Semi-Retirement Withdrawal Strategy

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Topic Author
Flyguy
Posts: 21
Joined: Thu Aug 13, 2009 7:43 pm

Semi-Retirement Withdrawal Strategy

Post by Flyguy »

Our family will need to increase our spending level, starting next year and need to determine how to best fund the increase.

Her: 58, Him: 55

Background:
My wife and I quit our corporate jobs 10 & 7 years ago; moving to part-time jobs we enjoy more. We've lived off the income from the part-time jobs, dividends from after-tax investments, and cash savings. We have mostly drawn down our cash savings and have larger needs in the next few years - 2 kids starting college (partly funded by 529s - not included below), major home maintenance items we have put off (furnace, etc.), cars that will be really old, etc. Plus, we would like to start spending more money on discretionary items like trips.

Our current income is about $ 45k per year, which is roughly the same as current expenses. We would like to sell investments to add about $ 40-50k to that (annually), starting after my wife turns 59.5 (next year). We want to stay below the ACA cliff.

We own our house (no mortgage); we'll probably stay there for the time being. No Debt. Both in good health, don't plan to take SS unitl 70.

Trad. IRAs: $ 2.0m
After-Tax Stocks and ETFs: $ 1.2m ($0.3m original investment; $0.9m in gains)
Roth IRAs: $ 0.3m


Questions:
- Where to source the funds from (TIRA or After Tax?) I'm concerned about the eventual huge RMDs if we don't start drawing down the TIRA. How should we decide?
mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: Semi-Retirement Withdrawal Strategy

Post by mhalley »

There are various calculators such as extended I-orp and the boglehead retiree portfolio model spreadsheet.
https://www.i-orp.com/Inflate/extended.html

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Topic Author
Flyguy
Posts: 21
Joined: Thu Aug 13, 2009 7:43 pm

Re: Semi-Retirement Withdrawal Strategy

Post by Flyguy »

Thanks. I'll look into the models.

I was wondering if anyone had any other suggestions?
Emilyjane
Posts: 163
Joined: Sat Jul 27, 2013 6:39 am

Re: Semi-Retirement Withdrawal Strategy

Post by Emilyjane »

Check out the threads on Variable Portfolio Withdrawal.
"Real knowledge is to know the extent of one's ignorance", Confucius
sycamore
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Re: Semi-Retirement Withdrawal Strategy

Post by sycamore »

To avoid falling off the ACA cliff, you can have around $100,000 in MAGI for a family of 4 (back in 2019) -- see https://www.kff.org/health-reform/issue ... me-people/, but you should use a calculatorr to double check those numbers for current year and your family size.

I know the premium tax credit goes down as your income goes up, so there's some trade-off there for you to investigate.

Withdrawing from Trad IRA all counts toward MAGI. And you pay income tax rates on the income.

By contrast if you sell investments in your after-tax accounts, only the capital gains (not your basis) count toward MAGI. And you pay capital gains tax on those gains, which at your bracket is probably 0%.

Without running any special calculators or withdrawal simulations, the simple-minded approach is to take 22.5k from Trad IRA and 22.5k from after-tax. It may not be the best approach but it probably won't be the worst. If you're still concerned about having too large of a Trad IRA, take 30k from it and 15k from taxable.

From what I've read, people use the calculators one year to decide what to do, then re-run it again each and every following year to get the best approach given current situation (tax rates will change, your investment results will change, etc.)
Topic Author
Flyguy
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Joined: Thu Aug 13, 2009 7:43 pm

Re: Semi-Retirement Withdrawal Strategy

Post by Flyguy »

Thanks, that's very helpful. I'm also looking ahead to when we eventually pass assets on to our children -- thinking about the step-up in basis for the After-Tax items versus them having to pay taxes on the TIRAs.
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celia
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Location: SoCal

Re: Semi-Retirement Withdrawal Strategy

Post by celia »

Flyguy wrote: Sun Jul 05, 2020 12:23 pm Our family will need to increase our spending level, starting next year and need to determine how to best fund the increase.

We want to stay below the ACA cliff.
You have conflicting goals. You want to increase your Taxable Income while keeping it lower. You can’t have both.

So which would you choose?
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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geerhardusvos
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Re: Semi-Retirement Withdrawal Strategy

Post by geerhardusvos »

Flyguy wrote: Sun Jul 05, 2020 12:23 pm Our family will need to increase our spending level, starting next year and need to determine how to best fund the increase.

Her: 58, Him: 55

Background:
My wife and I quit our corporate jobs 10 & 7 years ago; moving to part-time jobs we enjoy more. We've lived off the income from the part-time jobs, dividends from after-tax investments, and cash savings. We have mostly drawn down our cash savings and have larger needs in the next few years - 2 kids starting college (partly funded by 529s - not included below), major home maintenance items we have put off (furnace, etc.), cars that will be really old, etc. Plus, we would like to start spending more money on discretionary items like trips.

Our current income is about $ 45k per year, which is roughly the same as current expenses. We would like to sell investments to add about $ 40-50k to that (annually), starting after my wife turns 59.5 (next year). We want to stay below the ACA cliff.

We own our house (no mortgage); we'll probably stay there for the time being. No Debt. Both in good health, don't plan to take SS unitl 70.

Trad. IRAs: $ 2.0m
After-Tax Stocks and ETFs: $ 1.2m ($0.3m original investment; $0.9m in gains)
Roth IRAs: $ 0.3m


Questions:
- Where to source the funds from (TIRA or After Tax?) I'm concerned about the eventual huge RMDs if we don't start drawing down the TIRA. How should we decide?
If I was in your shoes, I would likely bite the bullet and pay some taxes. But I would be seeking to get as much of the pre-tax investment money into Roth by filling up that lower tax bracket and staying below the ACA cliff. It’s important to keep consistently doing that, maybe by working with a tax professional if you don’t feel comfortable, so that you don’t further compound your tax situation. For the last 5 to 10 years you could’ve been doing Roth conversions aggressively so that when college and house expenses come around, you have comfortably already paid lower tax bracket on your pretax money. Depending on how urgent some of these items are, you may just have to pay the taxes. But considering the large amount you have saved and your relatively low budget, you’re pretty safe to do these things. Again, might be worth talking to a tax professional and building a strategy, but I personally would start tapping the TIRA when your wife turns 59 1/2. You’re in great shape, especially with Social Security or other income sources, and good for you for retiring early. It’s a good lesson for others reading though, you need to be disciplined and fill up the lower tax bracket every year with Roth conversions especially with such a low budget. As others have mentioned, you can’t stay below the ACA cliff and spend additional tens of thousands of dollars at the same time, it just doesn’t work unless you have the cash and conversion planning ahead of time
VTSAX and chill
Topic Author
Flyguy
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Joined: Thu Aug 13, 2009 7:43 pm

Re: Semi-Retirement Withdrawal Strategy

Post by Flyguy »

celia wrote: Mon Jul 06, 2020 10:58 am
Flyguy wrote: Sun Jul 05, 2020 12:23 pm Our family will need to increase our spending level, starting next year and need to determine how to best fund the increase.

We want to stay below the ACA cliff.
You have conflicting goals. You want to increase your Taxable Income while keeping it lower. You can’t have both.

So which would you choose?
I guess I'm not following -- the goals don't seem to be conflicting to me. We are currently well below the cliff (roughly $100k for a family of 4).
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celia
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Location: SoCal

Re: Semi-Retirement Withdrawal Strategy

Post by celia »

In that case, since you can’t withdraw from tax-deferred (without penalty) until 59.5**, it looks like you can only withdraw from taxable or Roth and hold off on more Roth conversions until college is covered.

I’d aim for the 100k Taxable Income each year you are still on ACA. If/when you need more than that, you can always withdraw past Roth contributions and conversions without penalty.

Then as soon as you are done with ACA, up your Taxable Income by doing larger Roth conversions.


**Note that you can also avoid the penalty if withdrawing from the tIRA by converting (paying the taxes), then withdrawing from the Roth. I hope you have good records of all Roth contributions and conversions.
sycamore
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Re: Semi-Retirement Withdrawal Strategy

Post by sycamore »

celia wrote: Mon Jul 06, 2020 12:14 pm In that case, since you can’t withdraw from tax-deferred (without penalty) until 59.5**, it looks like you can only withdraw from taxable or Roth and hold off on more Roth conversions until college is covered.

I’d aim for the 100k Taxable Income each year you are still on ACA. If/when you need more than that, you can always withdraw past Roth contributions and conversions without penalty.

Then as soon as you are done with ACA, up your Taxable Income by doing larger Roth conversions.


**Note that you can also avoid the penalty if withdrawing from the tIRA by converting (paying the taxes), then withdrawing from the Roth. I hope you have good records of all Roth contributions and conversions.
You can also avoid the penalty by using Substantially equal periodic payments. My understanding is that it's a perfectly legit but fairly uncommon way to withdraw from your Traditional IRA account before 59.5, but there are significant caveats to be aware of.
bearwithbear
Posts: 82
Joined: Thu Jun 28, 2018 5:55 pm

Re: Semi-Retirement Withdrawal Strategy

Post by bearwithbear »

OP,

So you can take more money from after tax and stay under the ACA cliff. What I suggest is run some tax returns thru your favorite tax software. Vary the amount from the tIRA and the after tax account. Focus on the amount of money you want in a given year and the ACA cliff. The max amount of money is taking all from the after tax account (not including the Roths in this discussion) but you will still have large rmds. You can lower your rmds the most if you take it all from the tIRA but you will have the least amount of money. Find the balance that works. And that may well change year to year.
Once you are both on Medicare the ACA cliff is replaced by IRMAA. Not as onerous, allowing for taking more from tIRA.
Good problems to have.

Bear
Topic Author
Flyguy
Posts: 21
Joined: Thu Aug 13, 2009 7:43 pm

Re: Semi-Retirement Withdrawal Strategy

Post by Flyguy »

celia wrote: Mon Jul 06, 2020 12:14 pm In that case, since you can’t withdraw from tax-deferred (without penalty) until 59.5**, it looks like you can only withdraw from taxable or Roth and hold off on more Roth conversions until college is covered.

I’d aim for the 100k Taxable Income each year you are still on ACA. If/when you need more than that, you can always withdraw past Roth contributions and conversions without penalty.

Then as soon as you are done with ACA, up your Taxable Income by doing larger Roth conversions.


**Note that you can also avoid the penalty if withdrawing from the tIRA by converting (paying the taxes), then withdrawing from the Roth. I hope you have good records of all Roth contributions and conversions.
Just to clarify -- My wife will hit 59.5 this time next year (which is when we will start to need the additional funds). So we could either take from taxable or TIRA.
MJS
Posts: 577
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Re: Semi-Retirement Withdrawal Strategy

Post by MJS »

Flyguy wrote: Sun Jul 05, 2020 12:23 pm ... Both in good health, don't plan to take SS unitl 70.
Social Security can be tricky for a family. Have you run the OpenSocialSecurity calculator using Advanced Options -- https://opensocialsecurity.com/ -- to see some alternatives?
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