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Published On
March 21, 2023

Should Edith and Archie live off their non-qualified accounts and pay Roth conversion taxes from their 401(k)? How can Johnny from Knoxville do Roth Conversions and stay in a low tax bracket? Plus, at age 31, are Shad and his wife saving enough for retirement? What should Tech Chick do with her severance package after being laid off from her tech industry job? Finally, listener comments on retirement plan education, Roth conversions, and the 5 year Roth clocks.

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Show Notes

  • (00:39) Live Off Non-Qualified Accounts, Pay Roth Conversion Tax From 401(k)? (Edith & Archie, TX)
  • (11:35) How to Do Roth Conversions and Stay in a Low Tax Bracket + Estimating Taxes (John, Knoxville, TN)
  • (19:11) Retirement Spitball Analysis: Are We Saving Enough at Age 31? (Shad, Smith’s Grove, KY)
  • (27:11) Laid Off From the Tech Industry. What Should I Do With My Severance Package? (Tech Chick, Mile High Rocky Mountains)
  • (39:55) Comment: No Financial People Ever Mentioned Roth Conversions to Me Before! (Donna, Valencia)
  • (40:55) Comment: Thanks for Letting Me Educate You on Retirement Plans (Debra, St Louis, MO)
  • (42:41) Comment: You Got the Roth 5-Year Clock Wrong (David, Michigan)
  • (48:06) The Derails

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Transcription

Should Edith and Archie live off their non-qualified accounts and pay Roth conversion taxes from their 401(k)? How can Johnny from Knoxville  do Roth Conversions and stay in a low tax bracket? That’s today on Your Money, Your Wealth® podcast 421. Plus, at age 31, are Shad and his wife saving enough for retirement? What should Tech Chick do with her severance package after being laid off from her tech industry job? Finally, listener comments on retirement plan education, Roth conversions, and the 5 year Roth clocks. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Live Off Non-Qualified Accounts, Pay Roth Conversion Tax From 401(k)? (Edith & Archie, TX)

Joe: We got Edith and Archie from Texas. “Dear Andi, Big Al and Joe. Ladies first, Andi, am I spelling your name correctly?”

Andi: Archie did spell my name correctly. Yes.

Joe: I think it’s Edith. Is it Edith? Ladies first?

Andi: No, I think they’re- Archie is referring to me as being the lady.

Joe: But it’s Edith and Archie. So they’re writing together?

Andi: Read on.

Al: We’ll find out maybe.

Joe: But I got a question. What is the proper, so if, if I start a letter of Edith and Archie, wouldn’t you assume the first person that is on that is the one that is writing?

Al: I think that’s a fair, that’s a fair assumption.

Joe: That’s a fair assumption. Okay. All right.

Andi: Although it says “Edith is 55 and I am 53.”

Joe: Okay. I should have just kept reading.

Andi: Yeah, that’s what I said.

Joe: Okay. I’m sorry. “Just loving the show. Andi keeps the whole thing from flying off the tracks. Big Al’s the straight guy with the killer dry humor, Joe cuts through the noise and keeps us all laughing. The banter chemistry is wonderful. Please keep it up. Some background.” Let’s go with Edith and Archie from Texas. Yes, those were the days. Edith is 55. Oh, I get it now. Because you put that up there like that and you’re just following- See Andi, you always get me confused sometime.

Andi: Makes for great content, Joe.

Joe. It does, yes. Let’s go with Edith and Archie. All right, so “Edith is 55. I’m 53. I have a 23-year-old son who is fully launched, two daughters in high school and one much loved 14-year-old cat that for the purposes of this letter, we’ll call NFL.

Andi: Good name for a cat.

Joe: Yeah, “I’ve worked various jobs for a large manufacturing company for decades and my income over the past 10 years or so, has mostly ranged from $200,000 to $250,000 a year. Edith has spent that time at home using her brilliance and her herding skills to guide our kids and me through life. Year to year savings range between 40% to 50% of our gross income if you include our company match. Saving comes easy for us.” Yeah. Geez. 40% or 50%?

Al: I’ll say. Are you at a 50% rate, Joe?

Joe: Um, no. I wish.

Al: Yeah, me neither.

Joe: No, I was at one point. But then you pop out a kid, you get married and-

Al: Yeah. That changes everything.

Joe: Just completely just comes right out the door. The good old days. Those were the days. I’m with you Archie. “Spending is really harder for us than saving. We drive a 10-year-old Hyundai, our fancy new car, and a 20-year-old minivan. We all actually prefer driving the old minivan. We don’t drink a ton, but we tend to like tequila with a little mixer for Edith, straight for me. We’re worth a total of $2,700,000, $1,700,000 in deferred plans, $100,000 in a Roth, $300,000 in a brokerage account, $600,000 in our home. No debt other than the house, and $200,000 of money market funds. All assets are in equity based index funds. The retirement plan. Here’s the raw plan based on what we’ve learned from listening to your show. So far, we have not used a financial planner. So here’s the bullet points. Retirement 3 years, and utilize the 55 year rule to access my 401(k) plan if needed. Number two, sell our house in pretty much all of our stuff and begin slow traveling the world, mainly Mexico, Central and South America. Will keep a very modest apartment as home base in the US. We expect a very low cost of living, although I use more than twice our expected expenses when trying to forecast the viability of the plan. And we have incorporated a pre-Medicare health, college and wedding expenses. Live off of savings and house proceeds, so nearly no taxable income. Start Roth conversions to the top of the 12% or 15% tax bracket each year until 70, unless each- less after that because of Social Security. We estimate at 75 total between Edith and me, starting Social Security at age 70. If we do that and after incorporating an inheritance along the way, when I turn 75 and need to turn on RMDs, we should be worth just under $8,000,000, $2,000,000 in brokerage, $1,500,000 in deferred, and about $4,500,000 in Roth. Divided all that in half for our downside scenario. Ready. Aim. Spitball.” All right. I think he’s got a spreadsheet. Al.

Al: I think so too.

Andi: Archie, the engineer.

Joe: I think he just grinds on these numbers all night, all day.

Al: Yeah. I think he’s been thinking about this for a long time.

Joe: I think he’s got a countdown. He’s got a clock. His retirement.

Al: You think he’s in a job he doesn’t particularly like? So let’s- I gotta make it to 55 according to YMYW.

Joe: He’s just dreaming about drinking tequila, South Mexico, South America.

Al: Yeah. I love the concept.

Joe: Oh, he’s got that. How old is this guy? He’s 53?

Al: He’s 53. So he is gotta wait a couple years before he can retire.

Joe: He is got two years. So he is got a specific question. “When currently planning to our safe or non-qualified funds for living expenses and pay the taxes on our conversions with additional funds pulled from the 401(k), so for example, if $110,000 by the top of the 12% tax bracket, then we’d likely get about $95,000 into the Roth. And take an additional $15,000 out of the 401(k) in cash to pay the tax? Please go deep on this part of our plan. Pros and cons.” Well, you- alright. No, I would take out any more under the overall retirement account, you just look at what your taxable income is and then convert to the top of the 12% and pay the tax outside of the 401(k) plan.

Al: Yeah, but I think what he’s suggesting is he might be going through that? Well, well maybe not. He’ll have the home sale. Right? He’s already got how much in a non-qualified account?

Joe: $300,000.

Al: $300,000. So let’s say he is got $300,000 and let’s say $600,000 for the home, let’s say, and that’s $500,000. So he’ll have $800,000. So that’s a lot. So yeah, you’re right Joe. He can live off of that and just do the conversion and then also pay the taxes from that. You don’t have to take it outta the 401(k). I would recommend his strategy if he had no money outside of retirement because in this particular case, if he doesn’t do the Roth conversions, starting with the $1,700,000 in deferred plans, plus what he’s gonna add at age 53, by the time he gets to RMD age, gosh, so $2,000,000, double $4,000,000 to $8,000,000 potentially, right at RMD age. So it’s really important that he does it. And if he didn’t have money outside of retirement, I would say, yeah, I would, go ahead and do his plan up to the 12% or 15% bracket, but because he has money outside of retirement plan account, then I would use that. I just agree with you, Joe.

Joe: So I don’t understand why he’s waiting at age 55 because he’s gonna retire in 3 years to utilize the 55 rule to access to 401(k) if needed. He’s gonna have plenty of money outside if he lives that frugally in Mexico. Or Central America. He’s, well, yeah- condo, but what, it’s just for emergency cases that he wants to-

Al: I think, I guess so. Yeah. And maybe that’s not a bad call. Maybe you- maybe you worked two more years just in case. But all you’re really doing is buying 4 and a half years. Because at 59 and a half then you can get the money out without penalty anyway. So you’re basically buying insurance, I guess, if you will, between 55 and 59 and a half by waiting to retire then. But yeah, I mean, basically I would tend to agree with you based upon these numbers and cheap living. You could probably do it sooner, but then you just wouldn’t have the 401(k) as a fallback.

Joe: Yeah. But the only part of this plan, Archie, that makes it really hard for us to spitball, let alone- you know, take a spit- is how much is he spending?

Al: Well, he didn’t say, but, he’s basically suggesting that he’s gonna spend very little.

Joe: What is that? $10,000 a year or is that $50,000 a year?

Al: Well, I don’t know, but when you look at his point about- he took all his expenses, including the extra cost for health insurance and college and wedding expenses then, and he doubled it- and he still thinks he’s okay. So, I mean, we don’t know what the calculation, so we can’t-

Joe: That’s the problem.

Al: Yeah. We, we can’t really say whether this is a good plan or not, but based upon everything else he’s done, which seems pretty detailed, I’m assuming he’s done that math.

Joe: But I have to see what the spreadsheets are. I have to see what you’re using for assumptions because it’s like, all right, well here, we’re gonna do all of this. I doubled my living expenses and we’re gonna live, we’re gonna rent it, we’re gonna sell the house, but we’re gonna have a home base, you know, apartment or a condo, you know, here in the States. And you know, by the time I’m 75, I’m gonna have $8,000,000. Like, okay-

Al: Yeah. Well, that could be true.

Joe: He, he’s got, he’s got $2,000,000 today. And he is gonna have $8,000,000 at 75, retired without any income, without saving money. We need to understand a little bit more for us to spitball, I guess is my point.

Al: True.

Andi: So Joe, are you saying that you want people to actually send you their spreadsheets when they send you a spitball question?

Joe: Sure. Absolutely.

Andi: Really?

Joe: Yeah. And I will not read them.

Andi: Exactly.

Al: Well, let me put it this way. If he spends very little, then that $2,000,000 will probably grow. That’s number one. And number two is he mentioned an inheritance, which we have no idea.

Joe: Oh yeah. If it’s an inheritance of $7,500,000-

Al: If it’s a nice fat one, then you’re good.

Joe: You know, I’ve read the numbers and by at age 74, I’m gonna get a $7,500,000 inheritance. So what do you think?

Al: I’ll be golden. Yeah. There’s a lot we don’t know, but I would say based upon what we do know, I think it’s a fine plan. Assuming your numbers make sense and your assumptions make sense. I would probably work till 55 just to have the extra cushion if you need the 401(k). I would do the Roth conversions. I would live off the non-qual, which would be what you have right now, plus the home sale and have fun.

Joe: All right, thanks Edith and Archie.

How to Do Roth Conversions and Stay in a Low Tax Bracket + Estimating Taxes (John, Knoxville, TN)

Joe: We got Johnny from Knoxville, Tennessee. “Hi Joe, Al and Andi. We love YMYW here in East Tennessee.” Well, we love you right back. “These Tennessee winters are unpredictable. Today it’s 80 degrees and we are told it will be back in the 30s by the weekend. We drive a Ford F150 unless I’m enjoying my cold Bud Light. Yeah. My friends Bob and Betty want to restart partial Roth conversions and stay in the 12% tax bracket-” Why is John from Knoxville calling for Bob and Betty?

Al: Because he’s Bob and Betty. Or he’s an advisor for Bob and Betty.

Joe: Yeah, he’s- oh, that’s funny. “-restart partial Roth conversions and stay in that 12% tax bracket. They’re both 67 yo and retired, drawing on Social Security of $48,000. They take $12,000 in IRA distributions each year and have no additional income or dependents. The questions are how much can they convert to Roth and/or add to the IRA distribution and stay in that 12% tax bracket? Secondly, how can anyone calculate federal income taxes for estimated quarterly payments using the above extra income? They would like to use Roth conversions, but are concerned the extra tax increases canceled that benefit. Please spitball taxation of Social Security benefits.
Then explain Social Security benefits.“ And what else does this guy want?

Andi: And a pony?

Joe: Please write it down and say, dear Bob and Betty, from your advisor, John.

Al: Listen to this podcast. it’ll answer your question.

Joe: Good question, John.

Al: It is a- it actually is a good question.

Joe: Because there’s this thing called provisional income. Then when this provisional income gets to a certain rate, then all of a sudden the Social Security, becomes taxable, right? So if your income’s at a level, your Social Security is tax-free, and then as your provisional income increases, and then all of a sudden it’s like, oh, part of your Social Security is gonna be subject to income tax. So 50% of the benefit could be subject to income tax, or as your income continues to increase, then 85% of the benefit is gonna be subject to income tax. So you have to be really careful of what type of income that you’re putting on your tax return, not to blow yourself up. Because another $1 of taxable income could be another $1.85 of income, because you’re increasing the amount of Social Security income that is subject to tax.

Al: And let’s talk about how that happens. So in this case, provisional income is half of Social Security. So half of $48,000 is $24,000. And then you also have another $12,000 from IRA. Okay? So provisional income is $36,000, which puts you in a 50% taxable bracket for Social Security. So if you do a Roth conversion, not only is the conversion itself gonna be taxed at 12%, but now you’re gonna take $.50 on $1, and have that taxed at 12%, which adds another 6%. So a conversion right now would be taxed at 18%, not 12%, because you’re paying more tax on Social Security income than you would’ve otherwise. And that’s not necessarily a bad strategy. If this is what their situation is gonna be forever, then go ahead and maximize that 50% bracket. And if that’s true, then maybe all you wanna convert is about $8000 because the top of the 50% bracket is provisional is $44,000. So if this is a similar situation that they’re gonna be in forever, I would convert $8000 only and call it good. On the other hand, Joe, let’s say their IRAs are really big-

Joe: Yeah. We don’t even know the size of it.

Al: -and if the required mineral distributions are gonna be gigantic, then yeah, you’re gonna pay extra on Social Security taxes now, but you’re gonna have to pay it anyway. So we kind of need to know that, to know what the best way to go is. Like, let’s just say IRA balances are $2,000,000. I’ll just make up a number and the RMD will be around $80,000 that you add to this. You’re gonna be at a 85% Social Security rate anyway. And so you might as well convert to the top of the 12% bracket. And I think if you take your income of $48,000- well I don’t Social Security, I’d have to- I can’t even do that in my head cause I don’t even know how much that’s taxable. Because some would be 0% taxable and some would be 50% taxable. But you can probably do a lot of conversion, you know, $70,000, $80,000 maybe conversion and still stay in the 12% bracket, but just realize it’s gonna be more than a 12% tax because all of a sudden more of your Social Security income will be taxable.

Joe: Well said. Just to kind of put this in a bow, when you’re in those lower brackets claiming Social Security, you have to look at provisional income, not taxable income, or adjusted gross income or anything else like that, because then that gauges how much your Social Security’s gonna be taxed. So if your provisional income is under $32,000 if you’re married, if your Social Security’s tax-free, $32,000 to $44,000, then 50% of your benefit is going to be subject to income tax, not a 50% tax. 50% of the benefit is subject to tax. And then once you hit over that $44,000 for a married finally jointly, then 85% of that benefit is subject to tax. So you just have to look at that provisional income and just be wary that if you increase income, yes, more Social Security’s gonna be subject to tax. So yeah, the tax rate that you’re actually going to pay on that conversion or whatever distribution is gonna be higher than the marginal rate that you’re paying because now more Social Security is subject to tax that wouldn’t be.

Al: And as how you figure the taxes is you just do a tax projection with whatever Roth conversion that you wanna do with your other income. It’ll tell you what your total tax is. You compare that to any withholding that you have. Whatever the difference is, is the tax you have to pay, divide it by 4, pay that quarterly.

Get all those questions about your taxes answered live! Register for our free tax planning webinar on Wednesday March 29 at noon Pacific, 3pm Eastern. Pure Financial’s Tax Planning Manager, Amanda Cook, CPA will explain the latest tax legislation and how it impacts you, your family, and your retirement taxes, and she’ll help you strategize to lower that tax liability. Go to the podcast show notes, register for the tax planning webinar, and download free financial resources – the Complete Roth Papers Package is there. It includes the Ultimate Guide to Roth IRA’s, the 5-Year Rules for Roth IRA Withdrawals, and the Roth Basics Guide. Also get yourself a copy of the 2023 Key Financial Data Guide – the exact same guide the Joe and Big Al use during the YMYW podcast. You’ll see at a glance the 2023 tax brackets and capital gains tax rates, retirement plan contribution limits, taxation on Social Security, Medicare premiums, and more credits, deductions, exemptions, distributions, and exclusions than you can shake a stick at. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes for all these financial resources, all free, courtesy of Your Money, Your Wealth®.

Retirement Spitball Analysis: Are We Saving Enough at Age 31? (Shad, Smith’s Grove, KY)

Joe: Answering your money questions, we got Shad from Smith Grove, Kentucky. “I hope that I’m following proper protocols submitting my question in the correct way.” I believe you are. Shad, I think you’re in a good, good spot here. So far so good. “Both my wife and I are 31. She’s a nurse anesthetist-”

Andi: I knew that was gonna be a fun one.

Joe: Anesthetist, right?

Andi: Close enough.

Joe/Andi/Joe: Anesthetist.

Al: Yeah. That’s a hard one.

Joe: “-and I’m a firefighter.”

Al: That’s an easy thing to say.

Andi: These are some essential workers we got here.

Joe: That sounds like a firefighter. You know what I mean?

Al: Yeah, it does. Yeah. I think if you’re born with the name of Shad, you’re gonna be something cool like that.

Joe: You a badass. You’re gonna save lives. You gonna put your life on the line. “We’ve only been investing within the past couple of years and listening to your podcast weekly. My wife refuses to listen to boring financial podcasts.” Shad, you gotta just put it on at the dinner table like that one creepy guy did.

Al: That may not go over well being only 31, they may not have a lot of history together. Who knows?

Joe: Well, come on. Shad is- he’s like, Superman. He can say whatever he wants.

Al: That’s what I’m afraid of.

Joe: Yes. “She prefers murder podcasts. So maybe you can do a murder financial podcast episode to get her involved.”

Al: Oh, we gotta get on that. We need a question, tax question or investment question involving a murder. So you guys have one, send it in.

Joe: We can come up with something. “We have two dogs, an 8-year old mutt lab and an 8-year-old mutt golden doodle. His favorite snacks is my wife’s underwear.” Oh boy. Here we go. “I drive a 2016 Chevy Silverado. My wife drives a 2023 Hyundai Palisade. I enjoy nice bourbon on the rocks or Sam Adams Boston Lager. My wife prefers to drink a red wine on the weeknights and a little margarita or some bubbles.” I guess that’s champagne-

Andi: Rhinegeist Bubbles. It’s actually neither beer nor hard seltzer and it’s fruit flavored.

Joe: Rhinegeist?

Andi: So it’s hard craft beverage.

Joe: All right, cool. Well, very good. “We also have a two-year-old angel/demon in the making. She’s the cause of endless amount of joy in rapidly graying hair. Combined Income is a base salary of $255,000 with potential to earn more via overtime and side hustle. $97,000 in my wife’s 401(k), $30,000 in my 457, $12,000 in the Roth, $2800 in a brokerage account, $2000 in an HSA, $42,000 in my pension after 5 years of service. Who knows if it’ll be available when I retire. My wife’s company was recently bought out by another and she has some changes to the overall retirement plan. They offer $180,000 base salary pre-tax 401(k), Roth 401(k), maxable match 4% of wages, and they also have 3% of total earning profit sharing. I fear my attempt at the 3-bucket strategy will cause more of a headache than anything, wanting to consistently save around $55,000 a year, not counting company matches or pension. I’d love a spitball on how you would allocate and where we should be putting our focus, especially with their pre-tax 401(k) and Roth 401(k). Looking at retiring between 55 and 60, spending about $120,000 a year. Are we saving enough?” All right, Shad. Yes. Looking good. So far so
good.

Al: Yeah, so I did a little math Joe, just to help us out. So starting with $140,000 and adding another $55,000, $56,000 per year. I just said for 25 years-ish, at 6%, they end up with about $3,700,000. Okay. And retiring at that age, you probably wouldn’t want to do any more than a 3% distribution. So I would say that’s $111,000 plus pension he mentioned of $42,000. Maybe it’ll be more by then, but just go with that. So that’s $153,000, which does meet his goal of $150,000. But there’s a huge caveat, and that is, if you’re wanting to spend $150,000 in today’s dollars, it’s a lot more than that. So $150,000 in future dollars currently would be about $72,000. So if the plan spending is more like $72,000 in today’s dollars with a 3% inflation rate, then you’re right on track. Otherwise, it may be a bit much, but this is before any knowledge of what the pension could be. It’s before any knowledge of what Social Security could be, if any.

Joe: So, I ran some math here and I ran it at 7%. Let’s say he’s got $150,000 right now, he saves $55,000 a year. Over the next 25 years, at 7%. That’s $4,500,000. So yeah, if you saved that- maybe he could get 8% over a 25, 30 year time period.

Al: Maybe if he goes 70%, 80% stocks, 20%, 30% bonds.

Joe: He’s 31, right? And so they’re making a ton of income now. He’s a firefighter, he’s gonna retire early, then he’s probably gonna double dip. He’s gonna get the pension, then he is gonna go back to work, he’s gonna do something else.

Al: Probably so.

Joe: That’s what a lot of our clients are, that are firefighters do. Wife makes a ton of money and she’s 31 and she’s already making a couple hundred thousand dollars a year almost. I mean, the income is only gonna probably continue to go up from there. So here’s my- so this is what I would do, Shad. So go to the 401(k) with a match, right? So you’re at $255,000 minus that $200,000. So I would max out your 457 plan, because you wanna get into that 22% tax bracket. That 22% tax bracket is $190,000. Right? So let’s say if she maxes that out, so let’s call it $25,000. So you still have another $25,000 to save. I would go everything else into a Roth IRA. How you look at it is that now you’re in that 22% tax bracket. I feel that that’s a pretty good rate. And then all your other savings, if you have a Roth 457, but she sounds like she’s got the Roth 401(k), you have the 457 plan, well save your firefighter income into the 457 plan pre-tax. Yeah, you’re contributing the max $15,600. She might have to put a little bit more into the pre-tax 401(k). But if you don’t wanna hassle with this or have a headache about it, have her go 100% Roth 401(k) and then fill out- and then you guys can do a couple Roth IRAs as well.

Al: I agree with that. I would definitely slant the Roth IRA, particularly at age 31. Incomes generally go up and of course we’re doing a 25-year plan, assuming nothing changes. Which isn’t realistic. So I guess back of the envelope, I think it looks good. I just wanna caution you, depending upon what your retirement goals are, just make sure you consider inflation.

Joe: Yeah. And where I came up with that is that if you look at the tax rate at $190,000 of taxable income and above, you’re at a 24% rate. So you wanna maybe stay out of the 24% and get into the 22%, but the 22% is gonna turn into 25% in a couple of years anyway. So, I mean, I’m even comfortable with the 24% tax bracket at age 31 to fully fund everything that you can, the full $55,000 going to the Roth 401(k). I don’t know if the 457 has a Roth component, it probably doesn’t. So he has to go pre-tax, but everything of your wife and then your Roth IRAs, make sure that you max that out and that’s what I would do.

Al: Yeah, I agree with that thought.

Laid Off From the Tech Industry. What Should I Do With My Severance Package? (Tech Chick, Mile High Rocky Mountains)

Joe: “Hi there. I’ve been listening to your podcast and learning a lot. Thanks for continuing to explain Roth mega backdoor tips and all the guidance you share. I’d love you to spitball what I should be doing with my upcoming severance package. Let me see what you think.” All right. Little severance question here, Big Al.

Al: Yeah. Okay, cool.

Joe: Got your calculator ready?

Al: I do. It’s on the floor. Oh, it’s on the floor, but I’ll grab it.

Joe: “First up, we’re a Honda and a Toyota family with a rogue Chevy Avalanche. My drink of choice is a fresh mojito, but preferably boring water. We also have a mixed mutt pup who sleeps so much, he might as well be a cat. My partner and I are in our mid-40s. He’s a government worker in a very stable job, makes $115,000. He’s also on his medical insurance. He would like to retire early by next Fall when our teens go to college, but still work gig jobs to fund his hobbies, like golf and skiing. I work in tech and make $300,000 with a 30% annual bonus and $1,000,000 in restricted stock units that vest monthly over 4 years.” Wow.

Andi: I gotta get into tech. Wow.

Joe: Do it. “As of April 1st, it changes to $0 for me because I’m part of a recent wave of tech layoffs.”

Andi: Okay, nevermind.

Joe: “That said, I’d like to retire now, or actually yesterday. As severance from the layoff, I’ll receive about $120,000 cash payout and $125,000 of vested RSUs By May 1st. Our net worth is about $3,300,000.” So $314,000 in RSUs, $400,000 in stocks-“

Al: Hold on one second. Here’s the math. So $1,800,000 of liquid-

Joe: Okay. So we can- I can skip all this. “We also have 15 single family homes worth $1,500,000-” 15 worth $100,000 a pop?

Al: It’s, uh, it’s a lot. I mean, it must be- it must not be. Where do they live? Rocky Mountain, Colorado, probably. Yeah, it’s probably not in Denver. I’m guessing it’s someplace else.

Joe: “-cash flowing about $5000 or $6000 a month. We plan to 1031 exchange two to 3 poor performers and reinvest it in better cash flow properties this year or next year. We paid off most of them using my past RSU and annual bonuses. We have a few mortgages totaling $423,000 at about 3% interest. We rent and don’t own a home.“ Because you own 15 homes. “We got no credit card debt. We use them for living expenses plus those travel miles, we pay them off monthly. Expenses are about $20,000 a month right now. We know it’s a lot. Need to keep cutting down on our travel, food and discretionary spending. So my questions are, you think I can retire instead of returning to the tech world or even take two to 3 years off? What should we do with the severance of the $300,000 in cash just sitting in savings? What should we do to speed up an early retirement or just to have more time-”

Andi: -time freedom.

Joe: “-time freedom? I hope that wasn’t too long to read on the show.” Yes, it was very long.

Al: But you still read it.

Joe: Well we, you kind of helped me with a little bit of it there.

Al: Yeah, we got- shortened a bit.

Joe: “Thank you for your spit ball on our situation. Keep up the awesome of work on the pod. Love it. Signed Tech Chick from Mile High, Rocky Mountains.” Okay, let’s do some math. Let’s help her out.

Al: Okay, so I did a little math and you can take it from there. So I just said, well, she’s got $1,800,000 liquid. Gonna get another $200,000 severance. So $2,000,000. At this age, late or mid-40s. You probably wouldn’t want more than a 2.5% distribution rate if you’re not gonna ever work again. So I’ll start with that premise, which then would be, you could take about $50,000 from the portfolio, and then you’ve got about $60,000 from rental property income. So that gives you a $110,000. You’re spending $240,000, so you’re about $130,000 short. So it doesn’t work. It doesn’t even come close to working based upon the numbers you gave us. Now, if you can figure out a way to make up that shortfall of $130,000, between- maybe you guys working part-time, less stressful jobs, maybe that could work. Of course, you’re gonna want to cut your spending as you already suggested. Or, here’s one other, one other thought, Joe, if you’re really burned out, take a year off and then you’ll probably be bored of that and then you’ll feel refreshed to get back into the working world. That’s probably the best answer.

Andi: And hopefully by then AI hasn’t taken over all the tech jobs.

Al: Yeah. And, and it won’t. It’s coming, but it’s not there yet.

Joe: At $20,000- so they’re spending $240,000 a year.

Al: Yeah. And my math says they could generate $110,000.

Joe: Yeah, they need a few more million dollars here, unfortunately.

Al: Yeah. Yeah. To live the kinda life they’re used to living. Now if you can chop your expenses in half, which is hard to do. But if you could, you could have a lot more time freedom or if you’re okay cutting your expenses a lot, but then still working part-time. Yeah. That could, you know, do some side hustles and make $50,000, $60,000 and cut the rest in spending. All these things are possible.

Joe: Okay. So she gets $6000 a month from the rentals. So that’s $72,000.

Al: I took $5000 being the lower number, $60,000, but somewhere in there, $60,000 to $70,000.

Joe: And then they got $2,000,000 liquid, Al?

Al: Yeah. With the severance and vested RSUs.

Joe: All right. So let’s say if, at $2,000,000, let’s say they take 3% out. So that’s $60,000. Plus $72,000 is $132,000. And maybe they work part-time making, you know, $60,000, $70,000 or $30,000 apiece.

Al: Yeah. And then cut the rest in expenses.

Joe: Right. You’re making it.

Al: It can be done.

Joe: You’re making $200,000 there. Or if you can live off of $130,000 a year, $11,000 instead of the $20,000. A month. So if you want to travel, if you- I mean, they should join what’s his name- that’s going to South America and spending like $4 a month.

Al: Yeah. Right.

Joe: And most of that’s on tequila.

Al: That’s true. Yeah. So I got $110,000. You got $130,000. So, yeah, somewhere there is what you can spend. But like I say, another approach is to just, you know what, take a year off, live off the severance and RSUs for the rest of the year. And then, you know what, if you’re- you may get bored. I’m just thinking mid-40s, Joe, would you wanna retire fully tomorrow?

Joe: Absolutely.

Al: I know you would. But after, after 6 months to a year, I’m pretty sure you would wanna come back and do something.

Andi: Yeah. Especially if you’re home with the kids. Yeah.

Al: It may just be 3 months, Joe.

Andi: Maybe 3 weeks.

Joe: For like 15 years I didn’t take a vacation. Now it’s like, okay, I could see myself slowing down a little bit, but that’s just happened over the last year. So I get mid-40s, you know, you kind of get this little burnout stage where-

Al: No, I get it. Remember when I was, what, 47 I was planning to retire? You remember those days?

Joe: I do remember those days.

Al: I had a nice real estate portfolio and then the great recession hit and that kind of took care a lot of that.

Joe: Oh yeah. But you know, it’s funny with little Tech Chick here is that, hey, they got $3,500,000 in assets. So let’s just say if you take your $3,300,000 and you take a 3% burn rate on that, how much is that? $100,000. Yeah. So capping at around five, it sounds like cashflow on one, one and a half, and at $72,000.

Al: Yeah, it’s pretty good.

Joe: $3,000,000 does, I mean, it produces $100,000 of income, you know, at that age. You don’t want to take probably any more than 3% or 4%. So you’ve got $100,000, $120,000 on $3,000,000, you’d think $3,000,000. Wow. We can retire, we’re done. Let’s go off into the sunset. But in actuality, retiring at that age, making the amount of money that they are making, they’re used to spending and going on trips and, you know, it’s really hard to, to replicate that type of income without a lot more dollars behind that.

Al: Well, yeah, and some people listening to this might say, man, $3,000,000, I could retire tomorrow. But it all depends upon what you’re spending and what you’re used to spending. I have seen people cut their expenses drastically, but that’s unusual, I would say. Usually people get used to spending a certain level and they can cut a little bit here and there. Joe, how many times have we talked to people that say, I don’t spend lavishly, and then we find out they’re spending $30,000 a month? It’s like, well, for some people that seems a little lavish, but-

Joe: But like you’re in your mid-40s, it’s going to be hard to spend less than what they’re spending when you’re retired. If I’m in my, let’s say late 70s, I could see myself spending less. Because you’re probably not gonna be nearly as active. But if you’re in your 40s, you’re probably gonna do different hobbies and go to, you know, do different things. And it’s Saturday every single day. And so what do you think these people do on Saturday is they probably spend more money on Saturday than they do on a Tuesday?

Al: You go golfing, you go skiing, you go shopping, all these things cost money.

Joe: Absolutely. So, hang in there.

Al: It’s a little tricky. There’s ways to do this if you really want to, but it’s a combination of probably working part-time and cutting expenses pretty significantly. Or like I say, if you just wanna break, take a year sabbatical, you’ve got enough assets to do that and then go back to work after that.

Joe: Yeah. But I mean, you’re in high tech, you take a week off, you’re screwed.

Al: Well, it can’t- it depends, right? It depends what your specialty is, right?

Joe: It’s- I was gonna say a bad word. That stuff travels faster than the speed of light, you know, so you take a week, a year off and you try to get back into high tech, they’ll be like-

Al: What were you doing? You were in Peru doing what? Well, well there is that. But I do think tech people, if they’ve got a specialty in demand, I think they can talk their way out of it. I really do.

Joe: All right. Well, good luck. Let us know what you do.

Get a Retirement Spitball Analysis of your own! Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, then click Ask Joe & Al On Air and tell the fellas the relevant details like your name, age(s), and location. The ages and location should be real, but the name can be whatever you like. Also let Joe and Al know when you (and your spouse, if you have one) want to retire, how much you think you’ll need to spend annually in retirement, how much you make and save now, what you have saved, and in what types of accounts (401(k), Roth, brokerage, etc), Any other relevant financial details. Irrelevant details (to help Joe better visualize the situation!): Where or how you listen to YMYW, Your drink of choice, Your pet(s), What you drive, anything else you want to share – because the show would not be a show without you. So Ask Joe & Al to get your Retirement Spitball Analysis, to ask a money question, or to send in a comment, like these folks did…

Comment: No Financial People Ever Mentioned Roth Conversions to Me Before! (Donna, Valencia)

Joe: Donna from Valencia, she writes in Big Al. She goes, “Hey, I just wanted to thank you both for your dedication to financial education.”

Al: Okay. Thank you.

Joe: “I’m a doctor.” Well, thank you doctor for your lifetime of education to heal us.

Al: Yes.

Joe: “I have a high net worth.” Of course you do. “And have met several financial planners, quote unquote, over the years. Sadly NOT ONE, all capitals, of these people ever mentioned what a Roth conversion is, nor has my CPA ever brought it up. I had no idea I could do these. Your show on this subject was a light bulb moment for me. I cannot thank you enough. I am now off to creating a new strategy. I’ve already had a discussion-“

Andi: “Had I known about Roth conversions sooner, I would’ve done it a long time ago.”

Joe: All right. Well, thank you Donna. Appreciate that.

Andi: Dr. Donna.

Joe: Dr. Donna.

Comment: Thanks for Letting Me Educate You on Retirement Plans (Debra, St Louis, MO)

Joe: “So Joe and Big Al-“ this is from Deborah from St. Louis, Missouri. “-I could not have been- oh, I could not have loved your reaction more to my 401(k) guidance on Safe Harbor plans and the need for ACP testing.” Oh, is this-

Andi: This is Debra.

Joe: -when we keep botching the 401(k) stuff.

Andi: Top heavy.

Joe: Yeah. Got top heavy.

Andi: She goes chapter and verse for you on the next page.

Joe: Oh boy. “need for ACP testing when there are after tax contributions allowed in the plan, which was news to you. I think I now have to give you some additional thoughts. I gotta take care of my favorite podcast hosts and Andi. I love that you just wing it and still teach us so much.” I’m not sure about we teach anything. We wing it.

Al: We do have a chat.

Joe: “Thanks for letting me teach you a bit. Vesting schedules on a match. Super common. In almost 30 years of a career in retirement plans, I have to say that most non-Safe Harbor 401(k) plans have a vesting schedule on a match and profit share-” Oh, this goes on. Deborah’s really getting into this, “-even Safe Harbor plans who have to vest the Safe Harbor contributions 100% immediately, typically have a vesting schedule on any profit sharing. So you are confusing a few tests, but you’re in good company.” So Debra, thank you for educating us on retirement plans.

Al: Yeah, because we don’t know this stuff. I think the essence of what we said is right, but maybe we said the wrong test.

Joe: Probably.

Comment: You Got the Roth 5 Year Clock Wrong (David, Michigan)

Joe: David writes in, he’s like, “Hey, I believe you gave incorrect information on the podcast on SECURE Act 2.0 retirement rich, cash poor about Roth conversions. When doing a Roth conversion, each and every separate conversion starts a new 5-year clock for when withdrawals can be made, also have to be over 59 and a half years old. The standard rule that the principal amount can be withdrawn under 5 years is incorrect for conversions.” All right.

Al: Yep. I agree with that. I think we’ve said that 100 times.

Andi: I have a feeling that David misheard it.

Joe: The 5-year clock-

Al: Here we go.

Joe: If I do a Roth conversion, at age 57, I have a 5-year clock on earnings. If that was my only Roth IRA.

Al: Correct.

Joe: Let’s say I started a Roth IRA at 30, although they weren’t around then if I was 57, so let’s say 47, 40 years old. So over 5 years. If I do a Roth conversion at age 57, that Roth conversion doesn’t have its own separate 5-year clock once I’m over each 59 and a half.

Al: Right. But let’s say you did it when you were 51, then you’d have to wait till 56 to be able to withdraw the principal. You couldn’t get the earnings until 59 and a half.

Joe: Yeah, of course. But I think where he’s telling us that we’re wrong is that the 5-year clock on conversions, each conversion has its own separate 5-year clock. But if I do a Roth conversion at 55, 56, 57, 58, and then 59. The Roth conversion at 59- I don’t have to wait until 64 to get access to that money.

Al: Right. Once you’re 59 and a half, you can always get your principal. You may have to wait on earnings until you’ve had a single Roth for at least 5 years. Right?

Joe: Correct.

Al: But yeah, so it’s confusing though. And Joe, you’ve taught classes where people said you’re wrong and it’s like, it’s very confusing because there’s different rules if you’re under 59 and a half or over 59 and a half and then it gets super complicated when you’re close to 59 and a half, right? So, it can be tricky and it’s easy to misunderstand, but yeah, the basic rule is that when you do a conversion under 59 and a half, you’ve gotta wait 5 years to be able to have access to that principal. Unless you turn 59 and a half within that 5 years, then you have access to the principal, but you cannot have access to any of the earnings and growth until you reach age 59 and a half.

Joe: 59 and a half and 5 years. Right. Whichever is longer.

Al: -is longer. That’s right.

Joe: But each conversion has its own 5-year clock because that was established for people avoiding the 10% penalty for early withdrawals. So you at least have to get past 59 and a half. But then each conversion doesn’t have its own 5-year clock anymore. If you already had a Roth established prior to 5 years, once you reach age 59 and a half.

Al: Right. So there’s different 5-year clocks for earnings versus conversions versus younger than 59 and a half versus older. So it’s super confusing. I do sympathize.

Joe: David, we are not wrong. For the record. Alright, that’s it for us. Again, thank you so much for listening. Keep your questions coming in. Hopefully Big Al will make it back to San Diego someday. New Zealand, Hawaii. When are you back, next week? Couple weeks.

Al: Yeah, next week.

Joe: All right, sounds good. We’ll see you then. All right. That’s it for us. We’ll see you next time.

The Derails

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