What to do at 62?

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restingonmylaurels
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What to do at 62?

Post by restingonmylaurels » Tue Aug 21, 2018 11:42 am

Came across this interesting post on the VG blog; https://vanguardblog.com/2018/05/30/the ... ng-debate/

The point I found interesting was the recommendation to not take SS at 62 but instead withdraw living expenses from your T-IRA from that age. What this does is not only build up your eventual SS benefit payments to take from age 70 but also potentially lowers the tax that those eventual SS benefit payments would be subject to, because you have reduced the amount of your RMDs you must take starting at age 70 by decreasing the T-IRA balance with the withdrawals from ages 62-69.

Has anyone modeled this and looked at the limits, such as above what size of a T-IRA or the amount of SS benefit payment, that this approach becomes less effective? And a PV analysis of paying taxes on earlier T-IRA distributions vs. the reduction in taxes on later T-IRA distributions and SS benefit payments?

bob60014
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Re: What to do at 62?

Post by bob60014 » Tue Aug 21, 2018 12:07 pm

I believe there are numerous other threads on this site regarding this.

JBTX
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Re: What to do at 62?

Post by JBTX » Tue Aug 21, 2018 12:15 pm

The same can be said for deferring social security and doing traditional to Roth conversions after you retire but before drawing social security, and pay the taxes (which should hopefully be minimal) from taxable savings. This is probably the best option, assuming you have enough in taxable to cover your living expenses and the taxes on the Roth conversion. Otherwise using traditional to pay for some or all of your living expenses would be second choice. But doing a conversion and paying out of taxable is best because it keeps your retirement money in a tax advantages account.

There are a lot of threads in here on this subject. What works best really depends on your individual situation. But for many, deferring SS and either doing conversions to Roth or using traditional for expenses allows you to recognize some income with little or no taxes. Once you start pulling social security, your marginal tax rate likely increases once you hit somewhere around $25k to $30k.

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David Jay
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Re: What to do at 62?

Post by David Jay » Tue Aug 21, 2018 12:15 pm

bob60014 wrote:
Tue Aug 21, 2018 12:07 pm
I believe there are numerous other threads on this site regarding this.
Agree, there are a huge number of threads, search as follows:
SS age 70 (this is the longest you reasonably delay)
Roth Conversions
Living Expenses before SS

Here is my advice to someone about spending from TIRA first: viewtopic.php?f=1&t=246393

As a moderate income family in low cost of living area, here is my plan: viewtopic.php?f=2&t=210279
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

JW-Retired
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Re: What to do at 62?

Post by JW-Retired » Tue Aug 21, 2018 12:34 pm

There are bunch of reasons to use up some tax deferred resources to delay SS to the maximum age so your SS is as high as it can be. (1) It is Fed+state taxed significantly to fantastically less than your pension or IRA withdrawals, (2) your possibly much lower earning spouse will get to take over your larger SS monthly amount as a widow or widower, and (3) you can't lose any of your SS by senile investment management, & (4) It has a COLA.

Delay is especially sweet if you live in one of those high tax states like mine that taxes everything but SS. :D
JW
Retired at Last

restingonmylaurels
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Re: What to do at 62?

Post by restingonmylaurels » Tue Aug 21, 2018 2:39 pm

David Jay wrote:
Tue Aug 21, 2018 12:15 pm
bob60014 wrote:
Tue Aug 21, 2018 12:07 pm
I believe there are numerous other threads on this site regarding this.
Agree, there are a huge number of threads, search as follows:
SS age 70 (this is the longest you reasonably delay)
Roth Conversions
Living Expenses before SS

Here is my advice to someone about spending from TIRA first: viewtopic.php?f=1&t=246393

As a moderate income family in low cost of living area, here is my plan: viewtopic.php?f=2&t=210279
As the thresholds on the different SS benefit payments subject to tax are so low, my investment income would not allow me to take advantage of these. So I want to leave the SS issue aside and just focus on the present value tax implications of the Roth conversions from age 62 versus waiting to age 70, assuming the lower marginal rates are unavailable to guide the analysis (i.e. this is purely a PV of tax liabilities related to T-IRAs).

Is there a link to a PV analysis of the tax implications of taking early T-IRA distributions between 62-69 that may be then rolled into a Roth (or not) plus the subsequent RMD taxation from age 70 on a smaller T-IRA balance versus RMD taxation from age 70 on a larger T-IRA balance?

I hope this makes sense.

MIretired
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Re: What to do at 62?

Post by MIretired » Tue Aug 21, 2018 3:29 pm

restingonmylaurels wrote:
Tue Aug 21, 2018 11:42 am
Came across this interesting post on the VG blog; https://vanguardblog.com/2018/05/30/the ... ng-debate/

The point I found interesting was the recommendation to not take SS at 62 but instead withdraw living expenses from your T-IRA from that age. What this does is not only build up your eventual SS benefit payments to take from age 70 but also potentially lowers the tax that those eventual SS benefit payments would be subject to, because you have reduced the amount of your RMDs you must take starting at age 70 by decreasing the T-IRA balance with the withdrawals from ages 62-69.

Has anyone modeled this and looked at the limits, such as above what size of a T-IRA or the amount of SS benefit payment, that this approach becomes less effective? And a PV analysis of paying taxes on earlier T-IRA distributions vs. the reduction in taxes on later T-IRA distributions and SS benefit payments?
There is also a negative tax consequence of this, too, I think. It depends on T-IRA size and WD rate, etc.
You are taxed on SS after you reach 1/2 SS + taxable income = > $25,00 single, >$32,000 joint.
So, if you increase your SS by 75%, you increase 1/2 SS by 75%, and you leave 75% and you leave that dollar amount less of either RMDs or the earlier T-IRA WD to take while waiting for SS available, equivalently. Not sure how big an offset. Maybe someone has modeled this in.

restingonmylaurels
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Re: What to do at 62?

Post by restingonmylaurels » Tue Aug 21, 2018 4:48 pm

Perhaps I have just answered my own query but would like others to see if I did the numbers right.

Here is a simple scenario, with lots of simplifying assumptions.

Let's say I have an $800k T-IRA. I have two options, either convert some of it from ages 62-69 into a Roth or do nothing until age 70. So I will convert $50k per year for each of those 8 years, meaning at the end of 8 years (at age 70) I have $400k remaining in the T-IRA and $400k in the Roth. In the other option, I have done no conversions and so at the end of 8 years (at age 70) I still have $800k. I am assuming no returns or costs from investing to simply the example.

From age 70, I then will take RMDs according to the IRS Uniform Lifetime Table. I assume a flat 25% tax rate that applies to all distributions, either Roth conversions or RMDs.

Looking at these negative cash flows of the generated tax liabilities from a prevent value perspective, I will assume a 3% discount rate. I take the calculation out until age 82 (my PV table only had 20 years in it).

The result is that the option doing the Roth conversions at ages 62-69 and then taking RMDs on the $400k remaining T-IRA balance incurred tax liabilities whose present value was about twice ($115,676) that of the option leaving all of the distributions until age 70 did ($55,877).

I did this very quickly and wish I knew how to paste in my spreadsheet but my takeaway is that doing these early distributions does not, at least over a 20-year period to age 82, make sense, in absence of differing incremental tax rates.

Has anyone else come to a similar conclusion?

2015
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Re: What to do at 62?

Post by 2015 » Tue Aug 21, 2018 8:15 pm

As with everything I do, I attempt to not over think it. I'm doing conversions while delaying SS until 70. The general idea is to attempt to smooth out taxes throughout your remaining lifetime. I'll probably come close, but if it's not exact, I'm too busy enjoying retirement to sweat it.

bradpevans
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Re: What to do at 62?

Post by bradpevans » Tue Aug 21, 2018 9:34 pm

restingonmylaurels wrote:
Tue Aug 21, 2018 4:48 pm
Perhaps I have just answered my own query but would like others to see if I did the numbers right.

Here is a simple scenario, with lots of simplifying assumptions.

Let's say I have an $800k T-IRA. I have two options, either convert some of it from ages 62-69 into a Roth or do nothing until age 70. So I will convert $50k per year for each of those 8 years, meaning at the end of 8 years (at age 70) I have $400k remaining in the T-IRA and $400k in the Roth. In the other option, I have done no conversions and so at the end of 8 years (at age 70) I still have $800k. I am assuming no returns or costs from investing to simply the example.

From age 70, I then will take RMDs according to the IRS Uniform Lifetime Table. I assume a flat 25% tax rate that applies to all distributions, either Roth conversions or RMDs.

Looking at these negative cash flows of the generated tax liabilities from a prevent value perspective, I will assume a 3% discount rate. I take the calculation out until age 82 (my PV table only had 20 years in it).

The result is that the option doing the Roth conversions at ages 62-69 and then taking RMDs on the $400k remaining T-IRA balance incurred tax liabilities whose present value was about twice ($115,676) that of the option leaving all of the distributions until age 70 did ($55,877).

I did this very quickly and wish I knew how to paste in my spreadsheet but my takeaway is that doing these early distributions does not, at least over a 20-year period to age 82, make sense, in absence of differing incremental tax rates.

Has anyone else come to a similar conclusion?
I didn’t check your numbers but I’ll add some comments.

The concept is that your tax rate in EARLY retirement (no longer working, no SS) will be lower than after age 70.5, because at that point you have SS, perhaps pension, plus RMDs. At some point MFJ may become single. All of these push your tax rate up. So do Roth conversion early, fill up the lower tax brackets

If you ONLY look at IRA withdrawal you aren’t seeing the whole tax picture.

SGM
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Re: What to do at 62?

Post by SGM » Wed Aug 22, 2018 7:58 am

So you know your break even age. So what? You don't know how long you are going to live. If you are married there is a good chance at least one of you is going to live past the break even age. There was a study published in 2001... Do married men claim early out of ignorance or caddism?


I looked at the break even calculations once and dismissed it as meaningless for my goals. It is the additional insurance of higher payouts for delaying SS is one of us is possibly living 20 years beyond the break even age. I have no interest in the taking SS early arguments.

JW-Retired
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Re: What to do at 62?

Post by JW-Retired » Wed Aug 22, 2018 8:38 am

SGM wrote:
Wed Aug 22, 2018 7:58 am
Do married men claim early out of ignorance or caddism?
:beer
Thanks..... I've often wanted to say that but always chickened out.
JW
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The Wizard
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Re: What to do at 62?

Post by The Wizard » Wed Aug 22, 2018 9:10 am

restingonmylaurels wrote:
Tue Aug 21, 2018 4:48 pm
...From age 70, I then will take RMDs according to the IRS Uniform Lifetime Table. I assume a flat 25% tax rate that applies to all distributions, either Roth conversions or RMDs...
Thing is, we do NOT have a flat tax rate system, whether 25% or 24% (Federal).
Now it's true that the 24% tax bracket is rather broad, for taxable income (filing single) from around $82k to $157k.
So if you had a hefty pension of around $100k per year putting you at the bottom of the 24% bracket to start with, then yes, the next $70k of AGI, whether Roth conversion or RMD, all get taxed at 24%.

But for most people, maintaining an approximately level to slightly increasing AGI from their 60s thru their 70s results in lower cumulative taxes paid.
And the way you do that is by doing properly sized Roth conversions in your 60s...
Attempted new signature...

restingonmylaurels
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Re: What to do at 62?

Post by restingonmylaurels » Wed Aug 22, 2018 10:28 am

The Wizard wrote:
Wed Aug 22, 2018 9:10 am
restingonmylaurels wrote:
Tue Aug 21, 2018 4:48 pm
...From age 70, I then will take RMDs according to the IRS Uniform Lifetime Table. I assume a flat 25% tax rate that applies to all distributions, either Roth conversions or RMDs...
Thing is, we do NOT have a flat tax rate system, whether 25% or 24% (Federal).
Now it's true that the 24% tax bracket is rather broad, for taxable income (filing single) from around $82k to $157k.
So if you had a hefty pension of around $100k per year putting you at the bottom of the 24% bracket to start with, then yes, the next $70k of AGI, whether Roth conversion or RMD, all get taxed at 24%.

But for most people, maintaining an approximately level to slightly increasing AGI from their 60s thru their 70s results in lower cumulative taxes paid.
And the way you do that is by doing properly sized Roth conversions in your 60s...
I completely get the concept, which I think may not work for in the situation of having too large of an investment income pushing one into the higher marginal brackets. My main point was about the need to consider the present values, not purely the nominal, tax liability cash flows.

Doing Roth conversions early at a lower tax rates may save nominal tax payments but that is not the whole story. You have to look at the present value of those cash flows, as making tax payments early is obviously worse than making them later. So there is a two-part analysis to do.

I will post the (poorly formatted) table I used for my hypothetical case, with its simplifying assumptions.

Code: Select all

        Take from age 62                                       Take from age 70
Yr     Distrib     Tax     PV Factor     Tax Flow      Distrib     Tax     PV Factor     Tax Flow
Beg bal  800000                                        800000			
1      50000     12500     0.971          12138                0       0       0.971               0
2      50000     12500     0.943          11788                0       0       0.943               0
3      50000     12500     0.915          11438                0       0       0.915               0
4      50000     12500     0.888          11100                0       0       0.888               0
5      50000     12500     0.863          10788                0       0       0.863               0
6      50000     12500     0.837          10463                0       0       0.837               0
7      50000     12500     0.813          10163                0       0       0.813               0
8      50000     12500     0.789           9863                0       0       0.789               0
	400000								
End bal	400000                                            800000			
9     14599      3650      0.766           2796           29197     7299       0.766            5591
10    14543      3636      0.744           2705           29087     7272       0.744            5410
11    14487      3622      0.722           2615           28973     7243       0.722            5230
12    14428      3607      0.701           2529           28856     7214       0.701            5057
13    14367      3592      0.681           2446           28735     7184       0.681            4892
14    14305      3576      0.661           2364           28609     7152       0.661            4728
15    14240      3560      0.642           2285           28479     7120       0.642            4571
16    14105      3526      0.623           2197           28211     7053       0.623            4394
17    14036      3509      0.605           2123           28072     7018       0.605            4246
18    13892      3473      0.587           2039           27784     6946       0.587            4077
19    13743      3436      0.570           1958           27487     6872       0.570            3917
20    13590      3397      0.554           1882           27179     6795       0.554            3764
									
				          115676				                55877

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HomerJ
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Re: What to do at 62?

Post by HomerJ » Wed Aug 22, 2018 10:50 am

restingonmylaurels wrote:
Tue Aug 21, 2018 11:42 am
Came across this interesting post on the VG blog; https://vanguardblog.com/2018/05/30/the ... ng-debate/

The point I found interesting was the recommendation to not take SS at 62 but instead withdraw living expenses from your T-IRA from that age. What this does is not only build up your eventual SS benefit payments to take from age 70 but also potentially lowers the tax that those eventual SS benefit payments would be subject to, because you have reduced the amount of your RMDs you must take starting at age 70 by decreasing the T-IRA balance with the withdrawals from ages 62-69.

Has anyone modeled this and looked at the limits, such as above what size of a T-IRA or the amount of SS benefit payment, that this approach becomes less effective? And a PV analysis of paying taxes on earlier T-IRA distributions vs. the reduction in taxes on later T-IRA distributions and SS benefit payments?
It's a very good idea, but it requires the assumption that nothing will change with Social Security.
The J stands for Jay

WhiteMaxima
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Re: What to do at 62?

Post by WhiteMaxima » Wed Aug 22, 2018 10:54 am

Roth conversion to reduce future RMD. Also do whatever you like to do with hard earned money. Don't wait till too late.

MIretired
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Re: What to do at 62?

Post by MIretired » Wed Aug 22, 2018 11:05 am

restingonmylaurels wrote:
Wed Aug 22, 2018 10:28 am
The Wizard wrote:
Wed Aug 22, 2018 9:10 am
restingonmylaurels wrote:
Tue Aug 21, 2018 4:48 pm
...From age 70, I then will take RMDs according to the IRS Uniform Lifetime Table. I assume a flat 25% tax rate that applies to all distributions, either Roth conversions or RMDs...
Thing is, we do NOT have a flat tax rate system, whether 25% or 24% (Federal).
Now it's true that the 24% tax bracket is rather broad, for taxable income (filing single) from around $82k to $157k.
So if you had a hefty pension of around $100k per year putting you at the bottom of the 24% bracket to start with, then yes, the next $70k of AGI, whether Roth conversion or RMD, all get taxed at 24%.

But for most people, maintaining an approximately level to slightly increasing AGI from their 60s thru their 70s results in lower cumulative taxes paid.
And the way you do that is by doing properly sized Roth conversions in your 60s...
I completely get the concept, which I think may not work for in the situation of having too large of an investment income pushing one into the higher marginal brackets. My main point was about the need to consider the present values, not purely the nominal, tax liability cash flows.

Doing Roth conversions early at a lower tax rates may save nominal tax payments but that is not the whole story. You have to look at the present value of those cash flows, as making tax payments early is obviously worse than making them later. So there is a two-part analysis to do.

I will post the (poorly formatted) table I used for my hypothetical case, with its simplifying assumptions.

Code: Select all

        Take from age 62                                       Take from age 70
Yr     Distrib     Tax     PV Factor     Tax Flow      Distrib     Tax     PV Factor     Tax Flow
Beg bal  800000                                        800000			
1      50000     12500     0.971          12138                0       0       0.971               0
2      50000     12500     0.943          11788                0       0       0.943               0
3      50000     12500     0.915          11438                0       0       0.915               0
4      50000     12500     0.888          11100                0       0       0.888               0
5      50000     12500     0.863          10788                0       0       0.863               0
6      50000     12500     0.837          10463                0       0       0.837               0
7      50000     12500     0.813          10163                0       0       0.813               0
8      50000     12500     0.789           9863                0       0       0.789               0
	400000								
End bal	400000                                            800000			
9     14599      3650      0.766           2796           29197     7299       0.766            5591
10    14543      3636      0.744           2705           29087     7272       0.744            5410
11    14487      3622      0.722           2615           28973     7243       0.722            5230
12    14428      3607      0.701           2529           28856     7214       0.701            5057
13    14367      3592      0.681           2446           28735     7184       0.681            4892
14    14305      3576      0.661           2364           28609     7152       0.661            4728
15    14240      3560      0.642           2285           28479     7120       0.642            4571
16    14105      3526      0.623           2197           28211     7053       0.623            4394
17    14036      3509      0.605           2123           28072     7018       0.605            4246
18    13892      3473      0.587           2039           27784     6946       0.587            4077
19    13743      3436      0.570           1958           27487     6872       0.570            3917
20    13590      3397      0.554           1882           27179     6795       0.554            3764
									
				          115676				                55877
Interesting. One additional thing, though. What if you just added a collum that multiplies the running balance (started at 800,000) by an assumed portfolio growth rate. Say 4% pa. And see this: if port growth is equal to discount rate in your PV calc, then PV/tax flow, becomes nominal yr over yr. And then you increase your conversions by the real growth rate of the port. to keep from growing into a higher tax bracket. But, maybe as wizard mentioned, usually best to have a slightly rising AGI through time?

raider
Posts: 1
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Re: What to do at 62?

Post by raider » Wed Aug 22, 2018 11:10 am

I'm sure there are many threads that cover this, but there is a new book written by James Lange, CPA and Atty, that does a good job in covering all the details of the best time to take SS for individuals and couples. "The $214,00 Mistake: How to Double Your Social Security & Maximize Your IRAs, Proven Strategies for Couples 62-70". I'm not sure if the free Kindle download is still available on Amazon? He also has a great website "paytaxeslater.com". Luckily my wife and I were able to take advantage of the apply and suspend spousal rule that was eliminated when congress passed the Bipartisan Budget Act of 2015. Hope this is helpful--

rgs92
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Re: What to do at 62?

Post by rgs92 » Wed Aug 22, 2018 11:26 am

Of course it depends on the market, though. Drawing from your stock portfolio from, say 2008-2012, would not have been a great idea.
So it's not a sure thing or no-brainer. There is some risk involved whatever course you take.

Maybe split the difference and take SS in the vicinity of FRA, give or take a year or 2.

Or maybe just draw from the fixed income part of your portfolio and consider the imputed social security increases as an equivalent substitute.

(I kind of like this last approach.)

restingonmylaurels
Posts: 226
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Re: What to do at 62?

Post by restingonmylaurels » Wed Aug 22, 2018 2:56 pm

MIretired wrote:
Wed Aug 22, 2018 11:05 am
restingonmylaurels wrote:
Wed Aug 22, 2018 10:28 am
The Wizard wrote:
Wed Aug 22, 2018 9:10 am
restingonmylaurels wrote:
Tue Aug 21, 2018 4:48 pm
...From age 70, I then will take RMDs according to the IRS Uniform Lifetime Table. I assume a flat 25% tax rate that applies to all distributions, either Roth conversions or RMDs...
Thing is, we do NOT have a flat tax rate system, whether 25% or 24% (Federal).
Now it's true that the 24% tax bracket is rather broad, for taxable income (filing single) from around $82k to $157k.
So if you had a hefty pension of around $100k per year putting you at the bottom of the 24% bracket to start with, then yes, the next $70k of AGI, whether Roth conversion or RMD, all get taxed at 24%.

But for most people, maintaining an approximately level to slightly increasing AGI from their 60s thru their 70s results in lower cumulative taxes paid.
And the way you do that is by doing properly sized Roth conversions in your 60s...
I completely get the concept, which I think may not work for in the situation of having too large of an investment income pushing one into the higher marginal brackets. My main point was about the need to consider the present values, not purely the nominal, tax liability cash flows.

Doing Roth conversions early at a lower tax rates may save nominal tax payments but that is not the whole story. You have to look at the present value of those cash flows, as making tax payments early is obviously worse than making them later. So there is a two-part analysis to do.

I will post the (poorly formatted) table I used for my hypothetical case, with its simplifying assumptions.

Code: Select all

        Take from age 62                                       Take from age 70
Yr     Distrib     Tax     PV Factor     Tax Flow      Distrib     Tax     PV Factor     Tax Flow
Beg bal  800000                                        800000			
1      50000     12500     0.971          12138                0       0       0.971               0
2      50000     12500     0.943          11788                0       0       0.943               0
3      50000     12500     0.915          11438                0       0       0.915               0
4      50000     12500     0.888          11100                0       0       0.888               0
5      50000     12500     0.863          10788                0       0       0.863               0
6      50000     12500     0.837          10463                0       0       0.837               0
7      50000     12500     0.813          10163                0       0       0.813               0
8      50000     12500     0.789           9863                0       0       0.789               0
	400000								
End bal	400000                                            800000			
9     14599      3650      0.766           2796           29197     7299       0.766            5591
10    14543      3636      0.744           2705           29087     7272       0.744            5410
11    14487      3622      0.722           2615           28973     7243       0.722            5230
12    14428      3607      0.701           2529           28856     7214       0.701            5057
13    14367      3592      0.681           2446           28735     7184       0.681            4892
14    14305      3576      0.661           2364           28609     7152       0.661            4728
15    14240      3560      0.642           2285           28479     7120       0.642            4571
16    14105      3526      0.623           2197           28211     7053       0.623            4394
17    14036      3509      0.605           2123           28072     7018       0.605            4246
18    13892      3473      0.587           2039           27784     6946       0.587            4077
19    13743      3436      0.570           1958           27487     6872       0.570            3917
20    13590      3397      0.554           1882           27179     6795       0.554            3764
									
				          115676				                55877
Interesting. One additional thing, though. What if you just added a collum that multiplies the running balance (started at 800,000) by an assumed portfolio growth rate. Say 4% pa. And see this: if port growth is equal to discount rate in your PV calc, then PV/tax flow, becomes nominal yr over yr. And then you increase your conversions by the real growth rate of the port. to keep from growing into a higher tax bracket. But, maybe as wizard mentioned, usually best to have a slightly rising AGI through time?
I did a 4% CAGR column but it did not really change anything, as the non-Roth conversion option still had PV of tax payments half of what the early Roth conversions did. Assuming that the funds distributed from the T-IRA and reinvested into the Roth had the same investment profile as the T-IRA, the non-Roth conversion option ended with the larger portfolio, from the lower and later tax payments (the model was from ages 62 to 82).

I would like to see if someone has modeled this idea with differing incremental tax rates during the early Roth conversion phase and whether the possibly lower incremental rates can overcome the earlier payment of taxes on a present value basis. Anyone?

bradpevans
Posts: 355
Joined: Sun Apr 08, 2018 1:09 pm

Re: What to do at 62?

Post by bradpevans » Wed Aug 22, 2018 3:11 pm

I did a 4% CAGR column but it did not really change anything, as the non-Roth conversion option still had PV of tax payments half of what the early Roth conversions did. Assuming that the funds distributed from the T-IRA and reinvested into the Roth had the same investment profile as the T-IRA, the non-Roth conversion option ended with the larger portfolio, from the lower and later tax payments (the model was from ages 62 to 82).

I would like to see if someone has modeled this idea with differing incremental tax rates during the early Roth conversion phase and whether the possibly lower incremental rates can overcome the earlier payment of taxes on a present value basis. Anyone?



I'm missing something with the PV part - I don't see how it applies.

At some point you take money out of T-IRA and pay income tax, which depends on all of your sources of income and your tax filling status.

The rationale to do Roth conversion is that the tax rate you pay early is lower than if you take out later, because later eventually means the impacts of (RMDs + Social Security + Pension + Loss of Spouse)

Many people end up in a higher tax bracket after age 70 (at some point) compared to "early retirement", by which I mean you have stopped your main W2 source of income (i.e. no job) but you have not yet filled for SS or Pension.

The money went in to T-IRA during high earning years, so you saved that marginal tax rate.
The money then goes to Roth during low earnings, thus incurring that lower marginal tax rate

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Re: What to do at 62?

Post by restingonmylaurels » Thu Aug 23, 2018 1:49 am

bradpevans wrote:
Wed Aug 22, 2018 3:11 pm
[I'm missing something with the PV part - I don't see how it applies.

At some point you take money out of T-IRA and pay income tax, which depends on all of your sources of income and your tax filling status.

The rationale to do Roth conversion is that the tax rate you pay early is lower than if you take out later, because later eventually means the impacts of (RMDs + Social Security + Pension + Loss of Spouse)

Many people end up in a higher tax bracket after age 70 (at some point) compared to "early retirement", by which I mean you have stopped your main W2 source of income (i.e. no job) but you have not yet filled for SS or Pension.

The money went in to T-IRA during high earning years, so you saved that marginal tax rate.
The money then goes to Roth during low earnings, thus incurring that lower marginal tax rate
To answer your question, if you pay a tax earlier, those dollars are worth more to you than if you pay it later.

I went ahead and modeled the different marginal tax rates, first assuming I could get half of early (ages 62-69) $50k Roth conversion into the 12% bracket and the other half into the 22% bracket. Then I just modeled the $25k that I could get into the 12% marginal tax bracket.

Even with these lower marginal tax brackets in for early-year Roth conversions, the option of waiting and not doing the Roth conversions won out in every category.

The ending portfolio balance was higher, probably because of the loss of growth on the funds used to pay the taxes on the Roth conversions ages 62-69.

The total taxes paid were lower on a nominal basis, as the taxes paid on the Roth conversions ages 62-69 overwhelmed the slightly higher taxes paid later by the non-Roth conversion option when RMDs began after age 70.

The total taxes paid on a present value basis were also lower, due to bringing forward the tax payments into the ages 62-69 years for the Roth conversions, even when done at a 12% marginal rate, versus 22%/24% rates after age 70.

So, in conclusion, I cannot see the scenario where pulling money forward to do early Roth conversions actually makes sense, from both the loss of growth on portfolio balances due to paying tax earlier and the higher taxes paid in both a nominal and present value sense due to paying tax earlier.

While it may sound alluring to pay a lower marginal tax rate by doing Roth conversions between ages 62-69, unless the money tree in the back yard is going to pay the taxes on those early conversions, even at the lowest marginal rates, it would seem one would be better off not doing early conversions.

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Re: What to do at 62?

Post by Juice3 » Thu Aug 23, 2018 5:55 am

restingonmylaurels wrote:
Thu Aug 23, 2018 1:49 am
To answer your question, if you pay a tax earlier, those dollars are worth more to you than if you pay it later.
This is an incorrect assumption when we are talking about converting tIRA money to Roth or taxable accounts.

The taxes are a liability that tIRA accounts "carry". Assuming the tax rates are equal there is no difference in the "when" of converting the money between account types.

Thus the advice many have posted on this thread about finding the "margin" where you can leverage the lowest possible tax rates that will be available to you now or in the future.

The margin is often found tax cliff type rules such as IRMAA or at other times by keeping your bracket the same over the years.

Roths have a small advantage of not taxing investment earnings.

Taxable accounts have a small advantage of taxing LT growth at CG rates rather than income and a disadvantage of divs adding to your AGI.

Back to your primary assumption, please explain to me assuming no growth and same tax rates, how paying taxes on your tIRA distributions of 50K for 10 years now, verses 50K for 10 years in 10 years makes any difference?

The only thing your table proves is that you have a NPV tax liability in your tIRA of $115,676. When you pay that liability (do conversions), then you no longer have the liability.

The Boglehead objective is to minimize the sum of tax column in your table.
Last edited by Juice3 on Thu Aug 23, 2018 6:04 am, edited 4 times in total.

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Re: What to do at 62?

Post by Juice3 » Thu Aug 23, 2018 5:59 am

Duplicate

Chip
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Re: What to do at 62?

Post by Chip » Thu Aug 23, 2018 6:07 am

restingonmylaurels wrote:
Thu Aug 23, 2018 1:49 am
So, in conclusion, I cannot see the scenario where pulling money forward to do early Roth conversions actually makes sense, from both the loss of growth on portfolio balances due to paying tax earlier and the higher taxes paid in both a nominal and present value sense due to paying tax earlier.
You can't see it because you ignored many important issues in your analysis. You only considered the tax on the RMDs. You have to look at the entire tax picture, including tax on any taxable investments, tax on social security whenever it is taken. You ignored the likely scenario of arbitraging tax rates between pre and post RMD periods. You didn't look at tax effects on a surviving spouse facing single filer tax rates. Your analysis only went to age 82. There's an 80% chance that at least one of a couple will be alive at 82. A 40% chance that one will be alive at 90. You didn't take into account the increased social security payments resulting from delaying until age 70, including the benefit to a surviving spouse.

In short, it's an incomplete analysis.

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Re: What to do at 62?

Post by afan » Thu Aug 23, 2018 7:10 am

Given that the OP is comfortable running the numbers it is only a matter of including the important considerations. Unfortunately, these include a set of tax rules that make it impossible to assume level tax rates. The actual taxes paid under the varying scenarios are critical to which strategy is best. This means forecasting income, applying the real tax rates to that income each year, accounting for the tax brackets involved, accounting for the percent of Social Security that will be taxable, factoring in any state or local taxes, identifying an appropriate discount rate, taking account of the increased SS benefits from delaying claiming between 62 and 70 and running these to different assumed ages at death. If you are married then the optimal strategy for a couple is rarely the same as optimal for a single individual. All of these factors matter.

Opensocialsecurity will help with part of this but does not include taxes. It does have a handy feature that let's you discount each annaul SS payment by the likelihood of remaining alive using standard mortality tables. But since it ignores taxes the results are just a starting point.

Iorp works well for some people but apparently has bugs that make it fail for those with the higher incomes and assets that are common on this forum.

Retirement Portfolio Monitor, I think that is the full name but everyone on here just calls it RPM, is not user frlendly. However, it is very thorough. It will not tell you what to do. Instead, it let's you vary your assumptions and compare the results.

There are commercial packages that address this as well.

People like the OP who are prepared to get into the weeds, learn the rules and run the numbers should be fine. The complexity of it makes this a hopess endeavor for those unwilling to tackle the quantitative aspects of this decision.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: What to do at 62?

Post by restingonmylaurels » Thu Aug 23, 2018 7:50 am

Chip wrote:
Thu Aug 23, 2018 6:07 am
restingonmylaurels wrote:
Thu Aug 23, 2018 1:49 am
So, in conclusion, I cannot see the scenario where pulling money forward to do early Roth conversions actually makes sense, from both the loss of growth on portfolio balances due to paying tax earlier and the higher taxes paid in both a nominal and present value sense due to paying tax earlier.
You can't see it because you ignored many important issues in your analysis. You only considered the tax on the RMDs. You have to look at the entire tax picture, including tax on any taxable investments, tax on social security whenever it is taken. You ignored the likely scenario of arbitraging tax rates between pre and post RMD periods. You didn't look at tax effects on a surviving spouse facing single filer tax rates. Your analysis only went to age 82. There's an 80% chance that at least one of a couple will be alive at 82. A 40% chance that one will be alive at 90. You didn't take into account the increased social security payments resulting from delaying until age 70, including the benefit to a surviving spouse.

In short, it's an incomplete analysis.
Running to catch a flight in a few minutes but let me provide a quick response. Yes, this is a simplified model as I stated and I did not paste in my updated spreadsheets due to the difficulties in doing so. I don't think you read all of my posts fully, which have given all the assumptions.

The taxes on taxable investments and SS should not affect the overall result, SS was assumed to be taken at 70 for both options (which only focused on doing pre-RMD Roth conversions or not), I did look at lower rates (12%) for the pre-RMD Roth conversions in my last post and then a 23% rate (average of the likely 22% and 24% rates) for post-RMD distributions.

I looked at this only for a single person, again as simplifying assumption. Past age 82 the advantage would very slightly dissipate but the differentials in taxes in each of the final years were becoming so small (8339 vs. 8555) that they would not have closed the tax liability gap in a reasonable lifetime expectancy.

I would be happy for you to include anything you feel that I missed and then post the table to see where the general idea falls apart. In addition to the spouse, I did not look at someone having a source outside themselves paying the taxes or having to use the T-IRA distributions for living expenses during the pre-RMD years.

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Re: What to do at 62?

Post by SGM » Thu Aug 23, 2018 8:34 am

Since doing a Roth conversion while paying the taxes out of a taxable account is a complete wash in terms of buying power at the time of conversion I believe the use of the present value function leads to the wrong conclusion. There is no doubt in my mind that paying taxes at the 12% rate from 62-69 for a conversion is advantageous if the tax rate after 70 1/2 is 22 or 24% unless the Roth account has lost considerable value.

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Re: What to do at 62?

Post by mptfan » Thu Aug 23, 2018 8:43 am

SGM wrote:
Wed Aug 22, 2018 7:58 am
Do married men claim early out of ignorance or caddism?
What is caddism?

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Re: What to do at 62?

Post by afan » Thu Aug 23, 2018 9:36 am

Behaving like a cad, I assume. The presumptions being that, in a heterosexual marriage, the male is the higher earner and the female will live longer. If these are true, then the female is better off if the male delays social security, since this increases her long term benefit.

Ignoring the very different rules and implications of claiming strategy between single people versus those who are married- same sex or different sex- is highly likely to lead to the wrong conclusion. The rules are different, so the strategies are different.

Ignoring taxes for a decision like this only makes sense if you have a deal with the government that it will not collect any taxes on your income. Good for you if you have such a deal. For the rest of us:

Doing Roth conversions will lead to lower RMDs and thus lower taxable income once 70. This will reduce your taxes even if your marginal tax bracket stays the same. You will have a lower share of your income taxed at whatever your marginal bracket may be. So your average tax rate will go down and this is what determines how much you keep.

But you have to consider the taxes you will pay on the Roth conversions, at the applicable tax bracket at the time. Reducing your future taxable income may not be worth it, depending on your current and future tax rates.

If you spend down taxable investments to live on while waiting for SS and RMDs to kick in then you will also be reducing your future taxable income. How much this matters depends on the relative amounts of your annual taxable income before and after turning 70 and your RMDs plus SS once reaching that age. For some people, depending on the values, Roth conversions make sense. These people tend to have low tax rates during the conversion years and are pushed into higher rates by SS plus RMDs.

For those whose current income is high enough to make them pay high tax rates, Roth conversions can be a bad idea if they would be in a lower tax bracket after retirement, even with RMDs and SS.

For those who are in a high bracket now and will be in the same bracket in the future as RMDs and SS replace earned income, then Roth conversions do not accomplish much.

Two people of the same age, sex and health with the same earned income and same total value of taxable and tax favored assets can have completely different optimal SS claiming strategies. The strategies would likely be different if one were married and the other not. The optimal strategy would be different for someone who had most of their money in taxable versus someone who had most of their money in tax favored.

Tempting as it may be to find short cut rules of thumb, there really are too many factors for that to work.

Net present value is the right way to look at this. But if you ignore the rules and tax implications then the cash flows you enter in your NPV calculation will be wrong, meaning the output will be GIGO and your conclusions will have to be wrong.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: What to do at 62?

Post by afan » Thu Aug 23, 2018 9:47 am

SS benefits are currently scheduled to decrease by approximately 25% in the mid 2030's. The laws or economy could change so this is far from certain.

One can ignore this and end up with a scenario that might be too rosy.

One can assume it will happen as expected and right on schedule and perhaps have an overly pessimistic view.

Or one can make up some probabilities, levels of benefit reduction and effective dates to see how these affect claiming strategy.

But ignoring it completely is another simplifying assumption that may well be wrong.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: What to do at 62?

Post by bberris » Thu Aug 23, 2018 9:55 am

afan wrote:
Thu Aug 23, 2018 9:47 am
SS benefits are currently scheduled to decrease by approximately 25% in the mid 2030's. The laws or economy could change so this is far from certain.

...
"Scheduled" is too strong a word for what will happen. The SS website only says that Congress will have to make some changes before then to keep benefits up.

This is what they say:
"As a result of changes to Social Security enacted in 1983, benefits are now expected to be payable in full on a timely basis until 2037, when the trust fund reserves are projected to become exhausted.1 At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits. Thus, the Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future. The Social Security Board of Trustees project that changes equivalent to an immediate reduction in benefits of about 13 percent, or an immediate increase in the combined payroll tax rate from 12.4 percent to 14.4 percent, or some combination of these changes, would be sufficient to allow full payment of the scheduled benefits for the next 75 years."

Now that I am a senior, I only care about two things: "Get off my lawn. Don't touch my SS". So I view the chance of a 23 % benefit decrease as very small. Some sort of change is inevitable.

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Re: What to do at 62?

Post by afan » Thu Aug 23, 2018 10:06 am

"Scheduled" under current law.

The law can change.
If it does not then the only questions are exactly when and by how much benefits will be reduced. This depends on actual inflows and SS payments, which depend in part on the economy.

I am positive that I don't know whether the laws will change, or when, or what the new laws may say. So I plan for benefits reductions, among other scenarios.

According to the 2018 report
The Trustees project that the combined trust funds will be depleted in 2034
Considered separately, the DI Trust Fund reserves become depleted in 2032 and the OASI Trust Fund reserves become depleted in 2034.
In last year’s report, the projected reserve depletion years were 2028 for DI and 2035 for OASI.
Social Security’s total cost is projected to exceed its total income (including interest) in 2018 for the first time since 1982, and to remain higher throughout the projection period. Social Security’s cost will be financed with a combination of non-interest income, interest income, and net redemptions of trust fund asset reserves from the General Fund of the Treasury until 2034 when the OASDI reserves will be depleted. Thereafter, scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2092. The ratio of reserves to one year’s projected cost (the combined trust fund ratio) peaked in 2008, generally declined through 2017, and is expected to decline steadily until the trust fund reserves are depleted in 2034.
https://www.ssa.gov/oact/TRSUM/

As the report indicates, these are well informed estimates, based on current tax law.
Fun reading for those who expect some SS.
But the only effect on claiming strategy is whether the Trust Fund will be allowed to go to zero and what will happen to benefits if it does. Since these depend on the political process, no one knows the answers.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: What to do at 62?

Post by HomerJ » Thu Aug 23, 2018 10:35 am

bberris wrote:
Thu Aug 23, 2018 9:55 am
Now that I am a senior, I only care about two things: "Get off my lawn. Don't touch my SS". So I view the chance of a 23 % benefit decrease as very small. Some sort of change is inevitable.
I agree with you, but the proper way to do the analysis TODAY is to assume a drop to 76% SS in 2034 or so.

People who ignore this are not being conservative. They may be right, but they are not planning for a very possible scenario.
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Re: What to do at 62?

Post by protagonist » Thu Aug 23, 2018 10:40 am

My simple answer to this dilemma that I posted in a previous similar thread:

A huge mistake I humbly believe that many people make on this site is equating "maximum wealth" with "happiness" and "better life"...the latter is much more correlated with peace of mind. In that context, deciding when to start benefits is easy.

Consider the fate of two retirees, Rich and Delores. Both retire at age 62....let's say they were both laid off and cannot find additional work.

At time of retirement, Rich has $1,000,000 in financial assets. Delores has $10,000. Both would receive $20K/year from SS if they started benefits at age 62 and $30K/yr if they wait to age 70.

Delores' decision is simple. She needs to start benefits at 62 for survival.

Rich's decision is also simple. He should definitely wait until 70. Rich has plenty of savings to fund his early retirement. His concern is whether, due to unexpected financial reversal or whatever, he will still have enough money to live comfortably when and if he makes it to 85 or 90 or 95. If Rich dies suddenly at 71, he loses out big time on "overall benefits" by waiting until 70, but he dies happily with a happy retirement and peace of mind. If he runs out of money before he dies, he can still live much more comfortably on $30K/year than on $20K/year. So no matter when he dies or what the "break even point" is, he has way more peace of mind by deferring and a happier retirement.

If you have enough money to fund your early retirement, defer SS as long as possible. If not, start taking it whenever you feel you really need it to avoid significant immediate lifestyle compromise. It's that simple. Forget about break even ages, maximizing benefits in an unknown world, etc. What you should care about is minimizing lifestyle compromise and worry. This is a point that I think is crucial in much financial decision-making and is lost on many people who simply rely on the math.

He who dies with the most toys does not always win. He who dies happily and in peace does.

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Re: What to do at 62?

Post by afan » Thu Aug 23, 2018 10:53 am

For people who need the money now it is simple. For anyone who can reasonably delay, perhaps by working longer, the decision gets complicated.

The OP seems to be willing to run the spreadsheets, just needs to enter correct data. Getting to the correct data is complicated.

Deciding not to bother would make sense for someone who is so wealthy that SS benefits are not worth the trouble of optimizing. For everyone else there is some work involved.
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Re: What to do at 62?

Post by Chip » Thu Aug 23, 2018 11:04 am

restingonmylaurels wrote:
Thu Aug 23, 2018 7:50 am
Running to catch a flight in a few minutes but let me provide a quick response. Yes, this is a simplified model as I stated and I did not paste in my updated spreadsheets due to the difficulties in doing so. I don't think you read all of my posts fully, which have given all the assumptions.
Actually I did read all of your posts and assumptions. I think you have made so many assumptions that you have assumed a spherical cow. You have to look at a complete life cycle analysis of all the funds involved. What will happen to the Roth? Will it be spent? Inherited? If inherited, what are the tax rates of the heirs? Ditto for the tIRA. Does the tIRA owner have LTC insurance? If not, what are the odds of needing LTC and the associated expenses? The reason for that is that medical deductions under current law could reduce tIRA tax rates to zero if paying for LTC out of pocket.
The taxes on taxable investments and SS should not affect the overall result, SS was assumed to be taken at 70 for both options (which only focused on doing pre-RMD Roth conversions or not), I did look at lower rates (12%) for the pre-RMD Roth conversions in my last post and then a 23% rate (average of the likely 22% and 24% rates) for post-RMD distributions.
Maybe you think these things don't matter. I've modeled them for my situation and they do.
I would be happy for you to include anything you feel that I missed and then post the table to see where the general idea falls apart. In addition to the spouse, I did not look at someone having a source outside themselves paying the taxes or having to use the T-IRA distributions for living expenses during the pre-RMD years.
Sorry, not my job. I've extensively modeled my own personal situation and have concluded that conversions pre-RMD make all kinds of sense for me. Others may reach a different conclusion based on their situations. But to assume all these factors that have been pointed out "don't matter" is a mistake.

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Re: What to do at 62?

Post by HomerJ » Thu Aug 23, 2018 11:06 am

protagonist wrote:
Thu Aug 23, 2018 10:40 am
My simple answer to this dilemma that I posted in a previous similar thread:

A huge mistake I humbly believe that many people make on this site is equating "maximum wealth" with "happiness" and "better life"...the latter is much more correlated with peace of mind. In that context, deciding when to start benefits is easy.

Consider the fate of two retirees, Rich and Delores. Both retire at age 62....let's say they were both laid off and cannot find additional work.

At time of retirement, Rich has $1,000,000 in financial assets. Delores has $10,000. Both would receive $20K/year from SS if they started benefits at age 62 and $30K/yr if they wait to age 70.

Delores' decision is simple. She needs to start benefits at 62 for survival.

Rich's decision is also simple. He should definitely wait until 70. Rich has plenty of savings to fund his early retirement. His concern is whether, due to unexpected financial reversal or whatever, he will still have enough money to live comfortably when and if he makes it to 85 or 90 or 95. If Rich dies suddenly at 71, he loses out big time on "overall benefits" by waiting until 70, but he dies happily with a happy retirement and peace of mind. If he runs out of money before he dies, he can still live much more comfortably on $30K/year than on $20K/year. So no matter when he dies or what the "break even point" is, he has way more peace of mind by deferring and a happier retirement.

If you have enough money to fund your early retirement, defer SS as long as possible. If not, start taking it whenever you feel you really need it to avoid significant immediate lifestyle compromise. It's that simple. Forget about break even ages, maximizing benefits in an unknown world, etc. What you should care about is minimizing lifestyle compromise and worry. This is a point that I think is crucial in much financial decision-making and is lost on many people who simply rely on the math.

He who dies with the most toys does not always win. He who dies happily and in peace does.
I agree with you about peace of mind.

The trouble is, for me (and maybe others), it would hurt my "peace of mind" to be rapidly spending down my $1 million portfolio in my 60s, assuming that the SS benefits I'm counting on at 70 will be there, especially since the government has explicitly told me, as of today, that they will be reduced.

I will be in my mid 60s right around the time the SS trust fund is supposed to run out. My wife is 8 years older than me, and will be 73.

As of today, we intend to have my wife draw SS as soon as we retire, probably in 6 years when she is 63. If things change in the next 6 years, we can revisit that decision.

We will do the math separately for me, 8 years later, depending on the numbers then.
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Re: What to do at 62?

Post by Johnnie » Thu Aug 23, 2018 11:15 am

I am very interested in the present-value analysis of paying more taxes now to avoid larger tax burdens in the future.

The question becomes more salient given how close the the current 22% and 24% tax rates (single filer) are to each other. My own case illustrates:

I'm planning on conversions within the 22% tax rate for four years before age 70, with the tax mostly covered by taxable but some with tIRA distributions. After taking SS at 70 I will be paying 24 percent on some of my income, but am unlikely to ever reach a higher rate.

Some of my conversions will be at the 10 percent rate and this seems a no-brainer, but a good $40,000 worth would be at the 22 percent rate each year.

So to save 2 percent on taxes later I forego the gains I might have realized on the money paid now. The PV calculation seems highly relevant in that situation. I wondered about it before seeing this thread and now I'm really wondering.
"I know nothing."

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Re: What to do at 62?

Post by gips » Thu Aug 23, 2018 11:29 am

not sure how far away you are from 62 and your healthcare picture, I just turned 62 and have found aca cost and subsidies also need to be modeled.

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Re: What to do at 62?

Post by protagonist » Thu Aug 23, 2018 11:37 am

ignore...duplicate post. sorry.
Last edited by protagonist on Thu Aug 23, 2018 11:39 am, edited 1 time in total.

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Re: What to do at 62?

Post by protagonist » Thu Aug 23, 2018 11:38 am

HomerJ wrote:
Thu Aug 23, 2018 11:06 am
The trouble is, for me (and maybe others), it would hurt my "peace of mind" to be rapidly spending down my $1 million portfolio in my 60s, assuming that the SS benefits I'm counting on at 70 will be there, especially since the government has explicitly told me, as of today, that they will be reduced.

Hi, Homer.

I am unaware of an announcement regarding SS benefits that was made today.
You have me worried. I am 66 y o. Can you please provide me with a reference to what the government said today? I googled it to no avail.

Thanks.

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Re: What to do at 62?

Post by afan » Thu Aug 23, 2018 12:30 pm

Absolutely true that ACA costs matter if you retire before eligible for Medicare. That can be real money. Within certain income bands, reducing your income can also reduce what you pay for Medicare.

I believe RPM accounts for both of these effects.

For those who will be retired for a long time during the projected benefits reduction you need to take this into consideration. You also need to remember that the reductions might not happen. Or may take place differently than the under current law.

If your decision turns on the difference between a 22 and 24% tax rate, then it is a wash. Even without a change in tax law the brackets change every year with inflation. It is surely a mistake to assume you know within 2 % how they will adjust.
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Re: What to do at 62?

Post by bradpevans » Thu Aug 23, 2018 1:04 pm

Johnnie wrote:
Thu Aug 23, 2018 11:15 am
I am very interested in the present-value analysis of paying more taxes now to avoid larger tax burdens in the future.

The question becomes more salient given how close the the current 22% and 24% tax rates (single filer) are to each other. My own case illustrates:

I'm planning on conversions within the 22% tax rate for four years before age 70, with the tax mostly covered by taxable but some with tIRA distributions. After taking SS at 70 I will be paying 24 percent on some of my income, but am unlikely to ever reach a higher rate.

Some of my conversions will be at the 10 percent rate and this seems a no-brainer, but a good $40,000 worth would be at the 22 percent rate each year.

So to save 2 percent on taxes later I forego the gains I might have realized on the money paid now. The PV calculation seems highly relevant in that situation. I wondered about it before seeing this thread and now I'm really wondering.
Suppose you have 40,000 and pay 22%, keeping 78% leaves you with 31,200 and you invest it until it doubles, so eventually you 62,400

Suppose instead you leave it. Your 40,000 (invested the same way) also doubles, so you have 80,000. BUT, you owe taxes.
If you pay 22%, leaving 78%, you have the exact same 62,400.

If you leave and eventually pay 24%, leaving 76%, you then only have 60,800, which means the Roth would have been better.

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HomerJ
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Re: What to do at 62?

Post by HomerJ » Thu Aug 23, 2018 1:18 pm

protagonist wrote:
Thu Aug 23, 2018 11:38 am
HomerJ wrote:
Thu Aug 23, 2018 11:06 am
The trouble is, for me (and maybe others), it would hurt my "peace of mind" to be rapidly spending down my $1 million portfolio in my 60s, assuming that the SS benefits I'm counting on at 70 will be there, especially since the government has explicitly told me, as of today, that they will be reduced.

Hi, Homer.

I am unaware of an announcement regarding SS benefits that was made today.
You have me worried. I am 66 y o. Can you please provide me with a reference to what the government said today? I googled it to no avail.

Thanks.
As of today (I never said anything was posted today - but they do post an annual report every year), the ssa.gov website says that, based on their projections, with no changes being made to current law, starting in 2034, you will only get 75% of your Social Security check.

https://www.ssa.gov/OACT/TRSUM/index.html
A MESSAGE TO THE PUBLIC:
Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing.
Considered separately, the DI Trust Fund reserves become depleted in 2032 and the OASI Trust Fund reserves become depleted in 2034.
Social Security’s cost will be financed with a combination of non-interest income, interest income, and net redemptions of trust fund asset reserves from the General Fund of the Treasury until 2034 when the OASDI reserves will be depleted. Thereafter, scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2092.
To the moderators, this is NOT a political post. This is just stating what the laws and official projections are today. I agree it's likely to change in the future, but we can't discuss that. Based on the law and projections today, people should run the numbers assuming their SS check will get cut in 2034.

For people like my wife, who will be 73 in 2034, that makes a huge difference when running the numbers. Waiting until 70 is not optimal for her at this time. We will continually read the annual report from ssa.gov and may change our decision if the report changes in the future.

Protagonist, you will be 82 when this change is projected to happen. That's about the break-even point anyway, so you probably do not have to change your plans at this time.
The J stands for Jay

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tennisplyr
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Re: What to do at 62?

Post by tennisplyr » Thu Aug 23, 2018 4:52 pm

DW and I both took SS at 62 and still in my 60s. I was not willing to drain my portfolio for 8 years with all the unknowns of waiting til 70 and then having to wait years til break even. But that's just me.
Those who move forward with a happy spirit will find that things always work out.

The Wizard
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Re: What to do at 62?

Post by The Wizard » Thu Aug 23, 2018 5:04 pm

tennisplyr wrote:
Thu Aug 23, 2018 4:52 pm
DW and I both took SS at 62 and still in my 60s. I was not willing to drain my portfolio for 8 years with all the unknowns of waiting til 70 and then having to wait years til break even. But that's just me.
Ok, but the SS plan is to cut all benefits by ~25% in 2034, whether you claimed at 62 or at 70...
Attempted new signature...

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tennisplyr
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Re: What to do at 62?

Post by tennisplyr » Thu Aug 23, 2018 5:10 pm

The Wizard wrote:
Thu Aug 23, 2018 5:04 pm
tennisplyr wrote:
Thu Aug 23, 2018 4:52 pm
DW and I both took SS at 62 and still in my 60s. I was not willing to drain my portfolio for 8 years with all the unknowns of waiting til 70 and then having to wait years til break even. But that's just me.
Ok, but the SS plan is to cut all benefits by ~25% in 2034, whether you claimed at 62 or at 70...

We recently lost several friends in their early sixties, so you can wait if you want...
Those who move forward with a happy spirit will find that things always work out.

MathWizard
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Re: What to do at 62?

Post by MathWizard » Thu Aug 23, 2018 5:31 pm

I've modeled this for my situation and found that the amount of discretionary money is higher if I
1) have my spouse take SS at FRA,
2) I defer until 70 for SS,
3) she benefits by switching to spousal at that time
4) Because the health costs will be about $8K more before medicare, it is better to pull this extra from ROTH to minimize taxes.
5) Between 65 and 70, pull all from tax deferred to minimize RMDs.
6) After 70, pull what the ROTH returns (after inflation) which reduces taxes, especially SS benefit taxation.

If I retire after 65, I follow pretty much the same plan, but the cloiser I get to 70, the more I get pushed towards a higher bracket.
I believe that I will bunch up withdrawals, pulling more one year when 85% of SS is taxed, then the next pulling only the RMD
to have less SS taxed.

I estimate based on assuming
1) current tax law
2) receiving 75% of estimated SS benefits,
3) a 33% drop in equities before I retire, and
4) then 4% real growth in my portfolio after that.

I also plan on having $100K available for a change in housing as we age/downsize, and an extra $100K as an EF, mainly for
unexpected/uncovered medical care. We'll likely leave a bunch for the kids, but having a plan with a high 90% range of success
virtually guarantees leaving a lot in the table.

mptfan
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Re: What to do at 62?

Post by mptfan » Fri Aug 24, 2018 8:05 am

tennisplyr wrote:
Thu Aug 23, 2018 5:10 pm
We recently lost several friends in their early sixties, so you can wait if you want...
I don't think you will regret waiting when you are dead. There may be an afterlife, but I doubt social security will be a topic of worry there.

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