Doug Carey Blog | Converting To A Roth IRA Could Be A Great Move | Talkmarkets
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I am the owner and founder of WealthTrace, which provides web-based financial planning software to both financial advisors and consumers.. I have over 20 years of experience in the financial markets and I am a Chartered Financial Analyst (CFA). I hold a masters degree in Economics from Miami ... more

Converting To A Roth IRA Could Be A Great Move

Date: Thursday, April 20, 2017 1:57 PM EDT

What's your number? I don't mean phone number. Have you seen the TV ads by a financial services company with the people walking around carrying (mostly) seven-digit numbers on their backs, representing the amount they've calculated they'll need to have accumulated in order to retire?

In the most recent of a series of "The Number" posts I've done, I talked about a $3 million number. But my point in that column was only partially about how a $3 million portfolio can make for a successful retirement. It was just as much about things you can do to increase your chances of putting together a successful retirement plan regardless of your number.

A successful retirement is partially a question of probabilities. Unless you have some secret income-generating vehicle that will kick out an absolutely certain amount of money, year in and year out, no matter what the stock market does or inflation does or if war or crisis breaks out, you simply have to pay attention to probabilities.

I can put it another way. For most of us, so-called straight-line projections--where income, spending, taxes, and so on are assumed to move in an orderly fashion, year in and year out--simply won't cut it. The real world does not operate that way.

I'm a fan of Monte Carlo simulations. Monte Carlo is used in all sorts of disciplines outside of finance, like weather prediction and engineering. For the purposes of retirement planning, a Monte Carlo simulation takes into account your assets, tax bracket, the historical volatility of your investments, the correlations among your investment types, and more to estimate the probability--measured in percentage terms--of your plan succeeding.

So if it's less of a binary matter (yes I can retire with this plan vs. no I cannot), and more of a probability matter (my retirement plan has an X% chance of succeeding), what can we do to get the probability higher?

Preaching About The Converted

One way to increase your probability could be to convert a traditional IRA to a Roth IRA over time.

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