early retirement withdrawals Archives - ROI TV

How I’d Invest Before Taking Social Security: Portfolio Strategies for Early Retirees

James Conole — Wed, 04 Jun 2025 11:34:51 +0000

Retiring before you claim Social Security sounds great but there’s a hidden challenge many people overlook. If you retire at 62 but delay Social Security until 67, your investments need to carry the full weight of your expenses for those five years. And if the market stumbles during that time? Your entire retirement plan could unravel.

Let me walk you through what I’d do if I were in this situation specifically, what Becky (a hypothetical retiree) should consider when facing this exact scenario.

Becky’s Retirement Setup

Becky is 62, with a $1 million 401(k) portfolio and plans to spend $5,000 per month, or $60,000 annually, adjusted for 3% inflation. She doesn’t want to claim Social Security until age 67, so her investments need to fund her lifestyle entirely until then.

The problem? Becky’s entire portfolio is invested in U.S. large-cap growth stocks with an assumed return of 8.5%. That’s great in theory, but what happens if the market crashes during her first few retirement years?

The Withdrawal Crunch

During the five-year pre-Social Security gap, Becky’s portfolio will need to fund all her expenses potentially requiring 6.5% to 8% annual withdrawals. That’s well above the safe withdrawal range, especially in volatile markets.

Here’s the good news: once Becky turns 67 and starts Social Security, her need for portfolio withdrawals drops significantly from 8% to just 3.2% by age 68.

But surviving those first five years without sabotaging the entire retirement plan is the real test.

Why Early Market Losses Can Ruin Retirement

If Becky’s portfolio takes a major hit during those early years, her withdrawal percentage goes up. That’s the danger of sequence of returns risk the idea that losing money early in retirement is much worse than losing money later.

Bear markets typically last between 2.5 and 5 years. That means Becky could easily run into trouble if she doesn’t have a more stable, diversified portfolio to weather that period.

The Right Portfolio Shift: From Growth to Balance

To handle that five-year window, Becky needs around $380,000 to cover her expenses. Some of that say $80,000 might come from dividends (assuming a conservative 1.6% yield after a 20% dividend cut). But that still leaves $300,000 that needs to be safe from market swings.

That’s why I’d recommend shifting her portfolio to a 70/30 mix 70% in stocks, 30% in high-quality, short-term bonds. This gives her some growth, but also a layer of protection to draw from during market dips.

What Does This Do to Her Long-Term Plan?

Yes, moving from 100% stocks to 70/30 slightly lowers potential long-term growth. But here’s the trade-off: it increases her probability of retirement success. Her current all-stock plan has a 73% success rate. With the adjusted portfolio, that number climbs and her plan becomes much more resilient.

Once Becky hits 67 and her withdrawal rate drops, she can consider reallocating for more growth if her financial picture looks strong. But early on, stability matters more than potential.

Key Takeaways for Anyone Retiring Before Social Security

If you’re retiring before claiming Social Security, here’s what you need to know:

Calculate your pre-Social Security gap and make sure you have a stable source of funds to cover it.
Adjust your portfolio allocation to reduce risk during early retirement.
Use short-term bonds or cash reserves to avoid selling stocks in a down market.
Revisit your plan once Social Security kicks in and your withdrawal rate drops.

Retirement isn’t about hitting a perfect number it’s about creating a strategy that holds up when the market doesn’t. For Becky and for anyone else looking to retire before collecting benefits that means making smart portfolio moves now to protect your future freedom.

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.

The post How I’d Invest Before Taking Social Security: Portfolio Strategies for Early Retirees appeared first on ROI TV.

Mastering Roth IRA Rules and Retirement Tax Strategies

Joe Anderson — Sun, 01 Jun 2025 13:37:52 +0000

Planning for retirement involves more than just saving—it requires a detailed understanding of tax laws, account rules, and how to make the most of every dollar. In this week’s Your Money, Your Wealth discussion, Joe Anderson, Big Al Clopine, and Julie Anderson tackled a range of retirement planning questions, from early withdrawals to Roth conversions, diversification, and tax efficiency.

If you’ve ever wondered about Roth IRA withdrawal rules, the best way to manage stock holdings, or how to avoid costly tax missteps, this article is for you.

1. Funding Early Retirement Before Age 59½

Peter Lemon asked how to cover a few “gap years” before age 59½ without triggering penalties on retirement account withdrawals. He considered using Roth IRA contributions, which can be withdrawn tax- and penalty-free at any time. But he was unsure how that applied to dollars rolled over from a 401(k).

Julie clarified that even after a rollover, Roth contributions retain their original basis and are still eligible for penalty-free withdrawals. However, earnings on those contributions are subject to the five-year rule or age 59½, whichever comes later.

Joe and Big Al cautioned against tapping Roth IRAs too early, emphasizing that preserving tax-free compounding is often worth the wait. Alternatives like the IRS 72(t) election—which allows for penalty-free withdrawals if you take equal periodic payments for five years or until age 59½—were also discussed.

2. Paying Roth Conversion Taxes from Retirement Accounts: A Costly Move

One common mistake? Using retirement funds to pay the taxes on Roth conversions. Big Al illustrated this with a cautionary tale: a couple withdrew $500,000 to pay off a mortgage, leading to a $200,000 tax bill and additional stress.

Whenever possible, taxes on Roth conversions should be paid from non-retirement (non-qualified) assets. Otherwise, you risk reducing your long-term nest egg and missing out on future tax-free growth.

3. Backdoor Roth Contributions vs. Brokerage Accounts

David from Cincinnati asked whether to prioritize backdoor Roth contributions or build liquidity through a taxable brokerage account. With $630,000 in assets at age 30, he’s in a strong position either way.

Joe pushed for maximizing Roth contributions to take advantage of tax-free compounding. Big Al made a case for building up liquidity, especially with kids and potential home improvements on the horizon.

The takeaway? It depends on your goals. If you’re laser-focused on retirement, Roth wins. If you value flexibility, taxable accounts give you more freedom.

4. Consolidating Individual Stocks vs. Index Funds

Another listener asked whether they should roll 20 individual stock positions into an S&P 500 ETF. Big Al noted that an index fund offers broad diversification across 500 companies—compared to the limited scope of 20 individual stocks.

Joe added that selling stocks may trigger capital gains taxes, so investors should evaluate both the tax implications and their confidence in the individual holdings.

5. Understanding the Roth IRA Five-Year Rule

A common point of confusion: does the five-year rule apply to non-taxable Roth conversions, like those from after-tax 401(k) contributions?

Big Al confirmed it does. All Roth conversions—taxable or not—are subject to the five-year waiting period before the money can be withdrawn penalty-free. That’s in addition to the rules around age 59½ and original contribution tracking.

6. Home Office Deduction After the Tax Cuts and Jobs Act

Big Al clarified that the home office deduction is now only available to self-employed individuals. Employees can no longer claim it on their federal returns. However, some states still allow it—so it pays to check local tax laws.

7. Balancing Pretax and Roth 401(k) Contributions

A participant asked if contributing 15% pretax and 5% Roth is a smart strategy. Big Al said it depends on expected tax rates in retirement.

Pretax contributions lower your taxable income today but are taxed later. Roth contributions offer no upfront break but provide tax-free withdrawals. Balancing the two offers flexibility, especially if you’re unsure where future tax rates will land.

8. Can You Use Roth Dollars to Pay for Roth Conversion Taxes?

Michelle wondered if it’s okay to pay Roth conversion taxes using Roth IRA dollars. Joe and Big Al said it’s technically allowed—but not ideal.

Why? Because using Roth funds today means giving up future tax-free growth. If other non-qualified money is available, it should be used instead.

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.

The post Mastering Roth IRA Rules and Retirement Tax Strategies appeared first on ROI TV.

Maximizing Your Workplace Retirement Accounts

Joe Anderson — Thu, 15 May 2025 11:20:15 +0000

Managing workplace retirement accounts can be one of the most important steps toward achieving financial security in retirement. Yet, many people make costly mistakes that could easily be avoided with a little guidance. With over $36 trillion held in retirement accounts as of 2023, it’s crucial to understand how to optimize these investments. Let’s explore the different types of retirement accounts, withdrawal strategies, tax implications, and the benefits of Roth conversions to secure your financial future.

Workplace Retirement Accounts and Common Mistakes
Understanding your workplace retirement account is the first step to avoiding costly errors. As of 2023, $36 trillion is invested in preferred retirement accounts, with 35% of those funds held in IRAs. The rest is spread across 401(k)s, government pension plans, and annuities. One major point of confusion for many retirees is taxation—every dollar withdrawn from these accounts is taxable, and early withdrawals before 59½ often result in a 10% penalty. Knowing the rules and planning your withdrawals accordingly can save you thousands of dollars over the course of your retirement.

Types of Retirement Accounts: Defined Contribution vs. Defined Benefit Plans
Workplace retirement accounts generally fall into two categories: defined contribution plans and defined benefit plans.

Defined Contribution Plans like 401(k)s, 457 plans, and IRAs allow employees to contribute a specific amount each year. These are now more common because they are less costly for employers.
Defined Benefit Plans, commonly known as pensions, promise a fixed income based on years of service and salary history. Although less common today, those with access to these plans must decide between taking a lump sum or monthly annuity payments based on their risk tolerance and financial goals.

Options for Employer-Sponsored Plans Post-Retirement
After retiring, you have three main options for your employer-sponsored retirement plan:

Leave it in the plan – This option is the simplest and often comes with lower fees and fiduciary protections.
Roll it into an IRA – This allows for more investment choices and easier management.
Withdraw it – Early withdrawals from a 401(k) are penalty-free at age 55 if you retire, but regular income taxes still apply.

Taxation and Required Minimum Distributions (RMDs)
Understanding the tax implications of your withdrawals is essential. Distributions from 401(k)s and IRAs are taxed as ordinary income, and withdrawing before age 59½ incurs a 10% penalty.

RMDs are mandatory for traditional IRAs and 401(k)s starting at age 73, ensuring the IRS collects its share of taxes.
Roth IRAs, however, are exempt from RMDs during the account holder’s lifetime, making them a powerful tool for tax-free growth.
Inherited Roth IRAs are required to be fully distributed within ten years, though they remain tax-free if held for five years.

Roth Conversions and Tax Strategies
Roth conversions allow you to transfer funds from a traditional retirement account to a Roth IRA, paying taxes now to avoid them later. This strategy is especially useful if you expect your tax rate to rise in the future. Converting your accounts before age 73 also reduces RMD amounts, which can minimize your tax burden.

However, it’s crucial to plan these conversions carefully to avoid bumping into higher tax brackets or increasing your Medicare premiums. Properly timed Roth conversions can offer substantial tax savings and more flexibility in retirement.

Beneficiary Designations and Estate Planning
One of the most overlooked aspects of retirement planning is beneficiary designations. Remember, the beneficiaries listed on your retirement accounts override any instructions in your will. Non-spouse beneficiaries are required to fully distribute inherited IRAs within ten years. For Roth IRAs, these distributions remain tax-free if the account has been held for at least five years.

To avoid unnecessary tax implications, always keep your beneficiary forms updated, especially after major life events like marriage, divorce, or the birth of a child.

Consolidating Multiple Retirement Accounts
If you’ve held multiple jobs throughout your career, you may have several 401(k) accounts scattered across different employers. Consolidating these accounts into a single IRA simplifies management, reduces fees, and makes it easier to maintain a cohesive investment strategy.

Consolidation also helps with RMD calculations, making it easier to plan your withdrawals without the hassle of managing multiple accounts. As Kurt from La Jolla learned, consolidating accounts can make retirement much more straightforward and stress-free.

Retirement Readiness and Resources
Preparing for retirement is more than just saving money—it’s about understanding your options and making strategic decisions that optimize your wealth. Joe and Big Al recommend downloading the Retirement Readiness Guide to explore detailed strategies for accessing savings accounts, understanding account types, and planning for the future.