Planning my Father's Retirement

[kork13]

My father just retired from a ~40-year career with the federal government (military then NOAA), and is very active & healthy at age 63. He knows I'm big into the personal finance stuff, so he often aka my opinion about various things. Right now, it's his retirement accounts.

Mostly, the answers for him are pretty straightforward -- he's got ~$1.2M in TSP+IRA, $4k/mo pension, and will delay taking SS as long as possible, but should get ~$3500/mo. His expenses are fairly low -- he owns his home/cars, no debts, and he's always been fairly frugal. So his pension will easily cover his baseline expenses + some of his fun. So he's in great shape overall.

What I'm struggling with is the recommendation for his retirement accounts. He feels that the stock market is overinflated (reasonably so), and he doesn't want to ride it down if/when it does so. He wants to sit his retirement funds in 90% bonds/10% stocks (moving everything into the TSP, so 90% G-fund, 10% between C/S/I funds). He's not reliant on the money at all, but mostly wants to draw it out from retirement as much as possible (while staying below $100k taxable income for tax efficiency) before RMDs hit. I'm going to convince him to bring stocks up somewhat (talking bond/interest rate risks), but any other ideas?

[srblanco7]

My father just retired from a ~40-year career with the federal government (military then NOAA), and is very active & healthy at age 63. He knows I'm big into the personal finance stuff, so he often aka my opinion about various things. Right now, it's his retirement accounts.

Mostly, the answers for him are pretty straightforward -- he's got ~$1.2M in TSP+IRA, $4k/mo pension, and will delay taking SS as long as possible, but should get ~$3500/mo. His expenses are fairly low -- he owns his home/cars, no debts, and he's always been fairly frugal. So his pension will easily cover his baseline expenses + some of his fun. So he's in great shape overall.

What I'm struggling with is the recommendation for his retirement accounts. He feels that the stock market is overinflated (reasonably so), and he doesn't want to ride it down if/when it does so. He wants to sit his retirement funds in 90% bonds/10% stocks (moving everything into the TSP, so 90% G-fund, 10% between C/S/I funds). He's not reliant on the money at all, but mostly wants to draw it out from retirement as much as possible (while staying below $100k taxable income for tax efficiency) before RMDs hit. I'm going to convince him to bring stocks up somewhat (talking bond/interest rate risks), but any other ideas?

First and foremost, congrats to your father on his retirement. No great insight here and it's terrific that you'll get some time together in retirement.

If I'm understanding your post correctly, he's looking to move funds from his retirement accounts (TSP + IRA), keep the taxes at a reasonable level, and reinvest the net proceeds in a brokerage account.

Obviously, he should invest the funds in alignment with his risk tolerance. That being said, does he have a vision for his retirement funds? Is he looking to leave something material to his kids/grandkids? Since he doesn't require the money for living expenses does this allow for a long-term outlook (vs. his 10/90 target I'd view as a short-term/market-timing outlook)? With a long term outlook, could you suggest that he invest the brokerage account with a stock/bond split that's similar to his historic investment split or set aside some cash as a buffer against a market downturn?

Vanguard has statistics on model portfolios (https://investor.vanguard.com/invest...lio-allocation) that could facilitate a dialogue.

[Like2Plan]

Your father will have to keep a sharp eye on future taxes. Is he MFJ or single status?

He will already have the lower tax buckets filled with his pension and SS.

"Up to 85% of Social Security benefits are taxable for an individual with a combined gross income of at least $34,000, or a couple filing jointly with a combined gross income of at least $44,000"
https://www.investopedia.com/ask/ans...ity-income.asp

His pension will be partially tax free. It is usually a small portion of the annual pension amount (guessing 2-5% depending on the pension system). The tax free portion represents the contributions made that were already taxed spread out over about 30 years. (After the exclusion equals the amount your father contributed to the pension system, the entire pension amount is all taxed).

https://www.irs.gov/pub/irs-pdf/p721.pdf

RMDs kick in at 72.5 and the amount that has to distributed gets larger each year. His savings will continue to grow, so it will be over 1.2 million in 9 years. But, if it were still 1.2 million the RMD would be on the order of 48k (and increasing each year). I am assuming all pretax. If he has any Roth contributions, they will still be subject to RMDs in the TSP but they won't be taxed.

Pension annual income about 48k (2-5% tax free)
Social security income about 42k (15% tax free)
at 72.5 RMD 48k

If single, that looks to put your Dad into the 24% tax rate under current tax law. (RMDs rate for an 82 year old on 1.2million would be about 73.6k) So, as time goes on (especially with current tax law to sunset in 2025), RMDs could potentially put your Dad into a higher tax bracket.

Now, getting back to the TSP and the investment options. All of the monte carlo simulations (for predicted success of retirement) have at least 30% equities to overcome the inflation risk. But, your Dad doesn't really need the TSP money for a successful retirement plan. It will just erode his buying power over time. Is he investing for potential medical expenses (Long Term Care?), gifts to charity?, or a legacy for his kids? The answer to that question might guide him to the allocation. If it is for his heirs 30 years or so from now, maybe a higher stock allocation.

So, another tax aspect--will your father sign up for part B medicare at age 65? Some feds do and some rely on FEHB alone--there are pros and cons to this. (I am assuming he qualifies to carry FEHB into retirement. )
If your Dad signs up for part B, there are additional costs for higher income. IRMAA rates found here: https://www.medicare.gov/your-medica...s/part-b-costs Medicare does a 2 year look back on income to come up with the rates (so, starting at your Dad's income at 63). They do have a form that you can submit in the case of retirement to potentially reduce the IRMAA impact: Medicare Income-Related Monthly Adjustment Amount - Life-Changing Event https://www.ssa.gov/forms/ssa-44-ext.pdf

So, I'm getting to the punch line here. Keeping the parameters listed above in mind, maybe it might benefit your Dad to do some conversions to Roth in the early years of retirement--especially before he claims social security. Later on, it will reduce his RMDs and much later on, it will reduce the tax impact on his heirs for inherited IRAs. He won't be able to do the conversions from the TSP, he would have to do it from a rollover IRA.
He could put his equities in Roth (for the most potential growth over time).

[Like2Plan]

I wanted to add, another thing that might be useful for your Dad is QCD's after age 70.5.

I believe they have to come from a Rollover IRA:

Here is a link:
"A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met."

https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds

There is an age mis-match because they increase the RMD age to 72.5 (with the CAREs act I believe), but left the QCD age at 70.5

[kork13]

Appreciate the suggestions so far, and I'll answer some of the questions:

My dad is married & they do file MFJ. My understanding is that she'll continue to work part time, but only earning <$15k/yr I think, and only for a couple more years -- she works in counseling/therapy with institutionalized teenagers/adults & enjoys the work alot. They're only recently married (in the last year or two), but she's frankly not great with money/spending (I believe she has virtually zero retirement), but her small income is her play money & my dad covers household needs. It works for them, they're happy, so I'm trying not to judge.

My dad is definitely market timing with the bonds, he actually moved out of stocks like this back in Jan-Feb'20, right before everything crashed. He's happy about that, and I think it's coloring his judgement now, expecting another big drop. He's willing to move more into stocks later on, but he seems intent to wait. My goal is to get him into at least 30% stocks, for similar reasons as stated. One thing that helps at least a bit, though, is that the TSP G-Fund is special in that it earns mid-long term bond returns with zero principle risk. So it at least is slightly less vulnerable to inflation, by earning more interest than normal.

By my math, he can stay in the 12% bracket up to ~$81k taxable income, not including the $25k standard deduction (so $106k total income, napkin math). That's where the $100k target came from. The trick will be getting out as much as possible before his SS benefits & RMDs start.

He isn't overly concerned about leaving alot to his kids, which is fine -- the 3 of us are successful, responsible, financially stable adults. Likewise, I don't expect he'd be interested in the machinations of QCDs, as I think one of the only "charities" he gives money to is tithing & such to our church. He's perfectly happy just planning to run out down dry over the course of 30ish years, which is the skeleton of his current plan.

I don't think he realizes the bump up to 72 for RMDs, so I'll be pointing that out to him as it gives us more time to drain the retirement accounts. My goal is to get him down to around $500k in retirement if possible, which should be around $30k in RMDs.

I also have no idea about the Medicare/health care stuff for him/them. Not sure if he's looked at it yet, but I'll ask about that side.

I talked to him about rollovers into Roth IRA, and he's not really interested. He prefers to take it out & put it into taxable investments without the strings attached. Again, he's not very concerned about growth or wealth preservation. He's got enough today to fund his retirement years, and that's sufficient for his interests.

[disneysteve]

he's not very concerned about growth or wealth preservation. He's got enough today to fund his retirement years, and that's sufficient for his interests.

That's fine, and important to know. So then the question becomes what is his plan for that money? It has to go somewhere. If he isn't concerned about leaving it to the kids or giving it to charity, what does he want to happen with it? It sounds like he has no need or intent of spending it on himself.

Personally, I wouldn't advise a 63-year-old guy to go 10/90 in his portfolio, especially when he has a pension that totally covers his expenses. I think he needs to really give some deep thought to that money. He is young enough and well-off enough to build some serious wealth but he needs to have a reason for doing so.

$1.2 million earning 5%/year for 22 years (to age 85) would grow to $3.5 million. So even a 50/50 or 40/60 allocation could create quite a legacy.

You can never really answer the question "What to do with the money?" until you have the answer to "What is the money for?"

[Petunia 100]

By my math, he can stay in the 12% bracket up to ~$81k taxable income, not including the $25k standard deduction (so $106k total income, napkin math). That's where the $100k target came from. The trick will be getting out as much as possible before his SS benefits & RMDs start.

If he isn't planning on spending the withdrawals, he might want to consider Roth IRA conversions for at least a portion of his withdrawals.

[LivingAlmostLarge]

he should go 50%/50% because of his pension mostly to keep with inflation. Also look at converting up to 24% bracket the MFJ roth even if it means paying more taxes. I think the RMD will drive him there anyway.

[Like2Plan]

Appreciate the suggestions so far, and I'll answer some of the questions:

I talked to him about rollovers into Roth IRA, and he's not really interested. He prefers to take it out & put it into taxable investments without the strings attached. Again, he's not very concerned about growth or wealth preservation. He's got enough today to fund his retirement years, and that's sufficient for his interests.

Oh my goodness. Well, about the only strings attached for the Roth is it has to be qualified. Something tells me he would be opening a new Roth and so even though he is already over 59.5, he would still have a 5 tax year qualification period for any gains to be withdrawn tax free.

I'm going to assume that he wouldn't be spending 500k over the 9 year period and some will go into savings. I think it would be an expensive mistake to put it into taxable. He pays the same taxes on the pretax distribution whether he puts the proceeds into a shoe-box under the bed, puts it in a taxable account or converts it to Roth. The only difference is the Roth money (assuming the qualification time frame has been met) is not taxed again and will not negatively impact his tax plan in outlying years.

If he did go the taxable route, what would he invest in given his current plan to be 90 bonds/10 equities? I am wincing thinking about interest taxed at ordinary tax rates. If he invests in stocks and capital gains continue to receive favorable tax treatment, I guess that isn't the worst option.

Oh--one of the pitfalls of the TSP is a beneficiary participant account. I am going to assume that your Dad has his spouse listed as his beneficiary. If he predeceases her she has the option of keeping the money in a TSP beneficiary participant account and taking advantage of all the great investment options. But, on her death if there is any balance left in the TSP, her beneficiaries could end up with a very large tax bill:

"Death benefit payments made from your beneficiary participant account must be paid directly to your beneficiary(ies). These payments are subject to certain tax restrictions and cannot be transferred or rolled over into an IRA or eligible employer plan. In addition, your beneficiary(ies) will have to pay the full amount of taxes on the taxable portions of the payment in the year it is received."

https://www.tsp.gov/publications/tspbk33.pdf

[kork13]

he should go 50%/50% because of his pension mostly to keep with inflation. Also look at converting up to 24% bracket the MFJ roth even if it means paying more taxes. I think the RMD will drive him there anyway.

That's sort of my thoughts as well... If we don't get his traditional accounts down enough, the RMDs will push him into the higher bracket regardless. And the higher tax rate will only apply above the $106k line anyway, and the 22% bracket can take him all the way up to nearly $200k, so why not just rip off the bandaid? I'm definitely gonna try to convince him.

Likewise, to Steve's points, if I could convince him to transition toward 50/50, even over time, that would be a great end state. I'll try asking him explicitly what the intent for this money is. I totally agree that he could easily build some serious wealth, but I don't know if that's even desirable for him. I think he just wants to travel, spend time with family, and enjoy his time. The money is just a means to that end, and he's not concerned with it beyond providing for their needs. Defining some goals, even in retirement, might be helpful.

[Like2Plan]

That's sort of my thoughts as well... If we don't get his traditional accounts down enough, the RMDs will push him into the higher bracket regardless. And the higher tax rate will only apply above the $106k line anyway, and the 22% bracket can take him all the way up to nearly $200k, so why not just rip off the bandaid? I'm definitely gonna try to convince him.

Another thing that folks don't think about is that sadly, they may not always be in the MFJ tax filing status and the survivor might find themselves in a higher tax bracket with higher tax expenses.

[disneysteve]

Another thing that folks don't think about is that sadly, they may not always be in the MFJ tax filing status and the survivor might find themselves in a higher tax bracket with higher tax expenses.

To the same point, if he is the one who manages the finances and his wife is not financially savvy, he needs to think about building a portfolio that would best support her after he's gone so that she doesn't have to worry about it and hopefully avoids the temptation to let some sleazy "advisor" rope her into doing business with them.

What happens to his pension when he dies?

[Like2Plan]

What happens to his pension when he dies?

I was wondering the same thing. He would have to take a reduction in pension and depending under which retirement system he is in:

"If you retire under the Civil Service Retirement System (CSRS), the maximum survivor benefit payable is 55 percent of your unreduced annual benefit.
If you retire under the Federal Employees Retirement System (FERS), the maximum survivor benefit payable is 50 percent of your unreduced annual benefit."


https://www.opm.gov/support/retireme...ivor-benefits/

One thing to note: if there is no survivor benefit elected--the surviving spouse would not be eligible to continue FEHB.

"If you don't elect to provide for a monthly benefit after your death, your survivor won't be able to continue coverage under the Federal Employees Health Benefits (FEHB) program."

[scfr]

Try running his situation through this calculator. For the risk tolerance questions, either ask your father or make an educated guess.
You may be surprised at the results. I wouldn't be surprised if he comes in at the 10-30% recommended stock percentage range.

[kork13]

Try running his situation through this calculator. For the risk tolerance questions, either ask your father or make an educated guess.
You may be surprised at the results. I wouldn't be surprised if he comes in at the 10-30% recommended stock percentage range.

You are correct. I went through it and guesstimated what my father would respond, and it came out solidly in the 10-30% range. Interesting.