Cody Garrett and Sean Mullaney: 'For Most Americans, You're Going to Pay Less Tax in Retirement'

Key Concepts

• Early retirement is increasingly common, defined as retirement before age 65.
• Tax planning is a crucial, interconnected series of decisions in early retirement, focusing on when income is taken, not just how much.
• Recent changes to RMD rules and tax laws have significantly altered conventional wisdom regarding retirement tax planning.
• Roth conversions are most advantageous during specific “golden years” (66-69) and less so before or after, depending on individual circumstances.
• Accurate assumptions are paramount when using retirement projection tools.

Defining Early Retirement & Planning Fundamentals

The authors define “early retirement” as retiring before Medicare eligibility (age 65), noting that approximately 70% of Americans retire before 65, with an average retirement age around 62. Early retirees are often high earners and savers, frequently identifying with the Financial Independence (FI) movement, but not necessarily to an extreme degree. While the 4% rule (spending 4% of portfolio value annually, requiring 25x annual expenses saved) is a useful starting point, it shouldn’t be treated as rigid, and variable income sources like Social Security should be incorporated. Tools like Firecal and Projection Lab are recommended for sophisticated modeling, while caution is advised against relying on Monte Carlo simulations with unrealistically high success rates. A central tenet is strategic drawdown planning before considering Roth conversions, coupled with asset location – placing bonds in tax-deferred accounts (traditional 401ks/IRAs) and equities in taxable accounts. Spending from taxable accounts first can mitigate sequence of returns risk and allow for tax-loss harvesting.

Debunking Tax Fears & RMD Reassessment

The speakers challenge “fear-based narratives” surrounding retirement taxes, arguing that the assumption of inevitably rising tax rates is flawed. They point to recent tax cuts for retirees, regardless of political party, and the political incentives to maintain favorable tax treatment for the large 50+ voting bloc. Key principles include paying tax when tax rates are lower, understanding the progressive tax system, and prioritizing tax-advantaged accounts. Recent changes have made Required Minimum Distributions (RMDs) less burdensome than previously thought, including lower tax rates, a higher standard deduction, a revised RMD table, and a delayed RMD start date (age 75 for those born in 1960 or later). RMDs are now viewed as requiring converting assets into taxable income, not necessarily spending the funds.

The Evolving Landscape of RMDs & Roth Conversions

The 2017 tax cuts significantly lowered the tax burden on RMDs, a change often overlooked. The 2022 revision of RMD tables reduced RMD amounts by roughly 7%, and delaying the start date to age 75 (for those born in 1960 or later) effectively cancels four to five years of RMDs. RMDs are now considered a “self-correcting problem” as each withdrawal reduces the account balance and subsequent RMD amounts. Roth conversions are generally not advantageous during years when individuals rely on the Affordable Care Act (ACA) Premium Tax Credit due to double taxation. The years between 66 and 69 are considered optimal for Roth conversions, offering the benefit of delaying Social Security, no RMD requirements, and a high standard deduction. Once Social Security is claimed, Roth conversions become less appealing, and their need diminishes after RMDs begin.

Tools & Resources for Tax Planning

Several tools are available for retirement tax planning. DIY options include Dinkytown.net (tax calculators), Balden (long-term projections), and Prolana (detailed Excel-based planning). Professional tools used by financial advisors include Holista Plan, e-Money, RightCapital, and MoneyGuidePro. However, the speakers emphasize that the accuracy of any projection software is entirely dependent on the quality of the underlying assumptions.

Conclusion

Effective tax planning for early retirement requires a rational, data-driven approach that moves beyond fear-based narratives. Recent changes to RMD rules and tax laws necessitate a reassessment of conventional wisdom. Strategic timing of Roth conversions, particularly during the “golden years” of 66-69, is crucial. Ultimately, understanding the interconnectedness of tax planning decisions, utilizing available tools, and prioritizing accurate assumptions are key to maximizing tax efficiency and achieving a successful early retirement.