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Published On
July 11, 2023

YMYW listener Alan feels that there are two unspoken assumptions that many different podcasters make when it comes to claiming Social Security benefits. Today on Your Money, Your Wealth® podcast 437, Joe Anderson, CFP® and Big Al Clopine, CPA spitball on those assumptions, along with safe retirement withdrawal rates before and after Social Security and pension for Rick and Jen, and a thrift savings plan (TSP) and Social Security retirement strategy for Theresa. Plus, Mark and his wife are semi-retired at 51 and 44. Are they going to run out of money? Where should Mary be saving for retirement, and how should she handle large Roth conversions before required minimum distributions (RMDs) kick in? 

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Show Notes

  • (00:45) Unspoken Assumptions About Collecting Social Security? (Alan, Daufuskie Island, SC)
  • (09:38) Safe Withdrawal Rates Before and After Social Security & Pension (Rick & Jen, Atwater, OH)
  • (19:25) Thrift Savings Plan and Social Security Retirement Strategy (“Theresa”)
  • (29:28) Retirement Spitball: Will We Run Out of Money? (Mark, St. George, UT)
  • (37:37) Where to Save for Retirement and Roth Conversions Prior to RMDs? (Mary, small town Indiana)
  • (47:54) The Derails

Free financial resources:

Download the Social Security Handbook

Free Financial Assessment

Listen to today’s podcast episode on YouTube:

 

Transcription

YMYW listener Alan feels that there are two unspoken assumptions that many different podcasters make when it comes to claiming Social Security benefits. Today on Your Money, Your Wealth® podcast 437, Joe and Big Al spitball on those assumptions, along with safe retirement withdrawal rates before and after Social Security and pension for Rick and Jen, and a thrift savings plan and Social Security retirement strategy for Theresa. Plus, Mark and his wife are semi-retired at 51 and 44. Are they going to run out of money? And where should Mary be saving for retirement and how should she handle large Roth conversions before required minimum distributions kick in? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Unspoken Assumptions About Collecting Social Security? (Alan, Daufuskie Island, SC)

Joe: We got “Hello, Joe, Big Al and Andi, have listened weekly since early 2021.

Al: Wow. And still listening.

Joe: “Mostly when driving my Subaru Impreza.” Impreza?

Al: Impreza. Yep.

Joe: You know what that is?

Al: Subaru.

Joe: Subaru. Got it. Smart ass.

Al: I think it’s a smaller one.

Andi: It’s a compact car. Yeah.

Joe: Oh, all right. “But often at home when in the mood for some financial thinking.”

Al: Yeah. Oh, lemme sit down.

Joe: Ever in the mood for some financial thinking?

Al: Well, you know, the Clopine household, once a year, we have that Clopine Financial Summit.

Joe: Hey honey, are you in the mood for some financial thinking?

Al: It’s funny how she always says no.

Joe: Oh. “Would really appreciate your reaction to my scenario. I’m 62.” All right. Let’s see. “Over the past two years, I have run the open Social Security model, dozens of times to inform my decisions on when to take Social Security.” The open Social Security model. Ever heard of that?

Al: No.

Joe: “My breakeven age for starting at 62 versus 70 is 78.” That would be 16 years of foregone income from 62 to 78, recouped from 78 to 85. In podcast after podcast, yours and many others, there appears to me to be two unspoken assumptions. One, that the listener will outlive their actual life expectancy, 85 in my case. And two, that having outlived their life expectancy, they will enjoy the fruits of all that income that they have foregone in their 60s and 70s when they are in their 80s and 90s. And I cannot square in my mind, is it more valuable to wait to 70 to start than to take the income at 62 and enjoy it while my wife and I are in our 60s and 70s traveling and partying, versus when we’re in our 80s, like so many family and friends of our parents’ generation whom we observe intimately homebound and visiting hospitals and medical clinics and pharmacies instead of Nova Scotia, Barbados, and Tahiti?”

Al: Yeah. Come on, let’s get with it. That sounds way more fun.

Joe: I love this guy. Oh my God. I’m with you.

Al: I’ve changed my mind. 62. I’m going to Barbados, Nova Scotia.

Joe: He’s going to the office tomorrow-

Al:  I always- already been to Tahiti 3 times. God, I’m already past 62. Oh, I’m starting tomorrow.

Joe: All right. “Are these assumptions really there in the background as advisors and podcasters say, wait until 70, or am I missing something here? I don’t have to spend it all. I can save and invest some of that Social Security income too. Purposely omitting my detes, because I am after your reflection on the two unspoken assumptions rather than on my personal situation. Thank you.” Okay.

Al: It’s clear-

Joe: Fine.

Al: -clear as mud.

Joe: “Drink of choice-“ All right, let’s see, “-which is on the desk at hand as I write this email is vodka on the rocks with the little lemon or cherry juice.” Hardcore. Don’t wanna mix anything with that booze. You know.

Al: Let’s just go straight, have a little flavoring.

Joe: Oh, right. “PS. Just listened to Christine from Seattle and understood perfectly her comments that you have mellowed out the past couple years, Joe. She nailed it.”

Andi: Ha.

Joe: “Haha, Alan from-

Andi: Daufuskie Island.

Joe: “Daufuskie Island in South Carolina.”

Andi: I looked it up. Yeah. Daufuskie.

Joe/Al: Daufuskie.

Al: Daufuskie. Have you mellowed, Joe? What do you think, Andi? Is he mellowed?

Andi: Like I said last time, I’m not sure in what way he has mellowed, but if other- if the listeners feel that he has, then awesome.

Joe: I’m tired.

Al: I’m gonna say-

Joe: I got a-

Al: I’m gonna say yes. You got two young kids in home.

Joe: I got a two-year-old kid.

Al: You’ve mellowed. It’s like, you know what-?

Joe: I’m getting old.

Al: I don’t have the energy to get all riled up-

Joe: Just chasing around this little two-year-old. I still can’t believe I have a child.

Al: So what say you, why not take Social Security at 62 so you can go to Nova Scotia and Barbados and Tahiti?

Joe: I love it, Alan, to be honest with you.

Al: Let’s do it.

Joe: I get it. I totally get it. I think most people still, the majority of the of people take it as soon as they can get it.

Al: You know how many people take it at age 70?

Joe: Like 4%.

Al: Like 2% or 3%.

Joe: But all you podcasters out there- Yeah, not a lot of people take it at 70. But if you do the math- how we look at it as advisors, as professionals in this industry is that we’re looking at it as longevity insurance.

Al: Correct. That different than breakeven.

Joe: That’s different than breakeven. That’s different as an investment. And so as you age, you wanna make sure that you age with dignity. And that you wanna have a high income floor as possible. So that’s why a lot of professionals say, you know what, it probably makes sense to push this thing out as long as you possibly can, because then that’s gonna give you the highest possible balance or highest payment from Social Security to end of life.

Al: Yeah. Cuz you don’t know how you’re gonna- how long you’re gonna live and, and plus when you’re married, one spouse may outlive the other by a lot. And so a great strategy is to take the higher benefit, push that out to 70, or if you don’t like 70, 68, 66, I don’t care. Push it out a little bit so the survivor gets a higher benefit. Because the survivor gets the higher of the two benefits and then start the other one earlier. So you can go on all your trips.

Joe: But I get his point.

Al: I do too.

Joe: And so I think most people are in his camp.

Al: Yeah. And the other thing too is if you actually collect more than you need and can invest it, this is a great strategy. Most people don’t, most people get it and spend it. So, we’re kind of going on that assumption.

Joe: But let’s say someone who has shorter life expectancy. Because he’s got some scars, right? He’s looking, he is like, man, I remember just going to clinics and hospitals and I don’t want my Social Security-

Al: – to be used for that.

Joee: –  be used for that. Because in my 60s and 70s, I’m gonna be partying.

Al: That’s the go-go years.

Joe:  Yeah. So Alan, I think mathematically you- we look at it differently. We don’t look at it as an investment where you can invest and say, hey, it’s gonna break even at age 78. So you’re assuming that I have to live past age 78 to reap any benefits. Sure. I mean, that’s true if you look at it that way, but there’s a lot of assumptions that you can make.

Al: When you think about it as longevity insurance, it’s a little different perspective, but yeah, I totally get it too. And certainly if you have impaired life expectancy or as a couple, you both have impaired life expectancy or you need the money, take it at 62. Most people do, by the way, most people take it at 62. And we see that being a mistake in many cases.

Joe: Yeah. But in some cases, it’s right on.

Al: It’s right on.

Joe: Because it’s like my living expenses are gonna be so much higher during this time period. And then they’re gonna get cut in half because we’re not going to Barbados and I’m not doing whatever. I mean, run your numbers. It’s your financial plan, right? It’s your life. And so you wanna make sure that you construct your overall finances that really match up to what you’re trying to accomplish. And if it’s taking at 62, so you can party, take it at 62.

Al: I’m with you.

Andi: There are over 2700 rules around claiming your Social Security benefits, so it’s a really good idea to explore all your options before you file. Download our free Social Security Handbook and figure out how to maximize your monthly Social Security payments. This guide explains who is eligible, how Social Security benefits are calculated, the dollar difference between collecting early vs. collecting late, working while taking Social Security, details on spousal, ex-spousal, and survivor benefits, and how your Social Security is taxed. To download the Social Security Handbook, just click the link in the description of today’s episode in your favorite podcast app and look for the financial resources, just above the episode transcript. Then tap that share button there in the podcast show notes to tell your friends about YMYW, to share the love and spread the knowledge.

Safe Withdrawal Rates Before and After Social Security & Pension (Rick & Jen, Atwater, OH)

Joe: Got a call from Rick and Jen from Atwater, Ohio.

Andi: It’s actually an email, but we’ll call it a call.

Joe: Okay. Good point. “See withdrawal rates, pre–Social Security pension, and post Social Security pension.”

Al: Oh, she-

Andi: That’s his title.

Al: He or she titled it.

Joe: “Big fan of the podcast, great road trip radio.”

Andi: Ah, so listening on long drives.

Al: Do you think it’s him or her that’s putting this on?

Joe: It’s Rick and Jen. I think it’s a-

Al: Do you think it’s both of them?

Joe: Oh yeah. They’re both tight.

Al: They’re both in it. Got it.

Joe: “We live in northeast Ohio and I’ve been listening to you guys-“ Ohio slang versus Yinz Guys.

Al: What? Yinz? Is that what they say? Yinz guys.

Andi: Yinz guys.

Joe: Yinz guys if you’re from PA. “-for a few years now. Rick is 53. Jen is 51. Current income is a combined $250,000. Current spending is $95,000 a year.” I wonder how many couples actually listen to us. It seems like it’s more than one.

Al: Well, it’s not many though. It’s like usually it’s one and then forces the other one. Yeah, I like that.

Andi: I wonder how many of ’em actually type emails together though.

Joe: I think most.

Andi: Well, they’re listening over dinner or having sex on the driveway.

Al: We don’t know if Rick or Jen wrote this, do we?

Joe: I don’t know. “Current spending is $95,000 a year. Accounts are combined, $2,300,000, $850,000 in a brokerage, $850,000 traditional, $550,000 in Roth, including two smaller HSA accounts. We’ll be doing strategic Roth conversions over the next few years to be tax advantaged in our later years.”

Al: Yeah. That’s, that’s a lot better than not strategic conversions.

Joe: Yes. You definitely wanna be strategic to be tax advantaged. “If we retire at age 53 for Rick this year and age 54 for Jen 3 years from now and work part-time in retirement, making $20,000 a year until age 60, along with the $28,000 a year pension for Jen coming online in 2035 and $45,000 for Rick. No Social Security for Jen coming online in 2040-” There’s a lot of things going on here.

Al: You got that? Got all that so far?

Joe: I just get all stuff. Someone’s coming online, offline. We got Rick and Jen. Couple years, no years.

Al: I’ve just opened up Excel. What’s 2040? How much?

Joe: Okay. All right. So Rick wants to retire at 53. Jen at 54. So Rick is done this year. Jen, she’s got a couple years. I’m with you guys. They’re gonna work part-time in retirement to age 60, so both of them are gonna work part-time making $20,000. So is that $10,000 a piece or is that $20,000 a piece?

Al: You pick.

Joe: Let’s call it $20,000 all in. Then they got $28,000 pension. It’s coming online. Not offline.

Al: That’s coming online in 2035.

Joe: Hey, now for coming online.

Al: We got a 12-year gap there. Gotta calculate that.

Joe: 2035. Then we have $45,000 Social Security for Rick that will be coming online on 2040.

Al: Got it.

Joe: “How high can our safe withdrawal rate be pre-pension and Social Security to maintain our expenses, $95,000 a year, without exposing ourselves to sequence of return risk? We expect our Social Security and pensions will cover our fixed expenses in retirement with the discretionary and given expenses coming from the portfolio. Things I ponder as I cook out a medium rare filet while the drinking a Steigl grapefruit Radler-”

Andi: It’s an Austrian shandy with real grapefruit juice.

Al: I’ve actually-

Andi: And it’s a mixed beer drink.

Joe: A shandy.

Al: It’s actually pretty good.

Joe: It’s a beer with lemonade.

Andi: Well in this case, grapefruit juice. Yeah.

Al: It’s like a lighter beer. They’re pretty good.

Joe: “-and looking at my 1984 Dodge Ram pickup truck.” All right. ‘84 Ram. “- which guzzles gasoline, has old-fashioned window handles to roll up your windows. The good old days. Yeah.” Oh yeah.

Al: You ever have a roll up?

Joe: Oh yeah.

Al: In car?

Joe: Oh yeah.

Al: Yeah. Okay.

Andi: It’s been a long time. I miss those. Now if the motor goes out, you gotta take it to the mechanic.

Al: I don’t miss them at all. I don’t wanna do the crank anymore.

Andi: Wow.

Joe: Get a good workout.

Al: I suppose.

Joe: “Keep up the great work. You are teachers at heart. Have a great summer. Thank you, Rick and Jen.” Okay, so we got a lot of different fixed income sources. Coming in at different times. And then when the full fixed income sources come at age 70, is that, that should cover our living expenses, but we got these stump periods. It’s like, how much money can we take from the portfolio and still be okay without blowing ourselves up? I think that’s the gist.

Al: Yeah, that’s the gist. And so I guess there’s about $2,300,000 liquid right now. So there’s gonna be a little bit more savings and growth. Not much. Let’s call it $2,500,000. Why don’t we- why don’t we go with that figure? That’s what they have when they’re both retired. So $2,500,000, they’re gonna be 55 years old, so probably a 3% distribution rate. $2,500,000, 3%. What’s that? $75,000 maybe is what you could take from the portfolio. Maybe.

Joe: But he’s gonna work- Yeah.

Al: But then there’s the part-time income, right? Of $20,000 or $40,000, depending upon how you count it. Maybe that’s how they got to the $95,000.

Joe: They wanna spend $95,000? Is that the number?

Al: Mm-hmm.

Joe: Well, I mean, in the early years, you gotta be careful, right? To see- he’s right because the sequence of return risk is gonna blow him up because he’s so young.

Al: Yeah. And the truth is, no matter what you do, you always have that risk. It’s just how you respond to it. So what that means is if the first few years of your retirement, the market tanks, right? You can’t take that 4% or 3% or 2.5% because you’ll never recover, right? You gotta take a lot lower figure.

Joe: So here’s one way to look at it. If we were like the guy that wrote in last week, he’s like, hey, wanna go on cruises and party- if he believes that his fixed income is gonna be taking care of his living expenses at his age 70, well just go bananas. He got 15 years.

Al: True.

Joe: You got $2,500,000. Right. You could take 8% out. And then you’re- then you have no liquid assets at age 70 and you just live off your pensions and Social Security. That’s one way to look at it. Another way to look at it is, well, what do you want as liquid assets at age 70? Do you want $1,000,000? Okay, well then that can help you with your distribution rate as well. You know, I don’t know if the standard 2%, 3% is the right choice here, because he’s going to be fine at age 70, given what his assumptions are.

Al: I would agree with that.

Joe: So you could take a lot more from the portfolio, from a standard historical safe withdrawal rate.

Al: True. Yeah. But so the way you mitigate it, another way to think about it is just you have 3 years, 5 years, 10 years and safe in, in bonds. Yeah. Safe money, right? Let’s say you have 5 years and let’s say the market tanks for two, but it’s gonna recover and who cares, right? You’re using your safe money during periods- that that’s how you solve this. You never completely get around it, cuz I mean, we all have market exposure, but the point is you have enough safety to be able to cover any downturn that generally, I mean, the Great Recession, which is the worst one since the depression. It was what, a year and a half, two years maybe, where the market went down. It wasn’t like 10 years.

Joe: Because look at it like this too. Let’s say he’s spending $100,000 a year, so 10 years on $100,000 is $1,000,000. So out of his $2,000,000, he has liquid. You put a half in bonds or real estate money. You have half in stocks and then you just blow down the box.

Al: If that’s what you need to do.

Joe: You spend 100% of it. You spend $1,000,000 over the next 10 years, but you have another $1,000,000 that is growing in a diversified stock portfolio.

Al: That’s right. And- but you don’t really need it anyway.

Joe:  Right. So that other 10 years of that $1,000,000 growing, let’s say at 7% over 10 years, guess what? Boom, you got your $2,000,000 back.

Al: Yeah. Put another $1,000,000 in fixed and use that for the next 5 years-

Joe: And do it all over again, I don’t know, whatever. But no, there’s all sorts of different ways that you can slice and dice this. So the- but here’s my last point, and then we’ll take a break. Is that the safe withdrawal rate has nothing to do with what you should be withdrawing. In my opinion. It should be there to help you to determine how big of a nest egg that you need when you retire. Because if I was Rick and Jen,  I’d be looking each year, what do we wanna do this year? I’m 54 years old, I’m retired, let’s blow it out. I wanna go to Italy, I wanna do this, I wanna do that. So my distribution rate might be pretty high, so I wanna be strategic in my overall portfolio. I might be a little bit heavier in cash depending on what my spending needs are, right? But you look at it every single year, it’s not like, here, take 4% out of your portfolio and then call it good. You might pull 6% out one year, 2% the other. Depends on what the market does, depending on all sorts of different things.

Al: That’s a really good point. I mean, this basically, we use this to just see if you’re in the ballpark of being on track.

Joe: Right. That’s it.

Al: It’s not your distribution tool. Excellent point.

Thrift Savings Plan and Social Security Retirement Strategy (“Theresa”)

Joe: We got Theresa. She goes “Hello, Joe, Al, Andi. New listener, love the show. Love your spitball analysis and humor.” Yeah. At least one does.

Al: We try to do that.

Joe: “I’ve been binge listening to your show for the past few weeks and listened to over 60 shows.”

Andi: In the last few weeks. That’s just wall to wall Joe and Al.

Al: Oh my, how many times have you done that?

Joe: Yeah, that’s not even close. I mean, that’s like, I’ve been watching like these TV shows.

Al: I know. Yeah. I actually have been watching one recently.

Joe: And there’s back where, you know, the water boarding and the torture.

Al: Oh yeah.

Andi: Oh. That sounds like a fun thing to watch on tv.

Joe: I forget what show it was, but they were investigating it.

It was about the guy that was-

Al: Is that 24? One of those?

Joe: No, no, it’s a movie.

Al: Oh, it’s a movie?

Joe: Yeah. So anyway, I was, you know, they- it’s like sleep deprivation.

Al: Right. Okay, got it.

Joe: So they turn on a bunch of heavy metal music and you know, they can’t go to sleep.

Al: Got it. Okay.

Joe: And it’s just like torture and they put on the flashing lights.

Andi: Oh, so you’re comparing that to YMYW?

Joe: Yes.

Andi: I gotcha. Okay.

Al: This would be like just like that.

Joe: This would be, yes.

Al: Okay. Yeah. Anyway, let’s continue.

Joe:  Okay. “We live in Southern California. My husband drives a 2018 A6. And I drive a 2011 Honda Pilot. We both love margaritas on the rocks and Corona, when we drink, but not often. We are 56 years old and plan to retire at 59. Here are a few questions for you. Should we contribute to the Roth TSP until we retire? Influenced by listening to your show influencer-“ Al that’s, that’s you. “-what should we do with the TSP funds when we retire? Should we leave them in the TSP account or should we move them over to Fidelity? We always planned on taking Social Security at 62 and invest. But I hear you recommend taking Social Security at 70. Does that work in our case?” Here’s the details, Big Al.

Al: Okay.

Joe: “Our portfolio is diversified in value and growth stocks, some index funds and very little bonds. We max out our TSP and contribute extra to the catchup of $6500. We enjoy doing individual stocks analysis before buying stocks.” Stock pickers. “We got fundamental, top down, bottom up-“

Al: Fundamental. Which are we doing here?

Joe: “We have about $100,000 per year. Will require about $150,000 of income in our early retirement years. And enjoy traveling. Adjusted gross income is $268,000. Combined TSP accounts is $2,500,000, combined Roth $400,000. My husband is doing backdoor Roth now, but I have an old IRA, so I can’t. $1,100,000 in investment account, liquid savings is $170,000. Fixed income in retirement is $135,000 at 59. Pension and Social Security bridge, and $155,000 at 62 with pension and Social Security, dividends, $40,000 a year in DRIP now.

Andi: What does that mean?

Joe: Direct Reinvestment Program.

Andi: Ah.

Al: That’s great. I knew what it was- I didn’t know what, what it stood for.

Joe: I’m a CERTIFIED FINANCIAL PLANNER.

Al: You were paying attention.

Andi: That’s why I asked you.

Al: Usually you see that on like firefighters and policemen and people like that.

Joe: Wow. There’s a lot of stuff going on here.

Al: Yeah. Well, so far so good.

Joe: “My original plan was to use our fixed income and dividend retirement in tapping into the other accounts if and when needed. We plan to start Roth conversions after we retire to the top of 24% tax bracket to minimize our RMDs at age 73 of about $160,000 per year. We will have a couple of large expenses to consider. Our son is a junior in college and his undergraduate expenses. He’s covered with a 529, but his medical school and wedding is gonna be about $200,000 plus.”

Al: Got it. Okay.

Joe: That’s assuming he gets in.

Al: Yeah. Right.

Joe: And he gets married. She’s already planning everything out for him.

Al: Oh yeah.

Joe: You’re gonna be a doctor and you’re gonna get married in the next couple years. Mom, I don’t wanna be a doctor and I don’t have a girlfriend. I don’t care. We’re gonna find one for you.

Al: It’s not the cards.

Joe: “Should we use money from the TSP to pay for medical school? We have no debt except for our mortgage, $300,000, and we choose not to pay it off because our interest rate is 1.99% for the next 12 years.”

Al: Great.

Joe: “We believe our investment return can beat that. Sorry for the long email. Just wanted to give you a complete picture. I truly appreciate your time. I really enjoy the humor you bring to the hard and dry topic of finance.” All right, well, thank you very much.

Al: It is hard and it is dry too. Oh boy.

Joe: I was gonna say something, so I’m gonna hold on that one.

Al: Okay.

Joe: Okay. Let’s go to alright-

Al: Well you wanna answer the question?

Joe: Well, there’s 3 questions, right? Should we contribute to a Roth TSP? The $268,000 tax bracket, they got $400,000 in Roth, $2,500,000 in the TSP. I say, yes, I think that is the way to go.

Al: Agreed. That’s- that’s kind of a no-brainer. In fact, you can even do some Roth conversions to stay in the 24%. I would- I would think about it that way.

Joe: Absolutely. Because she’s got an IRA. I’m not sure how much that she has in her IRA, but she’s assuming she can’t do a backdoor, but she can just convert. It’s the same tax consequence.

Al: True. Yeah.

Joe: So just convert $7000. Or $6500 or whatever the number is. Because her husband’s doing it, but she feels that she can’t because I have an IRA. It’s the same effect.

Al: Yeah, true. Good point.

Joe: “What should we do with the TSP funds when we retire?” If you’re comfortable- well, they’re big stock pickers, so I don’t know. Maybe you go into a brokerage account, pick some stocks.

Al: Could.

Joe: I like the TSP, TSPs okay.

Al: Yeah, a lot of them have very low costs. And I guess it depends upon the- on the TSP fund itself, you know, what the investment choices are, but I guess it, it’s a bit of a tossup, but it’s personal choice really.

Joe: Yeah. There’s pros and cons to keeping it in your employer retirement plan. So there’s a lot of pros and there’s a lot of cons really, depending on what you wanna do and how you wanna manage the money. And how do you wanna look at the dollars in regards to from a consolidation perspective, do you wanna look at one statement? You know, do you wanna look at the overall return of all of your funds and things like that?

Al: In one place. Yeah.

Joe: In one place?

Al: Yeah. Yeah, sure.

Andi: Could they use it to pay for medical school too?

Joe: No, I don’t think you use the TSP funds to pay for medical school.

Al: Yeah, you’ve got the investment account, $1,100,000. So instead of doing that, put those funds- do the Roth conversion, and then get more money into Roth IRA.

Joe: Why I- apparently this- these people are doing pretty well.

Al: Yeah. There’s not much we can add to this.

Joe: There’s a huge pension. They don’t spend a ton of money and they got millions.

Al: Social Security 62, 70?

Joe: It doesn’t matter.

Al: It doesn’t, it really doesn’t. I totally agree. If you- it seems like you’re the kind of people that are disciplined to take it early and invest. Go for it, if that’s what you wanna do.

Joe: Because it’s all about the assumptions that you make here. So, because they’re like, hey, we wanna take it at 62 and we’re gonna invest it and we’re gonna make 6% on our money.

Al: Or, or take one at 62 and let the big one grow. You’re fine either way, it doesn’t really matter.

Joe: Right. If you need the money, take it. If you wanna push it out to age 70, you’re going to get a higher benefit guaranteed for life. But then, do you think you could probably eke more money out of the overall system if you took it at 62 and invested it and got a lot larger rate of return than the Social Security administration’s given you?

Al: Yeah. With your stock picking? Sure.

Joe: Right. But I don’t know where she would come up with, okay, should I pay for medical school with pre-tax dollars?

Al: Well, I think she’s thinking probably, I’m guessing she’s thinking instead of a Roth conversion for that year. And I’m saying do the Roth conversion as planned and pay for it outta your non-qualified account so that you can get more into the Roth.

Joe: Right, because how old are they? 60 or 50? They’re 56.

Al: 56. Yeah.

Joe: So let’s call it 20 years and they got $2,500,000 in a retirement account.

Al: Yeah. That’s a lot of time to get it out.

Joe: Right. And so she’s using a pretty conservative number if her RMD is gonna be a heck of a lot more than $136,000. So I mean that could double twice.

Al: Yeah. For sure.

Joe: So now you’re looking maybe twice as large of an RMD and you’re gonna potentially be in the highest tax bracket.

Al: But I would fill up the 24% bracket as long as you can. That might go away in 2027. That’s what it’s scheduled to do.

Joe: Right. And they’re gonna have a pretty high bridge on a fixed income perspective too. So I would try to get as much money outta the retirement account as possible. Do the conversions. Yeah. Social Security, it’s-

Al: And then next week you can do the podcast. We’ll listen and get your ideas.

Joe: Yeah. All right, Theresa. Thanks for the email.

Andi: Let Joe and Big Al spitball on your financial situation: click the link in the description of today’s episode in your favorite podcast app to go to the show notes, then click Ask Joe & Al On Air. Send a voice message or an email and include relevant details like your name, age(s), and location. The name can be whatever you want; the ages and location should be real for a more accurate spitball. Also – when do you (and your spouse, if you have one) want to retire? How much do you think you’ll need to spend annually in retirement? How much do you make and save now? How much do you already have saved, and in what types of accounts? Along with any other details that are relevant to your financial situation and your question. And for maximum entertainment – Joe’s, that is – don’t forget to mention where or how you listen to YMYW, what you drink, and anything else you want to share. Because the show wouldn’t be a show without you.

Retirement Spitball: Will We Run Out of Money? (Mark, St. George, UT)

Joe: Got Mark from St. George, Utah. “Hey guys and gal, daily podcast junkie, and I found your show about 6 months ago when it was recommended to me in my Facebook retirement group.”

Andi: Nice. Thank you Facebook group.

Joe: Not on Facebook.

Al: I am, but I’m not part of a Facebook retirement group.

Joe: You’re not? Are you part of any group, Alan?

Al: On Facebook?

Joe: Yeah.

Al: I don’t think so.

Joe: Andi?

Andi: Oh, yeah, jillions. Lots and lots. Yeah.

Al: I have different subscriptions in YouTube, but I don’t think I’m part of a Facebook group.

Joe: Retirement group.

Al: Certainly not retirement.

Andi: I run a bunch of Facebook groups, so I don’t have any choice.

Al: Oh, you do.

Joe: I wonder if Mark ever gets in the retirement mood or-?

Al: Well, he only listens to it when he’s in the mood.

Joe: Little Facebook retirement group. Thank you Group. “Can you spitball this for me?” Of course we can. “I’m 51. Wife 44. Semi-retired. We wanna be fully retired, but am not sure if we will run outta money. Roughly $2,000,000 in house equity in our primary home. And 4 rentals, that kick out about $36,000 net income after all expenses, taxes, insurance, repairs, loan repairs, vacancy. We also have about $400,000 in taxable brokerage accounts. $400,000 more in qualified retirement accounts across both of us, and $100,000 in cash. Mortgage debt of $900,000 has an average 27 years left until paid off at favorable loan rates of 3.5%. I would estimate rents will increase only slightly 2% per year with where we live in southern Utah. Each of the 4 rentals will need updating over the next 10 to 20 years. I would guesstimate $40,000 per. We spend $13,000 a month that includes the $6000 a month for the 4 mortgages.”

Andi: 5.

Joe: Oh, I’m sorry. “-5 mortgages. So we spend $7000 a month on everything else to live on that’s not mortgage related.” So I’m confused already here, bud, because he’s saying he’s got $37,000 year net income after all expenses. So that’s taxes, insurance repairs, loan vacancies.

Al: He’s already included that.

Joe: Why is he double- why is he double counting it.

Al: I’m wondering that too. So of the-

Joe: So $7000 is the number that we’re shooting for, right?

Al: I think it’s $7000 plus the mortgage on his house, but we don’t really know, so let’s call it- I don’t know what it is. Yeah, let’s call it $8000.

Joe: Because he’s already netting $36,000-

Al: I know.

Joe: -including the other $6000. So $30,000-

Al: But let’s say he’s spending $8000, let’s say he’s spending $100,000 a year. Okay.

Al: How about that?

Joe: Okay. “-and everything that’s not mortgage related. You can assume that the same spending to live will continue to increase with inflation at 3% or 4%. We plan to take Social Security as late as possible. No pensions.” So he is not going to Barbados with our boy.

Al: Apparently not.

Joe: “We will have a little side income each year, but leave that out of the spitball.” Okay.

Al: Okay, got it.

Joe: “We reluctantly to start living off our assets to make up the difference in rental income versus our spending, $7000 a month minus $3000 a month rental income equals $4000 a month shortfall.” Okay.

Al: That’s $48,000. I think he’s missing his home mortgage. But anyway.

Joe: “We will run outta money running a $48,000 annual cashflow deficit. At our age, will we run out?” Yeah. “We both have longevity in our family, nine to a hundred thousand dollars life expectancy. We drive a couple of high mileage Toyotas. Little Venza. Venza and a RAV4.”

Al: Venza.

Jo: All right. Venza? Yep. “We have a tabby cat, Gus, and I like all types of beer and wine and morning mimosas.”

Al: You like mimosas in the morning?

Joe: I like all types of beer, wine-

Al: In the morning?

Joe: -in the morning.

Al: Got it. Okay. Especially when you’re on a golf course.

Joe: You got it brother. If it’s wet, then it’s good.

Al: Got it.

Joe: All right. “The wife will sip off my chardonnay now and again, but isn’t a big drinker. Really love the show and look forward to your answers. Cheers and thank you.” Guy’s looking to retire pretty early. Big Al.

Al: Yeah. He’s 51. She’s 44. They got about $900,000 saved, but $100,000 is in cash for emergencies. So there’s really about $800,000 of investments to work with. So that’s what we’re going with. And also between rentals, which generate income, it looks like Mark needs about $50,000 a year from his portfolio.

Joe: He says $4000 a month.

Al: Yeah, that’s $48,000. We’ll call it $50,000. And if you take $50,000 into $800,000. That’s a 6.2% distribution rate. That, that’s too high.

Joe: At 51 years old, if you’re pulling 6% plus outta the portfolio-

Al: That’s too high.

Joe: It’s rich. It’s, it’s gonna, you’re gonna burn through the cash.

Al: I’d say upper end 3%. And that might even be generous. So let’s take $800,000 times 3%. That’s $24,000 maybe you could pull, so you’re about halfway there. Right? So maybe you need another $25,000 plus of side income. I mean, this is back of the envelope, right?

Joe: Totally.

Al: So don’t quote us, but just to give you an idea, no, you’re not really quite there yet. But you’re not that far and you’ve got equity in properties. Could you sell a property and make this up? Maybe. I don’t know enough about the properties.

Joe: Right. Well, you’ll lose income too though.

Al: Well, you do.

Joe: And we need to know what the cap rate is, or cash.

Al: You gotta calculate that. But I think the easiest way to think about this is, if you can create some side income, $24,000, 25,000, maybe $40,000, $25,000 to $40,000, just to be safer, then this probably works.

Joe: So I look at it a different way too, and then work myself backwards, is that he- so Mark is 52, his wife is 44. And so there’s- Wife’s life expectancy is 50 years. So you need this money to last.

Al: You do.

Joe: And so if I’m at 52, I’m not gonna receive- he doesn’t have any pensions and he wants to push Social Security out as long as possible. So age 70. If he retires at 50, he’ll have enough credits for Social Security, but I don’t know what him and his wife- and his wife retires at 44, right? So I’m looking at his living expenses and they given a 3.5% inflation rate on it. So he needs $48,000 now, 20 years from now, 3%. It’s roughly $90,000. So $90,000 is the shortfall that he’ll need from his investments. But he’ll have Social Security at that point. We have no idea what the Social Security is, so something Mark can do as he is spit balling himself, is that- well, that sounded really weird.

Al: I’m trying to wrap my head around that.

Joe: Okay. I won’t say that again. So you minus the $40,000, let’s say, that’s what they have in Social Security. And so then he’d be short, $49,000. It’s almost the same. So he needs at age 70, roughly $1,200,000. So he’s got $800,000 now. So if he depletes that, he’s going to hurt himself in the future. So I love your idea of doing a part-time, you know, part-time gig. Getting $25,000, maybe $50,000 of income between the two of ’em, just to substitute some of the overall income that they need.

Al: Yeah. I think, and then I think it does work, but it’s also something that is enough on the margin of this being successful. You’re gonna have to keep monitoring it as you go to make sure you don’t need to adjust.

Joe: Yeah. Yeah. I think they’ve done a really good job at their ages with the net worth that they have.

Al: Of course. And with all the rental properties. Yeah. Congrats. This is-, this is great. I mean, you’ve got a lot to work with really.

Joe: Yeah, I mean, it’s just kind of pulling levers at this point just to- if they’re dead set on retirement, then it’s getting a little bit more in the nitty gritty.

Al: Right. Sure.

Where to Save for Retirement and Roth Conversions Prior to RMDs? (Mary, small town Indiana)

Joe: We got “Hello, Andi, Joe, Big Al. This is Mary from Small Town, Indiana. My drink of choice is a nicely chilled New Zealand Sauvignon Blanc-” Yeah.

Al: I had one of those in New Zealand. It’s good.

Andi: Nice accent there, Joe.

Joe: Thank you very much. I’m working on my reading skills. “-preferably outdoors on a warm evening. I drive a 2016 Ford F-150.” Kinda like women that drives Ford F150.

Al: Yeah. Big, big old trucks.

Joe: Yeah. Love it. “And my home is ruled by two bossy felines. Your show always brightens my morning commute. I’m a longtime fan of your show and enjoy the playful banter. My quandary is where to place my retirement savings over the next couple of years, employer tax-deferred 401(k) planning versus Roth and other tax options. Unfortunately, I find myself one of those people who have been saving in the 401(k) for years rather than into a Roth or an after-tax account. I’m 53 years old, have been with my employer for 30 years. Plan on retiring in January, 2025. I have zero debt. Plan to relocate to Florida immediately following retirement.” So she’s got a couple of years, going to Florida. “My current home will cover the cost of the new home, so there will continue to be zero debt.

Al: Like it.

Joe: “My predicament is how to handle large Roth conversions prior to RMDs. Also, I’m considering working part-time following my retirement. The women in my family live well into their 90s, so I have to consider funding my many years and potential long-term care costs. Fortunately, I’ll have employer sponsored healthcare until Medicare kicks in. My Social Security payments will be around $30,000 a year. My current savings is $850,000 in a 401(k), $700,000 in a pension lump sum, $2000 in a Roth, $21,000 in a Roth IRA, $35,000 after-tax, $100,000 in cash.” So a total of right around $2,000,000, $1,700,000. “I currently max out the 401(k) and backdoor Roth, and I put additional $3000 to $4000 a month in after-tax accounts. My cost of living will be net $75,000 annually after retirement.” Does she mean after-taxes? Hmm. I think that’s a typo?

Al: I’m not sure what that means. Could be.

Joe: “$75,000 annually at retirement?”

Al: At, yeah. Let’s just say that’s what she needs, not including taxes.

Joe: Okay. “Knowing tax rates will soon increase, do you recommend I contribute more money into after-tax accounts now rather than deferred? Or do I wait and do larger Roth conversions later? I’m currently in the 32% tax bracket with room to increase earnings. If I start to contribute more into after-tax, what percentage would that be? What plan would you suggest for post-retirement conversions if I choose to work part-time to offset some of the living expenses for the first two to 3 years? I appreciate your money saving insights and how to handle my last few working years in the following Roth conversions. I would like to peacefully drink great wine with my friends rather than worrying about how to keep the fed from taking my vino fun.”

Al: Yeah, that that’s a good goal.

Joe: Love it. Okay. She’s got a little work to do here.

Al: Well, yeah, I mean, some calculations.

Joe: So $75,000 annually, she’s got $1,700,000. She’s got $30,000 coming to her from Social Security.

Al: Yeah, which won’t be for a while. She’ll retire at 55/

Joe: So 55- So she’s got 67, so she’s got a 12-year bridge.

Al: Got a stump period there.

Joe: So you got $75,000. Over a 12-year period. That’s a pretty big number.

Al: Figure, maybe by retirement age it’s $2,000,000, right? From $1,700,000?

Joe: Yeah. $1,700,000, let’s call it $2,000,000 in two years.

Al: So if you retire at 55, we would probably say 3% distribution rate.

Joe: So that’s $60,000. So she needs to make another $20,000 ish for-

Al: Something like that. $15,000, $20,000. Gotta pay some taxes with that probably. So, it seems a little short, although once Social Security kicks in, it’s a little bit better. Might wanna consider a little bit of part-time income just to bridge the gap.

Joe: Well she has to. If she wants to spend $75,000.

Al: She doesn’t have to, she can-

Joe: She could spend more and then run outta money potentially.

Al: She could- she could do that for 7 years and say, okay, I better go back to work now.

Joe: Right, right, right, right.

Al: Yeah. But anyway, what we’re saying, it might be a little bit short with the numbers that you gave us, but as far as your original question, yeah, I probably would go Roth right now on the- on the current 401(k). Not because it’s the right financial answer. You’re in a high bracket compared to what you will be, but it’s gonna be through your employer, through your withholding. You won’t even feel it. You start get some more money into the Roth 401(k). After you retire, depending upon how this all works out, that’s when you wanna start converting. You got 20 years between 55 and 75 to get a lot of this converted, so there’s plenty of time. Also, we don’t even know is the lump sum the way to go on the pension? Is the pension better? I mean, you gotta look at that too.

Joe: Right. But she may- if she’s in the 32% tax bracket, that’s $180,000 to $250,000 of in taxable income.

Al: It’s a lot, right?

Joe: So what is she- how much is she saving?

Al: Well, yeah, I mean, that’s a question too, but maybe this is new for her, right? Maybe I, you know, there’s

Joe: Because if she’s making that much today and then thinking that she’ll spend $75,000 in retirement, I’m missing something here.

Al: Yeah. Cuz to be in the 32% bracket, that means $182,000 taxable income. So probably at least $200,000 of income. Maybe more. So it’s like you’re asking, okay, well where is it? I mean, I see it.

Joe: Where’s the excess income? You’ve been with your employer for 30 years, you got $850,000 in the 401(k) plan. So how long have you been maxing that out?

Al: So the question is are you sure you’re spending $75,000?

Joe: -you’re spending $75,000?

Al: Good point. Take a good look at that.

Joe: Because this is where people blow up. Is that the- no one really knows what they spend. We’re not here to judge. I don’t care what you spend. Spend as much as you want, but you wanna make sure that you have the right plan in place for what you’re spending. Because it’s like, oh, I’m gonna spend half as much as I’m spending today. Well, let me tell you, you’re moving to Florida, girl. You’re gonna enjoy life. You’re gonna have some vino. You’re gonna have some new friends. You’re gonna get a convertible. You’re gonna get that-

Al: That costs some money.

Joe: -that Ford F150 is gonna get sold. And she’s gonna get a nice little Camaro convertible.

Al: Camaro. Oh, I like it.

Joe: Muscle cars. Right. People always underestimate what they spent.

Al: Well, yeah. How many times have we had someone come in? They- we ask ’em how much they’re spending and they say, oh about $2000 a month.

Joe: Yeah, $2000 a month.

Al: Yeah. Yeah. And you live in La Jolla in California?

Joe: Yeah, right. And your property taxes are probably-

Al: Your property taxes are $50,000 a year. So we’re not counting that? Oh. Do you ever, do you ever eat? Is that- do you use utilities? Is that something- Oh, you have a phone? Ever wear clothes?

Joe: Right. You have a nice watch. Oh, those are all gifts. So it’s just doing a little bit of more homework. I think she’s doing a really good job. She saved a ton. $1,700,000 at 53 is absolutely phenomenal.

Al: It’s great. Yeah. So, but this is- you’re high, you make very good income and so then it’s just kind of making sure that- people tend to- their living expenses tend to go up when their income goes up. And then especially that age, at 55 saying, I’m gonna cut my expenses in half, or I’m gonna cut my living expenses in half. Maybe she’s spending a lot of money on different things. She lives in small town,  maybe she lives on a farm. And then there’s a lot of ancillary expenses in Small Town, Indiana.

Al: A lot of feed for-

Joe: There could be.

Al: -life stock.

Joe: But awesome job. Way to go. Congratulations on the early retirement. You’re really super close, but the only thing that could blow her up is that it, the expenses are off.

Al: And, of course, and I’ll just kind of say this just to make sure we’re clear on this. When we spitball this kind of stuff, we’re just going on whatever facts that we have, right? And the thing is, we’ll spitball something and that might be good for a year. You wanna look at this constantly and adjust and revise depending upon how this actually works out.

Joe: Probably more than once a year. Alright, show’s called Your Money, Your Wealth®.

Andi: Gung Ho & Hugh Grant in the derails at the end of the episode, so stick around.

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The Derails

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