Q: I will turn 50 in May. My investment portfolio is based around your Couch Potato recipes. It hit the half-million-dollar mark in the last quarter of 2013. My work-sponsored 401(k) is valued around $600,000 and I have about $100,000 in cash reserves. I have worked over 25 years in a stressful but well-paying career. I am now dreaming of scaling back. I want to take some time and enjoy life again. I bought a small condo several years ago in Las Vegas. It is paid for, no mortgage. I have a home in Ohio valued about $275,000, with a remaining mortgage balance of $74,000. The note is a 5-year ARM at 2.79 percent maturing in 2017. I’m thinking of selling the Ohio home and taking a six-to-12 month sabbatical. Then I would find part-time work to offset my pre-retirement living expenses, especially health care. I know what my expenses will be at the condo (about $6,000 a year). I don’t need a lot of material things to make me happy. And I don’t believe in carrying debt. My 2004 vehicle is long paid for and has over 225,000 miles on it. My only extravagance is vacations. That amounts to one or two nice trips a year, but they are not 5-star luxury experiences. What do I do with my portfolio to make it work for me in semi-retirement? Do I transfer my 401(k) to Vanguard? Should I change my “recipe” to reduce volatility?
A: What you do with your portfolio is really a sideshow. It’s an important sideshow, to be sure, but it’s still a sideshow. As a practical matter, the desire (or need) to draw on investments for income at age 50 means you must live on the interest and dividend income from your assets, because you’ll be drawing on those assets for a really long time. When you are 65 or so, you can consider a withdrawal rate that exceeds investment income.
Your primary focus needs to be on things you control: Your spending and your earned income. The less you spend, the less earned income you will need, and the less you will pay in taxes. The less earned income you will need, the greater the odds that you’ll be able to earn enough part time to meet your needs until you are eligible for Social Security and Medicare.
Another consideration is that the bulk of your financial assets are in a 401(k). Whether you keep them there or do an IRA rollover, you won’t be able to make withdrawals before age 59½ unless you do it as a committed series of regular withdrawals. If you do it on an ad hoc basis, you’ll end up paying penalties. One implication of this is that the sale proceeds from your Ohio house and your cash reserves are very important.
If all this sounds like rain on your parade, I don’t mean it to be. The Affordable Care Act has made what you plan to do possible for millions of people in their 50s and 60s. Many of those people are really angry about their working conditions, the anxiety of their job environment and maybe the downsizings they’ve been through. Many of them have felt this way for more than a decade, not just a few years.
Previously, most people couldn’t think about early retirement or part-time employment because they were locked into employer-provided health insurance. Now, they will be able to get health insurance, regardless of pre-existing medical conditions, and they will be able to get it at a cost they can afford. This is going to make for big-time changes in the job market.
It would be good to consolidate your financial assets at a low-cost firm such as Vanguard or Schwab. It would also be good to make certain your Couch Potato portfolio holds some amount in a REIT exchange-traded fund because it will boost your income somewhat.
But the key is that you are serious about being willing to live a low-cost lifestyle and that you find others who share your goal.
Questions may be sent to scott@scottburns.com.