Delaying SS OR take IRA distributions early

[Independent]

This assumption could sabotage your retirement plans. The real longevity risk is not that you both live to 100. The real risk is that one of you (probably the wife) lives to 100 and the other one dies early. Instead of two SS incomes and a low tax rate, suddenly the survivor has one SS income and a high tax rate. Look at the tables for single vs married joint and you will see what happens. Although the cost of living goes down slightly when there is just one, this is probably equalized by the loss of one SS income. There are the same RMDs, so the survivor now is probably taxed on their SS as well as paying at the higher rate.

When running our portfolios through the different planners, this is the case that forces the survivor to pay huge taxes. Maximizing roth conversions to lower the RMDs is definitely important. It is also important to make sure spending assumes this worse case scenario. You don't want to spend too much early on assuming taxes will not eat away at your savings and then the worse happens and the surviror is stuck paying away their savings in taxes.

I can't stress enough how important this assumption is!

My planning assumption is that the cost of running the house stays the same (assuming my wife stays in the house after I'm gone). All other expenses are cut in half.

Sure, she would pay more taxes. But, in our situation, her spending would drop by more than the taxes would go up.

 

[RetiringAt55]

My planning assumption is that the cost of running the house stays the same (assuming my wife stays in the house after I'm gone). All other expenses are cut in half.

Sure, she would pay more taxes. But, in our situation, her spending would drop by more than the taxes would go up.

But SS income has dropped as well. So income is less and taxes are more.

In addition, non-housing expenses would probably not be cut in half. Food is probably more than half as there may be more waste. In retirement, you may have assumed one car for you both to share. So transportation may stay the same. Travel is more expensive as a single person. I suggest people actually run both the budget numbers and the tax numbers.

 

[jclarksnakes]

RetiringAt55 is making some very good points here. Some of us have done our retirement planning without adequately looking at what may happen after one spouse is gone.

 

[Options]

I use a fairly simple spreadsheet to keep track of the cases year by year. It includes a column for tIRA balance, tIRA withdrawals, SS income (from our annual SS reports), total income from the last two, taxes to be paid on that, after-tax income, how much of after-tax income is moved to the Roth and Roth balance. On a second page, I look at each year, with columns for SS, income from tIRA (100% taxable), and the income tax calculated for the total income. (Deductions are assumed to be the same in all cases.) The amount of tIRA withdrawn is incremented in successive rows in even steps.

This is really helpful, but can you explain what you mean by the last sentence?

The income tax for each case is calculated using the tax prep software. The last column calculates the marginal % tax rate between steps.

Again, can you explain what you mean by "between steps?"

This column tells me when to stop withdrawing from my tIRA each year. That info goes back to the first page (manually). On the first page again, when the tIRA is exhausted, the deficit in the inflation-adjusted after-tax income is made up by withdrawing from the Roth. I sum all the income taxes paid to age 100. I then look at the balances of the tIRA and Roth at 100 years

This process not unlike something that ORP does, although probably more accurate and reliable, would you agree?

The simple answer is that the payoff for converting tIRA to Roth is big, especially if it can be done before RMDs start at 70.5. I looked at withdrawals from the tIRA to the top of the 0%, 15% and 25% tax brackets. I am still checking my calcs, but it looks like the more I convert and the earlier I convert, the better. What happens in the first 10 years makes a big difference.

Agreed. I'm definitely leaning towards converting to Roth from ages 60-70 (retiring end of next year at 59 1/2)

There are several cases where we lose to inflation (can't maintain 3% increase in after-tax income until 100) and where we run out of money in the tIRA and Roth accounts well before 100. Typically, this warns me that we are starting with too high a draw.

Can you please explain how you run out of money when you used Firecalc to estimate initial expenses and success rate? Is it because you ran numbers in Firecalc excluding taxes?

The big attraction for me is that potentially we could have zero taxable income and be freed from making quarterly payments or even filing. We could be protected from many possible future tax increases and rules. Of course, they could always tax Roths, but I suspect that other things would happen first.

Again, do not be discouraged. It is not as hard as you may think.
[/QUOTE]

Yes, it's sounding less "taxing" all the time (sorry, I couldn't resist)...

 

[Ed_The_Gypsy]

This assumption could sabotage your retirement plans. The real longevity risk is not that you both live to 100. The real risk is that one of you (probably the wife) lives to 100 and the other one dies early. Instead of two SS incomes and a low tax rate, suddenly the survivor has one SS income and a high tax rate. Look at the tables for single vs married joint and you will see what happens. Although the cost of living goes down slightly when there is just one, this is probably equalized by the loss of one SS income. There are the same RMDs, so the survivor now is probably taxed on their SS as well as paying at the higher rate.

When running our portfolios through the different planners, this is the case that forces the survivor to pay huge taxes. Maximizing roth conversions to lower the RMDs is definitely important. It is also important to make sure spending assumes this worse case scenario. You don't want to spend too much early on assuming taxes will not eat away at your savings and then the worse happens and the surviror is stuck paying away their savings in taxes.

I can't stress enough how important this assumption is!

Your warning is welcomed, but it addresses a separate subject. One of us is certain to die first, and before 100, of course. This will happen in every case. The assumption of living to 100 will not sabotage our retirement plans because we are going to have zero taxable income after the conversion is completed, having eliminated everything in our tIRA so no RMDs. The big hit would come if, for example, one of us dies before we finish converting the tIRA to Roth. In that case, the survivor finishes the conversion as fast as possible and takes the tax hit early.

Remember this is an investigation into which strategy to choose today, comparing strategies on a common basis.

Your statement

Maximizing roth conversions to lower the RMDs is definitely important.

is the crucial point in ALL cases, as I have just proved to myself.

The biggest threat to us is Congress eliminates the right to convert, or taxes Roth distributions or taxes SS directly instead of indirectly. Congress has a way of eliminating options that are legal when people actually start to use them (for example, the free loan from restarting SS).

 

[Ed_The_Gypsy]

Never say NEVER Lots of economists believe taxing labor and using the tax code to influence behavior is inefficient and hurts job creation.

"NEVER!"

I agree totally with the economists, but Congress only listens to economists when the economists tell them how to increase revenues, usually by sneaky taxation (e.g., the Tax Torpedo--thank you, David Stockman ).

Two changes would supercharge this economy:
1) A flat income tax.
2) Eliminating income tax on corporate earnings.
Neither one will ever come to pass in this universe.

 

[RunningBum]

This assumption could sabotage your retirement plans. The real longevity risk is not that you both live to 100. The real risk is that one of you (probably the wife) lives to 100 and the other one dies early. Instead of two SS incomes and a low tax rate, suddenly the survivor has one SS income and a high tax rate. Look at the tables for single vs married joint and you will see what happens. Although the cost of living goes down slightly when there is just one, this is probably equalized by the loss of one SS income. There are the same RMDs, so the survivor now is probably taxed on their SS as well as paying at the higher rate.

Some good points, but as a single person I look at this the other way. What is the impact if I was to get married? I don't assume a slight increase in the cost of living at all, unless we were to live life very simple and not travel much, eat out, go to events that cost money, etc.

 

[dtbach]

I didn't try modeling it, beyond looking at what would happen if I left my IRA untouched and delayed SS to age 70 as longevity insurance (for my wife; remember how benefits interact.) With it untouched, and adding in distributions from taxable accounts, SS was heavily taxed. If I tapped the IRA from 59 1/2, then with taxable distributions I could still keep taxable income quite low, run down the IRA, and keep most of SS tax-free past age 70.

So that's the plan for me.

That is pretty much my plan. I am also most likely to get a nice inheritance which will really get me into a higher tax bracket. But there are worse things than paying a lot of taxes. . . .

 

[meierlde]

Never say NEVER Lots of economists believe taxing labor and using the tax code to influence behavior is inefficient and hurts job creation.

Possibility 3 of course is that Congress decides that "rich" people who own Roth IRAs should have to pay tax on them anyway. It is legislation after all, which can be changed. I would expect when the deficit hits the $30 - $40 Trillion range that they will be looking for more revenue and hitting retirement accounts will be easier than hitting Social Security, but who knows.

Still over 20 years out for me until RMD, so I am taking the bird in the hand vs. betting on the future and maxing out all current tax deductible options. If anything is left after that I hit a ROTH to hedge my bets some.

The first thing will be to provide RMD for any inherited Roths, based upon the originators age, and do the same thing for regular IRAs/Roths. Prevent perpetuates since the retirement vehicles are supposed to be for the originator. As suggested you would take the age of the originator and make that the value used for the RMD. The treatment of IRAs that came in during the 2000s where the clock is reset on inheriting the IRA/401k does give a big advantage to those who inherit allowing 2 to more generations of tax free growth.

 

[walkinwood]

ESPlanner does a good job estimating the living standard of the surviving spouse. While the absolute values may be suspect, there is good value in comparing various scenarios.

 

[Independent]

But SS income has dropped as well. So income is less and taxes are more.

In addition, non-housing expenses would probably not be cut in half. Food is probably more than half as there may be more waste. In retirement, you may have assumed one car for you both to share. So transportation may stay the same. Travel is more expensive as a single person. I suggest people actually run both the budget numbers and the tax numbers.

"Waste"? In our household, my wife and I eat different things for most meals. Sometimes we share. Any leftovers go in the fridge or freezer and get eaten later.
Travel for one is more than 1/2 the cost of travel for two. But, I'm the traveler in the family. If I weren't here, she'd prefer to stay home.
We have two cars. Most of our in-town driving is separate. And, frankly, that's not much money. She would save about 1/2 our combined in-town expense as soon as she sold my car.

OTOH, if world travel is a big chunk of your budget, and the surviving spouse would continue to travel, while not sharing expenses with a friend or relative, that would need to be covered.

You're correct, people should look at their actual spending patterns, note exactly what they spend, and make their own estimates. I think I've done that for us, and for planning purposes, the estimate I made seems valid.

 

[Animorph]

The single spouse passing was the toughest scenario for our retirement finances. Housing, HOA, utilities, communications, landscaping, house cleaning, pool, repairs and improvement expenses stay the same. That's the majority of our common expenses. We get rid of one car, half the groceries, eating out, medical, and travel, though some of those won't cut a full half. We lose one SS benefit out of two that are close to equal, and maybe half that in a non-COLA pension. Taxes go up to the single rates. And most likely DW survives me and hasn't bothered to pay attention to the financial stuff I've been trying to impart to her. It was definitely worse for us than both of us living past 100. Obviously it depends on your specific circumstances.

 

[BigFoot48]

+1 re probably seeking professional help. Losing my mind around estimating taxes due to RMD's and desire to delay SS to 70. Already have more than $2 of every 3 in after tax accounts, with a bit of that in roth. Considering tIRA to roth conversions from age 60-70. And spreadsheets? They are not my friend...

I created an easy to use Excel model for analyzing the Roth conversion decision, and it includes RMD calculations and tax calculations. A link to it on Bogleheads can be found in my profile.

 

[Options]

I created an easy to use Excel model for analyzing the Roth conversion decision, and it includes RMD calculations and tax calculations. A link to it on Bogleheads can be found in my profile.

I just looked at it and I love it. Will definitely use it when I start conversions next year. Great tool!

 

[BigFoot48]

I just looked at it and I love it. Will definitely use it when I start conversions next year. Great tool!

Glad you like it! My plan is to update it for 2014 tax rates etc. in January, so look for a new version then.

 

[Z3Dreamer]

Maximum OMAGI is a rounded $62,000. Personal Exemption & Standared Deduction is a rounded $22,000. If your OMAGI includes some SS that is only partially taxed, you will have taxable income of about $35,000. This leaves about $37,000 of the 15% bracket on the table, which equates to a tax cost of $3,700. But it saves you almost $10,000 in PPACA credits.

So a plan could be to convert to Roth (up to 15% maximum) while still qualifying for PPACA. Then when the magic SS dates of 62, 66 and 70 hit remodel.