2nd Year Anniversary

The end of July effectively marks my the completion of my second year of retirement. I retired having some idea of where I was going but no finely thought out plan. I knew the size of my portfolio, the risk of my portfolio, the expected reward. I really didn’t know my cost of living, so I started with an assumption of 10K/mo, about half of what my portfolio supposedly would support. It was a pretty good estimate but actually a little generous. My actual spending came in at about 9K/mo on the average.

I devised a method using Mint to accurately track my expenses. I also stress tested my budget to find out what tightening my belt actually felt like. Armed with real budget data and real variability data, I could then project what my need would be in full retirement. I look at my retirement in terms of epochs. Each epoch has it’s job to fulfill in my financial life. Prior to retirement was accumulation split into 2 sub epochs pretax savings and brokerage account savings. I maxed out my pretax to about age 50 and then realized what I was doing was maxing out my tax bill in old age. I had a brokerage and began aggressively funding the brokerage. I knew I had to move some money from TIRA to Roth to save myself from progressive taxation and living off brokerage money turned into cash was just he ticket. I also was fortunate to Tax Loss Harvest which helped my tax bill come Roth conversion time.

Epoch 2 was to retire. I completed my last SS payments, rustled up some health insurance, I was on Medicare the family on Liberty Healthshare, and said goodbye to my medical career. Epoch 3 was to map out a plan for Roth conversion, with the goal of converting the most TIRA at the least taxes. Epoch 4 was coming to understand how to optimize my portfolio. As I worked through the Roth conversions. I came to see partial Roth conversion was a more efficient model. In this epoch I subdivided my portfolio according to what I expected from each account type in retirement. I owned Brokerage, TIRA, Roth, Cash, Tax Loss Harvest and at age 70 I will claim SS. Each of these had their own tax treatment so I optimized along tax guidelines to minimize taxes as time passes in epoch 4 and this will further extend to epochs 5 and 6.

The brokerage mixed with tax loss harvest is the source of cash to live on while Roth converting and the money to pay the taxes of conversion. The TIRA provides funds to convert into the Roth. I discovered that leaving myself a small TIRA (500K) was most efficient. The small TIRA will contain money in stocks and bonds in a 20/80 ratio, which will have slow steady and controlled growth. I will let it go to RMD and the TIRA will act like an inflation adjusted annuity, throwing off a couple K/mo basically forever (at least till I’m dead and my wife is dead). My second source of income will be SS, first my wife will claim, then I will claim we will use it together and then upon my death she will claim survivor benefits. Topping of my income will be a little from the brokerage about a 2% WR or less. This setup will keep me in the 12% bracket for 15-20 years. The Roth provides insurance. It will remain closed to grow unmolested until there is an emergency. In an emergency it will fund the emergency without decimating the rest of the portfolio. Each account has it’s job protecting my future.

I analyzed how much I was going to need to live for the 20 years post full retirement using an inflation adjusted amount from my budget, which should be a fairly true estimate and it’s 2.7M inflation adjusted over 20 years. This is an important step because it ties need to reality in epoch 5. I have more than 2.7M so I have no need to over risk my portfolio. Less risk means a better chance of success. Living out those 20 years is epoch 5.

Epoch 6 happens when I die leaving my wife to fend for herself. When a spouse dies taxes can go up 2 brackets in addition to a loss of 1 deduction and part of SS income. Here is an instance where one might open the Roth. Also in the case of chronic debilitating disease the Roth serves it’s purpose as a money source. It took the better part of 2 years to make and implement this plan. This plan has a 99% chance of success despite its moving parts

Otherwise my life is full. My children fare well, my wife and I are closer than ever. I was dealt a little medical set back but am getting along in my recovery. My time is my own and there are a billion interesting things to do, including getting 8 hours sleep per day. The plan is unfolding precisely as planned. I picked a good time to retire. The economy is up as is my portfolio. The county is stable despite the news media’s insistence we are blowing up. I’m enjoying opining on his blog and others… I wouldn’t go back to work on a bet! Once optimized there’s nothing left to do but live a good life. Despite all my missives, hi jinx, conversions, tax payments and 2 years of spend down, I have more today than when I retired.

Life’s been good to me so far! We’ll see what the next year holds.

8 Replies to “2nd Year Anniversary”

  1. You have come roaring back after your surgery. So nice to see that!

    Retirement sounds like it is working well for you. I think my husband will feel the same when he slows down as well. He has many varied hobbies and interests.

    Keep doing what you are doing. It is good to hear another opinion on subject matters.

  2. Congratulations on the 2 yr mark. It is a great plan you put together and it seems almost bullet proof with many fail safes.

    You have certainly provided a good outline for the rest of us to follow.

  3. Happy anniversary, Gasem! Your toddler is up on two solid legs and curious, to the terror of the financially complacent everywhere.

    The high jinks, humor and integrity were the hook – the wisdom was just an added bonus.

    A financial stress test prior to retirement should become de rigueur.

    Thanks for the gifts of critical thinking and friendship,


  4. Thank you for documenting your journey. It has helped me tremendously. One question regarding the need to set up Roth conversion ladders. I’ve read about an IRS rule stating that the converted Roth can’t be touched for 5 years. I realize it isn’t an issue for you since your maintain your Roth for emergencies only. Appreciate any insight you can offer regarding the 5 year “vesting”

    1. Hi Linda

      Saving the Roth for later depends on how much you spend, how much SS you receive, and how much you are forced to RMD. If you have a 1.5M TIRA you will be forced to spend 3.6% the first year or 54,000 and pay tax on that money. Let’s say you need 60K/yr to live. If you have 50K in SS you will be taxed on 85% or 42,500 so your net tax bill is on $92,500 of income even though you don’t need $92,500. The tax on 92,500 MFJ is 7,527. If you have a small TIRA say $400K you RMD only 15,000. Add that to .85% of SS and your taxable income is 57,500 (4250 + 15000) for a tax bill of 3,327. Your net spendable income on (SS + RMD – taxes) is 50K + 15K – 3327 or 61,673. What’s left in the TIRA continues to grow and what’s left in the Roth continues to grow. You wind up paying 5.1 cents tax on each dollar. For the 92,500K amount you wind up paying 8.1 cents on the dollar so clearly conversion saves you 3 cents tax on the dollar. You pay for 1 year of retirement and save 3 cents on the dollar tax which can continue to compound, plus the Roth money compounds tax free. That’s a lot of compounding which extends the longevity of your portfolio.

      In addition the Roth offers you protection against SOR and medical disaster so you want to let that compound undisturbed as much as possible. A growing untapped Roth reduces your overall risk, very desirable. So beside the government mandate the tax structure and portfolio efficiency mandates leaving the Roth alone. If you need to access the Roth immediately in my opinion, it’s likely you don’t have enough money to safely retire, but that’s a general statement since I don’t know your particulars.

      The extra 3 cents on the dollar gets worse every year because of the progressive nature of the tax code and the progressive nature of RMD, so If you don’t optimize by year 1 you will never be optimized and stuck in a loop of ever rapidly increasing taxes.

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