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Accumulation to Draw Down Transformation... Not as simple as you would think.
Old 06-03-2020, 01:53 PM   #1
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Accumulation to Draw Down Transformation... Not as simple as you would think.

So all the years of accumulation has been a pretty easy concept for me to grasp... make as much money as you can, LBYMs, stash away as much as you can in tax deferred accounts/other investments, settle in on an AA, and as a self-employed high earner, employ any additional strategies to help minimize taxes. All simple enough. Now, as I get ready to flip the switch to draw down mode (age 56), I find myself scratching my head wondering what may be my best course of action(s). My (wife and I) simple draw down plan has me taking a min of $300K/year growing with inflation (this has significant discretionary spending as I have zero debt/reasonable fixed costs). With my draw down assets being split roughly 50/50 (taxable and tax differed accounts), my brain is a little scrambled putting together the best path...

A) Draw down from taxable accounts only until 59 1/2 or until it is exhausted before tapping tax deferred accounts? If I shut down my business 100%, I may have the option to start pulling from my 401K immediately which would make B) the first question. If I keep my some kind of part time gig going, then draw downs come from taxable accounts only until 59 1/2.
B) At 59 1/2, pull cash from 1) interest, dividends, capital gains that are naturally produced from taxable account, 2) $50K of return of capital from taxable account, 3) balance from tax differed accounts... thinking here is to avoid the NIIT and start minimizing future RMDs?
C) Roth conversions (I recently brought this up on another thread)... at the current tax rates and knowing the additional impact of NIIT, I am having a tough time seeing the argument to convert to the top of the 24% bracket as it would trigger the NIIT as well. Tell me why I should do the Roth conversions at effectively 28.8% (or higher)?
D) I have a plan for medical until medicare (age 65). I have not dug into the specifics on medicare costs yet, but anticipate I will be paying higher premiums one way or another based on income. Is there an real argument here for Roth conversions/other strategies to minimize my exposure come 65?
E) At this point, I really don't have SS factored into my modeling and will look at that as bonus cash flow (guessing 75% of benefit) at age 70. Should I be looking at this differently at this point and not dismissing it's impact?
F) Should I be shuffling the decks in my taxable and tax deferred accounts to be more efficient as I move to draw down mode? Of course, there would a sensitivity to unwanted capital gains if I got to aggressive here.

I get that these are all first world problems. Chances are taxes and the variables that affect SS will change over the next 10 - 15 years so I realize we can only plan based on what we know. None the less, I would rather plan smartly if I can without too many gymnastics.
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Old 06-03-2020, 02:33 PM   #2
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As mentioned in the other thread, with the level of wealth that you have accumulated I think you would be best to engage a CPA with a PFS (Personal Financial Specialist) to analyze your situation and give you advice.

My thinking is that you're going to be paying a lot of tax no matter what you do. I agree that I don't see Roth conversions as being particularly attractive. If you don't do any Roth conversions what do you expect your tax bracket to be in your first full year of retirement? If you don't do any Roth conversions what would you expect your tax bracket after SS and RMDs to be when you are 72?
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Old 06-03-2020, 02:42 PM   #3
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As mentioned in the other thread, with the level of wealth that you have accumulated I think you would be best to engage a CPA with a PFS (Personal Financial Specialist) to analyze your situation and give you advice.

My thinking is that you're going to be paying a lot of tax no matter what you do. I agree that I don't see Roth conversions as being particularly attractive. If you don't do any Roth conversions what do you expect your tax bracket to be in your first full year of retirement? If you don't do any Roth conversions what would you expect your tax bracket after SS and RMDs to be when you are 72?
Getting some advice is on my to do list. If I end up drawing from taxable accounts then the max marginal tax rate would be less than 24%, but would still not leave significant room for Roth conversions if I wanted to push to the top of the 24% bracket, and then the NIIT hits again. All guess work at age 72. This is why I feel my strategy B) will make the most sense, but wanted to get some other opinions. Thanks.
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Old 06-03-2020, 02:57 PM   #4
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Hate to complicate your thinking, but another thing to consider is if you have taxable equities that are substantially appreciated that your heirs get a stepped up basis when you pass on so those unrealized gains never get taxed.

For a while I had shifted from using taxable to tax-deferred to leave taxable alone to grow to get stepped up basis. With my recent equity sales unrealized gains is no longer a concern, but the quid quo pro is that I filled my headroom for 2020 Roth conversions with 0% tax capital gains.
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Old 06-03-2020, 04:20 PM   #5
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I echo pb4uski's advice, and will throw in my additional thoughts:

1. I'd at least take a SWAG at your age 72 tax return based on whatever reasonable assumptions you want to make with respect to investment returns. You'll probably be surprised at what your marginal bracket is once you throw in 85% of your SS being taxable and your RMD. Plus IRMAA. I was surprised. It also took me a while to believe those numbers, as they were rather large. Then at least try to Roth convert or withdraw from your IRA to balance your marginal rate in the current year with your marginal rate in your age 72 year. This is a first-order approximation and pb4uski and others have dialed in a lot more nuance to this question.

2. I think you'll probably just be paying 25%+ in taxes, as pb4uski said. If you take that as a given, then you may want to start looking at what happens to your taxes when the first of you or your DW pass away (hint: they go up, because remaining spouse has to file as single and unless a lot of income dies with the first spouse, IRMAA on the remaining spouse goes up a lot too).

2b. You may also want to consider looking at the tax rates of your heirs, if you have them. It may make sense to gift your heirs either appreciated stock or take similar actions so the wealth is taxed at their lower rate rather than your higher rate.

2c. You may also want to look at what tax rate your heirs might face if they have to draw down their inherited traditional IRA over 10 years, as the SECURE Act now requires. This is another large tax bill to perhaps consider trying to avoid a little.

3. A random thought, but if your DW and you are adventurous, you could maybe travel overseas. It could be that a lifestyle that is equivalent to a $300K lifestyle here in the US is only $80K in Thailand or Mexico or Brazil. Lots of other things to consider with this option, of course. But taxes on $80K would be a lot less. Although this'd probably just have you accumulating more.

What I do - which may be less than useless as I spend a fraction of your budget - is (a) take the dividends and interest from my taxable account and spend those, (b) sell stuff from my taxable account periodically for spending money, and (c) do Roth conversions above that to my target AGI. Right now my target AGI is related to FAFSA limits since I have three in college. Later, when that's no longer a concern, I'll take a look at it again, but it'll probably be the 400% FPL level for ACA.

If you get too stressed out about it, remember that probably any set of reasonable choices will work out just fine for you, and your biggest problem will be how to manage runaway wealth. And if those reasonable choices don't end up working out, then we've got bigger problems to deal with - and in the meantime you didn't have to work for a while.

Also, give yourself some time. You probably learned all of your accumulation tricks over the course of 20 or 30 years. There are draw down tricks as well, and you'll pick those up over a few years' time, and if you make reasonable choices as you learn them, you'll be fine. The one thing I've noticed is that there are very few articles on draw down that go beyond the basics.

I've learned almost all I know about draw down stuff from various posts and threads here over the years. I've been FIREd for about 4 years now and I do think I'm starting to get the hang of most of it, but there's always more to learn. Again, even if I don't get things exactly right, I'll still be OK financially - right now I mostly am playing to run up the score for my kids because I still find it fun.
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Old 06-03-2020, 05:01 PM   #6
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... 1. I'd at least take a SWAG at your age 72 tax return based on whatever reasonable assumptions you want to make with respect to investment returns. You'll probably be surprised at what your marginal bracket is once you throw in 85% of your SS being taxable and your RMD. ....
At a minimum, take your current/expected age 72 retirement income + 85% of SS + 3.9% of your tax-deferred accounts. Tax brackets are supposed to increase with inflation, as is SS.... and your tax-deferred accounts will probably increase at a bit more than inflation so the above calculation would likely be understated but a starting point.

I have a worksheet that does a year-by-year roll of taxable, tax-deferred and tax-free retirement assets with assumptions for growth and inflation so I have as good of an idea as I can have.
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Old 06-03-2020, 07:04 PM   #7
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At a minimum, take your current/expected age 72 retirement income + 85% of SS + 3.9% of your tax-deferred accounts. Tax brackets are supposed to increase with inflation, as is SS.... and your tax-deferred accounts will probably increase at a bit more than inflation so the above calculation would likely be understated but a starting point.

I have a worksheet that does a year-by-year roll of taxable, tax-deferred and tax-free retirement assets with assumptions for growth and inflation so I have as good of an idea as I can have.
I subtract off the standard deduction and then compute taxes based on the brackets. I think that's right. Otherwise my method matches yours.

Well, I choose to do everything in nominal dollars and inflate everything according to historical rates of increase (using different ones for tax brackets, SS, IRMAA, etc.). Yes, it makes it more complicated, but that's the fun part.
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Old 06-04-2020, 05:12 AM   #8
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Thanks for the suggestions fellas... good stuff. I will probably get with the right type of financial consultant and show him my cards to perhaps get a specific strategy/plan ironed out. There seems to be so many great resources recommended on this site that I thought (hoped) there was a "software gizmo" someone might know of that could solve my dilemma! I suppose in the end, the worst thing that happens is someone (wife and I, surviving spouse, or kids) are paying more taxes at some point, but that's because there is a pot a of money still around. I suppose it's better than a sharp stick in the eye!
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Old 06-04-2020, 05:39 AM   #9
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Just for what it is worth, Iím somewhat below you in terms of what Iím assuming your investible worth is but retired at 52 also debt free. My strategy has been pretty plain vanilla- use dividends as a base, sell from taxable (as cap gains taxes are lower than income tax) to keep AA in line and let tax deferred continue to defer. Soc sec will be an added stream. But at relatively high income/asset levels the ability to do many cute moves that actually save you taxes is limited.
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Old 06-04-2020, 07:15 AM   #10
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Thanks for the suggestions fellas... good stuff. I will probably get with the right type of financial consultant and show him my cards to perhaps get a specific strategy/plan ironed out. There seems to be so many great resources recommended on this site that I thought (hoped) there was a "software gizmo" someone might know of that could solve my dilemma! I suppose in the end, the worst thing that happens is someone (wife and I, surviving spouse, or kids) are paying more taxes at some point, but that's because there is a pot a of money still around. I suppose it's better than a sharp stick in the eye!
I-ORP is a software gizmo that can help you minimize taxes over your lifetime and determine an optimal withdrawal strategy. It has a lot of complex options and it can take some time to understand them all. https://www.i-orp.com/Inflate/index.html
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Old 06-04-2020, 09:12 AM   #11
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I-ORP is a software gizmothat can help you minimize taxes over your lifetime and determine an optimal withdrawal strategy....... https://www.i-orp.com/Inflate/index.html

+1 - even if you go to get advice from a professional, good to test some ideas with this tool. For example, just took 5 minutes to make 2 quick runs assuming:
- wife and husband are 56 yrs old and retire today

- have $10M, 1/2 in taxable account, rest in tax deferred, invested in 70/30 asset allocation
- no later income (excludes SS for example)


Case 1 assumes no Roth conversions.
Max disposable income = $277k
Tax rate when RMD's hit = upper 33%

Case 2 assumes optimum Roth conversion
Max disposable income = $295k
Tax rate when RMD's hit = 25%

My first thoughts in this situation would be (1) Roth conversions add around $18k of disposable income I can spend under the above assumptions (2) I expect tax rates to increase over the years making Roth conversions have a bigger impact that the above assumes (3) If wife or husband dies early, tax impact will be even larger than above assumes.

I find data like this (modified for your specific situation) useful when talking to a professional advisor.
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Old 06-04-2020, 10:46 AM   #12
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Thanks for the suggestions fellas... good stuff. I will probably get with the right type of financial consultant and show him my cards to perhaps get a specific strategy/plan ironed out. There seems to be so many great resources recommended on this site that I thought (hoped) there was a "software gizmo" someone might know of that could solve my dilemma! I suppose in the end, the worst thing that happens is someone (wife and I, surviving spouse, or kids) are paying more taxes at some point, but that's because there is a pot a of money still around. I suppose it's better than a sharp stick in the eye!
I retired in 2011, but I found the same thing. Accum was relatively easy for us, decum is harder to get right. There are some no brainer strategies, but perfect optimization is more difficult, probably impossible without predicting the future.

I haven't resorted to many pros other than wills/trust accts, but I haven't found a lot of software that's been helpful either (other than Roth conversions last year) - so if you find a more complete software solution, I'd be most interested.
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Old 06-04-2020, 02:29 PM   #13
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I have pretty much given up the fight on this issue. While my spending is not as high as your situation, at this time, we will be in the 24% bracket now and in the foreseeable future. I can't fathom paying more now to convert, and even if one of us croaks, we're screwed. With the SECURE Act, our kids are going to get screwed as well, unless we put our estate in a Charitable Remainder Trust with the kids as the first beneficiary. But there are issues there as well.
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Old 06-05-2020, 09:49 PM   #14
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Some on this forum have found "Income Strategy" helpful to plan future taxes, effects of Roth Conversions & so on.
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Old 06-06-2020, 03:22 AM   #15
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As I recall all of the software for income optimization is covered in this thread:
https://www.early-retirement.org/for...ion-99854.html
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Old 06-06-2020, 01:10 PM   #16
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At a minimum, take your current/expected age 72 retirement income + 85% of SS + 3.9% of your tax-deferred accounts. Tax brackets are supposed to increase with inflation, as is SS.... and your tax-deferred accounts will probably increase at a bit more than inflation so the above calculation would likely be understated but a starting point.

I have a worksheet that does a year-by-year roll of taxable, tax-deferred and tax-free retirement assets with assumptions for growth and inflation so I have as good of an idea as I can have.
Pb4uski, are you still following the income strategy for future tax planning, Roth Conversions...etc. Do you think it was/is helpful ?? Thanks
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Old 06-06-2020, 01:53 PM   #17
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No, I used Income Strategy for a month or two and then dropped it. For us is seemed to be saying that no matter what I did it wasn't going to move the needle a lot.

What I had decided was to convert to the top of the 0% preferenced income bracket for 2020 while we were still subject to state income taxes, and increase it to just below the IRMAA limit for 2021 and forward until RMDs start at 72, then reduce Roth conversions to a level where all my tIRA balances are converted when I am 90.

However, along comes COVID and the March swoon of stocks and I chose to sell equities and for 2020 use my headroom for 0% LTCG from those sales.
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Old 06-06-2020, 03:45 PM   #18
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No, I used Income Strategy for a month or two and then dropped it. For us is seemed to be saying that no matter what I did it wasn't going to move the needle a lot.

What I had decided was to convert to the top of the 0% preferenced income bracket for 2020 while we were still subject to state income taxes, and increase it to just below the IRMAA limit for 2021 and forward until RMDs start at 72, then reduce Roth conversions to a level where all my tIRA balances are converted when I am 90.

However, along comes COVID and the March swoon of stocks and I chose to sell equities and for 2020 use my headroom for 0% LTCG from those sales.
What do you mean, you sold (all) your stock funds ?
You mean, you are not in the market now, I learn & have benefited from your posts & your analysis of various situations. This is a surprise for ME. I am sure you had your reasons.

I know from a different thread you & Midpack had used Income Strategy, I am going to try it soon to plan my withdrawals starting next year.
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Old 06-06-2020, 05:26 PM   #19
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Yup, sold them all. Surprised me too. I will eventually get back in if the value proposition of equities evers seems sensible again.
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Old 06-06-2020, 05:46 PM   #20
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Yup, sold them all. Surprised me too. I will eventually get back in if the value proposition of equities evers seems sensible again.
There's a forest fire in front of the next few months of business reporting so it makes sense to she what's left standing after the fires have nothing left to burn. Maybe last quarter of the year?
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