Case Study - Bridging the 60’s

[TeeNixx]

Our story is quite different than the regular FIRE situation. I would consider us, I and my wife, semi-retired and the question is how we will manage the next ten years until I start to collect SS. With our SS and some small pensions from abroad, in combination with our modest spending, we don't need a lot to meet our needs moving forward.
A spreadsheet with the numbers behind my thoughts can be found at https://docs.google.com/spreadsheets/d/1bHkTPC1phva_Yxs5J0oiZdYPAHesALAZVfUlX4e3_Ao/edit?usp=sharing if you would like to tag along.

The spreadsheet shows some astronomical numbers, but keep in mind, that’s without considerations to taxes, RMD and health scare. Let’s call it a work in progress…..
 
Life Situation: I (A) and my dear (C), 60 resp 57 y/o. Married filing joint with no dependents. We gave up employments five years ago and are now running an LLC. This is a kind of 4HWW business that doesn't require too much of our time. The LLC is taxed as an s-corp with two employees, me and my wife.

Gross Salary/Wages: The LLC provide us with: W-2 salary; $24k/year per person, HSA contribution; $4,450 year/person, Bronze level health insurance, our phone and internet expenses, some of our travel expenses etc.
Our entire W-2 salary is contributed to 401(k)’s and the LLC contribute 25% of the W-2 compensation to the same 401(k)’s for a total $60,000 in contribution/year combined.
We take a distribution of $1,500/person per month for living expenses and additional funds as needed for taxes, personal projects etc. Not a ton of additional funds to extract from the business. 

We can see a downward trend for the business over the next few years as reflected in the falling AGI below. Eventually, I’m wrong and the revenue will stay strong. If that’s the case we are considering gifting/write over ownership gradually (and thereby income from the LLC to our kids while we still run the company) until we are completely out of it. 

Adjusted Gross Income: For 2018 I estimate our AGI will be around $104k, dropping 20% per year after that; 2019 - $93,600, 2020 - $84,200, 2021 - 38,000. Next year I start to collect a small pension from abroad, my wife will follow 3 years later. This pension is non taxed and will not be declared as income per IRS.

Current expenses: Our annual expenses is $49,100 including mortgage, $37,100 without a mortgage, $33,900 without a stipend we promised our grad school kid ending 03/2019. So $35,000 would be the basic spending moving forward after we paid off the mortgage in 2020.

Assets: Our main assets are in tax-deferred retirement savings as described in the spreadsheet above; about $504,900 in Vanguard VTSAX/VBMFX (80/20%), $18,000 in Roth IRA.
Our primary home has a value of around $420,000 and a “project property” about $170,000.
In addition about $30,000 cash, about $35,000 in cars, tractor and stuff.

Health plan: The LLC pay our bronze health insurance as well as full HSA contribution for now. Hopefully, we can keep that going for another three years. By then our AGI might be lower and we can qualify for an ACA insurance (if it’s still around). We have been keeping the HSA funds invested and pay medical expenses out of pocket. Hopefully, we can do that for a while. 

Liabilities: We have $95,000 @3.25% left on a mortgage (matures 06/2027).

Our property situation: Our passion/hobby is home building/design etc. For that reason, we have a “project property” that we purchased earlier. The idea is that will be our retirement home. When we finished that house in a couple of years and sold our current home, we plan on having a home with a value of about $350,000, no mortgage and $100,000 in profits to pocket. The construction is planned to be “self-financing” as we will build an ADU on the lot first while we sell our current home to finalize the new house.
 
Our questions/issues:

1. Will we be able to finance our retirement until my SS kicks in?
2. Converting some 401(k) funds to Roth before RMD? A big issue is how to deal with the 401(k)’s to minimize RMD that will kick in at 70 ½. If we can spend my 60’s to do some form to Roth conversion or something if the tax rate is reasonable?
2. How should we allocate our assets during our 60’s for the best outcome?
3. The LLC is moving along but I can see a trend of decline. Expecting the AGI to drop 20% per year for the next 2-3 years. Pesonalcapital shows a 99% probability on all scenarios I throw at it, including quit now, get abroad pension and SS at 70.

I’ll appreciate all input and suggestions.

[reeshau]

Next year I start to collect a small pension from abroad, my wife will follow 3 years later. This pension is non taxed and will not be declared as income per IRS.

This is just a side note, but is this a public or private pension?  If a public pension, this will alter your US social security payments.  You can find more info on the Social Security website.

If it is a private pension, you do need to declare the income.  You would be able to then claim the foreign earned income exclusion, but the activity needs to flow through your 1040.  Also, if your state has income tax, they don't have tax treaties with other countries, and so will tax based on AGI.

https://www.irs.gov/businesses/the-taxation-of-foreign-pension-and-annuity-distributions

[TeeNixx]

 

Next year I start to collect a small pension from abroad, my wife will follow 3 years later. This pension is non taxed and will not be declared as income per IRS.

If it is a private pension, you do need to declare the income.  You would be able to then claim the foreign earned income exclusion, but the activity needs to flow through your 1040.  Also, if your state has income tax, they don't have tax treaties with other countries, and so will tax based on AGI.

This pension is covered by a US treaty and taxed in the country of origin, not the US. Looked at cases from the last 30 years and it's not taxed on federal or state level.

[reeshau]

Next year I start to collect a small pension from abroad, my wife will follow 3 years later. This pension is non taxed and will not be declared as income per IRS.

If it is a private pension, you do need to declare the income.  You would be able to then claim the foreign earned income exclusion, but the activity needs to flow through your 1040.  Also, if your state has income tax, they don't have tax treaties with other countries, and so will tax based on AGI.

This pension is covered by a US treaty and taxed in the country of origin, not the US. Looked at cases from the last 30 years and it's not taxed on federal or state level.

I think we are talking past each other.  Not taxed is not the same thing as not declared on your tax form.  And since you haven't disclosed the country, be warned that it is a country-specific thing.  In fact, what you say is opposite of the standard, which is taxation in country of residence.  But, it is true (or, can be true) for UK-US or Canada-US.