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The Stunning Problem With The 4% Retirement Income Rule in One Chart

bogey21

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I solved this problem a different way. When I retired about 20 years ago I started giving away everything I owned to my kids and ex-wife. Nothing is left. My Pension and Social Security are enough to cover my living expenses...

George
 

WinniWoman

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I solved this problem a different way. When I retired about 20 years ago I started giving away everything I owned to my kids and ex-wife. Nothing is left. My Pension and Social Security are enough to cover my living expenses...

George
Yes, George. That’s great. But today most people don’t have pensions and in most cases you can’t survive on SS alone.
 

x3 skier

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If there’s anything left in my retirement accounts, the kids will get it. They didn’t earn it, my wife and I saved it and if the laws change, they will have to deal with it. I have a fairly substantial life insurance policy with them as beneficiaries so they will get that if I spend every cent. If not they will have two nice windfalls. If I do spend it all only one. No tax on one and whatever tax is due on the other

When I started working, there were no such things as 401K’s or IRA’s or Roth IRA’s. Laws and situations change and I deal with it if I can, accept it if I can’t and get on with life.

Cheers
 

rapmarks

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I solved this problem a different way. When I retired about 20 years ago I started giving away everything I owned to my kids and ex-wife. Nothing is left. My Pension and Social Security are enough to cover my living expenses...

George
George I never quite understood this, did you pay gift tax , because the government will expect that on any gift over x amount and twenty years ago it was $10,000 per person you could gift per year.
 

bogey21

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George I never quite understood this, did you pay gift tax , because the government will expect that on any gift over x amount and twenty years ago it was $10,000 per person you could gift per year.
Gift taxes have never been an issue. Without going into details let me just say my ex-wife, kids and I have been co-owners (JTWROS) of multiple Bank Accounts going back 30-40 years or more. Legally all money going into or out of these accounts has been their money as much as mine from the day the accounts were opened. To the extent I don't withdraw money from these accounts (which I haven't since I retired about 20 years ago) what remains in them is theirs. When I die all they have to do is take Death Certificates to the Banks and have my name removed from the accounts. As far as I know the only thing I own that technically should go through Probate is my 2011 Mazda3. The only other things in my name are interests in a couple of race horses which (like TimeShares) are more liabilities than assets...

George
 

rapmarks

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Gift taxes have never been an issue. Without going into details let me just say my ex-wife, kids and I have been co-owners (JTWROS) of multiple Bank Accounts going back 30-40 years or more. Legally all money going into or out of these accounts has been their money as much as mine from the day the accounts were opened. To the extent I don't withdraw money from these accounts (which I haven't since I retired about 20 years ago) what remains in them is theirs. When I die all they have to do is take Death Certificates to the Banks and have my name removed from the accounts. As far as I know the only thing I own that technically should go through Probate is my 2011 Mazda3. The only other things in my name are interests in a couple of race horses which (like TimeShares) are more liabilities than assets...

George
That is a solution to avoid gift tax
 

WinniWoman

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Gift taxes have never been an issue. Without going into details let me just say my ex-wife, kids and I have been co-owners (JTWROS) of multiple Bank Accounts going back 30-40 years or more. Legally all money going into or out of these accounts has been their money as much as mine from the day the accounts were opened. To the extent I don't withdraw money from these accounts (which I haven't since I retired about 20 years ago) what remains in them is theirs. When I die all they have to do is take Death Certificates to the Banks and have my name removed from the accounts. As far as I know the only thing I own that technically should go through Probate is my 2011 Mazda3. The only other things in my name are interests in a couple of race horses which (like TimeShares) are more liabilities than assets...

George
My parents did this with their bank accounts as well. So the money is still yours as well. We never touched their money when they were alive as we still considered it theirs. After they passed, however, it was pretty easy to go to the bank and withdraw money.

But- There are reasons not to do this, however. One is if anything happens and your kids are sued, they (and you) can lose that money. Two is if your kid gets a divorce, the wretched spouse can also go after the money. Three- your kids can go haywire and wipe out the accounts on bad stuff. I guess if you don’t care it doesn’t matter.

This is why we never added our son as a co owner to our accounts- only as a beneficiary. POD or TOD.

My husband and I are Power of Attys for each other in case one is incapacitated. I have my brother as my secondary but my husband had his sister and she is deceased now. So we need to get them revised and add our son. Of course, we have wills.

As for the car, my mom always signed the back of the titles and kept them in her safe. No probate needed. I am thinking of doing the same thing. An atty I mentioned it to thought it was very interesting...
 
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bogey21

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.As for the car, my mom always signed the back of the titles and kept them in her safe. No probate needed. I am thinking of doing the same thing. An atty I mentioned it to thought it was very interesting...
Actually I've done the same thing. I signed the title, put it in my safe and told my kids to give it to Kars for Kids if I hadn't done it already...

George
 

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One thing to consider with the 10 yr rule. You do not have to take out any before year 10. Hopefully that money can earn enough to cover the taxes. Real hopefully even after inflation. If the kids do not make much they can take some out each year to move up to the end of a favorable tax bracket. 10 more years of tax deferred earnings can be significant even if not as advantageous of a lifetime deferment. I actually see 10 yrs as fair. The only addition I would like is that capital gains in the account be treated as such. Now if the rest of the tax code was as fair.
 

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My broker said many of his clients have the bulk of their retirement in an Ira. Passing it on to your children at the height of their earnings will cause them a very big tax bill. I think someone said anticipating 18 billion of additional taxes.
there is no immediate tax bill on inheriting an IRA. The tax comes out of the money withdrawn, no sudden balloon payment. Sure, withdrawals add to income that is taxed, but no inheritor is paying tax on money they didn't receive. 18 billion is not "additional" taxes, it is what was going to paid on those savings sooner or later, money that evaded taxes for decades.

I just can't wrap my head around taxes being the reason people don't want more income. The money was sheltered, everybody knew it had to come out eventually. Are these same height-of-earnings people turning down raises at work that might bump them into next tax bracket? Who does that? no, please, no more income, I can't handle having to pay more tax....
 

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I'm thinking reaping additional taxes was the driving force behind the Secure Act. Personally, I view it somewhat "family unfriendly" but, perhaps, it is greatly appreciated by those not forced into withdrawals at 72.
I understand your position and situation, but, the IRA is by definition Individual. It was never meant to be a family account. It never even contains spouse as joint owner.
 

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Really? Well their deceased Parents worked hard for that money and I am sure their parents would have wanted their children to have THEIR money and not the government.

This is why I hate things like IRAs and 401ks ( which most of our money is in as well). They are deceiving and are really tax DIS- advantaged. Anything the government has a hand in forget it. In the long run better to have had a taxable account.
Absolutely NOT tax dis-advantaged!!! The dollars I put in 3 decades ago have blossomed into many multiples of those dollars. All I have to do is finally pay tax on dollars that weren't mine, they are earnings, money made from my money. It will take a very long time to finally get to the original dollars when I start my decades-long withdrawals.

In 2010 I ran the numbers on how much of my 401k was My Money, and it was 18%. That number is going to be a lot lower after the decade of growth we've had. There is no way I would have been better off in a savings account or brokerage account. ymmv
 

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If they can change the terms of withdrawal of an inherited ira,why can’t they change the terms on a Roth IRA too,taxing the growth.
We saved in an ira when we were making 11000 a year, because we were never going to get social security. We would have been way better off spending it. If we had bought bigger and bigger homes, we would have reaped a big gain and not paid taxes on it.
 

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Hard to muster pity for someone that just got a big account they must empty on a timeline.

Hopefully those who inherit will pay those taxes on the inherited funds and take what's left of the annual distribution and promptly invest the money into some worthwhile investments each year to make those funds grow.



.
 

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The Stunning Problem With The 4% Retirement Income Rule in One Chart.


.


Richard
The Original post is an interesting article and has generated a lot of good discussion here. It is not the first time I've heard about the issue with the 4% rule. As someone who is approaching retirement (my wife retired last year), I'm realizing that the specific planning for financial security in retirement needs to start many years before. All of the issues raised here about savings in various vehicles (401k, IRA's Roth IRA's and others) are decisions which should be made as early in the planning process as possible and should take future tax implications, inflation, RMD rules (which have changed now) and pension/ social security drawing strategies into effect. As far as inheritance, unless a family has a substantial estate to pass on to their heirs, I doubt this very often comes into consideration in most of our planning scenarios. Our financial planner has actually asked us if passing assets on to our kids is important in our retirement planning...I suppose it is for some clients. With the great unknown as to how long our assets need to last us, this is a complex topic for which no one has the "right" answer. I think having good advisors who understand the challenges is very important...and expect to pay them for their expertise.
 

rapmarks

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A friend of ours was found dead in his home last week by a friend. His wife died almost five years ago, fell and hit her head getting out of the car. He was very wealthy, had his own business and probably big iras. It occurred to me that his children will be one of the first to be effected by the Secure act.
 

bogey21

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This is a complex topic for which no one has the "right" answer...
The more I read these posts the more I think Brian is right. It is like everyone's desires, resources, health, family relationships, etc. are unique and we all try to structure our retirements to accommodate them. Clearly one size doesn't fit all...

George
 

VacationForever

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A friend of ours was found dead in his home last week by a friend. His wife died almost five years ago, fell and hit her head getting out of the car. He was very wealthy, had his own business and probably big iras. It occurred to me that his children will be one of the first to be effected by the Secure act.
If his wealth is mainly in taxable accounts and investments, but with a small IRA account, then there is not much effect of the SECURE Act.
 

rapmarks

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If his wealth is mainly in taxable accounts and investments, but with a small IRA account, then there is not much effect of the SECURE Act.
Yes, that is obvious, and apparently he never talked with his children about it, but many of my friends who were self employed funded anything tax advantaged.
His homes alone are worth a lot, 5500 square feet with lots of acreage on a lake, and a nice home in Florida,
 

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A friend of ours was found dead in his home last week by a friend. His wife died almost five years ago, fell and hit her head getting out of the car. He was very wealthy, had his own business and probably big iras. It occurred to me that his children will be one of the first to be effected by the Secure act.
I'm so sorry for your loss.
 

WinniWoman

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The Original post is an interesting article and has generated a lot of good discussion here. It is not the first time I've heard about the issue with the 4% rule. As someone who is approaching retirement (my wife retired last year), I'm realizing that the specific planning for financial security in retirement needs to start many years before. All of the issues raised here about savings in various vehicles (401k, IRA's Roth IRA's and others) are decisions which should be made as early in the planning process as possible and should take future tax implications, inflation, RMD rules (which have changed now) and pension/ social security drawing strategies into effect. As far as inheritance, unless a family has a substantial estate to pass on to their heirs, I doubt this very often comes into consideration in most of our planning scenarios. Our financial planner has actually asked us if passing assets on to our kids is important in our retirement planning...I suppose it is for some clients. With the great unknown as to how long our assets need to last us, this is a complex topic for which no one has the "right" answer. I think having good advisors who understand the challenges is very important...and expect to pay them for their expertise.

One thing our FA said right off the bat is that the priority was to make sure my husband and I had enough money to live for our lifetimes, not to leave to our son.
 

Ralph Sir Edward

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there is no immediate tax bill on inheriting an IRA. The tax comes out of the money withdrawn, no sudden balloon payment. Sure, withdrawals add to income that is taxed, but no inheritor is paying tax on money they didn't receive. 18 billion is not "additional" taxes, it is what was going to paid on those savings sooner or later, money that evaded taxes for decades.

I just can't wrap my head around taxes being the reason people don't want more income. The money was sheltered, everybody knew it had to come out eventually. Are these same height-of-earnings people turning down raises at work that might bump them into next tax bracket? Who does that? no, please, no more income, I can't handle having to pay more tax....
Why have more income than you want to spend? Saving for retirement or rainy day are reasonable, but dying with the biggest pile doesn't make you the winner. . .

I have used all the commonly available tricks to (hopefully) not pay any income tax in retirement. Am I stinting myself? (I ask, sitting at Bay Club at Waikoloa. . .)

Not really. I have no taste in fancy cars, fancy trips, or fancy houses. The furniture I bought 40 years ago still looks like new. (2,000 DVDs, 700 Audio CDs, 1,500 book, paper and e-books combined), a 200 bottle wine cellar, ect - I'm not hurting.

Playing the tax game, as I have, is fun. . .
 

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We do intend to leave a good amount of money in taxable and tax-deferred accounts to my son who will need the money. SECURE Act certainly will affect him but it is what it is. Over the next 5 years we may do some ROTH conversion up to 24% in Federal income taxes but the window will close on us thereafter when various income sources start paying us and we don't want to pay more than 24% in taxes.
 
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