More advice for BigLaw Survivor, please?

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JDCarpenter
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Re: More advice for BigLaw Survivor, please?

Post by JDCarpenter »

BigLaw Survivor wrote:
btenny wrote:I think you might want to plan out converting a big chunk your IRA to a Roth IRA while you are in a near zero tax bracket.
I've seen this advice before, and frankly I'm confused. How can I convert a "big chunk?" Aren't I limited to $6500 a year? Let's say, for example, that after selling my condo I netted $180k after capital gains taxes. I couldn't just turn around and put all the money into a Roth, right?

Don't forget you're talking to a total novice here.
Here is wiki on roth conversions: https://www.bogleheads.org/wiki/Roth_IRA_conversion The 6500 limit is for contributions, not conversions.

DW and I will be converting to top of 28% marginal bracket in our early retirement years--otherwise, our tax hit on RMDs and social after age 70 is almost guaranteed to be ugly (especially after one of us is widowed). Can't recall what your ratio of deferred to after-tax to Roth assets is like. In our case, very lopsided in deferred, so we will likely benefit from converting 200K plus for a few years (MD & JD with no pensions other than what we might get from social). There are many forum discussions on this; depending upon where your assets are, it may be worth it to pay tax now to avoid more tax later--or it may not. :-)
Our personal blog (no ads) of why we saved/invested: https://www.lisajtravels.com/
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

[/quote]

Here is wiki on roth conversions: https://www.bogleheads.org/wiki/Roth_IRA_conversion The 6500 limit is for contributions, not conversions.
[/quote]

Of course the limit only applies to contributions. I'm an idiot. Thanks.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Dottie57 wrote:
BigLaw Survivor wrote: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.
You need to know your expenses - mortgage being one of them. It is a lot of work to go through and see where money has gone but is a worthwhile task. Your mortgage is a. Ig expense. If it is gone, expenses go down. So really getting a handle on where you spend is invaluable for planning for the future.
Thanks. The ONE thing I know of, almost to the penny, is where my money is going. Personal Capital is a great tool for that, and I now have almost two years of retirement spending behind me.
Galun
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Re: More advice for BigLaw Survivor, please?

Post by Galun »

What have you been doing with your free time? Did you pick up another interest / hobby? Did you have a clear plan in what you wanted to do next before you walked away?
btenny
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Re: More advice for BigLaw Survivor, please?

Post by btenny »

I am not sure about what "income" you show on your taxes this year but that $30k for your IRA is all you have mentioned as taxable income now that you are retired. I am assuming your rental income nets out near zero after depreciation and interest payments. You said the rest of your spending is coming from taxable savings. Is this correct? If this is right I am guessing this is your only income in 2017. So you can convert about $150K-$30K = $120K per year from your regular IRA to a Roth IRA by paying taxes on the money. This will bring your taxable income up to the top of the 25% bracket. So you will spend a little on taxes now ($14K for $120K is a good deal IMO) to avoid paying 25% taxes after you are 70.5. Get it? So after about 6 years you should have converted $720K to a Roth IRA that you can leave untouched for the long haul into your 90s or maybe leave to your kids or grand kids.

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

Post by BigLaw Survivor »

btenny wrote:I am not sure about what "income" you show on your taxes this year but that $30k for your IRA is all you have mentioned as taxable income now that you are retired. I am assuming your rental income nets out near zero after depreciation and interest payments. You said the rest of your spending is coming from taxable savings. Is this correct? If this is right I am guessing this is your only income in 2017. So you can convert about $150K-$30K = $120K per year from your regular IRA to a Roth IRA by paying taxes on the money. This will bring your taxable income up to the top of the 25% bracket. So you will spend a little on taxes now ($14K for $120K is a good deal IMO) to avoid paying 25% taxes after you are 70.5. Get it? So after about 6 years you should have converted $720K to a Roth IRA that you can leave untouched for the long haul into your 90s or maybe leave to your kids or grand kids.

Hope this helps. Good Luck.
VERY helpful. Thank you.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Galun wrote:What have you been doing with your free time? Did you pick up another interest / hobby? Did you have a clear plan in what you wanted to do next before you walked away?
I had no clear plan on what, if anything, that I wanted to do next other than travel. And I've done quite a bit of that. I have no particular interests or hobbies other than spending time with family and friends. When I'm not traveling, that's pretty much all that I do. And it's been working out just fine for me.

Lots of folks ask "how do you keep busy?" I always say that if I wanted to keep busy I wouldn't have quit my job.
curmudgeon
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Re: More advice for BigLaw Survivor, please?

Post by curmudgeon »

I'm sure after years of paying six figures in taxes, it was really nice to have a zero tax bill this year. As others have mentioned, though, it's probably not the optimal thing to do over the medium/long term. Once you stop living off of the return of your law firm capital, much of the money for your expenses will be taxable. In the short term, you want to be at least running up to the top of the 15% bracket, maybe higher with either Roth conversions or capital gain harvesting. For 2017, it sounds like the sale of your rental condo will already bump you up above that point, but keep an eye on opportunity in future years.

The 72T is a good solution to do some basic income balancing. You can "right-size" an IRA for 72T treatment by doing a partial rollover from a large IRA into smaller one if needed, but it sounds like your situation worked out OK without tweaking. Roth conversions let you draw taxable income forward into low income years, but there are limitations to how quickly you can pull that money out without penalty.

The other thing you want to do some planning for is the mortgage. In 5 years or so, about the time your untaxed return of capital runs out, you might be needing another $40K per year for mortgage. Pulling the money to pay that could trigger an even larger tax bill. It seems like originally the money from the condo was intended to go towards the primary mortgage. I can understand the hesitation to lock it away in that form, but I would be inclined to earmark it for that future use and be quite conservative in investing it. It is also possible that you might be a good candidate for a reverse mortgage on the house when you are 62 or older. You may not fit the typical reverse mortgage profile, but as a cash flow and taxable income management tool it might work for you.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

curmudgeon wrote:I'm sure after years of paying six figures in taxes, it was really nice to have a zero tax bill this year. As others have mentioned, though, it's probably not the optimal thing to do over the medium/long term. Once you stop living off of the return of your law firm capital, much of the money for your expenses will be taxable. In the short term, you want to be at least running up to the top of the 15% bracket, maybe higher with either Roth conversions or capital gain harvesting. For 2017, it sounds like the sale of your rental condo will already bump you up above that point, but keep an eye on opportunity in future years.

The 72T is a good solution to do some basic income balancing. You can "right-size" an IRA for 72T treatment by doing a partial rollover from a large IRA into smaller one if needed, but it sounds like your situation worked out OK without tweaking. Roth conversions let you draw taxable income forward into low income years, but there are limitations to how quickly you can pull that money out without penalty.

The other thing you want to do some planning for is the mortgage. In 5 years or so, about the time your untaxed return of capital runs out, you might be needing another $40K per year for mortgage. Pulling the money to pay that could trigger an even larger tax bill. It seems like originally the money from the condo was intended to go towards the primary mortgage. I can understand the hesitation to lock it away in that form, but I would be inclined to earmark it for that future use and be quite conservative in investing it. It is also possible that you might be a good candidate for a reverse mortgage on the house when you are 62 or older. You may not fit the typical reverse mortgage profile, but as a cash flow and taxable income management tool it might work for you.
Good to hear from you, curmudgeon. You're right that the original plan was to sell the condo and pay down the mortgage on the house with the proceeds, but as time has gone by we have been thinking more and more that we will sell the house before 2022 and downsize. And since we already have close to a million in equity I don't want to invest much more in the place.
B0bL0blawsLawBl0g
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Re: More advice for BigLaw Survivor, please?

Post by B0bL0blawsLawBl0g »

Thanks for the update biglaw survivor. I replied on this thread last year when you updated it last, and it's been great to follow along with your story.

One question I have, not related at all to the financial aspect, is whether you feel regret that you spent years of your life in a career that you didn't really enjoy. On the one hand, you must have been good at it, and it's rewarded you financially, if not otherwise. On the other hand, we only have one turn on this earth, and so each moment in life is precious. Why spend it doing something that isn't enjoyable?

I ask because I am also a "biglaw survivor" of a lesser sense. I left biglaw a few years ago after a mere 5 years as a litigation associate. I have been at DOJ (also in litigation) for several years now, and while certainly aspects of the job are better here, I am starting to realize that maybe I just don't enjoy litigation. Or maybe I just don't enjoy it as much as I think I should (I do enjoy it at times, but on the whole it leaves me numb and unfulfilled). I enjoy the strategic thinking and problem solving, and I enjoy the analytical challenge. But, I get emotionally dragged and drained by the busy-work side of it, and particularly annoyed by the "fight for the sake of fighting" quagmires (e.g., protracted discovery disputes).

I am only in my mid-to-late-30s, and while my current position is not nearly as lucrative as big law, I am on sound financial footing (not enough to retire, of course). I often wonder if I should leave law behind and pursue a second act or follow a path that I am more passionate about. If you had it to do over again, would you leave the law earlier?
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

B0bL0blawsLawBl0g wrote:Thanks for the update biglaw survivor. I replied on this thread last year when you updated it last, and it's been great to follow along with your story.

One question I have, not related at all to the financial aspect, is whether you feel regret that you spent years of your life in a career that you didn't really enjoy. On the one hand, you must have been good at it, and it's rewarded you financially, if not otherwise. On the other hand, we only have one turn on this earth, and so each moment in life is precious. Why spend it doing something that isn't enjoyable?

I ask because I am also a "biglaw survivor" of a lesser sense. I left biglaw a few years ago after a mere 5 years as a litigation associate. I have been at DOJ (also in litigation) for several years now, and while certainly aspects of the job are better here, I am starting to realize that maybe I just don't enjoy litigation. Or maybe I just don't enjoy it as much as I think I should (I do enjoy it at times, but on the whole it leaves me numb and unfulfilled). I enjoy the strategic thinking and problem solving, and I enjoy the analytical challenge. But, I get emotionally dragged and drained by the busy-work side of it, and particularly annoyed by the "fight for the sake of fighting" quagmires (e.g., protracted discovery disputes).

I am only in my mid-to-late-30s, and while my current position is not nearly as lucrative as big law, I am on sound financial footing (not enough to retire, of course). I often wonder if I should leave law behind and pursue a second act or follow a path that I am more passionate about. If you had it to do over again, would you leave the law earlier?
Good observations and good questions. I, too, was in litigation for most of the time that I was a lawyer so I totally understand where you are coming from -- especially the "fight for the sake of fighting" mentality/insanity and the types of colleagues and adversaries that that kind of mentality forces you to deal with on a daily basis. The closer I came to leaving, the more I could do nothing but laugh at the silliness of it all.

I have no regrets about staying in the law for as long as I did. I had a large family to support and it beat the alternatives. I came from nothing and made lots of money for a long time while somehow managing for the most part to maintain a tolerable work/life balance. I came out of it with a pretty fat bank account and kids who have had a nice life and know who I am. I should add that the cost that I paid for my "tolerable" work/life balance was an extended track to partnership (many years in a counsel position) and less pay than most of the other partners (but still plenty) once I finally became one.

Coming from a working class family and rising to the ranks of partner at an elite international law firm earning close to seven figures makes it very hard to just walk away from it all. My decision to do so literally cost my family and me millions of dollars. So, obviously, I anguished over that but once I did it I haven't looked back and I feel great.

Your situation presumably is different. You probably do not have the family obligations that I did, you apparently are on better financial footing than I was at your age, and you are hinting that you actually have another passion of some sort -- which, honestly, I never did. So, if I were you and still in the law at my age, well, yea, I might have regrets.

Not sure if my ramblings help.
buckstar
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Re: More advice for BigLaw Survivor, please?

Post by buckstar »

BLS-

Just a bump to say thank you for a fantastic post and your updates, which I hope you continue to do periodically.

I hope/plan to be in your position somewhere in the next 4-6 years (albeit with college expenses still to pay for), and your post has been inspirational.
smitcat
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Re: More advice for BigLaw Survivor, please?

Post by smitcat »

Biglaw Survivor...
This is a great thread as well as the updates - thank you.
Although our situation is not really that similar I am learning a bunch about asset location/type (Tira, Taxable Roth etc) and use from following these posts and that will be similar.

My curiosity for you and the Bogles on this site is what happens to the taxable spending amount (funds available to spend) each year in the future?
In the present you are able to pull the $16,000/month with little or no tax drag.
What happens with these issues and the after tax money when...?
- The primary house requires a refi or relocation
- SS kicks in with a % taxable
- RMD's are needed and/or required

Have you been able to model these changes for tax's in the future and what can be done to lessen the affects of those?
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

buckstar wrote:BLS-

Just a bump to say thank you for a fantastic post and your updates, which I hope you continue to do periodically.

I hope/plan to be in your position somewhere in the next 4-6 years (albeit with college expenses still to pay for), and your post has been inspirational.
Thank you. If BigLaw were as civil as this forum I might not have left!
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JDCarpenter
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Re: More advice for BigLaw Survivor, please?

Post by JDCarpenter »

smitcat wrote:...
My curiosity for you and the Bogles on this site is what happens to the taxable spending amount (funds available to spend) each year in the future?
In the present you are able to pull the $16,000/month with little or no tax drag.
What happens with these issues and the after tax money when...?
- The primary house requires a refi or relocation
- SS kicks in with a % taxable
- RMD's are needed and/or required

Have you been able to model these changes for tax's in the future and what can be done to lessen the affects of those?
Smitcat, among the best modeling methods for these things (well, I dunno about the house issues), is the Retiree Portfolio Model spreadsheet put together by BigFoot48. Here is the wiki page on it, with links: https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

Generally speaking, you'll want to minimize lifetime taxes while maximizing lifetime income (duh!). One big reason for roth conversions is to minimize tax torpedo from Social and required distributions both hitting at 70.
Our personal blog (no ads) of why we saved/invested: https://www.lisajtravels.com/
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

smitcat wrote:Biglaw Survivor...
This is a great thread as well as the updates - thank you.
Although our situation is not really that similar I am learning a bunch about asset location/type (Tira, Taxable Roth etc) and use from following these posts and that will be similar.

My curiosity for you and the Bogles on this site is what happens to the taxable spending amount (funds available to spend) each year in the future?
In the present you are able to pull the $16,000/month with little or no tax drag.
What happens with these issues and the after tax money when...?
- The primary house requires a refi or relocation
- SS kicks in with a % taxable
- RMD's are needed and/or required

Have you been able to model these changes for tax's in the future and what can be done to lessen the affects of those?
Again, good and thought provoking questions. I do know that I will never refinance the house -- if I find when the time comes that the adjusted monthly payment isn't tolerable I'll either sell it or pay down a hefty chunk of the mortgage then. Most likely the latter. I should be able to do that five or six years from now without too much trouble, I hope.

I've done no modeling for taxes in the future. I know I need to do that. I probably need a professional. I am just loathe to get one!

[Note to self: earlier you said you'd likely sell the house in 2022 and now you're saying you'll likely pay down the mortgage and stay. Which is it? Ha ha]
WildBill
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Re: More advice for BigLaw Survivor, please?

Post by WildBill »

I've done no modeling for taxes in the future. I know I need to do that. I probably need a professional. I am just loathe to get one!

[Note to self: earlier you said you'd likely sell the house in 2022 and now you're saying you'll likely pay down the mortgage and stay. Which is it? Ha ha]
Howdy BLS

I guess you will figure out the house and mortgage one of these days. :happy It sounds like a nice arrangement, something I would enjoy a lot, so I had assumed you were going to figure out a way to finance it and stay there.

While you are figuring it out, here is some news you can use in the meantime. :mrgreen:

I did a trial run on the income tax calculator at Bankrate (Bankrate.com) for a hypothetical individual with the following situation married filing a joint return.

Current income

-qualified dividends from taxable accounts of around $25,000
- withdrawals from an IRA of $33,000 per year
-taxable interest from various sources of $3000
- nominal income after all expenses and depreciation on a rental property of plus/minus $3000 per year, assumed here to net out at zero
-substantial non-taxable return of capital from a partnership account

Deductions against income

Interest payment on mortgage of $30,000 per year
Various state, local and property taxes estimated $10,000 per year
Charitable contributions $5000 per year

Said individual will have an AGI of $61,000 per year, taxable income of $8000 and 0 tax liability.

Said individual could move - convert- an additional $20000 from his IRA to his Roth account. This would raise his AGI to $81,000 but would still leave him with a tax liability of 0.

Numbers and details may vary, but that is an example of the opportunity the individual has.

Said individual could convert more at a nominal tax liability, up to the top of the 15% bracket.

This individual could repeat the process for a number of years and will end up moving a substantial amount out of his tax deferred accounts into his Roth accounts without incurring any tax liability. He will benefit from tax free growth in the Roth accounts and decreased RMDs at age 70.

Said individual would have to be crazy not to take advantage of this opportunity. 8-)

For the finer details a gentlemen on the forum named livesoft is a master of the art. Search his posts for references. You really don't need help to do this. I was able to run the simulation and variations in about 2 minutes. It is quite straightforward once you have grasped the general idea that you have much flexibility in your current situation.

My situation was similar to yours. I was so used to having a high income and huge tax liability that I assumed that was the natural order of things. It took me a couple of months of reading and figuring things out to realize that when the W-2 income goes away there are many possibilities to optimize without incurring a tax liability.

Happy converting

W B


-
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
B0bL0blawsLawBl0g
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Re: More advice for BigLaw Survivor, please?

Post by B0bL0blawsLawBl0g »

BigLaw Survivor wrote:
B0bL0blawsLawBl0g wrote:Thanks for the update biglaw survivor. I replied on this thread last year when you updated it last, and it's been great to follow along with your story.

One question I have, not related at all to the financial aspect, is whether you feel regret that you spent years of your life in a career that you didn't really enjoy. On the one hand, you must have been good at it, and it's rewarded you financially, if not otherwise. On the other hand, we only have one turn on this earth, and so each moment in life is precious. Why spend it doing something that isn't enjoyable?

I ask because I am also a "biglaw survivor" of a lesser sense. I left biglaw a few years ago after a mere 5 years as a litigation associate. I have been at DOJ (also in litigation) for several years now, and while certainly aspects of the job are better here, I am starting to realize that maybe I just don't enjoy litigation. Or maybe I just don't enjoy it as much as I think I should (I do enjoy it at times, but on the whole it leaves me numb and unfulfilled). I enjoy the strategic thinking and problem solving, and I enjoy the analytical challenge. But, I get emotionally dragged and drained by the busy-work side of it, and particularly annoyed by the "fight for the sake of fighting" quagmires (e.g., protracted discovery disputes).

I am only in my mid-to-late-30s, and while my current position is not nearly as lucrative as big law, I am on sound financial footing (not enough to retire, of course). I often wonder if I should leave law behind and pursue a second act or follow a path that I am more passionate about. If you had it to do over again, would you leave the law earlier?
Good observations and good questions. I, too, was in litigation for most of the time that I was a lawyer so I totally understand where you are coming from -- especially the "fight for the sake of fighting" mentality/insanity and the types of colleagues and adversaries that that kind of mentality forces you to deal with on a daily basis. The closer I came to leaving, the more I could do nothing but laugh at the silliness of it all.

I have no regrets about staying in the law for as long as I did. I had a large family to support and it beat the alternatives. I came from nothing and made lots of money for a long time while somehow managing for the most part to maintain a tolerable work/life balance. I came out of it with a pretty fat bank account and kids who have had a nice life and know who I am. I should add that the cost that I paid for my "tolerable" work/life balance was an extended track to partnership (many years in a counsel position) and less pay than most of the other partners (but still plenty) once I finally became one.

Coming from a working class family and rising to the ranks of partner at an elite international law firm earning close to seven figures makes it very hard to just walk away from it all. My decision to do so literally cost my family and me millions of dollars. So, obviously, I anguished over that but once I did it I haven't looked back and I feel great.

Your situation presumably is different. You probably do not have the family obligations that I did, you apparently are on better financial footing than I was at your age, and you are hinting that you actually have another passion of some sort -- which, honestly, I never did. So, if I were you and still in the law at my age, well, yea, I might have regrets.

Not sure if my ramblings help.
Thanks for the thoughtful response. My post might have left you with wrong impression on a couple points. I don't really have an identified passion I'd like to pursue, more so a general ennui and mild dissatisfaction with my career. And I do have a small (but growing) family to support and no my finances are not solid enough to walk away from law right now. I will most likely keep at it for another decade or more, and even may return to private practice for more lucrative opportunities. I just hope that I don't end up regretting it all.

And I don't mean to sound so negative. I realize that I am lucky and fortunate in many respects.
Topic Author
BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

WildBill wrote:
I've done no modeling for taxes in the future. I know I need to do that. I probably need a professional. I am just loathe to get one!

[Note to self: earlier you said you'd likely sell the house in 2022 and now you're saying you'll likely pay down the mortgage and stay. Which is it? Ha ha]
Howdy BLS

I guess you will figure out the house and mortgage one of these days. :happy It sounds like a nice arrangement, something I would enjoy a lot, so I had assumed you were going to figure out a way to finance it and stay there.

While you are figuring it out, here is some news you can use in the meantime. :mrgreen:

I did a trial run on the income tax calculator at Bankrate (Bankrate.com) for a hypothetical individual with the following situation married filing a joint return.

Current income

-qualified dividends from taxable accounts of around $25,000
- withdrawals from an IRA of $33,000 per year
-taxable interest from various sources of $3000
- nominal income after all expenses and depreciation on a rental property of plus/minus $3000 per year, assumed here to net out at zero
-substantial non-taxable return of capital from a partnership account

Deductions against income

Interest payment on mortgage of $30,000 per year
Various state, local and property taxes estimated $10,000 per year
Charitable contributions $5000 per year

Said individual will have an AGI of $61,000 per year, taxable income of $8000 and 0 tax liability.

Said individual could move - convert- an additional $20000 from his IRA to his Roth account. This would raise his AGI to $81,000 but would still leave him with a tax liability of 0.

Numbers and details may vary, but that is an example of the opportunity the individual has.

Said individual could convert more at a nominal tax liability, up to the top of the 15% bracket.

This individual could repeat the process for a number of years and will end up moving a substantial amount out of his tax deferred accounts into his Roth accounts without incurring any tax liability. He will benefit from tax free growth in the Roth accounts and decreased RMDs at age 70.

Said individual would have to be crazy not to take advantage of this opportunity. 8-)

For the finer details a gentlemen on the forum named livesoft is a master of the art. Search his posts for references. You really don't need help to do this. I was able to run the simulation and variations in about 2 minutes. It is quite straightforward once you have grasped the general idea that you have much flexibility in your current situation.

My situation was similar to yours. I was so used to having a high income and huge tax liability that I assumed that was the natural order of things. It took me a couple of months of reading and figuring things out to realize that when the W-2 income goes away there are many possibilities to optimize without incurring a tax liability.

Happy converting

W B


-
W B, this is both really helpful and uncanny in how close you came to being spot on. We had a few more itemized deductions that we could never have used before -- like medical expenses -- and ended up last year with a net operating loss of $14k that we can carry over into 2017.

One question I'd have is whether selling the condo is going to throw a wrench into our ability to do this in 2017. Our accountant estimates that we'd have a taxable capital gain of $125k if we get our asking price.
Topic Author
BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

B0bL0blawsLawBl0g wrote:
BigLaw Survivor wrote:
B0bL0blawsLawBl0g wrote:
Thanks for the thoughtful response. My post might have left you with wrong impression on a couple points. I don't really have an identified passion I'd like to pursue, more so a general ennui and mild dissatisfaction with my career. And I do have a small (but growing) family to support and no my finances are not solid enough to walk away from law right now. I will most likely keep at it for another decade or more, and even may return to private practice for more lucrative opportunities. I just hope that I don't end up regretting it all.

And I don't mean to sound so negative. I realize that I am lucky and fortunate in many respects.
I don't think you sound negative. You just sound thoughtful. And I don't think you'll end up regretting it all if you continue to make your family your priority. As I said, while I'm very glad I checked out of the law, I don't regret my decision to stay as long as I did either. On balance, it did a lot for my family and me.
smitcat
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Re: More advice for BigLaw Survivor, please?

Post by smitcat »

"Smitcat, among the best modeling methods for these things (well, I dunno about the house issues), is the Retiree Portfolio Model spreadsheet put together by BigFoot48. Here is the wiki page on it, with links: https://www.bogleheads.org/wiki/Retiree_Portfolio_Model"

Thank you JD - I am working with that now to help in this area.

"Said individual will have an AGI of $61,000 per year, taxable income of $8000 and 0 tax liability."

WildBill- great quick analysis , how bad would it look if he does not convert and then receives estimated income from SS, RMD's and the like?
As you point out he can likely run them on his own and get fairly close without needing a consultant.
btenny
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Re: More advice for BigLaw Survivor, please?

Post by btenny »

Big. Two things.

I might have been low on the $$ to do the Roth conversion I suggested above. I misread the tax tables. I think you will be closer to $20K taxes for $120K conversion. But you need to ask your CPA to do some what if modeling with your exact details to find out the real $$ before you start.

I also know you did not ask this but think about downsizing. One of the best things my wife and I did after I retired was downsize and sell our big family home. We loved that big house and it gave us wonderful times. But it was sized for a family with several kids and lots of visitors. It was big and expensive to keep up both from $$ and time to do the chores view. Mine was a 4/3/3 +++. It had a big pool and big yard and acreage and big electric bills and big yard maintenance bills and just lot of stuff to take care of. Plus in our case, both our kids left the area, so no grand kids to come over and swim.

So we downsized to a modest size single story 3/2/2 home that just fits the two of us. It has no pool or big yard or big bills. Plus it can be locked up and left for months at a time with no worries. And since we sold the big home we now can afford to have a second home in a cooler location where we go for the summer and some winter skiing. And this second home gets my kids and grand kids to come and visit more often.

Think about it. Good Luck.
WildBill
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Re: More advice for BigLaw Survivor, please?

Post by WildBill »

Howdy BLS

I've had some practice running similar projections for myself since I retired last June, so I have gotten a feel for it. And if an ignorant hillbilly like me can figure this stuff out, anyone can.

As you say, this year with the sale of the condo it gets complicated.

Without knowing the details, no one can give you precise answers. However, here are some thoughts based on my experience of selling a rental property several years ago.

If you do sell it, there are things you can do to mitigate the tax hit.

Make sure that you harvest any capital losses you have in taxable accounts. You can use these to reduce the capital gain.

Minimize income and maximize deductions. Capital gains under the 15% income limit are treated at 0. You want to leave as much space as possible.

That means the IRA to Roth conversions would be off for this year, but you have until you are 70, so not a big deal.

You should have plenty of tax loss carryforwards on the property from previous years.They reduce the gain.

Ditto for the basement apt. If you have tax loss carryforwards on that they also can be applied.

Check all this with your tax guy, as he may not have taken a detailed look at it. I am willing to bet that the number he gave you is high after you look at ways to mitigate the hit.

For a true master class in tax avoidance, you can lease your primary residence, move into your condo for two years claiming that as your primary residence, sell it without tax consequences, move back into the old place and reclaim it as your residence.

That is definitely possible given your circumstances and the proximity of the properties, but it also might be over engineering things to save 20-40k in taxes.

A round trip without tax consequences. Very doable, but do not do this at home without checking it out thoroughly.

Good luck

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
curmudgeon
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Re: More advice for BigLaw Survivor, please?

Post by curmudgeon »

WildBill wrote: For a true master class in tax avoidance, you can lease your primary residence, move into your condo for two years claiming that as your primary residence, sell it without tax consequences, move back into the old place and reclaim it as your residence.
W B
They closed that particular loophole about 8 years ago. Now you have to pro-rate the gain according the the time used as rental and residence. If you rented it for 8 years, and lived in it for 2, you can only exclude 20% of the gains (and only if the residence usage fits the rules about timing). We are in a somewhat similar situation with a main residence and a rental. In our case, the rental was about 2000sf, and well located, so it suits us for downsizing. We are in the process of selling the large house, which will likely fit just under the $500K residence gain exclusion, and moving to the former rental. This delays the tax hit on the rental gains and gives us a good pile of cash for ER without other tax consequences. We spent a lot of time thinking about whether this was really a move that fit our retirement plans; while I don't mind letting tax scenarios nudge me in a particular direction, I try not to let them direct my life.
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celia
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Re: More advice for BigLaw Survivor, please?

Post by celia »

If you are doing a "full disclosure", did you mention an annuity in your original Roth conversion thread? What are its terms and payouts?

Have you started doing Roth conversions? Why or why not?

On your home mortgage, with an interest only mortgage, you realize that at the end of the mortgage, you still owe the same amount, don't you. Do you have plans to eventually pay it off? The way it is now, you will never own your house, the bank will own 2/3 of it and you 1/3 of it (although the fraction will change over time as house values increase). So for the rest of this mortgage, you look like non-paying tenants since you own 1/3 and the paying tenant pays the mortgage for the other 2/3.

How does the estate tax work when you die? Will your Trusteee have to include the full value of the house as an asset or only 1/3 of it?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
ChrisC
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Re: More advice for BigLaw Survivor, please?

Post by ChrisC »

curmudgeon wrote:
WildBill wrote: For a true master class in tax avoidance, you can lease your primary residence, move into your condo for two years claiming that as your primary residence, sell it without tax consequences, move back into the old place and reclaim it as your residence.
W B
They closed that particular loophole about 8 years ago. Now you have to pro-rate the gain according the the time used as rental and residence. If you rented it for 8 years, and lived in it for 2, you can only exclude 20% of the gains (and only if the residence usage fits the rules about timing). We are in a somewhat similar situation with a main residence and a rental. In our case, the rental was about 2000sf, and well located, so it suits us for downsizing. We are in the process of selling the large house, which will likely fit just under the $500K residence gain exclusion, and moving to the former rental. This delays the tax hit on the rental gains and gives us a good pile of cash for ER without other tax consequences. We spent a lot of time thinking about whether this was really a move that fit our retirement plans; while I don't mind letting tax scenarios nudge me in a particular direction, I try not to let them direct my life.
If he never sells his original primary residence (the one he later leased and then moved backed into), there is no recapture of depreciation and of course there is no pro rata apportionment of gain between primary residential and rental property because no gain can be recognized in such a case as there wasn't a sale.

Perhaps I'm missing something. Edited: I misread the above posts initially as it appears that the focus of these posts might have been the sale of the condo, in which case pro rata of primary residential and rental use would apply; sorry, if I confused stuff.
Last edited by ChrisC on Tue Apr 18, 2017 4:11 pm, edited 1 time in total.
WildBill
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Re: More advice for BigLaw Survivor, please?

Post by WildBill »

curmudgeon wrote:
WildBill wrote: For a true master class in tax avoidance, you can lease your primary residence, move into your condo for two years claiming that as your primary residence, sell it without tax consequences, move back into the old place and reclaim it as your residence.
W B
They closed that particular loophole about 8 years ago. Now you have to pro-rate the gain according the the time used as rental and residence. If you rented it for 8 years, and lived in it for 2, you can only exclude 20% of the gains (and only if the residence usage fits the rules about timing). We are in a somewhat similar situation with a main residence and a rental. In our case, the rental was about 2000sf, and well located, so it suits us for downsizing. We are in the process of selling the large house, which will likely fit just under the $500K residence gain exclusion, and moving to the former rental. This delays the tax hit on the rental gains and gives us a good pile of cash for ER without other tax consequences. We spent a lot of time thinking about whether this was really a move that fit our retirement plans; while I don't mind letting tax scenarios nudge me in a particular direction, I try not to let them direct my life.

Howdy

Not quite. As always the devil is in the details. Here is exact language from the IRS website.

Question: A property was my principal residence for the first 2 of the 5 years ending on the date of the sale of the property. For the 3 years before the date of the sale, I held the property as a rental property. Can I still exclude the gain on the sale and if so, how should I account for the depreciation I took while the property was rented?
Answer:
If you used and owned the property as your principal residence for 2 years out of the 5 year period ending on the date of sale, you have met the ownership and use tests for the exclusion. This is true even though the property was used as rental property for the 3 years before the date of the sale. In that case, you would qualify to exclude some or all of the gain on the sale of your home if you didn't use the exclusion on the sale of another residence during the 2 year period that ends on the date of sale, or you used the exclusion within the last 2 years but this sale of your home is due to a change in employment, health, or unforeseen circumstances.
For rental property, the law has additional limits on the amount you may exclude. You may not exclude the part of your gain equal to any depreciation deduction allowed or allowable for periods after May 6, 1997.
Generally, the law allows an annual depreciation deduction on your rental property and you must reduce the basis of the property by the amount of your depreciation deductions. If you don't claim some or all of the depreciation deductions allowable under the law, you must still reduce the basis of the property by the amount allowable before determining your gain on the sale of the property.
The gain attributable to the depreciation may be subject to the 25% unrecaptured Section 1250 gain tax rate. Additionally, taxable gain on the sale may be subject to a 3.8% Net Investment Income Tax. For more information, see Questions and Answers on the Net Investment Income Tax. Refer to Publication 523, Selling Your Home, and Form 4797, Sales of Business Property, for specifics on how to calculate and report the amount of gain.

As stated above the capital gain owed would be a function of accumulated depreciation. I am not familiar with the pro rata argument you are citing. Could you cite the source?

I completely agree about not letting the tax tail wag the dog.

Good luck

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
curmudgeon
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Re: More advice for BigLaw Survivor, please?

Post by curmudgeon »

WildBill wrote:
curmudgeon wrote:
WildBill wrote: For a true master class in tax avoidance, you can lease your primary residence, move into your condo for two years claiming that as your primary residence, sell it without tax consequences, move back into the old place and reclaim it as your residence.
W B
They closed that particular loophole about 8 years ago. Now you have to pro-rate the gain according the the time used as rental and residence. If you rented it for 8 years, and lived in it for 2, you can only exclude 20% of the gains (and only if the residence usage fits the rules about timing). We are in a somewhat similar situation with a main residence and a rental. In our case, the rental was about 2000sf, and well located, so it suits us for downsizing. We are in the process of selling the large house, which will likely fit just under the $500K residence gain exclusion, and moving to the former rental. This delays the tax hit on the rental gains and gives us a good pile of cash for ER without other tax consequences. We spent a lot of time thinking about whether this was really a move that fit our retirement plans; while I don't mind letting tax scenarios nudge me in a particular direction, I try not to let them direct my life.

Howdy

Not quite. As always the devil is in the details. Here is exact language from the IRS website.

Question: A property was my principal residence for the first 2 of the 5 years ending on the date of the sale of the property. For the 3 years before the date of the sale, I held the property as a rental property. Can I still exclude the gain on the sale and if so, how should I account for the depreciation I took while the property was rented?
Answer:
If you used and owned the property as your principal residence for 2 years out of the 5 year period ending on the date of sale, you have met the ownership and use tests for the exclusion. This is true even though the property was used as rental property for the 3 years before the date of the sale. In that case, you would qualify to exclude some or all of the gain on the sale of your home if you didn't use the exclusion on the sale of another residence during the 2 year period that ends on the date of sale, or you used the exclusion within the last 2 years but this sale of your home is due to a change in employment, health, or unforeseen circumstances.
For rental property, the law has additional limits on the amount you may exclude. You may not exclude the part of your gain equal to any depreciation deduction allowed or allowable for periods after May 6, 1997.
Generally, the law allows an annual depreciation deduction on your rental property and you must reduce the basis of the property by the amount of your depreciation deductions. If you don't claim some or all of the depreciation deductions allowable under the law, you must still reduce the basis of the property by the amount allowable before determining your gain on the sale of the property.
The gain attributable to the depreciation may be subject to the 25% unrecaptured Section 1250 gain tax rate. Additionally, taxable gain on the sale may be subject to a 3.8% Net Investment Income Tax. For more information, see Questions and Answers on the Net Investment Income Tax. Refer to Publication 523, Selling Your Home, and Form 4797, Sales of Business Property, for specifics on how to calculate and report the amount of gain.

As stated above the capital gain owed would be a function of accumulated depreciation. I am not familiar with the pro rata argument you are citing. Could you cite the source?

I completely agree about not letting the tax tail wag the dog.

Good luck

W B
I was looking at IRS PUB 523, pages 15 and 16. But I may have been misreading it. I can't quite parse the "second test" on page 15; particularly section 1.

The following is not authoritative, but describes the pro-rata situation I was thinking about:
http://www.nolo.com/legal-encyclopedia/ ... dence.html
WildBill
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Re: More advice for BigLaw Survivor, please?

Post by WildBill »

Thanks.

I was interested because I researched this several years ago when we had a similar situation to yours and were contemplating a similar move. At least I was.

Of course after I presented my cogent analysis to Mrs. W B I got the "look" that long married men are familiar with. You know the look. There was no further discussion of that subject.

For BLS I think he will find sufficient ways to mitigate the capital gains hit on the sale of his condo to make the sale a pretty good plan.

Happy tax avoidance to all

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Hi all, quick update on my situation. I put the condo on the market and sold it in one day for $15k over asking price. I was very happy about that. We closed last week and netted $200k after paying off the mortgage, fees, expenses and capital gains tax. 50k of the proceeds is going into my money market account (cash) and the remaining 150 is going into a high yield municipal bond fund. The monthly distribution from the fund is about 50 dollars more than the monthly cash flow that I got from the condo rental, with far less hassle. I feel pretty good about it. Obviously there's a risk involved but I keep a close eye on my holdings and will sell if I have to.

I hope everyone is well.
Nearly A Moose
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Re: More advice for BigLaw Survivor, please?

Post by Nearly A Moose »

Congrats!
Pardon typos, I'm probably using my fat thumbs on a tiny phone.
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

BigLaw Survivor wrote: Wed Oct 21, 2015 2:08 pm 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.
Hi all,

It's been 5 1/2 years since I posted the above a very long time since I've been on this forum at all. I thought I'd update my situation to where we are now for posterity's sake.

My net worth (according to Personal Capital) has increased in retirement from $4.8 million to $7.0 million. The current breakdown is:

Assets:

401k: $3.034 million
IRA: $1.13 million
IRA (spouse): $43k
Brokerage account: $1.28 million
Primary residence: $1.5 million
Second home: $700k
Cryptocurrency: $115k
Cash: $60k

Liabilities:

Mortgage (primary residence): $729k ($3115 a month at a 2.875 interest rate)

Notes:

While most of the 46 percent increase in my net worth since October 2015 has been from market gains, we also received a $450k inheritance from my mother in law. We used that money to finance a second home that we bought outside of the city in the midst of the pandemic; we paid cash for the property.

I've reduced the debt side of the ledger from $1.239 million to $729k by selling the condo and paying off the mortgage there; by paying off the line of credit; and by refinancing and then chipping away at the mortgage on the main house. I'm still not inclined to pay the mortgage off early because the interest rate is good and I like the liquidity.

The cryptocurrency is just "play money." The initial investment was only $62k, less than one percent of my net worth.

While the great bulk of my brokerage account and my IRA both continue to be in stock index funds, I diversified my 401k -- my largest account by far -- significantly last month. I rolled it over from my law firm to Schwab and put it into the "Schwab Intelligent Portfolio." It is now 58 percent stocks, 31 percent bonds/fixed income, 1 percent commodities and 10 percent cash. I'm not crazy about the 10 percent cash ($317k), but Schwab requires it so for now at least I'm living with it.

So there you have it. Comments/suggestions welcome. Hope everyone is healthy and doing well.
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Rager1
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Re: More advice for BigLaw Survivor, please?

Post by Rager1 »

Congratulations on your continued success!

I'd suggest you run some calculations on your required minimum distributions (RMDs) given your current deferred account values of $4.164M (starting at the date you'll be required to start). I believe you'll discover they're back loaded and you'll have a problem with ever growing RMDs in the future. Your tax burden will get worse and worse as you get older. That's what made me discover and implement the 72t distribution at an early age.

Ed
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Rager1 wrote: Sun Mar 28, 2021 7:10 pm Congratulations on your continued success!

I'd suggest you run some calculations on your required minimum distributions (RMDs) given your current deferred account values of $4.164M (starting at the date you'll be required to start). I believe you'll discover they're back loaded and you'll have a problem with ever growing RMDs in the future. Your tax burden will get worse and worse as you get older. That's what made me discover and implement the 72t distribution at an early age.

Ed
Thanks, Ed. You're absolutely right. That's why I did, in fact, implement the 72t distribution for the IRA (the smaller of the two accounts). Of course, now I'm 59 1/2 so I can withdraw as I please. I probably need to start doing that. I am worried about RMDs.
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FOGU
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Re: More advice for BigLaw Survivor, please?

Post by FOGU »

So apart from the numbers, which appear to be working out great so far, how was the adjustment to retirement?
rockstar
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Re: More advice for BigLaw Survivor, please?

Post by rockstar »

Rager1 wrote: Sun Mar 28, 2021 7:10 pm Congratulations on your continued success!

I'd suggest you run some calculations on your required minimum distributions (RMDs) given your current deferred account values of $4.164M (starting at the date you'll be required to start). I believe you'll discover they're back loaded and you'll have a problem with ever growing RMDs in the future. Your tax burden will get worse and worse as you get older. That's what made me discover and implement the 72t distribution at an early age.

Ed
This. RMDs are going to be a problem. You're going to give up a lot of your portfolio to future taxes as they go up.
bgf
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Re: More advice for BigLaw Survivor, please?

Post by bgf »

Wow, once you get a few million, things get real really fast.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

FOGU wrote: Sun Mar 28, 2021 7:52 pm So apart from the numbers, which appear to be working out great so far, how was the adjustment to retirement?
Heavenly ha ha. Thanks for asking!
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

bgf wrote: Sun Mar 28, 2021 8:17 pm Wow, once you get a few million, things get real really fast.
For sure.
desiderium
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Re: More advice for BigLaw Survivor, please?

Post by desiderium »

At this stage the best "active" investment strategy is tax management.

Given your net worth you might consider your charitable urges and how that might be channeled toward reducing taxes. You can offload equities with large taxable gains to a donor advised fund and give in that manner. When you get to RMD, you can spend it directly on charity through QCDs.

If you spend your dividends and taxable assets with limited gains, and bunch charitable contributions every 2-3 years, you may have space to do Roth conversions.
bgf
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Re: More advice for BigLaw Survivor, please?

Post by bgf »

BigLaw Survivor wrote: Sun Mar 28, 2021 8:41 pm
bgf wrote: Sun Mar 28, 2021 8:17 pm Wow, once you get a few million, things get real really fast.
For sure.
There was of course no way for you to know at the time, but do you wish now that you had retired earlier, given how much your portfolio has grown since retiring?
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
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BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

bgf wrote: Mon Mar 29, 2021 7:30 am
BigLaw Survivor wrote: Sun Mar 28, 2021 8:41 pm
bgf wrote: Sun Mar 28, 2021 8:17 pm Wow, once you get a few million, things get real really fast.
For sure.
There was of course no way for you to know at the time, but do you wish now that you had retired earlier, given how much your portfolio has grown since retiring?
Maybe a little earlier, but not much. I'm just glad I didn't retire later!
Valuethinker
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Re: More advice for BigLaw Survivor, please?

Post by Valuethinker »

BigLaw Survivor wrote: Sun Mar 28, 2021 6:46 pm
BigLaw Survivor wrote: Wed Oct 21, 2015 2:08 pm 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.
Hi all,

It's been 5 1/2 years since I posted the above a very long time since I've been on this forum at all. I thought I'd update my situation to where we are now for posterity's sake.

My net worth (according to Personal Capital) has increased in retirement from $4.8 million to $7.0 million. The current breakdown is:

Assets:

401k: $3.034 million
IRA: $1.13 million
IRA (spouse): $43k
Brokerage account: $1.28 million
Primary residence: $1.5 million
Second home: $700k
Cryptocurrency: $115k
Cash: $60k

Liabilities:

Mortgage (primary residence): $729k ($3115 a month at a 2.875 interest rate)

Notes:

While most of the 46 percent increase in my net worth since October 2015 has been from market gains, we also received a $450k inheritance from my mother in law. We used that money to finance a second home that we bought outside of the city in the midst of the pandemic; we paid cash for the property.

I've reduced the debt side of the ledger from $1.239 million to $729k by selling the condo and paying off the mortgage there; by paying off the line of credit; and by refinancing and then chipping away at the mortgage on the main house. I'm still not inclined to pay the mortgage off early because the interest rate is good and I like the liquidity.

The cryptocurrency is just "play money." The initial investment was only $62k, less than one percent of my net worth.

While the great bulk of my brokerage account and my IRA both continue to be in stock index funds, I diversified my 401k -- my largest account by far -- significantly last month. I rolled it over from my law firm to Schwab and put it into the "Schwab Intelligent Portfolio." It is now 58 percent stocks, 31 percent bonds/fixed income, 1 percent commodities and 10 percent cash. I'm not crazy about the 10 percent cash ($317k), but Schwab requires it so for now at least I'm living with it.

So there you have it. Comments/suggestions welcome. Hope everyone is healthy and doing well.
At this point, I would be reading that William Bernstein book (I think it was a thread here, too) "If you've won, stop playing the game" or a similar title.

I'd have half my portfolio in bonds - either TIPS bonds or 50/50 TIPS and regular US Treasury bonds, intermediate term or whole market. Municipal Bonds might be attractive for a US taxpayer, but don't assume those are absolutely safe (I would not have more than 25% of my bonds in the securities of one state or municipality, and not more than 50% of all my bonds).

Stocks are very risky. Real estate cannot be counted upon. Bitcoin is the same as putting a tenner on the outside horse in the 2.30 at Goodwood (horse racing track in southern England).

Really. You should have enough money to live your life and that of your spouse. Long trips abroad at least twice a year (once we all have our Covid vaccination papers). In fact you will have to look into Estate Planning.

But another Great Depression, or a 1966-1980 period of stagflation and -40% real returns from stocks, could absolutely kill you.

Tomorrow morning, the USA and China go to war over Taiwan. Or Russia invades the Baltic states and NATO invokes Article 5 (mutual defence) that was first used, ever, after 9-11. A new strain of the virus breaks out which is both more lethal, and existing vaccinations are completely ineffective. A major financial institutions goes bust without warning - as RBS, the world's ?4th? largest bank by assets, was threatening to do early in the GFC. We can all conjur the scenarios that start the next bear market.

Why, you should ask yourself, do you need to take that risk?
Topic Author
BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

PP. I hear what you're saying. I truly do. It's just that my strategy so far -- buy and hold, and don't overspend -- has served me very well for decades and I'm loathe to change it now. Not to mention that right now we have $400,000 in cash, which is two years' living expenses for us.
Tingting1013
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Re: More advice for BigLaw Survivor, please?

Post by Tingting1013 »

BigLaw Survivor wrote: Mon Mar 29, 2021 8:26 am PP. I hear what you're saying. I truly do. It's just that my strategy so far -- buy and hold, and don't overspend -- has served me very well for decades and I'm loathe to change it now. Not to mention that right now we have $400,000 in cash, which is two years' living expenses for us.
$200k/yr is not overspending??
Topic Author
BigLaw Survivor
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Joined: Mon Oct 19, 2015 8:55 pm

Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

Tingting1013 wrote: Mon Mar 29, 2021 9:00 am
BigLaw Survivor wrote: Mon Mar 29, 2021 8:26 am PP. I hear what you're saying. I truly do. It's just that my strategy so far -- buy and hold, and don't overspend -- has served me very well for decades and I'm loathe to change it now. Not to mention that right now we have $400,000 in cash, which is two years' living expenses for us.
$200k/yr is not overspending??
I don't think so. Not with a $7 million net worth. Certainly there is some fat involved, but I track my expenses very closely through Personal Capital and know exactly where the fat is -- so, when/if the need arises, I know how to cut back.
Onlineid3089
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Re: More advice for BigLaw Survivor, please?

Post by Onlineid3089 »

Tingting1013 wrote: Mon Mar 29, 2021 9:00 am
BigLaw Survivor wrote: Mon Mar 29, 2021 8:26 am PP. I hear what you're saying. I truly do. It's just that my strategy so far -- buy and hold, and don't overspend -- has served me very well for decades and I'm loathe to change it now. Not to mention that right now we have $400,000 in cash, which is two years' living expenses for us.
$200k/yr is not overspending??
$200k/yr is well within their means, unless you are of the opinion that the ultimate goal is to be the richest person in the graveyard. With how much their assets have been growing since retirement one cold argue they should be spending or donating more while they're in a position to enjoy it.
London
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Re: More advice for BigLaw Survivor, please?

Post by London »

Tingting1013 wrote: Mon Mar 29, 2021 9:00 am
BigLaw Survivor wrote: Mon Mar 29, 2021 8:26 am PP. I hear what you're saying. I truly do. It's just that my strategy so far -- buy and hold, and don't overspend -- has served me very well for decades and I'm loathe to change it now. Not to mention that right now we have $400,000 in cash, which is two years' living expenses for us.
$200k/yr is not overspending??
It’s less than a 3% burn rate. This guy’s net worth is INCREASING, even with $200k in expenses. Why cut down? There’s no prize for dying with money. If anything, his expenses will likely drop in 15 years or so due to aging. He could spend more now and be fine. This isn’t MMM.
Topic Author
BigLaw Survivor
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Re: More advice for BigLaw Survivor, please?

Post by BigLaw Survivor »

London wrote: Mon Mar 29, 2021 9:29 am
Tingting1013 wrote: Mon Mar 29, 2021 9:00 am
BigLaw Survivor wrote: Mon Mar 29, 2021 8:26 am PP. I hear what you're saying. I truly do. It's just that my strategy so far -- buy and hold, and don't overspend -- has served me very well for decades and I'm loathe to change it now. Not to mention that right now we have $400,000 in cash, which is two years' living expenses for us.
$200k/yr is not overspending??
It’s less than a 3% burn rate. This guy’s net worth is INCREASING, even with $200k in expenses. Why cut down? There’s no prize for dying with money. If anything, his expenses will likely drop in 15 years or so due to aging. He could spend more now and be fine. This isn’t MMM.
Yea, that's been my thinking. Also, assuming I start taking social security at 67 between my wife and me it's $52k a year. Personal Capital says I have a 99 percent chance that I'm doing this right.
Tingting1013
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Joined: Mon Aug 24, 2020 5:44 pm

Re: More advice for BigLaw Survivor, please?

Post by Tingting1013 »

BigLaw Survivor wrote: Mon Mar 29, 2021 9:21 am
Tingting1013 wrote: Mon Mar 29, 2021 9:00 am
BigLaw Survivor wrote: Mon Mar 29, 2021 8:26 am PP. I hear what you're saying. I truly do. It's just that my strategy so far -- buy and hold, and don't overspend -- has served me very well for decades and I'm loathe to change it now. Not to mention that right now we have $400,000 in cash, which is two years' living expenses for us.
$200k/yr is not overspending??
I don't think so. Not with a $7 million net worth. Certainly there is some fat involved, but I track my expenses very closely through Personal Capital and know exactly where the fat is -- so, when/if the need arises, I know how to cut back.
Please enlighten me in this thread

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