planning for imminent retirement

Investing Strategies Retirement Investing
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For a long time, I’ve been tracking feasibility of retirement. I poked around the ACA exchanges, ran sims about whether the money would last, etc.

Well, I’m expecting next month now.

We have sufficient cash on hand for at least a year. So no need to liquidate anything at this time. When we do liquidate, I have come to the conclusion that we should start with our ESPP company stocks. We have sold very little over the years, so it is an out-sized portion of our portfolios. It has grown well over the years, so no complaints. But probably about half our net worth is in that one company. Generally not a good practice.

I’ve read (repeatedly) that we should roll our 401Ks into IRAs upon separation. We both have IRAs at Vanguard, so that should be easy-peasy: roll into an existing IRA. From there, we may want to do backdoor ROTHs for as long as that is allowed. We both have ROTHs, also.

I need to have a conversation with HR about current options regarding COBRA, etc. But I will be completing an ACA application in the next month or so. I don’t know the current rule about when I have to submit it (need to look). COBRA will be expensive, but I can use that as a stop-gap regardless.

Mortgage will be paid off in about 2 or 3 years at our current rate of paying. If stocks recover, I may just pay it off at that point rather than maintain a mortgage. Right now I think cash should be going into equities while they’re on sale, and I can liquidate those to pay off the loan when equities have recovered.

Anything jump out at anyone as a bad plan? I realize this was broad brushstrokes. Appreciate any input.

1poorguy (countdown…tick, tick, tick, tick…)

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For a long time, I’ve been tracking feasibility of retirement. I poked around the ACA exchanges, ran sims about whether the money would last, etc.
…
Well, I’m expecting next month now.

Congratulations! Boy or a girl, though expecting must have put a wrench into your retirement date? :wink:

But probably about half our net worth is in that one company. Generally not a good practice.

Yes, just ask GWM. Plus if you have a pension with this company your pension will also be tied to the health of that company, though there is also the potential for insurance to eventually cover some or all if they do fail. We chose to cash out our pensions in 2020 when it looked as though the company would go under, and we decided we didn’t want to test the insurance theory. The money went into an IRA and it keeps us from having to pull a pension check at 65, allowing us to do more Roth conversions should we chose to take on IIRMA.

I’ve read (repeatedly) that we should roll our 401Ks into IRAs upon separation. We both have IRAs at Vanguard, so that should be easy-peasy: roll into an existing IRA.

Depends on your 401K fees and investment options. We chose to leave our at Vanguard where the 401K actually had a good number of investment options and very low fees due to volume from the employer.

Mortgage will be paid off in about 2 or 3 years at our current rate of paying.

Or consider refinancing while still employed and SOON, before rates go up. Depends on what your projected income looks like in retirement and what the indigestion effect is on your body by keeping a mortgage. Rates were still under 4% when we looked last week…probably closer to 3, but we were looking at an investor rate of 4.25 with zero points. I have a great broker at Amerisave if you want to talk with a pro about that option.

Enjoy retirement.

IP

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Mortgage rate is already very low. I’d have to check again, but it’s under 4%. Maybe 3.375? Something like that. We re-fi’d about 8-9 years ago, to a 15 year mortgage, which we have been accelerating the payments. That’s why there’s only about 2 years left. No indigestion. I could pay it off now, if I really wanted. But I’m fine just paying additional principal for now.

No pension. Company stock, and 401K. That’s how they compensate us, mostly.

401K is with Fido. Fido generally has higher fees than Vanguard, which is one reason why I think we should move it. I don’t believe the company actually can touch any funds in Fido, even if the Fido folks that handle the account appear to be specific to our company (i.e. they want to know our employer when we call, and then route us to a specific person within Fido that handles our company).

1poorguy

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You don’t say how much of your portfolio is in your soon to be ex-employer’s stock. I would point out when FaceBook reported a small decrease in average daily screen views last week, the stock dropped 26% on February 3rd and it has had smaller drops daily since then. Back in 1999/2000 Procter & Gamble dropped almost 40% over a short period of time. Such events are not common, but I know people who worked their entire career at P&G and since their retirement plan at that time was 100% P&G stock, they suffered.

If you have not considered the impact of at 25% to 40% drop in your employer’s stock over a period of time measured in weeks, it might be worth considering.

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Probably about half. So, yes, a drop would hurt some. But the company is firing on all cylinders, so I’m not too worried. We’re down right now, just like everyone else, but it has nothing to do with fundamentals (as near as I can tell).

As I said, I would start liquidation there simply because of overallocation. I originally thought I should minimize RMDs by taking money from the 401K as soon as I reach 59.5. But I think the concentration in the company stock is a bigger problem. Again, we’re doing great. It’s just bad practice to have that much in the company. Though it served me well for the past 25 years (I have shares that are roughly 60-baggers).

So my current thinking is to take living expenses from the ESPP shares, plus some extra to invest elsewhere, thereby reducing my concentration in the company stock over the next few years. If it recovers in the next couple of months, I’ll likely sell a chunk and allocate it to other investments.

1poorguy

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I wouldn’t bother paying off the mortgage unless you need to show lower income for ACA subsidies. Definitely do as much Roth conversions as you can. Then withdraw from the Roth last.

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For a long time, I’ve been tracking feasibility of retirement. I poked around the ACA exchanges, ran sims about whether the money would last, etc.

Well, I’m expecting next month now.

Congratulations!

I’ve read (repeatedly) that we should roll our 401Ks into IRAs upon separation.

A lot depends on your age(s). If you leave your company in or after the year you turn 55 and before you are 59 1/2, leaving the money in your 401(k) allows you access to your pre-tax money without a penalty and without having to jump through the hoops of doing SEPP withdrawals from your IRA.

From there, we may want to do backdoor ROTHs for as long as that is allowed.

I think you are getting the terminology confused. A backdoor Roth contribution is just that - a contribution - which requires that you be working. Since you’re retiring, you presumably won’t have any compensation, so you won’t be able to make Roth contributions. I believe that what you were planning is doing Roth conversions. The only new limits that have been proposed on Roth conversions is to reinstitute an income cap, so you won’t be able to do conversions into a Roth account if your income is too high.

I need to have a conversation with HR about current options regarding COBRA, etc. But I will be completing an ACA application in the next month or so. I don’t know the current rule about when I have to submit it (need to look). COBRA will be expensive, but I can use that as a stop-gap regardless.

If you’re changing to ACA, figure in the cost of having to meet the new deductible vs. how much you’ve paid into your current deductible when comparing COBRA. Additionally, COBRA premiums are eligible for reimbursement from an HSA, but ACA premiums are not. COBRA may not be as expensive when you add in those factors. On the other hand, for years when you can keep your income below the 400% of FPL threshold, your ACA premium is subsidized.

Also consider that if you retire in July, so that’s when COBRA would start, you can run it for the full 18 months, and your COBRA would run out in January, 2024 - so you could cut it off a few weeks early and just start a new ACA plan on Jan 1. That way you don’t have any years where you have to re-start satisfying a deductible. Of course, if you retire earlier than July and take COBRA through the end of this year to avoid having to restart your deductible, you can just start ACA on Jan 1 of 2023.

AJ

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Market risk are something everyone has to live with unless they want to guarantee negative real returns. Single stock risk is another item. We handled the affairs for person who pounded us to buy GE back in 2000. We successfully fought that issue. We failed to get her to sell any MSFT which was 15% of her holdings when we took over. That stock dropped 50% in less than a year and did not regain it value in the 18 years longer she lived.

Personally I do not think it makes sense to do Roth conversions, unless they are being considered as a way to transfer wealth to people who are at least 25 years younger - but that is something you might use as a way to both reduce single stock risk and increase Roth holdings.

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Probably about half. So, yes, a drop would hurt some.

Just in case you haven’t already looked into this, you may have the ability to use Net Unrealized Appreciation (NUA) on the employer stock - potentially significantly reducing your tax liability in the future.

https://www.investopedia.com/terms/n/netunrealizedappreciati…

Such isn’t without pit falls though so be sure to analyze your unrealized gains as well as the tax implications.

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I’ve read (repeatedly) that we should roll our 401Ks into IRAs upon separation.

This is not 100% correct. If you have a good plan with a major company likely to be around long term, its ok to leave the funds in the 401K until you get to RMD age.

In the rollover, you take control of your funds, can choose your own custodian and investments. You are not limited by the rules of 401k plan which can be prohibitive.

If its an expensive plan, if the employer is shaky or likely to get acquired, rollover keeps you out of a difficult situation. Some tell stories of having trouble with who has their 401k plan after a bankruptcy or acquisition.

Some companies subsidize the cost of their 401k plans. That can make them less expensive than an IRA.

Do your research of the details of your situation before you decide.

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Congratulations.

I will likely retire at the end of year and am fortunate to be able to carry my health insurance into retirement.

Stay well.

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Some companies subsidize the cost of their 401k plans. That can make them less expensive than an IRA.

Many IRAs have ZERO fees. What 401k plans can beat that?

Mike

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Many IRAs have ZERO fees. What 401k plans can beat that?

Our Vanguard account gets lower fund fees than our IRAs. Could have been a volume negotiated thing from our employer to give us access to the cheaper version of the funds.

IP

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Many IRAs have ZERO fees. What 401k plans can beat that?

My current one does. My 401(k) also has ZERO fees and provides me lower expense ratios for the same investment. For example, I get the institutional version of VTSAX (0.04% expense ratio in my IRA) for a 0.01% expense ratio in my 401(k). Same investment - lower skim.

And for someone who wants to do backdoor Roth IRA contributions or take money out without paying penalties or being restricted to SEPP withdrawals, rolling money from IRAs into a 401(k) can be a great option.

That said - I’ve had 401(k)s with higher expenses, too. So each person needs to research their own plan.

AJ

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Many IRAs have ZERO fees. What 401k plans can beat that?

Mike

The company sponsoring the 401k has the choice of paying the fees charged by the 401K custodian with company money or having those fees deducted from participant accounts. The fees I am talking about here are separate from the expense ratio charged by the mutual fund companies whose funds are offered as investment choices within the 401K. So it is theoretically possible that a mutual fund would be no more expensive in a 401K than it would be in a TIRA.

That said, rolling your 401K to a TIRA gives you a much wider selection on investment options as well as common access and reporting with other investments you already have.

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Our Vanguard account gets lower fund fees than our IRAs. Could have been a volume negotiated thing from our employer to give us access to the cheaper version of the funds.

25-30 years ago the S&P500 fund in Motorola’s 401K had a lower-than-average expense ratio of 0.04%. That’s when similar funds like SPY were 0.20%.

Today, VTI has E/R of 0.03%.
VOO is also 0.03%
IVV, 0.03%
SPLG, 0.03%
Fidelity has 4 (four) funds with 0.00% E/R

Even so, those E/R’s are so small to be negligible.

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The company sponsoring the 401k has the choice of paying the fees charged by the 401K custodian with company money or having those fees deducted from participant accounts. The fees I am talking about here are separate from the expense ratio charged by the mutual fund companies whose funds are offered as investment choices within the 401K.

I guess you missed the part about my 401(k) also charging ZERO fees? Not sure what was unclear about that. So here it is again:

My 401(k) beats my IRA because both charge ZERO fees and my 401(k) offers me the same investment as the VTSAX that I buy in my IRA at 1/4 of the expense ratio.

So there, you have a 401(k) that beats an IRA - it is possible. Sorry your employer chose not to offer you a 401(k) that was better than your IRA.

AJ

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VTI has E/R of 0.03%

Which is still more than the 0.01% I pay for the institutional version of VTI in my 401(k). Yes, it’s not a huge difference. But it still makes my 401(k) better than my IRA.

AJ

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aj485 posted "Many IRAs have ZERO fees. What 401k plans can beat that?

My current one does. My 401(k) also has ZERO fees and provides me lower expense ratios for the same investment. For example, I get the institutional version of VTSAX (0.04% expense ratio in my IRA) for a 0.01% expense ratio in my 401(k). Same investment - lower skim."

My question is does your TPA charge a fee?

5

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VTI has E/R of 0.03%

Which is still more than the 0.01% I pay for the institutional version of VTI in my 401(k). Yes, it’s not a huge difference. But it still makes my 401(k) better than my IRA.

Yah sure. 0.03% of $1,000,000 is $300/yr. More than $100/yr, but still negligible.

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