Understanding SWR, SS, etc?

[LBrowning]

I've read a ton of posts, and the more I read, the more confused I get. Trying to wrap my head around a 401K withdrawal strategy. My wife and I plan to retire in '16; we'll each have a pension. I need to determine the best SS strategy, coupled with 401K withdrawals (Roth conversion?) to minimize taxes and avoid RMD problems down the road. I'm 62; she's 59. Can anyone point me in the right direction; rule-of-thumb, thread, calculator? Thanks in advance!

 

[ERD50]

Since each persons situation can vary by so much, there can be no 'rule of thumb' (at least not one of any value).

Some others might be able to point to some RMD optimization calculators. I think there are some spreadsheets floating around.

-ERD50

 

[pb4uski]

Since you both have pensions I presume that you both work and will both get SS? If so, you may not have many choices that will affect your tax situation greatly.

I would suggest that you continue reading, check out i-orp and SSAnalyze - Bedrock Capital Management

 

[Jerry1]

Reading, talking, asking questions and finding calculators . . . I'm in the same situation (retiring soon and trying to plan). It's not easy, but it's worth the time and effort. This site has been a good place for me to get information that I would consider a good starting point.

 

[stepford]

While there's no rule of thumb, many folks trying to minimize taxes on RMDs choose to do Roth conversions up to the maximum of the 15% tax bracket (or 25% bracket - depending on the amount of your pension and of the size of the 401K/tIRA to be converted).

I'm in a similar boat - Pension will put me near the top of the 15% bracket. I can either convert an inconsequential portion of my 401K to a Roth and stay in the 15% bracket or about 1/3rd of it and stay in the 25% bracket. Either way when SS and RMDs hit I will likely be in the 28%. Another possible approach is to take SS early to try to reduce income enough to stay in the 25% bracket after 70, but this seems a bit like biting off one's nose to spite one's face...

 

[Midpack]

Reading, talking, asking questions and finding calculators . . . I'm in the same situation (retiring soon and trying to plan). It's not easy, but it's worth the time and effort. This site has been a good place for me to get information that I would consider a good starting point.

+1. There are some very general guidelines, some already posted above, but there are no easy answers that will serve every circumstance. You will have to do some research/reading** or pay someone to help you if you really want to optimize income/taxes.

In all my research, it seems keeping your taxable income reasonably constant throughout retirement is a good place to start. For many, the highest income begins at age 70 when RMDs kick in on top of pension and Soc Sec income (aka, The Tax Torpedo). So exposing some of your assets to taxes before age 70 can be optimal, Roth Conversions, using more of your own assets toward spending before age 70, etc. can be optimal - though counter-intuitive to not minimize short term taxes. That seems to be the biggest mistake retirees make, they minimize taxes in the near term, only to find they're forced to pay way more in taxes after age 70 - may not be optimal.

**There are several good books that address each of the topics the OP mentions, but laws change so the information in them can quickly go out of date. A good, broad reasonably current book you can buy or check out at your local library:

 

[H2ODude]

"keeping your taxable income reasonably constant throughout retirement is a good place to start"

That incredibly simple idea makes a great deal of sense to me! I've been struggling with the issue of a boatload of money that's being held tax hostage in IRA, and a reasonable pension and brokerage account that is allowing us to live all the life we want until SS and MRD's at 70 with the result of the "tax torpedo" you refer to. I've used I ORP to generate some staggering options of Roth conversions that I'm leery of. Anyway, keeping your taxed income relatively consistent makes a lot of sense vis a vis tax rates. Right now the FIDO RIP shows our taxes tripling or greater when we turn 70. Probably do substantial Roth conversion, but not to the degree I ORP dictates.

 

[Happily Retired]

I've read a ton of posts, and the more I read, the more confused I get. Trying to wrap my head around a 401K withdrawal strategy. My wife and I plan to retire in '16; we'll each have a pension. I need to determine the best SS strategy, coupled with 401K withdrawals (Roth conversion?) to minimize taxes and avoid RMD problems down the road. I'm 62; she's 59. Can anyone point me in the right direction; rule-of-thumb, thread, calculator? Thanks in advance!

Do a search on "Tax Torpedo" and then "Reverse Tax Torpedo". Good info.
Basics: Delay filing for Social Security. Spend down/draw down your taxable 401k or Traditional IRA money in the lowest tax bracket that you can tolerate (e.g. top of the 15% tax bracket).

 

[pb4uski]

It seems to me that many of those who squeal the loudest about the impact of the tax torpedo fail to consider that their marginal tax rate with they deferred the income in those tax-deferred accounts was higher, and in many cases, much higher, than the marginal tax rate that withdrawals are getting hit with, so economically they are still coming out ahead.

There is no such thing as a free lunch. They said tax-deferred, not tax-free.

 

[Options]

Do a search on "Tax Torpedo" and then "Reverse Tax Torpedo". Good info.
Basics: Delay filing for Social Security. Spend down/draw down your taxable 401k or Traditional IRA money in the lowest tax bracket that you can tolerate (e.g. top of the 15% tax bracket).

I've run ESPlanner in both monte carlo and upside mode. It shows strategy of spending after tax or Tira monies is not superior to withdrawing tax-deferred first. As to Iorp, it's a deterministic calculator, and I am not personally comfortable with any deterministic calculator.

People forget taxes in retirement are a different animal than earned income. More strategies exist to minimize taxes when in retirement, due to the favorable tax treatment. In this regard, something I've seen recommended is to use a combination of taxcaster and doing "dummy" returns using your tax software (Turbotax, TaxAct, etc) to forecast taxes (granted, tax laws will change, but it's a start).

I've found no silver bullet/magic pill/rule of thumb that can address everyone's situation other than the suggestions given in posts above. My only strategy is to roth convert before 70 while delaying SS to 70 and before RMD's hit. I've decided I'm not going to lose sleep over it. I have more than enough $ and frugality has served me well in this life.

 

[rayvt]

I've been struggling with the issue of a boatload of money that's being held tax hostage in IRA,

Ah, but it's not being "held tax hostage". That viewpoint is incorrect.

The correct way to view it is: Part of the money in your IRA belongs to the IRS. They allowed you to keep ahold of it for them -- by virtue of deducting your IRA contribution. But it's not your money and it never was. You just have to give it to them now, in 2015, instead of back when you filed your 1040 many years ago.

Once I got that explanation through my thinck head, it became a lot easier to deal with the situation.

And the really cool part is not only did they allow you to hold it for them, they also let you keep whatever earnings you made on their money. The other cool part is that the money they let you hold should have been taxed at 25%-30% but when you give it back to them it's at the 15% rate.

 

[Alan]

It seems to me that many of those who squeal the loudest about the impact of the tax torpedo fail to consider that their marginal tax rate with they deferred the income in those tax-deferred accounts was higher, and in many cases, much higher, than the marginal tax rate that withdrawals are getting hit with, so economically they are still coming out ahead.

There is no such thing as a free lunch. They said tax-deferred, not tax-free.

+1

Forewarned is forearmed and as mentioned above I also use Fido's RIP and see the big jump in taxes at age 70. However, each year that passes I move more from IRA to ROTH to smooth out the taxes paid. If I had had to pay the taxes at the time I earned the money and had to pay taxes on the ongoing earnings then I'm certain the overall tax bill would be much higher.

 

[pb4uski]

...And the really cool part is not only did they allow you to hold it for them, they also let you keep whatever earnings you made on their money. ....

They do let you keep it but when you take it out it is ordinary income and subject to tax so you don't get to keep all of it.

...The other cool part is that the money they let you hold should have been taxed at 25%-30% but when you give it back to them it's at the 15% rate.

Spot on. This is the most important part and the part those who complain about the tax torpedo commonly overlook since they are writing a check for the 15%.

 

[marko]

But it's not your money and it never was.

Gee. I thought I had earned that money myself. Didn't see anyone else around while I was working so hard for it.

 

[pb4uski]

Sure you earned it.... but you didn't pay taxes on it when you earned it and those taxes are now coming due.

You agreed to lock it away until you retired and then you would have to pay taxes to enjoy it... which is exactly what is happening.

 

[sengsational]

In another recent thread of similar topic, one rule of thumb did come up that didn't get completely bashed was to forget about waiting until age 70 for SS if you need the money now. In other words, if you can manage your prescribed burn rate without SS, then do so.

 

[Options]

+1

Forewarned is forearmed and as mentioned above I also use Fido's RIP and see the big jump in taxes at age 70. However, each year that passes I move more from IRA to ROTH to smooth out the taxes paid. If I had had to pay the taxes at the time I earned the money and had to pay taxes on the ongoing earnings then I'm certain the overall tax bill would be much higher.

What I find interesting is how little my tax hit will be throughout retirement according to both FIDO and ESPlanner. I haven't looked at the tax estimates closely in a while, but IFIRC taxes were always under $1K and at most around $2K when I reach 90 or so. These estimates factor delaying SS until 70 and its impact on RMD's, and don't even include the roth conversions I plan to do before 70. Then again, almost 2 of every 3 of my PF $ is after tax.

 

[marko]

Sure you earned it.... but you didn't pay taxes on it when you earned it and those taxes are now coming due.

Agreed. Just found it an interesting perspective that my tax bill isn't my money and "never was".

Kinda reminds me of my local DPW guy who once told me that "I'm paid by the city, not you!"

 

[Options]

Gee. I thought I had earned that money myself. Didn't see anyone else around while I was working so hard for it.

+1
I don't mind rendering to Caeser. I only mind rendering in excess, and when I was working, an awful lot of excess was withheld.

 

[sengsational]

I've run ESPlanner in both monte carlo and upside mode. It shows strategy of spending after tax or Tira monies is not superior to withdrawing tax-deferred first. As to Iorp, it's a deterministic calculator, and I am not personally comfortable with any deterministic calculator.

I am confused by lumping after tax and traditional IRA money together...they are such different beasts.

I-orp is deterministic, but what you are doing with it is finding a plan that "could work" and certainly does minimize taxes for that scenario. The take-away is not that the future will look exactly like that plan; there will be many bumps in the road. The take-away is what to do this year that fits into a plan that minimizes taxes. You will do another run next year, and turn that result into action. Probably those two plans will be similar. If it makes you feel better, plug the annual burn rate into firecalc to see the squiggly lines and make sure not too many drop below zero.

 

[Options]

I am confused by lumping after tax and traditional IRA money together...they are such different beasts.

....

ESPlanner does not lump them together, but allows you to model withdrawing after tax or tax-deferred first and see which is superior. This is what I like about that software, it allows you to model many, many different scenarios.

Regarding iorp, I'm not comfortable with calculators asking me to assume a rate of return. I have no idea, and I know of no one that does either. I will say I have taken into account Bogle's estimation that real returns for the next decade could be zero (notwithstanding p/e changes), and modeled that in ESPlanner.

I use the most pessimistic scenarios for all planning, and have found Pfau's SWR calculations (as of 4/15 according to his blog) to be the most conservative, followed by ESPlanner in monte carlo and then followed by its upside mode (what I call the armageddon scenario as it calculates your equity holdings lose all value), followed then by FIDO's "poor returns" scenario. I've found firecalc and ******** to be the most optimistic as they use historical returns.

 

[pb4uski]

Just because i-orp is deterministic doesn't mean that it is less relevant to developing a tax-efficient withdrawal strategy. I highly doubt that a tax-efficient withdrawal strategy that is optimal on a deterministic basis would end up being suboptimal on a stochastic basis.

 

[Options]

Just because i-orp is deterministic doesn't mean that it is less relevant to developing a tax-efficient withdrawal strategy. I highly doubt that a tax-efficient withdrawal strategy that is optimal on a deterministic basis would end up being suboptimal on a stochastic basis.

It certainly would if one assumed overly aggressive returns for the deterministic model. In fact, I wouldn't know how to correlate the two: one assumes a fixed number and the other is random. How does one extrapolate to the other?

Regarding deterministic calculators, I'm just not comfortable guesstimating future returns. It's been said that "no one knows nuthin'", to which I'll add least of all me when it comes to estimating what returns in the future will look like. All calculator outputs are subject to their inputs, which are in turn subject to (behavioral) bias. One can manipulate any calculator and come up with support for a given strategy. I simply want to minimize (as much as possible) that bias.

Otar discussed his issues with MC calculators which were in fact addressed by someone (my apologies for failing to remember who!), so I'm simply personally more comfortable with MC calculators. I should clarify that while I prefer them to deterministic calculators, YMMV. As we all know, no calculator is perfect and I agree with the above recommendation to recalculate/recalibrate every year.

 

[dallas27]

Gee. I thought I had earned that money myself. Didn't see anyone else around while I was working so hard for it.

Really, no police to safeguard your travel to work? No fireman to protect your assets from fire? No roads or rail to allow you to work more than walking distance from home? No military to stabilize your government? So on...


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[marko]

Really, no police to safeguard your travel to work? No fireman to protect your assets from fire? No roads or rail to allow you to work more than walking distance from home? No military to stabilize your government? So on...


Sent from my iPhone using Early Retirement Forum

I think you missed the point.