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"Alea Iacta Est" ("The die is cast")
Old 09-06-2016, 09:12 AM   #1
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"Alea Iacta Est" ("The die is cast")

Well, after being in OMY mode for the last 4-5 years, the decision of how/when to retire has been irrevocably made for me. I have been informed that, as of October 31st, my current position is being "eliminated". I had been in my (now annual) mode of thinking I would retire at the end of this year anyway ... but since I'd not mentioned that possibility to anyone in the office, I still kept the option of "backing out" once again if I got cold feet. But now, the decision has been made for me.

I was informed last week, so I had the long holiday weekend to let it sink in. My first and lingering reaction has been like grieving a deep loss. I've been at this organization for 39+ years (first/only job since graduating college). Guess how I feel about "change"? ;-) I guess the biggest "negative" is essentially being told that you're just not needed anymore - that's a pretty big blow to my ego. But, in the end, it was the easiest (and maybe only) way to get me past "OMY", and get on with life.

They've been pretty nice about it. I have 2 months notice, plus I'll receive an additional 2 month "severance package", which they offered to pay out after the first of the year if I prefer, to avoid a big "tax hit" this year. I'll also be receiving almost another half year's salary as payment for unused accumulated sick time (I've been pretty healthy for the past 39 years!), and that, too, can be deferred until after January 1.

I could use some advice about how to figure out if it's better to ask them to go ahead and make those payouts in 2016, and take the "tax hit" now (and then essentially have 0 income in 2017, so that I could start converting more of my 401K to a ROTH IRA). If I wait until after January 1, I'd be able to "max out" another full year of employee contribution to my 401K out of that, as well as max out another year's contribution to my HSA account). Is that something I-ORP would be able to tell me?

I'll also have to figure out what to do about health insurance between now and when I reach 65. I'll probably do COBRA to start with, since that's easiest, but that's only good for 18 months.

Financially, I probably could have left several years ago and been fine, so that's not my concern at this point. But I'm not really sure what life is going to be like going forward. I'm not married, and don't have any kids. I've thought about getting a dog ... but maybe I'll just start with a goldfish, and see how that goes! ;-) I do have a "hobby" playing music, and I always thought that once I retired, I might get more active doing that (I now have "paid gigs" once or twice a month, on weekends) ... but I don't ever want to get to the point where that starts feeling like w#rk !
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Old 09-06-2016, 09:29 AM   #2
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Hi. I-ORP should be able to help with the questions as far as to when to take the payouts; it depends on tax brackets - what bracket are you in now? If all that money would be taxed at 28%, then taking it next year so that you pay 0 and 15% taxes would generally be better. As you noted, you could do less Roth conversions, but contributing another year to the 401(k) would be a nice bonus.


As far as health insurance, start looking at the health exchanges (ACA). COBRA is expensive and ACA subsidies are based on your income, which will be negligible once you retire.


Best of luck. As far as figuring out what to do in retirement, this is definitely very important. If you want to read on the subject, try "How to Retire Happy, Wild and Free" or search Amazon or your library for other similar books.
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Old 09-06-2016, 09:31 AM   #3
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It may sound odd, but congrats! For those of us who don't like change, it's easy to get stuck in OMY. Sounds like you are well set financially and I'm sure it will take some time to adjust, but I'm equally sure you'll wonder what took you so long once you do. You may look into other hobbies you enjoy or volunteer activities, but I wouldn't commit to too much too soon. Enjoy this opportunity to explore your options and see what you like.

Does your company offer any retiree medical options for before Medicare? Some do, even if you have to pay more of the costs than when you were employed
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Old 09-06-2016, 09:38 AM   #4
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You did all there was to do at that position, so it isn't needed any more ... that's one way to see it.

I'd guess you're about 60, so that leaves you 10 years to do the ROTH transfers. I'm with Kaudrey - better to have minimize taxes now than later.

We have had individual health insurance since 2008. Depending on where you live, it can be quite affordable if you're healthy. We now use a bronze plan from Kaiser Permanente on the colorado exchange and are very happy with it. Very high deductibles, but the premiums are manageable. Hopefully, you planned for this during your OMY phase.

Good luck!
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Old 09-06-2016, 10:23 AM   #5
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Thanks, everyone, for the helpful feedback/comments.

re: health insurance - as far as planning, I had budgeted for what I knew COBRA would cost, assuming that would be a "worst case" scenario. I tried going to the various insurance company websites that are in my state, but couldn't get any current quotes because we are not in the "enrollment period" currently. I currently have a "high deductible HSA-eligible" plan through my employer, and plan to get something like that. I'm just not sure I'll be able to find a "private plan" that includes my same/current doctors ... but since I really don't use them much, that's probably ok.

re: when to take the payout (2016, or push to 2017) - looks like the best strategy will be to defer to 2017 so that I can max out another year of 401K contribution ($24K in my case), as well as HSA contribution ($4400). I could still do some ROTH conversion up to the 28% bracket in 2017.

I'll check out "How to Retire Happy, Wild and Free" - sounds like just what I need! ;-)
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Old 09-06-2016, 10:27 AM   #6
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I'm in a similar situation, only still waiting for my parting gift. Your timing sounds perfect to me, I'd defer as much as I could into next year. I'm also planning to start with COBRA, and here in CA we get 3 years.

Sounds like you're set financially, but not yet sure about your new free time. I moved downstate to be closer to family to prepare for my exit, so my OMYs are now remote. Unfortunately I run out of ideas pretty quickly so even this long weekend leaves me eager to get back to my cube in our branch office. I'm thinking about renting a local co-working desk for a few months after I leave to ease the transition.
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Old 09-06-2016, 02:10 PM   #7
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As a default response, I assume taxes would be cheaper if the pay was deferred to 2017--as long as you don't need the cash now.
Congrats on your retirement--earlier than you planned or not, as long as you're in good shape.

Quote:
Originally Posted by merlin3942 View Post
Thanks, everyone, for the helpful feedback/comments.

re: health insurance - as far as planning, I had budgeted for what I knew COBRA would cost, assuming that would be a "worst case" scenario. I tried going to the various insurance company websites that are in my state, but couldn't get any current quotes because we are not in the "enrollment period" currently. I currently have a "high deductible HSA-eligible" plan through my employer, and plan to get something like that. I'm just not sure I'll be able to find a "private plan" that includes my same/current doctors ... but since I really don't use them much, that's probably ok.

re: when to take the payout (2016, or push to 2017) - looks like the best strategy will be to defer to 2017 so that I can max out another year of 401K contribution ($24K in my case), as well as HSA contribution ($4400). I could still do some ROTH conversion up to the 28% bracket in 2017.

I'll check out "How to Retire Happy, Wild and Free" - sounds like just what I need! ;-)
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Old 09-06-2016, 09:39 PM   #8
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Originally Posted by merlin3942 View Post
...I could still do some ROTH conversion up to the 28% bracket in 2017.
Check your numbers. You need to have a lot of money (and I hope you do for ROTH conversions up to 28% to make financial sense. That would mean that your top marginal future tax rate after RMDs is expected to be higher than that.

We've found that our effective federal tax rate has fallen drastically after ER. Our only income is from dividends and cap gain distributions.
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Old 09-06-2016, 09:56 PM   #9
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You can get unemployment too so when you get payouts might cost you some weeks. Look for a new job, be available, looking and you can be unemployed for a few months. If you land interviews you can always show up and explain you aren't exactly what they are looking for so they avoid hiring you, for example taking calls and sending text during the interview.
Congratulations on your unemployment and retirement. Ask the company to cover you under medical for the rest of the year since you are on severance.
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Old 09-07-2016, 05:09 AM   #10
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Originally Posted by merlin3942 View Post
...But I'm not really sure what life is going to be like going forward. I'm not married, ...I do have a "hobby" playing music,...
Give music lessons: good way to meet girls! Anyway, that was my strategy as a teenager.
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Old 09-07-2016, 06:39 AM   #11
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Check your numbers. You need to have a lot of money (and I hope you do for ROTH conversions up to 28% to make financial sense. That would mean that your top marginal future tax rate after RMDs is expected to be higher than that.

We've found that our effective federal tax rate has fallen drastically after ER. Our only income is from dividends and cap gain distributions.
If I push the severance and sick time payout to after Jan 1, that alone will put me in the 28% marginal tax bracket for 2017. I do expect that my income will drop significantly for the next 8-9 years (probably 15% bracket) until I hit the dreaded "RMD" age of 70 - at which point it looks like I'll be back in the 28% bracket. I thought if I could convert enough to ROTH in those intervening 9 years, I might be able to reduce it enough to get to the 25% bracket by then. And for next year, as long as I'm in the 28% bracket anyway, I thought I'd convert just enough up to the top of that bracket to get started.

Is that "flawed thinking"?
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Old 09-07-2016, 08:16 AM   #12
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Is that "flawed thinking"?
- No, it's not flawed depending on your assumptions and your personal philosophy on finances.

Optimal Retirement Planner - Parameter Form (suggested by earlier post) does a good job of testing if ROTH conversions make financial sense for your situation. It will layout the optimum ROTH conversions each year to maximize money available to you (ie... minimize lifetime taxes). It also does a good job ot laying out what tax brackets you will be paying into each year. Lots of discussions on this board about general philosophy of paying taxes now (Roth conversions) vrs later ("RMD" taxation) that may be worth browsing.

I am one of those that is doing yearly Roth conversions now. Makes sense for me financially per I-ORP and is a hedge against potentially higher future tax rates for those with significant assets. My guess is that higher tax rates will occur for those with significant assets to help limit growth of our national debt. I am in a situation that even with no tax law changes. I-Orp recommends relatively aggressive conversions (up to 28% tax bracket) for a couple years before backing off a bit. Any increases in taxes makes these conversions more desirable so we are progressing with conversions.

Edited to add: Running I-ORP was quite interesting. One thing it has done is help us plan to avoid a 28% tax rate during RMDs. If progress as planned, it will be down to 15%.
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Old 09-07-2016, 08:44 AM   #13
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re: health insurance - as far as planning, I had budgeted for what I knew COBRA would cost, assuming that would be a "worst case" scenario. I tried going to the various insurance company websites that are in my state, but couldn't get any current quotes because we are not in the "enrollment period" currently. I currently have a "high deductible HSA-eligible" plan through my employer, and plan to get something like that. I'm just not sure I'll be able to find a "private plan" that includes my same/current doctors ... but since I really don't use them much, that's probably ok.
You might want to consult an insurance agent. I stuck with COBRA for 1.5 months because it was easily available. I did not check the Exchange because our investment income (plus DH's SS) would likely have made us ineligible for subsidies and I know that in our area the Exchange plans usually have narrower networks. It doesn't cost any more to use an agent- in fact, if you call the company directly, they'll just connect you to one. I was in the insurance business for 38 years (property-casualty) and still found it useful to have someone in the business ex0plain my options.

Like you, I've been blessed with great health and chose a high-deductible plan. It's been over 2 years since I retired, with about 1.5 years to go to Medicare, and (fingers crossed) my out-of-pocket has been minimal.

I also retired on very short notice (politics got toxic and I decided over a weekend to get the heck out). I do spend some time wondering what went wrong with my career (maybe I should have feigned more interest in the 50-slide PowerPoint presentations of the higher-ups?) but I don't dwell on it- that way lies madness, and life on the other side is good.
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Old 09-07-2016, 09:20 AM   #14
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Originally Posted by merlin3942 View Post
If I push the severance and sick time payout to after Jan 1, that alone will put me in the 28% marginal tax bracket for 2017. I do expect that my income will drop significantly for the next 8-9 years (probably 15% bracket) until I hit the dreaded "RMD" age of 70 - at which point it looks like I'll be back in the 28% bracket. I thought if I could convert enough to ROTH in those intervening 9 years, I might be able to reduce it enough to get to the 25% bracket by then. And for next year, as long as I'm in the 28% bracket anyway, I thought I'd convert just enough up to the top of that bracket to get started.

Is that "flawed thinking"?
If you think you can bring down your IRA balance so that RMDs will be taxed at 25%, then it makes no sense to pay 28% now. If you think your RMDs will be taxed at 28%, then it is a wash if you pay 28% now (spreadsheet it and you'll see)

So like the previous poster said - it depends on your assumptions.

Try some modeling using this year's tax software. It will give you an idea of how much you can convert each year before you hit 10%, 15%, 25%...in marginal taxes.

I find iOrp interesting, but don't understand some of their recommendations to aggressively do ROTH transfers at high tax rates. I should spend more time on it.

If you're in the 15% bracket over the next few years, you won't have to "worry" about the impact of health insurance subsidies
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Old 09-12-2016, 04:50 AM   #15
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I'm with walkinwood re: modeling using this year's tax software. I find it far simpler to do that than to work through i-ORP.

Also, you CAN get pricing on Exchange healthcare plans. Just tell it that you had a life event (or whatever they call it), and thus you would be entitled to sign up outside of the normal time period. Tell it you got married, etc.
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