Help needed: Couple planning for initial 10 years from taxable (updated)

[bigskyrookie]

My wife and I are planning to semi retire in the next five years when we will be in our upper 30s. We are planning to live off our taxable investments plus 4-7k in income for 10 years prior to using a roth conversion ladder to access retirement account funds.

We plan to have $230,000 in taxable funds at the time we semi retire. We need these funds to sustain withdrawing an initial 21.5k with a 1.25% increase each year. We also need to end up with a balance at the end of 10 years of at least 100k. Right now we have ~82k in VTSAX and ~3k in VWITX. Our plan is to have 55k in cash, 163.5k in VTSAX, and 11.5 in VWITX.

Here is where we need your help-
How can we best make 230k produce 21.5k per year (with 1.25 annual increase) for ten years while ending up with at least 100k balance at the end of the 10 year period?  Is our proposed allocation the most optimal and how would you withdraw over the course of 10 years (i.e. linearly, or cash heavy upfront?).

If our draft plan does not seem feasible please recommend what could be changed to make it work. It would be helpful to know what you would change and why. For example, how much should we save prior to semi retiring or how should are asset allocation change, etc.

We greatly appreciate any thoughts and ideas!

[ixtap]

So, you really only want to spend a little less than half of $215k, which would mean a 20% + inflation withdrawal for ten years. The plain math simply doesn't work. You may use your proposed allocation and get lucky, but you would pretty much need those ten years to look like the last ten years, maybe better. However, for a ten year time frame, a conservative allocation would generally be advised, making it hard to take advantage of such a situation.

Some options:
-set a higher savings goal
-look for higher paying part-time work for your coast FIRE plan, so that your initial withdrawals are lower
-if you have the money in retirement accounts, consider starting your Roth conversion ladder earlier (NOT at the expense of your later years, though).

[frugal_c]

It's too aggressive, you need to work a bit longer or plan for the possibility of going back to work.  If you didn't need $100k then you would be fine as you could keep it in bonds.  With your $100 k target the only way you have a shot is to keep heavily invested in equities and withdraw during a bull market.  If the market goes against you , it won't work and you could draw down your equity before the 10 years is even over.

If you do go for it I would keep at most 10% in bonds and the rest US or global equity.  Withdraw from the equity and dividends as much as possible and save the bonds for when the market takes a big drop.

[Paul der Krake]

On top of what other posters have said, I don't understand why you have tax-exempt bonds if it takes you 5 years to add ~130k to your taxable funds. Are you in a high tax bracket right now?

[bigskyrookie]

On top of what other posters have said, I don't understand why you have tax-exempt bonds if it takes you 5 years to add ~130k to your taxable funds. Are you in a high tax bracket right now?

We are using tax exempt bonds since they are in a taxable brokerage account. Thanks.

[SailingOnASmallSailboat]

If at the end of 10 years you're planning to get back into a more corporate job situation, just know that it's harder to do that at late 40s than in early 30s.

[DaTrill]

What you are asking for is impossible.  Don't plan for 10 years in the future, work more today, save more today.  10 years will work itself out if you make more, spend less, buy boring low-cost index funds.     

[Anniemaygo]

You are just letting us look through the keyhole.  Open the door with a full case study and let the solutions become much broader and more creative and you will have a better chance of talking through a plan that works instead of the simple answers that 1+1 doesn’t equal 3

[Anniemaygo]

      0.065      
Year      Grow   Take out   Balance year end
1   $230,000   $13,553   -$21,500   $222,053
2   $222,053   $13,015   -$21,823   $213,245
3   $213,245   $12,421   -$22,150   $203,516
4   $203,516   $11,767   -$22,482   $192,801
5   $192,801   $11,049   -$22,819   $181,031
6   $181,031   $10,262   -$23,162   $168,131
7   $168,131   $9,400   -$23,509   $154,022
8   $154,022   $8,460   -$23,862   $138,621
9   $138,621   $7,436   -$24,220   $121,838
10   $121,838   $6,322   -$24,583   $103,576
   $103,576   

So with very simple math, assuming you withdraw beginning of the year then earn, you will need a 6.5% return to end with 100k.  I think that’s manageable, heck right now i bonds are paying 7%.  That is not my recommendations, but it’s anyones guess what markets and interest rates will look like in 7 years.
Are you factoring in inflation and what 21500 will buy you 10 years from now?      

[bigskyrookie]

On top of what other posters have said, I don't understand why you have tax-exempt bonds if it takes you 5 years to add ~130k to your taxable funds. Are you in a high tax bracket right now?

We are using tax exempt bonds since they are in a taxable brokerage account. Thanks.

Do you think we would be better off with a different bond fun? Thanks.

[Paul der Krake]

On top of what other posters have said, I don't understand why you have tax-exempt bonds if it takes you 5 years to add ~130k to your taxable funds. Are you in a high tax bracket right now?

We are using tax exempt bonds since they are in a taxable brokerage account. Thanks.

Do you think we would be better off with a different bond fun? Thanks.

Impossible to know without knowing your marginal tax bracket.

From Vanguard's own website:

Am I in one of the higher tax brackets?

If you're not, tax-exempt funds probably aren't the right fit. You likely won't save enough in taxes to make up for the lower yields you typically get from a tax-exempt fund.

Compare the yields between the taxable and tax-exempt funds of your choice, discount the taxable one by your marginal tax rate, and compare. Keep in mind that the underlying securities likely will have the same risk profiles, so you should probably adjust for that too.

Typically, it's not worth it unless you're a pretty high bracket, 32% or more.

[bigskyrookie]

Thank you. We are in the 22% bracket so based on what your saying maybe I should make a switch for future contributions. What vanguard bond fund would you recommend?

[Paul der Krake]

Thank you. We are in the 22% bracket so based on what your saying maybe I should make a switch for future contributions. What vanguard bond fund would you recommend?

The usual Bogleheads-type recommendation is the US total bond fund, VBTLX/BND:
https://investor.vanguard.com/mutual-funds/profile/vbtlx

There are many decisions that could go into choosing the right bond fund for you. I recommend reading up on bonds to help inform your decision. Start here:

https://www.bogleheads.org/wiki/Bond_basics

[joemandadman189]

This may help with asset allocation planning

https://forum.mrmoneymustache.com/investor-alley/psa-read-tyler-of-portfolio-charts'-recent-blog-post-on-portfolio-construction/

There are better options than VTSAX

[zolotiyeruki]

cFIREsim is a great tool for this.  It sounds like what you're really looking for is "make $230k last for 15 years, with a 70% stock, 5% bond, 25% cash allocation."  And the numbers aren't great--cFireSim shows a probability of success of less than 60%.  That's terrible.

Now, that's if I'm understanding the setup correctly.  Anniemaygo is right--what little information you've given us is insufficient to base good advice on, or even properly understand your plan.  It sounds like you plan to live on taxable + growth for 10 years, then live off taxable for five more years while you build your Roth Pipeline.  Is that right?

If, instead, your goal is to live off taxable for only five years before starting your Roth Pipeline, your probability of success goes all the way up to 86%.  That's still not good, but it's a lot less bad than 58%.

Is there a reason you wish to delay the Roth Pipeline for ten years?  If in five years you have saved up 25x expenses, including at least five years' worth of expenses in your taxable accounts, I see no reason why you couldn't start your Roth pipeline in year 1 of retirement.

[Viking Thor]

If anyone could reliably help you they would be a billionaire.

The numbers are very aggressive in normal times and right now the stock market is by most metrics overvalued  relative to earnings.

You could get lucky but its essentially rolling the dice on 10 year stock market performance above what most people would expect.

You definitely don't want such a high amount in cash. Inflation is 6%+ so a big portion of your investment is having a large negative real  return.

[jeroly]

How can we best make 230k produce 21.5k per year (with 1.25 annual increase) for ten years while ending up with at least 100k balance at the end of the 10 year period? 

cFIREsim is a great tool for this.  It sounds like what you're really looking for is "make $230k last for 15 years, with a 70% stock, 5% bond, 25% cash allocation."  And the numbers aren't great--cFireSim shows a probability of success of less than 60%.  That's terrible.

I think this is off, and not only for the wrong time frame.  If you need to guarantee that you have 100k in 10 years, you need to put aside now enough at the risk-free rate to yield 100k in 10 years - let's say $84k given that the ten year treasury yield is 1.75% - and then put the rest ($146k) in some asset allocation. You'd need a consistent 9.15% return from the rest, over those 10 years, to not run out of money when drawing down $21.5k with a 1.5% annual rise.

Given how high CAPE is, this is probably optimistic even with an AA of 100/0, but I guess you have a chance that this works.  Of course that's not even taking the chances that you actually get to $230k in five years into consideration...