Author Topic: Case Study - Bridging the Gap  (Read 2874 times)

retired?

  • Pencil Stache
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Case Study - Bridging the Gap
« on: September 12, 2014, 10:05:59 AM »
Hello.  Recently found MMM blog and am enjoying.  My situation is as follows:

 - Married with two kids.
 - I am 45, wife is 43 and kids are 12 and 10
 - quit corporate job in June and am considering options, which include in order of preference:
       1) living off current assets and taking on flexible part-time work, e.g. tutoring,
       2) working as a teacher (45-50k to start),
       3) working a decent paying job
       4) going back to same type of career, well-paying, but stressful and annoying.

Question

Given my top preference, how should I organize my assets to best bridge the gap b/n now and when I turn 59.5 and can access 401k, IRA, etc.?

Here is a detailed version of assets and a short version of income/expenses (detailed version below) since I want to focus on what to do with assets/liabilities now and work on expenses later.

Income - $15k.  Interest and wife's part-time job.

Expenses - $62.6 (detail below).

Assets - $2,348k

  $404k - primary residence.  Post 6% commission to sell.
  $230k - rental home.  Post 6% commission to sell.  I don't include this in income/expenses since the net is negligible.
  $39k - cars. 
  $156k - liquid stock in taxable accounts.
  $38k - loan to individual.
  $384k - cash in Capital One 360.  Left over from equity in selling former main residence.  Need to deploy, but also used for expenses.
  $705k - 401k and IRA accounts.  401k are not ROTH.  This $$ is restricted until 59.5
  $257k - pension earning about 5% per year, sheltered.  Can a) be withdrawn and rolled over(partially or fully), b) kept earning 5%, c) receive 50% to rollover (partially or fully) and the other 50% as an annuity ($600 per month).
  $135k - 529 plans


Liabilities - $336k

   $176k - Mortgage on primary residence.  9.5 years left on 3.375% 15-year loan (only in first year, but paid down).
   $160k - Mortgage on rental home.  27 years left on 4.875% 30-year loan.

Assets less Liabilities - $2,012k

Some ideas I like are:

1.  Person to person loans (would be willing to set aside as much as 50k)
2.  Paying down primary mortgage.  Rental int rate is higher, but want to avoid tight situations.
3.  REIT's
4.  A local rental home in the $200k range, but paying cash seems risky at our current expense levels and I am not sure if I'd qualify for a mortgage (put down 1/3 or so)
5.  Start regular contributions to Vanguard stock fund.
6.  Using one of the "loopholes" to access the 401k earlier.  i.e. take withdrawal, pay tax, put in ROTH and then take out 5 years later.

Net income is negative 48k "as is".  With healthcare subsidy, could be negative 44k.  With some expense cutting and part-time work, could be negative 30k.

Any suggestions, creative or basic, on how to re-allocate my assets to generate 30-45k would be appreciated.  One might say 'you have enough, just withdraw from cash and stock', but I know the mix is far from optimal. 

I also don't know how successful I will be in getting the family on board with lower expenses given we've been pretty free-wheeling so far (similar to MMM not liking budgets and just seriously considering each purchase, my mode was to say 'given I earn X, I should be able to save Y' and then just set up auto-saving and didn't worry about spending the left-over)

Thanks.

Retired?



====================================Detail================








Detailed Income and Expenses

Income

$12k - wife recently went back to work part-time as a preschool teacher.  In her pre-kids profession, she'd earn about 60k.
$3k - Interest in Capital One 360 account.....but, plan to put this $$ to better use....part of the reason for the post.

Expenses

Housing - 18.8k.  We could lower this a good deal in 8 years (or sooner) when kids are out of high school.

   $6k - interest on 15yr, 3 3/8%, with balance of 176......be paid in about 9.5 years.  This expense would decrease over time, but current is about $500/month.

   $2.3k - property insurance.  Live in hurricane prone area.

   $1k - maintenance.  This is a plug.

   $1k - HOA dues.

   $8.5k - prop tax.  Live in Texas where prop taxes can be high to balance having zero income tax.

Healthcare - $9k

   $6.4k - healthcare premium.  This is the cheapest plan in our area.  If no/low income, then we'd qualify for as much as 5.4k in subsidies in 2015 and beyond.

   $0.6k - dental coverage

   $2k - copays, and deductible.  May be high in the average year, but with the occasional large expense, I think it is reasonable.

Transportation - $4.8k.  Three cars (2001 Accord, 2010 Oddysey, and 2007 Miata I bought as 'gift to self' to compensate for a crappy, but well-paying job.

   $2.1k - gas

   $1.1k - insurance

   $0.6k - maintenance....oil changes, brakes, etc.

   $1k - depreciation.  I include here since I also include cars in assets (some disagree with that, but I could sell them)

Utilities
- $8k.  Much room for improvement.  Includes phones, internet, cable, water, trash, power, and gas.

Savings - $3.5k.  Still contributing $3k to one 529 account and $500 to kids' savings accounts.

Other - $18.5k.  Includes clothing, food, entertainment, vacations, and kids' activities.  Room for improvement RE eating out.




No Name Guy

  • Bristles
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Re: Case Study - Bridging the Gap
« Reply #1 on: September 12, 2014, 10:19:27 AM »
There is no gap.  You can access 401k / IRA's before 59 1/2 without penalty via the Substantially Equal Periodic Payment part of the tax code.

Look up 72(t).

There's also the Roth conversion ladders.

electriceagle

  • Bristles
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Re: Case Study - Bridging the Gap
« Reply #2 on: September 12, 2014, 10:31:33 AM »
You're in good shape.

I think you're counting only $3k in passive income because it is the only part that is not tax sheltered. Really you should count (depending on risk tolerance) between 3% and 4% of liquid assets.

Take the cash in capital one, separate off one year of expenses + your family out of pocket healthcare max as an emergency fund and put the rest into an80/20 stock/bond asset allocation. You may want to overweight stock in taxable and bonds in tax advantaged to get the best overall tax treatment.

Roll any 401k money into an IRA. Begin rolling traditional IRA money into Roth up until your family has to start paying taxes.

Decide whether to sell the rental based on whether it pays out and whether it is a pain in the butt. You are not in need of cash, so there is no rush.

retired?

  • Pencil Stache
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  • Posts: 661
Re: Case Study - Bridging the Gap
« Reply #3 on: September 12, 2014, 11:22:49 AM »
There is no gap.  You can access 401k / IRA's before 59 1/2 without penalty via the Substantially Equal Periodic Payment part of the tax code.

Look up 72(t).

There's also the Roth conversion ladders.

Thanks for those tips.  I will look up 72(t).  I assume the Roth conversion ladders is what I mentioned (and covered in a MMM blog).

You're in good shape.

I think you're counting only $3k in passive income because it is the only part that is not tax sheltered. Really you should count (depending on risk tolerance) between 3% and 4% of liquid assets.

Take the cash in capital one, separate off one year of expenses + your family out of pocket healthcare max as an emergency fund and put the rest into an80/20 stock/bond asset allocation. You may want to overweight stock in taxable and bonds in tax advantaged to get the best overall tax treatment.

Roll any 401k money into an IRA. Begin rolling traditional IRA money into Roth up until your family has to start paying taxes.

Decide whether to sell the rental based on whether it pays out and whether it is a pain in the butt. You are not in need of cash, so there is no rush.

Thanks.  I like the bond/stock taxable/non-taxed recommendation.  If I have decent choices in the 401k, why roll over into IRA?  I am mainly trying to get comfortable with the idea of being "retired" and having no "standard job".  It's a new world and I had completely bought into the treadmill.  I am not counting any income from stocks given my horizon is 0-15 years.  I had liked MMM's separation of assets to cover "old man period" and covering the period until that happens.