$1.6M for Retirement — Seemed Like Enough? (134)

You can do everything “right,” hit a big retirement number, and still find out you can’t afford to retire at 60. That’s the uncomfortable math behind Robert and Susan’s $1.6 million plan and it has nothing to do with under-saving. The real issue is where the money lives and how withdrawals show up on your tax return. When your nest egg is concentrated in a traditional 401k and IRA, the IRS takes a bite of every distribution as ordinary income, turning a simple spending goal into a much bigger tax problem than most people expect. 

Let's dig into the five-year gap before Medicare and why Affordable Care Act marketplace subsidies can vanish if your household income crosses a hard line. For a couple, going even $1 over the threshold can wipe out the subsidy completely, which can make health insurance dramatically more expensive right when you’re trying to keep retirement expenses predictable. If you’re planning early retirement, the way you sequence withdrawals matters as much as your investment returns. 

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If you or someone you care about could use the help of a financial advisor and sees the value in establishing a financial plan, please reach out to me. 

Thanks for Listening! 

Jonathan

Episode Transcript

SPEAKER_00 (00:01):
Robert and Susan have saved$1.6 million.
They're both 60, they're bothready to retire.
And here's what they need toknow before they leave their
corporate jobs.
The way that money split acrosstheir account decides whether
they're actually ready to retireor if they should wait.
And it's not because they didn'tsave enough, it's because which

(00:23):
account the money sits in andhow it gets taxed.
By the end of this video, you'llknow the account that makes the
difference and why most peopledon't even open it until it's
too late.
Let's start with Robert andSusan's plan.
This is a hypothetical example.
$1.6 million, all of it intraditional 401k and IRA
accounts.
I've worked with a lot ofretirees who look at that number

(00:46):
and think that's what they haveto spend.
And it isn't.
In fact, there's a tax bombhidden inside those accounts.
Every dollar that comes out getstaxed as ordinary income.
It's never been taxed.
So when Robert and Susan saythey want$120,000 a year to live
on, they're not withdrawing$120,000.

(01:07):
They're withdrawing$120,000 pluswhatever the IRS takes on top of
that.
And that's a different numberthan the one on the statement.
Robert and Susan are 60.
So Medicare doesn't start until65.
So for five years, they need tobuy their own health insurance
on the Affordable Care Actmarketplace.
And that coverage comes withsubsidies, but only up to a

(01:29):
certain income threshold.
For a household of two, thatlimit is 81,760.
And if you cross it even by adollar, the subsidy vanishes.
It doesn't reduce, it'scompletely gone.
So Robert and Susan's$120,000withdrawal doesn't come close to
staying under that threshold.
It blows right past the$81,760.

(01:53):
And because every dollar of thatwithdrawal counts as income,
they don't just lose part oftheir subsidy, they lose all of
it.
And they pay the full price forhealth insurance on top of the
taxes they've already owed.
So what if their$1.6 millionwasn't split$1.6 million in IRA
$401Ks and zero in any otheraccount?

(02:16):
What if$600,000 of it had gonesomewhere else along the way?
I'll call this the opportunityfund.
It really is just a taxablebrokerage investment account,
nothing exotic, no special rulesto qualify qualify for.
I call it that because of whatit lets you do later.
And I'm about to show you themagic of the opportunity fund.

(02:40):
It it allows you to go anywhereto do anything later when you
need it.
So let's say Robert and Susanbuilt one of these up to
$600,000.
We'll say$400,000 of it is theirown money.
It's already been taxed, it'salready theirs.
200 of that is growth.
So$600 is exactly five years ofa hundred and twenty thousand

(03:03):
dollar lifestyle they want.
So for the next five years,every dollar they spend comes
out of their opportunity fund,not their$401.
And when they pull that$120 ayear out, most of it isn't
income at all.
Uh there might be a little bitof dividends and interest, but
it's primarily going to beprincipal coming back to them.

(03:24):
And the gain portion is tax ascapital gains, not ordinary
income.
And so for a couple spendingnothing but the opportunity
fund, that gain lands wellinside the 0% capital gains
bracket.
Their taxable income for theyear stays small enough that
they owe uh little to nothing infederal tax.

(03:45):
And they also stay nowhere nearthe 81,760 threshold.
So their subsidy, theirAffordable Care Act premium
subsidy, also stays intact forthe full five years.
So while the opportunity fundcovers their lifestyle, the
million dollars is still intheir 401k.
Remember, we've split these outin this example.

(04:07):
And so the IRA isn't sittingthere doing nothing.
It's actually still invested.
It's still growing, it'suntouched.
And so if we assume an 8%average return, and I want to be
clear, that's an assumption forillustration purposes.
It's not a promise of what anyportfolio will do.
That$1 million grows to roughly$1.469, almost$1.5 over the five

(04:33):
years without a singlewithdrawal.
They've almost replaced the full$600,000 that they had taken out
of their opportunity fund.
So at the same time, Robert andSusan can afford to delay Social
Security instead of claimingearly at 62.
Every year they wait locks in ahigher permanent monthly payment

(04:55):
from Social Security for therest of their lives.
So the same$1.6 million tostart, but because where it was
split, they get a five-yearbridge to Medicare, a 401k that
kept compounding instead ofshrinking, and a bigger Social
Security check for life.
None of that was possible in theall 401k version of this plan.

(05:19):
This isn't something you set upthe year before you retire.
It's something you buildalongside the 401k.
It takes years of planning aheadof time.
Get the full company matchfirst.
That's free money given to youby your employer.
So you always want to take it.
But once the match is covered,every extra dollar doesn't have
to go into the 401k.

(05:40):
Some of it can go into theopportunity fund instead.
And not choosing one accountover the other, but build both.
So when you get to Robert andSusan's situation in the future,
you have options that theydidn't.
I'm Jonathan Bedner, certifiedfinancial planner at Paradigm
Wealth Partners.
If you want to know what yournumbers look like, what an early

(06:01):
retirement would actually do foryour taxes, your health
insurance costs, and your SocialSecurity, schedule a call with
us using the link in thedescription.
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