How to start retirement decumulation from 401k with social security delay

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AnnieMfuse
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How to start retirement decumulation from 401k with social security delay

Post by AnnieMfuse » Sat Jan 09, 2016 10:35 pm

In a couple of years, I will be 66 and retire. A pension will provide 40K/annum. I need about 80K to live on. All of my assets are in the federal government 401K called the TSP (will be about 800k) except a small Roth IRA at Vanguard (40k). Since TSP fees are very low ($0.29 per $1000) I plan to keep most of my money in the TSP in retirement. TSP has limited withdrawal options: a onetime partial withdrawal, then a full "withdrawal" which can include leaving some funds in the TSP (specified lump sum amount) and also arranging for monthly payments from the balance, which amount can be set annually. At 66 (my full SS retirement age) I plan to take the one-time partial TSP withdrawal for 4 years of living expenses (~4 yrs x 40K plus bump up for taxes and inflation) and either roll it over to Vanguard funds or start taxable account at VG. I will postpone Social Security to age 70 and let it grow at 8% per year. I would live on the pension + non-Roth Vanguard funds until age 70. Then I would start taking my Social Security benefit, which would then be 39K per annum. Is this plan a good plan? Do I roll the partial withdrawal lump sum into an IRA or do I put it in a taxable account?
Other facts: single, no kids, live in cheap condo, only debt at retirement time will be mortgage (300/month). I own no other assets.
Thanks in advance.

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cfs
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Re: How to start retirement decumulation from 401k with social security delay

Post by cfs » Sun Jan 10, 2016 10:34 am

AnnieMfuse wrote: . . . . Is this plan a good plan? Do I roll the partial withdrawal lump sum into an IRA or do I put it in a taxable account? . . . .
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ljb1234
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Re: How to start retirement decumulation from 401k with social security delay

Post by ljb1234 » Sun Jan 10, 2016 10:54 am

A few questions:

Is your $80K number before or after taxes?
How are you invested in your TSP?
I would think that you could roll over everything into a Vanguard IRA and then have just one location for all your assets? (Not sure what the benefit of keeping the TSP is, but I am not that familiar with the plan)

Delaying SS until 70 is a good idea
If you want to keep the 4 years in cash, perhaps a CD ladder would be low risk for you with some additional interest.
Recommend rolling the money into IRA, not taking $160K in cash all at once, taxes would be on that amount in that calendar year.

See what others think here...

retiredjg
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Re: How to start retirement decumulation from 401k with social security delay

Post by retiredjg » Sun Jan 10, 2016 11:13 am

I think your plan is good, but I'd suggest rolling more than just 4 years worth of money to IRA. Do not roll to taxable or you will pay tax on it all in one year.

If you only roll 4 years worth, you lose a lot of flexibility because the next time you need money will require the full withdrawal (of whatever sort you choose). This makes getting to your money awkward.

I'd roll out probably $300k or $400k - leaving half in the TSP for the super low expenses. Put the $300k or $400k in low cost investments at a place like Vanguard. If you need $100, you can take it. If you decide to buy a new car, you can take $20k or $50k or whatever you want. You could even buy a house with cash if you want.

The flexibility of being able to take any amount you want any time you want is worth the little bit more you pay at Vanguard or at Fidelity if you only use their Spartan funds.

Each time you take money, have some withheld for taxes.

Here's an additional thought. You might consider doing Roth conversions on the money in tIRA each year, say up to the top of the 25% bracket (or up to the point where Medicare Part B costs more which is a little lower). This will reduce the amount of money that will be subject to RMDs when you reach 70.5. It seems likely to me the RMDs are going to push you into a higher bracket - maybe 28% bracket if you stay single. So paying 25% now instead of 28% later might be worthwhile.

I know people talk a lot about delaying SS. I think this is beneficial for married people because one person is likely to live beyond the break even point which is somewhere about mid 80's. I'm not sure the benefit is a clear for single people. For that reason, I started taking mine at 62. This means I take less from my IRA/TSP - more left for my heirs.

Have you considered retiring now? It seems to me like you should be able to, easily.

MnD
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Re: How to start retirement decumulation from 401k with social security delay

Post by MnD » Sun Jan 10, 2016 11:17 am

I don't see any reason to make the one-time 4-year of living expenses withdrawal from TSP. The TSP has arguably the perfect bond fund - a fund that has the characteristics of a money market fund that earns a blended interest rate of intermediate to long-term treasuries. So if your intent of the withdrawal was to have those funds more "secure", you could just up your G fund balance somewhat. You can do interfund transfers to keep your "safe" fund balance where you want it.

Why not just set up a monthly withdrawal equal to $30K a year from TSP and spend $10K a year from your existing IRA and 40K pension?
Like you mentioned, you can change your TSP monthly amount every year and you then haven't used up your one-time partial withdrawal. $30K is 3.8% of your TSP balance. You will consume your IRA but the balance is small and the largest SS check you could qualify for is coming in just 4 years into this plan after retirement.

AnnieMfuse
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Re: How to start retirement decumulation from 401k with social security delay

Post by AnnieMfuse » Sun Jan 10, 2016 9:54 pm

Thank you so much for the generous replies. I have tried to address all questions asked.

Clarification: I need 80K after taxes per annum. I think this corresponds to about 97K pre-tax in my state.
I am invested in TSP: G 30%, F 20%, C 20%, S 10%, I 20%. I'm thinking of converting all F to G since there is no downside to G unlike F.

Since TSP expenses are 2-10 times lower than typical VG index fund expenses, keeping some funds in TSP makes sense to me for less fee drag.

To RmD: I can't start monthly payments from TSP without executing the "full withdrawal" option. A single "partial withdrawal" lump sum is permitted before "full withdrawal". TSP has very limited and specific withdrawal options, which I guess helps keep the expense ratio so low. Annual adjustments would not give me flexibility for an emergency or large one-time expenses.

To retiredjg: I am too afraid of future medical expenses, especially long term care expenses, to retire now. I don't have easily transferrable skills for other work post-retirement. I don't have a family network for in-home support help so would need to self-fund. There is a history of dementia in my family. I was denied LTC insurance by the federal program because of health issues, and can't stomach the fees for the only policies available to me (hybrid LTC policies combining either LTC+annuity or LTC+life insurance). Also, I have witnessed coworkers struggling to get top LTC policies [MetLife and John Hancock] to even pay for existing policies on their parents. I am assuming I will need to self-fund my own LTC, and that after ~3 years I won't care so much if I end up in Medicaid-paid LTC.

With respect to SS, I am not concerned about the getting the maximum total amount for my lifespan, I am just focused on maximizing the monthly benefit amount for whatever lifespan I have. It's difficult to imagine any other "investment" paying a guaranteed 8% per yr.

So it sounds like the the most flexible option would be: At 66, roll over 300-400 to Vanguard tIRA as partial withdrawal and let the rest stay in TSP from ages 66-70. Do tIRA to RothIRA conversions from VG tIRA yearly, while mindful of tax brackets and tax consequences. Take balance of living expenses not covered by pension from VG tIRA until 70. Let Roth IRA sit to reduce future RMDs.

Does this sound about right? Thank you all.
Last edited by AnnieMfuse on Wed Jan 13, 2016 10:56 am, edited 1 time in total.

jcar
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Re: How to start retirement decumulation from 401k with social security delay

Post by jcar » Sun Jan 10, 2016 10:28 pm

You allude to some family health issues. You may consider starting SS sooner if unmarried. Health can play tricks on us. Also as others mentioned I would seek to move as much to Roth as possible while staying below 25% bracket. At any rate, you seem in fine shape. As to ltc do some research and consider using your condo as the ltc policy. This service is going to be used much less in future due to technology advances and minimal in home care. There is much data on these advances with in home care. Have a fulfilling retirement!

basspond
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Re: How to start retirement decumulation from 401k with social security delay

Post by basspond » Mon Jan 11, 2016 6:01 am

One thing to consider is depending on your income sources up to 85% of your SS benefits could be taxed. So from 66 - 70 if all of your income is taxable, it might be worthwhile to compare tax expenses between taking SS benefits at 66 vs 70.

No mater what, enjoy what the future has in store for you!

retiredjg
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Re: How to start retirement decumulation from 401k with social security delay

Post by retiredjg » Mon Jan 11, 2016 6:23 am

AnnieMfuse wrote:Does this sound about right? Thank you all.
Sounds like you have it well thought out.

The only thing I would question - why just leave the other money in the TSP from 66 - 70? Other than starting RMDs, there is no reason to remove that money at 70 unless you just want to consolidate.

bberris
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Re: How to start retirement decumulation from 401k with social security delay

Post by bberris » Mon Jan 11, 2016 6:46 am

basspond wrote:One thing to consider is depending on your income sources up to 85% of your SS benefits could be taxed. So from 66 - 70 if all of your income is taxable, it might be worthwhile to compare tax expenses between taking SS benefits at 66 vs 70.

No mater what, enjoy what the future has in store for you!
100 % of the Income from tax-deferred accounts is taxable. At most, 85 % of SS income is taxable. When trading between the two, its preferable to defer and maximize income from SS at the expense of tax deferred account.

MichDad
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Re: How to start retirement decumulation from 401k with social security delay

Post by MichDad » Mon Jan 11, 2016 9:14 am

I write simply to second all the advice given to you by retiredjg.

Please be aware that the Federal Retirement Thrift Investment Board has voted to liberalize (expand) the TSP's withdrawal options. However, the specific changes have not yet been announced and it may take a few years to implement them. You may want to read through the posts on this thread:

viewtopic.php?f=10&t=140180

Good luck to you!

MichDad

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VictoriaF
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Re: How to start retirement decumulation from 401k with social security delay

Post by VictoriaF » Mon Jan 11, 2016 9:30 am

Hi AnnieMfuse,

I am an early Federal retiree since the Fall of 2014. My approach to the retirement assets and income is similar to yours with some notable differences.

1. Most important similarity is that I am delaying taking Social Security until the age of 70. When Social Security is compared to commercially available annuities, Social Security is both less expensive and more reliable. There are strategies for married couples to stage their claiming Social Security for the maximum benefit. But even if you and I can't take advantage of these strategies, it does not negate the benefit of delaying Social Security for those of us who can delay.

2. Like you, I decided to take a partial withdrawal from the TSP. In my case, the motivation was to do Roth conversions, which are currently impossible within the TSP. I rolled a large sum from the TSP to a Vanguard rollover IRA account, and made my first Roth conversion in 2015. For a few years, I will be making Roth conversions within Vanguard. When all my Vanguard rollover funds are converted, I will move the rest of my TSP funds to Vanguard. At that time, I will have several options depending on the TSP policy at that time:
(a) If the TSP starts allowing in-plan Roth conversions, I will keep the remaining funds in the TSP (highly unlikely).
(b) If the TSP starts allowing multiple withdrawals, I will be moving money from the TSP to Vanguard annually.
(c) If the TSP policies remain unchanged, I will request a final withdrawal spaced over my remaining years until my age of 70.

3. My desire to keep my assets in the TSP for as long as possible is not predominately due to its low fees. Vanguard fees in admiral accounts are quite good, too. For me, the greatest value of the TSP is the access to the G Fund, which Bogleheads refer to as a "free lunch." With the G fund, we get long-term bond earnings with short-term security. All my TSP funds are in the G fund; I get my equity allocation elsewhere.

Best wishes,
Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

JW-Retired
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Re: How to start retirement decumulation from 401k with social security delay

Post by JW-Retired » Mon Jan 11, 2016 9:42 am

AnnieMfuse
I would urge you to do some TaxCaster estimates of your age 70 net income for the two cases of age 66 versus age 70 SS claiming. There
is more value in SS income compared to "other income" because of the SS cola and significantly lower Federal+state SS taxation.

For example, using these round number sort of estimates for age 70 income for your two cases TaxCaster gives:

Case 1. Age 70 income taking SS at age 66
$800k IRA => 4% RMD = $32k RMD income
................Pension = $40k
.......................SS = $30k
Gross income = $102k
TaxCaster Federal Tax = $17213
Guess of State tax at 5% of non-SS income = $3600

Net after tax income = $81187
______________________________________________________

Case 2. Age 70 income taking SS at age 70
$500k IRA => 4% RMD = $20k RMD income (spent $300k delaying SS)
................Pension = $40k
......................SS = $39.6k
.........Gross income = $99.6k
TaxCaster Federal Tax = $7838
Guess of State tax at 5% of non-SS income = $3000

Net after tax income = $88762 ($7.6k higher after-tax income from delaying)

One person delaying SS is more of a no-brainer for a married couple but IMO this still looks pretty good in your case. Suggest you make your own estimates using more realistic numbers. Also, it's always possible I bungled some of my TaxCaster input. :)

Good luck and welcome to the forum.
JW
https://turbotax.intuit.com/tax-tools/c ... taxcaster/
Retired at Last

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