Author Topic: My Plan - Looking for Optimization/Simplification/Review/Comments & Perspective  (Read 1943 times)

DeenGaleenga

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I am a 31 year old man and I have absolutely zero desire to sell my 30's to corporate America in the same way I sold off my 20's. This post could go for paragraphs about my ~toxic~ work environment and my ~gaslighting~ bosses and how ~burned out~ I am, but this tale is a dime a dozen so I will spare you. The fact is that I have no future in this profession and do not want one, not that I can find another job while interviewing when this attitude bleeds through every word I say to recruiters. I am surviving week by week, and entirely on fumes. I've developed a plan that I hope to pull the trigger on soon, and I think the timeline has shrunk to the order of months rather than multiple years. I need eyes on this plan that aren't mine before I enact it.

As a proportion of useful financial advice, the lion's share appears to me to relate to accumulation. It's pretty easy for the free CFP the brokerage assigns, rep from the company 401k, or the finance youtuber, to legally tell young go-getters to just max out them Roth IRAs, work hard, floss daily, and just be themselves, and everything will work out for the best! That's great and all but I'd like to group together any advice I can for the nitty-gritty mechanics of decumulating. I just about fainted when I saw the spreadsheet on here so I am hoping that if I just detail everything here I could get input: how the portfolio is structured across accounts, its asset allocation, potential improvements in tax efficiency, and how I intend to draw it down. At the end of the day I am trying to envision how an early retirement would function like, but I'm having some trouble connecting the taxes to the withdrawals, the manual rebalancing, and potential pitfalls. Honestly, I feel like at this point I may not be able to successfully get advice from a paid financial advisor on this, but I haven't yet tried this forum. Maybe none of this is particularly complex, but I would like to at least put it in writing. I also think I need to deviate from the template to present this in order.

Life Situation & Income:
31 M in Kansas (no desire to move), single filer (no desire to change), no dependents (no desire to have any)

My work income from 2024 would be about $96,000. Taking my SS wages since the first year I worked, SSA.tools provides me with a PIA of $1,434, meaning I have crossed the first bend point and then some. At this income, it would take me 22 more years to reach the second bend point (not happening). If I downshift into a lower-paying job, I could spend the rest of my life working and never reach the second bend point. No matter the amount, I intend to delay to the full amount, currently age 70.

Liquid Assets:
  • 401k - $385,000
    This is held entirely in funds that mimic total US stock, 19% a completion index fund with .02% E/R, and 81% an S&P 500 fund with .01% E/R.
  • Traditional IRA - $50,000
    This has $44k in Total US Bond, $6k in Total International, and SOME portion of this is a nondeductible basis, which I am tired of tracking
  • Brokerage - $250,000
    This is $142,000 in Total US Stock, and $105,000 in Total International. The dividends of this will now make up part or all of the contribution to a Roth IRA going forward so long as I have earned income
  • Roth IRA - $6,700 Total International
  • HSA - $17,000
    This has enough cash to cover one year's deductible, and the remainder in Total US Bond
  • HYSA @ 4.35% - $35,000
Comes out to a total of about $740,000.

I have kept a three-fund portfolio for as long as I've invested. I never picked stocks, or messed with crypto, or bought into literally anything but low cost index funds. This has led to an internal rate of return of 9.8% as of the beginning of this month. I wanted an allocation of 70% US Stock, 20% International, and 10% US Bond, and I believe I should stay at this allocation for the entire duration of the portfolio. I tried to place the assets in terms of tax efficiency and based off the limitations of available funds in my workplace accounts, and as a result annual rebalancing has led to this getting more complicated than I'd like. Yes, I mean to say I would like it even simpler than how I have it. If you have any suggestions, please let me know.

Real Assets:
  • Primary Residence - $286,000
    I don't plan on getting another
  • Daily Driver - $15,000
    I intend to drive this into the ground

Liabilities:
I have only one, the 30 year mortgage. 3.00% with $179,000 balance remaining.

Current "Must have" expenses (per month):
  • P&I - $793
  • T&I - $345
    My state now has at least three programs to take away most of low income seniors' property taxes, which I absolutely intend to take advantage of eventually.
  • Utilities (Gas, Electric, Trash, Sewage, Water, Cellphone) - rounds up to $300
  • Groceries & Toiletries - $300
  • Car; Gasoline, Insurance, and Maintenance - $200
    Once the value of the car drops a little more I intend to drop to a liability only policy, and if I no longer have to commute this gas expenditure will drop significantly.
Let's round this up to a total of $2,000. This doesn't include "May have" expenses a lot of which I hope to address while I still have an income, a lot of which is home maintenance. Even more nebulous are the "Want to have" expenses, when there's no more work income coming. I have cheap hobbies, enjoy cooking at home, and would like to travel annually (travel more like Rick Steves travels and less like Gucci Mane).

Putting it all together:
From my point of view, the situation has become a moving target based on when I can accumulate enough cash to eliminate the mortgage. The premium that riskless assets currently have over the mortgage rate will help me expedite this, but it will take a big reduction in my account contributions to build up cash; no more taxable contributions at all, and no more maxing out the 401k as I had, only achieving the match. The annual IRA contribution can be addressed with existing taxable account's dividends, and I think the HSA can keep going. I'm also going to need that income because for next several years that home maintenance I mentioned earlier needs to get done: water heater, some flooring, a bathroom reno, some siding, furnace & ac eventually. I expect the cost of these jobs to be proportional to the value of the home, and lots of DIY. I'm able-bodied and it's not exactly the Taj Mahal.

This is the point where I think I lose the plot:

Fast forward, between 12 and 24 months have passed, maybe asset prices have increased, maybe not. The mortgage is a little more paid off and I have hopefully saved up way more cash. I pay off as much as I can, leaving only an emergency fund. The remaining balance, if there still is one, I close out using the taxable. Once that is done, I hand in my resignation(?) At the start of the year, I begin a Roth conversion ladder. First with the tIRA balance, accounting for the small portion that is nondeductible, then rollover the 401k balance to tIRA and continue until the entire balance is converted to Roth or I reach 59.5, whichever comes first. For the same amount as the Roth conversion, I sell off the taxable balance to live off of. All of the lots at this point are held Long-Term. The balance of the taxable account must last no less than 5 years until I can begin withdrawing Roth principal. If the taxable is exhausted, I move to Roth principal. The worst case is that these balances must sustain me until I reach age 70 to take my maximum SS payout, the better scenarios are that I reach SS age and still have some left over. I do not want a lot left over in old age. I believe very much in the idea of dying with zero, and I don't intend to bequeath anything to anyone. This also acts as an upper bound for time horizon of safe withdrawal rate, in my case that'd be 37-39 years. The SS projected payout with those extra years of work and delayed to 70 gives me a monthly benefit of $1,776. 

I didn't mention the precise withdrawal number because I think more realistically, my expenses in retirement will be limited by the need to maximize ACA exchange subsidies until Medicare age. While doing Roth conversions and selling off taxable, I don't quite understand how much I can take. I could get a high-deductible Bronze ACA plan, but what I'd actually prefer is a Silver plan with cost sharing, which has subsidies max out at 150% FPL. To start I am not sure I can get there while performing both Roth Conversions AND realizing capital gains. How much headroom do I have, exactly?

As the example, if I am trying to get that Silver plan subsidy and need an MAGI of ~$24,000, I can only Roth convert only $24k less all of those capital gains, dividends, and interest? If that's the case it's probably not tenable and I would instead try for the Bronze plan for the duration of the Roth ladder. At $33,000 income I see a Bronze plan for a $0 premium and $7,500 OOP max. The purpose of the HSA would become the self-insurance in case I hit the OOP in any given year, and at least currently I have recurring medical expenses exactly never. Should I stop Roth conversion at 59, I could then control my income to get that Silver plan.

That's it so far as my drawdown plan. Does everything there look correct? Really hoping someone could help me with the missing pieces there.

Separately from that, is the asset allocation and location. Rebalancing has become increasingly difficult each year, and I don't think I can continue to do it. Should I change where the different assets are located? I felt like keeping bonds in the HSA may make more sense given the kind of account it is, but now think since VTIAX is an option there, to replace the international in the tIRA so that there are only bonds there.

Aside from that, do you all think I have a shot?
« Last Edit: December 24, 2023, 01:13:38 PM by DeenGaleenga »

Freedomin5

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Congratulations on amassing a nice size nest egg at such a young age! I am not American, so cannot comment on health plans.

There is a Pre-FIRE checklist on this forum. You may find it helpful to check your preparations against the list.

Also, what strategies are you using to mitigate sequence of returns risk (SORR)?

DeenGaleenga

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Congratulations on amassing a nice size nest egg at such a young age! I am not American, so cannot comment on health plans.

There is a Pre-FIRE checklist on this forum. You may find it helpful to check your preparations against the list.

Also, what strategies are you using to mitigate sequence of returns risk (SORR)?
Thank you, I would think the bond portion is what would help mitigate. What's in the tIRA now would make up the first converted lots, potentially 100% Total US bond - intermediate term and mostly US treasuries. Failing that, I would have to find some work again as I would still be in my 30's.

secondcor521

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I get the burnout.  I would encourage you to be open to getting an easier job at a place you enjoy, probably after taking some time off - a year or two - to decompress and destress.

You probably won't get good advice on decumulation from any paid advisor, especially trying FIRE at your age.  It's a rare knowledge set, and they have little to no incentive to learn it or provide it with the way their compensation is typically structured.  The closest  I ever came was an older CPA who was partner at a tax firm, and I have bought his advice, an hour at a time, a few times.

I think you'd hit the second bend point of SS sooner than you project, so I think you're doing something wrong with the math, but that's probably neither here nor there given the rest of your post.

The key thing about a low paying job is it helps preserve your taxable from drawdown while priming your Roth ladder and paying down your mortgage.  It also lets you slow down the Roth conversion ladder if needed which might help you on your taxes / ACA subsidy.

I don't and never have bought international.  Not buying international would simplify your asset allocation and rebalancing.  But I think that's something you have to decide if you're OK with.

Go find and read the Bogleheads article on asset placement and consider following it if you're not already.  As an example, I also have an HSA, but it's 100% stocks.  All of my bonds are in my traditional IRA.  There are potential drawbacks to this which I'm sure you can think of, but having a lot of slop in my plans and some luck has resulted in none of the drawbacks applying to me (yet, knock wood).

Also, in terms of asset placement, I think the BH article will recommend putting international in taxable so you can take advantage of the foreign tax credit.  I don't do international so I don't know if that's good advice or not.

Were I in your shoes, I'd keep the 3% mortgage (assuming it's fixed rate 30 year and you still have many years left), and just pay the payment as part of your monthly budget.  This will impact the size of your Roth conversion ladder for a decade or two, but it's also almost certain to grow your net worth (9.8% >> 3%), which will make your plan bulletproof over time.  And if you hit SORR early on, you can always get a job as you said.

I would not pile up cash and I wouldn't deplete the taxable to pay off the mortgage.

It looks like your brokerage should last long enough to prime your Roth conversion ladder.  ~$250K / $24K = 11ish years, even if it doesn't grow or throw off dividends.

$740K / $24K is about 31x.  That's arguably on the thin side for someone age 31, but if you have a flexible attitude and either some luck in terms of SORR and/or get some additional income for a few years, you should be OK overall.

One very key thing to understand is that $1776 age 70 SS benefit is in today's dollars.  So your SS benefit alone covers ($1776 / $2K) = 89% of your current budget.  The amount you'll get at age 70 from SS, even if you never work again (and of course assuming the SS budget situation gets worked out which I think it will), will be inflation adjusted, so you'll actually get like $5624 or so (assuming 3% inflation adjustments for the next 39 years).  Doublecheck to confirm this for yourself.

I agree on waiting until 70 for SS.  That's what I plan.

ACA subsidies are based on AGI, which is line 11 on your tax return.  Dig out your 2022 tax return, look at line 11, then look at all the numbers above that.  That's how you'll know what goes into your AGI.  (Of course, your wages, which I think are line 1, would drop.)

Yes, ACA CSR maxes out at an AGI of 150% of FPL, but they're still really good at AGI of 200% FPL, which may be a more reasonable target (especially if you don't pay off your mortgage - keeping your mortgage requires cash flow, which in turn requires you to draw money from somewhere, which will probably result in adding to AGI - either Roth conversions if you are doing a Roth ladder, or capital gains if you're living off taxable, or wages if you get a job).

2024 200% FPL is $14,580 * 200% = $29,160 AGI (https://obamacarefacts.com/federal-poverty-levels-for-aca-coverage/)

I'd take a look at ACA Silver plans at $29,159 AGI, or Bronze HSA eligible HDHP plans.  Silver plans are typically not HSA eligible, so if you chose an ACA Silver plan, you wouldn't be able to contribute to your HSA.  Personally I do a Bronze HSA eligible plan and contribute to an HSA even in FIRE.

Why stop Roth conversion at 59?  Is that when your mortgage would be paid off?  If so, you could probably stop the Roth conversion 5 years earlier because of the 5 year pipeline lag - you should always be Roth converting enough for your spending 5 years in the future.  So maybe age 54.

Why is rebalancing difficult?  Rebalancing takes me like 5 minutes once or twice a year.  If I understood why you think it's difficult, maybe I'd have ideas for that.

Other than that, you have a solid handle on your numbers, you have an asset allocation that you've thought about, you're aware of SS and SORR, and your liquid assets are high enough and your expenses low enough.  You're better prepared for FIRE than most people are for retirement.

DeenGaleenga

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I get the burnout.  I would encourage you to be open to getting an easier job at a place you enjoy, probably after taking some time off - a year or two - to decompress and destress.

You probably won't get good advice on decumulation from any paid advisor, especially trying FIRE at your age.  It's a rare knowledge set, and they have little to no incentive to learn it or provide it with the way their compensation is typically structured.  The closest  I ever came was an older CPA who was partner at a tax firm, and I have bought his advice, an hour at a time, a few times.

I think you'd hit the second bend point of SS sooner than you project, so I think you're doing something wrong with the math, but that's probably neither here nor there given the rest of your post.

If my SS wages were as high as they would be for 2024 that may be the case, but the numbers I'm using are as follows (rounded, 2023-2024 are an estimate):
  • 2024 - $93k
  • 2023 - $90k
  • 2022 - $88k
  • 2021 - $81k
  • 2020 - $78k
  • 2019 - $75k
  • 2018 - $73k
  • 2017 - $72k
  • 2016 - $69k
  • 2015 - $34k
  • 2014 - $12k
  • 2013 - $7k
  • 2012 - $4k
  • 2010 - $6k

SSA.tools doesn't allow for me to adjust the future earnings up, I can only enter one income for all future years. I get 22 years if I input 2024 earnings for the next 22 years. Obviously not very realistic, but even assuming my W-2 income doesn't drop, and instead follows inflation over the next several years, I think I need something like 13 years to reach the second bend. To estimate that, I have the Physician on Fire spreadsheet, and just pretended 2010 was 1996. The index factors may not be exactly the same going forward, but in either case that to me is many, MANY more years.

That said, I am referring to a benefit in 2023 dollars, as well as the expenses. Often people pick at the idea that safe withdrawal rates are only sustainable for 3 or 4 decades, so I anticipated this by anchoring how long the portfolio has to last in the worst case to max SS age, because I think the benefit in 2062 dollars will easily cover the listed expenses in 2062 dollars.

Quote
Why stop Roth conversion at 59?  Is that when your mortgage would be paid off?  If so, you could probably stop the Roth conversion 5 years earlier because of the 5 year pipeline lag - you should always be Roth converting enough for your spending 5 years in the future.  So maybe age 54.

Why is rebalancing difficult?  Rebalancing takes me like 5 minutes once or twice a year.  If I understood why you think it's difficult, maybe I'd have ideas for that.

I would discontinue Roth conversions that year because I could just begin to withdraw from the traditional accounts at that point, if there are still traditional assets there. I think it is correct that I would cut off conversions at 54 in either case though. Coincidentally that is also when this mortgage would be paid off.

Rebalancing is difficult because of just that, international allocation and tax efficient placement. I did primarily place International into taxable for the credit, and I do claim it. For amounts less than $300 it's a simple credit to claim. That little efficiency doesn't make up for its performance, meaning that of the three funds the Total US balance grows significantly, while the other two lag behind. For Total Bond rebalancing is easy because it's only a 10% allocation and it would be rebalanced in tax advantaged accounts. To make up the lag of Total International the only way I've been doing so far is just throwing more money at shares in the taxable. At this point my plan is to honestly just stop rebalancing and let it ride, then on drawdown, prioritize the Total US in the taxable.

secondcor521

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The reason I questioned it is that I got past the second bend point with about 22 years of full time after college income, and my early earnings trajectory was similar to yours.  But my earnings trajectory the last ten years of work probably exceeded inflation.  It's possible that it would take you a lot longer due to inflation in the sense that my earnings record was similar in nominal terms but occurred 20 years before yours.  But I don't think so; I think there's something off somewhere.  Again, though, it doesn't matter really as long as SS is calculating it right, and I'm sure they are.

If you just switched to US and domestic bonds, then your asset placement issues would be simpler.  Your 10% bond allocation fits in your deferred quite easily.  Again, though, that's up to you.

meadow lark

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Yep.  I think you can do it.  I wonít give you lots of suggestions - I donít think you need them.  If you want or need more money I have zero doubt youíll make more money.  Go have fun!

Malum Prohibitum

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I get the burnout.  I would encourage you to be open to getting an easier job at a place you enjoy, probably after taking some time off - a year or two - to decompress and destress.

You probably won't get good advice on decumulation from any paid advisor, especially trying FIRE at your age.  It's a rare knowledge set, and they have little to no incentive to learn it or provide it with the way their compensation is typically structured.  The closest  I ever came was an older CPA who was partner at a tax firm, and I have bought his advice, an hour at a time, a few times.

I think you'd hit the second bend point of SS sooner than you project, so I think you're doing something wrong with the math, but that's probably neither here nor there given the rest of your post.

If my SS wages were as high as they would be for 2024 that may be the case, but the numbers I'm using are as follows (rounded, 2023-2024 are an estimate):
  • 2024 - $93k
  • 2023 - $90k
  • 2022 - $88k
  • 2021 - $81k
  • 2020 - $78k
  • 2019 - $75k
  • 2018 - $73k
  • 2017 - $72k
  • 2016 - $69k
  • 2015 - $34k
  • 2014 - $12k
  • 2013 - $7k
  • 2012 - $4k
  • 2010 - $6k

SSA.tools doesn't allow for me to adjust the future earnings up, I can only enter one income for all future years. I get 22 years if I input 2024 earnings for the next 22 years. Obviously not very realistic, but even assuming my W-2 income doesn't drop, and instead follows inflation over the next several years, I think I need something like 13 years to reach the second bend. To estimate that, I have the Physician on Fire spreadsheet, and just pretended 2010 was 1996. The index factors may not be exactly the same going forward, but in either case that to me is many, MANY more years.

That said, I am referring to a benefit in 2023 dollars, as well as the expenses. Often people pick at the idea that safe withdrawal rates are only sustainable for 3 or 4 decades, so I anticipated this by anchoring how long the portfolio has to last in the worst case to max SS age, because I think the benefit in 2062 dollars will easily cover the listed expenses in 2062 dollars.

Quote
Why stop Roth conversion at 59?  Is that when your mortgage would be paid off?  If so, you could probably stop the Roth conversion 5 years earlier because of the 5 year pipeline lag - you should always be Roth converting enough for your spending 5 years in the future.  So maybe age 54.

Why is rebalancing difficult?  Rebalancing takes me like 5 minutes once or twice a year.  If I understood why you think it's difficult, maybe I'd have ideas for that.

I would discontinue Roth conversions that year because I could just begin to withdraw from the traditional accounts at that point, if there are still traditional assets there. I think it is correct that I would cut off conversions at 54 in either case though. Coincidentally that is also when this mortgage would be paid off.

Rebalancing is difficult because of just that, international allocation and tax efficient placement. I did primarily place International into taxable for the credit, and I do claim it. For amounts less than $300 it's a simple credit to claim. That little efficiency doesn't make up for its performance, meaning that of the three funds the Total US balance grows significantly, while the other two lag behind. For Total Bond rebalancing is easy because it's only a 10% allocation and it would be rebalanced in tax advantaged accounts. To make up the lag of Total International the only way I've been doing so far is just throwing more money at shares in the taxable. At this point my plan is to honestly just stop rebalancing and let it ride, then on drawdown, prioritize the Total US in the taxable.

I don't have any advice for you, sorry, I just wanted to congratulate you for having built up a massive amount of savings at such a young age, especially with the income levels you posted.  I was negative net worth at your age.  What was your savings rate?

DeenGaleenga

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I don't have any advice for you, sorry, I just wanted to congratulate you for having built up a massive amount of savings at such a young age, especially with the income levels you posted.  I was negative net worth at your age.  What was your savings rate?
Thank you. I actually didn't track savings rate too closely, I just knew that it was very high. I can say that I was able to max a 401k, HSA, IRA, buy taxable lots pretty much every year, and was still able to live off of the remainder. The only reason I have the earnings history is because the SSA keeps track of it for you.

blueberrybushes

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DeenGaleenga,

Will only offer two things:

- I agree with secondcor, don't waste your time with International.  The LT performance is about half of the domestic equity market (check it out).  Succeeding at international requires timing which no one is very good at.

- I quite the corporate world when I was 42 when my paycheck was about $55K/yr (not bad in 1994 before tech salaries) with about $675K in investments.  After that, I picked up all kinds of hustles to pay the bills, but never made more than $25K/yr with no debt.  My point is - there are alot of jobs out there that you might enjoy if you give them the chance.  Believe it or not, the job I liked the most was driving a motorcoach bus and coaching

- If you quit the corporate rat race, your life's tapestry will be quite different.  When I think back to 1994, if I had stuck with the path I was on, my net worth would probably be 3-4x what it is, but I would not have been happy and some amazing opportunities would never have come my way.  You should seek something you like to do and have a purpose for getting out of bed each day.

As it is, the $675K turned into $3.5MM today despite very poor decisions in 2008/2009.  Your time horizon is very long, so go heavy in the funds you won't need for 30+ years, so they return 8-10%/yr.

Good luck from a 70 something,

PW