Withdrawal Strategies for Larger Purchases after Retiring

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LadyIJ
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Withdrawal Strategies After Retiring

Post by LadyIJ » Wed Mar 23, 2016 12:22 pm

I'm planning to retire in July. All my working life I stashed money. we have about 90% in retirement funds and 10% in cash. Upon retirement I want to buy myself a car and remodel my kitchen (which I've been putting off because of the time required for planning). Now my head is spinning with different scenarios on whether to withdraw from the retirement funds staying in a certain tax bracket, and not depleting my cash OR depleting the cash, letting my retirement money grow tax free OR putting them on my home equity line. There is a party of me that wants a good cash stash, but maybe that's not so smart - I mean, the money is there. Has anyone else had this dilemma - what's your withdrawal strategy, and do you think it's important to have at least a couple of years' expenses in cash at the ready? Help!!

mattshwink
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Re: Withdrawal Strategies After Retiring

Post by mattshwink » Wed Mar 23, 2016 1:30 pm

LadyIJ wrote:I'm planning to retire in July. All my working life I stashed money. we have about 90% in retirement funds and 10% in cash. Upon retirement I want to buy myself a car and remodel my kitchen (which I've been putting off because of the time required for planning). Now my head is spinning with different scenarios on whether to withdraw from the retirement funds staying in a certain tax bracket, and not depleting my cash OR depleting the cash, letting my retirement money grow tax free OR putting them on my home equity line. There is a party of me that wants a good cash stash, but maybe that's not so smart - I mean, the money is there. Has anyone else had this dilemma - what's your withdrawal strategy, and do you think it's important to have at least a couple of years' expenses in cash at the ready? Help!!
We need more specifics to help. In general, cash is better but it really depends. Yes, it is useful to have 2-3 years as a cash cushion in case the market drops so you aren't withdrawing on a dip. But you really need to have a withdrawal strategy long term. That depends on how much money you have, how much money you need each year, do you have any pensions/social security. If you have traditional accounts and are in a low (15%) tax bracket it can be useful to convert these to Roth as well. But more specifics are needed to give any concrete recommendations.

magneto
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Re: Withdrawal Strategies After Retiring

Post by magneto » Wed Mar 23, 2016 1:34 pm

Suggest Frank Armstrong's book 'The Informed Investor' has one of the better strategies for the retiree.

A two bucket approach, it aims to avoid the pitfall of selling stocks at distressed prices. ("Dollar Cost Ravaging").

All Best
'There is a tide in the affairs of men ...', Brutus (Market Timer)

LadyIJ
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Re: Withdrawal Strategies After Retiring

Post by LadyIJ » Wed Mar 23, 2016 2:19 pm

magneto wrote:Suggest Frank Armstrong's book 'The Informed Investor' has one of the better strategies for the retiree.

A two bucket approach, it aims to avoid the pitfall of selling stocks at distressed prices. ("Dollar Cost Ravaging").

All Best
Thank you - I think the big issue is when you have big expenditures rather than the day to day living, but I am going on Amazon right now and ordering Frank Armstrong's book

Raploch
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by Raploch » Wed Mar 23, 2016 2:38 pm

I plan to use a combine of fund sources for major purchases in retirement. Most larger purchases like cars and remodeling can be timed when the Market is up. So most of the money will come from the stock or bond portion of my retirement account, during re-balancing. With only enough coming from my ROTH and cash to keep me out of a higher tax bracket. I would not let my cash holdings go below 2-3 years of expenses to purchase a car or remodel the house. I would wait to make the purchase. Also I would not use credit if I was not going to pay it off within a year.

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blueblock
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Re: Withdrawal Strategies After Retiring

Post by blueblock » Wed Mar 23, 2016 2:46 pm

I retired last year and keep two years' living expenses in cash. I consider those amounts off limits for any "borrowing," unless as a bridge from one year to the next to get a tax advantage in some sort of dire or emergency situation.

Before I retired, I built up a pool of about $200K (taxable, Roth, cash) for the large expenses you mention (e.g. we have $20K set aside for house repairs and upgrades), and for possible emergencies.

I would never use a line of credit to pay for something. That may just be a personal quirk, as I really hate debt.

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by Lynette » Wed Mar 23, 2016 2:50 pm

Remember to factor in your age. I'll take the money from RMDs for large purchases as I have pensions and SS for ordinary living. Don't forget the advice that many have given about having a spreadsheet to calculate the benefits of Roth conversions in the period between retirement and 70.

Once you are in your seventies and start to withdraw RMDs and have full SS, your opportunities for tax limitation is strictly limited. I'm still working in my early seventies and plan to retire some time this year. I will also have to pay additional Medicare B and D premiums (pensions, full SS and RMDs).

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Re: Withdrawal Strategies After Retiring

Post by Fletch » Wed Mar 23, 2016 2:50 pm

Another book I thought was good: "Unveiling the Retirement Myth" by Jim Otar. Unfortunately, you may have to go to the library. Big bucks on Amazon, probably is out of print.

http://smile.amazon.com/Unveiling-Retir ... ement+Myth

My big takeaway: NOTE: Never > 3.7% Sustained Withdrawal Rate at age 65 or 5.2% at 75 for 90% probability of not depleting portfolio by 95 - Unveiling the Retirement Myth Table 17.10 - Jim Otar

... Fletch
“Meaningless! Meaningless!” says the Teacher. Whoever loves money never has enough; whoever loves wealth is never satisfied with their income. This too is meaningless.

LadyIJ
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by LadyIJ » Wed Mar 23, 2016 3:41 pm

Lynette wrote:Remember to factor in your age. I'll take the money from RMDs for large purchases as I have pensions and SS for ordinary living. Don't forget the advice that many have given about having a spreadsheet to calculate the benefits of Roth conversions in the period between retirement and 70.

Once you are in your seventies and start to withdraw RMDs and have full SS, your opportunities for tax limitation is strictly limited. I'm still working in my early seventies and plan to retire some time this year. I will also have to pay additional Medicare B and D premiums (pensions, full SS and RMDs).


I think the problem area for me is that I'm 62 and will not draw SS until 70 - so I can withdraw up to a certain dollar amount and put some for living, some for major purchases and if there's a bit left over maybe put into a Roth, but then I question whether it makes sense to pull money out for purchases when it can be earning money tax free - like maybe I should use cash in my money markets, etc., but then there's a part of me that's afraid not to have a nice stash in money markets and cash.

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GerryL
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by GerryL » Wed Mar 23, 2016 4:06 pm

If you've "over saved" in tax-deferred accounts, you may want to begin moving some money before you need to start RMDs -- especially if those RMDs are going to impact future taxes on SS and premiums for Medicare. Some people do this by converting chunks of money from tIRA to Roth. In your case, you might want to incrementally cash out chunks and pay the taxes in order to make those large purchases. Do some estimates to figure out what your RMDS are going to look like as you age, and you may find that taking some of the money out of your tax-deferred accounts early is a better move than letting it continue to grow tax-free.

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by retiredjg » Wed Mar 23, 2016 4:25 pm

LadyIJ wrote:planning to retire in July. All my working life I stashed money. we have about 90% in retirement funds and 10% in cash. Upon retirement I want to buy myself a car and remodel my kitchen (which I've been putting off because of the time required for planning). Now my head is spinning with different scenarios on whether to withdraw from the retirement funds staying in a certain tax bracket, and not depleting my cash OR depleting the cash, letting my retirement money grow tax free OR putting them on my home equity line. There is a party of me that wants a good cash stash, but maybe that's not so smart - I mean, the money is there. Has anyone else had this dilemma - what's your withdrawal strategy, and do you think it's important to have at least a couple of years' expenses in cash at the ready? Help!!
If you can afford it, it probably does not matter a lot. Yes, you can optimize some, but I would not let that interfere with what you need to do and want to do.

Subtract the large purchases you intend to do and see if you can live on a 3 or 4% withdrawal from what is left. If you can, you can probably afford it. If you can't, you need to be careful and spread these things out. Or not purchase them at all.

I do not think it is important to have a couple of years of expenses in cash. That is money sitting on the sidelines, not working for me. Others have a different opinion. Again, if you have enough money, I'm not sure it matters a great deal.

Retirement is not an emergency. Just use the same good sense you have used to get here. It seems frightening, but that is only because some things are unknown. That will take care of itself very quickly.

There are some strategies for converting tax-deferred money to Roth that could help reducing or eliminating RMDs. Once you are retired and have established the financial rhythm of retirement, consider doing that.

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by Sheepdog » Wed Mar 23, 2016 4:35 pm

I have been retired for 17 years. As you noted, needs are not constant in retirement. You should consider a plan for such things as required large home maintenance items (major remodeling, new roof, driveway replacement, etc.)...automobile replacements in certain years......major unplanned medical expenses including large hearing or dental expenses which will popup unexpectedly.

This plan has worked for me in my retirement years. It requires an annual review of my annual spending and future needs to control withdrawals. In short, I planned for an AVERAGE annual withdrawal percentage of 4.5%, NOT adjusted for inflation, not a specific set annual withdrawal percentage. The withdrawals will be variable year to year, low in some years in order to pay for the large expenses in others, yet keep within the average of multiple years. It requires me to limit spending in down market years, but I have never wanted. That has worked for my lifestyle....good living, new autos on a regular basis, nice vacations and cruises when income is good, plus we want to enjoy sports and entertainment, etc. every year. Example: I will not buy that new car or whatever other higher expense item unless that purchase will not increase my multi-year average much above my planned average withdrawal. My actual annual withdrawals have been variable to meet my spending needs and wants. My wife and I have each purchased new cars periodically, taken several nice vacations, have had some major house remodeling in these years. Withdrawals have ranged from 3.11% to as high as 7.52%, but my 17 year average (4.59%) is very close to my plan.
It's not what you gather, but what you scatter which tells what kind of life you have lived---Helen Walton

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Re: Withdrawal Strategies After Retiring

Post by curmudgeon » Wed Mar 23, 2016 7:13 pm

People like to say "money is fungible", but when it is in tax-deferred accounts, that's not so true, is it?

When you have much of your retirement funds wrapped by a tax cost to withdraw, it definitely takes some thought about what is the right way to fund big one-time expenses. I would spend some time with taxcaster to evaluate purely the tax cost of some of the different options. You might find that the differences aren't really that large, or you might see a real pitfall to avoid.

Spreading the withdrawal from tax-deferred accounts across two years might be enough and not require much borrowing. While I normally pay cash for cars or home improvements, I could see using debt (carefully), to spread out the tax load of withdrawals over 3-4 years if the difference in tax costs were significant. I would probably choose my preferred cash/equivalent balance somewhat independently from the spending, though I might let the cash drop down for a few months to spread withdrawals across two tax years.

If your asset allocation or pension income is such that you aren't too worried about down markets, then it might make sense to spend down some of the cash. If you are all stock in your retirement accounts, then maybe you want to keep more cash.

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Re: Withdrawal Strategies After Retiring

Post by orlandoman » Wed Mar 23, 2016 7:21 pm

Fletch wrote:Another book I thought was good: "Unveiling the Retirement Myth" by Jim Otar. Unfortunately, you may have to go to the library. Big bucks on Amazon, probably is out of print.

http://smile.amazon.com/Unveiling-Retir ... ement+Myth

My big takeaway: NOTE: Never > 3.7% Sustained Withdrawal Rate at age 65 or 5.2% at 75 for 90% probability of not depleting portfolio by 95 - Unveiling the Retirement Myth Table 17.10 - Jim Otar

... Fletch
FYI it's available as a download for $5.99 or $14,99 hard copy from his site http://retirementoptimizer.com/
"Not everything you read on the Internet is true", Abraham Lincoln

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by inbox788 » Wed Mar 23, 2016 8:18 pm

Raploch wrote:I plan to use a combine of fund sources for major purchases in retirement. Most larger purchases like cars and remodeling can be timed when the Market is up. So most of the money will come from the stock or bond portion of my retirement account, during re-balancing. With only enough coming from my ROTH and cash to keep me out of a higher tax bracket. I would not let my cash holdings go below 2-3 years of expenses to purchase a car or remodel the house. I would wait to make the purchase. Also I would not use credit if I was not going to pay it off within a year.
I usually avoid loans, but when you've got zero interest rates by manufacturers, and below 2% by some lenders, I say go with a loan and spread the payments. This way, you don't have to cash out all at once. Don't consider the 10% cash a fixed amount. Think of what it does relative to your expenses. If you don't have a loan to pay off, the cash can last longer, you you need less cash for same amount of cushion. So, it's ok to draw down a little if you have sufficient cushion. I don't want to sell a bunch of stocks at the worst moment, even if it means I might miss the peak, so I split the sales in 2-3 chunks over some time, and accept the average vs best/worst.

In your shoes, I'd either get the car loan (and consider a HELOC, but I think they're more costly and trouble than its worth now) or just sell 25% of projected expenses immediately, sell 25% when you buy the car and 25% when you remodel the house, using up to 25% cash if needed, and replenishing it soon after to average out sales.

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by itstoomuch » Wed Mar 23, 2016 9:04 pm

We discovered that not having "income," places a limit what you can buy on credit cards, installment credit, scheduled credit (car/home) at attractive rates.
We have considerable IRAs and property, No debts, living off of SS and pension, separate bank accounts for security reasons, set low credit card limits while we were working. So now in retirement and living off of SS + small pension, we have a relatively low credit score and consequently get to enjoy higher interest rates. Since we never carry balances or debt, we never paid much attention to rates or if we would ever need a loan. We oughta qualify for sub 4% mortgage but infact we qualified for +4% mortgage, we said the heck with this, and paid cash for a rental condo in Seattle, from an inheritance. :annoyed
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

LadyIJ
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Re: Withdrawal Strategies After Retiring

Post by LadyIJ » Thu Mar 24, 2016 9:43 am

curmudgeon wrote:People like to say "money is fungible", but when it is in tax-deferred accounts, that's not so true, is it?

When you have much of your retirement funds wrapped by a tax cost to withdraw, it definitely takes some thought about what is the right way to fund big one-time expenses. I would spend some time with taxcaster to evaluate purely the tax cost of some of the different options. You might find that the differences aren't really that large, or you might see a real pitfall to avoid.

Spreading the withdrawal from tax-deferred accounts across two years might be enough and not require much borrowing. While I normally pay cash for cars or home improvements, I could see using debt (carefully), to spread out the tax load of withdrawals over 3-4 years if the difference in tax costs were significant. I would probably choose my preferred cash/equivalent balance somewhat independently from the spending, though I might let the cash drop down for a few months to spread withdrawals across two tax years.

If your asset allocation or pension income is such that you aren't too worried about down markets, then it might make sense to spend down some of the cash. If you are all stock in your retirement accounts, then maybe you want to keep more cash.
I guess I can withdraw from tax-deferred not going over the 15% bracket and use cash for the rest. Although I don't want to use all of our money market / cash funds, possibly it doesn't matter too much because of our tax-deferred retirement accounts we have 30% in money markets. It's just confusing how low would one want their actual cash on hand to go. If one doesn't have enough cash and say my Firm did away with the medical plan for retirees, that is when I would want to have enough of a cash blanket to live on for a few years to get affordable Obamacare. Things like that cross my mind.

LadyIJ
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Re: Withdrawal Strategies After Retiring

Post by LadyIJ » Thu Mar 24, 2016 9:43 am

orlandoman wrote:
Fletch wrote:Another book I thought was good: "Unveiling the Retirement Myth" by Jim Otar. Unfortunately, you may have to go to the library. Big bucks on Amazon, probably is out of print.

http://smile.amazon.com/Unveiling-Retir ... ement+Myth

My big takeaway: NOTE: Never > 3.7% Sustained Withdrawal Rate at age 65 or 5.2% at 75 for 90% probability of not depleting portfolio by 95 - Unveiling the Retirement Myth Table 17.10 - Jim Otar

... Fletch
FYI it's available as a download for $5.99 or $14,99 hard copy from his site http://retirementoptimizer.com/
THANK YOU!

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Re: Withdrawal Strategies After Retiring

Post by midareff » Thu Mar 24, 2016 10:20 am

LadyIJ wrote:I'm planning to retire in July. All my working life I stashed money. we have about 90% in retirement funds and 10% in cash. Upon retirement I want to buy myself a car and remodel my kitchen (which I've been putting off because of the time required for planning). Now my head is spinning with different scenarios on whether to withdraw from the retirement funds staying in a certain tax bracket, and not depleting my cash OR depleting the cash, letting my retirement money grow tax free OR putting them on my home equity line. There is a party of me that wants a good cash stash, but maybe that's not so smart - I mean, the money is there. Has anyone else had this dilemma - what's your withdrawal strategy, and do you think it's important to have at least a couple of years' expenses in cash at the ready? Help!!
I retired four years ago and was undecided about many things. I too had worked all my life and saved strictly to achieve my plan. It is a tough transition to go from accumulation to de-cumulation, especially after the investment boom years of 2009-2014. It was a tough transition for me, maybe not for all new retirees' though.

I don't know what your definition of "cash" is, but think that if it is bank cash in a savings account it's too high a percentage. If it's in better rate CD's that's different. If it is a short or intermediate bond fund that is different too. Personally, I'm more concerned with having an adequate cash flow in retirement with a reasonable WR so projects can be accumulated for in advance. Age 68 now and recently raised our WR to 3.8%. As an example, we accumulate from the WR to be able to pay in advance for travel. If you want to remodel your kitchen and it doesn't interfere with your future retirement cash flow, I'd say do it. If it means intruding into a higher tax bracket by having to draw from an IRA I'd be tempted to either do it in sections or spread it out over time so as not to raise the tax bracket. If paying it off (short term) and makes mathematical sense on a home equity line doesn't compromise your monthly retirement cash flow I don't see it differently than buying a car on affordable payments at a favorable interest rate.

FWIW, I use an Ally account to "save up" for travel or other major expense and keep about a year and a half of expenses in a Limited Term Tx-Ex Bond Fund and then another longer term amount in Intermediate Tx-Ex. I try to keep low yielding cash at a minimum.

BTW, Otar's Book is excellent and should be mandatory reading for those planning WR's in retirement.

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Re: Withdrawal Strategies After Retiring

Post by AlohaJoe » Thu Mar 24, 2016 10:50 am

IIRC both Otar and Kitces are against bucket strategies. If you just have a normal asset allocation and maintain it then you won't be selling equities in a down market... Because you'll be taking withdrawals from bonds to rebalance.

Kitces also has research showing that maintaining a multi year cash buffer almost always leaves you significantly worse off.

LadyIJ
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by LadyIJ » Thu Mar 24, 2016 11:35 am

itstoomuch wrote:We discovered that not having "income," places a limit what you can buy on credit cards, installment credit, scheduled credit (car/home) at attractive rates.
We have considerable IRAs and property, No debts, living off of SS and pension, separate bank accounts for security reasons, set low credit card limits while we were working. So now in retirement and living off of SS + small pension, we have a relatively low credit score and consequently get to enjoy higher interest rates. Since we never carry balances or debt, we never paid much attention to rates or if we would ever need a loan. We oughta qualify for sub 4% mortgage but infact we qualified for +4% mortgage, we said the heck with this, and paid cash for a rental condo in Seattle, from an inheritance. :annoyed
yes, it's tough. We have gotten a HELOC, under prime, but really - who wants to go into debt? You can't win - lol

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by SQRT » Thu Mar 24, 2016 11:42 am

We keep a fair amount in cash (mid 6 figures) to cover irregular cash flow requirements. Has a slight negative impact on earnings but I don't care much. Having the cash available makes me feel more confident financially. Retired ten years.

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by itstoomuch » Thu Mar 24, 2016 11:43 am

^ You may want to check if the HELOC is continued when you retire. The fine print. :oops:
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

LadyIJ
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Re: Withdrawal Strategies After Retiring

Post by LadyIJ » Thu Mar 24, 2016 11:44 am

AlohaJoe wrote:IIRC both Otar and Kitces are against bucket strategies. If you just have a normal asset allocation and maintain it then you won't be selling equities in a down market... Because you'll be taking withdrawals from bonds to rebalance.

Kitces also has research showing that maintaining a multi year cash buffer almost always leaves you significantly worse off.
ugh. Now I don't know what to do with the cash - I know it's not good to let it sit there doing nothing. I guess I could put it into CD's (laddering) and use my yearly withdrawals to take care of expenditures. Thank you for all the great responses. I am seeing things differently now.

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by The Wizard » Thu Mar 24, 2016 11:59 am

itstoomuch wrote:^ You may want to check if the HELOC is continued when you retire. The fine print. :oops:
HELOCs most certainly continue after one retires, based on my experience.
And since my taxable income for past few retirement years, from assorted 1099-R's, has been a bit more than my latter employment years, I'm sure I could take out an entirely new HELOC if I wanted.

But yes, if the majority of your wealth is in taxable accounts which you just draw from as needed, I can see how it might appear that "you" are a low income individual, which could be an issue with certain loan qualifications...
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by The Wizard » Thu Mar 24, 2016 12:07 pm

Addressing the main Q of withdrawal strategy:
I have large majority of my assets in tax-deferred accounts, so I manage my taxable retirement income to be roughly the same or a bit more each year in retirement.
RMDs will start for me in 2020, so I maintain a projection of how that, in addition to full SS, will impact me.

For larger purchases, motor vehicles mainly, I recently starting vectoring over $1000 per month from tax-deferred into a Roth IRA rather than my checking account, where it had gone previously.
This allows this accumulation for major purchases to grow tax-free until such time as I need to spend it...
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Re: Withdrawal Strategies After Retiring

Post by itstoomuch » Thu Mar 24, 2016 12:13 pm

We budgeted the retirement assets into Immediate/near-term/emergency; medium term ~5-20 years; longterm ~15-30 years out.

Hint: Look at your assets as Income sources rather absolute gross assets. Protect the Income.
JMO.

Near term=trading accounts
Medium term=deferred GLWB annuities, Indexes
Longterm=deferred GLWB annuities, Indexes, property, LTCi.

Note: the deferred GLWB income annuities are laddered by amounts and time. The last batch have a internal minimum Income growth of 15 years, 11 years remain. 65/68.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by Artsdoctor » Thu Mar 24, 2016 12:15 pm

Lady IJ,

There are many ways to handle this, but I can convey one way that I'd NOT recommend doing it:

Some people have nearly everything they have in tax-deferred accounts. If a large expense is incurred, then a large withdrawal is made from the tax-deferred account. Because withdrawals from a tax-deferred account are taxable events, this can increase your marginal tax rate in an unwelcome way.

One of the best tools you'll have as a retiree is flexibility, so you'd want several types of accounts to draw from (taxable, Roth, tax-deferred, HSA).

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by triceratop » Thu Mar 24, 2016 12:28 pm

Lady IJ,
I merged your two posts into one and moved the topic into the appropriate forum, the present one. This is not a big deal, it helps you receive the most helpful responses.

~triceratop
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by bertilak » Thu Mar 24, 2016 12:49 pm

Artsdoctor wrote:Lady IJ,

There are many ways to handle this, but I can convey one way that I'd NOT recommend doing it:

Some people have nearly everything they have in tax-deferred accounts. If a large expense is incurred, then a large withdrawal is made from the tax-deferred account. Because withdrawals from a tax-deferred account are taxable events, this can increase your marginal tax rate in an unwelcome way.

One of the best tools you'll have as a retiree is flexibility, so you'd want several types of accounts to draw from (taxable, Roth, tax-deferred, HSA).
+1

If you are 70+ years old and over-concentrated in a traditional IRA you can use RMDs to build up a taxable account.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by LadyIJ » Fri Mar 25, 2016 9:54 am

The Wizard wrote:Addressing the main Q of withdrawal strategy:
I have large majority of my assets in tax-deferred accounts, so I manage my taxable retirement income to be roughly the same or a bit more each year in retirement.
RMDs will start for me in 2020, so I maintain a projection of how that, in addition to full SS, will impact me.

For larger purchases, motor vehicles mainly, I recently starting vectoring over $1000 per month from tax-deferred into a Roth IRA rather than my checking account, where it had gone previously.
This allows this accumulation for major purchases to grow tax-free until such time as I need to spend it...
So if I were to transfer a chunk of money from 401k - IRA's to my Roth, which has been open for over 5 years, it would earn money and I can withdraw without paying taxes again? Say I only had $10,000 in my Roth - opened 6 years ago. I transfer $50,000, make money on the $50K, and then within 6 months want the $50K plus the money earned. Can I withdraw it all in 6 months, or would I pay taxes on the money the $50K earned?

itstoomuch
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by itstoomuch » Fri Mar 25, 2016 11:54 am

^ You will take 2 market risks in your above scenario. 1) the market and tax risk on the conversion of IRA to Roth; 2) the Market risk at time of distribution of Roth.

You could eliminate the risk #2 by moving IRA directly to distribution (taxable account). Plus when you take money out of taxable account you could use TLH (hopefully not), tax advantaged LTCG or reduced dividend taxation.

There are other strategies.
YMMV.
My standard disclaimers: A lot.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

Dandy
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by Dandy » Sat Mar 26, 2016 6:49 am

I don't automatically my taxable fund distributions. Sometimes they are a source to fund large/unexpected expenses. If not needed I will invest them. I usually like to conserve cash a bit so when recently I bought a used car for 10,000 I charged some (and paid it off the next month), used some cash and used HELOC loan to pay the balance. I then used any money left over at the end of the month in checking, taxable distributions, tax refunds etc to pay off the balance in 4 months.

Soon after buying the car my wife had unexpected medical expenses, the washer and dishwasher broke and I needed about $1500 in plumbing repairs. So I was glad I still had some cash and didn't have to sell investments to meet these expenses. I also try to space out larger planned purchases e.g. I wouldn't buy a car and re do the kitchen at the same time. I know once I double up on planned expenses a whole lot of others will appear. :oops:

Recently, I allocated money to a online money market account ear marked to fund vacations, home improvements, etc. to rely less on the HELOC - though I am meeting next week to renew the HELOC. Nice to have options when deciding how to fund expenses.

Chip
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by Chip » Sat Mar 26, 2016 7:49 am

You've received some very good responses.

One way to look at this is that you have 10% cash outside of IRAs and you have 8 years of expenses to cover at something around 3-4% withdrawal rate (my guess) until SS and RMDs kick in. So SOME money has to come from the IRAs in the next 8 years.

I would look at your expected tax bracket at age 70, when you have SS and RMDs. Then withdraw/Roth convert from IRAs now up to the start of that tax bracket, or maybe a little into it. The withdraw/convert split is based on your spending needs.

Caution 1: Be careful of exceeding the Medicare income limits (based on MAGI), which will raise your premium. I believe they use the two tax years before you turn 65, or something like that.

I've been retired for > 10 years. Have been doing Roth conversions and spending down the taxable account. I wholeheartedly agree that it is difficult to go from the mindset of finding places to invest money to finding places to GET money. I keep about at least a year's worth of spending in cash or cash-like things. That makes it easier for me. I might be losing a few bucks, but that's okay.

Caution 2: Be careful of large IRA withdrawals, especially after you're on SS. I had a tax client the other day (I volunteer as a tax preparer) who was paying 80% less federal tax this year vs. last year. The only difference was she took 10K more from the IRA last year. But it made another 8K of her SS taxable vs. this year. So that 10K IRA withdrawal was effectively taxed at something like a 27% rate, even though she was technically in the 15% bracket. So if you have a big expense coming that will HAVE to come from the IRAs, try to split the withdrawal between two tax years.

herpfinance
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Re: Withdrawal Strategies After Retiring

Post by herpfinance » Sat Mar 26, 2016 7:58 am

orlandoman wrote:
Fletch wrote:Another book I thought was good: "Unveiling the Retirement Myth" by Jim Otar. Unfortunately, you may have to go to the library. Big bucks on Amazon, probably is out of print.

http://smile.amazon.com/Unveiling-Retir ... ement+Myth

My big takeaway: NOTE: Never > 3.7% Sustained Withdrawal Rate at age 65 or 5.2% at 75 for 90% probability of not depleting portfolio by 95 - Unveiling the Retirement Myth Table 17.10 - Jim Otar

... Fletch
FYI it's available as a download for $5.99 or $14,99 hard copy from his site http://retirementoptimizer.com/
Thanks a lot! Seems like money well spent.
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

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desertbandit442
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by desertbandit442 » Sat Mar 26, 2016 8:03 am

Also know and factor in state income tax considerations, if you live in a state with income tax. In SC, for example; if under 65, $3000 of qualified retirement income (pensions, IRAs, 401Ks, etc.) is not taxed. Age 65 and over, $15,000 of qualified retirement income is not taxed for each person, for a total of $30,000 when both of you hit age 65. This plays a large role in my traditional IRA to Roth conversions, or using traditional IRA money for any large purchases. I would use cash before age 65 in my case, or sell off some of my taxable mutual fund investment for TLH or long term capital gains before touching my traditional IRA.

jimkinny
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by jimkinny » Sat Mar 26, 2016 8:14 am

I initially kept some funds in CDs for the immediate years after I retired, before starting pensions and SS.

I use a short term corporate bond fund for stuff I anticipate for a few months to a few years ahead.

I try to stay below the next higher tax bracket but I am close.

If I am fortunate and the markets, rmds and distributions put me into a higher bracket, so what? It is better than going into a lower bracket, no?

The Wizard
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by The Wizard » Sat Mar 26, 2016 8:42 am

LadyIJ wrote:
The Wizard wrote:Addressing the main Q of withdrawal strategy:
I have large majority of my assets in tax-deferred accounts, so I manage my taxable retirement income to be roughly the same or a bit more each year in retirement.
RMDs will start for me in 2020, so I maintain a projection of how that, in addition to full SS, will impact me.

For larger purchases, motor vehicles mainly, I recently starting vectoring over $1000 per month from tax-deferred into a Roth IRA rather than my checking account, where it had gone previously.
This allows this accumulation for major purchases to grow tax-free until such time as I need to spend it...
So if I were to transfer a chunk of money from 401k - IRA's to my Roth, which has been open for over 5 years, it would earn money and I can withdraw without paying taxes again? Say I only had $10,000 in my Roth - opened 6 years ago. I transfer $50,000, make money on the $50K, and then within 6 months want the $50K plus the money earned. Can I withdraw it all in 6 months, or would I pay taxes on the money the $50K earned?
No taxes on any Roth earnings, so the answer to your Q is yes, assumed you are over age 59.5.

I have two different Roth IRA accounts as it turns out. One is for the indefinite duration, invested mostly in stocks. I put new contribs into that from part-time earnings.

My second Roth IRA is my Big Ticket Item Spending Account, which I started just two years ago when I realized that accumulating $$$ in an online "high yield" savings account and paying 33% combined tax on the interest wasn't super smart.
This account is invested more conservatively, no stocks.
I have $1500/month going into that Roth (monthly Conversions) which formerly went into my checking account. So my taxable income is the same, but the accumulation grows untaxed. When the time comes to replace the '08 Mustang in a few years. I should be all set.

Note: if I choose to continue this scheme in 2020 and beyond, after I turn 70-1/2, I'll need to take my RMD each year in early January, before my first monthly conversion happens...
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livesoft
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by livesoft » Sat Mar 26, 2016 8:51 am

We have more than a dozen different accounts. When we need money, we simply withdraw some money from one or more of the accounts.

I figure out which way creates the least tax hit for us.

We also know when dividends will show up (every month for some, every quarter for others), so we know when that kind of thing will show up. I also know when credit card bills are due and which card to use to float an expense for 25 days or more.

And no, we don't keep any cash around because the interest rate on cash is too low to make that worthwhile.

Bottom line: We pay for larger purchases after Retiring exactly like we paid for them before Retiring. There is no difference.
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LadyIJ
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Re: Withdrawal Strategies for Larger Purchases after Retiring

Post by LadyIJ » Sun Mar 27, 2016 2:20 pm

Thanks all for all the good comments and advice!

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