FIRE Planning: Using a 10% Cash Allocation to Optimize ACA Subsidies and Roth Conversions — Thoughts?
Throwaway account..
We would appreciate your input on our plan over the next five years as we approach FIRE.
About us:
* Married couple in our early 50s/40s with one child
* About 5 years away from our retirement goal
* Investment target: roughly $6M total, split across taxable, Roth, and 401(k) accounts (529 excluded)
* Planned withdrawal rate: around $200k/year (~3.3% SWR)
* No debt, no pension, only future Social Security
Since we plan to retire before Medicare eligibility, we’ll need to manage healthcare costs for several years.
In the past, I never fully understood why some retirees maintained a relatively large cash position before/during retirement.
However, after researching ACA healthcare costs and Roth conversions during lower-income years, we’ve started to see the value of having a meaningful cash allocation.
Our retirement income would come from:
* Dividends from taxable equities
* Interest from cash/money market funds
* Selling taxable equities with relatively low capital gains
* Cash reserves as supplemental income
* During market downturns, potentially selling bonds and rebalancing into equities within tax-advantaged accounts
Our thinking is that holding cash:
* Helps control MAGI for ACA subsidy purposes
* Creates more room for Roth conversions at lower tax brackets
* Helps reduce sequence-of-returns risk
So over the next five years, we’re considering the following allocation:
* 75% stocks (across taxable, Roth, and 401(k))
* 15% bonds (primarily in 401(k))
* 10% cash/money market (primarily in taxable)
At first glance, one could argue that inflation will erode the purchasing power of the 10% cash allocation.
However, we’re thinking the combination of ACA subsidy savings, tax flexibility, and Roth conversion opportunities may more than offset the drag from holding additional cash.
One important note: this allocation is intended mainly for the pre-Medicare / pre-Social Security years, not necessarily as a permanent retirement allocation.
Would appreciate any thoughts or blind spots we may be missing.