Author Topic: What are the mechanics to living off your stache?  (Read 4088 times)

Swamp Chomp

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What are the mechanics to living off your stache?
« on: March 30, 2019, 07:45:43 PM »
So, you've followed the MMM lifestyle and investing ways and have reached the 25 times annual spending amount needed to "retire".  You're ready to quit your job and start living off your stache... but how exactly does that all work?  Can someone point me to some articles that explain how you then draw on that money (stocks, IRA's, other) to cover your living expenses?

Swamp Chomp

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Re: What are the mechanics to living off your stache?
« Reply #1 on: March 30, 2019, 07:46:56 PM »
By the way, I'm posting extra to get rid of this 5 O'Clock Shadow ;)  So embarrassing...

Swamp Chomp

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Re: What are the mechanics to living off your stache?
« Reply #2 on: March 30, 2019, 07:54:19 PM »
Also, if you're supposed to have 25 times your annual budget in investments, are there certain percentages in each category that you want to have?  For example 50% of your portfolio in stock, 50% in your IRA, etc?

ixtap

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Re: What are the mechanics to living off your stache?
« Reply #3 on: March 30, 2019, 08:23:13 PM »
IRA and stock are not different categories. One is a type of account and the other is a type of investment. You can have stock in your IRA.

Your asset allocation depends on a number of factors, which boil down to your risk tolerance. I believe the oft cited Trinity study looked at a 60stocks/40bonds allocation. When you choose which asset class to get the funds from, you look at where things stand and rebalance.

Choosing what type of account to draw from is a function of eligibility, tax consequences and how overall income affects healthcare or other requirements. When you withdraw (or convert) from a traditional retirement account, all of that is regular income. When you withdraw from Roth, none of it is income. When you withdraw from taxable accounts, you will usually have capital gains, which are taxed differently than regular income, but count against income for many program requirements (ie, ACA subsidies).

For US early retirees, drawing from tax sheltered accounts can be an issue, but there are many exceptions. For example, traditional IRAs can be converted to Roth, then those conversions are available penalty free after a five year waiting period.

Swamp Chomp

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Re: What are the mechanics to living off your stache?
« Reply #4 on: March 31, 2019, 11:05:47 AM »
Thanks a bunch ixtap.  I'm still in the process of figuring how all this works... so complicated. 

So, is what you're citing here about converting the Traditional IRA to the Roth what people refer to as the "Roth Conversion Ladder"?  I've heard some say the ability to do that is likely to go away at some point in the future.

For mustachian folk, what type of investments makeup the lions share of their portfolio?  IRAs?  Straight stocks/bonds?  Annuities?  Etc?  And what are the percentages in each?  It seems there is a lot that says you want to have 25 times your annual expenses built up in savings but isn't how that money is allocated also super important?

And do you know any good articles that go into detail on how to actually start living off the money you've saved?  I am ready to embrace this lifestyle and learn how the investing works but also want to understand how it's going to work when I'm on the other end.  Really don't want to get to that point and find out we put way too much into the wrong asset...

Greatly appreciate your insights.

- Ben

harvestbook

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Re: What are the mechanics to living off your stache?
« Reply #5 on: April 01, 2019, 09:54:48 AM »
I like Go Curry Cracker since he writes about living off his money and with lots of tips for managing or reducing taxes.

Mustachians are a very aggressive and optimistic bunch. A recent poll showed nearly 80 percent of us hold 80 percent in stocks or more. https://forum.mrmoneymustache.com/investor-alley/investors-how-risky-are-you-and-why/

That would horrify more conservative people, like those at Bogleheads (which is another very good site, but like this one, you have to pick and choose the advice that makes sense). I wouldn't worry too much about retirement spending yet since you're early int he journey. Just keep reading the forums and learn as you go. The most important thing to do now is keep expenses low and invest as much as you can.

bacchi

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Re: What are the mechanics to living off your stache?
« Reply #6 on: April 01, 2019, 10:52:14 AM »
The traditional IRA to Roth IRA conversion ladder takes 5 years for the conversion amount to become a tax-free withdrawal.

When you ER, you'll need 5 years of savings/investments to fill the gap between your first conversion and your 6th year (when your 1st conversion is ready).

Ideally, that 5 years comes from Roth contributions (the standard $6k/year kind) and taxable brokerage accounts.

reeshau

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Re: What are the mechanics to living off your stache?
« Reply #7 on: April 02, 2019, 08:04:16 AM »
@Swamp Chomp , the research that defined the 4% rule (also viewed as 25x savings) found an optimum point of 50%-75% equities.  However, the precision of those estimates were limited by the tool capabilities of the late 90's.  You can read up more on that, directly, on Wade Pfau's http://www.retirementresearcher.com website.

But really, there is no one solution.  Some people get 4% through a rental portfolio.  Some have 25x in stocks, and sell some off each year.  Traditionally, it wouldn't be out of line to get it through an annuity, but you won't get that with historically-low interest rates.  (not to mention other problems with annuities--danger! danger!)  If you are just starting to understand this whole community, though, know that the rule started with a basic stocks (mutual funds) / bonds mix.

DeniseNJ

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Re: What are the mechanics to living off your stache?
« Reply #8 on: April 02, 2019, 01:08:03 PM »
It's a good point that there are lists of exactly what to contribute to first, second, third, etc. like emergency fund, then 401K to match, then debt, etc. but there isn't such a list for tapping funds.  I guess it all depends on your tax situation or your financial needs.  Like you would first tap taxable accounts, so shield part of that up to the standard deduction, then Roth contributions, then the 401K or IRA that you've already started funneling into the Roth?  But it would also depend on age and are you getting Social Security or a pension.  Funny how the entire stategy is based on how to avoid taxes--I gues if not for that you could take out whatever you wanted.  You might also sell your stocks when they are not in the toilet or dollar cost ave the money out just as you put the money in.

I'd be interested to know some of the mechanics, like to you take out a lump sum at the beginning of the year to park in a savings acct or do you set up a monthly distribution to DCA out.  Would you sell your bonds first or your stock or a combo?  Lots of people say pay off the house last if at all, but nobody says, take out a mortgage on the house to live off of.  Like the mentality of if you wouldn't buy it now you shouldn't own it--like if you would delay paying off the house to invest the difference, would anyone with equity take out a mortgage to invest it?

I'm a few years away but it seems like more people would need help and advice on how to get your money vs how to save it.  Ppl hire investment advisers but they could just get an index fund and forget it.  It's when you are taking the money out that you are liable to make some major mistakes.  It seems saving is the easy part.

ixtap

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Re: What are the mechanics to living off your stache?
« Reply #9 on: April 02, 2019, 01:44:37 PM »
You will sell stocks or bonds as needed to maintain you desired asset allocation. You choose which accounts to draw down based on your own tax situation.

For example, I may never convert my traditional accounts to Roth because I am much older than my husband. We may well spend time converting his accounts, then live off of mine once I turn 59.5.

SpartyStash

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Re: What are the mechanics to living off your stache?
« Reply #10 on: April 12, 2019, 05:21:42 PM »
It's a good point that there are lists of exactly what to contribute to first, second, third, etc. like emergency fund, then 401K to match, then debt, etc. but there isn't such a list for tapping funds.  I guess it all depends on your tax situation or your financial needs.  Like you would first tap taxable accounts, so shield part of that up to the standard deduction, then Roth contributions, then the 401K or IRA that you've already started funneling into the Roth?  But it would also depend on age and are you getting Social Security or a pension.  Funny how the entire stategy is based on how to avoid taxes--I gues if not for that you could take out whatever you wanted.  You might also sell your stocks when they are not in the toilet or dollar cost ave the money out just as you put the money in.

I'd be interested to know some of the mechanics, like to you take out a lump sum at the beginning of the year to park in a savings acct or do you set up a monthly distribution to DCA out.  Would you sell your bonds first or your stock or a combo?  Lots of people say pay off the house last if at all, but nobody says, take out a mortgage on the house to live off of.  Like the mentality of if you wouldn't buy it now you shouldn't own it--like if you would delay paying off the house to invest the difference, would anyone with equity take out a mortgage to invest it?

I'm a few years away but it seems like more people would need help and advice on how to get your money vs how to save it.  Ppl hire investment advisers but they could just get an index fund and forget it.  It's when you are taking the money out that you are liable to make some major mistakes.  It seems saving is the easy part.


There was a CNBC article 5 days ago that mentioned 2 platforms (Kindur, Income Strategy) that I think are trying to address this challenge (which accounts should be used to generate your retirement income).   

https://www.cnbc.com/2019/04/05/new-tools-may-figure-out-how-big-your-retirement-check-will-be.html

I plan to take a look at these two products, but it's unlikely that I would sign up for anything that has a fee.  I think Kindur has a 0.5% yearly fee for assets under management, which is ~16% of the retirement salary I plan to pay myself (withdrawal rate ~3.0 - 3.5%).  So no. 

It would be nice to have some type of tool where one could plug in all of your positions and have it check your withdrawal strategy.  I'm definitely thinking about which accounts to sell from and what positions to sell.  This is a challenge for me.  Like some MMM folks, I've got a bunch of accounts (taxable investments, traditional IRA, rollover IRA, SEP IRA, Fidelity Personnel Retirement Annuity, small pension where there is no increase in monthly payout from age 60 to 65 (flat profile in that age range), eventually SS).  All of the accounts have multiple positions.  No Roth and no plans to convert though.  Right now I've got a bunch of spreadsheet tabs with different scenarios (e.g. early pension-delay SS, delay pension-early SS, etc..., that incorporate yearly dividends & capital sales that'll comprise my yearly income).  I've thought about which positions to sell in my taxable account as that's where I'll be drawing most of my retirement salary for the next 10-15 years.  But I'm not 100% sure on some of my choices.  It doesn't help that I have multiple positions that are similar (e.g. SCHG-VONG-IWF, BP-XOM-CVX).  Doh... 



BECABECA

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Re: What are the mechanics to living off your stache?
« Reply #11 on: April 12, 2019, 06:22:47 PM »
I feel like most of this stuff has been covered in an MMM post (http://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/) and anything not covered there is in JL Collinsí The Simple Path to Wealth.

sol

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Re: What are the mechanics to living off your stache?
« Reply #12 on: April 12, 2019, 07:30:10 PM »
I plan to take a look at these two products, but it's unlikely that I would sign up for anything that has a fee. 

There is already a fantastic free tool for calculating your optimal withdrawal strategy.  It's called a spreadsheet.

I have a column for the balance of each account.  Rows are months.  Each month I withdraw from one of those columns and add the amount to my checking account column, from which I then subtract my monthly projected expenses.

It's pretty easy.  Once a year the spreadsheet shows Roth conversions from a traditional IRA to my Roth, then five calendar years later it withdraws those conversions tax and penalty free and puts them in checking.  There are other transfers for things like incoming rent surpluses, and potential sales of properties. 

If you don't understand the mechanics of these accounts well enough to build your own spreadsheet, you probably need to do some more reading before trying to do it for real.

CowboyAndIndian

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Re: What are the mechanics to living off your stache?
« Reply #13 on: April 13, 2019, 08:03:17 AM »
If you want a great description on how to do this, go through what @Dr. Doom has published in his blog. He is not very active either on his blog or his forum, but his articles are phenomenal.

The article of actual withdrawal is here https://livingafi.com/2014/05/18/drawdown-part-3-strategy/
It is a 5 part series, I would recommend you read all five.

radram

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Re: What are the mechanics to living off your stache?
« Reply #14 on: April 13, 2019, 08:11:13 AM »
Thanks a bunch ixtap.  I'm still in the process of figuring how all this works... so complicated. 

So, is what you're citing here about converting the Traditional IRA to the Roth what people refer to as the "Roth Conversion Ladder"?  I've heard some say the ability to do that is likely to go away at some point in the future.

For mustachian folk, what type of investments makeup the lions share of their portfolio?  IRAs?  Straight stocks/bonds?  Annuities?  Etc?  And what are the percentages in each?  It seems there is a lot that says you want to have 25 times your annual expenses built up in savings but isn't how that money is allocated also super important?

And do you know any good articles that go into detail on how to actually start living off the money you've saved?  I am ready to embrace this lifestyle and learn how the investing works but also want to understand how it's going to work when I'm on the other end.  Really don't want to get to that point and find out we put way too much into the wrong asset...

Greatly appreciate your insights.

- Ben

Some great questions Ben. Welcome.

I think the key to most of your questions is knowledge. As you learn more, you can do more. And yes, things change. It is your responsibility to keep track of changes to tax law, and to plan accordingly. People here are great at discussing that sometimes with a political flair(I am guilty as charged). Keep asking, keep reading, and eventually you will lay out a plan that we would be more than happy to look at and comment on.

To some of your points:
Roth ladder - I have not heard of a law being proposed that would eliminate this ability. If it changes, we will change our plans to fit the law. As another example, tax law could change anytime to say that all future Roth withdrawals are taxed at 90%. I think the odds of this are almost zero, but I do believe that before I leave this earth, there will be added rules to Roth withdrawals I will need to maneuver to lower my taxes. I think the odds of unlimited tax free withdrawal of Roth accounts for my lifetime is also close to zero.

I like to think that investing is about buckets. You can have different buckets, and those buckets can be filled with different things. Each bucket has advantages and disadvantages under current tax law.

Roth IRA's have tax free withdrawals and no required minimum distributions but are funded with taxed money and have rules to access them. Traditional IRA's, 401k's, SEP's, etc. can be used to lower current AGI and grow tax deferred, but have RMD's and are income when you take them out. Non-qualified accounts(sometimes called cash accounts) have very few withdrawal requirements but realized earnings are taxed every year.

Annuities are a different animal. I do not consider annuities as part of an investment portfolio, because they make poor investments and charge very high fees in general. There can be some uses for them, but I think most here do not find them necessary. If interest rates skyrocket that may change.

As far as what to put in each bucket, same thing with regards to advantages and disadvantages. In qualified accounts(tax deferred ones), most earnings do not matter, since what matters is how much you take out, not how much that investment made. But in non-qualified accounts, how you earned the money means everything. Stocks held long term get favored tax treatment. For a married couple filing jointly, the tax due on $77,000 on long term capital gains is a big fat $0.00. CD's and bonds are taxed as regular income, but are guaranteed for the duration of the CD. Real estate revenue is taxed at your income tax rate, but depreciation lowers the amount of earnings.

For my family, we are much more concerned about adjusted gross income(Modified AGI, actually) for purposes of healthcare rather than taxes due to current law. We are a family of 4,  FIRE for 4 years, with a MAGA around $45,000. If we made around $40,000 more, our take home (after taxes and ACA credit "losses") would not increase at all. I like to think of it as being taxed at 100% for the next $40,000 of income. The ACA credit dwarfs the tax bill. When the law changes, we will change to maximize take home with the help of the suggestions on this site.

I think the even bigger picture around here is that a typical FIRE person hanging out in these parts will have moderate income, and hence a moderate tax bill to go with it. If my entire $45,000 income was from what I consider the worst taxed entity(bank interest), our tax bill would only be about $2,000 if we received no credits of any kind. So meh really.

For our family, we are about 40% retirement buckets and 60% non-retirement. 60% stocks, 10% real estate, and 30% guaranteed stuff. What is WAY more important than all that is to consistently spend less than you make and invest the difference using the investment order on a different forum post.

freya

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Re: What are the mechanics to living off your stache?
« Reply #15 on: April 13, 2019, 08:42:26 AM »
SwampChomp, that is an excellent question.  It's been partially answered by the above, but I think you're also asking when and how much to sell investment assets to provide the cash you need to live on, correct?  That has both a simple and complex answer - here's the complex one:

My retirement portfolio is the "Golden Butterfly" variant of the Permanent Portfolio.  The allocation is 40% stocks, 20% gold (actual metal, not gold miners stocks), 20% long (20 year+) US treasury bonds, and 20% cash.   I don't want to debate the merits of this portfolio here, but you can check it out here:

https://portfoliocharts.com/portfolio/golden-butterfly/

You rebalance when one of the assets strays more than 40% away from the target - that's +/- 8% for cash/gold/bonds, and +/- 16% for stocks.   The key here is the cash allocation.  It contains my emergency fund, whereas for stock/bond portfolios this is held separately (thus artificially inflating portfolio returns).   The mechanics of drawing on this cash allocation is automatically handled by the portfolio's rebalancing plan.  Just draw from the cash bucket as needed and check asset proportions occasionally, like once per quarter or per year. 

You could do something similar with a stock/bond portfolio, by making it a stock/bond/cash portfolio (or just stock/cash) in whatever % you desire.   20% is a pretty good number for cash.  If you have 25 years' worth of expenses in your portfolio, that would come to 5 years expenses, which it just so happens is the amount that many financial advisors recommend taking into retirement.  The timing of when to sell stocks to cover cash withdrawals then becomes automatic and stress-free.

If you're following the MMM plan and hold 100% VTI, you could also just collect the dividends & gains, and plan to sell stocks periodically, e.g. once per year or per quarter, to fund the rest of your cash needs.  However, you'll inevitably end up selling stocks that have dropped in value, by as much as 40-50%.  This might be OK over time, but it could certainly be too stressful for some.  (me included!)  If you're in that boat too, definitely consider using the % of portfolio in cash technique.

MustacheAndaHalf

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Re: What are the mechanics to living off your stache?
« Reply #16 on: April 13, 2019, 09:44:00 AM »
I don't want to debate the merits of this portfolio here, but you can check it out here:
If you aren't able to support your idea, then is it really suitable for a suggestion?

For example we have very low interest rates today compared to 40 years ago.  So for 40 years, long-term bonds saw gains from changes in interest rates.  Now rates are low, and a rise in interest rates hurts long-term bonds the most.  You can't expect the past 40 years of bond returns to be repeated when there's very little room for rates to fall further.

Anyone espousing gold always includes 1972-1974 as proof that gold has reasonable returns.  Exclude those years, and gold's 50 year performance drops in half.

Look at any target date fund - you will see bond market (short, medium, long-term bonds) and 0% gold.  Maybe Fidelity and Vanguard with billions in retirement assets know something you don't?  I think their approach, which could get them sued if they are irresponsible, is more trustworthy approach.

G-dog

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Re: What are the mechanics to living off your stache?
« Reply #17 on: April 13, 2019, 10:01:07 AM »
If you want a great description on how to do this, go through what @Dr. Doom has published in his blog. He is not very active either on his blog or his forum, but his articles are phenomenal.

The article of actual withdrawal is here https://livingafi.com/2014/05/18/drawdown-part-3-strategy/
It is a 5 part series, I would recommend you read all five.

Yep - this is the one I was going to recommend.  And Collins.

TomTX

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Re: What are the mechanics to living off your stache?
« Reply #18 on: April 13, 2019, 03:44:50 PM »
@Swamp Chomp , the research that defined the 4% rule (also viewed as 25x savings) found an optimum point of 50%-75% equities.  However, the precision of those estimates were limited by the tool capabilities of the late 90's.  You can read up more on that, directly, on Wade Pfau's http://www.retirementresearcher.com website.
Warning: Pfau almost always does some sneaky handicapping of the return to make the 4% SWR look worse than it really is.

Examples:
Handicapping returns to 20% worse than historical.
Adding a 1% management fee on top of the 4% WR (to me, this would really be a 5% WR)\
Etc.

TomTX

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Re: What are the mechanics to living off your stache?
« Reply #19 on: April 13, 2019, 03:44:59 PM »
The traditional IRA to Roth IRA conversion ladder takes 5 years for the conversion amount to become a tax-free withdrawal.

Sort of. Anytime during the year is considered the same, and IIRC the conversion year is counted as Year 1.

Lets say you did a Roth conversion at the end of December 2018, that's Year 1. You could use that conversion without penalty at the start of January 2022. Elapsed time of slightly over 3 years.

BicycleB

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Re: What are the mechanics to living off your stache?
« Reply #20 on: April 13, 2019, 05:57:02 PM »
Excellent set of comments here.

Exactly how you withdraw your funds in early retirement depends on which investments you choose, and what type of account or ownership format you use for each one (and has been pointed out, possibly you adjust due to limits related to health care and/or taxes). I'm FIR(E), early 50s and 5 years since last job roughly, so will give a personal example.

A. Half my 480k portfolio is equity in a house (roughly 340k value, 100k mortgage balance). I rent out rooms. Rent brings in about 15k to reduce expenses.
B. My cash outlay is about 30k/year. Nets to 15k after rent.
C. In year 1 of FIRE, I had about 16k in taxable stock (brokerage account, not retirement account). Sold that to complete the needed cash outlay. ACA was just starting then, so I was able to qualify based on claiming that I expected an acceptable income amount.
D. In year 2, I would have needed to start drawing from a previously prepared Roth, but I worked a part time job that roughly covered the cash need. Continued qualifying for ACA based on expectation of ongoing income, which was then verified by taxable income. Expanded Roth ladder by  transferring additional funds from a traditional account to a Roth account.
E. In year 3, could have drawn some from Roth, or drawn from a traditional retirement account (IRA, 401k) while paying the 10% early withdrawal penalty, or sold my house and lived off proceeds. In practice, borrowed against the house by home equity line of credit, then inherited a traditional IRA from which I withdrew enough ($14k) to ensure I still qualified for ACA that year and could use ACA premium credits in year 4.
F. Year 4, more of the same. Drew 14k income from inherited IRA, creating income that qualifies me to continue ACA as well as cover cash needs. Normally someone would be using taxable funds for the extra cash, or previously created Roth ladder. The normal early retiree would meanwhile create ACA income and future withdrawal Roth ladder by converting 401k to traditional IRA to Roth IRA in the amount of 14k.

It all sounds confusing at first, but once you understand one part, the next one starts to make sense. After a little while, they all fit together like a small familiar jigsaw puzzle.

Fwiw, Roth ladder is based on the fact that you can withdraw from a Roth account five years after you put money in. So you need a series of deposits from which you can later make withdrawals. This series is thought of as a ladder, where each rung is a year. Once it has started, every year you put an amount in that you'll withdraw five years later, and the cycle continues as long as you want.

freya

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Re: What are the mechanics to living off your stache?
« Reply #21 on: April 14, 2019, 06:23:19 AM »
I guess I could have predicted posts like "Mustache-and-a-half"'s.  That's why I provided the portfoliocharts link, so anyone interested can look it up for themselves.  Knee jerk responses like that are unhelpful (and not well informed).

It turns out that consistent performance has a lot to do with success of a portfolio in retirement, and in some ways it's more important than high CAGR.  The Golden Butterfly in fact has a higher success rate for the same starting amount than any other portfolio except for the Pinwheel that also includes gold.  That's because of the beauty of holding uncorrelated assets, rebalancing among them as you go, and having a cash allocation in the mix.

Anyway that's off topic a bit, sorry.  I just wanted to draw OP's attention to the iORP calculator, which helps guide withdrawals from various types of accounts with an eye toward tax management.  They recently extended it to include an Obamacare constraint, which makes it now much more helpful for early retirees than it was originally.

https://www.i-orp.com/bequest/index.html

It's also a nice check on calculators like "cfiresim", because it gives you numbers on after-tax expected income from your portfolio and account mix.  You can also use it to project your expected tax liability over time.

Swamp Chomp

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Re: What are the mechanics to living off your stache?
« Reply #22 on: April 14, 2019, 08:00:59 PM »
I feel like most of this stuff has been covered in an MMM post (http://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/) and anything not covered there is in JL Collinsí The Simple Path to Wealth.

Just finished this article - super helpful!  Thanks a bunch for sharing BECABECA ;)

MustacheAndaHalf

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Re: What are the mechanics to living off your stache?
« Reply #23 on: April 15, 2019, 09:36:49 AM »
I guess I could have predicted posts like "Mustache-and-a-half"'s.  That's why I provided the portfoliocharts link, so anyone interested can look it up for themselves.  Knee jerk responses like that are unhelpful (and not well informed).
Your only refutation is to insult me?  If I'm "not well informed", why is it so hard to refute my "knee jerk response"?

In that link, gold's performance is measured starting in 1970.  The year after Nixon ended the gold standard in the U.S., gold went up +49% in value.  According to portfoliocharts.com, gold surged +73% in 1973 and +66% in 1974.  Anyone investing from 1972 - 1974 had a performance of +300% in 3 years.  So naturally everyone who recommends gold fails to mention the unique events (like leaving the gold standard) that won't be repeated.  Without 1972-1974, your theory falls apart as gold's performance drops in half.

Just like the data you linked, which of course includes 1972-1974 in it's analysis - it starts from 1970.

You can look at U.S. Treasury data to see that I'm also correct on my point about declining interest rates.  Insulting people does not refute factual information, it just shows you can't justify your own theories, and must resort to insulting and belittling other people instead.
« Last Edit: April 15, 2019, 09:38:51 AM by MustacheAndaHalf »

secondcor521

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Re: What are the mechanics to living off your stache?
« Reply #24 on: April 15, 2019, 11:59:06 AM »
The traditional IRA to Roth IRA conversion ladder takes 5 years for the conversion amount to become a tax-free withdrawal.

Sort of. Anytime during the year is considered the same, and IIRC the conversion year is counted as Year 1.

Lets say you did a Roth conversion at the end of December 2018, that's Year 1. You could use that conversion without penalty at the start of January 2022. Elapsed time of slightly over 3 years.

Your first paragraph is accurate.  Your second paragraph is off by one year.  A conversion done at the end of December 2018 would be considered to have been done on 1/1/2018, and the five year period would end on 1/1/2023, or just over four years.

BECABECA

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Re: What are the mechanics to living off your stache?
« Reply #25 on: April 16, 2019, 09:28:42 AM »
I feel like most of this stuff has been covered in an MMM post (http://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/) and anything not covered there is in JL Collinsí The Simple Path to Wealth.

Just finished this article - super helpful!  Thanks a bunch for sharing BECABECA ;)

Awesome, glad to help! And I really do recommend reading The Simple Path to Wealth... this forum can be confusing with all sorts of advanced strategies if you donít already have a strong understanding of the basics. JL Collins wrote up this book as the basics for his daughter when she started college and MMM wrote the prologue, so it has the Mustache Seal of Approval. I read it just after I retired, and since it lays out all the steps that worked for me (and identifies some pitfalls that I could have avoided if it had read it when I first started working), I recommend it to everyone in my family. You can probably find it at your local library.

TomTX

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Re: What are the mechanics to living off your stache?
« Reply #26 on: April 18, 2019, 05:28:46 PM »
The traditional IRA to Roth IRA conversion ladder takes 5 years for the conversion amount to become a tax-free withdrawal.

Sort of. Anytime during the year is considered the same, and IIRC the conversion year is counted as Year 1.

Lets say you did a Roth conversion at the end of December 2018, that's Year 1. You could use that conversion without penalty at the start of January 2022. Elapsed time of slightly over 3 years.

Your first paragraph is accurate.  Your second paragraph is off by one year.  A conversion done at the end of December 2018 would be considered to have been done on 1/1/2018, and the five year period would end on 1/1/2023, or just over four years.

You are correct. I misremembered the second part.

https://www.irs.gov/publications/p590b#en_US_2018_publink1000231065