Author Topic: Post FI Withdrawal Strategy / Healthcare / Home Purchase / Real Estate Cashflow  (Read 3378 times)

kkoons83

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Hello,

I've read many articles that skim the surface on the topics I've mentioned above, but I'm searching for the following:

Post FI Withdrawal Strategy - I have quite a few investment accounts, some pre-tax, some post-tax, some cash, some stocks, etc. I am interested in seeing a template or a strategy or some guidance on how to prioritize and stagger the distribution of cash flow Post-FI through life expectancy.

Healthcare - I have read some articles on ACA. Is there a post, article or guide you have found helpful to minimize the cost of ACA? I am a family of 4 (2 adults, 2 children under 18). I'm planning to keep post-FI annual income at less than $78,000 married filing jointly. Planning to live in Florida. I'm trying to figure out how to budget my expected monthly medical costs as accurately as possible to determine my FI date.

Home Purchase - My original thought was to pay cash for my home to keep monthly expenses down to achieve my 25X FI number sooner, but I've been debating on this. Are there any topics/posts/articles you've found helpful in making this decision?

Passive Real Estate Income - I expect to go FI with at least 12 rental properties generating about $300/mo per unit in net cashflow. The mustachian calculator on the MMM website assumes 7% portfolio growth and 3% inflation by default. Is there another calculator out there you've found helpful to include rental real estate income cashflow in determining when you can achieve FI?

All comments and suggestions are appreciated.

Thanks,
Kevin




Acastus

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I live in NY, and I went to the marketplace and plugged in my numbers to get an estimated subsidy and the actual cost of plans. Other states will run a little differently. You may need to create an account before you can get to the info. For a back of the envelope calculation, the philosophy is that families should only pay up to 9% of income for insurance, and the government pays the rest. That works for 350-400% of poverty, which for 4 people is up to $96k. Lower incomes pay a lower % of income.

DreamFIRE

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Take a look at the ACA sticky thread.

My withdrawals are based on MAGI optimization for ACA subsidies, the post ACA years when my MAGI can be higher, and then SS benefit years where I take less from the stash, while my inflation adjusted income is pretty consistent across all time periods.

I have it all setup in a spreadsheet.

dividendman

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kkoons83

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Thank you for these responses, will review.

Mother Fussbudget

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As with all things, tracking your Income AND Expenses are the key. 
In my case, I plan to use rental income to finance my first few years of FI. 

If I had 12 doors generating $300 in cash flow/mth ($3,600/mth), I would work to keep my spending below $3,600/mth, and use the cash flow to finance FI.  While living off the cash flow, my investment accounts - 401K, IRA, Roth, HSA, and taxable accounts - can continue to grow UNTOUCHED.  In fact, I plan to add doors until I have enough cash-flow to cover both expenses, AND have enough left over to add additional contributions to a solo-401K as owner of my "property management" company.

It was an eye-opener to me to realize that the 4% SWR discussed in the Trinity study is for the withdrawal rate in the FIRST YEAR of FI
In the second year, one would withdraw the 4% SWR + the cost of inflation ~3% = 7%.  Rinse, lather, repeat. 

If you think about it... if you continue to withdraw the same amount, (4%) every year, while the cost of living goes UP by 3%, the retiree either spends the additional 3% to keep the same lifestyle, or experience a 3% shortfall in spending for the year. 

By living off cash-flow, you can delay draw down of retirement investments, and allow them to continue to grow.

kpd905

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It was an eye-opener to me to realize that the 4% SWR discussed in the Trinity study is for the withdrawal rate in the FIRST YEAR of FI
In the second year, one would withdraw the 4% SWR + the cost of inflation ~3% = 7%.  Rinse, lather, repeat. 

Just to clarify here, adjusting your withdrawals for inflation does not allow you to withdraw 7% of your portfolio value.  You are increasing your withdrawal by 3%.

So you have a million, year 1 you withdraw $40,000.

Year two you withdraw 40,000 x 1.03 = $41,200

This is 4.12% of the original $1 million portfolio, not $70,000 or 7% of it.

Monkey Uncle

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My strategy won't work for you because you are getting a substantial portion of your income from real estate, which has very different tax implications from the typical securities portfolio.  But in case anyone else is interested, here's how I'm planning to do it:

Focus on minimizing tax liability through a Roth ladder.  Convert as much as possible in the early years before SS and pension are fully kicked in.  At that point those sources will use up a good portion of my standard deduction space.

Set taxable account to pay out dividends and capital gains instead of reinvesting.  These will mostly be taxed at the 0% rate given my income level, but they get reported as part of my gross income regardless of what I do with them.  May as well spend them rather than reinvesting them and pulling out more tax-free Roth money than I have to.

Use tax-free Roth contributions and seasoned conversions (and withdrawal of tax-free gains when I reach 59 1/2) to fund the rest of my living expenses (at least those not covered by SS and pension when those sources kick in).

If I am unable to convert all IRA money prior to age 70 1/2, substitute RMD money for a portion of the Roth withdrawals.  I'll be paying taxes on it; may as well spend it.

Save principal in the taxable account for last.  No point in generating additional capital gains if I don't have to.  Basis will step up to current value upon my death, completely avoiding tax liability for the gains (I don't anticipate being in estate tax territory).

All of these tax minimization strategies also serve to keep MAGI down for ACA purposes.  Make sure income is high enough to stay off Medicaid, using additional Roth contributions to generate taxable income as needed.

moneytaichi

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@Money monkey, thanks for your advice! It's helpful for me too. I have earmarked this page :)

Mother Fussbudget

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It was an eye-opener to me to realize that the 4% SWR discussed in the Trinity study is for the withdrawal rate in the FIRST YEAR of FI
In the second year, one would withdraw the 4% SWR + the cost of inflation ~3% = 7%.  Rinse, lather, repeat. 

Just to clarify here, adjusting your withdrawals for inflation does not allow you to withdraw 7% of your portfolio value.  You are increasing your withdrawal by 3%.

So you have a million, year 1 you withdraw $40,000.

Year two you withdraw 40,000 x 1.03 = $41,200

This is 4.12% of the original $1 million portfolio, not $70,000 or 7% of it.

+1. Exactly this!  My ‘ah ha moment’ was based in my own ignorance at not realizing my expenses would increase every year due to inflation.  I admit it here so others might not make the same mistake / ‘bad assumption’. Thanks for clarifying

Dicey

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Save principal in the taxable account for last.  No point in generating additional capital gains if I don't have to.  Basis will step up to current value upon my death, completely avoiding tax liability for the gains (I don't anticipate being in estate tax territory).
Are you sure that's how it works?  Can you or anyone clarify this? Paging @Cheddar Stacker...

Also attempting to page @Cpa Cat...
« Last Edit: August 26, 2018, 09:49:45 AM by Dicey »

Padonak

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My strategy won't work for you because you are getting a substantial portion of your income from real estate, which has very different tax implications from the typical securities portfolio.  But in case anyone else is interested, here's how I'm planning to do it:

Focus on minimizing tax liability through a Roth ladder.  Convert as much as possible in the early years before SS and pension are fully kicked in.  At that point those sources will use up a good portion of my standard deduction space.

Set taxable account to pay out dividends and capital gains instead of reinvesting.  These will mostly be taxed at the 0% rate given my income level, but they get reported as part of my gross income regardless of what I do with them.  May as well spend them rather than reinvesting them and pulling out more tax-free Roth money than I have to.

Use tax-free Roth contributions and seasoned conversions (and withdrawal of tax-free gains when I reach 59 1/2) to fund the rest of my living expenses (at least those not covered by SS and pension when those sources kick in).

If I am unable to convert all IRA money prior to age 70 1/2, substitute RMD money for a portion of the Roth withdrawals.  I'll be paying taxes on it; may as well spend it.

Save principal in the taxable account for last.  No point in generating additional capital gains if I don't have to.  Basis will step up to current value upon my death, completely avoiding tax liability for the gains (I don't anticipate being in estate tax territory).

All of these tax minimization strategies also serve to keep MAGI down for ACA purposes.  Make sure income is high enough to stay off Medicaid, using additional Roth contributions to generate taxable income as needed.

Thanks Monkey Uncle. Can you elaborate a little bit more on using tax free roth contributions and seasoned conversions to minimize taxes?

maizeman

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Save principal in the taxable account for last.  No point in generating additional capital gains if I don't have to.  Basis will step up to current value upon my death, completely avoiding tax liability for the gains (I don't anticipate being in estate tax territory).
Are you sure that's how it works?  Can you or anyone clarify this? Paging @Cheddar Stacker...

Yup, I can confirm this. Inherited assets (stocks/houses/etc) are passed to your heirs with a basis of their value at the time of your death rather than when you originally purchased them.

This is one of the places where the tax code is just being pragmatic. Can you imagine trying to track down when and what what price your grandmother bought her AT&T stock that she's owned since well before your parents were born? (Long before the era of electronic record keeping.)

Edit: here's the specific legal reference if that would be helpful: https://www.law.cornell.edu/uscode/text/26/1014
« Last Edit: August 26, 2018, 09:46:11 AM by maizeman »

Cpa Cat

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Save principal in the taxable account for last.  No point in generating additional capital gains if I don't have to.  Basis will step up to current value upon my death, completely avoiding tax liability for the gains (I don't anticipate being in estate tax territory).
Are you sure that's how it works?  Can you or anyone clarify this? Paging @Cheddar Stacker...

Also attempting to page @Cpa Cat...

Yes, that's how it works.

It doesn't work that way for a traditional IRA, but it sounds like he's talking about a non-retirement account.

Dicey

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Thanks!

Monkey Uncle

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Thanks for cleaning up after me, @maizeman and @Cpa Cat.

Monkey Uncle

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My strategy won't work for you because you are getting a substantial portion of your income from real estate, which has very different tax implications from the typical securities portfolio.  But in case anyone else is interested, here's how I'm planning to do it:

Focus on minimizing tax liability through a Roth ladder.  Convert as much as possible in the early years before SS and pension are fully kicked in.  At that point those sources will use up a good portion of my standard deduction space.

Set taxable account to pay out dividends and capital gains instead of reinvesting.  These will mostly be taxed at the 0% rate given my income level, but they get reported as part of my gross income regardless of what I do with them.  May as well spend them rather than reinvesting them and pulling out more tax-free Roth money than I have to.

Use tax-free Roth contributions and seasoned conversions (and withdrawal of tax-free gains when I reach 59 1/2) to fund the rest of my living expenses (at least those not covered by SS and pension when those sources kick in).

If I am unable to convert all IRA money prior to age 70 1/2, substitute RMD money for a portion of the Roth withdrawals.  I'll be paying taxes on it; may as well spend it.

Save principal in the taxable account for last.  No point in generating additional capital gains if I don't have to.  Basis will step up to current value upon my death, completely avoiding tax liability for the gains (I don't anticipate being in estate tax territory).

All of these tax minimization strategies also serve to keep MAGI down for ACA purposes.  Make sure income is high enough to stay off Medicaid, using additional Roth contributions to generate taxable income as needed.

Thanks Monkey Uncle. Can you elaborate a little bit more on using tax free roth contributions and seasoned conversions to minimize taxes?

You may find this thread helpful: https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

In a nutshell, contributions to a Roth IRA can always be withdrawn tax free, because you already paid taxes on that income before you put it into the Roth. 

Seasoned conversions refers to traditional IRA funds that have been converted to a Roth account and have made it through the 5 year "seasoning" period.  Ordinarily you pay taxes on those funds at the time they are converted.  But the Roth pipeline strategy involves using your standard deduction to cover the converted amount so that you don't actually owe any taxes at the time of conversion.  After a five year waiting period, those converted funds are available to be withdrawn tax free.   Basically, they are treated similar to contributions at that point.  The thread I linked to describes the strategy in more detail.

Cheddar Stacker

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Save principal in the taxable account for last.  No point in generating additional capital gains if I don't have to.  Basis will step up to current value upon my death, completely avoiding tax liability for the gains (I don't anticipate being in estate tax territory).
Are you sure that's how it works?  Can you or anyone clarify this? Paging @Cheddar Stacker...

Also attempting to page @Cpa Cat...

Already been answered, but yes, this is very true under current US tax law. Everything Monkey Uncle stated is pretty much exactly what I plan to do as well.

I also plan to leave as much as possible in a Roth to benefit kids and/or charity, and will try to maximize SS benefits for cash flow rather than spending down Ira's or other assets. You can't pass SS benefits on to your heirs.