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401k and Roths to cover gap years
Old 09-18-2015, 02:17 PM   #1
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401k and Roths to cover gap years

Is it common to use personal investments to cover only the gap years between retirement and when social security and other pension kicks in? Then rely solely on those without personal investments?
Seems like I only came across plans for the 401k and Roths and whatever else is supposed to last a lifetime and just draw a percentage of that in retirement. But that doesn't seem doable in our case.
Am I missing something?
Would be nice not to rely on SS and pension, but not practical.
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Old 09-18-2015, 02:58 PM   #2
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Looks like you just joined. Welcome! You might want to start by posting in the "Hello I'm...." section to introduce yourself, if you haven't done so already. There's also an early retirement FAQ section that's worth a read.


In the meantime, many/most of us are indeed depending on SS (though not all of us have a pension). And many of us do include SS in our planning. Firecalc allows you to do that, by the way as well as many other options - it's worth a look and its pretty easy to use.


As far as "just draw a percentage" in retirement, that's just one method among many for how people choose to withdraw from their taxable/roth/401k/rollover IRA/etc. accounts. There are options the increase the annual withdrawals based on inflation, there are folks who just withdraw a fixed % every year and count on the portfolio's growth to take care of inflation in the long term, there are methods that limit the amount the withdrawal can change from year-to-year in case your portfolio takes a dive in a single year, there's the RMD method, there are "decision rules", VPW, ratcheting.... the methods are endless and there is, of course, no one right answer or we'd all be doing it. :-)


good luck and welcome to the forum!
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Old 09-18-2015, 03:10 PM   #3
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We are using our taxable accounts for pretty much as long as they last. We would like to Roth convert our IRA's as much as possible, in order to get RMD's below the 15% tax bracket when we have to take them and SS comes online. We'll save enough IRA balance to fill up the 15% bracket for a long time, probably including a couple of years before I turn 70 since I don't think our taxable accounts will last that long. I'm already 60, so no issues with getting IRA money out now, if that was what you were looking for.

For us it's pretty much all a strategy to minimize our life long tax hit. Your taxes will look different than ours, though it's a common strategy. You will have to think about how your taxes will look throughout retirement, how much income you will need, the various income sources available to you over time, and what accounts are accessible to you.

I would try not to draw down all of your portfolio before SS and pension kicks in, just to have some capital available for unexpected expenses.
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Old 09-18-2015, 03:31 PM   #4
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Is it common to use personal investments to cover only the gap years between retirement and when social security and other pension kicks in? Then rely solely on those without personal investments?
I find that words like "only" and "solely" don't typically apply to these things. More specifically, it behooves one to take advantage of the ability to withdraw from tax-advantaged accounts up to the top of the 25% ordinary income tax bracket, since that doesn't boost your long-term capital gains rate, and frees up those formerly tax-advantaged assets for use in future years, when perhaps withdrawing that money would put one over the top of that tax bracket. The tendency for withdrawals later in retirement to come from tax-advantaged accounts tends to track to having exhausted taxable accounts, I suspect.

I happened to run a Fidelity RIP report this morning. Hmmm.. it doesn't seem to differentiate. Let me check Quicken Lifetime Planner. In between when one spouse retires and the other spouse retires, QLP says we should be able to live on the one salary, plus withdrawals from taxable. Our situation has a coincidence in it... we go directly to a year with neither salary and one of the MRDs begins, but we can see that the tool is still favoring withdrawals from taxable, because it isn't pulling out of the retirement account more than the MRD I don't think. Interesting. As soon as the second MRD starts, taxable withdrawals end (but there are still taxable assets left). Yeah wow... the MRDs are high at that point. Ouch.

I don't think there's really much there we can rely on though. Besides the fact that this is my data, and we really don't know the logic behind the choices the tool made, and that specific tools is not necessarily the best for deciding where to get income from I don't think... certain tax-related decisions I could make before the second MRD starts may change things. We have ten years during which we'll have no wage income, and the one MRD will put us pretty low in the 15% tax bracket. I would think it would make sense to pull money out of tax-advantaged accounts to completely fill the 15% tax bracket (since that money will never be taxed lower than that I don't think) and the more pulled out earlier the less will have to be pulled out later, when QLP has us pulling out of tax advantaged accounts at a rate that would put us in the 25% tax bracket.
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Old 09-18-2015, 04:12 PM   #5
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I filed at FRA and DW is taking spousal SS. I am waiting until 70 to maximize survivor benefits.
Until then, we are living off a tiny pension, her SS and withdrawals from my trad IRA (and a little w*rk as well). At the same time, I am steadily converting my IRA to my Roth IRA.
At 70, we will be heavily dependent on SS but will be paying NO income tax. We will not be constrained by RMDS and plan to take only 3.5%/year from the Roth, but will be totally flexible.

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Old 09-18-2015, 04:54 PM   #6
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I use a spreadsheet and tentatively map out how much I will take each year from each source. The goal for me is to have about the same amount each year overall regardless of the source.
Between ages 50 and 65 a lot comes from our portfolio and then after that to age death it is mostly pensions and social security.
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Old 09-18-2015, 05:07 PM   #7
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Around here it's common to make customized plans that fit your own circumstances. Simple withdrawal systems don't work well if you've got non-level income or expenses in retirement.

We used up taxable accounts with fixed assets early in retirement, then started on IRAs (that came from 401k rollovers), and will finally use SS plus smaller IRA withdrawals.

I'll recommend you build a spreadsheet to see how it will work for you.
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Old 09-18-2015, 05:25 PM   #8
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Everyone has their own situation. In my case a pension that can start from 55-65 and SS from 62-70. So my gap is from 50-65 which I fill with my after tax / before tax savings withdrawals. Waiting the max time before taking payments is longevity insurance.
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Old 09-18-2015, 08:05 PM   #9
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We used up taxable accounts with fixed assets early in retirement, then started on IRAs (that came from 401k rollovers), and will finally use SS plus smaller IRA withdrawals.
+1


This is pretty close to my plan. At some point I may use some Roth IRA withdrawals to ensure my taxes remain at the 15% level. However, I have no idea how the tax regime will change over the next 30-40 years.
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Old 09-18-2015, 08:53 PM   #10
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Quote:
Originally Posted by walker View Post
Is it common to use personal investments to cover only the gap years between retirement and when social security and other pension kicks in? Then rely solely on those without personal investments?
Seems like I only came across plans for the 401k and Roths and whatever else is supposed to last a lifetime and just draw a percentage of that in retirement. But that doesn't seem doable in our case.
Am I missing something?
Would be nice not to rely on SS and pension, but not practical.
While situations vary, I would say that more often that not, SS and pensions are insufficient to cover retirement living costs. SS and pension will provide a large percentage of what we need in retirement, but not 100%, so we'll continue to draw from our nestegg to fill in the gap.

There was a poll on that recently... see How much of your retirement income is "guaranteed"?
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Old 09-18-2015, 09:05 PM   #11
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I fear too much money being in roths, if a future tax structure puts in place a consumption tax, you essentially will be double taxed on that money. I prefer to delay as much taxes as i can and do what i can to minimize later, rather than prepay now and hope other taxes don't hit later.


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Old 09-18-2015, 09:12 PM   #12
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Double taxed how? Even if a consumption tax were put in place there would be no tax when you take money out of a Roth, just when you spend the money on something taxable.

In a tax-deferred account you will pay tax twice... once when you take money out (the tax you never paid when you deferred the income.... and then again if you spend the money on something taxable.
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Old 09-18-2015, 09:14 PM   #13
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I am planning on using 100% rental income between FIRE and pension and SS. If I have to, I can get the pension right away, or SS at 62. Or my Roth and IRA money.

That is the challenge of ER, the gap years... It is not everyone that can do it.
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Old 09-18-2015, 09:17 PM   #14
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I fear too much money being in roths, if a future tax structure puts in place a consumption tax, you essentially will be double taxed on that money. I prefer to delay as much taxes as i can and do what i can to minimize later, rather than prepay now and hope other taxes don't hit later.


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Or you could take your money out of your traditional IRA, pay income tax on it, and then spend it and pay consumption tax on it again. I don't see that a Roth would be any more disadvantaged than a tIRA, or a taxable account for that matter, by a consumption/VAT tax. A consumption tax wouldn't know where your money came from.
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Old 09-18-2015, 09:18 PM   #15
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Old 09-18-2015, 09:59 PM   #16
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I fear too much money being in roths, if a future tax structure puts in place a consumption tax, you essentially will be double taxed on that money. I prefer to delay as much taxes as i can and do what i can to minimize later, rather than prepay now and hope other taxes don't hit later.
Your scenario of a tax nightmare for those with mostly Roth investments could be just as easily a nightmare tax increase for income tax rates, but Roths remain untaxed. Rather than bet heavily on one scenario, I prefer to hedge in all directions. I won't get the best deal because I know I cannot guess future tax policy, but I also avoid making a wrong guess and forcing myself in to the worst deal because my assumptions were wrong. I'm sticking to Roth, taxable and trad IRA all being in the mix and using them all to manage my income to stay just below bracket changes whenever possible. Pay a moderate tax to avoid a higher bracket in the future with RMD, but not pay so much tax now that I'm overly dependent on Roth rules either.
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Old 09-19-2015, 05:51 AM   #17
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I find that words like "only" and "solely" don't typically apply to these things. More specifically, it behooves one to take advantage of the ability to withdraw from tax-advantaged accounts up to the top of the 25% ordinary income tax bracket, since that doesn't boost your long-term capital gains rate, and frees up those formerly tax-advantaged assets for use in future years, when perhaps withdrawing that money would put one over the top of that tax bracket. The tendency for withdrawals later in retirement to come from tax-advantaged accounts tends to track to having exhausted taxable accounts, I suspect.
I think you mean 15% bracket. LTCG and Q-divys are not taxable until you exceed the 15% bracket.

Double taxing Roth money with a consumption tax comment... maybe? If they add a consumption tax while keeping the income tax, I'm not sure that would be double taxed as the IRA and normal income are getting this additional tax. But this is a matter of semantics. If the tax system is changed from income to consumption, then I would agree with the poster.

To the OP, I expect to live off my taxable accounts and convert TIRA to Roths to the extent possible while keeping in the 15% bracket. I expect to have TIRA money left to require RMDs. The only pension like thing I will get will be SS.
If you are looking at blowing through all of your TIRA/RIRA,401k, etc by the time you can get pensions/SS, I would consider how you are going to pay for health care, LTC, etc. Look at your plan closely. You may have a very nice pension that can cover all you needs including LTC/HC, etc. Or you may need to save more. Look at your health insurance cost/needs. Not just the premium, but deductible/max out of pocket. 3 years ago I got a pacemaker... blew through the deductible in that one visit. About every 8 to 10 years I will have it replaced (battery dies)... and this will blow my deductible again. These are the type of things one needs to plan for.
One always needs some Oh S#|T money because something will come up.
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Old 09-19-2015, 07:07 AM   #18
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I think you mean 15% bracket. LTCG and Q-divys are not taxable until you exceed the 15% bracket.
Yup. Thanks for the correction!
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Old 09-19-2015, 10:53 AM   #19
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Wow, I appreciate all the responses!
There is much to take in, but I think I'm on my way. It's been very good to hear that we're heading in the right direction. I'm making notes from your posts, you've all been so helpful.
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Old 09-19-2015, 11:21 AM   #20
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I should have said, I filed and suspended at FRA.

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