Author Topic: Drawdown strategy sticky request  (Read 4617 times)

Icecreamarsenal

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Drawdown strategy sticky request
« on: January 25, 2021, 07:35:44 PM »
I like reading about people that have already achieved what we're all trying to on these forums.  I also find the pre-FIRE checklist useful.
But I haven't seen a drawdown or withdrawal strategy sticky.  Can anyone post-FIRE post their strategy or strategies or guide me in a direction?  Thanks!

nirodha

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Car Jack

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Re: Drawdown strategy sticky request
« Reply #3 on: January 26, 2021, 08:44:05 AM »
I'm not finding good references (including the above posters' links) for drawdown.  I'm aware that there's a balancing act you need to play with income (IRA, 401k) and tax rates/taxes paid vs converting investments into cash to spend.

What I mean is, you can have no working income.  So you need to pay your bills.  There are a ton of ways to do this, assuming you've got a bunch of accounts like I do.  Some things to consider:

Do you have pre tax IRA money?  This gums up the works for Roth conversions.....or does it?  If you have no other income, your tax will be low, so converting over pre tax IRA at your ordinary income rate could be close to nothing.  So ok, there's a great way to go.  Not only do you pay little tax, you also reduce future RMDs.  This strategy seems to go against a lot of what I see out there to spend from taxable accounts.  Do the math.

Taxable:  Well, if you hold a bunch of BRK, which pays no dividends but has appreciation, you won't owe any tax till you sell.  So again, what's your long term cap gains rate?  If it's zero, then why not?  Do the math.

Do you have 401k's?  What do you do with them.  Personally, I say that if it's in a low cost portfolio there and they don't charge you a management fee, leave it there.  You don't get even more pre tax money into your IRA, making Roth conversions more sticky to do, or costing you more.

How about US Savings bonds?  I happen to have a boat ton of these.  I know that older ones have higher interest rates and that I pay no tax till I cash them.  I do plan to cash some just to even out the $$ with bonds that have each of my kids as co-owner.  I know what a problem it can be dealing with getting old bonds cashed when someone dies.  A fun scenario:  Grand parents bought bonds as far back as 1943.  Only grandparents names on them.  So now, we have to deal with getting all the documentation following aunt's recent death.  DW and her sister are the sole heirs.  Now, the good news with normal bonds in your own name are that they're easy to cash, there's no state tax and they pretty much become cash immediately.

I'm no expert and have not yet stopped working, but know this is going to be a complex balancing act to minimize taxes.  The good news for me: both my kids are working and likely done with college.  I have over 50 times spending in liquid assets with the house paid and a gaggle of cars outside.  Not pulling the cord yet because with covid, there's very little we can do anyways, so might as well keep working from home and picking up take out now and then.

If anyone sees a good, comprehensive drawdown plan out there, please post it.  I know I have more than enough money.  I'm in the "how do I pay little or no tax" quest.

cool7hand

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Re: Drawdown strategy sticky request
« Reply #4 on: January 26, 2021, 08:55:20 AM »
Is this what you're looking for? https://forum.mrmoneymustache.com/investor-alley/how-to-choose-a-withdrawal-order-once-fire'd/?topicseen

Or do you need to talk about why you're so worried when you have 50x spending? If you have that much, why are you so worried about optimization? Just get it close and do what you enjoy!

nirodha

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Re: Drawdown strategy sticky request
« Reply #5 on: January 26, 2021, 09:29:23 AM »
Taxes are complex and vary by state. They often change with stepped rules that are hard to model and feed back on one another. They are also subject to legislative risk (ie ACA reform).

I've been wrestling with this myself. Some additional confounders I've run into:

1. ACA subsidies and cost sharing act as a hidden marginal tax (https://www.gocurrycracker.com/obamacare-optimization-vs-tax-minimization/)
2. Social Security tax goes up with income, in steps (https://earlyretirementnow.com/2019/11/20/how-much-can-we-earn-in-retirement-without-paying-federal-income-taxes/)
3. Medicare premiums go up with higher incomes (https://www.ssa.gov/benefits/medicare/medicare-premiums.html)
4. Required minimum distributions hit you as a senior, so keeping runway growth in the 401k/IRA isn't a clear win (https://www.aarp.org/work/retirement-planning/required_minimuum_distribution_calculator.html)
5. Expected returns impact ideal asset locations (https://earlyretirementnow.com/2020/02/05/asset-location-do-bonds-belong-in-retirement-accounts-swr-series-35/)
6. State income taxes, obviously, but also medicaid rules

I have yet to see a one size fits all solution. If you keep income very low, most of these concerns run to zero. Fewer people are faced with the optimization challenge. Honestly though, I think many of them are ignoring the issues that arise in 50's, 60's 70's. Health insurance planning, social security and RMD's are big complicators. You can get into a bad position without planning. Especially in the more likely scenario - run away growth - a lot of money will be left on the table.

Icecreamarsenal

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Re: Drawdown strategy sticky request
« Reply #6 on: January 26, 2021, 09:37:39 AM »
I was thinking a 'best practices' sticky, kind of like the pre-FIRE checklist, from those that have already done it/are doing it.

For me personally Big ERN and his writing/speech style is a flowery word-salad that makes me slack-jawed, no offense. He may be an economist but he definitely doesn't have an economy of words.

I think this link: https://livingafi.com/2014/05/18/drawdown-part-3-strategy/ that @Frankies Girl shared is great.  I remember reading his blog years ago but the drawdown strategy did not apply to me at that point and so I left it on the backburner.
« Last Edit: January 26, 2021, 09:39:11 AM by Icecreamarsenal »

nirodha

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Re: Drawdown strategy sticky request
« Reply #7 on: January 26, 2021, 11:17:27 AM »
The linked to livingafi.com article is from someone who made up a plan in 2014, but isn't actually living it as of the article. There are some items that look incorrect to me:

1. He says roth conversions can happen only once per year. I don't think that's true
2. He argues for a high deductible ACA plan, ignoring the benefit of cost sharing for his possible income bands
3. The 15% tax bracket is now a 12% bracket
4. There's no consideration of social security taxation or RMD's
5. Very minimal (IMO far too optimistic) treatment of sequence of return risks

The author is keeping spending extremely low, which admittedly avoids most of the taxation concerns. But life circumstances and rules change. I think using that level of planning is taking on unnecessary risk.  ERN does take in the other direction, but worth the slog, IMO.

ysette9

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Re: Drawdown strategy sticky request
« Reply #8 on: January 26, 2021, 02:05:25 PM »
I think the reason we donít have a sticky thread for drawdown is because it is way more complex than the accumulation phase, as others have touched on. How much you have and spend, your age, whether you will get SS and/or pension, what asset mix you have in what types of accounts... this all leads to very different answers for different people.

Our plan is to live off of taxable investments initially, slowly shifting from a high-bond portfolio to a low-bond portfolio to help us through sequence of returns risk. I plan on engineering our income to be low to take advantage of ACA subsidies and do Roth conversions while we are young.

My parents have SS and pension and looked into Roth conversions, but they make no financial sense at all. My aunt and uncle are doing Roth conversions regardless because they want to pass down Roth IRAs as inheritance. My parents pull from their investments slowly while my aunt and uncle donít touch theirs and live off of pensions and SS. These are just a few quick examples of how our drawdown strategies differ quite a bit just in my family.

I got the book Living Off Of Your Money which is great, but the opposite of a sticky note. It is an academic textbook brick of a resource. https://www.goodreads.com/book/show/30269060-living-off-your-money Iíve read it once and annotated it and will be going back for a second serving once we get closer to my husband pulling the plug.

scottish

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Re: Drawdown strategy sticky request
« Reply #9 on: January 26, 2021, 07:27:50 PM »
I found the "Living off your money" book ysette9 mentioned was helpful for planning.    The sticky note version is:

1. live off your bonds
2. if you run out of bonds, live off your stocks
3. when your stocks go up 20%, sell some and buy more bonds
4. follow specific rules about asset allocation, how much stocks to sell and so on.

The authors called this approach "prime harvesting".    It's intent is to try and prevent you from selling stocks when they are down.

The book contains a large volume of alternative approaches, comparisons, backtesting and Monte Carlo simulations.

The book doesn't cover tax sheltered plans and different tax rates and so on.   Perhaps they think you won't have enough income to be concerned about taxation?    I think Pete (our host) said this was his approach.

Mr. Green

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Re: Drawdown strategy sticky request
« Reply #10 on: January 26, 2021, 08:51:41 PM »
I have quite an extensive reply I'd like to make on this subject as I've been heavy into the details over the last two years. I'm too tired tonight though. Hopefully tomorrow or the next day.

Dusty Dog Ranch

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Re: Drawdown strategy sticky request
« Reply #11 on: January 26, 2021, 09:57:58 PM »
PTF since we've been digging into McClung's book again trying to get a grip on how to do this ER thing, hopefully in the next 12 months. ERN's take on prime harvesting was interesting.

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Icecreamarsenal

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Re: Drawdown strategy sticky request
« Reply #12 on: January 27, 2021, 06:50:24 AM »
I have quite an extensive reply I'd like to make on this subject as I've been heavy into the details over the last two years. I'm too tired tonight though. Hopefully tomorrow or the next day.
Looking forward to it

TeeNixx

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Re: Drawdown strategy sticky request
« Reply #13 on: January 27, 2021, 07:16:49 AM »
PTF

2sk22

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Re: Drawdown strategy sticky request
« Reply #14 on: January 27, 2021, 07:58:48 AM »

It's easy to say "sell stock" but then there is also the question of which shares to sell when the time comes. The bulk of my investing was in index funds and ETFs but I did wind up buying a fair amount of shares (post tax) in a few individual companies using ShareBuilder with dollar cost averaging between 2001 and 2018.

Car Jack

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Re: Drawdown strategy sticky request
« Reply #15 on: January 27, 2021, 08:28:40 AM »
I have quite an extensive reply I'd like to make on this subject as I've been heavy into the details over the last two years. I'm too tired tonight though. Hopefully tomorrow or the next day.

I'm also looking forward to this.

All my stuff is sort of the "what about this?" floating in my head.  And yes, it's all about minimizing tax as assets are transformed into money to spend.

I know both my 80's father in law and mother utter the letters R M D and shake their fist at clouds.  Maybe I'm getting like that.  Oh, and get off my lawn.

bacchi

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Re: Drawdown strategy sticky request
« Reply #16 on: January 27, 2021, 09:18:59 AM »

It's easy to say "sell stock" but then there is also the question of which shares to sell when the time comes. The bulk of my investing was in index funds and ETFs but I did wind up buying a fair amount of shares (post tax) in a few individual companies using ShareBuilder with dollar cost averaging between 2001 and 2018.

Sell the stock that's too high for your asset allocation plan. Last year, I was selling off VTI because it grew too much too fast.

Unless you're a high roller, taxes are very favorable. If you sell $40k, your cost basis might only be $20k, leaving plenty of room for a Roth conversion.

Mr. Green

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Re: Drawdown strategy sticky request
« Reply #17 on: January 27, 2021, 12:29:05 PM »
I've been writing for the last few hours. Just over 5 pages in Google Docs now. Yes, it can be that complicated for someone based in the US because of how ACA insurance is tied to income. I'm probably about 75% of the way there. Have to run out to some appointments. Hope to finish later this evening.

ysette9

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Re: Drawdown strategy sticky request
« Reply #18 on: January 27, 2021, 02:22:29 PM »
I've been writing for the last few hours. Just over 5 pages in Google Docs now. Yes, it can be that complicated for someone based in the US because of how ACA insurance is tied to income. I'm probably about 75% of the way there. Have to run out to some appointments. Hope to finish later this evening.
You are amazing

flyingaway

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Re: Drawdown strategy sticky request
« Reply #19 on: January 27, 2021, 02:45:55 PM »
Using the 4% rule?

Mr. Green

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Re: Drawdown strategy sticky request
« Reply #20 on: January 27, 2021, 03:18:54 PM »
Using the 4% rule?
It's not that simple in practicality for people that live in the US and get their health insurance from the ACA. We could spend quite a bit more than we are if we were blindly following the 4% rule but the income factors with the ACA make that very inefficient. If we just wanted to spend a bunch of extra money in taxes we could do that but it also influences the Roth IRA conversion pipeline. So there are things to consider. We've been mapping out a lot of that for ourselves because of childbirth or medical issues, or wanting to buy a house, and how all of these things influence your income and how that affects taxes, etc.

seattlecyclone

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Re: Drawdown strategy sticky request
« Reply #21 on: January 27, 2021, 04:55:39 PM »
Agree with previous posters that this can be a very individualized thing. It depends a lot on your age at retirement, family circumstances, and your balance of assets in different account types.

I'll try to describe what we're doing and why. Maybe you'll be able to incorporate some of my thinking into your own plans.

We are a family of four: myself, my spouse, and two kids (ages 2 and 5). FIREd in 2019. Spent about $60k last year, which will probably go down some when the kids are both in elementary school and we are less likely to find an au pair to be a worthwhile expense. We had about a 3.5% withdrawal rate at FIRE time, though this has drifted down a bit with market gains since then. I had about $15k of self-employment income last year, expecting the same this year, Ī$10k. Our stash is approximately 40% taxable, 30% Roth, 25% traditional, 5% HSA/529/other. In our taxable accounts our basis is roughly 60% of the overall account value, and our Roth accounts have a pretty sizable amount of basis from (mega) backdoor contributions.

We have a few overarching long-term financial goals:
1) Keep health care spending under control,
2) Keep taxes under control,
3) Gradually move more of our money to Roth.

Current laws around health care and education and taxes create a few distinct phases in our current plan, described below.

Phase 1: Both kids at home (2019-2031)

Health care policies seem to be the biggest driver of the incentive structure during this phase.

In our state, kids in a family of four are put on Medicaid below $6,922/month ($83k/year) family MAGI. That's significantly more than we plan to spend, and due to our relatively high cost basis our MAGI will naturally tend to be less than our spending anyway. One option would be to do a bunch of Roth conversions up to this level if we wanted to avoid Medicaid. This would help with goal 3 (move our money to Roth), but would hurt with goals 1 and 2.

Adults, on the other hand, only qualify for Medicaid with a four-person family MAGI of $3,013/month ($36k/year) or below. In between these amounts you'll have the adults sign up for a subsidized private plan through the ACA marketplace while the kids will be on Medicaid. Seems like kind of a hassle. This is especially true since Medicaid looks at your ongoing, monthly income while the private ACA plans look at your annual income to determine your subsidy. We ran into trouble with that while enrolling for 2020. This is detailed more in a blog post I made at the time. Long story short, we predicted to be in this in-between range for 2020 and supplied our income forecasts showing that amount to the exchange. Because Medicaid looks at your ongoing, monthly income and because some of our 2020 income came in a lump sum from my previous employer's deferred compensation program, the Medicaid income verification folks determined that it didn't actually count at all for Medicaid purposes. This in turn pushed our monthly income low enough for the whole family to qualify for Medicaid.

Once you have been offered Medicaid coverage, you are ineligible to get premium tax credits toward private plans from the ACA marketplace: you either accept the Medicaid coverage offered or you reject it and pay full price for a private plan. We decided to give the Medicaid coverage a try. No major complaints so far, but the only care we've needed is well-child visits for the kids plus routine immunizations for us all. We had little difficulty keeping our income low enough every month of 2020 (except for the month my deferred compensation paid out, which again doesn't count for Medicaid purposes because it's only one month).

So far, the plan is to keep our income at this level throughout Phase 1 of FIRE. How exactly that looks every month varies. We tend to use taxable funds to pay the bills. Toward the end of the month I tally up our self-employment income and capital gains and any other income from earlier in the month. If it looks like we're going to be under $3,000 MAGI I'll realize a bit more capital gains. If it looks like we're going to be over, I contribute a bit to my traditional IRA or solo 401(k) to bring the number below the threshold. So far the overage scenario has happened in the last month of each quarter due to taxable dividends, while the opposite tends to happen in the other months.

I also contribute as much as allowed between my solo 401(k) and our IRAs. Consistent with goal 3 (moving money to Roth) I do Roth contributions when possible, but will do pre-tax contributions as needed to keep our MAGI in the right zone (see goal 1). So far I haven't done any Roth conversions because the taxable stock sales we've needed to do to pay the bills and max out retirement contributions have been enough to hit our income target all on their own, but that may change in the future.

Income taxes are pretty much a non-issue for us at this income level in this phase of FIRE. Between the stimulus payments (which we didn't get yet due to high 2019 income) and the child tax credit I expect to get roughly negative $10k tax liability for 2020. President Biden and the Democrats in Congress seem to be exploring changes to the earned income credit as part of the COVID recovery plan. The language from the House stimulus bill from last summer would have removed the investment income limit from this credit, not just for this year but for future years as well. If that language passes into law, that will be one more thing to optimize, and one more reason to keep our income low during this phase of FIRE.

Phase 2: FAFSA time (2032-2038)

Our oldest should start college in fall of 2034, making 2032 the first tax year that is used for FAFSAs. The recent stimulus/budget law included a pretty big overhaul of how the FAFSA and Pell Grants are calculated, but I haven't familiarized myself with this yet. The previous system included two interesting thresholds: automatic zero family contribution below a certain income level, and a "simplified formula" (that ignores investments) below a slightly higher income level. If something similar exists in the new system we'll probably want to consider adjusting our income as needed to make sure we qualify. Spending down taxable in Phase 1 should help here, as FAFSA doesn't look at retirement accounts.

Beyond that I expect things to look pretty similar to Phase 1.

We have existing 529s that should grow to cover a good chunk of college costs, and we'll take whatever grant aid we'll qualify for. It remains to be seen how much cost would remain after those two sources, and we'll have to decide by then how much (if any) we'll ask our kids to pay themselves.

Phase 3: Empty nesters, pre-Medicare (2039-2049)

Sometime early in this phase of FIRE, if not during Phase 2, our kids will each transition away from being tax dependents. With a smaller tax family comes a smaller federal poverty level that is used for calculating various Medicaid/ACA breakpoints. I expect we will graduate out of Medicaid range at this point, if we haven't already done so when the kids hit 18 and the higher Medicaid limit for them stops applying. The smaller tax family size would require us to actually reduce our income to stay on Medicaid, and by this point our taxable investments will likely be more gains and less basis than they are now. Both factors point against us being able to maintain such a low income so easily.

Starting in 2043 (spouse) and 2044 (me) we'll be able to freely access Roth earnings, so maybe we'll be able to keep our income low during this phase of FIRE after all. Whether we'll want to do that or not sort of depends on how much our other investments have grown in the first two phases. If we have a ton of money in pre-tax retirement accounts at that point we may decide to bump our income up a bit starting in this phase to reduce the RMD bite in the future. It's a balancing act.

Phase 4: On Medicare, no social security or RMDs yet (2050-2054)

Once we get past the ACA and its surprisingly high additional tax rates, things change quite a bit. We'll be able to realize more income at a lower marginal rate than before. This five-year period before we go on Social Security and before RMDs start will be a prime opportunity to do some rather sizable Roth conversions to help keep taxes under control in the next phase. The main things we'll be concerned with here are the federal tax brackets and the IRMAA cutoffs. We'll pick a suitable cutoff from those two sets of numbers, based on our remaining assets at the time, and try to get just below that.

Phase 5: Medicare, social security, and RMDs in full effect (2055-death)

I expect we'll wait as long as possible to claim social security. 2055 would be our first full year of doing so, and RMDs would start in 2056. Stability of income is the name of the game here. Wide swings from one year to the next mean higher taxes overall. Similar to Phase 4, we'll pick a tax bracket we think we can stay in indefinitely and try to reach the top of it every year, using Roth conversions to make up the difference.

Conclusion

Obviously this plan covers a pretty huge time period. There's a wide range of possibilities in terms of investment returns that could require us to rethink what we're doing in each phase, and a wide range of possibilities for changes in tax law and health care programs that would change the incentive structures enough to also cause us to rethink things. That's also why the first phase is much more fleshed out than the later phases. We can broadly describe what we plan to do in a decade or three based on what we know now, but trying to be too detailed about it given all the unknowns involved doesn't seem like a very useful exercise.

Another unknown concerns inheritances. I expect our parents to pass away probably in the next 20 years, 30 at the outside. It could happen literally any time in that range. Of course we all want that to happen as late as possible, but we just don't know, and when it does happen we expect to inherit a third of each estate. The timing and amount of these inheritances could change our withdrawal strategy rather significantly. Inherited IRAs now have to be depleted within ten years, so we'd probably spend from those as a first priority instead of selling other investments. If that ten-year period overlaps with Phase 2 (FAFSA time) we may find it useful to weight the withdrawals away from FAFSA time. We'll just have to see how that all plays out.

Mr. Green

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Re: Drawdown strategy sticky request
« Reply #22 on: January 27, 2021, 07:51:17 PM »
Whelp, here goes nothing!

*************

These thoughts on drawdown strategy are based on my experience over the last 4 years of FIRE. There are quite a few variables that you may deal with. I tried to hit as much as possible. At almost 8 pages in Google Docs Iím reaching concept fatigue, as the material is pretty broad. If you have questions or Iíve gotten something wrong (hopefully not) or Iíve missed something pertinent, please point it out!

A couple of notes up front. All of my examples use our situation, Married Filing Jointly with no kids. Youíll need to scale the numbers to your specific situation (single, kids allowing a higher AGI without paying more taxes due to Child Tax Credit, etc.). Lastly, if you have not been exposed to much of this in detail it is a lot to take in. This is a couple of years worth of knowledge growth that Iíve just tried to dump into one post. I also made no assumptions about what someone knows already, so if you find yourself reading something that seems trivial to you, sorry. Lastly, this is targeted at US people who expect to get health insurance through the ACA in retirement (post-FIRE). If you see ACA-related income values and it seems small, remember that I'm using a 2 person household in these examples. The Federal Poverty Level (FPL) scales with more or less family members. All of the acronyms you see below are the same acronyms that official entities refer to, so if you do a deeper dive on any of this stuff youíll have continuity there. Also, in any instance where Iím referring to monetary values in the future, Iím using present value. I make no attempts at projecting future inflation, etc.

Age
This will have considerable influence on your drawdown strategy because of when you start having access to various piles of money. If you retire very early (I quit at age 33), your only access to money (assuming you stay retired) until 60 will be brokerage accounts, Roth IRA contribution and conversion basis, passive income streams, and 72t separate and equal periodic payments (SEPP) on your traditional IRA (tIRA).

Though I think youíll find by the time I get to the end of this post that a 72t SEPP is not very appealing to the very early retiree. The big disadvantage to the 72t process is that you are required to take payments until age 59.5, and those payments are calculated based on your life expectancy in one of three ways dictated by the IRS. Technically, you can transfer some of your tIRA money to a new tIRA and only set up SEPP on the new, smaller tIRA, but it is quite possible that locking in a portion of your income until 59.5 may come back to bite you. Iíll touch on this later on in the Drawdown Mechanics section.

If youíre older, and the time until you can access all your Roth IRA money (age 59.5) and Social Security or pension (62 at the earliest, for now) is a significantly shorter period, like 10-15 years, things get quite a bit more flexible in how you may choose to approach drawdown. For one, you have significantly less concern about sequence of returns risk because unrestricted access to IRA money really opens up in the early 60ís.

Most younger folksí drawdown strategies are probably a combination of brokerage funds, a Roth IRA conversion pipeline, and passive income from real estate rentals or owning a business (some may argue about the passivity of these).

ACA (Affordable Care Act) Health Insurance
If youíre an American, living in the United States, the ACA is truly a force to be reckoned with when it comes to how it impacts your drawdown strategy. If you have managed to secure another source of health insurance whose premiums, deductibles, and maximum out-of-pocket (OOP) values are not based on your yearly Adjusted Gross Income (AGI), then you can pretty much ignore this section. If you are living outside the United States and don't carry US-based insurance you can also ignore this section, though there is a factor I will talk about for Americans choosing to live abroad temporarily in order to juice their drawdown strategy.

A note upfront about some language Iím about to use. For any given year, ACA insurance values use the previous yearís Federal Poverty Line (FPL) data. So in 2021, the income thresholds where Cost Sharing Reductions and premium subsides decrease or are eliminated are based on the 2020 FPL data. When Iím giving specific illustrations and pointing out numbers as a percentage of FPL, I wonít continually remind you that if Iím laying out numbers in 2021 that they are measured against 2020 FPL data. If this is confusing, there are a bunch of spreadsheets out there that illustrate in great detail how all this stuff plays together. I even have what I think is a pretty nice one myself, and Iíd be happy to share it if it will help folks understand this better.

The biggest factors for how the ACA will influence your drawdown plans are if you are planning on having children still or if you are not 100% healthy. My wife and I are trying to have our first child. With the insane cost of medical care in the United States, childbirth will immediately max out our insurance planís max OOP for the year. Since this is an event that we are planning for, it is fairly easy to control our income during that period to take advantage of the ACAís Cost Sharing Reductions (CSR). Below 250% of the Federal Poverty Level (FPL), these reductions lower the deductible and max OOP on Silver-tier (only Silver-tier) insurance plans. In our area, if our income was above 250% of FPL, the deductible is $12,600 and the max OOP is $17,100. At the lowest income level for private insurance, between 100% and 150% of FPL (or between 138% and 150% in Medicaid expansion states, the deductible drops to $0 and max OOP is $1,500. So if weíre able to anticipate a birth and drop our income down to where we qualify for the largest CSR, we can save ourselves $15,000 that year. The caveat here is that there is some lead time in the planning because the health insurance you qualify for in a given year is based on your AGI from two years ago. For instance, when annual open enrollment for the ACA started in November 2020, we picked our insurance plan for 2021, and it was based on our AGI from 2019 because that is the most recent finalized tax data.

If you have a chronic medical issue that will require high levels of medical care for many years, or even a medical issue that is temporary but will use high levels of medical care and itís not a true emergency, you may also benefit from being able to control your AGI to select an insurance plan each year that has significantly smaller deductible and max OOP values. For example, at 37 years old I just learned that I have hip dysplasia. For someone who remained unaware, or if left untreated, this condition typically results in premature osteoarthritis leading to hip replacement (often in oneís 50s). One of the common early symptoms of hip dysplasia is a hip labral tear. In your 30s and 40s, as normal aging starts to degrade the body, the hip is less able to tolerate the improperly formed joint. Hip labral surgery is highly specialized. If needed, this will max out my half of our family insurance plan for the year. A periacetabular osteotomy is a follow on preventative surgery that some people need to stabilize the hip joint and significantly reduce the chance of needing a premature hip replacement. This is an even more highly specialized surgery. So weíre potentially looking at a 2-3 year window where, between childbirth and a surprise hip condition, having greater control to reduce our AGI may yield medical cost savings of $30,000-45,000. Not exactly chump change!

If you (and your family) are all healthy, with no recurring medical issues, this is all quite a bit easier. You could easily choose a Bronze-tier plan, which is typically a High Deductible Health Plan (HDHP). You will most likely still want to stay below the ACA subsidy cliff (400% of FPL) lest you pay big money for premiums. I talk about the Subsidy Cliff in more detail 3 paragraphs below this one. Since premium subsidies are based on the Second Lowest Cost Silver Plan (SLCSP), selecting a bronze plan can be very economical because you get the same amount of subsidy regardless of which tier plan you choose. By choosing a Bronze plan, youíre selecting a plan with a lower premium to start. In many areas, people are able to choose bronze plans with premiums under $100 a month. This situation is the least burdensome on your ability to generate AGI from other sources, both because your premiums remain relatively small and your income can be much higher than those looking to keep their deductible and max OOP values small.

For US residents, living overseas for a year (or two or three) can have a significant impact on your drawdown because, in any year that you are out of the country for 330 days or more (the IRSí physical presence test), you are not required to purchase US-based health insurance. International travel insurance can be had pretty inexpensively and often this will include a provision for transport back to the US in serious medical emergencies. That that event, your arrival back in the US could be considered a move and this would allow you to pick a new US-based insurance plan under a special enrollment period. With the current US tax code, being out of the country for the year would allow you to max out long term capital gains and/or Roth IRA conversions without having to pay any federal tax, though you may still pay state tax because simply leaving the country for a year will probably not invalidate having domicile in whatever state you were last domiciled in. Since you wonít be staying in any one foreign country for the entire year (I donít know of any travel visas that last that long) you likely wonít be forwarding all your mail there or getting a local driverís license, or other things that would help you prove to the US state you just left that you no longer have domicile there.

Using the Federal Tax Brackets in 2021 for Married Filing Jointly (MFJ) - halve these amounts for a single person - you could convert $25,100 (the federal exemption amount) of tIRA money to a Roth IRA tax-free assuming you have no other ordinary income sources, which will then become available to you in 5 years. You can also harvest $81,050 of long-term capital gains tax-free. So thatís an AGI of $106,150 for the year while paying $0 in federal tax. Depending on your situation, it may even be worth paying a little tax to make a significant Roth IRA conversion while being out of the country. According to the 2021 MFJ federal tax brackets, your first $19,900 of taxable ordinary income (after your $25,100 personal exemption) is taxed at 10%. Taxable ordinary income from $19,901 through $81,050 is currently taxed at 12%. This is a reduction from 15% that was signed into law with the 2017 Tax Cuts and Jobs Act. This reduction will expire in 2025 unless additional legislation is passed to extend it. So if we were living in, say, Europe for 330 days or more in 2021 we could perform a Roth IRA rollover on $106,150 while only paying $9,328 in federal tax ($25,100 free because of personal exemptions + $19,900@10% + $61,150@12%). Thatís an overall federal tax rate of 8.78%. Pretty sweet! I will elaborate on the importance of this option in the Drawdown Mechanics section.

Living in the US, your AGI will likely be limited to a significantly smaller number because of the ACA Subsidy Cliff. At 400% FPL, you lose all subsidies for health insurance. This is highly location-dependent, but the jump in premiums for going over the cliff in many areas can be $6,000-10,000 or more. Ouch! As a family of 2, there is no circumstance while weíre living in the US that we want our AGI to exceed $68,960 (400% FPL for a family of 2 in 2021). Even then, there are significant financial disincentives to allow our AGI to rise into the $50,000ís if we don't need it for living expenses because insurance premiums dramatically increase and deductibles and max OOP values get significantly larger. However, if youíre a perfectly healthy person or family, higher deductibles and max OOP values may not bother you. Choosing a Bronze plan instead to keep premiums low and because you donít expect to use much medical care may be well worth it to have a larger AGI.

Drawdown Mechanics
Caveat: There is going to be a great degree of variability as to how influential many of these factors will be on an individualís drawdown plan. While I can outline the framework for the most common contributors here, you will have to do the legwork in understanding how each of these can shape what you need your own financial picture to look like moving forward. Youíll understand what I mean by this as we go through everything below.

Unless youíve made an obscene amount of money very quickly while young, odds are likely that you have a significant portion of your stash in a traditional IRA (tIRA) due to the benefits of tax deferral and employer contributions. After that, you probably have some money in a brokerage account, online savings account, I-bonds, or other after-tax vehicles. You may also have some money in a Roth IRA but the amount will likely be dependent on how consistently you contributed funds to your Roth IRA while working, or whether you took any opportunity to convert tIRA funds prior to retiring. Though people do inherit IRAs and a couple of years out of work mid-career may have created an excellent opportunity to make big Roth IRA conversions. So some folks may have larger Roth IRA balances. The bigger, the better. Though, interestingly, if all your money were in a Roth IRA this would actually be a bad thing because youíd have no way to generate a taxable income once retired. Since all Roth IRA money is tax-free (both contributions and growth), there is no withdrawal that will generate a tax event. Without taxable income, youíd be forced to use Medicaid in a state where Medicaid has been expanded by the ACA, or be in the very unfortunate position of having to pay the full cost of private health insurance in a state where Medicaid was not expanded unless you meet the income limits of who can qualify for non-expanded Medicaid as an adult (parents, pregnant women, and the disabled).

My career was mostly over before I learned about MMM and realized how little I actually knew about personal finance. I found the blog at the end of 2014 when I was 31. Iíd been working 10 years already, and my lack of understanding about how some Roth IRA funds can be accessed penalty-free before the age of 59.5 meant my wife and I didnít even have Roth IRAs at that point. Each year, beyond our 401k contributions, weíd been making additional tIRA contributions which in hindsight, with early retirement always being the goal, was incredibly stupid. Even as our combined income began to exceed the limit for making Roth IRA contributions, we could have used the backdoor Roth IRA conversion process, which we did finally start doing once I learned about it on this forum. However, I quit my job for the first time in 2016, and for the last time in 2017 so our Roth IRA balances were pretty paltry going into retirement.

Larger, replacing-my-income level Roth IRA conversions often donít start happening until after retirement because converting that much money while working is likely very expensive. Being the most highly taxed income (because youíre electing to convert it after already having made a salary, etc.) you may be paying over 20% of it in federal taxes alone. Though if your income is small enough, less than $106,150 ($25,100 exemption + $81,050 12% tax bracket) for Married Filing Jointly - singles halve that - it may be worth filling out that 12% ordinary income bracket with Roth conversions depending on how much after-tax money youíll have (brokerage accounts, online savings accounts, etc.) going into retirement, especially if you have health insurance through work and the ACA will restrict your Roth IRA conversions more in retirement (because medical expenses!). The larger your Roth IRA basis is at retirement, the less diligent you have to be about maximizing the 5-year pipeline.

So you retire, and at first glance, the first order of business may appear to be establishing a healthy Roth IRA conversion pipeline. Youíve done your due diligence and you know what your yearly expenses are going to be in retirement. The typical advice I see is to have at least 5 years worth of expenses in a brokerage account to live off of because it takes that long to establish a Roth conversion pipeline if you're starting from scratch (or close to it). After year 5, the basis you converted to your Roth IRA in year 1 is eligible for withdrawal penalty- and tax-free.

However, depending on whether or not you have reason to want health insurance with a lower deductible and max OOP, and what the stock market has done over the last 10 years, you may find different areas fighting for your ďself-generatedĒ AGI dollars. For instance, if you have a known major medical expense coming up, you may want a plan that requires your AGI to be lower. Above 200% of FPL, insurance premiums, deductibles, and max OOP values escalate pretty quickly. For a family of 2, staying under 200% FPL in 2021 means limiting our AGI to less than $34,480.

Another piece of advice that is commonly given is that it is more tax-efficient to keep your bond allocation (if you have one) in pre-tax accounts and keep equities (stocks) in your brokerage accounts. Depending on how the market has performed recently, and whether you have any funds that can be accessed without generating a taxable event (bonds in a brokerage account, online savings account, etc.), accessing money to pay for your living expenses in the first 5 years of retirement will create a certain amount of taxable income that you cannot avoid. We are currently at the end of a very long bull market cycle. This has spawned a lot of early retirees, but it also means that the stocks in most folksí brokerage accounts also carry large capital gains with them. My own brokerage account is 80% VTSAX and 20% VBTLX, only because weíre looking to buy a house otherwise it would be 100% VTSAX. At the moment, our VTSAX shares have an average capital gain of 43%, and if we wanted to sell specific shares the gain percentage ranges from 18% to 53%.

So if we needed $40,000 for living expenses this year, itís going to be comprised of two parts. First, the dividends on your stocks, and/or dividends and capital gains on your bonds if you have any. TAKE YOUR DIVIDENDS! You will have to pay tax on them each year so it does you no good to leave them reinvested once retired and have to pull that additional income from other sources if it means creating another taxable event. Obviously, the size of your dividends are going to depend on your brokerage account balance. We have just over $500,000 in VTSAX and it spawned dividends of almost $8,000 in 2020. Second, selling shares of VTSAX (or VBTLX or whatever) to cover the remainder of our living expenses for the year. In our example, weíll need to sell $32,000 of VTSAX. That, combined with our $8,000 in dividends, will give us the $40,000 to cover our living expenses. Selling $32,000 of VTSAX will generate a taxable event of $13,760 in long-term capital gains (LTCG), on average (43% appreciation!). If we no longer have money in accounts that can be accessed without generating a tax event, like an online savings account, we have no choice but to take those gains. So if we were trying to keep our AGI under $34,480, weíve just used $21,760 ($8,000 dividends + $13,760 LTCG) of that space accessing our living expenses for the year. An alternative strategy when selling is to always sell the least appreciated shares first. However, as you burn through your brokerage balance the gain to income ratio will rise, causing your AGI to go up to access the same amount of money over time. Only having more space to generate AGI than what you need for living expenses would let you harvest some of those gains before you need to sell the shares for income purposes, resetting the appreciation of those shares for future withdrawal.

Remember, that Roth conversion pipeline is important unless our brokerage account can carry us all the way to age 59.5. We donít want to have exhausted our after-tax money only to find that we didnít fund our Roth IRA well enough to finish the job. This is important because only the basis of our conversions is available to us before 59.5. Worst case scenario, we may have to pay the 10% penalty to access Roth gains, but if faced with that decision we would also have the ability to use tIRA funds as well, though this would generate more AGI since those funds are pre-tax.

So what you can see from the example Iíve given above is that our tax event generating living expenses, coupled with a medical need to keep our healthcare spending low, really starts to put a squeeze on that Roth IRA conversion process. Weíre left with only $12,720 of AGI space left for Roth conversions ($34,480 limit of 200% FPL - $21,760 dividends and LTCG for living expenses). Between higher deductibles, max OOP values, and higher insurance premiums and taxes, it is possible that most or all of the dollars we generate by raising our AGI (accessing more money) could be eaten up by these higher costs. If this situation was not brief, it could have some ugly consequences after having exhausted our brokerage funds. $12,720 is less than a third of $40,000, so once we start pulling Roth IRA basis weíll drain 3 years of conversions every year for living expenses. The closer you are to age 59.5, the less of a risk this is, but itís worth understanding the concept regardless. Even healthy people in their 30s or 40s can suddenly find themselves with health problems. Of course, it is my hope that in the near future the US healthcare landscape will change and no longer have such a considerable impact on determining an early retireeís chosen income level but who knows when or if that will happen. And if youíre healthy now, itís probably still worth having read this if only to have that little nugget in the back of your mind so that if your health did ever change you might remember to revisit this concept. Also, understanding how these things impact each other will allow you to do your own calculations for how raising your income will generate higher costs and whether there's an optimal point for your specific situation.

We also canít forget that ďpaperĒ income will also affect our AGI and change how much money we may be able to dedicate to a Roth IRA conversion. For example, my wife and I converted our mortgage to a 15-year fixed when we were still living in Maryland. When we moved out of state, we converted our house to a rental. While the house is cash flow positive on paper, because we have the higher mortgage payment associated with a 15-year note we donít actually see any money coming into our bank account. All the income is paying off the mortgage. This will be great for us when the note is paid off in 7 years, but for now, we show $5,000 of income on our tax return and that money canít be used for living expenses. If you have a situation like this where you have ďpaperĒ income, it will further reduce how much income you can generate from other sources if youíre trying to keep your AGI below a specific number. Now that we have retired and no longer have W-2 income, we do not qualify for a refinance. Even if we did still qualify for a refinance the rate will be higher because we no longer live there. So the lesson in this story is if youíre going to retire early, make sure youíve positioned the mortgages of your rental units as best you can because you may have limited ability to change that once retired. Though this may be less limiting if you have a bunch of rentals and a bank will look at that income stream as consistent, business-generated income. I can't speak to that scenario.

One thing to think about is that thereís an upward spiral to expenses once you have exhausted all sources of money that donít generate a taxable event, assuming your stocks have significant capital gains. Using my example from earlier, needing to use $40,000 per year for living expenses will generate $21,760 in AGI. You canít forget about the taxes and insurance premiums you will have to pay though. At this point, every dollar you need to access creates a gain, in our case 43 cents on the dollar. As each dollar raises our AGI, our health insurance premiums and taxes also go up, necessitating access to even more money. So, say we were using a Bronze HDHP and I broke my arm skateboarding. $8,000 later my arm is all set up, but I hadnít planned on that expense this year. Iíll need to pull $8,000 more out of VTSAX, generating $3,440 more in AGI, but my taxes and insurance premiums go up as my AGI does so my actual withdrawal ends up being more than $8,000. If youíre leaving all your funds in VTSAX for the best growth, this may just be the unfortunate consequence of large surprise expenses but itís worth knowing this will happen. If it takes place mid-year maybe youíre able to adjust other areas of income generation to keep your AGI where you want it.

One interesting idea to explore is that if your allocation across tIRAs, Roth IRAs, and brokerage accounts is extremely weighted toward tIRAs, it may be worth taking money from your tIRA early in retirement up to the amount of your personal exemption and allowing brokerage accounts and Roth IRAs to grow a little more. If you have kids this amount could rise considerably with the Child Tax Credit to offset it. Since youíd pay no tax on the ordinary income generated from the withdrawal, youíd only pay the 10% penalty. 61% of our portfolio is in tIRAs. Many Mustachians currently find themselves in the position of having accumulated significantly more money than their original target because of the run-up in stocks over the last 5 years. With our living expenses being relatively low, we may find ourselves in the position where our account balances are growing faster than we can reasonably spend our money. If we focus exclusively on drawing down brokerage accounts and Roth IRA monies first, we leave tIRAs to grow for many years. The potential disadvantage to this is ending up with ridiculously large tIRA balances in our 70s when Required Minimum Distributions (RMDs) start. If you end up having an RMD over $100,000, plus Social Security benefits or pension, you may find yourself paying significant taxes on all that income and paying a higher Medicare premium. To boot, your health may have reached a point that you couldnít possibly spend that much money. My grandparents were very healthy but as they reached their 70s their desire to travel really tailed off as ailments made being away from home for extended periods of time more of a hassle.

So, from all the information Iíve laid out above, you can see how there may be a fairly intricate dance that happens between keeping healthcare costs low and adequately funding your Roth IRA conversion pipeline if youíre expecting to need significant medical care. This is where a 72t SEPP on a tIRA could come back to haunt you. There are other reasons as well. You could choose to go back to work or monetize a hobby. Once that SEPP is in place, there's no stopping it so it's possible you could put yourself in a position with respect to AGI that you don't want to be in.

Another advantage to leaving the country for a year or two early in retirement is that it can help you redistribute your funds between tIRAs and Roth IRAs very quickly. In two years we could move over $200,000 while paying minimal tax. This would help ensure we donít end up with crazy high RMDs in our 70s and beyond. You may also have an opportunity to do this after youíve reached 65 and transitioned to Medicare, or if you have health insurance through the military or someplace else that isnít income-bound you may be able to do this any time. In our case, my wife and I are 3 years apart in age. So when I am 68, she will transition to Medicare and weíll have 4 years that we can make $100,000+ Roth IRA conversions at very little tax costs before RMDs start at 72 for me (under current tax code). This certainly helps, but it comes after a lifetime of portfolio growth so it wonít have near the same impact as if weíd traveled in our 30s or 40s and that converted money was able to grow in a post-tax vehicle for 20 years.

Some of this ultimately depends on whether you care about how efficiently youíre playing the long game. I have a spreadsheet set up to analyze a scenario for maximum tax efficiency for all years to age 100 based on current conditions. We donít want to have insane RMDs late in life when weíre no longer spending much money if we could have more efficiently moved that money to other buckets earlier and had better access to it. Of course, this is tempered by our plans for ACA healthcare spending. This takes precedence while weíre still young because we still have many years of market unknowns ahead of us and both the insurance landscape and the tax code could change in the future. Still, itís been an interesting exercise to understand what is most efficient, and how that compares to what weíre doing now, and where we could focus on improving if we have the opportunity.

********************

And that's all I've got at the moment. Hopefully, that was fairly comprehensive. Many atypical income situations are going to end up taxed similarly to what I've described above so it's probably fairly easy to swap out those examples if you already understand the tax ramifications of other income generation. The big thing is really understanding, in general, the relationship between dollars going into your bank account, what taxes they're generating, and how that influences your health insurance and overall tax picture. I hope this has been helpful!

BZB

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Re: Drawdown strategy sticky request
« Reply #23 on: January 28, 2021, 12:13:10 PM »
@Mr. Green Thanks for all the work you put into that post! I've read through it twice and took notes on some things I need to research for my own situation.

Dusty Dog Ranch

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Re: Drawdown strategy sticky request
« Reply #24 on: January 28, 2021, 08:35:00 PM »
I second that big thank you @Mr. Green! We are also MFJ no kids, but older (50), and the way you laid that out is really helping me get a grip.

A couple of things that I'm not quite grasping though; could you elaborate on these two?

[Folks my age] have less concern about SORR b/c of unrestricted access to tIRAs at 59.5.

The ACA will restrict your Roth conversions more in retirement b/c of medical expenses (maybe this is the $8K injury example?)

This drawdown stuff is really complicated, so I appreciate your response and the OP for requesting a sticky on it!



« Last Edit: January 28, 2021, 08:39:15 PM by Dusty Dog Ranch »

Mr. Green

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Re: Drawdown strategy sticky request
« Reply #25 on: January 29, 2021, 01:38:28 PM »
I second that big thank you @Mr. Green! We are also MFJ no kids, but older (50), and the way you laid that out is really helping me get a grip.

A couple of things that I'm not quite grasping though; could you elaborate on these two?

[Folks my age] have less concern about SORR b/c of unrestricted access to tIRAs at 59.5.

The ACA will restrict your Roth conversions more in retirement b/c of medical expenses (maybe this is the $8K injury example?)

This drawdown stuff is really complicated, so I appreciate your response and the OP for requesting a sticky on it!
@Dusty Dog Ranch Sure thing!

Less Concern about SORR for Older folks
For folks that are closer to 59.5, sequence of returns risk (SORR) is a little less of a concern because you have access to more buckets of money sooner. As a 37-year-old, the only access I have without penalty are Brokerage funds (or other after-tax vehicles like online savings accounts, CDs, or I-bonds if I have those) and the principal amounts from our Roth IRA contributions and conversions. In our personal case, our portfolio is 61% tIRAs, 36% brokerages, and 3% Roth IRAs. Since all tIRA withdrawals would have a 10% penalty associated with them (unless meeting emergency withdrawal rules), we can kinda pretend that bucket doesn't exist beyond the extent to which we use it to fuel Roth IRA conversions.

Our Roth IRA balances are almost non-existent because of how late we started contributing to our Roths. And even if we had started them when we were much younger, only the principal is available to us for withdrawal. We have been contributing to our brokerage accounts fairly consistently during the bull run of the last decade, so we have just over $500,000 in VTSAX there at an average of 43% capital gains. Only ~$285,000 of that amount is principal. If that was a Roth IRA instead of a Brokerage account, that $285,000 is all we have access to until age 59.5, unless we make additional contributions or conversions or want to pay the 10% penalty for early access.

So that's just over 20 years that we need to ensure that we adequately fund our Roth conversion pipeline because our Brokerage account will run dry since we'll be living on those funds for so long. And that's okay, we're planning for that transition to Roth IRA funds with our pipeline. But for someone who has had a Roth IRA for many years, if they're retiring later in life, those funds have had a long time to grow, and you get penalty-free access to those gains at age 59.5. So if you're 50, you have just under 10 years to wait for access, as opposed to my 22 years.

Also, your tIRA money opens up to use. For us, its only withdrawal value right now (penalty-free) is funding Roth IRA conversions. If you've retired later in life, odds are probably good that you've been maxing out your 401k contributions if you had an employer match. Maybe this means the percentage of your portfolio is even heavier toward tIRAs/401ks. Your access to that comes much sooner than for me. To drive home the point, our stash total at the beginning of 2021 was ~$1,750,000 but only ~$650,000, or a little more than a third of that amount is available to us penalty-free. For someone like me, the game we're playing is how to rely on Brokerage funds and Roth IRA principal, which we'll continue boosting using yearly conversions until we're age 59.5 and the rest of our portfolio opens up to use.

What makes SORR a bit easier to weather for someone older is the fact that they will have access to their entire portfolio in a shorter period of time, and you will also receive other forms of income sooner (assuming you'll get social security and/or a pension). Of course, none of this actually changes how poor market returns affect your total stash but you're closer to weathering that storm with all your money. Let's say you're 50 now and just retired, and we have terrible SORR over the next decade. For these first 10 years, you're in the same boat as me having only a part of your portfolio available to you for penalty-free withdrawals. But at the end of that 10 years, you're 60 and your whole portfolio is now available to you. Yes, your balances are still equally affected but you are now able to withdraw from all sources.

That same situation is much different for me. At 37 years old, I weather that 10 year period with the same access to money as you, but after that I have another 13 years of restricted (penalty-free) access to my funds. This could create extra pressure if my balances in that restricted bucket of money get low enough, knowing I don't have a penalty-free reprieve for 13 more years. Of course, I could access our tIRA money or Roth IRA gains if absolutely necessary and pay the 10% penalty but doing that for a long period of time might have ramifications on whether my portfolio will last my lifetime if I'm routinely giving away an extra 10%.

The addition of a pension or Social Security some time in your 50s or 60s also means another source of income that is unaffected by market returns. So if your stash is significantly drawn down with bad SORR, you have help coming sooner that will lessen your draw on your stash. If SS ends up covering half your living expenses that might be just the salve your portfolio needs to recover over time and go the distance because you're no longer drawing on it as hard. As a younger person, I have much longer to wait for SS (obviously no pension because of how early I retired). Now if you don't have any annuity-style (SS, pensions) help coming you still have to really consider how SORR impacts your portfolio, but at least you're likely not fighting that battle with only a portion of your total stash.

ACA Impacting Roth IRA Conversions In Retirement
Fair warning: This is something that really varies depending on where your money is located. If most of your money is in Roth IRAs or bonds in a Brokerage account, that's money you can access without generating a tax event so it gives you much more flexibility in creating your AGI for ACA insurance purposes. I'm focusing on people who have optimized their tax efficiency by leaving bonds in pre-tax accounts (tIRAs, 401ks), and the funds they expect to dip into after FIRE are highly appreciated stocks because that's where most people probably are as a result of the long bull run we've had. If you're accessing funds after FIRE from sources that don't really create tax events then you won't have the same clash between living expenses generating capital gains and needing to adequately fund your Roth IRA conversion pipeline for when you shift to that bucket of money.

So let's assume you have no taxable income other than the sources you're creating (capital gains, dividends, Roth conversions). You're probably analyzing how much of each kind you can take while being as tax efficient as possible. We'll start with ordinary income because that gets taxed first. If you're MFJ, the first $25,100 in income is free because of your personal exemption. You probably have Brokerage funds invested in VTSAX so you'll have quarterly dividends. Most of that will be qualified dividends but something like 10% of those dividends will be ordinary, so subtract that from $25,100. Whatever is left is how much you can convert to a Roth IRA while paying no federal tax on the conversion (assuming no kids). If you have other sources of ordinary income they will further reduce that number. For instance, we have a rental property that typically creates a taxable income of $5,000 a year, so that reduces that figure. If you have kids, the Child Tax Credit really bumps the amount you can convert while paying no federal tax. That $2,000 credit would allow for almost $20,000 more Roth conversions without any extra federal taxes. However, your state taxes will still go up, assuming you live in one that taxes income, and your AGI will go up, which will influence your ACA health insurance premiums and plan selections.

You may also find it worth paying a little tax to boost those conversions further. Maybe you don't have kids so no Child Tax Credit. You can convert another $19,900@10% and another $61,150@12%, based on 2021 ordinary tax brackets. State taxes and AGI go up just the same, Child Tax Credit or not. However, you will still have to balance your conversions with the capital gains that will come from brokerage withdrawals to make sure your AGI ends up where you want it.

Upon playing around with the numbers, I assume you will find some balance between spending and taxes paid that feels good. This likely starts with your living expenses because that's an immediate need. If you have no more free money available (bonds in Brokerage, Roth IRA principal), every withdrawal from your brokerage accounts come with capital gains attached. Let's say we're a family of 4 and need $60,000 to live on. Some of that will be dividends because we're taking those. The remainder is coming from VTSAX in our brokerage account. After the bull run of the last 10 years, our shares of VTSAX are highly appreciated, say 40% capital gains on average. So accessing that remainder for living expenses will generate significant capital gains. For us personally, we see about $10,000 in dividends a year based on how much VTSAX we have in our brokerage account. So we'd be making an additional $50,000 withdrawal ($60,000 living expenses - $10,000 dividends), which would create $20,000 in capital gains ($50,000 x 40%). You'll need to figure out what this is for your own personal situation.

Maybe we're all healthy so in an effort to boost our AGI as high as we can we pick a Bronze insurance plan because we'll pay much smaller insurance premiums and we won't use much medical care. Our AGI can go as high as $104,800 in 2021 (family of 4) without going over the ACA subsidy cliff. At the absolute top end of that range, the cost of the Second Lowest Cost Silver Plan (SLCSP) is limited to 9.83% of our income, or ~$10,300. But the bronze plan we chose will save us thousands of dollars in insurance premiums because it is cheaper than the SLCSP and our subsidy stays the same no matter what plan we pick. Because our income is so high our deductible and max OOP values are significant, probably between $15,000 and $20,000! We may not have copays with our insurance plan so a broken arm is probably all on us until we hit that deductible. Admittedly, I don't know what a broken arm costs in the US but with all healthcare being astronomically expensive, I bet it is very pricey. Maybe not $8,000 pricey if we have high deductibles but I'm just using that figure to illustrate how a surprise medical expense will influence our financial picture.

So using my personal brokerage balance in conjunction with the family of 4 living expenses example, our dividends and capital gains combined would create $30,000 of AGI ($10,000 dividends + $20,000 capital gains from selling $50,000 VTSAX for living expenses). We can convert ~$24,100 to our Roth IRA tax-free ($25,100 personal exemption - 10% of our $10,000 dividends taxed as ordinary income). We've got 2 kids so that's $36,650 more that we can convert to eat up our $4,000 in Child Tax Credits ($19,900@10% + $16,750@12%). Combined that is $60,750 we're converting to our Roth IRA. At first glance, this looks promising because our conversions match our living expenses so when our brokerage funds are exhausted we'll have established a Roth conversion pipeline that allows us to maintain that level of spending. But we need to look at what this is going to do to our AGI.

$30,000 in AGI from dividends and capital gains, plus $60,750 from Roth conversions, and our total AGI is now $90,750. The good news is that we're under the ACA subsidy cliff of $104,800 in 2021 (family of 4). But we need to see what our insurance premiums would be for that AGI. So let's say we figure out our insurance premium and it fits within our projected spending so all looks good. If the premium is too high, we'll need to figure out how we want to reduce our AGI to make that more affordable. We may not be able to reduce our living expenses so our Roth conversions are what would give in that situation.

Let's say halfway through the year, little Johnny breaks his arm and it costs $8,000 because everyone is healthy so we're using a high deductible Bronze insurance plan. That's $8,000 in unplanned spending, which comes with $3,200 in capital gains. So our AGI goes up $3,200. Because our AGI goes up, our insurance premium and state taxes go up. Because our premium and taxes go up, we need to spend a little more. Spending a little more means more capital gains. Eventually, we reach an equilibrium where an amount of extra spending, more than $8,000, covers both the medical event itself and the extra premiums and taxes it will generate.

In the broken arm example, if we were already maxing out our AGI where we're just under the ACA subsidy cliff, this event will push us over. We'll need to compensate for that by reducing our AGI, most likely by scaling back our Roth conversion for the year. The great thing about spending surprises during the year is that we're not going to make our Roth conversions until the last couple days of December because by then we know there are no more surprises coming. So however much Johnny's broken arm raised our AGI, we may need to reduce our Roth IRA conversions by that amount.

Now if our AGI wasn't at some threshold we don't want to cross, maybe we just pay a little more taxes and insurance premiums and it's okay. But we need to be aware of how much it matters. If we had a child with a chronic medical condition, maybe we want a Silver plan with Cost Sharing Reductions because it keeps our healthcare spending down. Since the condition is chronic we'll want to ensure our AGI stays below whatever threshold we deem suitable for the CSR level that keeps our medical expenses reasonable. In a situation like this, Johnny's broken arm likely won't cost $8,000 because we probably have a plan with lower deductibles and copays but it will still bump our AGI a bit because it's unplanned spending. In this case, we may find ourselves wanting to reduce our Roth conversion to keep our AGI where we need it to qualify for the same tier of CSRs in future years.

Where this gets different for each person's situation is how they calculate these numbers. How much capital gains are you paying to access your money? How much are you receiving in dividends? What can you convert to a Roth IRA with low or no tax cost? As you work through that for your specific situation, it will start becoming evident what combination of income sources and Roth conversions work for you, and you'll see how all that affects your AGI and, in turn, how that affects your taxes and insurance premiums. It's a bit of a circular reference which is why it's very useful to work through the numbers for your own situation. No one can give you an answer that applies to everyone because our capital gains percentage is different, our total brokerage account balance, and therefore our dividends, are different, our spending needs are different, and our tolerance for how much of our money we're willing to see go to taxes is different.

*******************************

I hope that helped to clarify those two subjects a bit.
« Last Edit: January 29, 2021, 01:42:04 PM by Mr. Green »

Digger1000

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Re: Drawdown strategy sticky request
« Reply #26 on: January 29, 2021, 03:10:27 PM »
I retired 4 years ago at 51. I pay $0 for health insurance premiums with ACA(high deductible), $0 state income tax, and $0 federal income tax. My withdrawal rate is 2.3%(1.5% of my current net worth). I live simply and extremely happily. No wants or needs. I had 20k in cash when I retired. Otherwise I am totally invested in stock index funds. So for 3.5 years I was able to live off the dividends from the index funds in addition to the cash I had on hand. I sold some shares, a few thousand dollars, for the 1st time 6 months ago. My income has been low enough that I have been able to convert 15k a year to a Roth, and as I said above my tax rate is $0. I have a longterm capital gains loss so I have 3k write off every year that reduces my total income for ACA and tax purposes.

scottish

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Re: Drawdown strategy sticky request
« Reply #27 on: January 29, 2021, 03:22:15 PM »
Damn, another reason I'm glad to have a government funded health plan.    All I have to worry about is the 1st year of prescription meds.

Dusty Dog Ranch

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Re: Drawdown strategy sticky request
« Reply #28 on: January 29, 2021, 05:25:24 PM »
@Mr. Green that helps a lot... I really appreciate you taking the time to share the details. I'm beginning to see how to map out the various buckets we have and how we might balance the ACA income and taxes.

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WannaGoOutside

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Re: Drawdown strategy sticky request
« Reply #29 on: January 30, 2021, 04:30:07 PM »
My husband and I retired 4 (!?!) years ago, when I was 45 and he was 53.  For the first couple of years, we lived off the profit from selling our house in Dallas (housing market was big and juicy when we sold) and used the remaining profit from that to finish fixing up our retirement place in Hot Springs, Arkansas.  I also spent that first year thinking about how this drawdown thing was supposed to work.

Luckily I stumbled across Living off Your Money and as a retired engineer, I was enthralled (so much DETAIL!!!!) :-D  We decided to give Prime Harvesting and his variable withdrawal method a try.  It's working well for us.

However, that was only part of the story, as I quickly realized.  ACA, taxes, ... added a new level of complexity.

We are looking at retirement in phases, and my thinking on those phases continues to evolve.  I spread our equity funds and bond funds across our taxable account, DH's tIRA/rIRA accounts, and my tIRA/rIRA accounts.  I had to make sure there was enough bonds to see us thru the first years of retirement, until DH's IRAs were accessible.  The first year tax hit to re-arrange the taxable account still stayed at the 0% capital gains tax rate.

So our phased drawdown plan is:

Phase 1 - use the taxable accounts.  This works well with the LOYM since you are selling bond funds, so not a lot of capital gains.  During this time, I'm also converting my IRA account to a Roth.  These accounts are the largest and will be used in the last phase, so I think it will save RMD headaches down the road.  After paying full price for ACA for a couple of years, we decided to adjust how much "earnings" we have, so I've been limiting our Roth conversions to 3-4x the FPL to qualify for subsidies.

As we get close to Phase 2, I'm starting to question whether I should have been converting DH's IRA first, in order to avoid the income (therefore tax) hit of pulling our living expenses solely from his IRA).  But I'm toying with other ideas as well (see Phase 2).

Phase 2 - the most problematic phase, as most of DH's money is in a tIRA, and therefore will count fully as income. When he gets to 65-ish, we'll probably start taking his SS to limit the amount of money we have to take out annually.  This would be both to limit taxes (not too big a deal) but also to allow us to get ACA subsidies and qualify for better medicare premiums for him (haven't looked into this much yet!).  I also am starting to play with the idea that I should convert the rest of our taxable accounts from equity funds to bonds, either as a Prime Harvesting conversion (fingers crossed) or by doing the opposite conversion in one of the IRAs.  This would incur a one time capital gains event again, but would allow us to keep pulling our living expenses from our taxable accounts, which causes very little taxable income each year after.

Phase 3 - live off my tIRA (hopefully mostly converted) and Roth IRA.  This will hopefully be far far in the future, so I haven't thought about it at all.  :-)

That's my drawdown story.  Feel free to offer pointers, as I said.. it's always evolving.  I enjoy the money management side and welcome new perspectives.

I agree that the strategy for drawdown is often overlooked until FIRE.  I put it off until the moment was upon us, and it was a bigger puzzle than I expected!  But it was a good puzzle to have to figure out!  :-)

Kteach

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Re: Drawdown strategy sticky request
« Reply #30 on: February 04, 2021, 08:27:46 AM »
Seattlecyclone- our thinking is somewhat similar to yours, although our situation is simpler because a) we have retiree health insurance-expensive, but excellent, and no ACA issues, b) we both have fully taxable teacher pensions which cover most of our expenses, c) we're older, so much closer to having access to tIRA, Roth, and/or social security.
I retired in 2020 and my dh retired in 2017. We have a couple more years when FAFSA matters, so weíre in your phase 2. Once FAFSA income no longer matters, but weíre still paying for college, we want to be sure that our AGI is below the limit for the AOTC tax credit. This will affect our ability to do Roth conversions.
Sadly, my mother passed away from Covid late last year. Most of the inheritance is tax deferred and needs to be distributed in 10 years. We will wait until after FAFSA to withdraw, but it clearly changed our earlier plans. We will be looking at both IRMAA and brackets to determine if Roth conversions are worthwhile. We also live in a high tax state ~9% state and local and itís possible that we'll move at some point later (probably to another high tax state, but possibly lower than our current rate).
It is unlikely that we will ďneedĒ our RMDs to live on. Our plan will be to donate (QCD) ďexcessĒ (above whatever tax threshold we set) unless we need the money for medical or long term healthcare in which case it would likely be tax free.

LoanShark

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Re: Drawdown strategy sticky request
« Reply #31 on: February 05, 2021, 10:54:51 AM »
Some great info in here - thanks!

ericrugiero

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Re: Drawdown strategy sticky request
« Reply #32 on: February 05, 2021, 12:55:53 PM »
I have what could be a dumb question.  Multiple people (in other threads as well) have talked about making sure their income was high enough to stay off Medicaid and qualify for an ACA plan.  What is so bad about Medicaid in this scenario?  Is it worse insurance?  Do some view it as morally wrong to accept that level of assistance?  I could understand the moral argument (for someone who is FIRE'd) but in reality what's the difference in taking Medicaid and taking subsidized ACA plan?

bacchi

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Re: Drawdown strategy sticky request
« Reply #33 on: February 05, 2021, 12:59:38 PM »
I have what could be a dumb question.  Multiple people (in other threads as well) have talked about making sure their income was high enough to stay off Medicaid and qualify for an ACA plan.  What is so bad about Medicaid in this scenario?  Is it worse insurance?  Do some view it as morally wrong to accept that level of assistance?  I could understand the moral argument (for someone who is FIRE'd) but in reality what's the difference in taking Medicaid and taking subsidized ACA plan?

The providers willing to take medicaid are fewer by far than those willing to accept your average insurance plan.

flyingaway

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Re: Drawdown strategy sticky request
« Reply #34 on: February 05, 2021, 05:02:27 PM »
I have what could be a dumb question.  Multiple people (in other threads as well) have talked about making sure their income was high enough to stay off Medicaid and qualify for an ACA plan.  What is so bad about Medicaid in this scenario?  Is it worse insurance?  Do some view it as morally wrong to accept that level of assistance?  I could understand the moral argument (for someone who is FIRE'd) but in reality what's the difference in taking Medicaid and taking subsidized ACA plan?

I have some feeling that Medicaid is means tested.

nirodha

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Re: Drawdown strategy sticky request
« Reply #35 on: February 05, 2021, 06:09:10 PM »
I don't believe Medicaid is asset tested under age 65. I think that was changed with the affordable care act.

I personally am avoiding Medicaid because I think there is a chance I might use my insurance, beyond preventative care. It offers a more constrained set of doctors and care than I'd like. Reimbursement rates for doctors is relatively low. Many view their Medicaid cases as charity work. I don't want to find a cancer or heart disease and have my treatment options constrained.

Meanwhile, if I can produce income at 1.4x the poverty level, I can have a silver PPO plan off the exchange. With subsidies, my premium will be under $1000 per year. With cost sharing, my max out of pocket is only $2850. The actuarial value of the plans are designed to be 94% - the patient doesn't pay much. The rules for medicine (ie step therapy) and care (ie prior auth) are comparable to any other insurance plan from the provider. Since it's a PPO plan, I can pick any specialist I want in a bad scenario. It's a huge improvement, for very little money.

I am also finding, to optimize my lifetime taxes, avoidance of excessive RMD's at age 72 means taking advantage of Roth conversions now. This would be very hard to do and stay under the Medicaid income limits.

Goldendog777

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Re: Drawdown strategy sticky request
« Reply #36 on: February 05, 2021, 07:13:10 PM »


I can have a silver PPO plan off the exchange. With subsidies, my premium will be under $1000 per year. With cost sharing, my max out of pocket is only $2850. The actuarial value of the plans are designed to be 94% - the patient doesn't pay much. The rules for medicine (ie step therapy) and care (ie prior auth) are comparable to any other insurance plan from the provider. Since it's a PPO plan, I can pick any specialist I want in a bad scenario. It's a huge improvement, for very little money.


Where do you live if you donít mind me asking.  I havenít seen any ACA choices that offer a PPO where Iíve looked.  They are typically HMOs.  Thanks!

nirodha

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Re: Drawdown strategy sticky request
« Reply #37 on: February 05, 2021, 08:39:47 PM »
I'd rather not disclose location. There are a small number of PPO's in my area - 4 of 49 available plans on the exchange.

Edit - it seems I am in the minority, having access to a PPO via the exchange:

https://slate.com/business/2015/12/ppos-are-disappearing-from-obamacare-why.html

I'd still favor a Silver HMO plan over Medicaid.
« Last Edit: February 05, 2021, 08:45:45 PM by nirodha »

seattlecyclone

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Re: Drawdown strategy sticky request
« Reply #38 on: February 06, 2021, 01:54:40 AM »
I don't believe Medicaid is asset tested under age 65. I think that was changed with the affordable care act.

If your state expanded Medicaid, this is absolutely correct. It's income-based only. If you're 55 or older there's an "estate recovery" provision that could allow your state to claw back the value of your coverage when you die. Younger than that and it's truly free if you qualify.

If your state didn't expand Medicaid, I think it depends on where you live what the rules are.

Quote
I personally am avoiding Medicaid because I think there is a chance I might use my insurance, beyond preventative care. It offers a more constrained set of doctors and care than I'd like. Reimbursement rates for doctors is relatively low. Many view their Medicaid cases as charity work. I don't want to find a cancer or heart disease and have my treatment options constrained.

A valid concern to be sure. I guess in my case we're taking that chance. If something like cancer comes up and we find the Medicaid coverage isn't opening the doors we need it to, we can always do a big Roth conversion or capital gains event two months in a row and say "hey Medicaid administrators, my income went up. I guess it's time to kick me off and make me buy a marketplace plan, eh?"

Quote
Meanwhile, if I can produce income at 1.4x the poverty level, I can have a silver PPO plan off the exchange. With subsidies, my premium will be under $1000 per year. With cost sharing, my max out of pocket is only $2850. The actuarial value of the plans are designed to be 94% - the patient doesn't pay much. The rules for medicine (ie step therapy) and care (ie prior auth) are comparable to any other insurance plan from the provider. Since it's a PPO plan, I can pick any specialist I want in a bad scenario. It's a huge improvement, for very little money.

You are somewhat lucky to be in a state that offers a PPO on the exchange. Most don't. Around here it's mostly HMOs and a few EPOs (which seem to be basically as limited in terms of doctor networks).

Quote
I am also finding, to optimize my lifetime taxes, avoidance of excessive RMD's at age 72 means taking advantage of Roth conversions now. This would be very hard to do and stay under the Medicaid income limits.

Another very valid concern. I find that with kids in the equation, the income we'd need to get the whole family off Medicaid is high enough that we might need to finish all the Roth conversions we could possibly do by the time they go to college. And if the kids are on Medicaid anyway, might as well do that for the whole family to keep things a bit simpler. Once it's just my wife and I to worry about, I do expect we'll have income well above the Medicaid threshold.

At the risk of repeating myself, I'll say that this withdrawal strategy stuff can be very dependent upon your own individual circumstances!

Paul der Krake

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Re: Drawdown strategy sticky request
« Reply #39 on: February 06, 2021, 02:20:23 AM »
Western states also have Kaiser, which is technically an HMO but employs a bazillion doctors. Especially in California where they cover nearly one third of the insurable population.

I would consider getting Medicaid through a Kaiser integration, but not the regular type. Too many restrictions.
« Last Edit: February 06, 2021, 02:22:59 AM by Paul der Krake »

nirodha

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Re: Drawdown strategy sticky request
« Reply #40 on: February 06, 2021, 08:09:56 AM »
At the risk of repeating myself, I'll say that this withdrawal strategy stuff can be very dependent upon your own individual circumstances!

Agreed. We don't have any children, so our income limits are lower. It's much easier to afford the premium on a policy covering fewer people. The availability of discretionary spending is higher, too. It's easy to trade "sleep at night" for another of my personal luxuries. Taking a larger amount from what could be spent on the kids - I'm sure that is harder.

Travel out of state is another big consideration. While there are provisions for emergency care, most ACA plans have geographically constrained networks. I think using Medicaid out of state is also tricky. Especially for someone younger and healthy, this tilts the decision towards a health share.

I know for those who make it to Medicare - access to the national network of doctors is a huge reason to afford traditional Medicare with Medigap, over the less expensive Medicare Advantage plans.


I do think there is value in a sticky around this topic, but the framework has to be higher level. IE:

Healthcare
  Healthshare
  Medicaid
  ACA - subsidies, cost sharing
  Medicare - Medigap, Medicare Advantage

Tax Optimization
  ACA subsidies and cost sharing as a marginal tax
  Federal tax brackets by income type (dividends, capital gains, roth conversions, etc.)
  State tax brackets and location
  Asset location (opposed to allocation)
  Required minimum distributions
  Medicare higher income premiums
  Social security taxation (it steps)
  Estate taxation

Withdrawal
  Asset allocation (what do I own)
  Income harvesting (what do I sell, how do I mitigate sequence of returns risk)
  Variable withdrawal strategy (how do I absorb market fluctuations)


Obviously an incomplete list. I haven't found any single source that treats all these problems in depth. I think the most that can be offered is an overview with references, plus case studies.

Edit - it's interesting to see how far the bogleheads wiki got: https://www.bogleheads.org/wiki/Bogleheads%C2%AE_retirement_planning_start-up_kit
« Last Edit: February 06, 2021, 08:16:23 AM by nirodha »

JRG

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Re: Drawdown strategy sticky request
« Reply #41 on: February 06, 2021, 10:41:02 AM »
@Mr. Green,

Great post.  This answers so many questions for me!

One question:

You said "The caveat here is that there is some lead time in the planning because the health insurance you qualify for in a given year is based on your AGI from two years ago. For instance, when annual open enrollment for the ACA started in November 2020, we picked our insurance plan for 2021, and it was based on our AGI from 2019 because that is the most recent finalized tax data."

However, when I go to Healthcare.gov to look up ACA plans, it states:

When you fill out a health insurance application and use some tools on this website, youíll need to estimate your expected income. Two important things to know:

Marketplace savings are based on your expected household income for the year you want coverage, not last yearís income.
Income is counted for you, your spouse, and everyone you'll claim as a tax dependent on your federal tax return (if the dependents are required to file). Include their income even if they donít need health coverage. See details on who to include in your household.


So I'm a bit confused about your statement.

Fishindude

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Re: Drawdown strategy sticky request
« Reply #42 on: February 06, 2021, 12:09:19 PM »
First thing you have to determine is how much you spend annually.
We retired a bit over three years ago, age 61, spouse 58, we spend $140-150k annually, carry no debt.

We have some secondary sources of income that are a big help:
Farm income approx. $30,000
Business ownership directors fees and dividends $37,000

Have been pulling $4,000 per month out of IRA = $48,000
(approx. 2.5% withdrawal rate of that account)

So that all totals up to $115,000.   The balance has simply been coming out of savings accounts.

Will start taking social security in a few years which will be close to what we've been pulling out of savings account, plus insurance costs will go down dramatically going from a full priced ACA plan to Medicare.
We could also increase the draw down of IRA substantially without creating any danger.

If push came to shove we could also liquidate some properties and live a lot cheaper.

 

Mr. Green

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Re: Drawdown strategy sticky request
« Reply #43 on: February 06, 2021, 04:25:26 PM »
@JRG That's a good question, and while you are technically right, the ACA people who approve your application will look at your previous tax return info as a comparison. So if you worked a six-figure job and are now retiring, they're going to want to see a reason for why your income will now be 40k per year.

The same thing applies to a early retiree who is maximizing Roth conversions or capital gains harvesting with a bronze plan to keep insurance costs low and suddenly says their income will be much lower (with the intent of selecting a silver plan with big CSRs). What good justifiable reason will I give for that? Because I dictate my income and its going to be lower this year? I just don't know if there'd be any push back to that, or how deeply they look at tax data. Can they only see AGI or can they see that all your income is capital gains and Roth conversions and you can basically control it?

By default, they will look at your most recent year of available tax data and if your projected income for the next year is close to that you will automatically be approved. If there's a variance (I don't know how much it has to be to trigger additional justification) then you will have to explain. I have never had a problem with them accepting well documented justifiable reasons for income changes myself.

However, I think that someone who habitually says their income will only be X (to qualify for big cost sharing reductions) and ends up being a lot higher at the end of the year (to maximize capital gain harvesting or Roth conversions) may end up not being approved for the subsidies on the front end, and thus having to pick a plan without any CSRs. I don't know if anyone could prove that series of actions as fraudulent or not but it definitely doesn't look good.

This is a detail because income-based CSRs only happen up front. If you thought your income was going to be higher and at the end of the year it wasn't, there's no going back to your insurance company and lowering your deductible and max OOP values. So for someone who knows they'll need major medical care there's an incentive to anticipate having an income that will give you smaller deductibles and max OOP values.

Perhaps the application approvers don't really care and will rubber stamp just about anything. I just haven't been in a position to test the issue because we've expected to need medical care in the years we target plans with big CSRs, not just wanting low deductibles and max OOP values because who wouldn't and then having a larger income at the end if the year.

JRG

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Re: Drawdown strategy sticky request
« Reply #44 on: February 08, 2021, 01:05:21 PM »
@JRG That's a good question, and while you are technically right, the ACA people who approve your application will look at your previous tax return info as a comparison. So if you worked a six-figure job and are now retiring, they're going to want to see a reason for why your income will now be 40k per year.

The same thing applies to a early retiree who is maximizing Roth conversions or capital gains harvesting with a bronze plan to keep insurance costs low and suddenly says their income will be much lower (with the intent of selecting a silver plan with big CSRs). What good justifiable reason will I give for that? Because I dictate my income and its going to be lower this year? I just don't know if there'd be any push back to that, or how deeply they look at tax data. Can they only see AGI or can they see that all your income is capital gains and Roth conversions and you can basically control it?

By default, they will look at your most recent year of available tax data and if your projected income for the next year is close to that you will automatically be approved. If there's a variance (I don't know how much it has to be to trigger additional justification) then you will have to explain. I have never had a problem with them accepting well documented justifiable reasons for income changes myself.

However, I think that someone who habitually says their income will only be X (to qualify for big cost sharing reductions) and ends up being a lot higher at the end of the year (to maximize capital gain harvesting or Roth conversions) may end up not being approved for the subsidies on the front end, and thus having to pick a plan without any CSRs. I don't know if anyone could prove that series of actions as fraudulent or not but it definitely doesn't look good.

This is a detail because income-based CSRs only happen up front. If you thought your income was going to be higher and at the end of the year it wasn't, there's no going back to your insurance company and lowering your deductible and max OOP values. So for someone who knows they'll need major medical care there's an incentive to anticipate having an income that will give you smaller deductibles and max OOP values.

Perhaps the application approvers don't really care and will rubber stamp just about anything. I just haven't been in a position to test the issue because we've expected to need medical care in the years we target plans with big CSRs, not just wanting low deductibles and max OOP values because who wouldn't and then having a larger income at the end if the year.

That does make sense.  I wonder with COVID going on if they tend to be more lenient, since a lot of people have had income reductions.  But maybe by next year (when I need to get on the ACA), it won't be applicable anymore.

Your posts in the thread should definitely be stickied!  I've printed and read them several times so far.  Great help!  Thanks.

jpdx

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Re: Drawdown strategy sticky request
« Reply #45 on: February 12, 2021, 01:39:41 AM »
@JRG
However, I think that someone who habitually says their income will only be X (to qualify for big cost sharing reductions) and ends up being a lot higher at the end of the year (to maximize capital gain harvesting or Roth conversions) may end up not being approved for the subsidies on the front end, and thus having to pick a plan without any CSRs. I don't know if anyone could prove that series of actions as fraudulent or not but it definitely doesn't look good.

Is this your assumption or have you seen evidence of people having CSRs denied?

Mr. Green

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Re: Drawdown strategy sticky request
« Reply #46 on: February 12, 2021, 03:33:24 PM »
@JRG
However, I think that someone who habitually says their income will only be X (to qualify for big cost sharing reductions) and ends up being a lot higher at the end of the year (to maximize capital gain harvesting or Roth conversions) may end up not being approved for the subsidies on the front end, and thus having to pick a plan without any CSRs. I don't know if anyone could prove that series of actions as fraudulent or not but it definitely doesn't look good.

Is this your assumption or have you seen evidence of people having CSRs denied?
Assumption. Only way I could think to find out for sure is by doing it and I'm not prepared to find out the answer is the ugly one. They don't have to give you CSRs up front though, and the approval process exists for a reason. The question is simply how strict it is.

Paul der Krake

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Re: Drawdown strategy sticky request
« Reply #47 on: February 12, 2021, 03:50:02 PM »
It's probably fine to get CSRs upfront that you end up not needing one year because your income is higher than expected, and that certainly wouldn't deter me. Doing it multiple years in a row is a different story and they might decide to go after you. We do swear the application is true to the best of our knowledge... What their reaction would be is anyone's guess. Could be anything from doing nothing to dragging you to court.