Digest

This episode of Your Money, Your Wealth Extra dives into a comprehensive retirement plan submitted by a listener named "Sunshine." The plan outlines Sunshine's financial situation, including $6.4 million in investments and $2 million in property, and details their desired retirement lifestyle. The episode focuses on analyzing Sunshine's rate assumptions, retirement spending strategy, and income strategy, which includes Roth conversions and RMDs. The hosts discuss the importance of asset location and how to optimize tax strategies for retirement. They also address concerns about Medicare premiums and the potential impact of Social Security taxes. The episode concludes with a discussion on the likelihood of Sunshine's success in achieving their retirement goals and provides recommendations for DIY software and tools to validate calculations and enhance planning.

Outlines

00:00:00

Introduction and Listener's Retirement Plan

This Chapter introduces the episode and the listener's detailed retirement plan, which has been waiting for analysis since January. The listener, known as "Sunshine," is a single individual with no children living in Orange County, California. Sunshine plans to retire in January 2025 at the age of 65 and a half, with a retirement income goal of $200,000 per year before taxes. The episode features Senior Financial Advisor David Cook, CFP, from Pure Financial Advisors San Diego Headquarters, who will be providing insights on the plan.

00:02:56

Analyzing Rate Assumptions

This Chapter focuses on analyzing Sunshine's rate assumptions for their retirement plan. The hosts discuss the 5% rate of return assumption for investments, the 3% rate of inflation, and the 2% rate of return for the tax-free account. They highlight potential concerns with these assumptions, particularly the low inflation rate and the 2% return on the tax-free account. The hosts suggest adjusting the inflation rate to 4% and emphasize the importance of considering asset allocation and location when determining returns.

00:06:00

Retirement Spending and Income Strategy

This Chapter delves into Sunshine's retirement spending and income strategy. The listener has broken down their annual spending into 50% essential living and 50% discretionary. The hosts commend Sunshine for this detailed approach and discuss the importance of considering Roth conversions and RMDs in retirement income planning. The episode outlines Sunshine's proposed withdrawal strategy from their tax-deferred, taxable, and Roth accounts, highlighting the projected depletion of these accounts over time.

00:12:07

Retirement Planning Strategy and Asset Location

This Chapter examines Sunshine's retirement planning strategy, which includes Roth conversions, asset allocation, and risk mitigation strategies. The hosts discuss the importance of asset location and how it can impact tax implications. They emphasize the need to consider the tax implications of different investment types within various retirement accounts. The hosts also address the concept of sequence of return risk and how to manage it through asset allocation and diversification.

00:20:01

Goals, Questions, and Recommendations

This Chapter focuses on Sunshine's retirement goals, which include financial security, maximizing retirement income, and minimizing remaining funds at age 100. The hosts address Sunshine's questions about the assumptions used in their plan, the soundness of their retirement income and planning strategies, and the need for additional key retirement planning principles. They provide recommendations for adjusting asset allocation, expense amounts, and Roth savings. The hosts also discuss the impact of Medicare premiums and the importance of considering charitable distributions.

Keywords

Q&A

• What are the key concerns regarding Sunshine's rate assumptions for their retirement plan?

  The hosts express concerns about the low inflation rate assumption of 3% and the 2% rate of return for the tax-free account. They suggest adjusting the inflation rate to 4% and emphasize the importance of considering asset allocation and location when determining returns.

• How does asset location play a role in optimizing Sunshine's retirement income strategy?

  The hosts explain that asset location involves strategically placing different types of investments within various tax-advantaged accounts to minimize tax liabilities. They suggest that Sunshine's Roth account, with its long time horizon, could hold more equities, while their IRA, with its potential for RMDs, could be more conservative with a higher allocation to bonds.

• What are some strategies for mitigating sequence of return risk during market downturns?

  The hosts suggest strategies like reducing or eliminating Roth conversions, reducing withdrawal rates, reducing expenses, and avoiding or minimizing withdrawals from market investments. They also mention selling the rental property, considering a reverse mortgage, or downsizing in case of financial depletion or long-term care needs.

• What are the potential tax implications of Sunshine's Social Security benefits?

  The hosts explain that up to 85% of Social Security benefits can be taxed, depending on an individual's income level. They emphasize that Sunshine's income from dividends, interest, and Roth conversions will likely push their income above the threshold for Social Security taxation.

• What are some DIY retirement planning tools that Sunshine can use to validate their calculations and enhance their planning?

  The hosts recommend using the EasyRetirement.com free retirement calculator, which allows users to input their financial information and see how different scenarios might impact their retirement plans. They emphasize that these tools should be used in conjunction with professional financial advice.

• What is the likelihood of Sunshine successfully achieving their retirement goals?

  The hosts believe that Sunshine is in a good position to achieve their retirement goals, given their substantial assets, reasonable distribution rate, and proactive planning. They highlight the importance of having income control and tax control when building a retirement income stream.

• What are some key retirement planning principles that Sunshine should consider?

  The hosts recommend considering Roth conversions, asset allocation, asset location, sequence of return risk, Medicare premiums, Social Security taxes, charitable distributions, and the use of DIY retirement planning tools. They emphasize the importance of having a comprehensive retirement plan that addresses these factors.

• What are some specific changes that the hosts recommend to enhance Sunshine's retirement strategies?

  The hosts suggest adjusting the inflation rate assumption, considering a more conservative asset allocation, and implementing a tax diversification strategy. They also recommend exploring charitable distributions as a way to manage RMDs and minimize taxable income.

• How does the concept of "Irma" impact Sunshine's retirement planning?

  The hosts explain that "Irma" refers to the income-related monthly adjustment amount for Medicare premiums. They note that Sunshine's income level will likely place them in a higher premium bracket, but they also acknowledge that Sunshine is not overly concerned about minimizing taxes at the expense of their retirement lifestyle.

• What is the overall assessment of Sunshine's retirement plan?

  The hosts believe that Sunshine has done a good job of planning for retirement and is in a strong financial position. They commend Sunshine's detailed approach and proactive planning, but they also offer suggestions for optimizing their strategies to ensure a comfortable and fulfilling retirement.

Show Notes