Tax-Deferred 401(k) Problem

Summary

Podcast Summary: "Tax-Deferred 401(k) Problem" Jill on Money with Jill Schlesinger | Released December 5, 2024

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Introduction

In the December 5, 2024 episode of Jill on Money with Jill Schlesinger, host Jill Schlesinger delves into the complexities of managing a tax-deferred 401(k) in the context of retirement planning. The episode features a detailed discussion with Melissa, a 51-year-old business owner from New York City, who seeks guidance on optimizing her retirement strategy within a decade-long timeframe.

Guest Introduction

[02:58] Jill Schlesinger: "Hello, Melissa, how are you?"

Melissa, fondly referred to as "Sweet Melissa," brings forward her financial dilemma, focusing primarily on the best approach to handle her substantial tax-deferred funds as she plans to retire at 61, ten years ahead of traditional retirement age.

Melissa’s Financial Snapshot

Melissa provides a comprehensive overview of her financial landscape:

• Age: 51
• Annual Income: $130,000
• Retirement Goal: Retire at 61
• Current Savings:
  • Tax-Deferred Account: $1.1 million
  • Brokerage Account: $350,000
  • Roth Accounts: $200,000
  • Emergency Fund: $26,000
  • 529 Plans for Daughter: $60,000

[03:36] Jill Schlesinger: "We got three buckets. One's a tax deferred. How much is in there right now?"

[03:40] Melissa: "About 1.1 million."

Key Discussion: Handling the Tax-Deferred 401(k)

Melissa is at a crossroads, contemplating whether to:

1. Drain the Brokerage Account to Roth: Convert her brokerage funds into a Roth account.
2. Convert Now: Move the tax-deferred funds to a Roth account immediately.
3. Spend Down at 61: Utilize the tax-deferred funds gradually from age 61 to 70, supplementing with brokerage accounts thereafter.

[03:03] Melissa: "The central question that I have is in 10 years I anticipate that tax deferred fund will double. I'm trying to decide if I should drain my brokerage account to Roth, convert or at the age of 61, just spend down everything until age 70 and store the excess in a brokerage account."

Jill’s Analysis and Recommendations

Jill evaluates Melissa’s options, emphasizing the importance of maintaining a diversified withdrawal strategy to manage tax implications effectively.

[10:26] Melissa: "That's correct. I want to try to wait as long as possible only because of this amount."

[11:08] Jill Schlesinger: "I think the game plan would be for you to keep putting money away. You're doing the Roth. It's great. You're going to… live your life."

Jill suggests maintaining contributions to the Roth accounts while allowing the tax-deferred funds to grow, proposing that Melissa withdraw from the tax-deferred account as needed between ages 61 and 70. This strategy aims to minimize immediate tax burdens and maximize the growth potential of her investments.

Considerations for Retirement Lifestyle

Melissa envisions a comfortable retirement lifestyle, estimating her monthly needs at approximately $6,000 in today's dollars, accounting for housing, taxes, healthcare, and miscellaneous expenses.

[09:47] Jill Schlesinger: "With inflation and everything, let's just say today's dollars. 6,000 a month. That's fine."

Jill underscores the importance of factoring in healthcare costs and inflation, advising Melissa to plan conservatively to ensure financial stability throughout her retirement years.

Living Arrangements and Family Support

A significant aspect of Melissa’s financial strategy involves her living arrangements. By residing with her parents in a two-family house, Melissa benefits from reduced living expenses, contributing 25% of her salary to support her family.

[06:23] Melissa: "Well, I should probably mention this, is that I don't own a home, and I think that's a big factor. I actually live with my parents, believe it or not, both of us do in a two family house."

Jill commends this arrangement as a strategic move that allows Melissa to allocate more funds toward her retirement savings, highlighting the mutual benefits for both generations.

Future Planning and Estate Considerations

The conversation also touches upon estate planning, with Melissa having already completed her estate documents. She anticipates that her sisters will collaborate in managing the family home should her parents pass away, ensuring a seamless transition and continued support for family members.

[08:18] Melissa: "I foresee my sister moving in with us and we would own the house together."

Final Recommendations and Conclusion

Jill wraps up the discussion by reaffirming Melissa’s robust financial position and encouraging her to continue her prudent saving and investment strategies. She also suggests that Melissa consider ways to stay engaged post-retirement, such as pursuing passion projects or part-time work, to maintain financial and personal fulfillment.

[14:08] Jill Schlesinger: "You make the trade-offs, you live with your family. This is, you know, Mark, I feel like this is a very more common thing maybe in a place like New York where, I don't know, like you can really, like you can pool resources much more easily."

Jill emphasizes the importance of strategic planning, family support, and maintaining flexibility in retirement strategies to adapt to changing circumstances and ensure long-term financial well-being.

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Notable Quotes

• Jill Schlesinger [03:36]: "We got three buckets. One's a tax deferred. How much is in there right now?"
• Melissa [03:03]: "The central question that I have is in 10 years I anticipate that tax deferred fund will double."
• Jill Schlesinger [10:26]: "I think the game plan would be for you to keep putting money away. You're doing the Roth. It's great."
• Jill Schlesinger [14:08]: "You make the trade-offs, you live with your family. This is, you know, Mark, I feel like this is a very more common thing maybe in a place like New York where, I don't know, like you can really, like you can pool resources much more easily."

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Conclusion

This episode of Jill on Money provides valuable insights into managing tax-deferred retirement accounts, especially for individuals aiming for an early retirement. Through Melissa’s case study, listeners gain practical strategies for optimizing their retirement savings, balancing current financial obligations, and planning for a comfortable and financially secure retirement.

For more personalized financial advice and strategies, visit jillonmoney.com and consider subscribing to Jill’s weekly newsletter for ongoing guidance and updates.

Transcript

[Jill Schlesinger]

Hi, this is Jill Schlesinger. As a business owner, you're always looking for ways to get more out of everything you do. And to do that, you need the right partners to help you keep moving forward. The American Express Business Platinum Card works just as hard as business owners to help them pursue their passions. With a flexible spending limit that adapts with your business and five times membership rewards points on flights and prepaid hotels booked on amextravel.com see how the American Express Business Platinum Card gives business owners the tools and rewards to do more of what they love. Not all purchases will be approved. Terms apply. Learn [e-mail] AmExBusiness and now a word from our sponsors at Betterment do you want your money to be motivated? Do you want your money to rise and grind? Do you think your money should get up and work? Don't worry, Betterment is here to help. Betterment is the automated investing and savings app that makes your money hustle. Their automated technology is built to help maximize returns, meaning when you invest with Betterment, your money can auto adjust as you get closer to your goal rebalance. If your portfolio gets too far out of line and your dividends are automatically reinvested, that can increase the potential for compound returns. In other words, your money is working like a dog while you can be sleeping like one and storing like one too, you'll never picture your money the same way again. Betterment, the automated investing and savings app that makes your money hustle. Visit betterment.com to get started. Investing involves risk. Performance is not guaranteed welcome to the Jill on Money show. It's Thursday, December 5th and we are here trying to help you make better or less bad or more considered financial decisions. The way that we do that, it's very easy. We encourage you to go to our website jillonmoney.com and when you're there, wherever you are on that website, in the upper right hand corner you'll see a Contact Us button. Click that button, write us your note and if you are shy and you don't want to come on the air, that's fine. But give us a bunch of detail. If you do want to come on the air, check the box and you don't have to write quite as long a note. Mark will do everything else. He will follow up with you while you're on the website. Don't forget to sign up for the free weekly newsletter and maybe even check out my book the Great Money Reset. I feel like around the year end and for the news year, people are Considering resets. And I love these stories so much and they are based on our conversations with you. So please check that out if you maybe want a little holiday gift for someone who you know is going through a big life transition. All right, Today we are talking to Ms. Melissa, also known as Sweet Melissa, for those of us of a certain age from New York City. Hello, Melissa, how are you?

[Melissa]

Hi, Jill. Hi, Mark. How are you?

[Jill Schlesinger]

We are great. What's going on? What brings you to us?

[Melissa]

So I have a dilemma. I AM so. I'm 51 years old. I would like to retire at age 61. So I really only have 10 years that I want to work. I have three buckets of money and I'm trying to figure out what to do with the tax deferred. I think the central question that I have is in 10 years I anticipate that tax deferred fund will double. I'm trying to decide if I should drain my brokerage account to Roth, convert or at the age of 61, just spend down everything until age 70 and store the excess in a brokerage account.

[Jill Schlesinger]

Okay, we got three buckets. One's a tax deferred. How much is in there right now?

[Melissa]

About 1.1 million.

[Jill Schlesinger]

Wow. Okay. And how much is in the brokerage account right now?

[Melissa]

About 350,000.

[Jill Schlesinger]

What's our third bucket?

[Melissa]

I have just Roth funds between two accounts. So it's about 200,000 in Roth funds.

[Jill Schlesinger]

And what about just plain old cash on hand savings, CDs, that kind of stuff?

[Melissa]

I have about $26,000 emergency fund.

[Jill Schlesinger]

Okay, and Melissa, you're working right now. How much are you earning?

[Melissa]

I earn about 130,000.

[Jill Schlesinger]

And you're single? Partnered, married?

[Melissa]

I am single with an 18 year old college student who I do have some 529s, but we're essentially cash flowing her her college.

[Jill Schlesinger]

Okay, how much is in the 529s?

[Melissa]

About. About 60,000.

[Jill Schlesinger]

60. And is she in college or a senior right now?

[Melissa]

She's a freshman. College freshman.

[Jill Schlesinger]

And she did not go. You're a New York person. So she didn't go to Hunter for free.

[Melissa]

She actually goes. She commutes. So she does go to a city school.

[Jill Schlesinger]

Okay, that's great. So how much does she need per year?

[Melissa]

We need about just tuition alone. Probably about $15,000.

[Jill Schlesinger]

Okay, so we have tuition basically carries is. Is covered by your 529. But there's other stuff. Correct.

[Melissa]

Like books and you know, all those books. All those.

[Jill Schlesinger]

That is so overrated. How much more do we Need a year?

[Melissa]

Probably like, maybe, maybe like twelve hundred dollars. I would say a year between, I guess between commuting back and forth.

[Jill Schlesinger]

Let's just say 2000.

[Melissa]

All right, let's say 2000, why not?

[Jill Schlesinger]

Okay. She really. She did you a solid.

[Melissa]

Yes.

[Jill Schlesinger]

Geez. All right, so right now, from the 130,000 that you earn, what percentage is going into a retirement account? How much are you putting in there a year?

[Melissa]

Right Now I'm putting 15%. I think next year I'm going to up it because I'm on a timeline that I would like to, you know, see it through for. I'd like to just finish out the decade.

[Jill Schlesinger]

Just finish the decade. Let's top off the decade. And in that 15%, is that going into a traditional or is that going into a Roth?

[Melissa]

It's going into a Roth and I've been doing only Roth probably for the last seven years.

[Jill Schlesinger]

Great. That's great. Okay, so on the 130, with the 15% and obviously the kid costs and stuff like that, how's your cash flow?

[Melissa]

It's, it's very good. It's good.

[Jill Schlesinger]

So in other words, someone just told me it is impossible to live in New York City on $150,000 a year. You are saying you're calling BS on that? Is that what you're telling me right now?

[Melissa]

Well, I should probably mention this, is that I don't own a home, and I think that's a big factor. I actually live with my parents, believe it or not, both of us do in a two family house. So I do pay my parents 25% of my salary, and that's pretty much it.

[Jill Schlesinger]

You pay them 25% of the 130 as like just cover your costs?

[Melissa]

Exactly.

[Jill Schlesinger]

Oh, I'm interested in this. How is that, how is it like living together? How do you find it? Is it like weird? Is it great? Like, where do you, where do you stand on that? I mean, that's a, it's a real number. I mean, it's, it's as if you were paying whatever, three grand a month probably, or whatever. Just under that.

[Melissa]

Yeah, I mean, it has its moments, but it is what it is. I think I see the bigger picture and I try not to let the little things bother me.

[Jill Schlesinger]

I think this is such a smart idea. I really do. And your parents, how are they? How is their, you know, their health, their age? Like, how is it, how is it for them?

[Melissa]

So far so good. They're, they're in their late 70s, early 80s. They do have some Retirement account. Retirement accounts and Social Security that, you know, sustain them and then whatever I give them and we're. That's pretty much what we do.

[Jill Schlesinger]

So you and your daughter live in one part of the two family house, your parents live in the other.

[Melissa]

Correct.

[Jill Schlesinger]

Okay. And. And right now, is there, do you have any siblings that would like, be mad about this arrangement or are they okay?

[Melissa]

No, they're okay.

[Jill Schlesinger]

Okay. Because they're like, good. You got mom and dad. Great. Keeping eyes on them. Right?

[Melissa]

Right.

[Jill Schlesinger]

What's the. I know this is going to be weird, but let me just put it out there. So is this an arrangement that, like, what happens upon their death? Let's, let's just walk through that. They have this two family house. Then what happens to you after they die? Do you get first of right of first refusal to buy your siblings out? Do you stay where you are? What happens?

[Melissa]

I foresee my sister moving in with us and we would own the house together. Probably. She has some health issues, which would probably not enable her to own the house because of her situation. But if I, if I do own it, then I would probably just own it outright.

[Jill Schlesinger]

Okay, that's great. So just one sib.

[Melissa]

Yeah, just one.

[Jill Schlesinger]

All right, that's. That makes it a lot easier. Okay, so there's, so there's no reason to believe that after, you know, let's pretend they live 10 more years. Okay. Just for the heck of it. And then they pass away. You're retired. It's not like I have to come up and you say to me, oh, no, no, in fact, you would inherit this house. You'd have to maintain it. There's no mortgage or anything on it. Right?

[Melissa]

Correct.

[Jill Schlesinger]

You would inherit it. You'd get the step up in cost basis. You'd live in one half, your sister lives in the other half. Life is good. Your kids launched, probably not with you maybe, you know, off doing something fabulous and you're ready to retire. How much do we think you need in income? You know, it's a funny thing, like the $3,000 a month is probably like taxes and upkeep and all that. So I'm going to presume that at least your housing is in today's dollars, would be that same three grand a month. But what else do you need to live on for spending money?

[Melissa]

I think this is just a ballpark number. I'm thinking like between 55 and 6,000amonth. At 10 years from now, you know.

[Jill Schlesinger]

With inflation and everything, let's just say today's dollars. 6,000amonth. That's fine.

[Melissa]

Okay.

[Jill Schlesinger]

Okay. So 6,000 is our bogey. Are you entitled to any pension?

[Melissa]

No. And I also, I also get health care, so I have to figure that out as well.

[Jill Schlesinger]

Yeah. Yeah, you do. Well, you can go to healthcare.gov and, you know, New York has plans and, you know, the. That's also a good thing to keep in mind that, you know, you'll have to pay, whatever it is, $1,000 a month for your health care. Maybe it's a little less, but let's call it that. So that's why I'd rather use 6,000 in today's dollars, which will be fine. All right. What are you going to do with yourself from 61 to 70? You're not going to claim till 70. Is that what I hear from you?

[Melissa]

That's correct. I want to try to wait as long as possible only because of this amount.

[Jill Schlesinger]

So I think that I would not convert. I hear what you're saying, but this for where we are today, what we know. What I think the game plan would be for you to keep putting money away. You're doing the Roth. It's great. You're going to. And you're doing. Yeah, the tax deferred is going to keep increasing, but from 61 to 70, you got to live on that money and you're going to pull out the money you need. And, you know, if we're. Again, let's pretend it's today's dollars. Right. And what I would say is that you would have, you know, 100 grand a year comes out of that tax deferred. You pay your taxes now. You're living your life. Right.

[Melissa]

Right.

[Jill Schlesinger]

And maybe even it's going to probably be like 120, because welcome to New York, the greatest city in the world, but also high taxes. So, you know, if you did that for nine years, you're in good shape now there. It is possible that, like, your brokerage account is built up or your, your needs have changed and you really aren't. Yeah. Maybe we would think about. Maybe, maybe you would think about converting. But if you're just going to live on that tax deferred money for those nine years, then you're going to collect Social Security at age 70. What's the. Do you know an estimate of your Social Security benefit?

[Melissa]

I think right now, I checked it the other day. If I take it at 70, I would get like 4,000 or something.

[Jill Schlesinger]

That's what I figured. And then at that point, you can keep pulling money out of the tax deferred account. You can and you know, maybe we would say it depends on the tax rates, depends on what happens, you know, I don't know. But for now, I think the game plan is a good one. You, you're going to have to figure out what to do. What are you going to do to Occupy yourself from 61 on? 61 is young, also known as very close to where I am right now. So I want to know from you, I have ideas. If you, first you're going to tell me what do you want to do? And then I'm going to give you ideas so you can help me. So what do you think you would do at age 61?

[Melissa]

I think that I would definitely retire from this corporate job that I have, but I would probably still work in something that's just, you know, not as stressful as I have.

[Jill Schlesinger]

Right. I mean, you could just make a couple grand a month, honestly, and get health care and you'd be pretty happy. Here's the other thing I'd like for you to do. I need someone, I know that this has probably already been done a million times, but I need someone to do. Write a book that's called Free New York City. Basically all the fabulous things that you can do in New York City for free or low cost. And I had a friend who did this. She, she actually had to. She retired from CBS and she was like a child in a candy store. She really was. She said there's so many unbelievable things to do in New York that don't cost a lot of money. And she became like the expert in that. But then she moved to the west coast. So I need you to do that for me. You write the book, I'll get you a publisher.

[Melissa]

That's excellent idea. I love that idea.

[Jill Schlesinger]

It's a good idea. Yeah. Do you have your estate documents done?

[Melissa]

I do.

[Jill Schlesinger]

Okay. And I don't think there's really anything else. I think you're in very good shape. Are you comfortable managing your own money?

[Melissa]

I, I'm comfortable only because I've been forced to, but yes, I, I feel good about it.

[Jill Schlesinger]

You've done a yeoman's job of navigating an expensive place. You make the trade offs, you live with your family. This is, you know, Mark, I feel like this is a very, a more common thing maybe in a place like New York where, I don't know, like you can really, like you can pool resources much more easily. I see it, I mean, especially in this, I know where Melissa lives in this area. You see it all over the place. Yeah. It's cool. And it's really good for both generations, by the way.

[Melissa]

Absolutely.

[Jill Schlesinger]

I mean, it's great for your parents to be like, oh, my granddaughter. I'm watching my granddaughter grow up. That's kind of cool. I love that. And it's great for you to be able to say, you know what, I'm here. I got my eyes on my parents. Things are good. I tried to get my mother to move into the city. No, she's stuck in the suburbs because her whole life is there. That's the problem. I might have to force her. I did tell her I found a nice home for her very close by. She didn't think that was great or very funny either. What am I going to do? All right, Melissa, anything else we can do for you?

[Melissa]

No, I really appreciate the call. Thank you very, very much.

[Jill Schlesinger]

Oh, you are in great shape and we're happy to chat with you. If you are thinking about what your ten year game plan is, your five year game plan, maybe you're thinking about some big real estate purchase. Maybe you want to buy a two family home with your siblings or with a family member to better manage the costs that are ahead of us. I think it's a great idea. I would totally buy a place with my sister being so much fun. Just go to our website jillonmoney.com, click the contact us button, write us a note, let us know if you'd like to come on the air live. Don't forget to sign up for the free weekly newsletter. Check out all the content that lives on our website. You can subscribe to us on the Odyssey app or wherever you find your favorite podcast. Do something nice for someone else today. Change your work. Change your wealth. Change your life. Thank you for listening and we'll talk to you tomorrow. 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.

[Melissa]

In the studio.

[Jill Schlesinger]

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.

[Melissa]

Well, we can't wait to see you there. Follow and listen to Office Ladies on.

[Jill Schlesinger]

The free Odyssey app and wherever you get your podcasts.