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:
-
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?"
-
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?"
-
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:
-
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."
-
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."
-
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."
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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.