Withdrawal Phase Modeling -- Any Suggestions?

R

Remediator

Dryer sheet wannabe
Joined
Oct 26, 2005
Messages
12
My wife (61) and I (62) have been happily retired for a little over a decade. We've withdrawn at or under the Safe Withdrawal Rates (SWR) since pulling the plug, and are doing fine (maybe better than fine) so far.

We've funded our living expenses mostly through annual sales of taxable MFs to rebalance our portfolio, but this feels like a tactical approach. rather than a strategic one. I'd like to model the (hopefully) remaining 30 years of our withdrawal/social security phase to help answer questions like:

a. what order should we sell assets in? (taxable, IRAs, Roth-IRAs?)
b. should we convert some IRAs to Roth-IRAs before RMDs start kicking in?
c. when should we start SS and pension payments?

I've been looking for a software package that would help us plan for these withdrawal years, but I haven't found much -- just a bunch of articles that say "it depends," and "see your tax professional," (which would be me and Turbo Tax). Has anybody out there found something useful?
 
Many folks here use I-ORP. https://www.i-orp.com/SocSec/index.html

Your overall goal should be to minimize taxes over your lifetime. I created a spreadsheet where I input each income source and the % of th source that is taxed, calculating taxes on an annual basis. My goal was to minimize taxes for as many years as posssible, taking distributions from the IRAs before RMD age, and keeping my overall taxes low for as long as possible. But this strategy works for me, as I can lower much of my IRAs and taxable prior to SS kicking in. Those with really large (e.g., >$3-4M) assets may not be able to use this strategy effectively.

a. Depends on a lot of things...total income, income tax bracket, etc. Generally, though, ROTH IRAs should be used last, as they grow tax-free. You'd need to look at the LTCGs on the taxable, and see if you can take these tax-free or not (depending on whether your MFJ "Taxable Income" is less than $78,750. I'd personally try to manage my income so that it was.

b. If you determine that your paying taxes now will lessen your tax liablity once SS kicks in.

c. Generally, sometime between age 67 and 70. Opinions vary widely here, but your health and other income are two factors. If you can deplete IRAs before SS kicks in, you may lessen the tax bite on the SS payments.
 
Have you looked at old threads? I'd do an advanced search with "Withdrawal" in the thread title.

Some people use i-orp. It's probably the best thing for what you're looking for. I've run it but I don't follow it. It's been a few years now so I can't really remember, but it seemed a little off in what I wanted to do, and I don't think it factored in managing MAGI for the ACA subsidy, at least not when I tried.

The basic strategy is usually to try to have pretty even income over the years so that you don't have some spike years with taxes hitting high rates. Trying for an ACA subsidy can alter that strategy. It may take a little more investigation to try to avoid the SS tax torpedo, if you even can.

Taxable is great to draw from, but if you think you'll be leaving a lot to heirs, you may want to hold onto heavily appreciated shares to give them a free stepped-up basis. I would almost certainly do any tax loss harvesting I can each year.

My own goal is to fully convert my tIRA to a Roth before I start taking SS at 70, but I wouldn't do that at a high tax rate relative to the marginal rate after 70. But once I start SS and a small pension I expect my taxes to go up, so I don't want to add any RMDs to that mix if I can avoid it by converting.

When to take SS depends on your goals--longevity insurance? get what you can before things change? maximize for a shorter life expectancy? spousal strategy if one of you was a low earner? Opinions abound here. Stick around. We're due for another thread soon. Or just search for threads on the topic.

Do you take MF distributions in cash rather than reinvest? I find that a good way to cover a good part of my expenses, then I sell from whatever asset class I'm overweight in as needed, which helps rebalance to my desired AA. I'm under 59 so I'm not taking from my IRAs yet.

It really does depend. Way too many factors. You can try giving all of your information and getting help here, but if you miss some details you might get faulty advice. Someone will find exceptions to my advice, and it will be valid for some situations.

In addition to using Turbo Tax, I do a lot of modelling with spreadsheets. If that's not your thing, most likely anything you do can't be too wrong as long as you aren't paying wildly uneven taxes from year to year. That would be a sign that you're not being tax efficient. Unless you're winning lotteries or doing short-term trading, you should be able to more or less even out taxes year to year.
 
Remediator said:
My wife (61) and I (62) have been happily retired for a little over a decade. We've withdrawn at or under the Safe Withdrawal Rates (SWR) since pulling the plug, and are doing fine (maybe better than fine) so far.

We've funded our living expenses mostly through annual sales of taxable MFs to rebalance our portfolio, but this feels like a tactical approach. rather than a strategic one. I'd like to model the (hopefully) remaining 30 years of our withdrawal/social security phase to help answer questions like:

a. what order should we sell assets in? (taxable, IRAs, Roth-IRAs?)
b. should we convert some IRAs to Roth-IRAs before RMDs start kicking in?
c. when should we start SS and pension payments?

I've been looking for a software package that would help us plan for these withdrawal years, but I haven't found much -- just a bunch of articles that say "it depends," and "see your tax professional," (which would be me and Turbo Tax). Has anybody out there found something useful?
Click to expand...

I haven't found any useful software out there (at least free anyway). i-orp is ok, but it often recommends way more Roth conversions than seems sensible to me. Ours is a similar situation to you... retired about 7 years, currently (63) me and 64 (DW).

If you're 61/62, then it is really only the next 8-9 years that you can do anything strategic IMO. Once you are subject to RMDs there aren't any levers to pull to change things dramatically.

Through 2017, we lived off of taxable accounts and did Roth conversions to the top of the 15%/12% tax bracket (other than the first year were we did some capital gains trading instead of Roth conversions). So from 2013-2017 we converted about $259k and paid $19k in federal tax (7.4%) since some conversions were offset by deductions, some in the 10% bracket and the rest in the 15%/12% bracket.

However, I found that the amount that I could convert was getting smaller each year because of capital gains from sales of equities to fund living expenses. So in 2018, I changed course and decided to live off of tax deferred account withdrawals and leave the taxable equities to grow and hopefully one day get a stepped-up basis when our kids inherit them while reducing tax-deferred accounts that they'll have to pay taxes on withdrawals.

I do have a simple spreadsheet that models out these withdrawals from now until I turn 70. The amount that we can withdraw at low taxes will reduce a bit when DW starts her SS at 66. Once RMDs start we'll still be in the 22% tax bracket, but the RMDs will be lower so that is a first world problem.

I guess that my epiffany last year was that capital gains from taxable account sales to generate living money were impeding our ability to drain tax-deferred accounts before RMDs start and since those taxable accounts get a stepped-up basis so can be inhetired by our kids tax-free, it didn't make sense to continue using those in our circumstances.

YMMV.
 
Really good responses so far -- clearly you guys understand the issues and I agree with most of your comments. Thank you! What a great resource!

I have done some spreadsheets on my own (they used to be my thing, not so sure anymore ...), but I found the hardest thing was estimating our annual tax bill based on some combination of reinvested dividends, interest, LTCG, STCG, and (one day) taxes on SS payments, pensions, and RMDs. I felt like my estimate of taxes might be +/- 30%, even assuming the tax brackets and rates remain unchanged (excepting for inflation). This was more than the difference in our final asset balances if we (a) did nothing differently, and (b) did everything we could for the next 8-9 years to minimize our NPV taxes, so it seemed a like a lot of work that got lost in the uncertainties.

I'll check out i-ORP, but I remember working with that a long time ago, and as I recall, it didn't get me where I think I want to be.
 
Remediator said:
...I found the hardest thing was estimating our annual tax bill based on some combination of reinvested dividends, interest, LTCG, STCG, and (one day) taxes on SS payments, pensions, and RMDs.
Click to expand...
It's complicated. But in retirement, you should not reinvest dividends in taxable accounts...cash them out! No need to pay taxes on them twice!
 
It is complicated... my spreadsheet actually has a minature federal and state tax calculation embedded into it... and qualified dividends and LTCG at one rate and ordinary income at another complicate it even more.
 
HNL Bill said:
It's complicated. But in retirement, you should not reinvest dividends in taxable accounts...cash them out! No need to pay taxes on them twice!
Click to expand...

Agree that in retirement it makes sense to not reinvest divs, just use them as part of your withdrawal. It also could create a wash sale if you need to sell some of the fund.

But I don't see how you get taxed twice on them if you reinvest? You get taxed as divs are paid, reinvesting is reflected in the cost basis, so that you are not taxed twice.

-ERD50
 
pb4uski said:
.....
I guess that my epiffany last year was that capital gains from taxable account sales to generate living money were impeding our ability to drain tax-deferred accounts before RMDs start and since those taxable accounts get a stepped-up basis so can be inhetired by our kids tax-free, it didn't make sense to continue using those in our circumstances.

...
Click to expand...

I've been thinking about this, but mostly in the more near term situation for my DW. That my taxable account will step up in basis and be available tax free for her. Unlike my IRA account.

For this to work, each has to have their own named taxable account.

For that reason, AND because our State does not tax IRA withdrawals, I'll take $$ out of my IRA and let my taxable accounts grow.
 
ERD50 said:
Agree that in retirement it makes sense to not reinvest divs, just use them as part of your withdrawal. It also could create a wash sale if you need to sell some of the fund.

But I don't see how you get taxed twice on them if you reinvest? You get taxed as divs are paid, reinvesting is reflected in the cost basis, so that you are not taxed twice.

-ERD50
Click to expand...
Yes, you are correct, I misspoke.

You are taxed for 100% of the dividends. They are reinvested. Then you pull money out of the fund. You're paying tax on LTCGs or STCGs....based on the tax basis you chose (average, or first in first-out). Let's say you received $10K in dividends and reinvested it. Then you pull $10K out of the fund to spend. You'll pay taxes on the gains, which represent 50% of your withdrawal if your funds have doubled in value. If you were able to pull out the LAST in (the dividends), you wouldn't owe any additional tax. But you can't.

You'll pay taxes on the dividends ($10K) and the other gains ($5K), exposing $15K to taxes, rather than $10K. The outcome could be worse or better, depending on what % of the funds represent capital gains, and your chosen cost basis.
 
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HNL Bill said:
Yes, you are correct, I misspoke.

You are taxed for 100% of the dividends. They are reinvested. Then you pull money out of the fund. You're paying tax on LTCGs or STCGs....based on the tax basis you chose (average, or first in first-out). Let's say you received $10K in dividends and reinvested it. Then you pull $10K out of the fund to spend. You'll pay taxes on the gains, which represent 50% of your withdrawal if your funds have doubled in value. If you were able to pull out the LAST in (the dividends), you wouldn't owe any additional tax. But you can't.

You'll pay taxes on the dividends ($10K) and the other gains ($5K), exposing $15K to taxes, rather than $10K. The outcome could be worse or better, depending on what % of the funds represent capital gains, and your chosen cost basis.
Click to expand...
You misspoke again. You have the option to use SpecID, where you could select whichever shares you want, including the last in--the dividends.

I agree you should not be reinvesting dividends, in fact I mentioned it before you did, but the reasons are mostly for simplicity--since you are now starting to withdraw money in retirement, you might as well keep this in cash, and not worry about short-term volatility for money you need now. Plus it helps avoid possible wash sale issues as ERD says. If you've locked your fund into using average cost/share, your reason in this post holds. I strongly advise against using avg cost for any shares acquired since 2011 or whatever the year was that they have to track and report basis for you.
 
ERD50 said:
Agree that in retirement it makes sense to not reinvest divs, just use them as part of your withdrawal. It also could create a wash sale if you need to sell some of the fund.

But I don't see how you get taxed twice on them if you reinvest? You get taxed as divs are paid, reinvesting is reflected in the cost basis, so that you are not taxed twice.

-ERD50
Click to expand...

+1
 
My retirement spreadsheet has a tab called "Taxes." It's basically a simplified federal tax return for each year from now to age 100. I increase brackets and the standard deduction for inflation. The rest is pretty basic math, but yes, it can get complicated. There's also a tab called "Withdrawal Strategy" which feeds the tax tab with amounts like dividends, Roth conversions, RMDs, and everything else needed to do the calcs. The basic purpose of the withdrawal tab is to cover gap spending from whatever source minimizes future lifetime taxes.

In our case, we have 2 small pensions we are collecting today (age 58). We also have a rental property and take taxable dividends in cash. All this covers 65-70% of spend. The rest comes from selling equities in the taxable account. Meanwhile, we are Roth converting to the top of the 12% bracket, taking advantage of tax loss harvesting most years, and still contributing the max to an HSA. Our plan is to operate this way until SS and RMDs at 70. If things get tight at any point, we have the option to start DW's SS a bit early or reduce discretionary spend.

We're less concerned about legacy objectives and more concerned about maximizing spending capacity, while also protecting against inflation, LTC, and longevity. There's no chance that we will completely convert our tIRAs. My basic plan is to hit 70 with a balanced mix of taxable, tax-deferred, and tax-free (Roth + HSA). This provides a lot of withdrawal flexibility to keep taxes in check after SS and RMDs start.
 
HNL Bill said:
Your overall goal should be to minimize taxes over your lifetime. ...
Click to expand...
With respect, I think this is fundamentally wrong. It would, for example, lead one to buy muni bonds even though the net from a taxable bond, after taxes, would be greater.


IMO the only sensible goal is to maximize the money in my pocket at the end of the game. If that involves paying taxes, so be it.
 
Remediator said:
My wife (61) and I (62) have been happily retired for a little over a decade. We've withdrawn at or under the Safe Withdrawal Rates (SWR) since pulling the plug, and are doing fine (maybe better than fine) so far.

We've funded our living expenses mostly through annual sales of taxable MFs to rebalance our portfolio, but this feels like a tactical approach. rather than a strategic one. I'd like to model the (hopefully) remaining 30 years of our withdrawal/social security phase to help answer questions like:

a. what order should we sell assets in? (taxable, IRAs, Roth-IRAs?)
b. should we convert some IRAs to Roth-IRAs before RMDs start kicking in?
c. when should we start SS and pension payments?

I've been looking for a software package that would help us plan for these withdrawal years, but I haven't found much -- just a bunch of articles that say "it depends," and "see your tax professional," (which would be me and Turbo Tax). Has anybody out there found something useful?
Click to expand...

Try flexible retirement planner
https://www.flexibleretirementplanner.com/wp/planner-launch-page/
 
I have not used this service https://www.incomestrategy.com/ yet, because I think I've been doing pretty well by reading in here and elsewhere.

But as I approach going on Medicare (2 years away) the ACA variable goes away. Around that time I have in my plan to collect a pension and then SS at 70. My wife is 2 years behind me.

Given all the variables I am thinking of using this service for a period of time to verify my plan or get new information. Once I'm satisfied I would discontinue.

Bob D
 
This thread interests me as I have contemplated the same questions as I prepare to launch at the end of this year at 55 (reasonable chance I may chicken out:eek:). I just had a friend, very fit/healthy, unexpectedly die in his sleep at the tender age of 60. While I agree we all need to be responsible and plan for some life span based on hereditary factors or statistics, I wonder sometimes if trying to form strategies for age 70 1/2 is really the right play. None of us really know how long we got and generally speaking, the odds are greater we are alive for the next 5 years than the 5 yrs after. Sooo... maybe we should be considering what the best strategy is for the next 5 - 10 yrs and let the RMD chips fall where they fall. Take the the most tax effective withdrawal strategy in the near term and when that is exhausted, go to the next tier. We know what we know right now as it relates to tax structures, and sure, we can try and predict the future relative to past history, but if you got enough dough, why not implement the best tax efficient withdrawal strategy now while you are younger and more active in the earlier years of retirement as you may be wearing a diaper watching Gun Smoke and Rifleman reruns in your 70's (if you are still upright!). What's the worst thing that happens at 70 1/2... you are paying more taxes then than today? I am betting I will spend/want to spend more $$ in my earlier years than my later years. And what's wrong with Gun Smoke?? Am I alone here??
 
SoReady said:
I have not used this service https://www.incomestrategy.com/ yet, because I think I've been doing pretty well by reading in here and elsewhere.

But as I approach going on Medicare (2 years away) the ACA variable goes away. Around that time I have in my plan to collect a pension and then SS at 70. My wife is 2 years behind me.

Given all the variables I am thinking of using this service for a period of time to verify my plan or get new information. Once I'm satisfied I would discontinue.

Bob D
Click to expand...
From a 5 minute look, that actually looks pretty interesting. Let us know how it goes if you do subscribe.
 
target2019 said:
Tried Flexible Retirement Planner for the first time. Simple to use, with options that can be modified. Not as useful as other planners which allow you to enter numbers for spouse. Still, a good tool to try out before moving on to others.
Click to expand...

You could use advanced options and model it if you needed, I think.
 
my plan is to live off of taxable assets as long as I can

so for 2020, we plan to live off of our defined benefit pensions, rentals, muni bond interest and dividends supplemented by drawing down taxable cash savings

this allows me to minimize MAGI, and thus (hopefully) qualify for subsidized medical and also allows the tax-qualified assets to accumulate tax free
 
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ERD50 said:
Agree that in retirement it makes sense to not reinvest divs, just use them as part of your withdrawal. It also could create a wash sale if you need to sell some of the fund.

But I don't see how you get taxed twice on them if you reinvest? You get taxed as divs are paid, reinvesting is reflected in the cost basis, so that you are not taxed twice.

-ERD50
Click to expand...

The taxed twice part (actually two taxable events) would be caused by needing to turn around and sell some of the fund you recently reinvested in - due to rebalancing or withdrawal or both.

If you’re clever, you’ll sell the highest cost basis shares to minimize gain, otherwise you might be selling shares with a lot of gain. If it’s recently purchased shares you may have a short-term cap gain. If you see a loss, you have to be careful of the timing to avoid a wash sale if the reinvestment was recent. It can be tricky.
 
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