Managing Cash Flow in Retirement

Summary

Managing Cash Flow in Retirement Jill on Money with Jill Schlesinger
Release Date: December 30, 2024
Host/Author: Audacy

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Introduction

In the December 30, 2024 episode of Jill on Money with Jill Schlesinger, host Jill Schlesinger delves into the intricate topic of managing cash flow during retirement. True to her style, Jill simplifies complex financial concepts, making them accessible to listeners. The episode features a listener call from John in New Jersey, whose meticulous financial planning sparks an engaging discussion on optimal strategies for maintaining cash flow in retirement.

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Listener Call: John's Financial Situation (02:16 - 05:20)

Jill welcomes John, a 57-year-old early retiree from New Jersey, who has retired without pensions and is living off his substantial savings. John outlines his financial landscape:

• Brokerage Account: $2.2 million in indexed funds and some cash, including holdings in SGOV (a zero to three-month Treasury fund).
• Roth IRA: $480,000 achieved through a mega backdoor Roth, invested primarily in index funds and individual stocks.
• Traditional IRA: Approximately $2.1 million in a 10-year Treasury bond ladder.
• Real Estate: Owns a single house valued between $1.4 and $1.7 million, mortgage-free.
• Withdrawal Strategy: Currently operating on a 3.3% to 3.5% annual withdrawal rate, translating to about $162,000 per year before taxes.
• Expenses: Monthly pre-tax spending ranges between $13,500, although they live below their means.

John's meticulous planning and diversified portfolio set the stage for a deep dive into effective cash flow management in retirement.

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Discussion: Managing Cash Flow and Bond Ladders (05:21 - 08:30)

Jill begins by assessing John's strategy of utilizing a bond ladder within his Traditional IRA. She inquires about the specifics:

Jill Schlesinger (05:40):
"How much is in there right now?" [06:05]

John (05:40):
"The brokerage is about 380,000. So it's about 390,000." [06:11]

John explains that the bond ladder matures annually starting in 2026, with interest flowing into a money market account and reinvested in SGOV. This setup provides liquidity and minimizes interest rate sensitivity, currently yielding around 4.9% to 5%.

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Strategies: Roth Conversions and ACA Subsidies (08:31 - 14:15)

John shares his dual strategy:

1. Roth Conversions: Gradually converting Traditional IRA funds to Roth IRA to manage taxable income.
2. Health Insurance Strategy: Leveraging the Affordable Care Act (ACA) in New Jersey to receive subsidies by keeping his Modified Adjusted Gross Income (MAGI) low until Medicare eligibility.

John (07:59):
"We're going to be using the ACA in New Jersey because we're kind of in control of what our adjusted gross income is going to be." [08:10]

Jill evaluates the complexity of balancing Roth conversions with ACA subsidies, questioning the long-term tax implications and the effectiveness of this strategy.

Jill Schlesinger (09:45):
"The risk that you're taking is you are wrong about tax rates and where you guys land ultimately." [09:45]

John acknowledges the meticulous nature of his plan, balancing immediate health insurance costs with long-term tax efficiency.

John (10:09):
"For a family of three making about 120,000, it would be about $850 a month." [09:45]

Jill weighs the benefits against the operational complexity, ultimately questioning whether the potential savings justify the effort.

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Jill's Advice and Conclusions (14:16 - 15:09)

Jill commends John's proactive approach but advises caution regarding the sustainability and simplicity of his strategies.

Jill Schlesinger (10:38):
"I couldn't be bothered. Isn't this terrible? I'm going to admit this to you, I could not be bothered for this $5,000." [10:38]

She highlights the potential risks of overcomplicating retirement strategies, especially concerning future tax rate uncertainties and market volatility. Jill suggests that while John's approach is not inherently flawed, it requires significant management and discipline.

Jill Schlesinger (15:09):
"I really do. John from New Jersey, just make sure you dot all your I's, cross your T's, have your estate documents done." [15:09]

She emphasizes the importance of comprehensive estate planning and maintaining flexibility in withdrawal strategies to adapt to unforeseen financial landscapes.

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Closing Remarks

Jill wraps up the episode by reiterating the value of proactive financial management in retirement while acknowledging the balance between optimization and simplicity. She encourages listeners to reach out with their financial questions, emphasizing the wealth of free resources available on her website.

Jill Schlesinger (15:44):
"You may actually be able to do both. You really might." [15:44]

Listeners are reminded to subscribe to the Jill on Money newsletter for ongoing financial insights and to engage with the community for personalized financial guidance.

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Notable Quotes

• Jill Schlesinger:
  "Everyone listening if you don't know that term, basically you're pulling out about 3.5% of your total investments on an annual basis. And that's fine." [04:36]

• John:
  "Our plan was to spend from the brokerage account and then do some Roth conversions every year until we're about 70." [07:30]

• Jill Schlesinger:
  "Great is the enemy of good. But dude, this is what you want to do." [12:20]

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Conclusion

This episode of Jill on Money offers a nuanced exploration of retirement cash flow management through John's real-world financial scenario. Jill Schlesinger provides balanced insights, highlighting both the merits and challenges of sophisticated financial strategies. Listeners gain valuable perspectives on optimizing withdrawals, managing tax liabilities, and ensuring sustainable income throughout retirement.

For more detailed financial guidance and resources, visit jillonmoney.com.

Transcript

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[Jill Schlesinger]

Time, Unlimited more than 40 gigabytes per month. Slows full [e-mail] welcome to the Jill on Money Show. It's Monday, December 30th. Tik just a couple days to go and boy, here we are. We are about to usher in 2025. But before we do that, we have to remind you that two days left to do a little tax loss harvesting in your investment accounts and also two days left to sign up for Jill on Money Live. At the current rate, Jill on Money Live provides you with access to quarterly live webinars, bonus content, the back catalog, and if you do this between today and tomorrow, by the end of the 31st, if you sign up, it will cost you $35. In a few days it's going to cost more $45. I hear Mark's going to announce it though. If you don't want to sign up, that's fine. There's a ton of free stuff on the website. Go to jillonmoney.com and you'll see there's a free weekly newsletter, there's blogs, there's other shows, there's resources, a ton of stuff right there for you. Also what's there is our contact Us button that's in the upper right hand corner. When you click it, a form will pop up and that is an email that we receive. And if you would like to join us live, then check the box and Mark will do everything else. Today we are talking to John who's on the line from New Jersey. Hi John, how are you Good. How are you doing? Great. What can we do for you?

[John]

You know, I just retired early at around 57 and I have saved a lot and have various accounts and I'm sort of trying to decide where the best place is to keep cash for our yearly budget. Whether it's good to sell from our brokerage account directly from, you know, our index fund.

[Jill Schlesinger]

Right.

[John]

Or it's better to put that cash into a high yield savings or something like sgov, which is zero to three month Treasury. That's basically like a high yield saving.

[Jill Schlesinger]

Right. So tell us a little bit about yourselves because you said we. So you're 57 and you have a spouse.

[John]

Yep, she's 57 as well.

[Jill Schlesinger]

And is she also retired?

[John]

Yeah, she left about a year ago from her job.

[Jill Schlesinger]

Okay, great. Do you have any income? Do you have pensions? Either of you? Both of you?

[John]

Nope.

[Jill Schlesinger]

Okay, so what you've done is you're retired and you're basically living off the money you've saved, right?

[John]

Yep.

[Jill Schlesinger]

Okay, so let's do a drill down of these accounts.

[John]

Tell us what you have in our brokerage account. Mostly indexed other than some. Again, some cash and sgov, it's about $2.2 million.

[Jill Schlesinger]

Okay, great.

[John]

And then in a Roth, we, you know, got really lucky and did a mega backdoor Roth when my company allowed it. And so now there's about 480,000 in there.

[Jill Schlesinger]

Okay.

[John]

And that's all in stocks or I should say indexes in a couple individual stocks.

[Jill Schlesinger]

Okay.

[John]

And then again got lucky and sort of missed the bond crash. And in our IRA is about 2.1, $2.2 million of a bond ladder, a 10 year bond ladder. And that's Treasuries.

[Jill Schlesinger]

All right, that's great. How much money do you need to draw to live on?

[John]

So that's the good news is that it's about, about 162, about a 3.3 to 3.5% withdrawal per year.

[Jill Schlesinger]

Okay, so everyone listening if you don't know that term, basically you're pulling out about 3.5% of your total investments on an annual basis. And that's fine. You're gonna be. That should be no problem.

[John]

Sure.

[Jill Schlesinger]

Do you have some kids?

[John]

Yeah, we have one kid who's l. York City and she's, you know, not a dependent. And then we have a college, college age daughter who's a junior right now, but that's all, you know, we have. We have no debt at all.

[Jill Schlesinger]

Okay. How much is your house worth?

[John]

Between probably 1.4 and 1.7.

[Jill Schlesinger]

Do you have a mortgage?

[John]

No.

[Jill Schlesinger]

Okay. And that's the only house you have, right?

[John]

Yep.

[Jill Schlesinger]

Okay. The bond ladder. Let me just, I want to understand this a little bit. Are you fully invested and then the interest is just flowing into a money market at that point?

[John]

Yeah. So the interest is going to be. So we're just starting to draw off everything next year because.

[Jill Schlesinger]

Okay.

[John]

But yeah, all the interest from the bonds flows into a money market that I sort of immediately put into SGOV again, which is just, I mean it's, it's very specific, but it's a, it's a zero to three month treasury fund that's, you know, not very interest rate sensitive and it's been really great. While rates are high, I think it's still yielding about 4.9 to 5%. I know that will go down if the Fed.

[Jill Schlesinger]

Yeah, I mean, it doesn't matter. It could be in a money market or this thing. Who cares? Exactly. So here's my question. How much is in there right now?

[John]

Total is about. Well. And the brokerage is about 380,000. So it's about 390,000.

[Jill Schlesinger]

Okay. And so the first bond matures when 2026.

[John]

I'm counting these sgov as like two, almost like one year bond. So I'm not really counting those.

[Jill Schlesinger]

Yeah, yeah, yeah. So when that bond matures, how much is in each of these now? A couple hundred grand.

[John]

Exactly. Yep.

[Jill Schlesinger]

Okay. And so presumably you have the money to live for next year. Right. You have the money from the brokerage account that's already there. And then when each bond matures from the ira, maybe what the best way to think about that is you pull out that money, you pay the tax that's due on that 200 and you live on it. Maybe the idea might be for the next 10 years to get all the money out of that pre tax IRA bond ladder.

[John]

Interesting.

[Jill Schlesinger]

The reason why I kind of like that is this might allow you to kind of get the. You don't have to do a conversion. You just live on the money. It's already done. It's like, sort of like you've done the hard work. It's like, wow, we have the bond ladder. It's done.

[John]

Can I ask you a question about that?

[Jill Schlesinger]

Yeah, sure.

[John]

So I mean, so my plan was, and I read way too much and listen to you constantly and Ritholtz in general, so. And I love, I love finance. Yeah. I mean our plan was to spend from the brokerage account and then do some Roth conversions every year, you know, until we're about 70. Take that money and do a roll, you know, the interest, do a rolling bond ladder while we're also doing the conversions.

[Jill Schlesinger]

Wait a second, wait a second.

[John]

Yeah.

[Jill Schlesinger]

Isn't that a lot of work for the same outcome?

[John]

Well, I don't think so. And I'll tell you why. Because we're going to be using the ACA in New Jersey.

[Jill Schlesinger]

Yes.

[John]

Because we're kind of in control of what our adjusted gross income is going to be. Our magi. Yeah, we, we can get quite a bit of subsidies by keeping our income pretty low.

[Jill Schlesinger]

You mean until Medicare.

[John]

Yeah, exactly, exactly.

[Jill Schlesinger]

So that's worth more. But like then you have this other weird problem that is on the back end, which I get, I get like, okay, Affordable Care act. You get. I don't know what the money you have, but I mean, you do have brokerage account income. Right. And not a lot. I get it. You have some of that. You keep your MAGI, your modified adjusted gross income down and then you're 65. Right. And then you're on Medicare and then the IRA has gone up in value every year at that point you then would be. If you start converting then, or even if you waited, but you then would be converting and then you have the problem of creating irmaa, Right. Income related adjustments. And then also I'm not sure what the tax situation's gonna be. I guess it's a weird thing. Like what is the benefit that you get? What's the premium? Like, what's the cost differential? So what are we talking about?

[John]

So I was just. I mean, because open enrollment just started and started like right now with Cobra, I'm paying a fortune, so it's about $2,300 a month. I consider a lot of money.

[Jill Schlesinger]

Whatever.

[John]

I looked and when I started doing research today because again, I'm nuts and I try to stand off of this stuff.

[Jill Schlesinger]

Yeah, sure.

[John]

For a family of three making about 120,000, it would be about $850 a month. And to tell you the trut. My income is about 40 or 50 through dividends from that brokerage account. So I would take the other $60,000 and use it towards taxes and conversions and also withdrawals from the IRA to get up to about 120 grand possible.

[Jill Schlesinger]

What is it? If it were more than120, where does it. Do you know how much? I'm just trying to figure out if we're like, wonderful. But if you're telling me it's like, well, it's $1,200 a month. And we're talking about saving four grand. I'm not sure I'm that interested in.

[John]

Yeah.

[Jill Schlesinger]

Do you know what the number is?

[John]

I don't because I capped it at 100. But New Jersey has up to 600% above the poverty level. They start doing subsidies, but I think the maximum I would pay is probably like 1200, $1300, which is still $1000 less than I'm paying. But there's a lot of levers to pull and a lot of math.

[Jill Schlesinger]

I get what you're doing. I don't know why. I'm a little bit more concerned about the IRA building up. And I mean, how much are you spending on an annual basis? Really? Like your after tax, you said 3.5% withdrawal, but what's your actual spend?

[John]

Yeah, so it's about, you know, before taxes. I would say it's anywhere between, let's say, 13, five a month, and that's conservative. In other words, we don't necessarily spend that, but we're not against spending it. And we'll go away for like a month or two even. But we live below our means and we always have been living that way, but, you know, not for any special reason.

[Jill Schlesinger]

Okay, so I'm just going to tell you, like, your math might be slightly better. Your scenario and your math might be better. I feel like this is a ton of work and it's a pain in the ass. I mean, like, you can do this and. Yeah, I mean, it is possible that you're going to save $6,000 a year, and that's great. I mean, but dude, this is what you want to do, you know, like, this is like, if you do great, go for it, manage it, have fun, it's fine. It's fine. And the risk that you're taking is you are wrong about tax rates and where you guys land ultimately. Okay. And so that's not a terrible risk. It's not. It really isn't. I couldn't be bothered. Isn't this terrible? I'm going to admit this to you, I could not be bothered for this $5,000. I mean, considering you're worth over 5 million. More than that, you know, if you include the house. But, like, you guys have 5 million bucks invested and I'm going to jump through hoops for five grand a year. Okay, have fun. But I much would rather get that money out of that IRA account. Know that it's coming out. Know that you have control over the tax rate. There's no way that you're going to Be paying. I think, like later in life. I don't think you'll be paying, you know, 22%. I think that, like, rates are going to go up. Everyone's going to pay more in taxes. You're young and I'd like to get that money out. But if you want to do it and you want to, like, play the game, and it is a bit of a game, I get it. And then try to manage it, you're going to be optimized up to your tush. You're going to make it. It's going to be great. I cannot do that. It is like, I just, I can't for myself, but I get that you can. And there are people like you that are far wiser than I am about my money. I'm lazy. I just want to be like, how can I live my life and get the money out? Control the tax situation. Boom. You may actually be able to do both. You really might.

[John]

I love doing it, I have to say. I know it's crazy and I was in a very, I was in a creative job for 30 years, so it's nice to sort of. I like the analytical part of it, so. But I think you're right. It's, it's, you know, great is the enemy of good. But I don't mind trying to be great.

[Jill Schlesinger]

I want you to be great. I love it. Do you guys have your estate docs done?

[John]

Yes. Yeah, we have long term insurance.

[Jill Schlesinger]

We have. All right, then. You are great. You're greater than I and we are. I am boring and lazy. Also, if the market were to crap out and it's going to, you know, you're young, so you're going to have another 50% wipeout someday. You just are. And if you are comfortable with having, you know, the money in index funds and stocks and that mostly works for you and you'll, you'll. I mean, I think that you'll end up scaling down risk wise because, you know, you're young now and. But you have decades in the future, so it's fine. But one of those powerful bear markets is going to spook the crap out of you because as you get older, it's scarier. It just is. So, you know, even so, I think you're, I mean, you're great. There's like, it will be hard for you to screw this up unless you started spending like 20 grand a month. Then you could screw it up. And I think you're in good shape.

[John]

Great.

[Jill Schlesinger]

I really do. John from New Jersey, just make sure you dot all your I's, cross your T's, have your estate documents done. Don't get too aggressive with your, you know, don't let that spending balloon and have fun qualifying for any sort of help that you can get from the great state of New Jersey. God knows you've played paid plenty of taxes, so I have no problem with it. I think you're in good shape. And don't worry about if you don't do it, it doesn't work out quite right or you have to pay a little bit more. It's not a big deal. You already just said you're paying $2,300 a month for COBRA right now. It's going to go down by a thousand at least.

[John]

Great. Thank you so much.

[Jill Schlesinger]

All right. Good luck to you. Hey, if you've got a financial question, if you've got some sort of finagling kind of scheme in your head, give us a Holler. Go to jillonmoney.com, click the contact us button and let us know if you'd like to come on the air. We'll talk it through with you. You can now tell I am both I'm a wimp and I'm lazy. Mark. Really, what a great a combination for someone hosting a personal finance podcast. Anyway, don't forget to sign up for the free weekly newsletter and of course 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, 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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