Funding ER in Your 50s, and Inherited IRA Questions

[googily]

Hey, all--

I have some questions about funding ER starting at 51 and specifically about good strategies for dealing with an inherited IRA. I am expecting to no longer work full-time after the end of this year.

I have about $300k in a taxable account at Vanguard (VTSAX, VTIAX, and Intermediate-Term Tax Exempt). I also now have an inherited IRA worth about $800k. My overall asset ratio, including my 401k and personal IRA, is about 70/30 stocks.

A generous estimate of my annual spend is about $80k (nearly double my fixed expenses). It's possible I may work part-time at my same Megacorp for a few more years (maybe making, I dunno, $50k?), mainly to keep health care. I already receive about $11k from DH's pension (non COLA). I do not have any terribly expensive hobbies, though travel will probably be a big portion of it (and traveling comfortably, since I'd be alone for a lot of it).

In another eight years, my own 401k and IRA will be available (currently together worth about $600k). I will also have my own non-COLA pension at 65 for about $25k. And I'm assuming I'll have SS, probably starting with my survivor benefits and then switching to my own, which will be in the neighborhood of $20k-$30k/year (current value) depending on whether I start early or wait.

On the inherited IRA, the RMDs will start next year at about $26k. It's about 60% invested in Wellesley and the rest in VTSAX. (spouse was 55 at death, btw)

My thought had been that the inherited IRA should be touched as little as possible, other than the RMDs, even though I can withdraw from it without incurring the 10% penalty. My spreadsheet seems to indicate that the RMDs will remain pretty low, relatively speaking, for the early years.

So:

* Should I be making more of an effort to withdraw from the inherited IRA beyond the RMDs and reinvest the money into my taxable account? I ask this because I've read people talking about how gains in IRAs are just then taxed as ordinary income when you withdraw, versus at CG rates as the gains are distributed in a taxable account. Is it just all about the tax brackets when considering how to handle this?

* Should I not bother reinvesting dividends in the inherited IRA, and use those to fund the RMDs?

* Should I then reinvest the dividends in the taxable account? (I had figured I would just let those go to the settlement account, either for expenses or for rebalancing.)

I have no direct heirs, and my mortgage is about $2,100 a month in a very HCOL area (yay for buying and holding!), and I don't intend on selling the house soon, but there's a pile of equity in it as well. I have no other debt.

I recognize that I am in a very good position despite being in a very bad position, so to speak. I have no desire to leave a huge estate for nieces and nephews and cats , but of course since I am now on my own I need to be mindful of perhaps having to spend a large chunk in my later years on assisted living, nursing care, etc. Or around-the-world cruises if I find myself still very healthy at 80!

If this were you, what would you do? I'm interested in all ranges of opinions.

Thanks.

 

[exnavynuke]

First question- Have you plugged your numbers into FIRECalc etc to see the likelihood of success for starting ER when you currently plan to? Also, does your $80k figure include paying OOP for full health insurance costs?

At $80k spend and $300k in your taxable accounts, you're going to have to get some of the money for the first 8 years elsewhere. I-ORP is pretty good at helping you to see what could be the "optimum" places to withdraw money when.

 

[Johanson]

First question- Have you plugged your numbers into FIRECalc etc to see the likelihood of success for starting ER when you currently plan to? Also, does your $80k figure include paying OOP for full health insurance costs?

At $80k spend and $300k in your taxable accounts, you're going to have to get some of the money for the first 8 years elsewhere. I-ORP is pretty good at helping you to see what could be the "optimum" places to withdraw money when.

She has an inherited IRA of $800K she'll be taking RMDs on starting next year too.

 

[Yachi]

Agree with putting your numbers into fireCalc. You have:
$300,000 in taxable account
$800,000 in inherited IRA
$600,000 in 401(k)/IRA

$11,000/yr in non-COLA pension
$25,000/yr in non-COLA pension starting in 2031.

Using the 4% withdrawal convention, you should be able to withdrawal $68,000 per year from your investment accounts, added to the $11,000 pension would leave you with $79,000. You would have $104,000 in 2031.

Your pensions payments will slowly lose value, so that would be my concern about this plan. You can tap your 401(k) and IRA using the 72(t) exemption if you need to. You just have to establish and stick to a withdrawal plan.

 

[RunningBum]

I second the recommendation to try i-orp, and see what it recommends. I haven't used it enough to know how trustworthy it is, but it can give you an idea. Or if you understand how everything is taxed, come up with a spreadsheet for your situation.

If possible, I'd try to keep your IRA distribution + cap gains & divs from taxable - exemptions & deductions just under the 15% cap, so that those cap gains & divs are not taxed. In other words, you might be able to take more than your RMD out of the IRA at 15%. However, if you go over the 15% bracket for this total, you start pushing LTCGs and Divs into being taxed, such that every extra dollar is taxed at 30% (15% for the IRA distribution + 15% dividend tax).

This is probably not going to be possible while you are working. Your working income + RMD probably already puts you out of the 15% bracket so all of your divs are taxed. You might want to take out of the IRA up to top of the 25% bracket, especially if you'd be paying more than that once you take pensions + SS. The best idea is usually to level out taxes over your lifetime, which is what I think i-orp tries to do for you.

Another caveat is whether you need to control income to get an ACA subsidy once you stop working. It's uncertain whether that will even continue, but if you go with the assumption it will, you may want to pull out larger chunks out of your IRA now, so that you have more cash set aside to live on and to reduce future RMDs.

I wouldn't reinvest dividends in either the taxable or the IRA. If you really want to invest more in those holdings, you can still choose to buy more, but there is no reason to automatically do it if you need the cash for living expenses. Even if you don't need it to live on, you can use those funds to rebalance, as you said.

 

[googily]

I second the recommendation to try i-orp, and see what it recommends. I haven't used it enough to know how trustworthy it is, but it can give you an idea. Or if you understand how everything is taxed, come up with a spreadsheet for your situation.

Thanks for this and for your entire post, definitely the type of info I was looking for. (FWIW, FireCalc is dandy with my numbers.)

I make over $100k right now, and I actually think it's highly unlikely I'll go right to zero work next year, because I think my full departure would put folks in a real pinch and I think we can work out some sort of part-time agreement--though I think any decent part-time salary would knock me out of the 15% bracket immediately. (and I don't think I'll tell them to pay me less )

Given that this year will be one more year of married filing jointly (and my own full salary), I wonder if I have a window to take more out of the IRA to, in essence, match what DH's salary would have been for this year.

i-orp has scared me in the past, but maybe with a more targeted type of information to be seeking this time, it might help.

I'm guessing that it will be tough for me to get below the 15% bracket in retirement.

 

[pb4uski]

I would think it will be easy for you to get in the 15% tax bracket early in retirement. The top of the 15% bracket for singles in 2017 is $37,950. Add in one exemption of $4,050 and the standard deduction of $6,350 and you could have as much as $48,350 of income and still me in the 15% bracket.

You have $11k of pension income and probably $6k or so of income from your taxable accounts... so ~$17k before any IRA withdrawals. You could do a withdrawal from your inherited IRA for $31k (would increase your income to ~$48k) and use $32k from your taxable account to get to your $80k you need each year.

If you itemize deductions then you can do higher IRA withdrawals and use less from your taxable account.