Answering Viewer Questions on Retirement Planning, Roth Conversions, and Income Optimization
Effective retirement planning requires strategic asset allocation, income optimization, and smart tax management to ensure financial security and flexibility. In this discussion, we explore real-world scenarios that highlight key strategies for building a robust retirement plan.
Retirement Planning for Jay and Her Husband
Jay and her husband are planning to retire in their late fifties or early sixties. Their current financial situation includes $285,000 in retirement savings, $200,000 in Roth IRAs, $85,000 in a rollover IRA, $75,000 in a Roth 401(k), and $10,000 in a brokerage account. Jay expects to receive a $50,000 annual pension starting in her early sixties, while her husband anticipates Social Security benefits ranging from $1,250 at age 62 to $2,450 at age 70.
Their assets also include a primary home valued at $800,000 with $330,000 remaining on the mortgage at 3.25% interest, and a rental property worth $800,000 generating $30,000 annually in net rental income. With monthly expenses around $8,000 and inflation-adjusted retirement expenses projected to hit $137,000 annually in 12 years, the team recommends aggressive saving to reach $1.5 million in retirement assets. Leveraging Roth IRAs, a Solo 401(k) for her husband, and maintaining a stock-heavy portfolio are key strategies due to their long investment horizon.
Asset Allocation and Investment Strategy
Jay’s Roth IRA and brokerage accounts are predominantly invested in stocks, aligning with her long-term goals and the presence of a fixed-income pension. The team supports this strategy, emphasizing low-cost index funds for diversification and growth. They also recommend continuing to max out Roth IRAs and contributing to a Solo 401(k) for her husband to optimize tax-free growth.
Bridging the Retirement Income Gap
To bridge the gap between early retirement and the start of pension and Social Security benefits, Jay and her husband plan to use their brokerage account, rental income, and retirement savings. They are considering selling their primary home and moving into their rental property to unlock equity and reduce living costs. Calculating inflation-adjusted living expenses is crucial to ensure their savings last without depleting assets prematurely.
Pension vs. Bond Investment Comparison
A question from Micah in South Dakota asked whether a $40,000 annual pension equates to having $1,000,000 in bonds under the 4% rule. Joe and Big Al confirmed that it is indeed comparable, as $40,000 annually from a pension matches the income generated by a $1 million bond portfolio withdrawing at 4% per year. While pensions offer guaranteed income and stability, bonds provide flexibility but come with market risks.
Roth Conversion Strategy for Barney and Betty
Barney and Betty, both retired, have $1.3 million in tax-deferred IRAs, $200,000 in Roth accounts, and $34,000 in pension income with cost-of-living adjustments. They plan to receive $60,000 annually in Social Security starting at age 70, with monthly expenses ranging between $6,000 and $7,000.
The team recommends maximizing Roth conversions up to the 12% tax bracket to lower future required minimum distributions (RMDs) and optimize their tax position. They explained the difference between marginal tax rates, which apply to Roth conversions, and effective tax rates, which are blended averages. Taking advantage of the 12% bracket allows for strategic tax planning.
General Retirement Planning Advice
The team emphasizes the importance of setting long-term goals, calculating future expenses with inflation, and targeting a specific savings amount to achieve financial independence. Leveraging tax-advantaged accounts like Roth IRAs and Solo 401(k)s, maintaining a stock-heavy investment portfolio for growth, and planning for cash flow needs during retirement are crucial. Consulting with financial professionals can help optimize complex scenarios involving multiple income sources and varied retirement timelines.
Conclusion
Successful retirement planning involves strategic saving, smart asset allocation, and careful tax planning. By leveraging tax-advantaged accounts, investing in low-cost index funds, and bridging income gaps with diversified savings, retirees can ensure lasting financial security and the flexibility to enjoy their golden years.
Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
