Managing a Taxable Account To Reach $0.00 at Retirement Age

[heybro]

I will have enough money to FIRE at retirement age.

Until I reach that age, I'd like to work part-time and draw from a taxable account to cover some expenses if I need it (and I may not need it).

Can you offer advice on managing a Taxable Account that you hope will be worth $0.00 by the time you retire?

What do taxes look like?  How do I make sure all taxes are qualified long-term capital gains?
What kind of asset allocations might be good?
How should you change asset allocations as you go?

For instance, if I start with $65,000 and need $6,000 out of the account per year and it grows at 8% then it should last about 25 years.  Should I put it all in a SP500 or Total Stock Fund or should I keep it all in bonds/money-market account?  If you need 10 years to recover from a market crash, that $6,000 per year times ten years already equals $60,000 so maybe stocks do not make sense here and I need to start with a larger chunk?

Since so much talk is about FIRE, I wanted to ask this unique question on how to set up such a unique account in order to "down-shift in to part time work."  Thank you.

[marty998]

If you have for example 20 years to go, it would not be a satisfactory outcome for your balance to accidentally hit 0.00 six months before you can access your retirement accounts. No point being 97.5% correct (along you have a long time to adjust plans if necessary).

Probably best to be a little conservative in the event of sequence of return risks.

[mcneally]

It doesn't really make sense to think of accounts in isolation like this because the safe withdrawal rate doesn't go up very much with a shorter time frame due to sequence of return risk, ie firecalc says over 30 years a 4% WR rate is 95% successful. Decrease your time frame to 15 years and maintaining a 95% success rate only increases your WR to 5.95%. 

If would make more sense to think of your accounts including your retirement accounts together and say you were only going to draw 1% or 2% or whatever of the total, which should still allow a limited amount of growth over the long term.

OP didn't necessarily say this was the case for them, but thinking (using some numbers I made up) "I have $200k and it will grow at a 6% real return over the next 25 years while I add nothing to it and that will give me enough to retire ($858k)", that's very optimistic thinking so far away from FI. You might end up with half that in 25 years. Drawing down your savings pre-FI is pretty risky. The stock market and job market are often going to get hit hard at the same time, so when you decide you need to earn more, doing so could be tough. I suppose it could work if your expenses are low and include a realistic budget for healthcare (i.e. any full time low wage job could cover the majority of your expenses and getting one if needed doesn't sound that dire to you). I still wouldn't want to do any more than 1% after halfway to FI or 2% after 75% FI.

[RWD]

Are you familiar with the methods of accessing retirement accounts before retirement age?
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

I also like to think of all my accounts as one combined portfolio.

[dandarc]

Are you familiar with the methods of accessing retirement accounts before retirement age?
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

I also like to think of all my accounts as one combined portfolio.

+1 - once you understand this, what to do while accumulating is obvious.

[SweatingInAR]

Are you actually trying to zero out the account once you reach retirement age?

Though I don't see the point at all, just donate whatever is left over to your favorite charity or establish a Donor Advised Fund and donate over the following few years.

[heybro]

This isn't about zeroing out the account (I can easily go blow a ton of money in a day if that was my goal).

My goal is to cure "one more year disease" and "what if what if what if" disease.

I'm trying to work the numbers back-ward and figure out how much I need before I can say "Stop working" and FORCE myself to quit making money.  I can easily work every year for the rest of my life and have a ton of money.

I DO NOT WANT TO DO THAT!

I want TIME!

And I need the reassurance that I've covered most of my "what-ifs" to a certain degree (you can never be 100% certain).

[heybro]

If you have for example 20 years to go, it would not be a satisfactory outcome for your balance to accidentally hit 0.00 six months before you can access your retirement accounts.

I'd be fine with it.  I have no problem working more at any point in my life.  Not-working is the skill I'm trying to learn.

[heybro]

Are you familiar with the methods of accessing retirement accounts before retirement age?
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

I also like to think of all my accounts as one combined portfolio.

I don't want to take money out of retirement accounts until I reach retirement age.  I don't want to do conversions.

The amount I need to live and work part time is so small that this issue is very negligible anyway.  I'd rather have it separate.  Mentally, I like it better that way.  And that way I won't ever take out too much as well.

[mistymoney]

this is an interesting point I think.

For me, I had always thought that once I could access retirement accounts, I would want to withdraw as much as I could while paying minimum tax rates on a yearly basis and perhaps transfer the unused amount into the taxable account. So that I could avoid a large withdraw with higher tax rates if a couple of big ticket items came up the same year.

Was going to leave the Roth account alone as the most tax advantaged money.

But - it may depend on what you anticipate with your tax rate. If you are looking at a draw of 40k, the taxes are fairly minimal vs a draw of 80k or more. In that case maybe best to maximize the retirement account money balances as you would be looking at a lower than cap gains tax rates over the long haul.

OP - what is your rationale for preferring to empty the taxable account as opposed to accessing retirement accounts earlier?

Another consideration for me is what is the best way to leave the money to heirs? What would maximum the money they get? maximize their future FI? I need to investigate how the different accounts function in inheritance.

[fuzzy math]

I will have enough money to FIRE at retirement age.

Until I reach that age, I'd like to work part-time and draw from a taxable account to cover some expenses if I need it (and I may not need it).

Can you offer advice on managing a Taxable Account that you hope will be worth $0.00 by the time you retire?

What do taxes look like?  How do I make sure all taxes are qualified long-term capital gains?
What kind of asset allocations might be good?
How should you change asset allocations as you go?

For instance, if I start with $65,000 and need $6,000 out of the account per year and it grows at 8% then it should last about 25 years.  Should I put it all in a SP500 or Total Stock Fund or should I keep it all in bonds/money-market account?  If you need 10 years to recover from a market crash, that $6,000 per year times ten years already equals $60,000 so maybe stocks do not make sense here and I need to start with a larger chunk?

Since so much talk is about FIRE, I wanted to ask this unique question on how to set up such a unique account in order to "down-shift in to part time work."  Thank you.

Assuming $6k is actually what you need per year --

8% is only possible with the stock market. Bonds / MM return so low that you'd need much more.
A 5-6% withdrawal rate based off mutual funds might be what you want, but in that case you'd need 17x - 20x expenses, which is far more than the $65k you quoted here. You'd want $102,000 - $120,000 and that doesn't include whatever additional buffer you might need for safety.

With bonds, you'd have to account for their lower historical return rates, which can be as good as 5 or 6% and as bad as 1.5%. Given that your first example had a withdrawal rate of almost 10%, you'd deplete the account in approx 10 yrs. I'm not going to do the math on it (reference: my name), but you're trading away the possibility of higher returns for the likelihood of never having negative returns.

All of this is inconsequential compared to the other equation you're looking at. Is it acceptable to you to possibly have to work more later than just part time in order to guarantee one less year on this end? You might not have to... Then again you might. That's the real question. It it wouldn't be upsetting to you since you plan to continue to work part time already, then use whatever math gives you at least 50% or 75% or whatever success rate you choose odds.

The other way to mitigate your risk is to use the commonly used rate of 75% stocks (mutual funds) / 25% bonds. That would allow you to draw from stocks when the market is high and draw from bonds when the market is hurting. It's still going to have very similar limitations as a 100% stock portfolio, where your Max withdrawal rate is going to be 5-6% assuming you want to guarantee it will all be spent. It's still going to have a margin of failure of possibly 10% or more.

[mistymoney]

this is an interesting point I think.

For me, I had always thought that once I could access retirement accounts, I would want to withdraw as much as I could while paying minimum tax rates on a yearly basis and perhaps transfer the unused amount into the taxable account. So that I could avoid a large withdraw with higher tax rates if a couple of big ticket items came up the same year.

Was going to leave the Roth account alone as the most tax advantaged money.

But - it may depend on what you anticipate with your tax rate. If you are looking at a draw of 40k, the taxes are fairly minimal vs a draw of 80k or more. In that case maybe best to maximize the retirement account money balances as you would be looking at a lower than cap gains tax rates over the long haul.

OP - what is your rationale for preferring to empty the taxable account as opposed to accessing retirement accounts earlier?

Another consideration for me is what is the best way to leave the money to heirs? What would maximum the money they get? maximize their future FI? I need to investigate how the different accounts function in inheritance.

quoting myself here -
Quick research reveals not much benefit to heirs for money in non-roth retirement accounts and it may be best to just leave it in taxable account for inheritance purposes. 

so my rough plan would be continue to take money out of the rollover ira to minimize income tax rates and put excess into the taxable account. Leave the roth alone until the end as the heirs can tap that tax free.
 

[RWD]

Are you familiar with the methods of accessing retirement accounts before retirement age?
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

I also like to think of all my accounts as one combined portfolio.

I don't want to take money out of retirement accounts until I reach retirement age.  I don't want to do conversions.

The amount I need to live and work part time is so small that this issue is very negligible anyway.  I'd rather have it separate.  Mentally, I like it better that way.  And that way I won't ever take out too much as well.

Well at least you are aware it is possible. Depending on how much you have in pre-tax retirement accounts it may still be useful to do conversions before retirement age (even if you don't plan to spend that money before then) because that will reduce the eventual tax impact of RMDs. If you have years of zero to little income doing a conversion creates some taxable income that will be taxed at a very favorable rate.

[Hargrove]

I sometimes think of it this way, too, but I include some conversions. I'm using the 401k as the "62+ bucket." I'm going to split income near retirement from Roth and 401k, to draw down the 401k at half-bracket tax rates, and treat the entire Roth as "safety margin."

It sounds like my FIRE goals may be larger, but I think I share your thinking about time. 21 years of relative freedom is more interesting to me than 14 years of total freedom and 7 more of my youngest remaining years pulling my hair out. "Barista FIRE" can also continue to take advantage of 401k matching.

The big question is your time to FIRE. If your taxable has to cover under 10 years, you could lock in CDs near 3% now and be done with it. I think the fear of a market downturn in any window over 5 years is unnecessary - I'm leaving all of my money in stocks indefinitely. Long-term, it's the best bet.

What do taxes look like...? Not much! I would let Vanguard work its magic with VTSAX for the simplest plan. Withdraw every year what you need from it. Most proceeds will be long-term capital gains, and if your needs are low (as you say), you should wind up paying very little.

What kind of asset allocations might be good...? 10 years or more, I would still do 100% stocks. I mean, I would do all stocks even at 5 years, but YMMV. CDs pay near 3% now - if not stocks, today, I would do CDs.

How should you change asset allocations as you go...? I would just choose how I wanted to set it up in the first place.

If you wanted to go conservatively, set up a 1, 2, 3, 4 year CD ladder with 4 sets of annual expenses (start them all at once) and keep one year's expenses in the bank for the current year, then leave the second half of your taxable money in stocks.

OR, just leave it all in stocks.

At year 7, if the market did well, sell and go to CDs for the remaining years. If it did poorly, leave the stocks alone to the extent you can.

Disclaimer: I would rather leave all the money in stocks rather than time the market with the "taxable bucket" this way, but if it helps you to go enjoy your life to think of it like this, the lost returns on those remaining 3 years would not likely be catastrophic.

[Linea_Norway]

In our taxable accounts, we only have cheap index funds, a world wide, an Asian and a Norwegian one. I calculate that the stash make 4% growth per year, after inflation.
In my excel sheet I have a column on how mamy wealth taxes we should pay. And a column on how much stash that can be taken out of the account for free. We will first take out the part that we put in, without paying tax, and thereafter we will take out the profit and pay full tax over that.
Whatever we will take out per year, is our yearly FIRE budget plus wealth taxes, plus any taxes to be paid over the takeout, if there is any.

When we sell our home, we will put half of the money on a high interest savings account, to be used when we buy a new home, maybe years later. The rest will go into index funds. I will think about bonds, but I have heard that in Norway they aren't doing any better than high interest saving accounts.

[heybro]

What do taxes look like...? Not much! I would let Vanguard work its magic with VTSAX for the simplest plan. Withdraw every year what you need from it. Most proceeds will be long-term capital gains, and if your needs are low (as you say), you should wind up paying very little.

What kind of asset allocations might be good...? 10 years or more, I would still do 100% stocks. I mean, I would do all stocks even at 5 years, but YMMV.

Yeah, long term capital gains on $6,000 per year would be 0% federal and 6% state.  Woo hoo!
I think the guaranteed loss of not using Stock is higher than the possible loss of using Stock.
If I had to somehow work full time at ANY POINT, I have no issue with that.  Most likely, even working part-time would not require that I use the $6,000.  Thank you for the help!