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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Hey, thanks for joining. Here's a question I was recently asked on my show, how to retire on time. Take a look. Alright. Let's go to the next question here.
Mike:Okay. If the markets crash when you retire, which this is one of the bigger risks. If you if it crashes for what's worth five years before you retire, or five years after, that's the red zone, as they call it. So if the markets crash when you retire, and you and you have cash to get through it, that only solves one year of the problem. What if it takes five years to recover?
Mike:Great question. So, and this is a reference to those who don't know, it's chapter four of the book, How to Retire On Time. You can go to retireontime.com and download that for free if you haven't already done so. But the idea is that you don't want just one year, you want a system that can sustain you for multiple years. Because we don't know.
David:Right.
Mike:Ideally, you've got your reserves funded at the beginning of retirement, so you've got like five to ten years covered. Now usually the first five years, we will like often ladder them out. So like CD ladder, bond ladder, MYGA ladder, just grows at a fixed rate, pays out, like there's no risk. After that, it typically becomes more dynamic. So you've got anywhere from two to five additional years, that if the markets go down, you have plenty of assets to tap into that have no downside risk and upside potential.
David:Mhmm.
Mike:That way you're not having to try and time, is it a one year crash, is it a five year crash, what is it? Yeah. No one knows. So, this is one of those, when I say, if implemented correctly, you should be just fine. You don't want just enough cash for one year.
Mike:You want reserves. Those are your assets that have upside potential, no downside risk. You want your reserves to be able to cover you for multiple years. And as a general rule, I mean if you're a typical retiree, if you do the basic plan, half your assets are in bond funds, half your assets are in the stock market. Mhmm.
Mike:What if half your assets were in reserves? You should not have an issue with that. And the assets that would be in a model in the stock market and so on, maybe you've got 5% in cash to also hedge against those bets. Just a few thoughts to consider.
David:Yeah. And when we say reserves, we're talking about one of those those products. Right? Like, whether it's a CD ladder or a bond or a Buffered ETF. Yeah.
Mike:You can be very dynamic with a lot of that.
David:It's a reserve because it it can't go down, but it can it does have upside potential. Yep. Where it won't go down very much. Maybe in some cases,
Mike:a buffered ETF. Depends on which one you buy and the risk you're willing to take.
David:Yeah. Okay.
Mike:So alright. Here's the next one. How do you determine how much should be converted from IRA to Roth each year? Yeah.
David:And then we just kinda went over that. Right? What if you're trying to keep your income low so you have max subsidy on your Affordable Care Act plan, then you This is a tricky one. So this could this will be different for everybody.
Mike:It'll be different for everyone.
David:No one size fits all here.
Mike:Alright. Well, I'll walk through it here real quick. I mean, if you're if you're in a situation where, let's say, you've got let's say you're in Texas. Mhmm. Okay?
Mike:And you had a million dollars saved.
David:Okay.
Mike:And you take out 4% from your portfolio, that's $40,000. Let's say there's 60,000 coming in from social security. So the idea here is, okay, $440,000 from your your portfolio, most of that's taken out by the standard deduction. Social Security then, based on the provisional income tax calculation, basically makes makes it so you're there's like zero taxes on Social Security. So your tax bill's like $3,000, $4,000, maybe $5,000 tops.
David:Mhmm.
Mike:So now you're in a very low situation, and you can can do IRA Roth conversions within 10 to 12% bracket. You've got room for that. That might be a good situation. It might not. Maybe you don't need to do this.
Mike:If you've got 500,000, that calculation's different. You've got more room just on basic restraints to kind of do those IRA Roth conversions and so on. If you've got $5,000,000
David:Mhmm.
Mike:You might be forced into a situation where you've really gotta you've really gotta push it. You gotta kind of pay the taxes in advance, because if taxes go up, then you're gonna get hurt. So it's it's kind of one of those catch 20 twos on how much do you have in your IRA, what will be the projected RMD, is that going is the RMD greater than or equal to the income that you want, and if so, that's a risk. If the RMD is less than the income that you already want, that's a lower risk. And then you have charitable intent and so on, that you might be able to donate the rest.
Mike:Mhmm. The point being that everyone's financials are different, everyone's goals are different, everyone wants something different.
David:Yeah. Yeah. So we can't just say like a blanket statement. Oh, yeah. Everyone should convert this much just to stick it to the government or like, I I don't wanna pay taxes in perpetuity.
David:Yeah. Wanna get it all out of the way. Well, you might not want to.
Mike:Yep. Don't. When
David:you look at the numbers.
Mike:Just gotta be careful. Yeah. And the reason is, why would you pay 22 or 24¢ on the dollar when you can get 10 to 12, maybe 15% for life? Some people are scared. And that's why they're taking, those who have less money are taking, are doing IRA to Roth conversions out of fear because it's what the wealthy do.
Mike:Well you have a different strategy and you can actually, you're in an advantageous position to be more strategic about your IRA to Roth conversions. Mhmm. And that's just so commonly missed. Hey, gonna take a quick break here and remind you this show is called how to retire on time. And if you want more retirement resources, go to retireontime.com where you can grab my book.
Mike:You can join any of our live classes and so much more, all of it free. Retireontime.com. Go there today.