Looking for input...

[YetiXing]

First time post...
Looking for input on our plan...
Really, the withdrawal strategy I have in place...

A few details, we will retire at H53/W54
All debts paid off...college, house, cars etc...
Our plan is to pull the trigger in 1.5 years when our youngest graduates college.

Assets 1.8m (500k cash / 200k Roth's / 1.1m 401k's)
Expenses 70k
Healthcare = ACA
SSA at 67years

My biggest question is my Roth conversion plan.
Since we will have no income from approx 53- 65...
We plan to use the ACA for insurance.

-This will be accomplished by making approx 60k Roth conversions annually from 53-65 to show income... (pay the tax from cash reserves)
-We will fill the first "5 year gap" $ with Cash and existing (older) Roth CONTRIBUTION withdrawals...
-In year 6, approx 59/60 we will begin to withdraw the Roth Ladder CONTRIBUTIONS, year by year as they mature until 65...
-At that point we will switch to 401k withdrawals for living expenses, and hold the remaining Roth conversions.
-And of course at 65 medicare kicks in... And SSA at 67.

Ive tested in a few different ways, Monte Carlo, ProjectionLab, NewRetirement, etc... and so far im left with an excess...testing at 100%

The plan is very flexible...
If it makes sense, i could start drawing off from 401k's at 59.5 ...just need to keep the income controlled before 65 for ACA insurance cost.
Any advice on this withdrawal plan would be appreciated.
Still have 1.5 years to tweak...

 

[SevenUp]

If you have considered the effects shown in Roth Conversion and Capital Gains On ACA Health Insurance then you probably have a good plan. Enjoy!

 

[Al18]

Looks good. Once you turn 59 1/2, I would take small withdrawals from the 401K rather than start spending the Roth IRA. Also, consider converting the 401K to an IRA once you are 591/2, so you don’t need to have 20% withheld for Federal Taxes.

You may want to start building a 3-5 year CD ladder for your cash, as I have a hard time believing MM funds will continue paying 5%+ until you are 59 1/2

 

[YetiXing]

Looks good. Once you turn 59 1/2, I would take small withdrawals from the 401K rather than start spending the Roth IRA. Also, consider converting the 401K to an IRA once you are 591/2, so you don’t need to have 20% withheld for Federal Taxes.

You may want to start building a 3-5 year CD ladder for your cash, as I have a hard time believing MM funds will continue paying 5%+ until you are 59 1/2

Thats where I was starting to lean, instead of continuing the Roth Conversions to create income for ACA, after 59.5 just pull directly from the 401k...

Im with you on the CD Ladder. A big chunk of "Cash" is in a 5 year CD Ladder/IBonds to lock up some decent rates.
High yield savings accounts are paying well now for the cash, but i wont last forever.

 

[Al18]

Great

 

[Surewhitey]

Thats where I was starting to lean, instead of continuing the Roth Conversions to create income for ACA, after 59.5 just pull directly from the 401k...

Im with you on the CD Ladder. A big chunk of "Cash" is in a 5 year CD Ladder/IBonds to lock up some decent rates.
High yield savings accounts are paying well now for the cash, but i wont last forever.

So the $500k in CD's will get you $25k in interest. Are you going to reduce the Roth conversions by this amount to still hit the ACA plans? $60k sounds like a lot for ACA subsidies...

Otherwise, sounds pretty solid.

 

[YetiXing]

So the $500k in CD's will get you $25k in interest. Are you going to reduce the Roth conversions by this amount to still hit the ACA plans? $60k sounds like a lot for ACA subsidies...

Otherwise, sounds pretty solid.

I guess that's where all this software comes in...
And getting accurate quotes.

That's the balancing act:
Getting a good ACA subsidy with a lower conversion...
And also draw down enough in a low tax bracket to reduce future RMD's.

Still lots of planning to do but with up to 12 years of health insurance cost, it may be more beneficial to get the biggest subsidy over the years....will start to add up.

 

[Surewhitey]

I guess that's where all this software comes in...
And getting accurate quotes.

That's the balancing act:
Getting a good ACA subsidy with a lower conversion...
And also draw down enough in a low tax bracket to reduce future RMD's.

Still lots of planning to do but with up to 12 years of health insurance cost, it may be more beneficial to get the biggest subsidy over the years....will start to add up.

That's our dilemma. Not there yet, but the Roth conversions (and taxes) vs subsidies is probably our biggest consideration.

 

[Exchme]

It seems you have enough money, but you need to look at the tax details some more.

You have to re-look at the ACA premium credit formula. The current ramp structure means Roth Conversions above about 2.5 FPL are being taxed at about 14-18%. This stacks on top of the 10-12% tax rate, so you have a high marginal cost for conversions, probably not worth doing them at that cost. The ramp structure is set to expire, but I'll wager something like it stays as politicians did not like getting calls from people that missed the old 4 x FPL cutoff by a couple bucks.
I've attached a graph of the ACA cost vs income (remember to add the tax bracket, so your marginal cost of some of those Roth Conversions can be ~16% ACA + 12% income tax).

You didn't share your SS benefits, so it's not clear if you have any portfolio draw once you claim. If you do and are taking it from tax deferred, you will be in the SS tax torpedo range, meaning potentially a high marginal tax cost for any withdrawals from tax deferred in the SS phase-in range. Deferring SS and using the time between Medicare eligibility and age 70 for Roth Conversions is often the lowest tax cost time to do them.

You didn't tell us why you were choosing for both of you to claim SS at 67, generally the spouse with the larger benefit should wait until 70, check out opensocialsecurity.com. Make sure you scroll to the bottom and click on different points on the graph, it displays the differences that different claim age choices make.

It's not clear why you are carrying so much cash in taxable, it's generating ordinary income. It's generally better to hold fixed income in tax deferred and hold stocks in taxable, so stock dividends will be mostly qualified and the gains are taxed as capital gains. That also slows the growth of tax deferred, taking a bite from the need to do Roth Conversions.

 

[FlaGator]

It seems you have enough money, but you need to look at the tax details some more.

You have to re-look at the ACA premium credit formula. The current ramp structure means Roth Conversions above about 2.5 FPL are being taxed at about 14-18%. This stacks on top of the 10-12% tax rate, so you have a high marginal cost for conversions, probably not worth doing them at that cost. The ramp structure is set to expire, but I'll wager something like it stays as politicians did not like getting calls from people that missed the old 4 x FPL cutoff by a couple bucks.
I've attached a graph of the ACA cost vs income (remember to add the tax bracket, so your marginal cost of some of those Roth Conversions can be ~16% ACA + 12% income tax).

You didn't share your SS benefits, so it's not clear if you have any portfolio draw once you claim. If you do and are taking it from tax deferred, you will be in the SS tax torpedo range, meaning potentially a high marginal tax cost for any withdrawals from tax deferred in the SS phase-in range. Deferring SS and using the time between Medicare eligibility and age 70 for Roth Conversions is often the lowest tax cost time to do them.

You didn't tell us why you were choosing for both of you to claim SS at 67, generally the spouse with the larger benefit should wait until 70, check out opensocialsecurity.com. Make sure you scroll to the bottom and click on different points on the graph, it displays the differences that different claim age choices make.

It's not clear why you are carrying so much cash in taxable, it's generating ordinary income. It's generally better to hold fixed income in tax deferred and hold stocks in taxable, so stock dividends will be mostly qualified and the gains are taxed as capital gains. That also slows the growth of tax deferred, taking a bite from the need to do Roth Conversions.

Good points to be considered.

As to the last one regarding $500K cash in a taxable account, yes, the standard advice is FI in tax deferred.

IME you can't have too much in taxable accounts at the outset of ER. At the OP's burn rate, he has 7+ years of expenses, and that will get them to 62/63, and still on ACA. And that will be even fewer years if paying conversion taxes from the cash. The money is going to have to come from somewhere. IMO, better to have $25K of taxable interest and $45K of principal spending than $15K of dividends and $55K of some type of ST/LT/loss from a variable market for the next 7+ years. Certainty at the outset of ER reduces anxiety.

At some point it will be necessary to draw down from the 100% taxable tIRA (or the Roth) for living expenses. My recommendation is to postpone that for as long as possible. And I wouldn't completely drain the cash either - things happen and it's nice to be able to take care of them without worrying about the tax implications.

All of the above is from my experience over the last 10 years. Take it or leave it, happy to answer questions.

 

[YetiXing]

Good stuff!
Thanks for the information, keep it coming.
I still have 1.5yrs to get things in order.

You know, they say saving the money is the easiest part....
And I believe they are right.
Withdrawal strategies and all other decision around retirement is much more difficult.
Lots of decisions.
Good thing is the plan can be flexible, and there is time...

 

[YetiXing]

Good points to be considered.

As to the last one regarding $500K cash in a taxable account, yes, the standard advice is FI in tax deferred.

IME you can't have too much in taxable accounts at the outset of ER. At the OP's burn rate, he has 7+ years of expenses, and that will get them to 62/63, and still on ACA. And that will be even fewer years if paying conversion taxes from the cash. The money is going to have to come from somewhere. IMO, better to have $25K of taxable interest and $45K of principal spending than $15K of dividends and $55K of some type of ST/LT/loss from a variable market for the next 7+ years. Certainty at the outset of ER reduces anxiety.

At some point it will be necessary to draw down from the 100% taxable tIRA (or the Roth) for living expenses. My recommendation is to postpone that for as long as possible. And I wouldn't completely drain the cash either - things happen and it's nice to be able to take care of them without worrying about the tax implications.

All of the above is from my experience over the last 10 years. Take it or leave it, happy to answer questions.

Tried to direct message you with a couple of questions, but the system wouldn't allow for 24hours.
I guess its because im new to the forum. Will try again later...

 

[Exchme]

IMO, better to have $25K of taxable interest and $45K of principal spending than $15K of dividends and $55K of some type of ST/LT/loss from a variable market for the next 7+ years.

These numbers are not realistic. If you use a total stock market fund your dividends would be significantly less than 2%, so less than $10K/year and your gains on any sales would be minimal. Toward the end, you would have less dividends, but still most of what you are withdrawing for spending would be money you invested, not taxable gains. You suggested $55K in gains, that would be hard to do when you need $60K for expenses, it would require that your stocks had a 1200% increase in value in 7 years! Obviously if OP is controlling income for ACA, the qualified dividends and long term capital gains aren't taxed at all, though they do count toward ACA MAGI and so reduce premium credits.

You are certainly correct that if you are willing to hold tons of cash in taxable, there are few decisions about money to make, but it costs a lot of taxes for that privilege. My wife asked me to make a "disaster plan" for her in case I died suddenly. The plan I made included selling the house plus using some insurance to have a lot of cash in taxable and just spend it as needed. My wife has no interest or desire to learn about finances, talk of IRMAA or Roth Conversions makes her eyes glaze over and she would be very reluctant to sell a stock, so for her, the best plan was a simple one, not worrying about optimization. On the other hand, OP seems very interested in optimization.

 

[YetiXing]

Its a balancing act for sure... Optimizing -vs- Simplifying

You bring up a good point, creating a simple disaster plan for the ones you leave behind...because not everyone wants to be so deep in the numbers. HaHa

 

[YetiXing]

These numbers are not realistic. If you use a total stock market fund your dividends would be significantly less than 2%, so less than $10K/year and your gains on any sales would be minimal. Toward the end, you would have less dividends, but still most of what you are withdrawing for spending would be money you invested, not taxable gains. You suggested $55K in gains, that would be hard to do when you need $60K for expenses, it would require that your stocks had a 1200% increase in value in 7 years! Obviously if OP is controlling income for ACA, the qualified dividends and long term capital gains aren't taxed at all, though they do count toward ACA MAGI and so reduce premium credits.

You are certainly correct that if you are willing to hold tons of cash in taxable, there are few decisions about money to make, but it costs a lot of taxes for that privilege. My wife asked me to make a "disaster plan" for her in case I died suddenly. The plan I made included selling the house plus using some insurance to have a lot of cash in taxable and just spend it as needed. My wife has no interest or desire to learn about finances, talk of IRMAA or Roth Conversions makes her eyes glaze over and she would be very reluctant to sell a stock, so for her, the best plan was a simple one, not worrying about optimization. On the other hand, OP seems very interested in optimization.

You certainly have me thinking outside the box...the box I built.
And that is what I am here for!

 

[FlaGator]

These numbers are not realistic. If you use a total stock market fund your dividends would be significantly less than 2%, so less than $10K/year and your gains on any sales would be minimal. Toward the end, you would have less dividends, but still most of what you are withdrawing for spending would be money you invested, not taxable gains. You suggested $55K in gains, that would be hard to do when you need $60K for expenses, it would require that your stocks had a 1200% increase in value in 7 years! Obviously if OP is controlling income for ACA, the qualified dividends and long term capital gains aren't taxed at all, though they do count toward ACA MAGI and so reduce premium credits.

You are certainly correct that if you are willing to hold tons of cash in taxable, there are few decisions about money to make, but it costs a lot of taxes for that privilege. My wife asked me to make a "disaster plan" for her in case I died suddenly. The plan I made included selling the house plus using some insurance to have a lot of cash in taxable and just spend it as needed. My wife has no interest or desire to learn about finances, talk of IRMAA or Roth Conversions makes her eyes glaze over and she would be very reluctant to sell a stock, so for her, the best plan was a simple one, not worrying about optimization. On the other hand, OP seems very interested in optimization.

Sorry for the imprecise wording, it apparently obscured my point.

The hypothetical securities sale to support expenses, whether $55K or $60K annually, are subject to market risk. Some years there will be gains, some years losses, some years a wash. It's still at risk, and the portfolio is still being drawn down no matter the holdings. Having to make those sales in a declining market like we've seen twice since 2020 might be uncomfortable and costly.

The current form of that principal has the lowest tax cost of the OPs portfolio, and it is the only source of zero tax-cost liquidity for several years.

My comments are based on what I've lived through the last 9+ years with my liquidity at the outset of ER and managing my taxable account along the way. Others will take a different approach.