Allocation Question for Decumulation

[plodding_investor]

Hi all, this is my first post/question here so I hope it's not to convoluted.

I'm considering creating a TIPS (or TIPS/Nominals) ladder to mature during my pre-SS years, from ages 62-67 (minimum age to claim to FRA). I would create rungs of about half my current salary as a safety floor for those years.

The issue is, I have to use the funds in our IRAs to accomplish this, as that's where we have brokerage functionality. That means all equities (and additional fixed income) will be in my 401k. My understanding is that it's really ideal to put equities in the Roth accounts, and to spend down the 401k sooner than the Roths for tax efficiency. But the ladder would reverse this allocation and likely my spend-down order. Should that be a major concern for tax management purposes before I commit to creating the ladder? Or is that something I would need an advisor to assess?

Thanks for any thoughts.

[kork13]

Overall, it's a very reasonable strategy to manage SORR and this question is merely one of tax optimization... So at worst, you're mildly inefficient at a minor tax cost.

An option to consider: Does your plan allow you to roll a portion of your 401k to an IRA as an in-service rollover? You could roll out just what you need for the TIPS ladder, which could give you access to the brokerage and keep the TIPS in a tax-deferred vehicle.

However, I would actually say that keeping them in your Roth IRA wouldn't be a bad thing. Remember that tax deferred investments (IRA/401K) will be taxed as ordinary income, while Roth assets are tax exempt. This is why stocks (typically higher-earning) are often kept in Roth, to keep their returns tax-free. But keep keeping other assets in Roth is certainly not a bad plan.

An investment advisor or tax pro could run the detailed numbers for you, but I wouldn't stress too much on it.

[plodding_investor]

Thank you! I didn't *think* this strategy should be so much of an issue, but I've read where some really discourage using Roth funds for anything other than equities (unless that's all you have available for both stocks and fixed). Which -- also seemed to go against their other advice to hold bonds in tax-deferred and equities in taxable, so that was confusing.

My 401k does allow in-service rollovers, I believe -- but I'm still 2 1/2 years away from when I would be allowed to do so.

[myrdale]

My reply isn't an attempt to give you an answer, but rather to understand your question as this is something I have never heard the terms TIPS or SORR before.

Treasury Inflation Protected Securities (TIPS) is a Bond? Its the equivalent to a Certificate of Deposit? COD at least I think understand. TIPS are issued with terms of 5, 10, and 30 years. The interest raid is determined at auction, I assume this means the market varies.

Laddering is purchasing these in such a way that they will mature annually when needed, but until then you continue to roll them over?

Sequence of Returns Risk (SORR) looks at how changes in the market will affect an account when you're ready to start withdrawing.

Am I at least in the ball park?

[disneysteve]

My reply isn't an attempt to give you an answer, but rather to understand your question as this is something I have never heard the terms TIPS or SORR before.

Treasury Inflation Protected Securities (TIPS) is a Bond? Its the equivalent to a Certificate of Deposit? COD at least I think understand. TIPS are issued with terms of 5, 10, and 30 years. The interest raid is determined at auction, I assume this means the market varies.

Laddering is purchasing these in such a way that they will mature annually when needed, but until then you continue to roll them over?

Sequence of Returns Risk (SORR) looks at how changes in the market will affect an account when you're ready to start withdrawing.

Am I at least in the ball park?

TIPS are sort of like I Bonds in that they adjust to track inflation so you don't lose ground over time.

SORR looks at how your portfolio will hold up over your retirement based on what happens to returns early on. If you retire during a bull market and your balance continues to rise despite your withdrawals, you're in great shape. But if you retire into a bear market and the balance is falling for those first few years you could be in trouble.

[plodding_investor]

One purpose of a TIPS ladder in retirement is to bridge the gap between retirement and aged 70, in order to live off the TIPS income and maximize the SS benefit by waiting until age 70 to claim. So there would be no need to roll the ladder unless you didn't actually retire when the first rung(s) mature. Then there is liability matching, which is probably better left to someone more knowledgeable to explain.

In my case, I was thinking of simply creating a safety floor TIPS ladder between ages 62-67 (FRA). That wouldn't necessarily fully cover my expenses during that time, but would give me a base amount to live on (in addition to my other funds) so that I could wait to claim until at least 67, even if I have to retire by 62. But, if I didn't actually retire that early I could roll the funds into a later rung. I'm looking at this strategy since my retirement accounts aren't as well funded as I'd like.

[LivingAlmostLarge]

Also depends if you are going to be trying to convert some of a 401k to roth ira. even if you don't have a lot if you are trying to even out income where SS kicks in, it makes sense

[plodding_investor]

Also depends if you are going to be trying to convert some of a 401k to roth ira. even if you don't have a lot if you are trying to even out income where SS kicks in, it makes sense

Yeah, that is something I need to consider as well. Once I do that it will also mean paying taxes.