Need Input on My Early Retirement Plan.....

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
TargetingFI
Posts: 14
Joined: Sat Mar 10, 2018 1:00 pm

Need Input on My Early Retirement Plan.....

Post by TargetingFI » Thu May 10, 2018 8:16 pm

I'm very interested in hearing from forum members about my early retirement plans, which I outline below. Does my plan, in your mind, make logical sense or not?

My wife and I are planning on retiring in two years when I'm 51 and she's 50. At that time we're looking to purchase a home in another state (are currently renting) and want to set aside enough cash to:

1) put $125k down on an approx. $350K home and set aside an additional 10K in closing costs
2) pay for moving expenses (10k)
3) purchase a new car (25k)
4) have enough cash left to cover three years worth of living expenses (70k x 3 = $210k)

In total, this would be $380K in cash. We’re targeting a net worth at that time of $3.35mn. Outside of the cash, the rest of our money is, and will be, in mutual funds (combination of pre-and post-tax and a mixture of stocks and bonds).

Right now we're working on saving enough cash to get to the $380K mark. Considering low interest rates, I realize this sounds like a lot of money to have outside of the market, but here's my thinking for the early part of our retirement....

1) Mortgage rates, although still low, are starting to rise slowly. As such, we want to put a large down payment and pay off the balance in approximately 8-10 years.

2) Having three years of living expenses in cash protect us, in large measure, from sequence of return risk

3) The three years of cash will be consistent for the first 6-8 years of retirement, as we’ll slowly replenish the funds by selling small portions of our mutual funds

4) Having a large stash of cash with no real income outside of some dividends, interest and capital gains will enable us to have a low modified adjusted income. As a result, this should position us to obtain Obamacare subsidies. Without having a large cash stash on the side, we’d be forced to sell more mutual fund shares. This would increase our income and potentially prevent us from getting Obamacare subsidies.

Please let me know your thoughts on my plan.

User avatar
Alexa9
Posts: 1320
Joined: Tue Aug 30, 2016 9:41 am

Re: Need Input on My Early Retirement Plan.....

Post by Alexa9 » Thu May 10, 2018 8:34 pm

Depends a lot on your lifestyle/expenses, the market, healthcare, social security, taxes, the cost of living, your health, and how long you live. The earlier you retire the more uncertainty there is in the equation. I would make some spreadsheets for worst case scenario to best case scenario considering the many variables.

delamer
Posts: 4795
Joined: Tue Feb 08, 2011 6:13 pm

Re: Need Input on My Early Retirement Plan.....

Post by delamer » Thu May 10, 2018 9:22 pm

Why not pay cash for the house?

It would only take about 10% of your assets and it would reduce your expenses. Your remaining assets would probably throw off enough income to cover your annual expenses (assuming around $60K).

User avatar
MP123
Posts: 660
Joined: Thu Feb 16, 2017 3:32 pm

Re: Need Input on My Early Retirement Plan.....

Post by MP123 » Thu May 10, 2018 10:08 pm

delamer wrote:
Thu May 10, 2018 9:22 pm
Why not pay cash for the house?

It would only take about 10% of your assets and it would reduce your expenses. Your remaining assets would probably throw off enough income to cover your annual expenses (assuming around $60K).
Good idea. There's no point in generating income to pay a mortgage if that income is going to push you over the ACA cliff. Have you checked unsubsidized health insurance rates?

You need to keep your income under $65k for subsidies and I'd guess $3.35M is going to generate more than that depending on taxable breakdown.

Paying cash for the house might be a smart move.

User avatar
Watty
Posts: 13439
Joined: Wed Oct 10, 2007 3:55 pm

Re: Need Input on My Early Retirement Plan.....

Post by Watty » Thu May 10, 2018 10:21 pm

delamer wrote:
Thu May 10, 2018 9:22 pm
Why not pay cash for the house?

It would only take about 10% of your assets and it would reduce your expenses. Your remaining assets would probably throw off enough income to cover your annual expenses (assuming around $60K).
+1

Many people find that it makes sense to structure their income to be able to do Roth conversions and take capital gains in a low tax bracket before they start Social Security. The problem with having a mortgage is that you would somehow have to generate the income to make the mortgage payment and that use up a lot of your space in low tax brackets.
TargetingFI wrote:
Thu May 10, 2018 8:16 pm
2) Having three years of living expenses in cash protect us, in large measure, from sequence of return risk

3) The three years of cash will be consistent for the first 6-8 years of retirement, as we’ll slowly replenish the funds by selling small portions of our mutual funds
There really isn't much need for that. You can set your mutual funds to not automatically reinvest your dividends and capital gains distributions. If you pay cash for the house you will still have about $3 million invested so a 2% dividend would generate $60K a year. If the stock market goes up or down the dividend will likely not change much and dividends tend to go up over time.

Sasquatch
Posts: 58
Joined: Mon Apr 09, 2018 12:44 pm

Re: Need Input on My Early Retirement Plan.....

Post by Sasquatch » Fri May 11, 2018 1:01 am

Will your interest paid on the mortgage exceed the savings of a ACA subsidy?

AlohaJoe
Posts: 3318
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Need Input on My Early Retirement Plan.....

Post by AlohaJoe » Fri May 11, 2018 2:21 am

TargetingFI wrote:
Thu May 10, 2018 8:16 pm
2) Having three years of living expenses in cash protect us, in large measure, from sequence of return risk
3 years of living expenses in cash doesn't really protect you from sequence of return risk. But if it helps you sleep better at night I guess it won't hurt given your massive portfolio.
3) The three years of cash will be consistent for the first 6-8 years of retirement, as we’ll slowly replenish the funds by selling small portions of our mutual funds
I don't understand your plan for selling mutual funds to cash. If you only sell a small amount every year, then you won't have a consistent 3 years of cash for the first 6-8 years. You need to sell a lot every year. $50,000 or so. I suppose you could bunch it up. Some arbitrary "sell a lot when the market does good" thing. (Yay for market timing!) But then doesn't that mess up your plan for ACA subsidies?

You're talking about an approximately 2% withdrawal rate. So long as have healthcare sorted out, no matter what you do -- cash buffer or no cash buffer, pay cash for the house or finance it, etc -- you will be fine.

cherijoh
Posts: 4770
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Need Input on My Early Retirement Plan.....

Post by cherijoh » Fri May 11, 2018 6:19 am

IMO, you shouldn't plan on the ACA and significant subsidies being available for the entire period until you and your spouse hit 65 and Medicare. Also since you mentioned moving to another state, be sure and check out the status of their healthcare exchange. I don't want to get this thread locked by veering into politics, so I'll simply say that there are significant state-to-state differences and states that have lower costs of living generally have fewer ACA options.

I agree with others that you should probably purchase your house in cash to keep the amount you will need to pull annually from your nest egg down -of course if the stock market tanks, you may need to have a plan B. Since buying a house with cash may mean a high tax bill in the year you retire, you might want to consider doing COBRA for health insurance initially - that is almost sure to cost you less than an unsubsidized health plan on the open market.

bradpevans
Posts: 156
Joined: Sun Apr 08, 2018 1:09 pm

Re: Need Input on My Early Retirement Plan.....

Post by bradpevans » Fri May 11, 2018 6:23 am

If you can "ordinary income poor" your taxes will be low.

In your *taxable* accounts, you may wish to break down the balance into
basis and gains.

For instance, if you withdraw 100,000 but the basis is 80,000, then:
You get to live on 100,000. The 20,000 cap gains hit would be zero since your "ordinary income" is zero.

Your situation may not exactly fit but see: https://www.gocurrycracker.com/never-pay-taxes-again/

jebmke
Posts: 7897
Joined: Thu Apr 05, 2007 2:44 pm

Re: Need Input on My Early Retirement Plan.....

Post by jebmke » Fri May 11, 2018 6:41 am

Watty wrote:
Thu May 10, 2018 10:21 pm
Many people find that it makes sense to structure their income to be able to do Roth conversions and take capital gains in a low tax bracket before they start Social Security. The problem with having a mortgage is that you would somehow have to generate the income to make the mortgage payment and that use up a lot of your space in low tax brackets.
Plus, with the standard deduction jumping up in 2018 and beyond, some may find that the interest on the mortgage is no longer deductible.
When you discover that you are riding a dead horse, the best strategy is to dismount.

TargetingFI
Posts: 14
Joined: Sat Mar 10, 2018 1:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by TargetingFI » Sat May 12, 2018 6:20 pm

AlohaJoe wrote:
Fri May 11, 2018 2:21 am
TargetingFI wrote:
Thu May 10, 2018 8:16 pm
2) Having three years of living expenses in cash protect us, in large measure, from sequence of return risk
3 years of living expenses in cash doesn't really protect you from sequence of return risk. But if it helps you sleep better at night I guess it won't hurt given your massive portfolio.
3) The three years of cash will be consistent for the first 6-8 years of retirement, as we’ll slowly replenish the funds by selling small portions of our mutual funds
I don't understand your plan for selling mutual funds to cash. If you only sell a small amount every year, then you won't have a consistent 3 years of cash for the first 6-8 years. You need to sell a lot every year. $50,000 or so. I suppose you could bunch it up. Some arbitrary "sell a lot when the market does good" thing. (Yay for market timing!) But then doesn't that mess up your plan for ACA subsidies?

You're talking about an approximately 2% withdrawal rate. So long as have healthcare sorted out, no matter what you do -- cash buffer or no cash buffer, pay cash for the house or finance it, etc -- you will be fine.
Thanks for the helpful feedback. In regard to sequence of returns, three years seems to be a decent cushion, no? Of course, if we hit, say, a 5-7 year bear market we're in trouble.

TargetingFI
Posts: 14
Joined: Sat Mar 10, 2018 1:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by TargetingFI » Sat May 12, 2018 6:31 pm

delamer wrote:
Thu May 10, 2018 9:22 pm
Why not pay cash for the house?

It would only take about 10% of your assets and it would reduce your expenses. Your remaining assets would probably throw off enough income to cover your annual expenses (assuming around $60K).
All my stock funds have appreciated, so I'd be dealing with a large capital gains tax in order to pay all cash. On the flip side, I'm wondering if there are ways to keep my ordinary income within the two lower tax brackets in my initial years of retirement (am looking more into this). If so, I'll pay zero taxes on my capital gains during that time.

On a separate note, and fyi, about half our net worth is in retirement buckets, so we won't be generating as much income versus had we had all money in post tax.

User avatar
Watty
Posts: 13439
Joined: Wed Oct 10, 2007 3:55 pm

Re: Need Input on My Early Retirement Plan.....

Post by Watty » Sat May 12, 2018 6:33 pm

TargetingFI wrote:
Sat May 12, 2018 6:20 pm
Of course, if we hit, say, a 5-7 year bear market we're in trouble.
If you pay cash for the house then you would start with $3 million in investments and you will eventually get Social Security too.

The Vanguard 2020 fund is 55% in stocks and 40% in bonds so if the stock market drops by 50% your portfolio would be down 27.5% (half of 55%) so you would still have over $2 million.

If your expenses are anywhere near the $70K you mentioned you will be fine.

The big unknown is what healthcare will be available until you are 65 and can get under medicare but even if it is expensive you should be able to afford it.

AlohaJoe
Posts: 3318
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Need Input on My Early Retirement Plan.....

Post by AlohaJoe » Sat May 12, 2018 8:28 pm

TargetingFI wrote:
Sat May 12, 2018 6:20 pm
AlohaJoe wrote:
Fri May 11, 2018 2:21 am
TargetingFI wrote:
Thu May 10, 2018 8:16 pm
2) Having three years of living expenses in cash protect us, in large measure, from sequence of return risk
3 years of living expenses in cash doesn't really protect you from sequence of return risk. But if it helps you sleep better at night I guess it won't hurt given your massive portfolio.
3) The three years of cash will be consistent for the first 6-8 years of retirement, as we’ll slowly replenish the funds by selling small portions of our mutual funds
I don't understand your plan for selling mutual funds to cash. If you only sell a small amount every year, then you won't have a consistent 3 years of cash for the first 6-8 years. You need to sell a lot every year. $50,000 or so. I suppose you could bunch it up. Some arbitrary "sell a lot when the market does good" thing. (Yay for market timing!) But then doesn't that mess up your plan for ACA subsidies?

You're talking about an approximately 2% withdrawal rate. So long as have healthcare sorted out, no matter what you do -- cash buffer or no cash buffer, pay cash for the house or finance it, etc -- you will be fine.
Thanks for the helpful feedback. In regard to sequence of returns, three years seems to be a decent cushion, no? Of course, if we hit, say, a 5-7 year bear market we're in trouble.
No one cares about a 3 year bear market. It isn't large enough to impact a retirement. A 3 year bear market isn't the kind of thing that causes sequence of returns risk. So you're protecting yourself from something that doesn't affect you anyway. Sequence of returns risk is things like the 1966-1982 bear market.

Research has shown that a three year cash buffer increases the chance of portfolio failure 19 times out of 20 (i.e. for every 1 time it increases the success rate, there are 19 times it makes the portfolio fail sooner). See "Sustainable Withdrawal rates: The Historical Evidence on Buffer Zone Strategies" for more details.

livesoft
Posts: 60976
Joined: Thu Mar 01, 2007 8:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by livesoft » Sat May 12, 2018 8:43 pm

Just saw this thread. I am early retired now and never had any cash cushion. Studies show it is a complete waste of money. It is only psychologically beneficial, but at a cost that is not worth paying.

So we have only enough cash to pay the bills for the next 2 weeks or so. Everything else is invested in a portfolio with an asset allocation of about 60/40. That makes things very simple, too.
Wiki This signature message sponsored by sscritic: Learn to fish.

delamer
Posts: 4795
Joined: Tue Feb 08, 2011 6:13 pm

Re: Need Input on My Early Retirement Plan.....

Post by delamer » Sat May 12, 2018 10:18 pm

TargetingFI wrote:
Sat May 12, 2018 6:31 pm
delamer wrote:
Thu May 10, 2018 9:22 pm
Why not pay cash for the house?

It would only take about 10% of your assets and it would reduce your expenses. Your remaining assets would probably throw off enough income to cover your annual expenses (assuming around $60K).
All my stock funds have appreciated, so I'd be dealing with a large capital gains tax in order to pay all cash. On the flip side, I'm wondering if there are ways to keep my ordinary income within the two lower tax brackets in my initial years of retirement (am looking more into this). If so, I'll pay zero taxes on my capital gains during that time.

On a separate note, and fyi, about half our net worth is in retirement buckets, so we won't be generating as much income versus had we had all money in post tax.

The point is that if you re-target the cash you are currently saving for 3 years of expenses toward paying for the house, then you can use the income thrown off by your portfolio to pay your expenses. The income willl be generated regardless of whether it comes from taxable or tax-deferred; the difference is the tax rate. There is no need to sell any stock funds and pay capital gains.

We don’t know enough about where your assets are held to determine if the above plan will be a problem for ObamaCare subsidies. But you will need to withdraw less with no mortgage, so that needs to be a factor in your planning. And, obviously, lots of things might change in 2 years.

marcopolo
Posts: 760
Joined: Sat Dec 03, 2016 10:22 am

Re: Need Input on My Early Retirement Plan.....

Post by marcopolo » Sun May 13, 2018 1:20 pm

delamer wrote:
Sat May 12, 2018 10:18 pm
TargetingFI wrote:
Sat May 12, 2018 6:31 pm
delamer wrote:
Thu May 10, 2018 9:22 pm
Why not pay cash for the house?

It would only take about 10% of your assets and it would reduce your expenses. Your remaining assets would probably throw off enough income to cover your annual expenses (assuming around $60K).
All my stock funds have appreciated, so I'd be dealing with a large capital gains tax in order to pay all cash. On the flip side, I'm wondering if there are ways to keep my ordinary income within the two lower tax brackets in my initial years of retirement (am looking more into this). If so, I'll pay zero taxes on my capital gains during that time.

On a separate note, and fyi, about half our net worth is in retirement buckets, so we won't be generating as much income versus had we had all money in post tax.

The point is that if you re-target the cash you are currently saving for 3 years of expenses toward paying for the house, then you can use the income thrown off by your portfolio to pay your expenses. The income willl be generated regardless of whether it comes from taxable or tax-deferred; the difference is the tax rate. There is no need to sell any stock funds and pay capital gains.

We don’t know enough about where your assets are held to determine if the above plan will be a problem for ObamaCare subsidies. But you will need to withdraw less with no mortgage, so that needs to be a factor in your planning. And, obviously, lots of things might change in 2 years.

I would second this. I see no reason to hold several years in cash while carrying a mortgage, especially if you are trying to stay under ACA cliff. You want to reduce yearly expenses, as that is likely to also reduce MAGI.

Also, as Livesoft stated above, several studies have shown that having a "cash cushion" really does not help with sequence-of-return problem, and it comes at a cost.
Once in a while you get shown the light, in the strangest of places if you look at it right.

sparky123
Posts: 13
Joined: Mon Nov 20, 2017 9:14 am

Re: Need Input on My Early Retirement Plan.....

Post by sparky123 » Sun May 13, 2018 2:03 pm

I am in a similar position. I plan to get Cobra for 18 months, and transfer some of my taxable funds to similar taxable funds to step up the basis. (There will be some taxes to pay.) Then I can live off those funds after Cobra expires and ACA starts.
Think about minimizing taxes over your entire retirement.
Here is an interesting strategy:
https://www.kitces.com/blog/tax-efficie ... ing-needs/

aristotelian
Posts: 4136
Joined: Wed Jan 11, 2017 8:05 pm

Re: Need Input on My Early Retirement Plan.....

Post by aristotelian » Mon May 14, 2018 8:18 am

I am confused. How much money do you have now?

Do you have bonds? If you have bonds, why would you carry a mortgage in retirement? They are just canceling one another out.

What do you mean that you are "working on" saving cash? Why not simply sell some of your stocks while the market is high?

Most people should be able to retire comfortably on $3M. Is there some reason you are concerned?

JoeRetire
Posts: 877
Joined: Tue Jan 16, 2018 2:44 pm

Re: Need Input on My Early Retirement Plan.....

Post by JoeRetire » Mon May 14, 2018 8:27 am

AlohaJoe wrote:
Fri May 11, 2018 2:21 am
3 years of living expenses in cash doesn't really protect you from sequence of return risk.
It will protect the OP from a sequence of return risk that lasts 3 years or less - which is the vast majority of significant downturn scenarios.

wolf359
Posts: 1244
Joined: Sun Mar 15, 2015 8:47 am

Re: Need Input on My Early Retirement Plan.....

Post by wolf359 » Mon May 14, 2018 11:09 am

I've been reading this thread with interest. I am in planning stages myself, but I was also considering a 3 year cash buffer. I want to do some additional pondering over that after hearing some of the reactions. However, there is this thread from 2008 viewtopic.php?f=10&t=25126 which is why I originally considered that cash buffer.

In accumulation, I minimize my cash holdings. After retirement... I don't know.

For what it's worth, make sure you have a Plan B in case ObamaCare is changed in the next 15 years. Politics cannot be predicted. My Plan B is to have my mortgage paid off so that the cash flow for that is available to pay unsubsidized insurance premiums.

wrongfunds
Posts: 1687
Joined: Tue Dec 21, 2010 3:55 pm

Re: Need Input on My Early Retirement Plan.....

Post by wrongfunds » Mon May 14, 2018 2:16 pm

Suppose you estimate your expenses to be $100K per year and keep $300K in cash at start of retirement. If the market takes a tumble after your retirement, do you really believe that you will just spend that $100K without giving a second thought?

michaeljc70
Posts: 2846
Joined: Thu Oct 15, 2015 3:53 pm

Re: Need Input on My Early Retirement Plan.....

Post by michaeljc70 » Tue May 15, 2018 6:19 pm

I agree with the other posts about paying cash for the house. To have that kind of NW and get a mortgage doesn't make sense to me. I didn't see your AA. Keeping all that cash around seems like a waste to me. Why not keep it in bonds? I could only see it if you had a very high allocation in stocks and didn't want bonds for some reason, but then I'd do a CD ladder.

DeerRunner
Posts: 61
Joined: Tue Jun 09, 2009 3:57 pm

Re: Need Input on My Early Retirement Plan.....

Post by DeerRunner » Wed May 16, 2018 9:45 am

When forecasting don't forget to factor inflation into your monthly draw. Clearly this won't be an issue with your estimated annual draw in todays dollars ($70k) against your portfolio (>$3mil).

I just don't see the point of getting a mortgage. Do you think the interest you'll make with investments will be more than the cost of the interest on a loan?

TargetingFI
Posts: 14
Joined: Sat Mar 10, 2018 1:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by TargetingFI » Wed May 16, 2018 1:49 pm

AlohaJoe wrote:
Sat May 12, 2018 8:28 pm
TargetingFI wrote:
Sat May 12, 2018 6:20 pm
AlohaJoe wrote:
Fri May 11, 2018 2:21 am
TargetingFI wrote:
Thu May 10, 2018 8:16 pm
2) Having three years of living expenses in cash protect us, in large measure, from sequence of return risk
3 years of living expenses in cash doesn't really protect you from sequence of return risk. But if it helps you sleep better at night I guess it won't hurt given your massive portfolio.
3) The three years of cash will be consistent for the first 6-8 years of retirement, as we’ll slowly replenish the funds by selling small portions of our mutual funds
I don't understand your plan for selling mutual funds to cash. If you only sell a small amount every year, then you won't have a consistent 3 years of cash for the first 6-8 years. You need to sell a lot every year. $50,000 or so. I suppose you could bunch it up. Some arbitrary "sell a lot when the market does good" thing. (Yay for market timing!) But then doesn't that mess up your plan for ACA subsidies?

You're talking about an approximately 2% withdrawal rate. So long as have healthcare sorted out, no matter what you do -- cash buffer or no cash buffer, pay cash for the house or finance it, etc -- you will be fine.
Thanks for the helpful feedback. In regard to sequence of returns, three years seems to be a decent cushion, no? Of course, if we hit, say, a 5-7 year bear market we're in trouble.
No one cares about a 3 year bear market. It isn't large enough to impact a retirement. A 3 year bear market isn't the kind of thing that causes sequence of returns risk. So you're protecting yourself from something that doesn't affect you anyway. Sequence of returns risk is things like the 1966-1982 bear market.

Research has shown that a three year cash buffer increases the chance of portfolio failure 19 times out of 20 (i.e. for every 1 time it increases the success rate, there are 19 times it makes the portfolio fail sooner). See "Sustainable Withdrawal rates: The Historical Evidence on Buffer Zone Strategies" for more details.
Thanks. I'll do some reading on this.

TargetingFI
Posts: 14
Joined: Sat Mar 10, 2018 1:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by TargetingFI » Wed May 16, 2018 2:03 pm

livesoft wrote:
Sat May 12, 2018 8:43 pm
Just saw this thread. I am early retired now and never had any cash cushion. Studies show it is a complete waste of money. It is only psychologically beneficial, but at a cost that is not worth paying.

So we have only enough cash to pay the bills for the next 2 weeks or so. Everything else is invested in a portfolio with an asset allocation of about 60/40. That makes things very simple, too.
Thanks for the input. The stock market has been very bullish for close to 10 years now, so I'm assuming this has, fortunately, turned out very well for you. That said, how would you handle a bear market than spans, say, a number of years? Would you be OK selling assets that have depreciated, for example, 30% or more?

Also, am wondering how long you've been early retired? Sequence of return risks, of course, greatly decrease as you move on in your retirement.

livesoft
Posts: 60976
Joined: Thu Mar 01, 2007 8:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by livesoft » Wed May 16, 2018 2:06 pm

TargetingFI wrote:
Wed May 16, 2018 2:03 pm
livesoft wrote:
Sat May 12, 2018 8:43 pm
Just saw this thread. I am early retired now and never had any cash cushion. Studies show it is a complete waste of money. It is only psychologically beneficial, but at a cost that is not worth paying.

So we have only enough cash to pay the bills for the next 2 weeks or so. Everything else is invested in a portfolio with an asset allocation of about 60/40. That makes things very simple, too.
Thanks for the input. The stock market has been very bullish for close to 10 years now, so I'm assuming this has, fortunately, turned out very well for you. That said, how would you handle a bear market than spans, say, a number of years? Would you be OK selling assets that have depreciated, for example, 30% or more?

Also, am wondering how long you've been early retired? Sequence of return risks, of course, greatly decrease as you move on in your retirement.
Of course, I would be selling and rebalancing. Do you remember that the 30 years from 1980 to 2010 that bonds outperformed stocks? If my bond funds dropped 30% or more, then I would be totally surprised as would everyone else.

I semi-retired 10 years ago and fully retired 3 years ago.
Wiki This signature message sponsored by sscritic: Learn to fish.

michaeljc70
Posts: 2846
Joined: Thu Oct 15, 2015 3:53 pm

Re: Need Input on My Early Retirement Plan.....

Post by michaeljc70 » Wed May 16, 2018 2:16 pm

TargetingFI wrote:
Wed May 16, 2018 2:03 pm
livesoft wrote:
Sat May 12, 2018 8:43 pm
Just saw this thread. I am early retired now and never had any cash cushion. Studies show it is a complete waste of money. It is only psychologically beneficial, but at a cost that is not worth paying.

So we have only enough cash to pay the bills for the next 2 weeks or so. Everything else is invested in a portfolio with an asset allocation of about 60/40. That makes things very simple, too.
Thanks for the input. The stock market has been very bullish for close to 10 years now, so I'm assuming this has, fortunately, turned out very well for you. That said, how would you handle a bear market than spans, say, a number of years? Would you be OK selling assets that have depreciated, for example, 30% or more?

Also, am wondering how long you've been early retired? Sequence of return risks, of course, greatly decrease as you move on in your retirement.
If you have 60/40 that means 40% in fixed income. If you had 25x annual expenses, that means you have 10 years of expenses in fixed income. You can sell that and not stuff that went down.

TargetingFI
Posts: 14
Joined: Sat Mar 10, 2018 1:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by TargetingFI » Wed May 16, 2018 2:18 pm

aristotelian wrote:
Mon May 14, 2018 8:18 am
I am confused. How much money do you have now?

Do you have bonds? If you have bonds, why would you carry a mortgage in retirement? They are just canceling one another out.

What do you mean that you are "working on" saving cash? Why not simply sell some of your stocks while the market is high?

Most people should be able to retire comfortably on $3M. Is there some reason you are concerned?
To answer your questions, we're close to $2.9mn now. My wife and I are still working and maxing our our retirement accounts. The money left over normally would go into taxable investment accounts. However, since we're looking to buy a house in two years we're now taking the surplus and putting it into high-yielding online banking accounts. Our portfolio is about 75% stock with the rest generally being invested in bonds and cash.

I don't understand your point about having bonds and that specific relationship to whether to carry a mortgage or not. Can you please elaborate?

delamer
Posts: 4795
Joined: Tue Feb 08, 2011 6:13 pm

Re: Need Input on My Early Retirement Plan.....

Post by delamer » Wed May 16, 2018 2:22 pm

michaeljc70 wrote:
Wed May 16, 2018 2:16 pm
TargetingFI wrote:
Wed May 16, 2018 2:03 pm
livesoft wrote:
Sat May 12, 2018 8:43 pm
Just saw this thread. I am early retired now and never had any cash cushion. Studies show it is a complete waste of money. It is only psychologically beneficial, but at a cost that is not worth paying.

So we have only enough cash to pay the bills for the next 2 weeks or so. Everything else is invested in a portfolio with an asset allocation of about 60/40. That makes things very simple, too.
Thanks for the input. The stock market has been very bullish for close to 10 years now, so I'm assuming this has, fortunately, turned out very well for you. That said, how would you handle a bear market than spans, say, a number of years? Would you be OK selling assets that have depreciated, for example, 30% or more?

Also, am wondering how long you've been early retired? Sequence of return risks, of course, greatly decrease as you move on in your retirement.
If you have 60/40 that means 40% in fixed income. If you had 25x annual expenses, that means you have 10 years of expenses in fixed income. You can sell that and not stuff that went down.
Bond values can go down too, and at the same time as stocks.

TargetingFI
Posts: 14
Joined: Sat Mar 10, 2018 1:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by TargetingFI » Wed May 16, 2018 2:34 pm

michaeljc70 wrote:
Tue May 15, 2018 6:19 pm
I agree with the other posts about paying cash for the house. To have that kind of NW and get a mortgage doesn't make sense to me. I didn't see your AA. Keeping all that cash around seems like a waste to me. Why not keep it in bonds? I could only see it if you had a very high allocation in stocks and didn't want bonds for some reason, but then I'd do a CD ladder.
Thanks for your insight. Yes, we are rather over weighted in stocks right now (75%) and, with interest rates rising, I'm a tad more comfortable putting this excess money in high-yielding bank accounts versus bond funds. I like the ideal and have considered CD ladders, though, and might go that route. Once interest rates stabilize, I'll probably put some more cash into bonds. Being the plan is to retire in two years, I won't be making money and investing additional funds for much longer, though.

TargetingFI
Posts: 14
Joined: Sat Mar 10, 2018 1:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by TargetingFI » Wed May 16, 2018 2:35 pm

delamer wrote:
Wed May 16, 2018 2:22 pm
michaeljc70 wrote:
Wed May 16, 2018 2:16 pm
TargetingFI wrote:
Wed May 16, 2018 2:03 pm
livesoft wrote:
Sat May 12, 2018 8:43 pm
Just saw this thread. I am early retired now and never had any cash cushion. Studies show it is a complete waste of money. It is only psychologically beneficial, but at a cost that is not worth paying.

So we have only enough cash to pay the bills for the next 2 weeks or so. Everything else is invested in a portfolio with an asset allocation of about 60/40. That makes things very simple, too.
Thanks for the input. The stock market has been very bullish for close to 10 years now, so I'm assuming this has, fortunately, turned out very well for you. That said, how would you handle a bear market than spans, say, a number of years? Would you be OK selling assets that have depreciated, for example, 30% or more?

Also, am wondering how long you've been early retired? Sequence of return risks, of course, greatly decrease as you move on in your retirement.
If you have 60/40 that means 40% in fixed income. If you had 25x annual expenses, that means you have 10 years of expenses in fixed income. You can sell that and not stuff that went down.
Bond values can go down too, and at the same time as stocks.
Yes, and we saw that during the Great Recession.

michaeljc70
Posts: 2846
Joined: Thu Oct 15, 2015 3:53 pm

Re: Need Input on My Early Retirement Plan.....

Post by michaeljc70 » Wed May 16, 2018 2:39 pm

delamer wrote:
Wed May 16, 2018 2:22 pm
michaeljc70 wrote:
Wed May 16, 2018 2:16 pm
TargetingFI wrote:
Wed May 16, 2018 2:03 pm
livesoft wrote:
Sat May 12, 2018 8:43 pm
Just saw this thread. I am early retired now and never had any cash cushion. Studies show it is a complete waste of money. It is only psychologically beneficial, but at a cost that is not worth paying.

So we have only enough cash to pay the bills for the next 2 weeks or so. Everything else is invested in a portfolio with an asset allocation of about 60/40. That makes things very simple, too.
Thanks for the input. The stock market has been very bullish for close to 10 years now, so I'm assuming this has, fortunately, turned out very well for you. That said, how would you handle a bear market than spans, say, a number of years? Would you be OK selling assets that have depreciated, for example, 30% or more?

Also, am wondering how long you've been early retired? Sequence of return risks, of course, greatly decrease as you move on in your retirement.
If you have 60/40 that means 40% in fixed income. If you had 25x annual expenses, that means you have 10 years of expenses in fixed income. You can sell that and not stuff that went down.
Bond values can go down too, and at the same time as stocks.
Fixed income does not necessarily mean bonds. It could be CDs. What was the longest period stocks and bonds both went down? I am counting 5 individual years from 1926-2015 where both stocks and bonds went down. And none were consecutive.

michaeljc70
Posts: 2846
Joined: Thu Oct 15, 2015 3:53 pm

Re: Need Input on My Early Retirement Plan.....

Post by michaeljc70 » Wed May 16, 2018 2:41 pm

TargetingFI wrote:
Wed May 16, 2018 2:35 pm
delamer wrote:
Wed May 16, 2018 2:22 pm
michaeljc70 wrote:
Wed May 16, 2018 2:16 pm
TargetingFI wrote:
Wed May 16, 2018 2:03 pm
livesoft wrote:
Sat May 12, 2018 8:43 pm
Just saw this thread. I am early retired now and never had any cash cushion. Studies show it is a complete waste of money. It is only psychologically beneficial, but at a cost that is not worth paying.

So we have only enough cash to pay the bills for the next 2 weeks or so. Everything else is invested in a portfolio with an asset allocation of about 60/40. That makes things very simple, too.
Thanks for the input. The stock market has been very bullish for close to 10 years now, so I'm assuming this has, fortunately, turned out very well for you. That said, how would you handle a bear market than spans, say, a number of years? Would you be OK selling assets that have depreciated, for example, 30% or more?

Also, am wondering how long you've been early retired? Sequence of return risks, of course, greatly decrease as you move on in your retirement.
If you have 60/40 that means 40% in fixed income. If you had 25x annual expenses, that means you have 10 years of expenses in fixed income. You can sell that and not stuff that went down.
Bond values can go down too, and at the same time as stocks.
Yes, and we saw that during the Great Recession.
I didn't see that in the great recession where both went down in the same year. Bonds went down one year. Sort of. The recession ended in 2009 and bonds went down that year. Stocks went down 1 year. And the year stocks went down bonds went up 20%. The year bonds went down stocks went up 26%. It seemed much worse than it actually was from a stock/bond perspective.

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html
Last edited by michaeljc70 on Wed May 16, 2018 3:47 pm, edited 4 times in total.

rgs92
Posts: 1900
Joined: Mon Mar 02, 2009 8:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by rgs92 » Wed May 16, 2018 2:44 pm

I would start by putting a million dollars in a fixed annuity (joint).

delamer
Posts: 4795
Joined: Tue Feb 08, 2011 6:13 pm

Re: Need Input on My Early Retirement Plan.....

Post by delamer » Wed May 16, 2018 2:56 pm

michaeljc70 wrote:
Wed May 16, 2018 2:39 pm
delamer wrote:
Wed May 16, 2018 2:22 pm
michaeljc70 wrote:
Wed May 16, 2018 2:16 pm
TargetingFI wrote:
Wed May 16, 2018 2:03 pm
livesoft wrote:
Sat May 12, 2018 8:43 pm
Just saw this thread. I am early retired now and never had any cash cushion. Studies show it is a complete waste of money. It is only psychologically beneficial, but at a cost that is not worth paying.

So we have only enough cash to pay the bills for the next 2 weeks or so. Everything else is invested in a portfolio with an asset allocation of about 60/40. That makes things very simple, too.
Thanks for the input. The stock market has been very bullish for close to 10 years now, so I'm assuming this has, fortunately, turned out very well for you. That said, how would you handle a bear market than spans, say, a number of years? Would you be OK selling assets that have depreciated, for example, 30% or more?

Also, am wondering how long you've been early retired? Sequence of return risks, of course, greatly decrease as you move on in your retirement.
If you have 60/40 that means 40% in fixed income. If you had 25x annual expenses, that means you have 10 years of expenses in fixed income. You can sell that and not stuff that went down.
Bond values can go down too, and at the same time as stocks.
Fixed income does not necessarily mean bonds. It could be CDs. What was the longest period stocks and bonds both went down? I am counting 5 individual years from 1926-2015 where both stocks and bonds went down. And none were consecutive.
You are correct about the CDs.

My general point was that, regardless of past performance, having bonds does not guarantee that you won’t need to sell assets that have fallen in value. (Of course, fallen relative to what? I track my portfolio compared to its peak value, but I am not withdrawing yet.)

Just like stocks, not all bonds perform in the same way at the same time. Someone holding a US government bond fund is not going to have the same performance as someone holding a junk bond fund.

aristotelian
Posts: 4136
Joined: Wed Jan 11, 2017 8:05 pm

Re: Need Input on My Early Retirement Plan.....

Post by aristotelian » Wed May 16, 2018 3:02 pm

TargetingFI wrote:
Wed May 16, 2018 2:18 pm

To answer your questions, we're close to $2.9mn now. My wife and I are still working and maxing our our retirement accounts. The money left over normally would go into taxable investment accounts. However, since we're looking to buy a house in two years we're now taking the surplus and putting it into high-yielding online banking accounts. Our portfolio is about 75% stock with the rest generally being invested in bonds and cash.

I don't understand your point about having bonds and that specific relationship to whether to carry a mortgage or not. Can you please elaborate?
Mortgage is a negative bond. If you have a $100K mortgage at 4% and $200K in bonds at 3%, you could also pay off the mortgage and have $100K in bonds at 3%. Generally, the reason to have a mortgage is to leverage your ability to invest in stocks. If you are using debt to invest in bonds, you are getting no net benefit and in fact probably losing interest to the bank.

TargetingFI
Posts: 14
Joined: Sat Mar 10, 2018 1:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by TargetingFI » Wed May 16, 2018 3:44 pm

delamer wrote:
Wed May 16, 2018 2:56 pm
michaeljc70 wrote:
Wed May 16, 2018 2:39 pm
delamer wrote:
Wed May 16, 2018 2:22 pm
michaeljc70 wrote:
Wed May 16, 2018 2:16 pm
TargetingFI wrote:
Wed May 16, 2018 2:03 pm


Thanks for the input. The stock market has been very bullish for close to 10 years now, so I'm assuming this has, fortunately, turned out very well for you. That said, how would you handle a bear market than spans, say, a number of years? Would you be OK selling assets that have depreciated, for example, 30% or more?

Also, am wondering how long you've been early retired? Sequence of return risks, of course, greatly decrease as you move on in your retirement.
If you have 60/40 that means 40% in fixed income. If you had 25x annual expenses, that means you have 10 years of expenses in fixed income. You can sell that and not stuff that went down.
Bond values can go down too, and at the same time as stocks.
Fixed income does not necessarily mean bonds. It could be CDs. What was the longest period stocks and bonds both went down? I am counting 5 individual years from 1926-2015 where both stocks and bonds went down. And none were consecutive.
You are correct about the CDs.

My general point was that, regardless of past performance, having bonds does not guarantee that you won’t need to sell assets that have fallen in value. (Of course, fallen relative to what? I track my portfolio compared to its peak value, but I am not withdrawing yet.)

Just like stocks, not all bonds perform in the same way at the same time. Someone holding a US government bond fund is not going to have the same performance as someone holding a junk bond fund.
Yes, these are good points and that's why I'm thinking about having 3 years in cash (probably a combination of CDs and a high-yielding bank account). Yes, it's somewhat conservative. However, it helps balances out the overall risk of our portfolio, which is about 75% stock.

texas lawdog
Posts: 75
Joined: Tue Jun 07, 2016 5:33 pm

Re: Need Input on My Early Retirement Plan.....

Post by texas lawdog » Wed May 16, 2018 3:46 pm

I see some value in not having a large negative cash outlay (-$380K) right at the beginning of retirement - as it sounds like OP wants to have some cash flexibility. However, given your situation it would probably be best to pay cash for the house rather than keep 3 years in cash.

If you are seeking short term cash flexibility you might want to pay cash for the house and seek out a HELOC

TargetingFI
Posts: 14
Joined: Sat Mar 10, 2018 1:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by TargetingFI » Wed May 16, 2018 3:48 pm

aristotelian wrote:
Wed May 16, 2018 3:02 pm
TargetingFI wrote:
Wed May 16, 2018 2:18 pm

To answer your questions, we're close to $2.9mn now. My wife and I are still working and maxing our our retirement accounts. The money left over normally would go into taxable investment accounts. However, since we're looking to buy a house in two years we're now taking the surplus and putting it into high-yielding online banking accounts. Our portfolio is about 75% stock with the rest generally being invested in bonds and cash.

I don't understand your point about having bonds and that specific relationship to whether to carry a mortgage or not. Can you please elaborate?
Mortgage is a negative bond. If you have a $100K mortgage at 4% and $200K in bonds at 3%, you could also pay off the mortgage and have $100K in bonds at 3%. Generally, the reason to have a mortgage is to leverage your ability to invest in stocks. If you are using debt to invest in bonds, you are getting no net benefit and in fact probably losing interest to the bank.
Yes, makes sense. Outside of cash for 3 years of living expenses (if we go that route), any money not used for the mortgage would remain in stocks.

aristotelian
Posts: 4136
Joined: Wed Jan 11, 2017 8:05 pm

Re: Need Input on My Early Retirement Plan.....

Post by aristotelian » Wed May 16, 2018 3:55 pm

TargetingFI wrote:
Wed May 16, 2018 3:48 pm

Yes, makes sense. Outside of cash for 3 years of living expenses (if we go that route), any money not used for the mortgage would remain in stocks.
Why would you carry a mortgage at all with a $3M portfolio? You are trying to leverage debt to invest in stocks? I don't think that makes much sense in a retirement scenario, even ER. If you are going to leverage the mortgage, why would you then try to pay it off in 8-10 years? I am still confused by your plan, although with $3M it probably doesn't matter what you do.

TargetingFI
Posts: 14
Joined: Sat Mar 10, 2018 1:00 pm

Re: Need Input on My Early Retirement Plan.....

Post by TargetingFI » Wed May 16, 2018 4:20 pm

aristotelian wrote:
Wed May 16, 2018 3:55 pm
TargetingFI wrote:
Wed May 16, 2018 3:48 pm

Yes, makes sense. Outside of cash for 3 years of living expenses (if we go that route), any money not used for the mortgage would remain in stocks.
Why would you carry a mortgage at all with a $3M portfolio? You are trying to leverage debt to invest in stocks? I don't think that makes much sense in a retirement scenario, even ER. If you are going to leverage the mortgage, why would you then try to pay it off in 8-10 years? I am still confused by your plan, although with $3M it probably doesn't matter what you do.
Thanks for your feedback. I'm trying to accomplish a couple of things. The main thing is to limit the amount of capital gains tax we pay in the year we retire (currently in the 24% bracket). Paying the house in cash would trigger a legitimate amount of capital gains. However, as income will be limited in retirement (only dividends, interest and capital gains from index funds), we should be able to fall within the 10 or 12% tax brackets. As such, we can then slowly sell pieces of funds and not accrue any capital gains tax because of our tax bracket. Does this make sense?

I feel there are pros and cons for each case, so I really appreciate the diversity of opinions here.

malbecman
Posts: 69
Joined: Fri Aug 05, 2016 4:49 pm
Location: CA

Re: Need Input on My Early Retirement Plan.....

Post by malbecman » Wed May 16, 2018 5:02 pm

You mention buying a new car for 25K. Do you have future allocations for cars in 5 or 10 years or do you fund that out of your 70K living expense (eg, set aside 2.5K/yr for ten years)?

I point this out as 25K is ~0.8% of your net worth so not a huge expense but something to consider.

aristotelian
Posts: 4136
Joined: Wed Jan 11, 2017 8:05 pm

Re: Need Input on My Early Retirement Plan.....

Post by aristotelian » Wed May 16, 2018 5:40 pm

TargetingFI wrote:
Wed May 16, 2018 4:20 pm
aristotelian wrote:
Wed May 16, 2018 3:55 pm
TargetingFI wrote:
Wed May 16, 2018 3:48 pm

Yes, makes sense. Outside of cash for 3 years of living expenses (if we go that route), any money not used for the mortgage would remain in stocks.
Why would you carry a mortgage at all with a $3M portfolio? You are trying to leverage debt to invest in stocks? I don't think that makes much sense in a retirement scenario, even ER. If you are going to leverage the mortgage, why would you then try to pay it off in 8-10 years? I am still confused by your plan, although with $3M it probably doesn't matter what you do.
Thanks for your feedback. I'm trying to accomplish a couple of things. The main thing is to limit the amount of capital gains tax we pay in the year we retire (currently in the 24% bracket). Paying the house in cash would trigger a legitimate amount of capital gains. However, as income will be limited in retirement (only dividends, interest and capital gains from index funds), we should be able to fall within the 10 or 12% tax brackets. As such, we can then slowly sell pieces of funds and not accrue any capital gains tax because of our tax bracket. Does this make sense?

I feel there are pros and cons for each case, so I really appreciate the diversity of opinions here.
That does make sense, yes.

JoeRetire
Posts: 877
Joined: Tue Jan 16, 2018 2:44 pm

Re: Need Input on My Early Retirement Plan.....

Post by JoeRetire » Wed May 16, 2018 5:50 pm

wolf359 wrote:
Mon May 14, 2018 11:09 am
For what it's worth, make sure you have a Plan B in case ObamaCare is changed in the next 15 years. Politics cannot be predicted. My Plan B is to have my mortgage paid off so that the cash flow for that is available to pay unsubsidized insurance premiums.
Sounds like your idea of "changed" involves having to pay significant unsubsidized insurance premiums.

If I were anticipating that, I would just save the money rather than paying off the mortgage. The saved money could then be used to help pay the higher premiums.

And since politics cannot be predicted, maybe we need Plans C through Z as well, since anything can change, not just healthcare...

wolf359
Posts: 1244
Joined: Sun Mar 15, 2015 8:47 am

Re: Need Input on My Early Retirement Plan.....

Post by wolf359 » Thu May 17, 2018 2:10 pm

JoeRetire wrote:
Wed May 16, 2018 5:50 pm
wolf359 wrote:
Mon May 14, 2018 11:09 am
For what it's worth, make sure you have a Plan B in case ObamaCare is changed in the next 15 years. Politics cannot be predicted. My Plan B is to have my mortgage paid off so that the cash flow for that is available to pay unsubsidized insurance premiums.
Sounds like your idea of "changed" involves having to pay significant unsubsidized insurance premiums.

If I were anticipating that, I would just save the money rather than paying off the mortgage. The saved money could then be used to help pay the higher premiums.

And since politics cannot be predicted, maybe we need Plans C through Z as well, since anything can change, not just healthcare...
I already have sufficient funds saved to pay off the mortgage. Depending upon when I actually retire, my mortgage will be smaller and that taxable account stash should be bigger. Keeping the mortgage and paying from the stash is Plan C, but it entirely depends upon how much the payments are. I'd rather reduce realized income where I can, because that reduces taxes and may qualify me for subsidies.

Post Reply