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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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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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Old 01-19-2024, 02:05 PM   #8
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UPDATE POST: It's been almost 7 years since I posted this intro, reviving it to update a bit here. We have continued LBYM through the past 7 years and have both managed to FIRE (me in 2018 age 42, DH in 2021 age 49).

We still have a 3.5% mortgage on our primary residence which has worked out okay for us so far. We sold our paid-off rental home when our long-term tenant moved out. We wanted out of the landlording business and did not want to do a 1031 exchange.

Liquid net worth has nearly doubled since 2017 despite withdrawing for the past 2.5 years. We did shift from a nearly 100% stock AA to a 70/25/5 AA (stock ETF/bond ETF/cash) when DH retired. In hindsight I wish we had just done individual treasuries in the IRA instead of the bond ETF (VGIT), but so far it hasn't been too much of a drag on our return. We have done decent sized Roth conversions for the past 2 years and plan to continue. We fill the 12% bracket and then go a little ways into the 22% bracket. We have about 20 years' time to really work on lowering the IRA balances before RMDs come due for DH.

Our SWR is around 3.25% and as it turns out, we will probably not need to do a SEPP/72t plan as our taxable stash has been keeping up with our needs and will hopefully stretch us until DH is 59.5. If it doesn't we can access our Roth contribs and conversions to tide us.

In the past 2 years since DH has retired we have taken several longstay trips to Europe, Australia, and SE Asia. We will probably continue to do these monthslong kinds of trips at least once a year while we are young and fit enough to be adventurous. But this year we're holding back a bit to spend a bit on home maintenance and upkeep. I also lost my mom recently and have a dear friend with serious health issues, so for the next few months I am content with being closer to home and family/friends here.

I continue to do all the fun stuff mentioned in my original post - language learning, online courses, and volunteering outdoors with a nearby nature conservancy. We eat at home a lot and I've learned to do a lot of scratch cooking, which I enjoy and makes it easier to eat reasonably healthily. Looking back I can say that I've not had any problem adjusting to early retirement and I often wonder how I found the time to do anything else while w*rking! My volunteering and time with DH, family, and friends gives my life plenty of meaning, much more so than when I was writing code and filling out "TPS reports".

So this is an update post, but it is also a thank you post. In the decade since I've joined here I have benefitted so much from the knowledge shared on this forum. In addition to the financial knowledge that is posted here I really appreciate the life knowledge that people openly share -- lessons learned, struggles, notes about health and aging, good books/TV shows, even the thread dedicated entirely to cheese -- all of it is so useful! I think I speak for many when I say some of these "life experience" topics are often tricky to broach with people in real life. So a big thank you to everyone who contributes here!
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Old 01-19-2024, 07:39 PM   #9
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Great update! I am 45 and my DW is 44 and we are retiring in 1 year. Good to hear that you had a plan, followed it, and are now living it and are happy! Cheers!
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Old 01-24-2024, 06:49 AM   #10
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Congrats!
I agree, this community is like no other and the only one I visit daily.
The retirement info brings you here, then the community and diverse knowledge on many subjects is a wonderful bonus.
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Old 01-24-2024, 07:56 AM   #11
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... Looking back I can say that I've not had any problem adjusting to early retirement and I often wonder how I found the time to do anything else while w*rking! ...
I recall my Dad saying that he was so busy that he didn't know how he ever found time to work a few years after he retired and that I thought that it was the lamest thing that I ever heard. I understand what he meant now.
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Old 01-24-2024, 11:10 AM   #12
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Congratulations on your early retirement. It sounds like your plan is working well.
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Old 01-24-2024, 11:41 AM   #13
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I recall my Dad saying that he was so busy that he didn't know how he ever found time to work a few years after he retired and that I thought that it was the lamest thing that I ever heard. I understand what he meant now.

I have no idea... I'm only a few years in and days fly by. I can't imagine throwing in 40-50 hours plus commuting.
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