0:01 Imagine that you've just retired and
0:03 your financial adviser tells you to put
0:06 $1 million on a hand of blackjack. Would
0:08 you do it? Well, for most retirees, Roth
0:10 conversions actually have worse odds.
0:13 And today, I'm going to prove it. My
0:15 name is Eric Amselog. I'm a certified
0:17 financial planner and the owner of Peak
0:19 Financial Planning. And in just the last
0:21 2 years, I've built more than 150
0:23 retirement plans. And by far, the most
0:25 common question I get is, should I do
0:26 Roth conversions? So, in the next few
0:28 minutes, I'm going to run three case
0:31 studies. a $1 million, $3 million, and
0:33 $5 million household to show how to
0:36 avoid a million dollar tax mistake that
0:39 financial software and advisers keep
0:41 recommending. We're going to use social
0:43 security data and income labs modern
0:45 guardrails to stress test Roth
0:47 conversion recommendations. And at the
0:48 end of the video, I'm going to give you
0:51 a simple checklist that you can use to
0:52 decide if a Roth conversion actually
0:55 makes sense in your plan. So, I'm going
0:56 to spend 90% of this video showing you
0:58 everything inside software and
1:00 spreadsheets. But before we dive in, we
1:02 need to start with some assumptions. And
1:04 if you stick with me, I promise that
1:05 your understanding of Roth conversions
1:07 will change forever. So, the first
1:09 assumption is that all three of the
1:11 tested households I'm going to show are
1:14 ages 62 and are fully retired. The
1:16 second assumption is that Social
1:17 Security is going to be the only
1:19 guaranteed source of income starting at
1:21 67 in all three scenarios. The third
1:23 assumption is that Income Labs is going
1:26 to be set to a 20% likelihood of needing
1:28 a spending adjustment, which is
1:30 essentially like planning for an 80%
1:32 probability of success. The fourth
1:34 assumption here is going to be that
1:37 smaller households have more pre-tax
1:40 savings and bigger households have more
1:42 after tax savings. And then finally, the
1:44 last assumption is that all the plans
1:46 I'm going to show are run for exactly 30
1:49 years, which is how long the top 20% of
1:51 retirees live according to Social
1:54 Security Lifetimes tables. Now, I've
1:56 already loaded all of these assumptions
1:57 into Income Lab. So, we're just going to
1:59 jump right in. In the first scenario
2:00 that I'm showing here on the screen,
2:04 Mike and Laura test have $1 million
2:05 saved, and almost all of it is in
2:07 pre-tax accounts. Now, Income Lab's
2:10 optimal recommended strategy here
2:12 recommends filling the 12% bracket with
2:14 Roth conversions. Now, the software
2:17 projects that they'd save about $92,000
2:19 in taxes and have the same amount in
2:21 additional net spending money in
2:22 retirement. And when I showed this to
2:24 Mike and Laura, this screen
2:26 specifically, their eyes lit up. They
2:28 said, "Eric, that is incredible. Why
2:29 wouldn't we do that?" And that's exactly
2:32 the reaction that most retirees and even
2:34 most financial planners have when they
2:35 see a screen like this with all these
2:37 pretty green boxes. And the $3 million
2:39 and $5 million versions of these plans
2:41 look are no exception. They look even
2:43 better. So, let's toggle through those
2:45 real quickly. At $3 million here, you
2:48 can see that Income Labs is recommending
2:50 conversions to fill the 24% bracket and
2:54 showing over $600,000 in projected tax
2:56 savings and additional spendable money.
2:58 Let's toggle to the $5 million plan
3:00 really quickly. At $5 million, it says
3:03 to fill the 32% bracket with a supposed
3:06 $1.2 million reduction in taxes paid an
3:09 additional $1.2 million in net income or
3:11 lifetime spending money. And so, the
3:13 bigger the portfolio, the bigger and
3:15 sexier the Roth conversion looks. But
3:16 here's the problem. These projections
3:19 assume extremely long lifespans that
3:21 very few people actually live. And Roth
3:23 conversions only start paying off very
3:25 late in retirement after you've already
3:27 passed the break even age. And so to
3:29 prove the point, I've rebuilt each plan
3:31 in Income Labs, but this time I just
3:33 shortened the time horizon from 30 years
3:36 to 25 years. Everything else stayed the
3:38 same. And for that, I have this summary
3:39 table right here just to make viewing
3:41 and clicking a little easier. In the $1
3:43 million plan, which you can see right
3:45 here, the software changes the
3:47 conversion recommendation to convert to
3:49 fill the 10% bracket and really
3:51 recommends only spending about $10,000
3:54 on Roth conversions as compared to the $118,000
3:55 $118,000
3:57 it recommended spending in the prior
3:59 scenario. Now, the translation of that
4:01 is that five fewer years of life turned
4:03 a six-f figureure Roth strategy into
4:05 pretty much nothing, right? The second
4:07 scenario here is the $3 million plan.
4:10 And in this plan here, you can see that
4:12 now the software recommends converting
4:14 up to the 12% bracket rather than the
4:17 24% bracket. And instead of spending
4:20 $646,000 on Roth conversion taxes,
4:23 that's dropped down to $76,000. And the
4:25 translation for this one is that that
4:27 half million benefit literally just
4:30 disappears by shortening the plan by 5
4:32 years. And finally, in the $5 million
4:34 plan, the recommendations just
4:36 completely collapse from a $1.2 2
4:38 million benefit, which you can see right
4:40 here, and from converting through the
4:45 32% bracket, to converting just 231 or
4:48 spending just $231,000 on taxes and
4:50 getting a very, very small benefit, if
4:52 at all. And so, here's what this really
4:54 means. If you live 5 years less than the
4:56 software assumes, then Roth conversions
4:58 flip from being a six or seven figure
5:00 win to a potential six or seven figure
5:03 loss. And so now let's overlay this with
5:05 actual survival data because the key
5:07 point here is that Roth conversions pay
5:08 off the longer you live and we're
5:10 planning for everybody as though they're
5:11 going to live very long. But the
5:13 question is how long do people actually
5:14 live? And what is the probability that
5:17 this bet this gamble will actually pay
5:18 off? And so according to the social
5:20 security life expectancy tables, a
5:24 single 62year-old man has just a 14%
5:26 chance of living to 92. That is the
5:28 final life expectancy in the plans I've
5:30 shown. By the way, for women, that
5:33 chance of living to 92 is 23%. And for a
5:36 married couple, there's a 1 in3, so 33%
5:38 chance that at least one spouse will
5:41 make it that far to age 92. And so 2/3
5:43 of the time, Roth conversions that
5:46 require you to live to 92 will fail. And
5:48 said differently, if you framed Roth
5:50 conversions honestly, you would say, you
5:52 have a one-third chance of winning and a
5:54 twothirds chance of losing. would you
5:56 still make this million or this half a
5:59 million or this $100,000 bet depending
6:01 on what wealth bracket your household
6:03 fell into? Now, saying this out loud
6:05 almost feels illegal, right? It kind of
6:07 feels like I'm talking about the risk of
6:08 planning for a long life expectancy
6:10 feels completely taboo in financial
6:12 planning because we've all been
6:13 conditioned to think that we are going
6:15 to live a lot longer and that longer is
6:17 always better. But here's and I'm not
6:18 saying you shouldn't live longer. I'm
6:19 just saying we have to understand the
6:21 trade-offs. And here's the truth. In a
6:23 world where Roth conversions are treated
6:25 like financial gospel, they actually
6:27 increase risk when you assume a very
6:29 long life. And the craziest part is that
6:31 most financial planners and retirees
6:34 will never notice it or never get told.
6:35 So, in just a minute, I'm going to show
6:37 you a checklist to decide if Roth
6:40 conversions actually make sense for you.
6:41 But first, let's go back to this
6:42 spreadsheet that I had on the screen a
6:45 moment ago. See, a 62-year-old is twice
6:47 as likely to live until 87 as they are
6:50 to make it to 92. And so the odds of
6:51 living that additional five years drops
6:53 in half. The difference between planning
6:56 for a 30-year versus 25 years is not
6:58 just a technical setting. It's a
7:00 complete gamble with real dollars on the
7:02 line. And as you can see in the red
7:04 cells that I've just shown here, that
7:07 gamble can be massive. The gamble column
7:08 here is basically the difference in
7:10 dollars that the household would have
7:12 spent on taxes if they assumed they
7:14 would live 5 years longer. You can see
7:16 in the five million $5 million household
7:18 net worth scenario, that household would
7:19 have spent almost a million dollars more
7:22 on Roth conversions if they assumed they
7:24 had a high likelihood of living through
7:26 30 years as opposed to 25. And I'm not
7:27 saying they shouldn't, but you should
7:29 know that information, right? It's a
7:31 real gamble. Now, most financial
7:33 softwares and the advisers using it will
7:35 never reduce life expectancy in the
7:37 software to test what negative outcomes
7:39 might occur because they just assume
7:41 there are no negative outcomes, right?
7:42 Usually, you'd think that a shorter
7:43 lifespan means fewer years of
7:45 withdrawals, fewer years in retirement,
7:47 and therefore your portfolio lasts,
7:49 right? But when you introduce Roth
7:50 conversions, you're actually introducing
7:52 an expense that's actually a gamble
7:55 investment on longevity. And so, now
7:57 that we've seen how fragile Roth
7:59 conversion wins really are, let's talk
8:01 about a couple additional hidden risks
8:03 that almost nobody factors in. The first
8:05 is that Roth conversions are a gamble,
8:06 which we've been talking about. Not
8:07 they're just not an action with a
8:09 guaranteed return. But the way financial
8:11 planning software looks when you click
8:12 to a screen like this, it makes it
8:14 appear as though it is a guaranteed
8:15 return. There's no indication of
8:18 probability or likelihood of it working.
8:20 It just looks like it works. The second
8:22 hidden factor is, well, I'm going to,
8:24 you might say, well, I'm going to do
8:26 Roth conversions for my heirs, so it may
8:28 still be worth it. And that may be true,
8:30 but we don't actually know whether our
8:32 heirs will be in a lower tax bracket
8:35 when distributing than we will be while
8:37 converting. Now, it still may be wise to
8:39 convert. you may just be doing it at a
8:42 loss, which is totally fine if you plan
8:44 to think of the cost of the Roth
8:46 conversion as a prepaid gift to your
8:48 heirs. The third hidden factor here is
8:50 that the illustrations I've shown today
8:52 don't even include a time value of money
8:54 component. See, the financial planning
8:56 software calculates the benefit of the
8:59 Roth conversion as the tax you save once
9:01 you've passed the break even threshold.
9:03 But that's actually inaccurate because
9:05 in reality, money early in life is worth
9:08 more than money later in life. And so to
9:10 be truly honest about the actual
9:12 financial payoff of Roth conversions,
9:14 you would have to apply a time value of
9:16 money factor and financial planning
9:18 softwares and those that rely on them
9:21 don't actually receive that. The fourth
9:23 and final note here is which could be a
9:25 whole video on itself truth be truth be
9:26 told is that financial planning software
9:28 does not show the substantial increase
9:30 in risk that occurs as a result of the
9:32 huge increase in spending and
9:34 withdrawals caused by the upfront cost
9:36 of the Roth conversion. See, depending
9:38 on the size of the Roth conversion,
9:40 retirees could unknowingly expose
9:42 themselves to significant extra
9:44 withdrawal rate and sequence of returns
9:47 risk that or they just might have to
9:49 make huge sacrifices to quality of life
9:51 in early retirement in order to
9:52 subsidize the cost of those Roth
9:54 conversions. But who really cares about
9:56 the quality of life when you're young,
9:58 healthy, and in the best part of your
10:00 retirement when you could prepay the
10:02 government taxes and get a gold star for
10:04 having a higher end of life after tax
10:06 legacy if you live till age 95. And if
10:08 you couldn't catch my sarcasm there,
10:10 I'll just say it out loud, which like
10:11 that's crazy, right? The translation
10:13 here is you could just end up
10:14 sacrificing the best years of your
10:16 retirement just to prepay the IRS money
10:18 for no reason. And so with all of that
10:20 said, here's a simple checklist that you
10:22 can use to evaluate whether a Roth
10:24 conversion actually makes sense in your
10:26 retirement plan. And it can. I know I've
10:27 come on strong in this video, but the
10:29 truth is there are place for Roth
10:31 conversions in retirement planning. So
10:33 the checklist is as follows. If you have
10:35 less than $2 million, ask yourself, do
10:37 you expect your guaranteed retirement
10:39 income to exceed your pre-retirement
10:40 income? And if the answer is yes, that
10:42 means consider a small conversion
10:44 because you're probably going to be in a
10:45 higher tax bracket in retirement than
10:47 you were before retirement because your
10:48 guaranteed income would exceed your
10:50 pre-retirement income. And if you answer
10:52 no, then most likely you're going to
10:53 want to skip Roth conversions cuz it's
10:55 almost always going to be a net negative
10:58 in your lifetime. If you have between $2
11:00 million and $4 million in retirement
11:02 savings, then you ask yourself, do you
11:04 have after tax money to live on while
11:06 converting or to apply to the cost of
11:08 the conversion? You might also ask
11:10 yourself, can you retire early enough to
11:12 create an income gap before social
11:14 security starts so you can do Roth
11:16 conversions before extra income sources
11:18 kick in? You might also ask yourself, is
11:20 there a widow penalty risk in your
11:22 household? Meaning, do you have a a
11:24 spouse, for instance, a a wife who is
11:26 significantly younger than a husband and
11:28 might live several years or many years
11:29 longer than their husband? And then the
11:31 final question you'd ask is, will Irma
11:34 or RMDs push you into higher brackets
11:36 later? And if you can say yes to most of
11:37 those things, then it may be worth
11:39 modeling Roth conversions. Now, finally,
11:41 if you have $4 million or more in
11:43 retirement savings, then Roth
11:45 conversions probably do deserve a look,
11:47 primarily for legacy planning purposes
11:49 and not necessarily maximizing your own
11:51 retirement lifestyle. But you'll find
11:53 that there are more cases once you reach
11:55 that threshold of wealth where Roth
11:57 conversions will financially make sense
11:58 while you're alive. The other obvious
12:00 area where Roth conversions will make
12:02 sense while alive or Roth contributions
12:03 rather would be when you're younger,
12:05 right? just start every year you start
12:07 doing Roth contributions, the more
12:08 likely they are to pay off because you
12:10 have a longer period of life ahead of
12:12 you within which the investment will pay
12:14 off. And so at this at the end here,
12:15 here's the bottom line. Roth conversions
12:17 are not the sure thing strategy that
12:19 they're sold as. They are a bet. They're
12:22 a bet on how long you'll live, what tax
12:24 brackets will look like, and what your
12:26 heir's situation might be. And most of
12:28 the time that bet will fail. One client
12:30 told me after we ran this analysis, I
12:32 thought I was being smart prepaying
12:33 taxes, but it turns out I was just
12:36 giving the IRS a bigger gift. And that's
12:37 the moment it really clicked for them.
12:39 Now, that doesn't mean Roth conversions
12:41 are always bad. It just means you need
12:42 to treat them for what they are, which
12:44 is an investment or a gamble that only
12:46 makes sense under very specific
12:48 circumstances. And if you don't want to
12:50 gamble your retirement on a coin flip or
12:53 on a blackjack hand, then click the
12:54 first link in the description below this
12:57 video to watch my free webinar on the
12:59 fourstep system we use at Peak Financial
13:01 Planning to stress test retirement
13:03 strategies. Thank you as always for your
13:05 time and attention. And if this video
13:06 gave you some clarity, hit the like
13:08 button so it reaches more retirees who
13:10 need to hear it, and subscribe for more
13:12 deep dives just like this one. I'll see
