I Need To Pick Your Brains

[misty57]

DH will be taking early retirement some time this year at age 55 (he hasn't submitted his paperwork yet). I will be 55 in the summer.

Here's what we have saved for retirement:
401K: $1,243,000
IRA: $92,000
Taxable Accounts: $293,000
Total: $1,628,000

I would appreciate anyone's thoughts or assistance regarding SWRs, asset allocation, and taxes.

I have been reading on initial sustainable withdrawal rates, and believe that in his first year of full retirement (2013) that his non-COLAed pension in addition to a $30K draw down will be ample for everyday living expenses (we could live on less if we had to).

ISWR
Here's where I get confused. We want to do some travel, but I don't know how often it will be or how expensive. We also will need or want a new car in the next (5) years. Should I take a "chunk of money" and "pretend" it's not there, earmarking it for those things before I determine our initial SWR?

ASSET ALLOCATION
DH is getting more and more conservative as time goes on. I think the max that he wants to "risk" now in his 401k is about $200K. I already have the IRA at a 50/50 allocation. Allocating $250K to equities equates to a 15/85 asset allocation between equities and fixed income if you consider the entire portfolio. From what I have read, our ISWR is low enough that it is probable doable without running out of money. Any thoughts on this and where the heck do I put all that fixed income?

Our choices for fixed income in his 401k are:
Government Short Term Investment Fund (Short term fixed income category)
Stable Value Fund (money market)
TIPs Fund (Inflation Protection Fixed Income Index)
Broad Market Bond Index Fund (Fixed Income)


TAXES
Even though we only need a $30K draw down (indexed to inflation), I am thinking that we should be drawing down his 401k as much as possible between 2013 and the time we decide to take SS. We will evaluate when to actually take it every year after we reach age 62. My SS will be minimal (<$400/mo) so we may opt to take it ASAP. I am concerned about the tax ramifications of not drawing down the tax deferred accounts and dealing with taxes after age 70 1/2.

Also, I have considered slowly converting the traditional IRA to a Roth IRA. I haven't researched IF we can or how to do it much yet though.

Okay, that's all I can think of right now; but I'm sure a lot of other questions will pop up. I would appreciate any inputs.

[pb4uski]

Congratulations on being well positioned for retirement.

On the travel and car you can either build it into your expenses (in which case it becomes part of your withdrawal rate) or exclude it from expenses and take a portion away from your nestegg for those costs.

I would take the travel off the top since it sounds like that will just be in the first few years of ER, but I would include a provision for a car in the cash flows since you'll need to buy a car every 7-10 years anyway until you can no longer drive.

The risk of a 15/85 AA is that your nestegg might not keep up with inflation. At your age, 40/60 is as conservative as I would go. Actually, if your WR is low, some would argue that you can take more risk and have a higher allocation to equities rather than a low allocation to equities. But in the end, it is whatever allows you and DH to sleep well at night.

I would convert the IRA to Roth as you can while staying in the 15% tax bracket, and also explore converting the 401k to an IRA.

Typically, your SS be the higher of the amount based on your earnings record or 50% of DH's SS, so you may want to check that out some more unless you have an unusual situation.

[Koolau]

Wow, Misty57, it sounds like you have thought of all the right questions. You GO girl!

First suggestion I would offer (most on the forum know this is coming) is to think of your deferred money 401(k) and IRA as being worth less than the nominal amount. I say this because, in reality, they are worth the nominal amount minus any taxes due on them when they are taken out. So, for instance, if you are in the 15% Fed tax bracket and have a 5% state/local tax, you might consider your deferred money as being actually worth 80% of the nominal amount. Once you have looked at your stash this way, then consider your SWR based on that. Some here might quibble with that approach (and that's okay). I just look at your retirement stash and think, whoah! You have a large proportion in deferred vehicles - even more than my current approx. 50% which I regret.

But, it sounds like you have your expenses under control. Since you have a fair amount of cash available, you might consider converting some deferred money to Roths (as you suggested) and use some of the cash to pay the taxes. This will give you a bump up in value shielded from further taxation. It's a truly beautiful (mistake) piece of legislation the Congress gave to us!! I say "use it" until they figure out what a great deal it is for us tax payers.

Honestly, it looks to me that you are in good shape. There are much more knowledgeable folks here on things like AA, etc. I'll let them suggest approaches for that portion of your questions. Best of luck and YMMV.

[Midpack]

Have you run your plan through FIRECalc: A different kind of retirement calculator? Good place to start.

As rule of thumb, 3% is widely considered a SWR for age 55 or less (one example of many below, 3.3% looks like the 95% success rate for a 40 year retirement based on past history at least). As you probably know, the 4% rate most often talked about was based on a 65 yo retiree living for 30 years. But both are without factoring in Soc Sec, which most if not all US citizens can factor in.

If you do FIRECALC, I'd take Koolau's suggestion to scale up your projected expenses by 15-20% to allow for taxes unless you know more exactly what your tax bite will be.

Your certainly in the ballpark financially, congrats!

[misty57]

Thanks for your reply. Would you feel the same way about the car if we didn't replace cars every 7-10 years. My car is 12 years old with < 85K miles and DH's truck is 9 years old with less than 75K miles, so I'll know that we'll have them for a while even though they are older models. I have allocated money from our annual retirement income for maintenance.

Yes, travel will definitely take place in the beginning of retirement, but I don't know for how long.

Do you have recommendations on reading material for how to convert the IRA to a Roth? And is your reason for suggesting that we converting the 401k to an IRA due to the fact that IRAs have more investment options? In any case, we want to be able to draw what we want to draw from it (not what the government tells us we have to draw from it) starting in 2013. We couldn't do that if we rolled it into an IRA at this time.

Yes, I am a little concerned about inflation and taxes. If I exclude $100K for a car and some travel in the early years, a $30K draw down would be just under a 2% WR in the first year of retirement. That's why I thought I might be able to squeak by with the conservative asset allocation, but that's why I posted here - I'm not really sure.

Could you explain more regarding the SS. I thought that being eligible for 50% of DH's SS only applied as a survivor's benefit. The idea was to take mine at age 62 and for DH to take his later at age 66 and 6 months (or whatever it is) or even wait until later if we need to draw down the 401k more before he applies. I can always convert to a survivor's benefit if anything happens to him before he starts receiving benefits....I think.

I've been trying to read up on all this stuff, but my head is kind of spinning with information which is why I turned to you guys for help. DH is too busy working to read up on retirement planning with me and I need some outside input to make sure that I'm thinking this through correctly and/or am not missing something.

[pb4uski]

My point was more that it is prudent to provide for a new vehicle every so often in your planning rather than how much or how often, and it sounds like you get that.

If you do use Firecalc it allows one to change the amount of expenses each year so you can explicitly provide for more travel in certain years and for new vehicles, etc. in the cash flows rather than just reducing your investment balances by these amounts.

The SS gets complicated but you can get 50% of DH's FRA benefits when you reach FRA. see Retirement Planner: Benefits for your spouse So assuming that DH's benefit will exceed $800 a month, your SS benefit will likely be more than the $400 you have in mind.

And assuming DH predeceases you, your surviving spouse benefit would be equal to his benefit. see Survivors Planner: How Much Would Your Survivors Receive?

[misty57]

Quote:

Originally Posted by Koolau Wow, Misty57, it sounds like you have thought of all the right questions. You GO girl! First suggestion I would offer (most on the forum know this is coming) is to think of your deferred money 401(k) and IRA as being worth less than the nominal amount. I say this because, in reality, they are worth the nominal amount minus any taxes due on them when they are taken out. So, for instance, if you are in the 15% Fed tax bracket and have a 5% state/local tax, you might consider your deferred money as being actually worth 80% of the nominal amount. Once you have looked at your stash this way, then consider your SWR based on that. Some here might quibble with that approach (and that's okay). I just look at your retirement stash and think, whoah! You have a large proportion in deferred vehicles - even more than my current approx. 50% which I regret. But, it sounds like you have your expenses under control. Since you have a fair amount of cash available, you might consider converting some deferred money to Roths (as you suggested) and use some of the cash to pay the taxes. This will give you a bump up in value shielded from further taxation. It's a truly beautiful (mistake) piece of legislation the Congress gave to us!! I say "use it" until they figure out what a great deal it is for us tax payers. Honestly, it looks to me that you are in good shape. There are much more knowledgeable folks here on things like AA, etc. I'll let them suggest approaches for that portion of your questions. Best of luck and YMMV.

Well, it's good to know that I'm asking the right questions. I've guess you can tell that I've "been studying". Geez, I feel like I'm back in college with all the books and articles that I've been reading. LOL!!

But I'm sure there are things that I'm not thinking of which is what scares the heck out of me.

I understand what you are saying about the taxes. I did estimate income taxes for 2013 and that expense is included in the $30K draw down in year one and thus indexed for inflation per the retirement calculator that I used. I have no problem "pretending" that our actual retirement nest egg is less than it is to account for unpaid income taxes, but I need further understanding of why one way is more efficient or realistic than the other. And if you do that, do you subtract the tax liability AND THEN do your retirement asset allocation with what is left or do you do your allocation based on the entire amount?

Ya, I realize that we are over-weighted in deferred accounts and it concerns me a little bit, but only about $250K is actual contributions on our part - the rest is company match and ROI. I am leaning toward a Roth conversion with the IRA account. Again, I'd love it if someone would point me in the right direction on some good literature about that.

This is what is driving me NUTS!! There are so many alternative ways of doing things. I'm sure if DH was doing all of this, he'd err on the conservative side so that is what I've tried to do when laying out "The Plan".

[misty57]

Quote:

Originally Posted by Midpack Have you run your plan through FIRECalc: A different kind of retirement calculator? Good place to start. As rule of thumb, 3% is widely considered a SWR for age 55 or less (one example of many below, 3.3% looks like the 95% success rate for a 40 year retirement based on past history at least). As you probably know, the 4% rate most often talked about was based on a 65 yo retiree living for 30 years. But both are without factoring in Soc Sec, which most if not all US citizens can factor in. If you do FIRECALC, I'd take Koolau's suggestion to scale up your projected expenses by 15-20% to allow for taxes unless you know more exactly what your tax bite will be. Your certainly in the ballpark financially, congrats!

Thanks for your response Mid. No, I haven't run anything through FIRECalc. Maybe that should have been the FIRST thing that I did BEFORE posting this. I have been using a retirement calculator on an MSN website, but I'll play with FIRECalc and see what it tells me.

I did realize early into my "studies" not to blindly trust the 4% SWR which was the first thing I calculated before I ever opened a book. So far, I think the absolute best thing that I've read is "Unveiling the Retirement Myth" by Jim Otar. Do most people on this forum agree with his ideas? So far, I haven't found any literature on retirement planning that compares, but I'd be willing to read anything that anyone might suggest.

[pb4uski]

If you are happy with your IRA vendor, they should be able to set up a Roth IRA for you and arrange a transfer. If you are not happy with your IRA vendor, then I would suggest Vanguard.

The principal reason for the suggestion of the 401k>IRA transfer was because of better investment choices and also provide a fund for IRA>Roth conversions since you'll likely go through the $92k in the IRA in a couple years. If your plan allows you might be able to have the best of both worlds and transfer some from 401k to IRA and leave enough in the 401k for any penalty-free withdrawals you want to do prior to age 59.5.

[Midpack]

Quote:

Originally Posted by misty57 So far, I think the absolute best thing that I've read is "Unveiling the Retirement Myth" by Jim Otar. Do most people on this forum agree with his ideas? So far, I haven't found any literature on retirement planning that compares, but I'd be willing to read anything that anyone might suggest.

Nicely done, you've already found one of the best reads out there about the money side of ER IMO. Having read URM, you're way ahead of most people. You're not overlooking anything, you just need time to get comfortable with it all, that takes a while no matter what your background. Just take your time, nothing to get stressed about, you're doing great!

As for asset allocation, you need to figure out what you can really live with. If you need 90:10 to make the plan work but you can't sleep at night (when the market heads south as it will do periodically), 90:10 won't work for you. Have you and DH done any of the risk tolerance quizzes to start with? Here's an easy and free one https://personal.vanguard.com/us/FundsInvQuestionnaire just as a place to start. If it says you can't sleep with anything higher than 20:80 and the plan won't work there, you're probably not ready to pull the plug.

[l2ridehd]

Congratulations, you have done what we all want to do. I am doing it March 31 this year, albeit a bit older then you.

You have to do what is best for you, but here is what I would do in your position.

I would use a SWR of 3.25% to 3.5% perhaps even 4% which would give you about 50K to 60K withdrawal and this would allow for taxes and be above your requirements. Taxable first to avoid penalty. This woug ld let you save for the vacation and cars and maybe add to a ROTH. By dointhis you spread the tax pain, still retain the savings habit, start to build ROTH non taxable money and have the money you need for a vacation and new car.

As you approach SS you can see where you are and maybe drop the SWR back to around 3%. Minimize taxes before SS hits if possible by withdrawing the most you can while staying in a 15% or less tax bracket.

Also15/85 is not good. Way to much in bonds with the potential for rising interest rates. I would scale this back to 40/60 or even 50/50 over the next 12 to 18 months. You can do this by taking all the SWR from bonds and selling enough to get you back to a more reasonable AA.

I hope this helps, and good luck and let us know what you decide.

[misty57]

Quote:

Originally Posted by Midpack Nicely done, you've already found one of the best reads out there about the money side of ER IMO. Having read URM, you're way ahead of most people. You're not overlooking anything, you just need time to get comfortable with it all, that takes a while no matter what your background. Just take your time, nothing to get stressed about, you're doing great!

Now that I think about it, I might have you to thank for picking up URM. I THINK that you mentioned it to someone else 2-3 months ago on another thread and your "tone" made me think that it was an important read. I can't thank you enough because it has been a HUGE help. He even provided some statistics for 40 yr. retirements which I've found lacking in a lot of other material that I've read.

Ya, I have to admit that I'm a little bit nervous. The economy sucks and the government is broke, but we've been planning this since we were 24 years old and DH, having been a "lifer", is really ready to leave the corporate world behind.

[Koolau]

Quote:

Originally Posted by misty57 I have no problem "pretending" that our actual retirement nest egg is less than it is to account for unpaid income taxes, but I need further understanding of why one way is more efficient or realistic than the other. And if you do that, do you subtract the tax liability AND THEN do your retirement asset allocation with what is left or do you do your allocation based on the entire amount?

I wasn't really talking about allocation. What I was suggesting is that you actually have "less money" than it would appear, based on the deferred nature of the savings vehicle (IRA/401(k)).

If it were me (and as I pointed out about my 50% deferred stash) I would assume the lesser amount (i.e., after you subtract the tax bite you will face) and THEN use that as the amount to apply your withdrawal rate to. I say that because, in your case, most of your stash IS deferred. If it were 10% or 20% deferred money, the tax effect would possibly be lost in the noise. Not so in your case unless you have a strategy to stay in a very low tax bracket. Even if you can get down to 10% Fed and no state tax, that's a big chunk of your deferred money when you run the numbers.

So nothing to do with allocation - everything to do with estimating what you actually have in your stash - to which you will apply whatever % withdrawal rate you find comfortable. Hope this is clear, if not, I've not explained it well. By the way, I'm not an expert, just someone who saved "too much" in tax deferred accounts. Not a bad problem to have. YMMV

[misty57]

Quote:

Originally Posted by Midpack As for asset allocation, you need to figure out what you can really live with. If you need 90:10 to make the plan work but you can't sleep at night (when the market heads south as it will do periodically), 90:10 won't work for you. Have you and DH done any of the risk tolerance quizzes to start with? Here's an easy and free one https://personal.vanguard.com/us/FundsInvQuestionnaire just as a place to start. If it says you can't sleep with anything higher than 20:80 and the plan won't work there, you're probably not ready to pull the plug.

That's the rub. DH really wants to get out but he also wants to be extremely conservative. Okay, now you've given me two action items:

1. FIRECalc
2. Risk Tolerance Quiz

I can't see him wanting to wait past this year. I'm pretty sure that we could reduce our monthly income needs in retirement by shaving a bit off of a few categories. An alternative would be to reduce the travel. We've already done some international travel and it's not that we wouldn't do any, but we could take a trip in the first couple of years and do more if we can afford it.....or not. I don't think either of us would feel "deprived".

[Koolau]

Quote:

Originally Posted by misty57 Ya, I realize that we are over-weighted in deferred accounts and it concerns me a little bit, but only about $250K is actual contributions on our part - the rest is company match and ROI. I am leaning toward a Roth conversion with the IRA account. Again, I'd love it if someone would point me in the right direction on some good literature about that.

I hear you on the company match/ROI. That's exactly how I got in the "fix" I'm in. But, what a great problem to have, I say. It used to be worse until I started taking money from my 401(k) to live on AND taking 401(k) money to convert to Roth IRAs.



This is the bible I use for Roth stuff.

Guide to Roth IRA, 401k and 403b Retirement Accounts

from Fairmark.com

YMMV

[misty57]

Quote:

Originally Posted by Koolau I hear you on the company match/ROI. That's exactly how I got in the "fix" I'm in. But, what a great problem to have, I say. It used to be worse until I started taking money from my 401(k) to live on AND taking 401(k) money to convert to Roth IRAs. This is the bible I use for Roth stuff. Guide to Roth IRA, 401k and 403b Retirement Accounts from Fairmark.com YMMV

Thank you very, very much. I will certainly read that. I do want to convert as much to Roths as possible before we take SS.

So were you able to do your Roth IRA conversions and stay in the 15% tax bracket or did you ever have to go into the 25% bracket?

For the record, the IRA that we have is mine so maybe we could both be doing gradually doing them.

Thanks again for your input. I really appreciate your taking the time to respond.

[LOL!]

Here is how to pay ZERO taxes in retirement. It hinges on understanding your tax return, your Roth conversions, and other scenarios: Bogleheads &bull; View topic - How to pay ZERO taxes in retirement with 6-figure expenses

Some of the ideas have been covered here, but do not forget about Optimal Retirement Calculator and Retirement Decision Support System and TurboTax.

[Koolau]

Quote:

Originally Posted by misty57 Thank you very, very much. I will certainly read that. I do want to convert as much to Roths as possible before we take SS. So were you able to do your Roth IRA conversions and stay in the 15% tax bracket or did you ever have to go into the 25% bracket? For the record, the IRA that we have is mine so maybe we could both be doing gradually doing them. Thanks again for your input. I really appreciate your taking the time to respond.

Well, full disclosure, I was trying to stay in the 25% bracket - not 15% (and will continue to do so). I also screwed up big time (long story short, had some income - depreciation recapture - which I didn't understand) and it will cost me an extra $40/mo on my medicare bill. I converted about $3K too much last year. The price? $40 X 12 X 2 I didn't need to pay. Live and (hopefully) learn.

You might wonder why it's worth going into the 25% bracket. It just depends on your income (and your income sources) as well as your assumptions about the future, aka tax policy. One other thing I thought of. You might do a quick estimate (tough to do at your age) of what your RMDs might be at 70 1/2. You'll need lots of assumptions on your ROI, but it could give you at least an idea of whether staying in the 15% bracket will be sufficient or whether to go to 25% bracket with your conversions. My particular opinion is that we will NEVER in our lifetimes see taxes as low (what a joke!) as they are now. So, by the time we (you especially?) get to 70 1/2, the rates could be higher. Just a SWAG, you understand, and YMMV.

[misty57]

Quote:

Originally Posted by Koolau Well, full disclosure, I was trying to stay in the 25% bracket - not 15% (and will continue to do so). I also screwed up big time (long story short, had some income - depreciation recapture - which I didn't understand) and it will cost me an extra $40/mo on my medicare bill. I converted about $3K too much last year. The price? $40 X 12 X 2 I didn't need to pay. Live and (hopefully) learn. You might wonder why it's worth going into the 25% bracket. It just depends on your income (and your income sources) as well as your assumptions about the future, aka tax policy. One other thing I thought of. You might do a quick estimate (tough to do at your age) of what your RMDs might be at 70 1/2. You'll need lots of assumptions on your ROI, but it could give you at least an idea of whether staying in the 15% bracket will be sufficient or whether to go to 25% bracket with your conversions. My particular opinion is that we will NEVER in our lifetimes see taxes as low (what a joke!) as they are now. So, by the time we (you especially?) get to 70 1/2, the rates could be higher. Just a SWAG, you understand, and YMMV.

I agree. With the national debt the way it is, eventually they will raise taxes on everybody. This will take more study on my part, but has definitely been on my radar. I'm going to avoid edging into the 25% federal bracket, but like you, I may have no choice. This will take some additional study on my part.

Boy, this retirement stuff is A LOT of work.

[omni550]

Quote:

Originally Posted by Koolau Well, full disclosure, I was trying to stay in the 25% bracket - not 15% (and will continue to do so). I also screwed up big time (long story short, had some income - depreciation recapture - which I didn't understand) and it will cost me an extra $40/mo on my medicare bill. I converted about $3K too much last year. The price? $40 X 12 X 2 I didn't need to pay. Live and (hopefully) learn. You might wonder why it's worth going into the 25% bracket. It just depends on your income (and your income sources) as well as your assumptions about the future, aka tax policy. One other thing I thought of. You might do a quick estimate (tough to do at your age) of what your RMDs might be at 70 1/2. You'll need lots of assumptions on your ROI, but it could give you at least an idea of whether staying in the 15% bracket will be sufficient or whether to go to 25% bracket with your conversions. My particular opinion is that we will NEVER in our lifetimes see taxes as low (what a joke!) as they are now. So, by the time we (you especially?) get to 70 1/2, the rates could be higher. Just a SWAG, you understand, and YMMV.

Koolau,

I'm trying to understand the tIRA to Roth conversions. Is it not possible to recharacterize (convert back to tIRA) the overage?

omni