Show Notes

• (00:58) Can I Use This Year’s Lower Income to Reduce My Medicare Premiums? (John, South Carolina – voice)
• (04:39) Forgot to Convert our Backdoor Roths. Are We in Trouble? (Johnny and June, Oakland, CA – voice)
• (07:47) Is Retiring This Year Doable? Should We Convert to Roth? $1.8M Saved, Spend $140K/Year (Big Tex – voice)
• (15:05) Should I Convert My Entire SEP-IRA If I’m Staying in the Highest Tax Bracket? (Paul, Baltimore, MD)
• (20:51) $11M+ at Age 46. How Much Roth Conversion and When to Retire? (Nick, AL)
• (24:42) Can I Back Off on Retirement Saving So I Can Be Less Miserly? (Lolly Pop, NJ)
• (31:24) Spitball on My Retirement and Real Estate Investment Strategies (Darren, NV)
• (38:28) Should My Untimely Demise Change Our Early Retirement Plans? (Ordinary Guy, Boston, MA)
• (48:10) The Derails

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Transcription

Andi: Big Tex, Paul in Maryland, and Nick in Alabama all need to know how much money they should convert to Roth to pay as little tax as possible, today on Your Money, Your Wealth® podcast 471. Johnny and June forgot to convert their backdoor Roth money – are they in trouble? Darren in Nevada has no plans at all to do Roth conversions, but surprisingly still listens to YMYW, and still wants a spitball on his retirement and real estate investment strategies. Plus, can Lolly Pop in New Jersey be less miserly and back off on saving for retirement? Can John in South Carolina use this year’s lower income to reduce his Medicare premiums? And finally, if Ordinary Guy in Boston meets an untimely demise, should that change his plans to retire early? If you thought the fellas spitballed on fat wallets last week wait ’til you hear this show. I’m producer Andi Last, with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA, and we’ll kick things off today with a few priority voice messages.

Can I Use This Year’s Lower Income to Reduce My Medicare Premiums? (John, South Carolina – voice)

John: ” Hey, Joe, Big Al and Andi. This is John from South Carolina. I have a quick question. I turn 65 in 2024.  My IRMAA income for 2022 and 2023  puts me in the fifth phase of IRMAA premiums. I would like to use my 2024 estimate of income to reduce these IRMAA premiums for Medicare. The SS government office tells me I cannot do this, but everything I read says that that is not as the case. Any information you can help me with would be greatly appreciated. I have a Labradoodle, I love bourbon neat, and I drive a Dodge pickup truck. Thanks a lot.”

Joe: All right.

Al: IRMAA.

Joe: So, that’s Medicare premiums. So, it depends on your income, but it’s kind of funky because they look a few years back to see what your income was to determine what your Medicare premiums are going to be two years in advance.

Al: I know. It’s weird. I mean, that stands for Income Related Monthly Adjustment Amount, and so they look back two years, right? So, if you’re-

Joe: Why do they do that?

Al: I don’t know. That’s a great question.  I didn’t design it. That’s just how it is. So if it’s for 2024’s premiums, they look at 2022, what your income was. I guess, just because it takes people a while to file the returns and maybe not everyone- as the returns, you know, I don’t, not really sure, but I think that’s the, you can’t do it on the current year. You can’t even hardly do it. I guess you can’t even do it on last year because things haven’t been filed. So I guess that’s why they go back 2 years. But here’s the problem is, what if you’re working as John was-

Joe: – making $1,000,000 a year.

Al: Yeah. And then he retires and it’s like, well, wait a minute. I got to pay these high insurance premiums of Medicare, even though my income is like plummeted. Right. And so the IRS has a form, Joe, it’s called SSA44. You just fill it out and you tell them why your income’s different. And I’m looking at the form right now as I sit here and on page two of the form, it says ‘type of life changing event’, and one of the boxes is ‘work reduction’, which is what this is. And a work reduction is designed, or defined as you or your spouse stop working or reduce, or reduce the hours that you work. That’s exactly the situation. So I’m not sure why John’s being told otherwise. You just simply download the form, fill it out, say why, show what your new income is or what you’re expecting it to be. And then the Social Security Administration will base the IRMAA premiums, Medicare premiums based upon that different income amount. And that’s not to say, Joe, that, I mean, if you, if you screw it up and your income is a lot higher, they probably will come back at you and want to get, well, you know, past premiums plus interest and penalties. But the point is there’s a mechanism if your income’s changed.

Joe: Yeah, there’s probably 6 exceptions. I forget exactly how many there are. Well, since you have them right there, what, do you just keep them on your desk?

Al: I got it right up here in the old noggin.  So, so here’s, there’s 8 of them.

Joe: You don’t have to read them. Okay, there’s 8 of them.

Al: Marriage, divorce, death of spouse, work stoppage, etc.

Joe: Okay, so they can go find the form. Go to ssa.gov, click the form, and you’re good to go, John. So, happy retirement, and like that bourbon neat.

Al: Yeah, and by the way, SSA44 is the form.

Joe: SSA44.

Forgot to Convert our Backdoor Roths. Are We in Trouble? (Johnny and June, Oakland, CA – voice)

Joe: Alright, who do we got next, Andi?

Andi: Johnny and June!

“Hey Andi, Joe and Big Al, this is Johnny and June in Oakland, wrote in the email a few months ago. You guys really helped me out. Appreciate it. Calling with a real quick question. Last year, my wife and I both did backdoor Roths. The max was $6500. We each did the max and it was sitting in our traditional IRAs and we kind of forgot to convert it for a few weeks. And so that’s what’s on the 1099s, needs to go on the form 8606. We in any trouble there? Do we need to pay any additional taxes?  You know, it was all post-tax dollars going in non-deductible. But I’m just worried about how to file my taxes. Thank you so much for your time. Oh, we upgraded the old Model S to a new Model Y, still like drinking beer and wine and our one-year-old Mini golden doodle is thriving. Thank you.”

Joe: Oh, what’s up with these doodles? Labradoodle, golden Doodle, Babbadoodle.

Al: Yeah. And I’ve got a cavalier poodle, which is called a caba poo.

Joe: Oh gosh.

Andi: Everybody’s a fan of the poodle. It’s not a purebred.

Joe: Keep that. Keep that to yourself.

Al: Got it.

Joe: Well, let’s see. Johnny and June. Did a little backdoor Roth and they forgot they made the contribution, Al. And so it sat in that traditional IRA for a few weeks and he’s like, damn it, I need to convert this thing. So he converts it a couple of weeks later.

Al: Right. And it’s probably, probably a different amount, right? I think that’s maybe the question.

Joe: Right. But we don’t know if it’s up or down.

Al: We don’t. So let’s answer both questions. So if, if it’s up, let’s say its $6800, for example, okay. Then you’ve got a Roth conversion. The first $6500 is tax-free and the extra $300 of gain is taxable. So the conversion, if that’s all the IRAs that you have, $300 is the extra tax you pay. On the other hand, Joe, if it went down, like the $6200, that you just, there’s no, you convert the $6200 and then you’re good.

Joe: Yeah. You converted $6500. It’s worth $6200. It is what it is. There’s no tax due.

Al: That’s right. Yeah. So it just depends whether it’s more or less. You don’t have to convert it at the same point, but if you don’t convert it at the same time, that’s what can happen, right? The market can increase or decrease, and then you end up with a different conversion. Then you’re back to a Roth.

Joe: Yeah, I did the exact same thing.

Al: Did you? Yeah.

Andi: You forgot?

Joe: Yep.  I’m busy, Andi.

Andi: No kidding. I know.

Joe: Yeah, I thought for sure I did it, and I actually, it was like a year.

Al: Oh, is that right?

Joe: Yeah, I don’t really look at my statements all that much, and it’s like my other backdoor Roth, and then I was like, why do I have money in an IRA?

Al: Yeah, what happened here?  And I was like, oh, I forgot to convert it.

Al: Yeah. So, I mean, it’s not the end of the world. It just means whatever growth is, assuming it grew, pay a little tax on that growth part. Not, not the majority of it.

Joe: All right. Very good.

Is Retiring This Year Doable? Should We Convert to Roth? $1.8M Saved, Spend $140K/Year (Big Tex – voice)

Big Tex: “Good afternoon, team. Appreciate your show. Love listening and great content and banter back and forth. Big Tex here, age 59, Miss Tex is 57. We’re looking for a little spit ball on our plan and hope you can help us. The goal is to retire this year and we were total market Investors, index fund investors with an asset allocation, 65% stocks, 35% bonds. We are debt free with a home worth about $650,000. In addition, we have $1,800,000 in savings, $925,000 tax-deferred, $725,000 taxable, $100,000 in Roth, and $50,000 in HSA. In addition, I have a $275,000 deferred comp that will pay out evenly over the next 10 years starting this year. Miss Tex has a $10,000 a year pension that will also start this year.  In consideration of Social Security benefits, we anticipate $70,000 a year starting at age 69 and 67, in consideration of the GPO offset. We also expect to inherit about $1,000,000 in the next 3 to 5 years of which about $300,000 will be in an inherited IRA.  The rest taxable in real estate. We’d like to spend $140,000 a year, inclusive of taxes and some lumpy expenses spread out over the next 25 plus years. So that’s it for us. Love to know what your thoughts are on our plan, if it’s doable or not. The second question, should we consider Roth conversions or will it not matter? And then, as far as what we drive, we drive whatever has four wheels, primarily right now, a ‘21 Ford Edge and a 2010 E350  Benz. As far as drink of choice, probably being down here in Texas and have some good old Tex Mex, I love a frozen margarita. I like mine with a little Grand Marnier on top. Wife likes hers, a little bit of a swirl with sangria. So, anyway, thanks for your time. I love the show again.”

Joe: Wow, Tex.

Al: Tex, right?

Joe: Alright, so we got Big Tex. He’s got $1,800,000 in retirement accounts or total savings, and then he has another $275,000 in deferred comp. All right, so he wants to retire right now?

Al: Yeah, right now, if he can.

Joe: Okay, so he’s 57, or Mrs. Tex is 57, he’s 59, 60, then he’s going to push out Social Security for about 10 years. So he needs $70,000? Alrighty?  Okay.

Al: Yeah, he’s good. It’s close, Joe. It’s close. Yeah, I think he’s, I mean, if he wants to spend $140,000 inclusive of taxes, and I’m just gonna guess taxes are $20,000 just to come up with a number. There’s no state taxes in Texas, so it won’t be super high. So if he needs to spend $120,000 and income, if there’s $275,000 in deferred comp, spread over 10 years. If there’s- she’s got $10,000 a year in pension, probably short around $80,000ish, right? Divide that into $1,800,000 that they have. It’s about a 4.5% distribution rate, which for a 59-year-old is typically higher than we would like to see. But that doesn’t include inheritance. It doesn’t include Social Security. So it’s probably okay, but there’s not a lot of room for error I would say.

Joe: This is what I’m going to do. He wants to spend $140,000. So, $140,000 today, given 3.5% inflation over 10 years, that’s roughly $197,000. Call it $200,000. You with me?

Al: Yep.

Joe: Okay, so then, he said he’s going to receive around $70,000 a year in Social Security. So that’s when his Social Security is going to kick in in 10 years. So if it’s $70,000 in today’s dollars over 10 years, that’s probably going to be what? Call it $100,000?

Al: Yeah, call it $100,000. Yeah. $90,000, $100,000. Yep.

Joe: So he’s going to be short $100,000, let’s just call it in rough numbers when he starts collecting Social Security, that needs to be produced from the overall portfolio.  You with me there?

Al: Yep. I’m going to say $90,000 because she’s got the $10,000 pension.

Joe: Okay. Yeah. Sounds good. So they’re going to have to have around $2,000,000, $2,500,000, give or take, when they start collecting Social Security to make up the shortfall of their spending needs after her pension and both of their Social Securities. So they got $1,800,000 today.  And so but they need to bridge the gap. So if I’m 57 years old and I’m not going to collect Social Security for another 10 years, and I need to live off of $140,000 a year, right? This is going to be tough. It’s all going to have to do with over the next 10 years. What is the market going to do? How’s that distribute- Because if the market stays steady, right, and we don’t have any huge gyrations, I think he will be okay. But if the market falls, and he’s taking that large of a distribution out of the overall account at that age, I mean, because the portfolio still has to grow.

Al: Yeah. It still, it still has to grow. And part of this though, is he’s including taxes and we usually take taxes out. So that’s why I was thinking spending more like $120,000, but yeah, no matter how you compute it, there’s not a lot of room for error.

Joe: Yeah.  I don’t know. Big Tex, might need to work a couple more years or just $140,000. That’s yeah, I guess tone it down to $110,000, I think.

Al: Yeah. Maybe just a little bit. I mean, if it were me, Joe, I probably wouldn’t retire quite yet. Right. I try to grow the portfolio and get my distribution rate down a little bit lower and maybe even look at part time work just to bridge the gap probably. But I think it’s really close.

Joe: All right. Good luck. Big Tex.

Andi: It’s that time again: the DIY Retirement Guide is the Special Offer right now at YourMoneyYourWealth.com, and it’s only available until this Friday! Nearly all our other white papers and guides and handbooks are always freely available in the Financial Resources section of our website, but the 40-plus pages of this guide are packed with so much practical, do-it-yourself information that we only make it available on a very limited basis – it won’t be offered again for a few months. Learn steps to understand and plan for your retirement income, sophisticated strategies for choosing a tax-efficient distribution method, guidance on developing an investing strategy that meets your needs, tips on preparing for the unexpected, and other actionable information that’s normally only available in our retirement classes or one-on-one meetings. Click the link in the description of today’s episode in your favorite podcast app, go to the podcast show notes, and claim the DIY Retirement Guide by this Friday, March 8th, 2024. If you know someone who could benefit from the gift of financial education, share the podcast and the financial resources with them! Now From here on out, it’s you, you gotta actually read ’em.

Should I Convert My Entire SEP-IRA If I’m Staying in the Highest Tax Bracket? (Paul, Baltimore, MD)

Joe: Okay, perfect. I like- and maybe I concentrate. Yeah, last couple, I was like zoning out there.  I was just listening to like, Big Tex accent.

Al: I know, good accent, right?

Joe: Yeah, I was just thinking about hanging out with Big Tex.

Al: I want to hear, I want to hear Miss Tex. That’d be really cool if she chimed in.

Joe: Drinking a margarita. Little Grand Marnier.

Al: Yeah. Right.

Joe: Paul from Baltimore. We’re going East Coast. “I discovered your podcast two months ago and started listening. I very much enjoyed it and commented- commend your brilliant mixture of human and personal finance.”

Andi: Humor. Or human. Either way.

Joe: What did I say?

Andi: You said human.

Joe: It is human finance.

Andi: It is.

Joe: “Makes it easier to approach this daunting and somewhat dry subject.”  Yeah. You’re telling me, Paul.

Al: We need, we need more humor. I’m not, I’m not listening anymore, Joe.

Joe: No, 25 years of this. “Full disclosure, skim chai latte is my favorite drink. I cruise the streets in Baltimore in 2023 Audi E8 during the weekdays and a 2023 Lincoln navigator on the weekends. Avid soccer family with 3 boys play cub soccer.” Man, he’s got some nice wheels there. A little Audi,  Lincoln 2023, just brand new cars. Love it.

Al: Yeah, yeah, he does. You bet.

Joe: Man, “51 years old, married, two incomes. I plan on moving my SEP IRA account with $530,000 into a Roth IRA. I plan on moving it all at once in order to take advantage of compounding. With future RMDs, I don’t think that I’ll ever get to exit the highest federal tax bracket. Combined annual income, 7 digits.” Oh, anyone that drives an Audi and a Lincoln-

Al: Brand new at that, right?

Joe: Brand new. It’s like, how much money you make? 7 digits.  It’s not, how much money you make?

Al: That’s a lot, that’s a lot of digits. I’ll tell you.

Joe: That’s a lot of digits. Oh, I like how he’s going to negotiate for his next  pay raise.

Al: There you go.

Joe: 8 digits.

Al: You know what? I’ve been set at 7 for a while. I’m going to need 8.

Joe: Oh, gosh. “$4,100,000 in tax-deferred accounts. He’s got $1,100,000 in a brokerage account, SEP IRAs $530,000. He’s got another cash balance plan of $700,000. Do you agree that my Roth IRA conversion strategy should be to take advantage of the compounding tax-free, have some diversity of withdrawals in retirement, rather than basing the conversion around a current tax bracket versus a future tax bracket? My plan is to move the cash balance plan as well into a Roth IRA once the plan closes in the next two to 3 years. Sincerely, Paul.”  Paul, 7 figures.

Al: Yeah, so he’s got a total of almost $6,500,000.

Joe: At 50.

Al: A lot, yeah, a lot of it’s in deferred. He wants to take that SEP, over $500,000, and just plop it into a Roth.

Joe: He’s just gonna rip the cord.

Al: He’s gonna say rip the band aid off and just say, okay, you know what? I’m going for it. What do you think?

Joe: I would.

Al: I know you would.

Joe: 100%. I’m with Paul. He’s, he’s 50 years old.  He’s got time for that money to catch up. He’s going to be always in a high tax bracket. I don’t know where tax brackets are going, but I would assume that they’re going to go a lot higher than they are today. He’s going to take the uncertainty of taxes off the table. He makes 7 digits, Al, 7.

Al: 7. It’s a lot of digits.

Joe: 7 digits. Not 5. He makes 7 digits. He can afford the tax.

Al: You know, when I look at our tax table, it only goes up to 6 digits.  Anything in the 7-digit range is in the highest tax bracket.

Joe: He lives in Maryland. What’s the state tax in Maryland? Is it high?

Al: I assume it’s on the higher side, but no, I don’t know.

Joe: So he’s got $500,000. He’s going to pay $200,000 in tax to get the $500,000 into the Roth. Now Roth over 10- now that $500,000 in 10 years is worth $1,000,000, right? He’s 60.  When he turns 70, it’s $2,000,000. I love it. I mean, he’s going to have so much cash and money. I think he’s always going to be in a really high tax bracket.

Al: Yeah. And when you, and so if he does that, you do the conversion, you pay for the tax out of your non-qual account. And so you got the whole $500,000 plus in there, growing tax-free. So that’s the plus. So here’s the question I would ask, which is how much longer are you working?  So RMDs don’t start till age 75, right? I mean, if he wants to work 5 more years and he’s in a lower bracket, I would wait till then, right? But we don’t know. He didn’t really say maybe he works till age 60 and he’s in a lower bracket. Then maybe you convert more aggressively then. Tax rates might be higher though. I mean, there’s so many unknowns, right? So I could see an advantage of doing it, ripping off the bandage. I would- I would want to have a little bit, me personally, I just want to have a better sense of how much longer he’s going to work and is there even a more sensible plan? Maybe there is, maybe not.  That’s my answer.

Joe: Okay, but I like it. Paul, you make a ton of money. You drive really nice cars.  You refer to your income as 7 digits. I mean, you gotta convert. Just do it.

$11M+ at Age 46. How Much Roth Conversion and When to Retire? (Nick, AL)

Joe: We got Nick, writes in from Alabama. “Hey guys, love the show.  Two Hearted Ale is my drink of choice. Here’s the breakdown.” Two Hearted Ale. Never heard of it.  He’s got $4,000,000 in a taxable account, Big Al. That’s-

Al: W got some big, big hitters today.

Joe: Yeah, geez.  Is this Nick Saban? Who is this?

Al: It must be.

Joe: “We got $1,500,000 in a Roth. We got $6,000,000 pre-tax, $1,100,000 in a 3% mortgage. I’m 46 years old.” What the hell?  Good for you, Nick. 46.

Al: Yeah, by my math, he’s got over $11,000,000.

Joe: At 46.  “He’s got a wife, two kids, 18, 14, college is funded-“ of course it is.  “We can live comfortably on $275,000 a year after tax.”  That’s it, Nick, huh? $275,000?  That’s not 7 digits.

Al: No, it can be, I can tell you right now, it can be a little higher.

Joe: “Assume no future- assume no  further retirement savings. Would like to optimize Roth conversions, but retire as soon as possible.  Projected to receive $3600 a month in Social Security. When should I retire? Should we fill up the 22% tax bracket in Roth conversions? Thanks for the spitball, Nick.” All right, first of all, Nick, congratulations on your success. You’ve done a heck of a job saving money. At 46 years old, I’ve never seen a retirement account at $6,000,000. I don’t know what he invested in. He must be either a small business owner that was able to like put a defined benefit plan together to save a bunch of money, or he’s been saving since he’s been two years old.

Al: Or he bought Apple stock, you know, 10, 15 years ago and just let it ride and did pretty good.

Andi: Or work for Apple.

Al: Yeah.

Joe: Yeah.

Al: I’ve-, did you have, did you have $6,000,000 in pre-tax when you were 46, Joe?

Joe: Oh, that was only last year, Big Al. No.

Al: No, you didn’t.

Joe: I’m a pretty good saver.

Al: Yeah, you’re pretty good saver. Me neither.

Joe: Not even close to that.

Al: Me neither.

Joe: I’m not even sniffing that.

Al:  I can’t even have as many digits as he had.

Joe: I mean, it’s like almost impossible because you can only put so much money into the account at 46 to have $6,000,000. I’m like, okay, what? Something’s going on. But anyway, so can he retire? He wants to spend $275,000 a year. So at $275,000 a year. At 46 years old, I would say. You don’t want to take out any more than 3%. 2.5%. At 3% he needs $9,000,000.  So he’s got $11,000,000.

Al: Yep. He’s fine.  You can retire right now, Nick. If these are real numbers and you’re not pulling our leg, yeah, go for it. No reason to wait.

Joe: So if he takes 2% out, that’s $13,000,000, he needs $13,700,000, so about $14,000,000. He’s pretty close.

Al: Yeah, I mean, I get, I get a distribution rate currently of 2.4%. 46 years old, I’m okay with that.

Joe: The only thing is that, man, at 46, they’re used to spending a little bit of money. $275,000 in retirement, so while they were, while he’s working, I don’t know what he’s spending. But I would imagine, if I retire tomorrow, I think I would, you would go bananas, you’d do all sorts of stuff. I think he would probably spend more money than $275,000. Al: Well, I’m guessing you’re correct.

Joe: Yeah, Nick, congrats, man. Thanks for the email.

Can I Back off on Retirement Saving So I Can Be Less Miserly? (Lolly Pop, NJ)

Joe: What’s this? Lolly Pop?

Andi: Lolly Pop. In New Jersey.

Al: Is that her name?

Andi: That is the name that was given to us, yes.

Joe: Lolly Pop. That’s kind of cool. “Your podcast is my absolute favorite.  I’m here to ask for a spitball of my own today.” All right, Lolly Pop from New Jersey. “Money’s pretty tight. I’m a teacher and our salaries are relatively modest. Last year, after taking out pension contributions, union dues, and retirement contributions, I netted $40,000. I’m a single 45-year-old with one child, age 5. Here are the numbers.  A couple hundred thousand dollars in- $165,000 in retirement accounts, $120,000 in Roth, 100- or $11,000 in a taxable account, $35,000 into an HSA, and $30,000 into a 529. So what is that? One, two, call it $300,000 of savings?

Al: Yeah, I get $330,000.

Joe: Okay, so $350,000 of total savings for Lolly Pop. Teacher, but she’s got a pension.

Al: Yeah, I get $40,000.

Joe: Okay, so-

Al: I think it says it somewhere.

Joe: “No debt on my condo. And my car. I contribute $21,000 a year into my retirement account.” That’s a hell of a saver right there, Lolly Pop.  “But it means being a real miser. If I can- if I can net out $50,000, it would be such a relief financially. So my question is, can I back off my retirement savings at all?”  Alright, I like this question. So, grinding. Lolly Pop is grinding. Is that a girl or guy?

Andi: I’m guessing, I’m guessing female, but I have no idea.

Joe: I’m glad you said that because you’re a female and you could, if I said that, would that be-?

Al: It might be- Is it sexist or maybe?

Joe: I don’t know. I don’t know.

Al: If I was guessing, I would say a female. Lolly Pop.

Joe: Okay. But if it’s a, if it’s a guy, that’s, that’s fine too.

Al: Sure.  Just saying, that’s fine.

Joe: So grinding away, saving all this money and netting $40,000, living in Jersey.

Al: Yeah, living in New Jersey with a child trying to make ends meet and it’s like she’s saving a ton for retirement and by the way, Lolly Pop, a teacher at age 45 to have over $300,000, Kudos. Congratulations. You are killing it.

Joe: Yep. Way to go. So, wants to kind of just peel back a little bit. “So, the question is, if I retire at 60, I should get health care and a pension worth roughly $40,000, but no COLA in New Jersey. Social Security will be about $30,000 if I wait until 67, $36,000 if I wait until 70. In today’s dollars, that would be more than enough money. But inflation doubles every 20 years, right?  So when I’m 65, I need $100,000 a year. If $50,000 would be comfortable today, and $200,000 a year by the time I’m 85? It seems imaginable- unimaginably- Andi: Well done.

Joe: Thank you.

Al: It does when you kind of think of it that way, right?

Joe: “I’d appreciate any spitball you could offer. Drink of choice is water. And I drive a 10-year-old Camry.” Well, of course she’s drinking water.

Al: Yeah, and an old Camry. She’s saving money. Yeah. Yeah. Joe:  We got Nick that’s got $45,000,000 wants to know if he can retire. We got Lolly Pop grinding, $300,000 dollars saved. Okay, so she wants to retire at 60, that’s 15 years from now.  But usually how pensions work in the school systems is, if it’s $40,000 dollars today, I think that would probably grow as her income grows over the next 15 years.

Al: I would- I would think so too. But even- even if we just go with her numbers, I, here’s what I did, Joe. I said, you start with $330,000 and let me just see, let me just do what she’s asking instead of adding $21,000 a year, add $11,000 a year, right? You know, $10,000 more net. I did 6%, 15 years. She ends up with $1,000,000. Okay. Good enough. So at $1,000,000, that’s great. 3% distribution rate’s, $30,000, 4% is $40,000. So that’s roughly what you could pull from it. She’d have the pension. Let’s call it a $40,000, but maybe it’s higher at that point, right? So let’s say the pension is at least $40,000. Distribution, maybe it’s $40,000. Her spending now is $50,000, 15 years from now would be about $75,000, $80,000. I think it works. I think- I think there’s-

Joe: You’ve got another $40,000 in Social Security.

Al: I know. And I’m not even counting that. So I’d say, you know what? Enjoy life a little bit more. You’ve got a child, 5 years old. If, if $40,000 is just too tight because you’re a teacher with a pension and you’ve already done a great job in savings. I think this works. I would, I would do that right away myself.

Joe: Yeah, in 15 years, that $300,000 is probably going to be worth- $300,000 in10 years- it should be worth $600,000, should double, and then another 5 years after that, it should be $700,000, $750,000, if she doesn’t save another dime.

Al: Correct. But even if she saves the $11,000, which is what she’s asking, I think this works. So I would do that. I would, I would say, you know what, life is short. In this particular case, you’ve got a good pension, you’re a good saver, you’re good at keeping your expenses low, but it’s a little bit too tight right now with a young daughter, it’s like, yeah, or a young child I should say, yeah, go for it. I would do it.

Joe: Yep, I 100% agree. I think, yeah, Lolly Pop’s done a great job and I couldn’t imagine, $40,000 a year in Jersey. With a kid?

Al: Yeah. I would suspect you’re right, Joe. I think as she works more, she makes more, it’s actually going to be a higher amount 15 years from now, but just even using that number, I think this, I think this works.

Joe: All right. Yeah. Save a little less, spend a little bit more, have a little bit more fun, have a cocktail on me.

Spitball on My Retirement and Real Estate Investment Strategies (Darren, NV)

Joe: We got Darren from Nevada. He goes, “Hey guys, and Andi, quick question regarding the potential sale of an investment property.  I’m 60 years old and plan on retiring the next one to 5 years. We’ll need about $200,000 a year to live comfortably in retirement. Currently in the 35% marginal tax bracket and have pretty good tax diversification. Currently $2,300,000 in retirement accounts, $400,000 in a Roth,  $3,500,000 in a brokerage account.”  Big Al, this is like the big dogs are coming out today.

Al: This is our wealthy show, so that’s about $6,200,000, Joe.

Joe: All right, we got “$1,000,000 in real estate, no debt, house paid off, current value of the home,  $5,000,000.” Huh? That’s it.

Al: In Nevada. That’s a pretty nice home.

Joe: “Married,  kids pretty much launched as their 529 plans will more than cover their college graduate school with leftover to fund $35,000 in the Roth IRA per the new rules, don’t plan to do Roth conversions at all.” And he still listens to the show.  Amazing. “We’ll delay Social Security to 70, no pension or annuity. We’ll need to purchase health insurance if I retire before Medicare, 65. Back of the napkin retirement plan is to never touch Roth and leave it to the kids for inheritance. Plan to withdraw first from 401(k) to the top of the 24% tax bracket and then minus my taxable dividends which are about $60,000 to $80,000 dollars a year. I won’t spend that much and I’ll just add the excess to the taxable brokerage account, but will withdraw to the top of the 24% tax bracket to hopefully reduce RMDs to the standard deduction amount at the age 75, and then just live off the taxable brokerage account at the capital gains rate.  I will likely have to sell investment property, which is in an LLC in the next one to 5 years. Or one to 10 years. My share is $500,000. The property has been completely depreciated over the last 25 years, so I’ll have to pay income tax upon sale. My thought is, if the sale goes through in the next one to 5 years, I’ll just retire and not take any of my current income that year.  If it happens after I retire, then I just don’t take a 401(k) distribution. Am I thinking about this correctly? Can you spitball a better strategy?”  I believe we can, Darren.

Al: I believe we can, too.

Joe: “Side bonus spitball.” Wow, a little side bonus. The bonus round. “If you were me, this close to retirement, with this portfolio, and wanted to buy a $1,500,000 lake house, how would you fund it? I don’t want to do a 1029 exchange in the lake house.”

Al: 1031, I believe.

Joe: Yeah, I think he’s a couple digits short.

Al: That 1029 exchange, that’s the lake house rules.

Joe: It is, yes.  “Lake house will be for personal use only, and I know where Big Al was gonna go there. Wife doesn’t work. Drink Coors Latte. $20 whiskey, $20 wines. Drive pretty basic cars only.” All right, Darren. Thanks. $6,000,000, looking to retire. He’s not going to do any Roth conversions. Hates them.

Al: Yep.  Well, he’s just gonna, he’s just gonna withdraw funds to get up to the top of the 24% and call it good.

Joe: Why on earth would he do that?

Al: I don’t- I can’t imagine a single reason, particularly, let’s say somebody that has how much in a brokerage account, $3,500,000 in a brokerage. I mean, if you’re going to pay the tax on it, wouldn’t you want that money sitting in a Roth IRA rather than your brokerage account? Roth IRA guarantees it’s going to be tax-free? Brokerage account, it’s taxable interest dividends. It’s capital gains upon sale. It’s short-term capital gains if you sell it less than a year. Roth is tax-free, tax-free, tax-free.

Joe: It’s yeah, 100% percent tax-free to you, to your spouse, to your kids, to whoever. It will forever grow tax-free. So you want to get as much money into the Roth IRA as possible. If you’re taking it up to the 24% tax bracket and you’re like, you know what? This is $100,000 more than I’m going to pay tax on, but I want to utilize that bracket. And he’s just going to take the rest and put it into a brokerage account. And those dollars are going to be taxed at a capital gains rate.  Those dollars will never be taxed if you put it in the Roth. I like the strategy of bleeding out the retirement account, but live off of the brokerage account and convert to the top of the 24% tax bracket over the next couple of years and get that money to compound tax-free.

Al: Yeah. I mean, the only reason you would pull money out of your IRA 401(k) into a brokerage account is number one, if you need it to live, right? Or number two is maybe you need the capital because you want to buy the lake house, right? And so you need to store up some capital to do that. I’m okay with that. But God, just having idle money in a brokerage account versus a Roth? It’s not even a,  I mean, talk about a no brainer, Joe, it should go into a Roth.

Joe: Darren, but maybe he’s, he’s got in his head that it’s like, well, I want to give the money to the kids. And so he’s, he’s like, well, I don’t want to put more money into the Roth.

Al: Yeah, I want to, I want to keep it for me. I think you think about this a little bit differently. I mean, the Roth IRA, you’re only 60, right? And I think this will be for you too. It’s not just for your kids. And if you put more in the Roth and you don’t need it, the kids get more tax-free. It’s all good.

Joe: Lake house. How should he buy it?

Al: Well-

Joe: $1,500,000 lake house. He could have, I would- I would leverage.

Al: Yeah, I would- I would probably, I mean, interest rates are high, but they’re coming down right now. I don’t think I would use $1,500,000 of my capital because I kind of like that to produce income to live off of. So I would lever some, I don’t know how much, maybe, I don’t know, maybe put $500,000 down, borrow $1,000,000, maybe, maybe. Maybe half and half. I don’t know. I’d have to think about it, but I would probably get a loan for part of it. And then if interest rates go down further, I just refinance to a lower rate in the future. That’s what I would do.

Joe: Yeah. I would do the exact same thing because he- you want the liquidity and he can always pay off the mortgage if it’s, if it annoys him, if it bugs him because he’s got the capital to do so, he can just cut a check. But yeah, I would want to lever that up a little bit. And then, yeah, like, like you said, if there’s, he’s got a $5,000,000 primary  that he locked from there.

Al: Yeah, you probably, you probably, you actually, you probably refinance that to get a, to get a better interest rate on a owner occupied residence.  Right. So maybe you do that and you use the money to buy the lake house with cash. Right. And then you, then you get a deal, right? Cause you’re walking up with it big check, right?

Al: Yeah. You do say right a lot.

Andi: Is the Federal Reserve about to start cutting interest rates? Can the Magnificent Seven continue driving stock markets higher? Will domestic or international politics sink the markets? From economics and inflation to Nvidia and the GRANOLA stocks, from the market impacts of Russia/Ukraine and Israel/Gaza to the upcoming election, Brian Perry gave a master class on the financial markets in last week’s live webinar, and answered audience questions. If you missed it, fear not, you can watch it on demand in today’s podcast show notes. Click the link in the description of today’s episode in your favorite podcast app and you’ll see the Financial Markets Master Class right before the episode transcript.

Should My Untimely Demise Change Our Early Retirement Plans? (Ordinary Guy, Boston, MA)

Joe: We’ve got Ordinary Guy from Boston, Massachusetts. “Hey Al, Joe, Andi. First off, thanks for the great mix of Big Al’s big brain and Joe’s caw stack a tack a-“

Andi: Caustic. It’s caustic.

Joe: Caustic. Is that like sarcastic?

Andi: Uh, yeah. It means you’re bitter.

Al: Caustic commentary.

Joe: Yeah.  “- and Andi’s pure awesomeness.”

Andi: Oh, thank you.

Joe: “Wanted to get an early retirement spitball and see whether my untimely future demise should change our approach.”

Al: Wow, that’s a tough start, right?

Andi: That’s planning for a worst case scenario real early.

Joe: My ultimate future demise.  All right. “This is the important stuff. My hot wife-“ Wow. “-drives a 2014 Mazda with heated seats, and I drive a 2015 Nissan Versa with a hell of an armrest.” Very cool.  “Hot stuff drinks a ton of ginger ale. And on occasion, fruity white wine. I prefer an Arnold Palmer-”  I prefer a John Daly.

Al: Got it.

Joe: “- when I’ve earned it. Foxy and I are both 44. Living in the Boston area. We would stop working at our current jobs at age 54. Our combined numbers are Traditional 401(k), about $1,000,000.” What’s the total here, Al?

Al: I call it $1,100,000.

Joe: Okay. So they got $1,100,000. “Each year until early retirement, they will contribute $72,000 a year, and then they’ll do backdoor Roths of another $22,000. So they’re going to save $100,000 a year over the next 10 years. They got $1,300,000, they’re going to save $100,000 over the next 10 years.” They want to know if they can retire.

Al: Yeah, $1,100,000, $100,000 a year, 6%, 10 years, $3,300,000 is the number.

Joe: Okay, so roughly if they save $100,000 a year with the amount of money that they’ve saved, in 10 years from now, at the age of 54, they’re going to have roughly $3,500,000. Call it that.

Al: Yeah.  Correct.

Joe: Alrighty.  “Let’s assume the kids’ 529 plans will be taking care of college and our mortgage will be paid off. Our expenses at age 54 will be $21,200 a month.”

Al: Okay. Might- might be, might be a little rich for this computation, but we’ll see.

Joe: Alright. “For hotness’ pension, pays $2300 a month.  She takes Social Security at 62. That will pay $4300 a month. If I’m alive-“ what, why is he, I think he was going to die.

Al: I’m not sure.

Joe:  “If I’m alive, I’ll take Social Security at age 70, paying $11,300 a month.  We sell old Eden at age 58, using $400,000 of the proceeds to live off of. And buy New Eden-“ is that, is that their home?

Al: I think so. Yeah.

Andi: Yeah, referring to their old house and their new house.

Joe: And I’m caustic.

Al: You can be.

Joe: “If I’m alive, we do Roth conversions of $259,000 a year from age 55 to 61, dropping down to $189,000 a year from age 62 to 69.  Now for the spitball.  Does it look like we can retire at age 54?  If I start working a new job at age 58 and I get killed one year later, what would we do differently?”

What the hell is this question?  So what kind of job is he going to take? Is he going to be a drug smuggler?

Al: Must be a very dangerous job.

Joe: Alright, but at 58, so he’s going to retire at 54 and then at 58, he’s like, if I get this new job and I die, if I get killed, it’s not, if he dies, like of a disease that he just found out that he has, and he’s got a 15-year life expectancy. Now he takes a job at age 58, and gets killed the next year.

Al: Probably not the kind of job you ought to take.  Just saying.

Joe: “What could we do differently so the newly eligible bachelorette doesn’t get hosed by the RMD taxes? Thanks. Ordinary Guy.” This is not an ordinary guy.  I’ll tell you that. He’s not ordinary. All right.  This is all over the board.

Al: It is. And so I’ll just take a quick stab, Joe. So you’ve got, he wants to spend around $250,000 a year in 10 years from now.  And he’ll have $3,300,000, roughly. So that’s a 7.7% distribution rate. Way too high. Now, yes, I understand there’s pension monies coming, but that’s a- that’s an 8 year gap of just going through your portfolio and then even still, I’m not sure that there’s enough coming in to cover it. I mean, this, this is, this is the kind of question that you actually need financial planning software because there’s too many variables to just do on the back of the envelope. But quick math for me, Joe is no, this doesn’t work.

Joe: Well, why I got so many questions here is that he’s going to do Roth conversions of $259,000 a year from age 55 to 61.

Al: Well, I think that’s because their income is low, right? And then when her pensions kick in, they’re not going to be as, the Roth conversions are going to be lower. I think that’s what I get from that.

Joe: He doesn’t have any money to- that much money to- he’s got $100,000 in a brokerage account.

Al: I know. It doesn’t- I don’t see how this works.

Joe: The $259,000, he’s gonna owe at least $100,000 in tax by doing those conversions.

Al: Yeah, he’d have to take the money out of the IRA to pay the tax, which is probably not-

Joe: And he doesn’t have anywhere near enough money  to live off of.

Al: So yeah, there’s a, there’s a, it seems, yeah, there’s a lot of issues here, I would say.

Joe: So you got $3,500,000 dollars. Let’s do this. Alright, so you got $3,500,000. You’re 54 years old.  So, let’s say you take 3.5% out because you’re gonna get killed at 58. So, you can live off of $125,000 a year.

Al: Okay, and he wants to spend, he wants to spend $250,000.

Joe: Exactly. You can spend half, right? That’s it.

Al: Yeah, yeah, that’s about right. I mean, now, of course, maybe a little more because there’s pensions coming and at age 62-

Joe: I would say $175,000. If I’m total back of the envelope spitballing this thing, if the markets do well, you could probably get up to 200,000. I wouldn’t do that. That would be too risky. But if he’s going to die at 58, he’s going to get killed in his new job, then yeah, spend $250,000 because then your wife is going to spend half of what you had been spending over that time period. So that I think everything works out if you die at 58. But I hopefully he doesn’t get killed at 58.

Al: I hope not.

Joe: And he lives a healthy lifestyle. I would say $175,000 is probably the- is going to be in the ballpark of what they can spend if they save that much money at 6%.Over the next 10 years, if they get 10%,  I think he’s right on track. If he gets 2%, there’s no way. He’s going to blow out of his money before he even turned 60.

Al: Yeah, you know, a lot of times when we’d run this quick back of the envelope, people are pretty close and this one isn’t really that close. So not that it can’t be done. I mean, there’s will be a lot of assets here. So I’m not saying. I mean, there’s plenty to work with. It’s just-

Joe: Yeah, he has $3,500,000, which is a boatload.

Al: Boatload. It’s just the ratio between what he wants to spend and what he has doesn’t, doesn’t pencil out.

Joe: All right. Thanks everyone for listening. Thanks for your questions. And we will see you all again next week. The show’s called Your Money, Your Wealth®.

Andi: Un-Belize-able, overusing the word “right,” and Joe’s got a bone to pick with Discount Tire in the Derails, so stick around.

This show would not be a show without you! When you tell your friends about YMYW or leave your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, and all the other podcast apps that let you do that, it helps us reach more listeners like you – and we really appreciate it!

Your Money, Your Wealth is presented by Pure Financial Advisors. A retirement spitball from Joe and Big Al is a great first step, but to really learn how to make the most of your money and your wealth in retirement, schedule a free assessment with the experienced professionals at Pure Financial Advisors. Click the Free Financial Assessment banner in the podcast show notes at YourMoneyYourWealth.com or call 888-994-6257 to book yours. Meet in person at any of our locations around the country, or online via Zoom, and the Pure team will help you create a financial plan that’s to customized for your retirement needs and goals.

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.

The Derails

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