Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
March 19, 2024

Why would a financial advisor suggest that Frank in Lake Wobegon sell a piece of inherited property, pay 25% tax, and invest the lump sum? Mark in Florida is 72 and invested in CDs. Should he go back to his financial advisor, or just buy more CDs? Plus, Adam in Tennessee will have deferred income in 5 years. Should his asset allocation be more conservative? And in order to retire early at age 55, should Lewis in Arkansas delay starting Roth conversions? But first, if Mike’s wife outlives him, how can he keep her in a similar tax bracket?

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Show Notes

  • (00:48) If My Wife Outlives Me, How Do We Keep Her in a Similar Tax Bracket? (Mike)
  • (06:49) Long Term Capital Gains: Retirement and Real Estate Spitball (Frank, Lake Wobegon)
  • (17:04) I’m 72. Should I Go Back to an Advisor or Just Buy More CDs? (Mark, FL)
  • (21:32) Should My Deferred Income Asset Allocation Be More Conservative? (Adam, Franklin, TN)
  • (31:13) Should We Delay Starting Roth Conversions to Retire Early by Age 55? (Lewis, AR)
  • (41:11) The Derails

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Andi: Why would a financial advisor suggest that Frank in Lake Wobegon sell a piece of inherited property, pay 25% tax, and invest the lump sum? Mark in Florida is 72 and invested in CDs. Should he go back to his financial advisor, or just buy more CDs? That’s today on Your Money, Your Wealth® podcast number 473. Plus, Adam in Tennessee will have deferred income in 5 years. Should his asset allocation be more conservative? And in order to retire early at age 55, should Lewis in Arkansas delay starting Roth conversions? But first, if Mike’s wife outlives him, how can he keep her in a similar tax bracket? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

If My Wife Outlives Me, How Do We Keep Her in a Similar Tax Bracket? (Mike)

Joe: “Hi Andi, Joe, Al. You may want to skip to the bottom for my question.”

Andi: The very last sentence.

Joe: Should we do it?

Al: Sure. Let’s do it.

Joe: I gotta read it. I’m already here.

Al: You want to go through the whole thing. Okay.

Joe: “I enjoy the podcast while I’m exercising or walking my two and a half year old golden retriever who is a well trained expert who cannot contain his joy when meeting new people and may try jumping on them. I’ve been listening for a few years and sent a crappy limerick when that was a thing.”

Al: You remember that one?

Joe: I do.

Andi: That was a long time ago.

Joe: Love this guy.

Al: I liked it myself.

Joe: Wow. “I drive a 2017 hybrid Highlander or 2012 Miata.” Oh, a little Mazda Miata. “It’s supposed to be my wife’s. My time machine 1966 convertible Mustang. My wife drives a 2012 Outback. My favorite drink is, what are you serving?” Yeah.

Al: Now that’s our kind of guy.

Joe: “In Summer, I like a cold beer, often a New Castle or Legends Brown Ale. I think that excessive hops are added to a beer to make the trip around the horn, or to cover up a bad beer. Sometimes I’ll have a glass of sparkling wine to celebrate today, or red or white wine, depending upon the meal. Lastly, a single malt scotch to have a serious or entertaining discussion with a friend.” He sounds very like a professor of some sort. He likes limericks-

Al: You know what? It sounds like-

Joe: He likes a little scotch with delightful conversation with a good friend.

Al: Sounds like someone we want to hang out with.

Joe: “I don’t drink as frequently as it sounds.” I don’t know about that, Mike. “My wife and I are part of the FIRE movement. FI.” Yes. We know what FIRE movement is.

Al: Retire Elderly.

Joe: Oh, Retire Elderly. Financial Independence-

Al: – Retire Elderly.

Joe: -Retire Elderly. “We are 70.”

Al: Okay.

Joe: Smoking a cigar or something. Maybe a pipe. Drinking that scotch and having a nice, pleasant conversation.

Al: Could be. Right?

Joe: “We retired about 4 years ago on a fat wallet. Now 2/3 an IRA and 1/3 on Roths. We have lived the past 4 years on savings, a small Social Security benefit, and spousal benefits. Social Security is now fully turned on, and savings fill in the difference. We have been converting into our Roth IRAs over the past 4 years, paying taxes out of the savings. Our savings are also being used to update and remodel our 60 plus year old home. It’s killing me! When RMDs start, we can live on Social Security plus the RMDs. I’m thinking I should continue converting to the top of the 24% tax bracket, but I’m reluctant to use all of our savings to do so, since the main reason for converting is to try to keep my widow, assuming she outlives me, in a similar bracket to what we are now. Finally, the question, is it reasonable to pay the taxes out of the conversion, or for the next two years, take our living expenses and taxes out of the IRAs? Thank you, Mike.” Would you look up his old question? How much money does Mike have?

Al: Yeah, that’s- we’re missing a key point here.

Joe: If he drinks scotch and writes limericks, I’m guessing millions.

Al: Probably got a lot, right?

Joe: I’m guessing, I’m guessing. He’s got a couple of them.

Al: It could be he just sent us the limerick and we don’t really know.

Andi: I’m not finding his limerick. I’m finding others, but I can’t find one from Mike.

Al: Got it. So here’s the thing we’re missing. We need to know what the dollar amount is, how much you have in IRAs versus Roths, and then we can sort of get a sense of what the RMDs look like. Then we can tell you.

Joe: Yeah. I think what he has to do, he’s in his 70s now, so he’s got RMDs coming up. His RMDs and his Social Security is going to be enough for his living expenses. And so, if you need the cash anyway, if it’s excess of your living expenses, so what we find is this, let’s say if someone wants to spend $100,000 a year and they have $50,000 of Social Security, but their RMDs are $150,000, so there’s excess dollars that are coming out of the retirement account that are pushing them up into a higher tax bracket, then we would say probably convert and pay the tax within the IRA while tax rates are low over the next couple of years just to see what happens with the tax law over the next two years.

Al: Yeah, I think that’s perfectly said. Because many of our listeners and our clients, their RMDs are greater than what they need and that’s a problem. They’re paying tax on income they don’t really need.

Joe: Right, but if the RMD and whatever other fixed income sources are is what you want to spend then I wouldn’t convert anymore. I think you’re good. And then the dollars will compound in the, because if he’s been converting the 24% tax bracket is giant.

Al: Yeah, it is.

Joe: He’s converting a lot of money and he’s blowing out of his cash savings. And it’s like, it’s killing him. It’s like my, my cash is dwindling. So I’m remodeling the 60 year old house. I’m buying all this booze and writing limericks and spending all this money on these conversions because I listened to these two yahoos on a podcast back in 2021.

Al: Yeah, the 24% bracket for married couples in 2024 goes to about $380,000. So we don’t know what your income is, but if you’re converting to the top of that, that’s a pretty big conversion.

Joe: Yeah, I would say, I think you’re good, Mike.

Al: I would say if you want to convert some, yes. We can’t really answer this because we don’t know what the dollars are, but I think the concept that you outlined, Joe, is exactly right. If you don’t have excess income and you need what’s coming out. Maybe you’re okay.

Joe: All right. Thanks for the update, Mike.

Long Term Capital Gains: Retirement and Real Estate Spitball (Frank, Lake Wobegon)

Joe: We got what- do we got? Lake Wobbegon, Wobbegon, Wobbegobbegon-

Andi: Wobegon.

Joe: Wobegon.

Al: Prairie Home Companion, right?

Andi: Yep.

Joe: “I know the guys love when people lead with the question. So here it is. I’m trying to limit the amount of long-term capital gains I would pay on this situation. But first things first. I enjoy Grain Belt premium.” Oh-

Al: You know that?

Joe: I love Grain Belt premium.

Al: What is it?

Joe: It’s beer.

Al: Okay.

Joe: Yeah. It’s a Minnesota beer. I haven’t had a Grain Belt premium in, I don’t know, it’s probably 10 years.

Al: Got it.

Joe: My dad used to drink it and he died 17 years ago. “Joe would appreciate that.” Hey, whoa.

Al: Oh, he got that right.

Joe: Yes, he got that right. You know I would. “My wife likes tequila and sampling craft beers with me. I drive a 2010 Ford Ranger and a 2006 Prius. My wife has a 2015 GMC Terrain. All paid for. I think you’ll notice a trend. We live a common lifestyle. I’m 65 and retired since 59, but work part time as a substitute teacher. More because there’s a shortage of substitutes than the need for the money. I also volunteer about 40 hours a month at a local food shelf. My wife is a full-time teacher. She plans to retire in 3 years at 62.” So, well, this guy’s like, he’s like Garrison Keillor.

Al: Even though you don’t know who that is.

Andi: Frank’s a cool guy.

Joe: Yeah. “My Social Security’s $22,000 a year. My subbing is $10,000 a year. My annuity’s $8000 a year. Wife’s salary’s $55,000. Land rent, $11,000. We have around $50,000 in our brokerage account, $30,000 in donor advised fund, which we plan to build on. $40,000 in HSA, got $500,000 in Roth and traditional IRAs. My wife’s pension will be around $2500 a month, which we might wait because it increases over time. Her Social Security will be another $24,000 a year. Our plan is for her to wait until full retirement to claim her Social Security. Our annual expenses are $65,000 a year. We would like to help our two adult children by funding their Roth IRAs or HSAs when we can in the tune of around $3000 a year. Our plan is for our retirement income to be around $90,000 a year.”

Al: Okay, there you go. So someone retiring that wants to kind of step it up with travel and everything else. That’s great.

Joe: All right. “We inherited some land around 20 years ago that we plan and sell the same time she retires. The land will sell for $650,000. Our financial advisors suggest we sell it outright and pay the 25% taxes, long term and regular. They say we will benefit from being able to invest the lump sum.” Oh, man.

Al: Oh, okay. Here we go. I wonder where that advice came from.

Joe: Long term. Yeah. Okay. Let’s go. “We hate that idea.” All right. Well, if you hate the idea, don’t do it.

Al: Yeah, don’t do it. Don’t need to.

Joe: “I want to sell it on a contract for deed and receive around $80,000 a year over 8 years. Our current renter is interested in that arrangement.”

Al: There you go.

Joe: “My thinking is that the year we sell the land, I will suspend my Social Security. I will be 68 and start it up again at age 70. That will give me two years of growth. We will live off of $80,000 a year. We live off the contract to deed and we can supplement the funds with the Roth or traditional IRAs if we need and/or her pensions. Our thinking is that we would keep our long-term capital gains low and we really don’t need the $640,000 in a lump sum anyway. Is the tax saving in this strategy worth the effort or is our advisor right? Frank, from Lake Wobenegon, Wobegon.” Okay, so, let’s see, $640,000, 25% of that, alright, okay, doing some math here. What do you think, Big Al?

Al: Yeah, well, there’s no reason to sell the land right now, if you don’t want to, and, and, well, just FYI, sometimes you get an advisor that will want you to sell a capital asset so they can manage more and have more fees. I’m not saying it was true in this case, but just be careful of that bias, I guess, from that advice. But I would say, you know what? In just a few years, you’re, you’re, you’ll probably have 3 years, 6%. You got about $600,000 now, $700,000, right? And you want, you’re spending is going to be $90,000, but you got $60,000 of fixed income, even before wife’s Social Security, right? So you need $30,000 out of $700,000. That’s a 4% distribution rate. Plus you got the $80,000 per year. So. Yeah, this, what you want to do works just fine. I like that better than what you’re being told.

Joe: So he’s got $600,000 right now, and so he doesn’t want to sell the land, pay $200,000 in tax. He’s going to net out $450,000, something like that. And then now that $480,000 would grow. Or, he could say, well, maybe I don’t touch my $600,000 today and I let that grow over the next 10 years because I’m going to receive the cash income that I need to live my lifestyle from this contract for sale deed. So $600,000 over 10 years is going to be $1,200,000. He’s going to have $60,000 of fixed income.

Al: And another whatever, when wife takes $24,000 a year, right? So, call it $75,000, $85,000, sorry, I did the math wrong.

Joe: $85,000 plus another $1,500,000, call it, I think that’s good.

Al: Yeah, I do too. You don’t need to do anything rash right now.

Joe: Because let’s say he sells it, and he doesn’t want to do it. He sells it, he pays the tax, and then his advisor is going to invest it, which is great. I mean, if that, I mean, that’s more liquidity, there’s probably maybe, I don’t know if there’s less risk depending on the tenant- is the tenant- I mean, there’s, there’s, there’s pros and cons to both sides here.

Al: Yeah. But if-

Joe: Al, you just wanted to rip on the advisor.

Al: I just, I want folks to be careful when an advisor tells you not to pay off your mortgage or to sell a property because it’s-

Joe: Hey, a lump sum is-

Al: – looking pretty good to me.

Joe: I agree. I agree. But all right, so he needs to bridge a gap for 10 years. Right? So now he doesn’t have the $80,000 coming in. So let’s say he sells the property, he’s got $600,000, and then he’ll receive another, let’s call it $450,000. So he’s got $1,200,000 today. But he’s going to have to take $80,000 from that portfolio over the next 10 years to cover his living expenses.

Al: No he doesn’t, because he’s got- he’s already taken his Social Security.

Joe: But he’s pushing all of that out, he said, for 10 years. Because he’s just going to live off of the land.

Al: Oh, I see what you’re saying.

Joe: So, I’m comparing the two.

Al: That’s not what he’s doing right now. Okay. Got it.

Joe: Right. So, his plan, what he’s thinking of doing, if I understand the question right, and sometimes it’s hit or miss with me.

Al: I think, I think you may be right.

Joe: And so he’s like, all right, I’m going to do this land deal and I’m going to get $80,000 over the next 10 years. And I’m going to live off of that. We’re going to push pensions. We’ll push Social Security. Everything’s good. We can live that. And if we needed a little extra cash, we have some savings here, but for the most part, we’re going to live off of this $80,000. So he doesn’t have to touch any of the investments and he can let everything else grow. And so if, if that were the case, his other assets would grow to, let’s call it over $1,000,000. $1,500,000. If he sells the land today, he’s only going to net, let’s call it $450,000 from the sale of that property. If he could sell it, pays the tax, he nets $450,000. He’s got $600,000 already saved. So if you add those two together, it’s $1,100,000. Sure. Make sense?

Al: Yep.

Joe: But now, he doesn’t- he has to create the $80,000 from the $1,100,000.

Al: Yeah, which is difficult.

Joe: Which is almost impossible.

Al: Without the other income.

Joe: Right. So, then he’s going to have to draw Social Security early, the pensions are going to have to come into play early.

Al: Right, and so they’ll be lower than they would have been.

Joe: Yep.

Al: Yeah, I think it’s a brilliant plan to do what you’re thinking.

Joe: I love it. So yeah, sell the property. Here’s my number and I’ll invest that for you. No problem there.

Al: Yeah, because we’ll make up the tax.

Joe: You know, we’ll share a Grain Belt. That brought some good memories back. Grain Belt Premium.

Al: Did it, really?

Joe: All right. Yeah.

Al: I’m gonna have to try to get you some for your birthday.

Joe: Sure.

Andi: It’s tax season, and we’ve got free resources for ya. Watch 10 Tax-Cutting Moves to Make Now on YMYW TV, and download the companion Top 10 Tax Tips from the podcast show notes, available this week only. Plus, sign up for our free live webinar next Wednesday, March 27th at noon Pacific, 3pm Eastern time, to learn strategies to reduce your tax bill and lower your overall tax liability as you plan for a successful retirement! Tax Planning Manager Amanda Cook, Esq., CPA, will outline the laws that impact your taxes, important tax deadlines, and how to take advantage of tax-saving opportunities that are available this year. She’ll also answer your tax planning questions – live. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, register for the free live tax planning webinar on Wednesday, March 27 at noon Pacific, 3pm Eastern, watch 10 Tax Cutting Moves to Make Now on YMYW TV, download the free guide for a limited time, and to spread the love and share the YMYW knowledge and free financial resources.

I’m 72. Should I Go Back to an Advisor or Just Buy More CDs? (Mark, FL)

Joe: All right, we got Mark from Florida writes in. He goes, “Hey, I’m 72. Been retired since 2008 when I got rif” – when I got ripped off?

Andi: I think it was going to be “fired,” but it ended up being “rif.”

Al: Came out “rif.”

Joe: “When I got riffed from-“

Al: Let’s go with fired.

Joe: You think he got fired? 33 years of service? He got riffed.

Al: I think he got laid off is what happened. He got riffed.

Joe: He got riffed.

Al: Which doesn’t sound good.

Joe: No, it’s really bad.

Al: That’s worse, worse than getting laid off.

Joe: Yes. “I was working with financial advisor up until about 5 years ago when I decided to riff him.”

Al: There you go.

Joe: “I decided to get out of the market. I just put my money in CDs at 3.5%- or 3.25%. My CDs have matured this January 2024. I have approximately $1,400,000 in IRAs that need to be reinvested. I’m thinking about going back to the financial advisor because he could be helpful with my tax issues coming up. Just to note that I have never taken any money from my IRAs since 2008. Do you agree with my thoughts of going back to the financial advisor at this time, or should I just buy more CDs?” So Mark had some money, got riffed from Verizon after 33 years of service. He had a financial planner, doing well. And he’s like, you know what? 5 years ago, he’s like-

Al: I’m done.

Joe: I’m done. I’m out.

Al: Don’t want the risk.

Joe: I’m getting out of the market. I’m buying CDs at 3.5%. The CDs now are maturing. He’s got $1,800,000 or $1,400,000 in his IRAs. He’s never touched the IRA.

Al: Doesn’t, doesn’t really need it. It sounds like.

Joe: Right. He’s been retired since ‘08. So what’s that, 16 years?

Al: He’s fine without it.

Joe: So now he’s like, all right, well, what do you think? Should I go back to the advisor? Well, there’s two thoughts here. He- if he doesn’t need the money, why take the risk?

Al: Yeah, exactly. Just go into CDs, they’re paying better than 3.2%. You’re not gonna get a 5-year CD probably for that, but you could get a 2-year maybe.

Joe: But on the other side, it’s like, okay, well you don’t need the money, at least invest it prudently. And have a globally diversified portfolio, and you could probably do anywhere from 4% to 7% over the long term.

Al: Yeah. Because you can ride out the market, right? If you’re not going to need it. Who cares?

Joe: Yeah. He doesn’t necessarily need it.

Al: I think- I think part of this would come into play, which is, do you think you’re ever going to need it? Right. In terms of lifestyle. I mean, some people want to use their IRAs for retirement homes if they need them. Do you have kids? Do you want to grow this for your kids? If you do, that would be a good reason to continue to invest. And you can be as aggressive as you’re comfortable with because you don’t really need it.

Joe: Yeah. Mark, here’s, here’s what I would do is that, yeah, I would go back to the advisor. But if the advisor is just a money manager and says, here’s this portfolio that we’re going to come up with that’s not really geared toward your specific goals, your tax situation and things like that, then I would probably try to find an advisor that would be a little bit more holistic. Because I think there’s a lot of really good advisors, but they’re just plain money managers. They say, all right, here’s our investment solution. And it doesn’t necessarily matter what your overall situation is. They’re trying to find alpha. Let’s say in the overall market, they’re trying to outperform. They have unique strategies. Which could be great for accumulation, but hey, you’re retired, you don’t like to take on a ton of risk it looks like, but you have all this money in a retirement account, sounds like you don’t need it. There’s probably some tax plays, if I were to guess, to probably avoid some of the unnecessary taxes that he’s going to be facing down the road.

Al: : Yes, you’re thinking Roth. Roth conversion.

Joe: Yes, I’m definitely thinking- yes. What else do I think about?

Al: That’s about it.

Joe: It’s all beer-

Al: Beer and Roth. And golf.

Joe: Yeah. So, go, yeah, I would go back to the advisor, check him out. Yeah, and hopefully he does some really good planning for you.

Al: Yeah, I think the thing about CDs, just, just be aware that CDs generally over the long term do not keep up with inflation. I mean, they’re paying pretty well right now, but as a general rule, they’re not going to keep up with inflation.

Joe: All right, Mark. Thanks for the email.

Should My Deferred Income Asset Allocation Be More Conservative? (Adam, Franklin, TN)

Joe: We’ve got Adam from Franklin, Tennessee. He writes in, he goes, “Hello, the Fabulous Trio. Enjoy your show. I look forward to it every Tuesday. Let’s get the details out of the way. Drink of choice is iced coffee. Drive a Porsche Taycan-”

Andi: Taycan. (Tie-con)

Joe/Al: Taycan.

Andi: I looked it up. It’s Taycan.

Joe: “Yes, it’s the electric one. I’ve been converted. I have two cavapoos, Tucker and Scout. My question is related to the asset allocation within one of my accounts, specifically my executive deferred account. My wife and I are turning 50 in February, and I’m likely to retire at early 55ish. So I feel like I’m in the window when I need to be a little bit more diligent about my asset allocation and my potential withdrawal strategies as I’m in a 5-year window. Current allocation – current overall allocation across qualified accounts is $1,700,000, Roth $300,000, brokerage account close to $4,000,000 and the executive deferred comp plan is $275,000 and they’re all very close to 70% equities/30% bonds. I’m deferring a big chunk of my annual income currently roughly $150,000, $150,000 per year. Started this two years ago and we’ll continue this for the next 5 years. So without any growth in it, there’ll probably be over $1,000,000 by the time I retire and that money will come out evenly over 10 years after I separate from service. That should cover the vast majority of my expenses. Might need another couple of bucks so I can pull that out of the brokerage or the 401(k). My question is- “ So let’s, let’s back up before we get to his question, just so everyone understands. So he’s got an executive deferred comp plan. And so what that means is that he can defer his income and put it into an account. But there’s rules around this. It’s not like, hey, I want to defer $150,000 this year because I’m going to receive a big bonus. You usually have to defer your income way in advance, and you have to pick a timeline of how that money is going to come out at the date that you defer it.

Al: Yeah, and it’s typically, generally only available for executives in companies that have these kind of plans. But the thing is, you can decide how much to defer. You can defer a lot, but you have to make that election in November, I believe, of the year before, and you have to make an election on each year what you want the payout period to be. Right. I think 5 years. 10 years, 15, whatever. Depends upon the plan. It could be 20 years even. So, it, and it, I’m not even sure, I guess, I think depending upon the plan, these do grow, but it’s not necessarily invested in a-

Joe: Well, yeah, it depends on the plan. So, here’s the- here’s all the pros, is that it’s a pre-tax contribution, so we can reduce his taxes today. So he’s taking $150,000 off the table pre-tax, so he’s not going to be taxed on it. That money is going to continue to grow. So some plans I’ve seen where they can pick and choose their options. Some plans is on the company. The company controls it.

Al: Yeah. And maybe it’s 10 years and that’s your choice.

Joe: Right. But this is also now a, if the company blows up, now this money’s at risk too. So there’s cons to these plans.

Al: Yeah. And the reason for that is this is not the company putting your salary money into a separate account. It’s just, it’s a liability of the company. So if the company fails and there’s no more money, that plan is- it’s, it’s gone, right? So when you’re- when you’re considering an executive comp plan, you always want to consider the strength of the company, not only now, but when you retire, and then maybe 10 years after.

Joe: Right. If you think of it, if this is probably a lot larger company.

Al: Probably, I mean, most, most of these larger companies do this.

Joe: Let’s say if, we have a pretty small company and we’re executives of this company. And if we put our own dollars into the company, yeah sure we can get a tax benefit, but then there’s so many restrictions on how you get it out. But let’s say the company, you know, takes a turn for the worse, well we put money into the company, I mean that cash is available for creditors, or to pay bills, or whatever.

Al: Correct. Exactly.

Joe: So, you just want to understand all the rules here. So, some people will, oh, you got this deferred comp, that’s pretty great. Yeah, but you also want to be careful, there’s cons too. Right. Alright, so let’s get to his question, Big Al. He goes “I know that the deferred income will start to come out starting in 5 years, would you recommend that I consider changing that allocation to something more conservative, maybe all bonds, and adjust the equity allocation of the other accounts to get me back to 70/30 overall? Or since that money will come out over a 10-year period, should I be thinking about it more of a long-term allocation and just leave it 70/30 from 55 to 65? I expect another $75,000 or so of dividends, interest, capital gains from my brokerage account, so likely looking at $175,000 or so of income during that period before the deferred income ends and Social Security starts. Thanks for your help and your faithful listeners appreciate what you do. Thank you, Adam from Franklin, Tennessee. He’s got some big bucks and some big income. It means a lot.

Al: It’s over $6,000,000. Good good for you.

Joe: Yeah, it’s a 15-year time frame Adam. It’s not a 5-year time frame So you want to glide path that thing and I hate that term glide path and I can’t believe I just said it.

Al: I can’t believe you just said it too.

Joe: As soon as I said it I wanted to kick myself.

Al: Right.

Joe: But it’s a 15 year time frame. So instead of going all bonds, you could probably go 70/30 still, but then you might want to go 60/40, 50/50, depending on, and I would gauge it that way.

Al: I would too, and then you may change it later depending upon what the market does, but, you know, in some ways you, here’s a thought for keeping it 70/30, the whole way through, is 30% of what you got is- is in bonds. Now in the early years, you know, it’s okay if the market, it collapses, generally it will recover in a year or two or 3, but as you start getting into maybe 5 years in, now you’re, you don’t necessarily want to keep it 70/30, because more is coming out than the 30%. So, so we’ll go back, we’ll go back to your glide path, which basically means keep it 70/30 now, maybe even at the beginning. But then start getting it, ratcheting it down to where basically if the market collapses for a couple years, you still have enough in bonds to be able to cover that payment. That’s how I would think of it.

Joe: So think of it- he’s hypothetically, he’s going to have $1,000,000. Once this thing starts to pay out, and so he’s going to take $100,000 out over the next 10 years, if he keeps it 70/30, at $1,000,000, he’s going to have $300,000 in fixed income.

Al: In safety, right.

Joe: So, maybe that might be a little bit aggressive. Because sometimes it might take more than 3 years for those equities to recover. So he would take 3 years out of that $100,000 to satisfy the distribution of the deferred comp plan. And then hopefully that $700,000, the market tanks 20%. Well, only that $700,000 is at risk. And hopefully over that 3-year time period, that $700,000 recovers back to its basis or higher. But if you say, well, I don’t know if it’s 3 years, is it 5 years?

Al: Could be.

Joe: Maybe you feel more comfortable with 5 years. Maybe, I’m fine with having it 5 years for those equities to recover. So, that’s how I should, you know, Adam should be thinking about it.

Al: 100% agree. But here’s, here’s some point of reference, which is the Great Recession, which is the worst stock market we’ve had in our careers, Joe. And that, that was down for about 18 months, and then it started recovering. So, that just- just as a point of reference, right? It doesn’t normally take 5 years or 10 years to recover.

Joe: Well, then you have the lost decade where it was flat for 10 years.

Al: Well, true. If you’re only invested in one asset class.

Joe: Okay. Yeah. If you’re just comparing the S&P.

Al: Yeah. Yeah.

Joe: Or US markets.

Al: So if you had the US markets between 2000 and 2010, you made nothing, but if you had US and international, and bonds, you could have made a 5% or 6% return over that same decade.

Joe: Yep. Okay, hopefully that helps, Adam. Thanks for the compliment. Thanks for the question. And Franklin, Tennessee. Not sure where the hell, Franklin, Tennessee- Is that by Nashville?

Al: That’d be a good guess.

Joe: I want to go to Nashville. Maybe I move to Nashville.

Al: That’s where you should go.

Joe: So I can be close to Adam.

Andi: It is just south of Nashville, yes.

Al: Have you been to Nashville?

Joe: Decades ago.

Al: Long time. We went about 3 years ago. It was fun.

Andi: I went earlier this year. It was a great time.

Al: Oh, there you go.

Andi: If you don’t have a firm grasp on asset allocation, or the importance of diversification, or even the various types of investments, you are not the only one! Less than half of Americans have a solid understanding of basic investing terms and concepts. How can you grow your wealth if you don’t know the tools and strategies that are available, much less know how to use them to develop a long-term financial plan? Visit the podcast show notes and download our Investing Basics Guide for free. It’ll give you a beginner’s overview of asset classes from cash to fixed income, equities to commodities. Why does a basic 60/40 portfolio generally outperform the average DIY investor? How are mutual funds and ETFs different, or stocks and bonds, for that matter? What kind of returns do they get, and how much should you have of each? Find out. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, and download the Investing Basics Guide, right before the episode transcript, for free.

Should We Delay Starting Roth Conversions to Retire Early by Age 55? (Lewis, AR)

Joe: “Hey Joe, Big Al, Andi. This is Lewis from Arkansas.”

Al: Nice accent.

Joe: “Long-term listener, first-time writer.” Oh, there it is. “I drive a Ford F150. But sorry, Joe, I don’t drink straight Jack Daniels. I prefer a Long Island iced tea or a Kentucky Mule. Wife enjoys a little red wine or an old fashioned.” Wow. I like the wife that drinks in old fashioned.

Al: I don’t think he drinks straight Jack Daniels.

Joe: No, I think I was making fun of the guy with the Ford F150 where I go I guarantee he probably just slams Jack Daniels out of the bottle.

Al: Right. Yeah, I suppose he’s responding to that.

Joe: “We got a newborn, two years old. And a too rambunctious mini-Aussie.” Wow. “I was hoping you could spitball on my current Roth strategy. I’m 35. My wife is 33. Income is $300,000 from W2 wages. We don’t expect income to increase much. We also get $12,000 from rentals, current investments, $500,000 in retirement accounts, $500,000 in a brokerage, $45,000 in HSAs and $25,000 in 529s, $1,000,000 in equity across several rental properties. Current annual investment allocation. $58,000 going into 401(k)s, $24,000 a year going into the brokerage account, $20,000 to 529 plans.” Man, they’re saving a ton of money.

Al: Big time.

Joe: What are they saving, $100,000 a year?

Al: It’s a lot.

Joe: Oh my god. They’re $330,000 of W2 wages. So, I mean, they’re paying a ton of tax and they’re saving everything else. They must live in Maumelle.

Al: That lower cost of living? No.

Joe: It’s a really nice area. “Our current plan is to continue this investment strategy for about 8 to 10 years and then die with $1,000,000,000. I would like for my wife to retire or take a lower paying, lower stress position at that time. And I’ll also work part time. My income would be about $80,000 at that time. Rental income is harder to project. But let’s say it’d be around $25,000 at age 45 and $70,000 at age 55. We would work in this part time capacity until our necessary drawdown was less than 3%.” All right, this guy’s sharp.

Al: Yeah, he is.

Joe: He’s got it. He’s got it dialed. “But I think we could both be completely retired by 55 and 53. We currently do not have any Roth assets. If a- if tax rates cooperated, do you think we could use this 30-year period to reduce income to more efficiently generate Roth assets through conversion? We recently started tracking our annual spend, which is about $130,000 a year. This does not include daycare costs and 529 contributions. We have about 5 more years of the shorter term expenses that are currently $50,000 a year. I know Joe will say, you’re young, you’re gonna want those decades of tax-free growth.” Damn right you do.

Al: I can hear you thinking that right now.

Joe: “But hear me out. If we are diligent about using the tax savings today to continue investing, could we use our potential long runway to do conversions to do better than 24% tax bracket that we’re in today? I do have the option of a Roth 401(k) with my plan, and we could both be doing yearly backdoor IRAs, but I think we can do better. Am I thinking about this wrong? I have a long list of podcasts I’ve listened to, and yours is my favorite.”

Al: There you go.

Joe: Oh, Lewis. “I know you guys like to joke around, like y’all doing is just sitting around shooting the spit around finances, but seriously, thank you for all that you put in there- that you put out there. It’s fantastic stuff. I think you’re making a bigger impact than you give yourselves credit for. And don’t worry Joe, at the bottom I’ve listed all the podcasts that I’ve listened to over the years that you guys are clearly superior to. Keep up the good work.”

Andi: He’s got some big names listed there.

Joe: Let’s get back to the yeah point at hand.

Al: He wanted to know whether his Roth conversion strategy is a good one. In other words, not do any now, but do it later while he’s in a lower bracket.

Joe: I would say do the Roth. Roth 401(k), backdoor Roth IRAs all day, every day. Absolutely, no doubt about it.

Al: And I would probably disagree.

Joe: He’s in the-

Al: Because he’s, he’s got a really high income. They’re living on peanuts. And so chances are their spending will go up a little bit in retirement.

Joe: We don’t know that a Roth conversion’s even going to be available.

Al: I don’t.

Joe: All right. I mean, they’re making so I don’t know that- who knows?

Al: Here’s what I would do. I would do-

Joe: Saves a ton.

Al: I know.

Joe: He’s going to have millions in retirement accounts and real estate, and-

Al: So here’s what he’s going to have in 10 years. He’s going to have $2,900,000.

Joe: He’s not going to retire in 10 years.

Al: Roughly.

Joe: Unless he listens to the Money Guy.

Al: Well, if he listens to Choose FI, he will.

Joe: Yeah. I don’t think guys like this can retire. This guy’s a grinder. He makes a ton of money, drives a Ford F150.

Al: So if he retires in 10 years or-

Joe: He’s got a ton of real estate.

Al: He’ll have a 12-year-old, retiring with a 12-year-old.

Joe: I like Lewis, man. We got two-year-olds. We should hang out. You want to retire in 5 years? Let’s do it.

Al: Yeah. And anyway, I would personally, I would do the, the Roth provision in the 401(k). I’d want to know a little bit more, I guess, about really whether this retirement is serious or not. You bring up a good point there, Joe, and that is, is he really going to retire?

Joe: He’s not. It’s so, I mean, you’ve got the compound tax-free growth now. You take the uncertainty of taxes out of the equation.

Al: I know. Yeah, but he’s listening, he’s listening to all these FI shows and they’re getting them all jacked up.

Joe: Yeah. And he’s saving a ton. He’s getting jacked up and he’s saving he’s like he’s getting excited and then guess what? It’s gonna hit that day and it’s like, oh-

Al: It’s like what was I thinking?

Joe: Or you know? It’s like once you accomplish a goal, right? And it’s like, all right. Well, I got a bigger goal. I got- people like this I think is that- my goal is to retire here or have enough capital to retire at a certain age. And let’s say that number is going to be $3,000,000. He’s going to get $3,000,000 and guess what he’s going to do. He’s going to say, it’s not enough. I want more. I could do more. I’m going to figure something else out. But he’s savvy. He’s smart. He’s sophisticated. He’s in his 30s and he’s saving like mad and he’s already got a ton of cash. It’s just like the other guy.

Al: Yeah, it’s very similar, but I’m going to, I’m going to go with what he asked, assuming a 10 year work period. And I just ran some numbers. And I think he’s about, he said he worked part time. He’s about $60,000, $70,000 short in income, right? So based upon my conservative math at 6% rates to return 3% inflation, that’s what I’m coming up with.
That’s, that’s how much he would need to make. I don’t know. Sometimes you get to 45 and you’re thinking this is great. And then you retire. You actually do retire. But then you realize, oh, this isn’t quite what I thought. And I think whether he retires or not doesn’t really matter. I think what you’re saying is he will likely come back to work because at 45 he got a lot of energy.

Joe: He’s going to run his own business. He’s going to do something.

Al: Yeah. Yeah. So, so if that’s the case, then you might want to do Roth conversions now as well as later just because you may not be in that lower bracket you’re thinking. And I, I get there’s a certain amount of logic in that.

Joe: If you just look at the math Al, but this show’s not just about math, it’s about life.

Al: I’m just thinking what I would do.

Joe: Got it. All right. That’s it. We’re done. Goodbye. Show’s called Your Money, Your Wealth®.

Andi: Limericks, Prairie Home Companion, 30 hours of YMYW, golf carts in Arkansas vs Belize, and I edit Joe to save him from his own comments about other podcasters in the Derails, so stick around.

If you enjoy YMYW, tell a friend or twelve. And don’t forget to leave your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts and all the other apps that let you do that like Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Pocket Casts, Podcast Addict, Podchaser, Podknife, and Spotify. We are literally on all of ‘em!

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The Derails



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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