Can Claire and her husband retire early at age 60? Joe and Big Al spitball for them and explain how to calculate how much you’ll need in retirement. Plus, should Jeff invest his pension money more aggressively, and should he save to his thrift savings plan or his Roth? Should Paula save to her brokerage account or her 401(k)? When and how much should Ken and “Fume Guzzler” each convert to Roth? The IRS charged Lex late fees for not paying estimated taxes throughout the year on her Roth conversion – find out how to avoid that yourself. Finally, how can Ken get out of an annuity? And is it harmful for Sarah to advise co-workers with little financial experience?
Show Notes
- (00:00) 7th Annual YMYW Podcast Survey: your chance at a $100 Amazon e-gift card! (type in ymyw)
- (00:46) Show Intro
- (01:36) Retirement Spitball: Do You Agree We Can Both Retire at Age 60? (Claire, OR)
- (10:03) Retirement Spitball: More Aggressive With Pension? TSP Instead of Roth? (Jeff, South Carolina)
- (15:09) Retirement Spitball: TSP + Rollover IRA = $3M. Convert to Roth? (Fume Guzzler, NYC)
- (20:33) Is There a Formula for Retirement? Watch YMYW TV, Download the Retirement Readiness Guide
- (21:42) Is It Harmful to Give Advice to Coworkers With Little Financial Experience? (Sarah, Phoenix, AZ)
- (26:17) How to Get Out of an Annuity (Ken – voice)
- (29:03) Tax-Efficient Retirement Distributions: How’s Our Roth Conversion Strategy? (Ken, Southern California – voice)
- (33:49) How to Request a Retirement Spitball Analysis
- (34:40) IRS is Charging Me Late Fees for Not Paying Estimated Taxes on Roth Conversion! (Lex Martin, Maryland)
- (38:43) Should I Save to the Left Pocket (Brokerage) Instead of the Right (401(k)? (Paula, TX)
- (46:26) Show Outro
- (48:02) The Derails
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Transcription
7th Annual YMYW Podcast Survey
Andi: Which financial topics are of the most importance to you today, what are your favorite and least favorite things about the Your Money, Your Wealth podcast, and what would make YMYW even better for you? You’ve got until August 30th to answer these and 14 other questions for your chance to win a $100 Amazon e-gift card. See all those links to free financial resources in the description of today’s episode in your favorite podcast app? Click the one to go to the show notes, and you can access the 7th annual YMYW Podcast Survey and get the secret password to it. Help us make Your Money, Your Wealth your favorite retirement and personal finance podcast. US residents only, no purchase necessary, survey and giveaway close and winner chosen at 12pm Pacific time on August 30th, 2024.
Intro
Andi: Can Claire and her husband retire early at age 60? Today on Your Money, Your Wealth® podcast number 490, Joe and Big Al spitball for them and explain how to calculate how much you’ll need in retirement. Plus, should Jeff invest his pension money more aggressively, and should he save to his thrift savings plan or his Roth? Should Paula save to her brokerage account or her 401(k)? When and how much should Ken and Fume Guzzler each convert to Roth? The IRS charged Lex late fees for not paying estimated taxes throughout the year on her Roth conversion – find out how to avoid that yourself. Finally, how can Ken get out of an annuity? And is it harmful for Sarah give advice to co-workers who have little financial experience? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Retirement Spitball: Do You Agree We Can Both Retire at Age 60? (Claire, OR)
Joe: Got Claire from Oregon writes in, goes, “Hello, I want to see if you agree we can both retire at 60.” Why is that in red?
Andi: That’s the title.
Joe: Thank you. “I’ll be 56 in August and my husband will be 58 in February. We live in Oregon currently and don’t plan to move in retirement because we are near the grandkids and kids. But we do travel a lot and we’ll be gone for months at a time in retirement. My husband drives a 2005 3500 Dodge Ram. Go Dodge Diesel.” Alright, “and I drive a 2012 Dodge Journey. We may need new vehicles soon. The hubs don’t drink. But is a true coffee connoisseur, and I am water or red wine, Our two kids are adults and have their own families and been launching for years. We have 8 grandchildren we love to spoil. Don’t care about passing anything, or maybe the house to our son.” She doesn’t care about passing anything. Ah, but maybe our house. And $1,000,000. And the Dodge 3500 and whatever the hell that can tell.
Al: And that only goes to the son. The house. The other kid?
Assuming the daughter?
Joe: They’re fine. Okay, “We already travel a few times a year. Around the world and I love it.” That’s Big Al. World traveler.
Al: Doing the same thing, Claire. Right with you.
Joe: Winner. “When we’re too old for that, we’ll take the RV around the states. Here are our numbers. Husband, pre-tax $1,300,000, after-tax $217,000, pension at $502,000 now, but should be $900,000 at retirement using the company projections. Pension, because he works for a major oil company, contributes 20% all after-tax starting a few years ago. Me, pre-tax $279,000, after-tax $54,000, money market $24,000, contributing $1200 a month to build up cash. Also, I have about $6000 in a stock brokerage. I currently contribute 6% after taxes to my work 401(k), which gets me my company match. I’m in corporate finance as a financial analyst. He makes $126,000 a year and I make $117,000, not counting bonuses early, but those flex.” Okay? We add that up there, Big Al?
Al: Yeah, that’s about $2,400,000.
Joe: $2,400,000 for Claire.
Al: And I will just tell you this, so he would like to retire at age 60. I’m, I just said husband’s 58, so let’s just go two years. Two years with what they’re saving, about $20,000, maybe a little bit more. I just used $20,000 saving 6%, so about $2,700,000 is what they end up with.
Joe: All right. So the projection is going to be close to $3,000,000 in liquid cash.
Al: Correct.
Joe: Some pre-tax, some after-tax, some stuff. Okay. They spend about $10,000 a month, so $120,000 a year. Yep. Or be in the mortgage, which will be paid off in November 2035 and house is worth $850,000 right now. And we owe $437,000 and I pay an extra $300 a month to get that thing paid off in November, 2035. When the mortgage is paid, we have about $600 a month still for property taxes and insurance. Expenses include investment of $1000 medical, $900 a month for discretionary, vacation or house repairs. We have no debt except normal household expenses, including in the $10,000. My husband’s company offers medical for retirees, but I just estimate another cost of $1000, which may be on the high side.” You don’t have to get in all that. I mean, just say $10,000.
Al: We just gloss over those kind of details.
Joe: Okay, so $10,000. They got $3,000,000.
Al: Yep. Looks pretty good
Joe: $120,000. Looks pretty good. Now we got Social Security at $62,000. I don’t know, they take it at 62, full retirement age, they’re going to have 3, 6, $7000 a month.
Al: They got $7000. Yeah. To cover what they can already cover with their investments.
Joe: I think it looks pretty good.
Al: Yeah, me too.
Joe: “Question, do we buy new vehicles before retirement?” Yeah. Let’s buy a big ass truck so we can haul more stuff.
Al: So Claire, the real answer is it doesn’t matter, however, I would buy the vehicles before you retire because you have cash flow to pay for it. It’ll just feel better.
Joe: Okay, or “should we pay cash with retirement money?” Just buy them now.
Al: Yeah, I buy them now with cash flow. And I would pay cash.
Joe: “Or just put down some cash to make the payment smaller. Can we retire at 60?”
Al: Yes, you can.
Joe: God, she’s like asking very specific, “when should we take Social Security?” I don’t know. But you could take it at 62, 67, or 70, and I think the numbers still work.
Al: Yeah, it sort of doesn’t matter, but-
Joe: “maybe mine at 65, his at 67.” Sure.
Al: I would say at least one of you goes to 70, because then you got the higher benefit for if one of you survives the other.
Joe: “I’m worried about cash flow until the mortgage is paid, which is when I’m 67, my husband’s 68.” Okay, well, I get it.
Al: I’m, I’m not too worried about it.
Joe: I’m not either.
Al: If I, if I take your $120,000 a year in expenses and I divide that into $2,700,000, which is what I got as a, as an estimate, that’s a 4.4% distribution. We like to say keep it 4% or even 3.5% at age 60, but you have such large Social Security payments. Don’t worry about it. 4.4% is fine.
Joe: “How much should I withdraw to cover expenses? What about taxes? Oregon is a high tax state, it seems. Spitball would be great.” You’re close, right? She goes, “I listen while I cardio.” Then she comes back and she pours over her spreadsheets. So this is what you do, Claire. Here’s your spreadsheet. You put $10,000. You put 3.5% inflation on the $10,000 per month or $120,000 per year starting this year.
And then you forecast that out to age 100. So, each year that $10,000 a month or $120,000 a year is going to increase by 3.5% per year because that’s a fairly conservative inflation rate on your living expenses. You could even get more technical because you already gave us kind of the breakdown of what your mortgage is. So then you break down your discretionary expenses, you run that at 3.5%, 4%. Then you run your mortgage at a fixed number until 2035 when you pay the thing off. So that would be a second cell in your overall spreadsheet. Then you would look at taxes. You could run a straight effective tax rate or you could get more complex and look at tax tables and so on. But I think then you look at your retirement accounts and separate your retirement accounts on top of the spreadsheet by what you have in retirement accounts. So pre-tax, what do you have in Roth accounts? And then what do you have in brokerage accounts? Separate the 3 of those and then use a 5%, 6%, 4% growth rate on those. And then you put your contributions and what you’re putting in each of those different pools. And then you can see when you claim your Social Security at 62 or 67 or 70, then you’re going to see a shortfall of how much money needs to come from the portfolio. Here’s your fixed income. Here’s your expenses. What is needed from the portfolio? Then you divide that shortfall by your balance of what you have in retirement accounts and that will be your distribution rate. You’re going to see that it’s going to matter very little because you’re going to be good because you’ve done a really good job of saving and you don’t spend that much. But if you want to pour over some spreadsheets, I just gave you like 8 hours of fun.
Al: She’s going to listen to that in slow motion. About 20 times or Claire, you could just do this. I think you’re fine. No matter what you do, your husband’s Social Security benefit’s a little bit higher. I’d have him wait till 70. Take your, take yours when you can’t stand it anymore. In other words, if you feel like you’re running out of cash, just go ahead and take your benefit. It’s a 62, 64, 67, I don’t care. Just make sure you have one of the benefits wait till 70, because it’ll be a higher benefit for the both of your lives.
Joe: Yeah. I mean, you could really maximize it or just take it.
Retirement Spitball: More Aggressive With Pension? TSP Instead of Roth? (Jeff, South Carolina)
Joe: We got Jeff from South Carolina. “Gentlemen. 47, recently selected for a position that will provide a pension equal to my salary. If I retire at 65, the salary is presently $225,000, but will likely be $295,000 to $315,000 by the time I reach 65 with the standard cost of living adjustments. If I retire less than 65, the pension would be reduced by 2% per year. My wife does not work outside of the home. But may return to work in the next year. Between the two of us, we have $850,000 in retirement accounts with $700,000 in my TSP, where I’m maxing my TSP are two Roth IRAs and about $45,000 going annually into our retirement accounts.” So, how can he max the TSP in the Roth IRA? Oh, so that’s the total?
Al: That’s the total. Yep.
Joe: So, it’s not an additional $45,000?
Al: No. That’s the total of everything.
Joe: Got it. All right.
Al: That’s how I read it.
Joe: Okay. “We recently bought a new house and took out $450,000, 30-year mortgage at 6.5%, which tripled our monthly mortgage payments. I do not expect our retirement expenses to outpace our current income-to-expense ratio, but we would like to travel more in retirement and clear the debt on the home. I’ve got 3 questions for you. Number one, given the pension, can I be more aggressive with the retirement fund selections? I am presently in all equity and would like to continue to be more aggressive.” So the salary is presently $225,000.
Al: Correct.
Joe: So he’s going to receive a pension of $225,000 a year? Or is he going to receive a lump sum pension of $225,000?
Al: No, I get that the pension will be the same. In other words, his pension will be, if he retires at 65, as I hear this, he’ll get 100% of his income. So if he retires earlier, he’s got to give up 2% per year. So it’s a lower amount.
Joe: So he’s going to receive $225,000 annually.
Al: Correct.
Joe: As a pension?
Al: Correct. Well, that, that’s, that’s if it were, if he were 65 in today’s dollars, he’s saying his income would be $295,000 to $315,000 at that time. If he retires at 65, that’s-
Joe: That’s the lottery.
Al: -that’s what he will receive.
Joe: Yeah. That would go, that would go all in.
Al: Yeah. I, yeah. So the point is, Jeff, you’re, I think you’re thinking about this right. In other words, your expenses are going to be covered by your pension, right? Even if you retire a little bit early, they’ll be mostly covered by your pension. And then you’ve got a lot of savings already. You got $850,000. Joe, I just did a quick calculation because his third question is if he retires at 61, is he okay? If you take $850,000, add $45,000 a year, 14 years at 6%, he ends up with $2,800,000. He hardly needs it. Right? So yeah, you can afford to be more aggressive if you want to. You don’t have to. So, Jeff, you’re, you’re in a great position where you can be super conservative if you want to, ’cause you don’t need the money, why worry about it. On the other hand, because you don’t necessarily need most of it. If you wanna have a little bit higher rate of return, as long as you understand it’s gonna be more volatile and ride out the lows, then yeah, go.
Joe: He’s got 20 years.
Al; Go for it. Right?
Joe: If it goes to zero, he still has $225,000 at his account per year.
Al: I know. So. “He switches contributions from all Roth to all traditional to free up cash with a higher mortgage. Is this a mistake? Only $170,000 of our portfolio is in Roth. But of course, I’ll keep funding the Roth IRAs and make a catch-up contribution Roth until I turn 50.” I would not worry about the higher mortgage. Because you’re going to have tons of fixed income.
Al: Right. Yeah, if you look at it this way, your fixed income will be the same as salary, so it’s all ordinary income. Then if you have your IRA, 401(k), TSP, it’s going to all be taxed at ordinary income. And if you look at you’re 47, so the RMD will be roughly 30 years from now. I mean, a little bit less, but 30 years from now, it’s going to be a big number. So I sort of like the, I think maybe you did make a mistake. I think I would have stayed Roth, particularly this year and next year because we’re in lower tax brackets. We don’t know about 2026 yet.
Joe: Yep, I would go all Roth. Stay with all Roth because any dollar that you pull out of those retirement accounts down the road is going to get taxed at the same rate or higher if you believe tax rates are going higher. “Can you spitball my retirement picture at 61 where I would receive a pension equal to about 92% of my salary?” So you already answered that.
Al: Yeah, you’re all good.
Al: Yeah, you’re great. Don’t worry about it.
Joe: Okay. “I drive a beater truck that I inherited from my dad, and my wife enjoys her CRV. Enjoy an occasional glass of wine or a little SoCo with Coke.”
Al: So they’re covered.
Joe: “Thanks for the entertainment.”
Retirement Spitball: TSP + Rollover IRA = $3M. Convert to Roth? (Fume Guzzler, NYC)
We got Fume Guzzler.
Al: Fume Guzzler? Okay.
Joe: Is this Fume Guzzler? Is that the same guy? Is this the guy that drinks- ?
Andi: No, I don’t think it is. I think this is somebody completely different-
Joe: – gasoline for free?
Andi: That was Will.
Joe: Okay. All right, “Fume Guzzler from NYC. Just started listening to Joe and Big Al in May.”
Andi: Notice it says “Bill Al.”
Al: Close enough.
Joe: Bill Al. “And I’m binging the episodes backwards. And I’m up to 366. I’m addicted. Keep up the good work. Looking for a spitball and starting Roth conversions.” How could you be addicted to this garbage?
Al: He must be thinking of another show.
Joe: Fume Guzzler. All right, let’s go. “Here’s my deets. Single, 41, NYC salary, $125,000, interest and dividends, $50,000. I’m above the Roth IRA income limit, 24% IRS bracket. Own my own apartment, no mortgages, no debts, no cars, annual expenses are $35,000. Drink of choice, Heineken. My current accounts, he’s got a TSP of $580,000. Roth TSP of $885,000. Just started June 2024.
Al: No. $885.
Joe: I’m sorry. $885.
Al: Yeah.
Joe: “Just started in June 2024 and will continue going forward at the max levels. HSA, just started that as well, $3000, rollover IRA $410,000, old 401(k) of $40,000, Roth IRA of $120,000. Another Roth IRA of $31,000. Taxable brokerage account of $410,000, cash, CDs and bonds of $750,000.” So if you’re keeping score-
Joe: This guy’s 41, has a fortune.
Al: – he’s got about $2,300,000.
Joe: And he makes 150- $125,000.
Al: Well, he spends $35,000.
Joe: Yeah. All that Heineken he drinks. He should just go to like Pabst.
Al: Yeah, it could save more.
Joe: It could save more.
Al: Save another $1000 a year.
Joe: Okay, so congrats then. “Plan to retire at age 58 and stay in New York City. He’s got a FERS benefit of $36,000. Social Security supplement will be $24,000. He’s going to take regular Social Security at age 62 at $24,000, no family. Projected amounts at age 58, assuming 7% rate of return. So TSP is going to be about $1,800,000. Roth is going to be about $1,000,000. Rollover IRA is going to be $1,200,000. The old 401(k), $120,000, Roth IRA, $350,000, and another $100,000.”
Al: So that’s about $4,500,000.
Joe: Okay. “I’m concerned the TSP and rollover IRA at $3,000,000 will throw me into the same or higher tax bracket in retirement. Appreciate you spit balling Roth conversions. I’m thinking of starting conversions this year for my rollover IRA of $410,000. Thinking about $10,000 to $20,000 every year and paying the tax out of the cash. Also thinking of waiting until 58 to do the conversions. Thank you.” 24% tax bracket. Let’s see. Heineken. What’s your name? Fumie Guzzler. Fumie Guzzler.
Al: Fume Guzzler.
Joe: Yeah. Convert to the top of the 24% tax bracket. No brainer, in my opinion.
Al: Yeah. Why not? Right. Because you are correct between, between all this money, because you’re going to retire with a $3,000,000 in retirement accounts at 58. 68- s o it’s going to be 15 years- More than 15 years. Before your RMD kicks in, so it’s probably going to be, if just, if it doubles in that time, it’s going to be $6,000,000, your RMD is going to be $240,000.
Joe: How do you live on $35,000 in New York City?
Al: Because for your entertainment, you smell fumes.
Andi: And listen to this podcast.
Al: Right.
Joe: Or he’s guzzling something.
Al: Yeah, yeah.
Joe: $35,000 in New York City. I mean, isn’t that like rent a month for some people?
Al: It’s, you gotta be living in your car, don’t you?
Joe: Oh man. Well, I mean, his stuff is paid for, I guess he bought a, yeah, he’s got his apartment. He owns it home.
Al: I know, but you got property taxes.
Joe: Yeah. Insurance.
Al: Yeah. Yeah. A couple things. Clothes you ever get clo? You ever eat food, eat?
Joe: Do you eat? I mean, what the hell do you eat?
Al: Do y’all ever buy gas or, or just kind of. So how do you- ?
Joe: So how do you spend $35,000.
Al: I don’t know.
Andi: And he has no cars, but calls himself a fume guzzler. There’s something we don’t know about here.
Joe: He’s got something besides Heineken, but he’s doing a hell of a job. He’s got a ton of money, ton of cash.
Al: Yeah, for sure. Yeah.
Joe: Yeah. He’s like, I’m just going to be alone my whole life. Just listen to this podcast. I don’t know. Yeah, I would convert top 24%, keep it going, keep up savings. I would switch my savings to Roth IRAs. I would kind of wait and see what happens to the tax rates, because you’re just going to compound the tax effect. Yeah. You’re young enough, you’re 41, even though you’re in the 24%, the compounding tax-free is going to pay off for you, in my opinion.
Al: Yeah. And what that means is, is do that at least for the next two years, in 2026, when the rates are scheduled to go back up, let’s see what happens. Maybe you’ll continue that, or maybe you’ll have to change a little bit. We’ll see.
Joe: We’ll see. All right, cool. Thanks for the question, Fume Guzzler.
Is There a Formula for Retirement? Watch YMYW TV, Download the Retirement Readiness Guide
Andi: There’s investing rule of 72. The 80% retirement spending rule. The retirement spending smile. The 4% rule. 100 minus your age for asset allocation…are any of these financial formulas worth anything? There are rules of thumb to live by, and others that can completely derail your retirement dreams! Discover which ones may be your golden ticket, and which are your one-way ticket to trouble, on the latest episode of Your Money, Your Wealth® TV with Joe Anderson, CFP® and Big Al Clopine, CPA. Click the link in the description of today’s podcast episode to watch “Is There a Formula for Retirement?” on YMYW TV. Then click through to YouTube and leave us a comment and tell us what you think. Also, download the Retirement Readiness Guide for free to learn the secrets to controlling your taxes in retirement, creating income to last a lifetime, making the most of your retirement investing strategy, and much more. These plays will boost your retirement readiness despite the uncertainties of market volatility, inflation, rising healthcare costs, and the future of Social Security and Medicare. Just click the links in the description of today’s episode in your favorite podcast app to access all of these free financial resources.
Is It Harmful to Give Advice to Coworkers With Little Financial Experience? (Sarah, Phoenix, AZ)
Joe: “Hi, Joe.” Or, “hi Al, Joe, and Andi. To start off, my favorite beverage of choice is strong black coffee. I live in Phoenix, drive a Honda Odyssey, and enjoy the podcast immensely. It has given me great insights for my future. I wanted to ask you, in your combined wisdom of being in your chosen fields for so many years, what do you do when friends or peers ask you for professional advice?” I tell ’em to go pound sand.
Al: That sounds like what you would do.
Joe: My fee is $275 an hour. “I wanted to specifically ask as it’s harmful if I’m giving advice to my coworkers who have very little financial experience or insights as, is it harmful?” Okay. “I work in the healthcare field and I’m not sure how the conversations start. Perhaps I start them. But most of my peers do not know the difference between a traditional or a Roth 401(k), the huge difference between traditional IRAs or 401(k)s, or even how the company match works. One of my elder relatives advised me not to get involved with this because it only opens up for a backlash if things go wrong. If someone asks for advice, tip them to go to their financial advisor for recommendations, because in the end, personal finance is personal. I feel I positively impact the lives of people when I help them learn about the importance of investing and saving, even if it’s just a small change in their lives. But do I understand this as murky territory to enter? Thanks for your insight.” Interesting questions, Sarah.
Al: I like the question.
Joe: So, she works in the medical field. So, water cooler.
Al: But she loves finance and it seems to come up a lot.
Joe: Yeah. So, she’s talking about Roth IRAs and they’re like, what’s that?
Al: Right.
Joe: And then Roth 401(k)s, what the hell’s that?
Al: What’s the difference?
Joe: What’s the difference? Did I do that?
Joe: What’s the math?
Al: Yeah. I get that.
Joe: So, she’s helping people out. And she gets the joy out of helping people.
Al: Yeah, yeah, yeah.
Joe: And that’s why we do this as well.
Al: We love it. Yeah.
Joe: But then, all right, so they go Roth IRA versus non and then they’re in a higher tax bracket and they’re, they’re going to, so she’s worried that they’re going to come back to Sarah and say, Hey, you broke your fiduciary duty.
Al: Yeah. You told me to, to save more. And I’m now I’m retired. I got too much money.
Joe: Yeah. Or man, I got all this money in a Roth when I should, I really wanted to pay taxes on it. But I get it. It’s like, all right, well, yeah, personal finance is personal. But I think you’re given just broad strokes here, just educating people on the difference between, you know, nuances in retirement accounts.
Al: Yeah, I agree. You’re just educating on some of the basics. I’m okay with what you said, Sarah. Here’s what I would not do. Do not tell people to invest in this stock or that stock or I got a hot tip. That, that’s where you can get into trouble or give tax advice when you’re not a CPA. You know what? This happened in my, you know, I’m sure if you do this, you’ll be okay. Don’t do things like that. But in terms of just basic differences. I mean, everyone when they retire is going to be glad they saved and people are going to be glad if they got money in the Roth IRA when they retire because it’s tax-free.
Joe: Yeah, I think if you just talk about the differences, you know, I give medical advice sometimes.
Al: I know and I don’t follow it. Actually, that thing you told me 10 years ago, I’m thinking of suing you for it.
Joe: Oh, okay. All right. So yeah, that’s murky water.
Al: Yeah.
Joe: But no, I think just to recap, Sarah, if you want to share the insights that you learned throughout, you know, your, your studies through personal finance, I don’t see anything wrong with that. And I think more and more people need help.
Al: I do too.
Joe: And I think going through a friend and just learning is a lot more comfortable than going to a professional sometimes. It’s like, no one wants to sit down with us. It’s like, okay, now I’m going to get sold a bag of goods. Big Al’s going to start ripping on me because of my taxes and, you know, and we totally get that. So if someone else can help educate. I think that’s really good. That’s cool.
Al: And like I said, just, just kind of, just kind of don’t give investment recommendations. Don’t give tax advice. You’ll, you’ll sort of get a sense, but, but basic knowledge, I think that’s a good thing.
How to Get Out of an Annuity (Ken – voice)
Joe: Alright, what do we got, we got Ken?
Andi: Yep, we got a voice message.
Ken: “Hi, Joe. Hi, Al. I was talked into an annuity. I don’t want an annuity. The more I learn about the annuity, the less I like about it. It’s under a 5-year contract. How do I get out of this thing? Is there an easy way? I want out.”
Al: Pretty clear on the question. Yeah, very good.
Joe: Well, I have no idea. I’m not sure if it’s a variable annuity, if it’s a fixed annuity, if it’s a fixed indexed annuity.
Al: I’m guessing that because he wants out, there’s probably some surrender charges.
Joe: But- So listen, alright, we need way more information on how to get out of this thing and if you should get out of it. So if you got a 5-year annuity, I’m not sure what that means. It’s like, alright, well here, I have 5 years until I can get out surrender free? Or is it a fixed rate for 5 years?
Al: Yeah, I’m guessing the former. I’m guessing he’s got to surrender for 5 years. But we don’t know. He doesn’t say.
Joe: He can always surrender out of an annuity. No big deal.
Al: Yeah.
Joe: You’re just going to have to pay something to get out of it. So it depends on what the surrender schedule is and when he got into it. So there’s a free look period. I’m sure it’s past the free look period. And then-
Al: And if it’s in a retirement versus not in a retirement, there’s differences and your age, if it’s not in a retirement account, makes, makes a difference. So yeah, we don’t really have a lot of information.
Joe: Yeah. You can surrender an annuity. You’re not locked into it forever. You’re just, you’re locked into it if you don’t want to pay any fees. But, you have to take a look at the annual fees anyway. So let’s say you bought this annuity. It’s a variable annuity and it sounds like Ken doesn’t necessarily like it. The more he reads into it, the more he doesn’t like it.
He wants to get out of it. And so it’s going to cost him 5% to get out. So he’s got $100,000 in the annuity. It’s going to cost them $5000 to get out of it. That’s the surrender charge. Or you look at the internal fees. If it’s 2% a year, you’re going to pay 10% over the next 5 years, just in the internal costs.
Al: Sure.
Joe: So, do you want to pay $5000 today to get out of it, or are you going to pay $10,000 over the course of the 5 years in internal fees and costs? I don’t know. You have to look at the, you know, the features and benefits of the overall product. Why he bought it in the first place. And then what is the true cost to get out of the thing. But he can get out. I’m not sure if he should because we don’t, we need a lot more information.
Al: Yeah. Okay. That makes sense.
Joe: Okay. That was fun.
Tax-Efficient Retirement Distributions: How’s Our Roth Conversion Strategy? (Ken, Southern California – voice)
Ken: Hi Joe, Al and Andi. Thank you for taking my question today. My name is Ken. I live in beautiful Southern California and I am calling on behalf of my wife and I. I drive a Toyota Camry. My wife drives a Lexus SUV. She doesn’t drink but I enjoy a cold beer in the Summer months and a nice glass of wine or a gin and tonic in the Winter. We have a question, a spitball question on what you would call distributions, tax efficient distributions during retirement. We are overfunded in IRA and 401(k)s. We’re 57, both of us are 57, and plan to retire in about 3 years. At that time, we thought that we would do Roth conversions of about $300,000 a year. And live on what we have as far as muni bond interest, rental income, and some regular interest and qualified dividends. We believe we can live on that comfortably. If we can’t, then maybe we take something out of a brokerage or a little bit out of the conversion. But our plan was to do that up until RMD age. We understand that IRMAAs are going to be expensive. We’re not worried about that. However, we do want to draw down these pre-tax retirement accounts by the time we get to RMD age. My thought on this would be is if we convert these to Roth and pay with our brokerage accounts, that would be the way to do it. Right now we have some tax loss harvesting at about $100,000. So our plan was to sell some of our stock, not pay capital gains because of that tax loss harvesting and do that for a year or two. And then go and take money out or sell stocks from the brokerage account and pay for the taxes on the Roth conversion. That way on the tax basis, we have quite a bit of basis in that brokerage, so we don’t believe we will have a big tax hit for the capital gains because there’s a lot of basis in tax loss harvesting there. We plan to do that until about 75 where these muni bonds will mature. And then we get into RMDs. Does that sound like a plausible plan to you? Looking forward to your response. Thank you.
Joe: Yeah, a lot of words, not a lot of substance here. They must have a ton of cash.
Al: I, I’m guessing if, if you can live off of muni interest and rental income and dividends and doing a $300,000 conversion, you know, which is going to cost some money to pay the tax.
Joe: So I think really the strategy is fine. He’s going to pay, but I don’t know, is it $300,000 or should it be a lot more than that? A lot less, less than that. We need to understand how much is in the account.
Al: Right. Here’s what we don’t know. We, we, yeah, we don’t know your account balances. We, we don’t know what your spending is. We don’t, I don’t know. I’m not sure if you told us your age. We don’t know a lot of particulars to really help us decide whether this is a good strategy. I will say one thing though, right off the bat with what we do know, is you don’t necessarily need to convert 100% of your dollars out of your IRA, 401(k) in higher brackets just to be in a 0% bracket in retirement, right? You kind of, you’d kind of like to do it. So you’re converting in lower brackets now to keep you in lower brackets later instead of paying more tax than you need to. So maybe think about that, but without knowing the numbers, it’s kind of hard to say.
Joe: Yeah. No clue. But congratulations. I mean, I, I think it sounds plausible. It’s like you have outside monies. He’s done some tax loss harvesting, a lot of buzz words there, a lot of muni interest, tax loss harvesting, basis, conversions. He’s been listening for a while.
Al: Or at least some have been- somebody.
Joe: So if you’re not going to pay tax on the brokerage account, you’re going to live off the brokerage account, plus a muni interest, plus whatever real estate income that you have. You’ve done tax loss harvesting along the way. So when you sell the stocks, you’re not going to pay tax on that.
Al: And the real estate will be sheltered with depreciation, probably. So it’s a great strategy to have almost no income. You do your conversions and you stay in lower brackets.
Joe: So if you stay in the 24% tax bracket, or are you going to stay in a higher bracket? I would not touch the Roth money to live off of. I would just convert less. So that’s the only thing that he said there that I would probably pause upon. Okay, cool. Thanks for the question.
How to Request a Retirement Spitball Analysis
Andi: So for a good retirement spitball, the fellas need to know four things about your finances: number one, how much do you, and your spouse, if you have one, have saved for retirement in tax-deferred, tax-free, and taxable accounts? How much fixed income will you have in retirement, that’s number 2 – for example, from Social Security and pensions? Number 3, how old are you and when do you want to retire? And finally number 4, how much you expect to spend annually in retirement, preferably adjusted for inflation? Don’t forget to give us whatever name you’d like us to call you, and your real location, in case state taxes factor into your spitball. Then, of course, we want to know where or when you listen, how you found us, and what you drink so Joe and Big Al can really get into your situation. Click the link in the episode description to send in your retirement spitball request as as a priority voice message or as an email.
IRS is Charging Me Late Fees for Not Paying Estimated Taxes on Roth Conversion! (Lex Martin, Maryland)
Joe: We got, “Hi Joe, Al, Andi, I’m Lex Martin. It’s not my real name.”
Andi: Lex Martin is actually a romance author who has titles that often make the USA Today bestsellers list. She is the writer of the Shameless and the Dearest series. So I’m guessing that this is either a reader of Lex Martin or somebody who really wants to be Lex Martin.
Joe: Lex is a female?
Andi: Yes.
Joe: When I think of Lex, I think of Lex-
Andi: Lex Luthor. Me too. It’s probably short for Alexis or something like that.
Joe: Oh, yeah. Okay. Lexi. Yeah. Lexi Thompson. She was, she’s retiring. Just FYI.
Al: I heard that. Yeah.
Joe: All right. “And a fan of the show for about a year. Bingeing back episodes. My husband and I live in Maryland. We own a 2017 Honda CRV and a 2020 Subaru Accent. We both enjoy craft beers and ciders.” Mmm. I’m not a big fan of either of those, but I would drink those with Lex. “You would think that I would have gotten the scoop on how to do conversions from a traditional to a Roth after listening to hundreds of your episodes. But apparently I messed up on $140,000 traditional to a Roth conversion in December, 2023, because I got a letter recently from the IRS for late fees for not paying estimated taxes throughout the year. Even though I sent in estimated taxes on the conversion less than a month after I converted. I ended up having to pay enough taxes that I didn’t even owe federal taxes. I paid the penalty, have filed an appeal, and await for response.” Lex. $140,000 conversion in December. Lex paid the tax bill in January, still got penalized.
Al: Right.
Joe: “I’m planning to do the same conversion this year, but I’m afraid of in that same predicament. I don’t want IRA monies paying the taxes so I can do especially-“ what?
Andi: “So what can I do, especially since I have not paid any estimated taxes this year?”
Joe: “So what can I do, especially since I haven’t paid any estimated taxes this year? I’ve never paid estimated taxes up until one payment last year. Ack! Ack! Appreciate your help.” What is ACK?
Andi: It’s a sound of frustration. You made it very well. I’m sure you do it all the time.
Joe: Okay. So how big of a penalty do you think Lex had to pay?
Al: Well, so let’s see, $140,000. Let’s just say the tax is $30,000. We’ll just, go with that for the time being. Maybe on average, the payments were late by 6 months, 6%. So that’s like 3% of, you know, so, I don’t know, $900 maybe. I’m not really sure. But at any rate, Lex, you did nothing wrong. You just forgot a step. Or didn’t know you were, you were supposed to do a step, which is this, on your tax return, you file form 2210, Underpayment of Estimated Tax by Individuals. And on that form on page 3, there’s an area called Annualized Income Installment Method. And what that does is that allows you to show that this income, extra income that you had for the Roth conversion was in the fourth quarter and otherwise. And so you don’t have a first quarter estimate, a second quarter estimate, third quarter estimate, just fourth. So you did the right thing. You just didn’t fill out that form. So that’s what you have to do for next year. And actually, if your appeal, I don’t know what kind of appeal you did. If that doesn’t work, fill out the form for last year and said, you know what? I didn’t realize there was this form, I don’t owe the tax because it was in December, please, go ahead and rebate that and refund the payment. And hopefully that’ll work, but yeah, you just missed a step is all.
Joe: Very good. Saved the day, big Al.
Should I Save to the Left Pocket (Brokerage) Instead of the Right (401(k)? (Paula, TX)
Joe: We got Paula from Texas writes in. “Hello, I’m 48 years old, considering working part-time at age 55, primarily to enjoy my life earlier than later.” Okay. “Time being the most valuable resource we have.” That’s pretty deep, Paula. I’m with ya. “Throughout my 23-year career, I maxed out my 401(k) contributions. My financial advisor suggested that I consider stopping or reducing these contributions and instead investing more aggressively in my brokerage account. So saving that money in the left pocket instead of the right pocket.” Oh God. I don’t think I’ve ever said that in my 25-year career being a CFP®. Right pocket versus left pocket, Al?
Al: Well, now you’ve got a new saying, Joe.
Joe: Hey, put it in the right pocket instead of your left pocket.
Al: Right.
Joe: Which pocket do you like best, bud?
Al: I like my coat pocket. Either one.
Joe: Your coat pocket. All right. Okay. So she’s got all sorts of fun stuff here. We got the right pocket. “This strategy could provide a financial bridge-“ financial bridge “-until I can collect my pension at 60 and access my retirement savings at 59 and a half. While this approach feels counterintuitive to me after 23 years of maxing out my pre-tax contributions. Quite a habit. It seems like it could be a beneficial move. We are starting to feel retirement rich without much liquidity. I’m having a hard time shifting my mindset to contribute those 401(k) contributions to my brokerage account. Instead in this, it’s just a terrible idea. What am I missing? Drive a little 2020 Porsche Macan S.” Paula. “And drink –“
Andi: Negronis.
Joe: “-Negronis. And red wine.”
Andi: Together?
Joe: Paula, let’s get in the details here.
Al: Oh boy.
Joe: So the base of the question is, is that, all right, well here, should I put money instead of my 401(k) and get the tax deduction, should I put the money in a brokerage account? I don’t know. We’ll see. Let’s. So “Paula’s married, zero debt, zero children, net worth is $4,000,000. I make roughly $350,000 a year. We have 3 to 6 months of emergency funds in a high-yield savings account. My spouse is 41 and works part-time for fun money.” Gotta love the fun money. “I will have a pension of $130,000 a year and can access at age 60 with no penalties. I have $2,000,000 in my 401(k). My employer puts 9% of my salary up to the 401(a)17 limit each year without requiring anything from me and will continue to do so.” You like how Paula puts the tax code 401(a)17 limit?
Al: That’s very clear.
Joe: “I have $72,000 in my after-tax brokerage account I started one and a half years ago. We have $200,000 in an IRA and a backdoor Roth, which I’m slowly converting. That is outside of my 401(k) account. My spouse has $141,000 in a 401(k). We maximize HSA contributions. Our forever home is paid off, worth about $900,000, our rental property is paid off, worth $400,000, and we collect $3000 in rent monthly. When I calculate compound interest on my Fidelity account over the next 12 years at a 9% yearly contribution from my company at a 7% rate of return, I’m seeing that we’ll have roughly $5,000,000 at the age of 60 with no contributions on my own, plus the pension to live off of.” All right, so Paula wants to build a bridge, and then she wants to take it from the right pocket and move it into the left pocket.
Al: Right. Well, there’s a better bridge than I think what was recommended here.
Joe: You want to put it in your coat pocket.
Al: That’s right.
Joe: She’s 48, wants to retire at 55.
Al: Yeah, I got it. So at 55, when you separate from service, 55 years of age, then that 401(k), you have access to it without penalty. It’s I think kind of a little-known rule. That’s not true of IRAs. You have to be 59 and a half. But your 401(k), you’re 55 years old when you separate from your service. If you’re 54, it doesn’t work. You got to be 55. And then that 401(k), not old ones, but that 401(k), you can take money out of it. You’re going to pay taxes, of course, but you’re not going to have a penalty. That would be a better way than left pocket, right pocket.
Joe: Right. You’re 55 at retirement. The only thing that we need to know to make sure what pocket you’re putting your cash in, is how much money that you want to live off of. So let’s say you turn 55 years old, you’re continuing because you make $300 some odd thousand dollars now and your, your husband’s there for the fun money, making whatever, right? So. You’re in a pretty high tax bracket today and you want to work for the next 5 years in your peak earning years. And so if you put money into the 401(k) today, you’re going to receive a tax benefit. But then you retire at age 55 you have no other income because you just told me your pension hasn’t come in until age 60. So from age 55 to age 60, 100% of the income is going to be derived from your investments. So if you live off of $100,000 a year, let’s say, and you pull all of that from your 401(k) because you have access to that money penalty-free at 55, well, you pull $100,000 outta the 401(k), you’re going to have the, the standard deduction.
You’re going to be in the 22% tax bracket, roughly, right? So right now you’re probably in the 32% tax bracket. So you’re gonna receive a tax benefit at a higher tax rate today by, by a pre-tax dollar, by pulling it out at retirement. You’re going to be in a lower tax bracket because you have no other income. But then at age 60 is when the kicker comes in, you’re going to have a huge pension and then you’re going to receive Social Security. So what I’d be thinking about from age 55 to age 60 is be pulling enough money from the 401(k) to live off of it and also maxing out whatever bracket and also do conversions. I’m fine with you building up a non-qualified account because you want to be tax-diversified. But you just want to understand how taxes work, how much money that you have in your retirement account, what tax bracket you’re in today, what are you going to be in the future, and then come up with a strategy there versus right pocket, left pocket, and let’s build a bridge.
Al: Yeah, and I think I’m, I’m not seeing where she put down what they’re spending unless I missed it.
Joe: Yeah, I missed it too.
Al: And if she makes $350,000 a year after 401(k) and taxes, I mean, she could be spending $200,000, $250,000, which if you have $4,000,000, that’s a, that’s a nice big number. But. It might not, it might be a little tough retiring a 55.
Joe: So I don’t know, I think our advice is a little bit better than right pocket, left pocket. All right.
Andi: Your spitball.
Joe: We don’t give advice on this show. This is a spitball.
Outro
Andi: Yep, we got the cameras rolling once again! Last week’s video interview with Ed Slott, CPA is on our YouTube channel, and videos of some of the questions from today’s episode and future episodes will be posted in the coming days, so subscribe to our YouTube channel and turn on notifications so you don’t miss a thing. Leave a comment or two and let us know what you think, like Fast Eddy who said we’re getting old! Thanks Eddy, we had no idea!
In the Derails at the end of this episode we’ve got SoCo, Heineken, our food bills, 3500 Dodge Ram, and listening while you cardio, so stick around.
Your Money, Your Wealth is presented by Pure Financial Advisors. To really learn how to make the most of your money and your wealth in retirement, you really do need more than just a spitball: schedule a no-cost, no obligation, comprehensive financial assessment with the experienced professionals on Joe and Big Al’s team at Pure. Click the Free Financial Assessment link in the description of today’s episode in your favorite podcast app, or call 888-994-6257 to book yours. You can meet in person at any of our locations around the country, or online, right from your couch via Zoom. No matter where you are, the Pure team will work with you to create a detailed plan that’s tailored to meet your needs and goals in retirement.
Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.
The Derails
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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.
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