March 4, 2025 • 45 mins
How much do Nick and Nora in Pittsburgh, and Doc Mc Muffin and her Mr. in Minnesota, need to have saved, and how much can they afford to spend in retirement? What are the disadvantages to Fred and Ethel in Virginia if Ethel collects her Social Security early? Are the Moonshiner and the City Girl in Florida so obsessed with avoiding RMDs and IRMAA that they're wasting too much savings on Roth conversions? That’s today on Your Money, Your Wealth® podcast 519 with Joe Anderson, CFP® and Big Al Clopine, CPA. Plus, will the tax benefits on a rental property offset the negative cash flow for Lily's 29-year-old son, who has started his professional career with a $750K salary?
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Andi (00:00):
How much do Nick and Nora in Pittsburgh need to have saved for retirement and how much can they
afford to spend? When can Doc and Mr Mc Muffin in Minnesota retire? What are the disadvantages to
Fred and Ethel in Virginia if Ethel collects her Social Security early? Joe and Big Al spitball on
these topics today on Your Money, Your Wealth® podcast number 519. Plus, are the Moonshiner
(00:22):
and the City Girl in Florida so obsessed with avoiding RMDs and IRMAA that they’re wasting
too much savings on Roth conversions? And finally, will the tax benefits on a rental property offset
the negative cash flow for Lily’s 29-year-old son who has just started his professional career
and is making $750,000? We will find out. I’m Executive Producer Andi Last and here
(00:45):
are the hosts of Your Money, Your Wealth®, Joe Anderson CFP® and Big Al Clopine, CPA.
Joe (00:50):
Sounds like a good show, Big Al.
Al (00:52):
It's, I can't wait.
Joe (00:53):
Let's go. Let's get right to it. We got Nick and Nora from Pittsburgh, PA. He goes, “Hey Joe,
Big Al, Andi, thanks for producing such a great show in making retirement fun.” That's what we do.
Andi (01:06):
It’s all about you guys making it fun.
Joe (01:08):
We make fun-
Al (01:10):
- and make fun.
Joe (01:12):
“I'm writing in because I'm having trouble wrapping my
head around the right way to think about a safe withdrawal rate with a
retirement plan that has different phases. First, the fun phase.” Oh,
“first the fun stuff.” I thought he was going to say that the yo-go years and the no-no.
Al (01:29):
Yeah, all that, right?
Joe (01:30):
I hate those phases.
Al: Which one are you in? You're the work hard go. (01:32):
undefined
Andi (01:36):
He's go-go all the time.
Joe (01:38):
Go-go Joe-Joe go-go. All right, “we drive a 2020 Kia Soul. The one that looks like a toaster
on wheels. We drink dark roast coffee in the mornings, and I like a little Manhattan at
night. While Nora likes red wine. Okay, now on the finances. Nora is six years older than me,
(01:58):
and we're targeting both of us to retire at the same time I turn 56. This would allow us
to make a game-time decision on whether we could hold off on her Social Security
or take it right then if we needed it, since she'll be 62. Where I'm getting tripped up
is thinking about what number would make sense for us to aim for in savings before
(02:19):
retirement? Traditionally thinking is to aim for a withdrawal rate of 4 percent for a 30
year retirement or slightly lower for more years. Nora's planning on living to age 90 and me, 85.”
Al (02:32):
Okay, that's pretty specific.
Joe (02:34):
Yeah, very. “Which means we're looking at about a 30 year retirement. So I would typically
think we should be aiming for somewhere about 3. 5, 4 percent range. However,
my Social Security will come into play anywhere between six to ten years after we started our
retirement and should make for a decent chunk of our spending. As such I figure We should be able
(02:55):
to have a higher withdrawal rate to start our retirement knowing that we'll drop down later
in later years. We expect to spend about $115,000 a year none of these number adjust for inflation
because my question is about a percentage withdrawal rate, so we can use today's numbers
and know that when all of them will need to be adjusted for future based on inflation. Nora’s
(03:19):
Social Security will cover about $22,000 of that, meaning we will have a gap of $95,000. Starting 10
years later my Social Security will cover #40,000 bringing the gap down significantly. Given that,
how would you think about a reasonable withdrawal rate to aim for starting retirement?” Okay,
this is just so long. I get what he's going at. He's got more to talk about here.
Al (03:45):
Yeah.
All right, “for example, if I had two million dollars in retirement funds, that would be a
four-and-a-half percent withdrawal rate. With a normal retirement that would be really high,
but if we got another forty thousand dollars a year coming down the road,
would that be a reasonable rate to start, knowing that we will drop below three in the future? I
realize there's going to be some increased risk by starting with a higher withdrawal rate given
(04:08):
sequence of return risk, but I would just be interested in to hear how you would think about
a situation like this. We'll have some flexibility in our spending. There's a buffer of about $10,000
of our current spending rates and about $15,000 in the budget in travel. For context, we have
a million dollars in savings right now and we're putting $70,000 a year. Also, I realize any number
(04:30):
we come up with today as a goal for savings will need to be adjusted based on inflation. That's why
I'm mostly interested in withdrawal rate. And then we can come back to the savings goal. Thank you
for any thoughts you share in a spitball in this situation. Nick and Nora from Pittsburgh, PA.”
Andi (04:47):
Now, I want to point something out. Through this, they tell us that
they want to retire at ages 56 and 62, but they never tell us how old they are now,
or how long they have to save until they retire at that time. And I did email
them back and I asked them, “Okay, how old are you now?” And I haven't gotten a response back.
Al (05:03):
Yeah. So we don't know. It's a-
Joe (05:06):
Well, he doesn't care about that. What he wants to know is that he's got a couple of
different phases. His wife is older than him. He wants to retire at the same age. She's going to
have a fixed income. 10 years later, he's going to have more fixed income. They're going to spend X
amount of dollars. And so that withdrawal rate in the beginning is going to be a little bit higher.
And then the Social Security dollars are going to come in. That's going to offset some of the
(05:27):
withdrawal rates. So he's like, “Well, how big a chunk can I spend in the beginning?” He was like,
“Hey, you know, four and a half, 4.7. Is that a, is that too much?”
Al (05:36):
Well, the answer's maybe we, don't really have enough to go on, but I would say it this way, Joe,
is when you're retiring, if you retire around 55 or before 60, you might want to think about
a three or three and a half percent distribution rate. If you retire between 60 and 65, you can
approach 4%. 65% is kind of the 4% rule, but yes, when you have other money coming in later,
(06:04):
of course, you can have a higher distribution rate for a while. As far as what that rate should be,
it just depends upon your numbers. So, we can't just give you a rate,
you have to do some calculations to figure out what's going to work for you. But yeah,
there's no question, if you have more money coming in from Social Security or
a pension,right? Then you can start out with a higher rate because when that kicks in,
(06:27):
you'd be at a lower rate. So that didn't really answer the question. But I don't know how to,
Joe (06:31):
I think it's all luck of the draw. I think he knows, he just wants to have the dialogue.
The sequence of return risk is the biggest risk that he has. You could take 8 percent out for the
first couple of years, it sounds like. As long as you get a, probably a five or 6 percent rate of
return in the overall markets. But if the market drops 20%, you pull out a little bit higher than
(06:52):
four. You're probably going to run into some trouble. But you have the buffers that you
said in regards to travel and you're buffering another ten thousand dollars. So this is where
you want to, you know, yeah, the answer is yes, you could probably spend more because
your Social Security is going to come in and cover a big gap. Think of it this way, is like,
what is the Social Security number that you have was like $40,000 for you and $22,000 for her,
(07:17):
so that's $62,000. And he wants to spend $100,000? Well, is your buffer 40 grand? If your buffer is
$20,000, then you only need $20,000 from the portfolio. If you have a million dollars today,
that's a 2 percent burn rate. So you just look at, alright, what does the number need to be
(07:38):
when you turn your Social Security on, is how I would look at it. In other words, so let's say
that the total need from the portfolio, and you don't want to count inflation, so I get that,
is that you want to spend $100,000 today, There's going to be $60,000 roughly a fixed income,
right? So there's a $40,000 shortfall at, what's his name? At Nick's age 67.
Al (08:04):
Right.
Joe (08:05):
Or 66.
Al (08:06):
Yeah, 67 I think.
Joe (08:11):
Well, whatever. So let's say it's a $40,000 shortfall at age 67.
Al (08:16):
Yeah.
So you at least probably want to have a million dollars left in your nest egg by age 67,
because then that will give you a four percent distribution rate at that time when you have
full fixed income. So from that point on and before if you want to spend more or less you
can buffer it that way just to make sure that you have that four percent burn rate
(08:39):
when both of your Social Securities turn on in all of your fixed income is. So who knows
what that burn rate or that the withdrawal rate - some years it might be really high
some years it might be pretty low. But that would be my gauge if I was Nick and Nora.
Yeah, I actually, I agree with that. It's the time when your fixed income comes in, where
are you at, what do you need, and you are going to have to factor in inflation, to be able to do
(09:01):
this properly, and then work backwards. But, the fact that there's some flexibility, I think that
total spend they want is $115,000, but they've got 15,000 travel and another buffer of 10,000.
So I like that. Joe, I like the fact that there's some buffer if things don't go quite as planned,
right? And so maybe you do your bit, your better, bigger travel in years where the market does well
(09:22):
and you don't travel as much when the market goes down or stays flat so you don't decimate
your portfolio. So you just have to be sensible about it. Something else I would think about if
I'm retiring at this point with you know, a long period between then and Social Security is, can I
make some extra income in some other way if I need to? I just want to have that in my back pocket.
Joe (09:42):
Yeah. If Nick's retiring at 56-
Al (09:45):
Yeah.
Joe (09:47):
-you work part time and make 20 grand or something.
Al (09:50):
To make it up. Right. Or, if nothing else to
make up what Social Security would have been, so you're in the same spot, right?
Joe (09:56):
Yep. Alright, no, really cool question. I like it. So again, this is, Nick and Nora,
what I would do, just make your spreadsheet, but count inflation. I get you're looking at whole
numbers and you just want to look at a burn rate. I think it's a little bit more complicated than
that. And a second thought is, I hate using a 4 percent or 3 percent or a sustainable distribution
(10:20):
rate as a retirement income strategy. You cannot look at it that way. It's really an accumulation
strategy of saying, “Hey, I need to have a million dollars if I want to spend $40,000 a year.” But
by the time you retire, and you start taking dollars from the portfolio, I mean, it's a totally
different strategy. The 4 percent rule is out the window. Because you're going to be pulling out
(10:42):
totally different percentages, you know, depending on what happens in your life, depending on what
happens in the markets, depending on, you know, what happens, you know, across the globe.
Al (10:52):
Yeah.
Joe (10:53):
It's just not that simple. It's not, all right, 4%, you're good. Because things
happen in life all the time. Things really good in life happen. Things
not so good. You just have to adjust as you go. So, that's a good ballpark, you know,
like kind of rule of thumb. But it's not a rule of thumb that I would abide by to say, Hey, I'm-
Al (11:13):
I'm good.
Joe (11:14):
Yeah. I'm perfect for retirement and no more planning's needed.
Al (11:17):
And that Joe, it does work if there's a flat market.
Joe (11:21):
If it's perfect.
Al (11:22):
Right. Which it never is. The market goes up and down at different times. Sequence of returns
mean you retire, maybe the market goes down for three years in a row. Now you're changing
everything. So you got to consider all of these things. That's why the 4 percent rule is just,
I agree with you, Joe. It's more of an accumulation plan. How much do you
need to retire? And then after that, it's like, how can I make this work?
(11:44):
What do I need to adjust each and every year, depending upon the circumstances?
Joe (11:47):
Right. What assets are you going to sell to create the income? What's
the taxation going to be? You know, how tax diversified are you? Should
you be thinking about conversions or not conversions? What is IRMAA? I mean,
so there's only, there's so many other things I guess you want to consider. So.
Al (12:01):
Yep.
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Andi (12:01):
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strategy needs to change. Our Withdrawal Strategy Guide will tell you more about
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(12:24):
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free copy of the Withdrawal Strategy Guide. If you know someone who would benefit, why not share
the show and the free financial resources with your friends, your family, and your colleagues?
Joe (12:38):
All right, we got doc McMuffin from Minnesota, the homeland.
Al (12:43):
Yeah. Your homeland.
Joe (12:44):
The mothership. “Hi, Joe Al, and Andi. And thanks for the great
podcast. I've been listening for years and I love the content, humor, and great vibes.
Andi (12:54):
“vibes”.
Joe (12:54):
“I'm a 41-year-old physician. Mr. McMuffin is a 40-year-old engineer.” Alright,
Doc McMuffin. “I drive a 2012 Honda CRV with 209 miles and my husband drives a
2015 Chevy truck.” She doesn't know what type of Chevy truck it is, it's just Chevy truck.
Al (13:15):
Yeah, that's all you have to say.
Joe (13:16):
Chevy truck.
Al (13:17):
We get the idea.
Joe (13:18):
“My drink of choice is Chardonnay or IPA. And
his is funky sour beer.” He drives a Chevy truck, Mr. McMuffin, with funky sour beer.
Al (13:29):
Right.
Joe (13:30):
Does that mean that the beer he drinks,
he just doesn't care for, or is there such a beer called funky sour beer?
Al (13:36):
I don't, never heard of it. I don't know.
Andi (13:38):
I have a feeling she's saying that it's sour, so that makes it funky.
Joe (13:42):
Okay. “We have two elementary age boys, no pets. Regarding our finances,
combined 401k and 457, 2.4 million dollars. Nearly 50% of that is in Roth.” Geez.
Al (13:55):
Wow.
Joe (13:55):
Good for you, Doc. “Combined backdoor Roths are 130. Combined HSA is 107. Brokerage account,
130. Kids 529 plans, $30,000 each funded monthly. We'd cover college costs by
then. Primary residence is worth 750, have $150,000 left on a 3.6% mortgage.” Alright.
(14:20):
“I make $500,000 a year. My husband makes around 150. We both max out our Roth 401ks,
backdoor Roth IRAs, HSA, my pre-tax 457, and my husband's mega backdoor Roth every year. Plus $
12,000 in the taxable.” What possibly could be your question, Dr. McMuffin?
Al (14:38):
They're saving 150,000 a year.
Joe (14:40):
You're fine. You're good. Keep saving lives.
Al (14:43):
They've got over 2 million to start with.
Joe (14:45):
It's like, okay, and you're 40. All right, let's keep going here. “Despite our high tax
bracket, we are in Joe's camp of not missing the tax deduction and love Roth money.” See,
I'm with you, girl. “I work a ton but love being a doctor. My husband likes his job fine,
but is thinking of switching to a more flexible career in the next few years. Our investments are
(15:08):
currently 100% in index fund equities with 90% be in total U. S. market and the rest international.
My question!” Finally, doctor! “Anything we are missing? Any blind spots we should be thinking
about? Or anything you'd be doing different? I'm not sure exactly what our spending will look
(15:29):
like in retirement, but I'd like to be able to travel and order nice wine. I wouldn't be
surprised if Mr. McMuffin, semi-retired by age 45, but I'll probably have a hard time hanging
it up until I'm close to 60. Thanks for the spitball, you guys are the best.” Anything,
any blind spots? No, there's zero blind spots in this overall strategy. None.
Al (15:53):
It looks perfect. I would say, three things that weren't mentioned,
but they're probably covered, but just in case:
make sure you got appropriate disability coverage and life insurance and make sure
you've got to get emergency fund. Outside of that, I just keep doing what you're doing.
Joe (16:08):
Big Al, did you get an insurance license?
Al (16:10):
No. But, you know, when you make that much money, and if your husband retires,
then they're depending upon that, so you gotta think about such things.
Joe (16:20):
Got it. Yeah. She could be, like, Dr. Strange. You know, hurts his hand,
he can't do surgery anymore, then he has to go to Tibet or something,
right? No? You have no idea. Never watched a Marvel movie in your life, probably.
Al (16:35):
No, I have. I don't know that part of the story.
Joe (16:38):
Dr. Strange? You don't know?
Al (16:39):
Yeah. I know Dr. Strange.
Joe (16:40):
So he was a doctor. Surgeon. Really
good surgeon. His hands. And then he got in a car accident.
Andi (16:46):
Which part of the Marvel universe is this from?
Joe (16:50):
I don't know. Dr. Strange.
Andi (16:51):
Oh, okay.
Joe (16:53):
I got a three-and-a-half-year-old that all of a sudden just loves Marvel movies.
And so I have to watch these stupid movies over and over and over again.
Al (17:02):
If you would have asked me 30 years ago, I would have talked to you about Power Rangers.
Joe (17:08):
Oh, I suppose. Oh, Power Rangers.
Yeah. Is that what your kids were into?
Al (17:13):
Yeah.
Joe (17:14):
Okay. Andi, what were you into? Scooby Doo?
Andi (17:17):
Mr. Rogers. That was my guru. Absolutely.
Joe (17:21):
Mr. Rogers. Mr. Rogers Neighborhood.
Al (17:22):
Okay, nice.
Joe (17:22):
Won't you be mine?
Andi (17:24):
Yup.
Al (17:25):
That's why you're the fine person you are today, Andi.
Andi (17:28):
I try, you know? Somebody has to be.
Joe (17:31):
What was the king's name again? Mr. Howl? King Owl?
Andi (17:36):
No, that's Gilligan's Island.
Joe (17:38):
Well, no, it's Howl, right? It was an owl.
Al (17:41):
Howl the Owl?
Andi (17:41):
King Friday.
Joe (17:42):
No, he was the tree guy. Who was the king? The king was something, right?
Andi (17:45):
King Friday was the king. King Friday.
Joe (17:46):
Oh, yeah, King Friday. Yeah. And something Saturday.
Yeah. Ask me about Little House on the Prairie and I'll kill it.
Andi (17:56):
Although, I will say, somebody pointed out in the comments on YouTube that you said
that her sister's name was Debbie, and then at the end you finally remembered it was Mary. So.
Joe (18:04):
Yeah. Just takes me -it's a process.
Al (18:06):
You'll get it.
Joe (18:08):
I just got to put myself in the prairie and just be thinking about-
Andi (18:11):
Oh! And somebody also mentioned that it was actually Minnesota,
and I was shocked that you didn't realize that. Plum Grove, I think, Minnesota?
Joe (18:18):
Yeah, I knew that.
Andi (18:20):
You said it was Iowa.
Joe (18:22):
Well, okay, well-
Andi (18:23):
It was the homeland!
Joe (18:26):
It was a sequel or something, right?
Andi (18:27):
Got it. Okay. That must be it.
Al (18:29):
That's tough to comprehend, showing a little kinks here.
Joe (18:31):
I know. I got some kinks in the armor,
brother. I'm tellin’ ya. Oh my goodness. Ah, that age.
Alright, we got Fred and Ethel from Virginia. “Hi, YMYW team. We found the show last year and
have been enjoying getting caught up on past episodes. It's been extremely helpful. We’d
like a spitball on our strategy for taking Social Security. Here's the details. Fred,
(18:55):
he's 55 and is considering retiring around 59 to 60. He drives a Ford F-150 Limited King Ranch and
is a connoisseur of fine brown spirits, whiskey, rum, brandies and uh… amorcognac.” What is that?
Al (19:19):
Dunno.
Andi (19:19):
Armagnac?
Joe (19:20):
Okay.
One of his favorites.
Al (19:23):
Arm. Armagnac, I don't know.
Joe (19:26):
Arm-
Andi (19:27):
I think it's French pronunciation, so I think it's armagnac.
Joe (19:32):
Okay.
Al (19:32):
Okay. We'll go with that.
Joe (19:33):
Got it. Fancy Nancy there. “Ethel will turn 62 in March and is retired from raising
three children. All three are through college and on their own. She drives a Lincoln MKX
and prefers good wine in any color, and on any occasion, she drinks a dirty vodka martini. Oh,
(19:55):
on an occasion. Okay. Fred, he's a sole income earner, 450 salary bonus, and earns six,
earns Social Security benefit at age 70 in 2039, will be $59,000 per year in today's dollars. Ethel
has enough Social Security credits to collect on her own at $17,000 per year at age 62, 24 to 67,
(20:17):
31 at 70. We don't expect to need Social Security to fund our expenses in retirement. We have
about $1. 8 million in a 401k, 275 in an ESOP, another 150 in an IRA, commercial real estate
partnership of $500,000. Fred's privately held company stock is $3.9 million.” Okay.
Al (20:42):
Wow. Okay.
Joe (20:43):
All right. You go, Fred. “Which he will sell and move into a brokerage account when
he retires. Two homes with a mortgage average 3.25%. Total equity combined $1.5 million.” Okay,
yeah, so you don't need the Social Security. You got millions. So,
they're gonna try to figure out how to squeak every last-
Al (21:01):
Easy, easy answer, right.
Joe (21:04):
It doesn't matter. Okay, so the total current net worth, $8 million with $6.5 million
in non-residential Investments.” So liquid investments, “assuming nothing catastrophic
in the market or Fred's company over the next few years, the expectation upon Fred’s retirement is
the total net worth of about $10 to $11 million, $8 to $9 in non-residential investments. When Fred
(21:28):
retires, the plan is to live off all the after-tax accounts and do Roth conversions on the retirement
accounts using the after-tax funds to use to pay tax. Here's the question. Conventional wisdom is
to wait until 70 to claim Social Security to pay the tax.” I mean, “claim Social Security benefits,
which Fred plans to do. Ethel's spousal benefit, when Fred claims, will be about $24,000 per
(21:52):
year. That combined with Fred's $59,000 will provide $83,000 of Social Security income.
We are strongly considering Ethel start claiming Social Security when she turns 62 in March of
this year. We're thinking that income can be used to invest, pay Roth conversion taxes,
go on a cruise, etc. We would do this for 15 years until Fred claims Social Security and
(22:14):
Ethel can switch to her higher spousal benefit. Straight math suggests that this strategy will
provide more dollars over the next 15 years than if she waited to claim at 67 or 70 And she'd still
be eligible for the higher spousal benefit when Fred claims his. Does Ethel taking Social Security
early makes sense? Are there disadvantages in doing so? Are we missing anything? Thanks in
(22:36):
advance for your spitball. Fred and Ethel.” Yeah, they're missing a couple key things.
Al (22:42):
What do you think?
Joe (22:44):
Okay well If she claims at 62,
she's going to have a reduced benefit. She's claiming on her own benefit at 62.
Al (22:52):
So she'd get about $17,000.
Joe (22:54):
She's going to get a 30% haircut for the rest of her life.
Al (22:59):
That's right.
Joe (23:00):
So she cannot claim the spousal benefit until he claims his own benefit.
Al (23:06):
That's correct.
Joe (23:07):
So she's going to have to wait until Fred is age 70 to claim the spousal benefit.
Al (23:14):
and she'll be about 76 or 77.
Joe (23:17):
Okay?
Al (23:18):
Yep.
Joe (23:18):
The spousal benefit is going to be half of what Fred's benefit
is at his full retirement age minus the fact that she took
hers at age 62. So she's not going to receive the full spousal benefit.
Al (23:36):
So that was his benefit had he taken at 67, right?
Joe (23:40):
Correct.
Al (23:41):
Half of that and then a 30% haircut on that.
Joe (23:43):
Correct.
Al (23:44):
Yeah, right.
Joe (23:45):
So I'm guessing the spousal benefit
is going to be lower than her benefit as she took at age 62.
Al (23:52):
That's what-
Joe (23:53):
If she doesn't take it at 62, then the spousal benefit is going to be higher. But after
hearing this, and Fred's like, well, “she's taking it for sure.” If you take the benefit at 62 on her
own benefit and invest the money, and assume a 6% growth rate, yeah, you're probably gonna make out.
Al (24:11):
Yeah, well, I think so too, because you get, what, you get five years of extra money that you
wouldn't have had. I mean, yeah, you'd have more on a spousal benefit, but not that much
more. I think if you do the straight math, just like you said, Fred, if you factor in
the month-by-month income for those five years, I think you'd do better just having her go ahead
and collect. And I think the second question, should you do Roth conversions, the answer is yes.
Joe (24:36):
Well, no, he wants to use the money for, to pay the Roth conversion.
Al (24:39):
Yeah, yeah.
Joe (24:40):
Go on trips. You have $10 million. Yeah. Take it at 62. Go have fun. See,
I'm the voice of everyone that listens to the show when they hear these numbers.
Al (24:54):
I know. They go, this isn't the show for me.
Joe (24:57):
They shut it off. They're like. So then we have to make fun of Fred and Ethel.
Al (25:02):
We just answered the questions.
Joe (25:04):
Yep. You got $11 million. I would imagine one month of interest on his $11 million is
going to be more than whatever he's trying to figure out with his Social Security strategy.
Al (25:19):
Yeah, I would agree with that.
Joe (25:20):
All right. So congratulations on all your success. But yeah, take her benefit at 62 because
I don't think he understands the full rules of that. She has to wait. So, spousal benefit,
again, if you want to claim the spousal benefit is going to be half of your spouse's benefit. So
you could claim yours or half of your spouse's, whatever's larger, but you can only claim the
(25:45):
spousal benefit when your spouse claims their benefit. And if you claim your benefit early,
you're going to have a permanent haircut either on your own record or the spousal. There you go.
Social Security 101. For those- you want to talk about GPO and WEP?
Al (26:04):
No, not particularly.
Joe (26:06):
Got it. Okay. Some rules have changed there.
Al (26:08):
True.
Joe (26:09):
Get into that some other day.
“Alright, my main question is,” we got the Moonshiner in the City Girl.
Al (26:16):
Okay, Florida.
Joe (26:17):
A little Orange Park, FLA. He's got a main question, “my main question,” and
then all of a sudden this is like four pages long. So I don't know what this
means. “My main question, am I overly obsessed with trying to avoid future RMDs,
IRMAA surcharges, and RMDs? Is my obsession causing me to waste too much in current savings
(26:40):
on Roth conversions?” Alright, here we go. Let's see, how long is this one?
Al (26:47):
It's about a page.
Joe (26:50):
I don't even know what page 7 is. Aaron stapled this on me and double sided it.
Al (26:55):
Makes it tougher.
Joe (26:57):
Alright, here we go. “I'm also concerned about doing nothing. And
either of us die with unconverted IRA or TSP on the table, the RMD and tax situation will
be magnified. I always look forward to your podcast. Where I listen via SiriusXM.” Oh,
cool. “While working out or working outside. Your joyvial, non-intimidating,
(27:22):
informative explanations are the best. Very joyvial. Joyvial.
Al/Joe (27:25):
Joyial. Joyvial.
Andi (27:26):
I like joyvial. That's even better than jovial.
Joe (27:31):
Yeah, it feels like I've had a couple cocktails myself.
Joyvial. “Hearing Andi's welcoming voice is a major benefit.” It is a major benefit. Yes.
And (27:41):
Thank you.
Joe (27:42):
All right. We identify as blue-collar working class, but we feel like the federal-
Andi (27:47):
Revenuers.
Joe (27:49):
Revenuers. “But feel like the federal revenuers”-
Andi (27:53):
“Tax us at white collar rates.”
Joe (27:55):
Got it.
Al (27:56):
Okay, so they feel like they're paying a lot of tax.
Joe (27:58):
The IRS. The Federal Revenuers. I don't think
I've ever heard anyone call the IRS the Federal Revenuers.
Andi (28:04):
That sounds like the name of a band. The Federal Revenuers.
Joe (28:07):
It does, I like it.
Al (28:08):
It's clever. It's catchy.
Joe (28:11):
Yeah. We're blue collar. You know, my mom is like,
“I'm a blue-collar lady with champagne taste.”
Al (28:19):
I would agree with that. I met your mom.
Joe (28:23):
Yeah. “After retiring for about 26 years stretch in the Navy,” thank you for your service,
“I went to work in the real world. City Girl also served in the Navy for 10 years where we
met on the remote British isle of Diego Garcia.” Very romantic. She later retired from a civilian
(28:45):
career. We enjoy spending time where I grew up in the Appalachian Mountains. Visiting vineyards,
eating out, and occasional concert. Oh my god, I feel like I'm reading, like, a love novel.
Andi (28:58):
You always want people's stories! You want
to get into their lifestyle and what they're doing! Here you go.
Joe (29:02):
Now I gotta go to the British Isles of Diego Garcia.
Al (29:05):
Even this might be excessive.
Joe (29:07):
We just love walking around the Appalachian Mountains, visiting vineyards.
Al (29:12):
Hand in hand.
Joe (29:13):
Under waterfalls.
Andi (29:14):
He hasn't even gotten to the drinks yet.
Joe (29:17):
Yeah, “eating out and maybe an occasional concert.” Listening to-
Andi (29:23):
Kenny G.
Joe (29:23):
Diego Garcia play the ukulele.
Al (29:28):
I like that. Okay. What do they like to drink?
Joe (29:33):
Okay. “I enjoy a few sips of a good bourbon.” A few sips, okay?
Al (29:38):
Can you do a few sips?
Joe (29:39):
Yeah, I can do more than that. “Elijah Craig, a little barrel proof,
an Irish black and tan, or a German W”-
Andi (29:49):
Warsteiner.
Joe Warsteiner Pilsner.
Al (29:52):
Warsteiner Pilsner.
Joe (29:54):
“City Girl prefers an un-oaked dry Chardonnay.
I drive a 2024 Silverado and City Girl drives a 2017 Mazda MX 5. I also have a
Massey-Ferguson farm tractor at our getaway location. Oh, they got a getaway location.
Al (30:10):
Yeah, with a tractor. That's an important fact.
Joe (30:13):
Yes.
Andi (30:14):
I'm just imagining them getting away from,
like, a bank robbery or something like that in their tractor.
Joe (30:19):
“I'm shooting to convert $200,000 to Roth every year from age 66 to age
70 because should keep me within the 24% tax bracket and the third IRMAA bracket.
Al (30:30):
Okay.
Joe (30:31):
200 grand a year. Big Al.
Al (30:33):
That's a lot.
Joe (30:34):
That's a, it's a big chunk of dough. “Our retirement nesting includes $765,000 Traditional
IRA, TSP of 705, Roth IRA and Roth TSP of 225. Cash at 25. Vanguard Mutual Fund of $22,000.”
All right. “Out of a habit, I contribute monthly to a mutual fund. A big chunk of
the $225,000 in cash will be used to pay the Roth conversions. Combined cash flows from pensions,
(30:59):
City Girl’s Social Security, plus her $24,000 IRA distribution is $126,000, gross of $105,000,
or $100,500. We basically just spend it. I plan to delay Social Security until late 2028 when
I turn 70 and I expect to receive $39,000 gross for $26,500 net after tax and IRMAA. Tricare and
(31:21):
Medicare cover most health care costs. I turn 67 and City Girl turns 68 later this year. We both
retired at 65 and have good financial security. We do not have children or grandchildren. We
recently lost our beloved cat and chocolate lab due to old age. I'm trying not to follow
their leads. We're totally debt free and own two properties mortgage free. According to Zillow,
(31:45):
our Florida home is $350,000 and our out of state Montana getaway is probably worth $400,000. The
value would be the land, not the old farmhouse. I hope you will consider responding to our situation
and that other hard-working folks might benefit as well. Thank you. Moonshiner and City Girl.”
Andi (32:04):
I'll point out that is Mountain Getaway probably in the Appalachians rather than Montana.
Al (32:09):
And I will clarify, because you read that pretty fast, $765,000 in an IRA/TSP
and $705,000 in a Roth IRA and Roth TSP. So it's about mixed, $700-$800,000 each.
Joe (32:22):
Okay. And he wants to convert $200,000 a year.
Al (32:25):
He wants to get it all out. So he's wondering, is he-
Joe (32:28):
Yes, don't, is he's overly obsessed. Yes, you are overly obsessed. Go have a
cocktail and go under the waterfall of Diego Garcia. Yes, he's totally obsessed.
Al (32:41):
I would agree with that. And here's some reasons why
you don't necessarily want to convert everything.
Joe (32:45):
Cause you got a 10%, 12%, right?
Al (32:47):
Yeah. Well, you got the lower brackets. Now, you know, maybe those get filled up with pensions,
so we don't, you know, even assuming that, so medical, if you have medical expenses down the
line, those are deductible, you can put them, pull them out of the IRA, you record that as income,
but then you get to record the deduction, they net out. Right? So, if you have it all in a Roth
(33:09):
and you pay taxes on money you don't need to pay - or what if you want to give money to charity? You
could do a qualified charitable distribution right out of the IRA and not pay tax. So,
there's some reasons why you don't want to convert everything. and the, and maybe even
the most important, Joe, is the one you said, which is you want to fill up the lower brackets.
Joe (33:26):
22%. That's where you go, Moonshiner. 22% is $200,000 of
taxable income. Your income right now is $125,000. So you can do plus
the standard deduction. I would do half of the conversion that you're thinking.
Al (33:42):
Yeah, I would say that's about right. About $100,000-ish. Something in that range.
Joe (33:47):
Stay in the 22% tax bracket. I don't think you need to go to the 24,
because it- the RMDs are not going to be that bad. He's got 10 years, if he converts $100,000 out.
Al (34:00):
Yeah, for four years.
Joe (34:02):
He will get all of it out in 10 years and probably pay a lot less tax.
Al (34:04):
Yeah, you can keep going if you want, right? You can still convert even though
you've hit Social Security age. It's just you have a little extra income,
so you convert a little bit less. So maybe you convert $70,000 instead of $100,000,
whatever it may be, right? So don't think that you have to pay in these higher tax brackets.
Joe (34:20):
Yeah, I get what- he's thinking of the widow or the widower's tax. If one were to die,
you know, some decent fixed income and they got a lot of money still in retirement accounts,
but it's $700,000. He already has $700,000 in a Roth.
Al (34:32):
It's already looking-
Joe (34:33):
If it was like 1.4 all in the TSP or the IRA or 1.5, then I would be like,
yeah, 200 is probably the number if he had other income or cashflow to live off of and pay the tax
Al (34:45):
I would agree with you.
Joe (34:47):
So, yeah, 22% tax bracket.
Andi (34:52):
Does your outdated, tired, set-it-and-forget-it financial plan
need a complete money makeover? Assumptions you make about your finances can make or break your
retirement lifestyle - will it be bad or beautiful? This week on the Your Money,
Your Wealth TV show, Joe and Big Al show you how setting goals, revamping your portfolio,
and doing a tax turnaround can give your retirement plan the financial facelift it
(35:13):
needs. Click or tap the links in the episode description to watch Complete Money Makeover,
and to download the companion Money Makeover Guide for free. This is a limited-time special
offer on that guide, so get yours before this Friday, as it won’t be available again for
several months. If you’ve got money questions or want your own Retirement Spitball Analysis,
click or tap Ask Joe and Big Al in the episode description and send it on in.
(35:36):
Got a little Lily, from California. “Hi, my name is Lily. I love your show.” Well,
well, thank you. We love that you love our show. “I have a question
on behalf of my son regarding tax saving strategies. My son is 29 years old and has
recently started his professional career and earns an annual income of 750 grand.
Al (35:56):
Was that your first job?
Andi (35:57):
As a starting salary.
Joe (35:58):
Starting salary. At age 29. Yeah, that was me. Lily. 29. 750. What is he?
Al (36:07):
I don't know. Does he work for a private equity firm maybe?
Joe (36:13):
“He's single and falls in the highest tax bracket. To reduce his income tax liability as
much as possible, he is exploring investment opportunities. He currently has $300,000 in
cash on hand, but is not interested in purchasing a primary residence right now,
as he doesn't plan to stay in his current location for long. The area is remote and
(36:33):
not ideal for property investment. Instead, he's considering buying property in San Diego
and renting it out. Oh, he's going to be our neighbor. I guess so. You know what?
He's like a Land Man. Texas oil. Seen that yet, Big Al? Land Man?
Al (36:49):
No.
Joe (36:50):
Andi?
Andi (36:50):
I haven't even heard of it. Is that a movie or is that on TV?
Joe (36:54):
Are you…
Al (36:54):
Is that HBO?
Joe (36:55):
Aaron! Alright, it's by far one of my favorite shows, I think, of all time.
Al (36:59):
I know, every show that you like, I hate, so.
Joe (37:01):
Billy Bob Thornton, you like Billy Bob Thornton?
Al (37:03):
I do, but not all his stuff.
Joe (37:06):
He's a Land Man. He goes around, you know,
they're in Odessa, Texas, Midland, Texas. But $750,000 a year at 29.
Al (37:16):
I can't believe it.
Joe (37:17):
It's incredible.
Al (37:17):
It's great.
Joe (37:18):
All right, so he's gonna buy in San Diego.
Al (37:21):
Okay
Joe (37:21):
“His mortgage payments will likely exceed $7,000 a month.” It might be more than that, Lily.
Al (37:27):
It could be.
Joe (37:30):
“While rental income will range about $4,000 to $5,000. My questions are, will the tax benefits
from the rental property offset the negative cash flow? Are there any other potential investment
opportunities that could help reduce his income tax liability? Thank you so much, looking forward
to hearing your thoughts.” Alright, your 29 make $750,000. W-2 wages, I'm guessing?
Al (37:50):
Yep, that's what I would guess too.
Joe (37:52):
And so, the 401k is probably the only thing that this young man has
that's going to save him any ounce of taxes unless he does something exotic
that we would probably highly recommend that he wouldn’t do.
Al (38:06):
Yeah, and I don't even want to go into those, but there are some pretty weird things out there.
But, yeah, so when it comes to rental property, 1986 is when Ronald Reagan and his administration
passed the passive loss rules, which limited the ability to write off losses. When your income is
too high, and your income is too high, way too high, right? Once it's over $150,000,
(38:30):
you can't take losses on rentals. What you can do, though, is you can take that rental income,
and you can deduct the mortgage interest against it, property taxes against it. If
you still have extra, it'll carry over to the next year, but you cannot create a loss. So,
Joe, I would tend to agree with you. 401k is something you could do, contributions,
(38:50):
right? To be able to reduce your taxes, invest in municipal bonds. Do you do tax less harvesting,
right? If, you've got investments that have gone down and you sell them against other ones.
Joe (39:02):
Everyone thinks real estate will give you such a tax break. And it doesn't.
Al (39:06):
Yeah. It doesn't.
Joe (39:07):
it's a good investment. San Diego real estate has appreciated fairly nicely. Buying
a $1.2 million property, and so renting it out, you're going to lose, you got to bank on growth,
right? So what do you think that the growth rate is in San Diego and where does he want to buy?
(39:28):
You know, if he buys coastal, it's probably going to have a pretty good growth rate,
but it's going to be pretty hard to find a $1.2 million property, you know,
the west of the five. Are you west of the five? No, you're by me, you're east of the five.
Al (39:44):
Yeah, east, just like you. Yeah, I'm closer to five, but I'm not west of it.
Joe (39:48):
Got it. But no, I think that's a fine investment. He
makes $750,000 a year. He wants to buy the property in San Diego. At
some point he might want to move here. He's already got the property. The sooner
that you can buy into Southern California and some, you know, desirable places, the better.
Al (40:04):
I think so too. And so maybe with an eye towards moving in later. Right? So
think about that. Maybe you spend a little bit extra, a little bit more negative cash flow,
but it's the place you want to live. I don't know. You take a look, but yeah,
you're not going to get a tax write-off, unfortunately.
Joe (40:18):
Lily, I got to know, what does your son do? 29, $750K.
Andi (40:25):
Starting salary.
Al (40:27):
Venture capital firm?
Joe (40:28):
It does remind me of myself.
Joe and Big Al's Very First Jobs
Andi (40:32):
What was your very first job, Joe?
Joe (40:34):
My very first job ever?
Andi (40:36):
Yeah.
Joe (40:37):
I worked at a grocery store, Rainbow Foods.
Al (40:39):
Were you making 750?
Joe (40:41):
I was making $7.50 an hour.
Al (40:46):
I actually am a little older than you. My first job, I was making less than $7.50 an hour.
Joe (40:51):
Oh, that's why I have terrible anxiety. I can't go into grocery stores anymore.
Al (40:56):
Oh, yeah. Because it reminds you.
Joe (40:57):
Oh, man. It's terrible.
Andi (40:59):
You’ll start merchandising and –
Joe (41:00):
Yeah. But I was a cart guy.
Al (41:01):
You were a cart guy.
Joe (41:01):
Yeah, I would push the carts in.
Al (41:02):
Was that stressful?
Joe (41:03):
No, it was great. You can walk around, you know, pick up carts.
Al (41:07):
Say hi to people.
Joe (41:09):
Yeah. And then I got promoted. And then I worked in the produce section.
Al (41:12):
Oh, okay.
Joe (41:13):
That didn't last very long because I wanted to be outside.
Al (41:15):
You're an outdoor guy.
Joe (41:16):
Yes. Well. I don't know. I don't know, like putting grapes in a, that was just boring and I
hated it. Then you had the lifers, right? The guys that were working the produce.
Al (41:27):
Yeah. They've been there. They were like, 55 years old.
Joe (41:29):
Yeah. They're 60 years old,
waiting for their pension. They were not Lily's kid making 750 grand.
Al (41:35):
They might have made more than $7.50 an hour.
Joe (41:38):
Yeah. And then, no, I worked two jobs. Then I had a job at the Shantytown.
Al (41:42):
Shantytown.
Joe (41:43):
Yep. It was a little bar restaurant in Robbinsdale, Minnesota.
Al (41:47):
Oh.
Joe (41:47):
My father used to go there Friday afternoons after a hard work, a work week.
Al (41:53):
So that's where the bar experience started.
Joe (41:55):
Oh, yeah. Just, it was like draft beer only three huge draft, drink s**t beer. So
we would hang out, so the family would go. He would have a few beers and we would have some
burgers and then he got me a job there. And so I was probably, I don't know, I think 14, 13?
Andi (42:15):
And serving beers. Really? Hm.
Joe (42:16):
Oh, I wasn't serving beers. I was mopping floors.
Andi (42:19):
Okay. Thank you for clarifying that.
Joe (42:20):
Yes. No, there was the owner of the place was serving beers. I was mopping floors,
cleaning the bathrooms. You know, yeah. Two jobs, 13, I think 12, maybe. I don't know. I
was young. Yeah. I was probably breaking child labor law rules back then. But I was a hustler.
Al (42:36):
Maybe it's different in Minnesota. I don't know.
Joe (42:38):
I started my own business. Yeah. I was mowing lawns.
Al (42:42):
Yeah.
Joe (42:42):
Joe and Ted's lawn service. We had like four clients.
Al (42:47):
I started my business at 13, mowing lawns too. I had one client, but it was steady, twice a week.
Joe (42:53):
Twice a week to mow the lawn?
Al (42:55):
I made $1.50 an hour. That was just amazing to me.
Joe (42:59):
Whose yard were you mowing twice a week?
Al (43:02):
I don't know, but this neighbor lady wanted it twice a week. She was on it.
Joe (43:07):
Like my gardener grinds me. “No,
you can come once a week. You know once every other week in the winter?”
Al (43:13):
Yeah, right, because the grass doesn't grow fast.
Joe (43:15):
And I don't really have a big yard.
Al (43:17):
Yeah.
Joe (43:18):
I could do it real quickly, you know,
but I got trees, and so there's the tree trimming and the leaves and all of that.
Al (43:26):
I have a friend that used to live in Poway, one of the really nice homes in Poway,
and this is probably when he was in his, I don't know, late 30s,
and he just couldn't stand to pay for a gardener, but it wasn't the kind of
neighborhood where you'd get caught mowing your own lawn. So he would get up at 6:30
in the morning on a Saturday with a ski cap and a push mower so it wouldn't be too loud.
Joe (43:51):
Oh, well, all right. Well, congratulations. Good luck. Look us up if your son moves to San
Diego. We're right down the street. Andi Last, wonderful job today. Thank you for everything.
Andi (44:04):
Thank you.
Joe (44:05):
Aaron, wonderful. Aaron Townsend, folks. Big Al.
Al (44:10):
it was fun. Good job again, Joe, as usual.
Joe (44:12):
All right. We'll see you guys next week. The show’s called Your Money,
Your Wealth®. Keep the questions coming and yeah Keep the retirement flowing.
Andi (44:18):
Your Money, Your Wealth is your podcast, and you are awesome! On Feedspot.com you’ve made YMYW
the #1 in the 100 Best Tax Podcasts, #3 in the 50 Best Retirement Podcasts, #4 in the 60 Best
Financial Planning Podcasts, and #46 in the Best Money Podcasts! And on Goodpods.com you’ve made
(44:39):
YMYW the all-time #1 of the Top 33 Retirement Podcasts, #7 of the Top 98 Finance Podcasts,
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(45:01):
it helps us grow. The show truly wouldn’t be a show without you. Thank you, friends.
Your Money, Your Wealth is presented by Pure Financial Advisors. Schedule a no-cost,
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(45:24):
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(45:47):
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.
How much do Nick and Nora in Pittsburgh need to have saved for retirement and how much can they
afford to spend? When can Doc and Mr Mc Muffin in Minnesota retire? What are the disadvantages to
Fred and Ethel in Virginia if Ethel collects her Social Security early? Joe and Big Al spitball on
these topics today on Your Money, Your Wealth® podcast number 519. Plus, are the Moonshiner
(00:22):
and the City Girl in Florida so obsessed with avoiding RMDs and IRMAA that they’re wasting
too much savings on Roth conversions? And finally, will the tax benefits on a rental property offset
the negative cash flow for Lily’s 29-year-old son who has just started his professional career
and is making $750,000? We will find out. I’m Executive Producer Andi Last and here
(00:45):
are the hosts of Your Money, Your Wealth®, Joe Anderson CFP® and Big Al Clopine, CPA.
Joe (00:50):
Sounds like a good show, Big Al.
Al (00:52):
It's, I can't wait.
Joe (00:53):
Let's go. Let's get right to it. We got Nick and Nora from Pittsburgh, PA. He goes, “Hey Joe,
Big Al, Andi, thanks for producing such a great show in making retirement fun.” That's what we do.
Andi (01:06):
It’s all about you guys making it fun.
Joe (01:08):
We make fun-
Al (01:10):
- and make fun.
Joe (01:12):
“I'm writing in because I'm having trouble wrapping my
head around the right way to think about a safe withdrawal rate with a
retirement plan that has different phases. First, the fun phase.” Oh,
“first the fun stuff.” I thought he was going to say that the yo-go years and the no-no.
Al (01:29):
Yeah, all that, right?
Joe (01:30):
I hate those phases.
Al: Which one are you in? You're the work hard go. (01:32):
undefined
Andi (01:36):
He's go-go all the time.
Joe (01:38):
Go-go Joe-Joe go-go. All right, “we drive a 2020 Kia Soul. The one that looks like a toaster
on wheels. We drink dark roast coffee in the mornings, and I like a little Manhattan at
night. While Nora likes red wine. Okay, now on the finances. Nora is six years older than me,
(01:58):
and we're targeting both of us to retire at the same time I turn 56. This would allow us
to make a game-time decision on whether we could hold off on her Social Security
or take it right then if we needed it, since she'll be 62. Where I'm getting tripped up
is thinking about what number would make sense for us to aim for in savings before
(02:19):
retirement? Traditionally thinking is to aim for a withdrawal rate of 4 percent for a 30
year retirement or slightly lower for more years. Nora's planning on living to age 90 and me, 85.”
Al (02:32):
Okay, that's pretty specific.
Joe (02:34):
Yeah, very. “Which means we're looking at about a 30 year retirement. So I would typically
think we should be aiming for somewhere about 3. 5, 4 percent range. However,
my Social Security will come into play anywhere between six to ten years after we started our
retirement and should make for a decent chunk of our spending. As such I figure We should be able
(02:55):
to have a higher withdrawal rate to start our retirement knowing that we'll drop down later
in later years. We expect to spend about $115,000 a year none of these number adjust for inflation
because my question is about a percentage withdrawal rate, so we can use today's numbers
and know that when all of them will need to be adjusted for future based on inflation. Nora’s
(03:19):
Social Security will cover about $22,000 of that, meaning we will have a gap of $95,000. Starting 10
years later my Social Security will cover #40,000 bringing the gap down significantly. Given that,
how would you think about a reasonable withdrawal rate to aim for starting retirement?” Okay,
this is just so long. I get what he's going at. He's got more to talk about here.
Al (03:45):
Yeah.
All right, “for example, if I had two million dollars in retirement funds, that would be a
four-and-a-half percent withdrawal rate. With a normal retirement that would be really high,
but if we got another forty thousand dollars a year coming down the road,
would that be a reasonable rate to start, knowing that we will drop below three in the future? I
realize there's going to be some increased risk by starting with a higher withdrawal rate given
(04:08):
sequence of return risk, but I would just be interested in to hear how you would think about
a situation like this. We'll have some flexibility in our spending. There's a buffer of about $10,000
of our current spending rates and about $15,000 in the budget in travel. For context, we have
a million dollars in savings right now and we're putting $70,000 a year. Also, I realize any number
(04:30):
we come up with today as a goal for savings will need to be adjusted based on inflation. That's why
I'm mostly interested in withdrawal rate. And then we can come back to the savings goal. Thank you
for any thoughts you share in a spitball in this situation. Nick and Nora from Pittsburgh, PA.”
Andi (04:47):
Now, I want to point something out. Through this, they tell us that
they want to retire at ages 56 and 62, but they never tell us how old they are now,
or how long they have to save until they retire at that time. And I did email
them back and I asked them, “Okay, how old are you now?” And I haven't gotten a response back.
Al (05:03):
Yeah. So we don't know. It's a-
Joe (05:06):
Well, he doesn't care about that. What he wants to know is that he's got a couple of
different phases. His wife is older than him. He wants to retire at the same age. She's going to
have a fixed income. 10 years later, he's going to have more fixed income. They're going to spend X
amount of dollars. And so that withdrawal rate in the beginning is going to be a little bit higher.
And then the Social Security dollars are going to come in. That's going to offset some of the
(05:27):
withdrawal rates. So he's like, “Well, how big a chunk can I spend in the beginning?” He was like,
“Hey, you know, four and a half, 4.7. Is that a, is that too much?”
Al (05:36):
Well, the answer's maybe we, don't really have enough to go on, but I would say it this way, Joe,
is when you're retiring, if you retire around 55 or before 60, you might want to think about
a three or three and a half percent distribution rate. If you retire between 60 and 65, you can
approach 4%. 65% is kind of the 4% rule, but yes, when you have other money coming in later,
(06:04):
of course, you can have a higher distribution rate for a while. As far as what that rate should be,
it just depends upon your numbers. So, we can't just give you a rate,
you have to do some calculations to figure out what's going to work for you. But yeah,
there's no question, if you have more money coming in from Social Security or
a pension,right? Then you can start out with a higher rate because when that kicks in,
(06:27):
you'd be at a lower rate. So that didn't really answer the question. But I don't know how to,
Joe (06:31):
I think it's all luck of the draw. I think he knows, he just wants to have the dialogue.
The sequence of return risk is the biggest risk that he has. You could take 8 percent out for the
first couple of years, it sounds like. As long as you get a, probably a five or 6 percent rate of
return in the overall markets. But if the market drops 20%, you pull out a little bit higher than
(06:52):
four. You're probably going to run into some trouble. But you have the buffers that you
said in regards to travel and you're buffering another ten thousand dollars. So this is where
you want to, you know, yeah, the answer is yes, you could probably spend more because
your Social Security is going to come in and cover a big gap. Think of it this way, is like,
what is the Social Security number that you have was like $40,000 for you and $22,000 for her,
(07:17):
so that's $62,000. And he wants to spend $100,000? Well, is your buffer 40 grand? If your buffer is
$20,000, then you only need $20,000 from the portfolio. If you have a million dollars today,
that's a 2 percent burn rate. So you just look at, alright, what does the number need to be
(07:38):
when you turn your Social Security on, is how I would look at it. In other words, so let's say
that the total need from the portfolio, and you don't want to count inflation, so I get that,
is that you want to spend $100,000 today, There's going to be $60,000 roughly a fixed income,
right? So there's a $40,000 shortfall at, what's his name? At Nick's age 67.
Al (08:04):
Right.
Joe (08:05):
Or 66.
Al (08:06):
Yeah, 67 I think.
Joe (08:11):
Well, whatever. So let's say it's a $40,000 shortfall at age 67.
Al (08:16):
Yeah.
So you at least probably want to have a million dollars left in your nest egg by age 67,
because then that will give you a four percent distribution rate at that time when you have
full fixed income. So from that point on and before if you want to spend more or less you
can buffer it that way just to make sure that you have that four percent burn rate
(08:39):
when both of your Social Securities turn on in all of your fixed income is. So who knows
what that burn rate or that the withdrawal rate - some years it might be really high
some years it might be pretty low. But that would be my gauge if I was Nick and Nora.
Yeah, I actually, I agree with that. It's the time when your fixed income comes in, where
are you at, what do you need, and you are going to have to factor in inflation, to be able to do
(09:01):
this properly, and then work backwards. But, the fact that there's some flexibility, I think that
total spend they want is $115,000, but they've got 15,000 travel and another buffer of 10,000.
So I like that. Joe, I like the fact that there's some buffer if things don't go quite as planned,
right? And so maybe you do your bit, your better, bigger travel in years where the market does well
(09:22):
and you don't travel as much when the market goes down or stays flat so you don't decimate
your portfolio. So you just have to be sensible about it. Something else I would think about if
I'm retiring at this point with you know, a long period between then and Social Security is, can I
make some extra income in some other way if I need to? I just want to have that in my back pocket.
Joe (09:42):
Yeah. If Nick's retiring at 56-
Al (09:45):
Yeah.
Joe (09:47):
-you work part time and make 20 grand or something.
Al (09:50):
To make it up. Right. Or, if nothing else to
make up what Social Security would have been, so you're in the same spot, right?
Joe (09:56):
Yep. Alright, no, really cool question. I like it. So again, this is, Nick and Nora,
what I would do, just make your spreadsheet, but count inflation. I get you're looking at whole
numbers and you just want to look at a burn rate. I think it's a little bit more complicated than
that. And a second thought is, I hate using a 4 percent or 3 percent or a sustainable distribution
(10:20):
rate as a retirement income strategy. You cannot look at it that way. It's really an accumulation
strategy of saying, “Hey, I need to have a million dollars if I want to spend $40,000 a year.” But
by the time you retire, and you start taking dollars from the portfolio, I mean, it's a totally
different strategy. The 4 percent rule is out the window. Because you're going to be pulling out
(10:42):
totally different percentages, you know, depending on what happens in your life, depending on what
happens in the markets, depending on, you know, what happens, you know, across the globe.
Al (10:52):
Yeah.
Joe (10:53):
It's just not that simple. It's not, all right, 4%, you're good. Because things
happen in life all the time. Things really good in life happen. Things
not so good. You just have to adjust as you go. So, that's a good ballpark, you know,
like kind of rule of thumb. But it's not a rule of thumb that I would abide by to say, Hey, I'm-
Al (11:13):
I'm good.
Joe (11:14):
Yeah. I'm perfect for retirement and no more planning's needed.
Al (11:17):
And that Joe, it does work if there's a flat market.
Joe (11:21):
If it's perfect.
Al (11:22):
Right. Which it never is. The market goes up and down at different times. Sequence of returns
mean you retire, maybe the market goes down for three years in a row. Now you're changing
everything. So you got to consider all of these things. That's why the 4 percent rule is just,
I agree with you, Joe. It's more of an accumulation plan. How much do you
need to retire? And then after that, it's like, how can I make this work?
(11:44):
What do I need to adjust each and every year, depending upon the circumstances?
Joe (11:47):
Right. What assets are you going to sell to create the income? What's
the taxation going to be? You know, how tax diversified are you? Should
you be thinking about conversions or not conversions? What is IRMAA? I mean,
so there's only, there's so many other things I guess you want to consider. So.
Al (12:01):
Yep.
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Andi (12:01):
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(12:24):
earned and send less to the IRS. Just click or tap the link in the episode description to grab your
free copy of the Withdrawal Strategy Guide. If you know someone who would benefit, why not share
the show and the free financial resources with your friends, your family, and your colleagues?
Joe (12:38):
All right, we got doc McMuffin from Minnesota, the homeland.
Al (12:43):
Yeah. Your homeland.
Joe (12:44):
The mothership. “Hi, Joe Al, and Andi. And thanks for the great
podcast. I've been listening for years and I love the content, humor, and great vibes.
Andi (12:54):
“vibes”.
Joe (12:54):
“I'm a 41-year-old physician. Mr. McMuffin is a 40-year-old engineer.” Alright,
Doc McMuffin. “I drive a 2012 Honda CRV with 209 miles and my husband drives a
2015 Chevy truck.” She doesn't know what type of Chevy truck it is, it's just Chevy truck.
Al (13:15):
Yeah, that's all you have to say.
Joe (13:16):
Chevy truck.
Al (13:17):
We get the idea.
Joe (13:18):
“My drink of choice is Chardonnay or IPA. And
his is funky sour beer.” He drives a Chevy truck, Mr. McMuffin, with funky sour beer.
Al (13:29):
Right.
Joe (13:30):
Does that mean that the beer he drinks,
he just doesn't care for, or is there such a beer called funky sour beer?
Al (13:36):
I don't, never heard of it. I don't know.
Andi (13:38):
I have a feeling she's saying that it's sour, so that makes it funky.
Joe (13:42):
Okay. “We have two elementary age boys, no pets. Regarding our finances,
combined 401k and 457, 2.4 million dollars. Nearly 50% of that is in Roth.” Geez.
Al (13:55):
Wow.
Joe (13:55):
Good for you, Doc. “Combined backdoor Roths are 130. Combined HSA is 107. Brokerage account,
130. Kids 529 plans, $30,000 each funded monthly. We'd cover college costs by
then. Primary residence is worth 750, have $150,000 left on a 3.6% mortgage.” Alright.
(14:20):
“I make $500,000 a year. My husband makes around 150. We both max out our Roth 401ks,
backdoor Roth IRAs, HSA, my pre-tax 457, and my husband's mega backdoor Roth every year. Plus $
12,000 in the taxable.” What possibly could be your question, Dr. McMuffin?
Al (14:38):
They're saving 150,000 a year.
Joe (14:40):
You're fine. You're good. Keep saving lives.
Al (14:43):
They've got over 2 million to start with.
Joe (14:45):
It's like, okay, and you're 40. All right, let's keep going here. “Despite our high tax
bracket, we are in Joe's camp of not missing the tax deduction and love Roth money.” See,
I'm with you, girl. “I work a ton but love being a doctor. My husband likes his job fine,
but is thinking of switching to a more flexible career in the next few years. Our investments are
(15:08):
currently 100% in index fund equities with 90% be in total U. S. market and the rest international.
My question!” Finally, doctor! “Anything we are missing? Any blind spots we should be thinking
about? Or anything you'd be doing different? I'm not sure exactly what our spending will look
(15:29):
like in retirement, but I'd like to be able to travel and order nice wine. I wouldn't be
surprised if Mr. McMuffin, semi-retired by age 45, but I'll probably have a hard time hanging
it up until I'm close to 60. Thanks for the spitball, you guys are the best.” Anything,
any blind spots? No, there's zero blind spots in this overall strategy. None.
Al (15:53):
It looks perfect. I would say, three things that weren't mentioned,
but they're probably covered, but just in case:
make sure you got appropriate disability coverage and life insurance and make sure
you've got to get emergency fund. Outside of that, I just keep doing what you're doing.
Joe (16:08):
Big Al, did you get an insurance license?
Al (16:10):
No. But, you know, when you make that much money, and if your husband retires,
then they're depending upon that, so you gotta think about such things.
Joe (16:20):
Got it. Yeah. She could be, like, Dr. Strange. You know, hurts his hand,
he can't do surgery anymore, then he has to go to Tibet or something,
right? No? You have no idea. Never watched a Marvel movie in your life, probably.
Al (16:35):
No, I have. I don't know that part of the story.
Joe (16:38):
Dr. Strange? You don't know?
Al (16:39):
Yeah. I know Dr. Strange.
Joe (16:40):
So he was a doctor. Surgeon. Really
good surgeon. His hands. And then he got in a car accident.
Andi (16:46):
Which part of the Marvel universe is this from?
Joe (16:50):
I don't know. Dr. Strange.
Andi (16:51):
Oh, okay.
Joe (16:53):
I got a three-and-a-half-year-old that all of a sudden just loves Marvel movies.
And so I have to watch these stupid movies over and over and over again.
Al (17:02):
If you would have asked me 30 years ago, I would have talked to you about Power Rangers.
Joe (17:08):
Oh, I suppose. Oh, Power Rangers.
Yeah. Is that what your kids were into?
Al (17:13):
Yeah.
Joe (17:14):
Okay. Andi, what were you into? Scooby Doo?
Andi (17:17):
Mr. Rogers. That was my guru. Absolutely.
Joe (17:21):
Mr. Rogers. Mr. Rogers Neighborhood.
Al (17:22):
Okay, nice.
Joe (17:22):
Won't you be mine?
Andi (17:24):
Yup.
Al (17:25):
That's why you're the fine person you are today, Andi.
Andi (17:28):
I try, you know? Somebody has to be.
Joe (17:31):
What was the king's name again? Mr. Howl? King Owl?
Andi (17:36):
No, that's Gilligan's Island.
Joe (17:38):
Well, no, it's Howl, right? It was an owl.
Al (17:41):
Howl the Owl?
Andi (17:41):
King Friday.
Joe (17:42):
No, he was the tree guy. Who was the king? The king was something, right?
Andi (17:45):
King Friday was the king. King Friday.
Joe (17:46):
Oh, yeah, King Friday. Yeah. And something Saturday.
Yeah. Ask me about Little House on the Prairie and I'll kill it.
Andi (17:56):
Although, I will say, somebody pointed out in the comments on YouTube that you said
that her sister's name was Debbie, and then at the end you finally remembered it was Mary. So.
Joe (18:04):
Yeah. Just takes me -it's a process.
Al (18:06):
You'll get it.
Joe (18:08):
I just got to put myself in the prairie and just be thinking about-
Andi (18:11):
Oh! And somebody also mentioned that it was actually Minnesota,
and I was shocked that you didn't realize that. Plum Grove, I think, Minnesota?
Joe (18:18):
Yeah, I knew that.
Andi (18:20):
You said it was Iowa.
Joe (18:22):
Well, okay, well-
Andi (18:23):
It was the homeland!
Joe (18:26):
It was a sequel or something, right?
Andi (18:27):
Got it. Okay. That must be it.
Al (18:29):
That's tough to comprehend, showing a little kinks here.
Joe (18:31):
I know. I got some kinks in the armor,
brother. I'm tellin’ ya. Oh my goodness. Ah, that age.
Alright, we got Fred and Ethel from Virginia. “Hi, YMYW team. We found the show last year and
have been enjoying getting caught up on past episodes. It's been extremely helpful. We’d
like a spitball on our strategy for taking Social Security. Here's the details. Fred,
(18:55):
he's 55 and is considering retiring around 59 to 60. He drives a Ford F-150 Limited King Ranch and
is a connoisseur of fine brown spirits, whiskey, rum, brandies and uh… amorcognac.” What is that?
Al (19:19):
Dunno.
Andi (19:19):
Armagnac?
Joe (19:20):
Okay.
One of his favorites.
Al (19:23):
Arm. Armagnac, I don't know.
Joe (19:26):
Arm-
Andi (19:27):
I think it's French pronunciation, so I think it's armagnac.
Joe (19:32):
Okay.
Al (19:32):
Okay. We'll go with that.
Joe (19:33):
Got it. Fancy Nancy there. “Ethel will turn 62 in March and is retired from raising
three children. All three are through college and on their own. She drives a Lincoln MKX
and prefers good wine in any color, and on any occasion, she drinks a dirty vodka martini. Oh,
(19:55):
on an occasion. Okay. Fred, he's a sole income earner, 450 salary bonus, and earns six,
earns Social Security benefit at age 70 in 2039, will be $59,000 per year in today's dollars. Ethel
has enough Social Security credits to collect on her own at $17,000 per year at age 62, 24 to 67,
(20:17):
31 at 70. We don't expect to need Social Security to fund our expenses in retirement. We have
about $1. 8 million in a 401k, 275 in an ESOP, another 150 in an IRA, commercial real estate
partnership of $500,000. Fred's privately held company stock is $3.9 million.” Okay.
Al (20:42):
Wow. Okay.
Joe (20:43):
All right. You go, Fred. “Which he will sell and move into a brokerage account when
he retires. Two homes with a mortgage average 3.25%. Total equity combined $1.5 million.” Okay,
yeah, so you don't need the Social Security. You got millions. So,
they're gonna try to figure out how to squeak every last-
Al (21:01):
Easy, easy answer, right.
Joe (21:04):
It doesn't matter. Okay, so the total current net worth, $8 million with $6.5 million
in non-residential Investments.” So liquid investments, “assuming nothing catastrophic
in the market or Fred's company over the next few years, the expectation upon Fred’s retirement is
the total net worth of about $10 to $11 million, $8 to $9 in non-residential investments. When Fred
(21:28):
retires, the plan is to live off all the after-tax accounts and do Roth conversions on the retirement
accounts using the after-tax funds to use to pay tax. Here's the question. Conventional wisdom is
to wait until 70 to claim Social Security to pay the tax.” I mean, “claim Social Security benefits,
which Fred plans to do. Ethel's spousal benefit, when Fred claims, will be about $24,000 per
(21:52):
year. That combined with Fred's $59,000 will provide $83,000 of Social Security income.
We are strongly considering Ethel start claiming Social Security when she turns 62 in March of
this year. We're thinking that income can be used to invest, pay Roth conversion taxes,
go on a cruise, etc. We would do this for 15 years until Fred claims Social Security and
(22:14):
Ethel can switch to her higher spousal benefit. Straight math suggests that this strategy will
provide more dollars over the next 15 years than if she waited to claim at 67 or 70 And she'd still
be eligible for the higher spousal benefit when Fred claims his. Does Ethel taking Social Security
early makes sense? Are there disadvantages in doing so? Are we missing anything? Thanks in
(22:36):
advance for your spitball. Fred and Ethel.” Yeah, they're missing a couple key things.
Al (22:42):
What do you think?
Joe (22:44):
Okay well If she claims at 62,
she's going to have a reduced benefit. She's claiming on her own benefit at 62.
Al (22:52):
So she'd get about $17,000.
Joe (22:54):
She's going to get a 30% haircut for the rest of her life.
Al (22:59):
That's right.
Joe (23:00):
So she cannot claim the spousal benefit until he claims his own benefit.
Al (23:06):
That's correct.
Joe (23:07):
So she's going to have to wait until Fred is age 70 to claim the spousal benefit.
Al (23:14):
and she'll be about 76 or 77.
Joe (23:17):
Okay?
Al (23:18):
Yep.
Joe (23:18):
The spousal benefit is going to be half of what Fred's benefit
is at his full retirement age minus the fact that she took
hers at age 62. So she's not going to receive the full spousal benefit.
Al (23:36):
So that was his benefit had he taken at 67, right?
Joe (23:40):
Correct.
Al (23:41):
Half of that and then a 30% haircut on that.
Joe (23:43):
Correct.
Al (23:44):
Yeah, right.
Joe (23:45):
So I'm guessing the spousal benefit
is going to be lower than her benefit as she took at age 62.
Al (23:52):
That's what-
Joe (23:53):
If she doesn't take it at 62, then the spousal benefit is going to be higher. But after
hearing this, and Fred's like, well, “she's taking it for sure.” If you take the benefit at 62 on her
own benefit and invest the money, and assume a 6% growth rate, yeah, you're probably gonna make out.
Al (24:11):
Yeah, well, I think so too, because you get, what, you get five years of extra money that you
wouldn't have had. I mean, yeah, you'd have more on a spousal benefit, but not that much
more. I think if you do the straight math, just like you said, Fred, if you factor in
the month-by-month income for those five years, I think you'd do better just having her go ahead
and collect. And I think the second question, should you do Roth conversions, the answer is yes.
Joe (24:36):
Well, no, he wants to use the money for, to pay the Roth conversion.
Al (24:39):
Yeah, yeah.
Joe (24:40):
Go on trips. You have $10 million. Yeah. Take it at 62. Go have fun. See,
I'm the voice of everyone that listens to the show when they hear these numbers.
Al (24:54):
I know. They go, this isn't the show for me.
Joe (24:57):
They shut it off. They're like. So then we have to make fun of Fred and Ethel.
Al (25:02):
We just answered the questions.
Joe (25:04):
Yep. You got $11 million. I would imagine one month of interest on his $11 million is
going to be more than whatever he's trying to figure out with his Social Security strategy.
Al (25:19):
Yeah, I would agree with that.
Joe (25:20):
All right. So congratulations on all your success. But yeah, take her benefit at 62 because
I don't think he understands the full rules of that. She has to wait. So, spousal benefit,
again, if you want to claim the spousal benefit is going to be half of your spouse's benefit. So
you could claim yours or half of your spouse's, whatever's larger, but you can only claim the
(25:45):
spousal benefit when your spouse claims their benefit. And if you claim your benefit early,
you're going to have a permanent haircut either on your own record or the spousal. There you go.
Social Security 101. For those- you want to talk about GPO and WEP?
Al (26:04):
No, not particularly.
Joe (26:06):
Got it. Okay. Some rules have changed there.
Al (26:08):
True.
Joe (26:09):
Get into that some other day.
“Alright, my main question is,” we got the Moonshiner in the City Girl.
Al (26:16):
Okay, Florida.
Joe (26:17):
A little Orange Park, FLA. He's got a main question, “my main question,” and
then all of a sudden this is like four pages long. So I don't know what this
means. “My main question, am I overly obsessed with trying to avoid future RMDs,
IRMAA surcharges, and RMDs? Is my obsession causing me to waste too much in current savings
(26:40):
on Roth conversions?” Alright, here we go. Let's see, how long is this one?
Al (26:47):
It's about a page.
Joe (26:50):
I don't even know what page 7 is. Aaron stapled this on me and double sided it.
Al (26:55):
Makes it tougher.
Joe (26:57):
Alright, here we go. “I'm also concerned about doing nothing. And
either of us die with unconverted IRA or TSP on the table, the RMD and tax situation will
be magnified. I always look forward to your podcast. Where I listen via SiriusXM.” Oh,
cool. “While working out or working outside. Your joyvial, non-intimidating,
(27:22):
informative explanations are the best. Very joyvial. Joyvial.
Al/Joe (27:25):
Joyial. Joyvial.
Andi (27:26):
I like joyvial. That's even better than jovial.
Joe (27:31):
Yeah, it feels like I've had a couple cocktails myself.
Joyvial. “Hearing Andi's welcoming voice is a major benefit.” It is a major benefit. Yes.
And (27:41):
Thank you.
Joe (27:42):
All right. We identify as blue-collar working class, but we feel like the federal-
Andi (27:47):
Revenuers.
Joe (27:49):
Revenuers. “But feel like the federal revenuers”-
Andi (27:53):
“Tax us at white collar rates.”
Joe (27:55):
Got it.
Al (27:56):
Okay, so they feel like they're paying a lot of tax.
Joe (27:58):
The IRS. The Federal Revenuers. I don't think
I've ever heard anyone call the IRS the Federal Revenuers.
Andi (28:04):
That sounds like the name of a band. The Federal Revenuers.
Joe (28:07):
It does, I like it.
Al (28:08):
It's clever. It's catchy.
Joe (28:11):
Yeah. We're blue collar. You know, my mom is like,
“I'm a blue-collar lady with champagne taste.”
Al (28:19):
I would agree with that. I met your mom.
Joe (28:23):
Yeah. “After retiring for about 26 years stretch in the Navy,” thank you for your service,
“I went to work in the real world. City Girl also served in the Navy for 10 years where we
met on the remote British isle of Diego Garcia.” Very romantic. She later retired from a civilian
(28:45):
career. We enjoy spending time where I grew up in the Appalachian Mountains. Visiting vineyards,
eating out, and occasional concert. Oh my god, I feel like I'm reading, like, a love novel.
Andi (28:58):
You always want people's stories! You want
to get into their lifestyle and what they're doing! Here you go.
Joe (29:02):
Now I gotta go to the British Isles of Diego Garcia.
Al (29:05):
Even this might be excessive.
Joe (29:07):
We just love walking around the Appalachian Mountains, visiting vineyards.
Al (29:12):
Hand in hand.
Joe (29:13):
Under waterfalls.
Andi (29:14):
He hasn't even gotten to the drinks yet.
Joe (29:17):
Yeah, “eating out and maybe an occasional concert.” Listening to-
Andi (29:23):
Kenny G.
Joe (29:23):
Diego Garcia play the ukulele.
Al (29:28):
I like that. Okay. What do they like to drink?
Joe (29:33):
Okay. “I enjoy a few sips of a good bourbon.” A few sips, okay?
Al (29:38):
Can you do a few sips?
Joe (29:39):
Yeah, I can do more than that. “Elijah Craig, a little barrel proof,
an Irish black and tan, or a German W”-
Andi (29:49):
Warsteiner.
Joe Warsteiner Pilsner.
Al (29:52):
Warsteiner Pilsner.
Joe (29:54):
“City Girl prefers an un-oaked dry Chardonnay.
I drive a 2024 Silverado and City Girl drives a 2017 Mazda MX 5. I also have a
Massey-Ferguson farm tractor at our getaway location. Oh, they got a getaway location.
Al (30:10):
Yeah, with a tractor. That's an important fact.
Joe (30:13):
Yes.
Andi (30:14):
I'm just imagining them getting away from,
like, a bank robbery or something like that in their tractor.
Joe (30:19):
“I'm shooting to convert $200,000 to Roth every year from age 66 to age
70 because should keep me within the 24% tax bracket and the third IRMAA bracket.
Al (30:30):
Okay.
Joe (30:31):
200 grand a year. Big Al.
Al (30:33):
That's a lot.
Joe (30:34):
That's a, it's a big chunk of dough. “Our retirement nesting includes $765,000 Traditional
IRA, TSP of 705, Roth IRA and Roth TSP of 225. Cash at 25. Vanguard Mutual Fund of $22,000.”
All right. “Out of a habit, I contribute monthly to a mutual fund. A big chunk of
the $225,000 in cash will be used to pay the Roth conversions. Combined cash flows from pensions,
(30:59):
City Girl’s Social Security, plus her $24,000 IRA distribution is $126,000, gross of $105,000,
or $100,500. We basically just spend it. I plan to delay Social Security until late 2028 when
I turn 70 and I expect to receive $39,000 gross for $26,500 net after tax and IRMAA. Tricare and
(31:21):
Medicare cover most health care costs. I turn 67 and City Girl turns 68 later this year. We both
retired at 65 and have good financial security. We do not have children or grandchildren. We
recently lost our beloved cat and chocolate lab due to old age. I'm trying not to follow
their leads. We're totally debt free and own two properties mortgage free. According to Zillow,
(31:45):
our Florida home is $350,000 and our out of state Montana getaway is probably worth $400,000. The
value would be the land, not the old farmhouse. I hope you will consider responding to our situation
and that other hard-working folks might benefit as well. Thank you. Moonshiner and City Girl.”
Andi (32:04):
I'll point out that is Mountain Getaway probably in the Appalachians rather than Montana.
Al (32:09):
And I will clarify, because you read that pretty fast, $765,000 in an IRA/TSP
and $705,000 in a Roth IRA and Roth TSP. So it's about mixed, $700-$800,000 each.
Joe (32:22):
Okay. And he wants to convert $200,000 a year.
Al (32:25):
He wants to get it all out. So he's wondering, is he-
Joe (32:28):
Yes, don't, is he's overly obsessed. Yes, you are overly obsessed. Go have a
cocktail and go under the waterfall of Diego Garcia. Yes, he's totally obsessed.
Al (32:41):
I would agree with that. And here's some reasons why
you don't necessarily want to convert everything.
Joe (32:45):
Cause you got a 10%, 12%, right?
Al (32:47):
Yeah. Well, you got the lower brackets. Now, you know, maybe those get filled up with pensions,
so we don't, you know, even assuming that, so medical, if you have medical expenses down the
line, those are deductible, you can put them, pull them out of the IRA, you record that as income,
but then you get to record the deduction, they net out. Right? So, if you have it all in a Roth
(33:09):
and you pay taxes on money you don't need to pay - or what if you want to give money to charity? You
could do a qualified charitable distribution right out of the IRA and not pay tax. So,
there's some reasons why you don't want to convert everything. and the, and maybe even
the most important, Joe, is the one you said, which is you want to fill up the lower brackets.
Joe (33:26):
22%. That's where you go, Moonshiner. 22% is $200,000 of
taxable income. Your income right now is $125,000. So you can do plus
the standard deduction. I would do half of the conversion that you're thinking.
Al (33:42):
Yeah, I would say that's about right. About $100,000-ish. Something in that range.
Joe (33:47):
Stay in the 22% tax bracket. I don't think you need to go to the 24,
because it- the RMDs are not going to be that bad. He's got 10 years, if he converts $100,000 out.
Al (34:00):
Yeah, for four years.
Joe (34:02):
He will get all of it out in 10 years and probably pay a lot less tax.
Al (34:04):
Yeah, you can keep going if you want, right? You can still convert even though
you've hit Social Security age. It's just you have a little extra income,
so you convert a little bit less. So maybe you convert $70,000 instead of $100,000,
whatever it may be, right? So don't think that you have to pay in these higher tax brackets.
Joe (34:20):
Yeah, I get what- he's thinking of the widow or the widower's tax. If one were to die,
you know, some decent fixed income and they got a lot of money still in retirement accounts,
but it's $700,000. He already has $700,000 in a Roth.
Al (34:32):
It's already looking-
Joe (34:33):
If it was like 1.4 all in the TSP or the IRA or 1.5, then I would be like,
yeah, 200 is probably the number if he had other income or cashflow to live off of and pay the tax
Al (34:45):
I would agree with you.
Joe (34:47):
So, yeah, 22% tax bracket.
Andi (34:52):
Does your outdated, tired, set-it-and-forget-it financial plan
need a complete money makeover? Assumptions you make about your finances can make or break your
retirement lifestyle - will it be bad or beautiful? This week on the Your Money,
Your Wealth TV show, Joe and Big Al show you how setting goals, revamping your portfolio,
and doing a tax turnaround can give your retirement plan the financial facelift it
(35:13):
needs. Click or tap the links in the episode description to watch Complete Money Makeover,
and to download the companion Money Makeover Guide for free. This is a limited-time special
offer on that guide, so get yours before this Friday, as it won’t be available again for
several months. If you’ve got money questions or want your own Retirement Spitball Analysis,
click or tap Ask Joe and Big Al in the episode description and send it on in.
(35:36):
Got a little Lily, from California. “Hi, my name is Lily. I love your show.” Well,
well, thank you. We love that you love our show. “I have a question
on behalf of my son regarding tax saving strategies. My son is 29 years old and has
recently started his professional career and earns an annual income of 750 grand.
Al (35:56):
Was that your first job?
Andi (35:57):
As a starting salary.
Joe (35:58):
Starting salary. At age 29. Yeah, that was me. Lily. 29. 750. What is he?
Al (36:07):
I don't know. Does he work for a private equity firm maybe?
Joe (36:13):
“He's single and falls in the highest tax bracket. To reduce his income tax liability as
much as possible, he is exploring investment opportunities. He currently has $300,000 in
cash on hand, but is not interested in purchasing a primary residence right now,
as he doesn't plan to stay in his current location for long. The area is remote and
(36:33):
not ideal for property investment. Instead, he's considering buying property in San Diego
and renting it out. Oh, he's going to be our neighbor. I guess so. You know what?
He's like a Land Man. Texas oil. Seen that yet, Big Al? Land Man?
Al (36:49):
No.
Joe (36:50):
Andi?
Andi (36:50):
I haven't even heard of it. Is that a movie or is that on TV?
Joe (36:54):
Are you…
Al (36:54):
Is that HBO?
Joe (36:55):
Aaron! Alright, it's by far one of my favorite shows, I think, of all time.
Al (36:59):
I know, every show that you like, I hate, so.
Joe (37:01):
Billy Bob Thornton, you like Billy Bob Thornton?
Al (37:03):
I do, but not all his stuff.
Joe (37:06):
He's a Land Man. He goes around, you know,
they're in Odessa, Texas, Midland, Texas. But $750,000 a year at 29.
Al (37:16):
I can't believe it.
Joe (37:17):
It's incredible.
Al (37:17):
It's great.
Joe (37:18):
All right, so he's gonna buy in San Diego.
Al (37:21):
Okay
Joe (37:21):
“His mortgage payments will likely exceed $7,000 a month.” It might be more than that, Lily.
Al (37:27):
It could be.
Joe (37:30):
“While rental income will range about $4,000 to $5,000. My questions are, will the tax benefits
from the rental property offset the negative cash flow? Are there any other potential investment
opportunities that could help reduce his income tax liability? Thank you so much, looking forward
to hearing your thoughts.” Alright, your 29 make $750,000. W-2 wages, I'm guessing?
Al (37:50):
Yep, that's what I would guess too.
Joe (37:52):
And so, the 401k is probably the only thing that this young man has
that's going to save him any ounce of taxes unless he does something exotic
that we would probably highly recommend that he wouldn’t do.
Al (38:06):
Yeah, and I don't even want to go into those, but there are some pretty weird things out there.
But, yeah, so when it comes to rental property, 1986 is when Ronald Reagan and his administration
passed the passive loss rules, which limited the ability to write off losses. When your income is
too high, and your income is too high, way too high, right? Once it's over $150,000,
(38:30):
you can't take losses on rentals. What you can do, though, is you can take that rental income,
and you can deduct the mortgage interest against it, property taxes against it. If
you still have extra, it'll carry over to the next year, but you cannot create a loss. So,
Joe, I would tend to agree with you. 401k is something you could do, contributions,
(38:50):
right? To be able to reduce your taxes, invest in municipal bonds. Do you do tax less harvesting,
right? If, you've got investments that have gone down and you sell them against other ones.
Joe (39:02):
Everyone thinks real estate will give you such a tax break. And it doesn't.
Al (39:06):
Yeah. It doesn't.
Joe (39:07):
it's a good investment. San Diego real estate has appreciated fairly nicely. Buying
a $1.2 million property, and so renting it out, you're going to lose, you got to bank on growth,
right? So what do you think that the growth rate is in San Diego and where does he want to buy?
(39:28):
You know, if he buys coastal, it's probably going to have a pretty good growth rate,
but it's going to be pretty hard to find a $1.2 million property, you know,
the west of the five. Are you west of the five? No, you're by me, you're east of the five.
Al (39:44):
Yeah, east, just like you. Yeah, I'm closer to five, but I'm not west of it.
Joe (39:48):
Got it. But no, I think that's a fine investment. He
makes $750,000 a year. He wants to buy the property in San Diego. At
some point he might want to move here. He's already got the property. The sooner
that you can buy into Southern California and some, you know, desirable places, the better.
Al (40:04):
I think so too. And so maybe with an eye towards moving in later. Right? So
think about that. Maybe you spend a little bit extra, a little bit more negative cash flow,
but it's the place you want to live. I don't know. You take a look, but yeah,
you're not going to get a tax write-off, unfortunately.
Joe (40:18):
Lily, I got to know, what does your son do? 29, $750K.
Andi (40:25):
Starting salary.
Al (40:27):
Venture capital firm?
Joe (40:28):
It does remind me of myself.
Joe and Big Al's Very First Jobs
Andi (40:32):
What was your very first job, Joe?
Joe (40:34):
My very first job ever?
Andi (40:36):
Yeah.
Joe (40:37):
I worked at a grocery store, Rainbow Foods.
Al (40:39):
Were you making 750?
Joe (40:41):
I was making $7.50 an hour.
Al (40:46):
I actually am a little older than you. My first job, I was making less than $7.50 an hour.
Joe (40:51):
Oh, that's why I have terrible anxiety. I can't go into grocery stores anymore.
Al (40:56):
Oh, yeah. Because it reminds you.
Joe (40:57):
Oh, man. It's terrible.
Andi (40:59):
You’ll start merchandising and –
Joe (41:00):
Yeah. But I was a cart guy.
Al (41:01):
You were a cart guy.
Joe (41:01):
Yeah, I would push the carts in.
Al (41:02):
Was that stressful?
Joe (41:03):
No, it was great. You can walk around, you know, pick up carts.
Al (41:07):
Say hi to people.
Joe (41:09):
Yeah. And then I got promoted. And then I worked in the produce section.
Al (41:12):
Oh, okay.
Joe (41:13):
That didn't last very long because I wanted to be outside.
Al (41:15):
You're an outdoor guy.
Joe (41:16):
Yes. Well. I don't know. I don't know, like putting grapes in a, that was just boring and I
hated it. Then you had the lifers, right? The guys that were working the produce.
Al (41:27):
Yeah. They've been there. They were like, 55 years old.
Joe (41:29):
Yeah. They're 60 years old,
waiting for their pension. They were not Lily's kid making 750 grand.
Al (41:35):
They might have made more than $7.50 an hour.
Joe (41:38):
Yeah. And then, no, I worked two jobs. Then I had a job at the Shantytown.
Al (41:42):
Shantytown.
Joe (41:43):
Yep. It was a little bar restaurant in Robbinsdale, Minnesota.
Al (41:47):
Oh.
Joe (41:47):
My father used to go there Friday afternoons after a hard work, a work week.
Al (41:53):
So that's where the bar experience started.
Joe (41:55):
Oh, yeah. Just, it was like draft beer only three huge draft, drink s**t beer. So
we would hang out, so the family would go. He would have a few beers and we would have some
burgers and then he got me a job there. And so I was probably, I don't know, I think 14, 13?
Andi (42:15):
And serving beers. Really? Hm.
Joe (42:16):
Oh, I wasn't serving beers. I was mopping floors.
Andi (42:19):
Okay. Thank you for clarifying that.
Joe (42:20):
Yes. No, there was the owner of the place was serving beers. I was mopping floors,
cleaning the bathrooms. You know, yeah. Two jobs, 13, I think 12, maybe. I don't know. I
was young. Yeah. I was probably breaking child labor law rules back then. But I was a hustler.
Al (42:36):
Maybe it's different in Minnesota. I don't know.
Joe (42:38):
I started my own business. Yeah. I was mowing lawns.
Al (42:42):
Yeah.
Joe (42:42):
Joe and Ted's lawn service. We had like four clients.
Al (42:47):
I started my business at 13, mowing lawns too. I had one client, but it was steady, twice a week.
Joe (42:53):
Twice a week to mow the lawn?
Al (42:55):
I made $1.50 an hour. That was just amazing to me.
Joe (42:59):
Whose yard were you mowing twice a week?
Al (43:02):
I don't know, but this neighbor lady wanted it twice a week. She was on it.
Joe (43:07):
Like my gardener grinds me. “No,
you can come once a week. You know once every other week in the winter?”
Al (43:13):
Yeah, right, because the grass doesn't grow fast.
Joe (43:15):
And I don't really have a big yard.
Al (43:17):
Yeah.
Joe (43:18):
I could do it real quickly, you know,
but I got trees, and so there's the tree trimming and the leaves and all of that.
Al (43:26):
I have a friend that used to live in Poway, one of the really nice homes in Poway,
and this is probably when he was in his, I don't know, late 30s,
and he just couldn't stand to pay for a gardener, but it wasn't the kind of
neighborhood where you'd get caught mowing your own lawn. So he would get up at 6:30
in the morning on a Saturday with a ski cap and a push mower so it wouldn't be too loud.
Joe (43:51):
Oh, well, all right. Well, congratulations. Good luck. Look us up if your son moves to San
Diego. We're right down the street. Andi Last, wonderful job today. Thank you for everything.
Andi (44:04):
Thank you.
Joe (44:05):
Aaron, wonderful. Aaron Townsend, folks. Big Al.
Al (44:10):
it was fun. Good job again, Joe, as usual.
Joe (44:12):
All right. We'll see you guys next week. The show’s called Your Money,
Your Wealth®. Keep the questions coming and yeah Keep the retirement flowing.
Andi (44:18):
Your Money, Your Wealth is your podcast, and you are awesome! On Feedspot.com you’ve made YMYW
the #1 in the 100 Best Tax Podcasts, #3 in the 50 Best Retirement Podcasts, #4 in the 60 Best
Financial Planning Podcasts, and #46 in the Best Money Podcasts! And on Goodpods.com you’ve made
(44:39):
YMYW the all-time #1 of the Top 33 Retirement Podcasts, #7 of the Top 98 Finance Podcasts,
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(45:01):
it helps us grow. The show truly wouldn’t be a show without you. Thank you, friends.
Your Money, Your Wealth is presented by Pure Financial Advisors. Schedule a no-cost,
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on Joe and Big Al’s team at Pure. It’s free, it doesn’t commit you to anything,
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(45:24):
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Pure Financial Advisors is a registered investment advisor. This show does not
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(45:47):
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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