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Mid-40's, almost ready, looking to learn about drawdown strategies
Old 03-10-2017, 02:24 PM   #1
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Mid-40's, almost ready, looking to learn about drawdown strategies

I have been reading this forum pretty frequently for the past five years (even registered for an account a few years ago) but felt too inexperienced to actually post anything until now. DH and I live pretty frugally and have done fairly well on the savings front over the past few years. We sock away quite a bit each year into a SEP IRA, traditional IRAs (when allowed), and our taxable accounts. We are looking at early retirement sometime around 2020 or 2021 based on our expenses and a roughly 3% withdrawal rate. The savings part up until now has seemed very straightforward -- save the extra wherever Uncle Sam will let you -- but it's the drawdown and tax implications that I want to better understand.

We have roughly 1MM in the SEP, 130K in IRAs, 260K in Roths, and about 680K in taxable. Almost all is in indexes (75% is in SPY). We don't own bonds, but we do have a paid for rental house that brings in about 8K/year after expenses. We also have a fairly large mortgage (~290K) at 3.5% on our primary home. We're still working to try to juice up the taxable accounts to help stretch us until that golden age of 59.5. Because we will have a long time horizon in ER (we're 41 and 45), we want to understand the most tax-efficient way to get at our money. So my questions revolve around understanding that before pulling the plug. Would 72t work for us? Roth conversion ladder? I know I have a lot to learn in the next 3-4 years. We are also holding back on ER a little to see what happens with healthcare (we currently pay out of pocket for a Blue Cross grandfathered plan, but premiums are sure expensive!)

A little about me: I do contract work at Megacorp, although am in between gigs right now and may become a W2 employee soon if I can't find another contract. I love travel -- especially slow travel where you really get a feel of what it is like to live in a place. DH and I have done a few trips like that. I also love learning the "fun stuff" -- have taken about a dozen online MOOC courses on edx -- art history, philosophy, jazz appreciation, French -- all the "elective" stuff I wish I'd had the time to take back in college. I have a feeling that early retirement for me would include more of both travel and learning (in addition to the occasional day puttering around the house or surfing the web...which are also things I enjoy when the mood strikes).

Anyway, this forum has been a great research tool thus far and I'm looking forward to participating more in the discussions.
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Old 03-10-2017, 02:52 PM   #2
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Old 03-10-2017, 03:21 PM   #3
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I'm not smart enough to answer your specific situation, but you know the standard draw-down method is taxable, then tax-deferred, then Roth, right? This takes your taxable and "will-be-taxable-at-70.5" money down early on. The goal is to get the tax-deferred $s down before 70 1/2 when it not only becomes taxable, but under government edict.

I am planning on moving some of that money myself over the next few years (my income will be very low) from Traditional tax-deferred into Roth. This is done by playing the tax bracket game, converting money that keeps you in the lowest bracket you can, rather than paying more tax than necessary now.

There is also things that push you out of the standard methods, such as where the money is invested. Certain investments are "tax-efficient" (common stock, corporate bonds, REITs), others are not (junk bonds, preferred stock). So if these are in the "wrong" type of account, it may make more sense to draw down a bit differently.

There is a lot of reading out there on this topic, but everyone's situation is different enough that I wouldn't try to advise on your specifics. Hell, I'm probably going to be paying a professional on my situation this year to make sure I've got my head on straight.
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Old 03-10-2017, 03:30 PM   #4
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Originally Posted by RockLife View Post
I'm not smart enough to answer your specific situation, but you know the standard draw-down method is taxable, then tax-deferred, then Roth, right? This takes your taxable and "will-be-taxable-at-70.5" money down early on. The goal is to get the tax-deferred $s down before 70 1/2 when it not only becomes taxable, but under government edict.
Yes, thanks for the reminder. Because we have so little (comparatively) in our taxable accounts, that's why we are continuing to work, so that we can put extra savings there for our early retirement (pre-59.5) spending. But, as you mention, the goal is to avoid massive RMD's later as well...which I why I want to understand more about 72ts and/or Roth conversions. I'm wondering if we can't whittle away at the larger SEP balance so that we won't get stuck with massive RMD's at the end. We don't intend to spend anything out of our Roths and will let them grow as much/as long as we can.
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Old 03-10-2017, 04:31 PM   #5
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The primary benefit I've noticed for using 72(t) withdrawals is that it can help supplement your retirement income prior to 59.5 with a secondary benefit of having a lower balance to worry about potential taxes on later.

The primary downside is that if you NEED to use more before you eventually no longer have to take the payments then you can get hit with back taxes on all of the payments. That's a massive penalty to pay if things go bad and you need more from the account.
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Old 03-10-2017, 04:43 PM   #6
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The primary downside is that if you NEED to use more before you eventually no longer have to take the payments then you can get hit with back taxes on all of the payments. That's a massive penalty to pay if things go bad and you need more from the account.
Thanks for this, exnavynuke. I'm wondering if one could, if needed, use a different IRA for this type of thing. So hypothetically, in a few years, we are taking large-ish 72t distributions off the SEP (say ~$47K given the current balance), but haven't touched either of our other traditional IRAs. Would those other IRA's be available to us in a pinch, either to do another separate 72t, or just take a small withdrawal for whatever's needed and pay the 10% penalty?
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Old 03-11-2017, 07:20 AM   #7
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I'm not an expert and I wouldn't have a clue to how to answer your question. I can tell you I have some of the same concerns and not sure what I will do either.

I might not take any funds from my tax deferred accounts till I have too (70). I might just let things grow and pay the tax I will be required to pay at the time. I have done some numbers and either I will be in a higher tax bracket at 70 going forward any way.

There is some very knowledgeable people here that may be able to give you advise. I really think you will need to run numbers from a program to see what works out the best for you.
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