72t for the spouse?

[dtbach]

Planning on retiring in about 18 months at 60, DW will be 55. Have 13 year old twins. Assets approx. 1.5M, w/ 35% taxable and 65%IRA.

I will have a Navy pension that will pay out approx 15K first 3 years then 30K after that (paying back a previous buy out). In addition, in 3 years the mortgage will be paid off. In another 3 years will start taking SS.

The problem is, income from stock dividends and pension will be rather small in the first 5-6 years, which is exactly the time we want to do some extensive travel with the kids, do some landscaping, etc. while we are still young. By 2019, pensions and SS will pretty much pay for all living expenses (and are COLA protected).

So we want to access all our funds( i.e. DW doing a 72t) and take out a bit more aggressive the first 5-6 years (like maybe 5%). After than we can throttle back to perhaps 3.5% from then on.

Does this sound like a good plan? I know from reading here that it is risky to pull too much money out in the early part of retirement, but on the other hand, the kids and us are only young once and would like to take advantage of doing stuff early on.

 

[bizlady]

We are pulling a bit more out early to carry us til 59.5 and for planned vacation in 2012, and built our plan that way. We are not using the 72t however, as we have funds to hold us until then.

My concern would be still having a mortgage, 2 - 13 year olds, health insurance and taxes.

Have you run Firecalc and your numbers? There is too little info in your post to say if it sounds good or not....

 

[dtbach]

We are pulling a bit more out early to carry us til 59.5 and for planned vacation in 2012, and built our plan that way. We are not using the 72t however, as we have funds to hold us until then.

My concern would be still having a mortgage, 2 - 13 year olds, health insurance and taxes.

Have you run Firecalc and your numbers? There is too little info in your post to say if it sounds good or not....

Health care will be covered by my Navy Pension. What have I left out that needs to be covered? Yes, I've run some Firecalc but it doesn't cover getting mortgage paid off, etc (Unless I don't know how to run it correctly).

 

[jimnjana]

You need to check on 72t rules. Thought withdrawal percentage was based on age didn't think you could adjust it. You should be able to withdraw from your TSP w/o penalty, why not do that?

 

[dtbach]

You need to check on 72t rules. Thought withdrawal percentage was based on age didn't think you could adjust it. You should be able to withdraw from your TSP w/o penalty, why not do that?

I'm not sure what a TSP is. My DW and I have IRA's, ROTH IRA's, Stocks and Bonds and my Navy pension. The idea for the 72t was so that my DW at 55 could get some $ from her IRA's without tax penalty. I'm not sure I want to deplete some "buckets" faster than others, would prefer to siphon some assests out of all the buckets over time.

 

[jimnjana]

I'm not sure what a TSP is. My DW and I have IRA's, ROTH IRA's, Stocks and Bonds and my Navy pension. The idea for the 72t was so that my DW at 55 could get some $ from her IRA's without tax penalty. I'm not sure I want to deplete some "buckets" faster than others, would prefer to siphon some assests out of all the buckets over time.

TSP = Thrift Savings Plan

 

[dtbach]

TSP = Thrift Savings Plan

Must have been after my time. Is that a Fed Civilian thing? I don't remember ever hearing of such a thing in the military. We didn't have a contributionary plan when I was in.

 

[jdw_fire]

Planning on retiring in about 18 months at 60, DW will be 55. Have 13 year old twins. Assets approx. 1.5M, w/ 35% taxable and 65%IRA.

I will have a Navy pension that will pay out approx 15K first 3 years then 30K after that (paying back a previous buy out). In addition, in 3 years the mortgage will be paid off. In another 3 years will start taking SS.

The problem is, income from stock dividends and pension will be rather small in the first 5-6 years, which is exactly the time we want to do some extensive travel with the kids, do some landscaping, etc. while we are still young. By 2019, pensions and SS will pretty much pay for all living expenses (and are COLA protected).

So we want to access all our funds( i.e. DW doing a 72t) and take out a bit more aggressive the first 5-6 years (like maybe 5%). After than we can throttle back to perhaps 3.5% from then on.

Does this sound like a good plan? I know from reading here that it is risky to pull too much money out in the early part of retirement, but on the other hand, the kids and us are only young once and would like to take advantage of doing stuff early on.

it is difficult to give a quality/comprehensive answer when we dont know 1) what your expenses will be in retirement and 2) what and when your income sources will be.

however, here is a plan. i would prefer not to use a 72t unless i had to, therefore i suggest you consider:

1) putting off taking SS until you are 70 (this will maximize this COLAed "annuity" and i am assuming that your SS will be larger than your wife's)

2) for any income you need over your pension between the day you retire and the year your wife turns 59.5 use taxable funds and your TIRA. during this time, if it looks good from a tax standpoint, convert as much of your wife's TIRA (and some of yours if your income/expense picture supports it) to roths.

3) for any income you need over your pension between the year your wife turns 59.5 and you turn 70 use all funds except roths. if your wife has earned SS on her work record (i am still assuming that yours is larger) start taking hers when she turns 62. also continue to convert TIRAs to roths as is appropriate wrt taxes.

4) start taking your SS at age 70.

however, if your wife's SS, based on her work record, is larger than yours then you would alter the above plan by starting yours when you are 62 yo and delay the start of her until she turns 70.

 

[clifp]

I mostly concur with JDW's plan

It sounds like you have a 4.5 year gap between when you retire and your wife is eligible to withdraw her IRA money penalty free. It probably makes sense for you guys to start withdrawing money from your IRA in order to take advantage of the relatively low tax bracket you'll be in. A 15K pension plus the interest and dividends from a ~500K taxable portfolio is pretty small. However, I don't see any reason not to withdraw money from your IRA (and possible do roth conversions with hers as JDW suggests).

Why do you want to go through the hassles of setting up a 72(t) for her IRA as opposed just taking the money from hers?

 

[jimnjana]

Must have been after my time. Is that a Fed Civilian thing? I don't remember ever hearing of such a thing in the military. We didn't have a contributionary plan when I was in.

Guess so, didn't realize you were out in 99. Nowadays Military and Civil Service can contribute, essentially a 401k.

 

[dtbach]

I mostly concur with JDW's plan

It sounds like you have a 4.5 year gap between when you retire and your wife is eligible to withdraw her IRA money penalty free. It probably makes sense for you guys to start withdrawing money from your IRA in order to take advantage of the relatively low tax bracket you'll be in. A 15K pension plus the interest and dividends from a ~500K taxable portfolio is pretty small. However, I don't see any reason not to withdraw money from your IRA (and possible do roth conversions with hers as JDW suggests).

Why do you want to go through the hassles of setting up a 72(t) f
or her IRA as opposed just taking the money from hers?

I didn't realize they were such a hassle.

 

[clifp]

I didn't realize they were such a hassle.

I haven't set one up, just read over the years posting by the guy behind 72t.net. I don't think they are horribly hard to set up, but they aren't something that typical employee of financial institution has much or even any experience with administrating. They aren't particularly flexible and the IRS penalties for making a mistake are draconian IMO. They are very valuable in some situations. In fact just this week, I urged my friend who has been out of work for 2.5+ years and just started tapping his IRA to use a 72(t) rather than taking the 10% penalty.

However, 72(t) are much more complicated than simply withdrawing money from traditional for anybody over the age of 59.5. So why take the risk?

 

[jdw_fire]

I mostly concur with JDW's plan

It sounds like you have a 4.5 year gap between when you retire and your wife is eligible to withdraw her IRA money penalty free. It probably makes sense for you guys to start withdrawing money from your IRA in order to take advantage of the relatively low tax bracket you'll be in. A 15K pension plus the interest and dividends from a ~500K taxable portfolio is pretty small. However, I don't see any reason not to withdraw money from your IRA (and possible do roth conversions with hers as JDW suggests).

Why do you want to go through the hassles of setting up a 72(t) for her IRA as opposed just taking the money from hers?

thank you for your support of my plan however i am not seeing where your suggestion is any different than mine. all i can find in your post is as follows:

I mostly concur with JDW's plan
...
However, I don't see any reason not to withdraw money from your IRA (and possible do roth conversions with hers as JDW suggests).
...

however i also suggested that if needed, from the start of his retirement, he use funds from his TIRA as needed for expenses and if reasonable for roth conversions.

2) for any income you need over your pension between the day you retire and the year your wife turns 59.5 use taxable funds and your TIRA. during this time, if it looks good from a tax standpoint, convert as much of your wife's TIRA (and some of yours if your income/expense picture supports it) to roths.

i think it is important to get as much money as you can out of your TIRAs and into roths while also trying to do tax bracket leveling across your lifetime. this means more TIRA conversions/withdraws when you have lower other taxable income. also, this will take some guess work as to future tax brackets but it is probably not a bad bet that tax rates will only go up from here.

did i miss some point you were making that didnt agree with what i said?

 

[jdw_fire]

I didn't realize they were such a hassle.

not just a hassle but they also limit your flexibility. and if your TIRA investments drop like a rock, they can force you to deplete your TIRA. (as well as what clifp said)

 

[clifp]

did i miss some point you were making that didnt agree with what i said?

No only disagreement is that we don't have enough info health and earnings history to make a recommendation about when to take SS. For the generic case of older higher earning man it make sense to wait till 70 to take SS, not sure this would be true in the OPs case. Everything else makes sense.

 

[jdw_fire]

No only disagreement is that we don't have enough info health and earnings history to make a recommendation about when to take SS. For the generic case of older higher earning man it make sense to wait till 70 to take SS, not sure this would be true in the OPs case. Everything else makes sense.

i do agree that we dont have enough info and i said that

it is difficult to give a quality/comprehensive answer when we dont know 1) what your expenses will be in retirement and 2) what and when your income sources will be.

but it sounds like you are saying that the "when to start taking SS decision" depends on how much the SS payment will be. i disagree as it is scalable. the increase in SS you get by waiting is the same percentage, no matter what the actual amount is. i did cover the question of who's is higher, saying that the 1 with the higher SS should be the 1 who waits till age 70.

 

[dtbach]

i do agree that we dont have enough info and i said that

but it sounds like you are saying that the "when to start taking SS decision" depends on how much the SS payment will be. i disagree as it is scalable. the increase in SS you get by waiting is the same percentage, no matter what the actual amount is. i did cover the question of who's is higher, saying that the 1 with the higher SS should be the 1 who waits till age 70.

Health is good (relatively, i.e. do have heightened BP, but otherwise fine), so is DW health. I am 5 years older than DW and do have the higher earnings. So far we have about 250K transferred into Roth and I'd like to get another 50-75K moved over. I can see where if it is not a hardship, to wait until 70 for my SS, since both of my parents lived into their 90's

 

[jdw_fire]

Health is good (relatively, i.e. do have heightened BP, but otherwise fine), so is DW health. I am 5 years older than DW and do have the higher earnings. So far we have about 250K transferred into Roth and I'd like to get another 50-75K moved over. I can see where if it is not a hardship, to wait until 70 for my SS, since both of my parents lived into their 90's

i see you are providing more info but the kind of info i am interested in is 1) a detailed projection of your expenses in retirement (along with a bit of an explanation as to how you arrived at it) including what your mortgage payment is, how much extra you are planning on spending on travel in the early years, how many years you want to spend this extra on travel, how much & when you plan to spend on landscaping and any other unusual expenses you forsee, 2) projected SS for both you and your wife (based on her work record) at both ages of 62 and 70, 3) size of your TIRA, your wifes TIRA, your roth ira and your wifes roth ira, 4) total cash (including in iras) available, and 5) any other sources of income.

remember, our analysis/advice can only be as good as the data we use (i.e. the data you give us)

 

[dtbach]

Will get something out to you by tonight

Thanks

 

[dtbach]

i see you are providing more info but the kind of info i am interested in is 1) a detailed projection of your expenses in retirement (along with a bit of an explanation as to how you arrived at it) including what your mortgage payment is, how much extra you are planning on spending on travel in the early years, how many years you want to spend this extra on travel, how much & when you plan to spend on landscaping and any other unusual expenses you forsee, 2) projected SS for both you and your wife (based on her work record) at both ages of 62 and 70, 3) size of your TIRA, your wifes TIRA, your roth ira and your wifes roth ira, 4) total cash (including in iras) available, and 5) any other sources of income.

remember, our analysis/advice can only be as good as the data we use (i.e. the data you give us)

OK, I get the message and agree you can't give advise on minimal info so
1) expenses in retirement. Right now we have about 4500/month expenses, including $1600 mortgage, $250 utilities, $1000 insurance (home, auto, health), $650 food, and the remaining $1000 for gas, clothes, etc. Toss in an extra $6000 a year for auto repair, dining out, etc. and we get to about $60K/year. For retirement (Mar 2013), I'd like to figure on $85K/year since we will have more time to travel. I'd like to buy an RV so would add on $12K/year in payments for that, 1 cruise a year at $7K and add $6K for additional travel costs and some hobbies. I would plan on 10 years of this in early retirement.

At retirement, I start getting a Naval Pension of approx. $15K/year. I would also get the Tricare health which is about $600/year (that saves about $9000/year in health insurance). The mortgage is paid off in 2016, and at the same time my Naval Pension jumps to $29K/year w/ COLA increases thereafter.

2) SS for me at 62 is $1700/mo, 66 is $2190/mo and 70 is $2930/mo. SS of DW is 62= $835/mo, 66.5 = $1120/mo and 70=$1445/mo

3/ My TIRA= $590K, Roth= $130K; DW TIRA= $251K, Roth=$101

4) Total cash avail at ER (my TIRA and ROTH, plus taxable accounts) = $1195K

5) Summary, 2013-2016 income is $15K Naval Pension plus income from #4
After 2016 $29K Naval Pension, no mortgage.

Other info: 2015 I'm 62, 2019 I'm 66 and DW is 62, 2021 DW is 66.5, 2023 I'm 70.

Let me know if other info is needed. I really appreciate the advice here.

 

[jdw_fire]

OK, I get the message and agree you can't give advise on minimal info so
1) expenses in retirement. Right now we have about 4500/month expenses, including $1600 mortgage, $250 utilities, $1000 insurance (home, auto, health), $650 food, and the remaining $1000 for gas, clothes, etc. Toss in an extra $6000 a year for auto repair, dining out, etc. and we get to about $60K/year. For retirement (Mar 2013), I'd like to figure on $85K/year since we will have more time to travel. I'd like to buy an RV so would add on $12K/year in payments for that, 1 cruise a year at $7K and add $6K for additional travel costs and some hobbies. I would plan on 10 years of this in early retirement.

At retirement, I start getting a Naval Pension of approx. $15K/year. I would also get the Tricare health which is about $600/year (that saves about $9000/year in health insurance). The mortgage is paid off in 2016, and at the same time my Naval Pension jumps to $29K/year w/ COLA increases thereafter.

2) SS for me at 62 is $1700/mo, 66 is $2190/mo and 70 is $2930/mo. SS of DW is 62= $835/mo, 66.5 = $1120/mo and 70=$1445/mo

3/ My TIRA= $590K, Roth= $130K; DW TIRA= $251K, Roth=$101

4) Total cash avail at ER (my TIRA and ROTH, plus taxable accounts) = $1195K

5) Summary, 2013-2016 income is $15K Naval Pension plus income from #4
After 2016 $29K Naval Pension, no mortgage.

Other info: 2015 I'm 62, 2019 I'm 66 and DW is 62, 2021 DW is 66.5, 2023 I'm 70.

Let me know if other info is needed. I really appreciate the advice here.

thank you for the more complete picture. first, a few comments on your expenses. 1) the way you stated them i am concerned you are guesstimating some instead of having actually tracked your expenses. hopefully i am mistaken about this. 2) i see no income taxes in your expenses which means your true expenses will be higher. 3) i also see no expenses for college for your children. if you are planning on funding any of this you should add it to your expenses analysis.

my next concern is does your pension have survivor benefits for your wife? if the answer to this is no then i wouldn't use her retirement accounts for your expenses. you should still convert her TIRA to her roth (paying the taxes with other funds) but save them for her as a kind of insurance policy. seeing as you have both a higher SS and the pension you would be ok if she dies before you. oh BTW, this is another good reason for you to put off taking your SS till you are 70, it will increase the amount of SS she gets if you die first.

all that being said, it looks like you are good to go at the expense level you stated (and even higher) and except for the change i made above (re. your wifes TIRA) my earlier advice holds on how to fund it. i would definately not do a 72t with your wifes ira!

 

[dtbach]

thank you for the more complete picture. first, a few comments on your expenses. 1) the way you stated them i am concerned you are guesstimating some instead of having actually tracked your expenses. hopefully i am mistaken about this. 2) i see no income taxes in your expenses which means your true expenses will be higher. 3) i also see no expenses for college for your children. if you are planning on funding any of this you should add it to your expenses analysis.

my next concern is does your pension have survivor benefits for your wife? if the answer to this is no then i wouldn't use her retirement accounts for your expenses. you should still convert her TIRA to her roth (paying the taxes with other funds) but save them for her as a kind of insurance policy. seeing as you have both a higher SS and the pension you would be ok if she dies before you. oh BTW, this is another good reason for you to put off taking your SS till you are 70, it will increase the amount of SS she gets if you die first.

all that being said, it looks like you are good to go at the expense level you stated (and even higher) and except for the change i made above (re. your wifes TIRA) my earlier advice holds on how to fund it. i would definately not do a 72t with your wifes ira!

jdw, I appreciate the response. I don't track our expenses down to the penny but our expenses per month at this point are about +/- $100 of $4500/mo. I added $6K as a cushion for the unpredictable car repairs, house expenses, etc. Also, taxes will take their cut and we will have to live with what is left. We can do that.

The Naval Pension does have a survivor benefit and the $ amount I quoted was after paying the premium. As far as a SWR, should I figure it on the whole amount, even though we are just withdrawing it from my IRA and taxable funds? i.e. Total is about $1500K, so at 4% we should be able to take out $60K/year? This would give us $75K/year. I might take out an extra $10K for the first 3 years (a 4.7% rate) and then throttle back to a 3.5% rate after since I will gain about $25K w/ pension and lack of mortgage.

This is also about the time the kids will go to College. I have approx. $15K each put away in a Fidelity College program for each. Will try to encourage one to go military first LOL! I figure if they work and we contribute $5K each a year we can work it out.

Hopefully I'm being realistic here. Taking a bit of a chance early on but life is risky anyway. At worst, Pension and SS will cover the basics if armagedon happens. . . .

 

[clifp]

I think you are in in good shape. You withdrawal strategy is pretty straightforward take money from your traditional IRA when you retire. If you have any room left in the 15% tax bracket (it looks dicey since your gross income will be 85K and the bracket ends at 70K) than convert a small amount of DW IRA to a Roth.

After you retire you'll have some time to look at the college situation. In general colleges expect a higher contribution from a families taxable assets than IRAs. So this may encourage to spend down your taxable assets first. I'd also think long and hard about taking out a loan for the RV, I would think in almost every scenario you'd better either buying it with cash, or even doing HELCO while you are still working.

 

[jdw_fire]

jdw, I appreciate the response. I don't track our expenses down to the penny but our expenses per month at this point are about +/- $100 of $4500/mo. I added $6K as a cushion for the unpredictable car repairs, house expenses, etc. Also, taxes will take their cut and we will have to live with what is left. We can do that.

The Naval Pension does have a survivor benefit and the $ amount I quoted was after paying the premium. As far as a SWR, should I figure it on the whole amount, even though we are just withdrawing it from my IRA and taxable funds? i.e. Total is about $1500K, so at 4% we should be able to take out $60K/year? This would give us $75K/year. I might take out an extra $10K for the first 3 years (a 4.7% rate) and then throttle back to a 3.5% rate after since I will gain about $25K w/ pension and lack of mortgage.

This is also about the time the kids will go to College. I have approx. $15K each put away in a Fidelity College program for each. Will try to encourage one to go military first LOL! I figure if they work and we contribute $5K each a year we can work it out.

Hopefully I'm being realistic here. Taking a bit of a chance early on but life is risky anyway. At worst, Pension and SS will cover the basics if armagedon happens. . . .

taxes can be a big expense so just letting them take their cut and you adjusting could be a hardship on you, however when i looked at your numbers i multipled your projected expenses by 1.1 to help compensate for your lack of including taxes in your expenses.

i am thinking you are getting too hung up on a SWR. over an 11 year period you are expecting your expences to go from $85k down to just under $41k (in constant dollars). if you do wait to start your SS at age 70 (like i suggested) then when your expenses get down to $41k your income, just from your pension and SS, will have gone up to just under $82k. therefore, as long as you have faith in the US government to continue paying those, at that point you wont be withdrawing, you will be accumulating. so your assets only have to support 10 years of WDs. when i ran your numbers (with your expenses being 10% larger than you said) i only used your TIRA to make up the difference between your expenses and your income and after that 10 years there was still money left in your TIRA. when a person's income and expenses change greatly (in real terms) over their retirement the analysis is more about cash flows than about SWRs. just take the withdraws you planed and watch your investments so they dont take a big hit. since you are going to use your assets more in the near future than later on in life you should probably be more heavly invested in cash, cash eqs, and short term bonds. all you really need these investment to do is keep up with inflation.

i am thinking you arent taking much of a chance here. have you rerun your numbers starting SS as i suggested? i think it would be comforting for you. as i said above, when you start taking SS (at age 70) your pension plus SS will be about twice your projected expenses then.

 

[dtbach]

taxes can be a big expense so just letting them take their cut and you adjusting could be a hardship on you, however when i looked at your numbers i multipled your projected expenses by 1.1 to help compensate for your lack of including taxes in your expenses.

i am thinking you are getting too hung up on a SWR. over an 11 year period you are expecting your expences to go from $85k down to just under $41k (in constant dollars). if you do wait to start your SS at age 70 (like i suggested) then when your expenses get down to $41k your income, just from your pension and SS, will have gone up to just under $82k. therefore, as long as you have faith in the US government to continue paying those, at that point you wont be withdrawing, you will be accumulating. so your assets only have to support 10 years of WDs. when i ran your numbers (with your expenses being 10% larger than you said) i only used your TIRA to make up the difference between your expenses and your income and after that 10 years there was still money left in your TIRA. when a person's income and expenses change greatly (in real terms) over their retirement the analysis is more about cash flows than about SWRs. just take the withdraws you planed and watch your investments so they dont take a big hit. since you are going to use your assets more in the near future than later on in life you should probably be more heavly invested in cash, cash eqs, and short term bonds. all you really need these investment to do is keep up with inflation.

i am thinking you arent taking much of a chance here. have you rerun your numbers starting SS as i suggested? i think it would be comforting for you. as i said above, when you start taking SS (at age 70) your pension plus SS will be about twice your projected expenses then.

I'll try to wait until 70 ("if you do wait to start your SS at age 70 (like i suggested)") but I have this nagging feeling that at that point, SS will be means tested and I might get only half of the published number. I think this could be a real possiblity and perhaps those who say, "get it while you can" might be onto something. Regardless, I'll have at least 7 years to watch things before pulling the trigger.

As far as expenses, heck, I want to take as much as I "reasonably" can from my assets. I think I can easily figure out what to do with any "extra"

I'll run a number of scenarios in firecalc to see what happens.

Again, thanks for your thoughts and suggestions!