Retiring soon - some questions

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Jim85
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Retiring soon - some questions

Post by Jim85 » Fri May 18, 2018 6:40 am

I’m retiring next month and have a few questions. Some background data:
Age 62, married, wife also 62. Kids all on their own.
No debt, house paid off (worth maybe $425K)
Planned annual spending – about 85K which is about 25K higher than current spending but includes more travel and of course healthcare costs.
Total assets (besides house, cars. etc) - $3.3M (about 50/50 allocation)
Taxable Assets:
• CDs, Bank/MM accounts, etc – 155K
• Vanguard Stock funds: 740K (about 50% is cap gains)
• Vanguard Int term tax exempt fund: 135K (currently 2K loss)
Tax deferred:
• 2.27M 60% bond, 40% stock (130K in Roth, the rest in Rollover IRAs or 401k)
Health Insurance – I plan to go on COBRA for 18 months. Cost is about $1K/month for same plan I have now.

First question – I assume it’s best for me to spend from the taxable account for now. Maybe the Vang Tax exempt first as it’s now at a slight loss so no taxable income. Later use cash accounts , then the taxable stock funds. Sound right?

Second question - I know everything can change with health insurance but, assuming status quo, I am thinking I can qualify for a ACA subsidy after the COBRA period and keep my premiums down. I would not be expecting a lot of income from the taxable accounts. For example if I tapped the stock funds for 85K a year, about ½ (42.5K) would be taxable gains. That would keep me below the 65K threshold for the subsidy. I think I could manage this until age 65 when medicare kicks in. Actually the ACA with subsidy route could even be better than COBRA.

Last – I guess I need to consider Roth conversions which I guess could impact some of the above.

Not sure when I’ll take SS. I believe our total SS would be about 50K/yr at 66.
Any thoughts are appreciated.

Johnsson
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Re: Retiring soon - some questions

Post by Johnsson » Fri May 18, 2018 7:11 am

I have a similar plan for our (hopeful) retirement in 3.5 years. As I read your post I immediately thought about Roth conversions, then saw you included them.

I think you really need to balance the value of larger Roth conversions now (at least until social security is started), and the long-term savings they would likely provide (raising your tax rate a little, earlier in retirement, but lowering it when mandatory withdrawals from your pre-tax accounts start at 70) with the loss of the ACA discount that would occur.

I know you'll only need ACA for 1.5 years. However, those are prime Roth conversion years.

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dwickenh
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Re: Retiring soon - some questions

Post by dwickenh » Fri May 18, 2018 7:24 am

I agree with your draw down strategy as it closely resembles mine. I am currently managing income for ACA subsidies for the next 2 years for DW and myself. I have also been able to slip in some Roth conversions at 0 tax rate to fill out my 138-150% of poverty level for ACA premium and cost subsidies. The 30,000 savings on the ACA is a much better benefit than full Roth conversions at this time. I may delay SS futher than full retirement age to accommodate additional Roth conversions. My tax deferred account is not as high as yours, so Roth conversions will not need to be as large. I am 50% taxable and 45% IRA and 5 % Roth at this time.

Best wishes for you retirement next month, Enjoy!!!!

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

chw
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Re: Retiring soon - some questions

Post by chw » Fri May 18, 2018 7:32 am

My circumstances are somewhat similar to yours (retired last year at age 59/DW is 61). We have some deferred income for 3 years, and plan other income needs from taxable dividends and our tax deferred account. Because of the deferred income, we won't qualify for the ACA subsidy for a few years, so any taxable income from the TDA not as much of an issue. You might strongly consider deferring SS until age 70 for at least the higher earner, and spend down the TDA (in addition to Rorh conversions). The only consideration to this plan is the IRMA calculation for Medicare, which I believe is impacted in the year before you apply for Medicare. We haven't modeled its impact yet, as we are several years away from it, but given your circumstances, it seems to be a consideration.

BlackStrat
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Re: Retiring soon - some questions

Post by BlackStrat » Fri May 18, 2018 7:36 am

Someone posted this link recently in another thread (I added it to my 'Favorites') and I thought it was valuable regarding withdrawal strategies:

https://www.kitces.com/blog/tax-efficie ... ing-needs/

book lover
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Re: Retiring soon - some questions

Post by book lover » Fri May 18, 2018 7:39 am

When you drill down into the ACA, make sure to look at the strength of the provider network, it may be better to pay more for a more robust network.

livesoft
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Re: Retiring soon - some questions

Post by livesoft » Fri May 18, 2018 7:40 am

I do not believe your tax situation makes the tax-exempt muni bond fund a good deal. Based on your portfolio size and your expected income, I think you should tax-loss harvest that entire position and instead put your bond fund assets in your tax-deferred accounts (401(k), rollover IRA). You should also ditch the $155K in money market / CDs in taxable. They are creating taxable income for you that you do not need.

Your family situation and wealth are not dissimilar from ours, so you should be able to pay under $3,000 a year in Federal income taxes and only because you are doing Roth conversions.

To expand further, look at your Federal return Form 1040 Schedule B. All that income on the top half can be avoided. Also, note that tax-exempt muni bond income gets counted when calculating how much your social security income is taxed.

Instead of that bond, CD, and money market income, we just have tax-efficient equities in our taxable accounts. We get some qualified dividend income (not taxed like tax-exempt muni bond income) and return of capital (not taxed) from selling shares of equity funds, and realized long-term capital gains (not taxed since we are in a low tax bracket). We keep fixed income in tax-deferred where it is not taxed until converted to Roth iRAs.

Anyways, your portfolio is set up to cost you in unnecessary taxes which is money you can keep for yourself.

Specifically: Exchange MM, CDs, Bond funds in taxable into tax-efficient equity funds like Total Stock Market Index fund. In 401(k)/rollover IRA exchange same amount of total stock market index fund into MM, CDs, and bond funds. You will have the same asset allocation, but no taxes.

To pay expenses, use the quarterly dividends from the taxable equity funds (do not reinvest them) and sell some shares in those equity funds. You have a choice of which shares to sell:
1. Sell losing positions every year in a tax-loss harvesting move.
2. Sell enough short-term positions with gains to offset any realized losses.
3. Sell enough shares held long-term to realize long-term capital gains that are not taxed.

That should keep your Adjusted Gross Income below $40K while still having $85K to $110K to spend (tax-free return of capital is wonderful). You can increase AGI by Roth conversions. In essence, careful attention to detail will allow more dollars to be converted to Roths each year while staying in low/no tax brackets.
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mickroark
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Re: Retiring soon - some questions

Post by mickroark » Fri May 18, 2018 7:58 am

Unfortunately money does not make one happy in retirement. I have been retired for 8 years and most retired folks I meet are unhappy. Mostly due to family relationships and health issues. If I had life to do over I would work on these for retirement happiness and not money. :oops:

carolinaman
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Re: Retiring soon - some questions

Post by carolinaman » Fri May 18, 2018 8:18 am

mickroark wrote:
Fri May 18, 2018 7:58 am
Unfortunately money does not make one happy in retirement. I have been retired for 8 years and most retired folks I meet are unhappy. Mostly due to family relationships and health issues. If I had life to do over I would work on these for retirement happiness and not money. :oops:
+1. Good point. I think we need to put considerable energy into both.

Jim85
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Re: Retiring soon - some questions

Post by Jim85 » Fri May 18, 2018 8:24 am

Thank you all. This site is a great sounding board.

Livesoft - I think I will do exactly what you suggested. Thought that muni fund wasn't right for us and definitely generating more taxable income than necessary with the MM and CDs. Most of that was my emergency fund. Thank you for the detailed response.

JW-Retired
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Re: Retiring soon - some questions

Post by JW-Retired » Fri May 18, 2018 8:26 am

Jim85 wrote:
Fri May 18, 2018 6:40 am
Not sure when I’ll take SS. I believe our total SS would be about 50K/yr at 66.
This should be heavily dependent on what state you live in, which you didn't mention. Many/most states don't tax Social Security income at all, but some do tax every other type of income heavily. My dear old California income tax rate is about 10% on everything else (including dividends and long term capital gains), but zero on SS. Needless to say, maximizing our SS by delaying to age 70 was very a good tax move for us. :D
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David Jay
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Re: Retiring soon - some questions

Post by David Jay » Fri May 18, 2018 8:29 am

If you have not done so, you need to look at the impact of required minimum distributions (RMDs) in your future. These required distributions from your tax-deferred accounts increase in percentage over time (based on remaining life expectancy). With 2.2M in tax-deferred (which could grow to, say, 5M in 25 years), you could be looking at RMDs of $400,000 a year (8.3% of 5 million).

Two things that BH types use are:
1. Roth conversions between retirement and start-of-SS-benefits. During those years your marginal tax rate is at it's lowest and there is no SS 85% rule.
2. Spend down some of your tax-deferred in the early years of retirement, rather than taxable. This reduces your tax-deferred balances which in the long run keeps you out of those very high (35%) tax brackets when RMD withdrawal percentages get high.
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DR
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Re: Retiring soon - some questions

Post by DR » Fri May 18, 2018 8:47 am

I'm a little confused by your assumption about $85K of spending. I took your numbers and put them into my planning calculator--MaxiFi Planner, I work for the company--just out of curiosity because that 85K just didn't sound right to me.

I created a hypothetical earnings history to create a combined husband/wife SS at age 66 of $58,000, a bit higher I guess than your estimate.

You have 2.27M in qualified accounts and 1.03 in taxable accounts. Did I I add that up correctly?

I assigned you 4K in property taxes and 3K in home insurance, both probably too high. I put you in New York, which has state taxes.

I assumed 4% average nominal return on qualified assets and 3.5% average nominal on taxable assets with inflation at 2.5%.

In this model, with SS at age 66, you have smooth, inflation-adjusted discretionary spending--by which I mean after taxes, housing costs, and after Medicare B premiums--you have available $125,081 in spending. If you take that same model and take SS at age 70 for both, you would have $131,160.

This modeling assumes you spend all of the taxable and all of the qualified assets through age 100 and leave nothing but the value of the home in estate.

So although the question about which accounts to draw from is perhaps interesting, it seems the first order of business is to take a look at available discretionary spending. Just an observation guess for what it's worth.

Chadnudj
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Re: Retiring soon - some questions

Post by Chadnudj » Fri May 18, 2018 8:48 am

livesoft wrote:
Fri May 18, 2018 7:40 am
I do not believe your tax situation makes the tax-exempt muni bond fund a good deal. Based on your portfolio size and your expected income, I think you should tax-loss harvest that entire position and instead put your bond fund assets in your tax-deferred accounts (401(k), rollover IRA). You should also ditch the $155K in money market / CDs in taxable. They are creating taxable income for you that you do not need.
I'm a bit curious that this is what you advise (although I'm sure there's a good rationale I'm missing).

In OP's situation ($85k desired expenses, OP and spouse both 62, $740k in taxable stocks/bonds, lots in tax deferred accounts), I'd plan on keeping the $155k in money market/CDs, and drawing down on it to pay for living expenses from now until 65 (when Medicare will kick in to cut down health insurance costs) -- along with dividends from the taxable account, there should be plenty to make that doable. I'd then use those 3 years to do some Roth conversions on the tax deferred accounts to as high a level as makes sense given the taxable dividends (I'll leave it to the tax specialists here as to what amount makes sense). The money market/CDs could also be used in part to pay for the taxes on those Roth conversions.

From 65-70, I'd keep doing the Roth conversions if possible, but would probably have enough money in taxable/taxable dividends/Roth to pay my living expenses while still allowing me to do some Roth conversions on the tax-deferred accounts while in a lower tax bracket. Then, at 70, I'd take the higher earner's Social Security (the lesser earner could claim anytime after 65, but ideally you wait at least until full retirement age, whatever that is for you/your spouse).

The goal would be to get as much out of the the traditional accounts and into Roths as possible by 70 that RMDs+SS+dividends on taxable accounts would ideally hit your $85k per year desired expenses, allowing the Roth to grow for legacy/fun lifestyle inflation/long-term care purposes.

livesoft
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Re: Retiring soon - some questions

Post by livesoft » Fri May 18, 2018 8:51 am

David Jay wrote:
Fri May 18, 2018 8:29 am
If you have not done so, you need to look at the impact of required minimum distributions (RMDs) in your future. These required distributions from your tax-deferred accounts increase in percentage over time (based on remaining life expectancy). With 2.2M in tax-deferred (which could grow to, say, 5M in 25 years), you could be looking at RMDs of $400,000 a year (8.3% of 5 million).

Two things that BH types use are:
1. Roth conversions between retirement and start-of-SS-benefits. During those years your marginal tax rate is at it's lowest and there is no SS 85% rule.
2. Spend down some of your tax-deferred in the early years of retirement, rather than taxable. This reduces your tax-deferred balances which in the long run keeps you out of those very high (35%) tax brackets when RMD withdrawal percentages get high.
Another way to keep a tax-deferred accounts tamped down in this situation is to have all of one's fixed income assets in such accounts. Yes, Roth conversions are the way to go. My preference is not to ever spend down tax-deferred until RMD time. Instead, I convert down which is your #1.

But personally, I don't worry so much about RMDs in 25 years.
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Watty
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Re: Retiring soon - some questions

Post by Watty » Fri May 18, 2018 8:57 am

My numbers are different and I retired at 59 but my situation is similar.
livesoft wrote:
Fri May 18, 2018 7:40 am
I do not believe your tax situation makes the tax-exempt muni bond fund a good deal.
+1

A married couple can have around $100K in taxable income and still be in the 12% federal tax bracket.
Jim85 wrote:
Fri May 18, 2018 6:40 am
Last – I guess I need to consider Roth conversions which I guess could impact some of the above.
The federal long term capital gains tax rate is 0% up to the top of the 12% federal tax bracket so you will need to make your choice between doing Roth conversion in the 12% tax bracket or taking long term capital gains. The way your state taxes capital gains may be different.

If you have mutual funds in the taxable account you may want to set them to not automatically reinvest your dividends and capital gains distributions. That will help make all of your gains long term gains when you sell them.
Jim85 wrote:
Fri May 18, 2018 6:40 am
Second question - I know everything can change with health insurance but, assuming status quo, I am thinking I can qualify for a ACA subsidy after the COBRA period and keep my premiums down. I would not be expecting a lot of income from the taxable accounts. For example if I tapped the stock funds for 85K a year, about ½ (42.5K) would be taxable gains. That would keep me below the 65K threshold for the subsidy. I think I could manage this until age 65 when medicare kicks in. Actually the ACA with subsidy route could even be better than COBRA.
I was on Cobra for 18 months and then switched to ACA with a subsidy. At least for me the COBRA coverage was much better.

A couple of things;
1) Many, but not all employers will pay the health insurance through the end of the month when you terminate. If yours is like that then retiring on the 1st of the month instead of the 31st of the prior month could save you a months Cobra payments.

2) My company had COBRA administered through the same third party company that managed the flexible spending account. That company did the bare minimum that they were required to allow me to make the COBRA payments. Their payment website was bare bones and didn't even allow you to schedule automatic payments. My impression was that they were doing this in the hope that I would somehow miss payment and be dropped from COBRA.

You need to be vigilant in getting the COBRA paperwork and making the payments even if you do not get a statement. If you miss a payment, even if it is because you are in a hospital, there is a very limited time to get caught up. After that there is virtually no way to get back in COBRA. This means that you also need to have someone like one of your kids that knows how to make the COBRA payments if both you and your spouse are in the hospital after a car accident.

Late in the year there will be an open enrollment period just like when you were working and and your rates may change. Watch out for that paperwork and be sure to make the new payment in January.

Before you retire ask your HR department for the COBRA paperwork early otherwise you they will mail it to you at a later date after you terminate. The normal way it works is that once you get the paperwork you can pay it retroactively to have coverage be retroactive but that leave a gap where you could go to an emergency room and have it look like you do not have insurance.

3) Refill any prescriptions before your last day of work and once you are on COBRA be sure to refill your prescriptions a week or so before you run out. At least twice there were snafus with my COBRA where prescriptions were rejected and that took a day or two to straighten out.


Jim85 wrote:
Fri May 18, 2018 6:40 am
I am thinking I can qualify for a ACA subsidy after the COBRA period and keep my premiums down.
1) You might want to get a home equity line of credit before you retire to help smooth out any spending. After you retire it may be more complicated to set one up. I bought a new car a few months ago and I would have liked to have paid cash for it by taking the money out of an IRA but that would have put me above the ACA income limit. I got a car loan instead to keep my taxable income lower. I will pay that off after I get under Medicare.

2) When you get closer to that also read up the details on the way it that works. The details are a bit more complicated but for me the subsidy is based on about 9% of my income. This means that if my taxable income goes from $50,000 to $60,000 then the extra $10,000 causes me to lose around $900 of the subsidy. Effectively that adds 9% to my marginal federal tax rate to take it from 12% to 21%.

3) Do not cut it close. There were several threads earlier this year by people that had gone over the subsidy income limit and lost the entire subsidy and had to pay it back.

4) My birthday is roughly in the middle of the year so the year I turn 65 and start Medicare so I will only need an ACA policy for about half that year. I have not figured out the details yet since the rules will likely change by then but that may mean that I do not get much, if any, of the subsidy that year.
Jim85 wrote:
Fri May 18, 2018 6:40 am
Not sure when I’ll take SS. I believe our total SS would be about 50K/yr at 66.
When to start Social Security varies wildly but for many people it make sense for one person to start at 62 and for the other to wait until they are 70. It would be good to figure that out ASAP just in case it would make sense for one of you to start it now.
book lover wrote:
Fri May 18, 2018 7:39 am
When you drill down into the ACA, make sure to look at the strength of the provider network, it may be better to pay more for a more robust network.
+1

When I had COBRA I had a policy through Blue Cross. When I went to sign up for ACA there was a Blue Cross option that looked OK. The problem was that none of my doctors were under the ACA Blue Cross plan. I ended up selecting an ACA Kaiser plan just to be sure that I would not have problems getting access to a specialist if I needed one.
Last edited by Watty on Fri May 18, 2018 9:01 am, edited 2 times in total.

livesoft
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Re: Retiring soon - some questions

Post by livesoft » Fri May 18, 2018 8:58 am

Chadnudj wrote:
Fri May 18, 2018 8:48 am
I'm a bit curious that this is what you advise (although I'm sure there's a good rationale I'm missing).
Maybe you are missing that the OP is spending down their taxable account. Whether one "sells" money market fund shares or shares in a tax-efficient, passively-managed stock index fund does not change the money that can be spent on expenses. It does change the taxes paid by quite a bit.

The OP should not wait to age 65 to do Roth conversions. Start this year after looking at the tax situation. The money to pay the taxes on the Roth conversion could come from tax-free sales of shares of tax-efficient, passively-managed stock index fund found in the taxable account.

The goal is still to get as much out of the traditional accounts and into Roths as possible. I have outlined how to keep the money market and CDs from increasing one's AGI. Increasing AGI needlessly just reduces the amount of Roth conversions possible at a given tax rate which is not a good thing.

We are doing exactly this and it works.
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want_to_retire
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Re: Retiring soon - some questions

Post by want_to_retire » Fri May 18, 2018 6:29 pm

Watty wrote:
Fri May 18, 2018 8:57 am
My numbers are different and I retired at 59 but my situation is similar.

A couple of things;
1) Many, but not all employers will pay the health insurance through the end of the month when you terminate. If yours is like that then retiring on the 1st of the month instead of the 31st of the prior month could save you a months Cobra payments.
Also COBRA payments for current month are due on the last day of the month. You could save the last month COBRA payment - so long as you make sure all medical and prescription needs are completed in the previous month itself. Even if you do have some medical bills spill over in the last month - you do not make the COBRA payment so long as the bills are below COBRA cost.

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Re: Retiring soon - some questions

Post by dknightd » Fri May 18, 2018 7:50 pm

Jim85 wrote:
Fri May 18, 2018 6:40 am
I’m retiring next month and have a few questions. Some background data:
Age 62, married, wife also 62. Kids all on their own.
No debt, house paid off (worth maybe $425K)
Planned annual spending – about 85K which is about 25K higher than current spending but includes more travel and of course healthcare costs.
Total assets (besides house, cars. etc) - $3.3M (about 50/50 allocation)
Taxable Assets:
• CDs, Bank/MM accounts, etc – 155K
• Vanguard Stock funds: 740K (about 50% is cap gains)
• Vanguard Int term tax exempt fund: 135K (currently 2K loss)
Tax deferred:
• 2.27M 60% bond, 40% stock (130K in Roth, the rest in Rollover IRAs or 401k)
Health Insurance – I plan to go on COBRA for 18 months. Cost is about $1K/month for same plan I have now.

First question – I assume it’s best for me to spend from the taxable account for now. Maybe the Vang Tax exempt first as it’s now at a slight loss so no taxable income. Later use cash accounts , then the taxable stock funds. Sound right?

Second question - I know everything can change with health insurance but, assuming status quo, I am thinking I can qualify for a ACA subsidy after the COBRA period and keep my premiums down. I would not be expecting a lot of income from the taxable accounts. For example if I tapped the stock funds for 85K a year, about ½ (42.5K) would be taxable gains. That would keep me below the 65K threshold for the subsidy. I think I could manage this until age 65 when medicare kicks in. Actually the ACA with subsidy route could even be better than COBRA.

Last – I guess I need to consider Roth conversions which I guess could impact some of the above.

Not sure when I’ll take SS. I believe our total SS would be about 50K/yr at 66.
Any thoughts are appreciated.
Personal opinion. Waiting till a month before you retire is cutting it pretty close for planning purposes.
Luckily, I think you will be OK no matter what you do.
My plan is to keep a couple of years of expenses in a cash like investment. Some people think you should keep less in cash as you get old. I think you should keep more cash. When you quit working you stop having an income, except for you prior investments. Honestly I think my income is more dependable than future investment gains.

Medical expenses are a big deal. I would plan on paying market rates till I retire, then plan for medicare supplemental coverage to increase more than inflation rate. I would not plan my future healthcare based on current ACA rates.

I have the lower earner claim SS at full retirement age. The higher earner claim at 70.

delamer
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Re: Retiring soon - some questions

Post by delamer » Fri May 18, 2018 8:23 pm

A minorish point — if you want to keep earnings low enough to get the ACA subsidy (post COBRA, pre Medicare) aren’t you going to need to spend some of your cash to cover expenses during that period? So you’ll need to tap those accounts.

A more general point — I know the ACA subsidies can be significant, but isn’t there a point where it makes more sense to be able do Roth conversions or otherwise manage your investments to your best advantage rather than focusing on the short term benefit of the subsidies?

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Re: Retiring soon - some questions

Post by marcopolo » Fri May 18, 2018 10:57 pm

delamer wrote:
Fri May 18, 2018 8:23 pm
A more general point — I know the ACA subsidies can be significant, but isn’t there a point where it makes more sense to be able do Roth conversions or otherwise manage your investments to your best advantage rather than focusing on the short term benefit of the subsidies?
You raise a good point. I retired earlier this year and am on company paid COBRA until the end of the year, at that point I will switch over to an ACA plan. I have been going back and forth on the Roth Conversion vs ACA subsidy question. Here is the conclusion i have come to so far. The ACA subsidy cliff can be very steep. So, i think it makes sense to keep income below the cliff. Conversions that put you above the cliff are very costly, unless you make them REALLY large. So, conversions that put you just a little over the cliff do not make sense.

We are a family of 4, so that still leaves pretty significant room to do Roth conversion below the cut-off. Even for a family of 2, there is likely some room depending on how the living expenses are drawn. Whether or not it is advantageous to do conversions below the cliff cut-offs is less clear. The numbers get complex, but you are essentially converting at a 21% federal tax rate. If that is still likely to be below your (RMD + SS + dividend/Cap Gains) tax rate at age 70.5, then it makes sense. But, it is not as much of a slam dunk as converting at 12% federal rate.

OP: You seem to be in great shape. I have numbers in the same ball park and recently retired at age 51, so I sure hope your retirement is secure!
You are wise to follow livesoft's suggestions. I have structured my asset location and withdrawal mechanics similarly, much of it based on numerous threads on this board where he and others have provided very detailed and helpful analysis. Best of luck to you in the next stage of your life.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Johnsson
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Re: Retiring soon - some questions

Post by Johnsson » Sat May 19, 2018 2:36 pm

delamer wrote:
Fri May 18, 2018 8:23 pm
A minorish point — if you want to keep earnings low enough to get the ACA subsidy (post COBRA, pre Medicare) aren’t you going to need to spend some of your cash to cover expenses during that period? So you’ll need to tap those accounts.

A more general point — I know the ACA subsidies can be significant, but isn’t there a point where it makes more sense to be able do Roth conversions or otherwise manage your investments to your best advantage rather than focusing on the short term benefit of the subsidies?
To the more general point, I agree. It may be a complex calculation, but there must be a current value of pre-tax investments where it makes more sense to maximize Roth conversions than enjoy the ACA subsidies... at least into the mid-12% bracket and maybe far into the 22% bracket.

If you're looking at 70k of SS plus RMDs (based on today's value with NO gains) of 84k at age 70, that's $144k of taxable income (without dividends,...).

What's the real value of maximizing Roth conversions as compared to the loss of several years payments of 30k for healthcare?

JoeRetire
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Re: Retiring soon - some questions

Post by JoeRetire » Sat May 19, 2018 2:51 pm

Jim85 wrote:
Fri May 18, 2018 6:40 am
Planned annual spending – about 85K which is about 25K higher than current spending but includes more travel and of course healthcare costs.
Total assets (besides house, cars. etc) - $3.3M (about 50/50 allocation)

Health Insurance – I plan to go on COBRA for 18 months. Cost is about $1K/month for same plan I have now.

I am thinking I can qualify for a ACA subsidy after the COBRA period and keep my premiums down. I would not be expecting a lot of income from the taxable accounts. For example if I tapped the stock funds for 85K a year, about ½ (42.5K) would be taxable gains. That would keep me below the 65K threshold for the subsidy. I think I could manage this until age 65 when medicare kicks in. Actually the ACA with subsidy route could even be better than COBRA.
Before you choose COBRA, run the calculations with a subsidized ACA plan. You might very well find that skipping COBRA will be beneficial (or at least just using COBRA until the end of this year).
With the assets you have and your moderate expenses, I doubt that healthcare expenses will matter too much anyway,
Not sure when I’ll take SS. I believe our total SS would be about 50K/yr at 66.
You can clearly afford to do anything you like regarding SS benefits. Take it now. Take it at 66. Take it at 70.
The benefit-optimizing decision depends on a number of factors like your benefit versus your spouse's benefit, your expected lifespans, etc. You might consider spending $40 at http://maximizemysocialsecurity.com to run some scenarios.

Have fun in retirement!

JoeRetire
Posts: 605
Joined: Tue Jan 16, 2018 2:44 pm

Re: Retiring soon - some questions

Post by JoeRetire » Sat May 19, 2018 2:58 pm

mickroark wrote:
Fri May 18, 2018 7:58 am
Unfortunately money does not make one happy in retirement. I have been retired for 8 years and most retired folks I meet are unhappy. Mostly due to family relationships and health issues. If I had life to do over I would work on these for retirement happiness and not money. :oops:
There's no need to choose one over the other - why not work on both?

All I know is that if I had family relationship and health issues, I'd certainly rather be wealthy than poor.

Jim85
Posts: 153
Joined: Tue Dec 11, 2012 10:10 am

Re: Retiring soon - some questions

Post by Jim85 » Sun May 20, 2018 10:19 am

Thanks once again to all. I really do need to look closer at the whole Roth conversion value vs ACA subsidy. As some have suggested, I may be able to do some conversion and still get the subsidy. Very possible I may only use COBRA until the end of this year as it might turn out that the ACA subsidy route is more cost effective than COBRA. Lots of food for thought here but I think my initial plan is pretty good and I should have a lot more time in the next few months to figure out the rest.

Chip
Posts: 1997
Joined: Wed Feb 21, 2007 4:57 am

Re: Retiring soon - some questions

Post by Chip » Sun May 20, 2018 11:05 am

Jim85 wrote:
Sun May 20, 2018 10:19 am
Thanks once again to all. I really do need to look closer at the whole Roth conversion value vs ACA subsidy. As some have suggested, I may be able to do some conversion and still get the subsidy. Very possible I may only use COBRA until the end of this year as it might turn out that the ACA subsidy route is more cost effective than COBRA. Lots of food for thought here but I think my initial plan is pretty good and I should have a lot more time in the next few months to figure out the rest.
Note that if you are getting a premium tax credit (PTC) any increase in income (MAGI for ACA purposes) is effectively "taxed" at an additional 5-17% while in the range of 138% to 300% of FPL due to decreases in the PTC. And that doesn't even consider the additional benefits available via a Cost Sharing Reduction silver plan, as dwickenh mentioned. Those factors should enter into any calculation of Roth conversion costs or the costs of realizing capital gains.

If you think you need to realize the gains you mentioned you might want to do it, based on the above, in a year when you're covered by COBRA for the entire calendar year. Obviously subject to your other tax considerations.

kmurp
Posts: 254
Joined: Fri Jun 01, 2007 1:53 pm

Re: Retiring soon - some questions

Post by kmurp » Sun May 20, 2018 12:31 pm

livesoft wrote:
Fri May 18, 2018 8:58 am
Chadnudj wrote:
Fri May 18, 2018 8:48 am
I'm a bit curious that this is what you advise (although I'm sure there's a good rationale I'm missing).
Maybe you are missing that the OP is spending down their taxable account. Whether one "sells" money market fund shares or shares in a tax-efficient, passively-managed stock index fund does not change the money that can be spent on expenses. It does change the taxes paid by quite a bit.

The OP should not wait to age 65 to do Roth conversions. Start this year after looking at the tax situation. The money to pay the taxes on the Roth conversion could come from tax-free sales of shares of tax-efficient, passively-managed stock index fund found in the taxable account.

The goal is still to get as much out of the traditional accounts and into Roths as possible. I have outlined how to keep the money market and CDs from increasing one's AGI. Increasing AGI needlessly just reduces the amount of Roth conversions possible at a given tax rate which is not a good thing.

We are doing exactly this and it works.
I understand what you are saying about minimizing taxes in the taxable account. I would worry though about the impact of a stock market decline on the spendable assets in the taxable account. If there were a 30% decline, that could really hurt spending. Sure, he could withdraw from the tax deferred bond accounts but that might kill his ACA subsidy.

Hockey10
Posts: 218
Joined: Wed Aug 24, 2016 12:20 pm
Location: Philadelphia suburbs

Re: Retiring soon - some questions

Post by Hockey10 » Sun May 20, 2018 12:44 pm

First, this is a great thread. Thanks to livesoft, Watty, and others who have provided some very thoughtful advice.

Second, I went through the same back and forth late last year in trying to decide between Roth conversions and ACA subsidy for 2018. My conclusion was the same as marcopolo above. The subsidies are so large that I could not justify going over the ACA cliff in order to do some more Roth conversions now, in order to possibly save some taxes many years down the road when RMD kick in. I will do some Roth conversions later this year while being ever so careful as not to go over the cliff.

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