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 [...]

Andi Last

Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
June 11, 2024

Market declines just before you retire, or early in your retirement, can really screw up your retirement income strategy. If you’re in the middle of the expensive kid years, how do you avoid this sequence of returns risk when making your retirement plans? That’s “Jaclyn Smith’s” question, today on Your Money, Your Wealth® podcast 485. Plus, can Vern’s wife collect Social Security at age 63, then switch to spousal benefits at age 70? Matt wants to know if 2026 catch-up Roth contributions will be subject to the pro-rata rule, and Tom and Amy are trying to figure out how to avoid Medicare’s monthly income-related adjustment amount, or IRMAA, in their plan for Roth conversions. 

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Show Notes

  • (00:49) How to Minimize Sequence of Returns Risk When Spitballing Retirement in the Expensive Kid Years? (Jaclyn Smith)
  • (17:18) Collect Social Security Early at Age 63, Then Switch to Spousal Benefits at Age 70? (Vern, Beautiful Portland Oregon)
  • (23:30) Will 2026 Catch-Up Contributions to Roth Be Subject to Pro-Rata Rule? (Matt, TX)
  • (23:47) Should We Do Roth Conversions? What About Medicare IRMAA? (Tom & Amy, Northern MN)
  • (31:51) The Derails

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Andi: Market declines just before you retire, or early in your retirement, can really screw up your retirement income strategy. If you’re in the middle of the “expensive kid years”, how do you avoid this sequence of returns risk when making your retirement plans? That’s Jaclyn’s question today on Your Money, Your Wealth® podcast number 485. Plus, can Vern’s wife collect Social Security at age 63, then switch to spousal benefits at age 70? Matt wants to know if 2026 catch-up Roth contributions will be subject to the pro-rata rule, and Tom and Amy are trying to figure out how to avoid Medicare’s monthly income-related adjustment amount, or IRMAA, in their plan for Roth conversions. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

How to Minimize Sequence of Returns Risk When Spitballing Retirement in the Expensive Kid Years? (Jaclyn Smith)

Joe:  We got “Hi, Joe, Big Al, and Andi Last, but not least.”  That’s kind of a little catchphrase now, nowadays.

Andi: Yep.

Joe: “Andi, I’m giving myself the alias of Jocelyn-“

Andi: Jaclyn.

Joe: “- Jaclyn Smith. Jaclyn Smith. Alright, Jaclyn Smith. Because I always wanted to be her when we were playing Charlie’s Angels growing up. My drink of choice is Michelob Ultra. My husband’s is a little Budweiser.” He’s a Budweiser drinker.

Al: Yep.

Joe: “I tell myself that Mich Ultra is a drink of choice for athletic people to make me feel better when I’m about 6 to 12 deep on the weekend.” Oh, Jaclyn.

Al: Okay.

Joe: Wow, man. You’re my cup of tea.  “My husband drives a 2020 ridiculously giant manly Ford truck and I drive a tiny sporty 2021 BMW. My husband’s 55. I just turned 54. We have 3 kiddos, two in college and one is an eighth grader.  Like a certain YMYW host, I had the last baby a little later than most, and now we’ll be a little geriatric mother at high school graduation.”

Al: Can you relate?

Joe: I can.

Al: Okay.

Joe: Right there with ya.  “This also means I am in the middle of a very expensive kid years while I’m also trying to spitball my retirement. I stupidly started all 3 in private school when they were young. Can’t stop now. The good news is that college doesn’t seem expensive at all when you’ve been cash flowing private elementary and high school tuition for years.” I suppose. “Oldest graduates college next year and all is paid for. We have about $120,000 in 529 plans for college for the two youngest and will keep adding. Love your spitball to see if I’m on track to retire around 59 or 60 or sooner when that last kid is out of high school and heads off to college. We will have some anomalies in our finances due to two items.  One, we are between homes. We sold our house of 15 plus years when we got stuck renting with a high interest rate in cost of building.” All right. So they were building a new home?

Al: Well, they sold their house and they’re, I guess they bought, yeah, I think-

Joe: – they got stuck renting with high interest rates in cost of building.

Al: So they put it on hold because they didn’t want to pay the-

Joe: Ah, they sold their house and they’re going to build a new one. So they got stuck.

Al: Temporarily renting and then they didn’t really want to continue with the mortgage rates.

Joe: Understand. “We are currently renting pondering our next housing move. I have to come to love the lack of responsibility involved in renting.”  All right, so yeah, no property tax. Yeah. No.

Al: Don’t have to be called a landlord. Yeah. No breaks.

Joe: Fix this. Yeah. Got it. “Number two, my husband has always been a small business owner. We sold a previous business about 5 years ago. And it was doing okay for 20 plus years. And then due to some government regulations on immigration, turned the financial south and sold the business to get from underneath it. We started another new business that was sporadic, really good profit, and so for our purposes, I’m planning on having this income as pure extra travel and toy gravy.” All right. We’ll travel and toy gravy. Okay. “And not model in this below.”  All right. Okay. So here we go. Okay.

Al: So that’s just, so, so his income’s just extra.

Joe: Got it.

Al: I don’t know what toy gravy is.

Joe: That means it’s just gravy.

Andi: It’s gravy, specifically for travel and toys.

Joe: Yes.

Al: Oh, travel and toy comma. Okay, now I get it. I thought toy gravy was a thing.  That’s how I read that.

Joe: No, it’s a cocktail.

Al: I want to travel, and then I want some toy gravy.

Joe; Toy gravy’s really good. You drink that, and it’s like that peyote, or whatever.

Andi: Peyote?

Joe: Peyote.

Al: Peyote.

Joe: When you’re in Brazil.

Al: Have you done that?

Joe: No. “House renters for now. We do own a vacation lake home paid out for about $600,000. I know this is a depreciating asset and in the finance world frowned upon, but we also have about $450,000 in boats fully paid for.” They like those toys.

Al: Yeah. They do. There’s, that’s the toy.

Joe: I love it.

Andi: Toy gravy.

Joe: Yeah. Toy gravy, that’s right. “Own a residential lot pending a possible build worth about $400,000. Paid off. $700,000 in a high yield savings account from the previous sell of a home.” Alright, so they got $90,000 in a brokerage account, $175,000 in a Roth, $40,000 in a HAS, $30,000 in savings. $1,800,000 in retirement accounts, $145,000 in a deferred comp plan.”

Al: $2,300,000 if you’re keeping track.

Joe: “My pension.  Fairly modeled, working till 60, then waiting and taking pension at age 65, he’s got a couple options here. We can take a lump sum of $650,000 or $3600 a month, joint with 75% survivor. My Social Security is going to be about $4800 or $5000 monthly. Husband Social Security, 67 is $2500 a month. We also have about $100,000 in a SEP IRA.  And when and if he retires, he would also like to have some equity in the business. Hopefully we get a couple hundred thousand dollars back from that. My income is approximately $375,000.” Good for you, man. All right. Where’s the meat here? How long is this thing?

Andi: It’s long. At the bottom of this page, she starts asking the questions.

Joe: Okay, so “maxing out the 401(k) plan, Megatron backdoor of $36,000, started that a couple years ago, maxing out the HAS, annual RSU grants of $80,000 to $100,000 per year based on results, deferred comp adding $15,000 to $20,000 per year, 20% match of total company stock. So, total retirement savings annually is $140,000 plus.  We’ll keep up the above for 5 or 6 more years.  Here are the questions.” Okay. Thank you.  “Income in retirement, $150,000.”

Al: That’s the goal.

Joe: So, they got how much?

Al: Well, they got $2,300,000, but if you, if you do a little math here, if you’re saving $140,000 at 6% for the next 5 years, they’ll end up with just under $4,000,000. So let’s call it $4,000,000.

Joe: Okay. And then that’s at age 65.

Al: That’s, no, that’s at age 59, 59, 60.

Joe: 59, 60.  Okay. And so, their fixed income is going to be pretty good because she’s got the pension. She could take a lump sum or she could have-

Al:  Yeah, that’s right.

Joe: You know, so far so good. This sounds really good.

Joe: Yeah. Although the pension, she works to 60, but it doesn’t start till 65, so 5 year stump period.

Joe: All right. Keep funding brokerage. All right, so here’s, here are some options to ponder. Okay, all right, let’s ponder.  “Keep funding the brokerage the next 5 to 6 years, which should get balanced to hopefully forward to $500,000 by retirement. First 5 years of retirement use deferred comp, which is set payout for 5 years after retirement. Hoping to get this to $250,000 prior to retiring, so the balance would generate $50,000 a year, payout years one through 5.  Okay, we drop from 401(k) to close to the remaining $100,000 gap and then up to married filing jointly approximate tax rate of 22%, converting extra to Roth using brokerage to pay the taxes over that 5 years. Other option is converting to Roth to max of 22% and live off the brokerage as much as possible. Not sure if it’s better to get higher dollars into the Roth, or some into the Roth and live off the rest as a distribution,  okay, you get there.  And number 4, then at 65 pension kicks in depending on interest rates, take the lump sum depending on the interest rate or monthly payment. If lump sum, then add that to the rollover IRA and continue withdrawing from the 401(k) rollover IRA and still converting and living off of those dollars. Number 5, at 70 Social Security kicks in about $60,000 a year. So continue to use 401(k) IRA for the rest.  Any other spitball factors or ideas. I think that I’m really struggling with the first 5 years. What is the best way to prepare for those years? What can I do to minimize the sequence of return risk? My thought was just to get those one to 5 years of expenses mostly funded, and then let the 401(k), IRA and Roth IRA grow as much as possible. Then pension kicks in as a kicker at 65. I know housing is a wild card. We may keep renting 5 or more years, then live in the lake house for a few years after retirement if we have not bought or built a primary home by that time.  Or we can decide to pull the trigger and build and buy. Thanks for your spitball. Your favorite Charlie’s Angel.”  Damn. Man, that was awesome.

Al: Yeah, so let me try to summarize here. So she’s 54, husband’s 55, she wants to work about 5 more years. Give or give or take, wants to retire around 59 or 60. They got $2,300,000 right now. They have a, she’s got a pension option. It’s at 65 of either a lump sum of $650,000 or $3600 a month.  They’re saving. She’s saving a lot. $140,000 a year. If she continues that with what she has at a 6% rate of return, she ends up close to $4,000,000. Okay. So $4,000,000 at age 60, you know, the fact that there’s such good pension, I think you use a 4% distribution rate, even potentially higher, really, but 4% distribution rate on $4,000,000 is $160,000. Retirement goal is $150,000. Now, of course, I’m not accounting for inflation on expenses. So maybe I’m a little short, but yeah, I think, I think this looks fine. Even though there’s a, there’s a stub period here between 60 and 65, I think, I think it works. And there’s all kinds of options that she has in terms of how to fund that 5-year stub period. Right. And you know, any of these, I like the deferred comp idea because that that’s going to happen anyway. So, so in other words, the, you put the money in deferred comp and then it comes out over 5 years. And so that’s, that’s actually perfect. That’s $50,000 right there. Right. And then as far as how you make up the rest of it, you could use the brokerage account and then try to do bigger Roth conversions. That’s probably a good idea.

Joe: Here’s, here’s my thought is that what Jaclyn needs to do is figure out what does that dollar figure need to be by the time she’s 59, or whatever her retirement date is. Is it 59?

Al: Yeah.

Joe: So 59, is it $4,000,000? Is it $4,500,000? Is it $3,500,000? And that’s just by running the numbers. We’re doing back of the envelope spitball here, but we’re pretty close. What number does that need to be at first? And then make sure that you’re doing the appropriate savings and investing those dollars appropriate to get there. And monitoring it, rebalance, manage the risk, and everything else. Before you start worrying about the sequence of return risk on this stub period. Because, don’t focus too, oh, it’s like, alright, well, here, I want to put all this in my deferred comp plan because that could get me $50,000. How about if it gives you $30,000? How about if it gives you a $60,000, right? Is that going to blow up your overall strategy? I think she saves a ton. She’s doing a really good job with how much money that they’ve accumulated now, but I think they’re spenders as well. Right. But if they have a clear strategy and game plan, they’ll probably hit it because they got $500,000 in boats. They got a summer home. They were like, all right, and then the husband’s, you know, he’s a small business guy. He’s got his hands in this business and that business blew up, but then this business is making some money and hey, let’s not count the cash flow of this business. So there’s a lot of different moving parts from just, I think how they look at life.

Al: Yeah, I agree. But, but if I take a step back from what you said, which is the number she gave us, assuming a 6% rate of return, they’ll end up close to $4,000,000, which I think will probably be enough to, based upon everything you told us, that, but in terms of when you make $375,000, and if you say you can spend $150,000, now I know you saved a lot and I get that, but the fact that you’ve got the boat and you’ve got the lake house-

Joe: But he sold some businesses. So he sold some business on some good side and some bad and they made good deals or bad deals.

Al: Maybe.

Joe: So what I’m saying is that you want to be careful here,  find that number of whatever it is, and then say, alright, well, here’s what we’re going to do and save to make sure that we hit the number that we’re shooting for. And then start getting in the specifics of, alright, how much money should be in a Roth IRA, how much money should be in deferred comp, how much money should be in the 401(k). Because I think  people get a little bit into the weeds here on some of this stuff, versus saying, hey, if we have a certain dollar figure, but they still might buy a house, they might build a house.

And all of a sudden, then that, hey, they get into the weeds on that, and that could be a couple million dollar project.

Al: Yeah, that’s true. And the extra money they have for the house, I didn’t count that, but maybe they get a better home than the $700,000, they got a mortgage, so then you got to factor all that in. Assuming that you get-

Joe: Is it really better because it’s more expensive, Al?

Al: Maybe, maybe not. Let me rephrase that. A more expensive home. Yeah. Better. Probably. But, but yeah, as far as sequence of returns, when you get there, I’m just going to take a leap. Joe, I want you to do some calculations first. 5 years, 6 years, figure out what that spending need is. You have that in, in bonds or cash, right? Yeah. End of story. And then you don’t worry about sequence of returns.

Joe: Right. That’s where I was going with this, is once you have that dollar, and then you can start your figuring out what that allocation should look like as you’re getting closer to that stump period. Right. To make sure that you have enough safety in the portfolio to give you the income that you need, and you don’t worry, have to worry about the market. If the market blows up, you have enough safe money to cover that stump period. Right. So, no, love the question.  Great job. Yeah, there’s a lot here.

Al: There is.

Joe: And she’s, she’s spent some time on the planning and she’s probably got a couple spreadsheets and she’s probably doing all of that. I think you’re right there. You probably want to fine tune this just a little bit, but you’re, they’re throwing a ton of money at it at this point. And I think as you get a little bit closer to retirement, then that’s when you want to probably really nail down of how all this comes into play because-

Al: But the, the savings is quite aggressive, and if you can maintain this with the numbers you gave us, you’ll have a lot of resources and there’s a lot of possibilities.

Joe: Yeah.  Got a lot in common with Jaclyn here. She’s 54 with an 8-year-old. I might be close to that age with an 8-year-old.

Al: Yeah, when it happens, yeah.  Yep.

Joe: See if I can make it to 54.

Andi: Looking at the news, it’s hard to tell if we’re headed for a recession, in a recession, or if we’re finally gonna stick the soft landing and avoid a recession. Does the word “recession” make you want to run for the hills, or do you look for a golden opportunity? Defined as a fall in gross domestic product for two successive quarters, recession not only impacts prices and jobs. Taking the wrong actions during a recession can have a negative impact on your investment portfolio and take decades to recover from, maybe even delaying your ability to retire. Watch “How to Build a Recession-Proof Portfolio” on YMYW TV, and download the companion guide for free from the podcast show notes. Learn the signs of a recession, how to position your portfolio accordingly, and how to be prepared to grow your wealth, regardless of the economy and market conditions. Click the link in the description of today’s episode wherever you get your podcasts to watch How to Build a Recession Proof Portfolio on YMYW TV, and to download the companion Recession Protection Guide, all free, all yours, courtesy of Your Money, Your Wealth.

Collect Social Security Early at Age 63, Then Switch to Spousal Benefits at Age 70? (Vern, Beautiful Portland Oregon)

Joe: We got Vern writes in from beautiful Portland, Oregon. He goes, “Hello, Joe and Big Al.  Who’s really not that big.” Wow. Shots fired, Al. Geez.

Al:  Not that big. Well, I’ll take that in terms of not being overweight.

Joe: Okay. “I drive a 2022 Mercedes GLE and a wife drives a 2022 Miata convertible.” How does he know you’re not that big?

Andi: TV show.

Al: Yeah.

Joe: Okay. All right, “My drink of choice is a Woodford Old Fashioned made with honey and not the simple syrup. Plus, I use two-“

Andi: Luxardo cherries-

Joe: Luxardo cherries. Oh, Luxardo cherries.

Andi: “-along with some cherry bitters.”

Joe: Oh man, that seems really cherry to me. “The wife is a non-drinker, so I have a DD 22/7.

Andi: So in other words, she’s a designated driver except for two hours a day.

Joe: Two, yeah, so she can- Right. “Here’s my question. The wife and I are both 60. She mainly stayed home and raised two wonderful boys or amazing boys during our early years. And now she is a full-time grandma. I plan to take my Social Security at age 70, which will be $4800 a month. My wife’s Social Security is $920 at age 62 and $1620 at age 70.  If we have her start collecting $920 a month at age 62 can we switch her over to the spousal benefit at age 70 and have her receive $2400 a month, which is half of mine? It seems too good to be true. We wanted your spitball on the topic.  Loving life in Portland. But not loving these taxes. Thanks for the spitball.”  Alright, Vern. Yeah, it is too good to be true.

Al: Yeah, it’s, that’s not how you calculate it, unfortunately.

Joe: Yep. The spousal benefit is based on your full retirement age, no matter when you claim your benefit.

Al: Yeah, so that for you, Vern, will be age 67.

Joe: So whatever your benefit, let’s say your benefit at 67, does he give it to us? I’m just gonna say it’s $3000 a month. Your wife’s spousal benefit is $1500.

Al: Yep, so half of that. Except-

Joe: If she claims hers at 62-

Al: Now she’s got to get a haircut on that figure.

Joe: Yes, but they will true it up, but there’s going to be a haircut, she’s going to take to $920, and then  the spousal benefit only kicks in once he starts claiming his benefit. So if he waits to age 70, the spousal benefit is not going to come into play until he claims. Right. So she will get the spousal benefit, but it’s not going to be half of his at age 70. It’s not going to be half of his at age 67 because she’s already claimed her benefit on her record at age 62.

Al: Yeah, now if she waits for retirement age, then she would get half of Vern’s at, at, at his full retirement age at 67. So that is possible, but the fact that, that, well, first of all, and I think that’s a lot of people don’t really understand that, that, that rule is based upon full retirement age, not age 70. So first of all, that’s a lower figure. Secondly, if your spouse claims early, then there’s going to be another haircut on top of it.

Joe: All right, sorry Vern, but I’m glad you’re loving Portland.

Al: Yeah.

Will 2026 Catch-Up Contributions to Roth Be Subject to Pro-Rata Rule? (Matt, TX)

Joe: Got Matt from Texas. He goes, “I understand the 2026, the catch-up contributions of the 401(k) for people 50 years and older will be placed in a Roth IRA. Will these Roth contributions be subject to the pro rata rule?”

Al: That’s actually a true statement. So in 2026, I think this was SECURE Act 2.0 if I’m not mistaken-

Joe: Who knows-

Al: – yeah, whether it’ll stick or not. But, but here’s the rule, is if your wages are higher than $145,000, so I’m assuming Matt yours are, cause you asked the question, then if you have the 401(k). Or, I’m going to tell you, the catch-up contributions for a 401(k), it will have to go into Roth. That is the rule as it stands on the books right now.

Joe: All that means is that you can’t get the tax deduction for the catch-up contribution.

Al: Correct.

Joe: The money goes into the Roth and it grows tax-free.

Al: Which isn’t a bad thing.

Joe; It’s a great thing.

Al: In fact, we’re trying to get people to do it more.

Joe: Yes. But is it subject to the pro rata on distributions, or what’s he thinking here? Is he thinking conversions?

Al: Well, there’s no pro rata rule for the 401(k).

Joe: I know. So here’s what people get confused on when they try to do the backdoor Roth.

Al: Yes.

Joe:  And they have money in a 401(k), and it’s like, all right, well, is there a pro rata rule because I have maybe pre-tax and after tax? How does that all work? Matt, when you retire, move the money out of the 401(k), and move your Roth into a Roth IRA, move the pre-tax into your IRA.

Al: Yeah, it’s no more complicated than that. The complication is when you have an IRA with tax basis in it and you convert that, then you’ve got some basis, so some taxable and some non-taxable.

Joe: Well, I think there’s also, if you have, let’s say after-tax, you have Roth and you have pre-tax all in the same plan.  And let’s say you keep it in the 401(k) plan. Some plans will take it out pro rata.

Al: Yeah, if, if, yeah, if you do distributions. Well, that’s a good point. That is a true statement.

Joe: So, it depends on the plan doc of, of the retirement plan that you have. But the way around it is just to move it out.

Al: Yeah. And most people do. Most people roll that their 401(k) and the, yeah, the, the, the post-tax money in the Roth goes into the Roth, the pre-tax goes into the IRA and then everything is how it’s supposed to be.

Joe: Thanks Matt.

Andi: Will the winner of the upcoming presidential election mean wins or losses in our investment portfolios? Do financial markets perform better under Republicans or Democrats? If the sensationalized political news has you fearing the worst for your nest egg, get the facts. Check out our new blog post that dives into the historical data to show how the stock market performed under different presidents and different political control. Find out how your portfolio would have fared had you only invested during red or blue times, and what you should be doing now. Also new on the blog: mutual funds, ETFs, and SMAs. They’re all common investment vehicles, but what are the differences and benefits, and which one best fits your needs? Find out in our new blog. Check the links in the description of today’s episode wherever you get your podcasts to read both of these new blog posts. And if you find them interesting, hit the share button to spread the knowledge.

Should We Do Roth Conversions? What About Medicare IRMAA? (Tom & Amy, Northern MN)

Joe: All right. “Hi guys. Really appreciate the show and valuable content. It’s one of a kind and incredibly informative.” Wow. One of a kind.

Al: Wow.

Joe: That’s very generous.

Al: It probably is one of a kind.

Joe: “My name’s Tom. My wife is Amy. We retired to a lake country in northern Minnesota two years ago. I’m 55. My wife is 54. A drink of choice for me is a good IPA. Surly. Ferocious.”

Andi: Furious.

Al: Or furious?

Joe: I like ferocious.

Al: Ferocious. That’s a better name.

Andi: Surly ferocious.

Al: You should send that to the marketing guy.

Joe: That’s trademark. “- or little Grain Belt Premium.” There it is. Grain Belt Premium. Okay. I love that.

Al: I don’t know what, what I’ve, what kind of beer is that?

Joe: That’s-
Andi: That’s from Wisconsin, right Joe?

Joe: No, Minnesota.

Andi: Okay.

Joe: God’s country beer.

Al: Yeah. Made with good grain.

Joe: Yeah, it is. It’s so good.  “Wife’s, let’s see, consistent go-to is a Chardonnay, but we’ll both drink Cabs or Red Zins on occasion. We have two dogs, Yellow Lab and a mini–Golden Doodle. I drive a 19 Ford F150 and she drives a 22 Honda Passport.” Very popular cars here at YMYW. Yeah. Ford F150.

Al: You see that a lot.

Joe: Tons.  “My question mostly revolved around a Roth conversion strategy.” Oh my God, imagine that.  “We have roughly $6,800,000 broken down-“Geez, look at the big, bad wallet on Tom,  gaming. 54 years old, $6,800,000.

Al: Not too shabby.

Joe: Livin in northern Minnesota, this guy is like Prince.

Al: He’s livin the dream.

Joe: Prince’s incarnation, right here.  Alright, “-We got pre-tax, $1,800,000, Roth, $250,000, taxable, $4,700,000, HSA, $60,000. Social Security projections about $60,000 annually, today’s dollars.  As mentioned, I retired a few years ago at age 53 and still have income rolling in from my previous employer RSUs and consulting fees. As such, I cannot start converting my pre-tax income until my income drops. Income will be about $500,000 in 2024 and 2025 and then $225,000 in 2026.”  Wow, makes a lot of cash. That helps. That helps when you want to pull the, punch the ticket at 52.

Al: You know, you still got money coming in.

Joe: About half a million dollars.  “I might be able to start a conversion in 2026 to the top of the 24% tax bracket. I fully expect 2027, I’ll be 59 that year, will be the year I can ramp things up. Obviously, tax brackets will probably look different. So, the first question is our current pre-tax account seems like a future tax bomb. Are you on board with my strategy to convert these dollars over before RMDs hit?”

Al: Let me see what you’re going to say on that.  I would say Joe’s in favor.

Joe: Yeah. Are we on board? Come on.  Invite me over to your house and let’s have a Grain Belt.  I’ll run some numbers for you.

Al: Well, so he’s got $1,800,000 in pre-tax. He’s 55. So it’s going to probably double twice.  So, so call it almost $4,000,000, almost $8,000,000. So we’ll call it $7,000,000. RMD on that will be $280,000.

Joe: He’s got $2,000,000 now.

Al: Yeah. Yep. That’s what I’m saying. Double twice. Yep. Between RMD age.

Joe: Two, four, eight. Yeah.  That’s gonna be a big number.

Al: Big number.

Joe: “Second, hear a lot of talk about IRMAA.” Don’t worry about Irma, bro.  Don’t. Worry. About IRMAA.

Al: 00% agree. It’s not even worth mentioning. Especially when-

Joe: You’re 52 years old and you’re worried about IRMAA.

Al: I’m not gonna do the conversion-

Joe: IRMAA’s gonna look so much different by the time you have to worry about IRMAA.

Al: There probably won’t be an IRMAA then.

Joe: There will- There will- Yes. There won’t be an IRMAA.  Yeah, IRMAA’s dead.  “Should I concern myself about this, given I will be converting into my 60s, and that will make me jump in.”  No wonder why this guy has so much money.

Al: His forward thinking.

Joe: Oh my God.  Just relax. Enjoy your retirement. Oh my God.

Al: But see, that’s, that’s how his whole career was. You can’t just shut that off.

Joe: No. “It seems to me I have bigger fish to fry than to worry about this-” Yes, you do have bigger fish to fry than worry about this. “-but perhaps I’m missing something.” You’re not missing anything. The fact that you’re thinking about it scares me. “Finally, our current budget is around $225,000 to $250,000 a year and we’ll save around $100,000 for the next few years. What do you project our withdrawal amount per year in the next few years when income stops coming in? That we’ll need to live off of our nest egg. We would appreciate this spitball.”  What is he, what, he wants to know what the distribution rate is going to be?

Al: Yeah, I think so. So, I just, I took his numbers. $6,800,000.  I just said, Alright, two more years at 6%, adding $100,000 a year, so that’s $7,800,000, 3% distribution rate would be $234,000. So, yeah, about 3%, give or take.

Joe: Plus tax?

Al: Yeah, plus tax.

Joe: But he’s got $4,700,000 in that brokerage account, so, yeah, that’s cap gains.

Al: Yeah, it’ll be cheaper, but yeah, this all looks good. For sure.

Joe: $250,000 in northern Minnesota is living pretty large.

Al: It’s living large. Maybe a lot of travel, maybe a lot of-

Joe: I don’t know-

Al: – boats, toys.

Joe: Could be.

Al: Vacations, whatever.

Joe: Yeah, I would be worrying about where-

Al: Would you worry about IRMAA?  Have you ever woke up in the middle of the night, you know, I got- gosh- IRMAA.

Joe: That’s 17 years and I know there’s a two year look back  and I have $10,000,000 in the bank right now and I’m 52 years old. That premium might go up on me.

Al: I might have to pay $73 more dollars a month. Honey, wake up.

Joe: Would you believe, I gotta go back to work.  This is crazy. That IRMAA premium is going to kill me.  All right. Congratulations. Yes, Tom and Amy. Very good job.

Andi: Charlie’s Angels, Jaclyn Smith and a hair model, Big Al Googling himself, and lake country Minnesota in the Derails at the end of the episode, so stick around. Joe and Big Al are now both officially on vacation, so for the next few Tuesdays in your podcast app, listen for YMYW Extra – bonus episodes with me and some of the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors. Watch the bonus video spitballs on YouTube, and tell us what you think in the newly opened YouTube comments. 

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The Derails



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.

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