February 18, 2025 • 37 mins
Should Nancy in Washington take out a 401(k) loan and invest it in her brokerage account to catch up on saving for her retirement? When Joe and Big Al talk about having a balanced portfolio of various asset classes like stocks and bonds, Brian in Naperville, Illinois wonders whether that asset allocation strategy takes into account the stabilizing effect of monthly Social Security payments? That’s today on Your Money, Your Wealth® podcast 517 with Joe Anderson, CFP® and Big Al Clopine, CPA. Plus, Joy and her brother are each inheriting $400,000. How should they each invest it for their very different financial situations? Mike in Colorado has a good guaranteed income stream, so what should he do with the money he’s drawing from his taxable IRA every year - convert to Roth, put it in a brokerage account, go on a cruise? And finally, Skipper asks the fellas to spitball on whether he should do Roth conversions or take advantage of zero percent capital gains tax rates. Access free financial resources and the episode transcript: https://bit.ly/ymyw-517
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Andi (00:00):
Should Nancy in Washington take out a 401(k) loan and invest it in her
(00:03):
brokerage account to catch up on saving for her retirement? When Joe and Big Al
talk about having a balanced portfolio of various asset classes like stocks and bonds,
Brian in Naperville, Illinois wonders whether that asset allocation strategy takes into
account the stabilizing effect of monthly Social Security payments? That’s today on Your Money,
Your Wealth® podcast number 517 Plus, Joy and her brother are each inheriting $400,000. How should
(00:29):
they each invest it for their very different financial situations? Mike in Colorado has a
good guaranteed income stream, so what should he do with the money he’s drawing from his taxable
IRA every year - convert to Roth, put it in a brokerage account, go on a cruise? And finally,
Skipper asks the fellas to spitball on whether he should do Roth conversions or take advantage
of zero percent capital gains tax rates. I’m Executive Producer Andi Last, and here
(00:54):
are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Joe (00:59):
All right. We got Nancy from Washington. “Hello Joe and Big Al. 6 years. I'm a 6-year-old
who was a single mother and got a late start on my retirement savings. My 401(k) has about $750,000
and a brokerage account of $90,000. I continue to max out the allowable pre-tax contributions of my
(01:19):
401(k), including the catch up, and my employer matches 6%. I plan to retire at 65,
sooner if possible. I'm approaching a point where I'm concerned about RMDs, but I have
not converted to a Roth because I'm in the 20%- or 32% tax bracket. So here's my question. Does it
make sense to pull a 401(k) loan, which will pay myself back at 9% interest and put those funds in
(01:46):
my brokerage account where I can increase wealth outside of my 401(k)? I watch the show every
Sunday morning as part of my routine. I appreciate the information you share. Additionally, I have a
rollover IRA of about $25,000, another brokerage account of $10,000. Social Security income of
$37,000 at 65. Tiny little pension of $50,000 or $5000 annually. Annual spending is $75,000,
(02:10):
only debt is a mortgage. I’m not a good saver and spend more than I should as I'm working on
being a better steward of my finances and really want some financial freedom.” Okay,
Nancy, $750,000 and a brokerage account of about $100,000, so $850,000 plus-
Al (02:32):
- plus the rollover, call it $900,000 ish.
Joe (02:35):
Yeah, okay.
Al (02:36):
I think that's, Nancy, actually,
I think you're a good saver. I wouldn't beat yourself up at all.
Joe (02:41):
Right, she spends $75,000. She's got $37,000,
$40,000, call it $45,000. She needs $35,000. She's got close-
Al (02:53):
Yeah, it goes to $900,000, yeah, so she's there even if you do a little math. So 5 years
from now, Joe, 6% adding, call it $30,000 a year. She ends up with about $1,300,000. At that point,
her spending at 3% inflation would be $87,000 minus the fixed income
of $42,000. I didn't even do a COLA on that, just $42,000. $45,000 shortfall to
(03:16):
$1,300,000. That's a 3.5% distribution rate at $65,000. That looks pretty good to me.
Joe (03:22):
Yeah, that was a lot of numbers, Al.
Yeah, but that's important for the context.
I got- Well She's- she'll have $1,000,000 and I think the distribution rate from the
$1,000,000 will cover her living expenses with the help of her Social Security and pension.
Al (03:38):
That's a correct statement.
Joe (03:39):
I would not be worrying about taking loans out of your 401(k). Don't do that.
Al (03:43):
I would definitely agree with that. I definitely would not do that.
Joe (03:46):
Don't be worrying about doing Roth conversions because you're gonna
be taking 4% out anyway. The RMD on the retirement accounts is probably
gonna cover your spending. You don't have a ton outside of retirement to pay the tax,
so No, I would do exactly what you're doing. The only thing that I would change,
you're the 32% tax bracket though, so it's like single, 32%? that's a lot of income.
Al (04:16):
Yeah, that's above $200,000.
Joe (04:18):
So, $200,000, if she says she's spending
$75,000. There could be some excess there that she could potentially-
Al (04:26):
Well, I think that's what she was implying. So maybe the $75,000 is the goal,
what she wants to spend. I would probably, I agree with everything you said, although I would,
I probably would look at Roth conversions upon retirement. Because, Nancy, I think you'll be
in a low enough tax bracket. And I might even do a small conversion right now. $2000, $3000,
(04:46):
$5000, just to start the 5-year clock. I think that's maybe what I might do.
Joe (04:52):
Well, what does she have, an IRA of $25,000?
Al (04:56):
Yep.
Joe (04:57):
Well, put the $25,000 into the 401(k). And then do a non-deductible IRA and convert it.
Al (05:03):
Could do that too.
Joe (05:04):
Yeah, that won't cost her any tax at all. She's got the money outside.
Al (05:07):
But doesn't start the 5-year clock yet.
Joe (05:10):
Yeah. It would?
Al (05:12):
Well, in the 401(k), but if you roll it to an IRA, you got to start over.
Joe (05:16):
Yeah, no, you do a backdoor Roth, that's what you-
Al (05:18):
I know, but when she retires, that's what I'm saying. If it's in the 401(k)-
Joe (05:22):
Yeah.
Al (05:23):
Oh, I got, I, never mind.
Joe (05:25):
Cause she's gonna have a Roth IRA that has a 5-
Al (05:27):
I'm with you now. you're right. Got it. Yep. You're right.
Joe (05:30):
All right. Good luck,
Nancy. Thanks for watching the show and thanks for listening to the podcast.
All right. Let’s move on to Naperville, Illinois. We got Brian. He writes in, he goes,
“Hey, I'm 58. I hope to retire at age 62 with a sufficient portfolio that
will last me to age 100. Over the years, my investing strategy has changed along
(05:50):
with my lifestyle. When I was younger, I used to drink bloater shots in college.” Floater shots.
Andi (05:56):
What is that?
Joe (05:57):
It's like 151 or something. That’s RIP. Like you light it.
Al (06:04):
The alcohol's so heavy, it floats on top of whatever else.
Joe (06:07):
Yeah. Light it on fire and just let her go.
Al (06:10):
Got it.
Joe (06:12):
Wow.
Andi (06:12):
Don't wanna be doing that with Pappy.
Joe (06:14):
Yeah. No, no floater shots. “Drove a two door sporty car and invested 100% in stocks.
Now I drink a lot less. I drive a mini van. And I have an asset allocation of 70% stocks, 30%
bonds. My asset allocation is a little aggressive, but I'm blessed to have two parents still living
(06:34):
in their 90s. And so I'm investing in case I live to 100. I have a few questions for the
asset allocation that are generally for- the asset allocations that are generally recommended. Does
it take into account the stabilization effect of Social Security payments?”
Al (06:53):
Wow, that's deep. Let's see what, let's see what he means by that.
Joe (06:57):
All right. “Additionally, how should your asset allocation change depending on your Social
Security income? For example, if you're retired age 62 and claim your Social Security benefits,
the present value of that Social Security payments could be considered as an asset
being the equivalent to, let's say a TIP. And therefore, you can have more equity.”
(07:17):
All right? So he's saying the fixed income component of his strategy is like a bond.
Al (07:22):
Yeah, so he's taking the Social Security payments and equating that to an asset.
Joe (07:27):
Yeah, he's going to do the present value calculation and calculate it.
Al (07:31):
That's very clever. Okay.
Joe (07:32):
Treasury played a protected security.
Al (07:34):
Right, because it goes up with inflation.
Joe (07:36):
Yeah, look at the big brain on Brian here.
Al (07:37):
Yeah, right.
Joe (07:38):
All right. Let's see, “In contrast, if you retire at age 62, but claim your Social Security
later, let's say at age 70, then you will be reliant on a greater portion of your 401(k)
portfolio for your day to day needs for ages 62 to 69. In this second scenario. You would want
less equity heavy portfolio so the strategy would be to increase your equity holdings the moment
(08:04):
that Social Security payments start flowing even though you are older. More precisely you
should value your Social Security payments as a bond and adjust your allocation based
on the total assets. Is this correct? Another angle on this topic could be considered that
your Social Security payments are probably going to be there when you need them, and therefore,
be more aggressive with equity allocation regardless of when you claim Social Security.”
(08:30):
Brian's doing some spreadsheets, he's doing some math, and he's thinking-
Al (08:33):
He's probably already got it figured out.
Joe (08:35):
He sounds like a smart guy.
Al (08:37):
He wants to see what we think.
Joe (08:38):
Yeah. I've seen a couple of different studies here where the
overall allocation gets more aggressive as someone ages. It was like counterintuitive,
what most, most people think. Right. Because the demand of the portfolio shrinks in some cases.
Al (08:55):
Yeah, and plus the longevity shrinks, too.
Joe (08:58):
Right, so-
Al (08:59):
You don't need it for as long.
Joe (09:01):
Exactly. So then, it's looking at this glide path, they call it. And Michael Kitsis did a study
on this. It was like, alright, well here, this is, you know, the older that- as we age and our fixed
income increases sometimes for some people, their income or their income need decreases as you age.
Al (09:21):
That's true too.
Joe (09:22):
And so the demand of the portfolio- you always, I mean, not always, a good way to
think about your asset allocation and how you're managing the money is what is the demand on the
portfolio? What is the money for? Is it strictly for income? Well, then you're going to have a lot
less growth in the portfolio. If it's like, hey, I need a little bit of income for this,
(09:44):
but I want to make sure that I leverage this so that I have some cash available if I make it to
age100, and then from there it goes to the kids or grandkids or whoever that you want the money
to go to. Right. So it's a little bit more thought of, hey, is it just a 60/40 portfolio or 70/30?
You really want to dive in a little bit deeper to say, what's the demand or what's the money for?
Al (10:04):
Yeah, I’ll tell you what, I do like the idea. I think it's a great idea, but it's not really
how I think about it. I think about it and we think about it as you take your total expenses
and you subtract out your fixed income like Social Security and you end up with a shortfall. And then
you compare your shortfall to the assets that you have to figure out what rate of return you need to
(10:27):
make this work. I think that I mean, although I understand your argument, but I think you
get a better allocation that way because that's your true need on your assets to, to cover that
shortfall. I think that's a, I think that's just a safer, better way to think about this.
Joe (10:44):
Yeah. For instance, you have $1,000,000 portfolio, you need $40,000 from the portfolio.
Like, alright, well how much money should I have in fixed income versus bonds? Right. Well,
you still need that $40,000. Let's say your true income need is $100,000, but $60,000 is
going to come from Social Security or pension. Right. I think what Brian's doing is saying,
(11:05):
alright, well this $60,000 that's coming in as my pension or Social Security or both, you know,
we should count that as a bond. And so that $1,000,000 that I have I should probably have
more stocks because I already have a good fixed income base and I think Alan and I
both agree with that. But you have to look at the shortfall. The $40,000 is really what the
demand for the portfolio is. So if you have $1,000,000, 4% of that $1,000,000
(11:29):
is $40,000. So the allocation should be based on that demand. So maybe you want 10 years of
total fixed income. So you don't care what the market does over the next 10 years. So 40,000
times 10 is $400,000. So then you want like roughly a 60/40 portfolio given that scenario.
Al (11:46):
Yeah. And the other way is to just think about what rate of return do you
need for this portfolio to be sustainable for your lifespan, 25 years, 30 years,
whatever you think it may be. So I think that's a safer way. Although, like I say,
I do get why you came up with this and it's actually quite clever.
Joe (12:02):
Okay, good luck, Brian. Thanks for the email.
Calculate your free Financial Blueprint,
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Andi (12:06):
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egg with our free Financial Blueprint tool. Input your financial details like cash flow, assets,
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(12:31):
there in the episode description, the link to register for our Risk Management and Retirement
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(12:52):
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Joe (13:03):
Alright, let's go to Jay. He goes, “Hey, Joe Big Al, Andi, love the show. Thanks for all
what you do. I drive a 2023 Jeep Grand Cherokee. I have a cat named Joe.” Ha!
Al (13:13):
Okay, after you, maybe.
Joe (13:14):
Alright. “When I do drink my drink of choice,
it's 7 and 7. Hope this can be a two for one spitball.” Oh, two for one. Alright.
Al (13:24):
Two questions, maybe.
Joe (13:25):
7 and 7. Seagram7. That's a, is that a bourbon?
Al (13:29):
Yeah, 7Up.
Joe (13:30):
Yeah, my brother used to drink those.
Al (13:34):
That doesn't sound good. If I'm gonna drink it bourbon, I just would drink the bourbon, probably.
Joe (13:39):
Yeah, straight up. Little rocks on there, maybe?
Al (13:43):
Yeah, maybe little rocks, yeah. Are you a fan of like the big rock?
You know, I had one, for the first time in Sydney, and I kind of liked it.
Joe (13:53):
I thought, didn't you have like, don't you make them?
Al (13:56):
I don't make them.
Joe (13:57):
Like, the big ice cubes?
Al (14:00):
No.
Joe (14:00):
Was that you that was talking about that?
Al (14:01):
No, that was someone else.
Joe (14:03):
Oh, okay.
Al (14:03):
That was your other friend named Big Al.
Joe (14:06):
Yeah. Big John.
Al (14:10):
Big John.
Joe (14:10):
Alright, so let's go for the two for one here. “My brother, age 47,
has struggled with addiction and mental illness. He has many low paying jobs. He has never saved
into a 401(k). When our parents passed away two years ago, he received enough money to buy a
small house outright. He's also received shares of stock of about $150,000. This is all he has.
(14:30):
He is able to pay his bill with his current income. Recently, our uncle had passed away.
He will inherit close to $400,000. How should I tell my brother to allocate his money for his
retirement? Currently he's sober. But he has his ups and downs. Would some sort of annuity
be good for him so that the money can grow until he is able to collect Social Security?”
Andi (14:56):
And I'll point out, she says “we will each inherit close
to $400,000.” So her brother will get $400,000 and she will as well.
Joe (15:03):
Yeah, that's what I thought.
Al (15:05):
Yep. Okay, sounds good.
Joe (15:07):
Alright, he's 47 years old. $400,000, he's going to get the cash,
how should he allocate it? So, sometimes we need protection from ourselves.
Al (15:18):
We do.
Joe (15:19):
Even if, I mean, if you have addiction, mental illness, or just perfectly sane,
rational people, right? They continue to make mistakes with their money.
Al (15:28):
It’s true.
Joe (15:28):
So, what, in this situation, Big Al, what do you think?
Al (15:32):
Well-
Joe (15:34):
You like the annuity idea?
Al (15:35):
Not really. I would probably- Gosh, what would I do? I might even open up an account
with a trustee and someone else handle it. So I didn't have access to it. I mean, that may not
be what he wants to do, but that could protect it from himself. I would try to get as much of
(15:56):
it into retirement account as possible. If he has a 401(k), just go ahead and load that up.
Even if he doesn't have enough money to live off of. Instead of living off his paycheck,
he takes a similar amount from the $400,000. So he gets it in a 401(k). I would have him do a
Roth IRA contribution, just try to get as much in the retirement accounts. I would probably,
(16:17):
without knowing anything else, I mean, you always kind of default to a 60% stock, 40% bond portfolio
without knowing anything else. I don't know if that's the right portfolio or not, but
that would be a starting point. But I just would want to, if I were him, I'd want to have maybe
some protection, some barrier to the funds that you'd have to talk to someone to get the funds.
Joe (16:40):
So he bought a house, he's got $150,000 in stock that he inherited two years ago.
Al (16:44):
Yeah.
Joe (16:44):
So it's like, all right, well, if he's letting that ride
to make sure that he can fund his overall retirement, he has some discipline. So-
Al (16:53):
Well, we don't know if he still has it, but he received it.
Joe (16:55):
I suppose, I'm assuming he does.
Al (16:58):
Yeah. Could be.
Joe (16:58):
So at $650,000 that he has at 47, that's a lot of cash that a 47 year old has. I mean,
that's a ton of money. By the age 57, you know, that could be $1,500,000.
Al (17:10):
It could be. Yeah. If you don't touch it.
Joe (17:13):
That could then, you know, help. And then another 10 years at 67. Right. And that could
be $3,000,000. Right. And if it doubles every 10 years, okay. Be assuming that 7%,
then he claims his Social Security. I mean, he could potentially be, you know,
living the exact same lifestyle or maybe at a larger lifestyle in retirement. If he can,
(17:36):
you know, continue to, you know, let the money, grow. So, I don't know. I think you would want
to have a globally diversified low-cost portfolio. I don't like the annuity idea.
Al (17:47):
No, I don't either.
Joe (17:48):
The only time annuity would be good if he goes in there and,
like, I think there's other ways that you can help him without putting it into
a product that's going to blow him up if he tries to touch it prior to 60, you know?
Al (18:02):
Yeah, I mean, at the very least, maybe you find an advisor and you give the advisor the,
so in other words, to get the money, you have to go through the advisor and
if the advisor has instructions from you to not let me take too much, I don't know.
Joe (18:15):
But he took his money, he can do whatever he wants.
Al (18:17):
That's right, and we don't know enough about the situation. I mean,
maybe he's had addiction problems, but maybe he's fine now. And if that's the case,
then just invest it, 60/40, and call it good, probably. Cool.
Joe (18:29):
Alright, now her question.
Al (18:30):
Yeah.
Joe (18:31):
Alright. “If you have time-“oh Joy, we have time. “I just retired from my job at age
56. I'm pretty sure with my retirement accounts, which I do not have to draw,
until it's RMD time. My husband and I are able to take care of our needs on his income
alone of $83,000. I have $520,000 in 401(k)s, $26,000 in Roths, $170,000 in a savings account,
(18:53):
$130,000 in CDs, $40,000 in cash. I will receive a tiny pension of $350 a month and my husband
will receive one in 6 years of about $850 a month. Main home and vacation home are both
paid for. How should I invest my inheritance? Do I put it in a brokerage account? What would the
allocation be? Thank you for making me laugh. I never thought the highlight of my week would be
(19:17):
waiting for a new episode of a financial podcast to come out. Joy.” Wow. That's incredible.
Al (19:25):
Yeah. That's pretty good.
Joe (19:27):
Thanks for the compliment, Joy. I would do the same, Joy. Lowly
diversified low-cost portfolio. Look at how hilarious that was.
Al (19:36):
It was hilarious because it was predictable.
Joe (19:39):
Yeah. I don't, I mean. Yeah, so people get so confused. I think sometimes it's like
they compartmentalize their money. Yeah, so my retirement accounts I'm gonna invest this way
and then I got some CDs and I got some cash and I got some high yield stuff and Oh, then I got
this inheritance. How should I invest that? Look at your entire portfolio. If you've got 401(k)s,
(20:01):
Roth IRAs, your cash accounts, your brokerage accounts, look at your entire portfolio and
say here's the allocation that I want. Here's how much money that I want in cash and safety,
here's how much money that I want to have in stocks, here's how much money that I want to
have in bonds, and then look at it that way. And then if the money's outside of a retirement
account versus inside the retirement account, then you want to look at asset location. Put
(20:23):
your more stock type investments in your brokerage account because you get better
tax advantages. If you have Roth accounts, you want more growth oriented, you know, assets in
those accounts because it's growing tax-free. Your retirement accounts, you want a little bit
more safety. So look at your entire assets as one big portfolio versus saying, well, this is,
(20:43):
you know, his is over here. Mine's over there. Now, should I invest this inheritance differently?
Al (20:49):
Yeah. So 100% agree. That really is the right answer. The right answer is
look at your overall situation, figure out- So what your cashflow needs are going to be,
your husband retires, what that looks like, what you need to be invested in
to get to a certain asset amount to fund your lifestyle. That's really the answer to you. And
you look at everything as a whole instead of in compartments and Joe, you're absolutely right.
Joe (21:13):
Absolutely right.
Al (21:14):
That's what a lot of people-
Joe (21:15):
Absolutely. Right.
Al (21:15):
-in this case. What a lot of people do is they assume of retirement accounts,
they're already set. So now I got this extra money. What should I do with that?
And now you've got to take a step back and look at the whole thing in one fell swoop.
Andi (21:28):
All right. So now we've got a voice message. So this is Mike. He
went to YourMoneyYourWealth.com. He clicked on Ask Joe and Big Al on Air and he left us this.
“Hey y'all, my name is Mike coming to you from the great state of Texas. All right,
so here's the situation. I'll give you the simple things first, I guess. We don't have any pets. I
have a 2024 Silverado 1500 we purchased about a year ago. My wife's got a brand new 2024 Lincoln
(21:54):
Nautilus she just purchased here a couple months ago. And the situation is pretty simple. We have
a pretty good guaranteed income stream coming in about almost $17,000 a month after taxes coming
in between our pensions and I'm military retired and I'm disabled and so forth. So we bring home
about $205,000 a year in retirement. However, only about $140,000 of it's taxable. That being said,
(22:22):
we've got about $1,200,000, $1,300,000 in assets. And most of that's in taxable IRAs. They're both
traditional, so we need to pay the tax on that when we draw it out, and that's what we kind
of do now. I'm drawing about $10,000, $15,000 a year right now to draw that down. And so,
(22:43):
I guess my bigger question is, would it be wiser to do the Roth conversions? And just spend that
money on a cruise or something every year or put it into our trading account in the sense
of a stock broker account. All that being said I’m not sure what's the best idea for us. But
I do know we have about $250,000 in cash. I keep to the side I'm just a cash guy. I like to keep
(23:05):
a lot of cash just in case something happens. That's our thoughts. Give us our spitball. What
you think we should do in the sense of what you would do, I guess. I know you can't give advice,
but something to think about for us. I'd appreciate it. Listen, y'all doing a great
job. All 3 of you. Without one of you, there's not a team. All right, y'all take care. God bless.”
(23:27):
Well thank you Mike.
Joe (23:29):
Mike, Texas.
Al (23:31):
Yeah.
Joe (23:32):
Helluva job. Thank you for your service first of all. Yeah,
do the conversion. And then if you want to take the money out of the account and go
on a vacation- you got $250,000 in cash. But you got a ton of fixed income. He's got a VA
pension. That's coming to him tax-free. He's got $140,000 taxable income. Or
$140,000 that's taxable of the pension. Yeah. So $140,000, let's call it, he's got $110,000 of,
(24:00):
taxable income. I would convert to the top of the 22% tax bracket, which would give him-
Al (24:08):
22%, that would be about $200,000? $207,000. Yeah, I would too. And,
the reason is because with all this fixed income, it's almost like you've already got
a bunch of money in an IRA that's paying out, you're paying ordinary income. So you have a
lot of ordinary income already. So when you get to RMD age, required minimum distribution age,
(24:30):
then you're going to, all of that money is going to be taxed at a higher rate still. So
go ahead and bite the bullet now. Get some of this, get more of this out, probably up to the
22% bracket. So we're talking about, what, close to $100,000 you could do. You've got
the money to pay the tax and go on the cruise. Have fun. You've earned it, man. Just have fun.
Joe (24:52):
Yep, $100,000 conversions. You don't know where tax rates are going to go. If tax rates
go up, you know, just more money of, that hard earned money that you saved is just going to go
to the IRS. So this is a prime conversion case for sure. Very large fixed income,
really good savers, doesn't spend a ton. You know their fixed income is covering their expenses,
(25:14):
he's trying to leak some of their retirement accounts out. You put it into a brokerage account,
you're just going to be taxed at ordinary income. I mean, not ordinary income, but capital gains on
any gains that you have, or if you have short term gains, it's going to be taxed at ordinary income.
If you convert it, you're still paying the same amount of tax if you moved it in your brokerage
account, if you spent the money, or if you put it into a Roth. If you put it into the Roth,
(25:37):
all future growth is going to grow 100% tax-free. So, for sure put it there,
and then if you want to take the money on, go on a cruise later, then do that.
Watch Retirement Rebound on YMYW TV, download the Retirement Income Strategies Guide
Andi (25:48):
A retirement strategy is kinda like a basketball game
take to be nothing but net, but sometimes you miss, and you need a Retirement Rebound. This
week on Your Money, Your Wealth TV, Joe and Big Al show you how four plays can help you turn things
around, get that rebound, and score a comeback. Click the link in the episode description to
watch it now. Plus, after a lifetime of saving, making the transition to retirement means facing
(26:13):
a whole new set of challenges - how are you going to generate income in retirement? Download the
Retirement Income Strategies Guide for 5 questions you need to ask yourself before you retire, the
sources of income available for you in retirement, how to maximize your Social Security benefits,
and how to develop a retirement income strategy that meets your needs. Click
the links in the episode description to watch Retirement Rebound on YMYW TV,
(26:37):
and to download the Retirement Income Strategies Guide for free.
Joe (26:40):
Yeah. Alright, we got Skipper. “Hey guys,
this is Skipper, wife Ginger, both 65.” Where's Gilligan?
Al (26:49):
He didn't make the cut.
Joe (26:51):
Who's your favorite character?
Al (26:53):
MaryAnn.
Joe (26:55):
Not the professor, Mr. or Mrs. Howell? I didn't like, well, I mean,
they were all fun. Gilligan? Yeah, I mean, Goofy. Fun, though.
Andi (27:06):
Yeah. I was gonna say,
that's from a different show. Goofy was not on Gilligan's Island.
Joe (27:09):
He was goofy.
Al (27:10):
He was goofy. I know.
Andi (27:12):
Joe, who's your favorite?
Joe (27:15):
I liked Gilligan. Yeah. He was good.
Andi (27:20):
I was a fan of the professor.
Joe (27:23):
Yeah. Very dapper.
Andi (27:26):
Brainy.
Joe (27:26):
He was able to make telephones out of coconuts,
but they couldn't figure out a way to fix the boat. It's like, what the hell?
Al (27:35):
It's funny how they always had like spare parts to build whatever.
Joe (27:39):
Just whatever, man.
Al (27:39):
Except for a boat.
Joe (27:41):
I mean, he was building AI robots, but still stranded on that island. How'd they ever get off?
Al (27:50):
I don't remember.
Joe (27:52):
Yeah. I don't know if I ever saw the finale.
Al (27:54):
Cause there, there was a, I think there was a movie where they'd gotten off if I remember.
Joe (27:58):
Well, I don't know. Wasn't there like.
Al (28:00):
But they really were, they were in a studio in LA,
so it wasn't, they weren't exactly shipwrecked.
Joe (28:05):
Oh, come on. No, I think they were definitely shipwrecked.
Andi (28:09):
I can't believe you felt the need to say that Al.
Joe (28:11):
Yeah. Well, you know, they were actually in the studio. Are you kidding me?
Al (28:17):
So they, well you asked the question,
how'd they get off? Every night they got off and went home.
Joe (28:21):
I don't think so. Alright.
Al (28:25):
They drove their cars home? No problem.
Joe (28:28):
“First the drinks, we both enjoy California red wines,
and I occasionally enjoy, like a Moscow Old Fashioned.”
Andi (28:37):
Mezcal.
Joe (28:38):
Mezcal, what's that, tequila?
Andi (28:40):
I think it's related, I don't think it's exactly tequila, but I'm not really sure.
Joe (28:44):
All right, “The question relates to Roth conversions versus taking
advantage of the 0% capital gains rate.” Oh, this is a juicy one.
Al (28:52):
Yeah, it could be.
Joe (28:53):
All right. Okay, “We're both mostly retired. I don't have some part- I do have some part time
consulting income. After that fades away in 2025 our ordinary taxable income will
be in the lower end of the 12% tax bracket leaving room to harvest about $70,000 of
long term capital gains each year at the 0% tax bracket until Social Security starts at
(29:16):
age 70 and then RMDs at age 73. Of course, California will take their bite as always,
but we really want to do some significant Roth conversions. As I learned from Big
Al in a prior episode, the first $70,000 of a Roth conversion in those years will have an
effective federal tax rate hit of 27% with the loss of the 0% long term capital gains rate to
(29:43):
15% plus an additional 12% ordinary income from the Roth conversions.” Did you follow all that?
Al (29:49):
Yeah, and I have said that, and that's a true statement.
Joe (29:52):
“I've run an 8-year projection.” Okay. Skipper. Yeah, call the Gilligan up and-“
Al (30:01):
Actually call the professor. He'll be able to tell you if this is a good plan.
Joe (30:06):
My goodness. 8-year projections. “And I'm thinking maybe try and optimize
each year with some heavy long term capital gains and other years of heavy
Roth conversions. Also while keeping an eye on IRMAA tiers, 3.8% net investment, income tax,
plus cashflow to support our lifestyle and the tax on conversion. The dilemma is
(30:28):
that we will make it difficult to reach the Roth conversion target of $800,000, and I really don't
like missing out at the 0% cap gains rate. What do you suggest?” What the hell is he talking about?
Al (30:41):
Well, he's thinking from what I said, he needs to do one or the other in any given year.
Joe (30:47):
Oh, was this the same guy that- Skipper called in before or something?
Andi (30:52):
We've had a number of people that have been from Gilligan's Island,
so I'm not sure if this is the same Skipper.
Joe (30:57):
Okay, so here's his investments.
Al (30:59):
Okay.
Joe (31:00):
“He's got a taxable account of $1,600,000 with $750,000 unrealized long term capital gains.
He's got a retirement account of $2,000,000 and he's got a couple of bucks in a Roth. Plus,
we have a rental house and a primary residence, both with solid equity.”
All right. “Thanks for looking forward to your ideas and the laughs.” All right, well,
(31:28):
this is the only time I think I ever need to know what is in the taxable account.
Like some people give us like ticker symbols and everything else. I'm just kind of ignoring that,
but is this individual stock? Is this just a couple mutual funds? Did he get
lucky and bought Nvidia? Apple? What was this? A magnifi- ? Magnificent. Seven.
Andi (31:51):
The FAANGs?
Al (31:52):
Well, you're, you are right because it depends what the investments are,
whether you need to reallocate.
Joe (32:00):
Right. If there's a lot of concentrated risk you need
to diversify. If it's diversified and they're in decent investments-
Al (32:07):
Yeah, then stick with it and do Roth conversions. All day, all year after year.
Joe (32:12):
Yeah, don't worry about the long term, unless you need the money to live off of. So
the plan that you have to figure out is, all right, well, how much money do I need to take
from the overall portfolio? So. In that case, it's like, all right, well here, maybe you take
enough out of the non-qualified and get that into a high basis area where you can live off
(32:32):
of that money for a couple of years while you're doing the conversions. And you don't necessarily
have to worry about the tax. But there's a lot more analysis, I think, on this, but if you
don't need the non-qualified and it's diversified and good investments, Roth conversions all day.
Al (32:48):
100%. And plus, I mean, so we're talking at the moment,
we're talking about a $1,600,000 taxable estate and less than half of it’s capital gains. What
if that became $2,000,000 or even $3,000,000? You sell it, yeah, you pay capital gains tax,
but not on the whole thing. It's very tax efficient, but the, your problem is you got
(33:08):
almost $2,000,000 in a taxable retirement account. You got to get that over to Roth the best you can,
that needs to be the priority. Unless Joe, as you said, the portfolio is not correctly
allocated. If you need to diversify, then maybe focus on capital gains for a couple of years.
Joe (33:25):
Yeah. If at $1,600,000, let's say if you have a concentrated position or it's not
allocated – I mean that $1,600,000 drops back down to $750,000, I don't know. I bet you'd
been a lot happier to pay some tax, than to look at your balance and say, Oh, I got my basis back
and I could sell it now and I don't have any tax. So you got to look at both here. I mean,
(33:47):
you want to make sure that you have the appropriate diversified portfolio of the entire
estate. So it's almost $4,000,000 of liquid assets that you currently have. Your house is paid for,
you got a rental house, you got Ginger, you got the life. What you're worried about is okay,
some taxes, and do you take advantage of the 0% capital gains rate? Because
(34:07):
in a non-qualified brokerage account, you could sell as long as you stay in the 12%
tax bracket of taxable income, and it's 0%. So he's really loving that 0% cap gains rate.
Al (34:21):
Yeah, I think, and maybe a way to think about this is pick one or the other. Right? If you do
want to diversify and you want to sell some of your assets, then sell enough not only to fill
up the 12% bracket and pay no taxes on that, but then go higher, right? Because you're only paying
15% taxes on that. Don't do Roth conversions that year, but then get your portfolio allocated
(34:43):
properly over a couple of years. Then, if you need to- and then switch to Roth conversions after
that. That's the bigger problem I see, unless you're not diversified. Joe: Yeah. Let's say he's
got $2,000,000 in a retirement account and his RMDs are roughly in 10 years. Let's say that money
doubles. Now it's at $4,000,000. That's $360,000 RMD. Just the RMD alone is going to be taxed at-
(35:06):
Right.
Joe (35:07):
What, 36%? Well, 30%, I mean 32%?
Al (35:10):
Yeah, 32%, as it stands right now, yeah. Well, actually 24%- it's,
we're supposed to be going back to the old rates. So yeah, we don't know.
Joe (35:17):
And then he's gonna have, well, he'll have Social Security.
Al (35:20):
Yeah, true. I mean, he may be approaching 32%. Yeah. Yep, you're right.
Joe (35:24):
So, I don't know, you’re, you might be thinking you're tripping over,
you know, dollars to pick up pennies here.
Al (35:31):
Right.
Joe (35:32):
I want to take advantage of the 0% capital gains when you could pay 15% or you're going to
pay 32% potentially or a lot higher tax on the ordinary income when it's forced out.
Al (35:44):
Right.
Joe (35:44):
The worst thing that happens with very good savers is that they're forced to pay tax
on income they don't need. And those RMDs are just forcing this out and putting all of that income on
your tax return. And then all you're doing is putting it in your brokerage account anyway,
right? And so now you're getting interest and dividends and paying capital gains tax on the
(36:05):
money that you just paid tax. So you're, it's just this tax cycle. So get ahead of it now.
You're 65- conversions, I think is the right answer. But of course, that's just a spitball.
Al (36:18):
Yep.
Joe (36:19):
All right.
Andi (36:19):
And a good spitball it was at that. Funny how Roth conversions often are the answer.
Skipper, thank you for your question. Thank you all for sending in your money questions,
and for watching and listening to us each and every week. Your Money, Your Wealth is
your podcast, and this show wouldn’t be a show without you! If you enjoy YMYW, help us grow
it! Keep sending in your money questions. Leave your honest reviews and ratings for Your Money,
(36:42):
Your Wealth in Apple Podcasts and all the other apps that accept them. Subscribe to
our YouTube channel to watch us do the YMYW podcast, and to join me in the comments. And
tell everyone you know that we’re making fun of finance over here at Your Money, Your Wealth.
Get a Free Financial Assessment today with the experienced professionals on Joe and Big
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(37:06):
identify potential roadblocks, and create a personalized plan to help
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Pure Financial Advisors is a registered investment advisor. This show does not
(37:29):
intend to provide personalized investment advice through this podcast and does not represent that
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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.
Should Nancy in Washington take out a 401(k) loan and invest it in her
(00:03):
brokerage account to catch up on saving for her retirement? When Joe and Big Al
talk about having a balanced portfolio of various asset classes like stocks and bonds,
Brian in Naperville, Illinois wonders whether that asset allocation strategy takes into
account the stabilizing effect of monthly Social Security payments? That’s today on Your Money,
Your Wealth® podcast number 517 Plus, Joy and her brother are each inheriting $400,000. How should
(00:29):
they each invest it for their very different financial situations? Mike in Colorado has a
good guaranteed income stream, so what should he do with the money he’s drawing from his taxable
IRA every year - convert to Roth, put it in a brokerage account, go on a cruise? And finally,
Skipper asks the fellas to spitball on whether he should do Roth conversions or take advantage
of zero percent capital gains tax rates. I’m Executive Producer Andi Last, and here
(00:54):
are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Joe (00:59):
All right. We got Nancy from Washington. “Hello Joe and Big Al. 6 years. I'm a 6-year-old
who was a single mother and got a late start on my retirement savings. My 401(k) has about $750,000
and a brokerage account of $90,000. I continue to max out the allowable pre-tax contributions of my
(01:19):
401(k), including the catch up, and my employer matches 6%. I plan to retire at 65,
sooner if possible. I'm approaching a point where I'm concerned about RMDs, but I have
not converted to a Roth because I'm in the 20%- or 32% tax bracket. So here's my question. Does it
make sense to pull a 401(k) loan, which will pay myself back at 9% interest and put those funds in
(01:46):
my brokerage account where I can increase wealth outside of my 401(k)? I watch the show every
Sunday morning as part of my routine. I appreciate the information you share. Additionally, I have a
rollover IRA of about $25,000, another brokerage account of $10,000. Social Security income of
$37,000 at 65. Tiny little pension of $50,000 or $5000 annually. Annual spending is $75,000,
(02:10):
only debt is a mortgage. I’m not a good saver and spend more than I should as I'm working on
being a better steward of my finances and really want some financial freedom.” Okay,
Nancy, $750,000 and a brokerage account of about $100,000, so $850,000 plus-
Al (02:32):
- plus the rollover, call it $900,000 ish.
Joe (02:35):
Yeah, okay.
Al (02:36):
I think that's, Nancy, actually,
I think you're a good saver. I wouldn't beat yourself up at all.
Joe (02:41):
Right, she spends $75,000. She's got $37,000,
$40,000, call it $45,000. She needs $35,000. She's got close-
Al (02:53):
Yeah, it goes to $900,000, yeah, so she's there even if you do a little math. So 5 years
from now, Joe, 6% adding, call it $30,000 a year. She ends up with about $1,300,000. At that point,
her spending at 3% inflation would be $87,000 minus the fixed income
of $42,000. I didn't even do a COLA on that, just $42,000. $45,000 shortfall to
(03:16):
$1,300,000. That's a 3.5% distribution rate at $65,000. That looks pretty good to me.
Joe (03:22):
Yeah, that was a lot of numbers, Al.
Yeah, but that's important for the context.
I got- Well She's- she'll have $1,000,000 and I think the distribution rate from the
$1,000,000 will cover her living expenses with the help of her Social Security and pension.
Al (03:38):
That's a correct statement.
Joe (03:39):
I would not be worrying about taking loans out of your 401(k). Don't do that.
Al (03:43):
I would definitely agree with that. I definitely would not do that.
Joe (03:46):
Don't be worrying about doing Roth conversions because you're gonna
be taking 4% out anyway. The RMD on the retirement accounts is probably
gonna cover your spending. You don't have a ton outside of retirement to pay the tax,
so No, I would do exactly what you're doing. The only thing that I would change,
you're the 32% tax bracket though, so it's like single, 32%? that's a lot of income.
Al (04:16):
Yeah, that's above $200,000.
Joe (04:18):
So, $200,000, if she says she's spending
$75,000. There could be some excess there that she could potentially-
Al (04:26):
Well, I think that's what she was implying. So maybe the $75,000 is the goal,
what she wants to spend. I would probably, I agree with everything you said, although I would,
I probably would look at Roth conversions upon retirement. Because, Nancy, I think you'll be
in a low enough tax bracket. And I might even do a small conversion right now. $2000, $3000,
(04:46):
$5000, just to start the 5-year clock. I think that's maybe what I might do.
Joe (04:52):
Well, what does she have, an IRA of $25,000?
Al (04:56):
Yep.
Joe (04:57):
Well, put the $25,000 into the 401(k). And then do a non-deductible IRA and convert it.
Al (05:03):
Could do that too.
Joe (05:04):
Yeah, that won't cost her any tax at all. She's got the money outside.
Al (05:07):
But doesn't start the 5-year clock yet.
Joe (05:10):
Yeah. It would?
Al (05:12):
Well, in the 401(k), but if you roll it to an IRA, you got to start over.
Joe (05:16):
Yeah, no, you do a backdoor Roth, that's what you-
Al (05:18):
I know, but when she retires, that's what I'm saying. If it's in the 401(k)-
Joe (05:22):
Yeah.
Al (05:23):
Oh, I got, I, never mind.
Joe (05:25):
Cause she's gonna have a Roth IRA that has a 5-
Al (05:27):
I'm with you now. you're right. Got it. Yep. You're right.
Joe (05:30):
All right. Good luck,
Nancy. Thanks for watching the show and thanks for listening to the podcast.
All right. Let’s move on to Naperville, Illinois. We got Brian. He writes in, he goes,
“Hey, I'm 58. I hope to retire at age 62 with a sufficient portfolio that
will last me to age 100. Over the years, my investing strategy has changed along
(05:50):
with my lifestyle. When I was younger, I used to drink bloater shots in college.” Floater shots.
Andi (05:56):
What is that?
Joe (05:57):
It's like 151 or something. That’s RIP. Like you light it.
Al (06:04):
The alcohol's so heavy, it floats on top of whatever else.
Joe (06:07):
Yeah. Light it on fire and just let her go.
Al (06:10):
Got it.
Joe (06:12):
Wow.
Andi (06:12):
Don't wanna be doing that with Pappy.
Joe (06:14):
Yeah. No, no floater shots. “Drove a two door sporty car and invested 100% in stocks.
Now I drink a lot less. I drive a mini van. And I have an asset allocation of 70% stocks, 30%
bonds. My asset allocation is a little aggressive, but I'm blessed to have two parents still living
(06:34):
in their 90s. And so I'm investing in case I live to 100. I have a few questions for the
asset allocation that are generally for- the asset allocations that are generally recommended. Does
it take into account the stabilization effect of Social Security payments?”
Al (06:53):
Wow, that's deep. Let's see what, let's see what he means by that.
Joe (06:57):
All right. “Additionally, how should your asset allocation change depending on your Social
Security income? For example, if you're retired age 62 and claim your Social Security benefits,
the present value of that Social Security payments could be considered as an asset
being the equivalent to, let's say a TIP. And therefore, you can have more equity.”
(07:17):
All right? So he's saying the fixed income component of his strategy is like a bond.
Al (07:22):
Yeah, so he's taking the Social Security payments and equating that to an asset.
Joe (07:27):
Yeah, he's going to do the present value calculation and calculate it.
Al (07:31):
That's very clever. Okay.
Joe (07:32):
Treasury played a protected security.
Al (07:34):
Right, because it goes up with inflation.
Joe (07:36):
Yeah, look at the big brain on Brian here.
Al (07:37):
Yeah, right.
Joe (07:38):
All right. Let's see, “In contrast, if you retire at age 62, but claim your Social Security
later, let's say at age 70, then you will be reliant on a greater portion of your 401(k)
portfolio for your day to day needs for ages 62 to 69. In this second scenario. You would want
less equity heavy portfolio so the strategy would be to increase your equity holdings the moment
(08:04):
that Social Security payments start flowing even though you are older. More precisely you
should value your Social Security payments as a bond and adjust your allocation based
on the total assets. Is this correct? Another angle on this topic could be considered that
your Social Security payments are probably going to be there when you need them, and therefore,
be more aggressive with equity allocation regardless of when you claim Social Security.”
(08:30):
Brian's doing some spreadsheets, he's doing some math, and he's thinking-
Al (08:33):
He's probably already got it figured out.
Joe (08:35):
He sounds like a smart guy.
Al (08:37):
He wants to see what we think.
Joe (08:38):
Yeah. I've seen a couple of different studies here where the
overall allocation gets more aggressive as someone ages. It was like counterintuitive,
what most, most people think. Right. Because the demand of the portfolio shrinks in some cases.
Al (08:55):
Yeah, and plus the longevity shrinks, too.
Joe (08:58):
Right, so-
Al (08:59):
You don't need it for as long.
Joe (09:01):
Exactly. So then, it's looking at this glide path, they call it. And Michael Kitsis did a study
on this. It was like, alright, well here, this is, you know, the older that- as we age and our fixed
income increases sometimes for some people, their income or their income need decreases as you age.
Al (09:21):
That's true too.
Joe (09:22):
And so the demand of the portfolio- you always, I mean, not always, a good way to
think about your asset allocation and how you're managing the money is what is the demand on the
portfolio? What is the money for? Is it strictly for income? Well, then you're going to have a lot
less growth in the portfolio. If it's like, hey, I need a little bit of income for this,
(09:44):
but I want to make sure that I leverage this so that I have some cash available if I make it to
age100, and then from there it goes to the kids or grandkids or whoever that you want the money
to go to. Right. So it's a little bit more thought of, hey, is it just a 60/40 portfolio or 70/30?
You really want to dive in a little bit deeper to say, what's the demand or what's the money for?
Al (10:04):
Yeah, I’ll tell you what, I do like the idea. I think it's a great idea, but it's not really
how I think about it. I think about it and we think about it as you take your total expenses
and you subtract out your fixed income like Social Security and you end up with a shortfall. And then
you compare your shortfall to the assets that you have to figure out what rate of return you need to
(10:27):
make this work. I think that I mean, although I understand your argument, but I think you
get a better allocation that way because that's your true need on your assets to, to cover that
shortfall. I think that's a, I think that's just a safer, better way to think about this.
Joe (10:44):
Yeah. For instance, you have $1,000,000 portfolio, you need $40,000 from the portfolio.
Like, alright, well how much money should I have in fixed income versus bonds? Right. Well,
you still need that $40,000. Let's say your true income need is $100,000, but $60,000 is
going to come from Social Security or pension. Right. I think what Brian's doing is saying,
(11:05):
alright, well this $60,000 that's coming in as my pension or Social Security or both, you know,
we should count that as a bond. And so that $1,000,000 that I have I should probably have
more stocks because I already have a good fixed income base and I think Alan and I
both agree with that. But you have to look at the shortfall. The $40,000 is really what the
demand for the portfolio is. So if you have $1,000,000, 4% of that $1,000,000
(11:29):
is $40,000. So the allocation should be based on that demand. So maybe you want 10 years of
total fixed income. So you don't care what the market does over the next 10 years. So 40,000
times 10 is $400,000. So then you want like roughly a 60/40 portfolio given that scenario.
Al (11:46):
Yeah. And the other way is to just think about what rate of return do you
need for this portfolio to be sustainable for your lifespan, 25 years, 30 years,
whatever you think it may be. So I think that's a safer way. Although, like I say,
I do get why you came up with this and it's actually quite clever.
Joe (12:02):
Okay, good luck, Brian. Thanks for the email.
Calculate your free Financial Blueprint,
Register for the Risk Management and Retirement Planning webinar
Andi (12:06):
See for yourself how various changes to your financial strategy may impact your retirement nest
egg with our free Financial Blueprint tool. Input your financial details like cash flow, assets,
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Click or tap the Financial Blueprint link in the episode description to get started. Also notice
(12:31):
there in the episode description, the link to register for our Risk Management and Retirement
Planning webinar, happening Wednesday February 26 at noon Pacific, 3pm Eastern time. There’s a lot
going on in the world today - are you concerned about the risks of longevity, inflation, sequence
of returns, interest rates, liquidity, market volatility, and taxes? In this free webinar,
(12:52):
David Cook, CFP® will share actionable strategies to help you manage those risks as you prepare for
retirement. Click or tap the link in the episode description to register for free.
Joe (13:03):
Alright, let's go to Jay. He goes, “Hey, Joe Big Al, Andi, love the show. Thanks for all
what you do. I drive a 2023 Jeep Grand Cherokee. I have a cat named Joe.” Ha!
Al (13:13):
Okay, after you, maybe.
Joe (13:14):
Alright. “When I do drink my drink of choice,
it's 7 and 7. Hope this can be a two for one spitball.” Oh, two for one. Alright.
Al (13:24):
Two questions, maybe.
Joe (13:25):
7 and 7. Seagram7. That's a, is that a bourbon?
Al (13:29):
Yeah, 7Up.
Joe (13:30):
Yeah, my brother used to drink those.
Al (13:34):
That doesn't sound good. If I'm gonna drink it bourbon, I just would drink the bourbon, probably.
Joe (13:39):
Yeah, straight up. Little rocks on there, maybe?
Al (13:43):
Yeah, maybe little rocks, yeah. Are you a fan of like the big rock?
You know, I had one, for the first time in Sydney, and I kind of liked it.
Joe (13:53):
I thought, didn't you have like, don't you make them?
Al (13:56):
I don't make them.
Joe (13:57):
Like, the big ice cubes?
Al (14:00):
No.
Joe (14:00):
Was that you that was talking about that?
Al (14:01):
No, that was someone else.
Joe (14:03):
Oh, okay.
Al (14:03):
That was your other friend named Big Al.
Joe (14:06):
Yeah. Big John.
Al (14:10):
Big John.
Joe (14:10):
Alright, so let's go for the two for one here. “My brother, age 47,
has struggled with addiction and mental illness. He has many low paying jobs. He has never saved
into a 401(k). When our parents passed away two years ago, he received enough money to buy a
small house outright. He's also received shares of stock of about $150,000. This is all he has.
(14:30):
He is able to pay his bill with his current income. Recently, our uncle had passed away.
He will inherit close to $400,000. How should I tell my brother to allocate his money for his
retirement? Currently he's sober. But he has his ups and downs. Would some sort of annuity
be good for him so that the money can grow until he is able to collect Social Security?”
Andi (14:56):
And I'll point out, she says “we will each inherit close
to $400,000.” So her brother will get $400,000 and she will as well.
Joe (15:03):
Yeah, that's what I thought.
Al (15:05):
Yep. Okay, sounds good.
Joe (15:07):
Alright, he's 47 years old. $400,000, he's going to get the cash,
how should he allocate it? So, sometimes we need protection from ourselves.
Al (15:18):
We do.
Joe (15:19):
Even if, I mean, if you have addiction, mental illness, or just perfectly sane,
rational people, right? They continue to make mistakes with their money.
Al (15:28):
It’s true.
Joe (15:28):
So, what, in this situation, Big Al, what do you think?
Al (15:32):
Well-
Joe (15:34):
You like the annuity idea?
Al (15:35):
Not really. I would probably- Gosh, what would I do? I might even open up an account
with a trustee and someone else handle it. So I didn't have access to it. I mean, that may not
be what he wants to do, but that could protect it from himself. I would try to get as much of
(15:56):
it into retirement account as possible. If he has a 401(k), just go ahead and load that up.
Even if he doesn't have enough money to live off of. Instead of living off his paycheck,
he takes a similar amount from the $400,000. So he gets it in a 401(k). I would have him do a
Roth IRA contribution, just try to get as much in the retirement accounts. I would probably,
(16:17):
without knowing anything else, I mean, you always kind of default to a 60% stock, 40% bond portfolio
without knowing anything else. I don't know if that's the right portfolio or not, but
that would be a starting point. But I just would want to, if I were him, I'd want to have maybe
some protection, some barrier to the funds that you'd have to talk to someone to get the funds.
Joe (16:40):
So he bought a house, he's got $150,000 in stock that he inherited two years ago.
Al (16:44):
Yeah.
Joe (16:44):
So it's like, all right, well, if he's letting that ride
to make sure that he can fund his overall retirement, he has some discipline. So-
Al (16:53):
Well, we don't know if he still has it, but he received it.
Joe (16:55):
I suppose, I'm assuming he does.
Al (16:58):
Yeah. Could be.
Joe (16:58):
So at $650,000 that he has at 47, that's a lot of cash that a 47 year old has. I mean,
that's a ton of money. By the age 57, you know, that could be $1,500,000.
Al (17:10):
It could be. Yeah. If you don't touch it.
Joe (17:13):
That could then, you know, help. And then another 10 years at 67. Right. And that could
be $3,000,000. Right. And if it doubles every 10 years, okay. Be assuming that 7%,
then he claims his Social Security. I mean, he could potentially be, you know,
living the exact same lifestyle or maybe at a larger lifestyle in retirement. If he can,
(17:36):
you know, continue to, you know, let the money, grow. So, I don't know. I think you would want
to have a globally diversified low-cost portfolio. I don't like the annuity idea.
Al (17:47):
No, I don't either.
Joe (17:48):
The only time annuity would be good if he goes in there and,
like, I think there's other ways that you can help him without putting it into
a product that's going to blow him up if he tries to touch it prior to 60, you know?
Al (18:02):
Yeah, I mean, at the very least, maybe you find an advisor and you give the advisor the,
so in other words, to get the money, you have to go through the advisor and
if the advisor has instructions from you to not let me take too much, I don't know.
Joe (18:15):
But he took his money, he can do whatever he wants.
Al (18:17):
That's right, and we don't know enough about the situation. I mean,
maybe he's had addiction problems, but maybe he's fine now. And if that's the case,
then just invest it, 60/40, and call it good, probably. Cool.
Joe (18:29):
Alright, now her question.
Al (18:30):
Yeah.
Joe (18:31):
Alright. “If you have time-“oh Joy, we have time. “I just retired from my job at age
56. I'm pretty sure with my retirement accounts, which I do not have to draw,
until it's RMD time. My husband and I are able to take care of our needs on his income
alone of $83,000. I have $520,000 in 401(k)s, $26,000 in Roths, $170,000 in a savings account,
(18:53):
$130,000 in CDs, $40,000 in cash. I will receive a tiny pension of $350 a month and my husband
will receive one in 6 years of about $850 a month. Main home and vacation home are both
paid for. How should I invest my inheritance? Do I put it in a brokerage account? What would the
allocation be? Thank you for making me laugh. I never thought the highlight of my week would be
(19:17):
waiting for a new episode of a financial podcast to come out. Joy.” Wow. That's incredible.
Al (19:25):
Yeah. That's pretty good.
Joe (19:27):
Thanks for the compliment, Joy. I would do the same, Joy. Lowly
diversified low-cost portfolio. Look at how hilarious that was.
Al (19:36):
It was hilarious because it was predictable.
Joe (19:39):
Yeah. I don't, I mean. Yeah, so people get so confused. I think sometimes it's like
they compartmentalize their money. Yeah, so my retirement accounts I'm gonna invest this way
and then I got some CDs and I got some cash and I got some high yield stuff and Oh, then I got
this inheritance. How should I invest that? Look at your entire portfolio. If you've got 401(k)s,
(20:01):
Roth IRAs, your cash accounts, your brokerage accounts, look at your entire portfolio and
say here's the allocation that I want. Here's how much money that I want in cash and safety,
here's how much money that I want to have in stocks, here's how much money that I want to
have in bonds, and then look at it that way. And then if the money's outside of a retirement
account versus inside the retirement account, then you want to look at asset location. Put
(20:23):
your more stock type investments in your brokerage account because you get better
tax advantages. If you have Roth accounts, you want more growth oriented, you know, assets in
those accounts because it's growing tax-free. Your retirement accounts, you want a little bit
more safety. So look at your entire assets as one big portfolio versus saying, well, this is,
(20:43):
you know, his is over here. Mine's over there. Now, should I invest this inheritance differently?
Al (20:49):
Yeah. So 100% agree. That really is the right answer. The right answer is
look at your overall situation, figure out- So what your cashflow needs are going to be,
your husband retires, what that looks like, what you need to be invested in
to get to a certain asset amount to fund your lifestyle. That's really the answer to you. And
you look at everything as a whole instead of in compartments and Joe, you're absolutely right.
Joe (21:13):
Absolutely right.
Al (21:14):
That's what a lot of people-
Joe (21:15):
Absolutely. Right.
Al (21:15):
-in this case. What a lot of people do is they assume of retirement accounts,
they're already set. So now I got this extra money. What should I do with that?
And now you've got to take a step back and look at the whole thing in one fell swoop.
Andi (21:28):
All right. So now we've got a voice message. So this is Mike. He
went to YourMoneyYourWealth.com. He clicked on Ask Joe and Big Al on Air and he left us this.
“Hey y'all, my name is Mike coming to you from the great state of Texas. All right,
so here's the situation. I'll give you the simple things first, I guess. We don't have any pets. I
have a 2024 Silverado 1500 we purchased about a year ago. My wife's got a brand new 2024 Lincoln
(21:54):
Nautilus she just purchased here a couple months ago. And the situation is pretty simple. We have
a pretty good guaranteed income stream coming in about almost $17,000 a month after taxes coming
in between our pensions and I'm military retired and I'm disabled and so forth. So we bring home
about $205,000 a year in retirement. However, only about $140,000 of it's taxable. That being said,
(22:22):
we've got about $1,200,000, $1,300,000 in assets. And most of that's in taxable IRAs. They're both
traditional, so we need to pay the tax on that when we draw it out, and that's what we kind
of do now. I'm drawing about $10,000, $15,000 a year right now to draw that down. And so,
(22:43):
I guess my bigger question is, would it be wiser to do the Roth conversions? And just spend that
money on a cruise or something every year or put it into our trading account in the sense
of a stock broker account. All that being said I’m not sure what's the best idea for us. But
I do know we have about $250,000 in cash. I keep to the side I'm just a cash guy. I like to keep
(23:05):
a lot of cash just in case something happens. That's our thoughts. Give us our spitball. What
you think we should do in the sense of what you would do, I guess. I know you can't give advice,
but something to think about for us. I'd appreciate it. Listen, y'all doing a great
job. All 3 of you. Without one of you, there's not a team. All right, y'all take care. God bless.”
(23:27):
Well thank you Mike.
Joe (23:29):
Mike, Texas.
Al (23:31):
Yeah.
Joe (23:32):
Helluva job. Thank you for your service first of all. Yeah,
do the conversion. And then if you want to take the money out of the account and go
on a vacation- you got $250,000 in cash. But you got a ton of fixed income. He's got a VA
pension. That's coming to him tax-free. He's got $140,000 taxable income. Or
$140,000 that's taxable of the pension. Yeah. So $140,000, let's call it, he's got $110,000 of,
(24:00):
taxable income. I would convert to the top of the 22% tax bracket, which would give him-
Al (24:08):
22%, that would be about $200,000? $207,000. Yeah, I would too. And,
the reason is because with all this fixed income, it's almost like you've already got
a bunch of money in an IRA that's paying out, you're paying ordinary income. So you have a
lot of ordinary income already. So when you get to RMD age, required minimum distribution age,
(24:30):
then you're going to, all of that money is going to be taxed at a higher rate still. So
go ahead and bite the bullet now. Get some of this, get more of this out, probably up to the
22% bracket. So we're talking about, what, close to $100,000 you could do. You've got
the money to pay the tax and go on the cruise. Have fun. You've earned it, man. Just have fun.
Joe (24:52):
Yep, $100,000 conversions. You don't know where tax rates are going to go. If tax rates
go up, you know, just more money of, that hard earned money that you saved is just going to go
to the IRS. So this is a prime conversion case for sure. Very large fixed income,
really good savers, doesn't spend a ton. You know their fixed income is covering their expenses,
(25:14):
he's trying to leak some of their retirement accounts out. You put it into a brokerage account,
you're just going to be taxed at ordinary income. I mean, not ordinary income, but capital gains on
any gains that you have, or if you have short term gains, it's going to be taxed at ordinary income.
If you convert it, you're still paying the same amount of tax if you moved it in your brokerage
account, if you spent the money, or if you put it into a Roth. If you put it into the Roth,
(25:37):
all future growth is going to grow 100% tax-free. So, for sure put it there,
and then if you want to take the money on, go on a cruise later, then do that.
Watch Retirement Rebound on YMYW TV, download the Retirement Income Strategies Guide
Andi (25:48):
A retirement strategy is kinda like a basketball game
take to be nothing but net, but sometimes you miss, and you need a Retirement Rebound. This
week on Your Money, Your Wealth TV, Joe and Big Al show you how four plays can help you turn things
around, get that rebound, and score a comeback. Click the link in the episode description to
watch it now. Plus, after a lifetime of saving, making the transition to retirement means facing
(26:13):
a whole new set of challenges - how are you going to generate income in retirement? Download the
Retirement Income Strategies Guide for 5 questions you need to ask yourself before you retire, the
sources of income available for you in retirement, how to maximize your Social Security benefits,
and how to develop a retirement income strategy that meets your needs. Click
the links in the episode description to watch Retirement Rebound on YMYW TV,
(26:37):
and to download the Retirement Income Strategies Guide for free.
Joe (26:40):
Yeah. Alright, we got Skipper. “Hey guys,
this is Skipper, wife Ginger, both 65.” Where's Gilligan?
Al (26:49):
He didn't make the cut.
Joe (26:51):
Who's your favorite character?
Al (26:53):
MaryAnn.
Joe (26:55):
Not the professor, Mr. or Mrs. Howell? I didn't like, well, I mean,
they were all fun. Gilligan? Yeah, I mean, Goofy. Fun, though.
Andi (27:06):
Yeah. I was gonna say,
that's from a different show. Goofy was not on Gilligan's Island.
Joe (27:09):
He was goofy.
Al (27:10):
He was goofy. I know.
Andi (27:12):
Joe, who's your favorite?
Joe (27:15):
I liked Gilligan. Yeah. He was good.
Andi (27:20):
I was a fan of the professor.
Joe (27:23):
Yeah. Very dapper.
Andi (27:26):
Brainy.
Joe (27:26):
He was able to make telephones out of coconuts,
but they couldn't figure out a way to fix the boat. It's like, what the hell?
Al (27:35):
It's funny how they always had like spare parts to build whatever.
Joe (27:39):
Just whatever, man.
Al (27:39):
Except for a boat.
Joe (27:41):
I mean, he was building AI robots, but still stranded on that island. How'd they ever get off?
Al (27:50):
I don't remember.
Joe (27:52):
Yeah. I don't know if I ever saw the finale.
Al (27:54):
Cause there, there was a, I think there was a movie where they'd gotten off if I remember.
Joe (27:58):
Well, I don't know. Wasn't there like.
Al (28:00):
But they really were, they were in a studio in LA,
so it wasn't, they weren't exactly shipwrecked.
Joe (28:05):
Oh, come on. No, I think they were definitely shipwrecked.
Andi (28:09):
I can't believe you felt the need to say that Al.
Joe (28:11):
Yeah. Well, you know, they were actually in the studio. Are you kidding me?
Al (28:17):
So they, well you asked the question,
how'd they get off? Every night they got off and went home.
Joe (28:21):
I don't think so. Alright.
Al (28:25):
They drove their cars home? No problem.
Joe (28:28):
“First the drinks, we both enjoy California red wines,
and I occasionally enjoy, like a Moscow Old Fashioned.”
Andi (28:37):
Mezcal.
Joe (28:38):
Mezcal, what's that, tequila?
Andi (28:40):
I think it's related, I don't think it's exactly tequila, but I'm not really sure.
Joe (28:44):
All right, “The question relates to Roth conversions versus taking
advantage of the 0% capital gains rate.” Oh, this is a juicy one.
Al (28:52):
Yeah, it could be.
Joe (28:53):
All right. Okay, “We're both mostly retired. I don't have some part- I do have some part time
consulting income. After that fades away in 2025 our ordinary taxable income will
be in the lower end of the 12% tax bracket leaving room to harvest about $70,000 of
long term capital gains each year at the 0% tax bracket until Social Security starts at
(29:16):
age 70 and then RMDs at age 73. Of course, California will take their bite as always,
but we really want to do some significant Roth conversions. As I learned from Big
Al in a prior episode, the first $70,000 of a Roth conversion in those years will have an
effective federal tax rate hit of 27% with the loss of the 0% long term capital gains rate to
(29:43):
15% plus an additional 12% ordinary income from the Roth conversions.” Did you follow all that?
Al (29:49):
Yeah, and I have said that, and that's a true statement.
Joe (29:52):
“I've run an 8-year projection.” Okay. Skipper. Yeah, call the Gilligan up and-“
Al (30:01):
Actually call the professor. He'll be able to tell you if this is a good plan.
Joe (30:06):
My goodness. 8-year projections. “And I'm thinking maybe try and optimize
each year with some heavy long term capital gains and other years of heavy
Roth conversions. Also while keeping an eye on IRMAA tiers, 3.8% net investment, income tax,
plus cashflow to support our lifestyle and the tax on conversion. The dilemma is
(30:28):
that we will make it difficult to reach the Roth conversion target of $800,000, and I really don't
like missing out at the 0% cap gains rate. What do you suggest?” What the hell is he talking about?
Al (30:41):
Well, he's thinking from what I said, he needs to do one or the other in any given year.
Joe (30:47):
Oh, was this the same guy that- Skipper called in before or something?
Andi (30:52):
We've had a number of people that have been from Gilligan's Island,
so I'm not sure if this is the same Skipper.
Joe (30:57):
Okay, so here's his investments.
Al (30:59):
Okay.
Joe (31:00):
“He's got a taxable account of $1,600,000 with $750,000 unrealized long term capital gains.
He's got a retirement account of $2,000,000 and he's got a couple of bucks in a Roth. Plus,
we have a rental house and a primary residence, both with solid equity.”
All right. “Thanks for looking forward to your ideas and the laughs.” All right, well,
(31:28):
this is the only time I think I ever need to know what is in the taxable account.
Like some people give us like ticker symbols and everything else. I'm just kind of ignoring that,
but is this individual stock? Is this just a couple mutual funds? Did he get
lucky and bought Nvidia? Apple? What was this? A magnifi- ? Magnificent. Seven.
Andi (31:51):
The FAANGs?
Al (31:52):
Well, you're, you are right because it depends what the investments are,
whether you need to reallocate.
Joe (32:00):
Right. If there's a lot of concentrated risk you need
to diversify. If it's diversified and they're in decent investments-
Al (32:07):
Yeah, then stick with it and do Roth conversions. All day, all year after year.
Joe (32:12):
Yeah, don't worry about the long term, unless you need the money to live off of. So
the plan that you have to figure out is, all right, well, how much money do I need to take
from the overall portfolio? So. In that case, it's like, all right, well here, maybe you take
enough out of the non-qualified and get that into a high basis area where you can live off
(32:32):
of that money for a couple of years while you're doing the conversions. And you don't necessarily
have to worry about the tax. But there's a lot more analysis, I think, on this, but if you
don't need the non-qualified and it's diversified and good investments, Roth conversions all day.
Al (32:48):
100%. And plus, I mean, so we're talking at the moment,
we're talking about a $1,600,000 taxable estate and less than half of it’s capital gains. What
if that became $2,000,000 or even $3,000,000? You sell it, yeah, you pay capital gains tax,
but not on the whole thing. It's very tax efficient, but the, your problem is you got
(33:08):
almost $2,000,000 in a taxable retirement account. You got to get that over to Roth the best you can,
that needs to be the priority. Unless Joe, as you said, the portfolio is not correctly
allocated. If you need to diversify, then maybe focus on capital gains for a couple of years.
Joe (33:25):
Yeah. If at $1,600,000, let's say if you have a concentrated position or it's not
allocated – I mean that $1,600,000 drops back down to $750,000, I don't know. I bet you'd
been a lot happier to pay some tax, than to look at your balance and say, Oh, I got my basis back
and I could sell it now and I don't have any tax. So you got to look at both here. I mean,
(33:47):
you want to make sure that you have the appropriate diversified portfolio of the entire
estate. So it's almost $4,000,000 of liquid assets that you currently have. Your house is paid for,
you got a rental house, you got Ginger, you got the life. What you're worried about is okay,
some taxes, and do you take advantage of the 0% capital gains rate? Because
(34:07):
in a non-qualified brokerage account, you could sell as long as you stay in the 12%
tax bracket of taxable income, and it's 0%. So he's really loving that 0% cap gains rate.
Al (34:21):
Yeah, I think, and maybe a way to think about this is pick one or the other. Right? If you do
want to diversify and you want to sell some of your assets, then sell enough not only to fill
up the 12% bracket and pay no taxes on that, but then go higher, right? Because you're only paying
15% taxes on that. Don't do Roth conversions that year, but then get your portfolio allocated
(34:43):
properly over a couple of years. Then, if you need to- and then switch to Roth conversions after
that. That's the bigger problem I see, unless you're not diversified. Joe: Yeah. Let's say he's
got $2,000,000 in a retirement account and his RMDs are roughly in 10 years. Let's say that money
doubles. Now it's at $4,000,000. That's $360,000 RMD. Just the RMD alone is going to be taxed at-
(35:06):
Right.
Joe (35:07):
What, 36%? Well, 30%, I mean 32%?
Al (35:10):
Yeah, 32%, as it stands right now, yeah. Well, actually 24%- it's,
we're supposed to be going back to the old rates. So yeah, we don't know.
Joe (35:17):
And then he's gonna have, well, he'll have Social Security.
Al (35:20):
Yeah, true. I mean, he may be approaching 32%. Yeah. Yep, you're right.
Joe (35:24):
So, I don't know, you’re, you might be thinking you're tripping over,
you know, dollars to pick up pennies here.
Al (35:31):
Right.
Joe (35:32):
I want to take advantage of the 0% capital gains when you could pay 15% or you're going to
pay 32% potentially or a lot higher tax on the ordinary income when it's forced out.
Al (35:44):
Right.
Joe (35:44):
The worst thing that happens with very good savers is that they're forced to pay tax
on income they don't need. And those RMDs are just forcing this out and putting all of that income on
your tax return. And then all you're doing is putting it in your brokerage account anyway,
right? And so now you're getting interest and dividends and paying capital gains tax on the
(36:05):
money that you just paid tax. So you're, it's just this tax cycle. So get ahead of it now.
You're 65- conversions, I think is the right answer. But of course, that's just a spitball.
Al (36:18):
Yep.
Joe (36:19):
All right.
Andi (36:19):
And a good spitball it was at that. Funny how Roth conversions often are the answer.
Skipper, thank you for your question. Thank you all for sending in your money questions,
and for watching and listening to us each and every week. Your Money, Your Wealth is
your podcast, and this show wouldn’t be a show without you! If you enjoy YMYW, help us grow
it! Keep sending in your money questions. Leave your honest reviews and ratings for Your Money,
(36:42):
Your Wealth in Apple Podcasts and all the other apps that accept them. Subscribe to
our YouTube channel to watch us do the YMYW podcast, and to join me in the comments. And
tell everyone you know that we’re making fun of finance over here at Your Money, Your Wealth.
Get a Free Financial Assessment today with the experienced professionals on Joe and Big
Al’s team at Pure Financial Advisors, and see if you're on track. They’ll analyze your situation,
(37:06):
identify potential roadblocks, and create a personalized plan to help
you get on the road to where you want to be in retirement. Click or tap the free
assessment link in the episode description or call 888-994-6257 to schedule your assessment
either online or in person at one of our offices all around the country.
Pure Financial Advisors is a registered investment advisor. This show does not
(37:29):
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.
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I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com