4% Rule and SEPP 72t

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L1: 4% Rule and SEPP 72t
I’m a bit curious as to why many here use the maximum interest rate when setting up their SEPP 72t which exceeds the well defined 4% safe withdrawl rate? I am retiring a bit early at 53 and plan on withdrawing a total of 3.5% as it has been mentioned as the ground floor for making your funds last indefinitely. Any insight would be appreciated.
4/30/19 18:39 By: Bruce IP:

L2: 4% Rule and SEPP 72t
The max interest rate is usually used because most people want to receive the highest possible distribution per dollar of account balance. They need the distributions for living expenses, taxes etc and the 72t plan distributions must also be large enough to cover any emergency needs (eg medical) for each year of the plan. In your case the plan must run 6-7 years.

However, if your IRA balance was large enough to generate a distribution higher than what you need, the recommended approach is to partition your IRA into two account by a direct transfer prior to starting your plan. Using a reverse calculator make the balance of the account to be used for the 72t distributions generate your needed amount using the highest interest rate. The other IRA is outside the plan and can be used for emergency needs or even to start a second 72t plan down the road if needed. This is a much better approach than to simply reduce the max interest rate to reduce your payout, but still have all your IRA assets subject to the plan. The recommended approach gives you much more flexibility and provides some insurance against eventually busting your plan.
4/30/19 18:49 By: Alan S IP:

L3: 4% Rule and SEPP 72t
Thanks Alan. If I were confronted with one or the other, Id rather cut outgoing expenses than withdraw more than 4%. For example: when planning for a slightly early retirement, my wife and I have been both in agreement that we currently have too high of a mortgage payment of $1,836 per month which unfortunately has a lot to do with out of control Illinois property taxes. While my wife and I really like our home which we built new in 2005, the fact is, with the kids all out, at 3000 sq. ft., it’s way more space than we need. So we’ve been looking to relocate to 1 story ranch in Nevada where property taxes are 1/3rd and there is no state income tax as my wife will continue to work for 4-5 more years.
At the beginning of this year, we also cut our $160 per month rarely watched cable bill and now watch TV through the Amazon Fire Stick and we are finding more shows than ever we like.
I guess my point is some sacrifices are hard, some are easy, but withdrawing more than 4% from your portfolios has a greater possibly for setting yourself up for failure later on.
4/30/19 19:17 By: Bruce IP:

L4: 4% Rule and SEPP 72t
Bruce — Apparently you do not understand Alan’s excellent response. The withdrawal rate has little or nothing to do with your spending habits. By partitioning your IRA into 2 accounts, you do not have to “lock up” the full amount of your IRAs until you are 59 1/2, regardless what % you withdraw. The idea is to PLAN what you want/need, and then just set aside the applicable amount using the reverse calculator TODAY (because this website is closing tomorrow). You didn’t indicate the total of your IRAs, or the amount you want to withdraw, or you plan as to whether to have taxes withheld or paying estimates.
I PLAN with clients to determine taxable income to stay within the 12% tax bracket, if possible, which is $ 103,000 before the $ 24,000 Standard Deduction. That way you can defer distributions if they would take you into a higher tax bracket with you spouse’s income, or non-retirement investment income.
The 4% traditional rate is only a maximum guide so that it minimizes the possibility of running out of money over your lifetime. You can withdraw 3.5%, but some people may need 5%. The absolute dollars are more important than the %. Further, you are only talking about the next few years until you reach 59 1/2, and your wife retires. Then you will need to do PLANNING DURING RETIREMENT, and deferring SS benefits.
4/30/19 19:43 By: dlzallestaxes IP:

L5: 4% Rule and SEPP 72t
dlzallestaxes No disrespect at all to Alan at all. They were just examples.
I’m just trying to learn others investing and withdraw behavior when applying the SEPP 72t calculations to see what I may be doing wrong. I had seen a previous comment that doing a reverse 72t calculation at times is more appropriate but still exceeds the 4% guideline in many random calculations I ran as an example not applying to me.
I greatly appreciate everyone’s feedback and knowledge here. Thanks.
4/30/19 20:07 By: Bruce IP:

L6: 4% Rule and SEPP 72t
Everyone’s situation is different. I never worry about others, and only concentrate on the specific client’s assets in and outside of retirement plans, needs, marital status, taxable income and what can be controlled or not.
Also, if your IRA investments are earning/appreciating at a rate that is more than your withdrawal rate, then they will last forever. If they are less than your withdrawal rate, then you will eat into the principal. Then it is a matter of whether or not you have heirs/beneficiaries that you have to provide for, would like to provide for, or are self-sufficient and want you to spend your estate enjoying your life together.
4/30/19 20:18 By: dlzallestaxes IP:

L7: 4% Rule and SEPP 72t
dlzallestaxes Are you by any chance a fee based tax adviser in the Chicago metro area? I would still like to consult with someone to make sure I’m not making an error in my calculations. With my severance, I will not need to initiate the SEPP 72t until early next year 2020.
4/30/19 20:32 By: Bruce IP:

L8: 4% Rule and SEPP 72t
I am a fee-based tax and financial planning practitioner in suburban Phila. I have about 40 clients, mostly investors, in several states. Phone, e-mail, and fax work well for exchanging information. Alan S. is very knowledgeable, and may be nearer to you geographically. Both of us work with information, and do planning. There aren’t any cookie cutter quick solutions to any situation, either financially or tax-wise.
4/30/19 21:57 By: dlzallestaxes IP:

L9: 4% Rule and SEPP 72t
My 72(t) plan actually has me withdrawing about 2.5% of my account per year. Set it up back in 2016 at age 36 using the amortization method with a low mid term rate. The 72(t) distribution calculations are based on formulas, not just a random withdrawal rate that one decides.
5/1/19 7:00 By: brkr12002 IP: 2001:5b0:50c6:6008:6cd1:d637:a6e1:a1c0

L10: 4% Rule and SEPP 72t
brkr12002 I was going to use something like 1.00% to calculate my SEPP interest rate which gets me to a near 3.5% SWR. 1.30% would get me close to a 4% SWR. It’s good to know you have flexibility to use a rate other than the current month maximum SEPP rate for calculations. I would still like to meet with a tax adviser like Alan to ensure I’m doing it right unless the calculations are good enough to ensure no 10% penalty is imposed down the road. Thanks.43586.6111111111 By: Bruce IP:

L11: 4% Rule and SEPP 72t
My same answer as I made to brkr12002, and others. It makes no sense to me for anyone to lock up more than necessary for 5 years or until 59 1/2. If you use the highest rate, then you lock up much less money. For example, without being exact, why use 1% on $ 400K, if you can use 4% on $ 100K, and keep $ 300K for a second and/or even 3rd plan later if needed, or for periodic emergencies ? If you are 54 1/2 or older, why lock up excess funds beyond 59 1/2 unnecessarily ? Why lock up more funds than required ?
5/1/19 14:40 By: dlzallestaxes IP:

L12: 4% Rule and SEPP 72t
dlzallestaxes I understand the benefits of breaking up IRA’s with SEPP however my issue is with anyone recommending to exceed a 4% withdrawal rate without knowing the possible pitfalls with money lasting whether in one IRA or divided in several. It violates one of the main fundamental principles of retirement and William Bengen’s in depth research dating back to the 1920’s through present leading to a workable safe withdrawal rate for making one’s retirement last at least 30 years. To add, Vanguard recently announced to share holders that their research shows investors can expect 4% – 5% returns over the next decade with a 60/40 equity/fixed asset allocation moving forward.
5/1/19 14:45 By: Bruce IP: