Tuesday, July 21, 2015

My Poland Relocation: Investing, MMM Style

CleanSlate Wrote: Quick question... (maybe we should PM about this instead of going public) When you talk about living off the monthly interest off that $450k, where do you keep that money? In taxable/savings accounts or in retirement accounts? IRA? Brokerage?

Nothing to hide below, should help the forum:

In an ideal situation, I believe you'd stick the entire $450k in two places: a traditional 401k (if you have one, and it has competitive expense ratios for its S&P 500 & ex-US index funds), and a traditional IRA (which you're free to get anywhere).

The idea is that if you're taking less interest income in retirement (just to cover your lower expenses abroad), then you'd rather be taxed at that rate (which may in fact be zero or close to it), rather than the (presumably) higher one you're taxed at when you're working.

Of course, the 401k and IRA have limits as to what you can contribute annually (Google them), so then you can contribute to an after-tax account (if you're out of other tax shelters, ie an HSA, etc). Your employer may offer an after-tax 401, which you may want to use, if the expense ratios of the index funds in it are lower than what you can get on your own. Otherwise, at that point, you're looking at taxable investments.

It bears repeating that for the $450k sum to generate $1500/mo on average, you must invest in something that has historically generated 6% nominal returns. Index funds that track the S&P 500 and its ex-US equivalent are one of them. Savings accounts (in the US anyway) are not.

 CleanSlate Wrote: Okay, I was asking for a reason. How do you actually get $1500 a month in spending money from those retirement vehicles without paying taxes or penalties? Did you use the backdoor method where, for example, you contribute to a traditional IRA every month and immediately transfer that money to a Roth, and then take that money out starting after 5 years? Or do you have some other method? I just want to learn the mechanics.

Man, been busy moving out of my current apartment. Anyway, to answer your question:

First, check out Mr. Money Mustache's post on taxes and withdrawals: http://www.mrmoneymustache.com/2012/06/0...etirement/
Here's the TL;DR (quoting myself):

Quote:In short, once I quit my job, I'll be in a lower tax bracket, at which point I can convert traditional 401k money into Roth IRA money and pay the associated income taxes, then let it sit for the IRS-minimum 5 years before withdrawing the principal (but not the gains) penalty-free. So basically another thing to look at after I move, when I have more time.

At the onset anyway, I'll withdraw the money from non-retirement brokerage accounts, which don't have penalties. (I built these up due to my savings rate exceeding the annual IRS limits on retirement accounts.)

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