Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 02:03 – I’m Burned Out. Can I Pre-Retire Next Year? (Roger & Jane, Canton, OH)
• 11:46 – Watch Recipe for Retirement | Retirement Plans Explained on YMYW TV and Calculate Your Free Financial Blueprint
• 12:50 – Would You Rather for Asset Location: Roth vs. Brokerage? Roth vs. ESPP with 15% Discount? (Roger & Jane, Canton, OH, cont’d)
• 21:08 – Higher Performing Assets in Roth Exposes You To Sequence of Returns Risk and You Can’t Write Off  The Losses (YouTube comment)
• 24:54 – Next Week on the YMYYW Podcast
• 25:27 – Download Why Asset Location Matters for Free

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Transcription

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

Intro: This Week on the YMYW Podcast

Roger in Canton, Ohio, is burnt out. Can he and his wife Jane pre-retire next year in their mid-50s with $2.8 million? Joe and Big Al spitball on whether they’ll still have enough money for their Go-Go years, Joe’s favorite, today on Your Money, Your Wealth® podcast number 539. Roger also has an employee stock purchase plan. For the best asset location strategy, should he max out the ESPP at a 15% discount, convert to Roth IRA, build his brokerage account, or a little of all the above? Speaking of asset location, some of our YouTube viewers object to the idea of putting higher-performing assets in your Roth account. They say you can’t write off the losses and you’ll be exposed to sequence of returns risk. Stick around for Joe and Al’s response. I’m Executive Producer Andi Last, and here at long last are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA.

I’m Burned Out. Can I Pre-Retire Next Year? (Roger & Jane, Canton, OH)

Joe: It’s been a minute since we’ve been here live. Our studio is in a massive construction zone, so we’re sitting here at our desks. Andi’s in Australia.

Andi: Yep.

Joe: Big Al, you’re back from a European trip for the last five weeks.

Al: That’s correct. yes.

Joe: And I came back from a very beautiful trip from Minnesota. So-

Andi: You spent some time in Arkansas too, didn’t you? You were doing the whole family thing.

Joe: Arkansas. Minnesota, yeah.

Al: Sounds, it’s just like, that was like two family trips there.

Joe: Yeah. Obligations, not vacations. But yeah, it’s, it’s been a minute, so it’s good to have everyone back. How’s Australia, Andi?

Andi: It’s taking a lot of adjusting to. I haven’t lived here in about 16 years, but got my driver’s license now, got signed up for healthcare. I’m learning how to drive on the other side of the road once again. So I will say as we record this, it’s tomorrow from where you guys are, so that’s pretty interesting. Unfortunately, I can’t tell you anything about like, you know, lottery numbers or anything like that, but-

Joe: Well, let’s get to it. We got, 50 pages, that I don’t think we’re even gonna sniff here today, but at least we can get back in the routine. Dear YYW, my name is Roger and I live in the home of the Pro Football Hall of Fame with my wife Jane. All right. That’s Canton, Ohio for those of you that, are taking score there, right. I’ve listened to nearly all of your podcasts over the last few years. Love picking up your new content. Every Tuesday on my way to work, I drive a 2013 F-150 Raptor. Now every single one of our podcasts, what is wrong with Rog here?

Al: That would be a lot.

Joe: That’s a tough pill to swallow. but he drives a Raptor. I mean, he’s committed.

Al: That’s amazing. That is commitment.

Joe: That’s not interested. That is committed. My wife still drives a 2018 Toyota Sienna minivan. All right. My drink of choice. A little bourbon big, bold Cabernets and hazy IPAs, Jane prefers a lemon drop martini or a margarita with a quality reposado cristiano tequila. Is that right? Cristiano? Something like that.

Andi: Looks like it’s Cristalino.

Joe: Cristalino. I know what Reposado is. I don’t know what Cristalino is. Right? I’ll be 54 this year. My wife will be 55 or three girls are off to college, and we were thinking about downsizing in a career, lifestyle change in exchange for pre-retirement bliss. I’ve been working for the same company for over 30 years and while it’s been a good ride in great for our family, I’m burned out and looking for a change. I plan on retiring for my primary vocation next year after I turn 55. I do plan on still working on a part-time basis and Jane has gone back to work after supporting our family as our field general for over 20 years. Alright, all my spreadsheets would suggest we are a go. I’m looking for a little spitball affirmation to seal the deal. In addition, I’d love to hear if you see any blind spots I’m not aware of. So here are the details. All right, got your pen and paper ready, Big Al?

Al: Yeah.

Joe: He’s got $1.9 million in a 401(k). He’s got 280,000 in a traditional IRA 220 in Roth. 300 cash 50 in brokerage, 50 in HSA. I’ll do Big Al favor. It’s 2.8 million. Oh, look at this guy. Good job.

Al: Oh, that’s helpful. Good job. Thank you.

Joe: Very helpful. In retirement dollars to cash and brokerage. All retirement accounts are a hundred percent equity positions and we still have significant time horizon in liquidity, right out volatility in the market. I don’t intend to dial that down until I’m closer to age 65. We’ll need $110,000 a year in our pre-retirement phase from 55 to 65 50,000 of that will come from our deferred compensation ladder I’ve been building, and the balance will come from income from James job, as well as part-time consulting income. I would like to generate beyond the $120,000 budget. We anticipate drawing from my 401(k) using the rule of 55 to fund any large expenditures, travel cars, pool. We may decide to take out. The amount we pull from that account will ideally not exceed 2% annually until we are fully retired at the age of 65. What we are doing now to prepare for the pre-retirement phase. Wow. This guy’s read a lot of books or he is an engineer. He’s got the phases down. He’s got the rule of 55 down.

Andi: At least he hasn’t said his go-go years.

Joe: He’s, oh, if he said go-go years, I was,

Al: you would drop it.

Joe: In my logo no go fo go years. What, the hell is it called again?

Al: Slow-go.

Andi: The slow go and the no-go.

Joe: Is the no-go you’re dead or the no-go is you’re just tired?

Al: No, you’re just sitting around tired.

Joe: You’re just tired. Got it. We are selling our home of the last 14 years, and we’ll downsize into a recent build with limited need for maintenance over the next 10 years. In the process, we’ll also eliminate the last debt. We have that mortgage as asset location. Improvements. While I believe the amount of assets we have will fuel our retirement goals, the location of those assets could use some improvement. So I’m backing off to just the match percentage of the 401(k) and in turn using those dollars to max out my ESPP at a 50% discount to double our brokerage position. We’ll continue to contribute to our traditional IRAs and Backdoor Convert. We’ll keep our eyes open to opportunistic, deploy some of our dry powder cash into those investments. Oh boy. Opportunistically deploy some of our dry powder.

Al: That’s great.

Joe: He has read a couple books. Well, guaranteed he’s an MBA. He’s gonna lean into it. Circle back.

Andi: And add some color.

Joe: Oh yeah, we gotta add some color to that. Add some color.

Al: Yep. I think he already did.

Joe: Can you speak more to that? Any variable compensation will be used, to pan cash in brokerage balances. Things we plan on doing with our portfolio during our pre-retirement phase: convert all traditional IRAs into a Roth this 10 year period. Continue to build our brokerage account. Allow the HSA to continue to grow and use those funds sparingly as they are triple tax advantaged at 65 we would intend. Fully retiring in using a combination of Social Security, $54,000 estimate in other assets to fund the go-go lifestyle. There it is. The Gogo years between 65 and 75. We are going to give ourselves a huge pay raise to do all the things we want. All right. The anticipated budget this period of time will increase to $210,000. Post 75 will downshift back to $110,000 a year in today’s dollar budget until we kick the bucket, my new nerdy spreadsheet saying all this works with a healthy amount of money left at the end. But what do you say YMYW? Do the numbers seem viable? Can I be retired next year? What are other things that we should be doing to maximize our potential to succeed? Many thanks in advance for the spitball, “The Goodells”.

Al: Okay. Wow. There’s a lot there.

Joe: From Canton, Ohio.

Andi: So what is your take on starting at one level of spending, jacking it up in the middle, and then going back down? Does it usually work out where people can be that disciplined about their spending? Maybe if they have a whole bunch of nerdy spreadsheets?

Joe: Yes. I think it’s feasible for sure, for some, I mean, this guy for absolutely, I mean he’s got two MBAs. I’m guessing he’s an engineer. I’m guessing he grinds on these spreadsheets in absolutely super disciplined because he’s watching this like a hawk. I think as soon as he sees those account balances shift the way, he doesn’t want them to shift, he’s gonna pull back. He’ll probably go back to work, he’ll consult, he’ll do whatever. But you can already tell with his planning if he’s gonna pre-retire. I mean, he doesn’t need any money from the portfolio for quite some time.

Al: Yeah, that’s what it says. Right?

Joe: And then, so he’s got a lot of time for. For these dollars to continue to grow because he is not taking any of those dollars out to spend.

Al: So, no, I, would, say it this way, Joe. I think he did say he might pull up to 2% annually for trips. Pool, things like that though, if you look at his current portfolio of 2.8 million and let’s just say a rate of return could be 6%, so we back off 2%. Just like where, could he be in 10 years? Sure. So I did a 4% rate of return for 10 years. He’s got 4.1 billion. Okay, so that’s, what he has to work with. He’s got Social Security. You know, spending at that higher amount with inflation could be the two 10, could be as high as 280. 280 minus Social Security maybe needs 200, 210 from his portfolio, which might be even a little bit high. But on, on the other hand, I completely agree with what you said, Joe, which is, here’s someone that would know how to back off. So maybe we can’t spend two 80, but we could spend two 50 and still have a great time. The point is there’s a lot of assets here and there’s a lot of Social Security income, so it’s gonna be a great retirement.

Joe: How many years does he wanna spend? 200,000?

Al: I think like 10 years, go-go years 65 to 75. I’m quoting you.

Joe: Just hearing that makes me cringe. So two. Alright, so he’s gonna have 200,000 for 10 years and then he is gonna tone down and then the $110,000 in today’s dollars, his Social Security’s gonna cover a lot of that.

Al: That’s a lot of it. That’s right. Yeah. So I mean. So, and yeah, so it’s good point. So even a higher distribution rate, if it comes back down. Could be great. I mean this is, but this is the kinda guy that’s gonna keep computing this every year. I think he just wants to know whether we think it’s workable. And I would say it’s workable, Joe. There’s a lot of assets here in income and the spending could be ratcheted up or down depending upon how everything goes. So, I mean, some of it can spend 110 to 220, back to 110. They’ve got discipline, right? So they can adjust as needed.

Watch Recipe for Retirement | Retirement Plans Explained on YMYW TV and Calculate Your Free Financial Blueprint

Andi: We’ll dive into asset location and tax diversification for Roger and Jane here in just a minute. Roger has an ESPP as part of his retirement recipe, one of at least 14 different types of retirement plans you may have available to you. How do you know which ingredients are the best for your unique retirement recipe? This week on Your Money, Your Wealth® TV, Joe Anderson, CFP® and Big Al Clopine, CPA outline the characteristics, benefits, and drawbacks of defined contribution plans, defined benefit plans, and equity compensation. Whether you’re a worker, a self-employed small business owner, or a management or executive type, they’ll break down your options from 401(k)s and IRAs to pensions and cash balance plans. From solos, SEPs, and SIMPLES, to RSUs, NSOs and ISOs, and ESPPs. Learn about all the acronyms and ingredients that can go into your Recipe for Retirement – click or tap the links in the episode description to watch Your Money, Your Wealth® TV, and to calculate your Financial Blueprint for free to learn if you’re on track for retirement. Now let’s play Would You Rather.

Would You Rather for Asset Location: Roth vs. Brokerage? Roth vs. ESPP with 15% Discount? (Roger & Jane, Canton, OH, cont’d)

Joe: So a couple things in regards to his strategy from an asset location perspective, to be a little bit more diversified from a taxable to a tax-free to a tax-deferred status. So he was fully funding his 401(k) plan and he said, you know what, I’m going to tone that down and then I’m going to take the dollars and invest in my ESPP plan at a 15% discount. And so those dollars, so an ESPP plan is an employee stock purchase plan for those of you that don’t know. And so there’s some rules and restrictions around that. So he’s working for probably a Fortune 500 company that has a publicly traded stock. And so he’s able to purchase that stock at a 15% discount. But he there, there’s holding requirements for that stock. So if he purchased the stock, he either needs to hold it for a year, maybe 18 months. It really depends on the plan document. And then he could sell the stock, but he’s building up his non-qualified account with his ESPP plan, right? What do you like that strategy or is there another strategy that you would do if you were in, Mr. Roger…

Andi: “Roger Goodell.”

Joe: That’s right. That’s the commissioner of the NFL.

Al: Roger, yeah. That’s right. I would be a little careful with that strategy because now you’re getting close to retiring and you’ve got concentration risk in a company right now. Maybe it’s a great company. We don’t even know what kind, what company is. I don’t know what industry, I don’t know how it’s doing. But, one of the things that you wanna think about as you get close to retirement is diversification. Because now it’s less about earning the highest rate of return, but it’s keeping what you have and that’s what diversification is good for. Concentration. If you have a company and you get company stock and the company does well, it can go up quite a bit more than the market, but it could also go down quite a bit more than the market. So I just think you have to be a little bit careful there.

Joe: So what about this? This, you’re the CPA of the family here. So as I’m looking at the tax implications of. I’m not going to go pre-tax. I’m gonna pay the tax on these dollars and then I’m going to invest it into a brokerage account. let’s just ignore the fact that it’s an ESPP plan that gets a 15% discount.

But let’s just compare apples to apples here, is that if I was not going to take the tax deduction, so it’s an after-tax contribution, wouldn’t I rather do a conversion and get dollars into a tax-free position? I think it’s the same tax implications either way, but now I’m getting money out of a brokerage account and getting more money into a Roth IRA, if I’m contemplating diversification from a tax perspective, is that, Hey, I want more money into a brokerage account. Well, I would absolutely have be fine with $0 in a brokerage account and all my liquidity in a Roth. Does that make sense?

Al: Yeah. But I think the, at least the way I see it, the fact that he wants, he’s got 1.9 million in a 401(k) and another $280,000 in a traditional IRA, that’s gonna be a fair amount of tax to convert that all. And he doesn’t have enough in his brokerage account and cash to do that. I mean, 300,000 cash is a lot, but you’re gonna wanna probably save $100K just for emergencies. So maybe you’ve got. 250,000 to work with. It’s not enough, capital to be able to convert that much and that, but I would also say-

Joe: No, here’s what I’m saying is this, is that, alright, here’s the choice I have. I have $10,000 and I could go pre-tax and let’s just assume I’m in the 20% tax bracket. So if I go pre-tax of that $10,000, I’m going to save $2,000 in taxes. Right? Yep. Okay. Or the decision is, you know what? I want to go after tax and I’m going to pay $2,000 in taxes and I’m going to put that into a brokerage account. Right? And then if I put it into a 401(k), I save 2000 today. But then I’ll owe that 2000 later. So if I did nothing with that same $10,000 that I have in an IRA. And I convert that to a Roth IRA and I’ll pay $2,000 in taxes. So where, my head’s going, and maybe we’ve been on vacation too long, but it’s if, I don’t take the tax deduction so he’s not putting dollars into the 401(k) because he doesn’t want money in the 401(k). He would much rather have it into a more tax favored account. So instead of putting them into a brokerage account, wouldn’t, I would rather convert part of that IRA and take the tax savings that I would’ve got if I would’ve contributed into the 401(k), take that tax savings that I’m foregoing by putting them into a brokerage account, just putting them into a Roth and stay that tax neutral.

Al: Yeah, so I think I see what you’re saying. So you got, you pay the same tax either way. But so would you rather have that 10,000 end up in a Roth or in a brokerage account? And the answer is a Roth. Because you’re not gonna pay any future tax on the earnings and growth. So, so, yeah. Yes, I would rather do that. it simplest would be to fully fund the 401(k) with a Roth option. Right. And then you’ve accomplished the same thing. Assuming he doesn’t have a Roth option, I would still fund the 401(k) and then do a Roth conversion with the traditional IRA. Right in the same amount and you end up with the money in the Roth. I guess the point you’re making, which I agree with, is given a choice of paying the same tax, would I rather have money in a Roth or a brokerage account and I’d rather have it in a Roth?

Joe: Would you rather have – now I feel like I’m in high school playing.

Andi: Would You Rather!

Joe: Yeah. Okay, would you rather kiss Hillary behind the tree?

Al: Oh boy.

Joe: Or- So, but would you rather have like, invest money into it ESPP plan at a 15% discount or Roth with a diversified portfolio?

Al: I would, being that I’m close to retirement, I’d probably go Roth over ESPP, but that’s without knowing anything about the company and the prospects for the company. If the company, I guess if I felt really bullish on the company and could get the stock at a 15% discount, maybe I might do that. Right? I think you gotta consider that.

Joe: Yeah. Well, a concentrated risk is not all that bad.

Al: No, it’s not bad wealthy.

Joe: That’s how wealthy people get wealthy.

Al: I’m just saying that as you get closer to retirement, you probably wanna get out of the concentrated risk and get into diversified.

Joe: Okay, cool. Yeah. Well, he’s 54 and 55. Yeah, I don’t know. Big hot rod Rog. He wants to retire next year. He’s a hundred percent equities. He’s like, man, I’m not slowing down either. I’m just gonna bang off that bourbon in my big, bold cabernets. Things get bad. I just switched to the hazy IPAs.

Al: I’ve got, which I agree with, and I like big, bold Cabernets, so I’m,right with them there. But I, would also say, Rog, I don’t think you need to convert your whole thing because here’s what happens. You convert in a higher bracket, then you end up in a 0% tax bracket, and you might as well, you, you wanna save some money in the IRA 401(k) because what if you need it for medical, right? Because that’s gonna be deductible anyway. Or what if you wanna fill up those 10 and 12% brackets, right? But you pay tax at 24% to save the 12%. So. I would back off on trying to convert everything, but I like the concept. Convert as much as you can.

Joe: Alright.

Higher Performing Assets in Roth Exposes You To Sequence of Returns Risk and You Can’t Write Off  The Losses (YouTube comment)

Andi: This all brings me to, a question that we actually got on our YouTube channel, which I wanted to bring up now. Somebody said, this is in response to the conversation about holding higher performing assets in your Roth, Al in the conversation that you had with Susan Brandeis last week.

Al: Yeah.

Andi: He said, higher performing assets in the Roth is also taking on more risk. This needs to be understood. All stocks in the Roth right before retirement could give you a nasty sequence of returns. Just sayin’. And then somebody replied to that and said, true. And you can’t write off the losses in the Roth, so putting your risky stocks there might be a mistake. So what say you two about that?

Al: If you look at-

Joe: Well, I wasn’t on that show.

Al: So I’ll answer that. Yeah, so, so I think I wouldn’t, pick like stocks, I would pick asset classes, right? So certain asset classes tend to perform better than others over the long term. I would put those in the Roth. I would ignore the short term. The thing about putting riskier asset or asset classes in a Roth, IRA, implies that you have time to write out the volatility. If you don’t, then don’t do it. If you need the money, if your strategy is to withdraw from the Roth, then make sure you have enough safe money in the Roth to be able to withdraw so that the, riskier asset classes have the chance to kind of go down and then come back up. So that’s what I would say to that.

Joe: Yeah. No, well said. I agree with that a thousand percent. If you’re worried about sequence return risk in your Roth, then that is telling me that you’re taking dollars from the Roth to live off of. So sequence of return risk is volatility in the overall accounts as you’re taking dollars out to live off of.

Volatility is your friens as you’re contributing to those accounts. So you wanna make sure that you have the appropriate strategy as you approach retirement. And if you’re taking dollars from the Roth, of course you want to have safe asset classes in the Roth to determine whatever distribution that you’re taking from that account for whatever years. But as you’re accumulating wealth, as you’re growing your wealth as well, you wanna make sure that you have the highest performing asset class within that account. You don’t want it in your retirement account if you have the option, and I agree with both of those statements, is that I would want more aggressive asset classes in my Roth or my brokerage account because then of course you can write out the losses in your brokerage account. We see that mistake quite a bit.

And just the last – hot Rod, or “Roger Goodell”, he’s got $300,000 sitting in cash. He’s got $50,000 in a brokerage account, and then he wants to stop putting money into his 401(k) plan and put more money into his ESPP plan. I would say. Put $200,000 of your 300,000 in cash and invest it, right? If you want more liquidity or cash, he’s already said he was gonna take the Eule of 55 and take it out of his 401(k). If you want a little bit more cushion, then put your 401(k) in cash. You wanna have a little bit more volatility in those types of accounts to take advantage of taxes. But once people have money outside of a retirement account, they treat it completely different.

You, we see piles of cash and safe investments, and then you look at their 401(k) plan and it’s very aggressive, and then they got very little money in, rocks, and they think they’re diversified. I’m like, well, you got your head in a freezer and your feet in the oven, you’ll, you’re gonna die. That’s not diversification, right? That’s not how you keep warm. When, people don’t have money in the retirement, since it’s closer to them or they can spend it, that they invest more conservatively in most cases.

Al: Well said.

Joe: Thanks buddy. Get warmed up here.

Al: You are getting warmed up.

Joe: Well, it’s been a while.

Next Week on the YMYW Podcast

Andi: Now that Joe’s all warmed up, next we’ll pick up where we left off: can Beth and Rip retire early, spend more, and Die with Zero? When should they claim Social Security? Forrest and Jenny have 10 rental properties at age 31. Can they retire at age 50? Memphis needs to know the rules for spousal IRA contributions and RMDs, and, I’ll also have your chance to win a $100 Amazon gift card, just for telling us what you think about the podcast. The 8th annual YMYW Podcast Survey opens next Tuesday, July 29 – don’t miss it.

Download Why Asset Location Matters for Free

Andi: For more on which assets to put in which accounts, download Why Asset Location Matters for free. Find out how to boost your investment returns simply by paying less tax on your investments – at the right time, for the right amount of time. Link in the episode description.

Your Money, Your Wealth® is your podcast! Wade into the comments with me on our YouTube channel just like those folks did earlier, and join the conversation. Leave your honest reviews and ratings for YMYW in Apple Podcasts. Mention the show to anyone who might dig it. Redditors, we see you and we love you, even if you did call Joe and Big Al old men! Wow.

Your Money, Your Wealth® is presented by Pure Financial Advisors. If you’re worried about outliving your savings and wondering if you’re on track for retirement, don’t rely on a spitball from Joe and Big Al. Sit down face to face, either in person, or online, right from your couch, with one of the experienced professionals on Joe and Big Al’s team at Pure. It’s free, just like a spitball, but they’ll take a deep dive into where you are now, where you want to be in the future, and the smart ways to get you there – just for you. Click or tap the free financial assessment link in the episode description to book yours or call 888-994-6257.

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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