quote:

Originally posted by konata88:
Nuance but if I have a T-bill bond fund in my 401k, would this be subject to federal taxes? Is it only directly held T-bills that would be exempt or would a T-bill fund be exempt as well? I'm guessing non-exempt with my luck.

Every penny you withdraw from your 401k is taxable income.

quote:

Regarding bonds, I learned the hard way to avoid bond funds. They can vary in value just like any other etf or mutual fund! As the interest rates change, existing bond values change. Bonds held to maturity guarantee you no loss as long as the issuer isn't bankrupt. So, I buy T-Bills and hold them to maturity. Thus I don't care if they vary in value along the way - I get my interest and I get back my investment.

As part of 401k, I only have access to bond funds (ie - the T-bill bond fund I'm using). To do as you suggest, are you recommending to reduce my 401k contributes to just the equity mix and then use post-tax wages to buy T-bill direct? Or is 401k bond fund better in the absence of pre-tax direct purchase options?

quote:

Originally posted by Fly-Sig:
Every penny you withdraw from your 401k is taxable income.

To the kiplinger link above: 401k is taxable income from the federal tax perspective. From the state tax perspective, it depends on the state, correct?

2 million? So I can have 4 girls at the same time?

I'm 66 and retired at 62. Most advice I read was 2 to 3 million, which I think is meant to frighten people into investing. It's probably a worst case projection. Long life with lots of health issues.

Don’t look at what you make today, look at what you take home. I retired at 61, have VA medical as a disabled Vet. Living comfortably in theory making half of what I made while working. My 401k is not in the millions by any means, and I’m not drawing from it right now, but plan on a draw for a nice vacation.

I also have everything paid off, which was key to my retirement.

I’ll be about 8k a month plus 401k at 51, of course I can’t pull retirement until appropriate age. Given my desires I’d rather retire at 51 on 8k a month than work until 65 for 12k a month. I’d rather enjoy more time. And my enjoyment doesn’t cost much. Couple cows, some chickens, reload, a little cabin. That doesn’t cost 8k a month. And if I want to take a year contact at 225k, I can do that whenever I want so long as my clearance is still active. Maybe I do that 1 out of 5 years.

ETA: at 52 I’ll have free healthcare for life.

As long as you’re comfortable with the finances, and can cover medical, I say enjoy your retirement as soon as you can.

I do plan on working to 67 for SS full retirement age. We have a couple of house projects we need to complete before sale, and I'd rather do that while I'm still making bank. My wife will be 64 and 6 months, and has been collecting a pension for a couple of years which we invest, though she is still working.

Social Security between us is projected to be about $7300 a month then. We'll use her pension to cover the last several months of health care.

We will be relocating from Colorado to the Blue Ridge Mountains, exact location is undecided.

Great discussion, and surfaced things to look at, and some advantages.

quote:

Originally posted by konata88:

quote:

Originally posted by Fly-Sig:
Every penny you withdraw from your 401k is taxable income.

To the kiplinger link above: 401k is taxable income from the federal tax perspective. From the state tax perspective, it depends on the state, correct?

Correct. Some states do and some don't tax retirement account withdrawals.

quote:

Originally posted by scratchy:
Social Security between us is projected to be about $7300 a month then.

So in a couple years, you're going to have:

No debt
$2M+ in retirement savings
$87k/year from SS
Plus a pension?

Then yeah, you're going to be just fine. I'd venture to say you're in better shape than 99% of retirees. With all those factors, I'm honestly surprised you're even creating a thread like this.

I'm nervous. Leaving the work force truly scares the hell out of me. After my 1st divorce, the child support, temp alimony and job loss made me homeless for a little while, living in my van. The effects never wore off.

I was also laid off at 58 and managed to land a software engineering management job. That has not made me less nervous about leaving the work force.

quote:

Originally posted by konata88:


As part of 401k, I only have access to bond funds (ie - the T-bill bond fund I'm using). To do as you suggest, are you recommending to reduce my 401k contributes to just the equity mix and then use post-tax wages to buy T-bill direct? Or is 401k bond fund better in the absence of pre-tax direct purchase options?

Always get the full company match. Roth to the max, and even maximize Roth conversions.

Roth conversions are taxed today but grow tax free and all withdrawals are tax free. The math says the only difference in the final bottom line is your tax rate today vs the future tax rate were you to leave it in your 401k. (it is more complicated in that future taxable income determines your medicare costs, which can be a huge penalty, like $70k, if you go $1 over the limit, plus future taxable income dan cause SS to be more heavily taxed). The simple guess is if you expect a similar spend in retirement to today, your taxes will be the same as today if you withdraw from a 401k as your primary source.

Once retired, more Roth and less 401k is way better. The tradeoff is the current day tax penalty. If you think tax rates are likely to be higher in the future, paying taxes today is better.

T-bill interest is taxable when the bill matures, which is of course 1 yr or less from purchase. So T-bills in your regular brokerage account get taxed now.

So it all depends on your current income and taxes vs your future situation. That includes state taxes.

There are additional factors that also weigh in favor of the Roth IRA for most folks.

Like no required distributions later in life (unlike a 401k or Traditional IRA).

And the fact that you can withdraw your Roth IRA contributions at any age, penalty free. (Though that's not usually a smart move, outside of a dire financial emergency, since doing so can hamstring your future returns.)

Plus, as mentioned earlier in the thread and alluded to in your post, Roth IRA withdrawals don't count towards income in retirement. This not only helps with stuff like Medicare costs and taxes on SS, but also helps with getting cheaper subsidized marketplace insurance if you or your spouse retires before reaching Medicare eligibility, or qualifying for certain other programs that have income limits.

Plus, let's be honest... Does anyone expect taxes to go down between now and whenever you retire? No, they're almost certain to go up. Especially if you're like me and looking at 25ish years before retirement.

Sigh, late in the game be sounds like I need to learn about Roth and Roth conversions. Where to start? Some finance book from Prime?

quote:

Originally posted by konata88:
Sigh, late in the game be sounds like I need to learn about Roth and Roth conversions. Where to start? Some finance book from Prime?

Roth regular contribution limits https://www.schwab.com/ira/rot.../contribution-limits

If you have a regular brokerage account at Schwab, Fidelity, etc, their website should have information, and you can talk on the phone with them.

A Roth conversion is taking money out of your traditional retirement account and putting it into a Roth account. So it is money beyond the limits in the above link. As a withdrawal it becomes taxable income, so you pay taxes now. If you have the savings elsewhere to pay those taxes, you can roll the entire withdrawal into to Roth (the best long term results), or you can pay the taxes out of the withdrawal and put the remainder into the Roth.

https://www.investopedia.com/r...ersion-rules-4770480

The 5 year rule is important. You must have the Roth established for 5 years before withdrawing money. It has some further details depending on your age.

quote:

Originally posted by scratchy:
I'm nervous. Leaving the work force truly scares the hell out of me. After my 1st divorce, the child support, temp alimony and job loss made me homeless for a little while, living in my van. The effects never wore off.

I was also laid off at 58 and managed to land a software engineering management job. That has not made me less nervous about leaving the work force.

I turn 55 this year, last week I went to another friends funeral who died at 62 (and was only retired for 2 years). Killed in a head on collision. The older I get, the more people I know die. Retire and enjoy what you have saved, stop worrying. Death comes quicker than most people realize.

quote:

Originally posted by LoboGunLeather:


In the OP's case, wife will have 3 years before qualifying for MediCare, so medical insurance will be a concern during the interim (actually it will always be, but once we hit 65 Medicare is mandatory and serves in a primary role). If the OP's policy provides spousal coverage this could already be dealt with; otherwise OP may be shopping for a policy which will not be inexpensive for a 62-year old spouse......

Having to buy medical insurance for 7 years out of pocket was my biggest hurdle to retire at 58. It cost me $2,500 per month (over 10 years ago) just for medical insurance and it wasn't even that good of coverage.

quote:

Originally posted by Fly-Sig:

quote:

Originally posted by konata88:
Sigh, late in the game be sounds like I need to learn about Roth and Roth conversions. Where to start? Some finance book from Prime?

Roth regular contribution limits https://www.schwab.com/ira/rot.../contribution-limits

If you have a regular brokerage account at Schwab, Fidelity, etc, their website should have information, and you can talk on the phone with them.

A Roth conversion is taking money out of your traditional retirement account and putting it into a Roth account. So it is money beyond the limits in the above link. As a withdrawal it becomes taxable income, so you pay taxes now. If you have the savings elsewhere to pay those taxes, you can roll the entire withdrawal into to Roth (the best long term results), or you can pay the taxes out of the withdrawal and put the remainder into the Roth.

https://www.investopedia.com/r...ersion-rules-4770480

The 5 year rule is important. You must have the Roth established for 5 years before withdrawing money. It has some further details depending on your age.

Thanks! I'll look into it. May be too late for me (5 year) as I'm approaching retirement now. But may be okay - just partial conversion from 401k to Roth; use the 401k for at least 5 years. Use Roth in the RMD years.... May be stupid; I need to look into Roth, pros/cons vs 401k, why to use Roth and what to convert from 401k, if any.

Not stupid. That'd be one way to do it.

Also keep in mind the 5 Year Rule is by tax year. It's not 5 years from the day of conversion. So if you were to convert to a Roth IRA between now and December 31st, your clock would start on January 1st, 2024 with the 2024 tax year, and then your 5 years will be up and those Roth funds able to be fully accessed without that penalty starting on on January 1st, 2029 with the 2029 tax year.

Just remember that your 401k is pre-tax money, and the Roth IRA is funded with post-tax money. So if you were to roll your entire 401k into a Roth all at once, you'll be on the hook for a bunch of income tax that year. You'll want to talk to a tax advisor or retirement advisor about the best way to roll over into a Roth to hopefully avoid that huge tax bill all at once.

You may be able to do partial/gradual rollovers each year from your 401k into a Roth, but not all 401ks allow this. If you're limited to just a one time lump sum rollover from your 401k, you may need to do an intermediate step like rolling over your 401k into a Traditional IRA (also pre-tax), and then gradually rolling some money from the IRA over into a Roth IRA each year during the early years of your retirement.

Your situation and timing seems very similar to mine, and I've certainly been more mindful in planning in recent years. Not just the saving, but planning for mechanics of how the spending side goes, budgets, down-the-road assets and security of residual. With that wanted to add a couple observations other than my useless initial take.

A couple mentions of the "4% rule" and how it applies. Others have mentioned this. In my studies I believe the modeling that shows statistically that would put you on track contemplate the 4% being initial year withdrawal, but not holding to that as amount or % going forward. IOW, that percentage is presumed to go up over time to offset inflation and other changing costs. Only tapping 4% each year to death is pretty conservative and would likely leave you with the same or more invested at death. If that is an objective great, but like many have posted I am not looking to leave a huge estate for my kids at the expense of me doing things we want in the next 10-30 years of life.

In my modeling, I'm assuming a withdrawal rate of 3.5% year one, 1.5% increases in SS, which may be low early one but of course the stability of that program into 2050s is suspect. That coupled with an assumed 3.5% rate of inflation and average returns of 4.5% after retiring sees me with essentially the same invested balance at age 80, but in order to keep the inflation-adjusted total combined inflows the same I'll be pulling out ~7.5-8% of invested balance at that time.

Even with that, still have runway to age 93 with about 50% of starting balance on hand, which is what leaves some security for unplanned expenses or some assurance of not being a financial burden on our kids.

I think you mentioned having your house paid off as well. I think it's important to look at combined assets in modeling, and in our case assuming a 2% annual increase in value there (again, conservative as it's a lake home in very desirable location) we end up with approximately the same combined assets at age 93 as at age 64. IOW, the house functions as a serious insurance policy if we have really significant expenses later on.

On the Roth front, I've seen tons of forecasts and modeling for how this reduces the overall tax burden in future years. However early on it was evident that the timeline for this to make a big difference is far down the road. While I like planning to live to 90+ from a don't-burden-others standpoint, I don't like taking the risk of making that tax gamble early on and kicking off at 75. Sure the Roth distributions to heirs is tax free, but while IRAs are taxable to them as withdrawn they should still end up with more total in a tax deferred growth model. I think. This is still something I'm working through.

Also, in my modeling described earlier, the increased amounts we already PLAN to withdraw are very close to the RMD amounts, so no benefit there.

Taxation - some states actually do exempt IRA distributions from SIT, which is a big deal. MS does, for example, but the state we are headed to does not, other than the first $9K or so. Big whoop.

As you plan for your net income targets you do have to take into account FIT and SIT, but try to get a handle on more precisely what that will look like. In many cases, the overall effective rate for FIT may be less than you think. I'm forecasting 12% based on current rates, of course that could go up.

As you get closer you also need to look at which assets you tap first (generally after tax investments rather than tax deferred) and the timing of those. Doing some "bunching" of sales to minimize or eliminate capital gains is a powerful tool, and can make a difference.

I'm sure there's more, I've rambled on enough!

OH - one last thing on timing that we've had in plans and I've gotten a couple close friends to follow. The window to retire for most folks is fully open at age 63.5 since at that time, if you are covered by an employer health plan, you can quit, elect COBRA and pay reasonable premiums for decent to good coverage until Medicare kicks in.

And speaking of Medicare, do NOT miss the deadlines for initial enrollment or, IMHO, fall for the shiny Mcare alternative plans. Much discussion here in other threads on that.

quote:

Originally posted by RogueJSK:
Whereas you don't need anywhere near $2M to retire to the rural South.

This, too, is a broad overgeneralization. It really is about having a clear vision of your individual budget, plans and needs.