Summary

The article outlines a retirement strategy for John and Nancy, detailing how they can achieve a tax-free retirement income of $123,482 per year with a portion of their$ 1.15M net worth, while also maintaining $716,339 for discretionary spending.

Abstract

The case study presented by Matthew R. Harris discusses a financial strategy for a couple, John and Nancy, who are planning for retirement. With a net worth of $1.15M, they aim to secure a tax-free retirement income and allocate a portion of their assets for discretionary spending. The strategy involves converting a$ 600,000 401k into a deferred income vehicle for guaranteed lifetime income, coupled with a Roth conversion to avoid taxes in retirement. Additionally, they plan to invest $400,000 from their brokerage account for growth and discretionary use, while setting aside funds to cover the taxes on the Roth conversion. This approach ensures a tax-free annual income of$ 83,482 from the income account, supplemented by tax-free social security benefits, totaling $123,482 per year. The article contrasts this method with the traditional 4% withdrawal strategy, highlighting the benefits of guaranteed income and reduced risk of outliving one's savings.

Opinions

The author advocates for a strategy that provides guaranteed lifetime income and tax-free retirement benefits, contrasting it with the traditional 4% withdrawal approach.
The article emphasizes the importance of longevity planning, especially for individuals with a family history of long lifespans.
The author suggests that the traditional 4% withdrawal strategy is not only more expensive but also carries a significant risk of depleting assets in retirement.
The strategy proposed is believed to offer better liquidity for discretionary spending, such as purchasing a sports car or traveling, without compromising the guaranteed income.
The Roth conversion is presented as a key component for eliminating taxes on retirement income and avoiding required minimum distributions.
The article criticizes the 4% withdrawal strategy for its potential 14% chance of running out of money in retirement, which is deemed too high by the author.
The author's opinion is that their proposed strategy provides peace of mind by ensuring a 0% chance of outliving one's money, which is a priority for retirees.

Case Study: Retire 100% Tax-free with $123,000/year (plus $700k of sports car money!)

(Check out the video on this too!)

I recently posted a video about how to get your social security check completely tax-free and I got a LOT of questions….

So in this blog, I want to walk through a pretty typical example of exactly how you can accomplish not only a tax-free social security check, but a completely tax-free retirement.

⭐️The Deets⭐️

☑️ John (60) and Nancy (58)

☑️ Both had grandparents live into their 90s (they have longevity in their family, so money needs to last awhile)

☑️ Net worth = $1.15M

☑️ $515,000 in a brokerage account

☑️ $600,000 in John’s 401k

☑️ $40k/yr of social security income (@ 70)

☑️ They want to designate 60% of their retirement assets to INCOME

☑️ They want to keep 40% of their retirement assets available for DISCRETIONARY spending

☑️ They want to retire in 10 years

⭐️The Strategy⭐️

☑️ Position $600,000 into a deferred income vehicle to provide guaranteed, lifetime income (GLI, baby!)

☑️ Simultaneously do a Roth conversion to move retirement money into a vehicle that is completely tax-free in retirement (plus eliminating the required minimum distributions)

☑️ $400,000 brokerage account will be aggressively invested in the stock market and earmarked for discretionary spending in retirement (assume it grows at 6% per year for 10 years which is pretty conservative)

☑️ Approximately $108,000 will be used out of their brokerage account to pay the taxes on the Roth conversion in the 24% tax bracket (at approximately an 18% effective tax rate).

⭐️The Results⭐️

☑️ Their deferred income account has a guaranteed annual payout of $83,482 per year that will last for the entirety of both John AND Nancy’s life

☑️ Since the income account was moved into a Roth account, it will be a 100% tax-free income source in retirement AND it will NOT count as provisional income, so social security will not be taxed either❗️

☑️ They have approximately $716,339 of discretionary spending money in retirement that they can use to buy a new sports car, travel the world frivolously, AND spoil the grandkids with….

☑️ They have $40,000 per year of social security income that will be 100% tax free (because of the Roth conversion)

☑️ TOTAL: $123,482/year of completely tax free income (plus the inflation growth of social security) AND they still have $716,339 of invested assets that they can use for ANYTHING they want….

❌ The Alternative (a 4% withdrawal)❌

Most investment advisors recommend taking no more than 4% out of your retirement portfolio, otherwise you take on too much risk of running out of money in retirement (I talk a bit more about that here).

But this strategy requires you to “lock-up” the majority of your assets solely so they can generate income.

You’re much better off designating a portion of your assets to income so that you can free up the rest of your money for discretionary spending.

The 4% withdrawal strategy just doesn’t work as well at providing a contractually guaranteed income source, plus using the 4% withdrawal strategy still leaves you with a 14% chance of running out of money in retirement (that’s far too high in my eyes).

Creating a guaranteed, income plan for yourself ensures that you have a 0% chance of running out of money (which is what everybody wants), but the 4% withdrawal strategy is super expensive too…and here’s why:

❌ Without the guaranteed income, you would need approximately $2,087,050 to be able to provide $83,483/year of income (at a 4% withdrawal) and only the social security income of $40,000 per year would be guaranteed…

❌ Remember, we were able to provide $83,483/year of GUARANTEED income that you could never outlive for only $600,000 by simply designating it as income prior to retirement (that’s the same amount of income for less than 1/2 the price PLUS a guarantee that you can’t outlive it)

❌ Our strategy also allows tons of liquidity and discretionary money, where the 4% withdrawal strategy does not, because the money needs to generate income (that just means less money to spoil the grandkids with and not enough liquidity for that shiny sports car)!

As you can see, designating a percentage of your retirement assets to income not only allows you to maximize your income, but it also allows you to free up your other assets for discretionary spending.

Plus, it completely eliminates the risk of running out of money in retirement, giving you the freedom to fully enjoy your well-deserved retirement years with complete peace-of-mind.

Getting it all tax-free is just the cherry on top.

Like this blog? You’ll probably like this one too: 6 Proven Ways to Not Outlive Your Money in Retirement

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