Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:00 – Age Gap Retirement Spitball: Retire Now and Aggressively Convert Before Husband Passes? (Jennifer, WA)
• 12:18 – Widow’s Tax Retirement Spitball: Convert IRA in 2025 and 2026 Since I Won’t Be Able to File Joint? (Suzanne, MI)
• 17:50 – Download the 2024 Key Financial Data Guide for free
• 18:46 – What is a Brokerage Account? How to Pay RMD Tax? Should I Consolidate My Assets? (Lu)
• 21:27 – Comment: It Doesn’t Matter Where You Pay Roth Conversion Tax From (Jim2179)
• 23:19 – Clarifying the 10 Year Rule on Inherited IRA Rollover (Invictus)
• 25:39 – Should I Do a Backdoor Roth IRA? (119Agent)
• 27:56 – Watch Harris Vs. Trump – Cancel the Noise: Economic and Market Impact of the 2024 Election webinar, Calculate a Free Financial Blueprint
• 29:00 – What Are Extended Market Index Funds? (PH)
• 30:25 – Is the 4% Rule Sustainable for 40 Plus Years of Retirement Withdrawals? (N70199)
• 34:55 – Outro: Next Week on the YMYW Podcast

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Transcription

Intro: This Week on the YMYW Podcast

Andi: Should Suzanne in Michigan do Roth conversions in 2025 and 2026 since she’s widowed and won’t be married filing jointly? How should she pay the tax on her conversions? Jennifer in Washington state is 55 and her husband is 70. Should she retire now and do aggressive Roth conversions before her husband passes? We’re talking about the widow’s tax, today on Your Money, Your Wealth® podcast number 501. Plus, answers to questions from our YouTube viewers: what’s a brokerage account? What’s a good way to pay RMD taxes? How does the 10 year rule work on inherited IRAs? What are extended market index funds? The fellas also spitball on the 4% rule for retirement withdrawals. Listen in your favorite podcast app, or watch us on YouTube or Spotify. To ask a money question or get a Retirement Spitball Analysis of your own, click the Ask Joe and Big Al link in the episode description. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Age Gap Retirement Spitball: Retire Now and Aggressively Convert Before Husband Passes? (Jennifer, WA)

We got Jennifer from Washington State writes in. “Hi, Joe. Big Al. Hoping you can give me a little spitball because retirement podcasts rarely consider my situation.” She’s a big listener to a bunch of retirement podcasts?

Al: Yeah. And they don’t really address her situation. So let’s see what we can do.

Joe: All right. “I drive a little 2018 Subaru Cross Check.”  Oh, Washington. Yeah.

Al: Yeah, that’s right.

Joe: Every Washington writer calls in with the little Subaru.

Al: That is a common vehicle. Colorado too. A lot of Subarus in Colorado.

Joe: It’s a great car.  “My drink of choice is Diet Coke.”  All right, let’s see what Jennifer’s got here.  “55, salary is $250,000. My husband is a lot older, 70!”

Al: Exclamation point.

Joe: “And he’s retired.” All right. 55 and 70. “He gets about $2500 a month from Social Security. Got $3,300,000 across all my retirement accounts.” Good for you. Jennifer.

Al: Yeah, amazing.

Joe: “All in my name because my husband lost all of his day trading.”

Al: Ooooh, sore subject there?

Joe: This old man.  Losing all our money.  No retirement podcast knows my situation.

Al: Not gonna be in his name.

Joe: “The vast majority is in my employer’s 403(b) pre-tax. My employer doesn’t allow in-plan conversions, so I can’t do Roth conversions on that money until I separate from my employer. My employer also doesn’t do the rule of 55.  So I would have to do a 72(t) tax election.” How does she know about a 72(t)?

Al: She’s been listening-

Andi: She listens to retirement podcasts.

Joe: Geez. 72(t). So what that means for everyone else-

Al: Yes. Like all of us.

Joe: – is that you can take a separate equal periodic payment out of a retirement account in avoid the 10% penalty.

Al: Yeah. So you still pay tax on it. You just don’t pay a 10% penalty.

Joe: If you’re under 59 and a half. But I read something this week is that millions of people avoid, or like, didn’t pay the 10% penalty. Billions and billions of dollars.

Al: No kidding.

Joe: And then the IRS just figured it out or something.

Al: Oh.

Joe: I didn’t read the whole article.

Al: Got it.

Joe: I probably should have, if I was going to mention it.

Al: Since you brought it up.

Joe: It was just a headline. That headline got it.

Al: Got it. Okay.

Joe: Alright.  “My expenses are $15,000 a month, but I expect that to decrease in a few years when my 18-year-old son becomes independent. I pay for all his expenses because I want him to focus on graduating from high school.”  You think he’s got a lot of expenses? Yeah. High school.

Al: There’s, it gets more expensive when they go to college.

Joe: Yeah, right.

Al: And then when they come home after college.

Joe: Yeah.  All right. He goes to college. “If he goes to college, it’ll probably be a community college, which I can afford from his $40,000 in the 529 plan. We own a house worth about $900,000 with a $400,000 mortgage and a condo worth $600,000 with no mortgage.  Here’s the problem.  Because my husband is 15 years older than me and has health problems, he’s likely to die much earlier than I will.”  Oh boy, here we go. A little morbid.

Al: Yeah, a little bit.

Joe: “When he dies, I will have to file single, which will raise my taxes a lot.

Al: Exclamation point.

Joe: She’s so concerned about taxes. “I want to retire sometime between tomorrow and age 60.” Okay, Jennifer, you’re 55.  “Fidelity Retirement Calculator says I can retire at 57 and live to 100, even with significantly worse than average economy.”  Have you ever played with the old Fidelity retirement calculator, Big Al?

Al: I, I haven’t. Have you?

Joe: No, I haven’t either. No. It’s like, how does Fidelity retirement calculator know? It’s significantly worse than average economy. I don’t even know what that means.  “But I’m not sure how it’s calculating the taxes because I will be married for part of the plan and single for part of the plan. Am I crazy for waiting to retire?”

Al: Wanting, wanting.

Joe: Oh, -“wanting to retire a year or two or should I retire immediately? We do aggressive Roth conversions before my husband passes.”

Al: Wow.  Jennifer, keep working.  Working is always a better choice, particularly-

Joe: What, is he on his deathbed?

Andi: It does say he’s got health problems, and he’s 70, and he spent all of his money on day trading.

Al: I mean, I mean, let me, let me-

Joe: Do you think she wants to probably, she’s still pissed about the day trading?

Al: I think so. A little bit. Yeah. She’s more concerned about her tax rate than her husband.

Joe: I wonder if she’s left with a condo that’s paid off and he lives in the other one with a mortgage.

Al: Yeah, let me, let me rephrase that. If you want to retire to be with your husband who’s older and has health problems, go for it. The situation looks all right, except for, you don’t have access to most of your money. So that’s a little bit more of a challenge. If you want to retire just because you want to do Roth conversions instead of not, no, that doesn’t make any sense. I mean, the longer you work, the less you’ll need to dip into your savings, which is actually not really available that much because you’re not-

Joe: Here’s how she can get availability of her savings.  She retires, she rolls the 403(b) into- she gets another job.

Al: Okay, now, okay, you still have to work.

Joe: But she can work for like a month. She rolls a 403(b) into a 401(k) that allows age 55 distribution.

Al: That’s creative. I like that. That does work.  Or you start up your own little consulting company.

Joe: Oh, that’s my other, yeah. You start a care facility for your, for your husband.

Andi: Oh gosh.

Al: Oh my. Well, there might be a need.

Joe. So she could start her own 401(k). She just rolls it right into that bad boy.

Al: So the concept is you’ve got a 401(k). You can roll your 403(b) into the 401(k). The 401(k) will have the ability to have you retire. And you’ll be 55 or older and then be able to access that money without penalty.

Joe: But here’s, here’s the crux, is that she’s 55, she wants to spend $15,000 a month, it might be a little bit lower. She needs probably $5,000,000 to $6,000,000, well, probably $4,500,000 to support that lifestyle.

Al: Yeah, but she says it’s her income’s in a few years. It’ll be expenses be lower.

Joe: Yeah, I don’t know how much lower.

Al: I don’t- she doesn’t really say, so I don’t really-

Joe: So you take away that Social Security from- she’s got a huge bridge if she retires at 55.

Al: Oh, she does.

Joe: Takes it at 67. That’s 12 years at $15,000, $180,000 for the next 12 years. That’s $2,000,000 that she’s gonna need for her living expenses plus tax. And she’s got $3,3,000,000. So you put a little bit of growth on that, I don’t- that, that math doesn’t work for me.

Al: It just, it, it all depends upon how much less she can spend when her son leaves and when that, I don’t, I don’t know how old he is. Does, does it say? 70. 70?

Al: No, no. Not husband, I mean the son.

Joe: Oh. Son’s going to 18-year-old son.

Al: Yeah.  Yeah, yeah. Yeah. Oh yeah, 18-year-old.

Joe: 18.

Al: So maybe, yeah, we need to know how much it’s reduced, but,  yeah-

Joe: It’s tight.

Al: It is.

Joe: No, don’t retire tomorrow to do Roth conversions. I get it. She’s she’s worried about the widower tax, right?

Al: It’s a valid concern.

Joe: Yeah, she’s got $3,300,000. That’s a ton of dough.

Al: Yeah. Yeah.

Joe: And so it’s all in a retirement account. And so when she pulls that out to live off of $15,000 or $10,000 a month, $120,000 a year as a single taxpayer, she’s not in the 22%, she’s in the 24%, potentially going to the 28%, so she’s going to lose a lot more potentially in taxes because of her tax bracket. So, you continue to work, you continue to save, or you can roll the money into an IRA, you can do conversions there, or into your new job’s 401(k) when you can’t work a couple paychecks, start your own business.

Al: I’m not sure, does she have any pre-tax? I mean, after-tax?

Joe: No, it’s all pre-tax.

Al: Yeah, that’s what it looks like, so it makes it harder to do a conversion too.

Joe: Yeah, you have no cash to pay the tax.

Al: Right.

Joe: Yeah, oh, this is the issue- 55 at $3,300,000, so she was a hell of a saver. So congratulations there Jennifer. But this is a problem that we see quite a bit on the show is that you know most of the savings are in a retirement account and they want to do conversions. They want to be more diversified, but then they don’t necessarily have the excess liquidity or the cash to pay the tax to do so.

Al: Right, right. So, well, so let’s just do the math. The most conservative, say $3,300,000, we’ll just say $3,000,000 at 3% distribution rate. 90 that let’s say she could pull $100,000 from the portfolio.  Disregarding the fact that it’s all in, it’s all taxable with a potential penalty, but she could pull $100,000 for – husband’s Social Security, that’s another $30,000. So $130,000, that’s probably the number instead of $180,000 that she can pull out. Maybe she could stretch it to $140,000, even $150,000, $180,000 is a bit rich if you want to retire right now.  If that’s the goal. Otherwise, you work a few more years, and you, you know, maybe even to 59 and a half or close to it, so you don’t have this problem.

Joe: Well, the Fidelity retirement calculator said 57.

Al: I understand.

Joe: All right.

Al: But, and that depends upon what your expenses are really going to be. We don’t know what that figure is.

Joe: Yeah, maybe she, yeah, her money’s locked. Right, until she retires, or she leaves that job and finds another job to roll the money into another plan. And that’s, that’s a pain in the-

Al: It is, just for that.

Joe: Just for that. Right.

Al: I’d rather, I think I’d rather do a 72(t).

Joe: Oh, that’s, that’s awful as well.

Al: I know it’s awful, because you can’t get as much as you need.

Joe: Yeah, and you can’t stop it.

Al: And now you’re, now you’re only probably I don’t know how much you get $40,000, $40,000 instead of $100,000.

Joe: Yeah. Yeah. She needs $180,000. The 72(t)’s not going to do it.

Al: I know. Right. Cause that’s based upon life expectancy, right?

Joe: Well, there’s 3 ways to calculate it, but it’s still all less than what she needs.

Al: Yes. Agreed. So, that’s a little tricky. I think you’re, if she has to retire, you either spend less or you, you get another job somewhere where you can roll the 401(k). That’s not a bad idea actually.

Joe: All right. Well, really sorry to hear about your husband. Hopefully lives a long life. And thanks for the question. All right, Jennifer, good luck.

Widow’s Tax Retirement Spitball: Convert IRA in 2025 and 2026 Since I Won’t Be Able to File Joint? (Suzanne, MI)

Joe: We got Suzanne. She writes in from Michigan. “Hey guys, and Andi. I’m 65, retired in January and recently widowed.” Oh, sorry to hear that. 65, that’s young.

Al: It is.

Joe: “My retirement accounts have been combined into my IRA that are taxable at $2,300,000 and the Roths are $200,000. I’ll be taking my husband’s Social Security about $2300 a month.  And plan to switch to mine at age 70, estimate at $3500 a month. I have very little liquid cash and I’ve been taking about $6500 pre-tax per month. I expect that going forward I’ll need about $110,000 a year pre-tax. But our estimated AGI for this year is $165,000 due to severance and vacation payout from my job.  I’m wondering if I should convert some of my taxable IRA this year, and probably in 2025, not just because I expect rates to increase in 2026, but also because I won’t be able to file jointly for 2025. If yes, how much?  Don’t have the cash to pay the tax. So any conversion would have to be grossed up for our taxes. And I’m concerned that converting too much will- converting too much will push me into higher IRMAA in a couple years when I’ll be paying more proportionately due to what I hear about the widow’s tax,  essentially higher tax rate because I’m now single. I have a ‘97 Chevy 2500 truck-“  2500 Chevy 2500 is that- am I saying that right?

Al: Yeah, I think so.

Joe: Never heard of it. Got to be 2500, ‘97  “- and 1990 Mazda Miata.” Wow. It’s 2024 today. Correct?

Al: I think so.

Joe: Look at Suzanne.  All right. Mazda Miata. My college roommate had a Mazda Miata. I could barely fit in that thing.

Al: My sister had one. They’re small.

Joe: No. Tiny. “My drink of choice is a lemon water. Thank you for your show. I’ve learned so much and thank you for your help with this question.” Well, our pleasure. Wow. It’s the widow’s – The widow’s weekend here. That’s Your Money, Your Wealth®. She can’t pay the tax, but she is filing jointly in 2024.

Al: Mm hmm.

Joe: And the estimated AGI she’s thinking for this year is gonna be $165,000. So you subtract the standard deduction for married and whatever she put into her 401(k), I don’t know I’m guessing that’s gonna be about a $120,000.

Al: Yeah, it could be $120,000ish.

Joe: Yeah, that’s 22% tax bracket.

Al: Yes, the top of the 22% for married couple is $200,000.

Joe: $200,000.

Al: Top of the 20.4% is about $380,000.  I, here’s the tough part is there’s no cash to pay the tax. I, yeah, it’s a little tough. I do like the idea of converting this year because the rates are lower. Maybe you go to the top of the 22%.

Joe: Top of the 22%, that’s all I would do.

Al: You know, that $200,000, so maybe she could do $60,000, $70,000. Something like that.

Joe: Yeah, but then you subtract out the tax.

Al: I know.

Joe: Convert $40,000 and pay $20,000 in tax.

Al: Well, I mean, you have to do the math, right? But yeah, you, you’re, you’re going to have to figure out the convert-

Yeah. Let’s just say you convert $60,000. You’re probably only going to be able to convert, have $40,000 to $45,000 go in the Roth and the rest goes to tax. That’s something we normally like to do. But given your circumstance, you might want to consider it. Plus, if you do that, you would stay in the lowest IRMAA category. So that would, that would, that wouldn’t affect that. But then after that, it gets, gets tougher, right? Because as you say, you’re going to be in single rates.

Joe: Yeah. $110,000 a year. Most of that is going to be taxed at ordinary income.  For single taxpayer, the top of the 12% tax bracket is what? $70,000?

Al: 12%. Yeah.

Joe: Or half that.

Al: Well for a single- yeah half that. For marriage $94,000, singles $47,000.

Joe: $47,000. Yeah, so $50,000 and then- Yeah, so she’s gonna be in the 22% tax bracket. Yeah moving forward- Yeah, so RMDs hit-

Al: – she is.

Joe: – and then that’s gonna pop her up. So I would def- 24% probably the math makes sense, but that’s a huge bite and tax that you have to pay the tax to pay the tax.

Al: I couldn’t do that.

Joe: I couldn’t do it either. You have to pull money out pay tax just to pay the tax man.

Al: Well, maybe here’s another way to think about it. So she’s spending $110,000.  Social Security is $28,000. So her shortfall is $982. And if she were RMD age today, the RMD would be about $92. My point is the RMD is mostly paying for expenses. So the RMD itself is not going to throw her into a higher bracket. So I like the idea of converting, but maybe you don’t have to be super aggressive.

Joe: Okay. Well, sorry about your loss, Suzanne. Enjoy that lemon water and the Chevy.

Al: That old truck and that Mazda Miata. Yeah.

Joe: Miata on the weekends with the Mazda with the top down.

Download the 2024 Key Financial Data Guide for free

Andi; Did you see that document Big Al referenced when talking about tax rates? That’s the 2024 Key Financial Data Guide. Along with their email list, and their HP12C financial calculators, that single two-sided sheet is a must-have for Joe and Big Al to be able to spitball for you. You should download a free copy for yourself from the link in the episode description. It shows at a glance this year’s tax brackets and capital gains tax rates, retirement plan contribution limits, tax on Social Security, Medicare premiums, and all the current credits, deductions, exemptions, distributions, and exclusions. All the numbers that affect your financial strategies as you plan for retirement. One listener said that, basically, this guide alone is worth the price of admission to YMYW. In other words, it is priceless! Just click the links in the description of today’s episode to download the 2024 Key Financial Data Guide, to Ask Joe and Big Al your money questions, and to share YMYW with your friends.

What is a Brokerage Account? How to Pay RMD Tax? Should I Consolidate My Assets? (Lu)

Joe: Andi, you want to kind of open this thing up for us? What are we doing here?

Andi: Now that we are doing the podcast on video on YouTube, we are getting comments like crazy, which we’ve been getting for quite some time. And so there’s a number of questions that have racked up and I thought it’d be good if we could get through some of those so that we could get answers for the folks on YouTube. Thank you for watching, by the way.

Joe: We’re answering questions from our YouTube listeners is what we’re doing.

Andi: Right. Actually, they’re YouTube viewers, but yes.

Al: Yeah, technically. They do listen also.

Joe: Or they could read.

Al: Yeah. Closed-captioned. Or transcript, yeah.

Joe: Transcript. Okay. All right.  Lu writes in, “What is a brokerage fund?” All right. “I ask, as we have to do RMD soon, and I keep hearing, roll over to a brokerage account. Is that a brokerage firm? Schwab, Fidelity, Vanguard? When it comes time to do an RMD, can you pay the required taxes with cash out of hand and then just roll over the entire amount into a brokerage account?”  Okay. Yeah. Really good question, Lu. I wonder who, where’s she hearing that from though?

Al: I don’t know. So, but she basically wants to take a required minimum distribution in stock or mutual fund shares, as opposed to cash.

Joe: It depends. So if it’s in a 401(k), the answer is no. The distribution from a 401(k) will come to cash and then from cash, you will then buy the stock.

Al: So, so the shares have to be sold inside the 401(k).

Joe: Unless you’re doing an NUA, which means that you have company stock within the 401(k), you take that and move that into a brokerage account-

Al: Another topic for another day.

Joe: So, if you have, let’s say an account, a brokerage account is yeah, Schwab, Fidelity, Vanguard. So let’s say you have your IRA at Charles Schwab and you have to take your RMD of $20,000. And so you could go in kind the $20,000 shares of XYZ mutual fund and move that directly into a brokerage account at Charles Schwab and pay tax on the $20,000. So yes, if that’s what you want to do, Lu, then you’re good to go.

Al: Yeah, and a brokerage account really is nothing more than an account outside of retirement. And a brokerage house, like Schwab, for example, Fidelity, Vanguard, they allow you, they hold the, they’re custodians, they hold the stock shares for you.

Joe: Okay. Thanks, Lu.  All right.

Al: Okay, what else we got?

Comment: It Doesn’t Matter Where You Pay Roth Conversion Tax From (Jim2179)

Joe: We got Jim. Jim2179er.  “I don’t think it matters where the tax for a conversion is paid from.  If I could pay the tax without a penalty out of my traditional IRA balance, I would convert $100,000 this year and next. At the end of the day, all that matters are the final balances. Would you be better off having $100,000 pre-tax or $70,000 Roth? That’s what matters.”  Jim, I love it.

Andi: I knew you were going to love this one.

Joe: But I don’t think sometimes the math always works out that way.

Al: Well, it depends upon your bracket and you have to be 59 and a half to do this. Without penalty.

Joe: Correct. And that’s what he said.

Al: Yep.

Joe: So what would you rather have? A $70,000 Roth or a $100,000 IRA?

Al: Me personally, I’d rather have a $70,000 Roth if those are the two choices.

Joe: Yeah, me too. Because the $70,000 is all mine. The $100,000 is going to continue to compound, tax-deferred, and then you still have to pay the tax or the toll coming out of the account.

Al: Yep.

Joe: But if you’re paying tax out of the retirement account, you just have to do the math.You pull the money out, then you have to pay tax on that distribution, then to give it to the tax man. So you’re paying tax to pay tax. I hate that.  So you don’t want to pay tax to pay the tax on the tax to pay the tax.  You get the- you get the point, right, Jim?  But yeah, in this scenario with your math here, that’s 30%. So you’re going to pay 30% all in in tax as you withhold?  Yeah, I mean, sure, I think there’s a lot more to this, but-

Al: But that’s. If we’re in a bubble, if we’re in the YouTube bubble, I’ll buy it.  That’s all that matters, Joe.

Clarifying the 10 Year Rule on Inherited IRA Rollover (Invictus)

Joe: Okay, we get Invictus.  Is that right, Invictus?

Andi: That’s correct. Yes, Invictus.

Joe: “If we roll over our inherited IRA, there isn’t a 10-year rule. The 10-year rule is only for withdrawals, correct? As a child to a passed parent.”  10-year rule. So he’s a child, so his parents passed. Depends on how old is this child, I wonder, Invictus.

Al: Well, probably old enough to write our show, so I’m gonna assume-

Andi: I believe Invictus is 35. Invictus comments quite frequently, and I believe he said that in another comment.

Al: He’s how old, 35?

Andi: 35.

Al: Okay. There you go. Not a minor.

Joe: Does he qualify for the normal stretch?  I don’t believe so.

Al: Nope.

Joe: I don’t think so. So the 10-year rule is only for withdrawals, correct? The 10-year rule means that the money has to come out of the inherited IRA within 10 years.

Al: Correct. So that would be if you inherit an IRA and, and it’s not from your spouse. Non-spousal, maybe is another way to say that.

Joe: Correct.

Al: So from your parent. And there’s a few exceptions. If you’re a minor or if you’re 10 years- Less than 10 years younger than the person that passed away –

Joe: More than 10 years or less than 10 years?

Al: 10 years or less. Let me, let me, let me say it that way.

Joe: Yeah.  So, he doesn’t have to take an RMD in for the next 10 years but depends on the required beginning date.

Al: Yeah. Depends upon who, who passed away.

Joe: If it was your parent, how old was your parent when, when, when your parent passed, were they, yeah already taking RMDs or have they not taken RMDs yet?

Al: Yeah, and if your parent, the original IRA holder, if they were taking RMDs, you have to take an annual RMD yourself based upon your life expectancy, but it still all has to come out within 10 years.

Joe: How about that? Did you get all that?

Al: I get the question.

Joe: These rules are so stupid.

Al: I get the question because when you look up the rule, it is so complicated. You need like a Venn diagram because if this, that, if that, this, if this, that, if that, this, and then you still don’t know what you’re doing.

Should I Do a Backdoor Roth IRA? (119Agent)

Joe: Okay, now let’s go to the next one here. “After 20 years, age 24 and 44-“  Okay, after 20 years, so from age 24 to 44 “-I  only had access to a traditional 401(k), which I maxed out every year. Now I’m 44, I have access to a Roth 401(k), and I will max that out every year. I make too much for a Roth IRA, and I’m considering doing a backdoor Roth on some of my existing 401(k), but it would be taxed at the 35% marginal tax rate. I’m wondering if my withdrawal miss post-tax and deferred would be enough to keep my taxes down in retirement.  I’m wondering if my withdrawal mix-“ Okay. I don’t-  When he retires? he’s 44. He wants to work for how-?

Al: He’s thinking ahead. I think.

Joe: He doesn’t have enough in- And so let’s say he works until 64 for another 20 years.

Al: Yeah. And he’s got all this money in Roth, I guess, as well as deferred.

Joe: I think, yes, if you have diversification. So the concept of tax diversification is to have money in Roth IRAs, in your pre-tax 401(k)s, and then some money in a brokerage account. So as you’re taking distributions from the account, it’s all not locked in your retirement account because then you’re just stuck at ordinary income rates.

And the more money that you take out, let’s say for trips or vacations or for inflation or whatever the case may be, the more dollars that come out, the more tax potentially you’re going to pay. So, if you have money in different areas, you can control your tax brackets more easily because you can pull your retirement account and stay in whatever bracket, and then you can pull from your brokerage account or Roth account and stay in those lower rates. So, having a diverse mix of Roth and 401(k) dollars is key. He’s 44, so he’s still very young,  and if he’s going to work for the next 20 years, yeah, max out all Roth and go from there.

Al: Yeah, I like that. And the reason why this works, it’s not like you’re going to take half out of one and half out of the other. You’re going to fill up whatever tax bracket you’re in, probably with the deferred part, pay taxes on and maybe do the Roth for the balance. Of course, there’s a lot of variations on this, but that’s the concept, right? You can control your taxes by how much you take out of each account.

Watch Harris Vs. Trump – Cancel the Noise: Economic and Market Impact of the 2024 Election webinar, Calculate a Free Financial Blueprint

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What Are Extended Market Index Funds? (PH)

Joe: Let’s see. “Hi, Andi, Big Al and all-knowing Joe.”

Al: Ooh-

Andi: He knows how to pat you on the back.

Al: This would be a question for you, Joe.

Joe: I love it. This would, this would make every Monday of mine so much happier, if I just read this right when I get up.

Al: You want me to read it? In my sermon?

Joe: Yes, please do.

Al: All knowing?

Joe: “I have a question that I would love if you maybe touch on. “What are extended market index funds? Why should we have or not have them in our portfolios?”

Al: Okay. All knowing Joe.

Joe: No clue.  No idea.

Al: Let me tell you what extended market funds are.

Joe: Oh, you’ve done some research here. See, I don’t read any of this stuff. And Alan spends like months.

Al: I have no other job.  Remember? That’s what you told me.

Joe: An extended market- I can make something up.

Al: No, well, here’s what it is. Extended market just simply means it’s an index fund that favors like smaller and value- things that are not in the S&P 500.

Joe: Who made that up?

Al: I don’t know. But that’s, that’s what it is.

Joe: So it’s like small cap, emerging markets.

Al: Yes. I mean, they already have it.

Joe: Okay.  I understand.

Al: Yep. Yeah.

Joe: So and extended. So, and extended outside of the, the standard core market.

Al: Or you could, or you could do the Walsh or 2000 or 5000 or, you know, get the same thing.

Joe: Russell. Okay.

Al: Yep. Yeah.

Joe: So, yeah. All right. Well, it’s the All-Knowing Al.

Is the 4% Rule Sustainable for 40 Plus Years of Retirement Withdrawals? (N70199)

Joe: All right. We got one more? What’s this? Yeah. All right. So, “Perhaps I missed the nuance here, but it makes me a little nervous that there was some hesitation in your voice that taking less than 4% distribution would be sustainable for 40 plus years.”

Andi: This was specific to a question where somebody asked whether or not they could afford to have a 40 year retirement. But the rest of their question is, is very, important here.

Al: Okay.

Joe: “I was under the impression that less than 4% might be on the conservative side, considering that other financial advisors might recommend as sustainable. I do not appreciate that you mentioned that-“

Andi: I do appreciate-

Joe: Oh, I, I thought this was going to be a negative Nancy. “I do appreciate that you mentioned that future market performance and lack thereof can make a major factor in the long-term success of the retirement. However, I also thought that the longer the span of time, the more chance you would take advantage of averages in market gains. Thanks for the great content.” This is just a comment.

Andi: Yep.

Joe: But 40-year retirement at 4%, yeah, you’re probably right that you, over that time period, you’re going to receive the market averages.  But averages don’t mean anything. They don’t.  It’s just math. As you’re taking dollars out of your account, you’re retired, so that means there’s a demand for the portfolio. So as you’re accumulating, averages are great. Some years you get 5%. Some years you get -7%, some years you get +20% and so on and so forth. And over your 10, 20 year period, let’s say if you average 8%, you average 8%. It doesn’t matter when those or when those market returns hit the account, you average 8% because you weren’t taking dollars from it. But what happens, it’s called reverse dollar cost averaging. When you start taking dollars out over a 40-year time period, averages mean nothing. Because let’s say if you take out your 4%, which Al and I thought would be more aggressive, or we didn’t feel comfortable with that. Over a 40-year time period. Maybe it’s closer to 3%. So let’s say you have $1,000,000 hypothetically and you take 3% out or $30,000 out of the account, but then it drops 20%.  All right. So if it drops 20% and then the next year it gains 20% most people think hey I got my money back and I only took 3% out so I’m fine. Al, if you lose 20%, how much do you need to get your money back? It’s not 20%.

Al: It’s about 25%, I think.

Joe: Because you’re working at a lower balance. 20% of $1,000,000 is not, right, is at $800,000, or, right?

Al: Yeah, at 20% of $800,000.

Joe: 20% of $800,000.

Al: $160,000.

Joe: Is not enough.

Al: You’re not there.

Joe: And then you’re also taking your $30,000 out of the account to live off of. So you need a lot higher rate of return to get the account back up. So. That’s why you look at a lower distribution rate. Now, if markets go up for, you know, a consistent period of time, 3, 4, 5 years, all right, you could take probably a little bit more. Maybe you stuff a little bit more into cash where you can kind of cushion your lifestyle. That’s why retirement income planning is so different than like accumulation because you have all sorts of different types of risks. That’s called sequence of return risk. So I don’t know. I just babbled on.

Al: I think you did pretty well.  I’ll just add one more quick thing. And that, and that is this, when we talk about the 4% rule or 3%, if you retire younger, this is just a guideline to figure out if you’re close to being on track. The real truth is when you get to retirement and you’re pulling money out, it should be a more dynamic approach. Meaning it’s something you look at every year, depending upon what the market has done, what you want to spend, what you’re invested in. There’s a lot of things that can affect this. The 4% rule is not necessarily that magical. It’s just a guideline to tell you if you’re kind of on track.

Joe: Is that it for us today?

Andi: That is it for you Joe. Yes. Thank you very much for answering all those- all of our YouTube viewers are going to appreciate it.

Joe: All right.

Al: Awesome.

Joe: We will see you all next time folks. Show’s called Your Mwa- what? Your Money, Your…

Al: Your Money, Your Wealth®?

Joe: Oh, man, I’m tired.

Outro: Next Week on the YMYW Podcast

Andi: This show – that is, Your Money, Your Wealth® – wouldn’t be a show without you, and we love that you’re a part of it. Bauer and Lainey in Illinois, Brad in Michigan, N&N in San Francisco, and Elizabeth in Connecticut, Joe and Big Al spitball for you next week in episode 502. Your Money, Your Wealth is your podcast! When you share YMYW with your friends and leave your honest reviews, comments, and ratings for Your Money, Your Wealth on YouTube, Apple Podcasts, Spotify, and the like, it helps us reach more listeners and viewers like you.

To really make the most of your money and your wealth in retirement, schedule a Free Financial Assessment with the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors. They’ll go beyond a simple spitball to provide you with a comprehensive analysis of your income, expenses, assets, and debts so you have a clear roadmap towards your retirement goals They’ll help you understand your comfort level with investment risk to craft a plan with you that’s aligned with your needs, goals, and risk tolerance. Click the Free Assessment link in the episode description to schedule your financial assessment today.

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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