retirement drawdown strategy

Revisiting Our Drawdown Strategy After 3 Years of Retirement

A year before I retired, I wrote Our Retirement Investment Drawdown Strategy as our plan for how we were going to manage the transition from Accumulation Phase to Drawdown Stage in retirement.  That post was written on June 20, 2017.

I retired one year later.

In today’s post, a look back at how that strategy has actually worked over the past 4.5 years.  Below, I’ll review each section of our original drawdown strategy as well as give our performance a grade.  Just like in school, an A is excellent and an F is a failure.  Fortunately, we’ve scored pretty well.

In addition, we’ll review our strategy to see what changes we should consider now that we’re 3.5 years into retirement. 

  • How has it worked thus far? 
  • What changes should we make going forward?

I enjoyed writing this post and updating the original charts from our Drawdown Strategy.  I hope you enjoy reading it and trust you’ll learn some things that you can apply to your situation.

How has our Drawdown Strategy actually worked in retirement? Today, a look at our original strategy and how it's actually worked out after 3.5 years of retirement. Click To Tweet

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Revisiting Our Retirement Drawdown Strategy

Developing a strategy for managing your transition from “Accumulation” to “Drawdown” is critical.  It’s a huge shift in your investment strategy, and it’s not something you should approach without a plan. Today, we’ll revisit our original retirement drawdown strategy and analyze how it’s worked since our retirement in 2018. 

For consistency, I’ll present each of the charts from the original drawdown strategy, with updates showing our current status as of 12/31/21 for each. I’ll also summarize our original strategy, then provide an update with actions taken to date.  Each of the elements will be presented in the same sequence as the original drawdown strategy, which means we’ll start with Asset Allocation.


Asset Allocation:  “Increase Stock Exposure”

From the original drawdown strategy, I mentioned we were planning on increasing our stock exposure: 

“When there’s a market correction, we’ll likely rebalance a bit back into equities”  June 2017

Grade:  A

We have increased our stock exposure from 48% to 57%, which is in line with what we were targeting.  We took advantage of the “COVID Correction” to buy during the bear market, with our biggest move into equities coming on March 23, 2020.  The S&P 500 hit 2,237 that day, which represented the low point in the market (as I write these words on 1/25/22, the S&P500 is at 4,348.  In spite of the ~9% downturn YTD, I’m still up 94% from the date I made that last major purchase, confirming the value of rebalancing in a down market). 

I outlined the steps we were taking in my post at the time, A Strategy For Buying Into A Bear Market, which included the following chart (red circles are dates we moved $ from cash/bonds into stocks, the % is what percentage of our Net Worth we moved.  Timeframe for the chart below is Feb-Apr 2020):

In addition to growing our equities, we’ve also increased our “Alternative” asset class from 6% to 15%.  This reflects our shift out of bonds and into real estate when we purchased a second home near our daughter in Alabama.  Since we expect we’ll sell that home at some point in the future, we’re continuing to “count it” in our investment holdings (unlike our primary home, which is excluded). 


Tax Allocation:  Convert Before-Tax Into Roth

Like many Baby Boomers, we have “too much” money in our Before-Tax accounts, a legacy of the Roth not being an option in our 401(k) during many of our working years.  To rectify that and minimize our chances of getting punished by the Required Minimum Distributions when we turn 72, we planned on doing annual Roth conversions from our Before-Tax accounts.

From the original strategy:

“This will provide an ideal opportunity to pull heavily from our Before-Tax funds and convert them into after-tax and/or Roth at the lowest possible tax rate.”

Grade:  B

As I wrote in How (And Why) To Execute A Before-Tax Rollover Into A Roth, we’ve done Roth conversions every year since 2018.  You can see the impact in the pie charts above, summarized below:

  • Roth increased from 24% to 37% of our investment portfolio.
  • Before-Tax reduced from 56% to 51%
  • After-Tax reduced from 20% to 12%

In addition, “the size of the pie” has increased over the same timeframe, with our net worth increasing 45% from 2017 to 2021 (thanks, bull market), in spite of the fact that we’re no longer contributing to our investments.  I suspect we’ve lost a bit of ground since 12/31/21 with the market’s current volatility, but I haven’t bothered to check.  #NoWorries.

I’ve found it surprising to realize how difficult it’s been to reduce our before-tax allocation.  Due to the strong market, and the fact that most of our before-tax is invested in equities, the total value of our before-tax accounts has actually increased in spite of our Roth conversions!  I never expected that, and that’s the reason I’ve graded this section with a B.  In essence, the growth has been bigger than the amount we’re converting to Roth. 

For example, say we convert $50k in a given year, but the actual value of the before-tax investments increases by $75k.  In spite of a $50k conversion, the before-tax amount actually increases by a net of $25k due to investment performance.  The only reason the percentage has reduced from 56% to 51% is that the total pie is growing faster than the before-tax slice.  We may have to get more aggressive on the amount we convert every year, perhaps to the top of the 24% marginal tax bracket as outlined in The New Tax Law Loophole That Benefits Retirees

Paying those taxes requires after-tax funds, which we’re also using to live on in retirement.  You’ll notice that the after-tax slice has been reduced from 20% to 12%, which makes sense given that those are the funds we’re using to pay for our retirement expenses and Roth conversion taxes.  At some point in the near future, we’ll have to determine when to move to either Before-Tax or Roth withdrawals to fund a portion of our retirement expenses.  I’m thankful the after-tax has proven sufficient to “cover the gap”, and I’m fine with beginning to tap into those retirement accounts when required (I’ll turn 59 1/2 this year, though I could have tapped the 401k earlier if necessary given that I retired at age 55). 


Delaying The Pension

In our original strategy, I was considering delaying my pension to allow for continued growth (similar to Social Security, the payout increases if you defer).  Ultimately, we decided against doing that. 

Why? 

Unlike Social Security, our pension payments are NOT inflation-adjusted.  Once they start, they remain at a fixed payout for the balance of my life, at which point my wife will get a reduced payout for the balance of her life.  Since we would have had to withdraw from our investments to fund our retirement during the delay, we decided against it.  By NOT withdrawing those investments, we’ll allow them to continue to grow, which will allow longer-term inflation protection than increasing our non-inflation adjusted pension.  I find that paragraph a bit confusing, but hope you understand the logic. 

Bottom line:  we did the math, and are convinced that our decision to NOT delay the pension was our best long-term decision to maximize the amount of money we’ll be able to spend during our retirement.

Grade:  A


Implement The Bucket Strategy

the bucket strategy

I’ve written extensively about this one, and The Bucket Strategy Series has been my most-read series.  In summary, we’ve created 3 buckets and fund our retirement spending as a “monthly paycheck” from Bucket 1, which we refill 3-4 times a year with whatever assets have best performed.  It’s worked more smoothly than I envisioned, and I couldn’t be happier with the approach.  If you’re interested in reading more about it, below are links to the three articles I’ve written on the strategy:

The Bucket Strategy Series:

Grade:  A

A quick note, given the market’s decline YTD.  As mentioned above, I strive to keep Bucket 1 “full” to provide maximum protection against a bear market.  In fact, I sold several months’ worth of spending in early January to “top off” Bucket 1 as part of our Annual Financial Review.  In hindsight, it was good timing, but that’s not the point. Rather, I’m simply following our pre-determined methodology for managing the buckets.  At this point, we have 3 years of cash to ride out the stormy weather, and I’ve not lost any sleep over the recent market volatility.  If the stock portion of our asset allocation falls below 50%, I’ll be rebalancing any funds in excess of our Bucket 1 and 2 limits from bonds into stocks.  I’ll likely skip refills on Bucket 1 for a while, allowing it to draw down as intended to avoid selling any stocks during a downturn.  Stay tuned…


Figure Out Health Insurance

At the time of our original drawdown strategy, we hadn’t resolved how we were going to manage health insurance during our early retirement years.  We ultimately decided to use COBRA for the first 18 months, then migrated to an Aetna group plan my employer had previously established for retirees.  Historically, my employer offered retiree health insurance, and the group plan was established for that purpose.  My employer has discontinued that benefit, but the group plan remains available (fully paid by the retiree) and has slightly lower premiums than I was able to find through private individual plans.  Given the increased ACA subsidies in 2021 and 2022, it’s possible we could have reduced our cost slightly for these two years, but we elected to remain in the group plan to ensure it was still available to us until we join Medicare in 7 years.  Because of this voluntary “sub-optimization”, I’m grading this one a B-.

Grade:  B-


Longer-Term Strategy Items

Our original strategy had a bullet list of various other long-term issues we were considering.  A brief update on each follows:

  • Delay Social Security:  I’m still planning on delaying my SS until age 70, though we may elect to have my wife start claiming at full retirement age based on my reading of Wade Pfau’s latest book.  We have plenty of time before having to make any decisions on this one.
  • Protect The Roth:  To date, we’ve only added to our Roth through conversions from our Before-Tax accounts.  When our after-tax funds are nearing depletion, we’ll evaluate the optimal mix of withdrawals from Roth vs. Before-Tax.  I assume this will be driven by tax optimization, but more work is required before finalizing our decision. In general, it’s “best” to protect your Roth as long as possible, and we suspect the majority of any legacy we leave our daughter will be in the Roth account
  • Life Insurance:  At age 52, we purchased a $200k term policy that expires when I reach age 72 as a bit of hedge for my wife in the event I die “early”.  My pension survivor benefit drops to 67% upon my death, so this was a cheap insurance hedge if that happens before I turn 72.  We’ll continue to carry it until it expires in 13 years.
  • HSA:  We’ve contributed the max every year since retirement and spent from the account as medical bills arise. For simplicity, we use it to “pay as we go” rather than intentionally pursuing a longer-term tax strategy.  We plan on continuing with this approach until we start Medicare and lose the ability to contribute to the HSA.
  • Part-Time Work:  We had talked about some potential short-term seasonal employment opportunities in our original strategy, but have elected not to pursue them.  In reality, having 4 dogs makes a seasonal job in a National Park impractical, and we don’t need the extra money.  The Board of Directors’ work was not a part of my original strategy and has been an enjoyable experience to date.
  • Long Term Care:  As stated earlier, we elected to self-insure against LTC risks, and continue to be comfortable with that decision.

What We’re Changing In Our Drawdown Strategy

As we approach our 4th year in retirement, we’re pleased with how well our initial drawdown strategy has worked.  Going forward, the basics of the plan will remain intact.  Following is a summary of how we’re approaching each of the key elements in our original plan and the minor tweaks we’ll be making:

  • Asset Allocation:  In the original strategy, we were planning to increase our stock exposure from the 48% allocation at the time.  Mission accomplished.  Going forward, we expect to maintain a stock exposure of 50 – 60%, with 20 – 30% in bonds/cash and 15% in Alternatives.  We’ll watch that 50% floor given the current market downturn as a potential trigger for rebalancing, though we’ll only rebalance funds from cash/bonds to stocks in excess of our Bucket 1 and 2 limits.
  • Tax Allocation:  We’ll continue to make annual Roth conversions,  though we’ll consider implementing them to the top of the 24% marginal tax bracket due to the reality that our before-tax accounts are still larger than we would prefer.
  • Donor-Advised Funds:  This is an addition to our original drawdown strategy. Before the new (favorable) tax law took effect, we pre-funded ~5 years of charitable donations into a Vanguard Charitable Fund.  This fund has been drawn down, and we’ll likely look at doing another “big” funding in the next year or two to make the deduction worthwhile versus the standard deduction of $24k.
  • Bucket Strategy:  We’ll continue to utilize our bucket strategy, though I expect our quarterly “refilling” process will be put on hold (as designed) if the current market correction continues. It’ll be interesting to see how the strategy works in a more volatile market, but I’m convinced it’ll be the best way to manage our “retirement paycheck” regardless of market conditions
  • Roth vs. Before-Tax:  The biggest change from our original strategy will be to determine which funds we utilize to fund our retirement expenses once our after-tax funds are depleted.  I expect we still have 3 years before we face this decision.  If I had to answer this one today, I’d lean toward using the Before-Tax to fund our expenses and reduce our annual Roth conversions by a like amount.  We’ll likely move toward a combination of Before-Tax withdrawals AND Roth conversions to optimize within our chosen tax bracket.

Conclusion

As we approach our 4th anniversary of retirement, I’m pleased to report that our original Drawdown Strategy was effective in managing our transition from the “Accumulation” phase to the “Withdrawal” phase. 

Overall Score:  A-    (mathematically calculated from the above scores) 

The primary shortfall lies in the reality that converting the Before-Tax funds into Roth is a bigger challenge than originally envisioned, especially given the strong market growth in our first 4 years of retirement.  Also, each conversion triggers a tax bill, which accelerates the depletion of those valuable after-tax funds.  I’m fine with that “problem” and am confident that we’ll continue to navigate the challenges of optimizing the withdrawals from our portfolio for the foreseeable future. 

Going forward, our biggest challenges will be to transition from using after-tax funds to beginning to withdraw from our “tax-sheltered” accounts. It’s a reality we’ll all face, and it’s the reason we built those tax-sheltered retirement funds in the first place. As for the recent market volatility, I’m not too worried about it yet given the cushion provided by Bucket 1 and 2, but I’ll be monitoring for potential rebalancing actions if it turns into a full  Bear.

Finally, health insurance continues to be a nagging (and expensive) concern. I’m looking forward to the day we’re eligible for Medicare and can put the problems of private health insurance behind us.  It’s a problem we can live with until then.

Your Turn:  What have been your biggest challenges as you made the transition from “Accumulation” to “Withdrawal”?  Does your withdrawal strategy provide protection against the current market downturn? Let’s chat in the comments…

126 comments

  1. I’m impressed you increased your equity exposure in retirement. I would think that’s rare.

    I don’t consider myself retired, even though I don’t have a job, because I write regularly on Financial Samurai. So from that perspective, I’ve just kept my net worth allocation relatively similar since 2012 when I left work. 30% of net worth in equities.

    I wish I sold more at the end of 2021, but I’m just going to ride it. Been investing more strategically in real estate.

    Curious, when do you think I can start saying I’m retired as well? Writing my book I just finished took a crazy amount of effort. Felt like having two jobs! Did you not feel that way writing your book?

    Sam

    1. 4:32 EST? Wow, you work late, Sam! As for “increasing equity exposure”, the reality is that I entered retirement with more cash than targeted, primarily due to the sale of our “big house” in the city and the liquidation of the equity. Took me a while to work it into the market. I’ve always planned on 50 – 60% equity in retirement, and plan on holding to that for the time being.

      As for “being retired”, my definition of retirement is when financial considerations are no longer required as major considerations in decisions. You’re choosing to write not because you need the money (or so it appears from your writing), but for other reasons. Same with me. As for writing a book, no doubt that’s a LOT of “work”, but it’s work you’ve CHOSEN to do, not HAD to do. Hence, you’re already retired in my book. And yes, I did feel the pressure of the extra work load when I was writing my book. That’s why I said “No” when the publisher approached me (twice!) about writing another book.

      Ah…the Freedom of Retirement!

      1. Yeah, gotta do the computer stuff when the kiddos are sleeping so I can play with them when they are awake!

        I don’t think I can write another book for another 5 years once mine comes out. Too many cooks in the kitchen. All serve to make a great meal, but it’s just two much work for me. Got out of finance in order to do my own thing.

        That’s great you have demand from your publisher though. Nice to be asked.

        Maybe once both kids are in school full time will I feel comfortable saying I’m retired. But being a stay at home dad is a full time job and a half!

        Sam

  2. You covered Roth conversions and current tax consequences up to and maybe beyond the 24% rate. Have you looked at the Medicare IRMAA adjustments you may face when you and your spouse reach 65 years old? This is independent of your plan to start Social Security at age 70 and spouse at FRA.

    1. IRMAA looks back two years. Better to convert a large amount before age 63, if a large conversion is needed, when it won’t affect IRMAA.

    2. I have indeed, TLS. I’ve got reminders every month in the year I turn 63 to ensure I review the IRMAA impact for any Roth conversions from that point forward (two year lookback on earnings). It’s one of the primary reasons I feel some urgency to get the Roth conversions increased before I have that nasty little calculation impacting my ability to execute low cost conversions.

      1. FYI: You can exceed IRMAA thresholds at 63 and 64 if in the year you turn 65 you are below the IRMAA threshold. You will have to appeal the IRMAA and show that your income is reduced for ages 65 and 66.

        1. Roth conversions reduction is not one of the life changing events that SSA accepts IRMAA appeals.

      2. IRMAA was my first thought when you mentioned your conversions, but I figured you’d be on top of it! I’m wrestling with the conversion issue. I’d prefer to just spend the last penny the month before I die, but…. I just started Medicare after 18 months of COBRA (very reasonable) and 4 months of ACA (crazy expensive). Starting Medicare was like winning the lottery.

  3. Great job Fritz! What would you say to people who ask you why you’re still playing so voraciously after you already won the game?

    1. I would argue that a 50 – 60% stock allocation isn’t “voracious”. In reality, with a fixed pension, I’ll need that growth in my portfolio to handle the impact of inflation, since any increased spending due to inflation will come exclusively from my portfolio (and, in fairness, Social Security when the time comes). With 3 years of cash in Bucket 1, I feel I’m taking a fairly conservative approach to the game.

  4. Ah Medicare the end all for health care. But you forgot to mention your aunt IRMA that will certainly come to bit you in the ass. I am retired but with outside consulting and mail box money from real estate LLP’s we are paying an extra 600 a month each for Medicare. I hope you have that factored into your health care costs.

    JJ

    1. Great point, JJ. See my comment above to TLS. Valid point, and the reason I’m trying to be as aggressive with my conversions as possible prior to age 63. And yes, I do have a “conservative” (expensive) estimate for health care costs going forward, just to be safe. I always prefer surprises to the “good” than the “bad.”

      1. Would love to see a blog about IRMA. I am a few years away from retirement but love reading you blog to help with how to draw down! I also can’t remember if you used your own spreadsheets or something else. I plan to do some planning this year as we are probably 1-3 years out from retiring. Live in Winston Salem so you are pretty nearby by the way.

        1. Marie, I’ve not done any extensive research on IRMMA yet, may have to do that as a future post (thanks for the suggestion). I did use a lot of my own spreadsheets, you can find many of them on my “Resources” page. If you ever get over my way, give me a shout and I’ll buy you a coffee, neighbor!

  5. Thanks for the valuable info. We are just heading into retirement in 2022 and will face some of the same issues/decisions. Great insight.

  6. To increase Roth assets relative to qualified assets, you might consider changing your asset location strategy, putting the most productive (at least in theory) assets in the Roth. I’m not retired yet, but Roth is 100% equities, and qualified is about 40% equities. Over the last several years (and in general since equities tend to go up) the Roth balance has grown quite a bit relative to the qualified assets. I use a spreadsheet to maintain the overall asset allocation over all accounts. Rebalancing qualified and Roth assets does not have tax consequences. You can just search for “Kitces asset location” to find out more.

    1. John, great point. If you look at the original drawdown strategy post (link in the article above), you’ll see a table that identifies “best” asset classes by location (it’s aligned with Kitces’ work). I’m working in that direction, but it takes time as I’m doing it during my rebalancing moves.

      1. Given the bulk of your assets are held in pretax and Roth accounts and there would be no tax consequences to selling, why are you only adjusting asset location as a part of rebalancing?

        1. Actually, I should have said “and Roth conversions”. In reality, it’s not as easy for me to “optimize” tax locations. For example, I’m using after-tax to fund current retirement expenses, so it needs to be liquid (Bucket 1). Ideally, you’d hold a high % of stocks there for tax loss harvesting, capital gains taxation, etc, but those are Bucket 3 assets (which fit better in my Roth, since that’s the last account I hope to tap into). So…I do what I can when doing rebalancing and Roth conversions, and don’t worry about it much beyond that. It’s a “fine tuning” issue to me, can’t imagine the net impact is going to make me or break me, so I tweak it when it’s convenient and get on with life. To me, 95% “directionally correct” is fine, I don’t sweat the details for that last 5%. “Personal” finance, right?

  7. You continue to be a rockstar sir – thank you for continuing to share your journey and wisdom learned along the way. You are helping those of us in a similar path. Cheers!

    Positive Energy your way!

    Brandon Johnson

  8. Hi Fritz, I enjoyed reading this, and especially like the fact that you show your work” in regards to how your plan has worked out. We are a bit older (turning 63 in 2022) and have a more aggressive asset allocation (67%/28%/5%).

    I look forward to following along your journey and happy to learn from your diligent efforts.

  9. Great work on execution of your plans Fritz! Ultimately, prior planning does increase one’s odds of success. 🙂 Good article on your progress…..provides inspiration for those who are not retired.

    As far as our personal plans, we have exceeded our expectations. Personal Capital and Fidelity sites state we will have no withdrawals required from age 64 to 72. Then our RMD’s come into play. We are also doing annual transfers from pre tax to Roth accounts. Will do this for just 3 more years and we will land in our “happy” place tax wise.

    We converted some pretax accounts into a couple income producing annuities. Time will tell if we win on this investment. Living past 82 will give us a great return on one of them.

    We opened a DAF with Fidelity and will fund it this year. Giving is something we believe in. The returns on giving one’s talents (time) and treasures (money) are, by far, the greatest “feel good inside” actions one can take. I have learned this over and over again in the last 20 years.

    God bless you and your readers Fritz. Semper Fi, Steve

    1. Good point about annuities. I should have added that to my “To Do” list in the post. They are something I’m considering since reading Wade Pfau’s latest book. I agree they’re a viable longevity hedge. Too much to do, too little time (and, to be honest, I prefer spending my time where the returns are greatest, as you point out in your charity comment. Actually heading out on a fence build for Freedom For Fido shortly…the annuity research will have to wait).

      1. Wade Pfau is a leading cheer leader for the annuity industry. Isn’t he also involved with the “educational” The American College of Financial Services whose web site describes it as “Serving as a valued business partner to banks, brokerage firms, insurance companies …” So who exactly benefits from promoting annuities? Social Security and pensions are the ultimate annuities. Isn’t that enough? Why squander more of one’s assets on expensive, high profit vehicles for so called “peace of mind” and “longevity insurance”.

        1. Every financial product has a place for someone in some specific circumstance, few are just outright bad for all people. Whole life insurance is a good example – not a good product for most but a useful tool in some specific circumstances. Annuities are likley not right for most, but they have their place for some. For example, in one’s older years when they might be less able to handle their finances (re-balancing multiple accounts, etc.). An annuity vastly simplifies finances. “Peace of mind” has value and is worth is for some individuals. Personal finance is very personal. “The Retirement Answer Man” podcast has covered this issue in the past and I believe is planning to do a series on it in the near future.

          1. Good response, Frank. Thanks for saving me the typing. BTW, Roger @ Answer Man is a friend of mine, smart guy. He’s also as objective as one can be in the role, IMHO. Best to listen to multiple voices, learn the pros and cons, and decide for yourself what “fits” and what doesn’t. Everyone has to find their right tool for the job they’re trying to accomplish.

  10. Great work Fritz and thanks for the detailed breakdown. Your meticulous planning has paid off. As you know I’m only semi-retired so I’m still in the accumulation phase, but when I do fully retire I’ll likely follow a similar system. My biggest difference will be healthcare as I’ll most likely be forced to use the ACA.

  11. Really enjoy your writings. We just ordered your book on Amazon this weekend.

    You mention that you took your pension early vs waiting for it to mature more. Did you have a Lump Sum option vs Monthly? Do you ever write about that decision “monthly vs lump” and how and why you picked one over the other? Curious which way you went with pension as I have to make that decision shortly.

    1. Thanks for buying my book. As for the pension, I did not have a “Lump Sum” option, but even if I had I’d have most likely chosen the “monthly”. Every assessment I’ve seen says you’re better off with the “monthly” (annuity) instead of a lump sum unless you’re concerned about the sustainability of your company. An easy way to compare is to look at what they’d give you for a lump sum, then check online for how much of an annuity you could purchase for that amount. I’d be surprised if you could purchase an annuity that matches the monthly “paycheck” you’d get from your pension. Do you homework, but that seems to be the norm.

      1. For a different perspective on the lump sum v monthly question… we just made the decision recently and went with lump sum. Historically low interest rates made the lump sum payment more valuable than usual. In addition, we have a significant amount of unrealized capital gains in taxable accounts. Careful planning and management of income can allow us to realize these at the 0% tax bracket. This would have been very difficult with a monthly pension coming in.

  12. Excellent read Fritz. I really like to see the comparison from the initial plan to current day. I’m curious to know what kind of calculations you went through for holding off on Social Security. I am not BigErn in his ability to do crazy stuff in Excel, but my rudimentary math makes it look like taking SS at 62 is a better option for me as it looks like it would take until I was about 92 before another option would make sense. I hope I make it to 92, but I can’t count on that.

  13. 1) I am unclear on the not delaying pension strategy. The pension is not inflation adjusted regardless of when you take it. If one delays taking pension the amount is higher similar to social security. Actuarially, it is supposed to be the same; but if one is betting on longevity would not delaying be better? And would not the surviving spouse have a bigger payout?

    2) Roth conversions are a double edged sword. Higher Medicare premiums are almost a certainty. There is a break even point before which the upfront cost of conversion has not been recovered.

    1. Kris, I’m not surprised by the question, I struggled with how to explain it in a short paragraph. If I delay, I’d have to use my assets to “fund the gap years”. In return, yes I get a higher pension, but it never increases. If I avoid using those assets and take the pension immediately, those assets continue to compound (and, be available to my wife once my pension is reduced, though you raise a valid point that I’d have to analyze to fully respond to). Net result: taking the pension now should allow higher spending over the course of retirement.

      As for #2, higher Medicare premiums yes, but only for conversions I do at age 63 or later. I’m only 58, so I have a window of doing conversions now without impacting Medicare (and, reducing future RMD’s which would also drive up Medicare later). Also, I suspect future tax rates will be higher than today – the tax law of 2018 was favorable (click the link in the post for more details).

      1. I completely understand starting the pension early. I think it makes the transition from accumulation to distribution a little easier. Also how much of additional annuity income is needed above social security. If your SSA + pension meets most of your needs is there any reason to increase them further.

  14. Great job, Fritz. I appreciate the level of detail. We’ve entered our 5th year of early retirement at 54. Our strategies are aligned except for two categories. One: asset allocation. Two: Social Security election. On asset allocation, I’m wondering why you don’t consider your pension like an annuity and add it to your fixed allocation percentage. I’ve looked at the PV of this benefit and added it to the total asset allocation balance. Thoughts? On Social Security, we will take our SS at 62 given our break even is 84 and it’s likely a discounted amount is imminent as well as the potential for means testing. Plus, a dollar today is worth more than a dollar tomorrow even with the ~8% annual growth. We’re looking at SS as a stipend for our travel budget and will qualify for max payout. I’d be curious your thoughts on these two differences of opinion. Keep up the great work. Isn’t early retirement grand?

    1. Stan, good questions, and why it’s called “Personal” finance, right?

      I prefer to look only at the “gap” I need to fund with my investments and manage my portfolio accordingly. I target a 3 – 3.5% SWR of my investments, and that’s to fund “the gap”. You could certainly do a NPV of the “pension annuity”, but it would end up with a strange (and high) SWR, and I find it just complicates my thinking without adding any value for me. If it works for you, there’s certainly nothing wrong with that approach.

      As for SS, there are many arguments that can be made for either 62 or 70 claiming strategies. For me, I consider it a rare guaranteed and inflation-adjusted longevity hedge. One of my concerns is living a long life, and deferring gives me (or my wife, with survivor benefit) a better hedge than I can achieve elsewhere. Of course, there’s a breakeven point. I’m viewing it as a hedge for living to 90 or beyond, so I exceed the breakeven age (mid-80’s when I did the math).

      And yes, early retirement is, indeed, grand!

  15. Where can I find the rules about contributing to an HSA after retirement? I thought you had to have employment income to do this.

    1. One does not need employment to contribute to an HSA. (You are confusing it with IRA/Roth IRAs) One ONLY needs a High Deductible Health Insurance Plan. Period. That also means, you are not on Medicare, because Medicare and High deductible are mutually exclusive.

  16. If your wife’s social security payment at her full retirement age is less than the spousal benefit she could claim based on your benefit at your full retirement age then there is nothing to think about. She should draw her benefit at her full retirement age and then switch to the higher spousal benefit when you start taking your benefit. That is absolutely free money you are wasting otherwise. It’s the only no brainer decision in the social security decision making process. If her benefit is higher than the spousal benefit then it’s complicated.

    1. Yep, that’s the approach we’re planning after I read Wade Pfau’s book. She was a lower earning than me, so I’m assuming she’ll start claiming at FRA, not sure if she can pull spousal benefit before I claim though, can she (or, does she claim her benefit at FRA, then move to Spousal Benefit when I claim at age 70?) Still need to do some research on it, but we have time (I’m 58).

  17. Hi Fritz,
    I enjoyed reading your update on the drawdown strategy. You certainly hit the sweet spot on the sequence of returns and were well prepared to take advantage of the Covid dip. I am giving you an A+ on the softer side of the retirement life you have created and share on Instagram,

  18. I absolutely loved this article. You are so spot on in the things you share and write about. I too bought Wade Pfau’s book and have studied it like the text book that it is. Between the book and your real life examples, you have helped my wife and I prepare for retirement which I just started back in September at age 60 . The only conundrum I have to deal with now is my wife’s aging mother who we are responsible for. We cannot plan too far out due to changing circumstances in the next few years with her dementia and assisted living. If she gets worse, Medicaid will be an option for her. Thank you for all the work you do and all the info you share. It really helps verify what I’ve been learning and also teaches us so much about real life retirement.

    1. Thanks for your kind words, Doug. I can 100% relate to dealing with your mother-in-law, we did the same for mine (she ended up on Medicaid after her Alzheimer’s worsened and she could no longer live with us). It’s a real challenge dealing with aging parents, and one most folks underestimate until they’re dealing with it themselves. Congrats in your crossing of “The Starting Line” in September – best of luck on your journey.

  19. Hi Fritz,

    Given you are delaying taking SS and pension, are you withdrawing more now than later, i.e are you planning to cut back on investment withdraws once these other income streams start? Or more on a linear withdraw plan (with adjustments as you go along). The 60’s is a very special decade for bucket list items that require good health and physical conditioning. Would hate to penny pinch unnecessarily. For those of us with more modest investment accounts, this is a trade off that requires a lot of assessment to balance short vs. long term financial needs in retirement.

    1. Good question. In reality, SS will likely replace some “side income” that’s currently coming in (e.g., blog revenue and Board work, both of which will likely stop by the time I draw SS), so the withdrawal rate will likely stay more steady than would otherwise be the case. We retired at age 55 and have been very intentional in living our life and doing things we enjoy without concern. In addition, I built a workshop and we bought a second home, so we’re definitely spending money now on things that matter to us. I agree that it’s a critical balance to get right, and I encourage people to spend freely up to their predetermined Safe Withdrawal Rate. There’s no longer a reason to save, it’s time to enjoy the fruits of your labor (within constraints).

  20. Fritz,
    Thanks for sharing. Many of my retirement elements are similar to yours. I bought a second home but have never really thought of it as an alternative investment which would bring my asset allocation for equities down to 67%. I need to adopt the bucket strategy given that our spending has remained similar to full employment levels and was lulled by a very positive market which may not continue. After COBRA ended I eventually moved to ACA and looking forward to moving away from that in year. Tax planning with the Roth, ACA and our giving goals has become like a puzzle that requires fine tuning.
    Keep fighting the good fight.
    Paul

  21. Fritz,
    Aside from your second home purchase (which IIRC you are treating as an investment), would you be good enough to say a few words on how your actual spending has been versus what you planned; and could you indicate roughly how much of the actual spending was covered by your pension? Apologies if you have covered this above but I did not see it.

    1. Al, I appreciate your curiousity, but there are some areas I don’t disclose on my blog (Net Worth, Annual Spending, Pension, etc). I will say that we’ve targeted a 3 – 3.25% Safe Withdrawal Rate from our investments and have been able to live comfortably at/below that level.

      1. That is absolutely fine.
        Assuming I understood it correctly, you did indicate pension coverage (perhaps inadvertently) in your original drawdown strategy post and I was just curious how that had panned out? FWIW, our own spending has been consistently lower than I forecast prior to pulling the plug.

  22. Good article. Just about to start Medicare. Big surprise are prescription costs for newer drugs. Much more expensive than on private plans. Older drugs are fine. Just FYI.

  23. Great post Fritz!

    You wrote: “I’ve found it surprising to realize how difficult it’s been to reduce our before-tax allocation.”
    I noticed the same thing this past year when making our 2021 Roth Conversions. It was slightly smaller than our 2020 conversion but it just felt like it didn’t make a dent. I figured it was due to the fast growth of the market. Glad to hear I am not the only one paying attention that way. We are in our mid-40s so we have more time for conversions, but I do need to think about being more “aggressive” and open to paying some more taxes now if I want to get the balance down faster.

  24. Hello, great article. What tool are you using for the tracking of your asset allocation (percent stock, bonds, cash, alternative) and for your tax allocation (roth, after tax, before tax). I have read that you mentioned Personal Capital and I am exploring that with my checking, savings, expenses, etc. but just cannot commit to putting my investment and retirement accounts into it. Any input would be appreciated.
    Thanks

    1. Jean – for my year-end comprehensive review I do everything in a spreadsheet. For periodic checks throughout the year (e.g., quarterly refilling of bucket 1) I just use Personal Capital. I can appreciate your concern of using them, but heard their CEO interviewed on a podcast and was impressed with the security measures they have in place. Clearly a decision each person has to make for themselves, but I have no hesitation in recommending them. They provide a great (and free) dashboard, though you will have to put up with some pesky sales calls for a while until they realize you’re not interested in hiring them. Hope that helps.

  25. My withdrawal strategy is a little different than yours. Since I retired before 55, I’ve relied on pulling some funds out of my Roth account and since they were contributions I did not have to pay taxes. I’m also converting $30-40K a year from my traditional IRA to Roth each year to keep me within the lower brackets…may have to really look at a big conversion if the 24% goes away someday. For the first time since I retired in 2019, I’m setting up a 72t withdrawal from a carved off IRA for a monthly amount which should reduce some of my Roth contribution withdrawals. This will continue for six years until I reach 59 1/2. Unfortunately, some of this is harder to financially model so I’m relying more in instinct than hard calculations.

    I’ve always had an interest in taxes and was a VITA volunteer in the military but this last year I studied for and passed my enrolled agent exam and have started my own tax prep business…no big aspirations but I enjoy helping others (like you!) for a better financial future. If it brings a little income, great, but I’m more interested in keeping the brain stimulated for the years ahead. Also planning some longer RV trips right after tax season…hoping you can share some of your travel plans for the summer!

    1. Tom – congrats on passing the agent exam and starting the tax prep business, a great achievement in retirement! Your strategy sounds reasonable, the 72t is a handy trick for getting early access to those retirement funds.

      Not sure where we’re heading this summer in the RV, booked our first trip for May to do some kayaking near Augusta with friends. Maybe we’ll see you on the road sometime.

    1. It is exactly that. Within a 401(k) you typically have different tax status options (Roth, Before-Tax, After-Tax are typical). The “Before-Tax” option allows you to take a deduction in the year you make the contribution, but the contribution (and all earnings) are taxed as income when you make withdrawals. Before-Tax is sometimes call “Pretax”, and is common in IRA’s as well. Hope that clarifies.

  26. Thanks for sharing such a detailed update on how your withdrawal strategy has been working, Fritz!

    I enjoyed the read, as yours in one of my favorite blogs for gathering this type of information. Always well researched. We’re in the very early stages of creating our own plan, though with a bit more cushion to build and uncertainties to work out before we get there.

    Best wishes for a happy, healthy and prosperous 2022!

  27. Hi Fritz! Loving your info. I have 10yrs (or less maybe if we can work some magic) till retirement.
    I bought your book and just getting started on that – still wading through your blogs… great info and thanks!

    Some quick questions about tax withholding. When I’m earning a W2 salary, taxes are withheld from my paycheck. You made a great point in one of your videos – be sure to account for taxes.

    1. Is there income tax withholding from social security income?
    2. Is there income tax withholding from pension income? (I suppose may vary from company to company?)
    3. Is there income tax withholding from tax-deferred retirement account (e.g., 401k)?

    Basically, trying to figure out how to model this…. although I’m assuming it’s all baked into the online retirement planning calculators like new retirement, personal capital, emoney, etc. Just want to be sure I understand it. Like you, I’m a spreadsheet guy and like do do a lot of small spreadsheets to look at different aspects of the financials without building the equivalent of new retirement in Excel – lol

    Thanks!
    Kevin

    1. Kevin, thanks for buying my book, and kudos for thinking about this stuff while you still have plenty of time to plan. As for your questions:

      1) I’m not sure about SS withholding, haven’t researched it yet.
      2) My pension withholds taxes, suspect that’s the norm.
      3) I assume you’re talking about withdrawals? If so, it depends on your provider.

      In our case, Vanguard does NOT withhold taxes when I do Roth conversions from my VG 401(k) pre-tax to my VG Roth. I have to do quarterly estimated taxes, though you can also do your conversion late in the year and pay all related estimated taxes in Q4. Hope that helps with those spreadsheets (my kind of guy!).

  28. Good evening Fritz,

    A quick question regarding your HSA. I retired at the end of 2021 at age 56. I have an HSA account from my employer and recently signed on to a high deductible plan through ACA. Why do you fund your HSA above your deductible? In my view any amount above the deductible is taking funds that could be used for anything and placing them into an account that can only be used for healthcare. Now that I have no mortgage and taking the standard deduction, I need help understanding why you fully fund your HSA every year above your deductible.

    Thanks for sharing,

    Darren

    1. I fund it 100% because you can carry the balance forward and use it for future medical expense. Assume your marginal tax rate is 22%. In essence, you’re getting a 22% discount on any future medical expenses, a return that justifies maxing out the HSA and “taking funds that could be used for anything”. I view it as a guaranteed and safe 22% return, tough to match anywhere.

      Once you start Medicare, you can no longer CONTRIBUTE to an HSA, but you can spend the money that’s already in your account. Best to get every discount you can, so I max it every year and take the full deduction on my annual tax return.

  29. I think people overthink this whole thing too much. I am not uneducated financially (previous CFP) and I have simply maintained a 70/30 portfolio in retirement and withdrawn as much as I needed in my early retirement years (8%) to fund college expenses. After 8% withdrawals over four years I have more money than I started with due to strong market performance the past four years. My biggest fear when retiring was sequence-of-returns risk which fortunately I have been able to avoid, allowing my investments to continue growing. I can now cut down to a more normal 4-5% withdrawal rate which my portfolio will support. I have the ability to go to cash on a moment’s notice and am willing to take the risk of being fully invested. Half is in pre-tax and half is in 401K so taxes are manageable. Maybe I am less risk averse than averaged but this formula has created great returns and few sleepless nights.

    1. Rick, there’s a reason they call it “Personal” Finance, right?! If you prefer to avoid “overthinking”, who am I to judge? Wink. Personally, I love the mental exercise and find it an enjoyable hobby in retirement. But hey, I’m a personal finance blogger, so you’d expect me to say that, right? #NoJudging

  30. Awesome job, Fritz! Just a wonderful testimony to the meticulous pre-retirement planning you had made all those years. Kudos to your precision execution, too. I’m pleasantly unsurprised 🙂 and indeed, very encouraged by this that my own plans for the Big Day (in 2 years) and ensuing decades can bear fruit.

    Appreciating the fact that everyone’s financial situation is different and that you might have had perfectly legit reasons to want to extend the life of the post-tax funds, I would certainly consider maximizing pre-tax to Roth conversions through 2025, the last year before the generous income tax brackets expire. I’d then scale back from 2026 on, still more than just in time to avoid running afoul of IRMAA rules, among other things.

  31. My wife and I are both retiring this year on the 4th of July (Independence Day). We will truly go out with a bang as I am building a 7 foot model rocket and decorating it with the logos of all the companies I have worked for in the last 40 years. [My wife has her own smaller rocket painted pink…] We will send both rockets off on the 4th along with a party of friends and family. It will be a blast!

    Found your website (and book) about 3 months ago and found them WONDERFUL resources! We are doing many of the things you recommend and have our buckets, our problem with too much before-tax funds (didn’t really understand it was a problem until your posts and I will be doing some conversions over the next 5-6 years), our surprise encounter with Social Security’s WEP (wife’s school district employment), our rather simple allocation of assets (modified Couch Potato 60% FZROX, 40% FXNAX), sorting out our Medicare options (thinking medigap G plan), and of course thinking about life on the other side come July 5th. We still have some bumps to work out, but think we are going to make it (although the market YTD has not given me any warm feelings for our transition to unemployment).

    So thank you for all your work in your retirement!

    1. A 7′ Rocket on “Independence” Day. NOW I’ve heard everything. Have a “Blast” (Pun intended).

      Glad to hear my book and website have been helpful. It’s amazing how many things you have to consider as you prepare for “The Starting Line,” glad to hear you’re figuring things out. Enjoy those rocket launches…

  32. • Bucket Strategy: We’ll continue to utilize our bucket strategy, though I expect our quarterly “refilling” process will be put on hold (as designed) if the current market correction continues. It’ll be interesting to see how the strategy works in a more volatile market, but I’m convinced it’ll be the best way to manage our “retirement paycheck” regardless of market conditions

    Is there a formula/rule/guideline you follow as to WHEN you start to tap your 3 years cash instead of selling stocks or bonds in a down market? If stocks are down __ percent then you sell bonds instead of stocks to live on, and if bonds are down __ percent then you draw from the 3 years cash? I.e. can you explain what the drawing of your 3-years-cash bucket looks like? Also it may take years (once the bear ends, at the bottom/worst of the bear) for the portfolio to recover.
    Thank you .

    1. Phil, I don’t have an exact formula (shocking, I know) given how “easy” it’s been since I retired in 2018 (Bull Market). Since I’ve been doing refills quarterly, I just review where things are and make my decision at that point in time. To see the details on “the drawing of your 3-years-cash bucket looks like”, check out the links in the post, I explain everything in detail there (Summary: I set up a monthly paycheck via ACH from a CapitalOne360 money market fund into our checking account, adjusted every January based on our Safe Withdrawal Rate). As for “years to recover”, that’s exactly why Bucket 2 exists.

  33. Great post, Fritz. I like the detailed planning; I’ve done the same. Our situations are actually remarkably similar. I’ve not yet started my Roth conversions but will be next year; the IRMMA impact is annoying but I’ve run the numbers and we are still further ahead with doing them.

    My biggest regret, going back to when my savings was really kicking in mid-career was that I wasn’t knowledgeable on optimal asset location. I tried to create appropriate asset allocation balance within each type of account (before tax, after tax) rather than being more thoughtful about what type of asset would be best in each type of account. If that education was out there, I largely missed it. Seems like it’s talked about more now but still not emphasized. Now with unrealized gains in my after tax account, it’s harder to restructure things to put them where it makes the most sense. For example, locate US equities whose dividends are qualified in after tax accounts, while locating foreign equities in before tax accounts, etc., etc. Feel like I missed the boat a bit on this one…

    1. Yep, that “tax location optimization” wasn’t talked about much back in the day. I view it as a “fine tuning”, but not terribly critical in the overall course of managing your finances. Then again, I tend to be a “get it close, then fire” type of person. Too much focus on too much detail can suck the joy out of living (seems ironic after this detailed post to say that, but in reality I don’t spend much time on this stuff beyond my annual financial review every January). Gotta find the balance that works for you, and quit worrying about missing boats.

  34. Unfortunately I didn’t know who Aunt IRMMA was until too late. We are dealing with her this year and the next two. Happy to hear you have her under control. One thing I didnt hear you mention was QCD, perhaps because you are younger. We have chosen to rely on conversions and withdrawals on the front end of retirement to reduce future RMDs and once we reach 72 we will use QCDs for all or most of our RMD and continue to convert. Our goal is to leave to our children Roth IRAs.

    1. Aunt IRMMA is everyone’s least favorite Aunt. And why does she spell her name with two M’s?

      Valid point on QCD (Qualified Charitable Deductions), will likely be the path we take once RMD’s kick in. For now, we’re simply trying to get as much of it over to the Roth as we can and “batching” our charitable deductions via the Vanguard Charitable Fund.

  35. Fritz,
    What is your view of the New Retirement vs Personal Capital for retirement calculator/planning?
    My wife and I have been doing very detailed tracking of expenses for years in Quicken, so we don’t need that part, but I like to do lots of “what if” scenarios for retirement planning, and I can’t figure which one of these to start getting more serious (i.e., paying for!) about using.
    Thanks,
    Kevin

    1. For more advanced retirement planning, I’d recommend New Retirement. Their calculator is superior, whereas Personal Capital has a better dashboard for Net Worth tracking and an “easier” calculator for those who don’t want to really play with a lot of variables. Given your attention to detail, I think you’d prefer New Retirement. My opinion, for what it’s worth…

      1. Kevin, I use both Personal Capital and New Retirement. I especially like the New Retirement (paid version) for running various scenarios, and validating my Excel based Retirement Model. New Retirement has a Roth Conversion scenario feature which is very helpful to review the impact of Roth conversions, including the amount of Taxes saved via Roth conversions vs. RMDs.

  36. Fritz,
    Have you done a deep dive in any of your posts (I can’t find through searching) on why you use CapitalOne360? I know you like the subaccount function. From what I see on their website, it seems to be pretty efficient and it appears there are no foreign transaction fees on ATMs used abroad, which is important to us. Other than those features, are there other reasons you use it? Did you compare it with other similar cash mgt services / online banks out there?
    Many thanks,
    Kevin

    1. I haven’t gone into it much beyond what’s in the Bucket Strategy series. Bottom Line: I just wanted a “clean” (stand alone) account with subaccount functionality to “feed” the retirement paycheck. I didn’t do much homework since CapitalOne360 offered everything I was looking for. I really don’t touch the account beyond inputs and outflows for Bucket 1. By design, it’s a “low transaction” account to make expense tracking as easy as possible (Jan 1 vs. Dec 31 balance).

  37. Enjoyed reading this article. We started out using a very similar three bucket strategy but it quickly evolved. I am nine years into retirement (retired at 63) and the key difference is that we modified our bucket 1 to become our lifetime guaranteed income stream. This income stream consists of SS benefits and a self-funded pension (using single premium immediate annuities or SPIAs). This income stream was designed to cover our essential expenses (but wound up covering much more due to delaying claiming SS benefits until I turned 70). This approach also eliminates all the replenishment activities which was too confusing for my wife if I were not around.

    The total income stream (including some part time work) gave me the confidence to set our asset allocation to 80/20 even in retirement. However, I tend to “shift” my asset allocation between 60/40 (when market is over-heated) and 80/20 (when market is in bear territory) with an average close to 70/30 over the past nine years. Like you, I tend to “buy the dip” but only within the asset allocation range that I’ve set. Also like you, our portfolio has grown substantially (to what it was before we used our assets to purchase the SPIAs). So, in effect, the bull market has effectively “paid” for the SPIAs in nine years (due to the heavier equity weighting) even as we were withdrawing 4% to 5% each year.

    Now that I’ve started my SS benefits, our withdrawal rate is down to 1% and it is all for discretionary travel (which give us a lot of “peace of mind”). With our bond allocation, we can maintain our current lifestyle even if the market dropped 50% and took more than five years to recover (one of my “stress” tests).

    We have also been doing six-figure Roth conversions since the TCJA took effect in 2018 (paying some IRMAA dues). Unlike your situation, we only had tax-deferred assets so all conversion taxes came from our T-IRA (which, at mostly 22%, was still a bargain). We have now scaled back our conversions to be under the IRMAA threshold and will re-evaluate once the TCJA expires in late 2025. Presently, we plan on spending about half of our RMD (mostly for travel, charity via QCDs, and other gifting). Any unspent RMD amount goes to our after-tax brokerage account which can be another source of income moving forward (at the 0% to 15% tax rate).

    Keep up the great work! You (actually me) can never be too old to learn something.

    1. Nice.
      Effectively, a floor and upside approach with a rather high level of flooring. IMO, eliminating the replenishment activities is a big win.
      To clarify, is your 1% withdrawal rate before or after your RMD’s kick in?

      1. Our withdrawal rate dropped to 1% when I started my SS benefit at age 70 (in 2020). I start my RMD this year but our RMD has nothing to do with our withdrawal rate (at least, with regards to spending). However, we recently decided to spend about 2% (or about half of our RMD) and invest the rest in our taxable brokerage account. Part of that additional 1% we plan to spend annually includes gifting $6K each to our two adult children with the proviso that they invest it in their Roth account. I figure if we can put money into their Roth, they won’t have the 10 year Secure Act limitation with this portion of their inheritance.

        1. Thanks very much for the explanation.
          I just wondered with the benefit of hindsight if you would still delay your SS all the way to 70; as to my eyes it looks a little bit like you have possibly swapped eliminating the replenishment activities for re-investing/gifting your surplus “income” i.e. some of your RMD’s. I suspect which ever way you go it would be really hard to perfectly align all the moving parts. Just an idle thought really.

          1. In hindsight, I believe waiting to 70 to claim my SS benefit was the best decision for our situation. While my original goal was to claim at my FRA (age 66), being able to get spousal benefits (with the restricted application) gave us a nice $50K additional bonus while I waited. However, from my age 63 to age 70, I re-evaluated every year my decision to claim or wait. The defining criteria was whether not claiming impacted what we wanted to do (which was building a new house and traveling). So long as it did not, the decision to wait was fine with me (also I didn’t like leaving the “free” spousal benefit income behind). Working part time after retiring and having a strong market performance had a lot to being able to wait comfortably. Without those circumstances, I’m not sure we could have waited. It was not a forgone conclusion up front but one that we revisited every year.

            If I had to it over again, the only thing I would do differently is to scale back our SPIA purchases such that the lifetime income assumed computing my SS benefit at age 70 (versus at FRA as planned). It would have meant a smaller “pension” (easier to compensate for inflation) and allow more funds to be invested (but still cover all our essential needs). If we needed more, we could always purchase more later. However, waiting to 70 for SS was definitely a good decision (based on our circumstances). I believe having a plan is essential but I think it is more important if you’ve thought out some different “what if” scenarios. In retrospect, it does appear that “my plan” has a lot of moving parts. However, at the time, I was taking just “one step at a time” and re-assessing the trade-offs along the way.

          2. Glen,
            Thank you for the detailed and thoughtful reply. Some good “food for thought” there.

            With your equity heavy allocation perhaps your RMD’s will grow enough in real terms to offset [some of] the impact of inflation on your SPIA’s.

            I agree with your monitoring/vigilance point and since I pulled the plug my plan has already morphed a bit for a variety of reasons – some of which are outside my control.

  38. Hi Fritz, excellent article. I noticed there was not a section about your annual spending (budget). In the 3 years of retirement has your spending been as predicted? More so due to RV adventures? Less due to Covid and staying in more?

    1. Good question, Scott. In my head, that was more a part of the Bucket Strategy series than our Withdrawal Strategy, though I don’t get into the specifics of our spending in either (one of the details I’ve chosen not to share, along with Net Worth, etc). I focus on the Safe Withdrawal Rate, which we targeted at 3 – 3.25%. Our “expected” spending has been within that range (we included RV travel in “expected” and built a budget for it, which has covered all related RV expenses).

      Since I’ve also had some “unexpected” income (from the “3 B’s”: Book, Board and Blog), we’ve given ourselves liberty to have some “unexpected” spending, primarily on the workshop project. Net/net, we’re averaging ~3% SWR, and able to comfortably do whatever we choose to do.

  39. Kevin, I started using New Retirement a number of years ago as they were in the early development stages. Because they were in the early stages, I continued to use Pralana and have found that Pralana tends to be ahead of the curve on development have stuck with them. There is a learning curve to each so trying to keep up with both became too much. I recommend checking out both. Here is a link to Pralana. They have a great manual that goes with the software that I find very useful. The cost is minimal and the forum is also good for posting questions that others or Stuart will likely answer within 24 hours.

  40. Fritz – I enjoyed reading this and comparing the similarities and differences to mine.

    One question – Now that you’re 59.5, does it make sense to just make withdrawals from the pre-tax bucket up to the 24% marginal tax rate? It makes a big difference being able to use those funds to pay taxes vs. a Roth conversion that eats into the pre-tax savings. It makes sense to do this in the same year you’re going to turn around and hit a big contribution to your DAF.

    I struggle with this myself, I keep navigating money out of the pre-tax accounts yet they continue to grow each year. Success problems, but still creating a future problem.

    1. Robert,
      I think I’m at the same conclusion. Take the pre-tax money up to 24% tax now before RMD forces higher IRMAA in several years when you reach 72.
      TLS

      1. General idea is to use post tax money first to let retirement accounts grow tax free. To solve the long-term too-much-pre-tax problem, execute roth conversions, paying some taxes now in exchange for long-term tax free growth. Keep protected money, protected as long as possible. Use the after tax money to meet your spending goals that are above the target tax rate, i.e. use up the 22% bracket with after tax money + roth conversions, then if you need more cash, use a bit more of the after tax money. One may run out of post tax money pretty quick this way, but if you have to start withdrawing more pre tax money, than that’s where Roth comes in to save the day. Send big but look poor:)

    2. Robert, good question, and possibly the course I’ll take when my after-tax dwindles to the point where I have to make a decision. Until then, I’m planning on sticking with the Roth conversions (from pre-tax 401k) and paying taxes with after-tax funds. I’d prefer to get as much into Roth as possible before I start drawing directly from the pre-tax, but it’s certainly a viable option once this route has run it’s course. I do plan on protecting the Roth, so by default I guess that means I’ll prioritize withdrawals from pre-tax first. And yes, “bundling” a larger pre-tax withdrawal or conversion with a “big” DAF contribution is part of the plan. More to come…

      1. Understand this readers. Please read the last sentence of Fritz’s reply above. To me, this IS the most tax savvy move you can make while income is lowest. Big tax deductible contribution to your DAF in the same year you make a sizable Roth conversion. Think deeply about this and ask your tax attorney if you have one. No. 1 smart move to reduce Mr. RMD when you turn 72. Peace to all of you.

  41. I understand the logic of taking the pension early, but could you speak a little bit more as to the math (without getting into personal numbers)? Is the assumption that the “hit” you take on the pension more than offset by the expected growth in your un-tapped investments?

    1. Mr. C, your assumption aligns with my logic. Since the growth of the un-tapped investments grows forever (whereas the pension only grows until the date you start distributions), there is a cross-over point where the net value of the investments surpasses what’s gained by delaying the pension, and it continues to grow from that point forward. I consider it a longevity and inflation hedge.

  42. As a UK based person, I can’t comment on US tax on investments.
    Now 11 years retired, I went with the flow. I invested a bit more in the dip than I would normally have. I didn’t have your bravery, but at the same time i don’t have any bonds!! I am also blessed with a guaranteed regular income pension, which more than compensates for the ups and downs of my investments…
    Having been retired now, for more than 10 years, I have mainly followed a steady, but slightly risky portfolio. If 3 is the middle, I am on an overall 4, with a few 5’s, but nothing less than that, given we have a guaranteed income that more than covers our expenses…we can afford a few risks.

    1. Erith, you’re fortunate indeed to have a “guaranteed income that more than covers our expenses,” a luxury few in the USA have. You’re find with a “slightly risky portfolio” given your strong baseline, and you’re an inspiration to me for how to live a great retirement. I hope you’re able to enjoy your typical summer away in some exotic locale. Thanks for stopping by.

  43. Lessons learn, from my own personal experiences and reading your blog…

    1. Do not overload your tax saving account if you are planning to retire young (50 or younger?).
    2. If you are capable of manage your personal finance and retire young before the general population, delaying SS beyond your full retirement age seemed to be counter intuitive.

    1. TE, good point about needing to plan on “a bridge” with after-tax funds if you’re planning to retire early. Fortunately, we planned for that and it looks like our bridge will be long enough to get us across the water. I agree delaying SS seems counterintuitive, but if folks do the math they’re realize it’s a wise move for most people if you have a decent chance of living beyond 80 or so.

  44. Fritz,

    I would look forward to a future post from you on IRMAA.

    Aunt IRMAA is not our friendly aunt for sure.

    IRMAA premiums for Medicare for 2022 can be as much as $250.00 to $615.00 per month, per person, depending on your IRMAA Income bracket.

    One of the issues/impacts of IRMAA is that the Brackets for IRMAA and the Federal Tax Brackets are not synched, and they are based on different measurements. The Federal Tax Brackets are based on Taxable Income, and the IRMAA brackets are based on MAGI (Modified Adjusted Gross Income).

    I am far too familiar with the impacts of IRMAA, as my wife is 7 years older than I am, taking Social Security and has Medicare, and I’m still working for another 3-4 years.

    As others have mentioned IRMAA has a 2 year look-back period, based on your Tax Return from 2 years prior.

    Factoring in RMDs or Roth Conversions further complicates the impact to IRMAA, especially for those where one spouse is retired, and the other is still working.

  45. Agree IRMAA is not aligned as it should be. Additionally, IRMAA adjustment timing makes tax planning difficult every year.

    Looking forward to more on the relationship of IRMAA, RMD AND 401k to Roth conversations.

    Many have converted large 401k balances to Roth based on financial planner recommendations. Large current tax consequences now to avoid reversion to higher tax brackets and avoid the IRMAA/RMD conundrum.

    1. I was discussing this whole issue with one of my co-workers yesterday, and we both agreed that this fits the definition of “First World Problems”.

      May not like it, but it’s a nice problem to have.

    2. It wasn’t until the TCJA became effective in 2018 (when I was 68) that we dropped to the 22% tax bracket and could seriously consider doing Roth conversions. The question was how much conversion could we do, given we were both on Medicare. After “running the numbers,” it turns out (for us) that taking the first tier of IRMAA penalties made sense (staying mostly in the 22% bracket but hitting a portion of the 24%). If I were to convert to the top of the 24% bracket (which an advisor recommended) and take on the IRMAA tier 3 premium increases, this trade-off adds about 2% more to our marginal tax rate.

      I made this computation by taking the IRMAA increases and treated that as “additional taxes” to the marginal tax rate portion. If I then recompute the resulting percentage (due to adding the IRMAA increases), it makes my effective marginal tax rate 26%. In this case, virtually all the conversion would get taxed at this “marginal” tax rate. Currently, I anticipate when the TCJA expires, we will wind up in the 25% marginal tax rate so doing conversions to the top of the 24% bracket while covered by Medicare doesn’t make sense for us. I think the FA that made the recommendation to convert to the top of the 24% bracket assumed that future tax rates would be higher than the pre-TCJA rates (which may become true).

      In the meantime, the six-figure Roth conversions we’ve been doing annually (mostly at the 22% tax rate) has reduced our projected RMDs (which, for me, starts this year) such that we will be under the IRMAA threshold for many years. The RMD reductions have also given us more headroom to stay in a lower tax bracket and has reduced our taxable SS income from 85% (the max) to about 73%.

      1. Glen,

        Great post. Appreciate the perspective.

        IRMAA is one of those things that does not get enough attention until it hits home.

        Our IRMAA issue is that my wife is 7 years older than I am, has been retired for 4 years now, and I’m still working so we’ve just had to learn to live with the IRMAA premiums. I have a full-time job, and a Consulting Business on the side so there is only so much that we can do for now relating to IRMAA.

        I have spent more time running computations on the impact/interplay with IRMAA/RMDs/Effective Tax Rates than I care to admit.

  46. One thing I haven’t seem a comment on is dual RMD’s. My wife and I both had long careers, invested in our TIRA’s and Roth’s. I also used my investment accounts to trade in, which aided significantly in their growth. We’ve been retired a while and now she will start her RMD’s next year (I’m 81 and she’s 71).

    When I look at what two RMD’s add up to it is a rude shock, not that I didn’t know it was coming. In the last few years the market returns have been phenomenal and our TIRA’s are pretty large. My RMD (which I will take out in 2023) will be 5.15% and her’s will be 3.65%. And her TIRA much larger than mine.

    While we will ‘only’ be in the first tier of IRMMA in 23, if the market continues as it has in two years we’ll be in the 2nd tier for 25.. All thanks to increased sizes of the TIRA’s and the RMD divisor’s increasing descent as we age.

    As someone said earlier, it’s a first world problem, but also the indication of a ravenous government.

  47. The Net Investment Income Tax (NIIT) is another “gotcha” that may be triggered by large conversions from a traditional IRA into a Roth. Individual taxpayers are subject to a 3.8% NIIT on the lesser of their net investment income (interest, dividends, capital gains) OR the amount by which their MAGI exceeds a threshold amount based on filing status. For MFJ filers the threshold is $250k MAGI, and every dollar of Roth conversion is MAGI.

    On top of your Conversion-fueled MAGI, If you also have money invested in taxable accounts – for example, in mutual funds that make dividend and capital gains distributions to account holders — you have extra exposure to being unpleasantly NIIT-picked when filing your return.

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