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**q-school** · 10-16-2017, 07:50 AM

We are in a similar situation and my advisor asked us whether we are sure we want to continue putting so much in retired space. For now we are continuing but not clear what the answer is for us.

**Hank** · 10-16-2017, 07:51 AM

I wouldn't back off of the IRA. Even with catch up contributions, it's only $6,500 per person or $13K for the two of you.

The diverse streams of passive income are a good thing. Between the pensions, Social Security, and the rental income, you already are well above your "bare bones" standard on your investment policy statement.

Normally I'd recommend doing a series of Roth conversions between early(ish) retirement and 70 1/2. In your case, it looks like your passive income will be pretty high. You don't get to make Roth conversions at a very low marginal rate, but you also get paid a good bit just for waking up on the right side of the daisies in the morning. It's a good problem to have.

Are you planning on staying in California in retirement? If you move to a low- or no-income tax state, then making traditional retirement contributions now and converting to Roth once you've escaped the clutches of the California franchise tax board might make a good deal of sense. You could get a place in Seattle, Vegas, Austin, or Tampa and spend six months and a day there every year while still maintaining a second home in California if you wish.

**Hatton** · 10-16-2017, 08:19 AM

I have fretted about this issue for years. I maxed out a sep-ira for many years that I expect to be at 2 million when I have to make rmds. I have no pension coming my way but I have 5 million in a taxable account. I also expect 40 k from social security. Good problem to have. I did a Roth conversion last year and I really hated to pay the taxes on it.

**White.Beard.Doc** · 10-16-2017, 09:00 AM

Yes, a major first world problem.

If our investment return runs at a conservative 6%, we will be looking at RMDs of well over 300k per year. We have no Roth accounts, so income taxes will be forever high in this lifetime.

I am currently semi-retired yet our income tax bill is still quite high. Income taxes come to about 3 times our total annual living expenses. I don’t need more retirement funds yet I continue to maximize the tax deferred contributions each year given that I also don’t need more current income. And my marginal combined income tax rate is just over 50%. Maybe I will convert to Roth if or when I retire to a low tax state. A pre-mortem Roth conversion could also potentially reduce estate taxes.

**StarTrekDoc** · 10-16-2017, 09:34 AM

Thanks everyone. Indeed fortunate to have this decision point. We aren't even contributing to the IRA buckets directly--just doing 18k 403b, 18k 457 and about 38k in 401a - > Mega Roth rollover.

As Hatton pointed out, we're already looking since passing the $2M mark in tax-deferred forced RMD will push us well into our 'do anything' retirement plans and my initial thoughts is to shift over the current save to max out the megaroll over to Roth IRA since we have that ability. Really trying to max efficiency excess dollars now and tax-efficiency to next generation.

A follow on question: since we have the ability to put away 90k between all our vehicles, and doing that and any shortfall in budget to use our taxable account funds to tax at 15% capital gains? ie pretax savings 36K + 54K ROTH IRA but anticipate a shortfall on yearly budget by about 25K that's funded by the taxable account's liquidation of capital gains.

**The White Coat Investor** · 10-16-2017, 12:49 PM

Don't need to back off, but you should give greater consideration to Roth contributions and conversions.

**q-school** · 10-16-2017, 07:13 PM

one of my questions is whether the pensions/ss reduce the recommendation to shift to bonds as the years pass.

another is once it is clear that you will have extra money beyond your own needs, does it make sense to stay 'aggressive' with stock allocations since the timeline is much longer?

lastly, given the pensions and ss, the likelihood that you would be in a significantly lower tax bracket in retirement is low. should one be superaggressive with roth conversions on market downturns to the max tax payment you can afford?

**jfoxcpacfp** · 10-16-2017, 07:45 PM

StarTrekDoc wrote:

First world problem here — still 15-20 years from retirement on the horizon but IRAs are starting to balloon and RMDs are looking to become an issue when factoring in our Pensions and even more so if SS is taken into consideration.

We’re fortunate enough to have to be splitting buckets for optimal retirement and generation planning:

IPS – Retirement calls for annual:  110k-250k – pre tax — depending on barebones-extravagant living.

Pensions from various sources:   VA-Kaiser-UC :   30k-30k-80k = 140k

Social Security – Me 40k;   Spouse 23k.    — and adult child son – 20k off my income.

Taxable Rental income: 40k

Current Tax-Deferred Balance: $1,400,000. Anticipate 36k x 20 years (720k plus can do catchup after 50×15 yrs too) = $2,100,000+ without any growth.

This would put us at a $80k RMD.

–Issues — Have Adult-Child who we would like to maximize funds for his lifetime use via his SNT.   We are further fortunate to have MegaRoth at our disposal for upwards 54k yearly. Our lifestyle doesn’t allow for maxing out both (90k year)

Question:

-Are what point does one back off on IRA and solely focus on MegaRoth?

-Should we EVER consider backing off IRA since deferred taxation still works for you regardless of RMD taxation now or later anyways?

Click to expand...

SO glad you asked and so glad you're considering this issue this far out. After growth, your current RMD projections will pale in comparison to what the future holds for you. My radar always goes ballistic when I read comments about how much lower a physician's tax bracket will be in retirement. That is a dangerous assumption upon which to base a career of maximizing pre-tax retirement contributions.

First of all, I think your question is, "At what point does one back off on 401k/403b and solely focus on MegaRoth?" That's tricky and you really need to have a plan in place with suitable future projections that will give you answers as to the trade-offs for your financial decisions at each stage of your career. "What If?" scenarios would be helpful, too. You are in a very fortunate position to have this opportunity and I hope you can plan to make the most of it given your timeline and goals.

We encourage clients to target having 1/3 Roth, 1/3 Taxable, 1/3 pre-tax at retirement. There is no Nobel prize-winning thesis for doing so, but it gives them a target to shoot for rather than focusing on tax deductions only. Not many folks are going to have the chance to contribute that much to Roth IRAs alone, but they will have opportunities over the 20 - 30 years leading up to retirement to make Roth conversions, particularly during market corrections. Our plan is to encourage this strategic thinking so that clients are anticipating the opportunity rather than shrinking from paying a dollar more in taxes. See Roth IRA Conversions - When and How.

q-school wrote:

We are in a similar situation and my advisor asked us whether we are sure we want to continue putting so much in retired space. For now we are continuing but not clear what the answer is for us.

I am sure your financial planner means well, but that doesn't sound like a very helpful question to me. I think s/he should be offering you solutions and information rather than asking YOU if YOU are sure you want to continue to do this.

**q-school** · 10-16-2017, 08:09 PM

jfoxcpacfp wrote:

q-school wrote:

We are in a similar situation and my advisor asked us whether we are sure we want to continue putting so much in retired space. For now we are continuing but not clear what the answer is for us.

I am sure your financial planner means well, but that doesn’t sound like a very helpful question to me. I think s/he should be offering you solutions and information rather than asking YOU if YOU are sure you want to continue to do this.

Click to expand...

that's a fair point. I made a poor summary of a fairly lengthy conversation with the planner. They presented a lot of graphs and a few spreadsheets. They blathered about historical modeling. Some commentary on asset allocations. They talked about real estate as another leg of the stool. They suggested a fairly radical change to the plan, and it is taking a while for me to digest. I'm trying to read the book Dr. Mom suggested by James Lange about paying taxes later, but it pretty much puts me to sleep in ten minutes.

Basically we built plan many, many years ago with retirement annual budget in mind.  first world problem, we have blown past creating the retirement budget we anticipated, and now are at a point where I feel we need fairly specialized guidance.  or maybe I just like to think I'm special.

I think the question was more behavioral than anything--what is the purpose of retirement funds? I should caveat by saying I have a curious mind, and like to think about things. They propose I should not feel obligated to keep stuffing money into retirement funds--given that we have achieved our goal even by most conservative estimates.   An even bigger question becomes what is the purpose of work if you are FI? Why are we here?

I have a hard time thinking I'm going to change my spending habits without really focusing on doing so--if I even want to. If I don't change spending habits, money is just going to keep piling up apparently.   I like the money to be used efficiently however, so that's what I'm focused on. And I get ideas here by posting, even if I'm fairly sure I know what I'm going to do. However, in this case, I'm still pondering what to do.

my junior partners think whatever happens, i should invest in a Porsche so i can be like them.

**ITEngineer** · 10-16-2017, 10:52 PM

StarTrekDoc wrote:

Current Tax-Deferred Balance: $1,400,000. Anticipate 36k x 20 years (720k plus can do catchup after 50×15 yrs too) = $2,100,000+ without any growth.

This would put us at a $80k RMD.

Click to expand...

Awesome. This is a big reason I started participating in the forum is I believe I will have large RMD in the future and I haven't found anyone with a similar 'problem' within my work/social groups. Engineers are poor savers/investors I guess and no one thinks long term.

Enough about me - Back to you. I believe you are vastly underestimating your RMD in the future unless you are going to invest in T-bills. I'm not sure your age (I'm guessing 46) and assuming you work till 60-65 then stop contributing (but at that point it won't matter much) and the RMD kicks in at 70 (obviously). Doing some simple math (starting at $1.4M and adding $36k for the next 20 years, and assuming a conservative 5% return) you end up with $6.3M at 70. That RMD would be $250k in year one and would probably grow in subsequent years.

Given that long timeline and all the assets that you have, if I assume 9% return (inline with any long term average) you'll end up with $15M at 70 and be required to withdraw $600k a year. With either calculation you won't be anywhere near $80k/year.

Congratulations and great job.

**Dr. Mom** · 10-16-2017, 11:29 PM

StarTrekDoc wrote:

Really trying to max efficiency excess dollars now and tax-efficiency to next generation.

Click to expand...

What is your highest marginal rate now versus what your child or children's would be given their earning potential and career choices? Have your advisor model out some scenarios for you based on current tax rates and different longevities. The higher your rate now and the lower theirs, I would keep going with tax-deferred. The closer they are, I would lean to Roth now. You can always Roth convert in the future if advantageous. You can't go back and recapture years of missed tax-deferral. Read about Lange's Cascading Beneficiary Plan (q-school just skip to that Chapter before you fall asleep!). The surviving spouse can disclaim some of the IRA to the kids/grandkids if not needed by him/her.

**Hank** · 10-17-2017, 12:18 AM

q-school wrote:

one of my questions is whether the pensions/ss reduce the recommendation to shift to bonds as the years pass.

Click to expand...

I'd view pensions and social security as somewhat riskier versions of bonds issued by the same entity. A treasury bond is a general obligation backed by the full faith and credit of the United States. A VA pension or military retirement also is a general obligation of the U.S., with the proviso that the government is more likely to move to chained CPI or some other chicanery to reduce the value of social security or a pension in a way that they wouldn't reduce the return to institutional investors on a treasury bond.

There's some risk that social security becomes means tested in the future. There's some risk that SS is offset by pensions (public or private). I'd argue that a University of California system pension is somewhat riskier than California municipal bonds. The risk is greater than with a U.S. pension or bond, but you probably will get all or most of your money. Definitely good to have enough of your own money to meet your needs, then the California funds cover wants.

A pension or a bond from Illinois, Puerto Rico, or Detroit would make me awfully uncomfortable. The situation in Illinois is bad enough that I wouldn't want to own much property or have much income subject to taxation by that state. I think StarTrekDoc will be fine, but I'd be worried for someone who expected to maintain a high income in retirement based solely on Illinois pension income.

For me, I view the net present value of an expected federal or (solvent) state government as being roughly equivalent to having a bond portfolio from that issuer in the same dollar amount. If you have a vested federal pension worth $300K in today dollars and you have $700K in Vanguard total market, then you have a 70:30 stock to bond allocation. No need to load up on bonds on top of that position, unless you can't stomach a downturn in the market. Do what you can tolerate behaviorally, then optimize financially.

**Dr. Mom** · 10-17-2017, 12:41 AM

Hank wrote:

For me, I view the net present value of an expected federal or (solvent) state government as being roughly equivalent to having a bond portfolio from that issuer in the same dollar amount. If you have a vested federal pension worth $300K in today dollars and you have $700K in Vanguard total market, then you have a 70:30 stock to bond allocation. No need to load up on bonds on top of that position, unless you can’t stomach a downturn in the market. Do what you can tolerate behaviorally, then optimize financially.

Click to expand...

Well said. Bogle views SS similarly.

**q-school** · 10-17-2017, 01:01 AM

so can't trust pensions, can't trust ss, market returns subject to SORR, what is there left that we can trust? spia? gold?

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RMDs - When to back off the gas pedal of 401k/403b/457, if ever?

RMDs - When to back off the gas pedal of 401k/403b/457, if ever?

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