How to Prepare for Retirement Within 5 Years: 401k, Savings & Investment Changes

Graham and his wife are in their early 50s and plan to retire in 5 years. He wonders if they should continue maxing out their 401ks, how their investments should change, and what they should do with savings accounts to best prepare for their retirement goals.

James addresses these questions, Graham’s biggest risk as he nears retirement, and potential tax strategies for him to employ.

Questions answered:
Which is a better tax strategy – tax gain harvesting or Roth conversions?

Do I need to have a dedicated emergency fund in cash?

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⏱Timestamps:⏱
0:00 - Graham’s question
3:16 - The move from single position
5:43 - Identify biggest risk
8:00 - Tax gain harvesting and Roth conversions
12:14 - Tax strategy
15:14 - Two variables to consider
20:44 - Max out 401k plans?
22:07 - A question of tax
24:52 - Tax plan in action
26:44 - Concern about emergency savings

Worried about retirement?

[cdub]

Please do a video on mental challenges experienced when going from Accumulation to Decumulation. Thanks.

[DrBilly]

Excellent discussion as usual. Thanks for posting.

[reinaldoreyes]

Excellent as usual. No need to submit questions as you keep answering and clearly explaining what I want to know. And yes, there ara a lot of us with healthy balances after 25-30 yrs of uninterrupted saving.

[markb]

Thanks James, the video was very helpful and informative!

[michelleholland]

Love all of your information James. Is is so helpful with our retirement planning.

[stephanebogen]

Such a great topic and spot on analysis - Thanks for such a great tutorial. At 56 and planning to retire within 18-24 months, I have been running multiple scenarios related to all that was discussed today. I understand the value of minimizing RMDs and minimizing tax burden for heirs but the complexity is to balance this with what we want to achieve in early retirement. What I mean is not jeopardizing activities/goals in first few years because of allocating/using "cash" to pay for Roth conversions. I want to make sure that I also experience the "net worth" advantage/consequence of doing these conversion while we can enjoy them and not getting net worth positive outcome at an older age when we can't enjoy them anymore. Your point of not converting 100% of IRA to Roth is well taken and should be noted by people. I have heard so many comments about converting everything and for me, leaving a balance of $500K for a married couple makes perfect sense.

[JA-erjp]

Is it just me or do almost all these examples/case studies have HUGE balances in joint/brokerage accounts? Most people I know don't even have a brokerage account, let alone $1M in one. I feel like more realistic examples would have the largest balance in 401k/IRA, a smaller amount in Roth, and maybe a modest balance in a brokerage.

[cereal]

Definitely glad I clicked on this video. I see so many channels offering opinions on finances but almost none of them are qualified to do so. It's refreshing to hear from an actual professional.

[IramisandGerry]

Great post. We are in a similar position, but we have a house that will go into brokerage to bridge the gap years when we sell it. We do plan on leaving the US to pay for cost effective healthcare and lower our monthly budget to 4K by doing full time travel.

[timz]

This was a very interesting discussion. I'm hopeful you'll take a similar look at scenarios where instead of 25% pretax and 75% taxable you'd look at a similar portfolio size for someone that is in process of building their "bridge" taxable fund. Maybe 75-90% pretax and 10-25% taxable and/or Roth. Would that couple ever have issues with RMDs or similar? Tax optimization would certainly be a different discussion in that scenario.

[kevinkanter]

great video - and very comprehensive!! thank you.
a consideration:
you put this scenario along a timeline and illustrate consideration of the decisions as you step thru the brackets (Tax, Cap Gains, RMD, IRMAA) with different location %'s (ROTH - IRA/401K - Taxable-Brokerage + HRA, all as variables focusing on final goal requirements. I just briing up the brackets for my situation (single) as well as decreasing the $$ amounts to show the constraint variables relevant to my situation to help me follow along your example. Very useful since i faced most of the questions you provided ways to think about --- but i only had 5 years to plan since i retired late (68-73) rather than 20 years (50-75).

in my understanding, you set up your data into coupled phases of retirement w/ actual numbers and so will you do this for a scenario for a single person (I'd like it) or as some others have said, with more common and lower values in the 1-1.5M range .
My question : Does your software allow scenario modeling to address a monte carlo sim of the final decision with the setting of the variables?

[FASTDTpodcast]

You can always donate that stock to a chart. It can lower your taxable income and you take care of your giving for that year.

[timeformore]

This is my lunch break learning. I’m trying to plan for an early retirement situation that is somewhat similar, so this is very helpful-thank you! My plan hinges on selling our home to either downsize or become nomadic with RV travel for a few years. What’s left over from the home sale would become our brokerage account because we don’t currently have one. This is still 5-10 years away, but I think it’s doable.If we can’t get enough from selling our home, we can still “downsize” our jobs and take ones where we’re not worried about maxing out 401k contributions until we’re at a point where we could retire. After 5 years of the early retirement, one of us would be of the age to start 401k distributions.

[peterwright]

Similar situation here. I was selling shares from my concentrated position up until last year and paid the max capital gains rate plus Net Investment tax. However, once we decided to retire this year I stopped selling because I’ll pay a lot less in taxes on those gains after retirement. We’re are still maxing out both pre and post tax 401k contributions to to take advantage of the tax savings and the Mega Backdoor Roth Conversion while we can. Not sure it’s the optimal strategy, but it seemed like the best pre-retirement strategy to me for our final year of W2 income.

[hlgg]

My jaw dropped hearing 60% in an individual stock holy cow

[jaykraft]

Question for anyone who knows: If my wife and I were retired, filing jointly, and receiving $100K in social security per year together, and we had a long term capital gain of say $90K, what would be our tax ? (wondering if the $90K adds to AGI and provisional income causing more of the social security to be taxed, and assuming the long term gain has 0% tax, but not positive). Assume there is no other income and standard deduction

[WalterDorcas]

I would be retiring or working less in 5 years, and I'm curious to know best how people split their pay, how much of it goes into savings, spendings or investments, I earn around $250K per year but nothing to show for it yet.

[michaelmunin]

Hey James, would the analysis for keeping the 401K during the last few years change if they were getting say 50 % matching from their employer?

[aerobiotic]

Contributions to 401(k): If the employer makes a matching contribution, it will be hard to find an investment with a 100% gain in a given year.

[Growing-Our-Retirement]

If the big stock holding is in a really good company I would continue to hold it and sell some puts and some calls. Much less expensive than paying the taxes and potentially missing even more appreciation. This idea of selling your winners to rebalance actually works against you in many cases.