Bridging from planned age 45 retirement to 59.5

[theninthwall]

Hey guys, I hope someone can maybe direct me to an article or forum post, or provide advice here, about the best strategy for bridging the gap from age 45 planned retirement to 59.5?

We are concentrating on growing our brokerage account to $1m with a total net worth of $2m set as our number for retirement. Using the 4% rule that net worth would in theory mean $80k per year is our safe withdrawal rate, but I’m worried that it would put too much pressure on our brokerage account.

Our current net worth is $1.15m with a little over $600k in liquid assets. There’s another $260k in a house I used to live in that is now rented out and the remainder is in retirement accounts.

[reeshau]

What do ou mean by too much pressure?

Yes, withdrawing $80k from a $1M is 8% of that account; when this bucket alone is considered, it seems dangerous.  But, your 401k/IRA will still be growing.  So, as you draw down your brokerage, your wealth will continue to grow.

And, if you're lucky, it might not draw down, anyway.  The long-term market average growth is 10%.  If you had 100% stocks in your brokerage, you might even sustain growth through this.  Of course, you would also be subject to the risks of a market downturn.  Since this is the money you know you will be withdrawing from, you may want to carry some bonds / CD's / fixed rate investments.  This will make it more likely (on average) that you will be spending down this account, but will make it more predictable.

I am in the 5th year of exactly this strategy.  Given the market's history since 2020, even with the downturn in early 2020 and 2022, my account has been growing even as I take out expenses.  This was not my plan, but it's a pleasant surprise.   I am 100% in stocks, but I also carry a hefty year-plus emergency fund, which I can tap in case of a down market.  (Like the summer of '22)

Also, when thinking about your withdrawals, remember that they will be long-term capital gains.  You say "we," so as MFJ you can take $89k in gains at 0%.  Plus your standard deduction.  And that's not the withdrawal, just the gain.  So, if you have taxes in your budget, this can be a time much like withdrawing from Roths, with low or no income tax.

[Freedomin5]

Your calculations are not entirely correct. The 4% rule applies to accounts that you can live off of. So if you own your own house, but everything else is in investment or retirement accounts, you need to subtract the value of your house from the total, then calculate 4% on the remainder. The idea is that your house is not generating returns off of which you can live.

For example, if you own a 500k house that you live in, and have 1.5M in investments, for a total net worth of 2M, your 4% SWR would be 60k. But if you own a 1M house that you live in, with 1M in investments for a total net worth of 2M, your 4%SWR would be 40k. On the other hand, if you rent and don’t own a home and have 2M in investments, for a total net worth of 2M, then 4% SWR is 80k.


So, in your case, assuming you have a TNW of 1150k, of which 260k is a rental and 600k is in taxable, so assuming you have about 290k in retirement accounts, your 4% SWR would be 4% * (600k + 290k) = 35.6k.

[theninthwall]

Thanks Freedomin5. I did not realize that I shouldn’t include retirement accounts. Would not counting those accounts result in a large increase of income at 59.5? Is there a way I should
calculate spending on the liquid assets that is slightly higher than 4% to factor in those retirement accounts later? I appreciate the posts, thanks.

[joemandadman189]

maybe do a case study,

reading the OP you are leaving out a lot of information and giving us goals and current conditions.

it sounds like you rent out the $260k house? What does that net? is it better to Sell it and invest the proceeds? How does appreciation look?

I am doing a similar analysis, i am looking at our spending, time to 59.5/60, current brokerage balance, and needed balance at "retirement" to get us through to then access retirement accounts. Then i am building our savings plan to match those conditions, while also maxing out 401ks

This may be conservative but i think of the brokerage funding my retirement pre 60 and 401ks/IRAs funding retirement post 60. I know there are many ways to access retirement account cash prior to 60, like those in this post by the mad fientist

https://www.madfientist.com/how-to-access-retirement-funds-early/

There are many ways to achieve your goal, but a case study would be a good place to start

[theninthwall]

maybe do a case study,

reading the OP you are leaving out a lot of information and giving us goals and current conditions.

it sounds like you rent out the $260k house? What does that net? is it better to Sell it and invest the proceeds? How does appreciation look?

I am doing a similar analysis, i am looking at our spending, time to 59.5/60, current brokerage balance, and needed balance at "retirement" to get us through to then access retirement accounts. Then i am building our savings plan to match those conditions, while also maxing out 401ks

This may be conservative but i think of the brokerage funding my retirement pre 60 and 401ks/IRAs funding retirement post 60. I know there are many ways to access retirement account cash prior to 60, like those in this post by the mad fientist

https://www.madfientist.com/how-to-access-retirement-funds-early/

There are many ways to achieve your goal, but a case study would be a good place to start

Thanks, I might switch over to that section of the forums. I appreciate the help!

[ixtap]

Take a close look at the Mad FIentist article. We found that information to be such a relief when we were originally planning.

Once upon a time, our plan was to save 10x in taxable while maxing 401k and Roth IRAs, then take a very long sabbatical, then go back to work. Once we found the 4% rule and ways to access tax sheltered funds earlier, we only needed to save a small amount more to be FI. Then we found out about the Mega Backdoor Roth and truth be told today is my partner's last day at work and we are actually a bit shy of 10x in taxable and the vast majority of that is in equities. But we also have five years' expenses in Roth contributions/conversions plus the ability to do a Roth conversion ladder at very low rates.

[lhamo]

Roths are another great option for you at this stage -- especially if you have the option of a Roth 401k/403b at work.

I'm trying hard to avoid tapping any of my Roth money before age 59.5 (just over 3.5 years to go), but because I had a Roth 403b at my last job I managed to put in around 180k in contributions over the years.  So that is a backup bucket for me to tap into should my brokerage funds not stretch to age 59.5.  I did briefly consider the option of starting SEPP withdrawals from my Trad IRAs, but pretty much decided against that since it is a choice you have to lock in for at least 5 years.

If you are living mostly off LTCGs in the brokerage, that gives you quite a bit of room to do low- or no-tax Roth conversions over the years as well.

[Laura33]

Thanks Freedomin5. I did not realize that I shouldn’t include retirement accounts. Would not counting those accounts result in a large increase of income at 59.5? Is there a way I should
calculate spending on the liquid assets that is slightly higher than 4% to factor in those retirement accounts later? I appreciate the posts, thanks.

FWIW, I think you misunderstood the comment -- I think that was focused on not adding your home equity into your 4% calculations. 

To calculate your 4% withdrawal, you'd add together the funds you plan to use for retirement.  So both retirement and non-retirement accounts, but not your rental house.  Unless you plan to sell the rental house and add the proceeds to your 'stache.

Note that the rental does matter, though, because your net rental income is subtracted from what you need to withdraw from your portfolio.  So if you're looking at $80K in income needs, but the rental clears $10K after all expenses, then your investments need to support only a $70K withdrawal.

So the first step is to decide whether you're going to sell the rental (in which case the net sale value can go into the assets you plan to draw down), or whether you're going to keep it (in which case the net rental income reduces the amount you need to draw down from investments).  Once you do that, you can start looking at whether your taxable-only investments are sufficient to get you to 59.5, or if you need to do some more creative stuff.

[theninthwall]

Take a close look at the Mad FIentist article. We found that information to be such a relief when we were originally planning.

Yes! This is the kind of thing I was after. I'm from Australia originally so I don't have as much working knowledge of the system here in the states. That article laid it out well.

[Freedomin5]

Thanks Freedomin5. I did not realize that I shouldn’t include retirement accounts. Would not counting those accounts result in a large increase of income at 59.5? Is there a way I should
calculate spending on the liquid assets that is slightly higher than 4% to factor in those retirement accounts later? I appreciate the posts, thanks.

FWIW, I think you misunderstood the comment -- I think that was focused on not adding your home equity into your 4% calculations. 

To calculate your 4% withdrawal, you'd add together the funds you plan to use for retirement.  So both retirement and non-retirement accounts, but not your rental house.  Unless you plan to sell the rental house and add the proceeds to your 'stache.

Note that the rental does matter, though, because your net rental income is subtracted from what you need to withdraw from your portfolio.  So if you're looking at $80K in income needs, but the rental clears $10K after all expenses, then your investments need to support only a $70K withdrawal.

So the first step is to decide whether you're going to sell the rental (in which case the net sale value can go into the assets you plan to draw down), or whether you're going to keep it (in which case the net rental income reduces the amount you need to draw down from investments).  Once you do that, you can start looking at whether your taxable-only investments are sufficient to get you to 59.5, or if you need to do some more creative stuff.

Yes, this is what I meant. You count retirement and non-retirement accounts.

[mistymoney]

https://www.madfientist.com/how-to-access-retirement-funds-early/

does the 5 year rule only apply if you are under 59.5? so if you convert at 58.5, can you access as soon as you hit 59.5?

[tj]

https://www.madfientist.com/how-to-access-retirement-funds-early/

does the 5 year rule only apply if you are under 59.5? so if you convert at 58.5, can you access as soon as you hit 59.5?

I would say that if you are 58.5, there is no reason to spend any time analyzing this, because you should be able to cover that single year with taxable account and Roth contributions.

[mistymoney]

https://www.madfientist.com/how-to-access-retirement-funds-early/

does the 5 year rule only apply if you are under 59.5? so if you convert at 58.5, can you access as soon as you hit 59.5?

I would say that if you are 58.5, there is no reason to spend any time analyzing this, because you should be able to cover that single year with taxable account and Roth contributions.

just because you should doesn't mean you can.

[tj]

https://www.madfientist.com/how-to-access-retirement-funds-early/

does the 5 year rule only apply if you are under 59.5? so if you convert at 58.5, can you access as soon as you hit 59.5?

I would say that if you are 58.5, there is no reason to spend any time analyzing this, because you should be able to cover that single year with taxable account and Roth contributions.

just because you should doesn't mean you can.

In that case, I would just pay the 10% penalty for one year for the shortfall.

[secondcor521]

https://www.madfientist.com/how-to-access-retirement-funds-early/

does the 5 year rule only apply if you are under 59.5? so if you convert at 58.5, can you access as soon as you hit 59.5?

As long as your first Roth contribution was more than five tax years ago, you can access funds tax-free and penalty free the day you hit 59.5.

See the discussion of qualified distributions in the right hand column of page 31 of IRS Pub 590-B at https://www.irs.gov/pub/irs-pdf/p590b.pdf.  Specifically the phrase "You don't include in your gross income qualified distributions" near the top and the requirements 1 and 2a at the bottom of that column.

[mistymoney]

https://www.madfientist.com/how-to-access-retirement-funds-early/

does the 5 year rule only apply if you are under 59.5? so if you convert at 58.5, can you access as soon as you hit 59.5?

I would say that if you are 58.5, there is no reason to spend any time analyzing this, because you should be able to cover that single year with taxable account and Roth contributions.

just because you should doesn't mean you can.

In that case, I would just pay the 10% penalty for one year for the shortfall.

I think there is a misunderstanding. But I'm not sure what it is so can't clarify.

[tj]

https://www.madfientist.com/how-to-access-retirement-funds-early/

does the 5 year rule only apply if you are under 59.5? so if you convert at 58.5, can you access as soon as you hit 59.5?

I would say that if you are 58.5, there is no reason to spend any time analyzing this, because you should be able to cover that single year with taxable account and Roth contributions.

just because you should doesn't mean you can.

In that case, I would just pay the 10% penalty for one year for the shortfall.

I think there is a misunderstanding. But I'm not sure what it is so can't clarify.

When you turn 59.5, your entire Roth balance is available as long as your have had a Roth IRA for at least 5 years.

[mistymoney]

https://www.madfientist.com/how-to-access-retirement-funds-early/

does the 5 year rule only apply if you are under 59.5? so if you convert at 58.5, can you access as soon as you hit 59.5?

As long as your first Roth contribution was more than five tax years ago, you can access funds tax-free and penalty free the day you hit 59.5.

See the discussion of qualified distributions in the right hand column of page 31 of IRS Pub 590-B at https://www.irs.gov/pub/irs-pdf/p590b.pdf.  Specifically the phrase "You don't include in your gross income qualified distributions" near the top and the requirements 1 and 2a at the bottom of that column.

Thanks, I think I am good then. I have 2 roth accounts, one is about 20 years since I started it has about 50k in and I haven't contibuted in many years.

Based on the your post and the info at the link - If I convert 75k from a 401k rollover ira at age 58.5 to the old Roth account - I pay ordinary income taxes on the 75k - then the following year after I turn 59.5, I can access the 75k tax free.

[mistymoney]

https://www.madfientist.com/how-to-access-retirement-funds-early/

does the 5 year rule only apply if you are under 59.5? so if you convert at 58.5, can you access as soon as you hit 59.5?

I would say that if you are 58.5, there is no reason to spend any time analyzing this, because you should be able to cover that single year with taxable account and Roth contributions.

just because you should doesn't mean you can.

In that case, I would just pay the 10% penalty for one year for the shortfall.

I think there is a misunderstanding. But I'm not sure what it is so can't clarify.

When you turn 59.5, your entire Roth balance is available as long as your have had a Roth IRA for at least 5 years.

Got it! thank you!

[secondcor521]

https://www.madfientist.com/how-to-access-retirement-funds-early/

does the 5 year rule only apply if you are under 59.5? so if you convert at 58.5, can you access as soon as you hit 59.5?

As long as your first Roth contribution was more than five tax years ago, you can access funds tax-free and penalty free the day you hit 59.5.

See the discussion of qualified distributions in the right hand column of page 31 of IRS Pub 590-B at https://www.irs.gov/pub/irs-pdf/p590b.pdf.  Specifically the phrase "You don't include in your gross income qualified distributions" near the top and the requirements 1 and 2a at the bottom of that column.

Thanks, I think I am good then. I have 2 roth accounts, one is about 20 years since I started it has about 50k in and I haven't contibuted in many years.

Based on the your post and the info at the link - If I convert 75k from a 401k rollover ira at age 58.5 to the old Roth account - I pay ordinary income taxes on the 75k - then the following year after I turn 59.5, I can access the 75k tax free.

Correct.