What’s a saver to do? We’ve invested early and often in our tax-deferred retirement accounts, and our goals for these accounts should be reached in the next couple of years. This leaves us to cover the more worrisome bridge period: that time after we quit our day jobs but before we can withdraw from our retirement accounts. What options are available to us?
Option #1: Deplete Taxable
In this scenario, we simply save up a large taxable pool of funds like Physician on Fire has done and use the proceeds to sustain us until the older spouse reaches age 59.5. Pros: by not touching tax-deferred and tax free accounts, compound interest works its magic even longer. Cons: Taxable funds need to be moved to more conservative investment vehicles as we cannot risk loss of capital from volatility.
In this scenario, we simply save up a large taxable pool of funds like Physician on Fire has done and use the proceeds to sustain us until the older spouse reaches age 59.5. Pros: by not touching tax-deferred and tax free accounts, compound interest works its magic even longer. Cons: Taxable funds need to be moved to more conservative investment vehicles as we cannot risk loss of capital from volatility.
As a Californian currently in a high income tax bracket, we’d likely move our emergency fund (6 months of living expenses) into VCTXX, the Vanguard California Tax-Exempt Money Market Fund. A large remainder of the taxable account would be invested in VCADX, the Vanguard California Intermediate-Term Tax Exempt Fund, a municipal bond fund that preserves the funds we’ll need for the coming years. Thanks to the White Coat Investor, I’ve learned that the tax-efficiency of allocating bonds in a tax-free account are offset by the higher earnings from placing equities in tax-free and tax-deferred accounts while leaving bonds in taxable accounts.
Option #2: Substantially Equal Periodic Payments, a.k.a. 72(t) Distributions
This shortens our reliability on taxable funds by permitting us to tap into tax-deferred accounts before age 59.5. The Mad FIentist has a phenomenal post on accessing retirement funds early, which compared various options head to head and found that contributing to a 401k and taking Substantially Equal Periodic Payments was likely to result in the highest final pool of money. A recent conversation with a Vanguard financial advisor cautioned against this option - his concern understandably that depleting our retirement funds early, we’d increase our vulnerability to sequence of return risk should a bear market occur early in retirement.
Option #3: Home Equity: Yeah, I’d Tap That
When we purchased our home, we envisioned a place with sufficient space that we could host family for extended visits in our home. The road to hell is paved with similar good intentions. While we love our home, and have remodeled it to our liking, we could have lived quite happily in a well laid out place with a third less square footage, put up any visiting relatives in high end nearby hotels or airbnbs during the entirety of their stays, and either eliminated our mortgage completely or put more of our money to work for us.
When we purchased our home, we envisioned a place with sufficient space that we could host family for extended visits in our home. The road to hell is paved with similar good intentions. While we love our home, and have remodeled it to our liking, we could have lived quite happily in a well laid out place with a third less square footage, put up any visiting relatives in high end nearby hotels or airbnbs during the entirety of their stays, and either eliminated our mortgage completely or put more of our money to work for us.
We have far more house than we’ll need once we hit the empty nest stage. Options include renting out the house and using geographic arbitrage to live more cheaply or enjoy new locations for 3-6 months of the year; selling the house and either downsizing to a townhouse (which we could rent out while traveling) or renting a condo in a nearby area that might make us less car-dependent. The cons: our kids won’t get nostalgic visits home over the holidays. The pros: how cool would it be if, instead of staying in their childhood rooms, our kids get to reunite with us for Thanksgiving in Portugal or wherever else we decide to travel, which we can now easily fly them out to with our newly liquid funds and their far more liquid inheritance!
Purely from personal preference, I don’t plan to use a HELIOC. Once the house is paid off or sold, I intend to avoid future debt.