B and S in Maryland are in their mid-40s with $425,000 and a couple of rental properties. Can they retire early at 62? Vee in Oregon came to the US as a refugee with nothing and built a three and three-quarter million dollar portfolio from the ground up. Is his Roth conversion plan solid? And finally, Chandler and Monica in Texas are sitting on $1.4 million and hope they can walk away from work in 3 years. Will Roth conversions keep the tax man from taking a giant bite on their way out?
What is IRMAA, and why does it matter for Roth conversions?
IRMAA, the Income-Related Monthly Adjustment Amount, is a surcharge added to Medicare Part B and Part D premiums when income rises above certain thresholds. Because Roth conversions raise taxable income in the year they happen, a large conversion can push you past an IRMAA threshold and increase your Medicare premiums about two years later, so timing conversions around those limits matters.
Frequently Asked Questions
Q: What does it mean to “cover the gap” in retirement?
A: The gap is the difference between what you want to spend each year and your guaranteed income from sources like Social Security, a pension, and rental income. Whatever those sources don’t cover has to come from your investment portfolio, and that shortfall drives how much you need saved. In the case of early retirement, “covering the gap” can also refer to how you fund the time between when you stop working and when you start drawing Social Security benefits and/or a pension.
Q: Should you make Roth or pre-tax 401(k) contributions?
A: Pre-tax contributions lower your taxable income now and are taxed when you withdraw them. Roth contributions use after-tax dollars and can come out tax-free later. Roth often makes sense when your current tax bracket is similar to or lower than the bracket you expect to be in during retirement.
Q: How can Roth conversions help reduce future required minimum distributions?
A: A Roth conversion moves money from a pre-tax IRA or 401(k) into a Roth account. Because original Roth owners have no RMDs, converting before RMD age can shrink the pre-tax balance that would otherwise be forced out and taxed as ordinary income later in retirement.
Q: Why does a surviving spouse’s tax situation matter when planning conversions?
A: When one spouse passes away, the survivor usually files taxes as single, where the same income falls into higher brackets than it did filing jointly. Converting to Roth while both spouses are alive can move money out at today’s joint-filing rates before that shift happens.
Show Notes
- 00:00 – Intro: This Week on the YMYW Podcast
- 00:57 – Half a Million and Rental Properties in Our Mid-40s. Can We Retire Early? (B & S, Westminster, MD)
- 12:48 – Refugee to $3.75M: Is My Roth Conversion Plan Actually Solid? (Vee, OR)
- 25:55 – Can Friends with $1.4M and a Roth Conversion Puzzle Retire in 3 Years? (Chandler & Monica, TX)
- 33:05 – Outro: Next Week on YMYW Podcast
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The Number One Spending Mistake Ruining Retirements – YMYW TV
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Transcription
(NOTE: Transcriptions are an approximation and may not be entirely correct)
Intro: This Week on the YMYW Podcast
Andi: B and S in Maryland are in their mid-40s with $425,000 and a couple of rental properties. Can they retire early at 62? Vee in Oregon came to the US as a refugee with nothing and built a three and three-quarter million dollar portfolio from the ground up. Is his Roth conversion plan solid? And finally, Chandler and Monica in Texas are sitting on $1.4 million and hope they can walk away from work in 3 years. Will Roth conversions keep the tax man from taking a giant bite on their way out? That’s today on Your Money, Your Wealth® podcast number 591. If you’re one of the 47 and a half percent of people who watch us on YouTube but haven’t subscribed yet, please do. It means more people see us making fun of finance and it’ll bring more people to have fun with us in the comments too. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Half a Million and Rental Properties in Our Mid-40s. Can We Retire Early? (B & S, Westminster, MD)
Joe: Retirement analysis spitball please. And thank you. Wondering when I would be able to retire, how much to plan for covering the gap. Should I backdoor any of my 401(k)? And what would we change, if anything? We are B and S from Westminster, Maryland. Did I say that quickly?
Al: You said it perfectly.
Joe: Per- all right.
They got, three kids in middle school, high school. I’m S, I’m 43, corporate project manager, desk pilot.
Al: Okay.
Joe: A desk pilot.
Al: Never heard that term- Yeah … but like it.
Joe: And would like to retire as soon as the house is paid off, or as soon as possible. Hubs, B, is 45, half business owner of a vehicle restoration business, and will likely work full-time until retirement, and then switch to part-time or a hobbyist, to stay busy.
All right. Savings and income, I have $375,000 in a 401(k), 141,000 in basic Roth, 81K in comp match, 77,000 basic before tax, $42,000 supplement before tax. What is she talking about? Is she-
Al: She’s giving-
Andi: I was confused by all that too.
Joe: Oh, yeah. Let’s just-
Al: we’re, we’re getting all the components of the 401(k)…
Joe: getting everything just thrown at you, and right in the kitchen sink here. Let’s separate this a little bit. All right.
Al: I can give you a summary if you want.
Joe: They got a hundred- So she’s got $375,000 in a 401(k).
Al: Correct.
Joe: All right.
Andi: And then she breaks down what’s in that 401(k), I think.
Al: Yes, she does.
Joe: Got it. Okay. So let’s just go there. Then, they’re making contributions into this, Port- what do, what’s the contributions? Con-
Al: well, the comp- contribution shares, I don’t know what that, I assume that’s part of the 401(k). I don’t think that’s a contribution.
Joe: Okay. All right. “I make $140,000 annually gross with regular yearly increases of about 4% on average. Hubs has a $17,000 in a Roth IRA. Owner’s draw of 88,000 annually for now. We have $20,000 in savings, $14,000 in kids’ 529s, 13,000 in crypto, four collector vehicles valued at 80. Primary home is worth 900,000 and still owe $255,000.” So what’s the summary on that?
Al: Okay. and you’re about to say, or the next line is, “Fixed income. I have 108,500 fully vested pension that I plan on taking a lump sum.” So I’m gonna add that in as well, Joe.
Joe: Okay.
Al: All right. So, so we end up with about 535,000 of total assets, call it 325 in a tax-deferred, maybe 175 in tax-free, and maybe 30, 35 in taxable.
Joe: Yeah. Did you include the four collector vehicles?
Al: No.
Joe: Okay.
Al: Did not include those. Got it.
Joe: “As of today, Social Security would be $2000 a month at 62.”
Okay. “If hubs has no pension but considers the two business properties he shares with one partner as his retirement. Today, one property is worth a conservative 450,000, or $2000 a month if it’s leased out. The other is worth 1.1 million, or $4000 a month if leased out. I’m not sure what his Social Security would be, and okay with not counting it as part of our calculations. Whatever it is, it’ll be a bonus. We wanna spend $150,000 a year in retirement, assuming the house is paid off. My mom, who’s a longtime listener (Hi, Susie!) told me about the podcast, and after a few listens, curious on your take on our situation. As for drinks, B has been on the red and wine lately, but is known to have a vodka with orange or cran.” All right. “I’m a temperature drinker. Red wine when it’s cool. Moscow mule if it’s hard, seltzer, cider if it’s warm.”
Al: Okay. Are you a temperature drinker?
Joe: No.
Al: No, just drink whatever you feel like.
Joe: All temperatures.
Andi: He’s been in San Diego long enough- Well- … that temperature doesn’t matter so much.
Al: I was gonna say that. Doesn’t really matter here, Andi, you’re right.
Joe: All temperatures.
Al: Okay. Joe, so it’s kinda like, I wanna retire as soon as possible. We don’t know, They’re
Joe: 43 and 45?
Al: Yeah, we don’t know what they’re saving, but- So- … but per year, but here’s what I did.
Joe: All right.
Al: I started with 534,000 and I said, “What if they retired 62?”
I just picked a date just to see how this works out. 17 years from now, I did 6%. I’m s- I’m assuming between her and, her match, maybe 30,000. I, no idea. I, that’s, but that’s how I ran it. So they end up with 2.3 million, which is, it’s a good number, at 62. But spending 150? At a 3% inflation rate, in 17 years that’s 250 grand.
And I took the spend of 250. So here’s the formula. The spending is 250, and subtract out fixed income. they got a couple rentals, but it’s only half-owned, so I’m assuming this is the total re- rental. I made that assumption. So 6,000 of monthly income is really three, so that’s 36,000. I did 17 years at 3%, it becomes 60.
Joe: Okay.
Al: And I, I assume that she, or he, o- one of the two of them, would go ahead and take Social Security then, just to see how this worked out. 34,000. So now 250,000 of spend, fixed income of 94,000 between rental income and Social Security, $156,000 shortfall.
Joe: They’re gonna need four million.
Al: Against 2.3 million. 6.8%, they need four million, correct. So yeah, it doesn’t, Now, there’s a million ways to fix this, Joe. I mean, you could, you can, and you can even retire early, but you have to control the spending a little bit.
Joe: Yeah. I think the unknowns are what’s the inflation rate on the…
L- let’s see if the hubby takes the monthly.
Al: Yeah.
Joe: Two, and so we assumed the 2 and 4,000, it’s half of that. Maybe if it’s the full boat, they’re pretty close. If it’s the full boat,
Al: it’s bi- a little better. Yeah. Yeah. yep.
Joe: And maybe that’s 2 and 4,000 in today’s dollars. So maybe that’s the- it would-
3 and 6 …
Al: it would be 120 instead of 60, so, so they’d-
Joe: you already inflated it …
Al: I already inflated it. Got
Joe: it. Got
Al: it. Got it. But, so it, it would be about 100,000 shortfall into 2.3. that’s getting c- much closer. Closer. Yep. Yeah.
Joe: Okay.
Al: Yep.
But I also don’t know when… She said she wanted to retire maybe when the home was paid off, but we didn’t find out.
She didn’t say when that would be.
Joe: there’s $243,000 left on the home.
Al: Yeah. Probably gonna be a while.
Joe: Yeah. yep. Maybe another 10 years. At least. So that’s 53 years old, 43, 53.
Al: Yeah, so but I ran it to s- 17 years. 17. Yeah.
Joe: Yeah, so the home will be paid out. I think your math is right.
Al: Yeah. I, I-
Joe: I think they’re really close.
Al: I think- I
Joe: mean, if they keep doing what they’re doing, they’re gonna be close. If they can increase their savings a little bit, maybe spend a little bit less, I think they’re right on track.
Al: You know, and I think based upon their income, I think that’s probably about what they’re spending, give or take right now.
Joe: What do they make? A couple hundred thousand dollars a year.
Al: Yeah. a little bit more than that, I think, if I remember on the form.
Joe: The pilot, she’s making-
Al: Yeah …
Joe: 100-
Al: He’s making 140, and he’s making 88, so call it 225-ish.
Joe: Yep.
Al: I think, and here’s how this works well, Joe, as you know, and I’ll tell you guys.
If you can cut your spending now, that means you get used to a slightly different lifestyle, which also means you save more. So the combination of getting used to a lesser, a little bit less, you know, not drastic, but a little bit lesser lifestyle and saving more makes this work a lot better. that’s why we say this can be close, but you have to make some changes probably.
Joe: Yeah. wondering when I’d be able to retire.” So 62 is probably the right. How much to plan for the covering gap, covering the gap.
Al: I planned they would take it, but it, you know, there’s this- Is this
Joe: the Social Security gap is what the-
Al: I think so … 62? I think so.
Joe: Yeah. “Should I backdoor any of my 401(k)?”
I, you know what? I bet I would go 100% Roth on this case, because I’m, guessing the $88,000 draw from his business has very little tax on it.
Al: Yeah. Yeah, could be.
Joe: So- I’m guessing they’re probably in the 22% tax bracket. I’d say 22.
Al: Well-
Joe: Most of it is probably taxed at the 12?
Al: Yeah, 12 and 22 pro- probably. Probably… he’s got self-employment tax, so it’s gonna make it feel like it’s highly taxed, but- Yeah … but the income tax is probably reasonable.
Joe: But even if you try to shelter a lot of that into the 41- like, a solo 401(k), you’re still gonna pay the s- self-employment tax.
Al: Yeah, ex- oh, exactly. But- That doesn’t, that doesn’t- So- doesn’t change, right? So yeah, I think, I don’t disagree with that. I think they’re in a low enough tax bracket. I just think, based upon my numbers, which there’s some estimates, right? Based upon my numbers, I think they just need to figure out how to spend a little bit less and save a little bit more.
Joe: Yeah. They have, they have decent, tax diversification already.
Al: They do. I agree.
Joe: so I don’t know if they need to do any con- I wouldn’t recommend any conversions.
Al: Yeah
Joe:… I would wanna know how much of his income is taxed and what tax bracket they’re in. If they’re in the 22% tax bracket, I would, switch my contributions to all Roth.
Al: Yeah.
Joe: That’s what I would do.
Al: Yep. Because that will be the bracket they’re in retirement if they wanna spend $150,000. Yep. And of course, when we talk about the bracket that they’re in, Joe, it’s currently, we’re really, we’re using current brackets, but we’re also using current spending. So spending gets inflated, and so do brackets. So you can sort of think in terms of current numbers and have a sense of where it might be in the future.
Joe: Yep.
Al: Assuming tax rates stay the same, which they won’t. That’s a tough assumption.
Andi: So B & S just got a pretty decent spitball from Joe and Big Al on how soon they can retire, but remember, the fellas were working off a handful of numbers in an email, and they often are. But every situation you see or hear on YMYW really deserves more than a spitball, and so does your situation. If you’ve ever wondered whether you’re actually on track, or how soon you can realistically walk away from work, that’s why Pure Financial offers a free, no strings attached comprehensive financial assessment. You’ll sit down with one of the experienced professionals on Joe and Big Al’s team, either in person at one of our offices in San Diego, Seattle, Chicago, Denver, Salt Lake City, Nashville, Davis, Los Angeles, Irvine, Brea or Prescott, or right from home via Zoom no matter where you are. They’ll do a complete review of your real numbers, your income, your investments, your taxes, and your goals. And they’ll tell you where you stand and what you should be doing next. Find out the specific strategies that are unique to your circumstances, to lower your taxes now and in future, to align your needs and goals with your tolerance for risk, and to ensure you have a retirement plan that can weather whatever uncertainty the future holds. Click or tap the free assessment link in the episode description to book a time that works for you, or call 888-994-6257. It’s your retirement we’re talking about here. And you’re worth it.
Refugee to $3.75M: Is My Roth Conversion Plan Actually Solid? (Vee, OR)
Joe: All right. Let’s go to Vee in Oregon. Vee.
Al: Vee. Okay.
Joe: V-E-E. Never met a Vee.
Al: me neither.
Joe: All right. “Hello, Joe, Big Al, and Andi, producer. I’ve been listening to your podcast for about 10 years.” 10 years, Alan.
Al: Okay, that’s incredible.
Joe: And I’m hoping-
Andi: That might be a record. Besides us.
Joe: True. “And I’m hoping you could give me a quick spitball review, not advice. I’m 61, and my wife is 58. Unfortunately, neither of us drinks. I bought a 12-pack of Corona, and it lasted over a year.”
Al: Is that how your house goes?
Joe: Exactly. That is exactly how it goes. But it’s Corona, yeah. yeah. Yeah, so also- good point … I drive a 2008 Acura, with only 65,000 miles.”
Al: Wow. A 2008. So-
Andi: V drives like once a month.
Joe: “I have a half-eaten Snickers bar that I bought in 2008.”
Andi: That’s funny.
Joe: Oh, God. “My, my wife traded her 2008 Honda Pilot for a new 2025 RAV4 Limited. We hope it lasts another 15 years. I was laid off last year, and I’m seriously considering retirement. wife, she’s still working, so we can keep health insurance for a couple more years, but we believe we could both retire even if she stopped working.”
Here are the assets. We got some, let’s see, CMA, cash management account and a high-yield savings account- Yeah … is what I’m guessing.
Al: I think so.
Joe: $710,000.
Al: Correct.
Joe: 240 in cash, 475 in S&P 500. that’s not a high-yield savings account.
Al: okay. You’re right.
Joe: S- what’s a CMA?
Al: I don’t know.
Joe: I don’t know.
Okay. We got all IRAs, $2.7 million, Roth IRAs, 200,000, HSA, 105,000, total, $3.7 million.
Andi: And yes, when I Google CMA account type, I get cash management account, so.
Al: Yeah. that’s what we thought, but-
Andi: Yep …
Al: S&P 500.
Andi: Yeah.
Al: Not quite.
Joe: Not quite cash management. “We also own our $600,000 home outright. My wife and I came to the United States as refugees after the Pol Pot regime.”
Al: That turns out that was in Cambodia. Looked it up. ’75 through ’79.
Joe: The Pol Pot regime.
Al: Yeah.
Joe: Any, other history on the Pol Pot regime?
Al: It sounds like it wasn’t good. It,
Joe: it doesn’t sound good.
Andi: Yeah, it was bad. Khmer Rouge regime in Cambodia, killed an estimated 1.5 to 2 million people.
Joe: Wow.
Andi: And many survivors fled to refugee camps in Thailand before resettlement.
Joe/Al: Jeez. Hm. Yeah. Boy. Oh, my God.
Andi: So this is a success story already.
Joe: All right.
Al: Oh, hell yeah.
Joe: Okay. “We owe a deep gratitude to the United States government for adopting us and bringing us here from the refugee camp in Thailand.” All right. “We met after arriving in the States, and we are so thankful for a new life and a golden opportunity this country has given us.
We didn’t have the chance to finish college, but we worked hard and saved and invest. For the last 40 years, we repeated that cycle, work, save, invest. It allowed us to reach where we are today. We have two grown daughters, and we are able to send them to university and pay for their tuition in full.
Without government assistance or student loans, they both graduated debt-free. We need about $84,000 a year for our expenses, including travel. If my wife stops working, we need an additional $24,000 per year for health insurance until I reach 65. Here’s the retirement plan I drafted for the next 10 years.” Okay. Yep. All right. Let’s go to page four. Aaron double-sided this, so- I’m a little confused. Keep total income. Let me, V, keep total income under $218,000 for IRMAA and stay in the 22% tax bracket. All right. So they wanna- Yep … spend $84,000 a year, but they wanna keep the income under 218.
Al: Yeah, so that’s, that affects their conversion strategy.
Joe: All right. So then he’s breaking down the 218, I believe- from a Roth conversion of $100,000 a year from my $2.1 million IRA. We’re gonna take distributions $70,000 and add to Roth conversion if the market drops 10% or more. Interest and dividends $12,000, plus about $22,000 my wife brings home after 401(k)and Roth 401(k)contributions.
Taxes are $52,000. Use savings to cover any shortfall. I haven’t decided when to take Social Security yet. Do you think this plan is solid? Thank you, and I look forward to hearing your thoughts. V., Oregon. P.S. If you pick my question from the podcast, I know Joe will be the one reading this. You all might be impressed that this was written so well without a college degree. Hint, thanks to AI.
Al: Yeah.
Joe: Oh, wow.
Al: How about that, eh? it was-
Andi: When I first read it, I thought it said, “Thanks to Al.”
Joe: Yeah.
Al: That’s how I first read it, and I thought, “Yeah, I don’t think I helped on this one.”
Joe: Very well-written. It was like, it flowed very nicely. It,
Al: it’s amazing.
Joe: That’s why the CMA got kind of confused, because the AI doesn’t know what a CMA is probably.
Al: Could be. Anyways, so Joe, quick calculation. yeah, it’s a great plan. The, I mean, y- you look at, I looked at 108,000 of spending. I e- even added another 24,000, for health insurance, although now as I read this again, it sounds like he’s already included that in the 108, but whatever.
Joe: Yeah.
Al: 132,000 spend is 3.5% distribution rate, and that’s before Social Security, so this looks amazing.
Joe: So yeah, that’s just the quick d- back and dirty. And he’s like, “All right, I have this IRA. I’m only spending 84,000.” He’s gonna collect at age 70 $5,200 a month from Social Security-
or $4,000 a month at 67, or 3,000 a month.
Al: Yep.
Joe: He’s only spending, call it 100 grand.
Al: Right.
Joe: Now, 40%, 50% of his income is gonna be covered by Social Security, so- Correct
you’re pulling 50,000 from $3.5 million, 3.8.
Al: Yeah, it gets to be a real low distribution rate.
Joe: Exactly. So the, issue is what he sees is the $2.8 million in retirement. He’s got a 70/30 allocation to equities, so that’s gonna continue to compound over the next several years. And he is right now, I forget, 58 years old.
He’s 61.
Al: 61, yep.
Joe: So he’s got another roughly 15 years before RMDs.
So he’s right on track to say, “You know what? let’s try to get as much money out of here as possible.” If he’s unemploy- or if he got laid off-
and he wants to retire, I would have the wife go 100% Roth in their retirement account, because he was saying something like she brings home 22,000 after the- Her 401(k)and Roth 401(k)contributions?
Al: Yep, yep.
Joe: I would switch hers to total Roth.
Al: Yep, agree with that.
Joe: And then you’d be able to convert more out of y- then maybe just- convert more out of yours to the top of the… I would go to the top of the 22, but he wants to stay under that IRMAA.
Al: I think- it doesn’t matter for the next few years, but-
Joe: he’s 61.
Yeah.
Al: Yeah. He’s- Next c- next, 61, 62. At 63 you gotta start paying attention.
Joe: So, yeah, I would go to the top of the 22. So I would convert more until he turned 63, and I would still do the math. You know, if you go to m- maybe one higher IRMAA bracket-
and get a little bit more money into the Roth, I, still think that makes sense.
Yeah. I, d- Given how much they spend, they’ll… Or- Yeah … they spend very little and they- they’ve saved a ton.
Al: Yeah.
Joe: They’re gonna give a lot of it back to the US, and maybe that’s what they wanna do. But- I don’t think he would listen to this podcast for 10 years if that was the plan.
Al: Yeah. I actually did the math, ’cause I was curious.
Joe: Oh, really?
Al: So, so yeah. So if you go from the first bracket to the second, and it’s a, it’s an extra 100 bucks a month. Round. Yeah, 1200 bucks a year. Round it. 1200 bucks a year. And let’s say you convert 50 grand. You could probably convert 60, but you get close to that cliff then, right? Yep. You convert 50, 1200.
it’s, you know, it’s like a 2.4%- Tax … tax. So that’s how you think of it, right? So yeah, you don’t necessarily wanna pay that. But if that 2.4% additional, call it a tax, on top of what you’re already paying, if that still makes sense, do it. Don’t worry about it. Especially in this case, because that-
Joe: It’s
Al: gonna go to the- th- this money is just gonna keep doubling and, you know, it’s gonna be a big tax problem eventually.
Joe: but yeah, that- that’s- that’s the right way to think of it. I gl- I’m glad you did the math, is that-
Al: Now, that’s only the first… So it gets a l- The first
Joe: tranche. it gets a little better …
Al: it gets a little worse la- Yeah … so you, but you just, the point is you have to do the math. You have to say, “What if I do a conversion that gets over into the next level or two levels or three levels?
How much more am I gonna have to pay for the Medicare IRMAA?” And then it’s like, okay, and then compare that to how much extra you converted to do that, d- and what’s the percentage? Does it make sense? Couple percent, I’m okay with that.
Joe: Yeah.
Al: 10%, no. Y-
Joe: right.
Al: But it’s not gonna be 10%, I’ll tell you right now.
Joe: It’s like y- you have to run the numbers, run the math. And it’s like people hear the word IRMAA and like, “Oh, I don’t wanna touch that.” It’s like, “Oh, I’m scared of IRMAA.” It’s like it’s not that bad if you do- Yeah … the math and you can make the right, the analysis to say, “All right. I’m still gonna be in a better spot even though, yeah, I have to pay a, another $1200 a year to, to do the conversion up to that bracket.”
it’s still p- probably cheaper to do it. Get the money in the Roth. The faster you get the money in the Roth, the better off you’re gonna be because all that growth over the long term is gonna compound tax-free versus compounding tax-deferred. It’s great to have compound growth, and it’s great if the markets continue to go up.
But, you know, especially, I like his plan here, too. It’s like if the market goes down 10%, I’m gonna convert. then don’t care about IRMAA if the market goes down 10%. Yeah. go
Al: for it.
Joe: Go for it. Because you’re gonna make up for it because the recovery will then go in the Roth, and you’re gonna make up, in spades.
But m- most people don’t do that ’cause usually when markets go down, they freeze. They don’t do anything, so.
Al: even though that’s what they should do. Yep. Yep.
Joe: That’s when you gotta be alert.
Al: Gotta pay attention.
Joe: That’s right.
Al: As far as Social Security, honestly personal choice. It does-
Joe: He’s gonna live.
He’s, he bought a case of beer that lasts him 10 years. He’s gonna live at least until 150.
Al: I know, but it, it hardly matters. If it were me, I’d wait till 70.
Joe: Yeah. I think I would do the same. s- that just gives you more time to convert and then control kind of the taxes long term. And then from, you know, 70 to 90-
Al: Yeah
Joe: then you have choice.
Al: and I guess maybe another way to think about this is if you have 2.7 million in a retirement account at 61- Every 10 years-ish it may double. Let’s just be on the conservative side. So it’s 5 million, but then you got another four or five years. So what’s it gonna be, six, seven million?
Joe: Yep.
Al: If he’s, not taking anything out, right? And so we’ll just do seven. so that’s, what, 280,000 of income- Yeah … on the first year.
Joe: First year.
Al: Yeah. And then it
Joe: goes-
Al: RMD … it goes up from there, and then you got Social Security. Now, I know tax brackets will be different then, i- but the way I think about that is I just inflate tax brackets the same way as inflation, 3%, and get a sense of where you’re at.
But more importantly, do you think tax rates are gonna go up or down or stay the same? a lot of people, Joe, tend to think they may go up in the future. And the second thing is one of you is gonna survive the other one, and so eventually one of you is gonna be in a single bracket. You’ll be in much higher brackets, so maybe you wanna get some out now and not worry quite so much about IRMAA.
Andi: Now that Vee’s at least got an idea of next steps for his pile of pre-tax money, he’s ahead of most people: because nearly half of retirees don’t have a withdrawal strategy at all. And that’s the number one spending mistake Joe and Big Al break down this week on a YMYW TV. They get into why the old ‘spend your brokerage first’ rule of thumb can leave money on the table, how RMDs and Social Security taxes can push you into a higher tax bracket, and how the right withdrawal order can help your money last for years longer. Watch the show at the link in the episode description. And to go deeper, download the free Withdrawal Strategy Guide. It covers how much you’ll actually need to have saved, how your asset mix changes your odds of success, and the tax-smart moves, from Roth conversions to smarter sequencing, that can help shrink your future required minimum distributions. Click or tap the links in the episode description to watch YMYW TV and download the Withdrawal Strategy Guide for free. When you grab that guide, choose “podcast” in the “how did you hear about us” dropdown.
Can Friends with $1.4M and a Roth Conversion Puzzle Retire in 3 Years? (Chandler & Monica, TX)
Joe: Okay. Here we go. Chandler and Monica. Little Friends action.
Al: That’s right.
Joe: Who was your favorite Friend?
Al: Oh, I would say Rachel.
Joe: Rachel. Okay. Andi, got a favorite?
Andi: the lady that sang Smelly Cat. What was her name?
Al: Oh, that’s, Phoebe? …
Andi: Phoebe. Phoebe. Thank you. Yeah. Yes.
Al: Phoebe. how about you?
Joe: Joey.
Al: Oh, Joey was fun. He, he, was, he made me laugh the most, I will say that.
Joe: Yeah. I like Chandler too.
Al: Yeah.
Joe: You know, I guess the,
Al: the- Actually, the play between the two of them was really fun …
Joe: yeah. yeah, I haven’t seen that show in quite some time. Pretty sad that Chandler died.
Al: It is, yep.
Yep.
Joe: Let’s see. “I’m a bit of a newbie to the podcast- Okay … but I have learned so much while listening after morning, every morning during my dog walks.”
Okay. So newbie.
Al: Okay.
Joe: we got him for at least couple more months.
Al: Three months. ”
Joe: I’m 55, and the husband…” Or she. Okay. “I’m 55 and husband’s 57.” Okay. “We would like to retire in three years.
Besides, can we afford to retire? The part we are trying to figure out, plus paying for health insurance, is a plan for Roth conversions. Okay, we wanna avoid large R- RMDs later. We have two traditional IRAs, 627,000 and 37,000, a traditional 401(k)of 96, and two Roths of $78,000 each. We got a Roth 401(k)of 38 and a brokerage account of $167,000.
Cash of about 200. We anticipate an inheritance of about 3 to $600,000 in 15 years.” 50, she’s counting the- … counting the years there
Al: Yeah, the, yeah, the-
Andi: Planning ahead for that one.
Joe: That’s the, All right. Just pencil that in.
Al: Yeah, pencil it in, but make sure you have an eraser.
Joe: We, we will have a, pension of $38,000 a year starting when my hubby is 65.
Al: Okay.
Joe: Not sure when to take Social Security, but if we wait until 67, minus 32 and hubby is 38. Where’s this person from? Texas.
Al: Yeah.
Joe: Hubby.
Al: Hubby.
Joe: Is that what, your wife calls you?
Al: No.
Joe: You got it.
Al: You?
Joe: Nope.
Al: Rosie?
Okay …
Joe: currently our gross income is about $110,000, and we save maybe $10,000 a year, but that goes into a high yield savings. We both contribute the full matches to our 401(k), but not sure how much that is. We will spend more in our early retirement years, probably still under $100,000, maybe 85, and then much less. We are frugal and we live pretty simply. We have no debt besides $150,000 on our mortgage. I just can’t make a solid plan for the 60, 65 years with money to live fun years post Roth conversions. Our adult beverage of choice is a Michelob Ultra for the hubby- How many times has she written hubby?
Al: Pretty, seems pretty common there.
Joe: She loves hubby.
Andi: She could just call him Chandler.
Al: She loves hubby.
Joe: Yeah. And any white or rose wine for me, unless we are at a Mexican restaurant, then it’s a margarita 100% of the time.
Al: You like margaritas?
Joe: I do like a margarita. Yeah.
Al: I, do, too. I didn’t have margaritas for a long time because tequila and I didn’t work out too well- No when I was younger, but-
Andi: You got over that?
Al: I got over it-… ’cause I don’t drink shots anymore.
Joe: Got it. Nice. yeah, I don’t have them often, but-
Al: I do at a Mexican restaurant.
Joe: Yeah. Yeah.
Al: Yeah. I
Joe: think I-
Al: I agree.
Joe: Yeah. Yep.
Al: Yep.
Joe: Yeah. I found this new little Mexican restaurant, by my house. It’s been there for years, and it’s like their advertising is so bad.
Al: You didn’t even know it was there.
Joe: Didn’t even know it was there. And then they’re like, “Yeah, we get told that.” And it was empty. It was really good food. Yeah. But I had a margarita. Margarita wasn’t great.
Al: Yeah.
Got it.
Joe: All right. So how do- we got some wood to chop on this one here.
Al: I’ll do, I’ll start with a little math first.
Oh, okay. Yeah. they got about 1, almost 1.4 million to start with.
Joe: And how old are they again? 55 and 57.
Al: Yeah, and they’re talking about working- Three years … three years. So I went three years, 6%. I added 23,000 per year savings, and the way I got that is- I took, they said 3%, they said the match.
I don’t know what. I just assumed 3% match on 110. So that’s 3,300 plus the match, and then a second person, 3,300 plus the match, so that’s 13K, plus the other 10 they’re saving into- The
Joe: high-yield savings …
Al: in the high-yield savings. Okay. So 23. Anyway, they end up with 1.7 million.
Joe: In three years.
Al: Three years.
Joe: All right.
Al: And assuming they spend 85, ’cause they said they, they’ll still be under 100, maybe 85,000. Yeah. I just used that number. So
Joe: they need 50,000, 60,000-
Al: yeah …
Joe: into the 1.5 million. Yeah. That’ll be close.
Al: So I, I just inflated that 3%, three years, 93 grand, which th- that distribution rate, without regard to pension and Social Security, is 5.5%. But the fact that basically all their in, expenses will be covered with their fixed income-
Joe: Yeah …
Al: in just a few years, I’m not too concerned about that. I mean, I guess maybe one way to think about it is we’d rather see cl- like a 4% distri- so it’s 1.5% distribution rate over, which is, But
Joe: hold on. What’s your math? So they got $1.7 million. They wanna spend 85,000. They have a $40,000 pension, so they’re short $45,000- No, but that, that- … not including Social Security?
Al: no, but I didn’t do that, ’cause that doesn’t kick in till 65. The, the-
Joe: Oh, the pension doesn’t kick in until 65?
Al: Yeah, so this is just the stub period.
Joe: I gotcha.
Al: So it’s greater than the 4% that we like to see, but it’s only five years, and it’s not that much over, so that’s why I’m not concerned about this.
Joe: So from 60 to 65-
Al: Yeah, that’s- …
Joe: they have to come up with the whole $85,000 from the 1.7.
Al: Yeah, yep.
Joe: All right, and 85 into 1.7 is 5.5%. Got it. yep. And so they have to do that, so they’re gonna pull 5 to 7% out of their account- over that five-year time period.
Al: But it’s only five years.
Joe: And then five years, the $40,000 come in. They claim Social Security. They’re gonna have-
Al: They have more fixed income than they spend
Joe: than-
Al: Yeah.
Joe: So they’re gonna spend, let’s call it $800,000 total out of that five years. Is that enou- or no, probably more than that. Maybe a million dollars?
Al: they’re, if they
Joe: retire- I’m sorry, eight, I’m, I was, $450,000?
Al: Yeah. if they retire in three years, he’s 60, so let’s just say five years and let’s just use the whole amount. We’ll call it $100,000- Yeah … for five years.
Joe: $500,000. $500,000.
Al: They have 1.7.
Joe: Let’s say the
Al: market blows- That, that’s including no growth whatsoever …
Joe: no growth or no loss.
Al: So they got 1.2 million, plus their fixed income covers their expenses. I like it.
Joe: Yeah.
Al: That’s another way to say it.
Joe: Yeah, really good shape.
Al: Yep.
Outro: Next Week on YMYW Podcast
Andi: Next week on YMYW, Michael in Pittsburgh, K and J up in the Cascades, and Tracy in California all need retirement spitballs and Roth conversion plans, but none of them told Joe and Big Al how much they want to spend in retirement. Tune in to 592 next week and hear the fellas reverse engineer their spitballs. Clever. Plus, how can Sean in Orlando retire at 56 with $4.4 million without getting crushed on taxes? And Dallas and Leeloo in Brooklyn wonder if is there such a thing as too much Roth?
If YMYW makes retirement planning a little less painful for ya, do us a favor and tell a friend we’re over here making fun of finance on YMYW, so nobody has to sit through another boring money show.
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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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.
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC, a Registered Investment Advisor.
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