I have to be honest, it's hard for me to understand folks who work hard and grow a huge nest egg, but are scared to spend any of it. To have nearly 5 million in investments and several guaranteed streams of income, but still limit your spending to just $3000 per month seems absurd to me. What was the point of growing that wealth if you're not going to utilize it, even if it's spending on loved ones or charity? I think some people just like seeing a large number on a statement every month, but when they get to the end they will deeply regret not having done more with what they had. Money is a tool to be used to enrich life, it's not the end goal in itself.
Totally agree! We're in a similar position, but currently spending more than $10k per month plus taxes. Enjoy it while you're healthy! ETA: After reviewing the numbers, health care, travel and cars are on top of the $3k/mo. $3k/mo isn't that low for food and house costs.
Lots of it is just stability. If you are already happy as a person and you just want money for stability that's fine... I know I have a similar mindset to that which is why I'd be more likely to retire on 1.5-2% of my portfolio rather than the 3-4%. To have no risk of failure as well as continue to grow income over time, since the portfolio should grow an extra 1-2% each year.
It happens to many people that have prioritized saving. I wonder if you fall in the same boat? If yes, then great and good question. If not, maybe you haven’t prioritized saving.
Thomas Sowell once said, rich people are rich because they act like they are poor (they don't blow there money) and poor people are poor because they act like they are rich. So it's hard to turn off that "gotta save" mentality.
What a great problem to have. Proud of Alejandro and Jeanette for being humble enough to ask for help and realize how much better life can actually be for them. thanks for sharing
There are options to mitigate RMDs other than by Roth conversions alone. For example draw down you traditional IRAs earlier rather than letting them grow to a point where they become expensive from a tax standpoint.
I think the real lesson here is the mindset that allow this couple to become so wealthy to begin with. The mindset that they are very comfortable with having low expenses, and they do not feel I need to grow those expenses and his extreme interest in minimizing tax burden is all something we can learn from. With that mindset this is how teachers become millionaires.
james these video interviews are great. your experience and advice is just what people of all levels of retirement need from a cfp. thanks for taking the time to make these videos
James, we are confused. $3k per month in total expenses when they have a 400k+mortgage and, we assume, property tax and insurance on a 1.8M home - seems entirely not possible. No way they are living on 36k per year.
Congratulations to both of you. You did it! Now go enjoy and spend the money you earned. Be careful leaving a large amount of money to your kids (and their knowing this). I have seen it many times. Nothing makes your children more lazy in life than knowing a huge inheritance will come to them later in life. They will not achieve what they could have because their drive is lost. This isn’t 100% of the time. But it is quite often. Good luck.
If the plan is that they ultimately get the money, I think it's much better to help them strategically along the way. (Especially if the alternative is resentment that they are struggling and you haven't died yet.) My in-laws took the whole family on cruises; and we made sure the kids' college was covered. Gratitude and memories, instead of resentment and a large post-mortem check.
Alex & Jeannette, thank you for sharing. You've worked hard and saved well. James, great analysis and advice. We have a lower portfolio but are currently considering Roth conversions, so this video was spot on for me. I'm concluding that we also need to increase our spending.
As someone in a similar position who retired at 57 in 2022, your certainty isn't necessarily reality. The strategies and tools can be useful to a large level of net worths.
I've skipped most of the interview videos, but this has been so helpful. I'm using the same software, but don't have the level of hand-holding James offers. I will get more value from the program because I watched how he was able to manipulate it.
Another excellent video, James! I'm very appreciative of Alejandro and Jeanette for sharing that level of detail to help others understand real-life scenarios. I also appreciate seeing the Right Capital tool in action as it helps educate me on some of the features available in it.
Thanks to the couple for their willingness to share such personal info online so we can all learn some strategies. Their conservative spending probably plays a large part in why they have such a significant portfolio. Looks like their annual expenses are about $150k not just the $3k month ($36k yr)
Great Conversation. Really enjoyed the part where you talked to the family about enjoying what they have worked so hard for. Now, when they are in their 90's they can see how they have enhanced their family. Thank you so much James
Now that I have my own( not work ) computer, I am buying this software . Looks so easy to move things around yourself to see the effects on my portfolio.
I don't know if it's the best program out there; but it's one of the most commonly used. It has some quirks, and the user interface is depressingly dated, but it's so helpful in sorting out the options for what's ahead. Watching James' videos is definitely opening up more of the program's features to me!
Hello James, we just purchased the Right Capital (RC) software from Root Financial (RF). We understand that RF is under no obligation to offer support. We then went to RC to seek support , but they do not offer support when purchased through a third party. I find this a little disheartening. Here is our dilemma. The software focuses on spending down our stock portfolio. We need the software to work on the assumption of living solely on dividend income from a pre-tax account.
They seem like very nice people, so I dont want this to sound attacking in any way. I think they were still in an accumulating/planning mindset and the “tax planning” tail wagging the dog. Its great that you asked them what would change in the way they live at the beginning. Then steering them towards spending some money to get life experiences for themselves. You could see the wheels start to turn in their minds. Although its going to be a process. It was interesting their first thought was to spend on their kids and families. 😂
I'm curious why you think 'spending on their kids and families' is funny to the point of bringing tears? For parents with kids recently out of the house-like the interviewed couple-this is top of mind. It's a time in the 'kids' life that they are saddled with significant expenses and haven't yet built up their career or income. I imagine most parents in that situation would be very pleased to spend a surfeit of money on their kids if they could.
This is a common theme planners talk about dealing with - those who struggle with retiring and spending on their fun even when they can completely afford to. It's far from unique to this couple. I won't have this problem!
I'll be in a similar situation as this couple where i have a large amount in my pre tax 401k and there's a high chance I'll be in an 8% higher tax bracket when my RMDs come due. For that reason I'm working to convert my 401k to after tax roth IRA now every year so i only pay at the lower tax rate as much as I can. I calculated if I don't do this I can spend more than $300k in taxes later! I'm glad the calculations you made in this video help me confirm I might be doing the right thing. And also maybe its ok to spend somee more now for additonal things that matter. Great video!
Just being honest. Annuities in your situation…?? Really ?????Pretty much a waste of your wealth. Nobody needs an annuity with what you have. Especially on top of a huge pension.
Does Windfall Elimination Provision (WEP) apply here where your social security amount is reduced because you also have a pension plan? I know that in some cases, you cannot double dip into both.
So, after watching this, I'm still not clear on what the Roth conversion trap is and what the the common tax planning mistakes to avoid are. Did I miss the point where those things were directly stated?
I agree it is a little misleading. The point here is that Roth conversions are all about reducing your tax liability. The "trap" is the fact they are letting the tax tail wag the dog. They are so myopically focused on reducing their tax bill they are missing the bigger picture that that they missing the point of retirement. having a small tax bill is a small problem compared to the fact they will die with $20M in the bank if they continue with the same trajectory.
I suggest Alex and Jeanette read “Die with Zero” by Bill Perkins. James informed them of the gist of it, but I still feel it is a valuable read for EVERYONE. The title is a little bit misleading; it doesn’t mean spend all your money before you die. Rather, I would say die with zero REGRETS. Give while you are alive and while the recipients have the greatest need for your money. Example: helping kids with home down payments rather than waiting for a big inheritance when they are already retired and doing well financially.
Agreed, although I think the author focused too much on the idea of physical activities passing beyond your ability. Not every interest is a "use it till you lose it" proposition. Warren Buffett enjoys deploying capital through BRK.b, and he's still "tap dancing to work" at 93.
This was a great analysis. I would want to ask Alejandro and Jeanette if they had to do it again, are the annuities a mistake. They now are locked into heavy taxes down the road and for many years. Obvious to get the IRA money converted to Roth. Do the annuity values pass to a beneficiary?
Watch the video again. The Roth conversion can be a trap; and it is NOT obvious once they determine what they want to optimize for in retirement. (If their retirement goal is funding buildings for charities, for instance, Roth conversion would be a 100% waste of money.)
Nice Video, Thanks. Maybe they worked too long before they retired. They also need more boating time. I think the spend strategy has to be set before the Roth conversions can be optimized. If you are pulling from IRA for spending then less needs to be converted. For those with significant IRA's, be sure not to do nothing or RMDs will get you. Fill up the tax brackets that make sense.
James, I really like your approach to retirement planning. I am considering the Retirement Planning Academy. What type of software are you using? Is it web based and hosted on your site? Or, is it necessary to download the software onto my computer? Thank you for your very informative content on UA-cam!
Many here commenting on the $5m net worth. The purpose of the video is to teach concepts which apply regardless of the actual numbers. One can apply the same concepts to a $500k portfolio.
How do you take into account the annual gifting limit as a tool for giving heirs money that isn’t taxable to them before you and your spouse pass away, but the amount (for a car, for example) is more than that amount?
The threshold for gifting is $18,000 in 2024. If you gift more than this amount you need to file IRS form 709. However, you do not need to pay taxes on the amount over $18,00. The excess amount goes against your lifetime threshold. Current lifetime threshold is around $12.3 million per person ($24.6 million per couple). Very few families would need to pay additional tax. Be aware states can also have thresholds where additional state taxes may need to be paid.
I think gift tax is due from the giver, not the recipient. A gift is a gift, and you don't send it with a 1099. The gift limit is also per-person. So, for instance: dad gives to child up to the limit, then mom does, then dad to child's spouse, then mom to child's spouse. If the gift is still larger, the family definitely needs to be using more sophisticated tax and legal strategies.
Annual limits are for reporting only. Gift tax itself doesn't kick in until you get to big numbers total over your lifetime. (Also, money mom gives is seperate from money dad gives.)
They can put $36,000 down on a new car and take an auto loan for the balance. Next year they pay off the loan, assuming the car cost less than $72,000.
You can give 20K each year to each Kid to max out their 401k and ROTh early and they will automatically become millionaires themselves by retirement. Make sure you only give kids used cars. New cars are wealth killers and train the kids to want new cars. Better to give a down payment on a property they can live in and share with a paying roommate.
i think they are sorely underestimating what their spending will be, especially for a couple that lives in a 1.8M home with more than 400k mortgage and a boat. 141K per yr i doubt will support that lifestyle. having 78k pension supporting that 141K is great. 3 yrs ago upon retirement, i shot for a 141K/ yr for my first yr( pre medicare age), did that for first 2 yrs but we ended up going to 202k for the 3rd yr( inflation and 2 nice trips) and we live in a upper middle class neighborhood where houses are nowhere near that price.
How can you have a $470,000 mortgage, two car loans and only have $3,000/mos in expenses. Something seems way off. My auto insurance, life insurance, oil, propane, electric and food are more than this even before I put in mortgage and car loans.
Can’t go back. But they should have retired 5 years prior and spent pretax IRA. If they really wanted to spend less in taxes. 30,000 = 150,000. They would have free ACA for insurance. Good example about taking a look at retirement when you’re around 50, not at 65.
I wonder why they keep debt when they have a large portfolio. I also question why they don't consolidate at least half of their investments. Interesting folks... they have to be kidding about "pressure" on their accounts.
Their investments are probably generating a higher return than their mortgage interest rate. Plus, mortgage interest expense is tax deductible. Thus, their mortgage provides a DOUBLE benefit.
With interest rates having dropped into the 2-3% range for a few years, and fixed income investments now available at 4-5%, I can see it. I refinanced a multi-family building at 3.325% in November 2021. There's no way I'm crimping my cash flow or account balances to get the money back to the bank early.
James, you are spot on challenging them on the purpose of wealth accumulation. Tax and financial planning are secondary if we do not address the first things first. If a person just wants to see the number getting larger every year while minimizing tax liability, there is nothing wrong but sounds like a Scrooge.
The only one thing that you can do with money is to spend it. Of course how you spend it makes a difference, however all you can do with it is to spend it.
Will we be evaluating Elon Musk or Bill Gates next week? James feels bad when people are leaving on the table. I feel bad that tgey could have retired ten or more years ago. They lost a lot of time. Time is more valuable than money.
This people are a good example of what happens when you dont know how to spend. If that 3k was the fun money, i would have said, kaybe cut it back a grand. But that 3k also includes non housing related expenses. You have 5m in savings. Thats insane. And he has a pension as well!!!
Very enlightening. At $3k/month I can see how they've accumulated a healthy portfolio. I find $6k to be more realistic but perhaps it's the same because that includes everything, insurance, medical, groceries, auto maintenance and gas, property taxes, home maintenance, etc.
I would think that with this level of wealth they should insure against the long-term care risk and buy a policy with a hybrid LTC/death benefit policy.
You insure against risk you can't afford to bear financially, and LTC doesn't seem like that for this couple. And as far as needing a death benefit, when their options are $8M to $30M already, why?
I sure hope they at least start giving to their kids - pay for cars, mortgage, education funds for grandkids. The kids will appreciate it a million times more than receiving $29M inheritance.
James, seriously, with $4+ mil, and income (pension, SS, annuities) that exceeds expenses, why on earth did the words "car loan" come out of your mouth? Frankly, I'm a bit flabbergasted that one would voluntarily pay interest for something one could pay cash for without blinking. I love your channel, but you lost me there. Would love to hear the rationale.
Hire someone smarter than you to deal with the tax issue. You only have 10-15 go go years left, what are you waiting for? Your children and grandkids will be just fine with or without your money.
Was disappointed to see Root Financial won’t work with anyone with under 2 million of investable assets. I need help, but as a 58yo blue collar single father I’m not quite there despite scrimping and sacrificing. I can’t find affordable help.
Would like to add that medical expenses can skyrocket and if you need 24/7 private help you can wind up with a huge expense so fast. One month we spent $50k. Granted the issues were unique but it can happen.... especially w dementia in the equation
These presentations are not geared towards people who do not pay taxes. They are mostly for people who want to reduce the tax burden. Way before $5M, people want to mitigate the SS 'tax torpedo' and for them the financial planning toolbox is pretty similar.
You never gave any solutions Yes, you said I need to implement a strategy, but you never said that We all need to implement tax strategy, but how to do it that’s the hard part and he did not cover that
He sorted of did but he tried to address the more important issue: what are they going to do with their assets? Tax strategy is the tail of a dog. One needs to address where they are going first.
I think you missed the point of the video. He's challenged them to rethink tax minimization as their top priority and to have more fun/spend more money in retirement as their primary goal. They said they'd like to help their kids and gave a number of way they might do that, and once they have a clearer picture of what they'd "like" to spend versus how they came into this discussion, James can develop a plan to 1) make their adjusted wishes a reality and 2) do so in a tax efficient way.
They need to pull cash out of their home via a cash-out refinanced mortgage, combined with Roth conversions. The cash-out money can be used for living expenses and payment of taxes on Roth conversions. This also allows for higher Roth conversions. That's what I did. I've been doing Roth conversions into the 22% bracket for 10 years, with 3 years to go. At that point, I'll be moving from Texas to California, where I'll take out a 30 year mortgage. I'm 63 and retired at 48. My plan also includes three more cash-out refi's, about every 7 to 10 years, in the future. I'll try to coordinate this inflow of cash with stock crashes. My portfolio is 100% stock, so I'm hopeful this plan helps me limit stock sales during market downturns.
I don't think there's anything they'd like to accomplish that requires the money from refinancing. Your strategy is interesting and I'd need to think on it more (although I'm not a fan of all those transaction costs); but if it helped you retire so early and it's working for you, great!
I have similar sentiments that others have regarding their expenses. They have a mortgage, car loans, kids in college, property taxes and insurance, how could they only need 3k to cover all those expenses? Something is not adding up.
Really think it depends on the situation. For me without my mortgages my basic monthly expenses would be less than $2k. I do not have car loans, kids in college, etc. I’ve worked to pay everything off before I retire. You should plan to be debt free as you enter retirement, it really takes planning way ahead to accomplish but is possible. This does include my insurance and property taxes. I live in Oregon.
Really? I heard them say (25:50) that they want to want to help three children who are in college, buy them cars, etc. I don't think it's "miser" as much as it is the need to move from accumulation to decumulation when salaries stop. After working 30-40 years, it's a definite mind-shift and can require help to navigate.
I’m an advisor and find these videos very scripted 😅. Rarely (if ever) do clients even use phrases like “tax efficient”.. they don’t know what they don’t know.
This makes zero sense. Property tax, insurance and maintenance on their house adds up to $1850/month and we are to believe that this couple is living off the remaining $1150 per month? But wait, they still have mortgage and auto loan payments! So why put this figure in their goals when it is not realistically possible? Oh but this story gets better. They are early retirees planning to spend 3K/mo on healthcare. But wait, now they want 10K/year for vacation. Um, but then we learn they have a boat…and 14 minutes in we learn that their expenses are actually 12k/month. Why not just start with their actual expenses instead of wasting viewers time with a nonsense spending goal?
It's not nonsense. He always separates the expenses into categories. Excluding housing, medical, vacations, boats, etc., what are your core/base living expenses -- those are $3K/month. If you lump everything together and just say that there are $140K in total annual expenses, then you have a greater chance to miss a car payment going away or a house note paid off. Breaking apart expenses isn't nonsense; it's proper planning steps.
😂 tax harvesting, a nice way of saying we saved you taxes, cuz we lost you lots of money. I would rather make the income and pay my fair share of the taxes, somebody has to put money into that pot they keep spending in Washington
Roth Conversions aren’t worth the big taxes paid upfront. You’re better off paying taxes as you take distributions on a lower tax bracket. Besides, the accumulated pretax assets are usually so large that it’s difficult to “cash out” and reinvest in a Roth account. What should be be done is take larger distributions than expenses and reinvest as you might need them in regular non-retirement accounts. Besides, the government will force you to take distributions on Roth accounts after age 70 so it’s not like a long time horizon.
You typically wouldn't do Roth conversions if you expect "big" taxes.... i.e., it's about the bracket, not just "big" vs something else. Conversions are done to limit overall tax liability. Also, RMDs on Roth accounts? May want to Google that one again...
I don't know of any requirement to take distributions on Roth at age 70. Roth accounts are tax-favored and generally the last assets to be used, no matter how old the account owner is.
I have to be honest, it's hard for me to understand folks who work hard and grow a huge nest egg, but are scared to spend any of it. To have nearly 5 million in investments and several guaranteed streams of income, but still limit your spending to just $3000 per month seems absurd to me. What was the point of growing that wealth if you're not going to utilize it, even if it's spending on loved ones or charity? I think some people just like seeing a large number on a statement every month, but when they get to the end they will deeply regret not having done more with what they had. Money is a tool to be used to enrich life, it's not the end goal in itself.
Totally agree! We're in a similar position, but currently spending more than $10k per month plus taxes. Enjoy it while you're healthy!
ETA: After reviewing the numbers, health care, travel and cars are on top of the $3k/mo. $3k/mo isn't that low for food and house costs.
I think it just goes to show how little we need to live a happy fulfilling life.
Lots of it is just stability. If you are already happy as a person and you just want money for stability that's fine...
I know I have a similar mindset to that which is why I'd be more likely to retire on 1.5-2% of my portfolio rather than the 3-4%. To have no risk of failure as well as continue to grow income over time, since the portfolio should grow an extra 1-2% each year.
It happens to many people that have prioritized saving. I wonder if you fall in the same boat? If yes, then great and good question. If not, maybe you haven’t prioritized saving.
Thomas Sowell once said, rich people are rich because they act like they are poor (they don't blow there money) and poor people are poor because they act like they are rich. So it's hard to turn off that "gotta save" mentality.
What a great problem to have. Proud of Alejandro and Jeanette for being humble enough to ask for help and realize how much better life can actually be for them. thanks for sharing
Thanks Alex and Jeannette for sharing your case study. It was great to see a real life example.
There are options to mitigate RMDs other than by Roth conversions alone. For example draw down you traditional IRAs earlier rather than letting them grow to a point where they become expensive from a tax standpoint.
I think the real lesson here is the mindset that allow this couple to become so wealthy to begin with. The mindset that they are very comfortable with having low expenses, and they do not feel I need to grow those expenses and his extreme interest in minimizing tax burden is all something we can learn from. With that mindset this is how teachers become millionaires.
james these video interviews are great. your experience and advice is just what people of all levels of retirement need from a cfp. thanks for taking the time to make these videos
Never needed the expensive annuities. Should address that
I appreciate people that are comfortable sharing their financial situations for the educational benefit of others. This is very helpful.
James, we are confused. $3k per month in total expenses when they have a 400k+mortgage and, we assume, property tax and
insurance on a 1.8M home - seems entirely not possible. No way they are living on 36k per year.
Most of us can't relate to millionaires. The ones who can won't be looking at these videos. Please bring it down to middle-class scenarios.
Congratulations to both of you. You did it! Now go enjoy and spend the money you earned. Be careful leaving a large amount of money to your kids (and their knowing this). I have seen it many times. Nothing makes your children more lazy in life than knowing a huge inheritance will come to them later in life. They will not achieve what they could have because their drive is lost. This isn’t 100% of the time. But it is quite often. Good luck.
I completely agree. And I would not leave a dime to anyone who wasn’t working diligently, skilled with money, and doing well financially on their own.
If the plan is that they ultimately get the money, I think it's much better to help them strategically along the way. (Especially if the alternative is resentment that they are struggling and you haven't died yet.) My in-laws took the whole family on cruises; and we made sure the kids' college was covered. Gratitude and memories, instead of resentment and a large post-mortem check.
Alex & Jeannette, thank you for sharing. You've worked hard and saved well. James, great analysis and advice. We have a lower portfolio but are currently considering Roth conversions, so this video was spot on for me. I'm concluding that we also need to increase our spending.
Glad it was helpful!
Retired Engineer and Healthcare professional with 4.5 million and a paid off home. Welcome to the 1%. I'm sure you guys are gonna be just fine.
Yea, they did very well. Very proud of them and respect them a lot. Great couple. Still blows my mind the “1%” actually starts at $12-13 million. 🤯
1% requires 11millions
Their home is NOT paid off. The still have almost $500k in mortgage.
As someone in a similar position who retired at 57 in 2022, your certainty isn't necessarily reality. The strategies and tools can be useful to a large level of net worths.
Not that unusual. Not even 1%, more like top 15%
I've skipped most of the interview videos, but this has been so helpful. I'm using the same software, but don't have the level of hand-holding James offers. I will get more value from the program because I watched how he was able to manipulate it.
What software program is it?
Another excellent video, James! I'm very appreciative of Alejandro and Jeanette for sharing that level of detail to help others understand real-life scenarios. I also appreciate seeing the Right Capital tool in action as it helps educate me on some of the features available in it.
Thank you 🙏
Thanks to the couple for their willingness to share such personal info online so we can all learn some strategies. Their conservative spending probably plays a large part in why they have such a significant portfolio. Looks like their annual expenses are about $150k not just the $3k month ($36k yr)
Thank you for sharing a real life example. Lots to think about as we near retirement.
Great Conversation. Really enjoyed the part where you talked to the family about enjoying what they have worked so hard for. Now, when they are in their 90's they can see how they have enhanced their family. Thank you so much James
Thanks for watching!
Glad you enjoyed it!
Now that I have my own( not work ) computer, I am buying this software . Looks so easy to move things around yourself to see the effects on my portfolio.
I don't know if it's the best program out there; but it's one of the most commonly used. It has some quirks, and the user interface is depressingly dated, but it's so helpful in sorting out the options for what's ahead. Watching James' videos is definitely opening up more of the program's features to me!
Hello James, we just purchased the Right Capital (RC) software from Root Financial (RF). We understand that RF is under no obligation to offer support. We then went to RC to seek support , but they do not offer support when purchased through a third party. I find this a little disheartening. Here is our dilemma. The software focuses on spending down our stock portfolio. We need the software to work on the assumption of living solely on dividend income from a pre-tax account.
They seem like very nice people, so I dont want this to sound attacking in any way. I think they were still in an accumulating/planning mindset and the “tax planning” tail wagging the dog. Its great that you asked them what would change in the way they live at the beginning. Then steering them towards spending some money to get life experiences for themselves. You could see the wheels start to turn in their minds. Although its going to be a process. It was interesting their first thought was to spend on their kids and families. 😂
I'm curious why you think 'spending on their kids and families' is funny to the point of bringing tears? For parents with kids recently out of the house-like the interviewed couple-this is top of mind. It's a time in the 'kids' life that they are saddled with significant expenses and haven't yet built up their career or income. I imagine most parents in that situation would be very pleased to spend a surfeit of money on their kids if they could.
This is a common theme planners talk about dealing with - those who struggle with retiring and spending on their fun even when they can completely afford to. It's far from unique to this couple. I won't have this problem!
I'll be in a similar situation as this couple where i have a large amount in my pre tax 401k and there's a high chance I'll be in an 8% higher tax bracket when my RMDs come due. For that reason I'm working to convert my 401k to after tax roth IRA now every year so i only pay at the lower tax rate as much as I can. I calculated if I don't do this I can spend more than $300k in taxes later! I'm glad the calculations you made in this video help me confirm I might be doing the right thing. And also maybe its ok to spend somee more now for additonal things that matter. Great video!
Glad it helped!
Why they have so many retirement accounts?
Just being honest. Annuities in your situation…?? Really ?????Pretty much a waste of your wealth. Nobody needs an annuity with what you have. Especially on top of a huge pension.
💯
Thank you James! Excellant content!!!
Thanks for this case study. It was good to listen in 😊
Thank you for sharing this you’re a gift to us all
Does Windfall Elimination Provision (WEP) apply here where your social security amount is reduced because you also have a pension plan? I know that in some cases, you cannot double dip into both.
So, after watching this, I'm still not clear on what the Roth conversion trap is and what the the common tax planning mistakes to avoid are. Did I miss the point where those things were directly stated?
I agree it is a little misleading. The point here is that Roth conversions are all about reducing your tax liability. The "trap" is the fact they are letting the tax tail wag the dog. They are so myopically focused on reducing their tax bill they are missing the bigger picture that that they missing the point of retirement. having a small tax bill is a small problem compared to the fact they will die with $20M in the bank if they continue with the same trajectory.
I suggest Alex and Jeanette read “Die with Zero” by Bill Perkins. James informed them of the gist of it, but I still feel it is a valuable read for EVERYONE. The title is a little bit misleading; it doesn’t mean spend all your money before you die. Rather, I would say die with zero REGRETS. Give while you are alive and while the recipients have the greatest need for your money. Example: helping kids with home down payments rather than waiting for a big inheritance when they are already retired and doing well financially.
Agreed, although I think the author focused too much on the idea of physical activities passing beyond your ability. Not every interest is a "use it till you lose it" proposition. Warren Buffett enjoys deploying capital through BRK.b, and he's still "tap dancing to work" at 93.
This was a great analysis. I would want to ask Alejandro and Jeanette if they had to do it again, are the annuities a mistake. They now are locked into heavy taxes down the road and for many years. Obvious to get the IRA money converted to Roth. Do the annuity values pass to a beneficiary?
Watch the video again. The Roth conversion can be a trap; and it is NOT obvious once they determine what they want to optimize for in retirement. (If their retirement goal is funding buildings for charities, for instance, Roth conversion would be a 100% waste of money.)
The annuities, if they have a death benefit, will go to heirs.
They already knew they would be fine, they have no struggle
Nice Video, Thanks. Maybe they worked too long before they retired. They also need more boating time. I think the spend strategy has to be set before the Roth conversions can be optimized. If you are pulling from IRA for spending then less needs to be converted. For those with significant IRA's, be sure not to do nothing or RMDs will get you. Fill up the tax brackets that make sense.
James, I really like your approach to retirement planning. I am considering the Retirement Planning Academy. What type of software are you using? Is it web based and hosted on your site? Or, is it necessary to download the software onto my computer? Thank you for your very informative content on UA-cam!
Thanks Jason. It is web based.
You should take into account of penalty on social security WEP since they have pension
Great session and fantastic video.
Many here commenting on the $5m net worth. The purpose of the video is to teach concepts which apply regardless of the actual numbers. One can apply the same concepts to a $500k portfolio.
How do you take into account the annual gifting limit as a tool for giving heirs money that isn’t taxable to them before you and your spouse pass away, but the amount (for a car, for example) is more than that amount?
The threshold for gifting is $18,000 in 2024. If you gift more than this amount you need to file IRS form 709. However, you do not need to pay taxes on the amount over $18,00. The excess amount goes against your lifetime threshold. Current lifetime threshold is around $12.3 million per person ($24.6 million per couple). Very few families would need to pay additional tax.
Be aware states can also have thresholds where additional state taxes may need to be paid.
I think gift tax is due from the giver, not the recipient. A gift is a gift, and you don't send it with a 1099. The gift limit is also per-person. So, for instance: dad gives to child up to the limit, then mom does, then dad to child's spouse, then mom to child's spouse. If the gift is still larger, the family definitely needs to be using more sophisticated tax and legal strategies.
Annual limits are for reporting only. Gift tax itself doesn't kick in until you get to big numbers total over your lifetime. (Also, money mom gives is seperate from money dad gives.)
They can put $36,000 down on a new car and take an auto loan for the balance. Next year they pay off the loan, assuming the car cost less than $72,000.
Home mortgage = 2500 (350k home) incurance = 2500; car insurance 3500 / 6 months; groceries 500; utilities $400 elec; 250 garbage / water / waste water; gas $200; vacations $1000; Christmas and Birthday gifts to kids: $1500 / year;
Love these!!
You can give 20K each year to each Kid to max out their 401k and ROTh early and they will automatically become millionaires themselves by retirement. Make sure you only give kids used cars. New cars are wealth killers and train the kids to want new cars. Better to give a down payment on a property they can live in and share with a paying roommate.
How much is Medicare plan plus out of pocket for them at 65?
how can i get access to this tool?
i think they are sorely underestimating what their spending will be, especially for a couple that lives in a 1.8M home with more than 400k mortgage and a boat. 141K per yr i doubt will support that lifestyle. having 78k pension supporting that 141K is great.
3 yrs ago upon retirement, i shot for a 141K/ yr for my first yr( pre medicare age), did that for first 2 yrs but we ended up going to 202k for the 3rd yr( inflation and 2 nice trips) and we live in a upper middle class neighborhood where houses are nowhere near that price.
How can you have a $470,000 mortgage, two car loans and only have $3,000/mos in expenses. Something seems way off. My auto insurance, life insurance, oil, propane, electric and food are more than this even before I put in mortgage and car loans.
😮wow great analysis of their options
Thank you
Great job guiding these people to have a more “rich life” in retirement! 🙌🏼
Can’t go back. But they should have retired 5 years prior and spent pretax IRA. If they really wanted to spend less in taxes. 30,000 = 150,000. They would have free ACA for insurance. Good example about taking a look at retirement when you’re around 50, not at 65.
I wonder why they keep debt when they have a large portfolio. I also question why they don't consolidate at least half of their investments. Interesting folks... they have to be kidding about "pressure" on their accounts.
Their investments are probably generating a higher return than their mortgage interest rate. Plus, mortgage interest expense is tax deductible. Thus, their mortgage provides a DOUBLE benefit.
The debt interest rate may be less than they are making with investments.
With interest rates having dropped into the 2-3% range for a few years, and fixed income investments now available at 4-5%, I can see it. I refinanced a multi-family building at 3.325% in November 2021. There's no way I'm crimping my cash flow or account balances to get the money back to the bank early.
James, you are spot on challenging them on the purpose of wealth accumulation. Tax and financial planning are secondary if we do not address the first things first. If a person just wants to see the number getting larger every year while minimizing tax liability, there is nothing wrong but sounds like a Scrooge.
The only one thing that you can do with money is to spend it. Of course how you spend it makes a difference, however all you can do with it is to spend it.
Will we be evaluating Elon Musk or Bill Gates next week?
James feels bad when people are leaving on the table. I feel bad that tgey could have retired ten or more years ago. They lost a lot of time. Time is more valuable than money.
This people are a good example of what happens when you dont know how to spend. If that 3k was the fun money, i would have said, kaybe cut it back a grand. But that 3k also includes non housing related expenses. You have 5m in savings. Thats insane. And he has a pension as well!!!
Let’s goooo!!!! 🎉
Very enlightening. At $3k/month I can see how they've accumulated a healthy portfolio. I find $6k to be more realistic but perhaps it's the same because that includes everything, insurance, medical, groceries, auto maintenance and gas, property taxes, home maintenance, etc.
Yes, the $3k is after mortgage and other goals
I would think that with this level of wealth they should insure against the long-term care risk and buy a policy with a hybrid LTC/death benefit policy.
I think with that level of wealth they are self insured for that event.
Probably what is considered self-insured based on how much they will have .
You insure against risk you can't afford to bear financially, and LTC doesn't seem like that for this couple. And as far as needing a death benefit, when their options are $8M to $30M already, why?
With 5 million, they can self-insure and save the hassle.
Why? Most LTC stays are under 3 years and they have plenty to self insure for that.
I sure hope they at least start giving to their kids - pay for cars, mortgage, education funds for grandkids. The kids will appreciate it a million times more than receiving $29M inheritance.
James, seriously, with $4+ mil, and income (pension, SS, annuities) that exceeds expenses, why on earth did the words "car loan" come out of your mouth? Frankly, I'm a bit flabbergasted that one would voluntarily pay interest for something one could pay cash for without blinking.
I love your channel, but you lost me there. Would love to hear the rationale.
Maybe it's a low interest or no interest rate loan.
Hire someone smarter than you to deal with the tax issue. You only have 10-15 go go years left, what are you waiting for? Your children and grandkids will be just fine with or without your money.
Was disappointed to see Root Financial won’t work with anyone with under 2 million of investable assets. I need help, but as a 58yo blue collar single father I’m not quite there despite scrimping and sacrificing. I can’t find affordable help.
Just pay the tax. Why crib about it? You are still doing better than 90%of the people in the world.
Are you serious? They are worried about not having enough? 🎻
Terrible problem to have, but they have not planned well up to this point
I think they’ve planned well, just haven’t seen a real projection of what’s possible
$3k per month, I live on the sidewalk and I need more than that.🤪
Spend your money now
Would like to add that medical expenses can skyrocket and if you need 24/7 private help you can wind up with a huge expense so fast. One month we spent $50k. Granted the issues were unique but it can happen.... especially w dementia in the equation
Lost me at the $5 million net worth. Show me someone who has a real financial struggle.
These presentations are not geared towards people who do not pay taxes. They are mostly for people who want to reduce the tax burden. Way before $5M, people want to mitigate the SS 'tax torpedo' and for them the financial planning toolbox is pretty similar.
You never gave any solutions
Yes, you said I need to implement a strategy, but you never said that
We all need to implement tax strategy, but how to do it that’s the hard part and he did not cover that
He did. Watch again
He sorted of did but he tried to address the more important issue: what are they going to do with their assets? Tax strategy is the tail of a dog. One needs to address where they are going first.
I think you missed the point of the video. He's challenged them to rethink tax minimization as their top priority and to have more fun/spend more money in retirement as their primary goal. They said they'd like to help their kids and gave a number of way they might do that, and once they have a clearer picture of what they'd "like" to spend versus how they came into this discussion, James can develop a plan to 1) make their adjusted wishes a reality and 2) do so in a tax efficient way.
The key to having the $4 million in investments were saving early, probably in their 20’s
Yes high savings rate from a young age is huge
They need to pull cash out of their home via a cash-out refinanced mortgage, combined with Roth conversions. The cash-out money can be used for living expenses and payment of taxes on Roth conversions. This also allows for higher Roth conversions.
That's what I did. I've been doing Roth conversions into the 22% bracket for 10 years, with 3 years to go. At that point, I'll be moving from Texas to California, where I'll take out a 30 year mortgage. I'm 63 and retired at 48.
My plan also includes three more cash-out refi's, about every 7 to 10 years, in the future. I'll try to coordinate this inflow of cash with stock crashes. My portfolio is 100% stock, so I'm hopeful this plan helps me limit stock sales during market downturns.
You skipped telling us the reasoning behind the cash-out refis. Could you please explain?
I don't think there's anything they'd like to accomplish that requires the money from refinancing. Your strategy is interesting and I'd need to think on it more (although I'm not a fan of all those transaction costs); but if it helped you retire so early and it's working for you, great!
I have similar sentiments that others have regarding their expenses. They have a mortgage, car loans, kids in college, property taxes and insurance, how could they only need 3k to cover all those expenses? Something is not adding up.
James said the 3k was for things like food, gas, utilities, and excluded mortgage/tax/insurance.
Really think it depends on the situation. For me without my mortgages my basic monthly expenses would be less than $2k. I do not have car loans, kids in college, etc. I’ve worked to pay everything off before I retire. You should plan to be debt free as you enter retirement, it really takes planning way ahead to accomplish but is possible. This does include my insurance and property taxes. I live in Oregon.
Why does this guy have almost 6 million in investments and takes an auto loan 🤔
I would advise for people to be realistic. people who live in the ground and see light every 5 years is not realistic. it is waste of time to do this.
The miser mentality
Really? I heard them say (25:50) that they want to want to help three children who are in college, buy them cars, etc. I don't think it's "miser" as much as it is the need to move from accumulation to decumulation when salaries stop. After working 30-40 years, it's a definite mind-shift and can require help to navigate.
I’m an advisor and find these videos very scripted 😅. Rarely (if ever) do clients even use phrases like “tax efficient”.. they don’t know what they don’t know.
Thank you for tuning in to so many of our videos 🙏
Funny, the wife when she's thinking of how to spend more on other people instead of on themselves.
This makes zero sense. Property tax, insurance and maintenance on their house adds up to $1850/month and we are to believe that this couple is living off the remaining $1150 per month? But wait, they still have mortgage and auto loan payments! So why put this figure in their goals when it is not realistically possible? Oh but this story gets better. They are early retirees planning to spend 3K/mo on healthcare. But wait, now they want 10K/year for vacation. Um, but then we learn they have a boat…and 14 minutes in we learn that their expenses are actually 12k/month. Why not just start with their actual expenses instead of wasting viewers time with a nonsense spending goal?
The software program divvies up expenses, as the video explains. (14:10).
You misunderstand. The $3k/month is but one small part of their expenses
It's not nonsense. He always separates the expenses into categories. Excluding housing, medical, vacations, boats, etc., what are your core/base living expenses -- those are $3K/month. If you lump everything together and just say that there are $140K in total annual expenses, then you have a greater chance to miss a car payment going away or a house note paid off. Breaking apart expenses isn't nonsense; it's proper planning steps.
The tool he uses separates housing from other normal expense items. The 3k didn't include the mortgage. Listen at the 7:30 mark on the video.
😂 tax harvesting, a nice way of saying we saved you taxes, cuz we lost you lots of money. I would rather make the income and pay my fair share of the taxes, somebody has to put money into that pot they keep spending in Washington
Roth Conversions aren’t worth the big taxes paid upfront. You’re better off paying taxes as you take distributions on a lower tax bracket. Besides, the accumulated pretax assets are usually so large that it’s difficult to “cash out” and reinvest in a Roth account. What should be be done is take larger distributions than expenses and reinvest as you might need them in regular non-retirement accounts. Besides, the government will force you to take distributions on Roth accounts after age 70 so it’s not like a long time horizon.
You typically wouldn't do Roth conversions if you expect "big" taxes.... i.e., it's about the bracket, not just "big" vs something else. Conversions are done to limit overall tax liability. Also, RMDs on Roth accounts? May want to Google that one again...
Agree, plus doing a conversion there is a 5 year wait to access it after a conversion.
There's no RMDs for Roths.
I don't know of any requirement to take distributions on Roth at age 70. Roth accounts are tax-favored and generally the last assets to be used, no matter how old the account owner is.
IF you are in a low tax bracket "up front" before SS kicks in, that's the best time to do them!