Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mr. Corporate Refugee”

Welcome! It’s time for another Safe Withdrawal Rate case study! Please click here for the other seven installments. Today’s volunteer is “Mr. Corporate Refugee,” not his real name, obviously. But as the name suggests he is ready to pull the plug on the corporate grind. He and his wife did everything right to prepare for early retirement. Pay off the mortgage on their house (as recommended by yours truly) and accumulate a nice nest egg close to seven figures. The only problem: they reside in a high-cost-of-living area in California and more than half of their net worth is tied up in their primary residence. Even a portfolio as large as $1 million will likely not be sufficient to cover expenses in your current location. What to do now? I’ll propose two routes to early retirement. Move to a cheaper location, a “secret” low-income-tax paradise – more on that below, and be able to retire now. Or work for only four more years and retire in the current location. Let’s go through the math…

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Ask Big Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI”

Welcome to a new installment of our “Ask Big Ern” series with case studies on safe withdrawal calculations. This is already the seventh part, see here for the other parts of the series! Today’s volunteer is Ms. Almost FI and that’s not her real name, of course. She’s planning to retire early in 2019 and this causes a lot of anxiety: Does she have enough money? When should she take her pensions? What about long-term care insurance? All very valid questions, all impossible to answer without a careful customized analysis! Continue reading “Ask Big Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI””

Why would anyone have a mortgage and a bond portfolio?

We are homeowners with a pretty sizeable mortgage but we also accumulated a nice retirement nest egg, which is actually many times larger than our mortgage. Even our taxable investments are several times larger than the mortgage. Still, we don’t pay off the mortgage because we like the benefit of leverage. We have a liability with a low-interest rate and assets with a much higher expected rate of return, so our overall expected rate of return is higher than without a mortgage. Our friend FinanciaLibre (now a defunct site) did some nice number crunching on this topic recently and we agree wholeheartedly.

Moreover, if you follow our blog you’ll also remember that we take a pretty dim view on bonds:

So, personally, we skip the bond allocation altogether. Others have written about this, too, check Physician on Fire’s 2-part guest post here and here. In light of all of this, here’s one question that occurred to us:

Why would anybody have a 30-year mortgage at about 3.50% and a bond portfolio currently paying around 1.8 to maybe 2.5% interest for safe government bonds?

Leverage works only when the asset has a higher expected return than the liability!
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The ultimate retirement account comparison in one single Google Sheet

Some people argue that there is a rule of thumb for which account is more attractive when saving for retirement (both early retirement and “normal” retirement). Jeremy over at Go Curry Cracker likes the 401(k) and is skeptical about Roth IRAs, while someone on Kiplinger recently recommended the Roth and trash-talked the regular 401(k) in light of higher projected future tax rates. Who is right? Nobody. There are likely no universally true answers to the following (and many other) questions:

  1. Taxable account vs. Roth IRA?
  2. Roth 401(k) vs. regular 401(k)?
  3. After-tax 401(k) contributions or a taxable account?
  4. Should I invest in a high-fee 401(k) at work or a low fee taxable account?
  5. What is the drag in after-tax returns from having to pay taxes on dividends throughout the accumulation phase?
  6. If you have a lot of money to invest and already max out the regular 401(k), should you shift more money into a Roth 401(k), to get more “bang for the buck?”
  7. Should I roll over an IRA to a Roth IRA?
  8. Should I use a deferred variable annuity to boost tax-deferrals?
  9. Pay down credit card debt first before saving for retirement?

It all depends on the individual situation, tax rates, expected return assumptions, account fees/expense ratios, etc. The only way to tell which account is more attractive is to get out the spreadsheet, punch in your particular parameters and compare. But how do you do that? Others did it before but sometimes we have the feeling they compare apples and oranges. A Roth 401(k) is best because you can withdraw tax-free? Not necessarily because you have to take into account the taxes you pay upfront when contributing to the Roth IRA.

We came up with an easy way to make sure you compare apples to apples to gauge the relative attractiveness of different accounts.  Continue reading “The ultimate retirement account comparison in one single Google Sheet”

Why we don’t trust financial planners: a rant

I remember recent posts by Plan Invest Escape and Slowly Sipping Coffee about bad advice from the experts, the so-called financial planners. The post itself and the comments from others about bad experiences with advisers can really raise your blood pressure. But you don’t even have to hire them. Sometimes just reading their posts online is enough to expose the empty suits. One of those nuggets was on Kiplinger (via Yahoo! Finance) today on why, ostensibly, the 401(k) is not a good option to save for retirement Continue reading “Why we don’t trust financial planners: a rant”

How to create a no-limit Synthetic Roth IRA in a taxable account

Tired of contributing a paltry $5,500 per year ($11,000 for couples) to your Roth? If you like to contribute more than that, why not find a way to generate returns in a taxable account that mimic those of a Roth IRA? Impossible, you say? Under very specific conditions it is possible to generate after-tax returns in a taxable account that replicate those of a Roth IRA. We call it the Synthetic Roth IRA. Continue reading “How to create a no-limit Synthetic Roth IRA in a taxable account”

REITs pros and cons

We live in a low-yield world. Interest rates are much lower than in recent history and this has spurred a mad “search for yield” whereby investors look for anything, really anything, that offers yield above the measly low interest rates currently prevailing in this country. REITs have greatly benefited from this trend and when my hairstylist starts telling me that he invests in REITs it makes me wonder if that sector might be a little bit overheated (brings back memories of the late 1990s when a different hairdresser in a different city gave out Tech company recommendations). Here are some pros and cons of REITs.
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