IRA RMD render SWR moot?

[hogwild]

I've been reading a retirement book and a chapter is about the RMD on conventional IRAs. The "Uniform Distribution Table" is included that tells you the divisor to use to determine the amount of your IRA you must withdraw for each year past the age of 70½.
I put these divisors into my retirement planning spreadsheet to show me my RMD thru age 90. I was surprised to see that, just the RMD alone, generated a SWR of an average of 4.87%, ranging from 3.5% at age 70 to 6.7% at age 90.
Needless to say, this is more income that I believe I will need and also puts me close to the 33% tax bracket.

Two questions:
1. Have you considered RMD in your retirement income planning?
2. Does FireCalc take RMD into consideration?

 

[LOL!]

You don't have to spend everything you withdraw. You can invest it instead if you want.

 

[hogwild]

Needless to say. But that doesn't answer the questions.

 

[bosco]

1. Have you considered RMD in your retirement income planning?
2. Does FireCalc take RMD into consideration?

1. Yes. It's in my spreadsheet. It is largely because of this that I think I will take my pension in a manner that provides accelerated payments up to age 66 and reduced thereafter.

2. No

 

[hogwild]

Bosco, that's what it is pointing to for me as well. I have the option to take my pension over a 10 year period and that looks to be the best option of the scenarios I've looked at that take RMD into account.

Also, previous to including the RMD factor, all the scenarios I ran indicated it was better to delay SS until full retirement age (66 for me). However, when I put in the RMD, it reverses that and shows I should take it at 62. The effect would be similar to taking the enhanced 10-year pension. You get more of your money out before the RMD begins.

As to FireCalc, I think this could be a big oversight.

 

[youbet]

RMD has no impact on SWR.  It does have an impact on taxes which impact your retirement budget as an expense item.

RMD requires you to transfer a percentage of your deferred portfolio account to your non-deferred portfolio account, paying tax (as ordinary income) on the amount transferred.

I agree that the tax expenses involved must be accounted for in retirement planning.  But FireCalc is not intended to be a tax planning tool. 

 

[hogwild]

youbet,
I agree with you to a point.  However, RMD does impact SWR in my cast at least.  When RMD starts, my SWR goes to zero from that point forward.  However, as I stated earlier, the RMD exceeds the pre-RMD SWR.

As to FireCalc, I don't understand how you can do a financial plan without including taxes.  Taxes have a huge impact.

 

[youbet]

RMD does impact SWR in my cast at least. 

OK, but I think you are twisting the definition "SWR."  For me, at least when using FireCalc, SWR means the percentage of your intital portfolio that can be withdrawn, inflation corrected, over a specified time period and given a specified investment allocation.  Moving funds from deferred to non-deferred at 70.5 yrs old changes nothing other than generating a tax expense that must be accounted for.

 

[unclemick]

Goggle up ORP or The Opimal Retirement Planner.

I play games with this one a lot as one who has a lot in trad IRA.

You gotta dink around with it a little to get a feel for what's programed into their rules but it gives you a feel for your tax situation. Change the extected return, when you plan to croak, tax rates, amount of estate, etc.

Far from perfect - I guess their crystal ball doesn't read the cap gains buried in my taxible account.

At least it gets you to thinking.

ORP and FireCalc - I like em both.

heh heh heh

 

[samclem]

hogwild,

In your situation, can you save $$ by doing partial conversions from your conventional IRA to a Roth RA every year, taking care to keep below the higher tax bracket you are trying to avoid?

This is a a common technique. Once the bucks are in a ROTH you have lots of flexibility.

Observation: If I make 90, taking a 6.7% annual withdrawal as required under the RMD rules will probably seem pretty conservative.

 

[SteveR]

Two questions:
1.  Have you considered RMD in your retirement income planning?
2.  Does FireCalc take RMD into consideration?

1. Yes-- the projected future income streams (and taxes) have been dialed into my income plans and that is one reason I will start withdraws on the largest IRA as soon as I retire.  The others will continue to grow until RMDs.  I have projected 6% annual growth and with the max. RMDs, I will have a constantly increasing income stream until I am dead.  My income "issues" are the first 10-15 years of ER; not the next 20+ due to the RMDs.

2. Defer this to the "experts" here.  I-ORP does account for RMDs but I am not sure how FIRECalc addresses them other than lumping them in with After tax $$ for the overall SWR income stream.

 

[hogwild]

In your situation, can you save $$ by doing partial conversions from your conventional IRA to a Roth RA every year, taking care to keep below the higher tax bracket you are trying to avoid?

Excellent point!  I believe that has been recommended by other authors I have read as well.  They have recommended that one convert enough of your conventional IRA to Roth to take you up to the limits of the 15% tax bracket.  I have not analyzed that, but it seems like it makes sense.

 

[hogwild]

Excellent point!  I believe that has been recommended by other authors I have read as well.  They have recommended that one convert enough of your conventional IRA to Roth to take you up to the limits of the 15% tax bracket.  I have not analyzed that, but it seems like it makes sense.

I just realized that won't work for me.  Perhaps the limits of the 25% bracket would work.

 

[heyyou]

For a moment, forget marginal tax rates and look at the effective tax rate, i.e. tax paid divided by gross income.  Due to exemptions and deductions, at the TOP of the 15% bracket, you are paying less than 11% of your gross.  Try the numbers at the top of the 25% bracket, coverting T-IRA to Roth IRA is going to be a good deal.  Watch out for income limits on CONVERTING to Roth that are different from income limits on CONTRIBUTING to a Roth.  Caveat about Flat Tax, but Roths would be grandfathered or it won't pass.
Fairmark.com is a good source for info on Roth conversions.  Scott Burns has written extensively about the "torpedo tax" due on large TIRAs.
I expect to delay SS while converting more TIRA to my RIRA.  Those exemptions and deductions are indexed to some inflation measure, accuracy of which is a different thread.
Joe

 

[donheff]

Keep in mind that a ~4% SWR is 4% of the initial portfolio. In worst case scenarios (a prolonged bear market) when you get into your late 70s or 80s you could easily be withdrawing more than 4% of the then current portfolio due to inflation and portfolio depletion. Thus the RMD might end up close to or less than the planned SWR. Under good scenarios your portfolio has groen by leaps and bounds. In that case the RMD may be more than you need but so what - invest it.

 

[JohnP]

1. Yes
2. No

We're retired with pensions and tax-deferred accounts. I use I-ORP and Rustic23's analyses to understand retirement money flow. In our case, the pensions mean that it doesn't make sense to do a IRA to Roth conversion because we would be paying taxes at a high rate several years before we'd have to face the music associated with the RMDs.

In your case, you may want to rethink taking the accelerated 10 yr pension if it impacted IRA to Roth conversion or paying taxes earlier that desired.

It's good to think-out these trade-offs before ER...

JohnP

 

[cute fuzzy bunny]

I hope to heck my biggest problem is being in my 70's and having too much income and that forcing me to pay more than I want to pay to the feds...

 

[d]

forget marginal tax rates and look at the effective tax rate

a very important point.  when putting $ into a tax advantaged plan (or when switching to a ROTH vehicle), it's the marginal rate which needs to be watched, but when taking RMDs, it's the effective rate that if of concern. (or something like that.  all of which just adds to the confusion.)

hope to heck my biggest problem is being in my 70's and having too much income and that forcing me to pay more than I want to pay to the feds...

but better to avoid paying more than necessary if it can be avoided.

 

[SteveR]

I hope to heck my biggest problem is being in my 70's and having too much income and that forcing me to pay more than I want to pay to the feds...

I can't do Roths because of current income level. I rolled over two 401ks into 2 IRAS and they have been getting some decent returns over the past 4 years. Even with an expected return of 6% (conservative in my opinion) the potential income from RMDs for these will put me in the 33% bracket in my early 70s and into the top bracket 10 years later. I realize it is a good problem to have but tax avoidance is a key planning criteria for ER. If my plan works out...I will have no need for even half the income.

Conversion to a Roth would create a tax issue for me too so I see no reason to do so. The plan is to start taking out as much as I need to live on from one of the IRAs to draw it down and to create the needed income stream. It won't create enough income alone but with my after tax and paying off the mortgage it should work out. We will also be rolling over two other 401ks into IRAs next year. These will be much much smaller but left untouched until age 70.5 they will still generate significant RMDs over time. So...we plan to spend as much as we feel comfortable with over the next decade...while keeping an eye on the balances and adjust accordingly.

According to annual 6% return projection....we would have a RMD income of over $300K/year at age 85. That will buy a lot of Depends and Viagra.

 

[rmark]

Heres my plan -

Divide after tax fixed pensions and mixed portfolios annually over IRS life expectancies, spending part and reinvesting the rest, thus adjusting fixed pensions for past inflation and matching conservative withdrawals to required minimum distributions of 401k type plans

I'm just using the RMD as the withdrawal rate.

 

[youbet]

According to annual 6% return projection....we would have a RMD income of over $300K/year at age 85.  That will buy a lot of Depends and Viagra.   

SteveR:

I think I recall from another one of your posts that you are in your mid-fifties.  That would make 85 about 30 years away from now.  For my retirement budget, which just began last Friday, June 30, I project I will need a little over $300K annually in 30 years to lead a decent retirement lifestyle.  I assumed 4%inflation.  $300K sounds like a lot today, but 30 years from now it's what a retired couple will need to live a decent retirement lifestyle...........  

Don't ya feel for folks who don't account for inflation in their planning? If they live very long, they're in for a big surprise!

 

[d]

potential income from RMDs for these will put me in the 33% bracket in my early 70s and into the top bracket 10 years later

as "youbet" suggests, did you "inflate" the tax brackets?

 

[LOL!]

Right now I'm not too worrried about the RMD and being in the 33%+ tax bracket. Don't forget that the exemptions and standard deduction are indexed to CPI or something like that. By the time I need to withdraw $300K RMD, exemptions will be worth $100K each and the standard deduction will have grown to $1.5Million.

 

[SteveR]

as "youbet" suggests, did you "inflate" the tax brackets?

I just assumed that with universal healthcare, universal welfare, and universal elder daycare, we will have by then we will be paying taxes of at least 60% so inflating todays tax brackets will not be a useful exercise. The whole tax structure will have to change to pay for all the new stuff over the next 30 years. Anybody remember the Great Society programs and the taxes from that? I see another wave of that coming in the not so distant future.

 

[spideyrdpd]

You could buy some houses and have the depreciation lower your tax basis.

Its interesting that since the goverment already has a killer debt problem how they can even think of all these new programs.
Most people keep saying the dollar will have to be deflated inorder for us to keep paying on the debt.
I think its scary trying to think of what things will cost or what taxes will be. Although maybe the next einstein has already been born that will solve out energy crisis and usher in a new golden age ?