Roth Conversions: Timing and Tax Considerations for Early Savers

In this episode of 'Retire with Style', hosts Alex Murguia and Wade Pfau discuss the importance of understanding the funded ratio in retirement planning. They explore how the funded ratio compares to Monte Carlo simulations, the significance of present value in assessing retirement income, and the implications of conservative return assumptions. The conversation emphasizes the need for a solid financial plan and the upcoming retirement income challenge designed to help participants create their financial strategies. They also discuss the differences between funded ratios and Monte Carlo simulations in retirement planning. They emphasize the simplicity and intuitiveness of funded ratios, which allow individuals to easily understand their financial status. The discussion also covers the importance of variable spending strategies, the complexities of tax calculations, and how to analyze essential versus discretionary expenses. They address listener questions about Roth conversions and the challenges of retirement planning, advocating for a shift towards funded ratios as a more reliable tool for assessing retirement readiness. Listen now to learn more!

Takeaways

• The funded ratio helps assess if you have enough assets to cover retirement liabilities.
• Monte Carlo simulations and funded ratios approach retirement planning from different angles.
• Present value calculations are crucial for understanding future income streams.
• The funded ratio is a powerful tool used by pension funds and can be applied to individual retirement planning.
• The funded ratio can provide a clearer picture of retirement funding status than Monte Carlo simulations.
• Future earnings can be included in the funded ratio assessment.
• The choice of discount rate can significantly impact the funded ratio outcome.
• It's important to know the difference between current value and present value in retirement planning. The funded ratio is a more intuitive approach than Monte Carlo simulations.
• Variable spending strategies can be effectively modeled with Monte Carlo.
• Understanding essential vs. discretionary expenses is crucial for retirement planning.
• Roth conversions can be beneficial even when working, but require careful consideration.
• The financial planning profession has largely favored Monte Carlo methods.

Chapters

00:00 Introduction and Upcoming Events
02:58 Understanding the Funded Ratio
10:30 Present Value and Retirement Planning
12:23 Conservative Return Assumptions
17:48 Monte Carlo vs. Funded Ratio
20:34 Understanding Funded Ratios vs. Monte Carlo Simulations
25:22 The Role of Monte Carlo in Variable Spending Strategies
27:49 Gathering Information for Funded Ratio Calculations
30:11 Analyzing Funded Ratios for Essential vs. Discretionary Expenses
33:53 The Shift from Monte Carlo to Funded Ratios
39:54 Listener Questions: Roth Conversions and Retirement Planning

Links

Register to attend Retirement Researcher’s FREE 4-Day Retirement Income Challenge on March 10-13th from 12:00 – 2:00 PM ET each day: https://risaprofile.com/podcast

The Retirement Planning Guidebook: 2nd Edition has just been updated for 2025! Visit your preferred book retailer or simply click here to order your copy today: https://www.wadepfau.com/books/

This episode is sponsored by Retirement Researcher https://retirementresearcher.com/. Download their free eBook, 8 Tips to Becoming A Retirement Income Investor at retirementresearcher.com/8tips