Author Topic: Requesting advice on logistics of parents' retirement withdrawals  (Read 2141 times)

Abe

  • Handlebar Stache
  • *****
  • Posts: 1265
Hello all,
My parents are finally considering semi-retiring, with full retirement in a few years. They have a lot of retirement funds (mostly in vanguard index funds: 60% bonds, 40% stocks) and wanted your opinion on how best to withdraw while minimizing taxes.

They have tax-deferred accounts, state pensions, and are eligible for social security (65 & 64yo).
Their living and medical expenses are covered by pensions. Any unexpected expenses can be covered by me, and medical costs / insurance premiums aren't a big a problem. Their goal is to maximize the 401k for charity and grandkids' college expenses. This leaves 401k earnings and social security as "extra" money. I'm thinking they should defer SS, and keep any remaining earnings from part-time work into their 401ks. Is there any advantage of taking social security now and investing that in a bond index fund, or just defer until 72yo? What further information is needed to determine this?

 .

bogart

  • Handlebar Stache
  • *****
  • Posts: 1056
Re: Requesting advice on logistics of parents' retirement withdrawals
« Reply #1 on: May 05, 2016, 07:37:22 PM »
In an "on average" sense (impossible to say with certainty for any individual unless you have a crystal ball), it's generally better if they are in good health and have no reason (e.g. family history) to expect not to live well into old age, to defer taking and/or defer taking money out of anything they can.

That said, they should buy (or get from the library, etc.) the book Get What's Yours, and likely, the software associated with it (both are fairly inexpensive).  It's a painfully detailed discussion of Social Security claiming strategies and how to maximize benefits, and it comes really highly recommended (not just by me!).  They are perfect candidates for needing it.

I think it's unlikely if they are working PT that they'll have access to a 401K for contributions, though you may know something I don't.  But they will likely still be able to contribute to Roth IRAs, which are a reasonable alternative for the first ~$12K they want to stash away. 

Abe

  • Handlebar Stache
  • *****
  • Posts: 1265
Re: Requesting advice on logistics of parents' retirement withdrawals
« Reply #2 on: May 05, 2016, 08:02:10 PM »
Thanks for the advice! I'll find that book (they don't have any interest in finances).  They will still be able to contribute to 401k. I should've clarified that they will still be working over 30hrs/wk, which they consider part time (currently 65/wk!) but qualifies for contributions. There's no income % limit for contributions.

MDM

  • Walrus Stache
  • *******
  • Posts: 9715
Re: Requesting advice on logistics of parents' retirement withdrawals
« Reply #3 on: May 05, 2016, 11:03:47 PM »
Hello all,
My parents are finally considering semi-retiring, with full retirement in a few years. They have a lot of retirement funds (mostly in vanguard index funds: 60% bonds, 40% stocks) and wanted your opinion on how best to withdraw while minimizing taxes.
They might give www.i-orp.com a shot.  It will look at minimizing taxes, but only as a means, not an end.

Quote
Is there any advantage of taking social security now and investing that in a bond index fund, or just defer until 72yo?
Maybe (but only until 70yo - doesn't get any better after that).

Quote
What further information is needed to determine this?
It's simple - "all" you need to know is the rate of return on the SS investment...and how long they will live. ;)

The longer they will live, the better it is to defer.

The higher the interest rate they can earn, the better it is to claim early.

Good cases can be made, both for "take it early while you can enjoy it" and "defer it because it will be the best inflation-adjusted annuity you can get."

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Re: Requesting advice on logistics of parents' retirement withdrawals
« Reply #4 on: May 06, 2016, 12:03:16 AM »
I have actually gone through this exercise with my parents where we project out their income cash flows for each significant event in their retirement.  For example what their income will look like taking into account all source when, my father stopped working, when my father reaches SS full retirement ages (FRA), when my mother starts collecting her pension, when my mother reaches SS FRA, when my mom fully retires, ect. 

This allowed us to determine what tax brackets they will likely fall under, and since they have enough income to cover their expenses, they don't need to withdraw their 401k so it became a matter of tax optimization like your parents seem to be in.  In my parents scenario there is a period where they will have room to withdraw from their 401k and still stay in the 15% tax bracket, which is what they will be under when required minimum distributions kick in when they each turn 70 1/2.  So the strategy is to do a IRA Roth conversion from their tIRA's so that it can grow tax free and minimize their RMDs when they are collecting pensions and SS.

However in the case of your parents if they are going to continue working then it would seem likely they will not have much room to perform Roth conversion, but I would project their cash flows and use a tax caster https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ to see if they will be in a lower tax bracket now or when they hit their RMDs.  Then see if it makes sense to withdraw do Roth conversion from their 401ks.
« Last Edit: May 06, 2016, 12:06:04 AM by mxt0133 »

Dee18

  • Handlebar Stache
  • *****
  • Posts: 1646
Re: Requesting advice on logistics of parents' retirement withdrawals
« Reply #5 on: May 06, 2016, 07:58:44 AM »
I discussed some of these issues just yesterday with a financial planner (free via my TIAA investments).  I have found most resources discussing Social Security don't fully consider significant pensions and other retirement funds and their related tax issues.  As he explained, deferring SS until age 70 is a guaranteed 8% per year return on investment, tax free, for those years between 66 and 70.  I am going to convert 2/3 of my 401 to Roth  in the first few years when I retire, despite the big tax bite at 28 %, because there are no mandatory payouts for Roth when one turns 70.5 which would increase my annual income more when I probably won't need it and the tax consequences of that.  This also really helps heirs too, as mxt1033 said, since an inherited traditional IRA is taxed as income to the heir when the money is taken out, and payouts are mandated if the deceased was 70.5 or older.  I am going to leave 1/3 of my IRAs in traditional, because the payouts after 70.5 and any amount left when I die are not taxable if given to qualified charities, which I've designated as the beneficiaries of those.(And if I do need the money, it's there.)  One thing to check for your parents is if IRA funds paid directly to educational institutions for tuition receive some special treatment.
« Last Edit: May 06, 2016, 08:03:07 AM by Dee18 »