Author Topic: Please critique our plan  (Read 2788 times)

fullplay2024

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Please critique our plan
« on: April 23, 2019, 02:04:11 PM »
Please critique my plan.

Family:

Husband 43
Wife 40
Child #1 (starts college in 2020)
Child #2 (starts college in 2024)

Current income:

Combined W2 income: $450,000
Net rental cash flow: $30,000 (Goes up to $75,000 if investment mortgage fully paid off)

2018 household expenses:

Mortgage, Extra principal payments, and Property taxes:    $60,000.00    50%
Children sports & summer activities:    $15,000.00    13%
Food, dining, grocery, clothing and shopping:    $20,000.00    17%
Utilities and home maintenance:    $6,000.00    5%
Travel & vacations:    $5,000.00    4%
Gas and Transportation:    $5,000.00    4%
Donations:    $5,000.00    4%
Health and Fitness:    $2,000.00    2%
Miscellaneous (term life insurance, other, etc):    $2,000.00    2%
Total:    $120,000.00    100%

Break down of net worth (Assets - Liabilities):

Taxable brokerage accounts + cash: $550,000
Tax deferred retirement accounts (401k, Roth IRA, etc): $1,100,000
Rental real estate equity: $1,000,000
Primary home equity: $450,000
Other long term investments: $300,000
Total NW: $3,400,000

College Savings, not included in NW (529 + UTMA/UGMA): $450,000

Total Debt:
Primary mortgage: $300,000 left over 10 years remaining of a 15 year fixed term @2.875%
Rental mortgage #1: $125,000 left over 7 years remaining of a 15 year fixed term @3.75%
Rental mortgage #2: $115,000 left over 8 years remaining of a 15 year fixed term @2.75%
Total: $540,000

Other:
Husband and Wife have a term life insurance of $1M coverage each through 2023
Umbrella insurance of $1M coverage

Five year 2019-2024 and post-retirement outlook:

1. We have been blessed with a relatively high W2 income from high paying jobs in Tech and Healthcare.  But, we both have very demanding, stressful jobs, and we also feel our high income may not last.  Therefore, our wish is to semi-retire or significantly scale down work load next year (2020) and fully retire in 5 years (2024) after child #2 leaves for college.
2. In 2024, scale down from current 4000 sqft home and move to a 2000 sqft paid off condo
3. Spend time on healthy hobbies (marathons/triathlons/hiking) and travel post retirement
4. Would like to fund $130,000 of total expenses post retirement. Budgeting $25,000 for income taxes and $25,000 for health insurance
5. Would like to fund college savings up to a total of $500,000
6. We're both in good health now, but future health care expenses are a concern
7. We're debt neutral today (Taxable investments offset debt), but would like to be completely debt free in 2024.
8. We live in a MCOL midwest area now.  Would like to relocate to a no income tax, retiree-friendly state with warmer weather in 2024.

Questions:

1. What are we overlooking in our plan?
2. What adjustments/refinements do you suggest to our plan?

PS: I'll also post this on bogleheads for additional advice.

Enigma

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Re: Please critique our plan
« Reply #1 on: April 23, 2019, 02:27:05 PM »
1)   You stated Roth IRA, did you mean Traditional IRA?  I would imagine you are getting penalized for putting money in a ROTH since make so much each year.  Maybe you are doing a conversion.  If so it just shows you having an even larger income for these years.  You might want to hold off for the years that you will be making less income and that money would be taxed at a lower tax bracket.

2)   Pay off your primary mortgage
Maybe take a loan out against your investment properties and then pay off your Primary mortgage.  That way you write off more of the interest from the investment properties at the end of the year.

With the standard deduction so high and with so much money being invested it gets harder to itemize.  If the mortgage was under your investments it would be easier to write off that interest ($300k @ 2.875% ~ $8,625/yr).  Keep that in mind when you also go to buy the condo.  It might as well be paid off while investments at least the interest is a slight writeoff.

(Just my input ~  Looks good with the high income)

Gin1984

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Re: Please critique our plan
« Reply #2 on: April 23, 2019, 02:29:20 PM »
What are the "Other long term investments": $300,000 and what rate of retire do you expect?

fullplay2024

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Re: Please critique our plan
« Reply #3 on: April 23, 2019, 02:35:49 PM »
1)   You stated Roth IRA, did you mean Traditional IRA?  I would imagine you are getting penalized for putting money in a ROTH since make so much each year.  Maybe you are doing a conversion.  If so it just shows you having an even larger income for these years.  You might want to hold off for the years that you will be making less income and that money would be taxed at a lower tax bracket.

2)   Pay off your primary mortgage
Maybe take a loan out against your investment properties and then pay off your Primary mortgage.  That way you write off more of the interest from the investment properties at the end of the year.

With the standard deduction so high and with so much money being invested it gets harder to itemize.  If the mortgage was under your investments it would be easier to write off that interest ($300k @ 2.875% ~ $8,625/yr).  Keep that in mind when you also go to buy the condo.  It might as well be paid off while investments at least the interest is a slight writeoff.

(Just my input ~  Looks good with the high income)

Thanks for your input.

1. Roth IRA balance is through Mega backdoor contributions.
2. Plan is to pay the mortgage off over next five years.

fullplay2024

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Re: Please critique our plan
« Reply #4 on: April 23, 2019, 02:38:45 PM »
What are the "Other long term investments": $300,000 and what rate of retire do you expect?
Cost basis of overseas farm land investments producing no cash flow or income.  No idea on expected return, but we don't plan on selling at this point.

walkwalkwalk

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Re: Please critique our plan
« Reply #5 on: April 24, 2019, 03:08:58 PM »
What are the "Other long term investments": $300,000 and what rate of retire do you expect?
Cost basis of overseas farm land investments producing no cash flow or income.  No idea on expected return, but we don't plan on selling at this point.
Then you really shouldn't be including it in net worth (at least to the extent that you're defining a certain "net worth" that will be able to sustain you in early retirement and beyond)

fullplay2024

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Re: Please critique our plan
« Reply #6 on: April 24, 2019, 06:07:39 PM »
Then you really shouldn't be including it in net worth (at least to the extent that you're defining a certain "net worth" that will be able to sustain you in early retirement and beyond)

Agreed.  We will sell some time down the road..just don't know when, but until then we can pretend like that is not part of our net worth, for the sake of early retirement calculations as you suggested.

affordablehousing

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Re: Please critique our plan
« Reply #7 on: April 24, 2019, 06:16:44 PM »
Looks like a good plan, especially if you're comfortable with downshifting to a cheap market in retirement.

fullplay2024

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Re: Please critique our plan
« Reply #8 on: April 24, 2019, 08:16:01 PM »
Looks like a good plan, especially if you're comfortable with downshifting to a cheap market in retirement.

Thank you for sanity checking and confirming the plan.

SwordGuy

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Re: Please critique our plan
« Reply #9 on: April 24, 2019, 09:10:01 PM »
I wouldn't pay off your primary mortgage more than required.   The interest rate is super low and you're planning on selling the house.     You have enough equity in your primary house to purchase a new home free and clear and pay off your two investment properties when you sell it.

The interest rates on your investment properties are also very low.  Pay them off when you retire and sell your home.  That gives you an income of $75k from your rentals  in retirement which is when you actually *might* need it and gives you maximum deductions while your income is high.

I would be investing any surplus income, preferably in tax-sheltered accounts: 401K, IRA, HSA.   Set up a 401K for your rental company.  Employer contributions are huge so you can get more in a 401K that way.  (Get good CPA advice on how to do it the right way, I can't give you particulars.)


Frankly, $450k for a college education for 2 people is God's plenty.   Your kids would probably be better off in life (and better people) if they had to work their way thru college to keep expenses down.   Don't hand them that much money, make it available for good grades or as matching contributions based on what they earn during college and high school.   See "The Millionaire Next Door" for why this is good advice if you don't believe me.

marty998

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Re: Please critique our plan
« Reply #10 on: April 25, 2019, 02:28:39 AM »
6. We're both in good health now, but future health care expenses are a concern

If 1%'ers are worried about health care costs, then there really is something fundamentally broken about the American Healthcare system.


SwordGuy

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Re: Please critique our plan
« Reply #11 on: April 25, 2019, 06:30:57 AM »
6. We're both in good health now, but future health care expenses are a concern

If 1%'ers are worried about health care costs, then there really is something fundamentally broken about the American Healthcare system.

More like a 5%'er.   There's a big gap between 5 and 1% and an exponentially bigger gap between 1% and 0.1%.

Laura33

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Re: Please critique our plan
« Reply #12 on: April 25, 2019, 07:34:50 AM »
One nit:  your net worth is assets-liabilities.  So looks like around $2.9M vs. $3.4.

The big-picture issue is that before you decide where to move, you should do a very careful tax analysis of all of your options, because a no-tax state might not be the best option.  Remember that all states have to raise money somehow, and so no-income-tax states tend to have high sales taxes, and/or high property taxes, and/or high license/fee costs, etc.  Meanwhile, I think you are significant overestimating your income taxes in retirement -- you are anchored to the taxes you pay now on $450K, which are much much higher than the income you'd pay on $100K+/-.  In addition, when you are no longer relying on W2 income, you have much more flexibility to control how much income you need to report in any given year -- your Roth withdrawals will be completely tax-free; any withdrawals from taxable investments will be subject to the generally-much-lower capital gains tax rates (which can be as low as 0 depending on your other income), and even that applies only to the growth you have earned; and you can convert your traditional IRAs to Roths strategically over time to manage how much taxable income you realize in any given year.  Oh, and if you keep the rentals, you can offset the income with the costs of managing the properties*, and continue to take depreciation deductions (the classic "paper" loss that lowers your taxes while maintaining your cash flow). 

And on top of all that, state taxes are generally pretty low in comparison to the feds, unless you throw high city taxes on top.  So will it really benefit you to decrease your state income taxes by $2K if you increase your sales tax by 2%, your property tax by $1K, and your car registration by $500?  Keep in mind that you can control how much you pay in state taxes per the above, but you have no ability to control your property taxes and licenses/fees.

IOW, your plan seems to focus on lower taxes, but right now you don't even know what the real tax impacts will be.  Do some more research on all of the options before you pull the trigger.

Finally, do some hard math on where the money will come from.  Say you sell the house, so you have a NW of $2.8M.  But $1M of that is in rental properties netting $30K/yr.  That leaves you $1.8 investable cash.  The 4% rule says that you can safely withdraw around $70K/yr from that figure.  Add that to your $30K rental income, and you're at around $100K.  Subtract what you calculate for taxes.  Is that enough for the lifestyle you want long-term?

*A second good reason to keep the mortgages (the first being that at that interest level, it is basically free money).

Enigma

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Re: Please critique our plan
« Reply #13 on: April 25, 2019, 07:40:05 AM »
...there really is something fundamentally broken about the American Healthcare system.
There is something broken.  It is the number 1 reason that I am not RE.  There is too much uncertainity which makes it harder to plan around.  Very political and the system didnt get better under the Affordable Care Act.

Gin1984

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Re: Please critique our plan
« Reply #14 on: April 25, 2019, 12:10:07 PM »
...there really is something fundamentally broken about the American Healthcare system.
There is something broken.  It is the number 1 reason that I am not RE.  There is too much uncertainity which makes it harder to plan around.  Very political and the system didnt get better under the Affordable Care Act.
For many people, especially in states that did not try to screw it up, it got a lot better under the ACA.

MoneyizHere

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Re: Please critique our plan
« Reply #15 on: April 25, 2019, 12:18:57 PM »
If I were in your boat - I'd pay off the $240k in the rental property - i consider that a ROI of 18.75% (as it releases $45k cash/$240k debt). 
Don't bother early payoff off the primary home mortgage - since you're looking to sell it down the line somewhat soon -
I would also not float the boat for your kid's education in fully funding it like that.  Better to consider it a loan - it will help them out since they don't have to get an expensive loan - and you teach them the value of their financial decisions.

You're in a good spot - but I think you could find ways to optimize your spending a tad - but no biggie - you're in good shape with your plan and its a rockin' plan

SwordGuy

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Re: Please critique our plan
« Reply #16 on: April 25, 2019, 02:31:23 PM »
...there really is something fundamentally broken about the American Healthcare system.
There is something broken.  It is the number 1 reason that I am not RE.  There is too much uncertainity which makes it harder to plan around.  Very political and the system didnt get better under the Affordable Care Act.

Justin at www.RootOfGood.com is an early retiree and really knows how to stretch his money.  He adores the ACA.  Given the numbers he's posting, I understand why!   When people with his proven ability to manage money and costs swears by it (not at it), I'll take his word over the uninformed rantings of folks who've never actually checked out the facts. 

I suggest you really look into it in depth.   Justin's articles on it are a good intro.   Consider moving to a state that cooperated with the ACA rather than tried to destroy it.

fullplay2024

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Re: Please critique our plan
« Reply #17 on: April 25, 2019, 03:43:58 PM »
I wouldn't pay off your primary mortgage more than required.   The interest rate is super low and you're planning on selling the house.     You have enough equity in your primary house to purchase a new home free and clear and pay off your two investment properties when you sell it.

The interest rates on your investment properties are also very low.  Pay them off when you retire and sell your home.  That gives you an income of $75k from your rentals  in retirement which is when you actually *might* need it and gives you maximum deductions while your income is high.

I would be investing any surplus income, preferably in tax-sheltered accounts: 401K, IRA, HSA.   Set up a 401K for your rental company.  Employer contributions are huge so you can get more in a 401K that way.  (Get good CPA advice on how to do it the right way, I can't give you particulars.)


Frankly, $450k for a college education for 2 people is God's plenty.   Your kids would probably be better off in life (and better people) if they had to work their way thru college to keep expenses down.   Don't hand them that much money, make it available for good grades or as matching contributions based on what they earn during college and high school.   See "The Millionaire Next Door" for why this is good advice if you don't believe me.

You bring up an excellent point on my primary mortgage. All the extra payments were auto-scheduled 5 years ago. Iíll follow your advice and stop the extra payments and invest those extra funds.

Great comment on rental properties in retirement although Iíll look to outsource management to a property management firm. Iíll do some research on setting up 401k and talk to my CPA.

Regarding college savings, the idea was to use any excess/unused funds for nieces and nephews who are much younger than our kids.

Thanks for your thoughts.

fullplay2024

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Re: Please critique our plan
« Reply #18 on: April 25, 2019, 03:52:57 PM »
One nit:  your net worth is assets-liabilities.  So looks like around $2.9M vs. $3.4.

The big-picture issue is that before you decide where to move, you should do a very careful tax analysis of all of your options, because a no-tax state might not be the best option.  Remember that all states have to raise money somehow, and so no-income-tax states tend to have high sales taxes, and/or high property taxes, and/or high license/fee costs, etc.  Meanwhile, I think you are significant overestimating your income taxes in retirement -- you are anchored to the taxes you pay now on $450K, which are much much higher than the income you'd pay on $100K+/-.  In addition, when you are no longer relying on W2 income, you have much more flexibility to control how much income you need to report in any given year -- your Roth withdrawals will be completely tax-free; any withdrawals from taxable investments will be subject to the generally-much-lower capital gains tax rates (which can be as low as 0 depending on your other income), and even that applies only to the growth you have earned; and you can convert your traditional IRAs to Roths strategically over time to manage how much taxable income you realize in any given year.  Oh, and if you keep the rentals, you can offset the income with the costs of managing the properties*, and continue to take depreciation deductions (the classic "paper" loss that lowers your taxes while maintaining your cash flow). 

And on top of all that, state taxes are generally pretty low in comparison to the feds, unless you throw high city taxes on top.  So will it really benefit you to decrease your state income taxes by $2K if you increase your sales tax by 2%, your property tax by $1K, and your car registration by $500?  Keep in mind that you can control how much you pay in state taxes per the above, but you have no ability to control your property taxes and licenses/fees.

IOW, your plan seems to focus on lower taxes, but right now you don't even know what the real tax impacts will be.  Do some more research on all of the options before you pull the trigger.

Finally, do some hard math on where the money will come from.  Say you sell the house, so you have a NW of $2.8M.  But $1M of that is in rental properties netting $30K/yr.  That leaves you $1.8 investable cash.  The 4% rule says that you can safely withdraw around $70K/yr from that figure.  Add that to your $30K rental income, and you're at around $100K.  Subtract what you calculate for taxes.  Is that enough for the lifestyle you want long-term?

*A second good reason to keep the mortgages (the first being that at that interest level, it is basically free money).

Thank you very much. These are exactly the kind of recommendations I was looking for when I asked for things I was overlooking. I have some reading to do on optimizing taxes in retirement.

Also, my net worth line items are net MV minus liability numbers. So they donít include any of the debt listed in OP.

fullplay2024

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Re: Please critique our plan
« Reply #19 on: April 25, 2019, 03:57:52 PM »
If I were in your boat - I'd pay off the $240k in the rental property - i consider that a ROI of 18.75% (as it releases $45k cash/$240k debt). 
Don't bother early payoff off the primary home mortgage - since you're looking to sell it down the line somewhat soon -
I would also not float the boat for your kid's education in fully funding it like that.  Better to consider it a loan - it will help them out since they don't have to get an expensive loan - and you teach them the value of their financial decisions.

You're in a good spot - but I think you could find ways to optimize your spending a tad - but no biggie - you're in good shape with your plan and its a rockin' plan

I think your ROI calculation is flawed. The return of paying off debt is the interest rate minus tax benefit. So, iíd say itís around 3%

mistymoney

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Re: Please critique our plan
« Reply #20 on: April 28, 2019, 09:26:23 AM »
since you are both high income, would one of you be willing to work 1 or 2 years after the other RE as a way to step down a little slowly, testing the waters? Or are you both committed to starting RE at the same time?


waltworks

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Re: Please critique our plan
« Reply #21 on: April 28, 2019, 12:33:29 PM »
You have a million bucks in rental properties that is only returning $30k a year? Is that *before* set asides for management, vacancy, CapEx, etc? Or is that just how much more you get in rent than the mortgages?

That's terrible either way. Extra terrible if you're not setting aside money for a new roof and water heater and paint, but regardless, you should sell them both.

But really, it doesn't matter at your NW anyway if you can stop spending quite so much money. Doing triathalons is cheap and you're not going to be spending money on summer camps and kids activities soon - why are you planning to spend *more* in RE than you are now?

-W
« Last Edit: April 28, 2019, 12:47:21 PM by waltworks »

fullplay2024

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Re: Please critique our plan
« Reply #22 on: April 28, 2019, 07:25:24 PM »
since you are both high income, would one of you be willing to work 1 or 2 years after the other RE as a way to step down a little slowly, testing the waters? Or are you both committed to starting RE at the same time?

We both want to retire at the same time, unless either of our employment situation changes.

fullplay2024

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Re: Please critique our plan
« Reply #23 on: April 28, 2019, 07:28:38 PM »
You have a million bucks in rental properties that is only returning $30k a year? Is that *before* set asides for management, vacancy, CapEx, etc? Or is that just how much more you get in rent than the mortgages?

That's terrible either way. Extra terrible if you're not setting aside money for a new roof and water heater and paint, but regardless, you should sell them both.

But really, it doesn't matter at your NW anyway if you can stop spending quite so much money. Doing triathalons is cheap and you're not going to be spending money on summer camps and kids activities soon - why are you planning to spend *more* in RE than you are now?

-W

As wrote in original post, annual rental income (NOI) if mortgage is paid off, will be $75,000.  Return on rental investments over last 7 years has been around 12%.  Our actual expenses in retirement may very well be lower.

waltworks

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Re: Please critique our plan
« Reply #24 on: April 28, 2019, 09:09:27 PM »
As wrote in original post, annual rental income (NOI) if mortgage is paid off, will be $75,000.  Return on rental investments over last 7 years has been around 12%.  Our actual expenses in retirement may very well be lower.

That's still pretty bad, though. Your returns are awesome because everyone's returns on everything have been awesome for a decade. You got lucky, that's great. Time to really analyze whether the properties make sense going forward, though.

But like I said, it doesn't really matter. You can cut your spending just a hair and be totally set. I'll ask again: why do you think your expenses will go *up* in RE?

-W

fullplay2024

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Re: Please critique our plan
« Reply #25 on: April 29, 2019, 09:56:46 AM »

You can cut your spending just a hair and be totally set. I'll ask again: why do you think your expenses will go *up* in RE?

-W

I have included a buffer to account for three major unknown expenses in retirement: 1) Health care expenses, 2) More domestic and international travel, and 3) Taxes.  Although it seems like I'm budgeting a large number for expenses, $80k ($130k minus $50k for health care and taxes) for living expenses plus increased travel doesn't seem like a big overestimate.  Since I have 5 years before I want to pull the plug completely, I felt it was safer to overestimate than underestimate the expenses.

waltworks

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Re: Please critique our plan
« Reply #26 on: April 29, 2019, 11:24:00 AM »
Look into what your actual MAGI will be in RE. Remember that if you're selling shares to fund your expenses you are only paying tax on the returns over the basis, so even if you sell $80k worth of stocks, your income might only be $40k. If you do some tax loss harvesting at the same time and/or transfer funds from taxable to tIRAs, you can probably get your income down very, very low without much difficulty.

Your taxes should be negligible in RE even at $80k/year spend.

-W
« Last Edit: April 29, 2019, 11:32:33 AM by waltworks »

fullplay2024

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Re: Please critique our plan
« Reply #27 on: April 29, 2019, 02:16:59 PM »
Look into what your actual MAGI will be in RE. Remember that if you're selling shares to fund your expenses you are only paying tax on the returns over the basis, so even if you sell $80k worth of stocks, your income might only be $40k. If you do some tax loss harvesting at the same time and/or transfer funds from taxable to tIRAs, you can probably get your income down very, very low without much difficulty.

Your taxes should be negligible in RE even at $80k/year spend.

-W

Thank you so much.  This is certainly very encouraging to hear.  I will have to run some tax scenarios to get a better handle on post-retirement taxes.  Thanks again for your insights.

waltworks

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Re: Please critique our plan
« Reply #28 on: April 29, 2019, 03:58:25 PM »
Yeah, it's a different mindset when you are RE.

For example, things like dividend stocks or paid-off rental real estate are great for cash flow - but if you aren't trying to accumulate, they push your AGI and hence health care and tax costs through the roof. You're better off keeping the mortgages or even cash-out refinancing (remember, mortgage interest is 100% deductible for those rentals). You are better off selling shares of stock (you can pick and choose what lots you sell to minimize the AGI/tax hit, even if you're in index funds) than collecting a ton of dividends, too.

You can take money out of taxable accounts and fund tIRAs, even though you're already retired - just to manipulate/lower your income for tax purposes.

Paying off your (home) mortgage can be good too, since in most cases *that* interest won't be deductible, and with no mortgage to pay, you have less need for income that will be taxed...

Etc, etc, etc.

You can live the life you want and show very, very little income. You're set.

-W

Finances_With_Purpose

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Re: Please critique our plan
« Reply #29 on: April 30, 2019, 11:13:21 PM »
Look into what your actual MAGI will be in RE. Remember that if you're selling shares to fund your expenses you are only paying tax on the returns over the basis, so even if you sell $80k worth of stocks, your income might only be $40k. If you do some tax loss harvesting at the same time and/or transfer funds from taxable to tIRAs, you can probably get your income down very, very low without much difficulty.

Your taxes should be negligible in RE even at $80k/year spend.

-W

Thank you so much.  This is certainly very encouraging to hear.  I will have to run some tax scenarios to get a better handle on post-retirement taxes.  Thanks again for your insights.

As someone who has helped retired folks and seen the tax returns, it's pretty incredible how much one can make via investments without incurring significant taxes...  @waltworks is spot on about taxes, from my experience.  It's an odd adjustment going from focusing on income to avoiding income, ha.