What’s the next move for a 22-year-old who wants to retire early at 50? Can another YMYW listener afford to retire by the ocean in 10 months? Can Flowergirl and her husband AND her boyfriend retire next year? Joe and Big Al also check extensive retirement spitball math sent in PDF format. Plus, what are the fellas’ philosophies on single vs. married tax rates when one spouse passes, and how does high state income tax impact a retirement strategy?
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- (00:46) I’m 22. What’s My Next Move So I Can Retire Early By Age 50? (Nic)
- (03:54) Can We Afford to Retire by the Ocean in 10 Months? (Joe, Sacramento, CA)
- (06:43) Retirement Spitball for Me, My Husband, and My Boyfriend? (Flowergirl, Tennessee)
- (17:27) Check My Retirement Spitball Math? (Jim)
- (34:30) Widow’s Tax: Single Vs. Married Tax Rates (Kevin – voice message)
- (39:00) Does High State Income Tax Impact My Retirement Saving Strategy? (Ron Burgundy, Washington)
- (42:56) Comment: Crushing Dreams and Ponzi Schemes (Juan)
- (45:05) The Derails
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The title of Your Money, Your Wealth® podcast 395 is a mashup of today’s retirement spitball analyses: what’s the next move for a 22-year-old who wants to retire early at 50? Can another YMYW listener afford to retire by the ocean in 10 months? Can Flowergirl and her husband AND her boyfriend retire next year? Joe and Big Al also check extensive retirement spitball math, sent in PDF format. Plus, what are the fellas’ philosophies on single vs. married tax rates when one spouse passes, and how does high state income tax impact a retirement strategy? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA.
I’m 22. What’s My Next Move So I Can Retire Early By Age 50? (Nic)
Joe: “Hey, I’m Nic. I’m 22 years old. I have $40,000 in my liquid savings. I have $25,000 in my Roth TSP. I was an active duty Navy, no longer. Looking at rolling that over so I can put more money into it. While this isn’t really my question, if you have any suggestions on how to roll it over or what to do with it, I’m all ears. I work and go to college full time and earn $65,000 a year working in IT. I have zero debt, own my car outright and rent a small apartment in Phoenix, Arizona. Can you gentlemen please help me with what the next move to helping me retire by 50 is? Please let me know. My family is a bunch of avid listeners. Thank you, guys.”
Andi: Awesome. Thank you, Nic.
Joe: Right. Family is a bunch of avid listeners.
Andi: Not necessarily to this show.
Al: They listen to other shows.
Joe: Appreciate his active duty, Navy.
Al: Yes. Nic, thank you for your service, first of all.
Joe: Yep, absolutely.
Al: And you know what, guys?
Joe: The guy’s killing it. He’s only 22 years old.
Al: 22 years old. Crazy. You’re doing great.
Joe: Without question.
Al: Keep it up.
Joe: You got $40,000 in liquid savings, plus he’s almost got $100,000.
Al: I know.
Joe: $75,000- the guy makes $60,000, he’s going to school full time.
Al: Did you have $100,000 at age 23?
Joe: 22? No.
Al: Me neither. Wasn’t even close.
Joe: I was like running up $100,000 bar tabs.
Al: Took you 10 years to pay off.
Joe: I’m still paying them off. Yeah, at 22? Not a chance. No. But congrats. I guess rolling over the TSP into a Roth IRA- you don’t have to necessarily roll the TSP into a Roth IRA. You can open up a Roth IRA, Nic, and you can contribute to it. So the TSP is a really good account. It’s very low in cost. If you want to make it simple, you might want to roll it to a Roth IRA. You can open one up at Schwab, TD Ameritrade, Vanguard, wherever. Something where you feel comfortable with managing the money. So you can roll the TSP there, keep the TSP as is, and just open up a Roth IRA. And you can make contributions to that every year.
Al: Right. And at age 22, this is what I would tell my kids, and did tell my kids, you want to be in the market as opposed to in cash and bonds in this Roth IRA and be globally diversified, low cost. So get a total stock market fund. Vanguard has one, so does Schwab and others. Get a total international fund and focus on equities because they’re going to grow more, they’re going to be more volatile, but over the next 28 years, they’re going to produce the rate of return that you’re looking for.
Joe: And I would try to save 20% of your income. That would get you probably to retirement at 50.
Al: Yeah. Especially starting at $100,000.
Joe: So that would be the goal, trying to save 20%. And if you can do that, then try to save a little bit more. Then you’re going to have some optionality. But congratulations, Nic. Thank you and your family for being avid listeners.
Can We Afford to Retire by the Ocean in 10 Months? (Joe, Sacramento, CA)
Joe: All right, we got Joe from Sacramento, California writes. And he goes, “I’m 54 years old and I work for the State of California. I want to retire next year in June when I turned 55. I’m married with one 15-year-old child. Wife is 51 and will retire when she’s 54. I have a pension that will bring in $70,000. Wife has a pension that will bring in $30,000 but not until she’s 60. I have a few years with no cash flow. I have $600,000 in my 401(k). Wife has $900,000 in the TSP. I have $170,000 in Roth, $1,400,000 in inherited IRA, at 8 years left since the passing of 2020, $1,500,000 in brokerage, $100,000 for child college, and another $40,000 in 529 plans. Estimated Social Security is $2000 per month for each of us at 67. We spend around $10,000 each month. Wife is maxing out the TSP and I’m maxing out my 401(k) and 457, but only have 10 months before I retire. We have 3 dogs, drink Irish mules. I would love to live by the ocean on the West Coast if I could afford it. Will this work out?” Okay, he lives in Sacramento, so he’s already close to the West Coast. He just wants to move a little bit closer.
Al: He can drive there, take a few hours maybe.
Joe: All right, well ocean-
Al: Or drive up to Tahoe and spend time by the lake.
Joe: He wants ocean.
Al: I know, but just saying, it’s water.
Joe: Got it. Okay, so $10,000 a month before 67. He’s 55, he’s going to retire at 55. So he’s got a 12 year gap-
Al: Right, before Social Security. But if he wants to spend $120,000 and he’s got a pension of $70,000, he only needs $50,000. And if you add up all his assets together, it’s roughly $4,600,000ish.
Joe: So let’s go, what’s that, 1. –
Al: It’s 1.1%. So, yeah, you’re fine.
Joe: But you need some of that cash and capital to buy his new house on the ocean.
Al: Depending on what you buy on the ocean, might change it. But if you stay put- see, at age 55, we would say probably- so that’s obviously retiring young. Maybe you want to limit it to a 3% distribution rate, maybe 2.5% distribution rate if you want to be conservative. Your distribution rate is 1%. And that’s before your wife’s pension and before Social Security. So as it stands right now, Joe, you’re in great shape. Now, if you want to buy a nice home by the ocean, it could change a little bit.
Retirement Spitball for Me, My Husband, and My Boyfriend? (Flowergirl, Tennessee)
Joe: And we got a little email here from Flowergirl in Tennessee. But I don’t see anywhere on this email that says ‘thanks Flowergirl’, or did you make this name up?
Andi: No. I did not. That is actually what she put as the name. And as you go through the email, you will see that she actually explains.
Joe: Got it.
Al: Oh, okay.
Joe: Alright. “Hello Joe, Andi, Big Al. Hope to retire next year at 52yo, and I would love to hear your spitball on the success of our retirement plan.” Alright?
Joe: Okay, here we go. “My husband is 53yo, and he has given an early retirement due to medical OGI-.”
Joe: OJI. Medical OJI.
Al: I don’t know what that means either.
Joe: “- and gets a pension of $36,000 a year. He only pays $1100 in tax on this income. My husband-“
Andi: On the Job Illness.
Al: Okay. There you go.
Joe: Gets pension of $36,000. On the job illness. Thank you, Andi. So a lot of that’s tax-free. $1100 is gonna be taxed on this income. “My husband plans to take Social Security at 62. My boyfriend-“ Okay.
Al: Oh, okay.
Joe: “- who is also my husband-“
Al: that’s good.
Joe: What the hell? “-works-” So what… I’m so confused. My husband and my boyfriend, but my boyfriend who is also my husband.
Al: Same- same person.
Andi: Joe are you familiar with the concept of role playing?
Andi: Yeah. _____ role plays Big Al.
Al: How does that go over?
Joe: Just try to be really boring.
Al: And I’m at home trying to be snarky. It’s like Annie, what’d you do this for?
Joe: Oh my gosh. Alright. So little role play, little freak show here. I like it.
Al: Okay. Alright.
Joe: Now we’re back on track. “-works as a part time gig making $14,000 a year, so he can take me out to dinner, dancing and Lemon Drops. He likes Coke and Jack.” Okay. I’ve never heard it like that before. “My husband likes homemade wine and moonshine.” Is it Coke and Jack or Jack and Coke?
Al: Jack and Coke.
Andi: This is her boyfriend, and they’ve got a really exciting relationship.
Joe: Yes. It’s super exciting. Okay. “I make $316,000 a year from my job. And about $60,000 a year from long term capital gains from investments. We have $2,000,000 in 401(k)s and Traditional IRAs and another $1,000,000 in a brokerage account.” Alright.
Joe: No wonder why you got a husband and a boyfriend. “We have no debt on our house. We have about $250,000 in cash. My husband drives a 2005 CRV and my boyfriend drives a 1990 GMC Suburban. And I drive a 2015 Town and Country. We would like to start Roth conversions next year in the top the 24% tax bracket. Does my husband’s pension reduce the amount we could convert to Roth if we wanted to stay in the 24% tax bracket?” Yes. But only the $1100 that is taxable. So I mean, it’s not gonna be a ton.
Al: Well, no, that’s the tax he pays, $1100. So I don’t know what the taxable part is.
Joe: Oh, he’s paying $1100-
Al: -in tax.
Joe: – on the $34,000 pension?
Andi: $36,000 pension.
Joe: Oh I’m sorry, $36,000 pension? He pays, oh $1100 in tax.
Al: Maybe they’re married filing separately.
Joe: And then the boyfriend- I mean, and the boyfriend’s filing separately and they’re filing married?
A: But they’re one in the same.
Joe: Got it.
Al: Do we need a little flow chart?
Joe: Yeah, Big Al, we need a flow chart. That’s good. So, yeah, whatever is taxable on the pension- so some of its tax-free, whatever’s taxable would add to your taxable income that would include-
Al: That’s right. Assuming you file married filing joint. If you file married filing separate, and I don’t believe Tennessee is a community property state, then it would not necessarily affect your Roth conversion. “Does a long-term capital gain income reduce the amount that we can convert?” No. The long-term capital gain will sit on top of your ordinary income. So you convert to the top of the 24%, then the capital gain sits on top. What you gotta look out for is the net investment income tax.
Joe: Oh, “We will have to pay the 3.8% Medicare surtax in 2023?” Yeah, Probably. You make $350,000 a year. Your boyfriend or- has the side gig, your husband has the pension-
Al: – has the disability or whatever.
Joe: And so, yeah. All of that is gonna be added to your taxable income. And then your capital gains of $60,000 is gonna sit on top of that. Your 3.8% Medicare surtax will be taxed on those dollars.
Al: Yeah. So now for purposes of our discussion, we’re gonna assume you file married filing joint. So that means then, yeah, it’s all the combined income to take you to the top of the 24%. You don’t even count your capital gain income. So go to the top of the 24% without your capital gain income. It’ll still be taxed at 15% or-
Joe: -could be 20%.
Al: -could be 20%. You will have to pay the net investment income tax. That’s 3.8%. That starts when your adjusted gross income- modified adjusted gross income is over $250,000, as a married couple, which sounds like you’d already be there.
Joe: So any dollar over $250,000 would be subject to the surtax. So if you’re already making $350,000 then 100% of that capital gain would be subject to it.
Al: Yeah. And it- but it’s that 3.8% is only on capital gains, interest, dividends.
Joe: “We will pay our bills with our husband’s pension. My boyfriend’s side gig, and $20,000 from cash. Health insurance is included in the medical retirement for the family, the conversion income tax payments will come from the brokerage account. I plan to become a flower girl or a flower child next year. And bring in no significant income. Strictly, a kept woman. I may even get a tattoo. Always wanted one of those.”
Andi: You go Flowergirl.
Joe: Flower child. “We have two grown unmarried children, a naval officer and college student. We have a 529 for the college student and if he goes to grad school, well, he’s on his own. When he graduates, I’m burning the apron strings and running away with my boyfriend. The kid will need to cut the grass and keep the dog until we return, whenever that is.”
Joe: Alright. “We don’t care to leave anything to our kids as we plan to spend every dime and bounce our last check. They can have the house as the inheritance as it’s worth about $800,000 in today’s dollars. I plan to take SSI at FRA. What are we missing? Are there any taxes we are missing? Thanks for your spitball. Love, peace and chicken grease.” Love, peace and chicken grease.
Al: It rhymes.
Joe: I think that is the most unique, unusual email we’ve gotten to date.
Joe: I mean, since the inception. We got boyfriends, husbands, chicken grease, flower child.
Al: Remember we got a call once from somebody that said, ‘knowing that the world is going to end in two years. How should I invest?’ I remember that one.
Joe: Those were kinda yahoos. This was creative and fun.
Al: It was. It was good.
Joe: Yeah. Sorry if I butchered it as I read it because I was shocked of what I was gonna read next. What is she missing? I mean, they make a ton of money. She’s 52 years old, husband’s 53. Unfortunately, he got a little injured on the job. He’s got have some pension there he’s gonna take. So they’re super young. And so they gotta bridge some gaps. She’s gonna work. I don’t even know when she’s gonna turn into a flower child.
Al: At 53.
Andi: Next year.
Al: She’s 52.
Andi: “I plan to become a flower child next year and bring in no significant income. Strictly a kept woman.”
Al: When she retires.
Joe: Oh okay. But did she tell us how much money that they’re making- or spending?
Al: I don’t think so. That’s what I’m checking because we kinda need that.
Andi: They said they’re “gonna pay their bills with the husband’s pension, the boyfriend’s side gig and $20,000 or so from cash.” So the husband’s pension is $36,000-
Andi: -boyfriend’s side gig is $14,000. Then $20,000 for cash.
Al: So they’re spending like, $70,000, I guess.
Joe: So $20,000 is what they’re gonna be taken from their investments?
Al: Yep. And they got $3,000,000.
Al: Yeah. Does that math work?
Joe: That math is just fine. And they already got 529 plans for the kids and naval officer, and a little grad student that’s going to be –
Flowergirl, if you need a recommendation for a tattoo artist, let me know! Listen, don’t Google your way to your golden years when making your plans to cut the apron strings and run off into your retirement sunset. This week on the Your Money, Your Wealth TV show, Joe and Big Al help you separate the facts from the fiction and ignore the hype telling you which stocks will make you rich and the minute-to-minute headlines about the market. Click the link in the description of today’s episode in your podcast app to go to the show notes, watch the show, and, while supplies last, reserve your free copy of Ignore the Hype: Financial Strategies Beyond the Media Driven Mayhem, the latest book from Pure Financial Advisors’ Chief Investment Officer, Brian Perry, CFP®, CFA. Get yours now in the podcast show notes.
Check My Retirement Spitball Math? (Jim)
Answering your money questions. And in this case, we are answering a full novel.
Al: This spans pages.
Joe: It’s like Jim, settle down. He goes. “Hi, Andi, Joe, Big, Al. Sorry this is a bit long. I also attached a PDF in case the email blows up.” Anytime you got to send a PDF, Jim-
Al: It’s a little too long.
Joe: Just FYI, it’s a little too long. It’s just a little rich. All right, I’m going to bust through this as fast as I possibly can. And still give-
Al: – good answers. Great spitball.
Joe: Great spitball-
Andi: He’s going to use his superpowers today.
Al: Yeah, we will.
Joe: “Dear Joe, Big Al and Andi. I’m a relatively new listener and love the show.” Okay, well, now you know not to send us a novel. “The weekly podcast makes the drive to work in Chicago highways a learning experience and enjoy the humor as well. Great information.
Looking forward to a future episodes. I’m nearing retirement and have had several portfolio reviews in the last year. Each opinion offered different views regarding RMD, insurance and investment vehicles, spend down strategies, etc, etc, etc. Given the conflicting info, I’m wondering if you could give me a spitball assessment on the following questions.” Yeah, so he’s actually going to other advisors, paying them-
Al: – and getting different advice.
Joe: And then he’s like, well, you know what? I should send a PDF file that is so large that can barely get through the Internet airwaves so Joe and Big Al can spitball this for me.”
Al: Okay, well, we’ll give it our best shot.
Joe: All right. “Will we have RMD tax issue as the advisor insurance agent states based on their Monte Carlo simulation? Some say we will, others no. In the last two years, I converted $60,000 annually to Roth from deferred, keeping us in the 22% tax bracket and below the IRMA threshold. Some say convert up to 24% or $330,000 to knock down the RMD threat and just pay the Medicare up charge.” Okay. No idea, Jim.
Andi: He did say his financials are at the very end of the question. You have to go to the next question.
Joe: Oh, you start with the financials Jim. Jim, I know you’re a new listener. You start there.
Al: Okay, we’ll put a pin on that one. Come back.
Joe: Okay. Insurance. “They say rather than Roth conversions, use withdrawal tax to fund life insurance, which will act like a bond percentage of your portfolio while instantly providing $1,000,000 in coverage plus increasing cash value guarantee 2% to 3% per year.” Yikes. Yeah, get rid of that. That’s a strategy, but- “Roth would provide tax-free gains, but no coverage. Additionally, the insurance would not be subject to the stretch 10-year payout rules.” Yeah, because it’s paid out 100% in year one.
Al: Yeah, there are advisors that recommend that, and typically they’re the ones that make commissions-
Al: – on that product.
Joe: Okay. Considering our situation, what is a good spend down strategy? Some say use the taxable investment brokerage account first, then Roth because there isn’t any tax burden. We will pass the 5-year test, then tax-deferred last. So what spend down looks good for us?
Or might one strategy work until 70 and shift to another? I’m assuming our AGI tax rates will be more in retirement.” Okay, so, Jim, your spend down strategy is not non-qualified, then your RMD and then tax-free. The whole purpose of doing conversions and getting yourself diversified from a tax perspective is that you probably want a blend of all to keep yourself in the lowest tax bracket possible. Because what happens when you take from, let’s say, your brokerage account that’s taxed at a capital gains first, so you’re taking that money out and letting your deferred continue to grow. And then all of sudden, you have RMDs, you’re out of taxable investments in most cases. And then so most of your income is going to be taxed from the retirement account that’s all ordinary. So you want to be a little bit smarter. You’re getting rules of thumb and product pitches from these advisors. And I don’t even know your situation.
Al: And I will say that’s a common recommendation.
Joe: Very much so.
Al: And I will tell you this. If you look at one year at a time and only focus on one year, that’s a good strategy. I don’t have to pay tax this year. But if you look at the next 20, 30, 40 years, this is a horrible strategy. You got to look at all these tax years at one time to figure out the best strategy. Because here’s the big mistake, as you have no taxes, right? You have no income, very little income. Maybe you have a standard deduction, maybe you have negative taxable income, right? So you pay no tax for 5 years, whatever. And then all of a sudden, when you have to start pulling out of your deferred accounts, now you’re in a higher tax bracket. You’re much better off making those level by doing Roth conversions.
Joe: All right, number 4. “Lastly, I always figured we are going to be okay with what we’ve saved. But inflation, taxes and uncertain returns now have me questioning about that and not allowing ourselves to enjoy the savings. So is it gloom and doom? Will we have enough? Can we manage what we have more effectively for taxes? Can I relax a bit?” That’s all underlined.
Al: That’s the big question of the day.
Joe: That’s a big question.
Al: That’s the only question underlined.
Joe: Yes. All right. So now do we get to the meat?
Al: Yeah, I think so.
Joe: Okay, here we go. “My wife will be 66 this year and currently draws Social Security. And I’ll be 64, planning to work until 65, longer or part time is needed and wait until 74 my Social Security. At 70, we expect to earn $40,000 a year gross with $35,000 net from Social Security. I currently earn $75,000 a year gross and my wife $26- or $26,000 I’m sorry, year gross. Of that we average $78,000 take home or $6500 a month. Unfortunately, our expenses typically exceed that amount by about $1500 a month due to home improvements, making our annual needs, et cetera. Our total investments include tax-deferred 401(k)s and IRAs of $2,700,000, Roth IRAs of $354,000 and brokerage account of $200,000, mostly money market. The latter I tap to make up the shortfall when we overspend the income. And it was how I was going to pay myself from 65 to 70. We still have a mortgage at 3.6% for another 20 years. So I did the math spreadsheet. I hope it’s right. My assumption formulas include 2.5% inflation, a 5% return and the Roth and tax-deferred accounts. The brokerage account, which is our emergency fund, slowly erodes with inflation. The math is all based on my age and joint balances show our annual expenses climbing from current $96,000 a year to $120,000, age 72 to $150,000 dollars a year and age 82 at $200,000 and at 92 pages based on 2.5% inflation, our max RMD will hit $154,000. We will come at age 89 and our balances will be $1,700,000 tax- deferred, $660,000 in Roth in brokerage $117,000 in brokerage- I’m sorry. This is all based on RMD withdrawals only, not withdrawals to help us get by. Maybe the spitball will show how/where to fund the shortfalls, so the above figures are a starting point. Maybe the max RMD coupled with our Social Security income will never really face huge tax bills as the buckets get adjusted, et cetera. Appreciate the efforts and your weekly banter. Agree that the Review Compensation Committee, that’s you Big Al, should give Andi, she’s great, a well-deserved increase.” Look at this guy.
Al: Yeah. What episode was that? 398?
Joe: 396, 27 minutes in, “I drive a 2017 Nissan Titan and I’ve been known to suck down a frosty Sierra Nevada Atomic Torpedo-“
Andi: Double IPA.
Al: That’s a serious beer.
Joe: Yep. “-on the patio while throwing the ball to our 3-year-old golden retriever, Thor. Thanks again, Jim.” All right. Very cool. Thanks, Jim, for the question. I appreciate you writing the novel. First thing you got to do is add up your assets just to make sure that you can retire.
Al: Yeah. So I get about $3,200,000.
Joe: All right, so you got $3,200,000 in total assets, and then you want to spend roughly what, $100,000 a year?
Al: Yeah, he says $96,000. Whatever.
Joe: Okay. Minus the $26,000 from his wife’s Social Security.
Al: Yes. So you need about $70,000 from the portfolio.
Joe: Okay. So he’s making that right now as an income. But when he retires, that income is going to go away. And now he needs to start taking dollars from the overall portfolio.
Joe: So you take your shortfall. Maybe it’s higher some years. Maybe you want to spend $150,000 one year because you want to go on more vacations. You got more home improvements. Some years you might spend $80,000. But this is a rule of thumb just to make sure that you’re kind of on track. So the first step is to add up all of your assets, look at what you’re spending minus the fixed income that’s coming in, and find your shortfall. So the shortfall is $75,000. You divide the $75,000, that’s the shortfall that needs to come from your portfolio, into the total portfolio, which is what percentage?
Al: Call it $3,200,000. Let’s call it 2.2%, 2.3%.
Joe: Okay. So off the cuff, you’re looking at all right, hey, this looks okay, you’re about under 3% now, you could probably do this.
Al: Yeah. And at age 65 and 66, let’s see, he’ll be 64. Not sure about his wife- oh wife will be 66 this year. You could probably do 4% distribution rate. And so you’re fine. You got cushion here.
Joe: So from a cash flow perspective, are you overreacting? Not necessarily, because you’re close. We have volatile stock market.
If the market drops quite a bit and you’re pulling money from the overall accounts and you don’t necessarily have a strategy, I can see why you’re meeting with hundreds of advisors and writing this novels.
Al: Something else to consider is we often say 4% is a good distribution rate at age 65 when you’re retiring. But that’s prefaced on you staying invested. And so some people think I can just take 4% out of my savings account. No, that would be predicated on a 60% stock/40% bonds.
Just if you’re trying to have the greatest chance of success. But you always have to be conscious of the market is not always predictable. So you have to have some built in cushions here.
Joe: And he’s super close. I mean, he could blow this thing up wide open, make a couple of mistakes, and yeah, I can see why there’s some anxiety there because you have a paycheck now you got to replace the paycheck with your overall investments. Do you have enough? We think, yeah, you’re pretty close. Second step then is to look at how are you going to create the retirement income long term. And what is the tax liability going to be on that retirement income? Because if you can save money in taxes, then that money is going to continue to stretch for you.
Al: Correct. Yeah.
Joe: So then he starts talking to advisers to say, all right, well, I got $2,700,000 in this retirement account. Should I be looking at Roth conversions? And the answer is probably yes, but you don’t have a lot of liquidity to eat one, pay the tax, and to two, live off of as you’re converting. So when you look at $2,700,000 Alan, and he’s 64 years old, so let’s just fast forward 10 years. So let’s say this $3,000,000 is $5,500,000.
Al: Or even $5,000,000, just to make it simple.
Joe: Okay. So your required distribution at 72 is going to be $200,000. He’s going to have about $50,000, $60,000 combined of fixed income?
Al: Yeah, his $35,000 to- yeah, about $60,000.
Joe: Okay. But that’s not including the distributions that he’s taken along the way, because he needs to live off of this over the next 10 years.
Al: So it’s going to be a little bit lower probably.
Joe: So let’s call it $4,000,000.
Joe: Fair enough?
Al: Yeah. Good enough.
Joe: All right, so $160,000 plus that- let’s call his taxable income is going to be roughly $200,000.
Al: $200,000 minus standard deduction.
Joe: So at $200,000 or anywhere between $180,000 and $220,000 is going to be where he’s going to fall. As a married filing couple, what tax bracket will he be in?
Al: Yeah, that’s 24%.
Joe: So that’s why you’re getting the advice to convert to the 24%, because the 24% will turn to 28%. Potentially, you could fall into Alternative Minimum Tax and so on and so forth. So you’re buying the tax cheap today. But I don’t know if he needs to go full bore all the way up to the 24% tax bracket. Because the 24% tax bracket is huge.
Al: It is huge. It goes up to over $340,000 for 2022. And the thing is that you have to look at your cash flow. Just like you said, Joe, there’s only a couple of hundred thousand to pay the tax and have cushion to live off of. Right. So anyway, you have to be sensible with all these things together.
Joe: So you would want to look at is that, yes, conversions make sense, but it’s not like go to the top of the 24%. Because if he converts up to $300,000, over the next several years, his RMD might be very little. And all of a sudden, now he’s in the 15% tax bracket. And you can pay tax at 24% when you’re in the 15%. So there’s a balancing act here. You have to run some tax projections. You have to look at the numbers. The person that recommended you taking money out of your retirement account and buying life insurance is out of their mind, given how much money that you have. If you had $15,000,000, then I would say, sure, like the other dude that had $11,000,000, but $200,000 in pensions that spends like $.30 a day, he’s going to have a huge tax problem, but he’s right at 4% or at 3%, I should say.
Al: That’s right.
Joe: That’s not including tax. So I don’t know if you want to give your cash flow away to a life insurance contract that yeah, the death benefit is going to go tax-free to the heirs, but that money is gone. You might need it for long term care. You might need it for additional expenses. There’s all sorts of different things.
Al: Yeah, I agree with that. I would not do that myself.
Joe: So will you have an RMD tax issue? Potentially. Should you buy insurance? No. What’s the proper spend down? We talked about it. You have to have a better strategy than just non-qualified qualified Roth.
Al: Yeah, what you’re trying to do is level out the tax rate over time, not just have low and then spike. You want to even it out. You’ll end up paying a lot less tax over time.
Joe: And then finally, is he freaking out? No. You’re not gloom and doom. I would say doom and gloom. Not gloom and doom. That’s just me.
Al: Got it. Okay. Very good.
Joe: I think he’s okay. I think there’s a lot of planning that he needs to do and implement, and execution is going to be key. So a) first, find a producer that’s not selling product. Find a CERTIFIED FINANCIAL PLANNER™ and a CPA that you can trust and work with, or do this yourself. Continue to get the free assessments and analysis all over the place, and then finally figure out the strategy. The biggest thing is that now he’s got to create the income from the portfolio. And he’s got to be disciplined and consistent with the overall strategy, as things will change in the market, things will change in tax codes, things will change in his life, and he’s got to be able to change with that. That’s where most people blow up and that’s where most people fail, is that they’re not dynamic or they’re too dynamic. Right. Then they freak out when the market turns, and then they stop the strategy or they pause or they get out of the markets. Or they stop doing the tax strategy when markets are down, that could be the best time to do the tax strategies.
Al: Yep. I think we got it.
Joe: All right. You asked a really long question. I gave you a really long answer. Hopefully you enjoyed.
You’re invited! Join me as I moderate your questions on Creating a Healthy Retirement at our free webinar at 12pm Pacific time on Wednesday, September 28th! Associate Advisor Joe Schweiger, CFP®, from Pure Financial will provide insight into evaluating the limits on your finances. Learn about making a budget, how a written financial plan can improve your retirement, and strategies to bring lower your taxes. Click the link in the description of today’s episode in your podcast app to go to the show notes and register for the Creating a Healthy Retirement webinar now. If you’ve got money questions, click ask Joe and Big Al On Air in the podcast show notes to send them in as an email or as a priority voice message, like Kevin did:
Widow’s Tax: Single Vs. Married Tax Rates (Kevin – voice message)
Kevin: “Hi, Joe and Al. My question is kind of a philosophy question when planning for retirement and tax rates, whether or not the tax you think in the future the tax is gonna be lower or higher. Sometimes, as a married couple, do you consider usually the tax rate at the married couple? Well maybe if one of you dies early? What’s the tax rate gonna be as a single person? So you might be planning- you say we’re gonna… our taxable income be $80,000 a year as a couple, 12% tax rate. One of you dies, boom that all of a sudden shoots up to 22%. Just what’s your philosophy on that?”
Joe: Philosophy on death?
Joe: And tax rates.
Al: Death and tax. Yeah. Death and taxes. Can’t avoid that.
Joe: Well, I don’t know if it’s philosophy, but it’s a planning mechanism. And I think he’s right on- It’s called a Widow’s Tax, is what he’s referring to.
Joe: And so when you have, let’s say retirement accounts that you have required distributions, maybe it’s a pension, maybe it’s whatever fixed income that you have. And what he’s saying, it’s $80,000 as a married couple, well, you know, I’m a 12% tax bracket. But if one spouse’s die, then I still have that $80,000 of fixed income, I’m gonna shoot myself up into a lot higher tax bracket. And yeah, we definitely wanna look at that for sure. I mean, if someone has impaired life expectancy or if they don’t. I mean, if someone has a really large retirement account, those are some of the aspects that you look at. If one spouse dies, what is the tax gonna be? If it goes to the next generation, what are the kids or the grandkids, whoever the money is gonna go to, what is their tax rate? So there’s multiple things that you wanna be looking at in a well thought out comprehensive strategy.
Al: And you know, we talk about Roth conversions. Sometimes.
Joe: We do.
Al: On this show.
Al: It’s come up. And I would say my philosophy, so I’ll use that word, because-
Joe: Good. Sound smart.
Al: -he brought it up. My philosophy is to plan based upon current tax rates or known changes in tax rates, like we know that tax rates are going to go up in 2026. Could it change between now then? Of course, but that’s what we know. And you plan on your tax rate right now as a married couple. That being said, you have to have that in the back of your mind. And that is a factor in doing Roth conversions, particularly if you think one has impaired life expectancy versus another one.
Joe: Or maybe one is a lot older.
Al: Yeah. One’s a lot older. Yeah. Exactly. And so then it’s like what that makes Roth conversions even that much more important. Because right now for the first several brackets, the single rate- there’s the same rates, 12%, 22%, 24%. But it takes twice as much income to get there as a married couple versus single. So you know when one spouse dies, you’re gonna be in a higher tax bracket.
Joe: Yeah. So I mean, it’s double. Right?
Al: It’s double.
Joe: So $80,000 roughly is the top of the 12% and $40,000 is the top of the 12% for single.
Al: And that happens for, I think for the next two brackets after. When it gets to the highest brackets, it’s not quite double anymore. But the point is that your tax- you’re gonna pay more tax as a single tax payer than married in most cases, if you have basically the same income.
Joe: And if someone has- we’ve done like- I hate to say it this way, but like, death bed type Roth conversions, you know, someone is terminally ill and like alright, well, what’s gonna happen to the widow when they inherit the money. So there there’s all sorts of different things that you’ll wanna look at. But I think you start with if you’re married, you’re married. What’s the tax rate now? What’s the tax rate in the future? And then you kinda take a look at your core strategy there. And then from there, you take, I guess more layers off the onion.
Al: And sometimes- so this is maybe not quite the same, but maybe related, which is in certain cases, like if once spouse dies, and there’s a big life insurance premium or something like that, or there’s a huge step-up in basis- so that surviving spouse on some levels will be better off. But I never like to make that our core- I never like to have death as be like the core plan. I mean, it’s something to be aware of and this is the same with this. It’s something to be aware of, and it makes it even that much more important maybe to consider Roth conversion, but it shouldn’t be part of your core strategy.
Does High State Income Tax Impact My Retirement Saving Strategy? (Ron Burgundy, Washington)
Joe: We got Ronnie Burgundy writes in from Washington. He goes “Hey Joe, Big Al, Andi. Love the show, enjoy an Old Fashioned with a nice steak.”
Andi: Sounds very Ron Burgundy-esque?
Joe: “a little Busch latte on a Friday night and a little Pacifico on the golf course.” I would flip those.
Al: Would you?
Joe: Yeah. I would have the Busch light on the golf course and then the Pacifico on a little Friday night.
Al: Got it. Okay. That’s your preference.
Joe: I think so. Yeah. Pacifico. Probably can only in a couple on a golf course, he might go through couple more. A little Busch light. We’re just kinda-
Al: I think they’re pretty similar. To me.
Joe: “Now to the question. My wife and I make $180,000 a year combined. 32yo, we are moving to Washington from Oregon. We just recently started maxing out 401(k)s, IRAs, HSAs and currently going completely Roth. A little behind in retirement overall, $200,000 portfolio, 75% Traditional/25% Roth. I was hoping to get your thoughts on how much we should be allocating towards Roth after we move to Oregon. I know every situation was a little bit different. Just looking for a little spitball here on a high income state and the effects of Roth versus Traditional. Thanks.” What do you got there, Big AL?
Al: Great questions.
Joe: He’s going all Roth. You’ve got $180,000 of dollars combined. He’s going from Washington to Oregon.
Al: Yeah. So Washington is an income tax-free state. There’s plenty of taxes, just not income tax. Oregon has a tax. It’s on the high side. Not as high as California that we’re in, but Oregon is still relatively high. So then the question is, should I wait- should I still do the conversions when I’m in Oregon? Because now I have to pay state tax?
Joe: Or go all Roth in his contributions?
Al: Yeah. Yeah. Go exactly. And the answer- the way I think about it anyways. is it depends how long you’re gonna be living in the state. Like, let’s say you’re gonna live and you probably don’t know at age 32, where you gonna live, but I’ll do it another way. Let’s say you’re in Oregon right now and planning to move to Washington and you’re near retirement, and you’re several years away from required minimum distribution, you might wait to do your big conversions until you move to Washington as long as you have enough time to get it done. Now at age 32, I’m not that worried about the state tax. I think the idea of getting the money into Roth is good. You don’t necessarily need to get it all in though. But if you could get a lot of it or even most of it at that age and have all the tax-free growth, I personally wouldn’t worry too much about the Oregon tax.
Joe: Okay. Yeah. I wasn’t sure where you’re going with that, bud. You were like well, yeah. Let’s just assume that you’re 70. And you’re not living in Washington and moving to Oregon. It’s vice versa.
Joe: And let’s just pretend that you have $1,000000. It’s all these hypotheticals that have nothing to do with our boy, Ron.
Al: But more than Ron is listening to the show. I’m giving more color here.
Joe: So Ron, let me answer someone else’s question.
Al: And now I’ll get to yours.
Joe: I’ll get to yours. Oh my, God. I was like, where is he going with this one? Ron, 32 years old, you’re already gonna go all Roth, you’re little bit behind on the savings you think. $200,000 at 32. That’s pretty good.
Al: Yeah it is. I agree.
Joe: You got 25% Roth/75%- Yeah. I would go 100% Roth. Don’t worry about the tax. You’re not gonna miss it. That’s my spitball for you.
Al: I did a bigger spitball than you.
Joe: Yeah. Well, let’s just pretend you’re 70. I know you’re 32. Let’s just go in the future.
Comment: Crushing Dreams and Ponzi Schemes (Juan)
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