Close to Retirement - Now What?

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Paul
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Close to Retirement - Now What?

Post by Paul » Mon Oct 17, 2016 8:25 pm

My wife and I are 54 and 55, and considering early retirement in March of 2017. At that point we will have earned about $50k for the year. Our expenses are about $70k a year. Our investments are roughly $2.1 million. We have about $150k in cash savings. The investments are as follows:

401k/IRA: $1.5 million
Roth: $200k
Taxable : $460k
Cash: $150k

Our overall AA, all in index funds:

55% U.S. Stock
10% Int'l Stock
5% Int'l Bond
5% REIT
25% U.S. Bonds


However, the $460k taxable is:

$70k MidCap Index
$70k SmCap Gr Index
$70k SmCap Index
$20k Total Int'l
$215k TSM
$15k SP 500 Index


Our plan is to sell the taxable funds first and avoid capital gains by keeping AGI below $75k. We are not reinvesting dividends.

We're thinking of using a variable withdraw method, and hoping to be able to keep a cushion in cash in the event the market goes down.

I think we've done OK up to this point but don't feel confident in our next steps. We're looking for advice and feedback. Is anyone aware of a good book or two that might address our following concerns? It seems there are hundreds of books to help one get to this step, but not many once you arrive.

1. Should we max out our 401k's for the few months in 2017 or just go for the company match?
2. Once retired should we be doing Roth conversions? If so, how much? As much as we can within the 15% bracket? And if one of us has a larger IRA should that be converted first?
3. Assuming we both remain healthy should we plan to begin collecting SS at 70?

Thanks!

LeeMKE
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Re: Close to Retirement - Now What?

Post by LeeMKE » Mon Oct 17, 2016 9:02 pm

1. Should we max out our 401k's for the few months in 2017 or just go for the company match?

You've won the game, it doesn't matter what you do at this point, enough to change anything. I max out tax deferred out of habit after so many years, so if it were I, I'd max out the 401K in those few months.
2. Once retired should we be doing Roth conversions? If so, how much? As much as we can within the 15% bracket? And if one of us has a larger IRA should that be converted first?

You have a pretty good percent in Roth already. Since you are new, I hesitate to recommend this, but many of us have gotten advice on how much to convert to ROTH from the Optimal Retirement worksheets found at http://I-ORP.com
3. Assuming we both remain healthy should we plan to begin collecting SS at 70?
Try out this calculator to see what it recommends:http://www.bedrockcapital.com/ssanalyze/ In most cases, one person will take a bit earlier, with the second person taking at 70, but everyone's situation is just different enough you are better off running a calculator before making a decision.
The mightiest Oak is just a nut who stayed the course.

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Svensk Anga
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Re: Close to Retirement - Now What?

Post by Svensk Anga » Mon Oct 17, 2016 9:10 pm

one correction first. Gross income at the top of the 15% bracket will probably be 96,700 (in 2017 after the next inflation adjustment). After 2 exemptions and the standard deduction, that leaves 75,900 taxable income. So good news, you have a bit more room for tax free capital gains and qualified dividends.

1.) If you will be in the 15% bracket for 2017, you could probably forego contributions beyond the match. You could be in danger of putting money into the 401k at 15% and taking it out at 25% or worse when SS and RMD's kick in. Earnings on these contributions in the 401k would be taxed at ordinary income rates eventually. If they go into stocks in taxable, you stay in the 15% bracket, and the 0% rates for CG and QDI continue, earnings could be tax-free for a while.

2.) On Roth conversions, I would suggest making a projection on where you will stand at age 70+, with SS income and RMD's. Your marginal tax rate could be 25 or 28% if returns are good. If so, you would do well to get some of your tax-deferred funds into Roths at 15% in the early retirement years. If one of you has non-deductible contributions in their IRA, convert that first and leave that person's 401k where it is. If not, probably does not matter which goes first given small age difference.

3.) The one with the higher SS benefit should hold off until 70 if possible, in order to provide maximum inflation adjusted income to the survivor into advanced old age. Claiming age for the lower benefit does not matter as much. I lean to taking both at 70 if other means allow and life expectancy is good.

SGM
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Re: Close to Retirement - Now What?

Post by SGM » Mon Oct 17, 2016 9:13 pm

I will weigh in on the side of at least waiting until age 70 to claim SS for the higher earner for the insurance against longevity factor.

On converting in the 15% bracket there are issues with being bumped up into a higher bracket if your RMDs are high or if one of you becomes widowed and has to pay taxes at a higher rate then maybe converting above the 15% bracket is okay. For most people in the 15% bracket converting above that tax bracket is not encouraged. It sounds like you will get more than $44k in income so 85% of your SS will be taxed with or without conversions.

Do you have a pension?

Are you comfortable with having such a high stock allocation once you stop receiving earnings and are pulling money out of the market for expenses.

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Watty
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Re: Close to Retirement - Now What?

Post by Watty » Mon Oct 17, 2016 9:19 pm

1. Should we max out our 401k's for the few months in 2017 or just go for the company match?

Max them out. You would in effect be moving the money from a taxable to tax advantaged accounts.

Your 2017 income may be low enough that you will also be able to make a deductible IRA contribution for 2017.

If you have healthcare flexible spending accounts you can use the entire 2017 amount in the first months of the year and not have to pay it back. If you have money in the account when you leave the job you cannot use it for expenses later in the year.

Many companies will pay the health insurance through the end of the month so making the first of the month be your last day may save you a months insurance costs.

One potential problem if you max out the 401k is that one of you could end up working a bit longer if your employer makes a great offer to have you work some more. If you have already maxed out the 401k then depending on how your employer pays the match you could miss out on the match later in the year,


2. Once retired should we be doing Roth conversions? If so, how much? As much as we can within the 15% bracket? And if one of us has a larger IRA should that be converted first?

That can be a complicated choice. In addition to staying in the 15% tax bracket on Roth conversions you can also take capital gains in the 15% tax bracket and pay a 0% capital gains tax rate. If you will qualify for a healthcare subsidy for an ACA exchange policy then keeping your taxable income low enough to get that is another concern.


3. Assuming we both remain healthy should we plan to begin collecting SS at 70?

That is also a complicated choice. I would defer worrying about that decision until one of you is getting close to 62 since your situation may change or the rules may change.

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celia
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Re: Close to Retirement - Now What?

Post by celia » Mon Oct 17, 2016 9:22 pm

Here's a similar situation to yours but with a shorter conversion window:

viewtopic.php?t=194462

Note that many topics besides Roth conversions are introduced in that thread.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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SeeMoe
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Location: Near Philly..

Re: Close to Retirement - Now What?

Post by SeeMoe » Tue Oct 18, 2016 12:44 pm

Good job done! Now Guard what you have with a bit more conservatism and enjoy life "within "your means,..
We retired over 20 years ago at age 53. Kept investing too, but have good pensions that take up the slack.

SeeMoe.. :mrgreen:
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}

itstoomuch
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Re: Close to Retirement - Now What?

Post by itstoomuch » Tue Oct 18, 2016 5:13 pm

Think about derisking current assets to cash or "safe", ASAP and coast into March. ReEvaluate your retirement situation in Fall 2017 or Spring 2018.

Think about if Markets increase 20% by March, How would you feel?
Think about if Markets decrease 20%; How would you feel?

I didn't watch our numbers that closely in 2008, ages 58/61, and thinking about retirement in 2009. We had a 60/40 portfolio then.

YMMV.
GL
Rev90517; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax 25%. Early SS. FundRatio (FR) >1.1 67/70yo

malabargold
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Re: Close to Retirement - Now What?

Post by malabargold » Tue Oct 18, 2016 7:08 pm

Just keep in mind that these assets COULD be the values
at the tail end of a long bull run.

Put in a hypothetical pull back of say 25%, would you still
feel O.K. retiring?

Also the earlier you retire, the lower your SWR should be.

Paul
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Re: Close to Retirement - Now What?

Post by Paul » Tue Oct 18, 2016 7:27 pm

You have a pretty good percent in Roth already. Since you are new, I hesitate to recommend this, but many of us have gotten advice on how much to convert to ROTH from the Optimal Retirement worksheets found at http://I-ORP.com

Try out this calculator to see what it recommends:http://www.bedrockcapital.com/ssanalyze/


Thanks for the reply. The SS calculator worked great, but unless I'm reading something wrong, I-ORP.com doesn't consider Roth conversions.

Paul
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Re: Close to Retirement - Now What?

Post by Paul » Tue Oct 18, 2016 7:37 pm

Put in a hypothetical pull back of say 25%, would you still
feel O.K. retiring?


This seems to be a common question among the responses. I've always had a high risk tolerance and I look at this as money invested long term - possibly 40 years or more. I am concerned that the taxable accounts are all in stocks but I don't want to incur capital gain taxes if I can help it. I've thought about going to a very conservative AA - say 40-60 for the start of retirement, since that's where most risk seems to be, but then I'd have to trust myself to make the right decision to get back in. I also like the idea of keeping things as simple as possible. Having said that, I know that if the market drops I'll have to consider going back to work.

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Peter Foley
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Re: Close to Retirement - Now What?

Post by Peter Foley » Tue Oct 18, 2016 8:17 pm

I agree with the maxing out your retirement account strategies. This will help put you in a position where you can cash out a good portion of your taxable prior to age 59.5 without being subject to capital gains.

Given the size of your 401K + IRA relative to your other assets, I think doing some Roth conversions makes sense.

Staying within the 15% tax bracket is a good strategy. Especially during the first 10 years of retirement I would look to fill that tax bracket every year (Roth conversions and potentially some tax gain harvesting might come into play).
Also, I would look at your withdrawal strategy as having 4 different phases:

1. Withdrawals prior to age 59.5.
2. Withdrawals between age 59.5 and when you take SS benefits.
3. Withdrawals after taking SS benefits but before RMDs. (This phase could be a few years or very short.)
4. Withdrawals after RMDs.

You may have to use a variety of strategies in each phase to maximize your tax efficiency over your combined lifespans. A bit of a challenge I would think. You are probably in a position where you can do this well. I don't think you can do it perfectly except in hindsight.

You have done very well so far. Congrats.

SuzBanyan
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Re: Close to Retirement - Now What?

Post by SuzBanyan » Wed Oct 19, 2016 9:59 am

Peter Foley wrote:I agree with the maxing out your retirement account strategies. This will help put you in a position where you can cash out a good portion of your taxable prior to age 59.5 without being subject to capital gains.

Given the size of your 401K + IRA relative to your other assets, I think doing some Roth conversions makes sense.

Staying within the 15% tax bracket is a good strategy. Especially during the first 10 years of retirement I would look to fill that tax bracket every year (Roth conversions and potentially some tax gain harvesting might come into play).
Also, I would look at your withdrawal strategy as having 4 different phases:

1. Withdrawals prior to age 59.5.
2. Withdrawals between age 59.5 and when you take SS benefits.
3. Withdrawals after taking SS benefits but before RMDs. (This phase could be a few years or very short.)
4. Withdrawals after RMDs.

You may have to use a variety of strategies in each phase to maximize your tax efficiency over your combined lifespans. A bit of a challenge I would think. You are probably in a position where you can do this well. I don't think you can do it perfectly except in hindsight.

You have done very well so far. Congrats.

I like your concept of different strategies for different time periods. I would suggest 2 more:
Split #2 to account for healthcare expenses before the OP is eligible for Medicare.
Add a new period after #4: Withdrawls for the surviving spouse.

hogfanboy
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Re: Close to Retirement - Now What?

Post by hogfanboy » Wed Oct 19, 2016 1:36 pm

1. Should we max out our 401k's for the few months in 2017 or just go for the company match?

How does your State treat taxes on retirement income withdrawal.
I live in IL and there is no income tax on retirement withdrawal.
a savings of 3.75%. In my case my wife is working and she maxes out the $24K into the 401k which means very small take home. But we make up for it by withdrawing from my 401K State income tax free.

Looks like you are retiring at 55. Does that mean you have access to withdrawal from your 401k without penalty?
If you plan to design your income to be right at the top of the 15% bracket for the foreseeable future. The advantage of shifting money to the Roth bucket is greatly reduced if you keep on top of doing tax-gain harvesting.

Paul
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Re: Close to Retirement - Now What?

Post by Paul » Wed Oct 19, 2016 8:03 pm

Thanks to all that responded. This is only the 2nd time I've posted here and I've received great advice and ideas on both occasions. A special thanks to Peter and Watty who responded to both my posts!

Emilyjane
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Re: Close to Retirement - Now What?

Post by Emilyjane » Fri Oct 21, 2016 7:40 am

Paul wrote:Thanks for the reply. The SS calculator worked great, but unless I'm reading something wrong, I-ORP.com doesn't consider Roth conversions.


Re: I-Orp, the short version does not do Roth conversions. But, at the bottom of the home page, there is a button to link to "full I-Orp". That version allows one to choose enabling option of conversions, and to what marginal tax rate. Interesting to play with. One suggestion I learned from a Boglehead, set up anticipated returns to be same for Roth, traditional and taxable, at least initially. I had tried setting Roth higher (as I anticipate higher stock allocation there) and I-Orp pushed what seemed to be overly aggressive conversion, to get the assets in that higher yielding Roth.

One reason I'm liking idea of conversions during 60s is to limit MAGI in future years, trying to keep us in lower brackets for Medicare premiums.
"Real knowledge is to know the extent of one's ignorance", Confucius

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