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WealthTrace Retirement Planning Review

March 1, 2022 by Lazy Man Leave a Comment

There are many, many retirement calculators out there – perhaps hundreds. I could review a couple a week for a whole year and not run out of calculators. However, there are very few retirement planners. Many people may use calculators and planners interchangeably. There is certainly some overlap. In my opinion, a retirement planner goes a lot deeper than a calculator. A good retirement planner can give you estimates year-by-year how your money situation is going to change. Many retirement calculators give you the bottom line of whether you can retire and how much money you may have.

Retirement calculators have their place. Some people may want a quick and dirty calculation to see if they are on track. Calculators could be perfect for them.

I’ve found that retirement planners provide more detail. That gives me the information I need to not only know if I’m on track but also details like what our Required Minimum Distributions (RMDs) may look like 25 years from now. That forecasting into the future is important because it allows me to make money moves now. A couple of years ago, a retirement planner showed that our retirement savings were huge and would grow to be bigger by the time we can access them. That’s when we decided that it’s better to switch to investing with a regular brokerage account. It’s great to have access to that money now if we need it.

WealthTrace is one of those retirement planners that I’d like to focus on today. WealthTrace has all the features that you’d find in most retirement planners. Some features include:

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  • Import and link accounts from all your financial instutions – This gives WealthTrace the information it needs to do its calculations as well as keep holdings and balances updated
  • Adjust assumptions – Retirement planning requires making some assumptions for unknowns. This lets you adjust tax rates, inflation, and even asset allocation in the future. The last one is useful as most people shift to a safer asset allocation with lower returns as they get older.
  • Projected Performance – WealthTrace looks at the historical performance of your investments and uses that to predict future performance. Predictions of future performance are just that “predictions.” WealthTrace gives you Monte Carlo Simulations where they look at many different things that could happen in the future and let you know the odds of success.
  • Live Customer Support – This is one area that sets WealthTrace apart from the other retirement planners. There’s phone, chat, and email support.
  • Run “What-If” Scenarios – WealthTrace allows you to simulate what an extended bear market might do to your portfolio. I find this particularly useful because we’ve had such a good run for a dozen years now. There may be a bear market coming and it could last a while.
  • Rental Property Analysis – You can model rental income and the sale of real estate. I’m specifically looking into this scenario with one of our properties right now. It’s a pain to calculate manually. I’ve set up a spreadsheet to do most of the number crunching. However, many people would like software that just does it for you.
  • WealthTrace Expert Available – My biggest problem with Quicken and Microsoft Money was that I didn’t know how to use either of them properly. When I made a mistake they multiplied on me. Soon the numbers didn’t accurately show my portfolio at all. WealthTrace has people who can help you with that. That’s very important because if you put garbage numbers into the simulators, the simulators are going to give you garbage numbers back.
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I was going to include a bunch of sample reports here, but I’ll live up to my moniker. WealthTrace includes a pile of sample reports here. I was shocked at the level of detail that you can add and the reports that you get back. If you’ve used a retirement planner like Personal Capital it is like comparing Little League to an MLB All-Star.

I should add that you get what you pay for. While Personal Capital is free (except for the cost of annoying phone calls), WealthTrace averages around $250 for the first year. They have different plans and one is a little cheaper and another is a little more expensive. So you can spend more on some features or save a bit if you need fewer features. The renewal is about $30 off, but again, it depends on the specific plan.

If you are looking to take control of your retirement, check out WealthTrace here. (In the interest of full disclosure, I do not receive a commission if you choose to sign up for WealthTrace.)

Filed Under: Retirement Tagged With: retirement planner, WealthTrace

Should You Max Out Your 401k?

February 16, 2022 by Lazy Man 7 Comments

Should you max out your 401k?

I was reading Joe’s Udo’s Retire by 40 article asking, “What if you always maxed out your 401k? The first question that popped into my mind was, “Should you even max out your 401k? I used to think you should definitely max out your 401k if at all possible. Now, I feel the opposite. I don’t find myself changing my mind on too many things. So how did I get here?

Can You Max Out Your 401k

When I started as a software engineer in 1998, I was making around $34,000. I lived with two roommates and drove an Oldsmobile Delta 88 that my mother passed down when she got a new car. I could live fairly frugally.

With those circumstances, I was able to max out my 401k. Back then the maximum was around $10,000. I was even able to contribute $2,000 to my Roth IRA. That was a lot of saving back then. It also helped us have the potential of a great retirement income. At least a lot of it was pre-tax money, so it didn’t feel like my paycheck was that much smaller.

Times have changed. It’s nearly 25 years later. The 401k maximum contribution now is over $20,000. The cost of living is a lot higher. I didn’t have student loans, because I had gotten a scholarship. That seems very rare today. Rents are much higher now than they were then. Good luck if you want to put away money for a house – getting a 20% down payment seems out of reach nowadays. Used cars and food are much more expensive due to the inflation we’ve seen.

It’s not a pretty picture when you look at how much you’d have to max out your 401k after all that. Also, consider that in almost all cases, it would be wiser to max out your Roth IRA of $6,000 first.

The good news is that you’d probably make more money. The bad news is that it might not be too much more. As a software engineer, I would have probably done well in either era, but if the median salary in 1998 was ~$38,000. Today it isn’t that much more, ~$44,000.

Maybe as you get older and move up the corporate ladder it would seem easier to max out your 401k. In some time, you’ll probably have a spouse, which is great for splitting expenses and growing income. However, there’s bad news. You may want to buy that house and you may have kids coming. It might not get easier to max out your 401k.

If you get through all that, you are ready to ask the real question:

Should You Max Out Your 401k?

For the longest time, I believed that if you could afford it, the best plan was to max out all your retirement options.

Now, I think very differently.

We maxed out those retirement accounts whenever we could. The only problem is that now, at age 45, it isn’t easy to get that money back out to retire early. Some bloggers have detailed a lot of ways and they work for a lot of people. The main premise is that you’ll be using the money in the retirement to fund your entire retirement. In that scenario, you can get a lot of money at very, very low tax rates. It makes a lot of sense.

However, we aren’t normal because my wife has a pension. I also have a couple of side businesses that I’d do no matter what. So when we try to get money out of those retirement accounts, we’re starting at a higher tax bracket. I’m not sure it is any better than the tax bracket where I saved the money. I’m sure that many of you don’t have pensions, but I know a lot of people who continue to earn an income in retirement.

Furthermore, when I was putting money in my 401k, the investment options were… not great. Some of the funds had fees over 1%. Fortunately, I knew how to look for expense ratios and did the best I could with the options available to me. I’ve heard those fees are better now. I hope so.

In hindsight, I may have been better off just putting the after-tax money in a brokerage. Maybe I could have bought dividend stocks and held them for a long time. Then I’d awesome qualified dividends that would be taxed at around 15%. That’s a good tax rate compared to the bracket we may be in during retirement.

The biggest benefit to maxing your 401k, in my opinion, is that it is forced savings. You don’t need to save the money afterward and risk spending it on mountains of Swedish Fish. You never had the money in the first place.

I’m going to suggest that maybe you should be careful about maxing out your 401k. Obviously, at some very high-income levels, it may be fine. At these levels, a Roth IRA isn’t an option. At the income level of the vast majority of people, I’m not sure it makes sense to max out your 401k. I think it’s better to max out your Roth IRA and then maybe do half the max of a Roth IRA and half of after-tax directly in a brokerage for investing in safe index funds.

What do you think? Does maxing out a 401k make sense for more than a few outliers nowadays?

Filed Under: Retirement, Uncategorized Tagged With: 401k

Finding Purpose in Retirement

September 27, 2021 by Lazy Man 6 Comments

Retirement means different things to different people. There’s a traditional view of sipping Mai Tais on the beach. I know a few retired people and I don’t know anyone who does that. I think it gets more boring. They are more likely to take their surfboard into the water at the beach.

I’ve been thinking of retirement a lot lately. I’m not sure if I believe in that traditional retirement of not working completely. When I tried to define “retirement” in 2007, I came up with five things that I would want in my retirement job:

  • Ability to work on projects that I enjoy
  • Flexibility to working as much (or as little) as I want to
  • Flexibility to when I want to
  • Flexibility to work from wherever I want to
  • Freedom from having to take orders (which I might disagree with) from others

The article that I wrote s a little rough around the edges, but the comments are exceptional for 2007. There are some bloggers who are still popular today (Early Retirement Extreme) as well as Brip Blap giving a great definition of “Work Optional”, something that’s seen some popularity in more recent “retirement” discussions. This is one reason why I love when people leave comments on blog posts. It’s a time capsule treasure.

I still agree with all those aspects of the ideal retirement job, or what is often called a “second act” today. For me blogging fits the mold. Unfortunately, blogging got a lot more difficult and the income has gotten a lot worse. It’s trending in the hobby category for me, which is fine as our financial situation is very good now.

While all those things are still great, they don’t do much to help with one thing:

Finding Purpose in Retirement

Even though I have these retirement qualities to my work now, it would be a stretch to say that I’m retired. On a basic level, I do customer service work for someone else, so that defeats almost all the bullet points above. Fortunately, there’s not a tremendous need for customer service much of the time. I still do blogging obviously. I also do dog sitting, which matches some of the above retirement qualities.

Unfortunately, I don’t find a lot of purpose in any of these things. Customer service is famously known as a thankless job. That said, I get so many polite people who say “thank you”, far more than the rude people. Dog sitting has some of the retirement job qualities, but not all of them. Overall, most people just want their dog back healthy with some good pictures that he/she had fun. Personal finance blogging has become a crowded field and producing more financial content for the world to consume seems, well, entirely unnecessary.

The first two (customer service and dog sitting) are transactional fulfilling someone’s needs. I don’t remember most dogs or customers from three years ago.

Blogging seems to have more purpose. For example, by digging up that old article from 2007, I feel like I uncovered a tiny piece of history. Like dogs or customer service requests, I do sometimes forget blog posts from a few years ago, but they are still there.

I’ve been thinking about how to do things that have more staying power than a transaction. I am working on starting another blog. I would like to self-publish a couple of eBooks. I don’t know if the eBooks will make any money as that’s a crowded area as well. However, I would be able to say, “This is something I created. Someone will be able to read the thoughts I had while on this Earth (and not with all the typos and poor grammar like my blog posts).” It doesn’t matter much to me that most people may not want to read those thoughts. It would be nice if they did, but it’s enough for me to know that they could.

I’m at a point in my life where I’m trying to put all these pieces of the puzzle together. There are those three jobs. There’s landlording our three rental properties that are becoming more and more difficult. In reality, our patience for dealing with them is running low. When I’m not doing those, I’m doing the basic errands of laundry, dishes, grocery shopping, cooking, etc. (some cleaning and yard work are outsourced). There’s also the kids and their activities.

I don’t know when I’ll reach a point of true retirement. Maybe we’ll get property managers or sell the properties. The kids will go off to college or live on their own someday. Maybe we’ll take fewer dogs as our mortgages get paid off. Even though, I can’t see a clear path to true retirement, it is helpful for me to think about what I’m going to do that’s going to have a purpose or leave some legacy. (Some may say raising decent human beings counts, but the human beings have to be decent and the jury isn’t close to deciding that one yet – LOL.)

So what do you think? How do you think you’ll find purpose in retirement? Or have you already found it?

Filed Under: Retirement Tagged With: Purpose

Fixing My Biggest Money Mistake

September 21, 2021 by Lazy Man 1 Comment

Last week, I wrote about My Biggest Money Mistake. It was not a money mistake that most people can identify with. I over-optimized and put too much into retirement accounts. It’s great if we are looking to maximize our net worth. It’s very poor if the plan is to use the money to pay expenses now – 15 years before traditional retirement age. As I mentioned in my previous article, this is a “good problem” to have. We’ve been extremely lucky that most of our personal finance plans have worked out well.

Overall, around 90% of our money is in real estate equity or a retirement account. Half of the real estate equity is our primary residence. The other half is in rental properties. We’re a few years away from owning our primary residence which will largely eliminate our biggest expense. The mortgages on the rental properties will be paid off in a few years as well, giving us a supplemental income. The rental property equity simply looks like a big number on paper a screen.

Getting the money out of the rental properties is straightforward. We could sell one to pay off the other two and get a smaller income stream now. We could sell off all three and invest the money in an index fund. If we did that, we may get around $10,000 a year in dividends. However, if we stay the course, I estimate we’ll get $30,000 a year in rents after all expenses once the mortgages are paid off. I don’t like the idea of selling the properties at this time.

Getting the money out of the retirement accounts early is a little more complicated. Actually, it can be easy if you are okay with paying penalties. However, the whole reason why I put the money in a retirement account was to maximize the growth and the amount available after taxes.

When we look at retirement accounts there are two basic types – those that are invested with pre-tax money and those that are invested with after-tax money. Pre-tax retirement accounts include 401ks, traditional IRAs, and government TSP plans. After-tax retirement accounts include things like Roth IRAs, Roth 401ks, and Roth TSP plans. With the after-tax Roth accounts, you’ve already paid tax, so you don’t need to pay tax again. For this reason, the only thing we need to think about with Roth IRAs is being old enough (age 59.5) that we don’t get penalized.

However, with the pre-tax retirement accounts, we have to pay regular income taxes on all the money we take out. Right now, that actually isn’t too bad. If we earn up to $80,250, we’ll pay only about 12% of taxes. If we earn less than $171,050 we’ll be in the 22% tax bracket. If we earn less than $326,600 we’ll be in the 24% bracket. That’s a ton of income, so I it’s not worth look at the 32% tax on incomes over $326,601. This almost guarantees that our effective tax rate would be less than 20%. (If you didn’t know, you pay all the taxes as you move up in the bracket, landing in a high tax bracket doesn’t mean all your income is suddenly taxed at that number.)

It’s hard to imagine we’d make over $326,000 in retirement, but it isn’t impossible. My wife may get a $60,000 pension that’s indexed for inflation. We might have income of $45,000 from rental properties (which will naturally adjust for inflation). We have a few other income sources (blogging, my dog sitting, etc.) that could add up to around another $50,000. My wife may continue to work that brings home an income. That would be around $150,000 before we account for withdrawing money from the IRAs. There’s not much room left in the 22% bracket, but still plenty of room in the 24% bracket.

So we wouldn’t pay too much more than the expected 20% in taxes except for two possible scenarios:

1. The brackets get lowered over time. I think there’s a strong possibility that this happens. We can imagine that at some point we want to fix the national debt and one way to do that is to raise taxes by lowering the bracket thresholds. If the $326,000 bracket gets dropped to $200,000, we might risk running into the 32% bracket easier. Alternatively, the tax rate may go up, which would conceivably be the same thing.

2. At age 70-something, we might have to pay Required Minimum Distributions (RMDs). I write “70-something” because the RMD age has changed recently and there’s legislation for it to potentially change again. In any likely scenario we’d be forced to take a percentage of our nest egg as regular income at age 70 or later. Since my wife and I are 45 years old, we may have 25 years of compound interest. With that much time, our pre-tax retirement accounts could be a big number, leading to taking a big distribution in our 70s. Social Security will still exist (in some form) and some simulations say that will be another $60,000 of income.

Some combination of #1 and #2 will likely happen. It’s always difficult to plan for “what ifs” in the future, but it never hurts to be prepared.

I’ve been writing a ton about taxes, but having access to money earlier rather than waiting until age 59.5 would be ideal. Fortunately, it’s possible to get access to the money early, while also potentially limiting high tax brackets in the future.

There are two ways we can access our IRAs early:

1. We can take Substantially Equal Periodic Payment (SEPP). That means that we commit to taking an amount of money out of our IRAs as determined by an IRS formula. We’d have to continue it until age 59.5 or face big penalties… with interest. It’s not a bad plan, but I don’t like to have to withdraw money based on what an IRS formula says we should. I also don’t like to be locked into 10-15 year decisions.

2. We can use a Roth IRA conversion ladder to move money from our pre-tax IRA to a Roth IRA. We’ll have to pay the taxes on the income immediately, but that sets up two very good scenarios. First, we can withdraw the money, tax-free, after 5 years. Second, we can let the money grow while not having to worry about taxes. The first scenario would give us access to money, penalty-free. The second scenario gives us the flexibility to decide not to take the money if we don’t need it.

I’m 90% sure that the Roth IRA conversion is the way to go. Getting access to money tax-free in 5 years is about as good as we could hope for.

There’s one small problem with a Roth IRA conversion. Paying taxes up-front can be tough. If we were to convert $50,000, we’d have to pay $10,000 in taxes (and we can’t use that $50,000). When you are trying to get through 5 years because you don’t have access to that retirement money, it’s not easy to come up with $10,000. That’s when I had an idea. Since you can take out Roth IRA contributions at any time, we could use our previous Roth IRA contributions to pay off the taxes on our IRAs. Under normal circumstances, you won’t want to pull those Roth IRA contributions out. However, pulling $10,000 out means putting $50,000 in, so I’m sure the personal finance experts won’t mind.

At the end of the day, all this essentially guarantees us paying around a low 20-ish% marginal tax rate, while giving us access to money in five years. Locking in that tax rate now is valuable, because I feel that taxes will rise in the future. Of course, I’ve felt this way for a long time and it doesn’t happen. Politicians don’t like the idea of raising taxes as it’s unpopular with almost all voters. At some point, I think we’ll simply need to do it.

Filed Under: Investing, Retirement Tagged With: Money Mistakes

My Biggest Money Mistake

September 28, 2021 by Lazy Man 7 Comments

My Biggest Money Mistake

For whatever reason, people love to ask me about my biggest money mistake. Other bloggers will ask it when they are compiling a top ten article. For a few years, I had gave some answers, but I didn’t have any strong conviction behind them. There was a brief period of day trading after college. I also bought a convertible after college. Basically, the “after college” time wouldn’t make many of my financial highlight reels.

However, in hindsight, I don’t think either were big money mistakes. I didn’t lose too much day trading and I learned a lot. I still have the Mustang convertible today (20 years later) and have paid roughly about $1400 a year (or a little more than $115/mo.) for it. Things could have been a lot worse.

I think it’s difficult for many people to talk about their biggest money mistakes. In about 99.9% of the cases, it is because they are embarrassed that they made the mistake in the first place. I’m finding it difficult to write about my financial mistake, but for a completely different reason. My biggest money mistake comes from a situation when it’s considered a “good problem to have” such as having two great starting quarterbacks or being at a great buffet and realizing that you only have one stomach. (Does anyone remember buffets?) Because most people would love to have this kind of problem, it may sound tone-deaf. If so, I’m sorry in advance.

I Saved Too Much for Retirement

For years, I made it my mission to max out my retirement accounts the best I could. As a software engineer, I was pretty successful. As a blogger, less so. My wife, as a pharmacist was able to max out her retirement accounts as well. It turns out that if you max out your retirement you can have a million dollars in 20 years. Neither of us are there, but, as you can imagine with our retirement accounts are not small. Given the stock market run of the last decade, maybe a lot of people find themselves in this situation.

In general, putting more money into retirement accounts is a smart move. You get to delay paying taxes during what is, for most people, their peak earning years. Then you can pull out the money and pay taxes on the smaller amount because you don’t have your main income. The downside to most retirement accounts is that you can’t easily access the money until you are older, typically around age 59.5.

Having too much money in the future isn’t the problem. The big money mistake is that the money we have access now is 7% of that retirement nest egg. That’s not a lot of liquid cash.

I should have planned it so that we set aside 35-45% of the money to use now and 55-65% that we can use later in retirement accounts. It’s a lopsided situation, where it feels like we are just getting by now, but are set up to have a lot more money in the future.

That’s why we stopped retirement contributions, with the exception of Roth IRAs. We continue to contribute to Roth IRAs because we can pull those contributions out at any time without a penalty. In fact, the ability to do this may turn out to be very important in the future, but we’ll put that aside for the follow-up article.

There was another reason why we put so much money for the future. Simply put, we could. We didn’t have kids for a long time, so the dual-income, no kids gave us a lot of financial flexibility. More importantly, we have my wife’s military pension and rental properties to help supply income before retirement. Unfortunately, we still have to wait five years for the mortgages on those rental properties to be paid off. They won’t produce income until then.

There’s one other “problem” with this lopsided situation. When you combine a pension, rental income, and a big IRAs it has the potential to lead to a high tax bill. The IRA disbursements are taxed as regular income which may be 37%, or (much likely) even higher in the future. I’ve forgotten a lot of math over the years, but if memory serves, the commutative property of multiplication means that it doesn’t really matter when you pay the taxes, you just want to pay the lower amount. If we had invested money in a regular taxable account, it could be subject to long-term capital gains rate which maxes out at 20%. The money could also be invested in a way that paid qualified dividends that would realistically max out at 15% for us. (You need over $500,000 in qualified dividends a year for a married couple to get to the 20% range.)

If we could pay taxes of between 15-20% it would be a lot better than paying taxes of 40%.

Fixing My Biggest Money Mistake

Sometimes there are problems you can’t fix. As the saying goes, you can’t put the toothpaste back in the tube.

Fortunately, in this case, there are some things we can do. OThe solutions that I initially found were less than ideal. However, with a little more time and focus, I think I’ve found some ways that it won’t be so terrible…

… but that will be an article for another day. Update: Read Fixing My Biggest Money Mistake.

Filed Under: Investing, Retirement Tagged With: Money Mistakes

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