Portfolio Plan Check

[taxesarecool]

Hey all. I've read a ton of articles on here and it's all been very interesting but I don't see any that are really similar to my odd situation. Looking for conversations about where I may be thinking incorrectly.

43yo, 43yo spouse
Spouse doesn't work and no plans for income; my income has covered everything up to and from now
Currently receiving a lifetime inflation-indexed taxable pension of $99,000 from a previous venture; but it all stops when I die
Spouse receives a lifetime inflation-indexed taxable pension of $32,000 from same previous venture; but that too stops when they die
Because of that venture and expected pension I didn't really save much young, so have ~$130k in Roth IRA, ~$220k in T-IRA/401ks, ~$150k in taxable account
Currently working (W2) and saving $100k/yr in taxable account and $38,000 in traditional 401k; 38% tax bracket between Fed/State

Now, I'm not kidding myself that I'm insanely lucky. But that doesn't mean I shouldn't still try to optimize right? So here's my thought:
MAIN GOAL (prepare for worst case): Ensure my spouse has $120k/yr if I die; I am fine if they pass first
SECONDARY GOAL (prepare for best case): minimize lifetime tax bill assuming we both live to 100 and ability to pass wealth on
- To cover my main goal, I assume she puts whatever lump sum into the golden butterfly and lives off 3.5%; hence I need a lump sum of (120k-32k)/0.035 = $2.5M
- With a current lump sum of $500k I am $2M short; I have fairly cheap term life insurance of $2M to cover that but ends at 50
- With a hopeful 10% RoR, at age 50 I'll have FV=(0.1,7,-138k,-500k)=$2.2M
- With a lower RoR, I may have to bridge the gap with some later-life term or whole conversions (I have options that let me convert regardless of health) and work another couple years
- Otherwise, retire at 50 to pursue next life stage, but both spouse and I are fully covered with passive income at that point

- To cover my secondary goal
- Convert my $220k over the next couple years to Roth IRA, even at a 32% Fed Tax Bracket...I won't exceed the 38% tax bracket so just convert whatever I can handle the tax hit on without impacting the main goal
- Switch my current 401k to a Roth version
- Do a mega backdoor 401k to switch some of the 100k taxable into the Roth 401k (total remains 138k/year)

All my investments are TSM portfolio with expectation of switch to golden butterfly when stop working.

I'm sure I'm very poorly planning for the future and leaning on the blessings of the past, so happy to take any spears you all can throw at me! Thanks.

[invest4]

You are in your early 40s...how about some additional life insurance to plug most of the gap for your spouse? Of course, you can still do what you are doing...but will go a long way to solve the potential problem of spouse not having enough income if you die first, no?

[Carl53]

Go with the term insurance. Also how guaranteed are those pensions? A lot of things can change over the next 40-50 years. Companies do go bankrupt.

[taxesarecool]

You are in your early 40s...how about some additional life insurance to plug most of the gap for your spouse? Of course, you can still do what you are doing...but will go a long way to solve the potential problem of spouse not having enough income if you die first, no?

Thanks…I already have enough life insurance to plug the gap.

[taxesarecool]

Go with the term insurance. Also how guaranteed are those pensions? A lot of things can change over the next 40-50 years. Companies do go bankrupt.

I’ve considered that but let’s assume i’m not concerned about the pensions.

[HomeStretch]

With a marginal tax rate of 32%, doing Roth conversions of all tax deferred balances now and making Roth (rather than traditional) retirement contributions doesn’t seem optimal.

Doing mega backdoor Roths to move savings from Taxable to Roth makes sense.

Will you/your spouse receive SS benefits? Or are your pensions the only source of retirement income?

Do you and spouse have long-term care insurance?

Your 10% ROR planning assumption is aggressive. Your current portfolio + $138k savings /yr will probably grow to a portfolio of $2.0-$2.5 million invested in at least 60% equity in 10 years. Consider:

(1) do you have adequate disability insurance? As the sole breadwinner, your plan is dependent on you being able to work until you reach the desired #.

(2) apply now for 20-30 year level-premium term life as your current policy expires at age 50. If you die before age 65, this will allow your spouse as a surviving spouse to delay withdrawing from the portfolio until their 60s as the portfolio needs to last until age 100 and pass wealth on
per your planning assumptions. It also helps if spouse’s pension benefits are terminated unexpectedly or spouse has significant uninsured care costs.

[taxesarecool]

With a marginal tax rate of 32%, doing Roth conversions of all tax deferred balances now and making Roth (rather than traditional) retirement contributions doesn’t seem optimal.

Doing mega backdoor Roths to move savings from Taxable to Roth makes sense.

Will you/your spouse receive SS benefits? Or are your pensions the only source of retirement income?

Do you and spouse have long-term care insurance?

Your 10% ROR planning assumption is aggressive. Your current portfolio + $138k savings /yr will probably grow to a portfolio of $2.0-$2.5 million invested in at least 60% equity in 10 years. Consider:

(1) do you have adequate disability insurance? As the sole breadwinner, your plan is dependent on you being able to work until you reach the desired #.

(2) apply now for 20-30 year level-premium term life as your current policy expires at age 50. If you die before age 65, this will allow your spouse as a surviving spouse to delay withdrawing from the portfolio until their 60s as the portfolio needs to last until age 100 and pass wealth on)
per your planning assumptions. It also helps if spouse’s pension benefits are terminated unexpectedly or spouse has significant uninsured care costs.

Thanks very much for the thoughts. To answer you:
- Why doesn’t Roth conversions right now and roth 401k seem optimal? If I survive then I won’t need my savings and RMDs will bite me. Sure I may be in a 22/24 bracket later but then i’d also have a decade+ of growth to convert and pay taxes on.
- Agree about mega backdoor max…if i’m paying taxes anyways might as well grow and withdraw earnings tax free!
- Yes we’ll receive SS (although spouse will be half of mine)
- We don’t currently have LTCI. I’ll have to read up more on this and when the right time to purchase is
- Yes I have full replacement short and long term disability
- I’m not sure i’m eligible for best rate term anymore, hence my thought of using my guaranteed conversions if required later.

[retired@50]

...
~$220k in T-IRA/401ks,
...
Currently working (W2) and saving $100k/yr in taxable account and $38,000 in traditional 401k; 38% tax bracket between Fed/State
...
- Why doesn’t Roth conversions right now and roth 401k seem optimal? If I survive then I won’t need my savings and RMDs will bite me. Sure I may be in a 22/24 bracket later but then i’d also have a decade+ of growth to convert and pay taxes on.

Roth conversions aren't typically done when one is in their highest earning years, and/or in the highest tax bracket they are likely to face. So..., not "optimal". I'd suggest you wait until the lower brackets are available to you after you stop working.

I don't see how the T-IRA/401k balance of $220k is going to create an RMD that will "bite" you. Anything under $1 million for a married couple is typically fine.

Regards,

[HomeStretch]

^^^ This.

The SS benefits will reduce the net spend your portfolio needs to cover as a couple or as a surviving spouse. Your surviving spouse will receive your higher benefit. So the retirement # you are calculating will be lower when taking into account the SS benefit (it looks like you are already taking the pension benefit into account).

It’s easy to get quotes at selectquote.com or term4life.sale. I was suggesting a 20- or 30-year level-premium term life policy now. Yes, the annual premium for a new policy will be higher than your current term policy as you are older and perhaps your health rating isn’t as good. But the policy term will be longer and cover your surviving spouse in order to make sure your portfolio is adequate. “Guaranteed conversions” of level-premium term life policies or employer group life policies are generally not great premium-wise - the premiums may increase every year, the employer plan conversion may only be to universal life, etc.

As a fallback, if your spouse is willing or able to go into the work force if you dies first or die earlier than planned, that may also be a game changer in your calculation of your retirement # under a surviving spouse scenario.

[taxesarecool]

...
~$220k in T-IRA/401ks,
...
Currently working (W2) and saving $100k/yr in taxable account and $38,000 in traditional 401k; 38% tax bracket between Fed/State
...
- Why doesn’t Roth conversions right now and roth 401k seem optimal? If I survive then I won’t need my savings and RMDs will bite me. Sure I may be in a 22/24 bracket later but then i’d also have a decade+ of growth to convert and pay taxes on.

Roth conversions aren't typically done when one is in their highest earning years, and/or in the highest tax bracket they are likely to face. So..., not "optimal". I'd suggest you wait until the lower brackets are available to you after you stop working.

I don't see how the T-IRA/401k balance of $220k is going to create an RMD that will "bite" you. Anything under $1 million for a married couple is typically fine.

Regards,

Love your name…let me join you!
It’s 220k NOW but if the optimal is leave / continue investing in tax deferred and i don’t die then I end up with $3M+ here down the road. We’re talking another 10 years of contributions plus 25 years of growth.

[taxesarecool]

^^^ This.

The SS benefits will reduce the net spend your portfolio needs to cover as a couple or as a surviving spouse. Your surviving spouse will receive your higher benefit. So the retirement # you are calculating will be lower when taking into account the SS benefit (it looks like you are already taking the pension benefit into account).

It’s easy to get quotes at selectquote.com or term4life.sale. I was suggesting a 20- or 30-year level-premium term life policy now. Yes, the annual premium for a new policy will be higher than your current term policy as you are older and perhaps your health rating isn’t as good. But the policy term will be longer and cover your surviving spouse in order to make sure your portfolio is adequate. “Guaranteed conversions” of level-premium term life policies or employer group life policies are generally not great premium-wise - the premiums may increase every year, the employer plan conversion may only be to universal life, etc.

As a fallback, if your spouse is willing or able to go into the work force if you dies first or die earlier than planned, that may also be a game changer in your calculation of your retirement # under a surviving spouse scenario.

Ok thanks for the extra thoughts there. My conversion options are 5 year terms renewable until 75…i’ll call to get quotes on those premiums today and also get quotes for a new 20/30 year terms renewable until policy and decide off those. Thanks for helping me think through this one hole!!!

As for SS…I wasn’t counting that but that’s a good point. I’ll have to include that for spouse as it will change how much i need saved.

[retired@50]

Love your name…let me join you!
It’s 220k NOW but if the optimal is leave / continue investing in tax deferred and i don’t die then I end up with $3M+ here down the road. We’re talking another 10 years of contributions plus 25 years of growth.

Use the tax-deferred IRA/401k account(s) to hold nothing but bond funds or fixed income. They will grow slower that way, and they are a tax efficient location for fixed income assets - which you'd presumably be holding anyway.

ETA: Also, you'll get penalty free access to this tax-deferred money at 59.5 years old, so you could withdraw some sooner than the RMD age of 75 to help smooth the income tax burden.

For more on this line of thinking, see the wiki link below.
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,

[taxesarecool]

^^^ This.

The SS benefits will reduce the net spend your portfolio needs to cover as a couple or as a surviving spouse. Your surviving spouse will receive your higher benefit. So the retirement # you are calculating will be lower when taking into account the SS benefit (it looks like you are already taking the pension benefit into account).

It’s easy to get quotes at selectquote.com or term4life.sale. I was suggesting a 20- or 30-year level-premium term life policy now. Yes, the annual premium for a new policy will be higher than your current term policy as you are older and perhaps your health rating isn’t as good. But the policy term will be longer and cover your surviving spouse in order to make sure your portfolio is adequate. “Guaranteed conversions” of level-premium term life policies or employer group life policies are generally not great premium-wise - the premiums may increase every year, the employer plan conversion may only be to universal life, etc.

As a fallback, if your spouse is willing or able to go into the work force if you dies first or die earlier than planned, that may also be a game changer in your calculation of your retirement # under a surviving spouse scenario.

Do you understand the survivor benefit? Assume she would otherwise get 0. If I die today, does she just wait until 62-70 and then collect what mine would have been (full amount) at those equivalent ages? Assume we’re born on the same day.

[taxesarecool]

Love your name…let me join you!
It’s 220k NOW but if the optimal is leave / continue investing in tax deferred and i don’t die then I end up with $3M+ here down the road. We’re talking another 10 years of contributions plus 25 years of growth.

Use the tax-deferred IRA/401k account(s) to hold nothing but bond funds or fixed income. They will grow slower that way, and they are a tax efficient location for fixed income assets - which you'd presumably be holding anyway.

ETA: Also, you'll get penalty free access to this tax-deferred money at 59.5 years old, so you could withdraw some sooner than the RMD age of 75 to help smooth the income tax burden.

For more on this line of thinking, see the wiki link below.
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,

Great points…but how do you rebalance. For instance if i want to buy more bonds i can’t really get more into (or out of) those accounts. Does one just do what you can and adjust more in the taxable accounts?

[retired@50]

Use the tax-deferred IRA/401k account(s) to hold nothing but bond funds or fixed income. They will grow slower that way, and they are a tax efficient location for fixed income assets - which you'd presumably be holding anyway.

ETA: Also, you'll get penalty free access to this tax-deferred money at 59.5 years old, so you could withdraw some sooner than the RMD age of 75 to help smooth the income tax burden.

For more on this line of thinking, see the wiki link below.
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,

Great points…but how do you rebalance. For instance if i want to buy more bonds i can’t really get more into (or out of) those accounts. Does one just do what you can and adjust more in the taxable accounts?

If the tax-deferred accounts are completely full of fixed income choices then you have to pick a "next best" place to put bonds (assuming you want or need more bonds). Sometimes this is a Roth account, other times it's taxable (either with municipal bond fund or US Treasury), but that choice in taxable depends on your income tax bracket at the time.

If you can hold your entire bond allocation in the tax-deferred accounts AND still have room left over, then use the remaining space for stock index funds (either US or international).

Regards,

[taxesarecool]

Great points…but how do you rebalance. For instance if i want to buy more bonds i can’t really get more into (or out of) those accounts. Does one just do what you can and adjust more in the taxable accounts?

If the tax-deferred accounts are completely full of fixed income choices then you have to pick a "next best" place to put bonds (assuming you want or need more bonds). Sometimes this is a Roth account, other times it's taxable (either with municipal bond fund or US Treasury), but that choice in taxable depends on your income tax bracket at the time.

If you can hold your entire bond allocation in the tax-deferred accounts AND still have room left over, then use the remaining space for stock index funds (either US or international).

Regards,

Ya that’s what i assumed thank you!

[HomeStretch]

Do you understand the survivor benefit? Assume she would otherwise get 0. If I die today, does she just wait until 62-70 and then collect what mine would have been (full amount) at those equivalent ages? Assume we’re born on the same day.

No, I don’t have a great understanding of survivor benefits.

Your spouse may collect SS benefits based on your record or their own record. If you die, your spouse may collect a survivor benefit at age 60 or, if disabled, at age 50. There are other requirements. This SSA publication about survivor benefits may be helpful:
https://www.ssa.gov/pubs/EN-05-10084.pdf

The amount of the benefits varies based on claiming age, among other things. If you and your spouse create mySSA.gov accounts, there should be information and tools available to estimate benefits.

[taxesarecool]

Do you understand the survivor benefit? Assume she would otherwise get 0. If I die today, does she just wait until 62-70 and then collect what mine would have been (full amount) at those equivalent ages? Assume we’re born on the same day.

No, I don’t have a great understanding of survivor benefits.

Your spouse may collect SS benefits based on your record or their own record. If you die, your spouse may collect a survivor benefit at age 60 or, if disabled, at age 50. There are other requirements. This SSA publication about survivor benefits may be helpful:
https://www.ssa.gov/pubs/EN-05-10084.pdf

The amount of the benefits varies based on claiming age, among other things. If you and your spouse create mySSA.gov accounts, there should be information and tools available to estimate benefits.

Thanks I already read that and have a myssa account but there’s nothing about how your spouse can collect if you die young and they wait until 60…62…67…70. I’ll give them a call.

[retired@50]

No, I don’t have a great understanding of survivor benefits.

Your spouse may collect SS benefits based on your record or their own record. If you die, your spouse may collect a survivor benefit at age 60 or, if disabled, at age 50. There are other requirements. This SSA publication about survivor benefits may be helpful:
https://www.ssa.gov/pubs/EN-05-10084.pdf

The amount of the benefits varies based on claiming age, among other things. If you and your spouse create mySSA.gov accounts, there should be information and tools available to estimate benefits.

Thanks I already read that and have a myssa account but there’s nothing about how your spouse can collect if you die young and they wait until 60…62…67…70. I’ll give them a call.

Mike Piper has a short book on Social Security. Maybe check your local public library for a copy.

https://www.goodreads.com/book/show/343 ... We6&rank=5

Regards,

[ScubaHogg]

I’m not seeing social security (survivors, etc.) accounted for?

[taxesarecool]

I’m not seeing social security (survivors, etc.) accounted for?

ya that’s a recent good point that’s as brought up i’m now factoring in thanks!