Work hard, saved hard, retired....now what :)

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
NukeWorker
Posts: 11
Joined: Mon Jun 10, 2019 7:04 am

Work hard, saved hard, retired....now what :)

Post by NukeWorker » Mon Jun 10, 2019 9:40 am

New "member" to forum, but have been reading post for years. Impressive group. Recently retired, and trying to set a course for the next 30-35 years(hopefully). Have typically been near 100% in US equity, but now trying to reallocate to a logical mix. Based on most retirement engines, I have more than enough to cover expenses for my wife and I. Been trying to save and grow assets for working career, so now considering what if anything to do differently.

Planned maximum yearly spend: $190K ($120-130 more typical based on post-retirement tracking). Other than SS, no other pension plans or income streams.

Emergency funds: Two years covered in MM acct (~2.0%)
Debt: No significant debt, use credit cards for expenses and pay off every month.
Tax Filing Status: Married Filing Jointly
Tax Rate: 22% Federal (expect 32% bracket when RMD starts), 7% State
State of Residence: SC
Age:60 (planning to 95)
Desired Asset allocation: 50% stocks / 50% bonds
Desired International allocation: 5% of stocks (never been a big fan of non-US equities, but this is likely foolish on my part)

Current retirement assets are in the mid-seven figures with 60% in taxable accounts, 40% in IRA accounts. No Roths unfortunately. Several of the fund in my taxable accounts have accumulated large cap gains so selling needs to be managed tax wise. I have a large cash allocation due to some job termination benefits, and need to do something with it! Recent market gyrations have kept me a little skittish.

Taxable (60% of total assets)
U.S. Stocks 51%
Intl Stocks 5%
U.S. Bonds 3%
Intl Bonds 1%
Alternatives 3%
Cash 37%
Total taxable 100%

Taxable Holdings

Cash Cash (MMs at 2.0-2.3) 36%
VTI Vanguard Total Stock Market Index Fund ETF 18%
VTTVX Vanguard Target Retirement 2025 Fund Investor 11%
VEIRX Vanguard Equity-Income Fund Admiral Shares 9%
VPMAX Vanguard PRIMECAP Fund Admiral Shares 8%
VYM Vanguard High Dividend Yield Index Fund ETF 7%
VHDYX Vanguard High Dividend Yield Index Fund Investor 3%
XOM Exxon Mobil Corp 2%
KIM Kimco Realty Corp 2%
WMT Walmart Inc 2%
KMB Kimberly-Clark Corp 2%



IRAs (40% of total)
U.S. Stocks 49%
Intl Stocks 5%
U.S. Bonds 41%
Intl Bonds 3%
Alternatives 2%
Cash 1%
Total IRA 100%

IRA Holdings

FZROX Fidelity ZERO Total Market Index Fund 41%
Fidelity Managed Bond Fund (0.35% Fee) 43%
FCNTX Fidelity® Contrafund® Fund 9%
FZILX Fidelity ZERO International Index Fund 5%
TRRBX T. Rowe Price Retirement 2020 Fund 2%


Combined Taxable and IRA percentages

Overall
U.S. Stocks 50%
Intl Stocks 5%
U.S. Bonds 18%
Intl Bonds 2%
Alternatives 2%
Cash 22%

Questions:

1. I would like to have a strategy to roughly maintain at least 50% of my principle for inheritance purposes. My withdrawal percentage of total assets is less than 4% currently. Is their a better allocation strategy than I am currently using?

2. I have too much cash sitting in MMs. I plan to keep enough to cover two years of expenses to allow me to avoid forced selling in down markets, but that still leaves me $600K on the sidelines. What should I do with this lump sum?

3. I am slowly adjusting the tax efficiency of the holdings in my taxable accounts, trying to take advantage of lower income and cap tax rates before my RMD earnings kick in and taxes go back up. I'm torn between using this low income period to realize long term gains in my taxable accounts or starting withdrawing some IRA funds to lower the RMDs later. Hard to plan with the uncertainty in "step up basis" and inherited IRA withdrawal requirements. Is their a easier way to approach this problem?

mhalley
Posts: 7013
Joined: Tue Nov 20, 2007 6:02 am

Re: Work hard, saved hard, retired....now what :)

Post by mhalley » Mon Jun 10, 2019 11:00 am

With your desire to leave a legacy [comment on pending legislation removed by moderator oldcomputerguy], you might consider doing Roth conversions prior to rmds. You can use extended I-orp to run some numbers.
https://www.i-orp.com/
There are multiple posts on dca vs lump sum. I might lean toward dca in your case to minimize sequence of returns risk. Kitces has some good posts on sequence of returns risk and doing partial Roth conversions prior to rmds.
https://www.kitces.com/blog/understandi ... d-decades/
https://www.kitces.com/blog/url-upside- ... al-wealth/
https://www.kitces.com/blog/using-syste ... 2cb487ac58
https://www.kitces.com/blog/tax-efficie ... ing-needs/

User avatar
Watty
Posts: 16189
Joined: Wed Oct 10, 2007 3:55 pm

Re: Work hard, saved hard, retired....now what :)

Post by Watty » Mon Jun 10, 2019 12:17 pm

NukeWorker wrote:
Mon Jun 10, 2019 9:40 am
1. I would like to have a strategy to roughly maintain at least 50% of my principle for inheritance purposes.
Planning to leave an inheritance like that is problematic if you are planning on leaving it to your kids.

If you will be able to easily support yourself until you are over 95 it is very possible that you would live that long but the most likely outcome is that you both die long before then and would leave a huge inheritance anyway without doing anything special. On the flip side if you or a spouse do live to be over 95 then by the time you die and leave the money to your kids they will likely be in their 60s or 70s and already be retired. Ideally they will have already have saved a tidy retirement nest egg of their own so they will not have a lot of need for the inheritance then.

One strategy to allow for the inheritance would be to buy a Single Premium Immediate Annuity(SPIA) when you are in your mid to late 70's that will cover your living expenses that will not be covered by dividends and Social Security. You would need to plan on buying additional SPIAs every five or ten years to make up to purchasing power that is lost due to inflation.

Between your Social Security, Interest and dividends, and the SPIA you would not have much need for your savings so you could start giving it to your kids while you are still alive and your kids are young enough to get a lot of use out of "inheriting" the money early. One of the founders of the board has posted about doing something like this for his kids.

Just FYI, a SPIA is the only type of annuity that you should consider, if some salesperson tries to talk you into some complex annuity with big promises they are trying to take advantage of you to get paid a huge commission.
NukeWorker wrote:
Mon Jun 10, 2019 9:40 am
Planned maximum yearly spend: $190K ($120-130 more typical based on post-retirement tracking).
Be sure to also consider taxes in your spending, it was not clear if you were including that.

You also need to consider your spending needs at different ages, if nothing else it will go down when you both get on Medicare. If you save $15K a year when you start Medicare and also get $35K a year when you start Social Security that combined $50K would lower your typical income needs down to $70-$80K which I would think you could fund with your dividends and not touch your principal.

I suspect that as you age your actual expenses will be a lot lower especially if you have a paid off house. I have seen relatives naturally slow down when they got to be in their mid 70's even though they were in relatively good health. At that point they didn't want to travel much and things like an expensive evening out did not happen very often. They were also more interested in downsizing than buying more stuff. They had occasional large expenses like when they needed a new roof but there were often months when they did not even spend their entire Social Security checks since their main expenses were things like utilities, food , and a housekeeper that came in several days a week.

If you ever need to go into assisted living your expenses could actually go down especially if you were not at the point there you needed full nursing home care.

Here are a couple of links that might be useful.

For figuring out your Social Security claiming strategy.

https://opensocialsecurity.com/

Assisted living costs by state/city. South Carolina looks a lot lower than average and note the price difference between assisted living and nursing home care.

https://www.genworth.com/aging-and-you/ ... -care.html

User avatar
dm200
Posts: 20313
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Work hard, saved hard, retired....now what :)

Post by dm200 » Mon Jun 10, 2019 12:26 pm

What are you doing to occupy your time in "retirement"?

What does your spouse recommend?

I know a few folks in early retirement who were so "bored" that they sought out part time employment - not for the money - but to keep from being "bored". A coworker's father retired after many years of hard work. To keep from being "bored" he took a job driving folks to and from medical appointments - with the added twist that most of these folks have limited English language capability and he is an immigrant from that country and can speak the language. She says her father is much happier working a regular type job now.

A close relative of mine (cousin) the same age as I am, retired about age 71. He and his wife moved to the Carolinas to be near their daughter and family. They now spend a lot of time volunteering at a church there and a lot of time with the very young grandchildren. From seeing them on facebook - he looks just about as 'active" as before retirement.

delamer
Posts: 7868
Joined: Tue Feb 08, 2011 6:13 pm

Re: Work hard, saved hard, retired....now what :)

Post by delamer » Mon Jun 10, 2019 1:48 pm

I’d highly recommend that you begin giving gifts to the people/organizations that you want to inherit your assets now, instead of making them wait until you and your wife are gone.

You each can give $15,000/year without any tax consequences or filing requirements to a child, for example, in 2019. That means that for a married child, the two of you can gift $60,000 to the couple.

If any charities are expected beneficiaries, then you can use QCDs when you are required to take RMDs to avoid taxes on the RMDs: https://www.fidelity.com/learning-cente ... the-basics

User avatar
beyou
Posts: 2590
Joined: Sat Feb 27, 2010 3:57 pm
Location: Northeastern US

Re: Work hard, saved hard, retired....now what :)

Post by beyou » Mon Jun 10, 2019 3:07 pm

I would adjust my AA over time.
When you start collecting SS you can raise your equity allocation.
Reasoning, I would have a conservative allocation for the cash you intend to spend, and a more aggressive allocation for the amount you hope to pass.
The older you get, the less years you have to fund, and more you can rely on SS income, hence a more aggressive allocation makes sense.

If you have doubts about whether you can really leave 50% to your heirs, do not give away sooner,
and wait to raise equity allocation until milestones like medicare at 65 and SS at 70.
But if you are sure the total amount is sufficient, yes give away some now, your kids would appreciate having the money sooner.

Topic Author
NukeWorker
Posts: 11
Joined: Mon Jun 10, 2019 7:04 am

Re: Work hard, saved hard, retired....now what :)

Post by NukeWorker » Mon Jun 10, 2019 3:27 pm

mhalley wrote:
Mon Jun 10, 2019 11:00 am
With your desire to leave a legacy [comment on pending legislation removed by moderator oldcomputerguy], you might consider doing Roth conversions prior to rmds. You can use extended I-orp to run some numbers.
https://www.i-orp.com/
There are multiple posts on dca vs lump sum. I might lean toward dca in your case to minimize sequence of returns risk. Kitces has some good posts on sequence of returns risk and doing partial Roth conversions prior to rmds.
https://www.kitces.com/blog/understandi ... d-decades/
https://www.kitces.com/blog/url-upside- ... al-wealth/
https://www.kitces.com/blog/using-syste ... 2cb487ac58
https://www.kitces.com/blog/tax-efficie ... ing-needs/
Thanks for your response mhalley. I have not used the i-orp tool so yet but will. As I "think you may have said concerning pending legislation", it is very hard to make long range plans when the rules are dynamic. Thanks

Topic Author
NukeWorker
Posts: 11
Joined: Mon Jun 10, 2019 7:04 am

Re: Work hard, saved hard, retired....now what :)

Post by NukeWorker » Mon Jun 10, 2019 3:36 pm

Watty wrote:
Mon Jun 10, 2019 12:17 pm
NukeWorker wrote:
Mon Jun 10, 2019 9:40 am
1. I would like to have a strategy to roughly maintain at least 50% of my principle for inheritance purposes.
Planning to leave an inheritance like that is problematic if you are planning on leaving it to your kids.

If you will be able to easily support yourself until you are over 95 it is very possible that you would live that long but the most likely outcome is that you both die long before then and would leave a huge inheritance anyway without doing anything special. On the flip side if you or a spouse do live to be over 95 then by the time you die and leave the money to your kids they will likely be in their 60s or 70s and already be retired. Ideally they will have already have saved a tidy retirement nest egg of their own so they will not have a lot of need for the inheritance then.

One strategy to allow for the inheritance would be to buy a Single Premium Immediate Annuity(SPIA) when you are in your mid to late 70's that will cover your living expenses that will not be covered by dividends and Social Security. You would need to plan on buying additional SPIAs every five or ten years to make up to purchasing power that is lost due to inflation.

Between your Social Security, Interest and dividends, and the SPIA you would not have much need for your savings so you could start giving it to your kids while you are still alive and your kids are young enough to get a lot of use out of "inheriting" the money early. One of the founders of the board has posted about doing something like this for his kids.

Just FYI, a SPIA is the only type of annuity that you should consider, if some salesperson tries to talk you into some complex annuity with big promises they are trying to take advantage of you to get paid a huge commission.
NukeWorker wrote:
Mon Jun 10, 2019 9:40 am
Planned maximum yearly spend: $190K ($120-130 more typical based on post-retirement tracking).
Be sure to also consider taxes in your spending, it was not clear if you were including that.

You also need to consider your spending needs at different ages, if nothing else it will go down when you both get on Medicare. If you save $15K a year when you start Medicare and also get $35K a year when you start Social Security that combined $50K would lower your typical income needs down to $70-$80K which I would think you could fund with your dividends and not touch your principal.

I suspect that as you age your actual expenses will be a lot lower especially if you have a paid off house. I have seen relatives naturally slow down when they got to be in their mid 70's even though they were in relatively good health. At that point they didn't want to travel much and things like an expensive evening out did not happen very often. They were also more interested in downsizing than buying more stuff. They had occasional large expenses like when they needed a new roof but there were often months when they did not even spend their entire Social Security checks since their main expenses were things like utilities, food , and a housekeeper that came in several days a week.

If you ever need to go into assisted living your expenses could actually go down especially if you were not at the point there you needed full nursing home care.

Here are a couple of links that might be useful.

For figuring out your Social Security claiming strategy.

https://opensocialsecurity.com/

Assisted living costs by state/city. South Carolina looks a lot lower than average and note the price difference between assisted living and nursing home care.

https://www.genworth.com/aging-and-you/ ... -care.html
Thanks for the response Watty
We have been taking advantage of the annual gift exclusion amounts to try to "jump start" our child's retirement saving, house down payment, ect. I really like your idea on the SPIA after reaching 70+. Better rates, and would give me some peace of mind that my wife won't have to manage finances for essential cash flow. Thanks for the SS and aging links. I will give those a try. Thanks again!

Topic Author
NukeWorker
Posts: 11
Joined: Mon Jun 10, 2019 7:04 am

Re: Work hard, saved hard, retired....now what :)

Post by NukeWorker » Mon Jun 10, 2019 3:39 pm

dm200 wrote:
Mon Jun 10, 2019 12:26 pm
What are you doing to occupy your time in "retirement"?

What does your spouse recommend?

I know a few folks in early retirement who were so "bored" that they sought out part time employment - not for the money - but to keep from being "bored". A coworker's father retired after many years of hard work. To keep from being "bored" he took a job driving folks to and from medical appointments - with the added twist that most of these folks have limited English language capability and he is an immigrant from that country and can speak the language. She says her father is much happier working a regular type job now.

A close relative of mine (cousin) the same age as I am, retired about age 71. He and his wife moved to the Carolinas to be near their daughter and family. They now spend a lot of time volunteering at a church there and a lot of time with the very young grandchildren. From seeing them on facebook - he looks just about as 'active" as before retirement.
Thanks DM200. Staying busy has not been a challenge so far....honey do list. We also have a camper and "lots of places to go"!

User avatar
BL
Posts: 8955
Joined: Sun Mar 01, 2009 2:28 pm

Re: Work hard, saved hard, retired....now what :)

Post by BL » Mon Jun 10, 2019 3:40 pm

I would say you do have an income stream with those high-yield funds and the target fund. At minimum, you could invest all distributions into tax-efficient funds like total stock or total international. If your children have lower tax brackets than you, you could gift them the funds rather than cash.

Target date funds just complicate things, unless that is all you have. You could simplify IRA with no tax concerns. Simplify and buy total bond market there.

Look into the thread, Wiki page, and book on the 3-fund portfolio.

Jane Bryant Quinn has a good retirement reference book, How to make your Money Last. Easy to read and solid advice.

I would convert IRA to Roth IRA up to top of your tax bracket. That lowers RMD. Also better for kids to inherit thatn IRA. Delay your SS until near 70. 15% of it is not taxed. Remember tax rates for survivor will increase.
Last edited by BL on Mon Jun 10, 2019 5:35 pm, edited 1 time in total.

Topic Author
NukeWorker
Posts: 11
Joined: Mon Jun 10, 2019 7:04 am

Re: Work hard, saved hard, retired....now what :)

Post by NukeWorker » Mon Jun 10, 2019 3:43 pm

delamer wrote:
Mon Jun 10, 2019 1:48 pm
I’d highly recommend that you begin giving gifts to the people/organizations that you want to inherit your assets now, instead of making them wait until you and your wife are gone.

You each can give $15,000/year without any tax consequences or filing requirements to a child, for example, in 2019. That means that for a married child, the two of you can gift $60,000 to the couple.

If any charities are expected beneficiaries, then you can use QCDs when you are required to take RMDs to avoid taxes on the RMDs: https://www.fidelity.com/learning-cente ... the-basics
Thanks Delamer. We have been gifting for a while now. Started a ROTH IRA for my child as soon as he started summer jobs. He can earn his own keep, so trying to strike a balance not to over do it. So far so good. If he marries, we can double down as you suggested. Thanks again for the input.

renue74
Posts: 1533
Joined: Tue Apr 07, 2015 7:24 pm

Re: Work hard, saved hard, retired....now what :)

Post by renue74 » Mon Jun 10, 2019 3:44 pm

I don't know the size of your family or their financial health, but I will say that my inlaws have "helped" my wife's siblings tremendously over the last 15 years financially. Unfortunately, it's been more of the "pay $30K to help them get out of foreclosure," type spending instead of help with college or retirement savings.

It sounds like you are very intent on leaving a large chunk of your estate to your children. So you know it's a good choice. Why not help them fund their Roth IRAs, children's 529 plans, annual $ gifts, etc. If you have the means, that would reduce some of your estate. Plus, I think they would really appreciate the help.

I typically stay out of any family discussions about finances with my wife. It's a slippery slope. Just keep in mind to be equitable, if you choose that route.

I would preach the "need to keep generational wealth" as an important mantra.

Topic Author
NukeWorker
Posts: 11
Joined: Mon Jun 10, 2019 7:04 am

Re: Work hard, saved hard, retired....now what :)

Post by NukeWorker » Mon Jun 10, 2019 3:48 pm

beyou wrote:
Mon Jun 10, 2019 3:07 pm
I would adjust my AA over time.
When you start collecting SS you can raise your equity allocation.
Reasoning, I would have a conservative allocation for the cash you intend to spend, and a more aggressive allocation for the amount you hope to pass.
The older you get, the less years you have to fund, and more you can rely on SS income, hence a more aggressive allocation makes sense.

If you have doubts about whether you can really leave 50% to your heirs, do not give away sooner,
and wait to raise equity allocation until milestones like medicare at 65 and SS at 70.
But if you are sure the total amount is sufficient, yes give away some now, your kids would appreciate having the money sooner.
Agree beyou. We are gifting to the limit now as you suggested, with an eye on sequence risk if things don't go well (like the first year I was retired - 2018 :shock: ). I will throttle back quickly if I see any longevity risk.

123
Posts: 4719
Joined: Fri Oct 12, 2012 3:55 pm

Re: Work hard, saved hard, retired....now what :)

Post by 123 » Mon Jun 10, 2019 3:53 pm

You should consider taking advantage of your lower tax bracket before RMDs begin. Instead of doing Traditional IRA withdrawals to reduce RMDs you should consider doing Roth conversions to reduce RMDs (the tax cost is the same either way). The Roth status generally prevents taxation of the gains, particularly valuable if you live a long time.
The closest helping hand is at the end of your own arm.

Topic Author
NukeWorker
Posts: 11
Joined: Mon Jun 10, 2019 7:04 am

Re: Work hard, saved hard, retired....now what :)

Post by NukeWorker » Mon Jun 10, 2019 3:56 pm

renue74 wrote:
Mon Jun 10, 2019 3:44 pm
I don't know the size of your family or their financial health, but I will say that my inlaws have "helped" my wife's siblings tremendously over the last 15 years financially. Unfortunately, it's been more of the "pay $30K to help them get out of foreclosure," type spending instead of help with college or retirement savings.

It sounds like you are very intent on leaving a large chunk of your estate to your children. So you know it's a good choice. Why not help them fund their Roth IRAs, children's 529 plans, annual $ gifts, etc. If you have the means, that would reduce some of your estate. Plus, I think they would really appreciate the help.

I typically stay out of any family discussions about finances with my wife. It's a slippery slope. Just keep in mind to be equitable, if you choose that route.

I would preach the "need to keep generational wealth" as an important mantra.
Thanks renue74. There are plenty of pitfalls for sure. We have maximized his savings in retirement accounts every year he was eligible, and helped with the down payment of a house so far. Putting money in places other than easy access SV/CK accounts is the way we have tried to go for the majority of any gifts. I hope to make good enough decisions that we can help along the way, and still have enough left over to make a difference when we are gone. My dad is a CD guy that retired pretty well off and got "poor" over the next 30 years. I want to be smart, but also acknowledge that I can be a little more risk averse. Thanks again.

Topic Author
NukeWorker
Posts: 11
Joined: Mon Jun 10, 2019 7:04 am

Re: Work hard, saved hard, retired....now what :)

Post by NukeWorker » Mon Jun 10, 2019 3:58 pm

123 wrote:
Mon Jun 10, 2019 3:53 pm
You should consider taking advantage of your lower tax bracket before RMDs begin. Instead of doing Traditional IRA withdrawals to reduce RMDs you should consider doing Roth conversions to reduce RMDs (the tax cost is the same either way). The Roth status generally prevents taxation of the gains, particularly valuable if you live a long time.
Thanks 123. An early post suggested the same so I will be running some scenarios to see how that might work.

renue74
Posts: 1533
Joined: Tue Apr 07, 2015 7:24 pm

Re: Work hard, saved hard, retired....now what :)

Post by renue74 » Mon Jun 10, 2019 4:05 pm

Also....it hasn't been said, but I would reach out to an estate attorney and get a plan to together.

Over and beyond the normal will, you may find trust strategies, transfer of real estate strategies or other ways to ensure the generational wealth transfer with minimal tax liability.

I think in our will, we had indicated some age milestones for our children before they received part of our estate. Setting up trusts may be a good option for you.

Topic Author
NukeWorker
Posts: 11
Joined: Mon Jun 10, 2019 7:04 am

Re: Work hard, saved hard, retired....now what :)

Post by NukeWorker » Mon Jun 10, 2019 4:13 pm

BL wrote:
Mon Jun 10, 2019 3:40 pm
I would say you do have an income stream with those high-yield funds and the target fund. At minimum, you could invest all distributions into tax-efficient funds like total stock or total international. If your children have lower tax brackets than you, you could gift them the funds rather than cash.

Target date funds just complicate things, unless that is all you have. You could simplify IRA with no tax concerns. Simplify and buy total bond market there.

Look into the thread, Wiki page, and book on the 3-fund portfolio.

Jane Bryant Quinn has a good retirement reference book, How to make your Money Last. Easy to read and solid advice.

I would convert IRA to Roth IRA up to top of your tax bracket. That lowers RMD. Also better for kids to inherit that IRA. Delay your SS until near 70. 15% of it is not taxed. Remember tax rates for survivor will increase.
Thanks BL. Good thought and I appreciate the reference to the book. I will check that out. My goal over the next few years is to get to a smaller set of funds spread out over fewer places. I will be looking at ROTH conversions as you suggested, and just hope the ROTH details don't get changed too much over the next few years.

Luckywon
Posts: 453
Joined: Tue Mar 28, 2017 10:33 am

Re: Work hard, saved hard, retired....now what :)

Post by Luckywon » Mon Jun 10, 2019 5:43 pm

NukeWorker wrote:
Mon Jun 10, 2019 9:40 am
Planned maximum yearly spend: $190K ($120-130 more typical based on post-retirement tracking). Other than SS, no other pension plans or income streams.
NukeWorker wrote:
Mon Jun 10, 2019 4:13 pm

I will be looking at ROTH conversions as you suggested, and just hope the ROTH details don't get changed too much over the next few years.

NukeWorker

Maybe I missed it above but could you clarify whether your spend rate of $190k is before or after income taxes? And what marginal tax rates are you estimating for your RMD's and capital gains and dividends? You may be surprised at how high taxation can be due to effect of these income streams on NIIT and SS income taxation.

My spending projection is close to 190k (not including income taxes). Portfolio is a bit larger at high 7 figures with about 50 % in tax deferred. I have done some pro forma tax calculations (I'm in California and file as a single person) which show my RMD's being taxed at a marginal rate greater than 36 % combined state and federal and that's a very convervative estimate of taxation as it assumes no growth in my 401k from this point on which is highly unlikely as I still have 17 years before RMD's begin. Regarding Roth conversions, If I stopped working now, very modest Roth conversions of 5 % of current 401k balance would be taxed over 31 %.

So, for me I estimate taxes on 401k funds above 36 % and I don't see Roth conversions making any meaningful difference. Your tax rates will be lower since you are filing MFJ and have a lower 401k balance/RMD's and will have lower state income taxes but may not be too far from that. The best way to know is to do pro forma calculations with your own figures. If you are looking at needing 190k after income taxes, it will be interesting to see what your withdrawal rate would need to be after accounting for taxes using pro forma tax returns to guide your estimates.

The tool below is very good, IMO and includes both federal and state income tax.

https://www.irscalculators.com/tax-calculator

Blender
Posts: 144
Joined: Wed May 13, 2015 10:56 am

Re: Work hard, saved hard, retired....now what :)

Post by Blender » Mon Jun 10, 2019 8:13 pm

I'm surprised nobody gave the obvious answer to your subject line: play hard!

Congrats on your success. In the process of now enjoying the fruits of your labor, if you haven't already, be sure and try to find something that helps fulfill you.

Topic Author
NukeWorker
Posts: 11
Joined: Mon Jun 10, 2019 7:04 am

Re: Work hard, saved hard, retired....now what :)

Post by NukeWorker » Wed Jun 12, 2019 10:59 am

Luckywon wrote:
Mon Jun 10, 2019 5:43 pm
NukeWorker wrote:
Mon Jun 10, 2019 9:40 am
Planned maximum yearly spend: $190K ($120-130 more typical based on post-retirement tracking). Other than SS, no other pension plans or income streams.
NukeWorker wrote:
Mon Jun 10, 2019 4:13 pm

I will be looking at ROTH conversions as you suggested, and just hope the ROTH details don't get changed too much over the next few years.

NukeWorker

Maybe I missed it above but could you clarify whether your spend rate of $190k is before or after income taxes? And what marginal tax rates are you estimating for your RMD's and capital gains and dividends? You may be surprised at how high taxation can be due to effect of these income streams on NIIT and SS income taxation.

My spending projection is close to 190k (not including income taxes). Portfolio is a bit larger at high 7 figures with about 50 % in tax deferred. I have done some pro forma tax calculations (I'm in California and file as a single person) which show my RMD's being taxed at a marginal rate greater than 36 % combined state and federal and that's a very convervative estimate of taxation as it assumes no growth in my 401k from this point on which is highly unlikely as I still have 17 years before RMD's begin. Regarding Roth conversions, If I stopped working now, very modest Roth conversions of 5 % of current 401k balance would be taxed over 31 %.

So, for me I estimate taxes on 401k funds above 36 % and I don't see Roth conversions making any meaningful difference. Your tax rates will be lower since you are filing MFJ and have a lower 401k balance/RMD's and will have lower state income taxes but may not be too far from that. The best way to know is to do pro forma calculations with your own figures. If you are looking at needing 190k after income taxes, it will be interesting to see what your withdrawal rate would need to be after accounting for taxes using pro forma tax returns to guide your estimates.

The tool below is very good, IMO and includes both federal and state income tax.

https://www.irscalculators.com/tax-calculator

I had to go back and re-think my spreadsheets based on some of your comments. I have both fixed and Monte Carlo type views, and currently use a variable withdrawal strategy (a modified version of the Variable Percentage Withdrawal calculator produced in this Forum). I have always accounted for taxes based on what generated the taxable event. For W2 and SS type income, I subtract taxes prior to adding it to net worth. My big hitter is obviously the pending RMDs, and I assume I will take the RMD required amount and then pay taxes out of the taxable account as long as enough money remains in that bucket. This results in applying a drag on net worth from year to year. Including the 7% SC income tax, my current marginal rate is about 29%. After RMDs begin, I will be well above 32%. Because I have a few additional sources of pre-RMD money coming in (Employer EDCP), I don't have a great window for Roth conversions.

The thing that caused me to pause and re-look at my numbers was my erroneous withdrawal rate. I had initially built my spreadsheets starting with a disposable income number and calculated my WD percentage based on the $190K. Although my "annual projections" are still valid based on the modeled tax impact on net worth, my actual withdrawal rate is closer to 4.3% versus 3.8%. I make small adjustments on the WD amount within the monte carlo simulator to reflect good and bad years on ROR and inflation, and it shows >95% success at the current WD rate. I also used the handy link you provided to double check my tax calculations. Everything was accurate on that front, given the assumption that income and gains taxes stay as is....which they won't of course.

The only thing that really concerns me now is getting a very bad first 5-10 years if things go bad (ie, sequence risk). That is one reason I built in a variable WD strategy to keep me on track. My WD amount is well above my minimum WD amount just to give me an upper cap to "have fun" while we are healthy and young. (60 is the new 40!)

Thanks again for taking the time to give me some input. I have some more work to do.

Topic Author
NukeWorker
Posts: 11
Joined: Mon Jun 10, 2019 7:04 am

Re: Work hard, saved hard, retired....now what :)

Post by NukeWorker » Wed Jun 12, 2019 11:03 am

Blender wrote:
Mon Jun 10, 2019 8:13 pm
I'm surprised nobody gave the obvious answer to your subject line: play hard!

Congrats on your success. In the process of now enjoying the fruits of your labor, if you haven't already, be sure and try to find something that helps fulfill you.
Blender - I knew someone would jump on that! :P Thanks for the input. So far, my wife has been keeping me busy but I do foresee the need for some more rainy day "things to do" in the future. Still pondering that one.

WhiteMaxima
Posts: 1856
Joined: Thu May 19, 2016 5:04 pm

Re: Work hard, saved hard, retired....now what :)

Post by WhiteMaxima » Wed Jun 12, 2019 5:12 pm

Life is short, play hard.

Post Reply