Latest thinking from experts who aren’t retired is that one should use “guardrails”. A 5.2% withdrawal is “safe”, if you’re willing to cut spending in a stock market decline.
I’ve actually used the “reverse guardrails” approach. In the 2008 market meltdown, I more than doubled my spending for a few years to take advantage of all the cruise and travel bargains while others cut back on discretionary spending. Similarly, my “rent vs. buy” calculation turned positive in 2012 at the depths of the mortgage crisis, and I paid cash for a home at 70%-off it’s 2008 value. Once prices returned to more normal levels and others started spending, I found I had a much lower appetite for travel and housing. {{ LOL }}.
John, I don’t understand how you got beaucoup ACA subsidies while withdrawing money, or generating dividends, from your retirement account(s) that is considered “ordinary income”. As a single, did you manage to live on <$34K a year inflation-adjusted from back in the day?
The key is using selective selling of assets to minimize reported net income and/or taxable impact.
Say you have $1,000,000 of stock with a $900,000 basis. If you need $50,000 of cash, then “on average”, you would sell $50,000 and only book $5,000 of gains as “income”. In all likelihood, if your investment profile looked like that, you’d have a mix of assets with gains and losses, and you could often pick and choose what you sold to keep your income within whatever limits you’re targeting.
Where it really gets “fun” is that there’s a concept called capital gains harvesting. If your income is low enough, your long term capital gains tax rate is 0%. If you qualify, you can sell some assets for long-term gains, pay no federal taxes on those gains, and then re-buy the same assets at a new, higher basis price. The higher your basis is relative to your total portfolio value, the easier it is to play that game of keeping your taxable income down by selecting which assets you sell to minimize your reported income and tax burden.
Chuck thanks for the explanation. But does that apply to selling assets in an TIRA? I thought withdrawals from an IRA were just… withdrawals/distributions taxed at ordinary income. (I have 98% of my assets in TIRAs.) I’d need to sell stock in the account, but capital gains aren’t a factor. Right?
You are correct that the rules are different for TIRAs vs. ordinary investment accounts. You are also correct that most withdraws from TIRAs are considered ordinary income and that gains inside TIRAs are generally meaningless. (The “weasel words” of “most” and “generally” in that prior sentence are there because of a few cases where different rules apply…)
No. First I got on the Obamacare website and found the maximum income that would still allow me to get a Bronze Plan with a near $0 monthly premium. For 2024 in my zipcode in WA State, that’s a bit over $50,000/yr.
Then I used capital gains tax loss harvesting to match winners with losers where I could to withdraw money from the portfolio without generating a net taxable gain. I also spent down some of my “5 years worth of living expenses in fixed income” which only generated a slight capital gain (like about $2,000 on a $100,000 withdrawal.) If all else fails, I might even go into my Roth IRA to top off my spending for the year to keep the Obamacare windfall.
I was only on Obamacare for six years. If I was doing it for 20 years, no doubt I would have eventually run out of tax losses I could harvest. Today my taxable account has almost no loss positions. It’s almost all unrealized capital gains and a very small cost basis from stuff I bought 30-35 years ago.
My IRA and Roth IRA only make up about 1/3 of my net worth, so I didn’t touch those while on Obamacare. My “5 years worth of living expenses in fixed income” was in the taxable account – and with interest rates near zero, generated very little in taxable income. Everything seemed to break my way to make the “free Obamacare” dream possible. {{ LOL }}
Of course in 2008 to 2012 when I was doing all that extra travel spending and bought my home for cash, that was pre-Obamacare so I wasn’t under any spending limits to maximize my tax subsidy at that time.