Roth Conversions - McQuarrie study

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lazynovice
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

David Jay wrote: Sat Jun 19, 2021 4:40 pm Dr. McQuarrie:

For background on the demographics here, the Boglehead average and median age of retirement is 58. Fully 70% retire before age 62 so it would be commonplace for folks to have a few years of 100% self funded retirement.
Where are those stats kept? I don’t think I have ever seen them in all these years!
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cbeck
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Re: Roth Conversions - McQuarrie study

Post by cbeck »

bsteiner wrote: Sat Jun 19, 2021 9:26 am
cbeck wrote: Thu Jun 17, 2021 7:11 pm
lazynovice wrote: Thu Jun 17, 2021 4:00 pm ...

One finding is that if you withdraw the money from the Roth before a certain break even period, you didn’t get any benefit. The break even point is 13 to 15 years best case.
Which points out a problem that I have noticed in discussions of Roth. The value of the Roth depends on the expected lifespan of the Roth, not the owner. I expect my Roth to be feeding my younger wife forty years from now.

Another point that I don't see addressed in most of these discussions is the benefit from paying for the Roth conversion with after-tax funds, thereby enabling us to replace the portion of the TIRA which belongs to the govt with our own money. Also, the estate planning benefit of assets exempt from RMDs for the surviving spouse is usually overlooked.

Having done my conversions between the ages of 61 and 70 when my taxable income was close to zero and having a (much) younger wife, I don't see how having most of my assets in the Roth could fail to pay off.
cbeck is correct. He mentions breakeven point many times. But that's not a relevant concept. The proper comparison is between (i) how much money there would be after all taxes on the day the beneficiaries have to withdraw the last dollar from the IRA if you convert, and (ii) how much money there would be after all taxes on the day the beneficiaries have to withdraw the last dollar from the IRA if you convert (or if you convert some specified amounts).

cbeck is also correct that whether you pay the tax on the conversion out of other money is a significant factor. That analysis is the same for contributions as for conversions.
Didn't you mean to compare total after taxes on the last dollar having converted vs not having converted?
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Re: Roth Conversions - McQuarrie study

Post by bsteiner »

cbeck wrote: Sat Jun 19, 2021 7:33 pm
bsteiner wrote: Sat Jun 19, 2021 9:26 am
cbeck wrote: Thu Jun 17, 2021 7:11 pm
lazynovice wrote: Thu Jun 17, 2021 4:00 pm ...

One finding is that if you withdraw the money from the Roth before a certain break even period, you didn’t get any benefit. The break even point is 13 to 15 years best case.
Which points out a problem that I have noticed in discussions of Roth. The value of the Roth depends on the expected lifespan of the Roth, not the owner. I expect my Roth to be feeding my younger wife forty years from now.

Another point that I don't see addressed in most of these discussions is the benefit from paying for the Roth conversion with after-tax funds, thereby enabling us to replace the portion of the TIRA which belongs to the govt with our own money. Also, the estate planning benefit of assets exempt from RMDs for the surviving spouse is usually overlooked.

Having done my conversions between the ages of 61 and 70 when my taxable income was close to zero and having a (much) younger wife, I don't see how having most of my assets in the Roth could fail to pay off.
cbeck is correct. He mentions breakeven point many times. But that's not a relevant concept. The proper comparison is between (i) how much money there would be after all taxes on the day the beneficiaries have to withdraw the last dollar from the IRA if you convert, and (ii) how much money there would be after all taxes on the day the beneficiaries have to withdraw the last dollar from the IRA if you convert (or if you convert some specified amounts).

cbeck is also correct that whether you pay the tax on the conversion out of other money is a significant factor. That analysis is the same for contributions as for conversions.
Didn't you mean to compare total after taxes on the last dollar having converted vs not having converted?
Yes. I fixed it. Thanks for catching it.
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David Jay
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Re: Roth Conversions - McQuarrie study

Post by David Jay »

lazynovice wrote: Sat Jun 19, 2021 4:51 pm
David Jay wrote: Sat Jun 19, 2021 4:40 pm Dr. McQuarrie:

For background on the demographics here, the Boglehead average and median age of retirement is 58. Fully 70% retire before age 62 so it would be commonplace for folks to have a few years of 100% self funded retirement.
Where are those stats kept? I don’t think I have ever seen them in all these years!
I developed them from self-reported retirement ages from previous “Retirement Roll Call 20xx” threads. I first showed them in a Virtual Bogleheads presentation in 2019.

I acknowledge that self-reporting could slew the numbers a little bit, but I am confident that they are good enough to get a “picture” of the BH demographic.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Tdubs
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Re: Roth Conversions - McQuarrie study

Post by Tdubs »

David Jay wrote: Sat Jun 19, 2021 8:00 pm
lazynovice wrote: Sat Jun 19, 2021 4:51 pm
David Jay wrote: Sat Jun 19, 2021 4:40 pm Dr. McQuarrie:

For background on the demographics here, the Boglehead average and median age of retirement is 58. Fully 70% retire before age 62 so it would be commonplace for folks to have a few years of 100% self funded retirement.
Where are those stats kept? I don’t think I have ever seen them in all these years!
I developed them from self-reported retirement ages from previous “Retirement Roll Call 20xx” threads. I first showed them in a Virtual Bogleheads presentation in 2019.

I acknowledge that self-reporting could slew the numbers a little bit, but I am confident that they are good enough to get a “picture” of the BH demographic.
I suspect those who retire early are the most eager to self report.
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David Jay
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Re: Roth Conversions - McQuarrie study

Post by David Jay »

Tdubs wrote: Sat Jun 19, 2021 9:02 pm
David Jay wrote: Sat Jun 19, 2021 8:00 pm
lazynovice wrote: Sat Jun 19, 2021 4:51 pm
David Jay wrote: Sat Jun 19, 2021 4:40 pm Dr. McQuarrie:

For background on the demographics here, the Boglehead average and median age of retirement is 58. Fully 70% retire before age 62 so it would be commonplace for folks to have a few years of 100% self funded retirement.
Where are those stats kept? I don’t think I have ever seen them in all these years!
I developed them from self-reported retirement ages from previous “Retirement Roll Call 20xx” threads. I first showed them in a Virtual Bogleheads presentation in 2019.

I acknowledge that self-reporting could slew the numbers a little bit, but I am confident that they are good enough to get a “picture” of the BH demographic.
I suspect those who retire early are the most eager to self report.
Have you been on the Roll Call threads? I do not get that sense.

A good prercentage of the participants report and many are reporting ages in the 60s and 70s.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
VanGar+Goyle
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Re: Roth Conversions - McQuarrie study

Post by VanGar+Goyle »

I kept expecting the paper to look at multiple Roth conversions, bit it did not. Why would that couple only do one conversion?
Each tax year is a new decision, and can lead to a long series of partial Roth conversions each year.
There are many reasons to recalculate each year, such as changing tax rates, changing tax brackets,
covid-19 suspension of RMDs, state tax changes, birth, marriage, death, old age and blindness.
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VanGar+Goyle
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Re: Roth Conversions - McQ study

Post by VanGar+Goyle »

since Roth accounts always prevail when the compounding period is long enough, the decision calculus is somewhat different for contributions.
My calculus days peaked back in undergrad, so use a simple back of the hand calculation:
Roth grows at 7%,
- taxable account grows at 7% * ( 1 - 0.15 LTCG )
____________________________________________
Roth gains 1% a year.

Your hand may be dealt with differently. ;)
Well, you pay a little bit, we're a little bit tough. | You pay very much,very much tough. | You pay a too much, we're too much a tough. | How much you pay? ... Well, then we're plenty tough. - Marx
Tdubs
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Re: Roth Conversions - McQuarrie study

Post by Tdubs »

David Jay wrote: Sat Jun 19, 2021 9:12 pm
Tdubs wrote: Sat Jun 19, 2021 9:02 pm
David Jay wrote: Sat Jun 19, 2021 8:00 pm
lazynovice wrote: Sat Jun 19, 2021 4:51 pm
David Jay wrote: Sat Jun 19, 2021 4:40 pm Dr. McQuarrie:

For background on the demographics here, the Boglehead average and median age of retirement is 58. Fully 70% retire before age 62 so it would be commonplace for folks to have a few years of 100% self funded retirement.
Where are those stats kept? I don’t think I have ever seen them in all these years!
I developed them from self-reported retirement ages from previous “Retirement Roll Call 20xx” threads. I first showed them in a Virtual Bogleheads presentation in 2019.

I acknowledge that self-reporting could slew the numbers a little bit, but I am confident that they are good enough to get a “picture” of the BH demographic.
I suspect those who retire early are the most eager to self report.
Have you been on the Roll Call threads? I do not get that sense.

A good prercentage of the participants report and many are reporting ages in the 60s and 70s.
Have you? I reviewed the threads for 2020, 2021, and 2022. I didn't find any in their 70s--using the summary list by Miram2. While there were plenty in their 60s, as anyone should expect with an average of 58, I don't think any had reached even FRA, except for two who were 66. If we want to use Medicare age as the definition for early retirement, then throw in a few more at 65. In other words, almost all were early retirees. Perhaps these numbers are a true reflection of BHers, or perhaps the BH early-retirement zeitgeist discourages comments from those who don't make it.
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David Jay
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Re: Roth Conversions - McQuarrie study

Post by David Jay »

Tdubs wrote: Sun Jun 20, 2021 8:14 am
David Jay wrote: Sat Jun 19, 2021 9:12 pm
Tdubs wrote: Sat Jun 19, 2021 9:02 pm
David Jay wrote: Sat Jun 19, 2021 8:00 pm
lazynovice wrote: Sat Jun 19, 2021 4:51 pm

Where are those stats kept? I don’t think I have ever seen them in all these years!
I developed them from self-reported retirement ages from previous “Retirement Roll Call 20xx” threads. I first showed them in a Virtual Bogleheads presentation in 2019.

I acknowledge that self-reporting could slew the numbers a little bit, but I am confident that they are good enough to get a “picture” of the BH demographic.
I suspect those who retire early are the most eager to self report.
Have you been on the Roll Call threads? I do not get that sense [edit: the sense that the younger ones are more eager to report]

A good prercentage of the participants report and many are reporting ages in the 60s and 70s.
Have you? I reviewed the threads for 2020, 2021, and 2022. I didn't find any in their 70s--using the summary list by Miram2. While there were plenty in their 60s, as anyone should expect with an average of 58, I don't think any had reached even FRA, except for two who were 66. If we want to use Medicare age as the definition for early retirement, then throw in a few more at 65. In other words, almost all were early retirees. Perhaps these numbers are a true reflection of BHers, or perhaps the BH early-retirement zeitgeist discourages comments from those who don't make it.
I used RollCall through 2018, see above. I specifically remember a “72” and a “47”, but those were outliers :wink:
Last edited by David Jay on Sun Jun 20, 2021 8:37 am, edited 1 time in total.
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Tdubs
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Re: Roth Conversions - McQuarrie study

Post by Tdubs »

David Jay wrote: Sun Jun 20, 2021 8:26 am
Tdubs wrote: Sun Jun 20, 2021 8:14 am
David Jay wrote: Sat Jun 19, 2021 9:12 pm
Tdubs wrote: Sat Jun 19, 2021 9:02 pm
David Jay wrote: Sat Jun 19, 2021 8:00 pm
I developed them from self-reported retirement ages from previous “Retirement Roll Call 20xx” threads. I first showed them in a Virtual Bogleheads presentation in 2019.

I acknowledge that self-reporting could slew the numbers a little bit, but I am confident that they are good enough to get a “picture” of the BH demographic.
I suspect those who retire early are the most eager to self report.
Have you been on the Roll Call threads? I do not get that sense.

A good prercentage of the participants report and many are reporting ages in the 60s and 70s.
Have you? I reviewed the threads for 2020, 2021, and 2022. I didn't find any in their 70s--using the summary list by Miram2. While there were plenty in their 60s, as anyone should expect with an average of 58, I don't think any had reached even FRA, except for two who were 66. If we want to use Medicare age as the definition for early retirement, then throw in a few more at 65. In other words, almost all were early retirees. Perhaps these numbers are a true reflection of BHers, or perhaps the BH early-retirement zeitgeist discourages comments from those who don't make it.
I used RollCall through 2018, see above. I specifically remember a “72” and a “47”, but those were outliers :wink:
So the "many" in their 70s was one? :happy
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David Jay
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Re: Roth Conversions - McQuarrie study

Post by David Jay »

Tdubs wrote: Sun Jun 20, 2021 8:32 am
David Jay wrote: Sun Jun 20, 2021 8:26 am
Tdubs wrote: Sun Jun 20, 2021 8:14 am
David Jay wrote: Sat Jun 19, 2021 9:12 pm
Tdubs wrote: Sat Jun 19, 2021 9:02 pm

I suspect those who retire early are the most eager to self report.
Have you been on the Roll Call threads? I do not get that sense.

A good prercentage of the participants report and many are reporting ages in the 60s and 70s.
Have you? I reviewed the threads for 2020, 2021, and 2022. I didn't find any in their 70s--using the summary list by Miram2. While there were plenty in their 60s, as anyone should expect with an average of 58, I don't think any had reached even FRA, except for two who were 66. If we want to use Medicare age as the definition for early retirement, then throw in a few more at 65. In other words, almost all were early retirees. Perhaps these numbers are a true reflection of BHers, or perhaps the BH early-retirement zeitgeist discourages comments from those who don't make it.
I used RollCall through 2018, see above. I specifically remember a “72” and a “47”, but those were outliers :wink:
So the "many" in their 70s was one? :happy
I don’t have the old spreadsheet in front of me, but I don’t understand your emotional investment here. If you don’t like my numbers, develop a more current set. It won’t hurt my feelings…
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Tdubs
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Re: Roth Conversions - McQuarrie study

Post by Tdubs »

David Jay wrote: Sun Jun 20, 2021 8:40 am
Tdubs wrote: Sun Jun 20, 2021 8:32 am
David Jay wrote: Sun Jun 20, 2021 8:26 am
Tdubs wrote: Sun Jun 20, 2021 8:14 am
David Jay wrote: Sat Jun 19, 2021 9:12 pm
Have you been on the Roll Call threads? I do not get that sense.

A good prercentage of the participants report and many are reporting ages in the 60s and 70s.
Have you? I reviewed the threads for 2020, 2021, and 2022. I didn't find any in their 70s--using the summary list by Miram2. While there were plenty in their 60s, as anyone should expect with an average of 58, I don't think any had reached even FRA, except for two who were 66. If we want to use Medicare age as the definition for early retirement, then throw in a few more at 65. In other words, almost all were early retirees. Perhaps these numbers are a true reflection of BHers, or perhaps the BH early-retirement zeitgeist discourages comments from those who don't make it.
I used RollCall through 2018, see above. I specifically remember a “72” and a “47”, but those were outliers :wink:
So the "many" in their 70s was one? :happy
I don’t have the old spreadsheet in front of me, but I don’t understand your emotional investment here. If you don’t like my numbers, develop a more current set. It won’t hurt my feelings…
The emotional investment is yours since these are your numbers. You exaggerated how many older people were represented in the results and don't want to walk it back.
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Re: Roth Conversions - McQuarrie study

Post by retiredjg »

I think this thread is difficult enough to follow without going off into another tangent. :?
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Re: Roth Conversions - McQuarrie study

Post by retired@50 »

McQ wrote: Fri Jun 18, 2021 1:04 am Bogleheads: Edward McQuarrie here...
Welcome to the forum. :happy

I'll be looking forward to the additional conditions you mention (single taxpayer, etc.) in the future revisions.

Regards,
This is one person's opinion. Nothing more.
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Re: Roth Conversions - McQuarrie study

Post by iceport »

lazynovice wrote: Thu Jun 17, 2021 4:30 pm
iceport wrote: Thu Jun 17, 2021 4:24 pm
lazynovice wrote: Thu Jun 17, 2021 4:16 pm
iceport wrote: Thu Jun 17, 2021 3:34 pm
ckangas wrote: Thu Jun 17, 2021 3:22 pm There are so many things which depend on personal circumstance.
That's so true!

Conveying that message would probably be the best way to counter misleading or overly simplified personal finance articles.

I must admit, I find Roth conversions a very confusing strategy. I'm doing them, but without a crystal ball, I don't know how much it will benefit me. But tax-deferred contributions were made in a 25% tax bracket, so I figure if I can convert in the 22% bracket, I'm saving at least 3% in federal taxes off the top.

During all my years making tax-deferred contributions, I never expected such a tax break!

(And that should be a big lesson here: We just don't know what our future tax rates will be until we get there.)
Sure you are saving 3%, but could you still be overpaying?
I don't know. Doesn't that require knowing my future tax rate(s)?

A modest pension will keep me firmly within what is currently the 22% tax bracket. No really low income years.
Unless the pension is COLA adjusted, the tax brackets will inflate while the pension stands still. And if you are using post tax dollars to pay current taxes what is the opportunity cost of what you could be making there with an opportunity in a step up in basis at death. I don’t know the answer.
I think you finally arrived at the correct answer: Without knowing future tax laws and future personal circumstances, a deterministic solution to the question is usually impossible, no matter how much other data is known.

The Utkas Uncertainty Principle applies here, informally named after a (now or former) principal at the Vanguard Center for Retirement Research in Valley Forge, Pennsylvania.
When you put $100 into your 401(k) plan, you have no idea at that moment what your ultimate tax savings from that contribution is going to be. That savings depends on future tax rates.

Just recognizing tax uncertainty is the beginning of wisdom.
It seems this principle applies equally to Roth conversions. Thus, the concept of not placing — or not keeping, in the case of Roth conversions — all one's savings in one tax treatment basket becomes a relevant strategy to address tax uncertainty.
"Discipline matters more than allocation.” ─William Bernstein
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Re: Roth Conversions - McQuarrie study

Post by McQ »

David Jay wrote: Sat Jun 19, 2021 4:40 pm Dr. McQuarrie:

For background on the demographics here, the Boglehead average and median age of retirement is 58. Fully 70% retire before age 62 so it would be commonplace for folks to have a few years of 100% self funded retirement.
Helpful. More of an early retirement group than I understood. The very last section of Appendix alpha in the paper considers the power of voluntary early withdrawals with respect to reducing a TDA balance, and how these can be combined with Roth conversions to drive the age 72 TDA balance way down.

Not sure anyone knows the answer to this question, but here goes: I wonder where the median Boglehead fits in the larger universe of individuals with substantial IRA or 401(k) balances? Reports by Fidelity indicate that even a $1 million dollar TDA balance puts a saver in the 98th to 99th percentile among the 16 million or so accounts they administer.
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

McQ wrote: Sun Jun 20, 2021 12:04 pm
David Jay wrote: Sat Jun 19, 2021 4:40 pm Dr. McQuarrie:

For background on the demographics here, the Boglehead average and median age of retirement is 58. Fully 70% retire before age 62 so it would be commonplace for folks to have a few years of 100% self funded retirement.
Helpful. More of an early retirement group than I understood. The very last section of Appendix alpha in the paper considers the power of voluntary early withdrawals with respect to reducing a TDA balance, and how these can be combined with Roth conversions to drive the age 72 TDA balance way down.

Not sure anyone knows the answer to this question, but here goes: I wonder where the median Boglehead fits in the larger universe of individuals with substantial IRA or 401(k) balances? Reports by Fidelity indicate that even a $1 million dollar TDA balance puts a saver in the 98th to 99th percentile among the 16 million or so accounts they administer.
For both groups, you’d have to stratify. David Jay is quoting stats for retired Bogleheads.

There are plenty of Bogleheads still accumulating (ages 21 to 67) or working for the fun of it as opposed to money. Just as Fidelity’s 401(k) stat includes my 401(k) at age 50 versus my 23 year old son’s. And then there are the people who have two or three 401(k)s for various reasons- investment choices, fees, laziness. I doubt great data exists but certainly a Fidelity or a Vanguard could get to it if it advantaged them.

I’d say this forum, the early retirees and the Roth converters skew heavily toward those with defined benefit pension plans which are becoming less common for the younger set.
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Re: Roth Conversions - McQuarrie study

Post by LadyGeek »

McQ wrote: Sun Jun 20, 2021 12:04 pm Not sure anyone knows the answer to this question, but here goes: I wonder where the median Boglehead fits in the larger universe of individuals with substantial IRA or 401(k) balances? Reports by Fidelity indicate that even a $1 million dollar TDA balance puts a saver in the 98th to 99th percentile among the 16 million or so accounts they administer.
I'll take a stab at this. We currently have 108,890 registered members, but only a few members who actually post in the forum. Also, self-reported data can not be verified.

Your question has no answer because (1) we don't have a statistically significant amount of responses and (2) the data is not verifiable.
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Re: Roth Conversions - McQuarrie study

Post by curmudgeon »

McQ wrote: Sun Jun 20, 2021 12:04 pm Not sure anyone knows the answer to this question, but here goes: I wonder where the median Boglehead fits in the larger universe of individuals with substantial IRA or 401(k) balances? Reports by Fidelity indicate that even a $1 million dollar TDA balance puts a saver in the 98th to 99th percentile among the 16 million or so accounts they administer.
There's no reliable data. People also drift in and out of being active members of the community, often based on looking for advice on various life events (including retirement, but also divorce, widowhood, inheritance, etc). People who take an active interest in finance and investing will definitely tend have saved more than their peers at any income level. Probably the most common factor here is a "Live Below Your Means" mindset, but that spans a quite wide range of lifestyles from very frugal to quite luxurious.

We get a lot of people who are approaching retirement, and looking for advice on the transition. Many will ask about Roth conversions, because they have read about them in the press. Quite often for these folks there is no significant value in doing Roth conversions, because their retirement income and IRA sizes are unlikely to ever push them into higher tax brackets.

We also get quite a few of what might be called "super savers". These are folks who saved early and often in their careers, and they are interested in learning what level of savings will let them retire with an equivalent lifestyle to what they had in their working years. When they hit that point, working is purely optional, whether they are age 45, 55, or 65. These people are often the sweet spot for considering Roth conversions; they typically have savings beyond just retirement accounts, and flexibility in how they recognize taxable income in the years prior to SS and RMDs.

While a few of the "super savers" have IRAs in the $4M plus range, I would say far more have a mix of tax-deferred and taxable savings. The silicon valley workers who made big chunks of money off of options or RSUs got that on the taxable side (and probably paid heavy taxes at the time). It seems like it's mostly the medical professionals who have been able to use the employer-side contribution limits to get really big 401Ks.
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Re: Roth Conversions - McQuarrie study

Post by mouth »

curmudgeon wrote: Sun Jun 20, 2021 3:36 pm
McQ wrote: Sun Jun 20, 2021 12:04 pm Not sure anyone knows the answer to this question, but here goes: I wonder where the median Boglehead fits in the larger universe of individuals with substantial IRA or 401(k) balances? Reports by Fidelity indicate that even a $1 million dollar TDA balance puts a saver in the 98th to 99th percentile among the 16 million or so accounts they administer.
It seems like it's mostly the medical professionals who have been able to use the employer-side contribution limits to get really big 401Ks.
And frugal federal/military retirees with sizable TSPs and COLA'd pensions. For the military retirees those pensions also start very young. As early as 38 for enlisted (ave. $20k-$30k) and 42 for officers (ave. $46-60k).

Those pension levels will be shrinking with the new blended retirement system, but for now the generation of military retirees in the sweet spot of your analysis still have the "good" pension and like me might have had many years without the option for a Roth TSP while sitting in a ridiculously low tax bracket [bangs head] due to so much of our compensation being tax free. With many working years ahead of us and a pension supplementing our compensation, we have a chance to accumulate even more of a nest egg if we continue to be frugal.
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Re: Roth Conversions - McQuarrie study

Post by The Stone Wall »

In addition, for super savors, the period between 2009 and now has magnified their retirement portfolios. Bogleheads tend towards the high savers if not super savors.
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Re: Roth Conversions - McQuarrie study

Post by McQ »

lazynovice wrote: Sun Jun 20, 2021 12:17 pm
McQ wrote: Sun Jun 20, 2021 12:04 pm
David Jay wrote: Sat Jun 19, 2021 4:40 pm Dr. McQuarrie:

For background on the demographics here, the Boglehead average and median age of retirement is 58. Fully 70% retire before age 62 so it would be commonplace for folks to have a few years of 100% self funded retirement.
Helpful. More of an early retirement group than I understood. The very last section of Appendix alpha in the paper considers the power of voluntary early withdrawals with respect to reducing a TDA balance, and how these can be combined with Roth conversions to drive the age 72 TDA balance way down.

Not sure anyone knows the answer to this question, but here goes: I wonder where the median Boglehead fits in the larger universe of individuals with substantial IRA or 401(k) balances? Reports by Fidelity indicate that even a $1 million dollar TDA balance puts a saver in the 98th to 99th percentile among the 16 million or so accounts they administer.
For both groups, you’d have to stratify. David Jay is quoting stats for retired Bogleheads.

There are plenty of Bogleheads still accumulating (ages 21 to 67) or working for the fun of it as opposed to money. Just as Fidelity’s 401(k) stat includes my 401(k) at age 50 versus my 23 year old son’s. And then there are the people who have two or three 401(k)s for various reasons- investment choices, fees, laziness. I doubt great data exists but certainly a Fidelity or a Vanguard could get to it if it advantaged them.

I’d say this forum, the early retirees and the Roth converters skew heavily toward those with defined benefit pension plans which are becoming less common for the younger set.
That point about pensions is one of several knowledge gains for me from attending this forum. I hadn't grasped the military retiree case in particular, not part of my circle. That's a Silicon Valley circle, highly compensated employees, no defined benefit pension, none of the excess employer-side contributions possible to medical partnerships and the like; just high bracket wage income. So I may have to expand my Table 2, distinguishing social security only, from social security + substantial pension, where the thresholds to move up into the 22% or 24% bracket may be quite lower, per earlier exchanges. Still hard for me to imagine that anyone outside the executive class will be pushed into the 32% bracket by RMDs (~$9 million balance if social security / pension income = $90,000 in 2027, $6.3 million if social security + pension = $190,000).
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Re: Roth Conversions - McQuarrie study

Post by chazas »

McQ wrote: Sun Jun 20, 2021 12:04 pm
David Jay wrote: Sat Jun 19, 2021 4:40 pm Dr. McQuarrie:

For background on the demographics here, the Boglehead average and median age of retirement is 58. Fully 70% retire before age 62 so it would be commonplace for folks to have a few years of 100% self funded retirement.
Helpful. More of an early retirement group than I understood. The very last section of Appendix alpha in the paper considers the power of voluntary early withdrawals with respect to reducing a TDA balance, and how these can be combined with Roth conversions to drive the age 72 TDA balance way down.

Not sure anyone knows the answer to this question, but here goes: I wonder where the median Boglehead fits in the larger universe of individuals with substantial IRA or 401(k) balances? Reports by Fidelity indicate that even a $1 million dollar TDA balance puts a saver in the 98th to 99th percentile among the 16 million or so accounts they administer.
I’m at 3.4M. It’s the bulk of assets.
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Re: Roth Conversions - McQuarrie study

Post by delamer »

McQ wrote: Sun Jun 20, 2021 5:16 pm
Helpful. More of an early retirement group than I understood. The very last section of Appendix alpha in the paper considers the power of voluntary early withdrawals with respect to reducing a TDA balance, and how these can be combined with Roth conversions to drive the age 72 TDA balanc
That point about pensions is one of several knowledge gains for me from attending this forum. I hadn't grasped the military retiree case in particular, not part of my circle. That's a Silicon Valley circle, highly compensated employees, no defined benefit pension, none of the excess employer-side contributions possible to medical partnerships and the like; just high bracket wage income. So I may have to expand my Table 2, distinguishing social security only, from social security + substantial pension, where the thresholds to move up into the 22% or 24% bracket may be quite lower, per earlier exchanges. Still hard for me to imagine that anyone outside the executive class will be pushed into the 32% bracket by RMDs (~$9 million balance if social security / pension income = $90,000 in 2027, $6.3 million if social security + pension = $190,000).
For MFJ taxpayers, I appreciate your point.

But for some of us with pensions, Social Security, and income from taxable accounts, being widowed could push us into the 32% bracket with RMDs from much smaller (although not small by most standards) tax-deferred balances.

With current rates, an income of about $180,000 (pre-standard deduction) puts a single filer in the 32% bracket.

And a $2 million tax deferred account(s) with an RMD factor of 25 would yield $80,000.

Thanks for joining Bogleheads and taking the time to post on this thread.
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Re: Roth Conversions - McQuarrie study

Post by LilyFleur »

delamer wrote: Sun Jun 20, 2021 5:47 pm
McQ wrote: Sun Jun 20, 2021 5:16 pm
Helpful. More of an early retirement group than I understood. The very last section of Appendix alpha in the paper considers the power of voluntary early withdrawals with respect to reducing a TDA balance, and how these can be combined with Roth conversions to drive the age 72 TDA balanc
That point about pensions is one of several knowledge gains for me from attending this forum. I hadn't grasped the military retiree case in particular, not part of my circle. That's a Silicon Valley circle, highly compensated employees, no defined benefit pension, none of the excess employer-side contributions possible to medical partnerships and the like; just high bracket wage income. So I may have to expand my Table 2, distinguishing social security only, from social security + substantial pension, where the thresholds to move up into the 22% or 24% bracket may be quite lower, per earlier exchanges. Still hard for me to imagine that anyone outside the executive class will be pushed into the 32% bracket by RMDs (~$9 million balance if social security / pension income = $90,000 in 2027, $6.3 million if social security + pension = $190,000).
For MFJ taxpayers, I appreciate your point.

But for some of us with pensions, Social Security, and income from taxable accounts, being widowed could push us into the 32% bracket with RMDs from much smaller (although not small by most standards) tax-deferred balances.

With current rates, an income of about $180,000 (pre-standard deduction) puts a single filer in the 32% bracket.

And a $2 million tax deferred account(s) with an RMD factor of 25 would yield $80,000.

Thanks for joining Bogleheads and taking the time to post on this thread.
This forum tends to skew toward the married folks, and the MFJ tax bracket is much kinder than the single bracket.

However, In the U.S., 27% of adults ages 60 and older live alone, a phenomenon mostly limited to the most wealthy nations in the world.

It is wise to consider that possibility in our financial planning.

https://www.pewresearch.org/fact-tank/2 ... the-world/
Last edited by LilyFleur on Sun Jun 20, 2021 6:16 pm, edited 1 time in total.
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Re: Roth Conversions - McQuarrie study

Post by delamer »

LilyFleur wrote: Sun Jun 20, 2021 6:01 pm
delamer wrote: Sun Jun 20, 2021 5:47 pm
McQ wrote: Sun Jun 20, 2021 5:16 pm
Helpful. More of an early retirement group than I understood. The very last section of Appendix alpha in the paper considers the power of voluntary early withdrawals with respect to reducing a TDA balance, and how these can be combined with Roth conversions to drive the age 72 TDA balanc
That point about pensions is one of several knowledge gains for me from attending this forum. I hadn't grasped the military retiree case in particular, not part of my circle. That's a Silicon Valley circle, highly compensated employees, no defined benefit pension, none of the excess employer-side contributions possible to medical partnerships and the like; just high bracket wage income. So I may have to expand my Table 2, distinguishing social security only, from social security + substantial pension, where the thresholds to move up into the 22% or 24% bracket may be quite lower, per earlier exchanges. Still hard for me to imagine that anyone outside the executive class will be pushed into the 32% bracket by RMDs (~$9 million balance if social security / pension income = $90,000 in 2027, $6.3 million if social security + pension = $190,000).
For MFJ taxpayers, I appreciate your point.

But for some of us with pensions, Social Security, and income from taxable accounts, being widowed could push us into the 32% bracket with RMDs from much smaller (although not small by most standards) tax-deferred balances.

With current rates, an income of about $180,000 (pre-standard deduction) puts a single filer in the 32% bracket.

And a $2 million tax deferred account(s) with an RMD factor of 25 would yield $80,000.

Thanks for joining Bogleheads and taking the time to post on this thread.
This forum tends to skew toward the married folks, and the MFJ tax bracket is much kinder than the single bracket.

However, In the U.S., 27% of adults ages 60 and older live alone, a phenomena mostly limited to the most wealthy nations in the world.

It is wise to consider that possibility in our financial planning.

https://www.pewresearch.org/fact-tank/2 ... the-world/
As someone pointed out either earlier in this thread (or maybe in another one), one spouse of now-married retired couples is almost certainly going to have a period of widowhood where s/he is paying taxes under the single bracket rates.
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David Jay
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Re: Roth Conversions - McQuarrie study

Post by David Jay »

McQ wrote: Sun Jun 20, 2021 12:04 pm
David Jay wrote: Sat Jun 19, 2021 4:40 pm Dr. McQuarrie:

For background on the demographics here, the Boglehead average and median age of retirement is 58. Fully 70% retire before age 62 so it would be commonplace for folks to have a few years of 100% self funded retirement.
Helpful. More of an early retirement group than I understood. The very last section of Appendix alpha in the paper considers the power of voluntary early withdrawals with respect to reducing a TDA balance, and how these can be combined with Roth conversions to drive the age 72 TDA balance way down.

Not sure anyone knows the answer to this question, but here goes: I wonder where the median Boglehead fits in the larger universe of individuals with substantial IRA or 401(k) balances? Reports by Fidelity indicate that even a $1 million dollar TDA balance puts a saver in the 98th to 99th percentile among the 16 million or so accounts they administer.
One issue with that Fidelity stat is that it is age-independent. I suspect something well under 0.1% of 25 year old Fidelity customers have a $1,000,000 balance. On the other end, I am confident the number is well north of the quoted 2% for 65 year old Fidelity customers.

Breaking out the numbers by age would give a much different picture, as TDA accounts are expected to grow over the employment years.
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Re: Roth Conversions - McQuarrie study

Post by David Jay »

McQ wrote: Sun Jun 20, 2021 5:16 pmStill hard for me to imagine that anyone outside the executive class will be pushed into the 32% bracket by RMDs (~$9 million balance if social security / pension income = $90,000 in 2027, $6.3 million if social security + pension = $190,000).
Are those numbers based on the Age 72 RMD percentage?
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Roth Conversions - McQuarrie study

Post by mouth »

Another fun aspect for federal and military retirees is access to very inexpensive healthcare. Tricare for Military and FEHB for civilians. That makes ACA considerations moot during conversion years. For military retirees at least, once 65 we must enroll in Part A and Part B if we want to retain Tricare coverage as well. So IRMAA is a factor; good news is Part D isn't needed so that's not a factor. I assume it's the same for Feds.
Last edited by mouth on Sun Jun 20, 2021 7:54 pm, edited 1 time in total.
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Re: Roth Conversions - McQuarrie study

Post by ChrisC »

McQ wrote: Sun Jun 20, 2021 5:16 pm That point about pensions is one of several knowledge gains for me from attending this forum. I hadn't grasped the military retiree case in particular, not part of my circle. That's a Silicon Valley circle, highly compensated employees, no defined benefit pension, none of the excess employer-side contributions possible to medical partnerships and the like; just high bracket wage income. So I may have to expand my Table 2, distinguishing social security only, from social security + substantial pension, where the thresholds to move up into the 22% or 24% bracket may be quite lower, per earlier exchanges. Still hard for me to imagine that anyone outside the executive class will be pushed into the 32% bracket by RMDs (~$9 million balance if social security / pension income = $90,000 in 2027, $6.3 million if social security + pension = $190,000).
Well, our last working years in Government (Federal and County) service we easily drifted into the 32% bracket, and we weren't even at the top of our wage scales at our respective agencies. And some Government agencies having generous TDA matching programs (not just TSP), with many employees exhibiting super saving tendencies, it's not surprising for this group of Federal annuitants (both civilian and military) to amass oversized TDAs. Moreover, when one of us passes, the survivor will likely be in a much higher tax bracket -- in my case, had I not done conversions starting in 2013, in all likelihood the survivor would be in the 35% bracket.

Regarding the size of pensioner TDAs, a number of Federal or Military retirees can retire after 20-25 years of service, migrate over to the private sector, don't need Medicare Part B, start earning considerable more in the private sector than they earned in the Government -- along with another 401k sponsored with a match by the new employer -- and you now have someone with a Federal pension, with a high draw from Social Security and TDAs that are in the $5-8 million range and then retire at 70! A few have posted here, and I know of a few of these folks in real time and these just aren't high paying, award recognized scientific reseach biologists from NIH, but they could have been former, military/civilian officials who hit pay dirt working in the private sector. (There's a general view that professionals, executives, and managers in Government are grossly underpaid compared to their private sector counterparts and that administrative and clerical employees in Government are grossly overpaid when compared to their private sector counterparts.)

You could also have the reverse too such as former partners at big law firms who spend the last 10 years of their practice life in Government to obtain FEHB (federal employer health insurance) and a pension. Early in my Government career, I remember a number of women, ages 50-60, who went into Government service, after spending years raising children, just to get FEHB coverage and a Government pension; My wife did the same thing with her County government service -- spent 6 years there to get a defined benefit pension, along with making contributions to the County's 401a and 457 plans.

BTW, perhaps it's not representative of people who post here, but another forum specifically targetted to those seeking guidance on early retirement, polled its members about whether they had a pension; more than half said they had a government or corporate pension:https://www.early-retirement.org/forums ... 09239.html
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Re: Roth Conversions - McQuarrie study

Post by curmudgeon »

McQ wrote: Sun Jun 20, 2021 5:16 pm That point about pensions is one of several knowledge gains for me from attending this forum. I hadn't grasped the military retiree case in particular, not part of my circle. That's a Silicon Valley circle, highly compensated employees, no defined benefit pension, none of the excess employer-side contributions possible to medical partnerships and the like; just high bracket wage income. So I may have to expand my Table 2, distinguishing social security only, from social security + substantial pension, where the thresholds to move up into the 22% or 24% bracket may be quite lower, per earlier exchanges. Still hard for me to imagine that anyone outside the executive class will be pushed into the 32% bracket by RMDs (~$9 million balance if social security / pension income = $90,000 in 2027, $6.3 million if social security + pension = $190,000).
I have an elderly relative who was pushed into the 32% bracket several years ago. By no means in the executive class, just a mid-level government employee who was fairly frugal. With Social Security and a pension, in the early years most of her RMDs just moved over and added to her taxable savings. As a rough example, $50K in SS benefits, $40K in pension, $15K in capital gains, $25K in dividends (interest rates were still significant on bonds). At age 92, all it took was a $600K IRA balance to push her into the 32% bracket (and 4th IRMAA tier), because the RMD divisor was down to 9.8. Now at age 97, it's less of an issue, as the big RMDs have been knocking down the IRA balance much faster than the investment growth even as low interest rates have cut down the dividend/interest income.
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Re: Roth Conversions - McQuarrie study

Post by McQ »

David Jay wrote: Sun Jun 20, 2021 7:19 pm
McQ wrote: Sun Jun 20, 2021 5:16 pmStill hard for me to imagine that anyone outside the executive class will be pushed into the 32% bracket by RMDs (~$9 million balance if social security / pension income = $90,000 in 2027, $6.3 million if social security + pension = $190,000).
Are those numbers based on the Age 72 RMD percentage?
Yes--post November 2020 IRS decision, age 72 divisor of 27.3, arrayed against 2027 tax brackets, projected by applying annual inflation of 2.5% against 2020 brackets (Table 2 in the paper).
:!: Of course, at current CPI rates, 2022 brackets may be 5% above 2021 brackets, a double jump.
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Re: Roth Conversions - McQuarrie study

Post by international001 »

I am missing something,

But under what conditions are Roth conversions not worth? Assume brackets don't move. If you are at a tax bracket 22% during conversion, then you convert because you think RMD will push you to 24% bracket. IS the premise of the article that you won't go actually get pushed to 24%

Beyond the numbers, any simple example you can show about the working hypothesis will be appreciated.
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Re: Roth Conversions - McQuarrie study

Post by Chip »

McQ wrote: Sun Jun 20, 2021 5:16 pm That point about pensions is one of several knowledge gains for me from attending this forum. I hadn't grasped the military retiree case in particular, not part of my circle. That's a Silicon Valley circle, highly compensated employees, no defined benefit pension, none of the excess employer-side contributions possible to medical partnerships and the like; just high bracket wage income.
It's also a possibility that the Silicon Valley connection is influencing your base case construction. I can somewhat understand how a couple earning 400k in SV could be spending every cent after taxes and TDA contributions, but isn't that situation heavily influenced by the cost of SV housing and the generally higher cost of living?

As an example, looking at Santa Clara real estate on realtor.com shows a median listing price of 1.3M. In my area of flyover country the median listing price is 315k. A "nice" house might cost $150/sq ft, including a 3/4 acre lot. Of course salaries would be lower here (and income taxes), but it wouldn't be uncommon for a professional couple to pull in 150k x 2.

Of course my take on this is heavily influenced by my own history: childless couple that retired under age 50 with significant taxable and TDA accounts. And yes, we have converted significant amounts at 12% and 15% tax rates. :happy
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Re: Roth Conversions - McQuarrie study

Post by mouth »

Further adding to the example, this year I'm going to be dipping my toes into the 35% bracket because of a nice raise, bonus, and filing single (on top of military pension). If I stop working right now my pension is just short of the 22% bracket. To fund my current living expenses from savings lands me into the bottom quartile of the 22% bracket. This is why I'm so interested in the nuances of Roth conversions since I'm not in the "obvious answer" zone and so many discussions miss the mark a bit. I've run the models but they have their limits as discussed.
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Re: Roth Conversions - McQuarrie study

Post by printer86 »

LadyGeek wrote: Sun Jun 20, 2021 12:23 pm
McQ wrote: Sun Jun 20, 2021 12:04 pm Not sure anyone knows the answer to this question, but here goes: I wonder where the median Boglehead fits in the larger universe of individuals with substantial IRA or 401(k) balances? Reports by Fidelity indicate that even a $1 million dollar TDA balance puts a saver in the 98th to 99th percentile among the 16 million or so accounts they administer.
I'll take a stab at this. We currently have 108,890 registered members, but only a few members who actually post in the forum. Also, self-reported data can not be verified.

Your question has no answer because (1) we don't have a statistically significant amount of responses and (2) the data is not verifiable.
As LadyGeek's numbers above show, the Bogleheads forum is a niche within a niche. However, for those in that sub-niche, the nuances of Roth conversions are an important part of retirement planning. I find McQ's challenge of writing a broad based study on the practicality of Roth conversions almost impossible since personal finance is really a confederation of niches.

I would suggest that he write something that articulates the specific drivers that move the needle on whether Roth conversions make sense. This thread has definitely highlighted some of those specific drivers.
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Re: Roth Conversions - McQuarrie study

Post by retiredjg »

printer86 wrote: Mon Jun 21, 2021 8:21 am I find McQ's challenge of writing a broad based study on the practicality of Roth conversions almost impossible since personal finance is really a confederation of niches.
I agree.

Th frustration about writing about Rob and Sue is that very few people will look like Rob and Sue and yet all of us are looking for guidance on this very complex issue.
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Re: Roth Conversions - McQuarrie study

Post by printer86 »

retiredjg wrote: Mon Jun 21, 2021 8:39 am
printer86 wrote: Mon Jun 21, 2021 8:21 am I find McQ's challenge of writing a broad based study on the practicality of Roth conversions almost impossible since personal finance is really a confederation of niches.
I agree.

Th frustration about writing about Rob and Sue is that very few people will look like Rob and Sue and yet all of us are looking for guidance on this very complex issue.
Just to add, what McQ describes on page 3 of his study as a highly unlikely scenario (a retired couple with a significant TDA and hundreds of thousands of dollars just sitting in a taxable account) describes our household perfectly. For me, it's almost not worth reading the remaining 42 pages.
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Re: Roth Conversions - McQuarrie study

Post by delamer »

mouth wrote: Sun Jun 20, 2021 7:50 pm Another fun aspect for federal and military retirees is access to very inexpensive healthcare. Tricare for Military and FEHB for civilians. That makes ACA considerations moot during conversion years. For military retirees at least, once 65 we must enroll in Part A and Part B if we want to retain Tricare coverage as well. So IRMAA is a factor; good news is Part D isn't needed so that's not a factor. I assume it's the same for Feds.
There isn’t any requirement to enroll in Part B for civilians.

We can keep FEHB coverage without taking Part B at 65. That’s one way to get out from under IRMAA.
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Re: Roth Conversions - McQuarrie study

Post by mouth »

delamer wrote: Mon Jun 21, 2021 9:08 am
mouth wrote: Sun Jun 20, 2021 7:50 pm Another fun aspect for federal and military retirees is access to very inexpensive healthcare. Tricare for Military and FEHB for civilians. That makes ACA considerations moot during conversion years. For military retirees at least, once 65 we must enroll in Part A and Part B if we want to retain Tricare coverage as well. So IRMAA is a factor; good news is Part D isn't needed so that's not a factor. I assume it's the same for Feds.
There isn’t any requirement to enroll in Part B for civilians.

We can keep FEHB coverage without taking Part B at 65. That’s one way to get out from under IRMAA.
Ah interesting. Maybe I WILL take a govvie job for a few years ;-) Well at least I know I am out of Part D IRMAA regardless of income. Despite all my modelling I can't seem to stay out of Part B

EDIT: correction, looks like the IRMAA I'm seeing is the first tier no one can avoid. I can't avoid the next level with conversions up to the top of the 22% bracket but at least I avoid RMD's. Even converting up to 24% doesn't avoid the second IRMAA tier.
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Re: Roth Conversions - McQuarrie study

Post by TonyDAntonio »

Prokofiev wrote: Thu Jun 17, 2021 2:22 pm Although the article is basically right for the majority of people, many/most Bogle Heads will be in the group that
can gain from Roth conversions. Many early retirees will have years with little income. I retired at 47 and will take SS
at 70, giving me 23 years of conversions at a 0,10,12 or 14/15% tax bracket. My post-72 income will be huge and force me
into much higher brackets. At least some Roth conversion is a no-brainer for me.

The article is also correct that for high-worth individuals, the amount saved by conversions is a relatively small % of
total worth and not likely to move the needle on retiree wealth. True. But if I can save $100k in taxes, I'll take it - even if
it only represents 1-5% of my total portfolio.
I agree. I'm in this boat and I haven't done any great calculations but I retired at 55, will take RMDs at 72 (?now) and have most of my money in IRAs/401ks. Seems like a no brainer to do some amount of conversions during those 17 years. And like most of my investment decisions I'm taking the minimal-brainer route.
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Re: Roth Conversions - McQuarrie study

Post by iceport »

retiredjg wrote: Mon Jun 21, 2021 8:39 am
printer86 wrote: Mon Jun 21, 2021 8:21 am I find McQ's challenge of writing a broad based study on the practicality of Roth conversions almost impossible since personal finance is really a confederation of niches.
I agree.

Th frustration about writing about Rob and Sue is that very few people will look like Rob and Sue and yet all of us are looking for guidance on this very complex issue.
And another frustration (which gets the better of me, at times) is the frequency with which changes in Rob and Sue's particular lives or changes in tax laws will render all the tediously constructed deterministic tax planning scenarios moot.

From the 2005 Vanguard paper (now outdated), Tax Diversification and the Roth 401(k):
The history of continuous change in the tax code, along with these research findings, underscores the inherent uncertainty of future tax rates. Participants cannot be sure of their tax rate in retirement, and so cannot be sure of whether pre-tax or Roth savings are inherently superior. The tax system is dynamic and seems subject to almost continuous change. Current reform proposals call for everything from higher tax rates (favoring Roth savings) to a scrapping of the income tax entirely (possibly favoring pre-tax savings).

In this environment of uncertainty, how should participants manage the risk that taxes could be higher or lower in retirement? In the face of such risk, our recommendation is to diversify. In an uncertain tax world, participants should hold both pre-tax and Roth savings—the former to benefit in the event of lower tax rates in retirement, the latter to benefit in the event of higher tax rates. This is the notion of tax diversification—hedging the risk of uncertain future tax rates by holding both types of contributions.

There is a direct analogy between tax risk and investment risk. Investors may believe that common stocks are likely to generate a substantial equity risk premium. Yet they also recognize that higher equity returns are not guaranteed, and so diversify against that risk by holding other assets such as fixed income securities. In the case of taxes, participants may expect taxes to be lower (suggesting pre-tax savings) or higher (Roth savings) in retirement. But in pursuing a strategy of tax diversification, they will acknowledge the inherent uncertainty of forecasting any future tax rates, including their own, and so hold both types of savings.
"...acknowledge the inherent uncertainty of forecasting any future tax rates, including their own..."

The author does address this tax uncertainty, but only marginally, and only assuming minor, easily envisioned changes, which result in only minor differences in outcomes, apparently. And that's ironic, given that a major inspiration for the detailed analysis was the changes in tax laws in only the last 10 years — highlighted in the very first paragraph — the kind so bombastically dismissed later as irrelevant (because we only have one government :confused ).
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Re: Roth Conversions - McQuarrie study

Post by McQ »

printer86 wrote: Mon Jun 21, 2021 8:21 am
LadyGeek wrote: Sun Jun 20, 2021 12:23 pm
McQ wrote: Sun Jun 20, 2021 12:04 pm Not sure anyone knows the answer to this question, but here goes: I wonder where the median Boglehead fits in the larger universe of individuals with substantial IRA or 401(k) balances? Reports by Fidelity indicate that even a $1 million dollar TDA balance puts a saver in the 98th to 99th percentile among the 16 million or so accounts they administer.
I'll take a stab at this. We currently have 108,890 registered members, but only a few members who actually post in the forum. Also, self-reported data can not be verified.

Your question has no answer because (1) we don't have a statistically significant amount of responses and (2) the data is not verifiable.
As LadyGeek's numbers above show, the Bogleheads forum is a niche within a niche. However, for those in that sub-niche, the nuances of Roth conversions are an important part of retirement planning. I find McQ's challenge of writing a broad based study on the practicality of Roth conversions almost impossible since personal finance is really a confederation of niches.

I would suggest that he write something that articulates the specific drivers that move the needle on whether Roth conversions make sense. This thread has definitely highlighted some of those specific drivers.
Please see Table 7 on p. 16 and the surrounding discussion for an attempt to articulate the drivers.
Re the "challenge of writing a broad-based study": that's all I can or want to do as a scholar. If the paper was doomed from the start, because everything is a niche, then we've all been wasting our time on this forum since Thursday night. Speaking personally, my time has not been at all wasted--I've gotten valuable ideas for how the working paper might be revised.
I do fear that what you and jg are requesting is something that no paper (and no discussion forum) can provide: customized assistance that directly addresses your unique individual circumstance. As a scholar I can only devise a conceptual frame for you (the paper) and a spreadsheet you can adapt to implement those concepts in your case (on my website): http://www.edwardfmcquarrie.com/?p=573
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Re: Roth Conversions - McQuarrie study

Post by joe_the_buckeye »

I think there's another consideration.

A Roth conversion would also be beneficial in that it effectively allows you to put more funds in a tax advantaged account. Assuming that the real value of an IRA is the sticker value x (1-income tax rate) and that the real value of a Roth IRA is simply the sticker value, converting Roth funds in this scenario allows you to shift more of your real wealth to the tax-advantaged account and out of the taxable account (almost as if the contribution cap for the tax-advantaged account was lifted entirely). Obviously there are a few assumptions here, including:

1) You max your tax-advantaged space currently
2) Your current tax rate is less than or equal to your retirement tax rate
3) You have sufficient taxable funds to pay for the conversion without using tax-advantaged resources

Otherwise, given that it is a Boglehead principle to fund tax-advantaged accounts prior to taxable, this seems like a clear win for the Roth? Or am I missing something?
lazynovice
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Re: Roth Conversions - McQuarrie study

Post by lazynovice »

joe_the_buckeye wrote: Mon Jun 21, 2021 1:25 pm I think there's another consideration.

A Roth conversion would also be beneficial in that it effectively allows you to put more funds in a tax advantaged account. Assuming that the real value of an IRA is the sticker value x (1-income tax rate) and that the real value of a Roth IRA is simply the sticker value, converting Roth funds in this scenario allows you to shift more of your real wealth to the tax-advantaged account and out of the taxable account (almost as if the contribution cap for the tax-advantaged account was lifted entirely). Obviously there are a few assumptions here, including:

1) You max your tax-advantaged space currently
2) Your current tax rate is less than or equal to your retirement tax rate
3) You have sufficient taxable funds to pay for the conversion without using tax-advantaged resources

Otherwise, given that it is a Boglehead principle to fund tax-advantaged accounts prior to taxable, this seems like a clear win for the Roth? Or am I missing something?
Did you read the study?
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
retiredjg
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Re: Roth Conversions - McQuarrie study

Post by retiredjg »

McQ wrote: Mon Jun 21, 2021 1:14 pm I do fear that what you and jg are requesting is something that no paper (and no discussion forum) can provide: customized assistance that directly addresses your unique individual circumstance.
Please do not misunderstand the intent of my comment. :happy

I was not speaking about my frustration with the paper. I have not even finished reading it yet!. My comment was about possible frustration as an author knowing that your conclusions only apply to the situation you have described...while people are clamoring for answers for every situation possible.

Every day people here ask if they should do Roth conversions or not. And if yes, how much and when? Lots of people are looking for answers and guidelines for this decision.

My concern is not about your paper. My concern is that people with very different scenarios are going to look at your paper as guidance without realizing that what you say about Rob and Sue's situation may not apply to them at all.
McQ
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Re: Roth Conversions - McQuarrie study

Post by McQ »

printer86 wrote: Mon Jun 21, 2021 8:54 am
retiredjg wrote: Mon Jun 21, 2021 8:39 am
printer86 wrote: Mon Jun 21, 2021 8:21 am I find McQ's challenge of writing a broad based study on the practicality of Roth conversions almost impossible since personal finance is really a confederation of niches.
I agree.

Th frustration about writing about Rob and Sue is that very few people will look like Rob and Sue and yet all of us are looking for guidance on this very complex issue.
Just to add, what McQ describes on page 3 of his study as a highly unlikely scenario (a retired couple with a significant TDA and hundreds of thousands of dollars just sitting in a taxable account) describes our household perfectly. For me, it's almost not worth reading the remaining 42 pages.
[with a nod to jg's response] Printer86, here is a second reply focused on your situation, which may make the paper more palatable. If you have "hundreds of thousands of dollars just sitting in a taxable account," then the proper counterfactual to a Roth conversion for you can be set up as follows:
Either:
1. deplete those funds over the next few years to fund a series of Roth conversions in the bottom brackets, each time writing a large check to the government, and locking up the converted funds under the five-year rule;
2. or, right now, take every surplus dollar and put it into the lowest cost, Total Market Index ETF you can find, there in the taxable account. Tax on dividends will subtract 30 basis points in return, otherwise you get the market return over what could be 40 - 50 years or more (heirs never have to sell the ETF, unlike the Roth).
The paper considers a similar scenario (table alpha 5, p. 25). The Roth conversion will still win if you have to liquidate the funds while alive. The reason is the embedded unrealized capital gain in the long-held ETF. But the Roth advantage over the taxable account may be much smaller than you expect; the ETF structure is incredibly tax-efficient in the case of stock index ETFs.
BTW, your situation is also considered in Table 6, pp. 14-15
printer86
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Re: Roth Conversions - McQuarrie study

Post by printer86 »

McQ wrote: Mon Jun 21, 2021 1:14 pm
printer86 wrote: Mon Jun 21, 2021 8:21 am
LadyGeek wrote: Sun Jun 20, 2021 12:23 pm
McQ wrote: Sun Jun 20, 2021 12:04 pm Not sure anyone knows the answer to this question, but here goes: I wonder where the median Boglehead fits in the larger universe of individuals with substantial IRA or 401(k) balances? Reports by Fidelity indicate that even a $1 million dollar TDA balance puts a saver in the 98th to 99th percentile among the 16 million or so accounts they administer.
I'll take a stab at this. We currently have 108,890 registered members, but only a few members who actually post in the forum. Also, self-reported data can not be verified.

Your question has no answer because (1) we don't have a statistically significant amount of responses and (2) the data is not verifiable.
As LadyGeek's numbers above show, the Bogleheads forum is a niche within a niche. However, for those in that sub-niche, the nuances of Roth conversions are an important part of retirement planning. I find McQ's challenge of writing a broad based study on the practicality of Roth conversions almost impossible since personal finance is really a confederation of niches.

I would suggest that he write something that articulates the specific drivers that move the needle on whether Roth conversions make sense. This thread has definitely highlighted some of those specific drivers.
Please see Table 7 on p. 16 and the surrounding discussion for an attempt to articulate the drivers.
Re the "challenge of writing a broad-based study": that's all I can or want to do as a scholar. If the paper was doomed from the start, because everything is a niche, then we've all been wasting our time on this forum since Thursday night. Speaking personally, my time has not been at all wasted--I've gotten valuable ideas for how the working paper might be revised.
I do fear that what you and jg are requesting is something that no paper (and no discussion forum) can provide: customized assistance that directly addresses your unique individual circumstance. As a scholar I can only devise a conceptual frame for you (the paper) and a spreadsheet you can adapt to implement those concepts in your case (on my website): http://www.edwardfmcquarrie.com/?p=573
McQ, Sorry if you interpreted my comments as a criticism of your paper. It was more an observation on the difficulty of the task you undertook. I will take a look at table 7 when I get to page 16 (I'm a very slow reader).

Also, I was not seeking individually specific guidance, but rather highlighting how difficult it is to cover all the valid scenarios.
Chip
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Re: Roth Conversions - McQuarrie study

Post by Chip »

Based on my calculations it appears that Rob & Sue can't retire in the manner envisioned in the base case and maintain anywhere close to their pre-retirement spending level. My calculations all are in constant 2020 dollars, so tax brackets don't change and neither does social security. Investment returns from the base case are reduced by the inflation rate to approximate a real return. Wage growth is assumed to be 1% real.

The base case scenario had their joint wage earnings at 400k at age 64, with 52k deferred into 401ks. Total taxes (2020 rates) are 119k (67k Federal, 29k CA and 23k FICA+Medicare. This leaves spendable income of 229k (400-52-119). The assumption in the base case is that all of this money is spent, since there is no money being saved in a taxable account.

The base case also assumes that one of the couple will retire at age 65 and that no further 401k contributions will be made from that point forward. With 200k of wage income and no deferrals, taxes will be 56k (30k Federal, 15k CA and 11k FICA+Medicare). This leaves spendable income of 144k. This calculation ignores IRMAA effects.

To achieve their pre-retirement spending level of 233k, they will have to pull enough from TDA to net 89k after tax. This works out to roughly a 129k withdrawal from their 2.9M TDAs.

This size withdrawal will actually slightly reduce their TDA balance, given that the nominal return in the base case is 5.51%; a real return of about 3%, given the assumed inflation rate of 2.5%. Note that this withdrawal rate is roughly 4.5% of their portfolio, above the oft-used 4% "guideline".

At age 70 social security begins. The 106k referenced in the base case deflates to 94k 2020 dollars, of which 85% is federally taxable and 0% taxable in CA. This income, plus the favorable tax treatment, allows much less to be pulled from the TDAs for spending; less than 10k each year.

At age 72 the second retirement begins. Total of the TDA accounts is now at about 2.8M. Replacing the lost wage income requires significant TDA withdrawals, approximately 200k/year. This corresponds to a withdrawal rate of close to 7% while facing a 23 year retirement if both live to age 95.

If the 200k withdrawals continue they will exhaust all savings before age 90, after less than 18 years of full retirement.
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