Advice on adjusting AA in early retirement

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Topic Author
sailingtex
Posts: 14
Joined: Fri Apr 10, 2020 8:06 am

Advice on adjusting AA in early retirement

Post by sailingtex »

Hello all and thanks for all the investment wisdom I have gleaned from Bogleheads.

I am almost 65, married and retired 7 months ago. We have appx 40x living expenses in our portfolio and wish to change our AA to a more conservative ratio- moving to 40/60 or 30/70 range. My wife is taking SS now, we plan to defer mine to age 70.

We have been blessed to have high income, and we both agree on being frugal and saving throughout our marriage. We have followed a low cost, index fund investing for decades (learned about this from Scott Burns columns in the newspaper) but didn’t find BH community until later and therefor didn’t know anything about tax efficient allocation of my money. I have also (probably) ended my working years with proportionately ‘too much’ in tax advantaged vs taxable. We have no Roth at this time.

Our current portfolio is this:
Tax advantaged $3,350,000; 28x living expenses, 54/46 AA
Taxable $1,134,000; 9.5x living expenses, 70/30 AA
Cash $350,000

Our SS will cover 0.5x of our living expenses at age 70, our RMD will cover 1.2x living expenses if I do not move money out of the IRA’s.

Our tax bracket this year will be 28%, next year lower, I was thinking of making Roth conversions to top of 24% bracket. I am still working part-time and will see about $48,000 income next year from that, her SS is $14,000 per year and our dividend income in the past was about $20,000, I think. We estimate our living expenses at $100,000 (with a generous allowance for travel).

My goals are:
1) Adjust AA to a more conservative number
2) Limit taxes
3) Move money to Roth IRA
4) Leave money to heirs

My questions are:
1) Best way to adjust AA and limit CG and income taxes. Should I sell from equities to fund my Roth and living expenses; slowly changing AA over a few years?
2) Should I sell IRA assets now for living expenses, in order to reduce RMD later (as well as doing Roth conversions). It seems 'conventional wisdom' advocates selling taxable assets first.
3) What is best way to leave money to heirs—in Taxable or tax advantaged accounts. We are also planning to ‘gift’ money to each of our children annually.

I have run iORP which shows I can move a lot to Roth over the next several years. I hope these questions make sense, I may be over-thinking this. I do feel some urge to change AA soon, as I don’t want to experience a large equity drop at this stage of my life. I’m sure there are other issues I am not considering, and welcome any and all advice—thanks in advance.

Edited to add dollar amounts, etc in blue above.
Last edited by sailingtex on Wed Oct 13, 2021 1:38 pm, edited 1 time in total.
bloom2708
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Re: Advice on adjusting AA in early retirement

Post by bloom2708 »

With most of your savings in pre-tax, simply sell stock funds in your Rollover IRAs/Traditional IRAs or whatever vehicle they are in and buy bond funds until you are at 40/60 or 30/70.

No tax consequences.

Paying tax now (Roth conversions) or paying tax later (RMD) is a more detailed discussion. Choose to convert up to the top of 22% bracket is an example of a strategy you might use.
Last edited by bloom2708 on Wed Oct 13, 2021 12:16 pm, edited 1 time in total.
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LilyFleur
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Re: Advice on adjusting AA in early retirement

Post by LilyFleur »

I have done some large Roth conversions lately. I plan to save those for my children to inherit some day.

Good job on getting married! You have a lot more room in the lower tax brackets for Roth conversions. :D
retiredjg
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Re: Advice on adjusting AA in early retirement

Post by retiredjg »

The cheapest way to move to a more conservative portfolio is to sell stocks and buy bonds in your tax-deferred accounts. If you can reach your goals that way, that may answer your question. It can be done in one day and will not trigger any taxes. It will also slow down the growth of your IRA which probably needs to be done anyway.

I sense you are a bit reticent to post your full information, but there's not much we can do without it other than general suggestions like the one above.

Chances are you may need or want to do some Roth conversions if you have too much in tax-deferred accounts, but information is needed for that as well.

If you do have too much in tax-deferred accounts, you need to start spending it and/or converting it to Roth. There are a couple of approaches. One would be to use tax-deferred accounts for living expenses and not worry much about Roth conversions or do small Roth conversions. The other would be to take living expenses from the taxable account (long term gains) and convert as much as possible (up to a limit) from tIRA to Roth IRA.

A place to start the discussion, if you are willing to share, would be to tell us your tax bracket this year and what you expect next year, your annual expenses, and all your incoming unstoppable income (pension, Her SS, dividends if more than a tad, interest, etc.)
Topic Author
sailingtex
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Re: Advice on adjusting AA in early retirement

Post by sailingtex »

LilyFleur wrote: Wed Oct 13, 2021 12:01 pm
Good job on getting married! You have a lot more room in the lower tax brackets for Roth conversions. :D
My original post was unclear, I've been married 34 years -- thankfully she has put up with me that long! Just retired 7 mos ago.
Topic Author
sailingtex
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Re: Advice on adjusting AA in early retirement

Post by sailingtex »

thanks for the early suggestions, I will gather more numbers and post more details later.
Topic Author
sailingtex
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Re: Advice on adjusting AA in early retirement

Post by sailingtex »

I have added more information, in blue, in my original post. Thanks.
nuthinbutnet
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Re: Advice on adjusting AA in early retirement

Post by nuthinbutnet »

OP,

Like you, I am nearly 65, long-time married, though I won't retire for a few months. I don't have as large a net worth/retirement (just over 2 mil) as you do, but our situation is much the same, in that we're approaching 35x living expenses (above social security and the like). Like you, we want to give some money annually to kids, particularly when our RMDs exceed what we'll need for expenses.

I used to think like most people here -- that is, that when you're retiring you should get more conservative with your AA. But why, really, if you have enough in fixed income to cover expenses for 8-10 years, as it appears you do? Try putting your numbers into a calculator such as this one, which is popular on the forum: https://www.wealthmeta.com/calculator/r ... calculator
It's pretty eye-opening that you won't run out of money and if you are a bit more aggressive you actually have less chance of running out.
retiredjg
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Re: Advice on adjusting AA in early retirement

Post by retiredjg »

Thanks for the update and especially for making the updated information so easy to find (in blue).

My instincts are similar to yours - convert up to the top of the 24% tax bracket...at least for 2022 - 2025 while tax rates are still lower than before. Maybe less after that, maybe not depending on how things look then.

That could get your tax-deferred balance down to $2.5 millionish or less if you continue after 2025. With living expenses of $100k, that is a pretty good number to have to take RMDs from.

It is not very important to convert everything. I think it is somewhat important to convert a certain amount if you can to make RMDs less of a burden, especially when there is just one of you left.

If you sell in taxable for living expenses and to pay the taxes, you can convert less but more of your IRA money goes into Roth IRA. If you use IRA money for living expenses and taxes, you will reduce the IRA more each year but less ends up in Roth IRA and more in taxable.

Putting most or all of your bonds into the tax-deferred accounts will make them grow slower resulting in lower RMDs.

Converting to the top of the 24% bracket is going to increase your Medicare premiums so don't be surprised when/if that happens.

This estimation is a much a guess as anything. There is no way to predict what is "best".
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tennisplyr
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Re: Advice on adjusting AA in early retirement

Post by tennisplyr »

If I had your issues I'd sleep very well at night. Don't forget to enjoy your retirement, life goes very fast😀
Those who move forward with a happy spirit will find that things always work out.
Topic Author
sailingtex
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Joined: Fri Apr 10, 2020 8:06 am

Re: Advice on adjusting AA in early retirement

Post by sailingtex »

Thanks for the thoughtful input. I understand the point 'nothingbutnet' makes that I can be more aggressive with money is excess of our expected expenses, but why only put 8-10 yrs of expenses in fixed income (since I hope to live 20-30 more years)? I ran the wealthmeta calculator and as you expected it shows that we should not run out of money. I am becoming more comfortable with the idea that we are ok financially, I just don't want to make any stupid mistakes.

I appreciate 'retiredjg' s comments and plan to pursue Roth conversions to reduce my RMD's in the future. I will look at things each year and determine from which accounts we take our living expenses, etc. We are painfully familiar with IRMAA, as my wife went on Medicare a year ago and we are paying a nice surcharge/tax due to our previous income. We did reduce the surcharge by filing paperwork when I retired.

Finally, to 'tennisplyr'; thanks for the reminder- I am having more fun in retirement than I ever imagined, busy all the time enjoying life.
delamer
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Re: Advice on adjusting AA in early retirement

Post by delamer »

sailingtex wrote: Thu Oct 14, 2021 1:08 pm Thanks for the thoughtful input. I understand the point 'nothingbutnet' makes that I can be more aggressive with money is excess of our expected expenses, but why only put 8-10 yrs of expenses in fixed income (since I hope to live 20-30 more years)? I ran the wealthmeta calculator and as you expected it shows that we should not run out of money. I am becoming more comfortable with the idea that we are ok financially, I just don't want to make any stupid mistakes.

I appreciate 'retiredjg' s comments and plan to pursue Roth conversions to reduce my RMD's in the future. I will look at things each year and determine from which accounts we take our living expenses, etc. We are painfully familiar with IRMAA, as my wife went on Medicare a year ago and we are paying a nice surcharge/tax due to our previous income. We did reduce the surcharge by filing paperwork when I retired.

Finally, to 'tennisplyr'; thanks for the reminder- I am having more fun in retirement than I ever imagined, busy all the time enjoying life.
The argument for not going too conservative when you have more savings than you will likely need for your own retirement is that you are essentially investing for your heirs.

It looks you have 40X your total expenses saved. The key variable for measuring your savings is actually residual expenses (total expenses minus Social Security & dividends/interest from taxable). So you actually have a lot more than 40X.

There are multiple income stages to your retirement:

1. Your working part-time, plus Social Security for wife
2. Social Security for wife only
3. Both Social Security

Plus dividends/interest from taxable at each stage.

So your residual expenses will differ in each stage, and it’s worth setting up a spreadsheet with each stage in it so you can see what your withdrawals will need to be at different points. That will allow you to determine how many years of residual expenses you actually have and you may see your asset allocation differently.

It’s hard to beat a Roth IRA as an inheritance. Withdrawals are tax-free (assuming the 5 year rule has been met) and if they are reinvested in a taxable account, there’s a cost basis created at the time of reinvestment (which will probably be greater than that of the step-up in a taxable account, but only probably).
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
joverby
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Re: Advice on adjusting AA in early retirement

Post by joverby »

delamer wrote: Thu Oct 14, 2021 4:12 pm
It’s hard to beat a Roth IRA as an inheritance. Withdrawals are tax-free (assuming the 5 year rule has been met) and if they are reinvested in a taxable account, there’s a cost basis created at the time of reinvestment (which will probably be greater than that of the step-up in a taxable account, but only probably).
I addition your heirs have 10 years to empty the Roth IRA. So they can gain 10 years of tax free growth.
protagonist
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Re: Advice on adjusting AA in early retirement

Post by protagonist »

Given that you have considerable assets, you might prefer a "bucket approach" to an AA percentage approach.
Keep what you figure you will need for a long secure retirement in very secure fixed income investments that will hopefully beat inflation (not an easy target anymore I know.)
Put the rest in the stock market and forget about it.
That way the next time the market crashes you will be assured you have enough for a comfortable survival and you won't climb a wall of worry, plus you won't have the pressure to re-allocate and think about it. What you want to avoid in retirement is stress. You had enough of that when you worked.
nuthinbutnet
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Re: Advice on adjusting AA in early retirement

Post by nuthinbutnet »

OP,

The reason I said that because you have 8-10 years (or more) in fixed income, so you can be more aggressive rather than less aggressive with your AA, isn't that anyone is trying to have expenses in fixed income for the rest of your life (20-30 years, you estimate), but that within a ten year time frame your stocks will have come back up if you haven't had to sell them. Unless we have an end-of-the-world as we know it scenario, but why bother planning for that. Make some money for heirs, charity, and the like!
Topic Author
sailingtex
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Joined: Fri Apr 10, 2020 8:06 am

Re: Advice on adjusting AA in early retirement

Post by sailingtex »

I appreciate all the advice and plan to calculate my 'residual expenses' and plan off of that. I have found a good spreadsheet in the Wiki here that I will use to allow me to run different scenarios on Roth Conversion. Also will use QCD's to lower my tax advantaged accounts over time. You all have really help crystallize plans. Now for the number crunching.
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