Withdrawal Strategy in Retirement Question

[NextInLine]

DW and I are 50. We plan to retire in 8 years at age 58. My job will pay decent pension and 75% health insurance cost. We would like to claim social security at 65. DW's work history is minimal for her to claim SS on her own. She will take spousal benefit according to my work history. I have 2 children and they should be done with college by 2027 (finger crossed). I have set aside 529 fund for their college cost. My house is paid off in 2015. We both are healthy and have active life style.

We LBYM and have saved more than 50% of our income.
Here is our finance situation and would like to have feedback on how to withdraw to maximize tax efficient.


401K – current balance $700,000. Annual contribution plus employer matching: $32K.
Roth IRA - current balance $150,000. Annual contribution $14,000
Taxable account- current balance $500,000. Annual contribution $24,000


We invest in passive index funds 80/20 AA and will scale back to 60/40 as we get close to target date of 2028. With conservative estimation by the time we retire my saving should have:


401K - $1M
Roth - $300K
Taxable - $700K


Every few years, I have counted every dollar we spent on entire year and our budget is very consistent of about $60k/year including health insurance.
My pension will pay close to $60K annually. That will cover our current cost of living. I’d like to withdraw $60K (3% SWR) from those 3 accounts to enjoy our retirement dream of traveling and doing good causes. When we claim SS at age 65, SS would pay at least $36K/year for both of us.
Many of you FIRE’d have similar savings structure. What is your withdrawal strategy from 401K/Roth/Taxable to maximize tax efficient? Appreciate feedback.

[Dash man]

Quote:

Originally Posted by NextInLine DW and I are 50. We plan to retire in 8 years at age 58. My job will pay decent pension and 75% health insurance cost. We would like to claim social security at 65. DW's work history is minimal for her to claim SS on her own. She will take spousal benefit according to my work history. I have 2 children and they should be done with college by 2027 (finger crossed). I have set aside 529 fund for their college cost. My house is paid off in 2015. We both are healthy and have active life style. We LBYM and have saved more than 50% of our income. Here is our finance situation and would like to have feedback on how to withdraw to maximize tax efficient. 401K – current balance $700,000. Annual contribution plus employer matching: $32K. Roth IRA - current balance $150,000. Annual contribution $14,000 Taxable account- current balance $500,000. Annual contribution $24,000 We invest in passive index funds 80/20 AA and will scale back to 60/40 as we get close to target date of 2028. With conservative estimation by the time we retire my saving should have: 401K - $1M Roth - $300K Taxable - $700K Every few years, I have counted every dollar we spent on entire year and our budget is very consistent of about $60k/year including health insurance. My pension will pay close to $60K annually. That will cover our current cost of living. I’d like to withdraw $60K (3% SWR) from those 3 accounts to enjoy our retirement dream of traveling and doing good causes. When we claim SS at age 65, SS would pay at least $36K/year for both of us. Many of you FIRE’d have similar savings structure. What is your withdrawal strategy from 401K/Roth/Taxable to maximize tax efficient? Appreciate feedback.

A few things. Does your pension have COLA adjustments? How secure is your healthcare retirement benefit? They have been known to disappear. Have you used the Firecalc tool on this site to see what it tells you? Have you considered your wife using her own SS for whatever she gets and holding off on yours until age 70 for longevity insurance for both of you? What survivor benefit will your wife get from your pension?

[NextInLine]

Quote:

Originally Posted by Dash man A few things. Does your pension have COLA adjustments? How secure is your healthcare retirement benefit? They have been known to disappear. Have you used the Firecalc tool on this site to see what it tells you? Have you considered your wife using her own SS for whatever she gets and holding off on yours until age 70 for longevity insurance for both of you? What survivor benefit will your wife get from your pension?

yes, my pension has skinny COLA. If the increase in the CPI is 2 percent or less, the Cost-of-Living Adjustment (COLA) is equal to the CPI increase. If the CPI increase is more than 2 percent but no more than 3 percent, the Cost-of-Living Adjustment is 2 percent. If the CPI increase is more than 3 percent, the adjustment is 1 percent less than the CPI increase.


My healthcare benefit is pretty secure. I expect my cost sharing to increase. I use Firecalc and and other tool at work and they all say 100% confident. I thought about SS at 70, but so far settle at 65 to enjoy it while we are still healthy and mobile. But we open to change if we feel we don't need it at age 65. DW will have 25% of my pension if I expire before her.

[RetireBy90]

Quote:

Originally Posted by NextInLine DW and I are 50. We plan to retire in 8 years at age 58. My job will pay decent pension and 75% health insurance cost. We would like to claim social security at 65. DW's work history is minimal for her to claim SS on her own. She will take spousal benefit according to my work history. I have 2 children and they should be done with college by 2027 (finger crossed). I have set aside 529 fund for their college cost. My house is paid off in 2015. We both are healthy and have active life style. We LBYM and have saved more than 50% of our income. Here is our finance situation and would like to have feedback on how to withdraw to maximize tax efficient. 401K – current balance $700,000. Annual contribution plus employer matching: $32K. Roth IRA - current balance $150,000. Annual contribution $14,000 Taxable account- current balance $500,000. Annual contribution $24,000 We invest in passive index funds 80/20 AA and will scale back to 60/40 as we get close to target date of 2028. With conservative estimation by the time we retire my saving should have: 401K - $1M Roth - $300K Taxable - $700K Every few years, I have counted every dollar we spent on entire year and our budget is very consistent of about $60k/year including health insurance. My pension will pay close to $60K annually. That will cover our current cost of living. I’d like to withdraw $60K (3% SWR) from those 3 accounts to enjoy our retirement dream of traveling and doing good causes. When we claim SS at age 65, SS would pay at least $36K/year for both of us. Many of you FIRE’d have similar savings structure. What is your withdrawal strategy from 401K/Roth/Taxable to maximize tax efficient? Appreciate feedback.

As to the question about withdrawals, the typical advice is to take from taxable then from tax deferred. Using the conventional wisdom, your taxable account should be cash or bond funds to minimize taxable gains.



I would recommend you also consider converting the 401K to Roth account to plan your tax bite in retirement. If your going to have a $60K pension and also $36K in SS you will be in 22% marginal bracket or higher in retirement so consider can you save by making your contributions to a Roth 401K if available or consider a plan to do Roth conversions between 58 and 65. The period between retirement and SS is typically a sweet spot for conversions.

[Dash man]

Okay, your 25% survivor benefit would concern me with your plan to take SS at 65. You need to seriously look at what your wife would live on if you were to die younger than you expect. Would she still be eligible for the healthcare plan if you died? Could she live on the social security you’ll receive at 65. Of course, this all comes down to expenses vs income. I agree with the comments about planning for Roth conversions when you retire. That’s another reason to postpone SS until 70.

[NextInLine]

Quote:

Originally Posted by Dash man Okay, your 25% survivor benefit would concern me with your plan to take SS at 65. You need to seriously look at what your wife would live on if you were to die younger than you expect. Would she still be eligible for the healthcare plan if you died? Could she live on the social security you’ll receive at 65. Of course, this all comes down to expenses vs income. I agree with the comments about planning for Roth conversions when you retire. That’s another reason to postpone SS until 70.

DW will be eligible for the healthcare plan if you died. Employer does offer Roth 401K. But for the last 22 years, I only contribute to traditional 401K. Mainly because pretax shelter benefit.

[EastWest Gal]

The next 8 years should be a good chance to beef up your savings considerably. And I agree with everything Dash Man said. By the time you tap into that 401K, your RMDs could be significant. But you can do Roth conversions at any time.

[Dash man]

One other thing about beginning Roth conversions early is you have higher tax brackets while you’re both alive. When one of you passes, you’ll be paying higher taxes on anything you pull out of your 401k.

[pb4uski]

With a $60k pension, the OP won't have a lot of headroom for low cost Roth conversions... the OP will likely be facing a big tax torpedo once SS starts as his pensions and taxable account income/LTCG and 85% of SS will likely put them towards the top of the 12% tax bracket or into the 22% tax bracket.

OP, what is your current marginal tax bracket while working? If 22% or less you might consider after-tax contributions to Roth rather than pre-tax contibutions to tax-deferred accounts.

[NextInLine]

Quote:

Originally Posted by pb4uski With a $60k pension, the OP won't have a lot of headroom for low cost Roth conversions... the OP will likely be facing a big tax torpedo once SS starts as his pensions and taxable account income/LTCG and 85% of SS will likely put them towards the top of the 12% tax bracket or into the 22% tax bracket. OP, what is your current marginal tax bracket while working? If 22% or less you might consider after-tax contributions to Roth rather than pre-tax contibutions to tax-deferred accounts.

My current Effective Tax Rate is 12% for federal. Having 2 dependents helps. I will not have that break when I retire.

pb4uski, you said that let pay 12% tax upfront rather than get hit when SS starts. Make sense.

What would tax picture looks like if I have:
$60K from pension
$30K from 401K
$20K from taxable
$10K from ROTH

[pb4uski]

Just the $60k from pension will put you in the 12% tax bracket in retirement. Add in the $30k of 401k distributions and you're still in the 12% tax bracket. Hard to tell how much of $20k of taxable withdrawals would be taxable or how much taxable account investment income you'll have but it will likely poke you into the 22% tax bracket. Add in SS and you're definitely in the 22% tax bracket.

So I think it is better to pay 12% now and invest in a Roth than invest tax-deferred and pay 22% later.

This is a useful tax calculator: https://www.dinkytown.net/java/1040-tax-calculator.html

Dependents don't affect your taxable income anymore so they no longer affect your tax bracket... instead you get tax credits that reduce your taxes for dependents.

[NextInLine]

Quote:

Originally Posted by pb4uski Just the $60k from pension will put you in the 12% tax bracket in retirement. Add in the $30k of 401k distributions and you're still in the 12% tax bracket. Hard to tell how much of $20k of taxable withdrawals would be taxable or how much taxable account investment income you'll hae be it will likely poke you into the 22% tax bracket. Add in SS and you're definitely in the 22% tax bracket. So I think it is better to pay 12% now and invest in a Roth than invest tax-deferred and pay 22% later. This is a useful tax calculator: https://www.dinkytown.net/java/1040-tax-calculator.html Dependents don't affect your taxable income anymore so they no longer affect your tax bracket... instead you get tax credits that reduce your taxes for dependents.

Thank you!

[Surewhitey]

+10 on Roth conversions. Maybe put off SS until you convert all the $$?

We're almost exactly the same (smaller pension w/o health), but the numbers are very close.

Use the taxable monies until the conversions are done.

Here's my 40 year plan...

[bada bing]

Along the thinking on getting more into Roth - Do you know if your 401K plan has the ability to do Mega Backdoor Roth conversions while you are still working ? You have a nice taxable savings balance and if you had the mega backdoor available, you could get some of that taxable money (or new savings if available) into a Roth IRA for no cost. The limits are annual, so every year delayed is that year's limits wasted. At $32K annual 401K contribution between you and employer, you have a potential for an additional $23K per year into Roth - If you have the mega backdoor available.

Also, don't forget you are now 50, which means eligible for catch-up contributions to 401K and IRA.
The catch-up limits also bump up the mega-backdoor Roth overall limits

[NanoSour]

I'm in a very similar financial situation at 56 (altho already ER). Unfortunately, you're not going to escape the taxman and the best you can do is to start living off the 401k tax-deferred at 59.5. You can convert some to the roth at the 12% line, but it won't really make a big difference unless you live well in to your late 80's. By then, you'll have much more pressing worries if you're anything like you average joe.

At your spending rate, I'm sure your heirs will be very happy with the windfall.

[NextInLine]

Quote:

Originally Posted by bada bing Along the thinking on getting more into Roth - Do you know if your 401K plan has the ability to do Mega Backdoor Roth conversions while you are still working ? You have a nice taxable savings balance and if you had the mega backdoor available, you could get some of that taxable money (or new savings if available) into a Roth IRA for no cost. The limits are annual, so every year delayed is that year's limits wasted. At $32K annual 401K contribution between you and employer, you have a potential for an additional $23K per year into Roth - If you have the mega backdoor available. Also, don't forget you are now 50, which means eligible for catch-up contributions to 401K and IRA. The catch-up limits also bump up the mega-backdoor Roth overall limits

Just checked. My 401K does not allow Mega Backdoor Roth conversions.
Yes, this year I turn 50 and start maxing out catch-up contributions on both 401K and Roth IRA.

Base on overwhelming recommendation, I start to look at Roth 401K next year.

[NextInLine]

Quote:

Originally Posted by NanoSour I'm in a very similar financial situation at 56 (altho already ER). Unfortunately, you're not going to escape the taxman and the best you can do is to start living off the 401k tax-deferred at 59.5. You can convert some to the roth at the 12% line, but it won't really make a big difference unless you live well in to your late 80's. By then, you'll have much more pressing worries if you're anything like you average joe. At your spending rate, I'm sure your heirs will be very happy with the windfall.

Can you please share of your distribution bucketization/percentage?

My teenage son works sparingly. Based on recommendation of a member of this board, I've started a Roth IRA for him for few years now. He should have a good head-start when he done with college.

[NextInLine]

Quote:

Originally Posted by Dash man Okay, your 25% survivor benefit would concern me with your plan to take SS at 65. You need to seriously look at what your wife would live on if you were to die younger than you expect. Would she still be eligible for the healthcare plan if you died? Could she live on the social security you’ll receive at 65. Of course, this all comes down to expenses vs income..

With 25% pension and SS survivor benefit, DW could come out with $39K/year. Plus the saving, I think she'd be OK.