In Need of a Decumulation Plan

Summary

Podcast Summary: "In Need of a Decumulation Plan"

Podcast Information:

• Title: Jill on Money with Jill Schlesinger
• Host/Author: Audacy
• Episode Title: In Need of a Decumulation Plan
• Release Date: December 10, 2024

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Introduction

In the December 10, 2024 episode of "Jill on Money with Jill Schlesinger," host Jill Schlesinger, CFP®, alongside co-host Mark, delves into the intricacies of decumulation planning— a critical phase in personal finance focusing on the withdrawal of retirement funds. The episode centers around a listener call-in from Anthony, who seeks guidance on optimizing his and his wife’s retirement finances.

Caller Introduction: Anthony's Financial Snapshot

[03:05] Anthony:

• Location: Southern California
• Age: Anthony is 61; his wife is 55 and a half
• Employment Status: Fully retired
• Income:
  • Anthony draws a military reserve pension and VA benefits, totaling approximately $7,500 before taxes ($6,000 after taxes).
  • His wife earns a base salary of $160,000, with bonuses averaging 20%, stock options, and has consistently earned over $200,000 annually for the past decade.

[03:31] Anthony:

“I’m calling about decumulation, not accumulating. My wife is 55 and a half. I'm 61. I'm fully retired. I have some things set up. I want some fresh eyes versus my tight eyes.”

Anthony’s primary concern is devising a robust decumulation strategy to ensure sustained financial stability throughout retirement.

Financial Assets and Retirement Accounts

Anthony’s Portfolio:

• Wife’s 401(k):
  • Balance: $2.5 million
  • Allocation: $1.75 million in traditional 401(k); $0.75 million in Roth 401(k)
• Health Savings Accounts:
  • HSA: $50,000
  • Retirement Medical Spending Account (RMSA): $140,000
• Anthony’s Accounts:
  • Traditional IRA: $340,000
  • Roth IRA: $117,000
  • Brokerage Account: $205,000 (broken down into $153,000 in stocks, mutual funds, ETFs; $52,000 in money market)
  • Emergency Savings: $42,000 in 12-month CDs
• Real Estate:
  • Home owned outright with no long-term debt

[08:13] Mark:

“You guys are so set. So you own your home, right?”

Anthony confirms financial stability, highlighting the absence of debt and substantial retirement savings.

Decumulation Plan Discussion

Anthony’s Objectives:

• Monthly Expenses: Approximately $10,000
• Withdrawal Strategy:
  • Plans to take systematic withdrawals from his IRA and brokerage accounts
  • Intends to manage the decumulation process to minimize tax burdens

Key Points Discussed:

1. Tax Efficiency:

   • Mark’s Advice (16:25):

     “Don't take it from the Roth. Leave that Roth account alone. Take it from your brokerage account.”
     Emphasizes using taxable accounts before tapping into tax-advantaged Roth accounts to optimize tax liabilities.

2. Systematic Withdrawal Strategy:

   • Anthony’s Approach:
     Plans to withdraw $75,000 annually from CDs, allowing for gradual depletion of pre-tax accounts, thereby managing tax brackets effectively.

3. Gifting and Estate Planning:

   • Gifting Strategy:
     Initial intent to gift from Roth IRAs was advised against. Mark suggested gifting appreciated securities instead, which could benefit from lower capital gains taxes for beneficiaries.
   • Estate Documents:
     Anthony confirms all estate documents are in place, with plans to review them biennially to accommodate changes and ensure they reflect current intentions.

[16:17] Mark:

“That's what I got for you. That's. I got an 80 to 90% solution.”

Mark reassures Anthony that his current strategies cover the majority of his decumulation needs, highlighting the effectiveness of his systematic approach.

Insights and Conclusions

Mark’s Evaluation:

• Financial Health:
  Commends Anthony and his wife for their robust savings and strategic planning, noting their ability to live below their means and manage expenses efficiently.

• Decumulation Strategy:
  Affirms that Anthony’s plan to systematically withdraw from retirement accounts is sound, especially given the structured approach to managing taxes and withdrawals.

• Future Considerations:
  Encourages flexibility in the plan to adapt to potential changes in tax laws and personal circumstances, ensuring long-term financial security.

Anthony’s Actions Moving Forward:

• Refining Withdrawal Plans:
  Adjustments to withdrawal sources to maximize tax efficiency, such as leveraging brokerage accounts before Roth IRAs.

• Estate Planning:
  Continues to update and review estate documents, ensuring that his and his wife’s wishes are accurately reflected and legally sound.

• Supporting Children’s Financial Growth:
  Redirecting gifted funds from Roth IRAs to taxable brokerage accounts to benefit from lower capital gains tax rates for beneficiaries.

[17:17] Mark:

“Anthony, thank you so much for joining us. We wish you the best of luck...”

Mark concludes the discussion by applauding Anthony’s proactive approach and encouraging other listeners in similar situations to seek personalized financial advice without judgment.

Key Takeaways

• Systematic Decumulation:
  Emphasizes the importance of a structured withdrawal plan to sustain retirement funds and manage tax liabilities effectively.

• Tax Efficiency:
  Strategic withdrawal from taxable accounts before tapping into tax-advantaged accounts like Roth IRAs can optimize after-tax income.

• Flexibility and Adaptation:
  Financial plans should remain adaptable to accommodate changing tax laws and personal circumstances, ensuring long-term stability.

• Estate and Gifting Strategies:
  Proper estate planning and thoughtful gifting can provide financial benefits to beneficiaries while minimizing tax burdens.

Notable Quotes

• Mark on Systematic Approach:
  [12:27]

  “You have a systematic approach to that period of time. And look, for all I know, for the next four years we know what the tax rates are probably going to be...”

• Anthony on Financial Security:
  [08:24]

  “I have the TSP through both federal government and military and I rolled over to Charles Schwab...”

• Mark on Gifting Strategy:
  [16:25]

  “Don't take it from the Roth. Leave that Roth account alone. Take it from your brokerage account.”

Conclusion

The episode “In Need of a Decumulation Plan” offers invaluable insights into the complexities of managing retirement withdrawals. Through Anthony’s case, Jill Schlesinger and Mark highlight the significance of strategic planning, tax efficiency, and adaptability in ensuring financial well-being throughout retirement. Listeners are encouraged to approach their decumulation strategies with the same level of diligence and seek professional advice tailored to their unique financial landscapes.

For more personalized advice or to share your own financial stories, visit jillonmoney.com and engage with the community.

Transcript

[Jill Schlesinger]

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[Mark]

Welcome to the Jill on Money show. It's Tuesday, December 10th and we are here trying to provide you with unconventional and entertaining insights on your money and your life. You know, Mark, I wrote that back in 2016. It sounds pretty good. Still amazing. Amazing. Almost. Almost a decade ago. Almost a decade ago, only a few years after Mark and I first went to CBS and said we think we should start a podcast. And they were like, what's that? And then we just did it. We did it on our own. So anyway, this is a program that does try to focus on you and your needs and we do so without judgment. I think that's the most important thing. No finger wagging, no yelling, just a little bit of laughing every now and again, maybe a little bit of crying. But whatever's going on in your life, if it touches your money, we'd love to hear from you. Just go to our website, jillonmoney.com, click the contact Us button and of course, if you'd like to come on the air, check the box and Mark will do everything else. Hey, while you're on the website, sign up for the free weekly newsletter comes out every Friday. And subscribe to Jill on Money Live. That is a service that right now for just 21 more days will cost $35 for the next 12 months. And for that 12 month period, you will be entitled to four quarterly live webinars. You'll also get the back catalog. And yes, there will be some bonus content. And yes, it's $35 and the price is going up next year. We'll talk about next year's pricing then, but get in now because the pricing is going up. So check that out. Today we are joined by Anthony. Anthony is on the line with us from Southern Californ. I bet it's lovely right now. How are you, Anthony?

[Anthony]

Thank you, Jill. Thank you. Mark is very nice out. It's a little too dry. My hands are very cracked today, so I'm putting lotion on constantly, but continually washing. It's like. It's a catch point, too.

[Mark]

Well, I'm sorry for your cracked hands. Really, truly. I'm feeling so sad for you. Well, here. It was freezing this past weekend. So. Anyway, Anthony, what can we do for you, brother?

[Anthony]

Yes, unlike most of the calls, I think we have about 80, 85% solution. And I'm calling about de accumulation not accumulating. My wife is 55 and a half. I'm 61. I'm fully retired. I have some things set up. I want some fresh eyes versus my tight eyes. Take a look at them now. I'm looking for about 80, 90% solution. So, you know, some things going forward. Who knows what the future will bring?

[Mark]

Oh, good. That's good because I have a crystal ball. It's all set for you. How much does your wife earn right now?

[Anthony]

Base is 160. Her bonus is usually 20% on that. It fluctuates, of course, and then she gets stock options. She also earns ot the last probably 10 years. She's maxed out Social Security, and she's gone over $200,000 for the last 10 years.

[Mark]

Oh, okay. So on that 200 grand, is that enough for you guys to live on her income alone?

[Anthony]

Yes.

[Mark]

Okay, how much do you think you need to live on? Like, what's the actual amount?

[Anthony]

Well, I'm glad you asked because I just added up this weekend. It's. This includes everything, including our travel budget is about $10,000 per month.

[Mark]

Okay, that's great. Will you or she be entitled to a pen?

[Anthony]

Yes, I will be. In fact, I'm drawing it now. As of at 58, I was able to draw my military reserve pension and then VA. Unfortunately, I'm 100% disabled for the VA. Yeah, I still have all my facilities. I still have my arms and legs. But unfortunately, if you look at the X rays, you know why I'm 100% disabled. The VA between VA, the military pension is small, Federal government pension. I'm earning 7,500 before taxes and right now it comes to just under 6,000 after taxes.

[Mark]

Okay, wow. Well, I'm so sorry that you have that disability. That sucks. It really does.

[Anthony]

Yes. I tell all my friends and people ask me, oh, you know, VA pension, trade grants, like no, you don't understand. It's. I give it, I probably give everything up like a wake up without knowing when my body parts don't hurt.

[Mark]

Yeah, no kidding. Right? Okay, so next question for you. Your wife, will she also be entitled to a pension?

[Anthony]

No. But she does have a healthy 401k. She's maxed out her 401k since 99 and right now she has 2.5 million.

[Mark]

Wow.

[Anthony]

Which is divided between 1.75 regular and then 0.75 as a Roth. He also has a HSA and it's called a rmsa. And what I've gathered and through research, it's basically hsa, but the company has this thing as retirement medical spending account. Basically works the same way.

[Mark]

Okay, and how much is in that HSA?

[Anthony]

Let me down that one second. HSA is at 50K and Retirement Medical is at 140 and we're contributing 3000. Retirement the company puts in our Mac,000 and then matches 1500 of the 3000.

[Mark]

Wow, that's a lot. Yeah, that's like a lot. That's a good benefit. Okay. How much longer do you think your wife's going to keep working?

[Anthony]

Oh, she could quit now. She likes what she's doing. She's an in house parallel. So.

[Mark]

But like she, she is she like wiped out. Do you think? Does she have a number?

[Anthony]

No, no, she, she really likes, she likes what she's doing and she's talked to her supervisor. As long as they give her her time off, she accumulates five weeks a year and she can accumulate up to 350 per total. So as long as her boss knows that as long as she keeps getting her vacations, she'll keep working. She probably has about two to four years left realistically.

[Mark]

Wow, that's great. So right now you've got her big fat retirement accounts. The hsa, the rmsa. Any other money that you guys have saved?

[Anthony]

Yes, I have my own. I had the TSP through both federal government and military and I rolled over to Charles Schwab. In fact, when she retired, we'll roll everything off to Charles. Swap. So my account for the, my RA is at 340,000. My Roth is at 117. Her Roth is at 70K. Our brokerage is at 205K. And that's broken down to 153 into stocks and mutual funds, ETF and then 52K as money market. The money market is basically where we're saving for anything. With the next five years we project like next year we're doing a, a brand new roof and then repainting the house, that kind of stuff. And then we have about 15,000 stuck in cash between checking savings. And then we also have a $42,000 emergency savings broken down to 12,3 1200 dollar CDs per month for 12 months.

[Mark]

You guys are so set. So you own your home, right?

[Anthony]

Yes. For you and Claire, we have no longer term debt.

[Mark]

Okay. And only one house knows like separate, correct?

[Anthony]

No, we live below our means, Jill.

[Mark]

Okay, you do. So what is it? You said you need a decumulation plan, right?

[Anthony]

Correct.

[Mark]

This is what you're thinking about. We know that you have a ton of money that is coming in the door right now, right? Because we have this $200,000 from your wife plus your pre tax 7,500amonth, which puts you in a pretty decent tax bracket. Right. And you live in. I'm sorry, you live. And I know part of yours is not taxable, I understand. But you do live in a high tax state. So I'm wondering if you feel comfortable right now just starting to pull some of the money out of your pre tax account, like because you're older than your wife. So now we have this place where we're like, okay, maybe we should pull a little bit of money out of your $340,000 pre tax account. Should we do that? And I mean, I don't know how much you really want to accelerate. Like it seems to me you don't need a decumulation plan in any major way, but you have this ticking time bomb of your wife's big fat traditional account that's just. It's out there, right?

[Anthony]

Yes.

[Mark]

So, and you have no kids, right?

[Anthony]

We have two kids. They're set up on 5.9 plans, fully funded. They also, through the VA in California, also get college for tuition free.

[Mark]

Oh, you got young kids?

[Anthony]

Well, one's 24, 121. So young. Ish.

[Mark]

Yeah.

[Anthony]

Again, the accumulation plan, I have my regular IRA set in four CDs at $75,000 starting. Well one comes in this year and then following three years. So again, as soon as she pulls the trigger, we have the money. And our, my Money comes, you know, at, in November of each year, set up where we'll get 75,000 plus the interest. And then every year that she doesn't, half the CD will roll into money market and about third will run to the B and D fund and then the rest will be in to the regular stock ETFs.

[Mark]

Like you have a plan. You're getting the money out of your pre tax account slowly but surely. And you're not going to accelerate that and jump into like you're not going to pull out hundreds of thousands of dollars out right now because you are in a high tax bracket. Correct. And it seems to me like you already have your solution, which is you set this up ahead of time. You are making sure that the money will come out. Whatever you don't need. You throw in the brokerage account whenever she's ready. I mean as you said it could be, could be a couple years, but maybe, you know, it's four years. But as she is kind of on her journey towards retirement, I think that there's like your solution is a little bit easier. You have a, you have much less pre tax money when she retires. Right. And let's say she retires and you know, she's 59. Okay. Or she's 58. We have some time between the time between the day that she retires and when she has to take money out and take pay for those required minimum distributions. So maybe the game plan is essentially the same with her. Not yet. But that you set things up so that you have a certain amount of money that comes out every year. It keeps you in a specific tax bracket, whichever one like feels most comfortable for you and you start really focusing on getting her money out of that pre tax account from the time she retires until she has to take required minimum distributions. And you do it just the way you're doing it now, Mike, doesn't really matter if it doesn't have to be a cd. It can be money that's inside of a, inside the retirement account, in a money market account. It can be however you want to do it. But that money is growing and it is going to continue to grow. So I don't think there's a huge issue here. I do think it is you guys having a systematic approach approach to that period of time. And look, for all I know, for the next four years we know what the tax rates are probably going to be. But if it's seven years from now and you're saying, Jill, our tax rate just went up enormously what should we do? We'll make a different decision then. I just think that where we are today. We know where you are. I don't think that there's going to be. I mean, I don't think there's going to be a big change for four years. But I do think when she retires, we might be looking at a different story. Who knows? We'll have to see. But I think you're in very good shape. You've done a great job of saving and investing. And the more that you can make a systematic. You can incorporate a systematic approach to all of these accounts so that you can consolidate and manage it more efficiently, the better you're going to be. And so if Schwab's the place you want to do everything, fantastic. And when she retires, you can just roll everything right in there. And as far as the kids, is there any idea around helping them out more like, is it your, you know, would you like to gift them money to buy a house or anything like that? Is that something that's in your head right now?

[Anthony]

Glad you asked that. We're actually. I'm starting to take withdrawals from my Roth IRA at minimum 6, $6,000 per year and giving it to as basically a parent match as their. As they're contributing to their either Roth or company 401k. We're gifting them from my account right now. And then we'll also include my wife's account, $6,000 per year to their Roth RA to set them up for retirement going forward.

[Mark]

You're very nice parents. But wait, wait. I just want to interrupt for one second. Don't take it from the Roth. Leave that Roth account alone. Take it from your brokerage account.

[Anthony]

Got it.

[Mark]

And I'll tell you one thing to consider. You can gift them a security, you could say, like, hey, I have the Charles schwab S&P 500 fund. You can gift that to the 21 year old and the 24 year old. And my guess is they're in a lower capital gains tax rate than you are. Let them sell it and then they can put it into their Roth.

[Anthony]

See, that's why I called you.

[Mark]

That's what I got for you. That's. I got an 80 to 90% solution. One last thing before I let you go, Anthony. Do you guys have your estate documents done?

[Anthony]

Yes, estate documents are done. We look at every five years through her. She gets a legal plan through her. So we look at, in fact, in about two years, we'll redo it because the kids should be old enough and hopefully smart enough to take care of the state when we passed.

[Mark]

I think they're going to. It sounds like they're on their way. Anthony, thank you so much for joining us. We wish you the best of luck. Way to go. I love the decumulation questions. They're so fascinating to me. So if you're going into retirement and know you don't have somebody who's got a two and a half million dollar account, don't get freaked out. We're not going to judge you based on what you have or what you don't have. Everybody here has a voice, right? That's this community. So just give us a holler. Go to our website, jillonmoney.com click the contact us button. Let us know if you want to come on the air. And while you're on the website, check out all of the content that lives there. It's always moving around, changing. Exciting. You can subscribe to us on the Odyssey app or wherever you find your favorite podcast. Please leave us a rating and review wherever you listen and of course, try to lift someone up. Change your work, change your wealth, change your life. Thank you for listening and we'll talk to you tomorrow.

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