Paying for major expenses in retirement

Retirement Retirement
1

This year, I’m looking at some major expenses - new (used) car, a new roof, porch repair, to name a few - and I’m mulling over how best to pay for it all. A little over two years into retirement, I can pay cash for it all but I’m not yet savvy about IRMAA, RMDs and the like.

Should I use the 401(k) and just pay the taxes on the higher income?

Use the Roth and hide the income, and use the tax savings to help pay down the costs?

Finance and pay it off incrementally over time, paying the interest?

Thanks for any thoughts!

2

We need a lot more information.

Such as, current income and the source(s), single or MFJ, current age, what would you liquidate, how much would you liquidate, what percentage of your investments does that represent, the alterative rate on the loan, etc.

3

Spending down accounts due for RMD can be attractive. Not if it puts you into a higher tax bracket. And maybe not if it puts you into higher Irma bracket. Run the numbers.

Most would avoid spending Roth money if you can.

And note that most would rollover 401k into Ira for more investment choices. Unless you have a very good 401k plan. And consider Roth conversions if you are in lower tax brackets. Partial conversions over several years can work for you before RMSs set in.

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4

My friend — congratulations on a successful retirement and on having enough in liquid assets to cover more than the bare minimum in life. That puts you in an incredible spot

It is very hard to answer your exact question on how to pay for those major “one-time” expenses without having a clearer picture of your overall financial picture and goals. In addition, I can’t give individual financial advice, so please consider anything shared here as a general thought starter.

Based on what you’ve shared, assuming that cash is in a non-tax-sheltered account, my default perspective would be to pay cash and then figure out whether and how to replenish the cash stockpile over time in the context of an overall financial plan.

Depending on your age, marital status, sources of income, cost of living structure, legacy goals, and asset levels and locations, there are many different approaches that may or may not make sense for that plan.

IRMAA, RMDs, the Social Security Tax Torpedo, the widow’s penalty, the risk of dying broke, and many other factors may or may not apply, based on your overall situation. Since you’re already retired, now would be a great time to get yourself educated on the fundamentals.

If nothing else, the words of wisdom from the rock band Rush certainly apply to retirees: “When you choose not to decide, you still have made a choice.” The earlier in your retirement that you get yourself up to speed on the interplay between your age, assets, benefits, and the rules that affect retirees, the more the choice on how to manage things will be yours, and not based on the defaults based on doing nothing.

Regards,

-Chuck

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Thanks for all the replies. I should have mentioned that I’m 68, married, with income from taxable , IRA, and Roth accounts, as well as Social Security and a very small pension. Your comments confirm what I already suspected but a little confirmation is always nice. Running the numbers is in order, of course

I absent-mindedly typed 401(k) but all 401(k) monies were rolled over into an IRA whenever I changed jobs or ultimately retired.

And yes, getting up to speed is my top priority, I view asking the collective wisdom here as a step in that direction. I already have a have a handle on investing and spending in retirement but the major spending is a new wrinkle I need to manage well.

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Part of it is spending, part of it is current income, and part of it is longer-term income.

As a relatively early retiree, you have flexibility now that you didn’t have while you were working, but that flexibility starts to wane as milestones pass.

Taking Social Security, starting pension payments, starting annuity payments, and reaching RMD age are all factors that start reducing people’s flexibility.

How much that affects you overall depends on your asset levels and locations, your income levels and characteristics, your tax filing status, your expense levels, and your plans for your money and your financial legacy.

It’s worth mapping out a plan this year, as each year that passes cuts out part of your available flexibility. “Do nothing major differently” might very well be a great approach — but you won’t know until you dig into it.

Regards,

-Chuck

7

Hi @LakeEffect,

As mentioned, your specifics count.

Some general thoughts:

But, if the amount of income will push MAGI above the threshold that will start/increase IRMAA, you should take more from the Roth IRA since Roth withdrawals do not add to MAGI

Financing the repairs/car is a decision between interest paid on the loan(s) offset by the income tax/IRMAA for a one-time payment.

At 68, RMD’s are a few years down the line yet.

If your Roth asset level is low vs your traditional assets, the loan may be the best solution.

Of course, pushing the car back a year might make a big difference also.

If you go with loan(s), just make sure they are pre-payable for capital. Thay allows you to accelerate payback when you have extra cash available.

Does that help you?

Gene
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