Vang. Says This Is the Ideal Point For Your Roth conv.

[marpro]

tinyurl.com/2v226nnu

[retiredat48]

I'm surprised at Vanguard. I consider the analysis has a huge error, that is often made on comparisons of converting to ROTHs, or not. Here is the error:

Vanguard states:  "As an example, let’s say you’re currently a high-earner in the 35% marginal tax bracket and considering a $100,000 Roth conversion. You have 20 years left to retirement, at which point you expect to be in the 24% tax bracket.

First you calculate the no-conversion potential. You assume your $100,000 can triple over those 20 years if left in a traditional IRA, reaching $300,000. After subtracting 24% in taxes, the final after-tax withdrawal value of your funds will be $228,000...and so on"

----------------------------------------------------------------
The flaw is assuming at this individual's retirement date, he withdraws the entire amount from is trad IRA. Yes, in that case the after tax value is $228,000. However, no one operates their IRAs like this. Most people have this dollar amount continue to grow until RMD time . Then one only has to take a 3+% withdrawal and pay a 24% tax. Further, most have IRA assets left when they pass away. In that case, the 24% tax rate is not applicable and is passed on to heirs, who may be in a much lower rate.

Lastly, the analysis ignores that gvts may start means testing ROTHs with taxes, etc. A retiree in a 24% bracket is likely to be "too wealthy" and come under such future taxation means testing.

Where am I wrong??

R48

[marpro]

Feb 21, 2023 20:09:01 GMT retiredat48 said:

I'm surprised at Vanguard. I consider the analysis has a huge error, that is often made on comparisons of converting to ROTHs, or not. Here is the error:

Vanguard states:  "As an example, let’s say you’re currently a high-earner in the 35% marginal tax bracket and considering a $100,000 Roth conversion. You have 20 years left to retirement, at which point you expect to be in the 24% tax bracket.

First you calculate the no-conversion potential. You assume your $100,000 can triple over those 20 years if left in a traditional IRA, reaching $300,000. After subtracting 24% in taxes, the final after-tax withdrawal value of your funds will be $228,000...and so on"

----------------------------------------------------------------
The flaw is assuming at this individual's retirement date, he withdraws the entire amount from is trad IRA. Yes, in that case the after tax value is $228,000. However, no one operates their IRAs like this. Most people have this dollar amount continue to grow until RMD time . Then one only has to take a 3+% withdrawal and pay a 24% tax. Further, most have IRA assets left when they pass away. In that case, the 24% tax rate is not applicable and is passed on to heirs, who may be in a much lower rate.

Lastly, the analysis ignores that gvts may start means testing ROTHs with taxes, etc. A retiree in a 24% bracket is likely to be "too wealthy" and come under such future taxation means testing.

Where am I wrong??

R48

retiredat48

  I moved out of Vanguard last year. Do not blame me. You cannot convert all at once. Will Vanguard pay all those taxes? It took me 6 years after 2008 rout to complete it. Still, I had to take a few thousand dollars of RMD twice before I completely depleted my TIRA because the TIRA also started growing and growing.

[Fearchar]

I am currently employed. After I stop working, my tax rate should be minimal as I have a significant taxable accounts and can liquidate some funds with smaller long term gains. So, I just have to figure out how much in conversion can I do without going into the next higher tax rate.

Surely, I am not the only person in this forum that is looking forward to Roth conversions....

[Chahta]

Feb 21, 2023 20:09:01 GMT retiredat48 said:

I'm surprised at Vanguard. I consider the analysis has a huge error, that is often made on comparisons of converting to ROTHs, or not. Here is the error:

Vanguard states:  "As an example, let’s say you’re currently a high-earner in the 35% marginal tax bracket and considering a $100,000 Roth conversion. You have 20 years left to retirement, at which point you expect to be in the 24% tax bracket.

First you calculate the no-conversion potential. You assume your $100,000 can triple over those 20 years if left in a traditional IRA, reaching $300,000. After subtracting 24% in taxes, the final after-tax withdrawal value of your funds will be $228,000...and so on"

----------------------------------------------------------------
The flaw is assuming at this individual's retirement date, he withdraws the entire amount from is trad IRA. Yes, in that case the after tax value is $228,000. However, no one operates their IRAs like this. Most people have this dollar amount continue to grow until RMD time . Then one only has to take a 3+% withdrawal and pay a 24% tax. Further, most have IRA assets left when they pass away. In that case, the 24% tax rate is not applicable and is passed on to heirs, who may be in a much lower rate.

Lastly, the analysis ignores that gvts may start means testing ROTHs with taxes, etc. A retiree in a 24% bracket is likely to be "too wealthy" and come under such future taxation means testing.

Where am I wrong??

R48

Watch the current tax brackets expire in 2025. Taxes will go up because they have to go up.

[Chahta]

Feb 22, 2023 11:51:13 GMT Fearchar said:

I am currently employed. After I stop working, my tax rate should be minimal as I have a significant taxable accounts and can liquidate some funds with smaller long term gains. So, I just have to figure out how much in conversion can I do without going into the next higher tax rate.

Surely, I am not the only person in this forum that is looking forward to Roth conversions....

I know to stay in the 10% bracket about $17k is about all that can be done, depending on your SS benefit and other minor interest etc. I will push the 12% bracket this year when I see how much spare cash I have. I think the 12% bracketmwould allow about $25k conversion. There are several tax calculator programs online that can help.

[marpro]

No way, you can stay in the 10% bracket if you want to do ROTH conversion. I did ROTH conversions before the new tax law at an effective rate of 18%-24%. That means that the marginal rates were 33-25%. It is ok because you can get rid of high taxes for life. I believe that I already recuperated my taxes paid even in this down market. Now, I have a large income-based investment because it is not taxable, reinvested again, almost 4 times the income when I retired. You can grow your portfolio with income also. Is it what we did, when we started investing?

[Fearchar]

There is the huge step between 12% and 22%. Smaller one to 24%

I have not really figured this out.
But I would like to know if maxing out the 22% bracket is good enough or not.

That is assuming I push off SS until 70.

There is also what time of year to retire and the potential bonuses that accure, but are not paid until following year.

Maybe I will end up in the 24% bracket after RMD since there will be SS then too.

[retiredat48]

Feb 21, 2023 20:21:15 GMT marpro said:

Feb 21, 2023 20:09:01 GMT retiredat48 said:

I'm surprised at Vanguard. I consider the analysis has a huge error, that is often made on comparisons of converting to ROTHs, or not. Here is the error:

Vanguard states:  "As an example, let’s say you’re currently a high-earner in the 35% marginal tax bracket and considering a $100,000 Roth conversion. You have 20 years left to retirement, at which point you expect to be in the 24% tax bracket.

First you calculate the no-conversion potential. You assume your $100,000 can triple over those 20 years if left in a traditional IRA, reaching $300,000. After subtracting 24% in taxes, the final after-tax withdrawal value of your funds will be $228,000...and so on"

----------------------------------------------------------------
The flaw is assuming at this individual's retirement date, he withdraws the entire amount from is trad IRA. Yes, in that case the after tax value is $228,000. However, no one operates their IRAs like this. Most people have this dollar amount continue to grow until RMD time . Then one only has to take a 3+% withdrawal and pay a 24% tax. Further, most have IRA assets left when they pass away. In that case, the 24% tax rate is not applicable and is passed on to heirs, who may be in a much lower rate.

Lastly, the analysis ignores that gvts may start means testing ROTHs with taxes, etc. A retiree in a 24% bracket is likely to be "too wealthy" and come under such future taxation means testing.

Where am I wrong??

R48

retiredat48

  I moved out of Vanguard last year. Do not blame me. You cannot convert all at once. Will Vanguard pay all those taxes? It took me 6 years after 2008 rout to complete it. Still, I had to take a few thousand dollars of RMD twice before I completely depleted my TIRA because the TIRA also started growing and growing.

I don't think my post "blamed you" for anything.  It was against Vanguard...as I said "I am surprised at Vanguard."

R48

[liftlock]

Feb 22, 2023 20:19:26 GMT Fearchar said:

There is the huge step between 12% and 22%. Smaller one to 24%

I have not really figured this out.
But I would like to know if maxing out the 22% bracket is good enough or not.

My suggestion is to do some long term income tax planning to assess where your income tax rates may be headed in retirement.  There are a range of potential outcomes which can depend on the need for income relative to the size of an investment portfolio, investment returns, the possibility of having to fund large health care expenses, etc.

Here is good place to start with tax planning: 

www.i-orp.com/Plans/index.html which is free to use.

Other software that can help with projecting long term income taxes:

pralanaretirementcalculator.com
maxifiplanner.com
www.newretirement.com

The calculator's listed above can help one investigate the potential benefits of "income smoothing".  The idea is maximize long term after-tax income by smoothing income over one's remaining life expectancy.

I don't care for hard and fast rules for doing or not dong Roth IRA conversions based on what tax rates may apply.  A taxpayer may find that doing a series of partial Roth IRA conversions at higher rates may help to smooth their lifetime income, maximize the amount of lifetime income taxed a lower at brackets, and prevent or delay increases in income from being taxed higher marginal income and IRMAA tax rates.

A 66 year old retiree starting with a $100,000 T-IRA, growing at a 5% constant rate of return, withdrawing 4% annually, adjusted for 3% for inflation might reasonably expect distribute / withdraw 50-60% of their T-IRA (including earnings on it) during their retirement.  That leaves a 40-50% as a reserve for funding longevity, long term health care costs, qualified charitable distributions, or for any heirs to pay and mitigate taxes on. The taxpayer can consider whether Roth IRA conversions may help to reduce the share of the taxes they or their heirs may have to pay based in different outcomes.

Here is an illustration I developed when RMDs commenced at age 72:

[retiredat48]

liftlock,...nice post. Thanks for table example.

R48

[Fearchar]

liftlock ,retiredat48 ,

Thanks liftlock;

That one link doesn't work for me.
Anyhow, I'm good enough with excel, that I'd rather just make a spreadsheet.
I did it yearly.
As I understand, RMDs start at age 73 (latest update) with rate of 27.4.
The rate adjust each year and that was easy to add in.

In my situation, I own the larger IRA, while my wife's is about 4% as big.
She's younger though, so she'll get a few more years before RMDs start.
However, since her's is so small, it's unlikely to be a significant factor.

Big Problem is just how low that 22% bracket starts.
My RMD alone will put's us at the top end.
Add in SS, which starts age 70 and I'll be in the 24% bracket.
So, 22% vs 24% bracket....  not that much difference.

I don't hit age 73 until 2031, so of course a lot will happen before then.
Tax brackets will be adjusted higher.
So, maybe I won't be in the 24% bracket.  Hard to say for sure.

The thing that gets me is what happens a few years latter.
That compounding starts to really add up.
1st year of RMD 27.4=3.6%
It doesn't hit 5% until age 80.
6% occurs at age 84.

I started assuming 6% growth in IRA (since PIMIX is yielding just over that).
So, the account continues to climb and climb and climb.
It maxes out at age 84 (assuming 6% growth rate) age 80 assuming 5% growth rate.
Of course the RMDs climb even faster...  zow za!!!  32 to 35%% bracket levels!!
But that's using current brackets, which we know will be a thing of the past by then.

So, I'm beginning to believe this is a good way to scare oneself into paranoia 
and a potential bonanza for financial planners to talk with clients about. 

[liftlock]

Feb 24, 2023 18:50:35 GMT retiredat48 said:

liftlock ,...nice post. Thanks for table example.

R48

R48, Thanks. It was one of your posts on the Fidelity forum that inspired me to do the analysis shown in the illustration.

[retiredat48]

Feb 24, 2023 20:13:18 GMT Fearchar said:

liftlock ,retiredat48 ,

Thanks liftlock;

That one link doesn't work for me.
Anyhow, I'm good enough with excel, that I'd rather just make a spreadsheet.
I did it yearly.
As I understand, RMDs start at age 73 (latest update) with rate of 27.4.
The rate adjust each year and that was easy to add in.

R48 reply in bold: Clarification to others; 27.4 is the divisor, not a tax rate.

In my situation, I own the larger IRA, while my wife's is about 4% as big.
She's younger though, so she'll get a few more years before RMDs start.
However, since her's is so small, it's unlikely to be a significant factor.

Big Problem is just how low that 22% bracket starts.
My RMD alone will put's us at the top end.
Add in SS, which starts age 70 and I'll be in the 24% bracket.
So, 22% vs 24% bracket....  not that much difference.

This means you will have a more than comfortable retirement, financially.  Great.

I don't hit age 73 until 2031, so of course a lot will happen before then.
Tax brackets will be adjusted higher.
So, maybe I won't be in the 24% bracket.  Hard to say for sure.

Not a given tax brackets will be higher.  Republican (Trump) last lowered tax rates.  Also, country may realize it needs a BROADER, LOWER tax to include more people, as the way to go.

The thing that gets me is what happens a few years latter.
That compounding starts to really add up.
1st year of RMD 27.4=3.6%
It doesn't hit 5% until age 80.
6% occurs at age 84.

I started assuming 6% growth in IRA (since PIMIX is yielding just over that).
So, the account continues to climb and climb and climb.
It maxes out at age 84 (assuming 6% growth rate) age 80 assuming 5% growth rate.

Yes...but the decline in total value is still slow.  And btw I see no reason you should settle on a 5% total return rate.  You personally can do better...at least that is how I am placing my bet!

Of course the RMDs climb even faster...  zow za!!!  32 to 35%% bracket levels!!
But that's using current brackets, which we know will be a thing of the past by then.

So, I'm beginning to believe this is a good way to scare oneself into paranoia 
and a potential bonanza for financial planners to talk with clients about. 

How about this..the final arbitor:  This means you got to above mid age 80 ...great.  It also means the gvt gave you a tax-free savings plan for decades  that fully met your needs/goals.  EVENTUALLY, giving some back via taxes should be an honor for you.  Pay it forward.

Best wishes.

R48

[Deleted]

Feb 22, 2023 11:51:13 GMT Fearchar said:

I am currently employed. After I stop working, my tax rate should be minimal as I have a significant taxable accounts and can liquidate some funds with smaller long term gains. So, I just have to figure out how much in conversion can I do without going into the next higher tax rate.

Surely, I am not the only person in this forum that is looking forward to Roth conversions....

I retired in 2019 and started Roth Conversion in 2022. I am using cash for living expenses, wife is withdrawing the SSN and little from 401K may be 1-2 %. I am targeting up to 12% bracket for Roth conversions. This year we will get a little more may be  $5900 more as upper limit for 12% bracket for two increased this year. I have approx. 4-5 years more to perform Roth conversions or if my cash runs out first. My goal is to do max Roth Conversions but I do have a large portfolio so not sure how much I will get it done. I am also keeping an eye on next elections if Republic side wins they may be able to keep the current tax brackets which would be beneficial to us for Roth conversions !!! My plan is to delay SSN as much as I can, so I can do Roth conversions and get a higher amount in SSN. 

[gman57]

i-orp == www.i-orp.com/Plans/index.html

[Fearchar]

gman57 ,

Thanks!

I've gone thru it and find it to be both interesting and surprising.

Some of the assumptions though are dubious.

First, they don't assume any Roth conversions since it tends to panic novices.
Since that's the topic of this thread, the tool doesn't help.

Planning horizon age 92 (spend down age 96)
Mom's 92 and I'm not about to spend down her accounts.

Selling primary residence at age 80!
Really; who would want do that?
Mom's in her home of 60+ years and I'm convinced it's the best place for her.
Sadly, I realize some people don't have the finances or family to afford that
and need the sale to finance their retirement expenses.  I feel for such retiree's.

[Fearchar]

Feb 25, 2023 1:15:17 GMT @jovan said:

Feb 22, 2023 11:51:13 GMT Fearchar said:

I am currently employed. After I stop working, my tax rate should be minimal as I have a significant taxable accounts and can liquidate some funds with smaller long term gains. So, I just have to figure out how much in conversion can I do without going into the next higher tax rate.

Surely, I am not the only person in this forum that is looking forward to Roth conversions....

I retired in 2019 and started Roth Conversion in 2022. I am using cash for living expenses, wife is withdrawing the SSN and little from 401K may be 1-2 %. I am targeting up to 12% bracket for Roth conversions. This year we will get a little more may be  $5900 more as upper limit for 12% bracket for two increased this year. I have approx. 4-5 years more to perform Roth conversions or if my cash runs out first. My goal is to do max Roth Conversions but I do have a large portfolio so not sure how much I will get it done. I am also keeping an eye on next elections if Republic side wins they may be able to keep the current tax brackets which would be beneficial to us for Roth conversions !!! My plan is to delay SSN as much as I can, so I can do Roth conversions and get a higher amount in SSN. 

Yeah;  as long as you have good health that makes sense.
I'm convinced that ultimately good health and family is far more important than money.

[retiredat48]

Feb 25, 2023 1:15:17 GMT @jovan said:

Feb 22, 2023 11:51:13 GMT Fearchar said:

I am currently employed. After I stop working, my tax rate should be minimal as I have a significant taxable accounts and can liquidate some funds with smaller long term gains. So, I just have to figure out how much in conversion can I do without going into the next higher tax rate.

Surely, I am not the only person in this forum that is looking forward to Roth conversions....

I retired in 2019 and started Roth Conversion in 2022. I am using cash for living expenses, wife is withdrawing the SSN and little from 401K may be 1-2 %. I am targeting up to 12% bracket for Roth conversions. This year we will get a little more may be  $5900 more as upper limit for 12% bracket for two increased this year. I have approx. 4-5 years more to perform Roth conversions or if my cash runs out first. My goal is to do max Roth Conversions but I do have a large portfolio so not sure how much I will get it done. I am also keeping an eye on next elections if Republic side wins they may be able to keep the current tax brackets which would be beneficial to us for Roth conversions !!! My plan is to delay SSN as much as I can, so I can do Roth conversions and get a higher amount in SSN. 

I like your post...but a couple observations:

--OK with the roth conversion plan.

--I would take SS now.

--And don't fret if you make no add'l conversions.  If you are in 10-12% marginal tax rate when you start RMDs, then the tax you will be paying in first year is about 3.6% of IRA (RMD amount) times  the tax rate, 0.12.  Example: On a $500,000 IRA, that is an RMD of $18,000.  Times tax rate of .12 = $2160.  And that assumes full RMD is taxed at 12%.  Pretty tolerable, no?

Good day...
R48

[gman57]

There is an "extended" tab on the ORP site where you can customize a lot of those assumptions. I really haven't used it but know of it so I posted it because someone couldn't get there with the original posted link.

[Deleted]

Feb 25, 2023 14:11:59 GMT retiredat48 said:

Feb 25, 2023 1:15:17 GMT @jovan said:

I retired in 2019 and started Roth Conversion in 2022. I am using cash for living expenses, wife is withdrawing the SSN and little from 401K may be 1-2 %. I am targeting up to 12% bracket for Roth conversions. This year we will get a little more may be  $5900 more as upper limit for 12% bracket for two increased this year. I have approx. 4-5 years more to perform Roth conversions or if my cash runs out first. My goal is to do max Roth Conversions but I do have a large portfolio so not sure how much I will get it done. I am also keeping an eye on next elections if Republic side wins they may be able to keep the current tax brackets which would be beneficial to us for Roth conversions !!! My plan is to delay SSN as much as I can, so I can do Roth conversions and get a higher amount in SSN. 

I like your post...but a couple observations:

--OK with the roth conversion plan.

--I would take SS now.

--And don't fret if you make no add'l conversions.  If you are in 10-12% marginal tax rate when you start RMDs, then the tax you will be paying in first year is about 3.6% of IRA (RMD amount) times  the tax rate, 0.12.  Example: On a $500,000 IRA, that is an RMD of $18,000.  Times tax rate of .12 = $2160.  And that assumes full RMD is taxed at 12%.  Pretty tolerable, no?

Good day...
R48


retiredat48 ,

Thank you for providing me the feedback, I respect your opinion. You helped me while ago on Morningstar forums on few things. My RMD's would be 70,000+, our SSN for both of us would be 45,000+ approx. 20,000 minimum in dividends

That puts me at 135,000 range. At existing tax brackets that puts me above 12%. Also this

is minimum projected monies, I am planning on taking out more as time goes on as I don't

have to save anything for heirs. Do you still think I should take SSN early?

[yakers]

Over the last few years have done a few small ($5 to $10K) Roth conversions but no more for me, too near the next tax bracket and the Roths are intended to pass on to the kids, seen only emergency funds for wife & I.

[retiredat48]

Feb 26, 2023 15:18:28 GMT @jovan said:

Feb 25, 2023 14:11:59 GMT retiredat48 said:

I like your post...but a couple observations:

--OK with the roth conversion plan.

--I would take SS now.

--And don't fret if you make no add'l conversions.  If you are in 10-12% marginal tax rate when you start RMDs, then the tax you will be paying in first year is about 3.6% of IRA (RMD amount) times  the tax rate, 0.12.  Example: On a $500,000 IRA, that is an RMD of $18,000.  Times tax rate of .12 = $2160.  And that assumes full RMD is taxed at 12%.  Pretty tolerable, no?

Good day...
R48


retiredat48 ,

Thank you for providing me the feedback, I respect your opinion. You helped me while ago on Morningstar forums on few things. My RMD's would be 70,000+, our SSN for both of us would be 45,000+ approx. 20,000 minimum in dividends

That puts me at 135,000 range. At existing tax brackets that puts me above 12%. Also this

is minimum projected monies, I am planning on taking out more as time goes on as I don't

have to save anything for heirs. Do you still think I should take SSN early?


R48 in bold:  observation: You state you need to take out more than $135,000 income when you retire??  OK...must be going on a lot of cruises!  That also suggest whenever you retire (stop working) you will need income from somewhere to fulfill needs each year.

The reason to take SS early is I consider 99.5% should be taking it asap.  There are threads on this...review them.  The breakeven point is in the mid age eighties, when waiting will have paid off.  

For your case, it is clear you will be in a relatively high tax bracket, if you take SS early OR wait.  One thing is for sure.  If you delay to age 70, start SS, and then die next day, you left a ton of money on the table with the gvt.  Also if you take SS early to live on, with dividends, you need lesser dollars from IRA or other parts of portfolio.  Could this allow some conversions to roth during this period?

R48

[Fearchar]

Feb 26, 2023 19:31:54 GMT retiredat48 said:

Feb 26, 2023 15:18:28 GMT @jovan said:

Some caution and a question...
At what age is SS 45K/year?
At what age may you be fully retired (zero W2 income)?

Delaying initiation of SS results in ~8% increase in benefits each year.
So, 1 year earlier would be ~41.4K while 1 year later would be ~48.6K.
SS is maxed out at age 70.  At that age, I agree one should start collecting.
But if you are significantly younger, then there is more to consider.

RMD's don't have to start until age 73 (latest update).

Consider the ~20K/year in Dividends.
If you are going to retire a few years before age 70, then your income would not be very much since that would  be it.
Some of those are probably qualified dividends too.
There is also the standard deduction of about $27K.
Even if the dividends not all qualified, then you are -$7K/year in taxable income.
So, with the 12% bracket starting at $89.4K in 2023, you could convert ~$96K below the 12% rate.
Understand you probably won't convert that much as you'll need more than $20K/year to live on.

What could make this option more attractive would be if you have taxable savings that don't require the realization of significant long or short term gains.  
If that were an option, then there wouldn't be more taxes if you needed some more cash.

Personally, I'm probably 2 years from retirement, but am leaning towards delaying imitation of SS until age 70.

[Deleted]

retiredat48,

Thank you for providing me the feedback, I respect your opinion. You helped me while ago on Morningstar forums on few things. My RMD's would be 70,000+, our SSN for both of us would be 45,000+ approx. 20,000 minimum in dividends



That puts me at 135,000 range. At existing tax brackets that puts me above 12%. Also this



is minimum projected monies, I am planning on taking out more as time goes on as I don't



have to save anything for heirs. Do you still think I should take SSN early?

R48 in bold: observation: You state you need to take out more than $135,000 income when you retire?? OK...must be going on a lot of cruises! That also suggest whenever you retire (stop working) you will need income from somewhere to fulfill needs each year.



The reason to take SS early is I consider 99.5% should be taking it asap. There are threads on this...review them. The breakeven point is in the mid age eighties, when waiting will have paid off.



For your case, it is clear you will be in a relatively high tax bracket, if you take SS early OR wait. One thing is for sure. If you delay to age 70, start SS, and then die next day, you left a ton of money on the table with the gvt. Also if you take SS early to live on, with dividends, you need lesser dollars from IRA or other parts of portfolio. Could this allow some conversions to roth during this period?




Hi R48, I have 3 houses to support, 2 in WI (One house and one cottage) and one house in FL near Villages. I have a lot of cash available to support myself for all the conversions I planned. I retired in 2019 at 57. I have a lot of cash but it is my comfort level and I planned it to live on this money when doing Roth conversions. I know I will be in high tax bracket in future. This is the reason why I am trying to do Roth conversions to stay in lower tax bracket. If I start SSN, that is included in the income, thus reducing my limit for Roth conversion. I rather have more money available for Roth conversions than taking SSN early. As far as dying, nobody knows when our day is coming. All we can do is hope we live long enough to enjoy our money.

[retiredat48]

Fearchar ,...who posted above: "Delaying initiation of SS results in ~8% increase in benefits each year.
So, 1 year earlier would be ~41.4K while 1 year later would be ~48.6K.
SS is maxed out at age 70. At that age, I agree one should start collecting.
But if you are significantly younger, then there is more to consider."

The crux of the argument is here. You have not identified that one pays a huge cost to get this 8% increase. The cost is forfeiting what the gvt will pay you annually if SS taken earlier.

If you need the money to live on, then take SS earlier (when stop working), so that you do not have to tap other sources (like a trad IRA), or stocks in taxable. If you do not need this early SS, then you must consider, if taken, it is a stand-alone investment...growing over time. That is what gets you to the approx age 85 breakeven point. And if your return approximates the historical stock market average, one gets way beyond age 85 breakeven.  Similarly, if you needed SS to live on early, you have to consider the loss of an investment you sold to otherwise get the needed income.

I have posted elsewhere, that just taking some of the early SS money, and buy a Longevity Insurance Plan, will provide much add'l income at from age 85 on, if this is ones concern.

Lastly, the benefits of conversions to roth are overstated IMO when looking at raw numbers. Like, when you have to take RMDs, you start with about 3.6% withdrawal value of portfolio and apply your tax rate. This is not a huge number for most. And as a recent poster showed, in his case, he projected his TRAD IRA would still be at 50% of portfolio size, when he would normally pass away. Yes, people do not take their IRAs to zero. Your heirs may have a much better tax situation.  I have also show what this extra money would grow to if you took the early SS and invested it in capital growth stock etfs...huge numbers.

Final point. Gvt just added a few years for RMD time to start. All those past conversion analyses are now in error, as this benefit was missed. (IE delayed rmd time means more growth/less tax overall).

R48

[Fearchar]

retiredat48,

Yes; there is the opportunity cost over the first year(s) that SS is not being collected.
That opportunity cost is a function of how aggressive one is with their savings and which way the market winds are blowing.
The better the market, the more sense it makes to collect.
However, longevity factors in too and if you live long enough you'll make up for it.

The first problem is if you die much before age 79.
However, if that happens than it doesn't really matter since you can't take it with you!
While it may be concerning to watch one's savings dwindle somewhat, there is the tax savings.
This is especially pronounced if one can avoid the 22% bracket.

Living to age 85 is sufficient to justify a 1 year delay assuming a 4% rate of return without considering the tax advantages.

Living to age 88, is sufficient for a 1 year delay at a 5% rate of return without considering the tax advantages.

Living to age 86 is sufficient to justify a 2 year delay assuming a 4% rate of return without considering the tax advantages.
Living to age 89, is sufficient for a 2 year delay at a 5% rate of return.

If one assumes 6-7% rate of return, then yes the longevity hurdle is too great for the majority of people.

I wish everybody the best of health, but also recognize that many are facing poor health.



 

[FD1000]

Observation: retirees with small portfolio don't need conversion. Conversion doesn't help much for retirees who have several millions. The ones in the middle are the ones who can benefit the most.  Having several millions is never a bad case.