In Our 40s and Planning for Retirement

Summary

Podcast Summary: "In Our 40s and Planning for Retirement"
Jill on Money with Jill Schlesinger
Release Date: December 8, 2024

In this insightful episode of Jill on Money with Jill Schlesinger, host Jill Schlesinger delves into the complexities of retirement planning for individuals in their 40s. The episode features a detailed conversation with David, a 41-year-old self-employed landscape architect and contractor from Northern California, who seeks guidance on optimizing his retirement strategy amidst a growing income and expanding financial responsibilities.

Caller Introduction: David's Financial Snapshot

David begins by outlining his current financial situation:

• Age and Family: 41 years old with a 42-year-old wife and two children, aged 8 and 11.
• Occupations: Self-employed as a landscape architect and contractor; his wife is a physician.
• Housing: Owns a home valued at $1.8 million with a mortgage of $900,000 at a 3.15% interest rate over 30 years.
• Income: His business income has recently surged to approximately $300,000, while his wife earns about $210,000.
• Debt: No other debts besides the mortgage.

Notable Quote:

David [02:02]: "We are in a pretty expensive place. Our house is worth about 1.8 and we owe about 900 on it. No other debt."

Retirement Accounts and Savings

David provides a comprehensive overview of his retirement and savings accounts:

• David's Accounts:
  • Roth IRA: ~$160,000
  • SEP IRA: ~$160,000 (initiated upon becoming self-employed)
• Wife's Accounts:
  • Roth IRA: ~$80,000
  • 401(k): ~$90,000 (split evenly between traditional and Roth 401(k))

Additionally, the couple maintains a Vanguard brokerage index fund with approximately $425,000 and has started contributing to 529 plans for their children, with $30,000 in one and $25,000 in another. Their emergency fund comprises about $75,000 to $80,000.

Notable Quote:

David [03:53]: "So right now we got about 425. Yowza. That's nice."

Pension and Employment Benefits

A significant aspect of David's financial strategy is his wife's employment benefits:

• Pension: His wife is eligible for a substantial pension, often referred to as "golden handcuffs," amounting to 75% of her maximum earnings.
• Medical Benefits: They will receive lifelong medical benefits through her employment.

Notable Quote:

David [03:10]: "She like doesn't absolutely love her job, but it's. They call it the golden handcuffs. So I think it's like 75% of her maximum earning."

Key Retirement Planning Questions

David seeks clarity on several fronts:

1. SEP IRA Contributions: Confusion over the contribution limits and potential benefits of his current S Corp structure.

   Notable Quote:

   David [05:35]: "So my question is, am I better off raising my salary to be able to contribute more to my IRA? Or does this S Corp even really make sense?"

2. Backdoor Roth IRA: Uncertainty about the feasibility and tax implications of executing a backdoor Roth IRA strategy given his existing SEP IRA.

   Notable Quote:

   David [07:19]: "I have never fully grasped [the backdoor Roth]. I think I kind of get it. But basically, if I was to just take the money that I have in my IRA and then try to do this backdoor Roth, I would just owe taxes on all of that money. Right?"

3. Brokerage Account Strategy: Plans to grow his brokerage account to one million dollars within three to four years to potentially reduce work hours and stress.

   Notable Quote:

   David [10:13]: "So my kind of set myself a goal of if I could reach like a million in the brokerage account and then cut back on work and go back to where I was before... then I might be set for retirement like at late 50s, 60s."

Jill's Expert Guidance

Jill Schlesinger provides comprehensive advice tailored to David's unique situation:

1. Optimizing SEP IRA Contributions:

   • Salary Adjustment: Jill recommends increasing his salary to the Social Security wage base to maximize SEP IRA contributions, allowing him to contribute more annually.
   • Tax Efficiency: By balancing salary and shareholder distributions, David can enhance his retirement savings while managing FICA taxes.

   Notable Quote:

   Jill [07:44]: "My inclination is for you to at least take your salary up to the Social Security wage base and then you take the rest as S Corp dividends. You would be able to crank a little bit more on your SEP IRA contribution."

2. Backdoor Roth IRA Considerations:

   • Pro Rata Rule: Jill explains that the existing SEP IRA complicates the backdoor Roth IRA process due to the pro rata rule, making it less advantageous or feasible in David's case.

   Notable Quote:

   Jill [09:00]: "The SEP is part of the pro rata. So the problem is, for you, a backdoor Roth won't work."

3. Balancing Work and Savings:

   • Sustainable Savings Plan: Jill cautions against overextending financially and physically to meet aggressive savings goals, emphasizing the importance of maintaining a balanced lifestyle while saving.
   • Leverage Pension Benefits: She underscores the value of relying on his wife's pension and medical benefits to secure their retirement.

   Notable Quote:

   Jill [10:49]: "I don't think you should work yourself like to death for four or five years. I think you should work hard and you should save, but you also have to live and you have to make a decision about how hard you want to work."

4. Final Recommendations:

   • Continue SEP Contributions: Maintain consistent contributions to the SEP IRA.
   • Increase Salary Strategically: Adjust salary to maximize retirement account benefits.
   • Diversify Savings: Keep building the brokerage account and consider reallocating funds to 529 plans as needed.
   • Consider Lifestyle Adjustments: Evaluate the feasibility of reducing work hours based on financial stability and retirement readiness.

   Notable Quote:

   Jill [10:49]: "You're going to keep socking money away into your SEP. You're going to increase your salary to the wage base. Sock money away into the SEP, keep putting money into the brokerage account."

Conclusion: Path to Retirement Success

The episode concludes with Jill reinforcing the importance of strategic planning and informed decision-making in retirement planning. By optimizing retirement account contributions, leveraging existing benefits, and maintaining a balanced approach to work and savings, David is well-positioned to achieve his retirement goals.

Final Takeaway:

Jill: "Change your work, change your wealth, change your life."

Additional Resources

Listeners seeking personalized advice or wishing to share their own financial questions are encouraged to visit jillonmoney.com, engage with the community, and subscribe to the weekly newsletter for ongoing insights and strategies.

Transcript

[A]

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[B]

Hi Jill. Great. Thanks so much for having me on.

[A]

Of course. What can I do for you? What can Mark and I do for you? Because he'll be listening in. He might pop in every now and again.

[B]

Primarily have a question about the best way to plan for retirement. I'm self employed. Do you want me to kind of give you the rundown?

[A]

Give me the rundown like how old you are and your family etc.

[B]

I'm 41, wife is 42. I'm self employed as a landscape architect and contractor. My wife's a physician. We have two kids ages 8 and 11. We are in a pretty expensive place. Our house is worth about 1.8 and we owe about 900 on it. No other debt. My business income has recently jumped to about 300 and my wife's salary is about 210 and she has the benefits through her work assets are. I have a Roth from kind of earlier about 160. My wife has Roth about 80 and then when I started Doing my self employed thing, I started a SEP IRA which right now has 160. My wife has a 401k through her work which has 90 and that's split 50, 50 between a regular 401k and a Roth 400 which she maxes out. And as long as she stays with her job, she'll get a really nice pension and medical benefits for life. So we're hoping.

[A]

Hold on, tell me more about the pension. Jill loves a pension.

[B]

She like doesn't absolutely love her job, but it's. They call it the golden handcuffs. So I think it's like 75% of her maximum earning.

[A]

Oh God.

[B]

Life.

[A]

Oh my God, that is fantastic.

[B]

Yeah, so the definite golden handcuffs. And then we've been able to save a lot more money the last few years. So I've been just putting that into a Vanguard brokerage index fund because I didn't really know what else to do with it. And we've started saving for the kids, 529 plans as well. We've got like 30 in one and 25 in another.

[A]

Okay. And how much is in the brokerage account?

[B]

So right now we got about 425.

[A]

Yowza. That's nice.

[B]

So yeah, we've been able to save pretty well the last like two to three years. And I'll kind of go over my question and my goal with you.

[A]

Wait, one quick question before you do that. The $900,000 mortgage, what's the interest rate on it?

[B]

3.15 I believe.

[A]

Okay. And it's a 30 year, right?

[B]

Yeah.

[A]

The kids college, are you putting money in on an ongoing basis or is it like grandparents that are dumping money? And how do you, how are you.

[B]

Deciding about that chunks right now? When, like, because my income just fluctuates. Like when I finish a big job, I get big paid, paid a big amount. So then I, I just put in like five here, 10 there, whatever. And my goal is to probably have about 100 for each kid hoping for state school.

[A]

Listen, you're in the California system. My God, that would be so good. Do you guys have a, in addition to the brokerage, do you also have an emergency reserve fund?

[B]

Yeah, we just, in our personal and business we have about usually 75 to 80 cash.

[A]

Anything else that is out there in terms of like obligations, parents or siblings that you think that you might have to worry about in the future?

[B]

No, we're really fortunate. Parents are in great shape and financially and physically, emotionally, everything like that. So no, we're.

[A]

What kind of family is Emotionally, all set.

[B]

I wonder what that's like. For the most part, it's all good. Yeah, we're lucky.

[A]

All right, so now tell me what you said. It's retirement. That's your big question. So let's talk about that. What's. What's on your mind about that?

[B]

Well, so I. The SEP ira, I just. There's so many different options out there, and I've tried to research it, and it's never been really clear to me what. What the best option is. So I set up a sep. My business is set up as an S corp, which my accountant talked me into a long time ago, to save some money on payroll tax and such. So my understanding is I'm only allowed to contribute 20% of my income to my SEP IRA every year.

[A]

25%.

[B]

25%. Yeah. So my salary is 80,000. And then my additional income comes from shareholder distributions and.

[A]

Right. So wait a second. Just hold on before. I just want everyone listening to understand this. The reason that you would have salary at 80 and then shareholder distributions for the balance is that when you have salary, you have to pay FICA tax on that. And so when you have salary of 80, you're like, oh, I gotta pay that extra money to pay into Social Security. Right. And Medicare. But when I take shareholder distributions, I don't have to pay the FICA on that. And the arbitrage is essentially that you save that money in taxes. I'm not sure I don't love that. Generally, I'd like you to. I wouldn't mind like you, because what happens is that, like, you kind of rob yourself of Social Security benefits in the future, right?

[C]

Yeah.

[A]

Because you're not paying into the Social Security wage base. But, you know, I presume the accountants run the numbers, but I don't know. I always feel like that's a little bit of a hokey pokey. I bet it was, like, more interesting when you were making, like, 120,000. Now that you're making 300, I sort of feel like that's when she set.

[B]

It up, when I was making, like, 80 to 100.

[A]

Yeah.

[B]

And so that was kind of one of my questions, too, was, am I better off raising my salary to be able to contribute more to my ira? Or does this S Corp even really make sense? And would I be, you know, potentially better off just going back to a sole proprietorship?

[A]

Would you have employees?

[B]

I have 10.

[A]

You have 10 employees?

[B]

Yeah. I didn't use two.

[A]

Holy crap.

[B]

Well, it's construction, so, yeah, I couldn't do what I do now without having the employees do the building for me.

[A]

Right. So they're. They're full time, right?

[B]

Yeah.

[A]

Okay. My inclination is for you to at least take your salary up to the Social Security wage base and then you take the rest is S Corp dividends. You would be able to crank a little bit more on your SEP IRA contribution.

[B]

Okay. And so the SEP is the best for desk. That was mainly what I was wondering. And then kind of following that is this whole backdoor Roth thing, which you guys talk about a lot and I have never fully grasped. I think I kind of get it. But basically, if I was to just take the money that I have in my IRA and then try to do this backdoor Roth, I would just owe taxes on all of that money. Right. And every time.

[A]

Right. I mean, you have. Well, right now you said you've got two Roth accounts, you've got a SEP IRA, your wife has a Roth and a traditional 401k. There's no other IRA asset that's outside of your wife's traditional 401k. Right. Neither you nor your wife have another IRA account that's not a Roth, right?

[B]

No.

[A]

Okay. The way that I guess that you could. The problem is that you have a SEP ira. And Mark, when he has a SEP ira, does that not screw him for doing a backdoor Roth because he's subject to the pro rata rules? Yeah, the SEP is part of the pro rata. So the problem is, for you, a backdoor Roth won't work. And the reason is that if you. For everyone listening, it's not just if you. A SEP IRA is a SEP special ira. It's a simplified employee pension. If you have an existing IRA account, whether it's a SEP or a traditional ira, and you want to try to do what's called a backdoor Roth, put money in a non deductible IRA and then immediately convert it to a Roth. It doesn't work when you have existing IRA assets in addition to that. But I think you're on the right track, which is you got the brokerage account, which is great. The money that's in the brokerage account. Is it not feasible that we take a chunk of that money out and dump it into the 529 plans?

[B]

Yeah, we could do that. And pretty confident I'll be able to get to the goal of like where I want to be with the 529 plans well before they're in college. My final question for you has to do with the brokerage account. So I'm working my butt off trying to make this money, but I don't. It kind of takes a toll and I don't really want to work this hard forever. So I kind of set myself a goal of if I could reach like a million in the brokerage account and then cut back on work and go back to where I was before, having all these employees and all the stress, I think I could be there maybe in like three to four years and then if I basically just don't touch it and for like 14 to 15 years and it could like double once and then maybe double it again, then I might be set for retirement like at like late 50s, 60s.

[A]

Well, listen, I mean, it depends. Isn't it somewhat predicated on your wife having that pension or not? Do you know what I mean? Like, yes, it's a feasible goal, but I don't think you should work yourself like to death for four or five years. I think you should work hard and you should save, but I mean, you can moderate also. You're making a really good living right now. You're kind of going for it while it's there for the taking. Right? But you also have to live and you have to make a decision about how hard you want to work. And some of this is going to be predicated on whether or not your wife will be able to claim that pension. Here's the game plan for you guys. You're going to keep socking money away into your sep. You're going to increase your salary to the wage base. Sock money away into the sep, keep putting money into the brokerage account. Try not to kill yourself, but then you can probably downshift a little bit from this sort of heavy duty. $300,000 a year, kill myself, and hopefully your wife is able to stick with her job and you're able to claim. Claim that pension benefit. And I think you'll be great. You'll be on track to do what you want to do when you want to do it. If you'd like to come on the air, it's very easy. Just go to jillonmoney.com, click the contact us button, and check that magic box. Mark does everything else. Hey, while you're on the website, sign up for the free weekly newsletter. Check out our YouTube show. You can subscribe to us on the Odyssey app or wherever you find your favorite podcasts. Try to do something nice for someone else today. It's going to make that person feel good, and I promise it is going to make you feel even better. Change your work, change your wealth, change your life. Thank you for listening and we'll talk to you tomorrow.

[C]

Feeling stiff?

[A]

Put your hands in the air like you just don't care. Or maybe like you do care. Move your arms behind your back, do some gentle twists with your core and repeat. This healthy suggestion is brought to you.

[C]

By Regents Blue Cross Blue Shield of Oregon. Together we Health I'm Jenna Fisher. And I'm Angela Kinsey. We are best friends and together we have the podcast Office Ladies where we rewatched every single episode of the Office with insane behind the scenes stories, hilarious guests and lots of laughs. Guess who's sitting next to me? Steve in the studio. Every Wednesday we'll be sharing even more exclusive stories from the Office and our friendship with brand new guests. And we'll be digging into our mail bag to answer your questions and comments. So join us for brand new Office Ladies 6.0 episodes every Wednesday. Plus on Mondays we are taking a second drink. You can revisit all the Office Ladies rewatch episodes every Monday with new bonus tidbits before every episode. Well, we can't wait to see you there. Follow and listen to Office Ladies on the free Odyssey app and wherever you get your podcasts.