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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: ardrum on February 09, 2017, 01:24:18 PM

Title: Would Roth conversion ladder work fine with these numbers?
Post by: ardrum on February 09, 2017, 01:24:18 PM
These are theoretical values based on rough estimates (in today's dollar values) of the proportions of what my assets could be in about 8-9 years based on current trajectory.  Assume I am renting, have no debts, and have $18k annual living expenses.  Also assume willingness to work part-time if necessary going for a flexible 4% SWR.  I am single now, and while I never plan to have children, I may or may not marry.  Assume single though with plans to continue renting housing.

Roth IRA - $89k ($33k of which being contributions)
Traditional IRA - $62k
Traditional 401k - $208k
Taxable Account - $91k

Total: $450,000 (age: 42)

Again, assuming I need $18k/yr, any ideas on the route you'd take with these numbers to FIRE?

Title: Re: Would Roth conversion ladder work fine with these numbers?
Post by: dandarc on February 09, 2017, 01:34:37 PM
You've got the assets to meet the 4% rule, so long-term, things should be OK, particularly if you're willing and able to work part time if needed.  Maybe you want a little more to account for taxes or the possibility of large one-off expenses, but basically you're there.  So the basic problem with the Roth ladder is you need 5 years of expenses available to "prime" the Roth-conversion ladder.

At 18K / year, this means 90K.  You've got $124K which is available penalty-free.

In a vacuum, where your 18K spending continues indefinitely, only going up by inflation, and you don't want some buffer for possible large one-off expenses, that means you should be OK.  Primary risk would be sequence of return - if year 1 the market goes down by half, you have a problem.
Title: Re: Would Roth conversion ladder work fine with these numbers?
Post by: respond2u on February 09, 2017, 11:30:08 PM
going for a flexible 4% SWR.

Again, assuming I need $18k/yr, any ideas on the route you'd take with these numbers to FIRE?

The 4% rule does well for a 30 year retirement (assuming yesterday's weather predicts tomorrows. Ignore Fukishima].
It fails for longer.  See for the origin of the 4% "rule".

Put your numbers into or (tweaking everything) to check things out. Make sure to include Social Security, because you'll definitely need that.  And the idea of a part-time job? Well, maybe. If the economy goes south, you could be in a 10% unemployment scenario vying with people who've actually worked recently. Risky.

As for the Roth conversion ladder, make sure to check its affect on your health care premiums. Any income-based subsidy (current in ACA for 2017, possibly 2018, possible for any Republican replacement) loss will drain off the value of the Roth conversion vs doing a SEPP (72t) when you're 42 through tax inefficiency.

Another consideration is the degradation to health that starts to happen to a man in his 40s. You're entering the age of torn Achilles tendons and the fruits of metabolic syndrome. Unless you have outstanding insurance, you're at risk for a massive shock that will devastate your savings.

Even without that, your health insurance premiums will rise dramatically as you age. I guess if you're not in the US, you'll be OK (and moving to another country is an option, right?)

Do you have the discipline to live off $18K for the rest of your life? Only you can answer that question.

Finally, 9 years is a long time. We don't know if we're at 1929 or 1989 for the stock market...
Title: Re: Would Roth conversion ladder work fine with these numbers?
Post by: ardrum on February 10, 2017, 04:41:39 AM
Thanks for the feedback!

Assuming a 0.5% return over the next 10 years (which many might say is pessimistic), I would still have 25x my annual expenditures by the end of that decade in 2027.  I'm assuming I will earn no additional income than I earn today (in today's dollars) too, and in reality I'm locking up a weekend job now as well that will pay approximately 1.5x more than I make right now on an hourly basis.

I'm not dreading less than 5% real returns (which puts my estimate more at that 8 year mark) in the next 8-9 years though because I generally value my work as a physical therapist.  My main gripe is with the idea of mainstream work-life balance being 5 days on, 2 days off.  Flipping those values seems more appropriate to me. :) 

I also tend to agree that work is better/more rewarding/more tolerable on stressful days when you don't desperately depend on the income associated with it.

I'm not worried about part-time work too because physical therapy is and should continue to be generally in high demand with an aging, deconditioned, obese populace dealing with numerous disease epidemics.  If I switched practice areas to work in nursing facilities, I could increase my income by 10-20% right off the bat (and elderly populations are perhaps my favorite demographic), but I really enjoy the perks at my current job.

PRN part-time work (highest pay) + possibly taking on a roommate would be further buffer along with SS, which I assume doesn't exist as another potential buffer. 

I guess that might help clarify some of the flexibility I'm accepting with a 4% SWR and to address surprise increases in COL. 

My $18k lifestyle has lots of luxury in it I don't need.