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Are any of you rethinking how you draw down your 401Ks
Old 05-19-2011, 11:04 AM   #1
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Are any of you rethinking how you draw down your 401Ks

DH will FIRE next year at age 55 with a pension and a sizable 401k. We also have a pretty healthy non-taxable investment account that is less than 25% of the value of his 401k.

With all the talk of the national debt and the possibility of large tax increases as well as rumblings of means testing for receiving SS and/or Medicare, are any of you changing your strategy on how to draw down your tax deferred accounts vs your taxable accounts.

We've done REALLY well in the accumulation phase, we don't want to screw this next phase up.
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Old 05-19-2011, 12:43 PM   #2
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I am 62 and retired, and thinking of claiming Social Security earlier than previously planned - - perhaps at age 64, instead of 66, due to the problems you cite.

Meanwhile, I am drawing down my TSP (=401K) by about the same monthly amount as my SS will be, to bridge the gap until I claim SS. I am doing this (instead of using cash) in order to even out my taxable income and reduce my RMD's at age 70.5 .

Also this could possibly help if by any chance SS is means tested based on AGI, in the future.

I don't really know what the best approach to these problems are, or if mine is at all wise. It feels right to me.
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Old 05-19-2011, 01:05 PM   #3
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With all the uncertainty with taxes, inflation, etc., this is a really good question. Our plan was to hold off pulling anything out of IRAs until we absolutely had to, but means testing for SS and other asset linked testing could really play havoc with anyone's plans. For us, it's very pertinant since about 90% of our assets are tax sheltered. The only real pool of non-tax sheltered money would be our house, if we chose to liquidate and rent. But you still have to live somewhere.

We are far enough away from RMD to wonder if the rules will change in 6 to 8 years. If not, we will probably have to withdraw more than we want to at that time. But then we would have non-tax sheltered money to invest .

Gotta do some real thinking and guessing the future on this issue.
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Old 05-19-2011, 01:26 PM   #4
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I am 62 and retired, and thinking of claiming Social Security earlier than previously planned - - perhaps at age 64, instead of 66, due to the problems you cite.

Meanwhile, I am drawing down my TSP (=401K) by about the same monthly amount as my SS will be, to bridge the gap until I claim SS. I am doing this (instead of using cash) in order to even out my taxable income and reduce my RMD's at age 70.5 .

Also this could possibly help if by any chance SS is means tested based on AGI, in the future.

I don't really know what the best approach to these problems are, or if mine is at all wise. It feels right to me.
Thanks for responding. We REALLY want to do this right.

Your strategy is EXACTLY along the lines of what I have been thinking.

DH will be getting a pension and we will need additional funds to cover our annual expenses. We do have a taxable account that we could draw from, but recently have been thinking about drawing down on the 401k instead. I could manipulate my tax bracket based on how much I withdraw from the 401k and reduce my AGI in future years when SS/Medicare might be means tested.

In the past, I believe the rule of thumb was to draw down your taxable accounts before your 401k, but based on what it looks like may be happening in the future I'm not sure the tax-deferral on earnings will be worth as much as full SS/Medicare benefits especially if you can manage to keep yourself in a relatively low tax bracket.

I know that the talk has been that there will be no changes in SS/Medicare for people who are NOW 55 or older, but the reality is that they haven't passed anything yet and are unlikely to do so before DH and I turn 55 next year.

We are not really concerned about SS (we've always figured it would be a bonus if we got it), but we are concerned about Medicare. Hopefully if they don't pass anything for a couple of years, which is probably more likely than not, they will grandfather in anyone who has already retired at 55.
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Old 05-19-2011, 01:36 PM   #5
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The decision on when to claim SS has been like a big game of "chicken" to me. I am just I hope I am grandfathered out of any proposed changes, but who knows? Nobody is grandfathered out of taxes, for example, and they could simply tax it heavily. I could easily afford to wait until 70 if I dare (and probably should, based on extreme longevity in my family).

As for Medicare,I have federal retiree health insurance which becomes secondary to Medicare when I qualify for it. So, I should be fine if the age for Medicare eligibility is raised. On the other hand, again we have no idea what the approach to fixing Medicare will end up being. Maybe the retiree's cost for Part B will go into the stratosphere.
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Old 05-19-2011, 01:39 PM   #6
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The decision on when to claim SS has been like a big game of "chicken" to me. I could easily afford to wait until 70 if I dare.
Ah yes, the "just one more year syndrome".
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Old 05-19-2011, 01:46 PM   #7
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Ah yes, the "just one more year syndrome".
Exactly! I am just playing it by ear, every year. Right now I am thinking age 64, but that could change.

If SS remains the same as it has always been (ha!) then I would wait until age 70 due to longevity in the family.

Edited to add: I just read an article that greatly encourages the undecided to be brave and wait before claiming SS:

social-security-medicare-meltdowns-moneywatch: Personal Finance News from Yahoo! Finance

Of course, the next article I read will probably be more gloomy.
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Old 05-19-2011, 01:56 PM   #8
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I'll still live off the taxable accounts and convert IRA's to Roth IRA's to fill up the tax bracket before tapping the rest of the IRA's for income. Works even better if income taxes increase in the future, but probably roughly neutral to something like a national sales tax.

I'll tap the traditional IRA's up to a lower tax bracket and use the Roth's to fill in income as needed once the taxable accounts are (mostly) gone. This should keep taxes low.

When the traditional IRA's are gone it'll be all Roth after that. Maybe that will qualify us as really low income! But somehow I think they'll means test that eventually.
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Old 05-19-2011, 02:07 PM   #9
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Medical coverage/Medicare is the $1,000,000 question for us.

I know "it's life", but it is so disappointing to have started saving for FIRE at age 24, maxing out 401k from Day 1 (thank goodness we did that) always planning to FIRE at 55, only to go into it not knowing what the heck is going to happen with something as important as Medicare. In the meantime DH does have retiree medical that will cover us both, but even after working for the same company for over 30 years the benefit has gotten progressively worse due to the increasing costs of premiums to the company. We went from retirees having to pay hardly anything in premiums in '04, to having a premium cost to us of over $800/mo. with a $3000 deductible when he retires.

As far as SS is concerned, since we never really planned on it anyway, we are going to take it as early as possible, but I can definitely understand other approaches. Now, it looks like we may need the SS $$ to supplement future medical premiums, deductibles, and co-pays. DH already has some health issues that may or may not prove to be problematic in the future.
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Old 05-19-2011, 02:32 PM   #10
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Exactly! I am just playing it by ear, every year. Right now I am thinking age 64, but that could change.

If SS remains the same as it has always been (ha!) then I would wait until age 70 due to longevity in the family.
As long as Mr. Market doesn't tank out again in the next year or two I'll be taking my SS at 63 years and 9 months. DW will be turning 62 at that point. Since she only worked 12 years she will only get a % or my SS. I turned 62 last month so 1 year and 8 months to go. Now I just have to keep breathing and hope the market holds up. Everything is subject to change!
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Old 05-19-2011, 02:38 PM   #11
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Now I just have to keep breathing and hope the market holds up.
...and your kitchen remodel is complete.
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Old 05-19-2011, 02:47 PM   #12
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I would definitely get as much out of the 401k and perhaps into a Roth conversion. The tax rate by 2016 will probably be 50% higher than today's, just my opinion but it can't not be.

I feel a bit embarrassed to think that I worked for 40 years and dutifully paid SS, Medicare, and massive taxes only to have the wool pulled from over my eyes at 60.

I'm not in any dire straits but I'm already thinking that life is gonna get adjusted down considerably from what I had retired to do.

Looking at the latest numbers for prediction of Medicare bankruptcy, the number was decreased by about 5 years from last years, from 2029 to 2024, so lets take that trend out another 4 years, hmmmmmmm, Medicare bankruptcy at 2015 seems about right.

I think it's time to assume that I will be paying my entire healthcare costs.

Anybody know which brand of cat food tastes best?
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Old 05-19-2011, 02:47 PM   #13
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...and your kitchen remodel is complete.
I have a feeling that one of us will be gone before the completion.
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