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Payouts during ER

 
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karma
** Regular


Joined: 31 Jul 2003
Posts: 65

PostPosted: Tue Feb 01, 2005 8:26 am    Post subject: Payouts during ER Reply with quote

Now that I've established that there are other retirees, I'm curious about how REers are paying for the years before they would naturally get funds from their retirement accounts. I realize we are an international community, so this might be a little tricky. Nonetheless, I think it would be interesting to find out how all FIREees and potential FIREees pay/plan to pay for early retirement.

In the US, one can usually get funds from a retirement vehicle (IRA, 401k, etc) at 59 1/2. If you are retiring from the company where your 401k resides, you may be able to tap in at 55. Here is where I am really curious. Is anyone using/planning to use the SEPP (Substantially Equal Periodic Payment ) method of tapping retirement money without penalty. This used to be quite arduous, but I believe it has become easier, though I don't know the particulars.

Just to get the ball rolling, I considered using a SEPP, but decided against it because during the period of the SEPP, I would have one year that would be taxed very highly. My husband will be getting a lump sum distribution in a couple of years, and that will push our personal rate pretty high. I'd rather pay 15% on capital gains than 35% (or whatever) on SEPP distributions. Smile So I have chosen to use my after-tax accounts until the natural time of tapping into retirement accounts at 59 1/2.

Anyone else?

karma


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Mike
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Joined: 06 Jul 2003
Posts: 278

PostPosted: Tue Feb 01, 2005 8:30 am    Post subject: Reply with quote

My pension puts me in a taxable bracket, so I ignore the IRA.


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hocus2004
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Joined: 10 Jun 2004
Posts: 752

PostPosted: Tue Feb 01, 2005 8:35 am    Post subject: Reply with quote

Just to get the ball rolling, I considered using a SEPP, but decided against it because during the period of the SEPP, I would have one year that would be taxed very highly

I don't have a SEPP feature in my plan.

There's a poster named "TheBadger" who did a report at Soapbox.com on SEPPS. I believe that is is now available for sale at RetireEarlyHomePage.com.


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peteyperson
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Joined: 26 Nov 2002
Posts: 525

PostPosted: Tue Feb 01, 2005 9:33 am    Post subject: Re: Payouts during ER Reply with quote

I'm avoiding traditional UK pension plans because whilst they offer tax-free deposits, they have significant negatives. One must buy an annuity with at least 75% of the money accumulated. Annuity rates have come crashing down from a peak of 10% to 4% for payout periods of 30+ years (what moron ever thought that 10% real was achievable even on a limited time payout scheme?). This will likely get worse as my life expectancy will hopefully extend out. Early retirees are penalised with a lower payout. All payouts are fully taxable like new income, not long-term capital gains. Fees tend to be on the high side and investing acumen of pension investors does not give one confidence at all! (There are now self-directed pensions but one still have to sell it on to an insurer who will then invest it for you). Several of the larger insurance companies here in the UK bumped up against liquidity limits to be able to stay viable because they lost so much at the end of the 1990s. They have since dialed back their equity exposure, putting funds into bonds. This is a typical knee-jerk reaction which will have been highly negative to capital values retained. The time to consider risk levels is prior to a large market correction! Standard Life, major provider had to float a £3Bn bond issue in order to get enough liquidity to continue.

Following all of this, I decided to educate myself on an ongoing basis by treating investment as my new hobby which should not only benefit me in numerous ways, but also I have to say is one of the cheapest hobbies the typical "big toyz for the boyz" a guy can have. Should end up earning me money not costing me money. I enjoy learning new things and becoming more knowledgable. I like charting my course and the more I do so, the more I feel in control of my life and more contented.

I plan a diversified portfolio of asset classes but with concentrated focus in each asset class where appropriate. So property will have a select group of companies that have property type or region/city focus, as opposed to nationwide focus. I am willing to accept volatility in per year results in each asset class in order to outperform in the portfolio as a whole over the long-term. Therefore I think one can be diversified and yet do very well with a well-constructed portfolio of interesting assets. I plan to obtain a 2% dividend yield from the portfolio and augment that with asset sales for an additional 1-3% per annum to live, depending on the market. There will also be some dry powder to enable complete avoidance of capital sales in a couple of down years. This would help ride out some of the large-cap decline observed late 2000-1. However, equity diversification by size, style and region will ensure a limited exposure to one type of asset class dominating and taking me down (large-cap growth in the last example). As a side note, here in the UK it was said that one should avoid investing in small cap entirely because large caps were booming. This persisted through the 90s until small cap almost became the forgotten asset class (micro cap too). The returns turned around when dividend yield spreads from large to small cap reached high levels (this strikes me as similar to the buy signal when the S&P 500 dividend yield rose over 6% in 1982 and declined to just 1.2% in 1999. Ditto Japanese market during the bubble when yields fell below 1% and Jeremy Grantham pulled out). These things go through phases, fads, investor overenthusiasm for one thing - call it what you will. It is quite possible that investors will overbuy China & India to the detriment of the rest of Asia, for instance. UK property is suddenly getting an increased allocation, as is small cap, very herd-like in execution! Wink There is much to be said for being a contrarian investor as well as for equity diverisfication.

Petey
karma wrote:
Now that I've established that there are other retirees, I'm curious about how REers are paying for the years before they would naturally get funds from their retirement accounts. I realize we are an international community, so this might be a little tricky. Nonetheless, I think it would be interesting to find out how all FIREees and potential FIREees pay/plan to pay for early retirement.

In the US, one can usually get funds from a retirement vehicle (IRA, 401k, etc) at 59 1/2. If you are retiring from the company where your 401k resides, you may be able to tap in at 55. Here is where I am really curious. Is anyone using/planning to use the SEPP (Substantially Equal Periodic Payment ) method of tapping retirement money without penalty. This used to be quite arduous, but I believe it has become easier, though I don't know the particulars.

Just to get the ball rolling, I considered using a SEPP, but decided against it because during the period of the SEPP, I would have one year that would be taxed very highly. My husband will be getting a lump sum distribution in a couple of years, and that will push our personal rate pretty high. I'd rather pay 15% on capital gains than 35% (or whatever) on SEPP distributions. Smile So I have chosen to use my after-tax accounts until the natural time of tapping into retirement accounts at 59 1/2.

Anyone else?

karma


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karma
** Regular


Joined: 31 Jul 2003
Posts: 65

PostPosted: Wed Feb 02, 2005 10:54 am    Post subject: Reply with quote

When do people plan to access their retirement funds? Right at the beginning (59 1/2) or wait until the last minute when they are forced to (70 1/2)? Is there some secret algorithm I don't know about? Smile

I've heard of people going through rather elaborate shifting of tax deductions, so that they have all the deductions for charity from 2 years listed in a single year so they can itemize. Would you time that with your doubled up IRA withdrawals? And maybe capital losses in an after-tax account?

Just don't know if you all have thought about these things.

karma


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ben
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Joined: 17 Feb 2003
Posts: 231
Location: The world is not enough

PostPosted: Wed Feb 02, 2005 6:22 pm    Post subject: Reply with quote

Well I have almost my entire nest egg offshore (am an expat) with free access and no taxes as such depending on what country I base myself in of course.

For my company pension I can only touch at age 60 and will probably pull as much out as I can then - it is ALSO kept offshore. Some of it is forced annuity though. It will only amount to 5% or so of total nest egg. All else will be either in bricks or invested on funds Etc.



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Mike
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Joined: 06 Jul 2003
Posts: 278

PostPosted: Wed Feb 02, 2005 9:28 pm    Post subject: Reply with quote

Quote:
When do people plan to access their retirement funds? Right at the beginning (59 1/2) or wait until the last minute when they are forced to (70 1/2)? Is there some secret algorithm I don't know about?


If I can withdraw any tax free at 59 1/2, I may. Otherwise, I will probably just keep it in the IRA until I need it, or the IRS forces me to take some out. It is too hard to predict future tax law changes, so I don't know how to optimize withdrawals for the best future tax effect.


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