New Retiree/Need a Withdrawal Strategy/Suggestions?

[SunnyOne]

I would really appreciate any and all advice here. I'm single, just turned 59.5 and planning to retire in a couple of months after 35 years of work.

I am a lifelong accumulator and saver. I have no experience with spending and it makes me nervous, but hey, I have to live, lol.

I need to get a grip on a tax efficient withdrawal strategy so I have money to actually live on, now that my paycheck is going away. I am not sure which accounts to draw from first, etc.


Portfolio Size : $1.92M +/-

Expected expenses in retirement: $70K-$80K/year

Key information: I am a renter, do not own any RE. Planning to move from HCOL area to LCOL area in retirement.

Current retirement assets by allocation percentage:

These are held in a combination of a taxable brokerage account, 2 - 401K accounts (one a former employer, one current employer - federal government TSP), money markets and I-Bonds and a Roth IRA


Domestic Equity 23%

International Equity 8%

Bonds 47%

Cash 22%


= 100%




Federal Pension: later this year will be approx $1,000/month minus $175/month for health insurance

Social Security $2000 at age 62
$3044 at age 67

 

[travelover]

One opportunity would be to take your pension then do Roth conversions up to the top of the 12% tax bracket, while pulling from your after tax investments to supplement the pension.

 

[SunnyOne]

Thank you. I have to take my pension immediately upon retirement - it's a condition of taking the healthcare with me when I leave.

 

[MRG]

One opportunity would be to take your pension then do Roth conversions up to the top of the 12% tax bracket, while pulling from your after tax investments to supplement the pension.

+1

If your cash is taxed spend it. You are in good shape.

 

[travelover]

Thank you. I have to take my pension immediately upon retirement - it's a condition of taking the healthcare with me when I leave.

I'm suggesting that you take your pension and supplement it with after tax dollars which allows you to make Roth conversions to minimize the tax hit when you hit age 72 and have required minimum distributions.

 

[Dean56]

I'm suggesting that you take your pension and supplement it with after tax dollars which allows you to make Roth conversions to minimize the tax hit when you hit age 72 and have required minimum distributions.

+1 This is also how I plan to start my retirement.

 

[ziggy29]

Yep. This situation screams "Roth conversions" to me (in the 12% bracket or less), especially to knock down the RMDs when you hit [-]70.5[/-] 72, and since once you retire you will likely have room in the 12% bracket to do it.

I personally think 22% cash is a little high. I'd feel better with 10-15%, but maybe that's just me. With the size of your portfolio, with the pension, with the health insurance beast comfortably subdued, with the SS soon to come, you're fine. In the meantime, if you don't yet have a significant after-tax cash position, I'd build it up to pay taxes on Roth conversions, based on what I am seeing here.

 

[pb4uski]

The important thing for us to know is how much in taxable (brokerage, etc), tax-deferred (401k, tIRA, etc.) and tax-free (Roth IRA or HSAs).

If most is in taxable then the advice is a lot different than if most is in tax-deferred (which would be typical).

Also, are you single or married? If you're single, with ~$75k of income ($12k pension and $63k of withdrawals) you'll already be in the 22% tax bracket so there isn't much to be done other than perhaps do Roth conversions to the top of the 22% tax bracket. If you're married then there is more opportunity for low tax-cost Roth conversions.

 

[North Texas Cajun]

A few suggestions from someone who faced some of these issues seven years ago when I retired at 62:

1. If you can expect to live 40 or more years, 31% of your portfolio in equities seems way too conservative - especially if you have SS and a small pension for a portion of your non-discretionary expenses.

2. Does your broker offer access to experts on tax efficient distributions? To me that seems to be a complex subject for someone who has a broad mix of accounts. Not a big issue for my household because over 90% of our portfolio is in simple IRAs. But that may change in the future due to inheritance.

3. I’ve been advised to hold on to Roth’s as long as I can. I wish I had more in mine, and could see those tax free funds getting larger and larger.

4. With 50% equities you should be able to safely withdraw 3.5 m% to 4% of your portfolio and never run out. That would be $67k to $76k. With $30k to $36k from the pension and SS, that provides considerably more than $80k spending. My suggestion: spend more than $80k your first 10-15 years and have fun. Things start to wear out after age 70, and having fun can get more difficult.

 

[Retire52]

SunnyOne,

First CONGRATULATIONS on your imminent retirement!

Check out this link--one of my favorite bloggers wrote about your situation and answers your question in detail:
https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/

A few observations and a suggestions.

-I assume your plan of spending $70-80k annually is solid; big assumption here, in my 2.5 years experience in retirement my spending went way up during transition to retirement and has finally reached steady state in the last year. Although it's stable at about 200% of pre retirement forecast.[emoji846] My spending has been a horror show. I have 5 good excuses, a DW with a bucket list as long as my arm and 2 kids in college with 2 more in the chute. With you being single, a saver, and moving to a LCOL, you're in muchbbetter shape than I was, but if your spend plan has been wired brushed then your overall numbers look good.

-I'd consolidate your 401ks under the TSP for simplicity and low expenses

-I also think 31/47/22 is extremely conservative given your pension and pending SS income. The author of the link above was your age at the time of the article, had no pension and had 75/25/only a month of expenses in cash. With what will likely be your 30+ year time horizon, a higher equity percentage will allow for growth without much risk.

-I pull 2.5% of my total investments from my taxable acct. Keep 2 years worth of annual draw in cash in the event of a 10-20% dip in the market. I am in a different position than you though--51 years old and maintain 96/0/4 and can rely on pension and annuity income for all of my non-discretionary spending.

 

[SunnyOne]

Thank you all.

Maybe I am not well informed, but I am not exactly sure what this sentence means: "In the meantime, if you don't yet have a significant after-tax cash position, I'd build it up to pay taxes on Roth conversions, based on what I am seeing here"

Can anyone explain...what is a significant after-tax cash position and how to get there for Roth conversions?

 

[RunningBum]

I'm not sure what is meant by "build it [after-tax account] up to pay taxes on Roth conversions", but the idea is to convert some of your tax-deferred account to a Roth, and you get the most gain from it buy paying the taxes on the conversion from your taxable account.

You probably had the most yearly income while working, so it made sense to defer income then.

You probably have the least yearly income now. It will grow when you start taking SS and have RMDs on your tax-deferred account.

So the idea is to recognize some taxes on the tax-deferred now, by converting some of it each year to a Roth IRA, where it will continue to grow tax-free. Many do it to the top of the 12% bracket, which also nearly matches up with where you have 0% LT cap gains and qualified dividends. How much to convert can be a complex calculation. You need to project your income tax bracket in your later years, including how much of your SS is taxed, and compare to your current rate. Generally you convert if your current rate with the conversion is the same or less than your future rate.

Ideally you have enough in your taxable account to supplement your current expenses and pay taxes on those conversions. But it's still worth converting even if you have to pay the taxes out of the tax-deferred account.

You may have reasons for taking SS early, but one benefit of delaying SS as long as you can is that you have more years with low income in which you can do Roth conversions. On the other hand it would give you more cash to pay those conversion taxes. Yet another complexity in the calculations.