Lucky Lou is 48, burned out and wants to punch at 50. How should he bridge the gap before pensions and Social Security? Joe Anderson, CFP®, and Big Al Clopine, CPA walk through the Rule of 55, 72(t)s, and the psychological reality of spending down a taxable account, today on Your Money, Your Wealth® podcast number 565. Alexei and Anna are high earners in their mid-20s who want to save aggressively and keep taxes low. Which retirement accounts should they prioritize, and can they afford a downpayment on a house? Jay and Gloria are wrestling with the classic question of whether to save to Roth or traditional 401(k), especially since their state doesn’t tax retirement income. Is taking the deduction now and backdooring Roths the smarter move? Plus, Sleepless in Seattle wants to know, can her 28-year-old daughter afford to buy a condo in a high-cost housing market? Finally, Jennifer in Texas wonders how to invest and withdraw an inherited IRA over the 10-year rule with the least tax damage.
Show Notes
- 00:00 – Intro: This Week on the YMYW Podcast
- 01:04 – Can I Retire at 50 with $5M and Bridge the Gap to Pensions and Social Security? (Lucky Lou)
- 10:51 – Which Retirement Accounts Should Young High Earners Max First? Can We Afford a House Downpayment? (Alexei & Anna, Cincinnati)
- 17:57 – Save to Roth 401(k) or Traditional If Our State Doesn’t Tax Retirement Income? (Jay & Gloria, People’s Republic of IL)
- 28:21 – Should a 28-Year-Old Buy a Home in an Expensive Market? (Sleepless in Seattle)
- 37:15 – How to Invest for Most Growth and Least Tax on an Inherited IRA? (Jennifer, TX)
- 41:04 – Outro: Next Week on the YMYW Podcast
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Transcription
(NOTE: Transcriptions are an approximation and may not be entirely correct)
Intro: This Week on the YMYW Podcast
Andi: Lucky Lou is 48, burned out and wants to punch at 50. How should he bridge the gap before pensions and Social Security? Joe and Big Al walk through the Rule of 55, 72(t)s, and the psychological reality of spending down a taxable account, today on Your Money, Your Wealth® podcast number 565. Alexei and Anna are high earners in their mid-20s who want to save aggressively and keep taxes low. Which retirement accounts should they prioritize, and can they afford a downpayment on a house? Jay and Gloria are wrestling with the classic question of whether to save to Roth or traditional 401(k), especially since their state doesn’t tax retirement income. Is taking the deduction now and backdooring Roths the smarter move? Plus, Sleepless in Seattle wants to know, can her 28-year-old daughter afford to buy a condo in a high-cost housing market? Finally, Jennifer in Texas wonders how to invest and withdraw an inherited IRA over the 10-year rule with the least tax damage. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Can I Retire at 50 with $5M and Bridge the Gap to Pensions and Social Security? (Lucky Lou)
Joe: Lucy Lou is up next.
Andi: Lucky Lou.
Joe: Lucky Lou. Hi Joe. Big Alm a new listener of the show and absolutely love it. wow. We got a new one.
Al: We do.
Joe: We lose more on the other. Wait, the back door? We’re net. We’re net negative. Just wait. She won’t love it for long. Yep. a little quick history. I’ve been with the same company for 26 years and have been lucky to climb the ladder so much so then I have a high paying job that brings in lots of money. I run a million dollars a year. Wow.
Al: Wow. Lucky Lou. That’s amazing.
Joe: But also has really worn me down. Realize a lot of people would be thrilled with this position, but man, I’m tired. The wife stays at home. We’re both 48 years old. We have two kids. One’s in college, one’s in high school. We have five 20 nines, and they are funded to cover both of their colleges. Okay. I drink a little bourbon in the winter, tequila in the summer. Wife loves a white wine or a margarita. Here’s the spitball. They would like, am I in the position to retire? Way early.
Al: Way early.
Joe: All right. He wants to punch at 50.
Al: Yeah, two years from now.
Joe: Okay. I have two and a half million dollars in a 401(k), $500,000 in a Roth, and one and a half million dollars in a taxable brokerage account. That’s so far so good. That’s about four and a half million. I like those numbers. All right.
House is worth $2.2 million and as a mortgage of 700,000, that is 2.75% at the age of 55. Oh. Be able to get a pension of about $13,000 per month. Wow. Okay. Oh, that’s rich like it. Assuming I work two more years at 67, my wife and I will get approximately $5,800 a month from Social Security for the next two years, I’ll max out my 401(k) contribute to IRAs and backdoor convert ’em for both being the wife and save approximately $150,000 a year into the taxable brokerage account.
Plan would be to spend down the brokerage until the pension kicks in at 55. Then can have access to my 401(k) at 57 and a half. Okay. we need approximately $240,000 per year after tax to live the lifestyle we want. So, can I quit two years? If not, how much longer do we gotta work? Thanks so much. Lucky Lou.
Al: Lucky Lou. first of all, access is at 59 and a half. 59 and a half.
Joe: So he is got a little bit bigger bridge,
Al: a little bit bigger.
Andi: There’s not some chance that, somebody has a weird plan that allows you to access it at 57 and a half, right? The 59 and a half thing is like a federal law.
Al: That’s an IRS regulation. Yeah, you can, access it 55 if he’s got a 457. If you retire at age 55, you didn’t pay 457, it’s 401(k).
Joe: So yeah, 55 would be the rule of 55. If he separates that 55 would, he wants to retire 50, so it’s not gonna happen.
Al: Yep.
Joe: okay. I think he’s spending more than two 40 a year, but, that’s still a rich number.
Al: Yeah, you may be, you know, with a, of course, we don’t know how long it’s been making a million dollars. I did a little math here on this, Joe. Okay. So you can, come up with your analysis in a second. But here’s what I did. So, four and a half million currently, I said, okay, two years from now, I just use a conservative 6% interest rate. I added 190,000 of savings, the amount going at a brokerage of about one 50 and then almost 40,000 of the 401(k) and Roth IRAs. So they end up with 5.4 million. So that’s pretty good. And then what I did, Joe, is I took 5.4 million, 6% for five years. I subtracted two 40 K as a negative.
Joe: Okay,
Al: so, and then I ended up with 5.9. In other words, he ends up with a little bit more than what he started with at a 6% rate of return. So then I took the 5.9 million and I said, okay, what’s you’re spending gonna be at that point, the two 40 becomes 300,000 at a 3% inflation rate.
Joe: What year are you in now?
Al: Five years, in seven years from now.
Joe: So that is when he turns 55
Al: Correct.
Joe: For his pension to come in?
Al: That’s right.
Joe: So the spending needed at his pension amount is 300.
Al: Yeah. Spending 300, his pension’s one 50 shortfalls one 50, which is about a two point half percent distribution rate. which, I think I’m okay with.
Joe: Yeah, but,
Al: so I think this works. Now what’s difficult though is the bridge to get to 59 and a half, and this is a case, Joe, where I might even do a 72(t).
Joe: Ooh, wow. Now we’re talking.
Al: because with a 72(t), you can access your IRA early, it’s not gonna be enough to cover your retirement, but at least you can get it out. You pay taxes on it, but you’re not penalized. And as long as you do it, to age 59 and a half or five years, whichever’s longer, you’re okay. And I think this would be a case where that might make sense because then it’s not all coming out of the taxable, which I don’t know that there’s enough to bridge that for 10 years. Nine, nine and a half.
Joe: Yeah. No, I agree.
Al: I think another thing I would say, I mean, every extra year at this point you work, it just gives you more cushion. Maybe you worked at 51-52, but I think the numbers work even at 50.
Joe: Yeah. I, think on paper it probably, yeah. Jives, but yes, in real life.
Al: you may have to,
Joe: he’s gonna see that $1.5 million taxable account. People look at their accounts differently.
Al: I know. It goes right.
Joe: So you look at your retirement account, it’s like, oh, I want to defer and defer. Defer that. I don’t want to touch it ’cause that’s for retirement. But then you look at your brokerage statement and all of a sudden you see that 1.5 going to 500,000 over a short period of time. It’s tough.
Al: Yeah.
Joe: It’s like, oh man, there’s my cushion. Everything that you have is. Retirement accounts and then-
Al: yeah, and then it’s your, it’s all ordinary income. Now you could convert, but then you don’t have money to pay the taxes. that’s why I think I would do, if I was gonna do this, I’d probably do a 72(t) election.
Joe: Yeah. So 72(t) tax election, SEPP. Separate equal periodic payments. There’s, three ways to calculate it. Yep. So you, could go online and just type in SEPP or 72(t), and then there’s an annuitization. What, amortization. And the third one And yeah, the third one, withdrawal-
Al: For technical, whatever it’s, yeah.
Joe: And it is gonna spit out like a certain dollar figure, so it’s not like you can grab whatever dollars that you want to avoid the 10% penalty. You have to follow a certain schedule. And in most cases, it’s probably not gonna be enough to cover everything. But he does have 1.5 in the tax bill, so he can mix it up a little bit. But he, you have to take that money out. until 59 and a half. So I think that works.
Al: Yeah. Yeah. I think so too. I mean, this is maybe one of the few cases I’ve seen where that could work. Now what you were saying, Joe, is like, if you see your taxable account going down now, I assume everything else would go up 6%. What if the market drops 20%?
Joe: Sure. Two years in a row, but if I’m pulling that much money out, $240,000 out of the 1.5, that’s not growing at six, because I gotta have a lot of safety and cash.
Al: No, that’s right. I mean, I, this is just a general, Yeah, of course. Of course. But, but yeah, I think, on paper it does work. Just, it’s one of those things where, you’re just gonna have to monitor, I guess, as, you go. But yeah, I think you got enough assets and I think, boy, you’re saving a lot. I do agree with Joe. Are you sure that’s what you’re spending? So make sure that, to, to continue your lifestyle. But yeah, I think you could potentially do this. What is he gonna do? 50. see that’s another thing. We didn’t even address that. So, so the thing that a hard charger retire at 50, just-
Joe: all of a sudden he’s 48 years old, makes over a million dollars a year and has $5 million saved.
Al: Yeah. I don’t know. You just stop. I, it’s hard. I, suspect what will happen, lucky Lou, is you may want to go back to work maybe in a less stressful job and, that’s okay, right?
Joe: Yeah.
Al: But it’s up to you. I think this, I think the numbers probably do work now.
Joe: Oh, yeah. I don’t know that I’m just putting myself in his shoes right now. And I’m like-
Al: that’s why I say if you could go an extra year or two, I, you know, every year you, you add, it’s helpful.
Joe: Okay. Good luck. I’m glad you enjoy the show. Hopefully you stick around a little bit, at least longer than most, at least you see the answer.
Andi: The decisions you make in that final working stretch – everything from when you claim Social Security, to how you structure your savings and spending, and even the order of account withdrawals – will determine what kind of lifestyle you enjoy once you punch the clock for the last time. It’s not just about having enough money, it’s making that money work so you can live the retirement you’ve dreamed of. This week on Your Money, Your Wealth TV, Joe and Big Al count you down to retirement with the must-do preparations that’ll get you ready to punch the clock for the final time. Watch The Last 5 Years Before Retirement Will Decide Your Lifestyle – Here’s How on YMYW TV. The link is in the episode description. Next, calculate your free Financial Blueprint and see if you’re on track for that big day from a financial perspective. Just input your income and savings, investments and debt, and your expenses and goals. The Financial Blueprint tool will analyze your current cash flow, your assets, and your projected spending for retirement and output a detailed report outlining what you can do now to help you achieve those retirement goals. Minimize stress. Maximize life, and prepare for the future. To start taking control of your retirement, just click or tap the Financial Blueprint link in the episode description.
Which Retirement Accounts Should Young High Earners Max First? Can We Afford a House Downpayment? (Alexei & Anna, Cincinnati)
Save to Roth 401(k) or Traditional If Our State Doesn’t Tax Retirement Income? (Jay & Gloria, People’s Republic of IL)
Transcript
Andi: There is a ton of free financial guidance just waiting for you, anytime you want it, on YourMoneyYourWealth.com. You’ll find in-depth white papers that break down the big stuff, like what the One Big Beautiful Bill Act could mean for your retirement plans. Or our Growing Your Wealth Guide or Tax-Free Retirement Guide. We’re also publishing new blog posts all the time, covering questions you’re probably already asking. Things like how to invest in the stock market even when volatility is making your stomach turn, whether AI is just a bubble or something more, and if owning gold instead of stock makes sense for long-term investors. All this practical, plain-English financial education can help you make better decisions with your money – and it’s all free, with no strings attached. Click or tap the link in the episode description to access our white papers, read the latest blogs, and browse all the other free financial resources that can help you have a smarter and more successful retirement – courtesy of Your Money, Your Wealth and Pure Financial Advisors.
Should a 28-Year-Old Buy a Home in an Expensive Market? (Sleepless in Seattle)
How to Invest for Most Growth and Least Tax on an Inherited IRA? (Jennifer, TX)
Outro: Next Week on the YMYW Podcast
Andi: Next week on YMYW – assuming our recording schedule goes according to plan – Joe and Big Al spitball on whether Wendi should work as a contractor or employee when returning to work at age 72, whether direct indexing programs offer true tax savings, student loan and 529 strategies for Eric and Tami, and retirement savings and pension options for Al and Peggy.
Your Money, Your Wealth is your podcast! When you tell your friends and family and colleagues about YMYW, it helps Joe and Big Al provide financial literacy and a few laughs to more listeners and viewers like you. Follow us on Spotify or subscribe on YouTube to watch us do YMYW. When you do find us on YouTube join me in the comments – pretty much the only place we have direct interaction with you. Leave your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, and in all the other apps that let you do that like Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Podcast Addict, and Podchaser. We are literally on all of ‘em!
Your Money, Your Wealth® is presented by Pure Financial Advisors. If you’re worried about outliving your savings and wondering if you’re on track for retirement, you probably don’t want to rely entirely on a spitball from Joe and Big Al for peace of mind. Sit down face to face, one on one, with an experienced professional on Joe and Big Al’s team at Pure. You can do it right from home via Zoom, or in person at one of our 13 offices nationwide. Headquartered in San Diego with four offices in Southern California, we’re also in the Sacramento, Seattle, Salt Lake City, Denver, Chicago, Phoenix, and Nashville areas. A financial assessment with Pure is free, just like a spitball, but the Pure team will take a deep dive into where you are now, where you want to be in the future, and the smart ways to get you there – custom-designed for you and your needs, not the entire podcast audience. Click or tap the free financial assessment link in the episode description to book yours, or call 888-994-6257.
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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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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