Need Neutral Advice Regarding Retirement Strategy

[jitterbug]

I haven't been on here for a while, but when wondering who might give me a neutral opinion, you guys came to mind.

Back story: I was widowed young, with one child. I was left a decent sum of life insurance and by the time I remarried, it was worth $1 million. My pre-nup states I get that sum of money if we divorce and my will states my child gets that sum at my death. All growth off that money would be split with my husband if we divorce and all income from it is used for our mutual benefit.  That money is about half of our net worth - the other half is mostly invested in 401k and IRAs (both his and mine)

My husband and I are in our late 50s and are starting to question whether we can afford early retirement. We've been talking to our investment guy (from a nationally well known company) and we asked him what the plan would be for us to GET to our money when we retire?  Will we take a percentage from each investment?  Will we drain one investment and then move on to the next?  (Our hope is that our dividends and capital gains will provide the majority of our income).

He does not want to draw from our 401ks until absolutely necessary due to the tax liability - so instead, he wants to tap into my pre-marriage money first, if needed.  But he knows I want to preserve that dollar amount for my child - so he's suggesting I buy a universal life insurance policy in that amount so my child will get that money - then the actual money is "free" to spend down in our retirement.  At this point, he didn't have a dollar amount on what that insurance policy would cost - but I'd imagine at my age, the cost would be fairly high - and wouldn't that offset the tax savings enough to make it not that worthwhile?

I also mentioned that Dave Ramsey says we should gift ourselves long term care insurance for our 60th birthday and he started suggesting these fancy plans, whereby we'd put a significant sum of money into a plan (like $100,000) and as I understand it, it would cover our long term care AND the principal would go to a beneficiary at our death.  We really just wanted a basic plan, where we pay "x" amount of dollars a month and get "y" amount of coverage.  We don't want to tie up $100,000 in a long term health care plan!  Yeah, if we live to be 99, we might have spent that amount of money in insurance.  But in the meantime, we want the income off that $100,000 to fund our current retirement dreams!

Up until this point, we've been VERY happy with our investment guy.  He's enthusiastic, he's smart, he's teaching us things. But his push for insurance plans is making me question his motive.  Or is he just looking at creative ways to preserve our principal?  But also - why the heck are we all pushing so much money into our 401ks if the best advice is to not actually TAKE IT?

Thoughts?

[justme]

Very first thought -- do you pay the guy a specific amount when you meet with him or is he taking a % of your investments? If it's the later I would him or at least find a fee-only CFP for a second opinion.

[buystoys]

I agree with justme.  It sounds like he has a good commission coming if he sells you that policy.  What is wrong with having some tax liability?  You will have some when you tap into the 401(k)/IRA anyway.  If you make it lower amounts drawn out over a period of time, your liability may be much lower in the long run.  Of course, taxes could decrease, but I think it's more likely they'll increase in the future.

[justme]

Ok universal life is very similar to whole life insurance. Which means it'll be a lot more than buying a term life insurance because there's an "investment" aspect to it. Usually they're not worth the extra money.



He's just wrong on the 401k advice. Our tax system here is in brackets so every year you have an ability to withdraw money "for free". I believe since married people get the $24k exception or whatever it's called the first $24k a year is essentially tax free. Then the next almost $20k is only at 10% - which is similar to the tax rate of long term capital gains. So you could pull out over $40k from your 401k a year for probably only around $2k in taxes and you'd still be in the 0% long term capital gains tax bracket. 

***Please don't take the numbers I said above as exact science. I'm still well away from that part of my life so I haven't dived deep into this and only have a high level working knowledge of this. Someone else here might have a better idea. A CFP might or it might be worth a consult with a CPA to figure it out. 



As for long term care insurance -- you really need to research this. I've seen a lot of articles that enumerate why this isn't as good as initially thought. Some suppliers are going under, others are having to raise rates by huge amounts in order to cover costs. I would thoroughly research any company you're considering. Also keep in mind that any company Dave Ramsey recommends is because they paid him and in a lot of instances the only research they put into the company before recommending them is that the payment cleared (this is for everything he recommends not just long term care). 


Oh and with regards to drawing down the $1M. The normal rule of thumb is you can take 3-4% of an investment each year and not touch the principal. So if the $1M is invested properly you should be able to get a $30k income from that without touching the principal.

So with the $30k from the $1M and the $24-44k from your 401k you're bringing in a decent income without having to buy an insurance policy.

[Lizard Queen]

A lot of times, they'll make extra commission from selling something like universal life. From my finance class on risk and insurance, these are terrible investments but they earn big commissions!

If you really want your kid to end up with the life insurance money, I'd say gift it to him gradually every year until you get to $500k, or whatever minimum you want to make sure they get. That might mean you can't retire as early, but a long stay in a nursing home will eat that up quick as well. How are you going to preserve that money for your kid in that case?

[Deleted]

Sorry that I don't have the answers you are looking for, but I do have a comment or two.

I would worry less about preserving the $1 million for my child and worry more about preserving it for yourself.  Even if you do buy insurance that preserves it for your child, you will have spent your money first for yours and your spouse's living expenses in case of a divorce.  I don't think the judge in a possible divorce case is going to reimburse you out of joint assets.  So I'd be reluctant to spend it first.  But if all you are trying to do is protect the money for your child, insurance isn't that bad an idea.  I know several people in their 50s who have chosen that route when deciding whether to take a reduced pension for the rest of their life in order to provide for their spouse.  So it isn't really an off-the-wall solution if protecting it for your child is the only purpose in protecting the $1 million.

There is a lot of variation in LTC plans so I'd suggest you use a separate broker for that.  Know that they aren't the LTC of yesteryear.  The basic plan you describe may not exactly exist.  For example, there is usually a time limit for how long the coverage lasts and some are structured more like a draw against a pot of money.  That's why I would use a separate broker.  Then you would be more likely to find one you like.

Does your investment guy sell insurance?  That would ring the alarm bell for me more than anything else. 

[The Walk of the Penguin Mich]

I hate to keep beating on the health insurance horse, but how has your financial advisor addressed this issue?  For a couple your age buying health insurance on the market, you can expect to pay roughly $24k/year for the number of years up to Medicare (and about half that after Medicare kicks in).  Assuming that you have 6-7 years until 65, this is going to run about 10% of your 401k/IRA. 

Did you discuss when to start taking SS?  Do you have a good idea as to how much you need to pullout of investments until you start to collect?  Has your financial advisor run any sort of Monte Carlo simulation on your draw downs?  

I was utterly amazed as to how much was really involved in trying to figure out how to figure this out.  We are in the same situation and will likely bite the bullet and retire at 63/62 (1-2 years).  The only difference is that we are not looking to preserve any of our assets for heirs, and hope we spend every dime.  The multiple Monte Carlo simulations our FA has run has us setting very well.  Right now, TD is working for access to health insurance as the local choices on the marketplace in our county really suck.  But when his current job is over, he is done.  He thought it was going to be last month, but they changed their mind.

[teen persuasion]

Let me get this straight. Your investment guy wants you to drain down the one asset you want to leave untouched, and wants to leave untouched until later the one asset class that will incur the highest tax rates (ordinary income vs LTCG) and have RMDs later on top of SS income? And to overcome your distaste for tapping the untouchable asset, he wants to sell you a poor "investment" that benefits him (commission)?

He's not listening to your desires, suggesting poor tax planning, and selling you things you don't need.



Usually, you want to tap (or strategically convert them incrementally to Roth) 401k and tIRA assets early, to prevent a tax torpedo after age 70-ish. If you leave them to last, they grow, possibly large enough that the RMDs (required minimum distributions) are larger than needed for spending. That forced income then makes more of your SS taxable. A good plan attempts to level out annually your tax load over your entire retirement.

[Tiny]

To the OP,  I would question why it is suggested to NOT draw down your 401K/tax deferred money sooner rather than later.   

I don't know how much money you have tax deferred OR what your SS will be OR if you will have pension income as well.  There's alot of moving parts 

A couple of things: 
While both of you are alive - you are in a lower tax bracket now - before you are drawing pension, SS, RMDs .... and once one of you dies - the survivor looses all the "married" tax benefits.   
Having to take large RMDs can dramatically effect your taxes (especially if having to file single) AND can effect the cost of medicare (is it IIRMA or MAGI or something)  It also can effect the taxes on your SS. 

It's NOT bad to pay taxes.  I'm not implying that having to pay taxes on your TAX DIFFERED money is the "government taking your MONEY!!!"   I"m not.   What I'm trying to say is with knowledge and planning you can make (or keep   ) more of your money.   I've started viewing it as paying "retail prices" or "on sale prices" -  when I eventually start to pull money from my Tax Differed Accounts I'd like to pay a "sale" price and not retail.      

I think there's a balancing act between figuring out what money to take, how much, and when.   I think it's a long term "game plan" and you have to look ahead to what changes in Income you will have in the future (a pension?  taking SS?  RMDs??) 
 

I'm also wondering about putting the 1mil into something that you (and your heirs) can't access until your death.   What if you live another 30 or 40 years - how useful will that money be to your child  who may be in their 60's or 70's??    Are they aware they do not need to save 1 million of their total retirement pot themselves?  So they have more flexibility now to save less?   

Another thought - I have heard that the whole life or universal life policies sometimes make sense for people with ALOT (I mean a really lot)  of money/assests as a way to preserve some of the wealth for their heirs.   Most people do not have that kind of wealth (even when they are "comfortably wealthy" in retirement.    You may need to find out what kind of "wealthy" you are to help making the insurance decision. 

[jitterbug]

Jun 19, 2020 12:16:30 GMT -5 justme said:

Very first thought -- do you pay the guy a specific amount when you meet with him or is he taking a % of your investments? If it's the later I would him or at least find a fee-only CFP for a second opinion.

He's with Edward Jones - he makes money on commission and backside fees. So normal stuff.

[Deleted]

Both my dad and stepmom and mom and stepdad use Edward Jones and seem happy, but I just cringe when I hear that name due to all the fees they charge. 

[jitterbug]

Jun 19, 2020 12:38:15 GMT -5 @bamafan1954 said:

Sorry that I don't have the answers you are looking for, but I do have a comment or two.

I would worry less about preserving the $1 million for my child and worry more about preserving it for yourself.  Even if you do buy insurance that preserves it for your child, you will have spent your money first for yours and your spouse's living expenses in case of a divorce.  I don't think the judge in a possible divorce case is going to reimburse you out of joint assets.  So I'd be reluctant to spend it first.  But if all you are trying to do is protect the money for your child, insurance isn't that bad an idea.  I know several people in their 50s who have chosen that route when deciding whether to take a reduced pension for the rest of their life in order to provide for their spouse.  So it isn't really an off-the-wall solution if protecting it for your child is the only purpose in protecting the $1 million.

There is a lot of variation in LTC plans so I'd suggest you use a separate broker for that.  Know that they aren't the LTC of yesteryear.  The basic plan you describe may not exactly exist.  For example, there is usually a time limit for how long the coverage lasts and some are structured more like a draw against a pot of money.  That's why I would use a separate broker.  Then you would be more likely to find one you like.

Does your investment guy sell insurance?  That would ring the alarm bell for me more than anything else. 

Well, if "his" pool of money is the only money we have left, we WILL spend it down for ourselves.  Our goal, though, is to not have to draw ANY principal once Social Security kicks in!  And as I told my husband yesterday, as our families become more "joint" and less "yours and mine" - or if my child inherits the money from his paternal grandmother as he might - I might not feel the need to preserve that whole sum just for him (We've been married for 10+ years and while our kids are all adults, we ARE becoming more of a cohesive family).

So I guess the thought is to preserve as long as it makes sense.  But when WE need it - it IS mine/ours.  (Meaning I would use it to pay for our living expenses or our healthcare.  But I'm not going to spend it down while there's plenty of 401k money available).

[Rukh O'Rorke]

Jun 19, 2020 14:04:25 GMT -5 jitterbug said:

Jun 19, 2020 12:38:15 GMT -5 @bamafan1954 said:

Sorry that I don't have the answers you are looking for, but I do have a comment or two.

I would worry less about preserving the $1 million for my child and worry more about preserving it for yourself.  Even if you do buy insurance that preserves it for your child, you will have spent your money first for yours and your spouse's living expenses in case of a divorce.  I don't think the judge in a possible divorce case is going to reimburse you out of joint assets.  So I'd be reluctant to spend it first.  But if all you are trying to do is protect the money for your child, insurance isn't that bad an idea.  I know several people in their 50s who have chosen that route when deciding whether to take a reduced pension for the rest of their life in order to provide for their spouse.  So it isn't really an off-the-wall solution if protecting it for your child is the only purpose in protecting the $1 million.

There is a lot of variation in LTC plans so I'd suggest you use a separate broker for that.  Know that they aren't the LTC of yesteryear.  The basic plan you describe may not exactly exist.  For example, there is usually a time limit for how long the coverage lasts and some are structured more like a draw against a pot of money.  That's why I would use a separate broker.  Then you would be more likely to find one you like.

Does your investment guy sell insurance?  That would ring the alarm bell for me more than anything else. 

Well, if "his" pool of money is the only money we have left, we WILL spend it down for ourselves.  Our goal, though, is to not have to draw ANY principal once Social Security kicks in!  And as I told my husband yesterday, as our families become more "joint" and less "yours and mine" - or if my child inherits the money from his paternal grandmother as he might - I might not feel the need to preserve that whole sum just for him (We've been married for 10+ years and while our kids are all adults, we ARE becoming more of a cohesive family).

So I guess the thought is to preserve as long as it makes sense.  But when WE need it - it IS mine/ours.  (Meaning I would use it to pay for our living expenses or our healthcare.  But I'm not going to spend it down while there's plenty of 401k money available).

That is completely reasonable, and I think you need to this turkey of an advisor.

It's wonderful your families are knitting together - but if a divorce situation did come up 6 years after you start down this road - or 10 - or more - you will be in a much poorer position. Your kitty would be depleted, and you'd have the additional expense of that life insurance policy? Senseless!  You put your protection in there for a reason. The money is there if you and spouse do need it as a last resort, keep to your original vision.

[countrygirl2]

One you get over 70.5 you have to start withdrawing 401k no matter what. Get ready. If your income is very high after retirement the extra costs for insurance will kick in and its not cheap. I learned a lot later. Did not know about the higher fees for ins and all as income went up. So be aware of that.  As paying nearly $900 a month for our supplements and drug coverage, if income is higher you will pay a surcharge on the premiums.

We wanted long term care insurance but the cost is just prohibitive, so we don't have it. And I heard of so many of those plans that have gone under or raise the premiums so high people can't keep up with them.

It's a lot of work figuring out how to do all that, good luck.

Life insurance we do not have

[The Walk of the Penguin Mich]

I really think that you need to consult with a fee only financial planner.  It might be a couple hundred $$ per session, but they will give you a better idea how to navigate things.  If your current FA works on commission, he is (naturally) going to drive you to products he sells (as you have seen).

We have one, but had to find one that deals more with foreign income as well.   We did not hire him for investments, but to figure out exactly how to get retirement money that is in Canada’s into the US without getting overtaxed, without me having to pay IIRMA on my Medicare (or minimize it) or to figure out where to draw from when.....and when it benefits us most as to when TD draws SS.

There are a lot of moving pieces, and one size does not fit all.

[teen persuasion]

This article from Michael Kitces has examples that show how IRA income, taxable investment income, and SS income can interact in complicated ways. Look especially at example #5.

Tax impact of long term capital gains bump zone

[NastyWoman]

Jun 19, 2020 14:41:53 GMT -5 countrygirl2 said:

One you get over 70.5 you have to start withdrawing 401k no matter what. Get ready. If your income is very high after retirement the extra costs for insurance will kick in and its not cheap. I learned a lot later. Did not know about the higher fees for ins and all as income went up. So be aware of that.  As paying nearly $900 a month for our supplements and drug coverage, if income is higher you will pay a surcharge on the premiums.

We wanted long term care insurance but the cost is just prohibitive, so we don't have it. And I heard of so many of those plans that have gone under or raise the premiums so high people can't keep up with them.

It's a lot of work figuring out how to do all that, good luck.

Life insurance we do not have

Unless I am very much mistaken, that changed to 72yo as of this year

[justme]

Jun 19, 2020 13:56:23 GMT -5 jitterbug said:

Jun 19, 2020 12:16:30 GMT -5 justme said:

Very first thought -- do you pay the guy a specific amount when you meet with him or is he taking a % of your investments? If it's the later I would him or at least find a fee-only CFP for a second opinion.

He's with Edward Jones - he makes money on commission and backside fees. So normal stuff.

Yeah...I wouldn't trust him on anything he'll get paid on recommending. Find a fee only CFP to help you. If they recommend something that this dude happens to deal with you can go through him, but I wouldn't trust him to put what benefits you over what benefits his paycheck. 

[tallguy]

My first advice would be to Edward Jones.  It is possible that you might find a good advisor, but not likely.  Either way, they will probably do more to profit themselves than their clients.  There are reviews all over the internet from dissatisfied clients.  High fees, churning accounts, inappropriate investment choices, poor customer service.  It's all there.  They sell you on being "the friend next door" but put their hands in your pocket.  The sad thing is that most people do not even need a financial advisor, and certainly not one who takes advantage of them.

[Deleted]

Disclosure: I have an EJ account for my grandchildren's 529 accounts and the guy is not that bad. DH answered the door when he came a'-knocking and I was at work years ago. I get a big break on American Funds' front-end fees because I have so much in American Fnds in my main account at another broker. He knows what I have there and has NEVER pestered my to move it to him. (That would be the end of him.) I like American Funds and will continue to add to those 529s.

Back to the OP: I don't like hybrid products and your advisor has suggested two of them. One is the life insurance policy. I bet you could get a good, cheap term insurance policy if you wanted to go that route- and there are plenty of on-line brokers that sell policies through reputable companies. I've also seen material on the hybrid investment-LTC product and it's too darn complicated. Like the life insurance-investment products there are too many moving parts and a lot of up-front and continuing expenses.

As others have said, that advisor does not have your best interests in mind.

[countrygirl2]

I bet you are correct about age 72, I had heard talk. We sure would not have started it till then if not an option.

[teen persuasion]

You could run scenarios thru i-ORP, it's an online retirement planning tool. It has a basic mode with limited inputs, and an extended mode for more tinkering.

I was just playing with it, both ways. It makes assumptions, some may not be appropriate for everyone, but it has to start somewhere. In your shoes, I'd first try it w/o adding in the pre-marriage money (because if i-ORP sees it, it will try to spend it.).  See what that output is. The program is trying to find the max level of income you can sustainably get out of your assets thruout retirement. It shows year by year increases and decreases in each account, and guesses on taxes. In the extended portion you can switch on Roth conversions up to a certain tax bracket, adjust spending schemes, etc.

It's an estimation tool, don't take the results as gospel. Tweak details and compare the outputs. Put in that pre-marriage money, and see how it changes. Remember, i-ORP is trying to spend down everything, so if your goal is to leave a legacy to your child, you need to tell it to do so (I think there's an option to do that in extended i-ORP).

ETA: I played with it a bit more - the field is "Plan Surplus".  You enter the amount you wish to have remaining at the end. It was interesting how little change it made to your annual spending, to have some amount left over vs go to zero. For my numbers, $500k legacy only reduced annual disposable income by $3k or $4k.

[Rukh O'Rorke]

Jun 19, 2020 15:19:56 GMT -5 teen persuasion said:

This article from Michael Kitces has examples that show how IRA income, taxable investment income, and SS income can interact in complicated ways. Look especially at example #5.

Tax impact of long term capital gains bump zone

this is interesting, thanks for posting teen!

OP - how is the 1M for your son currently invested? You mention that it was not 1m when disbursed, is it invested and growing? If it is in stocks, with gains or dividends, it seems those are being taxed, and so that money is not available to living expenses tax free anyway.

My own plan was to begin taking 401k money asap, depending on and up to the next tax rate level, to get it out of the 401k scenario as soon as possible, pay the tax and use what amount I need and invest what I don't and let it grow without the tax liabilities within the 401k. But I wasn't going to get all back door rothy on it, just go along year to year and see how much could be taken out at lower tax rates than might have if I get the RMD. 

So even if that money wasn't ear-marked specifically for your son I still wouldn't be on-board with this advisors advice!

All growth off that money would be split with my husband if we divorce and all income from it is used for our mutual benefit.

It seems that you are already using the growth for spending now? So - the balance is stable, not growing, and you draw off it if/when needed?

But advisor wants you to drain that account - and get an expensive life insurance policy?.

If that account is invested, you can draw off 4% easily and it would still be growing! That would provide about 40k a year for expenses, without, theoretically, dipping into principal. That should be sufficient for your 'contribution' to the household in early retirement, and then at some point you will draw on social security? So - will be kicking in over 50K to the household on your own, so to speak?

Why would anyone think you should do more? And drain something you want to keep separate for your son and your own security? To save a likely paltry amount of taxes - potentially?

 

[teen persuasion]

Jun 20, 2020 9:08:25 GMT -5 Rukh O'Rorke said:

Jun 19, 2020 15:19:56 GMT -5 teen persuasion said:

This article from Michael Kitces has examples that show how IRA income, taxable investment income, and SS income can interact in complicated ways. Look especially at example #5.

Tax impact of long term capital gains bump zone

this is interesting, thanks for posting teen!

OP - how is the 1M for your son currently invested? You mention that it was not 1m when disbursed, is it invested and growing? If it is in stocks, with gains or dividends, it seems those are being taxed, and so that money is not available to living expenses tax free anyway.

My own plan was to begin taking 401k money asap, depending on and up to the next tax rate level, to get it out of the 401k scenario as soon as possible, pay the tax and use what amount I need and invest what I don't and let it grow without the tax liabilities within the 401k. But I wasn't going to get all back door rothy on it, just go along year to year and see how much could be taken out at lower tax rates than might have if I get the RMD. 

So even if that money wasn't ear-marked specifically for your son I still wouldn't be on-board with this advisors advice!

All growth off that money would be split with my husband if we divorce and all income from it is used for our mutual benefit.

It seems that you are already using the growth for spending now? So - the balance is stable, not growing, and you draw off it if/when needed?

But advisor wants you to drain that account - and get an expensive life insurance policy?.

If that account is invested, you can draw off 4% easily and it would still be growing! That would provide about 40k a year for expenses, without, theoretically, dipping into principal. That should be sufficient for your 'contribution' to the household in early retirement, and then at some point you will draw on social security? So - will be kicking in over 50K to the household on your own, so to speak?

Why would anyone think you should do more? And drain something you want to keep separate for your son and your own security? To save a likely paltry amount of taxes - potentially?

 

Question for you, Rukh - what is the advantage to withdrawing from the 401k and investing in taxable instead of converting that portion to Roth instead?  Eventually in taxable it will have a tax drag, but in Roth it will be forever tax free.  Am I missing something?

I'm planning to convert bits of tIRA to Roth every year, and withdraw as needed from Roth.  Hopefully convert more to Roth than withdraw from, so eventually everything becomes Roth.  Depends - if tIRA balances left at 72, then I guess I have to do RMDs to spend directly, before any conversions.

[bookkeeper]

The time value of money comes into play here because you are wanting to retire early.  You want to preserve the 1 million for your child, but what will be the buying power of that million in  25-30 years when the child would inherit?

I bought a $100,000 life insurance policy around 1990 and boy did that seem like a pile of money for my husband and kids to live off of if I died unexpectedly.  Fast forward to today, and $100,000 is about our spend for one year of retirement.  Inflation happens and I find it helpful to consider our assets as separate piles of money for specific points in our future.  

DH and I retired almost 6 years ago at age 50 and 55. We had saved about 1 million in 401k/IRA and DH took a lump sum distribution from his retirement plan and rolled it into a traditional IRA.  So we look at our money that we saved while working as being our operating fund for year 1-10 of retirement, and then the retirement plan money that has had more time to grow and will fund year 11 - beyond of retirement.

Health insurance is the defining factor when trying to decide how and when to retire.  Currently we pay $1800/mo. for DH and I on a high deductible plan.  You can also plan for health insurance costs to increase 10% to 25% each and every year.  If you can participate in a health savings account while you are working, do it!! It is one of the only ways we have to reduce our tax liability by contributing to it annually.

I feel we will bump up hard against the RMD when DH turns 72.  However, those funds have been invested for a long time.  They have earned a lot of income in that time and I think that the earnings will far outpace the federal income tax due on the RMD.

We took advantage of contributing to our 401k and IRA when we were working to keep our taxable income lower.  Now the time has come to use this money and pay the Federal income tax.  

I know now that we should have been investing more outside of our 401k/IRA, but at the time, we chose to defer the income tax till later.  Later is only 11 years away when DH will turn 72.

[Rukh O'Rorke]

Jun 20, 2020 9:31:05 GMT -5 teen persuasion said:

Jun 20, 2020 9:08:25 GMT -5 Rukh O'Rorke said:

this is interesting, thanks for posting teen!

OP - how is the 1M for your son currently invested? You mention that it was not 1m when disbursed, is it invested and growing? If it is in stocks, with gains or dividends, it seems those are being taxed, and so that money is not available to living expenses tax free anyway.

My own plan was to begin taking 401k money asap, depending on and up to the next tax rate level, to get it out of the 401k scenario as soon as possible, pay the tax and use what amount I need and invest what I don't and let it grow without the tax liabilities within the 401k. But I wasn't going to get all back door rothy on it, just go along year to year and see how much could be taken out at lower tax rates than might have if I get the RMD. 

So even if that money wasn't ear-marked specifically for your son I still wouldn't be on-board with this advisors advice!


It seems that you are already using the growth for spending now? So - the balance is stable, not growing, and you draw off it if/when needed?

But advisor wants you to drain that account - and get an expensive life insurance policy?.

If that account is invested, you can draw off 4% easily and it would still be growing! That would provide about 40k a year for expenses, without, theoretically, dipping into principal. That should be sufficient for your 'contribution' to the household in early retirement, and then at some point you will draw on social security? So - will be kicking in over 50K to the household on your own, so to speak?

Why would anyone think you should do more? And drain something you want to keep separate for your son and your own security? To save a likely paltry amount of taxes - potentially?

 

Question for you, Rukh - what is the advantage to withdrawing from the 401k and investing in taxable instead of converting that portion to Roth instead?  Eventually in taxable it will have a tax drag, but in Roth it will be forever tax free.  Am I missing something?

I'm planning to convert bits of tIRA to Roth every year, and withdraw as needed from Roth.  Hopefully convert more to Roth than withdraw from, so eventually everything becomes Roth.  Depends - if tIRA balances left at 72, then I guess I have to do RMDs to spend directly, before any conversions.

nope.

I didn't want to get too detailed - but if I semi-retire - which seems likely  -  I may max the roth (which I am no longer permitted to contribute to at current income level) and take out from 401k as needed.

Are you able to take out from 401k and put into roth when retired? I'm not sure how that all works, so don't have any specific ideas/plans there. Will likely learn more (& things may change!) when I get there. but currently withdrawal strategies are not too fixed.

Roth money will be the last money I touch for living on. Currently have a little more than 10% of my investments in roths, and I hope it remains untouched until death!

[bookkeeper]

I would not purchase any of the products your financial advisor is recommending.  Your goal of trying to preserve a nest egg for your child would be better accomplished with paid help from an estate planning professional who works hand in hand with a CPA.  

Your needs may be better served with a trust at some point.  A trust insures that your money is distributed to who you intended.  It keeps assets completely separate, yet under your control.  With a trust there are no issues with probate or blended families when you pass.  The beneficiary of the trust receives the asset directly, with privacy and your intentions cannot be challenged by others.

[teen persuasion]

Jun 20, 2020 10:34:13 GMT -5 Rukh O'Rorke said:

Jun 20, 2020 9:31:05 GMT -5 teen persuasion said:

Question for you, Rukh - what is the advantage to withdrawing from the 401k and investing in taxable instead of converting that portion to Roth instead?  Eventually in taxable it will have a tax drag, but in Roth it will be forever tax free.  Am I missing something?

I'm planning to convert bits of tIRA to Roth every year, and withdraw as needed from Roth.  Hopefully convert more to Roth than withdraw from, so eventually everything becomes Roth.  Depends - if tIRA balances left at 72, then I guess I have to do RMDs to spend directly, before any conversions.

nope.

I didn't want to get too detailed - but if I semi-retire - which seems likely  -  I may max the roth (which I am no longer permitted to contribute to at current income level) and take out from 401k as needed.

Are you able to take out from 401k and put into roth when retired? I'm not sure how that all works, so don't have any specific ideas/plans there. Will likely learn more (& things may change!) when I get there. but currently withdrawal strategies are not too fixed.

Roth money will be the last money I touch for living on. Currently have a little more than 10% of my investments in roths, and I hope it remains untouched until death!c

You can convert from traditional to Roth at any time, you just need to pay the tax bill. If you are considering withdrawing from traditional, the tax bill is the same as converting.

[tallguy]

Jun 20, 2020 10:48:32 GMT -5 teen persuasion said:

Jun 20, 2020 10:34:13 GMT -5 Rukh O'Rorke said:

nope.

I didn't want to get too detailed - but if I semi-retire - which seems likely  -  I may max the roth (which I am no longer permitted to contribute to at current income level) and take out from 401k as needed.

Are you able to take out from 401k and put into roth when retired? I'm not sure how that all works, so don't have any specific ideas/plans there. Will likely learn more (& things may change!) when I get there. but currently withdrawal strategies are not too fixed.

Roth money will be the last money I touch for living on. Currently have a little more than 10% of my investments in roths, and I hope it remains untouched until death!c

You can convert from traditional to Roth at any time, you just need to pay the tax bill. If you are considering withdrawing from traditional, the tax bill is the same as converting.

Right, so why bother both converting to Roth and then withdraw from the Roth each year as you said you would do?  Just withdraw from the traditional IRA rather than complicate things more.  Also, you don't have to convert everything to Roth unless you have other sources of income.  You will be able to withdraw a certain amount each year tax-free anyway (because it will be offset by either the standard or itemized deductions) so paying the tax on a 100% conversion, even over time, is unnecessary.  Just get it down low enough by the time RMDs hit.  Convert the rest, sure, if it ends up lowering your taxes in the long run.  You will have to be aware of the effect on making Social Security taxable when you start taking those payments though.

[tallguy]

Jun 20, 2020 10:34:13 GMT -5 Rukh O'Rorke said:

Jun 20, 2020 9:31:05 GMT -5 teen persuasion said:

Question for you, Rukh - what is the advantage to withdrawing from the 401k and investing in taxable instead of converting that portion to Roth instead?  Eventually in taxable it will have a tax drag, but in Roth it will be forever tax free.  Am I missing something?

I'm planning to convert bits of tIRA to Roth every year, and withdraw as needed from Roth.  Hopefully convert more to Roth than withdraw from, so eventually everything becomes Roth.  Depends - if tIRA balances left at 72, then I guess I have to do RMDs to spend directly, before any conversions.

nope.

I didn't want to get too detailed - but if I semi-retire - which seems likely  -  I may max the roth (which I am no longer permitted to contribute to at current income level) and take out from 401k as needed.

Are you able to take out from 401k and put into roth when retired? I'm not sure how that all works, so don't have any specific ideas/plans there. Will likely learn more (& things may change!) when I get there. but currently withdrawal strategies are not too fixed.

Roth money will be the last money I touch for living on. Currently have a little more than 10% of my investments in roths, and I hope it remains untouched until death!

If you are planning to still be employed at the same company where your 401k is, you should check to see if they allow in-service withdrawals.  Many plans do, but some do not.

My plan also is to have my taxable account and my Roth money be the last money I spend, although I may take from Roth for a large expenditure like home remodel or new car.  Roth money is far better to leave to heirs than tIRA money, and taxable accounts get a stepped-up basis.  Over half of mine is in Roth or taxable now so I'm good.  I didn't get my IRAs down as far as I wanted through conversion, and circumstances changed to where further conversions are not the best option for me, but I can't complain.