Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 00:57 – Can I Afford to Be My Parents’ Retirement Plan? (Daniel, Texas)
• 07:07 – Will an Annuity Really Save Mom From Running Out of Money? (Jemma)
• 15:07 – Can We Retire in Our Early 50s With a Pension and a $190K Spend? (Cookie and Gerry)
• 30:39 – Can We Retire Early at 46 With a $4M ESOP and a $210K Spend? (Fred and Wilma, CA)
• 44:23 – Outro: Next Week on the YMYW Podcast

Free Financial Resources: 

What to Do When the Stock Market Gets Crazy – YMYW TV

10 Steps to Improve Investing Success – free download

Financial Blueprint (self-guided)

Guides | Blogs | Educational Videos | YMYW Newsletter | Subscribe on YouTube

Watch today’s podcast episode on YouTube

Transcription

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

Intro: This Week on the YMYW Podcast

Andi: Joe and Big Al spitball two sides of the retirement equation, today on Your Money, Your Wealth® podcast number 570. Daniel in Texas is 40 and worrying about how to support Mom and Dad if their money runs out. Can he build some kind of financial safety net for them without ruining his own retirement? Jemma’s 82-year-old mom is drawing down her portfolio. Is locking in guaranteed income with an annuity a smart move, or could that create new problems down the road? Plus, “Cookie and Gerry” want to walk away from work before 50 with a big brokerage account and a pension. Are they positioned correctly? How can they avoid pulling the wrong levers at the wrong time? And “Fred and Wilma” are staring at a potential multi-million-dollar ESOP payout. What levers do they need to pull so they can retire at 46 and shout Yabba Dabba Doo? I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA.

Can I Afford to Be My Parents’ Retirement Plan? (Daniel, Texas)

Joe: let’s head right to Daniel in Texas. Hi, Joe, big Al. Love Michelle, longtime listener, first time spitball request. I’m 40 years old single, trying to plan ahead for how to support my aging parents if or when they need it. Here’s the financial snapshot. $280,000 in a Roth. IRA six 20 in a traditional IRA 13,000 in HSA 70,000 in cash.

700,000 in a rental. No debt and no other debt. I earn about a hundred thousand dollars per year. My expenses run about five to $6,000 a month. My parents are both 70 and divorced. Dad owns his home outright. No savings still works. Making about $50,000 a year. He receives Social Security and is in good health.

Mom, she rents has about $200,000 in savings, a hundred thousand in cash, and a hundred thousand in a traditional IRA. She receives Social Security but runs about a $300 a month deficit also in good help. Here’s the thing, parents have virtually no long-term financial resources beyond Social Security and what I listed.

Well, that sounds like. They have some resources.

Al: Yeah. Mom’s got what, 300, 400,000 dad’s got a home.

Joe: So far so good.

Al: Yep.

Joe: I also have a sister, but she doesn’t have much. So I’m confident the financial burden of caring or emergencies will fall on me. My questions, what stages or what steps can I take now and in the near future to make sure I’m prepared if and when they need financial support?

Should I be hoarding more cash in case of emergencies or future long-term care needs? Is there a smart strategy or structure I’d be setting up now? Maybe through trust insurance or designated accounts to ease the burden later and ensure that, they’re taken care of without jeopardizing my own financial future.

Thanks again. Love the spitball and all the laughs. Look forward to hearing what you think.

Andi: It’s like the opposite of college planning.

Joe: Interesting question.

Al: It is, and I, and I think a common issue really.

Joe: I, they’re 70 and in good health.

Al: Yeah.

Joe: So he’s thinking man, he’s thinking

Al: way ahead. Yeah.

Joe: You know, parents are gonna run me dry since I gotta take care of my aging folks.

Right.

Al: I think the first thing I would, I would say is, is parents do have some resources. So mom’s got about 400,000. Dad’s got a home. A lot of people when, if they need long-term care, they sell their home and they use those proceeds to pay for long-term care. I’m not saying that’s gonna necessarily cover everything, but that’s reality for a lot of people.

Joe, I think, you know, if you just get to the point where there’s just no resources, there’s Medicaid. Right. Medicaid allows you to live in a, facility. it you have to basically be poor. And I think last I looked, the, the definition was about $2,000 or less. And then whatever income you have, if it doesn’t cover the.

Facility that goes to Medicaid and they pay the balance. And, and so that’s, that’s kind of what happens. That, you know, the problem is not every facility is a Medicaid facility, but there are, there are opportunities. To me, I think the most important thing is don’t jeopardize your own retirement. Just trying to cover your parents.

’cause there is Medicare, Medicaid, and that’s what this is for.

Joe: Yeah. Dan is still working, making $50,000 a year, owns the home outright so. I guess it’s looking at when is he gonna stop working and is Social Security gonna take care of his, his financial needs?

Al: Right.

Joe: so the biggest risk is if there’s.

Any type of extended care and like you mentioned, they can go on Medicaid.

Al: Yeah.

Joe: I don’t know. He’s looking for, you know, is there some smart strategies, some structures that he could set up? Any kind of trust or I don’t, I don’t think so.

Al: No, I don’t either. I mean, there’s long-term care insurance, but

Joe: that’s, that you could

Al: hard, harder to get at age 70.

Joe: Right. How do you not jeopardize your own futures that you have to run your own financial strategy or, or understanding what you need at your retirement, and if there’s anything extra, do you wanna hoard a little bit of cash to have some liquidity in case?

Al: Yeah,

Joe: there’s, there’s a need that. There’s some emergencies or if there’s repairs on the house that you need to fix for that.

I mean, that’s what I would be thinking about.

Al: Yeah. It’s kind of like we talk about college funding, right? You know, don’t jeopardize your own retirement for college funding. That’s kind of the same thing. Don’t jeopardize your own retirement for the sake of your parents. I get it. Your parents raised you, you want to take care of them, and that’s.

Great. but you, you wanna make sure you’re okay too and realize there are these resources like, well first of all, both your parents have assets, so that’s good. But secondly, if they run out there’s Medicaid and that’s not uncommon. I think a lot of people are in Medicaid facilities.

Joe: Alright, well what a nice guy taking care of ’em.

Al: Yeah. Yeah. Wonderful.

Andi: Let’s think he means when he references designated accounts, is he talking about potentially putting aside money that is specifically for the parents’ benefit or something like that? Does something like that exist? Okay.

Al: Well, it, it is just setting aside an account. It’s his account. He could use it for whatever he wants and it, it would be in his own mind.

It’s not like a special type of account.

Joe: Right. Got it. yeah, he will just have to follow gifting rules and Yeah. Of that nature, if he’s gonna be giving money to mom and dad. And is there ways that he can bypass that? I mean, all he’s gonna do is. Reduces his, his estate tax exemption, and I’m not sure if he’s in jeopardy of paying any large estate taxes.

Al: Yeah, doesn’t look like it.

Joe: I mean, I don’t know. At age 40, are you planning for an estate tax issue?

Al: Not generally.

Joe: Not generally. Yeah. Interesting question. Yes. Don’t put that opt in.

Al: No, but I think it’s, you know what? I think it’s gonna, it is a common question right now. It’s, it’s like, my parents, you know, people are living longer, Joe, and, and, and my parents had.

Some money, but not enough to cover long-term care.

Joe: Right.

Al: So now what?

Joe: Yep. alright, cool. Let’s move on.

Will an Annuity Really Save Mom From Running Out of Money? (Jemma)

Joe: Let’s go to Jemma. Hi. First and foremost, I drive a 2014 E three 50 MB convertible. What is that? Mercedes-Benz E 350. Those are the electric ones.

Al: Yeah.

Joe: Gonna drive it till it dies. Don’t drink often, but every now and again, I enjoy Retta Sour or a Meela.

I kn. Help with my mother. Oh, we’re doing the,

Al: the mothers, we gotta think of it.

Joe: I guess we got the theme. Andi likes the themes. I need help with my mother’s financial situation. She’s 82 years old, lives alone in good shape, still very active. Her current assets, three, $235,000 in the IRA $250,000 in a brokerage account.

$7,000 in checking her income is about. let’s see, 1150 in RMDs, 1600 in Social Security in a thousand dollars pension, has no coal. She doesn’t own a home. Her monthly spend is about 5,000 to 550. She currently has to draw from the brokerage account to meet her monthly needs. I’m fearing she’s gonna run outta money in about seven to eight years.

I hear nothing but bad things about annuities, but if the online calculators are correct. I tried a few. If she uses $200,000 of the IRA to buy a single life annuity, it would pay out about $2,000 a month for life, which would decrease, the burden of the brokerage draw and be there for her life. It seems too good to be true.

Obviously there is nothing for the heirs, but that’s not a concern. The only other note would be if her ex-husband. Who’s in good health at 84 passes before her, she’ll get a bump in her pension to about $2,000 a month. Not counting on that. What is your thoughts? So I am a little bit confused.

Al: Well, you’re thinking, let me, let me put some numbers to, just how this looks.

As I understand it, she spends about $66,000 a year fixed income, which is not RMD. It’s Social Security plus pension. That’s about 31,000. So that’s a $35,000 shortfall.

Joe: You divide, well, yeah, 31 200.

Al: Mm-hmm. You divide that $35,000 shortfall into your assets of 485, that’s a 7.2 distribution rate. You hear us talk, talking about, try to say at about four, so that’s a little bit too high.

Now, in your eighties, you can be a little higher than. For, but even that might be a little bit rich. But Joe, a couple things. One is. With that, shortfall, that money would last 14 years if there’s no growth at all.

Joe: Right?

Al: Right. Or if there’s a 3% earnings on that, it would last 19 years.

Joe: Yep.

Al: So it, you know, it might not be quite as bad as you think.

Joe: Well, yeah. I don’t know where she’s coming up with like. She’s gonna run outta money in seven, eight years.

Al: Yeah. Yeah.

Joe: I think she’s looking at the brokerage account. Might run outta money in seven, eight years maybe. Maybe. But then the, the IRA’s still there, but she’s still taking 1150, so I don’t know if she’s thinking All right, I get the 1150 from the RMD plus an additional $2,000 a month.

Al: Yeah. 2,600 for Social Security and pension.

Joe: Well, she’s saying that the annuity, if she takes the $200,000 and puts that in for life, oh, I guess she’s gonna get $2,000.

Al: Yeah. Instead of 1500 or 1100, I mean, yeah.

Joe: Right. Yeah. Yeah. It’s only gonna be an increase of 800 bucks.

Al: Yeah. Right, right.

Joe: So what is the draw that she’s pulling out now?

So how much is she drawing from the brokerage account?

Al: Well, she’s from the brokerage account. Let’s see, she’s drawing about a couple, a little less than $2,000. Call it 1500, call it 20,000 a year.

Joe: Alright. 12 times.

Al: And that’s about,

Joe: so she thinks the income is $45,000 in a fixed income and she wants to spend 60,000.

Al: Yeah.

Joe: All right. And then so what is that extra month? So she’s short 12 divided. 1250 a month?

Al: Yeah.

Joe: 1250 a month. How much does, does she have in the brokerage again? 2 35?

Al: Yeah, 250.

Joe: Okay. 12. Yeah, maybe that’s where she’s coming up with that number.

Al: Maybe.

Joe: I think mom’s looking like she’s in great shape from what she’s spending and what she has.

Al: I think it’s, it’s, I think it’s closer than Jemma thinks.

Joe: Yeah.

Al: In terms of making it right.

Joe: So I don’t know if you wanna buy the annuity, just understand the, the $2,000 a month that’s gonna come from the annuity 1150 will satisfy the r and d. So you are increasing the income to 2000 from 1150, but you’re also draining a hundred percent of that 200,000.

Right now you’re pulling 1150 from the, the account at 82. The RMD is probably what, 6%?

Al: Mm-hmm.

Joe: so I don’t know if the market does three. Five. If it does six, then you break even. Right? Then you’re just taking the growth out. So you, you just wanna run the numbers here a little bit, but I think she’s not in jeopardy of running outta money in seven to eight years.

Al: I totally agree. I think like, like I said, even with no growth, I think it’s 14 years.

Joe: Yep. Do you still do the annuity? Just to say, all right, well here, I don’t have to worry about, the income anymore. Mom is gonna be fine, and she still has the $285,000 in the brokerage account for the liquidity.

Al: Well, the, I mean, I see why it’s attractive.

Like it’s $24,000 distribution on 200,000. Right? So that’s over a 10% distribution, which if she lives to 110, that’s a great deal. If she lives to 84, it’s a terrible deal. So it, it’s, it’s insurance, right? You’re buying insurance. And, and I think if you think about it that way, and, and she mentioned it wasn’t necessarily for the heirs.

They don’t care about that. So, I mean, this could be a situation where you could do that if you want to.

Joe: Yeah. Sounds like,

Andi: are there specific instances where you think that an annuity absolutely makes sense for people, especially if they’re in, you know, their eighties?

Joe: Well, if they’re totally risk adverse,

Al: and they feel like they have longevity

Joe: and they live a long time, yeah.

You’re, you’re, you’re insuring against the longevity risk. Mm-hmm. And, and yeah. Don’t wanna deal with it. And they just want a fixed income and guaranteed income, and they, they don’t mind that the internal rate of return is going to be, I don’t know, three, three and a half percent versus where they could get maybe five or 6% in a diversified portfolio.

The annuity probably makes, makes the, the, the right move. Right? And it’s all right. Here I’m hedging against, I’m ensuring my, longevity and I’m buying an income stream. So understanding it’s insurance. I’m insuring my income.

Al: Yep.

Joe: It’s not an investment. It’s like, it’s totally insurance. So if you, if you, you buy into that, then, then buy the annuity.

Al: Yep.

Andi: Cool. That’s the last of the parent emails.

Joe: Okay.

Al: Okay.

An annuity may help Jemma and her Mom sleep better at night, but they’re not right for everyone. You might like the idea of the safety of an annuity when markets get wild, but as Joe said, annuities are insurance, not investments. Better asset allocation, a disciplined withdrawal strategy, or rigorous tax planning may help you accomplish the same goal with more flexibility. This week on Your Money, Your Wealth TV, Joe and Big Al talk about What to Do When the Stock Market Gets Crazy. Find out how to handle that market volatility, how to think about guaranteed income versus market growth, and how to build a financial plan that fits your needs whether stocks are soaring or dropping 20 percent. Then, find out if you’re on track for retirement with a Financial Blueprint. This tool is a free and self-guided check-in to see how you’re doing as you head down the path to retirement. Just input your cash flow, your assets, and your projected spending for retirement, and you’ll get a personalized report showing three scenarios for your retirement success, with clear next steps to improve your plan. Watch What to Do When the Stock Market Gets Crazy on YMYW TV, and calculate your Financial Blueprint for free. The links are waiting for you in the episode description.

Can We Retire in Our Early 50s With a Pension and a $190K Spend? (Cookie and Gerry)

Joe: Let’s move on. Well, here we go. We got Joe, Big Al, Andi, this is Cookie and Gerry hoping to get a spitball from you guys to better understand some of the nuances as we approach retirement. we load up on podcasts for long drives, usually between Norfolk.

And Kentucky or South Carolina get a sense of how we’re doing and preparing for our retirement. I like a good bourbon and Cookie likes a nice sweet wine. We have been married for 12 years. I’m 47 Cookie’s, 4 51. I have a retirement pension that is tax free and currently pays $92,000 annually. All right.

We have a retirement pension that is tax free. What is he? He’s 47 years old.

Al: Mm-hmm.

Joe: All right. With co adjustment in Tricare. All right. Military, I’m guessing?

Al: Yep.

Joe: Yes, sir. Our salaries are 297,000. We both max out contributions to our 401(k)s with my company match at eight and a half in Cookies at five.

We plan on retiring and pulling from the investments in two and a half years, at age 49 and 53. We currently have $220,000 in a Roth, six 70 in a traditional and 1.5 in a NASDAQ index brokerage mutual fund. We try to hit, we try to invest $10,000 each a month into this account. We’d like to travel the world and spend about $190,000 in retirement for our first 15 years.

We plan on tax harvesting our brokerage in the first couple years of retirement. Our principle is about half of the value. We then plan to make Roth conversions. My thought is that we go to the top, the 12% tax bracket for the entire time until Social Security kicks in for me at 67 a cookie at age 70. We vary year to year on how much we invest, but so around 30 to 40% of our gross pay, our mortgage is $25,000 annually and won’t be done until 2050.

My company just introduced a mega Roth that I’ll start maxing out as well. Is our tax harvesting conversion order correct? Should we continue only living on the brokerage account in retirement until it’s depleted? If there are any reasons to pay off the mortgage, it’s at two point a half percent when tax hard.

What, what? When tax harvesting is, is there,

Al: there’s quite a few questions here.

Joe: Is there a reason to move my investments from the NASDAQ index It is today. knowing we could easily live on pension alone in a bad market year. Are there any other investment strategies we are missing? Thanks for all you do, and I look forward to the critical thinking you can apply to our plan.

All right. I forgot the most important part. My retirement goes away when I pass. We are both in good health, but I wanna make sure that when I pass, Cookie has no issues with money. Can easily have a hundred thousand dollars in these days’, money annually. Happy to work longer if needed. Also forgot to tell you what we drive.

Drive a 2021 Nissan Frontier and Cookie drives a 2020 Volvo as 60. Thanks again. Alright?

Al: Okay. There’s a lot here. So, they wanna retire in two and a half years. They got, Joe, they got about 1.9 million mm-hmm. Right now. And they’re saving, they say they’re saving 30 to 40% of the gross pay, which is about 300,000.

So let’s call that 90,000 savings.

Joe: Yeah, they said 10,000 a month too.

Al: I know, I know. I’m taking the more conservative, but you’re right, you’re right. They did, So let’s just say they saved 90006%, or just call it two years. That’s 2.3 million. They wanna spend one 90.

Joe: Mm-hmm.

Al: the pension’s 90 ish. So they’ve got about a hundred thousand dollars shortfall.

You divide that into 2.3 million, that’s a, 4.4% distribution rate in your early fifties. That’s, that’s a bit rich, I would say, particularly if the pension goes away. If, if Gerry dies or, you know, Cookie survives him. But, I would say this, if it were me and I really, really, really wanted to retire, I would say maybe think of a safer withdrawal rate, Joe, like 3%.

So that would be, more like, call it 70,000 plus the 92. You end up about one 60, maybe one 50, may maybe spend one 50 and see how that goes. Right. See how that goes and, and adjust from there. That, that’s what I might do. And it sounds like they have the ability to, change their spending, so that that’s what I would do.

Try to live on one 50 or less.

Joe: Yeah. I don’t know. He could run the numbers a little bit more because there’s the, the Social Security gap. Yeah, there’s fixed income that’s gonna come to them in what, 15 years after they retire?

Al: Yeah. I mean there’s a lot to this. Yeah.

Joe: So, but let’s just assume that they’re going to re retire regardless.

Yeah. They’re gonna spend a little bit less So this tax harvesting. Alright, so that’s a tax strategy, not an income strategy, first off.

Al: Mm-hmm.

Joe: So you’re in a NASDAQ index fund with a $1.5 million, brokerage account. How are you gonna tax lost harvest that? So let’s talk about what tax lost harvesting is.

So when you have capital assets that are in a brokerage account, there’s a tax strategy that you can use that can save money in taxes and capital gain taxes long term, when markets go down. And if you sell that asset, you get a capital loss. That capital loss will all offset any capital gain dollar for dollar.

If you have one single security, it’s pretty hard to tax lost harvest. So it sounds like half of the 1.5 or $1 million that he has in the brokerage account. Yeah. $500,000 is basis and $500,000 is gain. Right. So the first $500,000 that comes out is gonna be taxed at capital gains rates. The $90,000 that he is receiving from social or from the pension, did he say that was tax free?

Al: He did.

Joe: Okay. So he can then sell up to $90,000 of that brokerage account. Not pay any tax. That’s actually called tax gain harvesting.

Al: Yeah, and actually, let me, let me interject. You actually could sell, if you related, the basis is 500 and selling 1,000,001

Joe: 130,000,

Al: you could sell 180 to have 90,000 of gain.

Right.

Joe: One. Oh, okay. Yeah. If you’re including basis.

Al: Including basis, yeah. Yeah. That’s the capital gain. I think maybe, yeah. So that’s tax less harvesting, but tax gain harvesting that might be more relevant here, which is do you do tax gain harvesting or do you do Roth conversion?

Joe: So tax gain harvesting is taking advantage of the 0% capital gain rate.

Yeah. Yeah. Which is up to the top of the 12 as a married, finally joint lead. Joint taxpayer.

Al: Yeah.

Joe: So as Al said, given if it’s half basis and half gain, he could sell up to about 180,000 pay no tax because he still falls or they still fall in that threshold of that 12% tax bracket or lower. So you’re selling that security, taking the gains, and then versifying that depending on how much that they wanna spend into, Or, or you could buy the, the NASDAQ index fund right back and you’re just increasing your overall, your basis at that point.

Al: Yeah. And I think being that they wanna retire in their early fifties, probably that is the right order. Probably tax gain harvesting. ’cause you’re gonna need those dollars to live off of, maybe do Roth conversions later when you’re, when you don’t have all this gain you’re trying to pay tax on, when you do a Roth conversion and tax gain harvest thing in the 12%, it’s not such a good result because.

That, that, Roth conversion can push you up to the, the top of the 12% bracket. And then if you do capital gains on top of that, it’s taxed at 15% and you get a pretty high tax rate, which it could have been a lot lower. And I want to try to explain because it’s complicated, but if you do both and go over that 12% bracket, it’s like a 27% effective rate.

so anyway, that’s what, yeah, I think the tax gain, harvesting, I do that first. because you gotta live off those dollars if you’re gonna retire young, and then later on when you’re 59 and a half, you know, you could, you could switch over.

Joe: Yep.

Al: Yep.

Joe: But I wouldn’t if, if I’m retiring at 40. Seven and 51.

Al: Well, they’re two, two years

Joe: for 49 and 53 9.

Al: Yeah. Yeah.

Joe: I I’m not, you need to draw income from your brokerage account and if you have a hundred percent in the NASDAQ, you, you’re gonna see a lot of volatility there.

Al: Yeah. And yeah.

Joe: And when markets go down, or let’s say the NASDAQ loses 20%, you’re not gonna be caring about tax harvesting.

You’re gonna be like, what? Where the hell do I pull my income from?

Al: Yeah. I’m going back to work.

Joe: Yeah. I’m going, yeah, I’m going back to work. Because you, you don’t wanna sell that asset when it’s down, so you, you probably need to diversify a little bit just to hedge the risk as you’re pulling income from that.

But if you diversify, that’s gonna create tax.

Al: Mm-hmm.

Joe: That’s also, you know, so you’re gonna have to figure out what. If you wanna continue to work, then slowly diversify out of this and have a capital gains budget. And then when you re do decide to retire, you know, then you can sell the rest down at that 0% cap gains.

But,

Al: right.

Joe: I would not have my. My nest egg that I wanna live off of, a hundred percent in the NASDAQ.

Al: Yeah, that’s a good point, Joe, because once, once you start drawing money from your account, right. If it’s all in the market and we’ve seen markets go down 10%, 20%, 30%. The market goes down 30%, now it’s worth 700,000, and you’re drawing out another 5% on top of it.

That just doesn’t, that’s not gonna feel good.

Joe: Yeah. Market drops 20%. You need a lot higher rate of return than 20% to get your money back.

Al: Right. And you take money out. It, it makes it that much harder to recover.

Joe: Yeah. It just, it, it definitely compounds the

Al: effect. So that’s why people, when they get closer to where they need to draw money outta their account, they, they start putting some money into safety.

That could be cash, it could be bonds, it could be things that, yeah, they don’t go up very much, but they also don’t go down a lot. That, that’s where you pull your, your income from when you need it. In bad markets, when the markets are great. Cool. Then sell some of those stocks or stock funds, pull it from there.

But when the market is down, have that savor money that you can withdraw from. So it doesn’t, it doesn’t, you’re not pulling out money at, in a down portfolio. That’s a, that’s a tricky thing.

Joe: Yeah. Or you don’t spend. Any money, right? He’s got a hundred thousand dollars tax free pension.

Al: I know. You could just live off of

Joe: that.

You can just live off of that until the market recovers. Right? That’s, or you go to work part-time or you do some different things or I don’t know. So, there’s a ton of options here.

Al: Mm-hmm.

Joe: That a hundred thousand dollars tax free pension is huge. That’s worth several million dollars if, if someone that didn’t have a pension would need to accumulate.

That type of dollar to create that income after tax.

Al: Yeah, that would be like a two and a half, a million, $3 million portfolio to get that kind of income.

Joe: For sure. Yeah. So I mean, if he wants to pull the trigger at that age and travel the world, just understand that A, you probably want to re-look at the overall investment strategy.

What target rate of return do you actually need to generate? And if you wanna spend a little bit more in your first 10 to 15 years, just understand that you probably have to pull back later. And if that’s okay, then that’s all right. it’s all really looking at how you’re handling the withdrawals and what happens to the overall markets.

We can’t control the future, but you can’t control your overall, you know, discipline on how you’re utilizing the strategy. Again, I mean, I don’t know. I’ve been talking about this. For a while where we’ve been complacent with a, a, a really strong market.

Al: That’s so true.

Joe: And it’s like, here, I wanna retire at 50 with a couple million dollars and I wanna pull out four point half percent plus tax

Al: because I, because I always earn 10 or,

Joe: yeah.

Because I, yeah. Well I’m in the NASDAQ. The NASDAQ is up 20 some odd percent.

Al: Yeah.

Joe: Yeah. But the NASDAQ dropped like 80%.

Al: It, it was, gosh, the, what was 2008? It went down over 50%.

Joe: Well, 2000.

Al: Yeah. Well that

Joe: the.com, but

Al: yeah. Right, right.

Joe: It took I don’t know how many years for that thing to recover. Mm-hmm. That was, so just understand what you’re investing in as well.

Yeah. The rate of return looks really nice, but how much risk are you taking to get the return that you have received? Right. Are you willing to take that much risk going into retirement as you’re pulling dollars outta the portfolio? Spending money and saving money are two different things. They’ve been very good at saving money.

Mm-hmm. And it’s like, hey, I want to save 30, 40% after tax of my income because they have this pension. It’s like, alright, here we’re saving 50% of the pension. Roughly.

Al: Yeah.

Joe: Or, or a hundred percent of the pension. Yeah.

Al: Right.

Joe: you know. That’s awesome. But just realize that now that you need to spend, your strategy needs to change.

You need to control the risk. You need to continue to tax manage the account. You need to create the income from it. And then you have to be looking at tax laws from, alright, do I do a Roth conversion? When do I do the conversion? How is that gonna affect my other taxes that I have as I’m creating an income long term?

I mean there’s, there’s five or six. Different things that, that you definitely wanna make sure that you’re juggling.

Al: Yeah. And then maybe lastly, don’t, don’t pay off the mortgage at 2.62, two point half percent. That’s a, that’s a great rate. Just keep that going, right? Because you’re drawing, you’re drawing more, from your portfolio.

Yeah. You don’t wanna use resources to pay that thing down. So that, that’s a good rate. Keep that going.

Joe: All right. congrats. Good work.

Markets change. Tax laws change. Life changes. Is your financial strategy nimble enough to change with all of that, or have you been lulled into a false sense of security? None of us can control the future, but with the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors, you can shake that complacency and create a disciplined strategy that’s flexible and tailored to your unique situation. They’ll look at everything. How much risk you can handle. Your retirement income plan. Your tax strategy. Whether Roth conversions make sense for you. It all gets integrated into one comprehensive plan designed around your specific needs. Like a spitball, a financial assessment with Pure is free. No pressure. No obligation. They’ll identify potential risks and opportunities and show you where you stand. If you’re already on track, they’ll tell you. If there are gaps, they’ll show you exactly where they are and how to fix them. Don’t cross your fingers and rely on a spitball and hope. This is the rest of your life we’re talking about here. We have offices all around the country, from California to Tennessee. Or you can meet one on one with the Pure team online via Zoom no matter where you are. Call 888-994-6257 or click or tap the free financial assessment link in the episode description and schedule your free financial assessment today.

Can We Retire Early at 46 With a $4M ESOP and a $210K Spend? (Fred and Wilma, CA)

Joe: Let’s, let’s go to Fred and Wilma. Hi, Joe, Big Al. This is Fred and Wilma looking to get out of the day-to-day grind and retire early. I’ve been listening to YMYW for six months, but caught up on the last two years of episodes while walking through airports during my long layovers and love the real world examples, which I found it years ago, as I only now understand Rob and how important tax planning is.

I’m 44, my wife is 43. she recently took an early retirement from tech to stay at home with our two little cavemen. All right. We have been hard charging smashing rocks for years, in the tech grind. It has, been good to us, but also is taken a lot from us. Travel and stress. for me, I wanna be done as early as possible and join my wife for wait for it.

Go-go years. Yeah,

Al: that’s what I want. I want a go-go Years.

Joe: Go-go years. Let’s do it. All right. We’re asking four your spitball on retiring by 46 in. Some additional questions on taxes. Roth, when and if we pull that trigger. Alright, so I drive a 2025 Ram 1500. She drives our family 2023 Kia Telluride.

Both are paid off and we don’t plan on buying new cars for another 10 years. Houses NorCal with 25 years left in the mortgage at 2.9 $450,000. mortgage in the house is valued at 3.8 million. Saved and bought at the right time in 2012, remodeled in 2020, and we never plan on moving. And we have found our forever spot drink of choice.

For me, it used to be a nice hazy IPA, but age has cut up to me and the next morning doesn’t feel like IPAs or does not like the IPAs. So now I’m better off with a German Pilsner or Guinness out of the tap. Cut up with you, Al, on your little

Al: unfortunately, yeah.

Joe: Got it.

Al: I I can do one, but,

Joe: but he is only 40.

Al: If I, if I do a couple, it’s a little rough the next morning.

Joe: Got it. her drink is a nice dry French rose or a spicy margarita. Here’s our details. The last few years, my income has increased and I’m making a million dollars a year, but all W2. So the Fed in California tax man takes theirs a million bucks a year.

Al: That’s

Joe: bread.

Al: Yeah.

Joe: Wife has a 401(k), she’s got $500,000 in it. My 401(k) is a million Roth. $30,000 each, and we had them for over five years. We got a brokerage account of, two and a half million. Cash in money market is 500,000. We like having liquidity, and we’ll get this number up to a million over the next couple of years.

Now, here’s where it gets interesting. I’ve been blessed with working for over 20 years in a NorCal Tax company with an ESOP. It should be valued when I’m 46 at 4 million, but I won’t have access for three years after I retire, and then it will be paid out at a monthly rate over five years While it sits, it may earn 3%.

Keep it pace with inflation. Social Security is a bonus if it’s still around fund money, but I don’t want to plan on it. We hope to live to 90, but you never know, which is why. It is best to be done asap. All right?

Al: Okay.

Joe: He wants to be done asap ’cause worried. Right. Longevity life expectancy,

Al: right?

Joe: We need $210,000 in today’s dollars annually.

Accounting for a new car when the old one hits 10 years old, yearly housed. Expenses of 10,000 are unknown and $25,000 for health insurance. We did not account for the cost of living, not paying out the mortgage at 25 years, or the little caveman leaving the cave at some point. Both will be substantially.

Both will be substantial because feeding the two is expensive. Costco takes all of our money. Boys will be outta the house within eight years and we have funded their 5 29 accounts to a hundred thousand dollars each. We expect that the 5 29 plans will put a good dent in their college tuition and anything left over is on them.

So here’s the questions and then we’ll plan based on catching up on two years of your money or wealth. Can I be done at 46? Do you have any suggestions on how to bridge until the ESOP starts paying out? Alright. let’s see. Can the 401(k) or IRA be taken out without penalty? How do we best avoid the tax man in supercharging that Roth?

Is there any benefit to filing separately over the next couple of years? So he wants to do Roth conversions.

Al: Mm-hmm.

Joe: since she doesn’t have, income

Al: right.

Joe: Thoughts on keeping IRMAA low to help cover health insurance? All right. do you want to hit these?

Al: Well, I think we gotta keep going.

Joe: No, we do.

Okay. Man, this is a long question.

Al: I know

Joe: it’s gonna take me two years just to read it. The plan. For the first three years, use 400 or $640,000 in cash to pay for expenses. Transfer heavily from 401(k) to Roth, starting at the 22% tax bracket. So under $200,000 a year. After three years, the ESOP will kick in.

It will be getting monthly checks. That will be about $66,000, but we only need 20,000. The other 46,000 we plan on move in the IRA. I think our tax bracket would be too high to do conversions. This should give us another $2.8 million into the IRA and we will be 54 when the ESOP payments are done.

Alternatively, instead of taking all living expenses from the ESOP, we could live off a mix of our brokerage unless ESOP, to try to keep taxes down and move some money into the Roth. But I just think letting the brokerage grow, may be the best. Any thoughts on the best plan for this? Once the ESOP is done paying, we’ll have another four years to bridge until 60.

When we can take the 401(k)IRA without penalty, this six year bridge would use brokerage, which would still be going strong until not needed it for eight years in any remaining cash. We plan on having 30% in bonds in the brokerage account for market dips. We will go heavy after converting 401(k). Kevin.

401(k) to the Roths maxing. Any amount that keeps us under the 22% tax bracket at 60, we feel that we would have a good mix in the 401(k) brokerage in Roths, so we can pull whatever bucket that makes sense. Does this math work? I have no idea. There’s a lot here.

Al: Let, let me, let me try to summarize.

Joe: All right.

Al: So, they have, Fred and Wilma have about 4.5 million right now. So

Joe: is that including the ESOP?

Al: No, that’s without,

Joe: I would include the ESOP.

Al: No, I don’t want to, ’cause I wanted to do that as income. Hang with me for a second.

Joe: All right.

Al: so four and a half million, two years, 6%. I don’t know how much you’re saving.

I think about 300,000. He didn’t save, but it’s a big number. So I think they end up with about 5.7 million. And they’re gonna need about, let’s just call it 700,000 Joe, to cover the next three years of expenses. Right. So they, they have about 5.7 million with their spending about 700,000. I think they end up with about 5 million when the ESOP payment starts.

So now you got 5 million at five years, 6%, and they’ll be adding about 500,000 a year because it’s over $40,000 extra for five years going into the IRA. So if you do that math, they end up with 9.5 million. and at that point they’re spending 210,000 in, in future dollars would be about two 70, and that’s under a 3% distribution rate.

So It’s actually 2.8% distribution rate. So I think just in broad strokes, back of the envelope, the math works. So, so let’s, that’s that’s question one. Can it be done at 46? And I think the answer is yes. But it depends upon a lot of variables, right? It depends upon the market for 40 years. There’s a lot of things we can’t really predict, but if you just look at straight numbers, yeah, it seems like it probably works.

Joe: Yeah, I mean, the ESOP definitely helps then That’s. huge variable there.

Al: Yeah. as far as covering the gap between retirement and when the ESOP starts kicking in, yeah. Just use your cash, your brokerage account. That’s, that’s not too difficult. And then if you can, if you’re in a low enough tax bracket, do some Roth conversions at the same time.

You got enough resources in the brokerage account, you got, $3 million. I’m sorry. yeah, $3 million in the brokerage account. So there’s a lot of money that could be used to live off of as well as, pay taxes on conversions.

Joe: Yeah. can you get access to the IRA 401(k) prior to 59 and a half, without penalty?

The answer’s yes. You retire at age 46.

Al: temp to be at 70

Joe: 70 TI don’t,

Al: I don’t think you need to though.

Joe: I don’t know. I mean, it’s not gonna be a ton.

Al: No, you’re right. Yeah.

Joe: I might think about it

Al: just to, just to add a little extra

Joe: Yeah. Just to get some money out of the, the accounts too. Mm-hmm.

Al: Well, you either do that or you do Roth conversions, one or the other, I guess.

Joe: Because there’s gonna be a lot of money after the ESOP payment goes out, because he’s gonna take the payment and then he’s gonna, he’s gonna put it right back and then, then he’s gonna put it into the IRAs. Yeah. But that’s just gonna build up the ira.

Al: Yeah, I know, right?

Joe: So a lot of that $9 million that you came up with is all.

You know, more than half is qualified.

Al: Right?

Joe: So then you’re losing your tax diversification.

Al: Well, the truth is, he could, he could put all of the ESOP in an IRA live off the brokerage account and do massive Roth conversions. I mean, there’s there, there’s all kinds of ways to do this. But the point is, you want to end up in a better situation.

If it all goes to the IRA without Roth conversions, you’re gonna end up with a horrendous tax problem.

Joe: Yeah. There’s, IRMAA’s. That’s for your Medicare premiums at age 65. Yeah. So I wouldn’t worry too much about IRMAA.

Al: Ask us in 20 years about that one.

Joe: You’re 46, so when you turn 65 you have to worry about IRMAA, so you’re good there.

Al: Yeah.

Joe: but yeah, you definitely wanna be thinking about a, what should the asset allocation be looking at? I think he said he wants to put 30% in fixed income. 70% in, in the market.

Al: Mm-hmm.

Joe: alright, so how much of, and, and is that all 30%? Is that going to be in the brokerage account? Because you’re gonna spend that down?

I don’t know, do you think about municipal bonds to give you some income that’s tax free? so I don’t know. Looking at the asset allocation might make some sense. I think it’s, again, how are you gonna create the income and manage the risk and tax manages for, you know. 40 years.

Al: Mm-hmm. Correct.

Joe: so, but yeah, if you just look at the numbers itself without any strategy, I think it makes sense.

But really to fine tune this, it’s like now, hey, I’m drawing money out. How do I draw money from a retirement account, not pay the penalties? How much should I be converting, if I should do conversions at all? how should I invest the Roth versus my retirement account versus the brokerage account? Is there any benefit of having different al, you know, allocations in those accounts?

and the answer is yes, right? You wanna make sure that you have in your Roth account. Asset classes that have a higher expected rate of return, you want to take on more risk there. If I’m taking money from my brokerage account, what does that look like from a stock bond perspective to get me the income that I need over that bridge period?

Or if I’m taking money from the IRA, what does, what does that asset allocation look like to to bridge that? that, that same period, but if I’m taking from both

Al: right

Joe: now, a lot of things to consider. But yeah, you’re in a phenomenal spot.

Al: Oh yeah, no, this looks fantastic. I think one more thing I would say is, doesn’t pay to file separate married, filing separate.

’cause you’re in California, California’s a community property state, so half of your income is hers, half of her income is yours. So you have mirror returns, but just a higher tax bracket.

Joe: Yeah, we. A lot of people think this way is that, you know what my, I’m making a million dollars a year. My wife just retired.

She has no income.

Al: Mm-hmm.

Joe: So let’s file separately because, all right, honey, you have $500,000 in your retirement account, you’re. Have zero income, so they’re thinking on her return. Mm-hmm. There’s no income, so let’s do conversions out of her accounts to eat up some of these lower brackets

Al: and that Joe that can work in a non-community property state.

California’s not one of them. I think it’s, there’s like 11 or 12. 13 community property states, the rest are not. So it could work in another state, but realize married, filing separate. There’s all kinds of ways that you get trapped in terms of, of of, of things that, you know, phase outs that start way earlier.

Tax rates are higher. So just, just be, just be aware of that. But yeah, California doesn’t work.

Joe: All right. I think we,

Al: that’s pretty good.

Joe: Yeah, we got that one. All right.

Outro: Next Week on the YMYW Podcast

Andi: The early retirement spitballs continue next week on YMYW for George in South Carolina, Joe in Massachusetts, 26 year old Jonathan in Florida (sorry we weren’t able to get to your question today, Jonathan), and for Kris and Rojo, both in California. The fellas spitball on where to save before retiring early, how to cover healthcare and long term care costs in early retirement, and whether it’s possible to retire early and still fund college. Every single question we get comes from you, the YMYW audience. Because Your Money, Your Wealth is your podcast! And this show wouldn’t be a show without you.

If you dig what you see and hear on YMYW, we’d appreciate your help in spreading the word. Tell a friend about us. Leave your honest ratings and reviews for Your Money, Your Wealth in Apple Podcasts, and watch, like, subscribe, turn on notifications, and join the conversation on YouTube. Did you know that only about half of our YouTube viewers are subscribed to the channel? Any time you engage with our content, it tells the almighty algorithms that YMYW is worth showing to other people, which means Joe and Big Al can share financial literacy with more people while they’re making fun of finance.

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.

_______

Listen to the YMYW podcast:

Amazon Music

AntennaPod

Anytime Player

Apple Podcasts

Audible

Castbox

Castro

Curiocaster

Fountain

Goodpods

iHeartRadio

iVoox

Luminary

Overcast

Player FM

Pocket Casts

Podbean

Podcast Addict

Podcast Index

Podcast Guru

Podcast Republic

Podchaser

Podfriend

PodHero

podStation

Podverse

Podvine

Radio Public

Rephonic

Sonnet

Spotify

Subscribe on Android

Subscribe by Email

RSS feed

YouTube Music

See All Platforms