Please help my family optimize our 1,000,000 portfolio & retirement plan!

[bc3m]

My husband and I have roughly 1M in various accounts (no other assets). We did not think we were anywhere close to having enough to retire based on all the retirement calculators out there, but then we found this site and we are very grateful we did. We'd like some help and suggestion on how we should allocate our money in order to retire in about 5 years. We are in our early 40s and have three children (ages 3, 4, and 7). We would like to live on a monthly budget of around 5,000. About 350k of our asset is in Roth and Traditional IRAs (total of 4 accounts), the rest is all in savings accounts. The large amount of cash in savings came from the sale of our house, which we don't plan on buying another in the near future. We were on the sideline for over three years but really don't feel like we can afford anything in this market any more (in Southern California). So we will continue to rent for some time. For the next 5 years, we will live off our income and not withdraw from our assets. We will also start putting around 30k for each child's college over the next 5 years. We'd like to grow the 1M to 1.5M in 5 years so we can start withdrawing the 4% from it in 5 years and be financial independent. We will slowly transition our savings account cash into i401k account, but for now they will need to be invested in none tax deferred account. We want to hold an allocation of 80/20 stocks/bonds or 90/10 stocks/bonds. Thank you in advance for the help. Here are some of our questions:

1. What's the best way to handle our none tax deferred account investment?

2. Is the 80/20 or 90/10 stocks/bonds allocation a good balance for our goal (VTSAX & VBTLX)?

3. Should the allocation of 80/20 or 90/10 be for each account or as a whole, which is easier to manage?

4. Where and what’s the best account/place to park kids education fund?

5. Is putting this much cash into the market in none tax deferred account at this pricing point a good idea?

6. Should we consider putting some money back into real estate in more affordable areas (primary home)?

[velocistar237]

Looks like you have a majority of your plan already worked out.

1. Just open a Vanguard account and put money in it? You can dollar-cost average if you're more comfortable with that, or some split between the two, but studies show that time in the market is better on average than waiting. There is a risk that you'll put it in the market and the market will drop significantly in the near future, but that's just the nature of the market.

2. Both splits are good for long-term investing, which is what you'll be doing. You have enough assets to consider diversifying a little more, but you don't have to. If you're going to buy a house within 5 years, you might want to put some aside in a short-term investment.

3. Your asset allocation should be across all of your assets, with funds placed according to tax efficiency: https://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement . With a simple stock/bond split, this would mean putting all of your bond investment inside your tax-deferred accounts. Rebalancing can be a pain if you diversify more, but it's worth it.

4. Some mix of shielding your assets from FAFSA in your home and retirement accounts, 529, and qualified IRA withdraws. This is a pretty big topic, so spend some time poking around on this forum and elsewhere.

5. Timing the market usually doesn't work. You will always risk losing a big chunk of money, but you have to get into the market at some point. Might as well take the risk and maximize your time in the market.

6. Do you mean buying a primary residence, or investing in real estate?

[Financial.Velociraptor]

Assuming poor tax efficiency to make the math easy (YMMV):

5000/mo = 6,667/mo before taxes (25% bracket)
6667*12 = 80,000 annual withdrawal
80000 / 1000000 = 8% withdrawal rate.

That's twice what the conventional wisdom says is "safe".

I spend less than half what you project and consider myself somewhat spendy-pants.  Every dollar you can shave off your expenses is worth 12.5 dollars of 'stache to you, assuming the 8% rate.  I'd recommend an exercise to document every penny you spend for 3  months so you can get a realistic idea of what can be trimmed without causing marital stress.  Your returns there will be much higher than anything you can achieve in the market.  If you can get down to 6% withdrawal rate your odds of outliving your money will drop dramatically.

[velocistar237]

80000 / 1000000 = 8% withdrawal rate.

Sounds like they plan to keep working until they get to about a 4% WR. They'll probably cut some expenses in the meantime, too, if they pay any attention to this community.

[forummm]

Assuming poor tax efficiency to make the math easy (YMMV):

5000/mo = 6,667/mo before taxes (25% bracket)
6667*12 = 80,000 annual withdrawal
80000 / 1000000 = 8% withdrawal rate.

That's twice what the conventional wisdom says is "safe".

I spend less than half what you project and consider myself somewhat spendy-pants.  Every dollar you can shave off your expenses is worth 12.5 dollars of 'stache to you, assuming the 8% rate.  I'd recommend an exercise to document every penny you spend for 3  months so you can get a realistic idea of what can be trimmed without causing marital stress.  Your returns there will be much higher than anything you can achieve in the market.  If you can get down to 6% withdrawal rate your odds of outliving your money will drop dramatically.

The taxes will be much less than that (first almost half is taxed 0%, next portion 10%, etc). OP, try out taxcaster to see more precisely given your specific scenario.

[beltim]

Assuming poor tax efficiency to make the math easy (YMMV):

5000/mo = 6,667/mo before taxes (25% bracket)
6667*12 = 80,000 annual withdrawal
80000 / 1000000 = 8% withdrawal rate.

That's twice what the conventional wisdom says is "safe".
…
  If you can get down to 6% withdrawal rate your odds of outliving your money will drop dramatically.

Velocistar and forummm already addressed this, but I want to point out just how wrong this post is.  I don't think the raptor actually read the post.  The post completely misses (as velocistar pointed out) the fact that the OP doesn't want to retire now at 1 million, but instead in 5 years at 1.5 million. 

And, to put numbers to forummm's point, a married couple filing jointly with 3 kids and $60k per year expenses would owe a grand total of $191 in taxes, assuming all of it came from the higher-taxed ordinary income.  So financial.raptor is off by just under $20,000 per year in taxes (33%), $500k on assets (50%), which combines to be wrong by a factor of two on withdrawal rate.

If even half of the retirement income came from qualified dividends or long-term capital gains, then total annual federal taxes would be under $1,000 per year even after the OP loses all deductions and tax credits for the kids.

[My Own Advisor]

I wouldn't say the math is easy...but I would aim for 3-4% SWR and nothing more.

Spend the dividends and distributions and keep your $1 M capital intact until you at least have the kids out of the house.