Tag: Roth Conversion

How much can we earn in retirement without paying federal income taxes?

Update 11/22/2019: After I published a shorter version of this piece on MarketWatch and the story was picked up by YahooFinance as well I got a lot more readers! Thanks and welcome to my blog! Make sure you subscribe to be notified of future blog posts! Both on Yahoo and MarketWatch I saw the expected assortment of hate comments. They fall into two categories, see below plus my response:

  • “I’m a CPA and this doesn’t make any sense!” My response: You’re either not a CPA at all or you’re a really bad & incompetent one. The standard deduction and the 0% bracket for capital gains are all very well-known in the financial/tax planner community. The same goes for the taxability worksheet for Social Security.
  • “How unfair that you retired already and don’t pay taxes while I’m working so hard and pay a lot of taxes!” My response: I hear ya! I’ve paid a ton of taxes throughout my work life. A seven-figure sum, more than most people pay over their entire lifetime. Keep that in mind if you complain about the unfairness of the U.S. federal tax system!

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The question “how much can we earn without paying federal income taxes” is relatively easy to answer for most people. The standard deduction for a married couple is $24,400 in 2019 (if both are under 65 years old) and the top of the no-tax bracket for capital gains is $78,750. So, we can make a total of $103,150 per year, provided that our ordinary income stays below the standard deduction and the rest (2nd bracket + any leftover from the std. deduction) comes from long-term capital gains and/or qualified dividends. With our daughter, we also qualify for the child tax credit ($2,000 p.a.), so we could actually generate another $13,333 per year in dividends or capital gains, taxed at a 15% so that the tax liability of $2,000 exactly offsets the tax credit for a zero federal tax bill.

Once people file for Social Security benefits, though, things become a bit more complicated. That’s due to the convoluted formula used to determine how much of your Social Security is counted as taxable income, see last week’s blog post! So, calculating and plotting the tax-free income limits is a tad more complicated. Oh, and talking about tax planning in retirement: as promised, I will also go through an update on the Roth Conversion strategy for the Becky and Stephen case study from two weeks ago.

Let’s get started…

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Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mr. and Mrs. Shirts”

Welcome to the 10th episode of our Case Study Series! Today’s case study is for Mr. and Mrs. Shirts. They run their own blog Stop Ironing Shirts and I encourage everyone to head over and check out their outstanding work. Mr. Shirts and his wife face a dilemma; they have already amassed a pretty impressive nest egg, probably large enough to retire later this year. But the temptation to work a little longer to cash in that next financial milestone around the corner (bonus, vesting date, etc.) is a pretty strong incentive to stay onboard for just a little bit longer. Otherwise known as the One More Year Syndrome. In fact, in the Shirt’s case, it’s only nine months (June 2018 vs. March 2019). So, what are the tradeoffs, what are the pros and cons of retiring in 2018 vs 2019? Let’s look at the details…

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

It’s time for another Safe Withdrawal Rate case study today! Believe it or not, but this is already the ninth installment of the series! Check out the other case studies here. Today’s volunteer is Mrs. Wanderlust (not her real name), a frequent reader of the ERN blog. She and her husband plan to retire in 2018 (more or less voluntarily) and asked me to run their numbers. One challenge in pinning down a safe withdrawal rate: large additional cash flows because they plan to purchase of an RV and then sell it a few years later. They will also have different budgets during different phases in retirement. And not to forget, a four-legged family member that’s factored into their planning. So without further ado, let’s start calculating…

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Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mr. Corporate Refugee”

Welcome! It’s time for another Safe Withdrawal Rate case study! Please click here for the other seven installments. Today’s volunteer is “Mr. Corporate Refugee,” not his real name, obviously. But as the name suggests he is ready to pull the plug on the corporate grind. He and his wife did everything right to prepare for early retirement. Pay off the mortgage on their house (as recommended by yours truly) and accumulate a nice nest egg close to seven figures. The only problem: they reside in a high-cost-of-living area in California and more than half of their net worth is tied up in their primary residence. Even a portfolio as large as $1 million will likely not be sufficient to cover expenses in your current location. What to do now? I’ll propose two routes to early retirement. Move to a cheaper location, a “secret” low-income-tax paradise – more on that below, and be able to retire now. Or work for only four more years and retire in the current location. Let’s go through the math…

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Ask Big Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI”

Welcome to a new installment of our “Ask Big Ern” series with case studies on safe withdrawal calculations. This is already the seventh part, see here for the other parts of the series! Today’s volunteer is Ms. Almost FI and that’s not her real name, of course. She’s planning to retire early in 2019 and this causes a lot of anxiety: Does she have enough money? When should she take her pensions? What about long-term care insurance? All very valid questions, all impossible to answer without a careful customized analysis! Continue reading “Ask Big Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI”” →

Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mr. Corporate”

Welcome to the sixth installment of our “Ask Big Ern” series where I perform case studies in safe withdrawal calculations. See here for the other parts of the series.

Let’s make this Geographic Arbitrage Week because after Monday’s guest post on “Geographic Arbitrage,” I will now feature a case study with the same theme! Meet Mr. Corporate (not his real name) who reached out a while ago for advice on whether he’s ready to leave the corporate life. Just looking at his numbers I knew immediately that there is no way he and his wife can retire in their current location. But Mr. C found that moving to another country with lower living expenses will cut years off the time it takes to reach FIRE. And we’re talking about a country in Europe (he wouldn’t mention which one), with a high quality of life, nice climate, and a good healthcare system! Can he retire now? Let’s look at Mr. C.’s numbers…

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