FREE NEWSLETTER
WHEN I RETIRED IN 2009, I had two main goals: I wanted to buy a used Volkswagen van—and I didn’t want to touch the money in my tax-deferred retirement accounts. Instead, I wanted to let that money compound for as long as possible.
What was so important about the VW van? When I was growing up in the 1960s, those vans were a symbol of freedom. While I was in college, I remember a friend spending most of his days surfing. He lived out of his van and worked a few odd jobs whenever he needed money. I admit it, I envied him.
The vans were also emblematic of a nomadic lifestyle. That’s what I wanted to do when I retired—travel from one place to another. I was planning to load a VW van with an air mattress, sleeping bag, cooler and a few other belongings. I didn’t particularly care where I was going. I just wanted to go.
Unfortunately, things didn’t work out as planned. A few months after I retired, my father was diagnosed with cancer. Later, I became a caregiver for my mother. Then I married a lovely lady who has no desire to sleep in a van while crisscrossing the country. I must confess, now that I’m older, roughing it in a van doesn’t sound so appealing to me, either.
I had better luck with my other retirement goal: leaving my tax-deferred retirement accounts untouched.
My plan was to live solely off my taxable investment account during my early retirement years. I had a good chunk of money in a Vanguard Group account. Even though I was only age 58, I thought that money could last me until I started taking my first required minimum distribution (RMD) from my retirement accounts in the year I turned age 70½. (The required starting age was later revised to 72.) I figured that, from my 70s on, my retirement account RMDs—along with Social Security—would give me enough predictable income for a financially secure retirement.
As part of my planning, during the two years before I retired, I tracked my spending using an Excel spreadsheet. My fixed expenses were low. I had no debt. Still, I doubled my estimated expenses to make sure my plan was doable.
I was eligible for a pension. I took the lump-sum payout, instead of the annuity, and rolled the money into an IRA. One reason I took the lump sum: During my early retirement years, I wanted to keep my taxable income low, so I could do larger Roth conversions without incurring a sizable tax bill. That, in turn, would help reduce my tax bill when my RMDs kicked in starting in my early 70s. On top of that, the conversions would give me a well-funded Roth IRA, which I viewed as my insurance policy in case I incurred long-term-care expenses.
I was single at the time, and that was another reason for taking the lump-sum payout. I was concerned that, if I later married, my wife wouldn’t receive any money if I took the annuity. There would be no survivor benefit upon my death. It turned out to be the right decision. In 2020, I did indeed get married.
I still haven’t withdrawn any money from my tax-deferred accounts. Thanks to the 2009-20 bull market, the longest one in U.S. stock market history, I was able to live solely off my taxable investments. My first retirement account withdrawal will be next year, when I start required minimum distributions at age 72.
I’m confident we won’t run out of money because our income from our RMDs and Social Security will be more than enough to cover our low overhead costs and our discretionary spending. In addition, we have a substantial Roth IRA to fall back on.
The financial security we have today all started with that Vanguard taxable account that I built up during my working years. The account allowed us to leave our retirement accounts to grow and to delay my Social Security benefits until age 70. The bottom line: When investing for retirement, also try to fund a taxable account—because it can be an important bridge to financial security.
Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. Check out his earlier articles and follow him on Twitter @DMFrie.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Well done to stuff the taxable mattress and delaying SS. I was able to do some of that but I doubt I could afford to live off our taxable accounts for 12 years. My wife and I both have “cash-balance” pensions which we are delaying to 70 (or 72) but then we will also be faced with the lump sum/annuity question. I struggle with the annuity with no inflation protection so may go with the lump and buy inflation-protected bonds.
In my previous comments I did not make my point clear. There are two kinds of plans: one is a contributory plan like defined benefit and defined contribution plans. The other kind is non contributory plans, i.e. your employer gives you a pension for your services. I was referring to the latter kind of plans when I commented that the pension cannot be rolled over to an IRA.
https://www.rocketdollar.com/blog/rules-for-rolling-over-pension-to-an-ira-
I was lucky, my company had a “supplemental” defined benefit Retirement Income Account (SRIP) for some of us old timers because of a legal settlement in the 1990s. This was in addition to our regular defined benefit RIP, which I took as a lump sum and rolled over into two IRA(s). The SRIP paid out like a payroll check, which subjected me to one of the highest marginal income tax rates. However, like my wife said “Do you want the money or not?” LOL and there was no legal way to shelter that money without undue risk IMO.
Anyway, we lived on that SRIP for years and I took my SS at 70 for her benefit, because she is 16 years younger than me and will get my SS when I pass. Lucky? maybe. However, I thank God for our happiness, my career and our well being. I persevered for almost 39 years through many layoffs, divorces and bosses during my career at that company and retired happily in 2016.
Hello Dennis – thank you for sharing details about how you managed your portfolio to get you over the finish line.
We’re in a similar situation, I think, in that we have a significant taxable portfolio and an equal sized pre-tax portfolio in IRA accounts. We don’t have as much in ROTHs because I didn’t want to take the tax hit.
One question I struggle with is asset location – where to put the bond component of our asset allocation (60/40ish, eq/bonds – all ETFs). So far we’ve followed the conventional wisdom, which is to put the bond positions in pre-tax accounts so we’re not hit with the dividend income they throw off.
I often look at this with some pangs of regret, given how the stock market has run for the last 5-10 years – all of that equity gain happened in our taxable portfolio. Our advisor continues to tell us that it’s still the right approach.
How have got yours set up, in terms of both your asset allocation; and your asset location?
Thanks.
tshort, FWIW… we’re in a similar situation in terms of taxable/traditional/Roth split, and virtually all bond holdings except for I-bonds are in Traditional 401k.
Thanks for sharing that. It does occur to me that from a long-term tax efficiency perspective, all of the appreciation of our taxable portfolio will only attract a 15% LT cap gains hit, whereas those same gains in the IRAs will likely attract a higher marginal tax rate as we withdraw them. This could become even more true if the Fed increase income taxes by lowering the income thresholds for the lower tax brackets.
So I guess what we’re doing makes sense. If we had a bunch more in ROTHs, not so much.
We’re taking a similar approach in spending from taxable accounts and leaving retirement accounts alone, but I sometimes question it, as it likely means higher RMDs later.
I’m not sure retiring, and then waiting 14 years to tap tax-deferred accounts is the optimum plan. Was all that sacrifice really necessary to be financially secure?
Who says it was a sacrifice? I didn’t read the decision as one to not spend, but rather a decision on where to spend from first.
Few readers commented that they rolled their pension to IRA. Traditional IRA is a tax-deferred account and pension is taxable. So you cannot mix these accounts. You may be lucky if you did and not audited. There are strict contribution limits and income limits for traditional and Roth IRA contributions per year. After a 2010 change in the tax laws one can convert any amount from traditional to Roth IRAs if one is willing to pay taxes on the converted amount. Furthermore one can only contribute from earned income not from pension.
As several people have already replied to your first comment, it is perfectly fine to roll your pension to an IRA. If you Google it, the first few results give the procedure on how to do it. Please stop responding with this misinformation.
I had 2 VW vans in my 20’s and early 30’s. Built the latter into a camper with koa wood interior. My wife and I had a lot of fun in that van…then we had 3 kids in 4 years, lol.
It is amazing how life changes our plans. I did not retire until 66 and hoped to play golf and travel more. For various reasons that did not happen. People need to realize that when you retire later, your or your wife’s health or other loved ones (my mother) may interfere with your plans.
Financially, we live off of my pension and our SS. The only time we dip into investments and savings are for major capital purchases like a car. My wife’s 2007 Avalon blew an engine two weeks ago and we bought a late model replacement for a mere $40k. We are very thankful to have savings that permits that.
I had hoped that my non COLA pension and SS would provide for our living expenses until age 75. So far so good at age 77.
I love the quote by Mike Tyson, “Everybody has a plan until they get punched in the face”. I think people who have a plan can more easily adapt after getting punched in the face.
Did you ever buy you a VW van?
Sounds like a good plan coupled with disciplined follow-through. Thanks for sharing. It’s always good to hear a success story that’s built on such. Congrat’s!
Sorry to hear about the VW van dream dying. Hopefully you were able to travel some more traditionally.
I have a pension which is the great bulk of my income and that monthly payday as we still call it makes our financial life about the same as when I was working.
I could never understand the idea of taking a lump sum and the risk that goes with it. However, your foresight in planning for a possible marriage certainly demonstrates one good reason for the lump sum.
We are using survivor annuities as part of the pension.
You are fortunate that you have such a robust pension. This is becoming increasingly rare.
As companies have been phasing out defined benefit pensions over the last 20-30 years, fewer and fewer new retirees have a steady source of ‘mailbox money’ to fund their retirement. As a result, they must turn to their portfolios as their primary source of income, which will usually include withdrawing from them (aka, ‘decumulation’).
Depending on the size of the pension, a rollover can make a lot of sense, especially when the lump sum is relatively small compared to one’s pre-tax portfolio value.
I did the math on my meager pension, which stopped growing from company contributions in the mid-90’s when my company changed to a defined contribution plan for all employees. It turns out the growth rate of the pension balance was about 1-1.5% over 20 years! I could’ve easily doubled that had I simply taken the lump sum rollover when I left the company and put it into my conservatively managed investment portfolio.
Oh well – live and learn.
You say that you took out the pension payout as a lump sum and rolled it over to IRA. To the best of my knowledge, that is not allowed under our tax laws.
Sure it is. When I was 55 years old, I received a discounted $500,000 lump sum payment option from my employer (Altria) 5 years ago instead of my full pension at age 65. The pension was reduced by 6% for each year before age 65. My options were: 1) get the discounted $500k an pay taxes, 2) roll over to an IRA the discounted $500k amount, 3) receive a third party annuity on the discount pension, 4) do nothing and wait to turn 65 to collect the full pension………. I did the math and chose option 4.
My wife also took a lump sum and rolled it over to a Fidelity IRA. The only IRS requirement I know of is the 60 day time limit for moving the money.
Sure you are. Into a 401k too, if the plan permits it.