December 17, 2024 • 41 mins
John in Pennsylvania doesn’t have bonds in his investment portfolio. Should he add them, and if so, where? That’s today on Your Money, Your Wealth® podcast number 508 with Joe Anderson, CFP® and Big Al Clopine, CPA. The fellas also spitball on retirement plans for James in Tierrasanta, California, who has $4 million plus annuities, Esther in the San Francisco Bay Area, who has nearly $12M net worth, and Tiger and Lioness, who wonder about a safe level of lifestyle creep. Also, Charlie in Castlerock, Colorado has an “exciting” new question on how to balance collecting Social Security with making withdrawals from his pre-tax retirement account for living expenses. And a Worrywart Mom in Seattle asks whether her 27-year-old daughter should focus on paying off her student loans or saving for the future.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Andi (00:00):
John in Pennsylvania doesn’t have bonds in his investment portfolio. Should he add them,
(00:04):
and if so, where? That’s today on Your Money, Your Wealth® podcast number 508. Plus,
Joe and Big Al spitball on retirement plans for James in Tierrasanta, California, who
has $4 million plus annuities, Esther in the San Francisco Bay Area, who has nearly $12M net worth,
and Tiger and Lioness, who wonder about a safe level of lifestyle creep. Also,
(00:25):
Charlie in Castlerock, Colorado has an exciting new question on how to balance collecting Social
Security with making withdrawals from his pre-tax retirement account for living
expenses. And a Worrywart Mom in Seattle asks whether her 27 year old daughter should focus
on paying off her student loans or saving for the future. To ask your money questions,
or to get a Retirement Spitball Analysis of your own, click the link in the episode
(00:48):
description to Ask Joe and Big Al Air. I’m Executive Producer Andi Last, and here are
the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Joe (00:58):
John in PA goes, “Hello Joe, Al, Andi. Long time,
first time. I'm 61 years old and my wife is 58. We don't drink much. When we do,
there'll be some of PA's Yuengling beer.” What's that called again?
Andi (01:13):
I believe it's Yuengling, but I think you did it pretty good on the first shot.
Al (01:17):
Yeah, me too.
Joe (01:19):
“My wife drives a 2024 Lexus 350 Hybrid, and I'm still driving that 2020
Honda Odyssey. I have a question on bonds. We don't have any bonds in our portfolio.
Here's the breakdown of our investments. Joe and Al will be proud of our asset locations.
The assets are equally almost owned by my wife and I. $2,000,000 in 401(k)s. IRAs,
(01:39):
$500,000 in Roth and $200,000 in cash, $3,000,000 in brokerage accounts. None
of these accounts have bonds. We are retiring in 2025 and 2026. Or we are retiring in 2025 and
26. We spend $80,000 a year for our basic needs and we'll want to put another $50,000 to travel.
(02:00):
So we'll need to withdraw $150,000 a year.” Well, $80,000 and $50,000, is not 150,000.
Al (02:06):
Well, I think he's adding more for tax, maybe.
Joe (02:09):
Okay. “We will be in the accumulation phase and not sure where to add bond or
bond funds. Should we put it in the brokerage accounts? Or the tax-deferred
IRA accounts? Will also be doing Roth conversions starting in 2025.” Okay.
Andi (02:26):
That's it. Yep.
Al (02:28):
That's it.
Joe (02:28):
All right. So he wants to know-
Al (02:31):
Yeah. Where do you put the bonds?
Joe (02:32):
Well, he's got $6,000,000, roughly. $5,500,000 of total liquid assets.
Al (02:37):
Yeah.
Joe (02:38):
And a hundred- let's say, well, he wants-
Al (02:41):
If he wants $150,000 into $5,700,000,
it works out to about 2.6% distribution rate. So that's good.
Joe (02:47):
$130,000. He doesn't need bonds if he doesn't want them. Yeah. But.
Al (02:55):
Yeah, some people just don't like ‘em. But if it were me, I would probably favor getting
my distributions out of my taxable account, which wouldn't cause a lot of taxation. So I could do
more Roth conversions, which would mean I might want my bonds in the taxable account. In that
case, I would do Muni bonds. So they're tax-free. That's what I might do in this situation, I guess.
Joe (03:21):
So under the $5,700,000, let’s see- Here's an option. Yeah, I like that Al,
I think I would do in the non-qualified account. So here's the allocation that
might make sense for John, is that he wants to spend $130,000. He says $150,000 so it
(03:47):
doesn't matter, but let's say you put that $150,000, you have 10 years of safe money.
Al (03:53):
Right.
Joe (03:54):
So that's $1,500,000 out of the $5,700,000. So what's that 20%,
25% in bonds? You're still heavily weighted in equity so you're still participating in
the growth? But let's say if the market tanks over the next 10 years, you still have that
safety valve that you can pull that for your income. And you know let your equities recover.
Al (04:13):
Yeah, and someone like this that has no bonds and probably has done well in
his portfolio. Maybe you just do 5 years of, you know, $130,000 times-
Joe (04:22):
Because his burn rate's 2%, right?
Al (04:24):
Right. It's low.
Joe (04:25):
So you could be in all equities there. If you're burn- if your distribution rate was
a little bit higher then you probably want a lot more safety because- But it sounds
like he doesn't. So, he's got a high tolerance for risk if he's never had bonds in his life.
Al (04:39):
Right. That's what I'm thinking.
Joe (04:40):
And he's 60-some-odd years of age.
Al (04:41):
Right.
Joe (04:42):
That’s probably why he's got $5,700,000.
Al (04:44):
Yeah. He's kind of rode things out.
Joe (04:46):
Correct. Yeah. Though his average rate of return over the
last several years has been probably pretty high.
Al (04:50):
Yeah.
Joe (04:51):
So, but, here’s the question I would ask him. If that, let's say, $5,500,000 goes to $3,000,000,
how does he feel? Right. Or, I mean, does he want that $5,500,000 to grow to $10,000,000?
Al (05:05):
Yeah, or another way, another question is,
what did you do during the Great Recession? Did you hold the course? Stay the course? And if so,
then you're probably a good candidate to keep going with equities. However,
it's a little different mentality when you're retired and you don't have the income.
Joe (05:21):
Right. And seeing your accounts drop
as you're pulling $150,000 from the account, you might-
Al (05:27):
Doesn't feel so good.
Joe (05:28):
It doesn't. And you might do things that you may not want to do. So if you're doing
Roth conversions, you probably want to keep the safety in your overall taxable account.
And you might want to go Muni bonds, just to get the tax-free income from that to keep as
much income off the tax return as you possibly can. The other aspect of the non-qualified,
(05:49):
you would want to definitely keep in equity so that you can tax loss harvest and wash out any
capital gains on an annual basis. And then do Roth conversions probably to the top of
the 12% or 22% tax bracket and just pay the tax on the conversion. And you want to do
that for a few years until you get the right balance. Right. I think he's right on his way.
Al (06:07):
Yeah, me too. On the other hand, I'll just say, like, let's say he was 41. For example,
and he wanted bonds for a little less volatility. You'd probably put those in
the IRA and 401(k) because there you don't necessarily want your equities
in high in tax-deferred accounts. Cause you just pay more tax later.
Joe (06:27):
Right. Because all of that, if you get a 10% return in your retirement account, well,
you have to pay ordinary income tax on the 10% return versus if
you get a 10 % return in the Roth, it's tax-free. If you get a 10% return in the,
you know, your brokerage account, it's at a capital gains rate.
Al (06:41):
But the reason why I like the taxable account is because he wants to do distribution.
So that's why I would probably put the bonds there and do Muni bonds.
Joe (06:48):
Right. Because if the market tanks, he's got all equities in his non-qualified account.
Right. Then he's selling stocks to create the income at a loss.
Al (06:55):
Yeah. Right. Right.
Joe (06:56):
That doesn't make a lot of sense.
Al (06:57):
Correct.
Joe (06:58):
Okay. We got Tiger. NotWoods.
Al (07:01):
NotWoods. Okay.
Joe (07:02):
All right. Here we go. “Dear Joe, Big Al, Andi.” Just throw that in there for you.
Andi (07:10):
Well, thanks. Appreciate that.
Joe (07:11):
“Enjoy your Roth heavy content. I am a financial advisor and want a
second opinion and spitball on my current situation.” Okay.
Andi (07:20):
You got advisors asking you for spitballs on their own situations. That's pretty good.
Al (07:25):
I like it.
Joe (07:26):
“We are both 33 years old. I am a- I'm on a health kick and drink a choice of chocolate
protein shakes. My wife needs her morning coffee. We drive an 18- 2018 Ford Explorer
and a 2024 Grand Highlander. My wife works part time and we can combine $240,000 due
(07:49):
to some great single stock returns. We have the following assets.” Okay. So what's he
say? “My wife works part time and we have a combined income of $240,000.”
Al (08:01):
That's what he says.
Joe (08:02):
That's right in there. Okay. And then due to some single stock returns,
he's got a pretty nice portfolio at the age of-
Al (08:08):
I'll say he must have hit a home run on some, on a, one, a stock.
Joe (08:13):
“He's got $1,000,000 in a brokerage account after selling single stock,
paying taxes in April of 2025. He's got $1,000,000 in pre-tax retirement accounts, $850,000 in a Roth
and $375,000 in crypto. Home value is $1,000,000. He's got a $360,000 mortgage at 2.875%.” Wow.
Al (08:32):
If you're keeping track, that's about $3,200,000.
Joe (08:35):
At 33.
Al (08:36):
At 33. Amazing.
Joe (08:39):
Wow.
Andi (08:40):
I wonder, can he retire?
Joe (08:43):
I wonder why he said that.
Al (08:44):
Well, we'll see what his question is.
Joe (08:46):
“Additionally, all 4 of our parents are still living,
ages 65 to 71. But I expect to receive a combined inheritance of $5,000,000-“
Andi (08:53):
- plus-
Joe (08:56):
“- 70% pre-tax between the two families. Our current plan is for my wife to retire when
our kids get out of daycare. That's in 4 years. And me to retire when I reach
$2,800,000 in a taxable account, not including the bitcoin. Two questions. We spend $120,000
a year now after- We spend about $120,000 a year now after a retirement savings of around $40,000
(09:24):
a year. Can I let off the retirement savings to just get employer matches?
Put it in Roth 401(k) and increase our spending by $2000 a month and put the
extra in the taxable brokerage? Whatever you found is a safe level of lifestyle creep on
an annual basis. Thank you for your time and laughter.” Tiger and Lioness. Lioness.
Al (09:49):
Lioness, but Tiger but not Tiger Woods.
Joe (09:52):
No.
Al (09:53):
TigerNotWoods. Well, he wants to retire when he gets reaches $2,800,000 in taxable assets.
Joe (10:02):
So he's got right now $1,400,000?
Al (10:05):
Yeah, $1,400,000. So basically double what he's got right now roughly. Well actually says not
including crypto. So actually he's got $1,000,000. So he'll almost he wants to almost triple that.
Joe (10:18):
Got it.
Al (10:18):
He's probably done his own analysis to figure out that's his magic number.
Joe (10:22):
Sure.
Al (10:22):
So we'll go with that. I mean, that's probably
a good number because tax-deferred will grow. So will Roth IRA grow.
Joe (10:29):
And he's getting $5,000,000, right?
Al (10:32):
Yeah, although I hate to plan that in your own early retirement.
Joe (10:37):
33.
Al (10:37):
Yeah.
Joe (10:38):
I mean, his parents are 60s.
Al (10:40):
And yeah, that's like me. I'm not going anywhere, juniors. huh.
Joe (10:48):
So what's it, what’s the question? “Can I let off the retirement savings
to just get the employer match and put that in the Roth 401(k),
increase our spending by $2000 a month?” So, yeah, I mean-
Al (11:01):
He wants to spend a little more.
Joe (11:03):
So, but, so he's saving $40,000 a year. And he wants to go to $24,000 a
year. Or increase our spending by $2000 a month.
Al (11:14):
Yeah, maybe save about $16,000 a year, plus the employer matches. It's going to mean the
taxable account is going to take a lot longer. Cause there's less savings. Maybe that's okay.
Maybe he works longer. I guess that's what he's thinking. I guess the real question is,
can he spend a little bit more? You got $3,200,000 at 33. Yes, you can spend a
(11:35):
little bit more. I mean, I love the idea of maximizing your savings, but, apparently he
did really well with a certain stock. Here's, this is a concern I have though, Joe, and that is the
overconfidence bias. You know, when you're young and you hit a home run on something,
you think you can keep doing it. And I'm not saying Tiger not Woods can't keep doing it. It's-
(11:57):
just be careful. You hit a home run on something and it's- It may or may not happen again.
Joe (12:06):
He’s 33, he's making more money, wants to spend a little bit more, wants to put up the
foot off the gas and the retirement savings, can he continue to do it? But the funny thing is that,
all right, well, if you, his planned retirement date is not necessarily an age,
it's a number, right? And when it's, when is non-qualified dollars reach $3,000,000.
(12:29):
So he's got to triple his non-qualified dollars, right? And he could do that in probably 20 years.
Al (12:37):
He could.
Joe (12:38):
So now you're 53 years old. But without any savings at all at around,
you know, 6% growth rate, right?
Al (12:47):
I'm wondering if he's saving- if he wants to save a lot less if he's
thinking he'll hit another home run to get to the basically triple the taxable account,
which maybe he will. I'm just saying it's- you do it once it's difficult to keep repeating.
Joe (13:06):
What have you found is a safe level of lifestyle creep? I don't- everyone does and
I don't know if there's a safe level or not. The more money that people make the more they spend.
Al (13:14):
Agreed. I think that's what's common. You make more and you spend
it. That's what's common. Yes, and so the way that, you know, you stay out of
the creep is you put money into 401(k) so you never see it, so you can't spend it.
Joe (13:28):
But, I don't know, Tiger and Lioness doing a hell of a job.
Al (13:32):
Great job. Fantastic. This is, this could be our record for a 33-year-old.
Joe (13:37):
For sure. By far.
Andi (13:39):
There are at least 5 questions you need to ask yourself before you retire,
because after a lifetime of saving, making the transition to retirement means facing a whole
new set of challenges. As we plan today, we face a very different retirement landscape than the ones
our parents saw! We're living longer and may need to rely on that retirement income for much longer.
(13:59):
Download our free Retirement Income Strategies Guide to learn how to answer those five critical
questions before you quit working. This guide outlines the sources of income available for
you in retirement and maximizing your Social Security benefits. It also covers how to develop
a retirement income strategy that meets your needs. Click the link in description of today’s
episode in your favorite podcast app to download the Retirement Income Strategies Guide for free.
Joe (14:23):
We got, Charlie writes in from Castlerock, Colorado.
“Exciting new topic, Social Security versus pre-tax account withdrawals.” Is that you?
Andi (14:33):
No, that's him. He actually wrote that in his email.
Al (14:36):
Exciting new topic.
Joe (14:38):
Wow. Wow. Exciting. “Hi team, love the show, the spitballs and the laughs.
Here's the question I haven't seen you cover. As a standalone decision,
I understand the pros and cons of when to take Social Security.” Yep. All right. “However,
I haven't heard you talk about that decision when a person's other assets are all in pre-tax
accounts. This is my situation. The more I delay Social Security, the more I need to pull out of
(15:02):
my pre-tax accounts, which is taxed at ordinary income. I also lose the benefit of compounding
interest on the money that I pull. I also see that the Social Security COLA has been on average 2.5%,
which I think should be factored in the decision as well. I'm 60, single and want to retire at 61
or 62. I currently make approximately $200,000 a year and I contribute the max of the 401(k)
(15:27):
and receive $6500 contribution from my employer. I have no Roth yet.” Don't kill me, Joe.” Okay,
brother. “I estimate I will need $7000 a month or $84,000 a year in today's dollars in retirement. I
have $1,500,000 in pre-tax retirement accounts and plan to start converting to Roths once I retire.
(15:49):
I have $20,000 in HSA, $50,000 in a brokerage. My house is worth $2,200,000 with 8 years left
on a $200,000 note. My Social Security benefits are at 62, we got $2300 a month. 65 is $3000. 67,
$3500, and 70, $4400. Can you spitball some ideas of when to start taking Social Security given my
(16:13):
above scenario. I drive an older SUV, live in Castle Rock, Colorado, and I'm transitioning
from the Margaritas to a Rye Old Fashion now that the Winter has arrived. Thanks so much,
Charlie.” All right. Let's talk about- so he's got $1,500,000, wants to retire in two years.
(16:35):
He's saving, maxing out his plan. So let's call it. He's got $1,800,000 at 62. He wants to spend-
Al (16:44):
Probably right. I just did current math, $84,000 into $1,500,000,
it's 5.6% distribution rate, but that doesn't include Social Security and tax.
Joe (16:54):
Okay. So what he's forgetting, yeah, there's a COLA. But, there's also- a couple things with
Social Security. If you know how long you're going to live then you can dial this thing to the penny.
Al (17:10):
It'd be easy.
Joe (17:11):
But we don't know how long we're going to live. So the longer you live, the more it makes
sense for you to push this thing out. But that's the advice and that's what the numbers show. But
most people don't do that. A couple of things of why the numbers show that is that each year
that you wait after full retirement age, you get a delayed retirement credit of 8% plus the COLA.
(17:33):
So when you think about hey, well I’m pulling this out. And I'm losing the- there's a cost,
there's a opportunity cost because I'm pulling that money on and spending it. Right. Well,
how do I go about the appropriate claiming strategy? Most people take it early.
Al (17:55):
They do.
Joe (17:55):
Because of that. They want a income stream and they don't want
to take a large distribution out of their retirement account. Because they don't want-
Al (18:04):
They don't see that balance go down, down, down, down-
Joe (18:07):
They like the nest egg.
Al (18:09):
I get it. I get it.
Joe (18:10):
He's done a great job. He's saved $1,500,000. It's like, well,
I want to retire at 62 and he's almost talking himself into taking it early.
Al (18:21):
Even though he's heard we should do, he should do otherwise.
Joe (18:23):
Yes.
Al (18:24):
I think for me it's a bit of a personal choice. When you're single, I think your own
expectation of life expectancy and health really factors into this. Because at you know, are you,
at 60, do you feel like you're gonna live into your 90s or do you feel like you got health issues
and it's not going to be as long. That, that's a factor. And if you're not as healthy, you might
(18:48):
want to take it sooner, and so forth. If you're healthier, you might want to delay it. But here's
another thought, too, is the longer you delay it, not only is the benefit greater in the future, but
you'll have less, potentially, a little bit less income. You could do maybe more Roth conversions.
Joe (19:02):
I don't think he's going to do Roth conversions.
Al (19:04):
Probably not though, because he's going to, with what he needs,
he's going to be in the 20% bracket anyway.
Joe (19:10):
Charlie, I did a little bit of math for you. Let's see if you can get this thing to
$1,800,000. And then once you retire, given your Social Security at age 62, your distribution rate
is going to be roughly around 3%. And so you're going to have a lot more flexibility looking at
that balance. If you don't pull it at 62, you’re going to have a 5%, 5.5%, you know, let's call
(19:34):
it 4.5% to 5% distribution rate, which is 2% higher. Like you're going to see that balance.
And especially at the markets turn on you, you're going to see that balance go down. And can you
handle that? You know, 62 year, just take it. I think that's what he wants to hear. Just take it.
Al (19:55):
Just take it.
Joe (19:56):
Financially speaking it probably doesn't make any sense. But I think emotionally,
that's what you need. You need someone to push you to make a bad investment decision. I'm your guy.
Al (20:08):
I think, I don't know, I still go back to your own health and what your
expectations are. I try to, me personally, I would hold out as long as I could. But if I,
if the market was going down, I saw the balances going down, and that felt terrible,
which of course it would. Maybe I start taking it then, I don't know. It's a, it's really,
it's kind of a longevity insurance, is what Social Security is, if you think about it. Right. I like
(20:33):
it to think about it more that way than a break even. Because the break even, it's like, well you
have to be dead before you know if you, was a good idea or not, and at that point, you don't know.
Joe (20:44):
$4400, 12, so $53,000. If he waits until 70, he's gonna probably have a $60,000 benefit
from Social Security, which would cover probably close to 70% of his living expenses. Yeah. So if
he burns through some of that, those assets, until then, he's gonna have a lot larger fixed income,
(21:10):
and if the, assets continue to burn, I'm sure he would still live a pretty comfortable life.
Al (21:15):
Right, right.
Joe (21:17):
So, But yeah-
Al (21:19):
It's a, it's, I guess, Charlie, it's a bit of a toss-up-
Joe (21:23):
Run the numbers and then you just run worst case scenarios on it and then
you can kind of see what, whatever that you want to stomach. Or you don't take
it and then you wait until the market does something and then you're like,
you know what, I'm just going to pull the trigger and then I'll take it now.
Al (21:39):
It's like, I can't stand it. And then by the way, I mean, every month you wait,
you get a higher benefit, so you don't have to wait till 65 versus 62. Any extra year
or extra few months you wait, you'll have a better benefit. So just be aware of that.
Andi (21:52):
There are over 2700 rules around claiming your Social Security benefits,
so it’s a good idea to really explore all your options before you file. Download our
Social Security Handbook and figure out how to maximize your monthly Social Security payments.
This guide explains who is eligible, how Social Security benefits are calculated,
the difference between collecting early vs. late, working while taking Social Security,
(22:16):
details on spousal, ex-spousal, and survivor benefits, and how your Social Security is taxed.
Click the Social Security Handbook link in the episode description to download yours for free.
Joe (22:27):
We'll move on to Seattle, Washington. We
got a daughter that's a career changer and that worries Mom. She wrote that.
Andi (22:39):
She said, yes, exactly. And she called herself Worrywart Mom.
Joe (22:41):
Worry Wart Mom. Okay. “Hey, a big fan of the pod. Keep up the great work. My 27-year-old had
a career change recently due to a layoff. She's very frugal and has been working hard to save.
This career change has caused some setbacks on her finances since she has to start all over from
(23:04):
the bottom. She's trying to pay off the student loans and save. But feels like one step forward
and two steps back. She's currently paying about $80 to $100 a month towards the student loan.
More whenever she could. She's working toward a certification to advance her career and hoping
she would get a raise soon. Not sure if it's a good idea to just pay off the student loan
(23:26):
with her savings and move on. Any insight and advice on a strategy to help pay off that loan
and start putting money away for the future, like buying a house, saving for retirement,
etc. Your input would be much appreciated. Worry Wart Mom.” All right, so she’s,
the daughter's got “$50,000 salary, monthly expenses of $2200, and student loan at $11,000,
(23:53):
interest rate’s between 3% and 4%. Current savings, $10,000 in a CD, $1500 in a Roth,
$10,000 in a 401(k), and $20,000 in a general savings account.” Okay,
so $48,000. So she's probably got, I don't know what, $500 to $800 extra a month.
Al (24:18):
Yeah, based upon what we're seeing.
Joe (24:24):
Man, she's got like $50,000 some odd already.
Al (24:29):
Yeah, 42. She's doing well, really well. Well, here's what I would say. You
kind of look at what the needs are. So number one, the emergency cash reserves are fine.
Joe (24:43):
It's $30,000.
Al (24:44):
$30,000. Her spending is $26,000. So she's got a year's. So I'm good with that. So,
so make sure you, she at least does the 401(k) to the match. That's a minimum and put it in the
Roth side. If it were me and it was my daughter, I might say, you know, maybe focus on the student
loans that are higher interest rate, like the 4.5% one, get that paid off quicker and make,
(25:10):
you know, make your, make payments on the other ones too, of course, but make the bigger payments
on the higher interest rates. And then to the extent there's any extra money, go back to
the 401(k) or if it makes you feel better, pay more student loan. But that’s what I might do.
Joe (25:26):
401(k) to the match.
Al (25:29):
And then pay off the higher student loans and then you got to probably have
extra money. Probably go back to the 401(k) was probably what I would do. What was she doing?
Joe (25:42):
I don't know. I'm almost thinking about just getting rid of the debt. Just getting rid of
it. She needs $20,000 in cash reserves, she's got $30,000, student loans are $11,000. Maybe
you cut a check for $10,000 and then you pay that thing off the next few months after that,
(26:06):
then that creates more cash than I would fully fund the 401(k) and Roths.
Al (26:11):
Yeah. Seems dramatic. How about this? Why don't you pay off half of it this year
and half next year with earnings. I don't know, you've saved up $30,000,
you've, you were laid off. And a job that looks like-
Joe (26:26):
You shouldn't worry. I guess is the point.
Al (26:28):
And well, I agree. I agree. Mom doesn't need to worry. Yeah, there's plenty here to work with.
Joe (26:33):
Right. Go to the 401(k) to the match and then continue to chip away
at the student loans. I mean, they're 3% and 4.5%. If they're a lot higher-
Al (26:40):
No, it's not bad. There's no tax deduct- well actually there is a little tax deduction for it.
Joe (26:45):
She can continue to, you know, have the rest funnel into savings and then if that savings
account gets to $25,000, take $5000, cut that off and get up the, you know, pay off the debt.
Al (26:53):
Yeah, I like that.
Joe (26:55):
Alright, cool question. Thanks for, thanks for that. Hopefully that helped.
Alright, we are in the San Francisco Bay with Esther. My, my grandmother's name was Esther.
Al (27:08):
Really?
Joe (27:09):
Yeah, my sister's middle name is Esther. Didn't spell it that way, though.
Al (27:13):
No.
Joe (27:14):
There's an A in there, I think, somewhere. Okay. All right. Anyway,
Esther. “My husband is 51 and retired this year. Now a house husband.” At 51.
Al (27:25):
Wow. That's, there's hope for you.
Joe (27:28):
Here we come. Let's go. “I'm 47 and waiting to retire until I hit 49.” Wow.
Al (27:35):
Two years.
Joe (27:36):
“We have a 10 and 14 year old. 529 plans to cover 4 years of a state public school,
I'm going to us- I'm going on sabbatical next summer and I might not want to come
back to work after I get back. Can I pull this off? Net worth $11,800,000” Yep, you're good.
Al (27:53):
Next question.
Joe (27:57):
“Real estate, primary home, paid off, $2,600,000, investment properties,
$2,700,000. We get positive cash flow from them. They got 401(k) accounts of $3,500,000 Roth IRAs.
And Roth 401(k)s of $600,000, brokerage accounts of $2,200,000 and cash of $350,000. Estimated
(28:18):
expenses in retirement, padded for ACA premiums and cushy vacations, $21,000 a month. Currently
working annual salaries, approximately $360,000, including the bonus, and about a $100,000 in
annual RSVs that vest. We will only have 30 years of work on our Social Security numbers. So I think
(28:40):
we'll be around $3300 each at age 67. Also, my husband gets a pension around $46,000, no COLA
at the age of 65. Mentally, I have one foot out the door from work. If things go south at work,
I don't want to be trolling on LinkedIn looking for a job.” Well, you're one foot out the door.
Al (29:02):
ha. It doesn't necessarily go back.
Joe (29:05):
She's cashed in.
Al (29:06):
Yep, I was going to say, $6,600,000 of liquid assets. $11,800,000. You can
do almost anything you want. So, but just to put a couple numbers to this.
Joe (29:20):
1000 x 12 is 252.03 is 8.4.
Al (29:28):
What are you doing? Oh, the 3%?
Joe (29:31):
Yep.
Al (29:32):
Yeah, so I did it the other way. I just said, what's the burn rate? It's 3.8%. Okay.
But I don't know what the positive cashflow is. So here's what I did, Joe. I said, okay,
well, you got a piece of rental property with $2,000,000 of equity. What if it's
3%? I don't know what it is. What 3% $60,000. If I take $60,000 off the $250,000 needed,
(29:56):
I get $190,000. That's a 2.9% burn rate at 50. I'm good with that. Plus the other thing too,
is with this amount of assets, it's- If you need to cut your cushy vacations one year, you can do
it. I mean, that's worth not having to go back to a job you don't want to go back to, I would say.
Joe (30:14):
Yeah. What would you do? What we, do with your time? Yeah, that,
that's another question. I'd have trouble with that at 51 or 49 in our case. I think,
as you know, I was thinking that when I was that age and I,
of course the real estate market changed my mind, but even still now being older,
(30:40):
it's like, I don't know what I would have done at 50 without something to do. I don't know.
Yeah, I went to the doctor yesterday, got my physical. Yeah,
and then they're like, what- any other hobbies besides golf?
Al (31:00):
Really?
Joe (31:02):
I'm like, yeah, I like to spend hang out with my family.
Al (31:05):
Yeah. Okay. Sure.
Joe (31:06):
Well, what do you guys do?
I don't know. We kind of hang out.
Al (31:09):
Yep.
Joe (31:10):
Suggesting I don't have enough hobbies. I mean, you know-
Andi (31:15):
Is he saying that you need more exercise?
Joe (31:17):
No.
Al (31:18):
No Well, you can't- you have to have more than golf.
Like you gotta volunteer or you gotta have some, something to get up to where you-
Joe (31:24):
Wait, what, Andi, what was that comment? You think I'm-
Andi (31:27):
No, well, I was figuring if they were asking you, do you have any other hobbies,
that maybe it was because you're spending too much time being sedentary or something
like that? And he was suggesting that you need to-
Al (31:36):
No, I don't think it's that. I think they're, he's a, he is a, what do you,
what would you call Joe? Hard charger? That's my term. And if he's not working, what happens?
Joe (31:46):
Yeah, right. It's like, I don't know. I’d blow myself up.
Al (31:50):
Yeah, it's actually, to me, that's the bigger question is when you're used to working really
hard and being productive to all of a sudden not work,
it can be a little tricky. Yeah. I think that's the bigger issue here.
Joe (32:05):
But it sounds like they got cushy vacations to look forward to. So,
congratulations on all the wealth and the well-being.
Al (32:13):
Yeah, for sure.
Joe; You're one foot out the door. If you're one foot out the door, just get out the door.
Yeah, just do it.
Joe (32:19):
I mean, you're just not doing anyone any good here. You're just kind of milking that $360,000,
right? And you're miserable, going to work every day. It's like, you got enough assets, why don't
you find something that you're really passionate about, then make a little bit less money.
Al (32:30):
Right, and, if you, retire and you can't find something you're passionate about,
you know what, go back to work, get another job. Whatever, but yeah,
if you want to give it a try, you've got the assets to do it.
Andi (32:41):
There so many factors to take into account when forecasting your financial future
required minimum distributions, asset allocation, stock market declines, Social Security and
Medicare, long-term care and estate planning, and many others. After 40-plus years saving for
retirement, the last thing that you want to do is sabotage all your hard work with unrealistic
(33:03):
expectations, market miscalculations, or planning missteps once you retire! Watch Retirement
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from Joe Anderson, CFP® and Big Al Clopine, CPA key tips and tricks to avoid sabotaging
yourself. Download the Retirement Readiness Guide for 7 plays to help you get retirement ready,
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(33:31):
watch YMYW TV, download the Retirement Readiness Gide, and access other financial resources,
all free, all courtesy of Your Money, Your Wealth and Pure Financial Advisors.
Joe (33:40):
All right, we got James, he writes in, he goes, “Hey Joe, Al, Andi,
I enjoy your podcast while walking the peaceful neighborhood and local trails and canyons.”
Andi (33:49):
I forgot to mention that James is actually from Tierrasanta here in
San Diego. He did actually put that in his email. So-
Al (33:55):
Okay.
Joe (33:56):
Oh, Tierrasanta. It's just down the street.
Al (33:57):
Yeah, right. Okay.
Joe (34:00):
Alrighty. “On special occasions, my wife and I enjoy a little iced Thai tea with boba.”
Al (34:08):
Never heard of Thai tea with boba?
Joe (34:10):
No, sir. Never heard of it. “- while exploring the fantastic Convoy
area restaurants.” All right. I've been down Convoy Street. “But I'm planning
to retire next year when we turned 60 and thought we would request some advice, or,
I mean, a spitball from you while we chew on our boba.” You chew on boba.
Andi (34:33):
Boba is little, like, chewy little,
gelatinous pearls that go into the bottom of iced tea drinks.
Al (34:40):
Yeah, it's like tapioca in your tea.
Andi (34:43):
Yeah.
Joe (34:43):
Tapioca?
Al (34:44):
Yeah.
Joe (34:44):
That's what that's like.
Al (34:46):
It's like they put different spices and they it's got a little milk in it.
They have these little yeah pearls, Andi. I mean, it's what I've not had
it. I've heard. It's like tapioca. So you're drinking. You're drinking your-
Joe (34:59):
When I think of tapioca, I’m thinking like pudding. Not pearls.
Al (35:03):
Well, you know, tapioca has those little pearls in it. You
take out the pudding part and just put the pearl-
Joe (35:12):
So it's a pearl before it becomes pudding?
Al (35:14):
I think so.
Joe (35:15):
I got it.
Al (35:16):
I actually, I've never had one. I just have seen people with it.
Andi (35:20):
I love Thai tea, but I do not put boba in it.
Joe (35:26):
All right. Okay. “We estimate we'd like our annual retirement income to be $180,000.
Next year, we have $2,000,000 in our 401(k)s and $2,000,000 in a deferred compensation
account that can be rolled over into an IRA upon retirement. My family history suggests that I've
got the longevity gene. We're both in good health, so we've been taking advantage of the
(35:48):
normalization of rates over the last two years and purchased a couple of annuities with GLWBs,
Guaranteed Life Withdrawal Benefits, for longevity insurance, one which will turn
on when we are age 65 at $47,000 a year, and another that will turn on at age 70 for $28,000
(36:10):
a year. We're planning on waiting until 70 to turn on Social Security, which we estimate will
be $50,000 a year combined. In our 60s, we plan on aggressively converting to Roth IRAs,
our combined $4,000,000 pre-tax 401(k) plus deferred comp before RMDs kick in at age 73.
(36:32):
I know this is just a spitball. What do you think of our retirement plan? Do you think it can work?
Or do you think one of us should plan on working for a few more years in our 60s? Thanks for your
very entertaining financial education. You 3 are great.” All right, cool. Thanks, Dave.
Al (36:53):
That's nice.
Joe (36:54):
All right, first of all, you got a lot of assets, but I don't like these guaranteed GLWBs.
Al (37:03):
Lifetime withdrawal benefit?
Joe (37:08):
Mmmm.
Al (37:08):
Mmmm. Why don't you like them?
Joe (37:10):
Because the insurance company always wins.
Al (37:12):
They do seem to win a lot, don't they?
Joe (37:14):
Yes, they do. I understand you have-
Al (37:17):
But if she lives a long time, maybe she wins.
Joe (37:20):
It's a he, James.
Al (37:23):
Okay, sorry. He.
Joe (37:24):
Yeah, it's fine. It is what it is. They bought the insurance. So,
$65,000. They want to spend $180,000. They have, what, $4,000,000 liquid right now?
Al (37:34):
Yeah. 4% on that would be $160,000. They're basically there. That doesn't
include Social Security, and it certainly doesn't include
the guaranteed income. Once you add that in, they got, they have plenty of money.
Joe (37:47):
Yeah, I think their guaranteed income is going to be, what, $120,000?
Al (37:50):
Yeah, call it $125,000 out of $180,000, right? Right. So,
and then you got $4 million to produce, we'll call it $60,000.
Joe (37:59):
Yeah. Yeah, it's fine. But I would consider that the annuities as your fixed income or bonds.
So I would probably take on a little bit more risk in the overall liquid assets because you have a
pretty high floor in regards to fixed income. So, right. If you think of those guaranteed
annuities as your bond allocation, I mean you still will have a quite a bit of liquidity and
(38:23):
then do conversions up until 65 until that first annuity kicks in. Yeah, and I take a look at where
tax brackets are but they don't have a ton of money in non-qualified accounts. It looks like,
Al (38:33):
No, they don't. It's all tax-deferred. I mean almost all.
Joe (38:38):
So- I wonder where those annuities came from.
Were they non-qualified dollars or were they qualified? So when you do the conversions,
you just gotta be careful of where you're pulling the tax.
Al (38:52):
Right, right, right.
Joe (38:53):
Is it gonna work? Yeah, it'll work.
Al (38:55):
Anyway, the question is, do you, what do you think our retirement plan,
do we need to go back to work? The answer is no. You got plenty here.
Joe (39:01):
Do I like the plan?
Al (39:04):
That wasn't what they asked.
Joe (39:06):
Okay, then I'll just shut up.
Al (39:07):
Well, actually, he did want you to spitball. So you don't really like the annuity.
Joe (39:11):
No. Why do you think it's a she? Because of the tapioca?
Al (39:14):
I don't know. Maybe. Sorry, James.
Andi (39:23):
Well, it is James and his wife.
Joe (39:27):
Yeah, it's James and his wife.
Al (39:29):
Yeah, it's just based on this one.
Joe (39:31):
Yeah, alright. Well, no, I think the plan works. Don't love it. But think it works.
Al (39:38):
Yeah, me too.
Joe (39:38):
All right, way to go. Congrats James. Show’s called Your Money, Your Wealth®.
Andi (39:42):
Richie and Heather, Rebecca and Sam, and P. Ware, I’ve asked Joe and Big Al to
spitball on your questions on when to claim Social Security, what to do with an annuity,
reasonable financial advisor fees, and of course, Roth conversions, next week in YMYW
podcast episode 509. We appreciate you watching us on YouTube and Spotify, and listening on
(40:03):
Apple Podcasts and all the other podcast apps. Tell your friends and join us then, won’t you?
Time flies, especially when it comes to planning for retirement at year-end.
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(40:26):
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(40:52):
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in the podcast in the process of making a full and informed investment decision.
John in Pennsylvania doesn’t have bonds in his investment portfolio. Should he add them,
(00:04):
and if so, where? That’s today on Your Money, Your Wealth® podcast number 508. Plus,
Joe and Big Al spitball on retirement plans for James in Tierrasanta, California, who
has $4 million plus annuities, Esther in the San Francisco Bay Area, who has nearly $12M net worth,
and Tiger and Lioness, who wonder about a safe level of lifestyle creep. Also,
(00:25):
Charlie in Castlerock, Colorado has an exciting new question on how to balance collecting Social
Security with making withdrawals from his pre-tax retirement account for living
expenses. And a Worrywart Mom in Seattle asks whether her 27 year old daughter should focus
on paying off her student loans or saving for the future. To ask your money questions,
or to get a Retirement Spitball Analysis of your own, click the link in the episode
(00:48):
description to Ask Joe and Big Al Air. I’m Executive Producer Andi Last, and here are
the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Joe (00:58):
John in PA goes, “Hello Joe, Al, Andi. Long time,
first time. I'm 61 years old and my wife is 58. We don't drink much. When we do,
there'll be some of PA's Yuengling beer.” What's that called again?
Andi (01:13):
I believe it's Yuengling, but I think you did it pretty good on the first shot.
Al (01:17):
Yeah, me too.
Joe (01:19):
“My wife drives a 2024 Lexus 350 Hybrid, and I'm still driving that 2020
Honda Odyssey. I have a question on bonds. We don't have any bonds in our portfolio.
Here's the breakdown of our investments. Joe and Al will be proud of our asset locations.
The assets are equally almost owned by my wife and I. $2,000,000 in 401(k)s. IRAs,
(01:39):
$500,000 in Roth and $200,000 in cash, $3,000,000 in brokerage accounts. None
of these accounts have bonds. We are retiring in 2025 and 2026. Or we are retiring in 2025 and
26. We spend $80,000 a year for our basic needs and we'll want to put another $50,000 to travel.
(02:00):
So we'll need to withdraw $150,000 a year.” Well, $80,000 and $50,000, is not 150,000.
Al (02:06):
Well, I think he's adding more for tax, maybe.
Joe (02:09):
Okay. “We will be in the accumulation phase and not sure where to add bond or
bond funds. Should we put it in the brokerage accounts? Or the tax-deferred
IRA accounts? Will also be doing Roth conversions starting in 2025.” Okay.
Andi (02:26):
That's it. Yep.
Al (02:28):
That's it.
Joe (02:28):
All right. So he wants to know-
Al (02:31):
Yeah. Where do you put the bonds?
Joe (02:32):
Well, he's got $6,000,000, roughly. $5,500,000 of total liquid assets.
Al (02:37):
Yeah.
Joe (02:38):
And a hundred- let's say, well, he wants-
Al (02:41):
If he wants $150,000 into $5,700,000,
it works out to about 2.6% distribution rate. So that's good.
Joe (02:47):
$130,000. He doesn't need bonds if he doesn't want them. Yeah. But.
Al (02:55):
Yeah, some people just don't like ‘em. But if it were me, I would probably favor getting
my distributions out of my taxable account, which wouldn't cause a lot of taxation. So I could do
more Roth conversions, which would mean I might want my bonds in the taxable account. In that
case, I would do Muni bonds. So they're tax-free. That's what I might do in this situation, I guess.
Joe (03:21):
So under the $5,700,000, let’s see- Here's an option. Yeah, I like that Al,
I think I would do in the non-qualified account. So here's the allocation that
might make sense for John, is that he wants to spend $130,000. He says $150,000 so it
(03:47):
doesn't matter, but let's say you put that $150,000, you have 10 years of safe money.
Al (03:53):
Right.
Joe (03:54):
So that's $1,500,000 out of the $5,700,000. So what's that 20%,
25% in bonds? You're still heavily weighted in equity so you're still participating in
the growth? But let's say if the market tanks over the next 10 years, you still have that
safety valve that you can pull that for your income. And you know let your equities recover.
Al (04:13):
Yeah, and someone like this that has no bonds and probably has done well in
his portfolio. Maybe you just do 5 years of, you know, $130,000 times-
Joe (04:22):
Because his burn rate's 2%, right?
Al (04:24):
Right. It's low.
Joe (04:25):
So you could be in all equities there. If you're burn- if your distribution rate was
a little bit higher then you probably want a lot more safety because- But it sounds
like he doesn't. So, he's got a high tolerance for risk if he's never had bonds in his life.
Al (04:39):
Right. That's what I'm thinking.
Joe (04:40):
And he's 60-some-odd years of age.
Al (04:41):
Right.
Joe (04:42):
That’s probably why he's got $5,700,000.
Al (04:44):
Yeah. He's kind of rode things out.
Joe (04:46):
Correct. Yeah. Though his average rate of return over the
last several years has been probably pretty high.
Al (04:50):
Yeah.
Joe (04:51):
So, but, here’s the question I would ask him. If that, let's say, $5,500,000 goes to $3,000,000,
how does he feel? Right. Or, I mean, does he want that $5,500,000 to grow to $10,000,000?
Al (05:05):
Yeah, or another way, another question is,
what did you do during the Great Recession? Did you hold the course? Stay the course? And if so,
then you're probably a good candidate to keep going with equities. However,
it's a little different mentality when you're retired and you don't have the income.
Joe (05:21):
Right. And seeing your accounts drop
as you're pulling $150,000 from the account, you might-
Al (05:27):
Doesn't feel so good.
Joe (05:28):
It doesn't. And you might do things that you may not want to do. So if you're doing
Roth conversions, you probably want to keep the safety in your overall taxable account.
And you might want to go Muni bonds, just to get the tax-free income from that to keep as
much income off the tax return as you possibly can. The other aspect of the non-qualified,
(05:49):
you would want to definitely keep in equity so that you can tax loss harvest and wash out any
capital gains on an annual basis. And then do Roth conversions probably to the top of
the 12% or 22% tax bracket and just pay the tax on the conversion. And you want to do
that for a few years until you get the right balance. Right. I think he's right on his way.
Al (06:07):
Yeah, me too. On the other hand, I'll just say, like, let's say he was 41. For example,
and he wanted bonds for a little less volatility. You'd probably put those in
the IRA and 401(k) because there you don't necessarily want your equities
in high in tax-deferred accounts. Cause you just pay more tax later.
Joe (06:27):
Right. Because all of that, if you get a 10% return in your retirement account, well,
you have to pay ordinary income tax on the 10% return versus if
you get a 10 % return in the Roth, it's tax-free. If you get a 10% return in the,
you know, your brokerage account, it's at a capital gains rate.
Al (06:41):
But the reason why I like the taxable account is because he wants to do distribution.
So that's why I would probably put the bonds there and do Muni bonds.
Joe (06:48):
Right. Because if the market tanks, he's got all equities in his non-qualified account.
Right. Then he's selling stocks to create the income at a loss.
Al (06:55):
Yeah. Right. Right.
Joe (06:56):
That doesn't make a lot of sense.
Al (06:57):
Correct.
Joe (06:58):
Okay. We got Tiger. NotWoods.
Al (07:01):
NotWoods. Okay.
Joe (07:02):
All right. Here we go. “Dear Joe, Big Al, Andi.” Just throw that in there for you.
Andi (07:10):
Well, thanks. Appreciate that.
Joe (07:11):
“Enjoy your Roth heavy content. I am a financial advisor and want a
second opinion and spitball on my current situation.” Okay.
Andi (07:20):
You got advisors asking you for spitballs on their own situations. That's pretty good.
Al (07:25):
I like it.
Joe (07:26):
“We are both 33 years old. I am a- I'm on a health kick and drink a choice of chocolate
protein shakes. My wife needs her morning coffee. We drive an 18- 2018 Ford Explorer
and a 2024 Grand Highlander. My wife works part time and we can combine $240,000 due
(07:49):
to some great single stock returns. We have the following assets.” Okay. So what's he
say? “My wife works part time and we have a combined income of $240,000.”
Al (08:01):
That's what he says.
Joe (08:02):
That's right in there. Okay. And then due to some single stock returns,
he's got a pretty nice portfolio at the age of-
Al (08:08):
I'll say he must have hit a home run on some, on a, one, a stock.
Joe (08:13):
“He's got $1,000,000 in a brokerage account after selling single stock,
paying taxes in April of 2025. He's got $1,000,000 in pre-tax retirement accounts, $850,000 in a Roth
and $375,000 in crypto. Home value is $1,000,000. He's got a $360,000 mortgage at 2.875%.” Wow.
Al (08:32):
If you're keeping track, that's about $3,200,000.
Joe (08:35):
At 33.
Al (08:36):
At 33. Amazing.
Joe (08:39):
Wow.
Andi (08:40):
I wonder, can he retire?
Joe (08:43):
I wonder why he said that.
Al (08:44):
Well, we'll see what his question is.
Joe (08:46):
“Additionally, all 4 of our parents are still living,
ages 65 to 71. But I expect to receive a combined inheritance of $5,000,000-“
Andi (08:53):
- plus-
Joe (08:56):
“- 70% pre-tax between the two families. Our current plan is for my wife to retire when
our kids get out of daycare. That's in 4 years. And me to retire when I reach
$2,800,000 in a taxable account, not including the bitcoin. Two questions. We spend $120,000
a year now after- We spend about $120,000 a year now after a retirement savings of around $40,000
(09:24):
a year. Can I let off the retirement savings to just get employer matches?
Put it in Roth 401(k) and increase our spending by $2000 a month and put the
extra in the taxable brokerage? Whatever you found is a safe level of lifestyle creep on
an annual basis. Thank you for your time and laughter.” Tiger and Lioness. Lioness.
Al (09:49):
Lioness, but Tiger but not Tiger Woods.
Joe (09:52):
No.
Al (09:53):
TigerNotWoods. Well, he wants to retire when he gets reaches $2,800,000 in taxable assets.
Joe (10:02):
So he's got right now $1,400,000?
Al (10:05):
Yeah, $1,400,000. So basically double what he's got right now roughly. Well actually says not
including crypto. So actually he's got $1,000,000. So he'll almost he wants to almost triple that.
Joe (10:18):
Got it.
Al (10:18):
He's probably done his own analysis to figure out that's his magic number.
Joe (10:22):
Sure.
Al (10:22):
So we'll go with that. I mean, that's probably
a good number because tax-deferred will grow. So will Roth IRA grow.
Joe (10:29):
And he's getting $5,000,000, right?
Al (10:32):
Yeah, although I hate to plan that in your own early retirement.
Joe (10:37):
33.
Al (10:37):
Yeah.
Joe (10:38):
I mean, his parents are 60s.
Al (10:40):
And yeah, that's like me. I'm not going anywhere, juniors. huh.
Joe (10:48):
So what's it, what’s the question? “Can I let off the retirement savings
to just get the employer match and put that in the Roth 401(k),
increase our spending by $2000 a month?” So, yeah, I mean-
Al (11:01):
He wants to spend a little more.
Joe (11:03):
So, but, so he's saving $40,000 a year. And he wants to go to $24,000 a
year. Or increase our spending by $2000 a month.
Al (11:14):
Yeah, maybe save about $16,000 a year, plus the employer matches. It's going to mean the
taxable account is going to take a lot longer. Cause there's less savings. Maybe that's okay.
Maybe he works longer. I guess that's what he's thinking. I guess the real question is,
can he spend a little bit more? You got $3,200,000 at 33. Yes, you can spend a
(11:35):
little bit more. I mean, I love the idea of maximizing your savings, but, apparently he
did really well with a certain stock. Here's, this is a concern I have though, Joe, and that is the
overconfidence bias. You know, when you're young and you hit a home run on something,
you think you can keep doing it. And I'm not saying Tiger not Woods can't keep doing it. It's-
(11:57):
just be careful. You hit a home run on something and it's- It may or may not happen again.
Joe (12:06):
He’s 33, he's making more money, wants to spend a little bit more, wants to put up the
foot off the gas and the retirement savings, can he continue to do it? But the funny thing is that,
all right, well, if you, his planned retirement date is not necessarily an age,
it's a number, right? And when it's, when is non-qualified dollars reach $3,000,000.
(12:29):
So he's got to triple his non-qualified dollars, right? And he could do that in probably 20 years.
Al (12:37):
He could.
Joe (12:38):
So now you're 53 years old. But without any savings at all at around,
you know, 6% growth rate, right?
Al (12:47):
I'm wondering if he's saving- if he wants to save a lot less if he's
thinking he'll hit another home run to get to the basically triple the taxable account,
which maybe he will. I'm just saying it's- you do it once it's difficult to keep repeating.
Joe (13:06):
What have you found is a safe level of lifestyle creep? I don't- everyone does and
I don't know if there's a safe level or not. The more money that people make the more they spend.
Al (13:14):
Agreed. I think that's what's common. You make more and you spend
it. That's what's common. Yes, and so the way that, you know, you stay out of
the creep is you put money into 401(k) so you never see it, so you can't spend it.
Joe (13:28):
But, I don't know, Tiger and Lioness doing a hell of a job.
Al (13:32):
Great job. Fantastic. This is, this could be our record for a 33-year-old.
Joe (13:37):
For sure. By far.
Andi (13:39):
There are at least 5 questions you need to ask yourself before you retire,
because after a lifetime of saving, making the transition to retirement means facing a whole
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(13:59):
Download our free Retirement Income Strategies Guide to learn how to answer those five critical
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you in retirement and maximizing your Social Security benefits. It also covers how to develop
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Joe (14:23):
We got, Charlie writes in from Castlerock, Colorado.
“Exciting new topic, Social Security versus pre-tax account withdrawals.” Is that you?
Andi (14:33):
No, that's him. He actually wrote that in his email.
Al (14:36):
Exciting new topic.
Joe (14:38):
Wow. Wow. Exciting. “Hi team, love the show, the spitballs and the laughs.
Here's the question I haven't seen you cover. As a standalone decision,
I understand the pros and cons of when to take Social Security.” Yep. All right. “However,
I haven't heard you talk about that decision when a person's other assets are all in pre-tax
accounts. This is my situation. The more I delay Social Security, the more I need to pull out of
(15:02):
my pre-tax accounts, which is taxed at ordinary income. I also lose the benefit of compounding
interest on the money that I pull. I also see that the Social Security COLA has been on average 2.5%,
which I think should be factored in the decision as well. I'm 60, single and want to retire at 61
or 62. I currently make approximately $200,000 a year and I contribute the max of the 401(k)
(15:27):
and receive $6500 contribution from my employer. I have no Roth yet.” Don't kill me, Joe.” Okay,
brother. “I estimate I will need $7000 a month or $84,000 a year in today's dollars in retirement. I
have $1,500,000 in pre-tax retirement accounts and plan to start converting to Roths once I retire.
(15:49):
I have $20,000 in HSA, $50,000 in a brokerage. My house is worth $2,200,000 with 8 years left
on a $200,000 note. My Social Security benefits are at 62, we got $2300 a month. 65 is $3000. 67,
$3500, and 70, $4400. Can you spitball some ideas of when to start taking Social Security given my
(16:13):
above scenario. I drive an older SUV, live in Castle Rock, Colorado, and I'm transitioning
from the Margaritas to a Rye Old Fashion now that the Winter has arrived. Thanks so much,
Charlie.” All right. Let's talk about- so he's got $1,500,000, wants to retire in two years.
(16:35):
He's saving, maxing out his plan. So let's call it. He's got $1,800,000 at 62. He wants to spend-
Al (16:44):
Probably right. I just did current math, $84,000 into $1,500,000,
it's 5.6% distribution rate, but that doesn't include Social Security and tax.
Joe (16:54):
Okay. So what he's forgetting, yeah, there's a COLA. But, there's also- a couple things with
Social Security. If you know how long you're going to live then you can dial this thing to the penny.
Al (17:10):
It'd be easy.
Joe (17:11):
But we don't know how long we're going to live. So the longer you live, the more it makes
sense for you to push this thing out. But that's the advice and that's what the numbers show. But
most people don't do that. A couple of things of why the numbers show that is that each year
that you wait after full retirement age, you get a delayed retirement credit of 8% plus the COLA.
(17:33):
So when you think about hey, well I’m pulling this out. And I'm losing the- there's a cost,
there's a opportunity cost because I'm pulling that money on and spending it. Right. Well,
how do I go about the appropriate claiming strategy? Most people take it early.
Al (17:55):
They do.
Joe (17:55):
Because of that. They want a income stream and they don't want
to take a large distribution out of their retirement account. Because they don't want-
Al (18:04):
They don't see that balance go down, down, down, down-
Joe (18:07):
They like the nest egg.
Al (18:09):
I get it. I get it.
Joe (18:10):
He's done a great job. He's saved $1,500,000. It's like, well,
I want to retire at 62 and he's almost talking himself into taking it early.
Al (18:21):
Even though he's heard we should do, he should do otherwise.
Joe (18:23):
Yes.
Al (18:24):
I think for me it's a bit of a personal choice. When you're single, I think your own
expectation of life expectancy and health really factors into this. Because at you know, are you,
at 60, do you feel like you're gonna live into your 90s or do you feel like you got health issues
and it's not going to be as long. That, that's a factor. And if you're not as healthy, you might
(18:48):
want to take it sooner, and so forth. If you're healthier, you might want to delay it. But here's
another thought, too, is the longer you delay it, not only is the benefit greater in the future, but
you'll have less, potentially, a little bit less income. You could do maybe more Roth conversions.
Joe (19:02):
I don't think he's going to do Roth conversions.
Al (19:04):
Probably not though, because he's going to, with what he needs,
he's going to be in the 20% bracket anyway.
Joe (19:10):
Charlie, I did a little bit of math for you. Let's see if you can get this thing to
$1,800,000. And then once you retire, given your Social Security at age 62, your distribution rate
is going to be roughly around 3%. And so you're going to have a lot more flexibility looking at
that balance. If you don't pull it at 62, you’re going to have a 5%, 5.5%, you know, let's call
(19:34):
it 4.5% to 5% distribution rate, which is 2% higher. Like you're going to see that balance.
And especially at the markets turn on you, you're going to see that balance go down. And can you
handle that? You know, 62 year, just take it. I think that's what he wants to hear. Just take it.
Al (19:55):
Just take it.
Joe (19:56):
Financially speaking it probably doesn't make any sense. But I think emotionally,
that's what you need. You need someone to push you to make a bad investment decision. I'm your guy.
Al (20:08):
I think, I don't know, I still go back to your own health and what your
expectations are. I try to, me personally, I would hold out as long as I could. But if I,
if the market was going down, I saw the balances going down, and that felt terrible,
which of course it would. Maybe I start taking it then, I don't know. It's a, it's really,
it's kind of a longevity insurance, is what Social Security is, if you think about it. Right. I like
(20:33):
it to think about it more that way than a break even. Because the break even, it's like, well you
have to be dead before you know if you, was a good idea or not, and at that point, you don't know.
Joe (20:44):
$4400, 12, so $53,000. If he waits until 70, he's gonna probably have a $60,000 benefit
from Social Security, which would cover probably close to 70% of his living expenses. Yeah. So if
he burns through some of that, those assets, until then, he's gonna have a lot larger fixed income,
(21:10):
and if the, assets continue to burn, I'm sure he would still live a pretty comfortable life.
Al (21:15):
Right, right.
Joe (21:17):
So, But yeah-
Al (21:19):
It's a, it's, I guess, Charlie, it's a bit of a toss-up-
Joe (21:23):
Run the numbers and then you just run worst case scenarios on it and then
you can kind of see what, whatever that you want to stomach. Or you don't take
it and then you wait until the market does something and then you're like,
you know what, I'm just going to pull the trigger and then I'll take it now.
Al (21:39):
It's like, I can't stand it. And then by the way, I mean, every month you wait,
you get a higher benefit, so you don't have to wait till 65 versus 62. Any extra year
or extra few months you wait, you'll have a better benefit. So just be aware of that.
Andi (21:52):
There are over 2700 rules around claiming your Social Security benefits,
so it’s a good idea to really explore all your options before you file. Download our
Social Security Handbook and figure out how to maximize your monthly Social Security payments.
This guide explains who is eligible, how Social Security benefits are calculated,
the difference between collecting early vs. late, working while taking Social Security,
(22:16):
details on spousal, ex-spousal, and survivor benefits, and how your Social Security is taxed.
Click the Social Security Handbook link in the episode description to download yours for free.
Joe (22:27):
We'll move on to Seattle, Washington. We
got a daughter that's a career changer and that worries Mom. She wrote that.
Andi (22:39):
She said, yes, exactly. And she called herself Worrywart Mom.
Joe (22:41):
Worry Wart Mom. Okay. “Hey, a big fan of the pod. Keep up the great work. My 27-year-old had
a career change recently due to a layoff. She's very frugal and has been working hard to save.
This career change has caused some setbacks on her finances since she has to start all over from
(23:04):
the bottom. She's trying to pay off the student loans and save. But feels like one step forward
and two steps back. She's currently paying about $80 to $100 a month towards the student loan.
More whenever she could. She's working toward a certification to advance her career and hoping
she would get a raise soon. Not sure if it's a good idea to just pay off the student loan
(23:26):
with her savings and move on. Any insight and advice on a strategy to help pay off that loan
and start putting money away for the future, like buying a house, saving for retirement,
etc. Your input would be much appreciated. Worry Wart Mom.” All right, so she’s,
the daughter's got “$50,000 salary, monthly expenses of $2200, and student loan at $11,000,
(23:53):
interest rate’s between 3% and 4%. Current savings, $10,000 in a CD, $1500 in a Roth,
$10,000 in a 401(k), and $20,000 in a general savings account.” Okay,
so $48,000. So she's probably got, I don't know what, $500 to $800 extra a month.
Al (24:18):
Yeah, based upon what we're seeing.
Joe (24:24):
Man, she's got like $50,000 some odd already.
Al (24:29):
Yeah, 42. She's doing well, really well. Well, here's what I would say. You
kind of look at what the needs are. So number one, the emergency cash reserves are fine.
Joe (24:43):
It's $30,000.
Al (24:44):
$30,000. Her spending is $26,000. So she's got a year's. So I'm good with that. So,
so make sure you, she at least does the 401(k) to the match. That's a minimum and put it in the
Roth side. If it were me and it was my daughter, I might say, you know, maybe focus on the student
loans that are higher interest rate, like the 4.5% one, get that paid off quicker and make,
(25:10):
you know, make your, make payments on the other ones too, of course, but make the bigger payments
on the higher interest rates. And then to the extent there's any extra money, go back to
the 401(k) or if it makes you feel better, pay more student loan. But that’s what I might do.
Joe (25:26):
401(k) to the match.
Al (25:29):
And then pay off the higher student loans and then you got to probably have
extra money. Probably go back to the 401(k) was probably what I would do. What was she doing?
Joe (25:42):
I don't know. I'm almost thinking about just getting rid of the debt. Just getting rid of
it. She needs $20,000 in cash reserves, she's got $30,000, student loans are $11,000. Maybe
you cut a check for $10,000 and then you pay that thing off the next few months after that,
(26:06):
then that creates more cash than I would fully fund the 401(k) and Roths.
Al (26:11):
Yeah. Seems dramatic. How about this? Why don't you pay off half of it this year
and half next year with earnings. I don't know, you've saved up $30,000,
you've, you were laid off. And a job that looks like-
Joe (26:26):
You shouldn't worry. I guess is the point.
Al (26:28):
And well, I agree. I agree. Mom doesn't need to worry. Yeah, there's plenty here to work with.
Joe (26:33):
Right. Go to the 401(k) to the match and then continue to chip away
at the student loans. I mean, they're 3% and 4.5%. If they're a lot higher-
Al (26:40):
No, it's not bad. There's no tax deduct- well actually there is a little tax deduction for it.
Joe (26:45):
She can continue to, you know, have the rest funnel into savings and then if that savings
account gets to $25,000, take $5000, cut that off and get up the, you know, pay off the debt.
Al (26:53):
Yeah, I like that.
Joe (26:55):
Alright, cool question. Thanks for, thanks for that. Hopefully that helped.
Alright, we are in the San Francisco Bay with Esther. My, my grandmother's name was Esther.
Al (27:08):
Really?
Joe (27:09):
Yeah, my sister's middle name is Esther. Didn't spell it that way, though.
Al (27:13):
No.
Joe (27:14):
There's an A in there, I think, somewhere. Okay. All right. Anyway,
Esther. “My husband is 51 and retired this year. Now a house husband.” At 51.
Al (27:25):
Wow. That's, there's hope for you.
Joe (27:28):
Here we come. Let's go. “I'm 47 and waiting to retire until I hit 49.” Wow.
Al (27:35):
Two years.
Joe (27:36):
“We have a 10 and 14 year old. 529 plans to cover 4 years of a state public school,
I'm going to us- I'm going on sabbatical next summer and I might not want to come
back to work after I get back. Can I pull this off? Net worth $11,800,000” Yep, you're good.
Al (27:53):
Next question.
Joe (27:57):
“Real estate, primary home, paid off, $2,600,000, investment properties,
$2,700,000. We get positive cash flow from them. They got 401(k) accounts of $3,500,000 Roth IRAs.
And Roth 401(k)s of $600,000, brokerage accounts of $2,200,000 and cash of $350,000. Estimated
(28:18):
expenses in retirement, padded for ACA premiums and cushy vacations, $21,000 a month. Currently
working annual salaries, approximately $360,000, including the bonus, and about a $100,000 in
annual RSVs that vest. We will only have 30 years of work on our Social Security numbers. So I think
(28:40):
we'll be around $3300 each at age 67. Also, my husband gets a pension around $46,000, no COLA
at the age of 65. Mentally, I have one foot out the door from work. If things go south at work,
I don't want to be trolling on LinkedIn looking for a job.” Well, you're one foot out the door.
Al (29:02):
ha. It doesn't necessarily go back.
Joe (29:05):
She's cashed in.
Al (29:06):
Yep, I was going to say, $6,600,000 of liquid assets. $11,800,000. You can
do almost anything you want. So, but just to put a couple numbers to this.
Joe (29:20):
1000 x 12 is 252.03 is 8.4.
Al (29:28):
What are you doing? Oh, the 3%?
Joe (29:31):
Yep.
Al (29:32):
Yeah, so I did it the other way. I just said, what's the burn rate? It's 3.8%. Okay.
But I don't know what the positive cashflow is. So here's what I did, Joe. I said, okay,
well, you got a piece of rental property with $2,000,000 of equity. What if it's
3%? I don't know what it is. What 3% $60,000. If I take $60,000 off the $250,000 needed,
(29:56):
I get $190,000. That's a 2.9% burn rate at 50. I'm good with that. Plus the other thing too,
is with this amount of assets, it's- If you need to cut your cushy vacations one year, you can do
it. I mean, that's worth not having to go back to a job you don't want to go back to, I would say.
Joe (30:14):
Yeah. What would you do? What we, do with your time? Yeah, that,
that's another question. I'd have trouble with that at 51 or 49 in our case. I think,
as you know, I was thinking that when I was that age and I,
of course the real estate market changed my mind, but even still now being older,
(30:40):
it's like, I don't know what I would have done at 50 without something to do. I don't know.
Yeah, I went to the doctor yesterday, got my physical. Yeah,
and then they're like, what- any other hobbies besides golf?
Al (31:00):
Really?
Joe (31:02):
I'm like, yeah, I like to spend hang out with my family.
Al (31:05):
Yeah. Okay. Sure.
Joe (31:06):
Well, what do you guys do?
I don't know. We kind of hang out.
Al (31:09):
Yep.
Joe (31:10):
Suggesting I don't have enough hobbies. I mean, you know-
Andi (31:15):
Is he saying that you need more exercise?
Joe (31:17):
No.
Al (31:18):
No Well, you can't- you have to have more than golf.
Like you gotta volunteer or you gotta have some, something to get up to where you-
Joe (31:24):
Wait, what, Andi, what was that comment? You think I'm-
Andi (31:27):
No, well, I was figuring if they were asking you, do you have any other hobbies,
that maybe it was because you're spending too much time being sedentary or something
like that? And he was suggesting that you need to-
Al (31:36):
No, I don't think it's that. I think they're, he's a, he is a, what do you,
what would you call Joe? Hard charger? That's my term. And if he's not working, what happens?
Joe (31:46):
Yeah, right. It's like, I don't know. I’d blow myself up.
Al (31:50):
Yeah, it's actually, to me, that's the bigger question is when you're used to working really
hard and being productive to all of a sudden not work,
it can be a little tricky. Yeah. I think that's the bigger issue here.
Joe (32:05):
But it sounds like they got cushy vacations to look forward to. So,
congratulations on all the wealth and the well-being.
Al (32:13):
Yeah, for sure.
Joe; You're one foot out the door. If you're one foot out the door, just get out the door.
Yeah, just do it.
Joe (32:19):
I mean, you're just not doing anyone any good here. You're just kind of milking that $360,000,
right? And you're miserable, going to work every day. It's like, you got enough assets, why don't
you find something that you're really passionate about, then make a little bit less money.
Al (32:30):
Right, and, if you, retire and you can't find something you're passionate about,
you know what, go back to work, get another job. Whatever, but yeah,
if you want to give it a try, you've got the assets to do it.
Andi (32:41):
There so many factors to take into account when forecasting your financial future
required minimum distributions, asset allocation, stock market declines, Social Security and
Medicare, long-term care and estate planning, and many others. After 40-plus years saving for
retirement, the last thing that you want to do is sabotage all your hard work with unrealistic
(33:03):
expectations, market miscalculations, or planning missteps once you retire! Watch Retirement
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(33:31):
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Joe (33:40):
All right, we got James, he writes in, he goes, “Hey Joe, Al, Andi,
I enjoy your podcast while walking the peaceful neighborhood and local trails and canyons.”
Andi (33:49):
I forgot to mention that James is actually from Tierrasanta here in
San Diego. He did actually put that in his email. So-
Al (33:55):
Okay.
Joe (33:56):
Oh, Tierrasanta. It's just down the street.
Al (33:57):
Yeah, right. Okay.
Joe (34:00):
Alrighty. “On special occasions, my wife and I enjoy a little iced Thai tea with boba.”
Al (34:08):
Never heard of Thai tea with boba?
Joe (34:10):
No, sir. Never heard of it. “- while exploring the fantastic Convoy
area restaurants.” All right. I've been down Convoy Street. “But I'm planning
to retire next year when we turned 60 and thought we would request some advice, or,
I mean, a spitball from you while we chew on our boba.” You chew on boba.
Andi (34:33):
Boba is little, like, chewy little,
gelatinous pearls that go into the bottom of iced tea drinks.
Al (34:40):
Yeah, it's like tapioca in your tea.
Andi (34:43):
Yeah.
Joe (34:43):
Tapioca?
Al (34:44):
Yeah.
Joe (34:44):
That's what that's like.
Al (34:46):
It's like they put different spices and they it's got a little milk in it.
They have these little yeah pearls, Andi. I mean, it's what I've not had
it. I've heard. It's like tapioca. So you're drinking. You're drinking your-
Joe (34:59):
When I think of tapioca, I’m thinking like pudding. Not pearls.
Al (35:03):
Well, you know, tapioca has those little pearls in it. You
take out the pudding part and just put the pearl-
Joe (35:12):
So it's a pearl before it becomes pudding?
Al (35:14):
I think so.
Joe (35:15):
I got it.
Al (35:16):
I actually, I've never had one. I just have seen people with it.
Andi (35:20):
I love Thai tea, but I do not put boba in it.
Joe (35:26):
All right. Okay. “We estimate we'd like our annual retirement income to be $180,000.
Next year, we have $2,000,000 in our 401(k)s and $2,000,000 in a deferred compensation
account that can be rolled over into an IRA upon retirement. My family history suggests that I've
got the longevity gene. We're both in good health, so we've been taking advantage of the
(35:48):
normalization of rates over the last two years and purchased a couple of annuities with GLWBs,
Guaranteed Life Withdrawal Benefits, for longevity insurance, one which will turn
on when we are age 65 at $47,000 a year, and another that will turn on at age 70 for $28,000
(36:10):
a year. We're planning on waiting until 70 to turn on Social Security, which we estimate will
be $50,000 a year combined. In our 60s, we plan on aggressively converting to Roth IRAs,
our combined $4,000,000 pre-tax 401(k) plus deferred comp before RMDs kick in at age 73.
(36:32):
I know this is just a spitball. What do you think of our retirement plan? Do you think it can work?
Or do you think one of us should plan on working for a few more years in our 60s? Thanks for your
very entertaining financial education. You 3 are great.” All right, cool. Thanks, Dave.
Al (36:53):
That's nice.
Joe (36:54):
All right, first of all, you got a lot of assets, but I don't like these guaranteed GLWBs.
Al (37:03):
Lifetime withdrawal benefit?
Joe (37:08):
Mmmm.
Al (37:08):
Mmmm. Why don't you like them?
Joe (37:10):
Because the insurance company always wins.
Al (37:12):
They do seem to win a lot, don't they?
Joe (37:14):
Yes, they do. I understand you have-
Al (37:17):
But if she lives a long time, maybe she wins.
Joe (37:20):
It's a he, James.
Al (37:23):
Okay, sorry. He.
Joe (37:24):
Yeah, it's fine. It is what it is. They bought the insurance. So,
$65,000. They want to spend $180,000. They have, what, $4,000,000 liquid right now?
Al (37:34):
Yeah. 4% on that would be $160,000. They're basically there. That doesn't
include Social Security, and it certainly doesn't include
the guaranteed income. Once you add that in, they got, they have plenty of money.
Joe (37:47):
Yeah, I think their guaranteed income is going to be, what, $120,000?
Al (37:50):
Yeah, call it $125,000 out of $180,000, right? Right. So,
and then you got $4 million to produce, we'll call it $60,000.
Joe (37:59):
Yeah. Yeah, it's fine. But I would consider that the annuities as your fixed income or bonds.
So I would probably take on a little bit more risk in the overall liquid assets because you have a
pretty high floor in regards to fixed income. So, right. If you think of those guaranteed
annuities as your bond allocation, I mean you still will have a quite a bit of liquidity and
(38:23):
then do conversions up until 65 until that first annuity kicks in. Yeah, and I take a look at where
tax brackets are but they don't have a ton of money in non-qualified accounts. It looks like,
Al (38:33):
No, they don't. It's all tax-deferred. I mean almost all.
Joe (38:38):
So- I wonder where those annuities came from.
Were they non-qualified dollars or were they qualified? So when you do the conversions,
you just gotta be careful of where you're pulling the tax.
Al (38:52):
Right, right, right.
Joe (38:53):
Is it gonna work? Yeah, it'll work.
Al (38:55):
Anyway, the question is, do you, what do you think our retirement plan,
do we need to go back to work? The answer is no. You got plenty here.
Joe (39:01):
Do I like the plan?
Al (39:04):
That wasn't what they asked.
Joe (39:06):
Okay, then I'll just shut up.
Al (39:07):
Well, actually, he did want you to spitball. So you don't really like the annuity.
Joe (39:11):
No. Why do you think it's a she? Because of the tapioca?
Al (39:14):
I don't know. Maybe. Sorry, James.
Andi (39:23):
Well, it is James and his wife.
Joe (39:27):
Yeah, it's James and his wife.
Al (39:29):
Yeah, it's just based on this one.
Joe (39:31):
Yeah, alright. Well, no, I think the plan works. Don't love it. But think it works.
Al (39:38):
Yeah, me too.
Joe (39:38):
All right, way to go. Congrats James. Show’s called Your Money, Your Wealth®.
Andi (39:42):
Richie and Heather, Rebecca and Sam, and P. Ware, I’ve asked Joe and Big Al to
spitball on your questions on when to claim Social Security, what to do with an annuity,
reasonable financial advisor fees, and of course, Roth conversions, next week in YMYW
podcast episode 509. We appreciate you watching us on YouTube and Spotify, and listening on
(40:03):
Apple Podcasts and all the other podcast apps. Tell your friends and join us then, won’t you?
Time flies, especially when it comes to planning for retirement at year-end.
Don't put your financial future on hold! Get a comprehensive assessment for free from one
of the experienced professionals on Joe and Big Al’s team at Pure Financial Advisors. See
if you're on track. They’ll analyze your situation, identify potential roadblocks,
(40:26):
and help you create a detailed, personalized plan for your retirement. Don't wait to book yours,
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(40:52):
Pure Financial Advisors is a registered investment advisor. This show does not
intend to provide personalized investment advice through this podcast and does not represent that
the securities or services discussed are suitable for any investor. As rules and regulations change,
podcast content may become outdated. Investors are advised not to rely on any information contained
in the podcast in the process of making a full and informed investment decision.
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