Question about 4% withdrawal rate in retirement

[NW-Bound]

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Originally Posted by pb4uski +1 Roth never came about until later in my career and many years I earned too much to contribute so whe I retired Roths were 3% of our retirement savings... today, thanks to many years of Roth conversions, Roths are 29% of our total retirement nestegg even though the sixe of the nestegg is about the same.

+1

I did not have chances to contribute to Roth either. Still doing Roth conversion now before I hit SS at 70, then RMD.

I explained to my son the advantages of a Roth account, a place to stuff his savings even if he already had a 401k. It took several occasions before he opened an account.

Young people spend more of their free time to play computer games or other pursuits, instead of spending 15 minutes just one time to open an account online. Then, when they are old and tired of work, wonder how other people can retire and they cannot.

Anyway, my son finally had a Roth as he told me. But I wonder if he can contribute to it anymore due to having more raises recently. Another missed opportunity. Yep, you can lead a horse to water, but you cannot make it drink.

[Time2]

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Originally Posted by NW-Bound +1 I did not have chances to contribute to Roth either. Still doing Roth conversion now before I hit SS at 70, then RMD. I explained to my son the advantages of a Roth account, a place to stuff his savings even if he already had a 401k. It took several occasions before he opened an account. Young people spend more of their free time to play computer games or other pursuits, instead of spending 15 minutes just one time to open an account online. Then, when they are old and tired of work, wonder how other people can retire and they cannot. Anyway, my son finally had a Roth as he told me. But I wonder if he can contribute to it anymore due to having more raises recently. Another missed opportunity. Yep, you can lead a horse to water, but you cannot make it drink.

While I wish my son was earning more, ($50k) only 9 months on the job, hoping to move up after a retirement. He is living with us and will put 19k in his 401, $6k in a Roth and $3,650 in an HSA and probably have some more in a taxable account.

[NomDeER]

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Originally Posted by NYC1967 Hi everyone, Question, that might sound stupid but need to ask: Lets say you have $1,000,000 in retirement accounts. The safe withdrawal rate in retirement is 4% a year (40,000). On average your retirement accounts grow conservatively 4% a year. Its pretty much a wash from what you withdraw a year and earn. How would you ever run out of money?

Sequence of returns risk is a real issue. Take a look at what is currently going on, and you can see how it could be a problem. There are lots of people here who retired early in a long bull market. They are far better off than they probably anticipated. In contrast, I retired late last year and received my last check right around the height of the market. If I do a FIRECALC calculation right now, the numbers definitely are different from what they were when I recently retired.

If there is a prolonged bear market and I have to sell while the market is lower and early in my retirement, that will have a significant impact on me for the rest of my life. (I'm very glad I had a fairly good cash cushion and that I am not locked into spending what I had planned to spend.) Just like it's important to start saving for retirement earlier in life so that you can compound returns, it's important not to be selling a lot early in retirement.

There also is an inflation component similar to SORR. Inflation is very high right now, but impacts people differently. (I have a smallish pension that is not inflation adjusted, and some of the things currently hit hardest by inflation are having a significant impact on me.) FIRECALC's default is an inflation rate that is much lower than the current rate. A common recommendation here is to look at your spending over the last few years when figuring out costs in retirement, but that doesn't necessarily work when you're entering a period of high inflation. You may have to make cuts in spending plans to stay within your planned 4%. If you're going to have to spend more, that will impact you permanently going forward just as SORR does.

Even with increasing interest rates, that definitely doesn't offset inflation and the stock market downturn right now.

So, you have to ask yourself not only whether 4% is a safe withdrawal rate, which is a common debate, but also whether you really could live on that withdrawal rate given issues such as inflation.

You are much more likely to be able to do well financially and emotionally under adverse conditions if you have a significant amount of discretionary spending in your budget and are willing and able to adjust. Only you and your spouse know whether you will feel comfortable and sleep at night under various economic and financial conditions.

[N02L84ER]

You don't actually need a funded Roth IRA to be able to do Roth conversions. The day you do your first conversion, you could open a Roth IRA and then perform the conversion. The reason to start a Roth IRA now is to start the 5 year clock.

[G-Man]

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Originally Posted by pb4uski +1 Roth never came about until later in my career and many years I earned too much to contribute so whe I retired Roths were 3% of our retirement savings... today, thanks to many years of Roth conversions, Roths are 29% of our total retirement nestegg even though the sixe of the nestegg is about the same.

pb4uski.. Can you provide some specific examples on how you were able to grow your Roth IRA dollars in retirement. I assume in retirement you can't contribute directly to the Roth IRA, you must execute Roth Conversions to grow your Roth dollars. Can you provide examples of your Roth Conversions?

In my situation, I only have 401K dollars in retirement.

Thanks for being patient with me as I learn more about the back-door Roth IRA and Roth Conversions during retirement.

[NYC1967]

OP here,

I just checked my husbands 401K, currently we contribute 6% and company matches 82% of our 6%. I think we should probably start contributing some more to a ROTH. The company will match in the ROTH as well.

1) Do u think we should contribute the 6% to his 401k ROTH instead of the 401k?
** he has a 70/30 allocation. OR

2) leave the 6% as is in the 401k and put in addition to that about $100 a month into our Vanguard Roth IRA VTSAX (stock)?

In addition to his 401K, I have a 403b at work that has a Fixed rate of 7% and I just started contributing the full amount allowed per year.

[TheWizard]

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Originally Posted by NYC1967 OP here, I just checked my husbands 401K, currently we contribute 6% and company matches 82% of our 6%. I think we should probably start contributing some more to a ROTH. The company will match in the ROTH as well. 1) Do u think we should contribute the 6% to his 401k ROTH instead of the 401k? ** he has a 70/30 allocation. OR 2) leave the 6% as is in the 401k and put in addition to that about $100 a month into our Vanguard Roth IRA VTSAX (stock)? In addition to his 401K, I have a 403b at work that has a Fixed rate of 7% and I just started contributing the full amount allowed per year.

Whether to contribute to a Roth 401(k) depends entirely on your numbers.
If you're in the 24% bracket now, while working, and expect to be in the 12% marginal bracket when retired, then keep on with the regular 401(k).

You can additionally contribute $7000 each per year to Roth IRA while still with earned income, so do that also...

[NYC1967]

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Originally Posted by TheWizard Whether to contribute to a Roth 401(k) depends entirely on your numbers. If you're in the 24% bracket now, while working, and expect to be in the 12% marginal bracket when retired, then keep on with the regular 401(k). You can additionally contribute $7000 each per year to Roth IRA while still with earned income, so do that also...

I will most likely be in the same tax bracket in retirement, receiving 3 pensions and social security

[pb4uski]

Quote:

Originally Posted by NYC1967 OP here, I just checked my husbands 401K, currently we contribute 6% and company matches 82% of our 6%. I think we should probably start contributing some more to a ROTH. The company will match in the ROTH as well. 1) Do u think we should contribute the 6% to his 401k ROTH instead of the 401k? ** he has a 70/30 allocation. OR 2) leave the 6% as is in the 401k and put in addition to that about $100 a month into our Vanguard Roth IRA VTSAX (stock)? In addition to his 401K, I have a 403b at work that has a Fixed rate of 7% and I just started contributing the full amount allowed per year.

As long as your marginal tax rate is substantially higher than your expected tax rate in retirement I would favor tax-deferred savings over Roth.

A fixed rate of 7% is great... I would definitely continue to take advantage of that.

[G-Man]

Sorry OP.. I will start a new thread for my situation.

[NYC1967]

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Originally Posted by G-Man Sorry OP.. I will start a new thread for my situation.

not a problem - all good information to know.

[TheWizard]

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Originally Posted by NYC1967 I will most likely be in the same tax bracket in retirement, receiving 3 pensions and social security

Ok, so maybe do more Roth contributions now.
You also need to consider the eventual size of all tax-deferred accounts and the approximate RMD addition to ordinary income at age 72+.
And then also the Roth conversions prior to age 72 to contain and shrink that RMD amount somewhat...

[Gumby]

I have moved the G-Man Roth discussion to a new thread of its own and merged it with the one he created so all the relevant posts are in one place.

[G-Man]

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Originally Posted by Gumby I have moved the G-Man Roth discussion to a new thread of its own and merged it with the one he created so all the relevant posts are in one place.

Thanks

[NYC1967]

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Originally Posted by TheWizard Ok, so maybe do more Roth contributions now. You also need to consider the eventual size of all tax-deferred accounts and the approximate RMD addition to ordinary income at age 72+. And then also the Roth conversions prior to age 72 to contain and shrink that RMD amount somewhat...

Alot to figure out.....

[doneat54]

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Originally Posted by Gumby Haven't seen it mentioned yet, so I will -- when you input spending into FIRECalc, you must gross up for taxes. For example, if you anticipate actually spending $125k per year, and you are drawing it from a taxable IRA or 401k, you will actually need to draw $160k per year, because you'll be in the federal 22% tax bracket. So, Draw = 160; tax = (0.22 x 160) = ~35; Net to spend = 160 - 35 = 125. If you have state tax, you need to account for that too. The formula for grossing up is this: Desired actual spend/ (1 - marginal tax rate). So $125k/(1.00 - 0.22) = $160,256.00 draw from account. You should use the $160k in FIRECalc, because it is tracking draws on your portfolio, whether that actually goes to taxes or vacation is irrelevant to FIRECalc.

Not all of the $160k will be taxed at 22%. It is a graduated tax scale. Only the last $76k or so would be taxed at 22%. For federal only, with no deductions used, actual fed tax rate on $160K would be 16.52%. I wrote a tax calculator in Excel for this. Results for $160K would be:

[G-Man]

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Originally Posted by doneat54 Not all of the $160k will be taxed at 22%. It is a graduated tax scale. Only the last $76k or so would be taxed at 22%. For federal only, with no deductions used, actual fed tax rate on $160K would be 16.52%. I wrote a tax calculator in Excel for this. Results for $160K would be:

Can you share the tax calculator.

[doneat54]

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Originally Posted by G-Man Can you share the tax calculator.

Happy to. How to share and Excel Spreadsheet though? Some way to attach it here?

[Gumby]

I believe that if you hit "Go advanced", then the "manage attachments" buttons below the quick reply box, you can attach a .xls file

[G-Man]

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Originally Posted by doneat54 Happy to. How to share and Excel Spreadsheet though? Some way to attach it here?

Can you PM me.