Originally Posted by rustyp (Post 2053233)

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

Originally Posted by BlueStarAirlines (Post 2053238)

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.

Originally Posted by rustyp (Post 2053250)

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.

Originally Posted by Gunny2403 (Post 2053269)

A nicely subtle way of promoting annuities.

Originally Posted by dewilson58 (Post 2053184)

…

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 The IRS has you value the conversion equal to the amount of taxable income you would create had you simply withdrawn the proceeds rather than converting them into a Roth IRA.

Originally Posted by CoachKandSportsguy (Post 2053387)

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!

Originally Posted by CoachKandSportsguy (Post 2053387)

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!

Originally Posted by rustyp (Post 2053399)

Originally Posted by dewilson58 (Post 2053403)

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.

Originally Posted by M2inOR (Post 2053407)

Yes, math and full understanding is required.

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

Originally Posted by dewilson58 (Post 2053411)

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

Obviously you don't know my background.

:ho:

Originally Posted by M2inOR (Post 2053419)

Originally Posted by Boomer (Post 2053111)

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

Originally Posted by Boomer (Post 2053176)

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

Originally Posted by M2inOR (Post 2053508)

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

Originally Posted by petsetc (Post 2053493)

Here is a retirement calculator that lets you do what if senarios - FIRECalc: A different kind of retirement calculator

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.

Originally Posted by BlueStarAirlines (Post 2053234)

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.

Originally Posted by Stu from NYC (Post 2054269)

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.

Originally Posted by Stu from NYC (Post 2054269)

Originally Posted by dewilson58 (Post 2054317)

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:

Originally Posted by Stu from NYC (Post 2054411)

Originally Posted by dewilson58 (Post 2054419)

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.

Originally Posted by Stu from NYC (Post 2054269)

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.

Originally Posted by Michael G. (Post 2054438)

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.

Originally Posted by Michael G. (Post 2054438)

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

...

Originally Posted by CoachKandSportsguy (Post 2052841)

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.