The SS decision does NOT require complicated math. There are only three main issues: 1) Life expectancy is near 80 years old. 50% die before, 50% after 80. Think about your health and family history. Hold that thought. 2) For those who die at exactly age 80, the total SS payout adds up to exactly the same whether you take SS at 62, 65, or 72. That is the "breakeven" point. If you die before 80, the total payout for age 62 signup is MORE than waiting. If you die after 80, the total payout is MORE for those who waited, but the 62's still get SS, just less than the max possible. 3)The deal maker/breaker: If you wait, do you starve, live on savings, or keep working to pay living expenses? Most people need the money and CAN NOT wait. If you have savings or income, then you can afford to wait if you expect to live past 80. Maybe die early? Then take SS at 62, leave assets to heirs. Otherwise, you lived off assets for 8-10 years and less is left for heirs. No complicated "8% a year" thinking
Keep in mind that IRA capital gains are taxed at ordinary rates, i.e., taxes on gains strictly due to inflation. Roth IRAs are not taxed on inflation. So if you only keep up with inflation in future gains, the ROTH has zero real return and the IRA has a negative real return, approximately negative your marginal tax rate at withdrawal. Ouch!
Here is a very tactical process for annual decisions about the complex brew of factors discussed in the article and comments. The idea is to understand the impact of tax brackets on these decisions. Create a small spreadsheet, starting with all of the tax brackets (this year) and account for the "add-ons" such as the 3.8 percent Net Investment Income Tax, etc. Then estimate income, capital gains & losses, taxfree-muni income. I separate Social Security because taxes are a function of income/AGI. Then calculate the maximum amounts that you can utilize within each tax-bracket. Example: Brackets of 84K, 178k, 340k, 432k, 648k; your taxable income is about 100k. You can "use" up to 78k within your current tax bracket (marginal rate), 162k in the next bracket. This tells you to withdraw no more than 78k from an IRA at one marginal rate and any more at the next, etc.
Rather than convert a fixed dollar amount to a Roth each year, I carefully look at how much, maximum, I can convert in each tax bracket and then decide. Looking to withdraw funds in later years? Withdraw up to $X in a low bracket and then some from a Roth, if needed. The Roth withdrawl is saving marginal higher tax if it were from an IRA. That is what I mean by a "tactical" process that helps me optimize annually.
My personal spreadsheet now includes my state income tax brackets and deductions, such as out of state munis, plus the effect on Medicare premiums. Medicare uses "MAGI" (add back muni income) greater than 176(182?)k from 2 YEARS AGO, so I project the tax effects for a few years in the future. A huge lump sum Roth conversions puts you in progressively higher tax brackets this year and higher premiums in two years. The 3.8% Medicare NIC kicks in at 200k. Lots of different "bracket" effects for the spreadsheet to keep track of. But easy to do "what if" scenarios to consider different alternative.
Keep the spreadsheet for next year, as rates, brackets, etc. change annualy. Easy to maintain once you have it setup for your situation.
The first-level discussion centers on "the market has already priced in" near-future performance. A second-level view would be to look for value that the market has not priced in (yet), little known companies or advances in technology. In the 1980's Peter Lynch averaged double the S&P by visiting small and mid-sized companies to see them first hand.
Spending, 50,000 foot view: Go to your 1040 tax return. Now you have Income figures, some of which varies, e.g. cap gains. For the same year, get Dec 31st statements for banks, brokerage, 401k, etc. Figure or read change in the BALANCE over 1 year. Income minus savings (+/-) = how much was spent. For me, I then backed out retirement contributions pre-65, job pay at 65 or whenever, Medicare premiums! and then added back income from Soc Sec + pensions. Ret. income - spending (w/out ret. contribs) gives an idea of how much trouble you might get into.
Comments
The SS decision does NOT require complicated math. There are only three main issues: 1) Life expectancy is near 80 years old. 50% die before, 50% after 80. Think about your health and family history. Hold that thought. 2) For those who die at exactly age 80, the total SS payout adds up to exactly the same whether you take SS at 62, 65, or 72. That is the "breakeven" point. If you die before 80, the total payout for age 62 signup is MORE than waiting. If you die after 80, the total payout is MORE for those who waited, but the 62's still get SS, just less than the max possible. 3)The deal maker/breaker: If you wait, do you starve, live on savings, or keep working to pay living expenses? Most people need the money and CAN NOT wait. If you have savings or income, then you can afford to wait if you expect to live past 80. Maybe die early? Then take SS at 62, leave assets to heirs. Otherwise, you lived off assets for 8-10 years and less is left for heirs. No complicated "8% a year" thinking
Post: Tiresome Debates
Link to comment from September 18, 2022
Distilled Water. Price was $1.00/gallon last year, $1.60/gal this year. Think about what the cost drivers are ...
Post: What everyday purchase do you consider most overpriced?
Link to comment from July 23, 2022
Keep in mind that IRA capital gains are taxed at ordinary rates, i.e., taxes on gains strictly due to inflation. Roth IRAs are not taxed on inflation. So if you only keep up with inflation in future gains, the ROTH has zero real return and the IRA has a negative real return, approximately negative your marginal tax rate at withdrawal. Ouch!
Post: Self-Inflicted
Link to comment from June 29, 2022
Here is a very tactical process for annual decisions about the complex brew of factors discussed in the article and comments. The idea is to understand the impact of tax brackets on these decisions. Create a small spreadsheet, starting with all of the tax brackets (this year) and account for the "add-ons" such as the 3.8 percent Net Investment Income Tax, etc. Then estimate income, capital gains & losses, taxfree-muni income. I separate Social Security because taxes are a function of income/AGI. Then calculate the maximum amounts that you can utilize within each tax-bracket. Example: Brackets of 84K, 178k, 340k, 432k, 648k; your taxable income is about 100k. You can "use" up to 78k within your current tax bracket (marginal rate), 162k in the next bracket. This tells you to withdraw no more than 78k from an IRA at one marginal rate and any more at the next, etc. Rather than convert a fixed dollar amount to a Roth each year, I carefully look at how much, maximum, I can convert in each tax bracket and then decide. Looking to withdraw funds in later years? Withdraw up to $X in a low bracket and then some from a Roth, if needed. The Roth withdrawl is saving marginal higher tax if it were from an IRA. That is what I mean by a "tactical" process that helps me optimize annually. My personal spreadsheet now includes my state income tax brackets and deductions, such as out of state munis, plus the effect on Medicare premiums. Medicare uses "MAGI" (add back muni income) greater than 176(182?)k from 2 YEARS AGO, so I project the tax effects for a few years in the future. A huge lump sum Roth conversions puts you in progressively higher tax brackets this year and higher premiums in two years. The 3.8% Medicare NIC kicks in at 200k. Lots of different "bracket" effects for the spreadsheet to keep track of. But easy to do "what if" scenarios to consider different alternative. Keep the spreadsheet for next year, as rates, brackets, etc. change annualy. Easy to maintain once you have it setup for your situation.
Post: Self-Inflicted
Link to comment from June 29, 2022
The first-level discussion centers on "the market has already priced in" near-future performance. A second-level view would be to look for value that the market has not priced in (yet), little known companies or advances in technology. In the 1980's Peter Lynch averaged double the S&P by visiting small and mid-sized companies to see them first hand.
Post: Think Again
Link to comment from June 4, 2022
Spending, 50,000 foot view: Go to your 1040 tax return. Now you have Income figures, some of which varies, e.g. cap gains. For the same year, get Dec 31st statements for banks, brokerage, 401k, etc. Figure or read change in the BALANCE over 1 year. Income minus savings (+/-) = how much was spent. For me, I then backed out retirement contributions pre-65, job pay at 65 or whenever, Medicare premiums! and then added back income from Soc Sec + pensions. Ret. income - spending (w/out ret. contribs) gives an idea of how much trouble you might get into.
Post: Teaching the Teacher
Link to comment from October 23, 2021