Podcast Summary: Your Money, Your Wealth Episode 503 – “When to Pay Off Your Home, Retire, and Do Roth Conversions”

Release Date: November 12, 2024

Hosts:
Joe Anderson, CFP®
Alan "Big Al" Clopine, CPA
Executive Producer: Andi Last

Introduction

In Episode 503 of Your Money, Your Wealth (YMYW), hosts Joe Anderson and Big Al Clopine tackle a series of listener-submitted questions revolving around retirement planning, mortgage payoff strategies, Roth conversions, Social Security timing, and the impact of state taxes. Known for their engaging and humorous approach to personal finance, Joe and Big Al provide insightful analysis and actionable advice tailored to each unique financial scenario.

Listener Question 1: Jack and Swan from Florida

Scenario:
Jack (61) and Swan (57) reside in Florida with combined savings of $692K in tax-advantaged accounts, $178K in Roth accounts, and $318K in after-tax savings. Their pension provides $30K annually starting at age 65, Jack anticipates $110K income per year, while Swan expects $120K in expenses, excluding a $7K monthly mortgage payment on a $645K home with a low 2.5% interest rate.

Questions:

1. Should they pay off their mortgage now, in four years, or not early at all?
2. Should they retire now or adhere to their baseline plan of both retiring at 65 and 61 respectively?
3. Do they need to undertake any Roth conversions?

Discussion & Advice:

Joe Anderson emphasizes maintaining their low-interest mortgage, stating:
“I would not pay off the home mortgage at that interest rate. I love the mortgage. I love the rate. Keep it.” ([04:02])

Big Al concurs, advising against early payoff due to the favorable rate and suggesting focusing on continued savings and adhering to their retirement timeline. Both hosts recommend delaying retirement to align with their baseline plan, ensuring a more stable financial foundation.

Notable Quotes:

• Joe: “I don’t like retiring now as an ant, go at the baseline at working another four years.” ([04:02])
• Big Al: “You have some measure of control on your income taxes... where you don’t have really much control over a lot of other stuff.” ([07:33])

Listener Question 2: Jennifer from Colorado

Scenario:
Jennifer recently retired from the military at age 48, earning approximately $400K annually (including a $130K military pension, $82K tax-free). She plans to purchase a new home valued at $1.1M with a 4.5% mortgage rate. Jennifer and her spouse currently spend around $210K annually, including mortgage payments, and have substantial savings in Roth and traditional retirement accounts.

Questions:

• Should they halt additional investments to expedite mortgage repayment and achieve a debt-free retirement within ten years?

Discussion & Advice:

Joe recommends maintaining their investment strategy over aggressive mortgage payoff:
“I’d rather have them keep up savings and watch the interest rates. If they go down, then refinance later.” ([18:15])

Big Al highlights the importance of liquidity, suggesting they make manageable extra payments rather than allocating all excess income to debt repayment:
“I like to have the optionality versus just throwing everything, you know, with the kitchen sink there at the mortgage.” ([20:40])

Notable Quotes:

• Joe: “It’s not a great rate compared to what they have been say two, three years ago. But compared to history, it’s actually not all that bad.” ([18:15])
• Big Al: “If you’re taking every last dollar and throwing it into the house, you’re going to have a paid-off house, but then you’re not going to have any liquidity.” ([20:40])

Listener Question 3: Kevin from Scottsdale, Arizona

Scenario:
Kevin, age 66 and newly retired, is single with $3.2M invested in the market. His portfolio includes $500K in cash, $1M pre-tax accounts, $150K Roth, $150K HSA, $200K inherited IRA, and generates $80K annually in dividends and interest.

Questions:

• Should he collect Social Security in 2025 or postpone benefits and execute Roth conversions over the next two years?

Discussion & Advice:

Joe and Big Al discuss the benefits of delaying Social Security to maximize benefits and manage tax liabilities effectively. They consider the potential for higher future tax rates and suggest considering Roth conversions during years with lower taxable income.

Big Al advises:
“I would convert to the 24%, but if you move out of Texas, depends on where you move and what’s your residency.” ([25:30])

Notable Quotes:

• Big Al: “If in fact you do retire in four years, that would be the time to think about it.” ([05:07])
• Joe: “What do you think, Joe?” [mid-discussion] ([04:02])

Listener Question 4: Skipper from Texas

Scenario:
Skipper plans to retire in two to three years at age 61 or 62 with estimated annual retirement spending of $120K. His income sources include a $60K pension, $35K Social Security at age 67, $10K in royalties, $300K in Roth accounts, $500K in IRAs, $425K in a brokerage account, and $1.2M in real estate. He anticipates inheriting $2.7M in an IRA within the next 2-10 years and aims to establish residency in Florida to benefit from no state income tax.

Questions:

1. Should he continue aggressive Roth conversions given his impending inheritance and potential higher tax brackets?
2. How can he effectively establish Florida residency given his plans to own homes in multiple states?

Discussion & Advice:

Joe and Big Al examine the implications of Skipper's inheritance on his tax situation. They advocate for increasing Roth conversions to manage future tax liabilities, especially considering the inherited IRA which could push him into higher tax brackets.

Regarding residency, Big Al provides practical steps to establish Florida residency despite frequent relocations:

• Obtain a Florida driver's license.
• Register to vote in Florida.
• Use Florida-based bank accounts.
• Make Florida the primary exit and entry point for travels.

Notable Quotes:

• Joe: “I would be more aggressive with converting, especially since he may have 2.7 million coming.” ([26:53])
• Big Al: “I would probably get the nicer home in Florida to make that look like your residence.” ([25:30])

Listener Question 5: Harry and Helen Tasker from Minnesota

Scenario:
Harry (58) and Helen (55) have approximately $5M combined in retirement accounts, including $2.3M in a 401(k), $500K in Roth, $70K in HSA, and additional investments. They are considering fully retiring but facing differing opinions: Harry wishes to retire, while Helen believes he should continue working. They estimate annual expenses of $130K, with projections to increase to $220K when accounting for taxes. They aim for a 40-year retirement horizon and possess a paid-off home valued at $400K to cover long-term care if needed.

Questions:

1. Can they afford to retire on their current savings without additional income?
2. Should they pursue Roth conversions to manage their tax burden over a longer retirement period?

Discussion & Advice:

Joe advocates for their ability to sustain retirement due to substantial savings and suggests flexibility in their spending:
“I feel like they have the ability to make adjustments and changes depending upon what happens.” ([39:18])

Big Al emphasizes the importance of tax diversification and recommends strategic Roth conversions to remain within favorable tax brackets:
“I would be more aggressive by converting his IRA.” ([26:53])

They conclude that Harry and Helen's financial situation is robust enough to allow for retirement, provided they maintain flexibility and continue effective tax management.

Notable Quotes:

• Joe: “I don’t think he has to part-time get a part-time job.” ([39:18])
• Big Al: “I think they could be a little bit more aggressive by converting their IRA.” ([26:53])

Listener Question 6: Tomb Raiders from Colorado

Scenario:
The Tomb Raiders seek advice on managing a planned retirement spending of $120K annually. They possess $5M in retirement accounts heavily weighted toward 401(k)s, with $4.5M subject to ordinary income taxation upon withdrawal. Their strategy includes delayed Social Security and considering Roth conversions to mitigate future tax impacts.

Questions:

• Are their current savings sufficient for a 40-year retirement?
• How should they adjust their spending or savings strategies to accommodate potential tax hikes and market fluctuations?

Discussion & Advice:

Joe affirms their strong financial position, suggesting a conservative 3% distribution rate:
“I feel like they can adjust. I don’t think they necessarily have to work.” ([39:18])

Big Al warns of tax implications, especially with significant RMDs from inherited accounts, advocating for Roth conversions within the current favorable tax bracket:
“I’d probably want to get some of that money into a Roth IRA in that 24%.” ([29:19])

The hosts recommend building a diversified tax strategy and remaining adaptable to ensure long-term sustainability.

Notable Quotes:

• Joe: “Almost anyone with $5 million that is able to watch their spending and dial it down if need be… they have the ability to make adjustments.” ([41:36])
• Big Al: “If tax rates go sky high, that could blow him up a little bit.” ([42:14])

Listener Question 7: Listener from Strawberry Plains, Tennessee

Scenario:
A listener from Strawberry Plains, Tennessee, age 63, and his spouse (57) have amassed $1.3M in IRAs (including traditional and Roth accounts), a $400K debt-free home, and passive rental income of $100K annually. They plan to retire abroad in Asia, targeting an annual spending of $120K adjusted for inflation.

Questions:

• Are their savings and income sources sufficient for their retirement goals?
• Should they undertake Roth conversions to bridge their income and tax strategies over a longer retirement?

Discussion & Advice:

Joe assesses their distribution rate at approximately 6.7%, noting the high sustainability given their income streams:
“I think it may work.” ([47:29])

Big Al highlights the importance of tax planning and suggests converting a portion of traditional accounts to Roth to manage future tax liabilities:
“I would look at trying to figure out a diversification strategy as well.” ([42:14])

The hosts conclude that with disciplined spending and strategic tax management, their retirement plan is feasible.

Notable Quotes:

• Joe: “They’ve got about a million and a half… I don’t think they need to work.” ([47:07])
• Big Al: “I think he could be a little bit more aggressive by converting his IRA.” ([42:14])

Conclusion

In this episode, Joe Anderson and Big Al Clopine demonstrate their expertise in addressing complex retirement and tax-related questions with clarity and practical advice. They emphasize the importance of maintaining liquidity, strategic Roth conversions, tax diversification, and flexibility in spending as cornerstones of a successful retirement plan. Their conversational and humorous approach makes intricate financial strategies accessible and engaging for listeners.

Final Takeaways:

• Maintain Low-Interest Debts: Favor keeping mortgages with favorable rates over aggressive payoff strategies.
• Strategic Roth Conversions: Execute conversions during lower income periods to manage future tax liabilities effectively.
• Tax Diversification: Ensure retirement income streams are diversified across taxable, tax-deferred, and tax-free accounts.
• Residency Planning: Establish clear residency in states with favorable tax environments through tangible ties (e.g., driver's licenses, voting registration).
• Flexibility in Retirement: Be prepared to adjust spending and work strategies based on market conditions and personal circumstances.

Notable Final Quotes:

• Joe: “If it feels good, go ahead and make a couple hundred dollar extra payment per month or whatever. Just don’t go all in.” ([20:53])
• Big Al: “Have to live the slow go years.” ([42:19])

For More Insights: Access free financial resources and episode transcripts at YourMoneyYourWealth.com. Engage with hosts Joe and Big Al through their “Ask Joe & Big Al On Air” segment for personalized retirement spitball analyses.

Disclaimer: This podcast summary is for informational purposes only and does not constitute personalized financial advice. Listeners should consult with a certified financial planner or tax advisor for guidance tailored to their individual circumstances.