Author Topic: Investing in the last year before FIRE  (Read 1054 times)

FIRE 20/20

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Investing in the last year before FIRE
« on: May 18, 2018, 12:58:19 PM »
First, a little background - I'm about 12 months out from FIRE, and will be in my early to mid 40s when I pull the plug.  I am currently at about 24.7x of planned FIRE expenses, and if the markets return 0% over the course of the year my contributions should get me to ~26.6 or a ~3.75% withdrawal rate.  I'm comfortable with that withdrawal rate because I have quite a few back-up plans in place and ready to go (2x small pensions, 2x social security, ability to cut, arrangements for consulting with my old company, not counting likely inheritance). 

I'm planning to execute a 60 -> 100% rising equities glidepath (https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/).  I am current at 60% VTSAX and 40% VBTLX or the closest equivalents in my 401(k).  I am very close to having 5 years of expenses in taxable accounts and should get there around September of this year.  My mortgage is paid off (I know...).  Right now I basically have a 60/40 split in all of my accounts, and I assume that I need to adjust that so I have the 60/40 split that I'm aiming for in my overall portfolio but within my taxable accounts I have a lower allocation to stocks with a higher stock allocation in my tax advantaged accounts. 

Questions:
1.  Where should I put my taxable "first 5 years" money?  I assume I should put it in my Vanguard brokerage account, but I'm not sure if I should put it into VBTLX or if I should put it into CDs or Treasuries, and if so if I should to it with Vanguard or somewhere else?  This is a multi-part question; where should I put the money I'm going to be adding over the next year and should I adjust the allocation I currently have in those accounts now?  They're split over vanguard brokerage funds, 2 Roths (his & hers) with Vanguard, and her company Roth 401(k) which will be moved to Vanguard in a year when she FIREs at the same time I do. 
2.  Are there any good resources for this phase of planning?  I feel like I have a solid grasp of the concepts; I can describe a Roth conversion ladder (thanks Mad Fientist!), I can describe index funds and why they're a better choice that picking stocks (thanks JLCollinsNH!), and I know the difference between a traditional and Roth IRA.  However, I am fuzzy on the specific execution details.  I'm worried that I'm going to blunder into a mistake that costs me a significant amount of money because I so far I've been focused on accumulation in index funds and cost cutting instead of the details of how to implement the ladder and withdrawals. 
3.  Any comments on any mistakes that you see here?

Thanks in advance for any input!

toganet

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Re: Investing in the last year before FIRE
« Reply #1 on: May 18, 2018, 01:14:17 PM »
First off, congratulations on being so close to the goal.  It sounds like you have prepared well and are asking the right kind of questions.

Search the forum (google is best) for "Bond Tent" and Sequence of Returns Risk (SORR).  Just prior to FIRE you may want to make some changes, but it is up to you.

ChpBstrd

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Re: Investing in the last year before FIRE
« Reply #2 on: May 18, 2018, 02:15:44 PM »
1) Your first five years' income should probably come out of taxable accounts first, and then Roths if taxable is used up. Reasons: Can't do early withdraws from traditional IRA or 401k without a penalty at your age. Roth ladder will be funded from trad. IRA or 401k.

To execute the glidepath towards a higher equity allocation, you want your taxable account to be mostly bonds so that the desired adjustment occurs as you cover living expenses. Usually, allocating dividend and interest generating assets to a taxable account is a bad idea, but with yields as low as they are I don't see the point.

Remember that the purpose of your low-yielding bonds is to provide an alternative to selling stock in the event of a correction or recession. So, in the event of a slump, you would want to apply this function and live off of proceeds from bonds until things recovered. Your AA might change when you do this, but what else would be the purpose of the insurance? Others might argue for a consistent, preplanned AA in this situation no matter what, so pick a side and make it your plan.

In general, I'd create a basic spreadsheet plan with all your accounts, their current values, and your target allocations. For each year, show from where the living expenses are withdrawn and model the effect on AA. Try a few different strategies. Create an annual instruction set for yourself to follow.

2) The biggest mistakes I can think of would be:
  (a) Withdrawing from a traditional IRA or 401k and triggering the tax penalty.
  (b) Failing to fund the Roth ladder - even for one year!
  (c) Your capital gains will be low in those first years because you are selling more bonds, which presumably have not appreciated. Don't get used to low taxes though, because when it comes time to sell more equities, capital gains will be much higher. Think this out when budgeting (past the initial years.
  (d) Thinking bonds cannot decline in value. 30 year treasuries do not count as a bond allocation for your purposes - not at these low rates. Keep the durations short - like 3-5y so you don't get burned by rising interest rates.
  (e) The usual stuff like becoming a day trader or trying to juice the 4% rule with dividend stocks, junk bonds, market timing, or other forms of risk concentration.

3) You might toy with making those first 5 years super-frugal to increase your odds of long-term success. E.g. downsize housing, hold off on big vacations, go down to 1 car, etc. After a few years, you will either be really well off or you will be aware that you retired right before the Great Crash of 2020, in which case it'll be a good thing you went the frugal path and got used to that lifestyle.

DreamFIRE

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Re: Investing in the last year before FIRE
« Reply #3 on: May 18, 2018, 07:42:52 PM »
With less than 5 years of expenses in taxable accounts, and and less than 60% of that in equities, you should easily be able to avoid long term capital gains taxes.  For a couple, you would have to have over $100,000 in AGI before you hit the 15% capital gains rate.

Depending on the state, you may have additional state income tax as a result of those gains, though.

From your questions, it sounds like your ~5 years of expenses includes Roth accounts, so there are no capital gains taxes at all with those.
« Last Edit: May 18, 2018, 07:53:12 PM by DreamFIRE »

lhamo

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Re: Investing in the last year before FIRE
« Reply #4 on: May 18, 2018, 08:39:53 PM »
What are your plans for health insurance?  If you will be doing an ACA plan, the subsidy cliffs can hit you pretty hard if you aren't extra careful with taxable income from investments + Roth conversions.  We will probably be converting quite a bit less than I had originally planned due to the extra hit we'd take on subsidies (once we are into RMD territory SS will cover most of our expenses anyway, so I'd rather take the tax hit later than now when we still have kids at home that we need to get launched in the next 5-10 years).

FIRE 20/20

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Re: Investing in the last year before FIRE
« Reply #5 on: May 21, 2018, 06:50:49 AM »
Thanks for all the inputs. 

lhamo, I need to look into my options for health insurance, and it'll depend a bit on when each of us decides to retire.  It's possible that one of us will quite earlier than the other, and we could then go on the other's insurance at work.  Or, we might work part time for all or most of 2019.  Whatever we do it's likely that we'll plan on the ACA.  Even with no subsidies (if we retire later in 2019 and have too much income) the full cost isn't too bad for just a few months.  After that I hope the ACA is still around, but we'll deal with whatever we face.  The worst case would be for one of us to go back to work part time, but I think that's unlikely. 

radram

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Re: Investing in the last year before FIRE
« Reply #6 on: May 21, 2018, 07:20:31 AM »
Thanks for all the inputs. 

lhamo, I need to look into my options for health insurance, and it'll depend a bit on when each of us decides to retire.  It's possible that one of us will quite earlier than the other, and we could then go on the other's insurance at work.  Or, we might work part time for all or most of 2019.  Whatever we do it's likely that we'll plan on the ACA.  Even with no subsidies (if we retire later in 2019 and have too much income) the full cost isn't too bad for just a few months.  After that I hope the ACA is still around, but we'll deal with whatever we face.  The worst case would be for one of us to go back to work part time, but I think that's unlikely.
What do you mean when you say paying for health insurance without any subsidies for a few months is "no big deal". You will need insurance for 20 years if you FIRE at 45.

Health insurance is a much bigger nut than a casual "yeah... we need to work that out" kind of attitude. My plan for a family of 4 is over $20,000 per year. Manageable with the subsidies, but on my list of backup plans is a move to a country with health services for its people(you know...ANY OTHER COUNTRY), as well as the Starbucks barista part time for medical buy-in plan.

Also recently added to that backup plan list is purchase of catastrophic only insurance, which should start to spring up for 2019 with the new tax law passed last year. Boy does that sentence sound ridiculous when I read it out loud.

Make sure your plan and backups are laid out before pulling the plug.

Congratulations.