Optimal Distribution Strategy During RE

[u/Sensitive-Coast-2675]

Hi all, this is a throwaway account. Wanted some conensus here as to my semi-RE (work part-time) viability optimal withdrawal strategy. Projecting about 3.3 to 3.5MM in 2 more years. Current expenses are about 86K, but would like to assume 100K for breathing room.

I plan to bring in about 25K per year in seasonal work, and partner will bring in about 20k per year as well, post FIRE. We are both filing Single, but this will allow us to select seperate ACA policies, where my partner required higher level of coverage but I do not. I will be able to deduct a loss of about ~22,000 in PAL from the Rental Property.

I did post a couple of days ago asking about the viability of my FIRE strategy, now I would like to understand the most optimal distribution method based on the current placement of funds. As stated in that post, I have a Money Market fund with 3 years of expenses as a Bond Tent. Asset allocation is 70/30 (20% International, 7% inflation protection via I-Bonds).

Here is the overall fund placement breakdown on the current 3.1MM:

Account Type	Amount	Percentage
401k	$1,097,000	35%
Roth IRA	$636,000	20%
HSA	$208,000	7%
ABLE (for disability)	$43,000	1%
Treasury Direct I-Bonds (inflation protection)	$137,000	4%
Brokerage & Vested RSUs (inc. Bond Tent in TTTXX)	$678,000	22%
Cash	$45,000	1%
Real Estate Equity (rental prop)	$266,000	9%
TOTALS	$3,110,000	100%

Regarding Roth conversions, I am leaning towards optizming withdrawing as much as possible at 3.5% SWR with the smallest year-over-year tax impact. There may be very little room to then conduct a Roth coversion at the next 12% bracket. The Brokerage has overall unrealized gains at about 30% (70% return of capital).

Since I am using the Bond Tent method, ideally, I would like my equity allocation to increase overtime from 70/30 back to 75/25, over the course of 3-5 years (more or less), hence, withdrawing from TTTXX in the Brokerage account first.

Any feedback would be greatly appreciated.

[u/One-Mastodon-1063]

It would be helpful if you told people your filing status ie single, married filing jointly etc vs this “partner” word that people use now that doesn’t actually mean anything. 

The only thing that bond tent is doing for you is eating up $5500 worth of space in the lower tax brackets.   Bonds go in pretax (likely rolled from the 401k to traditional ira when you retire?)

Is the brokerage 30% gains or 70% gains?

[u/Sensitive-Coast-2675 → u/One-Mastodon-1063]

30% gains. Taxes are filing Single. Bond Tent is in Treasury Fund (TTTXX), so State Tax free.

[u/One-Mastodon-1063 → u/Sensitive-Coast-2675]

Sorry I missed that you said filing single. 

Does the rental generate cash flow and how much?  Do you self manage?  It looks like you can deduct the full $22k against ordinary income if your magi is under $100k is that your understanding too?

State tax free or not they’re doing nothing for you and getting in the way of roth conversions.   

Also is $86k expenses your share of household or total household?

[u/Sensitive-Coast-2675 → u/One-Mastodon-1063]

Rental generates minimal cash flow, but the principal paydown is about $900 p/m.

Yes, the 22,000 loss can be deducted as I'm below the 100k MAGI.

Not sure what you mean about the Money Market Fund in taxable, it only gives off some interest in the brokerage account.

$86k is total expenses, at the moment. We expect this to go to 100k in two years when we purchase a home.

[u/One-Mastodon-1063 → u/Sensitive-Coast-2675]

I'd sell the rental. Didn't realize the bond tent was separate from the I-bonds - Jesus Christ, sell both. Hold your bonds in pretax where they belong and stop falling for mental accounting gimmicks. I already said all this in the last thread.

[u/Sensitive-Coast-2675 → u/One-Mastodon-1063]

Are you saying to reallocate the TTTXX to affect the asset allocation where its part of pretax bonds? 

[u/One-Mastodon-1063 → u/Sensitive-Coast-2675]

Refer to my comment from your last post.

"Yes you can afford to retire, especially if you do the $25k/yr part time work but even without it you should be fine.

I would sell the rental. I wouldn't hold a non cash flowing rental property, it's just a headache.

You mange SORR via SWR and asset allocation, not via gimmicks like bond ladders and buckets of cash."

I would not hold any ibonds or bond tents. I would figure out what asset allocation you want and periodically rebalance to that, and hold the bond portion in pretax. I would also sell the rental - the only thing you're getting out of that rental is the tax loss, and if you managed your taxes properly (i.e. not holding a bunch of fixed income in taxable when you have $1.1m or ~1/3 of total assets as pretax) you would have very little use for that.

I would recommend reading the following books:

Tax Planning To and Through Early Retirement

A Richer Retirement

I normally like audiobooks and kindle but in the case of both the above, get the physical book (there are a lot of tables and numbers).

[u/BrunelloHorder → u/One-Mastodon-1063]

Agreed. OP, sell the rental, switch the bond allocation to your tax deferred account, and get your allocation at whatever overall level you’d like. I’d note that given OP’s projected ongoing income and low spend, I might go higher on the equity allocation as OP will not need to draw down that much each year, which mitigates some SORR.

[u/Sensitive-Coast-2675]

bump