How to Retire ASAP - and Where to Save to Get There - 505

Summary

Podcast Summary: Your Money, Your Wealth – Episode 505: How to Retire ASAP - and Where to Save to Get There

Release Date: November 26, 2024

Hosts:
Joe Anderson, CFP®
Alan Clopine, CPA

Podcast Overview:
In Episode 505 of "Your Money, Your Wealth," hosts Joe Anderson and Alan Clopine tackle pressing retirement planning questions from listeners aiming to retire as soon as possible. The episode delves into optimal savings strategies, tax implications of Roth conversions, and maximizing retirement income to ensure financial stability through the golden years. With their signature blend of humor and expert advice, Joe and Big Al provide actionable insights for listeners navigating the complexities of retirement planning.

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1. Listener Question: Ricochet J's Early Retirement Planning

Listener Profile:

• Name: Ricochet J
• Location: Colorado
• Age: 45 (Joe), 51 (Husband)
• Income: Combined $200,000
• Current Savings: $285,000 (Roth IRAs, Rollover IRA, Roth 401k)
• Assets: Primary home ($800,000 value, $330,000 mortgage), rental home (fully paid, $800,000 value, nets $30,000/year)
• Goals: Retire in late 50s to early 60s, potentially move abroad

Key Questions:

• Should surplus funds be directed to a brokerage account or a solo 401k?
• Is their current saving trajectory sufficient to achieve early retirement?

Discussion Highlights:

• Evaluation of Savings Options:
  Ricochet J is contemplating whether to allocate extra funds to a brokerage account or establish a solo 401k for her self-employed husband. Considering their substantial existing retirement savings and the potential tax advantages, the hosts lean towards setting up a solo 401k.

  Joe Anderson [07:00]: "It seems to me the solo Roth would be a better option given that there ain't. There isn't any tax on the flip side, like a brokerage and we use either to bridge the gap until I could use or turn on the pension."

• Financial Projections:
  Utilizing a spitball analysis, Big Al estimates that with their current savings and annual contributions, Ricochet J could amass approximately $1.2 million over the next 12 years, potentially meeting their retirement income needs.

  Big Al Clopine [08:15]: "You're in low cost index funds. Great for you. Should you put money into more Roth IRAs? Yes, because you're going to have a lot of fixed income. So you're doing all the right things."

• Retirement Income Strategy:
  Factoring in their pension ($50,000/year) and rental income ($30,000/year), the hosts assess that Ricochet J would need an additional $57,000 from their investment portfolio to cover annual expenses projected at $137,000 in 12 years.

  Joe Anderson [09:00]: "So, you need $57,000 from your portfolio. Then you take $57,000 shortfall, divide that into what you have at that point, at a 6% return, $1,200,000, you get 4.8%."

Conclusion:
Joe and Big Al affirm that with disciplined saving and strategic investment, Ricochet J is on a promising path towards early retirement. They recommend maximizing contributions to Roth IRAs and establishing a solo 401k to leverage tax benefits, ensuring financial flexibility and security.

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2. Listener Question: Micah's Pension vs. Bonds Comparison

Listener Profile:

• Name: Micah
• Location: South Dakota
• Question: Is receiving $40,000/year in a pension equivalent to having a million dollars in bonds based on the 4% rule?

Discussion Highlights:

• Analyzing the 4% Rule:
  Joe and Big Al discuss the practicality of equating a $40,000 annual pension to a $1 million bond portfolio using the 4% withdrawal rule, which suggests withdrawing 4% of total investments annually to sustain retirement income.

  Joe Anderson [17:02]: "Yeah, I would say that's a good way to look at it."

• Flexibility vs. Stability:
  While Micah's pension offers guaranteed income, the hosts highlight the flexibility a bond portfolio provides. A bond portfolio allows for variable spending, additional Roth conversions, or further investments, albeit with the risk of depleting funds if not managed prudently.

  Big Al Clopine [17:39]: "I'd rather have the million than a $40,000 pension because of the flexibility. But that can backfire, Joe. Sometimes people spend too much and then they run out of money."

• Risk Considerations:
  The hosts caution that relying solely on a bond portfolio introduces investment risks that a fixed pension does not present. Market downturns could erode the portfolio’s value, impacting long-term financial stability.

  Joe Anderson [18:00]: "People would be like, no, I don't want that game. I'd much rather take the 40 grand."

Conclusion:
Joe and Big Al conclude that while a $1 million bond portfolio offers greater flexibility, it carries inherent risks that a fixed pension does not. They suggest evaluating personal risk tolerance and financial goals to determine the most suitable option.

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3. Listener Question: Barney and Betty's Roth Conversion Dilemma

Listener Profile:

• Names: Barney and Betty
• Ages: 62 (Barney), 60 (Betty)
• Status: Both retired, no debt
• Assets: $1.3 million in deferred IRAs, $200,000 in Roth accounts
• Income: $34,000/year in pension, $60,000-$70,000/month expenses
• Question: Should they perform Roth conversions given their marginal tax brackets of 12% or 22%?

Discussion Highlights:

• Tax Bracket Analysis:
  The hosts dissect the implications of converting traditional IRA funds to Roth IRAs within Barney and Betty's specific tax brackets, taking into account both federal and state taxes.

  Big Al Clopine [21:38]: "He's in the 12%. So the question is, does he take out more of the retirement account that he has in $1,500,000 and convert the remainder at the top of the $12,000?"

• Strategic Conversions:
  They advocate for proceeding with Roth conversions while the marginal tax rate is favorable, emphasizing the benefits of tax-free withdrawals in retirement and reduced taxable income in later years.

  Big Al Clopine [22:55]: "In this case, 12% rate is about as low as it goes. So I would do that all."

• Understanding Marginal vs. Effective Tax Rates:
  Joe clarifies the difference between marginal and effective tax rates, advising that conversions should be based on the marginal rate since it determines the tax on the converted amount.

  Big Al Clopine [21:57]: "Your marginal rate's your highest rate. That's the rate that you'll pay tax on for the conversion."

Conclusion:
Joe and Big Al recommend that Barney and Betty take advantage of their current low marginal tax brackets to perform Roth conversions. This strategy aims to minimize future tax liabilities and enhance retirement income flexibility.

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4. Listener Question: Amir's Maximizing Retirement Income

Listener Profile:

• Name: Amir A.
• Age: 68
• Status: Single, retired
• Assets:
  • $1.3 million in deferred IRAs
  • $200,000 in Roth accounts
  • Rental properties generating ~$1,800/month
  • $250,000 in CDs, $260,000 in cash
  • Ownership in a restaurant ($2,000/month income)
• Income:
  • Pension: $6,300/month
  • Social Security: $4,100/month (increasing with age)
• Expenses: Desired income of $140,000/year
• Question: How to maximize retirement income while managing inflation and taxes?

Discussion Highlights:

• Comprehensive Income Assessment:
  Joe and Big Al conduct a thorough analysis of Amir's income streams, including pensions, Social Security, rental income, and business earnings, to determine the sustainability of his desired spending level.

  Big Al Clopine [26:43]: "He's got $1,900,000. At age 68, you could do 4% distribution rate. That'd be 76,000. His fixed income with the rental income is about 95,000."

• Distribution Strategy:
  They discuss the appropriate distribution rate from Amir's investment portfolio, suggesting a conservative approach given his low-risk allocations (70% money market, 30% stocks and bonds) and the need to safeguard against inflation.

  Joe Anderson [28:35]: "I would go, yeah, 3 or 2%. Two and a half maybe."

• Asset Allocation and Risk Management:
  The importance of maintaining a balanced asset allocation to generate sufficient returns while minimizing volatility is emphasized. They advise Amir to consider adjusting his investment mix to better align with his income needs and risk tolerance.

  Big Al Clopine [28:47]: "He's trying to squeak out the most income that he possibly can with the least amount of risk."

• Maximizing Income Through Multiple Streams:
  The hosts commend Amir for his diversified income streams, including rental properties and business ownership, which provide additional financial security and flexibility in retirement planning.

  Joe Anderson [28:49]: "But he's trying to squeak out the most income that he possibly can with the least amount of risk."

Conclusion:
Joe and Big Al affirm that Amir is well-positioned to meet his retirement income goals through his diverse income sources and strategic asset allocation. They recommend maintaining a conservative withdrawal rate and optimizing his investment portfolio to ensure long-term financial stability.

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5. Additional Insights and Recommendations

• Maximizing Roth Conversions:
  Both hosts underscore the benefits of Roth conversions, especially when individuals are in lower tax brackets, to secure tax-free income in retirement and reduce future tax burdens.

  Big Al Clopine [22:58]: "The marginal rate's your highest rate. That's the rate that you'll pay tax on for the conversion."

• Flexibility in Retirement Planning:
  Emphasizing the importance of flexibility, Joe and Big Al encourage listeners to evaluate their unique financial situations, consider multiple income streams, and adjust their strategies to adapt to changing circumstances and goals.

  Joe Anderson [28:41]: "It's just kind of planning and just figuring out what's the appropriate step so you don't make any mistakes along the way."

• Utilizing Financial Tools:
  The hosts promote resources such as the Financial Blueprint tool and comprehensive Roth Papers package to aid listeners in making informed financial decisions.

  Andi Last [22:30]: "Download our complete Roth Papers package and make sure you understand Roth accounts thoroughly so that you can take full advantage."

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Notable Quotes with Timestamps:

• Joe Anderson [07:00]: "It seems to me the solo Roth would be a better option given that there ain't. There isn't any tax on the flip side, like a brokerage and we use either to bridge the gap until I could use or turn on the pension."

• Big Al Clopine [17:39]: "I'd rather have the million than a $40,000 pension because of the flexibility. But that can backfire, Joe. Sometimes people spend too much and then they run out of money."

• Big Al Clopine [21:38]: "He's in the 12%. So the question is, does he take out more of the retirement account that he has in $1,500,000 and convert the remainder at the top of the $12,000?"

• Joe Anderson [28:35]: "I would go, yeah, 3 or 2%. Two and a half maybe."

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Conclusion:

Episode 505 of "Your Money, Your Wealth" offers invaluable insights for listeners aiming for early retirement and strategic financial planning. Through detailed listener case studies, Joe Anderson and Alan Clopine provide practical advice on optimizing retirement accounts, managing tax liabilities, and ensuring sustainable income streams. Their expert analysis, combined with relatable humor, makes complex financial topics accessible and actionable for a broad audience seeking to achieve financial independence and security.

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Access Additional Resources:

• Retirement Plan Spitball Analysis: YourMoneyYourWealth.com
• Complete Roth Papers Package: Available through the episode description.
• Financial Blueprint Tool: Assess your current financial status and retirement readiness.

For personalized advice, schedule a free assessment with Pure Financial Advisors by visiting YourMoneyYourWealth.com or calling 888-994-6257.

Transcript

[Andi Last]

Ricochet J in Colorado and her husband want to retire as soon as humanly possible. Are they on track? Should they save their surplus funds to a brokerage account or a solo 401k? That's today on youn Money, you, Wealth podcast 505 Plus. Micah in South Dakota wonders whether having $40,000 a year in a pension is basically the same as having a million dollars in bonds. According to the 4% rule. What did Joe and Big Al think? Barney and Betty will be in the 12 or 22% marginal tax bracket, but their effective tax only be between 10 and 12.4%. So how much should they convert to Roth? Are they asking the right question? And finally, Joe and Big Al spitball on ways to ensure that Amir in New Mexico has the maximum possible retirement income to last him to age 90 or 95. To ask your money questions or to get a retirement spitball analysis of your own, click Ask Joe and Big Al in the episode description and send us a message. 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]

Hi Joe Al, Andy Ricochet. Ricochet J. Yeah, Ricochet J. I was gonna totally butcher that, but I took a guess that it was Ricochet.

[Andi Last]

Well done.

[Big Al Clopine]

Good for you.

[Joe Anderson]

Yeah, he's here from Ricochet J from Colorado. Now this is surely what my golf nickname would be if I played more.

[Big Al Clopine]

Ah, okay.

[Joe Anderson]

A little Ricochet probably. Little blade it right in the trees. Thank you for taking my question. I started listening to the show about a year ago and I first I wasn't sure about it. Well, just one of you.

[Big Al Clopine]

I know what he's going I wonder which one.

[Joe Anderson]

See, just like I'm a fine wine, it just takes time and you fall in love. But you've grown on me and I joy listen each week during my commute. No, not really into cars. So I'll tell you, the last exciting place we traveled was to Monaco in the Canary Islands or Morocco. Whatever you say. Morocco. I go to Monaco.

[Big Al Clopine]

It turns out they're different places.

[Joe Anderson]

It's so beautiful at both.

[Big Al Clopine]

A little better in Monaco, in my.

[Joe Anderson]

Opinion, but oh, look at snooty over here. Okay, the coast of Morocco is amazing and it's worth the road trip. Drink of choice for me is a paloma or a glass of Chardonnay. Husband doesn't drink, but he does love those athletic na beers.

[Big Al Clopine]

Non alcoholic.

[Joe Anderson]

Yeah, I've never had one of those.

[Big Al Clopine]

Yeah, I have. They're pretty good.

[Joe Anderson]

Are they. Yeah, I think I'd rather drink water than NA beer, but maybe.

[Big Al Clopine]

Well, I'll give you. I'll give you 10 more years when you don't need quite as much alcohol, but you still want to have fun.

[Joe Anderson]

Have a little taste.

[Big Al Clopine]

Yeah, a little taste. Yep.

[Joe Anderson]

Okay. All right. I am looking for a spitball in our situation. I'm wondering how best to direct an expected increase in income in the future retirement funds. Okay. I work for a municipality and my husband is self employed. My question is whether we are better off directing surplus funds to a brokerage or setting up a solo 401 for him. Here's our info. We have a combined gross income of $200,000 and next year I expect to have a pay increase to about 15,000 DOL. I'm 45, my husband's 51. We also have a 10 year old son. We have currently retirement savings of $285,000, $125,000 in Roth IRAs, $85,000 in a rollover IRA and $75,000 in our Roth 401. Through our current employer, I've been maxing out the Roth IRAs, including catch up for me and my husband, the Roth 401 each year and plan to keep doing so. I'll be eligible for a pension and since I'm already close to 10 years in, I think I'm in it to win it and we'll try to stay in the system. My hope is to reach a point where I'll receive around $50,000 a year from the pension. I'll have to stay at least another 10 years to wait to draw upon it until my early 60s. We have a brokerage account that I just set up this year and we have about $10,000 in it. We currently add $500 a month to this. Our primary home is worth $800,000 and we owe $330,000 on it at a 3.25% interest rate. We also have a rental home in Denver also worth around $800,000. With no mortgage left. We currently it currently nets up $30,000 a year in rent after expenses. $30,000 on $800,000. That's really good.

[Big Al Clopine]

It is.

[Joe Anderson]

All right. Our son has about $55,000 in his 529 plan. Our account and our account and the grandparents, we keep, we'll keep putting funds into this and I'm a little more worried about a retirement right now. So I'm not going crazy with that in just adding $300 a month. Wow. Ricochet. J, this is a novel.

[Big Al Clopine]

It keeps going.

[Joe Anderson]

Yeah. Spend about $8,000 a month, depending on where it's hockey season for our son, AKA the longest and most expensive sport a kid can play. Never played hockey, but my best friend did in high school. I expect we'd spend the same or a little bit more in retirement since we'd love to travel. All right, we'd like to retire as soon as humanly possible, but I know in reality that it won't likely be until our early 60s. If we could work some spitball magic to see if late 50s were in for us and early 60s for my husband, that would be great. Since my husband is six years older and could tap into his Roth 401 sooner than I can access my funds. Would it make sense for us to start one of those for him or should we start putting more funds into a brokerage account? It seems to me the solo Roth would be a better option given that there ain't. There isn't any tax on the flip side, like a brokerage and we use either to bridge the gap until I could use or turn on the pension I don't pay into Social Security currently. So my projected payout is low. 12 $12,000 at 67 or $15,000 at 70. Is that $15,000 or $1,500? It's $1,500, $1,500 a month, $1,200 a month and 1500 dollars.

[Big Al Clopine]

I think so, yeah.

[Joe Anderson]

My husband's is 1250 at 60, 2000, 1900 dollars at $67,000, 2450 at $70,000. We have a loose plan that as we near retirement time, we'd move back into our rental to get two years of primary residence back before selling the lot. We'd love to move around. Maybe France or move abroad. Maybe France and live in a country with a national health care. But we'll see what the state of the world is in 10 to 15 years. I'd like to see what the state of the world is when I get done reading this question.

[Big Al Clopine]

It's still going.

[Joe Anderson]

I'm sweating. This is hard work here. Can you spitball how we're doing and how I should be directing our new funds? Is our dream of living in the land of baguettes?

[Andi Last]

Baguettes.

[Joe Anderson]

Baguettes. Baguettes. And vino on track.

[Big Al Clopine]

Bread and wine Translated.

[Joe Anderson]

Okay, thank you, bro. I'm also curious if you approve of my asset allocation strategy. I'm going heavy on stocks since I have a pension coming. I have my husband's Roth IRA 7030. The brokerage is all in stock market. We're just trying to sort out how to best fund the gap until we can start reaching our Social Security and our pension. Hoping that between you, some of the combined house sale funds in the brokerage of our Ross. Okay, blah, blah, blah. Thanks so much for your insights. Keep up the great work. Alright, so she's got some extra cash, right? She wants to put it in some a brokerage account or Roth 401K.

[Big Al Clopine]

Yeah. All right, so that one's easy.

[Joe Anderson]

So total assets, she's got $300,000, $85,000 in a rollover IRA, $10,000 in a brokerage, $200,000 in a Roth.

[Big Al Clopine]

Yep.

[Joe Anderson]

Okay.

[Big Al Clopine]

Rental income $30,000, $50,000 a year in pension later. So let me recap a couple of things here, Jeff. All right, so first of all, question whether we're better off directing surplus funds to brokerage or setting up a solo 401k for him. I would do the solo 401 every day of the week, particularly since when the funds might be needed. According to your explanation or question, he'll be in his 60s and it'll be fully available for withdrawal. Right. So, yes, do the Solo 401. It's going to be tax free, so that's an easy one in terms of whether you're going to be. Okay, first of all, thanks so much for your question, but this really is a better question for a financial planner to run an analysis instead of us trying to figure out all these numbers in our head. But nevertheless, I did do a spitball for you. So I'm going to say this. You got 300,000. Now you're adding about 38,000 per year based upon two Roth IRAs and maxing out a 401. I'm going to say 12 years from now. I just made that up. You're 57, husband's 63, 6% interest, you end up with about 1.2 million. Okay, so right now you want to spend about 96,000 a year, 3% inflation. 12 years from now, that's about 137,000. Okay. There's a pension of 50,000 a year, although you won't get it until I think you said 60, but I'm going to put that in anyway. And rental real estate, 30,000. So that's about $80,000 off the $137,000. So in other words, you need $57,000 from your portfolio. Then you take $57,000 shortfall, divide that into what you have at that point, at a 6% return, $1,200,000, you get 4.8%, which is a little bit higher than we'd like to see. However, if your husband takes Social Security at 62, which we're not necessarily recommending, but if he did, then that distribution rate would go down to three and a half percent. And it. You're kind of right on the cusp. But that, that I'm going to say maybe it may work out for you, but this is something that.

[Joe Anderson]

Hold on. Let's see. There's an easier way to do this. Don't start peddling financial planning services over there.

[Big Al Clopine]

Well, yeah, but, I mean, you can't. It's hard to spitball this when there's so many variables. I don't care.

[Joe Anderson]

It's almost impossible.

[Big Al Clopine]

I don't care if she uses a program herself.

[Joe Anderson]

Here's $96,000 is what she wants to spend. And she's 45 years old, right?

[Andi Last]

She is 45, husband is 51.

[Joe Anderson]

All right, so she wants to retire in the late 50s.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Okay, so 45, 55. I'm going to get her retired at 60.

[Big Al Clopine]

Okay, you're going 15 years.

[Joe Anderson]

I'm going to go present value, and then you got 15. And then let's say inflation is at 3.5, and then. So that's $160,000 living expenses 15 years from now. I'm just taking that 96,000 and pushing it out.

[Big Al Clopine]

Now I got $140,000 for 12 years, but.

[Joe Anderson]

Okay, in the ballpark, but. So at 60, she's going to have $50,000 pension. I don't know if there's a cola on that pension or not, but.

[Big Al Clopine]

Don't know.

[Joe Anderson]

She's pretty excited about the pension. So am I. I would be, too. 50,000, plus another 30,000 of. Of rents. I don't know if there's going to be an increase in rents.

[Big Al Clopine]

That's right.

[Joe Anderson]

So $80,000. Call it. So she needs another $80,000, not including Social Security. She says she's going to have a pretty small Social Security, and then you got to bridge the gap with the husband. So if you need 80, what was her husband's Social Security?

[Big Al Clopine]

Well, it's 62. It's 1,200. Then 1967, 2,400 at 70.

[Joe Anderson]

All right, I'm gonna say she needs, like, what you said $50,000 is what the shortfall was.

[Big Al Clopine]

Yeah, that's what I calculated.

[Joe Anderson]

I would say she needs to target, like if you could get to $1.5 million over the next 15 years. I think you're sitting in a really good spot. So it's just kind of focusing on a goal, what the number is. I think once people can get a number in their head, then they're much more apt to, to achieve it. But you're right. I mean, we're just spitballing. It's a back of the envelope. But the more that you could save, Right. And the more that you invest, you're all in stocks, you don't need the money for another 12 to 15 years. I think all of that is really good. You're in low cost index funds. Great for you. Should you put money into more Roth IRAs? Yes, because you're going to have a lot of fixed income. So you're doing all the right things. I think where you're going, driving yourself crazy or making yourself a little bit nervous is that, yeah, you want to travel more, you want to go get some wine and be. No. And baguettes or whatever the hell that is. And so. And then you're going to sell the house. So there could be equity within the home if they're going to, you know, hang out in France.

[Big Al Clopine]

Could be, yeah, you get baguettes. Although the. Yeah, the rental income would go away, but.

[Joe Anderson]

Well, no, she's got a rental and the primary.

[Big Al Clopine]

I know, but she's saying she might want to move into the rental.

[Joe Anderson]

Oh, I didn't read that. Well, I got bored of it or something. But let's see what she gets. One and a half million dollars. Right. So that's the target. So if you ricochet. Don't ricochet. This just kind of keep focus, keep saving. And then if you can get to $1.5 million, I think you're sitting in a really good spot.

[Big Al Clopine]

Okay, I'll accept that.

[Joe Anderson]

Right. Sometimes it gets super confusing because there's all these cash flow needs that have to happen at certain time periods because your Social Security is timed at a certain. Then your pension's going to come in. You want to retire at a certain point, but then your husband's going to retire at another point. So yeah, you have to spreadsheet this thing out. But if you're just looking at back of the envelope, you can look at, all right, well, what do I want to live? What do I want to spend on an annual basis? And she figured that out closely to $100,000 a year. You just need to figure out what that 100,000 is going to buy in 10 or 15 or whatever year that you really want to retire and then look at. All right, well, divide that by distribution rate, 3%, 4%, and then that's going to give you kind of a number to shoot for. So, I don't know, we're just dragging these things out.

[Andi Last]

You're spitballing.

[Joe Anderson]

Good luck. I'm glad you you warmed up to you. She's like, she only likes one of us, Al.

[Big Al Clopine]

Now. She likes both now.

[Joe Anderson]

Yeah.

[Big Al Clopine]

Probably likes you better because you're like, fine wine. Always keeps getting better.

[Joe Anderson]

Yeah, you know, remember that one guy was like, yeah, I came back like four times and I just, I gotta leave again. I just can't do it. But they keep coming back. Why do you guys keep coming back?

[Big Al Clopine]

I wonder why he kept coming back.

[Joe Anderson]

It's like, man, you know, I've tried you now four times.

[Big Al Clopine]

This has got to be a good show. No, not really.

[Andi Last]

If you just can't get enough of Joe and Big Al, check out the YMYW TV show this week. They're talking about financial freedom. Only about 1 in 10Americans are living their definition of financial freedom. 54% say that means living debt free, 50% say living comfortably, 32% say that financial freedom means not having to work, and 13% define it as being rich. But too many of us fall short of financial freedom because of lack of retirement savings, salary constraints, debt, or unforeseen emergencies. Watch this week's brand new episode of youf Money, you, Wealth TV where Joe and Big Al put you on your 11 step path to financial freedom. Find out how to take inventory, invest in yourself and sustain your financial dreams and goals. Our Financial Blueprint tool will help you with that first part, taking inventory. Click the Financial blueprint link in the episode description, enter your details and you'll get an analysis of your current cash flow, assets and projected spending for retirement, along with three scenarios that'll help you determine your probability of Success. Watch your 11 step path to financial freedom on YMY W TV and calculate your financial blueprint for free. You'll find links for both in the description of this episode.

[Joe Anderson]

We got Micah from South Dakota. Hello. Hello, Micah. Is it safe to say that if I get $40,000 in pension, is it similar to having a million dollars in bonds according to the 4% rule? Yeah, I would say that's a good way to look at it.

[Big Al Clopine]

It is a good way to look at it. I think probably. 4% rule though was originally designed for a mixture of stocks and bonds. But yeah, you're on the right track. That to me the main Difference is, when you have a pension, you know what it is? It's 40,000 a year, maybe of cost of living, maybe not. When you got the million dollars, you can spend more than 40,000 a year, or you can spend less than 40,000 a year, or you can convert some of that to Roth ira. So you have a lot more flexibility. I'd rather have the million than a $40,000 pension because of the flexibility. But that can backfire, Joe. Sometimes people spend too much and then they run out of money.

[Joe Anderson]

That million dollars could go to 700,000. And 4% of 700,000 is less than 40 grand.

[Big Al Clopine]

Correct. So what I said is I'd rather have the million, but there's risks in that.

[Joe Anderson]

Yeah, because you got a lot of extra do in your big fat wallet.

[Big Al Clopine]

Oh, come on. If I had a choice, I mean, wouldn't you. If you had a choice?

[Joe Anderson]

Because I think we have experience in the business and we. Right. So let's say if I'm conservative, depends on the client, I would be like, all right, well, here. If you don't want to deal with investing this.

[Big Al Clopine]

Right.

[Joe Anderson]

And if you want a guaranteed income and $40,000 is going to give you all the things that you need in life, then take the 40 grand all day.

[Big Al Clopine]

Yeah. Then there's no concern.

[Joe Anderson]

Right. Or if you want to have a little bit more flexibility, but there's risk there.

[Big Al Clopine]

Right.

[Joe Anderson]

So that million could go to 1.2 or 1.3. But if you were to ask someone, okay, you got a million dollars, and that million dollars went to 2 million.

[Big Al Clopine]

Right.

[Joe Anderson]

Or that million dollars went to 500,000.

[Big Al Clopine]

Yes.

[Joe Anderson]

Right. People would be like, no, I don't want that game. I'd much rather take the 40 grand.

[Big Al Clopine]

Right. A lot of people would say that. I agree.

[Joe Anderson]

All right, here we go. Hi, Andy. Joe, Big Al. Hoping to get a spitball question answered. I'm 62 and my wife is 60. We're both retired. We have no debt. I have about $1,300,000 in all deferred IRAs, with very little in a brokerage account, about $200,000 in Roth accounts, and have $34,000 per year in pension. With the cost of living adjustment for life, I will get about $60,000 per year between my wife and I, Social Security, starting at age 70. I want to do a little Roth conversions to the 12% tax bracket for the next few years. But my question is this. If I will be in the 12% or 22% marginal tax bracket, but my effective tax rate will only be between 10% and 12.4%. Does doing conversions to the 12% or 22% marginal tax bracket make any sense? I also have a 7% state tax to worry about. I think I spent about $60,000 to $70,000 or 6 to $7,000 per month, LOL. What was so funny about that?

[Andi Last]

You really should figure that part out.

[Big Al Clopine]

Oh, that's the funny part.

[Joe Anderson]

No, that's hilarious. I know my spent six or seven thousand dollars per month, lol.

[Big Al Clopine]

I think what he meant, or she, I guess he meant to say is I really should figure that part out. Right, Right.

[Joe Anderson]

Lol.

[Big Al Clopine]

That's what it should have been.

[Joe Anderson]

Love it. Best regards. Love your show. Well, we love you Barney and Betty. Yeah, riot.

[Big Al Clopine]

We had another Barney and Betty before.

[Joe Anderson]

But a lot of Flintstone fans.

[Big Al Clopine]

Different one.

[Joe Anderson]

A lot of Flintstone.

[Big Al Clopine]

Yeah. Yeah.

[Joe Anderson]

Okay, let's see. He's got very little bit in. So he's got $1.5 million in total assets. He's got fixed income of 94,034 from a pension, 60 from Social Security. He's going to spend 80. He's not going to touch the deferred assets. Does he do a conversion? And he is. I'm sorry, he's 62. So he's retiring. Is there a bridge? When is he retiring?

[Andi Last]

Both retired. He's 62, she's 60, both retired.

[Joe Anderson]

So we need to bridge the gap. He's 62, so they need, let's call it $80,000 a year. Yeah, I think they're okay for the next eight years. He needs. Because how much?

[Big Al Clopine]

Well, he's got 34,000 pension, but his shortfall is about $50,000 and a $1,500,000. It's about a 3.3% distribution rate. So I think that's good, especially since Social Security is coming.

[Joe Anderson]

So $50,000 plus $34,000 minus the standard deduction. He's in the 12%. So the question is, does he take out more of the retirement account that he has in $1,500,000 and convert the remainder at the top of the $12,000? Yeah, I would, I would do all day, every day. Even on Sunday.

[Big Al Clopine]

Wow. On the day off, on the day of rest. Okay, got it. Yeah. The reason is because 12% bracket, that's a great bracket. Right. And so you want to take advantage of it, particularly when you got over a million dollars. Right. In a tax deferred account. Social Security is coming. That's taxed at ordinary income. Your pension is taxed at ordinary income. So you want to try to get as much of that future required minimum distribution tax free as possible by filling up the 12% bracket. One of your questions was you're getting confused about marginal bracket and effective rate. Effective rate is your blended rate. Your marginal rate is your highest rate for purposes of Roth conversion. You always look at your marginal rate. Your marginal rate's your highest rate. That's the rate that you'll pay tax on for the conversion. And then the question is, is that rate or that tax worth it compared to your future rate? And in this case, 12% rate is about as low as it goes. So I would do that all.

[Joe Anderson]

Yep, well said, my friend.

[Andi Last]

Once your money is in a Roth, your earnings in that account will not be taxed. There are a lot of rules though. Download our complete Roth Papers package and make sure you understand Roth accounts thoroughly so that you can take full advantage. This bundle of Roth Guides is packed with valuable information. What's the difference between a Roth contribution and a Roth conversion? What are the pros and cons of saving in a traditional IRA versus a Roth IRA versus a Roth 401k? How do you withdraw money from your Roth without penalty? What can you do if you make too much money to contribute directly to a Roth? Get the answers to all of these questions in the complete Roth Papers package. Yours free, courtesy of your money, your wealth and pure financial advisors. Scroll down to the description of this episode. You see that link that says complete Roth Papers package? Click it, go to our website and download yours.

[Joe Anderson]

Hello, my name is AMIR A. I'm 68 year old single man born in November 1956. Oh, can you give me the date? What hospital?

[Big Al Clopine]

We need more information.

[Joe Anderson]

Yes, we need Justin Smith more Amir. Eh. Oh man. And I've been working for the same company for 28 years. My current salary is $265,000 and I'm thinking about retiring in July 2025. I have $1,200,000 in a 401 extremely conservative 4% yearly return with 70% of my money in the market in money market and 30% in stocks and bonds. I have a pension plan that pays me $6,300 a month at the time of my retirement. My Social Security will also pay me $4,100 a month. July 2025. $4,400 when I'm 69 or $4,600 when I'm 70. I also have a total annuity of $150,000 for the past 15 years that pays me $1,300 a month in case I want to start taking monthly payments. Okay. Also in a condo in Denver from which is clearing about $1,800 a month, valued at $430,000 fully paid. I have a $250,000 CD that matures in January of $260,000 cash. My primary primary residence is in New Mexico. It was fully paid for. It's praised at $160,000. I'm thinking about selling and moving in a house in Irvine, which is my second residence. And Amir, he's got houses all over the place. He's got Denver, New Mexico, Irvine. I'm a 50% owner of a restaurant in Costa Mesa with my sister, which pays us about $2,000 a month. We'll hook a brother up. We're just right down the street from Costa Mesa.

[Big Al Clopine]

We are.

[Joe Anderson]

I'd like to go to your restaurant. He didn't even tell us. What?

[Big Al Clopine]

No, we don't know.

[Joe Anderson]

Come on. My desired income after retirement is to have $140,000 a year of spending. I really appreciate your evaluation of my financial blueprint with an additional comment and suggestion that you may have. My main concern is with inflation and taxes. Will it be okay until 1995? No idea. What other advice do you have for me? To have a maximum. To have a maximum income possible. Okay. I'll be in Southern California in about a month. I'm wondering if I could have a little meet and greet with Al. What do you think, Al? You got some time for Amir a Al.

[Big Al Clopine]

Joe.

[Joe Anderson]

Oh, I didn't see that.

[Big Al Clopine]

Or any other fiduciary advisor that is recommended to meet with me.

[Joe Anderson]

Oh, wow. Okay.

[Big Al Clopine]

How about that?

[Joe Anderson]

Costa Mesa.

[Big Al Clopine]

Yeah. It's close to San Diego.

[Joe Anderson]

Yep.

[Big Al Clopine]

Okay.

[Joe Anderson]

68 years old, wants to retire soon.

[Big Al Clopine]

Okay. Wants to spend $125,000 net, $140,000 gross. He's got $1,900,000. At age 68, you could do 4% distribution rate. That'd be 76,000. His fixed income with the rental income is about 95,000. Actually, that doesn't even include the restaurant. So, yeah, if you add all that stuff in, it's close to 200,000 of spending. Whether you want to spend that much. I mean, that could be max spending.

[Joe Anderson]

He wants. The shortfall is about 140, 125, something like that.

[Big Al Clopine]

Yeah.

[Joe Anderson]

He's got plenty of fixed income, plenty of assets.

[Big Al Clopine]

This works just fine. And so if you want to spend 140, great. If you want to spend a little bit more, you know, maybe 180, 190 would be max spending. But see, the thing is, when you, when you, when you calculate max spending, basically that puts you on the margin where you can't make errors. So I'm not suggesting you would spend that much, but you could spend more than 140 from time to time if you want to.

[Joe Anderson]

Yeah, he's a conservative individual. He's mostly in cash money market. He bought an annuity that's fixed. He's got CDs. But it's funny, he owns a restaurant.

[Big Al Clopine]

Yeah, well, probably his sister. Sister needs some capital, I'm guessing.

[Joe Anderson]

I don't know. But isn't a restaurant pretty risky?

[Big Al Clopine]

Yes, it can be. So that $24,000 of income may not be forever. You never know.

[Joe Anderson]

But, yeah, I think you're sitting just fine. You just want to. But you can't really use a 4% burn rate with him because he's probably not even getting close to 4% long term with his allocation. I would look at 2.

[Big Al Clopine]

Well, we don't know what his 401.

[Joe Anderson]

Assets are, but that other 70% cash.

[Big Al Clopine]

Oh, it says that.

[Joe Anderson]

Okay.

[Big Al Clopine]

Yeah, you're right. So probably maybe a three.

[Joe Anderson]

I would go, yeah, 3 or 2%. Two and a half maybe.

[Big Al Clopine]

Maybe, Sam.

[Joe Anderson]

But he's trying to squeak out the most income that he possibly can with the least amount of risk. And I think that's what everyone's goal is. It's like, all right, how do I go about creating the income that I need and not worry about my investments and not worrying about the markets and so on and so forth? So you've done a really good job of accumulating the wealth. I think if you take a smaller distribution rate, you can spend maybe a little bit less. He's got houses all over the place. He's going to sell some of those.

[Big Al Clopine]

Homes, move to Irvine and even calculate that. Yeah.

[Joe Anderson]

So, I mean, you've done a great job. Now it's just kind of planning and just figuring out what's the appropriate step so you don't make any mistakes along the way and then just come up with the appropriate allocation that you're comfortable with to give you the return that you want with the least amount of volatility and the least amount of risk. And yeah, Big Al is available at any time. You want to meet up here. I will set that appointment for you Saturday mornings. You want to come in the office?

[Big Al Clopine]

Yeah, just bring me. Bring me takeout from the restaurant.

[Joe Anderson]

All right, that's it. We're done. Thank you, Mir. Thank you, everyone. For the wonderful questions. Andy great job on putting all this stuff together.

[Andi Last]

Thank you. Thank you for doing it here to.

[Joe Anderson]

Ride your guys coattails. Aaron thank you for the lighting. Appreciate it. We'll see you all next week.

[Andi Last]

Show Scotty Money, Wealth, James Bond in the Silicon Valley, Doc in San Francisco, Wine Guy and Wine Gal in Sonoma Joe and Big Al Spitball for you and maybe some non California listeners and viewers too next week on YMYW podcast number 506. Your money, your wealth is your podcast and this show would not be a show without you and your participation. Keep sending in those voice messages and emails. Keep watching and commenting on YouTube. Leave us your honest reviews and ratings and Apple podcasts and keep telling your friends how we're making fun of finance over here at yout Money, you, Wealth 2025 is now just five weeks away with a new administration with new rules coming in January. Find out what last minute tactics you may still be able to leverage to bring down your 2024 tax bill and make sure your plan for your financial future is secure. Schedule a free assessment with one of the experienced professionals on Joe and Big Al's team team at Pure Financial Advisors, either in person or online via Zoom. There is no cost and no obligation and this assessment is tailored specifically to your financial needs, your tolerance for risk and your retirement goals. Do not procrastinate. The calendar is filling up fast. Click the free assessment link in the episode description or call 888-994-6257 to book yours while there's still time. Your Money, your Wealth is presented by Pure Financial Advisors, 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.