Show Notes

• (00:40) Psychology of Retirement: I’m Paralyzed By Not Earning and Saving (Jim, IL)
• (10:15) Should I Contribute to Rollover IRA Before or After Leaving My Job? (Anonymous Fan, Atlanta)
• (15:48) Does It Pay for Us to Do a Roth Conversion, and How Much Should We Convert? (Paul, NJ)
• (18:39) Roth Conversion Strategies When Your Income is Too High to Contribute (Jim, TX)
• (22:44) Should We Purchase Long-Term Care Insurance or Self-Insure? (DK, Delaware)

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Transcription

Today on Your Money, Your Wealth® podcast 361, Joe and Big Al touch on the psychology of retirement: what do you do if you’ve saved enough and you’re financially ready to retire, but paralyzed by the idea of no longer earning and saving? Plus, a Roth conversion strategy when your income is too high. How to know if it pays for you to convert and how much, and does it matter if you contribute to a rollover IRA before or after leaving a job? Finally, should you purchase long term care insurance or self-insure? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Psychology of Retirement: I’m Paralyzed By Not Earning and Saving (Jim, IL)

Joe: Jim writes in from Illinois. He goes, “I came across your show when the pandemic hit and have been listening regularly ever since. It’s very informative. The mix of expert advice-” or expert feedback.

Al: Expert feedback. Not advice, not advice.

Joe: “and sarcastic humor is a unique and inviting combo.” Yeah.

Al: Not too many financial shows have that.

Joe: Yeah, I really agree with that statement.

Al: I’ll tell you what, Jim. We have no issues with that statement.

Joe: Well, sarcastic humor. There’s nothing better. “Also, I feel the connection with Joe because I, too, butcher words when I have to read aloud and I admire that Joe doesn’t seem to care.”

Al: I think most of us butcher words.

Joe: Thanks, Jim. You and I, brother. I’m not a very good reader.

Andi: You’re getting better, though. You’re doing a lot better.

Joe: Thank you. Thank you.

Andi: Especially with these long ones, these page long ones, you’re doing excellent.

Al: I happen to love your reading. It’s very entertaining. I think it’s sarcastic humor. Unique.

Joe: Oh, perfect. That’s expert feedback. “On to my question, which relates to something that I haven’t heard thus far on the show. I’m 56, happily married. I’ve climbed the corporate ladder in a large global company where I did well and then stepped into the CEO role of a small startup, which I have been doing for the past 3 years. I have lived with personal financial management principles of delayed gratification, little debt, and low fee investments. As a result, I’ve saved and invested for many years and have been able to accumulate a net worth of about $6 million, made up of $5 million in taxable accounts ($2.3 million in 401(k), $2.4 million in index funds), $500,000 in liquid money market account, and $500,000 in home equity. I will also have a small pension of about $1,800 a month. Social Security, conservatively estimated at $2,000 a month. My base salary is about $350,000 a year. I have stock options, but let’s ignore those because it’s a startup and who really knows? Lastly, I have about $670,000 of 529 plans for my two kids’ college. It is overfunded, but it makes me feel good to know that they’re covered. So on paper, things look good and I should be a happy guy, but I’m miserable.”

Al: Oh, boy. And so far, I thought you’d be ecstatic. OK.

Joe: “Because I hate my job. I want out and I’m paralyzed by the idea of not having an income and not being able to save money. Over 25 years, I’ve been wired to save and invest for the future and now the future seems to be here, but I’m fumbling around listening to your show and others and I’m so confused.”

Al: OK, well we’ll do our best.

Andi: This is becoming quite a dramatic reading.

Joe: I got goosebumps.

Andi: You gave yourself goosebumps.

Joe: I do. “What advice do you have for people like me who have done well, but the psychology of managing their finances without an income or with the smaller income of semi-retirement is making them miserable? I’ve made a career of always trying to have answers for problems, but I now seem to have a problem of my own and it’s painful for me to admit that I don’t know how to solve it. Is this a familiar issue with you guys, with your clients? If so, what spitballs of advice can you throw my way?” First of all, I really appreciate the question. This guy is the CEO. Killed it. Very successful.

Al: Used to saving. Saves a lot.

Joe: He’s young, and he’s like, I’m going to take on the CEO role and I’m going to make stuff happen.

Al: Get some stock options, and this will be a little different than the big corporate world.

Joe: I’m the man. I don’t have the answer to no one.

Al: I am the man. It turns out you always have to answer to somebody.

Joe: Yes, you might have some investors. And it’s lonely at the top, isn’t it there, Jim? It’s lonely up here. I’m with you, brother. But OK, so he has enough money.

Al: The quick math is $5 million at age 56, I would use a 3% distribution rate. So that’s about $150,000. If you’re spending less than that, which you probably are based upon your profile, you’re good to go. I’ll tell you one thing that helps me, being an accountant. I don’t know if this works for other people, but I like to run this out on financial planning software. And what does this look like given certain inflation and investment and spending assumptions? And tweak those and see how it works in different scenarios. And I think, Jim, in almost any scenario, you’re going to see that this works. So that would be one thing you could do.

Joe: Yeah, but life is too short. If you’re miserable and you hate your job, quit. You have financial security. Most people are working their tails off. And I get this, you’re not asking for sympathy and you’re not asking, “Oh, woe is me, I got $6 million.” I get it. People that are very successful, they’re wired a certain way to save, to save, to save and think about the future and everything else. And then when they look back and in trying to step out, there’s a lot of fear there. It’s like, “Well, what the hell am I going to do tomorrow? I’m going to drive myself nuts or I’m going to be a couch drunk”. One of the two.

Al: And I think that that is really common for someone that’s very successful and has devoted their whole career to being successful and growing up the ladder and all that sort of thing. So here’s a couple more thoughts, Jim. You can step into a consulting role. I’m sure you’ve got a lot of skills that would be valuable to a lot of companies, but maybe you work a lot less. Maybe you make enough now to cover your own expenses so you don’t see your accounts going down, they’re actually going up with the market. And maybe you could have a much better and happier lifestyle just doing that. Maybe you could have consulting jobs where you could work from Italy, from Hawaii, from wherever. So you have a better quality of life. But I think, at least for me, I’ve got to see it in black and white. I’ve got to see the spreadsheets to make sure, regardless of the assumptions I put in, that I’ll be OK. And I think, Jim, you’re going to find you’re going to be fine.

Joe: Yeah, but I think Jim has a number in the back of his head. He’s got a $5.7 million net worth. He might be in the back of his head, he’s 55 years old. He’s like, “I’m not going to feel comfortable until that’s 10.”

Al: I know, but remember it used to be $1 million, and then it was $2 million and then….

Joe: But that’s the issue. That’s the problem. Even though we both agree that he’s fine financially on paper, on black and white. It’s not like he’s making $3 million a year. He makes $350,000 a year with a $6 million net worth. And that $6 million net worth will probably produce anywhere from $150,000 to $200,000, so his income could be pretty close to match. Because you take $350,000 after taxes, after savings, and so on. What is he truly spending? That might be $100,000-$150,000. Well, his investments could probably produce that after tax. And so he’s going to be in the same spot, financially. But emotionally in his mind, where’s his purpose? Is, I think, the bigger issue.

Al: Yeah, I completely agree with that. And that’s a very common issue. It happens with men and women. But I would say, at least from my experience, a lot of men face this that are used to being very successful in their roles, making a lot of money. So then it’s a matter of trying to figure out “what’s the next phase for me?” And there you really have to do some soul searching. There’s plenty of books out there to help you with that. So to me, it’s less of a money problem and more of a “what am I going to do with my life?” Because when you’re used to working 80 hours a week and just to stop, it’s actually not terribly healthy.

Joe: Jim, I’m a lot younger than you, and I feel the same way every day.

Al: Not too much, single digits.

Joe: I feel the same way every day. I don’t have as much money as you. Someday…

Al: Someday. You aspire at age 56 to get there?

Joe: Yup, that’s it. I wish this company would pay me.

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Should I Contribute to Rollover IRA Before or After Leaving My Job? (Anonymous Fan, Atlanta)

Joe: Here’s one that comes in and says, “Hey team! I live in the suburbs of Atlanta and drive a 2016 Toyota Corolla, and I have two cats. I drink Bud Light, Fireball’s, and Tennessee Whiskey.”

Andi: Somebody almost after your own heart.

Al: Your kind of guy or gal.

Joe: Perfect. I lived in Atlanta.

Al: I know. And you like Bud Light–well, actually, Coors Light, but same thing. And you like Fireball. I bet you like Tennessee whiskey, too.

Joe: You know what? I’ll try it. I’ll drink some Tennessee whiskey. “I recently opened a Roth IRA with Fidelity, where I also have multiple brokerage accounts. I will be leaving my job of 25 years at some point next year. My question is can I start contributing to the rollover IRA before doing the transfer of my 401(k) once my exit is official? Or do I need to wait until after that transfer occurs? Also, I was planning on moving $7,000 into my wife’s IRA in January to max it out for the next calendar year. However, I was wondering if that violates any rules being that she won’t actually earn that much income until March or so and also contributes to a 403(b)? Meaning, her retirement accounts will reflect more in contributions than her income for at least several months. Thank you. Love the show!” Didn’t want to give a name.

Al: Anonymous fan.

Joe: Anonymous fan.

Andi: At least they mentioned that they’re a fan, so that’s good.

Al: Yeah, that’s good. These are good questions.

Joe: Yeah, very good questions. So let’s break it down. So he’s going to roll his 401(k) into a new established IRA. And he’s wondering, “I’m going to establish this New IRA. It’s a rollover IRA that I’m going to put my 401(k) in once I retire at some point in 2022.” He’s like, “Well, can I put my $7,000 as an IRA contribution into that new established rollover IRA? Or do I have to wait until the funds get into the account?” Is that what you understood?

Al: That’s what I understood.

Joe: Yeah, no problem. You can set up the account and fund it.

Al: It’s funny that we hear these terms “rollover IRA” and others, they’re the same thing. It’s just an IRA. So you can set up what’s called a rollover IRA, but it’s still just a regular IRA. You can put your $7,000 in first, after, whatever you want.

Joe: So you can set up a rollover IRA or an IRA. The Rollover IRA is established so that you could move a 401(k) into a rollover IRA, and then that would allow you to roll the IRA into another qualified plan. If you establish just a standard IRA, then you might have problems moving that IRA into another qualified plan. You can set up an IRA and still roll your 401(k) into the IRA. It doesn’t necessarily have to be a rollover IRA. Because for all intents and purposes, they are basically the same. So, put the $7,000 in and then wait and then put your 401(k) dollars in there as well. As long as your wife or you have income, Anonymous, it doesn’t matter. You can do a spousal contribution. So since you’re making a $7,000 contribution for yourself, your wife can also make a $7,000 contribution for herself, as long as you have $14,000 of income.

Al: As long as you have $14,000 in income by year end, I don’t care when the income is earned or when you do the IRA contribution, as long as by year end you have enough earned income to cover your contributions, we’re good with that.

Joe: Yeah, that’s another good point, because he’s like, “well, if I make the contribution now, my wife’s not going to make that money and qualify yet.” It doesn’t matter. Let’s say, if something happened and you didn’t make the $14,000, you could recharacterize the money out of the IRA. So make the contributions in January, always. And then you could figure it out later.

Al: And that’s why they allow recharacterization of contributions because you may or may not qualify. You don’t even know that until year end.

Joe: Yes, and so make the contributions. Always. For all of you backdoor Roth worshippers, do this in January. You always want to make sure that you get the money into your accounts as soon as you possibly can. And here’s the reason why. Let’s say if we have another really good year of 10%, 20%, 30%, even 5%. Any growth that happens, you want to make sure that that growth is done in the Roth. So some people wait and they’re like, “I’m going to do my backdoor Roth contribution in December.” Well, it doesn’t matter. It’s a backdoor. It’s a contribution. Get it done in January. Conversions, on the other hand, you probably want to wait until you have a better idea of what your income is because there is no recharacterization of conversions.

Al: Well said.

Joe: Thanks, buddy.

Does It Pay for Us to Do a Roth Conversion, and How Much Should We Convert? (Paul, NJ)

Joe: “Hi, Andi, Al and Joe, Happy Holidays and Happy New Year. Love the show, the education, and the humor. So many of these shows answer questions like “I have $10 million in an IRA and $1 million in bitcoin and have four vacation homes in Hawaii. Should I do a Roth conversion?” Well, my dog can answer that. How about someone with $1 million in a 401(k), with a $30,000 pension, retiring at 60, with $60,000 in cash and taking Social Security at $44,000 combined at age 70 with a spouse? Does it pay for that couple to do a Roth conversion? And how much should they convert? Any chance you can spitball that scenario on your show? Best regards, Paul from Jersey.” You’re spending $60,000– no.

Al: $60,000 cash, we actually don’t know the spending.

Joe: Yeah. Well, Paul, we need to know a little bit more info, bro.

Al: Let’s pretend he’s spending $60,000. Let’s just answer that.

Joe: Well, then yes, I would do a conversion.

AL: And here’s the way you think about it, Paul. With $60,000 of income, you get a standard deduction of $25,000. So that leaves $35,000 of taxable income. You could do a $45,000 Roth conversion, that’s a no-brainer, to get to the top of the 12% bracket. That’s very cheap tax money. Maybe you go to the 22% bracket. We don’t know enough about your situation, but you kind of need to know what you’re spending. You definitely want to do conversions over the next 10 years to maximize the 12% bracket. And you might even want to go a little further.

Joe: Yeah, if they have $10 million or $1 million or $100,000. Each person’s situation’s a little bit unique.

Al: But, $1 million is a big number in a 401(k). Let’s say you were 72 right now, that’d be about $40,000 required minimum distribution. But at age 72, and I assume you’re going to be drawing from that a bit, but maybe it’s worth $1.5 million or $2 million. Your RMD might be $60,000, $80,000, and that’s going to be added to your Social Security and pension.

Joe: So you got $30,000 pension, $44,000 combined Social Security, and then you have RMDs at 72. You’re at $73,000 of fixed income, plus whatever RMD is going to happen.

Al: Which means you would be in what is now known as the 22% bracket, which is why I said you might want to do some conversions even in the 22% bracket. But there’s a little bit of a catch here, and that’s you only have $60,000 in cash to pay for the taxes. So that’s why I was thinking, at least convert to the top of the 12% bracket because that’s very cheap tax.

Roth Conversion Strategies When Your Income is Too High to Contribute (Jim, TX)

Joe: Jim from Texas writes in. He goes, “Hey Joe and Al. My question is regarding the Roth IRA income phase out. I’m a single person making $140,000 per year. I understand that I cannot make the direct Roth contribution because my income is too high. Also, with the backdoor possibly going away in 2022, it’s looking like I won’t be able to contribute to the Roth IRA for the foreseeable future. I’m wondering if I can max fund my 401(k) plan with pre-tax deferrals and then just convert that $20,500 over to the Roth within the plan. This would bring my income down to about $120,000 before the planned conversion. My understanding is that a conversion does not add income to MAGI calculations for determining if I can fund a Roth directly. Would doing this strategy work? At the end of the day, my income would still be about $140,000, but $20,500 of that income is going to come from an in-plan conversion. Would love to hear your thoughts. Jim from Texas.” Liking this idea here.

Al: I think it’s actually pretty clever.

Joe: What Jim’s doing is that he’s got $140,000 of income. The phaseout for a single taxpayer…

AL: For 2021, at least, it’s $125,000. It starts and by $140,000, you can’t do any Roth contribution.

Joe: So it completely phases out. So he cannot make any type of Roth IRA contribution. He can do a backdoor Roth, which all of you love so much. That is when you do a nondeductible IRA, and then you convert that directly into the Roth because it’s an after tax contribution. The conversion is tax free, just because it’s after tax, unless you wait a while and there’s earnings on the contribution.

Al: And by the way, that does not work very well if you already have IRAs. If you don’t have any IRA it works great.

Joe: So he’s like, I need to get more money into Roth. I like the Roth IRA, so why don’t I do this? I do a pre-tax contribution of $20,000 right into the 401(k). So then that brings my adjusted gross income down by $25,000. So instead of $140,000, my income’s $120,000.

Al: My W-2 says $120,000.

Joe: So then that allows me to make a Roth IRA contribution. Then he converts $20,000 to a Roth. The conversion is not included in the MAGI calculation to determine if you are eligible to make a Roth contribution.

Al: Modified Adjusted Gross Income. That’s right. The Roth conversion doesn’t count. So as far as the Roth contribution goes, your income’s $120,000.

Joe: Yeah, so you qualify for the contribution.

Al: That’s pretty clever, actually.

Joe: And then you can also do the conversion. Love it. Love it. Love it, Jim.

Al: As long as your plan allows in-plan conversions. So check that. That’s very creative. I’m going to start using that.

Learn more about getting tax-free growth on your investments for life when you put money into Roth accounts by downloading the Ultimate Guide to Roth IRAs from the podcast show notes at YourMoneyYourWealth.com. Get it now before tax laws change and render it obsolete! This guide explains the rules for contributing or converting to Roth, how a Roth IRA is different from a traditional IRA and a Roth 401(k), rules for taking money out of Roth accounts, how tax diversification reduces your risk when taking withdrawals in retirement and more. Click the link in the description of today’s episode in your podcast app to go to the show notes and download the Ultimate Guide to Roth IRAs. Then share both the YMYW podcast and free resources with your friends, family, and colleagues.

Should We Purchase Long-Term Care Insurance or Self-Insure? (DK, Delaware)

Joe: D.K. “My husband and I are both retired and collecting state pensions. I’m 62, he’s 63. He has a gross monthly state pension of $4,200. I have a gross monthly state pension of $3,600. The pensions do not have a built in cost of living adjustment. However, they all have built in survivor benefits of 50%. We would continue to get 50% of each other’s pensions if one were to die. Excellent health insurance is provided through the state pension system for about $250 a month for the two of us. In addition, we have traditional IRAs of $300,000, Roth IRAs of $350,000, we also have mutual fund CDs and bonds and a non-retirement account for $200,000, and $45,000 in cash.

We felt that was enough since our state pensions are pretty secure. Our monthly expenses are $6,500. Our home is worth $300,000. There’s no mortgage or other debt. We both are planning to take Social Security in January of 2022, we would each get about $1,800 a month. This would allow us to be able to do some upgrades to our home, travel, and spend money on helping with expenses for our younger children. We would like to leave our IRAs untouched as long as possible. Hopefully, the Roth IRAs could remain untouched forever. It would become an inheritance for our adult children and grandchildren unless the money is needed to pay for long term care in the future.

We have no long term care insurance. We looked into it, but it was extremely expensive because I have a chronic health condition. My husband’s health is OK. What are your thoughts on long term care insurance? Do you think we should investigate this more? I possibly could qualify for one of the hybrid policies, but it would require cashing out some of the investments to pay for it. Long term care costs are my biggest fears as my parents both required stays in a nursing home that pretty much depleted their savings. When we begin collecting Social Security, where would you suggest we invest the extra money? We know we get more if we wait to collect Social Security, but we would rather take it now, invest it, even if I don’t earn the 6-8% rate guaranteed by Social Security. That way, if we were to die, at least our children and grandchildren could benefit from it. I know you usually recommend delaying Social Security for at least one of us, but if we both start collecting in January 2022, do you think we’ll be OK?

If we didn’t have such great pensions, we might think differently. We tend to think with our pensions and Social Security, we should be fine. Do you agree? Even if one of us were to die, the other would have a gross minimum monthly income of $7,500 with just our pensions and Social Security, without touching any of our investments. We’ve seen too many people die young before being able to enjoy their hard earned money. I love listening to your show, I value your advice. D.K. from the Diamond State, Delaware.”

Al: Delaware, apparently, is the diamond state.

Joe: I had no idea.

Al: I had never heard of that, either.

Andi: Thank you, D.K.

Joe: So a lot of diamonds? It’s the Diamond State.

Al: I guess. I think of diamonds coming from South Africa.

Joe: Well, those are blood diamonds.

Al: Well, yeah, there’s that. OK, so the pensions, I’m just going to round. They’re about $8,000. And Social Security, if they collect it, will be around $1,800, I’ll call it $2,000. So they’re close to $10,000 in monthly income. Their monthly expenses are $6,500, so they get $3,000 plus extra, even without their investments. So that’s pretty good. And their investments, $300,000 IRA, $350,000 in Roth and then another $250,000. So that’s about $900,000.

Joe: Yeah, they have $900,000. Call it $1 million.

Al: Call it $1 million. So I think that certainly if nothing goes wrong, they’re just fine. Now they’re concerned about long term care. Long-Term Care Insurance is pretty expensive.

Joe: Because long term care stays are very expensive.

Al: That’s why it is expensive. And I think something that a lot of people don’t realize, a long term care policy provides you a pool of money in the future. It’s not unlimited. It’s not like health insurance that will pay no matter what your health care is. It gives you access to a pool of money. And so if you need it, you’re glad you have it because there’s no way you could earn that rate of return to take whatever dollars you invest in the policy to use it for long term care. On the other hand, if you don’t need it, it’s wasted money just like any insurance.

Joe: Right, it’s leverage. Let’s say your long term care policy is going to cost you $15,000 a year. And you spend $150,000 in premiums, but you probably have $400,000 of pool benefit. Or even more. So if you invested that $15,000, you need to get a very high rate of return that’s unachievable to get that type of pool of money, plus the pool of money in the long term care is going to be tax free to you. So if you need it, it’s absolutely the best thing in the world. If you don’t need it, it’s just like putting fire insurance on your house.

Al: So this is just spitballing because we don’t know their exact situation. However, you guys have $10,000 of income before even touching your investments. Long term care stays on a national level are about $100,000 a year, something like that? So $10,000 a month would cover it, at least under current dollars. So I’m not sure you have a huge need for the insurance. Furthermore, the last thing you’d want to use is your Roth IRA to pay for it because long term care, if it’s convalescent care, is 100% tax deductible as a medical expense. So you’d rather pull it out of your IRA because those two net. The income nets with the expense.

Joe: Yeah, because the retirement account is going to be taxable. But then you get a tax deduction for using that money to pay for your long term care stay.

Al: And it’s not quite dollar for dollar, but you get the idea.

Joe: So a few things is that if she’s super worried about it and she can’t sleep at night, at least look at it. You have excess cash flow and you could potentially afford it. And what you’re doing is you’re protecting your $1.3 million nest egg. You have $1 million in investable assets and $300,000 in your home. So you got $1.3 million that you don’t necessarily want to lose to extended care. So if you want to pass it onto the next generation, then you might want to look at a long term care policy to protect it. But I think they have enough assets in income that they could self-insure. But then they might have a _spendout_. And so you really have to take a deeper dive to see. If long term care is your biggest fear, then you’ve got to figure out a plan to cure the fear. It’s either what assets are you going to use, what income is going to be available, or you insure against it. A long term care plan is not necessarily insurance, it’s just having a plan to figure out what’s going to happen when that long term care is going to occur. Because it’s not usually if, it’s when now, because we’re living a lot longer and so on and so forth. Hopefully, that helps. Thanks, D.K. From the diamond state.

_______

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