Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:05 – What’s Our Guaranteed Safe Withdrawal Rate for 35 Years of Retirement? How Aggressive Should We Convert to Roth? (Wine Guy/Gal, Sonoma, CA)
• 12:09 – Calculate your Free Financial Blueprint, schedule a Free Financial Assessment
• 13:45 – Should We Move to a No Income Tax State in Retirement? (James Bond, Silicon Valley, CA – voice)
• 20:50 – Can I Stop Working in 8 Years When Daughter Starts College? (Doc, San Francisco, CA)
• 26:10 – Late 30s With $2M. Are We Really on Track for Early Retirement? (Rob, Kansas City)
• 31:20 – Watch Financial Planning at Every Age on YMYW TV, download the Retirement Readiness Guide
• 32:25 – Our Home Equity is Over the $500K Exclusion. How Much Will We Be Charged? Will This Kill My IRMAA? (Elisa, Fremont, CA)
• 35:44 – Should We Take the Monthly Pension or Lump Sum Payout? (Happy Camper & Jolly Pumpkin, WI)
• 43:03 – I’m Not a Fan of Retirement Accounts. Talk Some Sense Into Me. (Lloyd Christmas, SD)
• 49:04 – Outro: Read the blogs, It’s Not Too Late! Year-End Financial Moves to Make Right Now and US National Debt and the Impact on Long-Term Investing

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Transcription

Intro: This Week on the YMYW Podcast

Andi: What’s an SWR – or safe withdrawal rate – for Wine Guy and Wine Gal in Sonoma California to have 35 years of “guaranteed” retirement spending? How aggressively should they convert their retirement savings to Roth IRA? Should the Bond family move from Silicon Valley to a no-income tax state in retirement? Can Doc in San Francisco quit work in 8 years when his daughter starts college? Rob in Kansas City and his wife are in their late 30s and have 2 million saved. Can they retire early? Joe and Big Al spitball for all of them, Your Money, Your Wealth® podcast number 506. Plus, home equity – Elisa in Fremont has more than the capital gains exclusion for a married couple of $500,000 worth of it. How much will this cost her, and will it kill her IRMAA? Should Happy Camper and Jolly Pumpkin take their pension’s monthly annuity or the lump sum payout? And finally, Lloyd in South Dakota isn’t a fan of retirement accounts and he wants the fellas to talk some sense into him. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

What’s Our Guaranteed Safe Withdrawal Rate for 35 Years of Retirement? How Aggressive Should We Convert to Roth? (Wine Guy/Gal, Sonoma, CA)

Joe: We got “Hello, it’s Wine Guy and Gal in North Cal, Sonoma County.  You might imagine our drink of choice is a nice pinot or Chardonnay, but also like to make a Paloma on the warm days. We drive a ‘27 Camra hybrid Camry-“

Andi: a 2007 Camry hybrid-

Joe: “- a 2007 Camry hybrid. I drive a company car and not excited about buying a new car in retirement. I’m 58, my wife is 56. New to the show, but absolutely love it. Enjoy the numbers and good humor.”  All right, you get both on this podcast that’s for damn sure.  Here’s the details Big Al, get your calculator ready.

Al: Okay.

Joe: All right. “I make $350,000 to $400,000 a year. Wife does creative work and brings home $20,000 a year. Expecting 2025 between small consulting work will make another $100,000 a year. Assume no income in 2026 or beyond. $100,000 of RSU vesting in the next 4 years, 3 grown kids between us, all launched and independent.”  Okay. A lot of income there.

Al: Yep.

Joe: “Assuming no inheritance, but very likely to receive one in the $1,000,000 range.”  Well, you’d just like to throw that in there?  Let’s not plan on inheritance,  but-

Al: It’s gonna be a mill.

Joe: I mean, if you just want to kind of throw it in there. Just put that on the side.

Al: Just in case I’m just almost there.

Joe: If I’m short, throw it in. If I’m good, don’t worry about it.

Al: That’s right.

Joe: I never brought it up.

Al: Right.

Joe: Alright. “Yet their parents are in their 80s and incredible health. We are born savers and currently save $125,000 a year. Both went through divorces about 10 years ago, so I had to rebuild our wealth. We currently spend $165,000 a year, $100,000 on everyday expenses, including the mortgage, $65,000 on vacations, eating out, and other splurges. Expect in February, we will have the following assets before 2025, work, income, and RSUs.” All right.  “$2,500,000 in deferred accounts, one small $40,000 inherited IRA, $60,000 in Roth 401(k), $1,600,000 in a taxable investment account, $325,000 in equity in a rental property, which generates $6000 a year of free cash flow. Consider selling that 3 to 5 years, $400,000 in primary residence, $400,000 loan with 13 years remaining. If stop working in 2025, Social Security will be $6200 a month at age 70 in today’s dollars. Spitball advice not focused on can I retire?  Are we going to stop full time work February 2025? Already put in my notice.”  He’s done.

Al: He’s not waiting for us to say, huh?

Joe: No. “Focus is on spending and tax efficiency. Specifically what is a viable annual spend that is guaranteed to last 35 years? Done all the SWR analysis-“ Safe withdrawal rate? Is that what SWR is?

Al: I think so. Sounds right.

Andi: When I initially looked it up, it was “standing wave ratio”. So you have to put in that it’s a financial analysis you’re looking for.

Joe: I’m guessing it’s a safe withdrawal rate analysis. Use your retirement calculator.

Al: Okay.

Joe: All right.  “Cash flow analysis calculates our SWR is $175,000 per year for 35 years and we can spend $225,000 in assets in the first 10 years while paying off the mortgage.  Keep getting the same answer but we’re in disbelief that we can spend more money than we are today and never run out of assets.  Love to hear if you agree. How aggressive should we convert to Roth IRA knowing that we have 7 to 9 years of private health insurance costs through Obamacare. If we do large conversions, calculate health plan to be about $20,000 a year.  Confident we will always fill up the 12% tax bracket but wondering if it makes sense for the 22%. Thanks for consideration to the spit ball.”  Okay. So Wine Guy and Gal, it looks like you’ve saved quite a bit of money. $2,600,000, $1,600,000, I don’t care about the equity in your primary, you’re gonna pay that off, I don’t know if you’re gonna use that, you got $6200 a month. He wants to spend $165,000?

Al: Yep.

Joe: Alright, plus tax, plus the cost of living.

Al: Right.

Joe: So you go on the calculators and you put in all your assumptions.  Those assumptions are dangerous, because it’s a straight line. It’s a sequence of return is what really what he needs to care about.

Al: Yeah. Well, so the first, the question, what’s the viable annual spend that is guaranteed? There’s no guarantees on anything. So if you don’t, if you don’t want to run out of money, spend zero.

Joe: Yeah.  Well, you could buy some sort of guaranteed product, but that probably wouldn’t be it.

Al: Yeah, but if, you want a way to think about this, you’ve got $4,300,000, you retire at 58, although you’ve got lots of money coming in for the next 4 years, including the RSUs.

And I don’t know, there’s a lot of factors here. But what if we- so let’s just go conservative $4,300,000 at 3% distribution rate just to be conservative. That’s $129,000 add $6000 rental. So that’s $136,000 plus Social Security when that’s received. So, yeah, $200,000 ish is probably, I mean, eventually, I mean, it’s based upon whatever assumptions you put in the retirement calculator.  But that, that probably could be true, but as what’s, true in almost every case of retirement, there’s uneven cash flows. And so it’s hard to just say, here’s your number because you got all these different calculations to make.

Joe: Yeah. Each year is going to be a little bit different. You have to be thinking about hey, all right, the 1st step of all of this is how much assets that you have and how much money that you want to spend. And then you look at what is your fixed income sources, and then you find your shortfall and you kind of divide that by 4% or 3%, which is kind of the standard spitball. But he wants a little bit more info here. He’s going to different calculators. He’s scouring the internet and he’s using acronyms like SWA.

Andi: SWR.

Joe: SWR, right? The Safe Withdrawal Rate Analysis. So all that is a rule of thumb. The SWR is just to see if you’re in the ballpark, that you have enough assets. Once you retire, what you already put in the paperwork, this is when the real work begins.  Is like, all right now you have to create the income from the portfolio at some point. And what is that portfolio going to look like you where are you going to be pulling the money from? So he’s got Roth dollars. He’s got pre-tax dollars and he’s got some equity in some rentals.  So he’s going to convert to the 12%, but then he’s worried about the Affordable Care Act premiums.

Al: Yes.

Joe: So you have to calculate that as an added tax if you convert higher than the 12% tax bracket. Because if you’re spending $200,000 a year, just think, your first 10 years, you’re spending $2,000,000 out of the nest egg, plus tax, plus the cost of living. You have $4,000,000 today, or $4,200,000. You’re going to spend almost half of that nest egg in 10 years.

Al: Right.

Joe: So if the market goes sideways, if the market goes down, if you don’t do this with a tax efficient kind of mindset, I mean, Right?  It’s not going to completely blow up on them, but I think with all these different calculators that people run, it might give them false confidence that they can spend a lot more than they probably should.

Al: Well, I think that’s right. Yeah, I mean it tells you whether you’re in the ballpark. But here’s the reality is life happens right? The stock market goes down 10% for 4 years in a row. Now what? Right? So every year you’re making adjustments based upon your life, what’s happening in the market, your investments, your ability to handle risk and all kinds of things, your health. Now your kids or your grandkids or whatever they might need. Oh, they, you need to spend money for this or that. Joe, things change. And so these calculators give you an idea. Can I retire? Yeah, you can probably retire. Is this the number for life? No way. Life changes, and that’s why a financial plan is it, it happens over time. It’s not something you do once and you got your number. You’ve got to do every year, maybe even multiple times. Maybe look at it each quarter just to make sure you’re still on track.

Joe: But yeah, I think he’s done a really good job of saving. He’s a born saver.

Al: Sure.

Joe: He can’t forget about the $1,000,000 that we’re not really counting, but he wants us to count.

Al: No, I mean, so you’re right. So taking another step back, this is an amazing story. They both got divorced and probably lost a bunch of money. But they buckled down for another 10 years, saved a lot of money. So, so the truth is they’re in a great spot. They’ll be able to have a great retirement, but there, there’s no such thing as a single number or a guarantee or anything like that. Financial planning is a process you do throughout your life.

Joe: Yeah, but I guess my point is that he needs to figure this stuff out and I think he can, he’s already doing some of the research now. But he might be looking in the wrong areas is that here you have to figure out a distribution plan and strategy. The safe withdrawal rate is a rule of thumb, as we just talked about, but he’s got Roth assets. And he’s got pre-tax assets. $2,600,000 is pre-tax. So how much should he be converting? He wants to go to the 12% to avoid, you know, a little bit more premium on the Affordable Care Act. But is that going to bite him later as that deferred asset continues to build and grow where he could save a lot more tax and premium if he did this correctly and ran the numbers maybe a little bit differently.

Al: Well, and I would say if he converts the top of the 12% bracket, it would be very expensive because now you’ve got all that affordable Care Act credit that you gave up, right, so you probably want to convert to the top of the 22% or the 24% if you’re not,  if, you’re, going to then avoid, not, let me try to figure out how to say this properly, you’re giving up the credit, right, and so, to say it again, what you-

Joe: Right, if you’re going to go to the top of 12% and give up to the credit, don’t do it.

Al: Yeah, because that’s a really high effective tax.

Joe: Right, so you go to the top of the 22% if you’re going to give up the credit.

Al: That’s what I’m trying to say.

Joe: No, that’s well said. Yeah.

Calculate your Financial Blueprint, schedule a Free Financial Assessment

Andi: Wine Guy and Gal used our free Financial Blueprint to calculate their retirement readiness – have you? Look for the link to it in the episode description. Just answer all the questions it asks, and it’ll analyze your current cash flow, your assets, and your projected spending for retirement, then it’ll calculate three different scenarios to forecast your probability of success. It outputs a detailed report that includes future taxes and actionable steps you can take now reach your retirement goals. But as Joe said, even if it says you’re in great shape, a lot can happen in a 35 year retirement. This is not a set it and forget it kinda thing! This is where meeting with a real live human financial advisor comes in. Schedule a time to review your Financial Blueprint with one of the professionals on Joe and Big Al’s team at Pure Financial Advisors. They’ll help you develop a thorough plan for retirement that’s not only constructed to meet your personal financial needs and goals and your tolerance for risk, but also designed to weather economic changes and market volatility – with adjustments as you proceed on your path to retirement. Calculate your free Financial Blueprint, then schedule a Free Assessment with a financial professional at Pure Financial Advisors. Click the links in the episode description to get started.

Now, back in episode 503, Joe and Big Al discussed for Skipper the IRS’ residency requirements when splitting time between locations when one is a no-tax state – and I think that may have spurred this next question. To ask your money questions or to get your own Retirement Spitball Analysis, click Ask Joe and Big Al On Air in the episode description and send us an email or a priority voice message, like this one:

Should We Move to a No Income Tax State in Retirement? (James Bond, Silicon Valley, CA – voice)

“James Bond”: This is Bond, James Bond. This is not my voice because too many of my friends listen to the show so I’m using a combination of AI tools to produce this, first time so forgive me if its amateurish, where is Q when you need him? I am 59 years old, I finally made an honest woman out of Moneypenny and married her, she is 51 years old, she retired 4 years back. We have 3 grown and self-sufficient children. We live in the Silicon Valley we have absolutely no debt, we own 2 houses with a combined total of about $1,800,000, one is in Rio (Brazil). We plan to rent the Silicon Valley house once we pull the trigger and leave the Valley, that’s part of my question. We have about $2,000,000 in Traditional IRA accounts another $1,000,000 in Roth IRA’s, about $2,000,000 in a brokerage account and $100,000 in the online bank as part of the emergency fund. Have $500,000 in a 401(k) and are converting that to Roth, about 3/4 done, but want to start converting the traditional IRA to Roth and have 15 years to do it before RMD’s kick in. My question is: getting a bit tired of the Silicon Valley as it’s getting too busy and too dang expensive, we’re thinking about moving to another state, ideally a tax-free state. I went back to work due after retiring at 52 but my job is exceedingly easy, I basically use it to continue to fund Roth IRA’s and pay for some living expenses though we don’t need that really, just nice to have. When we want to start converting the traditional IRA’s into Roth IRA’s in the not too distant future we’re thinking about being in a state like Texas or Nevada where there’s no state income tax. We travel all the time so an actual physical location is not that big of a deal, we would stay in the state as long as required to meet the residency requirements but other than that this would just be a rental or something just to have the local address and tax treatment for these conversions. The thought of moving to another state doesn’t bother us at all because like I said we travel all the time anyways, so want to get your spitball on if this works? Does it make sense to relocate to a tax-free state for a few years in order to convert IRA’s and not pay state income tax as we do now? Right now the Austin-Martin DB5 is in the shop, the Lotus Espirit is too small for a Joe-ish size person like I am and is unreliable so we drive something sensible when home… It’s usually parked. I like my martini shaken not stirred, Moneypenny does not drink because she cannot, sadly allergic to alcohol. Love the show, been listening for years so keep it up thanks guys (and gal!) Cheers, James

Al: Wow, James Bond listens to our show.

Joe: That was very difficult to follow.

Al: A little bit difficult, yeah.

Andi: Lotus Esprit is too small for a Joe ish sized person. I like that.

Joe: Oh, Joe ish.

Al: Oh, got it.
Joe: I was like, I didn’t catch what that was.

Al: Yeah, I guess you don’t fit into it.

Joe: I could fit into it.

Al: You could?

Joe: So what’s the question? He wants to move to a tax-free state to do the Roth conversions?

Al: Yeah, I think so.

Joe: Because he travels all the time and it doesn’t necessarily, I don’t know. You’ve got $5,000,000. $5,600,000.

Al: Correct. Yeah, so that’s what he’s at.

Joe: And he’s got $500,000 left in the 401(k) that he’s going to convert. He’s saving into the 401(k), but he’s got, oh, another $2,500,000 of different money?

Al: Yeah, he’s got $2,000,000 in traditional IRA as well. So $2,500,000 total. So basically, he wants to convert. He’s tired of Silicon Valley. He wants to move out of California. He would like to do Roth conversions. He’s 59 years old. Sounds like he wants to retire, right? And so then he does conversions. If he does a conversion, tax conversion, or Roth conversion, out of state, out of California. Well, I’m having trouble today. I’ll get it. Stick with me. So if he moves to Texas, they moved to Texas, or, Washington state or Nevada, for example, there’s no state taxes and Joe, that does work. You can move to another state, do your Roth conversions and pay no state tax on the conversion. However, you just have to be careful because California and other high tech states are on to this. They- here’s what they look for. They look to make sure you actually move. They want to make sure you have a new residence you acquired or you’re leasing a new residence and you sold your old residence. Or you leased your old residence, you set up your driver’s license in the new state, register to voter, your bank accounts, your brokerage statements, your doctors, your all your life is in the new state. Maybe that’s where you’re buying groceries. That’s where your cable bill is. So on and so on. And if you can prove that, you know, that’s one thing. The other thing is spending 183 days in a particular state is- that’s over half the year. So that would be important too. But some people that travel don’t get to the 183. So it could be the majority, but there’s a lot of factors, but you really have to move. It’s something you can’t fake. And one more thing I’ll say is, if you’re doing this, for- just to avoid state taxes so you can immediately move back into California. That doesn’t go over very well in tax court.

Joe: There’s no real audit on the days. They’re just gonna judge- If it comes to audit, there’s no way they can track how many days you spent in state. They’re gonna look at just the bills as you mentioned. Yeah. All right. Well here, why don’t you buy groceries for 4 months and or yeah 11 months in Nevada, right? You bought groceries there for a month.

Al: Yeah, so here’s cases in the past that have failed like people that got a P. O. box in Las Vegas and they called out there, that doesn’t work, right? Or they get, they have a $5,000,000 home in Silicon Valley and they, bought a $100,000 condo in what?

Joe: Texas.

Al: Texas, you know, rural Texas somewhere, right?

Joe: Sure.

Al: And they, don’t spend, yeah, it’s, that’s how these things fail, but even people that do everything right, if they, if you move out of state, you go ahead and avoid state taxes for whatever transactions you want to do, whether it’s selling your company, right, or Roth conversions, and you move back into that same state, chances are that high tax state, like California may want to look at that. And you may have to pay all that old, that back tax money that you should have that you would have owed plus penalties and interest. So just be aware of that.

Joe: All right. Thanks James. Do you- have you ever watched James Bond movie?

Al: Yeah.

Joe: Do you have a favorite? Who’s your favorite James Bond?

Al: You know, I started watching after Sean Connery retired.
So, although I’ve seen the old ones and he was great. Roger Moore was James Bond when I first started watching. And I really kind of liked him because that’s who I got used to. That was kind of my initial frame of reference. How about you?

Joe: Yeah, probably Daniel Craig, but I like them all.

Al: Yeah, Daniel Craig. And see, you’re younger. So there you go. Daniel Craig.

Joe: There you go. yeah, I’m a big James, James Bond guy. I enjoy the movies.

Can I Stop Working in 8 Years When Daughter Starts College? (Doc, San Francisco, CA)

Joe: We got Doc from San Francisco. He goes “I’m 54 years old, a single dad of a 10 year old, 2022 Toyota Tacoma, probably be my last vehicle and drink of choice is Tito’s- Tito vodka soda water and lime.” Why would that be his last vehicle?

Andi: He’s figuring it’s a Toyota Tacoma so it’s going to last for the next 40 years.

Joe: He’s 54.

Andi: Exactly.

Al: You know, that makes no sense to me either.

Joe: This will be my last car. All right. Well, we’ll just keep reading here. Yeah. “Found you guys on the podcast and enjoy your show while I’m walking my dog in the morning.” He found- Found you guys on the podcast. So you found us on the podcast.

Al: Yeah. Podcast app, let’s just say. Let’s insert that word.

Joe: All right. “Enjoy your show while I’m walking my dog in the morning. Have about $300,000 in a Roth 401(k), $190,000 in a Roth IRA, $130,000 in crypto, pension from my parents of $800 a month for life, personal pension of $25,000 a year at age 65, he’s going to claim Social Security at 67, or at 65 it’s $2500, at 67 it’s $3100-“ I’m sorry, “-$25,000 a year at 65 is the pension. He’s got $2500 a month at age 67 for Social Security or $3100 a month at age 70.” So why does he put pension annually and Social Security monthly?

Al: To mix you up.

Andi: Doesn’t Social Security actually- they quote based on the amount that you’re going to get monthly? So he just didn’t do the annual calculation for you?

Al: That’s the correct statement, Andi.

Andi: But that’s why I put it at the top of the sheet for you.

Al: That’s how the statements are. They say monthly. So he could have said $2000 a month pension, but he said $25,000 a year.

Joe: “He’s got rental income that generates about $3000 a month and the home is paid off. Life is, live a simple life, no extravagant purchases, but would like to take my daughter on nice vacations every Summer, maybe a budget of $6000. My rent is $1700 a month. Want to continue working part time and hoping to be done working when daughter enters college in 8 years. Thoughts and thanks in advance.” All right, Doc, you’re 54. You want to retire in 8 years, 62. You spend how much a month?

Al: Well, you have to- it looks like his budget is $6000. When I first saw this. I thought that was what he wanted to spend on his vacation. But I think maybe that’s what he wants to spend ongoing monthly that’s- so let’s go with that.

Andi: That’s how I read it too.

Al: Let’s say $72,000 a year is his spending.

Joe: $72,000. Okay.

Al: Yeah, and so if we go with that, so at least we got because otherwise we’re just- there’s no answer. We need a spending number. We’re gonna go with that. So Joe, just a little bit of math for you. So if you start with $620,000 and for 8 years at 6%. I’ve assumed he’s adding nothing. I don’t know. It doesn’t say. So, just what would that be in 8 years? It’s $1,000,000 bucks. And if he’s spending $72,000 in 8 years at 3%, that’d be $91,000. Okay, so his current income between rental and I don’t know what the $800 a month from parents, but we’ll just go with that. So $10,000, so that’s $46,000. So shortfall is about $45,000. Now, I didn’t do, I didn’t do inflation on the other income. So maybe it’s a little bit less than that, but $45,000 into $1,000,000, 4.5% distribution rate. And that would be at age 62. That’s probably pretty close given that he’s got a pension of $25,000 and 3 years later, and then Social Security. So yeah, it’s, that probably works.

Joe: He’s got $91,000 of fixed income at 67.

Al: Yeah, that’s right. Yep.

Joe: So he wants to retire at 62. So he’s got to bridge a gap-

Al: That’s the key.

Joe: If he wants to spend $70,000, $80,000, I think he’s right there. He’s going to have a higher distribution rate those first 7 years or 5 years. Maybe he wants to work part time too, is what he said. He’s got a pretty simple life. So, no, I think he’s right on track for sure given the fixed income that he’s going to have once he reaches age 67.

Al: I do too, and here’s an example. So-

Joe: He could blow through all of his liquid assets. And if he spends $91,000 a year, it sounds like this guy’s going to be pretty happy.

Al: Yeah. Yeah. Cause that’s the fixed income. So here’s an example of sometimes we just say in your 60s or six- you know, 65, 4% distribution rate as just kind of a ballpark, right? So here’s 4.5% at 62. Is that too high? Well, there’s fixed income coming. So probably not. It’s probably okay.

Joe: All right. Good luck. Hopefully, we got those numbers right.

Late 30s With $2M. Are We Really on Track for Early Retirement? (Rob, Kansas City)

Joe: We got. “Hey, Joe, Big Al, Andi. This is Rob from Kansas City. I’ve been a big fan of the show, listening for a few years now. Wanted to ask you my own financial spitball. I’m 39 years old. My wife’s 38. We drive a 2011 Subaru Legacy. And a 2017 Toyota Highlander. A drink’s of choice a little local pale ale and a glass of red wine. We’ve done a good job savings over the year but we’ve started to wonder, are we really on track? Life is hectic right now with 3 kids between the ages of 5 and 10 so it’s hard to project the next 25 years based on today’s numbers. I love a little spitball on how we’re doing. Especially as we juggle competing financial goals, like vacations, home improvements, funding the kids’ education, and even in early retirement, or at least downsizing to a less stressful career with a lower income. Here’s where we stand.” Kind of feel what he’s going through. Big Al.

Al: You can relate, huh?

Joe: I can relate a little bit. “Pre-tax 401(k) is $500,000. Roth 401(k) $600,000. After tax investments, $150,000. Total invested $1,200,000. We got 529 for the kids is about $100,000. Cash is $30,000. Total net worth is $1,800,000. I make around $300,000, which has doubled over the past 6 years, but it comes with a lot of stress. And I’m not sure how sustainable it is long term. My wife works part time and earns around $50,000, which is great while our kids are young. I’m willing to push through for now, but I’d love to scale back in my mid 40s and possibly retire in my mid 50s. We probably live off $150,000 a year, but I know a lot of that is discretionary spending. I think we can manage about $100,000 if needed, but I also know how easy it is to spend more when you’re not careful. $200,000 would be out of the question if we get a little loose. Given our savings, income and future goals, I’d love to hear your thoughts on whether we’re on track and how to balance everything moving forward. Thanks. Follow up. One part I did forget to mention is our current savings plan. We currently max both mine and my wife’s Roth 401(k)s as well as my HSA and save an additional $60,000 per year towards longer term expenses and financial goals like those mentioned above, vacations, renovations, children’s education and possibly an early retirement.” Okay. $1,200,000 for Rob in Kansas City. He is saving $60,000 per year, roughly, into that $1,200,000. Rob is what, 40 years old? 39?

Al: 39. So, Joe, here’s what I did. So, I said, I’ll just go with his scenario. He wants to work at current pace through mid 40s. So, let’s say 45, 6 years from now.

Joe: That’s going to be a challenge.

Al: Well, wait until I’m done.

Joe: Got it.

Al: 6%, 6 years, add $64,000 a year, he’s got $2,300,000. Then what I said is, now he wants to downsize. What if he could pay for all his expenses, but just not add to savings? What happens for another 10 years? So now you got $2,300,000, 10 years, 6%, no adds, and that’s $4,100,000. He’s got $4,100,000 at 55.

Joe: So you’re saying he downsizes his career, gets a less stressful job.

Al: And then he’s not saving in retirement-

Joe: He’s not saving a dollar.

Al: But he has a couple million dollars when he does that and then let’s that grow. And then it grows to $4,000,000.

Joe: Got it. So 55 is probably a realistic number for full retirement and you’re saying 45 could be realistic-

Al: – for downsizing.

Joe: – for a little downsize that less stressful.

Al: That’s I mean, that’s what I’m thinking.

Joe: But he’s saving $30,000 into the 401(k) and additional $60,000 to added expenses.

Al: And I didn’t even count that only because he said that was for vacations, renovations, kids’ college.

Joe: So yeah, that’s gravy.

Al: Yeah, that’s what- I mean some of that’s possible early retirement but I just said what if that was all gone. Right? So I think he ends up with over $4,000,000 if he works another 6 years at my assumptions, right? And then 10 years after that, doesn’t add anything, just lets it grow. So I, yeah, $4,000,000 at age 55, I think he could have a great retirement.

Joe: Now, I think Rob is doing a great job. I mean, he makes a ton of money, but also that comes with some stress, right? So he’s like, man, I can power through maybe a few more years, but God, I would love to get out of this mess.

Al: Yeah. I hear ya. Remember what I was thinking at that age?

Joe: You punched almost.

Al: Almost. Gonna make my money in real estate and then the great recession hit and then I went back to work. So you never know.

Joe: Yeah. And you’re still working.

Al: Still here. Right?

Joe: Almost 20 some odd years later.

Al: Almost. Almost. Almost. Almost.

Joe: All right, Rob. Very good.

Watch Financial Planning at Every Age on YMYW TV, download the Retirement Readiness Guide

Andi: Whether you’re a Millennial like Rob, a Gen-Xer like Joe and me, or a Baby Boomer like Al, the stakes are high when you’re trying to create financial security for your future. Watch Financial Planning at Every Age on Your Money, Your Wealth TV as Joe and Big Al guide you through the financial strategies and goals that each generation should implement that can mean the difference between a retirement of scarcity or a retirement of abundance. Click the link in the description of today’s episode in your favorite podcast app to watch Financial Planning at Every Age. Then click through to our YouTube channel to subscribe and join the conversation in the comments. Also, download the Retirement Readiness Guide for free to learn the secrets to controlling your taxes in retirement, creating income to last a lifetime, making the most of your retirement investing strategy, and much more. These plays will boost your retirement readiness despite the uncertainties of market volatility, inflation, rising healthcare costs, and the future of Social Security and Medicare. Just click the links in the description of today’s episode in your favorite podcast app to access all of these free financial resources.

Our Home Equity is Over the $500K Exclusion. How Much Will We Be Charged? Will This Kill My IRMAA? (Elisa, Fremont, CA)

Joe: Let’s go to Fremont, California. “Hi, guys, Andi, we waited too long to move, got comfortable, and now our equity is way over the $500,000 exclusion when we’re looking to sell. We bought our house for $300,000, and now it’s probably worth $1,200,000 or more. How will this excess equity be charged if I’m in the 24% tax rate? It will kick me over the 25% and kill my IRMAA?” Kill my IRMAA?

Al: Wow, that’s-

Joe: Not your IRMAAA. How can we move now and manage this tax bill? Love the show.” Okay, IRMAA. Yeah.

Al: Yeah. Well-

Joe: Kill my IRMAA. It sounds like you say killing a relative or something.

Al: Yeah, that’s referring to Medicare premiums that she’ll pay two years from now. Okay, so let me, tell you, Elisa, it’s probably not quite as bad as you think. And I just did a little calculation. What if you sold your home for $1,200,000? You’d probably have $100,000 closing costs. Just come up, you know, for realtor and other costs. So you probably net $1,100,000, something like that. And you bought it for $300,000, but you probably put improvements in it. So let’s just say $100,000 improvements. So $400,000 versus $1,100,000. So the gain is $700,000 in that example. Exclusion is $500,000. So maybe you have a taxable gain of $200,000 just with the assumptions I came up with. Now, even if you’re in the 24% bracket, it means your capital gain will be taxed at 20%. Probably maybe, yeah-

Joe: some at 15%-

Al: – some at 15%, but let’s just say at 20%, right? Some 20%, ,3.8% for the net investment income tax state of California, Fremont call it 9.3%. So let’s add those together. It’s about a third. It’s about 33%. So a third of $200,000 is $67,000. Call it $70,000. You sell your house, you walk away with $1,100,000 to pay $70,000. No one likes to pay $70,000, but I don’t think it’s gonna kill you.

Joe: Yeah. It’s not as bad as they think. Yeah. But it’s-

Andi: But is it gonna kill IRMAA? He said it’s not gonna kill her, but is it gonna kill IRMAA?

Joe: So what’s that gonna do to IRMAA? Well, it’s gonna increase the amount of income that you have. So yeah, it’s gonna increase the amount that you pay to Medicare.

Al: Yeah, for a year. I wouldn’t worry too much about that. I think a lot of times people-

Joe: Well think about it. You bought the house for $300,000-

Al: And it’s worth $1,200,000 and it’s like, that’s a great problem, right? I’m just saying the taxes in many cases, like cases like this are not as bad as you, probably think.

Joe: So my parents bought their house in like 1974 for like $50,000 and then they sold it when my dad died years ago. But my- when my mother sold it she sold it for like $80,000, 35 years later.

Al: Wow okay, well it made a nice profit there.

Joe: Relative on where you live.

Al: Yeah, these are, these, this is a California type problem.

Joe: That’s a nice gain that you have, and so if you gotta pay a little bit of tax, I think it’s alright.

Al: Right.

Should We Take the Monthly Pension or Lump Sum Payout? (Happy Camper & Jolly Pumpkin, WI)

Joe: “Hello Joe, Big Al, Andi, love the show, been listening for over 5 years. I listen to podcasts while exercising in the morning. I live in the beautiful state of Wisconsin. My drink of choice is a little nice Amber Ale. My husband’s choice of drink is a bitter IPA or a good whiskey. For today’s show, our names are Happy Camper and Jolly Pumpkin. We both drive company cars, but that will change in retirement. We will need to purchase two used cars in 2025. We plan on retiring next year at the age of 61 and 62. We are empty nesters and the kids are off the payroll and are sufficient and doing well financially. My question is whether I should take an annual pension or a lump sum. The annual pension will be $38,000 per year for life with no COLA or a lump sum of $520,000. Have no debt or mortgage, the house is worth $750,000, estimated expenses in retirement are $150,000. We’ll both plan to take Social Security at age 70. Estimated Social Security payment would be $55,000 a year for each of us. Currently investments are in broad index funds, pre-tax savings is $1,700,000. Roth savings, call it $900,000. Brokerage account, $300,000. I Bonds, $100,000. HSA, $100,000. Grand total, little over $3,000,000 mil, Al.

Al: Okay, got it.

Joe: “Two questions. Should I take the pension or the lump sum? Am I in a good financial position to retire in 2025?”

Al: Okay.

Joe: Right. Did you do any calculation here?

Al: I did.

Joe: How old is she?

Al: She’s 61 or 2.

Joe: So Jolly Pumpkin or is she Happy Camper?

Al: I don’t know. But I, here’s what I did.

Joe: What do you think? I think she’s-

Al: Well, she’s probably 61, only because it sounds like she wrote it and she probably put her age first, but I’m not sure.

Joe: But what are the names? I’m more curious on who’s the Happy Camper and who’s Jolly Pumpkin.

Andi: I would guess that means, again, she put herself first, so she’s the Happy Camper and he’s the Jolly Pumpkin.

Al: Well, yeah, we’ll go with that. I don’t know. Anyway, here’s all I did, Joe.

Joe: If you think of a Jolly Pumpkin, do you think male or female?

Al: Well, I would think female for Jolly Pumpkin.

Joe: Jolly Pumpkin?

Al: Yeah. Yeah.

Joe: Andi, does that-?

Andi: I was thinking more in terms of what the shape of the person might be but go either way.

Al: Okay. Well-

Joe: Happy Camper sounds like, I don’t know, like a rugged camper.

Al: Yeah. It sounds like a dude.

Joe: It does for me. I don’t know. I don’t know. I don’t want to be sexist. I don’t want someone to write in and, but I’m just thinking, all right, hey, someone’s got the overalls and, you know, kind of like a, you know, not saying that women can’t be farmers or campers. I’m sure I’m just going to get myself in trouble.

Andi: You should just stop now.

Al: So here’s what I did. I did, I said, all right, so what’s the net present value of $38,000 a year for 25 years? I used a 5% discount rate. I don’t, know if that’s a good rate or not. I get $535,000, which is about the same as the $520,000.

Joe: Would you put 4% in?

Al: Okay. 4%? Okay. Let’s see. So $38,000 is your payment. And 25 years and 4%, the present value is $593,000. Okay. So, but wouldn’t you think, wouldn’t you think that, I mean, in terms of what you could make on your investments?

Joe: You could.

Al: So it could be 6%.

Joe: It could be 6%, which would then bring it down to probably $500,000.

Al: Yeah, about $500,000. So it depends upon your discount rate. So I guess the point, what we’re doing is we’re trying to decide which is better for you and they’re relatively equal in terms of numbers, right?

Joe: So it’s going to rely on life expectancy. So if you live 35 years, the numbers are going to-

Al: -or 25 years.

Joe: 25 years. You’re 61, 62 years old, right? So if you have longevity in the family, you’re probably going to make out a little bit more if you take the pension. If you want more flexibility, if you want to invest the money, if you want to take on more risk, then you take the lump sum. If you want the certainty of a fixed income on top of your Social Security, then I would take the pension. You have $3,000,000 of other liquid assets that you can do Roth conversions with, that you can, you know, take on a little bit more risk. If you think about having a really strong baseline in regards to fixed income then maybe I would take the annuity plus Social Security. And then you can maybe you know, create a larger legacy for the kids. By taking on maybe a little bit more risk with the liquid assets.

Al: Yeah, I like your thinking. And partly, when I think about this at age 61, and I’m not going to collect Social Security until 70, that’s 9 years of going through my nest egg. I think I’d kind of like to have the pension. So it, the, it, my nest egg doesn’t take such a big hit waiting for Social Security.

Joe: I guess the point is it’s not a huge discrepancy. It’s not like you would make a huge mistake because of how the discount rates are working with this particular pension. I mean, we’ve seen before that the lump sum is a lot better than the annuity. And we’ve also seen where the annuity is a lot better than the lump sum. Doing the math here, given a certain life expectancy, the numbers are almost the same.
So, either decision is going to be-

Al: Personal choice.

Joe: Yeah, personal choice. Either decision, I think financially, from a numbers perspective, you’re right on. So, I wouldn’t necessarily-

Al: And are they in a good position to retire? Just quick math, $150,000 of expenses, if they take the pension, $38,000, shortfall’s $112,000 into $3,000,000, 3.7% distribution rate, age 61, 62. Yeah, that looks pretty good.

Joe: Yeah. It looks really good. Again, there’s a lot of forces that are unknown and creating the income. Where are you going to sell? How are you going to manage the risk?

Al: That’s right.

Joe: What the portfolio looks like, strategy-

Al: Yeah. Well, back of the envelope, this looks pretty good.

Joe: But they’ve done a really good job savings, but then it’s like, all right, well, let’s say you take the lump sum, or you, like you take the pension. You still have to take $110,000 distribution.

Al: You do, right?

Joe: So you’re still draining the portfolio quite a bit. Then you’re thinking all right, so I have 7 years of pulling $110,000 out.

Al: Or even 9 years, 61.

Joe: Yeah, 9 years, I’m sorry. So again, that’s $1,000,000 plus dollars that you’re pulling out of your $3,000,000. So a third of your nest egg is taking out of the portfolio before you reach full Social Security.

Al: So you better have it invested for some growth because that’s how you need to do investments in retirement.

Joe: Sometimes I feel like we give a little bit of false confidence with people. Yeah, it looks great. It’s back in the envelope spitball. All right. Well, and then in 5 years, we’re going to get calls. Hey, Big Al-

Al: Yeah, you said-

Joe: You said-

I’m Not a Fan of Retirement Accounts. Talk Some Sense Into Me. (Lloyd Christmas, SD)

Joe: All right. We got Lloyd Christmas. Okay, Dumb and Dumber. “Hello, love the show. I’m not a fan of the idea of retirement accounts.” Okay. All right. “I own a small business and we offer a 401(k) to employees, but I don’t use it. My wife, Mary, and I are approaching 40 so retirement isn’t much of a thought yet. We have $4,000,000 worth of commercial real estate, about $2,000,000 in my business, about $1,000,000 in real estate funds and she has about $300,000 in her 401(k). Our CPA and CFP® are both telling me about the immediate tax benefits of contributing to a 401(k), but I’m pretty sure our effective tax rate will continue to go up as we age. I have no interest in paying more taxes later. If we did the Roth conversion we don’t save taxes now. I’m struggling with changing what we’ve been doing as it’s been working. Talk some sense into me. Wife drinks anything but whiskey. I drink anything but tequila.”

Al: Wow, that’s a broad range.

Joe: I say to Lloyd Christmas from South Dakota, keep doing what you’re doing.

Al: It’s working.

Joe: It’s working. You’re 40. You’ve got a net worth of what?
Well, several million dollars?

Al: Yeah. Over $7,000,000.

Joe: You got $7,300,000 of total assets. I don’t know what the debt is on your real estate. Right. You like real estate. You got a business that’s worth $2,000,000 bucks.

Al: Yeah, they’re going well. So I, Lloyd, I’m, I might offer one thing for you and that is your taxable accounts are in real estate funds. Why not at least have a Roth option in your 401(k)? Contribute to the Roth and invest in your real estate funds in the Roth, because that’ll be tax-free. Same/same, except now you’re creating tax-free income in the future.

Joe: Yeah. If you love real estate, just open up a Roth or convert your wife’s. And then you can still buy real estate funds.

Al: You can buy real estate funds, or you can even buy real estate in a self-directed Roth, if you really want to go that route.

Joe: You’re probably a little heavy on real estate.

Al: Well, so my second comment is, that reminds me somewhat of me at age 40, although the numbers were a lot smaller, I will say. But I had a business and I had real estate, not much else. And I felt pretty good. Until the great recession hit, then I didn’t feel so good. Now I realize it’s kind of nice to have a little bit of diversification. So that’s just me. I get it. I love real estate too. I always have.

Joe: But I don’t think we got to talk some sense into you, but I think there’s other things that you could be potentially doing that would benefit you long term. Diversification’s always a good bet, but concentrated risk is what makes people super successful and wealthy.

Al: I know. And we don’t talk about this often enough, right? So we talk about diversification. So what is diversification? That’s having all these different asset classes because they go up and down at different points and you have a smoother ride. But to get rich, the best way is to concentrate in a single company or asset class, but that asset class or company or real estate has to do really well. Sometimes it works, sometimes it goes the other direction and you end up with very little. Concentration is a lot riskier, but Joe, you can make a lot more money if you pick the right asset class.

Joe: Yeah. Well, he owns a business that’s going to make him a lot of money, right? So he’s doubling down on his business and it’s worth a couple million dollars. He’s 40 years old. I have no idea what type of business that is, you know, or the wealthiest people, the ones that take the most risk, but also you could lose your ass- Assets, assets, very quickly here too, it’s a double-edged sword so you just want to be careful. It depends on your risk tolerance. It sounds like he has an appetite for risk.

Al: It does.

Joe: But you just have to be aware that with risk, it can go the other way on you. That’s $7,500,000 that you have in total assets- How would you feel if it went to $2,000,000? It’s like what? Boom. Or $3,000,000. Would that blow you up? If not, then I think, all right, keep doing what you’re doing. And I don’t need to talk sense in you, but you have to look at the downside. If I’m not looking at the downside, what is the worst case scenario? I’m not saying it could happen, but it may, if you want to protect that, most people are twice as fearful or twice as upset or twice as mad when they lose a dollar than they are to gain a dollar.

Al: That is true.

Joe: You’ve already done way more than most in accumulating a net worth of $7,000,000. Now you just have to talk to yourself to say where do I want this $7,000,000 to go? Would I be twice as happy if the $7,000,000 went to $14,000,000? Or how mad would I be if that $7,000,000 went to $3,000,000? Is your life going to change all that much if that net worth went to $10,000,000 or $20,000,000 versus if it went to $2,000,000? Yeah, that’s $7,000,000 net worth Al, that’s a ton.

Al: At age 40? That is a ton. And so if that seems like a good amount, then think about diversifying. But what diversifying does is it’s safer. It allows you to hold on to what you’ve made, but you may not have the same upside. That’s really what it comes down to.

Joe: So, Lloyd, his buddies, anyone know his buddies? It was Harry. What was Harry’s last name? Dumb and Dumber?

Al: Yeah, I don’t remember. You probably know. It kind of looked like-

Andi: Harry Dunne.

Joe: What was it?

Andi: Harry Dunne. D U N N E, Dunne.

Al: There you go.

Joe: Speaking of Dunne, we’re done.

Al: Yes.

Joe: Great job, Andi.

Andi: Thank you.

Joe: Al, Wonderful job.

Al: You too. It was fun, as always.

Joe: And we’ll see you guys next week. Show’s called Your Money, Your Wealth®.

Al: Great.

Outro: Next Week on the YMYW Podcast

Andi: We’ve got new blog posts on Year-End Financial Moves to Make Right Now and the US National Debt and it’s Impact on Long-Term Investing, check out the links in the episode description for these and all our other free financial resources.

Your Money, Your Wealth is your podcast, and this show would not be a show without you. Keep sending in your voice messages, your emails, keep watching and commenting on YouTube, and leave us your honest reviews and ratings in Apple Podcasts. And keep telling your friends how we’re making fun of finance over here at Your Money, Your Wealth.

2025 is just around the corner. Find out more about those last minute tactics you may still be able to leverage to bring down your 2024 tax bill, and make sure your plan for your financial future is secure. Schedule that free financial assessment with one of the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors. It’s free, and it’s tailored specifically to your financial needs, your risk tolerance, and your retirement goals. Don’t procrastinate – the calendar is filling up quickly. Click the Free Assessment link in the episode description or call 888-994-6257. Book yours now while there’s still time.

Your Money, Your Wealth is presented by Pure Financial Advisors, 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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