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 [...]

Published On
January 5, 2021

Welcome to 2021! In this first episode of the year, Joe and Big Al go over estate planning strategies for CFP® candidate/Redditor Nate in SC, they do a spitball analysis for John in TN who wants to retire early, a retirement withdrawal and 529 plan strategy for Ace in TX, and a breakdown of pension options for James in AZ – after Big Al figures out how to work his HP12C financial calculator.

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Show Notes

  • (00:49) Estate Planning: Joint Tenants With Rights of Survivorship (JTWROS) on Brokerage Account (Nate, SC)
  • (12:19) Early Retirement Spitball Analysis: Can I Retire? (John, TN)
  • (25:12) Retirement Withdrawal and 529 Education Savings Strategy (Ace, Texas)
  • (34:36) Pension Options: 10 Year Period Certain or Joint With Rights of Survivorship (JWROS)? (James, AZ)

Free resources:

LISTEN | YMYW Podcast #305: What’s the Best Retirement Withdrawal Strategy?

WATCH | Educational Video: Should I Take the Lump Sum Payout From My Pension Plan?

Listen to today’s podcast episode on YouTube:


Welcome to 2021! Kicking it off with Your Money, Your Wealth® podcast episode #307, where Joe and Big Al go over some estate planning strategies for CFP® candidate and Redditor Nate in South Carolina, a spitball analysis for John in Tennessee who wants to retire early, a retirement withdrawal and 529 education savings strategy for Ace in Texas, and a breakdown of pension options for James in Arizona – after Big Al figures out how to work his HP12C financial calculator. Click the link in the description of today’s episode in your podcast app to go to the podcast show notes. See that big “Ask Joe and Al On Air” banner? Avail yourself of that if you’ve got money questions of your own! I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Estate Planning: Joint Tenants With Rights of Survivorship (JTWROS) on Brokerage Account

Joe:  I’m not feeling confident this week, Alan.

Al: Why is that?

Joe: You know my prep for this show is-

Al: I know it’s limited. Is it less than normal?

Andi: Wait, what prep?

Joe: Well it’s about 7 seconds. I just print out a bunch of email questions that Andi puts together for us. I go in the studio.

Al: Okay.

Joe: That’s the prep.

Al: I mean that’s no different than any other time.

Joe: But there’s a lot of long questions.

Andi: And complicated.

Al: Oh yeah. And you gotta read them.

Joe: And I gotta read them. So this might be a very terrible show.

Al: It might. It’s going to be an easy show for me because I’ll just sit here and listen.

Joe: And it’s hotter than Hades in this studio.

Al: It is warm.

Joe: Oh my God. It is wooooo. All right.

Andi: That’s why you guys started undressing when you got in there.

Joe: Yes. That is correct. Okay well let’s- and I’m fighting a little bit of this cold.

Al: I’m gonna scoot further back.

Joe: Yeah, please do. I’m gonna lose my voice. You know our listeners are getting a little out of control.

Al: I think we need to have a word count.

Joe: I think so too. Because some of them, they just say ‘what do I do with $100,000?’ And then we say well we can’t answer that, we need more information. And then we get these others, holy-

Al: – page after page after page. And they finally get to the question that has nothing to do with what we just read.

Joe: Then they send other emails ‘hey I forgot to add this point too after thinking about it.’ I’m like-

Andi: I do integrate those in, by the way.

Joe: All right. So I’m gonna give it my best shot today.

Al: Okay. See what you got.

Joe: All right. “Hey gang. Nate here from South Carolina. I’m preparing to take the CFP® in 2021 and apparently, your podcast is quite the hit amongst many CFP® candidates. I stumbled across your show because it was recommended on Reddit on more than one occasion. I dig it.” I dig it too.

Al: That’s awesome Nate.

Joe: “Plenty of diverse topics in real-world scenarios with the scope of the CFP®.” CFP® is CERTIFIED FINANCIAL PLANNER™, folks. “The jokes certainly make the subject matter easier to digest. Fingers crossed I have a Roth conversion question on the exam.”

Al: 50/50.

Joe: Oh, without question.

Joe: Well that’s very cool. I didn’t know that we’re a big hit with the CFP® candidates out there.

Al: I have never heard of that in South Carolina. That’s great.

Joe: Yeah. You sit around drink coffee in South Carolina, talk and read Reddit and study for the CFP® exam listening to our podcast.

Al: It’s like those review courses got to be just so boring they want to liven up a little bit.

Joe: Got it. I would like to know what our pass/fail rate is.

Al: Nothing. I don’t think we want to know that. But people have more fun.

Joe: ‘Hey these guys are great. You should listen to them if you wanna fail.

Al: I don’t know about CFP®, the CPA exam I know all about that. Becker’s kind of one of the top ones and they say you know 95% pass rate if you do all this homework and stuff. I think us were probably 10%.

Joe: Okay here’s his question, “Over one decade ago-” this sounds like the beginning of Star Wars.

Al: That’s right. I can see the letters coming to the screen.

Joe: That’s what this all looks like-

Al: You better read it fast before the print gets smaller.

Joe: Right? I always have to rewind that too. I remember watching in the movie theater you kind of miss what the hell was going on with the Jedi and Yoda.

Al: You know what? Next time we watch and I want to have you read it. That’d be fun.

Joe: Oh God. Okay. “Over one decade ago, my father and I busted a family trust by utilizing the-

Andi: Situs states’ statutory language-

Joe: Situs statutory language regarding uneconomical-” oh, where are we going with this, Big Al?

Al: We’ll see.

Joe: “- fees outweigh income.” So they had a family trust. The fees were outrageous.

Al: Yeah. So they shut her down.

Joe: They busted it. They shut her down. You can tell he’s studying for the CFP®.

Al: Yeah right.

Joe: Young lad. Yeah, we busted this trust up, my dad and I. One decade ago.

Al: Yeah right.

Joe: In a galaxy far far away.

Joe: “In short, he was an income only beneficiary and was 50/50 principal remainder beneficiary along with his sister- along with my sister. Another corporate and individual co-trustees of the trust would approve our request to terminate the un-economic trust without judicial oversight, as long as my father received a portion of the principal with all parties unanimously agreed to.” You like how I- ?

Andi: Unanimously-

Al: That’s a new word.

Joe: Ok, I knew it’s going to be a tough show. “As you know, we could not disclaim it.” I did not know that. Well thank you Nate. Did he really- ?

Al: You must know that. Come on.

Joe: Come on.

Al: As you know-

Joe: You have a CFP®, don’t ya? All of us on Reddit, we know this stuff. “He didn’t really need the cash received from the trust settlement so he and I opened a self-directed brokerage account registered as joint tenants with rights to survivor. He is the primary owner. I’m sure this is the part of the show where you explain to your listeners what the benefits and disadvantages of registering property with joint with rights to survivor are. Can I request Al to do this?”

Al: He doesn’t want you to do it?

Joe: No, now he’s being a smart ass. “As you are aware, or likely aware, our intent was to invest the cash in marketable securities and upon his eventual demise, I would take sole ownership and share with my sister.”

Al: Certainly we knew- we were aware of that.

Joe: Just how he writes, this is a future CFP®?

Al: Yeah right.

Joe: Who would want to work with this guy?

Andi: It doesn’t have anything to do with your reading.

Joe: No, I read like a CFP®.

Al: That’s the problem.

Joe: I know numbers. I get paid for numbers. “Because the value has increased, I am concerned about a few things. The first is providing to the IRS or the account custodian that the initial contribution to the joint with rights to survivorship account was 100% his at the time of the funding. As you know, the cost basis for a non-spousal account would receive one-half step-up basis unless it can be proven that it was contributed 100% by a particular owner. That’s my first question. Do we need to prove this to the current transfer agent before he dies? Or is this something I, as executor of my father’s estate, would need to prove to the IRS when my sister and I get to sell the shares and re-register in our names?”

Al: All right. You want me to take over?

Joe: Please.

Al: Ok. So first of all, let’s see, we’ll just kind of dissect this a little bit. The first-

Joe: He’s making this so complex.

Al: Yes.

Joe: He busted a trust that his dad was a beneficiary of. He was an income and principal beneficiary. He was at a corporate trustee. The corporate trustee was gouging them in fees because young Nate here is a study in CFP®. He says ‘Dad, look at the fees that you’re paying in this. We should get rid of it and bust it.’ So they busted the trust up and then they put it into a brokerage account. And because he’s the beneficiary of it he’s like ‘Dad put me on as joint with rights to survivor.’ And since I can’t explain joint with rights to survivor because I’m an idiot, Alan, would you please take over?

Al: Let’s start there. So in South Carolina, along with a lot of states, a couple main choices of title is joint tenancy with rights of survivorship or tenants in common. And they’re somewhat similar so it’s more than one person owning property. Typically joint tenancy is a married couple. And the main reason it’s typically a married couple is because when one spouse passes the other spouse inherits the remainder interest. And so you don’t-

Joe: And there’s an unlimited marital deduction.

Al: That’s right. So you see that less often between anyone that’s not married. You can see it, in this particular case father/son. Yeah. That can work. Here’s the problem with that though and-

Joe: Why are they titling that in the first place?

Al: Well it would be- say that the reason they- people try to avoid probate doing this and that doesn’t work. So you got a couple problems with this first of all. The first problem is as soon as your dad puts you on as joint tenants you actually have a- he has a gift tax problem.

Joe: Exactly. He gifted half of the assets.

Al: Right. So let’s say it’s $1,000,000. So basically half the assets going to you. And so he has to fill out a gift tax return showing that he gave you $500,000. So that’s the first problem. And if he- lets say you pass away then it goes back to him.

Joe: It doesn’t go to the sister.

Al: Yeah. Right. And it’s just- it’s a mess. Really. So because of that usually people do tenancy in common when there’s- when they’re not married. But I mean if the main point here is trying to avoid probate and-

Joe: Set up a living the trust and just the name the kids as the beneficiary.

Al: Exactly. Let’s say if this goes the correct way, so your dad passes, he passes first, and you end up with the asset. Now you’ve got the asset, are you going to give half to your sister? Now you have to file a gift tax return and show that you’re giving your half to your sister. It’s just a complete mess. So I wouldn’t do that. Plus there’s no step-up and basis.

Joe: Right.

Al: A gift- the thing about a gift is whatever the giftee’s basis- or giftor’s basis I mean- it then becomes the giftee’s basis. The person- let me do that English. The person that gave the gift, whatever their tax basis was, becomes your tax basis as the person that received the gift.

Joe: “Lastly, my other concern. I’d like to add my sister to the account registration because the account has increased in value. And when it comes time to share one-half of the account with her I’d like to avoid making any taxable gift to my sister. If you remember- ” What the – ? If I remember what?

Andi: From earlier in his email.

Joe: “- she is not on the account registration now. However my father and I are.” Yes I just- him and his ‘are you aware or not aware and if you are aware-‘

Al: ‘as you know’-

Joe: ‘as you know’- ‘And Joe please don’t answer this question.’

Al: ‘Have Al do this one.’

Joe” ‘Please give it to Al.’

Al: So the problem with that is the same problem in the first place. So now your sister gets on title, now there’s a gift tax return from you and your father over to your sister. So anyway-

Joe: Nate, good luck on the CFP®.

Download our free Estate Plan Organizer from the podcast show notes so your loved ones have all the information they need in the event something happens to you. It’s divided into fourteen sections, ranging from the names and contact information of your advisors, to your account details, insurance policies, and final wishes. Collect ALL the relevant information, put it in the organizer, tell your loved ones where to find it or make sure they have a copy, and don’t forget to update it regularly with any changes. Get the Estate Plan Organizer in the podcast show notes at YourMoneyYourWealth.com. Just click the link in the description of today’s episode in your podcast app.

Early Retirement Spitball Analysis: Can I Retire?

Joe: Got John from Tennessee writes in. “Hello Andi, Joe and Big Al. I would be embarrassed to tell you how many hours I’ve spent catching up on your podcasts the last month or so. I have thoroughly enjoyed your show and look forward to them every week. Keep up the good work. I’m looking for a second opinion. I think you guys would be the perfect source for that.” All right. Well thanks for listening. Even though how pathetic it really is that you’re spending all this time on this podcast. You want to get in the nitty gritty here Big Al? You got your calculator ready?

Al: Sure.

Joe: Because this thing is long.

Al: Ok, I’ll pull it out.

Joe: Good. Actually I brought mine today too. “I am 47, married, live in Tennessee and often listen to you guys as I walk my little doggies.” I don’t know, what the hell is his dogs’ names?

Andi: Shichon and Cavapoo. They’re actually mixed breeds.

Joe: Shichon and Cavapoo. OK.

Al: Close enough.

Joe: Whatever.

Al: You can skip that part.

Joe: Oh boy. Anyway. “I’ve been working for a large company for 25 years and getting a little tired of the corporate executive grind. So I’m toying with the idea of a very early retirement. I don’t know if a year or two down the road I might get bored and decide to get back to work. But I’m sure that if I do that I won’t earn anywhere near the same amount of money that I’m making now, around $400,000. I would love to hear your thoughts on how I should be thinking about a general game plan to utilize invest my assets to cover my expenses in retirement but still provide some growth inflation protection.” All right. So here we go. Here’s the nitty gritty, here’s the numbers. John’s got “a net worth of $6,000,000 but $1,500,000 of that is equity in my paid-off home which I would sell and downsize in the next 3 to 5 years probably freeing up at least $750,000 to invest after buying another home. The remaining $4,500,000 is split roughly a third, $1,500,000 in retirement accounts, almost all pre-tax, $1,200,000 in 401(k), $200,000 in IRA, only $100,000 in Roth and another $3,000,000 in brokerage accounts and a mix of equities and bonds. I know you guys will make fun of this but my retirement accounts are 0% equities. I moved all my money into fixed bonds once I recovered losses plus some from earlier this year and the 401(k) funds are in a guaranteed 3% fund.

Al: By the way, there’s a Cavapoo. That’s a cute looking dog.

Andi: And this is a shichon.

Joe: Ok. “The $3,000,000- ”

Al: I wasn’t listening. I was looking at the dog pictures Andi’s put up there.

Joe: “The $3,000,000 in brokerage account is roughly 70% equities, 30% fixed. So the total net worth is currently split 25% real estate, 35% equities, 40% fixed income. After the downsize, I would like to increase my equity exposure with about $750,000 net proceeds which would change my split to 12.5% real estate, 47% equities, 40% fixed income. I’m assuming annual expenses of roughly $100,000. We always lived well below our means. And based on last year’s tax return it looks like we’ll generate roughly $65,000 to $70,000 of taxable dividends, interest, cap gains, distributions etc. plus another $8000 of tax-free muni bond interest. My wife also does some travel agent work and will likely generate another $25,000 of income for the next 8 to 10 years.” He wants to spend $100,000, he’s got $4,500,000, right?

Al:  Yep. I’m with ya.

Joe: “I am just looking for general ideas or thoughts that jump to mind to you guys when you hear this set of circumstances. We would reduce taxable income by contributing as much as we can to my wife’s solo 401(k) which we just started this year and contribute to my IRA if allowed, thinking spousal. The full HSA contributions we would get health coverage that was HSA compliant. I already have an HSA with roughly $65,000 in it. With those deductions and our standard deduction, our taxable income would be very low and I assume that means I should probably be converting $1,500,000 in pre-tax money over to Roth. I would of course balance that with Obamacare subsidy cutoffs. I know you guys will make fun of me for this mentioning that given my total assets.” Yes you’re right John. You’re very wealthy and you’re worried about the subsidies. “What else? Any other bright ideas? It feels to me like there’s plenty of income and assets here to make a very early retirement entirely possible. But let me know if you see it differently. Some specific items that I have been considering. Should I just have a dividend interest- should I have the dividends and interest just distributed out to me instead of reinvesting? Should I supplement that with taking some capital gains each year especially since I would likely be in the 0% cap gains bracket? Should I focus more on Roth conversion? Or should I maybe consider SEPP from the pre-tax account?” So that’s a separate equal periodic payment or a 72(t) tax election for those keeping score at home there. Look at John and his sophistication there.

Al: That’s pretty good.

Joe: “What about the $750,000 net from my proceeds from the house? I assume I should increase my equity exposure with those funds? One more note. I have a 19 year old son, 16 year old daughter, but we have more than adequate funded 529 plans for each of them and excluded those 529 balances from the totals above, as I’m going to keep them- I’m going to let them keep whatever’s left. No need to preach a sermon about ‘what are you guys going to do for the next 40 years?’ I’m sure we’ll end up back to work at some point, likely get bored. But I wanted to get this plan in place. Hope you guys have or had a great Thanksgiving. And I look forward to hearing any advice. Whoops. I mean your thoughts as I know you guys don’t give advice.” Your devoted listener, John from Tennessee.” John, this is just a pure brag.

Al: It is a pretty big brag.

Joe: It’s like I got $6,000,000 net worth. Let me see what you guys think.

Al: Can I retire?

Joe: Can I retire?

Al: Yeah, you can.

Joe: I’m gonna have about $4,000,000- it’s like blah blah blah I got the equity, and this and that- it’s very simple. Yes, you can retire.

Al: So let’s just really quickly, so $4,500,000 plus you get another $750,000 from selling your house so let’s just say you got $5,000,000. And if you’re retiring at 47, early retirement, we probably would want you to have no more than a 3% distribution rate which would be $150,000-

Joe: Call it 2.5%.

Al: Yeah 2.5%. Right. $125,000. You’re at $100,000. So yeah. No, this looks really good, really good in terms of your ability to fund the retirement. And yes, have your wife fully fund the solo 401(k), do the Roth component if you want to. Yes, HSA, that’s a great idea. Keep funding that. Yes, you can do a spousal Roth, although you can’t double up on the income. So if your wife has $25,000 of income and she puts all or most of it in the 401(k), you can’t double up and then you do have a spousal Roth on that. So just be aware of that fact. But this looks great I think. And I don’t really care how you take the money. If you want to take interest dividends, go for it. I think me personally, I would have kind of a periodic withdrawal from my account, kind of create my own cash flow based upon rebalancing and what’s doing well and not so well to keep a certain balance in my accounts. You know in your particular case, I don’t know whether a Roth conversion or capital gains is better. It just depends upon how many gains you have and what kind of investments you have. If you have poor investments and you want to rebalance and focus on that. If your investments are fine as is, don’t worry about it, just do Roth conversions.

Joe: Yeah I agree. I would look at it as how much equity mix do I want versus fixed income? And so I would say if you’re spending $100,000 a year- he’s going to go back to work. The Mrs is going to be a travel agent making $25,000. So he really only needs $75,000 from the portfolio.

Al: And they can travel cheap because she’s a travel agent.

Joe: Right. That’s smart. So but why would you leave Tennessee? Hopefully he lives in Nashville, then we could come and visit him.

Al: Yeah that’s right.

Joe: So looking at that I would probably have let’s see- he’s got what did we say, $5,000,000.

Al: Well we’ll call it $5,000,000.

Joe: I would probably have a- probably a 70/30 split of fixed income.

Al: 70% fixed?

Joe: No, I would say-

Al: – the other way.

Joe: – the other way and probably 60/40.

Al: Yeah Yeah.

Joe: Because he’s still young.

Al: Right.

Joe: And let’s say you take 40% out of $5,000,000, what is that, $2,000,000?

Al: Right.

Joe: So that would cover roughly 20 years of fixed income.

Al: No matter what the market does.

Joe: No matter what the market does.

Al: Unless you get do you think we’re going to hit a depression and never recover. And if that happens, no investments are good.

Joe: Right. You can put it in CDs and cash if you wanted to be super conservative and then on the 60% equity side, you would have a balanced globally diversified strategy that’s low cost, cheap, but that you would rebalance instead of looking at a dividend paying strategy. You don’t have to be cute with this. Hey, should I look at high dividend yielding or high income yielding portfolio to give me the income and I’ll just feed out the interest and dividends and let my principal grow? Yeah, that’s one way to do it. But I would much rather have a lot simpler strategy that’s more tax efficient, that’s probably a lot less expensive and a lot easier to manage. You’ll probably gain more wealth. So look at it as 60/40, 40% somewhat saved short term bonds. As interest rates go up, you can reinvest those into a higher paying yielding. Maybe you put some preferreds in there. You could look at CDs. You could even- there’s all sorts of different fixed income vehicles that might get you to 1% to 3%. Who cares? You don’t necessarily need it. And then on the on the equity side. If there’s dividends and interest or cap gains, maybe you spend that when markets are high. But when markets are low, you don’t want to be spending the dividends. You want to reinvest those dividends at lower stock prices. So yeah I would want to keep myself in that low bracket by converting the hell- at 47, you could convert to $1,500,000 probably over a 15-year period and then just compounding tax-free. Because who knows? When he’s 70, our life expectancies could be 110.

Al: Could be.

Joe: So I don’t know, man. I like you, John. I think you’re pretty tight-  SEPP- how about that? You want to do on a separate equal periodic payment?

Al: Don’t need it.

Joe: Yeah, well what that means is that John can have access to his money out of his retirement accounts before the age of 59 and a half without the 10% penalty as long as John takes a separate equal periodic payment out of the overall retirement accounts. This could make some sense as well instead of- but I like the conversion strategy better. But what John could do is say here’s how much money that I have in qualified accounts. I’m going to take a 72(t) tax election and I’m going to bleed my retirement accounts. Maybe he takes $15,000 out of the retirement accounts over the next several years. He keeps himself still in a low tax bracket. But he’s taking the money out of the retirement accounts at maybe a 0% bracket given the standard deduction, so that could be an interesting play too. But I think I’d rather have him spend down the qualified and- or non-qualified and do a conversion.

Al: Yeah me too.

Joe: John, appreciate it. Thank you.

So that’s how the fellas spitballed John’s retirement plans, now what about yours? Find out how ready you are for retirement. First, go to the podcast show notes at YourMoneyYourWealth.com and download Big Al’s Quick Retirement Calculator Guide- it’ll help you ballpark how much income you’ll need from your investment portfolio in retirement. Then, click the Ask Joe and Al on Air button in the podcast show notes and send in your situation to have the fellas spitball for you. Or, you can skip over all of that and click the big green “Get an Assessment” button at the top of the page to schedule a free, comprehensive and personalized one-on-one financial assessment with a CERTIFIED FINANCIAL PLANNER™ on Joe and Big Al’s team at Pure Financial Advisors. There is no cost or obligation and it’s pretty likely that they can find ways to get more out of your retirement portfolio and plan. Just click the link in the description of today’s episode in your podcast app to get the process started.

Retirement Withdrawal and 529 Education Savings Strategy

Joe: I got Ace from Texas. Ace.

Al: Ace. That’s a great name.

Joe: Sounds like a bad ass. Texas. Got a Dooley truck, I bet. Big old wolf dog.

Al: Probably he plays poker all the time, what do you think?

Joe: Smokes like really good cigars.

Al: I would think so. Drinks Scotch?

Joe: Sure. I aspire to be Ace. “Hey YMYW team. I’m a long time listener, first time questioner.” Oh look at you Ace. “Great show. Funny as heck.” I guarantee he doesn’t say heck.

Al: Well he lives in Texas.

Joe: But I- oh yeah, he’s like- he probably says something else.

Al: Probably.

Joe: “I’m 51 years old, married, living outside of Houston in Fulshear, pronounced full sure-

Joe: Fullsure. Driving a 2018 Blue King Ranch F150 with the- I told you it was a big ass, bad ass truck, right?

Al: Yeah right.

Joe: I wonder if it has Dooleys. Big King. Big King Ranch. Bet that’s a big truck. He’s got 3 Shetland Sheepdogs.

Al: And we’ve got that on screen here.

Joe: Okay. Cody, Rocco and Minzee.

Al: Minzee.

Joe: What about ______?

Andi: Cavapoo.

Joe: Cavapoo. “We’ve got 2 kids in college, UT Austin and TCU and fully funded with 529 plans, might even have a little leftover. I will be involuntary retired in January 21st from a 24-year old career in oil and gas with a pretty good severance and pension. Future job prospects in my area of expertise is horrible. My current portfolio is roughly $4,800,000; $3,800,000 qualified accounts mixed between 90% 401(k), 10% Roth and $1,000,000 in non-qual cash and stocks. I have 2 questions for your consideration.”

Al: Okay.

Joe: All right. “I’m assuming worst case I cannot get out- I’m assuming worst case and I cannot get any significant employment in the future. I want the $1,000,000 in non-qualified accounts to cover my $170,000 a year after tax needs for the next 8 years to get me to 59 and a half so I can have access to the qualified money which I think will grow to $5,700,000. And I’ll be good with the 4% withdrawal rate. What would be an iolistic allocation for the non-qualified $1,000,000 to get to cover $170,000 for 8 years?.

Andi: That was ‘idealistic’ by the way.

Joe: What did I say?

Andi: Iolistic. Not sure what that means.

Joe: It’s- you know, means what’s the proper asset allocation. That’s what that means.

Al: Iolistic?

Joe: Yeah, Iolistic.

Andi: Iolistic and optionality and-

Joe: Yeah. Ace knows what I’m talking about.

Al: Optionality is a word.

Joe: Thank you.

Andi: Oh good.

Joe: Killed it.

Al: It is nowadays. I don’t know if it used to be 5 years ago.

Joe: Got it. I added it. Does he want growth, stocks, dividends, bonds, cash, munis? “If needed, are there any other strategies to dip into the quantified money ahead of 59 and a half? Oh, we just talked about that.

Al: Oh, you’re gonna be really good on that.

Joe:  So- yes.


Joe: 72(t) tax election. “It looks like I’ll have $20,000, $30,000 leftover in the 529 plans. Original principal over the years was $50,000. I assume I can withdraw the remainder penalty-free. Were the previous withdrawals automatically from earnings then principal or is it designated that time of withdrawal? Keep the podcast coming. Sincerely, Ace from Texas. By the way, not Texan. Originally from Philly. So he’s chillin’ in Philly, buys a big ass truck with some sheepdogs in Texas.

Al: Got it. Got it. So what do you think? Do you drain out the non-qual and wait to 59 and a half or what’s your other strategy?

Joe: Oh OK. Let’s talk about this here because he retiring at age 51.

Al: And he’s thinking- and if he takes $170,000 out for I don’t know for 9 years, 8 years, that’s about $1,000,000.

Joe: Okay well what’s-

Al: Actually, it’s more than that. Hold on. It’s $1,360,000.

Joe: Well what’s $170,000 divided into $4,800,000?

Al: Ok, $4,800,000 divided by $170,000- You’re talking about the qualified- that’s 28.

Joe: No no no. $170,000. What’s the distribution rate? So he’s got roughly $4,800,000, $3,800,000 qualifying accounts.

Al: That’s 3.5% distribution rate.

Joe: So he’s got a 3% burn rate, 3.5%. But he also needs to pay taxes. Right?

Al: True.

Joe: Because he wants $170,000, plus tax plus the cost of living. So he’s at 3.5% at 51. I mean that is super, super tight, Ace.

Al: That is. It is tight. Probably gonna have to lower that a little bit.

Joe: Right. So what we’re talking about is, what is _____ distribution out of the assets that you grow? So Ace here has $4,800,000 and he wants to spend $170,000. So kind of the first step in any calculation that you want to run is to just divide $170,000 in the total liquid assets that you have to provide income. And in Ace’s case, it’s 3.5%. And at 51, we’re probably looking at 2.5% to 3% probably.

Al: I would say no more than 3% mainly because most of this is in retirement accounts. So you’ve got to consider the taxes.

Joe: And $170,000, plus tax, plus the cost of living-

Al: And at $170,000, it’s a pretty high tax rate.

Joe: And so what Ace’s plan is that I’m going to blow through the $1,000,000 of non-qualified dollars. Burn that thing down. And then my qualified money, my retirement accounts is going to grow to $5,700,000 and then I can take a 4% distribution there. Then I’m going to collect Social Security at age 67 and I should live happily ever after. But what is going to happen to Ace is that he’s going to have zero type of liquidity. Because everything at that point is going to be in a retirement account that will blow him up and I’m gonna go long. There’s so much that he has to look at because I think this is what a lot of people do. I think this is advice that is very typical as well, spend down non-qualified, let your qualified money grow. Don’t take that money out until you have to. Because you don’t want to pay taxes on it. But Ace is going to get blown up in the future. I think with future tax rates going up, he’s spending $170,000 which is going to put him probably in a higher tax bracket if everything is coming out of the retirement account. I would do something maybe a little bit different.

Al: Yes I agree with you. I’m with ya.

Joe: So I would look at it- I don’t know, we haven’t done a 72(t) tax- and we’ve talked about it twice today. That might be an option here.

Al: I think it’s a great option in this one.

Joe: Right. So what is 72(t) tax election is that you could take partial- you could- there’s 3 ways to calculate the separate equal periodic payments, so it’s an SEPP or 72(t) tax election. Because he’s retiring earlier, he doesn’t have any good job prospects, and so he’s like screw it. I’m going to retire. I’m done. So yeah, I would split up the retirement accounts and do an SEPP on one of them to cover maybe 50% or 40% of his need to keep him in a low bracket. And then supplement the rest so he doesn’t blow through all his non-qualified accounts.

Al: I think I would do that as well. And then I would try to at least get some kind of at least part-time work to help supplement because otherwise you run the danger of really digging in to part of this portfolio. And I think- so his job prospects aren’t that great but he’s- I’m sure he can find something.

Joe: His name’s Ace and he drives a bad ass truck and he lives in Texas. All he has to do is go anywhere and say my name’s Ace.

Al: And he shows up in his truck.

Joe: Right. Hire me.

Al: With his 3 dogs.

Joe: I’d hire ya. Wanna come to San Diego, Ace? We’ll figure something out for you. Or you find some part-time work. That 3.5%, that makes me nervous. That’s just too- at that age, it’s just too much burden on the portfolio. That thing turns on you and all of a sudden now that 3.5% burn rate is 5% for a year. Because you’re 50 it’s not like okay well we’re going to settle down this year. He’s probably going to spend more than $170,000.

Al: Probably.

Joe: That guy’s in the oil business. He’s making a half $500,000 a year and all of a sudden he’s going to retire and have all this time on his hands when he was a badass in the oil fields. He’s going to spend twice as much. I don’t like your plan Ace.

Learn more about the 529 plan and other education savings plans that offer tax incentives and those that don’t, along with the rules, pros, and cons of each plan. Check out our Saving for College educational video in the podcast show notes at YourMoneyYourWealth.com Got just one more question coming up for today’s show, this one is on choosing pension options – and you’ll find a couple videos on that topic in the podcast show notes as well. Click the link in the description of today’s episode in your podcast app to access all these free resources, and to Ask Joe and Al your money questions.

Pension Options: 10 Year Period Certain or Joint With Rights of Survivorship (JWROS)?

Joe: We’re a little bit behind on the emails.

Al: Yeah we’re finally- I think we’re doing pretty good.

Joe: We’re finally in December. We’re almost at the end of December. So I apologize folks. We try the best we can.

Al: We do our best.

Joe: Got James in neighboring Arizona. “Hello Joe-” Did you write ‘neighboring’? Who writes- ?

Andi: See how he signed the email?

Joe: Oh, James- sorry. I don’t read the emails, Andi.

Andi: I know. That’s why I’m telling you now.

Joe: When they’re hot off the press-

Al: So they’re fresh.

Joe: Fresh.

Al: Fresh in your mind.

Joe: Yeah. And that’s why it’s such an awful experience listening to me read aloud.

Al: People seem to like it. They binge listen.

Joe: I don’t know how. I can’t even listen to 7 seconds of this godawful mess. Oh man. Okay. “Hello Joe, Al and Andi. Thanks so much for your podcast. It really does help so many of us as we consider our retirement strategy. I’m a few years away from retirement and I would like to get your thoughts on how to handle my company pension option. The company froze our pension several years ago when they increased the 401(k) match. The pension does not have a lump sum payout option. And does not adjust for inflation. So there is no COLA. I’m thinking it might make the most sense to take the 10-year period certain option and go towards our early living expenses while we delay taking Social Security and allow our other investments to grow. When I retire at age 62, the pension options I’m looking at are as follows: 10-year period certain, $45,000 annually, $450,000 dollars total. Or joint with rights to Survivor. $18,500, so $18,500 annually with no cost of living. And this is at age 62.” Can you tell me Alan, what the present value is of $18,500, let’s say 62, 72, 82, let’s run 25 years and let’s run a discount rate of call it 4%.

Al: Okay. $289,000.

Joe: Okay. Wow. That’s it?

Al: Yeah. If it’s 5%, it’s $260,000. Yeah. It’s low. I mean if you just take $18,500 into 450 which you can’t really do. But that’s only at 4%.

Joe: So yeah. You look at the present- and what you want to do when you- there’s 2 ways to look at it I guess. Well, there’s multiple ways to look at this. So for those of you that have a lump sum pension option or an annual payment or in this case James from neighboring Arizona says I’ve got a 10-year period certain. What a 10-year period certain means is that he’s gonna get $45,000 a year and if he dies the next year the beneficiary is still going to get $45,000 until the10 years. Or a joint with rights to survivor is $18,500 that will pay for both lives. So if they live until 105, $18,500 is still going to come to the overall household. So if he’s getting a 10-year period certain of $45,000 with no COLA, 10 years, he’s going to receive $450,000 dollars as they add up over that 10 years. So what you kind of want to figure out is what is the present value or what is the internal rate of return.

Al: So I did that wrong.

Joe: Yeah that seemed way too-

Al: It’s actually the present value at 4% is $462,000.

Joe: Ok.

Al: $462,000.

Joe: Ok. So see what the company is doing here? It’s usually the same or very close to that. And that’s why Al and I are good team. Because I knew that was wrong and then he was like well wait a minute-

Al: I had that number in the future value button, I didn’t realize it.

Joe: Got it. Oh, you’ve got to clear out your calculator, Al.

Al: I know.

Joe: So $18,500 on an annual basis, then you look at what is the present value of that $18,500, so you can make an informed decision. So you’re making apples to apples. Because when people look at $45,000, $18,500, well $45,000 seems better. But wait a minute, you’re gonna get the $18,500 for that many more years, so what is the present value of that? You can use certain discount rates of whatever that you think that you could grow the money out or inflation is or you can make your own assumptions here depending on how aggressive or conservative that you are.

Al: If you think you can earn 6% then the present value is $308,000. So then maybe you just take the take the money, $45,000 a year and invest that 6%.

Joe: Right. So looking at- they use usually conservative discount rates. And so it’s usually the same. So $450,000 if you take the 10-year period certain or we’ll give you a joint with rights to survivor and if you live a normal life expectancy. Guess what? We’re going to be out roughly $450,000.

Al: That’s right. Same-same. We don’t care.

Joe: Same-same.

Al: That’s actually usually how all these are run, basically so it’s same-same for them.

Joe: Correct. So then you just want to make sure that you’re placing this income into your overall financial strategy so you don’t have to spend hours upon hours to decide, look at all these pension options we have. In most cases, unless someone’s has impaired life expectancy or someone that lives- you have ancestors that are still alive from the- I was going to say something, but I won’t- let’s say that you have a very long life expectancy or short life expectancy, then you can kind of play with your own financial plan to see what makes sense. So he’s got some other details here. Let’s see we don’t get a ton of time to go through all of this but he’s got some Social Security. He’s got the spousal benefit. And if they delay, it’s going to be around $50,000. Got a portfolio of about $3,000,000, mostly he’s got tax-deferred and $1,100,000 tax-free. Look at this guy. Look at James.

Al: Wonderful. Yeah, right?

Joe: He’s killing the game. He’s hoping to spend $165,000 annually. “Current plan is to pull from the tax-deferred to minimize the 12% tax bracket each year-

Andi: Maximize.

Joe- “- maximize and then pull the remainder from tax-free. I realize the tax brackets may change in the future. So this plan could change. Your general opinion would be appreciated.” All right. You know what? I’m going to spend a little bit of time here, Andi. Sorry to keep blowing up the clock.

Andi: Yep. No, go for it. It’s alright.

Joe: This is kind of the theme of today.

Andi: Blowing up the clock?

Al: Right. Yeah, that too.

Joe: The what?

Al/Andi: Blowing up the clock.

Joe: Yes blowing up the clock, too. So he’s gonna take $45,000 let’s say over the next 10 years that’s going to cover some of his living expenses. But let’s do this math again first. This is where people you always need to start. He wants to spend a $160,000 per year. And he is 62 years old? Yes he is. When I retire at 62. So he wants to spend $165,000 a year. So he’s going to receive Social Security of $50,000 at age 70. And then let’s see, Social Security 67 ____ excludes spousal benefit, so let’s call it, I don’t know, $60,000 at full retirement age. So he needs $105,000. He needs $165,000 for about 4 or 5 years and then about $100,000 thereafter.

Al: I’ll agree.

Joe: He’s gonna take the pension option of $45,000 so really he needs $45,000, $50,000 from the portfolio, plus tax. You kind of with my math there?

Al: Yeah. $50,000, $60,000.

Joe: So if I look at $60,000 and if I divide that into $2,800,000-

Al: We get 2.1%.

Joe: So 2.1%. So it’s not bad. It looks pretty good.

Al: Yeah I agree. Good distribution rate.

Joe: Okay, so first step. Check. Check that box.

Al: I think when you’re retiring at 62 let’s just say, 4% is probably a little too rich. 3.5% is probably fine. 3% is better. 2% is great.

Joe: Yep. And so what he’s looking at doing here is that he’s got $600,000 outside of retirement accounts. He needs $50,000 a year. So he wants to take money from his retirement account to fill up the 12% tax bracket. So he could probably pull out $60,000 from the retirement account to keep him with the standard deduction.

Al: Well if you’re counting the $45,000, he’s already getting.

Joe: Minus $25,000. Yeah. And that’d get it up to $80,000.

Al: About, yeah about.

Joe: So $60,000 he’s pulling from retirement accounts, get him to the 12% and then so he’s pretty good just almost pulling money from the retirement accounts. But would you do that?

Al: No.

Joe: I wouldn’t either. Where you at? What are you thinking? What’s your strategy over the next, let’s just call it 5 years? What’s your 5-year plan for James?

Al: Let’s see, what would I do? 62. See my problem was I got sidetracked. I wasn’t really listening. You give me yours.

Joe: All right. I would not waste that 12% tax bracket on income. I would rather convert to the top of the 12% tax bracket. He has $600,000 that are sitting outside that he could live off of. So he’s got the $45,000 pension. I would take the non-qualified in cash to supplement my income. And then I would convert to the 12%. He’s got $1,100,000, I would convert that over the next couple of years. Then his RMDs are going gonna be fairly low and he’ll never ever touch anything higher than the 12% or 15% tax bracket for life. Because he’s going to push his Social Security out to age 70. And if he gets a little bit more money into the Roth, his Social Security could potentially be tax-free. And we’re talking almost $60,000 of Social Security benefit. So you would have to look at what the provisional income is going to be so I would forecast that out. Look at half your Social Security plus the interest or whatever distributions are coming out of your retirement accounts. That would be my play. I would still want to get more money into Roth because then thereafter you could be in the 0% tax bracket with $100,000 plus income.

Al: I think that makes sense to me too because when you’re able to get so much here converted then a lot of your Social Security will be tax-free as well, so you get a double benefit that way. And this is the case where you don’t have to go into the 22% bracket or 24% bracket because you got enough years to get enough out to still stay in the 12% the future. So yeah, I’m with you.

Joe: So yeah, pay just a little bit of tax, get a lot of money out. Thanks for the question, James. That was a good one.


Behind the scenes on your emails, the Shichon and Cavapoo, and my internet all make appearances in today’s Derails – stick around to the end to hear ‘em.

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