Christmas Eve Retirement Planning

Yahoo had an article "what to do with your retirement savings in a market selloff." It's a timely article as the FOMC news sent the S&P 500 careening down to levels not seen since November 15th. Yes, I am being snarky. Paraphrasing Cliff Asness, if your retirement plan is thrown into upheaval when the stock market goes down 3%, you might want to rethink your retirement plan. 

To address the premise of the Yahoo article, this is an asset allocation question. If you have the correct asset allocation, there's probably nothing to change in the face of a 3% move in the stock market, regardless of direction. 

Where we're talking about retirement and every so often I share details of our (my wife and me) planning process. I'm coming up on a milestone age kind of soon, soon enough to impact my planning for 2024 and 2025. 

I'm a huge believer in being prepared in case things go unexpectedly sideways from what you had in mind. We've all seen countless articles about people being forced out of work in their 50's due either to company issues resulting in a layoff or the like or some sort of health issue being the cause. Not everyone in their 50's will be able to find work that reasonably replaces their income. In terms of you gotta do what you gotta do, if that means taking some sort of work for half the pay to make ends meet, ok do it. 

For quite a few years, I talked about our trying to build up our savings outside of retirement accounts in case somehow my hand was forced in some unforeseeable way in my 50's which almost happened. At 50 years old, you're 9 1/12 years from being able to access IRA money without a penalty. Obviously the context here is some sort of unexpected outcome and hopefully avoiding being forced to access retirement money early. If something bad does happen but you can avoid the 10% penalty of taking money out before 59 1/2, that's a small win. Yes, there is a thing called a 72T distribution but there are restrictions and complexities.

If something came out of left field, we have enough savings in taxable accounts that would last quite a while especially considering we have decent income from our rental. One important point is if you find yourself out of work and living off of savings meaning no earned income or very little earned income, health insurance through healthcare.gov will be very inexpensive. 

At this point, I am 10 months from 59 1/12. For most of my 50's, we did build up non-qualified savings. With 10 months to go before accessing IRA money without penalty, if something bad happens after 59 1/2 and there is no penalty to access IRA money from that point on, there is a strong argument to plow as much as you can into some sort of IRA/401k. At 50 or 55 I would say no but at some point when 59 1/2 gets close, go heavy into IRAs. If you contribute money at 57 or 58 or 59, you're obviously deferring taxes. If you need that money unexpectedly at 62 for example, yes you would pay the tax to get it out but if you don't end up needing to access that money, the tax can be deferred until you have to start taking it which for now is 73. 

Part of making this decision is to understand whether you might have a higher income when you retire. I would suspect that most people reading this are in the 22% bracket or the 24% bracket. The 24% bracket, married filing joint will top out at $394,000 in 2025, the 22% bracket will top out at $206,000.

What are your sources of income likely to be at RMD age? For me

• Social Security
• RMD
• Rental Income
• Reduced Investment Management Income

The Social Security Administration wants everyone to know their expected benefit. Factor in a benefit cut if you think that is prudent. If you're IRA is $3 million (Bitcoin would have to do something miraculous for that to happen to me) your RMD would start pretty close to $110,000. How big do you think you IRA will be at 73? Spreadsheet it out. What is a reasonable expectation of your RMD amount? We have rental income that I can't imagine growing by more than 50% by the time I'm 73. I don't spend time soliciting new business for my practice, I get a referral every so often or a blog reader, and I am younger than most of my clients so there is a path to a considerably smaller practice in my 70's. If the incident management work ever happens, I probably would be done doing that past RMD age. Do you have other potential sources of income? If so, try to quantify them. 

I make a fine living but there is no reasonable scenario where I will be making more after I retire. Anecdotally, that is a very rare thing but figuring out where you fall in this regard is important. If I knew that some $250,000 gig was waiting for me at age 70, that would kick me into another bracket and I'd be less aggressive with 401k contributions because reducing RMDs would be important if possible, I'd be paying less on what I earn now than what I'd be paying later in that scenario.

For anyone who really does find themselves with a tax problem due to a high retirement income (expected or unexpected), qualified charitable donations can help. Annual donation limits are $105,000 and they can satisfy the RMD burden. Another way to reduce the RMD burden is with a qualified longevity annuity contract (QLAC). Yes, it's an annuity product so it probably expensive and complicated, far more so than QCDs (QCDs don't cost anything and brokerages like Schwab and Fidelity will know how to process them). Despite the expense and the complexity, there will be some people for whom those tradeoffs with the QLAC are worth it to pay less in tax or at least defer it. A QLAC, current limits are $200,000 per person, allows for deferring the RMD on the money invested to be deferred until age 85.  I have one client who has been doing QCDs for a long time and since I am not licensed to sell insurance products, I've never had a conversation with a client about QLACs. 

A little context about the RMD table is that around 93 or 94, the RMD percentage reaches 10% of the account balance. Anyone lucky enough to live that long combined with one of those scenarios where market growth combined with a low withdrawal rate could have more money at 93 than they did at 73 could wind up with "too much money." Maybe at 73 this person had $1,000,000 in their IRA and back then their RMD would have been $37,000+/-. In the circumstance I just spelled out, at 93 they could have $1,200,000 with an RMD of $120,000. 

For our own situation, if somehow my wife and I end up "burdened with too much money," I imagine we'd go heavy with QCDs to Walker Fire (my volunteer gig) and United Animal Friends (her volunteer gig). 

Since I haven't mentioned it elsewhere in this post. I'm not a huge fan of Roth conversions for the simple reason that not too many people will be in a higher tax bracket when they retire. Ed Slott (Google him) feels otherwise if you want to find his argument and decide for yourself. Of course, if you find yourself with no earned income or very little and can convert for free or at a very low effective tax rate, it makes plenty of sense. 

In your 50's, I don't think you need to have it all figured out but it will makes things much easier to have it somewhat framed out, that is a general framework of what you expect for income sources, rough estimate of savings, how you'd spend your time, an honest look in the mirror about health prospects and maybe most important is the ability to Plan B or otherwise adapt if some part of your plan doesn't go as expected. That's all probably relevant for other ages too.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.