Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:00 – Retirement Income Style, Tax Laws, and Annuities with Dr. Wade Pfau
• 16:39 – What’s the Future of Your Social Security? Watch Last Week’s YMYW Podcast & Subscribe on YouTube
• 17:08 – Joe Anderson’s Top 5 Things: How to Manage Market Volatility
• 26:27 – Escape These 11 Tax Traps and You’ll Save in Retirement on YMYW TV, Download the Tax Planning Guide
• 27:13 – What Should I Do With My IRA and 401(k)? I’m 61 and Have $10M. (Al Bundy, St. Louis)
• 42:17 – YMYW Podcast Outro

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Transcription

Intro: This Week on the YMYW Podcast

Andi: What is your retirement income style? Dr. Wade Pfau, CFA, RICP®, is the co-founder of RISAprofile.com, providing investors with retirement income style awareness. He returns to Your Money, Your Wealth today on podcast number 522 to talk about four different styles of retirement income, and distribution planning. Plus, what does Dr. Pfau think will happen with President Trump’s 2017 tax cuts, scheduled to sunset at the end of this year? What are Dr. Pfau’s thoughts on annuities as part of your retirement plan? Next up, Joe Anderson’s Top 5 Things to help you manage the impact of all this market volatility on your portfolio. Also, Joe and Big Al spitball for Al Bundy in St. Louis: what withdrawal strategy makes sense for him, and what he should do with his IRA and 401(k) money? To ask your money questions and to get a retirement spitball analysis of your own, click or tap Ask Joe and Big Al in the episode description and send in your deets. I’m executive producer Andi Last with the hosts of Your Money, Your Wealth, Joe Anderson CFP and Big Al Clopine CPA.

Retirement Income Style, Tax Laws, and Annuities with Dr. Wade Pfau

Al: We have Dr. Wade Pfau on our podcast today. Wade, thank you so much for joining us.

Wade: Absolutely, it’s my pleasure to be here.

Al: I think you are one of the smartest people in our industry and I can’t believe you’ve taken time to talk with us. So we really appreciate it. So you are founder of RISAprofile.com. You even have the sweatshirt.

Wade: Yeah, I’m wearing the swag today.

Al: What is that?

Wade; So the RISA, it’s the idea of retirement income style awareness. And it’s really an effort to help people when they’re first starting to think about retiring. There are many retirement strategies out there, and I think it’s really hard for people to even know the options or to sort through that. So the RISA is meant to help people as a starting point, figure out what sort of retirement strategy resonates best with them, that they’re comfortable with using in their retirement.

Al: What, so what kind of retirement income styles are there?

Wade: We’ve identified 4 broad viable styles.

Al: Okay.

Wade: Starting with total returns, which is more of the investment-based approach. If you’ve heard about things like the 4% rule, where you build a diversified portfolio and take distributions.

Al: Yeah.

Wade: Then we’ve got income protection, which is more the classic, “before I start investing, I wanna have a floor of lifetime reliable, protected income. Then I can feel comfortable investing on top of that for discretionary goals.”

Al: Okay.

Wade: We’ve got time segmentation, that’s also known as bucketing, that’s more, “I have these different buckets, I’ll invest differently based on the time horizon.”

Al: Got it.

Wade: And then we’ve got risk wrap is the fourth one. It’s a cousin of income protection. It’s also about having a floor of reliable income, but also having more desire to build market growth into that. So there’s a desire for growth and investing, but wanting to have guardrails around that as well to help protect from the downside risk.

Al: Okay. So, which did most people use, or is it across the board, or what’s the best, or what do you think?

Wade: Well, I don’t want to say that any of them are best because people are solving for different problems.

Al: Okay.

Wade: Like if you believe someone does want to have a fixed level of spending over their lifetime, a case could be made for the income protection idea. Have protected income and then invest for discretionary goals on top of that. But not everyone’s solving for that problem. So there’s really no single best solution. The two, we, we’ve done a number of national studies at this point. The two most popular approaches are the total return investing approach.

Al: Right.

Wade: And the income protection approach.

Al: Okay, okay. Well, how does the RISaprofile.com, how does it help people figure this out?

Wade: Well, it’s an assessment tool and, for the basic RISA there’s 12 questions that go into that.

Al: Okay.

Wade: So just answer those questions and get a report based on the way you answer these questions, this looks like an approach that you may be most comfortable using for your retirement.

Al: I think that’s so important because I think a lot of people are taught how to save, but they’re not really taught how to spend, or how to go about it, or, there’s a lot of confusion. I mean, saving, you click, you pick a box, click a box on a 401(k), save a certain percentage, and it’s done automatically. But now you retire, now you gotta figure this out, you gotta, the distribution part of this is, can be much more complicated.

Wade: Oh, absolutely, and that’s really what makes retirement income different. It’s still a relatively new field in that there’s no standardized terminology for how these things work. But yeah, when you switch from saving, working and saving, to having to spend from those assets over an unknown length of time in retirement, it really does change the problem that you’re solving. You may want to use a different approach at that point.

Al: Yeah, good point.  Okay, switching gears a little bit, let’s talk about the SECURE Act. SECURE Act 2.0, the death of the STRETCH IRA for most people.  Retirement planning through IRAs has changed. And what are, how do you think about that? What should people be considering with their IRAs?

Wade: Well, yeah, absolutely. In terms of that lifetime stretch, a lot of adult children will now be getting a 10-year distribution window for any inherited IRAs. That’s really driven me to do a much deeper dive into tax-efficient retirement distributions and looking at Roth conversions.

Al: And yeah.

Wade: Then for individuals in their retirement, who’s going to pay at a higher tax rate? Them? Or potentially their adult children who will someday inherit those funds?

Al: Yeah.

Wade: And if I think maybe my adult children may be in their 50s when they inherit the IRAs, that may be their peak earnings years. They may have quite high tax rates. So I think it really does push the conversation towards there may be a bigger, more important role for Roth conversions.

Al: You know, that’s such a good point because a lot of times with a lot of CPAs, they won’t necessarily recommend Roth conversions because it increases taxes in that tax year. But when you look at tax planning over 20, 30, 40 years, or maybe two, 3 generations, you might make completely different decisions.

Wade: That’s right. Yeah, if you want to minimize taxes this year, you would never do a Roth conversion, but if you accept the reality that we have to pay taxes someday and so let’s look for opportunities to pay those taxes at a lower rate. That’s when the opportunity to do Roth conversions. You pay a higher tax bill today. But that could lower the pressure over your lifetime and have out more after-tax wealth for your beneficiaries.

Al: Yeah, and of course Roth conversions is taking money out of your IRA 401(k), converting it to a Roth, you pay the taxes on that one time. But then it sits in the Roth forever tax-free, income, growth, principle, for you, your spouse, your kids your grandkids, whoever inherits it. It’s a great thing. And now I think that with the current tax law, you know, we’ve had lower taxes since the Tax Cut and Jobs Act of 2017.  So Roth conversions have been easier and better just because of the lower tax rates, but that’s set to sunset this year. Do you see that being extended, or what are your thoughts?

Wade: Huh, you’re right. This year, the tax rates are lower, and under current law, they will increase next year. I think at this point, it’s very unlikely that we would revert back to the 2017 tax rates that are currently scheduled to return in 2026. It remains to be seen, but if I had to make a wager on it, I would guess we’re not likely to see those old tax rates return at this point.

Al: Yeah. Well, let’s hope you’re right because that would be such good news for people wanting to do Roth conversions. I mean, you look at the 22% and 24% bracket, 24%, how high that goes for a married couple, almost $400,000 of taxable income.  There’s a wide margin for people to do Roth conversions at relatively low tax brackets.

Wade: And that can also then help set them up in the future as well to avoid those Medicare premium surcharges. Those IRMAA-

Al: Right.  Right.

Wade: Potentially the Social Security tax torpedo, although that tends to impact at lower income levels, but also be in a better position to help manage with long-term capital gains stacking on ordinary income. There’s a nice runway where you’re paying 0% on long-term gains. Right. And having ordinary income can push those gains into the 15% bracket, which yes, you’re in the 12% income bracket, plus 15%, as you push into your long-term gains into the 15% bracket, you have a 27% marginal tax rate.

Al: That’s so interesting you’d say that. I’ve actually been saying that for quite a while. And people don’t necessarily believe me, but I, here’s how it works, right? Like, Social Security, good example. You get Social Security that is all of a sudden taxable because of a Roth conversion and/or pushes your capital gains into taxable, you get that much higher rate. Yeah, and that’s, you know, since we’re talking about Roth conversions, for those that are probably in the 12% bracket, be careful on your Roth conversions because you may be in a higher bracket than you think considering capital gains and considering Social Security.

Wade: Yeah, with both of those combined, it’s possible to have $1 of ordinary income, it could be taxed at over $.50 when you combine the Social Security impact, the long-term capital gains impact. And the impact of that dollar itself.

Al: Yeah, and that’s not even including state tax.

Wade: Right, not including state income taxes that then go on top of that.

Al: So, so be careful on that.  In the past you’ve recommended annuities in portfolios in certain circumstances. And I want to talk to you about that because annuities have kind of gotten a bad name in our industry because a lot of them have had higher fees. Maybe they had somewhat unrealistic rates of return that were either anticipated or maybe even promised.  But annuities can work well in portfolios. Can you address maybe what types of annuities should people be looking for?

Wade: Well, I tend to look at annuities more from the perspective of providing for lifetime income. Whether that’s a simple income annuity that you pay the premium and then you have that monthly income for the rest of your life.  Whether it’s more of a deferred annuity with a living benefit on top of that can support lifetime income, but still create some flexibility. But yeah, the way I look at it, and it fits into that conversation around retirement styles.  The baseline for retirement income, I could build a bond portfolio. I could have, if I want 30 years of spending, I could build a 30-year bond ladder. Now I have two ways to potentially spend more than bonds would let me spend. The one is a diversified investment portfolio with a total return.

Al:  Sure.

Wade: I diversify, I use stocks.  I seek that risk premium from the market, and if it works, I’ll spend at a higher level. But the other is annuities. With insurance, there’s the idea of risk pooling.  Everyone doesn’t know how long they’re going to live, but the insurance company can do the math on, this is how long the average customer that they have will live. And those who end up not living as long help subsidize payments to those who live longer. And that also can support a higher level of spending than bonds. So people do have options there. Do they want to use the stock market to spend more than bonds, which creates risks? Or do they want to use insurance to spend more than bonds? Which has contractual protections, it would have the risk that if I end up not living as long, I don’t ultimately get as good of a quote unquote return out of that. But it would provide spending linked to what I’m trying to do, which is sustain my lifestyle for as long as I live.

Al: Are there certain types of annuities that people should steer clear from? Or certain pitfalls they should know?

Wade:  When it comes to annuities, it’s not so much just certain types. It’s more, not every annuity is priced fairly. They may have high built-in commissions that really incentivize. So if you’re getting an ad through the mail to come to the chicken dinner or steak dinner, and you get pitched an annuity at that dinner, There’s probably a pretty good chance that it’s not the most attractive terms. You’re going to ultimately be paying for that dinner through the cost of the annuity.

Al: Through your commissions. Yeah. Right. Right. Right.

Wade: But if you’re working with someone who’s not as incentivized to just sell annuities without really incorporating them into a complete retirement income plan, well, good advisors who are, they have access to good annuities and those kinds of annuities, whether it’s a variable annuity or an indexed annuity or a simple income annuity, the best in class annuities. All can potentially be worthwhile for individuals as part of their planning.

Al: Yeah, that’s, a good point, because I think, like I said, the, industry,  annuities have kind of gotten a bad name, but they’re not all bad, and there’s some annuities now that are very low cost, right? So, how do people find that out? What questions do they ask of their advisor to figure all this out?

Wade: Well, you can look at the fees that are part of the annuity and the advisor can lay out these are the different fees, but that can also get complicated because a lot of annuities, fixed annuities, they’re spread products. It’s like bank checking accounts where the bank may offer a free checking account because they’re able to earn more interest on your deposits than they pay out to you. It’s the same idea with an annuity where you may not see the fees, it’s just internally the, the insurance company is earning more by investing those funds than they’re paying out to you as the owner of the annuity. So, so the fees are not transparent necessarily. But what is transparent is you know exactly what you’ll get if it’s a fixed annuity in terms of, if I put this amount in, I’ll get this amount monthly for the rest of my life. And the advisor could help calculate kind of what’s the implied return on that. But more importantly, if that helps you meet your spending goals over your lifetime in a cost-efficient manner, and if I’m worried about outliving my money, I might be earmarked, be able to earmark less assets to that than I would feel like I have to hold with other investments. And that’s really how to frame the problem. How much does it take to meet my retirement goals?

Al: Yeah, well said. I’ve heard you in the past talk about distribution planning in terms of percentages, and can you talk about how- I mean the 4% rule, obviously we know about that, but there’s certain cases where you could probably do more, maybe certain cases where you would do less. Is that age driven? Portfolio driven? Let’s chat about that.

Wade: Sure, well the 4% rule, it’s really just a research simplification. It’s not a retirement spending strategy because nobody has such a simple financial plan. It basically, if I was 65, I wanted to plan to live to 95, I had $1,000,000 in a Roth IRA, because taxes are not part of the calculation.  I could take $40,000 a year plus inflation and expect to not run out. But no one’s financial plan is that simple. People have Social Security, they have other cash flows. Their tax bill is not growing every year by inflation. So real life financial plans can’t really consider something like the 4% rule. But also the 4% rule doesn’t have any built in flexibility to adjust spending based on market performance. So, like you’re saying, yeah. If you have some flexibility, if I can cut my spending if the markets are down,  that can help me support a higher initial level of spending because I have a way to manage that market volatility risk of if markets are down and I’m having to sell more of the assets I have left, I dig a hole for my portfolio that’s difficult to recover from. So the 4% rule maximizes market risk for your portfolio because it doesn’t give you flexibility.

Al: Yeah. So I think what you said is such a key. It’s flexibility. It’s not this hard, rigid 4% every year. I mean, maybe of certain years where you spend a little bit more and maybe some years a little bit less, but you got to be flexible based upon what’s going on with your portfolio, what’s going on potentially with your life. I mean, if you’re, if all of a sudden your life expectancy is shorter than what you expected, then obviously that changes it too.

Wade: Yeah, the 4% rule specifically is calibrated to a 30 year horizon. Right. So if you’re already old enough that 30 years seems unrealistic, unrealistically long, then, yeah, the 4% rule doesn’t apply at that point.

Al: Yeah. I think we, we like to think about at least that in our company, in our, on the podcast, 4% rule is, an interesting way to gauge whether you’re in the ballpark of having enough assets, but it’s not going to be the distribution plan that’s going to probably be the best for you. Right?

Wade: Absolutely. It can be helpful when you’re far from retirement to gauge approximately what you need to be doing, but it’s not a retirement income plan.

Al: Yeah. And then things happen. The market corrects, right? Your life changes. All kinds of things can happen. And so flexibility, I think, is important when it comes to distribution planning. Yeah. Well, very good, Wade. I really appreciate this time with you.

Wade: My pleasure.

Al: You really are one of the best and brightest minds in the industry, and it’s been a pleasure talking with you.

Wade: Thank you. It’s been a pleasure talking with you.

Al: Thank you. All right.

What’s the Future of Your Social Security? Watch Last Week’s YMYW Podcast & Subscribe on YouTube

Andi: Thanks to the American College of Financial Services for making it possible for us to bring insights from all of these thought leaders, like Dr. Wade Pfau, right to you, our YMYW audience, from the Horizons conference earlier this month. What are the 3 predictors of retirement happiness? Find out next week in Big Al’s interview with Dr. Michael Finke, CFP®. If you missed the forecasts on Social Security from several of the College’s financial brainiacs, you can watch them on our YouTube channel. Subscribe and turn on notifications so you don’t miss the rest of the series.

Joe Anderson’s Top 5 Things: How to Manage Market Volatility

Joe: All right, we’re seeing a little bit of market volatility, Big Al.

Al: Yes, we are.

Joe: And so I was thinking about this, this morning in the shower.

Al: Oh, well, that’s dangerous.

Joe: I know.  That’s when I do my best thinking, I guess.

Al: Apparently.

Joe: But, a couple of things, a couple of items that people should be thinking about given a volatile market. So here’s Joe Anderson’s top 5 things.  What do you think about that for a catchphrase?

Al: Wow, that sounds like something I would do.

Joe: Alright, so first, you have to assess your overall portfolio. A lot of times in times where you see increased volatility, people don’t want to do a thing.  But I think the first thing that you have to take a look at is just assess what you currently have. How much risk are you actually taking in the overall portfolio? Because it might not be as bad as you think, even if you see some bigger swings in the overall portfolio. So, number one, assess.  Number two, manage the risk in the current portfolio. What does that mean?

Al: Well, you want to think about the rate of return that you need, right? To cover your goals. And you want to have the, probably the least risk portfolio to make that happen.

Joe: But here’s the problem with that. And I agree with you 100%, but let’s say markets get volatile. If someone has a decent portfolio, the last thing you want to do is make, like, wholesale changes.

Al: Well, right.

Joe: And most people won’t make wholesale changes. They would much rather put their head in the sand. But you can still manage the risk in the current portfolio, and it’s just looking at a rebalancing strategy of how much money you have in stocks versus bonds and making sure that you keep that or slowly get into the portfolio, I think, that you mentioned is what is the appropriate mix of stocks and bonds to get you your target return.

Al: Yeah. And Joe, when you have that mix, then it’s like the market goes down and you kind of feel like, gosh, maybe I should just kind of stay put or even get out of the market. You kind of want to do just the opposite. Ss the market starts to go down, stocks are cheaper. You want to rebalance by buying more stocks, selling some of your bonds, some of your safer investments, or maybe in right, currently international stocks are doing better. You want to rebalance because you’re buying cheaper.

Joe: I think if you look at it, a globally diversified portfolio makes so much sense. And for the last several years, it’s like, well, I don’t want a globally diversified portfolio. I want NVIDIA, right? Or I want the Magnificent Seven because you’re going to have such a huge rate of return. And maybe just the S&P 500 has outperformed, let’s say, value stocks or growth stocks have outperformed value stocks. Small companies haven’t necessarily performed as they did in the past.  When things get more volatile, you want to have more asset classes because right now, let’s say large-cap growth is underperforming, international is overperforming. So what do you want to do at that time? You want to buy more large-cap growth and sell some of the international to keep you in balance, so you’re buying low and selling high. Most people don’t do that because they don’t have a disciplined strategy to do so, plus the emotion gets in the way. Well, no, these are going down. I don’t want to buy more than more of them. I want to sell more of them.

Al: Right.

Joe: All right.  Number three, you have to understand asset location.  Now this is where taxes come into play. So asset location means you want certain asset classes in certain pools. If you look at pools of money that you can invest in, there’s a tax-free pool, which would be the Roth IRA, there’s a taxable pool or a capital account, a brokerage account, and then of course your tax-deferred pool, which is your IRAs, 401(k)s, 403(b)s, TSP, anything that’s deferred that’s going to come out as ordinary income. You want to hold certain assets in each of these different pools differently to take advantage of taxes. For instance, what I usually see, what Big Al usually sees, is that if I have a Roth IRA and I have a deferred account and I have a brokerage account, it’s almost the same portfolio on each of those different accounts. So just assume it’s 60/40, 60% stocks/40% bonds. We look at the Roth IRA, it’s 60/40. You look at your deferred account. It’s 60/40. You look at your brokerage account at 60/40. You don’t necessarily want to do that. What you want to do is a 60/40 portfolio and set it on top of all of those different pools to take advantage of taxes. And what I mean by that, Roth IRA, what type of assets do you want in your Roth?

Al: Yeah, I mean a Roth grows tax-free. So wouldn’t you want your asset classes that have the highest expected rate of return? Because you get-

Joe: – the biggest bang for your buck. Because if it grows at 12%, all 12% is yours tax-free.

Al: Tax-free.

Joe: Versus, let’s say, if you have something like a bond or a CD, cash that’s growing at 2% to 4%. Well, I would much rather have that in my deferred account because I’m going to be taxed the highest.

Al: Yeah. And you think about, so your 401(k), your deferred account, then you don’t necessarily want those asset classes that have the highest expected returns because you pay the most taxes out of that account, ordinary income.

Joe: All right.  Your brokerage account, tax loss harvesting.

Al: Yeah, so what that means, Joe, is that when you have positions that you know, they’re gonna go up, they’re gonna go down. But when they go down you have an opportunity to sell them, create a tax loss on your portfolio, buy something similar. So you’re still in the market, but now you’ve created a tax loss that you can use against any other capital gains.

Joe: Volatile markets are your friend from a tax perspective. Assets go down, you sell that asset, the IRS gives you a tax break. In regards to the stock market, if your assets go down you want to sell but you don’t want to sell and go into cash. You want to sell and buy something similar.  Sell Coke and buy Pepsi. Sell mutual fund (a), buy mutual fund (b), but still have the same integrity of the overall portfolio. But what you’re doing is you’re creating those losses that will sit on your tax return. And those will offset gains dollar for dollar. Most people don’t realize that. It’s I only get a 3% write-off. If I have a $20,000 capital loss and I have a $20,000 capital gain. Those offset 100%.

Al: Yeah. 100% short-term offset, short-term, long-term, but you still have, if you still have extra, your short-term losses can offset long-term gains and vice versa. Plus you can set, you can offset all those gains and still take another $3000 loss against ordinary income.

Joe: So in volatile markets, it’s like, all right, well here, I could have my cake and eat it too. As long as I’m disciplined, I’m managing the risk. I’m assessing my overall portfolio and I’ll make sure that it’s set up appropriately. I don’t have to make wholesale changes.  You can do all of this with your existing portfolio and slowly get it into the appropriate portfolio because this is where people feel that stomach of risk. If I’m seeing my portfolio go down 5%, 10%, or you see a lot of noise in the overall markets on a day-by-day basis, and if my anxiety level goes up, and then I look at my balance and I don’t like the movement of the account, you’re probably taking on too much risk. You loved it on the upside, but people are twice as fearful to lose a dollar than they are to gain. So it’s assessing the risk that you’re currently taking, managing that risk, and then slowly getting into the portfolio that you should be getting into. Then position the portfolio from an asset location and tax loss harvesting opportunity. And then finally, of course, you gotta Roth it.

Al: Get as much money in the Roth IRA because that’s tax-free growth in the future. And put those asset classes that have higher expected returns, stocks, certain kinds of stocks like smaller companies, value, right? Merging markets tend to have higher expected returns over the long term.

Joe: So think of this. If the market’s down 10%, that is a phenomenal time to convert, because then all of that growth that it- all of the recovery of that asset class or mutual fund or stock, whatever that you convert, all of that recovery is going to go into the Roth. So you’re converting at a 10% discount or 5% or 20%, whatever asset class that you convert. You don’t have to sell the asset class, you can convert shares, as long as it’s IRA to Roth IRA. You have NVIDIA. Move NVIDIA shares into the Roth IRA, pay the tax on the current balance today, and then have all of that recovery grow 100% tax-free, or whatever stock or mutual fund ETF that you’re holding. Also, if you haven’t made a Roth contribution yet, do it when the market’s down.  If you haven’t done a backdoor Roth, do it when the market’s down. If you haven’t converted your after-tax for the Megatron, backdoor, barnyard, do it when the market’s down. There’s a lot of opportunity for those disciplined investors that don’t necessarily care about market timing. All of these are phenomenal strategies that you can do to manage the portfolio that have nothing to do with the crystal ball of picking the right stocks or understanding when the market’s going to go up or down. Whatever you feel comfortable with. Volatile markets, you can take advantage of it versus freezing and then like putting your head in the sand.

Al: I think that’s well said. There’s opportunities in down markets and so take advantage of them.

Joe: Alright, well hopefully that helps and hopefully we can stay cool and not freak out.

Escape These 11 Tax Traps and You’ll Save in Retirement on YMYW TV, Download the Tax Planning Guide

Andi: So many different IRS rules can cause you to pay more taxes than necessary on required minimum distributions, Social Security and Medicare, long-term capital gains, your investments, and more. Learn to Escape These 11 Tax Traps and You’ll Save in Retirement – that’s the name of this week’s brand-new episode of Your Money, Your Wealth® TV. Joe Anderson, CFP®, and Big Al Clopine, CPA will show you the escape routes from these tax traps, so you can keep more of your money in retirement, when you need it most. Watch YMYW TV and download the 2025 Tax Planning Guide – you’ll find links for both in the episode description. And hey, don’t keep this free financial goldmine a secret, share the YMYW podcast, the TV show, and all the downloadable resources with anyone and everyone who needs them. You’ll be a hero.

What Should I Do With My IRA and 401(k)? I’m 61 and Have $10M. (Al Bundy, St. Louis)

Joe:  We’ve got Al Bundy, St. Louis, Missouri. Was- Al Bundy was actually in Chicago.

Andi: This one’s in St. Louis.

Al: Yeah. Well, Married With Children.

Joe: Married With Children?

Andi: I guess he sees himself and his wife as being like them, perhaps.

Joe: Got it. Big, Married with Children fan? I saw a bunch of them, yeah. Andi, you loved that show, didn’t you?

Andi: Not at all.  Not a big fan.

Al: Not a fan. Did you watch it, Joe?

Joe: No, not really. I like Christina Applegate.

Al: It was kind of a ridiculous show.

Joe: Let’s see.

Al:  It was, I thought it was, slightly entertaining.

Joe: It was kind of like a kickoff of what, All in the Family?

Andi: All in the Family, yeah.

Al: Yeah.

Andi: It’s supposed to be the, what’s his name?

Joe: Archie Bunker.

Andi: Archie Bunker, thank you.

Al: Yeah. Of that generation. Yep.

Joe: All right. Al Bundy, let’s go. What do you got? “Hello, Joe. Or hello, Al and Joe. I got turned on to your podcast through my AI assistant about 5 months ago.”

Al: Wow.

Joe: AI assistant. What the hell is that?

Al: I don’t know, but it sounds impressive.

Joe: It sounds super cool. You got an AI assistant, Andi?

Andi: No, but hey, I’m glad to hear that AI assistants are actually giving advice to people to listen to YMYW. That’s pretty cool. So thank you AI.

Al: Yeah.

Joe: “Love the good info and the humor. Also love hearing Joe struggle with some of the words.” Thank you. Just kicked me right in the old you-know-where. “I have two questions for you.” I don’t know why people like, I mean, I would never listen to this podcast because I’d be like, who is this idiot that can’t even talk?

Al: Well it can be funny.

Joe: That’s not, it’s embarrassing is what it is.

Andi: It makes you sound very real. You’re not AI, clearly.

Joe: I should practice, I should read this stuff, I should prepare.

Al: It’s funnier when you don’t though.

Joe: Yeah, it’s great. It’s good times.  Alright, “You always use 4% or less for withdrawal rate. You never discuss variable withdrawal rates such as Vanguard and Guten withdrawal rates-” Guyton, Guten?

Al: Guyton, I think. I don’t know.

Joe: I’ve never heard of the Guyton. “Is that because you’re just spit balling and keep it simpler or, number one, or, number two, am I struggling  with what to do with my IRA? Let me digress. 61 years old, gynecologist, oncologist.”  Okay, wow.

Al: Gynecological oncologist.

Joe: Gynecological oncologist.

Andi: Al Bundy as a gyno onc, can you even imagine? That would be scary. Just from the perspective of a woman.

Joe: “I had a problem with too much debt in med school and took me a few years to dig it out since my first job ages 25 and 40. I lived below my means and saved about 22% of my pre-tax salary and 50% of my bonuses. I plan to retire at age 64 so I can COBRA health insurance. Kids are grown up and off the payroll and have really good jobs. I set them up with Roth accounts. Daughter has $85,000. Son has $70,000. So I don’t feel I need to leave them any significant assets. Peggy and I have the following assets. 401(k), $1,600,000.  IRA, $3,300,000.  Peggy IRA, $215,000. Roth IRA, $75,000. IRA and 401(k) are 60/40. Equity bond brokerage, $4,200,000.”  Come on here, Ed.

Al: So we got, we’re getting up to almost $10,000,000.

Joe: “And $450,000 in emergency fund, but overall 80/20 equity bond.”  So we have total liquid assets of $10,000,000?

Al: Yeah. $9,800,000.

Joe: All right. “We got a whole life worth $700,000, death benefit of $291,000, cash surrender value, $91,000 is taxable. 70 ounces of gold bullion for dark times, house is worth $2,000,000, paid off. Essential expenses, $175,000, but I’d like to spend $275,000 to $300,000 to enjoy the fruits of my labor!”  Oh, that’s calling real good living.

Al: That’s like you.

Joe: Oh, yeah.  Half of me. “I’m working .75  full time and making $500,000 a year, so I’m puzzled as to what to do with the IRA and the 401(k). I’m eligible to roll the 401 into my IRA now. Can’t do Roth conversions till I retire. Would you suggest doing Roth conversions to the 24% tax bracket or simply start drawing down from the IRA only once I retire? Please spitball and let me know. I had asked different advisors and got different answers.”  All right. “I love bourbon, red wine in the Winter and a nice little Chablis  or vodka  in the Summer.”  Is that right?

Andi: Chablis. Yeah.

Joe: Yeah. You’re right.

Joe: I killed it.

Al: Totally.

Joe: Totally guessed on that one. I was going to take an answer.

Andi: Wow. That was a guess? No kidding.

Joe: You did that on purpose. I guarantee you wrote that just to have these.

Al: Just to see what you would do.

Joe: Yep. Crap the bed.  “A nice IPA works on a hot Summer day. Had big dogs all my life, but end up-  but end of life situation breaks my heart. Thanks. Keep up the good work.” Follow up. “My only fixed income will be $4000 a month at 67. Peggy at $1700. Brokerage account throws off $73,000 in dividends. P. S. Please mention to Joe that I find his voice soothing, that I listen to reruns of the podcast at night to help me fall asleep.”

Al: Really?

Joe: Perfect.

Andi: That’s the first time we’ve ever gotten that one.

Al: I’m guessing he’s got you and me confused.

Joe: Yeah, remember Tax Chat with Big Al.

Al: That was gonna be your go to sleep podcast.

Joe: Tax Chat.  Okay, Al Bundy, well congratulations on all your success.  $10,000,000. So 4%. Okay, a couple things with the 4% rule. The 4% rule is kind of, it has nothing to do with distributions. It’s just to give us an idea, and it’s a spitball totally back of the envelope to see how much money that you should have accumulated to create the income. There’s been a lot of different studies, you know, Berger, right? What was this?

Andi: Bingen. Bill Bingen.

Joe: Yeah, Bill Bingen, right? Right here in San Diego.

Al: Yeah.

Joe: And then Wade Pfau.

Al: Yep.

Joe: Then all the other guys right and so I think now it’s closer to 3%, 3.5%. But it’s not like take 4% out of your portfolio every single year. I think you want to have a dynamic withdrawal rate. You actually want to have more of a structured strategy in regards to your withdrawals. You wanna look at how much money that you’re trying to spend. You wanna spend $300,000, then you have to come up with a strategy to pull $300,000 out a year with the least amount of tax and the least amount of risk, right? The 4% rule is like more of an accumulation. So if I wanna retire in 10 years and I wanna spend $40,000 a year from my portfolio, well at least I need a $1,000,000 saved. At least, right. Some people will say, All right, well, I want $40,000 a year and I have $300,000 saved. I think you know, the market does 8%, 10%. So it’s just a very high-level rule of thumb that I would not recommend a withdrawal strategy at all from the 4% rule. It’s just a gauge to see how much money you should have.

Al: 100% agree. And he was talking about a Guyton, Guyten Klinger, I think, Klinger,  that’s a flexible withdrawal rate. Just, what you described.

Joe: Yeah. Yeah. We call that the Anderson.

Al: Yeah, the Anderson method? Yeah.

Joe: Did you get the white paper?

Al: Anyway, yeah, so that’s, that is, I think, a much better way to, I mean, when you’re in distribution mode, right, so maybe you do some analysis to figure out, based upon your life expectancy, based upon your investments, based upon your goals, you know, how much can you pull out of your portfolio and then it’s, and let’s just say it’s 3%  and then maybe you have an upper limit of 5% and a lower limit of 2%, or maybe it’s 4% and upper limit of 5% and 3%, whatever, right? So you’re able to, spend a little bit more when the market does well and spend a little bit less when the market doesn’t do as well. Have some, that’s- dynamic withdrawal strategies. And when you think about that, the best way I think to do that is look at what expenses are fixed that you have to spend. Maybe it’s two-thirds of what you spend, 80%. Maybe the other 20%, 25% is discretionary. Maybe in certain years you do a little bit more than that 25%, in certain years you do less. You gotta be flexible. That’s what, I think increases your chances for success.

Joe: So, he has, right now $3,000,000, $4,000,000, what $5,000,000 in a retirement account. You need to do conversions today. He’s got $500,000 of income. He’s sixty-some years old. You could go to the 32% tax bracket. I think at $5,000,000, if that continues to grow, I don’t know what we want to grow that at, but his RMD alone is probably in the 200s, plus another $100,000 of dividends. He’s going to be-

Al: It’s going to be high- I mean, if he doesn’t do much of anything, the $5,000,000 in retirement accounts, by the time RMDs kick in, could be-

Joe: He’s 61.

Al: -could be $10,000,000?

Joe: Right.

Al: So $400,000 of RMDs plus dividends and Social Security. So basically you’re in a high bracket. That’s why you want to do Roth conversions now. We’ve got low rates right now. So 24% certainly. Maybe even more, maybe 32%.  If you want, if you do retire in a few years, then you really can sort of front-load it and get a lot more in. That’s assuming we get the tax cuts extended, which Joe, I talked to several experts yesterday that they all felt they would be extended at least in some level and at least the tax rates.

Joe: Yeah, so I think if I was Al Bund,  I would, do a conversion into 30, he’s 61, so he’s got plenty of time.  And I don’t know where tax rates are going to go, but I think tax rates, you know, at the higher level, or the rates are going to come down in a sense of that, right now the 24% tax bracket is giant, then it jumps to 32%, and I think it goes to the 32%  bracket at-  I mean the start of the 32% is $400,000 or the end of the $400,000.

Al: For a married couple, $400,000.

Joe: So $400,000. He’s at $500,000 of income minus whatever he’s saving. I don’t know. He’s probably right in the 32% tax bracket. I would do a conversion this year and I would do conversions because he’s got $4,500,000 in a brokerage account that he could live off of his $350,000. I’m guessing he got two answers. He’s like, well, no, you probably want to take the distributions from the retirement account to a certain level and then top off the rest of your living expenses with your brokerage account.

Al: Right.

Joe: I would run the numbers both ways. But I think you’d be better off if he did the conversion. And he lived off his brokerage account or you could do a conversion and live off of some of the brokerage. Let’s say you’d-

Al: Some of the IRA.

Joe: – some of the IRA, maybe you convert or you pull on, to the top of the 15% or the 12% tax bracket to live off of, which is what? $100,000, $150,000 out of the $250,000 or $300,000 that you need. Then I would convert to the top of the 24%. And then I would live off of the brokerage account with everything else.

Al: Yeah. Then you keep it in the 24% bracket. Yeah. I think there’s a lot of strategies, but the reason why you do that is because if you don’t, you can pull the money out. And I guess in some ways you could get the same impact, but wouldn’t, but basically you’re growing your brokerage account instead of your Roth. I’d rather live on the brokerage and increase the Roth where it’s tax-free. Then what some of these advisors are telling you is just withdraw out of the IRA for your living expenses. Then you don’t really increase your Roth, you increase your brokerage account in the sense that it’s going to grow, but that’s going to be taxable with dividends and capital gains.

Joe: Yeah. If you think about it, you have two pools of money. You have a brokerage account. That’s- any future growth is going to be subject to a capital gains tax, or you could have it all in a Roth IRA that you’re never ever going to be taxed on it again.  Let’s say if one of the spouses dies, right? You got the widow or widower tax. Now you have a huge RMD that you, Al, or Peggy need to take.  But now you cut your tax brackets in half so that RMD is gonna shoot to probably the highest tax bracket. If you got $5,000,000, $10,000,000 or $8,000,000 or whatever that thing grows to over the next 10 years.

Al: Particularly, I mean so you think about 14 years from now, what are the tax rates gonna be?

Joe: Who knows?

Al: I mean, I think most people realize that our country needs, at some point, we’ll need to get that debt under control, which probably means higher taxes at some point in the future.

Joe: You’re taking the uncertainty of taxes off the table. The other only issue that I see here is that at $5,000,000 in a retirement account, you know, the IRS really likes those big fat retirement accounts.

Al: Right.

Joe: And if that continues to build and grow, you know, they could, what’s the dollar figure today on those larger IRAs?

Al: Well, yeah.

Joe: They were spittin’ around?

Al: They were thinkin’ $10,000,000, but it didn’t really become law, but that was discussed, right? Your IRA’s over $10,000,000, it’s gonna be, you have to start taking money out.

Joe: Start taking distributions, even if you’re not-

Al: -even if you’re not retirement age.

Joe: Right.

Al: Yeah. Yeah. But it didn’t, pass, but it’s been discussed, right? And the other thing too is, you know, hopefully, Al and Peggy, you live a long life, but if one of you pre-deceases the other, now all of a sudden you’re in the single tax brackets. Now, this is even way worse. So just think about all that.

Joe: Yeah. I just said that. I guess you’re, you don’t really listen.

Al: No, not really.

Joe: My voice is soothing.

Al: I went to sleep.

Joe: Yeah, you fell asleep.

Al: Yeah, right. Yeah.  You just said that.

Joe: I did.

Al: I don’t know what I was thinking.

Joe: Yeah.

Al: I was thinking about my next thing I was going to say, which was the same thing you were saying.

Joe: You were thinking about, man, I wish I had $10,000,000. Oh, that’s right, I do.  Oh, only can I have the big-ass wallet like Big Al.

Al: I need a bigger wallet.

Joe: Yeah, you do, to fit all that money.

Al: Yeah.

Joe: Alright, well I’m glad you find my voice soothing.

YMYW Podcast Outro

Andi: Your Money, Your Wealth is presented by Pure Financial Advisors. Meet with one of the experienced professionals on Joe and Big Al’s team at Pure for a financial assessment. It’s a deeper dive than a spitball, there’s no obligation, and it’s free. Call 888-994-6257 or click or tap the link in the description to schedule yours. Pure currently has 10 offices around the US where you can meet in person, and we’re growing every day, but you can also get your free assessment right from home via Zoom no matter where you are in the world. The Pure team will help you create a detailed plan 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.
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