transcript
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Episode #519 - Should I Withdraw from My IRA To Pay Off My Mortgage?
Roger: "Be at war with your vices, at peace with your neighbors, and let every new year find you a better man."
-Benjamin Franklin.
Hey there, welcome to the Retirement Answer Man show.
Roger Whitney here. We are dedicated to helping you not just survive retirement but have the confidence to lean in and really rock retirement. Usually, you get that conference cause you're doing the work, right?
So, my hot take is I think New Year's Eve is one of the most overrated holidays.
I don't know. I just don't get into it. I don't get into the excitement and the pageantry. Maybe I'm a Scrooge. I don't know. I do get the rhythm of renewal that comes with a new year. I guess I take it a different way because every day the first thing I write as soon as I walk up into my office is, today's the day, day one.
I feel like I like those micro renewals every single day is a clean slate. Every single day I'm at war with my vices, I'm at peace with my neighbors and I want to be at 1 percent better. So New Year's, I guess, is doing that in a broader sense. If you love New Year's, that's awesome. I do like a little bit of the rhythm. Maybe I'm just a scrooge about the holiday. I'm sorry.
Anyway, welcome to the show. We're going to answer some of your questions on using tax deferred assets to pay off mortgages, and then we have some other questions. In addition to that, we're going to get an update from Rosie, who was last year's retirement plan live case study. If you recall, that was a good one. She retired in a bear market. So, we're going to see how Rosie's doing this year.
Next week, we launch the new year with a new case study with Mark and Mary. They just got married less than a year and a half ago. They both have a kid from their prior life. They have their own assets and here they are later in life near retirement, trying to figure out how they create, bring all of that together and still take care of the obligations that they had coming into it. It's going to be an interesting one. So, I'm excited to get started with that.
Speaking of getting started, I would suggest that prior to the new year, you go to rogerwhitney.com and sign up for our 6-Shot Saturday email, because if you like the show, you're going to love the email that we send out every Saturday morning where we share links to resources that we talk about in the show. So, it's a great way to have a very casual read. It's on a Saturday morning with your coffee and click on a link of something you wanted to get that we talked about, whether it's a book or a resource.
So, you can go to rogerwhitney.com to sign up for that. Let's get going with the show.
LISTENER QUESTIONS
All right, now it's time to answer your questions. If you have a question for the show, you can go to askroger.me and type in a question or leave an audio question, and we'll do our best to answer it on the show.
SHOULD WE PAY OFF OUR MORTGAGE WITH OUR IRA?
So, our title questions this week comes from Timothy. So, Timothy, I'm just going to read his background here.
"I am 60, my wife is 62. I would like to retire at the end of the year.
We are testing driving what it's like to live on our projected retirement income."
That's a good idea, by the way."
"We have about a 500, 000 balance on a fixed rate mortgage for our home at 2. 49% But if we had no mortgage payment, our projected income would be comfortable, but it's a little tight with our mortgage payment on a monthly basis.
So, my question, is there a mechanism to pay off the mortgage with tax deferred retirement funds without making all of the funds taxable income? By the way, I really enjoy your podcast. Your team is awesome. Love the eight pillars graphic."
Timothy says he suggested that several months ago, and actually we read that, Timothy, and that's why we created it.
We will share a link to the eight pillars of a great retirement plan for non-financial in our 6-Shot Saturday email. Thanks for the suggestion, Timothy.
There's a lot more to come on that. I want to say there will be a book on Agile Retirement Management with the pillars in there. I am giving no promise of when that book will happen, but we are fleshing that out as we've done our process. But my New Year's resolution, even though I don't make them, is to not over commit. Nichole Mills will be happy to hear that.
So, let's get to your question.
You're 60, your wife is 62. With the mortgage payment, it's tight. But if you were to pay off that 500, 000. It'd be a lot easier to have a lot of excess cash flow.
And is there a mechanism to do that from tax deferred accounts without all that being tax deferred interest?
First off, Timothy, I want to congratulate you and your wife because you are the first person, I met that has well, you didn't qualify whether it was a 30-year fixed mortgage. I have a 30-year fixed mortgage at 2. 58. Yours is at 2. 49. So you're the first one that's been lower than me, but I don't know if you have a 15-year rate or a 30-year rate. But if it's 30 years, congratulations. You're the first person I know that has a better mortgage rate than I do.
So, your first question, is there a way of paying off your mortgage from tax deferred assets, 401k, et cetera, without making it taxable income?
The answer is no, there isn't.
If you were to pay off that mortgage of 500, 000, meaning you pulled out 500, 000 from your retirement accounts, that entire amount would be considered taxable income in the year that you did all or part of that distribution. So, if you wanted to actually have the 500, 000 and assume you're in the 20 percent effective bracket, you're going to have to pull out. What? Between 600, 000 to 620, to get the actual 500, 000. So no, there is no easy way to do that.
That is disappointing because you're running on your target retirement budget and it's a little tight. So, what can you do?
Well, first off, this is an optimization question. We're going to lean into these pillars more and more when we're answering questions so we can categorize them appropriately.
If you have your plan of record, you know that your plan is feasible, you have it wrapped out where it's relatively resilient against the outside forces, if you have that plan of record continuing the mortgage, Timothy, you could create a what if scenario. What if you did pull out the 620,000, paid the tax on it all in one year, and then you'd never have the mortgage again.
Is it feasible? Is it still resilient and gives you the margin that you need? You could create that example.
Another what if scenario that you could explore, Timothy, and these are usually where the answers are, right? Somewhere in between is okay. It's a little bit tight. What if you looked at taking some money out of your retirement accounts, maybe enough to cover the mortgage, year by year where now you're not going to be so tight. You're not going to run up the tax in one single year and you're draining money from your retirement account. So, you can have some go-go money during your go-go year.
One option would be, well, what if you took out some qualified distributions, but not the full amount, maybe enough just to pay the mortgage. Maybe you will pay it off quicker. Maybe you do tax planning every year, which I think you should do anyway, to see in these early years of retirement, you're 60 62. Perhaps you explore proactively moving up the tax brackets into the, you know, I don't know where you're at, up to the 22%, or even up to the 24%, whether that's taking qualified distributions or Roth conversions to help you while you're 60 and 62 early in retirement so you can minimize potential required minimum distributions later on.
But I think there's an in between there, Timothy, of why not just take partial distributions even if it's just to cover the mortgage. I had this decision, it was with after tax assets, of do I pay off my mortgage at two and five eighths? I had the cash in the bank and at the time, Interest rates were low, so I wasn't earning much money on that cash. I chose not to pay the mortgage off because the payment, getting rid of the payment, because my interest rate was so low, wasn't going to have a material impact on my life. I wanted to have the optionality of that money to do other things, either to have a cash cushion or to invest it, et cetera.
So, yours is even complicated more because it's in pretax assets. So, I would be very wary of taking that money out of an IRA or pretax and just paying it all off with the interest rate that you're at. I would suggest doing qualified distributions to give you margin year by year to do the things that you want to do because I don't want you to feel tight.
If you decide to do that, let's just do some basic math here. If we assume you have a 30-year mortgage, half a million-dollar balance, and you just started it at your interest rate, your monthly principal and interest payment is 1, 973. According to my HP 12c that's an OG calculator for you young-ins.
So, if you're deciding, well, I'm just going to take enough money from my IRA or 401k to pay my mortgage, and let's assume you are at the 12% tax bracket, I'm just going to do very simple math here because I hate doing math live. So, you take out about $2,200 a month. In order to get enough to pay off your mortgage, as an example.
So now you plan to do 2, 200 a month distribution from your 401k to cover your mortgage so you can do go-go spending. How do you invest that money in your 401k now? So, this would change your pie cake, right, your allocation. In our world, that 2, 200 a month that you would be taking to make your mortgage would be about 26, 400 per year.
Let's assume you have a five-year income floor to help give you clarity on how you're going to pay for your life over the next five years. So that means in your retirement account, if you had a million dollars, we'll use that number, 132,000 of that money, which is five years of the annual payments of your mortgage, would be reallocated to your income floor and be invested in T bills, or individual bonds or CDs that mature when you need the money or your guaranteed cash account, say, within a 401k.
So, you can see the downstream effects. Now you have your mortgage prefunded for the next five years in your 401k accounting for taxes.
I think that would be a better approach with the facts that you gave me to explore, Timothy, than doing it all at once. Given your interest rate and the fact that it's in pre-tax accounts.
AN INHERITED IRA QUESTION
So, our next question comes from Carol where she's trying to help out a family member with an inherited IRA.
Carol: Hi Roger.
I enjoyed your podcast very much. I've been a listener for about the past three years and have benefited greatly from your wisdom. I am hoping that you can help direct me as to the best way to handle a situation that I just learned about. I have a family member who inherited an IRA from his father, who passed away in 2000 at the age of 70 and two months.
The problem is that this family member has never taken a required minimum distribution from this account, and it's now grown to more than 10 times the original amount. He was unaware that he needed to do anything with this inheritance, and so it had just been left alone. And now this is where we are.
This family member has lived a very simple life and only recently began to earn more than 15 an hour. He is close to retirement, and this is his only retirement money. The investment house that's holding the inherited IRA has changed hands a couple of times, and to my knowledge, no one has reached out to him, probably because they don't have an email, and he does not access the account online.
My understanding is that he should have been taking RMDs on this account for the past 23 years. I really don't know how to guide him at this point. Do you have any idea of what would happen to this account and who he should talk to about cleaning this up?
I really appreciate you taking my question and thank you very much for your help.
Roger: It's wonderful that you're wanting to help guide this individual, this family member in cleaning up this mess.
Fact set is, the owner died in 2000, which is 23 years ago, at 70. 2, under 70 and a half. The person that inherited that IRA should have been taking required minimum distributions each year since that time.
During that time, for any distribution they did not take from that inherited account, The IRS has a penalty of 50 percent of the amount they should have taken. So, in 2021, based on the life expectancy, they're going to look at the year-end value the year before. So, let's work through this.
The first RMD person died in 2020. They inherited it. The year end value in 2020 would have been calculated using the life expectancy of the family member that inherited it, and that calculation would be based on a percentage based on how long they're going to live, and that would determine the required minimum distribution for that year.
Then let's assume that distribution should have been 2, 000. Well, the family member did take the required minimum distribution, so the IRS tax penalty is 50 percent of that 2, 000 of what they should have taken, and then each year, so fast forward to 2022, you would have looked at 2021-year end value. Use the life table, which the IRS publishes and changes over time to calculate that required minimum distribution. Again, if they didn't take it, there's 50 percent penalty on the amount they should have taken. So, this is compounded over a long period of time.
This is what they call a big conversation now, right? This isn't a little conversation where we missed one year, and we got to go fix it. Oh, and then you got an exemption for 2020 because of COVID, but that's beside the point. So where do you go to fix this? That's really the question.
This is a bigger problem. So, I would suggest going to a CPA. or an hourly financial planner and go through the process of calculating what those RMDs, Required Minimum Distributions, should have been for each year and then doing that distribution as quickly as possible.
Part of this is best practice, and you can let the person that you find guide you, are to take each distribution separately, or at least not include it with the 2023. So, let's say you have got to do a 2023 distribution for this year. Let's get that done. So, you're going to look at the year-end value, year end of 2022, and you can use the Schwab Required Minimum Distribution Calculator for Inherited IRAs, and we'll put a link to that in 6-Shot Saturday.
Figure out this year's required minimum distribution, get that done before the end of the year, and then go through this process of calculating all these years and have that taken out in a separate distribution ultimately.
After you do that, the form I believe is 53 29 for each year that the RMD was missed, and that form should be the form for that particular year because that form has changed over time and then that will at least notify the IRS that you're cleaning all of this up. Then work with the CPA or the planner that you find to figure out how to ask for relief from the penalty, which is pretty substantial in this case, all cases, for relief, explaining why it was missed.
In my experience, when an RMD is missed, I've never seen relief from the IRS, at least in my own personal experiences, which has been maybe three or four times. In your case, given the situation, I have no idea. But this is where you definitely, I think, because one, it sounds like this family member isn't financially adept, doesn't really access this stuff, and you're taking this on for them.
It might be best to have a professional do this, that can be the project manager and do all this calculation, so it doesn't put too much pressure on you to clean up somebody else's mess. But sorry for this person because it sounds like they really need these monies and that this could really impact their retirement.
I feel bad about that, and it's such a great thing that you're working to help clean this up so they can be on a better trajectory. But this is definitely a bigger conversation and a little bit bigger journey that you'll have to go through.
I would definitely get the 2023 done using the Schwab calculator, look at your end value. Definitely get access online so they can access the statements and then find someone to clean up the rest of the mess.
THE ORDER OF WITHDRAWALS IN RETIREMENT
Our next question comes from Anonymous.
Anonymous asks about ordering of decumulation.
"Great podcast, been listening to you for a while. Love that you're incorporating life lessons."
Those will be coming back in 2024. We're going to lean into those a little bit more as we add video to all of this as well.
"I have a question about the order of withdrawals in retirement. Conventional wisdom says to use taxable accounts first. Then tax deferred accounts like IRAs or 401ks, then tax free Roth accounts.
I currently have about 1,000,000 in IRA's, 700,000 in brokerage accounts, and 150, 000 in Roth accounts. At age 62, I'm late to the Roth bandwagon and will be converting as much from IRAs to Roth as is feasible. My social capital, meaning pension and Social Security, covers my current spending needs and I'm confident in my plan, and I'm working to increasing my joy bucket, but project that I will still probably leave at least a million to the next generation to that.
Given that, would it be best to spend down the IRA first and grow the taxable account for heirs? The taxable portion of the brokered account would be limited to the capital gains taxes when realized and would not have any RMD requirements versus the IRA accounts, which are fully taxable and wouldn't be in the after-tax account, wouldn't be subject to RMD rules for non-spouse beneficiaries."
All great points, Mr. and Mrs. Anonymous. In addition, after tax assets, when you pass, will receive a stepped up in cost basis, whoever receives them. So, this is definitely an optimization question.
The answer is not going to be crystal clear on should you be spending down your IRA assets or doing Roth conversions or not.
Here we are at the end of the year. I've been on the gauntlet of Roth, do I convert or not conversations in my practice for sure, and individually doing tax estimates and making judgment calls so a lot of this context is fresh in my mind.
Ultimately, Anonymous will be a year-by-year decision, and it sounds like you know you have a feasible plan; you know that it's resilient. You have a lot of social capital, it sounds like, in terms of pensions and Social Security. So, this is definitely an optimization question. So that's good, or an optimization issue.
The question you want to ask yourself first is, what am I trying to solve for? That's usually the first question I start with in any situation. What is your intent here? What are we solving for?
Well, I'm not surprised anymore. A lot of times that's hard to articulate because there are a lot of things that you're trying to solve for, but we need to prioritize what those are. So, in this case, are you trying to solve for lowering required minimum distributions by doing Roth conversions or qualified withdrawals? Are you trying to solve for efficiently passing money to your heirs? Are you trying to solve for guarding against tax increases in the future? Or if you're married, having a spouse pass away, and going to single brackets if you're a joint bracket? Are you trying to solve for Affordable Care Act healthcare subsidies?
What is it that you're trying to solve for? And then what are the priorities of those things? It is good to do a little bit of thinking about that before you get to the next step.
So, when you have your version one of your retirement plan of record. I always recommend using the default option of drain the taxable, drain the tax deferred, and then drain the Roths.
Have that be your version one. In doing that, in mapping out exactly how you would pay for life, then you're also going to have at least a five year cash flow estimate if you're using the Agile process where you can see the cash flow for at least the next five years of your income sources and your spending, your base great life, your wants and your wishes, your base tax estimate and what the deficit is, and that will give you some information as to what tax brackets you may be in this year, next year, and the next five years.
That's important information as you're thinking about this decision because it will help you identify, oh, wow, I'm going to be in the 12 percent bracket. I'm going to be in the 22 percent bracket.
That will give you some ideas of where you're going to be from a tax perspective. This is what we do with clients. We have that five-year cash flow estimate. We also do a current year tax estimate with exactly what they've taken out to see where there might be opportunities to do qualified withdrawals or Roths.
Next thing you want to do is look at, what will my required minimum distributions be if I don't do anything? If I just take it out of say, in this case, you're 700, 000. The reason you want to do that is because estimated Roth distributions later on might start driving you up the tax brackets quicker if you just let this liability grow because you haven't touched those accounts.
Then obviously in 23, 24, and 25, we're in a lower tax bracket scheme than we will be in 26, because we revert back to the old tax brackets, unless we have some legislation there.
So first, do your five-year cash flow estimate. Create how you're going to pay for life in the traditional sense. Estimate your required minimum distributions and then you can create version one of what if I do Roth conversions or do qualified withdrawals.
Either of them are totally appropriate. It doesn't matter which pathway you ultimately choose. It sounds like your life is going to be fine from a funding standpoint. So, it's really the question of do I want to build after tax assets for my heirs because I know there's no requirement of distributions, it's going to get a step up in cost basis, et cetera, or do I want to pass them Roth assets? It's going to be a year-by-year decision of choosing where you pull money from.
I think moving money to Roth makes sense with the facts that you provided because giving them Roth assets is probably more advantageous than giving them after tax assets. You're going to pay the tax now and then let it grow forever and you have the ample assets, but maybe you do a mix.
You take some qualified withdrawals to preserve your after-tax assets and you do some Roth conversions. When you're doing your tax estimates, this is just another side. This is where video would be very helpful in this case is when you have your base tax estimate for this year of just using your after-tax assets, you can get to what your effective tax rate is, or your average tax rate is.
Then you can say, well, what if I took out 100, 000 from my IRA? Doesn't really matter whether you did it as a Roth or not. You can still say, now this is what it does to my average tax rate. A lot of times your average tax rate may go for say 15 percent to 18 percent or 19%. Then you just have to make a judgment call and do this year by year.
But if you don't have that first plan of record with the traditional defaults that we described, then it's very hard to compare. That's why you always want to start there. But it sounds like either pathway, Roth conversions, qualified withdrawals, or just stick with the traditional drain of your after-tax assets. It sounds like those three pathways will all lead to relatively good outlook comes for you and your family.
This is just going to end up being a judgment call. Just for this year and then you'll have to do another judgment call for next year because your life may change. That’s why you want to be agile.
So hopefully that gives you some perspective of how to approach getting to a decision in an organized way.
THE BENEFITS OF A CONTINUING CARE RETIREMENT COMMUNITY
Our final question comes from Lyra I think I'm pronouncing that correctly.
It's Italian and Turkish. She gave me some guidance. Thank you so much, by the way.
"On retirement communities, I've been thinking about the benefits of a CCRC, Continuing Care Retirement Community. I know this topic has come up in the RRC. Would it be worthwhile to have an episode or a month-long topic on these?
There's a lot to know, several different contracts, refundable entry fees, as well as some financial advantages. The major selling point for me would be most of my daily care, including assisted living and memory care is included, and that is easier to budget for. Would it be worth exploring?"
So, Lyra, yes, it would be worth exploring.
We had Kathleen Toomey, I believe her name is, off the top of my head, in the Rock Retirement Club to talk specifically about CCRCs. I think we had her on the show, and I've been on her show, where we talked around this. She has her own podcast. She actually works with a CCRC in the northeast, and she has a passion for education. So, we'll put a link to any interviews we had with her on the show, but also a link to her show, which might help you explore this. She definitely has the heart of a teacher. She works for a very local one that is a very small business that is tight, so it's not like she's trying to market to the world.
She just has a passion for this, but definitely retirement living later in life is a great theme idea that we will take into consideration.
With that, let's move on and catch up with Rosie.
CATCHING UP WITH ROSIE FROM THE 2023 RETIREMENT PLAN LIVE
So today we are talking or catching up with Rosie from well, I guess last year's Retirement plan live. She retired right in the middle of a bear market or at the beginning of.
Rosie, how are you doing?
Rosie: Pretty good It's been a, another year of adventure. So that's good.
Roger: I like that attitude.
So, your case study of retiring in a bear market was a little bit more difficult than most in terms of obviously the financial part of it, but also the fact that you had an advisor at the time.
We'll get into some of that. But I guess my first question is from a confidence standpoint, here we are about 12 months later. How are you feeling about the trajectory of retirement and your confidence level in it?
Rosie: Confidence level is better. I would say primarily because we've done a fair amount of homework and we're a little bit more educated.
We're still not exactly where we want to be in terms of really solid firm plan for going forward, but feeling better about where we are and what we need to do and how things might look.
Roger: Okay, and you were working with an advisor or planner when we chatted. Are you still working with that person?
Rosie: We are, we are in the midst of probably transitioning, we're going to definitely meet with a fee only planner and get some, another review of where we are and what we might do for next steps, that type of thing.
But we're definitely planning to move from this advisor either to managing on our own or working with someone on probably a fee only type basis.
Roger: Yeah, and another in between there is just having them create a plan in detail with you. I know we did a little bit of that after last year's case study privately, but they could also just help you create the decisions, the framework to implement.
Rosie: For sure. When we spoke with you last year after, I mean, that was really a huge light bulb for what we are not getting from our advisor. In a couple of short conversations with you, we learned way more than we have probably ever from any advisor we've ever had, which, you know, is on us, and it's also on them, I guess, in terms of getting what you pay for.
Roger: Well, it's both.
Now when we had the results webinar and we went through some of the analysis at a high level, it was relatively clear that some changes needed to be made to have a safe trajectory. So, what, if any changes have you made since then?
Rosie: Well, I would say after we spoke, it was winter, and we were in Florida for the winter at home for the summer. Summer is magical in our part of the country. It was crazy. Really it was fall when we really started focusing on the investment side of things.
Prior to that, in the spring and summer, when we got home, we knew we needed to ramp up our side hustle. So, we really put most of whatever time we had toward that and really ramping up our business side of that.
So that's helped. We are definitely in a better position with income from that now than we were. Then in the fall is when we really started doing a deep dive in our investments. Whoa, you know, we just recognized how kind of crazy our portfolio was in terms of way too many investments and complex.
Like, for example, we probably had eight funds with the name emerging market in them and each fund had very little money. I'm like, what good is this diversity doing me in terms of say, if I want to invest in emerging markets. Is this the way I would want to do it? So, we did a lot, a deep dive into that and started having meetings with our advisor. It's really been work, I'll say, because bottom line is they have models in the background and they want to run model one, two, or three. We don't want to run model one, two, or three. We want to run what we want, which is a way more simplified plan.
Then in the midst of all that in the fall, the firm converted from one brokerage to Schwab now. We kind of had to sit, I didn't want to make any big changes in the middle of that transition. You're lucky if your transactions make it over to begin with sometimes, but anyway, so we got through that and now we are at a point where we finally got it. We want this to be down to eight or 10 funds and we want to move to a much more conservative model than what we were on. We are almost done with that transition at this point.
Roger: How did those conversations with the advisor go? I'm a little surprised that it's here. We are a year later and it's just all happening in terms of getting it simplified.
Rosie: Yeah. Well, I would say we didn't push it real hard until early fall, but I wanted it all done by the end of November, which is what we said on our first week.
We want to simplify. We want to move everything over. I think probably most of the funds were transitioned over maybe a week ago or two weeks ago. Now we're and better spot than we were in terms of down to a manageable, but I'm going to be truthful. It was painful.
Roger: So, what was the painful part?
Rosie: I just don't know why it just seems like either there was resistance to what we were asking to do or there was a communication breakdown and there wasn't an understanding. I have felt for a while now that and I think we talked about this before When we talk about cash or safety or safe There's not the same understanding what we want and what we mean by that.
So now we finally got to that, and we finally do have decent amount of cash.
Roger: When you said it was difficult, can you give me in terms of the communication with the advisor or planner? Can you give me a specific instance?
Rosie: Well, I would say like, for example, on one call, after we had done the deep dive on all of the different funds that we have, I'll just use that emerging, because that's coming to mind, the emerging markets fund.
We were saying, why, why would we do this? What, I don't see the logic in having this much spread on one category. So, there was a lot of conversation about why we do it this way, and really in the end, it was, Basically, that's what the model does.
Roger: They have their model and that's just what they do.
Rosie: This is the model for the portfolio style that we were going, supposedly.
Roger: Fast forward 11 months and at least we didn't continue the bear market. It was a choppy year, but still a relatively positive year. So, are you in a different model or what did he do, or did he or she do differently?
Rosie: Well, he wanted to go to a different model.
But that still wasn't simple enough for us, at least me. So, for now, I think we're down to about six funds, six ETFs, and a good amount in cash. We've got a better balance with bonds and stocks, mainly. My husband's IRA is separate from mine. So, for sure, this is happening in mine. And then in his, if you recall, there were some individual stocks. So, he is reducing some, and we're not done there.
Roger: That was your husband that really had the preference with the individual stocks, if I recall.
Rosie: Yes, and a lot of those stocks are in these ETFs. Then you're weighted even more heavily than you need to be. So, we're not done, I would say, negotiating out of some of those individual stocks.
Roger: What's to negotiate?
Rosie: Well, getting my husband on board.
Roger: I understand. That negotiation. Okay.
Now I also recall that you had shared a conversation. I think it was in mid fall of 2022 that your advisor had said Hey, the long term forecast from the Monte Carlo scenario was not good, but we can address it in our annual meeting in 2023.
How is that addressed? The fact that the long-term feasibility assessment with whatever tool they're using, we're past the annual meeting in 2023, how is it addressed from, hey, are you safe from not running out of money or do we have any confidence in the plan?
Rosie: Has not been, has not really been addressed.
So, when we started these meetings in the fall, we kind of said we want to do, first thing we want to do is simplify the portfolio. Then we want to address these individual stocks and we want to rerun the Monte Carlo scenario, but not just that, just in general, where are we? How safer? That part has not happened, you know, and they wanted to get the funds transferred first before we even look at that.
The other question that we had, I think we mentioned, was that we had bought the lot up north and we.
Roger: So, you did buy the lot up there.
Rosie: Oh, we did. We bought that last year when we started, but the question remains, are we going to keep it?
Roger: That's right. That's right.
Rosie: That's the conversations we wanted to have in this with him, which have not happened.
So that's kind of why we're like, okay, we just need to get this transition of the funds and be done and move on and find someone who can talk the same language we do and help us.
Roger: So, this is December 23. I mean, we looked at the long-term trajectory from a Monte Carlo scenario back in January and it wasn't good.
Have you looked at it at all with your advisor to this point?
Rosie: Once in the middle of this. So, we, and this is another thing that was a little frustrating for me is our stipends that we've taken. Early on when we retired, we're like, well, can we take this much? Yeah, you're fine. Well, now in retrospect, no, we weren't fine.
We never should have taken that much. So, from where we have cut our stipend back, which is part of ramping up our side by a lot, probably more than 50 percent of what we were at the beginning of the year. I know, I mean, we're basically almost to the 4 percent rule, and so I know that we're probably okay while we're waiting.
We still need to know where we are.
Roger: I want to challenge you a little bit there, Rosie. You don't know that you're okay. It feels better from heuristic standpoint.
Rosie: I guess that's fair. That is a fair statement. Pretty soon. We can't survive on a whole lot less. So, a lot of people I know that don't have as much money as we do are still surviving.
I feel like it's just frustrating to me. I feel like every conversation we are initiating; we are following up on, we are scheduling, and that is frustrating to me. That's part of why some, we are still where we are. We've been doing a lot of the work ourselves, which has educated us, and so that part is good.
Roger: I'm actually really surprised you still have that advisor, and you haven't switched to someone else by now.
Rosie: I think what happened is it was fall before we even got back to looking at our investments in the account.
Roger: Because you're in Florida or where were you.
Rosie: We just focused on it, and we were in summer which isn't a good excuse I know but up here that is a golden moment. Sun does not shine except for three months a year. But we were working on the business part of it until then. Then as soon as we started deep diving, which I would say was late September.
I really thought we'd be completely done I mean, in some ways we're too patient, but I'm waiting to see if I can get the responses I want. They're not happening.
Roger: Yeah, and so remind me on the side hustle or the work part that you've been ramping up, that was selling stuff on eBay.
Rosie: For the most part. Yep.
Roger: Okay, and so how much did that income increase this year from your focus?
Rosie: I would say not quite double.
Roger: What happens if there's a hiccup in that income?
Rosie: Then other things have to change.
For example, part of the scenarios I want to change is like owning this lot. If we sell that, what difference does that make in terms of what we have to make? I mean, bottom line, if you have to make some money, you have to do what you have to do, right?
Roger: If you can, that's always the hard part, right? Just health wise.
Rosie: Well, true. We are fortunate so far that we have our health. So, it's not ideal. I guess you would say we're not as far along as I wish we were.
Roger: I would actually say the same thing, but you know, just from a check in standpoint, I was coming out of the results show and a few of the conversations, it was clear that the hard part is the compounding of you've definitely increased your income and lowered your stipend, as you call it, from the investments.
The longer things go on, the more they can compound, and thank goodness we didn't have a huge bear market, or it would have exacerbated a lot of this.
Rosie: I think we would have jumped faster. Maybe not, but it wasn't going south as fast as it had been back in 22.
Roger: Yeah, well, that feels like relief, right?
Rosie: A little bit. Yeah. It's like, okay, we might, but yeah.
So, I think we found someone now through that list that I had asked you for a different fee only advisor, so we are just signing the contracts to start that. Hopefully we'll have that wrapped up in the first month or so.
Roger: Yeah, and for those that are listening I just shared with her a list from Andy Panko's website of advisors that work, that are fiduciaries that work usually on a retainer basis don't do the traditional. He hasn't screened them in terms of done a really big due diligence on them, but he knows them and thinks highly enough of them to put them on there. Andy's a good guy.
When are you going to talk to that advisor and get moving?
Rosie: Right now, we're just waiting. We just need to sign the consent documents and then start sending over all of our info. So, we're ready to go. It's a 90-day engagement, which he said will probably only take six weeks, but they just allow that much time for questions back and forth after the plans.
Roger: So now that you have all your accounts at Schwab. Why don't you fire that advisor, get rebated the partial fees for this quarter and stop paying them, because you're paying them thousands of dollars a year for something that's not of any value to you.
Rosie: The thing that we were waiting for is to get the funds down to a half dozen funds.
So, I think we are there literally within the last week. I didn't want to remove them and then have to do all that myself, but I probably should have just because then this new person that we're engaging could have helped us figure this out. But at the same time, I will say this person already is, we've been with Schwab before in the past with other advisors is not like super Schwab.
So, odds are we're probably going somewhere else again to either Fidelity or Vanguard, depending.
Roger: Yeah, where the money is, is not as important as having a plan. I guess it depends on you, you want to work with somebody on an ongoing basis, and hopefully this will be the person. From my perspective, speed is a force. Especially mitigating and triage. We'll call it triage, right? Triage is important to get done sooner than later. Oh, the patient continues to bleed out in various ways, and that's sort of an icky analogy.
So, I would encourage you to embrace that.
Rosie: Get this taken care of.
Roger: However, many funds that are invested, whether it's 20 or 10 or 7, really doesn't matter. It's the long-term trajectory of the resources I have and the spending that I'm doing and do they match up for a safe trajectory. The feasibility of the plan is first and foremost, not how many different mutual funds there are.
So, I would encourage you to continue that journey, and even if we don't, I think as of today, the markets are off to the races again, because we think interest rates are going to fall. It's going to be very easy to, well, let me just stay in all these equities and enjoy the rebound. God willing, that will continue, but it could not, right?
Rosie: Right, right.
I do feel like we have made a fair amount of transition to more bonds and cash than we were for sure, but probably maybe not at the level that it should be overall.
Roger: Yeah. I don't know.
In my mind. It's not so much about bonds and cash. It's about matching your assets to what you need, so you can feel confident it's safe in the short term and still grows in the long term in whatever that percentage works out to be is it's sort of dependent upon that. I just worry about the feasibility and make sure you feel that you have a feasible plan that your future self is going to be okay.
I felt like from our last, from the results meeting, it was like, Ooh, if this trajectory keeps going, yeah, you may be able to do this for a while, but you're going to have some really big decisions later on. So better to do triage quicker than, or, but it sounds like you're taking steps, but it's easy when the markets recover, I guess. To feel a little comfortable.
Rosie: Yeah, well, I think I know what you're saying exactly, because that is exactly as you can imagine how my husband thinks, hey, we're on an up, we need to sit here. I'm like, no, we don't, we need to move. So, I feel better that we do now have somebody that we interviewed that we both felt would be a good fit and that we can now just move forward with that.
Roger: That's awesome. That's awesome.
Rosie: I was kind of waiting for that, but only because once you drop your advisor, you're on your own, right? I just wasn't sure we were ready for that.
Roger: It sounds like you gave them the benefit of the doubt and asked them to step up and asking them to dive into the stuff, and it's understandable because I think I've recalled they were a nice person or are a nice person. So, it sounds like you wanted to give them every chance. And they just weren't able to.
Okay. Anything else you want to share with me? I'm not beating you up. I'm just thinking a lot of this. I don't want you to feel that way.
Rosie: No, I don't at all. I get it. Sometimes we need a little bit of a boost, but I do think we are on the cusp. We are way closer than we were three months ago, at least. But still, it would have been nice if we had acted sooner. It just didn't happen for a multitude of reasons and maybe before we focused on the reselling business We should have focused on this first.
Roger: No, I think the reselling business was a big one, too I think I’m glad you focused there.
Rosie: Yeah, and it took a lot of energy to get, we're still not where we need to be but just to get from point A to point B.
Roger: Yeah, I am glad you focused there for sure. So maybe to end this So you're about to sign the engagement with this new planner.
Let's set a couple bullet points of your intent that you can communicate to them. Part of their job, they will likely ask you these types of questions or do this, but if you can come into that relationship with some expectations, especially initially, that might make it more productive for you, right?
So, I'll play the role of this new planner.
Okay. Okay.
So, Rosie. During these 13 weeks, right? I think you said it was a 13-week engagement to begin with, during the first 13 weeks what has to happen for you to feel more confident about our work together and your plan? What specifically do you want to see done first?
Rosie: We need to see where we are today and then your recommendations of how we might make any alterations based on the feasibility of us having money to last our lifetime for A, our basic needs and then B, our wants.
So, the first thing is to be able to work with you to design a plan that meets our needs and gives us feasibility.
Roger: Okay, so what I heard is at the end of this engagement, you want to have clarity as to the feasibility of your plan over your lifetime, given the resources you have in your current spending.
Rosie: Also, with that running scenario if point A happens, what is the course?
Roger: Part of that is you want me to come up with a specific road map of what I would recommend for you to have a feasible plan that feels resilient that you can have confidence in. You want my recommendation of what I suggest that you do.
Rosie: Yes, and that recommendation includes not only what kind of an investment mix, but also any other adjustments in our, whether it's our lifestyle or our travel plans or anything like that.
Roger: Okay. What else?
Rosie: But then also really for us, next steps, things that we need to be attentive to as time moves forward. Each month, each year, each quarter, whatever it is, they'll be rebalancing and that type of thing.
So, steps and what we need to look at and consider for that.
Roger: So, you want me to provide you with a housekeeping schedule. So, in year one and year two, you know what housekeeping to do at whatever particular times of the year, is that correct?
Rosie: Yes.
Roger: What else?
Rosie: I guess recommendations on tools that we would use to, if we want to, say, for example, run a scenario, say we're running scenarios with you and we decide that we're going to keep this lot, for example, for four years, and then we change our mind and we want to not do that in two years. Tools that will help us see the impact of those types of decisions. Maybe it's a big vacation that we weren't planning on that we want to do.
So, ways to know what that does to our overall feasibility if we adjust, and as time goes on, we might have less income or more income in our side hustle.
What does that do?
Roger: Okay. That might be harder to deliver, but you want to know, okay, this is the housekeeping I do. What tools or scaffolding do I use to make future decisions?
Rosie: Yeah, and if there aren't open market tools, then maybe what would the fee or what would we need to expect if we wanted to consult with you again for a one-time meeting or whatever.
Roger: Okay. What else?
Rosie: I think for now that might be the main thing.
Roger: One thing you had articulated earlier was this portage lot and whether to keep it or not.
Rosie: Right.
Roger: So, do you want more clarity on that? Should we explore that?
Rosie: Yeah. I mean, I thought it was just said that I might be using different words that don't make sense, but yes, definitely.
That would be part of those scenarios if we keep it for two years versus five years, and then we agree in the overall plan by the end of this. 13 weeks or whatever it is that we're going to keep it for five years. Let's say that's the agreement. Then something happens, or we change our mind in two years.
Roger: But you're going to want my recommendation on what you should do with it, given your financial situation, right?
Rosie: Right. As well as the travel plans that we would like, they have to be part of that, right? So, what we want to do travel-wise in the next five years. Clock is ticking faster than used to what is the feasibility of that and how does this fit together?
Roger: Okay, and I’m guessing Rosie, that you implied this, but I want to say it specifically. In this I want to know what the feasibility of our plan is for our entire life, and you want me to recommend the specific strategy or choices to have confidence in your plan.
So that's what we talked about earlier.
My guess is when we say that you want to know specifically what we should do with each account and exactly how we're going to get our paycheck from our resources as well. Is that true?
Rosie: Yeah, I guess what I'm thinking about is, you know, like asset balancing at the end of each year or quarter, however often you need to do it.
If we come up with a model that we say this is our pie cake, this is what we want it to be. As the market does its thing, things will adjust. So, making sure that we know what we need to do to bring it back into alignment. You know, we need to sell this, we need to buy that, we need to move from here to there.
Roger: But even before you have to figure out future decisions, you want to have the specific decisions of what you should do with each account right now, investment wise.
Rosie: Definitely.
Roger: Okay. Okay. Okay. Sometimes when we talk about, well, let's have a feasible plan of record, and create our allocation recommendation.
The fact that you want it really specific to what do I do with this account? What should I do with this investment in this account? Right? Very specific. A lot of times that can get caught if it's not said, they can think they're delivering.
Rosie: Yeah, and that's probably some of our issues with our current.
Roger: Exactly. Exactly.
Rosie: Not being specific enough. I'll take ownership of that for sure.
Roger: It's not unusual for all of us. Communication is really difficult. It's hard, things can seem very high resolution, but when you start asking questions like deeper questions, the questions behind the questions to pin them down specifically, what are you going to deliver?
Oh, we're going to give you this feasible plan. Okay. That's great. Specifically, what's in that plan? What exactly are you going to give me or what exactly do I want that way? You can document that together.
Rosie: That's funny, because one thing that I thought about before signing anything was, can you provide me a sample of what you're going to deliver?
I didn't know if that was a fair question.
Roger: Why wouldn't it be? Anything's a fair question.
Rosie: Because it would be helpful. It's some high level, fluffy, four paragraph thing. I don't need that.
Roger: That's a good point, and I think it's totally a fair question. And even if they don't provide you or can't for whatever reason, you can at least have a deeper conversation about what they will deliver.
Rosie: Okay.
Roger: Right. I think that is reasonable.
So I just want to encourage you when you engage with this advisor to go through this exercise, even if they don't bring it up. It's like, let's talk about the targets for our work together. What specifically your expectations are, and that way they can understand them and then either agree to them or say, hey, I don't do that, right? Which helps you because you don't waste a lot of time and money.
I would just encourage you to set specific targets at the beginning so there's clarity for both of you. That actually will extract more value from the advisor because advisors and planners are like everybody else. They're lazy. The people that poke a little bit are more specific. They're sharper. It actually is a good tension.
I just want to encourage you to do that.
Rosie: Yeah, you know, that's interesting because I will go back to the list that I sent to our current advisor when this conversation started.
This is what we want, A, B, C, D, E. So, I'm going to go back and look at that and see if it is what I think is specific or not, and that just might add a little bit more insight.
Roger: Yeah, and that advisor, I wouldn't give them any more time. I would just, yeah, I would just not even, they just weren't a good match.
So, all right. I'm excited about your journey. We'll check in again and you know how to reach me if you have any random questions.
Rosie: Well, thank you so much and I appreciate you with these thoughts on what to make sure we're getting from this next round.
Roger: I want you to be edgy. Nice, but edgy.
Rosie: Okay. Sounds great.
Roger: All right. I hope you have a wonderful holiday.
Rosie: Hey, thanks. You too.
TODAY’S SMART SPRINT SEGMENT
Roger: On your marks, get set,
and we're off to take a little baby step in the next seven days to not just rock retirement, but rock life, right?
In the next seven days, and this is a good time to do it at the end of the year. The beginning of the year is, update and have a vision of what you want for the future. If you already have this in place, this is a good time to refresh it because you're a different person now than you were last year, update your vision for the future, update your feasible plan of record, and then update your resilient plan of record, have that decided.
It can be scary to decide, but I want to encourage you that almost all of these decisions can be amended or changed later on. This is not writing with sharpie, so you have to decide because that's the only way you can plan, and you give yourself grace because you're using an agile process that you can change these things but if you don't have this plan of record printed literally or figuratively, you're going to be without a true north.
This is a great time to do that.
Now, if you don't have any of this and you really want to get something like this done, small pitch, in February 1st, when we have the results session with Mark and Mary for retirement plan live, we are opening the Rock Retirement Club for new members and we are starting a program with that, where new members and current members, we're going to have programming to help you get to a feasible plan of record within 30 days to have what you think you want, organize your resources, at least do the calculations. Is it feasible so you can get to that feasible plan of record? We're going to shepherd everybody to do their own planning and coach them.
So that's something to consider, but that's a good thing to do here at the year end.
CONCLUSION
My wife has given me a lot of great advice, well, over the 33 years we've been married, but she gave me some advice a couple of weeks ago. She said, "Roger, between Christmas and New Year's, would you just block your calendar? Just put some blocks on your calendar." Not that she had anything that she wanted to do or needed me for.
She just wanted me to be around and present. I get calendar driven and I'm an all-in kind of person. It's easy for me to overcommit and just keep doing and doing and doing. So, I am very blessed that she did that for me. I have been doing that. This is recorded before that week, just so you know.
I hope you have had a great year.
Now, if you have had some really rough things happen to you in 2023, I know a lot of people that have lost a spouse, have had major medical issues, have had other work issues, all sorts of things. Life just freaking happens to us, doesn't it? So, if you've had some of these things happen to you, one thing I would encourage you to do, and whether it's journaling or walking or noodling and thinking on it, is reaffirm for yourself.
Say, I am going to have a great life. Perhaps it's not the life that you imagined. Maybe you lost a spouse. It's not the life that I imagined, and I don't know how it's going to work yet, but I'm still going to have a great life. It may take a little while, but I'm still going to have a great life.
I believe that for you. I wish that for you, and I wish you a safe and happy new year.
The opinions voiced in this podcast are for general information only, and not intended to provide specific advice or recommendations for any individual. Foreman's reference is historical and does not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal tax or financial advisor before making any decisions.