How to convert investments to cash

[dvorak]

Hi all,
I am hoping to retire in August of 2024. I will be 53. I think my portfolio and pensions/SS will be in a good place to walk. But I have very little cash and I am worried about having enough if I get the worst sequence of returns issue right when I retire.
I will make 78K this year and then 50k in 2024 before leaving work in June. I spend about 46K a year (with very cheap and good quality health insurance as a teacher that I will lose when I leave). My state tax is 9%. I plan on needing 50K/yr each year in retirement with higher insurance costs.
•   At 55 I will get 520/mo pension with a lump sum payout of 30K.
•   At 65 I will get another pension of 1240/mo with a 54,000 lump sum (rolled to my IRA).
•   At 70 I get SS at 1500/mo.

My portfolio allocations are attached.
 
I have been investing a lot and probably waited a bit too long to build up cash for my first few years and am probably too heavy in bonds (especially right now!).
Would love feedback on what I plan to do.
Plan for cash this year:
•   Put 17k to my 457 (bond fund) this to keep salary very close to the 22% tax bracket and pair this with selling 17k of my brokerage bond fund (at a 3K loss) to add 17k to treasuries in my brokerage (and harvest the 3K loss to add any salary to 457 or treasuries). I’m also maxing an HSA.
•   Add a 5K RMD from my inheritance IRA to treasuries as well.
•   This year and next: I will continue to loss harvest bond funds to buy treasuries next year (market conditions allowing) to get the 50K cash for the first year and then an additional 14K for when I turn 55 and maybe some more for a third year. (In my 55 year I will start my first pension (6.2K/yr) and get the lump sum 30K… so that is effectively 36K cash). Then, at 56 I will see what I have and hope that bonds are more useful.
So, I find this all kind of confusing and wonder a few things:
•   Is the plan good enough to succeed? Will my available/accessible money last me until 59.5?
•   How much cash/treasuries do I actually need when I walk away? And how much in bonds?
•   Should I put my 457 money in bonds or equities? Bonds are feeling terrible right now.
•   Should I shift away from all bonds throughout my portfolio to treasuries (for example in my inherit IRA) and shift back when the treasuries stop returning 4.5% +?
•   And big picture: How do you decide in retirement when the market is “good enough” to pull funds from equities and bonds to replenish cash? Or do you just make an objective annual rule and follow it no matter what?
Thanks for any thoughts.

[gocurrycracker]

What has changed since your previous post?
https://forum.gocurrycracker.com/index.php?topic=450.msg1375#msg1375

In that discussion, it looked like pensions/SS cover your entire cost of living in the near future.
You also listed home equity previously but it is not included here.


>Is the plan good enough to succeed?
Pensions +SS cover your entire cost of living... with 12 years between retirement and full pensions.
50k * 12 years = $600k to bridge the gap. You have more than $600k.


What is driving your desire to fiddle with things?
What is missing from the simple math above?


The gap between retirement and age 59.5 is <7 years. $350k or so at $50k/year
If you run out of accessible funds, worst case tap the non-accessible funds and pay the penalty. If you need an extra $80k you can have it for a $8k fee, or 1% of total portfolio value. Small.

SEPP is also able to provide substantially higher withdrawals due to higher interest rates.

[dvorak]

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.

[gocurrycracker]

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

[dvorak]

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.

[gocurrycracker]

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