Update on how much do I need to stop worrying

While I was working on organizing my non-probatable assets, I read few personal finance blogs.

All say about the same:
Trinity study is obviously the best or the most popular study to determine your withdrawal rate to make sure the money will last trough the retirement time. And that is 4% withdrawal rate on $3,000,000 saved.

Some people, especially in the comments section, were concerned about market downturns which no one can ever predict.

That made me think about the market downturns.
I went to the stock charts and checked how deep did the market go while recent market "crushes".

The drawdown was about 50% for indexes. It was more variable for stocks. 

Here are some of my thoughts on how to combat that:

Option 1: The downturns are temporary. I can sit them out.
Especially if I accumulated for many years and the average price will not be the top price. The 50% decrease will be  from the top price (and not from the average price) and that will not be as critical after years of accumulating. 
   
Option 2: I can increase my magic number from $3,000,000 to $5-6,000,000. That number appears to be difficult to reach, because I don't know if I even reach the $3,000,000. And I will have to call it the "super-magic number".

But if the downturn is about 50% only from the top price and it might be only about 30% from the average, I might need only approximately 30% increase in the magic number and that will be approximately $4,000,000. This is still very far out but looks more doable.

Option 3: I could create an additional source of income. Dividends would be one option. Dividends, in most cases, are paid during marked downturns and can help to bridge that time. I can't think of any other realistic options working full time.

Recalculation of "How much do I need to stop worrying" - now it looks much better and simpler.

I am not a political person but this week I attended a meeting with Congressman Phil Roe as a key note speaker. One of the things he talked about was the Social Security. 

In his opinion social security will persist but it will change. One of the things what may change is that the retirement age will be pushed further toward 70. The other is that people may be vetted in based on their available retirement resources.  
The last one, the vetting (or means testing), worries me because that will mean all the paid in money will be gone, because very likely I will not qualify if they start vetting in. 

As you see in my other post I calculated how long the retirement savings will last, the second table was calculated without social security benefits. I calculated that with very conservative 1% yearly return rate.  
It looks like it might be enough until I am 97 years old. But as you know I have a "Challenge102" going to beat my granduncle who is 102 years old. In that case the money can become tight and I don't like it. 

Somewhere I read about the risk to die without using up all your money or "outliving your money" but it doesn't concern me at all. I am generous and my daughter can have whatever is left. 

Back to the retirement calculations. There is a way to improve this situation and this is to reach a higher rate of return, 5% will probably do it. 

Now I am changing the previously very conservative return rate of 1% to more realistic return rate of 5% per year and recalculating everything.  

I used bankrate retirement income calculator with settings of 3% inflation and 5% yearly returns. Per that calculator the $3,000,000 will be enough. After 50 years the ending amount is still approximately $3,000,000 and I can withdraw about $13,000 per month before taxes for 50 years without changing the capital (it is because they use withdrawal rate of 4% which is less them my set return rate of 5%). 

With this monthly withdrawal amount the ending balance will still be $3,000,000. If I want to withdraw more, I will have to use some of the capital but it still should be enough. 

Now, after this recalculation it looks like I only need 2 things:
1. I need to reach $3,000,000 in savings.
2. I need to reach stable 5% yearly return after I reach $3,000,000 in my savings. 

This simplification is motivating.
Here are my new 2 goals which I will track and update:
1. Track the savings and see when I will reach this magic number of $3,000,000. 
2. Learn how to reach stable 5% return per year. 
(3). Beat my granduncle so all my savings efforts make sense. 

When I reach the goals I will celebrate big! 

Will taxes in retirement be lower?

There are two views on how taxes will change in retirement. Some say they will go up or stay the same, the others say they will go down. Who is right? 

I wanted to know the answer when I got a recommendation from my 401k administrator to convert my 401k to a Roth 401k. 
He is convinced that it will be beneficial for me to convert and pay taxes now and get the distributions tax free later when I am retired. Yes I am in a high tax bracket now. But will it really stay the same in retirement? 


One possibility is that taxes in retirement will be the same or increase. This notion is mainly based on the fear and the experience that lately the taxes are more often increasing and rarely decreasing. 

The second view is that the taxes in retirement will be lower. This view is based on current tax code and the expectation that the tax laws will not change very much. 


When you work, you mostly just get a salary as a source of income - as one type of income.
When you retire, you will have different types of income. And the tax rules are different for different types of income. 

Here is the list of the most common types of income in retirement: 

1. Social Security benefits
This will only be taxed if you have additional income. No other income - no tax.
If you have additional income, up to 85% of Social Security benefits can be taxable.

  
2. 401k distributions
Traditional (non-Roth) 401k - the withdrawals will be taxed.
Roth 401 - withdrawals are not taxed.


3. IRA distributions 
Traditional IRA - withdrawals will be taxed. 
Roth IRA  - withdrawals are not taxed.


4. Investment gains (from taxable accounts)
Taxed will be dividends, capital gains (short or long term) and interest. 
If you are a HIP (=high income professional), you will "run out space" in your 401k and IRA due to the contribution limits and will have taxable savings and investment accounts with dividends, interest and capital gains.



5. Annuities
Some will have annuity distributions. Depending on the type of annuity different tax rules will apply.



I used various calculators, they are complicated. At the end I have an impression that my taxes in the retirement will either stay the same or will be lower. I asked my CPA and she hedged with "It is not possible to predict but generally the taxes are lower in retirement". 

I used various calculators, some were simple, some complicated. At the end I have an impression that my taxes in retirement will either stay the same or will be lower. 
That may influence some decisions like 401k to Roth 401k conversion. 
But overall it would be best just to have so much money that taxes will not matter.  

What is better - 401k or Roth 401k?

Will taxation in retirement matter for this choice?

My 401k plan adviser recommended to convert my 401k to a Roth 401k. That move will trigger substantial immediate taxes at the time of conversion. 
But it should make the later distributions tax free. 


Would this conversion make sense? 


Traditional 401k contributions are pre-tax. The money grows tax-deferred. When the money is withdrawn, every withdrawn dollar is taxed as ordinary income.

Roth 401k contributions are post-tax. Every contributed dollar is taxed. The money also grows tax-deferred. When the money is withdrawn, it is not taxed. 

With a Roth 401k I basically prepay my future taxes now.

When I pre-pay my taxes now, it will be at my current high tax bracket.
In retirement I will very likely have lower tax bracket.
It already doesn't make sense to pre-pay. 

In addition, I will probably not use up all my 401k money and part of the pre-paid taxes will go "unused".

My answer to my 401k adviser will be No.