Retirement readiness and plan

[notplannedbuthappy]

My second post

Due to continued bull market and me reprioritizing, I would like to retire in 2 years and my wife joining me a year after. Here are the latest numbers:

HIM (age 59). Target retirement age 62
401k: 1.3M (of which 150K in Roth 401k + after-tax Roth)
Roll over IRA -Vanguard (pension from former employer - pre-tax): 150K
Deferred compensation (pre-tax): 215K
Company pension (planning to annuitize): 13K/year starting at age 65 with 100% spouse survivor
Roth IRA (Vanguard): 420K
HSA: 98K
Vanguard brokerage: 110K (taxable)
Cash (online bank - savings + CD): 100K
ESPP (former employer): 38K
SS starting at age 70: 48K/year

HER (age 48). Target retirement age 51
403b: 202K
State Pension: 14K/year starting at age 65
Roth IRA (Vanguard): 130K
SS starting at age 62: 12K/year

Overall asset allocation (Stocks/Bonds-Fixed): 68/32

Our objective is to leave the two Roth IRAs (550K) to kids as inheritance unless there is a catastrophic event like health or stock market meltdown.

Kids out of college and in jobs. No debt including mortgage.

Our projected spend in retirement is around 110K/year.

PLAN
Till 2026 =>
Draw from cash (leave about 6 months emergency), brokerage/ESPP, deferred comp, His pre-tax 401(k).
Convert 150K Roll over IRA to Roth IRA over 3 years.
Rollover Roth 401k and after-tax Roth in 401K to Roth IRA to avoid RMD.
2026+
His pension starting 65, SS starting at 70.
Her pension starting at 65, SS starting at 62.
Fill gap (after pension and SS) from pre-tax 401k, 403b, Roth rolled over.

Questions:
#1 Can we retire at 62 and 51?
#2 Is our AA too aggressive for someone close to retirement?
#3 Does our plan sound OK or does it need adjustments?

Thanks in advance.

[bloom2708]

Have you used any tools like Firecalc to get a level of confidence?

If I divide $110,000 by .04 I get $2,750,000. Basic 4% withdrawal rate. Simple calculation to gauge ballpark.

I'd start a spreadsheet and chart your income path to 65 and 70. With one being 10 years younger, that also adds complications.

If your spending isn't flexible, I think it could be a bit bumpy to 70. Wanting to preserve the Roth also limits your sources of income.

You do not have a lot of taxable/cash to pay for Roth conversions. Does $110k account for health insurance? Taxes?

I would start your mySS account. I don't think the benefit can be $48k, so something is off there.

I would likely not be 68% stocks this close to a potential retirement. The risks are if you need a high rate of withdrawal for a number of years, that could deplete your pre-tax. You might look at taking SS a few years earlier.

We are a conservative bunch, but it isn't a slam dunk. Hopefully others can add some ideas.

[LeftCoastIV]

My understanding is that leaving the Roth IRAs to the kids won’t provide the same benefit as leaving them taxable or tax-deferred assets where the step-up value works in their favor. You’ve already paid the taxes on the Roth assets.

I would consider using the Roth assets to support your retirement, and hold off on selling taxable unless you really need to (towards the goal of your kids benefitting from the step-up).

[WoodSpinner]

OP,

I don’t understand how your Cashflow will work for expenses till 2026. Perhaps I am missing how the funds in the 401k are invested. Are most of them in a Taxable 401k bucket?

Does the $110M yearly expenses include Health Insurance and Taxes?

Strongly suggest you do some modeling of the Cashflows to get a better handle on your plans. Also agree that using some of the free tools (I-ORP, Firecalc, cFiresim, Flexible Retirement Planner, and Retiree Portfolio Model etc.) would be a good investment of your time and energy.

In terms of leaving the Roth to your kids, this only makes sense of they are in a higher Marginal Tax bracket than you will be in Retirement. OTW, it’s probably better to leave them part of your before-tax assets.

WoodSpinner

[retired@50]

My understanding is that leaving the Roth IRAs to the kids won’t provide the same benefit as leaving them taxable or tax-deferred assets where the step-up value works in their favor. You’ve already paid the taxes on the Roth assets.

I'm not aware of any step-up in basis for tax-deferred assets. Do you have any source info on that?

As far as I know, every dollar withdrawn from a traditional IRA is taxed at the tax rate of the person making the withdrawal, whether it's the original owner or an inheritor.

Regards,

[shapeshifter]

I'd consider adding the VPW Worksheet to your suite of tools. You could input your delayed pensions (and ss benefit) and model out a variable withdrawal strategy to cover for lack of pensions in the early years.

[LeftCoastIV]

My understanding is that leaving the Roth IRAs to the kids won’t provide the same benefit as leaving them taxable or tax-deferred assets where the step-up value works in their favor. You’ve already paid the taxes on the Roth assets.

I'm not aware of any step-up in basis for tax-deferred assets. Do you have any source info on that?

As far as I know, every dollar withdrawn from a traditional IRA is taxed at the tax rate of the person making the withdrawal, whether it's the original owner or an inheritor.

Regards,

Good point. Acknowledged. The suggestion is then only relevant for the step-up benefit for taxable accounts.

[just1question]

My second post

Due to continued bull market and me reprioritizing, I would like to retire in 2 years and my wife joining me a year after. Here are the latest numbers:

HIM (age 59). Target retirement age 62
401k: 1.3M (of which 150K in Roth 401k + after-tax Roth)
Roll over IRA -Vanguard (pension from former employer - pre-tax): 150K
Deferred compensation (pre-tax): 215K
Company pension (planning to annuitize): 13K/year starting at age 65 with 100% spouse survivor
Roth IRA (Vanguard): 420K
HSA: 98K
Vanguard brokerage: 110K (taxable)
Cash (online bank - savings + CD): 100K
ESPP (former employer): 38K
SS starting at age 70: 48K/year

HER (age 48). Target retirement age 51
403b: 202K
State Pension: 14K/year starting at age 65
Roth IRA (Vanguard): 130K
SS starting at age 62: 12K/year

Overall asset allocation (Stocks/Bonds-Fixed): 68/32

Our objective is to leave the two Roth IRAs (550K) to kids as inheritance unless there is a catastrophic event like health or stock market meltdown.

Kids out of college and in jobs. No debt including mortgage.

Our projected spend in retirement is around 110K/year.

PLAN
Till 2026 =>
Draw from cash (leave about 6 months emergency), brokerage/ESPP, deferred comp, His pre-tax 401(k).
Convert 150K Roll over IRA to Roth IRA over 3 years.
Rollover Roth 401k and after-tax Roth in 401K to Roth IRA to avoid RMD.
2026+
His pension starting 65, SS starting at 70.
Her pension starting at 65, SS starting at 62.
Fill gap (after pension and SS) from pre-tax 401k, 403b, Roth rolled over.

Questions:
#1 Can we retire at 62 and 51?
#2 Is our AA too aggressive for someone close to retirement?
#3 Does our plan sound OK or does it need adjustments?

Thanks in advance.

You have roughly $2.7M+, and three years to grow before retirement. Let's assume 5% growth. You are conservatively at $3.2M.

I'll assume your $110k/year spending includes taxes and healthcare. I'll also assume you and DW will have enough income over next three years to pay all your expenses. Let's assume your portfolio grows at the same rate as inflation thereafter (very conservative IMO). I'd break retirement down into stages, by your age:

Age 62-65: 3 x $110k = $330k
Age 65-70: 5 x ($110k - $13k pension) = $485k
Age 70-73: 3 x ($110k - $13k pension - $48k SS) = $147k
Age 73-76: 3 x ($110k - $13k pension - $48k SS - $12k DWSS) = $111k

So far, your at $1.073M spent to get to age 76. Going forward, subtract off another $14k per year for DW pension, and you are need $23k/year for spending given both of your SS and pensions. If your wife lives to 100, you are talking another 35 years. That's another 35 x $23k = $805k. When you die, DW will lose her $12k/year SS (taking yours instead), but the decrease of income should be offset by lower expenses because, well, you will be dead.

Anyway, that's my rough calculated estimate. I think you will be fine. But there are various assumptions made, including market performance at least keeping up with inflation, which historically is a fairly safe bet. Plus, I'm not a financial planner and really don't know what I'm talking about. I just read, a lot.

I agree with others that you should bequeath the after-tax brokerage account b/c it should have a stepped-up basis (based on my very limited understanding of the tax law).

As for your asset allocation, you can always adjust it as you grow older.

[MathWizard]

My understanding is that leaving the Roth IRAs to the kids won’t provide the same benefit as leaving them taxable or tax-deferred assets where the step-up value works in their favor. You’ve already paid the taxes on the Roth assets.

I would consider using the Roth assets to support your retirement, and hold off on selling taxable unless you really need to (towards the goal of your kids benefitting from the step-up).

As noted previously, there is no step up in basis for tax deferred.

Yes, you already paid taxes on the Roth contributions, but you also paid taxes on anything in taxable.

The step up in basis only means that capital gains on your taxable would not be taxed, but CGs in
a Roth are not taxed.

In taxable, you would pay taxes on dividends as they came.
In a Roth, you do not pay taxes on dividends.

So while taxable may be preferable to tax deferred with the new requirement that children need
to deplete an IRA within 10 years, taxable is not preferable to Roth.

[notplannedbuthappy]

Thank you all for taking the time to review and share valuable suggestions. Below are my responses to some of the questions.

Have you used any tools like Firecalc to get a level of confidence?

I used Fidelity's retirement calculator and ran a couple of scenarios "Below market performance" and "Significantly below market performance" and got a confidence of 90+. I will rerun with reduced SS numbers. I have downloaded Flexible Retirement Planner but haven't used it. It seems a little overwhelming Will try the VPW Worksheet.

Does $110k account for health insurance? Taxes?

Yes

I would start your mySS account. I don't think the benefit can be $48k, so something is off there.

I have an account at ssa.gov and you are right. $48K assumes that I continue working till FRA (67 years). Good catch!

OP,
I don’t understand how your Cashflow will work for expenses till 2026. Perhaps I am missing how the funds in the 401k are invested. Are most of them in a Taxable 401k bucket?

About $1,150,000 in 401k is taxable. Our $110K/year spend is flexible and it seems like we need to bump it down a bit to be safe.
Once again, thank you.