Retirement Plan 2.0 Stress Test

[dobig]

I am a confused. If your taxable account throws off $93K a year in income, how can your MAGI be below $63K? Is it because $93K includes ROC for some of these funds?

Yes. Around $30k is from ROC distributions.

 

[Koolau]

We're getting ready to retire this July at 55. Our plan is to use only dividends from our $2 mil taxable that will throw off around $93k/year at around a 4.5% yield. Our MAGI will be below $63,000

Yes. Around $30k is from ROC distributions.

How does that square with "Our plan is to use only dividends...?"

I don't care how you make your plan w*rk but you're apparently NOT using only dividends or am I missing something?

 

[dobig]

How does that square with "Our plan is to use only dividends...?"

I don't care how you make your plan w*rk but you're apparently NOT using only dividends or am I missing something?

I'm considering covered call distributions as dividends. Since those distributions are ROC or return of capital they count as zero towards MAGI or income taxes until initial investment is recouped. At that point dividends count as long term capital gains. Tax hit comes if/when you ever sell the fund which we have no plans of doing.

 

[Koolau]

I'm considering covered call distributions as dividends. Since those distributions are ROC or return of capital they count as zero towards MAGI or income taxes until initial investment is recouped. At that point dividends count as long term capital gains. Tax hit comes if/when you ever sell the fund which we have no plans of doing.

Thanks. I'm rather ignorant of such distribution plans. Appreciate the tutorial.

 

[dobig]

Thanks. I'm rather ignorant of such distribution plans. Appreciate the tutorial.

Maybe a better explanation.

Buy covered call income fund A at $10 a share. Receive $1 per share in distributions each year. It will take 10 years of receiving that $1 distribution before recouping initial $10 investment. That means you get 10 years of basically tax free income that counts as zero towards your MAGI.

Note: Most of these covered call income funds pay a ROC rate of between 92% - 99%. I'm using 100% for simplicity.

 

[Koolau]

Maybe a better explanation.

Buy covered call income fund A at $10 a share. Receive $1 per share in distributions each year. It will take 10 years of receiving that $1 distribution before recouping initial $10 investment. That means you get 10 years of basically tax free income that counts as zero towards your MAGI.

Note: Most of these covered call income funds pay a ROC rate of between 92% - 99%. I'm using 100% for simplicity.

Seriously, my knowledge is growing by leaps and bounds. Thanks again!

 

[dobig]

Seriously, my knowledge is growing by leaps and bounds. Thanks again!

Returning the favor. Can't count how much I've learned from you over the years.

 

[pb4uski]

Correct.
All withdrawals from tIRA are Ordinary Income...

True unless some contributions were non-deductible. I intentionally didn't make non-deductible IRA contributions because I didn't want to deal with that complexity.

 

[pb4uski]

Maybe a better explanation.

Buy covered call income fund A at $10 a share. Receive $1 per share in distributions each year. It will take 10 years of receiving that $1 distribution before recouping initial $10 investment. That means you get 10 years of basically tax free income that counts as zero towards your MAGI.

Note: Most of these covered call income funds pay a ROC rate of between 92% - 99%. I'm using 100% for simplicity.

If you are using these instruments to keep your MAGI low to qualify for ACA subsidies, the thing you need to be particularly wary of is that the final ROC portion of distributions received can be significantly different from their 19a-1 notice estimates and it could put you over the cliff... which would be a nasty surprise.

While I like the strategy, I would leave a lot of leeway from the cliff to make sure that you don't get pushed over the cliff by the taxable portion of dividends being higher than what you're expecting.

 

[dobig]

If you are using these instruments to keep your MAGI low to qualify for ACA subsidies, the thing you need to be particularly wary of is that the final ROC portion of distributions received can be significantly different from their 19a-1 notice estimates and it could put you over the cliff... which would be a nasty surprise.

While I like the strategy, I would leave a lot of leeway from the cliff to make sure that you don't get pushed over the cliff by the taxable portion of dividends being higher than what you're expecting.

Absolutely.

 

[Max Valerion]

Man I am driving myself crazy with options on how to set this up.

How about

$1.8m IRA's in some mix of equities (VOO and VT)
$100,000.00 in cash (SPAXX) as liquid in case of emergency expenses
$200,000.00 in SCHD I can use the dividends to offset some yearly living expenses plus hope SCHD itself grows over the next few years
$40,000.00 in cash (SPAXX) as travel seed money (then $24k gets added every Jan)
$300,000.00 in CD's
$50,000.00 in cash (SPAXX) for remainder of 2026 spending

Then at the end of every year I can evaluate and use a mix of dividends and cash to set me up for the following year, reinvest in CD's and do the same thing the following year. I can also rebalance inside of my IRA's as cash starts to draw down to make sure I avoid SORR.

That is about an 80/20 mix with lots of flexibility?

 

[SecondCor521]

Man I am driving myself crazy with options on how to set this up.

I'm going to suggest that your intense planning efforts might be an attempt to control the future outcome, which is unfortunately unpredictable and not guaranteed. It can be an understandable method by a capable and analytical mind to attempt to quell anxiety.

I did a very similar thing before I retired early. I had a four- or five-page document with all of my plans and steps and contingencies and checkpoints and backup plans.

What ends up happening is that the future unfolds for good or ill and almost certainly differently than our plans called for. All we actually can control is how we respond. If you've piled up "enough" resources and maintain your capability to respond, then you've got a really good chance of success, but there are ultimately no guarantees.

Rather than (over?) planning, I suggest you consider shifting your efforts to developing flexibility, resiliency, and options.

 

[Max Valerion]

I'm going to suggest that your intense planning efforts might be an attempt to control the future outcome, which is unfortunately unpredictable and not guaranteed. It can be an understandable method by a capable and analytical mind to attempt to quell anxiety.

I did a very similar thing before I retired early. I had a four- or five-page document with all of my plans and steps and contingencies and checkpoints and backup plans.

What ends up happening is that the future unfolds for good or ill and almost certainly differently than our plans called for. All we actually can control is how we respond. If you've piled up "enough" resources and maintain your capability to respond, then you've got a really good chance of success, but there are ultimately no guarantees.

Rather than (over?) planning, I suggest you consider shifting your efforts to developing flexibility, resiliency, and options.

I don't think it's that for me. I just want to make sure I start out with a solid plan. I know the numbers work and I know I can adjust but still want to make sure I start off on the right foot.

 

[Koolau]

I don't think it's that for me. I just want to make sure I start out with a solid plan. I know the numbers work and I know I can adjust but still want to make sure I start off on the right foot.

Going along with what SecondCor521 said, I retired late '05 - into the '08 debacle. I actually had plenty of money, but using it strategically (and tax efficiently) turned out to be problematic. A plan is good (and it's okay to plan). Just don't be surprised when something comes along and scraps your whole plan. My plan was turned upside down! Worst period of my FIRE financial life. Just sayin'

 

[Al18]

Your plan is good. Based on factors outside your control, you’ll probably need to make some adjustments. You have enough money to be able to accommodate these changes.

I’d recommend start working on a list of things you want to do in retirement, places to visit, etc. The money will be there - you don’t need to actively manage it.

 

[Dalton]

I don't think it's that for me. I just want to make sure I start out with a solid plan. I know the numbers work and I know I can adjust but still want to make sure I start off on the right foot.

If you think that covers enough of the bases you're trying to cover, then go with it.

When I thought I had my investment and income/withdrawal plan worked out, I then took the income/withdrawal numbers (not the most conservative numbers, but not the best possible, either) that my spreadsheet showed, and ran the numbers through the current tax forms, but I did it for next year, then an iteration for the year I plan to start taking SS (I tried a couple to see how waiting longer to start SS would affect my taxes), and I did an iteration of when RMDs start. For myself, I did these by hand on paper, taking the time to read through the instructions to understand how and why the cap gains and SS worksheets work (i.e., what effect increasing or decreasing the amounts has on the amount of taxes), and I made sure to crank up the returns and do a best case iteration at about 75 years old, increasing my withdrawal amount. I have a much clearer understanding of the current tax system, as a result of doing this exercise. Of course, I've made my whole system KISS, so this is easy.

 

[Max Valerion]

$2,684,252.00

Haven't pulled the trigger yet but I think I can at will at this point.

 

[TheWizard]

$2,684,252.00

Haven't pulled the trigger yet but I think I can at will at this point.

Good.
We'll look fwd to your one-year update...

 

[Max Valerion]

Good.
We'll look fwd to your one-year update...

I don't remember exactly who specifically but this site talked me down from a $1.7m rage quit and 6 months of patience paid off with not only market growth but company sale that made this so much easier to plan.

 

[RxMan]

Good luck with your decision. It seems like you are ready financially but the decision to retire is more than just a financial decision.

I’m the same age as you with our total assets being very close to being equal. My wife and I are meeting with a financial advisor for the first time at the end of next week. We’re trying to discover the feasibility of retirement in the near future.

In my opinion, at some point you have to trust your plan and take the leap of faith into the next phase of your life. I say this as someone who will be making that same leap of faith hopefully in the near future.

I’m not entirely sure what to expect from making the transition to retirement. The kind of freedom to do what I want with my time will be quite a difference from my working career.

Hopefully we’ll both be able to report that we made the plunge into retirement soon. If you retire first, I thank you in advance for the motivation for me to make the same decision.

 

[Max Valerion]

I have some more questions. I know which funds to invest in is a whole thing so I am looking more for overall strategical advice.

What I have done so far -

$90,000.00 held in SPAXX Vacation Fund - I am very excited about this one because in addition to our $24k a year travel budget we have $90k to start with $24k added in Jan.

-----Above this line is not considered part of my retirement planning, this is extra set aside to start-----

$125,000.00 held in SPAXX New Car / Emergency Fund

$65,000.00 held in SPAXX Rest of 2026 spending

$103,000.00 6 month CD @ 3.95% - 2027 spending
$102,000.00 18 month CD @ 4.05% - 2028 spending
$100,000.00 24 month CD @ 4.10% - 2029 spending
$267,000.00 invested in SCHD for 2030 -2032 spending
My thought is the SCHD diversifies me for the initial 5-7 years. I can pull some of it instead of using cash some years depending on how the market goes. I view SCHD as conservative equity fund.

That still leaves approx $1.8m that I need to transfer over from 401k(s) to IRA(s). I have not pulled the trigger yet but resignation is tee'ed up. Considering I will not touch this money for at least 5 1/2 years and possibly up to 7 years depending on how SCHD does do I just invest this all in equities or should I keep some bonds also?

Options I have considered -

85% VOO 15% BND
85% VT 15% BND
100% VOO
100% VT

 

[Dtail]

Why are you using SPAXX instead of FZDXX, which gives a higher yield?

 

[Max Valerion]

Why are you using SPAXX instead of FZDXX, which gives a higher yield?

I don't believe I was given that option when I setup my accounts?

These are my options for core position -

 

[Dtail]

I don't believe I was given that option when I setup my accounts?

These are my options for core position -

View attachment 63664

That is correct that FZDXX is not a core option. So you trade the funds (which is easy online) from SPAXX to FZDXX. The minimum in non IRA accounts should be 10k.

 

[Dtail]

FZDXX yield is 3.44% and SPAXX is 3.24%. Only 20 basis points, but effectively more money for doing minimal work.