Author Topic: Early retiring in two years...what should my taxable be in?  (Read 958 times)

ERFM

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Hi.  I am planning to early retire in two years.  I will be living off of my taxable account for the first five years as I do a Roth ladder conversion.  Since I will be entirely dependent on the taxable, I feel it should be in very conservative holdings.  Currently itís invested about 60/40 (stock/bond), but I am thinking it should be in a money market or something safe to preserve its value.  I am feeling particularly risk averse with this account.  Any ideas/suggestions?

MDM

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Re: Early retiring in two years...what should my taxable be in?
« Reply #1 on: May 01, 2021, 01:04:41 PM »
Depends on
a) the amount in the taxable account vs.
b) the amount you will need to spend from it.

The closer b) is to a), the more conservative you should be.  The more a) exceeds b), the more risk you can afford to take.

ERFM

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Re: Early retiring in two years...what should my taxable be in?
« Reply #2 on: May 01, 2021, 01:49:18 PM »
Thanks, MDM.  Itís current value is nearly the full amount I will need from it over the five year period, so I want to be very conservative with it.  Trying to figure out if there are particular conservative funds I should put it in, or perhaps just throw it all in a money market account, for example.

MDM

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Re: Early retiring in two years...what should my taxable be in?
« Reply #3 on: May 01, 2021, 02:00:07 PM »
Any choice has its pros and cons.  One to consider is a CD ladder.

chasesfish

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Re: Early retiring in two years...what should my taxable be in?
« Reply #4 on: May 02, 2021, 11:14:21 AM »
This may or may not help....but I've been retired two years and don't have significant Roth balances, so I'm early:

Overall I'm 21% Bonds/Cash, 79% Equities.

I have a significant deferred comp plan that pays out over 13 more years.   That account is 50/50 stocks and bonds and about half of my bond allocation

I also have two small inherited IRAs that have 9.5 years left on them, they are in 65/35 accounts. 

Those two accounts make up for around half of my withdrawals now

My taxable account runs just under 20% cash/bonds...this makes up the other half of my expenses. 

The rest of the bonds are in some old holdings of the Vanguard Wellington Fund in a couple of IRAs.

terran

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Re: Early retiring in two years...what should my taxable be in?
« Reply #5 on: May 02, 2021, 11:47:36 AM »
I'm going to use bonds as shorthand for the conservative but lower expected return investment and stocks as shorthand for the opposite. Keep in mind that holding bonds in taxable which you then sell and withdraw to spend is equivalent in an overall asset allocation sense to holding stocks in taxable which you then sell and withdraw to spend while at the same time selling bonds in tax advantaged and using the proceeds to buy stocks. In both cases the net effect is that you've replaced bonds with spendable cash resulting in less money in bonds, the same amount in stocks and more in cash, but with better tax efficiency (although this advantage is decreased in the current low bind yield environment). To MDM's point, if the amount you expect to need over the first five years is close to the amount you have available before your Roth conversion ladder is complete then you may decide to keep bonds in taxable despite the tax disadvantage since you can't afford to end up with too little in taxable even if that's offset with more in tax advantaged if there happens to be a crash during this time.

ChpBstrd

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Re: Early retiring in two years...what should my taxable be in?
« Reply #6 on: May 03, 2021, 12:54:56 PM »

FLBiker

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Re: Early retiring in two years...what should my taxable be in?
« Reply #7 on: May 03, 2021, 01:07:37 PM »
For a quantitative answer, see:

https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

and several other posts in this series.

This kind of made my head swim.  To soothe my ego, I'll blame it on my cold, rather than my intelligence.  Am I right in understanding that the recommendation is either a 60-100 or 80-100 glide path, and that the passive vs. active difference didn't amount to much (although active was a little better)?  And what is the timing for being back at 100%?  80 years old?  I really need like a 1 sentence conclusion for this...

ixtap

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Re: Early retiring in two years...what should my taxable be in?
« Reply #8 on: May 03, 2021, 01:35:08 PM »
Am I understanding correctly?

-You plan to retire with very nearly exactly 5x in taxable accounts
-You have no (or insignificant) existing Roth contributions or conversions

One missing factor would be tax rates. For example, someone who plans to retire very early may be in such a high tax bracket now that even with the 10% penalty it would make sense to pull funds from traditional or Roth accounts to fund a low expenses retirement.

Another missing factor is age. You talk about a 5 year Roth conversion ladder, so it seems likely that you are more than 5 years from 59.5, but it never hurts to be explicit. Especially since 60/40 in taxable seems pretty conservative for someone who is much younger than 55.

How set are you on retiring in two years? If you stay 60/40 now and haven't met your 5x in taxable goal, will you keep working?

If you are going to panic if this goes down, you should indeed be very conservative: CD's, MM, MYGAs, bond fund.

Watchmaker

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Re: Early retiring in two years...what should my taxable be in?
« Reply #9 on: May 03, 2021, 01:47:22 PM »
If your taxable account will be in the range of 1-1.25X the amount you'll need over the five years, a very low risk option is the right choice. Inflation probably won't be a significant issue over 5 years, but investing to try to at least get some inflation matching growth would be my recommendation. Given the rates you can get right now, I'd go with a money market account and keep my eyes open for better rates from savings accounts or CDs.

ChpBstrd

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Re: Early retiring in two years...what should my taxable be in?
« Reply #10 on: May 03, 2021, 02:59:10 PM »
For a quantitative answer, see:

https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

and several other posts in this series.

This kind of made my head swim.  To soothe my ego, I'll blame it on my cold, rather than my intelligence.  Am I right in understanding that the recommendation is either a 60-100 or 80-100 glide path, and that the passive vs. active difference didn't amount to much (although active was a little better)?  And what is the timing for being back at 100%?  80 years old?  I really need like a 1 sentence conclusion for this...

Best I can do:

"As a person with a 60-year retirement horizon, you should do a 60% to 100% glidepath over the first 100-133 months of retirement, which, at a 3.5% WR, will reduce your odds of full portfolio depletion to <1% compared to the ~10% observed for a static 100% equities portfolio starting in a high-CAPE environment like today's, assuming the future looks a lot like the past."

chasesfish

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Re: Early retiring in two years...what should my taxable be in?
« Reply #11 on: May 04, 2021, 04:49:54 AM »
For a quantitative answer, see:

https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

and several other posts in this series.

This kind of made my head swim.  To soothe my ego, I'll blame it on my cold, rather than my intelligence.  Am I right in understanding that the recommendation is either a 60-100 or 80-100 glide path, and that the passive vs. active difference didn't amount to much (although active was a little better)?  And what is the timing for being back at 100%?  80 years old?  I really need like a 1 sentence conclusion for this...

1 sentence conclusion:  The most risk to your early retirement plan is in the first five years, so you want to be more conservative during those years.

MustacheAndaHalf

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Re: Early retiring in two years...what should my taxable be in?
« Reply #12 on: May 04, 2021, 07:07:47 AM »
I think those equity glidepaths are also called a "bond tent".  As you approach retirement, your bond allocation goes up, and after retirement it starts dropping again - making it look like a tent.  You can also read about "sequence of returns risk" to see the problem it aims to solve.

A 60% stocks/40% bonds allocation is a standard retirement portfolio, so there shouldn't be too much to worry about.  The stocks provide growth, the bonds provide a cushion during crashes.

FLBiker

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Re: Early retiring in two years...what should my taxable be in?
« Reply #13 on: May 05, 2021, 10:16:42 AM »
Best I can do:

"As a person with a 60-year retirement horizon, you should do a 60% to 100% glidepath over the first 100-133 months of retirement, which, at a 3.5% WR, will reduce your odds of full portfolio depletion to <1% compared to the ~10% observed for a static 100% equities portfolio starting in a high-CAPE environment like today's, assuming the future looks a lot like the past."

Awesome, thank you!