Hi. Newbie here. I believe I am (will be) FI and planning to RE the end of 2018, when I reach 59.5, so I am starting to get my ducks lined up. I have been working on a retirement income plan.
We will have $1.9M essentially all in regular 401Ks. My estimated yearly expenses will be $63K, current dollars. DW, who will work until 62 (2020), has a low-paying ($45K) job.
Goal: Enough in Cash bucket each year to cover expenses, and to have the most possible left over if I hit 100, to pass on.
I am seeking advice from the fine folks here about my Plan A and Plan B...Which is really better, and am I missing some sort of better Plan C?
Plan A
====
As soon as I retire, start converting large sums ($250K) each year from the 401K to a Roth IRA. In 7 years, all will be moved from 401K to Roth IRA. This completely avoids RMDs. During those 7 years, I will also be pulling yearly needs from 401K into Cash bucket. All taxes, which will be quite large those first 7 years, will also be payed from Cash bucket. The 401K and Roth IRA will be set up to produce about 2.5% dividends, which will go into Cash bucket. I won't run out of Cash bucket until I am 89, then I can dip some from Roth IRA.
So, I am basically getting money transferred from 401K to Roth as soon as practical, to avoid RMDs.
My spreadsheet says I will have enough in Cash bucket each year, and have $5.5M left over at 100.
Pros: 1) No Fed taxes after I get everything over to Roth IRA, 2) Larger amount left over than Plan B.
Cons: 1) Paying huge amounts in taxes the first 6 years (but then no RMDs to be taxed on later), 2) Cash bucket has no more than one year's needs, some of the time.
Plan B
====
As soon as I retire, pull only what is needed each year from the 401K bucket into the Cash bucket. Keep about 2 years of Cash in the bucket. The 401K will be set up to produce about 2.5% dividends, which will go into Cash bucket. If Cash bucket becomes too large, then transfer to a taxable bucket. All taxes will be payed from Cash bucket.
My spreadsheet says I will have enough in Cash bucket each year, and have $4.4M left over at 100. I never deplete the 401K bucket, so pay RMDs every year after 70.5.
Pros: 1) Way less taxes the first 6 years.
Cons: 1) Gotta do RMDs, 2) Gotta pay taxes on the RMDs, 3) Less left over at 100 than Plan A.
For both Plan A and Plan B, I have simulated stock returns to start with a 25% loss, then repeat the pattern of 3 years random gain (0% - 25%), and 1 year of random loss (0% - 25%), with a 40 year average of 4% gain. I have adjusted for inflation, have SS kicking in at FRA for me and 70 for DW. I have SS benefits being cut to 77% in 2034. I have the new tax rates in the plans.
Thanks for the help, and let me know if I missed any data needed.
We will have $1.9M essentially all in regular 401Ks. My estimated yearly expenses will be $63K, current dollars. DW, who will work until 62 (2020), has a low-paying ($45K) job.
Goal: Enough in Cash bucket each year to cover expenses, and to have the most possible left over if I hit 100, to pass on.
I am seeking advice from the fine folks here about my Plan A and Plan B...Which is really better, and am I missing some sort of better Plan C?
Plan A
====
As soon as I retire, start converting large sums ($250K) each year from the 401K to a Roth IRA. In 7 years, all will be moved from 401K to Roth IRA. This completely avoids RMDs. During those 7 years, I will also be pulling yearly needs from 401K into Cash bucket. All taxes, which will be quite large those first 7 years, will also be payed from Cash bucket. The 401K and Roth IRA will be set up to produce about 2.5% dividends, which will go into Cash bucket. I won't run out of Cash bucket until I am 89, then I can dip some from Roth IRA.
So, I am basically getting money transferred from 401K to Roth as soon as practical, to avoid RMDs.
My spreadsheet says I will have enough in Cash bucket each year, and have $5.5M left over at 100.
Pros: 1) No Fed taxes after I get everything over to Roth IRA, 2) Larger amount left over than Plan B.
Cons: 1) Paying huge amounts in taxes the first 6 years (but then no RMDs to be taxed on later), 2) Cash bucket has no more than one year's needs, some of the time.
Plan B
====
As soon as I retire, pull only what is needed each year from the 401K bucket into the Cash bucket. Keep about 2 years of Cash in the bucket. The 401K will be set up to produce about 2.5% dividends, which will go into Cash bucket. If Cash bucket becomes too large, then transfer to a taxable bucket. All taxes will be payed from Cash bucket.
My spreadsheet says I will have enough in Cash bucket each year, and have $4.4M left over at 100. I never deplete the 401K bucket, so pay RMDs every year after 70.5.
Pros: 1) Way less taxes the first 6 years.
Cons: 1) Gotta do RMDs, 2) Gotta pay taxes on the RMDs, 3) Less left over at 100 than Plan A.
For both Plan A and Plan B, I have simulated stock returns to start with a 25% loss, then repeat the pattern of 3 years random gain (0% - 25%), and 1 year of random loss (0% - 25%), with a 40 year average of 4% gain. I have adjusted for inflation, have SS kicking in at FRA for me and 70 for DW. I have SS benefits being cut to 77% in 2034. I have the new tax rates in the plans.
Thanks for the help, and let me know if I missed any data needed.
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