It’s still a long time before I need to withdraw from my retirement accounts, nonetheless, I still want to have a rough game plan.
Roth IRA – Can be passed down to heirs. So logically, I’d want to spend these the last and hopefully, there’s leftover at the end. And it does not require withdrawals until after death.
Traditional IRA (59.5, 70.5) – There’s the required minimum distribution (RMD) age of 70.5 for this account. So I’d like to convert part or all IRA money to Roth during my low tax years without paying any taxes on them. To avoid or limit the tax,
- Either to perform Roth IRA Conversions in amounts that do not push AGI above the top limit of one’s tax bracket. E.g., a couple filing jointly with $50,000 ($17,851- $72,500 falls under 15% tax rate) of AGI would have been able to add $22,500 of income from a Roth conversion and still pay just 15% of that amount, or $3,375, in additional federal tax and state tax on the additional income. If they had wanted to convert more than that amount, they would have had to pay 25% in federal taxes and state assessment.
- Or wait until AGI is below $17,850 to be able to pay $0 tax when doing Roth IRA conversion?
401(K) (59.5, 70.5) – I contributed the highest amount possible to my 401(K) plan while working for a big Fortune 100 corporation because I didn’t want to be a bag lady in my old age. I rolled over most of my 401(K) to IRAs, but I still have some leftover money in the plan, which I’ll just let it do its thing passively. I like to diversify my eggs as well as the baskets that hold them. The RMD age for this account is 70.5.
Pension (55, 65) – I’m lucky to have a pension from a Fortune 100 company, albeit it’s not a huge one. I’m positive that I will not start withdrawing from it at age 55. I’d like to wait until age 65 so that I’ll have $1,300+ per month, which will require a nest egg of $321,000+ to generate at 5%. This year, my pension plan offered former employees the opportunity of rolling the pension over to an IRA, but I declined at this time. One reason is that I’d like to keep things diversified; the other reason is that I believe my pension is cost-of-living adjusted, which will require an expert without charging the exorbitant fees to manage to get the same return. I’m too cheap to pay. And I don’t think I’m a master at investing yet. Once I’m satisfied with my investment result, I may roll my pension over in the future. Here’s an article from Scott Burns that touched on some other perspectives regarding pension.
SS (62, 67, & 70.5) – I’m lucky if SS is still around when I need it. I may want to conduct a break-even analysis to find out when is the best time to start withdrawing money. It doesn’t matter whether you’ll get 75% at age 62, 100% at age 67, or 132% at age 70.5, once you reach age 83 to 85, the total money you’ll have gotten is about the same regardless when you started withdrawing it. So I can just simply start tapping into it ASAP at 62 before it’s depleted and shutdown. Scott Burns recently wrote an article on the reasons to defer it. The RMD age for this account is 70.5. The amount of SS payment per month is calculated as follows: The first $346K in lifetime earning are weighted at 90% and the next $1,744 million in lifetime earnings are weighted at the much lower rate of 32%. Since I have earned way more than $346K, I’ll at least get $743 per month from SS payment ($346k / 420 months (35 years) * 90% weighting = $743). Plus the rest that’s weighted at 32%. The max one can get from SS is $2,687 per month for 2017.
Here’s an article on how to maximize SS benefit. Regarding spousal SS, it states that a woman who has reached her full retirement age (67) can file a restricted application to claim spousal benefits. This application lets her receive spousal benefits while allowing her own Social Security benefits to grow until the monthly amount maxes out at age 70. Then, she can switch to her own benefits at that point. This option is not available to those who choose to receive spousal benefits before their full retirement age. So restricted application allows one’s own SS to accumulate for 3 more years at 8% while claiming spousal SS at full retirement age. But the file-and-suspend trick might go away in the year 2016. Per ssa.gov, a spouse can choose to retire as early as age 62, but doing so may result in a benefit as little as 32.5 percent of the worker’s primary insurance amount. This article gives examples of the effect of when to take spousal SS. Here’s a start-stop-start strategy, it mentions that one of the spouses to file for retirement benefits at 62. The other spouse would do nothing. Then, at age 67, the spouse who had filed at 62 would suspend benefits, allowing them to grow by 8% a year until age 70. The spouse who had done nothing could then claim a spousal benefit at age 67 and, at age 70, switch over to his or her own retirement benefit.
Pension and SS will be paid to me for as long as I live. While they are being paid, I will receive cost-of-living adjustments each year. Fortunately, I can lead a simple life and enjoy it, so I don’t anticipate I’d need too much each month to live. Maybe pension and SS will cover all the needs.
Annuity – I’m looking into this right now. The post-tax annuity has no RMD. However, one can only withdraw after 59½ years old without paying penalty. Money invested in an annuity grows tax-deferred. Earnings are taxed at regular income tax rate. If you cash out a deferred annuity in a lump sum, then you’ll have to pay income taxes on all of the earnings higher than your contribution. When you receive your monthly payment, part of the payment is considered a return of previously taxed principal with no tax consequences. The remaining part of your payment (determined by a formula) is considered earnings and is taxed as ordinary income. At death, an annuity payable during your life tends to wrap up, with nothing passing to your heirs. With a year certain annuity, if you die before the term expires, any remaining payments will be paid to your beneficiary and taxed accordingly. Choices for an annuity: life or years certain, fixed or variable, deferred or immediate. Annuities often carry high commissions. Up to 10% can be paid in fees to the insurance company. Furthermore, the fees on a variable annuity can often rise to 1.25% or more. Also, there are surrender charges for the disbursement of the annuity before the intended date. These fees can range from 7-20% and typically decrease by 1% every year thereafter.
The low fee version of annuity is called no-load annuity, a type of variable annuity, which has no withdraw surrender penalty fee. However, you still need to pay taxes and penalties on the withdrawal of any tax-deferred earnings if you’re under age 59½, per vanguard website. So you could, in theory, withdraw all principals without incurring any penalty.
Medicare (65) – Technically, this is not one of my retirement accounts, but it definitely will affect my financial health. It includes Doctors’ visits, hospitalizations, and medication costs. It excludes nursing homes or in-home care. These can be covered by long-term care insurance. I hope I can lead an independent life without these cares.
For all accounts that have RMD, the required amount increases every year based on the distribution period. For 71 years old, the distribution period is 26.5, 75 years old it’s 22.9, 80 years old, the distribution period is 18.7, 90 years old, the distribution period is 11.4, 100 years old, the distribution period is 6.3. E.g., At age 71, supposedly you have 1,000,000 in all the accounts on 12/31 of last year, 1,000,000 / 26.5 = 37,735.85, that’s how much you need to withdraw. At age 75, supposedly you have 1,000,000 in all the accounts on 12/31 of last year, 1,000,000 / 22.9 = 43,668.12, that’s how much you need to withdraw. You can withdraw the RMD amount from a single account. If you don’t withdraw any money or the RMD, you’ll be fined by 50% on the amount that you didn’t withdraw.