Spread-sheeting your way to Financial contentment…

Like most of you, I’m a spreadsheet junkie, and I love nothing better than to open one up and redo my financial calculations. I could spend hours doing “what ifs” with our finances (and I often do). What I find fascinating is that there hasn’t really been a good software packaged developed, that I know of, which covers all the variables that you now have to consider.

It used to be that the way you “drew down” your retirement money was fairly straightforward. You took out your taxable money first (investment accounts, etc.) in order to let your tax-deferred (401K/IRA) and tax-free (Roth) money compound. Then you take out your tax-deferred money, especially if you have a Required Minimum Distribution, and that money gets taxed as you are pulling it out (often driving you into a higher tax bracket). Finally, if needed, you pull out your tax-free money (Roth) last, as this money can easily be passed on to your heirs tax free.

It’s a simple, linear process, and most retirement calculators follow it (or something like it). However, with the new school of thought, the idea is to minimize taxes across the life of the retirement.

  • You would do Roth IRA conversions to shift money from taxable to tax-free accounts – up to a point (see next point)
  • Once retired, you would immediately begin drawing from your 401K up to the point where you have to pay taxes ($24K as of 2018 taxes) – so that would be still be tax free.
  • You try to withdraw from 401K earlier, so when you hit the time for RMDs (required minimum distribution) of these accounts, you still are only pulling out what is under the cap for tax-free
  • You would want some money to stay in your 401K/IRA tax-deferred accounts, as you can deduct the first $24K each year. Don’t convert it all to Roth
  • You defer or take your social security early, based again on the need to defer/reduce taxes and maximize overall income.
  • If you’ve retired early, keep your taxable income low, to take advantage of government subsidies on health insurance.
  • You can use other forms (insurance, etc.) if you want to further complicate your retirement plan

I don’t know of any software application available at this time which takes into account all of these complicated factors. Often you have to do the calculations year-by-year, due to stock market fluctuations, life changes, etc. Thus, you end up coming back to the “good old spreadsheet” to do your calculations.

I do my investment update at the beginning of each month (ex. May 1, today) and connected to that spreadsheet is my “retire now” sheet:

  • Current investment amounts for each bucket (taxable, tax-deferred, tax free)
  • Budget for retirement, including expected medical costs, expenses based on current actuals, etc.
  • Investment growth, based on inflation-adjusted numbers
  • Expected social security payments (currently I have Mrs. 39 Months pulling at age 62, and me getting ½ of the expected payout at age 67, due to issues with Social Security trust fund)
  • Annual draw down, based on budget, growth, and pulling from designated buckets.

As of now, if I assume Social Security is solvent (at least to the extent that I get half my benefits starting at age 67) then we could retire now, and still end up with about $500K (in current $) remaining at age 99. This is with paying almost no taxes for age 56 to age 67.

To get back to the original point, I think this might be an opportunity here. To create a software system which allows for all the other variables not currently being used and/or considered.

What do you think?

Mr. 39 Months

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