Show Notes

• (00:50) Should I Claim Social Security at 65 to Fully Fund My Wife’s Roth IRA? (Glen, Pittsburgh, PA)
• (04:18) Should We Use 401(k) to Bridge the Gap Until Social Security? (Fred & Wilma Flintstone, CA)
• (09:06) When Should We Take Social Security and Thoughts on Roth Conversions? (Bill, Shippensburg, PA)
• (15:45) Should Siblings Take Out Insurance on Parents Before Inheriting $10M? Are We on Track for Retirement? (Terry, IA)
• (34:14) Pay Off the Mortgage or Stash Cash in Brokerage and Refinance Later? (Jack, WA)
• (42:54) Should I Include Home Equity in Retirement Savings? (Maya, Seattle)
• (46:02) The Derails

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Transcription

Andi: Should Terry and his siblings take out a whole life insurance policy on their parents before they inherit their folks’ 10 million dollars worth of farmland? Is Terry on track for retirement? That’s today on Your Money, Your Wealth® podcast number 487. Plus, should Fred and Wilma use their 401(k) money for living expenses to bridge the gap until they collect Social Security benefits? Should Glen claim his Social Security at age 65 and use it to fully fund his wife’s Roth IRA? When should Bill take his Social Security and should he do Roth conversions? Finally, should Maya include home equity in her retirement savings? Should Jack pay off his mortgage or stash his cash in a brokerage account and refinance his house later? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Should I Claim Social Security at 65 to Fully Fund My Wife’s Roth IRA? (Glen, Pittsburgh, PA)

Joe: We got Glenn from Pittsburgh, Pennsylvania. Social security question. Now this sounds really exciting.

Al: This is right up your line.

Joe: Coming right back to social security. “I’m 65 on June 1st, 2024, my social security at 65 will be, call it $3,000. If I wait until my full retirement age, I will get $3,300. I could wait the 22 months, but would it be saving savvy to start my social security at 65 and dump the money into my wife’s Roth to fund it fully? I enjoy a little Belgian cherry beer. My wife drives a little Ford Timberline. I’m looking for a new car as I’ll lose my company car and the company cell phone on June 1st.” Glenn’s from Pittsburgh. A.K.A. Steeler Nation. What does he do? So, he’s like, alright, well here, I wanna take the money and run. I’m gonna take it and fully fund my wife’s Roth. I don’t know, what the hell, go for it.

Al: Yeah, go for it, although, you can only do, what’s the amount right now, $7,000?

Joe: Yeah. If he doesn’t have any extra cash to fund the Roth today. There’s so many different ways on how people look at Social Security. So it’s like, okay, well, if I don’t necessarily need the money, does it make sense for me to take it early and invest it?

Al: Yeah, it depends on your rate of return. I would say it this way. The answer is it could make sense to take it early. If you’re savvy.

Joe: Super savvy.

Al: But you’re taking a risk. You’re taking a risk on what the market’s going to do. Me personally. I wouldn’t do it. I would just let it grow. It’s guaranteed by the government. That’s my own personal opinion, but there is an argument for taking it early and investing.

Joe: For sure. But it’s all the assumptions that you run on it.

Al: That’s right. Right.

Joe: So if you look at a certain expected rate of return on the money that if you take it early, you’re going to receive a discount on the benefit that you receive from SSA. So that is a permanent haircut for life. So you have to look at factors of what your life expectancy is. What are your actual dollars and cents that you have outside of retirement accounts that can fund your lifestyle? If you don’t need the money, and if you want to take all of it and invest it, go for it. It might make a lot of sense, or it could reverse on you, and you end up with a couple of bucks less than you would have.

Al: And some people think that maybe there’ll be some kind of needs testing on Social Security where you don’t get it all. I’m not necessarily in that camp. I think it is a fixable issue, but nevertheless, there are reasons to take it early. And I’ll just say one more quick thing. If you’re married, and your benefit is higher than your spouse’s, it would be a good idea to wait, just because then the survivor between the two of you gets the higher benefit.

Andi: Quick question. Does she have to be working in order for him to fund her Roth?

Joe: Yes, and I think she still is because he’s retiring in June and she’s continuing to work, I believe.

Al: Yeah.

Joe: But if she doesn’t have earned income, then you cannot fund the Roth.

Al: Yeah. And you could get $3,000, $2,800, $2,900 a month, whatever. But you could only put $7,000, $8,000 with the catch up. $7,000 plus one, $8,000, the rest of it, you know, just put into savings.

Joe: Yeah, we’re assuming she qualifies for the Roth IRA. If she doesn’t qualify for the Roth IRA, then probably not a good idea.

Should We Use 401(k) to Bridge the Gap Until Social Security? (Fred & Wilma Flintstone, CA)

Joe: We got Fred and Wilma,

Al: The Flintstones again. They write to us a lot.

Andi: I think it’s a different Flintstones. There’s a lot of Fred and Wilmas.

Al: It seems.

Joe: “Hey Joe and Al, I love the podcast. I drive a 1993 Toyota Corolla, and my choice of beverage is an IPA in a nice frosty glass. My wife and I are about to turn 59. We have approximately $2 million in our 401(k), $60,000 in a Roth, and about $150,000 in savings. Wife just retired and is collecting the $3,400 a month with the cost of living adjustment. My pension at 65 will be $2,800 a month with no COLA.” So adding that up, it looks like a pretty good fixed income so far. “And also a lump sum of approximately $280,000. We plan to take Social Security at 70, and expect $4,100 for myself, $3,800 for my wife. We live in lovely California and I currently make $130,000 a year and just started maxing out my Roth 401(k) starting in 2023. Expect to retire between the ages of 60 and 62.” How old is he? 59. In a couple years. “But if the company will ever offer. A golden handshake, which is rare these days.

Al: It happens,

Joe: I’m going to give Al a golden handshake.

Al: I’ve been waiting.

Joe: I’m waiting for my golden handshake. I’m thinking maybe we’ll give each other a golden handshake.

Al: Right. Let’s do that.

Joe: “I’m thinking during retirement, we want to get approximately $8,000 a month for living expenses and vacations. My question for the fellas is. Could we use our 401(k) to bridge our expenses until Social Security kicks in, or take to Social Security early and not touch the 401(k)? Also, should we consider doing more backdoor Roths once I retire at 60 and 62?” He wants to bridge the gap of living expenses. He wants $8,000 a month. He will receive $6,000 a month. $7,000 a month.

Al: Yeah. So call it $6,200 on pensions. Another roughly $8,000 in social security if he waits.

Joe: So he needs a few thousand dollars a month. Call it $20,000/$30,000 a year from the retirement account to bridge the gap for social security or should he take the social security and let the 401(k) grow.

Al: Right and if we just go with the retirement accounts, it’s a little over $2 million.

Joe: I would drain the retirement accounts and let Social Security go.

Al: 100%. That’s what I would do too.

Joe: Because from a tax perspective, it’s great that you’ve saved all that money in a retirement account, but the more that continues to build and grow on you, I mean, it’s just potentially more taxes that you’re going to pay. If tax rates are a little bit lower today than they might be in the future. Your RMDs might cause some issues as well if you let those continue to build because now their fixed income with their pension and Social Security plus the RMDs.

Al: The other thing I would think about is if the tax cuts get extended and they’re still in place when Mr. Fred retires, I would look at Roth conversions on top of it.

Joe: Yep. You know, with Social Security; who knows what’s going to happen to that. But you get an 8% delayed retirement credit each year that you wait. He lives in California. The state of California does not tax Social Security benefits.

Al: Yeah, true.

Joe: The bigger the benefit that you have in regards to Social Security, you know It’s pretty good from a tax perspective because the state’s not going to touch it.

Al: Wouldn’t you want more of your income to be tax free in California than taxable?

Joe: I would drain those retirement accounts. I would look at a strategy like this, Fred and Wilma, is that once you retire, I would max out whatever bracket that I’m in. Maybe if he’s in the 22% tax bracket, I would take out more of the retirement account to max out the bracket, not just enough to live off of, but I would want to get as much out as I possibly can, given whatever tax bracket I’m in.

Al: And part of the reason why you want to think about that, Fred, is you’ve got such high fixed income. So any RMD is just going to be at the highest tax rate.

Joe: Right. He’s going to pay taxes on income that he doesn’t necessarily need. Then he’s just going to reinvest it into a brokerage account, potentially. Because the fixed income is taking care of his needs. Unless he’s like, all right, well, here, we got it at an added income.

Al: Yeah, maybe I’ll try to spend $6,000 or $600 a month or what?

Joe: Instead of $8,000, let’s go to $12,000. You know, and so you got the luxury of that too.

When Should We Take Social Security and Thoughts on Roth Conversions? (Bill, Shippensburg, PA)

Joe: We got Bill from…

Andi: Shippensburg, which only has a population of 5,400 people and is halfway between Philadelphia and Pittsburgh.

Al: Oh, look at that. Okay. You know your towns in Pennsylvania.

Andi: No, Google knows the towns.

Joe: “Hi, Joe. I’m Big Al. Hope all’s well. I’m 65. My wife is 62, both in good health. I’m working full time, making $156,000 annually with a 15% bonus, contributing to my 401(k) plan, 7% pre tax, 3% Roth, plus a $6,500 catch up. My wife is retired. I currently receive a monthly pension of $6,252 gross.” Monthly, Al. So, gotta multiply that by 12. “The pension does not pass on to my wife, currently paying $257 a month in Medicare Part B plan and $174 a month in Medicare Advantage plans for my wife through her former employer. When my wife turns 65, she’ll be on Medicare and transition to the Medicare Advantage plan. My monthly Social Security at FRA is $3,600 a month and $4,700 a month at age 70. My wife’s Social Security is approximately $1,000 a month at FRA. My 401(k) balance is $60,000. I got a traditional IRA of $1.2 million, a Roth IRA of $150,000, a taxable brokerage account of $330,000, cash is $65,000. Current investment portfolio allocations, 50/50, consisting of low cost, broadly diversified stock and bond index funds. He’s got a little international exposure in both stock and bond. Home is worth $350,000, no mortgage, credit card is paid off. One car loan of $38,000, which will be paid off in August of 2025.” Okay, Bill, get to it. What are we doing here? Currently, the marginal tax rate is 24%. Effective tax rate, 18%. Oh, he’s an engineer. I plan to retire in the second quarter of 2025 or first quarter of 2026 at the latest. We’ll leave some inheritance to our son in charity. Here’s the question. When should my wife and I take Social Security? Okay, number two. Your thoughts on Roth conversions. I plan to use QCDs at age 70 ½ . Lastly, I have a 2019 Ford F-150 and a 2022 Cadillac CT5B Blackwing.” That sounds pretty impressive.

Al: It does. That’s a lot of letters.

Joe: “And my wife drives a Hyundai Kona. That doesn’t sound very impressive at all.

Al: Compared to the other one.

Joe: He’s got the Ford F-150 and the Cadillac badass car. She drives the Hyundai Kona. “I drink red wine occasionally and my wife drinks beer. Enjoy the podcast and greatly appreciate the work you do, sharing your expertise and assisting the viewing audience.” Well, thanks Bill from Shippensburg. I mean, he probably has the nicest car in Shippensburg. Thanks Bill.

Andi: Which is interesting, because it doesn’t look like a Cadillac at all to me.

Joe: That’s a nice car.

Al: It is nice.

Joe: Nice little Caddy. Okay, when should he take Social Security? I would say, Bill, take your Social Security at age 70.

Al: I would agree with that. The reason is because your pension,

Joe: Does not have a survivor benefit.

Al: Goes away, no survivor benefit. So you’re going to want to have the highest benefit for your spouse if you pass away. So that would be taking Social Security at 70. That’s kind of an easy one.

Joe: I would tell your wife, take an NFRA. It’s not going to make a difference.

Al: Yeah, or even early. Maybe after you retire. But you don’t really need the money. Anyway, you could take it when you retire, or you could have her take it at full retirement age. But yours, you want to wait until 70.

Joe: Yep, hypothetically.

Al: Yeah, spitballing it then.

Joe: Presumably. Allegedly. What’s my thoughts on Roth conversions? Oh, come on, Bill. First time? Convert everything tomorrow? No.

Al: Oh boy, there we go.

Joe: He’s got $1.5 million in retirement accounts. He makes $156,000 with a 15% bonus? So in the 22 % tax bracket, I would convert to the top of the 22% tax bracket.

Al: Yeah, that makes sense too. You don’t need to convert all of it because you’re going to do QCDs at 70 ½ . But the fact that you have so much ordinary income from pensions and future social security.

Joe: It’s gonna be in the 25 % tax bracket and then regardless. So then he does QCDs. You still probably want to have some money in a Roth. I mean, you can at least take advantage of the lower tax rates now . You go to the top of the 22% for the next couple of years, get a nice little pot of money tax free. You want to do something special down the road and you need to take more money out of your retirement accounts. Going on a cruise, you’re doing this, you’re that, I mean, at least he has some flexibility by pulling it out of the Roth without, you know, jacking up your Medicare. I mean, look at how tight this guy is. He knows his premiums to the penny. And so he probably does not want to get into different tiers on Medicare. He knows what Irma means and everything else.

Al: Yep. I agree with that. That was going to be my conclusion, but you beat me to it, but all good. I 100% agree.

Joe: Thanks, Bill.

Andi: There are over 2,700 rules around claiming your Social Security benefits, so it’s a good idea to really explore all your options before you file. Download our Social Security Handbook and figure out how to maximize your monthly Social Security payments. This guide explains who is eligible, how Social Security benefits are calculated, the difference between collecting early vs. late, working while taking Social Security, details on spousal, ex-spousal, and survivor benefits, and how your Social Security is taxed. You’ll find the link to download The Social Security Handbook in the description of today’s episode in your favorite podcast app, along with a few other financial resources that are yours free, courtesy of Your Money, Your Wealth. Don’t forget to share the podcast and spread the knowledge.

Should Siblings Take Out Insurance on Their Parents Before Inheriting $10M? Are We on Track for Retirement? (Terry, IA)

Joe: “Hey, Joe and Big Al. This is Terry, my fake name, from Iowa, my fake state.”

Al: Doesn’t everyone use a fake name?

Andi: It’s getting to that point.

Joe: “I love the podcast and listen anytime I’m driving or operating equipment. Which is quite often as I’m a farmer and get a lot of windshield time.” Oh, I like that saying. A little windshield time.

Al: Yeah, right. Where you can kind of think about stuff.

Joe: Yeah, windshield time. “I’m 36, my wife is 37. She’s a teacher. We have two kids, 4 and 2. Kids have some outdoor cats. And we’re planning on getting a dog in the future for the kids. I drive a Ford F-250. I prefer an ice cold Busch latte or a Miller light. I have a two part question. I’m looking for a spitball. First question. Are we on track for retirement? As mentioned, I’m 36 and my wife’s 37. I plan to work until 65 and my wife will likely retire around 60, but honestly, who knows that’s a few years away. I’m fully self employed as a farmer and own a small farm supply business with no employees. Current income is $250,000, but I have quite a bit of accumulated depreciation. So AGI is much less. Currently spend about $120,000, not including investments or retirement savings, but does include the mortgage. I would like to spend the same or a little bit more in retirement. We are currently maxing out both our Roth IRAs and the family HSA. Wife is putting $12,000 a year into the 401(k) and we are putting $20,000 into a brokerage account. The rest of our income is being saved for working capital on the farm. I don’t like operating loans at 8%. I also have a home mortgage of $15,000 a year but will be paying off in five years and an AG real estate mortgage.

Andi: Agriculture?

Joe: Yeah, I think so.

Al: Yep, I think so.

Joe: Yeah, “$25,000 a year that will be paid off in three years. That will soon provide extra capital to allocate elsewhere.” All right. So network worth $2.5 million financial breakdown, cash assets, including business working capitals, $1.1 million brokerage account, $100,000 in Roth, $100,000 in IRAs, $50,000, HSA $21,000. Using an HSA like an IRA. Wife’s 401(k), $50,000.” Alright, Terry, this is getting long.

Al: It keeps going.

Joe: “Other equipment and AG real estate, $1.1 million. He’s got UTMA and 529 plans $30,000. Okay, I would like to use the majority of the $1.1 million in cash to produce more farmland and possibly a vacation home upon retirement. In retirement, we would like fixed income from our real estate farmland that is 0% vacancy rate of about $75,000 in today’s dollars. Do you think we’re on track or should I consider opening up a solo 401(k) for my small business? Currently, I’ve favored the tax brokerage account so I can use those funds to buy more farmland in the future. My thought process was that I can legally structure my depreciation from equipment purchases and inputs to keep me in the low tax bracket from time to time to cash out my long term capital gains at 0% or 50% levels and continue to step up the gains till I need the cash.” Terry’s on top of it.

Al: He is!

Joe: He knows the farm. He’s got windshield time.

Al: He’s got a lot of time to think about this.

Joe: And he’s like, you know what? I like to keep cash liquid. I like to buy more farmland. I’m gonna, you know, I know how to farm. I’m gonna keep doing this for another 20 years or so. Wife’s a teacher. Stable job. She’s got her 403(b). You know, I love what he’s doing.

Al: Yeah, me too. I actually even did a little math, Joe, and, and with his savings of about $45,000 and taking out all the working capital, $300,000 to start with. He still ends up over 29 years, $6 million, 4% of $6 million. Let’s just call it $240,000. Then he got the real estate. He thinks there’ll be $75,000 of income in today’s dollars, which will be $175,000 ish at a 3% inflation rate. So he has over $400,000 of income and the spending at $120,000 right now with 3% inflation would be $280,000. Right. And that’s before social security and wife’s teacher’s pension if she has one. So yeah, this looks really good.

Joe: Yeah. And he’s got a certain expertise that a lot of people don’t. He probably knows what lands to buy, he knows his craft pretty well. Where you know, I would go in there and I’d probably get oh, I want to start my own business or hey You know what? I want some windshield time. I’m sick of desk time. I Want some cold bush light on a Friday night?

Al: Can you imagine Joe if you and I bought a farm and tried to figure it out.

Joe: Terry would clean us out.

Al: We could have dogs running around. You wouldn’t have to walk them then because they’d be all over the farm.

Joe: I love what he’s doing. I think you keep doing what you’re doing. Say what you got, you know, maybe increase your wife’s 403(b). You know, maybe you max that out.

Andi: Should he open a solo Roth 401(k)?

Joe: He could do that too. It depends on the income and what the x-ray is. I like how he’s building up the capital to buy more land. So, all right, “question number two. My parents are in their mid 60s and they’re working on their estate plan. They currently have some farmland as well, worth about $10 million.” I knew this whole family was just,

Al: He learned this from a very young age. He’s got it down.

Joe: Yeah. It’s like Yellowstone ranchers, but they’re the farmer side.

Al: Yeah. That’s right.

Joe: Now if you just keep buying that land in Iowa. We’ll own the whole damn state. It’s going to be called Terryland.

Andi Terry land?

Joe: Yeah. It’s not my real name.

Al: That’s a fake name.

Joe: “So they got farmland of $10 million with a $2 million mortgage. The plan is I will inherit this with my siblings. There are four of us, so I’ll get 25%. I have two siblings that will need to be bought out at that time as they are not involved in the business with me and my other sibling and would prefer the cash. The estate planner that my parents have recently met suggested that my sibling and I, that farm together, buy a whole life insurance policy on my parents that doesn’t pay until they are both gone. And then, use the proceeds to buy out the other siblings that want cash. We do not want to sell any of the land, if we can avoid it. I think the whole life insurance idea is terrible advice and we would be better off investing whatever we can afford in low cost index funds in a brokerage account and use that to buy out the sibling in the future. What are your thoughts? Thanks again. Love the show.” Okay, so the parents have $10 million land, Al. And so the estate planner, he didn’t say estate planning attorney either, he said the estate planner says, set up a life insurance, put it on your parents lives for $10 million. And then when they die, you’re going to get $10 million of cash tax free. And then you take that money and you pay off your other siblings, and you walk away. Everyone’s happy. What do you think? You like it?

Al: No, I don’t, Not at all. Because I mean, they’re in their sixties. I mean, they could,

Joe: I know if they were in their eighties, I would say okay.

Al: They could live 30 or 35 years or more. Paying these very high premiums for all this time. No, I would…

Andi: Does the estate planner get the commission?

Al: Well, yeah, there’s that too, but I, yeah, I would rather just save it, invest it, and if I don’t have enough. When my parents passed, I just financed it. I mean, this, this guy, this guy knows how to run a farm. He can finance it and get that thing paid off.

Joe: Terry and his brother or his sister, well, I’m guessing it’s his brother or the farmers with the windshield time and they’re buying more land and my mom and dad pass their in their sixties, right? Like you said, it’s like 30 years. Terry’s going to probably be retired at that time and he’s going to have more land than his pops and his mother. And so it’s like, all right, well, mom and dad die. And then the other siblings want some cash. He’s going to write a check and say, here you go, because he’s going to be, like I said, he’s going to own half the state of Iowa.

Al: Yeah. And you’re right. So let’s say he’s in the sixties and maybe it’s like, I don’t want any more farmland. Let’s just sell it all. Yeah, I wouldn’t do the policy. I think that’s a terrible idea. I agree.

Joe: Here’s the planning though, is that, it’s used to pay like a state tax. I don’t know, $10 million. They’re both married. Do you think they’re going to be subject to the state tax? What’s the limit today? What’s it going to?

Al: Well, a great question. So the limit today is $13 million apiece, something like that. It could go in half. So let’s just call it $6 million plus maybe $13 million for the two of them.

Joe: I don’t know what the estate tax law is in the good state of Iowa.

Al: I don’t either.

Joe: On the federal side right now, you need $23 million. Any dollar above $23 million is going to be subject to an estate tax. Everything gets stepped up at death, so let’s say that the farm is worth $10 million. Mom and dad pass away and then it gets automatically stepped up to $10 million. His brother and himself, they’re like, all right, you know, we’re going to take the land and then we’re going to pay the other siblings $5 million. So they could take a note, pay out the siblings on the $5 million and go from there. The issue is that maybe this farmland continues to grow or the estate tax limitation goes down. And let’s say the estate tax limitation is $10 million and now the farm is worth $20 million. So there’s $10 million that’s going to be subject to an estate tax, a death tax. So, that’s not capital gains, that’s not ordinary income, it’s on their death and whatever the estate is worth, the farm, you know, any other assets that they own, is they’re going to take a look at what the gross estate is. Add everything up in anything over hypothetically, this $10 million is going to be subject to a tax. So it was as high as 50 some odd %. So I don’t know what the tiers would be, but let’s just assume, what’s the highest estate tax rate today?

Al: 40%.

Joe: So 40%. So 40 % of $10 million is $4 million. They would have to cut a check for $4 million to pay the estate tax. So sometimes they’re like, okay, well here, we’ll have to liquidate the farm to pay the estate tax. Big Terry doesn’t want to liquidate anything. He doesn’t want to sell a dime of that land. So the estate planning would be, alright, you set up an irrevocable trust that is outside of their taxable estate to help pay the estate tax. And so maybe what this estate planner was referring to. So then you set up a second to die life insurance policy on the two parents. They pay the premiums. So when they die, the premiums then would pay the estate tax so they don’t necessarily have to liquidate the farm to pay the estate tax. And then they have to pay off their siblings. So it could get complicated here depending on how large this farm grows, what price it does, and what happens to estate tax. Again, to the point what Al said, is that The parents are too young to do this type of planning, in our opinion. If their estate was worth $30 million, then I would say, yeah, probably start thinking about it. Because it’s only going to grow from there, and they’re already above the estate tax limitations. So, I don’t know, I kind of went on a rant there. Did that all make sense? I kind of lost my stream of consciousness.

Al: It made sense. I mean the way you explained it, and that’s, that’s why. Financial planners, estate planners sometimes recommend this. The flip side though, is there can be rather large commissions and these types of products. So just be aware of that with your eyes open before you go in and do something like this. I think in general, I’m not a big fan of this kind of planning, but it’s got its place. And I think it has its place when you have a business or real estate with zero liquidity and zero ability to finance then for any of them to have a state tax issue. I’ll tell you one other thing: I had a client years ago that didn’t have near enough liquidity to pay for the state tax for all this real estate that his father owned, but he was able to get the IRS degree. It was a business and as a business, he was able to pay the tax over a 10 year period. So I think there’s options there.

Joe: I just think the parents might be too young. The estate plan, yeah, get wills, get trusts, a revocable trust, get powers of attorney, make sure that you have beneficiaries, you avoid probate, you avoid all of that stuff, but then that’s kind of the basic estate plan. And then from there you go into layers. It’s like, all right, well here’s they’re going to be an estate tax. So then what type of planning do you want to do to avoid the state tax? Because you can always zero out the estate tax. You just have to give up control. So then what does that mean? Or there’s going to be added costs. So you’re either going to pay the estate tax or I’m going to pay insurance premiums. What is going to be cheaper? Well, probably the insurance premiums are going to be cheaper because you’re leveraging dollars. You got a $10 million policy. Your internal rate of return on the death benefit is going to be a lot higher than you could do in mutual funds, depending on how long.

Al: Yeah. It depends. Well, the insurance companies aren’t dumb though, right? So they’re going to make their money in general. I think actually on average, the insurance company gets their cut and this all works out, but you have another party that’s taken some of the dollars. And the insurance company and the agent probably sold you the policy. If the parents were to die prematurely, then of course this is a great strategy. But I don’t think you can count on that.

Joe: Right, If we know when we’re all gonna die, this planning is super simple.

Al: Yeah, true.

Joe: Right, but then, I don’t know, I’d much rather have complicated planning than know exactly when I’m gonna die.

Al: Yeah, you know, so let’s just go over…

Joe: Would you like to know your death date?

Al: I really don’t want to know. I’d rather assume it’s way far away.

Joe: All right, Terry, I could go on and on and on, but I think this planning is tight planning with the right circumstance. From the facts that we’ve heard, given what your parents have and their age, I just don’t think this type of planning is appropriate today, but it could be in the future. There’s several different other options that they can do versus setting up an irrevocable life insurance trust and buying a giant life insurance contract. You know, there’s different types of mechanisms to avoid the estate tax if that’s what you’re doing. It sounds like this person is saying, Hey, they’re not worried about an estate tax. They’re worried about liquidity at death so that they can pay off their heirs and that the brothers pay this life insurance contract that has the parents as the insured to pay off the other siblings. I don’t think that’s the right planning because I think he’ll have plenty of cash or he could finance it out.

Al: I think so too. And then even one other thing, I know he doesn’t want to sell any land, but what if he did sell a few, a part of this, right? To make this happen without financing it, if he didn’t have enough capital. To me, there’s so many choices on how to do this and, but you’re probably talking 30 years down the road.

Joe: Yeah. You just have to pencil it out and just run different assumptions and say, all right, if I do this, here’s this plan, here’s this strategy, here’s this strategy, and then you can figure out what is the most optimal strategy and to see if that coincides with what your objectives are and then go from there.

Andi: It’s important to plan now for what could happen in the future. Make things as easy and straightforward as possible when it’s time for your beneficiaries to inherit your assets by giving them a document that contains everything they need to know about your life, your accounts, and your estate before you pass. Download our Estate Plan Organizer for free. It’s organized into helpful blank sections so that you can simply fill out everything, from your financial account details and insurance policies, to your contacts and your final wishes. Put it in a safe place, give a copy to your family, and don’t forget to update it regularly. To get your free Estate Plan Organizer, just click the link in the description of today’s episode in your favorite podcast app.

Pay Off the Mortgage or Stash Cash in Brokerage and Refinance Later? (Jack, WA)

Joe: So, we got Jack from Washington State, “He goes, hey, YMYW team, thanks for all the great work and continue to school us on how great Roth accounts are.

Andi: That’s what this show’s all about.

Joe: That’s it. “First, the important stuff, I’m 32 years old, and my partner’s 34. We have two dogs, an 11 year old cattle dog, and a 10 year old catahoula,

Andi: Catahoula!

Joe: Washington State. Jack’s got some cool dogs. Alright, what is he doing? “I love wandering around the beautiful Olympic Peninsula, we are lucky enough to call home. I enjoy an IPA with an ABB above 7%. Alright, the GF enjoys housing a few white claws when the mood strikes.” Alright, I’m not a big white claw guy.

Al: I don’t think I’ve ever had it.

Joe: I’ll drink Truly.

Al: I never had a Truly either.

Andi: What is Truly?

Al: It’s not my thing?

Joe: It’s a seltzer.

Al: It’s a hard seltzer.

Andi: It’s one of those foo foo drinks you’ve started liking so much?

Joe: Yes. People don’t judge me when I drink them on the golf course at 9am versus cracking a Coors Light.

Al: Got it. Okay.

Joe: They think it’s like Celsius or something, I don’t know.

Al: Yeah. Right.

Andi: You hope.

Joe: I don’t really care on a Saturday. Yeah, if it was Monday morning, although that would be something. Not saying there’s anything wrong with that.

Al: You just implied that.

Joe: “Here’s the question. We are about to close on our first home. We’re putting 20% down and settled on a 7.1% interest rate. We’re debating how to go about paying it off and how aggressively we should be. We currently max out on our retirement accounts, pre tax 401(k), backdoor Roths, two Megatron barn door Roths.” Wow.

Andi: They’ve been listening for a while.

Joe: Those are big Roths.

Al: Yeah, they’re gigantic.

Joe: Gigantic. “And we’re thinking about putting all of our extra cash towards paying off the house. We also have a solid amount in a brokerage account already.” A solid…

Al: Solid, yeah,

Joe: Solid. How’s your portfolio? Solid.

Al: It’s solid.

Andi: Good for doing math.

Joe: We have a solid amount.

Al: He doesn’t even have to give us the amount. We know it’s solid.

Joe: It’s solid. It’s strong. It’s a very strong brokerage account. “It’s about $550,000 for those of you that want to keep score here. Is this a smart idea at our age? I know how valuable time in the markets is, especially in our early 30s, but 7.1% rate is creeping up towards what we can expect long term from the market. Should we stash the cash in the brokerage account and potentially refinance when and if rates come down? Or pay down the principal directly as the money comes in. Thanks again for all you do, and especially Andi, for putting up with all the riff raff.” Riffraff, what the hell? “Can’t imagine the show without her.” Well, neither can I. Jack.

Andi: That’s very kind, Jack. Thank you.

Joe: Alright, 7.1% interest rate. That’s a little hard pill to swallow.

Al: Yeah, I don’t like that rate either.

Joe: Yeah, but it’s not that bad. You probably have recency bias because you probably know like 2.5%.

Al: My first home loan in the 1980’s was 12.5%. Then I refinanced it at 10% and I couldn’t believe my good fortune. And then I remember my parents saying, well, we had a mortgage under 5% when we started and I’m thinking…

Andi: Wow!

Al: it’s not going to happen. Yet it did and quite a bit lower. What would you do Joe? 7.1% versus stashing more money in the market?.

Joe: You know, I’m kind of living this right now.

Al: Yeah, you are. This is recency bias for you.

Joe: This is right. Because I had a mortgage of 2.5% and it seemed like my payment was like $0.50 a month.

Al: It was a great house.

Joe: Oh, great house. Loved it. And then, you know, the lady friend, the wifey poo, wants to move three houses down the street.

Al: A little bit bigger home.

Joe: Yeah, a little bit bigger. Single, you know, you got to have

Al: a single story.

Joe: a single story. With small kids, you don’t want stairs, I guess. I don’t know. I had stairs when I was a small kid and look at how great I am.

Andi: No, Joe, she’s thinking of you and your old age, making sure you don’t have to take the stairs.

Joe: Shots fired. Shots fired!

Al: Yeah. I was wondering the same thing.

Joe: So anyway. So then it’s like, okay, well now my 2.5% mortgage is now 7% and I’m like, this sucks. So do I just throw a bunch of cash at it, quite a bit, or do I suck it up and then just see if, and when interest rates go down. It’s not like I can’t afford the payment. That’s one thing. I mean, if you can’t afford the payment, then don’t do it. But it sounds like Jack and Jill from Washington, they can afford it. It’s like 7%. Okay. This is our first home. Here’s the payment. We want to get rid of this thing as soon as we can. My advice. No, I’m not giving advice. My thoughts.

Andi: Your spitball. Your suggestion.

My spitball is that, Yeah, you need liquidity. I don’t know if I would want to take the $550,000 that he’s got in the brokerage account and start throwing a bunch of cash at the mortgage. Even though I don’t like 7.1%, I think at 30 years old, with the amount of money that he has liquid. I would just pay the payment and keep chugging and see what happens.

Al: And just when you get a chance to refinance later to a better rate. I think I agree with you, particularly when you’re younger, like in your 30s, I think that compound savings is pretty hard to beat. I think if I was in this situation at my current age, Which is in my 60s. I don’t know. I would probably be paying that thing down as fast as I could.

Andi: What do either of you think is the likelihood that interest rates are going to go down in, say, the next 10 years?

Joe: I would, I don’t know.

Al: Be careful. That’s just, we don’t know. I mean, if I was betting, I would say it’s more likely they’ll come down than stay the same and go up.

Joe: But yeah, but I mean, let’s see if they come down again to where they were. That means that the market blew up and some really bad stuff is going on.

Al: And the economy is terrible, but we know markets are cyclical. To me, it seems like it’ll probably happen, but that’s the thing about interest rates. We thought interest rates were going to go up for like 20 years before they actually went up. So the real answer is we have no idea.

Joe: 30 years old, they’re doing a great job saving sound like they have a lot of money. How big is the mortgage?

Al: Yeah. I don’t think we know.

Joe: We don’t know how big the mortgage is. I mean, they got a, they got a solid. I’m going to use his words. They got a solid brokerage account.

Al: They do.

Joe: Then if something happens, then at that point, just pay the thing off.

Al: Yeah, and that’s what you said. You used to say that when interest rates were lower, just save the money, bank it, you’ll probably do better in the long term. No guarantees, but likely you’ll do better in the long term. But if you ever want to pay it off, you got the money, just pay it off. I think the same thing still applies here.

Joe: Yeah. So, but yeah, Jack, I feel your pain. I’m right there with you, bro. So now I’m just gonna pay off my mortgage.

Al: You gotta go with my approach and pretend like you’re in your 60s. Yeah, pay that thing off.

Should I Include Home Equity in Retirement Savings? (Maya, Seattle)

Joe: We got Maya from Seattle. Maya writes, “hey, should I include my home equity in retirement savings? I say no.

Al: I say no also. Unless you’re planning on selling your home in retirement and downsizing and you, after closing costs, you still have some extra equity that goes into cash or investments. Yeah, you can include it then, but that would be the only time.

Joe: it’s a personal use asset, so most of the time we do not include your primary residence in any type of retirement calculation. I think some advisors do. I don’t know, you could probably utilize a reverse mortgage or a home equity conversion mortgage (HECM).

Al: Yeah, you could. I, yeah, but you and I generally don’t like to, I mean, it is an option. It is available, but I don’t like to think about making that your, the cornerstone of your plan.

Joe: Yeah, for sure. A lot of people do though when they write in, it’s like, here I have X amount of dollars in my retirement account. I have X amount of dollars here on, I have X amount of dollars in equity.

Al: Yeah. They do.

Joe: Yeah. They just want to, you know, pump their tires a little bit.

Al: They do. They say, you know what, Joe and Al, my net worth is $5 million. And then you look at it, it’s mostly real estate, which is great. But we know, I know personally, real estate equity can go up and down.

Joe: Okay. Good. We’re back. Thank you all for the questions and we’ll see you again next week. All right Al, are you going to be here?

Al: I will be.

Joe: Egypt or where are you going to be?

Al: I will be in the studio.

Joe: Okay. All right. Wonderful job, Andi, as always, thank you very much. And again, we’ll see you guys soon. Show is called Your Money, Your Wealth®.

Andi: Dogs, ABV, cherry beer, Pittsburgh, and frosty glasses in the Derails at the end of the episode, so stick around.

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Now, if you haven’t met with one of the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors, what are you waiting for? Get a free deep dive with the goal of optimizing your entire financial life. Pure Financial is a fee-only financial planning firm. Pure is also a fiduciary, that’s why Pure’s tagline is “Trustworthy By Design”. Click the link in the description to schedule your free assessment or call 888-994-6257. Whether you meet in person or online via Zoom, the Pure team will work with you to create a detailed plan that’s especially tailored for 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.

The Derails

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