Ok, so I am going to try this *budget* thing

[KTP]

Thanks for all of the work, I do appreciate it.

39, so close enough to age 40.

the 16,200 currently going into 401k (matched by employer to a total contribution of 21,600)

It is currently 140k, but *should* be over 300k even with the market crash if the mutual fund managers had any kind of sense. I don't trust them very much nowadays. But there is little choice other than company stock for the 401k fund and that would be an equal disaster.

Anyway, at 140k + 21,600 x 7 = 291200 total at age 46 in the 401k just based on current balance and contributions, not taking into account raises in cap or pay. Call it 400,000 with even a slight market recovery in 7 years. Stopping contributions in 7 years at age 46 and letting the money compound at a conservative 8% for the next 14 years = 1,174,878 at age 60. My 10k rolled over 401k should be another 30k added to that by then, so about 1.2 million we can access at 60.

Totally separate from the 401k we have 70,000+ a year to invest in any form we choose (except as we mentioned, no deductable IRA or standard roth other than the mentioned trick with rollover).

This is turning into a rehash of that other thread, but in essense, I wanted to be able to live as much as possible off of the 7 to 9 years investment of 70k a year + selling our home and assets, + the amount we have currently saved outside of our 401k (about 50k including the EF).

It is really hard to calculate this, but if we went 100% muni AAA rated bonds earning around 5%, and lump the 70,000 in at the end of each 1 year period, we would have:

50,000 start @ 5% = 52,500 + 70,000 = 122,500 at end of year 1
198625 at end of year 2
278556 at end of year 3
362484 at end of year 4
450608 at end of year 5
543139 at end of year 6
640296 at end of year 7
742310 at end of year 8
849426 at end of year 9

Add to that proceeds from sale of our home and contents: $250,000

Total at end of 7 years: $890,296

Or total at end of 9 years: $1,099,426

All of this is totally separate from the 401k which will be growing untouched until at least 60.

1) What grade muni average 5% with what level risk?

2) Would we be able to live off $1,099,426 @ 5% in 9 years when you count in inflation.

3) There is a temptation to try and get more than 5% return during the 9 years. But then again, I look at our sad 401k balance...

[jIM_Ohio]

KTP- you will have much better success managing this as one pile of money. You will be able to take on more risk, spread the risk out, and ride out down years if the whole pool is managed as one (IMO).

You have 165k at age 39
You want $1.8M at age 48? or is 55?? not sure on year/age you wanted to start sailing.

You can contribute 70+16.5=86.5k per year. I am assuming a 9% return for whole portfolio.

I have $1.9M available in 10 years (age 49).

Here is why I think you want this as one pool of money:

1) You can access 401k/IRA money prior to age 59.5 using rule 72t (SEPP=substantially equal periodic payments).

2) You will want some money in cash, some invested for income and some invested for growth. If you create 2 piles you will still need the cash-income-growth for the second pile (the one you said would be in 401k/IRA until age 60).

3) Your plan (muni bonds generating 5%) does not exist over long periods of time. Plan on 4% return from bonds.

cash return is 0 (assume it might keep up with inflation over a 5 year period).
40-60 portfolio will return around 6% with low deviation (most years should be positive) and also generate 4% interest/dividends. Inflation will eat away some of the 4%, but the 40% equity should also counter. This is why some other money (100k) is set aside in the market- you could withdraw any profits over 100k and buy income producing shares in 40-60 portfolio.

The 4% rule accounts for inflation and taxes (built in). If you used muni bonds it just shifts the paradigm some (maybe you need 3.75% instead of 4%) depending on how much you withdraw and what your tax bracket is.

Anything where you consider living off 5% is playing with fire. You should be thinking live off 3% because you are retiring so early. If you think I'm wrong you really need to see a CFP or do independant research. 5% withdraw rates are reserved for annuities, older retirees, or someone willing to go back to workforce if they run low on money when they are 80.

[jIM_Ohio]

1,174,878 at age 60

If you used this $1.2 M pile for age 60+, you would want to think about spending between 4% and 4.5% of this. 48k per year, maybe 54k per year. 54k is playing with fire/living on the edge/ 4.5% withdraw rate.

I thought you calculated expenses to be 56k. 4% withdraw rate gives around 90% chance (based on PAST performance) of lasting 30 years (age 90 for one spouse).

When dealing with retirement planning SWR (starting withdraw rate) is everything- the percentage of assets you withdraw each year is the variable which would be constant regardless of asset base/ spending patterns.

[KTP]

Uhg, it seems complicated to plan this out when there are so many factors unknown in the future. We could even get hit by a toilet seat re-entry from a space station or something and never end up sailing at all.

The main reason I was keeping the 401k separate in my head is because I have so little control over it. There are 7 funds to choose from. Put money in, hope it does well. (btw, calculate it as 21,600 not 16,500 since it has the matching contribution from employer).

I guess what I have to determine is the best way to distribute the 70k a year to complete the three buckets: growth, income, and cash. Do I try and grow them all at the same time, or fill the growth and cash buckets for the first 5 years or so, then gradually fill the income bucket.

(still in my head keeping the 401k separate) the 70k might be split up as follows:

30k into CDs, AAA muni, or/and TIPS
40k into equity index funds (maybe the tax managed Vanguard fund)

[MonkeyMama]

I second noppenbd's advice - was going to say the same thing.

Put $10k into IRA for 2008, 2009, 2010, and convert to ROTH in 2010. Can grow tax free forever.

If you don't want to invest right now, put it in cash. You don't have to invest all retirement funds in the stock market. This gives you opportunity to invest for much higher tax-free returns than any other alternative. (Though I'd personally snatch up stocks right now - expecting pretty decent tax-free returns in the long run - buying so low).

I would not expect retroactive tax changes to money already invested in ROTHs. Unlikely.

(As an aside, you are probably aware, you need income to use/deduct a SEP IRA).

[jIM_Ohio]

Uhg, it seems complicated to plan this out when there are so many factors unknown in the future. We could even get hit by a toilet seat re-entry from a space station or something and never end up sailing at all.

The main reason I was keeping the 401k separate in my head is because I have so little control over it. There are 7 funds to choose from. Put money in, hope it does well. (btw, calculate it as 21,600 not 16,500 since it has the matching contribution from employer).

I guess what I have to determine is the best way to distribute the 70k a year to complete the three buckets: growth, income, and cash. Do I try and grow them all at the same time, or fill the growth and cash buckets for the first 5 years or so, then gradually fill the income bucket.

(still in my head keeping the 401k separate) the 70k might be split up as follows:

30k into CDs, AAA muni, or/and TIPS
40k into equity index funds (maybe the tax managed Vanguard fund)

How you grow and how you distribute are two seperate things...

I would not try to accumulate wealth using buckets... buckets preserve it and differentiate risk... right now you need growth and more growth- income will concern itself later.

Best thing you can do now is the 25% of all savings going to cash or conservative investments (while the rest gets fully invested from the moment it is set aside).

If you are investing $90k per year (20k 401k+70k outside 401k). I would do the following:

68k total to equities
22k to cash or conservative investments

Once the cash is at 2 years (24 months) of current expenses, then open it up a little and go after some muni bonds or TIPs (is my suggestion). Improves return some with only a small amount of incremental risk (IMO).

That 68k will vary in return- might lose 30k in one year and gain 30k in another year... the purpose of the cash is so you can look and say "I have more in cash than I lost" and keep you in the market when times are tough.

[noppenbd]

Sorry I missed most of the discussion, but to answer a few questions:

Jim's asset allocation advice is great, I would follow it to a T. As far as the specifics, the Vanguard Tax-managed funds are a great one-stop shop to get your munis & your equities in one place, and the expense ratios are very low. You'll have to do some research to figure out which one meets your risk profile.

On the SS issue, you can file to get spousal benefits at 50% of your wife's benefits when she files. You could have never worked a day in your life and still get these. So don't worry about accumulating credits for SS, because you are set on your wife's coattails. As far as when to take it, I think she can apply and suspend her benefits when you she turns 62, and you can start taking yours at 62, then she can unsuspend at age 70. Doublecheck this though. If you can do it, probably the best bet for you.

When you review your asset allocation, I would take a look at the 401k allocation as well. I think Jim's advice to consider it as one pool of money with changing withdrawal rates is best. You can set your risk profile more accurately that way.

[KTP]

Oh wow, that is crazy good news? I can get half the benefits of SS that my wife gets even if I don't have enough work credits? I had no idea that was even possible. She will be at or near max, so half of that is still pretty dang good. (Of course all of this assumes SS will still be in the black by then, but it is only 2032 and they might still have a few dimes left).

Thanks Jim and noppendb for the help. I am coming around to your view of thinking of the 401k, future IRA/roth conversions, and our savings/investments as all one giant pool of money. It makes a lot of sense to put the high risk, high return, taxable equity type investments in the 401k and IRA and have less risk but less taxable return in the non-retirement accounts. Swirl that around a bit with munis and the Vanguard funds and I think we can come up with a workable plan. The good news about SS is just gravy on top.

The bad thing will be if one day the government passes a law taxing 50% of more of a persons assets in the bank/stocks. Might say it can't happen, but if they pass a law taxing the AIG executive bonuses at 100%, they can pass any law they please in the future. I think the bailout contract should have been worded to exclude large bonuses instead. Scary thing to think that even the money under your matress might not really be yours one day.

[LivingAlmostLarge]

KTP, i would not count on SS for you or your wife. If they change it to a means based thing it will suck to be (and me too). It will definitely be taxed, did you consider that in your equation?