Are You Cutting Retirement Too Close? - 542

Summary

Podcast Summary: "Are You Cutting Retirement Too Close?" (Episode 542 of Your Money, Your Wealth)

Introduction In Episode 542 of Your Money, Your Wealth, hosts Joe Anderson, CFP®, and Big Al Clopine, CPA, delve into three distinct retirement scenarios submitted by listeners. This episode, titled "Are You Cutting Retirement Too Close?", explores the intricacies of retirement planning, investment strategies, and the emotional aspects of financial decision-making. The hosts maintain their signature blend of expert advice and light-hearted banter, making complex financial topics accessible and engaging.

---

1. Case Study: Rubble and Sky's Retirement Plan

[00:00 - 04:15]

Overview: Rubble and Sky, a couple from Minnesota, aim to retire comfortably with an annual spending goal of $65,000. Their fixed income comprises $46,000 from Social Security and $21,000 from a pension, totaling $67,000. Additionally, they have saved $250,000, distributed across brokerage accounts, a Roth IRA, and a 401(k). They currently spend approximately $90,000 annually but believe they can reduce this to meet their retirement goal.

Hosts' Analysis:

• Big Al Clopine reassures the couple, stating, "Minnesota, you got good fixed income and you saved 250k. I mean, nothing like that."
• Joe Anderson concurs, highlighting the couple's solid fixed income and savings: "That's pretty good. It's fantastic. And it's more than the spending."
• The hosts discuss the importance of having a financial cushion. Big Al notes, "So you have a good fixed income. You got 250k... that's a lot of cushion."
• They address concerns about inflation impacting Social Security, suggesting potential spending adjustments in the future.

Conclusion: The hosts conclude that Rubble and Sky are on a stable path toward retirement. They recommend maintaining their current savings strategy and being mindful of future spending adjustments, especially considering inflationary pressures. As Joe aptly puts it, "Life is too short. It's time. Go for it."

---

2. Case Study: David's Home Purchase Decision

[14:03 - 21:03]

Overview: David from Redondo Beach, California, aged 69, is contemplating using his Roth IRA funds to purchase a $1.3 million home. His financial profile includes:

• Social Security: $4,800/month
• Pension: $2,200/month
• IRA: $1.4 million
• Roth IRA: $1.3 million David prefers to avoid drawing from his IRA to prevent additional tax liabilities and is considering a mortgage to finance the home purchase.

Hosts' Analysis:

• Joe Anderson questions the prudence of using $900,000 from the Roth IRA, suggesting a more balanced approach: "I think there's a lot of different ways that you look at this... but I want to ask, what makes you sleep better at night, looking at your liquid balance of $2.5 million?"
• Big Al Clopine recommends caution, advising against depleting the Roth IRA: "I would take $100,000 out of the IRA, pay the tax on it and try to stay in the 24% bracket... I wouldn't pick an even amount like $100,000."
• The discussion touches on mortgage rates and the implications of taking on significant debt in retirement. They emphasize the importance of aligning financial decisions with personal comfort levels regarding debt and liquidity.

Conclusion: While purchasing a dream home is a personal decision, the hosts advise David to carefully weigh the financial implications. They suggest a hybrid approach—partially funding the down payment through Roth withdrawals while maintaining a manageable mortgage—to balance immediate desires with long-term financial security.

---

3. Case Study: Charlie Pepper's HELOC vs. Pre-Tax Accounts

[22:00 - 33:44]

Overview: Charlie Pepper from Colorado is exploring whether to draw $100,000 from a Home Equity Line of Credit (HELOC) at a 7% interest rate or from his pre-tax retirement accounts to cover living expenses. His financial details include:

• Pre-Tax Accounts: $1.5 million
• HELOC: $378,000 limit at 7% interest
• Mortgage: $200,000 at 2.5% Charlie aims to minimize tax liabilities while managing his retirement funds effectively.

Hosts' Analysis:

• Joe Anderson breaks down the math, comparing the tax implications and potential growth: "If you draw $100,000 from the HELOC... versus $130,000 from the IRA, the difference is... $4,500 net."
• Big Al Clopine cautions against leveraging the home for retirement expenses due to variable interest rates and potential financial instability: "HELOC interest rates are variable. And I would, I would be really nervous doing this."
• The discussion highlights the risks associated with HELOCs, especially in a fluctuating housing market, and emphasizes the importance of maintaining liquidity without incurring high-interest debt.

Conclusion: The hosts advise Charlie against using a HELOC to fund retirement expenses. Instead, they recommend optimizing Roth conversions and strategically withdrawing from pre-tax accounts to maintain financial stability and minimize tax burdens. Balancing growth potential with risk management is key to ensuring a secure retirement.

---

Key Insights and Takeaways

1. Evaluate Fixed Income vs. Spending Needs:

   • Ensuring that fixed income sources cover essential expenses is crucial. Excess savings can provide a buffer against unforeseen expenses and inflation.

2. Strategic Retirement Withdrawals:

   • Optimizing Roth IRA conversions can offer tax benefits and maintain a balance between taxable and tax-free income sources.
   • Avoiding excessive withdrawals from retirement accounts preserves growth potential and reduces tax liabilities.

3. Debt Management in Retirement:

   • Taking on high-interest debt, such as HELOCs, can be risky. It's essential to consider interest rates, loan terms, and personal comfort with debt.
   • Maintaining a manageable debt load ensures financial flexibility and reduces stress during retirement.

4. Personal Comfort and Financial Decisions:

   • Financial strategies should align with individual preferences and stress levels. Whether it's minimizing debt or maximizing liquid assets, personal comfort plays a significant role in decision-making.

5. The Importance of a Financial Cushion:

   • Having a robust savings cushion provides security against unexpected expenses and market volatility, allowing retirees to enjoy their golden years with peace of mind.

---

Notable Quotes

• Big Al Clopine on Rubble and Sky's savings:
  "Minnesota, you got good fixed income and you saved 250k. I mean, nothing like that." [02:31]

• Joe Anderson encouraging the couple:
  "Life is too short. It's time. Go for it." [04:07]

• Big Al Clopine on using HELOCs cautiously:
  "HELOC interest rates are variable. And I would, I would be really nervous doing this." [28:26]

• Joe Anderson on debt and emotional comfort:
  "It's all about the emotion and this, the stress aspect of it." [19:07]

---

Conclusion

In this episode, Joe Anderson and Big Al Clopine provide thoughtful analyses of complex retirement scenarios, emphasizing the importance of balancing financial strategies with personal comfort and long-term security. Their insights offer valuable guidance for retirees and pre-retirees seeking to optimize their financial plans while navigating the emotional landscape of retirement.

---

For more detailed discussions and additional resources, visit YourMoneyYourWealth.com.

Transcript

[Andi Last]

Rubble and sky in Minnesota want to spend $65,000 a year in retirement and they'll have $67,000 in annual fixed income. Are they cutting it too close? Atouk and Tala in New Jersey will have retirement money, Social Security, and Lumpy, their lump sum pension. Will they be okay? We'll find out today on youn Money, you, wealth podcast number 542. Plus, should David in Redondo Beach, California use his Roth money to buy a home? And what did the fellas think of Charlie Pepper in Colorado using a home equity line of credit or HELOC retirement spending instead of living off of his pre tax money? I'm executive producer Andi Last, and here are the hosts of youf Money, you, Wealth, Joe Anderson, cfp, and Big Al Clopine, cpa.

[Joe Anderson]

All right, we got Rubble and Sky.

[Andi Last]

That's from Paw Patrol. Oh, not sure if you know that one from. From being a parent now for the last few years.

[Joe Anderson]

Yes. Paw Patrol is on every morning.

[Andi Last]

So you know Rubble and Sky personally.

[Joe Anderson]

Oh, yeah. Yep. Whenever you're in trouble, Paw Patrol.

[Big Al Clopine]

Paw Patrol, baby.

[Joe Anderson]

Got it. We'll get there on the double.

[Big Al Clopine]

Something like that cartoon.

[Joe Anderson]

Yeah, right there. There's Paw Patrol.

[Big Al Clopine]

Oh, there it is.

[Joe Anderson]

Okay, so there's 65. When I'm 65, I'm gonna. I'm gonna be watching Paw Patrol for sure. Gonna pop out some more. My husband and I are 65. We enjoy a little Corona. He enjoys Corona and I enjoy Pinot Grigio. We drive older paid off vehicles. My husband has worked in manual labor his whole life and is done working at the end of this year. His words. I'm not sure we're ready. We need about $65,000 a year for our expenses, and that leaves a small amount monthly for extra spending. Currently we spend a little bit more around $90,000 a year, but I think we can curb that down. We get about $46,000 a year in Social Security and $21,000 a year from my husband's pension. So they get $70,000. So $67,000 total. We have almost $250,000 saved. $200,000 in our brokerage, 25,000 in a Roth, 25,000 in a 401. Are we cutting it too close? How much extra padding should we have above our estimated budget? Is 250 enough? I feel like it's too late to start retirement planning at our age. And maybe we messed up. I don't think you messed up at all.

[Big Al Clopine]

I don't either.

[Joe Anderson]

That's 65 years old, Manual labor your whole life, and you're done. I get it.

[Big Al Clopine]

Minnesota, you got good fixed income and you saved 250k. I mean, nothing like that.

[Joe Anderson]

$7,000 a year is pretty good.

[Big Al Clopine]

It's fantastic. And it's more than the spending.

[Joe Anderson]

Right. So you have good fixed income. You got 250. My dad was manual labor.

[Big Al Clopine]

Yes.

[Joe Anderson]

He dropped dead at 61.

[Big Al Clopine]

He didn't get a chance to enjoy it.

[Joe Anderson]

No. Didn't you? No. So I would say, yes, you're done. Enjoy a little Corona in your Pinot Grigio.

[Big Al Clopine]

I would, too. I think you got a little extra in your brokerage account and tax deferred, tax free. So I think you got a little cushion there. I think the only thing I would think is Social Security may not increase the rate of inflation. So maybe 10, 15 years down the line, you gotta reduce the spending just a tad. But, yeah, no, I think this is fine, Joe.

[Joe Anderson]

They're spending 90,000 is what they're comfortable with. They say they can curb it down to 65.

[Big Al Clopine]

That's probably gonna be the hardest thing right there, trying to figure out how to do that.

[Joe Anderson]

So what do they got? That's 25,000 bucks, roughly? I don't know. They could probably take 12 to $15,000 out of their. Their accounts.

[Big Al Clopine]

Yeah. At least 10.

[Joe Anderson]

So that's $80,000. So we're getting there.

[Big Al Clopine]

Yeah, we're getting there at 65.

[Joe Anderson]

Maybe you could probably take out a little bit more, let's say over the next 10 years, 65 to 75, and.

[Big Al Clopine]

Spend a little bit less after.

[Joe Anderson]

And then spend a little bit less after that.

[Big Al Clopine]

Yeah. No, I agree with you, Joe.

[Joe Anderson]

Life is too short.

[Big Al Clopine]

It's time. Go for it.

[Joe Anderson]

Your body's beat up, Tired. Yeah, I would pull it.

[Big Al Clopine]

Yep.

[Joe Anderson]

So. But no, congratulations. I think you're pretty close. And I think at that time, too, you can probably curb it because it's like, all right, well, here we're on a fixed income now. I remember when my uncle retired, he's like, oh, no, we're on a fixed income. Everything was on a fixed income. But I don't know if that was his stress or if he just really liked to say that.

[Big Al Clopine]

He probably liked it, I think. You know what? When you're on a fixed income, you learn how to live within.

[Joe Anderson]

That means $70,000 is a very nice fixed income. So Paw patrol. Well, they got kids. They have to have kids. Kids are maybe just like grandkids.

[Big Al Clopine]

Yeah, I would say grandkids.

[Joe Anderson]

So what are you saying?

[Big Al Clopine]

I'm saying you missed the boat.

[Joe Anderson]

So you're saying I'm not going to be around for my grandkids?

[Big Al Clopine]

I'm not saying that. I mean, you gotta start being a vegetarian.

[Joe Anderson]

Oh, my God. It'll live to like, 120. It could happen. It happened. I'll give you a C plus on that one. All right. Okay.

[Andi Last]

This is Atouk and Tala, who I found are actually characters from an old Ringo Starr movie called Caveman.

[Big Al Clopine]

Sure.

[Andi Last]

How about now, 1981, with. Yeah. RINGO Starr and Shelley Long.

[Big Al Clopine]

Oh, Shelley Long. How about that?

[Joe Anderson]

Wow. Caveman. I think I remember seeing that at some point.

[Big Al Clopine]

I think I saw a preview it. I never saw the movie.

[Andi Last]

I'm sure it was an Oscar winner.

[Joe Anderson]

Well, 100, 1981.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Could have been right up there. Who won the Oscar in 1981?

[Andi Last]

Ordinary people.

[Joe Anderson]

Ordinary People Now. Okay.

[Big Al Clopine]

There you go. It wasn't Caveman.

[Joe Anderson]

No. A close third.

[Big Al Clopine]

Okay.

[Joe Anderson]

All right. Atukatala. Tala enjoys the rare daiquiri. And I'll never toot down a root beer. Andy, that's your favorite, right? Root beer?

[Andi Last]

One of. Yeah, it's among my favorites.

[Big Al Clopine]

Yeah.

[Joe Anderson]

What's your brand? It's like some natural, Right?

[Andi Last]

Virgil's. Yes.

[Joe Anderson]

Not a W. Nah.

[Big Al Clopine]

Or Bart.

[Andi Last]

Although they don't actually have root beer here. They have sarsaparilla made by Bundaberg Brewing. And so I used to live in Bundaberg when I was here before. So I'm back to my. My Bundy Brewing. It's good stuff.

[Big Al Clopine]

Okay.

[Joe Anderson]

When do you think you're going to get an accent?

[Andi Last]

Oh, mate, I have. I don't use it very often.

[Big Al Clopine]

It came out.

[Joe Anderson]

All right. I'm never tooting down a root beer. I've gone the spreadsheet route. Oh, boy, here we go. Unless I'm missing something, it seems like we might be okay. But I want to run the numbers by Joe and Al to see if they can tell me what went wrong. All right. He's 56. He has $160,000 in pre tax and $165,000 in a Roth. I did one Roth conversion last year and it went seamless. Perfect way to go. So I plan to do another one. $30,000 in December of each year and save for the hit, the tax hit each January. I'm also contributing $30,000 a year to my employer's Roth 401. With my employer match of about $5,400 a year, I'm investing 100% in stocks. And the plan is to stay 100% through retirement. Start investing in the 401 very late due to unavoidable family needs. Tala is four years older than me and has a little less than $10,000 in a jobs 403. Lastly, I have a lump sum pension coming to me of about $700,000 which I plan to roll in my IRA. We plan to retire in four years. So Roth conversions are my focus. To get ahead of lumpy, as I affectionately call the lump sum before it drags me into RMDs. Since I'm all in stock, everything's growing fast and lumpy might take things more difficult in a good way. Lumpy.

[Big Al Clopine]

Lumpy.

[Joe Anderson]

Yeah. That's what I call my lump sum pension. Lumpy.

[Big Al Clopine]

Do we have one?

[Joe Anderson]

No, not yet. I'm going to. I'm working that. With HR score, our gross income is $140,000 and our net is 70,200. Our home is worth about $650,000. We have $100,000 left on the mortgage, but we plan to downsize at five to six years. Our last kid will graduate college about two years, so we won't have that $20,000 a year tuition or the $19,000 a year mortgage much longer. The plan is when we Both retire in four years, Tala will have $12,738 a year in her Social Security. At 67. I'll start my benefit and have her trigger the spousal benefit for a combined 61,000. Five, six. All right, how old is Tala right now?

[Big Al Clopine]

60.

[Joe Anderson]

So she's going to take her Social Security at 64.

[Big Al Clopine]

Yeah.

[Joe Anderson]

So there's, there's going to be a little bit of a discount that also benefit a tuka.

[Big Al Clopine]

Yeah, a toque.

[Joe Anderson]

A toque. All right. Since we expect to withdraw about $65,000 a year to cover both essential expenses and discretionary expended, that leaves us a shortfall of $52,000 a year for seven years. All right. After I claim and we get the spousal benefit, the shortfall drops to just $4,000 a year. Meanwhile, the Roth continues to grow while we withdraw from pre tax. We'll use Cobra for 18 months, $25,600 a year, and the ACA for one year, $20,000 a year. And then we both get on Medicare $7,600 a year. Note that she will not be on ACA because she will enter Medicare soon after Cobra. Sorry to be long winded, but I enjoy hearing Joe triumph when he gets through each sentence. What the hell does that mean?

[Big Al Clopine]

You're pretty excited when you finish this thing.

[Joe Anderson]

No, because they're so long.

[Andi Last]

Thank you for catching yourself on that.

[Big Al Clopine]

All right.

[Joe Anderson]

Sweaty.

[Big Al Clopine]

All right.

[Joe Anderson]

Is there anything you can see in the calculation incorrectly? I appreciate your gooiest. Oh, boy. That's a word that I never thought I'd read on the podcast.

[Big Al Clopine]

Have you ever said that?

[Joe Anderson]

Gooiest? No, I don't think so. Yeah, I don't. Like where it's like. Like moist. No. Delicious. No, I don't. They're like, gooiest. Like anything. Like it?

[Big Al Clopine]

Yeah. Okay.

[Joe Anderson]

Thank you for the. The three. For a great program. All right. I don't know. Let's see. Caveman. How's the numbers look, Al?

[Big Al Clopine]

So here's what happens when you. When you take your benefits at full retirement age, which will be 67 for them. Yeah. The spouse gets half of that. That's right. But if your spouse took it early, then she's not going to get the full spousal benefit. And the earlier she takes it, the more the discount. Right. If she took it right at 62, be a lot of a discount at 64. Not quite as much. But just be aware that your numbers may not be quite correct. So. And when you think about that now, you're. You're still saving. Right. So. And I think that's great. You're going to work for another four years. How about you?

[Joe Anderson]

I'm just trying to follow the math here. So he's 56, wants to retire at four years.

[Big Al Clopine]

At 60. Yeah. Okay, so there's seven years before he gets the Social Security.

[Joe Anderson]

All right, so let's just say in four years. So what do they want to spend in four years?

[Big Al Clopine]

Well, they're 65,000, I assume, in current dollars.

[Joe Anderson]

Is that what they. So since we expect to withdraw about 65,000 to cover both essential expenses and discretionary spending, that leaves us a shortfall of $52,000 for seven years. I don't understand where that number's coming.

[Big Al Clopine]

From, because her Social Security is $12,000. And then later, when he takes his benefit, plus spouse will be 61, but I think 61 will be slightly less.

[Joe Anderson]

Okay, so, all right. From 56 to age 60, she's going to be claiming her Social Security benefit. So her benefit is going to be $12,000 in four years. That's when they retire.

[Big Al Clopine]

That's right.

[Joe Anderson]

So they want $65,000. So $65,000 minus 13 is 52,000.

[Big Al Clopine]

Yeah. So let's just say they're $50,000 short for seven years.

[Joe Anderson]

Got it. All right, so they need to pull $50,000 out for seven years.

[Big Al Clopine]

$350,000, and that's about what they have right now.

[Joe Anderson]

So they got seven. The total liquid assets here is seven. 8, 900,000.

[Big Al Clopine]

Yeah. Counting the lump sum. Call it a million.

[Joe Anderson]

Yeah. Call it a million bucks. They need $52,000 for seven years. Out of a million dollars, that's 5%. Then the bridge is 7,000. Yep. I think you're going. You do the conversions of $30,000. You pay the tax. I love the plan.

[Big Al Clopine]

Yeah, I think it works too. Yep.

[Joe Anderson]

Okay.

[Andi Last]

How investment savvy are you? Less than half of Americans have a solid understanding of basic investing terms and concepts like stocks and bonds, 401ks and IRAs. Lack of financial literacy can lead to enormous retirement ruining mistakes. Let Joe and Big Al increase your investing IQ for free. Click or tap the links in the episode description to watch Financial Boot Camp on youn Money, you, Wealth TV and to download the companion Investing Basics guide. Get a firm grasp on asset allocation, the importance of diversification, the various types of investments, investments and much more. If you already know all this stuff, your kids or grandkids or your clueless neighbor in the cave next door will appreciate it. If you toss them one of the links to these free financial resources, find them in the episode description.

[Joe Anderson]

We got David. He writes in from redondo beach. I'm 69, due to take Social Security in a few months at $4,800 a month. I also have a pension of $2,200 a month at $1.4 million in my IRA, $1.3 million in my Roth. I wish to purchase home in the area for approximately $1,300,000. About a 1,400, 1,300,000. 1,300,000. Yeah, he likes that number.

[Big Al Clopine]

That's it. It just works out.

[Joe Anderson]

My plan is to utilize $900,000 from My Roth and take a mortgage of $400,000 and not take the tax hit of taking to my ira. Is this a prudent decision? Oh, David, this is a tough one. So $50,000 and he's got or $4,800. So 5, 6, 7, 700 or $7,000 a month in income, in fixed income. What does he need to live off?

[Big Al Clopine]

He doesn't say. But let's. For sake of this, let's assume it's covering the income.

[Joe Anderson]

Would you take $900,000 out of your Roth 1.3 down payment?

[Big Al Clopine]

No, of course not. But. But what? I might do like, let's just say. So, let's. Well, let's say spending 8,000amonth, because that's 100 grand a year of income. We'll make the math.

[Joe Anderson]

He lives in Redondo. I don't know, he might spend a little bit more.

[Big Al Clopine]

He might. I'm just going to go with that.

[Joe Anderson]

Okay.

[Big Al Clopine]

For easy math. And he's single. Right. So the top of the 24% bracket for a single person is. Call it 200,000. Okay, so $200,000 then I would take $100,000. I would probably mortgage. Well, let's see. Does he have. He doesn't have non qual, does he?

[Joe Anderson]

No, he's got 1,400,000 in his IRA, 1,300, off.

[Big Al Clopine]

I would take $100,000 out of the IRA, pay the tax on it and try to stay in the 24% bracket. And that's what I'd use for the down payment. And then each year I would just keep taking 100 grand out and start trying to pay that thing.

[Joe Anderson]

He wants to buy 1.3 million dollar home. He probably want to at least have 20% down.

[Big Al Clopine]

Okay, well, maybe you bite the bullet and do a little bit more the.

[Joe Anderson]

First year, but $260,000 maybe go to the top of the $24,000.

[Big Al Clopine]

You know, maybe you take some out of the Roth.

[Joe Anderson]

Yeah, just split it a little bit.

[Big Al Clopine]

Maybe, maybe you take, maybe you take $300,000.

[Joe Anderson]

Yeah, three from the Roth. Three from.

[Big Al Clopine]

Well, maybe maybe three from the Roth. One from the. Because I don't want to go past the 24% bracket. Yeah. So maybe you finance 900,000 and then after that you just, you start trying to pay it off more aggressively with the IRA money, staying in the 24% bracket.

[Joe Anderson]

So you got. All right, let's say you got a $900,000 mortgage. 30 years. What are mortgage rates right now? Six, seven.

[Big Al Clopine]

Oh, six, five and a half, six.

[Joe Anderson]

All right, so his payment's going to be 65,000 bucks a year.

[Big Al Clopine]

Yeah.

[Joe Anderson]

$5,500 a month. So on top of his.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Now he's got $165,000 of living expenses.

[Big Al Clopine]

Right.

[Joe Anderson]

You could still stay in the 24.

[Big Al Clopine]

To the note to keep the note going.

[Joe Anderson]

I don't know if this is a, this is really top.

[Big Al Clopine]

And we also, we probably don't have enough information here to really.

[Joe Anderson]

Yeah, we don't know what he's sending and there's any other assets. But if this is his assets and he doesn't. And he's spending 100% of the fixed income, taking that much. I mean, that's why we put money in Roth. So for cases like this, you put $900,000, you have no note, you still have some Roth left. And if the pension and Social Security is enough to cover your living expenses, you're 69 years old, you still have, I don't know, 20 some odd years of life expectancy, give or take.

[Big Al Clopine]

I think I, I'd really like to know what that spending is, to be able to come up with more definitive answer here.

[Joe Anderson]

But, yeah, I'm on the fence. If, if I'm David and Redondo.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Do I blow out 900 grand? How much do you love this house? Is this your dream home?

[Big Al Clopine]

Yeah. Right.

[Joe Anderson]

Then, yeah, who cares? Go for it. Because there's still plenty of capital. He still has $1,300,000, 1,000,400 in the IRA. He's got really good fixed income.

[Big Al Clopine]

I guess if you think about it from the standpoint that the Roth is for my retirement and this is what I want to do with it, maybe that is a way to think about it. I still wouldn't take that much out there.

[Joe Anderson]

Yeah.

[Big Al Clopine]

I mean, I would take me personally if I didn't have any other purposes for the Roth, and I had plenty of fixed income to cover my expenses. And I'm not too worried about the RMDs, because I'll stay in the 22 or 24% bracket. Maybe I might take 3, 4, 500,000 out of the Roth. I don't think I'd take any more than that because I really like having that Roth cushion.

[Joe Anderson]

So here's the question I think that I would ask David. Is that what makes you sleep better at night, looking at your liquid balance of 2, $2.5 million or close to $3 million?

[Big Al Clopine]

Yeah.

[Joe Anderson]

All right. And you have that as a cushion. You can always pay up the mortgage at any time that you want. You can always cut a check from that account or not having a mortgage. And you have a lot lower liquid balance if, if not having a mortgage or a lot smaller mortgage payment that you feel that, you know you can pay. And that doesn't stress you out. I think this is all about the emotion and this, the stress aspect of it. Some people feel a lot more comfortable with, hey, I like to look at this, this, this balance in my retirement account and others is like, I hate debt. I don't want to pay off. I mean, I want to pay off every ounce of debt. Like the, the Dan, Dan, Dan Ramsey what's his name?

[Big Al Clopine]

David Ramsey. No debt. Yeah. Yeah.

[Joe Anderson]

Dan's his brother, I believe.

[Big Al Clopine]

Okay, we'll go with that.

[Joe Anderson]

Dan likes. Dan likes.

[Big Al Clopine]

Dan likes Dan.

[Joe Anderson]

Yeah. Dan likes a little bit of mortgage. David doesn't. So just get out, go on the Dan Ramsey.

[Big Al Clopine]

I guess I don't know if we helped you very much, David, but I think I would, I would be careful on taking that much out of the Roth all in one fell swoop. It, it costs a lot of money for you to get it in, and I'd hate for you to use that much of the Roth for this, this home. Just, just, I think what is what we're saying. So just think about it.

[Joe Anderson]

I think there's a lot of different ways that you look at this, but again, what he feels comfortable with, what's going to make him sleep at night, you know, he's retired, he's enjoying, you know, his no go years with it.

[Big Al Clopine]

Now he's selling the Go Go.

[Joe Anderson]

Is it, Is it go Go or slow?

[Big Al Clopine]

Well, maybe it's going to be slow go.

[Joe Anderson]

That's why he wants coming down. So now that way he wants to buy the nice house in Redondo.

[Big Al Clopine]

Maybe.

[Joe Anderson]

Yeah. All right.

[Andi Last]

You know, some in the YMYW audience tell us that they love the banter and the funny stuff on the podcast. Others say they like the common sense spitball with no funny stuff. Some say the show is too short. Some say it's too long. What do you think? Your chance at a $100Amazon E gift card awaits. And all you have to do is share your experiences and your opinions. What are your favorite things about yout money, you, wealth, and what would make it even better for you? Complete the 8th Annual YMYW Podcast Survey by 5pm Pacific Time on August 31st to help us make your money, your wealth, your top best personal finance and retirement podcast, and for your chance to win that $100Amazon E gift card, click or tap the link in the episode description and use the secret password YMYW to share your thoughts. We welcome everyone's opinions, but only us residents are eligible to participate in the giveaway. No purchase necessary. Survey and giveaway close and winner chosen at 5:00pm Pacific Time on August 31, 2025.

[Joe Anderson]

Okay, this is the last one because we're last year, we just. The grades are dropping.

[Big Al Clopine]

Yeah, we're. We're not doing so well, are we?

[Joe Anderson]

All right, we got Charlie Pepper. Is this a reference of anything? Little Charlie Pepper's Lonely Heart Club Band.

[Andi Last]

Well, that was Sergeant Pepper, but I Don't. I don't know if Sergeant Pepper's first name was Charlie. Maybe it was.

[Joe Anderson]

All right, Charlie pepper. Like is Dr. Pepper's first name Chuck?

[Big Al Clopine]

Chuck Pepper?

[Joe Anderson]

Maybe Charlie Pepper?

[Big Al Clopine]

Oh, maybe.

[Joe Anderson]

Hi Andy, Joe, Big Al. In a recent episode you raised the idea of drawing from a HELOC versus a pre tax account for income in retirement. This is an interesting concept. Do you remember talking about drawing from a HELOC versus I think over the.

[Big Al Clopine]

Last couple years we probably brought it up once and we then said immediately, this hardly ever works and is a good strategy for 99.9% of the people. But we'll check this one.

[Joe Anderson]

All right, let's see if Charlie Pepper is in that zone.

[Big Al Clopine]

Okay.

[Joe Anderson]

This is an interesting concept I've never thought of. I would appreciate your sprit spitball about my scenario. I apologize for the math problem, but I didn't know how else to lay it out. Background. I'm 60, single, just retired. Woohoo. I paid. Paid through 2025. So to keep it simple, let's say I need $100,000 in wool, be in the 30% tax bracket, fed in state next year. Okay. I will either draw from my pre tax retirement accounts or my HELOC. I have $1,500,000 in pre tax accounts and I can draw up to $378,000 from my HELOC, which is currently at a 7% interest rate. Here's where I need some math is. I don't know if I'm thinking about this correctly. If I draw $100,000 from the HELOC, it's 7%. I would get $2,100 tax deduction, pay $4,900 in interest and have taxable income of $97,900. No, you would have zero taxable income because it's a loan. Loans are not taxed.

[Big Al Clopine]

Well, assuming he's got other income.

[Joe Anderson]

Well, he says $100,000 minus $21,000 paid 49, that's 979 I think. Is that all right? If I use my pre tax IRAs, I need to withdraw $130,000 to net $100,000. The additional 30% tax on $130,000 versus $97,900 is almost $1,000, $963,000. Okay. You following this, bubba?

[Big Al Clopine]

I'm trying.

[Joe Anderson]

All right. Additionally, I could miss out on any growth of the $130,000. If I model 7% compound growth on $130,000 at a potential loss of $9,400 the difference between the $4,900 interest paid on the HELOC and the potential $9,400 loss in growth in the IRA is $4,500 net. By drawing on the HELOC, I would save $963 in taxes and potentially an additional $4,500 by leaving the $130,000 in the IRA to grow. Is this how you would think about it? I know the growth is not guaranteed, but. But it would seem the lower interest rates go and the higher the stock market goes, the more this makes sense. Additionally, info that may be helpful. I have $200,000 mortgage at 2.5% on my $2 million home. I plan to wait until 67 to draw my Social Security, which will be approximately $45,000 a year. I have a $60,000 brokerage account at $10,000 HSA. I plan to convert to the Roth at the top of my bracket over the next several years. Additional info that's surely not as helpful. I drive a 2018 Volvo XC90. My drink of choice is a Ryle fashion in the winter, a little gin and tonic in the summer. I have learned so much from your show, and I look forward to it each week. You three are superstars. Thank you for all you do for us. Retirement. For us in the retirement weeds. Superstars.

[Big Al Clopine]

Yeah. Well, thank you. Okay, let's see if we can unpack this.

[Joe Anderson]

So here's another problem about financial planning software.

[Big Al Clopine]

Yeah.

[Joe Anderson]

It's how you model things. So, yeah, if you take out a loan at 7% and then you. We have growth of 7% or 8% in the market, that will work out all day long.

[Big Al Clopine]

Fantastic.

[Joe Anderson]

Yeah. It's called arbitrage.

[Big Al Clopine]

Right.

[Joe Anderson]

And you look at some of these salespeople, they like to sell products, would be like, all right, well, no, you got to take money out of your house, and this is what you pay here. And that's all tax free. And then you utilize the home, and then you put this into an insurance product. And I mean, that's where things get super, super dicey. So I would be very careful of thinking about a strategy this way, given what they have in assets and given what their income is. But the math is. Right, Right. But you pull out $100,000 from a HELOC, there's no tax on that. It's a loan.

[Big Al Clopine]

Correct.

[Joe Anderson]

So it's 7% is what you're paying. So if you think of it this way, and I don't want you to think of it, but if you're really getting in the weeds here. It's like, what is the interest paid versus the tax that I'm paid? And if you never want to pay that thing off because you have a $2 million home and you have $400,000 of credit that's going to continue to build into the house that you may or may not have to pay depending on the growth of the home.

[Big Al Clopine]

Right.

[Joe Anderson]

I mean, those numbers would work on a spreadsheet.

[Big Al Clopine]

Agreed. Yeah. So here's a couple thoughts. I'm assuming that they're. He would have enough to itemize Joe. So he's getting the full benefit of the tax deduction. But that's the first thing you gotta look at. Am I using the standard deduction or am I itemizing this extra interest that I'm paying? Am I getting a full tax deduction for that? Assuming the answer is yes, so far so good. I see a couple one flaw and one thought. The flaw is the money you have in an IRA is not all yours. You gotta pay tax when you pull it out. So you really have to think about that as well.

[Joe Anderson]

That's what he's doing. Like I need 100,000. I need to pull 130 to net 100 given a 30%.

[Big Al Clopine]

I understand, but he's, but he's getting, he's talking about the growth that he's getting, the additional growth getting without paying taxes on the growth. So I think he's missing that. I think to me the most important thing is HELOC interest rates are variable. And I would, I would, I would be really nervous doing this. I mean, in my career, HELOC rates have been 16%, 18%. So just, it can happen. Right. So just be careful. I would never do this.

[Joe Anderson]

No way.

[Big Al Clopine]

I would. I like the idea of converting Joe. And I think I even. This is one of the few cases where I might even use some pre tax dollars to pay the tax. But I wouldn't pick an even amount like 100,000. I would look at my tax break brackets and figure out what's the right tax bracket to be in. Let's say it is 100,000. Right. Of extra income just to throw out a number. And if that's the right number, then 80,000, 75,000 goes into the Roth conversion. And the other you keep out to pay taxes. Right. That's how I wouldn't want to take on a HELOC loan at this point for this reason.

[Joe Anderson]

Well, okay, well let's do some math here. All right. Single, just retired. We know Social Security at age What's Social Security going to be?

[Andi Last]

He says $45,000 a year.

[Big Al Clopine]

Social Security, 45 grand.

[Joe Anderson]

$45,000. All right, so $55,000. Give your inflation. So that. Let's say that he'll. Or Charlie pepper will need $60,000. Call it from the portfolio at Social Security age.

[Big Al Clopine]

Yeah. A little more with inflation, but yeah, you're on the right track.

[Joe Anderson]

Okay, so call it $70,000. Are we good there? So at $70,000 at age 67, the portfolio needs to be $1,500,000. $1,700,000.

[Big Al Clopine]

Right.

[Joe Anderson]

He's got. Charlie Pepper's got $1.5 million today. So that's close.

[Big Al Clopine]

It's close.

[Joe Anderson]

That's tight because from now until 6, I could see why they might be getting a little. But there's a ton of equity in the home.

[Big Al Clopine]

True.

[Joe Anderson]

If they want to die in the home. I don't know, maybe you think of a reverse mortgage or there's the hecm, right. The home equity conversion mortgage, which some.

[Big Al Clopine]

You still have to have your mortgage. Well, you don't have to have your mortgage paid off, but you wouldn't get a ton of.

[Joe Anderson]

Right. I mean, if you want to maximize 100% of your assets. I mean, there's something that's called a home equity conversion mortgage, which is another word for a reverse mortgage, where basically you're taking out that line of credit from the house, so you'll have that line of credit that you don't have to pay back.

[Big Al Clopine]

That's the difference there. Right.

[Joe Anderson]

The interest accrues inside the house. You don't even have to pay interest payments.

[Big Al Clopine]

And that would be like if you didn't have any children or didn't have any kids or. Or anyone that you wanted the house to go to.

[Joe Anderson]

I'm single.

[Big Al Clopine]

Yeah, single. He didn't. Doesn't talk about kids, so.

[Joe Anderson]

And wants to maximize everything. The biggest asset Charlie has is the home.

[Big Al Clopine]

Yeah. Gotta wait till 62, but very possible. You know what. What doesn't really show here. Let's see if he's spending a hundred thousand a year. How do you. How do you convert a hundred?

[Joe Anderson]

I think there wasn't a dollar figure on conversions. It was like, they want to do conversions. So.

[Big Al Clopine]

Maybe it's just pulling out the hundred to pay for living expenses, huh?

[Joe Anderson]

Yes.

[Big Al Clopine]

Okay, got it.

[Joe Anderson]

I don't know. There's a lot of different ways that you can slice and dice this because there's such a large balance in the home. You want to sell the home, want to die in the home. I mean, what's the goal there? You could do a home equity or let's say you did a line of credit or you do a and you sell the home in a couple of years.

[Big Al Clopine]

Yeah, you could.

[Joe Anderson]

So you get some tax free dollars there knowing that you're going to sell it, let's say in 25 years.

[Big Al Clopine]

But you bring up a good point. If I was going to sell the home in the next three or four years, I might do this because I knew I was going to pay it off.

[Joe Anderson]

Yeah, right. You're going to pay it off when.

[Big Al Clopine]

You get in and I get a buy really nice million dollar condo and I pay off the loans and I've got a bunch.

[Joe Anderson]

Yeah, then you're debt free.

[Big Al Clopine]

Right.

[Joe Anderson]

You still got the 1.5 that's growing in the markets. Then you have your Social Security. That's coming up. I don't know it. I wouldn't want to leverage my home for living expenses.

[Big Al Clopine]

Right.

[Joe Anderson]

Unless there's only very small circumstances where.

[Big Al Clopine]

You want to do that. Tend to agree with that. Yep.

[Joe Anderson]

All right, that's it for us. Thank you, Andy. Andy Down Under.

[Big Al Clopine]

Yeah. And I always say good day.

[Joe Anderson]

Good day, mate. Good day.

[Andi Last]

Thanks very much.

[Joe Anderson]

All right. And then Aaron, do you want to, you want to say anything? Yeah, it is hot in here. We're doing some construction here in the studio.

[Big Al Clopine]

Yeah, there's no ac. Yeah, yeah, we played. Is it hot where you're at? No, it's winter there.

[Andi Last]

It's winter here. So. Yeah, it's actually quite cold.

[Big Al Clopine]

Yeah. Okay, so you're fine then. Yep.

[Joe Anderson]

That's the temperature in Australia right now.

[Andi Last]

I think it's about 10 degrees Celsius.

[Joe Anderson]

Which is what I drink. Celsius, which is. Help me out.

[Big Al Clopine]

Fifty.

[Andi Last]

Yes, it's 50 degrees Fahrenheit here.

[Big Al Clopine]

Okay, okay. See, I have that right there.

[Joe Anderson]

Yeah.

[Big Al Clopine]

Because I'm a world traveler.

[Joe Anderson]

You are a world traveler. All right, we'll see you guys next week. Show scout you'd money.

[Andi Last]

Well, Big Al is off gallivanting again. So over the next two weeks, Joe and I will be joined by Mark Horner, cfp, to spitball on retirement for Beavis and Daria. Tony Soprano, Elwood Blues, Clark Kent and Ray and Roy. Hey, I didn't come up with those names. You did. Mark is one of the newest principals here at Pure Financial Advisors. He's the founder of Fairhaven Wealth Management, which has just joined the Pure family to become our newest Chicagoland office in Wheaton, Illinois. Watch Mark's bio video in the episode description to learn more about him and click or tap the link to schedule a free brief financial assessment with one of the experienced professionals here at Pure. No matter whether you're in Chicago, Denver, Seattle, Nashville, Phoenix, Salt Lake City, Southern California or in your jammies on your couch, the Pure team will work with you either in person or online to craft a comprehensive financial plan to help reduce your taxes in retirement, align your plan with your risk tolerance, and to meet your needs and goals in retirement. Click or tap the free assessment Link or call 800-80-899-46257 to get started. Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.