Recommend easy book with the basics of withdrawing strategy

[UpQuark]

I have barely enough $ to retire (firecal success rate 98% with the failures less than -20K, assuming I accurately estimated what I will need to withdraw each year), and was planning to retire in August but now looks more likely to be end of the year or next spring. I will start taking SS when I retire (maybe 2 months earlier if I work until next spring), this will only be a year or less before than my full SS retirement age.



I feel very overwhelmed by withdrawal strategies. Is there a very easy book that could help me understand the best way to sell my investments in retirement?


For example, do I withdraw dividends and not sell the source of the dividends, or do I sell a little bit of everything? Does it make a difference that most of the dividends are apparently in the regular IRA?



I use Fidelity and I am not even sure what strategy to use to take the RMD from the little inherited IRA I have. I don't know what strategy it used to do, I turned it off for 2020 because I didn't have to take that rmd, and now that I have to turn it back on, I don't know whether to pick a source for it to sell to get the RMD or choose the option to evenly withdraw from each thing. One of the items in the account is bonds, do I take the RMD from the bonds first and wipe that out, it would run out in a couple years?


There is an example page on Fidelity that shows taking money proportionally from taxable and non taxable accounts reduces the total spent on taxes in retirement. But, I have very little in non-taxable accounts, and I wonder if I should preserve it for some year that I need to replace my car, or maybe use it up first of all to enjoy myself extra (travel) in my first year or two of retirement without having a lot of taxes?


I did not pay attention to financial topics soon enough in my life to provide myself with an ideal balance of account types. I have this percentage split of account types:
Investment account: 22%
Regular IRA/Regular 401K: 68%
Inherited IRA: 7% (inherited under old rules)

Roth IRA: 2%
an old HSA (no longer eligible to contribute): 1%


Anyone know a book or webpage with simple rules that aren't overwhelming?


Thanks!

 

[RunningBum]

I don't think you're going to find something that says "Always do A, B and C" because every situation is different.

I think you have the right idea to leave your Roth, HSA, and probably some of your taxable account alone for emergencies or large expenses like car replacement, so that you don't have a big jump in taxes for the year you need it. For most people the idea is to try to keep your income and taxes level over your remaining years though there are exceptions if you are running into things like ACA or IRMAA cliffs where you might go with uneven taxable income so that you only go over those cliffs some years rather than every year. That's an example of why there aren't simple rules for withdrawals.

Personally I'd be a little nervous splurging on extra travel with the stock market so high and so much uncertainty about inflation. But that's up to you. A lot depends on whether there are other things you can cut back on if your first few years of retirement are bad for you economically.

Do you have a target allocation, like 50% stocks, 50% bonds/cash? If so, use your RMDs and other withdrawals to balance that out. If the stock market does well, your stocks likely rise to over 50%, so sell stocks to withdraw from, and vice versa if stocks drop and bonds are over 50%.

Many of us turn off dividend reinvestment in taxable accounts to avoid possible wash sales or short term capital gains. An IRA is unaffected by all that, so you can reinvest dividends, or not if you prefer.

 

[rkser]

I am starting withdrawal from retirement savings in a couple of months.

I plan to direct all the dividends from taxable Non Ira accounts & interest from CDs to our online savings bank(used to be a high interest bank) as I will pay taxes on the dividends anyway. Our yearly Expenses - Taxable Dividends = Deficit needing to be funded ,

Then decide which would be the most tax friendly way to fill the deficit,
Either Tax Deferred (Ordinary Income Tax) or Taxable (Cap gains) and add Roth Conversions.

I am 65 & RMDs will be coming at age 72, keeping an eye on taxes use the IRAs if possible in an effort to lower the IRA balance, looking out if I am crossing the Tax Brackets or the IRMAA levels to control the Medicare Premiums.

I could not find a easier way, maybe in the next few years will become easier doing it every year. If it is becoming too complicated, will go to a an Accountant to plan the sources of the yearly income.

 

[sengsational]

I don't have a book recommendation, and I won't (ehem), write one here, but I can give you some ideas to think about.

Generally, tactics for withdrawal are to be able to spend the most between now and the end, which doesn't exactly align with paying minimum taxes, but that's a reasonable starting point. And, as mentioned, leveling taxes across all years is a pretty good stab at paying minimum taxes.

From a tax perspective, you have 75% tIRA style (you pay when you pull), 22% where spending doesn't impact taxes, and 3% growing tax-free. Not knowing the magnitude, it's impossible to say with precision, but one strategy would be to spend out of the 22% bucket and do Roth conversions (counts as income) up to some level that made sense. By that, I mean, since the "goodies" (lower marginal rates and things like health insurance premium tax credits) in the tax code start disappearing when you show too much income, it often make sense not to show too much income. On the other hand, it make perfect sense to show enough income to fill up the zero and low tax rate brackets.

One thing that sometimes trips-up the plan is that you want to, say, spend out of your after tax bucket, but that would leave you with a lopsided asset allocation. The solution is to sell in one tax bucket, and buy in another tax bucket (essentially sell to yourself).

I usually recommend running i-orp (scroll-down to extended orp). It takes a long time to figure out how to use it, though. The good news is that it gives you a plan for withdrawals by tax bucket. Not the "perfect" plan, but one that can be considered. I recommend making the percent equities and the percent bonds the same across all 3 tax buckets (even if it isn't that way in your accounts). This will optimize on taxes, not on expected return.

 

[Lewis Clark]

A few years ago, about 20 FIRE bloggers got together and all wrote posts discussing how they planned to implement their post-retirement spending plans. Here is a link to one of them, and this post contains links to the others.

https://earlyretirementnow.com/tag/drawdown/

You may get some useful ideas here.

 

[pb4uski]

OP, I think you might be overthinking it. It's not very complicated. But on the other hand, since it is so situational there are not any good books out there to my knowledge.

Most of us turn off reinvestment of dividends in taxable accounts and use that money for living expenses, which reduces needed withdrawals. What I did was to arrange a monthly automatic transfer from my taxable account to the checking account that we use to pay our bills... I refer to this as my monthly "paycheck". That covers us for most months, but we have some large lumpy expenses in November... property taxes and insurance... and I ususally do a special withdrawal as needed for that or any other unanticipated lumpy expenses (like for example, replacement of a car).

For most of us, once we retire and no longer have earnings so our tax bill close to evaporates. From what you wrote, once you retire your income will be mostly SS and interest and dividends from taxable investments. This is an ideal time to do Roth conversions at a low tax cost.

The first step is to try to estimate what your tax bracket will be once RMDs are required if you don't do any Roth conversions... a start would be to look at your tax bracket with SS, taxable account interest and dividends and ~4% of your tax-deferred accounts as an RMD. For us, that puts us towards the top of the 12% tax bracket. So I am doing Roth conversions to the top of the 12% tax bracket and paying about 8.5% of the amount converted in taxes... a portion of the conversion is 0% since it is offset by the standard deduction, some is at 10% and the remainder at 12% and it averages out to about 8.5%. A screaming deal given that I was in the 28% margnal tax bracket or higher for many of the years that I deferred that income.

Unfortunately, even after doing that for many years the Roth conversions barely make a dent in our tax-deferred balances but it does result in a nice shift from taxable to Roth. When I retired at the end of 2011, we were 44% taxable, 53% tax-deferred and 3% tax-free. Today we are 15% taxable, 59% tax-deferred and 26% tax-free.

Many of us have a target AA and rebalance periodically. Some people rebalance strictly near year end or on a specific date and others do it more when they feel they need to. I tend to rebalance near the end of the year in concert with my year-end tax planning.

We would need a bit more details on your situation to offer better advice. Good luck.

 

[rkser]

OP, I think you might be overthinking it. It's not very complicated. But on the other hand, since it is so situational there are not any good books out there to my knowledge.

Most of us turn off reinvestment of dividends in taxable accounts and use that money for living expenses, which reduces needed withdrawals. What I did was to arrange a monthly automatic transfer from my taxable account to the checking account that we use to pay our bills... I refer to this as my monthly "paycheck". That covers us for most months, but we have some large lumpy expenses in November... property taxes and insurance... and I ususally do a special withdrawal as needed for that or any other unanticipated lumpy expenses (like for example, replacement of a car).

For most of us, once we retire and no longer have earnings so our tax bill close to evaporates. From what you wrote, once you retire your income will be mostly SS and interest and dividends from taxable investments. This is an ideal time to do Roth conversions at a low tax cost.

The first step is to try to estimate what your tax bracket will be once RMDs are required if you don't do any Roth conversions... a start would be to look at your tax bracket with SS, taxable account interest and dividends and ~4% of your tax-deferred accounts as an RMD. For us, that puts us towards the top of the 12% tax bracket. So I am doing Roth conversions to the top of the 12% tax bracket and paying about 8.5% of the amount converted in taxes... a portion of the conversion is 0% since it is offset by the standard deduction, some is at 10% and the remainder at 12% and it averages out to about 8.5%. A screaming deal given that I was in the 28% margnal tax bracket or higher for many of the years that I deferred that income.

Unfortunately, even after doing that for many years the Roth conversions barely make a dent in our tax-deferred balances but it does result in a nice shift from taxable to Roth. When I retired at the end of 2011, we were 44% taxable, 53% tax-deferred and 3% tax-free. Today we are 15% taxable, 59% tax-deferred and 26% tax-free.

Many of us have a target AA and rebalance periodically. Some people rebalance strictly near year end or on a specific date and others do it more when they feel they need to. I tend to rebalance near the end of the year in concert with my year-end tax planning.

We would need a bit more details on your situation to offer better advice. Good luck.

A simplified & great reply.

 

[Time2]

Unfortunately, even after doing that for many years the Roth conversions barely make a dent in our tax-deferred balances but it does result in a nice shift from taxable to Roth.

Yes, I have that dreaded problem, i.e, having your tax-deferred balances grow faster than you can Roth convert them.

Here's to hoping it continues!

 

[Surewhitey]

A few years ago, about 20 FIRE bloggers got together and all wrote posts discussing how they planned to implement their post-retirement spending plans. Here is a link to one of them, and this post contains links to the others.

https://earlyretirementnow.com/tag/drawdown/

You may get some useful ideas here.

+1
These are all similar to each other, but are much like my ideas.

 

[qwerty3656]

So most of my money is actually in a Roths (75% Roth, 25% regular IRA). I was thinking I would be drawing down pro rata, but as I read more, I get the sense that people draw down regular IRA's 1st (up to a target income - either for ACA income targets, and/or for Roth conversion at the lowest tax brackets) and draw down Roth last.

 

[Markola]

I feel very overwhelmed by withdrawal strategies.

The withdrawal phase is entirely different emotionally and technically from the simple work/save accumulation phase. I, too, found it overwhelming, because it is too important to screw up while researching, implementing and then sticking to a plan long term, especially when the markets tank or unexpected expenses inevitably come up. Also, no two people do it the same way and everyone’s situation is unique, so no wonder you feel overwhelmed.

This board skews to passionate and competent do it yourselfers but the good news is, you don’t have to do it yourself. You probably have enough at Fidelity to get a free plan together with one of their in-house advisors and then just follow it. We do this with Vanguard and it’s been a massive relief to have help. Good luck.

 

[skyking1]

I just used I-ORP and it does try to answer some of the OP's questions, IMO.
https://www.i-orp.com/Plans/extended.html

 

[pb4uski]

So most of my money is actually in a Roths (75% Roth, 25% regular IRA). I was thinking I would be drawing down pro rata, but as I read more, I get the sense that people draw down regular IRA's 1st (up to a target income - either for ACA income targets, and/or for Roth conversion at the lowest tax brackets) and draw down Roth last.

Yes, there is no sense letting any headroom for no-cost or low-cost tIRA withdrawals or Roth conversions to go to waste.

 

[ncbill]

Not a simple book, but probably the best on the subject:

https://smile.amazon.com/gp/product/0997403403/

 

[tmitchell]

JL Collins has a stock series that may be useful, including a post on how to pull the 4%:

https://jlcollinsnh.com/2014/08/25/stocks-part-xxvi-pulling-the-4/