Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

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Topic Author
ZMonet
Posts: 259
Joined: Sun Dec 15, 2019 1:43 pm

Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

Post by ZMonet »

As my wife and I approach 50, I'm starting to wonder whether: (1) we are still saving efficiently (tax-deferred, taxable, Roth) given the pension income we will have starting at 60; and (2) with viability as the only factor (we realize there is much more to it), should we consider retiring in the next 5 to 8 years?

Current yearly investments: (approx. $150k/year -- 401k $67k, $48k taxable account, $14k Roth IRA, $20k mega backdoor Roth)

DEBT ($200k left on mortgage at 2.25%)

ASSETS w/ asset allocation around 80% stocks/20% bonds
  • ~$2 million in 401K
    ~$1 million in Vanguard brokerage account
    ~$500k Roth Accounts
    ~$50k cash
    ~$30K in EE bonds
  • ~$600k home equity
    ~$300k in 529 for one 13-year-old child
Pensions: 3 Pensions, which, if we retired in 5 years, would pay out approx. $134,000 in today's dollars (these are largely inflation protected) at 60
Social Security: Mine at 62 -- about $28k; Wife at 70 -- around $48k (obviously, these are subject to reduction as new laws dictate)

Health care post-retirement: subsidized by employer at current rate and eligible for Tri-care at age 60.

Spending: Currently around $150k/year (not including income taxes) but includes $35k for private school. College hopefully will be covered by 529s. We might travel a bit more during the go-go years, so let's keep spending at $150k/year.

I've learned a ton from Bogleheads and am just now starting to read up on things like IRMA and being pushed into a high tax bracket because of RMDs (a good problem to have, admittedly). How I can try and minimize those issues I'm still trying to figure out...I suppose if we retired at around 55 then we could do around five years of Roth conversions but after that, I think we're extremely limited. So back to the questions:
(1) What can we do to be more tax efficient, now and going forward?
(2) Is working past around 55 make little sense since our spending will largely be covered by pensions at 60 (with a cushion once SS kicks in at 62 and 70)?

Thanks in advance for your thoughts!
Last edited by ZMonet on Sat Feb 04, 2023 9:46 pm, edited 1 time in total.
Fairfox
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Joined: Fri Dec 30, 2022 6:11 am

Re: Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

Post by Fairfox »

Short answer is that I think you are fine to retire as soon as your pension gets up to the level you’d like (e.g. 5 years). You only need to bridge a few years to 60 when it kicks in and covers most of your spending. With a substantial taxable balance, plus Roth contributions, to carry you for a few years, you will arrive at 60 with most of your costs covered by pension, supplemented by SS, and access to $2.5M more tax-advantaged assets (plus your additional contributions and growth between now and then).

Eegarding tax efficiency, you might consider keeping a bit more in taxable instead of pre-tax accounts just to make the bridge between retirement and 59.5 smoother.

You’re in great shape — congrats!

You could consider putting your info into MaxiFi planner and see what it says about your sustainable spending levels with different retirement dates (and thus different pension amounts and bridge lengths to 59.5.)
Topic Author
ZMonet
Posts: 259
Joined: Sun Dec 15, 2019 1:43 pm

Re: Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

Post by ZMonet »

Thanks, Fairfox! Appreciate the input. I'll check out MaxiFi Planner and play around with the data.
GP813
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Joined: Wed Dec 11, 2019 9:11 am

Re: Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

Post by GP813 »

Your numbers are great $150k for future spending and you'll have $210K coming in with Pensions/Social Security by age 70 plus the social safety-net of Medicare on top of other medical coverage. You already have $3.5 million in investment accounts and 5-8 years for the balance to grow, even now with a 80/20 mix you're probably generating $63k-70K just in dividends and interest.

What exactly are you worried about?
Topic Author
ZMonet
Posts: 259
Joined: Sun Dec 15, 2019 1:43 pm

Re: Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

Post by ZMonet »

GP813 wrote: Fri Feb 03, 2023 12:24 pm What exactly are you worried about?
I'm not sure...something that I am missing. I alluded to reading about IRMAA here and things like that, which I never heard of, which makes me wonder if there are big holes in our plan. Also, taxes...I realize that the higher the expenses, the greater percentage of taxes we will need to pay. Maybe I'm looking to micro and as long as the bigger picture is in order (e.g., health care, hobbies, money in accounts with different tax treatment, etc.) If that is the case, should we consider retiring sooner, like when first eligible in 3 years (numbers would be a little different, but not substantially so)?
GP813
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Re: Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

Post by GP813 »

ZMonet wrote: Fri Feb 03, 2023 2:41 pm
GP813 wrote: Fri Feb 03, 2023 12:24 pm What exactly are you worried about?
I'm not sure...something that I am missing. I alluded to reading about IRMAA here and things like that, which I never heard of, which makes me wonder if there are big holes in our plan. Also, taxes...I realize that the higher the expenses, the greater percentage of taxes we will need to pay. Maybe I'm looking to micro and as long as the bigger picture is in order (e.g., health care, hobbies, money in accounts with different tax treatment, etc.) If that is the case, should we consider retiring sooner, like when first eligible in 3 years (numbers would be a little different, but not substantially so)?
New Retirement is pretty good software that let's you build your portfolio and model certain events like retiring early, taxes, Roth conversions. This might be worth looking into. You have more than enough but it terms of maximizing tax efficiency you would need to model that with professional advice or learn more to DIY and even then you're making a prediction today for a tax code than can change later.

https://www.newretirement.com/
Topic Author
ZMonet
Posts: 259
Joined: Sun Dec 15, 2019 1:43 pm

Re: Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

Post by ZMonet »

Is there anything we should be doing now and retirement to lessen the RMD tax hit? If we did conversions, up to what bracket should we consider? Thanks!
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Watty
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Re: Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

Post by Watty »

ZMonet wrote: Sat Feb 04, 2023 11:27 am Is there anything we should be doing now and retirement to lessen the RMD tax hit? If we did conversions, up to what bracket should we consider? Thanks!
With the pensions and two million in retirement accounts already it you can likely spend more on things like travel now instead of waiting for later.

Even though your mortgage rate is pretty low I would even look at getting that paid off especially if you have less than ten years left on it. Once it it paid off your income needs will be less and you may manage to be in a lower tax bracket.
Florida Orange
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Re: Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

Post by Florida Orange »

From a purely financial point of view, I don't see any need for you to keep working past about age 55. I can't think of anything you could do to be more tax efficient.
printer86
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Joined: Mon Apr 25, 2016 8:45 am

Re: Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

Post by printer86 »

Your child will inherit a lot of money. Congratulations on some great savings (and a nice pension and healthcare) over the years.
Topic Author
ZMonet
Posts: 259
Joined: Sun Dec 15, 2019 1:43 pm

Re: Retirement/Tax Efficiency Check-Up -- Planning for Retirement in 5 - 8 Years

Post by ZMonet »

Thanks for everyone's input. Much appreciated. I've read so many posts where the OP's retirement plan gets torn to shreds that it made me think I would experience the same. As we get closer to pulling the trigger and the numbers harden a bit, we'll see if I get the same response. Thanks again!

EDIT TO OP: I see that I didn't make clear that the pensions don't kick in until we are 60, so there will be five years where we need to fill the gap, but I doubt that changes the assessment much.
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