Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:01 – $3.9M Pre-Tax at 72: How Do We Minimize Taxes Before RMDs Hit? (Eric, CA)
• 11:13 – We’re on One Salary. Can We Retire at 62 With $1.7M and a $56K SS Benefit? (Rick & Kiani, Southern CA)
• 23:16 – Just Hit Full Retirement Age. Should I Delay Social Security or Start Now? (Mike, NV)
• 31:04 – Retiring With $4M and a Roth Conversion Roadmap at Age 59. Does Our Plan Hold Up? (Jeff & Amber, Orlando, FL)
• 44:54 – Outro: Next Week on the YMYW Podcast

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Transcription

(NOTE: Transcriptions are an approximation and may not be entirely correct)

Intro: This Week on the YMYW Podcast

Andi: Today on Your Money, Your Wealth® podcast number 590, Joe and Big Al are spitballing for four people who did everything right, saved a small fortune, and now it’s sitting in pre-tax accounts, turning into a tax bomb. Eric in California is 72 with nearly four million dollars in pre-tax accounts. The fellas spitball how much he should convert to Roth, and whether borrowing against his own house to pay the tax bill is brilliant or bonkers. Rick and Kiani in SoCal are living on one income, saving like mad, and hoping they can quit sooner than they think. Mike in Nevada just hit full retirement age. Should he claim Social Security now or wait until age 70? And finally, Jeff in Orlando wants to walk away at 59 with an aggressive Roth conversion roadmap, assuming the tax cliff doesn’t get him first. Do us a favor and leave your honest rating and review in Apple Podcasts. It’s a big part of how new listeners and viewers find this show instead of one that puts them to sleep. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

$3.9M Pre-Tax at 72: How Do We Minimize Taxes Before RMDs Hit? (Eric, CA)

Joe: So let’s go to, “I’m 72 with 3.9 million pre-tax. How do I minimize taxes? Hi, Joe, Big Al, and Andi. This is Eric from California. Binge listener since 2022.”

Andi: Dang, Eric, thank you. That’s a long time. Four years, Joe.

Joe: That’s pretty-

Al: Pretty good …

Joe: pretty good. “I drive a 25-year-old Lexus. My wife drives a 2014 Mazda. Drink of choice, water. Here’s our current situation. I’m 72 years old and recently retired. Wife is 62. She’s a stay-at-home mom. My Social Security income is 60,000. My wife’s at full retirement age at 67 will be 18,000. Net rental incomes is $30,000, no debts. I got a deferred compensation of 500,000, which will bring us $75,000 income this year, and then roughly 90,000 net for the next five years.” Annual expenses are $120,000. We got equity in the primary residence of $2.5 million, and our rental is worth a million. We got traditional IRAs and 401(k)s of 3.9 million, Roth IRA 300, brokerage account of 100,000. I’m currently getting Medicare. My wife will need either ACA or COBRA before qualifying for Medicare. I will face RMDs at the age of 73. How do I minimize the taxes? How much should I convert? And would you also… I’d also like to leave a legacy for our children. Any spitballs are highly appreciated. Eric. Wow. All right. So Eric deferred a ton of cash in retirement accounts.

Al: Yep, he sure did.

Joe: $4 million in a 401(k), half a million dollars in deferred comp. So you’re looking at 4.4 million that is gonna come out as ordinary income. He’s only spending $120,000 a year, and his fixed income is almost covering that.

Al: Yeah, current fixed income is 60. So shortfall currently without Social Security is 60. Distribution rate is 1.4%. So we’re not worried about the cash flow, but he does have a tax problem. So I think what you do, Joe, is I think you look at current taxable income. first of all, you look at what tax bracket, is he gonna be in when he starts his RMDs. that would be at 75, so that’s three years from now. So the way that you look at that is you look at your, fixed income, which will be 78,000. Now, not all Social Security is taxable, so let’s just say 70, just as a placeholder. And then you look at your RMDs on 3.9 million. Call it, 150… Call it 160,000, right? 160 and 70 is 230. that basically puts you with standard deduction right at the top of the 22% bracket, right? So this tells me that, you could convert to the top of the 24 if you want to, although there’s not a lot of money to pay the tax because taxable in- the taxable account’s 100,000. I would, if it were me, I’d probably go to the 22%, and call it good, although you could make an argument, Joe. Maybe you go to the 24% and just use some of the proceeds from the tax-deferred account to pay the tax. This would be one of the few cases where I might consider that, right? And i- if they… From my calculation, if they wanna go to the top of the 22% bracket for the next three years, that’s about 90K. If they wanna go to the top of the 24% bracket, it’s close to 300,000. Not quite, 275, let’s call it. So tha- those are kind of the two markers that you might wanna consider.

Joe: What about, he’s got $2.5 million in his primary and a million dollars in the rental. Would you wanna use leverage? How about you take a home equity line under the primary residence to pay the tax?

Al: Yeah. That’s an interesting… I didn’t even think of that. That’s an interesting idea, and this could be a case where that would make sense. And the reason, not that we’re trying to tell you to take on debt, but you take on debt to pay the tax, and you’re gonna be forced with a required minimum distribution in three years anyway. And so you use that money to pay off the taxes. You don’t really need it to live off, of, so actually, that’s a heck of an idea. Like it.

Joe: So what… He’s got $4 million in retirement accounts, right? So his deferred comp is gonna give him $75,000. He’s got $60,000 of income. His wife’s income, she’s what?

10 years younger than him, so she’s gonna have in five years her Social Security. Mm-hmm. So his Social Security is 60, plus, what? His net rental is 30.

Al: 30. We don’t know about depreciation.

Joe: So 90,000.

Al: Yep.

Joe: He’s got the deferred comp of another 75,000 that’s gonna come to him over the next… or 75 and 90,000. So, I mean, just right there is gonna cover his living expenses, so he’s not-

Al: Correct

Joe: gonna need to touch the retirement accounts for at least, what, five, six years?

Al: He’s gotta force out. He’s 72, right? So he’s gotta take it out.

Joe: No, I’m just saying he doesn’t need any access of that as like a distribution from, for living.

Al: I agree. Yep.

Joe: So $4 million. So his RMD is gonna be what, 160?

Al: Yeah, call it 160, something like that.

Joe: Yep. so 160 on top of that. That’s higher than the 22, isn’t it? Or no?

Al: I don’t think so. I’ve got rents at 30, deferred comp 75 for this year. so his-

Joe: And what

was the Social Security, of 60?

Al: 60, taxable part’s 51, standard deduction minus 32, so that puts him at about 124, I think- All-

taxable income. Yeah, all in.

Joe: And then plus, and then 160 on top of the 124?

Al: E- and what’s the 160?

Joe: That’s the RMD?

Al: Yeah, that’s right. Plus, yeah, plus he’s gonna… His deferred comp’s going up, but that’ll only be for five years total.

Okay.

But yeah,

Joe: I- Like, the portion of his RMD is gonna be in the 22 and 24, right?

Al: I think it’ll mostly be in the 22. But yeah, it could, some of it could, hop into the 24.

Joe: Yeah.

Al: A- as under current tax law, as we know it.

Joe: So would you… So you’re saying 22 or would you go 24?

Al: I’d probably do 22 myself.

Joe: Yeah.

Al: Just because I think that’s kind of about where he’s gonna end up anyway.

But on the other hand, and we talked about this before, if the market takes a dive, I would do up to the 24% bracket with a reduced market, and have that, recovery in the Roth, and I think, I, I think, I’d be pretty happy with that.

Joe: they’re only gonna take 1 or 2% out of the retirement account to live off of after the deferred comp is gone.

Al: Oh, I know. Yeah, exactly.

Joe: He’s 10 years older than his wife. He’s gonna die before his wife. He’s 72. He’s got $4 million. That thing is gonna be worth $8 million. He’s gonna pass.

Al: Yeah, it’s gonna be a lot.

Joe: That’s

RMD. He wants legacy planning. I would go to the 24, and then I would use-

Al: Use the home equity line. Yeah.

Joe: Yeah. I would use a home equity line, to pay the tax. And then once I… And then I’ll do the top of the 24 for a couple of years, get a good chunk out of there, and then do the math to see where I would stay given certain assumptions.

And then that RMD force out, I’m not spending a lot of that. Then I just take that and pay off the HELOC.

Al: Yeah, and why that might be a really good idea is if she outlives him by 10 or 15 years in a single taxpayer bracket, then he’s gonna be happy he did that. So I think I’m with you. Yeah. I think I’m with you.

24% bracket for three years.

Yep.

Top, top of the 24, which is, by the way, a little over 400,000 of taxable income. Right about 400K for a married couple.

Joe: Still just a small smidge.

Al: Yes, but it’s something. It’s something.

Joe: Yeah.

Al: And actually, he could, even after RMD, he could continue that if he wanted to, right?

Because he’d be… Basically, if he just took the RMD out, he’d be in the 22% bracket. So there, there’s some flexibility even after RMD age.

Joe: Correct All right. no, congratulations He’s got a ton of money. He’s got a tax problem. He can probably, get a little bit out, but, I think he’s gonna be just fine.

Al: Yeah. although now as I think of it, Joe, he’s probably, his RMD probably starts at 73, given his age. So he might only have one really good year to do this. So you crank it up to 24 at least this year, and then you consider what to do in future years.

Andi: If you’re anything like Eric, you’ve already done the hard part. You saved, and now most of your money is sitting in pre-tax accounts with required minimum distributions on the horizon. And since those distributions are “required”, a lot of people assume that tax hit is required as well. It usually isn’t. How you pull money out of those accounts, and when, can make a real difference in how much you keep versus how much goes to the IRS. Our Retirement Accounts Guide breaks down how 401(k)s, IRAs, and Roth accounts are each taxed, how conversions work, and the withdrawal rules that catch people off guard, right when the stakes are highest. If you’ve got a pile in tax-deferred accounts and you’re wondering how to keep more of it, this is a great place to start. Grab the Retirement Accounts Guide for free from the link in the episode description. And if you’d like the experienced professionals on Joe and Big Al’s team to take a free, no obligation look at your specific financial situation, the Free Assessment link is waiting there for you too.

We’re on One Salary. Can We Retire at 62 With $1.7M and a $56K SS Benefit? (Rick & Kiani, Southern CA)

Joe: All right, we got, “We are Rick, 57, and Kiani, 54, live in SoCal. Retirement timing, potential retirement between 62 and 65, or when you think it’s possible.” “We will work longer or at a reduced income if you think it’s needed. Financial goals, we would like to set a budget of $144,000 gross spending. Current finances, current income is $180,000, one salary.

Current savings, $25,000 into a pre-tax, $8000 into a Roth, an employer contribution to a 403(b) is 21,000, and then a $26,000 into a brokerage account.” So they’re saving quite a bit of money here. Yeah.

Al: About, about 80K per year.

Joe: That’s,

Al: That’s a lot …

Joe: $80,000, and they have one salary of 180.

Al: Yeah.

Joe: That’s giant.

Al: It is giant. that’s more than 10%, 15%. Yeah.

Joe: So total savings in cash, CDs, and money market is $361,000. Okay, so they got emergency fund and college fund. Yeah. They have a brokerage account of $244,000. They have a Roth account of $140,000. And then they have a pre-tax 403(b) of a million dollars invested in low-cost diversified mutual funds.

Al: Like it.

Joe: So you add all that up, that’s $1.7 million.

Al: Correct.

Joe: Okay. So bonus details.

Al: Okay.

Joe: Rick and Kiani live in Southern California, and we have three young children in college.

Al: Okay.

Joe: Three young adult children in college, and two dogs, old, but still paddling out, Turtle and Chandler Rick drinks of choice is a Western Michigan IPA.

Al: Okay.

Joe: And Kiani is water.

Al: I like water.

Joe: All right. “We have a single income and are considering delaying Social Security to 70 or to increase the benefit for Kiani if R- Rick goes over the falls first.”

Al: Ooh.

Andi: It’s a Niagara Falls reference. That’s one way to consider death.

Al: Yeah. Okay.

Joe: If Rick goes over the falls.

Al: Yeah. Is it…

Joe: at 70, Rick’s Social Security estimate is $56,000 a year. Kiani’s spousal benefit would be 22,000. Very small pensions with no COLA, $18,000 a year. Other details, we have a paid off house at 850, no other debt. We have three older imports that get us around, Toyotas. Thanks for the spitball. Love the show.

Allie Joe Big Al.

Andi: That is a first. I mean, my name often gets spelled A-N-D-Y instead of A-N-D-I. I’ve never been called Allie before.

Joe: I like Allie.

Al: I do, too. We’re gonna start calling you that. That’s a- a good name.

Andi: Okay. Joey and Bob.

Al: And-

Joe: Yep. All right. They wanna retire between 62 and 65. They’re 57 and 54 today.

Al: Yeah, I think this looks good.

Joe: So- We’d like to set a budget of $144,000 of growth- spending. It’s nice. So what is that, five years?

Al: yeah. I ran seven. let me put it this way, Joe. When someone says, “When can I retire?” this is back of the envelope. I don’t have a chance to run like 20 years of scenarios and figure out the…

I just pick a year, and then let’s see if you’re good or maybe, you know, whatever. So I pick 64.

Joe: Okay.

Al: Okay? and seven-

Joe: Whose year is 64? Rick’s?

Al: yeah. Seven years, Rick is 57, so when… Rick is 64.

Joe: Okay. Rick-

Al: I could have picked 62. I just picked 64.

Joe: in the middle. Love it.

Al: The, yeah, the reason I did was they’re saving so much that the, every year they do, they keep working, it’s gonna look even better, but- Sure

anyway, seven years, 6%, on 1.7 million, saving 80 grand a year. That’s 3.2 million. Their spending is 144. You inflate that 3% for seven years, it’s 177. And at that point, he’ll have a pension, currently $18,000. you know, you, you take that off, you get like 100, you know, you get about 160 grand as, a shortfall.

Divide that into 3.2 million, you get about 4.9%. But, that’s before Social Security. Sure. So this looks fantastic. could they retire earlier? Probably. But the, you know, I will say when you ask us what year can I retire, that requires a little bit more in-depth analysis, more than a back of the envelope.

I just have to pick a year to figure out what this looks like. But based upon this, I would say that they could, Rick could retire earlier.

Joe: All right.

Al: What do you got?

Joe: I, let’s give them something more. This is getting boring. It’s like-

Al: Okay, what do you got?

Joe: I don’t know. they’re saving $80,000 a year.

Andi: Give them a margin loan. Why not?

Joe: Yeah. Let’s see here. I don’t know. Okay, we got $25,000 pre-tax 403(b) . They have one income. The current income is $180,000, and they’re saving $80,000 a year. Okay, so they’re roughly, what’s pre-tax?

They got 403(b) pre-tax. They got-

Al: Yeah. Yep …

Joe: $8,000 into a Roth, and then they also have another 403(b) of 21,000. So they got two 403(b) s. Are they two teachers? They medical people?

M-

They’re nonprofit? What do you think?

Al: No, I think he’s saving 25, and then the employer contribution’s 21.

Joe: Oh, okay.

Al: that’s how I read it.

Joe:  That’s… oh, I didn’t see that employer co-… Okay.

Al: yeah.

Joe: One income.

Al: Yeah.

Joe: Would you go pre-tax? I would go Roth

Al: I’d go Roth, yeah. So-

Joe: Without pre-tax, go Roth …

Al: when you said it, when you said it was getting boring, tha- that’s j- that was their first question, so I just answered that.

Joe:  Got it. Yeah.

Al: Okay.

Joe: Let me give them a little bit more juice here.

Al: No, I, I agree.

Joe: I’ve been doing this 20 years.

Al: I agree, yeah.

Joe: So, all right. Savings- But I’m, I’m- … 25 pre-tax, I’d go Roth on there.

Al: I agree.

Joe: All right. And then, so you’re gonna get the pre-tax 21, $26,000 into brokerage. Would you go more into brokerage? Let’s see.

They’re gonna have 900, they got taxable account of 244 plus 361. Oh, that’s their inheritance that he’s gonna get in 45 years.

Al: sh-

Joe: should we run a, should we run a growth rate on the inheritance?

Al: Yeah, I think so. Yeah.

Joe: yeah.

Andi: Damn it, they just won’t die.

Joe: Yeah, I know. Oh, 137, paid off home. Wonder, okay, fixed income.

Yeah, they’re gonna have good fixed income. Yeah. Yep I guess that’s what I would do. I think, it’s like he’s already gone with his, diversified mutual funds. Yeah. I think he’s good there. Maybe you do a little asset location. You wanna talk about that? We could, Yeah, okay … like in the Roth-

Al: I like that

Joe: take on a little bit more risk, right? So, you know, pick instead of like your standard low-cost diversified funds in the Roth, maybe you go with maybe, emerging markets. You go- small cap value.

Al: Yeah.

Joe: You could maybe get a little, little bit more risque.

Al: A little more juice in the Roth. Yeah, so, so the point is what we’re trying to say is you have the same portfolio, diversified portfolio, but you pick and choose the pieces that have a higher expected return, and you put those in the Roth because why you get rewarded for that growth by not paying any tax.

You still have your same, investment allocation, but you put a little bit more conservative stuff in the 401(k)or 403(b) in this case because that’s fully taxable, Joe, so, so why not? So I agree with all of that. I would do the $25,000 into the Roth 401(k), or 4- 403(b) , sorry.

Joe: Yep. In the brokerage account, I’d be careful with what you’re doing there with your diversified mutual funds.

Maybe you pick, exchange traded funds versus mutual funds. They tend to be more tax efficient than mutual funds.

Are they passive or active? Active, they’re actively trading. Sometimes they beat the market, sometimes they don’t. Passive, you’re buying the entire market. so it’s a pretty low-cost way to do it.

You probably wanna take a little bit more risk in your brokerage account as well because you’re gonna be taxed at capital gains, versus ordinary income. And then the $947,000 that you have in the 403(b) , if you have any bonds at all, that’s where you want, wanna hold your bonds.

Al: What about Social Security? Rick’s thinking 70.

Joe: I like 70 because I think he’s gonna retire at 64. He can hold out six years. If he continues to save $80,000 until 64- they’re gonna have plenty of money to bridge the gap. I would then bleed out of the tax-deferred account. I don’t think he needs to do Roth conversions at this point if he p- if he changes all of his contributions to Roth.

Al: Yeah, I agree with that. But,

Joe: And then at 60- from 64 to 75 he could probably bleed a lot of the deferred account out at the 12% tax bracket.

Al: I agree.

Joe: Yeah. And then your RMD’s not gonna kill you.

Al: Yep, totally agree.

Yeah, and even maybe on down years you go up to the 22% bracket because why not?

Do you- that recovery’s in the Roth. You can afford to pay a little bit more tax ’cause you get that much more in. Yeah, there’s several things that could be done. But the question-

Joe: Yeah …

Al: what do you think? I say yeah.

Joe: Yeah, I think you’re doing pretty good. I think there’s a lot here.

Al: Yeah.

Joe: And there’s a lot more that they can potentially do, and just small tweaks could add, you know, tens of thousands of dollars to the bottom line.

Al: Right. So,

Joe: but I, yeah, I think they’re in a, in a good spot, and, congratulations there. what’s this? Rick and Kiani. Kiani, yeah. Where’s Rick and… What, is that, like, do you think that’s a real name or is there, like, a reference somewhere in this-

Andi: I think that’s actually their real names.

Joe: All right.

Al: Yeah, that would be a Hawaiian name, so that’d be my guess.

Joe: Look at you. Look at the big brain on you.

Al: I know all things Hawaii.

Andi: Al practically speaks Hawaiian, so.  Joe, do you know what the state fish of Hawaii is?

Joe: State fish.

Andi: I know Al knows it. Don’t say it, Al.

Al: I won’t.

Joe: No idea.

Andi: It’s the humuhumunukunukuāpuaʻa.

Joe: Oh, wow.

Al: Yeah, I, I usually go with humuhumu because then it gets… I forget the rest. Yeah. I knew nuku- I, humuhumu nukunuku, but then I sometimes forget the last part.

Joe: What does the fish look like?

Al: it’s really pretty. It’s-

Joe: Can you eat it?

Al: Is that,

Joe: would

Al: that- No …

Joe: that’s the law? I mean-

Al: It’s, you know, it’s not a eating fish. Okay. it’s a snorkeling and look and ooh and aah. It’s real pretty.

Joe: Ah, got it.

Al: But it turns out-

Joe: You can’t – no, you cannot …

Al: the bald eagle.

Andi: There he is.

Joe: Oh, wow. Are they a l-

Al: That, that, there’s a cartoon version. The one on the left is actually… Or yeah, the one on the very left is what they really look like.

Joe: Got it. Very- It’s down there. Yeah … very interesting.

Al: Usually you don’t hold them in your hand like that.

Andi: But it’s interesting, ’cause if you s- actually search for it by its Hawaiian name, it just comes up as reef triggerfish, which sounds so much more boring.

Al: Yeah. that, that’s what it’s really called. and here’s the fun fact. It actually is not native to Hawaii. Oh, wow. So it’s a little strange it’s the Hawaiian fish. But-

Joe: Huh …

Al: anyway.

Joe: yeah. We’re just learning all sorts of-

Andi: There you go. Talk about a derail … fun facts. Geez, sorry about that.

Just Hit Full Retirement Age. Should I Delay Social Security or Start Now? (Mike, NV)

Joe: all right. We’re moving on. let’s go to Mike in Nevada. Hello, guys. “Hoping you’ll spitball our recent retirement, maybe even talk me off this Social Security cliff.” Okay. All right. “We both are 66, have $1.6 million in total investments. We got $90,000 in a brokerage account, $200,000 in a Roth, and $1.3 million in tax-deferred accounts.

Portfolio allocation is 60/40, with most of the bonds in laddered CDs and short-term bond funds. Wife gets a small pension, net $600 from the fed-, from the federal retirement.” $600 a month, I’m guessing?

Al: Yeah, I think so.

Joe: “Expenses run about $8,000 a month. Been living off IRA withdrawals and her now part-time income, which barely covers her travel habit, but not my fly fishing.”

“My wife’s income from the federal fire management work is likely to exceed the income limit, so we’re waiting for her to hit 67 in January 2027 before turning on her Social Security.” Okay. “I just hit my FRA, full retirement age.” “Due to her recent separation, we have to sign up for Medicare even though we still have coverage through the Federal Employees Retirement Health System.

I can’t get comfortable with cutting the federal government a check for $400 a month when I could collect Social Security and just have a premium deducted. My Social Security benefits is $3200 now or $4000 at 70. Wife’s benefit at full retirement age is $2500. Intellectually, I understand that waiting on my benefit is probably the correct move, but pulling $7000 a month from savings is hard.

Help me think about this true while I ski- while I sip on my Sierra Ne- Nevada Pale Ale- … and she nurses a Dos Equis Amber Lager. Thanks for all your entertaining advice, and for Andi keeping the bumpers on the bowling alley known as YMYW.”

Andi: I thought it was a bar personally, but okay, bowling alley. You can get beer in a bowling alley, right?

Al: you can. Oh, yeah. Yeah.

Joe: Oh.

Al: Yeah.

Joe: And you know what bumpers are in the bowling alley.

Andi: Of course, yeah. Absolutely. I keep you guys on track.

Al: You do. We don’t go off the rails that much.

Andi: Until we talk- … start talking Hawaiian fish, then it’s all over.

Joe: What, I get, I totally get where he’s coming from, and most people- I do too

sitting in, like-

Al: Like, same thing …

Joe: same chair.

Al: Yeah, because, and here’s the… I’ll set it up for you, Joe. Yep. So distribution rate currently without Social Security 5.6%, so it seems like a, pulling out a lot of money.

Why don’t I just take Social Security, right? Now, if they, if they do, if they take Social Security at wife’s full retirement age, which is soon, and Mike at 70, then it’s about a 3.5% distribution rate, which is the right answer.

But it’s hard to take money out of your account when you feel like you’re s- y- it’s slipping away.

Joe: Pulling $7000 a month- It’s a big, it’s a big pull

Al: it’s a big chunk, right?

Joe: I mean, they’ve saved a lot of money.

Al: They have,

Joe: yep. They got $1.6 million And I mean, th- these people were probably savers.

And, I mean, the thing between your ears is the biggest thing that you have to control in retirement, I swear. It is. I mean, you could have the best laid out strategy and the plan and everything else. Why people derail is because of the emotions that we have towards money, and how we get emotional about it, and how we start being rational or ira- irra- r- oh, my God-

irrational about it as well. Yeah. I’m getting tired.

Al: Are you still thinking about Hawaiian fish?

Joe: I am. Yeah, I got bit by one it feels like. I’m losing my voice and I can’t speak. But I get where Mike’s coming from. I’d just take the Social Security, bud. Just do it.

Al: Nothing, nothing wrong with that.

Joe: Nothing wrong with that at all.

Al: I agree.

Joe: Life is short. You never know when you’re gonna go. when you fall off the cliff or the wa- waterfall. What the hell did she say? S-

Al: Social Security cliff.

Andi: Go over the falls.

Joe: No, when-

Andi: No, when you go over the falls.

Al: Yeah. That was-

Joe: When you go over the falls. yeah. The finish question.

Al: Yeah, the last one. Yep.

Joe: So-

Al: But that, that- …

Joe: I would jump off the Social Security cliff.

Al: And start it.

Joe: Cut it off.

Al: I’d wait till 70, but the truth is it doesn’t really matter. Either way you’ll be just fine, so j- do whatever feels right for you. I liked waiting till 70, ’cause it’s a higher amount than your wife’s, and whoever predeceases will get the higher amount, so that’s kinda cool.

But this works either way. So if that’s what you’d like to do, go for it.

Joe: Yep. I just think that, happiness is more important than a couple of bucks.

Al: I agree.

Joe: I think i- he’s obviously stressed about it, thinking about it.

Al: He’s talking about a cliff.

Joe: He’s talking about a cliff. He’s writing a fat check every month.

And it’s like- And I’m like, “I’m seeing my account go down.”

Al: I sa- I saved all this money, and now it’s slipping away.

Joe: Like, $1.6 million. we’ve been in a bull market for how long?

Al: Yeah, what? 12, 14 years.

Joe: It’s… Yeah. Since we started this business, basically.

Al: Pretty much.

Joe: And, I’m telling you, what happens when the mar- like, if we see a correction here, which we will, I just don’t know when.

We’ve seen some blips. Yeah. Like 2022, there’s a little bit of blip.

Al: yeah. But- 20- 2021 we had a COVID blip.

Joe: We, we have these little things that, that, that happened. but they’ve been short-lived.

Al: Right.

Joe: But Mike is now retired, pulling $7,000 a month, and he’s like, “You know what? I still got 1.6.” How about if he’s pulling that $7,000 a month and that 1.6 goes to 900 grand? And you’re still pulling money out. yeah. Like, I… Man, I get it. Maybe you wait until you, you kinda feel some things out, but, I get it mathematically, and he even admits it intellectually. But no, I don’t, I, don’t think it… You don’t know when you’re going to go, right? If you know when you’re gonna die, you know exactly when to claim Social Security, but we don’t know when we’re gonna die.  So it sounds like, “Hey- Wife and you are healthy, live in Nevada, drinking little Sierras. I would claim the Social Security-

Al: Dos Equis.

Joe: … and still have a little bit of fun, little Dos Equis.

Al: yeah. Both.

Joe: because it’s, close, but-

Al: Yeah, it’s, fine either way. I, agree. I think, that’s probably the way to say it. Intellectually, 70 is the right choice, but it doesn’t matter that much really.

Andi: Mike’s stuck on one big retirement decision, when to claim Social Security. And it is a big one. But that’s just one box on a much longer retirement checklist. This week on a brand-new episode of YMYW TV, Joe and Big Al cover seven things to check off before you retire. Click the link in the episode description to watch it right after this podcast. In it, Joe takes a shot at retirement calculators, and his critique is a good one. Plug in a rosy return or shave a bit off your spending, and every online calculator says you’re fine. Our free, self-guided Financial Blueprint works differently. Instead of one optimistic number, it gives you three different scenarios, so you can see the realistic range of how retirement could play out. Put in your cash flow, your assets, and your spending, and you’ll get a personalized report with your probability of success, your future tax picture, and steps to take right now. Watch the show and run your own Financial Blueprint, both are linked in the episode description.

Retiring With $4M and a Roth Conversion Roadmap at Age 59. Does Our Plan Hold Up? (Jeff & Amber, Orlando, FL)

Joe: All right. Jeff and Amber from Orlando, Florida.

Al: Okay.

Joe: “I might need a retirement spitball analysis please.

We are frugal, simple 55-year-olds. My wife is a retired nurse, and I want to join her when I turn 59. I’m fortunate to net $300,000 per year. We’ve saved 2.7 million in a traditional IRA, $260,000 in a Roth, and $1.1 million in a brokerage house, and we live in a million-dollar house.” Jeff and Amber just living the dream right there.

Al: They are.

Joe: Retired at 55, little frugal nurse, live in a million-dollar house in Orlando- Yeah. right next to Mickey- and Minnie.

Yep. Two and a half, almost $3 million in a retirement account. Get- can you picture them?

Al: 4 million overall.

Joe: Just-

Al: That, that would be sweet, wouldn’t it?

Joe: Living the dream and, yeah, with the palmetto bugs just-

flying around in the air. Sweating from the humidity.

Al: you’d have air conditioning, right? Yeah. And a pool.

Joe: Yeah, a million-dollar home.

Andi: You’ve got a million-dollar house.

Al: Yeah, yeah.

Joe: Yeah. That’s looks like it’s beautiful. no mortgage, no debt. Then why the hell are you calling us? We got no pension.

We’re com-

Al: That, yeah, that’s why they’re calling us.

Joe: Oh, got it. Got it. No pension. Yeah. Com- they’re scared … Social Security’s $84,000 a year at age 70. My plan was to retire at 59, aggressively maxing out, converting to Roth for three years, staying in the 24% tax bracket, then decelerating the conversions from age 63 to 69 to stay just-

under IRMAA penalties. Oh, that IRMAA- Oh, yeah, here we go again … every time bites you in the ass.

Al: Yeah,

Joe: Then we want to decelerate even more once taking Social Security at age 70 to avoid IRMAA.

Al: Again. Yeah.

Joe: Again.

Al: that’s a bad word-

Joe: Yeah, it’s-

Al: IRMAA

Joe: … so bad. “Our combined Social Security is $80,000 at age 70.”

‘Cause you can see, I loathe paying IRMAA- … or getting slammed with an RMD bomb.

Al: you pick one or the other.

Joe: We s- yes, exactly. do you wanna hurt a little or hurt a lot? “We spend very little, but want to make ourselves enjoy $150,000 a year after I retire. One 16-year-old child, and although we’re over-prepared his college, we feel he may be the only reason I work so hard.”

I can relate there, Jeff. That’s it. It’s for the kids.

Al: Yeah, for the kids. That’s why you’re doing this.

Joe: Yep. Yes. “I already plan to convert $35,000 out of the Roth when, if, he even makes income. Is this a good plan?” Oh, God. It’s a great plan, bro. My, my big pitfalls, I see I would be one of us, of dying if the tax-

Andi: Up and dying.

Joe: Oh, up- Up and dying … going over the falls again.

Al: Yeah. So now we’re in the single tax bracket.

Joe: Okay. He’s 55. We’re go- we’re talking about death.

Al: Usually wait a little longer,

Joe: but- A little bit. big pitfalls I see would be one of us end up dying, or tax brackets going wonky high.

Al: Okay.

Joe: Barring those two things, I think this is a good plan. “I’m pretty sure y’all will see something I don’t. My wife drinks dry red from a box.”

Al: that’s frugal.

Joe: From a box.

Al: Does your wife drink wine from a box?

Joe: No.

Al: No. Mine, me n- mine neither.

Joe: Firenza? Is that right? Firen- what, isn’t that a boxed wine? I don’t know.

Al: I don’t know.

Joe: I’ll come and look it up.

Al: we haven’t had boxed wine in-

Joe: No …

Al: quite a while.

Joe: I stole a box of wine from my mom- … I think when I was in high school.

Al: My, my wife found Caymus, and that-

Joe: Oh …

Al: that’s, w- it’s over.

Joe: That’s a good wine.

Al: It is a good wine.

Joe: Yeah. It’s expensive.

Al: Actually, she doesn’t always have to have it, but-

Joe: It’s pretty expensive.

Al: It’s, yeah.

Joe: That’s why you got a big-ass wallet.

Al: That’s, I gotta keep feeding it.

Joe: You keep reading that log, that’s why you’re still working.

Andi: There’s actually one that’s called Really Good Boxed Wine. That’s literally the brand name.

Joe: All right.

Al: Okay. I like it.

Joe: Really Good Boxed Wine.

Andi: There it is. Boxed in. Really Good Boxed Wine.

Yeah.

Al: Actually, I’ve had that before.

Joe: Firenza. There it is right-

Andi: Franzia.

Joe: There it is.

Andi: Franzia. Franzia.

Al: Oh, that’s what you’re thinking.

Joe: Franzia. Oh my God. Took a sip of that and-

Al: That was it? …

Joe: swear to God I’d never drink wine again. no, no offense to the- Got it … the great people at Frenzia Yeah

with Valencia.

Al: Frenzia. You’ve got, you, you’ve got cultured taste.

Joe: I do. I do. My dad used to drink red, white, and blue.

Al: It, okay.

Joe: You probably never heard of that. They don’t have this- I don’t know what

Al: that is …

Joe: or then he switched to Pabst.

Al: Oh.

Joe: Pabst

Al: Blue Ribbon. Oh, it’s a beer type. Okay. Yeah. Pabst I know.

Joe: Yep, and then, then he’d drink bourbon out of a rubber bottle. Windsor, Canadian Windsor.

Al: Okay.

Joe: Ugh.

Al: All amazing stuff.

Joe: And then, yeah, then we had Frenzia.

Al: Okay.

Joe: And so I-

Al: You get- Okay. Well- You guys went all out …

Joe: high- Cool … high class.

Al: Little, yeah, all out. Okay.

Joe: Yeah. Just like Jeff and Amber here in a million-dollar home in Orlando.

So, so, and I drink anything. Yeah.

Al: Ah, that’s not true. You don’t drink IPAs.

Joe: No, that’s what he says.

Al: Oh, you think- He’s reading it. I thought… Oh.

Joe: No.

Al: Never mind. I thought you were talking about yourself. I know. I was surprised too when

Andi: he said, “Oh, I drink anything.”

Al: we’re back to the question.

Joe: Yes, we’re back to the question.

We, I just got back to Jeff and Amber here.

Al: Got it.

Joe: so she drinks the boxed wine, and he drinks anything.

Al: Okay.

Joe: All right. just put in front of me. On a night I don’t have to work the next day. We love your show. All

we love you too.

Al: Yep.

Joe: all So well, congratulations to the wife.

Retired nurse, worked hard.

Al: Yeah.

Joe: And then he wants to join her soon here. Yeah. They’re both 55. And he- So he wants to retire in 4 years.

Al: He’s still working, and,

Joe: He nets 300. I like he capitalized net.

Al: Nets.

Joe: It was like-

Al: So that’s a little bit higher gross

Joe: … it’s like-

Al: yeah …

Joe: net.

Al: and-

Joe: Not gross is-

Al: And they wanna spend- I-

they wanna spend 150. They got 4 million now. Joe, even today it’s a 3.7% distribution rate if he quits tomorrow, and that’s before any kind of Social Security or anything.

Joe: But he’s doing it for the kid. He’s got a 16-year-old.

Al: I know, which is why-

Joe: So it’ll be on the,

Al: the- Yeah. he, but it, but the, he says, “We’ve over-prepared for his college” Yeah

so presumably that means they already got the money set aside.

Joe: Of course. he keeps grinding.

Al: He keeps grinding.

Joe: He just wants to make sure that the 16-year-old-

Al: Is okay … is, is-

Joe: Yeah … in good shape. Well- 16, what, that’s what? s- junior, senior?

Al: The, that’s,

Andi: That would be a sophomore or a junior

Al: sophomore. Yeah, sophomore into junior.

Joe: No, I graduated when I was 17.

Al: Oh, really? So did I. Okay.

Joe: So.

Al: I was 18.

Joe: You got held back?

Al: Took, took me a little longer than you.

Joe: Yeah. I can see how it all makes, it’s all coming together. Just that- It’s all coming together now. Got it.

Al: it’s ’cause I was born in April.

Joe: Oh, is that why?

That’s what they all say.

Al: Yeah.

Andi: I was- Yeah …

Al: I was b- born after the cutoff.

Joe: Got it. Got it, just couldn’t get that entry exam just- Yeah … quite past it, huh?

Al: I just didn’t quite make it, Joe. But college at 17,

Joe: I don’t think so. nope. In kindergarten they were like, “Nope.”

Al: Not this guy.

Joe: Not this guy. Next year.

Al: He- Yeah, pretty sure he flunked nursery school.

Joe: yeah, I don’t know what, I don’t know what else to talk about. This guy-

Al: Well, that-

Joe: … he’s doing it all. He’s got the life.

Al: Everything’s good. I, you know-

Joe: Great. the, $300,000 net income is the, I see why he’s like, “You know what? I’m gonna continue to do this until 59.” At 59 I bet he’s gonna continue to do it for a couple more years.

Al: Yeah, because it’s great income.

Joe: Yeah, it’s really good income, and he’s- Yeah … probably been there for a while, and- yeah … it’s probably not, you know, killing him.

Al: No, a- and I would do the same. With this kind of income why not pad this a little bit more? But th- that’s what I’m saying, it looks fine right now, but working a little bit more it’ll look even better.

Joe: Yep.

Al: IRMAA, we already talked about it.

Joe: Don’t worry about IRMAA.

Al: For- forget about it. Yeah.

Joe: Yeah.

Al: I mean, make some, your, tax deferred is 2.7 million. You’re gonna be in a humongous bracket at RMD age. and,

Joe: Yeah …

Al: or i- if one of you becomes, predeceases the other.

Joe: Huge tax bracket. He’s only got, yeah, he’s only got 260,000.

I mean, only, I shouldn’t say that. Compared to the $4 million, 260,000 and the four million is a pretty small percentage.

Al: Yeah, it’s about 5%, right?

Joe: Yeah, 6.5%.

Al: Yeah.

Joe: So if you look at 6.5% of his total liquid net worth is in Roth, it’d be, okay, is there some things that I can do here to kind of pad that up?

He’s gonna be, he- he’s gotta do a little bit of math here with, I would… What- what bracket? 300,000?

Al: It’ll be the 12- Yeah … but that’s net, so gross’ll be at least 400. Yeah. he might just be into the 32 a little bit.

Joe: 32?

Al: Maybe. Yeah. He’s on the border. 24 and 32.

Yeah, you wouldn’t do conversions right now.

No. but certainly at retirement, I think-

Joe: God, I don’t know. I would switch my contributions though or something. He’s gotta build it up.

Al: I know, but I, me personally, I’d wait till retirement and then I’d start cur- converting the heck out of it.

Joe: Yeah, but you don’t know when he’s gonna retire. This guy’s saved and-

Al: I know.

I, yeah, I hear you. Yeah …

Joe: his wife’s retired, I get it, but as soon as he tries to retire she’s gonna be like, “Get the hell out of the house.” “Now get, leave me alone with my boxed wine.” “Yeah, I don’t want you to know how many boxes I go through a week.”

Al: That’s right. If you leave it in front of me I’m gonna drink it.

Joe: If you, if you stay here any longer I’m gonna grab a, you know, a couple more.

Al: unless you put a lock on the refrigerator.

Joe: Yeah. yeah. He’s in a good spot. It, I mean, the good news is that you’re in a really good spot. The bad news is that, you know, our federal government likes to, to tax people that are in a good spot.

Yeah. you’ve saved some money, and a lot of it’s in a tax-deferred account. You didn’t pay taxes on those. so the taxes have to come out at some point. So then the math is just trying to figure out the appropriate strategy to get it out with the least amount of tax. But if I’m looking at IRMAA, IRMAA’s not gonna be your problem.

It’s gonna be the federal income tax bracket. You don’t pay state tax. You live in Florida.

So, I mean, if you lived in the state where we are recording this right now, you would add another 13% on top of that. So-

Al: Yeah, I

Joe: mean, think of, you know, a, the silver lining.

Al: Think of us.

Joe: Yeah. Think of us.

Oh.

Al: let’s see. L- I’m looking at this again. We’ve saved 2.7 million in a traditional IRA. I’m guessing his company would have a 401(k).

Joe: You rolled it into an IRA.

Al: Maybe he wants to roll it back into the 401(k)so he can do the rule of 55 if he needs the money before 59 and a half. What do you think about that?

Joe: I like that.

Al: Or at least roll some of it in-

Joe: Okay …

Al: for two, three years or four years or whatever of… And here’s what we’re-

Joe: But I, I don’t know, w- what is, did he tell us what he does?

Al: No.

Joe: But maybe he’s just saying IRA, but it’s actually a 401(k).

Al: He might. If it’s already in a 401(k), keep it there, or at least a good chunk of it.

So here’s what we’re talking about. If you retire at age 55 or older and you pull money out of your 401(k), there’s no penalty. It’s not 59 and a half like an IRA. It’s a, it’s 55 if two things have to happen. You have to be 55 or older and you have to retire at that point. If you retire at 53, Joe, and then at 55 say, “I can do this now,” doesn’t work.

You gotta be 55 or older when you retire. And then you get-

Andi: Is that the law or does it depend on your employer?

Al: No, that’s a, that’s an IRS rule.

Joe: Okay. Yeah,

Al: but the- on 401(k)s.

Joe: But it does,

Al: it could be plan specific.

Joe: Yeah, it’s plan… I mean, the plan doc always over succeeds the federal law, but-

Al: True

most plans-

I mean, how many plans have you seen- Zero … that didn’t have that rule?

Joe: Zero.

Al: Okay. So let’s be real.

Joe: I’m just saying but the… I mean, but, it’s true. The plan doc-

Al: It’s, true. You’re right …

Joe: the plan doc-

Al: You’re right …

Joe: will,

Al: And sometimes the plan docs will say you can’t do it in service would, even though the IRS would say you can.

So that’s probably where this comes up from.

Joe: Or then they say, “Yeah, you can do it in service, but you gotta do it at 65.” I mean, there’s-

Al: Yeah … all sorts of different rules. You gotta wait until you retire.

Joe: Yeah. There’s a lot of old plans that are, were written a long time ago-

Al: Yeah …

Joe: are just not kept up.

Al: Yep, yep.

Joe: By work for a smaller employer because it’s expensive and to do… But if he works for a pretty large employer, he’s got a couple million dollars.

He makes $300,000 net. I’m guessing it’s a, you know- within a, couple-

Al: I would think so

Joe: … a couple employee shop. So.

Al: Yep, yep,

Joe: but yeah, no, you’re right.

there’s real life and then there’s, real law, Al. True. We’re just feeding the law.

Al: Just feeding, just- … trying to get real

Joe: here. Got it. Let’s get real. Let’s, we’ll tell the story of why he got held back later. So, all right. That’s it. I have very little voice left, so, Andi, give us the ending.

Andi: thanks for using it up with us.

Joe: You got it.

Al: And, and-

Joe: You got it …

Al: and great job, Joe, as usual. And wonderful job.

Joe: Yeah. Wonderful job, Big Al. Have fun in Hawaii.

Al: Will do.

Joe: All right. We’ll see you guys next week. Show’s called Your Money, Your Wealth®.

Outro: Next Week on the YMYW Podcast

Andi: Next week on YMYW, B and S from Maryland are racing to retire in just three years and trying to time their escape to the day the mortgage is paid. Vee in Oregon came to the US as a refugee with nothing and built a $3.7M nest egg from scratch. Does his Roth conversion plan hold up? And Friends Chandler and Monica in Texas need a spitball for their plan for Roth conversions to avoid RMDs in retirement. Make sure you’re subscribed or following us wherever you watch or listen so you don’t miss it.

If you got something out of today’s show or any episode of YMYW, do us a favor and tell a friend that we’re making fun of finance over here at Your Money, Your Wealth.

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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