Show Notes

• (01:02) 401(k) to IRA Rollover: What Kind of IRA and Where? Are Banks Safe? Can I Take Cash Out? (Jerry)
• (04:37) What’s Our Most Tax-Efficient Retirement Withdrawal Strategy? (Laurie, IL)
• (14:01) Should We Pay Down the Mortgage, Keep Investing in 401(k) to Do a Conversion, or Build Up Our Taxable Account? (Brad, CA)
• (23:34) Social Security and RMD Retirement Spitball Analysis (Ann, NY)
• (29:25) How to Leverage a Whole Life Insurance Policy? (Sharon, Waukesha, WI)
• (37:56) Am I Taking Too Much Risk Investing 15% of My Portfolio in Preferred Stocks? (Edward, IL)

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Transcription

Today on Your Money, Your Wealth® podcast  336, Joe and Big Al spitball a tax efficient retirement withdrawal strategy for Laurie in Illinois – complete with sound effects – and they spitball a saving and retirement strategy for Brad in California, and a Social Security and required minimum distribution strategy for Ann in New York. Plus, how can Sharon in Waukesha leverage her whole life insurance policy, and is Edward in Illinois taking too much risk with his investments in preferred stocks? Oh, and Joe’s added something new to the list when you write in and tell us about your cars and pets – three guesses what it is, and the first two don’t count. But first, Jerry calls YMYW to learn about the mechanics and safety of doing a 401(k) to IRA rollover. Visit YourMoneyYourWealth.com and click “Ask Joe & Big Al On Air” to send your questions in as an email or a voice message – and remember, those voice messages get first priority. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

401(k) to IRA Rollover: What Kind of IRA and Where? Are Banks Safe? Can I Take Cash Out? (Jerry)

Joe: All right, let’s get to Jerry.

“Yes. My name’s Jerry. My question is I am 72 years old. I only have about $67,000, $66,000 in my 401(k). I’m not sure what to do with it. We’ll need some of it in cash, but I was gonna roll it over into an IRA. And I’m just wondering how do I know which IRA to roll it over to. Is a bank safe or should I roll over into some other type of IRA? And will it hurt me to take out a certain amount of cash before in the 401(k) or after I roll it over into an IRA? Because I want to take out some cash. Thanks.”

Joe: Great question, Jerry. So when any dollar that you take out of a 401(k) or IRA, so he wants a 401(k) rollover, put it into an IRA, he’s got about $70,000 and he wants to take a little cash out. So, yes, you can have access to 100% of the money, but just understand it’s fully taxable.

Al: Yeah. And so you can get cash out before you roll or after. It doesn’t really matter. It’s the same tax either way. Like, let’s say out of the $70,000, Jerry, you take out $5000, then $5000 gets added to your tax return as additional income. So you have to pay tax on it at whatever your tax rate is.

Joe: And looking at where does he put the money. You can open up any brokerage account. You can go to a bank. So is a bank safe? Sure. You can open up an IRA that- lets say if you just want to CD, something extremely safe, that’s guaranteed, you can open up an IRA at a bank. And then with that $66,000, you can purchase a CD or ladder some CDs at $10,000, $20,000 apiece. You can move the money into a brokerage account like Charles Schwab or TD Ameritrade, Fidelity, Vanguard. You could go direct to a brokerage house like a Merrill Lynch or any of the above or an independent advisor.

Al: Independent advisor. Vanguard has some, you can invest with them.

Joe: The IRA is just a tax code. The investment is the key component, Jerry. So if you open it up at a bank, at Vanguard, Charles Schwab, TD Ameritrade, Fidelity, it doesn’t necessarily matter. It’s all the same.

Al: I think that’s a key point. And sometimes we forget to kind of talk about it this way because an IRA is an IRA. It doesn’t really matter where you open it up. It’s the investments that make the difference. And so if you Jerry, if you want the safest investment possible, I would go to a bank because a bank would be FSR-

Joe: FDI.

Al: FDI, Thank you.

Andi: FDIC.

Al: FDIC.

Joe: FSI, LMNOP. Where’s my brush? Gotta feather my hair.

Al: Yeah, it’s out of whack. I’m not thinking right. Anyway, you get that government protection if something goes wrong with the bank. That’s the safest way. The problem with that of course is you don’t earn very much money and over time you will actually lose money to inflation. But it is safe.

Joe: Yep. So hopefully that answers your question because- one last thought on this is that an IRA, Roth IRA, we would get the question quite a bit. It’s like, what does a Roth IRA pay? It depends on what you invest in. So it’s not an investment- an IRA is not an investment or Roth IRA or 401(k), it’s the items that you put into those overall shells. If you will.

Al: And so I guess when you think of IRA versus a 401(k), there are differences between that as different vehicles, but one IRA is the same as another one, it’s just how you invest it.

What’s Our Most Tax-Efficient Retirement Withdrawal Strategy? (Laurie, IL)

Joe: We got Laurie from Illinois, writes in. “I drive a 2021 Honda CRV Touring Edition.

Al: It must be nice.

Joe: Touring Edition.

Al/Joe: Touring.

Joe: Is that like, bigger? smaller?

Al: It’s probably cooler, right. Because you’re going to be touring in it.

Joe: 2021. That’s nice.

Al: Yeah. Brand new.

Joe: “We had a Maltese-”

Andi: – Lhasa Apso.

Joe: “- Lhasa Apso.“

Al: Oh, there’s the picture on screen, very cute dog.

Joe: OK, that is kind of a cute little puppers.

Al: That’s like one you put it in your purse. If we had a purse.

Joe: “- a Maltese Lhasa paso-”

Andi: Something like that.

Joe: “- for 11 years, but do not have any plans to get another dog in the future. My husband and I are the same age and he plans on retiring in two years at age 59 and a half. I will continue to work part time and I make around $45,000 a year. I will carry our health and dental insurance when he retires. Today we have $1,200,000 in combined IRAs; $650,000 in combined Roth accounts; and $1,200,000 in a taxable brokerage account. We plan on converting money from our Traditional IRA to Roth up to the 24% tax bracket to help avoiding getting clobbered with high RMDs. If we want to live on $120,000 a year when my husband retires, how much should we pull from each bucket so that it’s most tax efficient? I figure we will live on some of our Traditional IRA money right when he retires up to age 72. So that will help draw down the amount we need to convert. I plan on taking Social Security at age 67. He will at age 70. We do not have any other retirement income. Thanks for any spit balling you can provide. Laurie, Illinois.” Great. Great question.

Al: Yeah. What kind of spitball? You start.

Joe: (Spitball sound) I can spit ball real quick.

Al: That was pretty good.

Andi: It comes with sound effects now.

Al: Yes.

Joe: Yes. OK, where’s my calculator here? She’s very tax diversified.

Al: Yeah. Already. Yeah. Look at that.

Joe: I like to see this. Usually you know what we see-

Al: So it’s about- she’s got about 1/3 in Roth and 2/3 in a taxable brokerage account.

Joe: OK, I get that. What, $1,200,000 in brokerage; $1,200,000, and then what was the other amount? $650,000. So call it $3,000,000. I could have easily done that in my head. (Sounds) OK, so he’ll be 60, she’s working, $45,000. So let’s take $120,000, $45,0000 minus-. So that’s $75,000. That’s into $3,000,000. What do you think that is-  3%?  OK, so I like the distribution rate. So Laurie, the first step of all this or anyone that’s listening I guess, when you’re spit balling a retirement analysis, you have two really good key components that most people forget to tell us when they write in, that a) how much money that you want to spend and b), how much money that you have. And then the other ancillaries are really good too like, hey, I’m going to make $45,000 a year for the next few years as part time income.

Al: That’s helpful.

Joe: It is very helpful in figuring this out. Because what you want to do is take the amount of money that you have, $3,000,000. And then you look at, OK, that’s my nest egg and you have to figure out what the nest egg needs to do to produce income for you to sustain the lifestyle that you’re accustomed to or that you want to enjoy. And so you said $120,000. That’s another key component. Awesome. And then you said $45,000 is what we’re going to make. So you take $120,000 what you want to spend minus $45,000, which is going to come in as fixed income, and then that leaves a shortfall of $75,000. So the $3,000,000 needs to supply you with $75,000 of income. Or is that clear enough?

Al: You’re on a track here.

Joe: So then you take $75,000, you divide it into $3,000,000 and you come up with a burn rate or distribution rate. That distribution rate in this example is 3% and at 59 and a half, 3%, I would say Al and I would think that that’s a pretty good percentage. Right on track.

Al: That’s right. And then I guess when husband stops working, Social Security will take over-

Joe:  No, the husband stops working. She’s going to work.

Al: Oh, she’s going to work. I got it backwards.

Joe: Yep.

Al: OK, so when she stops working and then they eventually take Social Security, they’re basically in the same spot.

Joe: You got it.

Al: So I like it.

Joe: So now then you could start throwing on the other layers of complexity. And so her real question is, well, how much money should I take out from each of these pools? From a tax perspective? Well, the $45,000 of income is going to come to you as ordinary income because that’s wages. So one way to look at this is to say maybe I don’t want to get myself out of the 12% tax bracket. So $45,000- $80,000 is roughly the top of the 12% tax bracket.

Al: Correct.

Joe: So I take $45,000 minus $25,000, which is the standard deduction. Are you good with that?

Al: Yeah, I’m good.

Joe: So that would give me what, $30,000 or $20,000 of taxable income. So then you can play with the other accounts, you can then pull $60,000 let’s say from your retirement account and live off of that and then that would keep you in the 12% tax bracket. But you need $75,000 so you could take the other $15,000 and you could pull that from your brokerage account and virtually pay zero tax. So you’re short $75,000. You could fill up the ordinary income tax bucket to 12% by pulling that from the retirement account and then you could take the others from the other account to keep you in the lowest bracket. That’s one way to look at it. I think a better strategy is to convert.

Al: Yes. Take more money out of the brokerage account. So you’ve got very little income so you can convert. And I agree with everything you said. I think of it maybe just a slightly different way. I would say if $80,000 is the taxable income, the highest amount you want, then you add the standard deduction of $25,000. So now you’re $105,000- $105,000 is how much ordinary income you can handle and still stay in that lowest bracket. And so you’ve already got $45,000 coming in to get to $105,000. That’s I think same answer, another $60,000. And then the other $15,000 comes from the brokerage account. But better yet, as you just said, Joe, is if you take more money out of the brokerage account, you’ll have less taxable income that will allow you to convert to get to the top of the 12% bracket.

Joe: You could convert $60,000, stay in that 12% tax bracket or you convert- let’s see- I’m going to say $170,000 is the top of the 22%-

Al: Correct. You could go up to that level.

Joe: You could go to $170,000.

Al: And of course we’ve oversimplified because the brokerage account probably has some interest and dividends and capital gains. So we’re oversimplifying. But you get the idea. What you’re trying to do is end up with a taxable income of $80,000 realizing you get-

Joe” – or $170,000 if you want to stay in the 22%. Because she’s stating she wants to convert the 24%. I think just doing the spit ball here is that she doesn’t have to convert it to 24%. You could easily convert to 22%.

Al: I would tend to agree with that. I would tend to agree with that, and I think that’s a- it’s a great strategy because now you can forever stay in the lowest tax brackets by having tax diversification.

Joe: So we’re going to break. Laurie, thank you. And that little Maltese Lhaso paso-

Andi: – or something.

Joe: Like that.

Al: That’s great.

Click the link in the description of today’s episode in your podcast app to go to the show notes at YourMoneyYourWealth.com and watch the latest and very relevant episode of the Your Money, Your Wealth® TV show – I’ll give you a hint, it’s called “Financial Planning Must-Do’s Before You Retire.” Your retirement withdrawal strategy may be entirely different than Laurie’s or anyone else’s, because your finances, your goals, your needs, and your risk tolerance are unique to you. Getting a free retirement plan spitball analysis from Joe and Big Al here on the podcast is a good way to get a rough idea if you’re on the right track, but this would be a great time to schedule an in-depth financial assessment with one of the CERTIFIED FINANCIAL PLANNER professionals on Joe and Big Al’s team at Pure Financial Advisors. This assessment is specifically tailored to your needs. It’s a comprehensive deep dive into your overall financial situation to help you determine when you can retire, if you can save money on taxes, whether Roth conversions make sense for you, how to craft your ideal retirement withdrawal strategy, when to take Social Security, and much more. Best of all, there is no cost and no obligation. Visit YourMoneyYourWealth.com and click the big green “Get an Assessment” button at the top of the page to schedule your free financial assessment now.

Should We Pay Down the Mortgage, Keep Investing in 401(k) to Do a Conversion, or Build Up Our Taxable Account? (Brad, CA)

Joe: “Joe and Big Al. Hello. My name is Brad from California.” He actually wrote that like that?

Andi: That’s what he wrote.

Joe: Interesting. Is that- Dear Alan. My name is Joe from California.

Al: He didn’t really want us to pin him down to what city.

Joe: “My name is Brad from California.” OK. Hello, my name’s Brad.

Al: What do you say?

Joe: And I’m from California.

Al: You would say ‘Hi, my name is Joe from Minnesota.’

Joe: Don’t you know?

Andi: I was going to say, he’d put that ‘sota’ on it.

Joe: “I have a couple retirement planning questions I hope you can help me out with. I’m 52. Wife is 49. We have a total of $1,300,000 invested and diversified in the market through IRAs, 401(k)s, and an inherited IRA of $125,000 that we’ll need to withdraw by age 61.” Hold on.

Al: The inherited IRA. He’ll have to withdraw within 10 years. So I think that’s what he’s saying there.

Joe: He’s 49-

Andi: He’s 52.

Al: He’s 52.

Joe: Oh, that “I’ll need to withdraw by age 61.”

Al: So he probably got it a year ago. Yes.

Joe: Got it.

Al: Because when you have an inherited IRA, you have to take all the money out within 10 years. You don’t have to take an RMD anymore each year, but by the tenth year, it has to be all gone.

Joe: “We also have about $190,000 sitting in cash in the money market account. Probably too much. Only- ”

Al: I like that. Yeah, that’s probably too much.

Joe: “Our only debt is the mortgage at $270,000 at 3%. We have about $450,000 equity in the home. We’re not sure if we’ll stay in California or move to another state at retirement. I’m currently making about $170,000 a year and contributing the max into the 401(k) into each year and an after-tax portion of 5% and converting that to a Roth. Hence the garage door.”

Al: Got it.

Joe: The Megatron. “My wife is self-employed and contributing her income of $16,000 to $18,000 a year into her self-employed 401(k). My goal is to retire at age 56 or 57.” So he’s 52, so he wants to retire in about 5 years. “I think we can live comfortably on $70,000, $80,000 a year. First, do you think this will be possible or just a dream? I’m looking for some advice on the best strategy to reach the goal. So here’s my question-” Well, first of all, Brad from California, we don’t give advice on this show. We just spit ball some stuff.

Al: We do spitball.

Joe: Yes, it’s called chatty. We’re having just a friendly conversation.

Al: It’s a financial chat.

Joe: Yes, it’s tax chat. Because if you start throwing the advice word around there and that’s when-

Al: compliance-

Joe: Yes. Liability.

Al: Yes. Gets a little bit-

Joe: Yeah. A little dicey. So we don’t give advice. FYI. If I have to say that 100 more times I will say it 100 more times. But we can talk about your questions here. “Should I concentrate on paying down the mortgage with my excessive cash each month and stop investing in the after-tax dollars into the 401(k) to do the Roth conversion?”

Al: My answer is no.

Joe: Absolutely not. 3% interest, tax deductible or potentially, depending on what your itemized deductions are.

Al: That’s a great mortgage.

Joe: $270,000. At, what did he say? 3%, Big Al? Is-

Al: $9000 a year of interest, $8000 something.

Joe: Well, let’s see your payment on that’s probably, what, $14,000 a year. So from a cash flow perspective, it’s not eating you up.

Al: Right. And it will- and it’s fixed. Right. So it’s with inflation seeming cheaper and cheaper.

Joe: Yeah. $1200 a month. Oops. That’s-

Al: Oh that was good.

Andi: I was wondering what that was, your elbow?

Joe: Just playing a little bongos.

Al: His elbow was on the keyboard.

Andi: Glad we didn’t get disconnected.

Joe: “Or would it be better to max out the after-tax contributions to my 401(k) to the combined max of $64,500 and converting to the Megatron. Doing this, I would need to pull down money from a money market account, $190,000, to help with living expenses. I figured this would be a good way to dollar cost average my cash into the Roth.” Absolutely, 100% agree with that.

Al: I like that idea, too.

Joe: Love it. Love it. “Or should I build up my taxable account currently at $80,000?” Why would you build up the taxable account when you could do the Megatron, get all the money tax-free versus at a capital gains rate?

Al: Yeah. Would I rather have tax-free income later or capital gains?  or ordinary income if it’s interest?

Joe: You have the same flexibility with Roth because there’s FIFO tax treatment, first in, first out. So and you’re 50 and he wants to retire at 56, 57. You will have full access to the 401(k) at age 55 and be separated from service, keep it in the 401(k). So you have access there. The Roth money, you probably still want to defer because you’re so young and you’re retiring at 55 and having that much more money into a Roth IRA compounding tax-free I think is the right idea. So, uh, so I would not build up the capital gains. “I need to purchase medical at retirement until Medicare at 65. I have a few pensions to supplement my income below. He’s going to have a pension Al, of, let’s see, $500 a month at age 60; $1800 a month at age 65; lump sum payment of $300,000 at 56; Social Security, when is the best time to pull it?” and is that the end?

Andi: That’s the end. That was the end of the question.

Joe: Very good. Brad, I was thinking that this is going to be an 8- pager. Should I divorce my wife? Should I buy a little kitty? I don’t know. I was thinking about should I change the oil on my own or should I go to a Jiffy Lube?

Al: Just spit ball all that for us.

Andi: Just a reminder, Joe is offering lifestyle advice. So he’ll answer that question as well.

Joe: Yeah, where’s the lifestyle questions. We got to get that back. I mean, I answered one. I must have just totally laid an egg on that. So Brad from California, I think he’s on the right track.

Al: Yeah. Yeah, me too.

Joe: And so can he retire is the question.  He’s currently making- how much money does he have total again? He’s got one, two-(sounds)

Al: Well, he’s got $1,300,000 plus another $100,000- plus-

Joe: plus $200,000?

Al: Yeah.

Joe: So $1,500,000?

Al: $1,500,000. Yeah – ish. $1,500,000. And he’s got- he’s going to work for another 5 years probably. And he’s maxing out.

Joe: OK, they’re both maxing out. So let’s call it $50,000 of savings, let’s say 5 years. Let’s say he gets 5% on average over the next 5 years. That’s $2,200,000. And how much money does he need to live off of?

Al: Well, doesn’t really say, but he makes $170,000 a year and-

Andi: He said, “I think we can live comfortably on $70,000 to $80,000 a year.”

Joe/Al: There ya go.

Joe: Thank you-

Al: Perfect.

Joe: – for sending that. He’s close. 3% at 55 is around $65,000 is kind of when I guesstimated. So he’s got call it $1,500,000 now. He saves $50,000 a year for the next 5 years at a 5% growth rate because it’s going to be pretty volatile I would imagine. Since we’re at pretty high valuations today. So if he gets 5%, he’s going to have $2,200,000, 3% of $2,200,000 is $66,000. So if he can live off of $66,000, he’s right there.

Al: Yeah. Or have a- get a part time job. Make another $15,000. But also remember, you’re going to have to pay for health insurance, which is going to probably be-

Joe: $20,000.

Al: – at minimum $1000 a month, probably more like $20,000. So maybe in this example, maybe you need to have a part time job where you make about $25,000, something like that.

Joe: He’s close. You probably want to get a little- this is spit ball and back of the envelope. But you- how you would really want to dial this thing in is you’ve got this lump sum payment at retirement. Another $300,000. I didn’t include that. You got the pensions at 60, 65, plus your Social Security, so your income level, let’s say when you retire at 55 with inflation, it’s going to increase. But then at age 67, you’re going to collect Social Security, your wife will have Social Security. So that’s going to bring some fixed income into the play. You’re going to have these pensions. So again, you want to just kind of look at things of, what assets do you have to generate income? And use a conservative rate or do it the- do the reciprocal of it is, what are you spending and divide that in- or what’s your shortfall? What’s the demand for the portfolio? And divide that into the nest egg.

Al: And I think something else and sometimes we talk about 4%’s a good distribution rate at age 65 and older. And that’s a starting point. It’s going to work for some you. For others, like for example, if you’re 65 and you have all your investments in cash, it’s not going to last. You’re going to have to have investments that account for growth. On the other hand, when you’re 60 or younger, we’re usually saying 3%. But that’s not necessarily the case. If you got pension in a few years and Social Security in a few years, you might be able to do 4% or even 5% for just a few years and still be OK. So this is the kind of thing it’s- what we’ll spitball it. But it’s hard to give you a definitive answer. This is where some software, financial planning software really is helpful.

Joe: Or a spreadsheet.

Al: Spreadsheet, yeah.

Joe: And a calculator.

Al: Yeah, sure.

Joe: I mean, if you have that, I think you’re good too. Thanks for the question.

Social Security and RMD Retirement Spitball Analysis (Ann, NY)

Joe: “Dear Joe, Al and Andi, I look forward to your podcast each week.” This is Ann from New York. “They’ve helped me so much in managing and understanding my finances. I would really enjoy a second one each week in the future.”

Andi: It’ll be all about beer.

Joe: Start bringing in your life questions. Cocktail questions.

Al: Then we could have more to talk about.

Joe: We can-

Al: – keep going.

Andi: Don’t ask Joe anything about cocktails. He’ll just tell you to drink Coors Lite.

Joe: Coors Lite baby. Maybe a little Fireball on the side, sometimes, only on special occasions.

Al: It’s like one extreme or the other. I only like Coors Lite- and Fireball.

Joe: Oh, you know, you just- it’s a little cutter, Al.

Al: I get it.

Joe: “We are currently 64 and 58. Before taxes, we currently have annual expenses of $85,000. My husband will start collecting Social Security at 70, approximately $4200 a month. And at that time I’ll also start collecting Social Security, approximately $1400 a month, if I don’t start collecting my own on my own record at age 62. Number one, my reduced benefit on my own record appears to be $5500. If I start collecting at 62, is it better for me to start collecting Social Security on my own record? And then switch to the spousal benefits at 66? Or just wait until age 66 to collect the spousal benefits so that the spousal benefits are not reduced more?” You can’t switch anymore my friend Ann. So she wants to take her own and then switch to the spousal. It’s deemed. So if she takes her benefit at age 62, they’re going to take a look at what is going to be higher, the spousal benefit- as long as your husband’s collecting. If your husband’s not collecting, then you collect on your own benefit at age 50- or 62 and then you can switch to the spousal benefit once he starts collecting and it’s going to be a reduced benefit. So you take $1400 a month. So that’s 50% of his benefit at age 67. And you’re going to take 30% of that which is $420 versus $550. So if you take your own benefit it’s going to be higher than the reduced spousal benefit. So take your own. That’s fine. Or I would just wait until your full retirement- or until you reach full retirement age to take the $1400 a month. That was- I was even impressed with myself on that one.

Al: That was like I’m thinking, man I would need a calculator on that.

Joe: Killed it.

Al: You got a calculating brain.

Joe: Killed it. “When my husband reaches age 72, his RMDs will be approximately $172,000 a year and our combined Social Security will be $67,000 a year. That is $240,000 a year. How much should we keep in liquid funds in case the market tanks since we do not want to sell our RMD stocks if the market is down tremendously, but rather transfer it out in kind? And where should we keep these liquid reserves? Should we keep 5 years of cash reserves in case of a longer market downturn? Thanks for your help.” OK. I don’t get the question here because she already knows that she can take a-

Al: So she doesn’t need any cash.

Joe: Right. If the RMD’s $172,000, you don’t have to take that money in cash. You take the $172,000 out in shares of stock. You can just put it into a brokerage account.

Al: I think a lot of people don’t understand you can do that. So your RMD doesn’t have to be a check. It doesn’t have to be cash. It can actually be shares of stock. So it goes from your IRA, your 401(k), into your brokerage account.

Joe: Where you want to have cash is how much money that you need from the overall portfolio. To live off of. So do you need to spend the $172,000 plus your Social Security? So are you spending $240,000? Again, missing components in the questions.

Al: No, no, no. “We currently have annual expenses of $85,000.”

Joe: Oh there you go. OK, I’m sorry, Ann. You’re good. So, yeah, the fixed income, your Social Security is almost covering $85,000.

Al: You don’t really need much cash here.

Joe: You don’t. If you want 5 years of cash, sure. But the cash is not the RMD amount. What you want 5 or 10 years in cash is what the demand of the portfolio is, what you’re actually taking and converting to cash to spend, not the RMD, because the RMD is not going to be converted to cash, as you can just take it in kind as shares and put it into the brokerage account.

Al: So question for you. I know you can do that from an IRA to a brokerage account. Can you do that from a 401(k)?

Joe: Absolutely not.

Al: OK, I stand corrected on that one. So there if it’s from a 401(k), you can either roll that to an IRA so you can do that. So that’s one approach. Or another approach is if it comes out of the 401(k) in cash, just buy those same securities in your brokerage account, and you’re kind of same same.

Joe: Yep. You could transfer shares out in kind. Like if you do a Roth conversion too, you can convert from IRA to Roth as shares.

How and when to collect Social Security is one of the biggest decisions you’ll make about your retirement. Our Social Security Handbook will help you as you make those decisions, with valuable information about how much your payments can grow, how they’re taxed, spousal and survivor benefits, and much more. Our Retirement Readiness Guide breaks down how to create retirement income, prepare for increased longevity, and control your taxes in retirement. Click the link in the description of today’s episode in your podcast app  to get your free copies of both the Social Security Handbook and the Retirement Readiness Guide in the podcast show notes at YourMoneyYourWealth.com. And if you wanna thank us, just share both the podcast and the free resources with anyone that will benefit from all the free financial information, entertainment, and beer and tax chat. 

How to Leverage a Whole Life Insurance Policy? (Sharon, Waukesha, WI)

Joe: Sharon from Waukesha. She- is she back?

Andi: I think we’ve had multiple people from Waukesha. Now that they’ve heard you say it, they’re coming out of the woodwork.

Joe” Because I can say Waukesha? They’re like wow-

Andi: Because you can say it.

Al: It’s like you’re the only one.

Joe: Yeah. I mean, I can’t say a lot of words, but I can say Waukesha.

Al: You can say Waukesha. Yeah, yeah. That’s a great town name.

Joe: It is.

Al: I like that.

Joe: It’s a nice little town. “Joe and Big Al, thanks so much for your show and for sharing your thoughts on my questions in the past.” See, I knew it was Sharon.

Al: Yeah, you did know, right?

Joe: There you are.

Al: You’ve got that steel trap brain. It’s great. Just get to my age-

Andi:  Steel sieve, whichever.

Joe: Steel trap.

Al: At my age, things start to slip out a little bit.

Joe: Little bit. “Your Money, Your Wealth® is my first choice in podcasts.”

Al/Joe: Wow.

Al: Out of everything? All podcasts?

Andi: There’s like 3,000,000 podcasts out there.

Joe: I would say that I don’t even subscribe to this podcast.

Al: I do.

Joe: I know you do. You love to hear your voice.

Al: But I haven’t heard it 5 years, but I am a subscriber.

Joe: Well, because in the back of the day we were-

Al: We were trying to get subscribers because-

Joe: We only had two.

Al: -it was your mom and my mom. So I made it three.

Joe: Yes. Oh. “I have another question, which I don’t know if I heard come up on recent shows. Any idea on how to best leverage a whole life policy? I have a 90 life whole life insurance policy with Northwestern Mutual. I don’t need the life insurance. And now I want to be smart with leveraging the accumulated cash value. I’m single, 59, and retiring next year. I want to use the cash value in this policy to support future retirement expenses. I don’t have an immediate need for it. Here are the details. So purchased policy back in ‘05. Cash value $74,000; cost basis is $65,000; monthly premium $362,000; annual premium $4300. Do I see the cash value increasing each year? So I do see the cash value increasing each year. How should I look at the growth or the ROI and the cash value component to the cost of the premiums? Would it be better to surrender the policy now and drop the cash into a brokerage account? Or I could continue to pay the premiums and grow the cash value if there was a long-term benefit. Sharing some details on past growth as of June, 2021: death benefits, $270,000, cash value, $73,000. Previous year cash value increases was $7000. As of June, 2020 that benefit is $263,066. So another cash increase of $6000. Thank you for your words and your show and continuing to make me smile.”

Al: Well, I guess if you take the increases minus the premium, it’s around $2000 or $3000 or something like that.

Joe: So we got $3000 and then-

Al: – compared to the cash value-

Joe: is $74,000?

Al: Yeah. So call it-

Joe: 4%?

Al: Yeah. 4%. So that’s your rate of return.

Joe: That’s your ROI.

Al: That’s your ROI. And could you do better than that? Well sure. If you didn’t have life- if you don’t need life insurance, why pay for it?

Joe: Because here’s the deal. She’s in a policy that’s giving her a good fixed rate that it’s Northwestern Mutual, which is a really good insurance company. They’ve been around I think right when Alan was born.

Al: What is it? What does a 90 life whole life policy mean?

Joe: It’s just the name. I think it’s-

Al: It’s the name of that policy.

Joe: Who knows? Don’t worry-

Al: I thought it might be something that-

Joe: Something special?

Al: – as a tax guy I would know.

Joe: Got it. Maybe it’s paid up at age 90 somehow.

Al: OK, maybe.

Joe: Here’s the pros. So you’re getting a good rate, OK? It’s growing tax-deferred. You could take the- let me finish my point, Alan.

Al: I’m just interjecting.

Joe: You’re just so excited.

Al: Oh, I just can’t wait.

Joe: Here’s the pros and then Al can give you his pros. It’s tax-deferred. You have a decent rate of return. If you pull the money out correctly, the money will come out to you tax-free. And if you die prematurely, you have leverage in regards to $270,000 life insurance policy that could go to your beneficiaries. Those are the pros I see. Alan, comment.

Al: Yeah. No, that is the pros. But my con was if you don’t need life insurance, you’re paying money, you’re paying $4000 for life insurance.

Joe: Right. So here’s the con is that if you really want the money to live off of, taking cash value from a life insurance policy is somewhat unique and challenging to- because the policy needs to stay in force. So if you wanted the cash value of $74,000 and you said I’m going to pull $70,000 out next year, and then you got $4000  remaining in the policy, the cost of insurance is going to continue to increase because you have a $270,000 death benefit. There’s a cost to that. But right now, your premiums that you’re paying, plus the interest rate is covering the cost of insurance, plus giving you a premium on those dollars, which is great. But if you start taking dollars from the cash value, you’ve got to keep the policy in force. If the policy lapse, that means either the cash value is gone and then your premium turns instead of $4000 to $30,000, you’re going to be like, I’m not going to pay this and you’re going to let it lapse. Then everything that you took out after basis is going to be taxable as ordinary income.

Al: Yeah, that’s right. So have you ever- any of you- ever heard this from a life insurance person? Is you can have, you can build up your cash value and then you can access it tax-free. And that is true. As long as the policy stays in force and it’s at a certain age, it may get to be rather expensive to keep it in force. But that’s the problem. If you take too much out and there’s not enough cash value to cover some of these premiums, then you’ve got to pay premiums from other income just to keep it in force to keep that a tax-free loan.

Joe: So if you look at it like this, too. So $65,000, first of all. $2000. I’m sorry. So let’s see. $65,000 is the cost basis, so that’s her premiums paid in. So that’s the present value. If the future value today on that is $74,000. And then if I’m looking you’ve had this for 16 years. What is your internal rate of return? And then you’re adding, I’m sorry, what is she adding to this? $4000?

Al: Right.

Andi: $4300 is the annual premium.

Joe: Yeah, OK, I’m sorry, I just totally blew this.

Al: Wouldn’t you have to subtract the cost of insurance out to get the-

Joe: Of course you do.

Al: – rate of return?

Joe: Just spit balling this one.

Al: Well, while you’re doing that, I’m just going to spit ball one second. I personally would surrender the policy. That’s what I would do.

Joe: I would too. The rate of return is OK. Internal rate of return- I keep on spit ball-

Al: And part of the reason I say that, Sharon, is because you don’t need the insurance.

Joe: You earned $10,000 dollars in 16 years. And you’re paying $4000 in a year.

Al: And you got insurance all along, but you don’t really need it. So you paid $65,000 to get $74,000. Right- over 16 years.

Joe: So if you cash it out, you’re gonna be taxed on the growth. But you have $65,00 of basis, that comes to you, you throw that into a brokerage account. The other $10,000 is gonna be taxed. And then you get rid of the insurance. Call it what it is and move on. If you want to avoid the tax, you can do something really stupid and move it into an annuity, but you probably don’t. Then you can annuitize and prorate the tax-

Al: You could. You could prorate it and pay the tax slowly. But it’s only $9000 of gain right now. So it’s not that much.

Joe: So if you don’t need the insurance, I would get rid of it. If you want leverage and die with the policy and give it to whoever, then keep the policy.

Al: Yeah, I agree.

Joe: Thanks, Sharon from Waukesha.

Am I Taking Too Much Risk Investing 15% of My Portfolio in Preferred Stocks? (Edward, IL)

Joe: Edward from Illinois writes in. “I drive a 2010 Honda Accord with 98,000 miles. Lots of life left.”

Al: Yeah, I would agree. Honda Accords, they go forever.

Joe: “I have been buying preferreds as my fixed income since bonds, etc., pay nothing. I buy mainly big banks, JP Morgan, Bank of America, Wells Fargo, Citi, etc. They seem to pay around 4%. I own some older ones approaching call date, paying close to 6%. Preferreds are about 15% of my portfolio. I’m wondering if I’m taking on too much risk. Tell me your opinion. P.S., I drink Landshark Beer mainly.”

Al: That’s Jimmy Buffett beer.

Joe: You know what? This is a new – this is it. We’re changing the rules on the podcast.

Al: All right. OK.

Joe: So we started out with the whole car thing and the pets. It’s because it gets me in the zone.

Andi: Oh, I see where this is going. The zone is much better for Joe if it’s beer.

Joe: I like to understand what people are doing when they’re listening.

Al: Got it.

Joe: So when I’m giving them the answers to their questions, I like to pretend that I’m either driving in their car, having a little conversation with them. Or if they’re going on a walk. You know, and they got their dog with them. We’re together. We’re hanging out. I’m just in your ears now.

Al: Yes. Right. Or if you’re sitting there drinking.

Joe: Yes. Now we got a-

Al: Let’s talk about that.

Joe: So if you want- the car’s good. We like the car. We like if you got a couple of pets, throw that stuff in there. But now it’s- what’s your drink of choice, right? Landshark Beer.

Al: Ever had it?

Joe: Never heard of it.

Al: It’s Jimmy Buffett’s brand. It’s a light beer.

Joe: This is going to give me stuff to do on the weekends. You know what I mean? It’s going to be great.

Al: Try all the beers?

Joe: Right. So Ed, I’m going to be like, you know what, Ed? I had Landshark Beer. And it was phenomenal. Or I’m going to say it was awful. I’m going to give you my review of your drink of choice each week as you tell me.

Al: Knowing you, I would predict you would like Landshark Beer.

Joe: All right. So, yeah, that’s where we’re going with this. That’s it.

Al: We’re done with the cars and the pets?

Joe: No, they can still do that. It’s part of the, you know-

Al: So this is more what they’re going to be doing while they’re listening to the podcast or listening to our answer.

Joe: No, just I like to know what people are drinking. Let’s have their choice of cocktail.

Andi: Because we know that Joe’s is Coors Latte.

Joe: I am the Count of Coors Lite. Is that what- ?

Andi: That’s what he said, yes.

Joe: Landshark. Cool. We got a lot of swag.

Al: So what do you think about preferred stocks instead of fixed income?

Joe: I like preferred stocks. I don’t know how much Edward has. I don’t know how old Edward is. And I’m not sure- and 15% of the portfolio in preferreds? If he said it’s 70%, then I would be like it’s a little rich. But 15% of preferreds, it sounds like he’s fairly sophisticated and knows what he’s doing. The preferred acts like a bond.

Al: Well, presumably he’s got 85% in stocks, I’m guessing because he says he does preferreds instead of- for his bonds.

Joe: Correct. And if Edward’s pulling income from the portfolio, I don’t know. If he’s using the preferreds as income generation, like saying, hey, I’m getting 4% and 6%, and he’s living off that versus reinvesting. Preferreds have their place, of course, in the portfolio. But I don’t like to just leverage preferreds as an income generator. Remember we dealt with that before? It’s like preferreds and MLPs and all sorts of other types of income-producing or only dividend-paying stocks, so they loaded up on just these sectors or these categories. I hate those portfolios, but if you got 10%, 15% of preferreds, I think you’re OK.

Al: Yeah, I think the bigger question is, is 100% stocks the right allocation? And Edward, we would need to know your age and whether- how soon you’re going to need any of this money.

Joe: All right, Landshark. OK, folks, give me your- no one’s going to do it. Because I want people to- I want to do life advice. And I want to know what you’re drinking cocktail-wise.

Al: I guarantee people are going to say what they like to drink.

Joe: All right, folks, thank you so much for your questions. Keep them coming. Bring your cocktails. Then we’re going to have a party. And we’ll see you again next week. The show’s called Your Money, Your Wealth®.

_______

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