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15 signs that a wonderful retirement lies ahead:

Excerpt, quote-unquote:

3. Your Social Security and required minimum distributions from retirement accounts will together cover all your expenses, discretionary and nondiscretionary.

4. You don’t pay attention to the stock market’s daily movements, because you’re confident you have enough, pretty much no matter what happens.


=== ===
Link to full article: https://www.marketwatch.com/story/15-signs-that-a-wonderful-...

== == ==
--BigBunk
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Maybe just give everyone a score based on your opinion of who should do what or how much they should have in retirement.
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3. Your Social Security and required minimum distributions from retirement accounts will together cover all your expenses, discretionary and nondiscretionary.

So let me get this straight.

SS+RMD=expenses

At age 74, your RMD is 4.05% of your retirement accounts. You're now exceeding the SWR and each year after that, it gets worse.

PSU
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At age 74, your RMD is 4.05% of your retirement accounts. You're now exceeding the SWR and each year after that, it gets worse.

No. Gets better. :)

4% is not the SWR for all ages. It's the safe rate with a time span assumed. IIRC, it was based on a 30-year simulation? It would be ridiculous for a 49-year-old retiree to be pulling out the same percentage as a 98-year-old retiree.
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PSU wrote At age 74, your RMD is 4.05% of your retirement accounts. You're now exceeding the SWR and each year after that, it gets worse.


Questions:

The 4% idea was the portfolio would last under worst case 30 years. What do you put your odds of a 74 year old reaching 105?

If 4.05% is a problem at age 74, what is the opinion of the RMD at these ages:

90 8.77%
95 11.6%
100 15.8%
110 32.2%
120 52.6%
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At age 74, your RMD is 4.05% of your retirement accounts. You're now exceeding the SWR and each year after that, it gets worse.

</snip>


At age 74, few people are going to live another 30 years to age 104. It's OK to take more than 4%.

And RMDs are just a percent of assets annual withdrawal. The annual withdrawal doesn't rise with inflation even if the year end account balance declines like the standard SWR.

intercst
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And RMDs are just a percent of assets annual withdrawal. The annual withdrawal doesn't rise with inflation even if the year end account balance declines like the standard SWR.

The article implied that the RMD was needed for spending. It didn't imply that you spend only a portion of it. But then the article was all over the place. Up until an RMD is required, the person lives on his/her assets while not collecting SS. Then when in a short period of time, the person starts collecting SS and taking the RMD for expenses. That seems to imply that at age 69 when the person was living exclusively on his/her retirement accounts, they were taking amounts exceeding 4%.

PSU
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You've got it wrong. SS is greater than non-discretionary expenses. RMD is something that you transfer from a tax-deferred account to an investment account unless you use a portion of it for discretionary expenses.
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I just want to chime in here as a 77 (soon to be 78) year old, 20+ years following the Motley Fool boards... I found the two items from that 15 item list pretty well described us. Obviously a number of years into receiving the RMD as well as Social Sec. At this point we get two SS payments each month, plus one RMD. My wife, ten years younger, will be adding her RMD to the pot in a few years...

We DO use the RMD to cover discretionary expenses, and live quite comfortably with all those incomes...what's really amazing is that my IRA just today hit its all-time high, despite my having been taking out those RMDs for the six or seven years since turning 71 1/2. Thanks to the Fool, I do sleep well at night, regardless of what the market has done that day, that week, this year....

Now, I realize that we are blessed to be able to sleep well at night, as described. But I guess what I wanted to add to the conversation here is that there are so many different ways to slice these income streams and the corresponding cash flows, we need to be careful with all generalizations. I took the list of 15 as a bit whimsical, even though it was nice to see that I could smile after reading each one.

mathetes
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At age 74, your [IRA] RMD is 4.05% of your retirement accounts. You're now exceeding the SWR and each year after that, it gets worse.

Nobody says you have to *spend* your RMD. You only are required to withdraw it.

Lots of people just do an in-kind transfer of their RMD and transfer shares from their IRA account to their regular (taxable) account.

Anyway, whether you like it or not, the IRS requires you to take the RMD. Speak to your congressman and ask him to change the law.
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"At age 74, your [IRA] RMD is 4.05% of your retirement accounts. You're now exceeding the SWR and each year after that, it gets worse."

So?

likely you have other assets that are sitting there.

How many JUST have an IRA? and nothing else?

I have one and it is a fraction of my portfolio.

Besides, if you reset at age 74, you probably aren't going to live another 30 years to 104. Few do - unless your parents are still alive and your grandparents lived to 95+. You can likely take out 4.5%.

So?

t.
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Nobody says you have to *spend* your RMD. You only are required to withdraw it.

The article said it. It said SS plus RMD equals non-discretionary and discretionary spending. It didn't say non-discretionary and discretionary spending and moving some of RMD to taxable account. I'm taking it literally. I know you don't have to spend RMDs.

PSU
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2. Your Social Security benefit will cover your fixed living expenses—and you can afford to wait until age 70, so you get a larger check.

The second item in the articles list is more important and somewhat conflicts with the third item.

Personally, I would revise the second item to read.

Your Social Security benefit plus pension covers your fixed living expenses--and your Federal and state taxes on your RMD withdrawals.

You won't have to worry about Safe Withdrawal Rates until Congress realizes that taxes need to be raised to pay for Donald's Wall and Bernie's Medicare-for-all.
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MCCrockett writes,

Your Social Security benefit plus pension covers your fixed living expenses--and your Federal and state taxes on your RMD withdrawals.

You won't have to worry about Safe Withdrawal Rates until Congress realizes that taxes need to be raised to pay for Donald's Wall and Bernie's Medicare-for-all.

</snip>


A lot of people seem to ignore the fact that retirement accounts are 'tax-deferred', not 'tax-free'. As others have noted, you're not required to spend your RMD, just to pay the tax on the amount of the withdrawal, which is probably less than 25% of the total for most people.

intercst
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MCC"You won't have to worry about Safe Withdrawal Rates until Congress realizes that taxes need to be raised to pay for Donald's Wall and Bernie's Medicare-for-all. "

Donald's wall is a few billion bucks. Not even 1 buck per person per year for 10 years.

Bernie's programs would cost 50 trillion dollars over 10 years. A couple hundred thousand per person (babies included).

You're comparing a grape seed to an elephant herd.

t.
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" MCC"You won't have to worry about Safe Withdrawal Rates until Congress realizes that taxes need to be raised to pay for Donald's Wall and Bernie's Medicare-for-all. "

Donald's wall is a few billion bucks. Not even 1 buck per person per year for 10 years.

Bernie's programs would cost 50 trillion dollars over 10 years. A couple hundred thousand per person (babies included).

You're comparing a grape seed to an elephant herd.

t."

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

Sure you meant to type "herd"?

Howie52
Just checking.
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11. You’re aware of how long-term care can adversely affect your life and your financial future. But you feel confident about your physical health, because you eat your salad and your grilled fish after another energetic workout at the gym.



And you'll never need to plan ahead because healthy people don't age or get sick.
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RMD is something that you transfer from a tax-deferred account to an investment account...

This is perhaps the most misunderstood and misapplied event of retirement years. The RMD is a TAX EVENT. It is NOT a household cash flow event.

If you look at your TIRA balance....and for simplicity let's say that balance is $100,000....that amount does not belong to you. Only a portion of it does, that portion being approximately the balance times 1-MTR, where MTR = Marginal Tax Rate for Federal + State Tax. To keep it simple, if your state does not tax IRA or other retirement plan withdrawals and you're in the 12% Fed bracket, then of that $100,000, you only own $88,000, the IRS owns $12,000....you are just holding it for them. That the IRS will ultimately get their portion is certain....its only a question of when.

At 70.5 and older, if the amount withdrawn from the TIRA for household income need exceeds the RMD determined amount, then for all intents, that individual does not have an RMD. There is no separate reporting or other filing to show the RMD has been removed from the TIRA, only a requirement the RMD amount be removed from the TIRA and reported as ordinary income along with all other sources of ordinary income. There is no requirement from the IRS as to how the RMD is used...that is entirely up to the owner.

Now, it is entirely possible to carefully plan the estimated future RMD amount to become required household cash flow. For example, at age 60, the retiree could purchase a 10 year period certain annuity from an insurance company that provides the household with $XXXX per month up to the first RMD year then stop and be replaced by the RMD amount. Such a plan would also require the timing of Social Security benefits and perhaps other sources of household income to coincide with the future RMD. But I suspect this is rare, but certainly possible.

BruceM
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If you look at your TIRA balance....and for simplicity let's say that balance is $100,000....that amount does not belong to you. Only a portion of it does, that portion being approximately the balance times 1-MTR, where MTR = Marginal Tax Rate for Federal + State Tax.

Don't you mean effective tax rate? Otherwise, it can't be this simple, because surely some will be taxed at 0%, and some at intermediate rates up to the Marginal Tax rate. Or some other income exists which will be taxed at the lower rates.
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BruceCM: This is perhaps the most misunderstood and misapplied event of retirement years. The RMD is a TAX EVENT. It is NOT a household cash flow event.

I use the RMD to refill my taxable account, which I deplete as needed (When the Countess demands money.) So far both accounts are still growing. How's that for tax planning?

When the Countess hits RMD age, we may have too much spending money. I guess we will just have to bear up under that burden.

CNC
... Not big into tax planing
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CountNoCount writes,

When the Countess hits RMD age, we may have too much spending money. I guess we will just have to bear up under that burden.

</snip>


I'm been dealing with DELL and Pfizer-related affluenza for more than 20 years. It's a cross to bear, but people manage.

intercst
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Don't you mean effective tax rate

No, the marginal rate or, for some with relatively large TIRAs, an average of the two top tax rates.
The Effective rate is an average tax rate across all brackets and forms of income (Qualified dividends + LTCG). The marginal rate is the tax on the next dollar of ordinary income.

Now, it could be an average of two tax brackets if the RMD is partly in one bracket and partly in the next higher bracket. But this would be unusual for most retired households, I'd imagine. For a couple with ordinary income of SS + Pension + investment ordinary income = $80,000 who take the standard deduction for 2019, it would take an RMD of >$26,000 to go from the 12% to the 22% bracket, or an IRA of about $712,000. Certainly possible...particularly for a retired household like ours that hasn't done much of any RMD planning and has let the TIRAs just grow like weeds =====> a very large tax bill bump in a couple of years :-(

BruceM
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Now, it could be an average of two tax brackets if the RMD is partly in one bracket and partly in the next higher bracket. But this would be unusual for most retired households, I'd imagine.

This is precisely what I am anticipating for our family.

Perhaps our family is atypical.
Actually, I'm sure we are, in many ways.

For a couple with ordinary income of SS + Pension + investment ordinary income = $80,000

Way above what we are expecting in income before we get to our IRAs.

We'll both be retired at the end of the year at age 57. The majority of our investments are in Taxable IRAs and 401(k) plans and some Roth IRAs. No pensions for either of us. Some money in non-retirement savings. We'll be spending some of our non-retirement investments and probably be doing a 72t distribution on at least some of our IRA or 401(k) accounts until we get to age 59-1/2. We will also be relying on 401(k), IRA and Roth distributions in the time between age 59-1/2 before we are required to take our required minimum distribution. Probably one of us (me) will take Social Security early, the other (my wife) at a later time.

When we do get to the point of RMD, we will have Social security earnings, but maybe on the order of $40-50k combined (depending on when we decide to take our benefits) I'm anticipating RMDs starting in 2032 (Age 70) of around $60k, perhaps. It's a little hard to project out 13 years for investment value or tax brackets, so I'm sure the real amount will be substantially different, but that's my best guess currently. Is it safe to exclude Roth distributions for this exercise?

Using current figures, applied to 2032 (no attempt to adjust for inflation):

SS $45k (85% taxable, but I treated it as 100% taxable for simplicity.
RMD $60k
Other $10k misc non-retirement investment income, cap gains, interest, dividends.
Total = $115k
Std deduction = $24k
taxable income = $91k


The math and the assumptions required make this a somewhat futile effort, but I plowed through, anyway. I'm going to round off to the nearest $1k to make it easier.
So, the first $19k of that is taxable at 10% (SS income)
The next $57k of that is taxable at 12% (or 15%) - that is mostly the RMD income.
The final $15k (RMD income) is taxable at 22% (or 25%)

So, in our case, 22% is definitely NOT a good estimate for the tax rate we would be paying on our RMD, since a larger part of the RMD is taxed at the 12% or 15% rate. I guess effective tax rate is not necessarily any better. With these numbers, somewhere between 12% and 22%, but closer to 12% for the tax rate on the RMD, as long as you are treating those dollars as the last earned.

Is my thinking generally correct for our situation?
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We'll both be retired at the end of the year at age 57. The majority of our investments are in Taxable IRAs and 401(k) plans and some Roth IRAs. We'll be spending some of our non-retirement investments and probably be doing a 72t distribution on at least some of our IRA or 401(k) accounts until we get to age 59-1/2.



You might look into the Rule of 55 for your 401k plans. You have to have left employment in the calendar year in which you turn 55.
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"Don't you mean effective tax rate?"

No, the marginal rate


People sometimes get confused about this. The IRS specifies the order or "stacking" of the various types of income. You don't get to apply them in the order you want to, they are applied in the order dictated by the IRS.

Some people want to think that an extra bit of income gets taxed at their effective (read: average) tax rate. But they are wrong. Some of them just make this mistake, but some of them insist strongly that the effective rate should be used. I think because they want to believe that it is taxed at a lower rate than it actually is.

Had a related discussion with my wife many years ago when she took a job after the kids were grown. She didn't agree that she should claim zero exemptions on her W-4 while my W-4 claimed a larger number. She wanted to know why her paycheck was the one that got hit with the large withholding instead of mine. Once I explained "marginal income/rate" she understood.

Couple years later, when we had a ton of capital gains and paid a huge tax, we discussed how cool it was that her entire income for the whole year just got sent to the IRS. That's when she decided to quit. And she didn't know the phrase "Going John Galt" but she sure understood the concept.
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Rayvt analyzes,

Couple years later, when we had a ton of capital gains and paid a huge tax, we discussed how cool it was that her entire income for the whole year just got sent to the IRS. That's when she decided to quit. And she didn't know the phrase "Going John Galt" but she sure understood the concept.

</snip>


That's kind of a meaningless way to calculate your tax bite. And an even crazier way to come to a decision to quit a job.

I could understand it if say, you were paying thousands of dollars a year for day care and made the calculation that the after-tax, after daycare expenses, amount left over didn't make being employed worthwhile. But to use a non-employment incurred tax liability as a reason to end employment, is just nuts.

I think I'm beginning to better understand the other financial calculations you're posting.

Over on METAR someone asked me what kind of tax analysis I did to move from the so-called "low-tax" State of Texas to what some would describe as the very Liberal tax purgatory of Washington State. Taxes were at best the #3 item on the list.

https://boards.fool.com/sp-asks-ltso-intercst-was-it-just-a-...

intercst
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You might look into the Rule of 55 for your 401k plans. You have to have left employment in the calendar year in which you turn 55.

small nit: This applies to workers who leave their jobs anytime during or after the year of their 55th birthdays, not just the year they turn 55.

We had hoped to use the rule of 55, but the plan does not allow it.
A plan to use the 72t distribution on the 401(k) will work, starting next year and running for the required 5 years. By tweaking the variables in the formula, we should be able to come pretty close to our intended target for income, for tax and ACA subsidy purposes, among other considerations.

Alternatively, we could live off our non-retirement savings/investments for just under 2 years, until my wife hits age 59-1/2 and even convert a bunch of IRA funds to Roth Accounts during that time. I think I prefer the 72t option and leave that savings intact for now and keep it for emergencies or special situations.

It's nice to have options, anyway. At least for the first several years of retirement, we are expecting both our marginal tax bracket and our effective tax rate to be lower than they has been. By the time we start taking Social Security and finally need to take our RMD, that may change, and I haven't even considered what will happen when we ultimately go from filing joint to single, hopefully a very long time from now.
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That's kind of a meaningless way to calculate your tax bite. And an even crazier way to come to a decision to quit a job.

Agreed.

But....the wife is not immersed in this finance stuff like I am and like many of us are. So imagine how this situation looks to the typical (non-finance deep-diver) person:

**wife getting ready to sign the 1040** "Holy mackerel [that's not the exact word she used], we owe the IRS $25,000?? Waitaminute, that's just about the same as what my pay for the year was!! Remind me why I am working, am I working for us or am I working for the IRS?"


Anyway, she had an unpleasant boss and working conditions, so every time she laid out her complaints to me, I thought the job wasn't worth putting up with all the BS. I kept telling her she could quit and we'd be okay financially. Seeing a check to the IRS that just about equaled her salary was the last straw. Next time she called me at work to complain about something her boss pulled, I said "Reach down under your desk, pick up your purse, stand up, toss your badge and keys on your desk and walk out."
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You might look into the Rule of 55 for your 401k plans. You have to have left employment in the calendar year in which you turn 55.
----
small nit: This applies to workers who leave their jobs anytime during or after the year of their 55th birthdays, not just the year they turn 55.




Well, yeah, just not sooner than 55.
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Part of my reason to retire was that I was at the point where I had as much investment income as I did salary.

If you looked at my paycheck.....where 8+% went for SS and FICA 1 and 2, where 23-28+% went for federal taxes.......heck, almost half my paycheck seemed to disappear......well, not quite...but if I lived in a high income tax state..it sure would have been. When I did my taxes, it wasn't fun to see how much money I was sending to Uncle Sam each year.....

So for each dollar I made at the top marginal rates, Uncle Sam got 40% or so.....hmmm....

plus I had the cost of commuting (not too bad - 30 miles a day) and spending 45 minutes in the morning and 30 minutes in the evening getting home....in rush hour traffic..... and saving on 'work clothes'.....

I retired at 52.

I figured that from there to age 66, I avoided paying at least a third of a million, and maybe even half a million in extra taxes to the tax man........

I got in 31 years of SS....so that was a tiny hit...not reaching 35 years....

Been retired 21 years.

Love those dividends.....

t
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So for each dollar I made at the top marginal rates, Uncle Sam got 40% or so.....hmmm....

Only 40%. I pay over 70%.

PSU
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We'll be spending some of our non-retirement investments and probably be doing a 72t distribution on at least some of our IRA or 401(k) accounts until we get to age 59-1/2.

I could be wrong but I think once you start a 72t you have to keep it in effect for five (5) years so I'm thinking you can't just shut it off at age 59-1/2. In your case I think you said you would start at age 57 then you would have to keep drawing under the 72t plan until age 62.

I could be wrong.

Regards,

ImAGolfer (retired '03)
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ImAGolfer writes,

I could be wrong but I think once you start a 72t you have to keep it in effect for five (5) years so I'm thinking you can't just shut it off at age 59-1/2. In your case I think you said you would start at age 57 then you would have to keep drawing under the 72t plan until age 62.

</snip>


That's correct. And another wrinkle is that the IRS interprets "5 years" as being 365 days x 5. You can't start in December of Year 1 and end it in January of Year 5 (i.e., 38 months) and call it "5 years".

intercst
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I could be wrong but I think once you start a 72t you have to keep it in effect for five (5) years so I'm thinking you can't just shut it off at age 59-1/2. In your case I think you said you would start at age 57 then you would have to keep drawing under the 72t plan until age 62.

Yes, I'm aware of the 5 year requirement.
Later in the thread I indicated that we would be taking 72t distributions for the required 5 years. In fact, it is likely that we would continue taking a similar amount after the five years anyway; perhaps a little more, maybe a little less.

In playing with the numbers, it seems that setting the "reasonable interest rate" to zero in the formula may be sufficient for our purposes. I didn't see anything in the documentation to indicate this would be disallowed, as long as one does not exceed the maximum "reasonable interest rate". As of June, the maximum rate was 2.86%, but was as low as 1.01% in 2012 and as high as 6.27% in 2006. Things to be aware of if planning to take 72t distributions starting years in the future.

https://www.imagisoft.com/equal/federalmidtermrates.html
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T: "for each dollar I made at the top marginal rates, Uncle Sam got 40% or so.....hmmm....

PSU: Only 40%. I pay over 70%.

---

When I lived in VA, it was 46%...... sort of kills the incentive to be earning a whole lot more and be looking for deductions where possible.....dropped to 40% when I moved to TX....or maybe more...I forget.....I just rounded it off to half....half my money going to Uncle Sam....

then you figure out there's sales tax on what you buy.......8.25% in TX, 6% on new cars.....that takes another cut of taxes out of your paycheck....or what's left of it......


t.
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