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Episode #528 - What Can I Learn from The FIRE Movement
The show is a proud member of the Retirement Podcast Network.
"Knowledge is proud that he has learned so much. Wisdom is humble that he knows not more."
-William Cooper.
Welcome to the Retirement Answer Man show. My name is Roger Whitney. By day, I'm a practicing retirement planner with over 30 years’ experience. This podcast is my lab where I noodle on how to not just survive retirement and how to have a confidence to rock retirement. I've learned so much from you on this journey and hopefully that you're, you're learning from me as well.
Today on the show, we are going to finish our series on FIRE, Financially Independent Retire Early Movement with Kevin Sebesta, he's been a great guide, where we're going to talk about what you and I can learn if we're not to the retire early stage, maybe we're beyond that, what we can learn from that movement to incorporate in our lives to well rock life.
In addition to that, we're going to answer some of your questions and have a rock life segment. Now, before we get started, Nichole "Rockstar" Mills has assigned me another task. She is very in control of things. She runs a lot of what goes on around here, including me in some ways. Ha. So, she has asked me, very kindly, to remind you that we have a survey. We're doing, I guess this is the 10th survey, because this is the 10th year. I don't know how many surveys we've done, where we ask you what you want. What you're thinking about, what you're excited about, what you're worried about, what you want more of on the show, what you want less of on the show, because this show is about you and I noodling on rocking retirement, not just in the financial sense, although that's extremely important, but in the non-financial as well.
So, I am asking you, if you are a member of our 6-Shot Saturday email, please click the link and take the survey so we can incorporate your feedback into the show. If you are not receiving our 6-Shot Saturday email, it's even better than the show. It's a summary of the show, but it gives you links to some of the resources that we mentioned.
So, it's very handy. Just comes out once a week. You can go to 6shotsaturday.com to sign up and then you can help improve the show. With that, let's get with Kevin and talk about what we can learn from the FIRE movement.
PRACTICAL PLANNING SEGMENT
All right, here we are to finalize this series on FIRE, Financial Independence, Retire Early, with Kevin Sebesta, our guide, a FIRE-er. You're a FIRE-er, is that what we would call you?
Kevin: No, no, I'm FIRED. With a D.
Roger: You're fired. I love it. Yes. I love it. Since, like, 42, if I get the year right.
Kevin: We're going to round, yeah, I'm fine.
No, details are not important here. When I'm in session, it's for entertainment purposes only. None of this education stuff. Definitely no advice.
Roger: Always. Well, there's a lot of wisdom there, for sure.
So, we've explored what FIRE is, the benefits of the movement, some of the challenges we talked about last year, and I want to round this out with What everyone can learn from this FIRE movement, especially those that are thinking of retirement in a traditional sense.
Kevin: Friends told me that the goal is to rock retirement, not have a rocky retirement, and thanks TJ for that idea.
Roger: I like it. I like it. I like it.
Ultimately, the goal in this case is to rock life, not wait to really have a great life in retirement.
Kevin: I do not like the phrase, "when I retire, I will..." I want that to start now.
Roger: Yes, we were talking about that prior to getting started and that is a phrase that we really need to catch ourselves when we say.
I'm struggling with that a little bit right now, Kevin, because we're back to the decision on building the Colorado house and my wife is like, well, maybe we should wait two or three years.
But if I assume I'm going to live 30 years, waiting three years is 10 percent of my life.
Kevin: You're active when you're in Colorado, right? So not only that, but it's later years.
Roger: Yeah, exactly. I'm missing three of the best years, 10 percent of the best part of life physically. It changes the perspective of it.
I still have to be financially prudent about it, but it's easy to forget that if you got 30 years, three years is 10 percent of that time.
Kevin: You talk about the regrets of dying and living your life, living your true life. If your true life is activities and new exploration and you can balance that, do it now.
You won't be sorry for all those extra years just being active, exploring new things.
Roger: I think this is part of one of the lessons we can learn from the FIRE movement is that traditional retirement planning thinks of getting to the life that you want, rather than thinking, you know, like climbing a mountain, you're trying to get to the summit, and then you'll be happy.
Whereas the FIRE movement is much more about, it's a journey that never really has an end, and you're trying to find more balance in your life, so you don't say, you at some point in the future.
Kevin: We talked a little bit about that, about what are your passions. What are your interests? What do you love to do?
There's a movie called Playing with Fire and the best part of it for me was the exercise where they separately wrote down their 10 favorite things to do in a day. Do you like to go for a walk? Do you like to cook? Do you like to dance? Do you like to build something, help others, learn, and prioritize those.
I think people should do those now in their lives, rather than waiting till retirement to do those activities. I say, why don't you do those activities on Tuesday night? Dance on Tuesday night, build something on Thursday. It's not worth waiting. In the club, we see people that are two years away from retirement, and now some four or five years. That's a lot of life to wait for those core things that you love to do. Things that drive you, that give you passion and purpose, or maybe just experiment, dabble, and have an interest.
Roger: Here's, I think, a good example of that, Kevin. I like to walk, whether it's on a trail or somewhere else, and Michael Easter, who's going to be on the show next month, had a series of data. I subscribed to his newsletter, and the average person walks about 5, 500 steps a day and that's about what I average and I'm just like I need to increase that more and walk outside like I could get an indoor treadmill and stuff like that and to get to say 10, 000 steps takes a lot of effort and I started to examine how my life is structured in terms of my schedule and how much opportunity I have to walk outside and realize my whole environment is structured in a way that doesn't really provide me that and so I'm trying to rethink that a little bit.
Because I want to do it, but if I'm not super intentional about it, I won't because my environment doesn't support that.
Kevin: That's a really interesting idea. We couldn't do this discussion recording walking, but Becky Heptick from Catching Up to FI, we spent the weekend together with a group of friends and she hiked to the top of a mountain in Phoenix. We don't have mountains. A little hill in Phoenix, scrambled up there on her hands and knees practically. At the top realized she should do her weekly minutes or whatever she does where she shares. So, she did record at the top. So, she incorporated her active life and realized she could share the experience and thoughts with others.
So, you have to intentionally think about combining these pieces of life together, not optimize, because I know you don't like that word, but improve.
Roger: I don't dislike that word. I just like it in its proper place.
Kevin: Improve and add together the experiences of life instead of one thing at a time, just walking on a treadmill.
Roger: Yeah. I think that's one thing we can learn is just that intentionality of not delaying things that really feed you.
Kevin: People in FIRE community do that. People in the FIRE community do slow travel so they can experience a new place and a new culture and build a community with friends in that location or traveled to other FI friends who are in a different location and the financial independence piece of FI gives you the freedom to try and do some of those things.
In this case, we just talked about community and letting others help build your base stronger, I think.
Roger: Let's talk about community as one of the things that we can incorporate more.
Again, I'll just use myself as an example. I work out of the house. I'm not in a corporate environment. You have a built-in "community" within a corporate environment, but community is something that needs some intentionality around it.
I think it seems like the FIRE community does that really well.
Kevin: You know, when you say that the corporate community, I think my FIRE friends are way cooler than my work corporate friends that I was stuck at a career. So why do we base our friendships off of the people who just happen to be in the same building with us, or get the same letterhead on the paycheck? The same signee. Why don't we build community around interests and passions we have?
Roger: I think the same reason that you build friends from school is that you just naturally have interactions, right? To build friends and community more intentionally requires effort, right?
Like with myself and Shauna, we just don't randomly have the interactions with people. We have to create those and find places where we can have those interactions.
Kevin: You're right. No more lazy friendships.
Roger: That is probably the essence of it, isn't it?
I try to collect really cool people. Which sounds weird, you know, collect is not really probably the best term to use. But when I find people that I think are very interesting, I try to nurture a connection with them in terms of having friendship at whatever level makes sense.
I think we need to think of it with that eye, and I think the FIRE community does that because they're all outside the workforce, but many times, if we're in a full-time career, we just can't, or don't.
Kevin: Well, you might not have a binding source of interest. People get that from faith and those communities. People get friendships from other parents in the community of activities, but on the money side, no one sits around in the lobby of the bank to make friends, I guess.
Roger: Yeah, it's hard to have those conversations.
So, what's another thing that community, you think FIRE does well, not just on the relationship part, but in terms of creating a rich life that we can learn from?
Kevin: Well, I think about the events that I attended, Economy Conference in Cincinnati, Camp FI's. You get together a group of people who really expand your vision, what your life can be, whether it's financial planning, and we were sitting around the table with my slacker friends, we call our slackers, we're overachiever slackers, and I said, when do we get to start talking about death and taxes? We all laughed and we kind of did. We talked about, of course, Roth conversions, but we talked more about travels and our past lives and our histories.
Even though I'm in the Rock Retirement Club, the Rock Retirement Club has over a thousand members. There's 1300 members now, and we have a clubhouse online and a private space. We have online meetups and we have in person gatherings. People share ideas, topics, interests, specific categories of concern with their retirement, special needs children, blended families, late marriages, we've had more discussions on those lately, locations in the country, expensive locations, less expensive cost of living, and so people share ideas from a retirement slant, future retirement slant, current retirement slant, or financial slant that you don't generally have with other friends in your neighborhood and I think the communities push you to think about new things.
First of all, everybody listening to this podcast and the video honestly are pretty amazing to focus on this this topic this interest because to a lot of people, retirement is just going to happen out there. Well, it's not going to happen well unless you plan for it. By surrounding yourself with other people, whether it's a small group, medium sized group, or an RRC remotely group with the club, you really start multiplying your knowledge and your pieces of data that you don't get unless you find this community.
That's how I see it, and I'm an introvert, 95 percent introvert, and I love the people that I interact with because each interaction, we're both growing together, and you can see it.
Roger: Well said. Now, everyone is on a spectrum of spreadsheet geeks to very non-financial. From a money perspective, what's one thing that we can learn from the FIRE community as we're planning how we want to live intentionally?
Kevin: I think everybody in the FIRE community understands their spending structure, how much money they spend each month or each year, they understand the spending shocks, they understand their cash flow income stream, and they understand the balance between their spending structure, their cash flow, and that gap that allows the saving side.
They determine whether they want to lower their spending. To have more savings for the future or whether they want to increase their cash flow income through better jobs, gaining skills to get better positions, getting side hustle. I always had a second job. I would teach computers on Wednesday night at the community college to give back to the way I learned computers through a university, and it was a second job. Nowadays, it's called the side hustle, which sounds so much cooler than second job or night job. Right.
I just think it's about the foundation of the money you need to spend to enjoy your life, and that takes the burden off of not knowing how much money is going to fly out the door, go out the door smoothly in the future because you have a structure and retirement's a big piece of that.
It's not. Oh, take 80 percent of your income. That's how much retirement is going to cost. That doesn't make any sense. We spend more in retirement right now in our go-go mojo years because we're intentional of using some of that extra money while we're younger, like you could in Colorado, versus having it in the bank when we're 82 years old.
That's the plan, and we're watching it.
Roger: So, what I heard there, Kevin, was that there is, in the FIRE movement, they have to have a structure for how cash flow works. that they can iterate off of earlier than most, right? Because most will, we have a paycheck from a traditional job and we just live off of what we make after savings and we don't have to think about it nearly as much as, at least as early. Then in retirement, it's this whole big shift.
The other thing I heard was really understanding what we call that base great life costs, knowing what the minimum level of a good life Is going to cost year by year. So, you can make those discretionary decisions.
Kevin: Yes, exactly and if you want to put your agile structure into practice, the FIRE communities living that now they're adding things and balancing things, maybe subtracting.
It's very intentional. I've said that many times. It's also future driven with events, activities, and base great life is a big deal. Things don't blindside FI people when they're looking ahead. They'll come into scope and into range, but they're just not usually out of the blue, and they adjust.
Roger: The last thing I want to talk about is that I think we can learn from the FIRE movement, and I'm going to do a training on this.
I'll use my verbiage, and I want to hear how, if that makes sense from the FIRE perspective, retirement traditionally is planned from the outside in. Like, here is your 4 percent rule or guardrails. Fit your life into this box, and that's what you get.
I think of the FIRE movement, the spirit, I think, is more internal, from the inside out, of, I want to create my version of what my life is, not by some outside rules.
Kevin: Good example of that is our friend Mark Trotman who's in the club, he's been on your show. He retired at 50 from his professional career. He decided he liked finances. He got his Certified Financial Planner certification for fun. He helps share experiences with people and he has a website, marksmoneymind.com, I'm sure it's been in the 6-Shot Saturday, but he's now starting a podcast that's kind of financial basics and beyond to just help build some knowledge, easygoing discussion on these topics. So, his early retirement turned into adding education and knowledge certification, helping others now helping others in a new way similar to how Becky did with Catching Up to FI.
Everything transitions and it comes from inside, in the core.
Let's be clear if you're in the FIRE you're an overachiever in so many ways and just like in a corporate high-level career and turning it off in retirement's hard. If you're a high-level achiever in your 20s, 30s, and 40s, you don't just shut that down, you transition that.
Roger: I want to make sure we define this term high level achiever.
That doesn't have to do with captain of industry and high-income earner.
Kevin: No.
Roger: I hear that and I think of just somebody that's very intentional about life.
Kevin: Yes, and themselves. They want to always just, maybe it's as simple as being curious. There's lots of articles that talk about how curiosity builds someone to the next level and the next step and the next step.
When you talked about hiking or climbing a mountain, that's curiosity, whether it's the trail or the top or the end, that's a big part of life. You can have that through family, spending time with children, grandchildren, spending more intentional time with them, helping them be curious. helping them grow, helping them have experiences.
There are so many overlaps with the FIRE community and the retirement community for those who are thinking.
Roger: They just realized they have the options earlier.
One example, as you were talking about Mark and Becky, which are great examples, was, and maybe we'll put a link to this in 6-Shot Saturday. I listened to an interview with Arthur Brooks, who wrote Strength, and a number of other books on the Cal Newport show.
I didn't know Arthur Brooks. I don't know how familiar you are with him, Kevin, but he, in his twenties, was a musician in an orchestra, I think in Barcelona. He didn't even graduate college. He left college to go do that. Then in his thirties, he decided that he wanted to be a professor. He hadn't even gotten a bachelor's yet.
So, in his 30s, he scrapped his career as a musician and became a professor, a very well renowned professor, tenured. Then after 15 years or so, decided he didn't want to do that anymore. So, he became a leader of a think tank, and guided that think tank or I don't know if it's nonprofit and then about 5 or 10 years later decided he didn't want to do that anymore and then became an author and a lecturer.
What struck me was he saw seasons of things and he had the ability mentally to recognize them and not be afraid to transition from season to season.
Kevin: You know, I might be too retired for that as a slacker, but to reinvent myself fully in that same manner, there are the theories of retiring early, retiring often, taking sabbaticals, explore, do different activities, do different fields. They talk about younger people today will have whatever six different careers, not jobs, but careers because of the transitions through technologies and everything. I mean, that's a great example going back to school, like, which is quite an undertaking to get to the professor eligibility level, that's unbelievable.
But his previous experiences made him a better professor, even though it's in a different field.
Roger: Right. To change seasons, you need what you talk about in FIRE. You need intentionality, you need curiosity, you need community, and you need to know what your base great life is so you can do it in a financially secure way.
Kevin: So, if we're going to end this now, I think follow whatever interest, curiosity you have an attempt to make your future better. Little better. A lot better. Making your future better is what I love.
Roger: Not just 10 years from now, but tomorrow.
Kevin: Oh yeah. Yeah. Tuesday.
Roger: Thanks for being a guide. Reppin the FIRE community this month.
Kevin: Sorry to all those people that I'm the mouth doing this, but I believe in it. I believe in enjoying your life with others.
LISTENER QUESTIONS
Roger: Now it's time to get to some of your questions.
If you have a question for the show, you can go to askroger.me and submit a written question or an audio question for extra credit. We'll be getting back to some more Q&A next month and into April. See, we're thinking ahead now. So, we always get questions that pile up so I want to get those answered.
WHAT IS THE PAYOFF PENALTY OF USING MY IRA TO DO A ROTH CONVERSION?
Our first question is a question and an insight from Brian related to Roth conversions. We did a Roth conversion themed month last year, and the interest in Roth conversions and the questions and comments related to it. It's been like an avalanche. But Brian has one question, one insight.
The question is,
"What is the payoff slash penalty of using part of my IRA to pay taxes on withdrawals instead of using after tax money?"
So, when you do a Roth conversion, that's essentially a withdrawal from an IRA that's considered taxable income that you have to pay taxes on, and then the conversion structure allows you to move that amount directly into a Roth IRA.
Well, what happens from a tax perspective is you're going to have taxable income on whatever amount you take from the traditional IRA to move to Roth.
Traditionally, the tax is paid with after tax assets, either from your savings account or your income. Brian wants to know, what's the impact if I decide to use part of my withdrawal from my IRA to pay the taxes on that amount and then move the rest of it to an IRA?
That's a great question. You can do that. That definitely is an option. Let's use a very simple example.
Let's assume that you are going to do a 30, 000 Roth conversion and that the tax is 5, 000 on that withdrawal. So, if you were to do that, you would do a Roth conversion with taxes paid from the conversion.
So, you would have a withdrawal of 30, 000. That's the taxable income. 5, 000 of that could be withheld to pay federal taxes. That can be done in the form that you complete at wherever your custodian is. Then the remainder amount, in this example, 25, 000 goes into the Roth account. So that's how structurally it would work if you're paying the taxes from the conversion.
Now, what's the impact of that?
Well, the impact is you have less money going into Roth, 5, 000 in this example, to be able to grow tax free forever. Now, does that make sense? It's not 100 percent clear, but let's think about this. If you have after tax assets, let's assume you have 50, 000 in an emergency fund, and you're going to do this hypothetical 30, 000 conversion, or even if you have 30, 000 in an emergency fund, does it make sense to pay taxes from the Roth conversion, which would have 5, 000 less going into the Roth that would have the ability to grow tax free forever? Or does it make sense to lower your after-tax savings by paying the tax with after-tax dollars and have that extra 5, 000 going into the Roth IRA?
We're dealing with 5, 000 here in this example. So, the question is, do I not have the tax bill so I can keep my 5, 000 in after tax assets, or do I have it go into the Roth.
All we're doing is changing tax treatment of the 5, 000. If you use your after-tax investment assets, let's say the savings account, and let's assume it's invested at 5 percent in, you know, a treasury bill or something, all you're doing is changing the tax treatment of that 5, 000 by using after tax assets.
You're basically taking it from an after-tax account where the interest on those treasury bills or whatever you're invested in would be taxable year by year. You're moving it to a Roth and you could still invest in treasury bills or what have you and then it's tax free forever, which would help in long term compounding.
So, I would argue the default scenario would always be to pay taxes from your after-tax accounts. The way that Roth withdrawals work, you're taking out your contributions first, so it's not like you wouldn't get access to that money. So, there's a big advantage of simply converting it from after tax assets to tax free assets.
Now, Brian's second question or insight is related to doing Roth conversions and Medicare Part B.
He said,
"You briefly touched on it. Doesn't Medicare Part B depend on your income? So, withdrawals for either a conversion, required minimum distribution, could increase your Medicare premium cost."
You are correct, Brian, and that is, this is IRMAA. This is the IRMAA surcharge.
So, every year, the premium for Part B and Part D, the drug subscription program, if you have elected that, is set by the government, and that's a fixed amount that they set every single year, there is a surcharge, which is called an IRMAA surcharge. It's an acronym I don't have in front of me. Forget exactly. I don't want to even want to try to butcher it off the top of my head, that if you make too much that they will add an extra surcharge to your premium.
As an example in 2024, if we look at the important numbers worksheet, which we've sent out, it's a great thing to have. So, we'll put that in our 6-Shot Saturday email. It's a good thing to download and save on your computer or print as a reference guide as you're doing planning this year. That if you earn, let's say as a single person, over 103, 001 that's modified adjusted gross income, then if you earn over that 103,000. 01, there's going to be an extra 69. 90 per month added to your Part B Medicare plan.
In addition to the standard Medicare premium for Part B, you're going to have an extra almost 70 a month added to your If your income is over 103, 001.
Now, this is where this all gets tricky. When they determine that for 2024, they're looking at your income for 2022. So, it always has a two-year lag. So, when they're determining whether you are going to pay an IRMAA surcharge, they're going to look at your tax return for two years ago, which is essentially your last filed tax return at the beginning of the year. The surcharges can go up from there, depending on what the income is.
So, Brian, yes. If you're looking at doing a Roth conversion, or you're looking at your required minimum distributions, those transactions add to your taxable income that's included in this modified adjusted gross income, which could increase your premium for Part B or Part D as a result of this surcharge based on income brackets of two years ago.
So, if you did a huge Roth conversion today, as an example, two years from now, they would evaluate whether that conversion put you into one of these surcharge tax brackets. The brackets you'll see on the 2024 important numbers, they go up as your income goes up. So, as an example, if you're single and you had income of over 161, 001, the surcharge on top of the normal Part B premium for 2024 would be 279. 50 a month. So, it could be substantial if you really go up the tax brackets or the income brackets.
What do you do with that from a Roth conversion? I think you factor that into your planning and it can lead you to potentially batch your Roth conversions. More to minimize IRMAA because if you have a surcharge, it's only for that one year and then it's recalculated for the next year again looking two years back. So that's one way you want to incorporate that.
Another way is you don't have to deal with this until you're 63. And the year you file tax returns at 63, that's the year that's two-year trailing when you go into Medicare. So that if you're under 63, you have some opportunities to do larger Roth conversions without having to worry about this IRMAA surcharge.
Thanks for that insight, Brian!
MOVING MONEY FROM AN IRA TO AN HSA
Our next question comes from Bill related to a little used and known rule around moving money from a traditional IRA or Roth IRA to a health savings account.
Bill says,
"I am 60 years old, recently retired with an ACA health savings account, qualified healthcare plan. We are able to fund our needs with my pension and use our retirement savings for travel and Roth conversions.
I understand you can roll IRA funds to an HSA only one time, but is there any restriction from simply taking an additional IRA distribution and funding the HSA with those funds? Seems like a way to convert extra IRA funds to a HSA and never pay taxes on the conversion if used for medical expenses down the road.
My bride and I love your show and have been listening since 2016."
Wow, you're like an OG, Bill. I'm glad that you're still loving the show. So, it's a great question. What he's referring to is there is a provision that allows you to do a transfer from a traditional or Roth IRA to a health savings account. As long as one, you're eligible for a health savings account and you pass a test, which means you have to continue to be in a high deductible HSA eligible account for at least 12 months. You can do this once in your lifetime, up to the maximum of what the HSA limits are in the year that you're doing it.
So that means that, in Bill's case, he gets one shot at this of taking money from a traditional IRA, moving it to a health savings account, which is essentially converting it from pretax dollars to tax free dollars. He gets to do that in one year, and as long as he meets those tests of being Part of a high deductible policy.
Now, one caveat on that, you can't do nondeductible contributions. It's only the pretax dollars, which seems a little weird, but that's the way that it is. So, Bill's question is around that. A little bit of a nuance is, but can I just simply take an IRA distribution, which is taxable income, and fund a health savings account with those funds? Seems like a way to convert IRA assets to HSA and never pay taxes on the conversions if used for medical expenses down the road.
That's the key there, Bill. So yes, you could. You just take a IRA distribution. That's a taxable event. You make a deductible health savings account contribution. Those will wash out, if not dollar for dollar, to a good extent, and then that money will grow tax free and be eligible to come out for qualified medical expenses during your lifetime down the road. So that works. You would just want to do your base tax estimate and then do a tax estimate with the contribution to the HSA and with the withdrawal from the IRA and just make sure it works out with your specific fact set from a tax perspective.
One part of that where it's not going to be as advantageous as a Roth conversion is that health savings accounts can be problematic when they're inherited. So, if your wife, your bride, Bill, inherits it, then this will become her account and she can continue to contribute to it, assuming that she qualifies because she is part of a high deductible savings policy, and so it can continue for your bride. But if it's inherited by a non-spouse, then it's not eligible for the 10-year stretch. What will happen is the account will become a taxable account and the full value is going to become taxable income to that beneficiary. So just understand that rule as well.
ON REFILLING THE PIE CAKE
Joe has a question on refilling the retirement pie cake or retirement allocations.
So, Joe's question is,
" Hey, Roger, thanks for all the educational information. I am a big fan of the pie cake and no longer focus on target asset allocation percentages now that I'm retired.
My liquidity portion of my pie cake or retirement allocation are one year of cash, five years of brokered CDs, which fund my retirement paycheck. My question is, can you suggest a plan for refilling the pie cake liquidity years that minimize selling equities when the market is down?
So, by way of background, I looked at the S& P 500 index history and I'm thinking about a plan where I only refill the liquidity pie cake years when the S& P 500 is within seven and a half percent of the prior highest closing.
Attached is a spreadsheet with the S& P 500 history and how I arrived at that plan. I would be interested in knowing what you think and whether there's another approach to go about it. My goal is to write specific instructions for my wife to consider if I'm not able to manage this myself."
It's a really good question, Joe, of how do you refill this, and can you build essentially an algorithm to do it?
Potentially you could, but I think where this can fall apart, Joe, is that whatever your five year income and spending estimates are, those are going to change just as much as what the markets are doing. After you get through year one of spending down the cash and then you have that brokered CD coming due and now you have four years, you're going to also reassess what the next five years are going to look like and what I have found in practice is that changes just as much as everything else. Well, we thought we were going to spend this but we're actually spending this, that car that we planned for this next year we're actually not going to need for six years or that car for six years that we didn't think we're going to need we actually need to do that now or I just discovered I have these major home repairs on my house, or I just, it can go on and on with the way things appear. So trying to build an algorithm to accomplish all of that or incorporate all of that, and especially one that your non manager wife in this case can take and run with, it's going to be really hard.
In addition, from a market perspective, I don't follow any hard rules when it comes to refilling the retirement allocations because you're constantly rebalancing because of other things that come into play other than just simply what the markets are doing. You have normal rebalancing, you have life events coming up, you have excess cash flow coming in that was unexpected.
I think it's more important, in my opinion, Joe, to have structured little conversations where you just simply think through it, and you make judgment calls given what is happening right now. There's nothing magical about five years, by the way, too. It could be ten years, it could be three years, it could be two years, depending on how overfunded or constrained you are. That's what we try to go through, at least in the class, that that informs this as well.
There's nothing magical about five years. What I like about five years is, one, we need a default, and two, that gives you a lot of liquidity to avoid making withdrawals and drain it down to four years if you want it, or even three years if you want it, if we're going through major market storms. It gives you a lot of flexibility to be patient, but also to make minor adjustments.
In my experience, Joe, is that when we go through major market storms, what ends up happening is that, in my term, the client or you naturally adjust your spending because you're not feeling as optimistic about the world. So, what we end up doing is buying lesser cuts of meat. Rather than going to Europe, we will go to Fort Worth, Texas. We make spending decisions almost unconsciously, because we don't feel as confident and optimistic, which actually extends the floor out. So, it's not just simply having to hard reset it every five years. All of these things go into managing it.
I think that's the key here, Joe. It's a framework for managing it rather than hard rules of not selling or selling based on where the S& P 500 is.
Now that said, all of us have our own way. There is no one right way. The key is, is to have a set of rules that you feel confident in, that you can consistently execute on, so you don't deviate every year because then you don't have a process. That's cool. If you feel like it works for you, you'll still end up making judgment calls, but you need to find something that works for you. In this case, you need to find something that makes sense to your bride so she can take over the reins if she's not the financial manager.
MAKE SURE YOU HAVE ENOUGH TAXES WITHHELD WHEN DOING ROTH CONVERSIONS
Our next comment is from Jay, and it's a tip to share. He says, I've been a podcast listener for two years, consistently picking up two or three nuggets. of good information. Hopefully it's not over the two years. Hopefully that's every week, Jay.
"I am in a Roth conversion window. So, your show on the OODA loop was a great take on the subject. And my comment about conversions is those doing conversions may need to ensure that they have enough taxes withheld or pay the IRS directly in the form of estimated taxes to avoid under withholding penalties."
Great point, Jay. On the taxes, and we'll get to the OODA loop though.
On the taxes, if in the quarter that you're doing a Roth conversion, that's the quarter you need to make sure that the taxes are transmitted to the IRS. So, if you are paying them out of your after-tax assets, you would want to estimate your quarterly tax payment and pay the estimated tax payment within the quarter of the year that you're doing the Roth conversion.
As an example, Let's assume you're doing 100, 000 Roth conversion and you say it's a 20 percent tax rate based on whatever calculations you do. So, you're going to owe 20, 000 on that conversion. If you're doing that conversion in the fourth quarter of the year, then you're likely going to want to do an estimated tax payment or transmit that money to the IRS by January 15th, the deadline for Q4 estimated tax payments. But if you know for certain you're going to do 100, 000 Roth conversion this year in the last quarter of the year, you don't have to make that estimated tax early. You just do it in the quarter that you're going to be in.
Now, in reference to the OODA loop, J, what he's referring to is a decision-making framework, which stands for Observe, Orient, Decide, and Act, and it comes from the aviation field, specifically fighter pilots, where if you're in a dogfight with another pilot, you want to observe, orient, and decide, and act as quickly as possible and just keep going through that loop.
That's why it's a loop. If, in theory, if you can get inside the other pilot's loop, then you're set up for victory because you're thinking faster and in a more organized way. We use the OODA loop when we're creating decision pods in the ROK Retirement Club of how we think through a decision.
We're in the midst of thinking through a Roth conversion OODA loop or decision pod for the club right now, which is a framework we can give people to think through this. I have on my docket to do a YouTube video just walking through my brainstorming using the OODA loop for this project. I thought that might be a fun exercise, so you can look for that.
If you're not subscribed to our YouTube channel, it's youtube.com/retirementanswerman.
CAN GAIL OPEN A ROTH FOR HER GRANDDAUGHTER?
Our next question comes from Gail regarding a teen Roth IRA.
"Hey there, I love listening to your show and I've learned so much. In one recent episode you said you have a custodial Roth account for his kids. That sounded like that great idea So I checked into it, but I have one question."
Actually, my kids don't have a custodial Roth. They just have Roth accounts I contribute to.
"My 60-year-old granddaughter, is a fully certified lifeguard and has pulled 10 people who couldn't swim out of the pool this year to save their lives."
How awesome is that? Hopefully she celebrates that, Gail, and what a great service attitude.
"She has earned income from this job. However, she has such a small income that she probably doesn't have to pay taxes. Can I open a Roth IRA for her since she is not paying taxes? I think of Roth as after tax, but my granddaughter isn't likely paying taxes on her earned income.
Also, would she have to file tax forms for her 2023 income?"
Gail, I think it's impressive what your granddaughter's doing for sure. Working in a job like that, if your granddaughter is receiving a W2, so she can see how much earned income she had, say, in 2023, it's a good plan to have her file her tax return just for documentation purposes to back up the Roth IRA contributions also often federal and state taxes in some amount will be withheld. So, if she files a tax return, she may get some of that back.
Yeah, you're right. She's paying taxes, just paying at a 0 percent tax bracket with the standard deduction and money. within the 0 percent tax bracket is perfectly eligible in a wonderful way in this case for Roth IRA contributions. Then she'll pay 0 percent tax on the money going in, 0 percent tax on all of the growth for the rest of her life.
Additionally, Gail, if you wanted to gift her the money to put into the Roth, that sounds like a win-win to me.
TODAY’S SMART SPRINT SEGMENT
Now let's move on to our smart sprint.
On your marks, get set,
Now it's time to take a little baby step you can take in the next seven days to not just rock retirement, but rock life.
In the next seven days, I want you to write down one thing you have total conviction that you know. Maybe it's about your withdrawal strategy. Maybe it's about a particular view on a topic. One that you really think you know.
I want you to become curious. I want you to start questioning, holding that belief up for examination, and do some basic brainstorming, perhaps reading with a mindset of curiosity to reexamine it, because that is going to help you either have a stronger conviction on that topic, adjust your view on that topic, or maybe help you rethink that topic.
Always stay curious.
CONCLUSION
I know lately we haven't been doing as much of the Rock Life segment, mainly because the show is getting long and we're working on these themes. We are committed to focusing not just on rocking retirement financially, but also non financially. So that is not a trend that's going to continue. I don't even think we had room for it in this episode, even though I might've said we would.
We are going to continue to have a Rock Life segment. I'm just working through the rhythm of how to get it all in there. We may just do them periodically rather than week by week. We'll figure that out as we go, because we are all in on you rocking retirement.
The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All. 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.