How quickly would you draw down a 457(b) account?

[VagabondMD]

TheHappyPhilosopher wrote:

I would try and draw down the 457 as soon as feasible without incurring excess unreasonable taxes of course. The 457 is basically an unsecured loan from you to your employer. Additionally it is not protected by ERISA. Risk of default is very low, but not zero. I would try and drain it within 5 years.

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I agree, and that is how we plan to withdraw my wife's plan (in a publicly traded Fortune 500 company), when she retires at about age 55--over five years.

[PhysicianOnFIRE]

TheHappyPhilosopher wrote:

The 457 is basically an unsecured loan from you to your employer.

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That's a great way to look at it.

While the employer seems to be on stable ground, there is always uncertainty in how healthcare will be financed that could affect the viability of many organizations in the future.

I think I'll set up a fairly aggressive drawdown plan. $3,000 a month should put most or all of it in my coffers within about five years. Thank you all for your thoughts!

[TheGipper]

PhysicianOnFIRE wrote:

TheHappyPhilosopher wrote:

The 457 is basically an unsecured loan from you to your employer.

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That’s a great way to look at it.

While the employer seems to be on stable ground, there is always uncertainty in how healthcare will be financed that could affect the viability of many organizations in the future.

I think I’ll set up a fairly aggressive drawdown plan. $3,000 a month should put most or all of it in my coffers within about five years. Thank you all for your thoughts!

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Just to play devils advocate.  You have already decided it is worth taking the risk of employer bankruptcy and 457b forfeiture for all the years you have contributed to your 457b rather than forgoing the tax deferral and contributing more to your taxable account.

Does the logic change dramatically once you retire and begin to drawdown?  I think drawing down the 457b first makes sense IF you also have so much in your tIRA or enough low basis shares in your taxable account that you're just choosing to prioritize 457b drawdown over Roth conversions or tax gain harvesting.  If not, then the logic is a bit fuzzy.

[PhysicianOnFIRE]

TheGipper wrote:

You have already decided it is worth taking the risk of employer bankruptcy and 457b forfeiture for all the years you have contributed to your 457b

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Excellent point. For me, it will be five years worth of contributions at the 33% and 35% federal income tax bracket, and a marginal tax rate approaching 50%. The drawdown will likely be in the 15% federal income tax bracket.

If I draw down over 5 years, I will have taken that small risk of employer default for a total of 10 years. It's another interesting way of looking at the issue.

[nachos31]

TheGipper wrote:

Does the logic change dramatically once you retire and begin to drawdown?

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You make a fine point. I would contend that the logic does not change during that transition, but upon retirement one is finally able to take further action. 457b money will always be less secure as an "unsecured loan from you to your employer" (not covered by ERISA, and subject to creditors/forfeiture) but for some high earners it's one of slim pickings of avenues for saving for retirement that is tax-deferred. That's a valuable avenue if though less ideal than a regular 401k/403b. So the logic goes: I will use this tax-deferred space knowing that my money is less secure. Thus, when it comes time for distributions, I will draw down the 457b first to further minimize that small risk I had during the accumulation phase. I guess I see that as part of the continuum of the initial logic, but it's probably just semantics.

(One certainly could make the off-cited argument to forego contributing to 457b and instead contribute to a taxable acct).

PhysicianOnFIRE wrote:

If I draw down over 5 years, I will have taken that small risk of employer default for a total of 10 years

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Yep. The only specific extra reward for taking on that extra risk is the additional tax-deferred space (and possibly accessing the money earlier in life than you otherwise could with a 401k).

[TheGipper]

All great points. In the end, I will probably agree with the consensus here to drawdown 457b first.

But, it kills me to give up give of valuable low-tax bracket space in early retirement that I otherwise could be using to maximize Roth Conversions.....

And it may limit or change my plans to sell my investment rental condos during this same time period without paying capital gains.

Too many moving pieces, will reassess in 5 years. Tax laws may look like a different animal by then. Worrying about ACA Medicare premium cliffs may be replaced by other cliffs and AGI break points.

Question for PoF. If you set up a $3000/month 457b withdrawal plan over 5 years, but keep the 457b invested, will you not have a large bonus last payment. How is the final payment typically handled?

[PhysicianOnFIRE]

TheGipper wrote:

Question for PoF. If you set up a $3000/month 457b withdrawal plan over 5 years, but keep the 457b invested, will you not have a large bonus last payment. How is the final payment typically handled?

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When I decide to make my "sabbatical" official and start planning my exit strategy, I'll get all the details on my particular plan. I've requested it, but didn't get great answers and didn't want to push too hard since at the time, it wasn't something I needed to know for years.

I believe I set the monthly amount, and I'll receive payments until the account runs dry. 5 years is in the middle of the range of likely scenarios, but the balance could go to zero more quickly in a bear market or last a couple years longer with a continued strong bull.

Taking $36,000 a year will limit my ability to make low-cost / no-cost Roth conversions in those first 5 or so years, which could be a bummer. As you say, there are many moving parts, which is what makes it an interesting discussion.

[PHANTASOS]

I get a little bit nervous (on your behalf) when I hear you talk about hanging it up at >36x annual expenses in your low/mid 40's.  I know history (which the future may not resemble) and I've read the ERN analysis of sustainable withdrawal rates for retirement periods > 30 years, etc. - but it still makes me nervous.  I can think of nothing more tragic than having gone through medical school, residency, and then just barely not sticking it out long enough in clinical medicine to establish long term financial security.

Also, on a related note, I am rather bothered by the degree of our progressive tax system that penalizes those who work hard and are economically productive (good thing LadyGeek is not around to hear me say that).  BTW, I am understating how I feel about progressive taxes.

I think this $150k is material to your long term success/happiness based on how much wiggle room you have (in other words, how close I feel like you are cutting it, which I understand you are less worried about).

This is my recommendation:

1.  Stretch out the tax deferral of the 457(b) over decades.

2.  Delay your retirement by an extra 6 months, so if you do lose some/all of the $150k you can absorb the loss more comfortably.

In almost any scenario, my recommendation will leave you much better off than any other recommendations in this thread - but that's because it requires 6 more months of exchanging your labor for money.

Advantages:

1.  The tax deferral of the 457(b).

2.  LTCG harvesting in 0% bracket.

3.  Roth conversions (down the road this could influence social security taxes, medicare premiums, etc.)

4.  With smaller annual 457(b) withdrawals, you will have more precise control over your AGI/MAGI which could influence healthcare subsidies, college aid for children, etc.

5.  Six more months of having an insider perspective of the entity holding your $150k.

[PhysicianOnFIRE]

Phantasos wrote:

1. Stretch out the tax deferral of the 457(b) over decades.

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Thank you for putting a lot of thought into my situation, and sharing those thoughts here.

My target date has been something of a moving target, but I might stretch it out a bit further by working part time. An interesting result from lots of number crunching is that market returns will determine my future net worth as much or more than working will -- the math in the $10 million dream post bears that out. Of course, all other things being equal, more work always comes out ahead, but an additional 2% to 4% in returns over the next decade could deliver as much as working part time.

My initial plan was to spread out the 457(b) over decades, but then the money is subject to undue risk as it belongs to the employer until it is dispersed. It's unlikely that it would disappear, but I've seen a hospital go bankrupt firsthand once in my relatively short career.

The other wildcard, which seems more likely now than when I started this thread, is the potential for future non-clinical income. Since I'm writing for other physicians who may be in a similar boat as me (minus the blogging aspect), I try not to factor it in too much to the equation, but the reality is I may have myself a part-time job that covers at least some of our expenses even after I "retire."

Cheers!

-PoF

 

 

 

 

[StarTrekDoc]

PhysicianOnFIRE wrote:

For context, let’s assume I have passive income of $30,000 a year from qualified dividends in a taxable account and no other earned income. Additional money to support our annual spending could come from selling funds in the taxable account or withdrawing Roth contributions if needed. We’ll ignore the possibility of continued online income, and yes, this could become a blog post.

How much would you draw each year in this situation, and why? Thanks!

 

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Congrats on possible -RE!

The question is--what is your anticipated expenses above the taxable $30k?

I would draw from the 457 on the anticipated balance (+10% as you probably will have a bucket list that will bump current expenses) since that is a giant IOU and would presume any draw on the $1M taxable will-  1. trigger Capital Gains tax  2. draw down on your future dividends.

We're 20 yrs from our official retirement, but only 10 yrs from crossing our -RE line.  We have a governmental 457(b) and plan to leverage that if we -RE between 55-65 as the supplemental income so not to pull in our pension until 65.

[mitochondria]

Very interesting. I thought there were laws to protect 457b employee contributions after folks in some California municipalities lost their 457b funds to bankruptcy.  This is obviously not the case universally after reading this post.

I had a sizeable 457b governmental (university) account that I rolled over to a traditional IRA (to allow further growth and delay taxes) with no problem after I transferred to another university.  I guess theoretically the university could go bankrupt, but I feel that the odds are unlikely.  I don't understand why the rules for a nongovernmental 457b should be conceptually different.

Can folks in nongovernment positions simply rollover their 457b plans into traditional IRAs after they leave in order to avoid mandatory withdrawals?

[PhysicianOnFIRE]

mitochondria wrote:

Can folks in nongovernment positions simply rollover their 457b plans into traditional IRAs after they leave in order to avoid mandatory withdrawals?

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Not if it's a non-governmental 457(b). They are treated quite differently. The only allowable rollover is to another non-governmental 457(b) with a different employer.

[PhysicianOnFIRE]

StarTrekDoc wrote:

The question is–what is your anticipated expenses above the taxable $30k?

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Last year, we spent $62,000. Make us responsible for our own health insurance, and I expect we'll have expenses in the $80,000 a year range. Drawing $4,000 a month should just about cover the gap between dividends from taxable and our annual expenditures.

If you'll be FI in 10 years but working for 20, you should be in great shape! I will have put in a few years after FI (which we hit ~18 months ago) and feel pretty comfortable with where we'll be in a couple years.

Cheers!

-PoF

[White.Beard.Doc]

I retired from my university position to another medical position.  I am still working and I have plenty of assets and income. When I left the university, I had to choose a distribution option for my 457b.  Each 457b plan is written differently, according to the wishes of the sponsor, per my understanding.

 

My first question is regarding your concern about risk and your principal balance. My 457b funds are all held by Vanguard. How does the financial health of the University Hospital where I worked have anything to do with risk of my 457b funds that are invested with Vanguard?

 

Regarding distributions and choices, I am in excelllent health, have plenty of money to live on, and don't need the money. So I looked at the distribution options and elected to let the 457b money ride as long as possible. I have to start taking the money out when I reach the age of 70.5. The maximum distribution period is 10 years.   So that is what I chose. There is an option to take a hardship withdrawal if circumstances change. So if I need the money and have some type of financial emergency, that is an option.

[White.Beard.Doc]

I retired from my university position to another medical position.  I am still working and I have plenty of assets and income. When I left the university, I had to choose a distribution option for my 457b.  Each 457b plan is written differently, according to the wishes of the sponsor, per my understanding.

 

My first question is regarding your concern about risk and your principal balance. My 457b funds are all held by Vanguard. How does the financial health of the University Hospital where I worked have anything to do with risk of my 457b funds that are invested with Vanguard?

 

Regarding distributions and choices, I am in excellent health, have plenty of money to live on, and don't need the money. So I looked at the distribution options and elected to let the 457b money ride as long as possible. I have to start taking the money out when I reach the age of 70.5. The maximum distribution period is 10 years.   So that is what I chose. There is an option to take a hardship withdrawal if circumstances change. So if I need the money and have some type of financial emergency, that is an option.