Time to get serious-Retirement within 1 year!

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cruzbay
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Joined: Thu Jan 25, 2018 5:47 pm

Time to get serious-Retirement within 1 year!

Post by cruzbay » Mon Mar 11, 2019 3:39 pm

Thank you in advance for taking time to read and give advice! This is a lot of info but better to get it all out there, I think. šŸ˜Š
Emergency Funds: Yes
Debt: No debt. Pay credit card monthly.
Tax Filing Status: Married Filing Jointly. No children
Tax Rate: 32% Federal 5.75% State (2018)
State of Residence: VA
Age: We are both 56
Him: Eligible for Federal retirement as of March 31, 2019.
Pension ($56,016 annual with full survivor benefit before health insurance deduction and taxes) and able to buy healthcare insurance at the employee rate for life (currently $4284 annual).
Also, currently, there is a ā€˜supplementā€™ for early retirees that pays out what you would receive in social security until you are eligible for social security at age 62. This is estimated at $19,920/yr. so for the first 6 years of retirement if he retires at 56.

Her: Owns S corp. Could continue work after husband retires, but doubtful. Nothing to sell upon retirement.

Projected Annual Expenses: 150K before taxes. Want to travel. Likely lower, especially when older but letā€™s go with it for the purpose of planning.

Desired Asset allocation: 50/50 (fixed income which includes mostly cash in high-yield) Havenā€™t focused on bonds except holding $20,000 worth of I Bonds a we will have a pension for fixed income. Desired International allocation: ?

LTC Insurance: No

Current Assets

Total portfolio: Approx $4.2M without the real estate. Not counting proceeds from house sales as it will likely be spent on another home, a possible RV and replacing two vehicles that are more than 20 years old.

Primary residence: No mortgage. Will sell this when we retire. HCOL area. Likely $850K after commissions and potential CapGains tax. Have lived in the home long enough to qualify for tax exemption on first 500K of capital gains.
Second Home: No mortgage. Will use this as a home base in early retirement. Likely will sell within 5 years after retirement. LCOL area. $280K after expenses associated with the sale. No capital gains.

Taxable Accounts:
1% --Brokerage Account: $44,100
99.39% in two individual stocks (CAT: LTCG of $7609, and PFE: LTCG of $9888)
0.61% in Cash

19%--High Yield CDs: $814,245 (Laddered. None more than 1 year to maturity)

13%--Cash in bank accounts: some high yield and some at low interest. $561,600

0.5%-- I Bonds 10K each in purchased in 2018=$20K. Intend to buy max each year.

Tax-Advantaged Accounts:
24.9%--His TSP: $1,051,000
100% C fund (ER 0.036%)

25.8%--His other active 401K: $1,088,583
43.9% New Horizons-I CLASS (PRJIX ER: 0.65%)
32.6% TRowe Price Growth Stock TRC (GCT ER: 0.04%)
16.7% International Growth Equity Trust D (IGC ER: 0.65%)
6.8% Equity Index Trust Class C (XCT ER: 0.06%)
This is: 99.2% stocks, 0.1% Bonds, .4% Money Market/Stable Value, .4% Other

3%--His Traditional IRA: $115,830
41% in 3 individual stocks (CCEP 14% of account, DE 24% of account, NUE 4% of account)
59% Cash

6%--Her Rollover IRA: $261,507
5% JENSX ER: 0.88%
7% SWPPX (S&P 500 index fund) ER: 0.03%
10% in two individual stocks (APD 9% of account, and VSM 1% of account)
78% Cash

6%--Her SEP IRA: $263,000
26% in 5 individual stocks (ADM 5% of account, DWDR 7% of account, GE 1% of account, NUE 6% of account)
74% Cash

Summary:
55.8% stock /.5% bond/43.6% Cash

Contributions:
$18.5K (2018) to his 401K accounts) 5% employer match.
$6000 catch up contribution evenly split between his 401Ks.
$6500 to his Traditional IRA includes 1K catch up. Non-deductible.
$6500 to her Rollover IRA includes 1K catch up. Non-deductible and now co-mingled with the original pre-tax 401K money. Working to calculate cost basis of each.
Contributions to her SEP IRA varies with the success of each year/salary paid vs. owner distributions. 25% of salary paid each year. 25K contributed in 2017. 55K in 2018. A portion of her comp is taken in the form of distributions.

Social Security:
If we wait until age 70: Him=$3391/mo + Her $2926/mo + $6317/month or $75,804 annual. This assumes income for 2019 and then none after that. Both at FRA=$2735 + $2360=$5095 or $61,140 annual.) Need to work further with Open SS tool to determine optimal strategy.

Questions
As you can tell, we are better earners/savers than we are investors. Want to maintain a healthy non-stock holding to offset worries about sequence of return risk and to live off of that money to keep our income lower and enable Roth conversions during the lowest income years of retirement. Knowing that the entire stock portfolio could vanish and we could still live enables sleep at night. For me, I would like to, at a minimum, invest the cash that is sitting in the IRA accounts. Stupid me for letting it sit!

Q: Should we still be making the non-deductible contributions to the IRAā€™s? We have been doing so thinking that it will eventually end up in a Roth and grow tax free. Have not done the 2018 contributions yet. Kicking myself over not doing this all along but we can only move forward.

Q: In the year of retirement, if DH stops work in March is it a good idea to load as much salary into the 401K as allowable before leaving in order to keep income low and do some Roth conversions?

Q: Given that his IRA is funded with all non-deductible money, should we go ahead and convert it now to Roth, paying taxes (at a high rate) on the earnings? Given that much of the money is sitting in cash, the earnings are only around $23K. Once it is in the Roth, I will invest the cash portion.

Q: Her IRAs are a SEP and a Rollover IRA (with co-mingled before and after-tax contributions in addition to the earnings.) When should I think about converting that to Roth, if ever? Is this all or nothing due to the pro-rata rule-meaning that I cannot convert one and leave the other?

Q: What are your thoughts on our allocation given our proposed retirement age and situation?

Q: What should we do with the cash in the taxable accounts that is not in CDā€™s? Other safe investments to consider? TIPS, I Bonds, Treasuries? Safe but still earning. Currently making between 2.3 and 2.9% on the CDs.

Q: What would be our SWR given our asset allocation mix? Does the 3% rule assume a 60/40? We project 40 years of retirement to age 96, I guess.

Q: Upon retirement, is it best to leave the money in the TSP and other 401K or roll to outside accounts? (Understand that we will want to leave some money in to have access to the G fund.)

Q: Should we leave the TSP in 100% C fund?

Q: If advised to keep the money in the "other 401K" after retirement, should we alter the holdings? Possible funds are:
CAPITAL APPRECIATION TRUST B CBT .55%
EQUITY INDEX TRUST CLASS C XCT .06%
GROWTH & INC TRUST CLASS B GIB .45%
NEW HORIZONS - I CL PRJIX .65%
INTL GROWTH EQUITY TRUST D IGD .65%
PIMCO ALL ASSET, INST. PAAIX 1.11%
T ROWE PRICE GROWTH STOCK TR C GCT .4%
T ROWE PRICE MID CAP GRWTH I RPTIX .62%
TRP US VALUE EQUITY TRUST VTA .62%
U.S. SMALL-CAP VAL EQ TRUST D SVD .66%
T ROWE PRICE HIGH YIELD I PRHIX .61%
TRP BOND TRUST I T1 B1T .33%
STABLE VALUE COMMON TRUST FUND SV-PB .15%
T ROWE PRICE RETIRE 2015 TR B RD2 (also 2020, 2025, etc.) .40%
T ROWE PRICE RETIRE BAL TR B RA2 .40%

I cannot thank you enough for your consideration and wise advice on our situation!

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Time to get serious-Retirement within 1 year!

Post by lakpr » Mon Mar 11, 2019 5:46 pm

With 4.2 million in assets not counting home equity, you have 28x annual expenses (you said annual expenses of $150k).

With the sale of your primary home in VA, you will have $5 million, approximately 34x expenses

By any measure you are ready to retire, heck you had been ready to retire 3 years ago. Why one more year?

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Artsdoctor
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Re: Time to get serious-Retirement within 1 year!

Post by Artsdoctor » Mon Mar 11, 2019 6:18 pm

You have the money but you have way too many investments. You can easily consolidate the majority of your holdings and if it's done in a tax-advantaged account, there will be no tax ramifications to consolidate.

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cruzbay
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Re: Time to get serious-Retirement within 1 year!

Post by cruzbay » Mon Mar 11, 2019 6:24 pm

lakpr wrote: ā†‘
Mon Mar 11, 2019 5:46 pm
With 4.2 million in assets not counting home equity, you have 28x annual expenses (you said annual expenses of $150k).

With the sale of your primary home in VA, you will have $5 million, approximately 34x expenses

By any measure you are ready to retire, heck you had been ready to retire 3 years ago. Why one more year?
To be honest, we are a bit paralyzed by the task of downsizing all of our household stuff, selling the house, etc. We should have started on this like two years ago so we would be finishing up vs just starting. I want to do the financial 'house cleaning' at the same time, streamlining our investments into something that will work better for the long term. Thanks for your response. I think that I may have put too much info into my post!

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cruzbay
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Re: Time to get serious-Retirement within 1 year!

Post by cruzbay » Mon Mar 11, 2019 6:31 pm

Artsdoctor wrote: ā†‘
Mon Mar 11, 2019 6:18 pm
You have the money but you have way too many investments. You can easily consolidate the majority of your holdings and if it's done in a tax-advantaged account, there will be no tax ramifications to consolidate.
Thanks for your response. Do you think that we should convert his IRA to Roth now, just pay the tax on the extra 23K (hoping that it doesn't make us jump a tax bracket. Not sure how close to the line we are.), and then move into index funds? For my IRA's, I am thinking that I will wait until a lower income year to do the conversion and then, after that, move to the index funds. Is this what you would do in my situation?

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Artsdoctor
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Re: Time to get serious-Retirement within 1 year!

Post by Artsdoctor » Mon Mar 11, 2019 7:18 pm

I'm not a fan of Roth conversions unless you're really in a low marginal tax bracket. In concept, you're going to compare your marginal tax rate now with yours in the future (something that is not knowable). Given your information, I don't think that's what you want to do.

View all of your accounts together when it comes to asset allocation. But within an account, don't have tiny allocations to a fund. Anything less than 5% of the total portfolio allocation really won't make any difference in your general performance.

lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Time to get serious-Retirement within 1 year!

Post by lakpr » Mon Mar 11, 2019 7:34 pm

Cruzbay,

Sorry I am unable to quote snippets of your long post, editing on this tiny smartphone is a pain, I apologize in advance. I am trying to answering your questions without quoting your post in place.

To address your reply to Artsdoctor: I am not sure what current tax bracket you are in, but I would not convert anything to Roth now. You indicated an intention to move to a LCOL area in retirement, could it be a no-income-tax state? If it is, that is when you should be doing Roth conversions. Paying 5.75% in taxes to Virginia seems almost criminal and would be a deal breaker. You keep that 5.75% to yourself by employing some geographic arbitrage. Move to FL, SD, TX etc for a couple of years.

I would definitely simplify your investments if there is no major tax hit though.

Some moves I would make would be to move all retirement accounts (Traditional 401k, Traditional IRA) into TSP. I heard TSP allows incoming rollover of tax deferred assets with no basis, even if you are no longer a Fed employee. I am not a Fed employee, so this is hearsay, please confirm. Then within the TSP I would choose appropriate asset allocation.

G fund, I heard, is yielding 3% now. As and when your CDs in taxable accounts mature, put them into Totsl stock market Index, then move equal amounts within TSP to the G fund. Your asset allocation remains the same but your future RMD bomb would be defused somewhat. Your Roth IRAs and taxable accounts should eventually move to 100% total stock market index and/or total international stock market index.

Even if you are not willing or able to move tax deferred assets to TSP, I would reallocate money within each 401k account and IRA account to funds with less than 0.1% expense ratio. That, the 0.1% ER, would be my red line. Anything greater, out it goes. Anything lesser, keep at least until the second round of pruning.

SGM
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Joined: Wed Mar 23, 2011 4:46 am

Re: Time to get serious-Retirement within 1 year!

Post by SGM » Tue Mar 12, 2019 1:14 am

We put as much into non-deductible tIRAs as possible in order to eventually convert them all to Roth IRAs including my last year of working.

For my last year of working part time I maximized my solo 401k to allow for more Roth conversions. Actually I maximized all tax deferred contributions over the 6 years that I converted to Roth accounts since the law changed in 2010 allowing conversions regardless of income. A few of those years I was completely retired and couldn't add to a solo 401k or tIRAs. We converted 100% of all tax deferred accounts. We will have no RMDs and will probably not access the Roth accounts for a very long time.

I delayed my SS until 70 and DW who was the lower earner was able to take a spousal benefit at 66 and delay her own SS until 70. Her own benefit exceeded her spousal benefit at age 68, but she chose to continue to delay her own benefit for another year and a half until 70.

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cruzbay
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Re: Time to get serious-Retirement within 1 year!

Post by cruzbay » Tue Mar 12, 2019 10:00 am

Thanks SGM for sharing your situation. Like you, I plan to move the tIRA funds into Roth if feasible in order to reduce the RMD/have the tax advantaged growth.

Thanks to lakpr for your input as well. I like the idea of the no income tax state and know that the requirements in SD are fairly easy to meet. (I am in a world nomad group on Facebook and many have their state of residence there.) I will look into the possibility of a transfer to the TSP. This is non-deductible/after-tax money, so not sure that they will allow it. Will consider moving future TSP contributions into the G fund and then focus on building stock holdings by purchasing TSM in the taxable account. Agree that I need to trim the ER on the funds within the 401K and IRA accounts. Also, none of the individual stocks are 'sparking joy' so I can jettison those. That should be a good first move.

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