Author Topic: 4% including retirement accounts  (Read 3132 times)

NearlyThere

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4% including retirement accounts
« on: June 30, 2015, 12:36:35 PM »
I haven't seen this touched on, so thought I might bring it up.

Can you count on the funds within your retirement accounts to make up your 4% withdrawal? Essentially pulling from the non retirement accounts first and leaving the retirement ones untouched until you have withdrawn all others. Has anyone constructed any models on how to best position this?

I can see it being a lot more intricate in how its managed and set up, but could be great for getting the most out of your pension allowance.

I know in the US you have the ROTH conversion, this is unavailable in the UK, but if we considered it this way, the conversion wouldn't be required.

dandarc

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Re: 4% including retirement accounts
« Reply #1 on: June 30, 2015, 12:49:29 PM »
That is one way to do it.  The difficulty is that you may run out of non-retirement account money before you reach retirement age, but there is a good chance you won't.  I'm not up to speed on UK laws, but lets say there is absolutely no way to get to the money early - not even with a penalty.

Say you want $40K income, so you retire when you have $1M - at that point you had $500K in retirement accounts, and $500K in taxable brokerage.  So the question is, how long do you need the money to last at an 8% withdraw rate?

C-Firesim gives me the following success rates:
10 years (retire at 49.5 in US): 97%
20 years (retire at 39.5 in US): 52%
30 years (retire at 29.5 in US): 20%

So if you retire around 40, you've got a better than even chance (based on historical data) for this to work.  Obviously things look even better if you have 600K or 700K in taxable at retirement.

livingthedream

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Re: 4% including retirement accounts
« Reply #2 on: June 30, 2015, 01:00:22 PM »
You can model this in the Flexible Retirement Calculator - http://www.flexibleretirementplanner.com/wp/

forummm

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Re: 4% including retirement accounts
« Reply #3 on: June 30, 2015, 01:20:41 PM »
That is one way to do it.  The difficulty is that you may run out of non-retirement account money before you reach retirement age, but there is a good chance you won't.  I'm not up to speed on UK laws, but lets say there is absolutely no way to get to the money early - not even with a penalty.

Say you want $40K income, so you retire when you have $1M - at that point you had $500K in retirement accounts, and $500K in taxable brokerage.  So the question is, how long do you need the money to last at an 8% withdraw rate?

C-Firesim gives me the following success rates:
10 years (retire at 49.5 in US): 97%
20 years (retire at 39.5 in US): 52%
30 years (retire at 29.5 in US): 20%

So if you retire around 40, you've got a better than even chance (based on historical data) for this to work.  Obviously things look even better if you have 600K or 700K in taxable at retirement.

And if you don't hit the 20 year target, you aren't destitute--you just have to borrow money or pay a penalty (assuming UK law is similar to US law). And in the US it's only 10% of what you're taking out before retirement age, so it's not disastrous.

EscapeVelocity2020

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Re: 4% including retirement accounts
« Reply #4 on: June 30, 2015, 01:34:55 PM »
I would certainly factor in Roth conversions (as a US citizen) because there is also an issue of having too much money in pre-tax retirement accounts at 70.5 that RMD's force you in to a higher than necessary tax bracket (which is even more likely, since you will also be collecting Social Security).  By rolling over the 401k and then converting to 'never again taxed Roth' over many more years, and delaying your application for Social Security, you can minimize (or eliminate) this tax liability and also maximize total lifetime benefits.

So there is a significant difference in recommended approach, but I do not know UK tax and retirement plan rules. 

forummm

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Re: 4% including retirement accounts
« Reply #5 on: June 30, 2015, 01:38:55 PM »
Good point. Of course you can always donate the RMD income to charity if you don't need the money to live on.

deborah

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Re: 4% including retirement accounts
« Reply #6 on: June 30, 2015, 01:51:26 PM »
In Australia you cannot take it out unless you are certified as having less than 12 months of your life left, you are permanently disabled, or you are fairly destitute.

I think that the destitute clauses have a maximum of $10,000 available per year and you have to pay tax on taking it out. Also, you have to have been on long term unemployment benefits or be about to lose your house or something like that - ER wouldn't cut it.

I suspect that the UK and Canada may have similar provisions as they both have unemployment benefits, but I do know that Australian Superannuation is much less available than most countries' retirement plans.

Al1961

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Re: 4% including retirement accounts
« Reply #7 on: June 30, 2015, 03:06:37 PM »
Answering from a Canadian perspective:

I haven't seen this touched on, so thought I might bring it up.

Can you count on the funds within your retirement accounts to make up your 4% withdrawal? Essentially pulling from the non retirement accounts first and leaving the retirement ones untouched until you have withdrawn all others. Has anyone constructed any models on how to best position this?

I definitely included all investment funds when modeling withdrawal strategies, this included:
  Taxable account
  RRSP (Tax deferred retirement account)
  LIRA (Tax deferred locked-in retirement account)*
  TFSA (Tax free saving account)

There's also government pension/support:
Canada Pension Plan (option of reduced pension @ 60, full pension @ 65, enhanced pension if deferred to as late as 70)

Old Age Security (available @ 66.5 yo for me) This is income tested.

*well, locked in from a maximum annual withdrawal perspective - As this is governed by provincial pension rules, I can access the funds now as I am >50yo.

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I can see it being a lot more intricate in how its managed and set up, but could be great for getting the most out of your pension allowance.

Agree

I've done some modelling on when to start withdrawing from various tax advantaged accounts, and on when to start collecting CPP. I'll be drawing from the taxable account until 2020, then begin withdrawals from RRSP and LIRA, commencing CPP @ age 64 and OAS at age 66.5.

I expect to keep adding $10k/year to TFSA - it's my longevity insurance, or the bulk of my kids inheritance.

Because of the number and importance of assumptions that have to be made (tax rates, changes to government support, inflation, returns) modeling only takes you so far.

In fact, I haven't even attempted to model sequence of return risk - just accepted that cfiresim and Firecalc both say 100% success with ~50% safety margin for expected spending level. Essentially what I have modeled is the trade-off between deferring income, paying taxes and avoiding having benefits clawed back. Also looked at pension income splitting opportunities with my spouse, but that may be a Canadian only issue.

I should have automated more of the spreadsheet.

Quote
I know in the US you have the ROTH conversion, this is unavailable in the UK, but if we considered it this way, the conversion wouldn't be required.

Yeah, Canada doesn't have any age based (or any) withdrawal penalties, so YAY don't have to deal with this!

Al

NearlyThere

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Re: 4% including retirement accounts
« Reply #8 on: July 01, 2015, 06:44:36 AM »
In Australia you cannot take it out unless you are certified as having less than 12 months of your life left, you are permanently disabled, or you are fairly destitute.

This is the same as the UK. There is no way to remove the funds legally without huge penalties.

My plan is loosely this. Become FI with a combination of both accounts and then "top up" the taxables to account for my FIRE budget x years I intend to retire. This way I have all bases covered and can allow my retirement accounts to mature with age.

This doesn't include a multitude of other incomes and factors btw, but in the absence of being able to withdraw from the pension until 57, it will have to suffice.

deborah

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Re: 4% including retirement accounts
« Reply #9 on: July 01, 2015, 04:51:51 PM »
Australia has provisions to increase your superannuation while you are ER and before the earliest you can access the old age pension, so I continue to contribute to it even though I am retired because of the benefits it has. The UK may have similar rules and advantages (although our advantages are unsustainable, so I doubt yours would be as good). If so, it wouldn't matter when you added the money to your retirement accounts.