The 5-year wait on the Conversion ladder

[Jude]

Hi all! First-time poster.

I have a question about the Roth Conversion ladder plan - not so much about how to do the conversions (saw those threads) but how to manage my stash for the 5 year wait period. I may be missing something really obvious - if so, please let me know (or point me to appropriate thread).

Let's say get $1,000,000 and retire, with a plan to use the 4% safe withdrawal rate of $40,000. And let's say that, given my Roth conversion plan, I have to wait 5 years to start taking money out of my retirement accounts. This means that once I retire, I have to come up with $40,000 per year, for 5 years, to live, ($200,000 total)

My question is, where do I get this $200,000? If I sell part of my $1,000,000, this will obviously cut into my stash and then my withdrawal rate. But I can't get it from returns because presumably my taxed investments won't that much. Do I have to save up $1,200,000 so I can have that $200,000 buffer (this would obviously delay my retirement, and it just doesn't make sense to burn through cash that could be invested, just to save on taxes).

This seems so basic a question that it might be obvious; or perhaps I'm missing something fundamental. If so, please enlighten me. Thank you!

[arebelspy]

Yes, you'd need it in taxable, or you'd have to pay taxes on those withdrawals the first few years.

If you're ERing, it's likely you saved outside taxable accounts, and didn't hit 1MM in your 401k by maxing that at 18k/yr (less in the past) and saved 0 outside that.

[Jude]

Okay, I get that I'm selling taxable savings, since of course I can't get 1MM into 401k/IRAs. But am I just selling off taxable stocks for cash to live on? Doesn't that burn through my original stash? (or am I supposed to write " 'stache"?) That $200,000 could be growing interest for the rest of my life.

Or, are you saying that I'm just living off of taxable returns for those 5 years? In which case, I'd have to make sure my taxable investments were large enough to provide a $40,000 return (not a given, depending on various factors), or cut spending for those 5 years.

[arebelspy]

Okay, I get that I'm selling taxable savings, since of course I can't get 1MM into 401k/IRAs. But am I just selling off taxable stocks for cash to live on? Doesn't that burn through my original stash? (or am I supposed to write " 'stache"?) That $200,000 could be growing interest for the rest of my life.

Or, are you saying that I'm just living off of taxable returns for those 5 years? In which case, I'd have to make sure my taxable investments were large enough to provide a $40,000 return (not a given, depending on various factors), or cut spending for those 5 years.

You always sell off stocks to get your annual spend, it's just that with a 4% WR, typically (historically) you never run out, because they go up more than that (I'm drastically over simplifying for clarity's sake).

So yes, you sell from that 200k, but the rest is going up. It's no different than if all of it was in the same bucket and you sold from that--it's a wash.

[Gone Fishing]

Okay, I get that I'm selling taxable savings, since of course I can't get 1MM into 401k/IRAs. But am I just selling off taxable stocks for cash to live on? Doesn't that burn through my original stash? (or am I supposed to write " 'stache"?) That $200,000 could be growing interest for the rest of my life.

Or, are you saying that I'm just living off of taxable returns for those 5 years? In which case, I'd have to make sure my taxable investments were large enough to provide a $40,000 return (not a given, depending on various factors), or cut spending for those 5 years.

You can burn through your taxable stocks during the 5 year start-up period because you are not touching your taxed advantaged accounts during this time and they are continuing to grow.  If all goes as planned, all of my taxable investments will be exhausted and every penny I have will end up in my ROTH over time (20+- years).

[Jude]

You always sell off stocks to get your annual spend, it's just that with a 4% WR, typically (historically) you never run out, because they go up more than that (I'm drastically over simplifying for clarity's sake).

So yes, you sell from that 200k, but the rest is going up. It's no different than if all of it was in the same bucket and you sold from that--it's a wash.

Yes! I get it. I was mixing up WR with expected returns, and thinking that I would have to be living off of returns and not selling stocks. I knew I was thinking about it wrong but I couldn't see how until I read your second response. Thank you!

[Jude]

You can burn through your taxable stocks during the 5 year start-up period because you are not touching your taxed advantaged accounts during this time and they are continuing to grow.  If all goes as planned, all of my taxable investments will be exhausted and every penny I have will end up in my ROTH over time (20+- years).

Thanks, So Close. That helps me start thinking about how to split my investments between retirement and taxable.