How to Retire ASAP - and Where to Save to Get There - 505

Ricochet J in Colorado and her husband want  to retire as soon as humanly possible. Are they on track? Should they save their surplus funds  to a brokerage account or a solo 401(k)? That’s today on Your Money, Your Wealth® podcast number  505. Plus, Micah in South Dakota wonders whether having a $40,000 a year pension is basically  the same as having a million dollars in bonds,

We'll continue on.  “Hi,  Joe, Al, Andi.  Ricochet!

Ricochet J!

Ricochet J!  I was gonna totally butcher  that, but I took a guess that it was Ricochet.

Well done.

Good for you.

Yeah.  He's here from, Ricochet J from  Colorado. “This is surely what my golf nickname would be if I played more.” Ah, okay a little  ricochet probably a little blade it right in the trees. “Thank you for taking my question.   I started listening to show about a year ago, and I first I wasn't sure about it. Well, just  one of you.” I know where he's going with that.

I wonder which one.

I know. See, it's just like I'm a fine wine.  It just takes time. You fall in love.  “But you've grown on me, and I enjoy listening each week  during my commute. Now, not really in the car, so I'll tell you, the last exciting place we  traveled was to Monaco and the Canary Islands.”

Or Morocco.

Whatever. Yes.  You  say Morocco, I go to Monaco.

It turns out they're different places.

It's so beautiful at both.

A little better in Monaco, in my opinion, but-

“ Look at Snooty Pahootie over here.  Okay. “The coast of Morocco is amazing. And it's worth the road trip. Drink of choice  for me is a Paloma or a glass of Chardonnay. Husband doesn't drink. But he does  love those athletic drinks NA beers.”

Nonalcoholic.

Yeah, I've never had one of those.

Yeah, I have. They're pretty good.

Are they?

Yeah.

I think I'd rather drink water.  NA beer.

Well, I'll give you, I'll  give you 10 more years when you don't need quite as much alcohol,  but you still want to have fun.

Have a little taste?

Yeah, a little taste. Yep.

Okay. All right.  “I am looking for a  spitball on our situation. I'm wondering how best to direct an expected increase in income in  the future retirement funds.” Okay. “I work for a municipality and my husband is self-employed. My  question is whether we are better off directing surplus funds to a brokerage or setting up a  solo 401(k) for him. Here's our info.  We have a combined gross income of $200,000 and next  year I expect to have a pay increase to about

It is.

All right. “Our son has about $55,000  in his 529 plan our account and our account, and the grandparents- we keep-  we'll keep putting  funds into this, and I'm a little more worried about a retirement right now, so I'm not going  crazy with that and just adding $300 a month.” Wow. Ricochet J.  This is a novel.

It keeps going.

Yeah.  “Spend about $8000  a month depending on where it's hockey season for our son, aka the longest  and most expensive sport a kid can play.” Never played hockey, but my best friend did  in high school.  “I expect we'd spend the same, or a little bit more in retirement since we'd  love to travel.” Alright. “We'd like to retire

It's $1500.

$1500 a month? $1200 a month? $1200?

I think so.

Yeah. “My husband's is $1250 at 62,  $1900 at 67 and $2450 at 70.  We have a loose plan that as we near retirement time,  we move back into our rental to get two years of primary residence back before selling the  lot. We'd love to move around, maybe France, or move abroad, maybe France. France and  live in a country with a national health

It's still going.

I'm sweating. This is hard work here.   “Can you spitball how we're doing and how I should be directing our new funds? Is our  dream of living in the land of baguettes?-“

Baguettes.

Baguettes. “- baguettes and vino on track?”

Bread and wine.

Mmm.

Translated.

Okay, thank you, bro.  “I'm also curious  if you approve of my asset allocation strategy. I'm going heavy on stocks since I have a  pension coming. I have my husband's Roth IRA, 70/30. The brokerage is all in stock market.  We're just trying to sort out how to best fund the gap until we can start reaching our Social  Security and our pension, hoping that between you, some of the combined house sale funds in the  brokerage of our rounds, okay, blah, blah,

Yeah. So that, that one's easy.

So total assets. She's got $300,000.

Yep.

$85,000 in a rollover IRA, $10,000  in a brokerage, $200,000 in a Roth.

Yep. Rental income, $30,000,   $50,000 a year in pension later. So let me recap a couple of things here, Joe.

All right.

So first of all, question whether we're better  off directing surplus funds to a brokerage or setting up a solo 401(k) for him. I would  do the solo 401(k) every day of the week, particularly since when it, the funds might be  needed according to the year. Your explanation or question, he'll be in his 60s and it would be  fully available for withdrawal. Right? So yes, do the solo 401(k). It's going to be tax-free.  So that's an easy one. In terms of whether you're

Well, hold on, let's see, there's an  easier way to deal with this. Don't start peddling financial planning services over there.

Well, yeah, but, I mean, you can't, it's hard to spitball this when there's  so many variables.  I don't care-

It's almost impossible.

I don't care if, she uses a program herself. Joe; It's $96,000 is what she wants to  spend and she's 45 years old, right?

She is 45, husband is 51.

All right, so she wants  to retire in the late 50s?

Yeah.

Okay, so 45, 55. I'm gonna-  I'm gonna get her retired at 60.

Okay, you're going 15 years.

I'm gonna go present value and  then you got 15 and then let's say Inflation is at 3.5% and then so  that's $160,000 living expenses 15 years from now. I'm just taking  that $96,000 and pushing it out.

I got $140,000 for 12  years, but in the ballpark, but-

So at $60,000, she's gonna have $50,000 pension. I don't know if there's a  COLA on that pension or not, but-

Don't know.

She's pretty excited about the  pension. So am I, would be too. $50,000 plus another $30,000 of rent, I don't know  if there's going to be an increase in rent.

Yep, that's right.

So $80,000 call it, so  she needs another $80,000, not including Social Security. She  says she's going to have a pretty small Social Security and then you've  got to bridge the gap with the husband.

Sure.

So if you need $80,000, what  was her husband's Social Security?

Well, it's a- It's  at 62 it's  $1200, then $1900 at 67, $2400 at 70.

Alright, I'm gonna say she needs, like what  you said, $50,000 is what the shortfall was?

Yeah, that's what I calculated.

I would say, she needs to target, like, if  you can get to $1,500,000 over the next 15 years, I think you're sitting in a really good spot.  So it's just kind of focusing on a goal, what the number is. I think once people can get  a number in their head, then they're much more apt to adjust to achieve it. But you're right.  I mean, we're just spitballing. It's a back of the envelope. But if the more that you can save  right and the more that you invest, you're all in

Could be, yeah.

You get baguettes from here.

Yeah, the rental income would go away, but.

Well, no, he's got a rental and the primary.

I know, but she's saying she  might want to move into the rental.

Oh, I didn't read that. Well, I got  bored of it or something.  But let's see, she gets $1,500,000. All right, so that's the  target. So if you- Ricochet? don't ricochet this, just kind of keep the focus, keep saving.  And then if you can get to $1,500,000, I think you're sitting in a really good spot.

Okay. I'll accept that.

But, right, sometimes it gets super  confusing. Because there’s all these cash flow needs that have to happen at certain time  periods because your Social Security is timed at a certain, right, then your pension is going to  come in, you want to retire at a certain point, but then your husband is going to retire  at another point. So, yeah, you have to spreadsheet this thing out. But if you're just  looking at back of the envelope, you can look at,

You're spitballing.

Alright, good luck.  I'm glad you, I warmed up to you.  She's like,  she only likes one of us, Al. No, she likes both now. Yeah.

Probably likes you better because you're  like fine wine. Just keeps getting better.

I am, you know. Remember  that one guy? He was like, yeah, I came back like 4 times. I  just, I gotta leave again, I just can't do it. But they keep coming  back. Why do you guys keep coming back?

I wonder why he kept coming back.

It's like, man, you know,  I've tried you now 4 times.

This has got to be a  good show. No, not really. Watch Your 11 Step Path to Financial Freedom on  YMYW TV, Calculate your free Financial Blueprint

If you just can’t get enough Joe and Big  Al, check out the YMYW TV show. This week they’re talking about Financial Freedom: only about one  in ten Americans are living their definition of financial freedom. 54% say that means living  debt free, 50% say living comfortably, 32% say financial freedom means not having to work, and  13% define it as being rich. But too many of us fall short of financial freedom because of lack  of retirement savings, salary constraints, debt,

We got Micah from South Dakota.   “Hello.”  Hello, Micah.  “Is it safe to say that I If I get $40,000 in pension,  is it similar to having $1,000,000 in bonds according to the 4% rule?”  Yeah, I  would say that's a good way to look at it.

It is a good way to look at  it. I think probably 4% rule, though, is it was originally designed for  a mixture of stocks and bonds. But, yeah, you're on the right track. That to me, the  main difference is when you have a pension, you know what it is, it's $40,000 a year, maybe  of cost of living, maybe not. When you got the $1,000,000 you can spend more than $40,000 a  year, or you can spend less than $40,000 a year,

For sure. That $1,000,000 could go to  $700,000, and 4% of $700,000 is less than $40,000.

Right. Correct. So, what I said is I'd rather  have the $1,000,000, but there's risks in that.

Yeah, because you've got a lot of  extra dollars in your big fat wallet.

Oh, come on.  If I had a choice. I  mean, wouldn't you, if you had a choice?

Because I think we have experience in  the business. Right, so let's say,  if I'm conservative,  depends on the client,  I would be like, alright, well here, if you don't want to deal with investing this,  and if you want to guarantee the income and $40,000 is going to give you all the things that  you need in life, then take the $40,000 all day.

Yeah, then there's no concern.

Or, if you want to have a little bit more  flexibility, but there's risk there. Right. So that $1,000,000 could go to $1,200,000 or  $1,300,000. But if you were to ask someone, okay, you got $1,000,000, and that $1,000,000 went to  $2,000,000, or that $1,000,000 went to $500,000, people would be like, no, I don't want that game.  I'd much rather take the $40,000. Right. So.

A lot of people would say that. I agree.

All right, here we go. “Hi, Andi, Joe, Big  Al.  Hoping to get a spitball question answered. I'm 62 and my wife is 60. We're both retired.  We have no debt. I have about $1,300,000 in all deferred IRAs with very little in a brokerage  account.  About $200,000 in Roth accounts and have $3400- or $34,000 per year in pension with  a cost-of-living adjustment for life.  I will get about $60,000 per year between my wife and I,  Social Security, starting at age 70. I want to do

He really should figure that part out.

Oh, that's the funny part.

No, that's hilarious. Nobody  spends $6000 or $7000 per month. LOL.

I think what, what he meant or she, I  guess he, meant to say is I really should figure that part out right. Right?  LOL. That's what it should have been.

Love it. “Best regards. Love your  show.” Well, we love you. Barney and Betty.

Yeah.

Riot.

We had another Barney and Betty before.

A lot of Flintstone fans.

Different one.

A lot of Flintstone fans.

Yeah. Yeah.

Okay, let's see. Okay. He's got very little  bit in, so he's got $1,500,000 in total assets. He's got fixed income of $94,000, $34,000 from a  pension, $60,000 from Social Security. He's gonna spend $80,000. He's not gonna touch the deferred  assets. Does he do a conversion? And he is, I'm sorry, he's 62, So. He's retiring.   Is there a bridge?  When is he retiring?

Both retired. He's  62. She's 60. Both retired.

Yeah.

So we need to bridge the gap. He's 62.  So they need, let's call it $80,000 a year-

Yeah, I think they’re okay.

- for the next 8 years. He needs how much?

Well because he's got  $34,000 pension, but he's, shortfalls about $50,000. $50,000  into $1,500,000. It's, about a 3.3% distribution rate. So I think that's good,  especially since Social Security is coming.

So $50,000 plus $34,000  minus the standard deduction, he's in the 12%.  The question is, does  he take out more of the retirement account that he has in $1,500,000 and convert  the remainder at the top of the 12%?

Yeah, I would.

I would do all day,  every day, even on Sunday.

Wow, on the day off, on the day of rest.

Yes.

Got it. Yeah. The reason is because  12% bracket, that's, a great bracket, right? And so you want to take advantage of  it, particularly when you got over $1,000,000, right? In a tax deferred account. Social security  is coming. That's taxed at ordinary income. Your pension is taxed at ordinary income. So you  want to try to get as much as that of that

Yep. Well said, my friend.

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Hello. My name is Amir A.   I'm 68-year-old single man born in November 1956.” Oh, can you  give me the date?  What hospital?

We need more information.

Yes, we need just a smidge more, Amir A. Oh  man. “And I've been working for the same company for 28 years. My current salary is $265,000, and  I'm thinking about retiring in July, 2025.  I have $1,200,000 in the 401(k), extremely conservative  at 4% yearly return with 70% of my money in the market- in money market and 30% stocks and bonds.  I have a pension plan that pays me $6300 a month at the time of my retirement. My Social  Security will also pay me $4100 a month,

We are.

I'd like to go to your restaurant.   Can I have a, you didn't even tell us what country it is. Come on. “My desired income  after retirement is to have $140,000 a year of spending.  I really appreciate your evaluation of  my financial blueprint with an additional comment and suggestion that you may have. My main concern  is with inflation and taxes, will it be okay until 90, 95?” No idea. “What other advice do you have  for me to have a maximum, to have a maximum income

“-or any other fiduciary advisor  that is recommended to meet with me.”

Oh, wow. Okay.

How about that?

Costa Mesa.

Yeah, it's close to San Diego.

Yep. 68 years old, wants to retire soon.

Okay, wants to spend $125,000 net,  $140,000 gross. He's got $1,900,000. At age 68, you could do a 4% distribution rate. That'd be  $76,000. His fixed income, with the rental income, is about $95,000. Actually, that doesn't  even include the restaurant. So yeah, if you add all that stuff in, it's  a close to $200,000 of spending, whether you want to spend that much. I  mean, that, that could be max spending.

He wants the shortfall’s about  $140,000, $125,000, something like that.

Yeah. Yeah.

He's got plenty of fixed  income, plenty of assets.

This works just fine. And,  so if you want to spend $140,000, great. If you want to spend a little  bit more, you know, maybe $180,000, $190,000 would be max spending. But, see the  thing is when you, calculate max spending, basically that puts you on the margin where you  can't make errors. So I'm not suggesting you would spend that much, but you could spend more  than $140,000 from time to time if you want to.

Yeah, he's a conservative individual.  He's mostly in cash, money market, he bought an annuity that's fixed, he's got CDs,  you know, but it's funny, he owns a restaurant.

Yeah, well, probably his sister  needs some capital, I'm guessing.

I don't know, but isn't  a restaurant pretty risky?

Yes, it can be, so that $24,000 of  income may not be forever, you never know.

But, yeah, I think you're sitting  just fine. You just want to- but for, you can't really use a 4%  burn rate with him because he's probably not even getting close  to 4% long term with his allocation.

Well, yeah, well, we don't  know what his 401(k) assets are-

- but the, yeah, the other 70% cash.

Oh, it says that?

Yeah.

Okay. Yeah, you're right,  so probably, maybe a 3%.

I would, yeah, 3% or 2%, 2.5%?

Maybe. Maybe so.

But he's trying to squeak out the most  income that he possibly can with the least amount of risk. And I think that's what everyone's  goal is, right? It's like, alright, how do I go about creating the income that I need, and not  worry about, you know, my investments and not worrying about the markets and so on and so forth.  So, you've done a really good job of accumulating the wealth. I think if you take a smaller  distribution rate, you can spend maybe a little

Didn’t even calculate that.

Yeah. I mean, you've done a great  job. Now it's just kind of planning and just figuring out what's the appropriate step.  So you don't make any mistakes along the way. And then just come up with the appropriate  allocation that you're comfortable with. To, you know, to give you the return that you  want with the least amount of volatility and the least amount of risk. And yeah,  Big Al is available at any time you want to meet up here. I will set that  appointment for you. Saturday mornings.

Saturday mornings.

You want to come in the office?

Yeah, just bring me, bring me  takeout from the restaurant. All good.

All right. That's it. We're done.  Thank you, Amir. Thank you everyone for the wonderful questions. Andi, great  job on putting all this stuff together.

Thank you. Thank you for doing it.

Here to ride your guys's coattails.   Aaron, thank you for the lighting. Appreciate it. We'll see y'all next week.  Show’s called Your Money, Your Wealth®.

James Bond in the Silicon  Valley, Doc in San Francisco, Wine Guy and Wine Gal in Sonoma, Joe and  Big Al spitball for you - and maybe some non-California viewers and listeners too  - next week in YMYW podcast episode 506. Your Money, Your Wealth is your podcast and  this show wouldn’t be a show without you