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How do you choose which money to withdraw from investments on which to live? I don't have answers. I am very interested in a discussion of this kind in RYR.

Traditional wisdom says: "Avoid paying taxes as long as possible." Does this always make sense?

The situation. Early retiree with a mix of tax-deferred (401K and IRA)investments, a permanent non-taxable annuity (personal injury award) and investments held in discount brokerage accounts. Too young (61) to collect social security. No debts at all. Taxable income from dividends and small amount of consulting. Few "big" income tax deductions.

The questions are: 1)Should I draw down my regular accounts first and leave tax-deferred withdrawals until later? 2)What impact will those withdrawals have on social security payments?
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"Traditional wisdom says: "Avoid paying taxes as long as possible." Does this always make sense?

The situation. Early retiree with a mix of tax-deferred (401K and IRA)investments, a permanent non-taxable annuity (personal injury award) and investments held in discount brokerage accounts. Too young (61) to collect social security. No debts at all. Taxable income from dividends and small amount of consulting. Few "big" income tax deductions.

The questions are: 1)Should I draw down my regular accounts first and leave tax-deferred withdrawals until later? 2)What impact will those withdrawals have on social security payments? "

Big big problem to solve.

Paying taxes now on money you don't use might not be a wise idea, although some say that converting regular IRA/401K to ROTH gives you tax free income in the future......doing your conversion now while you might be in a lower bracket (If you think that the DEMS will not lower rates, everyone will get whacked by AMT in a few years, and tax rates will climb across the board)..... so maybe considering moving part of your tax deferred assets to ROTH is something you want to consider - depends upon your tax bracket.

SS payments will be reduced under age 70 for 'too much earned income'. YOu can have all the income you want as long as it isn't 'earned' and still collect the full amount of SS. You can take a million a year out of an IRA (should you be that fortunate) and collect full SS.

SS payments will not be reduced for 'unearned income' - ie, dividends, interent, IRA/401K withdrawals, cap gains, etc. But.....

There is NO impact on SS paid, but the more income you earn, the higher percentage of SS is taxed as income. No way out of that, but not have 'income'.....stick all your money under a mattress and withdraw it...or have no visible taxable income (underground economy).

The bigger question is if you have different accuonts - stocks, bonds, CDs, REITS, etc.....how to do you your living expenses each year out of the 'collection' of them, and still maintain diversification - that is an interesting problem.

In some cases, you'll get interest, cap gains, income from REITS or bond funds - if you don't re-invest them, and take it as income - that is one way - but it can lead to getting lopsided in diversification if stocks are going down or way up compared to rest of asset classes.

I live mostly on the distributions and dividends and interest, and sell few things. Now 61.....retired going on 9 years.

Of course, if you own stocks, with all the buyouts, some seem to get bought out each year. This year TXU bought out, so that is a cap gains this year of many thousands. No choice. Last year it was something else....Year before something else. A couple hundred shares of each.

It is not about paying the least amount of income taxes, but things like maybe not paying income taxes on interest and re-investing it.....and then selling something else to live on.....or re-investing dividends and cap gains on mutual funds when you have to sell something else to live on - paying double tax.

Good luck...lots of choices, and none of them 'the best' - depends upon your situation, how tight your budget, when you plan to collect SS, and a lot of other factors.

Travel now or later? Health issues? Family issues - marriage of kids/college? Downsizing house? Upsizing house? Buying big asset (summer house/ski condo?)....Life goals? Expected age to live to (age of parents/grandparents....).....whether male/female....

t.
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You might start with the TMF home page, or go here

http://www.fool.com/investing.htm?source=LN

Err on the side of caution, or safety. Rule number one is "Don't lose money".

cliff
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Different folks will have different views - after a fair amount of consideration my view are:

Make withdraws in the proportion of your investments. So if you withdraw $1,000 and you are 65% stocks, 35% fixed income, take out $650 worth of stocks and $350 from fixed income.

Do not re balance annually -- if you must re-balance, do it in cycles at least 3 years (the reason is bull markets last long than bear markets) A partial re balancing will happen with the withdraw approach above. Historical data shows the an optimum in the range of 75 months.

Gordon
Atlanta
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Make withdraws in the proportion of your investments. So if you withdraw $1,000 and you are 65% stocks, 35% fixed income, take out $650 worth of stocks and $350 from fixed income.

With all the millions of words devoted to saving for retirement, it's downright discouraging how little help there is for spending your retirement savings to your best advantage. I use the Gordon's method, above, for my withdrawals. But, my investments are in a taxable account, so I am very careful of when and how I rebalance. I haven't actually rebalanced for quite some time, and I don't expect to in the near future. OTOH, many words have been written about using new contributions as your rebalancing method; Gordon's method uses withdrawals as the same.

Hedge
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Do not re balance annually -- if you must re-balance, do it in cycles at least 3 years (the reason is bull markets last long than bear markets) A partial re balancing will happen with the withdraw approach above. Historical data shows the an optimum in the range of 75 months.

Gordon
Atlanta

-----------------------


Interesting.
Most books/articles I have read encourage people to rebalance at least once a year.

Where/when/what-made-you decide to use such a long interval?

AM
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With all the millions of words devoted to saving for retirement, it's downright discouraging how little help there is for spending your retirement savings to your best advantage. I use the Gordon's method, above, for my withdrawals. But, my investments are in a taxable account, so I am very careful of when and how I rebalance. I haven't actually rebalanced for quite some time, and I don't expect to in the near future. OTOH, many words have been written about using new contributions as your rebalancing method; Gordon's method uses withdrawals as the same.

Hedge

--------------------------


Since my investments are in mutual funds, one method I use is that I have all cap gains and dividends dumped into my money market instead of back into the same fund. Then, when I'm ready, I have the funds to put wherever needs "balancing".

AM
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Since my investments are in mutual funds, one method I use is that I have all cap gains and dividends dumped into my money market instead of back into the same fund.

All my investments are in ETFs. As a general rule, I don't have any capital gains, other than from sales. As it turns out, it is actually better to leave money in a well performing index and defer the taxes, rather than trying to beat the market and pay taxes for each trade.

As to dividends; my investments don't generally return a high percentage. I am of the "live off the capital gains" camp, as touted by Edmunds.

Hedge
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The best $65 I ever spent for investing -- as has been said information on acquisition is all over the place. The real problem is how to spend it and also how to keep it.

“Conserving Client Portfolios During Retirement” by William P. Bengen;
ISBN-13: 978-0975344835

Gordon
Atlanta
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The best $65 I ever spent for investing -- as has been said information on acquisition is all over the place. The real problem is how to spend it and also how to keep it.

“Conserving Client Portfolios During Retirement” by William P. Bengen;
ISBN-13: 978-0975344835

Gordon
Atlanta

-------------------


Thanks.
I'll take a look at it.

AM
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Thanks for the responses to my note. I have ordered the book suggested. I will see what it has to say.

I don't really need to take anything out for a couple years. I am just thinking ahead. Rebalancing my portfolio is something I try to keep track of but haven't seen a serious need to do so recently. The biggest chunk is in a very low cost S&P Index fund. I have an annuity that is paid to me monthly as the result of a structured settlement. The principal isn't mine but is paid until death of both of us (wife & me.) I treat it as a bond fund for calculation of portfolio balance. That seems to work fairly well. I am about 65% stocks, 25% bonds, and 15% cash equivalents and have been that way for quite some time.

Again, thanks for the thoughts.

Anyone else have an idea or something to add???
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I am required to take RMDs. It is permissible to take it by moving an investment from an IRA to a taxable account, but what I've done so far is, as bonds mature, that provides my cash for the RMD. In retirement it will provide my living expenses.
My stocks, of course, do not mature. The effect of doing this, over time, will shift my allocation toward a higher % stocks right when it should be in more bonds.
In future years, I'll have to fix this, though I can put sine dividends toward more bonds.
I have three IRAs, and have decided to take the whole RMD each year from the one that has performed least well in the previous 12 months. When that is depleted, I will go to the next, and finally the best.
Hopefully, living expenses in excess of the RMDs will come from dividends and interest in my taxable accounts.

Best wishes, Chris
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The questions are: 1)Should I draw down my regular accounts first and leave tax-deferred withdrawals until later?

FWIW ... i built a spreadsheet a few months back that convinced ME that it's better to defer using the tax-deferred accounts( TDA) as long as possible
( theory -- you get 'earnings' on the taxes you don't pay .. the taxes on any withdrawal from a TDA generally being much higher than on withdrawals from taxables )

iirc ... AM and Cliff were unconvinced (don't recall why)


2)What impact will those withdrawals have on social security payments?

not entirely sure what you're asking but two things come to mind.

• if your income is above a certain level, your SS payments are partly taxed. More likely that withdrawal from TDA will have that affect

• there's talk of "means testing" SS .. if that turns out to mean looking at your net worth, they you might want to spend like a sailor for a while


=
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iirc ... AM and Cliff were unconvinced (don't recall why)



Don't know about Cliff, but MY concern is that by the time I begin withdrawing from my IRA taxes will have risen significantly -- or at least enough that I will end up with less money than if I take a small amount from each type account (taxable and IRA) when I start withdrawing.

True, it's an unknown.... but the possibility is always there. I'm not a person who does backflips to avoid paying taxes, but I do want to keep as much of my savings as I can since I'd like to stay off welfare :o) in my old age -- and I don't really know how long those funds will have to last.

However, since I have dividends and capital gains dumped into my money market as they are paid, it's likely that I would mostly be living off of taxable accounts by default - since I (so far) never touch the money market funds in the IRA).

Does any of this make sense?

AM
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Chris:

I am still young enough that RMD (required minimum distributions - for us TLA-challenged folks (TLA===three letter acronym))aren't much of a problem yet. I will be watching carefully when they become an issue.

ox6o74:

The spreadsheet sounds interesting. Is it something that others could use - after you have scrubbed your data out of it? Tell us more about the logic used and what assumptions you made.
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You can project all you want into the future, and figure out the best withdrawal format for yourself.

Unfortunately, the tax code and rates, and who knows what Congress will do on SS, make it very difficult to get answers that are valid for years.

I take my interest income, cap gains distributions, and dividend income and spend it each year - that is 60-70% of my annual needs.

Every now and then, one of my stocks gets bought out..this year, the TXU vanished into thin air- so I got a chunk of change that I can either invest, put in mad money account, or use to re-balance.

Likely I'll stick in in a short term CD.....need to buy new car in a 12-18 month time frame - so that is what I'll use it for.

In the past, when a stock was bought out ( I have about 30 in my portfolio) - I either used it for annual expenses, stuck it in a MMF fund (as good an interest rate as CDs for the past few years), or used it to buy diversified assets, or some specific stocks that I am willing to bet are going up significantly.

Otherwise, I don't touch the main part of my investments - It would cost me a fair amount in taxes to do so, as 80% of my assets are not tax deferred. The IRA/401K started too late for me to sock away a lot of cash, and been retired going on 9 years.

t.
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Likely I'll stick in in a short term CD.....need to buy new car in a 12-18 month time frame - so that is what I'll use it for.

----------------------

How do you know that you will need a new car in 12 to 18 months?
(Or, are you using "need" when you should be saying "want"?)

It's a good, legitimate question.
Car buying is such a mystery.

AM
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AM: "How do you know that you will need a new car in 12 to 18 months?
(Or, are you using "need" when you should be saying "want"?)

It's a good, legitimate question.
Car buying is such a mystery."

The current car has 168,000 miles on it and is 7 years old. I put about 25,000 to 30,000 on it - it is the road car. It is a 2001.

I already rebuilt the transmission at 153,000 miles and $2500. I figure by 200,000 miles it will be time to trade it in....too many other things likely to go wrong, and it just isn't going to make a reliable vehicle after about that many miles. Original water pump, alternator. Tires good to 200K miles or so...maybe 220K.

Gone through 1 battery, 2 sets of new tires, and not much else, other than the transmission repair. changed the spark plugs at 100K miles. The left rear power window died a year ago. The right rear power window died a month ago. That seems to be the weak point in the car - crappy power window mechanisms.

I suppose I could run it past 200K miles - but I don't have to!......and I don't want to start seeing lots of failures while out in the boonies all over the country.

At the current rate of miles being put on the car, I'll be ready for new wheels in 12 to 18 months. By then it should be at 200,000 miles. It's a 2001 Buick LeSabre.

The around town car is a 2007 Prius. Getting 50 mpg or so.

t.
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Don't know about Cliff, but MY concern is that by the time I begin withdrawing from my IRA taxes will have risen significantly -- or at least enough that I will end up with less money than if I take a small amount from each type account (taxable and IRA) when I start withdrawing.

••
Does any of this make sense?



yes.

the tricky thing about models is you can't predict the future and there's only so much detail you can put in until it isn't worth the trouble anymore.


...my model says the higher your average tax rate, the more dramatic the difference (mo' better to drain the TA before TDA) ..but doesn't look at 'what-if' tax rate is X for a yrs, then Y for b yrs then Z for c yrs then ...


=
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The spreadsheet sounds interesting. Is it something that others could use - after you have scrubbed your data out of it? Tell us more about the logic used and what assumptions you made.

i made it VERY simple. arguably too simple.

..no personal info

assume
equal amounts in TA and TDA;
average tax rate
conservative earnings (same on each)
annual expense.

three 'scenarios' .. draw expenses from TA, from TDA, 50% from each

look at total remaining after 35 yrs.

i *think* what's decisive is you have to withdraw much more from a TDA to make a given expense (eg if tax rate is 25%, you need to withdraw $32K from TDA to get 24K to live on)

i ignore (but wouldn't be tough to add) inflation on expenses .. just think of 'earnings' as 'real earnings'
i ignore (would be too difficult to add) changes to tax rates
i ignore (semi-difficult to add) RMDs
i ignore ....other stuff i'm not even aware of.



-j
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The current car has 168,000 miles on it and is 7 years old. I put about 25,000 to 30,000 on it - it is the road car. It is a 2001.

I already rebuilt the transmission at 153,000 miles and $2500. I figure by 200,000 miles it will be time to trade it in....too many other things likely to go wrong, and it just isn't going to make a reliable vehicle after about that many miles. Original water pump, alternator. Tires good to 200K miles or so...maybe 220K.

Gone through 1 battery, 2 sets of new tires, and not much else, other than the transmission repair. changed the spark plugs at 100K miles. The left rear power window died a year ago. The right rear power window died a month ago. That seems to be the weak point in the car - crappy power window mechanisms.

I suppose I could run it past 200K miles - but I don't have to!......and I don't want to start seeing lots of failures while out in the boonies all over the country.

At the current rate of miles being put on the car, I'll be ready for new wheels in 12 to 18 months. By then it should be at 200,000 miles. It's a 2001 Buick LeSabre.

The around town car is a 2007 Prius. Getting 50 mpg or so.

t.
--------------------------------


Wow! Sounds like you really DO need a new car.
Also sounds like you put a lot of miles per year on it.
Lots more than we put on ours, that's for sure.
Our old BMW (1984 325e) finally died. Really died. In Tacoma. :)
AngelSpouse just gave it to the guy who hauled it away.

AM
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iirc ... AM and Cliff were unconvinced (don't recall why)

Don't know about Cliff, but MY concern is that by the time I begin withdrawing from my IRA taxes will have risen significantly -- or at least enough that I will end up with less money than if I take a small amount from each type account (taxable and IRA) when I start withdrawing.

I see an advantage to withdrawing at a low (15%) tax rate and roling into a Roth IRA - no taxes ever.

But otoh, I like the 15% tax bracket so much I want to use all of it. May not be able to in the future - Who noze what congress may do next year?

cliff
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I see an advantage to withdrawing at a low (15%) tax rate and roling into a Roth IRA - no taxes ever.


hadn't thought of that.

Worth looking into.

the rules for who and how much and what can go into a Roth confuse me.


But otoh, I like the 15% tax bracket so much I want to use all of it. May not be able to in the future - Who noze what congress may do next year?


next year ...nothing. it's an election year

then following year ....Hoo Noze (as you say)


-
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I see an advantage to withdrawing at a low (15%) tax rate and roling into a Roth IRA - no taxes ever.



for Example .....

Note. If the amount on line 12 is more than the amount on line 13 and you have other income or loss items,
such as social security income or passive activity losses, that are subject to AGI-based phaseouts, you can
refigure your AGI solely for the purpose of figuring your modified AGI for Roth IRA purposes. When figuring your
modified AGI for conversion purposes, refigure your AGI without taking into account any income from
conversions or minimum required distributions from IRAs. (If you receive social security benefits, use Worksheet
1 in Appendix B to refigure your AGI.) Then go to list item 2 above under Modified AGI or line 3 above in
Worksheet 2-1 to refigure your modified AGI. If you do not have other income or loss items subject to AGI-based
phaseouts, your modified adjusted gross income for Roth IRA purposes is the amount on line 12 above.
...from IRS Pub 590, "IRAs"
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Back again!

Thanks for all the input. ox6a74 - thanks for the thoughts on a spreadsheet. I need to develop one for myself. It seemed that someone would have worked out a generalized answer. They all start with "It depends on ... "

My instincts suggest that avoiding paying taxes as long as possible is the best route. I agree that the Congress will muck things up eventually to pay for current stupidity. A good friend once said: "Render unto Caesar that which is Caesar's - and NOT A PENNY MORE!!" I have followed that advice for years and will continue.

By the way, did anyone notice that my earlier comment on portfolio balance added up to 105%. I mistyped and sent it before I checked my arithmetic.

Cheers

DTDTDTDT
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Thanks for all the input. ox6a74 - thanks for the thoughts on a spreadsheet. I need to develop one for myself. It seemed that someone would have worked out a generalized answer. They all start with "It depends on ... "


yup.......



My instincts suggest that avoiding paying taxes as long as possible is the best route. I agree that the Congress will muck things up eventually to pay for current stupidity. A good friend once said: "Render unto Caesar that which is Caesar's - and NOT A PENNY MORE!!" I have followed that advice for years and will continue.


sometimes that leads to less than optimal.

[ story -- i used to work for a law firm that did Muni Bonds ..Mom asked, "what's a Muni?" i splained and she said, "no taxes! i should move all my money to Munis!!" "nope. not necessarily. Depends on .." took me forever to explain why they can be good but they can be bad ]


=
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Yes, I had some muni funds in the early 80's when they were paying 11.75% but inflation was near that level too. It worked out OK for a while until the interest rates started falling and the bonds were called. I sold some above face-value and was paid out on the rest.

Part of a portfolio isn't bad but a foundation no! I have used S&P Index funds as the base with some individual stocks, money market funds, etc.

The quote indicates to the required taxes but to pay no more than that. Careful reading of the rules and claiming all deductions and exemptions that were legally available is the basis.

DTDTDTDT
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I'm baAAAck!!!

I purchased the book suggested in the earlier go-around. ("Conserving Client Portfolios During Retirement by William P. Bengen) and just finished a quick runthrough. It looks interesting. He uses actual performance from 1926 through 2004 to calculate numerous scenarios of withdrawal of funds. Short book report is that he uses a limited number of asset classes (approximately 40% large cap, 20% small cap, 30% intermediate bonds and 10% moneymarkets/T-bills as a base) to make his analysis. He shows a withdrawal rate of about 4% from a conservative portfolio should last at least 30 years. The analysis isn't too sensitive to reallocation (1 to 6 year range didn't have drastic impacts.) Analysis showed that long-term bonds were actually more risky to capital retention than intermediate bonds. The book seems to be worth the $65 plus shipping.

TO MY ORIGINAL QUESTION on the wisdom of withdrawing from taxable or tax-deferred accounts first. Bengen doesn't address it directly.

HOWEVER, in the suggested additional reading is an article written by Tracey Longo: ""The First Cut is the Cheapest" Financial Planning April 1999. The article addresses the order of withdrawal from taxable or tax-advantaged accounts.

UNFORTUNATELY, I haven't been able to find it on-line yet. I think it might be available through the magazine free but don't really want to give them all the information they want to gain access. The magazine is for the financial planning community rather than us poor civilians.

ANYONE have access??????

Inquiring minds would like to know!

Have a nice night,

Dave
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<<I also have income from two two-bedroom condos in Hawaii - one in Honolulu the other near Kailua-Kona, Hawaii. The Honolulu condo bought in 1971, the Big Island condo in 1994 during a real estate recession in the Islands.

Kahuna,CFA

>>


The usual recommendation is to avoid holding rental real estate when it's outside the area that you live. But this must have been working for you for a long time.

Perhaps you can tell us whether you think that general advice is good, and if so what the secrets of your success may have been.



Seattle Pioneer
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