1
Early Retirement / Re: How to convert investments to cash
« Last post by gocurrycracker on February 16, 2023, 12:41:06 PM »I’ll do my part to help other on the path to FI, when I can, to pay it forward.
My pleasure. And thank you
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My pleasure. And thank you
2
Taxes / Re: Tax benefit of putting cash/expenses needs in tax advantaged account
« Last post by gocurrycracker on February 16, 2023, 12:36:46 PM »You have a loss either way
3
Early Retirement / Re: How to convert investments to cash
« Last post by dvorak on February 16, 2023, 10:15:17 AM »Thanks, Jeremy. It appears I am not much wiser, but we can agree on older part, for sure. 
You make a lot of great points and I think the main take home message is to play the long game here and not get too caught up in the details. I also need to embrace the reality that “some days you win and others you lose,” but in general it is always up and to the right, which is a long-term win. And, I think you are right that I am trying to use my imaginary dowsing rods instead of systematically playing the probabilities.
So, I think here is my plan moving forward:
1) Go with an 80/20 bond allocation and two years of cash/rolling treasuries. Since I will start getting a pension at 55 and have others in the future I think heavier stocks with a cash cushion will suit me quite well. I’ll reallocate once or twice each year.
2) Move all of my TIRA VBTLX to VTSAX since I likely won’t tap them for 8 more years.
3) Sell some of my Brokerage VBTLX (probably 15k) to build cash and harvest the loss in my final year with a larger salary. I can put these in short term rolling treasuries to get a better return since I don’t need them immediately.
4) Stay in the 12% tax bracket by funding my 457 this year.
5) If I do decide to sell my house and live in a van for a couple years I will move bonds to equities and live off the cash and perhaps withdraw up to the 12% tax bracket each year (to replenish cash for a down payment on new house) and keep a low-cost ACA plan. Any cash above the down payment I will invest, of course.
Thanks for the clear advice and calling me out for my slow, ominous decent into market timing. Your willingness to help the masses here is really a kind and generous gesture. And I’ll do my part to help other on the path to FI, when I can, to pay it forward.
You make a lot of great points and I think the main take home message is to play the long game here and not get too caught up in the details. I also need to embrace the reality that “some days you win and others you lose,” but in general it is always up and to the right, which is a long-term win. And, I think you are right that I am trying to use my imaginary dowsing rods instead of systematically playing the probabilities.
So, I think here is my plan moving forward:
1) Go with an 80/20 bond allocation and two years of cash/rolling treasuries. Since I will start getting a pension at 55 and have others in the future I think heavier stocks with a cash cushion will suit me quite well. I’ll reallocate once or twice each year.
2) Move all of my TIRA VBTLX to VTSAX since I likely won’t tap them for 8 more years.
3) Sell some of my Brokerage VBTLX (probably 15k) to build cash and harvest the loss in my final year with a larger salary. I can put these in short term rolling treasuries to get a better return since I don’t need them immediately.
4) Stay in the 12% tax bracket by funding my 457 this year.
5) If I do decide to sell my house and live in a van for a couple years I will move bonds to equities and live off the cash and perhaps withdraw up to the 12% tax bracket each year (to replenish cash for a down payment on new house) and keep a low-cost ACA plan. Any cash above the down payment I will invest, of course.
Thanks for the clear advice and calling me out for my slow, ominous decent into market timing.
Your willingness to help the masses here is really a kind and generous gesture. And I’ll do my part to help other on the path to FI, when I can, to pay it forward. 4
Taxes / Re: Tax benefit of putting cash/expenses needs in tax advantaged account
« Last post by M on February 15, 2023, 04:47:29 PM »That makes sense. The last hurdle for us is that in option B if VTSAX loses value in any given year(s) but we need the funds for expenses it would mean we’d have to liquidate at a loss in the bucket we have access to (taxable) unless we did some other maneuvers. (Also, unfortunately we have no use for capital loss because we have enough rollover losses to last many years.) We have enough ibonds to cover a year. And we could move some of our Roth IRA money to cash-like positions to get to our contributions, although I’ll have to look at what that does to our asset allocation. Any other ideas? I’d like to put backup plans in place that have similar surety as the ladder maturing in taxable, if possible, but maybe the answer is we can’t. Thank you again!
5
Taxes / Re: Tax benefit of putting cash/expenses needs in tax advantaged account
« Last post by gocurrycracker on February 13, 2023, 05:46:34 PM »There is such a thing as diminishing returns, and simple is great.
Still, I would tend to put all of the bonds in the tax-deferred account.
Money is fungible... There is no portfolio difference between A and B, but the taxes on B are lower
A - I have $10k in bonds in my taxable account. I want to spend $10k so I sell them.
B - I have $10k in bonds in my IRA. I want to spend $10k, so I sell the bonds in my IRA and buy $10k worth of VTSAX. In the brokerage account, I sell $10k worth of VTSAX.
Still, I would tend to put all of the bonds in the tax-deferred account.
Money is fungible... There is no portfolio difference between A and B, but the taxes on B are lower
A - I have $10k in bonds in my taxable account. I want to spend $10k so I sell them.
B - I have $10k in bonds in my IRA. I want to spend $10k, so I sell the bonds in my IRA and buy $10k worth of VTSAX. In the brokerage account, I sell $10k worth of VTSAX.
6
Early Retirement / Re: How to convert investments to cash
« Last post by gocurrycracker on February 13, 2023, 11:10:06 AM »Thank you, that was very helpful for me to get up to speed.
In summary:
- you are older (and wiser(?))
- your portfolio behaved as expected, down when the market is down
- previous estimates for pensions and SS were too optimistic
I threw your numbers into cFireSim and came up with a 98% success rate, which is better than the 96% success rate from the 4% rule data.
Dropping spending to $48k/year (~4% reduction) results in a 100% success rate (30 years.)
The failure years were the early 70s with a combination of insane inflation, market crash, oil shortage resulted in a strong headwind.
You questions:
Q: do I just sit on what I have where it is and withdraw regardless of the market?
A: Yes. Doing otherwise is called market timing
Pick an allocation.
Q: Is the idea of loss harvesting and reallocating for 2 or three years of treasuries just spinning my wheels or a good idea?
Loss harvesting can reduce taxes in your final year of work. That is good.
Treasuries are short-term bonds. When you say, "should I shift my bonds to treasuries" what you are saying is "should I change my asset allocation, in particular should I shift my bond allocation from longer-term bonds to shorter-term bonds?"
This is another way to say, "I believe that interest rates will decline in the short term faster than the market expects, and that I can make a profit based on this special knowledge."
Does that seem like an accurate statement? I don't know if it is correct or not.
Q: do I need to do anything in particular in the next 1.5 years with rearranging allocations to treasuries or bonds (or do I just leave stuff in equities?)
See previous comment
The market is down in recent years, which says putting more $ into stocks is warranted
General statement:
I am mostly worried at this point, particularly given the hit both stocks and bonds took this last year, about how many years of cash/treasuries I should have when I walk away in June of 2024 to be safe from the sequence of returns risks in my available funds before 59.5.
I'm not sure this is the best focus. The goal generally should be to never run out of money.
We can do things in the short term (minimize sequence of returns risk) that compromise the long term (run out of money.)
For example, you could withdraw Roth IRA contributions now because they are accessible... but then you forego 30+ years of tax-free growth.
Or you could decide to hold ~7 years worth of cash (or cash equivalents) at $350k... more than you have accessible.
Therefore you could NOT contribute more to 457 this year to accumulate more cash... paying more taxes in the process.
An asset allocation of 40% cash would decrease our cFIREsim success rate to 88%, and the only reason it is that high is because of the large pensions
A healthy compromise position is probably:
- 2-ish years in cash / short-term treasuries
- more stocks (because this increases long-term success rate over a high cash/bond position)
More general statement:
In general, my lack of post-tax money throughout retirement concerns me a bit regarding taxes, particularly if I run into any large expenses.
If you need more $ from non-accessible accounts then:
a) pay the 10% penalty
b) setup a SEPP - I would probably just do this in year 2 anyway
c) both
Paying the 10% penalty in a few years is less expensive than choosing to pay 24% tax now in order to accumulate more cash
re: SEPP, for $100k in account value you can withdraw ~$6.5k based on 5% interest rate
With full TIRA value of $377k, that is about half of your living expenses available
In summary:
- you are older (and wiser(?))
- your portfolio behaved as expected, down when the market is down
- previous estimates for pensions and SS were too optimistic
I threw your numbers into cFireSim and came up with a 98% success rate, which is better than the 96% success rate from the 4% rule data.
Dropping spending to $48k/year (~4% reduction) results in a 100% success rate (30 years.)
The failure years were the early 70s with a combination of insane inflation, market crash, oil shortage resulted in a strong headwind.
You questions:
Q: do I just sit on what I have where it is and withdraw regardless of the market?
A: Yes. Doing otherwise is called market timing
Pick an allocation.
Q: Is the idea of loss harvesting and reallocating for 2 or three years of treasuries just spinning my wheels or a good idea?
Loss harvesting can reduce taxes in your final year of work. That is good.
Treasuries are short-term bonds. When you say, "should I shift my bonds to treasuries" what you are saying is "should I change my asset allocation, in particular should I shift my bond allocation from longer-term bonds to shorter-term bonds?"
This is another way to say, "I believe that interest rates will decline in the short term faster than the market expects, and that I can make a profit based on this special knowledge."
Does that seem like an accurate statement? I don't know if it is correct or not.
Q: do I need to do anything in particular in the next 1.5 years with rearranging allocations to treasuries or bonds (or do I just leave stuff in equities?)
See previous comment
The market is down in recent years, which says putting more $ into stocks is warranted
General statement:
I am mostly worried at this point, particularly given the hit both stocks and bonds took this last year, about how many years of cash/treasuries I should have when I walk away in June of 2024 to be safe from the sequence of returns risks in my available funds before 59.5.
I'm not sure this is the best focus. The goal generally should be to never run out of money.
We can do things in the short term (minimize sequence of returns risk) that compromise the long term (run out of money.)
For example, you could withdraw Roth IRA contributions now because they are accessible... but then you forego 30+ years of tax-free growth.
Or you could decide to hold ~7 years worth of cash (or cash equivalents) at $350k... more than you have accessible.
Therefore you could NOT contribute more to 457 this year to accumulate more cash... paying more taxes in the process.
An asset allocation of 40% cash would decrease our cFIREsim success rate to 88%, and the only reason it is that high is because of the large pensions
A healthy compromise position is probably:
- 2-ish years in cash / short-term treasuries
- more stocks (because this increases long-term success rate over a high cash/bond position)
More general statement:
In general, my lack of post-tax money throughout retirement concerns me a bit regarding taxes, particularly if I run into any large expenses.
If you need more $ from non-accessible accounts then:
a) pay the 10% penalty
b) setup a SEPP - I would probably just do this in year 2 anyway
c) both
Paying the 10% penalty in a few years is less expensive than choosing to pay 24% tax now in order to accumulate more cash
re: SEPP, for $100k in account value you can withdraw ~$6.5k based on 5% interest rate
With full TIRA value of $377k, that is about half of your living expenses available
7
Taxes / Re: Tax benefit of putting cash/expenses needs in tax advantaged account
« Last post by M on February 12, 2023, 08:17:35 PM »Thanks so much for those links- it worked out as you said! So it seems keeping the Treasury ladder in taxable means we’ll lose out on $42000 total in additional Roth conversions (roughly equivalent to a year’s worth of Roth conversions for us) which I’m guessing might equate to about $10k in extra state and federal taxes in the future if tax brackets are shifted for example. (Luckily ACA at the moment is very generous and so that’s not an issue right now.) After all this figuring, we are leaning toward keeping it in the taxable mostly because the whole reason we picked Treasuries (vs corporates or even municipal bonds) and a long-term ladder (vs bond fund, etc) was to allocate our bond portion of our asset allocation to be a sure thing to cover our expenses in many of our pre-59.5 early retirement years. So having it in the taxable account has the function of access and there is a trade off for that (more taxes), although that does sting. Am I off-base in my thinking and what would you do? Thanks again for your insights!
8
Taxes / Re: Tax benefit of putting cash/expenses needs in tax advantaged account
« Last post by gocurrycracker on February 11, 2023, 10:22:38 PM »Your income is ~50k and with standard deduction your taxable income is ~$22k?
Does ordinary income exceed $27.7k/year? (2023 MFJ standard deduction)
If no, then that bond interest would be taxed at zero. The standard deduction applies to ordinary income first.
Taxes on long-term gains from the sale of VTSAX would be at 0% as long as total income is less than ~$117k (2023.)
Since a portion of each sale is a non-taxable return of capital, and you get to pick which shares are sold (and can choose the shares with the smallest gain (or loss)) this seems unlikely.
https://www.gocurrycracker.com/long-term-long-term-capital-gains/
Taxes are calculated on the Schedule D Qualified Dividend and Capital Gains Tax Worksheet
I go through this worksheet on our 2016 tax return writeup
https://www.gocurrycracker.com/go-curry-cracker-2016-taxes/
By having $7k of ordinary income in taxable account you do forfeit the tax-free Roth conversion opportunity on that same amount.
This is federal taxes only.
ACA premium tax and State taxes also apply.
Does ordinary income exceed $27.7k/year? (2023 MFJ standard deduction)
If no, then that bond interest would be taxed at zero. The standard deduction applies to ordinary income first.
Taxes on long-term gains from the sale of VTSAX would be at 0% as long as total income is less than ~$117k (2023.)
Since a portion of each sale is a non-taxable return of capital, and you get to pick which shares are sold (and can choose the shares with the smallest gain (or loss)) this seems unlikely.
https://www.gocurrycracker.com/long-term-long-term-capital-gains/
Taxes are calculated on the Schedule D Qualified Dividend and Capital Gains Tax Worksheet
I go through this worksheet on our 2016 tax return writeup
https://www.gocurrycracker.com/go-curry-cracker-2016-taxes/
By having $7k of ordinary income in taxable account you do forfeit the tax-free Roth conversion opportunity on that same amount.
This is federal taxes only.
ACA premium tax and State taxes also apply.
9
Taxes / Tax benefit of putting cash/expenses needs in tax advantaged account
« Last post by M on February 10, 2023, 07:58:16 PM »Hello! I’m working through a tax comparison of having a Treasury bond ladder in spouse and my joint taxable account vs in our IRAs and swapping with VTSAX liquidated funds from our taxable account annually. Unfortunately I found this wiki after I bought a 6yr Treasury ladder in our taxable account a couple months ago to cover our annual expenses in our early retirement years with no pre-59.5 penalties: https://www.bogleheads.org/wiki/Placing_cash_needs_in_a_tax-advantaged_account. So now I’m wondering if there would be value in moving our bond ladder (since yields are getting close to when I bought in) into our IRAs by selling VTSAX by selling the bonds and buying an equal amount of VTSAX in our taxable account.
Here’s my comparison so far: Bond ladder in taxable, we’d have roughly $7k in interest and gains a year. Our taxable income is projected to be $22k (with the bond ladder, other dividends and interest, and reductions from HSA and prior year carryover capital losses), so 10% bracket. Therefore, we’d owe $700 each year in taxes just from the bond ladder and this would take the space of being able to do $7k more in Roth conversions each year a rung of the ladder matures. So over the 6 year ladder, we’d be paying $4200 in income taxes on the ladder instead of paying that amount in taxes on being able to do $42k in Roth conversions. However, the benefit is each year, we know what will be maturing and won’t come up short if VTSAX values drop in the taxable account and we won’t have to be bothered to do the annual buying and selling in our taxable and IRA accounts.
If the bond ladder were in the IRAs instead, I’m having trouble figuring the taxes we’d owe on the long-term capital gains of selling the roughly $70k annually of VTSAX in the taxable account, which would cover our projected annual expenses. I’m thinking if I assume I buy the same amount of VTSAX as I bought for the whole 6 year ladder at roughly $360k (about $60k per year) that would mean I’d have about $10k in capital gains if I cashed out $70k per year. But I’m not sure how I’d show the IRS that $10k should be taxed at the 0% bracket and how that links to the taxable income number on line 15 of my 1040 so that our ordinary income isn’t driven up higher than the 10% bracket. And I’m wanting to see if I actually would gain more space for a larger Roth conversion annually.
Any insights you could share on how I would complete the comparison and any problems you see so far would be greatly appreciated!
Here’s my comparison so far: Bond ladder in taxable, we’d have roughly $7k in interest and gains a year. Our taxable income is projected to be $22k (with the bond ladder, other dividends and interest, and reductions from HSA and prior year carryover capital losses), so 10% bracket. Therefore, we’d owe $700 each year in taxes just from the bond ladder and this would take the space of being able to do $7k more in Roth conversions each year a rung of the ladder matures. So over the 6 year ladder, we’d be paying $4200 in income taxes on the ladder instead of paying that amount in taxes on being able to do $42k in Roth conversions. However, the benefit is each year, we know what will be maturing and won’t come up short if VTSAX values drop in the taxable account and we won’t have to be bothered to do the annual buying and selling in our taxable and IRA accounts.
If the bond ladder were in the IRAs instead, I’m having trouble figuring the taxes we’d owe on the long-term capital gains of selling the roughly $70k annually of VTSAX in the taxable account, which would cover our projected annual expenses. I’m thinking if I assume I buy the same amount of VTSAX as I bought for the whole 6 year ladder at roughly $360k (about $60k per year) that would mean I’d have about $10k in capital gains if I cashed out $70k per year. But I’m not sure how I’d show the IRS that $10k should be taxed at the 0% bracket and how that links to the taxable income number on line 15 of my 1040 so that our ordinary income isn’t driven up higher than the 10% bracket. And I’m wanting to see if I actually would gain more space for a larger Roth conversion annually.
Any insights you could share on how I would complete the comparison and any problems you see so far would be greatly appreciated!
10
Early Retirement / Re: How to convert investments to cash
« Last post by dvorak on February 05, 2023, 06:50:07 PM »Hi Jeremy. Thanks for the reply.
Since my last post the following has changed:
1) Not only did my portfolio not grow, it dropped in the neighborhood of 75k. This is fine, and I know it will happen again, but I decided not to stop work during a down market when I can work another year and increase my portfolio, pension, and SS and at the same time as saving a year of spending in a down market.
2) My home value also dropped about 75k and I’m undecided on staying here or doing the van thing for a couple years. But even if I do get a van, I will eventually buy a home again and will likely need all the equity for a new home purchase within likely 3 years. So, I am not really counting on that money as I will need it in liquid form to put a down payment on a new home.
3) I discovered I am subject the Windfall Elimination Provision (WEP) with my SS which has decreased my SS benefit. I’ve spent endless phone calls and emails with folks the SSA and cannot get a straight answer to figure out what I will get exactly. [An aside: I know how to calculate the WEP PIA by hand but no one can tell me what number they use as “non-covered pension” amount required to calculate the WEP PIA. I have an option of collecting as low as 520/mo at 55 or up to 1050/mo at 65; my choice. The difference in my SS is $300/mo depending on which number I use. I cannot get anyone to tell me how they decide what number to use (oddly, given it is exactly the same pension). Talking with SSA folks is about the most infuriating experience one can have. So, if you want get really irritated give ‘em a call and ask a question. 😊] That said, until I know otherwise, I am planning to pull the 520/mo (which will also give me a 30k lump sum payout) at 55 with the hope that I will get a bigger SS check. And given the need for some cash in the early years, it might be better plan anyway to get 30K plus 520/mo starting at 55. But that choice will reduce my post-70 pensions+SS, giving me (a worst case scenario) closer to 36k a year and not 50k. If I'm guessing correctly, it might be as high as ~41K.
So, multiple FIRE calculators suggest I am in the 90+% range of success for the whole ride. And I also have lots of things I can do to mitigate a 1965-like situation.
I am mostly worried at this point, particularly given the hit both stocks and bonds took this last year, about how many years of cash/treasuries I should have when I walk away in June of 2024 to be safe from the sequence of returns risks in my available funds before 59.5. In general, my lack of post-tax money throughout retirement concerns me a bit regarding taxes, particularly if I run into any large expenses.
So, with all that, do I need to do anything in particular in the next 1.5 years with rearranging allocations to treasuries or bonds (or do I just leave stuff in equities?) to have the best available cash and tax situation when I walk. Should I be moving money to cash from my bonds/equities with my current allocations? Is the idea of loss harvesting and reallocating for 2 or three years of treasuries just spinning my wheels or a good idea? Or do I just sit on what I have where it is and withdraw regardless of the market?
Thanks again for any thoughts. Your help is always very much appreciated.
Since my last post the following has changed:
1) Not only did my portfolio not grow, it dropped in the neighborhood of 75k. This is fine, and I know it will happen again, but I decided not to stop work during a down market when I can work another year and increase my portfolio, pension, and SS and at the same time as saving a year of spending in a down market.
2) My home value also dropped about 75k and I’m undecided on staying here or doing the van thing for a couple years. But even if I do get a van, I will eventually buy a home again and will likely need all the equity for a new home purchase within likely 3 years. So, I am not really counting on that money as I will need it in liquid form to put a down payment on a new home.
3) I discovered I am subject the Windfall Elimination Provision (WEP) with my SS which has decreased my SS benefit. I’ve spent endless phone calls and emails with folks the SSA and cannot get a straight answer to figure out what I will get exactly. [An aside: I know how to calculate the WEP PIA by hand but no one can tell me what number they use as “non-covered pension” amount required to calculate the WEP PIA. I have an option of collecting as low as 520/mo at 55 or up to 1050/mo at 65; my choice. The difference in my SS is $300/mo depending on which number I use. I cannot get anyone to tell me how they decide what number to use (oddly, given it is exactly the same pension). Talking with SSA folks is about the most infuriating experience one can have. So, if you want get really irritated give ‘em a call and ask a question. 😊] That said, until I know otherwise, I am planning to pull the 520/mo (which will also give me a 30k lump sum payout) at 55 with the hope that I will get a bigger SS check. And given the need for some cash in the early years, it might be better plan anyway to get 30K plus 520/mo starting at 55. But that choice will reduce my post-70 pensions+SS, giving me (a worst case scenario) closer to 36k a year and not 50k. If I'm guessing correctly, it might be as high as ~41K.
So, multiple FIRE calculators suggest I am in the 90+% range of success for the whole ride. And I also have lots of things I can do to mitigate a 1965-like situation.
I am mostly worried at this point, particularly given the hit both stocks and bonds took this last year, about how many years of cash/treasuries I should have when I walk away in June of 2024 to be safe from the sequence of returns risks in my available funds before 59.5. In general, my lack of post-tax money throughout retirement concerns me a bit regarding taxes, particularly if I run into any large expenses.
So, with all that, do I need to do anything in particular in the next 1.5 years with rearranging allocations to treasuries or bonds (or do I just leave stuff in equities?) to have the best available cash and tax situation when I walk. Should I be moving money to cash from my bonds/equities with my current allocations? Is the idea of loss harvesting and reallocating for 2 or three years of treasuries just spinning my wheels or a good idea? Or do I just sit on what I have where it is and withdraw regardless of the market?
Thanks again for any thoughts. Your help is always very much appreciated.