Seeking Advice

[camfused]

Roth conversions do not count towards RMDs... so once RMDs are required you need to take the RMD as a withdrawal and then if you wish to you can do Roth conversions on top of the RMD.

Oh! Ok, I need to adjust plans for that.

 

[camfused]

Just a quick update. Due to an error in some of my calculations, we no longer will have any money left over with any of the plans, at 100. I would just barely make it to 100, so I will look into making sure that I don't last that long. Also, I am now going to start seeing how I can trim projected expenses. Roth is probably out of the picture now, since I would not have enough left to pass on to make it worth the bother.

I did learn a lot here though, so thanks for the help.

 

[pb4uski]

Are you getting the similar results if you put the same assumptions into ORP?

 

[rayvt]

Just a quick update. Due to an error in some of my calculations, we no longer will have any money left over with any of the plans, at 100. I would just barely make it to 100, so I will look into making sure that I don't last that long.

Time to take up skydiving.

Seriously, my wife had that epiphany a few years ago with respect to going on a zip-line excursion in Belize. What was she risking---a few more years of slurping gruel at 90?

 

[MBAustin]

If you are philanthropically minded, another option to mitigate some of the Roth conversion tax bite is to also contribute to a Donor Advised Fund in those years, then use the fund in the years where you have no/low tax liabilities for your charitable donations since the tax deduction won't be a factor.

 

[Sunset]

Just a quick update. Due to an error in some of my calculations, we no longer will have any money left over with any of the plans, at 100. I would just barely make it to 100, so I will look into making sure that I don't last that long. Also, I am now going to start seeing how I can trim projected expenses. Roth is probably out of the picture now, since I would not have enough left to pass on to make it worth the bother.

I did learn a lot here though, so thanks for the help.

That is soooo funny, I was thinking the other day about you and wondering what if you have an error and end up eating dog food because you wanted to pay such high tax rates willingly (reducing your investment) and then have many years of zero RMD's..

Glad you found ONE of your errors.

One thought I had was the extra complexity in your calculations, to be able to compare account levels, you need to have the same factor. So instead of varying the increase/decrease each year, use a flat (example 4%) as the after inflation return, and a flat inflation rate.

The answer it gives will be correct for comparative purposes.
There is no use modeling a monte carlo effect as you are not running thousands of cases, better to pick the best approach comparatively as that is the most money route.

I suspect your variation in yearly returns is different per accounts or senerio's and is introducing errors that you don't see.

 

[brokrken]

Just a quick update. Due to an error in some of my calculations, we no longer will have any money left over with any of the plans, at 100. I would just barely make it to 100, so I will look into making sure that I don't last that long. Also, I am now going to start seeing how I can trim projected expenses. Roth is probably out of the picture now, since I would not have enough left to pass on to make it worth the bother.

I did learn a lot here though, so thanks for the help.

Well, that was a swift change in direction of the conversation

 

[camfused]

An update: I was busy for a bit, so have not a had a chance to update here. I changed my plan to adjust the yearly expenses (primarily travel) a bit as we get older (by decade), and also adjusted the projected inflation rate from 3.5% down to 3%. All the plans look better now, and the winner is one where I move money from 401K bucket over to Roth bucket between 60 and 70 (yearly amounts are about $80K). We end up with about $2.5M at 100, and always have enough in the Cash bucket.

Its a big week for me, since I will be presenting this plan to my (normally disinterested in anything financial) DW. If she approves, I will FIRE end of next year and we start a new chapter in our lives.

 

[joeea]

Perhaps the following is for another thread: I am always puzzled how "normal" people doing things financially. For the past 20+ years, I have had every aspect of my current and future finances planned out in various spreadsheets (I have every car purchase planned out until I die). My family makes fun of me, but of course have no problems driving those cars or doing the nice travel we do (enabled by budgeting and savings).

I am just amazed how people get by without all the type of knowledge that is in these threads. DD just graduated from college with a humanities degree, and is pretty intelligent. Yet, she doesn't know squat about anything financial, like car loans, mortgages, investments, etc. I have been teaching her, as she becomes interested, but it is amazing what the education system does NOT teach people.

We all have our strengths and weaknesses.

Some are good at financial planning, others pay for help. Some are good at automotive work, others pay for help. Some are good at yardwork, others pay for help. Some are good at cooking, others pay for help. And so on...

Not to be critical, but you came up with two plans, then quickly changed to a third after reading a few posts here. Then you found some errors and made modifications. Spreadsheets are fun - I too have fun with detailed spreadsheets. But we need to remember that they are only a model of reality. Sometimes reality has a mind of its own.

If you've been planning your financial future for 20+ years, you certainly know that plans need to be adjusted as the world moves on. Mike Tyson once said "Everyone has a plan until they get punched in the mouth."

 

[Winemaker]

^^^ I had numerous talks in the early years with DD and DS. DD always wanted to know why everything always had to do with money. Educated as an engineer, everything I did was always measured in safety, cost and productivity. DS is an mechanical engineer now and gets it.
DD is just now getting it as she approaches 40.

 

[camfused]

Yeah, I hear ya. I am just reporting progress as I find things out, in an effort to help others.

I know that trying to plan ANYTHING for a period of 40 years is slightly nuts. Then throw in money / voodoo related items like the Stock Market, and you are even nuttier. But, because of the way I am wired, I *cannot* have no plan, and the plans were beneficial to see how one plan *may* be better than others. I know the actual dollar amounts will absolutely not turn out to be as predicted, but I am looking at relative comparisons. What I have tried to do is consider all *known* factors that should be considered, and I am a whole lot smarter now about it than I was when I started.

 

[joeea]

Yeah, I hear ya. I am just reporting progress as I find things out, in an effort to help others.

I know that trying to plan ANYTHING for a period of 40 years is slightly nuts. Then throw in money / voodoo related items like the Stock Market, and you are even nuttier. But, because of the way I am wired, I *cannot* have no plan, and the plans were beneficial to see how one plan *may* be better than others. I know the actual dollar amounts will absolutely not turn out to be as predicted, but I am looking at relative comparisons. What I have tried to do is consider all *known* factors that should be considered, and I am a whole lot smarter now about it than I was when I started.

Sounds great.

You might want to run your plans by a certified financial planner, who could help you learn about factors that are unknown to you, but known to them. You could find one that will charge a flat fee to take a look at your plan (or you could pay by the hour). It may be money well spent and result in a stronger plan with a higher probability of success.

Some planners would even take a look at your spreadsheets with you and help get them right.

 

[GravitySucks]

also adjusted the projected inflation rate from 3.5% down to 3%. All the plans look better now, .

Thanks for adjusting the expected inflation rate. My plans now look better too.

 

[Sunset]

An update: I was busy for a bit, so have not a had a chance to update here. I changed my plan to adjust the yearly expenses (primarily travel) a bit as we get older (by decade), and also adjusted the projected inflation rate from 3.5% down to 3%. All the plans look better now, and the winner is one where I move money from 401K bucket over to Roth bucket between 60 and 70 (yearly amounts are about $80K). We end up with about $2.5M at 100, and always have enough in the Cash bucket.

Its a big week for me, since I will be presenting this plan to my (normally disinterested in anything financial) DW. If she approves, I will FIRE end of next year and we start a new chapter in our lives.

So I would like to know how you think having all the money moved to a ROTH vs leaving $400,000 (for example) in an IRA results in you having more money by 100 ??

Also are you counting money in today dollars, or inflating them ?

Finally how are you sure that all your return factors (the stock market moves per year) are exactly the same for each senerio each year. Are you hard coding them or are you allowing them to be randomly calculated within a boundary. ?

 

[flintnational]

Interesting thread.

My random thoughts - some have already been stated.

1) Stay flexible - we do not know the future. I would want some money in Roths, taxable and non taxable accounts

2) Keep it simple - the more complicated your model, the higher the likelihood for errors. The 4% rule is probably more accurate than a complicated model with lots of variables. Small changes in a single variable amplified by decades can yield wide fluctuations. If I wanted a more complicated model for withdrawals, I would use I-Orp as my starting point.

3) Taxes vs. longevity - It is not likely that you will be extremely old and worrying about both high taxes and running out of money. If you have one issue, you will not likely have the other. So, why prepay taxes now? If your assets under perform or you over spend, you will eventually be in a lower tax bracket.

4) Seniors are politically powerful - While we don't know the future, seniors vote in large numbers and historically the tax code has favored this group.

5) Roth conversions - as others have stated, make conversions that maximize the lower tax brackets

 

[Nightcap]

I'm probably missing something, but if your current annual expenses are 63K, and that's roughly what you draw down from tax-deferred investments, and assuming you file your taxes as married filing jointly, your marginal tax bracket under TrumpTax is 12%. Why pay 22% to convert an extra $70K to Roth?

 

[camfused]

So I would like to know how you think having all the money moved to a ROTH vs leaving $400,000 (for example) in an IRA results in you having more money by 100 ??

Also are you counting money in today dollars, or inflating them ?

Finally how are you sure that all your return factors (the stock market moves per year) are exactly the same for each senerio each year. Are you hard coding them or are you allowing them to be randomly calculated within a boundary. ?

Q1: I am not sure why, but that is the scenario that works out best in my model.

Q2: Future dollars, inflated at 3% annually. Doesn't matter, I think, as long as I compare all monies in the scenarios the same way. I know that $2.5M in 40 years is worth $730K in today's dollars.

Q3: Yes, the modeled returns are the same for each scenario. Even though a constant return is easier to work with, I feel it does not reflect reality much. Therefore, I came up with the following that I used for each scenario:
Year Return
1 -0.250
2 0.150
3 0.000
4 0.050
5 -0.180
6 0.140
7 0.120
8 0.160
9 -0.120
10 0.010
11 0.150
12 0.060
13 -0.050
...

which is a first year big loss, followed by the pattern of 3 years of gain and 1 year of loss. It all averages out to 4.2% over the 40 years. I don't know if it is any better than something like a constant 4.2% gain, but I just thought it might be more realistic. I generated these numbers one time and use the same set in all scenarios.

 

[camfused]

As for i-orp, as has been suggested a couple of times before, I looked at it briefly, and it looked like the simple run was not going to be very accurate, and I need to come back to it sometime and do the detailed run. Thanks, I will get to it sometime.

 

[camfused]

I'm probably missing something, but if your current annual expenses are 63K, and that's roughly what you draw down from tax-deferred investments, and assuming you file your taxes as married filing jointly, your marginal tax bracket under TrumpTax is 12%. Why pay 22% to convert an extra $70K to Roth?

On my current best scenario, I am keeping my Roth conversions just barely inside the 12% bracket, thanks.

 

[Sunset]

Q1: I am not sure why, but that is the scenario that works out best in my model.

......

So that is very scary since you are going to plan your future on it.
Once you know which way is better, then you should be able to figure out why it is better to confirm that it actually is better.

Otherwise it could be wrong, and you don't know it.

Other things you are not considering will end up biting you as you will have lost a lot of flexibility.
Example: what if in 10 years after you have emptied your IRA, interest rates spike, like they did back around 1980, all the people that have a spare $125,000 in their IRA could buy a well paying annuity, removing that $125,000 from RMD calculations and then enjoy life long high payments as interest rates again fall to normal.

 

[wmc1000]

To be contrarian, I model my worst case scenario using an annual inflation rate of 4% with an annual investment return and SS increase of 2% over a 30 - 35 year lifespan.

Start SS at FRA and budget for a SS haircut of 23% starting in 2034. Still in the black, I am good!

 

[camfused]

Update: This evening, I went over with my DW the plans and info y'all have been giving me here, and in other threads. We agreed on one of the scenarios, and I have the green light to FIRE end of next year.

This plan meets the revised goals of a) having the most money in our 80s and early 90s, b) not excessive taxes, and c) has plenty in the Cash bucket. In this scenario, I take SS at 62, she also takes half of that until 70 and then starts taking her own, and we convert some money the first 10 years (until RMDs kick in) from 401K to Roth. This scenario is not the one with the most money at 100, but is the one with the most money for most of the 40 year span (including when we are in our 80s and early 90s).

Also, I will adjust our AA to 60/40 in a few days, and not touch it, other than rebalancing once or twice a year.

Hopefully this employs most of the advice from you fine folks, so thanks everyone.

 

[N02L84ER]

Update: This evening, I went over with my DW the plans and info y'all have been giving me here, and in other threads. We agreed on one of the scenarios, and I have the green light to FIRE end of next year.

I take SS at 62, she also takes half of that until 70 and then starts taking her own...

The tax law changed in 2016 regarding the underlined portion. You needed to be aged 62 in 2016 to continue to be allowed to "take half of that" while allowing her own to grow. If/when she files she will get the larger of her own at that time or half of yours.

 

[camfused]

Nuts! Ok, thanks.