun Jul 25, 2010 4:01 pm

Re: More advice for BigLaw Survivor, please?

Post by afan »

If I were you, I would go back to work.

This is in part because I share the concern that you have grown accustomed to a high income, and your expectations about life and expenses may be based on that. Perhaps once you do detailed planning, reviewing your expenses over the last 2 or 3 years to see what you have been spending, you can see what is a reasonable figure for spending. If your spending has been as low as you are planning, then it is OK, maybe.

I say maybe, because you also so young. You may not feel young after a career you apparently hated, but at your age you are likely to want to do a large number of things. Many of them will cost money. If you have things you would like to do that you could have easily afforded when you were working, but have to pass up now, it could lead to frustration, or bad financial choices.

It does not have to be another Big Law partnership or even of counsel position, but something that pays a fraction of you recent income could relieve stress on your savings, give you something to get up to each morning, limit the amount of time you have to find something to fill, and make a real retirement in your late 60's a much less uncertain prospect.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
Topic Author
BigLaw Survivor
Posts: 223
Joined: Mon Oct 19, 2015 8:55 pm

Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

afan wrote:If I were you, I would go back to work.
You're killing me, brother! This is the ONE piece of advice that I do not want to hear.
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JDCarpenter
Posts: 1800
Joined: Tue Sep 09, 2014 2:42 pm

Re: More advice for BigLaw Survivor, please?

Post by JDCarpenter »

Whatusername alluded to this above--do you have a good handle on what you have been spending (ignoring colleges, etc.)? How about SWAG (or better) for what you will "need" to spend going forward?

200K a year is much more doable/safe if you are in a position to spend less if needed. Say, if 100+ is purely discretionary, your margin of safety is much better than if you only have 20,000 of discretionary spending in there. (For example, in sort-of-similar income household to yours, we are looking to have 3/4 or so of our retirement spending in the discretionary category; if markets crash about our ears in early retirement, we will do some whitewater kayaking in our region, rather than diving in Indonesia. That serves to alleviate a lot of the sequence of return risk.)

P.S.--agree with your answer on going back in; you are set, particularly if you can be flexible if needed.
P.P.S--Roth conversions. 8-)
Our personal blog (no ads) of why we saved/invested: https://www.lisajtravels.com/
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