Planning after divorce

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casaver
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Joined: Mon Sep 10, 2018 1:56 am

Planning after divorce

Post by casaver » Mon Sep 10, 2018 2:40 am

Just finish divorce process and asset transfers. All the accounts need to be rebalanced. Contribution needs to be adjusted. Would like to hear input how to do it.

Current retirement assets (current age 50)

EF-total 200k
VCADX, VCTXX, I-BOND

401k -total 825k

34% VIIIX 0.01%
24% DSFVX 0.26%
8% VBIPX 0.03%

Roth IRA at Vanguard-total 270k
7% VFWAX 0.03%
5% VEMAX 0.04%
11% VSS 0.13%

Contributions

New annual Contributions
$18500 401k (50% match up to $8000)
$5500 Roth IRA

margin tax bracket (35% for fed, 9%for state, 3.9% for medicare investment surtax)
Need to withdraw 30k per kid raising two kids (9, 13)through high school in VHCOL area. 529 is fully funded for 4-year in-state costs.

So what is the best approach here? Should I stop contributing? or withdraw while contributing? Should I allocate more bond to earmark for the withdrawal over future years?

RickBoglehead
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Joined: Wed Feb 14, 2018 9:10 am

Re: Planning after divorce

Post by RickBoglehead » Mon Sep 10, 2018 5:22 am

ROTH limit is $6,500 50 and over.

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dwickenh
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Location: Illinois

Re: Planning after divorce

Post by dwickenh » Mon Sep 10, 2018 6:37 am

and 401K is 24,500 with catch up contributions.
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stan1
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Joined: Mon Oct 08, 2007 4:35 pm

Re: Planning after divorce

Post by stan1 » Mon Sep 10, 2018 7:29 am

You mean $30K/kid total until they are in college or $30K/kid/year until college? If its $60K total I would reduce the 401K contribution or spend down the taxable account a little. You might find that you can save in other ways or get a few pay raises over the next decade and get most of it back into savings within a short amount of time. Perhaps your plan is this money will purchase a car or summer camps for each child or similar. If its $60K/year you hired the wrong attorney or kids need to go to public schools. Assuming this takes any alimony/child support paid or received into account.

You want to review your life insurance and estate planning documents.

For asset allocation I'd do 70% equities and 30% bonds at 50. You came out of a divorce with over $1M; that's much better than many and are still on track to have a secure future in the next steps in your life.

casaver
Posts: 4
Joined: Mon Sep 10, 2018 1:56 am

Re: Planning after divorce

Post by casaver » Mon Sep 10, 2018 12:06 pm

Thanks for reminder on life insurance and estate planning.

This includes child support received in the form of interest in retirement account and real property (valued at 1.3m owned out right). 60k/year is the cashflow I will need for the coming 5 years and 30k/year for the following 4 years after fully contributing to 401k and Roth. Will retire and downsize once kids go to college. Also need to budget for 2 year unemployment or long term underemployment between 50 and 60.

My plan is to allocate 420K (child support) in fixed income and withdraw gradually from taxable and Roth.

The new AA will be like:

Current retirement assets (current age 50)

EF-total 240k
VCADX, VCTXX, I-BOND

Roth IRA at Vanguard-total 270k (180k, ie 15% can be withdrawn without penalty or tax)
15% Vanguard total bond admiral fund 0.04%
7% VSS 0.13%

401k -total 825k

34% VIIIX 0.01%
20% DSFVX 0.26%
12% VBIPX 0.03%
12% VFWAX 0.03%

Contributions

New annual Contributions
$18500 401k (50% match up to $8000)
$6500 Roth IRA (withdrawing while contributing?)
Last edited by casaver on Mon Sep 10, 2018 12:30 pm, edited 1 time in total.

mw1739
Posts: 512
Joined: Mon Mar 21, 2011 5:44 pm

Re: Planning after divorce

Post by mw1739 » Mon Sep 10, 2018 12:20 pm

Can you cover any of it out of normal cashflow? Given your tax rates, you're earning $200k+ and mention your home is paid off. Alternatively, you can take some from your taxable investments to cover a few years of withdrawals.

Assuming you're locked into this and cannot cashflow it or expect to receive significant raises over the next 9 years, you could consider doing a cash-out refinance on your $1.3MM paid off property. A 30 year mortgage at 4.5% for $420,000 (60k for 5 years, 30k for 4 years), is approximately $2k per month.

Is this child support, alimony or payments directly to a private school? I wonder if your ex would accept a discounted payoff for a lump-sum?

casaver
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Joined: Mon Sep 10, 2018 1:56 am

Re: Planning after divorce

Post by casaver » Mon Sep 10, 2018 2:12 pm

Updated the post above with proposal. Thanks for all the input. I probably need to be conservative and focus on cash flow.

We had held out with two income in this high cost/high tax area. I cannot fully cash flow the expenses now after losing one income and need to hire help.

We determined the cost to raise the kids and I got more assets to cover the difference. I expect about 60k negative cash flow with 2 kids and 30k with one. I should consider cutting some of the cost but I'd like to have enough buffer for any bad surprise. I work in a cyclical industry that booms and bursts. So I have to tuck income away in tax-advantaged accounts while preparing for bad years.

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Meg77
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Re: Planning after divorce

Post by Meg77 » Mon Sep 10, 2018 2:54 pm

I'm sorry for the ordeal you've been through.

If you're going to have negative cash flow though, I'd suspend all new savings contributions with the exception of $8000 into the 401k in order to get the match. There's no point putting money into the Roth or 401k just to take it back out and pay a penalty.

Hopefully income increases will help bridge the gap over time. And cost cutting measures as well. But in the meantime I think your plan makes sense - $420k in fixed income (including money market funds given the small different in yield) to cover those related expenses for the next 9 years until the kids are off at college. Drain taxable first, then you can remove Roth contributions without tax or penalty. It is probably worth seeking the counsel of a financial planner (not investment manager!) for an hour or so to get professional input and calculations. There may be programs or special rules for tapping retirement funds early that you can take advantage of. Tapping home equity is a decent option as well versus raiding retirement accounts early, either via downsizing or a loan. I hate to tell you to borrow to fund this, but you also don't want to drain your retirement savings, especially if it means paying a penalty.

Remember that your kids aren't that young and are probably not as dependent as you imagine (or shouldn't be). I can't imagine much hired help to be necessary, but of course I don't know your lifestyle. Just be wary of the desire to overspend which can feel like an obligation - to keep up appearances or to alleviate any perceived additional burden on the kids by taking away things you used to buy them or asking them to pitch in more. But that's what growing up is all about, and they will be fine. Again I'm sorry for what you're going through.
"An investment in knowledge pays the best interest." - Benjamin Franklin

casaver
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Joined: Mon Sep 10, 2018 1:56 am

Re: Planning after divorce

Post by casaver » Mon Sep 10, 2018 3:47 pm

Thank you for the warm words, Meg. Yes, I shouldn't stress myself out to maintain the lifestyle. Life is changed permanently. They will gain some and lose some. It is a stressful lifestyle. Long work hours, bad traffic, cut-throat competition at school and work. But it seems a bit too late to move with a high-schooler soon-to-be. This is more a personal decision.

To be precise, the estimate is more for an average case. In good years, I should be able to cash flow it but may need to take more than that in bad years. It is currently the peak for almost everything, job market, stock market, and housing market. I have been relatively aggressive on investment. With the loss of security of two incomes, two kids to raise, looming retirement(voluntary or not), I am thinking about going much more conservative.

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