Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 00:57 – Dr. Michael Finke on the Four Percent Rule, Three Predictors of Retirement Happiness, and Aging
• 19:41 – What’s Your Retirement Income Style? Watch & Subscribe on YouTube and Download The Retirement Lifestyles Guide 
• 20:36 – Can I Retire at Age 56? Should I Take My Pension as a Lump Sum or Monthly? (Jon, PA)
• 29:40 – When Can We Retire? We’re Ages 48 and 54 With About $3M Saved (Steve, CO)
• 37:36 – Watch Social Security Basics You Need to Know: Common Social Security Questions Answered on YMYW TV and Download the Social Security Handbook
• 38:23 – Can We Retire Next Year? We’re 61 and 63 With About $2M. (Eager Eagle, WA state)
• 41:43 – YMYW Podcast Outro

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Transcription

Intro: This Week on the YMYW Podcast

Andi: What are the three predictors of retirement happiness? Dr. Michael Finke, CFP® from the American College of Financial Services tells us and Big Al Clopine what his research shows. He also shares his insights on the four percent rule for retirement withdrawals, and whether there is anything we can do to stave off the effects of aging on our cognitive abilities. That’s today on Your Money, Your Wealth podcast number 523. Plus, Joe and Big Al do some retirement spitballing: can Jon in Pennsylvania retire early at age 56, and would it be better for him to take his pension monthly or as a lump sum? Steve and his wife in Colorado are 48 and 54 and they have 3 million saved. When can they retire? Eager Eagle and his wife in Washington state have 2 million saved at ages 61 and 63. Can they retire next year? I’m executive producer Andi Last with the hosts of Your Money, Your Wealth, Joe Anderson CFP® and Big Al Clopine, CPA, and special guest, Dr. Michael Finke.

Dr. Michael Finke on the Four Percent Rule, Three Predictors of Retirement Happiness, and Aging

Al: Michael, it’s so nice to meet you.

Michael Finke: Oh, my pleasure. It’s great to be here.

Al: And I’ve been really excited about talking with you. I think you are an expert on a lot of topics that I don’t get to ask people about.  But let me start with one that maybe a lot of people are familiar with, which is the 4% rule. The 4% distribution rule, you take 4% of your assets, do you distribute that each and every year? Is that a good way to go in terms of distribution planning? Are there better ones? What are the pros and cons? How do you think about that?

Michael: Well, let’s start with what is the 4% rule. The 4% rule says that if I have $1,000,000, then I should be able to take out $40,000 the first year and then increase that by the rate of inflation. And I probably won’t run out as long as I have balanced investment portfolio. This is based on the re- the research of Bill Bangin and Bill wanted to make the point that historically in the United States, even though your portfolio on average might return 7% or 8%, it doesn’t mean you can take 7% or 8% out of your investments. Because sometimes you’ll have these periods where investments are going to do worse than average. And in those periods, you probably have to ramp down your spending to make sure you don’t run out. That’s what’s known as a fixed withdrawal kind of strategy. And it really has been adopted by a lot of people in financial planning.  And many of us who study it feel like it’s a very inflexible way of thinking about retirement income generation from a volatile portfolio. The bottom line is it doesn’t really make sense to try to create a stable income from a volatile portfolio, right? The reason is because if you get unlucky, then there’s a chance you could just completely run out of money. So in other words, you shouldn’t just be blind to the fact that you got unlucky, that you got dealt the wrong cards at the beginning of retirement.

Al: Yeah.

Michael: So they make no changes.

Al: The market corrects and then you’re still taking 4% out and it stays down for a while.

Michael: I mean the big problem is that you go through a period like let’s say you retire on January 1st 2000 and I mean, immediately you get hit with maybe an 8% decline and then maybe a 20% decline and then another 10% decline or, you know, you, your, portfolio gets hammered. Now you’re down to, you know, $650,000. Do you continue to spend now, more money, you know, more than $40,000 a year from $1,000,000 portfolio? Or do you adjust your spending downward to give your portfolio a break, give it a chance when the markets do eventually recover to actually get back to the starting point? And the, I, you know, the other problem with the 4% rule is what if you would have retired in January 1st, 2003? In that situation, if you follow the 4% rule and you had $1,000,000, you’d have over $4,000,000 right now. And it’s just 3-year difference, right? But in that case, you’re on the opposite end, which is, you have now more than enough money to spend, more than that small amount that you allowed yourself to spend every year. And then who benefits from the fact that you’re not allowing yourself to spend more? Well, your heirs benefit. Your financial advisor benefits because they get to take a fee off that $4,000,000. But you don’t allow yourself to spend more.  So most of us who do research in this area feel that the right way to do it is to use a more flexible type of approach. There are different strategies for using flexible approaches. Bill Bangen came up with this floor and cap concept where maybe you allow yourself to spend up to some sort of a cap, and then you allow yourself to cut spending down to some kind of a floor. There’s also a guardrail strategy. There’s even more, I think, advanced strategies that allow you to make adjustments that are in the long run, not capped, but also allow you to be flexible up to a limited amount every year. So in other words, you can adjust your lifestyle, maybe 5% up or down every year, which most retirees can do. But the bottom line is when you take investment risk, you can’t just assume that you can have stable spending and not face the possibility of running out. But you should take- you should get some sort of an upside for taking investment risk. And the upside is that if you do get lucky and the markets do well, you should allow yourself to be able to spend more. So the problem with the 4% rule is that it’s too rigid.  Ideally, we should be more flexible. But flexibility means that we also have to now start thinking about how flexible our budgets are. And the research that I’ve done has shown that about two thirds of a retiree’s budget, who was making over $100,000 per year before they retired, two thirds is on fixed expenses. And about one third is on more variable types of expenses. So you want to construct a flexible budget. For that, maybe 33% of expenses that are more flexible, you know, if the market does poorly, then maybe cut into that portion of your budget. But recognize that there’s also a chunk of your budget where you’re not really going to be able to cut. So you’ve got to be able to make sure that no matter what happens in the market, you’re able to cover those expenses.

Al: Got it. So that’s a really good point. So depending upon the market and the economy, maybe you spend a little bit more, maybe you spend a little bit less, but if you’re flexible you have a lot better chance for success.

Michael: Well, you know, if you’re truly flexible you’re not going to run out.  And if you’re inflexible, and even if you follow let’s say a cap and a floor strategy where you limit the amount of downside adjustment you can make, that’s always going to mean that in the worst-case scenarios, you’re going to run out of money if you live too long. And that’s what we really worry about when we’re following a spending strategy is how can we create a strategy where we’re not at risk of potentially running out but also allow ourselves to live better if our investments do well.

Al: Great thoughts. Okay, I want to change gears a little bit. Because we talk on our show and many financial shows, we talk about finances. We talk about investments, the market, strategies, tax strategies, whatever. But what about life satisfaction? I think a lot of retirees, they focus so much on the numbers that they forget to think about how are they going to have a fulfilling, satisfying retirement. What are some of your thoughts on that?

Michael: Yeah, back when I was at Texas Tech University, I used to run a retirement planning and living center. And we studied life satisfaction in retirement. I had a few graduate students who worked on research in this area of life satisfaction.  What really came out of that research was that there were 3 main life domains that contributed to satisfaction in retirement. One of them is money, which I think is good news for anybody who accumulates wealth over the course of their lifetime. What does wealth give you? Wealth gives you, I mean, first of all, wealth is not giving you happiness. Really. It’s just green paper. It’s dots on a computer screen, right? It gives you access to the kind of activities that lead to greater happiness in retirement. However, when you look at the data, you can actually see that there are people who have a lot of money and who don’t spend it well. And there are people who have less money and spend it on the right kind of things.  And what it really comes down to is social spending. So social spending is the way, you know, if you just look at all the 10 different categories of spending that  you can have in retirement, what you see is that, you know, it’s not durable goods, it’s not cars,  it’s that kind of leisure spending, and especially on things like going out to eat with friends or going on vacations. Those are the things that are really going to make you happy. And spending correctly is going to make you more likely to be happy. But spending incorrectly, you know, and the example I very often give is the RV retiree that, you know, there are, there is this type of retiree who at the very beginning of retirement may take, you know, a few hundred thousand dollars and buy themselves a motor home,  without really giving much thought to how’s that going to affect their life.

Al: Sure.

Michael: And I had a friend who was a financial advisor and he used to say that whenever one of his clients asked him about buying a motorhome after retirement, he said, you know, that’s a fantastic idea I think what we’ll do is we’ll have you just rent one for a month. And we’ll rent a midsize one and then you can decide if you want a smaller, more nimble motorhome after that or if you want one of those larger motorhomes where you can spend more time and live in it. And what he found was that about two thirds of his clients after spending a month in a motorhome never wanted to do it again.

Al: I think I would be in that camp, bro.

Michael: Me too. So, I mean, basically what happened is you had one type of client who would, you know, set up at the RV camp and they would, you know, sit outside in their lounge chairs and they say hi to people and they put up a sign, say, you know, it’s a Smith’s, come and say hello. They became an opportunity for greater social interaction. And there’s another type of retiree who just goes from one place to the other and, you know, they plug in and they start, you know, they watch the cable and, they get up the next morning, they get back on the road again. And basically, they’re, you know, an unpaid truck driver for a month, and for them, they may not get as much happiness out of that whole experience. And also, you know, I’ve had talked to retirees who have bought vacation homes, and one of the big mistakes that sometimes retirees make is that they’ll buy a vacation home away from their long-term friends and family. And what that means is that they’re really becoming more socially isolated. And when you look at what predicts unhappiness in retirement, social isolation is consistently one of the strongest predictors. So you can create this sort of like RV retirement with a vacation home. It sounds really appealing. Al: Sure.

Michael: It may be your goal. It’s the reason that you save, but then you do it and you find, oh, you know, I’m just sitting here in my mountain home, looking out the window and it’s getting kind of boring and I’m just going to watch TV and it’s not the lifestyle that I’d hoped it would be.  So we have to be a lot more deliberate about things like social engagement. So, number one, money. Number two, social interactions. And one of the things that the research shows is that the relationship you have with your spouse is incredibly important as a predictor of life satisfaction. If it’s positive, then you’re going to be a lot happier. If it’s negative, you’re going to be a lot less happy. So the relationship you have with your spouse is very often more important after retirement,  than it was before retirement. Why? Because you’re spending more time together. It’s not just for breakfast and dinner. You’re- and there’s also relationship issues that can come up. There’s some really interesting research that’s been done on differences between men and women. Women tend to do a better job of maintaining a social network outside of the workforce that they can then draw from in retirement. Men tend to have most of their primary social interactions within their work environment. And then when they retire, they tend to become more dependent on their wife in an opposite sex couple.

Al: Right.

Michael: And what that leads to is a certain amount of friction in those relationships and friendship becomes also very important in retirement. And I like to think of all of these 3 areas that predict life satisfaction as investments. And what is an investment? An investment is a sacrifice that you make today in order to live better in the future.  So obviously, we’re familiar with financial investments. Instead of spending the money today, we decide to set it aside and then spend it in the future. That’s an investment. But also, relationships require an investment. If you’re going to maintain a friendship, you have to sometimes, you have to pick up the phone, you have to spend time, you have to fly to visit friends, and you know, it takes a certain amount of investment, but then you can draw from that deeper relationship when you retire.  And third is health. So, I did a review of Peter Etieh’s Outlive book for, actually for advisor perspective. Because I thought that one of the unique things that he did is really treat health as an investment.  It’s you sacrifice. You track your progress over time and you expect that the investment is going to pay off later on in life. You’re going to be healthier. Your health span is going to be longer. You’re going to be vibrant into your 80s and 90s. But it takes work and it takes effort.  And, you know, it’s, it is like any other investment. It’s also random. You know, some people will jog on a regular basis and take care of themselves and eat the right foods and then they’ll get a disease and they’ll die at the age of 70. It just happens. But on average, you make the investment so that you can live better.  So, you know, why would anybody, like, I enjoy hiking.  And one of my plans when I retire is to fly to Switzerland and, you know, rent a chalet and go hiking during the day. And I can save money to do that. But the money that I save is useless if I also don’t have a VO2 max, a, my abilities to process oxygen that allows me to go for a hike in the mountains in Switzerland. Because if I don’t have that, then I can’t actually engage in that activity. So, in many ways, these investments actually interact with each other.  So health and relationships and money in a way that if we’re doing it right, we’re paying attention to all 3 of those things. And if you’re working with a financial advisor, this is something that advisors should be able to help the client imagine what they want to do in retirement. In fact, I know a financial advisor who does retirement planning and doesn’t even talk about money during the first meeting. All he talks about is what the client wants to achieve out of their retirement lifestyle. Which I think is brilliant. And then you, you know, create the financial strategy to match the lifestyle, which is the way I’d like to do it. But that requires being conscious of the investments that you’re making in that pre-retirement stage so that you can then draw from them after you retire.

Al: I love that. So, social, your social life and activities, right, you’re having the money to be able to do it, and keep your health up, and I think that’s a great recipe. And the health thing, I totally agree.  There’s no guarantees here. You take care of yourself and it’s not a guarantee, but you do increase your odds of a longer health span in addition to a longer life.

Michael: You know, and you hear people say that, don’t you? Like I had a- an uncle who smoked into his 90s.

Al: Yeah, so I’m going to do that too.

Michael: So I’m, you know, I’m not going to take, use it as an excuse not to take care of yourself.

Al: Yeah, right.

Michael: You know, it’s just like saying, I knew somebody who hit the lottery when he, when they were in their 60s. Yeah, now they’re, you know, they’re rich and I don’t need to save money for retirement. Yeah. Because somebody else got lucky.

Al: Right.

Michael: We all make these incremental decisions to improve the likelihood that we’re going to live better, but it does require a sacrifice.

Al: Yeah, I agree. Okay, here’s another big topic, and that is as we get older, many people start to be more forgetful. There’s more incidents of dementia, Alzheimer’s. What can we do to try to ward that off best we can, increase our odds?

Michael: So I have done a lot of research in this area. I did one of the largest surveys on financial literacy and cognitive decline.

Al: Yeah.

Michael: And what I found from the data, we used this very large data set, the health and retirement study, 20,000 retirees. The answer to what can you do to stave off cognitive decline is, not much.

Al: Okay, that’s not good.

Michael: That’s.  That I think is an important realization.

All: Okay.

Michael: Because what it means is that no matter how many crossword puzzles I do, however, I try to make an investment in, you know, cause we do have this neuroplasticity concept  where we, can make the investment in improving our cognition in certain areas.

Al: Yeah. Cause I’ve heard play an instrument, learn a new language, things like that.

Michael: So, so let’s, talk about some of that research. There was just a recent study that was done on juggling and juggling is really cool because there’s a part of the brain that you can actually measure, when people learn how to juggle when they’re in their 80s. That part of the brain, you can just, you can see it becoming more active and larger. But 3 months later, you can’t tell the difference between people who learned how to juggle and people who didn’t learn how to juggle after they stopped. So, it’s the same thing with crossword puzzles.  The part of your brain that you use to solve crossword puzzles, you can maintain that to some extent in retirement. But the rest of your brain declines like it, you know, as you would expect, which is about 1% per year. So it’s, the depressing part is that it’s just part of getting older is this natural decline. I think oftentimes we feel if we just work hard enough, we can battle against physical and cognitive decline. But even when you look at things like marathon times of runners who are the healthiest athletes in the world, what you see is that they’re going to experience a natural decline as they get older. So, you know, I think, yes, we can do things to fight aging to some extent. But what is more productive is just recognizing that when we’re in our 80s and 90s, we’re capable of fewer things than we were capable of in our 60s and 70s. And that means that what you want to do is be able to plan ahead for a different type of living environment, not requiring very complex financial decisions to the 90-year-old version of ourselves.

Al: Got it.

Michael: Find someone who can help us take care of our finances and automate the income part of our lifestyle to the extent that we can avoid the kind-, I mean, a lot of people think, well, you know, it’s not gonna happen to me. And then I ask them, well, did it happen to your parents? And you know, do you trust your parents? By the time they got into their 90s, if they were alive in their 90s, could they have made the same quality decisions as they could make in their 60s? And they’ll say, well, of course they couldn’t.

Al: Right.

Michael: And your parents are not different than you are, you know?

Al: Sure.

Michael: Just it’s part of the-  It’s part of the agreement when you become a human being that eventually you’re going to experience some decline.

Al: Yeah, I was gonna ask, so how much of this is genetic versus trying to eat well, be healthy, and that sort of thing?

Michael: You know, it’s- there’s a lot of again, a lot of research on this. You know, you can look in like in different countries and you can look for rates of decline and it seems to be pretty consistent. You know, we, you know, some people start higher, but they still experience the same rate of decline. When we looked at the data, we looked at, for example, people who had graduate degrees to see if they had the same rate of decline. They did. They may have started at a higher level, but by the time they reached their 90s, there was still measurable cognitive decline and consistent among that group.

Al: Right, right, right. Well, thank you so much for spending time with me today. This has been very enlightening and I know our listeners and viewers are going to really appreciate it. Thank you, Michael.

Michael: My pleasure. Anytime.

Al: Awesome.

What’s Your Retirement Income Style? Watch & Subscribe on YouTube and Download The Retirement Lifestyles Guide

Andi: Once again, we thank the American College of Financial Services for making it possible for us to bring you insights from all of these thought leaders, like Dr. Michael Finke. Listen next week to see what tax expert Jeff Levine thinks will happen with these historic low tax rates that are scheduled to sunset at the end of this year. And if you missed it, watch or listen to the previous episode of YMYW podcast to learn about retirement income styles and annuities with Dr. Wade Pfau. As we heard today from Dr. Finke, along with money, our social relationships and our health have a significant impact on whether we’ll be happy in retirement. Click or tap the link in the episode description to download the Retirement Lifestyles Guide to learn how to make the most of your lifestyle, growth, health, and relationships in retirement. This free guide will help you determine your retirement vision, and figure out the activities to pursue that’ll fulfill you in retirement. Just click or tap the link in the episode description to download yours for free.

Can I Retire at Age 56? Should I Take My Pension as a Lump Sum or Monthly? (Jon, PA)

Joe: All right.  Let’s go to Jon from PA.  “I love the podcast as I found it about 3 months ago. My wife, Debbie and I have saved $2,800,000 for retirement with $60,000 in Roth and the remainder in tax-deferred. We have $400,000 in a brokerage account, $43,000 in an HSA and $90,000 in cash. My wife and I are both 54 years old. She is a retired private school teacher, no pension, and I’m a sales rep. At 70, I will receive $2000 in Social Security-“

Andi: She will receive $2000 in Social Security. He’ll get $4800.

Joe: “- And I have a small pension that will be $74,000 lump sum or $921 per month at 60, which increases 7% per year if I wait. Is it better to take the lump sum at 60 or the monthly amount at 60 or later?  In today’s dollars, we spend approximately $7500 in essential expenses and $2500 in discretionary expenses per month. I would like to retire at 56.  Can you provide a spitball, please? We’re also considering purchasing a vacation home on the Jersey Shore, where the typical price is about $1,200,000 to $1,500,000.  But that is a nice to have, not a have to have. Our current house is worth $400,000 with no debt.”

Andi: And here I thought that was going to be the line that was going to screw you up.

Joe: Nah, I’ve heard that one before.

Al: Okay, so they have-

Joe: What’s the question? He wants to retire at 56.

Al: Yeah, can he retire at 56? Let’s start with that. Can he retire at 56?

Joe: That’s in two years.

Al: Yeah. So they have, currently they have about $3,300,000. And they want to spend about $120,000, Social Security wouldn’t, they just gave us at age 70, so if they go by age 70, that wouldn’t kick in until 14 years after they retire, so  I wouldn’t even sort of factor that in, at least to the initial analysis, and if you just take $120,000 spending into $3,300,000, it’s 3.6% distribution rate.  It’s, it might be a little high for someone in their 50s. I think I might look at it this way, though, if the, what, what Jon said was that their, fixed costs, essential expenses, were $7500. If you just go with that, that’s $90,000. Divide that into $3,300,000, it’s 2.7%  distribution rate. I think that works. I think maybe, if you can make a little extra income for some of the extra things, maybe that could make sense. But, just on the surface, it seems, it seems a little tight to me.

Joe: Yeah, he’s got to bridge a pretty big gap there. That’s 14 years.

Al: Right.  And that small pension is relatively small, so it’s not going to make a big difference, but I don’t really get $921 per month is like $11,000 into a $74,000 lump sum. That’s 15%, I mean, just doing simple math, Joe,  that’s, 50, that’s, it doesn’t seem right. Something seems off there to me.

Joe: Yeah.  When can he take this?

Al: At 60. So he’s, they’re both 54.

Joe: So he’s ahead of the game at 75?

Al: Yeah. I mean, I’m not sure we have the right numbers because I’ve never seen anything quite like that.

Joe: I would take the pension all day long.

Al: Of course. I mean, it’s such a high percentage.

Joe: Yeah.

Al: Right. Usually we see it more like, if you just do straight math, like 6% or whatever. Yeah.  Yeah.

Joe: So $11,000 a year or a $74,000 lump sum.

Al: Yeah. I’d rather have $11,000 a year. That’s easy.  If that’s the truth.

Joe: Yeah. That’s the right number.

Al: Yeah.

Joe: Yeah, because the internal rate of return on that, depending on how long he lives-

Al: It’s high.

Joe: – is, let’s see, $74,000, you know, future value, 30 years. Yeah, let’s see. He lives 30 years. It’s 14.5%.

Al: It’s pretty good.

Joe: He’s 60, 70. If you make it to 90, let’s say if you make it to 80, 80, 20 years,  it’s still 13.7%-

Al: Take it.

Joe: – guaranteed.

Al: Yeah. Right.

Joe: Unless the company blows up and you lose the pension.

Al: Well, pension’s supposed to be in a different account, but, anyway.

Joe: So, yeah, so answering that question, take the pension, $11,000. Yeah, this is a tough one,  but your Social Security’s going to be a lot higher than $4800. Well, who knows now.

Al: Yeah, I know, right?

Joe: With the garbage-  But if there’s no COLA on it, let’s just say $5000, that’s $7000 a month.  That will cover half of his living expenses. Let me see this. Yeah. Let me do this. So, living expenses. We got 74. What’s the total amount? I’m sorry.

Al: They want to spend about $120,000.

Joe: Okay, $120,000.

Al: And about three quarters of that is essential and a quarter of it’s discretionary.

Joe: I’m going to go the whole, everything’s essential in retirement. So he’s 56. He’s going to retire, or he’s going to be 70 in 14 years.  Okay, let’s use 3.5% inflation.  Alright, so that’s $194,000 at age 70 that his living expenses are going to be.

Al: Yeah.

Joe: He’s going to have fixed income of $5000, $7000 plus, I’m going to call it $8000.

Al: Yeah, call it $8000, but then you got to have some kind of COLA on that too.

Joe: I’m just going to go, yeah, but let’s just be conservative.

Al: Just go straight without COLA.

Joe: Yeah.

Al: Okay.

Joe: All right.

Al: So that’s about $100,000 into $200,000, so $100,000 left over into $3,300,000 and that’s, that, that’s pretty good.

Joe: 0.04%. He’s going to need $2,500,000-

Al: And he’s got $3,300,000.

Joe: – at age 70.

Al: He’s got $3,300,000, but he might be using some of that.

Joe: Well, he’s going to, let’s say-

Al:- if he retires now.

Joe: Yeah. If he retires now, so that’s $1,000,000. He can spend $1,100,000, $1,200,000, I’m going to call it.

Al: Yep.

Joe: Straight line, over 14 years.  It’s 85 plus growth on the other. I don’t know. It’s close.

Al: It’s close. It’s close. I agree.

Joe: Yeah, so I mean, I think if he can toggle the spending.

Al: Yeah, I think that’s the key. There’s some ability to have non-discretionary. When the market does well, you spend more. When the market doesn’t do as well, maybe you gotta pull back a little bit. If you’re willing to do that, I think this could work.

Joe: Yeah. And I think the strategy, it’s like, okay, well, how is this invested? What target rate of return that he needs to generate?  I think, does he take Social Security at 70? It’s all going to depend on where Social Security’s at and what that burn rate is going to look like, what that portfolio does. Because pushing it off until age 70 is great because you get that 8% delayed retirement credit each year that you wait after full retirement age.  You also have to run the math. If you take it at full retirement age, you could get it at 67 and your distribution rate is going to be a lot lower because that fixed income comes through and then that’s going to preserve the portfolio a little bit longer, depending again on health, life expectancy, what that portfolio is doing now until then. Does that make sense maybe for one spouse to take it early just to kind of cut the bleeding a little bit?

Al: That’s what I was just thinking. Maybe he postpones and his spouse takes it early.

Joe: Yeah. They’re the same age and he’s got a lot larger benefit. Yeah. Maybe pension.

Al: Maybe that might be a good thing to consider to, to reduce the burn on the portfolio.

Joe: Yeah. I think he’s got $400,000 in a brokerage account, $2,700,000. If he retires at 56, he’s got access to the 401(k) at rule of 55.

Al: True.

Joe: Yeah. Okay. So he- He’s fine by taking some of the $2,700,000 out versus burning through all his non-qualified.

Al: Yep.

Joe: I’d probably do a mixture of taking some from the brokerage, taking some from the retirement account and doing some conversions along the way.  Yeah, a lot of things to consider here. But it’s super tight. You don’t want to go crazy with Roth conversions, because you’re going to have to pay the tax, and you’re going to blow out some of the liquid assets that you’ve saved. Right. But I think long term, if you retire at 56, you’re going to be really happy you have a lot of money in a Roth IRA at age, you know, 66.

Al: Right.  Yep. A lot of things to consider. I think it’s, I think it’s just a little tight maybe, but, but it’s pretty close. There’s a lot of things you can look at to make this work, including toggling your expenses. I think that’s one of the biggest things. If you can be comfortable with a little bit of variable spending, then I think this has a much better chance of success.

When Can We Retire? We’re Ages 48 and 54 With About $3M Saved (Steve, CO)

Joe: All right, got Steve from Colorado.  He writes in, “Hey, I’ve been listening to your show for about a year, find it both educational and entertaining, and I’m hoping you can help with some retirement spitballs. Here’s a little bit about our situation. I’m 48, my wife’s 54. I make $80,000 a year. My wife makes $115,000 a year. Combined it’s $200,000. Net worth is $3,900,000.”  All right.  So he’s got “$700,000 home that’s paid off, $1,000,000 in his wife’s retirement account, $350,000 in his retirement account, $1,400,000 in brokerage accounts, $400,000 in real estate syndications and alternative investments,  $91,000 in five tour- Excuse me- $91,000 in 529 college savings. Need probably another $100,000 to cover without incurring debt. He’s got $65,000 in car loans. She drives a ‘24 Lexus, I drive a ‘21 Chevy Silverado.  We aim to live off of $10,000 a month in today’s dollars.  Retirement plans, wife is eligible for a pension at age 55, starting at $1000 a month, rising to $2300 at age 60. Her Social Security estimate is $2000 per month at 62, $3000 at 70. Mine’s at $2000 at 62 and $3500 at 70.  I’ve heard these Social Security estimates will be reduced if one retires early.  Most retirement plan will probably work some sort of a stress free part time job, maybe making a combined $40,000. Can you spitball if we can retire? I’d like for my wife to retire first, for me to follow when it makes sense. Also, I’d love to spitball on how we might approach converting some of the traditional retirement funds to Roths. Last year we’re in the middle of the 22% tax rate. Thanks for all you do.” Okay, Steve, 48 and 54, and they want to retire when?

Al: Well, they want to know when they want, that’s the question. When can we?

Joe: All right.

Al: So let’s take that. Can they retire now? So they’re, spending Joe, about $120,000. They got about $3,200,000 in liquid assets.  I think, I think it’s possible to retire now if they, if it’s true, they could make a combined $40,000, right? Because now you spending $120,000. You take off $40,000, so you need $80,000 from the portfolio. $80,000 into $3,200,000 is a 2.5% distribution rate. I’m comfortable with that for 48 and 54 year olds. So I think that could, I think that could work.  And that’s, without even considering the, your wife’s pension. That, I’d probably wait till 60 because it’s more than doubles by waiting 5 years. I think that’s a good deal.

Joe: So, they make $200,000 a year.  They want to spend $120,000. At $200,000 a year, they probably paid $40,000 in state, federal, and property and FICA tax?

Al: Probably. And then the money they put into 401(k)s and so forth.

Joe: No, I’m just saying. How do you accumulate $3,200,000 at 48 and 54 off of $60,000 a year?

Al: It’s a great question.

Joe: It’s pretty good.

Al: That could be inheritance, could be-

Joe: But she’s got $1,000,000 in her retirement account, so she must be-

Al: Yeah, maybe, they, one of the two of them made more at one point, and they saved it, or maybe it’s stock options, or, restricted stock, or, you know, who knows?

Joe: Yeah, they’ve got a phenomenal net worth at their ages.

Al: They do.

Joe: But if they want to spend-  I don’t know how much they’re saving today, where they’re saving, but they got a paid off home and they got $3,500,000.

Al: Yeah, I think you have that amount and you’re also willing to work part time to make a little extra money.

Al: Yeah, I think this works. That’d be my thought.

Joe: Yeah.  What, well they got $1,000,000, $1,200,000 in retirement accounts, they got $1,400,000 in a brokerage account. So this is the, almost the opposite of the other individual.

Al: Yeah, right.

Joe: They got a lot of money sitting outside of retirement accounts where I’d probably beef up my Roth conversions.

Al: Yeah, because you got money to pay the tax.

Joe: Yeah, there’s capital to pay the tax. Right.  And taking advantage of today’s low rates, I think make a lot of sense, especially at age 48 and 54.

Al: And especially if they retire and they’re in very low brackets.

Joe: Yeah, I mean, they’ve been converting to the 22% tax bracket.

Al: Right.

Joe: Yeah, I think you continue to go to the 22% tax brackets if you lose your income or at least have $40,000 of income, most of that’s going to be sheltered through the standard deduction. Right.  So, that gives you at least-

Al: Yeah, and you can live off the brokerage account, because you’ve got plenty, and then just convert up to the top of the 22%. I think that makes sense.

Joe: Or, there’s a couple things here, too, though. Depending on how much gain is in the brokerage account.  Because, do you want a tax gain harvest? Because it’d be in the 0% tax bracket. So, if you’re in the 0% tax bracket, there’s no capital gains up to that 12% taxable income threshold.

Al: Right, yeah, so what Joe’s saying is this, so if you look at your taxable income, if you are in the 12% bracket, that means your capital gains are taxed at 0%. Your long-term capital gains are taxed at 0%. You may still pay state tax, but there’s no federal tax. So that’s something to consider when you’re in a low bracket. Maybe you want to tax gain harvest instead of doing Roth conversions to get that money out tax-free.

Joe: Yeah. I mean, I think you have to reassess what the portfolio looks like now that you’re transitioning into retirement. Yeah. You need to create the income from the portfolio and you want to create that income with the least amount of tax possible. And so then it’s figuring out, all right, well, where’s that income going to come from? And how much tax is it going to produce? So you have $40,000 of ordinary income. That’s your employment income. And so everything else that you want to generate to cover your living expenses, you probably want to have that close to zero as possible. So do you have to reposition the portfolio probably to create the income? So you have half of your liquid assets are in the brokerage account. So as I’m trying to reallocate those dollars, I want to take advantage of that 0% cap gains rate versus maybe then now I’m reallocated. I have a little bit higher basis. I didn’t pay any tax by doing so. And then moving forward, then work on the conversions.  Yeah, but again, I think there’s so many different moving parts here. How do you manage the risk? I think with this- like asset location is gonna be a huge- right, and then from conversions keep those asset classes that have higher expected returns in your Roth, but then you’re living off of the brokerage account. So what assets do you need to put in the brokerage account to mitigate the taxes that will show up on your tax return? And you still want asset classes that are going to produce a higher expected return. You want a little bit more volatility there so you can take advantage of tax loss harvesting. So it’s not in a bubble, you know. I think a lot of these questions come in and it’s like, okay, well here, a 4% distribution rate or 3%, I think you’re good. But I think we could be setting people up for failure that way unless they do another 50 different things, you know, with the money that they have to really make sure that they’re setting themselves up appropriately for retirement. They’ve done a great job saving but the strategies that you’ve done saving money has to change especially if you’re retiring at 48 or 54?

Al: Right. Because that’s a long time retired.

Joe: It’s 50 years, 40-some-odd years that you’ll have the money in retirement, and who knows what healthcare advancements are going to be in 20 years, let alone 30 or 40. Right. So yep.

Watch Social Security Basics You Need to Know: Common Social Security Questions Answered and Download the Social Security Handbook

Andi: One of the most important financial decisions you make could mean thousands more dollars of income in retirement. How and when you claim your Social Security could completely change your retirement lifestyle – but it’s complicated! The Social Security Administration’s Basic Guide to Social Security Programs contains 2,728 rules! This week on Your Money, Your Wealth TV, Joe Anderson, CFP® and Big Al Clopine, CPA answer the most commonly asked Social Security questions, and they help you avoid the mistakes that could reduce your Social Security benefits. Watch Social Security Basics You Need to Know: Common Social Security Questions Answered, on Your Money, Your Wealth TV, in the podcast show notes. Just click or tap the link in the episode description to get there, and to download our free Social Security Handbook as well.

Can We Retire Next Year? We’re 61 and 63 With About $2M. (Eager Eagle, WA state)

Joe: Alright.  Let’s go to Eager Eagle, Washington State. “Hello Big Al, Joe, and Andi. Big fan of the pod. Keep up the great work. My partner and I, neither of us is much of a drinker. Our vices are traveling. And we’d like to do more of that while we’re still relatively fit and able. We have two kids. One is fully launched. The other, well, 85% launched. I’m 61, partner’s 62. We would like to hear your spitball analysis on our retirement possibilities. First of all, do we even have enough to retire as we live in a high-cost state? We would love to call it quits next year when we hit 62 and 63. Here are the two scenarios that we are considering. Which one is more retirement friendly? Do you see a better scenario? Scenario A) retire in ‘26 and withdraw Social Security at 65, and scenario B) retire and withdraw Social Security at 65. We lowered the numbers.” All right, they’re both gonna retire  and pull their  Social Security at 65. What’s the difference between A and B here?

Al: I think, what they’re saying is they retire in ‘26, and then wait to withdraw Social Security at 65. Or, I think they retire at the same time.

Joe: Oh, 61 and 62.

Al: Yeah, they retire in 3, 4 years,  and then take Social Security at that point. So, I mean, you’re always better working longer, financially, if you’re asking us. But, I think what you’re really asking is can you make it happen sooner, right?

Joe: “Expenses, $140,000 a year.  Let’s see. Income $220,000. Current annual income pre-tax.  They’re going to get $3700 monthly from Social Security at 62 or $5000 monthly at 65, $2000 monthly income from pension with non-COLA. They got $1,100,000 in a 401(k), $360,000 in a Roth, $420,000 in a brokerage. Okay, HSA and cash.”  Well, could they do it at 62 is the question.

Al: Can they do it at 62? Well, first of all, let’s- I’ll go a different direction. Could they do it at 65? So I did a little analysis. So $140,000 of spending would be about $153,000, in 3 years at 3% inflation. Their pension would be, I mean, Social Security given a 2% increase would be about $62,000, and then they got a $24,000 pension. So their shortfall spend $153,000, fixed income is $88,000. Shortfall is $67,000. Divide that by 4%. How much do they need? They need $1,700,000. They got $2,000,000. So, yes, it, I think it works. I think scenario B) works. I think it’s tight enough. I might not want to retire much earlier than at the same time as Social Security. Not to say that it couldn’t be possible. I’m just thinking it might be a little bit tight and if you do want to retire now, if you could get some kind of part-time income or side income just until you get your Social Security, I think, for me, I’d feel a little more comfortable with that.

Joe: Totally agree.

Al: Okay

Andi: Thank you for doing that.

Joe: That’s it for us?

Andi: That’s it for us.

Joe: All right. Well, thanks everyone for listening. Appreciate the questions. Keep them coming and we’ll see y’all next time.

YMYW Podcast Outro

Andi: This is Your Money, Your Wealth, and your podcast! If you enjoy YMYW, tell your friends and help us reach more listeners and viewers like you. And don’t forget to leave your honest reviews, comments, and ratings for Your Money, Your Wealth in Apple Podcasts, on YouTube, and in all the other apps that let you do that like Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Podcast Addict, Podchaser, and Podknife. We’re on all of ‘em!

Your Money, Your Wealth is presented by Pure Financial Advisors. To really learn how to make the most of your money and your wealth in retirement, you need more than a spitball: schedule a no-cost, no obligation, comprehensive financial assessment with the experienced professionals on Joe and Big Al’s team at Pure. Click or tap the Free Financial Assessment link in the episode description or call 888-994-6257 to book yours. You can meet in person at any of our locations nationwide, or online, via Zoom right from your couch, no matter where you are. The Pure team will work with you to create a detailed plan that’s tailored to meet your unique needs and goals in retirement.

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.

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