My wife and I are in our mid 40s and trying to position ourselves for retirement (or semi-retirement if we wish to keep working some) in 5 to 10 years. We could retire now if we were willing to cut back some, but I'm not ready to stop working, and we'd like to have more to spend in retirement.
I'm trying to figure out an appropriate asset allocation between stocks, bonds, and real estate investments, and how to split it between taxable and tax deferred retirement accounts, along with a strategy for withdrawing during phases of retirement: before we can access retirement accounts without restrictions at 59.5 (possible roth conversion ladder or 72t), between then and 70, and after 70 when maximized social security would kick in and our spending is likely to decline somewhat. My wife is a couple years older so it will be staggered a bit, but close enough to think of it in those discreet phases for planning purposes. We don't have kids, so we're not looking to leave a large inheritance.
I have created some spreadsheets and run some scenarios through FIRECalc that give me an idea of what should be possible in general, but now I need to nail down some details.
For stocks and bonds I'm moving to a simple strategy of a few low cost index funds. I'm part owner of my company, so I was able to get us moved to a 401k plan that offers the best class of Vanguard and other funds and pay the administrative costs outside the plans. My business partner and I have been maxing out contributions including from the employer ($53K for 2015) and will likely continue to do that. My wife maximizes her employee contributions where she works and gets a partial match. Because of this we are able to save a lot in tax deferred accounts, but that makes early retirement trickier. We'll likely need to use a roth conversion ladder or 72t in our 50s to make it to 60 without having to sell the beachfront home we plan to move to in retirement (if necessary we could sell it later and "downsize", hopefully not before 70).
Our current assets are roughly:
$300K - Taxable cash/stocks
$75K - Commercial real estate, paying 7%
$750K - Retirement, tax deferred
$120K - Primary home equity
$650K - Vacation home equity, roughly covering itself through vacation rentals
In 5-7 years they could be:
$800K - Taxable cash/stocks/bonds/comm. real estate
$1.2M - Retirement, tax deferred
$200K - Primary home equity, likely to sell when we retire
$700K - Vacation home equity, move in when we retire
The growth assumes conservatively low returns on investments and keeping our current fairly high savings rate in both taxable and retirement accounts. Assume numbers are in today's dollars. I'm not counting business assets in this, since there's no guarantee there will be a buyout or continued income stream available from it. The only debt is mortgages on the two houses at low fixed rates.
Starting at 70 our combined Social Security benefit should be around $60K/y (in today's dollars) if we retire in our early 50s. Who knows how that will adjust in the next 25 years. I'm expecting it may be less, but I hope it's enough to be useful.
Notice I combined the taxable cash/stocks/bonds/commercial real estate into one amount in the 5-7 year time frame. That's because I'm not certain about the best allocation between those. We have the opportunity to continue investing in commercial real estate that pays a 7% ROI from the start and typically has projected IRRs in the 10% range with a sale around 10 years out (small fractional ownership of each property through separate LLCs). These properties should roughly keep up with inflation (possibly better) between investment and reversion in addition to paying a 7% ROI. Although they provide cash flow, they also tie up taxable money and can't be considered liquid, so we can't spend down that investment unless sales happen, which will depend on the real estate market and other factors. What I need to figure out is how much more taxable money we can tie up that way, how much of our overall portfolio should be in those investments, and how good of an investment they are in terms of risk/reward. Any thoughts on that would be appreciated.
I'm thinking of starting with a 70/30 allocation for stocks/bonds for whatever is not in real estate or a cash buffer/emergency fund (or should I consider cash part of the bond allocation?), maybe getting less aggressive by the time we retire. I'm planning for our retirement income to be above our basic needs by a good margin, so we can have fun if/when things are good (or even OK) and cut back when they aren't. That means we don't have to be too conservative with the investments, but we still need to have them arranged so we can generate the cash flow needed throughout the phases of retirement. We're hoping to have low six figures to spend to start with, tapering off some over time. Since that's not real low it means we may not have great tax rates for doing roth conversions and will have to pay taxes on some of what we draw, but less than our current marginal rate. Medical insurance probably wouldn't be subsidized. I'm looking for advice on how to best allocate these things and draw on them to have them last through the phases and minimize the tax burden given our situation. Please let me know if more detail would be useful in any particular area, and I'll provide it to the extent that I'm comfortable.
Another thing, in case it's useful - we have over $50K in passive activity losses to write off against future real estate income/gains, and about $10K in TLH generated recently.
