Might have to delay retirement to build up my pension income

Should I be a slave to my job and work as many years as I can?

I like my job and it is not too stressful…

I had dreams of retiring at 50, but might have to reconsider to 57-58.

What do you think? Can you put a price on freedom from age 50-57?

The trade offs are obvious. Work longer = more financial security. Retire early = Living on a midsized but not lavish budget…

I don’t get paid as much in base salary as the private sector, but the guaranteed health insurance and pension (years of service x 2.5 = % of annual income) should provide me with some comfort until the market recovers…

Hi @darrellquock,

I am not a “lavish” person, but I will pay more to have quality.

Initially, I wanted to go out at 50 but as I looked at the numbers, I did not want to be caught short. The thought of trying to find a job and work after being retired for 17 years is mind-numbing.

So we went the extra 5 years to 55. At that point, various models in various retirement calculators kept us “positive” through thick-and-thin.

And it has served us very well in retirement.

Example: We have been paying cash for building this house. Close to the end now and we have spent nearly double the value of our portfolio on the day we retired.

By retiring at 55, I locked-in a small pension, about 10% of what it would have been at 65. But even with no pension, our plan still worked.

We both get SS and DW has a small pension.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
https://community.fool.com/u/gdett2/activity (Click Expand)

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Personally i would suggest an aggresive savings investing program. Max you 401k. Max your Roth ira. Save and invest more if you can.

This gives you more options. Offered an early retirement package you can take it. You may love your job but compamies can decide they don’t need you. Or someone else can do your job cheaper.

Investments give you many choices. Retire early. Start your own company. Consulting. Teaching. Be creative. Volunteer. Take up a hobby. Work on your bucket list. Spend time with the grand kids.

Those investment resources give you many choices. Enjoy!!!

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Gene,

Did I read that correct? You left 90% if your pension on the table?

Instead of a potential 100k annual pension, you are only getting 10k? (Just an example)

Also, when did you convert all of your accounts to a Roth IRA. Did you do it gradually or did you suck it up and lay the large tax bill in a short amount of time?

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Hi @darrellquock,

That is correct!

Our plan worked without the larger pension amount. And …

In Nov 2015, I accepted a lump sum buyout for my qualified pension when it was offered. It completely made sense.

I did some calcs and found I could grow the amount by about 5.7% and reproduce the payments through both of our extended lifetimes (I had chosen 100% benefit to DW) Bumping that number to around 8%-ish, I could retain the capital and have the payments too.

I started conversions in Oct 2010 after researching the changes to regulations concerning conversion plus the special TY2010 bonus of splitting the tax across 2 years.

My main concern to start conversions was researching the reason(s) that Quicken Lifetime Planner was showing:

  1. Our income tax was tremendously increased when we turned 70. About 3X was added to our income tax bill!
  2. Our taxable brokerage was increasing much faster than our IRA’s.
  3. Alternately to #2, our expenses rose rapidly.

It came down to RMD’s. The #2 and #3 issue had to do with the question: “Should RMD’s be reinvested?” and a percentage for reinvestment.

While comparing the annual numbers, it was obvious that our large traditional IRA/401K assets were causing the large RMD’s even using a 6% growth rate. When I used 12%, it was unbelievable.

I tested conversions by adding an annual “transfer” from trad IRA to Roth IRA to the planner for 10 years straight along with extra tax.

The huge tax run-up reduced considerably and total tax paid reduced substantially.

So, I tested different amounts and finally made a plan, making our first Roth conversion on 10/20/2010. I followed that with annual conversions through 1/5/2022 when I made my final conversion after taking my first (and final) RMD on 1/1/2022.

Our accounts changed:

      Taxable  Trad IRA   Roth IRA
2010   13.00%    83.30%     3.70%
Now     0.17%     0.00%    99.83%

The plan I made was to try to max our tax bracket each year. I missed and went over a little a couple of times but it did not make any real problem.

Converting trad assets to Roth should be planned. It is not “right” for everyone. If our accounts were smaller, I probably would not have done much conversion.

Having a portion of assets in a Roth IRA can be EXCEEDINGLY HANDY when needed.

Example: If you need to withdraw a large amount of money for a onetime expenditure, taking it exclusively from the Roth IRA can save you a large, single year tax load.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
https://discussion.fool.com/u/gdett2/activity (Click Expand)

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Gene,

Wouldn’t it have been worth leaving some money in taxable or in IRA so you can at least “use up” the lower tax brackets each year going forwards? Especially that sweet sweet sweet zero percent long-term capital gains tax bracket (for taxable)?

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Exactly. Additionally, if you end up self-funding long-term care, or, even without going into long-term care, you have medical expenses in excess of your pension/SS income in your later years, you are missing out on the opportunity to deduct your expenses. Completely converting Traditional accounts to Roth accounts will likely result in paying more taxes than if you were to leave some in Traditional accounts. Personally, I’m aiming to split my Traditional and Roth accounts about 50/50 with most of my bond allocation in the Traditional accounts and most of the stock allocation in the Roth accounts.

AJ

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Hi @MarkR,

We used most of our taxable account to build a house in 2005, living expenses and for taxes.

Later on, I used “high fliers” as donations to charity to offset taxes. Some stock like Netflix (NFLX) that I gifted, gave me nearly $400/per share tax deduction for a cost of $3.08 per share.

So for a small cost to us, I spanked a lot of tax and now the money is continuing to fund an animal shelter and a volunteer fire department in perpetuity plus a number of smaller endowments rather than being wasted in government spending.

The taxes we pay on SS and pension are close to nothing. Why would I need additional taxable assets to “save money?” Our property taxes and continuing charitable contributions eat right through the standard deduction every year right now as it is.

As I mentioned, what I did does not make sense for everyone. People need to look at their exact circumstances and goals before making any decisions about conversions.

Gene
All holdings and some statistics on my Fool profile page
https://discussion.fool.com/u/gdett2/activity (Click Expand)

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You haven’t provided enough information to show that doing the conversions actually saved you money in the long run. If you are paying ‘next to nothing’ on your current ordinary income (pensions and taxable SS), that would indicate that you are in a lower tax bracket - either 10% or 12% So unless the bracket that you filled up to do the conversions was 15% (12% after the TCJA), you paid either a higher marginal rate on your conversions, or at best, the same marginal rate on the conversions than small RMDs would have been taxed at. Due to the impacts of inflation, paying taxes early, even at the same marginal rate, is spending more than you would have had to if you could have deferred the taxes to a future year. That means that you would have been saving money if you were paying taxes on RMDs after doing a partial conversion.

Nothing would have prevented you from continuing to do conversions in addition to taking RMDs.

I would agree. But given the current tax laws, it’s very rare that doing conversions so that substantially all assets are in a Roth account is the optimal solution from a tax perspective.

AJ

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You don’t “need” anything, but the question is about optimizing taxes paid (over a lifetime). One of the best ways of doing that is to take advantage of that sweet zero percent long-term capital gains rate bracket each year. And that can only be done with some assets in the taxable side of the ledger.

I would have to say that @intercst is the king of tax (and tax-system benefit) optimization. Look at some of his posts and you will see the tax wisdom there.

Ironically, I have the opposite problem, too much in the taxable side and not enough on the deferred/non-taxable side.

That’s not the way it works with Social Security. For example, if someone paying maximum FICA since age 27 quits working at age 45 or 46 instead of age 62, he still has to wait until age 62 to start benefits, but he’ll get 77% of the maximum benefit while only paying about half the FICA taxes.

intercst

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