Limping to the finish line at 55

[SpinDoctorTX]

Wow I love this thread. I retired with considerably less that you, with the only advantage being I have 50/50 HC through our retiree program. THat has to bridge me for a further 6 years & the tie has been flying by.

Retire already. Don’t end up being the richest person in the graveyard. A good friend of mine is dying of cancer and is only 54 years old. It’s a good reminder that we all have an expiration date. Some sooner than others. If you have the money, which you do, why go into work everyday? Go out an enjoy your life, while you still can.

I couldn't say that better if I tried.

When you do talk to the VP, which I'm assuming is your boss's immediate boss, I'd throw your boss under the bus so hard. Let him know that he's the reason you're retiring early (and I probably wouldn't mention that your initial retirement date was not far off). Let him know how miserable he's made you. Who knows, maybe he's a problem for his boss too, and they're finding any reason to fire him. Or maybe they'll give a stern talking to him that might make life easier for his subordinates in the future. Once you leave, you'll still have coworkers left that will be stuck dealing with this butthead. Even if nothing is done, at least you would have tried to help them out. Just my thoughts from a guy who is over 20 years from retiring.

Prior to me pulling the plug I was being farmed out to pasture by our dept head and treated most disrespectfully by my new manager (one of her new hire minions who had no clue how to manage a team of analysts). I did have a talk with the Sr. VP (with whom I'd had a very good long term professional relationship) to let him know the reasons I had chosen to leave during my peak earning years. I'd made & saved a LOT of money for the company during that 14 years, and he knew my work well. He did offer to find me another position in a different department, but I told him that by then I was beyond done with corporate politics & had no desire to integrate into a new group at that point in my life. Fast forward one year. Bad manager fired (shocker, that). Fast forward again to a month ago (I'm almost 3 yrs retired) and the terrible dept head was demoted and shuffled off into a losing part of the company. Sometimes people to get their just desserts. I know I had a part in the elimination of the bad manager, and I like to think that I provided at least "another brick in the wall" leading to the demise of the dept. head.

You're very well set to enjoy the rest of your life. Why delay? Run, don't walk!

 

[Rianne]

See, I've never thought that way. I don't lack for anything. My house and car are paid for. I'm very well insured. I have hobbies, I travel some, and I eat well. I even (over)pay for cable! But I have well developed habits of clipping coupons, shopping for deals, and hunting for credit card rebates.

Maybe I'll put some money into home upgrades after I retire, which is pretty common. Turn part of the backyard into a garden. Certainly more travel. Health insurance is going to add at least $10K to the annual budget. I'm resigned to that.

I plan to pay myself a monthly paycheck into my checking account, the details of my "cash buckets" yet to be determined, so that my daily cash flow management (paying bills) won't change at all.

The major reason my budget is so low is that I'm single. Not supporting kids or grandkids or exes, etc.

You've covered all financial aspects of a great retirement. The only relationship mentioned is with your boss. Where are your friends/family/interests?

Ha, your situation reminds of the lyrics in this song:
"Well I'm heavenly blessed and worldly wise
I'm a peeping-tom techie with x-ray eyes
Things are going great, and they're only getting better
I'm doing all right, getting good grades
The future's so bright, I gotta wear shades
I gotta wear shades"
But you need a SO to share it with.

 

[LarryMelman]

Larry, I am also an Engineer who retired at 55 this May and plan to perform aggressive Roth conversions.

Thanks for the pointer. Yes, another incentive to RE is the need to do Roth conversions in the low brackets. I had planned to convert each year up to the top of the 12% bracket (which is an overall tax rate of 8.8% on on $52K of ordinary income in the 0, 10% and 12% brackets). However this has the nasty side effect of taking $52K of dividend income which would have been taxed at 0, and making it taxed at 15%. I was surprised to learn that, or rather surprised that there aren't articles warning about it. Unavoidable, I guess.

$50K (or whatever future brackets allow) a year for 15 years will hopefully make a sizable dent in my IRA balance.

How "aggressive" do you plan your conversions to be?

 

[SpinDoctorTX]

You've covered all financial aspects of a great retirement. The only relationship mentioned is with your boss. Where are your friends/family/interests?

Ha, your situation reminds of the lyrics in this song:
"Well I'm heavenly blessed and worldly wise
I'm a peeping-tom techie with x-ray eyes
Things are going great, and they're only getting better
I'm doing all right, getting good grades
The future's so bright, I gotta wear shades
I gotta wear shades"
But you need a SO to share it with.

What an awesome song by Timbuk 3... I'll have to dig out my old CD lol!

 

[fishfactory]

roth conversions

Larry, I plan to fill the 28% bracket every year. I met with a financial planner, and he said that ideally I would convert the entire IRA all at once, but that would deplete my after tax account too early (before age 59.5) to pay the taxes. His calcs indicate better to convert all no matter how big the tax bill, because paying tax even at the highest current bracket is worth buying out the gov't's continued tax claim on the compounded future gains.

For now, I will follow the i-orp software and rerun each year with fresh numbers. It calls for filling the 28% bracket for the next several years. I would be interested in hearing what you find when you put your info in the program (what tax brackets to fill).

 

[LarryMelman]

I'll do that and let you know. But there isn't a 28% bracket right now. 0, 10, 12, 22, 24, 32...

 

[RunningBum]

Larry, I plan to fill the 28% bracket every year. I met with a financial planner, and he said that ideally I would convert the entire IRA all at once, but that would deplete my after tax account too early (before age 59.5) to pay the taxes. His calcs indicate better to convert all no matter how big the tax bill, because paying tax even at the highest current bracket is worth buying out the gov't's continued tax claim on the compounded future gains.

That's hogwash. You don't want to convert at a higher rate now than you'd play later. Run it through a simple spreadsheet to prove it to yourself. I wouldn't meet with that planner again.

 

[fishfactory]

Runningbum, it depends on the assumed compounded rate of return of the IRA and the size of the IRA. The RMD's can be very large, well into the top bracket.
Larry, I meant 24%, not 28%.

 

[RunningBum]

Runningbum, it depends on the assumed compounded rate of return of the IRA and the size of the IRA. The RMD's can be very large, well into the top bracket.

because paying tax even at the highest current bracket is worth buying out the gov't's continued tax claim on the compounded future gains.

I don't buy it, unless your future tax rate is also at the highest bracket.

 

[fishfactory]

Runningbum, future tax brackets will likely be higher than current brackets. Also, income will go up with social security and pension in my case. I think many people will be surprised that they will be in the top bracket when time for RMDs. The financial planner is dealing with this with some clients who are facing RMD tax bills in top bracket. Larry is 55 years old with a substantial IRA balance. The untaxed compounding can be significant to age 70.5.
Each person's situation is different. I suggest the i-orp software to optimize (minimize) taxes. I think Bogleheads also has a software package for this, but I have not tried it.

 

[RobbieB]

Cobra was much cheaper that my bronze HSA plan.

 

[RunningBum]

That's not the reason he gave though, he said it was due to the compounded gains. For some this may be good advice, but it sounded like he's giving this as a general rule. Maybe I'm mistaken there, but if it's due to the high future tax rate, that should be given as the reason, not the compounded gains. The latter reason is flawed on it's own, unless you're assuming very large returns, which would also be a reason to distrust a planner.

 

[fishfactory]

Runningbum, here is an article discussing the issue :
https://wealthyaccountant.com/tag/rmd/

 

[fishfactory]

Runningbum, higher tax brackets and many years of compounding are both factors. There are multiple variables, so I have not found that a simple spreadsheet is an option. Also, it doesn't take large assumed returns to run into issues with RMDs. Returns of 7% when retiring at age 55 can result in RMDs in the top bracket. I too was skeptical until I ran the software scenarios. All I am suggesting is software can help (and it's free), as everyone's situation is unique, and you might be surprised to find the way to minimize taxes over the long run is to pay more up front with aggressive conversions. For my case, I assume 7% returns, and will need to completely fill the 24% bracket immediately to optimize taxes.

 

[RetiredAt55.5]

Runningbum, higher tax brackets and many years of compounding are both factors. There are multiple variables, so I have not found that a simple spreadsheet is an option. Also, it doesn't take large assumed returns to run into issues with RMDs. Returns of 7% when retiring at age 55 can result in RMDs in the top bracket. I too was skeptical until I ran the software scenarios. All I am suggesting is software can help (and it's free), as everyone's situation is unique, and you might be surprised to find the way to minimize taxes over the long run is to pay more up front with aggressive conversions. For my case, I assume 7% returns, and will need to completely fill the 24% bracket immediately to optimize taxes.

Not disagreeing about the RMD issue, but the article you referenced above has the money doubling every 7 years, which seems to be about 10% returns.

So, the 50 year old with 2M would end up with 8M instead of 16M, if 7% returns instead of 10%. The author is being very optimistic (or overselling his point).

 

[RunningBum]

Runningbum, higher tax brackets and many years of compounding are both factors. There are multiple variables, so I have not found that a simple spreadsheet is an option. Also, it doesn't take large assumed returns to run into issues with RMDs. Returns of 7% when retiring at age 55 can result in RMDs in the top bracket. I too was skeptical until I ran the software scenarios. All I am suggesting is software can help (and it's free), as everyone's situation is unique, and you might be surprised to find the way to minimize taxes over the long run is to pay more up front with aggressive conversions. For my case, I assume 7% returns, and will need to completely fill the 24% bracket immediately to optimize taxes.

Filling the 24% bracket makes a lot more sense to me than converting all as your planner said. Of course I don't know your situation, but for most people with substantial tax deferred, if you convert all at once, the majority of it will be at 35 and 37%, and then in retirement you might be back down to 24, 22 or even 12%. You're paying too much extra in taxes and it won't be overcome with the compounding your planner talked about.

Converting some, and smoothing the tax rate, is a better strategy, especially if you have years between retirement (no wage income) and taking any pensions and SS (income goes back up). It's better to fill those lower tax brackets every year than have one year in which you have a huge amount tax

People complain that i-Orp is overly aggressive with converting, but I'm at least partially in agreement with you that if you aren't aggressive, that tax deferred account keeps growing and your tax bracket later will be higher than you might think. Again, this can be modeled on your own if you don't trust the tools. Maybe it's not a simple spreadsheet, but it can be done.

 

[RunningBum]

Runningbum, here is an article discussing the issue :
https://wealthyaccountant.com/tag/rmd/

This article ignores the rate you are in when deferring. If you are a high wager earning in the top tax bracket, it probably still makes sense to defer as much as you can. Mr. Taxguy is only looking at the retirement end of the issue.

Looking only at the working end, you want to defer as much income as possible.

On the retirement end, you want as little in tax deferred as possible.

The goal is to optimize both ends throughout your life. The author isn't presenting this, he is only looking at the back end.

 

[RunningBum]

Heading off on vacation later today, so I won't be continuing this discussion.

 

[fishfactory]

Runningbum, I plan to do exactly as you state - fill brackets over several years vs complete conversion in one year. Have a good vacation.
Larry, my initial inclination was to only fill the 12% bracket until I used the software. Even assuming a 7% return, in my case, it makes sense to fill the 24% bracket.

 

[Montecfo]

Fishfactory,

I also find your advisor's advice curious. What is the differential in tax you are expecting to save?

And, importantly, how many years of RMDs does it take for that tax savings to at least equal the tax you are planning to pre-pay voluntarily through Roth conversions?

Curious, but I understand if you do not wish to share. I have same issue as you but not planning aggressive conversions to this point.

Runningbum, I plan to do exactly as you state - fill brackets over several years vs complete conversion in one year. Have a good vacation.
Larry, my initial inclination was to only fill the 12% bracket until I used the software. Even assuming a 7% return, in my case, it makes sense to fill the 24% bracket.

 

[RunningBum]

Runningbum, I plan to do exactly as you state - fill brackets over several years vs complete conversion in one year. Have a good vacation.
Larry, my initial inclination was to only fill the 12% bracket until I used the software. Even assuming a 7% return, in my case, it makes sense to fill the 24% bracket.

We're on the same page then. I still have issue with the way your planner framed his recommendation, if not his recommendation itself, which was apparently to do a full conversion if you had enough money for the taxes without depleting your taxable.

 

[LarryMelman]

I am still working, as we all know. I am funding a traditional 401k, and it defers taxes that would a) otherwise be in the 24% bracket, and b) allows an equal amount of qualified dividend income to drop below the threshold of the 3.8% Net Investment Income Tax. So I'm saving 27.8% federal tax. Before the recent tax changes, I was in the 28% bracket for most of the last 20+ years. Taking money out and paying 22-24% seems excessive. Especially if, before age 59.5, I would have to pay the tax from my taxable assets or else be penalized.

Although you make a good point, another 15 years of steady growth could result in a huge tax problem when MRD time comes. It seems like Roth-converting up to the top of the 12% bracket (currently $50K) every year will make a decent dent but I'm not accounting for any growth in the remainder. I will have to play with the planning tools that have been mentioned.

 

[fishfactory]

Montecfo, I don't have an advisor - I handle all personal finances myself. The advisor is someone I knew from my old job who took my personal info and ran a simulation using his firm's software. Since I am not a paying client, I did not get into all of the assumptions in the software, but this is a big name firm - not a mom and pop. Without getting into $ specifics, most of my assets are in tax deferred IRA, so compounding is an issue due to the balance being so high and so many years to compound from current age of 55. I will utilize i-orp and fill the 24% bracket it suggests, and rerun the program each year with fresh numbers.

 

[pb4uski]

The compounding argument is a fallacy..... a popular urban myth.

Let's say you have $10,000 in an IRA and are in the 22% tax bracket now and will be in the 22% tax bracket later.

Option 1.... do nothing... the $10,000 IRA doubles in x years due to investment returns to $20,000 at which point you withdraw the $20,000, pay $4,400 in taxes and have $15,600 left to spend.

Option 2... you convert to Roth and to make the comparison easy, pay the $2,200 tax out of the withdrawal, leaving $7,800 in the Roth....in x years it doubles to $15,600 which you can then spend.

Either way, all else being equal you only have $15,600 to spend.

Conversions are a tax play... clear and simple.... if your tax rate today is less than your tax rate later then it is better to convert now... if it is the same then it doesn't matter... if your tax rate today is more than your tax rate later (like you are still working) then defer converting until later.

If you pay the tax from taxable account funds then there is a minor second order benefit because you avoid paying tax on that after-tax money... but it is very minor. The real juice is from rate differences.... like my paying about 8% now on Roth conversions or tIRA whdrawals to the top of the 12% bracket vs 22% later.

 

[CardsFan]

Conversions are a tax play... clear and simple.... if your tax rate today is less than your tax rate later then it is better to convert now... if it is the same then it doesn't matter... if your tax rate today is more than your tax rate later (like you are still working) then defer converting until later.

... like my paying about 8% now on Roth conversions or tIRA whdrawals to the top of the 12% bracket vs 22% later.

I agree with you, in general. When retired, converting to the top of the 12% bracket is a no-brainer for most. We will likely be in a higher bracket (22% or more) by RMD time.

The question then becomes, does it make sense to convert into the 22% bracket, even if you expect to be there at 70? Right now, I can convert into the low end of 22% bracket, my effective tax rate on the total conversion would be about 16% (our taxes without conversion would be zero, so I look at the total tax divided by the conversion amount).

It is a nominal benefit, but a real one. And has more value when one of us passes, or if the SECURE act gets passed.

But I just have a hard time paying $20k in taxes, that are "optional".

Emotions are hard.