Show Notes

• (01:14) Roth Conversion or Backdoor Roth Strategy? (Kyle, GA – voice)
• (07:38) Is 15% Pretax, 5% Roth a Good Retirement Savings Mix? (Ted, Oceanside, CA)
• (10:52) Should Dad, 93, Open His First Roth and Convert Before Tax Rates Change? (Gus, OC, New Jersey)
• (17:16) Should I Wait to Do Roth Conversions Until I Retire at Age 60? (Paul, Southern California)
• (23:08) Should We Do Roth Conversions and Pay Tax from Savings, or Wait for RMDs? (Daniel, So Cal)
• (29:02) Worst-Case Scenario Retirement Spitball Analysis (William, St. Paul, Minnesota)
• (41:23) The Derails

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Transcription

Tomorrow, August 31st, is the last day to enter for your chance to win a $100 Amazon e-gift card and help us make YMYW the best financial podcast ever. Click the link in the description of today’s episode in your podcast app to go to the show notes and access the survey and the secret password. US residents only, no purchase necessary, survey and giveaway close and winner chosen at 4pm Pacific time tomorrow, August 31st, 2022. 

Today on Your Money, Your Wealth® podcast 393, should you convert money from your pre-tax retirement accounts to Roth now, or wait until retirement, or until required minimum distributions kick in? Should a 93 year old open his first ever Roth and start converting? What’s a good retirement savings mix between pre-tax and post-tax? And the fellas do a worst case scenario retirement spitball analysis. Click Ask Joe & Al On Air in the podcast show notes to send in your money questions. I’m producer Andi Last, with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA, and we’re kicking it all off today with a priority voice message about Roth Conversions vs. Backdoor Roth.

Roth Conversion or Backdoor Roth Strategy? (Kyle, GA – voice)

“Hey, Joe, Big Al. This is Kyle from Georgia. My question is regarding some money that I have from an old employer 401(k). So it’s about $200,000 and it’s all pre-tax. And when I left that employer, I moved it to my personal IRA. So my question is twofold. One, I can do Roth conversions on that money. We did it for the first time this year and we were able to withstand the tax burden. We’re in a high tax bracket and above the income limit to do regular Roth contributions. But my other option is to take all that $200,000 and now I have access to my new employer’s 401(k) if I should roll it there. And the reason being is, I guess that the $200,000 is now sitting in a pre-tax account in my IRA. I can no longer make backdoor contributions, so no longer can put $6000 in and do a backdoor. So I’m wondering what you think is best, if I should just leave it there and continue to, I guess, chunk at it till it’s down to zero in all Roth. Because that’s the goal, to get it all Roth in our late 30s, as I said. Or if I should immediately take all $200,000, put in the new employer’s plan, that’s my pre-tax account, and then I can start making yearly Roth contributions. So drive a 2017 Honda Pilot and love all things Georgia Craft beer. And I really love listening to your show. Thanks for all you guys do.”

Joe: All right. Thank you, Kyle. A little Georgia craft beer.

Al: Yeah, I don’t think I’ve had Georgia craft beer. I’m sure it’s great, though.

Joe: Not a big craft beer guy.

Al: I loved Craft- San Diego makes a lot of good craft beer.

Joe: Not even close to one. All right, very good question. Couple of things. So Kyle has $200,000 in an old 401(k) that he rolled into an IRA. And so his question is now that it’s in an IRA, I’m subject to the pro rata aggregation rules in regards to backdoor Roth contributions. Do we need to explain what a backdoor Roth contribution is?

Al: Probably.

Joe: A backdoor Roth contribution is when you can- and here’s the funny thing, because this is a really good question that’s going to prove my point that I’ve been trying to make for years. Everyone’s all big on this backdoor.

Al: Yeah, a lot of comments on that.

Joe: Backdoor, barnyard, megatron, all this stuff, right? Oh my God, I can’t do the backdoor because of this and that. But Kyle’s goal is to get a lot of the money that he has into a Roth IRA by his late 30s. Pretty aggressive goal, but I like where he’s headed. He could move the money into a 401(k). Because the money is in a 401(k), there’s no aggregation and pro rata rules because the IRS looks at 401(k)s and IRAs differently in regards to basis. So if he keeps it in the IRA, he says he can no longer do a backdoor Roth, which is a non-deductible IRA contribution. He already paid tax on it. He says he’s in a high tax bracket. Right? You heard it?

Al: I heard it.

Joe: So he pays tax on that money and then he puts the money into an IRA and then he converts it. So the only difference of the pro rata rules and the aggregation rules is that if you’ve already decided to pay the tax, it makes no difference. Who cares about the backdoor? Because if I have the money in the IRA that I’ve never paid tax on, and let’s say he converts $6000, he pays tax on the $6000 conversion versus him taking his paycheck, paying the tax, then putting it into an IRA and then converting. Is there any difference in the tax?

Al: It works out the same.

Joe: It’s exactly the same. The only difference is that when you do a conversion is that you make the decision to prepay the tax. That’s it. If I want to do the backdoor, I’ve already paid the tax, I could keep the money outside of an IRA, I can move it into the IRA, then convert it to a Roth, keep it in my checking account. So you have more options. But if you want it in a Roth IRA to grow tax-free and everyone’s so high bent on the backdoor, you could just convert the same amount of money and you pay the exact same amount of tax.

Al: Yeah, true.

Joe: So it makes no difference in his case, I would keep the money into the IRA and I would convert the $200,000. I would still add $6000 into the IRA to add more money into the Roth later.

Al: Yeah, so you can convert that later. Here’s a couple of thoughts, too, to add to what you said, which is this is I’d be reluctant to put my IRA money back into an employer 401(k) unless they had good investment options. To me, that’s more important than being able to do a backdoor Roth. I mean, just in a bubble, if you just think about it that way. Now, if your company has great investment options and you really want to do backdoor Roth then, yeah, that could be a good way to go. But in this particular case, Kyle, you want to get this all converted in a short time. So maybe you want to leave it in the IRA so you have the access to convert it. Right. So I think that’s your answer. Just leave it in the IRA. The reason, again, you would want to roll it into your 401(k) is if the 401(k) had decent investment options and you just wanted to do the backdoor Roth, year in year out.

Joe: Or you could move it into the 401(k) and if there’s the Roth provision in the 401(k) that he can move the pre-tax 401(k) into the Roth 401(k), do inner plan conversions throughout. I mean, then you can have the best of both.

Al: If they allow that, then you can do both. Exactly.

Joe: So you move it into the 401(k), and then you convert the pre-tax to the Roth inside the shell of the 401(k) plan, then you can do your backdoor Roth IRA.

Al: Yeah, yeah. So I’m going to sort of second what you said, and that is there is so much talk and angst about backdoor Roths. It’s helpful. It’s helpful, but it hardly moves the needle that much. In a lot of cases, it helps. Any amount in a Roth is good, and if you can get it there tax-free, fantastic. But some people are-

Joe: But it never comes in tax-free. It’s always an after-tax contribution.

Al: Well, yeah, it’s an after-tax, but I guess what I’m saying is they want to make a contribution, but they can’t because of the income limitations, so this is a way around that. But you’re right. It’s after-tax money already. Right. So the only difference is it’s after-tax money from potentially a prior year. Maybe you’re in a lower tax year. So there could be a difference there.

Joe: Yeah, I mean, if we get super technical. Good point though. So, yeah, I think we answered- I think we busted that out.

Al: I think we got it.

Joe: All right, well, enjoy your Georgia craft beer.

Is 15% Pretax, 5% Roth a Good Retirement Savings Mix? (Ted, Oceanside, CA)

Joe: Got a question that came in. Teddy from Oceanside goes, “Hey, I’m putting 20% of my 401(k), 15% pre-tax, 5% into the Roth. It’s just my wife and I, we have a reasonable mortgage, no debt. Is this a good mix?”

Al: What do you think, Joe? Good mix? Probably need a little more information. I will say this, though, Ted, if I’m understanding what you’re saying. You’re putting 40% of your income in savings. Great job. I mean, we tell people to try to get up to 20%-

Joe: No, no, no, no, 20%.

Andi: Yeah. It’s 15% into the pre-tax and 5% into the Roth, for a total of 20%.

Al: I was adding it.

Joe: Yes.

Al: Okay. Got it. Never mind. So I’ll still say the same thing, 20% savings. I like it.

Joe: So is this a good mix? What mix is he asking us?

Al: Between pre-tax and Roth. That’s what he’s asking. Should it be 10% and 10%? Or should it be 15% and 5%? Or 5% and 15%? We don’t really know enough about you. So I think the answer is I don’t know.

Joe: Yeah, no clue. But 20% is a good savings numbers.

Al: Great savings number. Love it.

Joe: And I think that you have some money going to the Roth and you have some money going pre-tax, which is good, but you have to look a little bit more. What is your taxable income? What tax bracket are you in?

Al: That’s actually the very first thing you look at is, what’s your tax bracket? And is it worth paying tax? If you’re in a high bracket, you might do a little bit less Roth or even no Roth, or at least some to get some money into Roth.

Joe: Or vice versa. You want to do 100% Roth?

Al: Yeah, or vice versa. How old are you? Do you have a huge 401(k) already that’s all pre-tax and now maybe you want to do 100% Roth to kind of balance it out?

Joe: Yeah, so there’s a lot more I guess- there’s no rule of thumb.

Al: No.

Joe: You know what I mean? Especially with this stuff because-

Al: But we get asked that, right? How much they have in Roth pre-tax and 401(k)?

Joe: I wish it was that simple. Then this show would be over in, like, 7 minutes.

Al: 1/3, 1/3, 1/3.

Joe: All right, that’s it for us. We’ll see you guys next week. We’ll just play the same stupid show over and over and over again. But yeah, it’s a little bit more complex than that, but you’re on a good start, Ted. Appreciate the question.

Some listeners would say we *do* play the same show over and over again! Roth all the time, baby! What’s the best savings mix for you, and are you on track for a successful retirement? Get a deep dive into your entire financial situation from one of the experienced financial professionals on Joe and Big Al’s team at Pure Financial Advisors and find out. It’s free, just like the YMYW podcast, but it’s one-on-one, in-depth, and completely customized for your needs, wants, goals, unlike the YMYW podcast. Pure is a fee-only fiduciary, which means they’ll never sell you investment products or earn commissions off of you, and they’re required by law to act in the clients’ best interest. To schedule your free financial assessment, click the link in the description of today’s episode in your podcast app to go to the show notes, then click “get an assessment.” 

Should Dad, 93, Open His First Roth and Convert Before Tax Rates Change? (Gus, OC, New Jersey)

Joe: “Hey, Joe, Big Al, Andi, you are my favorite podcasters.”

Andi: Bam.

Joe: Nice. Boom.

Andi: Oh yeah, it’s boom. Sorry.

Joe: Could be pow as well. Boom. Bam. Pow. “My dad is 93 years old or years young, still pretty active. His drink of choice is Tullamore Dew. And he drives a Buick Lacrosse.” Wow, do they still make those?

Al: I don’t think so. I think he’s had it for 25 years.

Andi: He does say it’s a tank.

Joe: A tank. “He’s been drawing down his IRA as required, moving the RMDs into a brokerage account. He has a good pension, Social Security, about $200,000 in a brokerage account and about $200,000 in a MYGA-“

Al: – multi year guaranteed annuity.

Joe: Oh, pretty good.

Andi: Wow.

Joe: “He doesn’t need the money. So it’s just moved from one account to another. He is concerned about the current tax rates expiring in 2026 and wants to move the balance of his IRA, about $80,000, out before then. He is continuing to move the RMDs, which amount to be about $10,000 a year, into the brokerage, but wants to move or convert an additional $15,000 or $20,000 per year into the Roth IRA. This will still keep him in the 22% tax bracket and under IRMA. Two questions have surfaced. He does not have a current Roth IRA, so as this would be new, what would his withdrawal limitations be in depositing money into his new Roth in 2022? 2023? and 2024? given the 5-year rule for conversions?”

Al: Okay. Good question.

Joe: Yeah, very good question. So second question is, “In the event he would pass before each of the Roth conversions are 5 years old, what are the withdrawal limitations for his adult child beneficiaries? Thanks for the great show, Gus.” Gus, thank you for the question. All right, so he’s got a 93-year-old dad-

Al: Right, that does not have a Roth IRA.

Joe: – and was looking to open up his first Roth IRA. Yeah, a little virgin after 93 years. Congratulations.

Al: Better late than ever.

Joe: Welcome to the show. So he can open up a Roth IRA, no problem. And he can deposit money into the account. No problem. The only issues with the 5-year clock is that he will not be able to take basically any earnings out of the account for 5 years. The 5-year clock will start with the first dollar that hits the first Roth IRA in regards to earnings. The 5-year clock has two clocks, one for contributions and one for conversions.

Al: Correct.

Joe: And so there’s this rule when it comes to conversions that you have a 5-year clock on contributions for each conversion that you make if you’re under 59 and a half.

Al: Correct. Yeah. So you can do a contribution, which is the $6000 a year, $7000. You can pull the money out right away, no penalty, because it’s a contribution.

Joe: But Gus’ dad does not qualify for the contribution because he does not have earned income.

Al: That’s correct. And so I want to make that point, because when you said he can deposit money to the Roth, he can do a conversion. Yes. He can’t do a contribution unless he’s got earned income, which I’m presuming he doesn’t.

Joe: Correct. Earned income is wages, self-employment income, something that you pay tax on.

Al: Correct. Yeah, that’s right.

Joe: So the 5-year clock needs to be 5 years. So let’s say Gus’ dad puts the money into the Roth IRA this year and passes away. Is Gus the dad or is Gus the guy? I don’t know.

Al: I think he’s the son.

Joe: Okay, good. So Gus is the son. He inherits dad’s Roth IRA. So the Roth IRA was opened in 2022. He still has to wait 5 years to get any of the earnings out of that inherited Roth IRA out tax-free.

Al: Right, I agree with that.

Joe: Gus still needs to distribute all of the money out within 10 years as well. But he can wait the first 5 years, don’t take anything out, because he’s going to be taxed on it, and then wait after that 5 years. Then he has another 5 years to let the money continue to compound tax-free. And then, let’s say, in the 10th year, he could take all that money out and have a tax-free treatment. If he pulls the money out prior to the end of the 5-year clock, Gus is going to be taxed.

Al: You’re talking about the earnings, though, only.

Joe: Earnings only.

Al: So let’s be clear about that. Dad does a $50,000 conversion- $20,000 conversion, whatever the number is, and because his- Gus’ dad is over 59 and a half, he could actually pull that money out right away. But if the $20,000 grows to $21,000, that’s where that extra $1000, you got to wait for 5 years. So if Gus were to inherit the account before 5 years, Gus could still pull out the $20,000 because that’s the conversion amount, but he’d have to wait for that extra $1000 until 5 years has lapsed.

Joe: So the reason for the 5-year clock on conversions, each conversion has its own 5-year clock if you’re under 59 and a half, is because people would convert their IRA to a Roth IRA prior to 59 and a half, and then they would take the conversion money out of the account, and it would avoid the 10% early withdrawal penalty. So the IRS says, well, there’s a loophole here. So each conversion has to wait 5 years for you to get the conversion amount if you’re under 59 and a half. So I’m 50 years old. I do a conversion. I could get the conversion amount out after 55. I do another conversion the next year. Now I got to wait for 56 for that conversion, and so on and so forth. Once you hit 59 and a half, then the conversion 5-year clock kind of molds into the contribution 5-year clock-

Al: -same rules contributions at that point.

Joe: Right. At this case, he’s already got the account for over 5 years. Or if Gus’ dad passes, Gus is going to have to wait for 5 years to take a total tax-free distribution out of the account. And I’m talking earnings only.

Al: Correct.

Should I Wait to Do Roth Conversions Until I Retire at Age 60? (Paul, Southern California)

Joe: We got Paul from Southern California. He writes in. He goes, “Hey, I have a question about a Roth conversion.” Imagine that. First one.

Al: Have we ever talked about Roths before?

Joe: Never. First one here today. “While I’m still a high income earner, married, 56 years old and plan to retire when I’m 60.” All right. So he’s got 4 years.

Al: Right.

Joe: “I make between $450,000 and $800,000 annually.” Look at the big old income on Paul.

Al: That’s healthy.

Joe: Congrats. “Depending on how business is going, this puts me in the 35%, 37% federal tax bracket. I have maxed out my traditional 401(k) each year and currently have about $800,000 in it. We have no money in a Roth IRA account. Total savings is about $2,000,000. We have about $1,200,000 in equity in the house. Our kids are through college and out the door.” I like that saying, get the hell out of the house. “Do I wait until I retire? Maybe semi-retired? to do a Roth conversion when my income will drop to a lower tax bracket. I may start part time in a few years. After 60 or so, my income will be around $80,000. Or does it make sense to get money into the Roth now, even though I’m in the highest tax bracket? I appreciate any spitball you can do on this question, even if you mix in some flippant comments.”

Al: You wouldn’t do that, would you?

Joe: Never. Oh, he’s got a big wallet. Okay, the question I have- Paul’s making $450,000 to $800,000 a year. Then he’s going to go part time and make $80,000.

Al: Yeah, that’s what he says in 4 years.

Joe: Wouldn’t you think part time would be like $400,000? or $250,000?

Al: Not necessarily. Maybe he wants to work a lot less or even do something different. Something more fun.

Joe: Like 1/8 of the time.

Andi: It definitely sounds like it’s going to be just something different.

Joe: Yeah. I’m going to go part time and make $5 an hour. That’s fine.

Al: Yeah. Well, usually people say, I used to make $500,000, I’m going to go into consulting, I’ll make at least that, maybe more. And then we see him in two years later. How’d you do? Well, it didn’t quite happen like that.

Joe: They’ll be working at like the airport. OK. I don’t know. Al, I know what your opinion is going to be.

Al: Yeah. Okay, I’ll say it. I would wait till 60. If you’re in a high bracket, you’re going to be in a much lower bracket. You’ve got 12 years to convert. It’s not like you’ve got millions and millions. You got $800,000, which is a good number, but it’s not like it’s a- I mean, sometimes we see some pretty big numbers and if it were a much bigger number, I’d say let’s go ahead and start converting because you’re going to be in the highest bracket anyway. But I don’t think that’s the case. So I would wait until retirement. Personally.

Joe: Just kind of shattered Paul’s dreams there. Well, you don’t have that much money, Paul.

Al: I didn’t say that. I just said-

Joe: Well, it’s not like you got a lot of money, Paul.

Al: I didn’t even say that either. I said you got a good amount, but-

Joe: – not enough.

Al: But not enough- if it were me, not enough to do conversions while I’m in the highest tax bracket.

Joe: Got it. I would convert some for sure.

Al: I know you would.

Joe: Without question. The market is down.

Al: Yeah, but it’s recovering.

Joe: You better hurry.

Al: Do it tomorrow.

Joe: Do it now. As soon as you hit this ‘download’, hit that ‘go’ button on the conversion. I don’t know. The market is down. He’s got a couple of million dollars. He’s making $450,000 to $800,000 a year. So he’s killing it. And he’s going to work for another 4 or 5 years. He’s probably going to save another few hundred thousand dollars that’s going into a non-qualified or brokerage account. Then he’s going to go part time. He probably doesn’t spend a ton. I would say, what the hell? I mean, if you have a Roth 401(k) option, I would start there because it’s a lot easier to kind of swallow the pill.

Al: Yeah, I do agree with that.

Joe: So you say okay, well, going back to, I guess, Uncle Teddy’s question, just a good mix of 15% and 5%. You know what, I think that would be a fine mix for Paul. At least to start the Roth, you get a little bit of money tax-free, and then when he retires, semi-retires at age 60, then you’re right. Then you would unload and probably do maybe to the top of the 12% or 22% tax bracket.

Al: Or the 24% even.

Joe: Yeah, but you look at it, what tax bracket is Paul going to be at full retirement age. You know what I mean? That’s where Al is coming from, Paul. He’s like, well, you have $800,000. Your required minimum distribution is not going to blow you up. Depending on what his lifestyle is and what his savings- or spending is, you could probably spend or take money out of the account at the 12% tax bracket and maybe maintain a pretty low tax bracket throughout. Versus, let’s say if you have a large pension, you have Social Security, you have a lot larger retirement account and no other assets. That’s what we usually see. He’s got a few million dollars. It’s not chump change. But he’s diversified a little bit where he’s got some money in a brokerage account and then he’s got the other money in a 401(k) where mostly a lot of times we see $2,000,000, $3,000,000 in a retirement account and that’s their entire liquid investment.

Al: Yeah, good point. And so to kind of follow up on my thinking. So you’re right. So Paul has a lot of money outside of retirement, a lot of equity in his home. He’s got money in retirement, but he’s already got a decent mix. He just doesn’t have Roth IRA. And the thing is, if he was 69 years old, I might have a different answer. But at 60, you still got 12 years to do conversions. So that’s what I would do. I would wait. But it’s not a bad idea with your current 401(k), to at least get a little money going to the Roth just to get that started.

Joe: Sure. Okay, cool. Hopefully that helps. Thanks a lot for the email.

Should We Do Roth Conversions and Pay Tax from Savings, or Wait for RMDs? (Daniel, So Cal)

Joe: Go to YourMoneyYourYourWealth.com, click on Ask Joe and Al. We got Daniel writes in from SoCal. He goes, “Hey, Andi, Joe, Big Al, longtime listener, big fan. Joe, you always make me laugh.”

Al: That’s your goal? That’s why we do this show.

Joe: Thanks, buddy. Made my day. “Here’s the non-important stuff. I drive a 2007 Toyota Tacoma, wife 2016 Jeep. We have a new motorhome, Renegade Valencia 38 RV.” I don’t know what 38 RV is.

Al: I don’t know either.

Joe: That’s a bigass RV I’m guessing. “We tow the Jeep behind the motor home. We don’t drink alcohol, and we have one dog, Yorkie, named Mike. Important stuff. We are both 63 years old and have been retired for 6 years. I got a pension of $120,000 a year, but only $42,000 is taxable. We both take our Social Security. Me, $10,000 per year, my wife, $24,000 per year, for a total of $76,000 taxable per year.” All right, so $42,000 pension, $10,000 plus the $24,000 is getting the $76,000.

Al: Yep. Yep.

Joe: Okay. “Social Security is taxed at 85%, I believe, so actual Social Security combined would be $30,600 yearly, for a total of $72,000, $73,000 yearly taxable income. The house and the vehicles are paid off and no other payments, except for the normal monthly utilities, insurance, et cetera. We have a combined retirement account of $1,100,000 with $650,000 in a Roth, $450,000 in an IRA and $100,000 in savings. We have converted $120,000 per year for the last 3 years. In the past, I paid the taxes from money coming in from a benefit account, but that is almost used up. I can probably convert around $100,000 for year 2023, which will use up the benefit money.” Any idea what a benefit account is, Al?

Al: No. No idea.

Joe: Benefit account. What do you think?

Andi: Could he be saying he’s a beneficiary?

Joe: Maybe.

Al: Yes, that’s a good guess.

Joe: Maybe it was like a little account.

Al: It wouldn’t be an HSA account because you can’t use that for taxes.

Joe: Benefit account. Yeah, I’m guessing- I think we’ll go with your suggestion.

Al: I think so, too, Andi.

Andi: Cool.

Joe: So he’s got a little side pool of money that is a benefit account.

Al: Yeah. Came from somewhere. From maybe dad, mom.

Joe: It could be.

Al: Grandma.

Joe: “My question is, how much should I convert in the coming years now that taxes will be paid from my savings account at $73,000 a year after standard deduction estimate, $25,000 brings us to $48,000 of taxable income.
Should I only convert up to the top of the 12% tax bracket, or go higher? We have 9 years before we have to take RMDs. And at that age, our tax bracket is pretty low. Should we keep converting maybe less per year than what we have been doing? or stop converting? or just pay the tax when collecting RMDs? So far, we haven’t needed to pull any money out of the retirement accounts for our motorhome trips, vacations, or for any other reason. But that might change if we start traveling overseas. Appreciate your input and ideas. Thanks.” You think he’s going to bring the RV overseas?

Al: No.

Joe: Put that thing on a barge?

Al: I don’t think so.

Joe: Okay. So what do you think? $48,000 taxable income. He can convert $50,000, call it.

Al: Yeah, ish. $40,000.

Joe: Okay. Yeah, I like $40,000 better.

Al: To stay in the 12% bracket, the IRA is $450,000. And let’s see, at age 63, by the time Daniel gets to age 72-

Joe: -9 years-

Al: Let’s just say it’s almost doubled. $900,000, $800,000.

Joe: Okay.

Al: Yeah, we’ll call it $900,000. So RMD will be about 4%. So that’s what, about $36,000 per year? And based upon the numbers that we already know, that’s actually going to still keep you in the 12% bracket. So I would probably convert- I would definitely convert to the top of the 12%. I probably wouldn’t go higher.

Joe: Yes, I agree with that. 100%. So, yeah, you get $400,000 out over the next 9 years. And so now your IRA balance is not let’s say, double the $900,000. It still stays at like $400,000 , $450,000.

Al: Yeah. Right. Now you got an RMD of $16,000.

Joe: And then you have your Social Security that’s going to be tax-free.

Al: Potentially.

Joe: Potentially. No, he’s still has the pension. Right, that’s giving him $42,000 taxable–All right, so he got $42,000, 85% of that. But then he still has most of his other income is going to come from a Roth.

Al: Yeah. And then also with your IRA money, if you’re charitably inclined, at age 70 and a half, you can start giving it away through a qualified charitable distribution, QCD.

Joe: Yeah. I love it because it’s going to go back to the 15%. So at least take advantage of the 12% tax bracket now. But I wouldn’t probably go higher either.

Al: Right.

Joe: Yeah. Great job. Little RV’n-

Al: Right.

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Worst-Case Scenario Retirement Spitball Analysis (William, St. Paul, Minnesota)

Joe: “This is William writing in from St. Paul, Minnesota. Close to Joe’s home turf.” That’s right. “The Surley brewery is close to home and I enjoy a pint or two there from time to time. Though my favorite pour of the year is the Grain Belt premium.” Ooo, Minnesota State Fair. Grain Belt premium is pretty good beer.

Al: Is it? What’s it taste like?

Joe: A really good beer.

Andi: Is it specifically only available at the Minnesota State Fair?

Joe: I have no idea.

Andi: Or is that just like the optimal place to drink it?

Joe: I don’t know. I think any place is an optimal place to drink Grain Belt. I haven’t been to the Minnesota State Fair since I was like, 4 years old. But everyone has been just big raving about it.

Al: Got it.

Joe: Oh, it’s a big fair. It’s great. I don’t know.

Al: Wasn’t your thing?

Joe: I’m not a big state fair guy.

Al: Yeah, I could see that.

Joe: No, I-

Al: You don’t you want to go pet the goats and stuff?

Joe: No. No crowds, nothing like that. You go to the Del Mar Fair?

Al: About every other year.

Andi: I only go if there’s a band playing that I really want to see.

Al: Yeah, that’s the same reason I go.

Andi: Yeah.

Joe: “My wife and I share a 2017 Ford CMax hybrid, which we bought used in 2020 after the catalytic converter got swiped out of our Prius.”
Someone stole the catalytic converter out of his Prius?

Al: Yeah. I’ve heard this recently that this is a thing. People are taking these out of cars and then you’re left with nothing.

Andi: Yeah. Apparently, the chop shops can make a whole lot of money off of selling catalytic converters.

Joe: “We don’t drive much and neither of us likes cars.”

Andi: I can see why.

Joe: All right. Okay, that solves it.

Al: They’re a nuisance.

Joe: “My wife is 57. I’m 55. We have no kids, no specific legacy goals, though we’d like to leave money to the arts organization we’re both involved with. She makes around $80,000 a year. I’ve been making $110,000 a year and getting glowing reviews from customers, but management didn’t want a 55-year-old around anymore, and I got fired in June.”

Al: Wow, that’s too bad.

Joe: There’s some age discrimination going on here, Big Al.

Al: Yeah, I think- have you talked to an attorney?

Joe: So, glowing reviews from customers. Loving it. He’s killing the game-

Al: – and then turns 55.

Joe: Yeah. Big boss man.

Al: You’re out.

Joe: Yeah, we don’t want some old ass. Look at Big Al. He’s way older than you. I should talk to management.

Al: Would you kick me out please?

Joe: Al would appreciate getting his ass kicked to the curb here. “I got fired in June-” That’s sad. “-on the idea my position was eliminated.”

Al: That’s what they told him.

Joe: That’s the go-to, isn’t it?

Al: Yeah. Well, you’re killing it, 55.

Joe: Glowing reviews from customers, but I’m sorry, your position just got eliminated.

Al: You’re 55. We can’t have you around.

Joe: “At the time, I had a part time consulting gig that was lucrative for about two and a half months, but that ended, too. There might be some consulting work to come, but I’m unsure. Best case scenario, I’d make $50,000 to $60,000 a year, but more realistic, $15,000 to $20,000.”

Andi: There’s somebody that actually is thinking realistically like you were talking about.

Al: Yep.

Joe: Okay. All right. “Our house is paid for and we want to stay in it as long as possible. But there are 3 sets of stairs, so who knows how that’ll work?” This guy’s talking like he’s 78 years old. You know what I mean? It’s like you’re 55, bro. It’s like I’m old. I got fired.

Al: I’ll just tell you-

Joe: Get off my lawn.

Al: -I’m 65. I got stairs in my home and my condo in Hawaii, and I love it. In fact, I run up and down the stairs for exercise.

Joe: You do burpees and everything.

Al: The whole deal. Don’t have to leave the home.

Joe: Oh God. It’s like well who knows how that’s going to last? We got to get wheelchair access here soon. “We have no interest in owning a second residence, but we enjoy escaping Minnesota awful winter for two to 3 weeks for vacations in Hawaii, Florida, or other similar places.” Okay, cool. “Presently, yearly expenses are around $70,000, which includes vacations. It would be probably $10,000 or $20,000 higher if we needed to pay for health insurance. Presently, I’m on my wife’s insurance, but her health isn’t quite as good as mine, so I’m planning-“ God, this is just getting depressing. Her health sucks. Mine is in great shape.

Al: Plus, we need a new house.

Joe: 3 sets of stairs- just want to have a cocktail “-presently on my wife’s insurance, but her health isn’t quite as good as mine, so I’m planning as if we’ll need to fund our own health insurance at some point or combine IRAs. 401(k) balance is $1,800,000, which includes $450,000 in a Roth IRA, $200,000 in my 401(k) from my employer that fired me. The 401(k) plan allows rule for 55, so as I understand it, I can access the $200,000 penalty free. We have $100,000 in a brokerage account, just $10,000 in the HSA. We have $45,000 in bonds. The house is probably worth around $375,000. Past two years, I’ve rolled around $250,000 from my pre-tax IRA to the Roth and have used the money in the brokerage account to pay the taxes. My wife wants to keep working, but might not be able to do so because of health. Hard to say. I’m not really excited going back to work that pays 6 figures.”

Al: Yeah, too stressful.

Joe: Who wants that? “The consulting money is good when it’s there. I’ve also investigated work that is flexible but much lower paid, ranging from a substitute teacher.“ He’s going to sell beer at the old state fair.

Al: Yeah, that’s the one I’d recommend.

Joe: “I’d appreciate your spitball thoughts on how we position the worst case-“ this guy lives in a worst case scenario.

Al: Well, he’s just building it up for this question.

Joe: It’s just like I’m like, oh, my God. “-the worst case scenario of my wife working maybe a year or two more, me bringing in $25,000 a year or even less age 65, and us paying our own health insurance to age 65.
Also, any thoughts on future Roth conversions would be appreciated. The grand plan is to take Social Security at age 70. If we keep working in our present jobs, the government says I’d get $4000 a month and my wife would get two and a half a month in today’s dollars. Thanks again. Love the show.” We love you. Let’s get you fired up here.

Al: So I guess add the different accounts together, a couple of million bucks, we’ll say we got that to work with.

Joe: Okay, so he needs $70,000 to live off of.

Al: $70,000.

Joe: Okay. He’s going to make $25,000. Let’s call it $90,000. Let’s add another $10,000 or $20,000 for the health insurance.

Al: Okay. I agree with that.

Joe: You fine with that?

Al: Yep, good.

Joe: So $90,000 minus $25,000 is his consulting income. That gets us- and then his wife makes $80,000. But if she’s going to work for two more years. And then they got to bridge the gap from his age 57 to age 70, which is 12, 13 years-

Al: Right, for Social Security.

Joe: So let’s see, 25 -90 is what?

Al: $65,000.

Joe: $65,000. What’s 4%- divide 4% into $65,000?

Al: 4% of $2,000,000? What are you doing?

Joe: I’m doing if he’s got $65,000, the need- he needs $1,600,000.
If he takes 4% of $1,600,000, that gives him the $65,000 and his $70,000, says it includes his vacations and things like that. So he’s got a little wiggle room to pay some tax.

Al: Yeah, well, the fact that he’s got $1,800,000 in an IRA 401(k) and some other money as well. Yeah, I think this works. The only caveat here is that retiring in your 50s, 4% might be a little bit rich as a distribution rate.

Joe: Right. You’d probably want 3%.

Al: Or even 3.5%. Try 3.5%, see how that works out.

Joe: (calculating) He needs $2,100,000 if he’s taking 3%-

Al: – and he’s got a couple of million. So it’s pretty darn close.

Joe: Yeah, you’re pretty close.

Al: And if your wife works a couple more years, then hopefully save a little bit more, too. Although not much if you’re not working. Depends on your consulting income. But I think Joe, I think this is really close.

Joe: Yeah, I mean, he could go sell beer or hang out, have fun, do something and not be stressful 9 to 5 and work for the jerks that fire people that are 55. Even though he had glowing reviews. I don’t know if you heard that part.

Al: I heard it.

Joe: So here’s the math, folks. This is what we’re doing. He wants to spend $70,000. We’re adding another $20,000 for his health insurance, which gives us $90,000.

Al: And the reason we’re doing that is presuming his wife won’t be working, and then they’ll have to buy their own insurance until they hit Medicare age, which is 65.

Joe: Because his wife- he’s way healthier than his wife. So who knows how long she’s going to work, just using his language. And then he says, you know what? Let me make $20,000, $25,000 a year. So let’s say it’s $25,000. So what’s short is $65,000 that needs to come from his investments. So at 55, 57, you probably don’t want to pull out any more than call it 3%, 3.5%. Let’s be conservative and say 3%.

Al: Okay, good.

Joe: So then I’m dividing the $65,000 by 3%. That gets me $2,100,000,
$2,200,000.

Al: Is what’s needed in investments.

Joe: Right. Because if you look at, let’s say if you have $2,200,000, 3% of $2,200,000 is $65,000. So he needs $2,200,000 roughly, in a nest egg for him to do his retirement dream. And that’s going to bridge the gap until his age 70. I don’t know how long he wants to work part time.
Maybe his wife is going to continue to work a little bit longer. If they retire tomorrow, I think this thing still works.

Al: I think it works. And plus, you got to consider when they do take Social Security, they’ll probably be just fine. So that might argue that you could take a higher distribution rate when you consider what it’s going to be when Social Security kicks in.

Joe: And it doesn’t sound like they’re very happy. So maybe their life expectancy is lower and they could take a little bit more out.

Al: Well, and maybe they should do something about that. Take time off, travel. Turn this thing around.

Joe: You got it, man. Have a little Grain Belt. Is this the guy that likes Grain Belt? Yeah. All right, he’s my man. Send him a case. I don’t think I can buy it here. He’s going to buy a case and send me a-

Al: Yeah.

Joe: All right. Thanks for the call or email.

The Derails

_______

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