Retiring- pension is 2x annual expense. Roth conversions/ss advice.

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Lrt12
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Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Lrt12 » Thu Mar 14, 2019 3:15 pm

Relatives asking for help regarding converting traditional IRA to Roth to help limit RMD’s in tax efficient manner. Both are in good health.

Her-65 (planning to retire)
Him-66 (still working currently- likely for at least 1 more year)
Current annual spend: ~60k
Desired annual retirement spend: reports plan to “spend more” but with life-long LBYM doubt this would mean more than ~70k.
Cash: ~300k
Debt: No debt
Traditional IRA: 800k (invested 50/50; low ER; split ~50/50 between each)
Roth IRA: 13k (opened 2018; 100% VTSAX)
Pension (no COLA): ~60k/year each; survivor benefit on his pension
SS: Benefits ~38k/year each at 70
Have LTC insurance. Will have additional health insurance provided by employer in retirement in addition to Medicare.

Questions:
1. Is this a no-brainer scenario to wait until 70 to draw social security? They met with some type of social security advisor who reported the maximum value would be to take earlier than 70. I believe this was based only on life expectancy not considering additional investments/plan for Roth conversions.
2. It seems unlikely they will ever need to use any of the IRAs. Excess money will be invested in taxable brokerage at Vanguard. They have 2 heirs. Is deciding the amount they need to convert to Roth until 70 as easy as looking at what they will be paying in taxes once RMDs start as compared to now? OR is this complex enough a fee only advisor should be hired?

They are aware this is a nice problem to have, and the tax bills will be due. However, they desire to manage the money wisely and tax efficiently to the benefit of heirs. Please feel free to offer any other advice that may be beneficial. Thank you!

Katietsu
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Katietsu » Thu Mar 14, 2019 3:43 pm

There are people here better than me at “running the numbers.” But a quick look seems to me that there is no obvious answers. Unfortunately, I suspect “best” will be dependent on longevity, the length of time the surviving spouse files as a single person, and the financial choices of the heirs.

It looks like their social security will be fully taxed regardless of Roth conversions. And with no conversions, delaying social security, and no RMD’s, their marginal tax rate is 22% . But with social security and largish Roth conversions, they will only be bumped up to the 24% bracket. The IRMAA brackets are something to be aware. The size of Roth conversions will affect Medicare premiums over this range of income. Therefore, I would either try to stay below IRMAA or do large conversions over a short time(less paying only a year or two higher premiums).

Are there state tax factors, life expectancy factors, or financial situation of the heirs that would influence the decision?

Topic Author
Lrt12
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Lrt12 » Thu Mar 14, 2019 4:51 pm

Low state taxes. LCOL area. Neither have chronic conditions. Would expect the wife to outlive the husband. Heirs are at different income levels. I would guess one is into the 24% bracket and the other barely into 22%.

IRMAA is definitely a factor although I admit I need to look into this more. Really wanted to make sure I’m not missing anything that is completely obvious to do. Agree that a lot will be unknown as life expectancy is unknown.

megabad
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by megabad » Thu Mar 14, 2019 6:59 pm

Lrt12 wrote:
Thu Mar 14, 2019 3:15 pm
Questions:
1. Is this a no-brainer scenario to wait until 70 to draw social security? They met with some type of social security advisor who reported the maximum value would be to take earlier than 70. I believe this was based only on life expectancy not considering additional investments/plan for Roth conversions.
I would typically say that a couple in such a circumstance (similar age, similar income history, good health) should delay both SS claims until 70 though this is not necessarily a no-brainer for everyone. The answer can also depend on if you need room for Roth conversions or not.
2. It seems unlikely they will ever need to use any of the IRAs. Excess money will be invested in taxable brokerage at Vanguard. They have 2 heirs. Is deciding the amount they need to convert to Roth until 70 as easy as looking at what they will be paying in taxes once RMDs start as compared to now? OR is this complex enough a fee only advisor should be hired?
Well technically you would want to look at their current marginal tax bracket, their future marginal tax bracket, and the tax brackets of the heirs if you really wanted perfect optimization in this case. I do not think an advisor would necessarily add much to this decision specifically.

They are aware this is a nice problem to have, and the tax bills will be due. However, they desire to manage the money wisely and tax efficiently to the benefit of heirs. Please feel free to offer any other advice that may be beneficial. Thank you!
Agree with other poster that they are dangerously close to IRMMA cliff. I would make sure they convert enough to avoid this.

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sergeant
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by sergeant » Thu Mar 14, 2019 7:50 pm

Have both of them name the children as beneficiaries on the IRA's not the other spouse.
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CurlyDave
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by CurlyDave » Thu Mar 14, 2019 8:24 pm

Lrt12 wrote:
Thu Mar 14, 2019 3:15 pm

...1. Is this a no-brainer scenario to wait until 70 to draw social security? They met with some type of social security advisor who reported the maximum value would be to take earlier than 70. I believe this was based only on life expectancy not considering additional investments/plan for Roth conversions.
2. It seems unlikely they will ever need to use any of the IRAs. Excess money will be invested in taxable brokerage at Vanguard. They have 2 heirs. Is deciding the amount they need to convert to Roth until 70 as easy as looking at what they will be paying in taxes once RMDs start as compared to now? OR is this complex enough a fee only advisor should be hired?

They are aware this is a nice problem to have, and the tax bills will be due. However, they desire to manage the money wisely and tax efficiently to the benefit of heirs. Please feel free to offer any other advice that may be beneficial. Thank you!

I do not think this is a guaranteed "it is better to wait until 70" situation at all.

The SS break even dates that so many people like to quote, and use, do not take the time value of money into account at all. If one does this the break-even dates start to get later and later the greater the return assumed on invested money until somewhere in the 7% to 8% range when the break even dates become infinite.

How hard is it to get 7% to 8% on invested money? Well, the CAGR for the S&P over the past century is in the 10% to 11% range so it isn't really that hard, especially if one has a decades long time horizon. Which, is exactly the situation I would presume holds true for heirs.

IMHO, this is one of those cases where a very high stock allocation, 80+% on invested money, and SS at the earliest possible date, is what produces the best result.

Essentially the combination of pensions and SS produces a situation where there is no such thing as portfolio failure. Viewed through that lens, the best course of action is to invest as aggressively as reasonable and let the magic of time in the market work for them.

Now donning my flame-proof suit...

FoolMeOnce
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by FoolMeOnce » Thu Mar 14, 2019 8:30 pm

CurlyDave wrote:
Thu Mar 14, 2019 8:24 pm
Lrt12 wrote:
Thu Mar 14, 2019 3:15 pm

...1. Is this a no-brainer scenario to wait until 70 to draw social security? They met with some type of social security advisor who reported the maximum value would be to take earlier than 70. I believe this was based only on life expectancy not considering additional investments/plan for Roth conversions.
2. It seems unlikely they will ever need to use any of the IRAs. Excess money will be invested in taxable brokerage at Vanguard. They have 2 heirs. Is deciding the amount they need to convert to Roth until 70 as easy as looking at what they will be paying in taxes once RMDs start as compared to now? OR is this complex enough a fee only advisor should be hired?

They are aware this is a nice problem to have, and the tax bills will be due. However, they desire to manage the money wisely and tax efficiently to the benefit of heirs. Please feel free to offer any other advice that may be beneficial. Thank you!

I do not think this is a guaranteed "it is better to wait until 70" situation at all.

The SS break even dates that so many people like to quote, and use, do not take the time value of money into account at all. If one does this the break-even dates start to get later and later the greater the return assumed on invested money until somewhere in the 7% to 8% range when the break even dates become infinite.

How hard is it to get 7% to 8% on invested money? Well, the CAGR for the S&P over the past century is in the 10% to 11% range so it isn't really that hard, especially if one has a decades long time horizon. Which, is exactly the situation I would presume holds true for heirs.

IMHO, this is one of those cases where a very high stock allocation, 80+% on invested money, and SS at the earliest possible date, is what produces the best result.

Essentially the combination of pensions and SS produces a situation where there is no such thing as portfolio failure. Viewed through that lens, the best course of action is to invest as aggressively as reasonable and let the magic of time in the market work for them.

Now donning my flame-proof suit...
Though "better" isn't always the highest ceiling or even the highest probabilistic ending account balance. They don't need the money yet and delaying may be safer because it increases their COLA'd income. They don't need it earlier, and can spend more of the non-COLA'd pensions in the early years when it is more valuable. This also protects whomever outlives the other with a higher COLA'd income.

I can't speak to the tax, Medicare. Or other implications though.

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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Herekittykitty » Thu Mar 14, 2019 8:40 pm

Why a survivor benefit on his pension only and not one on hers?

There will only be one social security income once one spouse departs, and the drop in income should he be the survivor will be $60,000 in addition should her pension have no survivor benefit. Sure, females are statistically likely to live longer than males, but that doesn't mean any individual will conform to the statistics.

Should she predecease him and should he need a higher income than his social security plus his pension plus RMD's provide (such as expensive specialized nursing care for example) or want a higher income for whatever reason, he will be faced with the decision as to whether to do without what he could have had if her pension had a survivor benefit or spend his assets thus leaving less for heirs, i.e. less to meet his own needs and wants.

Besides which, as the years go by, the buying power of the pensions is likely to go down, and having a survivor benefit both ways would be even more important.

If it can't be helped, it can't be helped. But I think they should consider survivor benefits on both pensions.
I don't know anything.

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Peter Foley
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Peter Foley » Thu Mar 14, 2019 10:47 pm

Both of them waiting to age 70 for SS Benefits is probably not the best approach.

Have them use Mike Piper's calculator to determine the best approach: https://opensocialsecurity.com/

My best guess is that the one with the lower benefit should file at full retirement age. It may be possible for the spouse to file for spousal benefits at that time. The ability to do this is related to their birth date as SS laws were revised a couple years ago. Those born before a certain date were grandfathered in.

Doing modest Roth conversions is likely a good idea. I-orp and the Retiree Portfolio Model are calculators that can help you determine a good approach.

Also, doing qualified charitable distributions from an IRA once the retiree is age 70.5 is a way to limit income. (Think of it as a back door way of itemizing charitable contributions while taking a standard deduction.)

TBillT
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by TBillT » Thu Mar 14, 2019 10:52 pm

If it has not been mentioned, you should run the OpenSocialSecurity.com tool by Mike Piper that is popular here.
My wife and I are similar ages, and you will qualify for restricted application probably. The tool will give you a recommendation which you can consider.

TBillT
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by TBillT » Thu Mar 14, 2019 11:00 pm

sergeant wrote:
Thu Mar 14, 2019 7:50 pm
Have both of them name the children as beneficiaries on the IRA's not the other spouse.
I have not heard that idea. What is the rationale?

Topic Author
Lrt12
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Lrt12 » Fri Mar 15, 2019 8:10 am

FoolMeOnce wrote:
Thu Mar 14, 2019 8:30 pm
CurlyDave wrote:
Thu Mar 14, 2019 8:24 pm
Lrt12 wrote:
Thu Mar 14, 2019 3:15 pm

...1. Is this a no-brainer scenario to wait until 70 to draw social security? They met with some type of social security advisor who reported the maximum value would be to take earlier than 70. I believe this was based only on life expectancy not considering additional investments/plan for Roth conversions.
2. It seems unlikely they will ever need to use any of the IRAs. Excess money will be invested in taxable brokerage at Vanguard. They have 2 heirs. Is deciding the amount they need to convert to Roth until 70 as easy as looking at what they will be paying in taxes once RMDs start as compared to now? OR is this complex enough a fee only advisor should be hired?

They are aware this is a nice problem to have, and the tax bills will be due. However, they desire to manage the money wisely and tax efficiently to the benefit of heirs. Please feel free to offer any other advice that may be beneficial. Thank you!

I do not think this is a guaranteed "it is better to wait until 70" situation at all.

The SS break even dates that so many people like to quote, and use, do not take the time value of money into account at all. If one does this the break-even dates start to get later and later the greater the return assumed on invested money until somewhere in the 7% to 8% range when the break even dates become infinite.

How hard is it to get 7% to 8% on invested money? Well, the CAGR for the S&P over the past century is in the 10% to 11% range so it isn't really that hard, especially if one has a decades long time horizon. Which, is exactly the situation I would presume holds true for heirs.

IMHO, this is one of those cases where a very high stock allocation, 80+% on invested money, and SS at the earliest possible date, is what produces the best result.

Essentially the combination of pensions and SS produces a situation where there is no such thing as portfolio failure. Viewed through that lens, the best course of action is to invest as aggressively as reasonable and let the magic of time in the market work for them.

Now donning my flame-proof suit...
Though "better" isn't always the highest ceiling or even the highest probabilistic ending account balance. They don't need the money yet and delaying may be safer because it increases their COLA'd income. They don't need it earlier, and can spend more of the non-COLA'd pensions in the early years when it is more valuable. This also protects whomever outlives the other with a higher COLA'd income.

I can't speak to the tax, Medicare. Or other implications though.
I am definitely of the opinion they should be more aggressive with their investments, but I am young and naïve and wasn't in the market in 2008. Under the advice from a FA they pulled a lot of money out in 2008 so there is some residual discomfort with the market. They need to be comfortable with their allocation even if it may not be best for a likely 30 year horizon. Seems like there is maybe not an "obvious" answer regarding to their social security benefits. Although my thought would be they have more room for conversions if they delay.

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Lrt12
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Lrt12 » Fri Mar 15, 2019 8:14 am

Herekittykitty wrote:
Thu Mar 14, 2019 8:40 pm
Why a survivor benefit on his pension only and not one on hers?

There will only be one social security income once one spouse departs, and the drop in income should he be the survivor will be $60,000 in addition should her pension have no survivor benefit. Sure, females are statistically likely to live longer than males, but that doesn't mean any individual will conform to the statistics.

Should she predecease him and should he need a higher income than his social security plus his pension plus RMD's provide (such as expensive specialized nursing care for example) or want a higher income for whatever reason, he will be faced with the decision as to whether to do without what he could have had if her pension had a survivor benefit or spend his assets thus leaving less for heirs, i.e. less to meet his own needs and wants.

Besides which, as the years go by, the buying power of the pensions is likely to go down, and having a survivor benefit both ways would be even more important.

If it can't be helped, it can't be helped. But I think they should consider survivor benefits on both pensions.
Good thing to consider. Will discuss with them. I definitely think the assumption is the wife will live longer. Agree that in 30 years without COLA the pension will be worth much less and the survivor benefit would be helpful. They are fine with spending the IRA money if needed. The goal is not necessarily to not spend any of it. The heirs are in no way depending or counting on this money to live. Thank you for your help.

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Lrt12
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Lrt12 » Fri Mar 15, 2019 8:16 am

Peter Foley wrote:
Thu Mar 14, 2019 10:47 pm
Both of them waiting to age 70 for SS Benefits is probably not the best approach.

Have them use Mike Piper's calculator to determine the best approach: https://opensocialsecurity.com/

My best guess is that the one with the lower benefit should file at full retirement age. It may be possible for the spouse to file for spousal benefits at that time. The ability to do this is related to their birth date as SS laws were revised a couple years ago. Those born before a certain date were grandfathered in.

Doing modest Roth conversions is likely a good idea. I-orp and the Retiree Portfolio Model are calculators that can help you determine a good approach.

Also, doing qualified charitable distributions from an IRA once the retiree is age 70.5 is a way to limit income. (Think of it as a back door way of itemizing charitable contributions while taking a standard deduction.)
I don't have the full details but I believe this is the recommendation of the person they spoke with regarding maximizing social security. Would it be better to maximize social security benefits at the possible expense of being able to convert more to Roth? Thank you for your help.

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Lrt12
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Lrt12 » Fri Mar 15, 2019 8:19 am

sergeant wrote:
Thu Mar 14, 2019 7:50 pm
Have both of them name the children as beneficiaries on the IRA's not the other spouse.
I would also be interested to hear more about this approach. Their first goal is to take care of each other, not leave money to children. I would think if one needed long-term expensive nursing care this might back-fire.

JW-Retired
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by JW-Retired » Fri Mar 15, 2019 9:25 am

Lrt12 wrote:
Fri Mar 15, 2019 8:16 am
Would it be better to maximize social security benefits at the possible expense of being able to convert more to Roth?
Not sure what you mean? They shouldn't be doing any Roth conversions once they start taking SS benefits. It just balloons the taxes.

If they want to do some modest conversions while they are delaying SS to 70 that might make some sense.
JW
Retired at Last

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Lrt12
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Lrt12 » Fri Mar 15, 2019 9:54 am

JW-Retired wrote:
Fri Mar 15, 2019 9:25 am
Lrt12 wrote:
Fri Mar 15, 2019 8:16 am
Would it be better to maximize social security benefits at the possible expense of being able to convert more to Roth?
Not sure what you mean? They shouldn't be doing any Roth conversions once they start taking SS benefits. It just balloons the taxes.

If they want to do some modest conversions while they are delaying SS to 70 that might make some sense.
JW
Right my question would be which would likely be better- delaying SS benefits to 70 to allow for more Roth conversions OR maximizing ss benefits (which seems to be taking prior to 70) which would likely result in little, if any Roth conversions. It seems it is likely impossible to decide without knowing exactly how long each will live and the exact tax situation for their heirs at the time they start receiving RMDs.


Seems from responses overall there is no blatant "right answer". I really wanted to make sure there weren't any clear steps that should be taken in this situation that are outside of my knowledge. I am just now getting more involved in personal finance over the past couple of years so am a novice myself. I appreciate everyone's help!

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sergeant
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by sergeant » Fri Mar 15, 2019 5:07 pm

Lrt12 wrote:
Fri Mar 15, 2019 8:19 am
sergeant wrote:
Thu Mar 14, 2019 7:50 pm
Have both of them name the children as beneficiaries on the IRA's not the other spouse.
I would also be interested to hear more about this approach. Their first goal is to take care of each other, not leave money to children. I would think if one needed long-term expensive nursing care this might back-fire.
Pension and SS will provide 2.5X+ their annual spend. They have LTC insurance. Their taxable accounts will continue to grow and are already pretty decent. I doubt they will ever spend or need any of the IRA's. When one dies the one still here will have an onerous tax burden with RMD's and their income. To avoid this likely scenario it would be helpful to list the children as beneficiaries on the IRA's. If both children are high income individuals it won't be as beneficial.
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megabad
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by megabad » Fri Mar 15, 2019 5:13 pm

sergeant wrote:
Thu Mar 14, 2019 7:50 pm
Have both of them name the children as beneficiaries on the IRA's not the other spouse.
Just to be clear, this would not stand up to legal challenge in my state. The spouse is due a portion of the community property. But this is likely possible in other states if desired.

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sergeant
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by sergeant » Fri Mar 15, 2019 6:49 pm

megabad wrote:
Fri Mar 15, 2019 5:13 pm
sergeant wrote:
Thu Mar 14, 2019 7:50 pm
Have both of them name the children as beneficiaries on the IRA's not the other spouse.
Just to be clear, this would not stand up to legal challenge in my state. The spouse is due a portion of the community property. But this is likely possible in other states if desired.
Who would challenge it? Both spouses would be agreeing on this estate planning event. Are you saying that the state where you live has laws on beneficiaries that differ from what is common?
Lincoln 3 EOW!

megabad
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by megabad » Fri Mar 15, 2019 7:26 pm

For a real life example--A local bank would not allow my father to change the beneficiary to me on his IRA in my state (community property). They instructed him that they required my mother (his spouse) to be listed as primary. She was standing right next to him at the time and asked if there was a waiver form and they said no.

Believe it or not, there are number of firms that will not allow you to remove your spouse as a beneficiary in my state. I asked my own small bank and they said they would not either because they were worried about the legal fallout and informed me that if spouse ever pursued the case, they estimated spouse would win. This was back when we were investigating QLACs and other annuity type strategies so it might have been the insurer not the bank making this call not sure. I am not a lawyer but it doesn't seem like it matters if your provider won't let you do it, then you can either try another provider or get hosed.

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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by fujiters » Sat Mar 16, 2019 4:02 am

With 120k in pension income right off the bat, there really isn't room for Roth conversions in low tax brackets. They could still convert to the top of the 22% bracket for a few years before SS likely pushes them to 24%, where they'll probably stay, even after one dies and the other will file as single.

The high earner should wait until 70 to claim to ensure the highest SS for the survivor. I'd wait until 70 for both, not for expected value reasons, but for cutting the impact of the situation where they both live to 100 and inflation is high during that time. It's not probable, but it's also not impossible.

You could run the numbers in I-ORP.
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bada bing
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by bada bing » Sat Mar 16, 2019 4:47 am

I don't have anything to offer on withdrawal planning. just an observation on their
numbers. they are in an enviable position, but the numbers have a bit of a disconnect
that might warrant checking. The anticipated $38k each in SS indicates a nearly max'ed
35 year FICA record ($130k each in 2019 dollars). At $1.1m in savings, they have either
spent a lot more than $60k (2019 dollars) for most of their careers, or they have had really
poor investment performance, or they've over/under estimated their earnings or spending.

Their numbers are good, but there is something useful to understand in their bigger picture.
Perhaps it is already been looked at since it doesn't reflect directly on the topic questions.

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celia
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by celia » Sat Mar 16, 2019 7:33 am

Lrt12 wrote:
Thu Mar 14, 2019 3:15 pm
Pension (no COLA): ~60k/year each; survivor benefit on his pension
SS: Benefits ~38k/year each at 70
My first reaction when reading this is that the pension may not be enough to pay their expenses in 15-20 years, depending on what inflation does during that time. But their expected SS of $38K x 2 is inflation-adjusted each year and could cover expenses even when the pensions have lost half their spending power, provided both are still living (collecting SS) then.
Questions:
1.Is this a no-brainer scenario to wait until 70 to draw social security? They met with some type of social security advisor who reported the maximum value would be to take earlier than 70. I believe this was based only on life expectancy not considering additional investments/plan for Roth conversions.
Why would the SS advisor consider Roth conversions? They are not financial advisors. They only know their own “product”, not other sources of “income”.
2. It seems unlikely they will ever need to use any of the IRAs. Excess money will be invested in taxable brokerage at Vanguard. They have 2 heirs. Is deciding the amount they need to convert to Roth until 70 as easy as looking at what they will be paying in taxes once RMDs start as compared to now? OR is this complex enough a fee only advisor should be hired?
The comparison should be between their age 71 tax rate and their tax rate in the early years of retirement. The time between retirement and starting RMDs and SS is often the lowest income years, especially for those living off their savings during that time. The point of the age 71 analysis is to see what happens to their taxes with enough time left before then, to do some something about it when your tax rate is low.

The biggest impact that can affect their future post-age 71 taxes is after one of them dies. The survivor will then need to start filing taxes as Single. The space in each tax bracket for Singles is half as much as for Marrieds Filing Jointly. So they definitely should do some Roth conversions before then. The more they do, the better, even if their tax rate goes up a little. I would convert to at least the top of the 24% tax bracket.

I haven’t heard of any paid advisors who could figure this out any better than they could themselves, so don’t even bother with them.
Lrt12 wrote:
Thu Mar 14, 2019 4:51 pm
Low state taxes. LCOL area. Neither have chronic conditions. Would expect the wife to outlive the husband. Heirs are at different income levels. I would guess one is into the 24% bracket and the other barely into 22%.
The heirs' current tax rate is irrelevant. The tax rate at the time they inherit is what should be considered. But the children might not inherit until they themselves are retired.
sergeant wrote:
Thu Mar 14, 2019 7:50 pm
Have both of them name the children as beneficiaries on the IRA's not the other spouse.
No, no, NO! They have no idea what life will throw their way. Even if they could list the children as beneficiaries, the account owner could die the day after making the change. Then what will the survivor do?

It is best to list the spouse as the beneficiary and the children can be contingent beneficiaries. At the time of inheritance, if the survivor doesn't want all of the IRA, she can disclaim it then and it will go to the contingent beneficiaries. Listing the children as beneficiaries now is just too risky for the surviving spouse.
TBillT wrote:
Thu Mar 14, 2019 10:52 pm
If it has not been mentioned, you should run the OpenSocialSecurity.com tool by Mike Piper that is popular here.
My wife and I are similar ages, and you will qualify for restricted application probably. The tool will give you a recommendation which you can consider.
It doesn't make any allowances for Roth conversions, does it?
bada bing wrote:
Sat Mar 16, 2019 4:47 am
I don't have anything to offer on withdrawal planning. just an observation on their
numbers. they are in an enviable position, but the numbers have a bit of a disconnect
that might warrant checking. The anticipated $38k each in SS indicates a nearly max'ed
35 year FICA record ($130k each in 2019 dollars). At $1.1m in savings, they have either
spent a lot more than $60k (2019 dollars) for most of their careers, or they have had really
poor investment performance, or they've over/under estimated their earnings or spending.
This is an excellent point and I tend to agree with it. Did they include (federal and state) income taxes and medical insurance premiums as part of their living expenses? What about property taxes or other things that don't happen each month? What about an occasional new car, roof, wedding, or large one-time expense?

The easiest way to confirm that their living expenses are $60K is to live on that amount alone for an entire year. Every other penny should be saved. The expenses they are not considering need to be part of the experiment too. Don't forget that LTC premiums could rise as well as tax brackets after 2025. If they have hobbies or interests that cost money, that could be another expense.
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.

cherijoh
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by cherijoh » Sat Mar 16, 2019 8:10 am

bada bing wrote:
Sat Mar 16, 2019 4:47 am
I don't have anything to offer on withdrawal planning. just an observation on their
numbers. they are in an enviable position, but the numbers have a bit of a disconnect
that might warrant checking. The anticipated $38k each in SS indicates a nearly max'ed
35 year FICA record ($130k each in 2019 dollars). At $1.1m in savings, they have either
spent a lot more than $60k (2019 dollars) for most of their careers, or they have had really
poor investment performance, or they've over/under estimated their earnings or spending.

Their numbers are good, but there is something useful to understand in their bigger picture.
Perhaps it is already been looked at since it doesn't reflect directly on the topic questions.
I agree by Boglehead standards those savings look low for the projected amount of income. But I can think of a couple of other explanations. They may have spent a lot of money on a house (or home renovation) that is currently paid off. Also they could have cash flowed the kids' college educations. I have friends who did both - as well as putting all 3 kids through private religious school. I'm pretty sure that their retirement savings look very skimpy compared to the salaries that they earned.

Carl53
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Carl53 » Sat Mar 16, 2019 9:14 am

With the projected pension/SS income they certainly are in an enviable situation.

Depending on their exact birthdates, it is likely that one of them should be filing for SS and one that is at FRA should file a restricted application. If the younger one will be at FRA very soon it may not matter which way to file. https://opensocialsecurity.com/ will provide decent analysis. You may see that it may not matter too much either way you go, but there will likely be a substantial bump in value for one of them to not wait until age 70.

They may want to consider using the RPM model https://www.bogleheads.org/wiki/Retiree_Portfolio_Model to look at their situation. They will easily be near the top of the 22% bracket if they take SS early and in the 24% bracket if the delay until 70. More than modest conversions might cost them in higher taxes and IRMAA penalties. The IRMAA limits are supposed to start being adjusted annually for inflation in 2020.

If the couple does or plans to do charitable giving, delaying significant donations until one of them is 70.5 will essentially offer the opportunity to make those donations tax free via QCDs from the TIRA accounts.

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Lrt12
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Lrt12 » Sat Mar 16, 2019 10:04 am

cherijoh wrote:
Sat Mar 16, 2019 8:10 am
bada bing wrote:
Sat Mar 16, 2019 4:47 am
I don't have anything to offer on withdrawal planning. just an observation on their
numbers. they are in an enviable position, but the numbers have a bit of a disconnect
that might warrant checking. The anticipated $38k each in SS indicates a nearly max'ed
35 year FICA record ($130k each in 2019 dollars). At $1.1m in savings, they have either
spent a lot more than $60k (2019 dollars) for most of their careers, or they have had really
poor investment performance, or they've over/under estimated their earnings or spending.

Their numbers are good, but there is something useful to understand in their bigger picture.
Perhaps it is already been looked at since it doesn't reflect directly on the topic questions.
I agree by Boglehead standards those savings look low for the projected amount of income. But I can think of a couple of other explanations. They may have spent a lot of money on a house (or home renovation) that is currently paid off. Also they could have cash flowed the kids' college educations. I have friends who did both - as well as putting all 3 kids through private religious school. I'm pretty sure that their retirement savings look very skimpy compared to the salaries that they earned.
I will double check the social security numbers. Salary has grown slowly over 45+ year careers. Neither make over 90k now, and they are at their highest salaries in their careers. Put kids through college including one professional school. Each earn a similar salary. Pulled out when the market crashed and were invested way too conservatively when young. Have received bad financial advice for a long time. No expensive hobbies. House worth about 320k. Not concerned about unrealistic spending numbers but definitely understand the comments as I would be thinking the same thing.


So seems overall look at converting to the top of the 24% making sure not to go slightly over an IRMAA cliff...?

cherijoh
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by cherijoh » Sat Mar 16, 2019 10:22 am

Lrt12 wrote:
Sat Mar 16, 2019 10:04 am
I will double check the social security numbers. Salary has grown slowly over 45+ year careers. Neither make over 90k now, and they are at their highest salaries in their careers.
Could those SS figures be assuming that they worked until 70? The regular SS statements won't tell you how much you will get if you stop working but delay taking benefits. However, you can figure it out with one of the SS calculators.

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celia
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by celia » Sat Mar 16, 2019 12:55 pm

Is it possible for one or both of them to delay the start of their pension and/or retire now to give them more space for Roth conversions? This is more important IMO than maximizing any SS benefits by taking it before age 70. I would even go over the IRMAA cliff for a few early years if it prevented them going over it for the rest of their lives. If one goes over, both go over if filing joint. The Survivor will also go over.

Here are the current rules: https://www.ssa.gov/pubs/EN-05-10536.pdf
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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celia
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by celia » Sat Mar 16, 2019 1:10 pm

cherijoh wrote:
Sat Mar 16, 2019 10:22 am
Lrt12 wrote:
Sat Mar 16, 2019 10:04 am
I will double check the social security numbers. Salary has grown slowly over 45+ year careers. Neither make over 90k now, and they are at their highest salaries in their careers.
Could those SS figures be assuming that they worked until 70? The regular SS statements won't tell you how much you will get if you stop working but delay taking benefits. However, you can figure it out with one of the SS calculators.
I assume the estimate is for age 70 when they get an 8% increase for each year they delay past Full Retirement Age (FRA). But they will likely get the same benefit if they retire now since only the highest 35 years of inflation-adjusted wages is used.
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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Lrt12
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Lrt12 » Sat Mar 16, 2019 1:35 pm

celia wrote:
Sat Mar 16, 2019 12:55 pm
Is it possible for one or both of them to delay the start of their pension and/or retire now to give them more space for Roth conversions? This is more important IMO than maximizing any SS benefits by taking it before age 70. I would even go over the IRMAA cliff for a few early years if it prevented them going over it for the rest of their lives. If one goes over, both go over if filing joint. The Survivor will also go over.

Here are the current rules: https://www.ssa.gov/pubs/EN-05-10536.pdf
Not an option to delay the pension. She is retiring now. He is not ready. It will probably be at least another year as he has not even really talked about retiring. Money is not the reason for not being ready.

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FiveK
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by FiveK » Sun Mar 17, 2019 1:01 am

Lrt12 wrote:
Thu Mar 14, 2019 3:15 pm
Pension (no COLA): ~60k/year each; survivor benefit on his pension
SS: Benefits ~38k/year each at 70
The first chart shows tax rates on tIRA withdrawals with $120K/yr pension as the only other income.
The second chart shows tax rates on tIRA withdrawals with $120K/yr pension and $76K/yr SS income.

The spikes are due to IRMAA. State taxes are ignored.

Converting enough to avoid RMDs of $30K or more (or planning to make qualified charitable distributions with all or some of the RMD) and thus avoid that IRMAA cliff when taking SS seems a good idea.

Effects of state taxes, other (e.g., dividend) income, etc., can be observed by downloading the personal finance toolbox spreadsheet and entering the pertinent numbers.

Image

Image

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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by MathIsMyWayr » Sun Mar 17, 2019 10:07 am

Thank you, FiveK, for the chart which shows the effect of IRMAA. It is interesting to note that IRMAA lowers the after-tax income with higher income once you cross the IRMAA cliff. In the case of a MFJ, the couple need about $2,000 more to recover the hit on after-tax income over the $170k cliff.

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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by TBillT » Sun Mar 17, 2019 3:33 pm

TBillT wrote:
Thu Mar 14, 2019 10:52 pm
If it has not been mentioned, you should run the OpenSocialSecurity.com tool by Mike Piper that is popular here.
My wife and I are similar ages, and you will qualify for restricted application probably. The tool will give you a recommendation which you can consider.
It doesn't make any allowances for Roth conversions, does it? [/quote]

In our age bracket we are talking about, we are the last of the so-called SS "double dippers" .
Those strategies are gone for those any younger than us.
Yes you *might* be able to develop a better financial plan and leave that extra money on the table.
But it's an uphill batte.

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Lrt12
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Lrt12 » Mon Mar 18, 2019 9:11 am

FiveK wrote:
Sun Mar 17, 2019 1:01 am
Lrt12 wrote:
Thu Mar 14, 2019 3:15 pm
Pension (no COLA): ~60k/year each; survivor benefit on his pension
SS: Benefits ~38k/year each at 70
The first chart shows tax rates on tIRA withdrawals with $120K/yr pension as the only other income.
The second chart shows tax rates on tIRA withdrawals with $120K/yr pension and $76K/yr SS income.

The spikes are due to IRMAA. State taxes are ignored.

Converting enough to avoid RMDs of $30K or more (or planning to make qualified charitable distributions with all or some of the RMD) and thus avoid that IRMAA cliff when taking SS seems a good idea.

Effects of state taxes, other (e.g., dividend) income, etc., can be observed by downloading the personal finance toolbox spreadsheet and entering the pertinent numbers.

Image

Image
Thank you for this chart. Very helpful!

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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Sandi_k » Wed Mar 20, 2019 10:53 am

No one has mentioned the pro rata issues with the tIRA of $800k as they choose to convert portions of it.

The 24% bracket for MFJ is $165,001 to $315,000. That's a pretty wide bandwidth - until you add up their already-assured income.

$60k each from pensions; $38k each from SocSecurity. That's $196k annually, leaving them the option of converting something like $115k per year. So it would take 7 years to convert the entire $800k, meaning that they'd hit 70 before they're done converting.

IIWITS, I might consider taking only the pensions now - $60k for her, and his income of $90k. That allows something like this:

Year 1: Income $60k + $90k (his employment) = $150k - $24k standard deduction, room to convert $189k.
Year 2:He retires, Income $120k - $24k = $96k, room to convert another $219k.
Year 3: Both retired, income $120 - $24k = $96k, room to convert $219k.
Year 4: Both retired, income after std ded = $96k, room to convert $219k.

$189k + $219k + $219K + 219K = $846k. Conversions done. His age: 70, her age: 69. Then she files for Soc Sec, he files for Soc Security, and it's all finished in 4 years.

Yes, they'll be over the IRMAA cliff, but it's only a few hundred dollars a month, when we're talking tens of thousands in taxes saved - I'd be willing to take that plan. And once all the funds are converted, their income from regular sources is $120k for pensions, and $38k each in Social Security - so approximately $200k. When one spouse passes, all the funds will be in Roth accounts, and income can be controlled as needed.

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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by FiveK » Wed Mar 20, 2019 12:40 pm

Sandi_k wrote:
Wed Mar 20, 2019 10:53 am
Yes, they'll be over the IRMAA cliff, but it's only a few hundred dollars a month,....
There are multiple IRMAA cliffs. Going from $150K AGI to $339K AGI would cost ~$7000 in medicare part B premiums alone.

You might download the spreadsheet tool used to generate the charts a previous post and extend the amount of tIRA withdrawals to see what happens to the marginal rates at higher withdrawal amounts.

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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Sandi_k » Wed Mar 20, 2019 1:42 pm

FiveK wrote:
Wed Mar 20, 2019 12:40 pm
Sandi_k wrote:
Wed Mar 20, 2019 10:53 am
Yes, they'll be over the IRMAA cliff, but it's only a few hundred dollars a month,....
There are multiple IRMAA cliffs. Going from $150K AGI to $339K AGI would cost ~$7000 in medicare part B premiums alone.

You might download the spreadsheet tool used to generate the charts a previous post and extend the amount of tIRA withdrawals to see what happens to the marginal rates at higher withdrawal amounts.
But can't you file a "change in circumstances" petition, once you're through the conversions, that would allow you to retreat to the previous IRMAA rates?

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FiveK
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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by FiveK » Wed Mar 20, 2019 1:56 pm

Sandi_k wrote:
Wed Mar 20, 2019 1:42 pm
FiveK wrote:
Wed Mar 20, 2019 12:40 pm
Sandi_k wrote:
Wed Mar 20, 2019 10:53 am
Yes, they'll be over the IRMAA cliff, but it's only a few hundred dollars a month,....
There are multiple IRMAA cliffs. Going from $150K AGI to $339K AGI would cost ~$7000 in medicare part B premiums alone.

You might download the spreadsheet tool used to generate the charts a previous post and extend the amount of tIRA withdrawals to see what happens to the marginal rates at higher withdrawal amounts.
But can't you file a "change in circumstances" petition, once you're through the conversions, that would allow you to retreat to the previous IRMAA rates?
Three years after the last conversion year, the medicare premiums will drop back to whatever they will be based on all the other income streams. Lower income "this year" just because one stopped converting (or taking capital gains, etc.) isn't sufficient. There are some justifications for IRMAA Appeals.

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Re: Retiring- pension is 2x annual expense. Roth conversions/ss advice.

Post by Sandi_k » Fri Mar 22, 2019 5:44 pm

Thanks, good to know. So the answer to my question is yes.

I guess you have to weigh the IRMAA cliffs cost against the value of having the IRAs in Roths, safely converted and no longer exposing the future "singleton" to big taxes. Considering that most women outlive their husband by a decade, that seems like a relatively easy thing... especially if you ripped off the conversion bandaid in 4 years, as I hypothesized in my post.

Good conversation!

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