Gap Year Income (from age 59 – 60) Before Pension Starts at Age 60 – Where to Pull Money From?

[G-Man]

I am currently 58 and receiving a retirement severance package until next year (2025). Next year, I will turn 59 and need to determine where my source of income will come from to fill the gap (59-60) before my pension starts at age 60. I need about $60k to fill the gap.

Here are the options I have:

• Use my Taxable Account (checking/saving account) – This will deplete all the funds I have in my checking account. Not sure if that is good idea because I will not have immediate access to any emergency funds.
• Use the Fixed Income bucket within my 401k – I have carved out a fixed income bucket within my 401k that has about $75k.
• Turn on my pension at age 59 and incur a small reduction in the yearly amount – At age 60, I am eligible for my pension with no reduction. My pension does not have a cola adjustment. If I turn on my pension at age 59, it will reduce my yearly amount by $3k per year. Over a 30-year time period, that is $90k.

I modeled these scenarios out in the RightCapital retirement planning software and Option 3 gives me the larger end-of-plan balance.

Would love to hear from others on what you would recommend. I’m leaning toward Option 3 but can’t stomach the idea of not getting my full pension at age 60.

Thanks,

 

[qwerty3656]

I don't know the right answer for you, but just make sure you have a plan for healthcare from 60-65. If it's ACA than income level becomes important.

 

[walkinwood]

What percentage of your pension is the $3k reduction?

Imho, using tools like rightcapital is the way to go. They can optimize withdrawals in ways that are not immediately obvious. However, the tool suggest one method over the other based on your inputs - most importantly, future market returns (equities, bonds, cash) & life expectancy, as well as tax & SS reduction assumptions.

So check the sensitivity of the recommendation by making small changes in one of the assumptions & leaving the rest the same. I'd start with market returns.

 

[G-Man]

I don't know the right answer for you, but just make sure you have a plan for healthcare from 60-65. If it's ACA than income level becomes important.

Retiree healthcare plan from previous employer. Either my previous employer or my wife previous employer. In addition, I plan to exhaust my HSA savings to pay for healthcare premiums during this time period.

 

[Al18]

Many 401K plans allow you to withdraw without penalty if you separate from service at age 55 or later. Note Federal taxes are withheld at 20% for all 401K withdrawals. You should withdraw from stocks and fixed income according to your asset allocation plan.

 

[G-Man]

What percentage of your pension is the $3k reduction?

Imho, using tools like rightcapital is the way to go. They can optimize withdrawals in ways that are not immediately obvious. However, the tool suggest one method over the other based on your inputs - most importantly, future market returns (equities, bonds, cash) & life expectancy, as well as tax & SS reduction assumptions.

So check the sensitivity of the recommendation by making small changes in one of the assumptions & leaving the rest the same. I'd start with market returns.

It represents around 5.7%. I think it's a 1/2% reduction each month until I reach age 60.

 

[G-Man]

Many 401K plans allow you to withdraw without penalty if you separate from service at age 55 or later. Note Federal taxes are withheld at 20% for all 401K withdrawals. You should withdraw from stocks and fixed income according to your asset allocation plan.

Yes. My 401k plan allows the Rule of 55. I have confirmed that I'm able to make withdrawals without incurring the 10% penalty.

 

[G-Man]

Any other way I can quantify the pros and cons if I take my pension early?

 

[walkinwood]

You could see what an immediate annuity that would give you $3000 a year would cost.

I don't know if this is a good way to see if it is a good deal or not, but if the cost of the IA is more than your budget for that one year, it is probably a bad idea to take the pension early.

 

[G-Man]

You could see what an immediate annuity that would give you $3000 a year would cost.

I don't know if this is a good way to see if it is a good deal or not, but if the cost of the IA is more than your budget for that one year, it is probably a bad idea to take the pension early.

Since 90% of our retirement assets are in tax-deferred accounts (401ks) and the RightCapital retirement planning software is predicting we will have huge RMDs starting at age 75, the right option may be to draw down on the fixed income bucket ($75k) within my 401k and leave the pension alone. This strategy will make a small dent in the RMD problem that is predicted by the software at age 75, allow me to take my pension at age 60 without any reduction, and keep my checking account / emergency fund at around $60k.

 

[SevenUp]

Since 90% of our retirement assets are in tax-deferred accounts (401ks) and the RightCapital retirement planning software is predicting we will have huge RMDs starting at age 75, the right option may be to draw down on the fixed income bucket ($75k) within my 401k and leave the pension alone. This strategy will make a small dent in the RMD problem that is predicted by the software at age 75, allow me to take my pension at age 60 without any reduction, and keep my checking account / emergency fund at around $60k.

Seems a good strategy. Would you get a larger annual pension payment if you defer starting to a later age?

 

[G-Man]

Seems a good strategy. Would you get a larger annual pension payment if you defer starting to a later age?

Yes.. Between $3000 - $3500 more per year if I wait until age 60. However, my pension is non-cola.

 

[G-Man]

I know I would need to pay taxes on that $75k that I withdraw from my 401k. However, if I put the $75k in a brokerage, savings, cd, money market fund, etc. until I need it, it would be taxed again on the earnings/dividends.

Would converting the $75k from my 401k to my ROTH IRA and then draw down on the conversion amount as I need it save on taxes in the future? That way it will allow earnings to grown tax-free in the Roth IRA.

Would love to hear about this approach.

 

[SevenUp]

Seems a good strategy. Would you get a larger annual pension payment if you defer starting to a later age?

Yes.. Between $3000 - $3500 more per year if I wait until age 60. However, my pension is non-cola.

Do you get more per year if you defer starting past age 60?

 

[G-Man]

Do you get more per year if you defer starting past age 60?

No. I do not get any more per year after age 60. There is no benefit in deferring after age 60.

 

[G-Man]

Any other feedback?

 

[DuluthGA]

Maybe work some part time job and pull whatever else you need from your taxable cash fund? If some big expense comes up that’s more than your cash fund then draw from 401k. That would seem to preserve your pension, 401k and a portion of your cash account. Or just pull it all from your taxable cash and if emergency comes up pull it from the 401k. Roll the dice you wont have a big expense but have funds you can access if you do

 

[Yoheadden]

Since 90% of our retirement assets are in tax-deferred accounts (401ks) and the RightCapital retirement planning software is predicting we will have huge RMDs starting at age 75, the right option may be to draw down on the fixed income bucket ($75k) within my 401k and leave the pension alone. This strategy will make a small dent in the RMD problem that is predicted by the software at age 75, allow me to take my pension at age 60 without any reduction, and keep my checking account / emergency fund at around $60k.

This is what I was thinking. It’s a small dent, but at least it’s something and the pension doesn’t take the hit.

 

[G-Man]

Thanks for all your feedback so far.

 

[Al18]

As I mentioned in my post above, your 401K provider would automatically withhold 20% for Federal taxes. They will ask you if you want to withhold more for Federal taxes or withhold some for state taxes.

With the dramatic increase in stock values this year (up 16% this year), you’re stock/fixed income ratio is likely out of proportion and you sell stock funds to bring the ratio back into control.

 

[jollystomper]

I would pull from the tax deferred as that is your current largest source, and wait until 60 for your pension.

You have many years for that 75K withdrawal to be made up, if so desired. You might find that it made little or no difference for RMDs - but that would be a "first world" problem .

 

[G-Man]

I would pull from the tax deferred as that is your current largest source, and wait until 60 for your pension.

You have many years for that 75K withdrawal to be made up, if so desired. You might find that it made little or no difference for RMDs - but that would be a "first world" problem .

As I think about it more and more, I do believe the withdrawal from the tax-deferred bucket is the best strategy in this scenario. As you mention, it probably won't make a big difference in my RMD problem.

Thanks for your feedback and everyone that responded.

 

[pb4uski]

Since 90% of our retirement assets are in tax-deferred accounts (401ks) and the RightCapital retirement planning software is predicting we will have huge RMDs starting at age 75, the right option may be to draw down on the fixed income bucket ($75k) within my 401k and leave the pension alone. This strategy will make a small dent in the RMD problem that is predicted by the software at age 75, allow me to take my pension at age 60 without any reduction, and keep my checking account / emergency fund at around $60k.

This is what I was thinking. I would take advantage of the low tax bracket that you will be in after retiring but before SS and pensions start as much as possible.

By deferring SS and the pension as long as it makes sense to do so you can do a combination of penalty-free withdrawals for spending money needs supplemented with Roth conversions to the top of the 12% tax bracket (or maybe even higher).

 

[G-Man]

This is what I was thinking. I would take advantage of the low tax bracket that you will be in after retiring but before SS and pensions start as much as possible.

By deferring SS and the pension as long as it makes sense to do so you can do a combination of penalty-free withdrawals for spending money needs supplemented with Roth conversions to the top of the 12% tax bracket (or maybe even higher).

As always thanks for responding pb4uski.

Unfortunately, I will never see the 12% marginal tax bracket in retirement due to our 3 guaranteed income sources starting at my age 60 (2 pensions and wife's SS benefit). My wife is 3 years older than I am and plan to take her SS benefits starting at age 62. I will delay my SS benefit until age 70.

So, I would need to look at Roth conversions to the top of the 22%/25% marginal tax bracket.

 

[pb4uski]

What do you expect your tax on RMDs to be? Probably not worth it if you're in the 22%/25% range before Roth conversions.