Is It a Cardinal Sin to Withdraw from Tax Deferred First

[technovelist]

What assumptions are you making about the fraction of their income coming from SS?

For example, for a married couple with equal benefits, both claiming at the same age, with half their retirement spending coming from SS and half from investments, the death of one spouse would reduce the income by 25%. (If the SS benefits are unequal, the loss would be even less, and optimal SS claiming strategies should make them unequal. For example, if both spouses have the same income, the older spouse should claim at 70 and the younger spouse earlier.) A single person should be able to live on 75% as much as a couple, although this might involve moving to a smaller home.

That's an input into the program; I don't make any assumptions about it.

As you noted, the largest effect is when they have roughly equal Social Security payments.

About 50% of retirees get at least half of their income from Social Security, so your scenario is fairly common.

But even if the widow (usually) can eventually live on 75% of their joint income, there are often significant initial costs after the death of a spouse, especially if relocating. That's not a great time to lose 25% of your income, and the life insurance proceeds, generally available without taxation, can be very helpful in such cases.

"I didn't know what to expect before I wrote the program and was very surprised to find that the best way to cut off the left-hand tail risk for a lot of moderate-income and -asset couples, assuming they were in good health, was to buy 20-year term at ages below 65"
"About 50% of retirees get at least half of their income from Social Security, so your scenario is fairly common."

What age and yearly costs per $1,000 of coverage did you use for the program?
What is the definition for 'good health'?
Did you consider family health history for the rates?

"That's an input into the program; I don't make any assumptions about it."
Have you baseline tested this program against other programs to see if they come up with reasonably similar results?

There are inputs for life insurance ratings for both spouses, and the instructions for the program said they could apply for life insurance to get a free rating if they didn't know it.

The ages were an input.

The yearly costs per $1000 were taken from publicly available rates published by one of the big term insurance companies.

I don't know of any other similar programs or I wouldn't have written this one.

From my post above here are two of them....
Both RPM and Pralana will let you run future scenarios to optimize withdrawal strategies with your personal numbers and goals. Neither of them are quick to use or easy so you need to put in some efforts with setup/run/review top get the details. We have found both of them to be quite good and very helpful.
RPM
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Pralana
https://pralanaretirementcalculator.com/

Since you have mentioned that they aren't quick to use or easy, I'll probably pass because I already have my own situation well in hand. But thanks for the references if I decide to revisit this in the future.

[smitcat]

That's an input into the program; I don't make any assumptions about it.

As you noted, the largest effect is when they have roughly equal Social Security payments.

About 50% of retirees get at least half of their income from Social Security, so your scenario is fairly common.

But even if the widow (usually) can eventually live on 75% of their joint income, there are often significant initial costs after the death of a spouse, especially if relocating. That's not a great time to lose 25% of your income, and the life insurance proceeds, generally available without taxation, can be very helpful in such cases.

"I didn't know what to expect before I wrote the program and was very surprised to find that the best way to cut off the left-hand tail risk for a lot of moderate-income and -asset couples, assuming they were in good health, was to buy 20-year term at ages below 65"
"About 50% of retirees get at least half of their income from Social Security, so your scenario is fairly common."

What age and yearly costs per $1,000 of coverage did you use for the program?
What is the definition for 'good health'?
Did you consider family health history for the rates?

"That's an input into the program; I don't make any assumptions about it."
Have you baseline tested this program against other programs to see if they come up with reasonably similar results?

There are inputs for life insurance ratings for both spouses, and the instructions for the program said they could apply for life insurance to get a free rating if they didn't know it.

The ages were an input.

The yearly costs per $1000 were taken from publicly available rates published by one of the big term insurance companies.

I don't know of any other similar programs or I wouldn't have written this one.

From my post above here are two of them....
Both RPM and Pralana will let you run future scenarios to optimize withdrawal strategies with your personal numbers and goals. Neither of them are quick to use or easy so you need to put in some efforts with setup/run/review top get the details. We have found both of them to be quite good and very helpful.
RPM
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Pralana
https://pralanaretirementcalculator.com/

Since you have mentioned that they aren't quick to use or easy, I'll probably pass because I already have my own situation well in hand. But thanks for the references if I decide to revisit this in the future.

Perhaps you would like to make that program available for others to use and confirm the results similar to this other post on Bogleheads....
viewtopic.php?t=365518

If not perhaps run his program to confirm your results.

[pjtallman]

I know the standard advice is to withdraw from taxable accounts first in retirement. But if one wants to leave their taxable account for heirs (for the stepped-up basis), how damaging is it to withdraw from tax-deferred first and leave taxable alone as long as possible? Is there a way to calculate this?

Definitely not a Cardinal Sin!

To best gauge the impact use a Retirement calculator where you can vary the funding source. See the WIKI for some popular links….

WoodSpinner

Would you be so kind as to post wiki article link:)

[pjtallman]

I know the standard advice is to withdraw from taxable accounts first in retirement. But if one wants to leave their taxable account for heirs (for the stepped-up basis), how damaging is it to withdraw from tax-deferred first and leave taxable alone as long as possible? Is there a way to calculate this?

"Which Dollars to Spend First Every Year in Retirement" by Mike Piper

Video: https://youtu.be/atTp3sATI44?t=1571

Article: https://obliviousinvestor.com/which-dol ... etirement/

I hope that helps.

Much thanks for video link…exactly what I was looking for.

[technovelist]

"I didn't know what to expect before I wrote the program and was very surprised to find that the best way to cut off the left-hand tail risk for a lot of moderate-income and -asset couples, assuming they were in good health, was to buy 20-year term at ages below 65"
"About 50% of retirees get at least half of their income from Social Security, so your scenario is fairly common."

What age and yearly costs per $1,000 of coverage did you use for the program?
What is the definition for 'good health'?
Did you consider family health history for the rates?

"That's an input into the program; I don't make any assumptions about it."
Have you baseline tested this program against other programs to see if they come up with reasonably similar results?

There are inputs for life insurance ratings for both spouses, and the instructions for the program said they could apply for life insurance to get a free rating if they didn't know it.

The ages were an input.

The yearly costs per $1000 were taken from publicly available rates published by one of the big term insurance companies.

I don't know of any other similar programs or I wouldn't have written this one.

From my post above here are two of them....
Both RPM and Pralana will let you run future scenarios to optimize withdrawal strategies with your personal numbers and goals. Neither of them are quick to use or easy so you need to put in some efforts with setup/run/review top get the details. We have found both of them to be quite good and very helpful.
RPM
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Pralana
https://pralanaretirementcalculator.com/

Since you have mentioned that they aren't quick to use or easy, I'll probably pass because I already have my own situation well in hand. But thanks for the references if I decide to revisit this in the future.

Perhaps you would like to make that program available for others to use and confirm the results similar to this other post on Bogleheads....
viewtopic.php?t=365518

If not perhaps run his program to confirm your results.

I haven't kept up with tax law changes for some time so the results would not be as accurate as they would have been when I first wrote it in 2018. If I decide to get back to maintaining it I may put it up for others to use.

[WoodSpinner]

I know the standard advice is to withdraw from taxable accounts first in retirement. But if one wants to leave their taxable account for heirs (for the stepped-up basis), how damaging is it to withdraw from tax-deferred first and leave taxable alone as long as possible? Is there a way to calculate this?

Definitely not a Cardinal Sin!

To best gauge the impact use a Retirement calculator where you can vary the funding source. See the WIKI for some popular links….

WoodSpinner

Would you be so kind as to post wiki article link:)

Here you go ….

https://www.bogleheads.org/wiki/Retirem ... d_spending