# Boom Bust Echo How to Analyze Retirement income

I often see retirement income analysis in the FIRE Blogoland use these phrases: “SS, that will be my gravy” or “SS, it won’t be there by the time I retire!”. If SS isn’t there when YOU retire, YOU won’t retire, PERIOD. Your non SS nest egg will be looted by the government to pay for those expecting SS. A form of this is going on now with the proposed income redistribution in Biden’s tax law. The SS law is written such that if the fund runs a deficit it is cut by 24% which is slated to happen about 11 years from now. 75% of something is still a pretty significant something. If your retirement analysis is so cavalier as to ignore or dismiss a significant source of guaranteed, tax advantaged, inflation adjusted, (but apparently not deflation adjusted) retirement income with the wave of a hand, YOU’RE AN IDIOT and deserve your dogfood. SS is not gravy, it’s high quality meat almost as good as Roth tax protection.

TIRA Pot

From a tax perspective different pots of money have different value to the retiree. The least advantaged pot and also the biggest untaxed pot is the TIRA. The TIRA allows you to put ordinary income money in tax deferred, but requires you to remove money which is taxed as ordinary income, in a exponential way. If tax = amount * RMD and RMD is an exponential (non linear) function, Tax is an exponential (non linear) function. To calculate RMD for any given tax year I use THIS CALCULATOR, which is a government calculator consistent with the tax code. You can play with examples, for instance:

Age 72 RMD of a 500K TIRA has a withdrawal factor of 25.6 and a value of \$19,531.25. The % withdrawal rate at age 72 is 100/25.6 or 3.9% of that years TIRA value.

At Age 82, if the TIRA still holds 500K, the RMD that year is \$29,239.77 with a withdrawal factor of 17.1. At 82, 5.84% of your 500K is withdrawn to be taxed as ordinary income. An additional 10K can easily tip you oved to a higher tax bracket, which incurs a higher tax rate, the double whammy. Under present tax law, if you take standard deduction, married filing jointly, both spouses over 65, the allowable bracket 2 income is 104K with a 12% top tax rate. The next bracket is 22%. So you pay on more ordinary income at higher rates as you age.

SS Pot

The much maligned SS by law belongs to you. From SS.gov:

“We base Social Security benefits on your lifetime earnings. We adjust or “index” your actual earnings to account for changes in average wages since the year the earnings were received. Then, Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most.”

In addition SS is based on a multiplier, which is keyed to something called FRA (full retirement age). In 1998 Bill Clinton liked to brag how he ended with a “surplus”. How did Clinton get his surplus? He got it on my back. In 1998 I was 46 and SS retirement age was 65. By law my retirement age was raised to age 66, so the government “saved” one year of my SS. My wife had her FRA raised to age 67 and the government “saved” 2 years on her SS. This resulted in Clinton’s “surplus”. This same technique will be applied to the echo generation, the Millennials. Gen-X, the bust gen, probably won’t get hammered or maybe half hammered as I was half hammered. Boomers were a BIG generation and more ale to withstand the abuse. X-ers smaller and less able. Millennials once again are Big and will likely get hosed.

SS payout is a function of when you retire. The first available retirement date is age 62 and you can receive 70% of your FRA benefit, (typically 5 years early). If you wait till 70 your benefit will increase 24% (3 years surplus). In my case my surplus was 4 years since my FRA was 66, so my increase is 32%. SS is actually judged on months, not years and you can add that complexity if you like. My example will be based on years.

You’re SS will be based on your best 35 years of income and your FRA and your retirement date. Your income data is available to you on SSA.gov if you have an online account. I’ll work through an example using my own data. My FRA monthly SS is 3K/mo. My FRA was age 66. I choose to wait till age 70 to claim my benefit. My benefit increased by 8%/yr past age 66, so my retirement benefit at age 70 will be about \$3900/mo. My wife worked prior to children. Her benefit at age 62 when she chose to retire was 750/mo. SS allows the spouse to apply for spousal benefits which is 1/2 of the spouses SS. In my case that was 375/mo. So OUR benefit post her age 62 is \$1125/mo or \$13,500/yr. Of this only 85% is taxable aka \$11,475 as ordinary income. In addition that \$13,500 is inflation adjusted. (I don’t know if it’s also deflation adjustable.) \$11,475/yr easily pays our health care expenses and the \$2025 (15%) in tax savings pays the taxes.

Upon age 70 I will claim \$3900/mo and she will claim 1/2 of that or \$5850/mo total or 70K/yr. Of that \$59,500 will be taxable. Since the tax bracket tops at 104K, I basically have \$44,500 of remaining 12% bracket ordinary income I can add and remain in the bracket. Perhaps you think 70K/year of tax advantaged income is gravy, but to me it’s the meat.

In the above example my age 82 RMD on a 500K TIRA+ SS would be \$99,239 and my taxable would be \$88,739 still over \$15K below the top of the 12% ordinary income bracket. That \$15K gives ample leeway for “some” inflation. SS plus a correctly sized TIRA is a goldmine and certainly NOT gravy.

My technique to empty my TIRA uses a SOR twist. Based on the way the tax law is written, my SS constitutes the bulk of my yearly ordinary income. You also have to consider income from taxable accounts in the stream. Finally a contribution from TIRA is added OF AT LEAST the RMD is added. You can always take out more than RMD but not less. 500K at 6% throws off about 30 K/yr. The age 82 RMD is about 30K/yr. The age 70 amount between SS and 104K is about 44K. This means you can fill up to 44K from TIRA and dividends at age 70 and remain in the 12% bracket. That 44K will remain relatively constant up to about age 87, but the RMD will become an ever increasing % of that 44K. This keeps you in the 12% bracket pretty much till you’re dead. Let’s say at 74 the market is up and your 500K becomes 540K. Withdraw 40K that year. You are still below the 104K limit. Lets say at 76 the market tanks and your 500K becomes 400K. Simply withdraw the RMD on 400K or \$18,181,82. This is the SOR safety valve. In down markets take the least money. Continue to take only the yearly RMD until the TIRA regains 500K which gives the TIRA a chance to recover. If you need extra money use Roth Money (no tax) or Taxable (cap gains tax) money to supplement, or a combination of both based on tax loss harvest.

Cap Gains Taxable

SS is a very valuable pot, and a correctly sized TIRA can provide a low cost income up to the top of the 12% bracket. Taxable money has it’s value in the way it is taxed. There can be ordinary income or not depending on what you own. Some people want dividends. Dividends tend to force you into non diverse situations. Dividends are often higher in certain sectors like utilities and these sectors often forego growth opportunities. If you have the time and skill you can create a portfolio out of preferred issues which has a more diverse sector mix but devising such a portfolio is not a button press process.

Cap Gain Taxable money has certain advantages from a legacy perspective. It’s already been taxed once as ordinary income. When you buy 100 shares of IBM with cash, the cash has already been taxed and forms a basis. If you sell above the basis you incur a cap gain and below a cap loss. Your cap loss is accumulative and can be used to offset gains at a later date. This gives rise to the process of tax loss harvesting and basically moves cap gain taxable accounts toward the Roth end of things. Where TIRA is taxed as ordinary income cap gains tend to be lower and can be offset by judicious losses. They also aren’t subject to the 10 year distribution problem on inheritance. These advantages can be used to make your taxable money Roth like. Say you have 1M in taxable money and have managed over decades to acquire 500K in tax loss. This means you can slowly withdraw 500K of your 1M tax free, giving time for the 1M to continue to grow. If pull out 50K/yr and your 1M grows at 6% at the end of 10 years you pull out 500K tax free and have 2.5M in the account. This is very useful and makes taxable money very valuable.

Roth

I consider this the last money to spend because it grows tax free. This is old age money, money to fund your assisted living situation, money of self insurance. The top diseases in the US are Heart, Metabolic, NDD, and Cancer and each of these has a long term expense, sometimes decades long, and if married filing jointly each spouse is liable to a long term expensive demise. A well seasoned Roth account and its tax free compounding is your oyster when it comes to the far distant future expenses.

Demographics

If you look at the above chart it shows the burden of distribution across the generations. My burden as a Baby Boomer was raised (age 67 FRA) to pay for my Mom and Dad. Gen-X is a bust so likely they will just be added as a tail to the Boomers when it comes to paying for SS. My guess is Millennials will suffer another change in FRA. If you look at the Secure act RMD was raised to age 72 and if Secure 2 passes will be further raised to something like 75 when fully implemented. Even I will be eligible to Roth conversion to age 73 if that act passes. To me this looks like Millennials are being set up for post age 70 retirements which goes along with decreasing population. If you don’t have a growing population work the one you have longer. If you work them longer there is less retirement to pay. In addition if nothing is done SS will suffer a 24% reduction in 2032 which is supposed to place it on actuarially sound footing to the end of the century. “Something” WILL be there, and it’s important to understand and optimize it.

## 11 Replies to “Boom Bust Echo How to Analyze Retirement income”

1. I always learn a ton when you peel back the curtain like this, thank you for the transparency. Had you ever considered an earlier retirement date using 72(t)/SEPP ?

Fondly,

CD

1. mdonfire says:

Hi CD

72T is a reasonable way to go, but it throws off ordinary income. It’s main feature is it’s penalty free. If you are Roth converting it magnifies your tax bill as both the Roth conversion and the SEPP would be ordinary income. In my case I had some long term capital loss I accumulated over the decades, so I just cashed out some post tax brokerage money and wound up paying zero tax on my living expenses.

2. Al Cam says:

Love it.
Developing strategies to manage your overall tax burden always presents a good mental challenge! Here in the UK, inheritance tax can add an additional layer of complexity for some folks – is that also the case in the US?

1. mdonfire says:

Hi Al

Yes there are limitations to inheritance. Until recently you could stretch the disbursement and hence the tax burden of inherited funds. That ended in 2019 when all inherited funds need to be disbursed in 10 years.

3. GasFIRE says:

As always, I enjoy your analysis especially when it is counter-intuitive and goes against the grain. Part of the game is having the right balance of taxable, TIRA, and Roth. Having tax losses in the taxable account is certainly a bonus when it comes to creating cash to live on. A “correctly sized TIRA” is a key component of your plan but I suspect many heavy savers get overloaded on the TIRA portion. If you’re a multi-millionaire but most of it is in a TIRA it will be difficult to Roth convert your way to \$500K, not enough time or low tax-bracket space (not to mention the uncertainty after 2025, will there even still be 22 and 24% brackets?). I suspect Uncle Sam is OK with this and looks forward to a big bite of the apple.

1. mdonfire says:

Tax Loss saved my bacon for sure, but even without it the present cap gains regimen is only 15% and is probably the lowest it will be in my lifetime and would have been worth exploring a life time optimization. If SS yields 30K and grows at 2% due to inflation, in 30 years that is 1.2M. If your wife also has a 30K SS that’s 2.4M. If your wife piggy backs 50% on your 30K (total 45K) in 30 years that’s 1.9M. If you retire on 3M, it’s hard to ignore the extra 2M. Uncle Sam works by forcing people into funnels. The common refrain is max out your pretax, which is great for accumulation for the average guy, not so great for disbursement for the high income guy. People do their back of the envelop calculations and virtually NEVER look at the ongoing tax consequence.

It’s unclear to me what is going to happen in 2025 when the tax law expires, or 2032 when SS gets cut, but either way maxing out SS in my opinion improves portfolio longevity.

4. Dr. MB says:

Hey Gasem,

I view social security in the US as well as our Canadian equivalent as the penultimate mailbox money.

I also never understood anyone who dismisses it.

This will form the base of our retirement income stream.

1. mdonfire says:

Hey MB I think people simply don’t understand the granularity of retirement and just repeat some trope they read on another web site. Hope you are well

5. RocDoc says:

Gasem,

Good analysis.

For SS, spousal benefits are limited to 50% of FRA benefits of the spouse, not the higher 70 year old SS benefit amount. Survivorship benefits to the spouse would reflect the higher 70 year benefits, if the deceased spouse had claimed SS at 70.

1. mdonfire says:

Your comment is the correct analysis. If my FRA income is 3K hers is 1.5k upon her FRA or she can continue with her age 62 amount. In our case the age 70 income gross is about 4k for me and 790 for her until she hits FRA when she will then draw 1500 inflation adjusted. My 4K will inflation adjust also. Her death benefit on my earnings is something like 3800. This is why you need Roth money. Large IRA money and a large benefit for a single filer is a large tax bill. By having a small IRA inflation won’t put you in a new bracket for a long time but you can still spend some Roth money to maintain the lifestyle tax free.