Reply to Anyone else dealing with this issue of "gap years" before retirement?

Forum Index » Money and Finances

Reply to "Anyone else dealing with this issue of "gap years" before retirement? "

Subject:

Emoticons





More smilies

Text Color: Font: Close Marks

[quote=Anonymous][quote=Anonymous][quote=Anonymous]Hey guys- there is simply no issue.  You pay tax now or tax later.  [b]There is no  "tax bomb" [/b].  Money in your 401K is just money you have never paid taxes on.  The money inside your brokerage you paid taxes on it before you put it in your brokerage and you will also pay taxes on the gains.

[b]Most people will be in a lower tax bracket when they retire[/b] (let's say you take out 200K a year when you retire but make $400K now).  For the vast majority of high earners, it makes sense to shelter as much money from taxes now by putting it in your 401K so that the money can grow unencumbered.  It doesn't actually make sense to save in a brokerage until you have maxed out your 401K.  [/quote]

This is definitely not true for people who will retire with pensions and relatively large social security benefits. My family, which is two government employees with relatively modest incomes (125K and 130K), will have enough income guaranteed between the two that we'll always at least land in the 22% tax bracket.

We have also already oversaved for retirement with 700K in retirement accounts at 40 (plus an additional 160K in brokerage and high yield savings accounts). Expected growth over the next 25 years, even with very conservative growth expectations, results in more money than we'd likely spend given our relatively modest spending and large amounts of guaranteed income.

All of this literally dawned on me in the last year so we're radically changing our plans to avoid OP's situation. 
- We're doing in plan conversions in my old TSP account to get most of our money out of my Traditional TSP.* We want to minimize RMDs (and avoid paying taxes on money we're forced to withdraw but don't need), and it will be better for our kids to inherit Roth accounts. Plus having money in Roth accounts lets us retain control over the income we have in retirement and our level of taxation.** 
- We'll leave some money in my Traditional TSP because we've always been charitably inclined and we can make contributions directly from our traditional accounts. We won't have to factor charitable contributions into our retirement budget, we'll likely be able to make more generous charitable contributions, and we'll skip paying taxes entirely.
- We are saving only in my new Roth 457(b) account. 457(b) funds can be withdrawn without penalty at any age so long as you've left your employer, so it's serving as our tax free brokerage account. 
- We'll "retire" at 55 because there will be no point in working longer at the stressful and demanding jobs we currently have. We can do pro bono work, panel cases, or other work we truly enjoy if we want to keep working or if we need to earn a little bit of extra cash for extras above and beyond our normal everyday expenses. Otherwise we'll live off our cash, brokerage account, and my 457(b) account until 59½, likely fully depleting all of these accounts.
- At 59½, we'll start drawing from our retirement savings in decreasing amounts as we're able to access our pensions and social security benefits. Because we're only dependent on these funds for a short period of time, it will still be safe to withdraw more than 4%. We'll set aside the portion we need to use over the course of 10 or so years conservatively so that we don't have to worry about how the market is performing. We'll leave the rest of our retirement funds invested more aggressively for long term growth so we're not risking depleting everything.
- After we start receiving all of our guaranteed income, we'll drawn most likely less than 4% from our retirement accounts to cover any income gap, so this money will continue to grow without any risk of depletion. We will likely die with more money than we started retirement with. 
- There are still many decisions we'll play be ear in this plan as we age. Maybe it will make sense to pay off our outstanding mortgage balance 4 years early at 55 to free up more spending in our budget. Maybe we won't want to wait until 72 to take Social Security because it will be better for us to claim early and reduce the demand on our investment accounts. Maybe we won't need to claim reduced pension benefits to allow for survivor benefits because there will be enough in retirement accounts to support the remaining spouse.

*One other warning as an FYI - it can actually be hard to out-convert a Roth account. If we waited until retirement, the Traditional balance would be much higher and with compound growth, the traditional balance would like grow faster than we can pull money out and stay within the 22% marginal tax bracket and faster than we can build up money outside of our retirement account to pay the taxes for the conversions. For example, I did a conversion earlier this year when the market tanked with the Straight of Hormuz mess and I was cautious and only converted 25% (37K) of what we can afford to convert this year (around 147K). Literally the day after I did the conversion, the market rebounded and the balance grew and it's as if I had never made a conversion at all. The Traditional TSP balance was back to what it was pre-conversion.

**Being able to control your income in retirement is so important - there are actually lots of "tax bombs" lurking, especially if you have a high minimum guaranteed income through pensions and social security. If we did nothing to minimize taxes, we'd have RMDs we didn't need to take, which would force us into higher income brackets, which in turn makes more of our Social Security taxable so we pay more tax on that. Which in turn makes our IRMAA Medicare costs higher. And then when one of us dies, we lose our married filing jointly status, have to file with the lower single deduction and we wind up paying that much more in taxes. I've read so many books and learned so much over the last year that [b]I'm 100% confident that Traditional Roth contributions are a scam[/b], especially if you'll have a high minimum income from pensions, high social security payments, and other guaranteed income (RMDs, annuities, rental income, etc).

Anyways, I really like personal finance (in a different world I would have been a financial planner), and the one thing I learned from readings lots of books about all these things is that this is what a good financial planner (ie one who doesn't just handle investments) is doing for you. They are helping you to figure out what's really going on with your money, and figuring out how to help you life both plan and live a great life. If this weren't my interest/hobby, I would have kept working until 65, always worried that I wouldn't have enough because when the only thing I know is the 4% rule, I would never have enough money.[/quote]

Can you explain this more?  Are you talking about the TSP Roth option being a scam?  Is it better to only put up to the match in TSP and then invest the rest in a brokerage account?[/quote]

Options

	Disable HTML in this message
	Disable BB Code in this message
	Disable smilies in this message

Review message

Search Recent Topics Hottest Topics