depleting accounts in retirement

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matthewmatt
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depleting accounts in retirement

Post by matthewmatt » Thu Jul 13, 2017 5:02 pm

When retired, it is in general most prudent to deplete taxable account first, tIRA second and roth IRA last.
In general, it is also advisable to keep most bonds in IRAs and most stocks in traditional accounts.
However, because we will first deplete taxable accounts, it would be smartest if taxable accounts would contain most bonds, since bonds are more stable.
I wonder what is your opinion?

mhalley
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Re: depleting accounts in retirement

Post by mhalley » Thu Jul 13, 2017 6:42 pm

As I plan do draw down my taxable accounts first, I elected to have both bonds and stock to prevent the funds from tanking too hard in a crash. I am also doing Roth conversions yearly to help minimize rmds. Physician on fire recently discussed his drawdown strategy, with numerous other financial bloggers joining in. The anchor post starts here http://www.physicianonfire.com/drawdown/
And you can follow the links at the bottom for other posts.
I also recommend Kitces article on tax eff. Withdrawals.
https://www.kitces.com/blog/tax-efficie ... ing-needs/
Last edited by mhalley on Thu Jul 13, 2017 7:00 pm, edited 3 times in total.

123
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Re: depleting accounts in retirement

Post by 123 » Thu Jul 13, 2017 6:49 pm

It would depend on the relative balances of each account and your long-term tax situation. The mix should be based on attempting to minimize your tax obligations over a number of years. The solution may involving taking tax-deferred funds earlier to reduce RMDs down the road. I feel that leaving the Roth accounts, the crown jewels of any portfolio, alone as long as possible should be encouraged but it all depends on the relative amounts in all your accounts and your expected tax rates.
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Leif
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Re: depleting accounts in retirement

Post by Leif » Thu Jul 13, 2017 6:55 pm

As in many things "it depends".

Yes, drawing from your taxable accounts first allows the tax free and tax deferred accounts to grow without an immediate tax burden to drag them down.

However, it could be a good idea to draw from a tax deferred account if your taxable account has high appreciated equity. If that is passed on at death then it also gets a step up in basis. That could save a lot in taxes.

Also drawing from a Roth, instead of a tax deferred account, may help in keeping you in a lower tax bracket.

I keep the most tax efficient assets in my taxable accounts. These include broad based index funds such a TSM and EAFE. I've also built a CD ladder to provide protection from a stock market downturn. Not very tax efficient, but in retirement my bracket should be lower.

So many things to consider.
Last edited by Leif on Thu Jul 13, 2017 7:00 pm, edited 1 time in total.
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bligh
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Re: depleting accounts in retirement

Post by bligh » Thu Jul 13, 2017 6:57 pm

123 wrote:It would depend on the relative balances of each account and your long-term tax situation. The mix should be based on attempting to minimize your tax obligations over a number of years. The solution may involving taking tax-deferred funds earlier to reduce RMDs down the road. I feel that leaving the Roth accounts, the crown jewels of any portfolio, alone as long as possible should be encouraged but it all depends on the relative amounts in all your accounts and your expected tax rates.
+1

If you have a big tax-deferred portfolio, your RMDs could get pretty large. So if you are going to be retiring at 60 for example, delaying Social security until 70 and staying in a low tax bracket it can make sense to pull from the tax deferred accounts to keep the balance from continuing to grow.. perhaps even doing some Roth conversions. Your tax rate on your taxable investments is going to stay constant unless there is some changes in legislation.

As 123 said, Roth should be treated as your crown jewels and left alone as long as possible.

rick0
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Re: depleting accounts in retirement

Post by rick0 » Thu Jul 13, 2017 9:11 pm

ORP is an online calculator that tries to answer that question. I would recommend giving
it a try. Be sure to scroll down as there is an Extended ORP data entry thats often missed,
and gives you many options to play with.

https://www.i-orp.com/gamma/index.html
Essential ORP asks for the basic facts of your retirement income situation and computes an optimal savings withdrawal schedule using policy and forecast parameters that are the consensus of professional financial advisors.

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House Blend
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Re: depleting accounts in retirement

Post by House Blend » Thu Jul 13, 2017 9:50 pm

bligh wrote:Roth should be treated as your crown jewels and left alone as long as possible.
Not necessarily.

If at age 80 you discover that you've emptied out tax-deferred and taxable and all you have left is a Roth and SS income, then you're in the 0% tax bracket.

While there are worse problems to have, you've clearly spent too much from tax-deferred/taxable and would have been better off spending some Roth earlier, or you Roth converted too much.

And as Leif notes, Roth withdrawals are useful for years with higher expenses if they help keep you out of a higher than usual tax bracket.

galectin
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Re: depleting accounts in retirement

Post by galectin » Thu Jul 13, 2017 9:53 pm

I just retired and am facing this same question. About 80% of my money is in tax-deferred accounts. This year is unusual since I worked for 5 1/2 months and we have some income related to bond interest and distribution from an annuity in my wife's inheritance from her father. We will be taking money from our taxable account for the rest of the year, which will bring us to about the 15% tax bracket (~$95,000 for married, filing jointly). Fortunately, our expenses are below that level.

Next year we will file for my social security (currently we are getting SS with my wife as primary and me as spouse--FRA for both of us) and take money from our tax-deferred accounts to bring our taxable income up to that 15% level. We have some Roth money as well, but will probably access it last.

I had not heard of the ORP site, but will check it out. Thanks, rick0!

Lloydo
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Re: depleting accounts in retirement

Post by Lloydo » Fri Jul 14, 2017 8:31 am

Let's say one had 50/50 portfolio split between taxable and tax deferred with all stocks in taxable and all bonds in tax deferred. If one is worried about drawdown from taxable when stocks are down, why not sell from taxable (at a lower capital gain) then rebuy the asset (or similar) in the tax deferred account? Am I missing something?

Thanks.

Lloyd

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House Blend
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Re: depleting accounts in retirement

Post by House Blend » Fri Jul 14, 2017 8:54 am

matthewmatt wrote:In general, it is also advisable to keep most bonds in IRAs and most stocks in traditional accounts.
However, because we will first deplete taxable accounts, it would be smartest if taxable accounts would contain most bonds, since bonds are more stable.
It appears that no one has addressed this other aspect of your post.
(I assume traditional was intended to mean taxable.)

No, there's no particular reason to alter asset locations simply because you are retired and decumulating.

Let's say you are currently overweight in bonds. So you'd prefer to make your next dip into the portfolio from bonds. And let's say that all of your bonds are in tax-deferred accounts.

If you also need to meet an RMD, there's no dilemma. You pull bonds out of tax-deferred.

If no RMD is in sight, you still have the option of selling stocks in taxable, and then trading from bonds to stocks in tax-deferred so as to maintain your AA. The net effect is that you are selling bonds, and not touching stocks.

PS: welcome to the forum.

ETA: Lloydo -- saw your post after mine. Wasn't deliberately ignoring you.

Lloydo
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Re: depleting accounts in retirement

Post by Lloydo » Fri Jul 14, 2017 9:40 am

I wasn't feeling ignored... :happy I responded in the form of a question; your post provides more detail and is appreciated.

Thanks.

Lloyd

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bertilak
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Re: depleting accounts in retirement

Post by bertilak » Fri Jul 14, 2017 10:16 am

Lloydo wrote:Let's say one had 50/50 portfolio split between taxable and tax deferred with all stocks in taxable and all bonds in tax deferred. If one is worried about drawdown from taxable when stocks are down, why not sell from taxable (at a lower capital gain) then rebuy the asset (or similar) in the tax deferred account? Am I missing something?
Tax-deferred space is a non-renewable resource. You spend it, it's gone. If you are still earning, you can add NEW tax-deferred space but can't replace what you spent.

If you are drawing down investments it's a safe assumption you no longer have earned income allowing you to buy new tax-deferred space.
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Lloydo
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Re: depleting accounts in retirement

Post by Lloydo » Fri Jul 14, 2017 11:30 am

bertilak wrote:
Lloydo wrote:Let's say one had 50/50 portfolio split between taxable and tax deferred with all stocks in taxable and all bonds in tax deferred. If one is worried about drawdown from taxable when stocks are down, why not sell from taxable (at a lower capital gain) then rebuy the asset (or similar) in the tax deferred account? Am I missing something?
Tax-deferred space is a non-renewable resource. You spend it, it's gone. If you are still earning, you can add NEW tax-deferred space but can't replace what you spent.

If you are drawing down investments it's a safe assumption you no longer have earned income allowing you to buy new tax-deferred space.
I'm not sure I understand this answer... the drawdown would be from taxable. House Blend's post above is saying the same thing.

Thanks.

Lloyd

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bertilak
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Re: depleting accounts in retirement

Post by bertilak » Fri Jul 14, 2017 12:42 pm

Lloydo wrote:
bertilak wrote:
Lloydo wrote:Let's say one had 50/50 portfolio split between taxable and tax deferred with all stocks in taxable and all bonds in tax deferred. If one is worried about drawdown from taxable when stocks are down, why not sell from taxable (at a lower capital gain) then rebuy the asset (or similar) in the tax deferred account? Am I missing something?
Tax-deferred space is a non-renewable resource. You spend it, it's gone. If you are still earning, you can add NEW tax-deferred space but can't replace what you spent.

If you are drawing down investments it's a safe assumption you no longer have earned income allowing you to buy new tax-deferred space.
I'm not sure I understand this answer... the drawdown would be from taxable. House Blend's post above is saying the same thing.

Thanks.

Lloyd
My misunderstanding! I was misreading that as a remedy/recovery for having already sold from a tax-deferred account.
Listen very carefully. I shall say this only once. (There! I've said it.)

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Top99%
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Re: depleting accounts in retirement

Post by Top99% » Sat Jul 15, 2017 6:20 pm

There are lots of good suggestions in this thread. The only thing I can suggest is to play around in TurboTax and see how turning the various withdrawal knobs affects how much tax you owe. When I played around it seemed to make sense to pull a mix of taxable, IRA and Roth so that we can cover our desired income with the minimum taxes over time (once we hit 59.5) In addition, when RMDs hit (I am 14 years from that) there isn't any requirement that you have to spend the entire RMD amount.

Of course the variable is no one knows where taxes will head in the future. If you were convinced they were going to go up it might make sense to pull money now and squirrel it away.
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mhalley
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Re: depleting accounts in retirement

Post by mhalley » Sat Jul 15, 2017 7:01 pm

I was not talking about the ability to rebalance, I was talking about the drawdown of the taxable portfolio. Say I retire with 500k in taxable with the plan of withdrawing 100k a year for five years before starting to withdraw from IRAs. I retire and I take out 100k. Stocks drop 50%. The remaining 400k goes down by half and I now only have 200k, or 2 years of withdrawals available before having to start withdrawing from IRA. If I have a 50/50 portfolio in taxable, If stocks drop 50%, the 200k of stocks goes down to 100k but the 200k of bonds hopefully stays the same or even goes up. I have 300k or 3 years of withdrawals before I have to start drawing from IRA. By having 50/50 in my taxable account, I have only lost one year of taxable withdrawals instead of two. This of course does not count on any returns in the remaining years. Maybe this is the wrong way to look at it, but it made sense to me. Postponing ira withdrawals as long as possible gives me more years of roth conversions at lower tax rates.

nbseer
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Re: depleting accounts in retirement

Post by nbseer » Sat Jul 15, 2017 8:38 pm

I've been using Roth money as an emergency fund... new garage door, emergency car repair, etc. I converted at the 15% tax rate, and if I took more out of my tIRA, that would increase my taxes.. don't want to do that.

Johnnie
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Re: depleting accounts in retirement

Post by Johnnie » Sun Jul 16, 2017 9:14 pm

rick0 wrote:ORP is an online calculator that tries to answer that question. I would recommend giving
it a try. Be sure to scroll down as there is an Extended ORP data entry thats often missed,
and gives you many options to play with.

https://www.i-orp.com/gamma/index.html
Essential ORP asks for the basic facts of your retirement income situation and computes an optimal savings withdrawal schedule using policy and forecast parameters that are the consensus of professional financial advisors.
Oh that's evil - I just wasted hours messing around with it! :wink:

I'm not sure what to make of it. On its face the distribution levels appear very aggressive. The 2.5 percent inflation assumption makes it hard for me to visualize the results though. The extended version makes it look like you can set the inflation rate but I'm not sure it applies the change to all fields - I was still getting results that look indexed. They have you spending down to zero - I entered home value of $1 so they wouldn't sell that too!

I'd rather just look at nominal projections and plug in real, inflation-adjusted return rates (not nominal). I may easily be missing something about this though.
"I know nothing."

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PhysicianOnFIRE
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Re: depleting accounts in retirement

Post by PhysicianOnFIRE » Sun Jul 16, 2017 9:34 pm

You may be in a position to convert some of that tIRA to Roth IRA to fill up low tax brackets before RMDs become mandatory at 70.5.

As far as where you own bonds, you can "spend your bond money" indirectly even if it's tucked away in the IRA. Sell stocks from taxable, exchange an equal amount of bond to stock in your IRA, and the net result is you've got spending money, own fewer bonds, and the same amount of stocks.

Such a strategy could come in handy in a bear market when you don't want to feel like you're being forced to sell stocks low.

:beer
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rick0
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Re: depleting accounts in retirement

Post by rick0 » Sun Jul 16, 2017 11:22 pm

Johnnie wrote:
rick0 wrote:ORP is an online calculator that tries to answer that question. I would recommend giving
it a try. Be sure to scroll down as there is an Extended ORP data entry thats often missed,
and gives you many options to play with.

https://www.i-orp.com/gamma/index.html
Essential ORP asks for the basic facts of your retirement income situation and computes an optimal savings withdrawal schedule using policy and forecast parameters that are the consensus of professional financial advisors.
Oh that's evil - I just wasted hours messing around with it! :wink:

...
Yea, I don't thing anybody considers it perfect, but it does give you some ideas to consider.
Other threads on ORP:
viewtopic.php?t=218659
viewtopic.php?t=208586

The Wizard
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Re: depleting accounts in retirement

Post by The Wizard » Mon Jul 17, 2017 12:47 am

Though the topic is "depleting", I should note that for some folks with bountiful retirement income from pensions, annuities, SS, and RMDs, we can start to see our taxable investment accounts INCREASE in size starting around age 70.
I'm starting to see this a bit now at age 67, though these funds are lightly earmarked for a new vehicle purchase in a few years.
But starting in 2020, I see this ramping up...
Attempted new signature...

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celia
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Re: depleting accounts in retirement

Post by celia » Mon Jul 17, 2017 3:06 am

bertilak wrote:If you are drawing down investments it's a safe assumption you no longer have earned income allowing you to buy new tax-deferred space.
Not true at all if you have Inherited IRAs. You have to start taking RMDs in the year after the deceased passed, regardless of your age or employment status.

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celia
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Re: depleting accounts in retirement

Post by celia » Mon Jul 17, 2017 3:39 am

galectin wrote:I just retired and am facing this same question. About 80% of my money is in tax-deferred accounts. This year is unusual since I worked for 5 1/2 months and we have some income related to bond interest and distribution from an annuity in my wife's inheritance from her father. We will be taking money from our taxable account for the rest of the year, which will bring us to about the 15% tax bracket (~$95,000 for married, filing jointly). Fortunately, our expenses are below that level.

Next year we will file for my social security (currently we are getting SS with my wife as primary and me as spouse--FRA for both of us) and take money from our tax-deferred accounts to bring our taxable income up to that 15% level. We have some Roth money as well, but will probably access it last.
With 80% of your portfolio in tax-deferred, you may be a prime candidate for Roth conversions. Even though your living expenses appear to be below the 15% tax bracket of income, staying in that tax bracket intentionally may hurt you later. I suggest you map out your income each year from now until age 72 and see what your Taxable Income (on Form 1040, line 43) is each year. That determines what your taxes are. You'll have to project an increase in your tax-deferred account(s) from now until Age 70.5. Then estimate your RMDs which start at 3.65% of the account value and then increase each year. Then the account(s) will continue to grow as long as the growth is MORE than the RMD.

If you are surprised by your age 71+ taxes, which may be in the 25% or higher tax bracket, NOW is the time to analyze what to do about it, not then, when it is too late. Many of us find that it is advantageous to start our maximum SS as late as possible while using the years before that to do Roth conversions. Once you are on max SS, Roth conversions can't be done until you've taken the RMDs out. That will just increase your already high taxes.

For everyone, note that the spending power of a dollar in taxable is worth more than a dollar in tax-deferred, since you don't have the whole dollar left after you pay the taxes. For example, if you are in the 25% tax bracket, you have to withdraw 4 dollars in order to spend 3. Yes, even if you spend a dollar in taxable to pay the taxes, one dollar of the 4 withdrawn replaces that taxable dollar that was spent on taxes. Same result!
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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midareff
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Re: depleting accounts in retirement

Post by midareff » Mon Jul 17, 2017 9:19 am

I maintain a similar AA in taxable and tax advantaged but not in the Roth, which is 100% equities. I'll be 70 in December, have been drawing from taxable in addition to SS (started at 65, retired at 64) and have a pension which accounts for about 40% of my income. The balance being portfolio 40% and SS 20%. I've done Roth conversions to the top of the 15% bracket for the last 3 years and will start RMD in January, 2018.

The RMD will reduce the amount I need to withdraw from taxable to meet a WR which has averaged 3.5% since 2012 but is presently 4%.

Taxable is about 34% of total portfolio with IRA being 52%, Roth 6% and bank cash 7%.. My plan is to continue to deplete bonds in taxable as a supplement to RMD. ... which will be a monthly withdrawal from ST Bonds in my IRA. Both accounts will be rebalanced as necessary to keep equities between 40% and 50% of total for the next decade of life. My VG portfolio (taxable and tax deferred) is basically Boglehead although I do hold Healthcare, REITS and corporate bonds in tax deferred. Taxable is standard Total Stock Market, Total International and IT Tax Ex Bonds. My Roth is where I play with sectors, currently Technology, and I have the Roth WR presently at 5%, which I will probably raise to 5.5% next year.

Our budget has lots of flexibility in it as we cruise frequently and my pension and SS can pay all the bills, the portfolio pays travel and the finer things so if a Black Swan or significant financial turbulence comes around I can simply stop taxable and Roth withdrawals and still travel on the RMD.

Everyone's situation, their portfolio and it's account structure and their funding needs are different. I listed my situation above and my road map FWIW. Everyone needs to have a plan and have that plan well in advance of their retirement. My written plan for accumulation started about 17 years prior to my retirement and I'm enjoying the outcome now. We came back from 19 days in Alaska a couple of weeks ago and leave for the coast of Maine in a couple more. I just love it when a Plan comes together.

smitcat
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Re: depleting accounts in retirement

Post by smitcat » Mon Jul 17, 2017 9:49 am

Johnnie wrote:
rick0 wrote:ORP is an online calculator that tries to answer that question. I would recommend giving
it a try. Be sure to scroll down as there is an Extended ORP data entry thats often missed,
and gives you many options to play with.

https://www.i-orp.com/gamma/index.html
Essential ORP asks for the basic facts of your retirement income situation and computes an optimal savings withdrawal schedule using policy and forecast parameters that are the consensus of professional financial advisors.
Oh that's evil - I just wasted hours messing around with it! :wink:

I'm not sure what to make of it. On its face the distribution levels appear very aggressive. The 2.5 percent inflation assumption makes it hard for me to visualize the results though. The extended version makes it look like you can set the inflation rate but I'm not sure it applies the change to all fields - I was still getting results that look indexed. They have you spending down to zero - I entered home value of $1 so they wouldn't sell that too!

I'd rather just look at nominal projections and plug in real, inflation-adjusted return rates (not nominal). I may easily be missing something about this though.

You can set the IORP calculator for zero inflation.
You can also set it for a set amount of spending each year adjusted for inflation.
OR you can set it for variable spending if you like.
You can set your return rates to whatever you like by category.

I have found it to be a big help when running comparisons quickly and for planning.

Johnnie
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Re: depleting accounts in retirement

Post by Johnnie » Mon Jul 17, 2017 7:20 pm

smitcat wrote:

You can set the IORP calculator for zero inflation.
You can also set it for a set amount of spending each year adjusted for inflation.
OR you can set it for variable spending if you like.
You can set your return rates to whatever you like by category.

I have found it to be a big help when running comparisons quickly and for planning.
Thanks. They say themselves, don't get too focused on the exact numbers, it's the patterns and trends of withdrawals under different assumptions and regimes that are illuminating.
"I know nothing."

csm
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Re: depleting accounts in retirement

Post by csm » Wed Jul 19, 2017 2:29 am

The Wizard wrote: Though the topic is "depleting", I should note that for some folks with bountiful retirement income from pensions, annuities, SS, and RMDs, we can start to see our taxable investment accounts INCREASE in size starting around age 70.
I'm starting to see this a bit now at age 67, though these funds are lightly earmarked for a new vehicle purchase in a few years.
But starting in 2020, I see this ramping up...
This is an interesting point because when I use retirement planning calculators, they all seem to assume that one wants to leave a nest egg. In Personal Capital, if I enter my desired income draw as one amount, it shows I'm in "great shape" to succeed, but bumping it by another $5K per year suddenly shows that I only have a 97% chance of success. Yet when I look at the detailed breakdown, at age 93, it is estimated that I will have well over $1 million in the account in an average market, or $5-600K in a poor market.

With no heirs, what should one be aiming for? Psychologically, I like to see the message that I'm in "great shape" rather than only have a 97% chance of success. But I feel like I shouldn't still need over $1 million in investments at age 93 to be successful, considering I have also a defined benefit pension plan that will provide fixed income (with COLA) for life that I've entered in the calculator.

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House Blend
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Re: depleting accounts in retirement

Post by House Blend » Wed Jul 19, 2017 11:58 am

csm wrote:In Personal Capital, if I enter my desired income draw as one amount, it shows I'm in "great shape" to succeed, but bumping it by another $5K per year suddenly shows that I only have a 97% chance of success. Yet when I look at the detailed breakdown, at age 93, it is estimated that I will have well over $1 million in the account in an average market, or $5-600K in a poor market.

With no heirs, what should one be aiming for? Psychologically, I like to see the message that I'm in "great shape" rather than only have a 97% chance of success. But I feel like I shouldn't still need over $1 million in investments at age 93 to be successful, considering I have also a defined benefit pension plan that will provide fixed income (with COLA) for life that I've entered in the calculator.
This shouldn't be surprising.

When equities are involved, the dispersion of possible outcomes is going be extremely wide. If you have (say) $1M at age 65, and a balanced portfolio and spending level that projects to a 97% success rate (whatever that means), I'd expect the average outcome to mean having a large multiple of $1M at age 90.

Annuitization is one way to reduce the dispersion. Certainly if you want to maximize the amount you can "safely" spend and view leaving a million dollar portfolio behind as a "waste", SPIAs should be part of the toolbox.

If we could all rely on average outcomes, long term planning would be easy.

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