Retirement Planning Question

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D Newton
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Joined: Wed Feb 21, 2007 12:29 pm
Location: Down by the sea...

Retirement Planning Question

Post by D Newton » Wed Oct 02, 2019 12:32 pm

Hello,
I was hoping the bogleheads could provide some guidance to my wife and me. I am thinking of retiring in June 2021, at which time I will be 64. My wife will be 57 at that time. I plan to use COBRA for healthcare until 65 and then Medicare with supplemental insurance. Wife would be on Obamacare or something equivalent until she turns 65. I am eligible for full social security at 66.5 yr. I’d like to delay taking it till I’m maybe 67-68 if the numbers and our annual expenses work out. Right now, I am estimating our annual expenses in early retirement to be $65-$70K, including healthcare (assuming no mortgage), one large trip/year, car maintenance, gifts to kids/grandchildren/charity, entertainment, etc. We’d like to travel in early retirement, while we are physically able to do so; I expect our annual travel expenses to decline with time, although healthcare costs may go up.

We sold our ‘main’ house about 4 years ago and moved to our second house (‘retirement’ home) full time (I can work at home), which still has a $330K remaining on the mortgage. My wife took the proceeds of the house (her house from prior marriage) and invested it in 2-3 Vanguard Index funds. The good news is the funds have done very well. Regardless, we can pay-off the house ‘tomorrow’ with either my wife’s taxable account (proceeds) or a combination of wife’s taxable account and a portion of my (our) 401k. A local financial advisor, however, suggested I not payoff the mortgage and let the money we have ‘grow’ and work for itself. I don’t like this suggestion; not sure we could sleep at night with a mortgage in retirement.

Some specifics:

Me
62 yr
Est. Social Security at 66.5: $3,100/month
No pension
401K rollover: $900,000
• 65%/35% allocation (approx.); moving toward goal of ~60/40...
• Vanguard S&P 500; Wellington Fund; Total Bond Fund; and Money Mkt

Current 401K $80,000
• 80%/20% allocation
• Vanguard Total Stk Mkt Index; and Total Bond Fund
• Max-out every year (2020 should add another $20,000+)

Taxable Accounts
Money Mkt: $ 5,000
Vanguard Total Stk Mkt Index (taxable) $39,000

Wife
55 yr
Social Security: ~$1,800/month
No pension
401K rollover: $950,000 (approx.) asset allocation 80/20 index funds
Taxable Acct. $390,000 (approx.) asset allocation 60/40 index funds

In summary, if the mortgage is paid off from taxable account(s) at retirement we should have nearly $2.0M in retirement assets, or less than $2.0M if paid off with combination of taxable and 401K. I’m OK with either option...i just want to lessen the tax consequences, if possible.

Our daughters are all through with college so that expense is done. One married...several more weddings to go. After June 2021 I am thinking I could work part time as a consultant, if needed (or if I want to); my wife works part time in admin and wants to fully retire when I do, and I want her to do so also.

My questions are:

1. Generally, do we have sufficient funds to fully retire in June 2021 based on our expected annual expenses?
2. My wife cannot touch her 401K until she is 59.5 (2023); so, we will be primarily living off my 401k (and SS if i take it in 2021) in the early years, unless I work part time after June 2021. I’m thinking the first ~2 years of retirement we may have to tighten our belts a bit until my wife can tap into her 401K to supplement our retirement income, as (or if) needed...
3. I think it best for us to pay off the house at my retirement; what is a good time to do so? Now, or early 2021 when we may be in a lower tax bracket? Or later?
4. What funds should we use to payoff the house? I would first use (sell) any fund that lost money but as of today not sure if any did... Should we use a portion of the 401k funds? ...I think the capital gains on 401K’s are taxed at a higher rate than other funds?

Thank you for your comments and time reviewing the above.
DN
Regards, | Doug

delamer
Posts: 9312
Joined: Tue Feb 08, 2011 6:13 pm

Re: Retirement Planning Question

Post by delamer » Wed Oct 02, 2019 12:57 pm

Any withdrawals from your 401(k)s will be taxed as ordinary income. In other words, at the same rate as wage/salary income.

Capital gains’ tax rates are only relevant for long-term capital gains in taxable accounts, like your wife’s.

As a general rule, it is better to spend down taxable funds first, in order to allow the tax-free growth in tax-deferred retirement accounts to continue. But the best thing in your situation is to determine what your long-term capital gains are in the taxable account, and make a decision once you have that information.

Also, if your wife rolls over her 401(k) into an IRA, she will be able to make withdrawals prior to age 59.5. Look up rule IRS 72(t). (I am not sure if the rule pertains to 401(k)s.)

Finally, given the size of your portfolios and the amount of your Social Security benefits, you’ll have no problem covering your expenses in retirement. Two thing to consider - 1) the cost of health insurance for your wife pre-Medicare and 2) delaying your Social Security until age 70. Check out this calculator: https://opensocialsecurity.com/

557880yvi
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Joined: Wed Mar 06, 2019 3:11 pm

Re: Retirement Planning Question

Post by 557880yvi » Wed Oct 02, 2019 1:07 pm

Don't think you mentioned the APR on the mortgage loan or how many more years until it is paid off? You may have been advised to not pay it off as the rates have been extremely low (I am keeping a mortgage because I am earning more in a tax-free muni bond fund than the rate on the mortgage so making a profit on the loan!)

BernardShakey
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Joined: Tue Jun 25, 2019 10:52 pm

Re: Retirement Planning Question

Post by BernardShakey » Wed Oct 02, 2019 11:09 pm

Since your wife is 55, she should be able to leave her company today, leave the 401k with the company, and take annual withdrawals without penalty. That ability might vary from company to company but I believe most allow it. Others here much more knowledgeable than me could confirm.

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SevenBridgesRoad
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Location: Within Pacific Ring of Fire

Re: Retirement Planning Question

Post by SevenBridgesRoad » Thu Oct 03, 2019 12:26 am

557880yvi wrote:
Wed Oct 02, 2019 1:07 pm
Don't think you mentioned the APR on the mortgage loan or how many more years until it is paid off? You may have been advised to not pay it off as the rates have been extremely low (I am keeping a mortgage because I am earning more in a tax-free muni bond fund than the rate on the mortgage so making a profit on the loan!)
I'm not trying to re-re-re-start the tired old debate on mortgage payoff, but since 557880ywi presented one side of the standard argument, I'll make the other side. There are folks who just don't like debt, whether or not the arbitrage might be a better financial deal. I'm one of those people. I hate hate debt and there's no way I would be comfortable with a mortgage in retirement. Different strokes and all of that. I'm bulletproof (at least as far as not owing anyone money) and I sleep well at night. Again, I'm not trying to reopen a frequent debate. I just wanted to get the other side in here.
Retired 2018 age 61 | "Not using an alarm is one of the great glories of my life." Robert Greene

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Watty
Posts: 17612
Joined: Wed Oct 10, 2007 3:55 pm

Re: Retirement Planning Question

Post by Watty » Thu Oct 03, 2019 6:31 am

D Newton wrote:
Wed Oct 02, 2019 12:32 pm
A local financial advisor, however, suggested I not payoff the mortgage and let the money we have ‘grow’ and work for itself. I don’t like this suggestion; not sure we could sleep at night with a mortgage in retirement.
One problem with financial advisors is that they are usually paid something like a 1% fee each year for the amount they are managing. If you spend $330K to payoff the mortage then that is $3,300 a year less that they would be paid. This gives them a lot of incentive to suggest that you do not pay off the mortage. Even if you are not paying this financial advisor now they be hoping to get your business later, and they may just have the general mindset that paying off any mortage is likely a bad choice.

As other have said without more details about the mortage it is difficult to give good suggestions on that.

There is a wiki on this choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

One advantage of having a paid off mortage for me is that it allows me to keep my taxes lower which can be especially important once you start Social Security since the way that is taxed can result in a surprisingly high tax rate.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

Needing less income may also allow you to do more Roth conversion in a low tax bracket, or take long term capital gains in the 0% federal tax bracket.

With a paid off mortage you would also have less sequence of returns risk.

Here is an example of that which I have posted before. Some people have pointed out that over the long term you might still come out ahead even if you have a few bad years at first.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $22K. $18.5K. That would take a 25.6% 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://www.vanguard.com/us/insights/sa ... llocations

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
D Newton wrote:
Wed Oct 02, 2019 12:32 pm
I am eligible for full social security at 66.5 yr. I’d like to delay taking it till I’m maybe 67-68 if the numbers and our annual expenses work out.
See this web site to get a suggested optimal Social Security claiming strategy.

https://opensocialsecurity.com/

One caveat is that it does not try to take taxes into account and the years before you start Social Security can be a good time to do Roth conversions.

With the income tax rates scheduled to increase again in 2026 and the likelihood that one of you will survive the other and the file in the higher single tax brackets delaying Social Security so you could do more Roth conversion could make a lot of sense for you, depending on the rest of your details.

HomeStretch
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Re: Retirement Planning Question

Post by HomeStretch » Thu Oct 03, 2019 6:49 am

Agree that you should be able to cover retirement expenses with your joint portfolio and SS income.

What is your mortgage rate and remaining mortgage term? If your rate is high, an option is to refinance now while rates are lower if the payback makes sense. You have $395k in a Taxable account, $330k mortgage balance and a spouse that needs ACA coverage for 6-7 years after retirement. I am a proponent of paying off a mortgage by retirement. But in your case, I would consider not paying off the mortgage until wife is eligible for Medicare if you can fund living expenses with the Taxable account and qualify for an ACA subsidy.

Review your SS claiming strategy. Try opensocialsecurity.com as suggested by delamer. With no pensions, it may make sense to delay claiming the higher earner’s SS until age 70 to receive the maximum SS benefit that receives an annual cost-of-living adjustment. Think of it as longevity insurance.

With most of your portfolio in tax deferred accounts, evaluate whether Roth conversions make sense before age 70-1/2 required minimum distributions. The goal would be to level your AGI/Taxable Income/marginal tax bracket each year after retirement. You also want to think about the tax situation for a sole surviving spouse.

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Watty
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Joined: Wed Oct 10, 2007 3:55 pm

Re: Retirement Planning Question

Post by Watty » Thu Oct 03, 2019 6:53 am

D Newton wrote:
Wed Oct 02, 2019 12:32 pm
Right now, I am estimating our annual expenses in early retirement to be $65-$70K, including healthcare (assuming no mortgage), one large trip/year, car maintenance, gifts to kids/grandchildren/charity, entertainment, etc. ......



1. Generally, do we have sufficient funds to fully retire in June 2021 based on our expected annual expenses?
Your expenses will go down when your wife starts medicare.

Depending on when you start Social Security you might be getting something like $60K a year in Social Security once you are both getting Social Security checks. Even if one of you dies the survivor will still be getting almost $40K a year.

You will need to figure out how to fund the next eight years until your wife is getting Social Security but even without crunching the numbers you look fine.

petulant
Posts: 751
Joined: Thu Sep 22, 2016 1:09 pm

Re: Retirement Planning Question

Post by petulant » Thu Oct 03, 2019 7:02 am

Your current income and tax rates matter here. I don't think I see them in the material you posted. Basically, can you use extra cash flow from your job until 2021 to pay down the mortgage? What is the basis and capital gains on your wife's bond index funds in her taxable account? Could you stop working in 2021 and wait until 2022 to pay off the mortgage? Your best strategy may be to sell taxable bond index funds with little capital gains (compared to the stocks) during a year where you have no work income (2022) so that you recognize the maximum amount of capital gains in the 0% capital gains brackets. I support paying off your mortgage before retirement, but using 401(k) or selling taxable assets with large gains needs to be done at an opportune time.

GlacierRunner
Posts: 53
Joined: Mon Apr 16, 2018 5:29 pm

Re: Retirement Planning Question

Post by GlacierRunner » Thu Oct 03, 2019 1:30 pm

D Newton wrote:
Wed Oct 02, 2019 12:32 pm

My questions are:

1. Generally, do we have sufficient funds to fully retire in June 2021 based on our expected annual expenses?
2. My wife cannot touch her 401K until she is 59.5 (2023); so, we will be primarily living off my 401k (and SS if i take it in 2021) in the early years, unless I work part time after June 2021. I’m thinking the first ~2 years of retirement we may have to tighten our belts a bit until my wife can tap into her 401K to supplement our retirement income, as (or if) needed...
3. I think it best for us to pay off the house at my retirement; what is a good time to do so? Now, or early 2021 when we may be in a lower tax bracket? Or later?
4. What funds should we use to payoff the house? I would first use (sell) any fund that lost money but as of today not sure if any did... Should we use a portion of the 401k funds? ...I think the capital gains on 401K’s are taxed at a higher rate than other funds?

Thank you for your comments and time reviewing the above.
DN
1) Yes.
2) As others have indicated there are ways to tap 401(k)s prior to 49.5 years of age, but I question why that is needed. If you take 3.5% - 4% of your household total portfolio you hit your expense target of $65k - $70k. Does it matter whether it comes from your 401k or hers? I guess it may if you separate expenses now.
3) & 4) I think I would probably identify the taxable account as the house payoff fund. It would be helpful to know what your current tax bracket is. If you are in the 22 or 24% bracket you might want to wait until retirement to pay it off as the capital gains rate would be zero from the taxable account if you are in 12% tax bracket in retirement. Maybe you wouldn't want to pay it off completely. You could pay chunks each year up to the top of the 15% tax bracket. But you'd want to do the math on this approach and see whether paying interest instead of paying it off makes sense.

HoosierJim
Posts: 700
Joined: Wed Mar 24, 2010 7:11 pm

Re: Retirement Planning Question

Post by HoosierJim » Thu Oct 03, 2019 1:44 pm

Non subsidy healthcare (aca + cobra) could cost as much as $20,000 per year - your target expenses of around $70 k would include 20k of insurance. If you maximize subsidy (both of you on ACA - the ACA plans might not be so different than your work plan) - you might be able to peg your expenses to a point where you DO qualify for a subsidy. If you have any medical conditions, the deductible/copays could also increase your expense -for which lower income on ACA could reduce your deductible & other costs. So I would work the numbers for max subsidy and see what that looks like. I would delay SS at least until your wife is on Medicare. Here is a link to a calculator.

Run a calc with your taxable income around $23K and take the rest out of the house fund to live on.

reddison
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Joined: Mon Jul 16, 2018 11:13 am

Re: Retirement Planning Question

Post by reddison » Fri Oct 04, 2019 10:21 am

If you are not eligible for ACA subsidy, my understanding is that you may be able to extend the COBRA period for your wife. If you start COBRA upon your retirement at 64, and then go on Medicare at 65, this is considered a second triggering event, which could provide your wife an additional 18 months. I am planning to utilize this method because the ACA plan options in my state are horrendous and costly (e.g., no coverage outside of my state).

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