Show Notes

• • (01:08) Any Reason Not to Do Tax Loss Harvesting? (Mike, Steamboat Springs, Colorado – voice)
  • (05:46) Should I Switch from DIY to a Fee-Based Financial Planner? (Matthew, Seattle, WA)
  • (16:00) If Advisor Touts 8% Returns, Why Can I Only Withdraw 4%? (Mark, MN)
  • (24:49) 3% Retirement Withdrawals + Bonuses = Opposite of Sequence of Returns Risk? (Steven, CT)
  • (31:05) Can I Have an Active and Comfortable Retirement at Age 62? (Joe)
  • (36:35) 401k Vs Roth 401k Contributions, Student Loans, and Babysitting Tax Benefit (Elle, Los Angeles)
  • (41:16) When to Pay Taxes on a 2023 Roth Conversion? (George)
  • (43:26) Cost Basis: First In First Out to Minimize Taxes? (Chuck, ID)
  • (47:27) The Derails

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Transcription

Andi: Do financial advisors have some secret blood handshake that they’ll all claim 8 percent returns, but then tell their clients they can only withdraw 4 percent in retirement? That’s Mark in Minnesota’s question, today on Your Money, Your Wealth® podcast 459. Plus, should Matthew in Seattle quit the DIY approach to his finances and hire a fee-based financial planner? What do Joe and Big Al think about Steven in Connecticut’s “opposite of sequence of returns risk” strategy for retirement withdrawals and “bonuses”? Can listener Joe have an active and comfortable retirement at age 62? Elle in Los Angeles needs some spitballing on contributing to traditional or Roth 401k, student loans, and the potential tax benefits for paying mother-in-law for babysitting. The fellas also answer some more last-minute year-end tax questions, for George and for Chuck in Idaho. If you’ve got money questions, go to YourMoneyYourWealth.com and click Ask Joe & Big Al On Air. Remember, voice messages get priority, like this one coming up on tax loss harvesting from Mike in Colorado. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Any Reason Not to Do Tax Loss Harvesting? (Mike, Steamboat Springs, Colorado – voice)

Joe: ‘ Tis the seasons.

Al: Yeah.

Joe: We’re going to give some little holiday joy here by answering some of these questions, Big Al.

Al: Wow. It seems like we do that year ‘round.

Joe: Yeah.

Andi: That’s what I was gonna say.

Michael: “Hello, Joe and Big Al. This is Mike from Steamboat Springs, Colorado. I drive a 2020 Toyota Sienna all-wheel drive minivan, which does really well in our snowy winter. I’m very fond of craft beers, and I’d like your wisdom, please. Now that the year-end is near, what do you think about tax loss harvesting? I have a taxable bond mutual fund, which has a loss. What are the negatives of selling for a loss? And is there any reason not to sell for a loss? I just read that I should sell shares that are specifically identified rather than average cost. I’d appreciate your general advice. Thank you very much. I enjoy your show and get laughs and lots of wisdom out of it.”

Joe: All right, Mike, thanks for the question. Tax loss harvesting. So let’s explain what that means and the benefits and then we can say, does it make sense or not?

Al: Yeah. So tax loss harvesting simply means you bought in a stock or bond, a mutual fund outside of retirement, right? And you paid $10 per share. Now it’s worth $8 a share. So it went down in value. Should you sell that stock? If you do sell the stock, you create a loss. You get a $2 loss per share. Let’s put it into real numbers. Maybe you bought something for $50,000 and now it’s worth $40,000. So if you sell it now, you have a $10,000 loss and that loss can be used against any other capital gain, whether it’s this year or you can carry it forward to future years. So first of all, we’re big believers in tax loss harvesting from a tax standpoint, because you can offset other capital gains. So that’s a good thing. On the other hand, you don’t necessarily want to sell, lock in your loss and not get back in the market because then you’re going to lock in your loss, right? You want to buy something similar so you’re still in the market. So when the market recovers, you will get that money back, right? That’s the whole point of investing. Investments go up and down.

Joe: Yeah. Good point. Because when someone hears tax loss harvesting, they’re like, well, you want me to sell for a loss?

Al: Yeah. This is, yeah, this is counterintuitive.

Joe: Well, I understand people sell for a loss when they get scared and they get out of the markets. But we’re not telling you- this is a tax strategy period. So you sell XYZ stock, but you buy ABC stock, something similar. It can’t be identical because then there’s a wash sale rule. So the IRS understands if you sell, you get a capital loss. So you have to buy some- maybe in the same asset class. So if it’s maybe the S&P 500. You want to buy a total US stock or total world fund. So you’re still in the markets, but it can’t be identical. So you want to be careful there. If you sell Home Depot, maybe you buy Lowe’s. You sell Coke, you buy Pepsi.

Al: Now, you can, if you buy Lowe’s and you can sell Lowe’s in 30 days and buy Home Depot again. As long as you wait 30 days, that’s the wash sale rule.

Joe: Yeah, you have 30 days to buy that same security back.

Al: Correct.

Joe: So if you have a loss, yeah, absolutely take the loss, but don’t go into cash, buy something similar. So your asset allocation is very similar to where it was before you sold that particular security.

Al: Yeah. And then as far as what kind of cost basis you use. A mutual fund, most people use the average cost basis because it’s simple and that’s what the brokerage company house will send to you is your average cost. You can use specific identification, which just means, okay, I bought-

Joe: You take the ones with the lowest loss.

Al: Yeah, I bought 5000 shares and I got 1000 shares. I bought at a high dollar amount. I want to sell those and then take a bigger loss. You can do that. That’s just fine. Be aware when it’s a mutual fund, if you do that, now basically, you’ve basically elected a specific identification through the life of that security. In other words, you can’t go back to average cost and so every single time you have a dividend, if you’re reinvesting, that’s like another stock purchase. So if you have a stock for 10 years with 4 dividends and capital gain dividends, so that’s 5 times, 5 times 10 years, you have 50 different purchases, even though you didn’t really feel like you bought anything. Every time you got a dividend, it was reinvested. You have a new purchase that you have to account for. So the brokerage houses will send you all this information. I wouldn’t do it myself. It seems like too much work to do anything other than average cost on a mutual fund. On a stock with stock certificates, and shares that you bought it’s much easier to do that.

Joe: All right. Hope that helps, Mike.

Should I Switch from DIY to a Fee-Based Financial Planner? (Matthew, Seattle, WA)

Joe: We got Matthew from Seattle writes in. “Hey, Joe and Al. I’ve taken a DIY approach.” DIY.

Al: Do it yourself.

Joe: Okay, thanks. “Approach to financial investment in retirement planning for more than 20 years. I’ve started considering a fee based- oh, I- I have started considering a fee based planner as my wife and I hit a few life milestones. Looking for your input before dropping $6000 to $10,000 annually, but first the facts.” So do it yourself?

Al: Yeah. Or spend $6000 to $10,000.

Joe: Yeah. It should cost you. I mean, there should be value.

Al: There should be. I think that’s-

Joe: If it’s a cost, then don’t do it. If it’s value to enhance your overall situation, man, maybe you might want to consider.

Al: Okay. So we can probably skip the other page and a half.

Joe: He’s a DIYer. I could tell he wrote like 18 pages. Can you- I want to save some cash. All right. “My family and I, we live in the east suburbs of Seattle. A wife, two kids, one in college, one in high school, one yellow lab. I drive a BMW and my wife, a Mercedes.” Oh, okay. Fancy. Yeah, I’ll say. Fancy Nancy. “I drink a IPA on the weekends. I drink a kind.”

Al: A kind one? What’s a, is that one that’s not too bitter?

Joe: I guess so.

Andi: Maybe so. That might work for Joe.

Joe: I don’t know. He’s a little fancy. “My wife drinks anything within arm’s reach.” Oh, okay. All right.

Al: Is she gonna hear this?

Joe: “Our situation. I’m a spreadsheet junkie who actually enjoys learning more and more about personal finance and investing. I have worked in FAANG companies for nearly 20 years. Do you know what FAANG companies are?

Al: Yeah. Facebook, Apple, Netflix, Google. One of those 4.

Joe: Wow.

Andi: And Amazon. There’s two A’s there.

Al: Oh, yeah.

Joe: Alphabet?

Al: Alphabet.

Joe: There you go.

Al: Yeah, you’re right.

Joe: Well, Alphabet and Google are the same.

Al: Yeah, so it’s-

Andi: That’s why A is Amazon.

Al: That’s why we have Andi here. I was hoping you wouldn’t ask me about the second A.

Joe: You were quick. Yeah. You’re good. “Which has been very rewarding financially. I’m 50. My wife’s 49. I am well into the 37% tax bracket each year and wife doesn’t work. Our $2,500,000 home is paid off, our kid’s college education more than covered, healthy emergency fund, my compensation is nearly 75% RSUs and I invest 25%-30% of my annual income split between my 401(k), Roth IRA for my wife and I, by the way of a little backdoor conversion. And throw a little bit in some brokerage accounts. We invest in my 401(k) pre-tax Roth and IRAs up to the federal limits. Most of our investments are in low cost age based broad market funds, ETFs with two exceptions. I have $500,000 in a Fidelity actively managed account for tax loss harvesting. As well as $200,000 in T-bills for some short term goals. The financial facts- net worth is about $6,000,000, cash $150,000, bonds $200,000, investments $3,400,000, Roth IRA $225,000, 401(k) $1,800,000 mainly pre-tax, brokerage account $1,000,000.” What’s investments?

Al: So, the investments is those 4, Roth, 401(k), brokerage, invested, RSU, which by the way is restricted stock unit.

Joe: So, investments is $3,400,000, but then the Roth, the 401(k), the brokerage, the-

Al: Well, if you have the cash and bonds, the investments are, let’s just call it $3,500,000 and the home is worth $2,500,000.

Joe: Why wouldn’t they put bullet points?

Al: I don’t know. Because it might, it should be sub-points.

Joe: Sub-points.

Al: That would be helpful.

Joe: It would be. I’m like, man, this guy’s got $10,000,000 bucks.

Al: It just keeps adding up.

Joe: Yeah.

Al: And if we say this again in the next paragraph, we get $20,000,000.

Joe: Alright, so he’s got a $6,000,000 net worth.

Al: We’ll call it, we’ll call it $3,500,000 liquid and $2,500,000 home.

Joe: Okay. “I began to consider a financial advisor over the past two years for a few reasons. First, Fidelity provides free financial advising for high net worth clients, but it’s basic and a bit frustrating. Second, as compensation, wealth, dividends, and interest grow, I pay more attention to the tax efficiency. I wonder if a quality advisor can bring down my tax bill with things I have not thought about. Tax exempt mutual funds instead of treasuries.”

Al: Well, I think he thought of that because he put it in the paragraph.

Joe: Right. “Third, big tech is big stress. I consider bringing in my target retirement date from 60 to 56 after our youngest graduates college. I think a quality advisor may be able to provide guidance and position our investments for retirement over the next 5-plus years. To give you an idea of how hands-on I am, here are items I handle myself.” Oh boy.

Al: Oh, here are bullet points.

Joe: Yeah, finally we got bullet points. Thank you. “Annual comp and federal tax planning, updated tax laws, additional Medicare calculations, quarterly estimated tax payments, RSU granting, investing projections. He does a little investment related tax calculations on interest and dividends. He does backdoor Roth conversions.”

Al: Like it.

Joe: “Semi-annual compensation, investing, how much, which accounts, etc., cashflow and tax planning. Annual charitable giving strategy, annual semi-annual investment allocation review, reviewed by Fidelity Advisor, semi-annual refresh of endpoints of Fidelity Retirement Planning Tools, Monte Carlo Simulation.” So the guy does a ton.

Al: Yeah, he does. So he wants to know should he pay $6000 or $10,000 or nothing.

Joe: “Interested in your inputs on whether a financial planner will yield an ROI to offset the cost.” I think Matthew, yes, in my humble opinion, I believe that a really good financial advisor, and I’m very biased because I’ve been doing this for 25 years. I’m a CERTIFIED FINANCIAL PLANNER™ and we manage quite a few dollars. We have thousands of clients. Besides that, I think there’s a lot of value that a really good advisor could provide Matthew. But I think it would drive Matthew absolutely crazy, and it would drive the really good advisor crazy.

Al: That’s probably true.

Joe: I would not want Matthew as a client. No offense, Matthew. Could you imagine? Because you’d show him some, and then he would be like, all right, wow. And then it’s, you would have to explain it over and over. Oh, where’d you get that calculation? Because I did the same calculation. And I, well, you know, you’re $.40 different than mine.

Al: You know, the hardest financial plan that we do is an engineer that’s already done it. And so we do the plan, here’s the results, then they bring in their plan. Well, it’s $1000 off my plan in 25 years. What’s the difference?

Joe: Or they’re the best, or they’re the best clients because they get that well here, I’ve already back tested this. I already did this. All right, you do. All right. We’re on the same page. All right. I fully trust you, run with it. So it’s either one or the other. I’m not sure where Matthew’s at, but- if you take a look, he’s got $3,500,000 and he’s in target date funds. Target date funds should be used for someone that has $200,000.

Al: Yeah, that doesn’t know what they’re doing.

Joe: So, right there, that’s a red flag, like, oh, there’s an investment strategy that he could employ, then he’s looking at an active managed account for tax loss harvesting, but-

Al: That’s saying that those are worse because they lose more money?

Joe: But, I don’t get what that, he’s got the buzzwords, I can tell he’s smart. Tax loss harvesting needs to be, right, that’s not active. That’s just positioning the account from a tax perspective to benefit your tax situation long term.

Al: Yeah. And the best way to do that is you have multiple accounts. We have small companies, mid-sized companies, international because they go up and down at different times.
That’s the value of tax loss harvesting. Selling the ones that are down, buying something similar so you’re still in the market, not just through with one fund. Here’s how I would answer this question. I’m not sure whether you’re going to find a financial advisor worth $6000 to $10,000. However, I would, I would-

Joe: You could find an advisor worth $100,000, I guarantee you
I’m worth more than $100,000 for this guy.

Al: Let me finish. But, that being said, I would still, if I were him, I would still hire an advisor to make sure I’m on track, right?

Joe: He’s got the, he’s got the Fidelity guy, but it’s frustrating because I guarantee the Fidelity guy is just kind of a standard rep at Fidelity.

Al: Yeah, and it’s a free service. Yeah. So he gets what he pays for. So based upon-

Joe: He’s got a Mercedes and a BMW.

Al: So I’m going to say Matt, based upon everything that you said, I would hire an advisor for a year or two to make sure you’re on track and then see for yourself – is this worth it for you or not? If it is, continue, if not, then don’t, but at least you’ll get a second opinion, a second detailed opinion, go to an advisor that really does deep-level financial planning.

Joe: Just looking at the portfolio alone. In a volatile market, as you rebalance different asset classes versus a target date fund, even though it’s a glide path and I get all of that stuff, right, you can buy very low-cost funds. And if you have, and I’m not saying the advisor, you should hire an advisor for the investment part of this by any stretch of the imagination. I think you look at the overall strategy, and then how does the investment piece fit into it? Is it optimized to your specific financial goals? A target date fund doesn’t know what, Matthew’s goals are. So, I don’t know, I kind of just ranted there a little bit. So, yeah, I wouldn’t hire- I think he’s doing great. Congratulations, Matthew. If you want a job, go to our website.

If Advisor Touts 8% Returns, Why Can I Only Withdraw 4%? (Mark, MN)

Joe: “Hey guys, got a question or more of an observation that I’ve concluded over my years of building up my retirement. In listening to oldies of financial podcasts-“

Andi: Oodles.

Joe: Oodles. Is that oodles or oldies?

Al: It’s oodles, I think.

Joe: “When looking for a financial advisor, they all tell you how great their services, funds, knowledge is, and always show you the returns they have been able to achieve for their clients.”
Mark, if someone is showing you that garbage, then don’t hire them. You’re not hiring an advisor for their picking a mutual fund prowess. Because you can always backdate a portfolio to show you awesome returns.

Al: Whatever day you want to.

Joe: Sure. You pick whatever funds. However, I was just ranting and raving about my ability to do such things.

Al: Well, he said all tell their great service. I don’t think we- we talk about, actually, we don’t even do any of this. We tell people how to retire successfully. And then they can decide to do it on their own or hire us.

Joe: Yeah. We need to educate them to say, what is your strategy? What is your plan right now? Okay. And then here’s a better plan or better strategy, or, here’s my opinion. Here’s what we see to make your situation better. Any questions?

Joe: And then decide.

Al: And sometimes people say thanks and sometimes people say, great, I don’t know how to do it. Can I hire you?

Joe: Yeah. That, you know what, that makes a lot of sense. Because to hire an advisor should save you money. Or it should increase your wealth or it should save you time. It should save you stress or unnecessary mistakes or all the above. Okay. So all these guys are bragging about their knowledge and show returns and able to achieve for their clients. “I can just about guarantee that not one single one of these advisors are stating that their returns are going to be 4%. They all tout 8%, 9%, 10%, or even better. But when you want to start taking your money out, now they tell you, you better not take more than 4%!! Exclamation point, exclamation point. Why would that be? When you sold me on going with you initially, you told me to get those great returns. But now that I want to withdraw and reduce your assets under management and lower your pay-“
Is this a client of mine?

Al: I think so. It’s a former client.

Joe: I fired him years ago. I remember Mark from Minnesota.

Al: Yeah, right.

Joe: “-and lower your pay, you all of a sudden cannot get a greater return than 4%?” Wow. This guy is feisty.

Al: He is. I like it.

Joe: “Not a huge fan of Dave Ramsey. But he is not benefiting from-

Andi: – singing the same narrative-

Joe: But he’s not benefiting from singing the same narrative as all the other financial advisors that manage assets and recommends a much higher withdrawal based on his history averages. It makes total sense that advisors would not want you to drain down your money and just live off the earnings. That way, they never lose a dime of their book. Is there a secret blood handshake that advisors will all stick to the same narrative, or you will be kicked out of the club?” My God.

Al: Remember that time we did the blood handshake?

Joe: Yes, we did.

Al: Yeah, that was years ago.

Joe: Yeah. “Mark, freezing in Minnesota, drive a Tacoma, four-wheel drive, obviously, drink Diet Mountain Dew. Enjoy your podcast.” Yeah, I knew he’s from Minnesota. Anyone that drinks Diet Mountain Dew.

Andi: Yeah, that has been a thing lately. Apparently, Dave Ramsey has been claiming that you can take 8% per year out of your portfolio, no problem whatsoever. We got another email about that from our buddy Steve in Las Vegas, who always writes looking like he’s doing a deposition.

Joe: Yes.

Al: That’s because Dave Ramsey says you can get 12% on growth mutual funds. He’s said that forever. And you can sometimes.

Joe: Mark. We answered this question earlier today, too.

Al: Yep.

Joe: The 4% rule, again, is a rule of thumb. It’s not like, alright, you’re going to take 4% out every single year. Some years, take 10% out. Some years, you probably can only take 1% out. It really depends on your goals and what you’re trying to accomplish and everything else in between. So, but yes, there is a blood handshake. We don’t want to lose any of our book. And damn you for letting the cat out of the bag.

Al: Exposed. So let me say it this way, 8%, 9%, 10%, yeah, those are rates of return that you can earn if you’re 100% in the market – stocks, which when you’re in retirement distributing money, you don’t necessarily want to be 100% in the market. You want to have a globally diversified, low-cost balanced portfolio, which probably will earn 6% or 7%, let’s just say.

Joe: Outpace inflation and tax and then take 4% for your living.

Al: That’s exactly right. So, so do that math, right? You take out 4%, you save in 2%, so next year your 4% is a higher number, so you’re keeping up with inflation. You’re not losing purchasing power. Plus, that helps you with sequence of returns risk. If the market goes down 20%, it takes years to recover. Right. It’s not like you’ve been taking everything out and now you don’t have enough money. So that’s the whole point here.

Joe: Yes.

Al: And the second point is what you already made, which is this is something you evaluate each and every year. 4% is an initial guideline, but it’s based upon your circumstances, your goals, what happened in the market, your life expectancy changes in your health, all kinds of things. This can change dramatically based upon your own circumstances.

Joe: And then these are average rates of return. Average rates of return in our industry is very dangerous.

Al: Yes.

Joe: Because if you look at, all right, Al, let’s say you’re up 50% one year, you’re down 50% the other year, but your average rate of return over those two years is what?

Al: It’s negative.

Joe: Well, it’s zero, right? 50 and 50 is zero. If you look at a simple average.

Al: Oh, I thought you were going another direction. Okay. Yes.

Joe: However, if you look at what your actual rate of return would be is negative. Let me explain it this way and then we’ll take a break. Is that, if I have $100,000 and I lose 50%, and so now I have $50,000. But the next year I gain 50%. So if I lose 50% and gain 50%, that would net out to zero. Negative 50%. Andi, are you with me?

Andi: I’m with you.

Joe: Alright.

Al: It seems that way.

Joe: So that’s an average, but if you look at it from a dollars and cents perspective as you’re taking distributions from a portfolio, I’m down 50%. My $100,000 went to $50,000. Now I’m up 50%, but the 50% that I’m up is on a half of my dollar figure.

Al: Yeah. So that’s $25,000. So now you’re at $75,000.

Joe: I’m at $75,000, but my average rate of return over those two years is zero.

Al: Was zero. That’s correct.

Joe: But I have $75,000. Let’s say now you’re taking dollars out of that portfolio. I’m still not breaking even. And then that’s how you can see portfolios just blow up on people. So from a safe perspective, don’t take 4% out of your portfolio. Please don’t do that. Take as much as you think you need, but understand that each year is going to be different. If you take out more than 4% one year, you might have to take out a little bit less the next or if the market’s doing really well, who cares?
Take your bonus. God, I’m just-

Al: You’re fired up today.

Andi: Find out exactly how much you can afford to take out in retirement. Spend a couple minutes with our retirement calculator at EASIretirement.com, that’s EASIretirement.com – it’s free. Joe and Big Al just did a whole episode of Your Money, Your Wealth TV on the EASIretirement.com calculator, so click the link in the description of today’s episode in your favorite podcast app to go to the show notes and see how it works. Then give it a spin: go to EASIretirement.com, create an account, plug your income, savings, and expenses, and see what you need to do to avoid running out of money in retirement. E-A-S-I stands for education, assessment, strategy, implementation. YMYW provides the education, the calculator helps you assess your financial wellness and map out your strategy. Then, talk one-on-one with an experienced financial advisor to begin implementing your plan. Try it for yourself now at EASIRetirement.com and let us know what you think. EASIretirement dot com.

3% Retirement Withdrawals + Bonuses = Opposite of Sequence of Returns Risk? (Steven, CT)

Joe: Okay. We got Steven from Connecticut. He writes in. He goes, “Hello. In thinking about retirement spending, is there a framework whereby you start with a 3% withdrawal rate at age 60, which would be the spending floor through retirement, but are able to bonus yourself if you get the opposite effect of sequence of return risk? For instance, if you start with a $3,000,000 portfolio, that’s $90,000 spend, but get lucky and have a 30% increase within two years, could you cash out some or any amount of the rate of inflation? Maybe give yourself a $200,000 bonus that year, bringing your portfolio balance to $4,000,000 and $200,000, which-“ haven’t we had questions like this in the past?

Al: I think so.

Joe: Yes. Okay. I like where his head’s at.

Al: Yeah, me too.

Joe: It’s like, all right, “We got a $4,000,000 balance now and $200,000, with which- with which to live it up in the short term.” So he wants to just go crazy, go to Vegas.

Al: Market’s good, let’s enjoy.

Joe: Let’s go. “Any guidelines on how much of a bonus would be too much?” So then there’s a follow-up, I have to read this whole thing again?

Andi: He sent a second email that’s got more details, yes.

Joe: Oh boy.

Al: Well the first paragraph is the same thing.

Andi: So the additional details, yeah, the second paragraph, “Please assume-“

Al: Go to that part.

Joe: So he’s really thinking about his bonus. He sent, he would like, send, and then he’s like, you know what, oh, I really need to know a precise answer to this. Let me give you more information.

Al: During our careers, we all get excited about bonuses, so he wants to continue that feeling.

Joe: I like it. He goes, “Hey Andi, I wanted to provide a few more from my original message. I’m thinking about retire-“ Okay.

Al: That’s the reason.

Andi: That part’s, yeah.

Joe: Okay, blah, blah, blah.

Al: Additional details.

Joe: So why’d you print this?

Andi: Because I just realized that whole part was literally a reprint until you get to additional details.

Al: She’s trying to goof you up.

Joe: Got it.

Andi: Oh yeah, that’s it.

Joe: “Here’s the additional details-“

Andi: Like he needs the help with that, Al.

Al: Good point.

Joe: “Please assume that Social Security and rental property income will meet my bare bones needs in retirement. Food on the table, roof overhead. The $3,000,000 example would be additional spending money. And as such, a variable withdrawal rate would be fine. The $3,000,000 would be a combination of 401(k) pre-tax Roth and brokerage dollars. Assume $2,500,000 and $500,000 respectively. Car, 2020 Nissan Ultima, Wife 2024-“ they’re on the lot early “-Volkswagen Atlas Cross Sport.”

Al: Are we in 2024 already? We’re close.

Joe: Oh, you gotta get those VWs.

Al: Yeah, they came out early.

Joe: Come on, you gotta get them. He likes a little New England IPA. Oh, Paper Plane. He’s got a couple pets. “Used to have a wonderful shih tzu and a pain in the ass cat. R.I.P. both. We loved them dearly. Thanks, Steve.” Alright, so he wants a bonus. He’s got a floor. He’s got a little real estate income. So, $3,000,000. Can we go 3% withdrawal rate, and then you-

Al: – maybe just keep it there.

Joe: Big boom in the market.

Al: Take bonuses when you have good markets.

Joe: Makes sense.

Al: Yeah. I don’t, I’m okay with that. I mean, especially because he’s got his essentials covered with his other income.

Joe: So here’s the deal with the percent rule, these, the distribution rates, it’s a rule of thumb. And it should be used to see if you’re close to have enough accumulated dollars to provide you a retirement income that’s in the ballpark.

Al: Yeah, so it’s not gospel, that’s what you’re saying.

Joe: No. So, once you retire, we don’t want you all to start, oh, well, you know. Big Al said, take 4% out of the portfolio, so I’m going to take 4% out of the portfolio every year. No, you don’t want to do that. Each year is going to be a little bit different.

Al: Yeah. And the point is you’re right. That’s what you kind of, do you have enough? I mean, that’s kind of a back of the envelope to have enough. Each year you should be monitoring this and adjusting as appropriate.

Joe: Because the reason for it is that, all right, I have $200,000 and I want to spend $50,000 a year from the portfolio. Your money’s gone in 4 years. It’s over with, or it could be sooner than that. So the 4% rule or the 3.5% rule from our opinion is to help you gauge how big of a nest egg that you should have. It’s more or less a roadmap for an accumulation destination. How much money should be in my retirement account? How much money should I have liquid to help me provide income? Is that $2,000,000, $3,000,000, $5,000,000, $500,000? Do not use that rule as a distribution gauge. You want to make sure that you map it out. You want to look at the tax implications of the income. You need to change the portfolio. So just be careful when we’re spitballing this stuff, it’s really to help you see if you’re on track. But when you start pulling the plug from your paycheck to create another paycheck, it’s a totally different ballgame and there’s a lot more complexities in there.

Al: Yeah, so I will say a couple things here that I’ll add. So the fact that bare-bones needs in retirement is already covered means that you can be more flexible on your distribution rate.
Because for the average person that has a big shortfall, let’s say for example, then you may want to be careful here because certain years, you’re going to have a great market, but certain years, you’re going to have a negative market, right? And so the negative market years, are you going to put back 4%? Probably not. You already spent it.

Joe: Right. You got the bonus of $200,000, but now the market’s down 30% the next year.

Al: That’s right. So now what happens?

Joe: Where did that $200,000 go? If I had the $200,000- so yeah, you could ebb and flow this thing, you want to take more dollars out, for sure take more dollars out, especially if you’re bare bones-ing this thing.

Al: Yeah, but I think the key is just what you said. It’s something that you monitor over time and you make changes and adjustments as appropriate yearly or even more than yearly, depending upon your situation.

Can I Have an Active and Comfortable Retirement at Age 62? (Joe)

Joe: “Hello, Big Joe and Al. My name is Joe and I work at a printing shop earning $150,000 a year. I’m 61 years old, recovering from a stroke.” Ooh, sorry, Joe.

Al: Oh boy.

Joe: “Luckily for me, I made 100% recovery. My goal is to retire at 62, and my drink of choice is aged bourbon. I do not have any company-sponsored IRA plans, but I have a self-directed IRA of $320,000 of cash and one rental home valued at $270,000 that produces $20,000 of net income a year. If I use the income from my rental home and my Social Security, can I retire at age 62? I do not have a lot of expenses. My home is paid off. However, I do have to pay $10,000 a year in property taxes, $1500 in home insurance, and my car is very old and I’ll need a new one soon. I’ll also need to buy health insurance.” Wait, it sounds like a joke now.

Al: It’s not looking good.

Joe: And by the way, then I have to pay alimony of another $50,000.

Al: That was added.

Joe: Okay. “I am an active adult. I love to golf, ski, bicycle, hike, and bowl, go on two big vacations a year, and several three-day weekends golfing.”

Al: Okay. I like it.

Joe: Yeah. Love the lifestyle. Three-day weekends golfing, biking, hiking.

Al: Hiking.

Joe: Little different parts of the country. “My goal when I retire is to visit all the national parks and remain active and engaged in life. Can I retire at 62 comfortably and stay active?” That sounds like a pretty expensive lifestyle, Joe.

Al: Okay. Let’s break down the math. I mean, you, first of all, you didn’t tell us what you’re spending, nor did you tell us what Social Security is. So we’re going to make both those up. So we’ll start with what you did tell us. $20,000 of rental income. And you got $320,000 of cash, which needs to be invested, but let’s just say the $300,000 at 62, I’ll give you the benefit of the doubt. We’ll do a 4% distribution rate. So that’s $12,000. So we’re at $32,000 so far before Social Security. Let’s just say that’s $25,000. I don’t know, but at 62, that might be a reasonable estimate, $67,000. So call it $70,000 of income, maybe. And what are you spending? Well, let’s see, you’re making $150,000 right now, and I would say because there’s not a huge amount of money in a self-directed IRA, which is only, what, $7500 per year over 50, probably you’re spending about $100,000. It would be my guess, Joe. So it looks a bit short here.

Joe: Yeah. Well, the self-directed IRA, he’s got $320,000 in cash and one rental home. Is the rental home inside the self-directed IRA? That’s how I read that.

Andi: Yeah. “I have a self-directed IRA with $320,000 cash and one rental home.” Yeah. So it sounds like they’re both in the IRA.

Al: I would agree with that, but it’s still the same computation.

Joe: Oh, sure. Yeah.

Al: $20,000 plus-

Joe: He’s got $600,000.

Al: Yeah. Yeah. Plus 4% of the $300,000. So I think he’s probably got $65,000 or $70,000 of income, probably spends around $100,000.

Joe: He’s got $320,000 plus $270,000. That’s all he’s got.

Al: I know, but I’m taking the $20,000, I’m taking it face value that-

Joe: Oh, sorry, 4% on $320,000 plus $20,000?

Al: Yeah, that’s what I’m doing.

Joe: Got it.

Al: So that’s about, I got $32,000. I added $25,000 for Social Security.

Joe: Yep.

Al: $62,000 roughly.

Joe: Okay.

Al: We’ll call it that. So $67,000 is spending. We don’t know, but if you’re making $150,000 annually, you’re probably spending most of it. If you want to live the same lifestyle, I’m guessing you’re spending at least $100,000.

Joe: Yeah. Well, I don’t know if I’m golfing and I go on big vacations-

Al: Now you’re spending more. Right. So I think-

Joe: Golf isn’t cheap.

Al: No. Well, it can be if you go to municipal courses. Anyway, it seems a little tight.

Joe: Little, yeah, a little short.

Al: I think you’re-

Joe: Hold on, he’s 61. Okay.

Al: Yeah, yeah.

Joe: Another year.

Al: Another year. I think probably you either work a few more years or you work part time to bridge the gap. And it could potentially do it. I’d love for you to push your Social Security out a little bit longer to get a bigger number.

Joe: Yep. So do I. $150,000, that’s a good income.

Al: It is. And, and when you make $150,000, you save $300,000 plus the rental, save $600,000, that’s a good number. But to make $150,000 it’s not like he’s been saving like 50% of his income or 20%or even 10%.

Joe: All right. Thanks for the question, Joe. Sorry. Got to work a couple more years.

Andi: Ever donate to those birthday fundraisers on Facebook? Or give an old car to your local public broadcast station? Or write a check to support your favorite charity? It feels good, right? But those may be completely missed opportunities to save big on your taxes and give even more to the causes that matter to you. Learn 6 Secrets to Bigger Tax Savings from Your Nonprofit Donations on the latest episode of YMYW TV, with the lovely Allison Alley, CFP® alongside Joe, filling in for Big Al. Watch the show and download the companion Tax-Smart Charitable Giving Guide from the podcast show notes to get your strategy in place before year-end. Click the link in the description of today’s episode in your favorite podcast app to get there. Then, share the show and the free resources with your friends.

401k Vs. Roth 401k Contributions, Student Loans, and Babysitting Tax Benefit (Elle, Los Angeles)

Joe: Got Ellie from Los Angeles writes in, “Hey Joe, Al, my name is Ellie. I’ve just started listening to your podcast. Love it.” Boom. Love you, Ellie.

Andi: Might be Elle.

Joe: or is it Elle? Oh yeah. It is Elle. Like Elle McPherson?

Andi: Uh huh.

Joe: “I have a few questions I’d like to ask for your insight. I’m 32 years old and have recently begun my new career. My husband and I previously underwent a long stint of postgraduate training with low income, but we are now anticipating the high income next year, around $700,000.” Wow.

Al: Wow. That’s a lot.

Joe: “We also welcomed a baby this year and are aiming to save for a house in a high-cost-of-living area within the next two years.” Oh, highbrow, they’re making some cash, got the baby.

Al: It’s time to step it up.

Joe: Beverly Hills.

Al: Let’s go. Let’s get the house. Let’s get the car.

Joe: “Question one-“ What do you think? Brentwood? Beverly Hills?

Al: I’m going to say Santa Monica.

Joe: Santa Monica. “Should we maximize, prioritize contributions to our pre-tax 401(k) or allocate them to Roth 401(k)?” You’re making $700,000 a year, 32 years old. I know what I would do, and I know what Al would do, and it’s the opposite.

Al: What would you do?

Joe: I would go Roth.

Al: 100%?

Joe: 100%.

Al: I actually might go 50/50. I mean, in the past I would have said 100% regular 401(k) to get the tax deduction because you’re in a huge tax bracket, but I’m suspecting Elle or Ellie, you’re going to be in a high tax bracket forever. Based upon what you’ve just told us at age 32, husband and wife making $700,000. So I think maybe I would want to have some of both.

Joe: She’s been, they’ve been grinding at school.

Al: Yeah, sure.

Joe: And then it’s like, okay, now we’re making income, 32 years old, making $700,000 combined.

Al: So it’s a life changer.

Joe: And so rarely do you see someone, let’s just cut that in half, $350,000 a piece at 32?

Al: Yeah, it’s unheard of.

Joe: So now, when she’s 42, like my age-

Al: Well, that’s a stretch.

Joe: Yeah. She’s following my, you know, my path here. You could double that. So they’re always going to be in high tax brackets.

Al: Yes. Agreed.

Joe: And 32, I would compound tax-free all day, every day.

Al: I know you would. So I’d go, I’d go 50/50.

Joe: All right. “Question two. We currently have a student loan balance of $60,000 at an interest rate of 5.5%. Should we pay it off now or is it better to focus on saving for a down payment for our future home?” I would- 5.5% is not awful.

Al: Agreed, and $60,000 isn’t that bad either.

Joe: Isn’t ton, I mean the monthly payment’s probably minimal.

Al: Yeah, get the home you want.

Joe: Yeah, I would, yeah, start saving. Or-

Al: You could do some of both.

Joe: Some of both.

Al: But, I mean, definitely make sure you’re maximizing your 401(k) or Roth 401(k) to the match. I mean, that, that’s what we’ll tell you right off the bat. Don’t leave that money, but it sounds like you’re wanting to maybe, fully fund, which I agree with. And then as far as paying off the student loan or home, it’s like, well, how much do you need to save for the home? Maybe you come up with a plan, maybe you do some of both. I might be inclined to save for the home because I’ve just, I’ve got a new baby. That’s my priority. I’ve got $60,000 of debt. Yes. But it’s a reasonable interest rate. It’s not like it’s $1,000,000. We’ve seen $1,000,000 of student loan debt where it’s like, okay, this is like priority.

Joe: I thought that there was going to be a big student loan number.

Al: I thought there’d be another zero on it at least.

Joe: “We have a mother, our mother-in-law-“ our mother-in-law. I wonder if it’s her mother or his mother.

Al: It’s now a joint.

Joe: “-our mother-in-law taking care of our baby full time. Is there any way to pay her and have tax benefits for us? For example, providing her a 1099 form, allowing us to deduct her salary for tax purposes.”

Al: Yeah, the answer is no. The reason is because to get a tax deduction, you need a business, right?

Joe: She could be in the business of employing mother-in-laws.

Al: You gotta have a profit motive. I mean, there is the childcare credit, maybe something there, but no, I think this is not a way to go, pay self-employment, pay Social Security taxes and all that. No, I think that’s not the right path there.

Joe: All right, Al. Congratulations on the new baby-

Al: Great story.

Joe: – the new house coming up, and I’m guessing maybe Brentwood.

Al: You think? Yeah. Could be.

Joe: We’d like to know. Let us know.

When to Pay Taxes on a 2023 Roth Conversion? (George)

Joe: We got George. Just George.

Andi: Just George.

Joe: Just Curious George. “Love your show. My question needs your help. If I convert $50,000 to a Roth IRA on 12-10-23, may I pay the taxes of $11,000 in March 2024 when I file my 1040 form without penalty? Or I have to pay the estimated taxes by January 15, 2024. I’d be very grateful if you could help me at your earliest convenience or before 12-20. Very much appreciated.” All right, George. What’s the answer there, Big Al?

Al: Well, George, first of all, we’re going to get right on it, because it’s time sensitive. So, the answer is maybe, which is a terrible answer, but let me explain. So there’s two ways to avoid penalty when you owe extra taxes in any given tax year. As long as any combination of your withholding from your job and/or estimated payments, as long as that equals 100% of last year’s tax, it doesn’t really matter what the extra tax you owe, there’s no penalty. You pay it with the return. Now there is a caveat. It’s 110% of last year’s tax if your income is over $150,000 for the prior year. But anyway, so that’s one way to avoid penalty. Another way to avoid penalty is if you pay in 90%of this year’s tax quarterly. So in other words, in that particular case, you’re supposed to pay one-quarter of this tax each quarter. Now, of course, since you did the Roth conversion late in the year, you actually would only theoretically have to make an estimated payment on January 15th, if you didn’t qualify with your other withholding for the 90% rule or the 100% rule. It’s very hard to explain. I almost have to diagram it, but that’s, there’s two ways to avoid penalty. And so without knowing your situation, I don’t know whether you’re going to be penalty-free or not.

Joe: I would just pay the estimate January 15th.

Al: To be safe. Call it good.

Joe: All right. Yeah. Thanks, George. Hopefully we got you in time.

Cost Basis: First In First Out to Minimize Taxes? (Chuck, ID)

Joe: Let’s see if we can get Chuck from Indiana. “I recently sold from a fund I’ve had since 2014, so my wife could have her Tesla.” Oh, Chuck. “Vanguard asked if I wanted first in, first out to minimize taxes. I choose to minimize taxes and received a report two pages long of all kinds of transactions. How does this work?” Thanks. Enjoy the show.” So he’s looking at basis again with his brokerage account at Vanguard.

Al: Yeah. It’s a similar question of what we just had, which is when you sell-

Joe: I think the whole cost basis reporting changed about 5 or 6 years ago.

Al: Yeah. Actually longer than that. I think it was 2012 where the brokerage houses started giving you your cost basis. So, basically what the brokerage companies do is they give you an average cost. Generally, whether it’s a stock or a mutual fund-

Joe: Because if you bought it, let’s say if you’ve held that for years and it has dividends. So each dividend, like you said is reinvested back into the fund. You’re buying more shares. So you have a different cost on that share because it’s a different point in time.

Al: Yeah. So think of it this way. So you had a $200 dividend and if you want to reinvest it, it’s as if you got the cash, $200 in your hand and you bought $200 worth of shares. That’s a transaction. So that’s a purchase, right? So if you want to do anything other than average cost, and there’s a couple of choices, specific identification, which we just talked about, which is when you sell, you identify which shares you want to count as the sales shares. Or you can do something called first in first out, which means the oldest shares that you bought are the first ones you sell. So if you want to do that, like, I don’t know, you bought 10,000 shares and now you got 12,000 shares because of reinvested dividends and you sold 2000 shares. Then you get this two-page report from the brokerage house of all these transactions. And so you just have to take the first 2000 shares starting with day number one and until you get to 2000, you probably have to split one because you’re not going to hit 2000 exactly. And then whatever that cost basis is your cost basis. But then you got to keep that method on a go-forward basis, which most people, myself included, don’t want to do. Just use average costs. It’s much simpler.

Joe: We got to get out of here. I’m done. It’s over. Sayonara. All right. That’s it for us. Thank you, folks. The show’s called Your Money, Your Wealth®.

Andi: Steamboat Springs, oodles, the Paper Plane, Joe the hypochondriac and his Mom, and sexy Teslas in the Derails at the end of the episode, so stick around. Hey, want to do something nice for us before the year is over? Here’s our Christmas list:

1. Tell your friends about the show and the financial resources.
2. Subscribe or follow Your Money, Your Wealth wherever you get your podcasts, and don’t forget YouTube as well. It’s all free, you don’t have to pay for any YMYW content.
3. Review and rate us – honestly, mind you – in Apple Podcasts and any other app that accepts them.

All three of these things help the show, and me, immensely, so thank you, and Merry Christmas!

Your Money, Your Wealth® is presented by Pure Financial Advisors. Click the “Get An Assessment” button in the podcast show notes at YourMoneyYourWealth.com or call 888-994-6257 to give yourself the gift of a free financial assessment, in person at one of our many offices around the country or online, a time and date convenient for you, no matter where you are. Chances are, one of the experienced financial professionals on Joe and Big Al’s team at Pure will be able to identify strategies to help you create a more successful retirement.

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

The Derails

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