Tariffs Killed My Portfolio. Should I Claim Social Security Early? - 531

Summary

Episode 531 Summary: "Tariffs Killed My Portfolio. Should I Claim Social Security Early?"

In Episode 531 of Your Money, Your Wealth, hosts Joe Anderson, CFP®, and Alan "Big Al" Clopeline, CPA, delve into pressing retirement concerns raised by their listeners. This episode primarily focuses on two key topics: the impact of recent tariffs on investment portfolios and the strategic considerations surrounding early Social Security claims. Through insightful discussions, Joe and Big Al provide actionable advice to help retirees navigate these financial challenges effectively.

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1. The Impact of Tariffs on Investment Portfolios and Early Social Security Claims

Carl's Dilemma: A Case Study

The episode kicks off with a listener inquiry from Carl, a 63-year-old retiree facing a significant setback. Carl shares that tariffs have decimated his investment portfolio, leading to a $300,000 loss across his Roth IRAs and 401(k)s. Concerned about sustaining his retirement lifestyle, Carl contemplates claiming Social Security benefits prematurely.

[01:34] Joe Anderson: “Drinking a GLE350 and seeing a 7.5% return? I bet good old Carl wished he had all his money in that bucket before the tariffs hit.”

Carl’s situation underscores the volatility that external economic factors, like tariffs, can impose on even well-diversified portfolios. With $1.2 million in Roth IRAs, $1.8 million in traditional IRAs, and $500,000 in other investments, Carl is grappling with the right course of action to ensure financial stability.

Strategic Advice: To Claim or Not to Claim

Joe and Big Al meticulously analyze Carl’s financial standing:

• Distribution Rate Analysis: Carl's net budget stands at $96,000 annually with a portfolio of approximately $3.5 million. This translates to a 2.7% distribution rate, which Joe considers “a good rate” ([03:51]).

• Social Security Considerations: Big Al points out that even without Social Security, Carl’s distribution rate remains sustainable. He suggests that Carl doesn't need to take Social Security yet, given his substantial assets and potential for his investments to recover ([03:29] Big Al Clopeline).

[04:32] Joe Anderson: “People don’t always have a drawn-out strategy. Just because the markets are volatile today doesn’t mean you should make a hasty decision to take Social Security benefits early.”

Balancing Portfolio Recovery and Income Needs

The hosts emphasize the importance of adhering to a long-term financial plan rather than reacting impulsively to market downturns. They advise Carl to consider:

• Diversifying Asset Allocation: Ensuring a mix of safe assets like bonds to buffer against market volatility.
• Tax Planning Strategies: Exploring options like tax-loss harvesting and Roth conversions to enhance portfolio resilience.

Big Al highlights the personal nature of deciding when to claim Social Security, noting factors such as health and lifestyle preferences.

[08:47] Joe Anderson: “If you want to have extra cash now to travel and enjoy life, then take it. It’s about balancing dollar-and-cents decisions with real-life enjoyment.”

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2. Kelly and Steve’s Retirement Planning Questions

Listener Profile: Kelly and Steve

Kelly, aged 57, and her husband Steve, 64, present a comprehensive financial snapshot:

• Assets: $728,000 across savings, retirement accounts, and brokerage accounts.
• Income: Steve receives a $4,000/month pension, and Kelly earns $80,000/year.
• Expenses: Approximately $6,000/month, with plans to increase post-retirement due to travel.
• Debts: None, with their home paid off.

Their primary concerns revolve around the optimal timing for claiming Social Security, Roth contribution strategies, and potential Roth conversions.

Social Security Timing: To Claim at 67 or Wait?

Joe and Big Al dissect the pros and cons of claiming Social Security at the suggested age of 67:

• Current Income Needs vs. Future Security: Steve's pension and Kelly's income allow them to maintain their lifestyle without immediately tapping into Social Security. This positions them to potentially delay Social Security claims, thereby securing higher future benefits.

• Distribution Rate Assessment: Big Al calculates that their current distribution rate is 3.3%, which is within a safe range below the commonly recommended 4% threshold, indicating they can comfortably sustain their withdrawals without early Social Security income ([15:22]).

[17:44] Big Al Clopeline: “I personally would probably take it at 70 just because it would add almost $10,000 more of income for life. But if traveling more is a priority, taking it earlier to fund those desires makes sense.”

Roth Contributions and Conversions: Maximizing Tax Efficiency

Kelly inquires about shifting 401(k) contributions to Roth accounts and the feasibility of Roth conversions. The hosts provide a nuanced approach:

• Roth Contributions: They advocate for maximizing Roth contributions now to leverage tax-free growth in retirement.

• Roth Conversions: Suggested as a strategic tool, especially when managed during lower income years to minimize tax liabilities. Timing conversions around retirement or when taxable income is lower can optimize tax efficiency.

Joe elaborates on understanding marginal tax rates to make informed conversion decisions:

[21:52] Joe Anderson: “Look at the tax bracket you’re in today, forecast future tax brackets, and determine a conversion strategy that keeps you in the lower brackets to pay taxes now, rather than more later.”

Balanced Approach to Retirement Planning

The discussion emphasizes that retirement planning is highly individualized. Factors such as travel aspirations, health status, and personal financial goals play crucial roles in decision-making. Joe and Big Al encourage Kelly and Steve to:

• Evaluate Cash Flow Needs: Determine how much income is necessary now versus later.
• Maintain Flexibility: Allow room to adjust Social Security claims based on evolving financial situations and market conditions.

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3. General Insights and Strategic Takeaways

Throughout the episode, Joe and Big Al reinforce several core principles of sound retirement planning:

• Avoid Knee-Jerk Reactions: Market volatility should not derail pre-established retirement strategies. Maintaining discipline is key to long-term financial health.

• Diversification and Risk Management: Ensuring a balanced portfolio with a mix of asset classes can mitigate the impact of market downturns.

• Tax Efficiency: Strategic Roth conversions and understanding tax brackets can enhance after-tax retirement income.

• Personalized Planning: Recognizing that each retiree’s situation is unique, and strategies should be tailored accordingly.

[19:16] Big Al Clopeline: “A $700,000 nest egg is amazing. You’ve done a great job. It’s a personal choice, and they can take it now or wait to get a little extra income.”

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4. Conclusion

Episode 531 of Your Money, Your Wealth offers valuable guidance for retirees navigating investment setbacks and Social Security decisions. By presenting real-life scenarios and dissecting them with expert analysis, Joe Anderson and Big Al Clopeline empower listeners to make informed, strategic choices tailored to their unique financial landscapes.

For personalized financial advice and a comprehensive retirement assessment, listeners are encouraged to visit YourMoneyYourWealth.com and explore the free financial resources and tools available.

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Notable Quotes:

• Joe Anderson [04:32]: “People don’t always have a drawn-out strategy. Just because the markets are volatile today doesn’t mean you should make a hasty decision to take Social Security benefits early.”

• Big Al Clopeline [08:47]: “If you want to have extra cash now to travel and enjoy life, then take it. It’s about balancing dollar-and-cents decisions with real-life enjoyment.”

• Joe Anderson [17:44]: “You have to live your life. Now that she's retired, no income's coming in and just see how you adjust.”

• Big Al Clopeline [21:52]: “Look at the tax bracket you’re in today, forecast future tax brackets, and determine a conversion strategy that keeps you in the lower brackets to pay taxes now, rather than more later.”

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Stay Tuned: Don’t miss next week’s episode featuring Jonathan Clements, founder of Humbledollar.com, discussing initiatives to cultivate lifetime savings habits among young adults. Subscribe to Your Money, Your Wealth on Apple Podcasts or YouTube and join the conversation for more expert financial advice.

Transcript

[Andi Last]

Quick programming note before we get started today. Over the next several weeks, I will be moving to Australia, Video producer Aaron will be biking through Croatia, Big Al will be vacationing across Japan and Europe, and Joe will be enjoying his time in Arkansas and Minnesota. In our absences, I may run some encore episodes, some compilation episodes of previous content you may have missed, and some shorter episodes like this one. But everything will go back to normal in July, we're pretty sure. In the meantime, tariffs killed Carl's in investment portfolio and left him wondering if he should claim Social Security early. Join Big Al spitball for him today on youn Money, you, wealth podcast number 531. Kelly and Steve in Pennsylvania ask for a three for spitball. When to claim their Social Security, whether they should contribute to Roth or convert to Roth for that lifetime tax free growth on their investments and if they're on track for Kelly to retire in three years. To ask your money questions or to get a retirement spitball analysis of your own, check the links in the episode description. You can you'll see one that says Ask Joe and Big Al. Click or tap that link and before you start your ask, make sure you watch my video telling you how to make sure that your spitball is a good one. Then send us a voicemail or an email. I'm Executive Producer Andi Last and here are the hosts of youf Money, you, Wealth, Joe Anderson, CFP and Big Al Clokeline, cpa.

[Joe Anderson]

All right, we got a call or email from Carl. No location from Carl here.

[Andi Last]

Now. He emailed infoupurefinancial.com and he did not follow the rules.

[Joe Anderson]

Got it. He goes hey guys, just love your show. Drink of choice is now any IPA and I drive a GLE350. I'm 63, retired. My wife is 59, still works. We're on our way to a good retirement with $1.2 million in Roth IRAs, $1.8 million in traditional IRAs. Also have investments close to $500,000 returning at 7.5% per year. That's a pretty good return. My wife was planning to retire Q2 of 2026 but because of the tariffs we've seen our portfolio Roth IRAs and 401s drop over $300,000. I'm thinking about starting my Social Security benefits. Is this a bad idea? Also our net budget is 96,000. Owner home outright have no car payments but have a HELOC if needed. Carl Carl Benz but his Benz is that like a Mercedes Benz?

[Andi Last]

That is what he's driving his GLE350.

[Joe Anderson]

GLE350. Well, I wonder what's returning. 7.5% per year. I bet good old Carl wished he had all his money in the 7.5% per year bucket.

[Big Al Clokeline]

Or maybe that's what it was before the tariffs.

[Joe Anderson]

No, I bet it's some fixed triple net. Something that's going to blow up on them at some point, Right?

[Big Al Clokeline]

Private credit maybe?

[Joe Anderson]

Yeah, could be. I don't know.

[Big Al Clokeline]

Yeah.

[Joe Anderson]

All right, so what do you think? So his portfolio has dropped $300,000 a year or 300,000. So he's freaking out a little bit. He's 63 years old. Should he take his Social Security benefit? They'll give him about $3,000 a month.

[Big Al Clokeline]

Yeah. So first of all, just to do a little bit of math, he wants to spend $96,000 per year. He's got about 3,500,000 and he'll have 33,000 coming Social Security if he starts it now. So even without Social Security, Joe, it's a 2.7% distribution rate, which is a good rate, I think.

[Joe Anderson]

Yeah, but his wife is still working. I don't think he needs any of the money.

[Big Al Clokeline]

Well, I suspect he's. But she wants to retire in Q2 of 2026. I think that's what he's probably getting at is should I take it when she retires because our portfolio is down so much and I'm just going to be taking more from it. I. That's what he's getting at. And I'm going to say he doesn't need to. I think there's still plenty of assets. He's got to have some safe assets to draw the money from while the market is declining, like bonds or what, whatever. His fixed income is at seven and a half percent, that kind of thing. But no, I don't think he needs to. He can. He certainly can if he wants to, but I don't think he has to.

[Joe Anderson]

Yeah, I think this is the problem with people that necessarily have a true drawn out strategy is that, all right, things get a little bit shaky and what's my parachute? Should I go ahead and grab Social Security? Here's the probe of taking Social Security early is that it's a less distribution from the overall portfolio, so you're saving more of the portfolio long term. The downside is you're locking in a lot lower rate for the rest of your life. So do you feel that the market is going to continue to decline for a certain time period and never recover, or are you Taking so much from the overall portfolio. If he was taking 7%, 8%, or 9% from the portfolio and trying to bridge the gap to Social Security, it'd be all right, well, now that's a little bit too much, because as the market's declining and you're taking that big of a draw from the portfolio, it's hard to recover from the that big of a decline. I mean, we're seeing declines in the market, but you're taking 2% out. And I don't think he's taking 2% out today. I think he's taking 2% out in 2026, which is another 12 months from now. And if you look at the volatility of the market, I'm not sure when he sent this in, but it might have been, all right, well, here. What's going on in the overall markets? This is a short period of time. The markets blip. You're gonna have down years, you're gonna have good years. 70% of the time, the market's gonna go up. So I wouldn't make a hass decision to say, hey, because the markets are volatile today, I want to take my Social Security benefits. You still have to weigh this thing out. And I think Karl has a low distribution rate where I still think it makes sense for him to continue to wait until whatever plan he decided on prior to the volatility of the overall market.

[Big Al Clokeline]

I think you bring up a good point, Joe, which is a market decline or market increase doesn't necessarily affect your plan. Right. You should already have your plan. If the market goes up, great. You can pull a little bit more out of the stocks. If it goes down, well, that's too bad. Right? But you pull money out of your safe money, your bonds, you let the stocks recover. It doesn't really change anything else per se, Especially when you have a low distribution rate like this, 2.7%. You've got the flexibility to stick with your plan, whatever it may be.

[Joe Anderson]

Yeah, I think he needs to be thinking about other things at this point. It's like, all right, if the markets are down, how should you be rebalancing the open overall account? How do you manage the risk? Should he be thinking about tax loss harvesting opportunities? If he has non qualified accounts, should he be thinking about Roth conversions? Should he be thinking about more higher strategic things that will benefit him long term? By claiming Social Security early? It's kind of a knee jerk reaction. I get it, though. It's like, okay, I'm seeing my portfolio drop $300,000. I don't want to touch my portfolio anymore or I don't want to take as much from the portfolio. So why don't I just take this guaranteed income source of Social Security and then that's going to save that portfolio because I'd like to see that balance at a certain level. Right. Hey, I have $2.5 million or $3.5 million. Now that's worth 3.1, 3.2. It's like, wait a minute, I just lost 300,000 in a couple of weeks. That's way too much. Where's this thing going to go? And so that's why people go into cash. It's like, all right, I got to stop the bleeding. Or they do other things like this that could hurt them long term by, you know, maybe giving up some, some extra cash on the table, depending, you know, of course, what his life expectancy is.

[Big Al Clokeline]

Yeah. And of course, the second part of this is, is if you take Social Security early, not only is it a lesser amount for you, but one of you will probably outlive the other one. Right. And so then you're decreasing your spouse's, your spouse's benefit in the future. So, yeah, unless I, you know, I think we like to say, Joe, that unless you really need the cash, it's better to wait. Now if you have health issues or you both have health. Health issues and you want to take early, great. Or if you just, in this particular case, it's, it's not like it's going to kill them because they got plenty of assets. So it's, it's almost a personal choice. But I, I wouldn't do it. I think I'd, I'd much rather wait and get the higher benefit.

[Joe Anderson]

Yeah, it doesn't matter really for him if, you know, sometimes people write in and, hey, I want to take my benefit right away because I want the extra cash right now so I can go on vacations and I can travel and I can do different things while I'm still young and I'm still healthy and blah, blah, blah, blah, blah. It's like, yeah, then take it. Right? You can run the math all day long and you can look at the break even points that people want to think about or how much true dollars is going to come from the system, you know, given certain life expectancy ages. But it's like, okay, well, how much money am I actually going to spend, you know, on travel when I'm in my late 80s versus I'm in my early 60s? I want to see the world. I want to do different things. And it'd be great if I had an extra 20, $35,000 in my pocket to do those things, then go for it. Right? Who cares what the number and how much are you going to bleed the last dollar out of the system that you deserve versus all right, maybe you take a little bit of a haircut, but you enjoy your life that much more. I mean, so I think it's there's a dollar and cents side of things and there's also the real life side of things.

[Big Al Clokeline]

Yeah, completely agree. I just wouldn't make a decision just because of the market. I think that's, maybe that's what we're saying. If you want to and the reasons you just mentioned have a little bit more spending money right now, then great.

[Andi Last]

Planning for retirement is a challenge. Just like the game of golf. Only 3.2% of retirees have a million dollars in their retirement accounts, and only 1 to 2% of golfers annually make a hole in one. Luckily, you don't need a hole in one to win the financial game, but you do need a strategy. This week on a brand new episode of youf Money, you, Wealth tv, Joe and Big Al show you how to get off the tee, avoid the fairway hazards, and sink the putt to get through the retirement course successfully. And don't miss the golf tips, especially for the YMYW audience from PGA Professional Chris Riley. Find the links to watch in the episode description, then calculate your free financial blueprint to see if you're on the fairway for retirement. Input your financial details and it'll output a report that tells you how much money you're likely to need to meet your retirement goals and actionable steps you can take. Now to get there, click or tap the links in the episode description to watch the retirement course. Can you hit a hole in one on YMYW tv? And to calculate your free financial blueprint.

[Joe Anderson]

All right, let's move on. Let's go to Kelly. Hello. We would love for you to give us a little spitball analysis. I'm 57, husband's 64. I drive a 2017 Honda Accord, and he drives a 2017 Toyota Tacoma. I usually only drink on vacation, and I like tropical drinks. Yeah, looks like Big Al's got a little tropical drink right behind you. Little Malibu.

[Big Al Clokeline]

Little Malibu. Yeah, that's right. Kaloa Rum is the other one.

[Joe Anderson]

What's the other one?

[Big Al Clokeline]

Yeah, you got Malibu, and then the other one is Kaloa Rum. Dark rum.

[Joe Anderson]

Never heard of that.

[Big Al Clokeline]

Koloa is made Here, right? On Kauai. It's actually very popular rum these days across the United States.

[Andi Last]

We were wondering if you were gonna notice. And of no surprise, of course you did. There's alcohol in the shot.

[Joe Anderson]

There you go.

[Andi Last]

Are you much of a rum drinker at all, Joe?

[Joe Anderson]

No, My ties in my honeymoon and I almost got divorced.

[Big Al Clokeline]

That's because you had too many.

[Joe Anderson]

That was the end of that. All right.

[Big Al Clokeline]

You have to be. You kind of have to be an island guy to like rum, I think. And you're not. You're not much of an island guy. You're. You like Minnesota cold. Cold places. Yeah.

[Joe Anderson]

Yeah, the army schnapps, right? Yep. Yeah, I get, like, island fever. I get vertigo. Last. I was just there a couple. Like, a couple months ago. Yeah.

[Big Al Clokeline]

It's just. Just not for you, is it?

[Joe Anderson]

I guess not.

[Big Al Clokeline]

Yeah.

[Joe Anderson]

All right. Kelly's husband, he enjoys IPAs and always tries to get something local. All right. He's retired and gets a lifetime pension of just over $4,000 a month. No cola. My Survivor benefit would be $1,600 per month. He will be starting Medicare this year. I'm still working, hoping to retire in 2027. When I turn 60, I will be able to stay on his health insurance until I reach Medicare age. We will only need to get dental and vision privately. Once I retire, I make around $80,000 a year. We have no debts and the house is paid off. We plan to stay in this house long term. Our expenses are approximately $6,000 a month, and we do like to travel, so that will increase once I retire. We are healthy and hope to be able to travel for many, many years. Our kids are grown and financially independent. We got a cash in a high Yield savings account, 100 grand, 401ks is $425,000. Roth IRAs, $86,000. Brokerage account, $100,000. Stocks in crypto, 14k. Total is $728,000. Our current plan is for Steve to take Social Security at 67 when I retire. We can live off his pension and Social Security. My questions are one, when should we take Social Security? Is this a good plan for him to take it at 67 instead of waiting till age 72? Should I be putting all my 401 contributions into Roth instead of splitting it 3, should we do Roth conversions? If so, when? God, this is very specific.

[Big Al Clokeline]

It is.

[Andi Last]

She wants a dart on the dartboard rather than a spitball.

[Joe Anderson]

Yeah, it's not a spitball here.

[Andi Last]

And you better get a bullseye.

[Joe Anderson]

This Is like written recommendations. I gotta get compliance approval.

[Big Al Clokeline]

Right.

[Joe Anderson]

Thanks so much for your help. Love the show. Listen to it regularly. All right, Stephen Kelly. All right. When should they take Social Security? So 67. I have no idea why she came up with age 67 for Steve, because Steve is 64. She's not going to retire until age 60. She makes $80,000 a year.

[Big Al Clokeline]

Well, that's because he'll be 67 when she retires. Three years old.

[Joe Anderson]

So when she retires, he wants him to take Social Security. She's going to help plug the gap there.

[Big Al Clokeline]

That's what she's asking. Right, Got it. That makes sense. Now, if he doesn't take Social Security, they want to spend $72,000 a year, and they would have $48,000 coming in from his pension shortfall of $24,000. So here's the math. You take 24,000, do 4,000. You divide it by your total liquid assets. In this case, 728,000, you get 3.3%, and that should be fine. Right. That's under the 4% that you want when you're retiring in your 60s. So I'm okay with them not taking Social Security. But again, it's a little bit like we talked about on the last question. It's a little bit more of a personal choice. If, if he wants to take it, you know, he's. That would be another 33,000 of income. That would essentially cover their expenses.

[Joe Anderson]

That would save the portfolio. I would.

[Big Al Clokeline]

And save the portfolio.

[Joe Anderson]

Yeah. Yeah. I think this is such a different case, though, because they got 4% coming out. They're wanting to travel more. They're very healthy. It's like, well, if we, if we're traveling more, we're going to spend more. And the other guy, I think it's 3.5%, but then you have taxes in front of that. You're pushing four. I much rather have the cushion, taking the Social Security. And then if you want to travel a little bit, you can take a little bit more. I mean, the benefit, you get an 8% delayed retirement credit for a couple more years. So the longer that he waits, maybe you take it at 68 just to see how that first year goes. And then if it feels like we might be taking too much, we might be spending too much, you can always turn Social Security on at any month. So instead of a hard 67, it's nice to delay it, especially if they're really healthy, because they'll like the higher fixed income three years from now or three years after they claim. So I would test it. I mean, I don't think there's a hard, fast rule here. I think it makes sense to take it anytime between 67 and 70. But you gotta live your life. Now that she's retired, no income's coming in and just see how you adjust. Because that's why most people take Social Security early, Al, because they want at least some sort of fixed income coming in, right?

[Big Al Clokeline]

Yeah, I think that's right. Anywhere between 67 and 70. I personally would, in this situation, would probably take it at 70 just because, just doing the math, it would add almost $10,000 more of income for life. Right. And so that seems like pretty good. But on the other hand, it's almost more of a personal choice, as you said, and particularly the fact that they want to travel more, the fact that they may be thinking they shouldn't travel because they don't have the extra income. I think they're going to be fine either way. So in a way, I'd kind of rather have them take it earlier and travel if that's what they want to do. Right? Yeah, but, but I think they can if they wait, they get a little extra income. I think they have enough of a portfolio now. If the market's going down at the same time where they're pulling money out, that's not going to feel good. I, I, I guess I kind of like your idea, Joe. Maybe you don't take it initially, test it out, see how it feels, and then if you want to take it six months, a year later, whatever, go ahead. I like that.

[Joe Anderson]

Yeah. This is just kind of like the opposite advice that we gave earlier too. I mean, I think this is why you can't really have cookie cutter advice. Every situation is so different. I think the first question we had is like, all right here. The market fell, the market tanked. So I'm going to take my Social Security because I have $5 million or whatever. How much money did that guy have?

[Big Al Clokeline]

I want to say about three.

[Joe Anderson]

Yeah, I mean, it was a ton of money. It was several million dollars. It was like, here, I want to take it. It was like a knee jerk reaction because of the markets and he got kind of scared or freaked out and it's like, well, no, I mean, if you have a strategy in place, I think for him it probably makes sense to delay it. He could take it, but he had plenty of cash or plenty of capital, so it didn't necessarily matter all that much. I think the Social Security benefits to this couple means a Lot more to them not saying that. It doesn't mean. I mean, they don't have $5 million. Right. They're like all of us. They have 700, $800,000. It's a really strong nest egg. But they can't make a ton of mistakes. They're at a 3.5% distribution rate. So, I mean, if the market takes. And they're taking more out, I mean, you're going to see that balance, you know, go down a lot more. It's gonna. It's gonna affect them a lot more than it would be with someone with millions of dollars.

[Big Al Clokeline]

Yeah. And I will say we. We do get a lot of questions from people that have millions, but to be really blunt and honest, 700,000 of a nest egg is an amazing nest egg. I mean, that is so far above the average person, it's ridiculous. So you've done a great job. And it's a little bit of a personal choice. You could take it now. You could take it in between, you think? Me, personally, I probably wait to 70. But the fact that I don't want you to not travel. So if you're going to feel like I can't travel until I take Social Security, then take it. Right.

[Joe Anderson]

All right.

[Andi Last]

By the way, you didn't give advice earlier or now. You spitballed.

[Joe Anderson]

Thank you. Did I say advice?

[Andi Last]

Yes. It's been a long day.

[Big Al Clokeline]

It's okay. Oh, here, let's do these other ones real quick, too. Should the 401 contributions go into a Roth? I would say yes right now. And should we do Roth conversions? Possibly. But I would say that's more of a decision when she retires and you take a look at it and see what makes sense.

[Joe Anderson]

I don't understand how to figure out the tax rates. Well, let's help Kelly figure out tax rates. So let's see. Kelly, Kelly, Kelly, Kelly, Kelly.

[Big Al Clokeline]

So she makes $80,000 a year, husband's retired.

[Joe Anderson]

Yep. These kind of pension of $4,000 a month. So $48,000.

[Big Al Clokeline]

Yeah. So we'll say by the time you add that up and whatever other little amounts they have from taxable, it's probably near the top of the 12% bracket.

[Joe Anderson]

So you add up 48,000 into $80,000.

[Big Al Clokeline]

Yeah, $128,000.

[Joe Anderson]

And then let's call it minus 30,000.

[Big Al Clokeline]

For your standard deduction puts you right around $98,000, which is right at the top of the 12% bracket.

[Joe Anderson]

So if you go to, like the IRS. So how the tax brackets work, they're marginal And I think a lot of people get confused here. So if you look at married, finally jointly. So zero to $23,000, is that married? Yes. Of taxable income is going to be taxed at 10%. And then $23,301, $201 to $94,300 is going to be taxed at 12%. So the top of the 12% tax bracket is roughly $95,000 of taxable income. So there's a standard deduction, which is around $30,000. So you take your gross income, which Kelly and Steve have, of about $120,000. You minus the standard deduction, which is roughly $30,000. So $120,000 minus $30,000 is $90,000. So out of the $90,000 that Kelly and Steve have coming into the household, the first $21,200 of that $90,000. So let me just round. The first $25,000 of the 90 is going to be taxed at 10%. The remaining will be taxed at 12%. So it's stair steps. So some is going to be taxed at 10%, some is going to be taxed at 12. And then if you had additional dollars above the 12%, those additional dollars would be taxed at 22%. So when we say you want to convert to the top of whatever bracket is that, well, you're still in this bracket, and you might jump a bracket, you might go into a higher tax bracket later, or tax rates might go up. So it might make sense to buy that tax cheap today. So go to the top of the 12, pay the tax, get that money into a Roth. So when you're thinking about Roth conversions, you want to look at what tax bracket that you're in today, forecast what tax bracket you think you're going to be in the future, and then that's going to determine your conversion strategy. And how to kind of determine the amount is just looking at the tax tables that the IRS publishes and then looking at your tax return in looking at taxable income, which in 2024 now is what line 10 could be.

[Big Al Clokeline]

We don't have the return in front of us. I will. For our engineers. Joe, you quoted 24 rates, so the 25 rates is about 97,000. That would be the top of the 12%.

[Joe Anderson]

Oh, yeah, that's right. I did.

[Andi Last]

Welcome to 2025, Joe.

[Joe Anderson]

I didn't know it was 24. I thought that was off.

[Big Al Clokeline]

Yeah. Yep. You're close, though. That's within a few thousand.

[Joe Anderson]

Yeah, those were the 24 rates. Yeah, there you go. I was looking at my Key Financial data guide of 2024.

[Big Al Clokeline]

Right, we've got them going.

[Joe Anderson]

You can download the Key financial guide of 2025.

[Andi Last]

Check the link in the episode description to download your copy of the Key Financial Data Guide. We'll make sure you get a copy of from this year. Join us next week as our friend, the founder of humbledollar.com and former Wall Street Journal personal finance columnist Jonathan Clements returns to YMYW with a new initiative to turn young adults into lifetime savers and your chance to get a free copy of his latest book, this Is yous Money, you, wealth, you, Podcast. If you enjoy ymyw, do us a favor and tell your friends it helps us reach more listeners like you. And don't forget to leave your honest reviews and ratings for your Money, you, Wealth and Apple podcasts and join the conversation in the comments on our YouTube channel. If you're among the 44% of our YouTube viewers who haven't done so, help us out by subscribing to the channel and turning on notifications. Your Money, you, Wealth is presented by Pure Financial Advisors. Your retirement deserves more than just a few minutes of spitballing. Get a comprehensive financial assessment with one of the experienced professionals and join Big Miguel's team at Pure, either in person or online. They'll work with you to customize a plan for the retirement you deserve. 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.