Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]


Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show, and moderator for the firm's digital events. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm [...]

Published On
May 23, 2023

When should you take your pension, what types of things should you think about when it comes to deciding between a lump sum or a monthly annuity payment – risk protection, for example – and how do you work your pension into your overall retirement plan? Spitballing on retirement pension options, and saving to a taxable account when you’re concerned about required minimum distributions or RMDs, on today’s YMYW.

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Show Notes

    • (00:42) When to Collect My Pensions: Now, Early Retirement, or Age 70? (Rose, CA)
    • (12:16) I’m Concerned About RMDs. Should I Save to a Taxable Account for Retirement? (John Doe, Seattle, WA)
    • (17:33) Pension Retirement Spitball: Are We On Track to Retire in 2032 Without Saving Any More? (Jennifer & Zeke, NY State)
    • (25:32) Roth 457 vs. Roth IRA and Pension Options Retirement Spitball (Clay, Westerville, OH – from episode 377)
    • (35:39) COMMENT: Pension Vs. Lump Sum Risk Protection (Stephen)
    • (38:53) The Derails

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When should you take your pension, what types of things should you think about when it comes to deciding between a lump sum or a monthly annuity payment – risk protection, for example – and how do you work your pension into your overall retirement plan? Today on Your Money, Your Wealth® podcast 430, Joe and Big Al spitball on pension options for retirement, and saving to a taxable account when you’re concerned about required minimum distributions or RMDs. Get answers to your money questions – visit YourMoneyYour Wealth.com and click Ask Joe and Big Al On Air to send those questions in as a voice message or an email. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

When to Collect My Pensions: Now, Early Retirement, or Age 70? (Rose, CA)

Joe: We’re answering your money questions. We got Rose from California writes in. She goes, “Hi, Your Money, Your Wealth® friends or YMYW friends. I love the podcast and I’ve been listening weekly for a couple of years. My question is on how to take my pension upon early retirement at 62 next year. Should I take the lump sum of $269,000 or the monthly annuity of $1800 per life offered by my employer’s retirement plan?” This thing is like 3 pages long. How many questions does she have here?

Andi: Not quite 3 pages.

Joe: Alright, well I’m gonna keep reading or are we gonna get lost in the shuffle here?

Al: No, I, I think you have to keep reading because the details will help us answer the first question.

Joe: Got it. As you can tell, Alan is a little bit more prepared than I am.

Andi: You don’t say. That never happens.

Joe: He’s drinking Mai tais in Hawaii. While I’m actually keeping the company afloat here.

Al: Well then I better get prepared if I’ve had a couple Mai tais in me.

Joe: Oh. Let’s see. Take the lump sum. Okay. $269,000 or $1800. All right, write that down, Alan. -offered by my employer. “I have an additional pension that will give me $750 per month at 62, but it goes up to $1500 a month if I take it at age 70, so it doubles. Should I take it now or wait? Also, should I use pre-tax or post-tax monies to cover other expenses from age 62 to 70? I’ll need about $3500 to $4000 gross per month. My inclination is to take the $1800 per month rather than lump sum and wait to take the other pension at 70, at $1500 per month. We have plenty of savings, no debt, and no extravagant spending. If I take the $1800, I’ll have to dip into my savings of $2200 per month to cover expenses until age 70. The other pension and Social Security will take over. That is where I need to know if I should take from the IRA or post-tax. I expect to live into my 90s because my parents lived into the 90s and I’m very healthy. I can’t know when I’m gonna die, but I’m betting that I’ll be in my late 80s or 90s. If that’s the case, it seems like the $1800 a month is a better deal and I will have at least some sure and steady income until I’m 70 no matter what the markets do. Other assets and income, husband will be 65 next year and plans to continue to work until 70, cut back a couple days a week for about $65,000 per year, which is more than cover his expenses to then. He loves his job. At 70, his Social Security is $3500 per month for me and $4500 per month for him. We have $2,000,000 saved in post-tax brokerage accounts and cash accounts. We will likely inherit another $1,000,000 in the next couple of years. I have about $700,000 in my IRA, husband has about $700,000 in his.

After listening to your show, we decided to do Roth IRA conversions at least half of our IRA amounts over the years until our RMDs kick in. Thanks for the advice on that. Here’s the details. I drive a 2019 Chevy Bolt. My husband drives a 2015 Volkswagen eGolf, replacing it this year. Home is paid for. We have no debt. We are not extravagant. Love finding bargains, keeping expenses low. Oh, I have a moderately priced glass of Pinot every night with dinner. My husband has an occasional bourbon and joins me with wine.” All right. Nice little dinner atmosphere there.

Al: Sure. I can picture it.

Joe: Sure can. “Because we have a child with disabilities, we will need to leave her money in a special needs trust after we pass away. We have another independent adult child. We would like to leave substantial amount of money to each of our children if possible, so that at least they do not have financial worries. That’s it. What do you do? Thanks for the advice. Sincerely, Rose from California.” Rose, we don’t give advice on this show. That’s one thing we do not do.

Al: Right.

Al: We do spit ball.

Andi: Spitball.

Joe: Non-advice.

Al: Spitballs. We have- we have a chat and spitball a little bit.

Joe: Just pour a little glass- I’m gonna have a glass of bourbon, you know.

Al: Okay. I’ll pour another Mai tai.

Joe: Yeah. And then she can have a little pinot. We can kinda just spitball this a little bit.

Al: I like it. I guess we go back to the first part of this where her question was, should she take the lump sum of $269,000 or the $1800 per month for per life for the annuity? So Joe, I did a little math. She’s 62, so-

Joe: 90, so 28 years?

Al: Yeah. So I did- I did 25 and 30 years just as a point of reference. So if she lives 25 years, the rate return is 6.4%. If she lives 30 years, it’s 7.1%. Those seem like pretty good rates to me. But something always to consider on a lump sum is it’s gonna take 12 and a half years just to get her money back. So you always have to think about that. I mean, that’s always one thought is, am I gonna outlive the payback period. In other words, if you take the $1800 a month, it’ll take you for 12 and a half years to get what the lump sum would’ve been. In other words, if you die before that, it’s gonna be lower amount. And we don’t know if there’s a survivor benefit. That’s not a bad idea to have a survivor benefit for a spouse, although maybe it’s not needed because there’s so many other assets. But I think based upon those rates of return, I would probably take the annuity, I’d take the monthly payment, I think.

Joe: Well, 100% agree with you because here’s her goal is they like bargains. They don’t spend any money and they wanna leave a legacy. They have a special needs child that they wanna make sure that is taken care of. They have another child that they wanna leave a substantial amount to. They have a few million dollars sitting in liquid assets. A lot of it is after-tax monies. They’re going to receive another inheritance, so that’s $3,000,000 outside. So she needs $3500, $4000 a month. So, yeah, I would take the $1800. So that cuts that in half. So now they need a few thousand dollars a month from the overall portfolio, so they just gotta bridge the gap to Social Security or until her other pension pulls in. I would push her other pension too, because it, I mean, here’s the key. We don’t know when she’s gonna die, but she has longevity in the family. So in the 90s, you always wanna play the annuity card because then that’s a longevity play. It’s basically what you’re doing is buying longevity insurance. So if you have longer life expectancy, the numbers usually will play out. The annuity will be in your favor. If you live a normal life expectancy, the numbers almost come out identical. I mean, the actuaries are pretty smart that put this stuff together. So they know that some people are gonna live a long time, some people are gonna die a little prematurely. And so if you live until normal life expectancy, it’s kind of, you know, whatever you wanna do. You’re probably gonna get maybe a 4% rate of internal rate of return. So do you take the money and you invest it on your own or do you get a guaranteed rate of return via through the employer? I mean, those are my two quick thoughts in regards to the fixed income. Because they don’t have to touch a ton of this money that could continue to compound for the kids if that’s what they really want.

Al: Yeah, totally agree. And then they’ve got $2,000,000 already in outside of retirement. I’d actually live off of that. That extra $2200 that they need, I’d live off of that.

Joe: And convert.

Al: And convert. You got $1,400,000 between two IRAs, husband, wife, I would just be converting that like crazy because your fixed income is so high, you’re gonna be in a high bracket. And so RMDs are just gonna compound the problem. So that’s what I would do. I would just live off the non-qual, convert and use the non-qual to help pay the tax. You get a lot more money to Roth IRA, you keep your taxes lower, and then the kids when they inherit it, it’s tax-free to them. So that’s what I would do. I think something- something else Joe, I might consider is, I don’t know if I’d do this or not, but at least consider taking her Social Security benefit a little bit earlier since he’s got such a big one. You know, you want to probably at least have the higher benefit go to age 70 because the survivor rules. And so maybe that could bridge the gap a little bit, but that would cut into your Roth conversion strategy if you did that.

Joe: So one of the things that she said, she goes, ‘after listening to your show, we have decided to do Roth IRA conversions for at least half of the IRA amount.’ That’s not the right strategy. You wanna go to a certain tax bracket.

Al: Agreed.

Joe: And so let’s say that they have- how much will they have in Social Security benefits, roughly?

Al: Well, if they wait- Yeah, it’s, it’s about what, $8000 a month between the two of them if they wait till age 70.

Joe: And then she’s got the two pensions that is gonna be- she’s gonna have what? $130,000 of fixed income.

Al: Yeah, more than that even. Yeah.

Joe: So let’s say at age 72 you’ve got $1,400,000. She’s 62 now. That will double in 10 years.

Al: Correct.

Joe: So now you’ve got $3,000,000. So you’re gonna have $120,000 roughly RMD. So on top of your $120,000 or $150,000 fixed income, you’re gonna be in the 25% or 28% tax bracket.

Al: Maybe even subject to alternative minimum tax, if that comes back. Because Rose is in California and that’s a highly taxed state. So yeah, I would be converting potentially to top of the 24%.

Joe: So it’s not half of your IRA. You want to convert to the top of, let’s say either the 22% or the 24% tax bracket. So the top of the 24% tax bracket is what, roughly $300,000 some odd?

Al: Yeah, like $340,000 ish.

Joe: So let’s say your husband has income of 65. You’re gonna have your pensions and things like that. She could convert a few hundred thousand dollars a year. Maybe you go to the 22% and see what happens with tax rates over the next, let’s say, 3 or 4 years. They’ll still get several hundred thousand dollars out of it.

Al: Yeah, I’m just looking here. The top of the 22% bracket’s $190,000 for married, filing joint, and 24% bracket is $364,000. So it’s a pretty big bracket. Realize that in 2026 we revert back to the older rates and alternative minimum tax and the tax rates will be higher. Unless they change it, which they very likely could. But that’s the rules that we have right now. So especially Rose, given your situation, I think I would sort of try to front load some of these Roth conversions now while you know what the rates are and they’re good rates.

Joe: All right. Thanks Rose.

See at a glance all the numbers that affect your financial strategies: 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, when you download the 2023 Key Financial Data Guide from the podcast show notes. One YMYW listener said recently that, basically, this guide alone is worth the price of admission! In other words, it’s priceless. To download the 2023 Key Financial Data Guide, to Ask Joe and Big Al your money questions, and to share YMYW with your friends, just click the link in the description of today’s episode in your favorite podcast app to go to the show notes, you’ll see all of that just before the episode transcript.

I’m Concerned About RMDs. Should I Save to a Taxable Account for Retirement? (John Doe, Seattle, WA)

Joe: Got John Doe from Seattle, Washington writes in. “Hello team. Love your show. My drink of choice is a little Dr. Pepper and we have a not very smart, but very affectionate Labrador. I drive a 15-year-old Toyota Camry because I’m the most boring white guy around.” Wow.

Al: Well, it’s not a minivan.

Joe: “My wife, Jane, and I are 40 years old. We earn $300,000 per year and expect to work another 20 years and spend $120,000 per year in retirement.” Well, he’s 40 years old. When does he wanna retire? “We expect to retire in another 20 years and spend $120,000.” He knows what he is gonna spend. Okay, perfect.

Al: Yeah, yeah. That’s what you asked for, right?

Joe: Got it. I did ask for that. And he delivered.

Al: There you go.

Joe: All right, John. “We have around $500,000 in pre-tax 401(k), $30,000 in Roth IRAs, and $50,000 in HSAs. We pay for healthcare out-of-pocket and will use the HSA as a retirement account. We have an additional $40,000 in cash and next to nothing in non-retirement account except for the cash. All investments are 100% in stock. We’re maxing out our 401(k), HSA and Roth IRAs via backdoor conversions each year. We do not have the capacity to save beyond that currently, but may be able to regrow arms and legs after funding our daughter’s education.” This guy ain’t boring. He’s funny. He’s witty. Like it.

Andi: Because college costs an arm and a leg.

Joe: Yes sir. He’s gonna grow ‘em back. “My expectation is that with our continued contributions, employer match and non-elective employer contributions, that our pre-tax 401(k) balances will grow at about $2,500,000 to $3,500,000 in the next 20 years. I’m concerned about future required minimum distributions. Though we would not get a tax deduction for our savings outside of 401(k)s, we would be able to sell long-term appreciated stock in the 0% tax bracket for about 15 years between retirement and RMDs, or any low income year in the future. Should I reduce my 401(k) contributions and start saving in a taxable account?” What say you Big Al?

Al: Hmm. Well, I do like the tax diversification of having some Roth money, some IRA 401(k) money and some non-qualified. But given the choice, if I have the choice or the option, I would always rather save in a Roth IRA. Especially if I’m gonna retire at 60, I’d rather save in a Roth IRA than outside of a retirement account because all that growth that we know is gonna be tax-free. Whereas if you save it outside of any retirement, you’re gonna be subject to capital gains, which albeit it’s a good rate. I like that. But I like the Roth, especially if you’re 40 and gonna retire at 60, cuz by the time you get to age 60, then those funds will be fully available. So that’s what I would do.

Joe: John. Let me clarify. I would ask your employer if you have a 401(k) Roth option and go there because he’s maxing all of his plans out. Right? He’s already maxing out the Roth IRAs. He’s doing the backdoor Roth conversions. He’s maxing out the HSAs and they’re maxing out their 401(k)s. So I would look to see is there a Roth component in the Roth 401(k) and max the Roth component out versus going into a pre- or an after-tax brokerage account?

Al: Yeah, it’s the same tax impact. It’s just so you get that money in the Roth, which growth is tax-free and so that, yeah, that’s definitely the way to go. And Joe, I would say most plans now have a- have a Roth option. Maybe not all, but it seems like most plans do.

Joe: Yeah. But if he doesn’t, then what do you do? I think I still go pre-tax, at least for a couple more years. He’s got 20 years, he’s 40. A lot of things can happen. But if he changes jobs, he can roll the 401(k) out, then he could do Roth conversions to do some tax diversification there as well. So I would continue to fund the 401(k), the Roth IRAs, the HSAs. I wouldn’t change that. And because he is in a pretty high tax bracket to go in a brokerage account. It’s for savings. If he has a Roth option, I would switch to Roth, but I would wait a couple years to open up a brokerage account, I think. I don’t know. I’m just kind of holy free balling this.

Al: Yeah. The, the only reason-

Andi: Spit balling.

Joe: Spit balling.

Al: The only reason I would actually put the money into a non-qualified brokerage account instead of a Roth option in the 401(k) is if I had a need for the funds in the next few years, right? Like, like let’s say I wanna upgrade my house, or, you know, or, or whatever, right? If you need access to that money before you retire, that might be a little bit different story. But outside of that, I would go Roth option every day of the year.

Joe: Yep. I like his idea though. I like the fact that he’s thinking about tax diversification. He understands the tax line. He’s like, all right, I get a capital gains tax-free over this period of time. If I sell this, the RMDs are gonna kill me. So I think he’s on track. He’s a good saver. He’s on point. You know, I think you just kinda look at it year by year. And if you wanna switch and say, you know what, I’m not gonna go into the 401(k), I’m gonna open up a brokerage account, put my $20,000 there. I mean, I think that’s a good idea as well. It seems like he’s a pretty good planner. He’s, he’s on top of it, right? So, congrats John.

Pension Retirement Spitball: Are We On Track to Retire in 2032 Without Saving Any More? (Jennifer & Zeke, NY State)

Joe: “Dear Andi, Joe and Al. Hi. Thanks for the show. We are Jennifer, 43 and Zeke, 51. We live in New York State. We like Subarus and coffee. Assets, pensions, etc.: Got an investment portfolio of $2,200,000, home worth $300,000, Zeke’s pension $30,000 starts in 2036 when Zeke is 65. Jennifer’s pension $25,000 starts at 2039, at age 60, no COLA. Zeke’s Social Security, $25,000 at age 62, and Jennifer’s Social Security $27,000, starting in 2041 at age 62.” So there’s a what, 8 year age discrepancy? “Total gross income is $250,000. They wanna spend around $100,000 a year. We have two kids who we hope will enter college in 2026 and 2028. Let’s assume a financial worst case scenario of $80,000 per year per kid. Hopefully not.” $80,000.

Al: That’s a lot. But it could be. I mean, there are colleges that cost that.

Andi: Maybe they’re going to Harvard.

Joe: How about the University of Colorado?

Al: Well, let’s see. That was- when was that? That was 10 years ago and that was probably all in, room and board, was probably $45,000.

Joe: Wow. That was 10 years ago?

Al: Yeah. Yeah.

Joe: That just seems like last year.

Al: I know right? About that.

Joe: Alright. They have-

Al: And by the way, I’ve grown my arm and my leg back, so I’m on sound footing, as they say.

Joe: Yeah, you look good buddy.

Al: Thank you.

Joe: “We have $300,000 totally saved for college, all in 529s except for $50,000 in an UTMA account. We do not want the kids to take on excessive debt. So it’s possible that a lot of our earnings would go to college during these years instead of funding our retirement accounts. It also might suck up some of our liquidity. Hopes and dreams: We’d like to retire in 2032, age 53 and 61 to coincide with the projected end of college or earlier if we could comfortably do so. Questions. Are we on track for a 2032 retirement? General spitball on our situation would be great. Since Jennifer wants to retire well before 59 and a half, she will need money outside of retirement accounts to bridge the gap. But she is reluctant to build up too much because these non-retirement investments will directly decrease our eligibility, if any, for college financial aid. How do people navigate this? Thanks very much in advance. You guys are terrific.” All right. Zeke and Jennifer. Cool.

Al: Wow. This is very well organized, Joe.

Joe: It is. This is one of the best emails that we have received ever, like in the 17 years of doing this crap.

Al: I can’t believe it. Yeah, and plus the headings are underlined so we can easily refer back to ’em.

Joe: Just, yeah, we can just go back and look at hopes and dreams. What are they spending? We got account balances, we got Social Security, we got fixed income, we got the whole 9 yards.

Al: Yeah, we do.

Joe: We got Subarus, we got coffee, we got…

Andi: I guess that’s the only problem is that they don’t drink something that Joe wants to drink too.

Joe: Yeah, they gotta have some cocktails. You’re gonna retire early, I suppose. Okay. Yeah. I think they can. If I’m just doing simple math here, because they got $100,000 in 10 years, given a 3% inflation rate. I got my calculator. I’m guessing that’s gonna be like $130,000.

Al: Yeah, I’m gonna guess $140,000.

Joe: Okay. When Zeke turned 62, so if I look at they wanna spend $100,000 a year, we got 10 years, I’m gonna use a 3% inflation rate. So that’s $135,000. Okay.

Al: Okay, great.

Joe: So they need $135,000, year one. Year two, they’re gonna need something less because Zeke’s got a pension of $25,000, so they need $110,000 a year two. In year 3, they need $110,000. Year 4, and then until Zeke has his Social Security, which is in 2036, so let’s just go- even at $130,000, let’s say at a 3% distribution rate, and it’s 4. You need $125,000. Let’s go 0.03%. They need $4,000,000. Do you agree with that?

Al: Yeah. At a 3% distribution. Yeah. Mm-hmm.

Joe: They got $2,200,000, they got 10 years. That’s gonna probably double even if they don’t save another dime.

Al: Yeah. So the, the rule of 72 says this, I’ll just use 7%. I’ll keep this super simple. So in 10 years, at a 7% rate of return, without even adding any money, it’s gonna double. And if you’re mostly stocks, that’s a reasonable assumption. Not guaranteed, but it’s a reasonable assumption. And $2,200,000 becomes $4,400,000. Now when you’re adding to it, you got a lot more cushions. So I would say it’s very, very, very likely it’ll be over $4,000,000, I’ll put it that way.

Joe: In 10 years, he’s 61, you’re gonna have, let’s say $4,000,000. Even though, let’s say he stopped saving because he is gotta fund the daughters of $80,000, or the two kids of $80,000, he might have to dip into some of the savings. $4,000,000 at age 61. But here’s the kicker, is that there’s so much fixed income coming down the pike, right? He’s gonna have a larger distribution rate when he’s in his 60s and when Jennifer’s in her 50s. But then at some point, Jennifer’s gonna have fixed income, her pensions are gonna kick in, her Social Security’s gonna kick in. And then you’re gonna have double pensions and double Social Security. So that distribution rate is probably going to continue to go down. So you don’t necessarily need the $4,000,000, you need the $4,000,000 to bridge the gap. But if I had a full financial planning software program in front of me, we could dip it in. And I would say that they’re definitely on track.

Al: 100%. Yeah. And, and it’s because- so the analysis we just went through is if you don’t have any fixed income or Social Security, you need $4,000,000, right? So, but the fact that you have that, they have that it’s yeah, this looks really, really good. And even if they have to dip into savings a little bit for the kids- but they already have $300,000 saved for the kids.

Joe: It’s a ton.

Al: It’s a- it’s a ton. I would say Jennifer and Zeke, everything you’ve done is perfect. Including your question.

Joe: Yes, email is perfect. Your savings strategy is perfect to retire, and that’s why you can, I mean, they can retire early. 61. 51. Just know that, you know that money’s gotta last a long time. $100,000. You guys are making $250,000 today, $100,000 when you’re retired. You’re going to do other things. They like Subarus and coffee, so they sound active. So they could live a long time too. You just gotta be careful of what you’re spending and making sure that you have a, have a game plan in place. But so far, so good. Congrats man. Thanks for the question.

So many retirement planning strategies are for married couples, like Jennifer and Zeke here. But what if you’re single? Your retirement strategy is going to be a lot different. If you’re building your financial future solo, join Senior Financial Planner, Allison Alley, CFP® tomorrow at 12pm Pacific time, 3pm Eastern for a free live webinar, expressly for you. Allison will help you map out your journey, create a budget, manage debt, and strategize for retirement whether you’re a millennial, a gen-Xer, or a baby boomer. And any questions you have on Navigating Retirement Solo? Allison will be able to answer them for you live, tomorrow starting at noon Pacific, 3pm Eastern. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes and register for the webinar. Now for more on retirement saving and pension options let’s revisit a spitball from way back in episode 377:

Roth 457 vs Roth IRA and Pension Options Retirement Spitball (Clay, Westerville, OH)

Joe: “Clay from Westerville, Ohio. Westerville. I don’t know where that is.

Al: One thing it’s in Ohio. I can tell you that.

Joe: Okay. “I just found the show and I’ve been binge-watching.” Wow. What are these people doing, binge-watching?

Al: Have you ever binge-watched our show?

Joe: No, I’ve never seen it.

Al: Never, ever seen it.

Joe: I’ve never seen the show. I’ve listened to a couple. Andi did a really good job, I don’t know, a couple of years ago on the Best Of, or something. I listened to that.

Andi: A couple of years ago, he listened to one.

Joe: She did like a montage of something and she asked me to listen to it.

Al: Got it. Okay listened to that. You did that.

Andi: (whispers) I “asked you” to listen to it…

Joe: I did that. Yeah. I was on the ride to Palm Springs. So I thought-

Al: Got it, yeah, you might as well. And I’m probably about the same. I have heard our shows before, but not that frequently. Cause I mean, once through is enough, right?

Joe: It is. It’s the same show over and over and over again. So he’s binge-watching, he’s got a little Dr. Pepper Zero, just pounding away the Dr. Peppers, just absorbing Your Money Your Wealth®. Just can’t get enough of it. He’s got a 2008 Honda CRV with a double doodle roaming in the house.” A double doodle. Uh. “42. Wife’s 40. I make about $135,000. The wife stays home with the kids. We have approximately $650,000 in my governmental 403(b), all pre-tax, and $350,000 in a Roth.” Man. At 42 years old? Wife at home with the kids? The guy’s killing the game.

Al: Impressive.

Joe: Very impressive. Got $1,000,000. “Our best case is retirement at 58, with $3,500,000, which we’re on track for at a 6% rate of return. If we were to hit that number before 58, I could retire before that, our mortgage would be paid off, and likely need about $75,000 in income. We currently save 25% of our income. I max out both Roths and just started contributing to the 457 Roth option. We do not pay into Social Security, so there’ll be no Social Security income.” He’s got a couple questions. “1) Should one maximize Roth 457 first instead of our Roth IRAs, because of the additional flexibility it grants us to get us to 59 and a half and also help solve for the ACA credits in the future. I also have $100,000 in a retirement medical account, like an HSA after you retire, which will likely be about $200,000 at that time. So in theory, I could just pay for health insurance out-of-pocket, as well as draw on those funds in doing some Roth conversions of my 403(b).” So couple of things. With the 457 plan, there’s no 59 and a half. Everyone kind of gets confused on, when can I take money out of my account? In a 401(k), as long as you separate from service, the age is 55. It’s not 59 and a half. With IRAs, individual retirement accounts, it’s 59 and a half. However, Roth IRAs are totally different than that as well because you have access to the contributions at any time. So if he’s making $100,000 contributions for the next several years, he always has access to that because it’s first in first out. The earnings or the growth of the overall Roth will need to season for 5 years or until he turns 59 and a half, whichever is longer. So, should he stick with the Roth IRA or go with the 457? If I was sitting in Clay’s shoes, drinking my little Dr. Pepper Zero with the little dopper doodle, I would go 457. I don’t know. What about you, Big Al?

Al: Yeah, because you can put a lot more in, right?

Joe: Putting a lot more in, you have a lot more flexibility. Um, yeah, I think, do that all day long. Your paycheck, it’s easier. You don’t have to take it out of your savings account.

Al: And then there’s ACA credits, which we should explain that, Affordable Care Act credits. So this is to help you pay for your insurance when your income is low. And so what people tend to do is they try to keep their income low enough until they get to age 65, Medicare age, where they can then get credits and get help on paying for health insurance. And if you’re able to draw money out of Roth IRAs, or you’re able to draw money out of your savings, or maybe a non-qualified, non-retirement account and you don’t have a lot of taxable gain, then that can work.

Joe: Because then the income is virtually zero.

Al: Correct.

Joe: Right. Okay. Number 2) here, is that, “how do you guys look at pension options? A 403(b) can be completely or partially converted at 55 to a pension- How do you guys look at pension options? The 403(b) can be completely or partially converted at 55 to a pension as I choose the self-directed plan, not the guaranteed pension option when I started 20 years ago. I will have a COLA that matches CPI, but can’t exceed 3%. Traditional view is that a 6% distribution to take it and I liked the idea of converting some of it to create an income floor, conservative portion of assets, similar to Social Security between $25,000 and $40,000. But I also feel like I could take the money. I’d allocate the pension and create my own, while controlling my taxes with our Roth IRAs and possibly converting some of those balances to Roth. Just curious how one would spitball that. I am aware that I’ll likely die first and want to keep things as simple as possible for my wife. Really appreciate it. Loyal listener now.” Yes. Clay. Look at that, he’s already thinking about death. The guy’s 40.

Al: Yeah, 42. Is that something you think about these days?

Joe: I think about it every day. Every day I drive into the office and I’m like, I just wish this semi would just take me out.

Al: It’s like, I’ve had enough. I’m in my 40s. Good enough.

Joe: I killed it. Got married.

Al: Killed it.

Joe: A month in? I’m ready.

Al: I got a great legacy.

Joe: Bucket list.

Al: Take me now. Got it.

Joe: No, I don’t really think- I love life. I love my life. I’m a happy-go-lucky guy. But he’s responsible. The guy’s got $1,000,000 at 40. Of course, he’s thinking about his wife and estate planning and getting things dialed in there. How do we look at- well, there’s a lot of calculation that goes on in looking at, do you take the pension or the annuity stream versus the lump sum? In some cases it makes a lot of sense to take the lump sum and he’s right on track, because if he takes the lump sum, then he could create his own income from the overall portfolio. He could control his taxes, he can do conversions. He’s already got a lot of money in Roth. He’s doing the right things. He’s going to have even more money in the Roth because we just told them to max out the 457 Roth. And so he’s going to control his taxes quite a bit. If he takes the annuity, well, then that’s a guaranteed income floor- he doesn’t have Social Security. So then it’s like, at least I need some sort of floor of income. I’m going to have a lot less balance. And if I pass away, that income could stop either at his life or his spouse’s life. So it really depends on what’s the pension payment versus the lump sum? So there’s a calculation there to really determine kind of what the internal rate of return that you’re getting from the pension. Then it also deals with your risk tolerance. I mean, a lot of people like that floor. So then take the floor. Because you’re going to have a ton of other assets as well. So, he’s got to do a little bit more calculations here, but I think he’s right on the right track of at least thinking about it. But yeah, I would- if he doesn’t have Social Security, I would probably take the pension.

Al: I would probably take the pension too. And the reason is because 6% is a decent payout and it’s got cost of living increases. A lot of times with pensions, maybe they start around 8%, but there’s no cost of living increase. So by the time you get 10, 20 years in, it’s a lot lower payment in terms of purchasing power. It’s the same payment, but it will buy you a lot less because of inflation. So I kind of like that too. Plus the fact that he’s got, they have, so many other assets to utilize for other purposes, particularly they’re thinking $3,500,000. Yeah, I think I would take that, but I think that’s how I think about it. It’s just like you said, Joe is, you do the calculations, you see what’s going to be better, but in this case, I would probably lean towards the pension based on what I see.

Joe: Right. Well, let’s say if he doesn’t take the pension and then you look at his income needs, what is the burn rate? What’s the distribution rate, is what he really needs to figure out. So he wants to spend $75,000 today, forecast that out with a 3.5%, 4% inflation rate to see what that number is. And if he takes the pension, let’s say that’s $90,000 of income need, and he’s got $50,000 coming in from pension. So now he’s short $40,000, he’s got $4 million. That’s a 1% burn rate. Okay. That’s pretty healthy. Or you take the lump sum and you do the same number. Maybe it’s a 2.5% distribution rate. Well, that’s still pretty healthy. But if you’re running into 4% or 5% burn rate on that money, then it’s like, okay, well probably the pension might make a little bit more sense because you’re going to have to take on more risks in that overall portfolio, and he wants to retire early. And he’s probably going to have super longevity, just because the Dr. Pepper Zeros-

Al: Instead of beer? Or harder-

Joe: Cocktails? Yes.

Al: Well, you actually brought up a good point. So health does come into this. So if you think you and your spouse, if you get the survivor benefit, have impaired life expectancy and you’ve got kids, maybe you do want the lump sum, so you can maximize that for the kids. So there’s a lot to consider really.

Joe: Cool. Thanks for the question. Thanks for being a loyal listener. Welcome to the family, Clay. You’re one of 4.

COMMENT: Pension Vs. Lump Sum Risk Protection (Stephen)

Joe: Lot of pension questions here today. Stephen, he writes in, he goes, “Hi, I enjoy Your Money, Your Wealth® podcast. One comment I’d like to discuss about when to take a lump sum or the pension. “to often-” Shouldn’t that be like t o o?

Andi: Yes, it should.

Joe: Okay. Thank you.

Al: Wow. Look at you and grammar.

Joe: I am so- the show has not only helped my reading but my grammar.

Andi: You’re welcome.

Joe: “- Too often the question, as well as the question about when to take Social Security, is addressed as about which will give you the best return in dollars. I think both also have an insurance quality. Maybe I’m too cautious, but I figure the biggest risk are, one, outliving my savings. Number two, making a big mistake in losing my savings. Or number 3, being subject to fraud, stranger or family or friend that loses my money. Having a pension, larger Social Security payment and or annuities can provide a protection against all these risks. Maybe the cost is potentially a smaller legacy, but the tradeoff is my kids won’t have to take care of me financially.” All right. Yeah, sure, I agree with that.

Al: Yeah. There are definitely some non-financial considerations and I’ll add a fourth one, and that is Joe, some people just- when they have money, they spend it. And if that’s you, don’t- don’t take the lump sum. Just get your monthly check and call that good so you’re not tempted to dip in and get that new pool and get that new Tesla and whatever else you might be thinking about.

Andi: That sounds like you’re describing yourself, Al.

Al: I have no pool, but I do have a new Tesla.

Andi: Oh, okay.

Joe: Yeah, no, I agree. Alright, let’s get outta here. Thanks all for your questions, listening. Go to YourMoneyYourWealth.com, you know the drill. Get some questions and we’ll answer ’em right here. See you next week. The show is called Your Money, Your Wealth®.

Andi: In the Derails we’ve got one star ratings without reviews, Joe is feeling his age, and Al’s mai tai brain, so stick around. Help new listeners find YMYW by leaving your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts, and any other podcast app that accepts them – even if they are only one star.

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 o Joe and Big Al’s team at Pure Financial will be able to identify strategies to help you create a more successful retirement.

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The Derails



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.

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