Author Topic: Given the Gift of a Layoff - Input Please....  (Read 3434 times)

billsfan1_2000

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Given the Gift of a Layoff - Input Please....
« on: January 22, 2023, 12:12:27 PM »
Hello all.  I'd welcome and really appreciate input from the community about my situation.  This will NOT follow the normal case study format but here goes:

Background:

Married couple, age 59.  Great health.  Living in LCOL (except for the murderous taxes) area.  Twin sons aged 24 both in law school (paid by them), both living out of town.

Recent Developments:

This past Tuesday was informed by my employer, MEGABANK, that I am included in a round of layoffs, with a last working day January 30.  Benefits include 26 weeks of pay, through July 31, healthcare through the same date, immediate vesting of all restricted shares, valued around $55k.  Also bonus eligible for February 2023.

Expenses:

I track spending in detail and INCLUDING heath insurance premiums that I will have to fund till age 65 I will be spending about $7k per month, $84k per year, to maintain current lifestyle. 

Future Income Streams:

- Bank Pension kicks in at age 65, $25,362 per year
- My SS taken at 65, $38,076 per year
- Spouse SS taken at 65, $15,075 per yer

Total annual income at age 65:  $78,513

Resources to Bridge to Age 65:

House ($565k value per Zillow) owned mortgage free.  Two 2017 vehicles fully paid for.  No debt.

Portfolio:

Tax Advantaged (other than my 401(k)) all invested in Schwab Intelligent Portfolios):

My IRA      $1,099k
Wife IRA    $    58k
My 401k    $   325k
RSUs         $     55k

Total         $1,537k

Taxable Accounts:
Brokerage  $1,843k
Cash          $  232k

Total          $2,085k

Grand total investable assets:  $3,622k

Sooooooo...input I'd appreciate is.....how to generate the circa $100k in income I will need to maintain lifestyle, for the 6 years BEFORE all retirement income streams kick in?  One idea I have is.....move 100% of my taxable balances into treasuries (which are currently yielding about 4.5%), which would give me the income stream I am looking for ($2,085k * 4.5% = $94k).  Any other ideas on how to deploy these after tax balances to maximize yield?  REITs?  MLPs?  Dividend aristocrat stocks?  BDC's?

Really appreciate the input from this learned community.  THANK YOU!!!

billsfan1_2000

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Re: Given the Gift of a Layoff - Input Please....
« Reply #1 on: January 22, 2023, 12:38:38 PM »
Yes but in a perfect world I would preserve my principal balance for the purpose of kids inheritance....

Sandi_k

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Re: Given the Gift of a Layoff - Input Please....
« Reply #2 on: January 22, 2023, 12:38:45 PM »
I would take your wife's SS at her FRA (66?) and delay yours until age 70. That, combined with your pension and savings, make you pretty much bullet=proof.

I would put two years' worth of spending from the brokerage account, into cash, and use that, regardless of the market.

I would also be converting from your traditional IRA into Roth, as you are likely to have high RMDs in 13 years, which may affect your Medicare premiums. I would convert some amount up to the top of the 22% tax bracket, for 2023, 2024, and 2025. Previous tax brackets are supposed to jump in 2026 when the Tax Cut and Jobs Recovery Act expires.

Finally, I'd make a spreadsheet that lists each year from now until age 100 for your wife, and age 95 for you, and have a separate column for each source of income: pension, investments at 3.5% annual withdrawal rate, and both Social Security incomes.

I think you'll find that you will have big piles of money in your 70's, and the challenge will become how to minimize taxes due at that time when you have required minimum distributions, and no tax sheltering possible. So you should get started on that now, before IRMAA is assessed (at age 63 for each of you) for Medicare.

Assuming that the pension has 100% survivor benefits, you have more than enough money. The problem is you should have more of it in Roth than you do.


Gronnie

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Re: Given the Gift of a Layoff - Input Please....
« Reply #3 on: January 22, 2023, 12:59:52 PM »
Yes but in a perfect world I would preserve my principal balance for the purpose of kids inheritance....

Once pension and social security kick in that account will start to grow again if your spending doesn't increase.

GilesMM

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Re: Given the Gift of a Layoff - Input Please....
« Reply #4 on: January 22, 2023, 01:14:19 PM »
Why do twins in law school need an inheritance?  I would plan to spend it all and let them make their own way.

MDM

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Re: Given the Gift of a Layoff - Input Please....
« Reply #5 on: January 22, 2023, 01:38:28 PM »
I would take your wife's SS at her FRA (66?) and delay yours until age 70. That, combined with your pension and savings, make you pretty much bullet=proof.
That or similar is probably the recommendation Open Social Security: Free, Open-Source Social Security Calculator would provide.  billsfan1_2000, have you tried that?

Gronnie

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Re: Given the Gift of a Layoff - Input Please....
« Reply #6 on: January 22, 2023, 01:48:30 PM »
Why do twins in law school need an inheritance?  I would plan to spend it all and let them make their own way.

This. My brothers and I had to have a sit down with my parents to convince them we want them to enjoy their hard earned / saved money and that we will be quite alright even if we get 0 inheritance.

BicycleB

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Re: Given the Gift of a Layoff - Input Please....
« Reply #7 on: January 22, 2023, 02:20:15 PM »
Yes but in a perfect world I would preserve my principal balance for the purpose of kids inheritance....

Compared to REITs and MLPs, or even Treasuries, simple stock index investing seems like it would be simpler and more tax efficient. In other words, selling a few shares taxed at capital gain rates preserves principal better than having investments that generate ordinary income (you did say your region has murderous taxes. Are they on income?). Selling a few shares is fine if you’re preserving more capital elsewhere, as seems likely.

PS. This post also supports the suggestions upthread to focus on Roth conversions, and ideally model year by year withdrawals. Include tax effects - these are likely to be large at your upcoming income level. Also, model the effect of holding stock in your taxable accounts and holding any investments that generate ordinary income (interest, REIT distributions if you do those) in the tax advantaged accounts; might save additional thousands of $/year. All of this can flow to the kids someday if you like.

If your real goal is generational transfer, compare your model’s results with the tax-free ceiling if the federal inheritance tax. You might find the need to make some year by year gifts soon to minimize avoid inheritance tax unless you assume that the ceiling will continue to be raised with inflation (it will be unless statute is changed, you’re probably fine of course.) Even if not, your planned expenses are much lower than apparent likely income, so it seems that some gifts soon are an option if you feel that would be of value to the kiddos.

If they’re going to be successful lawyers, I can see an old school Mustachian saying they’re best left on their own, as @GilesMM implied - but that you could educate them by allowing them to participate in analyzing or deciding where to charitably donate some of the gifts you’d give them if they needed any. Just a thought.
« Last Edit: January 22, 2023, 02:48:35 PM by BicycleB »

billsfan1_2000

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Re: Given the Gift of a Layoff - Input Please....
« Reply #8 on: January 22, 2023, 05:10:11 PM »
this is good stuff thank you all!!!!

Laura33

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Re: Given the Gift of a Layoff - Input Please....
« Reply #9 on: January 23, 2023, 02:40:57 PM »
Yes but in a perfect world I would preserve my principal balance for the purpose of kids inheritance....

You're thinking about it the wrong way.  The distinction between principal and interest vs. capital gains matters only for tax purposes.  The only thing that is going to matter for inheritance is how much total money is in the account, no matter how it got there.

Think of it this way:  you need to take out a certain amount of money each year to live on, right?  You can do that any number of ways:

1.  Keep everything invested as it is and sell shares periodically (added bonus that you can rebalance and/or tax harvest as you sell).  This keeps your asset allocation the way you want it and gives you a chance to minimize taxes, but it makes you susceptible to swings in the market.  The amount you don't sell will continue to grow and earn interest/capital gains until you die.

2.  Buy enough bonds today to generate $80K/yr income.  This will require taking a large chunk out of your investments at one swoop, which will both generate capital gains from the sale and generate taxable interest from the bonds, and will change your asset allocation to a more conservative balance.  Ergo, it's not as tax-friendly, but it gives you a pretty damn high degree of security that the money will be there.  The amount you don't sell will contrinue to grow/earn capital gains until you die.

3.  Take a big hunk of your $$ and buy an annuity to cover you for the next 9 years.  Same impact as option 2:  big chunk gone now, so capital gains, along with taxes on the annuity payments over the next 9 years, plus more conservative asset allocation.  The amount you don't sell will continue to grow/earn capital gains until you die.

4.  Do a bond or CD ladder:  buy bonds/CDs worth $80K per year maturing in 1, 2, and 3 years now.  Each year, take the $ from the bonds/CDs that mature, sell enough of your investments to buy another group of bonds/CDs maturing 3 years out.  This will require a somewhat larger withdrawal this year (since it's covering 3 years) but spread out the rest of the withdrawals over the next few years, until the last 3 years you can just take the $ from the maturing bonds without having to buy more since your other income sources will kick in.  This gives you some tax flexibility on managing your investment sales, plus the ability to sit tight for up to 2 years in the event of a market crash, but it also generates interest from the bonds that you need to pay taxes on, and shifts your asset allocation to a slightly more conservative posture.  The amount you don't sell will continue to grow/earn capital gains until you die. 

5.  You can readjust your holdings into dividend-bearing stocks and interest-bearing bonds so that your whole portfolio throws off $80K of dividends and interest every year.  This shifts your overall portfolio a bit more conservative, triggers tax issues to the extent you need to sell stuff now, leaves you subject to market volatility and changes in dividend payments/etc, but it minimizes needs to change the portfolio every year (unless one of the above events happens).  The amount you don't sell will likely continue to grow some, but not as much, because you are not reinvesting capital gains (which over time can seriously affect your returns). 

Do you notice the recurring theme?  You can sell a lot now, but that leaves less to grow over time; you can shift your investments into more dividend/interest-producing options, which avoids the immediate hit, but ensures that what's left grows more slowly over time, because now you're taking out the dividends/interests every year.  Which, in turn, is fundamentally the same as just selling off shares every year -- you're still taking $$ out, thus leaving less in your accounts to continue to grow.  What matters is your overall asset allocation, the taxes you pay, and how much you take out and when.

tl;dr:  you should make your decisions on your desired asset allocation, need for secure income, and tax/income planning issues, not whether the money you are living on comes from stocks, bonds, CDs, cash, or something else.

Must_ache

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Re: Given the Gift of a Layoff - Input Please....
« Reply #10 on: January 26, 2023, 11:18:22 AM »
I would just sell the stock as you need the $$ and wouldn't sweat the details.  Sure do a bit of CD or Treasury laddering if you want to, rates are around 4% right now.
You've got $3.6M in assets alone, you only need a 2.8% return to generate the $100K to live in, everything else beyond that means your portfolio value is increasing.

Finances_With_Purpose

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Re: Given the Gift of a Layoff - Input Please....
« Reply #11 on: January 26, 2023, 01:51:54 PM »
I would take your wife's SS at her FRA (66?) and delay yours until age 70. That, combined with your pension and savings, make you pretty much bullet=proof.

I would put two years' worth of spending from the brokerage account, into cash, and use that, regardless of the market.

I would also be converting from your traditional IRA into Roth, as you are likely to have high RMDs in 13 years, which may affect your Medicare premiums. I would convert some amount up to the top of the 22% tax bracket, for 2023, 2024, and 2025. Previous tax brackets are supposed to jump in 2026 when the Tax Cut and Jobs Recovery Act expires.

Finally, I'd make a spreadsheet that lists each year from now until age 100 for your wife, and age 95 for you, and have a separate column for each source of income: pension, investments at 3.5% annual withdrawal rate, and both Social Security incomes.

I think you'll find that you will have big piles of money in your 70's, and the challenge will become how to minimize taxes due at that time when you have required minimum distributions, and no tax sheltering possible. So you should get started on that now, before IRMAA is assessed (at age 63 for each of you) for Medicare.

Assuming that the pension has 100% survivor benefits, you have more than enough money. The problem is you should have more of it in Roth than you do.

This is sage advice.  I say that as someone who has helped manage a retirement for someone who's now on the other end of the 70s / RMDs, and who made similar moves which turned out to save a lot of money in taxes.  Taxes are going to become your largest planning issue.  E.g., if your retirement accounts grow, the RMDs are really going to whack you, so converting to Roths, withdrawing, or finding other ways to minimize those hits may well help you.  I would talk with a CPA and run some simulations. 

@Must_ache is also spot on - those are the options and tradeoffs here.

You're far more likely to end with a better inheritance if you aren't as risk-averse, however, as a retiree, I would feel shameless about being risk-averse.  (I have advised my own parent to do the same based upon risk preferences.) 

If you DO consider a lot of bonds, then also consider something to hedge your interest-rate risk: that's the #1 risk with a large bond position.  If rates go higher/stay high, especially early on, it really hits you.  Nobody really expects that currently, but markets are markets and anything is possible (especially if there were a war or other exogenous crises). 

lhamo

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Re: Given the Gift of a Layoff - Input Please....
« Reply #12 on: January 27, 2023, 07:08:43 PM »
I don't understand why you are making this complicated.

You are over age 55.  You can withdraw from your 401(k) immediately upon termination with no penalty.

At age 59.5 you can do the same with your IRAs.

You do not have a cash flow problem.  Maybe you have a tax-minimization problem.  The bogleheads spreadsheet is a useful tool for seeing the impact of growth and taxes on Roth conversion timelines.

Congrats, dude -- you are FIREd and do not have to worry about money any more than you find it interesting to do so.

Dicey

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Re: Given the Gift of a Layoff - Input Please....
« Reply #13 on: January 28, 2023, 02:20:04 AM »
I don't understand why you are making this complicated.

You are over age 55.  You can withdraw from your 401(k) immediately upon termination with no penalty.

At age 59.5 you can do the same with your IRAs.

You do not have a cash flow problem.  Maybe you have a tax-minimization problem.  The bogleheads spreadsheet is a useful tool for seeing the impact of growth and taxes on Roth conversion timelines.

Congrats, dude -- you are FIREd and do not have to worry about money any more than you find it interesting to do so.
^This.^ Also, it shouldn't take much to trim some fat from your budget. Living where you do with a paid-for house and cars and still needing  $84k per year seems incredibly spendypants. Ditto too on leaving your kids a huge inheritance.

Must_ache

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Re: Given the Gift of a Layoff - Input Please....
« Reply #14 on: January 28, 2023, 08:04:47 AM »
As a married couple you get a $25,900 standard deduction in 2022. 
Above that $83,550 of income will still keep you in the 12% tax bracket. 
So you can have a combined $109,450 of income and pay
0.10 x 10,275 + 0.12 x 73,275 = $9,821 of federal tax.  That's a 9,821/109,450 = 9.0% effective tax rate. 
Pay any state tax as well and I'm pretty sure you have plenty to live on in 2023.
PAY THE TAX WHILE IT'S LOW. 

CONGRATS ON THE SUDDEN RETIREMENT!!
« Last Edit: January 28, 2023, 08:11:08 AM by Must_ache »

billsfan1_2000

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Re: Given the Gift of a Layoff - Input Please....
« Reply #15 on: January 28, 2023, 09:15:51 AM »
Thank you all again.  You are really amazing people.  It's an honor to be among this group.  All the VERY best!!!

Two weeks into FIRE....it's AMAZING!!!

:) 

BicycleB

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Re: Given the Gift of a Layoff - Input Please....
« Reply #16 on: February 17, 2023, 02:06:22 PM »
Thank you all again.  You are really amazing people.  It's an honor to be among this group.  All the VERY best!!!

Two weeks into FIRE....it's AMAZING!!!

:)

Two thumbs up, @billsfan1_2000. One per week :)