How do retirement withdrawals work? Explain like I'm five. :)

[DCBogler]

Hi, I am 53 and planning to retire at 62. I am having trouble understanding what will happen when I retire.

Currently I have about 500K in investments, and about 300K in home equity.

Say that on the day I retire, I have 400K in 401Ks, 50K in Roth IRA, 20K in traditional IRAs, and 30K in a savings account. I plan to take SS at 65, and need 4K monthly to cover my bills (I will have a mortgage until 71 if I choose not to move).

How do I get the money out, and how do I minimize taxes?

Thanks!

[zie]

See the wiki on Withdrawal Methods: https://www.bogleheads.org/wiki/Withdrawal_methods

Does your 4k/month expenses include health care costs(insurance can get spendy), replacement cars, new water heaters and roofs on your house, etc?

Hopefully you are currently saving about $40k/yr for retirement? Otherwise you may not make it, unless your SS payments will be very nice @ 65. Anyways, that's off-topic. If you want to dig into that, I recommend following the template here: https://www.bogleheads.org/wiki/Asking_ ... _questions with a new post.

Generally you just sell as needed to meet your bills. Some sell once a year all at once, so they know they have the year's expenses covered, others dribble money out as needed. Since almost all of your money will be in a (traditional?) 401k, you will just pay taxes to the IRS on your 401k withdrawals. Since you will have about 3yrs until you start pulling from SS, you might want to do some extra conversions from your 401k to your Roth IRA during that time.

There is no sure-fire guaranteed easy way to withdraw and minimize taxes, as your particular tax situation will be different from everyone else. You can run some sample tax returns given different scenarios and there are some tax planning software you can play with, though I'm not up to speed on any of those.

[RyeBourbon]

You are going to want to have more assets than that to comfortably retire.

Let's assume you start SS at 65 and are single. You might get say, $2,000/month or $24k per year.

You need $144k to bridge from 62 to 64 and then a $24k per year withdrawal from your accounts (plus the $24k SS). Using the 25x rule, you should have $600k plus $144k ($744k) to retire at 62 - this assumes you are invested at 60/40 stocks/bonds. Given that you are at $500k and have 9 years, you should be able to do that.

Plug in your numbers and keep in mind that each year you will want to adjust up your projected expense number for inflation.

[Squirrel208]

Assuming you expect to live another 20+ years after you retire, the 9.6% annual withdrawal rate described in your scenario likely isn't sustainable beyond 10 to 15 years or so. You may need to cut that (or your expenses) in half to sustain withdrawals for 30 years or more without running out of money.

I suggest reading all 3 of these excellent books at your earliest opportunity:
The Bogleheads' Guide to Retirement Planning
Your Complete Guide to a Successful & Secure Retirement, by Larry Swedroe & Kevin Grogan
How to Make Your Money Last: The Indispensable Retirement Guide, by Jane Bryant Quinn

[DCBogler]

Thanks for your responses. A few more details:

My mortgage should be paid off by the time I’m 71. The 4k/month should be reduced after that. I could also sell the house and rent or take in renters.

The 500k has another nine years to grow. Im saving about 20k/year in my 401k.

I don’t understand how I will be taxed once I retire. Say that by then I have 800k, mostly in 401ks. I will have to use that money until 65 when my SS starts. How will that money be taxed federally? My state does not have tax for SS.

[Jack FFR1846]

How much will your SS be? Do you have a pension or some other income that will be coming? Also, you can keep working beyond 62 to increase your savings.

Money you pull out of your Roth is not taxed and not considered income by the IRS.

Money you pull out of your traditional IRA or 401k is taxed as ordinary income and the more you pull out, you climb the tax brackets after you subtract your standard deduction. The same as your Federal and State taxes are on your W2 income. You no longer have to pay payroll taxes.

[DCBogler]

Hi, I believe my SS should be around 2700 if I take it at 65.

[delamer]

You probably want to withdraw from the 401(k) and traditional IRA first, at least to the top of the 12% bracket (or the lowest non-zero bracket at the time). The tax rate will vary for a given income level depending on whether you are single or married.

The custodian of your accounts can fill in the mechanics — you could set up automatic withdrawals throughout the year or initiate withdrawals as needed.

You’ll have two stages to your retirement, in terms of withdrawals: 1) ages 62 to 65 when all your income will come out of your savings and 2) age 65 forward when your withdrawals will decrease due to Social Security covering a chunk of your expenses.

[DCBogler]

Thanks for all these great replies!

I had forgotten about the standard deduction. So for the years from 62-65, I could withdraw 60k/year from my 401k. However I wouldn’t pay federal tax on that whole amount. So I might only pay tax on 40k of that.

Once my mortgage is paid off when I’m 71, I won’t need the 4k monthly, so hopefully most of my expenses will be covered by SS at that point.

[Katietsu]

To answer your tax question, the money you use from the 401k and the traditional IRA will be subject to the same income taxes as the wages that you currently earn. A single person with $48,000 in taxable wages pays about $4000 in federal taxes. A person who withdraws $48,000 from a 401k also pays about $4000 in taxes.

Once you start collecting social security, it gets more complex. Only part of your social security is considered taxable income. And the % can vary from 0 to 85 depending on your income sources. For example, $24,000 of social security plus $24,000 of 401k withdrawals for a single person would be a federal tax liability under $2000.

[DCBogler]

To answer your tax question, the money you use from the 401k and the traditional IRA will be subject to the same income taxes as the wages that you currently earn. A single person with $48,000 in taxable wages pays about $4000 in federal taxes. A person who withdraws $48,000 from a 401k also pays about $4000 in taxes.

Once you start collecting social security, it gets more complex. Only part of your social security is considered taxable income. And the % can vary from 0 to 85 depending on your income sources. For example, $24,000 of social security plus $24,000 of 401k withdrawals for a single person would be a federal tax liability under $2000.

Thanks for this explanation, that is much lower taxes than I thought it would be.

[FiveK]

Thanks for this explanation, that is much lower taxes than I thought it would be.

See Tax estimation tools - Bogleheads if you'd like to do some of your own estimating.

[Cah]

Don't forget the 10% penalty on any $ taken out of a 401k prior to 59.5 that's about 6 years for you.
Otherwise simple to set up. Auto withdraw monthly what you fell comfortable with. Retire early, you can always go back to work if you run out of loot.

[Grt2bOutdoors]

Don't forget the 10% penalty on any $ taken out of a 401k prior to 59.5 that's about 6 years for you.
Otherwise simple to set up. Auto withdraw monthly what you fell comfortable with. Retire early, you can always go back to work if you run out of loot.

He will have no penalty - he's 53 now, planning to take it at age 62. The penalty is a non-event.

[Cah]

Good point. Misread, thought early retirement now and ss at 62.

[dratkinson]

Money withdrawn from:
--Traditional (tax-deferred: tIRA, t401k,...) accounts/retirement plans are taxes as ordinary income. This means you lose tax benefits for: QDI (qualified dividend income: taxed like LTCGs), LTCGs (long-term capital gains), and FTC (foreign tax credit). Withdrawals (principal+growth) are for: living expenses, Roth conversions. RMDs (required minimum distributions) must start at age 70.

N.B. Bond dividends here are treated no worse than in taxable, so can skew toward bonds to reduce expected growth/taxes on withdrawals. You need bonds in retirement; some can go here.

--Taxable accounts distributions (dividends + capital gains) receive tax benefits for QDI, LTCGs, FTC, and tax-exempt dividends (municipal bond funds). Since you've already paid the tax on the principal, the only additional tax owed on principal is when you sell---you'll owe a tax on any profit (STCG, LTCG) or loss (STCL, LTCL). If in <=15% fed tax bracket, QDI/LTCG are taxed at 0%.*

--Roth (tax-free: rIRA, r401k,...) accounts/retirement plans have tax-free growth/withdrawals. It is for this reason they should be withdrawn from last, to give more time for tax-free growth. You need stocks in retirement, so skew toward stocks to maximize expected tax-free growth/withdrawals.



* Review Sch B for opportunities to reduce taxes.
--Sch B part 1. Everything reported here (1099INT) is taxed as ordinary income (bank/CU interest, saving bond interest, account opening bonuses, chasing teaser rates,...). Reduce or eliminate.
--Sch B part 2. Everything reported here (1099DIV) should have offsetting tax benefits for: QDI, LTCGs, FTC, and TE dividends. You'll get all of these by using TSM, TISM, and muni funds in your taxable account.

See: https://www.bogleheads.org/wiki/Tax-eff ... _placement



On income of $48K as single filer, you'll probably be in 12% fed tax bracket. Maybe 15% if tax code sunsets in ~2026.

How is SS taxed? See: https://www.aarp.org/retirement/social- ... taxed.html
It looks like 50% of your SS will be taxed.

N.B. SS benefits grow 8%/yr for every year you delay taking it, until age 70.



Fed tax owed. After single standard deduction on income of $48K (=$24K traditional withdrawals + $24K SS benefit), looks like you'll owe <$2K.

Verify tax owed in retirement by: https://www.mortgagecalculator.org/calc ... ulator.php
--Input: Filing Status & Dependents: Filing Status: single, age 62
--Input: Income All Other Sources: 24K Taxable IRA distributions; 24K Total SS benefits
--Output tabs at top of form: Calculate or View Report.
   Tax owed: $1745.

You'll need to wag your state income tax.



How to withhold tax in retirement so you don't need to file estimated quarterly tax payments?
--You can ask your broker to withhold tax on your withdrawals (living expenses/Roth conversions/RMDs).
--You can ask SS to withhold fed tax (only) on your benefit. (Believe max fed withholding is 22%.)



IRS Safe Harbor rules. If you meet the rule requirements, then you can hold the remaining tax owed earning interest until you file your taxes.
--Search IRS Safe Harbor rules: https://www.google.com/search?&q=irs+safe+harbor+rules
--Search tax payment methods: https://www.irs.gov/payments

Recall many BHs like the method: electronic funds withdrawal during efiling.



How much should your retirement accounts grow in 9yrs (nper) from age 53 to age 62? Assume current total investments of $500K (pv), $20K (pmt) annual contributions, and 6% (rate) market growth on 50/50 AA (asset allocation: stock/bond ratio):
    ~$1M (copy/paste character string between quotes into an Excel cell: "=FV(0.06,62-53,-20000,-500000,0)"---don't include quote marks.

N.B. Cash flow sign convention: money out of your hand into an investment is negative, money out of an investment into your hand is positive. Every cash flow calculation must have both positive/negative signs; sometimes the other sign is in the answer.

N.B. Having a 50/50 AA is give you a better chance to avoid the SoRR---you can sell bonds when stocks are down, and sell stocks when bonds are down.



RMDs. For the purpose of wagging growth of your total investments to age 70 and the start of RMDs, one lump sum Excel calculation is okay.
But for the purpose of calculating required RMDs for individual account types:
--For traditional IRAs. It's okay to withdraw the total RMD amount owed for the year, from one tIRA.
--For traditional employers retirement plans. The required RMD owed for the year must be withdrawn from each employers retirement plan.

One way to simplify your life before Roth conversions start, or RMDs start at age 70 is to roll all of your traditional employers plans and tIRAs into one employer's plan. This means you'd only have one traditional employer's plan, so only need to make one RMD/yr.

Also by eliminating all of your tIRAs, you also eliminate the tIRA pro-rata problem. See Caution in wiki TLH topic (link below).



SWR (safe withdrawal rate).
--A SWR of 4% from your retirement plans is reported to exhaust all within 30yrs. This is okay if your family has short genes. Not so good otherwise.
--If you can get your annual withdrawals down to <3%, then you are in the range of perpetual SWRs. Meaning your annual withdrawals should be offset by annual NAV growth + dividends, so never exhaust your retirement investments.

So it looks like your SWR should be ~2.4% (=24K/1M) at age 62. (You need to adjust this for inflation, which could push you into next tax bracket.)



If you don't like your answers, then you need a Plan-B: work longer, work part-time in retirement, move to lower cost of living area,....

One Plan-B option is to work 3yrs more until age 65, which should:
--Grow your retirement plans to ~$1.3M (Excel cell: "=FV(0.06,65-53,-20000,-500000,0)").
--Grow your SS benefit 8%/yr to ~$30K (=24K x 1.08 x 1.08 x 1.08).
--Qualify you for low-cost Medicare, which can be supplemented with a low-cost supplemental plan.

For better answers, lather, rinse, repeat with better numbers.



You need to worry about a crash in retirement. Why? You want to avoid a SoRR (sequence of returns risk): being forced to sell stocks during a crash to pay for living expenses. Why? During a crash:
--Stock can lose 50-90%, but should outperform inflation. (Lost 40% in 2008-9, ~4yrs to recover; lost 90% in great depression, ~10yrs to recover.)
--Bonds can lose 5-15%, so safer than stocks, but not expected to outperform inflation.
--Stock/bond crashes are not typically coincidental, but there have been exceptions.
--Most crashes recover within ~4yrs, but there have been exceptions.
--CD have insured principal, but expected lower yield than better (higher after-tax income, within reason) bonds.

From above, some retirees report keeping >5yrs of living expenses in cash equivalents.
--Use 5yr CD ladder for insured principal. Buy annual 5yr CD (indexed for inflation). Why? Higher expected return than HY savings. Live on matured CD.
--Taxable account. Keep >5yrs of bonds in taxable. Keep >5yrs of stocks in taxable. Buy new 5yr CD from bonds when bonds are up. Buy new 5yr CD and refill bonds when stocks are up. Refill taxable account from traditional retirement plans. Save Roth retirement plans to tap last.
--If crash last >4yrs, then you have 5yrs in cash equivalents to wait for bonds/stocks, one/both to recover.



If you have taxable investments:
--BHs generally recommend TSM (total US stock market index fund: >90% QDI), and TISM (total international stock market index fund: >70% QDI + ~10% FTC). You need stocks in taxable, and these work.
--I recommend using VWLTX (Vanguard’s LT national muni fund) for taxable bonds. Why? Its dividends are tax exempt, don’t add to AGI so don’t push you toward next higher tax bracket, staying in 12/15% fed tax brackets ensures QDI/LTCG taxed at 0% and generally produced higher after-tax income than TBM (total US bond market index fund)---the 3fund portfolio's preferred bonds. It's within my risk tolerance. BHs don’t recommend this muni in lower tax brackets because it’s slightly more risky than TBM; risk can be TLH’d.

See 3fund portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio
See TLH (tax-loss harvest): https://www.bogleheads.org/wiki/Tax_loss_harvesting

[DIYtrixie]

Money withdrawn from:
--Traditional (tax-deferred: tIRA, t401k,...) accounts/retirement plans are taxes as ordinary income. This means you lose tax benefits for: QDI (qualified dividend income: taxed like LTCGs), LTCGs (long-term capital gains), and FTC (foreign tax credit). Withdrawals (principal+growth) are for: living expenses, Roth conversions. RMDs (required minimum distributions) must start at age 70.

N.B. Bond dividends here are treated no worse than in taxable, so can skew toward bonds to reduce expected growth/taxes on withdrawals. You need bonds in retirement; some can go here.

--Taxable accounts distributions (dividends + capital gains) receive tax benefits for QDI, LTCGs, FTC, and tax-exempt dividends (municipal bond funds). Since you've already paid the tax on the principal, the only additional tax owed on principal is when you sell---you'll owe a tax on any profit (STCG, LTCG) or loss (STCL, LTCL). If in <=15% fed tax bracket, QDI/LTCG are taxed at 0%.*

--Roth (tax-free: rIRA, r401k,...) accounts/retirement plans have tax-free growth/withdrawals. It is for this reason they should be withdrawn from last, to give more time for tax-free growth. You need stocks in retirement, so skew toward stocks to maximize expected tax-free growth/withdrawals.



* Review Sch B for opportunities to reduce taxes.
--Sch B part 1. Everything reported here (1099INT) is taxed as ordinary income (bank/CU interest, saving bond interest, account opening bonuses, chasing teaser rates,...). Reduce or eliminate.
--Sch B part 2. Everything reported here (1099DIV) should have offsetting tax benefits for: QDI, LTCGs, FTC, and TE dividends. You'll get all of these by using TSM, TISM, and muni funds in your taxable account.

See: https://www.bogleheads.org/wiki/Tax-eff ... _placement



On income of $48K as single filer, you'll probably be in 12% fed tax bracket. Maybe 15% if tax code sunsets in ~2026.

How is SS taxed? See: https://www.aarp.org/retirement/social- ... taxed.html
It looks like 50% of your SS will be taxed.

N.B. SS benefits grow 8%/yr for every year you delay taking it, until age 70.



Fed tax owed. After single standard deduction on income of $48K (=$24K traditional withdrawals + $24K SS benefit), looks like you'll owe <$2K.

Verify tax owed in retirement by: https://www.mortgagecalculator.org/calc ... ulator.php
--Input: Filing Status & Dependents: Filing Status: single, age 62
--Input: Income All Other Sources: 24K Taxable IRA distributions; 24K Total SS benefits
--Output tabs at top of form: Calculate or View Report.
   Tax owed: $1745.

You'll need to wag your state income tax.



How to withhold tax in retirement so you don't need to file estimated quarterly tax payments?
--You can ask your broker to withhold tax on your withdrawals (living expenses/Roth conversions/RMDs).
--You can ask SS to withhold fed tax (only) on your benefit. (Believe max fed withholding is 22%.)



IRS Safe Harbor rules. If you meet the rule requirements, then you can hold the remaining tax owed earning interest until you file your taxes.
--Search IRS Safe Harbor rules: https://www.google.com/search?&q=irs+safe+harbor+rules
--Search tax payment methods: https://www.irs.gov/payments

Recall many BHs like the method: electronic funds withdrawal during efiling.



How much should your retirement accounts grow in 9yrs (nper) from age 53 to age 62? Assume current total investments of $500K (pv), $20K (pmt) annual contributions, and 6% (rate) market growth on 50/50 AA (asset allocation: stock/bond ratio):
    ~$1M (copy/paste character string between quotes into an Excel cell: "=FV(0.06,62-53,-20000,-500000,0)"---don't include quote marks.

N.B. Cash flow sign convention: money out of your hand into an investment is negative, money out of an investment into your hand is positive. Every cash flow calculation must have both positive/negative signs; sometimes the other sign is in the answer.

N.B. Having a 50/50 AA is give you a better chance to avoid the SoRR---you can sell bonds when stocks are down, and sell stocks when bonds are down.



RMDs. For the purpose of wagging growth of your total investments to age 70 and the start of RMDs, one lump sum Excel calculation is okay.
But for the purpose of calculating required RMDs for individual account types:
--For traditional IRAs. It's okay to withdraw the total RMD amount owed for the year, from one tIRA.
--For traditional employers retirement plans. The required RMD owed for the year must be withdrawn from each employers retirement plan.

One way to simplify your life before Roth conversions start, or RMDs start at age 70 is to roll all of your traditional employers plans and tIRAs into one employer's plan. This means you'd only have one traditional employer's plan, so only need to make one RMD/yr.

Also by eliminating all of your tIRAs, you also eliminate the tIRA pro-rata problem. See Caution in wiki TLH topic (link below).



SWR (safe withdrawal rate).
--A SWR of 4% from your retirement plans is reported to exhaust all within 30yrs. This is okay if your family has short genes. Not so good otherwise.
--If you can get your annual withdrawals down to <3%, then you are in the range of perpetual SWRs. Meaning your annual withdrawals should be offset by annual NAV growth + dividends, so never exhaust your retirement investments.

So it looks like your SWR should be ~2.4% (=24K/1M) at age 62. (You need to adjust this for inflation, which could push you into next tax bracket.)



If you don't like your answers, then you need a Plan-B: work longer, work part-time in retirement, move to lower cost of living area,....

One Plan-B option is to work 3yrs more until age 65, which should:
--Grow your retirement plans to ~$1.3M (Excel cell: "=FV(0.06,65-53,-20000,-500000,0)").
--Grow your SS benefit 8%/yr to ~$30K (=24K x 1.08 x 1.08 x 1.08).
--Qualify you for low-cost Medicare, which can be supplemented with a low-cost supplemental plan.

For better answers, lather, rinse, repeat with better numbers.



You need to worry about a crash in retirement. Why? You want to avoid a SoRR (sequence of returns risk): being forced to sell stocks during a crash to pay for living expenses. Why? During a crash:
--Stock can lose 50-90%, but should outperform inflation. (Lost 40% in 2008-9, ~4yrs to recover; lost 90% in great depression, ~10yrs to recover.)
--Bonds can lose 5-15%, so safer than stocks, but not expected to outperform inflation.
--Stock/bond crashes are not typically coincidental, but there have been exceptions.
--Most crashes recover within ~4yrs, but there have been exceptions.
--CD have insured principal, but expected lower yield than better (higher after-tax income, within reason) bonds.

From above, some retirees report keeping >5yrs of living expenses in cash equivalents.
--Use 5yr CD ladder for insured principal. Buy annual 5yr CD (indexed for inflation). Why? Higher expected return than HY savings. Live on matured CD.
--Taxable account. Keep >5yrs of bonds in taxable. Keep >5yrs of stocks in taxable. Buy new 5yr CD from bonds when bonds are up. Buy new 5yr CD and refill bonds when stocks are up. Refill taxable account from traditional retirement plans. Save Roth retirement plans to tap last.
--If crash last >4yrs, then you have 5yrs in cash equivalents to wait for bonds/stocks, one/both to recover.



If you have taxable investments:
--BHs generally recommend TSM (total US stock market index fund: >90% QDI), and TISM (total international stock market index fund: >70% QDI + ~10% FTC). You need stocks in taxable, and these work.
--I recommend using VWLTX (Vanguard’s LT national muni fund) for taxable bonds. Why? Its dividends are tax exempt, don’t add to AGI so don’t push you toward next higher tax bracket, staying in 12/15% fed tax brackets ensures QDI/LTCG taxed at 0% and generally produced higher after-tax income than TBM (total US bond market index fund)---the 3fund portfolio's preferred bonds. It's within my risk tolerance. BHs don’t recommend this muni in lower tax brackets because it’s slightly more risky than TBM; risk can be TLH’d.

See 3fund portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio
See TLH (tax-loss harvest): https://www.bogleheads.org/wiki/Tax_loss_harvesting

Under current tax laws, RMDs for OP will not start until age 73:
https://www.irs.gov/retirement-plans/re ... tions-faqs

[dratkinson]

..Under current tax laws, RMDs for OP will not start until age 73:
https://www.irs.gov/retirement-plans/re ... tions-faqs

Thanks. I'll correct my mistake shortly. Just too much to know; and what you thought you knew, keeps changing.

Also see I need to make a few other corrections: grammar, maybe a second though here/there. Will try to collect all changes and do them at one time---I like one-and-done.



You wouldn't happen to recall a reference to the different protection levels given to the different account types? I ask because I seem to recall that in employer vs individual accounts, one has more protection from lawsuits/garnishment than the other. The difference could determine whether someone decides to consolidate their retirement plans into an employer's retirement plan vs an individual retirement account.

[sc9182]

Nope - dividends only/mainly income strategy is suboptimal.

Nope - annuities in- general won’t help you much (infact they may suck money out of you)

Nope - there is no “successful” strategy for “principal preservation” in/during retirement withdrawal phase- you could be affected by Interest-rates, market-fluctuations, SORR, future-taxation, and/or inflation risks down the line - 10.20,30,40 years into your joint life.

Well - that’s how I might converse to a 5-year old. Want to have more mature discussions- lay it out, right here.

[imbogled]

SWR (safe withdrawal rate).
--A SWR of 4% from your retirement plans is reported to exhaust all within 30yrs. This is okay if your family has short genes. Not so good otherwise.
--If you can get your annual withdrawals down to <3%, then you are in the range of perpetual SWRs. Meaning your annual withdrawals should be offset by annual NAV growth + dividends, so never exhaust your retirement investments.

I did not quote the whole post for space reasons but, I have to say what an incredible effort helping someone was shown by this thorough post! True Boglehead spirit.

[DCBogler]

..Under current tax laws, RMDs for OP will not start until age 73:
https://www.irs.gov/retirement-plans/re ... tions-faqs

Thanks. I'll correct my mistake shortly. Just too much to know; and what you thought you knew, keeps changing.

Also see I need to make a few other corrections: grammar, maybe a second though here/there. Will try to collect all changes and do them at one time---I like one-and-done.



You wouldn't happen to recall a reference to the different protection levels given to the different account types? I ask because I seem to recall that in employer vs individual accounts, one has more protection from lawsuits/garnishment than the other. The difference could determine whether someone decides to consolidate their retirement plans into an employer's retirement plan vs an individual retirement account.

Thanks so much for putting this together! I'm going to print it out and keep it with my retirement documents.

[dbr]

You wouldn't happen to recall a reference to the different protection levels given to the different account types? I ask because I seem to recall that in employer vs individual accounts, one has more protection from lawsuits/garnishment than the other. The difference could determine whether someone decides to consolidate their retirement plans into an employer's retirement plan vs an individual retirement account.

Here is one reference. The issue arises under state law.

https://www.irafinancialgroup.com/learn ... %20rows%20

[CyclingDuo]

Money withdrawn from:
--Traditional (tax-deferred: tIRA, t401k,...) accounts/retirement plans are taxes as ordinary income. This means you lose tax benefits for: QDI (qualified dividend income: taxed like LTCGs), LTCGs (long-term capital gains), and FTC (foreign tax credit). Withdrawals (principal+growth) are for: living expenses, Roth conversions. RMDs (required minimum distributions) must start at age 70.

N.B. Bond dividends here are treated no worse than in taxable, so can skew toward bonds to reduce expected growth/taxes on withdrawals. You need bonds in retirement; some can go here.

--Taxable accounts distributions (dividends + capital gains) receive tax benefits for QDI, LTCGs, FTC, and tax-exempt dividends (municipal bond funds). Since you've already paid the tax on the principal, the only additional tax owed on principal is when you sell---you'll owe a tax on any profit (STCG, LTCG) or loss (STCL, LTCL). If in <=15% fed tax bracket, QDI/LTCG are taxed at 0%.*

--Roth (tax-free: rIRA, r401k,...) accounts/retirement plans have tax-free growth/withdrawals. It is for this reason they should be withdrawn from last, to give more time for tax-free growth. You need stocks in retirement, so skew toward stocks to maximize expected tax-free growth/withdrawals.



* Review Sch B for opportunities to reduce taxes.
--Sch B part 1. Everything reported here (1099INT) is taxed as ordinary income (bank/CU interest, saving bond interest, account opening bonuses, chasing teaser rates,...). Reduce or eliminate.
--Sch B part 2. Everything reported here (1099DIV) should have offsetting tax benefits for: QDI, LTCGs, FTC, and TE dividends. You'll get all of these by using TSM, TISM, and muni funds in your taxable account.

See: https://www.bogleheads.org/wiki/Tax-eff ... _placement



On income of $48K as single filer, you'll probably be in 12% fed tax bracket. Maybe 15% if tax code sunsets in ~2026.

How is SS taxed? See: https://www.aarp.org/retirement/social- ... taxed.html
It looks like 50% of your SS will be taxed.

N.B. SS benefits grow 8%/yr for every year you delay taking it, until age 70.



Fed tax owed. After single standard deduction on income of $48K (=$24K traditional withdrawals + $24K SS benefit), looks like you'll owe <$2K.

Verify tax owed in retirement by: https://www.mortgagecalculator.org/calc ... ulator.php
--Input: Filing Status & Dependents: Filing Status: single, age 62
--Input: Income All Other Sources: 24K Taxable IRA distributions; 24K Total SS benefits
--Output tabs at top of form: Calculate or View Report.
   Tax owed: $1745.

You'll need to wag your state income tax.



How to withhold tax in retirement so you don't need to file estimated quarterly tax payments?
--You can ask your broker to withhold tax on your withdrawals (living expenses/Roth conversions/RMDs).
--You can ask SS to withhold fed tax (only) on your benefit. (Believe max fed withholding is 22%.)



IRS Safe Harbor rules. If you meet the rule requirements, then you can hold the remaining tax owed earning interest until you file your taxes.
--Search IRS Safe Harbor rules: https://www.google.com/search?&q=irs+safe+harbor+rules
--Search tax payment methods: https://www.irs.gov/payments

Recall many BHs like the method: electronic funds withdrawal during efiling.



How much should your retirement accounts grow in 9yrs (nper) from age 53 to age 62? Assume current total investments of $500K (pv), $20K (pmt) annual contributions, and 6% (rate) market growth on 50/50 AA (asset allocation: stock/bond ratio):
    ~$1M (copy/paste character string between quotes into an Excel cell: "=FV(0.06,62-53,-20000,-500000,0)"---don't include quote marks.

N.B. Cash flow sign convention: money out of your hand into an investment is negative, money out of an investment into your hand is positive. Every cash flow calculation must have both positive/negative signs; sometimes the other sign is in the answer.

N.B. Having a 50/50 AA is give you a better chance to avoid the SoRR---you can sell bonds when stocks are down, and sell stocks when bonds are down.



RMDs. For the purpose of wagging growth of your total investments to age 70 and the start of RMDs, one lump sum Excel calculation is okay.
But for the purpose of calculating required RMDs for individual account types:
--For traditional IRAs. It's okay to withdraw the total RMD amount owed for the year, from one tIRA.
--For traditional employers retirement plans. The required RMD owed for the year must be withdrawn from each employers retirement plan.

One way to simplify your life before Roth conversions start, or RMDs start at age 70 is to roll all of your traditional employers plans and tIRAs into one employer's plan. This means you'd only have one traditional employer's plan, so only need to make one RMD/yr.

Also by eliminating all of your tIRAs, you also eliminate the tIRA pro-rata problem. See Caution in wiki TLH topic (link below).



SWR (safe withdrawal rate).
--A SWR of 4% from your retirement plans is reported to exhaust all within 30yrs. This is okay if your family has short genes. Not so good otherwise.
--If you can get your annual withdrawals down to <3%, then you are in the range of perpetual SWRs. Meaning your annual withdrawals should be offset by annual NAV growth + dividends, so never exhaust your retirement investments.

So it looks like your SWR should be ~2.4% (=24K/1M) at age 62. (You need to adjust this for inflation, which could push you into next tax bracket.)



If you don't like your answers, then you need a Plan-B: work longer, work part-time in retirement, move to lower cost of living area,....

One Plan-B option is to work 3yrs more until age 65, which should:
--Grow your retirement plans to ~$1.3M (Excel cell: "=FV(0.06,65-53,-20000,-500000,0)").
--Grow your SS benefit 8%/yr to ~$30K (=24K x 1.08 x 1.08 x 1.08).
--Qualify you for low-cost Medicare, which can be supplemented with a low-cost supplemental plan.

For better answers, lather, rinse, repeat with better numbers.



You need to worry about a crash in retirement. Why? You want to avoid a SoRR (sequence of returns risk): being forced to sell stocks during a crash to pay for living expenses. Why? During a crash:
--Stock can lose 50-90%, but should outperform inflation. (Lost 40% in 2008-9, ~4yrs to recover; lost 90% in great depression, ~10yrs to recover.)
--Bonds can lose 5-15%, so safer than stocks, but not expected to outperform inflation.
--Stock/bond crashes are not typically coincidental, but there have been exceptions.
--Most crashes recover within ~4yrs, but there have been exceptions.
--CD have insured principal, but expected lower yield than better (higher after-tax income, within reason) bonds.

From above, some retirees report keeping >5yrs of living expenses in cash equivalents.
--Use 5yr CD ladder for insured principal. Buy annual 5yr CD (indexed for inflation). Why? Higher expected return than HY savings. Live on matured CD.
--Taxable account. Keep >5yrs of bonds in taxable. Keep >5yrs of stocks in taxable. Buy new 5yr CD from bonds when bonds are up. Buy new 5yr CD and refill bonds when stocks are up. Refill taxable account from traditional retirement plans. Save Roth retirement plans to tap last.
--If crash last >4yrs, then you have 5yrs in cash equivalents to wait for bonds/stocks, one/both to recover.



If you have taxable investments:
--BHs generally recommend TSM (total US stock market index fund: >90% QDI), and TISM (total international stock market index fund: >70% QDI + ~10% FTC). You need stocks in taxable, and these work.
--I recommend using VWLTX (Vanguard’s LT national muni fund) for taxable bonds. Why? Its dividends are tax exempt, don’t add to AGI so don’t push you toward next higher tax bracket, staying in 12/15% fed tax brackets ensures QDI/LTCG taxed at 0% and generally produced higher after-tax income than TBM (total US bond market index fund)---the 3fund portfolio's preferred bonds. It's within my risk tolerance. BHs don’t recommend this muni in lower tax brackets because it’s slightly more risky than TBM; risk can be TLH’d.

See 3fund portfolio: https://www.bogleheads.org/wiki/Three-fund_portfolio
See TLH (tax-loss harvest): https://www.bogleheads.org/wiki/Tax_loss_harvesting

Kudos on this excellent post!

Thank you so much. Timely for us as well since my wife retired this summer and your post covers what to do with IRA/workplace plan accounts (401k/403b/457b). My thought was to get all of her 403b and 457b money into her tIRA so that when RMDs start for her in 8 years (she's under the age 73 cohort where I am age 75 under the new IRS changes), it's just one RMD rather than several, correct?

CyclingDuo

[KingRiggs]

CyclingDuo- if you have multiple IRAs, you need only make the RMD from one account. The IRS views your IRAs as a whole, and they don’t care where the RMD comes from, as long as it is met.

[angelescrest]

Overall, if you’re thinking of retiring at 62, then you may want to figure out how to put a lot more away now. If not, can you extend your working years? This would go a long way to helping you out in retirement. Also, delaying SS.

[CyclingDuo]

CyclingDuo- if you have multiple IRAs, you need only make the RMD from one account. The IRS views your IRAs as a whole, and they don’t care where the RMD comes from, as long as it is met.

Not multiple IRAs, but one tIRA, and the rest - at least for my wife - is in her 403b account and a 457b account. I always thought - at least from my understanding - that you had to take an RMD from the tIRA, as well as a separate one from the workplace 401k, or in my wife's case a 403b and a 457b plan. Plan was to move the 403b and 457b balances into her IRA. I guess, in sheer dollar amounts, it would be the same withdrawal whether it is all under one account, or separate accounts based on how the RMD is figured from the balances. Just having it all under one roof in the same IRA removes a little complexity regarding the mechanics.

CyclingDuo

[DCBogler]

Overall, if you’re thinking of retiring at 62, then you may want to figure out how to put a lot more away now. If not, can you extend your working years? This would go a long way to helping you out in retirement. Also, delaying SS.

Hi, I know that I'm probably retiring with a lot less money than most Bogleheads, but my lifestyle is probably fairly different as well. I've always been frugal and most of the things I enjoy doing are free (hitting the library, hiking and kayaking, game nights with friends and family, rescuing animals, writing, etc.). I've traveled to many countries in my life and taken care of many of my bucket list items already, so I don't plan to have an extravagant lifestyle. I plan for paying for my kids college (they have separate investment accounts not listed above) and will have that out of the way before retiring. I live in a nice house in a VCOL area, and can rent out the basement if I choose to keep living here. A roommate (possibly my sibling) is not out of the question as well. I live a very healthy and active lifestyle and hopefully that will result in lower medical bills in retirement.

Thanks for all the good comments and feedback. I may well keep working past 62, but I also know that ageism is real and that may not be up to me. I would be happy to keep working or do some consulting after 62 if that pans out.

Thanks!

[Johm221122]

Having the about the same investments and goal as you do, I just want to share that the amount you save from here forward and the returns that your investments give will have a large impact on your goal of retiring early.
In the last two years as I created a specific goal and had a clearer picture of my dream retirement I realized how important returns are over the last 10 years until retirement and this goes both ways (a market crash or strong Bull market)

[angelescrest]

Overall, if you’re thinking of retiring at 62, then you may want to figure out how to put a lot more away now. If not, can you extend your working years? This would go a long way to helping you out in retirement. Also, delaying SS.

Hi, I know that I'm probably retiring with a lot less money than most Bogleheads, but my lifestyle is probably fairly different as well. I've always been frugal and most of the things I enjoy doing are free (hitting the library, hiking and kayaking, game nights with friends and family, rescuing animals, writing, etc.). I've traveled to many countries in my life and taken care of many of my bucket list items already, so I don't plan to have an extravagant lifestyle. I plan for paying for my kids college (they have separate investment accounts not listed above) and will have that out of the way before retiring. I live in a nice house in a VCOL area, and can rent out the basement if I choose to keep living here. A roommate (possibly my sibling) is not out of the question as well. I live a very healthy and active lifestyle and hopefully that will result in lower medical bills in retirement.

Thanks for all the good comments and feedback. I may well keep working past 62, but I also know that ageism is real and that may not be up to me. I would be happy to keep working or do some consulting after 62 if that pans out.

Thanks!

Thanks for sharing. You may be right, though at the same time very few Americans are retiring at age 62 in a VHCOL with a mortgage remaining, while waiting several more years to take SS. With those factors, and the cost of health care insurance, you need to live only on your savings for the first few years which will significantly draw down your portfolio. But your flexible attitude is great, that will make a big difference. Kudos to you for keeping a modest lifestyle.

[WoodSpinner]

..Under current tax laws, RMDs for OP will not start until age 73:
https://www.irs.gov/retirement-plans/re ... tions-faqs

Thanks. I'll correct my mistake shortly. Just too much to know; and what you thought you knew, keeps changing.

Also see I need to make a few other corrections: grammar, maybe a second though here/there. Will try to collect all changes and do them at one time---I like one-and-done.



You wouldn't happen to recall a reference to the different protection levels given to the different account types? I ask because I seem to recall that in employer vs individual accounts, one has more protection from lawsuits/garnishment than the other. The difference could determine whether someone decides to consolidate their retirement plans into an employer's retirement plan vs an individual retirement account.

dratkinson,

While you are correcting, the RMD age for the OP will be 75, not 73….

BTW, excellent reply lots of good details and a significant effort to pull it together.

WoodSpinner

[exodusNH]

To answer your tax question, the money you use from the 401k and the traditional IRA will be subject to the same income taxes as the wages that you currently earn. A single person with $48,000 in taxable wages pays about $4000 in federal taxes. A person who withdraws $48,000 from a 401k also pays about $4000 in taxes.

Once you start collecting social security, it gets more complex. Only part of your social security is considered taxable income. And the % can vary from 0 to 85 depending on your income sources. For example, $24,000 of social security plus $24,000 of 401k withdrawals for a single person would be a federal tax liability under $2000.

Thanks for this explanation, that is much lower taxes than I thought it would be.

You're also not paying FICA, which normally takes 7.65% of your income. Without that, you need ~92% of your current income to maintain your current expenses.

[dratkinson]

...

dratkinson,

While you are correcting, the RMD age for the OP will be 75, not 73….

Thanks. Can you point me to chapter and verse?

[WoodSpinner]

...

dratkinson,

While you are correcting, the RMD age for the OP will be 75, not 73….

Thanks. Can you point me to chapter and verse?

Here is one source …

https://www.nstp.org/article/secure-act ... -rmd-start

[FiveK]

...

dratkinson,

While you are correcting, the RMD age for the OP will be 75, not 73….

Thanks. Can you point me to chapter and verse?

There's an inconsistency in the current law.

In 26 U.S. Code § 401(a)(9)(C)(v) there is

(v) Applicable age.—
(I) In the case of an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033, the applicable age is 73.
(II) In the case of an individual who attains age 74 after December 31, 2032, the applicable age is 75.

Those born in 1959 meet both (I) and (II).

But there is ~9 years before this becomes a real issue so it should be clarified by then....

[dratkinson]

Second thoughts.

I’m guessing about stuff that follows to show how I wag some things ...so to avoid GIGO (garbage in, garbage out), you’ll need to rerun with your better plan/numbers. Or better yet, create an Excel model of your retirement years to project that might happen long-term, and refine the model projections each year as you know more.



Living off distributions. With a large taxable account, you can live off dividends only. How much can you expect from taxable distributions (annual dividends + year-end distributions)?
--Stocks (TSM,...) returns ~2%/yr.
--My favorite muni (VWLTX) returns >3%/yr.
--So a taxable 50/50 AA should produce ~2.5%/yr in distributions.

If you assume 2%/yr in distributions to wag taxable principal needed, then anything extra gives a small pad for unexpected expenses.


Sidebar. There have been many forum topics discussing living off dividends vs selling investment shares.

Bottom line. The senior BHs say living off dividends vs selling shares* produces the same result. So since the market's LT growth is ~6%/yr (50/50 AA), and inflation is typically <6%/yr, then you should be able to live off your investments, even if you only expect 2%/yr in dividends.

* Another benefit. When selling to pay for living expenses, you can always choose to sell only shares with LTCGs.


SoRR. And to avoid SoRR, this is where you need bonds to sell when stocks are down, and maybe a 5yr CD ladder (inflation-indexed insured principal) for when both are down.



Equilibrium tax rate. The tax rate seen by a single filer (or surviving spouse) when RMDs start.
See: https://www.kitces.com/blog/tax-rate-eq ... nversions/

To avoid (a surviving spouse) being push into a higher ETR tax bracket when RMDs start, many BHs will proactively begin, in a lower tax bracket, some while still working, converting traditional accounts to taxable (to increase dividends to pay for living expenses) or to Roth (to increase tax-free growth to tap later if needed, or to pass to heirs).



Munis for non-Vanguard clients. Above I said I used/liked VWLTX. But it has no ETF share class, so non-Vanguard clients who want a recommended muni can consider MUB*. But since MUB is an intermediate-term (IT) muni, its dividends are less than (LT) VWLTX's. (* There may be other recommended munis, but I don’t remember them, so you’ll need to do your own research.)

In the 12/15% fed tax bracket, a muni's TEY (taxable-equivalent yield) calculation may suggest you’d have more after-tax income by using TBM (BND ETF) vs a muni. But the TEY calculation misses the fact that BND’s dividends are taxable, so add to AGI, so could push you out of 12/15% fed tax bracket and make your TSM/TISM QDI/LTCG distributions taxable at 15%.

To compute a muni’s TEY.
--National muni TEY = SEC yield / (1-fed tax bracket)
--Single-state muni TEY = SEC yield / (1-fed tax bracket -state tax bracket)


A first look, to determine a muni's ability to produce after-tax income vs taxable alternatives.

Compare its TEY to taxable bond SEC yield and bank APY. The higher result should produce more after-tax income.

Example:
--BND SEC yield: 4.72%; see: https://investor.vanguard.com/investmen ... rofile/bnd
--VWLTX TEY: 4.48% (=3.94%/(1-.12)); see: https://investor.vanguard.com/investmen ... file/vwltx
--MUB TEY: 4.14% (=3.64%/.88); see: https://www.ishares.com/us/products/239 ... i-bond-etf


A second look, to determine a muni's ability to produce after-tax income vs taxable alternatives.

N.B. These thoughts are added for completeness, but I don't believe they will work in current inverted-yield interest-rate environment. Why? See N.B. GIGO (below).

The TEY calculation misses all of the other tax code effects (QDI, LTCG, AMT, SS taxation,...). To account for the other tax code effects, use your last tax return software to create sample tax returns for each of your bond fund candidates. (I believe the only effect not accounted for by a sample tax return is Medicare’s IRMAA. But if you owe an IRMAA, then you have the money to pay it---don’t sweat the small stuff.)

This is how I wag inputs to create sample tax returns for bond fund candidates (based on 2022 TY documents):
--Total annual dividends = total bond principal x SEC yield.
--Taxable dividends (1099DIV box 1a) are included in taxable income (1040 line 15) and fed tax owed (1040 line 24).
--Tax-exempt dividends (1099DIV box 12) flow to 1040 line 2a, and are OMITTED from fed taxable income (1040 line 15) and fed tax owed (1040 line 24).
--Any AMT dividends (1099DIV line 13) are a percentage (from prospectus) of total annual dividends, and flow to 6251 line 2g.
--If subject to state income tax, state taxable income = 1040 fed taxable income + 1040 total muni dividends - allowed amount of muni dividends produced within your state. (My state allows any instate muni dividends to be excluded from state taxable income; other states are more restrictive.)
--After-tax income = fed taxable income (1040 line 15) + fed muni dividends (1040 line 2a) - fed tax owed (1040 line 24) - state tax owed.


Disclosure. I went through this tax return exercise many years ago in 15% tax bracket. I compared after-tax income produced by: ST/IT/LT, treasury/muni/TBM/corporate, before/after SS. The muni dividends tax-code benefits (0% fed tax, don’t add to AGI) kept me in 15% fed tax bracket, so preserved tax benefits for QDI/LTCG (0% fed tax), so made VWLTX’s after-tax income preferable to TBM’s.

TBM is 1/3 each: treasury, MBS (mortgage-back securities), and corporate bonds. Since MBS are deprecated, and corporate bonds are more risky than corporate, this makes a muni fund preferable to 2/3 of TBM’s components.

VWLTX (LT) is slightly more risky than TBM (IT), but this risk can be TLHed; and I have.

Since TBM is the 3fund portfolio’s preferred bonds, I compared all muni candidates to it. If a muni gives me more after-tax income, with only slightly more risk (based on my known risk tolerance), then I use the muni. Otherwise, TBM should be preferred. (So far, VWLTX has been my choice for the 12/15% and 22/25% tax brackets.)


Simplifying assumption. I assumed that dividends wagged by sample tax returns might not match actual dividends, but that the ranking of bond fund candidates to produce after-tax income would hold. (I reran this exercise when the tax code changed (2018 TY) and got the same results, so no need to change course. And probably no need to worry if tax code sunsets.)


N.B. GIGO. Sample tax returns produced today will give MISLEADING results. Why? We are currently in an inverted-yield interest-rate environment, so shorter-term interest rates are artificially high, meaning any sample tax return based on shorter-term rates (SEC yields, APYs) will produce misleading results---you will believe you can get both safety and higher yield from shorter-duration (1-5yrs) bonds. This will not always be the case as safer shorter-duration bond yields will drop/return to normal, after fed reserve board gets inflation under control. However, longer duration bonds (>5yrs, like VWLTX) are less affected by inverted yields; meaning their yields today should remain approximately the same going forward.
--See 2023 treasury yield curve (inverted): https://home.treasury.gov/resource-cent ... value=2023
--See 2017 treasury yield curve (more normal, before COVID-induced inflation): https://home.treasury.gov/resource-cent ... value=2017

Evidence. Today's inverted yields--shorter-term investments paying more than longer-term--are causing effects like this:
--VFISX (ST treasury) SEC yield: 4.85%; see: https://investor.vanguard.com/investmen ... file/vfisx
--VFITX (IT treasury) SEC yield: 4.32%; see: https://investor.vanguard.com/investmen ... file/vfitx

Notice, ST treasury has a higher SEC yield than IT treasury. This is not normal.
I recall, normally ST treasury's SEC yield is <1% and IT treasury's SEC yield is <2%.
Meaning those lower yields should return when the treasury yield curve returns to normal.
Meaning sample tax returns based on today's inverted yields will give misleading results for shorter-term bonds (<=5yrs duration).
So if you believe the sample tax returns and buy safe treasuries today, expecting their higher yields to continue, you may later be disappointed.



When do your RMDs start? Above I assumed your RMDs would start at age 70---it’s what I knew, and since I’ve finished Roth conversions (not subject to RMDs), have not kept current.
--See DIYtrixie’s reply (above), for reference that says your RMDs may start at age 73.
--See WoodSpinner’s reply (above), for reference that says your RMDs may start at age 75.

Bottom line: any confusion should be resolved by the time you get there.



Worst case for your RMDs and tax rate. Assume your RMDs start at age 75. (In all of this, I’m ignoring inflation.)
--Above, I wagged your Plan B option was to continue working until age 65 (to start Medicare/SS). I wagged your SS benefit could be $30K/yr. If you need $48K/yr for living expenses, then you only need to withdraw $18K/yr (=48K-30K) from traditional.

--If your only traditional withdrawal is $18K/yr (you’re not growing your taxable/Roth accounts) from age 65 to 75, how much will you have in traditional at age 75? From above, assume $1.3M in traditional at age 65, and 6% growth on traditional 50/50 AA.

I wag your traditional investment could grow from ages 65-75 to be $2M (Excel: "=FV(0.06,75-65,18000,-1300000,0)"). Your withdrawals are less than expected annual growth.

--What will be your RMD at age 75?
I wag your RMD divisor at age 75 to be 24.6.
See IRS Publication 590-B (2022), Appendix B, Uniform Life Expectancy, Table III, age 75 divisor: https://www.irs.gov/publications/p590b# ... k100090310

Which means your age 75 RMD could be $81K (=$2M/24.6).
See IRS RMD worksheet: https://www.irs.gov/retirement-plans/pl ... -worksheet

Which means age 75 income could be $111K (=81K RMD + 30K SS + 0 taxable dividends because didn’t grow it).
Which puts you in the 24% (2022 TY) fed tax bracket (before tax code sunset).
Click drop-down box for "single/unmarried individual": https://www.irs.com/en/2022-federal-inc ... eductions/

All is not lost if RMDs start. Why? While RMD can’t be used to convert to Roth, it can be used to grow your taxable/distributions (2%).



How large should be your taxable principal so you can live on investment dividends + SS?

Since your cost of livings is $48K/yr, this means you need $18K (=48K-30K SS) from another source: traditional withdrawals, taxable distributions....

If we a assume 2%/yr (conservative) from taxable distributions, this means you need a taxable principal of ~$900K (=18K/.02). (I believe a taxable 50/50 AA should give you closer to ~2.5%/yr, which means you could expect actual annual dividends of ~$22K/yr (=$900K x .025), so a little more as padding for unexpected expenses, or to reinvest.)

Since I wag (above) your worst case ETR tax bracket to be 24% if you do nothing more than withdraw living expenses, this means you may advance 2-tax brackets when RMDs start.

But if you begin withdrawing sooner (like starting now, while working) from your traditional account, then you can spread the withdrawals over more years so need to advance maybe only 1-tax bracket to complete your withdrawals. This means you'd pay less in total taxes.



Excel model. In above there are many unknowns and I’ve ignored inflation. So a better way to project what might happen long-term is to create/use an Excel model for each year up-to and in retirement.


Link model current-year values to flow to future-year values. If you build the Excel model so the numbers from this year flow into next year (ending account values this year --> beginning account values next year, cost of living this year --> next year's cost of living (indexed for inflation),...), then when you tweak numbers for a current year (update: starting account values, cost of living based on actual inflation,...), everything is updated for later years, too. Meaning you can create today a model to project (as best as you can) everything from age 60 to ~75, and your annual updates with realign it with reality.

Small deviations in predictions should be expected. But assuming you start current year with accurate parameters---account values, living expenses, inflation/growth estimates, tax bracket/headroom,...---then if your model predictions for next year deviate too much from reality, then you'll need to tweak your parameters (or add missing parameters) to produce better predictions. Why? It's your model parameters that help you make accurate long-term predictions*, so you want them to be as accurate as possible. (* It’s your model predictions that will tell you whether you’ll complete your traditional drawdown before RMDs start, so you want your model parameters to be accurate. Otherwise GIGO.)


Inflation/growth preset(s). You’ll want to build-in presets for some values: annual inflation (~1% to update: cost of livings, top-of-tax-bracket, SS benefit,...), indexed top-of-tax-bracket (computes new tax bracket headroom), additional tax bracket headroom allows additional traditional withdrawals,....


Use cell colored backgrounds to monitor status. I color the background of all computed cells to be 25%-gray. I color the background of all manually entered cells to be clear/no color. In this way I can see where I’ve updated entries, and which entries remain computed.

Example. The starting account values (gray) come from the preceding year’s ending account values (gray). Each Jan, update the starting account values (clear) based on your Dec statement ending values. So by visual inspection, you can see where you've made updated (clear), and which values are still computed (gray). The future year gray cells are your long-term predictions, and should tell you if your plan is on course to be successful.


To build your model.
--Inflation/growth presets. These are global parameters and can be placed at the top of your model.
--You want each modeled year to be one column.
--Each row will contain one model parameter: starting account values (taxable, traditional, Roth), top-of-tax-bracket (indexed for inflation: gives headroom for withdrawals), withdrawals (for: taxes, living expenses, to grow taxable/Roth), distributions from taxable (to: offset cost of living or reinvest), ending account values (taxable/traditional/Roth) flow to next year's starting account values, cumulative tax paid,....

If your model says you CAN NOT remain in the 12/15% tax bracket to finish your traditional withdrawals before RMDs start, then rerun model by advancing 1-tax bracket. (Set top-of-tax-bracket to be one tax bracket higher.)


How do you determine the success of your Excel model? I believe success will be when you find a way to convert your traditional account to taxable (to live off dividends + SS) + Roth (to be tapped later, or for heirs), at lowest total tax cost, before RMDs start. So you want to track these parameters:
--Total tax paid. I believe you want to minimize this. This suggests you may need to start withdrawals sooner, maybe while still working, maybe by advancing into 22% tax bracket, to have more withdrawal years and more bracket headroom. (You might later be thankful for withdrawals in 22% tax bracket, if tax code sunsets and 22% returns to 25% in ~2026.)
--Size of taxable account. Taxable size implies yearly distributions (2%) to offset living expenses or to reinvest. If you have enough from distributions + SS, then you don’t need to worry about a Roth.
--Size of Roth account. This implies tax-free growth to tap later, or to pass to heirs. If you withdraw only distributions, then you’ll never exhaust your Roth and the additional income is tax-free, doesn’t add to AGI/tax bracket for the year.


Model updates. Yearly, tweak your Excel model to keep it on track. In Jan, overwrite starting account values (=Dec statement values) to account for market growth, top-of-tax-bracket (tax code change), Medicare ($0 before age 65), unexpected cost of living increase,.... Set the updated cells to clear/no color background to remind you that you've updated those values.

If you find you’ve overlooked something in your model (more for health insurance in early years,...), than add it as a new parameter and work it into your future year calculations (additional health care cost is $0 in later years after starting Medicare,...).



Create multiple Excel models to try different retirement scenarios. If you put one model on one sheet, then you can create another model on another sheet. Keeping all models in one workbook will keep all of your work together. One model could assume:
--You start traditional withdrawals now at age 60, while still working to grow your taxable account.
--You retire at age 62, start SS, and start traditional withdrawals for living expenses and growing your taxable account. (Minimum SS benefit.)
--You retire at age 62, start traditional withdrawals for living expenses and growing your taxable account, but delay SS to age 65. (Expected SS $30K.)
--You retire at age 65/Medicare and start traditional withdrawals for living expenses, but delay SS to age 70. (Maximum SS benefit.)

Student exercise. Which model produces the best outcome for you---lowest tax paid for most converted to taxable/Roth, most income from dividends/SS? I don’t know, that’s why this must be your student exercise.



Prioritizing traditional withdrawals. I believe this is correct before RMDs start.
--In Jan, withdraw ~90% of tax bracket headroom from traditional for: taxes, living expenses, and to grow taxable/distributions. This will quickly transfer most of this year’s market growth out of traditional, while leaving a little tax bracket headroom for unexpected income (year-end distributions).
--In Dec (after year-end distributions known), withdraw remaining ~10% of tax bracket headroom from traditional for: taxes, and to grow taxable/distributions.
--When your taxable account is >$900K (wagged above and expected to fully cover your living expenses) + SS, then maybe you can focus on Roth conversions. Maybe*.

* Your Excel model's baseline inflation/growth preset(s) will increase your annual cost of living, so must increase the wagged $900K taxable principal needed for dividends (2%) to pay for cost of living increase. SS is inflation indexed, but any cost of living shortfall must come from additional traditional withdrawals (until traditional exhausted) or from additional taxable principle. Hence the need to wag future costs of living so you more accurately project your needed taxable principal**.

** Backup plan. Remember, senior BHs say selling investments (~6% expected LT growth) is equivalent to living off dividends. So this is a backup plan if you don’t have enough from dividends to cover the increased cost of living (expected inflation assumed to be <6%).

** Idea. You could add a new row parameter to your model to calculate the size of taxable principal needed, which when added to expected inflation-indexed SS benefit, would cover your inflation-indexed annual cost of living. Something like:
--Taxable principal needed to cover cost of living = (annual cost of living - SS benefit)/.025
--This assumes taxable 50/50A of TSM/VWLTX returns ~2.5%/yr in dividends. Since senior BHs say selling can be used to offset dividend shortfall, you don't really need to grow taxable principal, ...but my novice-investor self would rather know that I had enough in taxable that I didn’t need to sell.



Qualified Charitable Distribution (QCD) and Donor-Advised Fund (DAF). If you don’t finish traditional withdrawals before RMDs start, some BHs use these techniques to reduce taxable income.
--QCD (qualified charitable distribution), see: https://www.bogleheads.org/wiki/Qualifi ... tributions
--DAF (donor advised fund), see: https://www.bogleheads.org/wiki/Donor_advised_fund

Any RMD will increase your income/tax owed, but a QCD gives you an offsetting tax deduction, so you do not advance tax brackets. This means you can continue traditional withdrawals with the same tax bracket headroom after RMDs start.

If you have a favorite charity, then a QCD is a good deal because it bypasses the Sch A floor for charitable deductions.

But if you’d rather bequeath the money to heirs, then you will want to withdraw more aggressively from traditional to grow taxable/Roth before RMDs start.



Edit. Oops, grammar, third thoughts.

[SxSW]

Don't forget the 10% penalty on any $ taken out of a 401k prior to 59.5 that's about 6 years for you.
Otherwise simple to set up. Auto withdraw monthly what you fell comfortable with. Retire early, you can always go back to work if you run out of loot.

Many employers observe the Rule of 55, so you may be able to withdraw from your 401k if you work until the calendar your in which you turn 55.

[sailaway]

Don't forget the 10% penalty on any $ taken out of a 401k prior to 59.5 that's about 6 years for you.
Otherwise simple to set up. Auto withdraw monthly what you fell comfortable with. Retire early, you can always go back to work if you run out of loot.

Many employers observe the Rule of 55, so you may be able to withdraw from your 401k if you work until the calendar your in which you turn 55.

The Rule of 55 is IRS regulation. Some plans allow partial withdrawals if you leave between 55 and 59.5, some do not.

[dratkinson]

Unexpected expense increase in retirement. I've lived in my home for ~20yrs. During that time, the remaining vacant lots have been developed into McMansions, and recent "comparable" sales have been for much more than when I bought. Long story short: My property tax may increase significantly next year.

Idea. You might want to include a property tax expense (row) in your Excel model(s). Its inflation/growth preset may run separately from the basic consumer cost of living inflation index.



SS annuity. Was watching Suze Orman recently and she reminded her audience that SS's 8%/yr benefit growth for every year delayed, is a better return than that expected from the stock market.

Idea. No matter when you actually retire, it could benefit you to delay taking SS until age 70. Could you do that? Since you'd like to retire at 62, one Excel model you should test is to assume you retire at age 62, and withdraw from traditional for living expense (and growing taxable) to age 70 when you take SS. If the model's prediction is bleak, then you have your Plan B(s) to fall back on.