Drawdown Strategy

[txtig]

When I first posted here (about two years ago), I was forecasting a June 2017 retirement date, when I’d be 64.5 years old. Things at work have changed a lot (and not for the better), and I just don’t think I’ve got the will to hang in there for another two years. So, I’m thinking now that I will try to hang on until June 2016 when I’ll be 63.5 and DW will be 60.5. DW will be retiring from her school job at the same time.

So, my mind has now shifted to thinking about a drawdown strategy. In rough numbers, I think we will have about $550,000 in after-tax accounts and about $3.2 million in pre-tax accounts. I would like to spend about $120,000 (after-tax) per year in retirement. My social security and DW’s pension combined should be around $50,000 per year (pre-tax), which we will probably start drawing about four years into our retirement (when DW is eligible to start her pension).

With most of our nest egg in pre-tax accounts, I know taxes are going to be a big issue for me. I could draw down on the after-tax accounts during my initial four years of retirement (prior to SS and pension kicking in) and really minimize my taxes during those years, but pay a much higher tax after those funds are depleted. Or, I could draw down on both the pre-tax and after-tax accounts such that my pre-tax withdrawals do not exceed the 15% bracket. This would stretch out the period before my pre-tax withdrawals would start hitting the 25% bracket (at least until RMD kicks in).

Up to now, I’ve been focused accumulating and did not give that much thought to how to draw down. So, I’d much appreciate the thoughts of those who are already in that phase. Thanks in advance.

[karluk]

Quote:

Originally Posted by txtig Or, I could draw down on both the pre-tax and after-tax accounts such that my pre-tax withdrawals do not exceed the 15% bracket.

This is the way to go. Maxing out the 15% tax bracket is as close to a no-brainer as there is in the world of retirement spending. There are a few scenarios where it doesn't optimize your after tax portfolio value, but with your sizeable portfolio you will most likely find it impossible to avoid the 25% or higher tax bracket in the future. Do yourself a favor and get as much as possible of your tax deferred money withdrawn at 15%.

I'm sure many forum members will note that you appear to have more than enough savings to retire immediately, instead of trying "to hang on until June 2016". That doesn't strike me as a particularly pleasant way to finish up your career, when there isn't a financial need driving the decision.

[pb4uski]

A couple things. First, you have plenty now to provide you and your DW with $120k a year for the rest of your lives (3.2% WR ignoring pensions and SS, so really lower than 3.2%) so why toil for the man for another year?

While I'm not sure if there is enough to go on, I suspect that there isn't much that you can do at this point to avoid the 25% tax bracket with such a high tax-deferred balance and low after-tax balance, so I think the reality is that you'll just need to get used to being in the 25% tax bracket. Not a horrible problem to have tho.

Have you run your situation through i-orp?

You might be able to eek out a year or so in the 15% tax bracket but it won't have much impact.

[Whisper66]

Txtig - I have a very similar situation as you. I just retired this year at 55 yrs old (the main difference between us). Planned expenses are $120k. Savings are in the ballpark of you and have ~80% in pretax savings. My SS will be a little less but main difference is I won't get access to it for many more years, you have access now or soon if you wish. I've had three formal retirement financial plans done by various planners and all have come to the same conclusion - absolutely no concern with retirement. I've also used this board's advice and run Firecalc and I-ORP several times, several ways with same result. All this to support prior comments that given the data you've provided, you can retire TODAY if you would like and not have financial issues.

As prior poster suggests, I am using I-ORP to determine path forward on depleting pre-tax savings. Not fully done with playing with the numbers. But so far, it looks like I will be planning on drawing down my pre-tax savings at a rate that will put me in the mid to higher part of the 25% tax bracket. This will start next year for me (I just retired).

Wish you the very best in your decisions and retirement!

[Animorph]

With $3.2M in pre tax accounts you should have way more than $3.2M/27.4 = $117k per year (with portfolio growth), plus SS and pension as regular taxable income. You could easily be in the 28% tax bracket.

If you don't have any other compelling reasons to stay in the 15% bracket (ACA limits for example), you'd probably do better to Roth convert right up to the top of the 25% tax bracket, or up to the AMT or ACA investment tax starting points. Whatever keeps your marginal tax rate at 25%. This allows you to shelter a little more after-tax value into your retirement accounts and reduces the size of your coming RMD's.

Then after age 70 hopefully you'll be able to stay within the 25% bracket and not be forced higher.

[MBAustin]

Quote:

Originally Posted by Animorph If you don't have any other compelling reasons to stay in the 15% bracket (ACA limits for example), you'd probably do better to Roth convert right up to the top of the 25% tax bracket, or up to the AMT or ACA investment tax starting points. Whatever keeps your marginal tax rate at 25%. This allows you to shelter a little more after-tax value into your retirement accounts and reduces the size of your coming RMD's. Then after age 70 hopefully you'll be able to stay within the 25% bracket and not be forced higher.

This is exactly what we've been doing. If we don't need them, then when the Roths pass on to our kids, they'll get the no-RMD benefits (at least as current law stands).

[Chris M]

I agree with the other posters that you could retire now with very little risk of ever running out of money, but am wondering if the desire to stay on the job till 63.5 has to do with health insurance coverage? If you are trying to hang on for COBRA coverage, have you investigated your options under the ACA? The one issue is that if you try to max out to the top of the 15% or 25% tax brackets (as you may need to do to keep your future RMDs from pushing you into an even higher bracket) you likely won't qualify for premium subsidies. But it may still be preferable to another year in a bad job.

[pb4uski]

I view the unsubsidized health insurance premiums that I pay and built into my budget as part of the price of freedom from work. When I retired three years ago, I used the COBRA of $900/month for a couple, but have found similar coverage for quite a bit less. We currently pay about $425 a month and it is simply the price of freedom.

[W2R]

Sounds like a good idea to withdraw and spend some of your tax sheltered money before age 70.5 (assuming you don't need low income for ACA as previous posts mentioned).

At least, I have been doing that. Believe me, the time will FLY between now and age 70.5, when you have to start taking RMD's. At least, it has so far for me and I will be taking RMDs in about three years.

With your kind of wherewithall, you might also want to consider running your numbers past a CPA.

[txtig]

Thanks for all of your input.I’ll look into the Roth conversions and will run i-orp to help plan the drawdown strategy.I wasn’t expecting Animorph’s suggestion (doing Roth conversions up to the top of the 25% bracket), but that is something I’ll look into.I may need get some professional advice to help me plan this.
And, I appreciate the comments about retiring now vs. a year from now.I’ve actually given that a lot of thought over the last few months.But, no it doesn’t have anything to do with health insurance.Once I leave my current employer (of 3.5 years), I will go back to my prior employer (of 27 years) for their retiree health coverage.A pretty nominal sum will cover us under both their pre-65 retiree plan and their post-65 Medicare supplement plan.The desire to work another year is based on the fact that the savings numbers that I cited included about $250,000 that I’m not yet vested in, but will vest over the next 13 months (mostly in restricted stock grants, but some in my 401K and Company retirement accounts as well).And, I’ve got one more year of college expenses (about $30 K) for our youngest son that’s not included in my retirement spending estimate.Also, if the markets are good to me (or at least not bad), I’d really like to buy a big boat (38 to 44 foot) to do some coastal cruising . . . if I can fit it in my budget (not currently included in my spending estimate).So, in my view, working another year opens up that possibility.
Again, thanks for the input.It’s been extremely helpful.

[pb4uski]

Understood. $250k on top of your regular comp would be a big nut to walk away from for just 13 months more of misery.

OTOH, given that boats are holes in the water into which one pours money you may need that extra $250k.

[txtig]

Quote:

Originally Posted by pb4uski Understood. $250k on top of your regular comp would be a big nut to walk away from for just 13 months more of misery. OTOH, given that boats are holes in the water into which one pours money you may need that extra $250k.

You couldn't be more right on both comments. My problem (if you can call it that) is that even leaving 13 months from now, I'll be leaving about $200k on the table. But, I gotta quit this OMY thing at some point!

[pb4uski]

I guess that is why they call them golden handcuffs!