retire now or keep working?

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Topic Author
mercutio9
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Joined: Thu Oct 27, 2022 10:22 pm

retire now or keep working?

Post by mercutio9 »

Hello-

I'm 63yo, within 3-5 years of retirement, if I exclude tax considerations (I still like my job and would would continue to work until the job became unsatisfactory). My wife is also working and is the same age. We have a large amount ($2M+) of money tucked away in 401k and IRA investments. We're just starting to consider the most tax-advantageous way of converting these into retirement income. The approach that most seem to follow is to perform Roth conversions of these tax-deferred investments prior to the onset of Required Minimum Distributions (RMD). But, if we both continue to work, then these conversions occur while we are in a high tax bracket, effectively limiting our ability to do the conversions before RMD hits.

I have a sneaking suspicion that continuing to work will have a negative impact on our ability to perform Roth conversions in a tax-efficient manner, effectively lowering our salaries because we won't be able to perform these conversions as quickly as needed. We might be better off retiring now and getting the ball rolling on conversions once we're in a lower (post-retirement) tax bracket.

Are there other threads here that you can point me to, in order to look at the this retirement date consideration through the lens of Roth conversion limitation? I'm guessing this topic has been discussed before.

Are there any (free) online calculators we could use to compare various scenarios of retiring now vs working longer, with respect to performing Roth conversions?

Terry
Workinprogress
Posts: 262
Joined: Wed Mar 06, 2019 8:25 pm

Re: retire now or keep working?

Post by Workinprogress »

I am nearly exactly the same place as you. I have been converting a bit each year for the last four. This goes into the 22% bracket, but I think we might be in that area anyway, once RMDs, pension and SS are all online. We have about 550K converted at this point. so only about 1.45K in deferred.

Thank you for posting the question, so I can learn along with you.
exodusNH
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Joined: Wed Jan 06, 2021 7:21 pm

Re: retire now or keep working?

Post by exodusNH »

mercutio9 wrote: Sat Feb 10, 2024 11:15 pm Hello-

I'm 63yo, within 3-5 years of retirement, if I exclude tax considerations (I still like my job and would would continue to work until the job became unsatisfactory). My wife is also working and is the same age. We have a large amount ($2M+) of money tucked away in 401k and IRA investments. We're just starting to consider the most tax-advantageous way of converting these into retirement income. The approach that most seem to follow is to perform Roth conversions of these tax-deferred investments prior to the onset of Required Minimum Distributions (RMD). But, if we both continue to work, then these conversions occur while we are in a high tax bracket, effectively limiting our ability to do the conversions before RMD hits.

I have a sneaking suspicion that continuing to work will have a negative impact on our ability to perform Roth conversions in a tax-efficient manner, effectively lowering our salaries because we won't be able to perform these conversions as quickly as needed. We might be better off retiring now and getting the ball rolling on conversions once we're in a lower (post-retirement) tax bracket.

Are there other threads here that you can point me to, in order to look at the this retirement date consideration through the lens of Roth conversion limitation? I'm guessing this topic has been discussed before.

Are there any (free) online calculators we could use to compare various scenarios of retiring now vs working longer, with respect to performing Roth conversions?

Terry
The RMD for $2M is only $80,000. Tax brackets are indexed for inflation. Over a decade, 2% inflation is 22%.
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Watty
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Joined: Wed Oct 10, 2007 3:55 pm

Re: retire now or keep working?

Post by Watty »

mercutio9 wrote: Sat Feb 10, 2024 11:15 pm Are there any (free) online calculators we could use to compare various scenarios of retiring now vs working longer, with respect to performing Roth conversions?
It is not an online calculator but you should also read the wiki on how your Social Security will be taxed which can result in a higher effective tax bracket than you might be expecting.

The details of the calculations are complicated but you can go to the bottom of the wiki to see the color charts which lay out your effective tax rate.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

Once you start Social Security it becomes a lot harder to justify doing Roth conversions unless your income is so high that the maximum amount of your Social Security will already be taxed.

You also need to consider your state taxes.

One thing to keep in mind is that many people will be dealing with federal tax rates of 12,22, and 24 percent which will revert to 15, 25, and 28 percent in 2026. Doing Roth conversion in the 12 or 15 percent tax bracket is a straightforward choice but once you get to the 22% or higher tax brackets it is also very important to keep in mind just how much you might be saving. If you are mainly dealing with a maximum range of 22 to 28 percent that is only a 6% difference. When you are planning out over decades there are so many unknowns that to me 6% is not enough to make it a deciding factor in big decisions.

If you see scenarios where you could be above the 24% federal tax bracket in retirement then you might want to get good estate planning which would include a plan for doing any Roth conversions which make sense for estate planning purposes.
retire now or keep working?
You did not give a lot of details about things like your expenses but your post seems to imply that you would easily be financially fine if you retired today.

Assuming that is the case you may have the wrong focus on looking at taxes when you ask the question about if you should keep working.

While paying taxes is never fun they really do not matter since your big question is really to figure out how to leave the most money to your estate someday.

If leaving a large estate is important to you then the question of "If I work another year will I leave a larger estate?" is an easy answer since you should work longer if you want to leave a larger estate.

Personally while I want whatever is left over to go to my heirs my real goal is to be able to support myself and have a good time if I live to be 95+ years old without running out of money. I retired when I had enough for that, but that is just me.
Last edited by Watty on Sun Feb 11, 2024 9:11 am, edited 1 time in total.
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Cyan
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Re: retire now or keep working?

Post by Cyan »

Two simplified (of many possible) scenarios for comparison . . .
  • Both retire and pay taxes on Roth conversions now - salaries lowered to zero.
  • Both work for 5 more years accumulating additional savings including 401(k) and IRA retirement assets (and not drawing down on any retirement assets) – taxes paid on RMDs.
Which choice leaves you with more spendable income in retirement?
fuddbogle
Posts: 195
Joined: Fri Jun 21, 2019 8:35 am

Re: retire now or keep working?

Post by fuddbogle »

Are you sure you want taxes to drive your retirement decision date?

For me, to determine when to retire, I need to know how much we need, how much we would like and how much we want to leave for our heirs.

Only then will I determine the most tax efficient withdrawals.

Seems like you're skipping the first part? Am I missing something?
kumjan
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Joined: Mon Aug 22, 2022 7:33 pm

Re: retire now or keep working?

Post by kumjan »

This thread is like saying... I want to donate money because donations lower my taxes. Not by anything more than the amount you donated!! Donate only if you like to donate. Taxes are secondary benefits, not primarily.

Similarly, OP is saying I want to stop earning because I will be taxed at 24% or whatever? No you will not be worse of by accumulating more money because I have never heard of more than 100% tax rare.
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Wiggums
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Re: retire now or keep working?

Post by Wiggums »

How long you work is a personal preference. Tax wise, you need to consider your medicare premium, how social security is taxed and possible 3.8% NIIT when you withdraw from your retirement accounts. These factors might lead to to convert more slowly.
"I started with nothing and I still have most of it left."
chassis
Posts: 2134
Joined: Tue Mar 24, 2020 4:28 pm

Re: retire now or keep working?

Post by chassis »

mercutio9 wrote: Sat Feb 10, 2024 11:15 pm Hello-

I'm 63yo, within 3-5 years of retirement, if I exclude tax considerations (I still like my job and would would continue to work until the job became unsatisfactory). My wife is also working and is the same age. We have a large amount ($2M+) of money tucked away in 401k and IRA investments. We're just starting to consider the most tax-advantageous way of converting these into retirement income. The approach that most seem to follow is to perform Roth conversions of these tax-deferred investments prior to the onset of Required Minimum Distributions (RMD). But, if we both continue to work, then these conversions occur while we are in a high tax bracket, effectively limiting our ability to do the conversions before RMD hits.

I have a sneaking suspicion that continuing to work will have a negative impact on our ability to perform Roth conversions in a tax-efficient manner, effectively lowering our salaries because we won't be able to perform these conversions as quickly as needed. We might be better off retiring now and getting the ball rolling on conversions once we're in a lower (post-retirement) tax bracket.

Are there other threads here that you can point me to, in order to look at the this retirement date consideration through the lens of Roth conversion limitation? I'm guessing this topic has been discussed before.

Are there any (free) online calculators we could use to compare various scenarios of retiring now vs working longer, with respect to performing Roth conversions?

Terry
1. RPM spreadsheet does everything you need to forecast cash flows (income and expenses) and net worth. Among other things, it includes Social Security, pensions and Roth conversions.

2. Porfoliovisualizer "financial goals" model. Same concept as the RPM spreadsheet, but with a different user interface, and you enter your portfolio holdings. It is a Monte Carlo simulator. RPM has a Monte Carlo feature but I don't care for it because it is clunky to use and slow to compute.

You have mentioned Roth conversions several times. What prompts the interest in Roth conversions? Set up and use the RPM spreadsheet and let us know what it tells you about Roth conversions.
Jack FFR1846
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Re: retire now or keep working?

Post by Jack FFR1846 »

There are several recent threads about both Roth conversions and talking about Medicare IRMAA. I really didn't pay attention to this stuff before I retired last June. At retirement, we had about $2.5M in traditional IRAs. This along with 2 social security payments when we both reach 70 is around $250k a year. Add interest and taxable account dividends and we're well above IRMAA levels, at the second level that essentially doubles Medicare payments. While working, we pretty much stayed in the 22% bracket. With these RMDs, we'll be in the 24% bracket, so thinking that during retirement, you'll automatically be in a lower tax bracket can backfire. Add to this the fact that in 2026, the tax brackets revert to 2017 levels making 22% become 25% and 24% become 28%, not Roth converting now is likely going to cost you way more money.

If I were in your position, I'd be Roth converting such that your income is at the top of the 24% bracket.

The simplistic view for whether you're ready to retire, going just by the Trinity Study, at 4%, you'd be ok for 30 years at $80k. You probably want to put together a "retirement" spending list. It's not "while working" spending. DW and I spent $50k a year while working and now in retirement we're spending $75k. Health care expenses dominate that. No more cheap work, group insurance and each of us have to pay for our own insurance.
Bogle: Smart Beta is stupid
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daleddm
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Re: retire now or keep working?

Post by daleddm »

Paraphrasing a popular advisor here on BH, most people that do Roth conversions will benefit, but the benefit will be fairly small and will come very late in their lives. When I've done the exploratory estimates in various calculators this does indeed seem to be the case ... and I've concluded, at least for now and for us, that it's probably not worth it. Like you, I'm still working (67) which is a net positive (saving) when compared to quitting just to be able to do the conversions -- tax tail seems to really be wagging the dog there. Perhaps if there's a year or three when I've quit and there's a period when filling zero or very lowest tax brackets is available, I'll choose to do so.
backpacker61
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Re: retire now or keep working?

Post by backpacker61 »

I'm also 63, still working, and, like you, consider myself likely FI.

You're not going to "add more" to your savings by stopping working now; you are likely saving on health care premiums, adding to your tax advantaged employer-sponsored accounts, and probably modestly increasing your eventual SSDI Primary Insurance Amount.

Consider making Roth or "Backdoor Roth" IRA contributions while you're working.

Also, I believe RMD age for people in our cohort is now 75 (change from Secure Act 2.0), so there should still be opportunities for some Roth conversions.
Last edited by backpacker61 on Sun Feb 11, 2024 10:57 am, edited 1 time in total.
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billfromct
Posts: 2018
Joined: Tue Dec 03, 2013 8:05 am

Re: retire now or keep working?

Post by billfromct »

Effective in 2033, the RMD age moves up to 75, so you do have a few years after you do leave work to do some Roth conversations while managing your income to stay within your optimal tax bracket.

Opps, didn’t notice that the 75 year old RMD age was mentioned above!

bill
BradleyB
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Joined: Sun Sep 10, 2023 7:31 pm
Location: Ohio

Re: retire now or keep working?

Post by BradleyB »

Since you probably have enough $ to retire, I would base that decision on whether or not you actually like working. Knowing you don't have to, and can quit anytime would make your day much less stressful.

When to Roth, when to take SS...I have spent way too much time on the various online calculators and have come to the conclusion that there are way too many variables to make a definitive answer.

A friend told me that the time to retire is when you have enough and you've had enough.
Topic Author
mercutio9
Posts: 4
Joined: Thu Oct 27, 2022 10:22 pm

Re: retire now or keep working?

Post by mercutio9 »

Thank you all for the insights and the identification of tools I can use to burn endless hours calculating scenarios. But that is what I asked for.

Yes, I have enough to retire. It's the "you've had enough" part that is coupled, for me, to the effective salary I'm being paid for continuing to work. If my effective salary (after considering the downstream tax implications of continuing to work) is my current salary, then I would opt to continue to work, as my job offers many non-pecuinary benefits. If my effective salary is zero or negative, then I would certainly retire now. I'm just trying to figure out what my effective salary would really be and then I can properly decided on "had enough...at this salary". There is a break point in salary at which I will say, no more.

My thinking on this is colored by the retirement of older co-workers about 20 years ago, when everyone had defined benefit retirement plans. The retirement annuities in their plans would periodically be affected by changes in some type of interest rate. The rate adjustments would then induce big waves of retirements as people realized that they would be working for the next couple of years for free because their downstream pension benefit would be reduced. My current considerations are the modern version of this predicament.

Thanks.
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