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Published On
September 27, 2022

A compilation of some of Joe and Big Al’s retirement plan spitballing specifically for those in their 40s and 50s – a critical time on the path to retirement. Is your financial plan set up so you pay as little tax as possible? Does it take volatile markets and potential future tax increases into account? Have you got a strategy nailed down for Roth conversions, or backdoor Roth, or pension options? Maybe you’re making big decisions about what to do with your money between now and when you retire, like buying a house vs. saving for retirement? Are you comfortable with the retirement lifestyle you’re creating? Do you know what you’ll do with your time once you’re permanently off the clock? 

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Show Notes

  • (01:13) Should I Get a Roth IRA Even Though I’m Highly Taxed? (Laura, Los Angeles – from episode 335)
  • (03:40) Roth Conversion, Roth Contribution, AND Backdoor Roth All in the Same Year? (Ben, Fargo, ND – new!)
  • (05:31) How to Strategize for Future Tax Increases? (Susan, Atlanta – new!)
  • (09:27) When the Market Tanks, Is It Smart To Do Roth Conversions to Higher Brackets? (Mike – from episode 375)
  • (18:38) Save for a Home or Save for Retirement? (Abigail Scott Duniway – from episode 389)
  • (26:20) Psychology of Retirement: I’m Paralyzed By Not Earning and Saving (Jim, IL – from episode 361)
  • (35:44) Roth 457 vs. Roth IRA and Pension Options #RetirementSpitball (Clay, Westerville, OH – from episode 377)

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Transcription

Your 40s and 50s are a critical time on your path to retirement. Is your financial plan set up so you pay as little tax as possible? Does it take volatile markets and potential future tax increases into account? Have you got a strategy nailed down for Roth conversions, or backdoor Roth, or pension options? Maybe you’re making big decisions about what to do with your money between now and when you retire: should you buy a house or should you be socking that money away into retirement accounts instead? Maybe the idea that one day you’ll no longer be earning and saving fills you with dread. Are you comfortable with the retirement lifestyle you’re creating? Do you know what you’ll do with your time once you’re permanently off the clock? Today on Your Money, Your Wealth® podcast 397, we compile some of Joe and Big Al’s retirement plan spitballing specifically for those in their 40s and 50s. Click the link in the description of today’s episode in your podcast app to go to the podcast show notes, listen to the YMYW episodes in which each question originally appeared, access free financial resources, read the episode transcript, and Ask Joe and Big Al On Air to get your own Retirement Spitball Analysis. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Should I Get a Roth IRA? (Laura, Los Angeles)

Joe: Laura from Los Angeles. “I’m 40 yo, single, no kids, own a condo worth $450,000, have no debt aside from the $210,000 mortgage and make $150,000 a year. I’m worried about retirement. Only have a 401(k). My question is, should I get a Roth even though I get highly taxed right now? Or just stick with the Traditional?” She’s 40. Makes $150,000 a  year.

Al: Yep, single.

Joe: 401(k).

Al: She’s probably in a 24% bracket.

Joe:  I don’t know if she even qualifies.

Al: For a Roth?

Joe: What’s the- $133,000?

Al: Yeah. It’s like $125,000 to $135,000, somewhere in that range.

Joe: She makes $150,000.

Al: Yeah, let’s see $125,000 to $140,000. So once you make over $125,000, you start being phased out on doing a Roth IRA, but maybe she’s asking- because she’s got a 401(k)-

Joe: Well, it says in parentheses, IRA.

Al: I know. But I think that means the Traditional 401(k). Maybe there’s a Roth option in the 401(k). So let’s answer that question first. Because if she’s just trying to do a regular Roth IRA, she would probably not qualify because her income is too high or at least couldn’t be a full one. But if she has a Roth option in her 401(k), she can do that. Is that a good idea?

Joe: Sure, but it depends on how much money she has. She’s concerned for retirement. She’s got $150,000. She’s 40 years old. So I don’t know what- if she has no savings then go Traditional for sure. Because.

Al: Because why not?

Joe: Why not?

Al: And with that income-

Joe: – would save some money in tax. And you can-

Al: And as long as you’re not going to have too high of a required minimum distribution age 72-

Joe:  But if she’s already saved a bunch of money in a 401(k) and has very little tax diversification, then you might say Roth.

Al: Because she’s only in the 24% bracket.

Joe: And she’s 40 and she’s got a lot of time for that tax-free money to grow.

Al: Yeah, that’s true too. And as you have observed before, and I agree with you, you tend to when you go ahead and do the Traditional 401(k) or Traditional IRA and get the tax deduction, you don’t tend to save the money. You tend to spend it. So it’s kind of a forced savings. And plus you’re going to be happy later.

Joe: Yeah, the tax benefits.

Al: Yep.

Roth Conversion, Roth Contribution, AND Backdoor Roth All in the Same Year? (Ben, Fargo, ND)


Joe: “Hello. Love the show. My wife and I are 41. I have 4 kids and I drive a 2020 Nissan Altima and we have a cat. I have a rollover IRA worth $315,000, Roth IRA of about $100,000, 401(k) at work at $125,000. My wife has $18,000 in an IRA, $75,000 in a Roth. We also have a taxable brokerage account of $125,000. We make too much to do Roth contributions. We plan to convert her rollover IRA to her Roth and pay the taxes from our brokerage account.” And this is Ben from Fargo, North Dakota. Sorry, Ben. “My question is, can we convert my wife’s rollover IRA to her Roth IRA? And also contribute to a non-deductible IRA and convert that to a Roth backdoor style-”

Al: In Parenthesis.

Joe: (Backdoor style).

Al: Not through the front door. Let’s go through the back door.

Joe: The kinda of style you like. ”- in the same year or do we have to wait until next year to do the Backdoor? Thanks again.” That’s Ben from Fargo, North Dakota. Ben. So, yes, you can contribute to a non-deductible IRA so you have basis in the IRA. You convert everything and then that goes with it. I mean, you’re just getting an extra $6000 into the Roth IRA.

Al: Yeah. You can do that right now. So to use your numbers, contribute $6000 and now you got $24,000 in the rollover IRA for her. You convert the whole thing. You only pay taxes on $18,000. So it works just fine. You don’t have to wait till next year.

Joe: Yep. Yeah. Great question. Make the IRA contribution. You have basis in the IRA. And then when you convert your wife’s, convert that as well and all good.

How to Strategize for Future Tax Increases? (Susan, Atlanta)

Joe: We got Susan from Atlanta writes in. “Dear Big Al, Joe and Andi. I’m wondering, how much should be done to strategize for future tax increases? I’m currently filing head of household and fall into that 12% tax bracket. And I’ve been making small Roth conversions while staying in the 12% rate. Rates are going back up in 2025, I’ll probably lose head of household status around that same time, pushing me firmly into the 22% or future 25% tax bracket. Does it make sense to convert an additional $35,000 now and fill up that 22% tax bracket? I’d mostly like to have to make some sales in my brokerage account to pay the extra tax. I’m 55yo and currently have $365,000 in a brokerage account, $450,000 in a traditional IRA, $400,000 in a ROTH. I’m also expecting to inherit some taxable and tax-deferred funds at some point, which could possibly push me into higher brackets, with the expected dividends in the required 10-year drawdown. Thanks. Susan.” Alright, from Hotlanta. Would you go to the 22%? Keep in 12%? I would go to the 22%, what the hell.

Al: Probably. You’re gonna be in the 22% anyway, which is going to be 25%, so I would just plan ahead for that. You’ve got a good chunk of money in the traditional. You know, you’d like to get more in the Roth. Sure. Why not?

Joe: Yeah. Markets are low, convert to the 22%. Now’s a really good time to do that. Yeah. I like how she’s strategizing though. Right? Because she’s got a plan. She’s looking at future tax rates. There’s some estimation, guesstimation. There’s a little bit of forecasting involved here.

Al: And there’s unknowns.

Joe: Unknowns.

Al: We don’t really know what the future tax rates are gonna be.

Joe: She’s taking some of the uncertainty off the table.

Al: Right. She’s taking what she knows.

Joe: Exactly.

Al: Which is all you can do.

Joe: Right. You got here’s what you know, and then you make action or decisions based on that.

Al: And then you adjust later if need be.

Joe: Absolutely. So this is what people should be doing, taking lessons here from Susan from Atlanta. Is that it’s like here’s the tax bracket that I’m in. And I’m gonna look out and it’s like, oops, okay. Well, the tax brackets are gonna change on me. And then I’m probably gonna be in this bracket at that point. Oh, and guess what? You know, I’m probably gonna inherit a couple of bucks from mom and dad that’s also gonna add to my income. Oh, and there’s gonna be some other stuff here. So as I’m still strategizing at 52, 50- how old was she? Did she say? I thought she said something. Maybe she didn’t.

Al: 55.

Joe: 55. Yeah. So she’s 55. She’s got several years, for this IRA to continue to compound tax-deferred. Or does it make sense to slowly chip away at this thing and pay a little bit of tax to really blow up the Roth? And I think she’s doing the right thing. It’s like here, I’m forecasting a little bit, hey do I go on the 22% tax bracket? You’re gonna pay that rate regardless. You could stay in the 12% now or you could pay 22% to get more money into the Roth at lower market values. I mean, I think it’s a great strategy and I would I be all over it.

Al: I agree and even the 24% bracket for- actually, both single and head a household, is up to $170,000. So there’s a lot of room even in that bracket. But of course, then you gotta figure out the tax that you gotta pay. You’d have to use some of the money in your brokerage account. Do you wanna do that? Maybe, maybe not. But yeah, I think I would definitely- probably at least convert the 22% bracket. And that gets you up to about- let’s see- head of household $89,000, which actually the same for single and head of household in that bracket, $89,000 taxable income. So that might be a good target to convert to.

Joe: Alright.

When the Market Tanks, Is It Smart To Do Roth Conversions to Higher Brackets? (Mike)

Joe: We got “Hello, Andi, Joe and Al. Most importantly, we drive a pair of 2016 Mazdas, zoom, zoom.” A pair.

Al: Yeah. They each have one.

Andi: His and hers.

Al: Anne and I have two Infinities.

Joe: “We got a box turtle named Hamilton and a cat named Angel. We keep trying to be couch drunks in retirement, like Joe has suggested, but we love exercise, fitness and healthy food too much. However, with all your help, we upgraded from Coors Latte to Michelob Ultra. So we highly recommend Joe consider that upgrade when he becomes, well, a bit more stable.” Wow.

Al: Yeah. In your later years. Less carbs.

Joe: “It seems a good rule of thumb to do Roth conversions when possible to the top of the marginal tax bracket you expect to be during retirement, especially when you are in low income years and with funds available to pay the tax on the conversion outside of the retirement accounts. I would like to hear your spitball analysis on when it might make sense to do even larger Roth conversions, going into even higher tax brackets in a down market. I went back through old podcasts and couldn’t find any detailed discussion on this. In general, my question is, does it ever make sense to pull the trigger on larger Roth conversions in a substantially down market? If so, is there a rule of thumb? How far down in the market to then convert how far up? The question of how much to do on Roth conversions each year to the top of which bracket seemed to be the most uncertain aspect of our detailed financial plan-” Oh, yeah. Okay. Page two.

Al: Page two. Here we go.

Joe: “- which is understandable giving changing conditions. I appreciate both Joe’s shoot from the hip gut instinct approach as well as a CPA map from Big Al to back it up. Between tax brackets, returning to pre-tax cuts and JOBS Act, after 2025, the Congress targeting Roth account options, now through 2025 is clearly a great opportunity to maximize Roth conversions. Feel free to cut this off now.” Is that him?

Andi: That’s him. Yes. He wrote that. Then the rest of this, the next two and a half pages are, “If you have time for more, here’s a whole thing you can spit ball.”

Joe: Okay, well-

Al: Let’s start with this.

Joe: “Feel free to cut this off now.” All right, Mike, I’m going to cut it off now. So he’s saying, is there a different rule of thumb if the markets are down?

Al: Well, his first premise is go ahead and do Roth conversions if you are in the same bracket or lower that you’re going to be in retirement and you’ve got the money to pay the tax. Yes. That’s kind of a no-brainer and it’s even better right now because the tax rates are lower than they will be in 2026. So it’s doubly a good idea.

Joe: Doubly.

Al: Currently.

Joe: Doubly good.

Al: Yes, doubly good. Two times the pleasure.

Joe: Two times the fun.

Andi: You guys are the Wrigley Double Mint twins.

Al: That’s correct.

Joe: God, I can’t believe I remember that.

Al: Me neither.

Joe: So looking at this, so what he is saying is that well, the market’s down. Should we do a bigger Roth conversion? And I don’t think that’s the- I wouldn’t. Because you’re converting more shares when the market’s down. So it’s not, do I convert into a higher tax bracket then I’m going to be in the future? You’re already converting more shares of stock because those shares are worth less. But it’s the timing of it, is the key component of it.

Al: It’s hard to know. Right?

Joe: I mean, so the market drops 20%. So do you convert that? And then it drops another 20%, but you already converted to the top of the bracket. So do you convert more? I mean, and at that point, maybe, does it make sense? This is my gut reaction that he wants. Maybe. I mean, depends on how much money that he has in the overall retirement account. Depends on, you know, if I convert a little bit more, let’s say into the 24% tax bracket, if I’m going to the top of the 22%, does it make sense maybe to convert another tronch? Yeah, maybe. You would have to run the numbers because potentially you’re going to be in the 25% when the tax cuts and JOBS Act comes back in the year 2025. So, but if you’re converting to the top of the 24%, which is a giant tax bracket, I don’t think I would go higher than that.

Al: So I would say it this way. Remember when the market was down during the great recession? And people converted at that point. And we tend to recommend that you put your higher expected earned asset classes in the Roth because all that growth will be tax-free in the future. And so then people converted while the market was lower because the market had gone down. And then back in those days, we had till October 15th of the following year to determine what the account balance is. And if the account balance went up 10% or 15% or whatever in that year, year and a half, whatever it may be, then it was like, well, the tax you paid, when you consider what you got in the Roth was actually pretty low. So I, to me, the CPA math is this, if you believe the market is going to go up 10% in a relatively short period of time, then you might even want to convert past the 24% bracket all the way to the 32%, because that 8% additional tax, it’s going to be recovered when the market recovers. The problem is it’s impossible to market time.

Joe: Absolutely impossible to figure that out. Before, what we would do, the best strategy is that we would, you had the ability to re-characterize. So we had some Roth conversions. We would do like 10 different Roth conversions. One was in small cap. One was in the international, one was in bonds. One was in emerging markets. And then you would just let them all run. And then you would wait until October the following year. And then you would look at what had the highest balance. You would keep those and you would re-characterize everything back into the retirement account. Or if there was still such a thing as- then it didn’t matter what tax bracket that you’re in. Just convert $100,000, who cares. And then you would take a look at, does the math make sense depending on the expected rate of return, because you could re-characterize? You can’t re-characterize any more. So that makes that whole strategy impossible.

Al: It’s tricky.

Joe: It still could work out. Right?

Al: Yes.

Joe: You convert, but then just know that you’re stuck with whatever that you convert and you’re going to pay the tax and hopefully long-term that, you know, the Roth is going to produce for you.

Al: And markets do tend to recover. You just don’t know how quickly and when. So that’s the risk that you’re taking. But the theoretical mathematical answer is yes. I mean, you would rather convert while the markets are down because you’re putting less money into the Roth because the markets are lower and hopefully it grows that much quicker.

Joe: So a couple of different rules- or different thoughts- or different strategies. There’s a barbell Roth conversion strategy that, you wait, you take a look, and if there’s volatility in the market- And let’s say your conversion number is $40,000. So maybe you convert $10,000 or $20,000. So you still have a reserve of another $20,000. So if the market dips again, then you’ll get to your $40,000 later. Some people will do a conversion right in the beginning of the year, because it’s better to do a conversion in the beginning of the year, especially if the market goes up. Because then all of the growth for that year is in the Roth IRA. Some people wait until the end of the year. Well, if you wait until the end of the year and you have a good market year, well, that’s not a really great strategy because you missed all of that growth that’s sitting in your IRA versus your Roth IRA. You might want to do it monthly. Right. Hey, you want to convert $100,000, $10,000 a month. There’s all sorts of different, crazy things that you can do to maximize the effectiveness of conversions. But what Mike is asking us is market timing, which we don’t have a crystal ball, but if the market does go down, that is the best time to convert. But just know that the market could continue to go down, and then if you convert it to the top of whatever bracket that you wanted, does make sense to convert more? It’s going to be on your assumptions of what you think the expected returns going to be in that account.

Check out YMYW podcast episode 375 for the rest of the fellas’ answer to Mike, you’ll find it linked in the podcast show notes at YourMoneyYourWealth.com. Having your financial strategy and your retirement plans well-defined in advance can give you more peace of mind. But the best plan for you and your family is highly individualized and entirely dependent on your current circumstances, your risk tolerance, and your goals for retirement. If you don’t have a financial plan, get one: visit YourMoneyYourWealth.com and click Get an Assessment to schedule a no cost, no obligation, one on one, personalized deep dive into your financial situation with an experienced professional on Joe and Big Al’s team at Pure Financial Advisors. Learn the strategies to help you make the most of your retirement, and to give you that peace of mind. Go to YourMoneyYourWealth.com and click Get an Assessment now.

Save for a Home or Save for Retirement? (Abigail Scott Duniway)

Joe: All right, I got an email here. It says, “Andi, can you please give me a cool alias?” So what’s the alias of this person?

Al: What’s the name?

Andi: So I came up with Abigail Scott Duniway. Our emailer is actually from Portland, Oregon. So I looked up famous women in Portland and I came up with Abigail. She apparently was one of the first people on the Oregon Trail in 1851. Her husband suffered a farming accident, so she ended up having to support the family. She moved them to Portland.
She started a women’s rights newspaper called the New Northwest. She became the first woman to vote in Portland. So she was a pretty cool chick. So I decided I was going to name our emailer after Abigail here.

Al: Okay, a little history lesson. That’s good.

Joe: Oregon Trail.

Al: Right. You ever been on that?

Joe: No.

Al: I don’t think I have either. Been near it.

Joe: All right. “Hi, Andi. Joe. Al. I’m 40. I’ve spent most of my life-” on the Oregon Trail “- most of my life not really paying attention to money or investments. I’m debt free, but currently only have just over one times my annual income split between the old 401(k) and my TSP. Base salary is $73,000. But I’m currently in a unique position to pick up an extra day of overtime each week, which would almost be an additional $1600 a month. I’m curious about what my best course of action is in regards to this new money. I’m a renter, and I’d really like to use it towards the down payment on my first home. But I also know I’m really behind on my retirement savings. Currently, my work takes a mandatory 3.1% towards my pension. Plus, I’m investing 10% into my TSP. They match 5%. And I’m maxing out a Roth IRA. Based off my current salary, my pension will be around $22,000 a year. Am I too far behind to buy a house? I live in Portland with my SO-“

Al/Andi: -significant other-

Joe: “-SO-

Al: -with my SO-

Joe: -“with my SO and our 15 year old pit bull. We drive a- “15 year old pit bull. They last- they live that long? “ – and drive a 2005 Corolla and I enjoy a hard seltzer from time to time.”

Al/Andi: Cider-

Joe: I like the hard seltzer.

Andi: He just changed it to what he wanted to drink.

Al: You were thinking that was-

Joe: I was being selfish. Sorry. “Thanks for your help.” Okay, let’s see. I can help.

Al: Okay.

Joe: That’s minor.

Al: That’s yours. Couple of comments. 3.1% towards pension, 10% plus they match 5%. So you’re already about 18%. We tell folks they ought to try to get up to 20% of their savings. So that’s actually pretty good. You might be a little bit behind. I’m not sure you’re that far behind.

Joe: No, I don’t think she is. Because, let’s say- I bet she’s spending $60,000 a year. Because if she’s got $73,000, you pay the tax, plus you put the 10% into the TSP, plus you’re already taking money out for the pension and whatever benefits, I bet it’s like, I don’t know, $55,000, $60,000 a year?

Al: Yeah, $55,000, $60,000, exactly.

Joe: Okay, so let’s use $55,000. And she is 40, and she wants to retire at what, 60?

Al: Yeah. Call it 60- 20 years.

Joe: Okay. Present value- So we got $50,000, and then we got 20 years. And we’ll use 3.5% percent inflation. Okay, so she needs $100,000. Her living expenses will be roughly $100,000 in retirement.

Al: Yeah. With inflation. Okay.

Joe: She’s going to get a pension of $22,000. And that’s probably not adjusted for inflation. But it probably would be. But let’s just say straight $22,000. Maybe that’s today’s dollars. I don’t know if that’s future dollars. So she needs $75,000. You’re good with that number?

Al: Yeah. Social Security would probably be $30,000 at least.

Joe: Yes. Or let’s call it $20,000 even.

Al: Okay. Just to be conservative.

Joe: Yeah. So now that’s $55,000. So she needs about $1,000,000. Call it that.

Al: In that range.

Joe: In that range. So she’s got $100,000 roughly saved, and then she’s got 20 years. And let’s say she gets 7% on her money and she’s saving, with the match, $10,000.

Al: Yes. At least, yeah.

Joe: That gets her to $825,000. Super close.

Al: Yes, close. It depends on Social Security, though, because if it’s only $20,000, her fixed income is $40,000, and she needs $60,000. So she need $1,500,000, with that math. But-

Joe: I’m assuming that the pension- she’s got a TSP, so she’s a federal employee. The pension is going to have a cost of living on it, potentially.

Al: Yeah, potentially.

Joe: Social Security is going to be a little bit higher than that. And then if her income is going to continue to increase and she’s going to probably continue to increase her savings as that increases.

Al: Oh, you know what? She’s also maxing out a Roth. So you’ve got to add that in.

Joe: So she’s really close.

Al: Yeah, I think so, too. I think you know what? Use the extra money for a house if that’s what you want to do. Maybe your significant other can help, too.

Joe: Yeah, your SO.

Al: Your SO.

Joe: Get SO on board. So $1600. But the problem is that she’s going to have to figure out a down payment.

Al: Yeah, true.

Joe: Because I think she could cash flow if she could get a note.

Al: Well, she could. That’s why she’s thinking she’ll save the extra $1600 a month before that. But it’s gonna take awhile.

Joe: Yeah, it’s going to take a few years.

Al: Right.

Joe: So what’s that, $20,000 roughly a year.

Al: You can do what I did. I borrowed money from my grandma for the down payment. Or maybe your parents or your rich brother or whoever.

Joe: Or you could maybe, depending on what she does for the government, there could be some loan programs, maybe 2% down or 3% down. We’ve seen some of them.

Al: Right. Well, that’s true.

Joe: But yeah, I like the $1600 month. I think if you continue to put what you’re putting in the 401(k) with the match, with the Roth IRA, and then now you have this extra cash of $1600, and if you really want to get a house, yeah.

Al: Go for it, I think you can do it.

Joe: Yeah, I think so, too. I don’t know what segment we’re on.

Andi: You’re in segment 4, so you’ve got about a minute left.

Joe: We got to keep going. I can’t break early, is what you’re saying.

Al: Anything else to say on that one? Personally, I think if people want to own a home, that’s an important thing. And homes tend to appreciate over time. You’re living in Portland, Oregon, which is on the West Coast. The Coasts tends to appreciate a little bit more than the center of the country, not the slam anybody, but it’s just historically. Nevertheless, all properties have gone up in all areas over the past several years, and that tends to happen over the long term.

Joe: The biggest thing is that if you’re going to continue to rent all the way through your life, it’s going to kill you.

Al: Yeah. So you kind of want to lock in the housing. If that’s your goal, and it sounds like it is, yeah, go for it. I think you got enough money here to do it. The hardest part is the down payment, so you got to figure that piece out.

Joe: Yes. All right. Congrats. Thanks for the question. And good job, Andi, with the alias.

Andi: Hey, I hope Abigail liked it.

Al: We got educated.

Joe: Did that take you, like, a couple of hours of research there?

Al: She’s too awesome-

Andi: It took me like 30 seconds. Like I said, I just searched for famous women of Portland-

Al: I was gonna say- Andi’s going to submit overtime for that work.

Joe: Andi wants another $1600 a month for that work.

Al: I think so.

Psychology of Retirement: I’m Paralyzed By Not Earning and Saving (Jim, IL)

Joe: Jim writes in from Illinois. He goes, “I came across your show when the pandemic hit and have been listening regularly ever since. It’s very informative. The mix of expert advice-” or expert feedback.

Al: Expert feedback. Not advice, not advice.

Joe: “and sarcastic humor is a unique and inviting combo.” Yeah.

Al: Not too many financial shows have that.

Joe: Yeah, I really agree with that statement.

Al: I’ll tell you what, Jim. We have no issues with that statement.

Joe: Well, sarcastic humor. There’s nothing better. “Also, I feel the connection with Joe because I, too, butcher words when I have to read aloud and I admire that Joe doesn’t seem to care.”

Al: I think most of us butcher words.

Joe: Thanks, Jim. You and I, brother. I’m not a very good reader.

Andi: You’re getting better, though. You’re doing a lot better.

Joe: Thank you. Thank you.

Andi: Especially with these long ones, these page long ones, you’re doing excellent.

Al: I happen to love your reading. It’s very entertaining. I think it’s sarcastic humor. Unique.

Joe: Oh, perfect. That’s expert feedback. “On to my question, which relates to something that I haven’t heard thus far on the show. I’m 56, happily married. I’ve climbed the corporate ladder in a large global company where I did well and then stepped into the CEO role of a small startup, which I have been doing for the past 3 years. I have lived with personal financial management principles of delayed gratification, little debt, and low fee investments. As a result, I’ve saved and invested for many years and have been able to accumulate a net worth of about $6 million, made up of $5 million in taxable accounts ($2.3 million in 401(k), $2.4 million in index funds), $500,000 in liquid money market account, and $500,000 in home equity. I will also have a small pension of about $1,800 a month. Social Security, conservatively estimated at $2,000 a month. My base salary is about $350,000 a year. I have stock options, but let’s ignore those because it’s a startup and who really knows? Lastly, I have about $670,000 of 529 plans for my two kids’ college. It is overfunded, but it makes me feel good to know that they’re covered. So on paper, things look good and I should be a happy guy, but I’m miserable.”

Al: Oh, boy. And so far, I thought you’d be ecstatic. OK.

Joe: “Because I hate my job. I want out and I’m paralyzed by the idea of not having an income and not being able to save money. Over 25 years, I’ve been wired to save and invest for the future and now the future seems to be here, but I’m fumbling around listening to your show and others and I’m so confused.”

Al: OK, well we’ll do our best.

Andi: This is becoming quite a dramatic reading.

Joe: I got goosebumps.

Andi: You gave yourself goosebumps.

Joe: I do. “What advice do you have for people like me who have done well, but the psychology of managing their finances without an income or with the smaller income of semi-retirement is making them miserable? I’ve made a career of always trying to have answers for problems, but I now seem to have a problem of my own and it’s painful for me to admit that I don’t know how to solve it. Is this a familiar issue with you guys, with your clients? If so, what spitballs of advice can you throw my way?” First of all, I really appreciate the question. This guy is the CEO. Killed it. Very successful.

Al: Used to saving. Saves a lot.

Joe: He’s young, and he’s like, I’m going to take on the CEO role and I’m going to make stuff happen.

Al: Get some stock options, and this will be a little different than the big corporate world.

Joe: I’m the man. I don’t have the answer to no one.

Al: I am the man. It turns out you always have to answer to somebody.

Joe: Yes, you might have some investors. And it’s lonely at the top, isn’t it there, Jim? It’s lonely up here. I’m with you, brother. But OK, so he has enough money.

Al: The quick math is $5 million at age 56, I would use a 3% distribution rate. So that’s about $150,000. If you’re spending less than that, which you probably are based upon your profile, you’re good to go. I’ll tell you one thing that helps me, being an accountant. I don’t know if this works for other people, but I like to run this out on financial planning software. And what does this look like given certain inflation and investment and spending assumptions? And tweak those and see how it works in different scenarios. And I think, Jim, in almost any scenario, you’re going to see that this works. So that would be one thing you could do.

Joe: Yeah, but life is too short. If you’re miserable and you hate your job, quit. You have financial security. Most people are working their tails off. And I get this, you’re not asking for sympathy and you’re not asking, “Oh, woe is me, I got $6 million.” I get it. People that are very successful, they’re wired a certain way to save, to save, to save and think about the future and everything else. And then when they look back and in trying to step out, there’s a lot of fear there. It’s like, “Well, what the hell am I going to do tomorrow? I’m going to drive myself nuts or I’m going to be a couch drunk”. One of the two.

Al: And I think that that is really common for someone that’s very successful and has devoted their whole career to being successful and growing up the ladder and all that sort of thing. So here’s a couple more thoughts, Jim. You can step into a consulting role. I’m sure you’ve got a lot of skills that would be valuable to a lot of companies, but maybe you work a lot less. Maybe you make enough now to cover your own expenses so you don’t see your accounts going down, they’re actually going up with the market. And maybe you could have a much better and happier lifestyle just doing that. Maybe you could have consulting jobs where you could work from Italy, from Hawaii, from wherever. So you have a better quality of life. But I think, at least for me, I’ve got to see it in black and white. I’ve got to see the spreadsheets to make sure, regardless of the assumptions I put in, that I’ll be OK. And I think, Jim, you’re going to find you’re going to be fine.

Joe: Yeah, but I think Jim has a number in the back of his head. He’s got a $5.7 million net worth. He might be in the back of his head, he’s 55 years old. He’s like, “I’m not going to feel comfortable until that’s 10.”

Al: I know, but remember it used to be $1 million, and then it was $2 million and then….

Joe: But that’s the issue. That’s the problem. Even though we both agree that he’s fine financially on paper, on black and white. It’s not like he’s making $3 million a year. He makes $350,000 a year with a $6 million net worth. And that $6 million net worth will probably produce anywhere from $150,000 to $200,000, so his income could be pretty close to match. Because you take $350,000 after taxes, after savings, and so on. What is he truly spending? That might be $100,000-$150,000. Well, his investments could probably produce that after tax. And so he’s going to be in the same spot, financially. But emotionally in his mind, where’s his purpose? Is, I think, the bigger issue.

Al: Yeah, I completely agree with that. And that’s a very common issue. It happens with men and women. But I would say, at least from my experience, a lot of men face this that are used to being very successful in their roles, making a lot of money. So then it’s a matter of trying to figure out “what’s the next phase for me?” And there you really have to do some soul searching. There’s plenty of books out there to help you with that. So to me, it’s less of a money problem and more of a “what am I going to do with my life?” Because when you’re used to working 80 hours a week and just to stop, it’s actually not terribly healthy.

Joe: Jim, I’m a lot younger than you, and I feel the same way every day.

Al: Not too much, single digits.

Joe: I feel the same way every day. I don’t have as much money as you. Someday…

Al: Someday. You aspire at age 56 to get there?

Joe: Yup, that’s it. I wish this company would pay me.

Deciding on a Roth conversion strategy, whether to save for a home or retirement – these are all major retirement decisions that definitely require running some numbers, but just as importantly, what will you do with your time once you’re retired? In 2016, a Fidelity Investments survey found that 60% of men said having time to spend time with their spouse was a strong factor in their decision to retire, while only 43% of women said the same. Download the Retirement Lifestyles Guide from the podcast show notes at YourMoneyYourWealth.com to get some insight, suggestions, and ideas to make the most of your lifestyle, growth, health, and relationships in retirement. This is what Joe likes to call “the softer side of retirement.” Click the link in the description of today’s episode in your podcast app to download the Retirement Lifestyles Guide for free.

Roth 457 vs. Roth IRA and Pension Options #RetirementSpitball (Clay, Westerville, OH)

Joe: “Clay from Westerville, Ohio. Westerville. I don’t know where that is.

Al: One thing it’s in Ohio. I can tell you that.

Joe: Okay. “I just found the show and I’ve been binge-watching.” Wow. What are these people doing, binge-watching?

Al: Have you ever binge-watched our show?

Joe: No, I’ve never seen it.

Al: Never, ever seen it.

Joe: I’ve never seen the show. I’ve listened to a couple. Andi did a really good job, I don’t know, a couple of years ago on the Best Of, or something. I listened to that.

Andi: A couple of years ago, he listened to one.

Joe: She did like a montage of something and she asked me to listen to it.

Al: Got it. Okay listened to that. You did that.

Andi: (whispers) I “asked you” to listen to it…

Joe: I did that. Yeah. I was on the ride to Palm Springs. So I thought-

Al: Got it, yeah, you might as well. And I’m probably about the same. I have heard our shows before, but not that frequently. Cause I mean, once through is enough, right?

Joe: It is. It’s the same show over and over and over again. But he’s bingeing. I’m bingeing The Last Kingdom, I think it’s the name of the show? Have you seen that?

Al: Have not, I’m not bingeing anything right now.

Joe: No? Yeah. You’re just drinking Mai Tais, chilling and-

Al: I’m drinking Mai Tais, enjoying the waves and the ocean.

Joe: Hanging loose, brah.

Al: That’s right. You know, the Hawaiian “hang loose” is that- do a little wiggle there.

Joe: Got it.

Al: Just so you know.

Joe: Thank you. So he’s binge-watching, he’s got a little Dr. Pepper Zero, just pounding away the Dr. Peppers, just absorbing Your Money Your Wealth®. Just can’t get enough of it. He’s got a 2008 Honda CRV with a double doodle roaming in the house.” A double doodle. Uh. “42. Wife’s 40. I make about $135,000. The wife stays home with the kids. We have approximately $650,000 in my governmental 403(b), all pre-tax, and $350,000 in a Roth.” Man. At 42 years old? Wife at home with the kids? The guy’s killing the game.

Al: Impressive.

Joe: Very impressive. Got $1,000,000. “Our best case is retirement at 58, with $3,500,000, which we’re on track for at a 6% rate of return. If we were to hit that number before 58, I could retire before that, our mortgage would be paid off, and likely need about $75,000 in income. We currently save 25% of our income. I max out both Roths and just started contributing to the 457 Roth option. We do not pay into Social Security, so there’ll be no Social Security income.” He’s got a couple questions. “1) Should one maximize Roth 457 first instead of our Roth IRAs, because of the additional flexibility it grants to us to get- it grants us to get us to 59 and a half and also help solve for the ACA credits in the future. I also have $100,000 in a retirement medical account, like an HSA after you retire, which will likely be about $200,000 at that time. So in theory, I could just pay for health insurance out-of-pocket, as well as draw on those funds in doing some Roth conversions of my 403(b).” So couple of things. With the 457 plan, there’s no 59 and a half. Everyone kind of gets confused on, when can I take money out of my account? In a 401(k), as long as you separate from service, the age is 55. It’s not 59 and a half. With IRAs, individual retirement accounts, it’s 59 and a half. However, Roth IRAs are totally different than that as well because you have access to the contributions at any time. So if he’s making $100,000 contributions for the next several years, he always has access to that because it’s first in first out. The earnings or the growth of the overall Roth will need to season for 5 years or until he turns 59 and a half, whichever is longer. So, should he stick with the Roth IRA or go with the 457? If I was sitting in Clay’s shoes, drinking my little Dr. Pepper Zero with the little dopper doodle, I would go 457. I don’t know. What about you, Big Al?

Al: Yeah, because you can put a lot more in, right?

Joe: Putting a lot more in, you have a lot more flexibility. Um, yeah, I think, do that all day long. Your paycheck, it’s easier. You don’t have to take it out of your savings account.

Al: And then there’s ACA credits, which we should explain that, Affordable Care Act credits. So this is to help you pay for your insurance when your income is low. And so what people tend to do is they try to keep their income low enough until they get to age 65, Medicare age, where they can then get credits and get help on paying for health insurance. And if you’re able to draw money out of Roth IRAs, or you’re able to draw money out of your savings, or maybe a non-qualified, non-retirement account and you don’t have a lot of taxable gain, then that can work.

Joe: Because then the income is virtually zero.

Al: Correct.

Joe: Right. Okay. Number 2) here, is that, “how do you guys look at pension options? A 403(b) can be completely or partially converted at 55 to a pension- How do you guys look at pension options? The 403(b) can be completely or partially converted at 55 to a pension as I choose the self-directed plan, not the guaranteed pension option when I started 20 years ago. I will have a COLA that matches CPI, but can’t exceed 3%. Traditional view is that a 6% distribution to take it and I liked the idea of converting some of it to create an income floor, conservative portion of assets, similar to Social Security between $25,000 and $40,000. But I also feel like I could take the money. I’d allocate the pension and create my own, while controlling my taxes with our Roth IRAs and possibly converting some of those balances to Roth. Just curious how one would spitball that. I am aware that I’ll likely die first and want to keep things as simple as possible for my wife. Really appreciate it. Loyal listener now.” Yes. Clay. Look at that, he’s already thinking about death. The guy’s 40.

Al: Yeah, 42. Is that something you think about these days?

Joe: I think about it every day. Every day I drive into the office and I’m like, I just wish this semi would just take me out.

Al: It’s like, I’ve had enough. I’m in my 40s. Good enough.

Joe: I killed it. Got married.

Al: Killed it.

Joe: A month in? I’m ready.

Al: I got a great legacy.

Joe: Bucket list.

Al: Take me now. Got it.

Joe: No, I don’t really think- I love life. I love my life. I’m a happy-go-lucky guy. But he’s responsible. The guy’s got $1,000,000 at 40. Of course, he’s thinking about his wife and estate planning and getting things dialed in there. How do we look at- well, there’s a lot of calculation that goes on in looking at, do you take the pension or the annuity stream versus the lump sum? In some cases it makes a lot of sense to take the lump sum and he’s right on track, because if he takes the lump sum, then he could create his own income from the overall portfolio. He could control his taxes, he can do conversions. He’s already got a lot of money in Roth. He’s doing the right things. He’s going to have even more money in the Roth because we just told them to max out the 457 Roth. And so he’s going to control his taxes quite a bit. If he takes the annuity, well, then that’s a guaranteed income floor- he doesn’t have Social Security. So then it’s like, at least I need some sort of floor of income. I’m going to have a lot less balance. And if I pass away, that income could stop either at his life or his spouse’s life. So it really depends on what’s the pension payment versus the lump sum? So there’s a calculation there to really determine kind of what the internal rate of return that you’re getting from the pension. Then it also deals with your risk tolerance. I mean, a lot of people like that floor. So then take the floor. Because you’re going to have a ton of other assets as well. So, he’s got to do a little bit more calculations here, but I think he’s right on the right track of at least thinking about it. But yeah, I would- if he doesn’t have Social Security, I would probably take the pension.

Al: I would probably take the pension too. And the reason is because 6% is a decent payout and it’s got cost of living increases. A lot of times with pensions, maybe they start around 8%, but there’s no cost of living increase. So by the time you get 10, 20 years in, it’s a lot lower payment in terms of purchasing power. It’s the same payment, but it will buy you a lot less because of inflation. So I kind of like that too. Plus the fact that he’s got, they have, so many other assets to utilize for other purposes, particularly they’re thinking $3,500,000. Yeah, I think I would take that, but I think that’s how I think about it. It’s just like you said, Joe is, you do the calculations, you see what’s going to be better, but in this case, I would probably lean towards the pension based on what I see.

Joe: Right. Well, let’s say if he doesn’t take the pension and then you look at his income needs, what is the burn rate? What’s the distribution rate, is what he really needs to figure out. So he wants to spend $75,000 today, forecast that out with a 3.5%, 4% inflation rate to see what that number is. And if he takes the pension, let’s say that’s $90,000 of income need, and he’s got $50,000 coming in from pension. So now he’s short $40,000, he’s got $4 million. That’s a 1% burn rate. Okay. That’s pretty healthy. Or you take the lump sum and you do the same number. Maybe it’s a 2.5% distribution rate. Well, that’s still pretty healthy. But if you’re running into 4% or 5% burn rate on that money, then it’s like, okay, well probably the pension might make a little bit more sense because you’re going to have to take on more risks in that overall portfolio, and he wants to retire early. And he’s probably going to have super longevity, just because the Dr. Pepper Zeros-

Al: Instead of beer? Or harder-

Joe: Cocktails? Yes.

Al: Well, you actually brought up a good point. So health does come into this. So if you think you and your spouse, if you get the survivor benefit, have impaired life expectancy and you’ve got kids, maybe you do want the lump sum, so you can maximize that for the kids. So there’s a lot to consider really.

Joe: Cool. Thanks for the question. Thanks for being a loyal listener. Welcome to the family, Clay. You’re one of 4.

_______

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