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Hello all,

Here's a hypothetical for you. I'd appreciate any comments you might have.

Someone about 45 has accumulated $1M in stock (mostly growth companies with little or no dividends) and about $500k in brokerage IRA's. He has paid off his primary mortgage, needs about $50k/year to live very comfortably, and has two kids to put through school in starting in 5 years.

This person wishes to retire and needs to restructure the portfolio for income but is facing a large tax hit because most stocks were bought and held. Any thoughts (besides go see a CPA :) )?
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uniquename asks:

<<<<This person wishes to retire and needs to restructure the portfolio for income but is facing a large tax hit because most stocks were bought and held. Any thoughts (besides go see a CPA :) )? >>>>

I retired early (age 55) with primarily stocks. My pension was about $250 a month. I do not have children so don't have your situation there. Posts #10,11, and 14 on this thread discuss something that has worked great for me and might help you. I am anticipating adding more funding to these within two weeks. I can offer no details about IRAs.

Good Luck!!! --Gapfan :-)
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<<Someone about 45 has accumulated $1M in stock (mostly growth companies with little or no dividends) and about $500k in brokerage IRA's. He has paid off his primary mortgage, needs about $50k/year to live very comfortably, and has two kids to put through school in starting in 5 years. >>

I can't help with the tax hit question, but IMHO this hypothetical person doesn't have enough to retire at the early age of 45.

If the switch is made to income producing assets, there is the prospect that there will not be enough growth to keep up with inflation. The IRA cannot be tapped until at least age 59 1/2 without penalty. Is this person eligible to roll it into a Roth IRA? Of course that would mean more taxes now. The most troubling is the two kids. College is really expensive now even with scholarships. This person easily could have lived only half his life and I would not want to see him run out of money before his life is lived out.

We are newly retired at age 65 and have quite a bit more than this person has, thank goodness. We also have a pension and social security with medicare. We hope to leave a good bit for our children, but I'm also happy knowing that we have done everything possible to ensure that they won't have to worry whether we have anough to live on and whether we will be taken care of in our old age.

They say it's best to die broke, but I'd like to pass something on since I also received a good bit from my parents with the intention that it could also go to the grandchildren.

Meanwhile I fully intend to enjoy what we have and use it to live it up in retirement!

Carol
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They say it's best to die broke, but I'd like to pass something on since I also received a good bit from my parents with the intention that it could also go to the grandchildren.

Carol, Why wait until your gone to leave it to your kids. You may not die broke, but why not do all you can to give to your kids and grandkids now without straining your own lifestyle. That way you can enjoy it with them. Which would be better giving to the kids while your with them or waiting and let the attorneys take their cut as they tell the kids what you left them. Remember you can give any person you want $10,000 per year without any gift tax.

As an example my wife and I paid for plane tickets to Arizona for son, daughter-in-law, daughter, son-in-law, twin grandsons to visit with their great grandfather and help celebrate his 80th birthday. We all had a good time and enjoyed ourselves and Great Granddad got to see his twin great grandsons for the first time. They are 3 1/2 yrs old. To me that's better than an inheritance.

Anyway to each his own. Fool on.

Dave
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Thanks for the reply! Part of the thinking in this scenario is that $1M producing a 5% return equates to $50k a year. That leaves the IRA's free to continue to grow untapped for another 20 years. Good point on the Roth IRA - the IRA's would be Roths in this scenario. Thanks again.

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<<Why wait until your gone to leave it to your kids. >>

Dave,

I totally agree with you. We are also doing that and will continue to do so. I had control of my mother's finances when she could no longer take care of things herself. Once her house was sold and there was a good amount of cash available, I divied up what was there and got a good amount out of the clutches of you know who to lessen the amount in her estate a lot of which was in real estate which was not liquid. Estate taxes are one of the worst ripoffs the IRS has! I am determined to live past the year 2006 when one's estate can be $1,000,000 before being taxed. My husband also will have that amount and I will try my best to keep him alive too. (Unless living together in retirement does us both in!!!)

Anyway you made a good point and one which I overlooked when I was writing my reply.

Carol
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<< The IRA cannot be tapped until at least age 59 1/2 without penalty. The IRA cannot be tapped until at least age 59 1/2 without penalty.>>

The IRA can be used without penalty by withdrawing a series of substantially equal payments for a minimum of 5 years or until 59 1/2, whichever is longer. These are called section 72t withdrawals. See IRS publication 590 for more info.

Z-Bar
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uniquename said,
Someone about 45 has accumulated $1M in stock (mostly growth companies with little or no dividends) and about $500k in brokerage IRA's. He has paid off his primary mortgage, needs about $50k/year to live very comfortably, and has two kids to put through school in
starting in 5 years.

This person wishes to retire and needs to restructure the portfolio for income but is facing a large tax hit because most stocks were bought and held. Any thoughts (besides go see a CPA :) )?


Each year, sell as much of your stock as you need to produce the income you need. Otherwise, do not sell the stock. Do not touch the IRA at all until past age 70.

Also each year, determine how much of your total assets you want held in bonds and cash. Buy that amount of bonds and cash in your IRA. The rest of your IRA should be held in stocks.

Example: Say that one year the market is down, so you want to use your cash holdings for the $50,000 income you need and not touch the stocks. You would then sell $50,000 of taxable stocks and buy $50,000 of a similar stock within your IRA. You have IN EFFECT done what you wanted (sold bonds to produce the income) but still done the smart thing of not withdrawing from your IRA as long as you can avoid it.

Example #2: Say the next year the market is way up, so you want to use only stock holdings for the $50,000 income. You would then sell $50,000 of taxable stocks and NOT make any changes in the IRA.

You should also consider selling some of the stock to pay the taxes on converting part of the IRA to a Roth IRA. Whether that is a good idea depends on your overall tax situation. Generally it will be good to convert enough each year to "use up" the 15% tax bracket fully.

Bill


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The Retire Early Home Page has information on how to structure your portfolio for folks retiring at age 30 or 40. See,

http://home.earthlink.net/~intercst/reindex.html

If you review the article on "safe" withdrawal rates you'll find that a 45 year old (who will probably live to age 85, at least) should have about 75% of his portfolio in stocks. You may not need to make any change to your portfolio.
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>>Someone about 45 has accumulated $1M in stock (mostly growth companies with little or no dividends) and about
$500k in brokerage IRA's. He has paid off his primary mortgage<<

There's a 40 year old here for adoption....!
On a more serious note- I'd consider a life time annuity as "one" of the income vehicles.
Eddie
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