I Work in a Toxic Office. Can I Retire Early? - 513

What is the risk with BDCs, or business  development company funds? Edward in Illinois wants to know. Do Pebbles and Bam Bam in  Kentuckystone have too much invested in T-bills? Are mutual funds or ETFs a better  place for them to invest qualified money in the decumulation phase? Is there a difference  between a traditional IRA and a rollover IRA? And Keith in Connecticut is 34 and wants  a spitball on whether his investments are

Edward. He's in Illinois. He's like, “I have been buying BDC funds.  They are paying  close to 10% dividends. And at least recently, slight nav growth and net asset value. And I  don't completely understand the risk of these funds. I know they make loans to businesses  that can't get traditional financing. I'm just wondering what the risk is. Drive a  2022 Toyota Highlander. Enjoy Miller Lite after golf. I played 100 rounds this year.  Too  bad most of them are forgettable.”  100 rounds.

That's a lot. And do you-

How many do you play, Joe, in a year?

Let's see-

You're probably close to 100.

I'm probably over 100.

But do you wait for after the  round to be able to have your beer?

No, I have my beer before the round,  during the round, and after the round.

By the way, BDC is business development  company funds, which are risky from the standpoint that these are companies that  can't otherwise get traditional financing.

It's almost like, it's  like a private credit fund.

Yeah, right.

Private credit today is,  unbelievable. It is giant.

It's the latest thing, right?

Well, there was some laws that  passed in regards to the bigger banks, and so for smaller companies to get  financing, these banks started  going private, private lending. So BDC  would be one, an example of that.

Right.

Where there's, smaller companies are  a little bit more risky. There's probably underwriting that they couldn't  get a traditional standard loan.

Right.

And so, I don't know how many trillions  of dollars are in private credit, but-

As long as the economy's good, you're probably  fine. But when economies turn, sometimes these things can have problems. Remember the subprime  loans that essentially caused the Great Recession?

Well, if you think about return, there's no  free lunch. So, if you're getting a good return on the money because there's added risk, it's a loan.  So they're lending these dollars out to these organizations and if these organizations are not  around because of any type of turn in the economy, well, there's, the return on Monday, the  return on your money is going to be zero.

Right. And so, said just very simply, you loan your money to a company, the  company goes bankrupt, that loan is gone. You're done. Right. So that's the  risk, is the risk of losing principal.

So you're getting a little bit higher rate  of return, 10%. So it's paying close to 10%, Al.

That's a good rate. So there's got  to be risk and that’s, that’s what it is.

All right, yeah.  So 100 rounds.  Impressive. I wonder what the handicap is. We are talking money. We got myself,  Joe Anderson, we got Big Al.  Andi Last, Aaron Townsend, he doesn't, he just likes  to stay under the radar, doesn't he?

He doesn't even like to hear his name.

I know.

That's why we keep saying it.

Hello!

Aaron, and if you missed that, Townsend.

“Hello to the YMYW team, it's a follow up from Pebbles and Bam  Bam in KentuckyStone, following your non-advised spitball from last year, here's the  new skinny following up on 4 questions.” Oh gosh.

A 4-parter. All right, 67 years  old, Pebbles is 70, and, all right, “67-year-old retired Pebbles, 70 in 2027.” Yep.

“And 62-year-old BamBam, house paid, no debt, Pebbles has a qualified account of  $3,400,000, $1,100,000 in a Roth, brokerage account of $260,000, we got T-bills of  $700,000,  we got  I-bond of $10,000, collecting-“

“One damn I-bond.”

Right.

“- collecting Social Security at $4000  a month,  and then BamBam moved 410(k) to a Vanguard IRA, that's worth $1,000,000. Still  earns $50,000 a year and will collect Social Security at age 70, that's $3000 a  month.” Right. Got all this big, Al?

Yeah. So if you're keeping  track, that's about $6,400,000.

Okay. You're good.

We’re done with all the questions.

Yes, “Our goal is to move money to the Roth  IRA up to the 24% tax bracket as often as we can while maintaining the cash to live on, to live  off of and pay the taxes. Here's our question. One is. One, is this too much money sitting in  T-bills, even though the purpose of $10,000 a month living expenses, $120,000 a year, and the  estimated quarterly payments of $16,000 federal,

No, not at all, because you're using $200,000  a year for living and taxes, so you're fine.

Okay, “Number two, during the decumulation  phase, where is the better place for qualified monies to sit? Low indexed mutual  funds or low indexed ETFs? Does it make a difference? What's the rationale for  either?”  I think either/or is just fine.

I agree with that. I mean,  if they're exactly identical, ETFs have a few slight advantages, but for  the average investor, it's almost nothing.

Yeah, I would agree with that.  “Is  there any difference between a traditional and a rollover IRA?”  Yes, a rollover IRA  is where you can roll it out of the IRA. So let's say it's coming from a 410(k),  you're going to set up a rollover IRA. You roll your 410(k) into the rollover IRA.  If you ever want to move it out of the IRA,

Yeah, but they have the same rules and  you can actually put the accounts together.

Yeah, you can consolidate.

Not that big of deal.

Yeah. “Is there a better strategy  to consider?”  What, part of, hey, we don't give advice does he not understand care?  He's asking very specific type of questions, but-

Well, we're just spit balling.

All right.  This is not advice. Just little  compliance. FYI.  Okay, “What are we missing? i.e., should we be refilling cash buckets too?  Love the show, listening while walking our terrier in the woods.  Pebbles loves old fashioned,  since we live in bourbon country. And drives a 10-year old Lexus and BamBam likes the port.  And drives a Honda convertible as he's more-“

- continental.

Thank you.  “Kisses to  the team.”   There you go.

Oh, you like that, Aaron. Okay.

Alright.

Well, is there anything else to consider?

I don't know. Yeah, I think you should  fill up some cash as you're rebalancing the overall account. So, this is where  it gets a little bit more complex, is he needs $120,000 a year.  And he has roughly  several million dollars in a retirement account that he's converting. So he's converting  the IRA into a Roth. You probably don't want to touch the Roth dollars. So to create  the income that he needs to live off of he

At some point, yep.

So the 3 month T-bills, all of that  dollars is going to be gone. The brokered ETFs, he's got about $268,000 there. That's probably  the next pool that he needs to draw from.  So all of those dollars will be drawn down. And  then your IRA and Roth monies will continue to grow and then at some point you have  your RMD that you will have to take from your retirement account. And that's probably  gonna be over and above how much money that

Yeah.  And there's some different variables  here, like BamBam is still working. So $50,000 of the $120,000 spending need is already covered.  And then when Social Security kicks in for both of them, it's about $80,000. So they may not  need tons from their portfolio. I do agree that, with the thinking, which is, convert as much  as they can because they are gonna have a tax problem. In fact, it's over $4,000,000  in tax-deferred right now..  So yeah,

And so, the amount of money that you'd  live off of, whatever the shortfall is, right now I think it's, if they're  spending $120,000 a year, so what, they need about $70,000 from their  portfolio? And so, maybe at $70,000, you go out 5 to 10- 5 to 10 years and keep that  pretty safe. So just to keep the math simple, $70,000 times 10 is $700,000 that you  would want to have somewhat liquid.

Yep.

And he has $670,000 roughly in T-bills.

Right.

So I think he's right on track there.

Sure.

As he's distributing those dollars,  he probably needs to backfill the next years of income, depending on  how conservative he wants to be.

Right. Right. Yeah. Makes sense.

Get your downloading finger ready,  ‘cause I’ve got good news for ya: for the

All right. We got Keith from Kentucky.  “I was hoping to get a second opinion on the asset allocation and location. And if I'm  taking on too much risk in my portfolio, and if I'm in a good spot to retire at 57, that's  the earliest age I'm eligible for a full pension from the government. If I wait until 62, I get a  10% raise on my pension. The multiplier becomes 1.10 instead of 1.0. I'm 34, very single  and a USPS City Mail Carrier.” Alright.

Okay.

Very cool.  That's what  my aunt was a mail carrier.

Oh, no kidding.

Yes.  “Salary gross is  $58,000 a year, $80,000 in a TSP, roughly $32,000 of that is in a Roth. Roth IRA  is $20,000. He's got a little small cap value ETF in there. He's got some HSA cash.   HSA investment-“Am I still going here?

Yeah.

Yep.

With red, it gets me confused.  “Are these good funds for my time horizon?” So his funds, Al, are like the S&P 500.

Yeah.

He's in the total stock market. He's in some small cap. He's 34 years old. I  think those funds are just fine.

I do too. And TSP, it's, he says 40% C fund,  which is common stocks, S&P, and 60% S funds, which is like 4000 different stocks, kind  of more representative of the market. Yeah, I agree. That's fine.

Cool. Okay. “So if so, when should I- if  I should take less risk, I have a USA pension plus Social Security, whatever left that even  if it's 80% of what it could be. I currently only do the 5% match and put that into the Roth  TSP. Then I max out the Roth IRA and HSA through payroll deductions.  Alright, quadruple tax  advantage, ASAP.  They match 100% of my 5% and my insurance provider gives me $1000 towards  my HSA annually. He's got a 6-year CD at $6000.

I have a dog, should I buy a house?

You can buy ETFs, mutual funds, individual  stocks, etc. “How do I stop worrying?  I hear on the show about all these people with like  $6,000,000 and they're wondering if they can retire. And I'm over here not even making  $60,000 annually. I have no idea how much I'll spend in 30 years. I spend $2600  a month now.  That's what I take home roughly per two paychecks. I'm healthy,  I don't smoke, drink alcohol, I exercise,

There's a lot there, but  these are pretty easy to answer.

So, okay, first of all, Keith, I think  at 34 years old, making $60,000 a year, you have a total of about $150,000  saved. So, I think that is awesome.

It's phenomenal. Yep. And the fact  that you have a great pension plan, you're going to be in great shape. In  fact, Joe, in many cases, the people that are government workers that have a  good pension end up in better shape than all these people that saved all this money and  never learned how to live within their means.

Should he save for a home? Sure. I mean,  I think you've got some money sitting in a non-qualified brokerage account six or an  inner CD, $6000, continue to build up the cash and that will give you a nice little nest  egg for a down payment.  Keep renting. I mean, I think if you wanted to keep renting, the only  thing is just outpacing inflation with rent.

Right.  I think it's preferable if you can  eventually buy a home, but it depends on the location that he lives. It's in Connecticut. So it  depends what part of Connecticut, whether it might be expensive or not. But yeah, I would say, and  then the other part is, when should I take less risk? You only start thinking about that when you  get much closer to retirement and you're going to

I would say, when you get  about 10 years from retirement, that’s when I would look at  revamping the overall portfolio.

Yeah, and you may not even make a change,  but that's when you start looking, right?

You're 34 now, you're going to retire at 57.

And chances are with your pension, it's  going to cover a lot of your expenses. So you may not need a lot of safety. On the  other hand, you may want more safety because maybe you want to increase your  lifestyle in retirement so that there's different ways to think about it. But for right  now, growth is at age 34, growth’s important.

But what he's doing is way  more sophisticated than most.

Of course.

Like he knows, okay, so he's in  small, value. He's in an extended market, right? You know, he's in the  C fund. So what he's doing is-

It's amazing.

It's pretty good.

Keep it up. Know you're on a  good path. And then don't worry.

Yeah, stop worrying. We got Gus in Philly goes, “Hi, Joe, Big Al  and Andi. Thank you for my favorite podcast.” Thank you.  “Great mix of information  and lighthearted humor. My dad's 95 years young and still pretty active. His  drink of choice is Tullamore Dew  and he drives a Buick Lacrosse. It's  a tank.”  Drives. 95. Cruising.

Yeah, that's very good.

Alright. “He has a MYGA that started  with a deposit of $40,000 that has now grown to $192,000 over many years. It yields  4% and will mature on 1-1-2026. He has the ability to take out $19,000 out without  penalty in 2025, which we plan on doing, to put into his brokerage account. At his advanced  age, it is unlikely that he'll be able to roll the MYGA over into another multiyear option. So  I'm looking for options that he can pursue

Well, first of all, MYGA is  a multi-year guaranteed annuity. We'll just get that out there. So it's an annuity.

Right. So he put $40,000  in, it's grown to $192,000. So any growth that's in an annuity,  is taxed at ordinary income rates.

Correct.

So he's got a little bit of a tax  issue here of saying, all right, well, I'm going to pulling out $20,000 a year to  keep him in the 22% tax bracket. Why isn't he pulling more out? Because he's well into the  22%. Just take more out to max out the 22%.

And fill it up. And  just till it's done, right?

Because the 22% is going to go to, it could,  it's slated to go to 25%.  I would also look at who's the beneficiary?  And what is the options  at death?  Is it a lump sum or can you annuitize?

Right.

There's different options  for beneficiaries. So Gus is, maybe he's inheriting this. What tax  bracket is Gus in versus his dad?

Right. Yeah. And if his dad, I mean,  there's nothing wrong with just taking $19,000 a year or whatever the amount is,  whatever the plan should be. So you slowly get rid of it without getting into too high  of a tax bracket. That's what I would do.

Yeah.  You could potentially take out  more.  Just maximize the bracket. It's like, if you think- if you pay 22%- if you're in the 22% tax bracket and you want to get it out in  the 22%, might as well max out the 22%.

Right. Yeah. Now, if Gus inherits  it and he's in a higher bracket, maybe the father just takes a lump sum  and pays the tax. Yeah. calls it good.

Or if.

There, there's no way out of the tax.

Right. If, yeah, there's no,  if there is no way out of the tax, you're going to have to pay the tax.

There's no secret here. It's  taxable. Yeah. Yeah. It's taxable.

Yeah. The good news  is you get a $200,000 gain.

That is the good news, right.

And so, yeah, there's, there is no magic  bullet here. You gotta pay the tax and it's just when you wanna pay the tax and minimizing the  taxes.  It’s a charitable, speaking of charities.

Oh, yeah. Maybe you could offset some  of the tax if Gus gives money to charity, maybe you could, you know, front load some stuff. If he's above the standard deduction.  I mean, there's things that can be done, but the basic answer is it's taxable. So  you just have to decide how much you want to take each year to maximize  whatever tax brackets you can.

All right.

Let's go to Ken on page 24.

“I just buy MYGAs from A+ companies on  the peaks, when the rates go above 5%.  I have a bunch at 5.5% for 5 years, good  tax referral, 10%, free withdrawals.”

This is a comment on our YouTube  channel. So I said “Thanks for watching and sharing your strategy, hopefully you've got  it mapped out to account for future taxation, and how the MYGAs fit in  with your overall asset mix. To which Ken replied-

“Yes.  Doing Roth conversions each  year, especially with the Trump tax rates, as low as they are, I built a $2,000,000  portfolio using bonds and MYGAs only. PS. I've never paid an AUM fee. No one ever  should.”  Okay, wonderful.  Glad it's working for you, is what our response was. You're  just having conversations here with Ken.

Well, it's for everybody on YouTube to see.

Got it. Okay.  “Now that I  have safely landed in retirement with my 5+% conservative investments,  I'll use strategic investing for my excess cash in long term efficient capital gains  investments.”  What is strategic investing, Al?

Whatever it means to him, it doesn't say.

All right. Well, I think this is great.

Yeah, I do too.

Wonderful, Ken.

I think-

Great strategy.

Yeah, 5%. That's great. I mean, the stock market over the last 100 years  has done 10%, but, but yeah, this can be-

If I could get a guaranteed 5%, I would  take that all day long. Why wouldn't I?

Why not, right? It's just that-

You built a $2,000,000 portfolio.

Yeah, it's probably enough, right? Yeah.

Yeah. But. All right, so here's his next,  comment here. “How many times do I hear CFP®s say past performance does not indicate future  performance?”  Well, okay. Probably often.

That's true.

“Yet they always then tell you  to put their money in the market, even though it could take a couple decades  to recover from the downturn. 2008."

So we still haven't recovered. Have  to wait till 2028. I think if you look at all the indexes, they're quite a bit  higher than they were, even at the low.

2008.

Yep.

“It's like the CYA but then  they need to get their money from their portfolio with AUM fees. So  they put your money in the market, what do they care? It's not your  money. It's not their money. Yet.”

Okay, sounds like Ken doesn't  want an advisor. Which is great.

“Land your retirement by laddering 5% or  higher bonds in MYGA on the peaks for 5 or 5 to 7 or more years. After you land your retirement  income stream, then you can invest excess cash in the markets for the long term for growth and  inflation protection and tax optimization.”

Okay. Okay.  Fair enough, I'm  not sure that strategy didn't work for the last 20 years when interest rates  were 1% and 2%. Now it's not a bad idea.

I'm not gonna argue with him.  Whatever.  If that's what he wants to do, that's what he wants to do. I don't know  why he's harping on AUM fees. Doesn't he know that there's probably some sort of  cost in regards to the MYGAs that he's in?

Yeah, well that's a good  point. Good point, yeah.

There's no free lunch. Everything's gonna  cost you a little bit. Right. So then you just have to weigh out the cost of what you're  paying versus the value that you're receiving.

And some people say there's no cost, but  it's in the return. You get less of a return.

Right. Right. How do you think  banks make their money? Like a CD, well there's no cost in the CD. Well they're  taking your money and they're investing it elsewhere and they're getting a lot higher  rate of return and it's called a spread.

Right.

So, there is no free lunch anywhere. So if  you're happy with whatever return that you have, and you're happy with the investments that  you're in, and you've landed your retirement, then God bless, I think that's great.

And especially if they're safe and  you're able to pull this off, go for it.

Go for it.

So when he says he's never paid  an AUM fee and no one ever should, what would be the reason  somebody should pay an AUM fee?

There's multiple- There's thousands.

Many people don't, investing is a mystery,  right? So they just don't know what to do, right? Or maybe they need help. Can I  retire? Or maybe while they're retired, am I spending too much and it's ongoing  planning? Or maybe I'm paying too much in taxes. What can I do to save taxes?  On and on. I want to buy a house. Oh, I got to save for college. How do I go about that?  What's that? That's why people hire advisors. Quick answer.

Thank you.

There's more than that, but that's  what came off the top of my head.

Pitching your services, Big Al?

I'm not actually even slightly.

Certainly not to Ken. He doesn't need it.

But I'm just trying to answer  the question that Andi just posed.

For those wondering, AUM stands for “assets  under management.” A fee-only financial advisor charges clients a fee that’s a percentage of the  client’s total assets under management. And like Joe mentioned, other types of advisors get paid  by earning commissions on investment products they sell you… like annuities. Seems like a conflict  of interest to me. Pure Financial Advisors, the

We have some comments  here. What are we doing here?

Yeah, you guys, the first one actually  was a comment that was emailed in to me from one of our regular listeners, and the  rest of them are YouTube comments.

Alright. Okay. “Hey guys, heard a couple of  shows-“Hold on, let me start over here. “Hey guys, heard a couple of shows lately of people  having homes in different states. And where they file their taxes for residency. My  buddy's 83-year-old widowed mother has a house in California and Nevada.  She always files her  state taxes in Nevada.  California audited her and wanted years worth of bills. California  determined she was living in California

Yeah, and that's from Greg.

And that pretty much confirms, Al,  what I think that you said in those two episodes where we've talked about  this is that they will find out.

Well, and especially California, Andi.  California is very aggressive on this sort of thing. So, you, you can Google on YouTube,  Nevada residency, and you can find someone that will rent you a PO Box for $400 a year or  whatever. And try to say that will work for state residency. It won't. And California  is really good about catching these, Joe.

All right. We got Ed. He goes,  “Hey, please favor questions when the couple asking for a spitball has  less than $6,000,000 to $12,000,000.”

You know, we just read them as we get them.

“Many of us listen for guidance.  And it's ridiculous when the scenario asks whether or not they can flow $21,000  a month on luxury travel.  Love the show, but it's slowly becoming geared  only towards Thurston Howell III.”

Yeah.

We need more Gilligans.

We do.

Yeah.

Then send your Gilligan questions in.

Love it. Yeah, $6,000,000 to  $12,000,000 sometimes it's like, come on.

I know.

You're just writing in to brag. Right.  Not to brag. Well, and I have $50,000,000.

And we even make fun of them sometimes.

It's like, yeah, you did a great job.  Yeah, I want to spend like $7 a month.

You're good. You didn't need  to ask us permission for that.

All right, we got a little comment here  from Keith. He goes, “Good video as always.” Good video. Yeah. Looking good. Way to go, Aaron  Townsend.  “The first caller noted they are moving into their rental for two years to qualify as a  primary residence. That may not save them as much as they think as the rules are clear that the gain  in the sale is pro rata. For example, if this was a rental for 8 years, then they lived there two  years after as a primary residence, and the gain

And that's a true statement. And this has  been true, I want to say since like 2007, ‘8, ‘9, maybe even earlier. But, in other words,  it used to be you could move into your rental, live there two years, and get that  $500,000 exclusion if you're married, $250,000 if you're single. And then the IRS  started saying, no, you gotta do a proration between years of residence and years of,  of rental. So that's a true statement.

The rule's different if I lived  there as a primary residence first?

Yeah, and that's what's  weird, right? Yeah, because-

If it was my primary, then I moved out of it, I rented it out, then I moved back into  it, then the proration is different.

Yeah, there is no proration as long as you  satisfy the two out of the last 5 years. But what they're, what, I think what the IRS was  trying to say is you can't have 10 rentals-

And then just keep hopping into them.

Right, exactly. Exactly.

All right, so Keith, “Hey, I was a  bit surprised  there was any discussion on $1,000,000 versus $40,000 per  year as a break-even is never.” Andi:  This is the, from somebody who had  asked whether or not $1,000,000 in bonds, or a $40,000 a year pension is just like  having $1,000,000 in, dollars in bonds. “You could buy a risk free 30-year T  bond paying 4.25% and get $42,000 per year, and 30 years later you'll have $1,000,000  that would go to your heirs versus zero

Right, right. Yeah, that's exactly what  we were talking about. Given the choice, I'd rather have $1,000,000.

For sure!

Right? And then I can create my  income for $40,000 and I still have the $1,000,000. A pension goes away  when you pass away. So yeah, Keith, that's a true statement. I  think we were, that's what-

How many people have $1,000,000?

Not too many.

Right.

Yeah.

And so, but they have a $40,000 pension.  And if they might have, let's say a few hundred thousand dollars saved, it's like, well, no,  you have a lot more than a few hundred thousand dollars saved that $40,000 is almost like having  $1,000,000 that you would have to invest in.

Yeah. Yeah. Same, similar tax consequence.

A lot of recency biased here  with these high interest rates too.

Boy, that's for sure. I mean, some of  these are great strategies today and they weren't very good 3 years ago and  the last 20 years before that too.

All right. We got another  question here. It goes,

This is in reference to one of our TV shows  called “Your 11 Step Path to Financial Freedom”. He says, “the math was easy, so focus on PERMA  after, already.” And I looked that up to find out what PERMA was, and that is actually, it’s  the softer side of retirement. Positive emotion, Engagement, positive Relationships,  Meaning, and Achievement or Accomplishment.

Okay.

So, in other words, don't focus  so much on the money side of it, focus on what you're going to do with your  time in retirement.  And how to flourish.

You know what, Andi, we don't really  talk about that enough, but I think that, I think what you do, with your retirement and with  your time, your, what your purpose is, what gets you up in the morning, your, children, your  grandchildren, your friends, your spouse, this is just as important, if not more  important, but this is a financial show. That's why we focus on that. But  yeah, don't forget that other part.

And that is, that whole theory of  PERMA is from Dr. Martin E. P. Seligman, in case anybody wants to look that up.

Okay, good. Joe:  That's it for us. Show's  called Your Money, Your Wealth®. YMYW Podcast Outro

Hey, thanks for watching and  listening. Your Money, Your Wealth is your podcast! Click the Ask Joe and Big Al  link in the episode description to ask your money questions or get a Retirement Spitball  Analysis of your own. And if you enjoy YMYW, don’t keep it a secret - tell your friends,  and leave your honest reviews, comments, and ratings for Your Money, Your Wealth in Apple  Podcasts, and on YouTube. We appreciate it.