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FI and Semi Retired
Old 06-05-2013, 08:03 PM   #1
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FI and Semi Retired

Hello all; I discovered this site a few days ago and feel like I have found a community of like minded enthusiasts. There is one part of this forum focus though that I do not fit into and that is the early retirement focus. I hope that this fact does not disqualify me from contributing. Please comment if you all feel that I don't fit in. Facts are as follows:

I am 64.5, DH is 66.5. DH retired 5 years ago from the Federal Government, 4 months before his 62nd birthday. FEP health insurance covered as primary until our 65's b-days and then as supplemental after Medicare kicks in at a reasonable cost ($299/mo presently). I am self employed. I have not worked a forty hour week however for 6 or 7 years. Some weeks I work 10 hours and some closer to 30 hours. I feel blessed that I have had the opportunity to experience this glide path toward retirement, from a 40-50 hour work week, to a 20+/- hour work week. I have been able to avoid the precipice of going from full throttle work to zero work and am happy with this scenario, as I don't hate my job. I can manage my job from anywhere and am able to spend the winter months in a warm climate in a rental condo and also can travel abroad for a few weeks each year. As long as I have internet access and a cell phone, I can work from anywhere. Can't complain about that right!!!

Stats:

DH's annuities/pension/SS with COLA = $115,000/year
Current expenses $130,000/year (exclusive of extraordinary items) not including federal and state taxes which will decline when my income ceases. We have not tapped our investments yet and have continued to save roughly 22-25% or our income since DH retired. We have spent $ on extraordinary items in the past few years such as automobiles, home renovations and repairs, etc. hoping to avoid those sorts of items in the future when our income is less.
My income fluctuates between $150,000/year and $200,000/year, but I do anticipate that it will drop to zero within the next 1-2 years, with full retirement. I've been saying this for 5 years but I really do expect the income to stop within the next 12-18 months.
My pension/SS will be limited to SS, either $22,000/year if I stop work and draw it starting at 66, or $30,000 if I wait until I am 70, which our FA has advised us to do.
With all of this income it does seem as though we should have saved more, as we have always been LBOM folks, but with 2 private college/grad school educations for DD and DS and being in a high tax bracket, the numbers are not that impressive. Assets as of today: IRA's/401K's = $1,825,000, Taxable Investments = $1,000,000, No Debt, Home Equity = $500,000 +/-. AA is 55% Equities, 35% FI and 10% cash. DH and I are both Econ majors and DIY investors, invested primarily in exchange traded funds with a few hundred thousand in dividend yielding stocks, presently being reinvested.
DS and DD both out of the home with good degrees, although we have contributed to their retirement accounts and I have much to queery the forum members on with respect to how to manage ongoing support as we can afford quite a bit, but don't want to undermine their own self-sufficiency. This is a question of "give it to them now" or "give it to them later", which I am interested in feed back on.
We have been advised to gradually convert our IRA's to Roth's using tax strategies to avoid RMD's over and above what we need, over the course of several years, which will elevate our taxes while we are doing this. Assuming we limit the withdrawals to keep us in a 25% tax bracket or lower, our cash w/d rate would need to be $50,000 per year until I reach 70 and start drawing SS, or roughly 2% WR.

I feel blessed and would like to learn/contribute to this forum.

Do any of the forum members see cause for concern in our comfort with our situation?

Thanks for listening.
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Old 06-05-2013, 08:20 PM   #2
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Welcome to the forum. There's a a lot of experience, wisdom here.
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Old 06-06-2013, 07:06 AM   #3
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You clearly are in good shape for retirement. I am interested in your thinking about Roth conversions. I haven't evaluated it carefully but am in a similar situation with pension income kicking me into the 25% bracket. Without extensive analysis I guesstimated that conversions were not worthwhile. But...

Oh, and welcome.
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Old 06-06-2013, 09:15 AM   #4
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Thanks Donheff;

DH and I paid a one time fee to a FA just before his retirement to validate our planning/assumptions. He is the one who pointed us in the direction of gradual Roth Conversion. As you point out it is not for everyone. I am a bit of a spreadsheet nerd, so I have played around with two scenario's, one with Roth Conversion and one without and the case is pretty compelling.

Our Retirement assets are split pretty evenly between DH and myself, but my RMD's won't kick in for two years after DH's. In my perfect spreadsheet world, we would start exceeding our needs with RMD's in 2019 without gradual conversion starting in 2014. In 2020 we would be kicked up into the next tax bracket and at some point, down the road would move into the 33% tax bracket. By gradually converting 100% of the withdrawals into Roths in 2014 and shifting to utilizing about half of the RMD's for personal use in 2019 we end up with a signifcant legacy at age 100 while having paid only a few hundred thousand more in taxes. In the non Roth scenario, we end up with about half as much in our estate while saving a couple of hundred thousand dollars in taxes.

It might be worth it for you to have the numbers crunched to see if it would work out the same way.
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Old 06-06-2013, 10:50 AM   #5
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GS. I suppose I should study it more carefully. The confounding variable is the potential advantage of keeping more funds invested early (by withdrawing from taxable at lower rates, leaving larger sums to grow) if the market performs well. Did you run various scenarios and see advantages to conversion in all?
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Old 06-06-2013, 03:02 PM   #6
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Good luck!
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Old 06-06-2013, 03:17 PM   #7
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Quote:
Originally Posted by Golden sunsets View Post
There is one part of this forum focus though that I do not fit into and that is the early retirement focus. I hope that this fact does not disqualify me from contributing.
Not at all!
In fact, you exactly fit, being 64.5, or half a year earlier than the old standard "65" retirement age.

Seriously, there are a bunch of folks here who started out as early (sometimes very early) retirees, but have now aged matured into full curmudgeonhood and are considered old geezers (but we still love 'em).

Welcome to our little world.
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Old 06-06-2013, 03:20 PM   #8
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Donheff;

The problem with letting it compound in an a pretax account, if the market performs well, is the RMD's are even greater as time passes pushing one into a higher tax bracket even earlier. I didn't run any scenarios where we cashed it in and converted it all at once, if that is what you are asking. But seeing the compounding effects on a Roth that would never be taxed is pretty powerful stuff.
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Old 06-06-2013, 03:28 PM   #9
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Welcome to the forum. You done good!
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Old 06-06-2013, 03:43 PM   #10
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Thanks to all for the welcome.
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Old 06-06-2013, 07:49 PM   #11
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Congrats Golden, but I didn't think you could convert RMDs, or do you mean you converted money up to your tax bracket limit to reduce the size of your RMDs?
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Old 06-07-2013, 06:07 AM   #12
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Old 06-07-2013, 09:22 AM   #13
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Rothman; You are absoulutely right about the restriction converting RMD's to a Roth. I didn't realize this, but just located the applicable IRS rule. I could roll over funds beyond the RMD, but that would defeat the purpose and bump us to a higher tax bracket. I'm going to have to go back to the drawing board on this one. Perhaps we will convert greater amounts up to the 28% threshhold between now and our 70th birthdays and see if the case is as compelling. I HATE TAXES.

PS. Thanks for the heads up. I love this board.
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