Please Critique our Retirement Income Plan

[rrouse]

I am contemplating joining my wife in retirement in about 2 years at age 56, so I'm trying to develop a retirement income plan for us. I know there are a lot of smart people here, so I wanted to bounce it off you.

First, the basics:

• We expect to have roughly $3.4 million in cash and marketable securities spread across various types of accounts:
  • $2.5 million in tax-deferred 401(k) accounts.
  • $300K in Roth IRA.
  • $200K in taxable brokerage account.
  • $200K in I-bonds.
  • $100K in money market.
  • $120K in Health Savings Account (HSA).
• I have a portfolio of investment real estate worth about $3 million. It is professionally managed, has a capital reserve account for major expenses, and seems to reliably generate at least about $105K in income annually.
• We plan to leave the investment real estate to our daughter, who will benefit from the step-up in basis. She'll also get our house (~$1M). We feel that is more than enough for her, so we can safely spend the rest down to zero.
• We are debt free.
• Our goal is to use the $3.4 million to maximize income, especially in early retirement.

Here is what I've come up with so far. It consists of three tiers of income:

1. The first tier is a $127,872 annual income floor. It is intended to be as risk-free as is reasonably possible -- a "financial fortress", so to speak:
   • A split Social Security strategy where my wife takes it at 62 and I delay until 70.
   • Build a bridge to social security using the I-Bonds and TIPS (cost ~$740K from the 401(k) accounts).
   • Use $1.2 million to buy several joint life SPIAs totaling $60K per year with a 2% annual increase and 75% survivor payment.
   • $100K will be kept in the money market account for emergencies.
2. The second tier is somewhat less reliable $137,800 annual income to fund discretionary spending. In down years, we could dial back spending as necessary.
   • $12K per year from the Roth-IRA ($300K).
   • $8K per year from remaining 401(k) funds ($200K).
   • $8K per year from the taxable brokerage accounts ($200K).
   • $4.8K per year from the health savings account ($120K).
   • $105K per year from the real estate portfolio.
3. A third $40K tier to boost our spendable income (for travel, most likely) through age 70:
   • $40K per year TIPS ladder (cost ~$360K from the 401(k) accounts).

Visually it lays out like this (all amounts are annual and roughly in real dollars):



A few additional thoughts:

• I'm struck by how large a portion (75%) of the portfolio has been converted to fixed income, but if I do it any other way it seems that I end up with less income in early years, more in later years, and likely leaving our daughter an absurd amount of money.
• This gives about $305K inflation-adjusted income until age 70, and $265K thereafter.
• I anticipate getting a decent sized (~$1M) inheritance from my mom, but I have no idea when that will come so it seems useless for planning purposes. If I had to guess, I would expect it will come when I am around 70.
• It isn't clear to me whether or not we would benefit from Roth conversions. I suspect there is room for improvement, but I am unsure how to best analyze that.

Any constructive criticisms or ideas for optimization are appreciated!

[yatesd]

Looks like you are all set. What's your strategy for spending, health, and charity? Looks like those represent your biggest challenges. Already a super saver...

[peteyboy]

If you wanted to spend down your money, one way to do this is by VPW. Take a look at the Bogleheads wiki page (link below) and the thread for an ongoing example of the VPW (link below).

https://www.bogleheads.org/wiki/Variabl ... withdrawal

viewtopic.php?t=284519

EDIT: That said, I really like the way you laid this out. It looks great to me. The graphic helps communicate your plan well.

[SuzBanyan]

While you clearly have enough to generate the income you appear to need or want, you may want to evaluate whether the sources of the various income streams might result in higher than needed taxable income and eventually IRMAA payments after you reach 65.

It looks like only the Roth ($8k/year) and the HSA ($4.8/year) to the extent reimbursing for current or past medical expenses will not be taxable.

The $8k/year from your brokerage will only be taxable to the extent it represent dividends, interest or capital gains and the IBonds will only be taxable on interest. Social security will only be 85% taxable. In addition, your income from real estate ($105k/year) is probably mostly, if not entirely, taxable.

Everything else is from your 401k (up to $161k/year up to age 70) and will be fully taxable. Note that you need to be careful in how any distributions are taken from your 401k before you are 59.5 to avoid a 10% penalty.

My back of the envelope calculation shows that your are expecting up to $275k in taxable income per year up to age 70 and about $50k less than that at 70 and later. You didn’t mention health insurance in your post, so you may be prepared to pay substantial premiums for such insurance without any subsidies until you are 65 and IRMAA after that.

If you don’t yet have a plan for pulling funds from your 401k prior to age 59.5, you may want to think about that. To the extent you plan to create a Roth conversion ladder, you need to think about how that affects your planned asset placement for your TIPs ladder and SPIA in your 401k.

[Watty]

This gives about $305K inflation-adjusted income until age 70, and $265K thereafter.
......
Any constructive criticisms or ideas for optimization are appreciated!

With apparently having a paid off house you may be greatly overestimating your ability to effectively spend money in retirement.

A good chunk of the money will go to pay taxes each year but it would be good to take another look at what you will actually be able to spend when you are retired. This is especially true when you get to be a bit older and may not want to things like travel as much.

[rrouse]

Looks like you are all set. What's your strategy for spending, health, and charity? Looks like those represent your biggest challenges. Already a super saver...

Yes, we would probably qualify as super savers. A large percentage of our income is typically saved, invested, or invested.

Even so, we do live an affluent lifestyle. The spending in this plan is more than normal for us, but that is largely because of a large travel budget, plans to join a country club, and a few other luxury expenses that I haven't had time for.

I'm expecting that we will have to suck it up and pay for health insurance. We do have a decent sized HSA to help with deductibles and copays.

As for charity, we currently have no specific plan. I would likely want to donate time first, to see how well the charity utilized resources before writing any large checks. I served on the board of a non-profit once and was appalled by the poor use of money, so I need to get past that.

[rrouse]

While you clearly have enough to generate the income you appear to need or want, you may want to evaluate whether the sources of the various income streams might result in higher than needed taxable income and eventually IRMAA payments after you reach 65.

Yes, this is on my mind as well. Some financial engineering or Roth conversions might result in some savings. I'll need to take a closer look at the possibilities. I might pay a professional to see what can be done.

My back of the envelope calculation shows that your are expecting up to $275k in taxable income per year up to age 70 and about $50k less than that at 70 and later.

Yes, and there are several reasons for this.

• The retirement smile. After more than a decade of traveling and getting older, I suspect we will largely have it out of our system. Naples, Florida might be more attractive to us than Naples, Italy at that point. I just don't think we will spend as much.
• I suspect that will receive an inheritance by then, which should make up for any reduction in income.

[rrouse]

With apparently having a paid off house you may be greatly overestimating your ability to effectively spend money in retirement.

A good chunk of the money will go to pay taxes each year but it would be good to take another look at what you will actually be able to spend when you are retired. This is especially true when you get to be a bit older and may not want to things like travel as much.

Haha, that could be. Then again I'd rather be over-funded than come up short. We always have the option of giving it away, or leaving some of it to others.

[SuzBanyan]

While you clearly have enough to generate the income you appear to need or want, you may want to evaluate whether the sources of the various income streams might result in higher than needed taxable income and eventually IRMAA payments after you reach 65.

Yes, this is on my mind as well. Some financial engineering or Roth conversions might result in some savings. I'll need to take a closer look at the possibilities. I might pay a professional to see what can be done.

My back of the envelope calculation shows that your are expecting up to $275k in taxable income per year up to age 70 and about $50k less than that at 70 and later.

Yes, and there are several reasons for this.

• The retirement smile. After more than a decade of traveling and getting older, I suspect we will largely have it out of our system. Naples, Florida might be more attractive to us than Naples, Italy at that point. I just don't think we will spend as much.
• I suspect that will receive an inheritance by then, which should make up for any reduction in income.

You might look into a Roth conversion ladder, also known as rolling Roth conversions. Essentially, instead of distributing from an IRA or 401k for current spending, you convert that amount to the Roth, then pull the same amount (but different dollars) from the Roth. This strategy depends on having enough funds already in the Roth that can be distributed without tax or penalty, usually prior contributions or conversions made more than 5 years before. This strategy doesn’t save current tax dollars, but allows you to maintain your Roth balance.

[rrouse]

You might look into a Roth conversion ladder, also known as rolling Roth conversions. Essentially, instead of distributing from an IRA or 401k for current spending, you convert that amount to the Roth, then pull the same amount (but different dollars) from the Roth. This strategy depends on having enough funds already in the Roth that can be distributed without tax or penalty, usually prior contributions or conversions made more than 5 years before. This strategy doesn’t save current tax dollars, but allows you to maintain your Roth balance.

That is an interesting idea. I will look into it. I would really love to Rothify as much as is reasonably possible.

As I look at my plan, one of the risks that bothers me is the possibility of higher tax rates in the future. With the federal deficit and debts levels so high, plus rising rates on that debt, it isn't hard to imagine taxes going up, perhaps a lot. If we returned to the tax rates that were in place between World War II and the early 1960s (the last time the debt was so high and we had to deleverage) my top marginal bracket would be pretty scary.