Your Money, Your Wealth – Episode 539 Summary: "Where to Invest for Pre-Retirement and a GO-GO Lifestyle?"

In Episode 539 of the "Your Money, Your Wealth" podcast, hosts Joe Anderson, CFP®, and Big Al Clopine, CPA of Pure Financial Advisors delve into the financial strategies of Roger from Canton, Ohio, who is contemplating pre-retirement in his mid-50s. The episode provides an in-depth analysis of Roger's financial situation, explores optimal asset allocation, and discusses the implications of various investment strategies to ensure a comfortable and sustainable retirement. Below is a detailed summary of the key points, discussions, insights, and conclusions from the episode.

1. Introduction to Roger’s Pre-Retirement Scenario

Roger's Goal:
Roger and his wife, Jane, are planning to pre-retire next year at ages 54 and 55, respectively, with a total of $2.8 million in assets. Their objective is to maintain financial stability during their "GO-GO" years (active, travel-filled retirement phase).

Key Financial Details (04:15):

• 401(k): $1,900,000
• Traditional IRA: $280,000
• Roth IRA: $220,000
• Cash: $300,000
• Brokerage Account: $50,000
• HSA: $50,000

Roger has meticulously planned his retirement, employing various strategies such as the Rule of 55, part-time consulting, and deferred compensation ladders to ensure a steady income stream.

Roger's Statement (03:15):

"I plan on retiring for my primary vocation next year after I turn 55. I do plan on still working on a part-time basis."

2. Asset Location Strategy

Discussion on Asset Allocation (12:50):
Joe and Big Al analyze Roger's strategy of reducing his 401(k) contributions to maximize his Employee Stock Purchase Plan (ESPP) opportunities at a 15% discount.

Joe's Analysis (12:58):

"Roger is shifting his focus from maximizing his 401(k) contributions to leveraging the ESPP at a discount, aiming to bolster his brokerage account."

Big Al's Input (14:00):

"I would be a little careful with that strategy because now you're getting close to retiring and you've got concentration risk in the company."

The hosts emphasize the importance of diversification, especially as Roger approaches retirement, to mitigate the risks associated with holding a significant portion of his portfolio in company stock.

3. Diversification and Concentration Risk

Balancing Company Stock with Diversified Investments (14:12):
Big Al advises Roger against over-concentration in his company's stock due to the inherent risks, suggesting a more diversified approach to safeguard his assets.

Big Al's Advice (14:12):

"One of the things that you want to think about as you get close to retirement is diversification because now it's less about earning the highest rate of return, but it's keeping what you have."

Joe's Agreement (14:59):

"As you approach retirement, you probably want to get out of the concentrated risk and get into diversified investments."

The conversation underscores the necessity of balancing high-performing assets with safer investments to ensure portfolio stability.

4. Tax Implications and Roth Conversions

Evaluating Roth IRA Conversions (16:05):
Joe explores the tax implications of Roger's strategy, debating whether converting traditional IRAs to Roth IRAs could be more beneficial compared to investing additional funds in a brokerage account.

Joe's Scenario (16:05):

"If I go pre-tax of that $10,000, I'm going to save $2,000 in taxes, right? Or put it into a brokerage account and pay the tax now."

Big Al's Response (16:38):

"I would rather have that 10,000 end up in a Roth because you're not going to pay any future tax on the earnings and growth."

The hosts concur that, given the choice of paying the same tax, investing in a Roth IRA is more advantageous due to the tax-free growth and withdrawals in retirement.

5. Higher-Performing Assets in Roth Accounts

Risk Assessment of Asset Classes in Roth IRAs (21:08):
Andi Last introduces a YouTube viewer's concern regarding the placement of higher-performing, riskier assets in Roth accounts, citing potential sequence of returns risk.

Big Al's Explanation (21:42):

"Putting riskier asset classes in a Roth IRA implies that you have time to ride out the volatility. If you don't, then don't do it."

Joe's Perspective (22:05):

"As you're accumulating wealth, you want to have the highest performing asset class within that account."

The discussion reveals that while aggressive investments can accelerate growth during the accumulation phase, they pose risks during retirement withdrawals. The key takeaway is to align asset allocation with the retirement timeline and risk tolerance.

6. Final Thoughts on Roger’s Strategy

Feasibility of Pre-Retirement (08:33 – 11:46):
Joe and Big Al assess Roger's ability to retire next year, concluding that his disciplined approach and substantial asset base make his plan viable. They highlight his capability to adjust spending based on portfolio performance, ensuring financial sustainability.

Big Al's Conclusion (10:50):

"I think it's workable. There's a lot of assets here and income, and the spending could be ratcheted down depending upon how everything goes."

Joe's Confidence (11:11):

"This is the kind of guy that's going to keep computing this every year. I think he just wants to know whether we think it's workable. And I would say it's workable."

The hosts affirm that with Roger's disciplined financial planning and flexible spending, his pre-retirement plan is well-structured to support his desired lifestyle.

7. Additional Insights and Resources

Asset Location and Tax Diversification:
The episode also touches upon various retirement plans and the importance of asset location and tax diversification. Joe and Big Al provide insights into different retirement accounts, their benefits, and how they fit into a comprehensive retirement strategy.

Viewer Engagement:
Listeners are encouraged to engage with the podcast through YouTube comments and participate in the annual YMYW podcast survey for a chance to win a $100 Amazon gift card.

Resources Mentioned:

• Financial Blueprint Calculator: Available in the episode description.
• Asset Location Matters: A free download mentioned for optimizing investment returns through tax strategies.

Notable Quotes with Timestamps

• Roger's Introduction (02:35):

  "I've listened to nearly all of your podcasts over the last few years and love picking up your new content."

• Roger's Financial Breakdown (04:16):

  "All retirement accounts are 100. We still have a significant time horizon in liquidity right out volatility in the market."

• Big Al on Diversification (14:00):

  "If you purchased a stock, you either need to hold it for a year, maybe 18 months... diversification is good for concentration."

• Big Al on Roth vs. Brokerage (19:04):

  "I would rather have that 10,000 end up in a Roth because you're not going to pay any future tax on the earnings and growth."

• Big Al's Final Recommendation (24:49):

  "You got your head in the freezer and your feet in the oven. You're going to die. That's not diversification."

Conclusion

Episode 539 of "Your Money, Your Wealth" offers a comprehensive analysis of pre-retirement strategies through the lens of Roger's financial plan. Joe Anderson and Big Al Clopine provide actionable advice on asset allocation, diversification, and tax-efficient investing, ensuring that listeners gain valuable insights into optimizing their retirement portfolios. The episode underscores the importance of disciplined financial planning, flexibility in spending, and strategic asset location to achieve a comfortable and sustainable retirement.

For more detailed discussions and personalized financial advice, listeners are encouraged to access the free resources provided by Pure Financial Advisors and consider scheduling a financial assessment.