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Minimal savings outside retirement accounts-a hole in our plan?
Old 03-17-2018, 08:58 AM   #1
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Minimal savings outside retirement accounts-a hole in our plan?

We are 18 months to two years out from retirement day, and feel pretty good about our planned retirement with a pension and (nearly all) pre-tax retirement accounts.

I see one problem that we've started on fixing, that we have only a couple of months of expenses in after-tax accounts. I'm thinking that we should have double or triple that on retirement day, which we can probably get to without cutting our pre-tax savings rate.

While we both plan to do some work, my wife on her current job, even this higher amount seems low. As I will be past 59 1/2 by then, should I be planning for a transition withdrawal from retirement savings?
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Old 03-17-2018, 09:17 AM   #2
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My opinion could be at odds with all th others you get, but I've found having after tax assets in ER very useful. With much of your assets in pre-tax (TIRA/T401k) you will be paying normal income tax on all withdraws from these.
While Roths can do much of the following, after tax funds can supply spending cash and supply the tax $ to do Roth conversions.

Estimate what you RMDs will likely be in the future to see if this might push you into a higher tax bracket. If so, it may be good to do some Roth conversions.

I had over half our assets in taxable accounts at ER.
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Old 03-17-2018, 09:31 AM   #3
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I had that concern as well earlier. Especially with a very early retirement.. and 25% of my income going into IRA. I've ended up saving more in taxable accounts since.
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Old 03-17-2018, 09:36 AM   #4
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What bingybear said.

A few years ago I transferred a bit of money from Reg IRA to Roth IRA even thought the calculators showed it as a 'break even' transaction in the long run. The reason was to have some control over my tax bill.
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Old 03-17-2018, 09:45 AM   #5
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I have 14.5 months to go. I'm currently building up after-tax cash for this very reason and have been for about the last year. Up until that point, I had generally been fully invested and almost entirely in tax-deferred accounts.
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Old 03-17-2018, 10:19 AM   #6
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I'm in the same situation with over 90% in tax deferred IRA and 401k with retirement day possibly coming in 1-3 years. I recently changed my work contributions to 6% pretax and 9% Roth. I'm feeling like I should make it 15% Roth. I'm probably going to need some ACA income flexibility in the future.
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Old 03-17-2018, 01:24 PM   #7
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Originally Posted by Out of Steam View Post
We are 18 months to two years out from retirement day, and feel pretty good about our planned retirement with a pension and (nearly all) pre-tax retirement accounts.

I see one problem that we've started on fixing, that we have only a couple of months of expenses in after-tax accounts. I'm thinking that we should have double or triple that on retirement day, which we can probably get to without cutting our pre-tax savings rate.

While we both plan to do some work, my wife on her current job, even this higher amount seems low. As I will be past 59 1/2 by then, should I be planning for a transition withdrawal from retirement savings?
To me, it depends on what your marginal tax rate is now and what it will be in retirement and how much you save. I would not give up tax savings just to boost after-tax funds, especially since you will be able to access tax-ferred funds without penalty.
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Old 03-17-2018, 01:35 PM   #8
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To me, it depends on what your marginal tax rate is now and what it will be in retirement and how much you save. I would not give up tax savings just to boost after-tax funds, especially since you will be able to access tax-ferred funds without penalty.
Agreed. Having money in after-tax is nice, but don't pay a higher tax rate now to have that flexibility later. If you've got some very specific reasons, like managing for an ACA subsidy, maybe the numbers work. The numbers are the key, either it works or it doesn't. Don't do it just because you have some feeling that it'd be better to have it in after-tax if the numbers don't back that up.
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Old 03-17-2018, 01:54 PM   #9
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Yeah, the amount of info provided by the OP leaves a few unknown variables. The tax situation is huge as well as healthcare. With the tools available its not too complicated.
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Old 03-17-2018, 05:14 PM   #10
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Have post-retirement health insurance at fairly reasonable cost, and will be in a lower tax bracket in the early years, at least.

There are several posters who above who feel the same way about increasing their after-tax assets, though the amount we would keep is under 10% of our retirement account assets.

I can see the advantage of not having to draw retirement funds at the bottom of a market drop.
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Old 03-17-2018, 05:21 PM   #11
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For those looking into ACA for health care, it makes sense to keep non-qualified savings handy to help reduce your income for tax credits. Of course, if your prior employer provides insurance, or you have a pension in excess of ACA MAGI limits, it is a moot point.
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Old 03-17-2018, 05:37 PM   #12
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Have post-retirement health insurance at fairly reasonable cost, and will be in a lower tax bracket in the early years, at least.

There are several posters who above who feel the same way about increasing their after-tax assets, though the amount we would keep is under 10% of our retirement account assets.

I can see the advantage of not having to draw retirement funds at the bottom of a market drop.
If you're actively pulling from your retirement funds, you can have some of that in cash equivalents, out of the market, and withdraw that in a down market.
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Old 03-17-2018, 06:13 PM   #13
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We didn't really think about it and unintentionally had almost all our money in a 401K that rolled over into an IRA (I know we're not the typical ER member )--just kept socking it all the savings away in the 401K while raising kids. Oops. Pay income tax earlier, pay later, but our state doesn't collect income tax on retirement savings, pensions, etc., so I don't think we've been hurt by it. We'll have to manage RMDs in a year or so and figure out where to put that $$. We keep a chunk now in a MM fund within the IRA that we withdraw from and it still has a healthy balance.
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Old 03-17-2018, 06:15 PM   #14
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I left megacorp at 57 with a decent pension, farm income, retiree healthcare, and probably 98% of investable cash in a 401k. I was headed to a second career with less pay, no stress, and a 2 for 1 match on 5% of my income. I have no need for ACA, and also am still in accumulation mode. We did pull some money out for a new house, and paid some taxes on that. Looking forward, we are going to pay a lot of taxes when it comes to RMDs. But that amount will still be less than what we would have paid if we had not put it into the 401k.

So, I think we are ahead. If we had to manage for ACA, we would be out of luck. I have farm income plus a pension that puts us above the 400% mark. We could shift a few things around, but eventually the tax man will get his due.

The current state of the healthcare environment is a big consideration. I am proposing dropping back to 33% at my second career, just so that I could still be on the payroll and eligible for healthcare benefits. If megacorp should decide to drop those benefits in the next 3 years (before I turn 65) I would be in more of a pickle. But, at age 62, I can see a path to medicare one way or another.
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Old 03-17-2018, 06:32 PM   #15
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If you're actively pulling from your retirement funds, you can have some of that in cash equivalents, out of the market, and withdraw that in a down market.
+1. The solution to the OP's concern is AA, not tax attributes.
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Old 03-17-2018, 06:44 PM   #16
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DW & I were in the same boat as the OP. Thanks to valuable advice on this forum , 18 months out from our target ER dates we reduced contributions to IRA's and 401K's and instead redirected the balance to after tax accounts. We now have 3 years expense $$ in after tax accounts.
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Old 03-17-2018, 07:40 PM   #17
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I have 14.5 months to go. I'm currently building up after-tax cash for this very reason and have been for about the last year. Up until that point, I had generally been fully invested and almost entirely in tax-deferred accounts.

I wonder if this is a typical ER approach. IT is the one I am planning. Plan is the last 5-6years prior to ER I will just hammer taxable. Then, from 50-60 run on cash and some passive income, from 60-70 run on after tax dialing back backdoor conversions, and when RMD and SSA kicks in, dial back aftertax.
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Old 03-17-2018, 08:25 PM   #18
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I wonder if this is a typical ER approach. IT is the one I am planning. Plan is the last 5-6years prior to ER I will just hammer taxable. Then, from 50-60 run on cash and some passive income, from 60-70 run on taxable dialing back backdoor conversions, and when RMD and SSA kicks in, dial back taxables.
I don't think there's any one-size-fits-all. For example, the OP is going to be over 59.5 at retirement time, which has different considerations than someone retiring younger. A strategy may be typical here by the number of people doing them, but that may not fit your situation at all.

I don't know your situation so this isn't really advice, but instead of abruptly switching out of deferring income and hammering taxable, maybe you want to do some of each over more years.
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Old 03-17-2018, 08:29 PM   #19
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Have post-retirement health insurance at fairly reasonable cost, and will be in a lower tax bracket in the early years, at least.

There are several posters who above who feel the same way about increasing their after-tax assets, though the amount we would keep is under 10% of our retirement account assets.

I can see the advantage of not having to draw retirement funds at the bottom of a market drop.
I've got approximately 56% in taxable, but not by design. I invest in equities primarily in the taxable account and fixed income in the TIRA, so I would guess I would like it less to take out taxable money at the bottom of the market drop.... I expect one does not want to sell equities in a market pull back.
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Old 03-17-2018, 08:38 PM   #20
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I wonder if this is a typical ER approach. IT is the one I am planning. Plan is the last 5-6years prior to ER I will just hammer taxable. Then, from 50-60 run on cash and some passive income, from 60-70 run on after tax dialing back backdoor conversions, and when RMD and SSA kicks in, dial back aftertax.
What you outlined makes sense in that one doesn't have penalty free access to tax-deferremoney from 50-59 1/2 and quite often a 72t doesn't provide enough income so taxable (or tax-free) are the only other alternatives.

However, in this case the OP will be 59 1/2 when they retire and will have penalty free access to their tax-deferred money.... so why would it make any sense to pay higher taxes if it can be avoided?
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