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Post by liftlock on Apr 17, 2023 21:46:36 GMT
FD1000, I ran your data through the 2022 Pralana Retirement calculator because I was curious about what it would show. The attached file includes the results of Base Case 1 - withdrawing from taxable accounts first - no tax minimization strategies such as Roth Conversions. The analysis starts one year earlier than what Fearchar did because I haven't upgraded to the 2023 calculator yet. I need to fix the Social Security Income which is less than the $60,000 you outlined because the software is reducing the amount for taking it before full retirement age. I set the return on the taxable account to 10% to generate the $60K return you indicated, $20K of which is tax free. The return on the taxable accounts is 6% net of inflation. It might make more sense for comparison purposes if the return on the taxable account were also set to 6%. I can run other scenarios if you are ok with the assumptions shown. Base case 2 would be withdrawing from the T-IRA and letting the Taxable account grow. FD Summary Table - Base Case 1 - Withdraw ....xlsx (29.27 KB) |
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Post by FD1000 on Apr 17, 2023 22:54:42 GMT
FD1000, I ran your data through the 2022 Pralana Retirement calculator because I was curious about what it would show. The attached file includes the results of Base Case 1 - withdrawing from taxable accounts first - no tax minimization strategies such as Roth Conversions. The analysis starts one year earlier than what Fearchar did because I haven't upgraded to the 2023 calculator yet. I need to fix the Social Security Income which is less the software $60,000 you outlined because the software is reducing the amount for taking it before full retirement age. I set the return on the taxable account to 10% to generate the $60K return you indicated, $20K of which is tax free. The return on the taxable accounts is 6% net of inflation. It might make more sense for comparison purposes if the return on the taxable account were also set to 6%. I can run other scenarios if you are ok with the assumptions shown. Base case 2 would be withdrawing from the T-IRA and letting the Taxable account grow. View Attachmentwow, amazing. Just use 6% performance on everything. This is my conclusions. 1) Converting makes more sense if I make 8-9% average annually. Even then, I got to wait seeing the results. My guts tell me I made a mistake calculating conver=$250K 2) Nobody, including me don't want to pay a lot of taxes when the breaking point is 20+ years from now and older than 85 years old. 3) Right now, I'm the only one who takes SS, my wife will start taking it in about 2 years. Each is about $30K. 4) I can convert smaller amounts, as long as total tax is no more than 13%. I already did $80K. I was just taking a number SS=30K + taxable=$60K(all CG, no tax ded even if false) + Conver=80K =$170K. My real tax software says Fed tax=21330 GA=1369. This is 13.3%. See below SS=30K + taxable=$60K(all CG, no tax ded even if false) + Conver=60K =$150K. My real tax software says Fed tax=$16930 GA=235. This is 11.4%. SS=30K + taxable=$60K(all CG, no tax ded even if false) + Conver=50K =$140K. My real tax software says Fed tax=$14,730 GA=0. This is 10.5% much better SS=30K + taxable=$60K(all CG, no tax ded even if false) + Conver=0 =$90K. My real tax software says Fed tax=$6407 GA=0. This is 7.1% much better In reality, instead of $60K=taxable, it could be $20K muni no Fed tax dist. So now that I'm smarter, I can convert next years only 40K, and wait for Dec to know more. Basically, I need to aim to about $140-150K. Lastly, I think it doesn't matter converting $40-50K have minimal results. Converting nothing has the lowest taxes which means this extra money works another 7 years making money. Attachments:
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Post by liftlock on Apr 19, 2023 16:15:53 GMT
FD, I created several Roth IRA Conversion Scenarios for you using the 2022 Pralana Retirement Calculator. You can view them in the attached file. FD Summary Table - Scenarios 1-7 - 2022 PRC.xlsx (493.62 KB) I would be inclined to do Roth IRA conversions in 2023, 2024, and 2025 while tax rates are low before the Tax cuts and job acts is scheduled to expire at the end of 2025. I would limit the conversions to the 24% Marginal Tax Bracket not to exceed the top of a Medicare IRMMA Bracket of your choice. The first IRMAA bracket based on 2023 income has an estimated range of $204,000 to $260,000. A good choice would be to keep your MAGI under the $260,000 ceiling for 2023. A $228,000 ceiling for the first IRMAA bracket was used by the 2022 Pralana software to limit Roth IRA conversions in some of the scenarios. After 2025 you can see how the new tax brackets shake out, but it looks like doing ongoing conversions in the 22% to 25% tax bracket would smooth your long term taxable income and the taxes you would pay. One of the scenarios converts your entire T-IRA to a Roth by your mid 70s. After that you pay no more taxes. If you are self insuring for long term health care then retaining funds in a T-IRA for that purpose might make more sense. |
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Post by FD1000 on Sept 15, 2023 13:37:11 GMT
In order to confirm my assumptions I contacted my local branch Schwab rep which I know for years. He advised me to talk with Schwab wealth management for a "small" $300 fee. I asked him to waive the fee and he did. I was assigned a specific guy to work on my case. The process took several weeks and 3-4 meeting to collect all the data and process it. We had our last meeting where I got the results, ask questions, and played what if scenarios. He couldn't assign a specific performance annual performance but for a typical retiree who has 30/70 to 70/30 the software comes up with 6-7% average annual return in the next 10 years. I selected the lowest return, around 6%.
His recommendation were
1. Delay my wife SS withdrawal to age 70.
2. Convert from T-IRA to Roth up to IIRMA=194K for joint. He couldn't give me an accurate number because of liability issue + he isn't a CPA. But he was sure to tell me that it's a no brainier. The term SMOTHING was mentioned several times.
3. Our portfolio size has a 99% chance of success to be enough to age 100+ (99% is the highest you can have).
4. We can gift our kids $50K annually (or to a charity) and still be OK.
5. He told me that 2 accounts don't have beneficiaries. I fixed that on the same day.
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Post by retiredat48 on Sept 15, 2023 15:35:34 GMT
Review threads on why one should NOT delay taking SS to age 70; instead, take the money now each year and give it to kids, or reinvest in ETFs in taxable accounts. At your anticipated annual investment return percentages, this is the no-brainer choice.
R48
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Post by archer on Sept 15, 2023 15:49:18 GMT
Review threads on why one should NOT delay taking SS to age 70; instead, take the money now each year and give it to kids, or reinvest in ETFs in taxable accounts. At your anticipated annual investment return percentages, this is the no-brainer choice. R48 This is similar to the threads on TR vs income investing. Both sides are a no brainer, depending on whose brains. One is comparing anticipated returns vs SS which pays more like an annuity with added COLA. |
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Post by Chahta on Sept 15, 2023 16:21:25 GMT
In order to confirm my assumptions I contacted my local branch Schwab rep which I know for years. He advised me to talk with Schwab wealth management for a "small" $300 fee. I asked him to waive the fee and he did. I was assigned a specific guy to work on my case. The process took several weeks and 3-4 meeting to collect all the data and process it. We had our last meeting where I got the results, ask questions, and played what if scenarios. He couldn't assign a specific performance annual performance but for a typical retiree who has 30/70 to 70/30 the software comes up with 6-7% average annual return in the next 10 years. I selected the lowest return, around 6%. His recommendation were 1. Delay my wife SS withdrawal to age 70. 2. Convert from T-IRA to Roth up to IIRMA=194K for joint. He couldn't give me an accurate number because of liability issue + he isn't a CPA. But he was sure to tell me that it's a no brainier. The term SMOTHING was mentioned several times. 3. Our portfolio size has a 99% chance of success to be enough to age 100+ (99% is the highest you can have). 4. We can gift our kids $50K annually (or to a charity) and still be OK. 5. He told me that 2 accounts don't have beneficiaries. I fixed that on the same day. #3. Your portfolio is either MM or funds for days, weeks, maybe months at a time. A "normal" portfolio has fairly steady holdings. How did he decide you had a 99% chance of success? What was that based on? Your trading history or your assumption you could keep trading to make 6% yearly? Just curious. |
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Post by FD1000 on Sept 15, 2023 20:38:21 GMT
@chahta,
The Schwab team and software don't and can't look at what I do.
How did they arrive at 99%? The following are usually several of the things they look for: yearly expenses, and how big is the portfolio, do a stress test with several scenarios, and assuming a certain annual performance, in our case about 6% which is a generic % based on market conditions.
I'm very comfortable with 6%.
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Post by retiredat48 on Sept 15, 2023 23:13:02 GMT
@chahta, The Schwab team and software don't and can't look at what I do. How did they arrive at 99%? The following are usually several of the things they look for: yearly expenses, and how big is the portfolio, do a stress test with several scenarios, and assuming a certain annual performance, in our case about 6% which is a generic % based on market conditions. I'm very comfortable with 6%. OK, so take the first annual Social security payment to your spouse, that Fidelity suggests you forego and wait to age 70. Invest it (after initial taxes) at this 6% rate to age 85...see how many dollars extra you would have. I submit you will never catch up in your lifetime with the breakeven point of taking, versus waiting. R48 |
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Post by anitya on Sept 16, 2023 5:47:41 GMT
There is a 20 yr continuously callable after 1 yr Federal Farm Credit Bank ( guaranteed [sponsored] by the US Govt) bond with a YTM of 6.47% available. For however longer we have higher rates for longer, you can enjoy the high coupon (but not for less than a year). I think this bond is also exempt from State tax but check your State tax rules. Same issuer 15 yr is at 6.44% and 10 yr is at 6.22%. Edit: The Farm Credit System Insurance Corporation (FCSIC) is an entity of the Farm Credit System (FCS), established by the Agricultural Credit Act of 1987, to insure the timely repayment of principal and interest on FCS debt securities. en.wikipedia.org/wiki/Federal_Crop_Insurance_Corporationwww.fcsic.gov/about/general-information en.wikipedia.org/wiki/Farm_Credit_Systemen.wikipedia.org/wiki/Federal_Crop_Insurance_CorporationThe Federal Crop Insurance Corporation (FCIC) is a wholly owned government corporation managed by the Risk Management Agency of the United States Department of Agriculture. FCIC manages the federal crop insurance program, which provides U.S. farmers and agricultural entities with crop insurance protection. |
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Post by fishingrod on Sept 16, 2023 8:11:39 GMT
There is a 20 yr continuously callable after 1 yr Federal Farm Credit Bank (guaranteed by the US Govt) bond with a YTM of 6.47% available. For however longer we have higher rates for longer, you can enjoy the high coupon (but not for less than a year). I think this bond is also exempt from State tax but check your State tax rules. Same issuer 15 yr is at 6.44% and 10 yr is at 6.22%.
I do not think that FFCB bonds are actually guaranteed by the US Gov't. Farm Credit Debt Securities are the general unsecured joint and several obligations of the System Banks only.
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Post by FD1000 on Sept 16, 2023 16:48:35 GMT
R48, it's true that breaking even will be about 18-20 years in the future when you take SS early, and is a good idea for many/most investors.
The problem I have is much higher future tax burden. Instead of getting another SS=$30+K annually for several years, I convert this amount from T-IRA to Roth and pay the taxes from the taxable account.
I will achieve 2 goals, transferring my money to Roth=no taxes for decades + trying to deplete my taxable account. The numbers show I will save $400K to over 2 million in taxes by age 90, depending on the conversions + a larger total portfolio. I can convert in the 12-15% bracket, 22-24% or 25+%.
We don't know the future but it's very likely that taxes will go up, the payments on the deficits are getting bigger. The more taxes go up, the more conversion make sense.
I selected the lowest conversion bracket of 12-15% + don't forget that I'm getting my SS already. I like compromises when the future is unknown.
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Post by anitya on Sept 16, 2023 19:32:10 GMT
liftlock, please elaborate / provide more color on this - "If you are self insuring for long term health care then retaining funds in a T-IRA for that purpose might make more sense."
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Post by liftlock on Sept 17, 2023 0:37:51 GMT
liftlock , please elaborate / provide more color on this - "If you are self insuring for long term health care then retaining funds in a T-IRA for that purpose might make more sense." Long term care expenses may provide an opportunity for a taxpayer to claim an itemized tax deduction in excess of the standard deduction for medical expenses exceeding 7.5% of Adjusted Gross Income. Excess itemized deductions reduce taxable income and allow funds to be withdrawn from a T-IRA at reduced tax rates to pay for long term care. Years ago my mother-in law purchased access to a retirement facility that included a long term care benefit as part of the purchase price. She was able to claim an itemized tax deduction in excess of $100,000 dollars for the portion of the purchase price the facility attributed to the expected lifetime cost for long term care. Her CPA indicated the tax deduction was legitimate because the cost was being incurred even though the long term care benefit was not being used. |
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Post by retiredat48 on Sept 17, 2023 5:31:19 GMT
R48, it's true that breaking even will be about 18-20 years in the future when you take SS early, and is a good idea for many/most investors. R48 reply in bold: So you agree MOST investors should take SS early rather than wait to age 70s...but not you. I have comments below on your calculations re conversions to ROTHs. Further, the breakeven into ones age 80's are based on low total returns on invested SS payments...like 4% annually. If you make more return, like your 6%, then the breakeven is well into age nineties. Lastly, note that SS monies are invested at about a 2% return rate via internal government bond lending among agencies. You cannot game this system into higher returns.The problem I have is much higher future tax burden. Instead of getting another SS=$30+K annually for several years, I convert this amount from T-IRA to Roth and pay the taxes from the taxable account. I will achieve 2 goals, transferring my money to Roth=no taxes for decades + trying to deplete my taxable account. The numbers show I will save $400K to over 2 million in taxes by age 90, depending on the conversions + a larger total portfolio. I can convert in the 12-15% bracket, 22-24% or 25+%. R48 reply: I can't delve into this in great detail, but we have had numerous threads and charts on what you plan to do, and there is no way you achieve this huge savings in taxes, and/or get comparable or more portfolio growth by paying the taxes now instead of later. I consider the 0% bracket is a no-brainer; 12% bracket is close to breakeven; any percent taxes paid above 12% is a loser situation. BTW they did not have ROTHs when I worked; I now have a substantial ROTH, but all done on conversions at 0% and at most some at 10%. So I am not against conversions.We don't know the future but it's very likely that taxes will go up, the payments on the deficits are getting bigger. The more taxes go up, the more conversion make sense. R48 reply: I consider more likely is two things: 1)ROTHs WILL BE TAXED IN SOME WAY...MEANS TESTED ETC. AND 2) The general fed tax bracket rates will be LOWER, as the gvt and politicians realize they must BROADEN the tax base, and have lower rates to gain acceptance. Currently more than 50% of population pays no tax. Unacceptable.I (FD)selected the lowest conversion bracket of 12-15% + don't forget that I'm getting my SS already. I like compromises when the future is unknown. Good.
R48 in bold.
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Post by Fearchar on Sept 17, 2023 13:24:03 GMT
Participated on this topic back in April... Appreciate everybody's feedback and incorporated many good points into my spreadsheet. Obviously, everybody's situation and assumptions are unique. However, in general the sweet spot appears be conversions to maximize income in the 12% tax bracket. A nuance of a typical calculation is the age at which this no longer really matters. If it's only age 84, then converting to the 12% bracket limit is best. If it's age 95, then converting more is slightly better.  Note: I don't wish to speculate on and especially debate about all the possible future changes to the tax laws. |
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Post by retiredat48 on Sept 17, 2023 15:16:46 GMT
View AttachmentNote: I don't wish to speculate on and especially debate about all the possible future changes to the tax laws. GOOD POINT. Carried further: One should not base decisions today on tax laws two decades or more down the road! Like...my grandkids are projected to have $8 million in assets, each, in their ROTH IRAs(started age 12) at age 58; and then be able to withdraw tax free money to spend. AIN'T GONNA HAPPEN. GVT will find ways to take some portion of both the assets and income withdrawals...IMO R48 |
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Post by FD1000 on Sept 17, 2023 17:16:39 GMT
R48: Carried further: One should not base decisions today on tax laws two decades or more down the road! FD: Anything to do with money must have predictions. I always based everything on worse case scenarios because I don't want to be disappointed. When the predictions are close I go in the middle. That's what I did with my SS. The numbers were close from age 62 to 70, I went with 65 - 1 month. See fd1000.freeforums.net/thread/23/why-ss-age-65. Same with retirement, a portfolio size of 10-15 times of annual expense isn't sure enough, I waited for 25+. The main thing with conversion is the fact that even if the final amount is close, having more money is Roth is a plus based it on today laws. I prefer to have more burden than my kids. |
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Post by howaya on Sept 17, 2023 18:53:57 GMT
"FD: Anything to do with money must have predictions."
Knock me over with a feather, while you are at it!
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