Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 00:52 – Pros and Cons of Using a Taxable Brokerage Account for Early Retirement Income? (Chip Skylark, Dimsdale)
• 13:24 – Watch Your 11-Step Path to Financial Freedom on YMYW TV, Calculate Your Free Financial Blueprint
• 14:27 – Is My Dividend Investing Strategy Missing Anything? (Andy & April, Knoxville, TN)
• 25:02 – Can I Retire Between Ages 55-60? Should I Max Out Roth Contributions, or Convert to Roth? (Jack & Sally, NC)
• 31:18 – Download the Withdrawal Strategy Guide and 10 Steps to Improve Investing Success for Free
• 32:03 – Does a Separately Managed Account (SMA) Make Sense for My Taxable Account? (Don, IA)
• 40:46 – Next Week on the YMYW Podcast

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Transcription

Intro: This Week on the YMYW Podcast

Andi: What are the pros and cons if Chip uses the money in his taxable brokerage account for early retirement income? Jack and Sally ask Joe and Big Al to spitball on whether they can retire around age 55 or 60, and whether they should max out their Roth or convert to Roth. That’s today on Your Money, Your Wealth® podcast number 527. Plus, April and Andy ask the fellas to spitball on their dividend investing strategy, and Don wonders if a separately managed account or SMA makes sense for his taxable account. We’ll also find out what an SMA is. If you’ve got money questions or want your own Retirement Spitball Analysis, click or tap Ask Joe and Big Al On Air in the episode description and send us your deets. Do us a favor and watch the video on the Ask Joe and Al page to find out how to make your spitball a good one. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Pros and Cons of Using a Taxable Brokerage Account for Early Retirement Income? (Chip Skylark, Dimsdale)

Joe: Okay. We got Chip Skylark from Dimsdale. What, what is that? Nickelodeon?

Al: Nickelodeon cartoon.

Andi: I actually looked it up because it seemed like it had to be a fake name and yeah, it’s apparently from an animated series called The Fairly Oddparents.

Al: Alright.

Joe: Okay.

Al: Well I- we would’ve not have known that.

Joe: Very cool. So let’s, we go, “Hey Joe, Big Al. I was hoping you could help me think through some things with my taxable brokerage account. My wife and I are both 33 years old and we have one child that’s 9 months old. And we’d like some thoughts on any pitfalls or considerations as it relates to growing and then using a taxable brokerage account to supplement income before retirement. We both worked in IT consulting for about 12 years, both for large firms and make about $300,000 combined gross salary before bonuses. Neither of us really enjoy our jobs all that much, but we’ve stayed in the field because of the good pay and the flexibility the job provides. One thing we’d like to focus on over the next couple of years is growing our taxable brokerage so that we can eventually take our foot off the gas on our IT jobs or shift to other careers entirely. We wanna retire around 50. Here’s our financial details. Our finances are fully combined. We own our home that we just purchased in 2019 for $375,000 that we fully paid off in January, 2024. Alright, so no mortgage payments and no HELOC associated with our house. We both own our cars. We have $470,000 in traditional 401(k)s, $130,000 in Roth IRAs, $10,000 in HSA, $15,000 in 529 in plans, $27,000 in company stock. From my- from my wife’s work, about $40,000 in emergency fund and about $160,000 in our tax- taxable brokerage. The retirement accounts are all invested per the efficient frontier.” Oh, look at the big brain. I’m chippy. the efficient frontier.

Al: I haven’t heard that-I haven’t used in a while.

Andi: Will you explain that for us, please?

Joe: Yeah. Harry Markowitz.

Al: Yeah, it’s-

Joe: Is that for every level of risk that you’re willing to take, you should anticipate a higher expected rate of return.

Al: There’s a little graph that goes risk, and then with the more risk, you get a higher rate of return.

Joe: But then it plateaus-

Al: – it kinda levels out after around 60%, 70%. I mean, you get a little bit more return, higher equities. But, anyway, that’s the whole point, is to think about the rate of return you need and the amount of risk that you’re taking to get it.

Joe: And then you can put that plotted on a graph on the efficient frontier, and then that should pop out your optimal portfolio.

Al: Yeah. And then next day it’ll be slightly different. Because the market changes, but at least you get the idea.

Joe: So yeah. Efficient portfolio theory. Alright. “The brokerage account is okay to mainly set up of S&P 500 index fund. Neither of us have pensions.” He’s in IT. How the hell does he know about the efficient frontier?

Al: He, because he loved finances.

Joe: He’s grinding on the blogs. He’s, he is doing everything he can. Just-

Al: I don’t think we have mentioned that on our show for 15 years.

Joe: Yeah, Harry Markowitz. Love it. Nobel Prize winner.

Al: Yeah, we, you, we saw him speak, didn’t we?

Joe: Yeah. Yeah. it’s pleasant. If you’d like to fall asleep. We said do a little speech by Harry.

Al: It was a little dry.

Joe: Oh my goodness gracious. Smart as hell, but-

Al: Oh yeah.

Joe: Wow. Yeah, I mean, I maybe got 3 words there.

Al: I was gonna-

Joe: Can you just imagine me reading like his-

Andi: Which is amazing because you reeled off that description of the efficient frontier, just like you had it by rote. So I figured that you had like, studied this thing backwards and forwards.

Joe: Well, I did.

Al: We got, we learned the cliff notes. That’s all we really needed.

Joe: No, I’ve, yeah. Well, no, through finance classes and you know, yeah, I do have a degree in finance. I do have a certified financial planning designation.

Al: Really?

Andi: And it shows.

Joe: Yeah. I’ve been doing this for 25 years.

Al: Got it. Okay.

Joe: I know I sound like an idiot on the podcast. That is all for show.

Al: It’s all for show. It’s all for laugh.

Joe: I did, yeah. I, you know, I do read every now and again. I read this is, here’s my, this is, here’s my weekly reading.

Al: So if you wanna join a book-

Joe: When’s the last time you read out loud? You know what I mean? People give me (beep) all the time.

Al: I don’t like reading out loud.

Joe: No, people read, they’re not reading a novel and their books out loud.

Al: True. Good point.

Joe: On camera.

Al: Yeah. So if there was a book club, it would have to be questions because you wouldn’t read otherwise.

Joe: I would, could he- a book club? Could you read chapter one? Well, where’s the question? Oh my god, this one’s going on and on.

Al: Our book club today is episode 469.

Joe: Oh, man. All right. “So we paid off our house a little over 4 years, and we saved $100,000 into our brokerage account in 2024.” Wow.

Al: That’s great.

Joe: Incredible. “With all our extra funds pointing that direction. So once we have our eyes set on a financial goal, we usually hit it.” Oh, no doubt. Chip here makes $300,000. Yeah. And he can save $100,000. The other $100,000 goes to taxes and he lives off $100,000. Yeah, right. A third, a third, a third.

Al: Yeah. That’s right.

Joe: That’s pretty good. But no, he’s saving $100,000 just in the brokerage account.

Al: Yeah. So that’s on top of his 401(k)-

Joe: – his 401(k)s. Yeah.

Al: Very good.

Joe: God. Wish I had that discipline when I was 33.

Al: Yeah. I was, I was just getting married. Yeah. Kids- that was, didn’t have the extra money.

Joe: Yeah, that was a little, later than that.

Andi: Last year.

Joe: Are you? Yeah. It’s just my honeymoon. Yeah. Couple- last week.

Andi: Anniversary.

Joe: “Our yearly expenses are usually around $80,000, but with daycare costs and other baby expenses, we’re expecting it to be $100,000, $110,000 over the next few years.” Okay. All right. “What are some of the things I should be thinking about to take into account as we continue to pad our taxable account so that we can ease off or make a change? Obviously, we’ll start getting dividends in capital distributions and may need to put quarterly taxes to keep them from going to Uncle Sam. Let’s see, but outside of that, what is there? Is it as simple as building up an account as far as we think we need and then drawing down and take care of expenses? By the way, my wife and I drive Subaru Foresters. The wife drives the Subaru.” Where are they from? Seattle. Where are they from?

Andi: Dimsdale.

Al: Dimsdale. We’re not sure.

Joe: Guaranteed, Seattle.

Andi: From Nickelodeonland.

Joe: “Old Honda CV. I enjoy spicy cocktail that burns.” Ah oh, what’s that? Fireball?

Al: Probably. That’s 20 years.

Joe: Oh yeah. I’ll drink some Fireball when I get a birdie and I birdie a lot.

Al: That’s a requirement on your rounds, right?

Joe: Bird juice.

Al: Bird juice.

Joe: “My wife red wine. And we both like a little hazy IPA.”

Al: Yeah. Me. Me too.

Joe: “Thanks for your help. And then please keep up the good work on the show.”

Al: So what else can Chip do?

Joe: Alright, well so let’s talk about this ’cause I’m glad- So Chip is saving his tail off into a brokerage account, right? This is interesting to me because Chip has already saved a ton of money. Chip has a half $500,000 saved, more than that.

Al: Yeah. $500,000 in 401(k) at 33.

Joe: He’s only got $700,000. Almost $1,000,000 saved. Yeah. In a retirement account, a Roth account. And so when people put money into a retirement account, it’s like, okay, well here I’m gonna pick some mutual funds. And it’s like they, they feel a little bit more confident saving in the retirement account and they pick the funds within the plan and then they put dollars in every week and then they let it go. Right. Most people do not have the discipline or they have a little bit more intimidation by investing in a brokerage account. And it’s exactly the same, right? You invest exactly the same, you wanna be a little bit more tax sensitive. And we could get into the tax strategies. But it’s not like here, I wanna invest in my brokerage account a little bit differently than I do with my other investments, especially at 33 years old. You already know the efficient frontier. Find that frontier. Get on the line.

Al: Yeah. I would say, Chip, you’re doing everything great. Keep doing what you’re doing as far as, yeah. Saving at a brokerage account after you’ve maxed out your retirement accounts and favor the Roth IRA, right, because you got money in Roth. But, get some more. Favor that Roth IRA and the 401(k). The Roth- The Roth option in the 401(k), but as far as your brokerage account, yeah, go ahead and continue investing, as Joe said, like you do before, but now look at things like tax loss harvesting, when stocks or mutual funds, ETFs, when they go down in value, you sell it, create a tax loss, buy something similar. You’re still in the market, but you’ve created a tax loss to net against other gains. As far as your bond money, your safe money, invest in Muni bonds because there’s no taxes. And if you invest in Muni bonds in your own state, you don’t pay any state taxes or federal taxes. So those are a couple thoughts there. But mainly Joe, I would just say keep doing what you’re doing.

Joe: Absolutely. I mean, he’s doing the research. He’s over studying this.

Al: Yeah. Well, he knows the stuff.

Joe: At 33 you want to continue to build. And so here’s another thing, if he wants to retire at age 50, right? So I would just look at, okay, well what is the dollar that you wanna spend at age 50? What is the living expenses? He doesn’t it, it doesn’t seem like they spend too much. I think they got their expenses under control. They paid off their house in like 4 months. Right? And then he’s just jamming everything into a brokerage account. Yeah. All right. You wanna retire at age 50. How much money are you spending today? And then it’s like, all right, well how much money do you need to bridge the gap from age 50 to probably age 70 when you claim your Social Security, which would be 20 years.

Al: Yeah. And make sure you have enough in a brokerage account to age 59 and a half, or age 60-

Joe: – or 60. Yeah. So yeah, you got a 10-year bridge to get from 50 to 60. So if you’re, spending $100,000 a year today, right? So just inflate that until you turn age 50 and then you look, all right, well, I need 10 years of that number. It probably would be best if it was in a brokerage account that I could live off of as I’m having my other retirement accounts grow. That’s the easiest way to think about this in regards to numbers and how much money that you should be saving. But I think a better way too is that you wanna be diversified. And what we see a lot of times when people retire early is that they drain all of their non-retirement assets and that all they have left are retirement accounts that are all taxed at ordinary income rates. So having diversity from a brokerage Roth IRA, and a tax-deferred account, you know, can really control taxes long term. So I think he’s on track. Yeah, I think is, it looks like right now, over the next 5 years, just save as much as you possibly can in the brokerage account. Don’t overthink it. Because it’s in a brokerage account, it’s closer to me, right? I can grab at it at any time. Versus a retirement account. Oh, that’s long-term money. Think of it both as long-term money and invest it very similar for growth. But you just probably wanna take advantage of some, you know, tax techniques along the way. Tax loss harvesting being a little bit more tax efficient investments, you know, ETFs just understand kind of distributions from a, from dividends, cap gains that might spit out of retirement or mutual funds.

Al: So, yeah, I’d also say think about a potential 72T election right on an IRA at age 50 as a possibility to help bridge that 10 year gap until 59 and a half. Brokerage account is a great way to do it, but the last thing you wanna do is what Joe said, which is completely use up your brokerage account and then you get to 59 and a half and it’s mostly taxable. So just be careful of that.

Watch Your 11-Step Path to Financial Freedom on YMYW TV, Calculate Your Free Financial Blueprint

Andi: Only about one in ten Americans are living their definition of financial freedom. 54% say that means living debt free, 50% say living comfortably, 32% say financial freedom means not having to work, and 13% define it as being rich. But too many of us fall short of financial freedom because of lack of retirement savings, salary constraints, debt, or unforeseen emergencies. This week on Your Money, Your Wealth TV, Joe and Big Al put you on Your 11-Step Path to Financial Freedom. Find out how to take inventory, invest in yourself, and sustain your financial dreams and goals. Our Financial Blueprint tool will help you with that first part, taking inventory. Click the Financial Blueprint link in the episode description, enter your details, and you’ll get an analysis of your current cash flow, assets, and projected spending for retirement, along with three scenarios that will help you determine your probability of success. Click or tap the links in the episode description to watch Your 11-Step Path to Financial Freedom on YMYW TV and to calculate your Financial Blueprint.

Is My Dividend Investing Strategy Missing Anything? (Andy & April, Knoxville, TN)

Joe: We got Andy in April. Hey Joe, big Al Andy for Andy’s instructions. My wife and I have $366,787,000 saved in a Roth. IRA. What?

Andi: Very specific. All I said was we need how much you’ve got in taxable tax free and tax deferred, and he’s given it to us to the dollar.

Joe: Wow, to the penny here.

Al: Yeah, we need to know what day that was, because it’s different.

Joe: It’s different. Today we got 305,453,000 or $453 in a traditional account and $352,543 in a brokerage account for a total of $1,024,783.

Al: Yeah, and by the way, you can round. It’s okay.

Andi: Joe does all the time. I’m surprised that he’s reading them completely now.

Joe: Six months. Seven days, years year old. My wife is 33, 4 months, 27 days old, so we do not plan on receiving any money from the Ponzi scheme referred to as Social Security. oh wow. Political. Here we go. Little political, little bash, little political bash with the person that’s super accurate with his numbers. Right. Ponzi scheme, I suppose every 30-year-old guaranteed has called Social Security a Ponzi scheme. Probably. I think I probably did when I was 30.

Al: Yeah, I probably did too. And here. Here it still is.

Joe: Here we are. I’m, you know, five years later.

Al: Five years, huh? Well, you’ve aged.

Joe: I’ve grown up. I’ve grown up quite a bit. We currently spend $86,000 a year in lip in Knoxville, Tennessee. Oh, okay. I drive a 2012 Subaru in, she drives April, drives a 2012 Subaru, and I drive a 2014 Jetta. Okay, sure you guys don’t live in Portland? I drink Heineken and April is pregnant with our first child, so she’s not drinking, but she likes seltzers. Okay.

Andi: So does Joe.

Joe: Yeah. I do like seltzers. only if only like Truly. Truly White Claw, can’t stand, can’t even drink it. Any other flavors that just, they all taste the same to me.

Al: Really? I tried like Happy Dad. I thought that was kind of cool.

Joe: Yeah, because you are a Happy Dad.

Al: I am a Happy Dad. So you think that’ll be good? I was like, Hey, this is kinda like me. I’m gonna have a little Happy Dad. Yeah. You have two of those and it’s like, nope. Yep. Okay.

Joe: So, I could tolerate like the lemonade, the truly lemonades or the fruit punches. Okay. Anything else? I’m going to queer light.

Al: I will stick with beers and Mai thais.

Joe: Got it. Okay. All right, so let’s see. We’re back to April and Andy, we have recently started thinking about haunted plan for spending in retirement. We listen to your show. I frequently hear the 4% rule rate is considered safe. One of the strategies we have read about is living off of dividends. My understanding is that the dividend strategy invests in ETFs. Have higher dividend yields relative to the s and p 500. The investor uses the 3, 4, 3 or 4% yield to live off of, and the principle is not eroded due to the stock value increases.This leaves us with the goal of saving 2.1 to 2.9 million to replace our current spending needs. I understand that inflation and having child will increase our spending, but the previous mentioned funds have dividend growth rates that exceeded inflation. My question is what am I possibly missing? Not accounting for or misunderstanding if the pursuit of dividend investing strategy. I’m always entertained by your show while I’m commuting to work. I appreciate the show and the education resources you get said about retirement planning. Thanks, Andy and April, Parks an Rec reference. Got it. Okay.

Andi: I haven’t watched the show, so I don’t know who they are.

Al: Well, we’ve got, you got that on the screen?

Joe: Okay. Yeah.  Yeah. That’s Pratt. Chris Pratt. That’s the guy from the Avengers.

Andi: Ah, well apparently he is also from Parks and Rec. Yeah.

Joe: Guardians of the Galaxy. You should see him now, man. They, he’s like jacked.

Al: Yeah, he, isn’t he?

Joe: Yeah. all right, very cool. April and Andy, so dividend paying stock. So it’s, so here’s the 4% rule is that it’s a, it’s by no means gospel. Okay. It helps people determine, in my opinion, I. How much money that they should have at retirement. So if I’m looking to spend X amount of dollars, you just take those dollars and divide it by 4%, that’s gonna give you a lump sum. If I wanna spend $40,000 in retirement, 40,000 divided by 0.04 is a million dollars. So a million dollars should produce $40,000 of income. But that’s a rule of thumb. You don’t necessarily wanna take 4% out every year because it’s gonna depend on sequence of return risk. It’s gonna be dependent on how much tax that you’re actually paying on the distribution, how big of a nest egg that you have. It’s going to have a lot of different variations. But the problem is, let’s say I have a million dollars, some people will spend $120,000 a year from that million dollars.

Al: Yeah. Which would be a 12%,

Joe: which would be 12%, which would be way too much because. A 4% is like, alright, this is a safe withdrawal rate. But in my opinion, you wanna have a more dynamic strategy as you’re creating income. But when you’re spitballing to see, hey, are you close? Do you have enough money? Let’s just divide it by 4% or times that number by 25. It’s gonna give you a ballpark number to say, all right, well here, if you have a million dollars, $40,000 is probably a good estimate of how much income that you could probably take. The second question he’s asking is that, okay, well what should that portfolio look like now that I got my million dollars, or in his case 2.1 or $2.9 million, how should the portfolio look? Should I buy dividend paying stocks and live off the dividend, or should I do something different? So I think that’s really the question at hand.

Al: Yeah, I think that is the question and, we’ve heard this a lot and it’s not necessarily a bad strategy, but here’s something you might wanna think about, and that is companies, public companies in the United States, their goal is to make profits and some of those pay dividends. Large, some medium, some small, some don’t pay any dividends at all, and that’s not reflective necessarily of their profit. Like Berkshire Hathaway, for example, Joe, they don’t pay any dividends and they’re very profitable. And so what you do in a case like that, when you have a company stock that doesn’t pay big dividends, is you just periodically sell chunks of it. That’s called a syn. Pathetic dividend. You create your own dividend because if you get a high dividends from stocks that you don’t need, now you’re paying taxes on money you don’t really need. If you have companies that pay lower dividends, you can create the income you need by selling the shares when you need it, and thereby, you. Getting enough to cover your needs. So that’s one thing. My second quick point, is this, and if you’re only looking at high dividend paying stocks, you’re kind of missing out on a lot of companies, whether they be domestic and international. And we think you do better as a, with a full globally diversified portfolio.

Joe: I, absolutely love dividend paying stocks. Right, but I love a lot of other stocks too. So I wanna own these dividend paying stocks, but I wanna own more. Here’s a couple of things that you might not understand too, is that when a company issues a dividend, the stock price lowers buy the dividend.

Al: Yeah, I, A lot of people don’t realize it.

Joe: For instance, let’s say the do, let’s say a company is worth $10 a share and they give a dollar dividend. The share price, as soon as they distribute the dividend goes to $9. So it’s the same as if you sell a share of a stock that doesn’t give a dividend or doesn’t produce a dividend, and people are like, what are you talking about? That there’s no way that happens. It’s like, yes, that’s what happens. They’re distributing capital or cash from their organization or company. So the share price measures, whatever that dividend is, and it adjusts the share price. X dividend date. But what happens sometimes is that the stock price will exceed the amount of the dividend in the day that it happens. And they’re like, well, no, my stock price is the same or it’s low, or whatever. But no, how it works is the share price will fall. The same as the dividend.

Al: Yeah. I mean, how many times have we heard that argument? It, that’s just not how it goes. Right? I just

Joe: want high dividend paying stocks because yeah, I’m just gonna live off the dividend and the principle will stay constant.

Al: Yeah. And so, so by definition, the stock price goes down and the stock price goes down. If you don’t understand this, you might just think, if you’re checking it that day, you might think, oh, I guess the market’s down today. That’s why ’cause of the dividend, right? Or if the, if your, stock went up on an X dividend date, it’s because the market went up more than the dividend was. So it, it’s just, realize that, whether you get the dividend or not doesn’t really necessarily affect whether it’s a good investment or not.

Joe: Yeah, good point. But, I think there’s a lot of really good companies that. Offer really good dividends, but to AL’S point from a tax perspective, is that you can control your dividends too. So in my example of the company has a $10 share price and it’s given a dollar dividend. So you wanna live off of that dollar dividend. The share price goes to $9. Let’s say you have another stock that doesn’t give a dividend and you don’t necessarily need the income. So you have a $10 stock, it doesn’t give the dividend. Guess what? That’s fine. Right? It stays at $10. So you didn’t get the dollar in hand, but you didn’t necessarily need the dollar, so you’re not getting tax on that dollar. Or if you want the dollar, you can create that dollar at any moment in time by selling one share and taking that dollar. Now of course, that stock price or that stock is gonna be less $1, but it’s the same as a dividend paying stock. So you wanna take a look at the total expected return of the overall asset class overall deal. Overall company or sector or whatever. If you’re investing solely in dividend paying stocks, it’s a small universe of the entire stock universe. And I think that might be maybe a little bit too concentrated, little bit too risky. And I think a lot of individual investors, they hear dividend paying stocks. It’s so, they kind of crowd that marketplace. Marketplace. Anyway, so you look at some of these. ETFs that are dividend paying stocks. Retirees say, Hey, I want dividends. So they’re buying these ETFs and that could be boosting up the share price of those particular, you know, asset classes as well. So, alright, cool. We’ll beat that one to death. Let’s move on.

Can I Retire Between Ages 55-60? Should I Max Out Roth Contributions, or Convert to Roth? (Jack & Sally, NC)

Joe: We got gentlemen, Jack and Sally here. Just discovered your show and love it. We get a lot of people that just discover the show and they love it. And then we get people that listen to about two months and they hate it. We’ve had a few of those.

Al: So we’ve, I tried, I listened to a year ago I thought I’d try it again. It’s just as bad.

Joe: It’s so bad. All right. So I’m glad that you just discovered it. Stick around it. It only gets better. It’s like a fine wine. I could smash some cab and my wife loves a nice little pinot. Little cabin pinot group here.

Yeah. All right. We live in the beautiful hills of Western North Carolina with our 13-year-old daughter in two little pups. By the way, I drive an old Tacoma. My wife drives an old Dodge. I have two questions. Okay. One, is it realistic to think I could retire somewhere between 55 and 60 if I’m running out of juice for my job? Alright. Get sick of it. Yeah, once you get the hell out. Yeah. What’s the house paid off? Should I try to max out all Roth options right now or should I just focus on converting my existing traditional IRA to a Roth I a teacher, so I’ll try to fill up that Roth 401k and Roth 457 after the house is paid off or should I focus on conversions? Wag. Is wag what that is. What? new wild ass guess. Wild ass guess. Oh, I would’ve had no idea. I had to look it up. Wildas guess we’d like to spend about $10,000 a month in retirement after the house is paid off. My daughter has a little 5 29 plan she will receive for my GI bill for college. You should choose to go with my pension. I think we’re doing well as long as I stay alive. I’m actually concerned about my wife’s lifestyle once I’m gone. What? I’m hoping to live a long time though. Well, yeah, me too. What is it? You know, like we get to a certain age and we always think we’re gonna die.

Al: Well, we have to start thinking that way, and that’s it. We’re getting, they’re about your age.

Joe: Whoa, You know

Andi: Them’s fighting words Al.

Al: you know, you know I said, about,

Joe: got it. We’ll need new cars and a new roof in the next five to 10 years. Here’s the details. Jack is 52, Sally’s 51, current pension, a hundred thousand dollars. When I pass, Sally gets 40 current salary, 80,000, maybe some scraps from Social Security and teacher’s pension. Once I turned 62, we got checking brokerage, Roth IRAs, traditional IRAs. And, so on. So a total of tax deferred accounts of 500,000 taxable accounts. Of what? A hundred thousand in tax free Ross is 1.4. Is that

Al: right? Yeah, about

Joe: 1.4. Yep. All right. Yeah, man. You’re doing an adequate job pension of a hundred grand. You want to spend 10,000 a month? You’re good? Yeah. Agreed. Yeah, you could retire at 55. I get it. All right. So you’re worried about your wife spending once you’re dead, Jack. So then Sally’s gonna spend now 200,000, but the pension is not gonna come up with a hundred. It’s only gonna give her 60.

Al: Yeah. Or 40.

40%.

Joe: Oh, 40%. Okay.

Al: Yeah, I think this is fine too. I, if, it were me, I would try to get a better survivor benefit for my wife. that’s, but it’s already picked. Select it, it’s done. If you can change it, I don’t, I think that’s, as you think, that’s a one. Agenda. GI

Joe: bill, TSP. He got a TSP IRA current pension. Well it’s I wonder where the pension’s from? Well, he employer, now he’s a teacher. Right? Oh, I see. Teacher. Okay. So Cal, North Carolina teacher system. Yeah. I mean, we don’t know. So instead of a hundred thousand dollars pension, probably go 80,000 and give her 80,000.

Al: that’s what I would do. Yeah. Especially ’cause you got the resources otherwise. Right. Well, let’s just see. Let’s do the

Joe: math. So he wants to spend, that’s 10,000, $120,000 a year. And he wants, they wanna retire in five years or three years. Well, he’s, 50, 52,

Al: 2. And he is thinking somewhere between fifty five, fifty five and 60, right.

Call it five years from now.

Joe: Okay. So $120,000. So let’s just say five years from now, let’s say three and a half percent inflation. So that one 20 is gonna turn to 1 42. Yep. Let’s just assume that then he passes away and she only gets 40% of her pension, so that’s $40,000. So she needs to come up with a hundred thousand dollars to live off of.

Yeah. Given the same lifestyle, right? With inflation, right. With me, I’m with you. Point oh four. So they need about two and a half million dollars. They got $2 million today.

Al: Yeah,

Joe: I think even with the lower pension amount, if they’re gonna work for another three years, depending on of course, what the market does, it’s pretty close.

Al: Yeah, I, agree. I that’s, what I would do though, if I could, that’s the way I would think about it.

Joe: So he’s not even talking about, That’s the pension. So he’s not even including in social security? No, it’s like some scraps from the Ponzi scheme.

Al: So, so I guess he’s assuming it’s not that much ’cause he is a teacher.

Sure.

Joe: Okay. Yeah.

Al: But yeah, I think it looks good. I think it looks really good.

Joe: Yeah. A ton of Roth money. the, taxes are gonna be almost nothing. on any type of distributions. The RMDs are gonna be nice. I think he’s done an awesome job. I like this. Yep. I don’t know. I don’t know. Is it realistic to think I can retire? Yes. Once the house is paid off, should I try to max out more Roth options? So, so yes.

Al: So Joe, here’s an example of someone that will be at a higher than 4% distribution rate when they retire, but it’s only for a handful of years. I. And then all of a sudden you got a hundred thousand coming in. So just think, about that, right? So yeah, you can retire with a more than a 4% distribution rate if in just a few years you’ve got a hundred thousand pension or whatever the number is. So 4%, as we talked about earlier in the show, is just kind of a general guideline to tell you how much money you need to save for in retirement. And that’s, it.

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Does a Separately Managed Account (SMA) Make Sense for My Taxable Account? (Don, IA)

Joe: We got Don from Iowa. Does an SMA make sense for my taxable account? Hi Joe, Big Al, Andi, I love the show. I’ve been listening for about five years. Usually while exercising. I’m a 40-year-old with income of 300,000 spices, 38 y. He stays in the home to manage the household with the kids. We just, we have just over a million dollars in investible assets and savings. 330,000, our traditional 401 or 403(b) 55 in the Roth. 58 in the Roth governmental. Four fifty seven, a hundred seventy. Just say Roths. Jesus. 178,000 in our backdoor Roths, it’s labeling every Roth that he has. Yeah, we got the backdoor Roth, we got the governmental Roth, we got the 403(b) Roth in case 30. We got the traditional Roth. It doesn’t just, it’s all Roth. It’s one account. It’s all it good. $410,000 in a taxable account. I have a pension with a Cola. A hundred thousand dollars at 65. We are invested overall in a globally diversified low-cost index portfolio. I’d like to have the option to retire 55 with an income from a portfolio of $170,000 in today’s dollars. I was recommended to over a few year transition, my taxable account to an SMA for tax purposes and hopefully more growth. Okay. I’d love to hear your spitball on this. Thanks to keep up the good work. Cheers, Don. Let me digest this.

Al: Okay.

Joe: Well first explain what an SMA is. Separate managed account, so he’s 40 years old. He’s got an income of 300,000 and they have a total of. I get confused with this Roth, that Roth, this Roth backdoor, Roth, whatever. It’s about a million. Okay. He’s got a million dollars and he is 40 and 38. Yep. He wants to retire at 65 because he is gonna have a hundred thousand dollars cola, or he wants to retire when? 55. Alright, so he needs to bridge 55 to 65 and live off of a hundred thousand dollars, which would be, or he wants income of $170,000

Al: in today’s dollars. So that’s, gonna be a pretty hefty sum.

Joe: What, the hell? So, alright, so a hundred step, I mean,

Al: first of all, you gotta adjust for inflation, but then whatever you get, call it two 50, divide by 0.04.

Joe: What’s, okay, $170,000 is what he wants to spend. Yeah. So 15 years, 3.5 future value. It’s 2 84. Two 80.

Al: Okay.

Joe: All right. So

Al: what’s two 80 divided?

Joe: 7.1 million.

Al: Yeah, so that’s, quite a hefty.

Joe: So can that million turn to 7.1 million that’s going to help you create the 170,000? Unless he, I don’t think he needs that much. I’m guessing he needs No, he doesn’t. ’cause of the pension? Yeah, ’cause of the pension. so 70,000, let’s do this. 70,000, 0.034. So that’s 1.7. So he needs 1.7. When he turns 65, he wants to spend $170,000 in today’s dollars.

Al: Right? And you, just competed two 80. That’s,

Joe: so, that’s $280,000 times 10. That’s 2.8 million of income that needs to be produced over that 10 year time period. 1.7. All right. So he needs four and a half. He is got a million. He is got, yeah, I think he can do that.

Al: Yeah. With the way he saves

Joe: probably. So the SMA don’t worry. you need a, the SMA again, is just a product, like someone wants dividend paying stocks and SMMA is just a separate managed account. So instead of buying a mutual fund and individual stock, or you could buy an ETF or you can buy a separate managed account, they’re all good and they’re all bad really, depending on what you’re buying and what’s the strategy? What, are the costs? What are the fees? Do you know what the objectives are? Is it large cap, is it small? Is it bonds? I mean, I, really don’t know what the SMA is, but an SMA is just a separate managed account, so that’s like, Hey, someone re said I should get into a mutual fund. Is that a good investment? Well, is it a loaded mutual fund that’s actively traded with a two point half percent internal fee? I would say absolutely not. Or is it an index fund that’s covering the entire US market? I would say yeah, that’s pretty good. So the product itself, it could be really good or really bad. It just really understanding exactly what you’re investing in, I think is the more important questions.

Al: I, would agree with that. And SMA is a, it’s another manager that’s managing assets for you and picking the stocks for you. I, personally like direct indexing better. it’s still a source who’s picking certain stocks, but they’re trying to mimic an index and so instead of. The whims of someone thinking, okay, let’s pick this one, let’s pick that one. I kind of, me personally, I’m a little more comfortable with trying to mimic an index. The nice thing about direct indexing, you actually own the stock shares and you can tax less harvest and you can manage your account, more easily that way. but you know, Joe, probably for most people just to EE ETFs and index funds globally diversified is probably fine.

Joe: Yeah. SMEs are fine too. We offer SMEs to our clients.

Al: Yeah.

Joe: So it could be passive, it could be active, could be tax managed, it could be anything that you want. So I have no problem with the SME. I just don’t know what you, what the objective is.

Al: Well, he wants to, get the whatever, 5 million or whatever the number is,

Joe: but it’s like, okay, well here I would love an SMA for tax purposes and hopefully more growth. So what’s, how is it gonna mean to give them. Tax purposes, is it Alright, the SMA is gonna do tax loss harvesting, is it?

It’s in his brokerage account, I’m assuming.

Al: Yeah, I think that’s what he said.

Joe: So he is got $410,000 in a taxable account. Yep. Yep. I don’t know. In some cases if it’s actively traded, it’s not gonna be tax efficient. You’re probably gonna get more income and interest and dividends on the tax return. probably.

Al: Yep.

Joe: So anyway, I guess I need a little bit more information. He’s doing a hell of a job. Yeah. What Don needs to do is figure out a saving strategy and don’t worry too much about the product. I agree with you Al. I think he’d be just fine. Keep him with his low cost diversified, you know, index funds. That’s probably gonna produce a very good return for you. It’s gonna be tax efficient. What I need to understand is that, man, if you wanna spend $170,000 per year from 55 to 65, that’s a big nut to crack and. You wanna retire in 15 years. So it’s a saving strategy. It’s understanding how much money that you should be saving on an ongoing basis and where you should be saving that from. Either a taxable tax free or tax deferred. And then from there, then that would be determine what target rate of return should I be thinking about as I’m accumulating the wealth up to that time point. Is it 6%, 8%, 10%. And then from there, create the diversified portfolio that you need. And then from there, then you pick the product. Should I go into SMA? Should I go into mutual fund? Should I go into etf? Should I do my own direct index? Should I buy an individual stock? So I think there’s a lot more steps I. That I would take if I were you before I jump into the product, it sounds like he’s getting pitched a product by a broker or by maybe a buddy or whatever. Hey, I got this SMA. It’s gonna be really tax efficient and give you more growth. Hey, that sounds really good. But there, I think there’s more planning. People put the cart in front of the horse. In most cases.

Al: Yeah. And I would say, and I’ll just do a little disclaimer. So in a case like this where you’re talking about big numbers and a lot of years, don’t take our back of the envelope analysis, get some real analysis done on this and figure out what your goals really are, which you really wanna spend.

The fact that you got a big pension at age 65 means that you can have a higher than 4% distribution rate for, Probably 10 years. Like you want to, it’s just that you’re gonna have to map all this out to figure it out. I agree with you, Joe. It’s, just a matter of figuring out what the goals are, and then you start working backwards. What are the investments to achieve those goals? And then you can figure out ETFs, mutual funds, SMAs, direct indexing, what, however you want to do it, but start with the planning first.

Joe: Alright. Awesome. Yep. Well, thank you everyone for your questions. It. I got no more gas in the tank.

Al: Yeah, it was, I think you did a great job. Thank you. Particularly considering all that you did today already.

Joe: Thank you Al. Andi, thank you very much. Wonderful job.

Joe: We’ll see you, guys next week. Show’s called Your Money, Your Wealth®.

Next Week on the YMYW Podcast

Andi: Tune in next week as Joe and Big Al spitball on when Ron and Veronica can slow down on saving for retirement, how Scott can bridge the retirement income gap between ages 55 and 57, whether Big Juan and Frank and Jane can retire early – and how Juan can fund college.

It may seem on the surface like everyone who writes in to YMYW has similar questions about when they can retire, how they should invest, and whether to do Roth conversions, of course. It may seem like just getting a spitball is all you need. But notice how everyone has a different story. Different needs. Different goals. And a spitball is on average, what, 6, 7 minutes, including Joe mispronouncing your name and talking about your cars and drinks? That’s not enough to base your entire future on. That’s why scheduling an in-depth financial assessment at Pure Financial Advisors should really be your next step. It’s free, just like a spitball, and you can even participate from home just like a spitball. But a financial assessment is a one-on-one with an experienced professional on Joe and Big Al’s team at Pure. They’ll review every aspect of your finances with you. They’ll work with you to craft a retirement plan that’s tailored specifically to your needs, your goals, your risk tolerance. Click or tap the Financial Assessment link in the episode description and schedule yours today. Future you deserves it.

Pure Financial Advisors is 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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