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 manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
July 4, 2023

It’s a common question: should you pay off your mortgage when you have extra cash, or invest for retirement? Joe and Big Al spitball on how Ms. Moneybags and her wife-to-be should use their upcoming windfall. Plus, what should Bob’s asset allocation be as he nears retirement? Should Harley and Harlene do Roth conversions after tax rates increase, and should they take advantage of net unrealized appreciation (NUA) on Harlene’s company stock? Pete needs a 13-year retirement plan sanity check, Lauren wants to know if she can retire early or at least go part-time, and Michael and Carol want the fellas to spitball whether they’re on track for retirement.

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Show Notes

  • (00:57) Should We Pay Off the Mortgage or Invest Our Windfall On the Way? (Ms. Money Bags)
  • (09:00) What Should My Asset Allocation Be When Nearing Retirement? (Bob in New York)
  • (17:21) Should We Convert to Roth After Tax Rates Go Up? Should We Leverage NUA? (Harley)
  • (29:04) 10-13 Year Retirement Plan Spitball Sanity Check (Pete, AL)
  • (38:15) Retirement Spitball: Are We On Track? (Michael & Carol, Las Vegas)
  • (43:17) Can I Retire Early or Go Part Time and Stop Contributing to 401(k)? (Lauren, IL)
  • (48:24) The Derails

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It’s a common question: should you pay off your mortgage when you have extra cash, or invest for retirement? Joe and Big Al spitball on how Ms. Moneybags and her wife-to-be should use their upcoming windfall, today on Your Money, Your Wealth® podcast 436. Plus, what should Bob’s asset allocation be as he nears retirement? Should Harley and Harlene do Roth conversions after tax rates increase, and should they take advantage of Net Unrealized Appreciation or NUA on Harlene’s company stock? Pete needs a 13 year retirement plan sanity check, Lauren wants to know if she can retire early or at least go part time, and Michael and Carol want the fellas to spitball whether they’re on track for retirement. Get yer Retirement Spitball Analysis, here: visit YourMoneyYourWealth.com, click Ask Joe and Big Al On Air, and send the fellas 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.

Should We Pay Off the Mortgage or Invest Our Windfall On the Way? (Ms. Money Bags)

Joe: Hello from Minnetonka, Minnesota. I know where Minnetonka is.

Al: You do.

Joe: Yeah. Lord Fletchers. Used to hang out there.

Al: Okay.

Joe: Quite often.

Joe: “I have been listening and hanging on circa episode 30 or so.”

Andi: Wow. Ms. Moneybags. Wow, that’s a long time.

Al: That’s a while ago.

Andi: That’s like 2014.

Joe: Wow. “My partner and soon to be wife, on the other hand, rolls her eyes every time I put any personal finance podcast on the air, but has snorted in a few chuckles during your podcast derails.”

Al: I think your partner is intelligent to  roll her eyes at this show.

Joe: I love that. Okay. Got a big word coming up here, Big Al.

Al: Can you do it? I believe in you.

Joe: “We are in a conundrium-”

Al: Oh, you are so close.

Joe: So close.

Al: Conundrum.

Je: “- conundrum and debating if-“ I always like to put in extra syllables.

Al: Yeah, yeah. No, I understand.

Andi: Makes it unique to Joe.

Joe: Yeah. “-and debating if we should pay off our mortgage, invest all of the recent windfall that will be coming our way. The windfall after taxes, fees, et cetera, will net out to approximately $1,500,000. We are both 53 and have been blessed with good careers, and saving habits. We both plan on retiring at age 60 in order to piggyback on our employees retirement health benefits once we retire. Our investments are in low cost index ETFs and mutual funds with an allocation of 70/30 stock/bond range. Annual gross income, soon to be wife $100,000, me $300,000 to $350,000, depending on if I get a bonus.”

Al: Wow.

Joe: “Savings total $4,500,000, total traditional IRA, Roth IRAs, $3,000,000 in a brokerage checking and then ESOP $1,500,000.” That’s pretty impressive.

Al: That’s- yeah. That’s good’s.

Joe: Ms. Money Bags. That’s why it’s money bags.

Joe: Yeah. That’s a big bag. That’s a big ass bag of money.

Al: It’s big.

Joe: “Taxes, the IRS and the state of Minnesota have, for the last 15 or so years, sent us a thank you note every year since we’ve hit the top of the brackets consistently and don’t see that changing until we retire at age 60. House, a couple of years ago, we remodeled our entire house and after the dust settled, literally, our home was appraised at $1,700,000.

Currently sitting on a 30-year loan with an interest rate of 3%. The total monthly payments is currently $8000, which includes principal, tax and insurance. The balance of the mortgage is $1,300,000, home equity $400,000. Annual spending, after taxes is around $175,000, which includes our current mortgage and all discretionary, non-discretionary expenses, no debts except the mortgage. Annual savings, on average, we save about $80,000 plus $20,000 in employer matches, including $100,000 across all of our accounts. We’re confident given our current savings, my soon-to-be wife’s pension, estimated to be $25,000 plus a COLA per year at retirement. Social Security at 70 and 7 more years of annual savings at our current rate, that we’ll have more than enough to cover the expenses including our current mortgage and then some during our retired years. This is based on using a 6% to 8% rate of return, a 3% withdrawal rate and inflation rate of 3.5%. Given our confidence and grasp of our cashflow and spending habits. Here is the conundrium-“

Al: Okay, Okay. Okay. We got to it. Good.

Joe: “Given our low mortgage interest rate and that we can cover our savings and expenses needs between now and when we retire, one, should we pay off the mortgage of the $1,300,000 and then invest the remaining of approximately $150,000 giving us free monthly cash flow of about $7500 that we would invest accordingly to our investment plan goals and tap into excess cashflow as needed? Or, should we continue to stay the course in our current situation, invest the entire $1,500,000 according to our investment plan goals and tap into it as needed-” So they’re this getting this windfall here. And so the question with this windfall, do they pay out the mortgage? Or did they invest it?

Al: Right. Got it.

Joe: All of that for that question.

Al: Yeah. That was- could have been shortened a little bit. We got a lot of color, didn’t we?

Joe: Oh my God.

Al: And I do agree-

Joe: I mean, whereabouts in Minnetonka do you live? How often do you go to Lord Fletchers?

Al: Well, I will say-

Joe: Do you have a boat? Do you cruise around?

Al: -the name is correct, Mrs. Moneybags.

Joe: “I drive a 2015 Acra MDX and my soon to be wife drives a 2012 Volvo XC70. We plan to update with newer used cars when this windfall comes in at some point.

Al: Got it. Well a chunk’s gotta go there.

Joe: Oh yeah. “No kids. And in the process of adopting a cute Labradoodle. My soon-be-wife enjoys a chilled glass of wine, white wine during the mosquito landing summers and red wine during the winter months. I love a tall glass of Uncle Val’s Gin and tonic.” I’m just a big giant jug of it because I’m richest.

Al: I got the money.

Joe: Man, I just look at my bank accounts and just chug Uncle Val’s gin and tonics while sitting by the lake. Oh, look how nice that is.

Al: I know.

Joe: Just killing it at Lake Minnetonka.

Al: I could see it.

Joe: A big jug of Uncle Val.

Al: I haven’t been to that lake, but I’ve been to-

Joe: Oh-

Al: I can imagine.

Joe: So beautiful. “Thank you very much for your years of mind blowing and informative spit balling, many laughs and Joe’s word-butchering moments. That’s the best.” Yeah. I blew up a couple just on this one. Pretty wordy.

Al: Super close. Well, would you pay off the mortgage with the-

Joe:  I would keep the mortgage.

Al: Yeah. Me too.

Joe: I would invest that money because they can already pay off the mortgage at any time.

Al: I know.

Joe: So let’s say something happens to Ms Money Bags and the soon to be wife and the giant jug of Uncle Val’s.

Al: Yeah. The mortgage is at 3%. That’s a- that’s a great rate. You know what, if you wanna make extra principal payments, double up on your payment, $16,000 a month instead of $8000. I’m okay with that, but yeah, no, I wouldn’t use a lump sum to pay off something like that.

Joe: Not at 3%. I like liquidity.

Al: Me too.

Joe: You know, as you’re transitioning into retirement, you wanna have liquidity there. So if-it’s all in the mortgage and then it’s like, okay, well here now I want some liquid capital besides my retirement accounts and the ESOP account and blah blah, and the Roth accounts and things like that. You wanna have that diversification there so you can- and at some point, if it’s like, you know what, I don’t want this debt hanging over my head. Well, guess what? You could cut a check and just pay off.

Al: Yeah. And chances are, we don’t know the details on the $3,000,000 in retirement accounts, but I’m betting a lot of it is 401(k) or traditional IRA. So you’re gonna wanna save a bunch of money for Roth conversions as your income is lower. So yeah, I think-

Joe: Yeah, the $4,500,000 is 401(k) traditional and Roth IRA, so we would say a couple bucks- Well, she’s been listening since- Yeah, circa 30-

Al: Circa 30. What are we on now, Andi?

Andi: 436.

Joe: Oh geeez.

Andi: 400 episodes she’s been listening for.

Joe: Oh my God, I could- this is the future wife gonna marry you. I mean, I can see why you would roll your eyes.

Al: I can totally see that.

Joe: Oh my gosh.

Al: You know, she was thinking for so long. I can do it. No, I can’t, no, I can’t, I can.

Joe: All right, well, let me just look at her checking account one more time. Okay.

Al: Okay. I it. Yes, I did. Yes. I podcast.

Joe: I can’t do this.

Al: It’s over.

Joe: It’s over. Oh boy. Well, congratulations on the marriage. Congratulations on all your success and no, thank you very much. All kidding aside, to hang with us that long. That’s great.

What Should My Asset Allocation Be When Nearing Retirement? (Bob in New York)

Joe: I got Bob, New York goes. “Hello Joe, Big Al and the lovely Andi. Love the show. First things first, love a good bourbon. Drive a 2017 Ford Explorer. Have one golden retriever with a neurotic, but very cute- who is neurotic. I had a question regarding what my asset allocation should be nearing retirement. I’m 56 and plan retired at 60. My wife and I have $2,300,000 saved in combined 401(k), Roth IRAs, HSA, and taxable brokerage accounts. We save $60,000 a year into these accounts. We have $40,000 per year rental income, which will continue in retirement. We’d like to spend about $150,000, $160,000 probably in retirement. Presently, my stock and bond allocation is 75/25, which I feel is a little bit too aggressive given that we want to retire in 4 years. I’m calculating a 6% return for the next 4 years. I plan on taking Social Security at age 62 because I have a young son who’s disabled and wanna take benefits early, so he has money we can save for him when we’re no longer here. What do you think is a good stock/bond allocation for us in the next 4 years before retirement? Thank you for advice and insight.” Well, we don’t give advice on this program.

Al: Yeah. We just talk and-

Joe: We just chat and spitball a little bit.

Al: Like, Joe, this were you, what would you do?

Joe: Yeah. You know, just like couple of kids hanging out.

Al: Yeah. Right.

Joe: Having a couple of cocktails talking about finances. Cuz Al and I are always in the mood for finances.

Al: It’s amazing how we, even when we’re not, this show starts and we’re right there.

Joe: So, all right. Good question, Bob, because sequence of return risk, once again, is kind of the bearer of all evils-

Al: Sure.

Joe: -when it comes to retirement. So you don’t wanna plan for your allocation like the day before you retire. You know, some people in our industry like to call it a glide path. And I hate that terminology. I just hate saying it or hearing it.

Al: I know you don’t like it.  But if you have no plan-

Joe: What’s your glide path?

Al: -it’s as good as anything.

Joe: Do you have a glide path so you glide right into it? Or some people call it like the retirement red zone. I’ve heard that.

Al: Oh yeah, I’ve heard that too.

Joe: Yeah. That’s like 5 years before and 5 years after.

Al: I think we used that on our TV show.

Joe: Yeah. 10 years before? 10 years after? I don’t know, we stole it from someone.

Al: I’m sure.

Joe: I think he’s gotta take a look at the allocation. He’s got $2,300,000.

Al: Yeah, so I did a little math. So $2,300,000, 4 more years saving $60,000 a year at 6%. He ends up with about almost $3,200,000. So let’s go with that.

Joe: Hypothetically.

Al: Hypothetically. Yeah. Given, given those assumptions.

Joe: Sure. Right.

Al: So $3,200,000, age 60, to be on the safe side, 3% distribution rate. Maybe you could pull out about $100,000. You got $40,000 coming in from rentals. You’re $140,000. You’re really close here to making that work. And that’s before Social Secur- Well, Social Security at 62. Do we know what that is? No, we don’t. So yeah, this, so, so probably, probably it works just fine. But the real question is, what should be the allocation? The allocation to get there, right? 75/25.

Joe: What do you got for a shortfall, Al?

Al: Without Social Security, about $10,000 to $20,000.

Joe: $20,000 needed from the portfolio?

Al: No, no. I just- I did it the other way. I said that $3,200,000 could give you about, at a 3%, could give you about $100,000.

Joe: Okay. He wants $160,000. He’s got $150,000, $160,000, he’s got $60,000 coming- or $40,000 of rental income. So he needs $120,000.

Al: Yeah, $120,000. So let’s take $120,000 into $3,200,000. So that’s a 3.7% distribution rate, which is a little high at 60, but that doesn’t include Social Security. So, it should be just fine. Likely. Right?

Joe: Yeah. Okay. So here’s another way to look at it. Depending on how Bob feels about his risk. So let’s say he needs- let’s just ignore Social Security. Because we don’t know what that number is.

Al: Yeah. We don’t. You’re right.

Joe: So he needs $120,000 a year. That’s the demand for the portfolio. Plus taxes. Plus the cost of living.

Al: That’s right.

Joe: But I’m just gonna keep the math really easy. So Bob can do this at home.

Al: Yeah, that’s right.

Joe: So $120,000. Let’s say he’s pretty conservative, so it’s like, alright, well I want 10 years of safety. So I’m going to retire at 62. So at age 72, I want that 10 years where I’m not worrying about stock market volatility. I know that I have a very safe safety net and I know that over a 10-year time period that stocks usually go up. Do you agree with those assumptions?

Al: Sure.

Joe: So then you would take $120,000 times 10 years is $1,200,000. So then you take $1,200,000 and then you can divide that into $2,300,000. That’s his total nest egg today. But you said it’s gonna be what, three something?

Al: $3,200,000.

Joe: And I guarantee it’s gonna be a 60/40 split. $3,200,000-

Al: That’s at a 6% return. Yep.

Joe: So 40% bonds/60% stocks. If you have 40% safety, short-term bonds, treasuries, CDs, cash, 40%. That will give you 10 years of very safe assets that you can draw from if the market just takes a total dive.

Al: Yeah. Yeah. I 100% agree with that. And another way to think about this is, is if you take that $1,200,000 into what you currently have, now you’re gonna have to have more bonds and stocks. And I’m not sure that that gets you to where you wanna be.

Joe: So you could look and say, all right, well, I’m gonna forecast 6%. I’m- but 6%, even at a 50/50 split, you’re probably getting 6%.

Al: You could.

Joe: Given where fixed income is today and given- depending on where markets go over the next 5 years.

Al: You could, but I just think it’s a little more likely to have a little bit more equity in there, given historical trends. But yeah, but you don’t, you don’t know. You don’t know. I mean, I think the numbers look good. I think I would probably do 60/40 myself, because I want to have enough juice in it to get to this target. But I also agree with your analysis. What do you wanna end up with to make sure you have 10 years? Like if the market goes down for year, after year, after year, at least I got this money. Now I know you’re not living off the income, you’re selling the bonds or bond funds to be able to whatever.

Joe: But you’re not selling stock when they’re down.

Al: Correct. That’s the key.

Joe: It gives you better discipline. You just have to keep it outta sight, outta mind. And say, all right, well, the market’s down 10%, 20%, 30%. A lot of people will look at their entire portfolio, freak out, sell everything, go to cash.

Al: That’s right.

Joe: Right. You can’t do that, especially in retirement because this is your nest egg. This is- you’re not going back to work. And if you believe in markets that markets, you know, go up and go down, it’s been volatile. You know, he’s in his 60s, accumulated a lot of cash. So he understands markets. So, but once you retire and start living off of this stuff, you forget everything that you’ve learned throughout your life in regards to investing.

Al: And some people go completely the other way. They go 100% safe, realize- forgetting that they’re gonna live another 25 years or longer.

Joe: Right. So that’s what I would do. That’s the math. You just kind of take a look at, all right, well maybe 10 years, maybe it’s 7 years, maybe it’s 12 years. You want enough safety there to give you the shortfall that you need. And then that would be your stock bond allocation. That’s how we would kind of look at it. Or you wanna take the least amount of risk possible that gives you the return you need.

How much money do you need in retirement, and how does your retirement account balance stack up right now? What’s your contribution rate? How much of your portfolio should be in cash? How should your invested assets be allocated? Learn how to answer these questions and find out how to manage your assets at any age with our Portfolio Tracker guide, available for free download from the podcast show notes at YourMoneyYourWealth.com. Just click the link in the description of today’s episode in your favorite podcast app to get there. You can say thanks just by spreading the love and sharing the knowledge: tell your friends and colleagues about YMYW and all the free financial resources.

Should We Convert to Roth After Tax Rates Go Up? Should We Leverage NUA? (Harley)

Joe: “Hi Joe and Al. First off, I love your show.”

Al: Nice.

Joe: “I have been a full-time podcast listener for over two years now and I think you guys are dope.” What’s a full-time podcast listener?

Andi: I was gonna ask that. What is that?

Joe: It’s not part-time. It’s not halftime.

Andi: That means he’s listening to the show 8 hours a day?

Al: No, that means when it comes out – it’s like live.

Joe: He’s in there. All right, awesome. Dope. “But let’s give credit where credit is really due, without Andi, you guys would be out of control.”

Al: Yeah. We used to be without Andi and-

Al/Joe: -it was outta control.

Joe: It was terrible.

Al: That’s true.

Joe: “My name is Harley, 64 years old and retired at 62. My name, my wife, Harlene. 65 years old and retired at 60.” I’m guessing he drives Harley.

Al: I’m guessing too. I like it.

Joe: “We live in California. I drive a 2019 SUV and my wife drives a 2011 SUV. I love a cold Hefeweizen beer in a frosty mug and my wife loves a good stout. Assets $5,400,000. “ At least he didn’t start with that part. Usually, ‘hi, my name’s Harley I have $5,500,000. Love your show.’ “We have over $2,700,000- $1,200,000. Wife has $1,500,000 in traditional 401(k)s, which includes $300,000 in a Roth, $400,000 in company stock. 85% of the $2,700,000 is invested in the S&P 500 index funds and the other 15% or so in company stock. Additionally, we have $600,000 in a brokerage account, mostly in stock and index funds, $650,000 in cash. Our house is paid off worth $1,400,000. No debt. Income $120,000. Expenses $110,000. I received a single life annuity pension of $70,000 a year, no COLA, and my wife started Social Security at 64, received $26,000 per year. We earn another $24,000 per year in bank interest in $15,000 in dividends, capital gains each year. With the pension, Social Security, bank interest, and stock dividends, we have enough to cover our $110,000 expenses each year. I will postpone starting my Social Security till age 70 and will receive $55,000 per year. I chose 70 to ensure my wife has the largest survivor benefit, since I do not choose- I did not choose a survivor benefit on my pension.” All right. Good thinking, Harley.

Al: Yeah, very good.

Joe: “Additionally, because I have no pension survivor option, I took on a life insurance policy for 10 years, $86 a month to get me to age 70. We have no plans to touch our investments and why we are on 100% stocks. RMDs will start at age 73, expect $4,200,000 which includes at least $500,000 in Roth if we don’t convert at all. Before the tax rates revert back in 2026, we’re thinking about converting $75,000 to $100,000 per year in Roth. We plan to convert my wife’s 401(k), which has the company stock to a traditional IRA and leveraging the NUA option for the $400,000 of company stock and paying the ordinary income tax on $100,000 basis of her company stock. My two spitball questions are, should we do conversions to Roth beyond 2025? And if so, up to what tax bracket and what age? Secondly, for our situation, is leveraging NUA a good idea? And if so, would it also be smart to purchase another $200,000 of company stock in my wife’s 401(k), which will increase the basis from $100,000 to $130,000, but will further reduce our RMDs? The thinking is it’s cheaper to pay ordinary income tax on the extra $30,000 versus the ordinary income tax on the $200,000 when we sell for RMDs. I realize there’s risk with having that much money invested in company stock, but we are confident this company will continue to be an industry leader. This will give us $600,000 in today’s dollars in company stock, in which $470,000 would be treated as long-term capital gains.

Wouldn’t have we ever decide reducing our overall RMDs. Thanks for the great shows and continued success.”

Al: Wow. Great job.

Joe: All right, so here’s what I’m gonna do, and we’re gonna take a short break and we’re gonna come back and kind of break down Harley’s question. Because there’s some meat here and there’s maybe some confusion too.

Al: Yeah, agreed.

Joe: So he’s got a ton of dough, he’s done a great job. $5,500,000, 64. He has got 10 years roughly until his RMDs. He’s got enough money in his pension, Social Security, dividends, interest to cover his monthly nut.

Al: Correct.

Joe: And so he’s got this in- or his wife has an interesting tax play, which is called Net Unrealized Appreciation. So he’s considering doing that, as well as Roth conversions. So let’s kind of break down NUA, Al.

Al: Okay. Yeah, let’s start that. Net unrealized appreciation, NUA for short. So here’s an opportunity when you have company stock in your 401(k), right? You have an opportunity generally at retirement is to-  you can leave your money in the 401(k). But a lot of times people roll it to a IRA. But the part that company stock- part that you have in company stock can actually go right to your brokerage account. Not a- not an IRA, not a Roth IRA. Go right to your brokerage account. And here’s what happens when you do that because it’s company stock, whatever you paid for it. So in this case, let’s just say the stock is worth $400,000 and-

Joe: – you paid $100,000.

Al: You paid $100,000, right? So $100,000 is what you paid for it. That’s what you pay taxes on currently. $100,000 is added to ordinary income in the year you do that NUA. It goes from your 401(k) to your brokerage account, not your IRA, to your brokerage account. You still have a stock, though, worth $400,000. So when you eventually sell that stock, you will have $300,000 of gain. The year that you sell it, you have long-term capital gain, which is a lot lower tax rate than ordinary income. In many cases, it’s about half or less the ordinary income rate. So there’s an opportunity to save quite a bit of taxes when you’ve got highly appreciated company stock inside your 401(k). So that can be a great option. Now, you will add $100,000 of income the year that you do that, but not $400,000 of income. And then you have control over whenever you sell that stock, as to when you pay the tax on that. So that’s the- that’s the strategy. And, and what do you think, Joe, good idea in this particular case?

Joe: Well, he fixes income is $120,000, $132,000. So he’s in what, the 22% tax bracket? So adding another $100,000, he stays in the 22% to move $400,000 out of a retirement account.

Al: Yeah. It’s kind of a no-brainer.

Joe: But see if they keep- here’s what happens quite a bit, because a lot of people are not familiar with this overall strategy. They keep the money in the stock and then they sell it and they- they’ll diversify. So in this case, they bought it for $100,000, is the basis. It’s now worth $400,000. So the $300,000 is the net unrealized depreciation of that stock. That can be taxed at capital gains. If he keeps it in the retirement account, everything that comes outta the retirement account is taxed at ordinary income.

Al: Correct.

Joe: If he diversifies out of that stock, he loses the net unrealized depreciation forever.

Al: Right.

Joe: So moving the money out, adding $100,000 of ordinary income, he’s still in the 22% tax bracket, $400,000 comes out, you pay capital gains tax on it. All good. Do that all day long. Because they have so much money in retirement accounts.

Al: And if you wanna start to diversify, then you can, right?

Joe: Then sell it.

Al: Then sell it. Your capital gains sit on top of your ordinary income, so you’re in the 22% bracket or 24%, whichever, doesn’t matter. And then if you do a ca-if you sell half of it, let’s just say, and so you have $150,000 of gain, let’s just say, then in that particular case, you pay capital gains on $150,000, which would likely be the 15%, it could be 20%. You might have some of that net investment income tax on top of it. So you gotta- and state taxes, you gotta calculate all that, but you can diversify. It’s not gonna change your 22% or 24% tax bracket.

Joe: So his other question’s confusing to me because if he buys the stock today, $200,000, that’s his basis today.

Al: Yeah. That- we’re missing something here. Because what he was inferring is he could buy another $200,000 of stock for $30,000, which is not possible.

Joe: Right. That’s a pretty deep discount.

Al: I would do that any day of the week.

Joe: You would be a multi-billionaire.

Al: I’ll take $1,000,000 of that stock and I’ll give you $150,000.

Joe: So, because he’s adding $200,000, he’s buying the stock today. The basis is the price today.

Al: Yeah. Right. I don’t, I don’t-

Joe: He might be thinking it’s based on the-

Al: I don’t know what he’s thinking about.

Joe: -the cost of the initial purchase.

Al: So, unless we just don’t understand what’s going on here, because we’re going with what we read and what we saw. You’re limited to what you already have. Or your wife’s limited, she’s got $400,000?

Joe: She can buy more stock.

Al: She can, but then it, it’s not highly appreciated.

Joe: It’s not highly appreciated.

Al: It is what it is.

Joe: It is. So you buy $200,000 of company stock in your 401(k) plan today, and then you do an NUA, you’re gonna-

Al: It’s the same thing.

Joe: It’s the same thing. It’s ordinary income coming out on the basis.

Al: How this works is because it’s highly appreciated over what you paid for it.

Joe: You’ve been with the company for years.

Al: So if you- if you’re in that situation, this is a great strategy. I will say not too many people know about this. A lot of advisors don’t know about, a lot of accountants don’t know about it. A lot of custodians don’t know about it. It’s so hard sometimes to get the custodians- No, this is what this is-

Joe: Right. This is what I’m doing. What? I don’t understand. Okay, can I talk to your manager? But yeah, I like that- you wanna still continue to do conversions. One of the things that I don’t necessarily like is how he’s managing the income because he could be more tax efficient potentially. Because it’s like, well, right now I’m taking the dividends. Maybe I’m buying a little bit more dividend paying stocks. It seems to me his expenses are $100,000 to $110,000, but he has more income. And if he’s reinvesting or he have interest in, I have this and that or if I’m just reinvesting it, you might wanna be a little bit more tax efficient to keep that stuff off your tax return. As you’re doing Roth conversions, because you can convert more dollars if you have less income on your tax return that you’re not actually using to spend on other goods and services.

Al: Yeah. So right now as we do this broadcast, the top of the 24% bracket for a married couple is $364,000, right? So you can do a huge conversions and stay in that bracket. In 2027, I should say 2026, when things change, the tax rates revert to what they were before. Or that’s what’s scheduled, who knows exactly what’s gonna happen. So you really won’t know the answer of 2026 and beyond until we get there and we know what the tax rates are. But even if the tax rates change to what they had been before, there’s probably still some opportunity, maybe not as much. And so you’re gonna have to see when you get there.

Joe: Well, let’s say he’s got $3,000,000 roughly in retirement accounts at 62 or 64, 10 years from now that $3,000,000 is $6,000,000.

Al: Yeah. Yeah.

Joe: 4 times 6 is $240,000 of an RMD.

Al: Yeah. All a sudden.

Joe: Plus his pension, plus Social Security, plus interest, plus dividends and everything else, he’s gonna be in a giant bracket. So you want to get as much as that out, probably in the 22%, 24%, I think makes a ton of sense.

Al: Yeah. And even past that, I mean, maybe it’s gonna be 28%, but you gotta look at that.

10-13 Year Retirement Plan Spitball Sanity Check (Pete, AL)

Joe: We got Pete from Alabama here. “Hey y’all, this is Pete from Alabama. Love the show. I think we’re on track, but a sanity check is always appreciated. My wife 45, and I 47, have been married for 24 years with 5 kids, two in college, and one each in high school, middle school, and the youngest is in third grade.” All right. Damn. I’m his age and he’s got 5 kids. Been married for 24 years.

Andi: And you thought you were overwhelmed with two?

Al: Yeah. You’re, you’re just getting started here, brother.

Joe: Oh my God. Yeah. “I drive Hondas and Toyotas. I drink mostly bourbon.”

Al: I get that.

Joe: I get it. I get it, brother. Every day I’m pounding bourbon. “But for the summer, my wife and I enjoyed a drink called Sex on the Driveway.”

Andi: Ever heard of that one, Joe?

Joe: I’m gonna- it’s gonna happen this weekend.

Al: Remind me not to drive by.

Joe: Yeah. “Peach Schnapps. Little blue curacao, coconut rum, vodka and Sprite.” Okay. I’m gonna do a little Sex on the Driveway. “Our current expenses are between $10,000, $12,000 a month. We invest $25,000 to $30,000 annual. I’m projecting our retirement expenses around the same. Less for kids, more for travel. I’m a federal civilian and already receiving a military pension at $70,000 annual. I’ll probably work until I’m 60, 13 years from now, when I receive another $24,000 plus raises.” All right. Well, thank you for your service. “Currently our Social Security estimates are $4000 a month for me at 70. My wife will use that for hers. I believe that means she gets $2000 monthly. We waived the SBP and bought $1,000,000 life insurance policy on me until 70.” So a couple people are kind of getting rid of the old-

Al: Kinda savvy-

Joe: – survivor benefit there. Didn’t, I’ve never heard of that. Little SBP though.

Al: SBP. Yeah.

Joe: Yeah. I knew what he was talking about, but- “these all have COLAs, so that helps out a lot. The military pension also includes health insurance. Current return investments, $100,000 in a regular brokerage, $360,000 my IRA, $150,000 Roth IRA, $270,000 in her Roth IRA, $150,000 in my TSP, which is about half Roth. Almost entire equities. 25,000 international, 40 large cap, 35, small cap, et cetera. House has $250,000 in equity. We’re currently paying a 30-year 2.25% mortgage, which we’ll move before we pay off- which we’ll move out before we pay off. We would like to buy and move to a lake house when our youngest graduates high school.  We’re contemplating a house or a villa at our favorite vacation destination, which we could rent out during the peak season, May through September. Together these will probably cost between $1,000,000 and $1,500,000. That’s the part that gives me pause. I don’t mind having a mortgage in retirement if the rate is under 5%, but this would bump up our expenses. We’ll probably use the 4% rule of thumb with flexibility in a couple of years in short term bonds. I hope I included all relevant information.” Damn, I got everything but a question.

Andi: I think the question is, he said, ‘I think we’re on track, but a sanity check is always appreciated.’ So is he sane? Is Pete from Alabama sane?

Joe: That’s the question.

Al: Let’s just-

Joe: Sanity check.

Al: Let’s just do this- roughly $100,000 of fixed income before Social Security, wants to spend $120,000 to $150,000. Let’s call it $150,000. Okay. Probably have about $1,000,000 liquid as of today. Maybe a couple million by then, maybe.

Joe: So he is got, yeah, 3, 4, 5, 6, 7. Yeah, he’s got about $1,000,000 in liquid assets today.

Al: So let’s say $2,000,000 then and that’s at age what, 60? Well, I’ll use even 3%. $60,000 on top of the $100,000 fixed. That’s $160,000, spending $150,000. Now, of course you gotta add inflation. I’m being way simple here, but at least on the surface. And then you add Social Security. It seems like there’s plenty to work with here. So, my first sanity check is, I think it looks pretty good.

Joe: So he’s got $250,000 in equity. So he is gonna sell the house. He’s gonna roll that into a little lake house when the kid gets outta high school. So that’s $250,000. So he’s gotta have a mortgage of another $1,250,000.

Al: Yeah, exactly. Cuz you take the $250,000, subtract it from what he is gonna pay.

Joe: So I’m gonna say $1,200,000 and then let’s say it’s a 30 year fixed, I’m gonna give him 5% cuz-

Al: Okay. Who knows? Yeah.

Joe: Zero future value. He’s got a payment here of $6000 a month. Does that sound right? $1,500,000 at 6%, present value. Zero future value. 30 years, 6%.

Al: It was a little high?

Joe: Yeah. Does, doesn’t it? We could play some Jeopardy music while I-

Andi: I was gonna say, I’m gonna have to fill some time here as you guys furiously tap away on the HP12Cs.

Al: (hums) I screwed it up. Anyway, here’s the answer. The answer is, is you just have to- in 13 years from now when you actually know what the numbers are. Then you gotta look at how much money you have coming in fixed income, what your portfolio is, use a 3% or 4% distribution rate, add your new mortgage to your expenses and make sure this still works out. And then your cushion is, you got Social Security coming, so you can be kind of a little bit over in terms of distribution rate for a few years counting on Social Security to come and kick in. So it’s probably a little early for us to answer that. I guess I agree though. I would have a little pause myself based upon kind of what we know.

Joe: Right. Because it’s the villa and so you got the villa and the lake home. So you gotta work that out depending on where interest rates are. At 6%, you’re looking at a pretty big number, about $7000 a month, just principle and interest.

Al: Yeah, actually- that’s about right.

Joe: It’s just funny to calculate with those high interest rates.

Al: I know. Yeah. We’re used to- this is like double what it’s supposed to be.

Joe: Right. I’m like, well, this can’t be right.

Al: And my first mortgage was 12.5%. But that was a long time ago.

Joe: So, all right, so let’s say he’s got another $7000 to $10,000 just in debt service, carry service, taxes or whatever, for the villa. But he’s gonna get some cash flow from that when he rents it out.

Al: So yeah, you gotta, you’ve gotta factor that-

Joe: You gotta factor that in.

Al: Social Security will help offset it.

Joe: I think he’s pretty close. I think he’s done a really good job. I think there’s a lot of fixed income there. It’s just mapping it out just a little bit more. But you know, he still has time.

Al: Luckily you don’t have to decide tomorrow.

Joe: Yeah, exactly. So he thinks RMDs will start at 73. Expect- Okay. No, that was someone else. Pete from- yeah, I don’t know. Pete, I like your plan.

Al: Yeah. And I, and I like your caution. I think you should have, you know, be thinking about whether this actually works or not. Right now, based on what you gave us, it could work, it’s close. It may work, but the real point is when you get closer, you’ll have real numbers and you can recalculate and figure out what you really can pull out.

Al: Right. But he’s super close. So I mean, if he starts gonna be shopping around and thinking about, or daydreaming about the villa. Go for it. Have that Sex on the Driveway.

Al: There you- oh, you have to pick which drive-

Andi: At the lake home.

Joe: Yeah. You gotta pick which driveway you’re gonna have sex on. The Peach Schnapps. The blue curacao. Got it?

Al: Yes.

Before you make any big decisions about retirement, schedule a free financial assessment with one of the experienced financial professionals Joe and Big Al’s team at Pure Financial Advisors and get a handle on your real numbers. They’ll take a deep dive into your entire financial picture, rather than just spitballing on the fly. From Roth conversions and tax planning to Social Security optimization and investment management, they’ll uncover all the best strategies for your situation. And they won’t try to sell you any products or charge you any commissions, because they’re fee-only fiduciaries who have to act in your best interest, not theirs. Meet in person at one of Pure’s 7 offices in Southern California, Seattle, Denver, or Chicago, or via Zoom right from your couch. Schedule your free assessment now. All you’ve gotta do is click the link in the description of today’s episode in your favorite podcast app, go to the show notes, click Get an Assessment. Pick a time that works for you, and away you go.

Retirement Spitball: Are We On Track? (Michael & Carol, Las Vegas)

Joe: Got Michael and Carol from Las Vegas. “Hello, Joe and Big Al. Love your podcast and would appreciate your spitball and a plan to leave the workforce at 62. Currently, both my wife and I are 59, live in Las Vegas, Nevada, no state tax. I would like to leave my unrewarding and unfulfilling job in 3-ish years at 62.” Unrewarding, unfulfilling. Sound familiar, Al?

Al: When can I leave, Joe?

Joe: “At 62, this would make me eligible for 40% of my company’s split dollar annuity-” He must work for a small company. Split dollar. I haven’t heard that in a while.

Al: Yeah, no, right. Exactly.

Andi: You’re gonna have to explain what that is.

Joe: “-that would pay out $22,000 for 20 years starting at 67. After making numerous poor life choices, we have successfully managed to save a modest sum of money. My spouse is not employed and should qualify for spousal benefits. My annual salary amounts to approximately $237,000, completed by bonuses totaling around $50,000. Unfortunately, I’m limited to contributing only 6.5% of my salary to the company’s 401(k) plan.” That’s a little top heavy.

Al: Yeah. Or the other word that we- that we messed up.

Joe: Yeah. I’m sure we’ll get corrected on that.

Joe: He’s highly compensated, I’m guessing, compared to his other employee-

Al: It would appear.

Joe: All right. “With the inclusion of the profit-sharing plan and the employer matches, I do manage to add to the 401(k) annually, about $40,000 to $45,000 a year. I opt to redirect my contributions to the Roth 401(k). Currently, our expenses are roughly $85,000 per year in today’s currency.”

Al: Okay, good.

Joe:  Okay. All right. Thank you for that clarification.

Al: Current dollars.

Joe: “My wife and I also have Roth accounts outside of my company that we max out via back door. Also as of this writing, it is $7500 each annually. I am also thinking I need to save as much cash as possible to bridge the gap what I need between 62 and 65. Healthcare is one of my concerns in the gap years. So currently I’m adding to high yield accounts about $52,000 per year, or $2000 a paycheck. Also, we have zero debt except the mortgage. Below are the highlights. Got expenses $85,000.” Keeping score, Al?

Al: Yeah, everything else about $1,700,000.

Joe: All righty. “We plan on taking Social Security at 65 at which would be about $3000 for me, $1500 for my wife. The plan is to leave the workforce, I will roll my 401(k) to IRAs and then begin pulling $45,000 out annually to cover the projected healthcare cost of $18,000 and pay the mortgage $27,000. All other expenses will come from the brokerage account. This will attempt to keep my income low for tax purposes. And once we apply for Medicare, I’m open to go back to work, but it would be on my terms if I brought my employment back. My wife and I like to travel and volunteer. I enjoy bourbon and golfing.” Oh, we’re two peas in a pod there.

Al: That sounds- that sounds like you, Joe.

Joe: Let’s go.  “My drink of choices Maker’s Mark on the rocks and I drive a 2020 Ford Eagle. Sorry, I know it’s wordy, but I think I got everything covered. Many thanks for your spitball on my plan.”

Al: Okay, so let’s see.

Andi: Fast and loose with the spelling and wording there, but that’s fine.

Al: Okay. They’re 59, wants to retire at 62, so they got about 3 years, got $1,700,000 now. Maybe they’ll have in 3 years, I don’t know, call it $2,100,000. $2,200,000. Well, he’s saving- yeah. Yeah-

Al: 80. Um mm-hmm. Well, yeah, let’s call it $2,200,000. So he wants $85,000 out of $2,200,000, we’ll just go with the total expenses. That’s a 3.8% distribution rate. It’s under 4%. You kinda like to have 4% when you’re 65 and older, but it’s pretty close. And that also doesn’t really consider-

Joe: -$4500 a month in Social Security. Then that will bridge that- his distribution rate when he starts claiming Social Security is gonna be 2%.

Al: Like 2% or less. Yep. Yep.

Joe: Plus tax.

Al: So I guess it looks like this plan probably works.

Joe: Yeah. I like it.

Al: And especially working part-time to bridge the gap years. That’s a- that’s a great idea.

Joe: Right. But I mean, I think he’s, it’s like, all right, well, here, I’m gonna keep my taxes low, because he’s got an IRMAA play here is what I’m seeing. And then he’s like, okay, well- then he wants to go back to work at age 65. I mean, I don’t know, why you would wanna go back to work at age 65? You would wanna work prior to 65 at least part-time, because then you could probably get a little bit of medical insurance. But he is trying to keep his expenses low because he is what- playing the whole healthcare game and-

Al: Could be, could be. Get that little-

Joe: – little Obamacare? The Affordable Care Act?

Al: Right. Yeah. And plus we didn’t- we don’t have time to address it, but Roth conversions will be important as you got over $1,000,000 into 401(k). So that’s something you wanna do during your lower income years.

Can I Retire Early or Go Part Time and Stop Contributing to 401(k)? (Lauren, IL)

Joe: Lauren from Illinois writes in. “Hi Joe, Big Al, thanks for all you do.” Well, thank you. “I am a 33-year-old female and wondering when I can retire early or drop down to part-time and stop contributing to my 401(k). I currently make $125,000 a year and max out the following accounts each year: 401(k), Roth IRA and HSA, also contribute $1500 to a taxable brokerage account monthly. Currently, I have $200,000 in my 401(k), $70,000 in the Roth, $170,000 in a taxable brokerage and $10,000 in my HSA and $30,000 in a HYSA. I own my own home and will have it paid off by the time I’m 40. Is part-time work at 40, retain health insurance and full retirement at 45, 50 possible? Am I missing anything from my plan? Thanks.”

Al: All right, so let me maybe summarize this one. If we leave off the HSAs accounts, there’s about $450,000 currently. And I’m just gonna say Lauren’s gonna save $30,000 a year just to throw in a number close to that. 7 years, 7%. So she’ll probably end up with about $1,000,000. So that’s what you- that’s what you have to work with Lauren. $1,000,000 at age 40, we would probably say a distribution rate of 2.5%, maybe 3%, if you wanna stretch it. That’s $25,000 to $30,000 a year available of income. Mm-hmm. So, I don’t know what you’re spending right now. I’m assuming it’s probably going to be more than that, but let’s just say you’re spending $40,000 right now. You wanna do a 2% inflation factor, maybe it’s $50,000, 7 years, whatever the number is.

Joe: Well, she makes $125,000. Right?

Al: I know, but right and, and she’s saving a ton and there’s taxes, so we don’t really know what you’re spending, but I think you can count on your portfolio to give you $25,000 to $30,000 a year. And then you gotta figure out, what’s the shortfall that you make up from part-time income? And so maybe it’s $25,000 a year. Maybe it’s $40,000 a year, whatever that number is, but yeah, you probably need to work at least part-time. But there- but there’s also a fact that she’s paying off her mortgage, so maybe she’s probably spending more now than she will be. So I don’t know what those figures are, but all I’m saying is you probably in 7 years have about $25,000, $30,000 to work with from your portfolio.

Joe: So the math again, Lauren, is that you have around $450,000, is that what you said?

Al: Yeah. Currently.

Joe:  $450,000 today, you’re saving roughly $30,000 a year. Oh, by the time you reach age 40 in 7 years, given what rate of return did you use?

Al: I used 7%.

Joe: Right. So you get 7% on your money. You save $30,000 a year, you have $450,000 today, you’ll roughly, the portfolio will grow to $1,000,000.

Al: Yeah. Given those assumptions.

Joe: So you don’t wanna pull out at age 40, probably any more than 2%, 2% to 3%, right?

Al: Yeah, yeah. So I’m, I said 2.5% to 3%.

Joe: So $25,000 is 2.5% of $1,000,000. So if you’re spending $50,000 well, you gotta get part-time work to make $25,000 to make up the shortfall.

Al: That’s exactly how you look at it.

Joe: And if you’re 40 years old, I would imagine you’re going to get bored at some point.

Al: Yeah. You probably wanna work anyway to make something or-

Joe: -keep it a little bit busy. I don’t know. I could imagine. I could not imagine-

Al: What would you do?

Joe: My life expectancy would be-

Al: 4 years? Then you could spend 50% of your portfolio every year.

Joe: My distribution rate is gonna so high. Alright, let’s get outta here. Alright thank you Andi, wonderful job today.

Andi: Thank you.

Joe: Alright Big Al, I’m Joe Anderson, we’ll see ya all next week. Keep the emails coming in, the show is not good at all, it’d be really bad without you. So thanks for your emails and we’ll see you all next week.

Andi: In the Derails at the end of the episode we’ve got who’s who and how many people ask Joe and Al, Lord Fletchers in Minnetonka, and doing the show 3 times, so stick around.

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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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