My Roth Misunderstanding

[kylemerriman]

I am new to all of this...
When calculating for retirement I have been planning on withdrawing 100% of my roth at 60 years old and 100% of my wife's roth when she is 70 years old. Now that I am reading the four pillars of investing I see my mistake. Instead of taking the future value of my roth and dividing it by the number of years I want it to last to obtain an annual salary, I should be aiming for an overall balance that will allow me to live off of the interest without ever "cashing out" 100% of the roth balance, but instead letting it continue to grow. Not sure why but I didn't think about living off the interest. This will allow me to not have to fully fund two roths, but only one, and free up capital now to invest in other areas. So if I live to 80 can the roth keep growing or does it have to be completely "cashed out" at 70? Given my income it is not feasible to fully fund two right now.

[Wakefield1]

I intend that my Roth IRA principal be money that I wouldn't touch except as a last resort. One of the attractions of the Roth IRA is no required old age distributions as long as you live,unlike the regular IRA.
Of course you might think of withdrawing earnings from the Roth IRA but not drawing the principal down as prudent.

[PFInterest]

I'm not sure I am following you but there are no RMDs for rIRAs. You only pull out what you need to spend.

[kylemerriman]

So if by 60 yo my wife and I have a combined Roth balance of $1 million, we could just live off of $40k a year if we are getting a real return of 4%? Obviously a fixed 4% return every year is not to be expected, as some years may be higher and others lower. Am I making any calculation errors or overconfident assumptions?

[The Wizard]

So if by 60 yo my wife and I have a combined Roth balance of $1 million, we could just live off of $40k a year if we are getting a real return of 4%? Obviously a fixed 4% return every year is not to be expected, as some years may be higher and others lower. Am I making any calculation errors or overconfident assumptions?

The answer depends a lot on what other income sources and assets you have...

[iceport]

I am new to all of this...
When calculating for retirement I have been planning on withdrawing 100% of my roth at 60 years old and 100% of my wife's roth when she is 70 years old. Now that I am reading the four pillars of investing I see my mistake. Instead of taking the future value of my roth and dividing it by the number of years I want it to last to obtain an annual salary, I should be aiming for an overall balance that will allow me to live off of the interest without ever "cashing out" 100% of the roth balance, but instead letting it continue to grow. Not sure why but I didn't think about living off the interest. This will allow me to not have to fully fund two roths, but only one, and free up capital now to invest in other areas. So if I live to 80 can the roth keep growing or does it have to be completely "cashed out" at 70? Given my income it is not feasible to fully fund two right now.

Hi kylemerriman,

It's been many years since I read the Four Pillars, and now it's lent out, but I don't recall any advocacy of the notion of "living off the interest." Could you describe what part of the book leads you to that conclusion?

There very well might be an introduction to the concept of a sustainable withdrawal rate, but that's not the same thing. Most of us here understand that drawing down a portfolio for living expenses during retirement usually includes a combination of taking dividends and selling shares. In order to sustain the withdrawal rate, a decent allocation to equity is required throughout.

Also, the idea of a sustainable withdrawal rate typically doesn't justify backing off on your savings rate, because withdrawal rates typically considered sustainable are so low — 4% of the initial balance or less, adjusted for inflation each year. So think about what you will need to withdraw for expenses, divide that by 4% (or multiply it by 25), and that gives you some idea of how how big a savings balance you will need. Is that balance small enough that you can back off on your savings rate?

[cherijoh]

I am new to all of this...
When calculating for retirement I have been planning on withdrawing 100% of my roth at 60 years old and 100% of my wife's roth when she is 70 years old. Now that I am reading the four pillars of investing I see my mistake. Instead of taking the future value of my roth and dividing it by the number of years I want it to last to obtain an annual salary, I should be aiming for an overall balance that will allow me to live off of the interest without ever "cashing out" 100% of the roth balance, but instead letting it continue to grow. Not sure why but I didn't think about living off the interest. This will allow me to not have to fully fund two roths, but only one, and free up capital now to invest in other areas. So if I live to 80 can the roth keep growing or does it have to be completely "cashed out" at 70? Given my income it is not feasible to fully fund two right now.

So if by 60 yo my wife and I have a combined Roth balance of $1 million, we could just live off of $40k a year if we are getting a real return of 4%? Obviously a fixed 4% return every year is not to be expected, as some years may be higher and others lower. Am I making any calculation errors or overconfident assumptions?

if you can't afford to fund two Roth IRAs with their meager annual limits then it is highly unlikely that you will ever reach a $1 million dollar balance.

Also, interest and dividends have absolutely no meaning inside of a tax-advantaged account. For a traditional IRA you will be taxed at your marginal tax bracket, for a Roth IRA you pay 0 taxes. But if you plan to limit you withdrawal to what ever your account earns, that means you need a LARGER account balance at retirement, NOT a SMALLER balance to cover your expenses.

[kylemerriman]

I am new to all of this...
When calculating for retirement I have been planning on withdrawing 100% of my roth at 60 years old and 100% of my wife's roth when she is 70 years old. Now that I am reading the four pillars of investing I see my mistake. Instead of taking the future value of my roth and dividing it by the number of years I want it to last to obtain an annual salary, I should be aiming for an overall balance that will allow me to live off of the interest without ever "cashing out" 100% of the roth balance, but instead letting it continue to grow. Not sure why but I didn't think about living off the interest. This will allow me to not have to fully fund two roths, but only one, and free up capital now to invest in other areas. So if I live to 80 can the roth keep growing or does it have to be completely "cashed out" at 70? Given my income it is not feasible to fully fund two right now.

Hi kylemerriman,

It's been many years since I read the Four Pillars, and now it's lent out, but I don't recall any advocacy of the notion of "living off the interest." Could you describe what part of the book leads you to that conclusion?

There very well might be an introduction to the concept of a sustainable withdrawal rate, but that's not the same thing. Most of us here understand that drawing down a portfolio for living expenses during retirement usually includes a combination of taking dividends and selling shares. In order to sustain the withdrawal rate, a decent allocation to equity is required throughout.

Also, the idea of a sustainable withdrawal rate typically doesn't justify backing off on your savings rate, because withdrawal rates typically considered sustainable are so low — 4% of the initial balance or less, adjusted for inflation each year. So think about what you will need to withdraw for expenses, divide that by 4% (or multiply it by 25), and that gives you some idea of how how big a savings balance you will need. Is that balance small enough that you can back off on your savings rate?

The excerpt is from Chapter 12:

"Assume that all your money is in a Roth IRA, meaning that you don't have to worry about taxes at any stage and that you'll need $40,000 per year in current spending power in retirement. If you earn a 4% real return, then you can withdraw that 4% of your nest egg each year without reducing your principal. You will be able to maintain this forever, since the nest egg's value will rise along with inflation. The 4% you withdraw from it each year will keep up with inflation. This means that you'll need $1 million."

[iceport]

I am new to all of this...
When calculating for retirement I have been planning on withdrawing 100% of my roth at 60 years old and 100% of my wife's roth when she is 70 years old. Now that I am reading the four pillars of investing I see my mistake. Instead of taking the future value of my roth and dividing it by the number of years I want it to last to obtain an annual salary, I should be aiming for an overall balance that will allow me to live off of the interest without ever "cashing out" 100% of the roth balance, but instead letting it continue to grow. Not sure why but I didn't think about living off the interest. This will allow me to not have to fully fund two roths, but only one, and free up capital now to invest in other areas. So if I live to 80 can the roth keep growing or does it have to be completely "cashed out" at 70? Given my income it is not feasible to fully fund two right now.

Hi kylemerriman,

It's been many years since I read the Four Pillars, and now it's lent out, but I don't recall any advocacy of the notion of "living off the interest." Could you describe what part of the book leads you to that conclusion?

There very well might be an introduction to the concept of a sustainable withdrawal rate, but that's not the same thing. Most of us here understand that drawing down a portfolio for living expenses during retirement usually includes a combination of taking dividends and selling shares. In order to sustain the withdrawal rate, a decent allocation to equity is required throughout.

Also, the idea of a sustainable withdrawal rate typically doesn't justify backing off on your savings rate, because withdrawal rates typically considered sustainable are so low — 4% of the initial balance or less, adjusted for inflation each year. So think about what you will need to withdraw for expenses, divide that by 4% (or multiply it by 25), and that gives you some idea of how how big a savings balance you will need. Is that balance small enough that you can back off on your savings rate?

The excerpt is from Chapter 12:

"Assume that all your money is in a Roth IRA, meaning that you don't have to worry about taxes at any stage and that you'll need $40,000 per year in current spending power in retirement. If you earn a 4% real return, then you can withdraw that 4% of your nest egg each year without reducing your principal. You will be able to maintain this forever, since the nest egg's value will rise along with inflation. The 4% you withdraw from it each year will keep up with inflation. This means that you'll need $1 million."

Thanks for the excerpt!

Though I don't recall the full context, here are a couple of thoughts. First, this seems to be a simplification to introduce the concept of a sustainable withdrawal rate, and what that implies for the amount you will need to save. Second, the "return" referenced in that simplified (or idealized) example probably includes both dividends and capital appreciation due to a rise in share prices. I say probably because, again, I don't recall the full context, and back when the book was written I'm certain interest rates were far higher than they are today.

Regardless of the ambiguities on the second point, the overall message seems to be the same: You need a very large sum to generate a decent sustainable withdrawal rate. To cherijoh's point, are you on track to meet your goals?

[Wakefield1]

Some people in retirement who have a Roth IRA would also have some 401 or 457 money in accounts that they would be taking distributions from-for people who have those kinds of accounts provided/(allowed to contribute to possibly with some employer match) from employers the contribution limits per year are much higher than for the "individual retirement arraignment"=IRA or Roth IRA -some employers now have "Roth 401K" which I would assume is free of required minimum distributions but I didn't have that -pretax contributions for 401 and 457 that don't add to your Taxable Income that year as opposed to Roth type that you did pay taxes on (did add to your taxable Income that year that the contributions were made during/for.
there is always the possibility of putting money to work in a Taxable Mutual Fund or account with a mutual fund provider such as Vanguard; T. Rowe Price or Fidelity

Hard to cram $ 1M into your IRA during a 30 or 40 year working career because of the yearly contribution limits but might be more room in 457 and 401 accounts that have "additional space" for annual contribution.

[Wakefield1]

Married people concerns that I know nothing about: (single)
Have His and Her accounts such that if the marriage breaks up each keeps their own? As opposed to joint accounts?
I know that sometimes a spouse leaves the other and tries to get a financial advantage in what they take away
(I know because that has happened to people I know or relatives)
A good spouse is perhaps the best thing in life that can happen to you.

[warowits]

some employers now have "Roth 401K" which I would assume is free of required minimum distributions

I believe a roth 401k still has RMDs, but you can avoid them by rolling it into a Roth IRA fairly easily.

[kylemerriman]

The author does warn that you may retire at the beginning of a bear market and see zero return for 10-20 years.

[ValueInvestor99]

If you have one million in a taxable account and one million in a Roth account, spend
the money in the taxable account first.

[NC 911]

I look at my Roth money as the last asset I will spend. If I do have to touch it I probably made a big mistake in my planning. Just my two cents.

[FiveK]

When calculating for retirement I have been planning on withdrawing 100% of my roth at 60 years old and 100% of my wife's roth when she is 70 years old.

Do you have any non-Roth investments, or expect other income streams (pension, rentals, SS, etc.) in retirement?

Unless your marginal tax rate throughout your working career is 0%, having 100% in Roth accounts with no other income source would be a mistake.

See Traditional versus Roth - Bogleheads for more.

Also see Withdrawal methods - Bogleheads.