How to choose a withdrawal order once FIRE'd

[GoCubsGo]

Not sure if this is the section to post but I know there's a lot of smart people in this section. 

I've been running my parents portfolio through FireCalc and gathering all of their various IRA's, Annuities, brokerage and Whole life policies in an attempt to make my father retire (he goes to work everyday in an environment that's not  safe for COVID and he's super high risk).  Basically he has 100% success rate spending more than they do now and not including a large amount of home equity.  I presented it all to them this weekend and it looks like he's seeing the light (he's 66)

My question is pretty simple but I've never looked into it.  Is there a resource or a standard that most people follow when they do start pulling from their investments to live on?  Almost like a Investment Order but in reverse? 

I'm going to have to dig into their multiple whole life policies as they have a fairly substantial amount of cash value in those. Based on early analysis it says they earn 6% a year on those whole life policies which I find hard to believe but if true would be a nice hedge. Their biggest IRA is 50/50 allocation and makes up 70% of net worth.  I know they can't start tapping their annuity for 3 more years so I won't worry about that for now.  They do get roughly $15K a year in dividend income which I think they should stop reinvesting and use for an easy income source right away.

They pay a financial advisor through their big bank IRA and do have an accountant for basic taxes.  I would hope the financial advisor could offer some advice but I don't want to count on it.  I was thinking an accountant would probably be better as I have no idea how to derive cost basis on their multiple whole life policies and the annuity which would probably need to be figured out for tax purposes.

Sorry for the long post but I never realized how complicated things get with all of these different old school investment vehicles.  Even basics such as "pull from Bonds first" would help, along with other thoughts.

Thanks!

[ChpBstrd]

The key question is whether they are happy with their AA. If their overall AA is close to the 50/50 mentioned above, then they might as well withdraw proportionally. Sounds like they can actually slow down their withdraws in 3y once the annuity is available. How much of their needs will be covered by dividends + annuity + social security?

I'd suggest paying the accountant examine the whole life policies and the annuity. It could be true that they are a holdover from higher-interest-rate times 15 years ago, but it could also be true they are a bad bet. It would be good to know one's options here. Note that tax-free "loans" can be made from one's whole life policy, and this could be a way to weather any remaining SORR. Expect the cash surrender to be taxed at ordinary income rates.

Specific questions: What is my ROI on the policies? What is my cash surrender amount in-pocket before taxes?

I agree with your POV that avoiding death or disability by COVID should be a bigger concern for the parents than running out of money. Even a one-year sabbatical would do wonders for their risk profile. Their reason to continue working may be more related to self-concept and social life than money, so your next approach should emphasize what they could retire to do. Sitting in front of a TV all day is deadly in its own way.

[terran]

All other things being equal, applying the investment order, but in reverse is exactly what I plan to do. Best to keep money in the most tax advantageous accounts possible for as long as possible.

There are some tax considerations that might change that a bit though. I'd definitely fill the standard deduction with traditional IRA withdrawals if other income sources (pension, social security, employment) aren't filling it. It might be worth filling some of the 10% or 12% bracket depending on balances too. Keep in mind that Roth conversions could serve the same purpose while keeping the money in tax advantaged accounts. So you might convert to take advantage of the 0% tax of the standard deduction, but only spend from a taxable account.

ACA premium subsidies might also be a concern for someone under medicare age, in which case minimizing taxable income might be the priority.

[GoCubsGo]

Thanks, yes @ChpBstrd , probably $50K of their $70K spend will be covered by SS and dividends and $70K would be an increase of what they currently spend.  I do think that my fathers old-school "gotta go to work every day like I have since I was 17" is something we are going to have to pound out of his brain.  That said, he commutes in Chicago traffic nearly 2 hours a day and has a lot of hobbies outside work so it's really a no brainer and he's starting to see the light.   Asset allocation wise, I'd like to get him up to 60/40 (my Dad would actually prefer a little more risk).  I'm fine with it since the annuity along with the 4 whole life policies are a pretty safe hedge to pull from in a SORR situation

@terran, fortunately they have just become Medicare eligible so that makes the healthcare side easier. I'm definitely thinking it's a good idea to pay the CPA to do an analysis and I'll sit down with him.  Then I need to work on the getting them into less costly financial advisor as their current one uses primarily American Funds which aren't great on fees.

[Sandi_k]

Remember that the tIRA will have Required Minimum Distributions once he/they hit age 72. Roths do NOT have RMDs, so you want to preserve them if at all possible.

Most people recommend that they pull from the account at the end of the tax year, so that most of the withholding can be done in December for the annual taxes. Since you're hoping to encourage retirement now, perhaps your parents withdraw in January and December this year.

How much do they need from the accounts? If it's less than 4% annually, I would retire in a NY minute.

Has your mom elected SS yet? The typical advice is for the lower earner to file early, and the higher earner to file at age 70. Since it sounds like your dad is the high earner, I'd figure out sources of income, and then back into what they need from the portfolio.

For example: they need $70k. Mom's SS is $20k. So they need $50k from investments, until Dad files for *his* Social Security, That's only 4 years. So they withdraw $50k this year (Dad's age 66); $50k for 2022 (D: age 67), $50k for 2023 (D: age 68), $50k for 2024 (D: age 69) and $50k for 2025 (D: age 70, now gets his SocSec).

His SS is estimated at $30k. So starting in 2026, you have $50k in joint SS, and need draw only $20k from investments (maybe 25, given there's been no inflation adjustment - I leave that to you). ;)

Next: redirect the accounts to distribute dividends to the MM account.

After that: If you need more, pull from tIRAs.

Sounds like you're on the right track! I would totally get them away from the whole life, and from the FA - unless it's a CFP and a fiduciary.

The Boglehead forum likes the XY Planning network to find a fiduciary. Rick Ferri also gets a lot of thumbs up for a one-time consult (probably in the $3-$5k range).

[GoCubsGo]

Sooo much good advice Sandi K and on topic as I'm researching SS this week.  My mom was a stay at home, so from what I've read, she will be entitled to file for half of my fathers amount which, if true, creates an even bigger income cushion.  Remember FIREcalc had them at 100% success rate and that was me inputting very little in SS for my Mom.

I want him to retire May 1st and they are both full retirement age this year (September for him, December for her).  They are way more than set and if my Mom truly gets half his amount in SS they will need to fund even less from IRA's.

Currently their dividends are reinvested and I want to get those redirected to a cash sweep so they feel like they are getting a "paycheck" every quarter.  They had no clue they were getting $17k in "free money" in their eyes, because it was all being reinvested.  That weirdly made them very excited. The FireCalc graphs didn't impress them at all haha.  I guess it's all in mindset....

[ChpBstrd]

Perhaps all these stocks and annuities and policies and SS are a bit abstract to them. It sounds like you're on the right path to persuasion, adding up cash flows and finding ways to automate the "paychecks" in cash terms.

If they have to sell a certain amount of stock each month for living expenses, that might seem too complicated / unsustainable (which stocks, how many, do I have to talk to the advisor?). They will obviously have to do this at some point to keep their AA stable, but they probably got into the annuity and policies because the idea of predictable cash in hand sounded good. A lot of people work extra years because they don't want to make a budget or click buttons on retirement accounts.

Perhaps their FA has done a good job over the years talking them down from selling stocks. Now they think of selling a small monthly allotment in retirement as requiring an awkward conversation with the FA. Maybe show them how easy it is to sell one or two shares at a time, commission free, through your online brokerage. Or if they are attached to the FA, maybe explain how they could give the FA standing orders to sell, e.g. $1k of stock per month, and transfer to checking.

[GoCubsGo]

Yeah ChpBstrd, you nailed it. The whole concept is abstract to them as they've always relied on "experts".  That said, they could have done way worse.  Their AA through the FA was prudent (American Funds are high fee to MMers but pretty reasonable to the average person).  The annuity is from a very solid company and looks like it's rated pretty well.  I'll have to dig into the whole life next but from early glance, the account values have gone up solidly (looks like they were pegged to the S&P Index with caps which obviously didn't help upside but at least caught a chunk of the bull market). 

I'm going in to meet with the FA and my parents. They also have no online access to any of these accounts which shocked me.  The budget is the least of their worries as they probably won't spend close to what they have.  My father has been commuting in a 22 year old pickup truck nearly 100 miles a day.  I told him if he retires he can go out an buy the pickup truck of his dreams this week (which he's always wanted) and it will have almost zero impact on their retirement plans.  Little carrots like that are exciting him more than his substantial portfolio.  I'm so pragmatic, I need to see this through their eyes.

[BlueHouse]

Use this as your starting point.  It helps to visualize and make sure you're thinking everything out.   It also is helping me figure out which questions I need to ask that I wouldn't have considered otherwise. 

https://www.i-orp.com/Plans/index.html

[hooplady]

Posting to follow. All during my working years I concentrated on the best way to avoid taxes while saving the maximum I could. But now that I'm FIRE'd I realize that I never gave a second thought about the best way to draw it out as I needed it...or even when I don't need it,  as I've recently come to learn about RMD's.