- Withdrawal amount after taking into account taxes
- Effect of revenue on social security
- Effect of revenue on medical subsidies
As you remember from my review, the book breaks your funding down to three buckets:
- Taxable bucket (savings accounts, CDs, brokerage accounts, etc.)
- Tax-deferred bucket (401Ks, IRAs, etc.)
- Tax-Free bucket (Roth IRAs, LIRPs, etc.)
The way I chose to do my analysis is as follows:
- Identify specific FIRE date to start. This is controversial, in that it is committing me to “retire”, not just hit FI, but keep working
- Determine the amount of money I would have in each bucket at that time
- Estimate growth of investments while taking out inflation from growth, tax rates, etc.
- Determine withdrawal strategy for the two options and apply
- Determine a time frame for investments. I am going to assume Mrs. 39 Months and I live till we are 99/97.
- Determine if plan will enable us to survive
When going through our budget for retirement, I came up with a spend of $65,104/year, which included $8,892 for medical (insurance, co-pays, deductibles, etc.). Tack on $5,615 for state & local taxes, and I’m coming up with $70,719/year. For the basis of this analysis, I’m going to use $66K/year for expenses (again, I will adjust out for inflation) and $5K for taxes – bringing total to $71K. Just to be “extravagant”, I’m going to assume a spend of $84,000/year. Based on current tax rate and allowances, this would have me paying about $8,500 in taxes (Fed & State).
For investment returns, I’m going to assume 70% stocks (6.8% returns after inflation) and 30% bonds (1.6% returns after inflation) for a blended return rate of 5.24%.
At my FIRE date (21 months from now) I should have the following assets:
- Taxable bucket: $364,030 (including $156,689 in deferred that I will have just paid the taxes on)
- Tax-Deferred: $729,284
- Tax-Free: $294,922
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 & 2022: Withdraw $63.5K from Taxable bucket & $6K from Pop’s IRA. Pay reduced taxes because Deferred account already paid for them in 2020
- Year 2023: Withdraw final $45,448 from Deferred, $6K from Pop’s IRA, and $18,052 from Taxable bucket (investments). Again, paying reduced taxes because Deferred account and investments already paid, or income small enough for Cap Gains
- Year 2024: Pull $63.5K from Investments, $6K from Pop’s IRA. Reduced Taxes
- Year 2025: Pull Final $3K from Investments, $14K for wife’s Soc Security, and $76K from Pop’s IRA. Wife’s Soc Security pays full taxes on 85% because Pop’s IRA is treated as regular income. Since I am over the ACA limit, my medical costs jump up from $8.8K to $19.4K (ouch!)
- Year 2026: Pull final $27K from Pop’s IRA and $14K from Soc. Security. Begin drawing down Tax Deferred IRA money ($54.5K). Again, over ACA limit, so high medical. Not taking Mr. 39 Month’s Soc Security at this time.
- Year 2027: Mrs. 39 Months starts getting medicare, so medical costs drop to about $13.2K (overall revenue needed drops to $89,364/year). Pull $75.5K from Tax Deferred IRA and $14K from SS. Now left with $713K in Tax-Deferred and $430K in Roth IRA.
- Year 2028-2031: Continue pulling all money from Tax-Deferred Pulling $70-$75K and $14K from Wife’s IRA. All of this is taxable. At 65, Mr. 39 Months converts to Medicare and costs drop
- Year 2032-2045: 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. Security and $41K from Tax-Deferred accounts. All of this is taxable.
- Year 2046: Tax-Deferred IRA runs out of money, and have to switch to Roght IRA. At this time, Roth has about $1.02M in it, so the 5.24% return rate will cover this out till we pass away.
So based on that, my excel chart came in at roughly $1,102,346 remaining in my Roth IRA (all of which I could pass on to my heirs tax free). Not bad, though 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. This also assumes the tax rates stay the same in the years ahead (a big “if”).
Tune in next time when I take the “Power of Zero” lessons and try to do even better.
Mr. 39 Months