Account Withdrawal Strategies

[FLSUnFIRE]

Hi all, planning to FIRE this year at age 46 (I do plan to have earned income but do not want to be dependent on it lest it become w*rk instead of pay to have fun and do what I want) and thinking about withdrawal strategies. Expenses are about 3.5% of my current portfolio. At age 60, I'll get a slight income boost from a small pension and will also be able to end my SEPP and have much more flexibility so my concern is to get to 60 with adequate liquidity. I'm comfortable with my overall withdrawal rate and am just trying to get to my money before 60 in the best (flexible/tax efficient) possible way. I also established a HELOC so I can borrow/defer cash flow needs for a couple years if needed but it is an insurance policy and not something I will plan to use.



The majority of my funds are in my TSP account and Roth IRA and I will have to start my SEPP of my TSP fairly early (probably between age 47-50) in order for taxable accounts to maintain balances to maintain liquidity. -Exact timing will depend on market performance and how my actual expenses and earned income in "retirement" play out. I intend to do RMD method as I expect the market to go up over the next 15 years and the payments should rise (ideally enough to cover all my expenses) as my balance increases and my remaining life decline.


I am planning for the first couple years of FIRE to live off my taxable accounts and earned income and by then I'll have a better idea of both my real post-employment expenses/desires and my income potential at which time I'll decide when to start the SEPP. If my taxable balances drop below some threshold/psychological tolerance, I will start to augment my withdrawals by pulling contributions from my ROTH and if I have to start a SEPP after contributions are depleted.

I have also thought of possibly returning to an "easy" job in my 50s so I can properly retire from federal service at age 57 (boosting my pension a bit and also being eligible for health benefits). I'd prefer my SEPP be from my TSP account vice rolling it over into an IRA (since they support SEPP by RMD); does anyone know if I have a SEPP and re-employ if they'll open another TSP account or if they'll break my SEPP with the automatic contribution to my existing account (I'd hate to be in the position of choosing to go back and breaking my SEPP or not - after 20-plus years working for the gov't do not trust HR to not screw things up.) Anyone here have experience/tried this?


Greatly appreciate your collective wisdom and would like your thoughts on my general plan and, especially, any alternatives you may suggest!


FLSUnFIRE

 

[DrRoy]

At 46 I would not want to pull more than 2%/yr, maybe rising to 3% ten years later. Hang on to that earned income.

 

[FLSUnFIRE]

At 46 I would not want to pull more than 2%/yr, maybe rising to 3% ten years later. Hang on to that earned income.

Appreciate the thought but I'd really like strategies on maximizing flexibility in this thread. Non-discretionary spending (housing/food/medical/transportation) is under 2% of my invested asset... I tend to be conservative and suspect I'll be a skinflint the first few years as I get comfortable without my old income!

 

[zinger1457]

Just remember if you start pulling money out of your TSP early you need to follow the 72t rules, once started you will have to continue taking those withdrawals for 5 years or until you reach 59.5, whichever is longer. If you let the TSP calculate the monthly withdrawal amount using Life Expectancy it will meet the 72t requirements but starting out (age 46) it will likely be well short of the 3.5% you need for expenses. Not sure how they would handle the TSP account if you went back to work. I know when you setup a 72t with an IRA account you're not allowed to add additional funds into that account, you can open a new IRA account and make deposits. I would assume the same would apply with the TSP, they probably would have to open a separate TSP account if you wanted to make contributions.

 

[pb4uski]

I would start SEPP as soon as you retire to optimize penalty-free liquidity by having that money in taxable.

Then also do annual Roth conversions as soon as you retire to create a Roth withdrawal ladder after 5 years.

 

[Focus]

I expect the market to go up over the next 15 years

Counting on a best-case scenario? I'd rather hope for the best, but prepare for the worst.

 

[FLSUnFIRE]

I would start SEPP as soon as you retire to optimize penalty-free liquidity by having that money in taxable.

Then also do annual Roth conversions as soon as you retire to create a Roth withdrawal ladder after 5 years.

Thanks, soon is my thought but there are two issues/concerns I have. One, I would like to stay in TSP but I'm pretty sure if I decide to get rehired in any federal agency, they will stop my WD and bust my SEPP so I am really burning the bridge on every working for the federal gov't again. Of course, I could roll it over and start the SEPP in an IRA to mitigate. The other, is depending on how much I earn after "retiring" I may want to manage my income so stay under ACA tax credit threshold. I can't go too long though or I will deplete my cushion of after tax investments.

I think waiting till I decompress/see where I am in FIRE after 12-24 months may allow me some time to decide without burning too much AT funds while I feel out myself on the other side.

 

[FLSUnFIRE]

Counting on a best-case scenario? I'd rather hope for the best, but prepare for the worst.

No. Of course, if I really thought the market would (vice could) go down for the next 15 years I wouldn't invest in it... would any of us?!

 

[FLSUnFIRE]

Just remember if you start pulling money out of your TSP early you need to follow the 72t rules, once started you will have to continue taking those withdrawals for 5 years or until you reach 59.5, whichever is longer. If you let the TSP calculate the monthly withdrawal amount using Life Expectancy it will meet the 72t requirements but starting out (age 46) it will likely be well short of the 3.5% you need for expenses. Not sure how they would handle the TSP account if you went back to work. I know when you setup a 72t with an IRA account you're not allowed to add additional funds into that account, you can open a new IRA account and make deposits. I would assume the same would apply with the TSP, they probably would have to open a separate TSP account if you wanted to make contributions.

I'm pretty sure I'm SOL if I want to remain in TSP and have the possibility of going back into federal service. After more digging, it looks as any rehiring would result in discontinuation of the periodic payments so I'd be busted by that regardless of any automatic contributions (that would also bust it).

 

[ckelly78z]

I didn't see any mention about your plans for health care (until you potentially earn government benefits at 57 from your Federal service). You never know what situation will arise, that all of a sudden, you are incapacitated, and hospitalized...(an uninsured drunk ran a stop sign into the side of my car, I spent 6 months off work learning to walk again).

 

[FLSUnFIRE]

I didn't see any mention about your plans for health care (until you potentially earn government benefits at 57 from your Federal service). You never know what situation will arise, that all of a sudden, you are incapacitated, and hospitalized...(an uninsured drunk ran a stop sign into the side of my car, I spent 6 months off work learning to walk again).

It wasn't really germane to my question of strategies for liquidity. I'll likely do a post on my expenses/projections at some point. I've been tracking every dollar since 1998 so I have a pretty good handle on my spending.

My projected expenses are based off the full cost of an ACA plan plus maximized annual contribution to my HSA which is already funded with 3-4 years of max out of pocket under the plan I would buy ("off-balance sheet" and not counted in my assets for withdrawal calculations). At my spending level, I should be able to manage my income to get the credit as long as it lasts but I am not planning on it.

If something catastrophic happens to me, I'll be darn glad I didn't die as an employee in a job I can barely stand anymore. I take good care of myself and am fortunate to be in very good health and expect my healthy lifestyle to increase when not limited by the time and energy left after working FT. I am currently going through the gamut and making sure everything is good medically prior to resigning.

 

[levindb]

You may want to consider rolling over just a portion of your TSP into an IRA, and begin SEPP on just the portion you roll over. You then have flexibility to do another portion in the future if you need the funds...to handle things like inflation, or chunky expenses that come up.

Rather than doing the SEPP on the entire account, this give you the option of doing things in 5 year chunks without penalty. Once you start the SEPP on the full account, this penalty free option may disappear...until you are 59.5 when the penalty disappears.

 

[pb4uski]

I'm pretty sure I'm SOL if I want to remain in TSP and have the possibility of going back into federal service. After more digging, it looks as any rehiring would result in discontinuation of the periodic payments so I'd be busted by that regardless of any automatic contributions (that would also bust it).

What if you were rehired but did not participate in the TSP? Would that bust it?

Or if you were rehired but as a contractor?

 

[copyright1997reloaded]

Another (slightly off topic) comment: You mention setting up a HELOC as an emergency source. While this works on an individual basis, note that it may note (probably will not) work in terms of an overall economic downturn. Many people with HELOCs found them frozen when housing prices collapsed (almost all HELOC agreements give the lender the ability to terminate new withdraws on the line of credit at their determination).

 

[SecondCor521]

You can certainly do a SEPP on a traditional IRA using the RMD method of calculation. I'm not sure why you might think that isn't possible, but it is.

That should unblock you from your fear about returning to federal service and having your TSP SEPP busted.

 

[FLSUnFIRE]

What if you were rehired but did not participate in the TSP? Would that bust it?

Or if you were rehired but as a contractor?

I believe they would stop the withdrawals regardless when my SSN hit as an employee so that would bust it; also, there is no provision I know of to refuse the 1% agency automatic contribution either so that would bust it too. I certainly don't trust anyone in HR to process my requests correctly anyway, especially with the stakes so high.



Not being an employee, working for a contractor, would have no bearing on TSP.


As I mentioned by a few others, I could roll it over but I like that TSP will report the distribution as qualified and I'd really like that piece of mind that I'm good with the 72(t) rules! -Also, their expense ratio is hard to beat.


I doubt there is a great solution but still hoping for a eureka moment of finding a new strategy! (I did get smart and end my contributions over employer matching so I'm not throwing more money into the "can't touch it" pile this year).

 

[rkser]

I too am trying to set a withdrawal plan for starting June 2021 at age 65.

I plan to follow the Retirement withdrawal Plan calculated on Fidelity Website - Planning & Advice (All Vanguard Funds). I have a 50/50 AA, even after recent Market Downturn by buying on down days.

After playing around with Firecalc & some other Retirement Planning softwares, I found Fidelity's Plan roughly about the same as any out there, so I have hung my hat on Fidelity withdrawal Plan, at least for the Bridge Plan from 2021 to 2026 when I start Social Security.

Please help me as I have few questions in my mind -

1) I think I am right at picking today's dollars vs future dollars in the input ?
as I can see the withdrawal sum increase every year in the analysis, i.e inflation is being factored in.

2) I have 50/50 AA in the input, I presume it is taking the same AA in its calculations going forward thru the years.

3) No idea the accounts from which withdrawals need to be drawn - Either VTSAX in taxable or VBTLX in Tax Deferred.
I presume they mean approximately equal sums from each, so that 50/50 is being maintained ?
Although, I am planning Roth conversions into VTSAX till age 72 which will tend my Portfolio towards equities

What do you think of my withdrawal plan ?
Do you see any holes or aspects which I missed ?

Please advise

 

[sengsational]

Concerning #3, you might be thinking inside the box a bit; I'd have equities and bonds in both buckets. You might consider pulling from after tax or tax advantaged accounts strictly on the tax consequences. Typically that would have you pulling (or Roth converting) up to some level that made your tax rate now about the same as later in your retirement. But for spending money, maybe you'd be forced to "sell low" since you have equities in after tax. But the solution is to set and maintain your asset allocation targets across all tax buckets. So you might have to sell equities in your after tax account, but the same day you buy equities in your tax advantaged account. Since you essentially sell to yourself, you didn't have to '"sell low" (presuming the bonds you sold to fund the equity purchase weren't down too much)

 

[rkser]

Yes that is definitely one way to do, thanks.

Essentially this means the Stocks in Taxable & Bonds in tax deferred is out the window now. I guess this was preached to defer the Taxes on the dividends, during asset building.

Anyone else chose bonds in Taxable ? ( except in Target Date Funds )
Maybe thinking changes during asset depletion phase. I am trying to wrap my mind around this, although it will make things easier in some ways but as a preferred tax approach, I am not sure.

I will consider it as among the alternatives available.

 

[pb4uski]

....Essentially this means the Stocks in Taxable & Bonds in tax deferred is out the window now. I guess this was preached to defer the Taxes on the dividends, during asset building. ....

Not necessarily.

Say you have $2,000k.... 20% in taxable and 80% in tax-deferred and a 60/36/4 AA... so at the start you have 80k/4% cash and $320k/16% stock in taxable and $800/40% stocks and $800k/40% bonds in tax deferred.

The year ends and returns have been nil, so you have $1,920k.... having spent the $80k in cash on living expenses during the year.

You need another $80k of cash for spending for the next year so you sell $80k of stock... leaving you with $80k/4% of cash and $240k/12% stocks in taxable and $800/42% stocks and $800k/42% bonds in tax deferred... but with an overall AA of 54/42/4 and you want it to be 60/36/4.

So you then sell $115k of bonds and buy $115k of stocks in your tax deferred account.... leaving you with $80k/4% of cash and $240k/12% stocks in taxable and $915/48% stocks and $685k/36% bonds in tax deferred... but with an overall AA of 60/36/4.

Rinse and repeat each year. I've been doing something along those lines for teh last 7-8 years.

 

[rkser]

Great explanation pb4uski, this way I keep my Mutual Funds the way they are in the tax/tax deferred accounts.

Ideally done your plan looks simple enough & it has been working for you & also you have been Roth converting also (from different earlier threads).

Would not the marginal tax rate increase in the yr, when the ordinary income is coming from Tax Deferred accounts vs lower capital gain tax for Living expenses + (of course optional) Roth Conversion?.

Ideally I would like to handle this operation to fund my income needs myself & make changes as I go. With the planned SS at 70 & with RMDs coming at 72 my income needs may decrease some then.

The other option to fund this bridge is a 5 yr fixed annuity with its own can of worms of high usually opaque expense ratios.

I have read some draw on their taxable accounts first, but Fidelity & also Michael Kitces (if I remember right ) suggest drawing every year from mix of tax deferred & taxable.

Any other ways people are drawing from their accumulated Pots during retirement ?

 

[levindb]

It appears you have prepared for the 65-70 gap with after tax funds. The sequence of withdrawals my change throughout your retirement, and each person's situation will be different. This was my approach...

I have mainly been living off my after tax funds for my age 62 to 70, and the focus was minimizing short term taxes. I tried to stay within the 0% capital gains bracket to rid myself of the NUA stock I had moved from my tax deferred account. Also, if you have any individual equities in after tax accounts, you can look at tax loss harvesting

The idea is take advantage of these tax situations before SSA and RMD's kick in. Once my NUA stock was depleted, I then moved on to Roth conversions...and that means focusing on longer term taxes rather than short term taxes.

In case I was not clear, the focus is on TAXES, TAXES, TAXES

 

[pb4uski]

.... Would not the marginal tax rate increase in the yr, when the ordinary income is coming from Tax Deferred accounts vs lower capital gain tax for Living expenses + (of course optional) Roth Conversion?. ...

Can you elaborate? It isn't clear to me what your question is.

In our case, my small pension and interest/unqualified dividends from taxable funds are less than the standard deduction... so without tIRA withdrawals or Roth conversions our tax would be nil. So I usually do a combination of tIRA withdrawals with 100% withholding to pay my estimated income tax and the Roth conversions to the top of the 12% tax bracket.

This year it will be 0% LTCG in lieu of Roth conversions.

 

[rkser]

I meant,

One yr withdrawals presumably from selling stock MF, the capital gains taxes may be less vs the next year drawing from Tax Deferred ordinary income taxes.
But now knowing your marginal Tax Rate of 0 - 12%, I know you astutely control Taxes.