We felt there was some advantage to staggering our retirements (though only by a year, waiting for my husband to hit Medicare age). It definitely helped ease ourselves into the new mindset. I worked a lot from home, which helped - sometimes we were even able to go out on a lunch date. The home chore dynamics changed as he learned how to grocery shop himself and cook more. That made him more ready to split the responsibilities now that we are both retired.
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The upcoming tax increase after 2025 (for those who got a tax cut in 2018 from the 2017 TCJA) is due to the expiration of many of the TCJA changes in personal income tax, not something that Biden may have proposed (which was a tax increase for incomes over $400k, which is unlikely what most will see as āmiddle classā). Also, the change to a different inflation indexing method in the TCJA also means that personal income tax will rise relative to what would have been if the old inflation indexing method were kept.
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The proposed higher corporate income taxes will depress earnings which will lower stock prices. Not good for the middle class. Even is you believe that the Biden administration will keep their word - as if any politicians ever did - higher taxes on people who earn over $400K will depress demand which will lead to lower wages and job availability. Also not good for the middle class. And for those of us who work in the non-profit and university sector, this will result in lower donations. It may put off retirement for many people for years and years. Unfortunately, it is like trying to read tea leaves but I donāt see a lot of blue skies ahead.
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@TooOld4School Iām sorry you are feeling this way. Itās not fun.
I myself am feeling great optimism for the future
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I think we will be fine, my wife and I are in pretty good shape and I work in a sector where demand has risen this year, but we still have a wage freeze and our 403b match has been suspended until July 21. I am just trying to be realistic. Looking at the finances of our K-12 , hospital and uni clients is not pretty now, they are all under major stress. I am glad you are hopeful, things will definitely be better with the vaccine.
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Iām going to pop into this thread now that itās slowed down and dh is retiring this summer. We are spending the weekend relooking at our finances.
I have a question: Do you consider your 401k or other retirement vehicle something that you are using for day-to-day expenses either right away or some point into the future? Or do you consider it a nest egg that is there if you need it but donāt plan on making that money part of your regular budget?
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Neither of us have pensions, SS alone will not be enough, other investments may not be enough. So I donāt think weāll have a choice.
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We looked at our entire financial picture when considering how to finance our day-to-day living expenses. A big thing that came into consideration for us was future RMDs. Please consider doing some forward planning to understand how RMDs, Social Security and taxes will interact for your situation. Having a balance of taxable income (RMDs, SS), tax-free income (ROTH), and cash on hand is what we are planning for.
HTH
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Retirement in 2 years. Neither of us will be old enough to draw SS.
Husband has pension from his job of 40+ years. It will be enough to pay basic expenses. In early retirement we plan on doing things, living life, traveling. We have planned to spend some of our savings in early retirement. Husbandās job does provide retiree health care plus we will have a hefty medical expense fund to help with what the retiree plan doesnāt cover. We can also contribute to our medical fund until husband turns 65 and we plan on doing that.
Not sure when we will draw social security but the plan now is to wait until 70. At that point the pension, social security and RMD will be more than plenty to live on. With enough to leave a nice amount after we go. But donāt plan on that for a long time. And our children require no help from us and havenāt since college graduation.
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I have been playing around with models since we have 8-10 years to make adjustments before we take SS at 70. DW has a TIAA/CREF annuity, but that is not indexed to inflation. We are looking at when it makes the most sense to start it. 65? 70? 72? If it is based on our combined life span, the monthly amount is diminished by about 25%.
We will have plenty to live on from that and SS, at least initially, but the amount will diminish in real value as we age. Which leads to when to use the remainder of our retirement investments (403b, IRA, Roth, etc.) I realized that we have too much in our taxable retirement assets and not enough in our Roth after-tax assets because of RMDās. When you consider the 3.8% Medicare tax and the additional $7000 or so in Medicare part B payments, it amounts to a 35% marginal tax increase. We wonāt need that much money anyway. Most of the fairly pricing things in life are not what we enjoy (apart from travel) and we certainly donāt need to acquire more stuff. Weād need to by a bigger house with all of the headaches.
Iād encourage everyone to look at this in the decade or so before retirement so you can move assets around in tax advantaged way.
Each family should have a master plan, ideally a plan that enables peace of mind if there is a market downtown. We opted to design a plan with the help of a fee-only financial planner, but many couples consult with free financial planners (some available as a perk of community college classes ā¦ we started that way) or just do their own research online.
Here are some general tips as you start to look at your finances:
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Find a way to determine your monthly income needs/desires. Iāve done this by years of tracking (monthly spreadsheet update showing money āoutflowā - cash + checks + withdrawals; excluded college payments). Many financial planners suggest just total up the typical expenses, but I feel like that is unlikely to capture all itemsā¦ unless you include a general entry for average Visa bill. Another way is to look at annual income and subtract your annual deposits into savings/investments. Note - If now current car payments, it is also good to think about how you will budget future car purchases.
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As you list each assets, document the co-owners / beneficiaries. If none named, it might be a good time to define that (often doable via website). Or at least document as notes for estate planning
and future Will updates. We think it is good to have some asset designations for the kids that will not involve probate.
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I hadnāt really even considered RMDs until this weekend and how that will affect our taxes down the road. Does anyone have a link to an online worksheet or some kind of primer about how to start doing that math? For instance, is that an argument for starting to take money out of your 401k earlier, to avoid the tax hit once RMDs start? We will have more money than we need when the RMD kicks in. Nice problem to have, I suppose. The house is paid off, no car payments ever ā¦ we live really simply.
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Donāt forget that if RMDs kick you over the income limits that your Medicare part b payments and part D prescription payments will jump due to IRMAA For each of you individually. Itās not a gradual change, more of a cliff.
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@Youdon_tsay There are dozens of RMD calculators online. They all use an IRS table of life expectancy factors. You simply take your IRA balance subject to RMD and divide it by the factor. The factor for age 72 (the first age at which I will have an RMD) is 25.6. So if my total IRA balance at that time is $2 million, my RMD will be 2,000,000 / 25.6 = $78,125.
But the factor declines each year, which means your RMD goes up as a percentage of the total. If my IRA balance is still $2mm at age 80, the factor for age 80 is 18.7 so my RMD would be $106,952.
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In the earlier thread I advocated owning rental real estate (but not in a retirement account) for long term, inflation indexed income.
Weāre just completing the finishing touches on 6 new apartments we had built for us, and Iām happy to report that the lease up is going better than I could have imagined. We set our rents higher than we originally projected, and are getting tons of applications. Weāve already rented five of the six, and the tenant credit scores are all in the 700ās.
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On SS, our financial planner did a calculation and I think the crossover for me is 68 and not 70. Canāt remember why.
@sherpa, is your real estate in a Roth or in a qualified plan? If in a qualified plan, donāt you have to sell stuff to fund your RMDs?
Our RMDs in early years will be huge. So, we will live on that. Since Iām not planning to retire, I guess weāll save what I earn from my work. Iām never in a tax bracket where converting to a Roth makes obvious economic sense.
I am making investments in our house (solar power and batteries, insulation, windows) that will reduce our operating costs somewhat. Generally our utilities will be lower than in our previous house, even though the house is bigger. Property taxes about the same. Iāve reduced our mortgage to a 2.625% 30 year conforming mortgage, though I can pay it off if needed.
Iād like to be able to sell our Canadian house (which we use in the summer) as this is just as nice in the summer, but I donāt think that is going to happen. But, we may use it heavily this upcoming year when serious construction is happening at our house. We are selling a rental condo, but might invest at some point in rental real estate again as a source of income when we are older.
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@shawbridge - Our rentals arenāt in a retirement account; theyāre in a FLP.
I view them as retirement income but theyāre distinct from our retirement accounts.
@sherpa can you give us a brief description of what a FLP is?
If I recall correctly, an FLP is used to transfer assets to the next generation at a discount. The discount comes because the recipients have non-controlling interests. The discount either reduces gift tax or, in the current world, keeps the gifts under the total allowable gift tax exemption.
We have done things a little differently as our concerns were a little different. We have rental real estate owned by an LLC in a dynasty trust. I direct the LLC. The trustās beneficiaries are my wife and me and all of our progeny. Whatever assets are in the trust are not subject to estate tax. No tax advantage here, but the trustee is authorized to use this for our housing, health, welfare, education etc., so it would function as a retirement account if we need it. I suspect we will not, but only time will tell.
I have set up a similar trust for my son, who is selling his shares of his Silicon Valley startup to the trust. In his case, I wanted to provide him some protection against lawsuits (no reason to think there will be any, but if he does really well, Iād rather see the bulk of his assets protected.
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