Please share your mistakes

[audreyh1]

DW and I are both 60. I have been retired since 2009. She is retiring this year. We both have pensions. I HATE paying taxes and will do most anything to defer them till later. The biggest mistake we have made is that we put too much into tax deferred IRAs, 401s and 403bs and not enough into taxable accounts. The assumption early on in our journey to FI was that after retirement we would be in a lower tax bracket. Reality is that after we start collecting SS at 66 and RMDs at 70.5 we will likely be in the dreaded 28% tax bracket or possibly worse depending on whether rates go up over the next decade.. For the next few years before we start drawing SS if we had more cash available outside the deferred accounts we could invest more of it to earn tax free dividends and spend down some of it to keep us in the 15% bracket. As it is we will instead be drawing some from the tax deferred accounts and paying higher taxes. Did I mention that I HATE paying taxes. We could see this situation coming on several years ago and should have rolled more from the tax deferred accounts into our Roth IRA accounts. We will probably this year while still in the 25% bracket move as much as we can without going into the 28% bracket. Overall we are in fine shape with far more money available than we have been spending but better choices over the last few years would have put us into a better position in regards to taxes.

+1

I don't know, y'all, sounds like a "want to have your cake and eat it too" problem to me.

You maxed out on tax-deferred accounts, because at the time, it was most beneficial tax wise. And it may still be - as your money is growing tax-deferred. You can rebalance, or even completely change investments without paying taxes. That is a very big deal. It's only finally now, when you access some of the money, that the tax man shows up to take his share.

I suspect that if you had more money in taxable accounts, you would have beeb disturbed by the taxes you were paying on dividends/distributions, as while earning a salary you were not in a position to benefit from paying 0% on qualified dividends/cap gains. And taxable distributions might even have pushed you into paying AMT.

The absolute best way to avoid paying taxes, is to not make the money in the first place. I don't get the impression you are interested in that approach. Or I guess it's too late for you to have that option LOL!

Maybe when RMD time comes around you can send money from your IRAs directly to a charity [I'm hoping it's still an option in the future] and thus save a bundle on your taxes.

You are retired, and in the 25% tax bracket. That means you are doing very well indeed for a retiree.

IMO you should get over your frustration with paying taxes, and just accept that paying taxes means you are making (or have made) money. So it's not ALL bad.

And in the RMD years, you might even have medical expenses that lower the taxes you end up paying on your income and SS. Wait - that doesn't sound like a wonderful way to save on taxes - but you would save on taxes.

 

[kaneohe]

DW and I are both 60. I have been retired since 2009. She is retiring this year. We both have pensions. ............ The assumption ..................was that after retirement we would be in a lower tax bracket. Reality is that after we start collecting SS at 66 and RMDs at 70.5 we will likely be in the dreaded 28% tax bracket or possibly worse ............... For the next few years before we start drawing SS if we had more cash available outside the deferred accounts we could invest more of it to earn tax free dividends and spend down some of it to keep us in the 15% bracket. As it is we will instead be drawing some from the tax deferred accounts and paying higher taxes........................ should have rolled more from the tax deferred accounts into our Roth IRA accounts. We will probably this year while still in the 25% bracket move as much as we can without going into the 28% bracket.

If you will be in 25% bracket this yr w/ part yr income from DW who is retiring this yr, I assume that means that you were in higher bracket when both of you were working? If so, you did well by deferring taxes at that higher rate esp. if you were in 31% or above. The 0% on QDIV/LTCG is a nice thing to shoot for (assuming laws don't change) and you still have 10 yrs before RMDs kick in so why not do what you can within the 25% bracket w/ the Roth conversions. If you delay SS till 70, that would give you more room for the conversions. Paying the conversion w/ external funds is usually suggested so you can keep the conversion larger and (if younger) avoid the 10% early w/d penalty....since you're past the penalty phase, paying the conversion tax w/ internal IRA funds is not ideal , but perhaps better than not doing anything. You'd have to play w/ the numbers to see whether you can scrounge up extra funds from the TIRA w/d to do aftertax investing for dividends w/o raising the tax bracket. Perhaps your pensions are so good that you won't have much room.......kind of a nice problem to have.

 

[jclarksnakes]

If you will be in 25% bracket this yr w/ part yr income from DW who is retiring this yr, I assume that means that you were in higher bracket when both of you were working? If so, you did well by deferring taxes at that higher rate esp. if you were in 31% or above. The 0% on QDIV/LTCG is a nice thing to shoot for (assuming laws don't change) and you still have 10 yrs before RMDs kick in so why not do what you can within the 25% bracket w/ the Roth conversions. If you delay SS till 70, that would give you more room for the conversions. Paying the conversion w/ external funds is usually suggested so you can keep the conversion larger and (if younger) avoid the 10% early w/d penalty....since you're past the penalty phase, paying the conversion tax w/ internal IRA funds is not ideal , but perhaps better than not doing anything. You'd have to play w/ the numbers to see whether you can scrounge up extra funds from the TIRA w/d to do aftertax investing for dividends w/o raising the tax bracket. Perhaps your pensions are so good that you won't have much room.......kind of a nice problem to have.

DW is a teacher and will retire june 1st keeping us in the 25% bracket again this year. We accumulated quite a bit of our money in the deferred accounts back when we were in the 15% bracket. In retirement we will have quite a bit more money to spend than what we have been recently spending. Our mistake was that we just put a bit too much into the deferred accounts and will eventually be in the 28% bracket. You are right that this is a nice problem to have. But, did I mention that I HATE paying taxes? LOL

 

[Gumby]

More precisely, he rebuked a secretary’s query of “Don’t you hate to pay taxes?” with “No, young fellow, I like paying taxes, with them I buy civilization."


U.S. Supreme Court Justice Oliver Wendell Holmes

(as reported by Justice Felix Frankfurter in Mr. Justice Holmes and the Supreme Court, Harvard University Press, 1961, page 71)

 

[walkinwood]

Why? Our thinking is opposite - deal with the hideous, soul-sucking business of selling/moving after I retire and can be fully involved.

Or were you referring to situations where one's employer pays for a work-related move?

(Agree with your other recommendations, BTW).

Amethyst

I was thinking more in terms of the following:

Establishing a social/professional network. If you don't know anyone in the new city, it takes a lot to start a social network, get recommendations for doctors etc. Thanks to meetup.com and the two families we knew when we moved, we've done well in that area.

If you need a mortgage for the new house, having a job helps (if not essential).

There may be some benefits in finding health insurance too, but I'm not sure about that. Our plan to move to CO was dependent on our being able to get health insurance there.

And, you can have a year or so of actual spending data in your new location to make sure your planning is in line with reality.

 

[Meadbh]

I was thinking more in terms of the following:

Establishing a social/professional network. If you don't know anyone in the new city, it takes a lot to start a social network, get recommendations for doctors etc. Thanks to meetup.com and the two families we knew when we moved, we've done well in that area.

If you need a mortgage for the new house, having a job helps (if not essential).

There may be some benefits in finding health insurance too, but I'm not sure about that. Our plan to move to CO was dependent on our being able to get health insurance there.

And, you can have a year or so of actual spending data in your new location to make sure your planning is in line with reality.

+1

 

[Lcountz]

IF you know your retirement income, try to live on it for two years at least.

You will need to be truthful here-no cheating!!!!!

If you can, you are ready and able to retire.

If not, save more.

If you REALLY want to retire and your numbers don't add up, do what you can to make it work.

Buying new everything is nice, but if it means having to work for years and years more it is not worth it.....

I am starting week 3 of early retirement from a Megacorp...at 57 after 34 years....but I lived on my "pension" income for almost THREE years before I pulled the plug....I found I DID need some extra funds, but can take from my taxable pile until I either get SS or a possible inheritance. I will use the Taxable accounts til at LEAST 62, but dont plan to get SS til FRA or 70..

Good luck!!! IF you want it bad enuf you can do it!!!!

 

[Buckeye]

Good luck!!! IF you want it bad enuf you can do it!!!!

I think your statement is true with Obamacare and guaranteed medical coverage. I'm hoping many will now take the ER plunge and open up jobs for those who are desperately seeking them.

 

[sheehs1]

DW and I are both 60. I have been retired since 2009. She is retiring this year. We both have pensions. I HATE paying taxes and will do most anything to defer them till later. The biggest mistake we have made is that we put too much into tax deferred IRAs, 401s and 403bs and not enough into taxable accounts. The assumption early on in our journey to FI was that after retirement we would be in a lower tax bracket. Reality is that after we start collecting SS at 66 and RMDs at 70.5 we will likely be in the dreaded 28% tax bracket or possibly worse depending on whether rates go up over the next decade.. For the next few years before we start drawing SS if we had more cash available outside the deferred accounts we could invest more of it to earn tax free dividends and spend down some of it to keep us in the 15% bracket. As it is we will instead be drawing some from the tax deferred accounts and paying higher taxes. Did I mention that I HATE paying taxes. We could see this situation coming on several years ago and should have rolled more from the tax deferred accounts into our Roth IRA accounts. We will probably this year while still in the 25% bracket move as much as we can without going into the 28% bracket. Overall we are in fine shape with far more money available than we have been spending but better choices over the last few years would have put us into a better position in regards to taxes.

Along with some of the other replies, jclarksnakes, I get your other point here which is since you deferred so much, you don't have perhaps as much as you would like in a taxable account to throw off some tax free income. That income can be very helpful during market declines, surprises or as some percentage of "cash income" that is spendable.

I remember saying to my financial guy over 15 years ago that I wasn't sure I wanted to defer but so much of a percentage because I could not say without a doubt that my taxes would be lower in retirement (i.e. who knows what our government will do ). He actually agreed with me for reasons that pertain to my own situation.

At that time I was going against the grain. I deferred what I could but did not seek out other avenues to defer, such as annuities. Well...I take that back. Got talked into one. After the penalty phased, analyzed it and figured out they were paying me back with my own money. Cashed it out.

Everyone else was deferring as many dollars as possible, even into variable annuity vehicles once they maxed out everything else. Not only was it the "carved in stone advice", it was the holy grail for retirement. Remember

 

[haha]

Along with some of the other replies, jclarksnakes, I get your other point here which is since you deferred so much, you don't have perhaps as much as you would like in a taxable account to throw off some tax free income.

This puzzles me. By definition, income in a taxable account is taxable. Consequently, how can you throw off tax free income in a taxable account?

The only way I can think is that if one's income is low enough, some of this taxable income may not be taxed, as total reportable income is below the taxation threshold. Which is pretty low income, I would think too low to afford the kinds of lifestyles, homes, and travel and recreation that many here write about.

Ha

 

[Surewhitey]

Here's one for you. DW realized she "needed to w*rk" & I didn't...we came back to So Cal for 8-10 months to see if we "missed it". Now I'm going crazy to get back to FIRE and she's resolved to w*rk from home while living back in Mexico. We'll both do our part to cover monthly expenses.

FIRE is addictive and I would rather donate my time vs. full timing it again. If you think you'll want to "go back", you may find it hard to do.

Overestimate your monthly expenses just so you don't have to worry about them and monitor your first year together so you can prove it to all parties that it is not a problem to be where you are. We can live on $2k / mo, but plan on $2,500 just for travel back to visit or jaunts down to Belize or across the way to Cozumel...

We're 42 & 48 and are headed back to PDC, MX soon...woo hoo!

 

[jclarksnakes]

More precisely, he rebuked a secretary’s query of “Don’t you hate to pay taxes?” with “No, young fellow, I like paying taxes, with them I buy civilization."


U.S. Supreme Court Justice Oliver Wendell Holmes

(as reported by Justice Felix Frankfurter in Mr. Justice Holmes and the Supreme Court, Harvard University Press, 1961, page 71)

That is a great quote but I still HATE paying taxes.

 

[jclarksnakes]

This puzzles me. By definition, income in a taxable account is taxable. Consequently, how can you throw off tax free income in a taxable account?

The only way I can think is that if one's income is low enough, some of this taxable income may not be taxed, as total reportable income is below the taxation threshold. Which is pretty low income, I would think too low to afford the kinds of lifestyles, homes, and travel and recreation that many here write about.

Ha

Dividend income is taxed at 0% as long as total income does not exceed the top of the 15% bracket. I believe for 2013 the top of the 15% bracket for a couple filing jointly and taking the standard deduction is around 92K.

 

[haha]

Dividend income is taxed at 0% as long as total income does not exceed the top of the 15% bracket. I believe for 2013 the top of the 15% bracket for a couple filing jointly and taking the standard deduction is around 92K.

Somewhat less than that for 2012, but pretty close. I think a big part of it is that while an income in this ballpark is likely fine for a couple, 1/2 this might be tight for an individual. Quite a few of the expenses are cheaper for a couple, proportionately.

Also, at least in my life, I have never managed to have all my income be in whatever the favored category is that year.

Currently, my main problem in getting tax rates down is that once SS and RMDs begin, you are pretty well out of luck.

I do try to concentrate my interest paying investments in my IRA, but since almost 80% of my assets are taxable, that would mean that I would have very few fixed income investments, IMO not ideal when assets are fairly high priced.

I didn't by design wind up wth mostly taxable investments, it just happened as a result of how I made money, and what the laws were in those years. God bless some guy with a $3 or 4mm IRA or 401 K when he has to start withdrawals.

Ha

 

[ejman]

All things considered, I would absolutely love to be in the top tax bracket. What a nice problem to have.

 

[scrinch]

God bless some guy with a $3 or 4mm IRA or 401 K when he has to start withdrawals.

If she saved that much in an IRA/401k, then she was in high tax brackets when she deferred the income. So again, a good problem to have had for many years! You don't read about too many people starving because of being in the high tax brackets!

 

[cinman2000]

IF you know your retirement income, try to live on it for two years at least.

You will need to be truthful here-no cheating!!!!!

If you can, you are ready and able to retire.

If not, save more.

Problem in our situation is that we are projecting our expenses to go down about 50% over the next 6 years due to kids getting through college and becoming independent. I have a detailed breakdown of where they are going down, ie. cut food by 50% cut clothing by 50%, eliminate kids sports and allowance. I know 50% is a lot and it makes me uncomfortable without proving we can do it. But if I wait 6 years, we run the risk of ending up with way too much at the end of life. I think a part time job may be in the cards for me :-(

 

[Shawn]

All things considered, I would absolutely love to be in the top tax bracket. What a nice problem to have.

Then why did you decide to ER at age 52? Why wasn't it your plan to work full-time until age 80 or 85, thereby increasing the odds of eventually being in the highest tax bracket due to large investment returns and other payments (RMD's, dividends, capital gains, SS, pension, etc)? In reality, being in the top tax bracket may not be what it appears. If it is a nice problem to have, why did you choose ER over complete and total life-long dedication to your career?

While I understand the tongue in cheek humor, I often hear people make similar claims ... "I'd love to be in a high tax bracket" or "I wish I made a lot of money." But these statements are demonstrably false. Most people who ER choose less income and hence lower taxes. They choose ER over the stress, frustration, and pain that comes with additional work and income. What they really mean is, "I'd like to make a lot more money without any additional sacrifice on my part." Who wouldn't?

But there is no free lunch. I'm 53 and hope to ER this year. I currently have a solid income (not in the highest tax bracket) but this comes at a considerable price. I've taken only 12 days of vacation in the last 22 years. I've never taken a sick day. There has been only one day in the last two years when I haven't been in my office or on travel. That includes Christmas, Thanksgiving, and all other holidays. These have been personal decisions so I'm not in a position to complain. But I wouldn't ER if I enjoyed my work or enjoyed paying taxes. And when I ER, my total taxes will go from $65K/yr to under $10K/yr. Clearly, I want to pay less taxes, not more. I do not want to be in a high tax bracket.

 

[Ronnieboy]

Any regrets on pulling the trigger too late or too early? This info would be hugely helpful for us trying to decide in the next couple years. Thanks!

From what I have read over the years, most would say the biggest mistake was pulling the trigger too late.....

 

[Helen]

I've taken only 12 days of vacation in the last 22 years. I've never taken a sick day. There has been only one day in the last two years when I haven't been in my office or on travel. That includes Christmas, Thanksgiving, and all other holidays.

Wow, that is quite a record. Would you mind sharing what drove you to take so little time off? Did you own your own business?

 

[HighRoller]

I've only been retired for about a year now and so far no real surprises "except" that my medical insurance is about 50% higher than I expected. However, as many have said in similar threads, it's not a bad idea to have a good handle on your current spending. Tracking all your spending for a few years before retirement is a good idea but 5 or more years of tracking is probably better. Also, as others have indicated, if you have a lot in tax deferred accounts, you might want what to consider how to handle those accounts while in your 60s before you have to take RMD and be forced into higher tax brackets at 70 1/2. It's a nice problem to have but needs to be considered.

 

[ejman]

Then why did you decide to ER at age 52? Why wasn't it your plan to work full-time until age 80 or 85, thereby increasing the odds of eventually being in the highest tax bracket due to large investment returns and other payments (RMD's, dividends, capital gains, SS, pension, etc)? In reality, being in the top tax bracket may not be what it appears. If it is a nice problem to have, why did you choose ER over complete and total life-long dedication to your career?

While I understand the tongue in cheek humor, I often hear people make similar claims ... "I'd love to be in a high tax bracket" or "I wish I made a lot of money." But these statements are demonstrably false. Most people who ER choose less income and hence lower taxes. They choose ER over the stress, frustration, and pain that comes with additional work and income. What they really mean is, "I'd like to make a lot more money without any additional sacrifice on my part." Who wouldn't?

But there is no free lunch. I'm 53 and hope to ER this year. I currently have a solid income (not in the highest tax bracket) but this comes at a considerable price. I've taken only 12 days of vacation in the last 22 years. I've never taken a sick day. There has been only one day in the last two years when I haven't been in my office or on travel. That includes Christmas, Thanksgiving, and all other holidays. These have been personal decisions so I'm not in a position to complain. But I wouldn't ER if I enjoyed my work or enjoyed paying taxes. And when I ER, my total taxes will go from $65K/yr to under $10K/yr. Clearly, I want to pay less taxes, not more. I do not want to be in a high tax bracket.

As you pointed out, my reply was tongue in cheek and mostly directed at some comments re hatting to pay taxes. As to my decision to ER at 52, best decision I ever made. I took a year's sabbatical at age 40 to try to decide what to do with the rest of my working career, which I assumed then would be to age 65. What I discovered during my sabbatical is that I absolutely loved being in a sabbatical and doing my own thing without megacorp telling me what to do. I then redirected all my efforts to ER as soon as possible with enough to be comfortable. More money certainly would not have kept me working at megacorp any longer than I absolutely had to.

To be honest, I did not think much about taxes prior to ER (or after for that matter). I invested in something if I thought it made sense from an AA standpoint but did not time investments in the sense of trying to forecast what the tax rates will be in the future. I don't have a clue what the tax treatment of various investments will be 30 years from now (If I'm still around) for all I know we'll have a VAT in place of the income tax and then all current planning will be moot.

 

[Dawg52]

I retired 3/31/07. I guess my biggest mistake was my asset allocation. Although conservative by most people's standard here, it didn't pass the sleep test when the market crashed in early 2009. Luckily I did hang in there and made a few equity tweaks that enabled me to recoup my losses and then some. I have adjusted my AA over the last couple of years to allow me to sleep better but also have exposure to the market.

As far as retirement goes, no regrets what so ever. Hard to believe that my 6th year retirement anniversary date is fast approaching. Might have to drink an extra med or two to celebrate.

 

[obgyn65]

My main mistake has been working too hard most of my life. I have not had the time to enjoy my life.

Financially speaking, although I like my condo, buying it at the peak in 2008 was not my best move ever.

As a potential member of the class of 2014, I have a question for those of you well into your FIRE. What mistakes (if any) did you make in your planning the last couple years before FIRE? Any regrets on pulling the trigger too late or too early? This info would be hugely helpful for us trying to decide in the next couple years. Thanks!

 

[scrabbler1]

At times I kinda wish I had stayed in my rental apartment for one more year (1989). The real estate market took a dive in the next 12-18 months so I would have been able to buy a bigger apartment for the same money and would have saved up more in those 12 months to make the purchase easier.

In the early 2000s, I lost out on some of the skyrocketing company stock value by divesting myself of some of the shares when we were given permission to. At that time, my ER plans had not yet begun to gel. Also, at the time, we had some big companies such as Enron going bankrupt and taking their employees down with them who were heavilyinvested in company stock. So I wanted to diversify a bit more. The bond fund I put it into did not grow as fast as the compny stock did, costing me about $60k (before taxes) but that $60k is part of my IRA which mitigates the loss somewhat.