Portfolio review request and withdraw advice in retirement

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Topic Author
daica
Posts: 3
Joined: Wed Jun 22, 2022 9:59 am

Portfolio review request and withdraw advice in retirement

Post by daica »

I found this website few months ago, and have learnt a lot from reading it, especially with the simple three-fund portfolio and asset allocation/location concept. Thanks to the bear market, I have the opportunity to convert and rebalance our investment portfolio based this concept. I am really appreciated everybody that contributed to this great forum.

I am a federal employee, and going to retire (under FERS) this September at age 56. My wife, age 55, already retired 20 years ago to take care our kids.

As of today, our (roughly 2.5M 60/40 portfolio) balance and allocation on different accounts are as followed:
Retirement Accounts (Total 1.31M in Tradition, 620K in Roth):
His TSP Account: 1.46M (including 190K in Roth), allocation: 63% in G fund, 37% in C fund
His Roth IRA: 160K in VTI
Her Roth IRA: 270K in VTI
Her Tradition IRA: 40K in BND
Brokerage Account (Total 566K):
XOM: 186K (unrealized 121K long-term capital gain)
VXUS: 300K (unrealized 50K short-term loss)
Cash: 80K

We live in CA, own home, and don’t have any debt. During our retirement, our estimate yearly expense (including health insurance, FEHB) before tax is 110K. Our yearly expense is based on my current annual salary 138K minus 30K yearly retirement contribution. With my 60K yearly pension (no COLA before age 62), we still need additional 50K per year withdrawing from our account. Depending on the market performance, we may also want to withdraw an additional 20K per year to fund our vacation.

Question 1: To minimize our tax (now and future such as IRMAA), my question is from what account (Traditional TSP or Brokerage) should we withdraw this 50K (or 70K)? As far as I understand, I can withdraw from TSP when I retire without penalty.

Question 2: Please give me feedback on our current investment portfolio. Can this safely support our retirement?

Question 3: In my brokerage account, I have an individual stock XOM, with a sizeable LT capital gain. I want to sell this and buy VTI. Can you please give me ideas how to get it done with the objective of minimizing our federal/CA taxes?

This is my first post, and I want to thank everybody in advance. I am looking forward to your helps and ideas for my questions.
sycamore
Posts: 4401
Joined: Tue May 08, 2018 12:06 pm

Re: Portfolio review request and withdraw advice in retirement

Post by sycamore »

Welcome to the forum daica!
daica wrote: Wed Jun 22, 2022 11:18 am Brokerage Account (Total 566K):
XOM: 186K (unrealized 121K long-term capital gain)
VXUS: 300K (unrealized 50K short-term loss)
Cash: 80K

Question 3: In my brokerage account, I have an individual stock XOM, with a sizeable LT capital gain. I want to sell this and buy VTI. Can you please give me ideas how to get it done with the objective of minimizing our federal/CA taxes?
At the very least, do three things:
1) turn off dividend reinvestment on XOM to stop buying any new shares (maybe you already did this?)
2) sell all VXUS to realize the 50K loss.
3) sell enough of XOM to realize 50K in gains.

The loss and the gain offset each other. Capital gains taxes are based on net (annual) gains. With a gain of zero, no taxes are due.

That still leaves you with 71K gains in XOM. Options:

1) sell all the remaining shares this year and realize 71K in gains. Pros: you switch from XOM to VTI quickly; you lock in your gains. Cons: you likely maximize taxes given that your regular income (and tax bracket) is probably as high as it'll go. I mention this choice to help focus the question on how quickly you want to switch out of XOM and how much you want to lock in gains.

2) defer selling XOM until you retire and your overall income (and tax bracket) is lower, giving you some headroom to sell XOM at a lower rate. This option involves some guessing on your part regarding what your future income and future rates will be. Federal tax rates are - by current law - going to revert to the pre 2017 rates.

3) sell only enough XOM each year such that the gain doesn't push you into a higher tax bracket. This assumes you'd be OK paying your current cap gains rate on the gain. I don't know what your rate is. At least 15% fed, maybe 20% or 20% + NIIT. Not sure about California.

With options 2 and 3, you take on the risk that XOM could drop in price over the coming years, thereby reducing your taxes but unfortunately also reducing your net return. I know you mentioned minimizing taxes but net return is more important dollar-wise.
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arcticpineapplecorp.
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Joined: Tue Mar 06, 2012 9:22 pm

Re: Portfolio review request and withdraw advice in retirement

Post by arcticpineapplecorp. »

sycamore offered good advice.

regarding the withdrawal you ask, it looks like right now your assets are around $2.5 million. A $50k withdrawal from $2.5 million is just a 2% withdrawal rate. So you should be good.

Withdrawal from the tax deferred accounts first to lower RMDs assuming you're retiring before RMDs will begin at 72.

You might look at Roth IRA conversions as well, but you'll have to focus on the tax rate at the time, your taxable income, etc.

You mention pension but no SS. Are you elig. for SS?

If so, you'll likely need a lower withdrawal rate than 2%.

And if eligible for SS, do Roth conversions before you take SS if possible.

read more here:
https://www.bogleheads.org/wiki/Roth_IRA_conversion
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
Topic Author
daica
Posts: 3
Joined: Wed Jun 22, 2022 9:59 am

Re: Portfolio review request and withdraw advice in retirement

Post by daica »

Thanks sycamore and arcticpineapplecorp for your advices.

If I sell VXUS to harvest the 50K loss, is there any other equity (wash-sale rule) that I can buy to have some international exposure in my asset?

Regarding to my SS, I will have 27K at 62, or 37K at 67, or 46K at 70. My wife will collect spouse SS (or about half of mine). However my 60K pension will be reduced to 40K with COLA when I reach 62. As the current, I am planning to take SS at 62.

Again thank you all for your inputs.
sycamore
Posts: 4401
Joined: Tue May 08, 2018 12:06 pm

Re: Portfolio review request and withdraw advice in retirement

Post by sycamore »

daica wrote: Wed Jun 22, 2022 11:18 am Question 1: To minimize our tax (now and future such as IRMAA), my question is from what account (Traditional TSP or Brokerage) should we withdraw this 50K (or 70K)? As far as I understand, I can withdraw from TSP when I retire without penalty.
It's a tricky question to answer because there are so many variables at play. Remember that you may not be able to completely optimize one variable (like taxes paid) but by avoiding big mistakes and by following some simple guidelines you can get close enough.

Some thoughts:

- One general approach people is to make the decision one year at a time. In some years a TSP withdrawal is best, other years taxable is best. Or maybe even a bit of withdrawals from both. Basically, ask yourself each year what would your tax be if you withdrew from TSP versus taxable. Then choose the lower tax approach.

- If you find that withdrawals from either TSP or taxable increases your income high enough to make the taxes unpalatable, instead take a portion of the withdrawals from Roth.

- With taxable withdrawals, remember that a portion of it is simply a return of your capital (initial purchase), and that portion is not taxed. So if you withdraw $60K but $20K of those shares was your original purchase, you'd only be taxed on a gain of $40K. By contrast, a $60K withdrawal from a Trad 401k/IRA is all counted as income. By choosing taxable withdrawals you may be able to keep your total income below a certain level but still have enough for spending.

- With TSP, can you withdraw only from the Traditional (pre-tax) account, or do withdrawals come proportionally from Trad and Roth? If it were me, I'd want to avoid withdrawals from Roth accounts as long as possible.

- As a married couple, the MAGI (2020 for 2022 premiums) are $182K before you cross into IRMAA tier 1. Given your $60K pension, and another $60k withdrawal from TSP, you'd be well under that threshold. So IRMAA isn't the main concern.

- Some people are concerned about a "tax torpedo" that can happens when you start taking RMDs. If your TSP/401k/IRA accounts are large enough, the RMD amount may be more than you need for spending, and it may push you into a higher tax bracket. This leads people to withdraw from Trad 401k/IRAs first or to Roth convert some of it. In your case, it's not clear that you'd be hit by that tax torpedo. If you spend down a large chunk of it before age 72, your RMDs probably won't be so high. (As always, no one knows how the markets will do over the next 15 years -- if they go gangbusters your accounts & RMDs may very well be high, but that's not a bad problem.)



To get more precise answers, you need to make a model of your future income, tax rates, withdrawals, expenses, etc. Then run various simulations to help compare whether it's better to withdraw from taxable versus Trad IRA, or to Roth convert (and how much), etc. There are several calculators out there to help with this.

One common suggestion is Retiree Portfolio Model:
The Retiree Portfolio Model is a downloadable Excel spreadsheet created by a retiree for retirees. It models the most common financial aspects of a retiree and their spouse's lives, including pensions, Social Security benefits, living expenses, IRA Required Minimum Distributions, purchase of an annuity, sale of a house, and many other items including Federal and state income taxes. All of this data is used to create a model of their accounts over a period of 1 to 40 years.

A feature of this model allows the user to compare their normal portfolio results with one that includes alternative choices, such as doing Roth IRA conversions, choosing alternative Social Security starting ages and benefits, or buying a Single Premium Immediate Annuity. The model was developed by forum member BigFoot48.
I've not used it myself but it has a separate thread for questions & answers from the Boglehead community.
sycamore
Posts: 4401
Joined: Tue May 08, 2018 12:06 pm

Re: Portfolio review request and withdraw advice in retirement

Post by sycamore »

daica wrote: Wed Jun 22, 2022 1:36 pm If I sell VXUS to harvest the 50K loss, is there any other equity (wash-sale rule) that I can buy to have some international exposure in my asset?
Some common Tax Loss Harvest partners for VXUS are:
- IXUS - from iShares, another "Total" international stock ETF (different index than VXUS)
- VEU - from Vanguard, it follows the FTSE All-World ex-US index (large & mid cap)
- VEA - from Vanguard, it follows the FTSE Developed Markets index (so no exposure to Emerging Markets, if that's important to you)

The standard caveat with "will it be a wash sale?" questions is that no one here knows the answer. Maybe even the IRS doesn't know. I personally think none of those options would cause a wash sale.
Topic Author
daica
Posts: 3
Joined: Wed Jun 22, 2022 9:59 am

Re: Portfolio review request and withdraw advice in retirement

Post by daica »

Thank sycamore for your advice. I will look into into IRMAA, RMD, and Roth conversion for my situation. It sounds quite complicated with all of these factors involved, but I guess I have more time in retirement to look into those.

Regarding to TSP withdraw, as far as I understand, I can ask to withdraw only Traditional portion. I also understand that Roth asset is the last one we should touch in the order of withdrawal. In fact, my plan is as soon as I retire, I will request to transfer all of my Roth portion in TSP to my Fidelity Roth IRA for an ease of management it in the future. I saw some threads in the forum showing how to do that; however, with the recent change in TSP administration, this may be a totally new process which I have not seen anyone discuss it yet.
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