Thoughts on my Plan?

[Red Rover]

Could you please take a look at my plan and let me know what you think?

I am 56 and feel retired even though I haven't officially pulled the plug.

I have income from 2 businesses that are winding down that I expect to see me through until I'm 60. When the businesses end my retirement will be official.

I don't have a pension but do have some real estate related guaranteed income streams that together will generate about $12,000 a year for the next 22 years.

I have $2 million total broken down with $1 million in IRA, $260k in Roth, $740k in taxable and $75k in HSA. Estimated Yearly Spending is $80k.

My plan is to build a tips ladder in the IRA ($770k) for the 11 years between ages 60 and when I claim Social Security at age 70. Each rung will have the $70k or so more per year I need for that year plus years 12-15 ($99k) to fund the difference that Social security won't cover when it starts. I will reinvest any interest earned into future tips years in the IRA as long as there are funds to do so.

The taxable fund, Roth IRA and rest of the IRA will be in stock funds with the most in VTSAX and the rest in the international stock fund VIDGX. I will keep a small amount of cash in taxable as well.

This makes the AA: 50/44/6

If I'm still around when I'm 85, I have a QLAC that starts then that will provide $144k per year which I'm treating as my long term care insurance.

What do you think? Anything that could be better or might trip me up?

Thank you.

 

[Stormy Kromer]

You've done well.

I am an ER'd small business owner and understand where you are at. Your plan looks great to me.

I will ask you for advice someday.

 

[Red Rover]

Thanks Stormy. I have loved being a small business owner but it's also scary because everything is on me and there isn't anyone to say "hey, looks like you are missing this?" or "Have you thought about this?"

Good luck with your own ER.

 

[MuirWannabe]

Run your numbers through Firecalc. Link is on this page. If your annual spending is accurate and includes everything then you are looking good. But make sure you’ve given yourself enough room on the annual spending.

 

[Fermion]

I guess I could look it up but what in the world is a QLAC and why does it wait until age 85 to start?

 

[HarveyS]

What if you need long term care before 85?

 

[Sunset]

OP - does you QLAC go poof if you die before age 85 ?

 

[Red Rover]

I did run the numbers through FireCalc and it says 100% but I wasn't sure about my tips strategy and if doing a tips ladder as well as withdrawing from it and my IRA first is the correct move.

QLAC stands for qualified longevity annuity contract. Some IRA money can be moved to the QLAC. You can choose to get some of money back or not I believe but it pays out more if there is no return on death benefit.

I am single so I don't really care about leaving an estate and while there aren't any guarantees of course most people in my family have lived to be in their late 80's or 90s and have still been in decent shape up until the end. With the QLAC it takes the place of long term care insurance and although I may have to still fund some spending at that point, between the QLAC and social security I will be at almost $200k in income each year which I'm not confident I could generate on my own. With it I won't have to worry so much about funding my later years or buy long term care insurance which currently doesn't pay out that much. Just having the peace of mind that I don't have to fund all of my expenses after 85 on my own in case I don't plan well now makes having it worth it.

It can start at any age but the reason it starts at 85 is because there was a huge difference in payout amounts between earlier than 85 and 85. I can't remember exactly but I think it was something like $70,000 a year difference. It was really big. If I die before then and don't use the money it would be a bummer for several reasons but it's more important that I know I have income in later years so if I lose what I paid for it and can't use it oh well.

 

[DrRoy]

Looks good, but FWIW I spend a good deal more than I initially planned to.

 

[PaunchyPirate]

OP, I can't really tell from your post. Are you intending on withdrawing the $80k that you need each year from the IRA with the TIPS laddering?

Don't most people spend down a taxable account first and let the IRAs grow as long as they can?

 

[pb4uski]

... Don't most people spend down a taxable account first and let the IRAs grow as long as they can?

Sort of. I think many people spend down taxable accounts and do Roth conversions from ER until when pensions and SS and RMDs start to take advantage of lower tax rates while their income is low.

Point being, the money doesn't have to sit in a traditional IRA and if your tax rate today is the same or lower than what it will be later in life, you are better off to convert now and take advantage of those lower tax rates.

 

[Red Rover]

Yes. The TIPS ladder is in my IRA and my plan is to withdraw those from there before I reach RMD age. That's one of the things I'm really struggling with and not sure if is the right thing to do.

I could set up the TIPS in taxable but I would have to pay a lot in taxes where VTSAX has less taxes. It seems the experts say both 1) Keep bonds in IRA and Stocks in Taxable and 2) Don't spend down from IRA let it grow.

If I have the TIPS in taxable there will be quite a bit more taxes owed yearly but is it better to do that and have the VTSAX in the IRA and convert the IRA to Roth over the next 10 years or so?

DrRoy - While I can't be sure until I actually have no income coming in I think I'm in good shape on my estimated expenses. I have worked from home for the last 25 years and I do a lot of traveling now so I've included a large amount for travel in the budget. I expect that will slow down over time as I only have a couple of places left on my bucket list but I've also added another $20,000 in withdrawals for years 5-15 into Firecalc and it says even with those I'm still on track for 100%.

 

[Out-to-Lunch]

I, too, built a TIS ladder in tax-deferred savings as a bridge to SS. So obviously I am favorably inclined. A few comments, however:

I chose to build a ladder that just covers (along with my other income) my required expenses. I am willing to take the market risk on funds to cover my desired discretionary income.

Money is fungible. When your yearly TIPS matures, you can use it to buy equities in your IRA, then sell a comparable amount of equities in your taxable.

By many accounts, you may want to balance your withdrawals from taxable and tax-deferred anyway. Article from Kitces: https://www.kitces.com/blog/tax-efficient-retirement-withdrawal-strategies-to-fund-retirement-spending-needs/

Don't put the TIPS in taxable! You will have to pay taxes on "phantom income," i.e., increases in the TIPS principal that doesn't even put any moolah into your hot little hands.

 

[pb4uski]

Yes. The TIPS ladder is in my IRA and my plan is to withdraw those from there before I reach RMD age. That's one of the things I'm really struggling with and not sure if is the right thing to do.

I could set up the TIPS in taxable but I would have to pay a lot in taxes where VTSAX has less taxes. It seems the experts say both 1) Keep bonds in IRA and Stocks in Taxable and 2) Don't spend down from IRA let it grow.

If I have the TIPS in taxable there will be quite a bit more taxes owed yearly but is it better to do that and have the VTSAX in the IRA and convert the IRA to Roth over the next 10 years or so?

DrRoy - While I can't be sure until I actually have no income coming in I think I'm in good shape on my estimated expenses. I have worked from home for the last 25 years and I do a lot of traveling now so I've included a large amount for travel in the budget. I expect that will slow down over time as I only have a couple of places left on my bucket list but I've also added another $20,000 in withdrawals for years 5-15 into Firecalc and it says even with those I'm still on track for 100%.

An alternative to consider. When the $70k TIP matures in the tIRA, do a Roth conversion for the proceeds from maturity. The tax will be the same on a Roth conversion as on a tIRA withdrawal. Then that money will be tax-free for the rest of your life.

Then sell the same amount of VTSAX in your taxable account and use the proceeds for your spending needs.

This all presumes that the effective tax rate on the Roth conversion is the same or lower than the expected effective tax rate on RMDs, which is typical.

 

[Red Rover]

By many accounts, you may want to balance your withdrawals from taxable and tax-deferred anyway. Article from Kitces: https://www.kitces.com/blog/tax-efficient-retirement-withdrawal-strategies-to-fund-retirement-spending-needs/

That's a really great article. Thanks for sharing it. I didn't think about withdrawing from both in the same year but I really like the idea of doing so and the data indicates that's a much better way to do it.

An alternative to consider. When the $70k TIP matures in the tIRA, do a Roth conversion for the proceeds from maturity. The tax will be the same on a Roth conversion as on a tIRA withdrawal. Then that money will be tax-free for the rest of your life.

Then sell the same amount of VTSAX in your taxable account and use the proceeds for your spending needs.

Ooh. I like that too as that builds on what Out to Lunch and the Kitces data backs up as the better strategy. This way - IRA to Roth and pull money out of taxable - seems to give the best of both worlds - money growing tax free and providing income.

 

[almost there]

Similar situation here. Only thing different, I got my Roth IRA and Trad IRA to about a 50/50 split. Through Roth conversions. Plan to start taking reg IRA distributions now at 62, through 90 figuring an annual 3.5% return. Pull 24k a year from the Trad IRA over the next 27 yrs. My goal is to stay in the 12% tax bracket,....... if possible. And save either the IRA or SS funds depending how you want to look at it.
No pension, rental income and got a great deal on a lifetime annunity 7 yrs ago at 55. Taking SS soon. So its going to be close. The way its set up, I dont see a need to bother the Roth, ever... But will be there just in case.

 

[Koolau]

My suggestion would be to try your plan, but be flexible if income doesn't match spending at one time or another. One option is to begin SS earlier if you need to. YMMV

 

[almost there]

My suggestion would be to try your plan, but be flexible if income doesn't match spending at one time or another. One option is to begin SS earlier if you need to. YMMV

Or if you dont need to / to protect your net worth.
Spend SS first. Your money 2nd.

 

[Koolau]

Or if you dont need to / to protect your net worth.
Spend SS first. Your money 2nd.

Yes, the great "When to take SS" still rages.

 

[almost there]

Yes, the great "When to take SS" still rages.

The one thing that will never go away. LOL LOL

 

[Echard]

I have 75% of funds in post-tax accounts and 25% in IRAs. To get the 60/40 or 50/50 stock/bond ratio I want, I have to buy quite a bit of fixed income in post-tax accounts. This creates a lot of income (especially with high money market rates right now).

So, I don't have a lot of head room for IRA to Roth conversions until it pushes into a higher tax bracket. But from age 67+, the combination of social security, RMD's (as late as possible), and post-tax income will produce painful taxes. So, I'm not quite sure what I can do about it. Of course, I don't think I'll make 80 because of health issues, but my wife might.

Plus, given my health issues, I don't like the idea of paying taxes sooner rather than later.

 

[Sunset]

I have 75% of funds in post-tax accounts and 25% in IRAs. To get the 60/40 or 50/50 stock/bond ratio I want, I have to buy quite a bit of fixed income in post-tax accounts. This creates a lot of income (especially with high money market rates right now).

So, I don't have a lot of head room for IRA to Roth conversions until it pushes into a higher tax bracket. But from age 67+, the combination of social security, RMD's (as late as possible), and post-tax income will produce painful taxes. So, I'm not quite sure what I can do about it. Of course, I don't think I'll make 80 because of health issues, but my wife might.

Plus, given my health issues, I don't like the idea of paying taxes sooner rather than later.

Maybe doing conversion into a higher bracket is worth it now before SS & RMD's.

We are considering going into the first IRMAA bracket via Conversions, as I've looked at the tax rate a survivor will pay and it's plenty high. So get some out at the low tax rate of 22% and maybe 24% which seems silly but better than paying 32% -> 35%

 

[Echard]

Maybe doing conversion into a higher bracket is worth it now before SS & RMD's.

We are considering going into the first IRMAA bracket via Conversions, as I've looked at the tax rate a survivor will pay and it's plenty high. So get some out at the low tax rate of 22% and maybe 24% which seems silly but better than paying 32% -> 35%

Good point. I also forgot about IRMAA. I haven't even looked into that yet because we are still five years from Medicare.

 

[Yoheadden]

Could you please take a look at my plan and let me know what you think?

I am 56 and feel retired even though I haven't officially pulled the plug.

I have income from 2 businesses that are winding down that I expect to see me through until I'm 60. When the businesses end my retirement will be official.

I don't have a pension but do have some real estate related guaranteed income streams that together will generate about $12,000 a year for the next 22 years.

I have $2 million total broken down with $1 million in IRA, $260k in Roth, $740k in taxable and $75k in HSA. Estimated Yearly Spending is $80k.

My plan is to build a tips ladder in the IRA ($770k) for the 11 years between ages 60 and when I claim Social Security at age 70. Each rung will have the $70k or so more per year I need for that year plus years 12-15 ($99k) to fund the difference that Social security won't cover when it starts. I will reinvest any interest earned into future tips years in the IRA as long as there are funds to do so.

The taxable fund, Roth IRA and rest of the IRA will be in stock funds with the most in VTSAX and the rest in the international stock fund VIDGX. I will keep a small amount of cash in taxable as well.

This makes the AA: 50/44/6

If I'm still around when I'm 85, I have a QLAC that starts then that will provide $144k per year which I'm treating as my long term care insurance.

What do you think? Anything that could be better or might trip me up?

Thank you.

Another small business owner here. You haven't mentioned health ins at all. I am assuming you are paying it outright in the 80,000 est. expenses. We are on the Health Exchange and the health care credits throw a curveball into withdrawal strategies.

If you feel comfortable disclosing, how much was the QLAC?
That sounds like a smart decision for guaranteed income down the road.

What would be the point of the tips ladder as opposed to a balanced portfolio and taken the same amount of withdrawals each year? Is it to keep the rate of return consistent, with steady amounts each year as a withdrawal strategy?

I like what Pb4uski suggested about the Roth conversions with the proceeds and withdrawing the same amount from after tax, but doesn't that produce a double tax and risk raising your tax bracket? You have to pay the tax on the conversion and then the same tax again on the capital gains from selling VTSAX.
I'm obviously not a tax professional and I'm sure I'm missing something here.

 

[Finance Dave]

I have 75% of funds in post-tax accounts and 25% in IRAs. To get the 60/40 or 50/50 stock/bond ratio I want, I have to buy quite a bit of fixed income in post-tax accounts. This creates a lot of income (especially with high money market rates right now).

So, I don't have a lot of head room for IRA to Roth conversions until it pushes into a higher tax bracket. But from age 67+, the combination of social security, RMD's (as late as possible), and post-tax income will produce painful taxes. So, I'm not quite sure what I can do about it. Of course, I don't think I'll make 80 because of health issues, but my wife might.

Plus, given my health issues, I don't like the idea of paying taxes sooner rather than later.

Have you considered tax-free munis?