Please comment on my Withdrawal Plan

[rkser]

I need your feedback/comment on my withdrawal plan in retirement -

I will be turning 65 & retire next year & our income will be ONLY from my investments, apart from my Social Security at 70 & DW at Full retirement Age.

I am 64 & DW is 59, file taxes jointly & are in 24% Tax Bracket this year -

My Plan to draw down our assets in SEQUENCE for our living expenses is as follows -

1) Draw from Cash in the Banks for the FIRST 3 years & empty cash savings.

2) Draw initially from Tax Exempt Bonds in Taxable,
Then the Bonds in Tax Deferred IRA Accounts year 4 to year 18 -
(I am afraid my AA will be getting progressively aggressive as we age)

3) Draw from Stocks in the Taxable Accounts & then leave the remainder for inheritance - Allowing the stock funds time to taking Advantage of the STEP UP in basis for inheritance.

4)Leave Roth IRAs for inheritance.

5) Donate to Charity from our existing Donor Advised Fund (DFA) & later decide either from Tax deferred or Taxable depending on its effects on that years taxes.

1. I have noted other forum members withdraw either from Tax deferred/Taxable minimizing the taxes for that particular year. Although this makes sense to me I am unable to wrap my mind around this method.

2. Fidelity suggests to draw down proportionately from Taxable, Tax Deferred & Tax Free accounts simultaneously to keep the taxes approximately equal in all the retirement years.

I have 5 Vanguard Mutual Funds in total, which I manage with the help of members on this & Bogleheads Forums. We are lucky & fortunate to have sort of won the game,

Taxable Accounts -
VTSAX - Total Stock Market Index
VTIAX - Total International Stock Market Index
VWIUX - Tax Exempt Intermediate Term Bond Fund

Tax Deferred Accounts IRAs -
VBTLX - Total Bond Market Index
VTABX - Total International Bond Index

TAX free Roths -
VTSAX - Total Stock Market Index

Bank Accounts have Online Savings & CDs

Our present Overall Asset Allocation = 55/45,

Now that I have stated my above plan, I am not 100% sure which of the above 3 plans would come ahead.

I would appreciate any pointers & advise

 

[SevenUp]

1) Draw from Cash in the Banks for the FIRST 3 years & empty cash savings.

Especially during this time, when you will otherwise have no income other than interest and dividends from investments, how much are you planning for traditional to Roth conversions?

 

[rkser]

I usually do the Roth Conversions near the end of the year.

If we are in 22% Tax Bracket as we were last year, I will Roth Convert to the max of that Tax Bracket i.e around $ 170k

Similarly to the max of 24% like in this year.

 

[rkser]

Our yearly living expenses are around $ 135K

 

[Koolau]

No expert (trust me on this!). It's my opinion that you consider hiring a tax expert to help in your decisions. I had WAY too much in "qualified" funds. I converted a lot to Roths but still am stuck with significant RMDs now. SWAG is that a good tax person could help you set up a plan for withdrawal and save way more than the cost. It would be important to pick the right person. I had a tax professional who was good at manipulating the figures and not making mistakes. He was lousy at advice, however. YMMV

 

[rkser]

Bump -

Can you please share your withdrawals across the Pre Tax, Taxable & Tax free accounts for a learning opportunity for me and/or comment/critique my above withdrawal plan

 

[DawgMan]

Bump -

Can you please share your withdrawals across the Pre Tax, Taxable & Tax free accounts for a learning opportunity for me and/or comment/critique my above withdrawal plan

We may be missing some info, but it sounds like you may be "over funded"... 1st world problems.

My knee jerk is to draw down tax deferred accounts to a certain tax bracket and then fill the balance with after tax. This will help minimize taxes when RMDs hit. What % is pre/post tax? Taxes on RMDs may be what you are really managing.

 

[mountainsoft]

My Plan to draw down our assets in SEQUENCE for our living expenses is as follows -

1) Draw from Cash in the Banks for the FIRST 3 years & empty cash savings.

I may be misunderstanding your intentions, but I would not "empty" the cash savings. I would keep 3-5 years of expenses in cash in case the markets crash. You could live off the cash for a few years until the markets come back up, then replenish your cash savings from your investments so you're ready for the next down turn.

 

[pb4uski]

....I am afraid my AA will be getting progressively aggressive as we age...

Fidelity suggests to draw down proportionately from Taxable, Tax Deferred & Tax Free accounts simultaneously to keep the taxes approximately equal in all the retirement years. ...

that doesn't have to happen... just sell stock and buy fixed in your tax deferred accounts to rebalance your asset allocation to your target.

I would also add low-tax cost Roth conversions to at least the top of the % preferenced income tax bracket from when you retire to when you start SS... that's $80,000 of taxable income or $104,800 for a married couple in 2020 and will increase for inflation annually.

I'm not at all impressed by Fidelity's advice to you. I think all you need to do is withdraw from taxable accounts for spending, do Roth conversions to the top of the tax bracket that you expect to be in once SS is online and then rebalance in your tax-deferred accounts to maintain your target AA.

 

[rkser]

Bump,

I have added more details/changes on my withdrawal plan.

What If I start withdrawal (+ Roth Convert ) only from all bond Tax Deferred for the initial part of my retirement & then go to the Taxable Accounts? What am I missing ?

I understand the taxes on Ordinary Income from Tax Deferred withdrawals with be higher than Cap Gains, but will help me with increased taxes come age 72 with increased income from Social Security + RMDs + Taxable Dividends .

I am 64 & DW 59, we will start withdrawing from our retirement savings next year, have a all Vanguard Flagship Select Portfolio, by multiple retirement calculators we are fortunate to have enough funds to swing it & leave some for inheritance.

Please take another look at my updated more complete withdrawal plan & see what you think.

I noticed in another thread Pb4uski had posted of a similar withdrawal strategy .

Our Asset Allocation is 55/45 & the investments with rough estimates are as follows-

TAXABLE ACCOUNTS have Total Stock Market Index + Total International Market Index + Tax Exempt Intermediate Bond Fund = 25 + years of Living Expenses
TAX DEFERRED ACCOUNTS have Total Bond Market Index + Total International Bond Index = 17 + years of Living Expenses
TAX FREE ROTHS have Total Stock Market Index = 2 years of Living Expenses
CASH - Online Banks + CDs = 3 years of Expenses

I am thinking of starting withdrawing (+ Roth Converting) for our living expenses + Charity from the TAX DEFERRED, then go to the TAXABLE accounts. Leave the ROTHS + Balance in TAXABLE for inheritance.

My above plan is because of the present Rules (may change, who knows) -
1) Completing the withdrawals in 10 years by children of the inherited IRAs
2) Hopefully minimizing our income taxes due to RMDs
3)The Step Up in Basis for Children for the inherited Taxable Accounts

4) One negative I see is my Overall AA will be getting progressively aggressive, unless I periodically sell taxable stock funds pay Cap Gain Taxes & rebalance into Bonds or in old age I just develop a stomach for a lopsided high stock Portfolio

What do you think, what would you do different ?

Thank you in advance for your feedback

 

[OldShooter]

... I am afraid my AA will be getting progressively aggressive as we age ...

Contrarian, perhaps, but I think its natural and appropriate for an AA to drift towards more equities as we age. Consider the edge case: On the day you die, you are 100% equities. So what?

IMO the fixed income side of the AA is a buffer against SORR, but as we age that buffer can shrink because length of our need for it shrinks. For example, DW and I went from 60/40 a couple of years ago (@ 71YO) to 75/25 after realizing that the fixed income side of the 60/40 was far more money than we would ever need.

To look at being 100% equities on the day you die is really anticipating the appropriate AA for your estate. In our case, about 2/3 of our estate is going into testamentary trusts for our son and three grandchildren. This is long-term money and (again IMO) a high equity concentration is appropriate. If, OTOH, you anticipate that your beneficiaries will spend the money quickly, then there is an SORR for them that you may want to anticipate in your deathbed AA. The other 1/3 of our estate is going to charities where we have looked at their money management practices and we are content that our money will flow into a portfolio with an appropriate AA. So, again, it's long term money.

 

[pb4uski]

Do you have significant unrealized gains in your taxable accounts? I'm guessing perhaps so in your taxable account equity funds and less so in the tax-exempt bond fund?

You can address your discomfort with the increasing allocation to stocks but selling equities and buying fixed income in your Roth to make your overall AA more conservative.

One simple approach would be to Roth convert to a target (such as top of x% tax bracket) and then withdraw from taxable to the extent that you can without creating taxes and then from the Roth if necessary. Just remember, if you Roth convert and then later end up having to withdraw it from the Roth is it really no different than doing a tIRA withdrawal for spending.

 

[rkser]

Do you have significant unrealized gains in your taxable accounts? I'm guessing perhaps so in your taxable account equity funds and less so in the tax-exempt bond fund?

You can address your discomfort with the increasing allocation to stocks but selling equities and buying fixed income in your Roth to make your overall AA more conservative.

One simple approach would be to Roth convert to a target (such as top of x% tax bracket) and then withdraw from taxable to the extent that you can without creating taxes and then from the Roth if necessary. Just remember, if you Roth convert and then later end up having to withdraw it from the Roth is it really no different than doing a tIRA withdrawal for spending.

Yes Pb4uski, you are right I do have significant Cap Gains in Taxable Stock Funds. Now, let me understand + Follow on what you are saying.

Suppose I need around $140k for living expenses in year 2021 & would like to be in 22% nominal tax bracket i.e.. around $170k (MFJ) annual income.

Convert say $30k Bonds(ordinary income)into Roth Stocks = 30k
Withdraw from IRAs $80k for Living Expenses = 80k
Dividends from Taxable Accounts + Interest Bank CDs = 60k

So $140 for Expenses & $30k for Roth
As all IRAs are all Bonds, go to Roth & rebalance from Stocks to Bonds to maintain 55/45
Standard Deduction of $24k will give some more breathing room for end of year adjustments with running Turbo Tax What If for more into Roth

Please correct me if I am wrong
Thankyou

 

[pb4uski]

You're on the right track.

Using your numbers, your total income would be limited to $194k to be at the top of the 22% tax bracket... since you have $60k of dividends and interest you have $134k of headroom for either tIRA withdrawals and/or Roth conversions.

If your spending is $140k and you receive $60k of dividends and interest, then you'll need $80k from tax-deferred accounts for spending.

You could do it one of two ways... you could do a $80k tIRA withdrawal for spending and $54k of Roth conversions for a total of $134k of tIRA withdrawals.

Or... you could $134k Roth conversion and then Roth withdrawals as needed for spending.

Same difference, but I prefer the latter, especially if you do most of the Roth conversion early in the year and then true it up a little later. For example, you could do $120k of the projected $134k Roth conversion early in the year, withdraw from it as needed for spending and then top it off in December as part of your year end tax planning.

What I like about this approach is that the $120k grow tax-free during the year until you withdraw it and if you end up not needing the entire $80k then any excess has been sitting in the Roth growing tax-free for the year.

On the AA part, just buy bonds/sell stocks or vice versa in your Roth to rebalance your overall AA to target.

Make sense?

 

[rkser]

Yes it does & makes lot of sense.

I would not have thought of converting to Roth at the start of the year vs what I have been doing..ie.. Roth conversion near the end. No CPA has advised me such.

I always learn from you Pb4uski, thanks a lot