Down market retirement withdrawal strategies, the 5W1H (that is, the who, what, when, where, why, and how) of Roth conversions, the retirement spitball analysis, and the funniest Derails of 2022 on this, YMYW podcast’s Best of 2022.
Follow the YMYW podcast Subscribe to the YMYW newsletter
LISTEN on Apple Podcasts | Google Podcasts | Stitcher | Player FM
- (01:12) Best Strategy to Withdraw from an IRA in Retirement in a Down Market? (Ryan, St. Louis – from episode 379)
- (10:15) Should We Convert to Roth Rather than Contributing to Roth? (Lee, Jacksonville, FL – from episode 366)
- (17:45) Should I Wait to Do Roth Conversions Until I Retire at Age 60? (Paul, Southern California – from episode 393)
- (23:45) Why Would I Contribute to Roth and Lose Today’s Tax Savings? (Champ Kind, Washington – from episode 404)
- (34:53) A Model Retirement Spitball: On Track to Retire on $84K/Year? (John, Greenville, SC – from episode 387)
- (43:53) The Derails
Free financial resources:
WATCH | The SECURE Act 2.0: Major Changes to Retirement Savings and Tax Planning
FREE DOWNLOADS | The Complete Roth Papers Package – includes the Ultimate Guide to Roth IRAs, the 5-Year Rules for Roth IRA Withdrawals, and the Roth IRA Basics Guide
LISTEN | Early Retirement, Roth Conversion Tax: YMYW Best of 2021 (episode 362)
LISTEN | Top Funniest Moments from the YMYW Podcast (episode 300)
Listen to today’s podcast episode on YouTube:
Retirement savings and tax breaks have changed significantly with the passage of the SECURE Act 2.0 in the final days of 2022, and this new law contains about 100 different provisions that may affect your retirement. Click the link in the description of today’s episode in your podcast app to go to the podcast show notes now, watch the SECURE Act 2.0 video, and download the companion guide, to learn about some of the most immediate changes that have already gone into effect.
Today on Your Money, Your Wealth® podcast 411, the first YMYW of 2023, we’re revisiting your favorite topics of 2022: down market retirement withdrawal strategies, and the 5W1H – that’s the who, what, when, where, why and how – of Roth conversions, plus the funniest Derails of the year. We’ll kick things off with your questions from the two most popular episodes of the year: number 379, 6 Money Strategies for Down Markets Depending on Your Goals, and number 366, Roth Conversions vs. Roth Contributions. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
What’s the Best Strategy to Withdraw from an IRA in Retirement in a Down Market? (Ryan, St. Louis)
Joe: We got Ryan writes in from St. Louis. He goes “I tried submitting online, but it did not appear to go through. So sending it via email. Thanks.” Okay. Well, note to IT, got a little problem with our website.
Andi: They have been told and they keep saying, well, you know, sometimes if people have slow internet connections and I’m thinking, I think it might be the slow website that’s the problem.
Joe: I believe you’re probably right.
Andi: So if you have questions and you can’t get them through the form, you can just email firstname.lastname@example.org and we’ll make sure that that gets to Joe and Big Al.
Joe: Yeah, he found it.
Andi: He did.
Joe: Don’t know how long it took him. I wonder if he was like, man, I’ll try to send this question like 8 times. And he’s like, screw it. I’m just going to go to info. “Hello Joe, Big Al, Andi. I have not met Andi in person, but can tell from just her voice, she is a beautiful person.”
Andi: Thanks Ryan.
Joe: Oh, wow. What the hell is going on here?
Al: You know, we’ll just exit. We’ll let Andi answer this one because clearly there’s a favorite.
Joe: Oh Ryan, you’re going full court press. Just listened to your voice every week as it comes out. “I cannot say the same for Joe and Big Al as I do not have this power with male voices.” Oh, and he’s a cheeseball too to go with it.
Andi: He can’t tell if you’re beautiful people.
Joe: Oh. Love this guy. “I’ve been listening to the show for about 6 months and love it. Please keep up the great work.” Well, I guess this is the last episode that Ryan listens to. “I have what I think you will consider to be an easy or short question. My father-in-law just retired and he is wondering how best to withdraw from an IRA when in retirement. Do you simply take a fixed amount of monthly at a conservative rate? Or do you keep a safety stock of cash in the account to draw from while the remainder rides in the market? I’m thinking of times like now when the market’s down 20% and systematic withdrawals would hurt your position more while the market is lower than average. If you have a position of cash, you could then buy more when the market is down or build this cash reserve when the market is up. If cash reserve is best, how would you recommend? 6 or 12 months? or more? I drive a 2017 F-150, have a two year old golden retriever named Blazer, my loyal wife, and two twin boys.” Oh, lovely wife. Did I say loyal?
Andi: You did. I think that might’ve been a little projection there.
Al: Yeah, that works though.
Joe: Wow. Big ride from St. Louis. You know, it’s like, yeah, I got my loyal wife as I listen to Andi’s voice. “I love to drink Fantasyland IPA.” Fantasyland.
Al: Never heard of that one.
Joe: “And thanks for your advice.” We don’t give advice here, Ryan. Don’t give advice. What we do is just chat a little bit about people’s financial situation. Okay. So this is- you know, this market downturn, Al. I’m feeling that people are more chill, more confident or more something. You know? Like in years past, and we haven’t seen a ton of them, but you know, people would kind of be freaked out. You know what I mean? We’d get a lot of calls from clients. We have thousands of clients. We manage billions of dollars of assets. And over the years as Al and I -were growing our business, we would get calls and people would be a little bit scared and a little bit freaked out, and then we’d have to talk them off the ledge and so on and so forth. But I think this time around, it’s a little bit different. I don’t- I think either more and more people are getting more educated and like Ryan here is like, okay, we got a market downturn at 2%. So be it. But what should I be doing in regards to distributions? Should I keep this stash at 20%? Should it be a 6 months of income need? 12 months of income? Should I be taking distributions? Where should I be taking the distributions from? It’s not like, oh my God, what is the market going to do? You know, the sky is falling and everything else. He’s looking for strategy that’s really sound, that makes sense for him or his father-in-law, whoever he’s asking this for. Which I applaud. But I digress..
Al: Yeah. I agree with that too. I think that anyone probably in their 40s or 50s and older, they went through the great recession. They saw how this work, that was the worst recession since the depression. And I’ve never been clear on what’s the difference between a depression and recession. And it doesn’t really matter. It was the worst downturn that we’ve had since the-
Joe: -the one Al Capone lived in? The other- ? It was 2000.
Al: I think I read once that our government didn’t want to call it a depression because people would get too freaked. So that’s why it became the great recession. But nevertheless, that doesn’t matter. I guess the point is that the people that are thinking about retirement now lived through this and they saw that you know what, as bad as that was, that came back. So we’ve got some confidence, right? I think the younger generation, if they’ve invested in a 11, 12 year bull market, and all of a sudden it goes down, that might be a little different, because they haven’t had that experience.
Joe: With some of the FIRE folks, that we kind of blew up over the years. How about that crypto-? Remember – ?
Andi: Oh. Yeah. Yeah. Amanda, her name was Amanda. She works- Yeah. I remember the company that she worked for. I’m not sure if she’s still there or not.
Al: How about the guy that leveraged to the hilt to buy rentals?
Andi: That was Qbert.
Al: I can predict what’s going to happen there.
Joe: Yes sir. But Ryan- So he’s asking two different questions. One’s a bucketing strategy, one’s a distribution of the 4% rule or whatever. So he’s saying, all right, well, if I take 4% out of the portfolio, or 3%, is that a better way to do it than bucketizing the portfolio. Bucketizing means I’m not going to take a 4% distribution from the total balance and sell all positions within the portfolio. I’m going to have some money set aside in cash to live off of for 6 months, 12 months or whatever that is, as the market then can recover so I’m not selling stocks that are down. I think both are fine, but both are flawed. I think again, I mean, I think the theme of today’s show is like, all right, well, what are you trying to do with the money? And manage the money appropriately towards your goals. And if you have a really sound goal of what you’re trying to accomplish and have a set strategy, a real clear strategy of what you should be doing in good markets and bad, then you’re fine. Then you just kind of roll through it. You just execute on things that should be doing when markets are bad. Right now, you should be looking at Roth conversions. You should be tax loss harvesting. You should be buying equities because markets are down. When markets are up, then you take a look, okay, well maybe I should be selling. You sell high, buy low. So there’s different things and different strategies that you should be doing, given bear markets and bull markets. But as long as you understand what your strategy and plan is and what the money’s for, then you can trigger those executions automatically. You can- or have an advisor do it, or, or have a robo-advisor, do whatever, or set it and forget it, whatever. But, but then these- with times like this, it, it helps calm the nerves. You know what you’re going to do.
Al: Yeah, I think, particularly when you’re in withdrawal mode, you need some growth, but you need a lot of safety because you withdrawing money. Safety is generally bonds. If you want to withdraw from bonds, when stocks are up and stocks, I mean, other way around, withdraw from stocks when they’re up and when stocks are down, withdraw from bonds. Great. If you want to sell a few of your bonds into cash for a year’s cash, for whatever needs you have for the year, that’s a super simple way to do it. But yeah, I guess the main point is have the right allocation for what your needs and goals are.
Should We Convert to Roth Rather than Contributing to Roth? (Lee, Jacksonville, FL – voice message)
Joe: Lee from Jacksonville, Florida. He left us a message.
(Voice recording) “Hey, Andi, Joe and Al. Quick question from Jacksonville, Florida. We have a Roth IRA with $130,000, a traditional IRA with $120,000. We are currently near the top of the 22% tax bracket. We’ve been trying to convert IRA into traditional IRA pieces at a time, about $20,000 a year. But we’re getting to the point where we’re probably not going to get done by the time the tax hikes occur when they expire in 2026. So our question is, instead of contributing the $12,000 a year to Roth IRAs, $6,000 into my wife’s and $6,000 into mine, should we just bite the bullet and convert as much as humanly possible into the Roth IRA from the traditional using the $12,000 for taxes that we would have contributed to the Roth? We could probably complete it in about 2 years, except we would not be contributing to the Roth. We would have just rolled over everything from the traditional. Really appreciate any spitballing you can give. I am currently driving in my silver Tacoma. I’m not drinking because that would be bad and we have two cats. I emailed before, but I figured I’d give you my voice this time. Lee from Jacksonville. Out.”
Joe: Lee. Nice to hear your voice, Lee. He’s cruising around the Tacoma thinking about converting. So he wants to use some leverage. I like the strategy, but I don’t know if it makes sense.
Al: Why do you say that?
Joe: Couple of things. What Lee is trying to do is get all of his money from the traditional IRA to the Roth. So he’s got $120,000 in his IRA. He’s got $130,000 in the Roth, and he’s like, “Hey, let me bang this thing out. Let me convert 20 some odd thousand dollars a year and over the next several years, that $120,000 is now all going to be in a Roth IRA. I’ll pay the tax and we’ll be good.” I like that. But he doesn’t necessarily have to convert 100% of the IRA. Doesn’t make any sense. The strategy he’s talking about makes sense for a lot of people, but I don’t think it makes sense for Lee. So what Lee wants to do is say, you know what? I’m making Roth IRA contributions. We’re making $6,000 contributions per year for the spouse and I.
So instead of taking that $12,000, that would’ve went into a Roth, maybe we convert $30,000 and we’ll have a tax bill of $12,000. Instead of contributing to the Roth, we’ll just take that $12,000 and we pay the IRS to get the $30,000 conversion in the Roth. I don’t have a calculator. I just kind of totally made that number up.
Al: Close enough. Maybe it’s $40,000, but that’s the concept. Believe it or not, I agree with you. And the reason is because you don’t have to convert everything. If that’s your goal to convert everything, great. But in this example, you’ve got $120,000. I don’t know how old you are, Lee, but let’s just say you’re in your 60s.
Joe: Lee’s not in his 60s.
Al: I know, but I’m going to give two answers.
Joe: Did you hear his voice?
Al: No, but I’m going to give two answers for our other listeners. In your 60s, it means that your RMD is relatively close. It’s probably going to be no more than $5,000 or $6,000 per year. So it’s not a big number. On the other hand, if you’re in your 30s or 40s, which you probably are, then it’s going to grow a little bit more. The RMD, required minimum distribution, when you finally get there will be higher, but you don’t have to convert everything. Because what happens is by converting, you’re paying taxes in a 22% or 24% bracket in order to save a 12% or 15% bracket later. So that’s first of all. The concept is if you’ve only got a little bit of money, should you do a Roth contribution or should you use it to pay the tax on the conversion? I actually would prefer the tax on the conversion because then your $12,000 can get $30,000 or $40,000 converted instead of just the $12,000 going into Roth. So I like the concept. I just don’t think the numbers are high enough to justify it.
Joe: So we’re missing a lot of information, Lee. First, I think a lot of you just like to give us the IRA numbers, but you might have $2 million in a 401(k). Or there’s other retirement accounts or there’s pensions or there’s other income. So we have to map out the entire scenario for you, really, to understand. He’s kind of looking at it in a bubble. He’s like, “I’ve got $120,000 in this traditional IRA.” He might have several other retirement accounts. I don’t know. I don’t know if Lee’s given us more information in the past, but we would have to look at the entire picture. If this is just a picture of only $120,000 here, the _force out_ on the distribution is not going to be that bad where it’s going to pop another tax bracket where you could slowly do the conversions. You don’t have to get 100% of it in the Roth. But I like the concept.
Al: That’s a good point. Let’s say $2 million in a 401(k), then it would be completely different advice. Then I would say it’s a great, great plan because you’re going to want to bleed out as much as you can. And I’d rather have you use the $12,000 to pay the tax on a conversion than do the contribution.
Joe: For other listeners out there, I mean, our listeners love the Roth.
Andi: That’s ‘cause you taught them to, Joe!
Joe: So they want to look at every strategy possible to leverage the Roth.
Al: They like tax free.
Joe: Yeah, I like Lee’s point, and I think a lot of people probably should be looking at that strategy. So again, instead of taking the $12,000 from cash flow to go into a Roth contribution-let’s say that’s the only thing they can afford. There’s no extra cash flow. That’s what they’re going to say. That’s what they’re earmarked for, saving up $12,000. Does it make sense for them to convert, or to add to their savings? Well, are they on track for their goals? First of all, do they need to use that money to continue to build their nest egg? Well, that’s obvious. But if they’re close and they accomplish their goals and then they want more diversification, then you want to use that or some or part of that to do the overall conversion.
Laws regarding Roth options, taxes, retirement plans, and much more have changed since these questions were originally answered, so download the SECURE Act 2.0 Guide for free from the podcast show notes at YourMoneyYourWealth.com to find out how these changes impact you. In the show notes you can also watch Joe and Big Al answer these questions on video, find links to the original episodes where they aired, read the full transcripts, and share the love and spread the YMYW knowledge to help us grow the show. Just click the link in the description of today’s episode in your favorite podcast app to go to the show notes for all the good stuff. Next up, from episode number 359, the most popular YMYW podcast episode on our YouTube channel – Is Now the Time for Roth Conversions, or Wait Until Retirement?
Should I Wait to Do Roth Conversions Until I Retire at Age 60? (Paul, Southern California)
Joe: We got Paul from Southern California. He writes in. He goes, “Hey, I have a question about a Roth conversion.” Imagine that. First one.
Al: Have we ever talked about Roths before?
Joe: Never. First one here today. “While I’m still a high income earner, married, 56 years old and plan to retire when I’m 60.” All right. So he’s got 4 years.
Joe: “I make between $450,000 and $800,000 annually.” Look at the big old income on Paul.
Al: That’s healthy.
Joe: Congrats. “Depending on how business is going, this puts me in the 35%, 37% federal tax bracket. I have maxed out my traditional 401(k) each year and currently have about $800,000 in it. We have no money in a Roth IRA account. Total savings is about $2,000,000. We have about $1,200,000 in equity in the house. Our kids are through college and out the door.” I like that saying, get the hell out of the house. “Do I wait until I retire? Maybe semi-retired? to do a Roth conversion when my income will drop to a lower tax bracket. I may start part time in a few years. After 60 or so, my income will be around $80,000. Or does it make sense to get money into the Roth now, even though I’m in the highest tax bracket? I appreciate any spitball you can do on this question, even if you mix in some flippant comments.”
Al: You wouldn’t do that, would you?
Joe: Never. Oh, he’s got a big wallet. Okay, the question I have- Paul’s making $450,000 to $800,000 a year. Then he’s going to go part time and make $80,000.
Al: Yeah, that’s what he says in 4 years.
Joe: Wouldn’t you think part time would be like $400,000? or $250,000?
Al: Not necessarily. Maybe he wants to work a lot less or even do something different. Something more fun.
Joe: Like 1/8 of the time.
Andi: It definitely sounds like it’s going to be just something different.
Joe: Yeah. I’m going to go part time and make $5 an hour. That’s fine.
Al: Yeah. Well, usually people say, I used to make $500,000, I’m going to go into consulting, I’ll make at least that, maybe more. And then we see him in two years later. How’d you do? Well, it didn’t quite happen like that.
Joe: They’ll be working at like the airport. OK. I don’t know. Al, I know what your opinion is going to be.
Al: Yeah. Okay, I’ll say it. I would wait till 60. If you’re in a high bracket, you’re going to be in a much lower bracket. You’ve got 12 years to convert. It’s not like you’ve got millions and millions. You got $800,000, which is a good number, but it’s not like it’s a- I mean, sometimes we see some pretty big numbers and if it were a much bigger number, I’d say let’s go ahead and start converting because you’re going to be in the highest bracket anyway. But I don’t think that’s the case. So I would wait until retirement. Personally.
Joe: Just kind of shattered Paul’s dreams there. Well, you don’t have that much money, Paul.
Al: I didn’t say that. I just said-
Joe: Well, it’s not like you got a lot of money, Paul.
Al: I didn’t even say that either. I said you got a good amount, but-
Joe: – not enough.
Al: But not enough- if it were me, not enough to do conversions while I’m in the highest tax bracket.
Joe: Got it. I would convert some for sure.
Al: I know you would.
Joe: Without question. The market is down.
Al: Yeah, but it’s recovering.
Joe: You better hurry.
Al: Do it tomorrow.
Joe: Do it now. As soon as you hit this ‘download’, hit that ‘go’ button on the conversion. I don’t know. The market is down. He’s got a couple of million dollars. He’s making $450,000 to $800,000 a year. So he’s killing it. And he’s going to work for another 4 or 5 years. He’s probably going to save another few hundred thousand dollars that’s going into a non-qualified or brokerage account. Then he’s going to go part time. He probably doesn’t spend a ton. I would say, what the hell? I mean, if you have a Roth 401(k) option, I would start there because it’s a lot easier to kind of swallow the pill.
Al: Yeah, I do agree with that.
Joe: So you say okay, well, going back to, I guess, Uncle Teddy’s question, just a good mix of 15% and 5%. You know what, I think that would be a fine mix for Paul. At least to start the Roth, you get a little bit of money tax-free, and then when he retires, semi-retires at age 60, then you’re right. Then you would unload and probably do maybe to the top of the 12% or 22% tax bracket.
Al: Or the 24% even.
Joe: Yeah, but you look at it, what tax bracket is Paul going to be at full retirement age. You know what I mean? That’s where Al is coming from, Paul. He’s like, well, you have $800,000. Your required minimum distribution is not going to blow you up. Depending on what his lifestyle is and what his savings- or spending is, you could probably spend or take money out of the account at the 12% tax bracket and maybe maintain a pretty low tax bracket throughout. Versus, let’s say if you have a large pension, you have Social Security, you have a lot larger retirement account and no other assets. That’s what we usually see. He’s got a few million dollars. It’s not chump change. But he’s diversified a little bit where he’s got some money in a brokerage account and then he’s got the other money in a 401(k) where mostly a lot of times we see $2,000,000, $3,000,000 in a retirement account and that’s their entire liquid investment.
Al: Yeah, good point. And so to kind of follow up on my thinking. So you’re right. So Paul has a lot of money outside of retirement, a lot of equity in his home. He’s got money in retirement, but he’s already got a decent mix. He just doesn’t have Roth IRA. And the thing is, if he was 69 years old, I might have a different answer. But at 60, you still got 12 years to do conversions. So that’s what I would do. I would wait. But it’s not a bad idea with your current 401(k), to at least get a little money going to the Roth just to get that started.
Joe: Sure. Okay, cool. Hopefully that helps. Thanks a lot for the email.
Why Would I Contribute to Roth and Lose Today’s Tax Savings? (Champ Kind, Washington)
Joe: We got Champ Can- Champ Kind.
Al: I wasn’t going to correct you, but this- that one’s too obvious.
Joe: Little Champ Kind from Washington. That’s Anchorman?
Al: Yeah. Sportscaster, right? Wapow wapoo.
Joe: Whammy. There it is.
Al: Yep. Coming back.
Joe: All right. “Hey, guys. My friends have been pestering me about contributing to my Roth 401(k). I’m currently married and make $150,000 combined at the age of 33. Whammy.”
Al: All right. You could get away with it.
Joe: Hell of a job there. “We plan to retire when our retirement accounts hit $2,500,000 in our mid60s.” The guy is 33, he’s like, all right, 30 years, going to get $2,500,000. “We will then plan to withdraw $100,000 a year and receive $50,000 a year in Social Security. This will match our current income of $150,000. I’m not following the math why I should contribute to Roth.” Well, I can tell.
Al: Yeah, a couple of things missed here.
Joe: I’m trying to follow your math on your overall financial plan here. “We contribute to the traditional 401(k)s today. This saves us money in our marginal tax bracket at 22%. When we withdraw the money in retirement, we’ll pay taxes at our effective rate-” Well, you’re paying taxes on your effective rate today, too “-which we would expect to be lower than 22% at this lower income level. What am I missing? Why would I lose the tax savings at a marginal rate today to save taxes at effective rate in the future? Thanks so much for all the spit balling.” Alright, let’s kind of break this down for our friend.
Al: So they’re making $150,000 right now at age 33, which is great, and then plan to retire when their accounts to $2,500,000 in our mid60s. So, as you say yeah. Call it 30 plus years from now. OK, so let’s see, plan to withdraw $100,000 a year and receive $50,000 a year of Social Security. Okay, that’s all good. What about inflation? I don’t know what you’re spending right now, but let’s just say you’re spending, I don’t know, even if you’re spending $100,000 right now, what’s that going to be? What’s that going to be, Joe, in 30 years? Probably $250,000?
Al: Yeah. If you’re spending that today.
Joe: Okay, 30 years from now?
Joe: What inflation rate you want to use?
Al: We use what? 3.8?
Joe: Let’s go 3.5%- future value of that is $280,000.
Al: So you’re probably going to be spending $280,000. In fact, probably if you’ve done a good job saving, my guess is you want to spend a little bit more than that because you’re going to have more time for travel, more time for this and that. So the fact that you’re able to withdraw $150,000, that’s great, fantastic. But that’s not going to cover your current lifestyle. And then with inflation, it changes tax rates. It changes all kinds of stuff. Remember, we’re probably in the lowest tax rates we’re going to see for some time, although we’ve been saying that for a long time. But it seems right now, Joe, because we’ve had such higher tax rates, at least throughout my career, this is really actually as low as they’ve been. And they’re scheduled to go up in 2025. And the fact that our government still is in debt, likely will probably go up at some point in the future. So tax rates will probably go up. I think inflation is missed here. And what the real spend, what the real need is how much you’re saving to produce whatever kind of income you need. And if you can have some of that in Roth, in fact, even a lot of it in Roth, you’ll be in a much better position tax wise, in the future.
Joe: Okay, so let’s look at this the opposite way. The present value of $150,000, right? So let’s just look at he’s saying, hey, I’m going to produce $150,000 of income in 33 years.
Al: What’s that in today’s dollars?
Al: $50,000. Can you live on $50,000?
Joe: So, yeah, if I’m looking at this and say, all right, Champ, if you’re living off of $50,000 a year, then okay, then your strategy is sound. And at $50,000 of, let’s say, taxable income, you’re probably going to be in a lower tax bracket for sure. But if you want to maintain your same lifestyle, then your math is wrong, your plan is wrong because he forgot inflation. And then where’s tax rates going to go? And then he’s looking at effective and marginal rates. Well, you’re still taxed at your effective rate in retirement, somebody’s going to be taxed at 10%, 12%, 22% or someone’s going to be taxed at 10%, 15%, 25%, 28%, wherever the rates go.
Al: Yes. If Alternative Minimum Tax comes back like it’s supposed to, it could be kind of an effective 35% rate. The other thing too is, don’t forget that all things being equal, you probably will make more at age 43, then 33, and you’ll probably make more at age 53, then 43 and so on. So you’re likely going to be making more and you’re going to be paying higher taxes. You’re probably going to get used to a higher lifestyle. So you have to factor all these things in. When you’re young, especially young in a down market, you want to get as much money as you can in a Roth IRA. It’s kind of like a no brainer if you consider all the financial variables.
Joe: One last thing, and then I’ll drop this. Think about it like this. The Roth IRA is going to be able to help you control your taxes in retirement. OK? And what I mean by that is that you’re going to have different areas to pull from because of all of the money that you have, this $2,500,000 that you’re going to save, and all of that is in a retirement account. And now Champ is getting a little fancy with us because he’s switching back and forth from marginal and effective. So if you think- and I like where you’re going with that, because the effective rate is adding your tax to your income or dividing your tax into your income- marginal rates- You’re taxed on a marginal rate, you’re going to be taxed a little bit at each of the different marginal rates. So if you think of it like this to say, hey, as I start pulling money from retirement and right now he’s in the 22% tax bracket, is there a way that he could stay in the 12% tax bracket in retirement but have higher income? And that’s true if you have diversification in your investments from a tax perspective. If you have money in a Roth IRA, you’re never, ever going to be taxed on those again because you’ve already paid your 22% tax on it. And then when you start pulling money out and let’s say tax rates go up, or if they stay the same, so you’re going to pull money from your retirement account, and you’re going to pay whatever tax on that. But then if you need additional needs or you want more cash flow, you want to go on a bigger trip, you want to go buy a car, you want to whatever, you have money in other areas that are not going to be taxed at all. It’s going to give you a ton more control over your lifetime. Last point for Champ. So if I’m looking at this, let’s say he saves $10,000, right? Okay, well, hold on. He’s got $150,000 in a retirement account, right?
Al: He makes $150,000.
Joe: Oh, that’s right. I don’t know how much he’s got a retirement account.
Andi: He doesn’t say.
Joe: Okay, so let’s just say he has $150,000 in a retirement account.
And he was in the 22% tax bracket, and that’s what his savings was on that $150,000. So that’s $33,000 of tax savings that he received over the years by putting that money into the 401(k), getting a tax deduction. Can you follow that? Andi, you with me?
Joe: All right, good. So now he’s got $2,500,000, and now he’s got to pull that money on, and he’s going to be taxed on the $2,500,000.
Al: That’s right.
Joe: Let’s just say he’s in the 12% tax bracket. Well, he’s going to pay-
Joe: (calculating) – at 22%-
Al: I thought you did it at 12%-
Joe: at 22% it’s $550,000, keep it apples to apples. (calculating) And 12% is $300,000. Okay, so he saved $30,000 in the 22% tax bracket. It grows to $2,500,000. And then he pulls the money out. And let’s say he pulls it out at a lower rate at 12%, he’s going to pay $300,000 in tax, right? And if he pulls $2,500,000, I know a lot of people are thinking I’m stupid by going through this example. And I know if you’re going to pull $2,500,000 out of retirement account, you’re going to be in a hell of a lot higher tax bracket than 12%. But over his lifetime, if he stayed in that 12% tax bracket, that’s the amount of money that he’s going to be paying tax. So the tax deduction that he receives, he has to pay back in the future with interest because there is no free lunch. You get a tax deduction today, but 100% of those dollars are going to be taxed when the money comes out. Either they’re going to be taxed when you withdraw to spend it, or they’re going to get forced out within an RMD, or you’re going to pass away and your spouse is going to pay it, or your kids are going to get hammered with it. So don’t get so caught up in, well, I’m going to be in this bracket, in that bracket, right? Whammy. We got to take a break. Whatever. I hope that my point is made. Champ Kind. Go watch Anchorman. Folks, if you never got what the hell we’re talking about in this inside joke, that was the stupid catch phrase.
The Retirement Plan Spitball Analysis was the most popular type of question from 2022, so we’ll finish with a model spitball from episode 387. This show would not be a show without you, so visit YourMoneyYourWealth.com and click Ask Joe and Al On Air to send in your money questions via email or voice message, and to get a Retirement Plan Spitball Analysis of your own. Give us a name – make it up if you want. Tell us your location, age, when you – and your spouse, if you have one – want to retire, how much you need to spend in retirement, how much you make now, how much you have saved, and any other relevant details. And of course, the irrelevant details like your car, your pet, what you drink, and how you listen to YMYW, just like John does:
Model Retirement Spitball: Are We On Track to Retire Next Year on $84K/Year? (John, Greenville, SC)
Joe: John from Greenville, South Carolina. “Hey, YMYW team. John here from Greenville. Grew up as an Iowa farm boy. Regular listener, great financial info, and always hilarious.” Boom. Thank you. John from Greenville. “Drive a 2006 Hyundai Sontana-“
Joe: Thank you.
Al: Pretty close.
Joe: “- with 240 miles and drink Natty Light.” That’s that Iowa in him. “Retirement pitfall question. I’m 59, making $100,000 a year. My wife is 61, making $50,000 a year. She’ll retire in January 2023 at 62. Trying to get her to work longer, but not happening.” Gotta try a little bit harder there, John. “I’d like to retire at 64 or even 63 if all goes well in the market. Currently have approximately $800,000 pre-tax, $175,000 Roth, $120,000 brokerage, and $20,000 HSA. Current investments are about 70/30 allocation. Saving 10% pre-tax, 2.5% guaranteed employer match, annual variable match based on end-of-year profit, 7% of the 401(k) Roth, maxing out $7000 Roth and $4500 in the HSA. At 64, fixed income will be $51,000 from my Social Security, wife’s $12,000, Social Security and wife’s $14,000 pension. Current income projection need is $84,000 annually. Spitball thoughts?” All right, now we got some information from Greenville. Thank you.
Al: We do.
Joe: Sit back and have a Natty Light. So this is what you do. All right, so he’s figuring out his spending need, which is $84,000. So for those of you that know your spending need, that’s great, you take that number. If you want to retire in 10 years, take $84,000 by a certain inflation rate and inflate the number depending on when you want to retire. So he’s already done that, hopefully. So at 84, his fixed income is going to be $51,000, Al. So if I take $84,000, $51,000 minus, his shortfall’s $33,000. Let’s say wife is going to retire at 62. He’s going to retire at 65. He’s drinking Natty Light. So that means he’s going to live until at least 95.
Al: Because that’s a light beer.
Joe: It’s a light beer. It’s very refreshing. So maybe he takes 3% out, $65,000 plus tax, plus an ongoing cost of living.
Al: Yeah, there’s plenty. Plus, she’s got a $14,000 pension and Social Security’s in the wings, right?
Joe: No, I’ve already calculated that. So he needs $1,100,000 at age 64 when he retires. He’s already there.
Al: Already got it.
Joe: He’s already got it.
Al: You’re right.
Joe: So again, you take your $84,000, you subtract out your Social Security plus your pension.
Al: Got it. Yep.
Joe: That created a shortfall. You need to figure out what your shortfall. Because you have $51,000 from your Social Security, your wife’s Social Security, and the wife’s pension. So $84,000 minus $51,000 is $33,000. Then you take $33,000, divide it into whatever percent, 3%-
Al: To be safe. At this age.
Joe: – that’s $1,100,000. So then you look at okay, that’s your bogey. What do I need to do to get to $1,100,000? Well, you’re right there. You’re saving a ton, and you already have the bogey right now. So, yeah, there’s the spit ball for you. You’re on track. Now, the next step. So that’s the first step. Now, the next step is that okay, well, how’s the income going to be taxed? So then that’s when you start creating your tax strategy. So if it’s all in a 401(k) plan pre-tax, then you say, all right, well, maybe I start looking at getting more money into a Roth account. What tax bracket am I in? What tax bracket am I going to be in the future? If you want to live off of $84,000, you’re probably in the 12% tax bracket. But you do have a lot of money sitting in retirement accounts and your distribution rate is not going to be all that much. So then you’re looking at forecasting your 401(k) at 72 is going to kick out more money than you’re probably spending. So does it make sense to start converting? Or maybe not so much into pre-tax, put more into post-tax? And then the next step from there is to figure out, all right, how should it be invested? What target rate of return are you trying to shoot for? And then what is your withdrawal strategy? What assets are you going to start spending down to create that $33,000 of income. So from a spitball perspective, you’re good from a dollar only. Now you got to create your strategy. What’s your tax strategy? what’s your investment strategy? what’s your withdrawal strategy? God forbid, if you fall over drinking your Natty Light, what does the wife do? Or vice versa? Because now her pension is gone, Social Security is gone. So then you start playing the contingency plan, right? You got grown kids. What’s your estate plan? What is your estate strategy? So I think we get these questions, Al. It’s like, well, should I do a Roth conversion? I don’t know. I mean, there’s so many other things that you should be taking a look at.
Al: Yeah, I think you said it perfectly. So, just to reiterate, so you look at your spending need, what you want to spend, and then you look at your fixed income. In this case, then you subtract the spend from the fixed income. You get a shortfall. You divide that shortfall into what you have and it came out to about 3%. You can go the other way. You can take your shortfall and divide it into 3% to see how much you need since you’re not retiring right away. So that looks great. Most of your income is in a traditional 401(k), so therefore it’s going to be pre-tax. It’s going to be taxed at ordinary income rates. So yes, you want to be thinking about doing Roth conversions, but if you do this right, you may not have to convert tons. You might be able to stay in that 12% bracket the whole time, which will probably become the 15% bracket. But this is where some cash flow planning is in order to figure out how much you really ought to convert. But you’re absolutely right, Joe. It’s not just can I retire. Yeah, it looks like you can retire, but how can you make this even better? Because if you have more spendable money, it’s not what you make, it’s what you keep. Then you can have a better retirement.
Joe: Sure. Yeah. And then we’re getting a ton of questions from all of you over the last couple of weeks. Should I postpone retirement?
The market is down. Maybe I work another couple of years. Well, can I still retire when the market is down 20% or man, the stock market is down, my bonds are down, and should I continue to work? It’s not the point. We’re going to be in environments where things like this happen all the time. It’s what strategy do you have in place? Or what strategy are you going to be putting in place over the next several years so you could be financially independent.
Al: So, in other words, the strategy that you put in place would anticipate markets going up and markets going down. So that right now, when markets are down, you’re not caught in the cold.
Joe: And you’re not freaked out.
Al: You’re freaked out, but you’ve got a plan to ride it out.
Joe: All right, very good. Great question. Thank you for the email.
Andi: To wrap up YMYW’s best of 2022, stick around until the end of the episode for two of the funniest derails of 2022: whammy and crazed. Help us start 2023 off right, and help new listeners find the show, by leaving your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts. You can also rate or review YMYW on Spotify, Stitcher, Podchaser, Castbox, Podcast Addict, Podknife, Goodpods, Amazon, and Audible. Find links to YMYW on these and many other apps below!
Listen to the YMYW podcast:
Subscribe on Android
Subscribe by Email
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.
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC, a Registered Investment Advisor.
• Pure Financial Advisors LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.
• Opinions expressed are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.