What AA would you suggest going into early retirement?

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Topic Author
nun
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Joined: Wed Mar 12, 2008 9:51 pm

What AA would you suggest going into early retirement?

Post by nun »

ER is fast approaching for me. I have $750k in tax deferred accounts and $230k in accounts that I can access without penalty before I reach 59.5. I don't want to 72k so my question is how would you arrange the $230 to fund ER from 53.5 to 59.5.

The $230k is made up of:

After tax accounts

$20k cash in bank account
$40k Vanguard TSM
$40k Vanguard International Equity Index

457b Plan

$70k Stable Value earning 2.6%
$40k US equity index
$20k international equity index

My annual living expenses are $36k and I get $14.4k rental income. So I need to fund $21.6k for 6 years and I assume 3% inflation. My overall AA is 50/50 and I would adjust the AA on my "post 59.5" available funds to account for any suggested changes in my pre-59.5 accessible accounts. My inclination is to go into ER with at least one year's spending in the cash account, max out my Stable Value account ie increase it to $130k and then make biannual withdrawals from the stable value and my taxable accounts to keep their ratio constant.

What percentage of cash would you carry? What AA would you choose to fund the 6 years?
Quickfoot
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Re: What AA would you suggest going into early retirement?

Post by Quickfoot »

I would maximize cash and stable value funds, in taxable accounts I would spend down the stock now while it is at record highs. If you do wind up needing to SEPP you can break a portion off into another IRA and just SEPP that IRA.

50/50 is fine for an overall asset allocation, 40/60 and 30/70 can also work, it just depends on if you are more afraid of value fluctuation or inflation. We also plan to retire early and will run a 40/60 asset allocation prior to 60 at which point we will buy SPIAs for 2x living expenses and then switch to a 60/40 allocation for remaining assets.

We plan to keep a minimum of 2 years cash, maybe 3 but other people here might not keep any cash and some may keep significantly more, it's a comfort level thing.
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Ged
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Re: What AA would you suggest going into early retirement?

Post by Ged »

I am 63 and 7 mos and just retired. I'm planning to start Roth conversions in a year or so when my wife retires, and will be delaying my SS to age 70. My wife has already started taking her SS. My portfolio right now is about 1.3 million.

So for the next 6/7 years I will have my highest withdrawal needs. After that not much.

Right now I am 60% in bonds and cash and 40% equities. Of that 10% is cash, 60% short term bond funds (a mix of types) and 30% intermediate term bonds (BND). As time goes on I'll probably increase my intermediate bond allocation, by 70 I don't think I'll have any short bonds. It's possible I will run my stock allocation up as well. That is a future decision.
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EternalOptimist
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Re: What AA would you suggest going into early retirement?

Post by EternalOptimist »

I'm 63 and retired for 2+ years. My AA is 50/50 and I'm OK with that and plan to try and keep it that way for a while. I'm taking SS and my wife is retiring shortly and plans to as well. Good luck!
"When nothing goes right....go left"
Topic Author
nun
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Re: What AA would you suggest going into early retirement?

Post by nun »

Quickfoot wrote:I would maximize cash and stable value funds, in taxable accounts I would spend down the stock now while it is at record highs. If you do wind up needing to SEPP you can break a portion off into another IRA and just SEPP that IRA.

50/50 is fine for an overall asset allocation, 40/60 and 30/70 can also work, it just depends on if you are more afraid of value fluctuation or inflation. We also plan to retire early and will run a 40/60 asset allocation prior to 60 at which point we will buy SPIAs for 2x living expenses and then switch to a 60/40 allocation for remaining assets.

We plan to keep a minimum of 2 years cash, maybe 3 but other people here might not keep any cash and some may keep significantly more, it's a comfort level thing.
That's close to what I was thinking. As I would have $130k in Stable Value I feel that keeping between 6 months and one year's spending in cash is ok.
dbr
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Re: What AA would you suggest going into early retirement?

Post by dbr »

AA and how to manage an account that is intended to be at least half depleted in short order are two different issues.

The strategy here is to put enough in cash and SV to fund the withdrawal requirement so that the taxable fund can't run out of money before regular withdrawals from other accounts can begin.

To maintain overall AA one just balances the tax deferred accounts taking into account the AA that remains in the taxable and 457.
redhounds
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Re: What AA would you suggest going into early retirement?

Post by redhounds »

Quickfoot wrote:If you do wind up needing to SEPP you can break a portion off into another IRA and just SEPP that IRA.
I haven't spent any time researching the 72(t) rules yet, but this one piece of information makes my early retirement planning sooo much easier!
--Red
jwa
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Re: What AA would you suggest going into early retirement?

Post by jwa »

Ged wrote:I am 63 and 7 mos and just retired. I'm planning to start Roth conversions in a year or so when my wife retires, and will be delaying my SS to age 70. My wife has already started taking her SS. My portfolio right now is about 1.3 million.

So for the next 6/7 years I will have my highest withdrawal needs. After that not much.
Right now I am 60% in bonds and cash and 40% equities. Of that 10% is cash, 60% short term bond funds (a mix of types) and 30% intermediate term bonds (BND). As time goes on I'll probably increase my intermediate bond allocation, by 70 I don't think I'll have any short bonds. It's possible I will run my stock allocation up as well. That is a future decision.
I bet you don't worry about the sustainability of a 4% SWR :).
chaz
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Re: What AA would you suggest going into early retirement?

Post by chaz »

40/60 is good for a retiree.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
Topic Author
nun
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Re: What AA would you suggest going into early retirement?

Post by nun »

dbr wrote:AA and how to manage an account that is intended to be at least half depleted in short order are two different issues.

The strategy here is to put enough in cash and SV to fund the withdrawal requirement so that the taxable fund can't run out of money before regular withdrawals from other accounts can begin.

To maintain overall AA one just balances the tax deferred accounts taking into account the AA that remains in the taxable and 457.
Yes maybe I should have been more careful in my wording.

So given a starting annual budget of $36k, 14.4k a year in income and 3% inflation, how would you arrange the following current asset mix to fund the 7 years between 52.5 and 59.5 until access to IRAs and 403bs is possible with out penalty or SEP.

After tax accounts

$20k cash in bank account
$40k Vanguard TSM
$40k Vanguard International Equity Index

457b Plan

$70k Stable Value earning 2.6%
$40k US equity index
$20k international equity index
Chadnudj
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Re: What AA would you suggest going into early retirement?

Post by Chadnudj »

nun wrote:I have...$230k in accounts that I can access without penalty before I reach 59.5. I don't want to 72k so my question is how would you arrange the $230k. to fund ER from 53.5 to 59.5....

My annual living expenses are $36k and I get $14.4k rental income. So I need to fund $21.6k for 6 years and I assume 3% inflation. ...

What AA would you choose to fund the 6 years?
So you need $21.6k a year for 6 years? That's $129,600 (ignoring temporarily inflation). You have $230k. Seems like a pretty easy solution for me:

- $130k-150k in cash or cash-like vehicles (maybe do some CD laddering, or really anything that is extremely low risk)
- Invest the other $80-100k in index funds at your post 59.5 target AA. If you want to have some fun in early retirement, don't reinvest the dividends here automatically. Instead, take them as fun spending money for yourself in early retirement.

Regardless, congrats! Having way more money to cover those 6 years than you need based on your budget is quite an accomplishment!
Topic Author
nun
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Re: What AA would you suggest going into early retirement?

Post by nun »

Chadnudj wrote: So you need $21.6k a year for 6 years? That's $129,600 (ignoring temporarily inflation). You have $230k. Seems like a pretty easy solution for me:

- $130k-150k in cash or cash-like vehicles (maybe do some CD laddering, or really anything that is extremely low risk)
- Invest the other $80-100k in index funds at your post 59.5 target AA. If you want to have some fun in early retirement, don't reinvest the dividends here automatically. Instead, take them as fun spending money for yourself in early retirement.

Regardless, congrats! Having way more money to cover those 6 years than you need based on your budget is quite an accomplishment!
Thanks, I suppose I'm looking for a bit of validation, or better still criticism, as my current plan is to start out with $20k in the bank, $130k in my 457's stable value fund that is paying 2% after fees, $40k in US equity index and $40k in International equity index. I'll make withdrawals twice a year to top up the bank account.

The only possible way I can do this is because I've paid off my mortgage, taking $18k out of the annual budget is enormous.
dphilipps
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Re: What AA would you suggest going into early retirement?

Post by dphilipps »

I'm surprised no one has addressed this so far, but the OP stated he is receiving $14k in annual rental income.
Wouldn't you factor his income property into the asset allocation, based on its value and any mortgage?
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Phineas J. Whoopee
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Re: What AA would you suggest going into early retirement?

Post by Phineas J. Whoopee »

An early retirement prior to age 59.5 is the one situation in which a temporary buckets strategy may make sense.

Given your attempt to avoid SEPPs under rule 72(t) there really are two separate pools of resources, which are not created by mental accounting: those available without tax penalty now; and those available without tax penalty later.

I agree with the others. For the six years I'd stick with very safe assets in taxable, like savings and CD products, I Bonds, and maybe, especially if their real yields turn positive, short-term TIPS to be used in the later years, which can work because you have enough flexibility to handle small fluctuations. In asset allocation terms they would all count as fixed income, and as others have said, you'd rebalance in tax-deferred.

I myself am thinking about a risky career change that could, in a bad case, result in no income, which would be equivalent to early retirement. In my situation it could take SEPPs to get me through. I'd retain a level of optionality by splitting tax-deferred into at least two Traditional IRAs. You're in better (taxable account) shape than me.

On the other hand, I spend less than you.

PJW
Topic Author
nun
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Re: What AA would you suggest going into early retirement?

Post by nun »

Phineas J. Whoopee wrote: I myself am thinking about a risky career change that could, in a bad case, result in no income, which would be equivalent to early retirement. In my situation it could take SEPPs to get me through. I'd retain a level of optionality by splitting tax-deferred into at least two Traditional IRAs. You're in better (taxable account) shape than me.

On the other hand, I spend less than you.

PJW
Actually only $100k is in taxable accounts the rest is in a tax deferred 457 plan, but I can make withdrawals from it without penalty any time after I leave my current job. So tax planning come into the withdrawal startegy. I definitely look at the taxable and 457 as being in their own "bucket" ans so will invest it conservatively so there's no chance of me running oit of money as long as I keep to my budget and inflation stays around 3%. I will adjust my overall AA to keep me at 50/50 so my other retirement acounts will end up having a little more than 50% in equities.
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