Checking in -- fresh ideas?

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Topic Author
BigLaw Survivor
Posts: 144
Joined: Mon Oct 19, 2015 8:55 pm

Checking in -- fresh ideas?

Post by BigLaw Survivor » Tue Apr 17, 2018 10:58 pm

Hi everyone. I first posted on BH almost three years ago, after I had walked away from a BigLaw partnership just short of my 54th birthday. As I approach my 57th birthday and the end of my third year of retirement, I thought I'd update the forum on where I am and seek advice on what I ought to be doing moving forward.

Here's my current portfolio:

Taxable brokerage account: $1,530,268 (90 percent stocks, 10 percent high yield tax free municipal bonds)
401(k): $2,117,429 (70 percent stocks, 30 percent bonds)
Traditional IRA: $954,000 (100 percent stocks)
Cash: $31,250
Cryptocurrency: $7500
Home Value (est): $1,600,000
Mortgage: $745,776

NET WORTH: $5,494,671

The mortgage on my house is in the sixth year of a 10/1 interest only mortgage where the rate is 3.25 percent. Beginning October 2022, the interest rate will readjust, likely higher, and I also will have to begin making principal payments. Until then, the mortgage is $2019 a month and real estate taxes are $1008 a month, or a total payment of $3027 a month. However, the house has a basement apartment that we rent for $2400 a month, effectively making our house payment $607 a month.

I have us on a budget of $17,500 a month, requiring that I dip into our investments to the tune of $15,100 a month ($181,200) plus add the $2400 monthly from the rent. (We live in a highly desirable area in a large East Coast city and have no problem getting quality tenants). By my calculation, this comes out to 3.9 percent of my investment accounts ($4.6 million) per year. It does not include my home equity.

My current income tax rate is zero, as is my capital gains tax rate. I remain eligible for my law firm's health insurance and can stay on it until I'm Medicare eligible and beyond. The monthly premium for my wife and me is $1317 a month, and is increasing faster than the rate of inflation (last year it was $1210 a month). I am finding that we can easily live on our $17,500 montly budget, and can cut back if necessary.

Come October 2022, we will either (1) sell the house and take what will likely be by then $1m plus in equity and buy something smaller (giving up the basement income but being mortgage free), (2) pay off some or all of the mortgage and stay in the house, but be stuck with almost $2 million in home equity that we can't do anything with, or (3) just start paying the higher mortgage payments. We'll decide closer to then what makes the most sense. The one thing I know I don't want to do is pay down the mortgage any earlier than I have to because the 3.25 percent interest rate is low and I'm confident the returns on my investments will, on average, be higher than 3.25 percent over the next four years.

I probably won't take social security until I'm 70, and it should be about $2500 a month.

Based on what I've just outlined, does anyone have any advice or reactions for me? What should I be thinking about?

mhalley
Posts: 7269
Joined: Tue Nov 20, 2007 6:02 am

Re: Checking in -- fresh ideas?

Post by mhalley » Tue Apr 17, 2018 11:12 pm

Way too aggressive an aa for my blood, but I sleep well at 50/50 at age 63 and retired. Many roads to Dublin.
Last edited by mhalley on Tue Apr 17, 2018 11:17 pm, edited 2 times in total.

PFInterest
Posts: 2684
Joined: Sun Jan 08, 2017 12:25 pm

Re: Checking in -- fresh ideas?

Post by PFInterest » Tue Apr 17, 2018 11:13 pm

Have some fun! Although that might already be included in your 17K/m budget....
Also agree. Maybe take some off the table.

Topic Author
BigLaw Survivor
Posts: 144
Joined: Mon Oct 19, 2015 8:55 pm

Re: Checking in -- fresh ideas?

Post by BigLaw Survivor » Tue Apr 17, 2018 11:29 pm

Ha ha we've been having lots of fun. Lots of travel for one. Still, most months we've lived comfortably below budget. I'm often advised that my allocation is too aggressive. I'll have to think about that . . .

md&pharmacist
Posts: 262
Joined: Fri Mar 23, 2018 7:05 pm

Re: Checking in -- fresh ideas?

Post by md&pharmacist » Wed Apr 18, 2018 12:08 am

Way too exposed to markets. Statistically high risk of significant correction/recession in the next 1-3 years, can be tomorrow! Will you sleep well with this kind of exposure if there is a 30-50% drop in the markets? This exposure may have been okay in 2010, not so much now. You are drawing $15,000/month from your accounts - this looks fine now when shares are near an all time high. It will be much more painful if shares are suddenly worth half. Besides, don't you want a large cash position to usher in the next bull run? You won't have this ready if you lose a few million by being so heavily invested in an aging bull market - some new risks in 2018.

I'm in my mid 40's with only $1,600,000 exposed to the markets in retirement/taxable accounts. That's only about 15% of my total NW, about $10,000,000. Will bump up to 30% after the next major recession/depression for the next bull market. The market is not my only investment strategy if you're wondering what I do with the rest of the money, I am heavily invested in my own successful practice and in large commercial real estate holding (18,000 sq ft medical complexes) - all part of my diversification strategy outside of just market investing.

You need more cash for the short term/emergency fund. My expenses are much higher than yours, but I have a $1,400,000 cash/emergency account.

Lose the interest only mortgage. Recommend refinance to a 10 or 15 year fixed right away as rates are rising. You can afford the monthly payments. If your income tax rate is 0, you are not even getting interest deduction.

How is your capital gains rate 0 and your income tax rate zero if you are drawing from a brokerage account? If you are drawing from your taxable brokerage account (I suspect), you will have capital gains or income (short term) gains annually unless what you are only in cash positions or you are losing money on your stock/fund asset sales. If you are pulling from an IRA/401K they are taxable upon withdrawal unless you had converted to Roth.

If you are healthy and expect longevity, agree don't take social security until you have to.

Take out a little bit less monthly, since you are so heavily exposed to markets and a good chance of a big drop in the near future. Consider lower cost of living area at least part of the year - you're retired. I'm in Florida. Here, $1,500,000 got me about 7500 sq ft and a 4 car garage for my toys.

Update in another 3 years, curious to see what happens. You're in good shape!

Curious to know how you invest. Traditional Boglehead passive index investing to mimic market performance? I'm not so into keeping it simple, love the challenge of trying to beat the market averages and diversifying outside of US.

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Svensk Anga
Posts: 556
Joined: Sun Dec 23, 2012 5:16 pm

Re: Checking in -- fresh ideas?

Post by Svensk Anga » Wed Apr 18, 2018 7:28 am

Muni bonds do not make sense if you stay in 0% bracket.

You ought to consider getting out of the 0% bracket though. Standard advice is to keep tax rates level through retirement. You may be paying zero now, but will make up for it with a higher rate later. You could fill the 0, 10, and maybe 12% brackets with Roth conversions. Going to the top of the 12 would preclude tax free capital gains though, so it is unclear how to optimize, especially with your substantial draw rate. It will depend on your cost basis distribution and I suspect that is fairly low given market performance since you retired.

Topic Author
BigLaw Survivor
Posts: 144
Joined: Mon Oct 19, 2015 8:55 pm

Re: Checking in -- fresh ideas?

Post by BigLaw Survivor » Wed Apr 18, 2018 12:56 pm

md&pharmacist wrote:
Wed Apr 18, 2018 12:08 am
Way too exposed to markets. Statistically high risk of significant correction/recession in the next 1-3 years, can be tomorrow! Will you sleep well with this kind of exposure if there is a 30-50% drop in the markets? This exposure may have been okay in 2010, not so much now. You are drawing $15,000/month from your accounts - this looks fine now when shares are near an all time high. It will be much more painful if shares are suddenly worth half. Besides, don't you want a large cash position to usher in the next bull run? You won't have this ready if you lose a few million by being so heavily invested in an aging bull market - some new risks in 2018.

I'm in my mid 40's with only $1,600,000 exposed to the markets in retirement/taxable accounts. That's only about 15% of my total NW, about $10,000,000. Will bump up to 30% after the next major recession/depression for the next bull market. The market is not my only investment strategy if you're wondering what I do with the rest of the money, I am heavily invested in my own successful practice and in large commercial real estate holding (18,000 sq ft medical complexes) - all part of my diversification strategy outside of just market investing.

You need more cash for the short term/emergency fund. My expenses are much higher than yours, but I have a $1,400,000 cash/emergency account.

Lose the interest only mortgage. Recommend refinance to a 10 or 15 year fixed right away as rates are rising. You can afford the monthly payments. If your income tax rate is 0, you are not even getting interest deduction.

How is your capital gains rate 0 and your income tax rate zero if you are drawing from a brokerage account? If you are drawing from your taxable brokerage account (I suspect), you will have capital gains or income (short term) gains annually unless what you are only in cash positions or you are losing money on your stock/fund asset sales. If you are pulling from an IRA/401K they are taxable upon withdrawal unless you had converted to Roth.

If you are healthy and expect longevity, agree don't take social security until you have to.

Take out a little bit less monthly, since you are so heavily exposed to markets and a good chance of a big drop in the near future. Consider lower cost of living area at least part of the year - you're retired. I'm in Florida. Here, $1,500,000 got me about 7500 sq ft and a 4 car garage for my toys.

Update in another 3 years, curious to see what happens. You're in good shape!

Curious to know how you invest. Traditional Boglehead passive index investing to mimic market performance? I'm not so into keeping it simple, love the challenge of trying to beat the market averages and diversifying outside of US.
Wow. You and I have totally different perspectives on life for sure. That's what's great about America.

As a starter, my entire family -- kids and grandkids -- live in the same city that I do, so I'd never move full time. That isn't to say we wouldn't consider living somewhere else part time in the future. But if we ever did that it wouldn't be Florida (no offense but ugh) and it wouldn't be in a 7500 SF place with a four car garage! Why in the world does anyone need that?

On your suggestion that I refinance, why would I do that when I could just make extra payments on my current mortgage and pay it down more quickly that way? I never understand why folks push others to lock themselves into short term mortgages with high monthly payments that allow for no flexibility.

On my suggested need for more cash for "emergencies," I have $150k in a high yield municipal bond fund (NHMAX) in my brokerage account, where the principal has been very stable while also paying a nice monthly dividend. Why do I need more than a couple months worth of cash in my checking account for Wells Fargo to play with when I know that I could cash out the $150k tomorrow if I ever needed more? The $150k is basically a year's living expenses for me.

On your plan to move from 15 to 30 percent stocks "after the next major recession/depression," good for you but one thing I've never done is try to time the market. I'm a buy and hold guy, and it's worked well for me.

Here's how I'm in the zero percent tax bracket: I have no taxable income other than the $33k SEPP that I withdraw annually from one of my retirement accounts, and with itemized deductions I pay no taxes. I'm basically living off of what's in my brokerage account ($1.5 million) until I hit the traditional retirement age of 65, at which point I'll start tapping my 401k. That's the plan, and with three years behind me it seems to be working ok. I do think, as I've said before, that if the markets tank I can get by quite well on less than $17,500 a month. For example, the last six months we've averaged $14,951 a month and it's been awesome -- we've spent three of those months in 5 different countries.

I do need to look into Roth conversions though!

Katietsu
Posts: 2158
Joined: Sun Sep 22, 2013 1:48 am

Re: Checking in -- fresh ideas?

Post by Katietsu » Wed Apr 18, 2018 1:50 pm

Second looking into Roth conversions. It does not make sense to pay 0% for 15 years and then jump to 35%. The jump in tax rate could be even more than anticipated from the AGI increase associated with the RMD and SS. Unfortunately, at some point, most people will be paying taxes on the 401k withdrawals as a single person.

In my mind, your asset allocation is even more aggressive than it looks. In my mental accounting, I view the amount owed on the mortgage like money you are borrowing in order to invest. I think I have heard of this referred to as a negative bond.

md&pharmacist
Posts: 262
Joined: Fri Mar 23, 2018 7:05 pm

Re: Checking in -- fresh ideas?

Post by md&pharmacist » Wed Apr 18, 2018 2:00 pm

I agree, stay close to your children and grandchildren - they are the most important thing in your life. I'm in Florida precisely because my extended family is mainly here.

Florida has sunshine, top beaches, cruise ship departures and a LCOL. Certainly if you considered "snow bird" living, it could be anywhere you prefer.

Regarding the mortgage, when you said an interest only mortgage I assumed you are paying interest only. You said your rates will reset in 2022. If you wait until then to act, rates are likely to be quite a bit higher. A 10-15 year mortgage will mean ultimately lower total interest payment and faster principal reduction over the life of the loan, as well as lower loan interest rates versus longer term loans. If the monthly payment is high for you or you prefer flexibility, then you can stick with the current plan so long as you don't mind the extra interest paid over the life of your loan.

The $150K for expenses is fine. I only realized the $30K cash in your original post.

Buy and hold funds/stocks is fine. Most Bogleheads do. Should get you market returns. Yes, we are very different here. I don't like to keep to much at risk in mature bull markets and would love to capitalize on the next major correction. I appreciate most don't do this.

I see how the itemized deductions prevent taxable income for you off your capital gains/sales. Obviously great tax planning.

Also love traveling to different countries. Can't wait to one day have the time you do for this.

crazcarl
Posts: 25
Joined: Wed Jun 28, 2017 11:27 am

Re: Checking in -- fresh ideas?

Post by crazcarl » Wed Apr 18, 2018 2:17 pm

I second the Roth conversions. If these are ignored, RMDs will be extremely high with those numbers in tax deferred.

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