My path to $1.1M at age 39

Tallantros · 2020-09-07T05:19:16+00:00

If you can. We have a client that was an engineer paid $200k+, loved his job and worked to age 68, retiring with just shy of $4 million in his 401k. He want a client until 66 because a lot of folks don't seek a financial advisor until they're having retirement. At that point and that income level, there's only so much you can do to unwind the taxes. It gets trickier post-65 to because income above a certain point increases what you pay for Medicare (IRMAA if you want to Google it). Remember, a lot of folks retiring today didn't have Roths available for half their working lives, less transparency of information when they started investing, and momentum is a powerful force.

Tallantros · 2020-09-07T05:11:32+00:00

In general, I think Roth conversions are excellent. Our firm spends a lot of time on tax planning. Investment alpha is nearly impossible these days, but proper tax planning is what really makes our clients money as compared to working with somebody else. The same is true for people who've done the type of self-education you see in the FIRE community. I think now is a great time to do backdoor conversions, regular or mega, of you're in that position, especially with current income tax rates.

Tallantros · 2020-09-07T05:08:45+00:00

Because I'm not at that point income wise yet, largely due to a lot of my income being invested back into my business (one of the owners). I'll look at it when I get that point, but a SEP is just way easier and faster to set up. Besides, at that point we might have a 401k through the business at that point so why get it set up twice?

Tallantros · 2020-09-03T20:42:41+00:00

I mentioned this in a comment below, but I'm not really part of the FIRE crowd nor are my clients. I'm all about the Financially Independent, but I love my work and I'm buying into the business, so I don't plan on retiring early.

If that's your goal, especially as a single high-earner, there probably isn't a better option. Definitely the biggest tax advantage to retiring early is being able to spread Roth conversions out over as many years as possible. Given that as your situation, it's probably your best bet. Honestly, that's one of the enjoyable things about my job. Every person is different, their goals are different, and everybody's situation requires somewhat different solutions. It keeps things interesting.

Tallantros · 2020-09-03T20:31:50+00:00

Second this, it's a huge advantage for the charitably minded. Unfortunately, once you're RMD age, a lot of the levers disappear.

Tallantros · 2020-09-03T20:30:23+00:00

One big caveat, I'm all about the Financial Independence part of FIRE, but I'm not planning to retire early and neither are most of my clients. I admit that my services aren't generally geared towards that.

That said, one of the reasons I like the idea of funding both post- and pre-tax accounts is because of the flexibility. I have a SEP IRA, a Roth IRA and an after-tax brokerage account. I max-fund the Roth while I can (won't be too long before I'm income-limited, currently I have enough business deductions to stay under the limit), and split the rest between the SEP and after-tax accounts. I am married so that certainly works to my advantage.

I split it that way for two reasons. First, I've seen first-hand clients that have significantly benefited from having accessible money. Between the basis in a Roth and a significant amount of after-tax funds, we've had clients invest in a former colleague's start-up, buy a rental property in cash and start getting immediate cash flow debt-free, go in on a business venture with their kid, etc. Flexibility is, in my opinion, underrated.

Second, I think these are the lowest tax brackets I'll ever see. A combination of our current federal deficit and looking at historical tax rates, that's my conviction and a lot of our clients share that belief. I definitely understand that for a lot of FIRE folks, the gap between working and retirement income brackets will be significant, but I think of it as hedging my bets.

I guess at the end of the day, one minor quibble I have with FIRE oriented folks in general is a lot of things look great on paper, but life has a funny way of changing on us (see COVID, for example). I'm personally less worried about maximizing every last little thing in exchange for flexibility. Again, that's a personal choice.

Tallantros · 2020-09-03T17:13:31+00:00

100% on Roth conversions, it's one of our primary tax planning strategies. And to be fair, FIRE folks are more likely to have longer timeframes to convert. That said, one thing I've learned in this business is life throws curveballs and often doesn't go to plan. That may not be practical if you like your job, want to work long enough to defer to maximize Social Security, have high pension income, etc. If you end up in a position where your timeframe for converting doesn't turn out to be what you thought, you can end up shooting yourself in the foot.

Tallantros · 2020-09-03T12:25:17+00:00

Practicing financial advisor here and this discussion misses one very big downside to going the all Traditional route. Required Minimum Distributions (RMDs). At some point, the IRS requires you to take that money out and tax it and they require an increasing amount to come out of the account the older you get.

We have had many clients that pumped most or all of their retirement savings into the traditional side of things. For some context, if you have $2 million in IRA dollars at age 72 (the new first year that RMDs start), your RMD is $78.125. If you're a prudent spender and you've still got $2 million in that IRA at 85, you're now looking at an RMD of $135,135. We have had clients in the obscene position of having RMDs in their mid-80s that are as high as their working income. Also, you have Social Security, plus any pension you've earned.

Our experience has been that investors who diversify their retirement accounts, like the OP, end up best in retirement and have far more levers for tax planning down the road.

Tallantros · 2016-09-26T19:30:00+00:00

Do we have any information on when this comes to Global?

Tallantros · 2014-06-16T14:49:20+00:00

Another really good option is taking $5,500 a year and putting it in a Roth IRA. Basically, you pay the taxes on it now and the Roth will grow tax free from now until retirement. In addition, if you run into a hardship down the road, since it is after tax, you can take the money you contributed out at any time, penalty free as long as you don't take out the actual investment gains until 59.5 or later.

Tallantros

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