Author Topic: Just checkup, is my thinking right?  (Read 4020 times)

BTDretire

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Just checkup, is my thinking right?
« on: July 01, 2019, 03:00:45 PM »
I'm retired, 64, wife is 60yrs young.
 This is out first year, we are living on savings only no pensions.
 I don't plan on collecting SS until I'm 70.
The usual thinking is the 8% increase each year is better than, taking it early
as long as you live to about 82. I'm not sure that would have been true, 2011 thru 2018 though.
 I plan to do as much in IRA conversions each year staying in the 12% bracket as I can, since without SS I'll have a lower income.
Are still in the wait until later on SS idea.

DadJokes

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Re: Just checkup, is my thinking right?
« Reply #1 on: July 01, 2019, 03:13:46 PM »
A bird in the hand is worth two in the bush, or something along those lines.

I would take a guaranteed 8% over the volatility of the stock market at that age 10 times out of 10, as long as I didn't need it to get by.

Buffaloski Boris

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Re: Just checkup, is my thinking right?
« Reply #2 on: July 01, 2019, 03:21:48 PM »
I’m thinking tax arbitrage on SS. The maximum part of your SS that will be taxed is 85%. Probably less. So waiting till normal retirement age is a no brainer in my view absent a compelling health issue. After that I think its a case of “do you feel lucky.”

robartsd

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Re: Just checkup, is my thinking right?
« Reply #3 on: July 01, 2019, 04:14:28 PM »
Waiting until 70 is nearly always the best way to maximize annual spending while mitigating longevity risk - guaranteed 8% annual inflation adjusted increase is tough to beat. Sure if you end up not living to the break even age you could have accumulated more money to leave behind; but you couldn't have spent more annually without worrying about running out of money late in life.

ruhig

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Re: Just checkup, is my thinking right?
« Reply #4 on: October 22, 2019, 12:24:06 PM »
If one of you passes, you only get to keep one social security payment. In our case, it made sense for me to delay taking social security until age 70, because the survivor then gets the maximum payment.

Bird In Hand

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Re: Just checkup, is my thinking right?
« Reply #5 on: October 22, 2019, 12:46:30 PM »
A bird in the hand is worth two in the bush, or something along those lines.

IMO, strictly applying this principle would result in taking SS as early as possible -- take the sure thing now instead of potentially (e.g. you could die before age 82 or even 70) coming out ahead by waiting for more later.

But what would I know about it?  :D

Omy

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Re: Just checkup, is my thinking right?
« Reply #6 on: October 22, 2019, 02:18:56 PM »
If one of you passes, you only get to keep one social security payment. In our case, it made sense for me to delay taking social security until age 70, because the survivor then gets the maximum payment.

If the survivor was already collecting their own benefits (which were smaller), does he or she get to switch to the larger payment when their spouse dies?

robartsd

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Re: Just checkup, is my thinking right?
« Reply #7 on: October 22, 2019, 03:50:35 PM »
If one of you passes, you only get to keep one social security payment. In our case, it made sense for me to delay taking social security until age 70, because the survivor then gets the maximum payment.

If the survivor was already collecting their own benefits (which were smaller), does he or she get to switch to the larger payment when their spouse dies?
Yes. The survivor also can choose when to switch from their own benefit to the survivor benefit. If the survivor was not collecting their own benefit, they can choose to apply for the lesser benefit right away while delaying the greater benefit.

FreshlyFIREd

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Re: Just checkup, is my thinking right?
« Reply #8 on: October 23, 2019, 01:21:09 AM »
My thoughts ...

Assume you don't need the money and you take the SS benefits anyway. You stash the benefits and let the money grow.

If you die, the money is in your possession - not the governments. The money is actually compounding. And the thought that someone mentioned "... a bird in the hand ..."

DadJokes

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Re: Just checkup, is my thinking right?
« Reply #9 on: October 23, 2019, 06:01:58 AM »
A bird in the hand is worth two in the bush, or something along those lines.

IMO, strictly applying this principle would result in taking SS as early as possible -- take the sure thing now instead of potentially (e.g. you could die before age 82 or even 70) coming out ahead by waiting for more later.

But what would I know about it?  :D

Touché

I'm treating the returns as the bird in hand, rather than the money itself. It depends on whether the money is needed or not. I guess it was a poor choice of analogy.

Bird In Hand

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Re: Just checkup, is my thinking right?
« Reply #10 on: October 23, 2019, 07:11:04 AM »
Touché

I'm treating the returns as the bird in hand, rather than the money itself. It depends on whether the money is needed or not. I guess it was a poor choice of analogy.

Hahah, no worries.  Due to my moniker I just couldn't resist commenting, even though all I had to offer was useless pedantry.  :)

Admittedly that the 8% bump per year is mighty tempting.

Omy

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Re: Just checkup, is my thinking right?
« Reply #11 on: October 23, 2019, 07:30:14 AM »
Yes. The survivor also can choose when to switch from their own benefit to the survivor benefit. If the survivor was not collecting their own benefit, they can choose to apply for the lesser benefit right away while delaying the greater benefit.

Thanks. I've read a bunch of articles on the subject but I've never been completely clear on this. I presume the survivor would then wait until their full retirement age in order to get 100% of the survivor benefit...is that your understanding?

Mother Fussbudget

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Re: Just checkup, is my thinking right?
« Reply #12 on: October 23, 2019, 08:55:41 AM »
BTDRetire:  You're doing it just as I plan to do it.  Use the ~10 years between 59-1/2 to 70 to convert ALL T-IRA, and non-Roth 401K retirement funds to Roth.  Do it in large enough increments that you convert them ALL before you're required to pay RMD's (Required Minimum Distributions).  And in small enough increments to keep yourself in the lower tax bracket.  And of course this keeps you and your heirs from having to deal with RMD's - well done. 

Based in part on the 'take SS at 70' strategy,  I assume you've read Lawrence Kotlikoff's books 'Get What's Yours' on SS and Medicare - if not, do so, they're great.  Take SS at 70 is also part of my plan. 

I'm 1.5 years from starting the Traditional-to-Roth conversions, and have not touched my savings to-date.  I'm living off REI income (real estate investments) in the interim.  If I didn't have this income to live on, I would be drawing down my cash, money market, and taxable brokerage accounts down first.

Interesting thought... there has long been an "Investment Order" sticky post on the Investor Alley forum.  It gets regular feedback and updates based on changes in law, thinking, etc. 

Perhaps this calls for a new sticky topic "Post-FIRE Draw Down Order" which would include the what-do-do, and the why-to-do-it for tax avoidance, and inheritance strategies such as these.

I'll ponder this, do LOTS of additional research in my post-FIRE 'spare time' ;-), post a reasonable straw-man for review, call for feedback / face-punches / etc, and post something useful based on the feedback.

Thanks for sparking the idea!  MFB
« Last Edit: October 23, 2019, 09:05:45 AM by Mother Fussbudget »

robartsd

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Re: Just checkup, is my thinking right?
« Reply #13 on: October 23, 2019, 12:37:27 PM »
BTDRetire:  You're doing it just as I plan to do it.  Use the ~10 years between 59-1/2 to 70 to convert ALL T-IRA, and non-Roth 401K retirement funds to Roth.  Do it in large enough increments that you convert them ALL before you're required to pay RMD's (Required Minimum Distributions).  And in small enough increments to keep yourself in the lower tax bracket.  And of course this keeps you and your heirs from having to deal with RMD's - well done. 
You don't have to wait until 59-1/2 to covert from Traditional to Roth. Any conversion counts as income for tax purposes in the year of conversion, but conversion from Traditional to Roth does not incur penalty at any age as long as it remains in the Roth for at least 5 years (at least for IRA, I haven't looked into rules for employer sponsored accounts in as much detail). Heirs (other than spouse who assumes the account as their own as sole beneficiary) still have RMDs from Roth accounts.

Car Jack

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Re: Just checkup, is my thinking right?
« Reply #14 on: October 24, 2019, 11:50:54 AM »
It is helpful to build a spread sheet with various options on when you're taking SS and when your spouse does.  I do this with each year listed.  Something I have in mine is the assumption that in 2044, payments are going to forever drop by 21%, from the trust fund depletion and payments being supported only by taxes coming in, which is how SS must run by law. 

I've done this to figure out what age is break even for me but I'm in the same boat that you are at the moment, where I could take SS right now if I wanted, but I'm still working, so it would make no sense to do so.

flyingaway

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Re: Just checkup, is my thinking right?
« Reply #15 on: October 27, 2019, 11:43:06 AM »
BTDRetire:  You're doing it just as I plan to do it.  Use the ~10 years between 59-1/2 to 70 to convert ALL T-IRA, and non-Roth 401K retirement funds to Roth.  Do it in large enough increments that you convert them ALL before you're required to pay RMD's (Required Minimum Distributions).  And in small enough increments to keep yourself in the lower tax bracket.  And of course this keeps you and your heirs from having to deal with RMD's - well done.   

I think this is not a good strategy. If you convert ALL your tIRA to Roth before RMD, then you would pay zero tax in RMD. Why would you do that if your tax rate for conversion is 10% or above? I would spread the tax evenly before ad after the RMD if possible.

DadJokes

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Re: Just checkup, is my thinking right?
« Reply #16 on: October 28, 2019, 06:47:05 AM »
BTDRetire:  You're doing it just as I plan to do it.  Use the ~10 years between 59-1/2 to 70 to convert ALL T-IRA, and non-Roth 401K retirement funds to Roth.  Do it in large enough increments that you convert them ALL before you're required to pay RMD's (Required Minimum Distributions).  And in small enough increments to keep yourself in the lower tax bracket.  And of course this keeps you and your heirs from having to deal with RMD's - well done.   

I think this is not a good strategy. If you convert ALL your tIRA to Roth before RMD, then you would pay zero tax in RMD. Why would you do that if your tax rate for conversion is 10% or above? I would spread the tax evenly before ad after the RMD if possible.

Agreed. As of right now, (if you have no other income) the first $12,200/$24,400 you withdraw from your tIRA will have zero tax. The next $9,700/$19,400 is only taxed at 10%. So, at a bare minimum, a person should leave enough in traditional accounts to draw $21,900/$43,800 per year, increasing as the tax brackets are increased. A married, 70.5 year-old person with a $1.2 million tIRA balance would have RMDs around $43,800.

Bird In Hand

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Re: Just checkup, is my thinking right?
« Reply #17 on: October 28, 2019, 09:04:45 AM »
BTDRetire:  You're doing it just as I plan to do it.  Use the ~10 years between 59-1/2 to 70 to convert ALL T-IRA, and non-Roth 401K retirement funds to Roth.  Do it in large enough increments that you convert them ALL before you're required to pay RMD's (Required Minimum Distributions).  And in small enough increments to keep yourself in the lower tax bracket.  And of course this keeps you and your heirs from having to deal with RMD's - well done.   

I think this is not a good strategy. If you convert ALL your tIRA to Roth before RMD, then you would pay zero tax in RMD. Why would you do that if your tax rate for conversion is 10% or above? I would spread the tax evenly before ad after the RMD if possible.

Agreed. As of right now, (if you have no other income) the first $12,200/$24,400 you withdraw from your tIRA will have zero tax. The next $9,700/$19,400 is only taxed at 10%. So, at a bare minimum, a person should leave enough in traditional accounts to draw $21,900/$43,800 per year, increasing as the tax brackets are increased. A married, 70.5 year-old person with a $1.2 million tIRA balance would have RMDs around $43,800.

I generally agree that putting all the tax-eggs in one basket can end up being sub-optimal.  But there are so many factors that come into play that there is no one-size-fits-all strategy.  A couple of those factors:

- How much pension/SS/other income will there be, before and after RMDs?  These will affect both the marginal rate and the % of SS that is taxable.  This might (or might not) end up being a big deal, depending on the numbers.

 - If you expect to pass on a large inheritance and your heirs are in a high tax bracket (or you expect they will be when you die), having a big chunk of that inheritance in Roth accounts might be highly desirable.

robartsd

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Re: Just checkup, is my thinking right?
« Reply #18 on: October 28, 2019, 11:51:17 AM »
The increases in RMDs over time is another good reason to target a balance that might seem lower than optimal the first year.