Author Topic: Roth Pipeline vs. 4% Nestegg Withdrawal  (Read 1200 times)

Wallerstein

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Roth Pipeline vs. 4% Nestegg Withdrawal
« on: September 12, 2018, 05:42:47 AM »
Adjusting my forecasting spreadsheet for early retirement in 10 years I hit a snag. And it's a snag which illustrates I am missing a central idea. Or am I?

I project I will have the $750,000 needed in tax-advantaged accounts saved up in 10 years from which if I withdraw 4% per year will cover my monthly expenses ($2500/month). The plan is to retire at age 50, start a Roth pipeline of approximately $30,000/year + inflation and live off a $150,000+ taxable account for five years until the Roth conversions season.

At age 55 (until I hit 59.5 and can access the remaining tax-advantaged monies penalty free) I would live off the seasoned Roth conversions. But this decreases my overall $750,000 nestegg by about $150,000. I will no longer have the base amount needed to live off of assuming a 4% withdrawal rate: $500,000 x 4% / 12 = $1667/month.

Is the fundamental problem my $750,000 figure is unrealistic? I took my average monthly spending and multiplied by 300: $2500 x 300 = $750,000.


PowderStache

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Re: Roth Pipeline vs. 4% Nestegg Withdrawal
« Reply #1 on: September 12, 2018, 06:29:02 AM »
You are just ignoring what happens to the $750,000 tax-advantaged accounts during the five years you live off the taxable account, and about what happens to most of it while you withdraw from the Roth account between 55 and 59.5.

reeshau

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Re: Roth Pipeline vs. 4% Nestegg Withdrawal
« Reply #2 on: September 12, 2018, 06:37:56 AM »
There are a few things that are mixed here.  You aren't spending the Roth money, you are just moving it between accounts.  These recharacterized Roth contributions are actually available to you after 5 years.  So, staying on your plan, you have the Roth contributions available as a backup.

Next, the 4% rule was formulated for a 30 year retirement.  You are trying to apply it not just to a subset of your money, but also a subset of time.  Over a time period as short as a decade, there is a higher level of uncertainty:  while the Trinity study assigned a success rate of 93% even for a 6% withdrawal rate, you have to be worried about the *next* 10 years, since we have had a great past decade.  Here, you are using a strategic tool for a tactical decision; you need to get into more details for a real plan.

There's nothing wrong with this as a base plan.  You will have to understand it is planned for "nominal" performance, and you may want to consider alternatives / worst case scenarios to develop your backup plans.


Wallerstein

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Re: Roth Pipeline vs. 4% Nestegg Withdrawal
« Reply #3 on: September 12, 2018, 10:50:51 AM »
You are just ignoring what happens to the $750,000 tax-advantaged accounts during the five years you live off the taxable account, and about what happens to most of it while you withdraw from the Roth account between 55 and 59.5.

You are correct, I missed this growth in my forecasting. For the 5 years of living off the taxable, as I withdraw $30,000/year to convert to a Roth that money as well as the remaining tax-advantaged account monies continue to potentially grow with the market. This is correct? Even though the $30,000/year is in an unseasoned Roth it still is a Roth and I would select whatever investments I prefer. So after 5 years the total (traditional and Roth) would grow on average to:
    FV(7%/12, 60, 0, -750000) = $1,063,219


And to reeshau: I agree with your assessment...my short-term forecast is based on some assumptions that are not wholly guaranteed. I do take on a few assumptions to allow me to plan some retirement but I have other backups to cover some shortfalls.

MustacheAndaHalf

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Re: Roth Pipeline vs. 4% Nestegg Withdrawal
« Reply #4 on: September 13, 2018, 07:21:02 AM »
Planning on an exact 7% return is a bad idea.  There is a nearly 100% chance the market won't do that - far above, or far below - both are possible.  What if you simulate it, instead of trying to arrive at one specific (inaccurate) outcome?

Vanguard has a nest egg calculator where you provide your mix of stocks/bonds/cash, your length of retirement, and withdrawal rate.  It might also help give you a feel for how different withdrawal rates and stock/bond allocations behave in the 10,000 simulations it runs:
https://www.vanguard.com/nesteggcalculator

When I plug in 40 years, $750k, and withdrawing $30k/year, the simulation gives about a 1 in 6 chance of failure.

erutio

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Re: Roth Pipeline vs. 4% Nestegg Withdrawal
« Reply #5 on: September 13, 2018, 08:54:46 AM »
According to your numbers, your nest egg at age 50 will be $900k  ($750k + $150k).

If that is correct, then SWR of 4% gives you $36k/year.  If you really only need 30k per year, well that makes your withdrawal rate about 3.3%, which takes your chance of failure down to almost 0%.