Help Requested with Withdrawal Strategy

[connor77]

Could use some advice with a withdrawal strategy...
My wife and I hope to completely punch out next year and have approx $1.8m in our traditional IRA's and $800k in a taxable account. Also have approx $200k in i-bonds and cash. No debt. I'll be 57 and she'll be 59 come January of 2024 if that's relevant. No pensions or any other forms of income. Some might remember a recent thread of mine where I considered cashing out which I have not done. I have, however, put about 300k into short'ish term CD's earning 4.5% or better.

Our Vanguard advisor - a few years ago - suggested that we exhaust our taxable account completely before touching our IRA's but a couple of people have suggested this is not a good idea.
We plan to take SS as soon as we are able (~63 YO). We'll invest whatever we don't need.
Is there a simple strategy that I could/should be following in terms of withdrawing? Perhaps there is an existing thread someone could direct me to that answers some of my questions?
Separately, someone suggested the Fidelity site for retirement planning and I've plugged my info in and it looks like we'll be okay. When playing around with the numbers if I change my asset allocation to be heavier in bonds (moving $ from stocks to bonds) it improves the odds of us doing better. In other words, we'll run out of money 3 years later. This has got me to thinking that maybe I should be selling, albeit slowly, some of my "winners" and investing in CD's that are paying 5% or slightly more for both safety and because rates are attractive now.

Is there some recommended reading I should be looking for? I know that Healthcare will be a big consideration for us which I'm still reviewing.
Thoughts? TIA...

 

[SecondCor521]

On whether I have enough, I use http://firecalc.com.

On asset allocation, I use http://firecalc.com and the Investigate tab.

On asset placement, I use https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

On when to take Social Security, I use https://opensocialsecurity.com.

On withdrawal strategies, it ends up being highly situational, but I like https://www.kitces.com/blog/tax-eff...-strategies-to-fund-retirement-spending-needs

On health insurance, I use a Bronze HSA qualified HDHP with a Fidelity HSA and the Fidelity 2% cash back Visa. But health insurance and health care can also be highly situational.

 

[pb4uski]

Missing a key piece of information... how much do you need annually for spending?

Since you have so much in tIRAs, I would use as much of those as you can at low tax rates as soon as you are able to withdraw penalty free to try to reduce them before RMDs start when you are 72....at least to the top of the 0% qualified dividends/LTCG tax bracket. That is $89,250 for MFJ for 2023 but goes up a little each year. Plus $27,700 of standard deduction means you can have income of $116,950 in 2023 and remain in the 12% tax bracket for ordinary income like tIRA withdrawals and 0% for preferred dividends and LTCG.

So for example, if your only income in 2023 was $116,950 of tIRA withdrawals after 59-1/2 then your tax would be $10,270 (8.8%) leaving you with $106,680 to spend on state income taxes and living costs.

If you need more for spending you can use some taxable account cash. If you don't need that much for spending you could withdraw what you need for spending and do Roth conversions for the remainder.

 

[connor77]

Missing a key piece of information... how much do you need annually for spending?

Shoot...Sorry, missed that info. Ideally, $120k a year will allow us to live comfortably. We could, however, reduce that considerably if the stock market or economy forces us to and still be fine. Like $75 to $80k.

 

[pb4uski]

Does that $120,000 include federal and state income taxes or is it just living expenses?

Assuming it includes income taxes, I would consider taking tIRA withdrawals once your DW and/or you are over 59-1/2 and can do penalty free withdrawals to the top of the 0% preferred dividend/lTCG tax bracket, supplemented by taxable account withdrawals to the extent that the aforementioned is insufficient to cover your spending.

So your target for 2024 would be the top of the 2024 0% capital gains tax bracket plus the 2024 standard deduction (both will be announcedate 2023) less any taxable account interest or dividend income.

And as previously indicated for 2023 that would be $116,950 - any taxable account interest or dividend income. Then use $3,050 of cash and you'll have $120,000, less federal and state income tax would be available for spending on living expenses.

 

[Kork13]

Very simplistic withdrawal strategy could use a few buckets of money. I'm simple minded, and this is my general intention for a plan.

(1) Living expenses. 18-24 months of annual spending held in a cash savings account.
(2) Mid-term expenses. ~5 years expenses held in laddered CDs and/or T-Bills. I'd ladder them to have a portion mature every 3-6 months, to make the proceeds more accessible.
(3) "The rest". 15+ years' expenses held in mostly-stock MFs.

Use SS for as much of your expenses as it will cover, using bucket 1 to cover the difference. As you draw down from bucket 1, you refill it from either bucket 3 (if stock markets are up) or bucket 2 (if not). The refills could be done quarterly or semi-annual.

That would put you into a roughly 60/30/10 -esque AA profile, which should balance accessibility, stability, and sustained long term growth. For you, maybe that looks like $200k in cash, $600k split between 10x 5yr CDs/T-Bills (staggered to mature every 6mo), and $1.2M in stock MFs. As for taxable vs. IRAs, I'd primarily use the IRAs (taxed as straight income) but pull from taxable (taxed lower as LTCG & dividends) as needed to manage your tax bill.

As I said, it's very simplistic mindset, but as such, easily manageable. Most complex bit would be deciding how to balance taxable vs. IRA withdrawals to manage your taxes.

 

[connor77]

Does that $120,000 include federal and state income taxes or is it just living expenses?

Yes, it includes all expenses (discretionary and essential) and state and federal taxes.

Thanks for your help as always.
I hope you're in VT doing some skiing by the way! I'm in Maine and Sugarloaf has been fantastic recently

 

[pb4uski]

I wish. DW tweaked her knee a few years ago just before a planned trip to Colorado for skiing, so no more skiing for us. Until a few years ago I had a long streak of skiing at least once a year since I was 6 years old. Overbvb the years we had season passes to Sugarbush, Stowe, Bolton Valley or Burke/Jay Peak and DW was an instructor at Sugarbush for a few years. I miss it. DW is off on a trip in March and I'm tempted to fly to Vermont for a few days of skiing but my long time ski buddy is hardcore and I'm afraid I would do something stupid and hurt myself trying to keep up with him.

 

[connor77]

I wish. DW tweaked her knee a few years ago just before a planned trip to Colorado for skiing, so no more skiing for us. Until a few years ago I had a long streak of skiing at least once a year since I was 6 years old. Overbvb the years we had season passes to Sugarbush, Stowe, Bolton Valley or Burke/Jay Peak and DW was an instructor at Sugarbush for a few years. I miss it. DW is off on a trip in March and I'm tempted to fly to Vermont for a few days of skiing but my long time ski buddy is hardcore and I'm afraid I would do something stupid and hurt myself trying to keep up with him.

Too bad. Sorry to hear about DW's knee. Bolton Valley was the first mountain I ever skied. Loved it.

Of course I want to encourage you to fly to VT because the skiing is great now. Similar circumstances for me...my skiing buddy is 10 years younger than me. We ride up to the mountain together and then agree to meet at the car at a specified time. I can't keep up with him and won't try. I have come to grips with really enjoying the blue groomers!

 

[pb4uski]

Pretty much the same for me, I like the blues, especially the steeper pitches. I also like the black diamonds, especially if they are occasionally groomed or slightly bumpy, but my knees can't take the big bumps anymore.

I remember what to do and the mind says go... and the legs say no... especially after 50-100 yards.

 

[ivinsfan]

IMO you are not asking the most important question, which is the HC question. Deep dive into that and then figure out your retirement income sourcing. How much actual cash do you have? You'll probably use an assortment of cash, taxable and tax deferred to hit a target income for ACA. I'd reconsider the SS at 63 you can pull money out of tax deferred to meet your income target and continue letting the SS grow. Are the CD's in after tax account...that works for funding income as well.


Once the two of you go on Medicare take another look at your income sources. I don't think you want to know what it costs to insure to almost 60 years old at rack rate...by which I mean you DO want to know..

 

[SnowballCamper]

Kitces article does a good job of exploring the complexity involved, but leaves me wondering what to do in my particular situation. I found the following calculator to be one of the most useful things I've found in the forum. https://www.i-orp.com/Plans/index.html

It has a couple limitations with respect to medical insurance purchased on the govt. exchange and NIIT, but handles my situation of higher than average pension income quite well.

Good Luck.

 

[connor77]

IMO you are not asking the most important question, which is the HC question. Deep dive into that and then figure out your retirement income sourcing. How much actual cash do you have? You'll probably use an assortment of cash, taxable and tax deferred to hit a target income for ACA. I'd reconsider the SS at 63 you can pull money out of tax deferred to meet your income target and continue letting the SS grow. Are the CD's in after tax account...that works for funding income as well.


Once the two of you go on Medicare take another look at your income sources. I don't think you want to know what it costs to insure to almost 60 years old at rack rate...by which I mean you DO want to know..

No doubt I'll need to be extremely strategic in getting to an ACA friendly income...To answer your question, we have $160k in CD's in our IRA's and $200k in CD's in our taxable account. I may do what's been suggested and build a ladder of CD's in our IRA's by selling some equities on up days.

I'm sure I'll be spending the next few months learning how to actually execute against all of this.

 

[pb4uski]

Yes, if you plan on ACA subsidies before Medicare at age 65 then it is a whole different scenario... you can still use tIRA withdrawals to generate some of the income you need to get ACA subsidies but if you overdo it then you will fall off a cliff and may need to pay back the advance premium care credits that you received during the year.

 

[connor77]

Yes, if you plan on ACA subsidies before Medicare at age 65 then it is a whole different scenario... you can still use tIRA withdrawals to generate some of the income you need to get ACA subsidies but if you overdo it then you will fall off a cliff and may need to pay back the advance premium care credits that you received during the year.

I'm not certain we'll go the ACA route but this is surely the least expensive avenue for insurance. We're still looking at all of our options. I do know that if we don't use the ACA, we'll be paying a lot per month for insurance. Probably around $2k or maybe more.

 

[SecondCor521]

@pb4uski is mentioning IRA withdrawals.

Generally speaking, a Roth conversion will be taxed identically to an IRA withdrawal if you're over 59.5. But a Roth conversion will be taxed strictly better if you are under 59.5 because it will avoid the 10% early withdrawal penalty.

Also, a Roth conversion has the added benefit that any unspent amounts end up in your tax-free Roth rather than in your taxable accounts.

So I would only do an IRA withdrawal for amounts that I know I will spend and once I am over 59.5.

 

[connor77]

@pb4uski is mentioning IRA withdrawals.

Generally speaking, a Roth conversion will be taxed identically to an IRA withdrawal if you're over 59.5. But a Roth conversion will be taxed strictly better if you are under 59.5 because it will avoid the 10% early withdrawal penalty.

Also, a Roth conversion has the added benefit that any unspent amounts end up in your tax-free Roth rather than in your taxable accounts.

So I would only do an IRA withdrawal for amounts that I know I will spend and once I am over 59.5.

We have no plans to convert our tIRA's to Roth IRA's . I'm not convinced that it makes sense for us to do so. Also, no plans to withdraw from our tIRA's until we are able to do so with no penalty.

When we withdraw from our IRA's we will do so because we either need the money and/or because we should for tax reasons.
I haven't ruled out getting help from a fee based planner but I have some time still to get educated about best strategies. Will also utilize the retirement calculators that have been mentioned in this thread and others.

 

[pb4uski]

One thing I considered and just haven't got around to doing yet is to do low-tax cost Roth conversions as I described above and then just withdraw from the Roth tax-free as needed for spending. That way, if in a particular year we don't spend as much as planned then the excess is in the Roth. We are probably a few years away from exhausting our taxable accounts and then I'll start SS so I'm not sure if I'll ever be withdrawing from our Roth (unless we decide to move to TX before selling FL).

 

[ivinsfan]

No doubt I'll need to be extremely strategic in getting to an ACA friendly income...To answer your question, we have $160k in CD's in our IRA's and $200k in CD's in our taxable account. I may do what's been suggested and build a ladder of CD's in our IRA's by selling some equities on up days.

I'm sure I'll be spending the next few months learning how to actually execute against all of this.

Cash in an IRA does not serve the same function as after tax cash in regards to ACA income....I'm sure you already knew that..200k is a nice chunk to spread out for ACA.