Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 00:55 – We’re 63 and 58 With $4.6M Saved. Should We Do Roth Conversions? (Ralph & Alice, Monument, CO – voice)
• 11:51 – Watch Is There a Formula for Retirement? on YMYW TV, Download The Retirement Readiness Guide for free
• 12:59 – Should I Use My 403(b) Pay Off My Mortgage? (Mary Jo, Escondido)
• 16:48 – Brokerage to 401(k) to Social Security and Pension: Good Income Strategy for Retirement in 20 Years? (Lucas)
• 26:33 – YMYW Podcast Outro

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Transcription

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

Intro: This Week on the YMYW Podcast

Andi: Ralph and Alice in Monument, Colorado have $4.6 million dollars saved at ages 63 and 58. Should they do Roth conversions? Mary Jo in Escondido, California wonders if she should use her 403(b) money to pay off her mortgage. And Lucas has a plan to spend from his brokerage, then his 401(k), then his Social Security and pension when he retires in 20 years. What do Joe and Big Al think of his strategy? We’ll find out, today on Your Money, Your Wealth podcast number 534. I’m Executive Producer Andi Last, traveling in a fried out Kombi as you listen or watch this, with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, who is actually visiting fam in Minnesota at the moment, and currently in the home of Abba, Big Al Clopine, CPA. To ask your money questions or to get a Retirement Spitball Analysis of your own, click or tap Ask Joe and Big Al in the episode description, watch my how-to video to find out how to make it a good one, then send it on in as an email or a voice message, like this one:

We’re 63 and 58 With $4.6M Saved. Should We Do Roth Conversions? (Ralph & Alice, Monument, CO – voice)

Ralph: Hey guys, this is Ralph and Alice calling from Monument, Colorado. I love your show. I stumbled upon it just by browsing through my financial podcasts and you guys came as one of the better ones. I’ve been listening to you ever since, and I love it. Anyway, I would love to hear your retirement spitball analysis from me. I’m mostly concerned at a strategy for Roth conversions. I’ve only been doing about $20,000 a year, but before I get to that, let me give you all the numbers. Number one, been a diligent saver most of my life. I have 2 million in tax deferred IRAs. Of that $2 million, 1 million is mine, and about a million is my wife. I have a taxable account of $1.5 million, and then I also have a tax free Roth of 1 million and an HSA of $100,000. Currently I am 63 years old. My wife is 58. I retired about a year ago. I have a pension. I get $41,000 a year for the rest of my life, no cola adjustment. My wife is still working at 58. She’s a teacher. She wants to go two more years. She makes about $70,000, but she will have a pension upon retirement at age 60, of which that pension will be $42,000 a year. So she’s got two years to go before tapping into that. As far as Social Security, I am going to delay my Social Security until age 70, of which that will amount to annually, about $56,000 a year. We use that Mike Piper open security app to decide our Social Security strategy and stated my wife should probably apply early at age 62. And thankfully, the windfall elimination provision and the Government offset, provision or whatever that thing was called that was eliminated. So her Social Security from private sector will apply fully and at age 62 she’ll be able to take out $9,200 a year. And then the strategy was at age 65, and again, I’d be applying at 70, she would apply for the spousal benefit and her total Social Security would be $17,447 a year. Annual spending during retirement, we’re not spending too much, 60 to $70,000 a year. We do own our house free and clear, it’s worth about 1.1 million. The biggest issue I have is trying to figure out these Roth conversions. As I said, I’m doing about $20,000 a year now, but I would entertain going a little bit higher. Because I think, the tax man’s gonna bite me later on as that tax deferred account starts to grow. I’m trying to do a balancing act and stay below IRMAA and play that game. But I would just love your suggestions and your advice. It’s about all I’ve got. Oh, as far as the beer I drank: Guinness Stout. Love it. Although it’s getting a little high on the calories at my older age. And as far as the car I drive, and I’m not a liberal, but I guess now they criticize conservatives for driving these things. I drive a Tesla Model Y. It’s probably the most innovative and greatest car I’ve ever owned. That’s it, guys. Appreciate it. Have a great day.

Joe: Alright, well Ralph and Alice.

Andi: Honeymooners.

Joe: Yeah, Honeymooners.
Al: Yeah, that’s right. 60 years old.

Joe: He’s tripping over dollars to pick up some pennies here. Big Al.

Al: I think his biggest problem is he needs to spend more, enjoy life.

Joe: He’s got $70,000 is what he is spending. His fixed income’s $70,000.

Al: Yeah, it’s 80, right? And then he is got almost 5 million.

Joe: And his Social Security’s gonna come in 10 years or eight years. he’s gonna have more fixed income than he is actually spending. Right? Right. So he’s got two and a half million dollars, let’s call it, for him and his wife right in retirement accounts.

Let’s say his RMD age is 73, his hers will be 75. I don’t know. You double that. Two and a half is now five because they’re not touching it. Who knows what it’s invested in. But that could easily double in 10 years. Yep. Because RMD is going to be $200,000.

Al: Yeah. Just from that part. Plus

Joe: the pensions of, call it $80,000

Al: plus

Joe: Social Security of another a hundred thousand

Al: plus the, taxable money that will probably double all those dividends.

Joe: Yeah. Kick out dividends and interest and, yeah. So he’s worried about IRMAA,

Al: right.

Joe: He’s gonna pay the highest IRMAA. so I would try to get as much money outta the Roth or, outta the retirement accounts as he possibly can with these lower rates. 22%, 24%, right? I would probably kick it to the 24.

He’s got plenty of cash outside. He’s gotta run the numbers himself. I’m, I, guarantee he’s, got spreadsheets, he’s got a calculator. He can look at this and if he’s doing $20,000 a year, because what he’s trying to do is stay in the low, lower, Medicare premium payments, but. It’s, I mean, it’s a few hundred dollars a month or a couple thousand dollars a year.

He’s gonna have to pay that for the, he’s gonna be in the highest IRMAA for the rest of his life. So, I would get over that and start thinking about how to maneuver things, you know, to avoid some of this tax time bomb. Now, if Ralph or Alice were to die prematurely, Ralph Predeceases Alice.

I mean, a lot of that money that they’ve grown is now gonna be forced out at that same level, but it’s going to be taxed even more because now Alice is a single taxpayer. No offense Ralph, for killing you out first, but we usually go first

Andi: to the moon, Ralph.

Al: Well, yes. So when, you think of IRMAA, so for our engineers and accountants and all of those out there that really like to get this dialed incorrectly. Just think of the extra IRMAA amount that you’re gonna be paying in two years from now. Just think of that, add that to the tax that you’re gonna pay to figure out what your effective rate is. And what we’re saying, what Joe is saying, and I agree, is even when you add that in, it’s gonna be a pretty low rate relative to what it’s gonna be when you pull all that money out.

The required minimum distributions. And remember, that’s first year only every year it goes up after that, right? So it’s gonna be a higher and higher amount. Add that to your pensions and Social Security. And oh, by the way, your income from your non-taxable, or I should say taxable accounts, non-retirement accounts, that’s all income too.

So. Yeah, you’re gonna be in a pretty high tax bracket, so I would keep going. I would, even consider going to the top of the 24% bracket. But, I, agree with Joe. you gotta run the numbers yourself to figure out how this is gonna be. I’m not sure, I don’t think you mentioned kids where this money goes to what your long-term goals are at the end of life, but that should factor into this too.

Joe: Right. If it’s charity, he could do qds at least of a hundred thousand of it. But IRMAA, so this is just Medicare premiums. And so what, Medicare does is take a look at your overall modified adjusted gross income, and then depending on where you fall two years prior, excuse me, is gonna be your, Medicare premium amount.

And so I’m guessing, so he’s married finally joint. He wants to stay under that 200,000 where your Medicare Part B premium is $175. I’m rounding up 1 74 70. So if he goes to the top of the 24 out, his income is going to be, top of the 24 is 3 83.

Al: Yeah, so let’s go with that one. ’cause that’s near the top of the 24.

Joe: So it’s gonna go from $175 a month to four 50 a month,

Al: right?

Joe: So what is that? $275 extra a month.

Al: Yeah, call, call it 300 times 12 call. Call it 3,500. Right? So that’s the x-ray he’s gonna pay for IRMAA. So just consider that a little extra tax. Right. And if it still makes, so

Joe: yeah, he wants to save $3,500.

That’s the, I mean, that’s the delta, right? Because if he’s Right. Doesn’t convert. ’cause he wants to convert and stay in that lower Medicare premium. I get it. $3,500. I mean, that’s a lot of money to him. That’s why he’s got 5 million bucks. Because it’s like, what the hell? 3,500 is a ton of cash. I don’t wanna spend that unnecessarily, but he’s going to give it away to tax.

So you just take a look at the top of the 24% tax bracket. Then you calculate whatever tax that is, and then you add on the $3,500 and then you can find your effective rate. It’s still going to be a very good rate given if tax rates go up and, which I believe they will by the time he turns. 75 or 73 when he got, when he has to take his RMDs.

I mean, he’s gonna be in probably a lot higher tax bracket than he is today. And I would take advantage for sure of these lower rates and then I would just add back in the IRMAA and I think he’d be really happy that he did so. but. You’re, speculating on higher, like, I don’t know what’s gonna happen to Medicare, what Medicare premiums are gonna be.

I have no idea what tax rates are gonna be, but given where the law is today, given history, given the amount of money that he has, the IRS really likes people like Ralph and Alice because they have a ton of cash in retirement accounts that has never, ever been taxed. He is gonna pay at some point or the kids are gonna pay, or the wi or spouse is gonna pay.

So I, I think the best move is don’t necessarily think about tripping IRMAA. I’d be thinking more long term of how I can really maximize the tax code today and, save the most amount of taxes over my life.

Al: Yep. I am right

Joe: with

Al: ya. I didn’t say, if you look

Joe: at it year by year, you’re gonna make a different decision if you look at it over the next 20 years.

Al: Yeah. I think that’s what you have to do. And then particularly, we don’t know anything about their health of, the two of them. If one of them has more impaired health and the other one will survive, they’ll be in the single tax rates. This will be even worse than what we just said. So consider all that too.

Joe: All right. Good luck. Congratulations on quite the retirement.

Watch “Is There a Formula for Retirement?” on YMYW TV, Download the Retirement Readiness Guide for free

Andi: There’s investing rule of 72. The 80% retirement spending rule. The retirement spending smile. The 4% rule. 100 minus your age for asset allocation…are any of these financial formulas worth anything? There are rules of thumb to live by, and others that can completely derail your retirement dreams! Discover which ones may be your golden ticket, and which are your one-way ticket to trouble, on the latest episode of Your Money, Your Wealth® TV with Joe Anderson, CFP® and Big Al Clopine, CPA. Click the link in the description of today’s podcast episode to watch “Is There a Formula for Retirement?” on YMYW TV. Then click through to YouTube and leave us a comment and tell us what you think. Also, download the Retirement Readiness Guide for free to learn the secrets to controlling your taxes in retirement, creating income to last a lifetime, making the most of your retirement investing strategy, and much more. These plays will boost your retirement readiness despite the uncertainties of market volatility, inflation, rising healthcare costs, and the future of Social Security and Medicare. Just click the links in the description of today’s episode in your favorite podcast app to access all of these free financial resources.

Should I Use My 403(b) Pay Off My Mortgage? (Mary Jo, Escondido)

Joe: Mary Jo’s calling in, writing in, Hey, I’m about to retire in four months. I have 15 years left on my mortgage. I have enough money in my 403(b) to pay off my loan. Is this a good idea? I’ll be receiving a pension from my employer as well, and I’ll be taking my Social Security. I’m 65. Mary Jo wants to take outta,

Andi: I emailed her and asked her for more information and she hasn’t responded yet, so this is what we have to work with.

Joe: No, absolutely not. Do not take money outta your retirement account to pay off the mortgage.

Al: I knew you gotta say that. And, unfortunately, I agree. And here’s why. it’s because if you take money outta your 403(b), it’s fully taxable. So you’re gonna have to take more money outta the 403(b) to pay the tax so that you can have a net amount to pay the mortgage.

And you’re gonna be surprised how quickly that 403(b) account just gets swallowed up by taxes. So it what it so not only are the taxes all at one time, but it pushes you in a higher bracket. You’ll pay a lot more tax than you should. Yeah. You just don’t wanna do that. It’s just not a good idea.

Joe: We’ve seen it so many times. We’ve seen people take money outta retirement accounts to buy homes. And so, oh yeah, I wanna buy my dream lake home, and all the liquidity is in the retirement account. Right, and they don’t wanna have a mortgage, so they take the $500,000 outta the retirement account and they buy the house. Or in Mary Jo’s kick, she lives in Escondido. So, I don’t know, it’s a 15 year note. I’m guessing it’s gotta be a few hundred thousand dollars. So she’s got enough money, she’s got just enough money in the 403(b) al to pay off the note. Yeah, so guess what? She takes that $250,000 out of her 403(b) she pays off the note. April 15th. She’s gonna get a tax bill of what? 80 grand?

Al: Yeah. Yeah. Let’s, say a hundred grand, which she doesn’t have. Right? So then she goes and gets a mortgage for the a hundred grand, but she has no money at all. ’cause the 403(b)’s gone. So now it’s like, oh, now I gotta pay this mortgage and I got no money.

Joe: Right. I mean, that’s what happens. The $250,000, you take a huge check like that, it’s like, well, that’s 250,000 of ordinary, and come on top of whatever income that you have.

Let’s just assume that puts her in the 24% tax bracket. Plus state here in California is 10. That’s 34%, 34% on 250,000. It’s a big number.

Al: Yeah.

Joe: 70, $80,000. She doesn’t have the liquidity because all of the money, all, the liquid cash was in her retirement account.

Al: Yeah.

Joe: I mean, now she can’t get a loan because she’s retired. She doesn’t have any liquid assets because she wrote the check out of her 403(b) Right to pay the note.

Al: We had this exact case, Joe, you and I, 15 years ago. Remember the guy who came in was so proud. Joe Al, you’re not gonna believe it. I took out all the money from my 40(k) and I paid off the mortgage. I am so proud I have no mortgage. We said, well, what about the tax money? Because we computed it. It was, close to a hundred thousand. Where are you gonna get that? He goes. Oh, I, didn’t cal- I didn’t figure that. And of course then not only is the a hundred thousand is probably penalties for not making estimated payments timely. Right. So, so you got all of that. Fortunately, in that particular case, he’d taken the money out and he, returned it within the 60 day rollover rules. So he was able to get out of it. But, yeah, just it’s tricky. Can be.

Joe: all right, well hopefully we caught, Mary Jo in time. If it’s like $5,000 mortgage left, then sure, but the way she framed the question, it was like, I have just enough in my 403(b) to pay off my mortgage.

Brokerage to 401(k) to Social Security and Pension: Good Income Strategy for Retirement in 20 Years? (Lucas)

All right, let’s go to Lucas. I. I looking for some advice on my plan. All right, let’s go to the next question. We don’t give advice here, Lucas.

Al: Change the word advice to spitball.

Joe: All right. my wife and I are 35 at 36. She drives a 2015 Chevy Tahoe and I drive a work truck, mostly provided by the company. Also. I have an older Tahoe 2007. She just won’t give up. Going on. 250,000 miles. My wife drinks champagne in margaritas. I drink old fashions and Manhattans. Blanton’s neat is a great nightcap. Gotta tell you, never, never had a Blanton’s.

Al: I don’t even know what that is, do you?

Andi: It appears to be bourbon. Blanton’s Neat. Blanton Bourbon.

Al: Okay.

Joe: Yeah, the guy’s 30 and he’s drinking old fashioned Manhattans and Blanton’s.

Al: Yeah, he’s old school.

Joe: but you gotta at least get to 60.

Andi: Hey, you like old fashions and you’re like 37.

Joe: I’ll have one old fashioned, like every couple months. 6 1, 1 a quarter, maybe. Well, I did find this, mix, I think, I forget, it’s like in an orange bottle that it’s like pre-made so you don’t actually have to make it. Someone brought that over to the house and I had a little sip of that. I thought that was okay.

Al: It was all right. Okay.

Joe: But anyway. Alright, so in my younger years, oh boy, I would mix wine and Jack Daniels, you should try it. Oh, you’ll love the hangover. Geez, that just sounds awful.

Andi: Yeah.

Joe: Two pretty okay kids. 12 and six. Okay. Pretty okay.

Al: Pretty okay.

Joe: All right. We vacation a lot.

Andi:L It doesn’t say with, that’s with the kids or without?

Joe: Yeah. I don’t know. They’re, only Okay, so probably not. Yeah, we got 10 days in Mexico, two weeks in Europe, and they do this every year. Also own a lake home. We spend a lot of time at looking for 10 to $12,000 a month in retirement. We earn about $375,000 annually. We have $830,000 in a 40(k), a hundred grand in Roth, and we both max out the 40(k)s at 23,500.

Dollars, 4% max or 4% match. so only about $9,000 match combined. We have $25,000 in a brokerage and we contribute about 9,000 or a thousand dollars a month. It took a hundred thousand dollars for down. Payment on a cabin recently. Okay. Five 20 nines are 40 2030 1000. We contribute $600 a month, 50,000 in savings.

We want to retire at 56 and 55. I have a pension option to collect around 400,000 at 55 or collect $3,500 a month with no survivor benefit at 62. Also a small retirement through the Union Hall. Our combined social and pensions, if we collected 62 would be roughly $7,400 a month. Both employers and 40(k).

Use the rule of 55 if needed. Do you think it’s achievable to live out the brokerage from 56 to 59 and a half? Not worried about depleting the brokerage. 40(k) and after 59 and a half and supplement my withdrawals to 62 with Social Security pension. We will end up contributing more to the brokerage when the kids’ 5 29 plans are done and the mortgages are paid nine years left on the primary and 11 years left on the lake home.

Thanks. right. Okay, so now we, got to do some math here.

Al: Well, here’s the math I did because when you’re 20 years away and. Changing cash flows. It makes this rather difficult, but I just looked at what he’s saving. What they’re saving right now between the 2 40(k)s, the match and the 5 29, they’re saving about 63 grand out of their salary of 3 75.

That’s about 17% savings rate, which is great. we, tell people if you can get up to 20, you could probably. Retire kinda any way that you want to. Maybe not any way that you want to, but you can have a very nice retirement and they’re probably actually saving more than that because they’re buying cabins and, things like that.

So I think the savings rate is good. Whether they’ll have enough in brokerage in 20 years from now is, virtually impossible to say. Since they’re not really saving at a brokerage right now. I think. But I, would say another point here, Joe, would be. It looks like he’s, trying to spend different monies at different times, and I’ve never thought that was a very good idea.

I think you gotta have a formal withdrawal strategy when you get to that point. And since they’ll be over 55, they can take from their 40(k), which probably they’ll want to, they’ll probably wanna fill up lower brackets and even do Roth conversions and not necessarily live completely off a brokerage, or if the brokerage account’s really high, live off of that, but do Roth conversions to then.

Put more money into the Roth. I mean, there’s all kinds of things they can do, but we’re talking about something 20 years from now, which is a, bit hard to predict. So I’m gonna go back to my original thought on this, which is I think the savings rate is really good. I think they’ll probably be able to retire early and how, which monies they’ll use or what’s the right distribution strategy that would be figured out when they’re much closer to retirement.

That’s what I think

Joe: he’s 35, wants to retire 55.

Al: Yep.

Joe: So let’s figure it out for him. All right, so he wants to spend $12,000 a month, correct?

Al: Yep. But then you have to in inflate that for 20 years.

Joe: Let’s use three and a half percent inflation. Okay? So he wants to spend $286,000 in future dollars, right? Alright, so he’s got $900,000 today and so let’s say, and he’s saving 60 grand a year with Match.

Al: Yeah. I get 63,000 a year.

Joe: And you got 20 years and I’m gonna assume a 7% growth rate, which will be $6 million in 20 years.

Al: Okay.

Joe: Alright, so at 55, let’s say he takes 3.5% out of that account, which is gonna give him about $212,000 of distribution at a three, three and a half percent burn rate at 55, right?

I think he’s good ’cause he’s, that’s not including his pension, that’s gonna give him another $3,500 a month. It’s not including Social Security. yeah, I think you could bridge the gap there at 55, but I wouldn’t worry about draining the brokerage. You’re 55, take it from the retirement accounts.

Al: Yeah. ’cause you, you retire after 55 and you can do that without penalty.

Joe: Right,so it’s not like draining the brokerage account in cash. And then just then pushing my retirement account, you wanna have a mixture. You’re probably gonna take a little bit from your retirement account, a little bit from the Roth and a little bit from the brokerage account to keep you in the lowest tax back bracket possible, you know, through, through your overall entire retirement.

So, yeah, but no, I think, he’s in, think the guy’s 35. He has got a million bucks liquid.

Al: it’s amazing. It absolutely amazing. He just bought a cap. Yeah. Right. In his house. And then he goes to

Joe: Mexico for 10 days and he has wine in Jack Daniels when he is at the cabin,

Al: right? Yep. No, it’s, and he goes to Europe for two weeks

Joe: and maybe go to Europe for a week and spend, you know, and save that and you’re, you can retire at 50.

And don’t take the, okay kids, you know what’s up with the, okay. Kids. Kids are okay. I don’t know. Are they okay? Like in good health or, yeah, I don’t know. Yeah. What wanted them Never really cared for ’em.

Al: Hopefully they’re not listening

Joe: what they think. Six and 12.

Al: Yeah. If he plays, if he plays it in the car and they happen to be in the car,

Joe: I’m sure they’re, if they’re anything like my kids,

Al: they won’t be listening.

Joe: Oh, yeah. Not compute.All right. are we good?

Andi: Sure.

Joe: Wonderful. Alan, how long are you in Hawaii?

Al: I’m here the rest of this week and next week then I’m back.

Joe: Wow. How’s the weather? You look like you got sunburn already.

Al: Yeah, it’s 80 degrees right now. Water’s about 75. It’s lovely. It’s perfect.

Joe: You gonna go head out for a little snorkel after this or?

Al: I think so. Yeah.

Joe: And some rum.

Al: Yeah. I don’t normally sit inside in the afternoon unless I have to. It’s a little warm in here. And that’s in my shorts.

Joe: Oh, well, we’ll get you outside.

Al: Yeah. Okay. All good. Cool. All right.

Joe: Wonderful. Thanks Andi. Great job, Al. Thanks for joining us. we’ll see you again next time at Your Money, Your Wealth®.

YMYW Podcast Outro

Andi: This is Your Money, Your Wealth, your podcast! If you enjoy YMYW, tell your friends and help us reach more listeners like you. And don’t forget to leave your honest reviews, comments, and ratings for Your Money, Your Wealth in Apple Podcasts, on YouTube, and in all the other apps that let you do that (like Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Podcast Addict, Podchaser.) We’re on all of ‘em!

Your Money, Your Wealth is presented by Pure Financial Advisors. To really learn how to make the most of your money and your wealth in retirement, you need more than a spitball: schedule a no-cost, no obligation, comprehensive financial assessment with the experienced professionals on Joe and Big Al’s team at Pure. Click the Free Financial Assessment banner in the podcast show notes at YourMoneyYourWealth.com or call 888-994-6257 to book yours. Meet in person at any of our locations around the country, or online, right from your couch. No matter where you are, the Pure team will work with you to create a detailed plan tailored to meet your needs and goals in retirement.

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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