Article in Barrons behind Paywall about 4% Rule Might not work

[CoachKandSportsguy]

Copied here from Barrons, I am a paying subscriber :welcome:

Economist Wade Pfau has been thinking about retirement since he was in 20s. But not just his own retirement.

Pfau started studying Social Security for his dissertation while getting his Ph.D. at Princeton University in the early 2000s. At the time, Republicans wanted to divert part of the Social Security payroll tax into a 401(k)-style savings plan. Pfau concluded it might supply sufficient retirement income for retirees—but only if markets cooperated.

Today, Pfau is a professor of retirement income at the American College of Financial Services, a private college that trains financial professionals. His most recent book, “Retirement Planning Guidebook,” was published in September.

While many retirees are banking on a continuing rise in stocks to keep their portfolios growing, Pfau worries that markets will plunge and imperil this “overly optimistic” approach. He has embraced oft-criticized insurance products like variable annuities and whole-life insurance that will hold their value even if stocks crash, and he has done consulting work for insurers. He wrote another book, “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,” because these loans also can be used as “buffer assets” during market meltdowns.

Pfau, 44 years old, is already playing around with spreadsheets to analyze his own retirement plan. He recently built a model to determine when it is best to convert money from tax-deferred accounts to tax-free Roth accounts, partly because he wanted the answer for his own retirement accounts. We reached Pfau at his home north of Dallas. An edited version of our conversation follows:

Barron’s: The 4% rule says a retiree can safely withdraw that percentage annually from a portfolio, adjusted for inflation. Why don’t you think it will work?

Pfau: It’s not that I don’t think it will work. I think there is something like a 65% to 70% chance that the 4% rule works for today’s retirees rather than being a near certainty.

It’s a debate. Do you just stick with the historical data, or do you make the adjustment to say, ‘Wait a second. With low interest rates, you can’t have as high a bond return as we’ve had historically, and maybe you can’t predict as high a stock return as we’ve had historically either’?

What percent can people safely withdraw?

I think 3% would be a lot more realistic in terms of giving the same chance of success that we usually think about with the 4% rule.

Will people still have enough money to retire with a lower withdrawal rate?

One of the unrealistic assumptions of the 4% rule is that you don’t have any flexibility to adjust your spending over time. Someone could start retirement with a 4% withdrawal rate if they’re willing to cut back on spending somewhat if we do get into a bad market environment.

Anything else?

People need to be smart about their Social Security claiming decisions. It’s OK to spend down investment assets in the short term so you can delay Social Security benefits until age 70, at least for the high earner of a married couple. The boost you get from Social Security benefits by waiting will really reduce the need to take distributions from investments after age 70.

People also might look at ways to use home equity to support retirement spending, whether that’s downsizing the home or considering getting a line of credit through a reverse mortgage.

Isn’t tapping home equity to avoid selling stocks doubling down on a losing bet?

Using a buffer-based strategy such as home equity does buy into the idea that over long periods the stock market will perform at a reasonable level. If there’s no market recovery, it is going to be all the more harder to have any kind of sustainable retirement strategy.

Why are the first years of retirement most dangerous?

It’s the idea of sequence-of-return risk. I’ve estimated that if somebody is planning for a 30-year retirement, the market returns they experience in the first 10 years can explain 80% of the retirement outcome. If you get a market downturn early on, and markets recover later on, that doesn’t help all that much when you’re spending from that portfolio because you have less remaining to benefit from the subsequent market recovery.

What’s the solution?

There are four ways to manage the sequence-of-return risk. One, spend conservatively. Two, spend flexibly. If you can reduce your spending after a market downturn, that can manage sequence-of-return risk because you don’t have to sell as many shares to meet the spending need. A third option is to be strategic about volatility in your portfolio, even using the idea of a rising equity glide path. The fourth option is using buffer assets like cash, a reverse mortgage or whole life policy with cash value.

What is a rising equity glide path?

Start with a lower stock allocation at the beginning of retirement, and then work your way up. Later in retirement, market volatility doesn’t have as much impact on the sustainability of your spending path, and you can adjust by having a higher stock allocation later on.

Why do annuities make sense when interest rates and annuity payouts are low?

Well, because the fact that interest rates are low impacts every strategy. But the impact of low rates on annuities is less than the impact on a bond portfolio.

Most income annuities aren’t inflation-adjusted.

An income annuity is not going to be the source of inflation protection in the retirement strategy. That is going to have to come from the investment side. But the annuity will allow a lower rate of withdrawal from your investment portfolio early on to mitigate sequence risk. Most retirees naturally spend less as they age, and they may not need inflation protection

Medical costs go up as you age.

Right, that’s the one offsetting factor. The medical expenses increase but everything else tends to decrease at a fast enough pace so that overall spending still goes down until very late in life when people may need to pay for more care in home or a nursing home or other type of long-term care needs.

Is long-term care insurance a good idea?

When I look at traditional long-term care insurance, I struggle a bit because usually you use insurance for low-probability, high-cost events. And the problem with long-term care is that it’s a high probability, high-cost event.

There are other hybrid approaches where you can combine long-term care insurance with life insurance or an annuity, and that’s where most of the new business is going, and that has some potential.

How is your own money invested?

At my age level, I’m still primarily in equities.

Do you own annuities?

I’m interested in variable annuities with living benefits, but I’m still too young. Usually, we don’t talk about getting annuities until you’re in your mid-to-late 50s.

Variable annuities have a bad rep. You think it’s undeserved?

For a large part undeserved. They get a bad rep because they have a high fee drag, and I think about retirement not so much about the fee drag but about how much assets do you need to feel comfortable about retiring. Variable annuities mean you believe that markets will outperform but you also don’t want to stake your entire retirement on the market so you want some sort of backstop.

You’ve been a proponent of products sold by insurers such as annuities, and you’ve done consulting work for insurers. How can we be sure your research isn’t conflicted?

Whenever I do some sort of research paper, I outline the methodology completely to give people a full understanding. Nothing is in a black box. The assumptions are all listed, and if people want to try it with different assumptions, they can do so.

If I’m concluding that annuities may be helpful, I try to give the benefit of the doubt in my assumptions to not using the annuities and still find a strong case can be made for the annuities.

Social Security is more generous than annuities. Shouldn’t people max it out before buying an annuity?

Yes. Insurance companies have to live in the real world so when interest rates are low that impacts annuities. Indeed if you are thinking about annuities, step one is at least the high earner in a couple should defer Social Security until 70. And then if you want more annuity protection beyond that, fine. It wouldn’t generally make sense to claim Social Security early and then buy a commercial annuity at the same time.

Does it ever feel odd to be focused on an event that won’t occur for you for a couple of decades?

For the most part, no. It only comes up at times when somebody is saying why is this young person telling me how to do retirement.

For me it’s not so much retirement, as tracking the ability to be financially independent. It’s still relevant for me to think about when I may be able to retire, even if I’m not necessarily ready. I have a personal interest in it.

A personal interest in what?

In playing around with spreadsheets and analyzing my own retirement plan. That’s what primarily drove me to do this tax planning research so that I could specifically build in Roth conversion strategies into my own planning.

Thank you, Wade.

[manaboutown]

Wade Pfau is associated with the reverse mortgage and insurance industries so I find his recommendations nonobjective and indeed suspect. Wade Pfau: Retirement Planning Should Include Reverse Mortgages - Rethinking65 (https://rethinking65.com/2021/12/16/wade-pfau-retirement-planning-should-include-reverse-mortgages/)

[Stu from NYC]

Would be interested in how much money he makes from the annuity and reverse mortgage industry.

Taking out 4% from your assets each year starting as you enter retirement has been a recommendation for many years.

[dewilson58]

3% discussion started 10 years ago................the young kid is just rewriting old information.

Good for first time readers.

[retiredguy123]

Would be interested in how much money he makes from the annuity and reverse mortgage industry.

Taking out 4% from your assets each year starting as you enter retirement has been a recommendation for many years.
When I studied financial planning years ago, they would send me a financial planning trade magazine every month. The magazine always had several full page ads by insurance companies promising a 9-10 percent upfront commission for selling an annuity. I understood that they often recover most of that money from the 7-10 percent surrender fees from people who decide to cash in the annuity when they need the money after a few years. It takes a little longer to recover the commission from people who keep the annuity, but the annual fees eventually pay for the commission.

[manaboutown]

One or more of the recent guests on Consuelo Mack's Wealthtrack are recommending 3 - 3-1/2%.

WealthTrack (https://wealthtrack.com)

[davem4616]

Money, money, money

moving from that chapter in life where for decades the focus was on accumulating wealth, into that chapter of finally being able to enjoy your wealth is different for everyone...and difficult for some to make the transition

Most of the financial advisors that I've met were pretty much 'doom and gloom' personalities (they want to manage you money, because that's how they support themselves...yes, it's about your retirement, but it's just as much about them)

In my mind, there is no single magical percentage point...it's going to vary each year, based on what my plan is

there's a lot of non-financial considerations that investment advisors seldom, if ever, talk about during their 'free lunches' that individuals need to factor in and consider....

yeah the big push now is...wait until you're 70 to collect social security....that works if your parents died in their 90's, but is questionable if they barely made 70...(and who is behind this anyway?? Someone with my best interests in mind, or is there another motive)

no one wants to out live their money and, as my dad would say, 'end up in the poor house'....so having a plan is important

on the other hand....I'm not about to deny myself in my retirement either....just to conform to some percentage number, based on a mathematical algorithm developed using forecasting tools

My mother's advice to me was, 'have fun, but live within your means'

[Boomer]

I did some Roth conversions before RMD age. I regret not doing more of them.

Now we are at the point where the RMD has to come out before a conversion. I have not done any more conversions since — thought about it — but have not. . .

One reason is that I am not clear on how the 5-year rule works when converting from a traditional IRA to add to a long-standing Roth. From what I can decipher, I think it would work against me if I wanted to get to the newly converted money sooner than 5 years. . .

Does anybody here know if I am right? (And — for some of my fellow posters — for the sake of behaving in a gentlemanly manner, and not looking like grouchy cliches, please do not go into that condescending “look it up” litany that we see around this place all the time.)

For the record. . .

Investopedia gave me 3 applications of the 5 year rule but did not clarify separating newly converted money or stocks from the old money in the same long-existing account. And I will not make what could be an additionally taxable move without knowing, for sure, what I am doing. . .

I am advising myself against any further Roth conversions at this point because it looks like if I would want the newer money back before 5 years, I would get slammed. I think I am right. Damn!

Boomer

[CoachKandSportsguy]

I did some Roth conversions before RMD age. I regret not doing more of them.

Now we are at the point where the RMD has to come out before a conversion. I have not done any more conversions since — thought about it — but have not. . .

One reason is that I am not clear on how the 5-year rule works when converting from a traditional IRA to add to a long-standing Roth. From what I can decipher, I think it would work against me if I wanted to get to the newly converted money sooner than 5 years. . .

Does anybody here know if I am right? (And — for some of my fellow posters — for the sake of behaving in a gentlemanly manner, and not looking like grouchy cliches, please do not go into that condescending “look it up” litany that we see around this place all the time.)

For the record. . .

Investopedia gave me 3 applications of the 5 year rule but did not clarify separating newly converted money or stocks from the old money in the same long-existing account. And I will not make what could be an additionally taxable move without knowing, for sure, what I am doing. . .

I am advising myself against any further Roth conversions at this point because it looks like if I would want the newer money back before 5 years, I would get slammed. I think I am right. Damn!

Boomer

So I can't answer your question at the moment as far as taxes, and its a great question,

but the first question is: when or why will you take money from a roth?

My initial intuitive answer, which is about 1/1000th of a second of deep thought, is that you would live on SS and RMDs, and take money out of Roth ONLY when you need money more than SS and RMD, such as buying a new car, etc, where you would incur significantly higher taxes with additional RMD, and zero incremental from the ROTH. .

If that makes sense, that is the best use case I have thought about to diversify into a ROTH. . .

What's your thoughts on that logic about when to consider a ROTH distribution?

[retiredguy123]

I would feel comfortable using the 4 percent rule, especially if it is supplemented by a pension or Social Security income, and it is adjusted for inflation. I think using the CPI to adjust the payouts for inflation is too conservative because you can usually modify your spending to reduce the inflation impact. For example, if the cost of beef goes up, then you can eat more chicken. My conservative diversified portfolio has an average return of about 6 percent over the past 30 years or so.

[coralway]

I would feel comfortable using the 4 percent rule, especially if it is supplemented by a pension or Social Security income, and it is adjusted for inflation. I think using the CPI to adjust the payouts for inflation is too conservative because you can usually modify your spending to reduce the inflation impact. For example, if the cost of beef goes up, then you can eat more chicken. My conservative diversified portfolio has an average return of about 6 percent over the past 30 years or so.




That is veeeeeeeeeery conservative. You left a lot of $$ on the table

[Stu from NYC]

I would feel comfortable using the 4 percent rule, especially if it is supplemented by a pension or Social Security income, and it is adjusted for inflation. I think using the CPI to adjust the payouts for inflation is too conservative because you can usually modify your spending to reduce the inflation impact. For example, if the cost of beef goes up, then you can eat more chicken. My conservative diversified portfolio has an average return of about 6 percent over the past 30 years or so.

A return of 6% makes me think you might have been too conservative during this period.

We are all living longer and our money must last longer so a higher return is helpful. However we all have our own risk prefernces.

Notice nobody uses the rule of 100 anymore.

[retiredguy123]

A return of 6% makes me think you might have been too conservative during this period.

We are all living longer and our money must last longer so a higher return is helpful. However we all have our own risk prefernces.

Notice nobody uses the rule of 100 anymore.
30 percent stock, 40 percent bonds, and 30 percent cash. Mostly Vanguard and Fidelity index funds. I was probably too conservative, but now I can't even spend my obscenely high Government pension.

[CoachKandSportsguy]

30 percent stock, 40 percent bonds, and 30 percent cash. Mostly Vanguard and Fidelity index funds. I was probably too conservative, but now I can't even spend my obscenely high Government pension.

So that is the ideal place to be. . . very well done. . .

And always remember, paying income taxes is a byproduct of success, the more successful you are, the more taxes you will pay. A tax minimization plan is secondary to a wealth maximization plan. .

[Boomer]

So I can't answer your question at the moment as far as taxes, and its a great question,

but the first question is: when or why will you take money from a roth?

My initial intuitive answer, which is about 1/1000th of a second of deep thought, is that you would live on SS and RMDs, and take money out of Roth ONLY when you need money more than SS and RMD, such as buying a new car, etc, where you would incur significantly higher taxes with additional RMD, and zero incremental from the ROTH. .

If that makes sense, that is the best use case I have thought about to diversify into a ROTH. . .

What's your thoughts on that logic about when to consider a ROTH distribution?


Many years ago I had a CPA I loved. He loved me, too. (Not real love, not hubba-hubba love, just the kind of love between a CPA and a multi-faceted woman who loved to pick his brain and always showed up prepared. But he retired. (sigh) I then found another CPA and I liked him a lot, but he retired on me, too. (Hmmmm, should I be taking these CPA retirements personally?)

And so, now, I have a wet-behind-the-ears CPA who is also a lawyer in the office of our regular lawyer. He’s fine, but I have to teach him a little something once in a while — like how the way I do our QCDs is OK because of where the IRAs are on deposit.

(Of course, I took him well-sourced documentation on the subject to make sure he knew that this retired high school English teacher knew what she was talking about. . .And about that English teacher thing, yes, I know in my posts I bastardize the hellouta punctuation, but I know I am doing that and it’s OK. And I will never correct anybody else, unless it is to share a laugh about a funny typo. We all have them. Although, I do wish some people would double-space longer posts into paragraphs to make them more readable — to make them look less like a manifesto — but I digress.)

Anyway, the new young CPA is coming along nicely and I don’t think he will retire any time soon.

Long story longer — CPA #1 used to tease me a little about doing those Roth conversions before RMD age. He always said, “Why do you want to pay your kids’ taxes?” I would explain that it was not about anybody else’s taxes, and that I had projected taxable income, found some room to take a little more hit, and took the opportunity. (It just seemed like a good idea at the time. And I was right. But as I said earlier, I regret not doing more of those conversions while I could.)

I still project taxable income and buffer our RMDs with QCDs, especially if I think the next year is not going to bring any need for extra income. And when I reach a point where there could be a reason to keep more of the RMDs for ourselves, I will do that. But, for now, I stay well-aware of thresholds and IRMAA.

But to answer your question, “Why now?” — it’s because sometime I might want a little extra ice cream on my cake.

Boomer

[retiredguy123]

Many years ago I had a CPA I loved. He loved me, too. (Not real love, not hubba-hubba love, just the kind of love between a CPA and a multi-faceted woman who loved to pick his brain and always showed up prepared. But he retired. (sigh) I then found another CPA and I liked him a lot, but he retired on me, too. (Hmmmm, should I be taking these CPA retirements personally?)

And so, now, I have a wet-behind-the-ears CPA who is also a lawyer in the office of our regular lawyer. He’s fine, but I have to teach him a little something once in a while — like how the way I do our QCDs is OK because of where the IRAs are on deposit.

(Of course, I took him well-sourced documentation on the subject to make sure he knew that this retired high school English teacher knew what she was talking about. . .And about that English teacher thing, yes, I know in my posts I bastardize the hellouta punctuation, but I know I am doing that and it’s OK. And I will never correct anybody else, unless it is to share a laugh about a funny typo. We all have them. Although, I do wish some people would double-space longer posts into paragraphs to make them more readable — to make them look less like a manifesto — but I digress.)

Anyway, the new young CPA is coming along nicely and I don’t think he will retire any time soon.

Long story longer — CPA #1 — you never forget your first — used to tease me a little about doing those Roth conversions before RMD age. He always said, “Why do you want to pay your kids’ taxes?” I would explain that it was not about anybody else’s taxes, and that I had projected taxable income, found some room to take a little more hit, and took the opportunity. (It just seemed like a good idea at the time. And I was right. But as I said earlier, I regret not doing more of those conversions while I could.)

I still project taxable income and buffer our RMDs with QCDs, especially if I think the next year is not going to bring any need for extra income. And when I reach a point where there could be a reason to keep more of the RMDs for ourselves, I will do that. But, for now, I stay well-aware of thresholds and IRMAA. . .I always picture IRMAA as that big mean girl who was always waiting to give me a hard time in PE class when I messed up, in even a slight way, on whatever the sport du jour happened to be. The only time I was ever any good at PE was trampoline time. Oh, well. . .

Uh, oh. . .I sure am digressing today, killing time, it looks like, so I better get back to real life, where I think I need to stop thinking about Roth conversions at this point in our lives.

But to answer your question, “Why now?” — it’s because sometime I might want a little extra ice cream on my cake.

Boomer
I agree with CPA #1. I never could justify a Roth conversion. But, my IRA assets have always been in bonds. I maintained my stock investments outside the IRA to take advantage of the lower capital gains rate. I had a friend who converted all of his IRA into a Roth so that his children could inherit his money tax free. It is also hassle free as compared to inheriting a traditional IRA.

Remember, that, if you ever have a huge medical bill, like assisted living, a nursing home, or home care, you can use money in your traditional IRA and take a medical tax deduction.

[Boomer]

I agree with CPA #1. I never could justify a Roth conversion. But, my IRA assets have always been in bonds. I maintained my stock investments outside the IRA to take advantage of the lower capital gains rate. I had a friend who converted all of his IRA into a Roth so that his children could inherit his money tax free. It is also hassle free as compared to inheriting a traditional IRA.

Remember, that, if you ever have a huge medical bill, like assisted living, a nursing home, or home care, you can use money in your traditional IRA and take a medical tax deduction.


About those inherited IRAs, the tax law changes seem to have tripped up some of that for beneficiaries. I just went through re-visiting beneficiaries on IRAs in relation to the tax law and a trust. Some places limit the contingents that can fit on the IRA (traditional) online form, so you have to have an “on-file” added. I found that a little aggravating. I needed only one more contingent line but it took an extra hoop to jump through to get it.

Boomer

[CoachKandSportsguy]

Many years ago I had a CPA I loved. He loved me, too. (Not real love, not hubba-hubba love, just the kind of love between a CPA and a multi-faceted woman who loved to pick his brain and always showed up prepared. But he retired. (sigh) I then found another CPA and I liked him a lot, but he retired on me, too. (Hmmmm, should I be taking these CPA retirements personally?)

And so, now, I have a wet-behind-the-ears CPA who is also a lawyer in the office of our regular lawyer. He’s fine, but I have to teach him a little something once in a while — like how the way I do our QCDs is OK because of where the IRAs are on deposit.

(Of course, I took him well-sourced documentation on the subject to make sure he knew that this retired high school English teacher knew what she was talking about. . .And about that English teacher thing, yes, I know in my posts I bastardize the hellouta punctuation, but I know I am doing that and it’s OK. And I will never correct anybody else, unless it is to share a laugh about a funny typo. We all have them. Although, I do wish some people would double-space longer posts into paragraphs to make them more readable — to make them look less like a manifesto — but I digress.)

Anyway, the new young CPA is coming along nicely and I don’t think he will retire any time soon.

Long story longer — CPA #1 — you never forget your first — used to tease me a little about doing those Roth conversions before RMD age. He always said, “Why do you want to pay your kids’ taxes?” I would explain that it was not about anybody else’s taxes, and that I had projected taxable income, found some room to take a little more hit, and took the opportunity. (It just seemed like a good idea at the time. And I was right. But as I said earlier, I regret not doing more of those conversions while I could.)

I still project taxable income and buffer our RMDs with QCDs, especially if I think the next year is not going to bring any need for extra income. And when I reach a point where there could be a reason to keep more of the RMDs for ourselves, I will do that. But, for now, I stay well-aware of thresholds and IRMAA. . .I always picture IRMAA as that big mean girl who was always waiting to give me a hard time in PE class when I messed up, in even a slight way, on whatever the sport du jour happened to be. The only time I was ever any good at PE was trampoline time. Oh, well. . .

Uh, oh. . .I sure am digressing today, killing time, it looks like, so I better get back to real life, where I think I need to stop thinking about Roth conversions at this point in our lives.

But to answer your question, “Why now?” — it’s because sometime I might want a little extra ice cream on my cake.

Boomer

Why a ROTH conversion, of which you are proud of your decision versus a perceived professional, is not at all the question, nor the history . . remember, cpas and tax prep professionals have a current tax minimization today motivation. Tax minimization strategy is what you did, which is not their strength most of the time.. . . for that you need a planning professional, very different animal, one looks forward, the other looks backward. Very well done, and no criticism of your move to ROTH.

But now that the conversion is done, the question is for wealth maximization in conjunction with tax minimization, under what future scenarios for those two constraints or goals, does it make sense to take any money out of a Roth, versus using other sources of wealth. .

to be clear, the question is a future scenario question, one of which you are struggling for the constraints listed above. (which is the difference between finance and accounting) I am a finance professional, who only looks forward, as I can't change history, but I can influence the future towards wealth maximization and tax minimization, which is the point of the question.

looking forward to your thoughtfulness on your future decisions

[manaboutown]

Back in 2002 I had an anomalous extremely low income tax year and the market was off so I took a leap of faith and converted my entire IRA to a Roth. Glad I did!

[dewilson58]

Just got an email today from an investment guy (who I have listened to over the years)..................."Given the slump in the market, you should convert some traditional IRA dollars to Roth."

:read:

[triflex]

Only annuity I would consider is a life annuity which can be quoted through Immediate Annuities - Income Annuity Quote Calculator - ImmediateAnnuities.com (http://www.immediateannuities.com) . There are no commissions for the most part and that is why no one ever hears of them.

The life annuity is easy to understand. You get a quote on how much you will get monthly based upon the invested amount. Just divide the monthly quote into how much you invested and divide by 12 to see how many years it takes just to recover your investment.

To me it still makes no sense to buy even that annuity because they are based on bonds I believe. It just makes too much sense to stay in the stock market.

I would only ever consider it via the highest rated insurance company they offer.

[CoachKandSportsguy]

Just got an email today from an investment guy (who I have listened to over the years)..................."Given the slump in the market, you should convert some traditional IRA dollars to Roth."

:read:

what is the thought process behind that decision? just curious, is it to reduce future RMD in by creating a smaller IRA? but then if the market comes back, you are right back in the same situation. . . if your IRA was cut in half, would the mean to take out more? sounds like a tax minimization strategy of some sort.

just curious as i also look for hidden incentives. . and this one is a head scratcher for me. . so I must be missing something . .

[Boomer]

Why a ROTH conversion, of which you are proud of your decision versus a perceived professional, is not at all the question, nor the history . . remember, cpas and tax prep professionals have a current tax minimization today motivation. Tax minimization strategy is what you did, which is not their strength most of the time.. . . for that you need a planning professional, very different animal, one looks forward, the other looks backward. Very well done, and no criticism of your move to ROTH.

But now that the conversion is done, the question is for wealth maximization in conjunction with tax minimization, under what future scenarios for those two constraints or goals, does it make sense to take any money out of a Roth, versus using other sources of wealth. .

to be clear, the question is a future scenario question, one of which you are struggling for the constraints listed above. (which is the difference between finance and accounting) I am a finance professional, who only looks forward, as I can't change history, but I can influence the future towards wealth maximization and tax minimization, which is the point of the question.

looking forward to your thoughtfulness on your future decisions


I understand everything we own. A professional might have been able to show a bigger return, but we’re OK with our own decisions and our returns.

My wiring is such that I like taking the responsibility for investment decisions. In fact, I really do think we are all wired in whatever way when it comes to money. I don’t know exactly why I am wired with an interest in investing, etc., but I am glad I am, and Mr. Boomer is happy about it, too.

Giving somebody one percent, annually, taken quarterly, whether the accounts are up or down is not something we are ready to do.

I have been at this for decades — in a sort of comfort zone. Maybe boring, but a comfort zone.

I do have a philosophy of investing. It is simple and categorized and forward-looking — and backward-looking — because I think many investors often suffer from amnesia. And I pay attention. No spreadsheets or formulas involved, just making sure I completely understand what we own — and what those companies do — and how they are doing at doing it, along with general awareness of things I might need to be aware of — like taxes — and have been getting tax advice along the way. I understand cap gains very well and play them carefully.

Mr. Boomer and I have a backup plan if I get to the point where I start investing in Franklin Mint plates or Pez dispensers or Beanie Babies. We have interviewed a few planners and know who we will see if we feel like we need or want to.

The main aggravation I have now is that there is no return on cash in that moat I maintain around the stocks. Our parents could always get returns on CDs. I don’t think we will ever see returns on CDs again. But, even so, I know to never get us into the position of having to sell stocks to pay taxes — thus, the moat will continue to be around.

All advisors can claim big returns right now. Bigger than mine, no doubt. But the old bull has been running for a long time. He must be getting awfully tired — and there sure seem to be a lot of picadors around these days. Whatever happens, I will stay swaddled in our comfort zone with my unsophisticated approach, still making our own decisions, while we can.

Btw, I am now over the idea of looking further into Roth conversions at RMD age. The existing Roth will be there already — and all ready — if we want it for a tax-advantaged expenditure. But I still regret not doing more conversion before RMD age. But that’s just me and my whole picture wiring.

Thanks for the conversation.

Boomer

[dewilson58]

what is the thought process behind that decision? just curious, is it to reduce future RMD in by creating a smaller IRA? but then if the market comes back, you are right back in the same situation. . . if your IRA was cut in half, would the mean to take out more? sounds like a tax minimization strategy of some sort.

just curious as i also look for hidden incentives. . and this one is a head scratcher for me. . so I must be missing something . .

Thoughts: Market will be back, able to convert more dollars today. & Convert to maximize "lower" tax brackets.

[triflex]

I just quoted myself on a Life Annuity and it would take 44 years to recoup just the money I paid in. Putting me at 101 before I start to eat into the insurance company's assets.

I bought a big chunk of Goldman Sachs stock today. I'll take my chances with that.

[Boomer]

Just got an email today from an investment guy (who I have listened to over the years)..................."Given the slump in the market, you should convert some traditional IRA dollars to Roth."

:read:

Wils, he might not have meant literal dollars. He might have meant that if you want to convert in-kind shares, you can get more shares out at a lesser gain in a down market and back into a Roth if you want to do that. Of course, if the share price then goes lower, the ROI might not happen for a while, especially when factoring in the face value of the committed shares that would be taxed on the way out of the traditional IRA.

At least, I think that’s what it means. I am pretty sure I am right about in-kind transfers so you don’t have to sell the stock. But it is entirely possible that I have no idea what I am talking about.

This is really a question for the OP. I just keep killing time today. (sigh). Besides, I think I must be the only one in this lineup who thinks conversion to Roth before RMD age — and only if the stars align — can be an excellent idea.

OP? In-kind is OK, right?

Boomer

[dewilson58]

Wils, he might not have meant literal dollars.

Not cash dollars...............stock dollars, a/k/a current value.

You can transfer stock, depreciated or not, that you hold in a traditional individual retirement arrangement or qualified retirement account into a Roth IRA.

When you convert a qualified account to a Roth IRA, you create taxable income in the conversion year. The income is taxable at your marginal rate. The taxable amount is the current value of the assets transferred, excluding any nondeductible contributions. The IRS has you value the conversion equal to the amount of taxable income you would create had you simply withdrawn the proceeds rather than converting them into a Roth IRA.

[Boomer]

Only annuity I would consider is a life annuity which can be quoted through Immediate Annuities - Income Annuity Quote Calculator - ImmediateAnnuities.com (http://www.immediateannuities.com) . There are no commissions for the most part and that is why no one ever hears of them.

The life annuity is easy to understand. You get a quote on how much you will get monthly based upon the invested amount. Just divide the monthly quote into how much you invested and divide by 12 to see how many years it takes just to recover your investment.

To me it still makes no sense to buy even that annuity because they are based on bonds I believe. It just makes too much sense to stay in the stock market.

I would only ever consider it via the highest rated insurance company they offer.


Even on my favorite money show, WealthTrack on PBS, Christine Benz, Morningstar’s Director of Personal Finance, mentioned that some annuities are OK. If I am remembering correctly, she said that some annuities have more transparent language of in their contracts than others do. The reason I personally have avoided annuities is because I do not completely understand the various types and would rather just wing it with dividend stocks. But that’s just old buy-and-hold me. I know others who are comfortable with annuities though.

Christine Benz was interviewed on the January 14 episode which can be found on Consuelo Mack’s Wealthtrack YouTube stuff. That episode was a really good one. She also addressed withdrawal rates, along with alluding to the bumpy ride we could be facing until inflation calms down.

Boomer

[davem4616]

I'm totally in the camp of enjoying the money we put aside

kids are fine with that (like that would influence me)

[Boomer]

Not cash dollars...............stock dollars, a/k/a current value.

You can transfer stock, depreciated or not, that you hold in a traditional individual retirement arrangement or qualified retirement account into a Roth IRA.

When you convert a qualified account to a Roth IRA, you create taxable income in the conversion year. The income is taxable at your marginal rate. The taxable amount is the current value of the assets transferred, excluding any nondeductible contributions. The IRS has you value the conversion equal to the amount of taxable income you would create had you simply withdrawn the proceeds rather than converting them into a Roth IRA.

Don’t know how old you are. Not my business. But I do not regret having done it in my younger days. Having to get past RMDs and then add it on on top makes it not as much fun to do.

Boomer

[Boomer]

I'm totally in the camp of enjoying the money we put aside

kids are fine with that (like that would influence me)

And, like I have said before, “Fly first class or your kids will.”

(Geez. I gotta get outa here. I am turning into one of those people who hangs out on the internet all day. Today, I seem to be in need of an intervention. Maybe I should say something political or really mean and get into trouble and get benched. Might be a way out. :) )

Boomer

[CoachKandSportsguy]

Thoughts: Market will be back, able to convert more dollars today. & Convert to maximize "lower" tax brackets.

not sure I get why the price of equity has any relationship to the taxable bracket, etc.

Thinking about this more, the RMD is based upon the closing value of the IRA at the end of year. So if the market is ramped into the end of the year, and then sells off by 30%, you are taking a big hit on the total asset values by the calculation of the RMD, if you have to take a significant percentage out when the market is down 30%. . .

I still don't get the logic unless the increase is at a very low to zero tax rate, based upon social security and the taxable limit of tax free income. . so if the social security is $35K and you are allowed an extra $20K of income prior to taxation, and your RMD is $10K, then yes, taking an additional $10K out with very low taxes makes sense, as long as it then goes back into investments. . .

something like that makes sense, but many RMD put them over the limit. .

anyway, much more fun than corporate finance at 64

[Boomer]

When I was doing those conversions to Roth, my aforementioned CPA#1 said I was trying to free my money from its prison long before its sentence was up.

That was exactly it.

Boomer

[Luggage]

Left a lot of money on the table but he slept very soundly at night and it's well worth it

[Luggage]

If you live in The Villages then the odds are I you did pretty well in life. Further you probably saw the very expensive house up North and probably paid cash for the house year so you really do need a lot to live on and your Social Security probably pays most of what you really need so whatever Capital you really have just don't take a cruise every 3 months and you should do fine. If you can't afford to live the way you're living now it's really simple move 2 North Florida buy a $100,000 house and you're still has several hundred thousand Capital to live off of. Or have generous children like I do

[BlueStarAirlines]

Taking out 4% from your assets each year starting as you enter retirement has been a recommendation for many years.

I think recommended is a stretch. It WAS a recognized starting point for many folks to be used as a guideline, but updated thinking has changed to around 3%.

[rustyp]

If these financial gurus are so smart why would there be a need to modify the 4% rule. Did not the rule accommodate economic changes over the long haul ? Every time there is a hiccup we need a new rule ? Not a very comforting feeling. Never forget fear and greed the world's two biggest motivators.

[BlueStarAirlines]

Besides, I think I must be the only one in this lineup who thinks conversion to Roth before RMD age — and only if the stars align — can be an excellent idea.

Boomer

You are not the only one! I continue to Roth conversions up to my next tax bracket. Since I am still working, my 401k contributions go into my Roth account.

[dewilson58]

Don’t know how old you are. Not my business. But I do not regret having done it in my younger days. Having to get past RMDs and then add it on on top makes it not as much fun to do.

Boomer

60 is in sight.
"Couldn't" convert in my working years ............... hate those tax brackets.
Finally not working, looking at maybe some conversions & bringing some funds a shore.
:shrug:

[BlueStarAirlines]

If these financial gurus are so smart why would there be a need to modify the 4% rule. Did not the rule accommodate economic changes over the long haul ? Every time there is a hiccup we need a new rule ? Not a very comforting feeling. Never forget fear and greed the world's two biggest motivators.

Thats the problem right there! It was never intended as a rule...more of a guideline. Over the years it became "a rule" that people viewed as inflexible and unchangeable, so thats why you literally see almost everyone questioning the 4%. Its kind of like the recommendation to walk 10,000 steps or drink 8 glasses of water, general guidelines that people now follow to the step...er...glass.

[dewilson58]

If these financial gurus are so smart why would there be a need to modify the 4% rule.

Haven't changed, 4% is still a good guideline. :coolsmiley:

[rustyp]

Thats the problem right there! It was never intended as a rule...more of a guideline. Over the years it became "a rule" that people viewed as inflexible and unchangeable, so thats why you literally see almost everyone questioning the 4%. Its kind of like the recommendation to walk 10,000 steps or drink 8 glasses of water, general guidelines that people now follow to the step...er...glass.

I wonder why when the markets were breaking all time highs the gurus didn't change the "guideline" to 5%. I think I know. Without my money they make no money.

[CoachKandSportsguy]

I wonder why when the markets were breaking all time highs the gurus didn't change the "guideline" to 5%. I think I know. Without my money they make no money.

4% a heuristic rule, a generalized rule of thumb based upon a generalized rule of fingers of inflation, bonds and equity returns. Simplicity for non financial long term planning before the explosion in market data and software programming. . .

you don't hear about the 4% rule much because the software programs create customized plans with as much detail as you want to stuff into it.

The fidelity plan has car replacement inputs with/without loans, has forecasted health care costs, now that it is a large expense, etc. . . so advancements make thumbs meaningless. .

that's why

[Gunny2403]

Interesting info. A nicely subtle way of promoting annuities.

[dewilson58]

A nicely subtle way of promoting annuities.

Not me.

barf

[M2inOR]

…

When you convert a qualified account to a Roth IRA, you create taxable income in the conversion year. The income is taxable at your marginal rate. The taxable amount is the current value of the assets transferred, excluding any nondeductible contributions. The IRS has you value the conversion equal to the amount of taxable income you would create had you simply withdrawn the proceeds rather than converting them into a Roth IRA.

This is quite important.

Fortunately (unfortunately?), I just learned of ROTH conversions this past year. A friend had been doing this with small sums for the last two years, so I didn’t pay too much attention.

Wife and I retired a few years ago, and we moved from Oregon to The Villages with well funded IRAs and proceeds from our Oregon home sale. Investing since the 70s, and fully funded our IRAs and 401Ks since then. We paid attention to that 70s scare that Social Security wouldn’t be there.

Once retired, we’ve delayed taking SS until a few years from now when we turn 70 1/2. That 8% additional benefit growth is welcome.

We started paying attention to RMDs and were quite surprised as we’re likely to have a comfortable income but be in a new, very high tax bracket.

Soooo… ROTH conversion and establishing a Giving account made sense. Developed a plan in November with an advisor. Checked his math with my own calculations. Calculated likely estimated taxes, and converted 25% of our IRAs to ROTH in December. Paid our estimated taxes earlier this month, and it was the largest amount of $$$ we ever handed over to the IRS. We’ll convert the rest over the next 3 years.

No one knows for sure what future tax laws may require us to pay, but it’s comforting to know that we should be OK for the rest of our sunset years. Those new ROTH accounts will grow tax free and with the right investments, grow well beyond our needs.

Math and reading comprehension skills are very important at this point of our retirement. We gladly pay advisors to explain the details and provide reference reading material.

For those looking into ROTH conversions, spend your time understanding the near term tax consequences. Also, be sure to understand your break even point. It is not something for everyone.

[CoachKandSportsguy]

just checked the ROTH allowances for funding from salaries, and we aren't allowed to fund new, actually got into IRS violation and had to re-characterize the account. . as far as a conversion, that is best when not working and have a lower tax rate than when you are working with a high tax rate. . . So for us, the ROTH in any form would be too expensive. .

However, recently, the IRS and other investment houses have created 401K roth accounts, which you can fund instead of the 401K, with after tax dollars with the same tax free benefits. This seems like a no brainer, but the same total applies to > 50 at @25K. With a 401K Roth, the income grows tax free, assets always grow tax free until sold. But a Roth 401K has an RMD, even though its tax free. .

so, the key is in a high tax bracket, put as much away in qualified plans, 401K, especially with matching. When transitioned to a lower tax bracket, then conversions make sense, or even using IRA money to defer Social security and putting what you can into the ROTH, while your $30,000 SS income is growing at 3-4 % per year. . the often quoted 8% includes continuing to work. . . screw that!

[rustyp]

just checked the ROTH allowances for funding from salaries, and we aren't allowed to fund new, actually got into IRS violation and had to re-characterize the account. . as far as a conversion, that is best when not working and have a lower tax rate than when you are working with a high tax rate. . . So for us, the ROTH in any form would be too expensive. .

However, recently, the IRS and other investment houses have created 401K roth accounts, which you can fund after the 401K is full, with after tax dollars with the same tax free benefits. This seems like a no brainer, but the same total applies to > 50 at @25K. With a 401K Roth, the income grows tax free, assets always grow tax free until sold. But a Roth 401K has an RMD, even though its tax free. .

so, the key is in a high tax bracket, put as much away in qualified plans, 401K, especially with matching. When transitioned to a lower tax bracket, then conversions make sense, or even using IRA money to defer Social security and putting what you can into the ROTH, while your $30,000 SS income is growing at 3-4 % per year. . the often quoted 8% includes continuing to work. . . screw that!

Copied from your public profile:

About CoachKandSportsguy
Biography
Golfing and sports couple with a new begonia available for rent until we relocate down
Location
Marsh Bend
Interests
Golfing and sports for both, and chasing soccer and any other ball around for sportsguy
Occupation
medical data for coachK and finance, modeling, trading and investments for sportsguy

You seem quite knowledgeably in finance. Are you presently selling financial instruments in the state of Florida ? Are you a resident yet ? If you are selling what are your credentials ? Education, licenses, fiduciary, specialties. etc.?

[dewilson58]

Pros
Contributions and earnings grow tax-free.

You can withdraw contributions at any time, for any reason, tax-free.

You don’t have to take required minimum distributions.

Those normally ineligible for a Roth IRA can use it to create the account and a tax-free pool of cash.

Cons
You pay tax on the conversion when you do it—and it could be substantial.

You may not benefit if your tax rate is lower in the future.

You must wait five years to take tax-free withdrawals, even if you’re already age 59½.

Figuring taxes can be complicated if you have other traditional, SEP. or SIMPLE IRAs you're not converting.


Just another view........................not seeing a GREAT advantage of converting to a ROTH.

[M2inOR]

just checked the ROTH allowances for funding from salaries, and we aren't allowed to fund new, actually got into IRS violation and had to re-characterize the account. . as far as a conversion, that is best when not working and have a lower tax rate than when you are working with a high tax rate. . . So for us, the ROTH in any form would be too expensive. .

However, recently, the IRS and other investment houses have created 401K roth accounts, which you can fund after the 401K is full, with after tax dollars with the same tax free benefits. This seems like a no brainer, but the same total applies to > 50 at @25K. With a 401K Roth, the income grows tax free, assets always grow tax free until sold. But a Roth 401K has an RMD, even though its tax free. .

so, the key is in a high tax bracket, put as much away in qualified plans, 401K, especially with matching. When transitioned to a lower tax bracket, then conversions make sense, or even using IRA money to defer Social security and putting what you can into the ROTH, while your $30,000 SS income is growing at 3-4 % per year. . the often quoted 8% includes continuing to work. . . screw that!

We too had salaries that prevented funding of any ROTH IRA accounts while working in High Tech.

Fortunately, the Backdoor ROTH Conversion has no limits. Just have to pay current taxes on the amount being converted. Since our future RMD tax rate would be similar, makes sense to start doing it now before RMDs are required. Advantage is that new ROTH IRA investments continue to grow without any additional taxes due in the future if/when we make withdrawals.

The good news/bad news is that we expect to be in a higher tax bracket with RMDs if we do nothing. Our investments have done well during our working years.

For the time being, our income (outside of ROTH conversion) now is quite low and we are living off savings until we start SS in a few years. That is enough to take care of current expenses. We even took a mortgage as our investment return is considerably higher than our mortgage rate.

Wife and I are both retired now, and have no interest in working. We are not selling anything, either. Just providing info about ROTH conversions.

[dewilson58]

You seem quite knowledgeably in finance. Are you presently selling financial instruments in the state of Florida ? Are you a resident yet ? If you are selling what are your credentials ? Education, licenses, fiduciary, specialties. etc.?

He stayed at a Holiday Inn Express last night.

[M2inOR]

Regarding:

Cons
You pay tax on the conversion when you do it—and it could be substantial.

You may not benefit if your tax rate is lower in the future.

You must wait five years to take tax-free withdrawals, even if you’re already age 59½.

Figuring taxes can be complicated if you have other traditional, SEP. or SIMPLE IRAs you're not converting.


Just another view........................not seeing a GREAT advantage of converting to a ROTH.

Yes, math and full understanding is required.

The taxes can be substantial! They are for us, but as written above, ours would be similar with the RMDs when added to our eventual, likely SS income. Our future tax rate will likely remain high if we did not proceed with conversion.

Regarding that "untouchable for 5 years"...it's 5 years after each conversion year. For example, the amount converted in December 2021 is touchable without penalty in Jan 2026. The date of penalty withdrawals resets to Jan 1 of the year you convert funds. So 2021 conversions available Jan 1, 2026; 2022 conversions available Jan 1 of 2027, etc., regardless of when you did the conversion within that year.

Yes, figuring taxes will be complex, but I've already done some simulations with the 2022 TurboTax. Of course, you can also talk to your tax preparer to see if they comprehend what you are trying to do. If this is all Greek, best to talk to a professional.

[dewilson58]

Yes, math and full understanding is required.

If this is all Greek, best to talk to a professional.

:1rotfl::1rotfl::1rotfl:

Obviously you don't know my background.

:ho:

[M2inOR]

:1rotfl::1rotfl::1rotfl:

Obviously you don't know my background.

:ho:

Respectfully, quite true! :bigbow:

Not disagreeing with your Pros and Cons at all.

[dewilson58]

Respectfully, quite true! :bigbow:

Not disagreeing with your Pros and Cons at all.

No Prob. :coolsmiley:

[jimjamuser]

Thanks for a good, comprehensive thread. The stock market is high and the interest rates are STILL low, but increasing. Today, before more rate increases, a person could (?) sell their big home, sell much of their PROFITABLE stocks, and rent and buy a small condo, AFTER WAITING for the economy to drop. Because the economy ALWAYS eventually turns DOWN - just wait it out!
......As to the take 3% or 4% taken out each year after retirement - you need to know how long you are going to LIVE. Not counting accidents, there are apps, which could help a person predict their longevity. I have never used one so I can't really comment knowledgeably. For a universe of reasons, this is a tough time in History to make future predictions - especially in the US!

[jimjamuser]

Many years ago I had a CPA I loved. He loved me, too. (Not real love, not hubba-hubba love, just the kind of love between a CPA and a multi-faceted woman who loved to pick his brain and always showed up prepared. But he retired. (sigh) I then found another CPA and I liked him a lot, but he retired on me, too. (Hmmmm, should I be taking these CPA retirements personally?)

And so, now, I have a wet-behind-the-ears CPA who is also a lawyer in the office of our regular lawyer. He’s fine, but I have to teach him a little something once in a while — like how the way I do our QCDs is OK because of where the IRAs are on deposit.

(Of course, I took him well-sourced documentation on the subject to make sure he knew that this retired high school English teacher knew what she was talking about. . .And about that English teacher thing, yes, I know in my posts I bastardize the hellouta punctuation, but I know I am doing that and it’s OK. And I will never correct anybody else, unless it is to share a laugh about a funny typo. We all have them. Although, I do wish some people would double-space longer posts into paragraphs to make them more readable — to make them look less like a manifesto — but I digress.)

Anyway, the new young CPA is coming along nicely and I don’t think he will retire any time soon.

Long story longer — CPA #1 used to tease me a little about doing those Roth conversions before RMD age. He always said, “Why do you want to pay your kids’ taxes?” I would explain that it was not about anybody else’s taxes, and that I had projected taxable income, found some room to take a little more hit, and took the opportunity. (It just seemed like a good idea at the time. And I was right. But as I said earlier, I regret not doing more of those conversions while I could.)

I still project taxable income and buffer our RMDs with QCDs, especially if I think the next year is not going to bring any need for extra income. And when I reach a point where there could be a reason to keep more of the RMDs for ourselves, I will do that. But, for now, I stay well-aware of thresholds and IRMAA.

But to answer your question, “Why now?” — it’s because sometime I might want a little extra ice cream on my cake.

Boomer
Good Thoreau quote. That deserves extra ice cream and cake. Maybe start a class in TV Land called "teaching young CPAs".

[jimjamuser]

I understand everything we own. A professional might have been able to show a bigger return, but we’re OK with our own decisions and our returns.

My wiring is such that I like taking the responsibility for investment decisions. In fact, I really do think we are all wired in whatever way when it comes to money. I don’t know exactly why I am wired with an interest in investing, etc., but I am glad I am, and Mr. Boomer is happy about it, too.

Giving somebody one percent, annually, taken quarterly, whether the accounts are up or down is not something we are ready to do.

I have been at this for decades — in a sort of comfort zone. Maybe boring, but a comfort zone.

I do have a philosophy of investing. It is simple and categorized and forward-looking — and backward-looking — because I think many investors often suffer from amnesia. And I pay attention. No spreadsheets or formulas involved, just making sure I completely understand what we own — and what those companies do — and how they are doing at doing it, along with general awareness of things I might need to be aware of — like taxes — and have been getting tax advice along the way. I understand cap gains very well and play them carefully.

Mr. Boomer and I have a backup plan if I get to the point where I start investing in Franklin Mint plates or Pez dispensers or Beanie Babies. We have interviewed a few planners and know who we will see if we feel like we need or want to.

The main aggravation I have now is that there is no return on cash in that moat I maintain around the stocks. Our parents could always get returns on CDs. I don’t think we will ever see returns on CDs again. But, even so, I know to never get us into the position of having to sell stocks to pay taxes — thus, the moat will continue to be around.

All advisors can claim big returns right now. Bigger than mine, no doubt. But the old bull has been running for a long time. He must be getting awfully tired — and there sure seem to be a lot of picadors around these days. Whatever happens, I will stay swaddled in our comfort zone with my unsophisticated approach, still making our own decisions, while we can.

Btw, I am now over the idea of looking further into Roth conversions at RMD age. The existing Roth will be there already — and all ready — if we want it for a tax-advantaged expenditure. But I still regret not doing more conversion before RMD age. But that’s just me and my whole picture wiring.

Thanks for the conversation.

Boomer
Interesting wiring. I wonder if Henry David T. would have considered giving an expert 1% of his book royalties? I agree that it is time to remember that the old bull MUST be tiring sometime! I don't watch the 2 fast money shows as religiously as I used to. So, now I buy mostly ETFs, not individual stocks. I recently bought a small amount of ITA, an ETF for the Aerospace and Defense Industry.

[petsetc]

Here is a retirement calculator that lets you do what if senarios - FIRECalc: A different kind of retirement calculator (https://firecalc.com/)

Also, as I recall, the 4% withdrawal rate has the actual amount adjusted for inflation every year and was thought to offer a 97% chance of not running out of money for 30 years. I am currently using 5% of the Dec 31 balance each year (no inflation adjustment) because I can change it at will, and being in my 70s, don't expect to need it to last 30 years.

As for Roth, a question was asked about the 5 year waiting period. I believe that refers t the opening date, not the most recent contribution, and rules are different after 59-1/2.

Last thought, if you already have both TIRA & Roth, hold the bond-like investments in TIRA since their growth is minimal right now and equities in Roth.

[M2inOR]

I assume when you wrote TIRA, you mean Traditional IRA?

[petsetc]

I assume when you wrote TIRA, you mean Traditional IRA?

Yes

[Luggage]

My brother-in-law complained last year then he made too much money and he's going to have to pay a lot of taxes and he was crying. I on the other hand made very little in the stock market as I wasn't invested so I guess I was much happier. Same with all you guys what are you really complaining about that you made too much money over the last 50 years? Yes I know you want to keep as much as you can but you all know what the rules are and I hear a lot of crying over milk that has not been spilled. So what I'm saying is enjoy life spend your money and don't worry so much you got a lot more than 95% of the rest of the country

[retiredguy123]

Here is a retirement calculator that lets you do what if senarios - FIRECalc: A different kind of retirement calculator (https://firecalc.com/)

Also, as I recall, the 4% withdrawal rate has the actual amount adjusted for inflation every year and was thought to offer a 97% chance of not running out of money for 30 years. I am currently using 5% of the Dec 31 balance each year (no inflation adjustment) because I can change it at will, and being in my 70s, don't expect to need it to last 30 years.

As for Roth, a question was asked about the 5 year waiting period. I believe that refers t the opening date, not the most recent contribution, and rules are different after 59-1/2.

Last thought, if you already have both TIRA & Roth, hold the bond-like investments in TIRA since their growth is minimal right now and equities in Roth.
It is always a good idea to separate your bond investments into the traditional IRA, and your stocks into non-tax deferred accounts. The reason is that bonds earn interest that is always taxed as ordinary income. Stocks earn capital gains that are taxed at a lower capital gains rate, but only if they are held in a non-tax deferred account. If you have capital gain income in your traditional IRA, that income will be taxed as ordinary income.

[Stu from NYC]

You are not the only one! I continue to Roth conversions up to my next tax bracket. Since I am still working, my 401k contributions go into my Roth account.

Maybe I am missing something.

You pay income taxes on your 401 plan contributions now and put a lesser amount into your Roth for longer term growth?

If it works for you fine but would rather have that 30% or so that was taken out in taxes grow for me in the long term.

[retiredguy123]

Maybe I am missing something.

You pay income taxes on your 401 plan contributions now and put a lesser amount into your Roth for longer term growth?

If it works for you fine but would rather have that 30% or so that was taken out in taxes grow for me in the long term.
The numbers never seemed to work for me either.

[dewilson58]

Maybe I am missing something. You pay income taxes on your 401 plan contributions now and put a lesser amount into your Roth for longer term growth? If it works for you fine but would rather have that 30% or so that was taken out in taxes grow for me in the long term.

Got'a do a spreadsheet................works if you are paying higher income tax rates later.

It's a hedge for some IRA dollars.

Some convert (or will convert) 100% of their TIRA.........may The Force be with them.

:ho:

[Stu from NYC]

Got'a do a spreadsheet................works if you are paying higher income tax rates later.

It's a hedge for some IRA dollars.

Some convert (or will convert) 100% of their TIRA.........may The Force be with them.

:ho:

The problem is how do you know if you will be in a higher tax bracket down the road? Not to mention tax brackets do change over time as they figure out new ways to spend our money.

[dewilson58]

The problem is how do you know if you will be in a higher tax bracket down the road? Not to mention tax brackets do change over time as they figure out new ways to spend our money.

Yep, 100% correct.

That's why it's a hedge.
Your taxes will either (1) stay flat or go down, or (2) go up.
So hedge........prepare for both What If's, don't have all your eggs in one Tax Assumption Basket.

The National Debt, Who's in office, etc., impact the crystal ball.

[rustyp]

Yep, 100% correct.

That's why it's a hedge.
Your taxes will either (1) stay flat or go down, or (2) go up.
So hedge........prepare for both What If's, don't have all your eggs in one Tax Assumption Basket.

The National Debt, Who's in office, etc., impact the crystal ball.


Game over - It's too late. "Now trumps latter every time".

:BigApplause

-----------------------------
Mr Hopeless

[M2inOR]

Maybe I am missing something.

You pay income taxes on your 401 plan contributions now and put a lesser amount into your Roth for longer term growth?

If it works for you fine but would rather have that 30% or so that was taken out in taxes grow for me in the long term.

During our working years we could contribute to the 401K, the maximum allowed, but it was not a ROTH 401K.

We could not contribute to a ROTH IRA due to limits on contributions due to our joint income.

IRA Contribution Limits (https://www.aarp.org/retirement/planning-for-retirement/info-2021/ira-contribution-limits/)

[Michael G.]

All this valuable investment information and they still don't teach students how to balance a check book in school.

Take those young check-out kids in retail, remove all those registers that do their math, and if they
need to give change, they'd to lost.

Another thing to be said on investment information here, remember you came into this world with nothing,
and you're going out with nothing.

[Stu from NYC]

All this valuable investment information and they still don't teach students how to balance a check book in school.

Take those young check-out kids in retail, remove all those registers that do their math, and if they
need to give change, they'd to lost.

Another thing to be said on investment information here, remember you came into this world with nothing,
and you're going out with nothing.

It is sad they teach these kids so little in regard to personal finance. So many go heavily in debt to get a degree that will not allow them to pay back what they owe.

Than they think it is a good idea if the govt cancels the debt.' So many do not understand how it is foolish to think the govt will help you be a success in life while you sit back and do nothing.

[M2inOR]

All this valuable investment information and they still don't teach students how to balance a check book in school.

...


So true!

True story: a life long friend who worked with me in high-tech left the industry and became an adjunct professor at a state university in Oregon.

He teaches marketing and advertising for undergrads, and has been successful, eventually rising to become an untenured department head.

He proposed and promoted the need to have a personal finance course for seniors or juniors as a graduation requirement for those wanting a BS degree in marketing or advertising.

He was not successful.

My son and daughter-in-law are both Army officers. Early in their early years as junior officers, they spent a lot of time helping young soldiers the basics of personal finance.

Pretty sad that neither high school nor colleges are interested in personal finance.

I see this today with some new retirees still lacking personal finance skills.

[DAVES]

Copied here from Barrons, I am a paying subscriber :welcome:

Economist Wade Pfau has been thinking about retirement since he was in 20s. But not just his own retirement.

Pfau started studying Social Security for his dissertation while getting his Ph.D. at Princeton University in the early 2000s. At the time, Republicans wanted to divert part of the Social Security payroll tax into a 401(k)-style savings plan. Pfau concluded it might supply sufficient retirement income for retirees—but only if markets cooperated.

Today, Pfau is a professor of retirement income at the American College of Financial Services, a private college that trains financial professionals. His most recent book, “Retirement Planning Guidebook,” was published in September.

While many retirees are banking on a continuing rise in stocks to keep their portfolios growing, Pfau worries that markets will plunge and imperil this “overly optimistic” approach. He has embraced oft-criticized insurance products like variable annuities and whole-life insurance that will hold their value even if stocks crash, and he has done consulting work for insurers. He wrote another book, “Reverse Mortgages: How to Use Reverse Mortgages to Secure Your Retirement,” because these loans also can be used as “buffer assets” during market meltdowns.

Pfau, 44 years old, is already playing around with spreadsheets to analyze his own retirement plan. He recently built a model to determine when it is best to convert money from tax-deferred accounts to tax-free Roth accounts, partly because he wanted the answer for his own retirement accounts. We reached Pfau at his home north of Dallas. An edited version of our conversation follows:

Barron’s: The 4% rule says a retiree can safely withdraw that percentage annually from a portfolio, adjusted for inflation. Why don’t you think it will work?

Pfau: It’s not that I don’t think it will work. I think there is something like a 65% to 70% chance that the 4% rule works for today’s retirees rather than being a near certainty.

It’s a debate. Do you just stick with the historical data, or do you make the adjustment to say, ‘Wait a second. With low interest rates, you can’t have as high a bond return as we’ve had historically, and maybe you can’t predict as high a stock return as we’ve had historically either’?

What percent can people safely withdraw?

I think 3% would be a lot more realistic in terms of giving the same chance of success that we usually think about with the 4% rule.

Will people still have enough money to retire with a lower withdrawal rate?

One of the unrealistic assumptions of the 4% rule is that you don’t have any flexibility to adjust your spending over time. Someone could start retirement with a 4% withdrawal rate if they’re willing to cut back on spending somewhat if we do get into a bad market environment.

Anything else?

People need to be smart about their Social Security claiming decisions. It’s OK to spend down investment assets in the short term so you can delay Social Security benefits until age 70, at least for the high earner of a married couple. The boost you get from Social Security benefits by waiting will really reduce the need to take distributions from investments after age 70.

People also might look at ways to use home equity to support retirement spending, whether that’s downsizing the home or considering getting a line of credit through a reverse mortgage.

Isn’t tapping home equity to avoid selling stocks doubling down on a losing bet?

Using a buffer-based strategy such as home equity does buy into the idea that over long periods the stock market will perform at a reasonable level. If there’s no market recovery, it is going to be all the more harder to have any kind of sustainable retirement strategy.

Why are the first years of retirement most dangerous?

It’s the idea of sequence-of-return risk. I’ve estimated that if somebody is planning for a 30-year retirement, the market returns they experience in the first 10 years can explain 80% of the retirement outcome. If you get a market downturn early on, and markets recover later on, that doesn’t help all that much when you’re spending from that portfolio because you have less remaining to benefit from the subsequent market recovery.

What’s the solution?

There are four ways to manage the sequence-of-return risk. One, spend conservatively. Two, spend flexibly. If you can reduce your spending after a market downturn, that can manage sequence-of-return risk because you don’t have to sell as many shares to meet the spending need. A third option is to be strategic about volatility in your portfolio, even using the idea of a rising equity glide path. The fourth option is using buffer assets like cash, a reverse mortgage or whole life policy with cash value.

What is a rising equity glide path?

Start with a lower stock allocation at the beginning of retirement, and then work your way up. Later in retirement, market volatility doesn’t have as much impact on the sustainability of your spending path, and you can adjust by having a higher stock allocation later on.

Why do annuities make sense when interest rates and annuity payouts are low?

Well, because the fact that interest rates are low impacts every strategy. But the impact of low rates on annuities is less than the impact on a bond portfolio.

Most income annuities aren’t inflation-adjusted.

An income annuity is not going to be the source of inflation protection in the retirement strategy. That is going to have to come from the investment side. But the annuity will allow a lower rate of withdrawal from your investment portfolio early on to mitigate sequence risk. Most retirees naturally spend less as they age, and they may not need inflation protection

Medical costs go up as you age.

Right, that’s the one offsetting factor. The medical expenses increase but everything else tends to decrease at a fast enough pace so that overall spending still goes down until very late in life when people may need to pay for more care in home or a nursing home or other type of long-term care needs.

Is long-term care insurance a good idea?

When I look at traditional long-term care insurance, I struggle a bit because usually you use insurance for low-probability, high-cost events. And the problem with long-term care is that it’s a high probability, high-cost event.

There are other hybrid approaches where you can combine long-term care insurance with life insurance or an annuity, and that’s where most of the new business is going, and that has some potential.

How is your own money invested?

At my age level, I’m still primarily in equities.

Do you own annuities?

I’m interested in variable annuities with living benefits, but I’m still too young. Usually, we don’t talk about getting annuities until you’re in your mid-to-late 50s.

Variable annuities have a bad rep. You think it’s undeserved?

For a large part undeserved. They get a bad rep because they have a high fee drag, and I think about retirement not so much about the fee drag but about how much assets do you need to feel comfortable about retiring. Variable annuities mean you believe that markets will outperform but you also don’t want to stake your entire retirement on the market so you want some sort of backstop.

You’ve been a proponent of products sold by insurers such as annuities, and you’ve done consulting work for insurers. How can we be sure your research isn’t conflicted?

Whenever I do some sort of research paper, I outline the methodology completely to give people a full understanding. Nothing is in a black box. The assumptions are all listed, and if people want to try it with different assumptions, they can do so.

If I’m concluding that annuities may be helpful, I try to give the benefit of the doubt in my assumptions to not using the annuities and still find a strong case can be made for the annuities.

Social Security is more generous than annuities. Shouldn’t people max it out before buying an annuity?

Yes. Insurance companies have to live in the real world so when interest rates are low that impacts annuities. Indeed if you are thinking about annuities, step one is at least the high earner in a couple should defer Social Security until 70. And then if you want more annuity protection beyond that, fine. It wouldn’t generally make sense to claim Social Security early and then buy a commercial annuity at the same time.

Does it ever feel odd to be focused on an event that won’t occur for you for a couple of decades?

For the most part, no. It only comes up at times when somebody is saying why is this young person telling me how to do retirement.

For me it’s not so much retirement, as tracking the ability to be financially independent. It’s still relevant for me to think about when I may be able to retire, even if I’m not necessarily ready. I have a personal interest in it.

A personal interest in what?

In playing around with spreadsheets and analyzing my own retirement plan. That’s what primarily drove me to do this tax planning research so that I could specifically build in Roth conversion strategies into my own planning.

Thank you, Wade.

All of these things are sadly AMUSING. All you need to know is when you will die, what will kill you, the rate of inflation till you die and the return on your investments till you die, the tax rate till you pass and what will social security and any pensions do. We don't know any of that information. Oh, if we think we do AND HAVE AN ANSWER TO THAT NUMBER. You need to get the same impossible to get information on your spouse. That 4% proposal was a simple guide to deal with what is unknown.

I am OK but who would have ever planed for a 7% CPI cost of living increase?