Help Me Formulate A Draw Down Strategy

[Peter Parker]

My wife and I are going to retire in about 3.5 years.  We've been so focused on the accumulation phase, that I haven't given much thought on our draw down strategy.  I could use your input.  Here's the (likely) scenario in retirement:

*  My wife and I will both be 60 at the time of retirement.

*  I will have a pension that will cover approximately 70 percent of our monthly outgo

*  We will have 2.4mil  in a combination of 457/403b accounts

*  We both have Social Security available to us (and if we take it at FRA (i.e. 67) we will not need to draw down our 457/403 accounts).  We could take it at 62 and minimally touch our 457/403b accounts.

*  HOWEVER,  we will have RMDs on our 457/403bs when we reach 70.  And I don't like the thought of potentially withdrawing in a down market.  I suppose we could immediately put it in a taxable account, but not sure if there is another way....

*  We have three kids that we could possibly leave/give money to prior to/after our death.  BUT that is not our main focus...We have always planned on leaving our home to them (which would be worth approx 1 million--Bay Area.  I know crazy, right?).  And we would rather "gift"/help them while we are alive....

Our problem isn't covering expenses.  It's about how to handle excess in retirement.  So what would you do?  Mostly, my question revolves around the 457/403b accounts since we may have minimal needs to access once we pull the trigger...Thoughts?

[moof]

Retire today, why wait?

You are over 59.5, so withdraw your full expenses from your 457/403b's until your pension fully matures, then throttle back your withdrawals.

At 70 you will have maxed out SSA, take it then.  Take RMD's and reinvest the excess into your taxable account.

Sounds like you worked too long and are retiring too late.  Fix that mistake ASAP.

[Novik]

To review: you have ~2 million invested + a 70% spending pension coming in 3.5 years + social security which at 67 would cover the other 30%.

Why the heck haven't you retired yet?

It sounds like you could blow the 2 million in the next ~10 years and still have enough money to live on from pension/SS. That's not a good drawdown plan, obviously, but why not start spending that money now?

If the answer is something along the lines of trouble getting $ out of retirement accounts, I believe there are ways around that. Even if not, a 10% penalty for 2-3 years is well worth 2-3 years retiring early!

[RWD]

Retire today, why wait?

+1. You're far past the goal tape.

[Peter Parker]

To all who have asked why not retire now....It's a fair question, since I'm basically FI now.   There are a number of reasons for continuing, including enjoying my job (for the most part) and still enjoying my life now with plenty of time off to do the things I want.   However, by not retiring now, I'm creating a situation in which I'm going to have some excess--and the question of what to do with with the 457/403b accounts....

One thing I was wondering about is the Roth Conversion, does this make sense given my situation, or should I just leave it in the 403b/457 accounts and place it taxable accounts when I'm required to take RMDs?

Thanks for the replies thus far!

[moof]

What will change in 3.5 years?  If you enjoy your job enough to keep working despite not needing the money today (you don't), won't you still enjoy it about the same in 3.5 year?  Are you expecting to suddenly hate your job soon?  Why not just keep going until they drag your carcass out  on a stretcher?

How about taking a leave of absence for a few months and knock a few things off your buckets list?  With that in the bank you can always choose not to come back if you are happier without the job.

[mathlete]

Hire a financial adviser IMO.

[Peter Parker]

What will change in 3.5 years?  If you enjoy your job enough to keep working despite not needing the money today (you don't), won't you still enjoy it about the same in 3.5 year?  Are you expecting to suddenly hate your job soon?  Why not just keep going until they drag your carcass out  on a stretcher?

How about taking a leave of absence for a few months and knock a few things off your buckets list?  With that in the bank you can always choose not to come back if you are happier without the job.

I can take a leave of absence, but wouldn't be able to take the pension or access 403b/457 funds since I will not have "separated" from my job.  But my question really wasn't how to get out early, but how to best/strategically utilize the money I will have available...That being said, it's nice to have the FU money, should I change my mind :-)

[Peter Parker]

Hire a financial adviser IMO.

Yeah.  Something I may do.  I think I'm really asking about optimizing my money in retirement--that may be a question for a fee-based FP, perhaps a CPA/tax attorney?

[TomTX]

Hire a financial adviser IMO.

Yeah.  Something I may do.  I think I'm really asking about optimizing my money in retirement--that may be a question for a fee-based FP, perhaps a CPA/tax attorney?

Fee-only financial planner.

"Fee based" is also inhabited by those who take a fee, then direct you to a fund that gives them a kickback.

[moof]

I can take a leave of absence, but wouldn't be able to take the pension or access 403b/457 funds since I will not have "separated" from my job.  But my question really wasn't how to get out early, but how to best/strategically utilize the money I will have available...That being said, it's nice to have the FU money, should I change my mind :-)

If you do a trial run for a couple months it should be pocket change.  Maybe you can scale back contributions to build up a cash cushion to fund this.  Maybe you can fill in what magnitude of spending you think you need in retirement, as the money fears you portray don't jive with the rather substantial savings/pension you are sitting on.  My personal target is lavish for people on this site at ~1.6M with no pension at all, so maybe you have an exotic car habit, or a yacht club membership planned?

[Catbert]

I was in a somewhat similar situation, at least in the sense of have tax deferred accounts that were going to generate massive RMDs at 70.5.

I let tax brackets drive my decisions.  In my case at retirement, I was at the top of 15%/bottom of 25% brackets with "uncontrolled" income.  So I convert enough money each year from IRAs to fill the 25% bracket.  I figured that if I left the IRAs alone they would be at least 2M at 70.5 and generate 80K+ in RMDs (round figures) so filling the 25% bracket made sense.

 My income is high enough that SS is taxed at 85% level so nothing I could do there.  Others who are strategizing  for lower taxable income put off taking SS until 70 and convert IRA/401K before then and possibly avoid taxes on SS.  I think you're more in my situation.

Good luck.  It's a nice problem to have.

[alexpkeaton]

I know you said you weren't looking to leave a bunch of money to your children, but that seems to be your situation given you don't spend enough to draw down your retirement plans. You either need to step up your spending and live more lavishly, give a lot away while you're still alive, or start estate planning.

I only have knowledge for accumulation and drawdown phases of life. I have no clue about estate planning yet. I suspect a lot here are similar because, optimally, we'd die on the day our account balances hit $0.

[NaturallyHappier]

You need to follow what Catbert did.  You need to figure out what the lowest tax bracket is that you can stay in for the rest of your life.  If RMDs will drive you into a higher tax bracket, how much money do you need to convert now to Roth to get back down to a lower tax bracket when you draw your RMDs.  Will converting that money now throw you into an even higher tax bracket now? 

It's a balancing act and you want to end up in the lowest possible tax brackets now and for the rest of your life.  Making the problem even more complex is the fact that you don't know what your future returns will be.  The best you can do is project a reasonable return and try to get all future years in the same tax bracket.

[TomTX]

I know you said you weren't looking to leave a bunch of money to your children, but that seems to be your situation given you don't spend enough to draw down your retirement plans. You either need to step up your spending and live more lavishly, give a lot away while you're still alive, or start estate planning.

I only have knowledge for accumulation and drawdown phases of life. I have no clue about estate planning yet. I suspect a lot here are similar because, optimally, we'd die on the day our account balances hit $0.

Long-term care gets really expensive.

[Peter Parker]

Catbird, alexpkeaton, NaturallyHappier, and TomTX--

Thanks to each of you for your insight and input.    I like the way each of you approached the problem, as well as your suggestions.  I think some comprehensive estate/tax planning may be helpful (beyond the relatively simple will/trust we have in place now).  I like the suggested approach taking tax brackets into account--so I'm going to try and educate myself on different scenarios...

Both my wife have long-term care insurance so those costs should be minimized. 

As mentioned, there probably isn't a perfect approach, but it is indeed a nice problem to have.  However, after working so hard to get where we are, I just hate to "waste" more money than necessary...

Thanks again guys for the input!  Much appreciated.

[alexpkeaton]

Long-term care gets really expensive.

Ok, then you want to be broke when you go into a retirement home so Medicare (or is it Medicaid?) will pay for it. My parents gift me and my brothers ~$10k/year so they have fewer assets when they may need care.

[TomTX]

Long-term care gets really expensive.

Ok, then you want to be broke when you go into a retirement home so Medicare (or is it Medicaid?) will pay for it. My parents gift me and my brothers ~$10k/year so they have fewer assets when they may need care.

My aunt and uncle bought into a high-end retirement community a bit over a year ago. Buyin roughly $1Mil, but that plus $6k a month covers basically everything. Awesome on-campus restaurants (either eat there or get delivery), fishing pond, 3 large gyms each with a large swimming pool & hot tub, rubberized jogging/walking trails everywhere, Bocce ball, tennis, etc, etc - golf cart pickup/dropoff on demand. Concerts, art showings, etc. All utilities covered.

They are in an "independent living" condo (building even has a backup generator) but their care is covered at all stages of decline through full nursing home care. Fully equipped hospital on campus. Great resident:staff ratio.

When a hurricane hit, it was iffy whether they would need to move out. They were offered either another place on campus, or staying at the Omni (paid by the retirement community)

I believe the only extras they pay for out of pocket is if they go grocery shopping off campus, gas for their rarely-used car and very occasional clothes shopping.

Sounds a lot better to me than whatever minimal care/neglect Medicaid will pay for. Well within OP's budget.

[fuzzy math]

As mentioned, there probably isn't a perfect approach, but it is indeed a nice problem to have.  However, after working so hard to get where we are, I just hate to "waste" more money than necessary...

Thanks again guys for the input!  Much appreciated.

Just a thought RE: earning so much that you leave more to your kids. Your kids may end up wasting it by spending it in a way that doesn't fit with your values or by not optimizing the taxes on their end. Basically you're only working at this point to enable them to possibly misuse it on a larger scale.

Do you honestly enjoy work more than travel? Because you've set yourself up to where you could travel lavishly for years. I think there are only a few people here who dislike travel so much that they'd prefer to work instead.

Good luck with your decision. I think it pains a lot of us to see you in a position to be squandering the one resource you have a limited amount of -- your time on this earth.

[CanuckExpat]

Our problem isn't covering expenses.  It's about how to handle excess in retirement.  So what would you do

Save to Give: Planning for your ‘philanthropy retirement’
Planned charitable giving can help you with tax brackets :)

As a side note, don't forget that it's possible your expenses may go down in retirement.

[alexpkeaton]

Just a thought RE: earning so much that you leave more to your kids. Your kids may end up wasting it by spending it in a way that doesn't fit with your values or by not optimizing the taxes on their end. Basically you're only working at this point to enable them to possibly misuse it on a larger scale.

Meh. I'd hope I raise my son with good financial sense. But, if I fail, and I give him money, what he does with it is ultimately his business.