Obviously, any money in pre-tax accounts (e.g. traditional IRA/401k/etc.) needs to be adjusted for an income tax estimate, unlike money in post-tax accounts (e.g. Roth).
You can, of course, “lock in” and pay current tax rates by converting the traditional account to a Roth account now if you do not want to have uncertainty about whether future tax rates are higher or lower.
In no particular order, best way to avoid the RMD issue is to have your IRAs in Roth IRAs. You then also avoid all taxes. You can convert some or all of your money when you want. Not having an RMD is a huge tax savings as well as having the compounding be tax free.
As for social security, my spouse is 62 next week and eligible for early SS then. I’m 52 so I have a while. If you can afford to wait, the school of thought is usually to wait as long as possible for the maximum benefit and to use your savings up first. Reason being is because if you wait until you’re 70 then it’s that much more per month you will have for the rest of your life. If you have set up an account online at ssa.gov you can see your social security statement. Since my husband is older than me and we will want two checks as long as possible, it won’t make sense for me to wait until I’m 70 and he’s 80 so we will probably take mine when I’m 62 and he’s 72. There is a nominal amount of annual increase for social security that’s not worth writing home about. Don’t forget part of your social security is also going to be taxable and at 65 you’ll have to sign up for medicare which will also reduce it. If you or your spouse has any sort of pension, that will also reduce your social security so make sure you look into the windfall provision as well.
My goal is to have all of my retirement assets converted to tax free vehicles before I would fall into any sort of RMD circumstance so that I’m not required to take them out ever and so I don’t have to pay taxes on them ever down the line. I’m still heavily invested in equities in my HSA, my Roth IRA and regular brokerage accounts that I manage myself and I have my traditional IRAs, 401k and SEP IRA’s in Index Funds or other Funds. The equities have increased more than 100% this year so now I’m in a quandry that I would like to sell some stuff off now but I’m definitely not interested in paying huge capital gains. I fully expect a lot of people selling off next Monday as I will be as well with some things and hold on for most others.
As for annual draw, I don’t have any amount yet as I am not an empty nester and until I have a true sense of that number, I have no clue what it will really cost to live. Plus my husband who is semi retired still makes money and I still work and I don’t think either one of us is planning to stop anytime soon.
Long term care policies are a waste of money unless you buy it very young. Otherwise the cost is not worth it. My biggest cost I feel will be travel most likely and probably paying for insurance while my husband is on medicare and I am on an expensive group policy and high deductible. I have 3 of my 4 kids in college or living in 3 different states than I live in, and the likelihood that my 4th (hs senior) going to a different state too, so lots of places to visit, but lots of expenses too. I also plan to be charitable but also generous with my family so that will probably be costly. I’ve always been very frugal and been called a miser by one of my parents, but that doesn’t mean I don’t like nice things.
I don’t really have a bucket list, but my husband would travel 365 days a year if he could. When we kick covid’s butt and my last one is off to college then I can think about rebooking a trip that was scheduled and cancelled, but for now, just have to forge ahead and taking care of everyone else and making sure they’re safe. I’m also still paying for the bulk of 3 college educations while teaching my kids to be fiscally responsible at the same time!
To me one can never have enough for retirement. Is $5m enough, is $10m? I don’t think I will ever feel like I have enough and with interest rates at 1% I don’t even feel comfortable knowing that one can just sit with money in the bank living off interest. As someone else said, this is one other nice thing about Roth IRA and putting those stocks in dividend stocks. You can earn a nice dividend yield on blue chip stocks that more than make up for crap interest rates right now as long as you don’t need the principal and again, you don’t need to pay the taxes.
Also, with interest rates so low, I currently keep a lot of cash in tax exempt money markets since after taxes the taxable ones actually are a lower tax rate.
Agree that I feel we can never have enough to feel secure. As I understand it, we don’t qualify for a Roth and never have. It does seem like a smart move if you do.
Not all pensions are affected by WEP.
Correct, there are few exceptions though, especially for younger workers since many employers now take out both pension contributions and social security, but many people are not aware of the WEP so need to check on that as they may not receive the full pension + social security. This is something that may possibly affect me but I won’t know for sure until I’m 60.
Usually if you aren’t a govt employee you are not subject to WEP.
If you have a Traditional IRA you can always convert it to a Roth. Many people who don’t qualify for a Roth actually convert their Traditional IRA contributions immediately after they put them into their IRA’s right into the Roth. My husband is self employed so he makes an annual SEP IRA contribution and the day after we make the contribution, we convert it to his Roth. You just have to remember that you’ll pay the taxes on it in the year you convert it, but it’s worth it, especially if it was done earlier this year.
Can you do just a portion? For example 20%?
For IRA to Roth? Yes! You can do any amount at any time.
I have a SEP IRA established years ago and we had very little income 2 years ago the first year my husband retired so I converted a huge portion of it, but not all. In retrospect I probably should’ve done all of it. This year I converted more. I just go into my account and pick how much I want to convert. Of course the longer I wait the more taxes I am likely to pay unless the market tanks. People expect a lot of investors will sell in January to take gains since they don’t want to take them now. There are also people who will need to get cash in order to pay taxes on the gains they took on investments they sold in Feb-Apr when the market tanked but when people would’ve still sold stuff at a profit. Those people may have huge capital gains. There was a big run and many of those either didn’t go back in market, if they needed it for college, or went back in and now that money is tied up again.
@SOSConcern - Sorry you are having a stressful time, but so glad you and your husband survived Covid. After that experience, it would be understandable if you husband is in more of a “enjoy life while you can” mood.
It’s great that you can cover the pre-Medicare medical insurance via your job. I did same, working 15 months beyond my husband’s retirement. (Our case is different though because he is 7 years older than me - I still retired earlier than most people, after 36 years of full time work.)
For years we were caught in the AMT exemption phaseout doughnut hole, which combined with state income tax, put us in a 40% incremental bracket.
Roth’s make no sense at rates like this, as we will almost certainly see nothing near this (or even half of this) in retirement, unless things drastically change.
Conversions are a possiblity in the future, depending on how things work out.
We did a bit of the Millionaire Next Door years ago. We have lived mostly in the Boston area where costs of living are high (except for 5 years in NY where costs were probably even higher but I was working on Wall Street). We moved from Cambridge to an expensive sub/exurb with very good public schools but one section of the town had been more working class in earlier years. The folks in that section of town worked at the public radio station or teaching at private schools or as engineers (not software engineers). We explicitly chose to follow MND and live in that neighborhood although our income was probably 3 to 10 times of some of our neighbors. People in those days mowed their own lawns and shoveled their own driveways, didn’t send their kids to private school, and were more modest in their spending. The most common car brand in the neighborhood was probably a Toyota. People didn’t have vacation houses unless they were in the family. In that milieu, per MND, we were more modest in spending than we might have been otherwise. We did at some points send our kids to private school and sometimes not. We did take very nice vacations. [Interestingly, I noticed that many folks seemed to have newer cars than we did and dressed their kids more expensively than we did]. Due the good work of a broker who put me into a 415i Defined Benefit Plan (which morphed into a 412i, I think), I was able to save $200K+ pre-tax per year for a number of years. Not sure what I made in those years so hard to say what percentage of income I saved.
After 25 years, we moved within the same town to the other side of the tracks to an extraordinary location. The street clearly had some more modest house on it when they were built in the 50s (or 60s) but the vast majority have been replaced with 5000 or 6000 sf tasteful developer houses and every home has a team of gardeners come in every week (the lots are pretty large). I’m pretty sure all the driveways are plowed by someone as the driveways are much longer. The most common car brand in the neighborhood seems to be Audi. Everyone has at least one dog. Although there are some older couples on the street, the folks I know are senior execs at publicly traded companies and an owner of a private company. One is an insurance agent who does high-end houses and his parents live on the street as well but are retired (they were small business owners). People seem to go away to vacation houses. We are so isolated that we don’t see our neighbors, but I wonder if their consumption levels would influence us.
Had we lived then in our new neighborhood, I’m sure we would have saved considerably less.
I did ask my FA about a Roth conversion. I think she thinks that I will slow down and my income will go down, so I might be in a lower tax bracket later. In that case, a Roth conversion wouldn’t make sense. I don’t think I’m going to slow down any time soon, but also if I don’t convert, I will have big RMDs that will keep me in the top brackets even if I slow down.
That’s why you should take the time and do the calculations including with the taxes if you convert now and if you don’t and have to pay the taxes on the RMD based on the FV of the funds then using today’s tax rates, which of course depending who is in office when you have to tax the RMD may be higher. If you receive social security and/or have other taxable income that’s another factor. Or, you can just roll over a bit at a time, or take a one time hit pay it and be done. Your FA should be able to do these calculations for you. Your work income might go down but it sounds like if you have to take big RMD’s and have social security, etc. your taxable income will not go down. So, if that is the case and you’ll be paying large amount in taxes anyway, if you do the calculations and the tax free growth may indeed make it worthwhile to take the tax hit now.
Thankfully I have survived Covid and hopefully w/o any long term consequences. Working in skilled care/rehab, our facility had low-ish numbers until after Thanksgiving - then our county numbers went up a lot and more than half our our building was with Covid units. Each week more and more staff also affected and I was one of the last to test positive. My first evening back to work was last night “hit the ground running” - I worked 12 hours and came home exhausted but got very good sleep.
My family practice MD group does not see anyone with active Covid but will do telemed with confirmed Covid test (as insurance will pay). Not doing me any good when a MD can’t listen to my lungs. I didn’t want to go to a walk in clinic but would have if I needed to do so.
So all retirement planning would have been for naught (for me) had I not survived Covid.
We have copies of consent forms for the Covid two step vaccine, but no word on when we will have at our skilled care/rehab facility. I plan to take the vaccine unless I learn that I should not.
Now that DH’s sabbatical (Nov/Dec) is about to come to a close, let me see if he can be exploded out of his ‘retire early’ mentality and work the months I am working until we both are 65 (Oct 2021). I have plans for the money and see the need for it while he does not – immediate use for home improvements and sell/buy changes; longer term need for grandkids’ education which we are putting money into a fund already. I wanted to cash flow stuff in 2021 and not take out of retirement funds. He has some poor male examples in his family (his dad, at least one uncle) who had been satisfied to do as little as possible in career/work.
@SOSConcern - Again, thanks for your dedication to your patients during this difficult Covid Challenge. I can’t begin to imagine the stress.
Per your husband’s work options, would he be able to work from home? That can work nicely (especially if none of the offshift support hours I endured before retirement). Or part time?.. I know a few people (including my dad) who loved having semi-retirement gigs working 3 days a week. Good luck!
@Colorado_mom the person has to be ‘motivated’. And yes he potentially has work options open to not work FT (which I am totally fine with). I just finished working 13 hours and prior day 12 hours (the first two days back from Covid). He wants to pour himself into his select FT retirement activities and get satisfaction out of a hobby club instead of a paycheck for the next 9 months - leaving a lot of money ‘on the table’ at the height of his earning ability. He has always spent way too much time on this hobby. The problem is there are going to be house fix up chores, and we will be hiring help – which could be paid for by some of his earnings. He just isn’t grasping the importance of finishing the plan. In the mean time I am working my tail off making half of what he can earn with a lot less effort. Very frustrating.
Seems implied that the hobby does not produce anything that would help fix up the house.
Unfortunately many times that is what my marriage is like. My husband not grasping the importance of MY plan. Because it’s mine and not his. I’ve spent many years learning that we need to come to a halfway point. And sometimes we come to his point because he gets to have a plan also. Which sometimes is no plan at all.
My husband struggles with some health issues. I have to learn to give him some slack because I have to remember that he is not always feeling well. That he has worked full time for 40 years. That while not perfect, I like harmony in my house.
I’m just saying how things are at my house. And how I council my daughter when she complains about her partner. It’s taken me a long time to get here lol!
Excellent post @deb922. Not to mention that life sometimes shifts our or one person’s “plan”.