Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:06 – Why Retiring at 45 Using 72(t) SEPP Withdrawals is Risky (Red & Kitty, WI)
• 13:28 – Early Retirement Strategy: Withdrawal Order, Bonds, and 72(t) (Jiminy Billy Bob, NC)
• 22:49 – Laid Off at 56 With $7.9M: How to Handle Your Exit Strategy (Steve & Sharon, St. Paul, MN)
• 43:51 – Outro: Next Week on the YMYW Podcast

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Transcription

(NOTE: Transcriptions are an approximation and may not be entirely correct)

Intro: This Week on the YMYW Podcast

Andi: Joe and Big Al spitball on whether a popular early retirement strategy could actually blow up your financial plan, today on Your Money, Your Wealth® podcast number 577. Red and Kitty from Wisconsin are burned out at 40 and wonder if retiring at 45 using the 72(t) tax election to take substantially equal periodic payments, or SEPP, is a smart bridge strategy. Jiminy Billy Bob in North Carolina is also considering a 72(t). How should he structure his withdrawal order, and does he need to shift into bonds before downshifting his career? Plus, Steve and Sharon in Minnesota have 8 million bucks. Steve is getting laid off at age 56. What should they do with their 401(k), stock options, incentives, and benefits before and after the layoff? If you’re watching us on YouTube right now, please do us a favor: subscribe to the channel and leave a comment below with your thoughts on today’s episode – it really helps us out when you do. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Why Retiring at 45 Using 72(t) SEPP Withdrawals is Risky (Red & Kitty, WI)

Joe: Yeah. Alright, let’s move on. We got Reed and Kitty.

Andi: Red and Kitty. This is from That 70s Show.

Al: Oh, okay.

Joe: Red and Kitty Red is the dad.

Andi: Yes. The parents of Eric and Laurie and the adopted parents of Steven. Remember that?

Joe: Never watched it. I know what one of the,

Andi: but how did you know they were the parents?

Joe: Red? I don’t know. Wouldn’t you think that would be the dad?

Al: that’s be, yeah. You would think so.

Andi: You’re correct.

Al: You know, the only, no.

Joe: Is that what, McMasterson or something like that. He’s in jail for doing something that he shouldn’t have.

Andi: Yeah. Yes.

Joe: Yeah.

Al: All I know is Redd Foxx and that was a dad, so that’s where I went.

Joe: Got it. We could call you Red.

Al: You could, some people have. Yeah.

Joe: All right, let’s go. Hi, Andi. Joe, Big Al. I hope you’re having a great week. My spouse and I are older, millennial achievers. Not to brag, have you just referred to yourself to older millennial achievers? Both age 40.

Al: 40. Okay.

Joe: And we’re getting burned out.

Al: Oh, okay.

Joe: Just wait till you hit fifty. We would like to retire in five years, and if you guys tell us it’s too risky because of our age, but you did a good job and we approve, then we’ll be out like deuces.

Al: Okay. And she explains it to me in case I didn’t know what it meant.

Joe: That means peace out.

Al: Yep.

Joe: Out like deuces, like

Andi: Never heard that one before. But then I’m not a millennial.

Joe: So I mean, yeah. I’m not a millennial

Andi: As Gen Xers we just don’t understand the lingo, Joe.

Al: And you’re not a card player?

Joe: No. No, not really. Yeah, I played cards, but I’m very terrible at ’em.

Al: Okay. Yeah. Last time you went to Vegas was what?

Joe: Oh,

Al: 20 years ago. 15 years ago.

Joe: I don’t know. When was that?

Al: Oh, I remember your, you had a special birthday there.

Joe: Yeah.

Al: 35 I think.

Joe: Yeah. That was a long time ago. That was probably the last time.

Al: Yeah.

Joe: Maybe Hammer’s wedding.

Al: Oh yeah, we did do that. Yeah. Yeah. Uhhuh, did you gamble that time?

Joe: I don’t know. I don’t remember. I just,

Al: That’s probably not a good thing that you don’t remember.

Joe: Yeah. No, I don’t think so. No, I don’t think so. Okay, but anyway.

Al: All right.

Joe: Alright. So if, it’s too risky because of our age, but you did a good job and we approve. Then we’ll be out like deuces Al, that means peace out.

Al: Okay.

Joe: Alright.

Al: Good in there.

Joe: Okay. We work hard and have had success in our careers and want to enjoy more time with our two daughters. We live in a low cost living area of Wisconsin. We’d like to drink Earth Rider Superior Pale Ale and Old Fashioneds.

Al: Okay.

Joe: Earth writer. Never heard of that.

Al: Me neither.

Joe: We found you as a recommendation on Pandora podcasts and I’ve been listening for about five months and we’ll probably keep listening as long as you keep doing your thing.

Al: Okay, we’ll try.

Joe: We love your banter in real time analysis. We are especially listing in withdrawal strategy conversations using substantial equal periodic payments to help bridge the gap for folks like us that wanna retire earlier.

It seems like you’re not a fan, but I’m hoping with the fixed income in our savings, you may give the strategy some extra consideration. Anyways, here the numbers. We got a total of $2 million. So 401(k) is 1.4. Roth IRAs is 200. Brokerage account is 200. HSA is 90,000. Cash a hundred. We have $75,000 left on the mortgage and it will be paid off in two years worth, about 400. We have two young children that are still many, years away from college, but that we will cover because I served four extra years so I could transfer my GI bill to them. Alright, cool. Good for you. Thanks for your service. for fixed income Reed’s- Red’s pension will be about $53,000 at age 60.

In Kitty, there’s no pension for Social Security. Kitty’s will be $46,000. At 67 reds will be 50. At 67, we’d like to spend $75,000 annually between the ages of 45 and 60. And then after that, probably let loose and spend a little bit more. We’re excited to hear your spitball and wish you and your families well.

Hello Wisconsin. Love Red Kitty and the entire seventies show. Andi, I included all the important info for the spitball. Your video about the important stuff was very helpful.

Al: there you go.

Andi: Thanks Red.

Joe: Very good. Very good job all the way around.

Al: Joe, I’ll do a little math for you and then you can see what you think.

Joe: Okay. He wants to retire 45.

Al: 5 years,

Joe: so

Al: he doesn’t really say what he’s saving, but I’ve just, here’s what I did. I just took, call it 2 million today. Five years, 6%. Added about 40,000 just as a number. it gets to about 2.9 million. Call it 3 million.

Joe: Yep.

Al: Okay. You wanna spend 75,000 and today’s dollars, which at a 3% inflation rate for five years becomes about 87,000. Now, if you take your 3 million, you know, 3% distribution would get it there, but that would be a little risky, I would think, at age 45. Now I know he is got a pension coming at age 60, but that’s a long time.

Joe: 15 years,

Al: I might rather look at maybe if I was gonna do this, maybe a two and a half percent distribution, which would be like 67 grand and then we’re short 20 grand. I guess the point is this could work, but it’s awful. Tie I would want to have some kind of part-time income, that’s more than 20,000. ’cause that would be kind of right on the fringe.

Joe: I think at 45 you got $3 million. Hypothetically, allegedly.

Al: Yeah. Hypothetically, based upon the assumptions I just mentioned.

Joe: would you do a 72(t) at age 45? So an SEPP, he’s not gonna get anywhere near what he needs out of a separate equal periodic payment?

Al: No. He’ll probably get around 2%, which should be about 40,000 or two and a half would be about 50,000.

Joe: So,

Al: give or take,

Joe: so what an SEPP is, that you could take money outta your retirement account prior to the age 59 and a half and avoid the 10% penalty as long as you take a separate equal periodic payment. so you gotta take the same amount of money outta the account for five years or until you turn 59 and a half whichever’s longer. So in his case, he’s gonna start at 45. He’s gonna pull the same amount of money outta the account every single year until he turns 59 and a half. That’s a 15 year stretch where you gotta pull the money out.

Al: Yeah. Whether you want to or not, if you like it or not.

Joe: The market blows up, the market goes high, whatever. You’ve gotta continue to pull that money out, pay the tax, sure. And do whatever you want with it. I don’t know if I really care for that. That’s a long time of doing that. And I don’t know. Retiring at 45, I get, that he’s burnt out.

Al: I get that too.

Joe: So I’m 40 years old, I’m burnt out. I’ve saved some money. We make good incomes, we got high stress jobs, now we got little kids. We wanna spend time there. And you know what? I’m gonna work five more years, see if I can save as much as I can.

We live in a low cost area in Wisconsin. We like the seventies show and drink. I don’t know the, Earth Rider Superior Palette.

Al: A couple old fashions.

Joe: Yeah. A couple little sidecar. Old fashions, right?

Al: Yep. Yep.

Joe: he’s, living the dream. He’s thinking about it.

Al: So would you do it

Joe: Not a chance in hell. No way. I would, no, I’d be freaked out. I wouldn’t be comfortable. Three million’s a ton of money. But he’s making a lot of money and he’s saving a lot of money. and he’s got two kids that he probably wants to take care of. He’s got a GI bill that he’s I don’t know. I just think with two small kids, I, think it’s too tight. But I guess maybe I’m, conservative. What, are these, People writing in saying we’re too conservative?

Al: We’ve had some, yeah.

Andi: Oh yes. Yeah, that’s right. We had an Apple Podcasts review. Hold on, I’ll find it for you. Yeah, continue.

Joe: I dunno, yourself like 3%, 4% is way too conservative.

Yeah. I don’t know. You retire. We’ve helped thousands of people retire. We see people blow themselves up too.

Al: We have,

Joe: the goal is not to run out money, in most cases.

Al: Yeah.

Joe: People, you know, they get divorces over money. They have mental health issues over money.

Al: Well,

Joe: you wanna be a little bit a big conservative versus like Yeah. 45. Blow it out. Go for it.

Al: I agree. The first thing I would think of is maybe it worked till at least 50 if I really was wanted to do this. Now, if I just couldn’t do it, Joe, let’s just say I’m burned out. I gotta do something else. Okay. Then I wouldn’t do the 72(t) election. ’cause you get locked in, do part-time work, try to make a hundred thousand doing something between the two of you and see how you like it. You, it may be awesome, right? And if it is, and this is the lifestyle for you and you can make it work, maybe do that for a couple years, then maybe the 72(t) would work because now you know that this is something you wanna do.

Joe: they’ve gotta do a trial run.

Al: Trial run. That’s what I’m saying. Yeah. Yeah. Do a trial run. And I would say. Not in all cases, Joe, but most cases, people that do this end up going back to work. And the problem with that is then you’re in a higher tax bracket and you’re still pulling out this money, and so you just gotta pay higher tax on it.

Joe: Yeah. If I’m burnt out at age 40, I’m guessing I have a fairly high stress job.

Al: I would agree.

Joe: Right.

Al: And if they saved 2 million by 40, that’s, phenomenal.

Joe: Yeah. You’re in the top 1%.

Al: I, certainly didn’t have 2 million at 40.

Joe: No. Did

Al: you?

Joe: of course I did. That was just a couple years ago.

Al: Oh, you’ve got the big wallet. Okay.

but I, I think right off the

Joe: bat, but, yeah, you, you, gotta be thinking about, all right, what’s gonna get you up in the morning?

What are you gonna do? What’s your sense of perfect and all of that? I think maybe, yeah, you take. Six months off and just to relax and kind of figure things out and, recharge.

but at 45 you’re doing that a long time.

Al: It’s a long time. And, it, gets tricky, Joe, when you get, you try to go back to work and maybe you’re a few years Yeah,

Joe: yeah. Take five years off and then try to go back,

Al: try to go back and just say, oh, I’m really good at this. And it’s like, you were good five years ago, but

Joe: now AI.

Al: Yeah, AI took your job. You’re out anyway. I’m not saying you can’t do it. I, and I’m saying it’s really tight and make sure this is what you really want to do.

And I think the, probably the most important thing that I would tell my kids in the situation, they’re nowhere near that age, but if they were, I would say trial run. Just try this out for a while. See how it feels. You know, when you have little children. Things keep changing. You might wanna get a bigger home.

They might want, wanna play certain sports club sports and you drive hockey. They’re around, they’re gonna play hockey. Yep. Yep.

Joe: They’re in Wisconsin.

Al: Yeah, that’s, right.

Joe: They ain’t cheap.

Al: No, it’s, not cheap. I don’t know if it said boys or girls, but if it’s girls, they might want to do dance lessons and that there’s a lot of things that you can hardly anticipate at this point.

So maybe at age 45, then you rethink this. Is this still what I wanna do? And if it, does, if it is, then maybe a trial run might be the thing for you to at least give a shot, try it out, see if it’s for you or not.

Andi: Let’s make sure you aren’t making a financial decision today that could lock you into a strategy you regret later.  Whether it’s retiring early, tapping your retirement accounts too soon, or reacting to what you think the market might do next, making the wrong move at the wrong time can have long-term consequences for your entire financial plan. That’s especially true when markets get volatile. Emotions take over and that’s when investors are likely to make impulse decisions that can take years, even decades, to recover from. Download our Recession Protection Guide. It’ll show you how to recognize the signs of a downturn, how to position your portfolio to weather it, and how to stay disciplined so you don’t derail your long-term retirement strategy. Click or tap the link in the episode description to download the Recession Protection Guide, yours free courtesy of Your Money, Your Wealth and Pure Financial Advisors. And when you fill out that form – in the dropdown that says  “how did you hear about us?” choose “podcast.”

Early Retirement Strategy: Withdrawal Order, Bonds, and 72(t) (Jiminy Billy Bob, NC)

Joe: All right. We got Jiminy Billy Bob. Jiminy.

Al: Jiminy. Yeah.

Andi: Jiminy, like Jiminy Cricket.

Joe: Jiminy Billy Bob from North Carolina. I have a few details that I’d like to hear from you. So if you can spitball for me. Next steps or some relocation of my brokerage account

Al: or reallocation?

Joe: Oh, reallocation.

Al: Yep. Brokerage account’s not gonna relocate. Probably not.

Joe: it could

Al: to a

Joe: different broker, to a couple different, asset classes.

Al: It could.

Joe: Alright. Jim Jimy, the Biby Bob. My wife and I are both 44 years old and we have 11-year-old daughter. In the next five to seven years, we’re looking both to downshift in our careers and find something that would pay us much less. And we like your thoughts on a withdrawal order of our allocation.

We currently spend about $115,000 a year in all of our tax deferred and tax-free retirement are allocated 50% s and p 25 International, 15 small cap, 10% mid cap. We have about a million dollars in traditional retirement and roughly $375,000 in a Roth. We have $36,000 in a HSA and $75,000 in a 5 29. Our taxable brokerage, however, is worth $700,000 in a split between 85% s and p 500 funds, and 15% small cap over the next five to seven years.

If we want to take part-time jobs, start withdrawing from the taxable brokerage, would you start heavily working bonds into the allocation to de-risk? Should I consider a 72(t)? Is this the 72(t) show it?

Al: It is, I think.

Joe: Got it. Looking for any guidance. By the way, my wife and I both love a good espresso martini in the winter, in a nice cold IPA in the summer.

Thanks so much.

Al: Sounds good. Joe, to put a little math to this and then you see what you think. so right now they have about 2.1 million, which again great

Joe: at 44.

Al: 44. That’s phenomenal. That really

Joe: all these guys are killing it. And then they all wanna do a 72(t) tax alike.

Al: They, it’s like, I worked enough.

Joe: Yeah,

Al: I’m done. And I, they Google it. I get it. Remember you remember I was gonna retire at 47 and here I still am. But now I work ’cause I wanna work. And that’s a little different thing.

Joe: It is.

Al: but sometimes when you don’t have to work, work is actually more fun. Yeah. And anyway, just,

Joe: you’re not really working

Al: hardly.

I’m doing this show. YIII guess I’m aware of that. Yep. anyway, so let’s, say, okay, you got 2.1 million at 44. Great job. let’s go. I, just said, wouldn’t it be cool in your situation to retire 50? So I went six years just to see what that looked like. 6%. Conservative, but I went 6%. I don’t know what you’re adding.

I just said 40,000. ’cause you got a lot saved already, so you’re probably doing a great job saving. So then, you end up with 3.3 million. So 3.3 million at 50, 3% distribution would be probably as high as I’d want to go for a 50-year-old. And that’s a hundred k. They wanna spend 115 3% inflation for 1 37.

So you’re short by 37 K. And that’s kind of stretching it.

Joe: Yeah.

Al: So I think if you wanna do this, and still make it work, you probably have to have some kind of income to make at least $50,000 just to cover this gap.

Joe: Yeah. And I think that’s what they wanna do. It’s looking to downshift in our careers and find something with much less pay.

Al: Yep.

Joe: so yeah, the, math might work. What is your distribution order? it depends on how much the downshift is.

Al: Yeah.

Joe: You know, you, wanna keep some liquidity in your taxable account. You’ve done a good job there. You got $700,000, you got a million dollars in deferred accounts. You’re gonna continue to defer those.

Let’s say he stops saving into those accounts altogether.

Al: Yep.

Joe: He’s 44 and maybe he starts taking withdrawals at 60. Because now he’s eligible to take penalty free withdrawals without using the 72(t).

Al: Yes. Yeah.

Joe: So that million could be what? Three and a half, 4 million bucks by that,

Al: that’s 60.

let’s see. Yeah. ’cause it’s gonna

Joe: be four to 55. That’s 2 million. Yeah. 55, 52 and half. 3 52 and a half, 3 million bucks.

Al: Yeah. Something like that.

Joe: Yeah. So let’s say that’s $3 million, all deferred accounts and all of that is gonna be tax at ordinary income rates. And if he draws down all that taxable account from age 50, to 59, he’s gonna have very little tax diversification.

Al: True.

Joe: So you wanna keep to, to be diversified. So in this case, it’s like, because he has a lot of money in the non-retirement account.

I think I’m, I would be okay with the 72(t) tax election, but I wouldn’t do it at age 50. I would probably wait till 55.

I would downshift in the career. I would start making a little bit of cash depending on what my wife and I want to do.

You spend $115,000, so you get, but both get part-time jobs. Or maybe you get full-time jobs that are not high paying that

Al: Yeah.

Joe: You know, you can, you like, you can squeak by with both of you maybe $30,000 a piece, so that’s 60,000. You pull 40,000 from the accounts. I feel Okay. Drawing down a little bit from the taxable account at that point, see how you’re liking things.

Do you want to hit, you know, hit the gas again, or, not? I like this scenario a lot better than the previous one because there’s a little bit more diversity where the money’s held.

Al: Agreed. Yep.

Joe: Yep.

Al: Plus it’s 50 instead of 45.

Joe: Yeah. That 50, that a 0.5. That five year difference is huge. It’s

Al: a lot.

Yeah.

Joe: if the, like, who knows what’s gonna happen with the markets over that time period too. And they’re fairly aggressive. Investors because they’re young,

Al: right?

Joe: And so does he need a downshift and start going into bonds? that’s going to be the key of the downshift. Again, how much money do you think you’re gonna make in your part-time job is gonna depend upon how much money that you have in bonds and how much that you’re gonna pull and what your 72(t) tax election’s gonna be.

So I would start thinking and planning of like, what are, what am I really passionate about? And what can I make a couple of dollars doing?

And then figuring out what that income would be for you and your wife. and then that would probably help start formulating some of the strategy.

But to answer like, high level questions. Yeah. You need to tone your, I would change your allocation for sure. Just to give me a little bit of buffer and safety, because I don’t know what the market’s gonna do, but it’s not like, Hey, I want 70% in bonds. It’s gonna be strategic on how much money that you’re actually pulling out each year, and maybe you have a buffer for five years.

Al: Yeah. And right. and I tend to agree with you, Joe, but, I, probably, I would try, probably flip these two numbers. So I guess what I mean by that is instead of drawing a hundred thousand from your portfolio and making 50, I would make a hundred and draw 50. And, at that age, you’d have to draw it from your taxable account, which is 685,000 right now.

I, don’t think I would feel much comfortable if I went much higher than that. now if you did that for 10 years at 50,000 a year, that’s 500,000 even with no growth. You got enough?

Joe: Yeah.

Al: So I, would be more comfortable with that scenario. So if it were me, and I, agree with you, Joe. I think this is a better scenario than what, we just looked at, mainly just because.

They’re five years older.

Joe: They’re five years older. It’s roughly the same amount of assets.

Al: Yeah, exactly. Yeah.

Joe: But they have a little bit different diversification from a tax perspective where this, where, Billy Bob or Jimmy, Deb, Bob.

Al: the other thing too that is different is they have an 11-year-old daughter, not three and five.

Joe: Yeah. Young kids then.

Al: Yeah. And then they wanna work five to seven, not just five. So yeah, there’s things about this scenario that I like better. But again, it’s, not like you can stop at age 50 under this scenario, at least that I ran. I mean, I don’t have all your variables.

I just made some assumptions. So you wanna look at this more closely as you get closer, but on the assumptions I ran it, it’s, you can’t not work. You gotta, create some kind of income to get you to Social Security I would say.

Joe: yeah. All right. very good. Congratulations.

Andi: When you’re proactively planning for the best possible retirement, like Jiminy Billy Bob, you might think the biggest risk to retirement is a market crash or picking the wrong investment. Think again. Small, everyday financial pitfalls can quietly drain your wealth. From the tax traps hidden inside your 401(k) to investment mistakes that feel safe but are actually dangerous,   you could be adding years to your working life and costing hundreds of thousands of dollars without even realizing it. This week on Your Money, Your Wealth TV, Joe and Big Al break down six ways Americans accidentally sabotage their retirement and, more importantly, they show you exactly how to fix it. Plus, grab the Retirement Readiness Guide for retirement income planning, Social Security, taxes, healthcare, investments, and legacy planning, so you can see where you stand and what to fix before it’s too late. Click or tap the links in the episode description to watch YMYW TV and to download the Retirement Readiness Guide for free.

Laid Off at 56 With $7.9M: How to Handle Your Exit Strategy (Steve & Sharon, St. Paul, MN)

Joe: We got Steve and Sharon writing in from St. Paul, Minnesota. Dear Joe Al, I’m going to get laid off from work in January and have questions about how to financially exit the company in programs like my 401(k) employee stock option plan, employee stock purchase plan, and performance shares, restricted shares, health savings account, and getting my family health insurance. He’s got, there’s a long list there, Big Al.

Al: This could take all show.

Joe: This could take a while, man. He’s got a lot of benefits.

Al: Yes, he does.

Joe: All right. what are the key things to do before getting laid off, during and shortly after one that takes place? We currently have $7.9 million in assets, of which 425,000 or 452,000 is in cash in a premium savings account at 3.5% interest rate, seven and half invested, of which 2.8 million is in my 401(k) 308,000 employee stock ownership.

$112,000 in Street company stock in RSUs and PSUs, 27,000 in an employee stock purchase plan. We got 55,000 in a health savings account, $1.1 million in brokerage accounts, $20,000 in a Roth, IRA, we’ll call that 30,000 in a Roth. IRA $1.5 million in my wife’s rollover. IRA 73,000 in my wife’s simple.

IRA $44,000 in my wife’s SEP IRA $80,000 and 5 29 plans for the kids. We have a $1.6 million in our house, which is all paid off. Our investment mix is 70% stocks, 20% bonds, 5% alternatives, 5% cash. We also draw $18,000 per year from the $1.1 million NIMCRUT.

Al: That’s sophisticated.

Joe: Oh wow. He is got a NIMCRUT. Net-

Al: Net investment makeup.

Joe: Yeah. Makeup, not income trust. It’s makeup.

Al: Yeah.

Joe: Oh, NIMCRUT. Remember the NIMCRUT days?

Al: Yes, I did

Joe: Nrep days

Al: and we should continue – charitable remainder Unitrust.

Joe: Wow. NIMCRUT. All right. What was, that was created seven years ago from a highly appreciated company stock, and we use those funds to pay for a $2 million whole life insurance plan for our kids at $9,000 annually.

We don’t count this in our net worth or investments. I’m 56. How long do you think he’s gonna keep that, insurance?

Al: That’s a great question.

Joe: It’s 56.

Al: Yeah.

Joe: You think he’s gonna, he’s gonna die with it.

Al: 50. 50. 50.

Joe: I was gonna say the same thing. and he got it seven years ago, so he bought the $2 million whole life plan.

Put money in the NIMCRUT in his forties

Al: to fund it. Yeah.

Joe: I wonder who his broker is.

Al: I have some ideas

Joe: I could, yes. I’m 56 years old and we got a W2 job making $300,000 a year. I drive a 2021 Grand Wagoneer and I drink rye whiskey old fashioned. My wife is 48, self-employed a hundred thousand dollars a year. She drives a 2021 Porsche. Ty what

Andi: I think it’s Taycan. I don’t know.

Al: that I think Andi’s right,

Joe: but like a Porsche, Taycan that just,

Al: I never heard of that.

Joe: It needs to a

Andi: Taycan. I think it’s Taycan. Yeah.

Joe: Tacan. It needs to flow a little different. We need, it needs to be a little, smoother. It’s needs a, tiquan, a Tijuana? No, that’s a little place down south.

Al: That’s where I just was building a home.

Joe: she’s got a Porsche. Do you like to say Porsche or Porsche?

Al: Porsche.

Joe: Oh God. It you any

Andi: it I believe it is actually Porsche.

Joe: I know. Do you like Porscha or do you like Porsche?

Andi: It’s Taycan.

Joe: So Taycan?

Andi: Yes.

Al: Taycan. Okay.

Joe: That’s a SUV I’m guessing.

yeah. It’s kinda

Andi: like a No, it’s, a sporty looking.

Al: Oh, it’s little. Okay.

Andi: Hang on.

Joe: Oh, it’s a four-door kind of,

Andi: it doesn’t look four-door to me. It looks like a, is that It’s two A four. That’s a four car, four door?

Al: it can be either.

Joe: Yeah.

Al: Okay. You say Porsche or Porsche?

Joe: Yeah. It depends on my company.

Al: Okay.

Andi: It depends on the company, really?

Al: Got it.

Joe: You know, if they’re a douche I say Porschay.

Al: Got it. Okay.

Joe: You know, if I’m,

Al: now I’m clear.

Joe: If I see a guy wearing a Porsche hat, I would be like, Porsche,

Al: Porsche. Like they’re really into it maybe more than

Joe: Yeah. So that I blend in.

Al: Got it. Otherwise you say Porsche,

Joe: otherwise

Al: like everyone else.

Joe: Yes, exactly.

Al: Got it.

Joe: all right. We have two kids, ages 15 and 13 and burn around $150,000 a year in expenses. Man, that’s a lot of expenses for a couple kids. It is. I plan to retire before 60 or maybe now in my wife, before 55 at the same expense level.

Spitball would be greatly appreciated. What to do when getting laid off. Steven Shean from Oh, Steven Shean. I know Steven Sharon. They ran, they, did a little Good Morning talk show, oh. In Minnesota. Minnesota.

Al: Oh, okay.

Joe: Yeah,

Al: there you go.

Andi: Oh, so this is people that have actually called on your knowledge of, local, local information.

Joe: Yeah. Killed it. Yep. Steve and Sharon. Look it up. I think I’m right.

Al: You could have just made that up.

Joe: No, it was like, I forget the name. It was like, a Good morning, Minnesota, but maybe it was in the afternoon. I don’t know.

Al: Yeah. All right.  we’ll do a little fact check

Joe: on. Yeah.

Andi: Steve and Sharon Edelman, married television host duo, best known for their popular Minnesota talk shows Twin Cities today from 76 to 80, and Good Company from 82 to 84 on KSTP TV.

Al: okay. I stand corrected.

Joe: Yep. I don’t know. I never, I don’t think I watched it.

Al: But you knew about it.

Joe: Yeah, my mom did.

Andi: Do they look familiar to you?

Joe: yeah,

Andi: Uhhuh. There you go. That’s Steven, Sharon,

Joe: yeah’s. Steven, Sharon Edelman

Al: Edelman.

Joe: Okay. Twin Cities today. Very wonderful. Yeah. Handsome couple.

Yeah.

Al: Yep.

Joe: Alright, so what, does, Steve here, what does he do? What are the key things to do before getting laid out? when you got. 10 million bucks.

Al: Yeah, you got a lot of choices.

Joe: You track yourself a little bullet ride old fashioned

Andi: well. Okay, so let me, lemme ask right up front, because of the fact that he is getting laid off, that’s gonna make this a lower income year, should he do Roth conversions?

Joe: I believe he should.

Al: possibly. It depends if he gets severance though. ’cause severance can be even more salary.

Joe: So, yeah.

Al: Joe, here, let me start with all these fancy plans. I’ll just, be brief.

Joe: So let’s, know that we, can kinda stretch this out because I think it’s important for people to understand what they are. How it worked and what the, impact is-

Al: Yeah.

Joe: when someone leaves employment maybe unexpectedly.

Al: Yeah, I like that. So I’m just gonna go in the order where he brought stuff up. Okay. So we start with a 401(k) plan. Your employer 401(k) plan, you’ve been contributing to it and your company is probably doing a match and depends upon your plan. Sometimes some plans, the match is instantaneous, meaning that it’s vested as soon as you get it. Other times you gotta work a certain amount of years for each grant to be able to get it vested. So, you know. It depends upon the plan. Typically when you leave, whatever you have vested gets frozen. You can typically keep it in the plan if you want to, or you can roll it to an IRA, no taxation. But now you control that. So that’s number one. Personal choice, depending upon what you do. Most people tend to roll ’em to an IR so they have control, but you don’t have to.

Joe: He is, how old is he?

Al: He is 56.

Joe: Alright, so you might wanna keep it in the 401(k) because there’s something that’s called the rule of 55.

Al: Oh yeah. Gosh. I messed Yeah, you’re right,

Joe: So what, happens with the rule of 55. If I get laid off at 56, I, separate service at 55 or older, is that avoids a 10% penalty. There’s not the 59 and a half rule that everyone thinks about retirement accounts. With 401(k)s, your employer sponsored plan, you can take the money out at 55 and avoid the 10% penalty. So if you wanted to draw on it as income as you’re bridging the gap or just living off of that, keep it in the 401(k), don’t roll that yet, until you get another job. or might even wanna roll it into that 401(k)

Al: or it turns 59 and a half

Joe: until yeah, until he turns 59.

Al: Nine

Joe: and a half. Because,

Al: because then it’s an IRA, you can roll it and then you can still have access to the money.

So you are right Joe, that’s actually the best to keep it in there so you have access to it without penalty. And yeah, as you said, the rule is you have to be 55 when you retire or get laid off. So 55 years old or older. And then at that point you can draw on it as long as it stays in that plan, Until you’re 59 and a half and then you can roll it.

Joe: Alright. So like employee stock, like, I’m confused here. He says employee stock ownership account. And then he is also got, I.

Al: He said

Joe: the employee stock purchase plan.

Al: Yeah, those are generally two. Those are two different things. I’m gonna start with the first thing he said, which is Employee stock option plan.

So that’s,

Joe: ownership.

Al: Well,

Joe: you think that’s options or

Al: the, the first, I’m looking at the first sentence. He said stock options, so I’m gonna start there.

Joe: Okay.

Al: Yeah. Anyway, stock option plan is what your employer typically gives you an option to purchase a share of the company at a certain price. And why they do that is maybe at vest in three or four years from now, meaning you have to stay at the company for it to vest. But the idea is if the stock price is low and it goes up, you can buy it at that lower price and then all that extra appreciation you get, which is all ordinary income upon exercise. I won’t go into non-qual incentive. That’s, that, that’s going a little bit too deep.

Joe: Yeah. But I guess here’s the point. It’s, it’s. a really cool program for employees to act like an owner of that company, of a publicly traded company.

Al: Yeah.

Joe: So you get options and let’s say you have an option to buy the stock at $20 a share.

Al: Right.

Joe: And the stock price is worth a hundred dollars a share.

Al: Yeah. When? When it vests.

Joe: So the street has to pay a hundred dollars for the share, but I have an option to buy it at 20,

Al: correct.

Joe: So the spread, and this, is a pretty dramatic example.

Al: That’s a good one.

Joe: But the spread would be $80 per share.

Al: Correct.

Joe: so all of that spread is profit for me or income, where I would have to pay tax on.

Al: Yeah. And that actually goes right on your W2 Joe, as you know. So it’s ordinary income and there are incentive stock options which are treated a little bit differently, but it’s the same concept. You get to buy the stock at a lower price. Typically when you are, you retire or are let go, you have to cash in whatever is vested and then you pull it out, you can, in some cases, Joe, you can keep the stock, but in many cases, if it’s not a public company, they will require you to sell the stock back to the company. So just be aware of that.

Joe: But if I have non-qualified stock options, in some cases if I get laid off, depending on the package, so you have vested and unvested stock options. So vested is all right. here I, I have the option to buy the stock at whatever my option price is. Then I have unvested that are probably at a different price, that I can still purchase the shares, but I can’t buy those shares until they vest, right? In some cases, if I get laid off at, if I’m an executive, some of the packages that we’ve seen is that, all right, we’ll fully vest your options, right? So even though they’re unvested and you needed to wait a couple of years, if I was getting laid off and maybe they put a package together for me. So if this is the case, then you get fully vested and maybe you have to exercise. And that could create a fairly large tax event in that given year.

Al: It could be, ’cause that’s considered salary, Joe, as you just said. So, so if that happens, like let’s say you get let go in December, so you got a full year salary, maybe you’ve got a severance, which is extra salary for X number of months or even a year, whatever, and then you got stock options that need to be exercised. It can be pretty pricey. So let’s go to, employee stock option or ownership plan, which he kind of mentions that earlier, so I’m not sure which he’s probably the,

Joe: he’s got, 27,000 in an ESOP.

Al: that’s, yeah, that’s what it looks like. Yeah.

Joe: So he could purchase this?

Al: No, That’s not an ESOP. That’s an employees like purchase plan. That’s a different thing.

Joe: Oh, ESPP not ESOP. Yeah. Yeah,

Al: yeah, We’ll get there. We’ll get there. But, employee, stock ownership plan, that’s typically in a retirement account. And the company allows you to buy its stock in your retirement account. And, and it depends upon the plan, Joe. Sometimes you can keep it in. A lot of times the company wants you to sell it. Again, if it’s a private company, they’ll probably want you to cash out the shares and they’ll pay you the value, what they’re worth based upon what they believe the value is. If it’s a public company, you might be able to keep it.

Joe: Yeah. But an employee stock purchase plan is you’re buying the stock at a discount. And in, in most cases, it wouldn’t be an in,

Al: in, most cases. You’re right. You’re right.

Joe: It would be just another plan. I can buy it at a 15% discount. I have to hold those shares for a certain period of time. There’s vesting schedules. I can.

Al: Because you’re getting it at a discount, right?

Joe: So just kind of look at the plan doc there. Sometimes you’ll automatically vest again, if you get laid off, you have 27,000 in the, employee stock purchase plan. So it’s, not gonna make or break, your bank here, given that you have millions. But for those of you that have an employee stock purchase plan, you can buy it at a discount. You have to wait for a certain number of years from a vesting perspective, and then when you sell it, it’d be cap gains.

Al: and just to be clear, there’s an ESOP and an ESPP, and they’re different things.

Joe: You are right. And so,

Al: so just to be clear, an ESOP plan is usually in your retirement account. an employee stock purchase plan is usually outside of a retirement account where you can buy the stock at a discount. And they all have different kind of vesting schedules.

Joe: Okay.

Al: Okay, let’s go. Now. I would say these days, Joe, there’s less stock option plans and more restricted stock units.

Yep. Is what we see RSU. So, so a restricted stock unit is, you are vested a certain amount of shares in the company, but you’ve got meet a certain vesting period. It might be two years, three years, four years, five years. It might be a five year vest and you get 20% a year. So it can be different things, right?

And so when it vests, whatever it’s worth on that date is actually taxable income. It gets added to your salary. And so, but then you can either sell, a lot of people sell ’cause they don’t have the money to pay the taxes on the RSU or if you’ve got other money, you can pay the taxes on that yourself, keep the stock, and then if it goes up.

That’s all ordinary income. That part, if it goes up from there and you sell it at a gain, then it would be capital gain, either short term or long term, depending upon whether you’ve held it for a year.

Joe: Yeah. And some companies will, make you automatically withhold a little bit more. so each plan is a little bit different.

I don’t know what company works for, I’m guessing, I don’t know. It’s a publicly traded firm because of the amount of dollars that it has. It’s calling an executive Probably,

Al: yeah.

Joe: 3M.

Al: Yeah. Yeah.

Joe: What do you think?

Al: Yeah, that could be, I mean, usually Joe, you see this kind of thing when it’s a high tech company or Yeah, like

Joe: Microsoft

Al: or very successful company, so, so A PSU you don’t

Joe: performance.

Al: Yeah, you don’t see those as much, but it’s the same thing as a, restricted stock. You, this is a performance stock unit, so it vests upon a certain performance, maybe a revenue target or maybe a net income target, or whatever it may be. It vests or valuation of the company. It vests at that point, and then it’s the same as a restricted stock unit, meaning when it vests you get whatever it’s worth at that point is, ordinary income gets added to your W2 if you decide to sell the stock.

A lot of people do ’cause they can’t afford the tax. But if you keep it, then if the stock goes up from there, it’s a, capital gain or it goes down, Joe, it’s actually a capital loss. So you, you could have either, something I wanna say this is getting a little bit more advanced, but, When you get RSUs and PSUs restricted stock units, performance stock units, you can, when they are granted, fill out what’s called an 83 B election and that allows you to pay the tax on the shares at the price it was when it was granted, which in a growing company will likely be lower than it will be when it vests.

So if, you’re very bullish on the company or if it’s a startup and the stock isn’t valued very much, you wanna do an 83 B within 30 days after you get that, that grant and then you pay the tax at that point. And then any future gain is long-term capital gain. that’s a point that’s missed often I think.

Joe: Yeah, it’s a great tax strategy, especially for private companies.

Al: Yeah.

so I think we I think we hit, all of these.

Joe: So what about you

Andi: just say, is there anything that he needs to do differently with that?

Joe: No.

Al: It can just stay in that account. That’s fine.

Joe: So I, I don’t know how much he’s spending. Is he spending $150,000 on his kids or he just said, Hey, I have two kids and we’re all burning $150,000 a year.

Al: That’s what I think with the kids. It’s 150 k

Joe: all, all in. But it’s not like, here I’m spending 150, $150,000 on the two kids.

Al: I, don’t think so.

Joe: Okay.

Al: That’d be a lot, wouldn’t it?

Joe: That’s what I thought. I was like, man, he,

Al: especially Minnesota.

Joe: What are they doing?

Andi: What high tech companies are in Minnesota Joe?

Joe: High Tech? I don’t know. I haven’t lived in Minnesota in a long time, but I’m guessing like the big, you know, there’s, there’s Honeywell, 3M, there’s

Al: maybe one of those. Huh?

Joe: Best Buy.

Al: Best Buy. Oh, there you go. How about that

Joe: Target?

Al: Yeah.

right.

Joe: Let’s see. Margo. That’s private.

Al: Yeah. Yeah. So anyway, if you think you’re going to be let go, maybe a couple other things that you might wanna think about.

File for unemployment, because you will want, if you’re let go, you qualify for unemployment benefits, whatever your state offers. So that’s one thing. Sometimes there’s federal benefits, you want to consider health insurance, right? Maybe you can get it through your wife’s company. I think your wife is self-employed, so maybe she already has a plan and can include you on the plan.

Maybe you can do cobra, which, used to be 18 months after you got let go, but then it was extended during COVID. I’m not sure what it is right now to be honest, but you have the ability to get company, the company you’re with, continue their insurance. It’s called Cobra, but you have to pay for it, right?

So just be aware of that. and, Andi sort of, mentioned Roth conversions if you are in a lower tax bracket. For a year or two, that would be a good time to take some of this 4.4 million in your retirement account and convert it if you’re in a lower bracket. So that would be a great thing, particularly in your case, because you’ve got a lot of, non-retirement assets, from my calculation, a couple million.

Joe: Yep.

if you wanna spend a, he wants to spend $150,000 a year. He is got $8 million.

Al: He can do it.

Joe: Yeah. The math looks pretty good. Wife continues to work, you know, she’s self-employed. Yep. Have her make that a hundred thousand dollars.

Al: yep.

Joe: And yeah, I think they’re, yeah.

Al: If, they want, pretty good, if they wanna spend one 50 a year, that’s, they’re, looking fine.

technically he wouldn’t even have to go back to work. Joe, just to clarify here, when he says he has 7.9 million in assets, that includes the home, so you have to back that out at 1.45, one point until he is got

Joe: 6 million.

Al: He’s got 6.4. Okay. Really? So I guess the way I think about someone in their fifties, maybe a 3% distribution might be tox tops.

Maybe you wanna do two point a half percent distribution rate to be safe, but even a 3% distribution rate on 6.4 million Joe’s 192,000, if the spend is one 50, you know, then you got the wife’s income on top of that. So, yeah, it’s, that’s looking pretty good.

Joe: Yeah,

Andi: and to answer your question about Cobra 18 months, if you lose your job, if you, if it’s, voluntary or involuntary job loss, 36 months applies for things such as the death of a covered employee divorce or legal separation, or a dependent child losing eligibility in certain cases of disability, the 18 month period can be extended to 29 months.

Al: Got it. Wow. That’s great information. Wow. And you know what the, reason why I, couldn’t say it at the top of my head was it changed during COVID and then ch it was gonna change back, and then it got extended and I, sort of lost track. So. Yep. So that’s really helpful. Let’s see, what else can we say?

Joe: That’s it.

Al: Yeah, I think we did a lot.

Joe: I’m over. I’m over Steve and Sharon.

Al: you’re over it.

Outro: Next Week on the YMYW Podcast

Andi: Next week we’re talking Parks and Rec, Paw Patrol, Smokey and the Bandit on YMYW as Andy and April, Chase and Ryder, and Burt and Sally all want to retire early. Can they do it? And does Dolly have any options to maximize Social Security? Follow us in your favorite podcast app or subscribe to watch us on Spotify or YouTube, won’t you please?

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

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this 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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