Karsten Jeske, Ph.D., CFA
ABOUT Karsten

Karsten “Big Ern” Jeske, Ph.D., CFA retired in 2018 at the age of 44 after a long career in academia, government and Corporate America. He previously taught economics at Emory University in Atlanta and worked at the Federal Reserve Bank of Atlanta and BNY Mellon Asset Management in San Francisco. He uses his new-found time [...]


Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
August 27, 2019

What’s a safe withdrawal rate from your investment portfolio when that money has to last 50 or 60 years because you’re part of the FIRE (financial independence/retire early) movement? Karsten Jeske, Ph.D., CFA, aka “Big Ern” from EarlyRetirementNow.com shares his experiences. Plus, will listener Paul reach $5M by retirement? Can monthly payments from an IRA annuity be used for qualified charitable distributions (QCDs)? And what happens if you’ve made mistakes with your IRA that lead to penalties?

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Show Notes


00:59 – Getting to Know Karsten “Big Ern” Jeske, PhD, CFA

Joe: Karsten Jeske. Is it Jeske or Yeskee?

Andi: Karsten? Help us out here.

Karsten: Karsten Jeske (Yeska).

Andi: Jeske. (Yeska)

Joe: See? Killed it.

Karsten: But I’ve heard everything. I’ve heard everything from Jessica to jet ski.

Andi: Jet ski! (laughter)

Al: I’m Clopine and I’ve been called clothespin, Cloping, with a G, called all kinds of stuff.

Andi: Joe Anderson’s got it pretty easy.

Joe: Yeah, I do. So Big Ern they call you. Tell us about why they call you Big Ern?

Karsten: Well initially I blogged anonymously and while my blog is called Early Retirement Now, so ERN. People called me Ern, and then Big Ern. And the name just stuck and I’m a big guy, I’m 6′ 6″ tall. So I really like that nickname and I just kept it.

Joe: So did they call you like big Karsten prior to Big Ern?

Karsten: No no no. Never did that.

Al: It doesn’t roll as well as Big Ern.

Karsten: Doesn’t really roll as Big Ern.

Joe: So you’re retired at 2018, at the age of 44.

Karsten: That’s right.

Joe: So tell us about your journey, my friend.

Karsten: So I came to the U.S. in 1995, I was 21 years old. I came here for grad school. Got my first job here in 2000, at the Federal Reserve and then switched over to the private sector in 2008, right at the, pretty much at the wrong time. Right around the time when you had the global financial crisis. Lots of job cuts. And around that time I got a new job at a big asset manager. So I was always planning to do a little bit earlier retirement than normal. But then you see job cuts everywhere in 2008, pretty much every year since 2008. You see that there’s always some restructuring, job cuts. So you always have this concern that when does it hit me. So I always had relatively high savings rate. So and then after 10 years of having a savings rate of probably around 50% to 60% while I was working in the private sector, I thought well there’s no more need to work any longer. I feel I have enough money to have a pretty nice annual budget in early retirement and there’s a budget that will hopefully last for 50 to 60 years. Because my wife was 35 when we both retired. So my side it’s probably about a 50 year horizon, on my wife’s side a 60 year horizon. So I did the math and just came out that it

would be crazy to keep working.

Joe: Hey where are you from originally?

Karsten: I’m from Germany originally.

Joe: What’s the average savings rate in Germany? Because I know the U.S. is relatively low to a lot of European countries.

Karsten: It’s definitely higher than in the U.S. It’s probably somewhere around 20% or so. But then Germans are also really bad with where they put the money. The bulk of savings are in savings accounts and whole life insurance contracts. So I basically combine the best of both worlds, a high savings rate and then also the courage to invest your savings in something more productive. So especially stocks and real estate. That’s what I did.

Joe: So Big Ern and I are the same age.

Al: Yes. And you’re still working.

Joe: I know and I do this for a living.

Al: What’s up with that. Well maybe you like it.

Joe: It’s like I’m an obese trainer.

Al: Maybe you just like working.

Joe: Yes. Love it, Al.

Al: You love talking with me every week.

Joe: Walk me through, because we’ve interviewed quite a few people in the FIRE movement, which I find fascinating. But I think some of the individuals that we’ve interviewed are going to crash and burn and I’m not going to say any names. And I think some of them are going to be very successful throughout their overall early retirement or FIRE retirement. When you look at a sustainable distribution rate, and at 44 you can’t be taking 4% out of the overall portfolio.

Karsten: Oh no.

Joe: So what are some of the things that you’re looking at to make sure that your money is going to last you the next 50, 60 years.

Karsten: I’m doing basically what everybody is doing, whether it’s a traditional retirement or early retirement. I’m looking at historical returns and look at what would have been the failsafe withdrawal rates even at the worst points in time in history. And the worst time in history to retire would be either1929 right before the global financial meltdown back then, or in the mid-1960s, where you had pretty flat returns for about 8, 9 years, then the 1973, 74, 75, recession hit, then more recessions in 1980 and 81, 82. So even if you had retired at these worst possible times in history and you have a portfolio of somewhere around 60%, 40%, maybe 70%, 30%, even 80% 20%, you would have lasted 50 to 60 years in retirement withdrawing that initial say 3.2%, the withdrawal amount and then adjusting that for inflation. That would have lasted you 50 to 60 years. It’s amazing how just reducing your withdrawal amount from 4% to maybe into the lower 3% that would have lasted for a lot longer than the 4% rule.

Al: How did you come up with the 3.2% rate because that’s what everyone hears is the 4% as a safe withdrawal rate which, by the way, was designed for a 65-year-old and maybe to last about 25 years. But at age 44, obviously, you have to come up with a different number. How did you figure out it was 3.2%?

Karsten:  I mean I have my own calculations. I have a spreadsheet that I can use to do these historical simulations and then you can obviously personalize that. So you can target your personal preferences or your personal asset allocation. You can also factor in what kind of additional cash flows you may have and that could be positive or negative. So for example, in my case, I’m still getting a little bit of deferred compensation from my old job. So that’s going to knock about a percentage point or so off my withdrawals right now for the first 3 years in retirement. Then I’m going to get a small pension at age 55. I’m going to claim Social Security at age 70. So my wife and I, we’re going to do that Social Security hacking where the higher earner waits until age 70, and then she will claim it at 62. So there are these additional cash flows on the positive side. There’s obviously also a little bit of additional cost as we get older, we should take into account that we probably have some higher health expenditures when we get older. So factoring all these additional expenses and incomes, I have a way of exactly pinning down what would have been the exact amount you could have withdrawn from your portfolio if you had retired in say September 1929. So I do that for every possible starting month in history. But of course the failsafe retirement dates and the failsafe retirement to safe withdrawal rates, they would occur somewhere around 1929 and 1965, 66.

Joe: So Big Ern, another common theme we get with people that come on this show that are in the FIRE movement, they write a blog. And then some of these individuals end up making more money on the blog writing than they did when they were working

Al: Or as much.

Joe: So, are you kind of in that camp?

Karsten: No, not at all. At least not now. If that ever happens, it would be nice. Even though I see that there’s a certain irony there. I’m trying to educate people about safe withdrawal rates and then through this irony, I actually don’t need to factor any safe withdrawal rates myself anymore, because now I’m bringing in the big bucks from the blog which right now, I’m not.  I’m making a few hundred dollars a month from some advertising income.

Joe: Well, not after this show. Trust me.

Al: I was going to say that’s twice as much. That’s a hundred times more than us.

Andi: We should actually point out the fact that Big Ern has done a great deal of research on this and it is all available on his blog at Early Retirement Now. You’ve actually got a working paper on this, don’t you?

Karsten: Yes, I published a working paper. It’s out on my blog. If you look at the top of the page, there is a menu item, Safe Withdrawal Rate Series. I’ve written dozens of blog posts on this entire topic.

Andi: Aren’t you up to like 32 now or something?

Karsten: I think 31.  I’m working on 32. It should be coming out soon.

Joe: So you’re working at this asset manager and you started blogging and then it was just Ern at that point. You don’t want to say your name, because you didn’t want the big money manager to find out that Big Ern is really looking to punch.

Karsten: You didn’t want to do that, so in 2016 I started with the blog and I still had one promotion that I was eyeing and I got a nicer office for the last 2 years in the office. So I got that promotion in late 2016 and then in 2018, I had enough and retired.

Joe: So all right. Retiring at 45, 44. What does the day to day look like? Because we work with retirees that are 65. And then all of a sudden at age 70, they’re bored, they’re miserable, they’re depressed. They’ve lost a sense of purpose, identity and things like that. Because you get kind of stuck in this routine. But with you at 44, I mean that’s a long time of retirement. So what are you going to do besides the blog, I guess. What’s the day to day look like in Big Ern’s life?

Karsten: The last 14 months we traveled 11 months and we just returned from another trip this summer. So last year we were on the road for 7 months. Then we came home as basically we didn’t have a home for 7 months. We bought a house while we were traveling, made an offer on the house while we were traveling. The transaction closed while we were in Australia and then friends of us picked up the keys and looked after the house for us until we came back from the trip in late December last year. So then we moved into our house. First few months in the house we had to do a few home renovations so that keeps you busy, and so then in April we left again and just came back in August this month. And so right now, I’m definitely not bored. So this is actually going on vacation for so long. And first of all planning it all and then doing it all and going from place to place, country to country, doing sightseeing. It almost feels like a job. I mean it feels so much like a job. You almost have to take a vacation from your vacation every once in a while. So after 5 days of sightseeing, you have to take 1 or 2 days off and just goof off. And we have a little daughter. She is 5 years old. So if we just goof off we just go to some park or playground and I just read something, I work on my blog. I mean you’re right, that a lot of people in retirement they face this issue of boredom. I haven’t felt it yet even though I mean now we are back in our permanent location. Our daughter will start kindergarten in a few weeks. I’m thinking about could this happen to me that I’ll be bored. I hope not because I have my blog. I might do some other side projects. I want to get back into teaching again, doing a little bit of teaching on the side. Again, this is not going to be a job that I need in terms of the income, because I did my safe withdrawal analysis under the assumption that I’ve got no additional income from the blogging or teaching or anything. So there’s just going to be for fun and for staying active.

If you love hearing stories from the FIRE movement like Big Ern’s, click the link in the description for this episode in your podcast app to go straight to the show notes to read the transcript of this interview and to listen to previous FIRE episodes. Get more early retirement inspiration from Tanja Hester, who retired before the age of 40, listen to her in YMYW episode #211. Grant Sabatier, you may remember him – he saved a million bucks in 5 years and told us all about it in episodes 134 and 207. Jamila Souffrant talks about saving $85,000 per year in episode 162. And for ideas on making more money to reach FIRE, listen to YMYW episode # 165 for 250+ side hustles from Nick Loper. Links to all of these episodes are in the show notes for today’s episode at YourMoneyYourWealth.com

13:30 – Karsten “Big Ern” Jeske, PhD, CFA: Safe Withdrawal Rates for Early Retirees

Joe: So a couple things come to mind when I hear this. Big Ern made a big ass paycheck. And was able to save a bunch of money.

Karsten: That’s right.

Joe: It’s not like an average Joe here, where he’s working for big money manager probably made a ton of money was able to save 40%, 50% of it. So at 44, you look, you got a bunch of zeros behind this thing. That’s pretty cool that you can do all of these other travel activities. Because that’s not cheap. Australia’s not. I’ve never been. I’ve never really been outside of my little bubble. But I hear that Australia is not cheap, in traveling, in everything else, with a child and wife. So what advice do you think you can give someone that didn’t have a very large paycheck to still achieve the FIRE or independence at an early age, like myself?

Karsten: First of all, you’re right, I had a big paycheck. But then again, I was the only person working full time. My wife was just doing some hourly jobs, maybe a few hours, maybe five to 10 hours a week, through a temp agency. She’s a nurse, so I was the only one with a high income. So I had the advantage of having a high income, but we had the disadvantage of having only one income. And we had the disadvantage of living in a very high cost of living area like San Francisco. So you hear obviously a lot of people claiming that I could never do anything like the people in the FIRE movement because you have to be married, you have to both have high incomes, you have to have no kids, you can’t live in a high cost of living area, and I checked some of these boxes and I didn’t check some of the other boxes. So unless you’re really in the worst possible scenario where, in every single category, you’re unlucky. You don’t make much income, you are the only earner, you have five kids, you live in New York City, then it might become difficult. But I think everybody is going to have some ways how they can increase their savings rate. And I don’t know how you want to do it. If you want to do it the same way as Grant, who has been on your podcast a few times, or if you want to do it more cold turkey. Do you just slash your expenses and just to get it over with. I mean there are definitely a lot of ways how you can cut your expenses. Especially in the three big categories like car, housing, and food. It’s a lot of information out there in the FIRE community where people share recommendations how to cut costs in these three categories. Say for housing, what a lot of people do is they buy multi-family property, duplex, triplex, quadruplexes. They stay in one unit themselves, they rent out the other units, they get the tax benefit. Well, they used to get the tax benefit, now it’s gonna be a little bit more difficult. So housing, you can do this. This approach is called House Hacking, where you rent out part of your primary residence. So I mean there are ways and I don’t want people to think that the only way you can reach FIRE is if you’re exactly like I. Because nobody will be exactly like that and probably there was also a little bit of better timing. I was lucky that I had this long bull market run over the last 10 years. And if the people who are looking into this and they are a little bit less lucky and it takes them 15 years instead of 10 years, I think that’s still an extremely good performance. And also don’t forget, in my personal situation, I also went to school relatively long. It took me until age 26 to finish grad school. There are also some people they already make good money at age 21. W4152hyu08ihereas I was pretty much at a zero net worth, maybe slightly positive net worth until age 26. So everybody has their little advantages and disadvantages. I don’t want people to believe that they can’t do it because they don’t have my income.

Joe: But you were saving 60% of it. Is that after taxes, or is that gross?

Karsten: Yes. This is from the net income. And then there’s even a little bit of cheating because you save something pre-tax and you still include that. You split your total compensation into taxes, savings and consumption. And then when you calculate your savings rate, you add your savings plus your consumption and then you look at what percentage of that sum is my savings. That’s how I got 50% to 60%. Because you have a hard time getting a 60% savings rate if you pay 30% taxes. So it has to be off of some kind of a net figure because if you don’t do that then it becomes really difficult comparing by different income groups. Again it’s because I made very good money but we never felt that we were depriving ourselves. We led a relatively comfortable, upper-middle-class life in San Francisco. We didn’t really go out much to restaurants and bars. My wife likes to cook at home, I like to eat what my wife cooks. Instead of going out to restaurants, I mentioned we had friends in town, so instead of going out to restaurants and spending $100 a person per meal, we’d rather do something at home where you spend only a fraction of that. So a good indicator for us for example, was that when I retired and I told people at the office what I had done in terms of this was my savings rate and this is how much, I didn’t tell them how much money we had, kind of give them a ballpark. People were really surprised. And so that’s a good sign. So they didn’t consider me a penny pincher while I worked there. I did that really pretty much under the radar and nobody noticed what we were doing, which is a good sign. And that also means that it wasn’t really too much of a sacrifice for us.

Joe: One last question Big Ern. Can you give me an idea of what the makeup, not specifics but maybe asset allocation wise, of what your portfolio consists of, of stocks, bonds, real estate?

Karsten: Right now we have about 55% equities. That’s mostly index funds, both U.S. and international. And then about 35% of the portfolio, I do some option trading. I do put selling, so vol-selling to collect the premium from put options. So I do that on S&P 500 index puts. And then another 10% is in real estate and that’s through private equity funds. So that’s very hands-off for me. I don’t have to manage anything. It’s a fund that manages that for me. But then obviously the option trading, I do that multiple times a week. So I do the very short term, very short to expiration puts that I sell. That’s very profitable and we can almost live off of just that 35% of the total net worth that’s in that option trading strategy and we can almost leave the rest of the portfolio untouched right now.

Joe: That’s awesome. So the website is EarlyRetirementNow.com. Early Retirement Now?

Karsten: Yes that’s right.

Joe: What’s the latest blog? What do you got cookin’?

Karsten: Well, I just recently wrote a summary of everything I’ve written on the safe withdrawal rate series. So my blog and then also the series is nominated for a Plutus award. That’s kind of our FIRE  blogging Oscars basically. You may know about the Trinity study. But if you want to read up on what you want to do in early retirement, nobody wants to read 31 posts on safe withdrawal rates, each about probably 2,000 to 3,000 words, it’s too intimidating and off-putting. So I wrote a nice summary of that. So people who are interested, they read the summary and then maybe they find something that interests them in particular and then read up more on that. So that was the most recent post. And then I’m working on a bunch of different posts. I’m trying to write one where I want to compare what is the difference between me and a pension fund. Because we are essentially a pension fund with 2 beneficiaries. So what are the challenges that pension funds have and how is my problem as a 2 person pension fund actually slightly more complicated than even that of a real pension fund, like a corporate or public pension fund. So it’s just making the case that the withdrawal math is quite a bit more complicated than accumulating is. Everybody can accumulate. All you have to do is save money, automate your savings. Money grows over time. You put more money in. You don’t have to worry too much about say a bear market in the short term. It’s actually almost optimal to invest through the bear market into the dollar cost averaging. But the withdrawal math, it’s a lot more complicated. Now you are very very worried about short term losses. Because you would start withdrawing money when prices are down. So it’s basically what I tried to convey there is the withdrawal of your assets is a lot more complicated than accumulating assets. And then running this pension fund with 1 beneficiary or 2 beneficiaries is actually more complicated than, at least in certain dimensions, than running a corporate pension fund. And that’s already pretty complicated. They have to hire very highly skilled, highly trained people to do that. And my problem is even more complicated than that. So definitely you want to read up a little bit especially if you’re in the FIRE movement. You invest so much time over the next 10, 15 years to accumulate assets, maybe you want to invest a little bit of time on some learning about how to withdraw them without running out of money and so come to my blog and read up on that.

Joe: By far the smartest FIRE movement dude ever.

Andi: FIRE movement dude, there ya go, Big Ern.

Al: I would agree with that. Financial independence. Retire early.

Joe: Yeah. He’s a PhD.  He’s a doctor in this. CFA? Got a name Big?

Al: Put us to shame.

Joe: This guy’s awesome. EarlyRetirementNow.com.  Check it out.  Learn a bunch.  Big Ern, hey thank you so for your time and congratulations on all your success at such a young, early age.

Karsten: Thank you. Thank you so much. Thanks for having me.

If you’ve got questions about reaching financial independence or early retirement, or any money question for that matter, go to YourMoneyYourWealth.com, scroll down and click “Ask Joe and Al On Air” to send it in as a voice message or an email. Many of you filled out the podcast survey and sent in questions along with, which the fellas will answer over the coming weeks. If you don’t hear the answer to your question today, it will be covered in a future episode I promise, so keep listening! Now let’s get to those questions:

24:00 – Will We Make It to $5M By Retirement?

Joe: Paul from South Carolina writes in a novel. I gotta charge you for this Paul. All right here we go. How much time do I got?

Andi: As much as you want.

Al: We can do it in 2 seconds.

Joe: “I really enjoy your podcast.” Hey, thanks Paul. “I just started listening about a week ago but I’m catching up from 2018 until today.” Jesus Paul, get a life. “My wife and I have the goal of a $5,000,000 net worth when we retire. Can we do it and how long should it take? Background info, I’m 51, my wife’s 48, our annual gross household income is $120,000. We are debt-free.” He’s got a home worth about $650,000. Paid off.  He’s got dumpy-ass double-wide worth about $40,000.

Al: He used a different word.

Joe: There’s a hole. And there’s something in front of it. -it. He’s got a 401(k), four hundy, wife’s 401(k) is a hundy, Roth IRA $16,000, wife’s Roth IRA’s $14,000, got little Vanguard cash brokerage $14,000. EE bonds of 48,000, $1,300,000. Got some work to do Paulie, but so far so good. You just recently inherited 3 annuities that we would like advice on. Where to put these fund to reach our $5,000,000 goal. The first annuity from Modern Woman is worth $636,000. Is that right? $56,000 is taxable. The other 2 annuities from Lincoln Benefit were already annuitized prior to us inheriting them. The monthly payments for each of them is $3,000 and $1,600 so $4,500. Let’s just round. The annuity payments that he is receiving, the payments will continue until December 2026.  So he’s got about 7 years there. After 2020, the payments will no longer be taxable. How should we invest the proceeds of these 3 annuities? You want to start there Bud? Because he’s got a whole ‘nother page.

Al: I know. Yeah. I’ll start. Because I added a couple numbers together and did a couple of calculations. So I took a look at, Paul your 401(k) your wife’s 401(k), Roth IRA, your wife’s Roth IRA. The liquid assets, I get $592,000. So that’s a starting point. And then I just took the one annuity that we know what the value is $636,000. So I said well if you surrender that, you got to pay taxes on $56,000 of it. But I’m not worried about taxes. Now I’m just doing just a quick calculation. So I add the annuity, $636,000 to the liquid assets of about $600,000, I get a $1,228,000. So that’s the starting point. Then I said all right. So Paul’s 51 years old. Let’s just say he wants to retire at full retirement age, which would be 67, so I don’t know if that’s true or not but I’m just making that assumption. So that’s 16 years from now and then I just very simply said, well between you and your wife, you’re saving at least $50,000 into 401(k)s and Roth IRAs. I just use $50,000. And I use the 7% rate of return because it looks like he’s all in the stock market, which we’ll get to in a second. But I just use the 7% rate return. Sixteen years starting with $1.2 million, adding $50,000 a year, you end up with $5.1 million.

Joe: Boom.

Al: There you go.

Joe:  Paul.

Al: All done.

Joe: Killed it.  But he wants to retire early. He doesn’t wanna wait till 67. He listens to Your Money, Your Wealth®. And now he’s gonna listen to Big Ass Ern.

Andi: Big Ass Ern.

Joe: He should retire at 54.

Al: That’s right.

Joe: So if he just did that the max out 401(k) plans. What he’s currently got. Get 7%. Bada boom.

Al: Guy gets to $5 million.

Joe:  So let’s read on. So we also fund our 410(k)s annually $25,000 for me, $19,000 for my wife. Which will increase to $25,000 the year she turns 50. So Big Al already calculated that. This year we funded our 401(k)s…. what? I’m drinking fluids and sometimes I get excited.

Andi: Put that Coors Lite away, Joe.

Joe:  Hey don’t worry about it. This year we funded our 401(k) pre-tax to lower our adjusted gross income but both will be funding Roth IRAs for 2020. We also funded our Roth IRAs each year $7,000, for me $6,000 for my wife. We will continue fully funding the 401(k)s and Roth IRAs until we retire. So Al, can I add in another $13,000?

Al: I know. I’d say you’re right. But I was just going conservative. I mean just on the surface.  And then part of the question is, by doing this, and maybe tweaking a few other things, when can I retire? I didn’t do that calculation, but that’s something that Paul would probably like to know.

Joe: “Our investment blend in the different accounts is pretty similar. No bond exposure in 49% S & P 500, 70%, small-cap index 17 year, mid-cap index and 17 in international index. The only variance in the Roth accounts have actively managed funds but similar asset class blend. One final separate but related question, should I buy a new car? My current vehicle is high mileage, 2002 Ford Taurus.” Ow. Chicks dig 2002 Ford Taurus.

Al: You know from experience?

Joe: Tell you that right now. “My wife drives a 2015 Honda Odyssey.” So Paulie’s driving the Ford Taurus and she gets the 2015 Odyssey.

Al: She’s got the new Odyssey.

Joe: Wow. “But she hates my car and constantly begs me to buy a new car, something in the $30,000 to $40,000 thousand range. My fear she is already driving a luxury vehicle. And I do not want to jeopardize our financial goals by purchasing another…”

Andi: ostentatious.

Joe: ostentatious.

Andi: vehicle.

Joe: I was going to say something else but thank you for that.

Joe: My Taurus has some dents and rough interior, but it runs good. Although I would be lying if I said I didn’t wish the air conditioner worked on hot days. Please explain to her that fancy vehicles destroy wealth building. That was in red I shouldn’t read that out loud.

Andi: No, you should have. I was just pointing out things.

Joe: We will live long enough to reach our goal will….. Will we live long enough to reach our goal of $5,000,000 of net worth? Thanks.

Andi: Not if you replace that Taurus.

Joe: Dude, the Taurus is badass. I’d keep pimping the Taurus. The Honda Odyssey, that’s where you’d go out on date night. And if you’re just cruising to work and back, I don’t see anything wrong with that. But if you want to buy a new car, I don’t think you would jeopardize your overall situation. Because Alan why don’t you solve for N for me, please.

Al: Yeah that’s what I’ll do.

Joe: So do this. So let’s go. $56,000, $60,000, plus, if he saves the annuities that’s another $45,000, $65,000 a year. So let’s see. Cash is in the annuity. Those annuity payments come in. But you’re gonna have to do a little bit tricky math there because they only come in for 2026. And then he’s gonna save into

Al: But even $65,000 is with two 401(k)s plus Roth. So that’s about right anyway. So I’m saying $65,000 of savings per year. I’m saying how long’s it take to get $5,000,000 if you start with $1.2 million? I use the 7%. I’ll start there since that’s what I did before. And I get 15 years right now. If I do 8% instead of 7% because he’s all in the stock market, now it’s 14 years.

Joe: That’s not net worth though, because you’re, just including liquid assets. You’re not including his home of $650,000.

Al: That’s true.

Joe: So you’ll get there probably 12 years, buddy.

Al: We’re going to just net worth, but I was trying to go with spendable. Actually, the better question to ask yourself is, how much income do I want in retirement? And then work backward with that 4% rule that we just talked about. So if you want to spend $200,000 per year in retirement and you have no Social Security, let’s just make it super simple, so divide $200,000 by 4% or the same math. Multiply that by 25. Two hundred thousand times 25 you get 5,000,000.

Joe: But Paul’s, he’s a simple guy. He’s chillin’ in the Taurus, making $120,000 combined. Is what, he’s 50 years old. Probably drinking some Keystone Lights there in South Carolina. What do they drink out there?

Andi: I have no idea.

Joe: Probably something good.

Al: Another way to say this is,  Paul, you want to spend $150,000.

Joe: Are we gonna go 17 minutes on this thing?

Al: Yeah yeah. Just for one second. Say your Social Security is 30. So you actually need 120 we divide that by point .04. So what you really need is $3,000,000 of liquid assets and then you can get there a lot more quickly. It’s 9 years instead of 14.

Joe: Good work, Paul. Congratulations. Dude, you got to get a life though. You just found us and you’ve already caught up? Come on. Get out there. Wash that Ford Taurus. Maybe buy a new car. I don’t know.

Al: Yeah I would buy a new, used car.

Joe: Big Al’s got the big bucks.

Al: I just bought my son a car from Hertz Car Rental. It was a Sentra. It had 70,000 miles but it looked brand new. It cost under $8,000.

Joe: Your son’s 45?

Al: Yeah, he’s 64.  That’s right.

There go Paul and his wife, riding into a comfortable retirement in their Taurus or their Odyssey or their Sentra… How about you, is retirement just up the road for you as well? Check out this week’s episode of the Your Money, Your Wealth TV show for a 365 Day Countdown to Retirement to see if you’re financially ready to retire. I’ve linked to it in the show notes, along with a free download of Big Al’s Quick Retirement Calculator Guide to help you see if you’re on track. Click the link in today’s episode description in your podcast app and watch and download now. Or when you’re done listening to this podcast. The point is, YMYW has got you covered. Moving on now to more of your money questions.

34:16 – Can Monthly Payments From an IRA Annuity be Used for QCDs?

Joe: So Jason from…

Andi: He didn’t tell us.

Joe: Jason. There are rules to Your Money, Your Wealth®. If you want a question answered, you need to state where you’re from. Can monthly annuity payments from an IRA annuity be used for QCDs?

Al: Well, let’s explain what a QCD is. Qualified Charitable Distribution. So this is when you’re over 70 1/2, you actually can designate some of your required minimum distribution, or even all of it, you designate it to go directly to charity. Here’s the caveat, the check from your IRA or the distribution has to go directly to charity, it cannot be made out in your name, and then you give it back to the charitable organization. Because that’s a full distribution and then you get to take the charitable deduction. There’s a lot of reasons you might want to do a QCD. Because your adjusted gross income is lower, you may not be all the itemize your deductions anyway and so in a lot of cases folks that do QCDs these will end up paying less tax. Not in all cases, but in many cases.

Joe: Well with the new tax law some people might not be able to deduct the charitable contribution, you mean.

Al: Yeah that’s the problem. So a single taxpayers it’s around $12,000 your standard deduction. And maybe you don’t have enough deductions to count. So in other words, if you take the required minimum distribution and pay tax on it and then give it to charity, we didn’t even itemize anyway so you didn’t get a tax deduction. That’s kind of the big change with the new tax law. The standard deduction being so much higher. So a lot of folks are going to benefit more from these QCDs. But the question is, can monthly annuity payments from an IRA annuity be used for QCDs? I’m going to say no. And my reasoning is this. That depending upon how it’s structured I guess, but if the annuity payment is coming out each month to you, in your name, then it’s a distribution. Maybe if somehow in the IRA, the annuity payment just stays in the IRA. I suppose you could do that potentially and then have a QCD then go directly?

Joe: I don’t think so, because I’m guessing he already annuitized. The contract?

Al: Yeah that’s what I’m thinking too. That’s why I think it’s probably not very likely because the checks are already coming to him.

Joe: So I guess to take a step back. Jason purchased an annuity, it sounds like. And there are different investments that you can purchase inside an IRA or an individual retirement account. So he retired and maybe he already had the annuity in the IRA or maybe he rolled his 401(k) into an IRA and then he purchased the annuity. With an annuity, there are tax-deferred annuities or there are immediate annuities, there are variable annuities. We’ve talked all about annuities on this program in the past. But there are certain circumstances where individuals will say you know what, I’m done with investing, I just want to get a guaranteed income stream. And so you can annuitize the contract. And what that does is you tell the insurance company what is the amount of money that you will give me monthly, for the rest of my life, given whatever lump sum that Jason has. So they’re gonna calculate and they’ll say here’s the payment that we will continue to pay you forever. So that payment is either based on Jason’s life expectancy or a period certain or something like that and he’s the owner and the annuitant.

Al: Generally, that would come out to him in a monthly check or whatever. And it’s in his name. So he couldn’t say send it to charity.

Joe: Right, because the charity is not the annuitant.

Al: Right.

Joe: He’s the annuitant.

Al: The only thing I was thinking is if you had an annuity inside an IRA and the payments went to the IRA, I don’t know if you can even do that.

Joe: I don’t think so. Maybe if he did annuitize the contract, because people get confused with terms all the time too. So maybe he purchased an annuity and he’s just taking income from it. And he’s just taking standard distributions from it, then yes, you would be able to do a QCD, if you’re just taking distributions because it’s not annuitized.

Al: If you have the option. So then you can have a distribution go directly to charity.

Joe: Let’s say MetLife, the annuity. Send $50,000 to this charity.

Al: But typically when we think of annuitization then that means a payment stream to the annuitant.

Joe: Yes, this sounds to me it’s one sentence. We’re guessing on a bunch of stuff here, Jason, just to make sure that we give you the appropriate answers here. We don’t mess around.

Al: I think we nailed it.

Joe: We’re very thorough. OK. Hopefully, that helps.

39:11 – What Happens With IRA Mistakes That Lead to Penalties?

Joe: Tom, from Colorado. He goes, “what happens if someone makes a mistake with an IRA that leads the penalties?” Tom, well you should listen to Your Money, Your Wealth®.

Andi: Tom is a big listener of YMYW.

Joe:  “How do they get caught if they don’t self-report?” Oh, you want to break the law now, Tommy? “Is there a statute of limitations?” About the podcast, Tom said “I think you guys are better as a team than either are individually, and I like the outtakes. Andi’s participation makes the show more interesting.”

Al: So that means we suck individually.

Joe: We’re awful.

Al: But somehow it comes together.

Joe: Yeah, we’re awful individually.

Al: I couldn’t imagine it, actually I could not imagine the show with just me. You’d fall asleep. And with you, I don’t know you’d drive off the road. So, I guess I agree with Tom.

Joe: Scatterbrain. He’s yelling, just stupid stuff.

Al: You wouldn’t be happy. You’d be angry.

Joe: Yes. Yes, I’d be angry.

Joe: So Tom blew up his IRA, he’s got some penalties and then how’d he get caught.

Al: That’s a great question. So how could you make a mistake with an IRA? You could forget to do your required minimum distribution or you could make a contribution if even if you weren’t allowed to, like let’s say you had no earned income. Or maybe you’re over 70 1/2 and made a contribution to an IRA, you’re not allowed to do that.

Joe: Or too much income, it goes into a Roth.

Al: Maybe you put $10,000 into an IRA contribution and you’re under 50 and you can only do $6,000. I mean there are lots of ways you can mess it up. And so the IRS says you know, what if you undo it generally by October 15th of the following year, you don’t get penalized. But then a lot of cases, that date’s already passed when people realize they made a mistake.

Andi: That is what he is asking, is there a statute of limitations?

Al: And then in that case, what you’re supposed to do is then report it on your year’s tax return and pay an excise tax of 6% per year as many years that the excess IRA is in there. Or if you forgot to take a requirement of distribution, it’s a 50% penalty. So how do you get caught if you don’t self-report?

Joe: Upon audit with a 5894. 5498?

Al: I will say 5498.  I will say the IRS check these things, but in all honesty, just being honest they don’t have a ton of resources to go after everybody. So could you get away with it? Yeah, you could.

Joe: Likelihood? Yeah.

Al: Yeah. I didn’t say that, you did. However, there is a statute of limitations, it’s 3 years after you file if Tom’s in Colorado. I know in California, it’s 4 years after you file. And if they catch you, then you’re going to pay whatever taxes on the mistake, you’re gonna pay whatever penalties and they’ll probably slap on some other penalties just for doing it wrong.

Joe: So I think Tom, what mistake happened might be helpful. First of all, a lot better radio.

Al: He’s probably asking for a friend.

Andi: He said that leads to penalties, so.

Joe: “I have this neighbor.”

Al: “I have this friend, this neighbor, that might have.”

Joe: “I was telling him about your podcast and how great you guys are together and how bad you suck individually and Andi just puts everything together, without her the whole thing would be a piece of garbage. And anyway, we’re having a couple beers, and so he comes up and says hey, I wonder if you could call in for me?” So what the hell did ya do? Come on Tom. Spill the beans. Did you make an excise contribution? I mean when we see this every single day. You make $300,000 a year. How long have you been saving into the Roth? Well, every year since it came out. Well, how long have you been making $300,000? Well, I don’t know for the past 20 years. Okay well, you’ve been making excess contributions into a Roth for the last 20 years.

Andi: Is that the most common mistake that you guys see?

Joe: No. They’re all kind of common. I think people taking distributions out of retirement accounts and not understanding the amount of tax is probably the biggest mistake that we see.

Andi: But he is specifically asking about something that leads to penalty.

Joe: Well if you do excess. You don’t take an RMD. I would say those are the two probably most common.

Al: And those have a 3 year statute limitations. There’s one that probably has no statute of limitations. Which to me is more risky obviously and that’s if you make a Roth contribution and you weren’t allowed to. Twenty, 30 years later, that whole account could blow up because of that. And they’d say, no, none of this.

Joe: It was disallowed.

Al:  It’s disallowed. So all this money that you put in, that comes out tax-free. But all the growth is taxable and boy, we’re gonna charge you penalties.

Joe: Yeah, 6% each year. So 30% your GM and all that money in, let’s say $300,000, $400,000 in a Roth. Everything comes out, taxable ordinary income that year, plus 6% excise penalty. For twenty-some-odd years?

Al: That’s 60%.

Joe: Yeah, you blow that whole thing up.

Andi: Wow

Al: 100% whatever.

Joe: Right.  Whole thing gone. So, can that happen? Absolutely. So, I don’t know. Maybe a little bit more juice. Can I critique the questions?

Al: You already are. So I guess the answer is yes.

Joe: OK. Andi, wonderful job today.

Andi: Thank you, Joe.

Joe:  Big Al, Good job.

Al: Thank you, sir.

Joe: You got it. We’ll see you guys next week. The show’s called Your Money, Your Wealth®.


Big thanks to Big Ern, Karsten Jeske, PhD, CFA from EarlyRetirementNow.com. Keep listening for the Derails at the end of the episode to hear what Joe was planing for Big Ern before we set Joe on the right track. Read the transcript of the interview and check out all the free financial resources mentioned just by clicking the link in the description for today’s episode in your podcast app. Thanks also to everyone that told us how much they love the show in the podcast survey, and thanks as well to those who gave us constructive criticism. We appreciate it all. Honest. To help us spread the financial knowledge and funny, the best thing you can do now is to share Your Money Your Wealth! Email a link to the podcast to somebody you know would get value from it, or share an episode on social media and tag @ymywshow on Twitter or Pure Financial Advisors on Facebook.

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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.