Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mrs. Greece”

Welcome back to our case study series! To see the previous installments, please check out the first three parts:

Though, before we get started, I got a favor to ask: The nomination phase for the 2018 Plutus Awards is underway until September 8. Please take the time to nominate your favorite bloggers and podcasters to give them the recognition they deserve:

http://www.plutusawards.com/nominate/

You don’t have to fill out the entire form and you can nominate each blog/podcast in multiple categories. And if you like that one blog that does a lot of research on Safe Withdrawal Rates and publishes case studies for fellow FIRE enthusiasts and other fun personal finance content (wink, wink) please consider nominating it in one (or all?) of the following categories:

  • Best New Personal Finance Blog (Yes, that blog was started in 2016!)
  • Best Financial Independence/Early Retirement Blog
  • Best Investing Blog
  • Best Retirement Blog

But now back to our case study. Mrs. Greece, not her real name, not even her country of origin, contacted me a while back and wanted me to take a look at her financial situation. Here’s Mrs. Greece’s background…

We are both immigrants but from different countries. We’ve resided in the USA for 17+ years. I’m 42 and he’ll be 49 soon. We have two children (rising 6th and 3rd graders). We live in a city in one of the Southeast states (it has 5-6% income tax).

My husband is definitely a breadwinner for our family as he makes $144k (plus 15% bonus of the base salary for the last few years, but it all depends on his employer’s overall financial situation as he’s not in sales. If the company didn’t make good numbers, he would get a much lower bonus if at all). I earn a little over $60k.

Re our financial assets, they were worth $2.2M on 6/30/17. I guess, I should be jumping happily, but I don’t as it’s all on paper like some kind of mirage. The breakdown of the above number is as follows:

  • Our 401k’s – $1.12M (His $760K and mine is $360K);
  • Our Roth IRA’s – $230K;
  • Taxable accounts – $860K ($450k in 50 individual dividend blue-chip stocks, $200k in 3 mutual funds, $100K in I-Bonds, and the rest in CD’s).
  • AA stands at 78/22 today.
  • Our house is paid for and I’d estimate its value just above $200k. Since we must always have a shelter, its value is excluded from our financial assets above.

I’m lumping together CD’s and I-bonds in taxable accounts along with bond and TIPS funds in 401k to get to this 22% of bonds. I must admit that I’m quite clueless about bonds, but Mr. Bogle says one needs them so we have them. As they seem to be correlated in the same direction as equities in this bull market it’s scary to increase them though. What I’m not sure is whether it’s smart to hold a TIPS fund. I got this idea from reading financial articles and Bogleheads forums in the past.

First of all, congrats on building such an impressive portfolio. I think it would be more tax efficient to keep some of your bonds in the 401k if you have a decent low expense ratio bond fund available.

How about expenses?

Expenses have averaged $50-60k/year for the last 6 years. If we were to quit working right now, I’d assume that costs for summer camps and after school would be replaced by insurance fees, so I’d definitely keep $60-65k for this analysis.

Nice! I like how carefully you have monitored your budget and how you kept a lid on expenses despite the impressive combined salary! You definitely avoided lifestyle inflation!

I’m also curious about the analysis that excludes part-time work as well. I’d rather work in my current position for another few years than start driving for Uber at nights unless I was fired or laid off. I would be better at volunteering at a library, e.g. […] [W]e wouldn’t rule out living a few years in the EU after the kiddos finish HS just to save on the healthcare insurance. […] So…geographical arbitrage might be in the cards as well.

That’s good to know! Let’s do the analysis and find a fail-safe withdrawal rate! Though you can always use geographic arbitrage just in case!

Unless something drastically changes, the blue-chip stocks would be the last thing we would sell. Right now I sort of consider them as our inheritance for our kids. They’re on the way to generate $13k+ in dividends this year but are reinvested.

That’s one thing we can take into account, but depending on your retirement timing you might have no choice but to liquidate the taxable account with the beloved blue chip stocks to avoid having to liquidate the 401k prematurely. If that’s the case, why not buy them back in the Roth IRA and/or 401k? Remember, money is fungible!

I also ascertained the Social Security and pension payments:

  • Mrs. Greece Social Security: $1,111/month at age 67, starting in April 2042. In the simulations, I factor in a 20% haircut to account for future potential benefit cuts.
  • Mr. Greece Social Security: $2,110/month at age 67, starting in December 2035. In the simulations, I factor in a 10% haircut to account for future potential benefit cuts. (smaller haircut because Mr. Greece is older)
  • Mrs. Greece pension: $593.00/month (with 75% Joint Survivor Annuity) in May 2030. Not inflation-adjusted.
  • Mr. Greece pension: $314.70/month (with 75% Joint Survivor Annuity) in December 2023. Not inflation-adjusted.

There was the issue of whether to claim the pensions right when they become available or to defer them. Since the accruals of the pension benefits seem to be tied to a relatively low T-bill rate (same as in my own situation), I’d claim the pension at the earliest possible date.

Safe Withdrawal Rate when retiring today

Let’s plug some numbers into the Google Spreadsheet and see what kind of withdrawal rate would have been appropriate. A 78/17/5 split between stocks, bonds, CDs/cash actually seems appropriate for this situation. I will use that in the simulation. You have a very long horizon, plan for 55 years, which asks for a high stock weight. I also set a final asset target to 25% as the minimum bequest target: See results here:

Link to Google Sheet

As always, this sheet is read-only for you, so please save your own copy (Click: File -> Make a copy) if you want to change any of the assumptions.

Case Study MrsGreece SWRresults
Output from the Google Sheet to calibrate SWR.

The absolute fail-safe withdrawal rate would have been 3.76%. But that was for the 1929 cohort, and I’m pretty confident that we are not in a 1929 kind of economy today. Outside of the Great Depression the failsafe was pretty much exactly 4%, even with elevated CAPE ratios! With a $2.2m portfolio, this implies an $88,000 initial withdrawal amount (then adjusted for inflation). Even after accounting for taxes you’ll definitely hit the $65,000 consumption target.

Account Balances over time

The SWR calculation is only one part of the equation. We also have to check how the balances evolve over time to make sure you don’t afoul with the IRS due to early withdrawal penalties. Let’s check how the account balances would evolve over time when you both retire on December 31, 2017. I use the following assumptions:

  • Slowly reduce the TIPS portfolio and the CD ladder to 1x annual expenses each. Once the account sizes are right, you grow the principal by the rate of inflation so as to keep exactly 1x expenses in each account and you withdraw the remaining interest income.
  • You have to bridge about 10 years until your husband can start withdrawing from his 401k penalty-free (though there is the SEPP loophole, but we want to use that only as a last resort). Given that you have “only” about $200k in your mutual fund portfolio you will have to liquidate your beloved taxable stock portfolio as well. I assume you withdraw from both portfolios proportionately.
  • Along the way, you perform Roth conversions to max out the “tax-free bracket” (standard deductions + exemptions) plus the 10% federal income tax bracket. That’s because you expect at least a 15% federal marginal rate in retirement.
  • In 2028 you can start withdrawing from your husband’s 401k. I assume you now start reinvesting the dividends in the taxable accounts. (i.e., outflows = 0).
  • The withdrawals take into account estimates for taxes. These are my estimates which account for the state (6% flat) and federal taxes to the best of my knowledge. I then use the Excel Solver to solve for the withdrawals (shaded in yellow in the second table) to exactly match the consumption target.
  • I assume you keep a 75/25 split in the 401k and a 100% equity allocation in the Roth. Since the Roth is the last account to be tapped and it’s the most tax efficient we want this to have the highest expected return. With this, you start close to your current allocation but shift more into stocks over time. If you’re not comfortable with that, simply shift into bonds inside the Roth and/or 401k.
  • I use conservative return assumptions for equities: 5.75% for the next 10 years then slowly increasing to 7% nominal. Bond returns shift from 2% to 3.25% (nominal) over time. I assume you use a CD ladder of 1-year CDs and returns are just a little bit below the bonds.

Results:

Case Study MrsGreece Table01
Account balances over time, part 1.
Case Study MrsGreece Table02
Account balances over time, part 2.
  • You would deplete about two-thirds of the taxable stock portfolio by the time you gain access to the 401k. That might be a little bit too close for comfort. There is a risk of running out of money in the taxable accounts if the market takes a real big dive. But keep in mind that you still have the cash reserve in the CDs and bond portfolio and a large stash in the Roth IRA, where you can withdraw principal (but not capital gains) from your Roth Conversion ladder from 5+ years ago.
  • You’d do a really great job of keeping a lid on your 401k balance with this aggressive Roth Conversion ladder. When required minimum distributions (RMD) start you’ve already depleted the 401k to below $1m in exchange for a multi-million dollar Roth IRA! How cool is that?
  • Notice that despite the withdrawals you maintain and even grow the value of the portfolio even in real dollars. It moves sideways in the beginning but then starts increasing again once Social Security kicks in and the withdrawals drop!

So, both from the SWR historical simulations (4% SWR) and the account balance study it looks like you and your husband ready to retire this year!

Wait for 3 more years?

There are several reasons to delay early retirement:

  • As we saw in the calculations above you might get close to depleting all taxable accounts before your husband turns 59.5, especially if we experience a bear market before then. Sequence of return Risk! Delaying retirement and stocking the taxable accounts will clearly alleviate that problem.
  • You will avoid drawing down the “beloved” blue chip stocks.
  • From our numerous emails, it sounds like your husband is in no rush to retire and it also sounded like you haven’t planned much for what exactly you want to do once you retire. If you are not too eager to retire and you don’t really know yet what you want to retire to (we all know what we want to retire from), then it may not be a bad idea to wait a little longer.
  • You currently have only $60,000 in your two kids’ 529 college savings accounts. If your kids want to go to college and graduate school it may not be a bad idea to have some extra reserves.

So let’s do the same calculation but delay retirement by 3 years. Specifically, assume this:

  • Max out the $42,000 in annual 401k contributions. Since your husband turns 50 next year his max goes up to $24k! Also, you didn’t specify anything about company matching, so the 401k might even grow more if we add the matching.
  • $20,000 from the CDs and taxable Bonds plus an additional $30,000 savings from your income go into the after-tax mutual fund account.
  • You continue with the backdoor Roth IRA ($6,500 for your husband after age 50, $5,500 for you).
  • You can leave the beloved blue chip stocks untouched but you do withdraw the dividends to support your expenses at least for the first ten years.
  • Social Security benefits will be marginally higher: In today’s dollars, your estimated FRA benefits go up to $1,250 and your husband’s to $2,300, before the haircut.

Results:

Case Study MrsGreece Table03
Wait 3 more years: Account balances over time, part 1.
Case Study MrsGreece Table04
Wait 3 more years: Account balances over time, part 1.
  • Wow! You’ll grow your net worth to $4m+ (in today’s dollars!!!) by the time you reach age 70. One could argue that this is too conservative. You could increase your spending quite substantially! Or maybe you want to retire and you have your husband work for three more years?
  • By the time you can make the 401k distributions penalty-free you still have a close to $100k allocation of your mutual funds and two years in expenses in the CDs/bonds, in addition to the $640k reserve of individual stocks.
  • Also, notice the impressive growth of the Roth IRA which is never even used for any withdrawals. That’s a nice size extra cushion in case of health expenses. Or for sending the kids to medical school, all expenses paid!
  • One little fly in the ointment: You have a pretty massive stash in the 401k. Even when using the 401k for funding your expenses after 2028, you will have a $1m+ 401k. It looks like you keep the withdrawals high enough to satisfy the RMD rules, but depending on the actual asset returns, you have to monitor this and make sure you make the necessary RMDs. If you have to withdraw more than you need simply invest the money in the taxable account or keep a bigger cash cushion. Too much money in a 401k, it’s a good problem to have, isn’t it?

Social Security Hacking?

Currently, I assume you both retire at age 67 at your full retirement age. Considering that you’re a bit younger and your husband has substantially higher expected Social Security benefits you could do what we are likely going to do in the ERN household. If that’s still permitted in the future:

  • The wife takes benefits at age 62, or whatever is the earliest possible date. Benefits are 30% lower than under FRA.
  • The husband waits until age 70 and takes the maximum benefits, to boost benefits by 24% over the FRA.
  • If the husband dies before the wife, then the wife has the option to receive her husband’s benefit (though, reduced if taken before her own full retirement age). This would be substantially higher than your own benefits.

Tax accounting

BTW, one big reason why I think it would be best to leave our investments in the taxable account to our children or charity is because it would let me avoid doing tax accounting on all those individual sales. We invest monthly in our mutual funds and select stocks. Those monthly amounts are small ($100-$300), so you can imagine how many transactions we have.

I have already answered that via email: This is not something to worry about. I do the lot identification and never had any problems with it. I can pick which lots I want to sell (highest cost first or lowest cost first, depending on how my tax situation looks that year). You have to list each sales transaction. But to the extent that each sale is a combination of multiple purchase tax lots you don’t have to drill further into the origin of the individual lots. As long as they are all long-term, you simply list the purchase date as “various.” My brokers (Fidelity and Interactive Brokers) are both pretty good in providing the itemized transactions that go straight to IRS form 8949.

Roth 401k?

We both max out 401k’s and Roth IRA’s (via backdoor). My husband’s workplace also offers a Roth 401k, but I think that it’s not a good option for him considering our income tax bracket. Do you agree?

Agree. Considering your current and likely future tax bracket it’s best to invest into the regular 401k. For as long as your husband works, max out his regular 401k, contribute to the regular IRA (for both of you, even if you’re already retired!) and do the backdoor Roth.

Insurance

I wonder if it would be a good idea to increase our Umbrella Insurance ($1M) or even temporary life insurance on my husband. One policy ($500K) will terminate in 10 years and another ($250k) in 15 years. The insurance through his employer will cease once he leaves the company.

Once your husband draws Social Security benefits there is the risk that if he passes away you lose a big chunk of the guaranteed CPI-adjusted income. But by then the life insurance term has expired. My suspicion is that it would be too expensive to extend the term life insurance to age 70+. Use the massive stash of money in the Roth and maybe the Social Security hacking (see above) to deal with that scenario.

$1m umbrella insurance sounds good to me!

What if the husband works until 55?

If say my husband really wants to work until 55, I will not try to change his mind. So, in this case, due to the separation from the company at 55, wouldn’t it be better to start using his 401k for our living expenses for a few years at least in order to bring its balance down (and allow taxable accounts to grow)?

Yes! There is this nice exception to the 59.5 age limit. Normally you can withdraw penalty-free at age 59.5 but if the husband stays in his job until 55 then you’re good to go with penalty-free withdrawals from his 401k. Our blogging buddy Fritz over at The Retirement Manifesto plans a similar route!

If you go this route, the Roth Conversion ladder is out the window for the next 6 years. You simply let the Roth and the two taxable accounts grow on their own and take all the money you need out of the 401k after age 55. If that’s the plan then you (Mrs. Greece) can most definitely retire now. I don’t provide the full numbers here but your net worth will accumulate even more than under the “3 more years scenario!”

Added 9/8/2017: Fill out the 15% bracket for further Roth Conversions?

You might also consider what I proposed in the case study for Rene three weeks ago: Do Roth conversions to fill out the entire(!) 15% tax bracket, see the section “A Roth Conversion Ladder?” in that post. This will be less useful if you know for sure that you’ll be in the 15% tax bracket once the RMDs start, but as a hedge against higher future tax rates and/or the risk of slipping into the 25% federal bracket, the additional Roth Conversions should be worthwhile!

Do you have an estate plan?

One thing occurred to me: With a multi-million-dollar portfolio and young children in the household, what are your plans for when the unimaginable happens: both of you pass away. My wife and I have a similar problem with a three-year-old at home. We are not comfortable with our daughter getting access to a seven figure fortune when she turns 18. A revocable trust, which will become irrevocable once the parents die, can specify that the kids will get financial support from the proceeds of the portfolio but can’t access the principal until a later age.

Conclusion

Well, it looks like you’re in an extremely good spot to retire early. Even if you were to retire at the end of the year (or today, for that matter) you should be able to sustain a pretty comfortable retirement. It sounds like you’re financially prepared to pull the plug anytime between now and certainly in three years. Go on, read more Early Retirement blogs and find the inspiration and the courage to finally pull the plug! Best of luck!

We hope you enjoyed today’s case study! Please share your comments below!

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36 thoughts on “Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mrs. Greece”

  1. Good one ERN. The Greece’s are well prepared indeed! I recently did a private financial consultation for a doctor family with similar age and not as high net worth. Still, since they have 5-8 year work horizon left, I estimated their early retirement to be rock-solid in 5 years even accounting for market vagaries. He was a happy camper! It’s a pleasure to work with well-prepared FIRE cases, isn’t it?

    Liked by 1 person

    • Thanks, TFR! Yes, especially the FIRE planners that are a little bit older (40s/50s) usually underestimate the impact of pensions and Social Security on the SWR. You can definitely go to 4% SWR and be still very secure!
      Cheers!
      ERN

      Like

  2. Would you elaborate on/explain your opinion that he should contribute to a regular 401k, not a Roth 401k, because of his salary? Please include the basics as I’m neither a finance professional nor a math wiz. Thanks!

    Liked by 1 person

    • Great question! My estimate is that the Greece’s are in the 25% federal tax bracket today. They will be in the 15% bracket in retirement. $1 of pre-tax income translates into $0.69 (1-0.25-0.06) in a Roth 401k. You multiply that by some (cumulative) rate of return R and you get R times 0.69 when you retire. In a 401k you keep the $1, this grows to R times 1.00 in retirement before tax and 0.79 times R after tax. So, regardless of how returns evolve during the next 10 or so years, the Greece’s will have about 14% more after-tax money in retirement (0.79/0.69-1=14.5%).
      In other words, as long as the retirement marginal tax stays below today’s marginal rate it’s better to do the regular 401k. Sure, taxes might go up but not by 10 percentage points. No politician would impose that kind of tax hike on the middle class!

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      • We must be in 25% or higher. Isn’t AMT assessed at 26%? When I do our taxes, I also check if we might need to fill out Form 6251 (??) for AMT. So far we haven’t needed to do it which makes me think that we must be above 26% or something. I’d need to sit down one time and learn how one’s tax bracket are marginal tax rate are determined and how they impact planning for retirement, but I always lose interest in that after I’m done with the tax filing for the IRS and the state every year. My spouse has no interest whatsoever in this kind of stuff though I’d be happy to discuss it.

        Liked by 1 person

        • Probably you’re in the 25% bracket. If you don’t file AMT. If you do the AMT your marginal rate is likely higher: 26% times 1.25 (due to a quirk with a phaseout of an exemption in the AMT.
          One way to check if you’re using a tax preparation software (Turbotax, TaxAct, etc.): Run the calculation twice, once with your actual data and once with an additional $1,000 of, say, interest income. See if the federal tax liability goes up by $250 or $280 (=28% bracket) or $325 (AMT 26% times 1.25).

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          • Ahh, so I’ve got it backwards. I’ll pay more attention to our numbers when I report our taxes next spring. Our tax reporting is still very simple that we don’t use TT or TaxAct. However, I’ve heard that people can play on their online tax tools for free, so I’ll need to run our numbers when I’m in mood for that.

            I’ve been using Free Fill Forms for the federal and the state’s tax forms go by snail mail. Yeah, I know people think that it’s probably too cheap, but I like to see what lines numbers are reported on and how taxes “flow” in general. I don’t get that clarity on TT. OTOH, I obviously miscalculated (in my mind) AMT tax bracket in my comment. I do remember that I was within a few dollars of needing to file 6251 form for 2016 and I blamed the gov’t indexed AMT exemption. Hence, having less money in CD’s this year (some was diverted to the blue-chips).

            Liked by 1 person

  3. Love reading this one. Lots of parallels to our story. We also have been having good discussions using your series # 7 Google doc sheet. So helpful as we work through our planning. I was joking to Mrs PIE that we need to send you an anonymous case history – from Mr and Mrs. Pastry. Oh crap, then it would not be anonymous….!

    Keep publishing the case histories. They are invaluable!!

    Liked by 1 person

  4. Hi,
    This is Mrs. Greece of this case study. Love the picture which brought my memories of that country back again. I’ll visit Greece again not in the far future.
    Big ERN, thank you so much for taking my case! I appreciate your work on it. Everything is clearly presented, though I will want to play with your spreadsheets some more now.
    It’s a great relief to see confirmed that financially we’re all set even if we wished to retire today. I imagined that would be fine, but I never had hard numbers in an Excel file.

    Yes, I am considering the SS hacking like you describe if it’s available in 20 years. I’d like to confirm that I understand correctly. I’d take *my SS* at 62, and my husband doesn’t take until 70. When my husband claims his SS at 70, I’d request to switch me to the 50% of my husband’s SS. Is that correct?

    I’m curious about your thoughts in regards to increasing my husband’s contribution to his 401k once next year to include the catch-up. Is it because we’d save on our taxes plus ‘money is fungible’ once we retire? I was kind of considering to use the $6k for taxable investments.

    I don’t know how I missed it but my husband gets 10% match to his 401k because the pension accruals have been discontinued. My match is teeny tiny :-(.

    We have a revocable trust as well. Most of the assets are changed to the trust’s name except for a brokerage account at Capital One because it doesn’t offer trust accounts. We’ll have to do something about this account. When I asked Capital, they said they’d charge a fee (quite big, but I don’t recall it now) for each stock holding to move to Vanguard. But somebody on the Internet said that one can move the whole account from one broker to another without fees. Have anyone heard if it’s true and how to do it? Ideally, we’d like to move the joint account to Vanguard brokerage, and then Vanguard would change/convert that account to a trust account. If I cannot do it this way, then we’ll either have to pay a fee for each stock to have all moved or wait until we’re retired and in the 15% tax bracket to sell stocks and re-buy them at Vanguard or other brokerage.

    In general, we would like to work a few more years to boost retirement and college savings but I’m glad to know we should be OK even if we got laid off today. My employer is doing some kind of transformation and the management is quiet. However, one rumor is that once the systems are changed, the higher-up people will start re-arranging departments, human capital, etc. So, I’d say my job is safe for a year and then we shall see. At least I don’t need to panic. If it happened, I’d be an Uber mom for my kids LOL for a while. However, I do agree with your suggestion to explore what I’d like to retire *to*. I haven’t done a thorough thinking about that. I’ll have to read more about that and gather some ideas.

    Thank you again. You did a fantastic job and I’m grateful. I’ll save it in my files and see how all works out ;-).

    Mrs. Greece

    Liked by 1 person

    • Oh, great, I’m so glad you liked it!
      Yes, that’s how we plan the Social Security hacking, too!
      About the 401k: You’d have to pick between $6k extra in the 401k or (1-tax)*6000=probably $4,140in the taxable account. If you are afraid that in retirement you will eventually fall into the 25% bracket, then you might as well do the Roth 401k. In other words, if you haven’t yet maxed out the 401k the Roth 401k is preferable over the taxable account. At least the Roth will never be taxed.
      About the Capital One account: Yes, both routes you suggest will work. I would try the route of moving the whole account. In kind to avoid realizing capital gains. Second best option is what you suggested: leave account where it is. In retirement slowly sell off all shares as long as you’re in the 0% bracket for cap gains (=capital gains harvesting) and either use for living expenses or reinvest at Vanguard. In the unlikely case where you both die before you have shifted everything, your will should specify what happens with assets outside of the trust. Or even easier: set the trust as the beneficiary. The trust would still pay the transfer fee but that would be only in the unlikely event that you both die before you moved the account away from Capital One through capital gains harvesting.
      About retirement timing: In a way, a layoff would be even better for you financially. You’ll likely get a severance package and you can claim unemployment benefits. You probably don’t want to quit on your own until the uncertainty is resolved. 🙂
      Best of luck

      Like

  5. Big ERN,
    I’m glad to hear that your opinion confirms my thoughts. I’m definitely planning to stick with the company for a good year. There will be some challenges like learning the new system on top of doing my usual work, but that will keep my brain busy and I will learn a new skill (for just in case). I’m also actually curious to stay and see what happens in the future. I’d be totally happy if I was offered a layoff.

    Yes, I think I’m slowly starting to come around to do an extra $6k for my husband’s 401k. Savings in lower taxes sounds better than $100-$150 in dividends which will be taxed at 15% anyway.

    I’ll have to check beneficiaries on our Capital One. I think that the trust gets everything in case both of us die together, but I’ll have to double check.

    One last question after rereading the case. This is from the subsection “What if the husband works until 55?”
    You said:

    Why do you think the Roth Conversion is off the table? I think, in addition to taking money from his 401k for our living expenses only, there might be some money left over up to the top of the 15% tax bracket that could be taken out from the same 401k and converted to the Roth IRA. It wouldn’t be a big amount to convert and might be not worth the hassle to do it, but I would like to find out your thinking process on this. If people had left over money after withdrawing money from his/her 401k for living expenses, they could convert it to the Roth IRA for 15 years (leave company at 55, and RMD’s start at age of 70). There would be a lot of Roth IRA ladders as they all would have their own 5-year clocks. The question would be if it’s safer to open a separate Roth IRA account for each or can it all be done in the same Roth account.
    Well, first we need to hope that the backdoor Roth and Roth conversions are not ‘killed’ in the tax reform.

    Thank you.

    Like

    • Great!
      Regarding the Roth Conversion out the window, sorry, that was misleading. I meant it’s out the window for the next 6 years. Since you start withdrawing from the 401k five years earlier than otherwise, it’s possible that overaccumulation in the 401k becomes less of a problem. I wrote about the merits of maxing out the entire 15% bracket in the case study three weeks ago. I also added another section in this post: “Added 9/8/2017: Fill out the 15% bracket for further Roth Conversions?”

      Like

    • Oh, yes, you are right. She gets 100% of the husband’s. The 50% ratio is relevant only both spouses are alive and lower benefit spouse has the option to either take her/his own or 50% of the higher earning spouse. Good catch! That was misleading the way I wrote it initially!

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  6. Ryrroc, thank you for this important note, but can you help me understand it, please? Would this mean that I could claim his 100% SS benefit if my husband passed away after I had reached 67 only? What happens to this SS benefit if he dies before I’m 67? Is there a way/loophole to switch to the higher benefit in case I’m already receiving some kind of SS benefit?
    SS intricacies make my head spin so I don’t really read anything about SS. I have 20 years at the minimum before I can contact the SS anyway (unless we have an untimely death/disability before then, which I hope won’t happen).

    Thank you.

    Liked by 1 person

  7. I just found out about your blog through the ChooseFI podcast. I really enjoyed your interview. Love the blog.

    I’m curious to pick your brain about geographic arbitrage. Where are you thinking to retire to?

    Liked by 1 person

  8. I’m 100% with you, and I’ll up you a hyperlink.

    I lived in Seattle for 4 years (technically Mukilteo, 30 miles North of Seattle. Beautiful community. Very affluent. Zero state income tax. The further away from Seattle you go, the cheaper. On my short list of retirement destinations is Bellingham, WA just a few miles South of the Canadian border. I’ve also heard lots of good things about Sequim, WA, which is located on the Olympic peninsula and is in a rain shadow of the Olympic mountains, resulting in unusually high amounts of sunshine. Eastern WA also looks appealing (Spokane).

    WY is on my list for obvious reasons. Pretty much the ideal tax haven. Problem: No Costco’s in the state. Prettiest part: Jackson Hole. But Jackson is expensive.

    Carson City NV is on my list due to accessibility to Tahoe, 0 state income tax, very reasonably priced homes & property tax.

    TN is another beautiful state with a very favorable tax regime.

    I need to be by mountains. And preferably Costco. And preferably a good library system.

    Check out these links. This website is fantastic for educating yourself pretty intimately on the total tax burden of each state. The tax burden maps at the bottom of each page are pretty informative. You can input wages, # dependents, etc. and it will estimate total tax burden much like TaxCaster.
    https://smartasset.com/taxes/washington-tax-calculator
    https://smartasset.com/taxes/nevada-tax-calculator
    https://smartasset.com/taxes/wyoming-tax-calculator

    Colorado has a reasonable tax burden. Reasonable max marginal rates and very reasonable property taxes. CO Springs is on my list.

    You’re a quant guy like myself so I thought I’d pick your brain and share my thoughts.

    Like

    • Oh wow, thanks for sharing the links! You rock! I realize I forgot to include Colorado and Tennessee. Good point!
      I had the exact thoughts on Wyoming: Very beautiful, but so remote. The closest Costcos are in Idaho or Montana, depending on where you settle in WY. That’s a big minus! When do you plan to move? We are moving to the new location early next year. If everything goes well!
      Cheers,
      ERN

      Like

      • We are considering the same thing in the next year. But we live in TX now which people consider cheap but has really high property taxes, especially if you want a decent school system.

        Finding good schools, affordable housing, reasonable property taxes, and manageable income taxes has been a challenge.

        wa
        WA, TN, NC, WY, and CO are on our list but I’d love to find a place to crowd source more specifics, especially about the meeting the education constraint.

        Liked by 1 person

        • I agree entirely on crowdsourcing this thing, which is why I am reaching out to this group of high octane individuals.

          I’ve recently started spending a lot more time on the Bogleheads forum. It’s fantastic and full of brilliant people. If you search their forums you’ll find many threads on the topic.

          But I believe there has to be a better way of crowdsourcing this.

          Tweedie Gam, what are the specific educational requirements? Good K-12? Good in-state university ecosystem? All of the above?

          Liked by 1 person

          • Good k12 primarily. Young kid. We can adapt or pay for college and I generally prefer kids have some guided Independence in college but I would not be opposed to some sweet in-state tuition.

            I tried replying yesterday but it didn’t show about TN, which we like, but that Hall tax could make ER expensive unless they really phase it out as promised. Not sure how they so their funding without it though.

            Liked by 1 person

      • I’m several years behind you, but I like to daydream. Currently located in high tax (low COL otherwise) flyover country. I spent 12 years in college doing BS in engineering, MBA, PhD. My earnings were basically zero for that time period, but we’re saving >$150k/year now in mid 30s, most of that tax deferred. Current net worth is $430k. We live on around $50k currently but will be substantially less with lower property taxes (currently $8k) + 5 kids moving out some day. We could probably live on $20-25k ignoring health insurance.

        We’re planning on roth conversion ladder for 0/10/15% brackets + 0% LTCG/Div when the time comes. GoCurryCracker is my hero, as he first exposed me to the concept of Roth Ladder.

        I’ve also learned a lot through the transparency of the financial statements of Justin @ Root of Good.

        Given that you’re a spreadsheet nerd like me, you may find some of my spreadsheets interesting: http://www.frugalprofessor.com/excel-tools/. I marvel at how hard it is to calculate one’s effective marginal tax (after accounting for AMT, etc) rate so I spent some time developing a tax planning spreadsheet. My current federal marginal tax rate is 37.5% thanks to AMT. Add in a 7% at state level + 1.45% medicare = 46% total. Another shows how I track my finances in a disciplined way (income statement, balance sheet, statement of cash flows). I learned this type of modeling in my MBA when doing valuation modeling of firms. But I believe it is perfect for one’s own personal finances. I love the disciplining mechanism of balancing the financial statements to perfectly account for all cash flows. If I make an error, it shows up as a discrepancy between my statement of cash flows and my change in cash in the balance sheet. If everyone had their own detailed financial statements, I think it could be a game changer.

        I love learning from smart people. Keep up the great work.

        Liked by 1 person

  9. Frugal Professor,

    Thank you for sharing your knowledge about the geographical arbitrage in the USA. We’ll be considering this in quite a few years (in Medicare years). We might need to make one of the tax-free states as our new residence state before going to Europe first, though our state at ~6% is not bad. After seeing traffic and commute craziness in NYC and Philadelphia a few weeks ago, it made me change my attitude about my city and hope we’ll be OK until the kids finish schools here despite the traffic/commute conditions getting worse.
    I’ll be curious to check your Excel files as well ;-).
    P.S. I hope to find some expatriate forum or blogs that shed some light about various taxes, estate questions in Europe.

    Liked by 1 person

  10. This article is also helpful for us that are yet to retire. It is better to over-estimate expenses and life expectancy. This will ensure that one prepares adequately for the old age expenses when one will not be able to go back to work. Your article is very enlightening. Cheers!

    Liked by 1 person

    • I also remember when I came to this country with nothing but two big suitcases and my savings worth much, much less than $50k. I didn’t complain. I kept working hard to accumulate assets. It may take a while but if I made it so should you. Hang in there!

      Like

  11. Astrid,
    Yes, the beginning is very SLOW and hard. I agree that seeing somebody else’s numbers this high (from your perspective) might seem discouraging, but you have to begin somewhere and not to give up. If you listen to people that “I don’t have enough money, so why bother at all”, you’ll never achieve your goal. E.g. people in the USA have had smartphones for the last 8-10 years and we have had none. I’ll probably have to buy in a year or two once the kids get older, but I doubt I’ll jump on the iPhone wagon. If I mention that I don’t have a smartphone, people look at me like I’m an dumb alien or something.

    But yes, I’ll have to agree if lets say a family of 4 makes $50-100k pre-tax it can be tough depending which part of the country they live. There are 3 major variables for the middle class, IMO: good income, low expenses, and good health.

    Like

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