Show Notes

• (00:58) Early 50s, Teachers’ Pensions. Can We Retire Early in 1.5 or 2.5 Years? (Manley, Nashville)
• (08:17) How to Choose Pension Options for Early Retirement (Paul, Houston, TX)
• (18:25) Is CalSTRS Teacher’s Pension Enough in Retirement? (Greg, Southern California)
• (22:02) Am I In Good Shape to Retire in 2024? (Bucky from the Midwest)
• (23:32) Pension Fringe Benefits vs. Brokerage Account Returns (Keaton Money, CO)
• (32:00) Can We Retire at Age 59? (Henry Karl Kittensburg III, Western OH)
• (40:52) How to Reduce Taxes On a Headcount Reduction Retirement Lump Sum Payout? (Big Paw, mid-Atlantic state)
• (50:50) The Derails

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Transcription

Andi: Joe and Big Al spitball on bridging the gap to your retirement income when there’s a pension in the mix, today on Your Money, Your Wealth® podcast 456. Manley and his wife are in their early 50s and have teacher’s pensions. Can they retire early in 2 and a half, or even one and a half years? Can Bucky in the Midwest retire in 2024, and can Henry Karl Kittensburg III retire in about 3 years, with all the milk his heart desires? How should Paul in Houston choose his pension options for early retirement? Is Greg in Southern California’s CalSTRS teacher’s pension enough for his retirement? Keaton Money in Colorado needs the fellas to help him decide between his pension’s fringe benefits and brokerage account returns, and big Paw in a mid-Atlantic state asks the fellas to spitball on how to reduce his taxes on an impending headcount reduction lump sum payout. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Early 50s, Teachers’ Pensions. Can We Retire Early in 1.5 or 2.5 Years? (Manley, Nashville)

Joe:  Let’s see. We got Manley from Nashville, Tennessee he goes, “Hey, Joe, Big Al, Andi. My name is Manley. I live in Nashville, Tennessee. I drive a 2023 Ford Bronco. My wife drives a 2004 Nissan Xterra. We have no pets. However, we have two children, freshman in college and a junior in high school. No longer drink, but if I did, it’d be a little Gentleman Jack neat.” Sounds good. “I found your podcast three weeks ago, and I’m obsessed with it.” I feel sorry for you, Manley. “My wife and I have been teachers our entire career. Our individual salary ranges have been $24,000 to $88,000. We’ve been married for a little over 23 years and have benefited from a generous inheritance of $70, 000 and were gifted $13, 000 early in our marriage to purchase a vehicle. We have always lived within our means. We have been tracking our spending and writing a monthly budget since our sixth month of marriage. I’m 50 and my wife is 53. No current health issues or concerns. And we want to plan on meeting our needs to our nineties.” So, all right. We got salaries; Manley’s $88,000, wife’s $85,000. Current annual expenses are – I’m just going to call it $100,000 a year.

Al: I think that’s good. That shows he’s doing his budget. He gave us the exact figure.

Joe: $97, 680. “College expenses paid through 529 College Savings Plan, then merit scholarships, current yearly investment contributions, Roth IRAs and Roth 401(k)s of $24, 875. Investment allocations, 90% are in equities, 10% bonds. Combined investments, retirement accounts of $865,000, brokerage savings $85,000, home $1.2 million of equity. Social security, $3,000 at age 67, wife is $2,700 at age 67. Pension, I’ll be eligible to draw my full pension, 30 years of service at the end of 2025. My estimated monthly pension without survivor benefits of June 2025 would be $3,500 a month. My pension and my wife’s pension receive a COLA every year. She will receive approximately $1,500 a month. Retirement date if possible no later than June of 2026.” So what’s that? We got a year and a half?

Al: June 2026. Yeah. Two, actually, three years. Well, it’s just under three.

Joe: 2023, yeah, so we got 24, 25, 2 1/2 years.

Al: Yeah, 2 1/2 years.

Joe: All right, so yearly desired income at retirement. “We would like an annual income of$84,000 to $100,000 a year. I think we can make it on $84,000 because we would no longer be contributing to our investment accounts.” All right, you got all that down, Big Al?

Al: I do.

Joe: Okay, they want to spend $100,000. They want to retire in 2 ½ years. They have roughly, call it, $900,000 in investment accounts

Al: and $60,000 of pension, call it $65,000 in Social Security.

Joe: Okay, so it’s looking pretty good so far.

Al: I think so.

Joe: All right, first question for spitball. “Would we like to retire as soon as June 2025? But we are willing to work part time. My wife’s parents are 82 and 85 respectively, and her father is not in good health. My parents are in their mid 70s and in good health. We would like to enjoy time with our parents while we are living. Based on the information shared, what do you see as the best option? If we retire in June 2025 or 26, how much part time income would we need? Number two, if we did not want to work part time, what would be the earliest year we could retire?” These are very specific questions by Manley, by the way.

Al: They are. They are.

Andi: This is a question 1A and 1B, and then there’s a second one that’s got 2A.

Joe: Geez.

Al: Yeah. And this is one, I don’t do this very often. I edited this one because it was three pages long and I made it just over one. So sorry, Manley, if I deleted some important stuff, but we only have so much time.

Joe: “Related to the spitball analysis at the end of our lives, considering past stock market performance, what our nest egg at that time of retirement have grown, or would we be spending this down as we age? Again, I really enjoy the show and the love in the levity you bring to investing in retirement planning. Keep up the good work.” All right. So 2 ½ years would like to retire in 1 ½ years. Can he do it? He’s 50 some.

Al: Yeah, he’s 50. So let’s say he’s 52. Wife will be, let’s call it 54, 55.

Joe: Okay. And so he could collect his pension, 30 years of service, $3,500. Wife gets $1,500. So that’s $4,500. So we have to come up with another $40,000 a year.

Al: Correct. And if you take 40…

Joe: Plus tax

Al: Yeah, if we take 40 from the portfolio, let’s see what that is,

Joe: About 6%

Al: 40 into 9, um, it’s a, no it’s about 4 ½.

Joe: Would it, wouldn’t 40 into 865?

Al: I did 40 into 900,000.

Joe: Okay. So 4 ½, 5%?

Al: Yeah, probably. Yeah, call it five 5% which is pretty rich. In your fifties, you know, we kind of would like you to be closer to 3%, but you’ve got social security coming, although not for a while. So then it’s just a matter of trying not to deplete your portfolio while you finally make it to social security. So if it were me, Joe, I would probably – I just am going to be really simple. I want $100,000. I got $60,000 coming in. I’d want part time work of $40,000, to keep the portfolio working. That’s what I would do.

Joe: Yeah. I agree. 100%. They’re 50 years old. I get, you want to spend some time with the fam, but between the two of them, they need to make $40,000, $20,000 a pop.

Al: I think so. And then, as long as you’re comfortable with that, I think this works. I think you do that for a while though. Right. Until you hit social security. I mean, you may not have to wait all the way to social security because your portfolio will keep growing. Right. But anyway, I just, in my early 50’s I’d rather not be dipping into savings, especially since it’s a good figure. It’s $900,000, but it’s also, you know, based upon their spending of $100,000 there’s not a lot of wiggle room here.

Joe: Yep. I mean, super close. Because you’re building a bridge from 53 of Manley’s age to his age, 67. I mean, that’s a pretty big bridge. I agree with you, I would wanna let that grow because the $900,000 could grow to $2 million by the time they pull it. And then yeah, they have a little bit more comfort there. And if he doesn’t mind working part-time or maybe just one of ’em works part-time ’cause they,

Joe: or half-time or whatever.

Al: Yeah or whatever. That’s what I would do. And whether you retire at 25 or 26, I don’t care, either one works. Just make sure you back-bill with some part-time income.

Joe: All right, Manley. Hey, appreciate you listening. I’m glad you found us. Hopefully this helps.

How to Choose Pension Options for Early Retirement (Paul, Houston, TX)

Joe: We got Paul from Houston, Texas, he writes in. He goes, “Hey, my wife and I are 52 y’all. We have two fantastic boys, 20 and 17. I drive a 2018 Jeep Wrangler. My wife drives a 2022 hybrid Jeep Wrangler. We’d love to visit micro-breweries.” Of course you do. You have a hybrid. “And sample different beers. I prefer lagers and hazy IPAs. She prefers wits and hefeweizens. We love to travel to different cities and explore the local beers.” That’s a good time.

Al: You know what? Sign me up. That sounds good.

Joe: “My wife has a pension and will be fully vested in three years at 55. This pension gives us two options. We take the traditional pension payout at $66,000 per year, or if we take the cash value, $1.3 million. If we use the 4% rule, this would generate around $55,000 per year. I’m anticipating that this would still have principal remaining. If we take the cash value of the pension, we could continue to work two or three years and allow the cash pension to grow for a few more years. This would push our retirement back to 55 to nearly 58 years old. It seems like the main difference between the two options would be the amount of principal left to our heirs.
Question. How do we weigh the options of the cash value and the traditional pension payout? Please share your wisdom and thoughts on leaving some of the money to the heirs. Am I overlooking something about my pension option? Additional information, we have about $2 million in assets for retirement.” That’s above and beyond the pension.

Al: Yeah, I think so.

Joe: Traditional 401(k) and IRA balances of $1.5 million, Roth $120,000, non-qualified $300,000. Full Social Security will be $35,000 and $40,000 per year when we turn 67. Current household income is around $300,000. We’re planning on needing $200,000 a year in retirement which should allow for a significant amount of travel and sample beers.” All right.

Al: I like it. Why don’t we start with the pension? So either you get $66,000 a year or you get a cash value of $1.3 million and 4% roll would pay out about $55,000. So that’s the first question. I guess the follow up question I would have is does the pension have a cost of living adjustment? That would be a pretty important thing to know. Or is it fixed?

Joe: I’m guessing it’s fixed.

Al: So if it’s fixed, I would more likely probably take the payout. I would get the distribution, I’d have access to the funds, I could do Roth conversions if I felt like it.

Joe: You would take the lump sum?

Al: Probably.

Joe: Is that what you said?

Al: Yeah.

Joe: Instead of the pension payout.

Al: Yeah, exactly.

Joe: Well, which one are you taking? Are you taking the pension payout or are you taking the lump sum?

Al: The lump sum. That’s what I just said.

Joe: Well, you said payout.

Al: Oh, the payout of the lump sum. That’s what I meant. You’re right, I did confuse it.

Joe: All right.

Al: Then how about you? I mean, you’ll probably look at it differently than me. What would you do?

Joe: No, no, I think, well, he has to take a look at the internal rate of return of the cash flows is really how you determine it. And it’s going to be based on life expectancy. So how long does he have to live? Is he in good health? Does he have longevity? Because if you take the income, If he takes the pension payment and he lives a long time, he’s going to receive a lot more money potentially from the overall pension, right? It’s just an internal rate of return calculation. So it’s just going to be based on assumptions. How old is he now? When is he going to take it? And then how long does he expect to live? If he expects to live a long time, his rate of return is going to be higher. If he lives till normal life expectancy, it’s probably going to be lower. So it depends on what he wants to anticipate is a good rate of return on investment. So I think that with every investment you look at is what’s, what is your expectation of that investment and what do you want it to do and what do you think is realistic for your overall situation? Are you looking for 10% rates of return or are you satisfied with a 4 ½ or 3% rate of return?

So I think first of all you look at What’s the internal rate of return, and is that a good return given what his goals are? And it sounds like he has plenty of assets to do the things that he wants to do.

Al: I’m with you. I’ll go back to my original question. Is there a cost of living adjustment? If there isn’t, it’s a fixed number that then I would more likely take the lump sum because then that could grow. You could actually have increases in your monthly amount. Now, the problem with that is you have to self manage. Now, maybe he’s comfortable with that. He already has a couple million dollars in assets for retirement. So if he’s comfortable with that, on the other hand, if he’s not that comfortable investing, maybe you’d go for the sure thing, right? Which is the pension. And so then at least you’re not in charge of your entire destiny. For me, that’s one of the first questions I would ask, is there a cost of living adjustment? Cause to me, that makes a pretty big difference in what this is going to look like over the long term. But you’re right Joe, which is if you’ve got a shorter life expectancy, then of course you would take the lump sum because the pension is going to stop when you both pass away.

Joe: But if I look at the numbers now, he wants to spend $200,000 a year. He wants to retire at 55. So if let’s just say he takes the pension, he still needs $130,000 a year at 55. So if I look at $130,000, he needs $4 million.

Al: Yeah, that’s a 6.5% distribution rate. So he’s not there. On the other hand, he’s got about $75,000 a year coming in Social Security, albeit it’s quite a ways out.

Joe: Yeah, it’s another huge bridge.

Al: Yeah,and

Joe: I don’t think he’s got enough liquid assets. Sorry to interrupt.

Al: Yes, that was gonna be another point, right? I agree with that. I don’t think this works at $200,000 a year. That’s something small, like here’s probably the math that you would do is pension. If you do pension, let’s just go with that right now, $66,000 and you got $2 million. You’re 55. Let’s go at 3% distribution rate. Just figure, figure a number $60,000 plus $66,000, $126,000. That’s your number. Roughly. Maybe a little higher because social security is coming, you know, because you’ve got a big income stream coming.

Joe: Maybe $150,000 is what he can spend.

Al: Maybe tops, right? I would say that’s tops, you know, the safer bet if you really, so you got basically at a 3% distribution rate, we’ll call it $125,000. So you need another $75,000 somehow if you want to spend $200,000. So that’s your part time income. Or you just, if you can figure out how to do this and sample beers on more of a budget, then you could do it at $125,000.

Joe: Yeah. But I see his point. He’s got $2 million earmarked for retirement. He’s thinking, Hey, I got another $1.3 million vested in my wife’s pension, so now we got $3.5 million dollars. Oh, I only wanna spend $200,000, you know, $200,000 a year I should be good. But he’s retiring at 55 or even 58. That money’s got to last 30-40 years. With that large of distribution from 58 to 68, 10 years of pulling $150,000 out of a couple of million Even though a couple of millions a ton of money But if that market turns it’s all ordinary income too just about. The pension is going to be taxed at high rates. The 401(k)s IRAs are all taxed at ordinary income. He’s got little diversification from a tax perspective. So I think what Paul needs to be doing is first of all, mapping things out and looking at that bridge from when the pension comes in or when he fully wants to retire, to bridge it out to full retirement age, where he can collect his social security and then kind of back test it to figure out what he needs. He probably needs another million dollars or spends less, right? I think $150,000 is probably the number that he can spend.

Al: Yeah. Or just add some part time income. Agree. And the other thing people miss Joe is that $200,000 of expenses with inflation keeps going up. Right?

Joe: Yeah. Well, then you got to pay tax on that too, Al. That’s another $40- $50,000.

Al: Of course. Let’s just say he retires at 58. Let’s call it six years from now. Now that the $200,000 expense is really $240,000. You have to make sure you don’t have this fixed number for expenses as you’re calculating everything else with growth rates and rates of return. You have to make sure you inflate your expenses by the rate of inflation.

Joe: Don’t get us wrong, Paul. You’re doing a hell of a job. Congratulations. You got a great nest egg. You have another nest egg coming from a form of pension. $200,000 might be a little bit rich, but Houston. I almost died in Houston.

Andi: Oh, because of the heat playing golf?

Joe: Yes, playing golf in Houston – I wasn’t drinking IPAs either. If I would’ve drank IPAs I would’ve died. I definitely would’ve had a stroke.

Al: Yeah you wouldn’t be here, right? Almost dehydrated.

Joe: Yeah. But the cost of living in Houston is a little bit cheaper than – 200 goes a pretty long way in Houston than some other areas.

Al: Oh sure.

Andi: How will you generate income in retirement? After a lifetime of saving, making the transition to retirement means facing a whole new set of challenges.  As you plan today, you face a very different retirement landscape than the ones your parents saw! We’re living longer and may need to rely on that retirement income for much longer. Go to the podcast show notes and download our free Retirement Income Strategies Guide, newly updated for 2023. It explains how to answer 5 questions you need to ask yourself before you retire. Learn about the sources of income available for you in retirement, how to maximize your Social Security benefits, and how to develop a retirement income strategy that meets your needs. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes and download the Retirement Income Strategies Guide for free. 

Is CalSTRS Teacher’s Pension Enough in Retirement? (Greg, Southern California)

Joe: Got Greg from Southern California writing and he goes, “Hey, I don’t hear too much about retiring as a teacher with the CalSTRS pension and whether or not it’s enough.” CalSTRS, California State Teachers Retirement System.

Al: Yes.

Joe: If we are keeping score. CalSTRS encourages saving more on our own through the pension 403(b) program or some other avenue. But my wife and I feel like we’d be just fine on the pension alone. I should retire with around $8,300 a month gross if I take the 75% option, that will leave my wife with plenty of monthly payout for the rest of the life if I kick the bucket first. I also have a supplemental defined benefit plan that is currently worth $62,000. That can either be taken as a lump sum or a short-term annuity upon retirement. Our house will be paid for by then when I retire. Uh, we currently have about $18,000 in savings. And we are not quite fully funding our ROTHs that currently have a combined worth of $79,000. Also, we have a 403(b), which I no longer fund, worth $100,000. Seems like we should be just fine, right? We do love to travel, but don’t carry debt. Seems like we can live comfortably on $8,300 a month, and the extra can be used for special things and blessing others. The only challenge is if I retire before 59, seven years away, my wife is two years younger than me. So we’ll have to cover her healthcare from 63 to 65. My district’s healthcare coverage will end once I hit Medicare. Your spitball is greatly appreciated. Love the show. Greg.” SoCal teacher, $8,300 bucks.

Al: Yeah, that’s fantastic.

Joe: Real simple answer. Yeah. I mean, if you spend less than what comes in.

Al: Yeah. So to break that down by year, that’s $100,000 a year in pension, $100,000 a year in expenses. And presumably that covers taxes, I’m guessing, but we don’t know that for sure. And then currently about $250,000 of other assets for extras. Plus, I guess if he’s going to work another, at least seven years or well, he said he could retire before 59. So there’s going to be more growth, more savings, but with that much pension, it’s not like you have to do a ton. Right. So, I mean, based upon the numbers that we have, it, yeah, it looks just fine.

Joe: Yeah. Congrats, you have a giant pension, $100,000 fixed income pension. That’s like having a 401(k) plan worth over $2 million.

Al: Yeah. Or more, maybe $2.5 million.

Joe: $2.5 million. We talk about pensions all the time. Maybe we don’t get a lot of teachers that write in. I think he’s great. If he’s going to spend less, $83,000 fixed income, he could blow through that $200,000 in like a year, who cares! If he can’t live off $100,000…He’s already living probably a lot less than that.

Al: Anyway, the math that we just went through, just for, if you’re keeping score is if he had $2.5 million in a retirement account at a 4% distribution rate, that’s $100,000. So what we’re saying is Greg doesn’t have $2.5 million, but it’s almost like he had $2.5 million because it’s producing $100,000 of income. That’s where we get that math.

Joe: Okay. Great.

Am I In Good Shape to Retire in 2024? (Bucky from the Midwest)

Andi: Let’s do Bucky in the Midwest.

Joe: Okay, Bucky. “I’m curious if I’m in good shape to retire at age 60. Wife’s 58. Drive a 10 year old Audit.”

Andi: I think that’s supposed to be Audi. His email program probably corrected that to audit.

Joe: “A drink of choice, red wine. He’s got an annual salary of $350,000; IRAs and 401(k)s of $3.5 million; brokerage of $4.5 million.” Yeah, Bucky. I think you’re fine.

Al: End of question! LOL

Joe: Whatever. My Social Security is going to be $2 million. Let’s see. “We’ll receive pensions of $4,000 a month. Social Security is $4,000 a month at age 66. Wife is $1,500, home equities are $1.2 million. No other expenses or liabilities. Questions: I want to maintain this lifestyle. Can I do it and retire in 2024?” So he wants to maintain what kind of lifestyle?

Al: Well, we don’t know, but it’s something probably less than $350,000 because he’s saving. So let’s just say $300,000 just to pick a number, right? And if he takes the $8 million times 4%, that’s already $320,000. If you take pension and social security, which don’t start right away, but that’s another, I don’t know, $110,000 right there. So, I mean, no matter how you slice this. It’s looking pretty good.

Joe: Bucky, you’re good. Congrats.

Pension Fringe Benefits vs. Brokerage Account Returns (Keaton Money, CO)

Andi: I think last month we had Brent Money. Now we got Keaton Money. I wonder if they’re a family.

Joe: I don’t know. He’s from Colorado. Keaton Money, Colorado. “Hi Andi, Joe, Big Al, been listening to your show for over a year now. And I have to say it is by far the most entertaining financial podcast I have ever found.” Wow. He hasn’t really looked very far.

Al: It was probably ours and one other.

Joe: “Important stuff first. Wifey, she’s 32, yo. I’m 33, yo. Been married nine years. In her free time, she is studying to be a sommelier.

Andi/Joe: Sommelier.

Al: Yeah, that’s the second time we’ve seen that word in the last month.

Joe: Yeah, a lot of people like to taste their wines. “And our drink of choice is a little glass of Cabernet Sauvignon. I like a good coin style margarita. Or a little local IPA. We have three rescue cats and a big goofy Bernese Mountain Dog.” All right, My wife is a physician and absolutely killing the game. She brings home $225,000 a year, maxes out her 401(k) each year, First with pre tax dollars to get the employer match in the rest of Roth contributions. I work for the state, and make $80,000. I max my 401(k) Roth 457s. We also invest a small, but growing amount in a brokerage account at Vanguard. My question is regarding my mandatory 401(a) defined benefit plan. I am no longer contributing to Social Security, although I did manage to work my 40 quarters at a SS job, so I’ll receive a modest benefit. I just hit one year with the state. And as such, I have the option to either remain in the pension plan, where I will contribute the 11% of my salary, with a 11% match by the state, or leave the plan in exchange for a self directed brokerage account, where my mandatory contribution would be 8%, but the state would kick in 12%. After five years, I’m vested at 50% of the pension matching dollars, should I decide to cash out rollover instead of taking the lifetime benefit or 100% in the self directed matching dollars. Does it take a genius to see that it makes dollar sense to go with the self directed brokerage? At age 65, that will have grown to a much larger sum than the pension will ever pay out. But am I being too hasty and failing to quantify the other benefits that the pension offers? Obviously. Aside from the guaranteed income stream, it has other features such as survivor benefits, disability benefits, and health benefits that supplements Medicare. Is it worth giving up some investment return for the sake of diversification in fringe benefits? Been listening long enough to know you don’t give advice. But we’ll love to hear your spitball.” All right, interesting. This is an interesting question.

Al: It is. So, in the first case, the pension between him and the state, it’s 22%. The second case, between him and the state, it’s 20%. So, it’s actually a lower amount going into the Self directed.

Joe: Because he’s putting in 11% they’re matching 11 or he can put in a lower amount on his side and they’ll still

Al: They’ll put in more but overall it’s less.

Joe: Correct.

Al: So then it depends upon what is the rate of return? I mean what sort of investments are in the pension, which we don’t know. So to me, it’s not obvious that one is going to be better than the others at least from the information presented.

Joe: We are totally flying blind

Al: Yeah. Just off the surface, the pension is going to get more money per year. So theoretically similar investments, same, same, the pension would have more dollars. And so potentially you could have a higher lump sum if that’s the way you decide to go, right?

Joe: Because you’re saving more into the overall plan.

Al: Yeah, but more is coming out of your own pocket. So maybe you have to consider that in, but yeah, we certainly know that many state pension plans have great benefits like health insurance for life and things like that, that I think that’s the question. What do you think about that? You don’t want to discount that benefit.

Joe: Well, his wife is a physician and killing it.

Al: So maybe it doesn’t matter.

Joe: She makes three times as much as our boy here, Keaton Money.

Al: And she’s maxing out everything.

Joe: She’s putting money into the Roth plan. She’s going to continue to save. They’re going to continue to build non-qualified dollars as she builds her career. She’s 32 years old. In 10 years She’s probably gonna be making a lot more than that. They’ll be saving a lot more than that Doesn’t make sense to have a guaranteed pension income when they retire, as a floor. It may, because there’s probably going to be a lot of different liquid assets, but we don’t know. I mean, we’re comparing basically what you’re saving into the self-directed account versus a pension. That’s all we have.

Al: And there’s more going into the pension. So it’s not obvious to us that the brokerage is better than the pension. In fact, it seems the reverse. Now on the other hand, maybe the pension, maybe it’s really conservative investments, but we just don’t know.

Joe: Maybe it’s in a fixed account that’s growing exponentially. But I was just going to say, Hey, if you save into this, you’re going to receive 85% of your income or 70% of your income, 60% of your income, or we’re going to look at your highest five years. Five years before you retire, and you’re going to receive a percentage of that, depending on how many years of service that you put in with the state, right? It’s going to be a calculation like that, but what is the COLA that he receives on his income? I don’t know. Does it include health benefits? So there’s other things that you have to consider here. Which is a really good question.

Al: Yeah. It is a good question

Joe: He’s 32, he’s not going to get the pension for another 20 years. So doesn’t it make sense. To maybe be self directed, he can take on more risk. He still gets the match. If he’s going to work for the state for a while, he could continue to build up that nest egg. Um, and then he could control his own destiny. I don’t know. I mean, I like both options. But I want to know what the calculation is with the pension. Is it high five? Is it your highest last year? Is it, if you put in 30 years of service, is it 2% at 55? You know, so there’s all different ways on how you calculate the defined benefit, depending on what that pension plan is.

Al: Yeah, maybe something else, Joe, is Keaton spends a long sentence telling us what happens after five years in terms of vesting.

Joe: Yeah, he doesn’t want to stay there.

Al: Well, that’s what I’m thinking. If you think, you know, you had a year in, you don’t even know if you can make it a five, then go for the self-directed. It’s got better, better vesting.

Joe: I’ve been here a year, and I got an option for the pension, but the vesting schedule, in five years, if he’s not going to stick around, if he’s out of there in five years, then absolutely, you know, the answer, take the self-directed.

Al: 100%. Or even if you’re thinking that’s a reasonable possibility, then there’s no question. Take the self-directed.

Joe: All right, buddy.

Andi: You can put your pension options into our free retirement calculator and compare to see how they change your retirement outlook – just go to at EASIretirement.com, that’s EASIretirement.com. Create a login, enter your income, your pension lump sum or monthly payments and any survivor benefit, your retirement and other savings, and your monthly expenses, and see how things look. E-A-S-I stands for education, assessment, strategy, implementation. You get your financial education here on YMYW, and the EASIretirement.com calculator can help you with assessing your situation and looking at your long-term strategy. Implementation of your strategy is the most important part – that’s on you, but here at Pure Financial we can help you nail down the details and put your plan in place – just schedule a meeting with an advisor right there within EASIretirement.com. Check it out for yourself and let us know what you think. Get started at EASIretirement.com, that’s EASIretirement.com

Can We Retire at 59? (Henry Karl Kittensburg III, Western OH)

Joe: Here’s a question for us, Big Al, “Can we retire at 59?”

Al: Oh, I like it when we get the question first, then we know what we’re looking for.

Joe: Now we’re prepared. “You can call me Henry Karl Kittensburg III.

Al: Okay.

Andi: Okay. We will.

Al: I think I’ll just call him Henry for short.

Joe: You gotta love these listeners.

Al: Yeah, right!

Joe: “The name our daughter gave the cat, my wife has.” So the daughter gave the cat, Henry Karl Kittensburg III. That’s a pretty smart daughter.

Al: Yeah.

Joe: “I don’t have a cat. Don’t care for pets.

Al: Yet you refer to yourself as a kitten.

Joe: Yeah. But you refer to yourself as a cat. All right. “So they all belong to others at the house. My brother put me onto your podcast.” All right. “Since I get up too early and can’t sleep, I’ve listened to many of the back sessions”. Oh Henry Karl Kittensburg, big fan early in the morning.

Al: The second

Joe: He hates pets. He can’t sleep.

Al: So he listens to podcasts.

Joe: Yeah, this garbage show. It just puts him to sleep,

Al: and he’s thinking in the wee morning hours before this dawn, right. It’s dark. And he’s thinking, you know what, if I ever have a question, I’m gonna name myself Henry Karl Kittensburg II.

Joe: Yeah. I think it’s the third.

Andi: It is, I typo’d it on the second page. I left out the third.

Al: I looked at the second page. Oh, it’s the third. Okay. Got it. Got it. Okay.

Joe: “I heard the plea for more spitballs. That are not ones in the millions at age 26, and are more closely reality. I decided to send in a spitball. I feel very blessed, but listening to the podcast, it seems I must be in the poor class again. I don’t even conceptualize many of the situations people have.” Okay, let’s break it down for you. He wants to retire at 59. Now that’s the question. That’s how he started this thing talking about Henry Karl Kittensenburg and that he hates cats and hates people and can’t sleep. But he wants to retire at 59 ½ and now he feels like he’s in a poor house.

Al: Okay. That’s what we got so far. Poor house, cats, 59.

Joe: “We are in Western Ohio. I drive a 2003 Dodge Ram and have a company Kia Telluride, she drives a 2017 Honda Accord that I rebuilt from a total wreck. Quite satisfying. My wife drinks LaCroix. I drink, wait for it, milk!”

Andi: And he named himself Kittensburg.

Al: Well, maybe that’s why.

Joe: He’s a riot. “Some of the specs of our situation. 56. I’m going to retire at 59. Spouse is almost 57. It does not work outside the home. Volunteers daily. Income $190,000. Deferred comp $25,000 annually. Annual expenses after taxes and 401(k), etc. equals $100,000. What about the same in retirement spending in today’s dollars, except years 1 and 2 of retirement will only need $40,000 annually, and years 5 through 6 the same.” Only $40,000 annually.

Al: Yeah, probably because of deferred comp, I’m guessing.

Joe: I’m guessing that is the case too. “Social Security at age 67 for myself plus my spouse is $56,000. Uh, he’s got $760,000 in retirement accounts. Tax bill accounts are $200,000. And another $250,000 lump sum pension and then adding another $100,000 in December from inheritance.” So we got..

Al: That’s $1.3 million.

Joe: Yep, $1.3/$1.4 ish. “He’s got three houses.” Yeah, he needs three houses for all the milk,

Al: For all the milk LOL

Joe: “Total loans $275,000, rental income $38,000, rental expenses, including mortgage is $32,000. Current equity in all three is $535,000. Annually adding $50,000 to taxable, adding $40 to 401(k). Thanks a ton.” All right, so he wants to retire. Let’s just kind of recap some of this because yeah, he’s had milk on my mind.

Al: You can’t think of anything else.

Joe: I know he’s got 1, let’s call it $1.3 million. He’s 56. He wants to retire in three years. He wants to spend $100,000. Fixed, Um, well, hold on. He’s got more than that, right? Did we add in the lump sum pension and all that?

Al: I did, yeah. Okay. I did. Yeah, so here’s what I’m thinking, Joe. If I just look at the rental properties, that’s about $5,400 a month profit. And that’s even after reserves and repair renovations. So that’s, call it $65 000 a year just from that. So, he wants to spend $100,000, he’s got $65,000, so that’s $35,000 left over. And if you take $35,000 into $1.3 million, it’s a 2.6% distribution rate.

Joe: Where are you getting that? Rental income of $37,800.

Al: Yeah, rental expenses, including mortgage, $32,400. That’s $5,400 a month profit. Think about it.

Joe: Yeah.Sorry. Is that a year? No. That’s where I thought that was a year.

Al: Oh, you think it’s a year?

Joe: Yes.

Al: Oh yeah. You’re right. Sorry.

Joe: You’ve got properties.

Al: Yeah. Totally botched it. Yeah. You’re right. That’s a year. Okay. So I meant what I just said. So $100,000 minus $5,000 of income. So he needs $95,000, right? And $95,000, now, $1.3 million is a 7. 5% distribution rate. So that doesn’t work. But he’s got social security at $56,000, right? If that were, if that, but that’s not till 67. $100,000 minus 5 minus 65. Now it’s $30,000 into $1.3 million. Now that does work, but you got a pretty good stub period. Where you’re just draining the portfolio, but you also have another three years to save and he’s saving a lot. So there’s actually a lot of calculations here to figure out if this works or not, but.

Joe: He’s short.

Al: Yeah, just without doing the calculations. I think he’s short too. I think he’s going to have to work longer than 59.

Joe: Or spend less or spend less.

Al: Or spend less, yup that’s always the option or work part time, you know, to bridge the gap. And if you work part time, I mean, if you just take the $1.3 million, let’s say 3% distribution, that’s $40,000. You got five. So you need $55,000 roughly to not get, you know, to not really decimate your portfolio. So you’re making, what’s he making $300. How much is he making right now?

Joe: I bet he can spend, here’s my, here’s just a, just a wild ass guess what is that called, wag or waz?

Al: Yeah.

Andi: Spitball?

Al: Yeah. It could be a WAG

Joe: $65/$70,000 max spend. That’s my final offer.

Al: Yeah, without working part time.

Joe: Without working part time. If he wants to retire at 59, I think he can spend around $70,000. Because the distribution rate is going to be high, but he’s got… Again, we’re building bridges here. He’s going to take a higher distribution rate, but then it depends on inflation. It’s going to depend on his investment portfolio. It’s going to depend on taxes. Oh, there’s all sorts of different things. We’re just kind of running the numbers off the back of the envelope. But yeah, the milk man needs to go work a little bit more or drink less milk.

Al: LOL, 100% agree. Joe. It’s hard to know exactly what, so I mean, my quick calculation is you need about $55,000 in part-time income, but that doesn’t include that social security is coming right. In seven years, right? Or eight years after that. So, you know, you factor that in, you’re probably pretty close and what, what, what’d you say? You need about $40,000, $35,000 part time income, something like that or spend $35,000 to $40,000 less. That’d be the other approach.

Joe: All right. Thanks for the email Henry Karl Kittensburg, III. Yeah, that probably didn’t help at all, but.

Al: Well, we didn’t give him the right answer, but we’re being honest.

Joe: Save a little more, work a little longer, spend a little less. You’re all right there.

How to Reduce Taxes On a Headcount Reduction Retirement Lump Sum Payout? (Big Paw, mid Atlantic state)

Got Big Paw from Mid Atlantic State. “We got Paw’s 58. Beautiful Ma’s 55. Kids, several. Either fully launched or college fully funded. Mortgage balance, $170,000. at 1.99% with 8 years left and a value of $700,000. No other debt. Pretax balance is $1.5 million. Roth balance $350,000. Tax bill balances, T-bills, CDs, stocks, cash accounts $350,000. Expected lump sum retirement in 2026, not currently considering taking pension annuity options.” So, he’s not even considering it. He’s gonna get $1.3 million dollars. Or, $6,600 a month. Did you notice that this is the, almost the exact same number? As the other lump sum pension calculation we did earlier in the show.

Al: It’s very similar.

Joe: Very close. The actuary that put these together are pretty smart.

Al: Yeah, they know what they’re doing.

Joe: They basically take the internal rate of return on this thing and it’s like, alright, well here, if you think you can get 5% on the market, we’re going to give you 4.5, 5. But you’re going to get a guarantee. It’s going to be a little bit lower. And if you live to normal life expectancy, it’s a decent rate of return. If you live past life expectancy, you’re going to get a lot more. If you live less, well, then the errors are going to get something. Andi, did you look at it? It seems like you’re doing some research there.

Andi: No, I’m taking notes.

Joe: Oh got it.

Andi: So I can make show notes.

Al: Oh, look at that. So Joe, by the way, we’re at about $3.4 million, including the lump sum.

Joe: “He’s got an old Chevy Suburban. And even an older Chevy Suburban. See? Several kids. Fully funded college. As relates to the car situation. He’s got two dogs. He’s got a little G sheep. G shep.

Andi: German Shepherd.

Joe: Oh, is that what that is? German Shepherd. G Shep.

Al: G Shep.

Joe: And a Border Collie.

Al: I like that. That’s what I would’ve read too, right on the spot.

Joe: G. Shep

Al: It’s like I hadn’t heard of that one, but I’m sure it’s a cute dog.

Joe: “We like a Jefferson small batch bourbon neat in the winter. Little gin and tonic with a little legalized homegrown summer weed in summer.” Ah, look at Big Paw.

Al: Oh, and he’s in a mid Atlantic state. We don’t know which one.

Andi: That’s probably why.

Joe: He’s got a little Hefeweizen on the golf course chucking frisbees for the dogs. So he’s on the golf course not playing golf, it’s chucking frisbees for the dogs.

Al: Yeah, apparently.

Joe: “Background. Highly likely the company I work for will be having a headcount reduction. This will likely be before I turn 59 ½, y’all. Currently, separation benefits will reach, oh, will result in 78 weeks of pay upon separation. This is provided as a lump sum and issued through a payroll check. It used to be paid or spread out as a monthly check for the duration of the time. This lump sum is going to be around $300,000. Spitball the following two, please. Your ideas to preposition or post position actions to consider to minimize taxes on this lump sum. Your ideas on the best method to handle the retirement lump sum at the same time as I’ll be retirement eligible. Joe. Thank you. Curious George is the best nighttime book for kids. All of our kids are successful, and I swear it started with that.” You know what? I love Curious George.

Al: I do too.

Joe: And I’m very successful in my own right. In my own head, I’m very successful.

Al: Well, there you go. You’re agreeing.

Joe: Andi note in reference to your comment about reading and spelling with your kids, see my reading is.

Andi: That’s my note about it. It says Andi’s note to you.

Joe: Oh, sorry. Got it.

Andi: This is in reference to you talking about how…

Joe: I’m just reading. I’ve been practicing reading and I think it’s improved quite a bit over the last couple…

Al: It has. That’s why she put it in a different color so you wouldn’t read it.

Andi: He prints it in black and white.

Joe: Yeah, black and white. I printed it out.

Al: Oh, you printed it oh, so you don’t even know.

Joe: Okay. Got it. Cool. So, let’s see, well, the lump sum pension, if he’s going to take the lump sum, you’re going to roll it into an IRA, that’s a non-taxable event. The $300,000 that you’re going to receive as a lump sum from the severance payment are there some things that he could potentially do? It’s tough because it’s all wages. It’s going to come right on your W-2. If he could shelter some of that through your 401(k) plan, do you want to give more to charity in a given year?

Al: I think that’s, I mean, the same, right? The best thoughts I have is if you’re not maxing out the 401(k), then do, I mean, that’s kind of a no-brainer. Charity, that’s something you could set up a donor-advised fund if you’re charitable and want to continue to give after you retire, donor advised fund allows you to get all the deduction in the year you want it, and then you have a fund that’s for future years of charity that you dole out as you see fit. So that could be a good solution. Something else that might be a long shot, but I’ll mention it anyway. If the separation is right around year-end, maybe, maybe just maybe you could have the company pay half in December and half in January. So that would at least put it in a couple of years. And then you could max out 401(k)s in both years.

Joe: I don’t see how much money he wants to live off of.

Al: Well, I don’t think he wasn’t asking that.

Joe: Yeah, but some of these tax planning strategies are going to be dependent on what his lifestyle is, right? So, you know, we see some plans come through and it’s here. Here’s a great way to save money in taxes: give $100,000 away to a non-profit organization. But they are like, I need every last penny to spend.

Al: Yeah, what do you mean? I’ve only got $90,000 saved. That’s just gonna work Yeah, so I’m in the 12% bracket. Is that right? This will give me negative taxable income.

Joe: I’m not going to get any real benefit there, but he seems good.

Yeah. I mean, so you get $3.4 million. Let’s say you retire before, you know, I’ll use a 4% even though that’s a little bit rich, but that allows you to take around $130,000/$140,000 of income per year. I don’t think he even told us about social security, did he? We don’t have the spending, so we can’t really spitball on whether this is, this works or not.

Joe: Well, how about the wife? She starts a business. She loses a bunch of money. Well, maybe because they’re going to retire young.

Al: or he could start a business and lose a bunch of money.

Joe: Start a business. You buy your equipment, you buy whatever that you need to start the business, you build.

Al: Yeah. Maybe get some right up that way.

Joe: You get what? Oil and gas, a little tax credit there.

Al: Yeah. Would never recommend it, but you could do that.

Joe: Low-income housing. You could go into some low-income housing credits.

Al: Yeah, I wouldn’t recommend that either because of the rate of return. I wouldn’t buy a rental property because of the passive loss rules. It would be suspended losses, so you can’t really do that. Yeah, it’s kind of like pension and charity are kind of the main two levers, probably, that you have.

Joe: Because it’s W-2 income. If it came somewhere else, then there’s a lot of other potential that he could have. But, since it’s coming directly to the paycheck. It’s like, all right, well, it’s ordinary income.

Al: Yeah. That’s the tough part about all this. And it’s always been that way for people in W2s. There’s not a lot of choices. Now, if you have outside businesses or outside real estate, and you can somehow be under that $150,000 of income, so you could take some deductions on your rental property, then that could work, or if you had a bunch of rentals and your wife was a real estate professional, you could actually take losses that way, but I mean, that’s a, that’d be a lot to do in a short period of time to try to buy a whole bunch of rentals and tell you, tell your wife, okay, honey, you’re going to be in charge of all this.

Joe: Well, I think you’re set Big Paw.

Al: Yeah, it’s, I mean, we don’t know what you spend, but it’s, you’ve got a lot to work with here for sure.

Joe: Yeah and thanks for the advice with a little curious George. I’ll take you up on that. All right. That’s it for us. Hopefully you enjoyed the show. Andi, thank you for putting together the pension show today.

Andi: Thank you. Thank you for doing the pension show, Joe.

Joe: Yes. All right Al. We’ll see you next time. Thanks for listening. Show is called Your Money, Your Wealth®.

Andi: Joe vs. craft breweries, the hybrid Jeep Wrangler, coin style margaritas, Joe vs. themes, the benefits of excessive amounts of milk for Henry Karl Kittensburg III, and Halloween in the Derails, so stick around to the end of the episode.

Help new listeners find YMYW by telling your friends about the show, and by leaving your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, and all the other podcast apps that accept them.

Your Money, Your Wealth® is presented by Pure Financial Advisors. Click the “Get An Assessment” button in the podcast show notes at YourMoneyYourWealth.com or call 888-994-6257 to schedule your free financial assessment, in person at one of our seven offices around the country or online, a time and date convenient for you, no matter where you are. Chances are, one of the experienced financial professionals at Pure will be able to identify strategies to help you create a more successful retirement.

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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