Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:53 – Margin Loans, Buy-Borrow-Die, and PFIC Risk: Sanity Check (Jack & Jill, Australia)
• 13:11 – Why I Love Margin: NYC Tax Math (Bones1999, YouTube)
• 14:29 – 8% Margin Loans to Buy Stocks: Bad Math! (Tom, YouTube)
• 19:39 – Reverse Glide Path at Retirement: Does Starting Conservative Make Sense for Us? (Forest & Jenni, VA)
• 35:43 – Retiring to Florida: SEP IRA Bridge, Home Sale Timing, and Roth Conversions (Jack & Diane, NJ)
• 43:18 – Outro: Next Week on the YMYW Podcast

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Transcription

(NOTE: Transcriptions are an approximation and may not be entirely correct)

Intro: This Week on the YMYW Podcast

Andi: The margin loan discussion continues, today on Your Money, Your Wealth® podcast 589: Jack and Jill, longtime listeners who recently moved from the UAE to here in Australia, want a sanity check on using margin loans to build and live off their portfolio, and whether the strategy of buying stocks, borrowing against them, and never paying tax on the gains – aka “buy, borrow, die” – is a good idea. Oh, and we’ll recap the spicy YouTube comments the margin loan discussion back in episode 585 got us. Then Joe and Big Al spitball  on flipping the script in retirement for Forest and Jenni in Virginia: Does a reverse glide path – investing conservatively and getting more aggressive as they age – actually hold up? And finally, Jack and Diane in New Jersey are retiring this year, selling the house, and moving to Florida. Joe and Big Al spitball a stress-test on their Roth conversion plan. Hit subscribe if you’re watching us on YouTube and drop a comment: margin loans? Buy borrow die? Reverse glide paths? What do you think? I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Margin Loans, Buy-Borrow-Die, and PFIC Risk: Sanity Check (Jack & Jill, Australia)

Joe: All right. Hey, you found us once again, folks. Show’s called Your Money, Your Wealth®. Joe Anderson, Big Al, Andi Last hanging out in our offices-

Andi: Look how big your head is, Joe. You zoomed in next to the camera.

Al: It’s gigantic.

Joe: Yeah.

Al: You’re all face today.

Joe: This is gonna, this is gonna look really good. But we’re trying our best.

Andi: Obviously we are not in the TV studio today. Aaron Townsend, our TV producer, is actually, out. He’s… Where is he? He’s in Tahoe. He’s on vacation. And so we’re having to do this with Joe and Al from their offices, and so we’ll see what we get, but if it sounds a little different, looks a little different, that’s why.

Al: Yeah. And then Joe’s at the Pure office in San Diego, and I’m at my home office, also in San Diego. And Andi, you’re-

Andi: In my home office in Australia.

Al: Correct. Yep.

Joe: All over the world.

Andi: Speaking of Australia….

Joe: All right, let’s get to this. It goes, “Hey, Big Al, Joe, Andi. Jack and Jill here, again from the UAE. Episode 476.” Wow. “Still loyal listeners. Life update, we’ve come down the hill with our pails of money and moved to Australia.” Ooh. So they’re, right next to you-

Andi: Yep …

Joe: Andi Last.

Andi: Yep, they’re here.

Joe: In mid-2025. Crickey.

Andi: Crikey.

Joe: Crikey.

Andi: Crikey, mate. You don’t know crikey?

Joe: I don’t know crikey.

Andi: Steve Irwin, The Crocodile Hunter. He used to always say, “Crikey.”

Al: Yeah, when the alligator was about to snap him up, right?

Andi: Crocodile. But yes.

Al: Crocodile. You’re right. You- crocodile is correct.

Joe: Maybe we’ll run into Andi. We now have a two-year-old Sulky mix.

Andi: Saluki.

Joe: Saluki mix. What,

Andi: Let me show you this dog. It’s really pretty. It looks kinda like a… I don’t know. Is that look a little bit like a fancy greyhound?

Joe: Oh, wow.

Al: Yeah, it does.

Joe: It is fast.

Andi: Yeah.

Al: Fast as gotta be, right? Yeah, built for speed.

Andi: Pretty dog. Yeah.

Joe: Okay, so they rescued before moving to Australia, nickname our financial mistake. The wife has become quite partial to South Australian red wines, and I’ve started a home brewery. Stonewood Pacific Ale currently being bottled. Favorite beer in Australia so far is Four Pines Brewing Nitro Stout.

Andi: Man. And I will say South Australia here, which is actually where I am, is huge for red wines. There’s the Barossa Valley, and then there’s the McLaren Vale, both of which are huge areas for Shiraz, which is an incredible red wine if you’re into that kind of thing. I stopped drinking in December, so I’m not drinking anything anymore, but I’ve certainly heard, and I did love Shirazes when I was drinking.

Joe: Shiraz.

Andi: Yeah.

Joe: Shiraz?

Andi: They call them Shiraz here, and in the States it’s either a Syrah or I’ve seen plenty of Australian Shirazes on the shelves as well.

Joe: Okay. all right, we’re looking for a spitball on a topic I don’t find discussed much. Don’t worry, no barnyard Megatron backdoor. All right, thank God for that. Roth BS. Okay … oh my God, let’s discuss SBLOCs. Small business line of credit?

Al: Security backed.

Andi: I think it’s securities-backed line of credit, isn’t it?

Joe: Securities backed line of credit or margin-

Al: Yeah. Yeah, like a margin loan. Yep.

Joe: Okay. T- or, God, why am I blanking on what it’s called actually? A pledge loan, right? Isn’t that what that secure… All right, so securities-backed line of credit.

Al: Yeah, pledge with your securities, yep.

Joe: Yep, okay. All right. Margin loans for long-term growth strategy. Can you sanity check this before it becomes a learning experience? Two options. One, using margin to purchase lump sum long buy-and-hold, ETFs, triple Qs, VGT with good borrowing rates compared to most IBKR- Help me out.

Andi: Interactive Brokers, they’re known for their lowest margin rates among any of the retail brokerages.

Al: Yeah, and by-

Andi: Interactive Brokers, they’re called …

Al: And by the way, their margin rates are about 5%, Joe. Everyone else is 10 or 11 right now, as of current.

Joe: “Assuming over the long term, 20 years, these investments average over 10-plus returns annually, and the margin is 4 or 5%, keeping leverage at 25% of the portfolio to avoid any margin calls during a downturn, and only selling at retirement. I would still DCA regularly in a second account in low-cost ETFs during this time horizon as well. What I’m missing here asides from the potential of markets underperforming or if rates go up again? Second option, why not just take the margin loan in retirement rather than selling investments and realizing the gains and paying the tax? As I discussed in previous episode, I wasn’t able to contribute much to my Roth being overseas last 10 years and no 401(k), so majority of my assets are in a brokerage account. In this case, does a buy, borrow, die strategy make more sense? How come this isn’t considered or talked about more in personal finance?” Final question, and this one may be for Andi. “We want a PFIC risk-

Andi: PFIC …

Joe: Passive, PFIC, passive foreign investment companies. Big Al, what’s your experience with passive foreign investment companies?

Al: little to none, but I do know something about this, so read the question.

Joe: All right. “I read somewhere that contributing more to my-

Andi: Superannuation. That’s Australia’s version of the 401(k) retirement plan. Super …

Joe: Superann- All right, I’m not even gonna go there.

Andi: Just call it super.

Joe: Then my employer-

Andi: That’s what we call it here.

Joe: The super.

Andi: Yep.

Joe: “Then my employer does annual with a potential trigger of PFIC from the US government. What’s your experience or knowledge of this risk? Love your two cents.” I don’t have not even one cent for that one.

Andi: Well, Alan, I can talk a little bit about it.

Al: Yeah. you start, Andi, ’cause you’re living over there.

Andi: So I did. I had to look this up when I got here because in Australia, actually it’s government-mandated that employers have to contribute 12% to the retirement accounts of their employees. So I knew that going in, that I was gonna have 12% being contributed to my superannuation here in Australia, or as I said, shortened to super, and that could be considered a passive foreign investment company by the IRS because the US is one of the only countries in the world that actually taxes US residents regardless of where they are in the world. So my income here and my superannuation has the potential to be taxed by the IRS. And so, I was always told that it’s one thing to have your government-mandated employer contributions, but that employees should not — employees who are US citizens — should not contribute more to their superannuation because that then is more likely to trigger an IRS audit and potentially tax of the super.

Al: Yeah. And to add to, I think that sounds right to me. I mean, the- so first of all, when you live in a foreign country and you’re an American citizen, you get taxed in both places, but you do get a foreign tax credit in the US, so that’s how it works. I think the answer to this question is maybe, which isn’t a very good answer, but… Because it depends upon your contribution and the investments inside the fund. So basically what I would say isget a local, expert advice because this is something that we at the US won’t know too much about. This is kind of an international tax law.

Andi: And here in Australia there are a number of cross-border wexperts that can help with these kind of things, CPAs that actually work with people that are in the US and in Australia. And, I also understand that you have to file a form 8621, and that has to be done in advance, and the IRS, that makes them happy in terms of the PFIC situation.

Al: Okay. So that’s that question.

Joe: That was PFIC-arrific.

Al: Now you know what a PFIC is.

Joe: Yeah. I wasn’t even listening.

Al: I know you weren’t. I could tell from your expression.

Joe: Yep. Oh. you guys- So- … had fun with that. All right …

Al: what do you think about the, the two options?

Joe: Okay. So, let’s go to the… I’m just gonna go up the questionnaire. So-

Al: Okay …

Joe: How about using, margin versus selling the stocks?

Al: Yeah, and that’s, and Joe, that’s fine as long as the market doesn’t go down too much. I would say this, though. I think most people are, not that excited about increasing risk when they’re in retirement. Jack and Jill are in their mid-30s, and I know how I felt in my mid-30s. Now I’m in my 60s, I feel a little bit differently. So I would not do that, and I think most people wouldn’t, which is probably why they don’t hear it too much.

Joe: Yeah, I think it makes sense depending on how much money that you have and what is the tax liability, right? So and, depending on my age. So let’s say that to sell a bunch of stocks, I’m gonna ac- accord, 20% capital gains tax plus then investment income plan, tax plus state tax, or do I take a pledge loan for a couple of years?

Al: You would have to run the numbers, but if you don’t…

Joe: I- if you’re gonna get stuck or if the market’s down quite a bit as well, and you don’t wanna sell the stocks to create the income, using a pledge loan I think makes sense there, too. and then you just kind of pay it back within 12 to 18, 24 months.

So I think there is a lot of uses for it. But you gotta be careful, and you have to understand the risks by doing something like that.

Al: Yeah, and, the first one is how about investing currently? Maybe you leverage 25% of your portfolio, and that way you’re using other people’s money to get returns. Assuming it- the market does earn 10% for the next 30 years, it’s a great strategy. Particularly if you’re getting a 5% margin type loan or securities-backed line of credit. So that, that can work, but there’s certainly risks there as well.

Joe: Yeah. I think risk and return are related, right? So the more risk that you take, the more return that you potentially can earn, or the more that you can lose. So by taking a margin loan of 25% of the portfolio, so you have a million dollars, you take a margin loan, now I have purchasing power of a million, $250,000.

Al: Correct.

Joe: So you look at a 10% rate of return on a million 250 versus a million, right?

Then you look at that return minus what the cost of carrying the note is, and that’s your net return. So if the markets go up, I think it’s a phenomenal strategy. If the markets go down, it bleeds both ways, right? It cuts both ways, I should say.

Al: I do the keeping the leverage low because that reduces your risk. Some people might do, maybe some loans will allow you to do almost to up to 50%, and that to me is, gets pretty risky being that, I mean, you just… you look at the NASDAQ during the Great Recession, and it went down about 55%. And during the dot-com bust, it went down quite a bit more than that. So y- so th- there’s two events in this century so far that you would have not been happy with this strategy.

So just go in with your eyes open. As Joe, I have invested a lot in real estate. I still have a couple rental properties and a vacation rental. and I made a lot of money in real estate, and then market turned, and with leverage, it went the other way. So I learned I saw both directions. I saw the benefit, but also the risk, because when you have leverage, you have higher profits, but you also have higher losses because you have less invested capital. So just be aware of that.

Why I Love Margin: NYC Tax Math (Bones1999, YouTube)

Joe: Got a couple comments from YouTube on this exact topic here. Bones1999. It’s kind of a badass name.

Al: Yeah.

Joe: He goes, “I love margin. The interest rate I get is so much lower than my combined…” What is that? New York, New York State.

Andi: New York State, New York City, and fed tax rates. Yeah.

Joe: I live in NYC, 5.2% interest is way lower than a 25% combined tax rate. So not to mention, my money keeps working for me. So Bones likes to take on a little bit of risk.

Al: He likes it. Okay, good.

Joe: Yeah. I mean, I think I said that earlier, is that you have to take a look at what your combined tax rate is, and I don’t know if I wanna continue to build up on the margin loan versus not paying any tax at all.

I think I’d wanna have a tax strategy, to create some liquidity, to pay off those notes over a certain period of time. But I think a combination could make a lot of sense if you know what you’re doing.

Al: Yeah. And if you can keep yourself in the 12% federal bracket, capital gains are tax-free, at least in the feds.

So there could be a way to pay this, go ahead and record the gains without a big tax hit, potentially.

8% Margin Loans to Buy Stocks: Bad Math! (Tom, YouTube)

Joe: All right, so Tom, so he had something here about margin loan discussion. He goes, “Taking an 8% margin loan to buy stocks is horrible advice. It’s horrible advice.” First of all- … Tom, we don’t give advice.

Andi: That’s exactly what I said on YouTube. This was a spitball, not advice.

Al: Yeah.

Joe: If you get 10% returns, you are taking all that risk to net 2% on borrowed money. Is that true, Alan, or is Tom’s math a little off?

Al: It’s a little off, but I get the point. I mean, with leverage, it sort of increases the gain, but nevertheless, it’s close.

Joe: If I’m taking leverage, my rate of return is a lot higher than 2%, depending on- But, but- … how much leverage I take and what rate of return that I receive.

Al: In your example you just gave, with, taking a 25% margin loan, then your rate of return w- if the market is 10%, you’ve made 12 and a half.

Joe: Correct.

Al: If you take 50%, your rate of return is 15. So a- anyway, so it’s not quite the right… But I, get what he’s saying. It, when, the margin rates are too high, there’s, more risk because there’s not as much spread there.

Joe: Correct. And I’m making money on borrowed money of 8%, so. And then he goes, “Joe’s the same guy who thinks a 4% retiremen- retirement withdrawal rate is too risky, but he’s okay with an 8% margin loan to buy stocks? Crazy.”

Andi: You’re crazy, Joe.

Joe: Like Big Al said, maybe made sense when margin loans were 2 or 3%, not now. When did I say, that makes sense?

Andi: I believe- when we actually had that conversation in 585, you said yeah, you would totally do it.

Al: Yeah.

Joe: And Al was like, “Eh, maybe not.”

Al: I do remember. I was a little surprised at your comment, but yeah.

Andi: And then actually, you did say, full disclosure, that you have a margin loan of your own, so.

Al: Yeah.

Andi: But you also did say that it was only for a small amount of money, not like the million dollars that I think it was Michael, was going for in episode 585.

Al: Got it.

Joe: Yeah. Wonder what my sleep score was that day.

Andi: I think you said it was- … like 47 or something.

Al: Yeah, it was very low, not just low.

Andi: I think, going back to Jack and Jill, I was gonna ask what is the buy, borrow, die strategy, and what do you guys think of it?

Joe: No, you die, you pay off the note, so you don’t pay any tax, right? You buy your stocks, then you borrow from the stocks, and then you die, and you get a step-up in basis, and you pay off the note. So you’re not gonna pay any tax. So I think that’s what the buy, borrow, and die philosophy-

Andi: Is it a good idea? Is it something that Jack and Jill should consider here?

Joe: I don’t know. I mean, I think there’s, in moderation. I think when you’re looking at-

Andi: So only die a little bit.

Joe: Only die a little bit, yes.

Al: Moderation on the margin there.

Joe: Yes.

Andi: Okay, got it. Thank you.

Al: Yeah, I’m kind of half dead, so that’s, you know-

Yeah, I don’t know. It, it does… if everything goes right, yes, that does work because the next generation gets a step up in basis, right? The money is, if the money’s outside of a retirement plan, you can’t borrow inside anyway, but outside a retirement plan. And so the kids don’t pay any taxes, and you didn’t pay tax. Of course, you’re gone, but the kids don’t pay tax, and it does work, but there’s risk, and that’s what we’re talking about.

Joe: Yeah. I don’t remember that episode.

Al: I do. I do think you had-

Andi: You’ll have to go back and listen, 585.

Joe: Yeah. I don’t know. I’m gonna have to listen.

Al: I think we were talking about sleep scores. I think we both had kinda low ones that day.

Andi: Yeah. Good to know now that if that happens, Joe’s gonna be in a different world in terms of what he says on YMYW.

Joe: Yeah. I mean, I don’t know, I could retract. Yeah. 8% is a little rich, so.

Al: Yeah. You have a better sleep score last night?

Joe: Yeah, I did actually. So yeah, I’m sitting pretty good today.

Al: Okay.

Joe: See you then.

Al: Yeah. I am too. I didn’t even check, but I know I slept well, so.

Joe: Yeah.

Andi: Pulling money out in a down market if you don’t have to is a fast to undo decades of saving and to sabotage your own retirement. It’s hard not to with so many factors to juggle, from inflation and stock market declines to your RMDs, asset allocation, and Social Security and Medicare. So this week on YMYW TV, Joe and Big Al show you the key tips and tricks to avoid the 12 major ways that we sabotage our own retirements. And if you too need a sanity check – someone to pressure-test your plan before it becomes a learning experience, as Jack and Jill said – that’s exactly what a free financial assessment with Pure Financial Advisors is for. Meet with an experienced professional on Joe and Big Al’s team, either at one of our 13 nationwide brick and mortar locations or online from anywhere. They’ll look at your entire financial situation and go way deeper than a spitball. They’ll help you create a plan tailor-made for your retirement wants and needs. It is free. It does not commit you to anything. So what are you waiting for? Get that sanity check. Click or tap the links in the episode description to watch YMYW TV, and to schedule your free financial assessment now. When you request that meeting, choose “podcast” in the “how did you hear about us” dropdown.

Reverse Glide Path at Retirement: Does Starting Conservative Make Sense for Us? (Forest & Jenni, VA)

So let’s go to Forest and Jenni. Oh, Forrest Gump, Jenny.

Al: That’s right.

Joe: All right. “Hi Joe, Al, and Andi. Thanks for all you do, as I’ve been an avid listener since pre-COVID and always recommended the show to folks, as you make a dry subject entertaining, yet informative.” All right. “Hope your treatments are going well, Andi, and I’m very jealous you are now in Australia, as it’s a bucket list place for my wife and I to visit, even if folks make it sound like everything in Australia is out to kill you.”

Andi: It is known as the place that has the most dangerous flora and fauna in the entire world. But luckily, if you’re in a city, you really don’t come into contact with a lot of it, so it’s pretty good.

Al: Got it. And you’re still with us, Andi, so that’s-

Andi: I am still with us … you haven’t been bitten … and treatment is going great.

Actually, I just, real quick update, cancer is in maintenance mode at this point, so-

Al: That’s great

Andi: … as long as the treatment continues working, life is normal, so that’s awesome.

Joe: Maintenance mode?

Andi: Yep.

Al: That sounds better than-

Andi: Got a treatment that’s keeping the cancer under control. It’s not growing, it’s not spreading, which is exactly what we’re hoping for.

Al: All right. Absolutely love that.

Joe: Mm-hmm. So what is he saying about everything kills you in Australia? What’d you say?

Andi: The snakes, the spiders. There’s all sorts of plant life. There’s all kinds of things that just a single bite can kill you. And crocodiles. And don’t get me started on the drop bears.

Joe: All right.

Al: Yeah, what’s the jellyfish that’s in the water that stings you? Is that-

Andi: Oh, I- me- … is it a blue bottle- …

Al: man o’ war? …

Andi: I think.

Al: I, forget.

Andi: Oh, it’s…

Al: Yeah, It’s something.

Andi: Yeah. That’s why I don’t go into the ocean.

Al: It’s tricky.

Andi: Exactly.

Joe: All right. We’re setting the scene. Okay. All right. “We’re sitting in the lobby lounge bar after a great round of golf at Spanish B, enjoying a few drinks.”

Oh. “I’m a cocktail guy, but enjoy a gin and Fresca as well. Wife, who plays also, enjoys vodka tonic with a whiff of cranberry.”

Andi: Wow,

Al: okay.

Joe: That’s hardly anything. Oh, Spanish Bay. Love Spanish Bay. Yeah? A lot of people don’t like Spanish Bay.

Andi: Where is that?

Al: Really?

Joe: You… you got Pebble, you got Spyglass, and you got Spanish.

Al: Have you played all, have you played all three, Joe?

Joe: Oh, yeah. Oh, yeah. Oh, yeah.

Al: Okay. Oh, yeah. Of course. I’ve o- I’ve only played, I’ve only pl- played Spy- Spyglass. I haven’t p- played the other two.

Joe: You didn’t play the big course? You, went to Pebble Beach- No … and didn’t play Pebble?

Al: No, because that, because my buddy Clark…

That’s when I didn’t have any money. Then when my buddy Clark knew the starter at Spyglass, and we got on for free.

Joe: Oh.

Al: That was the, that was quite a- Now you

Joe: got a big ass wallet, so you-

Al: Now I can, n- now I can afford it.

Joe: Got it.

Al: Got

Joe: it. Now you got money. All right. yeah, no, I like… W- when I go, I play all three And, Spanish is like a links style course.

I think Spyglass is probably my favorite course.

Al: Really? More than Pebble even?

Joe: Yeah, I like Spyga- but, the, th- they’re all great in my opinion.

Al: yeah.

Joe: Sure. When you’re on Pebble, you’re on Pebble, and it’s like, “Wow,” right? Yeah. “This is iconic. This is great.” but Spyglass, I think y- you got really cool ocean, holes there as well.

The layout is a little bit different. It’s a little bit bigger it seems like to me. and, yeah. and Spanish is cool too. Spanish is a links style course, which, some people like and some people hate, so, but-

Al: Yeah. You gotta hit the ball.

Andi: This is becoming Golf with YMYW. Wow.

Al: You gotta hit the ball straight for a links course.

Joe: Yeah. then it just carries, and then it just rolls forever too, so. Yeah. all So you set the stage. He’s got me, he’s got me chomping at the bit here. So,

Andi: He knows how to get you.

Joe: Yeah. okay. “I drive a 2024 Jeep Grand Cherokee, while my better half, he has a Volvo XC40. So as we’re chatting, we get on the topic of retirement, and I ask you to explain.

Spitball, while a reverse glide path allocation is a valid approach, and more importantly, why it makes sense if you have a bond allocation which already covers a four- or five-year spending need in a market downturn as you near retirement. I thought I understood sequence of return risk, thus going into retirement with 20% in bonds.

But from what I’ve read and heard you say, you should have more like 60% in bonds at the beginning of retirement, and then decrease that by 4 or 5% per year for 8 to 10 years. So start retirement at 30/60/10, stocks, bonds, alternatives, and then 10 years you’ll be back around 70/20/10.

Al: Thoughts?” What do you think?

Reverse guide plan, glide path?

Joe: Interesting. Yeah. all right. Let me see. what is he reading I wonder?

Al: I had never heard of that. I, full disclosure, so I looked it up. Michael Kitces and Wade Pfau were two that have really kind of said this is a good plan. Because you’ve got less stocks at the beginning of your retirement, so there’s less sequence of return risk.

That’s the whole point. And then later on when y- there’s not as much risk ’cause you’re getting older, you have less longevity maybe, then you can increase the portfolio a little bit more. that’s the concept.

Joe: Okay. I thought I saw that study. I wonder, that was probably, what, five, 10 years ago?

Al: Yeah. I’d never seen, I’d never heard of it till I just looked it up. But I do know, and supposedly it could, there’s a, there’s an opportunity p- to increase the longevity of your portfolio by reducing the sequence of return risk. But the negatives, Joe, which makes sense to me, many retirees don’t wanna increase their risk as they get older. They wanna decrease it.

And the second thing, which I think is pretty important, the, the delta, the difference between doing this versus what we would talk about, which is a globally diversified portfolio at the right allocation for you, there’s the benefit is modest. So it’s not like it’s huge. So because of that, I don’t think I would do it, but it’s an interesting thought. I had never really thought of that.

Joe: No, I get it. I like it because w- when people go into retirement, I don’t care what their distribution rate is that they have to spend money versus save.

Al: Yeah.

Joe: And when people are good savers, they’ve saved all their lives, they put money in their retirement accounts, they’ve, added contributions to a brokerage account, they paid down their mortgage, they’ve been, prudent with their cashflow and they develop a, good size nest egg, the last thing they wanna do is to, spend that thing down.

And if you don’t have the right allocation or the strategy to begin with and you start spending down your portfolio and the market turns, that’s when people bail from their overall strategy and plan and either go all into cash and then they never get back in and, that, that’s probably the worst thing that people can do.

So if, I have more fixed income, that is gonna keep me in my seat, in the strategy longer, but I have to increase the stock allocation per year for this to make any sense for maybe my surviving spouse and for the heirs. so I think there’s some pro- pros here, but there’s also, cons. Because like I said, if you start taking dollars from the portfolio, it… I, people kind of rip on me by saying, “Hey, 4% I think is risky.” Th- those are like, guys my age or younger- Yes … that are looking at fire and then are trying to run back of the envelope, assumptions on their own money, and they’re not making it on 4%, they need 6 or 7% distribution, so that’s why they kind of blow me up. That’s my two cents.

Al: Yeah. That, that, makes sense. Yeah, I think,

Joe: It’s like we’re-

Al: the- …

Joe: going over our case today that, th- they had a few million… I don’t know, they had maybe $3 or $4 million, but the distribution that they had to take to, to cover their shortfall was $80,000 a year. So I don’t know, what’s 80,000 into 4 million? You look at that and that’s a couple percent, right?

Al: Sure. Sure.

Joe: But do you think they’ve ever taken $80,000 out of their portfolio before?

Al: Yeah, probably not.

Joe: No. No, right? Like, they’re used to saving the $80,000 a year.

Al: Yeah. Now- that’s a, it’s a really hard thing for people that are used to saving to all of a sudden switch it because they don’t wanna see their portfolio go down, and I understand it.

I mean, I’m semi-retired and I haven’t completely felt it, but I’m starting to get the feeling.

Joe: You look great, Al.

Al: Oh, thank you. I get, I have more chance to exercise and hike and eat well and do all this good stuff.

Joe: Yeah. Okay, let’s get to the details of Forest and Jenny. “My wife and I are 54, both work, plan to retire in five years, right near our 30th anniversary.”

Andi: Wow.

Joe: “We currently have $4.8 million in retirement savings, 70/20/10 allocation. Further breakdown below if needed. And expect to need $230,000 gross pre-tax to meet our retirement needs.” 230. Good for you. “Wife collects Social Security at 67, 4,000 a month, and I at 70 at $4,300. We contribute around $90,000 a year to our retirement, 401(k)after-tax, Roth, company match, and will continue to do so until retirement.

We have two launch boys, and if there is anything left over, we’ll pass to them. They get it. But we front-loaded their lives, paid for their education minus retirement account to start in first year of launching.” What’s up first year of launching? They just cut them a ch- fat check of- …

Andi: 100 grand? Here’s your expenses for the year.

Al: Out of college. They probably funded a gap year. That’d just be a guess.

Joe: Is that what you do, Al?

Al: no.

Joe: Did you fund a first year of launching?

Al: I didn’t. I would have liked that myself. Are you gonna-

Joe: No.

Andi: Joe, are you gonna fu- fund a first year of launching?

Joe: I don’t know I’ll be alive.

Andi: by that point-

Joe: you

Andi: gotta have plans then-

Joe: I’ll be so old

Andi: whether you are or not …

Joe: first year of launching, I’ll be out. I’ll be cutting checks. I don’t care. But, s- so they know anything in the future’s gravy. And yes, Joe, I’m a spreadsheet guy who happens to really love golf. Sincerely, Forest and Jenny, two peas in a pod in Virginia. All right. I love golf, too.

Let’s see. All right, so we kind of a- answered his questions. Yeah. 70% stocks- I think so … with 60% US, 20% international, all index funds. 20% bonds. Okay. 10% alternatives, REITs, makeup fund, 70% tax deferred, 16% taxable, 6% tax exempt. Rebalance whenever our allocation moves, 5% out of the allocation. This guy is like a CFP. This is great.

Andi: He did say he is an engineer that loves his spreadsheets and golf.

Joe: Yeah. So he’s, w- what are they making today?

Al: let’s see. They’re making 230 gross.

Joe: No, that’s what they-

Al: No, they, no, that’s what they- That’s what they wanna spend … that’s what they wanna spend. Sorry about that. did he say how much-

Andi: They contribute 90,000 a year to their retirement.

Al: Not sure he said.

Andi: Yeah, I don’t think he’s actually said what their income is

Joe: Someone that wants to spend like 230, they probably have a pretty high income

Al: Probably

Joe: And if 80% is all in a tax-deferred account, I’m guessing he’s spending more than 230. But maybe that’s because he paid for college and the first year launch, and then he bought the kids houses and all of that other stuff or whatever else he did. so okay

Al: It could be. Yeah. Anyway, I think that when I do the math, just quick back of the envelope, it’s just fine. Distribution rate, even without Social Security, in five years would be under 4%. And then with Social Security, it looks great. So yeah, based upon the numbers they gave us, it looks good. And-

Joe: But what’s a burn rate or with Social Security?

Al: What’s the burn rate? Without Social Security, in five years their burn rate’s 3.7%.

Joe: 3.7, and did you add $90,000 a year to their current savings and run it at a 5 or 6% growth?

Al: Yes.

Joe: Okay.

Al: So I, got, 4.8 million plus 97%, ’cause they’re aggressive, five years, 7.3 million.

Joe: Okay. And- $7.3 million, and they need three and a half percent of that pr- prior to- Yeah, Social Security. With Social Security, it’s probably, what, two and a half?

Al: Yeah, I didn’t even run that because it’s already fine. But spending 230,000, inflation 3%, five year, 267. So I divide 267,000 spend at a 7.3 million, and I get 3.7%.

Joe: Okay. So let’s say they have 3.7% is what they need from their portfolio annually, Right.

Al: Yep.

Joe: So I don’t think this reverse glide path, whatever Kitces and Carl put together- way faster … makes any sense for this guy.

Al: And why is that?

Joe: Because he only like, he’s gonna take the distribution is, let’s say his distribution’s two and a half percent, so he’s gonna put 70% of his overall portfolio in bonds.

Al: Yeah.

Joe: So $7 million.

Al: That would be a lot.

Joe: L- like almost 5 million out of the 7 in bonds, 2 million’s in stocks. He only needs 3%, 7, yeah, right? And he’s, at, 65 years old.

Al: Yeah. Let’s say if he needs 267 before Social Security, call it 250, easy math, multiply by five years, two and a half million. Call it 2.3 million. That’s what should be in safe money.

Joe: I think so, too. I like that a lot better. Two and a half million dollars, call it. Two and a half out of the 7, and then so you have long-term growth in, four and a half million dollars. Two and a half, it’s safe. You go into T-bills. You take on a little bit more risk in the stocks, your overall return over that 10-year time period is probably gonna be a lot higher than if you had 70% of your portfolio in stocks. How many Monte Carlos? They had to run, like, 1,000 different Monte Carlos in different iterations in that study that they did, I would imagine.

Al: Yeah. You know as well as I do, these guys are really smart. We wouldn’t, we couldn’t stack up against them, so.

Joe: No, not even close.

Andi: A huge percentage of your retirement savings is at risk of being eaten up by taxes, so your withdrawal plan is key to retirement success or failure. Download our Withdrawal Strategy Guide and learn the differences between the fixed-dollar approach and the 4% rule for taking income. Learn how your odds of not running out actually change based on your asset mix. The order you pull from your taxable, tax-deferred, and tax-free accounts can save you a lot in taxes over a long retirement, so there’s a section strategizing withdrawal order as well. This guide also covers tax-smart moves to keep your future required minimum distributions in check, so your tax bill doesn’t balloon the longer you’re retired. Click the link in the episode description to get your free copy of the Withdrawal Strategy Guide now, and don’t forget to share the show and the free financial resources with your friends and colleagues.

Retiring to Florida: SEP IRA Bridge, Home Sale Timing, and Roth Conversions (Jack & Diane, NJ)

Joe: Where are we?

Andi: Jack and Diane.

Joe: Oh, okay.

We haven’t had Jack and Diane for a while.

Andi: I’m sure it’s a different Ja- Jack and Diane than the ones we’ve had previously.

Joe: Oh.

Al: Co- com- common name for our shows.

Andi: Yep.

Joe: Okay, let’s dive in. We go, “Hi, Andi, Joe, Big Al. I’ve recently started listening to your podcast on YouTube, and since I’m retiring this year, I find the podcast entertaining and very informative to me.”

All right, thank you. Now to the important stuff. “My wife likes an occasional Riesling. I’m more of a beer guy. Estella or Dos Equis. After I finish anything, my wife opens.”

Al: Al- although, yeah.

Joe: All right.

Al: Whatever she opens, he’ll finish it.

Joe: Sounds good.

Al: Yeah, I- She drives a- … I’m right there …

Joe: she drives a 2019 Mazda6 Touring “My ride is a 2009 Wrangler.” Another Jeep guy.

Al: That’s right.

Joe: “I’m 65, wife is currently 63. I’m an independent contractor in North Jersey, and I’ve had my business for 39 years. My wife handles my business side. I’m looking to retire in 2026- In August … in August, so it’s coming up here.” Yeah.

Al: Yep.

Joe: All right, this is perfect timing.

Al: Yep.

Joe: All right, here’s our stats. “I currently have $1.7 million in my SEP IRA, about $60,000 total in two Roth IRAs, about $50,000 in cash. Primary home in Jersey is worth 1.3. We owe 120. Second home in Florida worth 550, no mortgage. My in- my net income is $230,000 a year. My wife has no income. I’m looking to collect Social Security at 70 at 5,000 a month.

My wife will collect at FRA at 1,800 a month. I’ll collect mine one and a half years later, then she will move to spousal. Total Social Security will be $85,000 at that time. We’re selling Jersey in May of 2027 and moving to Florida, hoping to pocket 900 to a million dollars from the sale. Planning on living off the cash and doing Roth conversions from age 66 to 75 up to the IRMAA limit, close to the top of the 22% tax bracket.

Looking on living about $100,000 a year using the cash after the home sale. To my Social Security at that time will have $85,000. Here’s the question: From my retirement to home sale, can I draw $10,000 a month from my IRA to fund income till I sell the home? Should be about 10 months.” So from my retirement to his home sale, can I draw $10,000 a month from my IRA to fund income until I sell the home?

Al: Yeah, ’cause he’s gonna, he’s gonna net 900,000 to a million from the home, because he’s gonna move into his second home in Florida, which is already paid off.

Joe: So w- yeah, I don’t see any issues with that. Do you?

Al: No, I don’t. I mean, the distribution rate’s a little high for 10 months but then, at, when, before the sale, but after the sale, it’s below 4%, so I’m fine with it.

Joe: Also wanna fund one home improvement to the Florida home before we move in there. It’ll be about 50 grand. How much should I convert before 75? Do I need to make conversions up to 75? My current expenses are $7,500 a month but will drop to under 5,000 after the home sale. I believe I have a decent plan but would greatly appreciate a little spitball from you guys.

I respect your opinions and look forward to your comments. Love, Jack and Diane. I don’t think he said love. No, he said thanks.

Andi: He said thanks.

Al: I was touched for a second.

Joe: Yeah.

Al: Anyway, to summarize Joe, he’s got about 1.8 million currently, planning to retire soon. home sale, I added 900,000 to get to 2.7 million.

I subtracted 50,000 for home improvement. I get 2.65 million. and then I look at the spend. That’s where I get, before the sale it’s about 5.5% distribution. After the sale it’s a 3.8% distribution rate. And, that’s even before Social Security, so yeah, I’m good with the, I’m good with the numbers as they stand.

I think it’s, I think it’s a fine plan. The fact that he has to take extra money out right now, I’m okay with that. I mean, you could actually add that to the liquid assets right now and have… And it’s below a 4% distribution rate, as long as he sells the home. so that’s kinda key here.

Joe: Yeah. Is he gonna sell it at the right price?

Al: Yep, yep.

Joe: Is it gonna be- Yeah … more than what he’s thinking? that’s kind of the big caveat. So-

Al: Yeah.

Joe: I think so too …

even

if he, you lowball what he would receive from that, I think the number still probably meets-

Al: I think so too. yep, for sure Okay, so second question about the home improvement to Florida.

Yeah, no problem with that. How much Roth conversion before 75? He’s got about 1.7 in tax-deferred.

Joe: I would just convert to the bracket he’s in, the 22. Go to the top of the

Al: 22- Yeah …

Joe: and I think I would stay there.

Al: I think I might do that too, but there’s not a lot of cash to pay the tax, so you gotta be mindful of that.

Joe: he’s gonna have a million dollars to p- pay the tax in 10 months.

Al: Oh, yeah. I forgot about that. You’re right. Absolutely right. Yep, that’s how you pay the tax.

Joe: Yep.

Al: Yep. Yep.

Joe: I would not go more than that. His RMDs are not gonna push him to the 24, so-

Al: I agree with- I agree with that …

Joe: cut it off at 22. I think you might wanna go to the 24 if you wanna get aggressive if the market tanks.

Al: Yep. I agree with that, too.

Joe: ‘Cause the tax rates will probably go up at some point. I would wait until he moves to Florida to do so. Become a Florida residence now, to do the- Yeah … conversions. You already own a home there. Get the Florida residency. There’s no state income tax. It’s a lot cheaper to do the conversions with a Florida residence than it is a Jersey residence.

Al: Yeah, and I bet, Joe, a lot of people don’t know that. Wherever you, whatever state you live in when you do the conversion is the state you pay taxes in, not the state that you actually put the money into your retirement account or IRA. So just be rem- mindful of that. If you move to Florida or Washington State or Texas, Nevada, to name a few, those are tax-free states in terms of income tax.

Andi: So Joe, are you suggesting that he actually moves into the Florida place now rather than waiting?

Joe: Yeah. He’s gonna move there eventually.

Andi: Yep.

Joe: He’s gotta fix it up. He’s gotta do some work. He’s gotta… So that’s his home. I don’t know if he’s… I don’t think he’s renting it out. I think it’s just a second home.

Al: I think so, too.

Joe: I would call that… He’s a contractor. He owns his own business, right?

Al: Yeah, unless he needs to fix up his home to sell it. We, we don’t know that. But I guess, I think the point, Andi, is he should move to Florida before he does the Roth conversion. Sure, yeah. maybe if it’s coming this fall, or anyway, before December 31st, right?

Andi: Yep, got it.

Al: So he doesn’t have to pay any state tax on the conversion.

Joe: All right.

Al: Cool.

Joe: There we go. That’s it. That’s it for, that’s it for us today.

Al: Excellent. Yeah. Kind of fun.

Joe: Yes. All right. I’m off to Minnesota, the homeland.

Al: Okay. have fun on your birthday trip.

Joe: It’s gonna be a b- it’s gonna be a blast, Al.

Al: I know it is.

Joe: All right. Thanks for listening. We’ll see you guys next time. Show’s called Your Money, Your Wealth®.

Outro: Next Week on the YMYW Podcast

Andi: Next week on YMYW, Eric in California has $3.9M in pre-tax accounts at age 72, and RMDs are about to hit hard. Joe and Big Al spitball on how to minimize the tax damage, and whatever else I can get in front of them for ya before next episode 590 next week.

Your Money, Your Wealth®, your podcast. If you got something out of today’s episode, do us a huge favor and tell a friend who’s wrestling with the same retirement questions.

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.
_______

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