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I need some guidance, please
Old 12-08-2015, 04:37 PM   #1
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I need some guidance, please

Hi all, I'm back seeking more help from you all. First my situation.

I'm 58 spouse is 56. We didn't really plan on ER but think we may give it a shot. Here are some facts.

We need approx 20k annually for the basic must pay expenses. I am looking at 36-40K for total spending but could get by on less. House, cars, etc are paid for and the basic expenses includes health insurance but I'm not including the OOP max in my budget. If included, that would add 4000 to the base budget.

We currently have approx 820K, 290 in taxable accounts and 530 in qualified accounts. The taxable is all equity and the qualified is approx 60/40. I was 80 or so stock until not long ago. I went with the "equity in taxable/bonds in qualified" rule of thumb. Now I am second guessing myself.

I will need to live off the taxable until 59.5 and then can use either until we start drawing SS . We plan to delay SS as long as possible.

Soo..., Should I move the taxable out of equities and into something more stable? If so, what would be the cleanest way to do this? I thought of just sell enough to live on after the first of the year. This would be good because I could use the capital gains to keep my MAGI above the Medicaid threshold. On the other side of the coin, if everything was down at that time I'd feel like a smuck taking money out.

Well, there you have it. Sorry for the ramble but I was trying to give as much info as I could think of. If any further detail is need just ask.

Thanks again and Merry Christmas to all!
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Old 12-08-2015, 05:18 PM   #2
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Originally Posted by Murf2 View Post
....The taxable is all equity and the qualified is approx 60/40. I was 80 or so stock until not long ago. I went with the "equity in taxable/bonds in qualified" rule of thumb. Now I am second guessing myself.

....Should I move the taxable out of equities and into something more stable? ....
No, you would likely get killed on taxes if you did that. Besides, at your level of income after you retire and before you begin SS, the qualified dividends from equities are not taxed and if you have international equities you can use fireign taxes paid as a refundable credit.

Stay the course... sell enough equities in your taxable accounts to provide for your living expenses and then sell bonds and buy equities as needed in your tax-deferred accounts to rebalance to your target AA.

You may also to be able to do Roth conversions from tax-deferred to a Roth from ER until you start SS and pay no or little tax on those conversions. For example, if you are MFJ and have $6k of qualified dividends and $15k of long-term capital gains you could do as much as $21k in Roth conversions each year and pay no federal tax (assuming standard deduction and MFJ). Check out Taxcaster to assess your specific situation.
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Old 12-08-2015, 05:59 PM   #3
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You have plenty in your taxable accounts to last 3.5 years. I'd leave it the way it is. Sell bonds and buy stocks in the retirement accounts to keep your AA balanced as you sell stocks in your taxable accounts.

I think you're pretty tight with 820k. 4% of that is only 32.8k. Depending on your SS, you may be able to safely withdraw 40k until SS kicks in, but check it carefully using FIRTECalc or something similar. You can't count on smooth sailing for equity markets.

You might consider withdrawing one year of expenses if the market is doing OK or going month-to-month (and selling bonds only) if the stock market is bad. You'll definitely want a plan because a higher withdrawal rate will be stressing your portfolio until SS starts. The nice thing is that if the portfolio does run into trouble you can start SS a little early if that looks desirable.
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Old 12-08-2015, 06:39 PM   #4
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Thanks guys!
Pb4uski, I don't quite in understand the Roth conversion amounts you posted. Could you please go in to detail on that for me?

Animorph, Thanks for the input. I've always wondered about the 4% swr deal. Is that figured so as to not spend down the "nest egg"? I have no problem spending down the money as there is no legacy need. I realize that I do need to spend as little as possible but if my returns would just keep up with inflation, wouldn't I be able to make it ? Am I not being conservative enough?

It seems like I could draw around 40K for 12 years and SS + the remainder should make it the rest of the way?

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Old 12-09-2015, 12:54 PM   #5
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Stay the course... sell enough equities in your taxable accounts to provide for your living expenses and then sell bonds and buy equities as needed in your tax-deferred accounts to rebalance to your target AA.
THIS ^^^^

You don't care what the price of the equities you're selling is, because you're buying them right back in your tax advantaged accounts.
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Old 12-09-2015, 02:46 PM   #6
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.....You may also to be able to do Roth conversions from tax-deferred to a Roth from ER until you start SS and pay no or little tax on those conversions. For example, if you are MFJ and have $6k of qualified dividends and $15k of long-term capital gains you could do as much as $21k in Roth conversions each year and pay no federal tax (assuming standard deduction and MFJ). Check out Taxcaster to assess your specific situation.
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.... Pb4uski, I don't quite in understand the Roth conversion amounts you posted. Could you please go in to detail on that for me?...
Sure. I'm assuming that you are married filing jointly and for simplicity use the standard deduction.

For 2015 the standard deduction is $12,600, so the standard deductions plus two $4,000 personal exemptions means you could have as much as $20,600 of ordinary income and pay no tax. However, because qualified dividends and Roth conversions don't count against this as long as your taxable income is in the 15% tax bracket or lower (lower than $74,900), qualified dividends and long-term capital gains from selling stock don't count towards this $20,600.

I'm further assuming that your $290k of taxable accounts generate ~$6k a year (a bit over 2%) of qualified dividends and that your basis is 50% or $145k. I assumed that you sell $30k worth of equities from your taxable account each year and have a gain on those sales of $15k (could be more or less depending on your basis) and $6k worth of qualified dividends gives you $36k to spend. Obviously, you'll need to replace these strawmen figures with your own numbers.

Anyway, IF in 2015 you had $6k of qualified dividends, $15k of LTCG and $20.6k of Roth conversions your federal tax would be zero (same principle for 2016 and beyond but the amounts will increase with inflation). If you're willing to pay some modest amount of tax you could do even more Roth conversions are relatively low tax rates. For example, if you did an additional $20k of Roth conversions ($40.6k rather than $20.6k) your tax would be $2,081 rather than zero or 10.4% on the additional $20k of conversions. You can make that more or less depending on your appetite for paying taxes, but doing the first $20.6k at 0% is a no-brainer.

Cool, huh?
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Old 12-09-2015, 03:38 PM   #7
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Thanks pb4uski. I went to taxcaster but I didn't really understand how to use it but I'm going to play around with it some more.

The Roth conversions would count as income on my MAGI, wouldn't they? I will need to keep my MAGI low for cost sharing on health insurance. I guess I will just have to do the most I can without hurting my insurance deductible & OOP max.

While I've got you here, When people talk SWR are they planning on not spending the starting amount? I ask because Firecalc seems to think I would be OK. I know there are "no guarantees" the future will be like the past.

Thanks again for your advice!
Murf
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Old 12-09-2015, 04:50 PM   #8
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While I've got you here, When people talk SWR are they planning on not spending the starting amount? I ask because Firecalc seems to think I would be OK. I know there are "no guarantees" the future will be like the past.
When people talk about SWR, they aren't really "planning" on any particular use of the particular fund.

As an example, I looked at a typical 4% SWR run. cfiresim, $1 million initial fund, $40k real annual withdrawals, 75/25 stock/bond, 30 year horizon, 115 historical starting years.

5 cases completely ran out of money
36 ended between $0 and $1 million (inflation adjusted dollars)
26 ended between $1 million and $2 million
17 ended between $2 million and $3 million
16 ended between $3 million and $4 million
17 ended with more than $4 million

So all this provides is a distribution of possible results. A Monte Carlo simulation with something like historic means and standard deviations would probably give a similar distribution. Of course, any real retiree only follows one path, we don't get the "average".

(Note that the numbers are values at the end of the 30 year horizon. Most cases will have both higher and lower values at various points within the 30 years.)
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Old 12-09-2015, 04:51 PM   #9
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While I've got you here, When people talk SWR are they planning on not spending the starting amount? I ask because Firecalc seems to think I would be OK. I know there are "no guarantees" the future will be like the past.
When people talk about SWR, they aren't really "planning" on any particular spending of the initial fund.

As an example, I looked at a typical 4% SWR run. cfiresim, $1 million initial fund, $40k real annual withdrawals, 75/25 stock/bond, 30 year horizon, 115 historical starting years.

5 cases completely ran out of money
36 ended between $0 and $1 million (inflation adjusted dollars)
26 ended between $1 million and $2 million
17 ended between $2 million and $3 million
16 ended between $3 million and $4 million
17 ended with more than $4 million

So all this provides is a distribution of possible results. A Monte Carlo simulation with something like historic means and standard deviations would probably give a similar distribution. Of course, any real retiree only follows one path, we don't get the "average".

You can get a similar distribution for your numbers from FireCalc using the "Investigate" tab.

(Note that the numbers are values at the end of the 30 year horizon. Most cases will have both higher and lower values at various points within the 30 years.)
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Old 12-09-2015, 04:57 PM   #10
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Yes, Roth conversions will count as income against MAGI for health insurance subsidies and cost sharing.. so Roth conversions for you might be limited with that constraint.

In answer to your second question... you only know when you are dead.

To some extent SWR is a "worst case" scenario... as you can see in Firecalc at 4%, a few cycles fail (you run out of money) but with many other cycles there is money leftover.... but nobody wants to have to subsist on cat food in their 90s or rely on their kids. After some point in their later years people loosen up on spending constraints or shift to withdrawals based on the balance divided by number of years left.
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Old 12-09-2015, 08:23 PM   #11
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I have no problem spending down the money as there is no legacy need. I realize that I do need to spend as little as possible but if my returns would just keep up with inflation, wouldn't I be able to make it ? Am I not being conservative enough?

It seems like I could draw around 40K for 12 years and SS + the remainder should make it the rest of the way?
I think that's a good, understandable way to think about it. If your investment returns match inflation, you'll spend down $480k over the 12 years, leaving $340k.

If your combined SS, with you starting at 70 and DW at 66, is at least $40k, then you've covered your regular spending. You don't really need to think about lifetime SWRs, since you would only plan to withdraw for the first 12 years.

But, be sure to go through this checklist: Some Important Questions to Answer Before Asking - Can I Retire?

Also, think about long term care. Your $340 might cover 4 years in a nursing home. If one of you needs care while the other is still living, you probably won't be able to offset any of that LTC spending with your income.
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Old 12-10-2015, 12:08 AM   #12
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I think it would be tight, and perhaps you have not considered all your costs, how will you replace a car in x years ?

Before you "give it a shot" make double sure you know your costs and income, because getting a job at your ages is a lot harder than quitting one.
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Old 12-10-2015, 07:52 AM   #13
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In answer to your second question... you only know when you are dead.
I don't remember about Firecalc, but the Schwab and Fidelity planning tools call this date "the end of your retirement."
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Old 12-10-2015, 08:24 AM   #14
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I think it's implied in the delightful acronym Fidelity chose for their Retirement Income Planner: RIP.

How about "culmination of your retirement?" That has a much nicer sound.
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Old 12-10-2015, 08:40 AM   #15
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How about "culmination of your retirement?"
CYR? It is an improvement over RIP but I vote for "culmination of your assets" (CYA). Has a nice ring to it.
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Old 12-10-2015, 08:56 AM   #16
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I think it's implied in the delightful acronym Fidelity chose for their Retirement Income Planner: RIP.

How about "culmination of your retirement?" That has a much nicer sound.
I have to admire whoever signed off on the name. For years I attempted to get DOA as a Megacorp product only to be shot down.
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Old 12-10-2015, 10:12 AM   #17
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I think it's implied in the delightful acronym Fidelity chose for their Retirement Income Planner: RIP.....
Seems totally appropriate to me... double duty.
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Old 12-10-2015, 04:39 PM   #18
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Animorph, Thanks for the input. I've always wondered about the 4% swr deal. Is that figured so as to not spend down the "nest egg"? I have no problem spending down the money as there is no legacy need. I realize that I do need to spend as little as possible but if my returns would just keep up with inflation, wouldn't I be able to make it ? Am I not being conservative enough?

It seems like I could draw around 40K for 12 years and SS + the remainder should make it the rest of the way?

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If FIRECalc says you are OK (100% success?) then you should be fine. I'm doing close to the same thing. You just need to make those checks because it's slightly more complicated than a simple 4% SWR withdrawal.

FIRECalc is using historical returns to see how you would have fared in the past. A typical bad scenario would be that you retire and then the stock market loses 50% of its value. You just can't test for that by assuming constant market gains equaling inflation, or any constant gain per year. That's why it's the 4% "rule" and not the 10% "rule". Plus many of us are chicken and add a margin of safety in addition to a safe FIRECalc result.
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Old 12-10-2015, 08:27 PM   #19
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Thanks, I understand that a constant % withdrawal isn't the way it works in the real world. I guess what I'm wondering about is that 4% would work in 1929/1930 but we should prepare for much worse in the future? I do understand the downside of being wrong, tho.

Thanks again.
Murf

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