Hiram
Dryer sheet wannabe
[-]Two[/-] One questions for the great minds of this forum:
We are considering taking a $45,000 loan for a five year term to avoid getting a tax hit on a withdrawal from a 403b this year. Does this make sense?
(edit: I found a thread with some answers to this second question, so this second question may end up duplicating earlier)
Second, how much “stock” do people put in to the lowest and highest portfolio balances at the end of a plan that Firecalc provides along with success rates? For instance, I put two different scenarios through the calculator. Both gave 100% success, but different portfolio values: for not taking the loan: $2,992 to $6,656,77, for taking the loan: $155,584 - $7,023,483. Is this a significant difference? (should I post this in the Firecalc forum instead?)
I would love for folks to chime in.
Background:
DW and I are about to retire. She is 58 and will be done this July after teaching for more than 20 years. I am 62 and working half time this year and next but am retirement eligible. I will retire fully in June 2021.
We have about $1million in a 403b, (55% stock index and 45% bond index) almost all of it tax deferred. So basically any withdrawals will be taxed. We owe about 70K on our main home which will be paid off in 2022. The house has a ridiculous amount of equity—we are in the overpriced Bay Area. Only other debt is car loan for 20k.
We have a rental property in another part of the state that we want to sell. We expect a capital gain of about 50,000.
DW has a CALSTRS California Teachers pension that she will defer for two years until she is 60. That will increase the amount of her pension $4500/year. But it reduces our income for the next 2 years.
I don’t have a pension but will get a decent SS of $37k/year if I delay till 70. I am pretty healthy so it makes sense. But it requires spending down the 403b a lot for the next 7.5 years. Also when I decided to go ½ time, we figured we would make up the difference in income by withdrawing from the 403b. That means we are facing some big tax hits, which leads me to my question/strategy.
My strategy:
We need about 45,000 to cover our expenses this year beyond our earnings. So we have two options: Option 1 is take $45,000 from the 403b. Option 2 is to use our HELOC to cover the extra costs.
Option 1 means we are in a higher tax bracket—I ran it through turbo tax and we would likely pay about 11% tax rate on all our income, state and fed. Option 2 be would be about 6%. That means we would pay about $14,200 extra in tax if we do the withdrawals rather taking the loans.
I figured that a 45k loan at 5% interest paid back over 5 years would cost about $8400 in interest. So we are about $5800 ahead by taking the loan. Does that seem right?
I also ran everything through Firecalc to see what it did to our success probability and estate—accounting for the increased annual expense of $6500/year in payments for 5 years and delaying taking anything from the 403b for a year (I guess that reduces sequence of returns risk and increases the chance we will have more money saved).
With both options Firecalc gives a 100% success rate over 40 years—that’s good. But it gives different ending portfolio values. For Option 1: $2,992 to $6,656,77 for option 2, $155,584 - $7,023,483.
Is this a significant difference?
Thanks for you wisdom.
We are considering taking a $45,000 loan for a five year term to avoid getting a tax hit on a withdrawal from a 403b this year. Does this make sense?
(edit: I found a thread with some answers to this second question, so this second question may end up duplicating earlier)
Second, how much “stock” do people put in to the lowest and highest portfolio balances at the end of a plan that Firecalc provides along with success rates? For instance, I put two different scenarios through the calculator. Both gave 100% success, but different portfolio values: for not taking the loan: $2,992 to $6,656,77, for taking the loan: $155,584 - $7,023,483. Is this a significant difference? (should I post this in the Firecalc forum instead?)
I would love for folks to chime in.
Background:
DW and I are about to retire. She is 58 and will be done this July after teaching for more than 20 years. I am 62 and working half time this year and next but am retirement eligible. I will retire fully in June 2021.
We have about $1million in a 403b, (55% stock index and 45% bond index) almost all of it tax deferred. So basically any withdrawals will be taxed. We owe about 70K on our main home which will be paid off in 2022. The house has a ridiculous amount of equity—we are in the overpriced Bay Area. Only other debt is car loan for 20k.
We have a rental property in another part of the state that we want to sell. We expect a capital gain of about 50,000.
DW has a CALSTRS California Teachers pension that she will defer for two years until she is 60. That will increase the amount of her pension $4500/year. But it reduces our income for the next 2 years.
I don’t have a pension but will get a decent SS of $37k/year if I delay till 70. I am pretty healthy so it makes sense. But it requires spending down the 403b a lot for the next 7.5 years. Also when I decided to go ½ time, we figured we would make up the difference in income by withdrawing from the 403b. That means we are facing some big tax hits, which leads me to my question/strategy.
My strategy:
We need about 45,000 to cover our expenses this year beyond our earnings. So we have two options: Option 1 is take $45,000 from the 403b. Option 2 is to use our HELOC to cover the extra costs.
Option 1 means we are in a higher tax bracket—I ran it through turbo tax and we would likely pay about 11% tax rate on all our income, state and fed. Option 2 be would be about 6%. That means we would pay about $14,200 extra in tax if we do the withdrawals rather taking the loans.
I figured that a 45k loan at 5% interest paid back over 5 years would cost about $8400 in interest. So we are about $5800 ahead by taking the loan. Does that seem right?
I also ran everything through Firecalc to see what it did to our success probability and estate—accounting for the increased annual expense of $6500/year in payments for 5 years and delaying taking anything from the 403b for a year (I guess that reduces sequence of returns risk and increases the chance we will have more money saved).
With both options Firecalc gives a 100% success rate over 40 years—that’s good. But it gives different ending portfolio values. For Option 1: $2,992 to $6,656,77 for option 2, $155,584 - $7,023,483.
Is this a significant difference?
Thanks for you wisdom.
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