advice on shifting to decumulation phase

[PerfectName]

Just retired last week! Wife already retired. Old enough for SS, but deferring until age 70. Between the two of us, have a mix of 401(k), 401(a), 403(b), IRA, and "regular" (non-retirement) funds. That includes multiple 401(k) of various sizes from prior employers. Already know we have way too many different mutual funds, and while reducing that total quantity (although some of the 401(k) have limited options) may shift some mutual funds to ETFs. Current allocation is 52% stock (only a few % of that is international), 41% short term (big piece is TIAA traditional), and 7% bonds. Out of the grand total, less than 5% is Roth. Have worked with TIAA advisor, and Fidelity tool, and think we have enough total to cover essential expenses and a reasonable chunk of "fun". I confess that I have trouble spending on fun, but need to shift that mindset.

Looking for general and specific advice on shifting from accumulation to decumulation phase. Some things I am wondering about, but welcome other thoughts as well that you deem particularly important:
1) What do you think are the most important things to do first? Is there anything that in retrospect you wish you had done just before or at initiation o f retirement?
2) How convert into an income stream? I know I can just ask the funds to start sending regular checks, but want to mix pre-tax and post-tax funds in the right way, need to figure out whether to pull from short term vs stocks, etc. There is also the divided-for-income crowd vs the sell-appreciated-funds crowd.
3) Are there any major advantages to having a year with zero income--just living from bank account savings?
4) Roth conversions (or not) of the smallish 401(k)s from former employers?
5) Buckets or not. If so, how many with how much in each
6) Is there a good thread or resource addressing some/many of my questions?

If putting all these questions into one thread is a violation of site etiquette, please let me know. On the other hand, I wonder if something like decumulation (or shifting to retired life) merits some kind of persistent sticky thread.
Thanks

[OP’s duplicative thread was merged into this topic and the duplicative post and a post explaining why a duplicative thread was started were removed - moderator ClaycordJCA.]

[sailaway]

Ask the mods to combine the threads or delete the previous one.

Have you considered consolidating by rolling your traditional accounts to an IRA?

To give you concrete answers to your questions, we would have to see a complete case study.

Shy of that, there are some topics to consider. Does your expected SS (plus any pensions) cover expenses or will you still need to supplement with these funds after SS starts?

If you have RMDs in excess of your needs, will you use QCDs or reinvest the funds? Or something else, like spoil your grandchildren more than you ever imagined?

What are your estate plans? If you have heirs, Roth will be favorable to inherit in many situations. If you are leaving it all to charity, you may want more left in traditional accounts.

[MathWizard]

More information is needed to see if Roth conversions would be helpful.

Regarding pulling from taxable accounts:

In states which have income taxes,but do not tax SS or withdrawal from retirement accounts, it is likely advantageous to draw down taxable, then switch to a combination of tax deferred and Roth to ride the top of a tax bracket, especially the 12% bracket.

I also found it advantageous to set up withdrawals from tax deferred to the point where the 20% required withholdings for my employer plan amounted to my estimated federal taxes for the year.
That way , I didn't need to make the estimated tax payments.
The rest , I converted to Roth with no withholding, and could withdraw monthly from Roth to fill out my income needs. I have plenty of Roth to pull from for this. Once I hit 70, I'll only need to pull from Roth to manage my tax bill.

[GerryL]

@PerfectName
In answer to question #1, here is what I did when I began retirement 9+ years ago:
I developed what I thought was a good, not-too-conservative estimate of what I expected to spend in a year by reviewing several years of expenses and subtracting a few expenses I would no longer have. Then I increased it by a bit to make sure it wasn't too tight a budget.

I asked a CFP to review my retirement plan and to evaluate how it would do given my planned spend if I were to live to 100. I was gobsmacked to learn that I could really afford to spend more. A lot more. Even worst-case scenario had me dying with about as much as I started retirement with.

A couple of years into retirement, I had my plan evaluated again with a target spend that was almost double my initial estimate. The result was that although I would eventually start spending down, I was still going to be fine at 100.

I track my spending throughout the year and know that as long as I stay within my target spend (which increases for inflation each year) I will be fine. I have yet to spend all my allowance in any year, so I've been keeping a rolling tab of how much I have not spent. That's a slush fund in case I want to splurge -- round-the-world cruise? -- or exceed my allowance in an odd year.

Knowing how much you can safely spend makes it much easier to loosen the purse strings. Although I still consider the value (to me) of what I am spending on, I have become much more generous to myself and to others.

[PaddyMac]

I've been working on such a plan the past few weeks. We're both 62 so have two more years of ACA subsidies to consider, which complicates things a bit.

The first thing I did was take the last ten years of expenses and put them in a spreadsheet, then work out the averages. I organized them into Mortgage (which ends in 2030), Fixed Housing (utilites, prop tax, hoa, house maintenance), Medical, Living Expenses (food, tv, cars, etc), Discretionary (fun and travel). What stood out was how "lumpy" expenses really impact the "average".

I have my own big spreadsheet for future retirement planning, as well as a current tax-planning spreadsheet for the current year so I can watch the income hitting the top of the ACA limit. That tells me how much I can withdraw from our tax-deferred by the end of the year – even if we don't need it now, we will need it in 2024. (Plus we're planning a big remodel next year, so need to pull withdrawals into this year as much as possible to avoid hitting the 22% bracket next year.)

To help with the future forecasting, I subscribe to both MaxiFi and Projection Lab software, and I think they've been worth the cost and the time spent to learn how to set them up. But at the end of the day, I put the same numbers in my retirement spreadsheet as well, which helps me see things more simply and I will use that to dictate how much to take from different account (Tax-deferred, Roth, Taxable, HSA) to keep taxes low. [Edit: I will add that where to pull from each account is a weakness of most software which want you to rank either "tax-deferred first" or "roth first" when it actually makes more sense to watch the tax brackets each year and then RMDs later.]

I would pull out as much as you can from tax-deferred to fill the top of the 12% tax bracket, because if you don't, you will be pushing more income into the higher tax brackets later in life (which might be 25% according to current tax law).

[Svensk Anga]

3) Are there any major advantages to having a year with zero income--just living from bank account savings?

One might reasonably live off savings for a year, but having zero income is a wasted opportunity. You should either withdraw from 401k/tIRA or do Roth conversions to use up the standard deduction for tax-free funds. Depending on your circumstances, you might venture into the 10%, 12% or even higher brackets. Another option is to realize long term capital gains at zero tax. The 0% long term gains bracket is nearly the same amount as the top of the 12% ordinary income bracket. Taking income when your rates are low reduces your potential tax cost later when more income streams (SS, RMD) are coming.

[Hacksawdave]

3) Are there any major advantages to having a year with zero income--just living from bank account savings?

One might reasonably live off savings for a year, but having zero income is a wasted opportunity. You should either withdraw from 401k/tIRA or do Roth conversions to use up the standard deduction for tax-free funds. Depending on your circumstances, you might venture into the 10%, 12% or even higher brackets. Another option is to realize long term capital gains at zero tax. The 0% long term gains bracket is nearly the same amount as the top of the 12% ordinary income bracket. Taking income when your rates are low reduces your potential tax cost later when more income streams (SS, RMD) are coming.

Totally agree with your point. I took a slightly different path when I came up with the decumulation plan. I simply eliminated the middleman and just take the 401k distribution in cash instead of Roth converting. I use a hybrid approach to keep tax rates much lower.

• $17,000 401k distribution
• $3,631 STCG and ordinary estimates
• $18,592 in LTCGs and QDs estimates
• $29,436 in municipal income estimates

This approach keeps my QD/LTCG federal tax rate at zero. The Dollar of income going into cashflow for expenses must come from somewhere. It takes some extra work to estimate and pull from all the sources, but it does work for me.

I also enjoy the tax arbitrage I get from my 401k distributions. I averaged deferment at 37.57 percent for combined federal and state over 31 years. My effective combined tax ratio is 3.15 percent this year. That is why the oddball distribution amount of $17,000 on the 401k.

[PerfectName]

Thanks to all for the info, and it is clear that there remain many things for me to ponder. Some replies (for which I am learning BBCode):

• moderator stepped in and fixed my duplicate post. Thanks for the cleanup
• RMDs are many years away--still in early 60's. But perhaps I need to make them a major factor in this year's decisions since they have a major impact on rationale for Roth.. While there will be some charitable bequests, heirs will receive greater benefits
• SS for both of us will be deferred until age 70, although at that point will cover bulk of our essential income needs. But, that is >5 years away
• Have been reluctant to roll things into IRA because current employer plan (well, at least the account with 60% of our total) has good costs and options. I also have it in my head that it is worth maintaining the federal protections for 401(k), etc. that do not extend to IRAs. But, I haven't checked to see how many states (TBD where will reside long term) have passed similar protections for IRAs. Open to hearing if this is aninsufficient rationale. Fidelity rep, who states he is a fiduciary, wants me to roll everything into an IRA. But, I haven't yet asked him for info on how my actions affect his compensation. Hopefully I can keep that from sounding like a rude question...
• I had no idea that withdrawals from the retirement accounts would be subject to 20% witholding. I also hadn't considered that leaving the world of payroll witholding means I will now have to figure out estimated tax payments. Blah.
• MathWizard, does "The rest , I converted to Roth " mean you converted a large percentage of your total retirement savings to Roth? I as thinking of only doing it for just 10 or 20% of our total.
• I did work with a (free) planner at TIAA, who uses some kind 3rd party tool (possibly from Morningstar) to assess required/desired income vs total assets. That seems ok. The fidelity self-service tool provides similar assurances. There is also a large choice of guardrail strategies, too many of which seem very sensible, but as far as I can tell none are really built into any of these tools. When I asked TIAA about buckets, he told me their tool uses something somewhat akin to a "reverse dollar cost averaging strategy"--take it proportionately out of your stock/bond allocation just when needed. I will look at I will look at MaxiFi and Projection Lab. Any other tools recommended? I am feeling spreadsheet-inadequacy on this forum
• No ACA concerns. Last employer will provide subsidy (although less than from fulltime employees) and let me remain on company plan until Medicare
• Good points about not wasting the standard deduction and the lower tax brackets. Is this trivial math where I just look at where the brackets fall, or perhaps clear the data out of last year's turbotax and fill in some potential numbers to help me plan for the coming year?
• As mentioned, I have used the TIAA and Fidelity tools. I do have an expenses spreadsheet, but it only goes back two years. Yeah, the "lumpy" expenses are problematic. We just spent $35k on some unexpected home repairs (not improvements).
• I do hope that having an entertainment "allowance" will help lower my aversion to spending on "fun"
• I bounce back and forth between seeking tools that will provide the means for optimal decisions vs wondering if the whole problem is insufficiently deterministic that I am fretting unduly and the best that can be achieved is "mostly right". Are there too many random variables to get it better than mostly right (hence Monte Carlo)? Of course, if the answer is to strive for "mostly", then I will start thinking of "mostly" as a spectrum and trying to figure out the "mostest" mostly I can achieve. Would be curious to hear other people's thoughts on this topic.

Regards

[flee]

We are holding out for the 70 mark on Social Security too. The tax advantages of SS quickly fade upon IRA withdrawals. My IRA withdrawals would incur tax cost of 19% because of losing SS tax benefits. Taxable and of course Roth accounts much more income tax cost friendly withdrawals. Try to move or spend as much as possible from your IRA before SS. It really makes an impact especially when single tax bracket strikes. Save some IRA account money for possible nursing home expenses and final bequeath. Also, good to make qualified charitable distributions from the IRA. My effective tax rate is low, nevertheless taking IRA money out will cost 19% for every dollar withdrawn. Not fun and the reason why for a few short years I'm converting IRA money to Roth up to top of 12% bracket before SS kicks in.

[Gennaro Dillinger]

You might need a lot more detail for more specific advice but...
You might consider combining 401ks et al into one.  I have tried to simplify everything for my wife and I - one brokerage, all the accounts # reduced/combined where possible.
I would evaluate Roth conversions for sure - you're in the that sweet 'clean up zone' before SS or RMDs.
If you have zero income - you can always recognize capital gains up to the top of the 0% range!  You never want to miss a year like that.
I use New Retirement - it's been great for helping me evaluate scenarios.
Best of luck!

[spammagnet]

• Have been reluctant to roll things into IRA because current employer plan (well, at least the account with 60% of our total) has good costs and options. ...

Simplify.

Unless your employer account offers guaranteed interest rates significantly higher than current market rates, (mine did in the past), consolidate accounts by rolling over employer accounts to IRAs and convert everything to a small variety of ETFs. That can be done at very low cost and the variety is huge.

You might not want to put it all in one place but minimizing banks, brokerages and accounts will make it easier. I consider Fidelity my primary bank/brokerage.

I don't follow my own advice on this subject but that's so I can make money on new account bonuses. They pay me for my efforts.

• ...Fidelity rep, who states he is a fiduciary, wants me to roll everything into an IRA. But, I haven't yet asked him for info on how my actions affect his compensation. Hopefully I can keep that from sounding like a rude question...

The term "fiduciary" is well-defined and well-regulated. I'm sure they've heard and answered the same question a lot and will answer yours but you needn't belabor the point. While the best approach is a matter of opinion, the rep's suggestions are given with your best interests in mind, not theirs.

• ... I also hadn't considered that leaving the world of payroll witholding means I will now have to figure out estimated tax payments. Blah.

Paying estimated taxes by credit card provides the opportunity to get cash kickbacks. It's not nothing. When it's time for your quarterly payment, roll over $100K+ to a Merrill Lynch IRA to get a $600 investment new account bonus, open a token checking account at Bank of America and enroll in the Preferred Rewards program. Open a Premium Rewards card to qualify for a $600 new credit card account bonus and 2.625% cash kickback (with Platinum Honors tier status). The tax payment fee is as low as 1.85%, netting 0.775% on 1000s of dollars doing something you have to do, anyway.

Merrill needn't be your primary brokerage. Just leave $100K there as a dormant account if you want to hold your investments elsewhere. While sitting their qualifying your for Platinum Honors status, your ETFs will earn the same returns as they would anywhere else.

As for "figuring out estimated tax payments", I'm not a tax expert but it needn't be complicated. If your income this year is significantly less than your salary last year you can spend the time to do that, or simply pay the total you paid last year, split into 4 payments. That's 'safe harbor' and avoids any penalties. You may end up with a large refund which, if you care about that, may justify more effort spent in calculations, but it's not enough to affect your life and will smooth out in the future.

Regarding new account bonuses referred to above, there's money to be had by transferring your assets around to different brokerages, and serially opening new credit card accounts. You may not care to spend your time that way but it's available if you choose. Doctor of Credit is a good source of basic information on new credit card bonuses and new brokerage account bonuses. ETFs make the brokerage account game easy. They're very portable.

• I do hope that having an entertainment "allowance" will help lower my aversion to spending on "fun"

Assuming you enjoy travel, spend your money while you know you can. Things happen. Even without gloomy predictions of ill health, it only takes a knee injury to take the fun out of travel.

• I bounce back and forth between seeking tools that will provide the means for optimal decisions vs wondering if the whole problem is insufficiently deterministic that I am fretting unduly and the best that can be achieved is "mostly right". Are there too many random variables to get it better than mostly right (hence Monte Carlo)? Of course, if the answer is to strive for "mostly", then I will start thinking of "mostly" as a spectrum and trying to figure out the "mostest" mostly I can achieve. Would be curious to hear other people's thoughts on this topic.

My advise is to make sure you have enough to maintain a baseline level of comfort. Beyond that, don't dwell on it. Just enjoy life. I spend a lot of time playing with retirement planning tools but it's more for entertainment (I may have wierd ideas about "fun") than it is obsession with money or concern about our financial well-being. We know we have enough to maintain a comfortable, if simple, life, even if financial calamities befall us. We just won't travel as much, buy new cars or gift our money as generously. (We're not wealthy philanthropists.)

[GerryL]

OP,
I don't know about 401Ks (and their brethren), but you are not required to have taxes withheld on RMDs coming out of a traditional IRA. Once your income has sort of evened out year-to-year, you can use two IRS rules to pay your taxes in one lump sum rather than doing estimated taxes and calculating withholding throughout the year on an uneven income.

#1 The Safe Harbor rule says that if you pre-pay 100% of your tax liability from the previous year (a higher percentage for high earners) you can use that figure for the next year's estimate.

#2 If you have that Safe Harbor amount covered by withholding, it doesn't have to be paid in even quarterly chunks.

Here is how that works: Each year in April, I can look at my tax return and note my tax liability from the previous year and know what I need to plan to pay in the current year -- no matter what my income will be -- to avoid an IRS penalty for underpayment.
I make sure that I have adequate $$$ left in my RMD, and towards the end of the year, I take my RMD with tax withholding to cover that Safe Harbor amount. IRS is happy, even if I underpay for the current year. My state accepts these rules, too, so I do it all at one time.

I know there are others here who do the same, so if my explanation is not clear, someone else can chime in.

And one other point I did not see covered in your summary: Get to know IRMAA (income-related monthly adjustment amount). This convoluted system that determines your Medicare premiums has messed up many a finely honed retirement plan. It's not life-changing, but it can be annoying when you discover you are paying more for Medicare because you didn't plan with IRMAA in mind.

[GAAP]

1) What do you think are the most important things to do first? Is there anything that in retrospect you wish you had done just before or at initiation o f retirement?
2) How convert into an income stream? I know I can just ask the funds to start sending regular checks, but want to mix pre-tax and post-tax funds in the right way, need to figure out whether to pull from short term vs stocks, etc. There is also the divided-for-income crowd vs the sell-appreciated-funds crowd.
3) Are there any major advantages to having a year with zero income--just living from bank account savings?
4) Roth conversions (or not) of the smallish 401(k)s from former employers?
5) Buckets or not. If so, how many with how much in each
6) Is there a good thread or resource addressing some/many of my questions?

1. Simplify. Rollover all of the tax-deferred amounts into a single TIRA (per person). Rollover all of the Roth amounts into a single Roth IRA (per person). These combined accounts should be held somewhere like Schwab, Fidelity, Vanguard that provides low-cost access to low-cost index funds/ETFs. Implement your chosen AA once in those accounts, possibly considering asset location for better tax efficiency.

2. As a generic model, determine which account to withdraw from first. If it has enough cash, you're done. If not, sell enough of whatever is above your target AA to provide sufficient cash, then withdraw it. Unless your withdrawal rate is really low, dividends won't be sufficient.

3. Truly zero income means you've given up the opportunity to Roth convert at the lowest possible tax cost in exchange for paying more taxes later.

4. Roth conversions are not limited to just your 401(k). Optimizing the amount to convert is the subject of multiple threads here, and a key feature of multiple tools popular here. FWIW, I'm converting everything for a variety of reasons -- others here probably think I'm nuts.

5. No buckets. My reasoning here: viewtopic.php?p=7547141#p7547141.

6. Start with the wiki -- lots of topics around retirement, withdrawals, conversions, etc.

[James.534]

No ACA concerns. Last employer will provide subsidy (although less than from fulltime employees) and let me remain on company plan until Medicare

I would make sure you have this clearly spelled out, how much the subsidy is , how much the total cost of the plan and the cost to you directly and also the costs if you need to cover someone else. Many individuals, have no idea how much a company plan costs, if you have to pay for the majority of it yourself.

[PerfectName]

Thanks for the ongoing helpful insights. Next (overly long) set of my replies"

• Pretty clear and consistent message that I need to shift my perspective to focus more on taxes and calculating/minimizing tax rate on all withdrawn funds. I knew I had to pay close attention to taxes, but hadn't thought of that percentage as the key driver of decisions. Not sure if people have favorite tools for this. Maybe it is just a simple spreadsheet where I keep a close eye on thresholds for brackets. Also, I am seriously thinking about whether a person who does both tax planning and prep would be a worthwhile cost for the first couple of years of retirement.
• Moving to a state with no/low income tax, particularly while doing Roth conversions, also seems particularly useful. But, it's not something that can be achieved quickly.
• IRMAA (including 2 yr lookback) is a good point. Looks like it kicks in at an income level that almost corresponds to the top of the 22% federal income tax bracket.
• I'll have to think more about how SS will push up our tax bracket.
• Will take a look at "New Retirement" tool. TBD if the free version will be helpful or it paid will be essential
• I know someone who is also an active participant in the "move funds to new brokerage accts to collect bonuses" activity. It's tempting, although I do get cautious about increasing my quantity of new online accounts since it also incrementally increases my cyber vulnerability.
• Simplify is good advice. I can also (unfortunately) relate to warnings of how "normal" wear and tear on your body can really be a detriment to travel plans.
• I will use "safe harbor" as my worst case for taxes, and see if it is so high that it would bug me unduly to potentially/probably overpay taxes (until rebate time). I do have to remind myself to do quarterly tax payments in 2024, since it is something I never did previously
• Thanks for the buckets and wiki pointers. I suppose that if most of the non-stock portion of my portfolio is money market, that implicitly serves as a large bucket as long I do most of my withdrawals out of there
• I confess I was one of the people who didn't really know the total cost of my medical plan--only the net cost after company subsidy. However, I do have paperwork that clearly lays out the health care plan cost for the retirees who quality for an ongoing subsidy, and those who have to pay the full burden

Regards

[spammagnet]

... * Pretty clear and consistent message that I need to shift my perspective to focus more on taxes and calculating/minimizing tax rate on all withdrawn funds. I knew I had to pay close attention to taxes, but hadn't thought of that percentage as the key driver of decisions. Not sure if people have favorite tools for this. Maybe it is just a simple spreadsheet where I keep a close eye on thresholds for brackets. Also, I am seriously thinking about whether a person who does both tax planning and prep would be a worthwhile cost for the first couple of years of retirement.

I use Quicken to track cash flow and investments and to forecast taxes. It helps me plan withdrawals and Roth conversions to stay below target taxable income thresholds. There's a long thread here on Bogleheads about it. Not everyone likes it. Some people swear by spreadsheets. I'm highly skilled at Excel but find that takes more work than I'm willing to invest to create the tools I'd like to use.

I like and use Maxifiplanner for long-term forecasting. It takes a different perspective on the subject, using what you have to determine what you can spend rather than determining what you need based on what you plan to spend. That involves a degree of Kool-Aid drinking. I get it, and it works for me. It will include Roth conversions in the forecast but does not calculate ideal conversion amounts. Other tools do.

... * I'll have to think more about how SS will push up our tax bracket.

Maxifiplanner includes expected taxes, and annual details of those taxes, in its forecast. It considers the impact of income on IRMAA and SS taxation (if any).

... * I know someone who is also an active participant in the "move funds to new brokerage accts to collect bonuses" activity. It's tempting, although I do get cautious about increasing my quantity of new online accounts since it also incrementally increases my cyber vulnerability.
* Simplify is good advice. I can also (unfortunately) relate to warnings of how "normal" wear and tear on your body can really be a detriment to travel plans.

I'm one of those people who pursue new account bonuses. Everybody has their own opinion about the benefit vs level of effort or risk. I find it worthwhile and low risk, but it is the opposite of simplifying because you end up with more accounts rather than less. I close accounts as soon as I no longer need them.