My last post, I covered the traditional way to withdraw upon reaching retirement (all your taxable, then all your tax deferred, and finally, all your tax-free spending. In the end, I was left with $1.1M in my Roth IRA.
I also did the analysis with a withdrawal rate of $84,000/year (of which 8,500 if Fed/State taxes). This works out to $75,500 if I manage to avoid any taxes whatever – based on the guidelines of “the power of zero”. In addition, if I keep my income around $24K (the exemption for married) my medical subsidies will reduce my medical costs by an estimated $7.166/year. So I’m going to assume a withdrawal rate of 68,500 to keep the same lifestyle as my previous withdrawal – again provided I can keep my revenue at $24K for the year.
In order to make this work, I would need to use money in my investment account over the next two years to shift $200,000 from my Tax-Deferred bucket, into my Tax-free bucket (using my investment account to pay the taxes. If I do this, at my FIRE date (21 months from now) I should have the following assets:
- Taxable bucket: $302,358 (including $156,689 in deferred that I will have just paid the taxes on)
- Tax-Deferred: $518,578
- Tax-Free: $505,627
So, unless being spent, the items listed will grow at 5.24%.
- Year 2020 (6 months): Pulling $42K out of Tax-Deferred account (Pop’s IRA). Taxable, but I just got hit with a lot of taxes for my Deferred.
- Year 2021-2024: Withdraw minimum from Pop’s IRA (a little over $4K) and enough from Mrs. 39 months IRA to hit the $24K (allowance for IRS with no taxes) and remainder from Taxable bucket. This allows us to pay $0 in tax and minimal for insurance, due to subsidies
- Year 2025-2026: Mrs. 39 Months starts collecting Soc. Security, which alters some stuff. Continue to pull minimum distribution from Pop’s IRA (starting to climb to $5K and $6K), finished depleting our taxable bucket, while reducing money from our tax-deferred bucket to keep total under the $32K minimum for tax-free. Will need to start pulling some from our Tax-Free Roth to make up for lower Tax-Deferred money
- Year 2027-2028: Mrs. 39 Months goes on Medicare. Assuming medical costs increase about $4500. Continue to take minimum from Tax-Deferred to keep Soc Security under $32K point where we’d have to pay taxes on it. Still Tax free 8 years after retirement.
- Year 2029-2031: Mr. 39 Months goes on Medicare. Assume medical costs climb to our final number, so our withdrawal has to be $75,500/year (adjusted for inflation). Still able to pay no taxes by withdrawing minimums from Tax-Deferred and supplementing with Tax-free Roth.
- Year 2032: Mr. 39 Months begins taking Soc. Security at age 67. However, I’m going to assume that, due to issues with Soc. Security, I am going to assume that I am only going to get half of what I will get (i.e. 50% cut in benefits), so that works out to $16,908/year. So, each year roughly $30K in Soc. Additional funds out of Tax-Deferred and Tax-Free, but I’m going to be past the “don’t pay taxes on Soc Sec – now taxed at 50% of them. Assume income requirements go up to $77K
- Year 2033-On. RMDs and Social Security force me into higher tax brackets, meaning I’m set at $78500. Mix of Tax-Deferred and Tax-Free withdrawals keep me in good shape.
- Year 2062: I hit 97 and Mrs. 39 Months hits 99. We have roughly $924K in Roth IRA, and $192K in Tax-Deferred IRA, for a total of $1.16M.
This is more than we had under scenario 1. This also doesn’t touch our “emergency fund” or house money – which I think of as our backup money in case of major disaster. If this tells me anything, it’s that I should look to shift more than $200k from our Tax-Deferred money, so that we can possibly keep our taxes lower once we start taking our Social Security.
Again, issues with this are that it shows that I could have taken out more and “lived a little more” in my years. In addition, I kept the $9K in medical spending stable, which might not really be accurate. However, I ended up not paying much in taxes over much of the early part of the retirement.
I think the next step here is to do this study, assuming no social security, and see where that hits.
Mr. 39 Months