Show Notes

• (00:48) Living Expenses: Cap Gains, Dividends & Social Security or Poor Performers? (Bob, Jupiter, FL)
• (10:02) From Which Account Should 76yo Mom Withdraw Living Expenses? (Neal, Dallas, TX)
• (18:11) Dart on the Wall for Our Retirement to Age 88? (Rod)
• (26:08) Can We Retire at 64 and Die With Zero? (IndyGuy)
• (35:50) Save to Roth 403(b) or Traditional Until Roth Conversions at Retirement? (Neal, Dallas, TX)
• (42:54) The Derails

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Transcription

Andi: Should 70-year-old Bob live off of capital gains and dividends from his mutual funds plus Social Security, or should he sell poor-performing mutual funds for living expenses and reinvest the cap gains and dividends? Which account should Neal’s 76-year-old Mother use for living expenses? Should Neal and his wife fund their Roth 403(b) until retirement, or contribute to the regular 403(b) and then do Roth conversions after they retire? That’s today on Your Money, Your Wealth® podcast number 481. Plus, Joe and Big Al spitball on whether IndyGuy can retire at 64 and Die With Zero, and Rod doesn’t want a spitball, but he’d like a dart on the wall as to whether his retirement savings will last until age 88. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Living Expenses: Cap Gains, Dividends & Social Security or Poor Performers? (Bob, Jupiter, FL)

Joe:  Let’s jump into Bob from Jupiter, Florida. “I’m a DIY investor, 70 years old, $12,000,000 in total assets, $5,000,000 in IRAs invested in the following, 4% cash, 85% stocks.  They’re in mutual funds, 44% growth, value, blah, blah, blah, blah, blah. He’s got $275,000 that he wants to live off of. Net worth is $18,000,000, no debt.”

Al: Yeah, I think you’re good, Bob.  We’ll just make that comment.

Joe:  I wonder if he’s neighbors of Tiger Woods there in Florida. Maybe Justin Thomas.  Alright, here’s a question. “Every year we use capital gains and dividends from the mutual funds plus Social Security to live on. Should we be selling poor performer mutual funds for our living expenses and reinvest the capital gains and dividends we normally would take out?”  So, let me see if I understand this question, Bob.  “Should I be selling poor-performing mutual funds?”

Al: Right, which if he means the poor performing mutual funds based upon asset class, the answer is no, because things turn around.

Joe: There’s so many things that are off on this.  Is that he’s living off of the dividends and interest from the mutual funds. So, I have to learn more. You know what I mean?  Is he an actively managed mutual fund that’s kicking a lot of interest and dividends and he’s just living off of whatever they’re kicking out? Does he have a strategy of a certain dollar figure that he needs to live off of? Or is he just taking the dividend and interest from the mutual funds and then living off of it? No matter if it’s $200,000, $500,000 or $100,000. And then secondly is that if you have a lot of money in a non-qualified account, which he does, yeah, you probably want to be selling your losers, but buy back the same losers, but in a different stock or different mutual fund. And that’s called tax loss harvesting, because then the interest and dividends or some of the dividends that you create, or the capital gains that you create from that account would be offset. So he could create probably income a lot more tax efficient than, than what he’s currently doing.

Al: Yeah. And here’s what I would add to that. I think a couple of things. So sometimes people, they just want to sell their poor performing mutual funds or index funds or ETFs, doesn’t matter which, and maybe if they’re actively traded funds and they’re not performing well, maybe. But if there’s just an index fund in a certain asset class that you’ve determined is the right asset class for you, yeah. Certain asset classes fall out of favor for a while and then they recover later. So it’s kind of like, it’s kind of like, you know, people look at their last year, large company stocks did the best. So I’m going to sell all the other stuff. And that that’s actually not a good way to invest because the ones that didn’t go up, have a little bit higher expected return. It may not show up for a while. But you want to, you want to stick with your investment allocation. If it is, in fact, it’s the right allocation for you, which we don’t know. And the other thing I would say is, when you’re thinking about income strategies, it’s, it’s not, it’s not like selling the poor performers that create the income you need. You’re constantly, you know, the best way to have a good income strategy as you said, first of all, Joe is, is tax efficient. So you want to factor that in. But secondly, it’s like, you know, in the year where stocks go up, you, you probably want to pull from the stock portfolio, you know, harvest some gains. And the year where stocks go down, you probably want to pull from the bond portfolio. Right, because let the stocks recover. That’s a, that’s a, considering taxation, that’s a better way to think about this than how do I, how do I get, should I, should I just live up the income from the dividends or some other strategy? And I guess I’m saying some other strategy.

Joe: Yeah, he’s collecting investments and he’s seeing what happens at the end of the year and then he’s making decisions based on that versus having a disciplined strategy in regards to his investments, it sounds like. And what I mean by that is having a well thought out plan to state that I want to live off of $275,000. I have an $18,000,000 net worth. I have $5,000,000 in IRAs and the rest is in- he’s got $12,000,000 total liquid assets. So he’s got $7,000,000 in non-qualified accounts that’s kicking up interest and dividends. Well first, look at how the allocation should be allocated. How much money that you should have in stocks and bonds, right? What is the asset allocation? And then from there, break it down to how much money that you want in value and growth in small and large, international, domestic.  So you figure out the allocation of what target rate of return that you’re shooting for with the least amount of risk. And then you manage the portfolio appropriately. You want to manage the risk first, so you’re rebalancing the overall account. So, as stocks continue to climb in the portfolio, you only want, let’s say, 60%, 50%, 70% in stocks. Well, you shave off some of those stocks, so you’re selling the winners and you’re buying the losers. Because that is diversification or asset allocation. You never really know what asset class is going to perform. If you did, you would just pick that asset class every year and be a multibillionaire. We don’t know what asset class is going to perform. So that’s why rebalancing is so key because you’re managing your risk.  So you can rebalance annually, quarterly, or by bands. So you want a certain percentage in small companies or a certain percentage in large companies. As soon as they go out of that band by 5%, 10%, 20%, depending on how aggressive that you want to trade, well then that triggers the rebalance. So it’s a disciplined approach. It’s based on investment policy statement that you create yourself, whatever that you want to do. But he’s looking to say, well, these loss, should I sell them to create a little bit more income? Well, these ones, so should I buy more of these? I think he wants to do the exact opposite, to have a more diversified, well-balanced, risk-adjusted return portfolio.

Al: Yeah, I think you explained it rather well. And just to use an example, if you decide you want 10% in large company stocks, S&P 500, let’s just say that, and you have a 20% band. So if, if the 10% deviates by 20%. 20% of 10% is 2%. So if you, if you’re going, if it gets up above 12% of your total portfolio, you’re selling 2% to get back to 10%. If it goes down to 8%, you’re buying another 2%. Right. To, to be able to get back to your allocation. That, that’s, that’s a, that’s a disciplined approach to constantly sell the winners, buy the losers. By losers, I’m not talking about maybe one single company that maybe is a loser. I’m talking about-

Joe: Right, it could be a falling knife or whatever.

Al: Right. I’m talking about an asset class, an index fund, a low-cost index fund, different asset classes perform at different times. You never know what’s going to be the best in the next year, two years, 5 years, whatever it may be. And so that’s, that’s the better way to think about this.

Joe: Yeah, then the other layer of complexity is to tax manage it. So that’s where tax loss harvesting comes into play in your non-qualified or non-retirement account. So when an asset class goes down by a certain percentage, you might want to sell that, but you buying back the same asset class or something very similar.  So you’re selling Coke and buying Pepsi for like an example, but let’s say you have a basket of stock. So you’re selling mutual fund A and buying mutual fund B. It can’t be identical because there’s wash sale rules that I don’t want to get into, but you can still stay in the market. You’re not selling out of that. You’re staying in the overall market because as soon as that recovers, right, you have more shares and that loss will offset those gains. So it’s a, it’s a really good tax strategy. So I would say that Bob has done a really good job of accumulating some wealth. Now that he’s transitioning into retirement, trying to create income, I think he probably needs just to dial that in just a little bit more because in a couple of years too, Al, he’s got a $5,000,000 IRA. Right.  That’s going to be a couple hundred thousand dollars of ordinary income that he’s going to have to pay on top of his Social Security and interest and dividends from his non-qualified account. That could blow him up into another tax bracket where he’s losing a lot of wealth that he’s, that he’s accumulated.

Al: Yeah. 100% agree tax management is important. One other point on that is when you think about where to put your different asset classes, you probably put the higher expected returns. In other words, the stocks in your non-qualified brokerage account, non-retirement account, because you get capital gain treatment on growth. And you probably put your safer assets, your bonds, or your asset classes, even in stock that are maybe safer, that have less higher expert expected rate return. Because you don’t want your highest return in your IRAs because when you pull the money out you pay ordinary income tax.

From Which Account Should 76yo Mom Withdraw Living Expenses? (Neal, Dallas, TX)

Joe: We got Neal from Dallas, Texas writes in. He goes, “Hey guys, my mother, 76 years young, recently widowed. Fortunately, she is well off financially, although her withdrawals could use some optimization for tax purposes.”  Feel like a theme coming on here, Andi.

Al: It does seem like a theme, doesn’t it?

Andi: It’s a two-question theme.

Joe: Got it. Let’s see. Where, where was I? Optimization. “She owns a condo worth $650,000 and she has $120,000 in her savings account. She has a traditional IRA worth $1,100,000 and a Roth IRA of $110,000 and a brokerage account of $1,500,000. The IRAs and brokerage accounts are allocated 70% mutual funds, 30% bonds. 2024, she has an RMD of $48,000 that is withdrawn from her traditional IRA. She also receives about $10,000 per year for Social Security. Finally, she withdraws another $58,000 for the year from her brokerage account.  She’s able to live comfortably on the income with travel, gifting, and charitable gifting. Her annual withdrawal rate is just under 4%. Our strategy is to sell mutual funds at the beginning of the year if the market is up from the year prior. If the market is down, we will withdraw bond CDs. She has enough fixed income to weather about 6 to 7 years of a market downturn. The major question we have is what account should she withdraw the $58,000 from? Currently, the entire sum is coming from her brokerage account, where about 50% of the money is taxed at long-term capital gains rate. After listening to your show, I’ve begun to wonder, she should withdraw some of that $58,000 from the traditional IRA instead.  Also, do you see any reason for her to do Roth conversions? My drink of choice is a strong cup of coffee in the morning, and my mom enjoys a glass of white wine in the evening. Thanks, Neal.”  You think Neal lives with his mom?

Al: I don’t think so. No.

Joe: I do. He does.

Al: No. No, no. He’s just, he’s caring for his mom who’s recently widowed.

Joe: Guaranteed, Neal lives in the basement.

Andi: Neal actually has sent us another question. He is married.

Al: Yeah, I don’t, I didn’t see, I didn’t see that question, but-

Joe: Neal is pouring his mom that white glass of wine.

Al: He just said-  I mean, I think you know what your mom likes to drink, right? You don’t have to live with her to know that.

Joe: I’m just saying.

Andi: Maybe Joe actually does live in his mom’s basement.

Al: And that’s how he knows what she likes to drink.

Andi: Exactly.

Joe: That’s what I picture. I’m trying to help Neal out, and I like to just get in the zone here, and I was just thinking, alright, well he’s hanging out with his mom, pouring her a glass of wine while he’s having a cup of coffee.

Al: Okay, got it.  I’m with you. I disagree, but I’m with you.

Joe: All right.  She withdraws another $58,000 from the brokerage account. Where should she pull it from?

Al: Well, let’s, let’s first of all, think about the top of the lowest tax bracket or almost lowest bracket for single taxpayers, $47,000. That would be the top of the 12% bracket. And then you also get a $14,000 standard deduction, right? So probably about $61,000, maybe even $62,000 rounding up because it’s, it’s $61,000 and change, call it $62,000 of income. She can accommodate and stay in the lowest brackets, which tells me if the RMD, if the $58,000 or the $48,000 is the RMD.  So that’s already coming out, right? And the $10,000,  so, so she’s at, what’s she at? She’s at $58,000.  So she’s only got another, another, about $4,000 in that 12% bracket. So it’s, let’s see, they say how much was in the brokerage? Yeah, I would, I would favor the brokerage account because that way you can stay out of the higher, or mostly higher ordinary income tax rates.

Joe: I would do something different here.

Al: Okay, what would you do?

Joe: Well, she’s gifting to charity. I don’t know, how much money is she gifting to charity? So she could give her RMD to charity. So, that would, as a qualified charitable distribution. So she could take some of that money, go directly to charity, never shows up on her tax return. So let’s say that’s $10,000, that’s $20,000. So then that’s going to create more room in that 12% tax bracket. So, then it’s one of two things. Then I’m taking a look at the brokerage account. I could sell stocks in the brokerage account to create the income and pay no capital gains tax because, I’m still in that 12% tax bracket.

So I would have to look at how much gain is actually in the brokerage account to make sure that they’re doing some tax management there to keep that basis in check. Do I want to do Roth conversions?  I know Neal wants her to, because he’s going to inherit that tax-free lump of money. That makes sense. I mean, depending on how much that she’s giving to charity, you could convert to the top of the 12% and still pay some capital gains rate. Then it’s just- what does she have? $1,100,000 and she’s 76?

Al: Yeah. $1,100,000 in the IRA.

Joe: So she’s got probably another 10 to 15 years of life.

Al: Yep. I think that’s what you anticipate. I mean, at age 76, you probably think about age 89, 90 as a, as kind of an average.  Yeah. So I like that, but it depends upon how much she’s giving to charity. If she’s giving away $4000 to charity, then you do that through a qualified charitable distribution. You’ve got a little bit more in the 12%. I guess another way to say that is try to keep her ordinary income in the 12%, in other words, ordinary income is $62,000. You can add capital gains on top of that by selling stocks. But if you can keep the ordinary income, any combination of, of RMDs that are taxable, that you’re not giving to charity and Roth conversions, that would be the best way to go. And then any additional income would come from the brokerage account, hopefully by selling stocks that are capital gains.

Joe: Sure. You could do a larger QCD. You can, you could give your RMD up to $100,000 to a charity. So, I mean, there’s a lot of unknowns here. We’re just spitballing this, right? So yeah, for charitable gifts are a couple thousand dollars and okay, whatever. But maybe they’re, they’re larger or maybe down the road she wants to give more. So you could do some larger gifts  through the QCD. That would take the RMD off the table. Then you could do conversions from that perspective. So there’s different ways on how you can slice and dice this I think. You could get fairly creative because there’s plenty of capital there. So the goal would be to look at, all right, well, how much mom needs to live off of and what’s the best way for mom to get the income that she needs with the least amount of tax. But then it’s also looking at, all right, well here, there’s a lot of dollars still on the table. How much money of that is going to go to charity? And then have a strategy for that. And then how much is going to go to the kids or the grandkids or whatever after that. So you have to take a look at kind of the whole picture before you start creating to make sure that you can leverage all of the goals specifically in one cohesive strategy.

Al: Yep. 100% agree.

Andi: Learn how you can avoid ten gruesome estate planning mistakes in our live webinar, next Wednesday, May 22nd, at 12:00pm Pacific time with special guest, estate planning attorney Nicole Y. Newman, Esq. Attorney Newman focuses on guiding clients through the complicated and confusing maze of balancing family protection, wealth preservation, and cherished family values in the planning process. In this webinar she’ll explain why you need an estate plan, the benefits of having a will and a trust, and she’ll answer all your estate planning questions. Find the link to register for this free, live estate planning webinar in the description of today’s episode in your favorite podcast app.

Dart on the Wall for Our Retirement to Age 88? (Rod)

Joe: We got Rod writes in. Hot Rod.  “Hello. I was listening to your radio show on Saturday, 2.10.24 and  you were speaking right to me.”  Okay, Rod, now I am speaking right to you.  “Can you give me your dart on the wall? I don’t like spitball.”  Oh boy.  Who doesn’t like a good spitball?

Al: Well, if you’re thinking literal, I don’t particularly like spitballs either.

Joe: He wants a dart on the wall. He wants it just right in the bull’s eye here.

Al: Okay. Correct.

Joe: All right. “My wife and I have a total of $1,200,000.  They got no pensions. Both working to the end of this year. Both will be 63 at the end of this year. We will purchase Cobra Healthcare for two years until they turn 65. The budget is $160,920 dollars a year, Al.

Al: Yeah. Are you sure?

Andi: There’s got to be a spreadsheet involved.

Joe: Oh boy, Hot Rod.

Al: Can we, can we, can we round it out to $161,000?

Joe: Settle down here.  “Social Security is going to be $53,000. Needed income stream will be $108,000 a year. Timeline is to reach 88 years old. That’s 25 years. Spending all down to zero. We live in a $1,200,000 home that will be paid off before the 25 years and will be worth $2,500,000 or more.  So that is our buffer in case we run out of cash before the 25 years. How much more gains do we need on top of the $1,200,000to be able to retire on 12.31.2024?  P.S. My simple amortization table is present value equals-“ oh this is an engineer “-  P. V. equals $119,000 and we need 25 years with a monthly budget of $9000, then we would need an after inflation rate of return of 7.76%.  Well that’s my dart on the wall. What’s yours? Thanks, Rod.” Rod, I wish life worked out in a spreadsheet. You just plug in some numbers on a spreadsheet and pow! You know, in 25 years, you’re good.  This is way too much money pulling out of the overall account. You will go broke way before 25 years. I think you have some huge assumptions on selling your house. And then, where are you gonna live? What’s – it’s going to be a hard row  to hoe. Because his burn rate is, he wants $110,000 on $1,100,000.

Al: Yeah, it’s, it’s, it’s a little rich. So let’s see, I’ll do a little math here. So one-

Joe: It’s 10%.

Al: 10%. I would say, to answer your question, 4% distribution rate, right? So if you want $110,000 and you divide it by 0.04, you need $2,700,000 to make this work. And here, here’s part of the reason why. So you can do an amortization schedule, but are you going to get 7.76% every year? No, I, I would say absolutely not. You’re gonna have years where you lose 25% and years where you make 25%. It’s all over the place. And if life were like a straight line- yeah, I agree. The math can work, but so many factors can come into play that I wouldn’t even dare try something like this.

Joe: Yeah. The problem is sequence of return risk.  When you start taking dollars out from a portfolio, and let’s say he pulls 10% outta the portfolio first year, the market does 10%. He pulls 7.76%, so he is got a little bit of extra in there. Then the market’s down 10%. He’s pulling 7.6%. It’s just a- when you look at compounding interest on the upside, it’s like the eighth wonder of the world. But when you look at compounding interest on the downside too, it’s the eighth wonder of the world, you can see money dissipate very quickly, it’s called reverse dollar cost averaging. Because if you lose 50%, and you gain 50%, you don’t have your money back. So you have a dollar, this is really simple math, right? So I have a dollar, I lose 20%.  Then the next year I gain 20%. So one year I’m down 20%, next year I’m up 20%. Shouldn’t I have my dollar back?  But I don’t!

Andi: No, because you have 20% on $.80, right?

Joe: Yes. Right. And then let’s say you’re pulling money from the account. So, I’m pulling 10% out of the account to live off of which Rod wants to do.  So I lose 20% plus I pulled 10% out of the portfolio to live off of. So now my portfolio is down 30%. The next year, the market’s great. I’m up 20%, but I’m nowhere near where I started from the year before because of the reverse dollar cost averaging. The sequence of return risk blows people up in retirement. Because of, it’s just- you have to be careful of what you’re pulling out.  That’s why we use a 4% burn rate. It gives you a lot of cushion for that sequence of return risk, plus taxes, plus whatever inflation is going to do to your living expenses. I like how he did the math. He goes, I don’t care. I want to bounce the last check to the mortuary. Like, this is it. I’m going to die broke.  Zero dollars left. So how do I run this thing?  That’s great, but I guarantee you as soon as that $1,100,000, all of a sudden it goes to $500,000. It goes to $300,000, right? He’s on his path to zero. When do you think he starts freaking out and pulling the plug on the strategy?  It’s like all of a sudden one year, he’s, you know, maybe $50,000, he’s like, oh, this is my last year of life, but he’s only 78 years old. I don’t know. I mean-

Al: Well, yeah. So his, his answer is that you got to sell the home, but here’s a couple other points maybe to think about. And that is, I don’t know when Rod’s going to be taking Social Security. Let’s say he’s 63. They’re both going to be 63. Let’s say they wait till 70. Now they got 7 years. And that’s actually $160,000 coming out. That’s a 13% distribution rate. So that- that doesn’t even come close to working. And then the other thing is no one knows how long they’re going to live. And the truth is, I mean, if you go by laws of averages, let’s just say that, you spend more in the earlier years. Maybe you spend a little bit less, you know, when you don’t travel as much. But then you could easily spend more or a lot more if you need long term care for an extended period of time, maybe the rest of your life. And, and, if you don’t have it, you’re going to a kind of a Medicare type facility that may not be your first choice on your final year. So just some things to think about. The 4% rule is not, it’s not a golden rule. It’s a guideline that gives you a fair amount of cushion regardless of what happens. Could you do a higher distribution rate in some circumstances? Absolutely. Particularly if you’re nimble enough in your spending that you can dial it back at any point. So, but on the other hand, if you just have, if like, let’s say you retired right before the great recession and the market went down 50%, it’s 4% distribution rate is not going to work. So it’s just, you’re trying to give yourself the best chance for success. The 4% rule running many, many, many scenarios was, was basically to try to get you at least 25 years of cashflow, which is what he wants.

Joe: All right. Good luck, Rod.  That’s aggressive. I wish you luck. I want to know how that plan works out. I’m not saying don’t do it. It might be tough.

Can We Retire at 64 and Die With Zero? (IndyGuy)

Joe: “Joe, Big Al, Andi. Love the show.  I’m 59. My wife is 66 and retiring now. I want to join my wife in retirement in two years at age 61. We have two grown kids, two beautiful granddaughters. We drive a 10- and 11-year-old BMW 5 Series and an Audi Q5.” Oh, fancy Nancy Cars here. “Got one dog, 12-year-old Shorkie.  Shih tzu.” So that’s a Shih tzu Yorkie mix. “I drink a little Modelo cerveza, but I’ve also fallen in love with red wine since about 10 years ago. My lovely wife enjoys Amaretto and Diet Coke.” Okay. Let’s see. “We have $460,000 in pre-tax, $200,000 in an IRA, $25,000 in Roth IRA, $600,000 in a brokerage account. Yes, only $600-“ oh, $600. Okay. “Yes, only $600.” Well, why the hell even?

Al: Don’t even need to put it.

Andi: It’s a start.

Joe: “After expected growth, total investment value in two years is $765,000.  Current income, $130,000. I’m maxing out my Roth IRA and I contribute 10% of my 401(k). No matching. Wife has a small pension already coming in, $400 a month pre-tax, no COLA. Wife just started Social Security benefits, $2700 a month. I plan to take Social Security at age 64. Also, approximately $2700. My wife will be on Medicare once I retire, but I will need to be on health insurance for at least 4 years until I turn 65.  We expect we’ll need $9000 a month after-tax in the first 8,10 years of retirement, but we can easily live very comfortably on $6000 to $7000 a month if forced to-“Well you’re going to be forced to.

Al: Unfortunately-

Joe: “Right now,  especially if there’s no sustained market downturn in our early years of retirement.  I firmly believe in YOLO.”  You only live once. Is that what YOLO is?

Al: Yeah, it is.

Andi: I believe so.

Joe: All right. “You only live once. I don’t want to die with any regrets or missed experience.” All right.  YOLO. You guys live the YOLO life?

Al: I do, yes.

Andi: I try.

Al: Do you? Are you living YOLO?

Joe: You only live once, man.  “We travel a lot. We want to continue exploring every corner of the world.  We will dial it back in our mid-70s, reducing our budget a bit by that time. My biggest concern is long-term healthcare needs-” We got a trend going here, Andi.

Andi: This is what people call or write in and ask us about, Joe.

Joe: Okay. “- but we have $500,000 plus equity in our paid home, which could be used funds for the last resort. Life expectancy for both of us is age 92. I believe in the ‘die with zero concept’.” Back-to-back ‘die with zero’, the same question.

Al: Almost.

Joe: $9000, they don’t have enough to fund the $9000. You got to live a YOLO life and you want to die with zero dollars.

Andi: I wonder if it’s the same person that actually wrote in under two different email addresses.

Joe: “We don’t worry about leaving a legacy. Inheritance for my parents could be possible, but we don’t have enough info at this time to factor that into our plan. I’m pretty determined to execute this plan, so I’m hoping you can spitball some favorable feedback for us. Keep up the good work.”  All right. IndyGuy. This is from IndyGuy.  He’s got $700,000. And he’s maxing out the Roth and putting 10% in, so that’s $700,000, let’s call it $800,000, just to be generous.

Al: Yeah. And he wants to spend, let’s, we’ll, we’ll round down on the spending. We’ll say he wants to spend $100,000 a year for 8 to 10 years. Then the money’s gone.

Joe: Done.

Al: It’s done.

Joe: He’s living YOLO.

Al: You’re going to die with nothing. So you got, you did that goal.

Joe: Yeah. But it’s going to be about 15 to 20 years prematurely.

Al: Correct. Yeah, so in terms of, we were just talking percentages, the first 8 years or so is a 14% distribution rate, which basically uses up everything you have. And then at the end of that period, let’s say you had the same money, which you won’t, but if you did, it’s still a 9% distribution rate. So I agree with the YOLO concept, but you also have to live with your own means, right? So $765,000 times 4%, it’s about $30,000. So that’s kind of what you have to work with.

You know, maybe, maybe you can have a little bit higher distribution rate knowing that some good Social Security is coming later. You’d want to kind of figure that out. Maybe you could, maybe you could spend $40,000. I don’t know, but not $100,000.

Joe: So let’s say it’s $84,000, $7000 a month. He says they can live very comfortably on that. The wife is 66 years old. He’s 61. He’s going to claim his Social Security in 4 years. She’s going to claim now.  So she’s got $2700 a month. So $2700 a month is $32,400. $84,000 minus that is $51,600.  So that’s going to be the shortfall if he can live comfortably on $7000 a month. So if I look at $51,600, let’s say he accumulates up to that $800,000, so that’s 6.4% distribution rate until he claims his Social Security in another few years.  So, if he can live off of $6000 or $7000 a year, I feel a lot better about the overall situation. $100,000 is going to be too rich. $80,000, I think he’s in the ballpark.

Al: Yeah, I think it’s a little less, but I get your math. But, yeah, $70,000 perhaps?

Joe: I’m not even including his Social Security benefit at age 64, he’s 61, so that’s 3 years. So they’re going to have a 6.4% distribution rate, then he’s going to get another $30,000 to cover the $50,000, then now he’s going to be under 4% once he claims his Social Security benefit, if it’s $6000 to $7000 a month of living expenses.

Al: Yeah, yeah.  Right. Okay. So maybe I read this wrong, but I was looking at his $9000 per month is what he wanted. I figured that was coming from the portfolio, but I guess that’s, that’s inclusive of all the other stuff that you said.

Joe: Well, yeah, I, I mean, I think he’s like, we, “we expect we’ll need $9000 a month after taxes in the first 8 to 10 years of retirement, but we could easily live very comfortably on $6000 to $7000 if forced to.” So $9000 a month, I think is a stretch. I think $6000 to $7000 a month. I think you’re right in the ballpark.

Al: Yeah, I’m, I’m with you. I’m just did the remath. Yeah. 100% agree. $6000 to $7000.  I would probably favor $6000 just to give yourself more cushion. But YOLO, you know, yeah, go for it.

Joe: Right. And so, well, or maybe you just tone it down at, at 70. Just watch your spending. I think you said it well, Al, is that if, if he, if they could dial back the spending at will, then I, then it’s good, but a lot of people can’t.  So they’re going to go on this vacation, and they’re going to travel the world, and they’re going to spend a little bit more money than they probably anticipated, they’re both retired, they’re living their YOLO, they’re loving life, and things come up, and then next year, oh, we’re going to go to this cool place, and then we’re going to go to this cool place, and we’re going to see every corner of the world, that’s what IndyGuy said, every corner of the world, that’s going to cost a little bit of dough.

Al: It is.

Joe: And so the market drops 20%, will they be able to just to chill at home?

Al: Yeah, and let it recover for a couple of years.

Joe: Right, and drink your Amarettos and Diet Coke and just hang out and pretend that you’re in Brazil.

Andi: YOLO at home.

Joe: Yeah, versus, you know, so that’s the hard part, right? Because you have to start planning and strategy if you want to go to every corner of the world, but can you dial it back when need be. Say, Oh, we can’t spend $7000, $8000, $9000 this year per month. It’s going to be half that because the market is a little bit fickle or something happened or on a, you know, attended expense hits, there’s always something that that comes up. So if you can dial it back and you can be disciplined then I say go for it IndyGuy. But if you’re human like, like the rest of us, be warned that it, it, it’s, it’s hard to do.

Andi: When it comes to your retirement plan, are you the captain of a sinking ship? Many of us need a life vest: we’re ill-prepared and traveling without a compass. By plotting a good course and using proper tools and strategies, you can cruise into retirement. This week on YMYW TV, Joe and Big Al show you how to be proactive and keep your retirement afloat with the steps to prepare, adapt, and remain on course. Watch How to Cruise Into Your Retirement and download the companion Cruising Into Retirement Checklist and Guide from the podcast show notes – it’s only available for a limited time, so download it before this Friday. Just click the link in the description of today’s episode in your favorite podcast app, you’ll see the show and the guide, right before the episode transcript.

Save to Roth 403(b) or Traditional Until Roth Conversions at Retirement? (Neal, Dallas, TX)

Joe: We got Neal from Dallas, Texas. “Hey guys, I’m 50 years old, my wife is 46. Together we have adjusted gross income of $270,000. We contribute monthly to our employer traditional 403(b) plan that includes 7.5% match. We also contribute the maximum $53,500 combined to our employer Roth 403(b) plan. We have already paid off our home mortgage and funded a 529 plan for our kid’s college. Any excess money at the end of the month gets invested in mutual funds in our brokerage account. Our total investable portfolio is currently $1,800,000.” We got 403(b)s, IRAs, and brokerage accounts.  Alright, nice big fat wallet there.

Al: Yeah, very good.

Joe: Our goal is to get out of my mother’s basement.

Al: That’s your assumption.

Joe: I’m kidding, Neal.  “Our goal is to retire in about 10 years.  Given this time horizon, I’d like to start optimizing our portfolio with an eye on withdrawal on taxes during retirement, given the current rate of investment into each account at about 7% annual return.  In 10 years, we would have $2,700,000 in a traditional 403(b), $1,700,000 in a Roth 403(b), and $650,000 in our brokerage account. My major question is, should we contribute to fund the Roth 403(b)? Or should we consider funding the traditional 403(b) and then perform Roth conversions after we retire?  I expect our yearly withdrawals to be between $150,000 to $200,000 during retirement. I see the tax advantage of funding our traditional 403(b) while our current income is more than it will be during retirement. However, I’m not sure if it’s worth the risk that Roth conversion rules may change in the next 10 years. We would love to get your thoughts on this. My drink of choice is a little strong cup of coffee. Only in the morning. And it’s only one.”  Did I pour my mother a nice glass of wine?

Al: When I go, when I go upstairs?

Joe: Yes.

Al: No, I think Neal’s got his own house. He can afford it.

Joe: Okay. So he’s doing some, some little financial planning here. So he wants to spend 10 years. He’s saving quite a bit of money and he’s looking, hey, I’m, I’m doing a lot into this Roth 403(b). What should I do? Should I kind of switch things up? He’s going to have $2,700,000 in the traditional 403(b), $1,700,000 in the Roth,  and then $650,000 in the brokerage. So should he get the tax deduction today, let the money grow, and then do conversions in the future? Because withdrawal, he needs about $200,000 to $250,000 or $150,000 to $200,000 in retirement years. What tax bracket he’s making- $270,000 today. The tax bracket’s probably gonna be the same if it’s all ordinary income. But he’s got diversification, so he’s doing some things good there.  Yeah, we in a lot of different numbers, I say keep doing what you’re doing, Neal.

Al: Yeah, and maybe I’ll, I’ll put a little numbers to it, so that the top of the 24% bracket for a married couple is $380,000 in round numbers.

Joe: Taxable income.

Al: Mm hmm, taxable income.

Joe:  What’s the bottom of the, the 24%? $200,000, right?

Al: $200,000. Yep. $200,000. So he’s, he’s in the 24% bracket, but that’s a good bracket, right? And then you get roughly a $30,000 standard deduction. So you could actually have about $410,000 of income and stay in the 24% bracket. So I would probably- they were getting a little bit more money into the Roth because that’s a good tax bracket. Based upon where tax brackets are scheduled to change to in 2026, I might reevaluate in 2026.

Joe: Yeah, because he could be in the 28% tax bracket in 2026, or it could fall into EMT, who knows where it’s going to fall.

Al: Yeah, I, I think the next two years it’s a known quantity. So that’s what I would do. I would, I would maximize the 24% bracket.

Joe: Yeah, I might even convert to the top of the 24% because, so, it should be into the 403(b) Roth, and then you might even convert a little bit into, to max out that bracket for the next two years, and then reevaluate. And then, and say, you know what, I’m going to go pre-tax until tax, tax rates change. Yeah, I like that too. I like that.

Al: Yeah, and I think then whatever you haven’t converted, if you still need to when you retire, you’ll be in lower brackets. Perhaps, so convert the rest. I would much rather convert sooner than later, because you get the compounding effect of tax-free growth. You’re taking the uncertainty of taxes off the table. We know we got the 24% tax break over the next couple of years. This guy’s a massive saver, and if this is the same coffee drinker that was talking about helping Mom out, he’s probably going to inherit a ton from Mom, so yeah, he’s going to have a tax issue. So, I would definitely- I would max out the 24% tax bracket all day every day.

Al: Yeah, and if that bracket gets extended into 2026 and beyond, then you can keep going. Now, you have only so much money to pay the taxes. I mean, you’ve got a lot in the brokerage account, but still. So you have to consider that too, right? But I think the fact that we know the 24% bracket is around the next two years, and it would be great to get a lot of this converted, I would go for it.

Andi: Get your Derails fix at the end of the episode with Shih-tzus and Amaretto. And now that Google Podcasts is no longer available, help us spread the word by telling everyone you know to find YMYW elsewhere! We’re on pretty much every podcast app out there, including the ones that accept your honest ratings and reviews, like Apple Podcasts, Amazon, Audible, Castbox, Goodpods, Pandora, PlayerFM, Podcast Addict, Podchaser, Podknife, and Spotify. Subscribe on YouTube and YouTube Music as well!

Your Money, Your Wealth is presented by Pure Financial Advisors. Schedule a no-cost, no-obligation, comprehensive financial assessment and get more than just a spitball on your retirement. Click the Free Financial Assessment banner in the podcast show notes at YourMoneyYourWealth.com or call 888-994-6257. You can meet in person at the Pure Financial offices in San Diego, Irvine, Brea, Woodland Hills, or Davis, California, Mercer Island, Washington, Chicago, Illinois, or Denver, Colorado, or online from home no matter where you are. The experienced professionals on Joe and Big Al’s team at Pure will work with you to create a detailed retirement plan that’s customized specifically for your financial needs and goals.

Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.

The Derails

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