Retirement Planning for Aging Parents - and Can You Retire Early? - 570

Summary

Podcast Summary: Your Money, Your Wealth – Episode 570

Retirement Planning for Aging Parents – and Can You Retire Early?
Hosts: Joe Anderson, CFP® & Alan Clopine, CPA
Date: February 24, 2026

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Episode Overview

In this high-energy episode, Joe and Big Al tackle two big sides of the retirement planning equation: caring for aging parents (including creating financial safety nets for those at risk) and building a robust early retirement strategy—often with complicated portfolios, large brokerage accounts, and looming ESOP windfalls. Listeners bring real-life scenarios, and the hosts “spitball” detailed personalized financial advice, highlighting pitfalls, clarifying strategies like Roth conversions, sequence of withdrawal, annuities, tax-loss harvesting, and risk management. Throughout, the irreverent, witty banter keeps things light—even when the numbers get large.

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Key Discussion Points & Insights

1. Supporting Aging Parents Without Sabotaging Your Future (Daniel in Texas)

• Listener Profile: 40, single, solid nest egg, aging parents (mom, 70, renting with $200k savings; dad, 70, owns a home, still working), worried about a future financial burden.

• Key Takeaways:

  • Use Parents’ Own Resources First: Both parents have meaningful assets—mom has $200-400k; dad owns his home.
    "[A lot of people], if they need long term care, sell their home and they use those proceeds to pay for long-term care." – Big Al (03:20)
  • Don't Sacrifice Your Own Retirement:
    "The most important thing is don't jeopardize your own retirement just trying to cover your parents, because there is Medicaid and that’s what this is for." – Big Al (04:16)
  • Trusts, Insurance, and Designated Accounts: At this stage, sophisticated structures are probably unnecessary. Setting aside cash is fine, but gifting/estate planning rules unlikely to matter much yet.
  • Medicaid Is a Real Safety Net: If resources run out, Medicaid can cover long-term care—albeit often at lower-tier facilities.

• Memorable Moment:
  "It's like the opposite of college planning." – Andi Last (03:02)

• Important Segment: Daniel’s question & response [00:58–07:06]

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2. Should You Buy an Annuity for an Elderly Parent? (Gemma’s Mom)

• Listener Profile: 82-year-old mom, $235k IRA, $250k brokerage, $7k checking; monthly spending exceeds income by ~$1,200; concern she’ll run out of money in 7–8 years.

• Key Takeaways:

  • Distribution Rate Is Manageable:
    • Current shortfall: $35,000/year vs. $480,000 in assets = 7.3% drawdown.
    • Even with no growth, assets last 14 years; with modest 3% returns, 19 years. "I think mom’s looking like she’s in great shape from what she’s spending and what she has." – Joe (11:15)
  • Role of Annuities:
    • A single-life annuity (e.g., $2,000/month for $200k) can provide peace of mind, but if longevity is moderate, it might not be “worth it.”
    • Annuity is insurance, not an investment—if the comfort of guaranteed income outweighs legacy/return, it’s reasonable. "If they’re totally risk averse and…they live a long time, you’re insuring against the longevity risk… the annuity probably makes the right move." – Joe (13:01)

• Important Segment: Gemma’s annuity question & nuanced discussion [07:06–13:52]

• Notable Quote:
  "You’re buying insurance…If you buy into that, then buy the annuity." – Joe (13:51)

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3. Sequence of Withdrawals & Early Retirement Planning (Cookie & Jerry)

• Listener Profile: Married, 47 & 51, planning retirement in 2.5 years; $92k/year tax-free pension w/ COLA, $297k income, $2.3m+ in investments (blend of Roth, traditional, and $1.5m in a NASDAQ brokerage account), plan to spend $190k/year in retirement.

• Key Takeaways:

  • Withdrawal Rate Is High: At ~4.4% in early 50s, spending is aggressive—recommend targeting a 3% withdrawal (~$150k/yr) and adjust upward later.
  • Tax Gain Harvesting vs. Roth Conversion:
    • For large brokerage accounts, tax gain harvesting (realizing capital gains up to the 0% bracket) before Roth conversions is optimal, given needed liquidity for early retirement spending.
  • Diversify the Brokerage Portfolio: 100% NASDAQ is risky for withdrawals—need more bonds/cash for stable income. "If you have 100% in the NASDAQ, you’re going to see a lot of volatility there." – Joe (23:51)
  • Paying Off Mortgage or Not: With a 2.5% rate, keep the mortgage and prioritize investment growth.
  • Investment Sequencing:
    • In early retirement: live off brokerage, utilize tax-free pension, consider diversifying, manage taxes by sequencing gains and conversions.

• Important Segment: Cookie & Jerry’s early retirement tableau and spitball [15:08–29:12]

• Memorable Quote:
  "Spending money and saving money are two different things…now that you need to spend, your strategy needs to change." – Joe (27:50)

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4. Managing a Mega ESOP Windfall & 40-Year Withdrawal Horizon (Fred & Wilma)

• Listener Profile: 44 & 43, major tech windfall approaching—possible $4m ESOP payout (paid over 5 years, available after 3-year wait), $1.5m+ in retirement, $2.5m brokerage, $500k+ cash, $3.8m house, large expenses ($210k/yr) and college-bound kids.

• Key Takeaways:

  • Math Supports Early Retirement:
    • With conservative growth and expenses, and assuming ESOP materializes, a ~2.8% withdrawal rate after all windfalls is possible. "[With] straight numbers… it seems like it probably works." – Big Al (39:27)
  • Bridging to ESOP: Live off cash/brokerage for first three years, consider Roth conversions if in low brackets.
  • Managing IRA Access: Pre-59.5 options include 72(t) distributions, but with brokerage ballast, probably unnecessary.
  • Asset Location & Allocation: Strategic placement of stocks/bonds across brokerage, tax-deferred, and future Roth to maximize growth, manage risk, and minimize taxes.
  • No Reason to File Married-Separate in California: Community property rules mean no effective bracket splitting; stick with joint. "Doesn't pay to file separate... in California... so you have mirror returns but just a higher tax bracket." – Big Al (43:06)

• Important Segment: Detailed ESOP scenario walk-through and action plan [30:38–44:16]

• Memorable Quotes:
  "You want to make sure…you have in your Roth account asset classes that have a higher expected rate of return." – Joe (42:55)

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Notable Quotes (with Timestamps)

• “The most important thing is don’t jeopardize your own retirement just trying to cover your parents, because there is Medicaid and that’s what this is for.” – Big Al [04:16]
• “If they’re totally risk averse and…they live a long time, you’re insuring against the longevity risk and… the annuity probably makes the right move.” – Joe [13:01]
• “If you have 100% in the NASDAQ, you’re going to see a lot of volatility there.” – Joe [23:51]
• “Spending money and saving money are two different things…now that you need to spend, your strategy needs to change.” – Joe [27:50]
• “With straight numbers… it seems like it probably works.” – Big Al [39:27]
• “Doesn’t pay to file separate... in California... so you have mirror returns but just a higher tax bracket.” – Big Al [43:06]
• “You want to make sure…you have in your Roth account asset classes that have a higher expected rate of return.” – Joe [42:55]

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Episode Timeline

| Timestamp | Segment / Topic | |-----------|---------------------------------------| | 00:58 | Daniel: Planning ahead for aging parents | | 07:06 | Gemma: Annuities and stretched portfolios for elderly mom | | 15:08 | Cookie & Jerry: Early retirement, safe withdrawal rates, sequencing gains and Roth conversions | | 30:38 | Fred & Wilma: Multimillion-dollar ESOP, withdrawal strategy, tax tactics for windfall retirement | | 44:23 | Announcements & next week’s questions |

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Tone & Style

Joe and Big Al keep the atmosphere light, playful, and collaborative, but don’t shy away from straight talk—especially when warning against risky withdrawal rates or complex tax pitfalls. They break down complex topics using relatable analogies, direct audience engagement, and frequent back-and-forth agreement or nuanced debate.

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Summary Verdict

This episode is a masterclass in balancing future-family obligations and aggressive early retirement aspirations. The team dispels myths (e.g., the universal “badness” of annuities), calls out common mistakes (overlooking risks or overconfidence in bull markets), and underscores the importance of:

• Not sacrificing your own future for others
• Risk-aware, sequence-sensitive withdrawal planning
• Layered, tax-savvy portfolio management
• Embracing flexibility as circumstances and markets shift

Listeners come away with actionable spitballs, clear guidance on next steps (even if “it depends”), and the confidence to ask better questions as their wealth grows and life changes.

Transcript

[Andi Last]

Joe and Big Al spitball two sides of the retirement equation today on youn Money, you, wealth podcast number 570. Daniel in Texas is 40 and worrying about how to support mom and dad if their money runs out. Can he build some kind of financial safety net for them without ruining his own retirement? Gemma's 82 year old mom is drawing down her portfolio. Is locking in guaranteed income with an annuity a smart move or could that create new problems down the road? Plus, Cookie and Jerry want to walk away from work before age 50 with a big brokerage account and a pension. Are they positioned correctly? How can they avoid pulling the wrong levers at the wrong time? And Fred and Wilma are staring at a potential multimillion dollar ESOP payout. What levers do they need to pull so they can retire at age 46

[Joe Anderson]

and shout we ever, never do?

[Andi Last]

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]

Now let's head right to Daniel in Texas. Hi Joe, Big Al. Love, Michelle. Longtime listener, first time spitball request. I'm 40 years old, single, trying to plan ahead for how to support my aging parents if or when they need it. Here's the financial snapshot. $280,000 in a Roth IRA, $620,000 in a traditional IRA, $13,000 in an HSA, $70,000 in cash, $700,000 in a rental. No debt and no other debt. I earn about $100,000 per year. My expenses run about 5,000 to $6,000 a month. My parents are both 70 and divorced. Dad owns his home outright, no savings, still works, making about $50,000 a year. He receives Social Security and is in good health. Mom, she rents, has about $200,000 in savings, 100,000 in cash and 100,000 in a traditional IRA. She receives Social Security but runs about a $300 a month deficit. Also in good health. Here's the thing. Parents have virtually no long term financial resources beyond Social Security and what I listed. Well, that sounds like they have some resources.

[Big Al Clopine]

Yeah. Mom's got what, 300, $400,000? Dad's got a home.

[Joe Anderson]

So far, so good.

[Big Al Clopine]

Yep.

[Joe Anderson]

I also have a sister, but she doesn't have much. So I'm confident the financial burden of caring or emergencies will fall on me. My questions what stages or what steps can I take now and in the near future to make sure I'm prepared if and when they need financial support? Should I be hoarding More cash in case of emergencies or future long term care needs. Is there a smart strategy or structure I'd be setting up now, maybe through trust, insurance or designated accounts to ease the burden later and ensure that they're taken care of without jeopardizing my own financial future. Thanks again. Love the spitball and all the laughs. Look forward to hearing what you think

[Andi Last]

it's like the opposite of college planning.

[Joe Anderson]

Interesting question.

[Big Al Clopine]

It is and I think a common issue really.

[Joe Anderson]

There's 70 and in good health.

[Big Al Clopine]

Yeah.

[Joe Anderson]

So he's thinking, he's thinking way ahead. You know, parents are going to run me dry since I got to take care of my aging folks.

[Big Al Clopine]

Right. Well, I think the first thing I would, I would say is, is parents do have some resources. So mom's got about 400,000 dads, got a home. A lot of people when, if they need long term care, they sell their home and they use those proceeds to pay for long term care. I'm not saying that's going to necessarily cover everything, but that's reality for a lot of people. Joe. I think if you just get to the point where there's just no resources. There's Medicaid. Right. Medicaid allows you to live in a facility. You have to basically be poor. And I think last I looked the definition was about $2,000 or less. And then whatever income you have, if it doesn't cover the facility that goes to Medicaid and they pay the balance. And so that's kind of what happens. The problem is not every facility is a Medicaid. Medicaid facility. But there are, there are opportunities. To me, I think the most important thing is don't jeopardize your own retirement just trying to cover your parents because there is Medicaid and that's what this is for.

[Joe Anderson]

Yeah. Dad is still working, making $50,000 a year, owns the home outright. So guess it's looking at when is he going to stop working and is Social Security going to take care of his, his financial needs.

[Big Al Clopine]

Right.

[Joe Anderson]

So the biggest risk is if there's any type of extended care and like you mentioned, they can go on Medicaid. Yeah, I don't know. He's looking for, you know, is there some smart strategies, some structures that he could set up any kind of trust or. I don't, I don't think so.

[Big Al Clopine]

No, I don't either. I mean there's long term care insurance, but that you could harder to get at age 70.

[Joe Anderson]

Right. How do you not jeopardize your own futures that you have to run your own financial strategy or understanding what you need at your retirement. And if there's anything extra, do you want to hoard a little bit of cash to have some liquidity in case there's a need, that there's some emergencies, or if there's repairs on the house that you need to fix for that? That's what I would be thinking about.

[Big Al Clopine]

Yeah. It's kind of like we talk about college funding, right? Don't jeopardize your own retirement for college funding. That's kind of the same. Don't jeopardize your own retirement for the sake of your parents. I get it. Your parents raised you, you want to take care of them and that's great. But you want to make sure you're okay too. And realize there are these resources. Like. Well, first of all, both your parents have assets, so that's good. But secondly, if they run out, there's Medicaid and that's not uncommon. I think a lot of people are in Medicaid facilities.

[Joe Anderson]

All right. Well, what a nice guy, taking care of mom.

[Big Al Clopine]

Yeah. Wonderful. Yeah.

[Joe Anderson]

What do you think he means when

[Andi Last]

he references designated accounts? Is he talking about potentially putting as money that is specifically for the parents benefit or something like that? Does something like that exist?

[Big Al Clopine]

Well, it's just setting aside an account. It's his account. He could use it for whatever he wants and it would be in his own mind. It's not like a special type of account.

[Joe Anderson]

Yeah. He will just have to follow gifting rules and of that nature if he's going to be giving money to mom and dad. And is there ways that he can bypass that? I mean, all he's going to do is reduces his estate tax exemption. And I'm not sure if he's in jeopardy of paying any large estate taxes.

[Big Al Clopine]

Doesn't look like it.

[Joe Anderson]

I mean, I don't know. At age 40, are you planning for an estate tax issue?

[Big Al Clopine]

Not generally.

[Joe Anderson]

Not generally. Yeah. Interesting question. Don't get that opt in.

[Big Al Clopine]

No, but I think it's, you know, I think it's going to. It's a common question right now. It's like my parents, you know, people are living longer. Joe and my parents had some money, but not enough to cover long term care. Right. So now what?

[Joe Anderson]

Yep. All right, cool. Let's move on. Let's go to Gemma. Hi. First and foremost, I Drive a 2014 E350MB convertible. What is that? Mercedes Benz E350. Those are the electric ones.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Going to drive it till it dies, don't drink often, but every now and again I enjoy a Amaretto sour or a Madela. I need help with my mother. Oh, we're doing the mothers. I guess we got the theme. Andy likes the themes. I need help with my mother's financial situation. She's 82 years old, lives alone, in good shape, still very active. Her current assets, $235,000 in the IRA, $250,000 in a brokerage account, $7,000 in checking. Her income is about, let's see, $1,150 in RMDs, 1,600 in Social Security in $1,000. Pension, has no cola. She doesn't own a home. Her monthly spend is about $5550. She currently has to draw from the brokerage account to meet her monthly needs. I'm fearing she's going to run out of money in about seven to eight years. I hear nothing but bad things about annuities. But if the online calculators are correct, I tried a few. If she uses $200,000 of the IRA to buy a single life annuity, it would pay out about $2,000 a month for life, which would decrease the burden of the brokerage draw and be there for her life. It seems too good to be true. Obviously there is nothing for the heirs, but that's not a concern. The only other note would be if her ex husband, who is in good health at 84, passes before her. She'll get a bump in her pension to about $2,000 a month. Not counting on that. What is your thoughts? So I'm a little bit confused.

[Big Al Clopine]

Well, you're thinking, let me put some numbers to just how this looks. As I understand, she spends about $66,000 a year fixed income, which is not RMD, it's Social Security plus pension. That's about $31,000. So that's a $35,000 shortfall. You divide.

[Joe Anderson]

Yeah, 31,200.

[Big Al Clopine]

You divide that $35,000 shortfall into your assets of 480,000. Do 85. That's a 7.2 distribution rate. You hear us talk. Talking about. Try to stay at about 4. So that's a little bit too high. Now in your 80s you can be a little higher than 4, but even that might be a little bit rich. But Joe, a couple things. One is with that shortfall, that money would last 14 years if there's no growth at all.

[Joe Anderson]

Right?

[Big Al Clopine]

Right. Or if there's a 3% earnings on that, it would last 19 years.

[Joe Anderson]

Yep.

[Big Al Clopine]

So you know it might not be quite as bad as you think.

[Joe Anderson]

Yeah. I don't know where she's coming up with, like, she's going to run out of money in seven, eight years.

[Big Al Clopine]

Yeah. Yeah.

[Joe Anderson]

I think she's looking at the brokerage account. Might run out of money in seven, eight years. But then the. The IRA still there, but she's still taking 1150. So I don't know if she's thinking, all right, I get the 1150 from the RMD, plus an additional $2,000 a month.

[Big Al Clopine]

Yeah. 2600 for Social Security and pension.

[Joe Anderson]

Well, she's saying that the annuity, if she takes the $200,000 and puts that in for life, you're going to get $2,000.

[Big Al Clopine]

Yeah. Instead of 1,500 or 1100. I mean.

[Joe Anderson]

Right. It's only going to be an increase of 800 bucks.

[Big Al Clopine]

Yeah. Right, right.

[Joe Anderson]

So what is the draw that she's pulling out now? So how much is she drawing from the brokerage account?

[Big Al Clopine]

Well, she's from the brokerage account. Let's see. She's drawing about a couple. Little less than $2,000. Call it 1500. Call it 20,000 a year.

[Joe Anderson]

All right, 12 times.

[Big Al Clopine]

And that's about.

[Joe Anderson]

So she thinks the income is $45,000 in a fixed income and she wants to spend $60,000.

[Big Al Clopine]

Yeah.

[Joe Anderson]

All right, and then so what is that extra month? So she's short 12 divided. 1250amonth? Yeah, 1250amonth. How much does she have in the brokerage again? 235.

[Big Al Clopine]

Yeah, 250. Okay.

[Joe Anderson]

Well, yeah, maybe that's where she's coming up with that number.

[Big Al Clopine]

Maybe.

[Joe Anderson]

I think mom's looking like she's in great shape. From what she's spending and what she

[Big Al Clopine]

has, I think it's closer than Gemma thinks in terms of making it right.

[Joe Anderson]

So I don't know if you want to buy the annuity, just understand the $2,000 a month that's going to come from the annuity. 1150 will satisfy the RMD. So you're increasing the income to 2,000 from 1150, but you're also draining 100% of that 200,000. Right now you're pulling 1150 from the account at 82. The RMD is probably, what, 6%? So I don't know if the market does 3, 5, if it does 6, then you break even. Then you're just taking the growth out. So you just want to run the numbers here a little bit. But I think she's not in jeopardy of running out of money in seven to Eight years.

[Big Al Clopine]

I totally agree. I think, like I said, even with no growth, I think it's 14 years.

[Joe Anderson]

Yeah. Do you still do the annuity? Just to say, all right, well, here I don't have to worry about the income anymore. Mom is going to be fine if she still has the $285,000 in the brokerage account for the liquidity.

[Big Al Clopine]

Well, I mean, I see why it's attractive. Like it's $24,000 distribution on 200,000. Right. So that's over 10% distribution, which if she lives to 110, that's a great deal. If she lives at 84, it's a terrible deal. So it's insurance. Right. You're buying insurance. And I think if you think about it that way, and she mentioned it wasn't necessarily for the heirs, they don't care about that. So, I mean, this could be a situation where you could do that if you want to.

[Joe Anderson]

Yeah.

[Andi Last]

Are there specific instances where you think that an annuity Absolutely makes sense for people, especially if they're in, you know, their 80s?

[Joe Anderson]

Well, if they're totally risk adverse and

[Big Al Clopine]

they feel like they have longevity and

[Joe Anderson]

they live a long time, you're. You're insuring against the longevity risk and. Yeah. And if they don't want to deal with it and they just want a fixed income and guaranteed income and they don't mind that the internal rate of return is going to be, I don't know, 3, 3.5% versus where they could get maybe 5 or 6% in a diversified portfolio, the annuity probably makes the right move. All right, here I'm hedging against. I'm insuring my longevity and I'm buying an income stream. So understanding it's insurance, I'm insuring my income. It's not an investment. It's like it's totally insurance. So if you buy into that, then buy the annuity.

[Big Al Clopine]

Yep. Cool.

[Andi Last]

That's the last of the parent emails.

[Joe Anderson]

Okay.

[Andi Last]

An annuity may help Gemma and her mom sleep better at night, but they're not right for everyone. You might like the idea of the safety of an annuity when markets get wild. But as Joe said, annuities are insurance, not investments. Better asset allocation, a disciplined withdrawal strategy or rigorous tax planning may help you accomplish the same goals with more flexibility. This week on youn Money, you, Wealth tv, Joe and Big Al talk about what to do when the stock market gets crazy. Find out how to handle that market volatility, how to think about guaranteed income versus market growth, and how to Build a financial plan that fits your needs whether stocks are soaring or dropping 20%. Then find out if you're on track for retirement with a financial blueprint. This tool is a free and self guided check in to see how you're doing as you head down the path to retirement. Just input your cash flow, your assets and your projected spending for retirement and you'll get a personalized report showing three scenarios for your retirement success with clear next steps to improve your plan. Watch what to do when the stock market gets crazy on YMYW TV and calculate your financial blueprint for free. The links are waiting for you in the episode description.

[Joe Anderson]

Let's move on. Here we go. We got Joe, Big Al, Andy, this is Cookie and Jerry hoping to get a spitball from you guys to better understand some of the nuances as we approach retirement. We load up on podcasts for long drives, usually between Norfolk in Kentucky or South Carolina. Get a sense of how we're doing and preparing for our retirement. I like a good bourbon and Cookie likes a nice sweet wine. We have been married for 12 years. I'm 47. Cookie's 51. I have a retirement pension that is tax free and currently pays $92,000 annually. All right. We have a retirement pension that is tax free. What is he? He's 47 years old, all right, with Cola adjustment in Tricare. All right.

[Big Al Clopine]

Military, I'm guessing.

[Joe Anderson]

Yes sir. Our salaries are $297,000. We both max out contributions to our 401s with my company match at 8 and a half and cookies at 5. We plan on retiring and pulling from the investments in two and a half years. At age 49 and 53, we currently have $220,000 in a Roth, 670 in a traditional and 1.5 in a Nasdaq index brokerage mutual fund. We try to hit. We try to invest $10,000 each a month into this account. We'd like to travel the world and spend about $190,000 in retirement. For our first 15 years, we plan on tax harvesting our brokerage. In the first couple years of retirement, our principal is about half of the value. We then plan to make Roth conversions. My thought is we go to the top of the 12% tax bracket for the entire time until Social Security kicks in for me at 67 and Cookie at age 70. We vary year to year on how much we invest, so around 30 to 40% of our gross paid. Our mortgage is $25,000 annually and won't be done until 2050. My company just introduced a mega Roth that I will start maxing out as well. Is our tax harvesting conversion order correct? Should we continue only living on the brokerage account in retirement until it's depleted? If there are any reasons to pay off the mortgage, it's at 2.5% when tax harvesting is there.

[Big Al Clopine]

There's quite a few questions here.

[Joe Anderson]

Is there a reason to move my investments from the NASDAQ index? It is today. Knowing we could easily live on pension alone in a bad market year. Are there any other investment strategies we are missing? Thanks for all you do. And I look forward to the critical thinking you can apply to our plan. Alright, I forgot the most important part. My retirement goes away when I pass. We are both in good health, but I want to make sure that when I pass. Cookie has no issues with money and can easily have $100,000 in today's money annually. Happy to work longer if needed. Also forgot to tell you what we drive. I drive a 2021 Nissan Frontier and Cookie drives a 2020 Volvo S60. Thanks again. All right.

[Big Al Clopine]

Okay. There's a lot here. So they want to retire in two and a half years, Joe. They got about $1,900,000 right now. And they say they're saving 30 to 40% of the gross pay, which is about 300,000. So let's call that 90,000.

[Joe Anderson]

They said 10,000amonth too.

[Big Al Clopine]

I know, I know. I'm taking the more conservative, but you're right, you're right, they did. So let's just say they saved 90,000 6% over. Just call it two years. That's $2,300,000. They want to spend 190. The pension's 90ish, so they've got about $100,000 shortfall. You divide that into 2.3 million, that's a 4.4% distribution rate in your early 50s. That's a bit rich, say, particularly if the pension goes away, if, if Jerry dies or, you know, Cookie survives him. But I, I would say this. If it were me and I really, really, really wanted to retire, I would say maybe think of a safer withdrawal rate, Joe, like 3%. So that would be more like. Call it $70,000 plus the $92,000. You end up about $160,000, maybe $150,000, may maybe spend $150,000 and see how that goes and adjust from there. That's what I might do. And it sounds like they have the ability to change their spending. So that's what I would do. Try to live on 150 or less.

[Joe Anderson]

Yeah. I don't know. He could run the numbers a little bit more because there's the Social Security gap, there's fixed income that's going to come to them in what, 15 years after they retire.

[Big Al Clopine]

Yeah. I mean, there's a lot to this. Yeah.

[Joe Anderson]

So, but let's just assume that they're going to retire regardless. They're going to spend a little bit less. So this tax harvesting. All right, so that's a tax strategy, not an income strategy. First off, so you're in a NASDAQ index fund with a $1.5 million brokerage account. How are you going to tax loss harvest that? So let's talk about what tax loss harvesting is. So when you have capital assets that are in a brokerage account, there's a tax strategy that you can use that can save money in taxes and capital gain taxes. Long term, when markets go down. And if you sell that asset, you get a capital loss. That capital loss will offset any capital gain. Dollar for dollar, if you have one single security, it's pretty hard to tax lost harvest. So it sounds like half of the 1.5 or $1 million that he has in the brokerage account. 500,000 doll. $500,000 is gain.

[Big Al Clopine]

Right.

[Joe Anderson]

So the first $500,000 that comes out is going to be taxed at capital gains rates. The $90,000 that he is receiving from social or from the pension. Did he say that was tax free?

[Big Al Clopine]

He did.

[Joe Anderson]

Okay, so he can then sell up to $90,000 of that brokerage account and not pay any tax. That's actually called tax gain harvesting.

[Big Al Clopine]

Yeah. And actually, let me interject. Yeah. Actually could sell. If you. The basis is 500 and selling a million, what, 130,000. You could sell 180 to have 90,000 of gain, right?

[Joe Anderson]

Oh, okay. Yeah. If you're including basis.

[Big Al Clopine]

Including basis, yeah. Yeah. That's the capital gain, I think, maybe. Yeah. So that's tax loss harvesting. But tax gain harvesting, that might be more relevant here, which is, do you do tax gain harvesting or do you do Roth conversion?

[Joe Anderson]

So tax gain harvesting is taking advantage of the 0% capital gain rate, which is up to the top of the 12 as a married, finally jointly, joint taxpayer.

[Big Al Clopine]

Yeah.

[Joe Anderson]

So as Al said, given if it's half basis and half gain, he could sell up to about 180,000, pay no tax because he still falls, or they still fall in that threshold of the 12% tax bracket or lower. So you're selling that security, taking the gains, and then re Diversifying that depending on how much that they want to spend into. Or you could buy the NASDAQ index fund right back and you're just increasing your overall, your basis at that point.

[Big Al Clopine]

And I think being that they want to retire in their early 50s, probably that is the right order. Probably tax gain harvesting, because you're going to need those dollars to live off of. Maybe do Roth conversions later when you're, when you don't have all this gain you're trying to pay tax on. When you do a Roth conversion and tax gain harvesting and the 12%, it's not such a good result because that, that Roth conversion can push you up to the, the top of the 12% bracket. And if you do capital gains on top of that, it's taxed at 15% and you get a pretty high tax rate, which it could have been a lot lower. And I want to try to explain it because it's complicated, but if you do both and go over that 12% bracket, it's like a 27% effective rate. So anyway, that's what. Yeah, I think the tax gain harvesting, I do that first because you got to live off those dollars if you're going to retire young. And then later on when you're 59 and a half, you know, you could, you could switch over.

[Joe Anderson]

Yeah, yeah. But I wouldn't if I'm retiring at 47, 51.

[Big Al Clopine]

Well, two years or 49 and 53. Yeah, yeah.

[Joe Anderson]

I'm not. You need to draw income from your brokerage account. And if you have 100% in the NASDAQ, you're going to see a lot of volatility there.

[Big Al Clopine]

Yeah.

[Joe Anderson]

And yeah, when markets go down, or let's say the Nasdaq loses 20%, you're not going to be caring about tax harvesting. You're going to be like, what? Where the hell do I pull my income from?

[Big Al Clopine]

Yeah, I'm going back to work.

[Joe Anderson]

Yeah, I'm going. Yeah, I'm going back to work. Because you don't want to sell that asset when it's down. So you'd probably need to diversify a little bit just to hedge the risk as you're pulling income from that. But if you diversify, that's going to create tax. That's also. So you're going to have to figure out what if you want to continue to work, then slowly diversify out of this and have a capital gains budget. And then when you do decide to retire, then you can sell the rest down at that 0% cap gains.

[Big Al Clopine]

But. Right.

[Joe Anderson]

I would not have my, my nest egg that I want to live off of 100% in the NASDAQ.

[Big Al Clopine]

Yeah, that's a good point, Joe, because once, once you start drawing money from your account, right. If it's all in the market, and we've seen markets go down 10%, 20%, 30%, the market goes down 30% now it's worth 700,000 and you're drawing out another 5% on top of it. That just doesn't, that's not going to feel good.

[Joe Anderson]

Yeah. Market drops 20%, you need a lot higher rate of return than 20% to get your money back.

[Big Al Clopine]

Right. And you take money out, it makes it that much harder to recover.

[Joe Anderson]

Yeah, it definitely compounds the effect.

[Big Al Clopine]

So that's why people, when they get closer to where they need to draw money out of their account, they start putting some money into safe. That could be cash, it could be bonds, it could be things that, yeah, they don't go up very much, but they also don't go down a lot. That's where you pull your, your income from when you need it in bad markets. When the markets are great, cool. Then sell some of those stocks or stock funds, pull it from there. But when the market is down, have that safer money that you can withdraw from. So it doesn't, it doesn't, you're not pulling out money in a down portfolio. That's a tricky thing.

[Joe Anderson]

Yeah. Or you don't spend any money, right. He's got $100,000 tax free pension.

[Big Al Clopine]

I know you could just live off that.

[Joe Anderson]

You can just live off of that until the market recovers, Right. Or you go to work part time or you do some different things or I don't know. So there's a ton of options here. That $100,000 tax free pension is huge. That's worth several million dollars. If someone that didn't have a pension would need to accumulate that type of dollar to create that income after tax,

[Big Al Clopine]

that would be like a two and a half million, $3 million portfolio. To get that kind of.

[Joe Anderson]

If he wants to pull the trigger at that age and travel the world, just understand that you probably want to re look at the overall investment strategy. What target rate of return do you actually need to generate? And if you want to spend a little bit more in your first 10 to 15 years, just understand that you probably have to pull back later. And if that's okay, then that's all right. It's all really looking at how you're handling the withdrawals and what happens to the overall markets. We can't control the future, but you can't control your overall discipline on how you're utilizing the strategy. Again, I don't know. I've been talking about this for a while where we've been complacent with a really strong market.

[Big Al Clopine]

That's so true.

[Joe Anderson]

And it's like here, I want to retire at 50 with a couple million dollars and I want to pull out 4.5% plus tax because I always earned 10 or 20. Yeah. I mean, the NASDAQ. The NASDAQ is up 20 some odd percent.

[Big Al Clopine]

Yeah, yeah.

[Joe Anderson]

But the NASDAQ dropped like 80%.

[Big Al Clopine]

It was, gosh, that. What was 2008. It went down over 50%.

[Joe Anderson]

Well, 2000.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Well, that the dot com bot.

[Big Al Clopine]

Yeah, right, right.

[Joe Anderson]

It took I don't know how many years for that thing to recover. That was. So just understand what you're investing in as well. Yeah. The rate of return looks really nice, but how much risk are you taking to get the return that you have? Are you willing to take that much risk going into retirement as you're pulling dollars out of the portfolio? Spending money and saving money are two different things. They've been very good at saving money. It's like, hey, I want to save 30, 40% after tax of my income because they have this pension. It's like, all right, here we're saving 50% of the pension, roughly, or 100% of the pension. That's awesome. But just realize that now that you need to spend. Your strategy needs to change. You need to the risk, you need to continue to tax, manage the account. You need to create the income from it. And then you have to be looking at tax laws from, all right, do I do a Roth conversion? When do I do the conversion? How is that going to affect my other taxes that I have as I'm creating income long term? I mean, there's, there's five or six different things that, that you definitely want to make sure that you're juggling.

[Big Al Clopine]

Yeah. And then maybe lastly, don't. Don't pay off the mortgage at 2.2

[Joe Anderson]

and a half percent.

[Big Al Clopine]

That's it. That's a great rate. Just keep that going. Right. Because you're drawing more from your portfolio. Yeah. You don't want to use resources to pay that thing down. So that's a good rate. Keep that going.

[Joe Anderson]

All right, Congrats. Good work.

[Andi Last]

Markets change, tax laws change, life changes. Is your financial strategy nimble enough to change with all of that, or have you been lulled into a false sense of security? None of us can control the future. But with the experienced professionals on Joe and Vigal's team at Pure Financial Advisors, you can shake that complacency and create a disciplined strategy that's flexible and tailored to your unique situation. They'll look at everything, how much risk you can handle, your retirement income plan, your tax strategy, whether Roth conversions make sense for you. It all gets integrated into one comprehensive plan designed around your specific needs. Like a spitball, A financial assessment with Pure is free. No. No pressure, no obligation. They'll identify potential risks and opportunities and show you where you stand. If you're already on track, they'll tell you if there are gaps. They'll show you exactly where they are and how to fix them. Don't cross your fingers and rely on a spitball and hope this is the rest of your life we're talking about here. We have offices all around the country from California to Tennessee. Or you can meet one on one with the Pure team online via Zoom. No matter where you are, call 888-994-6257 or click or tap the free Financial assessment. Link in the episode description and schedule your free financial assessment today.

[Joe Anderson]

Let's go to Fred and Wilma hi Joe, Big Al, this is Fred and Wilma looking to get out of the day to day grind and retire early. I've been listening to YMYW for six months but caught up on the last two years of episodes while walking through airports during my long layovers in Love the real world examples. Wish I found it years ago as I only now understand Roth and how important tax planning is. I'm 44. My wife is 43. She recently took an early retirement from tech to stay at home with our two little cavemen. We have been hard charging smashing rocks for years in the tech grind. It has been good to us but also has taken a lot from us, travel and stress. For me, I want to be done as early as possible and join my wife for wait for it our Go go years.

[Big Al Clopine]

Yeah, that's what I want. I want a Go Go year.

[Joe Anderson]

Go Go years. Let's do it. All right, we're asking for your spitball on retiring by 46. In questions on taxes, Roth when and if we pull that trigger. All right, so I Drive a 2025 Ram 1500. She drives our family 2023 Kia Telluride. Both are paid off and we don't plan on buying new cars for another 10 years. House is NorCal with 25 years left in the mortgage at 2.9 $450,000 mortgage and the house is valued at $3,800,000 saved and bought at the right time in 2012, remodeled in 2020, and we never plan on moving. And we have found our forever spot drink of choice. For me, it used to be a nice hazy ipa, but age has caught up to me and the next morning doesn't feel like IPAs. Does not like the IPAs. So now I'm better off with a German pilsner or Guinness out of the tap. Ange caught up with you Al, on your little IPAs?

[Big Al Clopine]

Unfortunately. Yeah.

[Joe Anderson]

Got it. I can do one, but he's only 40.

[Big Al Clopine]

If I do a couple, it's a little rough. The next morning.

[Joe Anderson]

Got it. Her drink is a nice dry French rose or a spicy margarita. Here's our details. The last few years, my income has increased and I'm making a million dollars a year. But I'll W2. So the Fed in California, tax man takes theirs million bucks a year.

[Big Al Clopine]

That's Fred. Yeah.

[Joe Anderson]

Wife has a 401k. She's got $500,000 in it. My 401k is a million. Roth is $30,000 each and we had them for over five years. We got a brokerage account of 2.5 million. Cash in money market is 500,000. We like having liquidity. And we'll get this number up to a million over the next couple of years. Now here's where it gets interesting. I've been blessed with working for over 20 years in a NorCal tax company with an ESOP. It should be valued when I'm 46 at $4 million, but I won't have access for three years after I retire. And then it will be paid out at a monthly rate over five years. While it sits, it may earn 3%, keep at pace with inflation. Social Security is a bonus if it's still around. Fun money, but I don't want to plan on it. We hope to live to 90, but you never know, which is why it is best to be done ASAP. All right.

[Big Al Clopine]

Okay.

[Joe Anderson]

He wants to be done ASAP because worried longevity, life expectancy. We need $210,000 in today's dollars annually, accounting for a new car when the old one hits 10 years old. Yearly house expenses of 10,000 are unknown. And $25,000 for health insurance. We did not account for the cost of living of paying out the mortgage in 25 years. Or the little caveman leaving the cave at some point. Both will be substantial because feeding the two is expensive. Tusco takes all of our money. Boys. Will be out of the house within eight years. And we have funded their 529 accounts to $100,000 each. We expect that the 529 plans will put a good dent in their college tuition and anything left over is on them. So here's the questions and then we'll plan based on catching up on two years of your money or wealth. Can I be done at 46? Do you have any suggestions on how to bridge until the ESOP starts paying out? All right, let's see. Can the 401 or IRA be taken out without penalty? How do we best avoid the tax man in supercharging that Roth? Is there any benefit to filing separately over the next couple of years? So he wants to do Roth conversions since she doesn't have her income. Thoughts on keeping IRMAA low to help cover health insurance? All right, do you want to hit these?

[Big Al Clopine]

Well, I think we got to keep going.

[Joe Anderson]

Oh, we do. Man, this is a long question.

[Big Al Clopine]

I know.

[Joe Anderson]

It's going to take me two years just to read it. The plan for the first three years, use 400,000 or $640,000 in cash to pay for expenses. Transfer heavily from 401 to Roth starting at the 22% tax bracket. So under $200,000 a year. After three years, the ESOP will kick in and we'll be getting monthly checks that will be about $66,000, but we only need 20,000. The other $46,000 we plan to move into the IRA. I think our tax bracket would be too high to do conversions. This should give us another $2.8 million into the IRA and we will be 54 when the ESOP payments are done. Alternatively, instead of taking all living expenses from the esop, we could live off a mix of our brokerage and less ESOP to try to keep taxes down and move some money into the Roth. But I just think letting the brokerage grow may be the best. Any thoughts on the best plan for this? Once the ESOP is done paying, we'll have another four years to bridge until 60 when we can take the 401 IRA without penalty. This six year bridge would use brokerage, which would still be going strong until not needed it for eight years. In any remaining cash, we plan on having 30% in bonds in the brokerage account for market dips. We will go heavy after converting 401Kevin 401k to the Roths, maxing any amount that keeps us under the 22% tax bracket at 60, we feel that we would have A good mix in the 401 brokerage in Roth, so we can pull whatever bucket that makes sense. Does this math work? I have no idea. There's a lot here.

[Big Al Clopine]

Let me please try to summarize.

[Joe Anderson]

All right,

[Big Al Clopine]

so they have. Fred and Wilma have about 4.5 million right now.

[Joe Anderson]

Is that including the ESOP?

[Big Al Clopine]

No, that's without.

[Joe Anderson]

I would include the ESOP.

[Big Al Clopine]

No, I don't want to, because I wanted to do that as income. Hang with me for a second. All right, so 4.5 million, two years, 6%. I don't know how much you're saving. I think about 300,000. He didn't say, but it's a. A big number. So I think they end up with about 5.7 million. And they're going to need about. Let's just call it 700,000, Joe, to cover the next three years of expenses. Right. So they. They have about 5.7 million with their spending, about 700,000. I think they end up with about 5 million when the ESOP payment starts. So now you got 5 million at 5 years, 6%, and they'll be adding about 500,000 a year because it's over 40,000 dol extra for five years going into the IRA. So if you do that math, they end up with 9.5 million. And at that point, they're spending 210,000 in future dollars, would be about 270. And that's under a 3% distribution rate. So it's actually 2.8% distribution rate. So I think just in broad strokes, back of the envelope, the math works. So. So let's. That's. That's question one. Can it be done at 46? And I think the answer is yes, but it depends upon a lot of variables. Right. It depends upon the market for 40 years. There's a lot of things we can't really predict, but if you just look at straight numbers. Yeah, it seems like it probably works.

[Joe Anderson]

Yeah. I mean, the ESOP definitely helps that. That's huge variable there.

[Big Al Clopine]

Yeah. As far as covering the gap between retirement and when the ESOP starts kicking in. Yeah. Just use your cash, your brokerage account. That's not too difficult. And then if you can, if you're in a low enough tax bracket, do some Roth conversions at the same time. You got enough resources in the brokerage account. You got $3 million in the brokerage account. So there's a lot of money that could be used to live off of, as well as pay taxes on conversions.

[Joe Anderson]

Yeah. Can you get access to the IRA 401 prior to 59 and a half without penalty. The answer is yes. You retire at age 46, have to do it 72.

[Big Al Clopine]

72. I don't think you need to, though.

[Joe Anderson]

I don't know. I mean, it's not going to be a ton.

[Big Al Clopine]

No, you're right. Yeah.

[Joe Anderson]

I might think about it.

[Big Al Clopine]

Just to add a little extra. Yeah.

[Joe Anderson]

Just to get some money out of the accounts, too.

[Big Al Clopine]

Well, you either do that or you do Roth conversions. One or the other.

[Joe Anderson]

Because there's going to be a lot of money after the ESOP payment goes out, because he's going to take the payment and then he's going to put it right back and then he's going to put it into the IRA. But that's just going to build up the IRA.

[Big Al Clopine]

Yeah, I know, right.

[Joe Anderson]

So a lot of that $9 million that you came up with is all, you know, more than half is qualified.

[Big Al Clopine]

Right.

[Joe Anderson]

So then you're losing your tax diversification.

[Big Al Clopine]

Well, the truth is he could put all of the ESOP in an ira, live off the brokerage account and do massive Roth conversions. I mean, there's all kinds of ways to do this. But the point is, you want to end up in a better situation. If it all goes to the ira, without Roth conversions, you're going to end up with a horrendous tax problem.

[Joe Anderson]

Yeah, there's IRMAA's, that's for your Medicare premiums at age 65. So I wouldn't worry too much about IRMAA.

[Big Al Clopine]

Ask us in 20 years about that.

[Joe Anderson]

You're 46, so when you turn 65, you have to worry about IRMAA. So you're good there. Yeah. But, yeah, you definitely want to be thinking about what should the asset allocation be looking at? I think he said he wants to put 30% in fixed income, 70% in the market. All right, so how much of. Is that all 30%? Is that going to be in the brokerage account? Because you're going to spend that down. I don't know. Do you think about municipal bonds to give you some income that's tax free? So I don't know. Looking at the asset allocation might make some sense. I think it's, again, how are you going to create the income and manage the risk and tax, manage this for 40 years?

[Big Al Clopine]

Correct.

[Joe Anderson]

But yeah, if you just look at the numbers itself, without any strategy, I think it makes sense. But really to fine tune this, it's like now, hey, I'm drawing money out. How do I draw money from a retirement account not pay the penalties. How much should I be converting? If I should do conversions at all? How should I invest the Roth versus my retirement account versus the brokerage account? Is there any benefit of having different allocations in those accounts? And the answer is yes. Right. You want to make sure that you have in your Roth account asset classes that have a higher expected rate of return. You want to take on more risk there. If I'm taking money from my brokerage account, what does that look like from a stock bond perspective to get me the income that I need over that bridge period? Or if I'm taking money from the ira, what does that asset allocation look like to bridge that same period? But if I'm taking from both, a lot of things to consider. But yeah, you're in a phenomenal spot.

[Big Al Clopine]

Oh yeah, no, this looks fantastic. I think one more thing I would say is, doesn't pay to file separate, married filing separate because you're in California. California is a community property state. So half of your income is hers, half of her income is yours. So you have mirror returns but just a higher tax bracket.

[Joe Anderson]

Yeah, a lot of people think this way is that, you know what, I'm making a million dollars a year. My wife just retired, she has no income. So let's file separately because all right, honey, you have $500,000 in your retirement account, you have zero income. So they're thinking on her return there's no income. So let's do conversions out of her accounts to eat up some of these lower brackets.

[Big Al Clopine]

And that Joe, that can work in a non community property state. California is not one of them. I think it's, there's like 11 or 12, 13 community property states, the rest are not. So it could work in another state. But realize married filing separate, there's all kinds of ways that you get trapped in terms of things that, you know, phase out that start way earlier. Tax rates are higher. So just, just be, just be aware of that. But yeah, California doesn't work.

[Joe Anderson]

All right, I think we,

[Big Al Clopine]

that's pretty good.

[Joe Anderson]

Yeah, we got that one.

[Big Al Clopine]

All right.

[Andi Last]

The early retirement spitballs continue next week on YMYW. For George in South Carolina, Joe in Massachusetts, 26 year old Jonathan in Florida. Sorry we weren't able to get to your question today, Jonathan. And, and for Chris and Rojo, both in California, the fellow spitball on where to save before retiring early, how to cover healthcare and long term care costs in early retirement, and whether it's possible to retire early and still fund college. Every single question we get comes from you the YMYW audience because your money, your wealth is your podcast and this show would not be a show without you. If you dig what you see here on ymyw, we'd appreciate your help and spread Spreading the word. Tell a friend about us. Leave your honest ratings and reviews for your money, you, wealth and Apple podcasts and watch like subscribe, turn on notifications and join the conversation with me on YouTube. Did you know that only about half of our YouTube viewers are subscribed to the channel? Anytime you engage with our content, it tells the almighty algorithms that YMYW is worth showing to other people. Which means that Joe and Big Al can share financial literacy with more people while they're making fun of finance. 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.