Spitballing Early Retirement for the One Percenters - 502

Summary

Podcast Summary: "Spitballing Early Retirement for the One Percenters" (Episode 502 of Your Money, Your Wealth)

In episode 502 of Your Money, Your Wealth titled "Spitballing Early Retirement for the One Percenters," hosts Joe Anderson, CFP®, and Alan "Big Al" Clopine, CPA, delve into the intricate financial scenarios of high-earning individuals aiming for early retirement. The episode, released on November 5, 2024, features detailed analyses of listeners' retirement plans, offering strategic insights into retirement planning, investment management, and tax optimization.

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1. Bauer’s Early Retirement Consideration (00:58 - 07:34)

Listener Profile:

• Name: Bauer
• Location: Mundelein, Illinois
• Age: 54
• Spouse: Lainey, 59
• Occupation: Federal Government Employee
• Income: $192,000 gross pay
• Retirement Plans: Mandatory retirement in June 2027 at age 57

Financial Details:

• Savings: TSP balance of $1.375 million, Traditional 457 Roth IRA of $210k, Traditional IRA of $8k
• Expenses: Approximately $9k/month
• Pensions and Social Security: Federal pension of ~$69,000/year (adjusted for COLA), Social Security supplements ranging from $30k at 62 to $56k at 70
• Additional Goals: Purchase of a $300,000 Class A motorhome

Discussion Highlights:

• Affordability of Early Retirement: Big Al emphasizes Bauer's strong financial position, noting a low distribution rate under 2% before Social Security. Joe raises concerns about the motorhome purchase impacting the burn rate, potentially increasing expenses by $4-6k/month.

  Big Al Clopine (04:04): "From a retirement perspective, I think it looks great."

  Joe Anderson (04:12): "The issue that I see is that the $300,000 motorhome is going to have to be financed. There's no liquidity besides the Roth in the TSP."

• Social Security Strategy: They recommend delaying Social Security benefits to maximize payouts, especially for the higher-earning spouse.

  Big Al Clopine (04:04): "I generally like to have the spouse that has the higher benefit go as long as they can, maybe age 70."

• Motorhome Financing: The hosts advise against draining retirement accounts to fund the motorhome, suggesting financing options or partial withdrawals to mitigate tax impacts.

  Joe Anderson (05:08): "It's not a $300,000 motorhome anymore. It's a $450,000 motorhome."

Conclusion: Bauer is likely well-positioned to retire at 57, provided he carefully manages additional expenses and financing for the motorhome to maintain a sustainable burn rate.

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2. Brad’s Early Retirement Strategy (07:34 - 24:58)

Listener Profile:

• Name: Brad
• Location: Michigan
• Age: 42
• Spouse: Ann, 41, Nurse
• Occupation: Sales Director
• Income: Approximately $350,000/year
• Savings: $750,000 in cash and brokerage, $850,000 in 401s, $400k in Roths
• Expenses: ~$80,000/year
• Children: Two middle schoolers with college expenses covered
• Retirement Goal: Early 50s with a desire to "coast" for the next decade

Financial Details:

• Current Savings Rate: 50% of after-tax income for seven years
• Future Projections: Planning to save an additional $25k-$50k/year, considering Roth conversions

Discussion Highlights:

• Feasibility of Early Retirement: Big Al conducts a projection, suggesting that with a 6-7% return, Brad and Ann could grow their assets to $4.1-$4.5 million, supporting retirement expenses at a cost-of-living-adjusted rate of ~3%.

  Big Al Clopine (12:10): "They have about $2 million to start. That's a great amount to start with."

• Savings Rate Adjustment: While Brad wishes to reduce his savings rate to "coast," Joe and Al underscore the robustness of his current financial trajectory, placing him in the elite 1% with substantial savings at 42.

  Joe Anderson (13:14): "What percentage of people in their 40s have $2 million? It's in the 1%. I would say less than that."

• Roth Conversion Strategy: Considering their high-income bracket, the hosts discuss the benefits of Roth conversions to manage future tax liabilities, especially given potential increases in tax rates.

  Joe Anderson (20:37): "At 52, they should go Roth all day, every day and even convert some."

• Tax Optimization: Emphasis is placed on leveraging Roth accounts to mitigate the impact of future Required Minimum Distributions (RMDs) and capitalizing on current favorable tax rates.

  Big Al Clopine (22:05): "They could argue that they're not going to be in a lower tax bracket and then they got all this other income too."

Conclusion: Brad and Ann are on a strong path toward early retirement. Maintaining their savings discipline and strategically utilizing Roth conversions can enhance their financial security, even if they choose to reduce their annual savings rate.

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3. Elizabeth’s Taxable Account Holdings (25:36 - 31:59)

Listener Profile:

• Name: Elizabeth
• Location: Connecticut (living overseas)
• Age: 54
• Spouse: Foreign born, 56
• Occupation: Not specified
• Income: Not specified
• Savings: $5 million in taxable stocks and mutual funds, $50k in IRA, $150k in Roth IRA
• Expenses: $140,000/year
• Children: Two teenagers, college funding covered
• Retirement Status: Early retired last year

Financial Details:

• Asset Allocation: Majority of $5 million nest egg in taxable brokerage accounts
• Retirement Planning Concerns: Lack of retirement accounts and 529 plans

Discussion Highlights:

• Tax Efficiency of Taxable Accounts: Big Al and Joe affirm that holding substantial assets in taxable accounts offers flexibility and potential tax management advantages through strategies like tax-loss harvesting and preferential capital gains rates.

  Big Al Clopine (30:23): "I can manage that. I can do tax-free interest. I can, you know, municipal bonds."

• Comparison to Retirement Accounts: They acknowledge that while retirement accounts provide tax-deferred growth, the ability to manage taxable accounts can equate or sometimes surpass the benefits, especially for high-net-worth individuals.

  Joe Anderson (31:03): "His money's all in a brokerage account. He doesn't pay less tax than his secretary. He probably pays a lower tax rate."

• Roth Contributions and Tax Management: Suggestions include maximizing Roth IRA contributions when possible and employing tax-efficient investment strategies within brokerage accounts to optimize after-tax returns.

  Big Al Clopine (31:15): "Because of the capital gain rate. He pays a lot more taxes than a secretary."

• Strategic Recommendations: While Elizabeth's situation is commendable, the hosts recommend exploring tax-advantaged accounts where feasible to enhance the tax efficiency of her portfolio.

Conclusion: Elizabeth is financially secure with a $5 million nest egg primarily in taxable accounts. To further optimize her retirement strategy, she should consider integrating more tax-advantaged accounts and employing sophisticated tax management techniques to enhance her portfolio’s after-tax performance.

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4. N and N’s Roth Conversion Dilemma (31:59 - 24:58)

Listener Profile:

• Name: N and N (referred to as "Fat Wallet" from the San Francisco Bay Area)
• Location: San Francisco Bay Area, California
• Age: 52
• Income: ~$800k - $1 million/year
• Savings: $10 million liquid assets ($5 million in diversified equities, $5 million in brokerage accounts), $150k in Roth IRA, $350k in cash
• Expenses: $200k+/year in retirement (housing, travel, hobbies)
• Real Estate: Significant mortgage payments on primary and rental properties, expected to be paid off by retirement

Financial Details:

• Retirement Goals: Retire around age 60, minimize RMDs, explore Roth conversions before retirement
• Investment Strategy: High exposure to RSUs and stock options

Discussion Highlights:

• Roth Conversion Strategy: Given their high-income bracket and substantial pre-tax retirement accounts, Joe and Al strongly advocate for maximizing Roth contributions and conversions to mitigate future RMDs and potential tax hikes.

  Joe Anderson (20:01): "At 52. 52. $4.5 million. They make a million dollars a year. I would go Roth all day, every day and even convert some."

• Tax Rate Considerations: They discuss the historical context of tax rates, acknowledging that while current rates are manageable, future increases could justify proactive Roth conversions.

  Big Al Clopine (21:25): "If you get an $800,000 RMD in year one and it goes up from there. So that's the same as what they're making right now."

• Investment Growth in Roth Accounts: Emphasis on the compound growth potential within Roth accounts, which can significantly enhance long-term returns without the burden of future tax liabilities.

  Joe Anderson (23:15): "At 50, he's young enough to get the compounding to make up, potentially take more risk in the Roth."

• Relocation Considerations: The potential move from a high-tax state like California to a no-income-tax state (e.g., Washington) could influence the timing and extent of Roth conversions.

  Big Al Clopine (23:40): "Another factor would be where do they want to live when they retire?"

• Risk Management: They advise a balanced approach, recommending ongoing contributions to Roth accounts while strategically timing conversions to optimize tax outcomes.

Conclusion: N and N are encouraged to aggressively pursue Roth conversions to safeguard against future tax increases and maximize their after-tax retirement wealth. Their substantial liquid assets and high income place them in an advantageous position to implement comprehensive tax optimization strategies.

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Notable Quotes

• Big Al Clopine (04:04): "From a retirement perspective, I think it looks great."
• Joe Anderson (20:01): "At 52, I would go Roth all day, every day and even convert some."
• Big Al Clopine (30:23): "I can manage that. I can do tax-free interest. I can, you know, municipal bonds."

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Key Takeaways

1. Early Retirement Feasibility: High-income earners with substantial savings can achieve early retirement, but it's crucial to manage expenses and investment withdrawals carefully to maintain sustainability.

2. Roth Conversions: For individuals in high tax brackets, strategic Roth conversions can mitigate future tax liabilities and enhance retirement flexibility.

3. Tax-Efficient Investing: Holding significant assets in taxable accounts can be advantageous when managed with tax-efficient strategies, offering flexibility and potential tax savings.

4. Financial Discipline: Maintaining a high savings rate and disciplined investment strategy positions individuals well for early retirement, even amidst changing economic landscapes.

5. Tailored Financial Strategies: Each listener’s situation is unique, underscoring the importance of personalized financial planning to address specific retirement goals and challenges.

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Additional Resources

Listeners are encouraged to visit YourMoneyYourWealth.com for more resources, including episode transcripts and personalized retirement spitball analyses through the "Ask Joe & Big Al On Air" feature.

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This episode of Your Money, Your Wealth provides valuable insights for high-net-worth individuals contemplating early retirement, emphasizing the importance of strategic planning, tax optimization, and disciplined financial management to achieve and sustain retirement goals.

Transcript

[Andi]

Can Bauer in Illinois retire at age 57 and when should he collect Social Security? More importantly, can he afford a $300,000 motorhome? Can Brad in Michigan coast for the next 10 years and still reach the promised land of retirement somewhere around age 53? Joe and Big Al spitball early retirement today on youn Money, you, Wealth podcast number 502 +. It seems weird to Elizabeth in Connecticut that all her money is in taxable accounts. Is that a good thing or a bad thing? And N and N in San Francisco bay area have 10 million dol liquid. Should they make Roth contributions and conversions now or wait until they retire? You can listen in your favorite podcast app or watch us right now on YouTube or Spotify. I'm executive producer Andi last with the hosts of youf Money, you, Wealth, Joe Anderson CFP and Big Al Clopine cpa. To get a retirement spitball analysis of your own, click Ask Joe and Big Al on air in the episode description and send us an email or a priority voice message like this one.

[Bauer]

Hello Andy, Joe and Big Al tuning in from Mundelein, Illinois. I'm Bauer, 54 yo. My wife Lainey, 59 yo. My drink is an Old Fashioned and I drive a 2018 GMC Sierra. Laney drives a 2016 Infiniti. I work for the federal government with a gross pay of about 192k. Laney's a SAM and collects city government pension of 16,000 per year. No cola tsp balance is 1.375 million. All traditional 457 Roth IRA of 210k, traditional IRA 8k kids college is paid for. Our spend is about 9k per month. I have a mandatory retirement in June of 2027. I'll be 57 Laney 61. My spitball request is will I be good to retire at 57 and not have to work? What will be my TSP drawdown in retirement? I'll get a pension of about 69,000 a year adjusted for COLA and will collect a Social Security supplement of 16. 8 per year until the age of 62. What age should we collect Social Security? Mine will be 30k at 62, 45k at 67 and 56k at 70. Laney's Social Security would be 14k at 62, 20k at 67 and 24k at 70. And most importantly, can I afford a $300,000 Class A motorhome? Looking forward to the Spits Bauer.

[Joe Anderson]

It's kind of a cool name.

[Big Al Clopine]

Great name.

[Joe Anderson]

$192,000 mandatory retirement from the federal government at age 57.

[Big Al Clopine]

Right.

[Joe Anderson]

What do you think he's like, secret? Secret.

[Big Al Clopine]

I. I think I want that job.

[Joe Anderson]

What do you think he does? Something badass.

[Big Al Clopine]

Yeah. Gotta be something really cool.

[Joe Anderson]

Yeah. Then he risks his life every day, probably.

[Andi]

With a name like Bauer, it sounds like he should.

[Joe Anderson]

Oh.

[Big Al Clopine]

Well, I think.

[Joe Anderson]

Yes. All across the board.

[Big Al Clopine]

Yeah, I think so, too. So let's. Let's put some numbers to it. So even before Social Security, Joe, fixed income is 86,000.

[Joe Anderson]

Yeah, 70,000 plus.

[Big Al Clopine]

And the spend. The spend is probably 100. We'll say 110,000.

[Joe Anderson]

Sure.

[Big Al Clopine]

Somewhere around there. Okay. So shortfall, this just rounded to 25,000. He's got 1.6 million. So that's a low distribution rate, under 2%. So even before Social Security, this looks great. As far as when to take Social Security, I generally like to have the spouse that has the higher benefit go as long as they can, maybe age 70. And then as far as the spouse that has a lesser level, it's kind of when you want to. I think that's kind of how I think about it.

[Joe Anderson]

Yeah. You're looking to lock in a guaranteed income, but he already has really good income that's guaranteed by the pension of the federal government of 70,000 bucks.

[Big Al Clopine]

Yeah. So what we don't know is what the survivor benefit is on the pension.

[Joe Anderson]

The issue that I see is that he. $300,000 motorhome is. You're going to have to finance it. There's no liquidity besides the Roth in the tsp. I don't know what he's got in cash. Yeah, right. So then his expenses go from 10,000 to, I don't know, 13, $14,000 a month.

[Big Al Clopine]

Could be. Yeah.

[Joe Anderson]

And so now you're not looking at a 2% burn rate. You're probably looking closer to a 4.

[Big Al Clopine]

Could be plus. Or if you just pull it all out, Joe, it's. You got to pull 300,000 out, plus a whole bunch more.

[Joe Anderson]

If he pulls $300,000 down to pay cash. I mean, pay cash for that.

[Big Al Clopine]

Going up for 400, you got to put more.

[Joe Anderson]

Yeah. Or more just to pay the tax on the 300. So it's not a $300,000 motorhome anymore. It's a $450,000 motorhome.

[Big Al Clopine]

Yeah. And I suspect that $300,000 motorhome takes a little bit to up for upkeep and gasoline and things like that.

[Joe Anderson]

Yeah, it depends on where. Where Bauer wants to go.

[Big Al Clopine]

Yeah. Right.

[Joe Anderson]

But I think, all in all, it works out. You just have to run the numbers and run the math a little bit. But from a retirement perspective, I think it looks great. From taking out $300,000 or how you finance that or what the added expenses are is going to be a little bit tricky. But I still think that he can potentially do it, of course, depending on how he invest is super aggressive. And, you know, he loses 20, 30% on that bridge because it's a bridge from 47 to 67 is 10 years where they're pulling out quite a bit, potentially, until the Social Security comes in.

[Big Al Clopine]

Right. So depending upon how they finance the motorhome. But. But I. Yeah, but I would say. Bauer, I'm talking to you right now. If. If that's your dream, the $300,000 motorhome. Yeah. You could pull this off. You just. We're just giving you a couple cautions about take all the money out of the IRA to pay for this. They got to take quite a bit more out to pay the tax. So you probably want to finance at least part of it, if not all of it, and then you got to figure out what the interest payments are and then kind of factor that into your budgeting.

[Joe Anderson]

He's got three years, so he's got pretty good income now. I don't know, depending on what he has, or he doesn't have any debt, it sounds like on his home, maybe he refinances the house.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Maybe takes out a couple of bucks there. I would imagine financing there is going to be a little bit cheaper than at the old motorhome dealership.

[Big Al Clopine]

Right.

[Joe Anderson]

He wants to work for another three years, and he's got good income, so I'm sure he'd qualify. So there's ways that you can kind of move some money around a little bit, and then you can aggressively pay it off with the retirement accounts. Just. You don't have to blow yourself up in really high tax brackets.

[Big Al Clopine]

Yeah, that's the key. Right.

[Joe Anderson]

You're not pulling $300,000 out. You might pull an additional $50,000 out, depending on where tax rates go. So keeping those rates to pay up the debt.

[Big Al Clopine]

Yeah. And we might say, don't use your Roth ira.

[Joe Anderson]

Yeah.

[Big Al Clopine]

For the motoro. It could be tempting, Joe, but don't do it.

[Joe Anderson]

Mandatory. Who's got mandatory retirement at 57?

[Big Al Clopine]

Federal government, usually. Yeah. Law enforcement or FBI, maybe field agent. I don't know.

[Joe Anderson]

Because he's seen a lot of stuff. It's like that. You're done. You've done your service.

[Big Al Clopine]

Right.

[Joe Anderson]

All right, Bauer thanks for everything. Thank you for the question, and good luck on retirement and have fun in that motorhome. All right, we got Brad from Michigan. Hey, Joe, Big Al. Andy, your podcast is completely addicting. I now look forward to historically the worst day of the week. Tuesday. Tuesday. Is that the worst day of the week?

[Big Al Clopine]

I guess.

[Joe Anderson]

I don't know. What's your worst day?

[Big Al Clopine]

Me?

[Joe Anderson]

Yeah.

[Big Al Clopine]

I don't have a worst day.

[Joe Anderson]

No, every day is like says Unshine. You're like, that's that stupid movie. When it's like, oh God, I love Mondays. Just jumps out of bed, starts singing show tunes.

[Big Al Clopine]

I can't say I had a. I don't know. I don't. I can't think. How about you? I can't think of one. What's your worst day?

[Joe Anderson]

I don't know. I don't really care for Mondays all that much.

[Big Al Clopine]

Yeah, I've noticed your expression sometimes on Mondays.

[Joe Anderson]

Well, when I. Yeah, just got it. I got a long week ahead of me.

[Big Al Clopine]

True.

[Joe Anderson]

But I mean, I don't hate them. It's not like I. No, I have a case of the Monday.

[Big Al Clopine]

No, you don't. Maybe for an hour.

[Joe Anderson]

Yeah, when I gotta listen to your sermons.

[Big Al Clopine]

Trying to get you out of your funk.

[Joe Anderson]

Yeah, that works. But Tuesdays, I like Tuesdays. Tuesdays are one of my favorite days. Okay, I like Tuesdays, Wednesdays, Thursdays. Of course. Friday, Saturday, Sunday. Yeah.

[Big Al Clopine]

Okay.

[Joe Anderson]

Monday morning, it's kind of like Monday mornings. Here we go.

[Andi]

By process of elimination, it becomes Monday.

[Joe Anderson]

Yeah, well, I have like 50 appointments a week. And you have this.

[Big Al Clopine]

Sure. That's great. That wasn't always the case. Yes, that's how it is right now.

[Joe Anderson]

Got it. Okay, let's see. Let's see if we can spitball for. For Big Brad as my wife Ann and I want to retire in early 50s. All right. I'm 42 sales and like a cold two hearted ale. And I drive a 2011 Lexus and my 41 year old wife is a nurse. Will enjoy a P note and drives a 2020 Lincoln Navigator. Cars and homes, $700,000 paid for, no debt. We have $750,000 in cash and brokerage, $850,000 in 401s, $400 in Roths, $529,000 funded about $100,000 for the two middle school kids. Annual expenses are about $80,000. Household income, I'm guessing averages about $350,000. And we've been saving 50% of after tax income for seven years. That's very, very impressive.

[Big Al Clopine]

Yes. We like you to get to $20,000. So 50 is good.

[Joe Anderson]

Not a lot of people can save 50% of their. Well, man, that's crazy. Amount after tax at $350,000. He's in a very high tax bracket.

[Big Al Clopine]

Right.

[Joe Anderson]

So. All right, well, he's been fit in. His only fixed income in retirement would be Social Security. Approximately $3,500 a month for me and $1,800 for my wife. We think we spend about $8,000 monthly in retirement, mostly on travel and property taxes. We plan to bridge the retirement pre Social Security with distributions, dividends from our growing taxable brokerage account. Can we coast for the next decade, maybe saving $25,000 to $50,000 per year and still reach the promised land at 2035? If I take a new job that pays less. Should we start doing Roth conversions next year? Thanks. You all are a joy for me and many others.

[Big Al Clopine]

Oh, Brad, that's very nice.

[Joe Anderson]

Very nice of you. Thank you. You're a joy for me, too.

[Big Al Clopine]

It's mutual. Except on Mondays.

[Joe Anderson]

Just every day is.

[Big Al Clopine]

They're all good.

[Joe Anderson]

Everyone just can't be as lucky as you there, Ned Flanders.

[Big Al Clopine]

Well, I did a little math for you, Joe.

[Joe Anderson]

Okay, let's. Brad, coast. So he's got a stressful job. He's got $350,000 of income. He's saving half of it. He's like, man, this is too much. Let's coast. I don't want to save that much.

[Big Al Clopine]

Yeah, yeah, yeah. So here's what I did. So they got about $2 million to start. So that's a great amount to start with.

[Joe Anderson]

A million at 42 years old. Okay.

[Big Al Clopine]

Yep. And they want to retire in their early 50s. So, anyway, so here's what I did. I said, okay, you got 2 million. I just said, now, what if you say 40,000 a year for 10 years at 6%, what does that look like? And then they get to 4,100,000. They're spending 96,000 a year. 3% inflation rate gets to about 130,000. So distribution rate would be 3.2% in the early 50s. That would be kind of right at the margin of what we might say. But, Joe, if they. If they get a 7% rate of return, then they got 4.5 million distribution rates, 2.9%. I'm feeling a little bit better about that.

[Joe Anderson]

How did they get a 0%?

[Big Al Clopine]

Well, then they're not retiring, Right. They're working. So I think. Brad, I think this does work as far as whether you can actually retire in your early 50s. You're close. That's what I would say.

[Joe Anderson]

Yeah. I don't know the guys that grind. What 40 year old has a couple million dollars?

[Big Al Clopine]

Yeah.

[Joe Anderson]

What percentage of people in their 40s have $2 million?

[Big Al Clopine]

It's in the 1%.

[Joe Anderson]

I would say less than that. I think Brad's going to be just fine, you know. Yeah, he's a. He's a grinder. He saves half of his income. I'm sure he's well.

[Big Al Clopine]

And, and the thing, Joe, is, I mean, like, let's say my numbers are right and he ends up with 4 million. You can live on 4 million. Like, like what if you, you don't spend 130? What if you spend 122? We get 127 or change or whatever.

[Joe Anderson]

Right?

[Big Al Clopine]

You can make it work.

[Joe Anderson]

It's so stupid. Yeah, Brad, you're doing fine. Keep doing what you're doing. If you want to coast for the next couple of years. I mean, you deserve it. I don't know if you deserve it, but I don't know you. But the money is.

[Big Al Clopine]

It looks pretty good.

[Joe Anderson]

Money looks right. So, yes, you are good to go, my friend. Hopefully this brings you a little bit more joy.

[Andi]

Even if you've done a great job of saving over your entire working life. There are wealth busters that can destroy your joy and your financial plan for retirement. Like funding your adult children, tapping your retirement funds early, or not having a retirement withdrawal strategy. Learn about these and more wealth busters to avoid as you make your way toward retirement. This week on youn Money, you, Wealth TV with Joe Anderson, CFP and Big Al Clopine, cpa. Download the companion Wealthbusters guide for strategies that'll help you avoid blowing up your entire financial future. Find the links to both the Wealthbusters to Avoid episode of YMYW TV and the Wealthbusters Guide. In the episode description.

[Joe Anderson]

We got in and in, in and in, in and in, in and in. Hi, Andy. Al, Joe. Been listening to your podcast for the past three months and gone through about 60 to 70 episodes while walking the dog or driving to work. 60 to 7. Big Al. That's a lot in three months.

[Big Al Clopine]

It is.

[Joe Anderson]

He loves it. Loves the entertaining but educational discussions you guys have great on air Chemistry. My wife and I are 52, live in the San Francisco Bay Area and have two high schoolers in a rescue. Sheep wheeler. Sheep wheeler.

[Andi]

I think it's Shepweiler.

[Joe Anderson]

Shepweiler. We drive old cars. I drive a 2006 Mercedes convertible. Oh, look at you.

[Big Al Clopine]

I like it. Why sell it, right once you got that?

[Joe Anderson]

Yeah. Every time I think of a 2006 Mercedes convertible, I think of the movie Roadhouse.

[Big Al Clopine]

You do?

[Joe Anderson]

I do. All right. Wifey, what does she Drive? Little 2013 BMW sedan. Both purchased new. We buy and hold our cars. I'm partial to drinking good red wines and she loves a good old fashioned. Wow, that's kind of reversed.

[Big Al Clopine]

You're right about that.

[Joe Anderson]

All right. Or simply a little whiskey or bourbon on the rocks. And also both are partial at a well made margarita and gin and tonics usually reserved for date nights. We both went to bartending school when we were single, so we also experiment with other drinks from time to time. Oh, isn't that fancy?

[Andi]

Didn't you bartend, Joe?

[Joe Anderson]

I did. I did bartend for several years.

[Big Al Clopine]

Do you experiment with drinks?

[Andi]

Did you do the Tom Cruise thing?

[Joe Anderson]

No, no, I would make a bunch of stuff that would. I don't like the fufu.

[Big Al Clopine]

Fruity stuff.

[Joe Anderson]

Yeah, not really.

[Big Al Clopine]

Yeah. You haven't been Hawaii enough to.

[Joe Anderson]

No, I got. I was there on my honeymoon and then I had. I went to the first Mai Tai place. I had a couple of those, like.

[Big Al Clopine]

Dukes or one of those.

[Joe Anderson]

No, it wasn't dukes. It was right on the water.

[Big Al Clopine]

Really nice. Okay.

[Joe Anderson]

But I had like maybe two of my ties.

[Big Al Clopine]

Yeah, no, they can be pretty.

[Joe Anderson]

Yeah, that was the little first fight of our marriage life. That was fun.

[Big Al Clopine]

Yeah. Okay.

[Andi]

I brought on the honeymoon.

[Joe Anderson]

Yeah, they were pretty strong, I'll tell you that.

[Big Al Clopine]

Yep.

[Joe Anderson]

Anyway, thanks for the. Thanks for that fun.

[Big Al Clopine]

You're very welcome. I didn't mean to poke the bear there.

[Joe Anderson]

Well, see what NNN are up to. They got high incomes, about $800 to $1 million a year. Alright, good for you guys. Max out. Our retirement incomes between our contributions and employer match with this is currently about $110,000 a year. All of this amount to pre tax. Given our high tax bracket at the 37% and 11.3%, we currently have $10 million in liquid assets. Geez. Okay, how old is he?

[Big Al Clopine]

They're in the 52. 52.

[Joe Anderson]

Oh, good for them. $5 million in diversified equities in a brokerage account. $5 million in a brokerage account. Okay, they must probably RSUs, stock options.

[Big Al Clopine]

Yeah, Bay Area. I'm gonna say. Yeah. RSUs, restricted stock units, stock options, something like that.

[Joe Anderson]

Yeah. 4.5 and pre retirement accounts and $150,000 in a Roth, $350,000 in cash. We have significant mortgage Payments for our primary residence and a couple of our rental properties. $200,000 plus a year. But most of that should be paid off when we retire. Our rentals should generate sufficient cash flow to cover our housing expenses in retirement. Taxes, insurance, maintenance, etc. Once the mortgages are paid. Our current span, including housing, excluding housing, is $120,000. But I estimate that will probably be around $200,000 once we retire. Have more time for long trips and other hobbies. So my question is, should we consider making Roth 401, 403 contributions or even conversions at this point? I feel that there is time to fill the tax brackets once the salary ends and before RMDs begin to pull dollars from our pre tax accounts, since we will probably work until the age 60. But you guys are the Roth conversion experts, so you let me know what you think. Thanks for your spitball on the question and I look forward to hearing it on a future podcast. P.S. you can call us NNN or Andy. Make up something more creative.

[Andi]

I thought NNN was good.

[Joe Anderson]

Yes.

[Big Al Clopine]

You didn't. Yeah, a little lazy.

[Andi]

Other than that, it's going to be Fat wallets from San Francisco Bay.

[Joe Anderson]

Fat wallet.

[Big Al Clopine]

Okay.

[Joe Anderson]

10 million.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Liquid.

[Big Al Clopine]

And so about half of that is IRAs. 401s, 403bs.

[Joe Anderson]

At 52.

[Big Al Clopine]

Yep.

[Joe Anderson]

$5 million.

[Big Al Clopine]

So it's going to roughly double and twice maybe by the time of RMDs. So could. If they don't do anything, they'll probably have close to $20 million in retirement accounts. Maybe that's maybe 17, $18 million. So that's a pretty big RMD.

[Joe Anderson]

Yeah. Okay, so he's 52. They're 52 years old. $4.5 million. They make a million dollars a year. I would go Roth all day, every day and even convert some.

[Big Al Clopine]

Would you?

[Joe Anderson]

I would. They're going to be in a giant tax bracket forever.

[Big Al Clopine]

I know.

[Joe Anderson]

I don't know. I mean, so it's looking at. Here's the gambler. He's going to have a giant arm. I mean, yeah, kick the can down the road, I don't care. But you look at tax rates today, they're pretty low. Historically, what was the highest tax rate ever?

[Big Al Clopine]

I think it was World War II. But even in my career.

[Joe Anderson]

In your era.

[Big Al Clopine]

In my era, I'll put it that way. I think the Highest rates were 70%.

[Joe Anderson]

70%?

[Big Al Clopine]

Yeah.

[Joe Anderson]

And then it went to 55 or something.

[Big Al Clopine]

Yeah, went to 50. That seemed like a good deal at the time. We're at 37 that's right, yeah.

[Joe Anderson]

It could go to 50. I don't know, I might be scared and, and here I'm not trying to do any fear mongering, but I just.

[Andi]

Googled and the top individual rate reached a high of 94% in 44 and 45.

[Joe Anderson]

94%, yeah.

[Big Al Clopine]

World War II. Yep. Now to be fair, that was for people that made like over $10 million, which was a lot of money even now, but during World War II.

[Joe Anderson]

So that's a billionaire.

[Big Al Clopine]

That was, yeah, that was a lot. Yep.

[Joe Anderson]

Well, so he, yeah, that's what I would do. He's not going to miss the tax and I think he would like to have some. It's just, it's a gamble on tax rates.

[Big Al Clopine]

I know.

[Joe Anderson]

Yeah, that's all it is.

[Big Al Clopine]

So this is a hard one. I, I, I, here's what I might do. I like the idea of going all Roth on current contributions because why not at least get it started? And let's see, they're 52, they want to retire around 60. Would I wait to do Roth conversions until then? Maybe, probably. Probably I would wait just because I don't like paying at the highest rate. But it's an excellent point. I mean taxes are lower compared to they have been. And if they're, if their IRAs 401ks are 20 million, that's an $800,000 RMD in year one and it goes up from there. And that's the same as what they're making right now. So you could argue that, you know, they're not going to be in a lower tax bracket and then they got all this other income too.

[Joe Anderson]

And assuming tax rates say the same, stay the same. I think you take a look for individuals that have wealth like this, unfortunately, half of it is in a retirement account. Yeah, I know it's gonna, I think it's a lot, it's gonna hurt.

[Big Al Clopine]

Here's one other thing I might say.

[Joe Anderson]

And at 50, he's young enough to get the compounding to make up, potentially take more risk in the Roth. Right. So when you convert, let's say if you pay at a higher rate and then you just take a lot more risk in your Roth IRA over the next 10, 15 years.

[Big Al Clopine]

Right.

[Joe Anderson]

Then you can run some math and.

[Big Al Clopine]

Have the growth there. Yeah, yeah, no, I get that.

[Joe Anderson]

That could help make up for the higher tax.

[Big Al Clopine]

Yeah. Another factor would be where do they want to live when they retire? They're in California, pretty high tax state. If they want to move to Washington state with no income tax, maybe you wait till you're 60 and you do a bunch then.

[Joe Anderson]

Yeah, if conversions are still around in 10 years.

[Big Al Clopine]

Yeah, true. I mean, a lot of unknowns, right?

[Joe Anderson]

I mean, it's a gamble, right? You're trying to predict the future of future tax rates and future, you know, regulation. If you play the status quo and say, you know what, I don't think any changes are going to happen, well then potentially could kick the can down the road and maybe you change your contributions like you said, maybe to get a little bit more diversification.

[Big Al Clopine]

And then.

[Joe Anderson]

Just kind of wait and see to see what happens. Take a little bit more risk in the Roth ira. I think that's a really good start. Do you convert at the 37 when he could be at a little bit higher rate? 37 is still not awful. I know it's going to go to 39.6, you know, two years.

[Big Al Clopine]

California. He's paying half in tax.

[Joe Anderson]

No, I understand. I live in California too.

[Big Al Clopine]

I have a hard. I'd have a hard time doing that myself.

[Joe Anderson]

Yeah. All right, well, good luck. Well, congratulations. I mean, he's got really hard problems here.

[Big Al Clopine]

Amazing. These are the kind of problems that everyone would like to have. Right.

[Joe Anderson]

I feel bad for him.

[Andi]

Calculate whether you'll have problems in retirement with a financial blueprint. Yours free, courtesy of your money, your wealth and pure financial advisors. Click the financial blueprint link in the episode description to get started. Then just input your details and the financial blueprint tool will analyze your current cash flow, your assets and your projected spending for retirement and calculate three scenarios to help you determine your probability of success. How will future taxes impact your plan? This detailed report will show you and you'll learn what you can do now to help you you achieve your retirement goals. Take control of your retirement future with a financial blueprint today. Click the link in the episode description to get started.

[Joe Anderson]

We got Elizabeth from Connecticut. I'm a 54 year old woman who lives overseas for 30 years. My 56 year old foreign born husband. Foreign born. All right.

[Andi]

She says she's American and he's foreign born.

[Joe Anderson]

Foreign born. Foreign born. And I earn well lived. Frugally or frugally? Yeah, thank you. Frugally. And invested a lot of our income mostly in US based index fund. The power of compound returns meant that we had a $5 million nest egg when we accepted early retirement last year. What is going on?

[Big Al Clopine]

Wow. This is, we, we got the 1%, the big thing. Yeah.

[Joe Anderson]

We moved to the US to be close to my family. We're happily living in a Paid off home with total expenditures of $140,000 a year. We don't think we'll need to return to work. Well, Elizabeth, I tend to agree with you.

[Big Al Clopine]

Yeah, I do, too.

[Joe Anderson]

I'm writing because after listening to your podcast, it seems weird that only $50,000 of our money is in an IRA and $150,000 is in IRA and we don't have anything in 529 for our two teenagers. This happened because of issues with overseas living and probably ignorant. The vast majority of our nest egg, $4.8 million, is in taxable stocks and mutual funds. I should note that for decades, we faithfully paid all necessary US Taxes. Is that situation good or bad? What? The fact that you faithfully paid all necessary U.S. taxes.

[Big Al Clopine]

It's important and it's the right thing to do.

[Joe Anderson]

I think that's good. It was probably bad because it was probably a lot, but I think she's asking if it's good or bad to have all of the money in a brokerage account.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Or should she be looking at tax advantage accounts? Or would that be like little drops in a bucket?

[Big Al Clopine]

Right.

[Joe Anderson]

I have a 2012 Honda C RV, but my husband and I ride bicycles more often than not.

[Big Al Clopine]

Wow. Like it.

[Joe Anderson]

All right. Do you have a bicycle, Big Al?

[Big Al Clopine]

I do. I don't ride it too much.

[Joe Anderson]

I enjoy margaritas while my wife still drinks Schlitzerbach.

[Andi]

I think it's slivovits.

[Big Al Clopine]

Yeah, that's. That. That's the hard one.

[Joe Anderson]

Jeff. Libo bits. Slibo bit.

[Big Al Clopine]

Slobo. Slybo.

[Joe Anderson]

Slybots.

[Andi]

It appears to be Eastern European plum brandy.

[Joe Anderson]

Oh, okay. I wonder if that's, like, aquabee art. That. That doesn't look very tasty. Liqueur in a very fancy bottle.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Okay. How do you pronounce it? Did I do it?

[Andi]

I think it's slivovits. And it's a fruit spirit or fruit brandy made from damson plums, often referred to as plum spirit or plum brandy.

[Joe Anderson]

And it's from Sweden.

[Andi]

It's from central, Eastern and southern Europe. So Bosnia Herzegovina, Bulgaria, Croatia, Czechia, Greece, Hungary, North Macedonia, et cetera, et cetera.

[Joe Anderson]

It's his home country spirit.

[Big Al Clopine]

Yes.

[Joe Anderson]

Thank you for your fantastic advice to everyone. You got two faithful fans in our household. Awesome. Well, I'm going to start drinking some slippabits first.

[Big Al Clopine]

You got to be able to pronounce it.

[Joe Anderson]

I'm going to. You're going to drink a bottle of it and just try to say sluice.

[Big Al Clopine]

I want you to go to Liquor store and say, I'd like some slim.

[Joe Anderson]

Don't be like, sir, have you been drinking? Not yet. Not until I get some sliver bits.

[Big Al Clopine]

And they'll say, what are you talking about?

[Joe Anderson]

Oh, well, I'm gonna show them that picture that Andy just put up.

[Big Al Clopine]

Yeah, okay.

[Joe Anderson]

All right, well, no, Elizabeth, great job. $5 million. Live within 150,000 into 5 million is what?

[Big Al Clopine]

That's 2.8%.

[Joe Anderson]

All right, 3%.

[Big Al Clopine]

You don't need to work. I would agree with that.

[Joe Anderson]

Yep. 56 years old. You got many years at three and a half. No, I think it's great. The only issue that you have with all that money in a brokerage account, you just want to make sure that you're tax managing it. That's because interest and dividends instead of growing tax deferred in a retirement account is going to be taxable each and every year. But that's such a benefit because you can control the taxes a lot easier. And then when you sell the stock, it's going to be at a capital gains rate versus ordinary income if it's in a retirement account.

[Big Al Clopine]

Yeah, I would personally much rather have. Prefer.

[Joe Anderson]

Preferably.

[Big Al Clopine]

You've already had some, haven't you? I personally would prefer to have money in a brokerage account as opposed to retirement account. If I'm picking.

[Joe Anderson]

Yes.

[Big Al Clopine]

Because I can manage that. I can do tax free interest. I can, you know, municipal bonds. Right. I can, I can have lower dividend paying type stocks. Right. I can tax last harvest. I can do all kinds of stuff. So. So yeah, no, this is what people would like to do. I mean, people are envious of this.

[Joe Anderson]

The big hoopla about Warren Buffett pays.

[Big Al Clopine]

A lower tax than secretary because this is his situation.

[Joe Anderson]

His money's all in a brokerage account. He doesn't pay less tax than his secretary. He probably pays a lower tax rate.

[Big Al Clopine]

Because of the capital gain rate. He pays a lot more taxes than a secretary secretary, I'll tell you that.

[Joe Anderson]

Because she gets paid W2 ordinary income. But his income is coming from investment like yours, which is going to be taxed at a capital gains rate which you can tax manage quite effectively. So yeah, it, it's all after tax money. So you probably paid a bunch of tax to get $5 million sitting in a brokerage account.

[Big Al Clopine]

But now you're in a great spot. Yeah.

[Joe Anderson]

56 years old, drinking some slipping slipper bits.

[Big Al Clopine]

You've got to say that word.

[Joe Anderson]

I love it. I just can't wait to go to the liquor store.

[Big Al Clopine]

Are you gonna do that? Tonight.

[Joe Anderson]

Yeah. All right, we'll see you next time. Feel Spread your money or wealth Jack.

[Andi]

And Swan in Florida, Jennifer in Colorado and Skipper in Texas. Watch and listen for answers to your money questions next week in episode 503. Click Ask Joe and Big Al on air in the episode description to get your retirement spitball analysis. Leave your honest reviews, comments and ratings for your money You wealth on YouTube, Apple Podcasts, Spotify and all the other apps that let you do that and share the show with your friends, family, neighbors and colleagues. We appreciate it when you do. Can you believe that we are coming up on the end of the year? Time flies and you've only got a few weeks left to make changes that will lower your 2024 tax bill. Pure Financial Advisors can help schedule a free and comprehensive financial assessment with one of the experienced professionals on Joe and Big Al's team at Pure to see what strategies you can implement now so you pay less taxes come April. Don't wait. The calendar is filling up fast. Click the free assessment link in the episode description or call 888-994-6257 to schedule your free financial assessment today and meet with our team in person or online. 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.