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ESR, how to withdraw?
Old 08-12-2015, 04:17 PM   #1
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ESR, how to withdraw?

I'm 61, have had my consulting business for the last 7 years that afford me to work part time, and make comfortable living and even put away $50-80k/yr. DW just retired, 59yo with small pension ($24k/yr). We have $4M investible assets: $900k cash, $400K in tax deferred (401k, IRAs)stocks and stock funds, $2.7M taxed acct in stocks. $70k dividends (currently re-invested) are taxed yearly. Plan to draw $22k SS each at 66-67yo.
Tracking for the last 5 yrs., expenses at $140 - 170k/yr. incl. taxes.

What should be the sequence of withdrawals if I would to wind down my consulting gig? Would like to cover at least $160k/yr of inflation indexed expenses.
We have no mortgage, no loans, everything paid for.

Thanks.
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Old 08-12-2015, 06:22 PM   #2
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I suggest you run FIRECalc (see bottom of page). It should help you decide if you have enough of a nest egg to meet your current requirements. My gut says "yes". In terms of the order, it probably comes down to "titrating" your withdrawals from taxable and already taxed to keep your taxes as low as possible. In addition to the size of your nest egg, I consider you to be in an enviable position of having relatively small amounts in your tax deferred accounts. Until RMDs kick in, you have almost complete control over how you use these funds to keep your taxes low.

Nice going and welcome to the pre-FIRE'd community. YMMV
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ESR, how to withdraw?
Old 08-13-2015, 01:55 AM   #3
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ESR, how to withdraw?

Curious what you're invested in to get a 70k annual dividend payout. On $2.7m taxable account that's nearly 4 percent yield. Wow.
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Old 08-13-2015, 08:56 AM   #4
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Thanks. I FIRECALCed few times previously. It basically tells me I'm 100% starting at up to $165k/yr. , or starting WR of ~4.2% if retired today.

regarding the $70k in div.: Re-checked - I have $500k in tax deferred, $2.75M in taxable, $870k in cash.
The $70k figure also includes ~$2k in interest.
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Old 08-13-2015, 01:26 PM   #5
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Looks like cash is acting like the bond side of your AA. If the cash is not part of the AA, you might want some bonds, though I like 100% equities, and I'd spend down the cash first.

Withdrawal order is mostly a tax issue, so you can have different solutions depending on your tax situation. I would start by Roth converting enough of your tax deferred accounts to hit the top of the 15% tax bracket, if you're not there already. Fill in the rest of your income from your taxable accounts. You're trying to get your money out of the tax deferred accounts at the lowest tax rate you can. Keep in mind the possibility of 0% capital gains taxes within the 15% bracket. And watch out for your tax rate at age 70 with SS and RMD's.

You'll probably end up living off your taxable accounts and leaving a large Roth account as your estate.
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Old 08-13-2015, 04:42 PM   #6
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Curious what you're invested in to get a 70k annual dividend payout. On $2.7m taxable account that's nearly 4 percent yield. Wow.
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Originally Posted by yidal8 View Post
....regarding the $70k in div.: Re-checked - I have $500k in tax deferred, $2.75M in taxable, $870k in cash.
The $70k figure also includes ~$2k in interest.
68/(500+2750) = 2.1% yield... that's more like it.
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Old 08-13-2015, 04:56 PM   #7
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You may want to consider delaying SS, living off your taxable money and doing Roth conversions to the top of the 15% tax bracket once you stop consulting until you are 70 to get favorable tax rates on your tax-deferred money.

If you assume $54k a year of qualified dividends, $24k of pension income and $44k of SS you would be in the 25% tax bracket.

Using the same $54k a year of qualified dividends, $24k of pension income and no SS you'll be in the 15% tax bracket and have $17-18k of headroom to convert and pay ~11% tax on rather than 25% or more.

Play with Taxcaster and run your numbers through i-orp.
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Old 08-13-2015, 05:39 PM   #8
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68/(500+2750) = 2.1% yield... that's more like it.
div. generated in tax deferred acct. are sheltered, and not part of the above discussed.

to be precise, I re-checked my 2014 tax return: Total ordinary dividends were $76k, (from which $70k were qualified div.), interest was only ~$1k.
so I think it comes to 76/2750=2.76%
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Old 08-13-2015, 05:48 PM   #9
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You may want to consider delaying SS, living off your taxable money and doing Roth conversions to the top of the 15% tax bracket once you stop consulting until you are 70 to get favorable tax rates on your tax-deferred money.

If you assume $54k a year of qualified dividends, $24k of pension income and $44k of SS you would be in the 25% tax bracket.

Using the same $54k a year of qualified dividends, $24k of pension income and no SS you'll be in the 15% tax bracket and have $17-18k of headroom to convert and pay ~11% tax on rather than 25% or more.

Play with Taxcaster and run your numbers through i-orp.

Not sure how this reconciles with my $160k/yr. anticipated need. I suppose you are saying I top off the rest from my cash reserve for few years...?
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Old 08-13-2015, 06:13 PM   #10
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Yes, in effect you'll be living off dividends from your taxable portfolio and some "principal" but on the other hand with the Roth conversions you'll be building a tax-free portfolio that you will then tap into later in life. Also, the reductions in your tax-deferred portfolio will reduce required minimum distributions in your 70s.

So for example, in the first year, your $160k need would be satisfied by $24k pension, $76k of dividends and interest and $60 from cash.
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Old 08-14-2015, 08:43 AM   #11
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First, congratulations on your nest egg - to build that is no small feat. I agree with the conversion and withdrawal strategies suggested by the previous posters. My only addition is that the amount of cash seems very high to me. I know that the short-term outlook for equity and bonds are cloudy but since you are probably looking at a 20-30 year horizon that concern should mitigated to some extent.
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Old 08-14-2015, 09:26 AM   #12
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Agree some of the cash can be invested. 5-6 years buffer in cash should be enough. However, not sure if best it be a multiple of $140k/yr. (and continue reinvesting the div.) or $60k/yr. + cashing div. ?
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Old 08-14-2015, 09:36 AM   #13
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I would think of it as expenses less dividends less pension.... take the dividends in cash rather than reinvest....so $60k a year in your case times the number of years you want as a buffer.
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Old 08-14-2015, 10:00 AM   #14
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Yes, but to add a wrinkle, I remember an advice I got some years back from someone who managed for wealthy people. Sell high and buy low applies also to dividends. i.e. cash divs. when the underlying investment is high, and leave to re-invest (buy) when it's low.......
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Old 08-14-2015, 10:45 AM   #15
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Many replies already, but I would look at pulling some of the tax deferred each year for living expenses before you start SS draw. Your income will impact how much of your SS is taxed and if you get to 70 with RMDs they could push your SS tax rate higher.
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Old 08-14-2015, 11:07 AM   #16
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Many replies already, but I would look at pulling some of the tax deferred each year for living expenses before you start SS draw. Your income will impact how much of your SS is taxed and if you get to 70 with RMDs they could push your SS tax rate higher.
That's where Roth comversions come in... the same impact as withdrawals in that they are taxable and reduce your tax-deferred balances so RMDs are lower but with the added benefit that you effectively reinvest in a tax-free vehicle that you would otherwise be precluded from investing in since you have no earned income.
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Old 08-14-2015, 11:48 AM   #17
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That's where Roth comversions come in... the same impact as withdrawals in that they are taxable and reduce your tax-deferred balances so RMDs are lower but with the added benefit that you effectively reinvest in a tax-free vehicle that you would otherwise be precluded from investing in since you have no earned income.
ok - I'll agree with that. Since he would be spending non-tax-advantaged $$ the tax hit would be lower. Thanks
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