How to Prepare for Retirement Within 5 Years: 401k, Savings & Investment Changes

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Graham and his wife are in their early 50s and plan to retire in 5 years. He wonders if they should continue maxing out their 401ks, how their investments should change, and what they should do with savings accounts to best prepare for their retirement goals.
James addresses these questions, Graham’s biggest risk as he nears retirement, and potential tax strategies for him to employ.
Questions answered:
Which is a better tax strategy - tax gain harvesting or Roth conversions?
Do I need to have a dedicated emergency fund in cash?
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⏱Timestamps:⏱
0:00 - Graham’s question
3:16 - The move from single position
5:43 - Identify biggest risk
8:00 - Tax gain harvesting and Roth conversions
12:14 - Tax strategy
15:14 - Two variables to consider
20:44 - Max out 401k plans?
22:07 - A question of tax
24:52 - Tax plan in action
26:44 - Concern about emergency savings
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Опубликовано:

25 июн 2024

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Комментарии : 93

@DrBilly90210 Месяц назад

Excellent discussion as usual. Thanks for posting.

@markb8515 Месяц назад

Thanks James, the video was very helpful and informative!

@JA-er2jp Месяц назад

Is it just me or do almost all these examples/case studies have HUGE balances in joint/brokerage accounts? Most people I know don't even have a brokerage account, let alone $1M in one. I feel like more realistic examples would have the largest balance in 401k/IRA, a smaller amount in Roth, and maybe a modest balance in a brokerage.

@timeformore Месяц назад

Agreed, we don’t have one and I don’t know anyone else who does either.

@miragexl007 Месяц назад

A kind of agree. Once it passes 2 million in assets... I tend to back off watching.

@peterwright837 Месяц назад

It’s not unusual in Silicon Valley where employees receive Restricted Stock Units as part of their compensation and also have the opportunity to purchase the company stock at a discount. It adds up over the years.

@M22Research Месяц назад

Gotta remember the firm’s target client. Bigger balance at 1% fee = bigger revenue.

@kevinkanter2537 Месяц назад

Like @miragexl007 I "kinda agree" but James puts this scenario along a timeline and illustrates his consideration of the decisions as he steps thru the brackets (Tax, Cap Gains, RMD, IRMAA) with different location %'s (ROTH - IRA/401K - Taxable-Brokerage + HRA, I just briing up the brackets for my situation (single) as well as decreasing the $$ amounts to show the constraint variables relevant to my situation. James usually puts this into coupled phases of retirement w/ actual numbers and so i hope he does this for a scenario as you suggest (or for a single person).

@michelleholland8639 Месяц назад

Love all of your information James. Is is so helpful with our retirement planning.

@cdub357 Месяц назад

Please do a video on mental challenges experienced when going from Accumulation to Decumulation. Thanks.

@iwan2bninja 24 дня назад

Interesting analysis. Thank you. Subbed

@maridolvi3723 24 дня назад

Thank you. Great information.

@MichaelToub Месяц назад

Great Video!

@msgmak1379 5 дней назад

Great Job!

@kevinkanter2537 Месяц назад

great video - and very comprehensive!! thank you. a consideration: you put this scenario along a timeline and illustrate consideration of the decisions as you step thru the brackets (Tax, Cap Gains, RMD, IRMAA) with different location %'s (ROTH - IRA/401K - Taxable-Brokerage + HRA, all as variables focusing on final goal requirements. I just briing up the brackets for my situation (single) as well as decreasing the $$ amounts to show the constraint variables relevant to my situation to help me follow along your example. Very useful since i faced most of the questions you provided ways to think about --- but i only had 5 years to plan since i retired late (68-73) rather than 20 years (50-75). in my understanding, you set up your data into coupled phases of retirement w/ actual numbers and so will you do this for a scenario for a single person (I'd like it) or as some others have said, with more common and lower values in the 1-1.5M range . My question : Does your software allow scenario modeling to address a monte carlo sim of the final decision with the setting of the variables?

@heidikamrath1951 Месяц назад

Excellent points! Thank you, James!

@stephanebogen5411 Месяц назад

Such a great topic and spot on analysis - Thanks for such a great tutorial. At 56 and planning to retire within 18-24 months, I have been running multiple scenarios related to all that was discussed today. I understand the value of minimizing RMDs and minimizing tax burden for heirs but the complexity is to balance this with what we want to achieve in early retirement. What I mean is not jeopardizing activities/goals in first few years because of allocating/using "cash" to pay for Roth conversions. I want to make sure that I also experience the "net worth" advantage/consequence of doing these conversion while we can enjoy them and not getting net worth positive outcome at an older age when we can't enjoy them anymore. Your point of not converting 100% of IRA to Roth is well taken and should be noted by people. I have heard so many comments about converting everything and for me, leaving a balance of $500K for a married couple makes perfect sense.

@peterwright837 Месяц назад

Similar situation here. I was selling shares from my concentrated position up until last year and paid the max capital gains rate plus Net Investment tax. However, once we decided to retire this year I stopped selling because I’ll pay a lot less in taxes on those gains after retirement. We’re are still maxing out both pre and post tax 401k contributions to to take advantage of the tax savings and the Mega Backdoor Roth Conversion while we can. Not sure it’s the optimal strategy, but it seemed like the best pre-retirement strategy to me for our final year of W2 income.

@gin170 Месяц назад

Very helpful video. We are less than 10 years from retirement and also hold a lot of individual stocks. It has done us wonders the last 20 years but we know it's too aggressive for a retiree's portfolio. We've done partial conversion, ourselves, as our IRA grows. Most of our funds are in Traditional IRA and Roth but we are also growing our Brokerage account. We earned less than 100k living in the bay and only breached over 100k income the last 2 years so it is possible to grow your retirement accounts to a sizeable amount but you have to start saving early when you start working. For this couple, maybe contribute to the 401k up to the employer match. If the employer has Roth 401k put funds in that.

@cereal76 Месяц назад

Definitely glad I clicked on this video. I see so many channels offering opinions on finances but almost none of them are qualified to do so. It's refreshing to hear from an actual professional.

@timz7548 Месяц назад

This was a very interesting discussion. I'm hopeful you'll take a similar look at scenarios where instead of 25% pretax and 75% taxable you'd look at a similar portfolio size for someone that is in process of building their "bridge" taxable fund. Maybe 75-90% pretax and 10-25% taxable and/or Roth. Would that couple ever have issues with RMDs or similar? Tax optimization would certainly be a different discussion in that scenario.

@IramisandGerry Месяц назад

Great post. We are in a similar position, but we have a house that will go into brokerage to bridge the gap years when we sell it. We do plan on leaving the US to pay for cost effective healthcare and lower our monthly budget to 4K by doing full time travel.

@hl10gg Месяц назад

My jaw dropped hearing 60% in an individual stock holy cow

@timeformore Месяц назад

This is my lunch break learning. I’m trying to plan for an early retirement situation that is somewhat similar, so this is very helpful-thank you! My plan hinges on selling our home to either downsize or become nomadic with RV travel for a few years. What’s left over from the home sale would become our brokerage account because we don’t currently have one. This is still 5-10 years away, but I think it’s doable.If we can’t get enough from selling our home, we can still “downsize” our jobs and take ones where we’re not worried about maxing out 401k contributions until we’re at a point where we could retire. After 5 years of the early retirement, one of us would be of the age to start 401k distributions.

@markbernhardt6281 Месяц назад

That's our plan too. The other Root channel with Ari Taublieb calls that brokerage account the 'superhero' account. My wife and I will be doubling our brokerage by selling our house and getting a very modest apartment. Later on we want our nest egg to grow so huge we can spend our golden years on a house on a lake with a live in maid haha

@johnd7304 Месяц назад

What about gifting the stock to a gift annuity to fund retirement, receiving a tax deduction (I know their ages are young but market risk might offset that), and an income for life? I’ve always told my clients you spend your income in retirement not your assets.

@Growing-Our-Retirement Месяц назад

If the big stock holding is in a really good company I would continue to hold it and sell some puts and some calls. Much less expensive than paying the taxes and potentially missing even more appreciation. This idea of selling your winners to rebalance actually works against you in many cases.

@markbernhardt6281 Месяц назад

I think you should always prioritize the roth conversions because the brokerage account when you die is worth the market value to your heirs, they will not have to pay any tax on the gains. Plus you will always have full control over what to do with the brokerage. The government will not tell you to sell any of it.

@WalterDorcas Месяц назад

I would be retiring or working less in 5 years, and I'm curious to know best how people split their pay, how much of it goes into savings, spendings or investments, I earn around $250K per year but nothing to show for it yet.

@michaelmunin5819 Месяц назад

Hey James, would the analysis for keeping the 401K during the last few years change if they were getting say 50 % matching from their employer?

@jgibbs6159 Месяц назад

If they get a 50% match on their contribution - they should NEVER stop contributing as long as they get a match. Even is the fund they are in had zero gains, they are still effectively getting 30%+ (after taxes) gain on their contribution via the employer match. Hell, they could shift all their income in the 401k to a low risk bond fund to ensure they don't loose any of their contributions, and just keep contributing as long as they can and watch that match work wonders on their balance.

@SirBenjamin-oq1wd Месяц назад

I have been a dividend focused investor for a long time. This does not mean I don't own growth stocks, I do. A well rounded portfolio should be a mixture of both categories. One way to minimize the anxiety out of stock market investing, is to make sure you keep a large cash cushion. I invest in the market, but never put all my money in market.

@Sylvan_dB Месяц назад

be careful about rule of 55. My company does not allow partial withdrawals.

@aerobiotic Месяц назад

Contributions to 401(k): If the employer makes a matching contribution, it will be hard to find an investment with a 100% gain in a given year.

@jaykraft9523 Месяц назад

Question for anyone who knows: If my wife and I were retired, filing jointly, and receiving $100K in social security per year together, and we had a long term capital gain of say $90K, what would be our tax ? (wondering if the $90K adds to AGI and provisional income causing more of the social security to be taxed, and assuming the long term gain has 0% tax, but not positive). Assume there is no other income and standard deduction

@missgui4400 Месяц назад

The capital gains have a different taxation. It is not considered income.

@aerobiotic Месяц назад

It would be great to see how this would be taxed !!!

@Sylvan_dB Месяц назад

"Provisional income is calculated using the recipient’s gross income, tax-free interest, and 50% of their social security benefits." So in my opinion, yes. Currently (in 2024) the maximum amount of social security that would be subject to tax is 85%. 85% of $100K is $85K. Considering the $29,200 standard deduction, the naive calculation is you would be paying ordinary income tax rates of 10% on $23,200 ($2320), plus 12% on $32,600 ($85,000-$23,200-$29,200 * 0.12 = $3912), plus long term cap gains. The LTCG starts with $85,000 - $29,200 = $55,800 offset from ordinary income into the 0% bracket: $94,050 - $55,800 = $38,250 at 0%. $90,000 - 38,250 = $51,750 which easily fits into the 15% LTCG tax bracket ($7763). Federal taxes from my naive calculation would be: $2320 + $3912 + $7763 = $13,995 (using the 2024 brackets and rates and standard deduction for married filing joint).

@Sylvan_dB Месяц назад

Oh, in case it isn't clear, I didn't document the provisional income calculation: $100K * 0.5 + $90K = $140K. That easily results in 85% of Social Security being taxable in 2024.

@j10001 Месяц назад

The capital gains are on top of other income, which includes soc sec. If you want to, pull out a form 1040 and try plugging in your projected numbers and see what happens.

@ronalddmccall6154 Месяц назад

Inflation at a 40 year high. Daily cost of living is way up. You can see it every time you go to buy groceries. Home insurance for me doubled this year. You can tell people it isn't bad when the people see how bad it is every time they go to the store! Very misleading to say inflation is way down. The rate of inflation is declining so prices are going up, just not as fast!

@DrMediterranean Месяц назад

I'd like to see the same video but with a household earnings of $80,000 a year, you know, the median...

@j10001 Месяц назад

The median person doesn’t make a good client for him

@aerobiotic Месяц назад

The 40K per year is being put into a brokerage account. Their income prevents them from making Roth contributions. Does their employer have a Roth 401 (k) plan? High earners are not restricted from contributing to Roth 401(k)s. You can also make higher contributions to a Roth 401(k). In 2024, you can put up to $23,000 into a Roth 401(k), with an additional $7,500 catch-up contribution if you're age 50 or older. In addition, some employers match Roth 401(k) contributions, but the company contribution won't be put in the Roth account.

@timz7548 Месяц назад

Any Roth contribution doesn't really benefit these folks at their current 24% tax rate. They'd benefit more from traditional pretax 401k as it will likely be taxed in a lower bracket in retirement.

@M22Research Месяц назад

Wow, $320K annual income and “only” have about $700-800K in retirement accounts… but $1.5mil in a brokerage account? Shockingly out of balance. And very modest total retirement funds for that kind of income. Particularly if they wish to spend $100K/year in retirement. Long past time to dump their prior “advisor”.

@bizzfo Месяц назад

Roth 401k, no RMD now. Take the tax hit now. Pay zero taxes later and no RMD.

@johnhoffman4969 Месяц назад

I like the videos! Too bad you only take on clients that have a minimum of $$2 million to invest.

@j10001 Месяц назад

This is great thinking, truly. But man I wish I could watch the version of this where he _doesn’t_ repeat himself 6-12 times. It’s not even saying it 2-3 times, which is annoying. It’s like 5 minutes of going in circles. Then on to a new topic, and turn in circles for 5 minutes again. 🙄

@bdtn342 Месяц назад

I agree with the comments section. Whoever sent in this question should be embarrassed for even asking. There is no emergency for graham, he is set. Is he trying to figure out if he needs another house and boat before he retires?

@jeffb.2469 Месяц назад

I stopped watching after you read their total savings and investment amounts. It's hard to relate to those numbers. I must be way behind.

@aerobiotic Месяц назад

My guess is ... DINKs - dual income and no kids 😃

@stephenmolloy3081 Месяц назад

agreed... would be good to get more realistic, everyday scenarios for the average family.

@DrMediterranean Месяц назад

I don't think you are, I see a lot of these types of videos and they are simply out of touch with the median worker

@danoberste8146 Месяц назад

Graham's biggest risk is Elon Musk. 🤣

@dforrest4503 Месяц назад

I was thinking that! That’s a very risky situation.

@Coast_to_Coast Месяц назад

😂

@josephjuno9555 Месяц назад

It irritates me that these people have several $millions act so Financially insecure? You hope to squeeze by in Retirement on Only $100,000 plus $20k for travel per year? Only $10,000 per month? You won't be eating Costco cat food! Just Bragging how RICH YOU ARE!

@adam964 Месяц назад

You realize that people who seek the services of someone like James are likely easily in 7 figure plus net worth territory don't you? This isn't bragging, this is the target demographic of his client base.