Pre Age 62 Retirement Funding Plan

[Brian]

I’m basically trying to figure out how to fund the gap between early retirement to age 62 while minimizing taxes, retirement account early withdrawal penalties, and still allowing for estate planning. I’m really not as knowledgeable as I need be regarding taxes/penalties/estate planning and am hoping to get ideas on where I should start researching/actions I should be taken.

I’m planning to retire in the next 2 to 7 years which will make me 50 to 55 years old. My wife is about 2 years younger than me and a stay at home mom. We have two children. The oldest starts college this fall and the youngest will start college in 4 years. So a good retirement transition time will likely be in 4 years when the kids are out of the house.

We currently have three main pots of money we could spend from which are summarized below in today’s dollars.
Pot 1 – Private Company stock = 4X current income
Pot 2 – Roth IRA/401Ks = 3X current income
Pot 3 – IRA/401Ks = 10X current income

I will be required to sell Pot 1 stocks upon retire. After paying capital gains, I plan to put the balance into a savings account/money market and spend it till it’s gone. I assume this will take care of our first 5 years or so. I assume we then should start spending from Pot 2 – Roth IRA/401Ks until their gone which would hopefully get us to 62. We would then start taking social security and the remainder from Pot 3 – IRA/401K.

I think this approach is the conventional wisdom and would minimize my taxes/penalties. However, I originally started the Roth IRA/401Ks for estate planning reasons thinking they would be spent last and possible passed onto our kids. I’m not specially trying to leave an inheritance. But I am trying to plan conservatively (example – not relying on social security) so we don’t run out, so most likely there should be something left over for the kids.

I don’t recall where I heard this, but one idea which made sense to me was to roll my 401K into multiple smaller IRAs to allow me the flexibility to establish multiple RMDs with different starting dates. Some of those RMDs could be taken prior to age 62.

I would appreciate any suggestions/ideas you can offer.

 

[Accidental Retiree]

I don’t recall where I heard this, but one idea which made sense to me was to roll my 401K into multiple smaller IRAs to allow me the flexibility to establish multiple RMDs with different starting dates. Some of those RMDs could be taken prior to age 62.

I would appreciate any suggestions/ideas you can offer.

Hi, Brian. Thanks for starting this interesting thread. I look forward to reading all the great feedback you will receive.

To get you prepared, the standard questions people will ask are how much do you plan/need to spend in these years, do you have your health care covered, and have you run your numbers through FIRECalc, for which you'll need your annual spending amount.

In the area where I've included your quote, above, I think you are talking about 72(t) withdrawals rather than your RMDs, which will start at age 70-1/2. I set up a couple of 72(t)s for my husband and myself. There are some great web resources out there to help you out. I used 72t dot net.

 

[Animorph]

I would suggest using Pot1 first, while filling up your tax bracket with Roth conversions. This hopefully gets some of your tIRA money into the Roth with a low tax hit since your income should otherwise be very low. There is a 5 year waiting period after a Roth conversion before you can withdraw it.

If you don't need to sell all of the stock in Pot1 right away, you might also be able to take advantage of 0% capital gains tax rate at low income levels. Can you sell it a little bit at a time? Diversification is also a big concern there, so maybe sell most now and the rest over a couple of years.

Generally after that you want to fill your tax bracket with tIRA withdrawals and then meet the rest of your needs with Roth withdrawals. Again, just trying to get the maximum out of your tIRA with the lowest taxes.

That's the big picture, but the amount of funds in each type of account and your withdrawal needs will dictate how they interact with the tax brackets, making it difficult to give detailed advice. You might try www.i-orp.com for a calculator that will give you more specifics.

 

[Brian]

Thanks for the replies.

I'm still working on what my magic number is. Most of the day to day expenses are relatively easy to estimate. It's the costs like insurance, entertainment, children milestone gifts/support (graduations, marriages, unemployment, etc.), parent elderly care, and taxes that I'm struggling to estimate.

Right now I'm at 17 time current income. I'm shooting for 20 to 30 times current income so there is enough that tight budgeting should not be required. Up until recently I've greatly enjoyed my work. But one big, multi year project has me thinking life is too short to be working if you don't need to. I've taken twice the amount of vacation I normally do in the last year and I still feel worn out all the time.

For the past +20 years, my take home pay has typically been about 60% of my net paycheck (net - taxes - health insurance - life insurance - retirement savings - company stock investment). Part of that 60% went to house payments which we no longer have. So planning for +100% of my current income/less than 4% withdrawal rate should be pretty conservative. I assume I can always find a way to spend it if I have it.

I'm currently putting all new retirement savings into Roth 401K. I've recently reduced this to 10% since the amount I put in seems small in regard to the retirement account balance. My company has some matching and profit sharing that also gets kicked into the 401K.

I've been doing lots of home/property improvements recently so there shouldn't be any major home repair/improvement project expenses in the first 10 years of retirement. I'm also strongly considering some elective surgery while I still have a paycheck to cover the out of pocket expenses.

 

[pb4uski]

One question - is the 401k from your current employer and if you hang until after you are 55 can you take penalty free withdrawals? Some plans allow penalty free withdrawals if you retire after you are 55 but others do not. If your plans allow such penalty free withdrawals then perhaps you can work part-time from 50-55 until you can withdraw penalty free.

If your plans don't allow penalty free withdrawals before age 59.5 then I agree with your approach to using taxable accounts from ER until they are gone or 59.5 (whichever is earlier). If possible I like Animorph's idea of selling the stock over time once you are retired and taking advantage of 0% capital gains if you stay in the 15% tax bracket (~$70 of taxable income a year for MFJ IIRC which equates to ~$90k of total income or even more if you make HSA contributions).

If you exhaust your taxable pot and you still can't do penalty-free withdrawals from your tax-deferred accounts then use the tax-free accounts until you can do penalty-free withdrawals.

YMMV.