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Balancing withdrawal sources
Old 05-03-2012, 09:16 PM   #1
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Balancing withdrawal sources

Like many here, I will have several sources of income in retirement. In my case there are three: Pension, SS and personal savings (IRA and non-IRA).

Many people consider tax consequences to decide if they should take SS early and conserve the personal savings, or use up personal savings to increase the SS payment later in life. Or delay a pension and and take earlier SS. Or delay SS and take the pension earlier, etc.

But, I am also thinking that diversification of income sources needs to be a consideration. Over the 30+ years many of us plan to be retired, nobody knows for certain what will happen: the pension could be reduced, SS could be reformed in a way that results in a cut, and personal savings could be damaged by a bad market and poor economic conditions. Having diversified sources would help buffer a retiree from one source doing badly or being cut off.

I would enjoy hearing other's thought on this and how you diversify income sources, or why you decided not to do so.
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Old 05-03-2012, 10:45 PM   #2
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Thanks for raising this, Chuckanut. We have exactly the same situation and I am looking for good solid objective advice on how to structure both asset allocation and withdrawals taking all of these factors into account. I have lots of links to Bogleheads and other forums in my "research queue" but nothing I have seen addresses this optimization problem effectively.
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Old 05-04-2012, 01:25 AM   #3
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In my case I want to hold those assets I control - savings - until last. I use assets at possible risk - pension and SS - first. Therefore I am taking SS at 62 and using a portion of that to pay down the remainder of my mortgage. If all goes well, future RMD's will simply transfer assets from tax-deferred to taxable. This strategy also allows me to ignore the current volatility as RMD's are 9 years away. The 9 years of compounding will hopefully offset some of the taxes due on the RMD. Not sure this is the right strategy, but this is my current plan.
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Old 05-04-2012, 04:34 AM   #4
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Originally Posted by Idnar7 View Post
In my case I want to hold those assets I control - savings - until last. I use assets at possible risk - pension and SS - first. Therefore I am taking SS at 62 and using a portion of that to pay down the remainder of my mortgage. If all goes well, future RMD's will simply transfer assets from tax-deferred to taxable. This strategy also allows me to ignore the current volatility as RMD's are 9 years away. The 9 years of compounding will hopefully offset some of the taxes due on the RMD. Not sure this is the right strategy, but this is my current plan.
Idnar7, I don't know enough about your situation (nor even if I did know, it's not enough to offer advice.) Still, as you point out, SS could change at the whim of Congress. Playing devils advocate, I would suggest that it is as likely (maybe more) that Congress will change the tax code (for the worse), hitting your RMDs harder than you now expect. All this talk of "rich" people not paying their share makes me think that us "rich folks" (not the folks with $250K incomes as they now say) the ones who actually prepared for retirement may well be saddled with a big portion of the increased tax bite. It's like the bank robber said "That's where the money is."

So, what i am doing is putting off SS and spending down my IRA/401(k) to lower RMDs. This may turn out to be folly. It wouldn't be the first time for me. Still, I think there is more will to take money away from "rich" retirees savings than to mess with the 3rd rail (SS). Of course, YMMV.
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Old 05-04-2012, 06:24 AM   #5
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Idnar7, I don't know enough about your situation (nor even if I did know, it's not enough to offer advice.) Still, as you point out, SS could change at the whim of Congress. Playing devils advocate, I would suggest that it is as likely (maybe more) that Congress will change the tax code (for the worse), hitting your RMDs harder than you now expect. All this talk of "rich" people not paying their share makes me think that us "rich folks" (not the folks with $250K incomes as they now say) the ones who actually prepared for retirement may well be saddled with a big portion of the increased tax bite. It's like the bank robber said "That's where the money is."

So, what i am doing is putting off SS and spending down my IRA/401(k) to lower RMDs. This may turn out to be folly. It wouldn't be the first time for me. Still, I think there is more will to take money away from "rich" retirees savings than to mess with the 3rd rail (SS). Of course, YMMV.
I agree with you about SS being a less likely target. I think the govt may tinker with current retiree benefits/tax rates and those in a 5 or 10 year window of hitting age 65. The younger population (and to some extent the "wealthy" however they decide to define the term) will feel the brunt of any changes. We too, plan on spending down TSP/401K accounts and try to wait until FRA before taking SS. Once DW turns 62, will probably relook our decision at least a few times a year.
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Old 05-04-2012, 08:18 AM   #6
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Playing devils advocate, I would suggest that it is as likely (maybe more) that Congress will change the tax code (for the worse), hitting your RMDs harder than you now expect.
A good point. Changes in the tax code could make one source of income more advantageous than another. In my mind this is another reason to diversify one's sources of income.
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Old 05-04-2012, 08:29 AM   #7
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I agree with you about SS being a less likely target. I think the govt may tinker with current retiree benefits/tax rates and those in a 5 or 10 year window of hitting age 65. The younger population (and to some extent the "wealthy" however they decide to define the term) will feel the brunt of any changes. We too, plan on spending down TSP/401K accounts and try to wait until FRA before taking SS. Once DW turns 62, will probably relook our decision at least a few times a year.
Our enlightened Congress has already tinkered with SS benefits. Our original SS plan had all benefits being tax free since we paid taxes on our contributions. That's gone so the "rich" now pay income tax on 85% of the benefit. There have been various increases in the SS/medicare tax rate while making the system more progressive. The more you make/contribute the lower the % of your original SS income will be covered by SS benefits. Of course, the "big one" is the elimination of double dipping by those covered by government pensions. Can the elimination of double dipping by private pensions be fare behind? That's small change since most private pensions are gone.

Back to the OP, I have a balanced plan that defers SS to 70 for the benefit of DW but I plan on getting her spousal benefit when I can. That will be very small change. I'll maximize moving IRA money into Roth's to fill up the 15% tax bracket until RMD's begin. That will drastically deplete my after-tax accounts; but at age 71, I'll have my assets fairly well balanced between Roth and taxable IRA accounts. My tax rate moving forward is targeted at 15% marginal. Of course, the gods laugh at the plans of mere mortals. I can only work with the playbook we have now. I know there will be changes.

Probably the worst tax code change to us solvent seniors would be a VAT. We've saved to get where we are in the face of income taxes. A VAT would suddenly raise our cost of living by 5, 10 or even 20%. That would effectively laugh at those of us that thought we could live on our Roth's tax free.
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Old 05-04-2012, 11:14 AM   #8
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We are spending down some of our IRAs via 72(t) distributions. That will get us over the 59-1/2 line. Then we will probably use some combination of Roth conversion and just taking regular distributions to stay at or below that 15% line, with the RMDs and SS taxation firmly in sight.
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Old 05-04-2012, 05:07 PM   #9
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......Back to the OP, I have a balanced plan that defers SS to 70 for the benefit of DW but I plan on getting her spousal benefit when I can. That will be very small change. I'll maximize moving IRA money into Roth's to fill up the 15% tax bracket until RMD's begin. That will drastically deplete my after-tax accounts; but at age 71, I'll have my assets fairly well balanced between Roth and taxable IRA accounts. My tax rate moving forward is targeted at 15% marginal. Of course, the gods laugh at the plans of mere mortals. I can only work with the playbook we have now. I know there will be changes. .......
+1 that is my plan as well
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Old 05-04-2012, 07:14 PM   #10
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Well, for what it's worth, these are what I consider likely drivers for my investment allocation and draw downs as I go into the second ER decade (currently age 62)

1) A high probability of a Japan like scenario with very low growth rates for the economy and very low interest rates for quite a few years. One result of this is that funds in my IRA's will probably grow slowly so my future RMD's will be low simply because the funds won't grow as fast as I hoped for earlier in my retirement dreams. So current strategy is to minimize current cash outflows by not paying early taxes (i.e. not converting to Roths) and taking SS as early as possible.

2) Being that SS is the highest portion of the Federal budget pie, I expect cuts either overt or covert (futzing with indexes etc) over the balance of my lifetime which points to taking SS as early as possible as indicated above. I expect all SS distributions to be fully taxable at some point.

3) There maybe some sort of means testing for SS but given the difficulty experienced by Governments historically to tax net worth I expect it to be some kind of income means testing.

4) I don't expect income tax rates for what's left of the middle class to go up significantly. There has been such an incessant drumbeat over the last 30 years about the wonders of low tax rates for everything that ails us that I suspect this is already baked into the national psychology and I just don't expect "normal" incomes to be taxed at significantly higher rates than now for quite a long time. Another reason why I'm not converting to Roths.

5) Sometime we will implement some form of national VAT. another reason not to convert to Roths.

So, all of the above points in my feverished mind point to keeping as much of my taxable accounts intact as I can, lowering my base costs as much as I can (fully paid up house and no debt of any kind), collecting SS as early as I can, and minimizing current expenses (including taxes) for as long as I can hence drawdowns from my current assets.

I have an insignificant non cola pension of a couple of hundred $ a month starting at age 65 simply as a reminder of what the world used to be like... No other sources other than my nest egg and SS.
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Old 05-04-2012, 07:52 PM   #11
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This is our plan (2012):
We already converted all of DW's IRA to Roth & I took Social Security @ 62.
1. draw down the Taxable accounts first and convert enough IRA into Roth IRA each year to fill up the 15% tax bracket
2. draw down the Roth IRA second (as needed), while making RMD from IRA
3. draw down the IRA last to minimize taxes
4. buy low-cost Single Payment immediate annuity (SPIA) @70, if steady income stream needed
There are so many variables, we will have to review each year, especially when DW turns 62.
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Old 05-05-2012, 08:58 AM   #12
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  • No pensions.
  • Converting to Roth's isn't to our advantage, so we'll have to deal with about 1/3rd of nest egg from 4 non-deductible IRAs.
  • I was planning on drawing down both taxable and sheltered every year up to 15% bracket.
  • Planning to defer my SS until 70. Might start DW's SS earlier, might not.
  • Planning on effective taxes (rates or whatever) to only increase in the decades ahead.
  • To be honest, though I understand RMD, haven't really given it much thought at age 57.

Beyond that, I don't have a well defined plan for this important aspect of retirement, so this thread has prompted me to give it more serious thought and actual (Excel) analysis - thanks OP.

Some great posts above too, thanks...
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Old 05-05-2012, 12:48 PM   #13
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Coming from the Precambrian era (cola pension) I originally had a plan of just spending my monthly pension and waiting for the the next one to arrive. However, uncertainty going forward and 30-40 years of retirement ahead of me changed my mind and behaviors. I save 20% of my check each month and max out I Bonds and make monthly contributions to my Vanguard funds. I also continue to work part time, so I can continue to max out my Roth IRA to build some diversity in tax free income since my pension is taxed pretty hard. I am still not 50 yet, so working some doesn't bother me and I don't feel deprived saving some of my money instead of spending it. I still do what I want to do, but creating income sources outside of my pension is comforting to me.
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Old 05-05-2012, 03:58 PM   #14
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We fortunately have 3 pensions and have initiated income stream on all 3. Only one COLAd.

I am 67 and DW is exactly 4 years younger than I am. I have delayed my SS and I am using what is sometime called the 62/66/70 strategy. As I have reached FRA, I can opt to begin my SS benefits or I can apply for DWs benefits (as her spouse) and my account continues to accrue delayed retirement credits of 8% annually until age 70. This is a large part of my plan. When I reach age 70 I will apply for my (now increased by at least 32%) benefits and DW will then file for spousal benefits and cancel her lower SS benefits under her #.

By taking the above action, it allows us to delay tapping into our tax-favored savings (IRA/Roth) until a later date (70 1/2) since the 5 income streams are plenty to keep us afloat today. If things change along the way, I can always switch to my SS account earlier and/or start spending the tax-favored cash.

I feel that I still have plenty of flexibility as well as lifetime steady, reliable income sources.
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Old 05-05-2012, 04:34 PM   #15
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No pension

1) Dividends (inside/outside of IRA) from bond funds and dividend paying equities paid to a 'holding' fund for regular withdrawal. Saves a lot of angst vs deciding when to sell during high/low markets.

2) SS myself and DW both at 62 (mitigate the draw from portfolio...and 'get in' before they change the rules!)

3) Minor sale of equities to fill gaps

4) Barter/DIY= a small/alternate 'income stream'
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Old 05-05-2012, 05:00 PM   #16
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Being only 49 years old, I am living off my taxable investments only and that will continue until I turn 59 1/2 when I will have unfettered access to my IRA, the first of what I call my "reinforcements." After that, I will be able to access my frozen company pension (at 65) as well as SS as early as 62.

The tax code as well as whatever rules are in effect for SS will affect how much I withdraw from my IRA and when I begin taking SS. I will also take into account my personal health (if it remains good and I feel I won't be dropping dead before I turn 70, knock on wood, then that would favor taking SS later). I will also have to keep an eye on the markets to figure out how to tweak my AA both in my IRA and in my taxable investments.
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Old 05-05-2012, 06:32 PM   #17
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Originally Posted by Chuckanut
Like many here, I will have several sources of income in retirement. In my case there are three: Pension, SS and personal savings (IRA and non-IRA).

Many people consider tax consequences to decide if they should take SS early and conserve the personal savings, or use up personal savings to increase the SS payment later in life. Or delay a pension and and take earlier SS. Or delay SS and take the pension earlier, etc.

But, I am also thinking that diversification of income sources needs to be a consideration. Over the 30+ years many of us plan to be retired, nobody knows for certain what will happen: the pension could be reduced, SS could be reformed in a way that results in a cut, and personal savings could be damaged by a bad market and poor economic conditions. Having diversified sources would help buffer a retiree from one source doing badly or being cut off.

I would enjoy hearing other's thought on this and how you diversify income sources, or why you decided not to do so.
Chuckanut, I like your idea of diversification of income stream sources as well as diversification in investments. In fact, I like it so much that I intentionally used this as a goal in designing my retirement. This was in an attempt to make it more bulletproof. Here are some income stream sources and so far, so good:

1) I have a small federal pension which currently pays my health insurance premiums plus a tiny monthly deposit.
2) I contributed the maximum possible to the TSP (=401k), from which I get monthly payments to supplement my pension.
3) I will claim my SS in a few years (and at that time start withdrawing less each month from the TSP, at a sustainable level).
4) I have a taxable portfolio at Vanguard which provides an income as well.
5) Originally I had also planned to buy an immediate lifetime annuity immediately upon retiring, to provide me with equal monthly payments, but have put that off for twenty years. Interest rates are so bad right now, and I will get a higher payment when I am in my 80's than now at 63.

I tried to make the amounts from these sources as nearly equal as possible, and I would be fine if any one of them vanished (which probably wouldn't happen, but it is reassuring to know this).
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Old 05-06-2012, 03:27 AM   #18
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5) Originally I had also planned to buy an immediate lifetime annuity immediately upon retiring, to provide me with equal monthly payments, but have put that off for twenty years. Interest rates are so bad right now, and I will get a higher payment when I am in my 80's than now at 63.
Good thinking!
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Old 05-06-2012, 02:37 PM   #19
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When DH retires this year at age 55, our income sources will be a moderate pension, a taxable account that is over $300K, a very large 401k, and a small IRA. We do feel that we need to balance this out a bit before we take SS by getting some money into a Roth and plan to do as much of that as we can while staying in the 15% tax bracket. We will revisit when to take SS as time progresses, but at this point plan to delay it depending on how much we can shovel into the Roth over the next 7-11 years.

Obviously as, when, and if things change, which I expect will happen, we will constantly be reevaluating "the plan".
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Old 05-06-2012, 11:22 PM   #20
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5) Sometime we will implement some form of national VAT. another reason not to convert to Roths.
I've thought a lot about this and I suspect you are correct that VAT will eventually come. It will come in the guise of "lowering" (i.e., revenue neutral) other taxes, e.g, income tax. Of course, it will simply be one more tax that can be "tweeked" upwards as the pols figure new ways to buy votes with tax money. Right now, you actually hear a fair amount of support for some type of VAT tax. However, when the time comes, it's just possible that folks will rethink the idea. Imagine if a new car would suddenly cost 15% more to purchase. Would that, perhaps, slow down all phases of the car business? (The car business used to be 1/7 of the economy.) What about vacations, "luxuries", etc.? Will folks balk at spending for these items? IIRC, the "luxury" tax killed the boat industry for several years.

If VAT becomes a reality, I can imagine an immense black market developing with public executions of the "black marketeers" (slight exaggeration - but drakonian punishments will be the only way to prevent black markets.)

I guess VAT and other potential tax changes argues for having as many sources of income and as many vehicles to stash wealth as possible - tIRAs, Roths, taxable, I-bonds, foreign currency investments, maybe even guns and ammo. In any case, it sounds like most folks on this thread are heading in the direction of multiple income sources. A word to the wise for the youngsters reading these words of wisdom. I wish I could go back and restructure much of my savings planning. I saved a lot, but I would dramatically change the WAY I saved if I had it to do over (example, much less 401(k) and more taxable). YMMV
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