Seeking recommendation for a retirement withdrawal strategy tool

[lindalou]

Hi. I am looking for recommendations for a tool that will help my husband and I make decisions about which sources (taxable, IRAs, Roth IRAs, 401(k)s, 401(k) Roth conversions) to take withdrawals from to minimize taxes and make our savings last. I was using i-ORP but that doesn't seem to be maintained anymore.


My husband (age 61) retired a year ago and I am still working (age 58).

He collects a pension. We aren't using our savings yet, but we moved when he retired to a HCOL area. We are selling our current home and purchasing a more expensive one. The new home will cost about $800k more than the proceeds from our current home sale (we are comfortable with the expense). We don't know how to finance the difference: a mortgage that we pay off ASAP or take large withdrawal(s) from our various accounts, but which ones?



Do you have recommendations on a tool that will help us with these decisions? Perhaps we should consult a tax/retirement planner?



Thanks,
Linda

 

[Koolau]

We did something similar and took the mortgage. The big difference was that we bought the more expensive place first and then sold the old place. So, we needed the mortgage to bridge the 6 months between the various rehabs we had to do (to live in the new place and to be able to quickly sell the old place.)



We were tempted to get into our retirement savings, but then we would have moved up a couple of tax brackets which we didn't want to do. YMMV

 

[pb4uski]

I may be facing this soon and agree that it doesn't make sense to do huge tax-deferred withdrawals and jump up one or more tax brackets to avoid having a mortgage.

We'll just get a mortgage and pay it down a quickly as we can while staying within the 12% tax bracket.

We could probably easily pay it off from our Roths but I hate to take money out of tax free if I don't need to.

 

[FLSUnFIRE]

I'd lean towards the mortgage. I realized capital gains to raise cash to buy my current place outright. Of course, with hindsight, I could be sitting on a very low mortgage and my NW would be a bit higher. That said, I have no regrets, having low cashflow needs gave me confidence/piece of mind pulling the trigger to FIRE and if I had a mortgage now I'd be paying significantly more in taxes as my realized income would be higher to pay the mortgage. I really don't think there is a wrong answer as future market and real estate appreciation along with tax policy will impact what the optimal decision would have been today. I did take out a HELOC prior to leaving to make some of my equity accessible if needed to manage emergencies or quickly take advantage of opportunities.

 

[DrRoy]

I would consider the difference between the return on the assets you would sell to pay for the house vs. the mortgage rate. Also, when in doubt, go 50:50.

 

[Exchme]

You are right that I-ORP is dead, the last update even for tax brackets was in 2020. By its nature, it had to have a number of tax simplifications, some of which were annoying like basing IRMAA on the current year's income, but it was always cool how it could do certain things holistically over your lifetime whereas other tools require a year by year approach.

I use Pralana Gold, it's a paid Excel sheet (web version coming in a couple months). Its tax package is really good, it has tremendous flexibility. It has an optimizer that will tell you the general order to do withdrawals and then you can test manually whether using a bit of another account would be useful (say for instance you need to manipulate income for an ACA premium credit, you may want to draw some money from a Roth to live on). Its Roth Conversion tool is nice - it has an optimizer that can check ordinary income tax brackets and then you can fine tune manually with things like IRMAA tiers and avoiding LTCG taxes.

I've heard of NewRetirement, but not used it. Maybe it's enough for your purposes, but reading over at Bogleheads, one person that had used both it and Pralana described NewRetirement as a toy compared to what Pralana can do.

If you happen to be one of those people that won't spend any money on software to help you plan, the Retiree Portfolio Model (RPM) available at the bogleheads.org wiki is a good free offering. Its calculations are accurate and if you are super into spreadsheets (and are very brave), you can modify it yourself. I found that because of its limited flexibility, completely manual nature and really difficult to understand data entry order, I don't use it anymore.

 

[VanWinkle]

I agree that it doesn't have to be one or the other. A combination of mortgage and withdrawals while staying in a reasonable tax brkt makes the most sense. An hourly financial advisor might be able to model the taxes and where to draw the line on pulling from accounts.

 

[LateToFIRE]

You are right that I-ORP is dead, the last update even for tax brackets was in 2020. By its nature, it had to have a number of tax simplifications, some of which were annoying like basing IRMAA on the current year's income, but it was always cool how it could do certain things holistically over your lifetime whereas other tools require a year by year approach.

I use Pralana Gold, it's a paid Excel sheet (web version coming in a couple months). Its tax package is really good, it has tremendous flexibility. It has an optimizer that will tell you the general order to do withdrawals and then you can test manually whether using a bit of another account would be useful (say for instance you need to manipulate income for an ACA premium credit, you may want to draw some money from a Roth to live on). Its Roth Conversion tool is nice - it has an optimizer that can check ordinary income tax brackets and then you can fine tune manually with things like IRMAA tiers and avoiding LTCG taxes.

I've heard of NewRetirement, but not used it. Maybe it's enough for your purposes, but reading over at Bogleheads, one person that had used both it and Pralana described NewRetirement as a toy compared to what Pralana can do.

If you happen to be one of those people that won't spend any money on software to help you plan, the Retiree Portfolio Model (RPM) available at the bogleheads.org wiki is a good free offering. Its calculations are accurate and if you are super into spreadsheets (and are very brave), you can modify it yourself. I found that because of its limited flexibility, completely manual nature and really difficult to understand data entry order, I don't use it anymore.

RPM has become my primary (pre-FIRE) planning tool of the moment, but admittedly, I'm a spreadsheet junkie and have enjoyed spending hours learning and modifying it. I'm tempted though by Pralana Gold, which I suspect will be a more useful tool for post-FIRE tax-planning, and will probably give it a test drive soon.

 

[LateToFIRE]

^^^

Further to the above, I had previously downloaded the Pralana Gold User Manual (they will allow you to download it for free). If you check it out, you'll notice it is almost 200 pages long, and we're not talking large font either. While it is a macro-enabled MS Excel driven application, my sense is that you can't necessarily modify it outside its design parameters or necessarily see whats going on behind the scenes, which is probably fine for most folks who are not me. It looks like using it would be akin to using a fairly structured accounting app like QuickBooks. Set-up, detailed data entry, and learning their menu's and structure will clearly require an investment in time and patience. The pay-off looks like would yield a very powerful planning tool, especially with respect to decision making, WD strategy, and tax planning. I'm sure Exchme can correct/amplify my observations.

 

[albireo13]

I would take the mortgage and see how the rates go. You will have the option of refinancing if the rates drop.

We did that 4 yrs ago ... took on a healthy mortgage on our new home. The rates dropped
a few years later and we refinanced at 2.625% fixed. We were fortunate.

 

[lindalou]

Thanks for the help, everyone. We appreciate the confirmation that a mortgage is probably the solution. I'm not gonna lie though - it will be psychologically difficult to take on debt just as we are entering retirement after being debt-free for so long.



I also appreciate the Pralana Gold recommendation - I will check that out. I have used RPM in the past and recently re-downloaded it, but I find it pretty daunting and didn't finish entering all the data. I might try again.


Thanks again,
Linda

 

[Jerry1]

- it will be psychologically difficult to take on debt just as we are entering retirement after being debt-free for so long.

Once you’re financially independent debt is just a cash flow tool. I took out a mortgage at under 3% to build my pool. I didn’t want to deplete my after tax money and drawing that much out of my retirement account would have put me in the 22% tax bracket. That 10% tax difference alone was enough to justify the debt.

 

[LateToFIRE]

Thanks for the help, everyone. We appreciate the confirmation that a mortgage is probably the solution. I'm not gonna lie though - it will be psychologically difficult to take on debt just as we are entering retirement after being debt-free for so long.

Lol, I'm coming from the opposite direction - - have carried mortgage(s) past ~25 years for home(s) and investment properties, now up to my ears in [low cost] debt. This kind of debt has been an invaluable tool that has allowed me to juice up NW with strongly appreciating assets much faster than would have been able to without it - though like fire also carries its risks which I don't want to have to worry about in the future.

I was looking forward to paying it all off and entering retirement debt-free, but rethinking keeping at least some of the 3% mortgage so I can keep more $$$ in taxable account - but need to think thru the benefit of tax ded on the mortgage interest and potential for added portfolio funds at work vs the added tax associated with higher WD's and reduced Roth conversion capacity.

I also appreciate the Pralana Gold recommendation - I will check that out. I have used RPM in the past and recently re-downloaded it, but I find it pretty daunting and didn't finish entering all the data. I might try again.

I've enjoyed using RPM, but it definately took some getting used to. Best to populate the bare basics for portfolio, budget, and SS first and then later spend some time refining the specific sections such as return rates, taxes, Roth conversions, special events, etc.