Show Notes

• (01:17) Johnny Mercer’s Cars, Drinks and Pets
• (02:19) Will Social Security Primary Insurance Amount Continue to Rise With Inflation?
• (05:20) Retirement Spending: What’s Reality?
• (06:40) Are Future Higher Tax Brackets Just Fear-Mongering?
• (08:21) How Much Can We Afford to Spend and Still Leave Money for Heirs?
• (11:07) Final Considerations & Roth Conversion Strategy

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Transcription

Andi: Johnny Mercer in Savannah, Georgia writes us back for a spitball on Social Security and inflation, tax bracket changes, and retirement spending strategies. Can we accentuate the positive for him? That’s up next on this bonus episode of Your Money, Your Wealth, aka YMYW Extra. I’m producer Andi Last, and you, the YMYW listeners, have sent us so many excellent retirement spitball requests that Your Money, Your Wealth® hosts, Joe Anderson CFP®, and Big Al Clopine CPA can’t even handle them all. so I’ve enlisted the help of senior financial advisor Rachel Foos, CFP from the Pure Financial Advisors office in Mercer Island, Washington to help out. It’s important to note that this is just a spitball, for educational purposes only. Even though you’ve given us a lot of details, we don’t know everything about your financial situation, so don’t take this to the bank! Here’s Rachel’s spitball:

Johnny Mercer’s Cars, Drinks and Pets

Andi: Rachel, thank you so much for taking the time today. I really appreciate it.

Rachel: Absolutely. Happy to be here.

Andi: Excellent. So, you’ve had a chance to listen to the podcast before, you know how this works, right?

Rachel: Yeah.

Andi: So this is going to be a little different because for once I’m going to read the question instead of Joe.  Let’s get started. It says, “Andi, Joe and Al, it’s Johnny Mercer again from Savannah. Your podcasts remain entertaining and informative. To me, you are the car talk guys of retirement planning. Please keep up the good work.” Thank you, Johnny Mercer. We shall. “Johnny is 68 and plans to work until 71. He still finds his work challenging and engaging. He wouldn’t mind boxing with his boots on-“ which, the last time that Johnny wrote into us, he said something about boxing and we determined that that meant, when he goes out in a pine box.

Rachel: Yes, I remember that episode.

Andi: He says, “But his lovely and wise wife, who is 65 and retired, has other plans. No grandchildren yet, but their 7 year old King Charles Cavalier is currently filling that role. His wife likes California Pinot Noir.” I agree with Johnny’s wife.

Rachel: Absolutely.

Andi: “And he was just recently reacquainted with Miller High Life and found that he likes it just as much as all the fancy and imported craft beers, so that is now his drink of choice. Rachel, what’s your drink of choice?

Rachel: I’m a wine person all the way. I don’t touch beer at all, so not a fan of Miller, but I like the Pinot Noir. I’m with the wife.

Andi: There we go. All right.  “And the wife drives a 2018 Lexus RX 350 and he is now in a 2023 Toyota RAV4 hybrid.” Very nice. Okay. All right.

Will Social Security Primary Insurance Amount Continue to Rise With Inflation?

Andi: So Johnny’s current income is roughly $300,000 a year. They’ve got no debt, no mortgage. Their assets, their house is worth $1,300,000. In the brokerage account, they’ve got $250,000 primarily in high yield money market at present. And in qualified retirement plans, they have approximately $4,300,000, roughly 50/50 stock to fixed income.” This is what Joe and Al would refer to as a big wallet. “I hope the Roth IRA is minimal, but this year he plans to start conversions up to the top of the 24% bracket, at least until RMD started age 73, at which point he hopes to have about $400,000. His plan is to start Social Security at 70, 67 for his wife, and Social Security should come to about $70,000 a year. Johnny will also get a government pension of about $35,000 a year and will be able to keep his current health insurance instead of Medicare Part B, therefore avoiding IRMAA, the income related Medicare adjustment amount, monthly adjustment amount. Yes.  “It’s estimated expenses in retirement, he thinks will come to about $200,000 after taxes. He thinks that comes out to about $275,000 before taxes, depending of course, on whether they go up in 2026. The great state of Georgia helps in this regard, not levying taxes on Social Security, pension income or the first $65,000 per person of income from qualified retirement accounts. Go Georgia!  So, Johnny’s first question has to do with the Social Security primary insurance amount. He’s already passed full retirement age, so the Social Security website has basically deleted his information about his PIA.  He’s been trying to find out if that PIA will continue to rise with inflation even if he is past full retirement age. Common sense tells him that it does, but he hasn’t been able to verify that yet. He says, I’ve tried calling Social Security to see if he could find a non bot that may know the answer, but to no avail. It is relevant to use since his lovely wife is going to qualify for 50% of whatever that number is.” So let’s start with that one.

Rachel: Absolutely.

Andi: Does the Social Security primary insurance amount go up with inflation?

Rachel: So here’s the, here’s the thing. When you choose spousal, you get 50% of your spouse’s age, 67 full retirement age amount. So as the- as your own retirement goes up all the way to 70, your spouse is not going to benefit from that. So her expensive tastes and, you know, Lexus and Pinot Noir and King Cavalier Spaniels. This is, this is not going to work in her favor I would, I would be sorry to tell you. But she’ll get half of your full retirement age.

Andi: Okay. And then is there, but is there a COLA adjustment each year? Would that have any impact?

Rachel: There is a COLA on the age 67 amount. Once she starts claiming, she’ll get COLA. Yes.

Andi: Got it. Okay. Excellent.

Retirement Spending: What’s Reality?

Now, question number two. “I’ve read all kinds of advice regarding estimating retirement expenses, but I’m still ill at ease about whether I’m in the ballpark with my estimates. I’m wondering with your vast experience, what would be your spitball of the average percentage of pre-retirement income your clients have used and whether they turned out to be correct? Johnny says, I think using median or mode may be more helpful than mean in this case, don’t you? Outliers can be so disruptive.”

Rachel: Yes, absolutely. So generally people expect that they will spend less, but the truth is people spend as much as they have been spending because nobody wants to decrease their lifestyle. You can’t cut your wife off of her wine membership, right? She wants to keep that. So if you want to make happy wife, happy life, you keep your budget the same. Not only that, but now you’re free. Your time is free. So you want to go out and do things. You want to travel. You want to, you know, meet up with your friends and go out to dinner and do all these extra things. So oftentimes you might end up spending even more. So I would hesitate to tell you to reduce your budget. I’d say if anything, push it a little bit.

Andi: And given the amount that he’s got in the retirement accounts and all of that, it looks probably, if you were to spitball, like that would probably be reasonable, correct?

Rachel: Absolutely. He can make that work, for sure.

Are Future Higher Tax Brackets Just Fear-Mongering?

Andi: Alright, and then, let’s see, the next one, question 3 is about the expiration of the current tax rates and return to the pre 2017 rates. He’s been trying to find out what the proposed brackets for income are going to be. Some websites are actually putting out brackets that show the increased percentages, but are using the 2017 income brackets, thereby putting many of us into even higher tax brackets. Do you know if this is the case or are these people fear mongering? If it’s true, I am tempted to go above the top of the 24% bracket with my Roth conversions.” What say you, Rachel?

Rachel: Absolutely. So they’re not fear mongering. It’s actually written into law. We are reverting back to 2016 rates. You can look at those tables, they’re published, but we will adjust them for inflation. So the numbers won’t be the same as in 2016. But yes, tax rates are going up by several percent for just about every bracket. And the brackets are actually condensing as well. So more of your income will be pushed into higher brackets. So it’s kind of a double whammy because more of your income is going to be pushed into a higher bracket. And then once it gets to that bracket, it’s going to be taxed at a higher rate.  So your total average rate of tax, your effective rate we call it, is going to be much higher.

Andi: So we don’t know exactly what the income ranges are going to be for each of those brackets yet. Is that correct?

Rachel: We have some pretty specific estimates on that and our CPA would be happy to provide some information on that if you’d like to get in touch with me after the show.

How Much Can We Afford to Spend and Still Leave Money for Heirs?

Andi: Excellent. Cool. All right. question number 4, “and this is the toughest one for me,” Johnny says, “Leaving money for our children is very important for us. One will most likely be single in a very low tax bracket and need the money. The other is married and will most likely be financially secure. But we have a tradition in my family of grandparents supporting their grandchildren’s education and career. Johnny’s grandfather was a Holocaust survivor who saved enough to put him through an expensive private college and money from his parents helped their children pay for school.”

Rachel: That’s incredible.

Andi: It is. It really is. “His goal is to have $2,000,000 in today’s dollars when we die. And I’m hoping for a spitball formula for figuring out what percentage of our assets he can plan on spending each year. He read Bill Bengen’s book a while back, and he’s a fan of the 4.15% rule. But given that we really need something left over, I don’t believe I should use that number for the whole amount. Thank you in advance for all you do.” So let’s talk about the leaving money to children first. Is there a way that he can do that, that you think makes sense in this situation?

Rachel: Yeah, and I kind of wonder about this because there’s the liquid portfolio of $4,300,000, but he’s also got his house, which is paid off. It’s worth $1,300,000. So that alone will likely be over $2,000,000. So do you want to leave $2,000,000 liquid plus the $2,000,000 house or just $2,000,000 altogether?  We need some more details from Johnny on that. But I would say the 4% rule, that’s a rule that’s been around for a long time. For a while, it got dropped down to the 3% rule because interest rates were so low that, you know, retirement earnings weren’t keeping up to be able to distribute the 4%. Now that rates are up, maybe it’s a little better, we can do that 4%.  But that’s, that’s an early retirement figure to kind of keep your assets growing. So if your assets are growing at 6% or 7% and you’re only taking 4%, then guess what? You’ve got an extra 2% or 3% that helps your portfolio keep up with those rising costs. Now, if you want to split your portfolio up and think, okay, let’s shave off $2,000,000 bucks for the kids and we’ll just, you know, draw down the $2,300,000, then you could do that. You could just take off all the earnings of the $2,000,000 that you’re carved out. So maybe you take 4% to 5%, depends on how that portfolio is invested, right? If it’s more aggressive, maybe you could take more.  And then for the $2,300,000, you can start conservative at that, you know, 3% to 4% range and then slowly over time, tick up your withdrawal rate so that you will eventually consume that $2,300,000. So that’s kind of the way that I look at it.

Final Considerations & Roth Conversion Strategy

Andi: Fantastic. Is there anything else that you can think of here for the information, the fact pattern that Johnny Mercer in Savannah, Georgia has given us, that you want to comment on here?

Rachel: Very good question. I think they’re definitely, you know, in that big wallet category. That’s great. They’ve done a great job saving. You know, I think they’re on track and it just it all comes down to budget. So, make sure before you, you know, before everyone retires that you have your budget pinned down because a lot of that’s the hardest number to come by. It’s really kind of chaotic and there’s spending that goes out from all different accounts. So sometimes it’s hard to pin down, but do some work on the budget before you give up your paycheck. That’s what I would say.

Andi: One more question. I wanted to ask you, he mentions the fact that he’s considering going top of the 24% tax bracket, for his Roth conversions. Obviously, this is just a spit ball and this, you know, we, we can’t give any kind of, pinpointed information, but would you think that that might be a good idea for him?

Rachel: Above the 24%, you know, I think 22% to 24% is very reasonable. I wouldn’t go probably above the 24% in his case because the income after he retires, he’s going to have $70,000 in Social Security. Not sure if he’s- it looks like that’s both him and his wife combined and then $35,000 in the pension. That’s only $105,000. Right? $105,000, but he needs a couple hundred grand to make his budget work. So he’s pulling the rest out of retirement. You know, he’s probably going to be- for around the top of the 22%, which will be 25% in the new system starting 2026. So jumping up now all the way to the 32% bracket doesn’t really make sense. Right? He’d rather just wait and take it out at 25%.

Andi: All right, Rachel Füss, thank you so much for your help here on YMYW, really appreciate it.

Rachel: Absolutely. And if your wife knows of a good King Charles Spaniel breeder, I am looking for one. So send me the name.

Andi: Wow. The timing on that, that’s quite a coincidence.

Rachel: I know. All right. Well, we will make a note of that. All right. That is Rachel Füss. She is in our Mercer Island, Washington office here at Pure Financial Advisors. And I appreciate the help. Thank you so much.

Rachel: Absolutely. Happy to be here.

Andi: Johnny Mercer, thank you for writing back in, and for your patience in getting a spitball. YMYW listeners, what did you think? Join the conversation on our YouTube channel. I’m in the comments every day, responding to you and passing your thoughts on to Joe and Big Al, because the show wouldn’t be a show without you.

Click the links in the show notes to get free access to helpful guides and white papers, blogs, educational videos and more, to help you get retirement ready. You can also subscribe to the YMYW newsletter, so you never miss Joe and Big Al on the Your Money, Your Wealth TV show and podcast. To really make the most of your money and your wealth, you need more than just a spitball. When you’re ready to get serious about crafting a retirement plan customized for your needs and goals in retirement, schedule a free assessment with Rachel or any of the experienced professionals at Pure Financial Advisors.

Help us grow Your Money, Your Wealth® by sharing the show, and by leaving your honest ratings and reviews in Apple Podcasts and any other podcast app that accepts them.

Your Money, Your Wealth® and YMYW Extra are presented by Pure Financial Advisors, a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.

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