My 3 bucket approach to retirement.

[Zooey72]

What I have come up with may just be me re-inventing the wheel, so if that is the case call me out on it.

I am looking at retirement in terms of having 3 'types' of money.  Tax deferred, which is the worst kind.  Money with capital gains tax.  And the best kind - ROTH.

My plan is this:

Out of the traditional 401ks that my wife and I have gotten during our life I am going to pull out 24k a year in retirement.  That number is important because with the standard deduction I will not pay taxes on it.  From there, I will pull out money out of our brokerage account, amounting to roughly 56k, which puts me just under paying long term capital gains tax.  And lastly I will pull out whatever else I want from our ROTH accounts which by their nature I do not pay tax on.

Is this a good strategy, because as best I can figure it I will pay nothing in taxes and have an income in retirement over 100k.

[Lou S.]

It seems like a strategy to minimize taxes in retirement. Whether or not it is "good" will depend a lot on your personal situation and goals. But on it's face it sounds like a reasonable plan.

Don't forget you will have Social Security benefits that are partially taxable, a portion of which is included in your AGI. Also at age 72 (barring another tax law change) you will have Required Minimum Distributions from your IRA accounts that may be larger than the standard deduction depending on the size of your IRAs.

 

[CuseFan]

And this is a strategy that you should review with your accountant or financial advisor, if you have either, for any unforeseen "gotchas" or missed pieces as Lou noted. If you are using this strategy to help delay taking SS, then that piece won't yet be an issue. Minimizing taxes is good but can you live on $100k per year (and pay for all you need, like healthcare, and all you want, like vacations) and how will that depletion compare to your joint life expectancies? Will you run out of money early or have large RMDs at age 72 that trigger large tax bills?

You shouldn't view retirement income in the tax vacuum. If I could take $200k in retirement income less $40k in taxes, knowing it would last my retirement and I could live the life I wanted, or opt to take $100k in annual income, outsmarting the government paying zero taxes as long as possible, but having to scrimp and sacrifice throughout the earliest and healthiest years of my retirement, I choose the former every time.

Sounds like your retirement funds are well diversified from a tax perspective. I would recommend, if you don't already have an advisor, find a reputable fee for service provider and pay for qualified advice that will help you map out a long term retirement income strategy that efficiently minimizes taxes (does not mean eliminate) throughout your joint life expectancies.

There are very smart people on this forum but I would not seek free advice and confirmation of my complex retirement income situation here or any other on-line forum.

[Zooey72]

I don't consider social security when I plan my retirement in terms of 'what I am going to get'.  My only question is 'what will they take'.  The social security ponzi scheme only has 2 possible outcomes.  One is where it becomes completely insolvent and collapses, or second (and more likely) they will 'means test' it and justify stealing my 'retirement insurance' because I had the audacity to save for retirement instead of being dependent on the system.  In neither of these scenarios do I 'get' anything.  My only hope is that they do not decide to steal money I have saved for myself.  It would not surprise me a bit if they come up with a new tax that goes after what I have accumulated, slap a slogan on it like "The Greed Tax", and tax my ROTH savings at 90%.

Outside the corruption that is social security, you have a good point about the RMDs at 71.  My projected savings in standard 401k money will give me more than 24k a year (estimated 7% return), which would mean it would continue to grow despite my withdraws.  Nothing I can really do about that other than take it out and get it taxed.  My brokerage account and ROTH money should be none of their business, but I am sure they will make it their business. 

Out of my 3 buckets, at the time of retirement I am going to be mostly weighted with ROTH money so the 80k I have planned to take out w/o tax is just a foundation.  This was intentional with our planning (we have been maxxing  ROTH IRAs for years, and almost all of my wife's income for the next 10 years will go into a ROTH 401k).

The best case scenario for me in terms of social security is that they give me some pittance of what they have taken over the course of my lifetime that is just enough to cover the tax on my RMDs at 71.  I doubt that I will get even that, but even if they steal everything over the 24k I should be fine.

[QDROphile]

"Nothing I can really do about that other than take it out and get it taxed."

You might look into the use of qualified charitable distributions.