All posts by Tom Canfield

How much do I need to sell this year for our spending in 2023?

Unless there is a dramatic change in prices for stocks and bonds, I will not be happy the first week of December when I sell securities for our spending for 2023. For the past eight years, I sold securities that week for the total that I planned to spend in the upcoming 12 months. I think I should change my normal process this December: I can sell far fewer securities in December at what may be a low point. This post explains my thinking.

 

== My normal process ==

 

 

1) Immediately after November 30, I calculate our Safe Spending Amount (SSA; chapter 2, Nest Egg Care, NEC) for the upcoming year based on the 12-month returns ending November 30. I sell securities to get the gross proceeds into cash for our SSA. This is the math approach in FIRECalc, and I like having it all in cash for the full year; I don’t have to worry about the downs and ups of the market during the next year; I just have to be concerned when I approach my next date to sell – like now.

 

2) I sell securities our RMD then. When I sell for our RMD, I withhold taxes – basically all the taxes that I will have to pay on my current-year return: I get this amount from my tax plan that I first worked on in early August. I withhold in December almost all our current-year taxes, since I do not withhold taxes from our Social Security benefits, and I generally don’t make estimated tax payments. When I withhold ~all our taxes for the year in December I effectively get an interest-free loan from the IRS. The IRS treats taxes withheld in one lump before the end of the year as being withheld throughout the year. I transfer the net cash to our taxable brokerage account.

 

3) I sell added securities from my taxable brokerage account, since our SSA is always greater than our RMD.

 

4) I now have the net, after taxes in cash for our spending for the up coming year. I  schedule automatic transfers from my Fidelity brokerage account as monthly payments throughout the year.

 

== This year? ==

 

My change would be to only sell securities in our Traditional IRAs in the first week of December equal the amount I want to withhold for current-year taxes. I’d transfer the balance of our RMD as shares. I’d then execute automatic sales each month throughout 2023 to get the cash I want transferred to our checking for our spending.

 

The benefit: I’m hoping that the sales over the next year are at better price per share than on November 30. I’m keeping more portfolio value than if I sold all of spending for 2023 in December.

 

== Here is the example ==

 

Let’s assume it’s just me who is subject to RMD and that is $50,000 for 2022. I’ll meet RMD requirements the first week of December.

 

I did not withhold taxes from my Social Security payments; I made no other estimated tax payments for in the year for other income I’ll receive in the year: dividends and interest would be an example.

 

I prepared a tax plan for the year in early August and I’ll refine it in November before my final decision as to what I will sell. Assume my tax plan says I will pay $15,000 in total federal tax on my 2022 return: taxes on my RMD; Social Security benefits, and other income, including taxes on gains of sales of taxable securities to get to our total SSA.

 

I want to withhold that $15,000 for federal taxes when I take my RMD. Again, the IRS assumes that I withheld this amount throughout the year. I don’t get hit with any penalties by paying too little in estimated payments throughout the year. I’ve effectively borrowed that $15,000 interest-free throughout the year.

 

 

 

The Fidelity web site allows me to pick the withholding percent on an RMD distribution up to 99%, but if I call Fidelity and ask the representative on the line, they can withhold 100% of an amount. I ask for a distribution of $15,000 with 100% withheld, and Fidelity send $15,000 directly to the IRS. That makes the rest of this easy.

 

I still must meet $35,000 balance of my required RMD. On the same call I ask Fidelity to transfer shares of a security or securities – let’s assume that’s all bonds and IUSB this year – equal to $35,000. That would be about 764 shares at a recent closing price of $45.67.

 

I now have 764 shares with $35,000 of value of IUSB in my taxable account; since I have no other IUSB in the account, my cost basis for these shares is $35,000. This will be the source for my spending over the next year. I can then use the “Automatic Transfers and Investments” for Fidelity to sell $2,920 of IUSB each month and transfer that $2,920 to my PNC checking account on the 20th of each month.

 

If IUSB improves in price throughout the year, I’ll have some shares left over at the end of 2023; I would have made the right bet by not selling all 764 shares for ~$35,000 in the first week of December. I’ll have remaining shares and portfolio value than if I had sold all 764 shares the first week of December.

 

But if IUSB declines further in value throughout the year, I would have made the wrong bet. I will run out of shares to sell before my 12 months are up; I’ll need to sell something else toward the end of 2023 for our spending needs.

 

 

Conclusion: I normally sell securities the first week of December to get the net for our spending into cash the first week of December. Our net for spending is the total proceeds of security sales less withholding all taxes that I expect to pay on our current-year tax return.

 

I don’t have to do it this way: I am not forced to sell securities when I take RMD. I can transfer shares and then sell those shares later for our spending. I think I will only sell securities from our Traditional IRAs the first week of December equal to the amount of taxes I want to withhold for our 2022 tax return. I’d sell securities for our spending monthly throughout 2023: I’m hoping that share prices improve and that I’ll have more portfolio value near the end of 2023 than I would have had if I sold this December.

What will we be selling for our spending in 2023?

In most years, I mostly or solely sell stocks in December for our spending in the upcoming year. That’s because stock returns have been greater than bond returns in all but one of the last seven years since the start of our retirement plan. Last year – stocks +15% real return and bonds -6% – I sold only stocks for our spending and then sold more stocks in our IRA accounts to buy bonds to rebalance our portfolio: that may seem strange, but that follows the correct math. This year will be different, and I explain in this post why – barring a DRAMATIC turnaround for stocks – we all will be selling only bonds for our spending in 2023.

 

== Stocks and Bonds have tanked ==

 

Both stocks and bonds have tanked. Stocks are worse than -25% real return and bonds are worse than -20% real return. Both, if unchanged for the year, are among the worst five years out of 97 since 1926. Typically bonds come to our rescue and are 20 percentage points better than stocks in their ten worst years in history. Not this year; bonds are failing us. This is a very abnormal year, one especially harmful to our portfolio.

 

 

== A year to Use our Reserve ==

 

In Nest Egg Care, Chapter 7 I recommend that we set aside 5% of our total financial portfolio as a Reserve at the start of our financial retirement plan. We don’t even think of that Reserve as part of our Investment Portfolio. The Reserve a pile of money we imagine that we keep under the mattress to use in an emergency. The emergency is a VERY HARMFUL year of stock returns.

 

That Reserve is invested in a short-term bond fund like BSV (DBIRX) or similar. It just sits there until we need it. We probably look at it as a dead weight in the years when stocks and bonds have done well, but this is the year we find the value in that Reserve. We use it to buy time for stocks to recover.

 

In Chapter 7 I suggest that we use our Reserve in the first year that stocks tank: my arbitrary definition was -17% or worse real return; that’s about a one in ten-year event. Over the past seven years, the worst return for my stocks was -1.6% real return in 2015; I hardly raised an eyebrow. Clearly we’re on track to hit that REALLY BAD one-in-ten-year event. We’re actually closer to a one-in-twenty-year BAD event.

 

We know our action: we sell our Reserve, BSV or similar, for our spending. We are skipping a year of the normal withdrawal and rebalancing from our Investment Portfolio. We’re clearly giving stocks free run for a year to recover.

 

We’d still rebalance the amount we have in our Investment Portfolio to back to our design mix. I’ll assume a design mix of 75% stocks and 25% bonds in this example: that would mean I sell more bonds to buy more stocks.

 

 

== The “only bonds” approach ==

 

I described an alternative tactic in this post. This tactic more clearly recognizes the concept that bonds are insurance that we use when stocks crater and we want to give the maximum time for them to recover. We use bonds for our spending when stocks crater, and we employ this tactic in all years when stocks crater.

 

The tactic was equivalent – or better – to the concept holding a one-year Reserve and using it up when stocks cratered. This alternative tactic resulted in more years of Zero Chance of depleting a portfolio when I tested the two options on THE Most Harmful sequence of returns in history.

 

The tactic is to sell only bonds for our spending when stocks tank, but then we do NOT REBALANCE back to our design mix. In this example, one sells only bonds and then adopts the resulting mix as the new design mix of 78% stocks and 22% bonds.

 

 

We’d rebalance back to that 78%-22% mix in subsequent, more normal years, but If we have another Very Harmful year where stocks crater, we repeat: sell only bonds and keep the resulting mix – that would be more than 78% stocks – as our new design mix. Given too many REALLY HARMFUL years for stocks, we’d deplete our bonds.

 

== It’s one of the two ==

 

We all will be employing one of these tactics when we calculate what we need to sell for our spending in 2023. I’ll make my final decision near the end of November.

 

 

Conclusion: Real stock returns year-to-date are worse than -25%. If there is no change for the rest of the year, that is about the fifth worst year out of the 97 years since 1926. Barring a DRAMATIC improvement, it won’t be business as usual at the end of the year.

 

We’ll all be selling solely bonds for our spending in 2023. We will adopt one of two tactics:

 

1) We’ll sell the Reserve we set aside at the start of our plan; in essence we are skipping a year of normal withdrawal from our Investment Portfolio; we’re giving a full year for stocks to bounce back. Our only task is rebalance back to our design mix.

 

2) We can view that we are adopting a plan of selling “only bonds” this year and accepting the resulting mix as our new design mix. We’ll rebalance back to that new design mix in more normal years, but revert to “only bonds” every time stocks crater.

How bad was the August inflation report?

The headline from the BLS press release on Tuesday said inflation was +0.10% in August. That’s an annual rate of 1.2%, and the stock market immediately fell by over 4%. This confused me. What gives? What gives is differences in the broadly used measure of inflation called CPI-U, the seasonally adjusted CPI-U, and Core Inflation. Core Inflation, which increased sharply from the prior month,  is the culprit in the story. The purpose of this post it to explain the differences in measures of inflation.

 

== CPI-U: -0.04% for August ==

 

The inflation number that is most widely used is CPI-U, the Consumer Price Index for All Urban Consumers. This is reported each month roughly two weeks after month-end. This is the table for CPI-U. (The table also contains CPI-W, which is what Social Security uses to calculate its annual Cost of Living Adjustment.) CPI-U decreased by 0.04% in August: that’s deflation. This August-result replaced the prior August, which was greater inflation. The cumulative value of the last 12 months was 8.26% inflation, less than the prior 12 months of 8.52% inflation.

 

Inflation in August was -0.04%, the second month of essentially no inflation.

 

== CPI-U seasonally adjusted: +0.10% for August ==

 

The BLS seasonally adjusts the price changes for price patterns to more accurately reflect monthly changes; adjustments smooth patterns due to seasonal weather or for buying around major holidays, for example. The pattern for these monthly changes is slightly different than those of unadjusted CPI-U, and is the reason for the headline that inflation increased by 0.10% in August.

 

Seasonally adjusted inflation increased by 0.10% in August. Both July and August are much lower than previous months on this graph.

 

Over a year, the unadjusted and adjusted inflation rates are almost identical.

 

== Core Inflation: +0.6% for August ==

 

Core inflation removes two volatile measures from the seasonally adjusted CPI-U: price changes in energy and in food. This graph shows that the annual changes in Core inflation is less volatile. The BLS press release states the August change in Core inflation was +0.6%, an annual rate of more than 7%. I could not find a table from BLS for these changes. This site has compiled the monthly changes that BLS reports. It shows that the 0.6% increase was twice that forecasted by economists. One could not conclude that Core inflation is declining.

 

The culprit is Core inflation, CPI-U seasonally adjusted less two volatile components, energy and food. The 0.6% increase in August is about the same as a number of recent months and was twice that forecasted.

 

I summarize the three monthly-changes for August and the results for the prior 12 months. Monthly inflation for all the things we buy is low, but Core inflation – everything other than energy and food – remains high. Thus, the wrenching decline in stocks.

 

 

Conclusion. I was surprised that the stock market reacted so negatively on Tuesday to this month’s report on inflation. I looked at the broadly used measure, CPI-U, which declined in July and again in August: that’s two months of deflation. The culprit in the story is the measure of Core inflation, which does not include the more volatile energy and food components of CPI. Core inflation in August increased 0.6%, close to the rate of a number of prior months, and one does not perceive a pattern that is says it is on track to decline.

How much walking do we need to do to prepare for a walking vacation?

Patti and I got back from our two-week trip to England last Thursday. We walked a portion of the Norfolk Coast Path, which is northeast of London. I picked this national trail since it was easier than our other trips: I judged this was the smart thing to do after my major surgery in March. Still, I found that I was pretty darn tired after most days. I might blame my age (77) or my surgery, but I think the real reason is that I did not put in enough miles before the walk. This post is a reminder to myself: how do I need to prepare for our typical walking trips? You may find my guideline useful for an active vacation, even if you are just a siteseer in a major city.

 

The prime part of Norfolk Coast Path is very flat along a coast line: along dunes, seawalls and salt marshes, and desolate beaches. The bus transportation along for 45 miles was excellent. It was easy and inexpensive to where we started the day and back to where we were staying. I could easily divide the trail into more days that the trail book suggests as liesurely.

 

 

Patti and I used to walk more than 100 trail-miles on a two-week trip when we were younger. Now, I think 50 trail-miles is about right, coupled with a visit to a city. We’ve spent added days in Manchester, Liverpool, York, Norwich, and a number of time in London. When I add up the trail-miles and the city miles for this trip, my iPhone says we walked 86 miles in 14 days or a bit more than 6 miles a day.

 

 

We averaged over 7 miles per day on the trail. I found that I was very tired after most days. I definitely wanted to take a nap! I used to be able to walk myself into shape after getting to England, but now that I’m older, I need to be in better shape before the trip. My stamina is not what it used to be.

 

== Match the average before. Peak miles at least twice ==

 

My iPhone tells me that I steadily increased my average miles per day from my surgery on March 15, and that I averaged 3.8 miles for the first half of August. This was 2/3s of the average for the trail. My peak day before we left was 5.8 miles. All days but one were more than this. I conclude that I missed the mark on both counts.

 

 

Our next trip, in just a few weeks from now, is to France. We walk east of Bordeaux and in the Dordogne. That’s a self-guided trip we planned/booked for 2020, but obviously did not take then or again in 2021. I can lay out the trail miles to see what I have to do to prepare.

 

 

I set these two benchmarks to hit in the next few weeks: I need to walk three days of nine miles; I should target to walk a full week of the trail-miles. For this upcoming trip, I need to walk about nine miles three times. I need to walk a total of 40 miles in a week.

 

I picked Wednesday as my longest walk-day. I hit 9.2 miles in three separate walks this Wednesday. We have two more Wednesdays before we leave. I need to walk about 40 miles for at least one seven-day period – averaging about 5.7 miles/day – in the week before we leave.

 

 

Conclusion: Patti and I like active, walking vacations. We want to be able to do at least one of these trips every year. At age 77, I need to put more time ahead of our trips – walk enough miles before we go – to be sure I can complete all the planned walks and enjoy the rest of our time. Good targets for me are to walk the peak trail-miles three times before we go and at least match the total trail miles we plan for seven days.

When should you take your RMD during the year?

My friend Jay sent me a clip from his Kiplinger letter that suggests you take your RMD early in the year. This is not a correct strategy. This post argues that your should take your RMD, if you can, all at the end of the year. You want to gain a year’s worth of tax-free growth and you gain the ability to avoid withholding taxes for the IRS for most all the year: you get a tax-free loan from the IRS. Both actions are to your advantage.

 

Here’s the clip, an excerpt of a letter to the editor:

 

Kiplingler’s Personal Finance, May 5, 2022. Page 5.

 

This sounds like a good idea, but it’s better to take your RMD, if you can, at the end of the year.

 

== In the Save and Invest phase ==

 

When you were in the Save and Invest phase of live, which was better: to contribute to your IRA at the beginning of the year or at the end of the year? It was – is – always better to contribute at the beginning of the year rather than the end of the year or right before April 15 — you can contribute up to that date for the prior tax year.

 

Why? You gain a year of tax-free growth, and that’s the big advantage of retirement accounts. It’s clear that you’d prefer to contribute to a Roth IRA at the first of the year. If you waited to the end of the year, you’d pay tax on dividends during the year. Those are taxes that you would never had to pay in your life if you contributed at the start of the year. Also, you’d want to keep any gain from price appreciation during the year in your Roth, since you’ll never pay tax on that gain in the future.

 

The same logic holds for a traditional IRA, although it’s pretty easy to get twisted. You have to stick with the logic that tells you a traditional IRA and Roth IRA give you the exact same after-tax benefit – assuming the same tax bracket at the time of contribution and withdrawal. Therefore, the much-easier-to-understand logic that applies to a Roth IRA applies to a traditional IRA. You want to contribute to your traditional IRA at the first of the year to gain the similar benefits of tax free growth; you don’t want to contribute at the end of the year.

 

== In the Spend and Invest phase ==

 

You want to do the opposite now that you are in the Spend and Invest phase. You want to hold on to tax-free growth for the year. You don’t want to stop tax-free growth any earlier than you have to. If you withdraw from your Roth early in the year, you’ll pay tax on the subsequent dividends; you’ll pay tax on the subsequent price appreciation when you sell to get cash for your spending. You don’t want to do that. Wait as long as you can in the year to withdraw from your Roth. The same logic again applies to your traditional IRA.

 

== A tax free loan from the IRS ==

 

 When you take all your RMD at the end of the year and withhold all taxes due then, you have delayed paying the IRS taxes that you must withhold. You’ve gotten an interest-free loan from the IRS for taxes that you otherwise would almost certainly pay earlier in the year.

 

For example, I pay very little estimated taxes for the first three quarters of 2022. I withhold almost all the taxes I estimate Patti and I will pay in 2022 when I sell securities this December for our RMD and transfer the net to our taxable account. In essence, I’ve gotten a tax-free loan from the IRS by delaying when I actually pay our taxes. The IRS sees that I withheld almost all of taxes due for the year, and assumes I withheld those taxes throughout the year; it doesn’t fit the dates of when I withheld taxes in the schedule to see if I might owe a penalty for quarterly underpayments. I suffer no penalties from paying almost all of our taxes due in December.

 

 

== The final nail in the coffin ==

 

I made the argument similar to the letter to the editor in this post, but I was mistaken. I took a portion of my RMD this May by transferring shares of FSKAX to my taxable account. I explain the reason in that post. It wasn’t to avoid or pay less taxes, but I did think that I would come out ahead on taxes. It won’t work out that way: I’ll pay greater tax this year (and less tax later).

 

This gets a little hairy.

 

Option 1. I wait until December to take my RMD. Let’s assume that is $10,000. I sell 100 shares of FSKAX in my IRA at $100 per share. Let’s assume this price/share at the start of the year is the same it will be at the end of the year. Let’s assume Patti and I are in the 22% marginal tax bracket. I withhold $2,200 for my 2022 taxes when I execute the transfer to my taxable account. My net transfer to our taxable account for our spending is $7,800.

 

 

Option 2. I transfer 100 shares of FSKAX in January at the start of the year, also at $100 per share. (My transferring of shares would be the same as selling shares in my IRA; transferring the cash with no withholding; and buying the exact same security on the same day.) I owe $2,200 for my 2022 taxes for this withdrawal-transfer, but let’s assume I did not sell $2,200 of FSKAX in my IRA for taxes to be withheld.

 

 

My 100 shares of FSKAX are combined with my greater amount of shares of FSKAX in our taxable account. Fidelity records my 100 shares as short-term shares and, with the exception of a relatively few shares that were distributed in the month before in December, all other shares are long-term shares. Fidelity also displays my average cost for my mutual fund shares. The average cost of my FSKAX was something like $68 per share before I transferred the 100 shares, and I now see it is $70 per share; my shares at $100/share are combined with many more shares acquired at a much lower average cost.

 

It’s now December, and I sell $10,000 of FSKAX. I have $10,000 cash proceeds, and I’ll set aside $2,200 for the tax ordinary taxes I will owe. I’ll pay that in a Q4 estimated tax payment in January.

 

But I now also incur tax on the sale of the 100 shares and need to set aside those taxes, too. Fidelity (and your broker) records sales of mutual fund shares at average price and on a first-in-first-out basis. At my average price of of $70 per share, I have gain of $30 per share. All shares sold are judged to be long term – my oldest or “first in” shares are all long-term shares.

 

I now have a $3,000 long-term capital gain on my sale and will owe $450 (15% in tax) that I must also include in my Q4 estimated taxes. I don’t have $7,800 net for our spending, I have $7,350, and I need to sell more securities to get that $450 and I’ll incur a bit of tax on that, so I have to sell more than $450 of securities. I actually have to sell $471 more of FSKAX, and I’ll pay a total of $2,671 in tax.

 

 

 

Conclusion: When you are retired, with rare exception, you always want to take your RMD at the end of the year if you can. In the year I started our retirement plan, I sold from our taxable account for our spending in the calendar year. I delayed taking my RMD to December (Patti was not subject to RMD at the time): that wound up being the cash we needed for our spending in the upcoming calendar year. By delaying your RMD to the end of the year, you are gaining another increment of tax-free growth, which is always to your advantage. By delaying your RMD, you have an ability to delay paying income taxes for the year, meaning you’re getting an interest-free loan from the IRS.

How will next month’s inflation affect the 12-month rate?

I wrote a prior post on inflation, but I think the two graphs I have in this post more clearly display how monthly inflation affects annual inflation.

 

== Each month replaces a prior month ==

 

The annual change in inflation is the compounding (proper multiplication) of the 12 prior monthly changes.

 

I think you have this, but it’s much easier for me to see on this graph: the most recent monthly inflation rate, replaces the same month of a year ago. The inflation rate for this July 2022 was -0.01%. It replaced the monthly inflation rate for July 2021 of 0.48%.

 

July ’22 replaced July ’21 for the 12 months used to calculate the 12-month inflation rate.

 

The 12-month inflation rate in June was 9.06%. This July replaced a higher prior July: the 12-month rate fell. The 12-month inflation rate for July was 8.52%.

 

The 12-month rate in July was 8.5% about .5% less than the 12-month rate in June.

 

The difference in the annual rate is not exactly the same as the subtraction of the rates in the two months: the math of compounding is the culprit.

 

 

== The next couple of months ==

 

The monthly changes in inflation in August and September 2021 were relatively low. That means monthly changes for this August and September will have to be darn low for the annual rate to decline. It’s easier to envision a measurable decline in the 12-month rate for October 2022 since the monthly rate in October 2021 was roughly four times the rates for August or September.

 

 

= Social Security (SS) COLA ==

 

When folks talk about inflation, they are using the measure of CPI-U – the Consumer Price Index for all Urban Consumers.

 

The SS calculation of COLA is based on the change of a different measure, CPI-W – the Consumer Price Index for Urban Wage Earners and Clerical Workers. COLA is based on the average 12-month change for the three month of July, August and September. We now have one month behind us. The 12-month change in CPI-W for July was greater than the change in CPI-U. That mean the three month change in SS will likely be greater than if it were calculated using CPI-U.

 

 

 

Conclusion: This post tries to help clarify how monthly inflation affects the 12-month inflation rate that you hear in the news. The inflation rate for the most recent month (July 2022) replaces the inflation rate for the same month from a year ago (July 2021). If the rate is lower now than the month it replaces, the 12-month rate declines. The 12-month rate for July declined by 0.5%.

 

Social Security bases its COLA (Cost of Living Adjustment) on a different measure of inflation that we hear in the news. COLA is the average the annual changes for July, August and September. The July 12-month rate was 9.12%. We might expect the COLA increase to our gross Social Security benefits to be in the 9% range.

How much does your suitcase weigh for two weeks of travel?

Patti and I leave for our trip to England next week. Over many years I’ve refined my list of what to wear on the plane and what to pack in my carry-on suitcase. This post shares my list. Lighter travel is better travel, and you may find my list helpful. I’ve packed 11½ pounds: that includes four pounds for my hiking boots, two sets of walking sticks and a small umbrella. Here’s my master list.

 

== Some generalities ==

 

No cotton or wool. Everything must be quick dry. Most everything is polyester or nylon. One of my polo shirts is cotton-poly, but it is quick dry.

 

Count layers for warmth. I could have six layers for warmth. Thin poly tee. LS poly tee. SS polo. ¼ zip. Fleece. Raincoat. Neck and head: neckband, thin fleece beany, baseball hat and sunhat.

 

Wash clothes every day. After hiking or being out for the day, I’ll shower and change into what I’ll wear for dinner. I’ll wash my very thin, stretch-poly undershirt, underwear, and the thin poly liner socks that I wore inside my hiking socks. I’ll wash them in the sink or in the shower with their body wash. I’ll dry those in a towel (roll and twist). They are usually dry before we go to bed. I’ll then wear the set I washed the previous night. I only have two pair of outer socks: hiking and black-poly crew; I’ll wash those infrequently.

 

== Things I like ==

 

Bluffworks pants. These are very comfortable and look great. These are my go-to pants all year round, and are not solely travel pants. (I order tailored-fit and smaller than my normal waist size; the waist band stretches.) I generally only spot wash them as needed. Especially with the one long-sleeve shirt I take, I never feel like we are poorly dressed for dinner. Bluffworks pants have lots of zippers, so my wallet is secure.

 

Two thin, poly-stretch undershirts. These are very comfortable under the polo shirt I wear when we are walking. Temperatures are typically in the 60s when we walk in England. I wash these daily, and I do not wash the two outer polo shirts that I take more than once.

 

Black poly quarter-zip shirt. I can wear this for dinner and look just fine. I wear my long sleeve collared shirt when we’re eating at a nicer restaurant.

 

Thin, black fleece. I bought one that I like for $12 in England about five years ago. It looks good enough to wear to dinner.

 

Sun hat. I wear one from Sunday Afternoons that I bought years ago. It may look funky, but it is the best for sun protection.

 

Collapsible walking sticks. Patti and I need these at our age. I need them for the boost when walking uphill, and we both need them for balance going downhill. The walking on this trip is very flat, but I’m sure we’ll start out using them and see how it goes.

 

Low cut hiking boots. I used to wear high top, but I like low cut now. Our hiking isn’t as challenging as years ago, and I only carry a day pack.

 

Osprey Talon 11 (11 liter) day pack. It fits like a regular pack in that I can tighten the waist band and put the weight on my hips and not my shoulders or back. I like the snap across my chest. I can carry my walking sticks. Patti thinks it is too small, but I get our lunches, water, and my rain jacket in it.

 

Gortex (or similar) rain jacket. Ours are from Outdoor Research. It has to breathe if you are hiking.

 

 

Conclusion. Patti and I are headed to England next week. Traveling as light as possible is more enjoyable for us. Over the years, I’ve refined what I need to take for two weeks international travel. This post provides my list. My suitcase has 11½ pounds in it. That includes 4 pounds for my hiking boots, two sets of collapsible walking sticks, and a small umbrella.

Have you completed your draft tax plan for 2022?

My tickler file (application) told me that this is the week for my first cut on my tax plan for 2022. I’m following my checklist that I provided in my blog post of January 28. The purpose of this post is to give you a spreadsheet you can use for your tax planning for this year; it’s similar to the one I provided last August and displayed in my post on February 4.

 

I try to solve a puzzle to avoid taxes that we don’t have to pay in our lifetimes. With planning I can avoid taxes now and much greater taxes in the future. You also may have a puzzle to solve, even if you can’t see it now. I can’t tell you if you have a puzzle or how to solve it, but this post describes my thinking on the puzzle and my tax plan.

 

== Our RMDs can increase significantly ==

 

I’ve discussed this before. If future returns match expected or long-run average returns, $RMDs will be much greater than they are now.

 

• The value of your traditional IRAs will increase in real spending power over time: your annual RMD% is below the expected, real return rate for your portfolio for many years – generally to your mid 80. I turned 77 this year. My  4.70% RMD% for this year is less than ¾ of the expected 6.4% real return on our portfolio.

 

• Your RMD% increases every year for the rest of your life. It increases by more than 50% from age 72 to age 85, as an example.

 

Combine these two effects and at about age 82, your real $RMD would be twice what you took age 72. And it doesn’t stop there. If you live to 92, your real $RMD would be four times the amount you took at age 72.

 

Patti and I are older. Our RMD%s are higher than at our start. When I run the math, it says our real $RMD could increase by 50% in eight years. If I live another eight years, it could be double our current RMD.

 

== Two taxes I want to avoid ==

 

• I want to avoid increased Medicare premiums. (I call that a tax.) This is a real possibility for the sole survivor of Patti and me.

 

• I don’t want either one of us to pay taxes in the 32% marginal tax bracket. I judge that that is too big of jump from the 24% bracket: I keep 11% less of income in that bracket relative to the 24% bracket. That would mean paying a very high taxes on money that is well beyond our spending desires. The start of that bracket is distant, but I want to be aware of it. (I don’t plan on heroic efforts to avoid the 24% marginal tax bracket relative to the 22% marginal bracket.)

 

 

== How to forecast our future tax return ==

 

I can judge the impact of greater $RMD by increasing our $RMD reflected in my 2021 tax return by 50% – line 4b of our tax return; alternately, I increase the RMD I have in cell C31 on the spreadsheet by 50%. The spreadsheet calculates to a greater MAGI and taxable ordinary income. I can then see if that MAGI has the potential to cross Medicare tripwires for a single taxpayer. I can then see if taxable income reaches 32% marginal tax on ordinary income for a single taxpayer.

 

 

== What can I do? ==

 

If I see Patti and I are near a Medicare tripwire this year, I can prudently use my Roth instead of sales from our taxable investment account to lower MAGI and dodge the tripwire.

 

If I have concerns about future Medicare premium tripwires and marginal taxes, the only way to avoid them is to get more out of our traditional IRAs now. That means I make a judgment that it is better to pay more tax now to avoid much more tax in the future. I should be happy to pay more tax now at the 22% marginal rate to avoid paying at the 32% rate in the future. More taxable income now could mean crossing Medicare tripwires in one year but avoiding them in for a number of future years.

 

You have three ways to lower the amount in your traditional IRAs; Patti and I have done all three to some extent. 1) You can convert traditional IRA to Roth. 2) You can donate from your IRAs earlier than you might otherwise plan to do. 3) You can withdraw more from your traditional IRAs and give the net to your heirs for their IRAs; the sum for you and them is, basically, no taxes paid: you pay tax, but they avoid tax, in effect,  on their contribution to their IRA.

 

== Steps I take ==

 

I list the steps for my tax planning on the template. My sheet differs slightly from the template. I don’t enter my SSA on the spreadsheet (cell C24). I will pay us less than my calculated SSA, as I described in this post. I enter our desired after-tax amount for our spending on my altered sheet. I then find the total gross security sales for that.

 

 

Conclusion. I complete a draft plan for our taxes the first week of August. The template I provide starts with your estimated SSA for 2023. You complete a spreadsheet that estimates total taxes for your 2022 return and the balance you will need to pay for the year. You then know the after-tax amount you have for your spending for 2023. You can jiggle with the three sources of cash to adjust your total 2022 taxes and your net for spending: sales of securities and withdrawal from your traditional IRAs; sales of securities in your taxable investment account; and sales of securities and withdrawal from your Roth account.

 

I think about future taxes, since our RMD could very likely increase by 50% in real spending power in a decade, and it could just be one of us alive then. I would like to avoid income levels that consistently trigger higher Medicare premiums and far too high of marginal tax relative to our spending desires. Solving this puzzle means incurring greater taxes now to avoid much greater taxes later.

How does the IRS calculate your RMD percentage?

The IRS publishes a “Uniform Life Expectancy” table to use for the calculation of Required Minimum Distributions (RMDs) from your traditional IRAs. The inverse of the years shown for your age is your RMD percentage. That table applies to all us while we are alive, and the table will apply to my IRA that Patti inherits on my death. The number of years in the table differs widely from a person’s life expectancy – mine from the table is more than double my life expectancy. Why is the difference so great? The purpose of this post is to describe how the IRS calculates your age-appropriate RMD percentage. I also describe that your RMD typically is much less than your annual Safe Spending Amount (SSA) that I calculate in Nest Egg Care (NEC) Chapter 2.

 

== Uniform Life Expectancy and your RMD percent ==

 

The IRS displays a “Uniform Lifetime Expectancy” for each age. The number of years for each age is also called the Distribution Period, and the inverse is your RMD percentage. See Appendix B, Table III here. All of us – married or not – will always use the age-appropriate Distribution Period – years – from the Uniform Lifetime Expectancy table to find our RMD percentage.

 

• Patti and I must use the age-appropriate Distribution Period from the “Uniform Lifetime Expectancy” table to determine our RMDs from our traditional IRAs.

 

• Upon my death, Patti will either rollover my IRA that she inherits into hers or keep my IRA in a separate account but elect to apply her age-appropriate Distribution Period for RMDs. (Rules are different if you inherit an IRA from someone other than your spouse.)

 

The years for my age in the Uniform Life Expectancy are more than double my life expectancy that I find from the Social Security Life Expectancy Calculator. Why is this?

 

 

== Calculating “Uniform Life Expectancy” ==

 

The IRS is calculating a life expectancy that is based on the assumption that there are two of you: you and your spouse who is ten years younger. The years calculated are roughly* the number of years for 50% probability for At Least One of You Being Alive. (A separate table applies if your spouse is more than ten years younger than you.) [*The IRS calculation is not quite as simple as the calculation of At Least One Alive that I describe in Chapter 3, NEC; this document explains the exact calculation, which is too hairy for me to understand.]

 

I turned 77 in 2022; the IRS assumes my spouse (Patti) will turn 67 in 2022. Patti will turn 75 in 2022; the IRS assumes her spouse (Tom) will turn 65 in 2022. My friend, Mary, is a widow, age 79; the IRS assumes she has a spouse age 69.

 

 

== Individual life expectancy ==

 

The IRS displays life expectancy for individuals in its Single Life Expectancy table. See Table 1, here. The IRS uses an average of the life expectancy for males and females. The table shows the life expectancy for a person who turns 77 in this year, is 13.3 years. This is about two years more years than I would get using Social Security’s Life Expectancy Calculator; I do not know why they differ.

 

 

The probability of At Least One Alive is always more years than the life expectancy of the one with the longest life expectancy. I explain this in more detail in Chapter 3 and Appendix E, NEC. The IRS’s life expectancy for a spouse ten years young than me is 21.2 years, but the number of years that is close to the point of 50% chance of At Least One Alive is 22.9 years.

 

 

As I read it, the IRS makes no underlying assumption about future return rates, but I would think the IRS is confident that their table of age appropriate RMD percentages ensures that a retiree does not run out of money in their life time. I think the objective is for the RMD percentages to be great enough for your spending to enjoy retirement, but not so high to run a chance of having too little RMD dollars from a seriously depleted portfolio.

 

== Nest Egg Care: SSR% ==

 

Nest Egg Care calculates a Safe Spending (or Withdrawal) Rate (SSR%) that eliminates the “return-sequence risk” in your financial retirement plan. NEC assumes that you are just starting to ride or have been riding along THE Most Harmful sequence of stock and bond returns in history and finds the spending rate that has Zero Chance of depleting for the number of years you pick.

 

Patti and I picked her life expectancy as the number of years we wanted for Zero Chance of depleting our portfolio throughout our plan. As we age, that number of years declines: her life expectancy was 19 years in late 2014, and at the end of this year her life expectancy is 13 years using the SS calculator. Our age-appropriate SSR% has increased, as have our RMD percentages.

 

Our age appropriate SSR% that I will test on for my calculation the first week of December is based on Patti’s 13-year life expectancy: 5.30% (See here and Graph 2-4 and Appendix D, NEC.). That’s roughly 26% greater than the average our RMD percentages.

 

 

== RMD% could ~equal your SSR% ==

 

It turns out, by accident I think, that if your spouse is ~ten years younger, your SSR% is close to your RMD%. My RMD percent is 4.37%. Our SSR% is based on Patti’s life expectancy. If she was 69 – nine years younger than me – her life expectancy would be 19 years and that equals SSR% of 4.40%. See Appendix D, NEC. (My example may be a total coincidence; I’ll play with this in a future post.)

 

 

== $RMD << $SSA ==

 

I think you get this: the dollars you withdraw from your traditional IRA will be much lower than the dollars you withdraw from your nest egg as your annual Safe Spending Amount using your SSR%. RMD% is applied to your traditional IRAs, while your SSR% is applied to the total dollars in all your Investment Portfolio: your taxable account; your Roth IRA accounts; and your traditional IRA accounts.

 

 

 

Conclusion. The IRS calculates a Required Minimum Distribution (RMD) percentage that you must withdraw from your traditional IRAs each year. The percentage is the inverse of a Distribution Period (years) that the IRS displays in a table, “Uniform Life Expectancy.” The years displayed in the table are many more than your life expectancy that you can find on the Social Security Life Expectancy Calculator. That’s because the IRS always assumes you are couple and your spouse is ten years younger than you, and it’s calculation is based on the chances of “At Least One Alive”.

 

For many of us, the RMD% is significantly lower that the Safe Spending Rate (SSR%) that one finds in Nest Egg Care. Our Safe Spending Amount using our SSR% is always much greater than the dollars of RMD: we nest eggers apply our SSR% to our total Investment Portfolio, while the IRS requires us to apply the RMD% only to our traditional IRA accounts.