Show Notes

• (01:06) Retirement Spitball Analysis for My Widowed Sister (Allen, sunny New Braunfels, TX)
• (06:52) $5M ESOP Strategy: Net Unrealized Appreciation, Retirement Withdrawals, and Tax Location (Barney & Betty, MD)
• (19:00) Should I Take Social Security Early to Pay Off My Rental Property? (Alicia, Denver, CO)
• (23:22) How to Buy a Home Before or During the Sale of My Existing Home? (Vern, Wickenburg, AZ)
• (26:50) Should I Buy a Qualified Longevity Annuity Contract as a Long Term Care Insurance Alternative? (Ron, IL)
• (31:08) I’ll Have $8M When I Retire at 53. Should I Contribute to 401(k) or Do the Mega Backdoor Roth Until Then? (Nick, PNW)
• (38:06) What’s the Best Thrift Savings Plan Investment Strategy? (Bryan, WA)
• (40:21) When in a Market Downturn Should You Start Spending Cash? (Lyse, GA)
• (46:00) The Derails

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Transcription

Andi: Barney and Betty in Maryland hit the jackpot. How’s Barney’s strategy for net unrealized appreciation, retirement withdrawals, and asset location for his $5 million employee stock ownership plan? Nick in the PNW will have $8 million when he retires early at 53. Should he contribute to his 401(k) or do the good ol’ mega backdoor Roth until then? Those are just a couple of the fat wallets Joe and Big Al spitball on, today on Your Money, Your Wealth® podcast number 470. Plus, should Allen in New Braunfels’ recently widowed sister contribute to her traditional IRA and do some Roth conversions? Should Alicia in Denver take Social Security early to pay off her rental property, and how can Vern in Wickenburg Arizona buy a new home before or during the sale of his current home? Finally, Bryan in Washington needs to know the best investment strategy for his thrift savings plan, and Lyse in Georgia wonders when in a market downturn you should start spending your cash. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Retirement Spitball Analysis for My Widowed Sister (Allen, sunny New Braunfels, TX)

Joe: I got Allen writes in from sunny New Braunfels, Texas. “My sister’s husband, 52 years young, recently passed away from cancer earlier this year.” Oh, hate to hear that.

Al: That’s too bad.

Joe: “Sister’s 51. They live in Dallas, Texas, and have a daughter, 16 years old. I’ve been helping her getting her finances in order and consolidation with her account at Vanguard. Given that she will be able to file a qualified widow for tax years ‘23 and ‘24, which is the tax equivalent of married filing jointly, I wanted to get your spitball on things to do.”  All right, let’s see.  “With the recent downturn in the stock market, we are able to do some tax loss harvesting to the tune of $29,000 short-term capital gain loss, $3000 of which will be used to reduce the family taxable income. Given the 20-“ how old is this email? Because the market is just like on fire.

Al: Well, this is November ‘23.

Joe: Oh, okay. We’re a little bit behind.

Al: A little bit behind.

Joe: This is what you would do when the market corrects again.

Al: Correct.

Joe: Alright. “Given that the 2023 standard deduction is around $30,000, her taxable income will be approximately $14,000, which puts her in the 10% tax bracket. In fact, she will have approximately $75,000 of room in the 12% tax bracket.  Starting next year, my sister will begin working full time as a CPA, making $60,000 a year with benefits, and she’ll begin making Roth 401(k) contributions. Because she had no taxable income this year, she cannot contribute to a Roth IRA. Her asset breakdown is as follows-“  Okay.

Al: Actually, let’s pause one second, if you don’t mind, because there’s a few things I want to go over right off the bat.

Joe: Please.

Al: So, when you’re married and you pass away, there’s this qualified widower status if you’ve got a child that you’re caring for, which I believe it’s under 18. So daughter’s 16, so no problem. Sister will qualify for this. However, the first year that your husband passes, which I’m assuming was 2023. That particular year, it’s married, filing joint still. Then you get two more years of qualifying, qualifying widowers. So if I’m reading this right, you get the married filing joint and then qualified widower. So for 3 years, 2023, 2024, 2025. So that’s the first thing I wanna say. And that’s helpful, right? Because those are lower tax brackets, married versus single.  It’s the same tax brackets. It’s just you get to the higher brackets, takes longer to get to the higher brackets than single. So that’s number one. Another comment I want to make is if, in fact, 2023, she feels like she can’t do a Roth contribution because she doesn’t have earned income. Well, did your husband have earned income? If he did, then that qualifies. So you can do a spousal. That would only be good, obviously, for 2023. But in 2024, sounds like she’s working, so she’ll be able to do it again.

Joe: Alright, a couple of questions. “Should she contribute to her traditional IRA, which would be deductible for ‘23 and ‘24?” So we answered that, maybe look at a spousal, if the husband made some money, if there’s any earned income. The same rules apply for Roth versus traditional, if there’s no earned income, she cannot make an IRA contribution. If there is earned income, given her tax bracket, probably makes a little bit more sense to do Roth versus taking the deduction.

Al: I would think so too. I’d go Roth, and yes, you could do 2023. Sounds like 2024, sounds like 2025 probably, right?

Joe: “In addition, should she do Roth IRA conversions from a rollover IRA? She will be in the 10% or 12% tax bracket filing as a qualified widow.” Yeah, I mean, you always want to look at Roth conversions in the 10% or 12% tax bracket. I hate the term no brainer, but that’s a pretty cheap rate.

Al: Well, it is. And so sometimes people think, well, you know what, I’m going to be in such a low bracket anyway because all I have is Social Security. But it’s interesting. Anytime you have any kind of income, and in her case, she’s got almost a, they’ve had about $1,000,000 of brokerage funds, which is going to probably produce, let’s just say $20,000 of dividends just right there. Then you’d have a required minimum distribution. Then you’d have Social Security. That income is going to push the Social Security into the taxable category. And if you can get the future RMDs, the money in the IRA converted before that, less, or maybe even almost none of the Social Security will be taxable.

Joe: She’s young. 10% or 12% tax bracket, the compounding effect of tax-free money is going to be huge. So all day. I would do that. “In two years, 2025, with her $60,000 salary and approximately $15,000 standard deduction, she’ll be in the 12% tax bracket, filing head of household,  which will be turning into the 15% tax bracket if Trump’s tax cuts sunset. Furthermore, who knows where the tax brackets will be in 25 years when she takes RMDs and maybe a good reason to bite the bullet and do some Roth IRA conversions now.” Yes.

Al: Yeah. We agree with that.

Joe: You’re all good. He’s got like part A, part B, part C.

Al: Got it.

Joe: “And number 3, it seems like as long as my sister remains in the 12% tax bracket for the next two years, she would qualify for their earned income credit.”

Al: That could be. It’s not necessarily being in the 12% bracket that gets you, but if you’re in the 12% bracket, you may qualify.

Joe: “My sister’s drink of choice is Kim Crawford’s wine.  She drives a 2020 Tia Jeep Wrangler and has a golden retriever named Luna. Thanks in advance for the spitball. Keep up the great work.” Alright.

$5M Employee Stock Ownership Plan Strategy: Net Unrealized Appreciation, Retirement Withdrawals, and Tax Location (Barney & Betty, MD)

Joe: “Dear Andi, Big Al, Joe, hello from Maryland. It’s Barney and Betty. You rock!”

Andi: Ba dum tss…

Joe: “What a resource for FYI folks to get spitballs on their retirement plans.”

Andi: I think that was supposed to be DIY.

Al: Yeah, I did too.

Joe: But FYI folks.

Al: Usually it’s do it yourself.

Joe: Just FYI, I’m a DIY.

Al: FYI, it’s good for me. Got it.

Joe: “I’m 53, Betty’s 55. I drink Diet Pepsi, but mostly water. Betty goes for Coors Light. I drive a 2014 Ford F150. She drives a 2015 Ford Explorer.  I’ll retire at 55 at the end of 2025. Betty will likely continue to work part-time for the foreseeable future. My salary and profit sharing is $220,000 and hers is $20,000.  Our situation is that I will have been with my company for 26 years. It is remarkable, consistent company, and as such, and for the lack of better planning, I’ve not set aside an emergency fund.” So he’s like Johnny on the spot with cashflow from a paycheck.

Al: Yeah. Paycheck’s good. Sounds like maybe the investments are good too.

Joe: Alright. He does have a HELOC though. “Available if needed.”

Al: Got it.

Joe: “In my years prior to joining this company, we saved diligently for retirement until we were in our early 30s. Then we decided to buy our long-term house that we could afford on one income. Betty stayed at home with the kids and we funded our kids’ education. I thought I could-“  Man, this is long.

Al: It is.

Joe: This is like 5-.

Al: No, no. This is page two. That’s the end.

Joe: Alright, “Though I could not have foreseen this, the stable company, an ESOP company with great benefits continue to grow and a weight well above the general stock market. Thus, combined with their generous annual company contributions has resulted in most of the nest egg we have today. So, we have highly concentrated, but in my view, low risk, only ever took one small distribution, which naturally did worse.”  Oh, one small diversification withdrawal.

Al: Sure.

Joe: I don’t know what a diversification withdrawal is.

Al: It’s like a distribution, just like he called it. Similar.

Joe: Okay.

Al: I guess he invested in something else.

Joe: All right. He’s “got $5,000,000 in this ESOP plan.” Wow. He put a couple of bucks in, the company kills it, and now he’s got $5,000,000. “And an employee stock ownership plan.

Al: Yeah. I like it.

Joe: “It’s projected to be $6,800,000 at his retirement. I sort of hit the lottery here with my choice of employers.” Yeah. Good for you.

Al: Yeah. Fantastic.

Joe: Where does he work? at the quarry?

Al: I think that’s what-

Joe: Isn’t that where Barney-?

Al: The rock business is better than you thought.

Joe: Yeah. Mr. Slate or Mr. Stone?

Al: Slater? Slate, Mr. Slate.

Joe: “My basis for NUA calculation purposes is about 6% of income will mostly be capital gains, $1,000,000 in IRAs. So my basis for NUA calculation purposes is about 6%.”  So 6% of the $5,000,000 is- never heard a basis referenced as a percentage before.

Al: Me neither, but-  All good. Okay, so let’s see. What’s that? $350,000. Yeah.

Joe: $350,000 is what the basis is on $5,000,000 ESOP.

Al: That’s what I’m getting.

Joe: “So the income will be mostly capital gains, $1,000,000 in IRA, $60,000 in Roth. We have no debt at retirement. Our current home is valued at $700,000. Social Security for me is $55,000 at 70 and much less for Betty.  I will need funds for the years until 59 and a half, then annually thereafter, because I’m all pre-tax. We plan to sell our current home within a few years after my retirement in upside, or at least up cost, our house to one near the beach.” Alright, so he wants to move near the beach. “So my modeling, I take roughly $2,000,000 pre-tax out the top plus our current home equity to allocate for a $2,000,000 house.” I take roughly $2,000,000 pre-tax off the top, Al.

Al: I guess he’s figuring he’s paying the tax, right? So that’s gross, not net.

Joe: So $2,000,000 all in.

Al: Well, yeah, so it looks like the $2,000,000, maybe he’s estimating, whatever, $500,000, $600,000 tax, I don’t know what he’s estimating, but he ends up with $2,000,000 net, that’s what he wants to buy.

Joe: “And finally, the questions,” thank God.  “How to take withdrawals in a tax location. Two most likely alternatives I would see is taking extra funds out of retirement via the NUA to have funds to do Roth conversions while the rest remaining in the IRA to grow and then be taxed at regular income when taken. Again, we have no after-tax money to do conversions otherwise. Or take the whole ESOP plan in stock to get capital gain treatment on a majority of it. So take the haircut now and then have after-tax dollars to live on and fund the Roth conversions on the amount not taken.  One gotcha is our new state taxes is about 3% lower than MD’s-“ than Maryland’s?

Al: Yep.

Joe: “- and we won’t have moved by that time I take the stock sale, which could lead to a sizable tax difference if we choose option two. Suspect a key factor will be if our funds will grow in the common inheritance or if we spend most of it. Doing so, the Roth conversion and outsize impact of the wealth become generational. Our expenses will be about $200,000 per year, but occasionally years will have an extra $100,000 for new cars, boats, all inclusive of taxes. Looking forward to hearing you chat about our questions.” All right. So let’s just kind of recap here. He’s got a $5,000,000 ESOP and he’s saying he’s got a 6% basis. So we’re assuming- we have no idea how this employee stock purchase plan is set up.

Al: Correct.

Joe: And- or stock ownership plan.

Al: Yeah. Yeah. So, well, a couple of terms, ESOP, it’s kind of unusual. A few companies have it. It’s yeah. Employee stock ownership plan. It basically allows company employees to buy into the company, right, with their retirement account, with their retirement plan. And that’s, what’s going on here with Barney. And so $5,000,000 is projected to be $6,800,000 at retirement. Wonder what projection that is, probably public stock. You can never count on that. So I would not so sure about that, but maybe so depending upon what the stock market does. But so the point is that they, Barney worked for a great company that has an ESOP plan. So he’s got a bunch of money in retirement. That’s the good news. The bad news is it’s all in a retirement account. It’s 100% ordinary income. But there’s a couple ways to solve this. One is the NUA, net unrealized appreciation, and one is the Roth conversion.

Joe: So he’s saying 6% basis, $350,000 basis. So what NUA, net unrealized appreciation, means is that basically you take the basis out of the plan and you pay ordinary income on the basis, but then all of the growth is taxed at capital gains rate, which is a lot lower rate than ordinary income. So this will give them tax diversification. So if you think of it like this, if you think there’s a tax-deferred pool, pre-tax dollars, grows tax-deferred, when you pull the money out, it’s taxed at ordinary income rates. Tax-free pools, Roth IRA type money. After-tax dollars, grows tax-deferred, you pull it out, zero tax. And then there’s a capital pool, or taxable pool, that it’s an after-tax dollar, but when it grows, the gain on that is going to be taxed at capital gains, but the basis is going to be tax-free.  So all of his money right now is pre-tax, and he’s thinking about a tax diversification strategy, because he wants to buy a $2,000,000 house. He’s going, he’s going to have some equity in his current house, but he needs to come up with $2,000,000. He’s got to bridge the gap to 59 and a half. So there’s all sorts of different things that he needs to do to create liquidity and also to reduce his taxes. So I think the NUA strategy is perfect, but I don’t think he has to do the whole thing, but I don’t know what his plan doc says.

Al: 100% agree. So just so we’re clear. So this is company stock in like a 401(k). It doesn’t have to be an ESOP, this one is an ESOP, it could just be company stock in your 401(k). You are allowed, generally at retirement, to pull as much as you want out and put it in your brokerage account. Right, your brokerage account, not another retirement account, your brokerage account. And the only taxes you pay currently is your cost basis, that’s why that’s important. So let’s, if he did the whole thing, he’d pay taxes on $350,000 and all the rest of the gain, we’ll round it to $4,500,000. It becomes taxable as a capital gain when the stock is sold. When it’s sold, it could be sold all at once. It could be sold a little bit each year.

Joe: He can hold it for the rest of his life.

Al: Whatever you feel like. And so typically when you have low basis, this is a great strategy. Question is what generally with an NUA Joe, you only get one chance, right? You get to do it once and then all the rest of the money in your 401(k) has to come out to an IRA.

Joe: Correct. And so, but he doesn’t have to do the full $350,000, he could do $100,000 NUA. So you pay tax on the ordinary income at $100,000, and then whatever the growth is on that $100,000 basis, let’s call it $2,000,000, $2,500,000 or $2,000,000.

Al: Yeah. And I would say this, you’d have to model it out, you know, the next 30 years to see what’s best. I would just tell you from my own experience, it hardly ever pays to take it all at once. There’ll be some, there’ll be some amount where it makes sense and then you keep the rest in the 401(k). And partly why that’s important is because keeping money in the 401(k) then retirement at 55 allows you to take money out and not pay that penalty.

Joe: At a 6% basis, I would do the whole damn thing. I mean, that’s so low. I mean, there’s $350,000, it’s worth $6,000,000. That’s legit. He hit the jackpot. I would get rid of it. Who knows where tax rates are going to go. You don’t have to sell all the stock right now. It probably makes sense to diversify, but you know, but you’re right. You got to model this thing out depending on what your cash flow needs and what are- But from a capital perspective of what you have in Social Security, what you have right now, I think the numbers make sense. Because, let’s call it $6,000,000 in the ESOP, another $1,000,000 in an IRA, he wants to spend $200,000. Well, 3% on $7,000,000 is going to get him right there. You just bridge the gap to Social Security, that’s going to give you another couple of bucks. It’s just figuring out the str- the tax strategy. And I wish I could map it out and give you the exact direction, but I think intuitively it’s like, all right, well, there’s a NUA opportunity here that I could do, right? I don’t know how much that you want to do, but you’re going to create some money in and outside of your retirement accounts. It’s going to create liquidity to live off of. And as he said, you can continue to convert over the next several years because he will be in lower tax brackets once he pays that initial tax on the NUA. And then that will allow him to get more money diversified from a tax perspective and really set them up long-term really good.

Al: 100% agree. So I, and again, I would say because the basis is so low, you probably would do a lot, but I don’t know how much that would be. I personally probably wouldn’t do all of it, but I would probably do a pretty good chunk.

Andi: Boost your investment returns, simply by paying less tax on your investments! It’s all about which types of assets you hold in which types of accounts – this is called asset location. If you’re like me, and seeing stuff in print helps you understand it better, download our free guide on Why Asset Location Matters from the podcast show notes at YourMoneyYourwealth.com. Find out how owning assets with higher expected returns in your Roth accounts, lower-returning assets in your 401(k)s and IRAs, and NOT holding income-producing assets in your brokerage accounts, for example, can generate “tax alpha,” resulting in better returns on those investments. Download the free guide on Why Asset Location Matters from the podcast show notes at YourMoneyYourwealth.com – just click the link in the description of today’s episode in your favorite podcast app, you’ll see the guide and other free financial resources just before the episode transcript.  

Should I Take Social Security Early to Pay Off My Rental Property? (Alicia, Denver, CO)

Joe: Got Alicia. Alisha?

Al: Alicia.

Joe: Denver, Colorado. “Plan to retire in June 2024, when I’m 62, salary of $135,000. Will continue maxing out my 401(k) until I retire. Contribute the maximum of $2200 per month. Will have a pension of around $3800 pre-tax deduction.”  All right, what’s the question here? All right, let’s see here.

Al: At the bottom.

Joe: Okay, “What would be better? Should I take a decreased Social Security amount and use all of that to pay down a mortgage on a rental property, save interest, and pay it off by the age of 68 or 69? I would own the property free and clear and use the rent as income. Should I wait until age 65 to take Social Security when the benefits will be higher? At that time, I would use the Social Security income to continue paying down the mortgage on the income property. Currently, I’m making principal only payments on the top of the mortgage using income of $833 a month.” She’s conflicted.  So I think the basis of the question, there’s a lot of information here that might be relevant or might not be, but I think really she’s looking at a cash flow problem. So should I claim Social Security earlier and pay off my mortgage with all of that Social Security, I’ll be debt-free and then I’ll have those added rents earlier because the mortgage would be paid off earlier.  Or do she wait, or does she wait?  And take it at full retirement age a little bit later, she’ll get a higher benefit for Social Security, but it’s going to take her longer time to pay off the mortgage, so those added rents will be a little bit lagged. So if I’m comparing those two, I think is the crux of the question.

Al: I think that’s the question, and maybe a couple key facts. So she has a rental property with a mortgage. It says of $15,000, but then in parentheses, $170,000 balance at 7%.

Joe: That’s why I skipped all of that.

Al: So I don’t understand how it goes from $15,000 to $170,000. So I don’t know. I think maybe if it’s, I don’t know, I don’t know where that, I don’t, I don’t really understand that, but the rent is like $2300 a month. So she’s thinking maybe I get this mortgage paid off and then I get that, then I’m in great shape. Having less Social Security is okay.

Joe: $15,000 is the payment I’m guessing.

Andi: Sounds really high.

Al: For a year?  I mean, that’s, that wouldn’t be-  Well, anyway, yeah, I’ll pull out your calculator. Anyway, so I would say just upon the- we don’t really have enough information to answer this question. It’s kind of like the last one. I would model this out and see what looks better.

Joe: We have a ton of information. What would you do? Would you claim Social Security early and pay off your mortgage? You’re stuck with a lower Social Security balance, but then you’re going to have the rents higher earlier.

Al: Without doing any kind of analysis, I would not pay off the mortgage. I would just keep paying on the mortgage the best I could and I would defer Social Security.

Joe: Exactly. I think it’s that simple. Because here’s the two things that, and I get what she’s thinking. It’s like, man, I would like to get- I want to get this mortgage paid off. Cash flow’s a little tight and I’m going to feel a lot better. Once I get this thing paid off, it’s off my conscious.  I feel a sigh of relief and I’m going to receive more rents. And so those more rents with the lower Social Security balance, hey, I’m going to make out.  But I think long-term longevity is going to catch up with her and holding off on Social Security, I think is the right move because she’s going to lock in a lower rate on her Social Security if she takes it at 62. So she’ll feel good for about 3 or 4 years.  But then she’s going to have a lower income for the rest of her life, versus maybe still tough it out for 3 or 4 years, and then have a lot higher income for the rest of her life.

Al: I would, yeah, agreed. I would be inclined to do that. Her expenses are relatively small at $5000 a month, so that’s good. She does say she’s got basement rental of $2,000. Is that in her base- She’s renting that out for $2,000?

Joe: She’s got it. She’s got it in the basement.

Al: And she’s got over $1,000,000 in a 401(k). So there’s plenty of assets to do that. But yeah, I think that’s what I would do without doing any kind of analysis.

How to Buy a Home Before or During the Sale of My Existing Home? (Vern, Wickenburg, AZ)

Joe: All right. Vern from Wickenburg? Wickenburg?

Andi: Well, that’s what it looks like, yep.

Joe: Have you ever heard of Wickenburg, Arizona?

Andi: Not at all.

Al: Heard of Winslow.

Joe: Okay.  “Want to move up to a larger home that is paid for? What is the best strategy to secure financing to buy first and then sell existing home very soon after or while in closing? Bridge loan with fees, sell brokerage securities and pay taxable gains, borrow out of the IRA?”  He wants to upgrade.

Andi: You’ve never heard of Wickenburg because it’s only got 7400 people in it.

Al: Oh, okay.

Joe: Wickenburg. Huh.

Al: All right.

Joe: So he’s getting out of Wickenburg?

Al: Maybe. Or maybe he’s buying the biggest home in Wickenburg.

Joe: Yeah. He wants to move out.  So, I was in the same predicament. It was kind of a lateral move, but it’s like, all right, well here, this is a house that you want to buy, but then you have another house that you would need to sell to buy the other house. So how do you get the down payment to make sure that you can, so how do you come up with the cash? So he’s like, do I do a bridge loan?  Do I sell brokerage accounts, securities?

Al: Sure, sure.

Joe: Do I borrow from my IRA?  So, what would you do? I mean, I think you’re in a similar situation.

Al: I have been, yes. So, well, first of all, it’s much better to sell first and buy second. Then you got the cash, and then it’s, if there’s not going to be any loans, it’s an all cash deal, you can get a better price. That’s the best way to do it. Now, on the other hand, it usually doesn’t work that way. Usually, as soon as you start looking, you find the home. It’s like, oh. I thought we were just looking, honey. No, I want this one. So, if that’s the case, it’s slightly backwards, which I think is the more common thing. So, how do you fund it?  Well, you, you can have the purchase price contingent upon the sale of your home, but that, that’s not, it’s not a strong offer, right? You may not get it then, right? So, getting a bridge loan, if you can qualify, which I’ve borrowed on other properties.  Borrowing from an IRA-

Joe: You can do a 60-day rollover.

Al: I did a 60-day rollover when I bought my condo in Kauai, and the sequence of events, I knew it was all going to work out, but it was a risk, right? Because I didn’t put the money back in within 60 days, it’s fully taxable.

Joe: So the only risk, well, there’s a ton of risk here, but the biggest risk I see is I don’t know- how hot is the real estate market in Wickenburg? You put it up for sale-  is it a strong market? Is, are you going to get a lot of offers right away? Now, if that’s the case, you can maybe time it out where you can do a 60-day rollover. But if that house doesn’t sell, you’ve got to put the money back into the IRA within 60 days. Or now you have a new home. That you took a 60-day rollover on for a down payment, and then you haven’t sold the other home. Then you have a taxable event of whatever you took out of the retirement account, so that, I mean, that could completely blow you up.

Al: It’s tricky. So, the reason I was comfortable doing it the way I did-

Joe: Because you have a big ass wallet.

Al: I had some money in my wallet, but I didn’t have enough and my home was almost free and clear, right? And it was way easier to get instant money from the IRA, buy the home all cash, got a better deal, and then I turned right around and refinanced my house. Yeah, exactly.

Should I Buy a Qualified Longevity Annuity Contract as a Long Term Care Insurance Alternative? (Ron, IL)

Joe: We got Ron from Illinois. He writes in, he goes. “Hey, so I’m 66, happily single, never married,  and semi-retired.”  Ron, it sounds like Ron Burgundy.

Al: Except he’s from Illinois.

Joe: “I started collecting SSA at 62 and still working part-time when I’ve been- where I’ve been for the last 18 years.  I also- I’m also collecting a couple of pensions, $1000 a month. My total portfolio is around $600,000. Question is, I’ve given some thought on long-term care insurance, but it’s sky high.”

Al: Sky high.

Joe: Ooh, premiums. Pretty expensive. “Do you think it might be a good idea to invest $100,000 from a traditional IRA into a QLAC, Qualified Longevity Annuity Contract? I’m currently collecting on one annuity, and will start another one next year.  My thought is, maybe doing this at 70, which would reduce my RMD and start collecting at age 80. My search came back with, of course, all things remain the same for the 8 years, about $30,000 per year. Perhaps you can check this out, thanks.” Alright, so he wants a Qualified Longevity Annuity Contract. Right. So you buy these annuity contracts.  Put $100,000 in and at 70, but they don’t pay out until you’re 80.

Al: Yeah, or 85, whatever age you pick.

Joe: And then you get a pretty good size payout for the rest of your life.

Al: Sure, which is nice for long-term care.

Joe: I don’t know, would you do that for a long-term care stay?

Al: No, I would use my house as my long-term care policy, personally. However, depending, maybe, I don’t know.

Joe: He’s single.

Al: He doesn’t really say how much equity he’s got in his home. It’s, to me, it’s not a terrible strategy. But the problem is taking that much money out of your 401(k) IRA. Do you have enough to live off of? So just be very clear on that because this really is money for longevity, right? And if you don’t make it-

Joe: – it’s not for long-term care.

Al: Well, but it could be used for it. But it’s basically to insure yourself from a long life where you run out of money. That’s the idea of this type of policy.  And if you don’t get to long life, it’s money down the drain.  But single, never married. I assume no kids, probably.  So, maybe that part doesn’t matter. I mean, I think it’s an okay strategy. I personally, I don’t know that I’d do it for that. I would consider-

Joe: How much do you think a long-term care insurance policy will cost this guy?

Al: No idea. That’s your bailiwick.

Joe: I would say it’s going to cost him probably $100,000 total.  So would I want to purchase a long-term care policy. So a long-term care policy is what you’re doing is, all right, well, if I go into a facility, I’m going to have a pool of money available for me to have for my care and that care could be in a pretty nice facility versus something that is not as nice.  So, if he’s really using this for long-term care, I would, yeah, I’d get it’s sky high. But he’s betting that, alright, well, here, I’m going to buy a QLAC to give me longevity income to purchase long-term care, but who knows what the care is going to cost? You’re going to leverage the amount of that $100,000, I think, a lot more tax-free from a long-term care policy than you would from a QLAC.

Al: Yeah, and the other part is, if you’ve got enough equity in your home, I wouldn’t even- think of your home because if you need long-term care and you’re single, you’re probably going to sell your home. There’s probably going to be a bunch of equity in your home. So I would- I would think about it that way. The other problem with this, I’m just thinking out loud, is what if you do the QLAC to age 85, but you need long-term care at 81? Now what? Right?  If you had a policy, it actually could, it could do better.

Joe: All right. Good luck with that. Thanks for the question. Unique. I don’t know. QLACs and long-term care. That’s kind of-

Al:  Yeah.

Joe: We haven’t really talked about that.

Al: No, it doesn’t come up much. I, I actually, I, I think they’re an okay tool, as far as a potential way to ensure against a long life if you don’t have a ton of resources, but you, but you think you’re going to live a long. Time.

Joe: Yeah. Right.

I’ll Have $8M When I Retire at Age 53. Should I Contribute to 401(k) or Do the Mega Backdoor Roth Until Then? (Nick, PNW)

Joe: We got, “Hey, YMYW team, Andi, Joe, and Al. This is Nick from Pacific Northwest.” What’s up Nick? “Long time listener. First time spitball requester.” Is that what they’re calling it now?

Andi: Apparently so.

Joe: “First the important stuff. I love beer.” So do I. “We have a border collie terrier mix, and I drive a 2013 Honda CRV. I’m 46, my wife is 44, and we have two teenage children. Just any kind of beer. “As long as it’s cold. The best type of beer is an open beer, or the best type of beer is a cold beer.”

Al:  He, he distinguished. He loves good beer.

Joe: Just good beer.

Al: Good beer.

Joe: “I know you guys are in the pro-Roth camp-” We are.

Al: Are we? I guess so.

Joe: “- and I’ve been thinking about changing over to the mega backdoor Roth, but personally think I should stay in tax-deferred for now. Details-“ Well, the mega backdoor Roth is still tax-deferred.

Al: Yeah. True.

Joe: So you can do pre-tax and then the dollars would go after-tax and the only time you can do a mega backdoor is an after-tax contribution.

Al: If you’ve got the money to do it.

Joe: -the money to do it.

Al: Or enough income, extra income to do it. Right?

Joe: “I’ve earned an income of about $580,000-“ bada boom, bada bing. Right there, Nick.

Al: You’re good.

Joe: You’re good.

Al: Go ahead and do it.

Joe: Giant. Giant income. I hate to brag, but I make a ton of money.

Al: You should continue and say, by the way, I’m in the top 1%.

Joe: I killed the game.  “80% independent contractor, 1099, 20% employed, W2, currently have about $30,000 unearned income. We try to save about 40% of our pre-tax income towards retirement. My AGI is about $460,000 and we file married jointly. I have about $3,800,000 saved for retirement.” This kid, 46 years old.

Al: Killing it.

Joe: No wonder why you love beer.  Go scotch now.

Al: You can afford it.

Joe: He’s got $4,000,000 at- $3,800,000, $3,800,000 saved for retirement, $2,400,000 in a brokerage account, $1,200,000 in tax- what the hell, Nick? You’re good.  Or, no, he’s breaking this up. $3,800,000 saved for retirement. Alright, so $2,400,000 in a brokerage account, $1,200,000 in tax-deferred accounts, and $130,000 in bonds. That all equals to $3,800,000. I thought he just kept on rolling out millions. $3,800,000, then another $2,500,000, and $1,700,000.

Al: I was gonna get out your calculator.

Joe: Don’t forget the HSA of about $60,000.

Al: Yeah, I’m sure that’s included.

Joe: “So far in my career, I’ve been maxing out tax-deferred 401(k) money, self-employed, and employed, HSA, backdoor Roth, my wife and I, and the rest of the brokerage account. In the brokerage, the basis is about $1,600,000 of unrecognized gains of $800,000.  I’d like to retire at 53 and project to have about $8,000,000 saved for retirement by then.” That’s it, $8,000,000.  Chunk change.

Al: That’s pretty good.

Joe: “During early retirement, I would live off the brokerage account, so would have some dividend interest income and capital gains. I’m not exactly sure what we would need to live off of in retirement, but figured somewhere between the $200,000 and $300,000 range would be doable. Should I continue to do pre-tax in the 401(k) as I’m in the 35% tax bracket, or should I switch to the self-employed mega backdoor Roth? Thanks for all you do and the spitball.” Well, first of all, Nick, congratulations.  Outstanding.  What should he do? He’s got $1,200,000 in deferred. He’s 46 years old, 56, 66, 76, 30 years until RMD. That $1,000,000 is going to go into $2,000,000, that $2,000,000 is going to go into $4,000,000, $4,000,000 is going to go into $8,000,000.

Al: Yeah, well, of the $8,000,000, well, let’s see, he’s also got, how much in a brokerage, $2,400,000?

Joe: $2,400,000.

Al: Yeah. So he may actually have more than $8,000,000. I don’t know, but whatever. Yeah. It’s going to be a lot in a retirement account.

Joe: So, but think of it like this, Nick, you’re putting money into a brokerage account, which is after-tax. So you’re already paying tax at a high rate and then you’re putting it into a brokerage account that is growing at a capital gains rate. The basis will come back to your tax rate, but all of the growth is going to grow at a capital gains rate. So you’re going to have to pay 12%, 15%, 0%, who knows? Whatever the capital gains rates go.

Al: Sure. Yeah. So here’s another kind of no brainer, right? Which is if you got a lot of money in a brokerage account outside of your salary, outside of your retirement, and you have the ability to do a mega backdoor Roth which basically it’s a 401(k) at your employer, where they allowed to have you put after-tax money in that you can immediately convert to a Roth IRA and pay no tax, you would do that all day long because all of that future growth is tax-free instead of a capital gains rate. The other question is, should you consider all pre-tax in your regular 401(k) or split it between Roth? I know what you’re going to say. I would probably go 50/50.

Joe: 46 years old, you already have a ton of money. You’re saving a ton of money.  Me personally, because I’m very close to that age, I would go 100% Roth, and I would go mega backdoor, I would convert the hell out of that, I would get as much money jammed into a Roth IRA as possible.

Al: And I agree with that completely, except for I would do 50/50 on the contributions.

Joe: You’re just pulling that out of your arse.

Al: Well, I got to say something. I just, I have a problem with paying too many taxes.

Joe: You’re a CPA.

Al: Yeah.

Joe: Well, yeah. And then you’re going to be like, oh man, I have all these distributions that I have to take that are all taxable. And I’d be like, Big Al.

Al: That’s a good problem to have.

Joe: I got zero taxes. I just put everything into a Roth IRA. I forgot about those taxes.

Al: I’m going to call you at 75, “Joe, I should have listened to you.”

Andi: Now listen to me – you can spitball your own retirement decisions right now in our free retirement calculator at EASIretirement.com. Go to E-A-S-Iretirement dot com, create a login, then enter your income, savings, and expenses. If you take the quick path you’ll know in about 2 minutes whether you’re on the road to retirement wellness or disaster. Change  your numbers to see how less spending or more saving impacts your future retirement, switch between optimistic, average, or pessimistic assumptions for inflation and returns, and you can even test different budgeting scenarios and withdrawal strategies. And you know, even if the EASIretirement.com calculator says your chance of a successful retirement is high, schedule a one-on-one with an experienced human financial professional from right within the calculator, and get more help creating even more sophisticated financial strategies to meet your retirement needs. Start calculating your retirement wellness now for free at EASIretirement.com – that’s E-A-S-I retirement dot com.  

What’s the Best Thrift Savings Plan Investment Strategy? (Bryan, WA)

Joe: Well, we got Bryan from Washington who writes in, he goes, “Hey, what’s the best investment strategy when you have a government pension annuity in a TSP, which is a government form of 401(k) and you can receive Social Security? Let’s say the TSP is currently $500,000ish, annuity would be $45,000 per year. We’ll have full Social Security potential. We want to retire in 6 to10 years.”  Okay.

Al: What’s the best strategy investment?

Joe: We need- who knows what your investment strategy should be Bryan. But to keep it real simple, you could use a lifestyle fund. I mean I hate those funds but there’s lifestyle funds in the TSP, the thrift savings plan, that you could use and say my glide path is 10 years. So what’s 2024 to- so you’re the 2034 fund  I think there’s a 2034 fund or something.

Andi: So it’s like a target date fund for TSP?

Joe: Yep. Yep.

Al: Correct. Yeah. So what happens then is each year there’s less stock and more bonds because you’re trying to get safer as you get closer to retirement cash flow.

Joe: That would be just the real simple lazy man’s way to do it.

Al: And so the second wrung up the ladder without knowing anything-

Joe: Yeah, we don’t know anything about Bryan here. This is not advice.

Al: This this is just based upon 10 years.

Joe: Yeah, I would say 60/40.

Al: Yeah, 60/40.

Joe: 60% stocks, 40% bonds. You can do 40% in the G fund which is the government fund. Then you could go maybe most of the equities, you go in the C fund and maybe you throw a little S fund in there.

Al: Yeah, and there’s international too, I think.

Joe: Yeah, I mean, there’s only like four choices.

Al: Maybe some of that.

Joe: But it’s real dark.

Al: I think if you really want to be more aggressive, go 70% stocks and, but mostly the G fund because those are the bigger companies.

Joe: You gotta, his pension’s $45,000 a year, so that’s like $1,000,000 in a retirement account.

Al: Yeah, that’s true. More than that even.

Joe: And he’s gonna receive Social Security. So maybe most of his fixed income is gonna be taken care of by the pension and Social Security. So then there’s two rules of thumb. There’s- there’s two thoughts, is that you take very little risk in the 401(k) because-

Al: -because you don’t need to.

Joe: -why take the risk? Or you take a ton of risk in it because you don’t necessarily need the money and you want to create a legacy for the next generation.

Al: And you can ride things out, right?

Joe: Just ride it out. So it depends on risk tolerance there. All right, I think we got time for one more.

When in a Market Downturn Should You Start Spending Cash? (Lyse, GA)

Joe: We got-  I need a little help with this one.

Andi: Lyse.

Al: Lyse.

Joe: Lyse.

Al: I was just thinking lice, and I didn’t think that was right.

Joe: “Hello, Joe, Al, and Andi. My name is (insert made up name here)- Lyse- Oh, so you made this up.

Andi: Yes.

Al: All right. She’s trying to stump us now.

Joe; Okay. Made up by Andi. Pronounced “Leez.”. All right. “I’m 33. Enjoy Miller Latte. Have no kids or pets and drive a 2024 Subaru Crosstrek-” Oh, never seen one of those before.  “- after my 2025 Honda Civic decided to retire.”

Andi: Or 2005.

Joe: Oh, 2005. “My question has to do with using cash for retirement income when markets are in a downturn. I’m helping my parents get ready for retirement and advise them to save a year’s income in cash for market downturns so they don’t draw on their portfolio. But how do you know when to transition into cash? For example, 2022 was a rough year. But at what point in 2022 would you have known to stop withdrawing from a retirement account and transition to using cash? Thanks for all the information and the help you provide.” Okay, so cash can be in a retirement account as well. First, this is what you have to be thinking about is what is the distribution needed per year? $50,000, $100,000, $30,000. And so what he’s saying or she’s saying here is that- is Lyse a girl or a boy? I don’t know.

Andi: Female, yes.

Joe: Female, okay. Lyse, Lyse. And so Lyse is helping out the parents and was like hearing, hey, take cash and ride out the downturns of the overall market. I get that, but you can still have cash in a retirement account. You can have cash in a Roth account. You can have cash, of course, outside of any type of retirement accounts. People get confused a little bit, is that if they have money in a retirement account, they never want to touch that, oh, defer, defer, defer. But if they have money in a checking account, in a brokerage account, they’re much more apt to spend that money. But you have to look at the tax consequence of the distribution and figure out a strategy there first, hey, how much money do you need from the portfolio? What’s that withdrawal rate and then come out with a distribution plan and then from there, let’s say you need $50,000. We would suggest you put 3 or 4 years in cash or very safe investments.  So it’s not like, oh, the market’s turning going to cash. You want to at least ride that out for several years. So you have a couple of years that you have that income where your stocks can recover.

Al: Yeah. And I guess the way I think about it is you figure out what your allocation should be, what kind of rate of return you need to make this work. And let’s just say it’s 50/50, 50% safety/50% stocks. Okay, great. So, and it’s easier if everything’s all in the same retirement account, and I’m, so, I’m just gonna make that as an assumption right now. Okay? 50% safety, 50% stocks. And so what happens is as the stock market goes down, your safe money holds its value. And so now your stocks are less than 50%, they’re 40% or whatever percentage. So basically you’re gonna be pulling money outta cash. Because that’s the one that did better. And then by doing that, you will bring your ratio up to stocks. You might even use some of the cash to buy a little stocks to get back to 50/50 and next year it does the opposite stocks go way up. Okay. Well now you’ve got 60% stocks. You want 50%. You want to sell stocks and use that for your distribution to get down to 50%. Just keep that in balance, you know, that’s called rebalancing.  And that forces you to take from the asset class that’s done better than the other one.

Al: This is where retirement income and distribution planning gets a little bit more complex. I think when we spitball, and we really love the questions, we have a lot of fun answering them. But you want to make sure that you understand how to create the income, making sure that you’re still managing the risk, making sure that you’re still managing taxes as you’re creating the income long term, because that will really help you stretch out the dollar. So, all right. Thanks a lot for the question. We got to take a break- we got to get the hell out of here! We’ll see you next time, folks. Show’s called Your Money, Your Wealth®.

Andi: Kim Crawford’s wine, my raise, Alicia vs Alisha, the Super Bowl, the Tesla truck and Hummers in the Derails at the end of the episode, so stick around.

This is Your Money, Your Wealth, your podcast! If you enjoy YMYW, tell your friends about it – that’ll help us reach more listeners like you. So will leaving your honest reviews and ratings for Your Money, Your Wealth in Apple Podcasts and all the other podcast apps that let you do that.

Your Money, Your Wealth is presented by Pure Financial Advisors. To really learn how to make the most of your money and your wealth in retirement, you need more than a spitball: schedule a no-cost, no obligation, comprehensive financial assessment with the experienced financial professionals on Joe and Big Al’s team at Pure. Click the Free Financial Assessment banner in the podcast show notes at YourMoneyYourWealth.com or call 888-994-6257 and book yours. Meet in person at any of our locations around the country, or online, right from your home. No matter where you are, the Pure team will work with you to create a detailed plan that’s tailored to meet your needs and your goals in retirement.

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.

The Derails

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