Author Topic: FIRE accounts/income logistics?? So confused!  (Read 2307 times)

Lady SA

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FIRE accounts/income logistics?? So confused!
« on: August 08, 2016, 01:40:45 PM »
Iím sure this is a dumb question, but I think I need this clearly spelled out for me to get it. I am beyond confused with the various accounts and how they work together during FIRE. The logistics of coordinating FIRE income are baffling me, and no matter how much reading and research I do Iím still not understanding this Ė probably because the answers are so obvious that no one bothers to spell it out haha. More details below to fully explain my confusion.

DH and I have the following accounts: DH 401k, my 401k, DH Roth, my Roth, a taxable brokerage acct, and a joint checking/savings. We are maxing contributions to 401ks and roths (with plans to start contributing to tIRAs instead soon), and currently putting ~$700/mo to the brokerage account. Once we finish off paying our student loans in 3 years, we will be able to put ~$4k/mo into our brokerage acct.

Now, for simplicityís sake, lets say that we need somewhere in the ballpark of $700-800k to FIRE Ė we need an income of around $32k/yr.

Ok, first dumb question:  does that $700k number assume we are using the roth conversion ladder (using 401k funds immediately), or are we assuming we donít touch the 401k funds until age 65? If our 401ks hold a large chunk of our savings, how the heck does this work?!?!
-- If we donít touch our 401ks until 65, we still need to generate the $32k/year to tide us over for 30ish years. Doesnít that mean not counting our 401k funds toward the total $700k needed? Which means it would take longer to reach FI... I must be missing something.
-- On the other side of the coin, I understand Roth conversion Ė but then you need to coordinate 5 years of living expenses right at the beginning of FIRE using some combination of your other accounts.

**Bonus question: What are peopleís thoughts on using the no-touchy-until-65 strategy vs the roth conversion strategy to handle 401k funds? This is a pretty major element to ER plans, and would affect how long we contribute to 401ks.

Then with all these different accounts, how do you draw down the total $32k ER income? Is there some sort of strategy for what money to be used when and how? What accounts do you draw down first? If you are primarily pulling from the Roth via roth conversion, what are you doing with the funds in the taxable brokerage account?

Iím just baffled on how to manage a taxable brokerage acct, roth accts, and 401k/tIRAs. I feel like Iím missing a big, key part of the puzzle here: the actual logistics of coordinating your ER income are mystifying to me. Weíve got the savings down, but when it comes time to use our savings, we have no clue what weíre supposed to do to even get at it! Since we donít understand how to use the funds in these accounts later on, Iím afraid we could be making bad assumptions now and shooting ourselves in the foot. Does that make sense?

Ugh I have so many questions and am so lost, I'm sorry if I'm talking in circles. I don't even know what I don't know! If anyone is willing to share their logistical plan for pulling down FIRE income and how you are organizing/handling your various accounts/funds, I would love to see examples of how you all are doing it. I can also share additional information if you want. Thank you for being willing to answer my dumb questions!

pyyj

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Re: FIRE accounts/income logistics?? So confused!
« Reply #1 on: August 08, 2016, 04:28:12 PM »
When you hit your number, you'll have some combination of retirement accounts and taxable accounts. For illustrative purposes, say the division is 50/50.

If you're planning on a 4% withdrawal, you'd just leave your retirement accounts untouched, and take all your money from the taxable accounts, so a 0% rate on the retirement accounts and 8% on the taxable ones. Sure, that'll unsustainably draw the taxable account down, but in the meanwhile the retirement accounts are continuing to grow tax-free with 0% withdrawal. Depending on how late you are planning to "early" retire and how big your accounts are, you might not even touch the retirement accounts until you actually hit the real "retirement" age.

You can supplement the above with fancy withdrawals from the retirement accounts (US tax rules scare me) but the basic idea is the same for any country: first withdraw from taxable accounts and only start pulling from retirement accounts much later.

Gimesalot

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Re: FIRE accounts/income logistics?? So confused!
« Reply #2 on: August 08, 2016, 06:53:51 PM »
Here is what I plan to do:

During the year (2017 for example): Withdraw 32k from trading account (this will be a mix of contributions and gains)

Beginning of next year (2018) before April 15th: Determine how much taxes you owe from the 32k spent in 2017.  Most likely, you will owe very little if any taxes on those gains.  Next determine your earned income from 2017, unqualified dividends, part-time work, interest etc.  Subtract the income amount from the total of the standard deduction and personal exemptions, we'll call this number M.  Rollover $M from your 401k to your Roth IRA as a 2017 contribution.  This money must stay in the Roth for at least 5 years.

Keep doing this until you have no money left in your trading account, minimum of 5 years.  Then start withdrawing from your Roth, but continue the rollovers from the 401k.

Gimesalot

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Re: FIRE accounts/income logistics?? So confused!
« Reply #3 on: August 08, 2016, 09:00:17 PM »
Forgot to add that you should check out gocurrycracker.com and his posts about their yearly taxes.

tonysemail

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Re: FIRE accounts/income logistics?? So confused!
« Reply #4 on: August 09, 2016, 12:28:01 AM »
here is a blog post with an actual withdrawal plan.
hopefully that helps spell out the logistics that you're concerned about.
http://rootofgood.com/roth-ira-conversion-ladder-early-retirement/

MDM recommended www.i-orp.com to me and that helped me visualize a withdrawal plan.
But I'm pretty close to FIRE, so it's easier for me to plug in account balances.

I wouldn't worry too much about the withdrawal phase yet.
Focus on accumulation and you can work on withdrawal strategy a few years down the line.

mathjak107

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Re: FIRE accounts/income logistics?? So confused!
« Reply #5 on: August 09, 2016, 03:00:41 AM »
the withdrawal phase will have lots of options depending on your personal situation , your income and taxes .

there is no best way and there are quite a lot of pitfalls because as you get older many things are linked to taxable income in retirement .

i can tell you what i did .

we retired  last year . we set a side two years spending cash .  i will be 64 and my wife 66 .

my wife gets a small ss check which she started collecting at 62 . i am delaying . so our income is a 20k pension , about 6k a year  in ss after medicare is taken out  and about 4k in rental income .

we have a multi  7 figure portfolio to draw from , so living in nyc and delaying ss we are at a 3.50% withdrawal rate from the portfolio to fill the gap between what we have coming in and what we have as a budget .

once ss kicks in at 70 draw will fall to 2% and we will be half as dependent on markets and rates . that low draw rate will give us lots of options .

we can invest more aggressively since we are less dependent on our portfolio , or we can go very very conservative ,since once again we are less dependent on the portfolio.

one thing i love in life is choices . .

i am to young for medicare so while this year  i am on cobra  , starting january i will grab an aca plan and hope to get a subsidy  by living mostly off cash .

the wild card is the fund distributions and dividends as they can range from 29k to 69k and we have no control over that . so having those funds in our taxable account because we already maxed out our retirement accounts can hurt the chances of the subsidy as well as hurt our plan to hope to be in the zero capital gains bracket .

we also made one other mistake . we sold an asset in 2014 while not retired and not on medicare yet .

well medicare goes back two years to set your yearly premium . that sale in 2014 caused a 300% increase in medicare premiums . my wife jumped from 104.50 to 400 a month because of the sale .

if both of us were on medicare we would have seen a 600 buck a month increase . that is on top of what we were paying .

so learn all you can and keep tabs on changes in things as you go along . keep nudging things to keep the plan on course but do not wait like i did to learn all about the pieces linked down the road .

« Last Edit: August 09, 2016, 03:05:14 AM by mathjak107 »

mathjak107

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Re: FIRE accounts/income logistics?? So confused!
« Reply #6 on: August 09, 2016, 04:20:31 AM »
one other point is you want to have as much tax free income as you can get set up .

the tax code gives us a gift if we are smart enough to utilize it .

we can pull about 22k a year out of taxable retirement accounts tax free just by the exemptions and standard deductions . in fact a retired couple can pull as much as 40k out and pay as little as 4% tax .

so not being able to use that  gift and getting  taxed at 15 or 25% later is a shame . our income is to high to take advantage but had i planned better that  could have been the deal since we are delaying ss . but i wasn't smart enough to know what i didn't know early on . now it is like telling the guy who built the brooklyn bridge , it's nice but can you move it 2"' to the left . it would be tax horror changing things at this point .

roths , cash , over funding life insurance and borrowing it back , staying in the zero capital gains bracket  are all ways of having a 6 figure income, especially in the early years  if you plan accordingly .

if you ddon't you have taxes , possible surcharges on income and capital gains , higher medicare premiums ,  taxed social security etc .

in fact let me point out one other thing . the lower income ranges can have a big tax issue .

if you are just under the threshold for getting 85% of your social security taxed and decide you want to pull anoth 1k out of a retirement plan for a trip   watch what can happen .

that extra 1k can trigger taxes on your social security . so you now have 2 moving targets . the end result is  you will pay an effective marginal tax rate of over 47% on that extra 1k you took because it triggered taxes on the ss too .

taxes and retirement can be a minefield .
« Last Edit: August 09, 2016, 04:29:37 AM by mathjak107 »

boarder42

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Re: FIRE accounts/income logistics?? So confused!
« Reply #7 on: August 09, 2016, 04:50:31 AM »
See madfientist latest post where even paying the 10% penalty is better than saving taxable. Also you have sepp 72t as another option.

Our current plan with Fire at 37 is to Roth ladder it. Taxable and Roth contributions will bridge the 5 year gap.

http://www.madfientist.com/how-to-access-retirement-funds-early/#ck_modal2

At the end of the day you can plan as much as possible but who knows what tax code will be so just plan for what we know now.
« Last Edit: August 09, 2016, 04:52:18 AM by boarder42 »

andy85

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Re: FIRE accounts/income logistics?? So confused!
« Reply #8 on: August 09, 2016, 06:42:40 AM »
I loveeeeee this question OP. Jim Collins spelled out his strategy in his book, which i don't have in front of me at the moment or i would summarize it.

The following is just a thought experiment for me...

Retirement Accounts:
401(k) $600,000
Roth IRA $100,00
Taxable $300,000
Cash $20,000
Spending at 4% = $40,000

Year 1: Jan 1st. Retire. Roll my 401(k) into a traditional IRA (you cant roll it directly into a roth). Pull $40k from my taxable account, balance goes from $300,000 to $260,000. Roll a portion of the trad. ira into the roth ira depending on taxes.

Year 2: Pull $40,000 from my taxable. Balance goes from $260,000 to $220,000. Roll a portion of the trad. ira into the roth ira depending on taxes.

Year 3: Pull $40,000 from my taxable. Balance goes from $220,000 to $180,000. Roll a portion of the trad. ira into the roth ira depending on taxes.

Year 4: Pull $40,000 from my taxable. Balance goes from $180,000 to $140,000. Roll a portion of the trad. ira into the roth ira depending on taxes.

Year 5: Pull $40,000 from my taxable. Balance goes from $140,000 to $100,000. Roll a portion of the trad. ira into the roth ira depending on taxes.

Year 6: Start pulling $40,000 from a combo of the roth ira and the taxable account. Roll a portion of the trad. ira into the roth ira depending on taxes

Repeat year 6 until i can pull the full $40,000 from the roth balance. Once that happens i leave the taxable account alone (if it remains) and continue rolling portions of the trad. ira into the roth ira each year until the trad. ira has been fully converted or until RMDs kick in.

__________________________

or, you could retire, roll the 401k into a traditional IRA, setup the 72t, and pull any additional money from a combo of your roth ira and taxable account.

« Last Edit: August 09, 2016, 06:45:31 AM by andy85 »

boarder42

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Re: FIRE accounts/income logistics?? So confused!
« Reply #9 on: August 09, 2016, 08:51:02 AM »
^^ you need to inflation adjust everything in this scenario andy.

Your roll from IRA to Roth should be 40k*1.03^(years retired +4)

also you could work some magic with your existing Roth contributions to minimize your tax exposure rather than pulling from taxable.