I’m 62 With $1.5 Million What Does My Retirement Plan Look Like (Part 5)

Troy Sharpe: Part 5 of this video series, we’re going to tie everything that we’ve learned from the past videos, but now, we’regoing to look at real-world circumstances, so different life expectancies. A go-go versus slow-go spending plan, a more moderate type portfolio that’s 60/40, and a few different variables with Social Security. We’re going to tie it all together and then we’re going to relate the concepts back to what we’ve learned over the previous four videos in this series.

Troy Sharpe: Hi. I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner professional, also a certified tax specialist, and host of The Retirement Income Show. I’m not going to recap all the videos. You can go and watch them, just to give you the summary of where we’re starting at with this case. Husband life expectancy, 80. Wife life expectancy, 90. They still have $1.5 million total of which $1.25 million is in retirement accounts and $250,000 is in nonretirement accounts. Spending-wise, we have them spending $100,000 a year for the first eight years of retirement, dropping it down to $80,000 in what we call the slow-go timeframe from that point forward. We’re going to have them taking Social Security at full retirement age. The reason we’re doing this is because we have a shorter life expectancy for the husband and a bit higher spend at $100,000 for the first eight years. Hypothetically, in this case, how
much money is left isn’t nearly as important as the quality of life that they have in retirement.

Hey guys, just a brief interruption here. If you’ve enjoyed this series, if you’ve enjoyed the videos that we’re putting out, our goal is to keep you more connected to your money, but we can only do that if you stay more connected to us. Hit that subscribe button, comment down below, and like the video. With all those variables input, this is the optimal tax strategy for that particular or hypothetical client. We’re still targeting the 22% tax bracket as we have in the other videos, but we notice now the schedule is going through 2028. From that point forward, we’re going to be  withdrawing from multiple accounts targeting that 10% tax bracket. Ending value is estimated to be $2.35 million, going to pay about $268,000 in taxes over time.

Compared over here to doing nothing, no Roth conversion strategy, following the conventional wisdom advice with these parameters, we have an ending value of about 1.84 and $558,000 in taxes. About $300,000 in less taxes paid by overlaying the tax strategy, but about $500,000 in increased ending value. This would be the point where once we went through everything with this particular client, as far as risk tolerance, which in case if I didn’t mention it’s a 60/40 typical average, what we would see stock portfolio in retirement. Once we went through risk tolerance and spending goals and Social Security strategy and then started to look at the tax plan to overlay on top of the previous few points there, this is where the File name: Im 62 With 1.5 Million What Does My Retirement Plan Look Like (Part 5) 1 discussion would start on for us.

It would be typically a third visit once someone becomes a client and we’ve really dug in and done all of this analysis. One of the first things we would say is, “Okay, ending value of $2.3 million, is that too much?” We don’t really care about what’s being left behind or how much is being left behind. Do we want to spend more, do we want to have a little bit more fun during retirement, but obviously keeping an eye on the account balances, the schedule that we’re expected to be on, and what actually happens in the real world.

They said, “Yes, Troy that’s a little bit too much. I want to be a little bit more aggressive at least in the beginning years of retirement.” We may go back in and we may change that spending goal from $100,000 for the first eight years to maybe it’s $100,000 for the first 10, or maybe it’s $125,000 for the first four, then $100,000 for that next four. We would look at different variations there and just see how does that impact the security, and also what does that do to the tax plan? One of the main things that I always try to get across to clients is, all we ever have to do is decide what is the plan for this year?

Then next year once you move into that review and monitoring phase, this is what we look through every single year. We’ll have these discussions, we’ll go through these different parameters and different things that can alter the course that we’re on. Not to mention, real-world events can change the course that we’re on. Health conditions, what’s going on with the stock market.

Those things obviously can change the plan as well, but let’s say they say, “No, you know what? This is pretty good, because I want to, one, make sure that I have money left over for medical expenses, possibly long-term care, assisted living.” In this scenario where the husband’s expected to pass away sooner, usually the wife at that point it becomes very, very important that there is money to make sure if she lives to 90, 92, 95, or maybe beyond, that there’s money in the bank to pay for the care to take care of herself.

Also your children. Do you have children? Do not have children? Are those children, can they be dependent on to actually help to take care of you either financially or just being around and being there to support you in chores and stuff around the house later? All of these things also play into this decision-making process. We’ll stick with this spending level because, in this particular scenario, she wants to make sure that there is money left over to pay for medical expenses. When we start to look at, first and foremost, the Roth conversion strategy and the tax plan moving forward, this is what we would be doing here. We’d target these two big conversions in the first couple years of retirement, and then 2024, and 2025, 70 and 70, and then we’re done with the Roth conversions for this particular scenario. If you think back to I believe was video three in this series where we looked at different spending levels and how that impacts your tax plan, it’s a great example.

We have higher spending levels, $100,000 a year for the first eight years of File name: Im 62 With 1.5 Million What Does My Retirement Plan Look Like (Part 5) 2 retirement. On a percentage basis, that’s a pretty high amount until Social Security kicks in. Those higher distributions act as essentially defacto Roth conversions in the sense that they keep IRA balances down so we don’t have this huge tax problem later in life. Again, because the amount of money in non-qualified dollars is relatively small as a percentage of the overall base of retirement assets, 250 in non-qual versus 1.5 million total assets, we don’t have a lot of non-IRA dollars to be paying the taxes on these conversions, so we’re going to keep the schedule. It makes the most sense to keep it short and go ahead and start to knock it out.

Now, if we look at an income plan, meaning, where are we going to take that income from? The taxable accounts, the non-IRA accounts, the Roth, et cetera. This is what it looks like for this particular scenario. We see the blue is Julie’s IRA. The green is John’s IRA. Again, just Julie and John, two hypothetical people with the parameters I went through earlier. We’re doing these conversions and then the yellow or the gold is the taxable money. This is what we’re living off of during that first few years, as well as paying the taxes on those Roth conversions. Once we get that done, now, we’re moving in over here to the green, John’s IRA. We’re living off John’s IRA.

We’ve completed the Roth conversions in these first four years. Now we’re spending down John’s IRA for living purposes. This keeps those balances low, so we don’t have a ballooning IRA problem later. Then we start to actually pull from John’s Roth, in addition to his IRA. Then we’re doing a combination of the taxable. You can see the chart here. This isn’t too important. I just want to show you what an income and tax plan looks like over time, not just with respect to conversions, but with account distributions, because remember we said we’re doing, or the optimal strategy here was the Roth conversion over four years, and then targeting the 10% tax bracket, multiple account withdrawals. That’s what this is. We’re targeting the 10% bracket, and the reason it’s optimal is because it leaves enough money in those accounts. We’re not paying taxes, looking at all the different permutations of earning interest versus paying taxes and not earning interest. This is what it looks like. This is the optimal strategy for this hypothetical scenario.

Now, if we have a really, really good year in the markets or a really bad year in the markets, all of this absolutely could change. In a vacuum, looking at these variables, and if we had to make a decision of what we’re going to do this year, first year of retirement, this is what we would do, because it gets us on the right course. Here, we have a quick chart showing requirement on distribution. This strategy, again, doesn’t get us into a ballooning IRA problem, because we’re doing conversions in the first four years, as well as the higher spending level. We have very manageable requirement on distributions. If you’re new to the channel, one of the big things you want to avoid is huge requirement of distributions because those forced withdrawals go on top of Social Security, go on top of your interest dividends, anything else, and it can create this tax domino where you’re paying higher Medicare File name: Im 62 With 1.5 Million What Does My Retirement Plan Look Like (Part 5) 3 taxes, possibly net investment income, you’re paying income taxes, possibly at a higher rate. We want to avoid those big distributions and this particular strategy, as we see, is solving that part of the retirement puzzle. Ledger style here, just to show you what the income and tax plan would look like. These are the conversions and what we’re living off of for the first four years. This is what we’re withdrawing from the taxable accounts. This is paying taxes and living expenses there.

Then once we get down here, we see we’re pulling from the taxable accounts, we’re pulling from the tax-deferred, we’re even pulling from the Roth for a couple of years here to manage that tax bracket in that timeframe. Okay, now I want to look at Social Security because this is a unique situation where we actually have input the husband living 10 years less than the spouse. I believe I misspoke earlier in the video where I said we took Social Security at full retirement age. We actually take it at 68 and one month for the spouse, let the husbands defer to age 70. Then when he passes away, she’ll get his benefit plus the survivor benefit. Here’s the optimal strategy based on this tax plan and the income strategy and the investment portfolio that we’ve laid out with those life expectancies. Again, Julie begins her benefit, which would be $2,606 in 2028. John begins his benefit of $4,172 in December of 2029 at age 70. Then in January of 2041, about 19 years from now, survival benefits would be switched to the total amount as estimated at $4,988.

If we start to look at what this looks like, the total annual benefits here, once they’re both turned on, would be $83,000 getting up to $90,000, and then with the inflation adjustments here once John passes away, the number that I showed you earlier, it’s actually because of cost of living adjustments, it’s up to $59,000, $60,000, $61,000, so this would be a loss of one Social Security check, but then survivor benefits kicking on. This is what Social Security would look like for the rest of her life. To do those conversions, we’d have to pay some taxes. I wanted to show you what that tax liability would be like, and then we’re going to compare it to doing nothing. Remember this was four years of conversions, then we’re living off the IRA for a couple of years, and then we’re doing multiple account withdraws, taxable IRA, and even the Roth for a couple of years there to target that 10% tax threshold, but we’re looking about 30,000 for the first few years of retirement, then drops to let’s call it about 15 to 20 and then very, very, very manageable throughout the rest of retirement.

Now, we see a spike right here. This is the year of death of John because they’ve received Social Security benefits for two people that year but they also switch the following year to this, where they switched to single tax filing bracket there. I get this question sometimes and I think there are some misconceptions out there. As long as you do not have dependent children, when one spouse passes away, you stay in the married filing jointly brackets only for that year that the spouse passed away. File name: Im 62 With 1.5 Million What Does My Retirement Plan Look Like (Part 5) 4 If you have dependent children, by chance, you get two years into that bracket, but otherwise, the very next year, you go into the single tax bracket. Now, on a comparative basis, we’re going to look at the taxes between doing these conversions versus not doing these conversions for the hypothetical scenario.

Here in bar form, we see very clearly the base strategies in the green if we’re not going to embark upon the tax plan, we’re paying a significant amount of more taxes, and also the required minimum distributions get to be fairly large, which is the green without doing conversions versus targeting the 22% bracket than the 10% bracket from that point forward. Here’s the schedule. We see over here, following the tax strategy, we’re paying about 30,000 for the first few years, then we have a couple more years where we’re paying a decent amount of taxes, but then rest of retirement, we really get ourselves into a pretty secure tax paying position, versus over here, we save some in the beginning years, but then as we go throughout retirement, we see taxes increasing. Then here in the year of death of John, we see moving forward, the taxes actually don’t go down, they continue to increase even though we have less Social Security income. We see the Social Security drop from 81 to 47.

The reason the Social Security drops to 47 there is in this base strategy, not only are we not doing conversions but, I said it, to take Social Security for both spouses at full retirement age. That’s why it’s a little bit different than over here. Keep in mind, this income column is just Social Security, it’s not showing requirement on distributions or any other withdrawals. It’s just showing Social Security. In the year of death here, we see the Social Security, if they just went with the full retirement age, didn’t really look at it strategically, did no conversions, Social Security is dropping from 81 to 47, but the taxes relative to the prior years are still increasing.

Now over here, we see Social Security by her taking it as 68 and him at 70, it gets all the way up to $100,000 per year in Social Security. Taxes are only $7,400, but then we have the loss of one Social Security benefit but then taking survivors benefits, so now Julie is left here with a $60,000 guaranteed lifetime income and only $4,300 in taxes. Now, some other withdrawals will have to come from the portfolio to meet that estimated spending need, but I want to point out how here, without doing the conversions, the taxes still increase even though they lose a pretty good chunk of Social Security income, and that’s because they switch from the married filing jointly bracket to the single bracket.

The reason we get a spike in this one year is just because of the timing of the date of death, so $21,000, $31,000, $24,279, just because it’s a timing issue, but they still go up versus over here, she’s in a much more secure position and $268,000 is the total estimated amount paid in taxes versus $558,000 over time. Of course, we see here the ending balances in these scenarios are higher than these balances over here as well. Based on the different variables that we’ve looked at today, this is a path that quite possibly we could start down for this hypothetical File name: Im 62 With 1.5 Million What Does My Retirement Plan Look Like (Part 5) 5 couple if they had these particular goals, needs, portfolio values.

Keep in mind, if your situation is even the tiniest bit different as far as longevity or investment strategy, how much you have in non-IRA versus IRA, spending goals, different timing of spending goals, all of this will be different, but regardless, this is all just a snapshot in time. It’s something that we need to look at every single year and then make adjustments based on the situation at that time.

If you like this video, if you like the series, if you like the channel, make sure to subscribe. Also, share this with a friend or family member, maybe somebody who’s getting close to retirement and could benefit. Also, comment down below, I try to personally respond to as many as I can. Thank you for watching. [music] [00:17:08] [END OF AUDIO] File name: Im 62 With 1.5 Million What Does My Retirement Plan Look Like (Part 5) 6