Possible earlier retirement...

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Possible earlier retirement...

Postby davidr-va » Sat Jun 29, 2013 10:32 am

I've been planning on retiring at 50 for quite some time (30+ years) and am now 18 months away from my 50th birthday. The situation at work continues to worsen and I may have to exit earlier than expected. Financially I'm not terribly concerned about retiring a bit earlier than planned but I would love some advice on moves I should be making now to prepare for "earlier" retirement or at 50. My assets are almost equally split between taxable and tax advantaged accounts. I have a healthy 6-12 month emergency fund in place.

For tax purposes my taxable account holds stock funds (total domestic and total international) and my taxable accounts hold bonds plus a small amount of total international stock. Should I start converting some of taxable funds into cash, bonds, or something else? I honestly haven't spent a great deal of time working through the logistics of funding living while in retirement and the actual moves that I need to make to do that. I've been in accumulation mode for so long that I'm feeling rather unprepared for spending it...
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Re: Possible earlier retirement...

Postby stan1 » Sat Jun 29, 2013 10:39 am

First step is to figure out your expenses, then figure out how to convert intellectual and financial assets to income (part time job, dividends, sale of assets). I wouldn't change my asset allocation until I was able to model my long term income requirements. If dividends meet all your income needs you might need to do nothing. If a part time job after a few months off is something you are considering that's another source of income to meet expenses.
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Re: Possible earlier retirement...

Postby livesoft » Sat Jun 29, 2013 10:56 am

We have no cash and no fixed income in taxable. If we need some money for expenses, then we sell equities to get spendable cash. It doesn't matter if equities have
(a) gone up, because we have tax-loss harvested and with carryover losses, we would have no net capital gains and would pay no taxes,
(b) gone down, because we are going to repurchase the same equities in our tax-deferred accounts at the same price for no net change,
(c) stayed the same.

For many folks, (b) is the problem. They don't want to sell equities when the market is down. (b) is not selling equities when the market is down because one can buy the equivalent equities by exchanging from a bond fund in a tax-advantaged account if they want to and thus maintain their equity position if needed. It is just like moving equities from taxable to tax-deferred while spending bond fund money from tax-deferred without any early withdrawal penalty and without paying any taxes.

See also: Wiki article link: Placing Cash Needs in a Tax-Advantaged Account
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Possible earlier retirement...

Postby BigFoot48 » Sat Jun 29, 2013 11:57 am

davidr-va wrote:For tax purposes my taxable account holds stock funds (total domestic and total international) and my taxable accounts hold bonds plus a small amount of total international stock. Should I start converting some of taxable funds into cash, bonds, or something else?

Congratulations. I too retired at 50 but had a relatively meager taxable account. What I did was to keep about 12 months living expenses in money market and short-term bond fund, and sold stock funds during favorable market conditions to keep it replenished. Depending upon your balance and expenses, this may be infrequent as dividends etc. will be adding to the MM balance, assuming you are not on auto-invest earnings.

After about four years my taxable got down to my emergency fund of $50k and I started SEPP withdrawals from my IRA. This strategy worked for me. The key point is to let earnings provide as much of your living expenses as possible to make sales an infrequent event.
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Re: Possible earlier retirement...

Postby staythecourse » Sat Jun 29, 2013 12:00 pm

I would think healthcare coverage is the most important.

Good luck.
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Re: Possible earlier retirement...

Postby egghead » Sun Jun 30, 2013 2:11 pm

livesoft wrote:We have no cash and no fixed income in taxable. If we need some money for expenses, then we sell equities to get spendable cash. It doesn't matter if equities have
(a) gone up, because we have tax-loss harvested and with carryover losses, we would have no net capital gains and would pay no taxes,
(b) gone down, because we are going to repurchase the same equities in our tax-deferred accounts at the same price for no net change,
(c) stayed the same.

What is the recommendation for folks that consider (a) the main problem, where they don't have sufficient carryover losses to cover new realized capital gains and therefore would have to pay taxes, which may also limit their ability to make Roth conversions in early retirement without bumping them into a higher tax bracket?

For those folks, during their last few years of work should they start building a larger cash equivalent position in their taxable account, and buy equities in tax advantaged accounts as needed to maintain their asset allocation?

Also if future TLH opportunities occur in the taxable account, then sell in taxable (add to their cash equivalent position in taxable) and buy similar equity position in tax advantaged.
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Re: Possible earlier retirement...

Postby VictoriaF » Sun Jun 30, 2013 2:49 pm

Unless you have access to a health insurance, wait at least until early 2014 when you will become eligible for a plan under the Affordable Care Act (ACA). That may be the most consequential part of your planning.

If your tax-deferred accounts (401k, IRA) are traditional, upon retirement you can start slowly converting them into Roth. You will have to determine your tax bracket based on your other income and can try to do the conversions within the same bracket.

If you do Roth conversions, you will be taxed both at the Federal and State level. If your state has income tax, you may consider moving to a state that does not have it.

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Last edited by VictoriaF on Mon Jul 01, 2013 6:25 am, edited 1 time in total.
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Re: Possible earlier retirement...

Postby elgob.bogle » Sun Jun 30, 2013 11:20 pm

If you need to continue working for a while, it likely will be easier to find a comparable position elsewhere while you are still employed. Foo for thought!

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Re: Possible earlier retirement...

Postby Dandy » Mon Jul 01, 2013 11:25 am

If you own a home you might want to consider getting a new home equity loan while you are employed. I'm not sure how they view retirees as far as what rate etc they will grant. I would say the same for any credit card you may be thinking of.

I tried to accumulate cash until I got my hands on retirement income vs expenses. It took about 6 months before I became comfortable.

Are there products that your employer offers that you are not enrolled in? If so, once retired you usually can't do it. e.g. health coverage, group legal, auto, Long Term Care, etc. If any will be useful in retirement you might want to sign up next open enrollment period.

Drop disability insurance??
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Re: Possible earlier retirement...

Postby wesleymouch » Mon Jul 01, 2013 3:03 pm

I would calculate expenses including healthcare and total up assets plus pensions, SS. At age 50 I would use a 2.3% withdrawal rate at the most.
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Re: Possible earlier retirement...

Postby Watty » Mon Jul 01, 2013 3:32 pm

I've been planning on retiring at 50 for quite some time (30+ years) and am now 18 months away from my 50th birthday. The situation at work continues to worsen and I may have to exit earlier than expected.


Since your time retirement could last until you are 95 or older your investing time frame was 1.5 to 45 years. If you retire 18 months earlier then you're investing time frame changes to be 0 to 45 years so overall it is not as big a change as it might sound like. If you had a good investing plan before then you should not need any radical changes.

You may very well want to review your current plan and decide that it could be improved, but the earlier retirement should be a secondary factor that would only result in some fine tuning.

One thing that you might consider since you are so young is to start looking for a part time "fun" job or part time business to help keep you active. If you can bring in $1,000 a month that would allow you and any spouse to make Roth contributions each year.
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Re: Possible earlier retirement...

Postby mrwalken » Mon Jul 01, 2013 4:26 pm

wesleymouch wrote:I would calculate expenses including healthcare and total up assets plus pensions, SS. At age 50 I would use a 2.3% withdrawal rate at the most.


Given that firecalc shows a 100% success rate using a 3.4% withdrawal rate over a 50 year period, I would say using 2.3% at the most is rather silly.
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Re: Possible earlier retirement...

Postby wesleymouch » Mon Jul 01, 2013 4:30 pm

mrwalken wrote:
wesleymouch wrote:I would calculate expenses including healthcare and total up assets plus pensions, SS. At age 50 I would use a 2.3% withdrawal rate at the most.


Given that firecalc shows a 100% success rate using a 3.4% withdrawal rate over a 50 year period, I would say using 2.3% at the most is rather silly.

Bernstein, Wade Pfau, Otar and others suggest a more conservative SWR. Basically 100/years in retirement = SWR. If you like the taste of Alpo then a higher SWR may be justified.
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