Transcription
In this video, I'm going to show you why there's a huge gap between answering the question, "Can I retire?" versus "How do I retire?"
See, most people in your shoes think they need to have a certain amount of money saved to retire successfully. And to be fair, there is some truth in that. But, this is where the problem lies as well. If you're only focusing on how much money you need to have saved, you're likely overlooking the importance of where you need to save. And in this video, I'm going to use Jamie's situation to show you why being intentional about where you save as you get closer to retirement can help you save big on taxes once you're in retirement, but also lower your health insurance premiums before age 65.
Now, if you're new here, welcome. My name is Jacob Duke. I'm a certified financial planner and the owner of Rivertree Wealth, a retirement planning firm that helps people just like you plan smarter and retire better.
Now, as I go through this case study here today, I'll likely refer to something called the Important Numbers Data Sheet here for 2026. And this is what my team and I use every single day as we're building plans for our clients. And I want you to have a copy as well. You can grab it for free and use it for your planning here in 2026 by using the link in the description below.
All right, let's go ahead and take a look at Jamie's situation and see where she is right now so we can build her a plan to retire at age 60.
All right, so here we've got Jamie and right now she is age 55, lives down in Texas. And a little bit about her net worth situation, she's got $25,000 bucks in cash. She's single. Um she's also got about $755,000 saved so far for retirement. Now, that's made up of her 401k, a little bit in brokerage, which she's kind of dumping as much as she can in every single year, anywhere between $5 and $10,000 dollars kind of what she's got going in there. And then she has about a six uh $60,000 bucks in an old rollover IRA from an old job. So, most of her money, nearly all of it, is tax deferred. That's the main thing to see here on this screen. She does have a property that she owns. She owes about uh $200,000 on that still with about a thousand dollars a month as a payment on it.
Now, what does she want to accomplish? She's 55 right now, wants to retire at age 60, expects to spend about $4,000 or so a month kind of on everything but her mortgage if that mortgage is still there. And right now for her health care costs, I've got her paying about $7,000 bucks a year for her health insurance premiums uh before 65. Afterwards, it goes down to part B uh and then also a Medigap policy on top of that what is what built in here. So, um so that's her ACA subsidies versus premiums paid for private insurance before 65. Um so, now she's making in terms of her income, she's making about $130,000. She will have uh expected to have around $3,100 at 67 for social security benefits. And I'm going to leave this here for now, you'll see why in just a second.
Now, she is maxing out her 401k, which is a very important part of this scenario we're going to look at. So, she is saving a big chunk of money. She's getting the catch-up on top of being uh the normal contribution since she is over age 50. And for right now, she's spending about $4,000 a month as well on top of that thousand dollar mortgage every single month. So, that's her current incomes, her savings, how much money she has, and where everything is going.
Now, what I want to evaluate is number one, can she retire by age 60, which is about five years from now, but then also two, how can she do that well? So, that's where we're going to spend most of our time. But first, let's see, can she retire successfully?
Now, as we look at this, you see, "Hey, 85%." You're like, "Jacob, that doesn't say 100%. Is that good or bad?" Well, in my opinion, if you're anywhere in that 80 to 95% range, 85% is actually a perfect number in my opinion. If you're in that range whenever you're thinking about retirement, I think you have a green light. Now, just because you're at 85 doesn't mean you can just do anything you want at any point you want. It means that you can retire because there is the human element of being able to pull back on your spending or change things as you need to as the world around us evolves. But, here's what I can say. I think she can retire confidently, but it's not 100%, meaning she can't just go do everything she wants to do at all times. So, can she retire? Yes, but can she live a lavish lifestyle? Maybe not just yet.
So, now that we've kind of addressed can she retire, what I want to really dig into is how can she retire? So, what I've got here is uh the first thing that comes to mind whenever we look at this, if she only has tax deferred accounts and she keeps maxing out that 401k, this might become a problem before age 65 because she could end up having minimal uh cash or brokerage account to keep her income low, which would increase that premium on those health insurance subsidies.
So, if we go to cash flows really quickly, we can look at this and see, "Hey, this is her income going up just a little bit every year until 2030 in which she'd have a partial year. She'd retire halfway through that year. The rest of her income, this amount here, would actually have to come from her accounts. Now, we see no income starting at 61 all the way through 67. I've got social security starting there at 67. And um you can see how much money she will need over here on the right from her portfolio to cover her different needs from expenses, but also a little bit of tax payment.
Now, what I want you to notice here is the tax payment is zero in 2031, so that's the first full year of retirement, and then it is very minimal in year two. Now, why is that? Well, the system right now is saying that she would spend down her cash and her brokerage accounts first. So, that means her IRA would not be tapped or her 401k money, any tax deferred, would not be tapped until after that is completely depleted. So, if we look at her accounts really quick, we can see that under the current plan, under that spending model taking from those accounts first, we can see that if she retires at 60, by the halfway through 2031, halfway through her second year of retirement, she's basically eliminated all of her taxable money. All of her money that's her freedom money. She can do whatever she wants with it. It creates flexibility. It is all gone. Meaning, the only place she'll have to pull money from is going to be her 401k and her traditional IRA. By that point, they'll probably rolled into the IRA, so they'd probably be the same account. But either way, it's tax deferred money that she would have to use and pay taxes on.
Now, if we go and look at this from a tax perspective, here's the problem. What I want to look at is if we go down to uh let's see, 2031. This is the first full year, no other income, and she's using the brokerage account and cash, right, to get to this point. She's going to have minimal income, right? She's going to have a few dividends and qualified dividends and interest and so forth. Maybe some capital gains realized, but uh if you follow anything that I do, you know that capital gains, they could be taxed at 0%. And I've got videos that I've done on that. So, that's why she can have $19,000 of capital gains here in 2031 and actually create no taxes because she'll have this much of total income. She'll have a uh standard deduction perhaps of this much at this point. And then also her taxable income would be this, but that taxable income would be long-term capital gains or qualified dividends. Therefore, there would be no taxes to pay on that because of her income levels. Again, you can see this on the data sheet if you'd like to go grab it.
Now, what's important to understand here is 2031 is this way, but what about 2032? Well, again, we've got um uh minimal taxes to pay here, right? But, we do have taxable amounts that are higher and higher. Well, why is that? Well, she's going to have to start taking some money from her IRA or her 401k. Now, if we keep going and we look at 2032 2033, I'm sorry. This is the first year, okay, that we have to take all of our income from her 401k or her IRA, her tax deferred dollars. We have no other brokerage or cash money to pull from at this point because she spent all of her taxable money first. Now, you see, $90,000 has to come from her IRA in this situation. Now, what this does is it absolutely increases her tax rate, but now it also is going to likely increase her premiums on her health insurance. See, if we operated under the assumption that $40,000 was the the total modified adjusted gross income that she could have before she ever started paying any premiums or went above $100 a month on her premiums, that might be a good assessment. So, $40,000 is probably a good number to say, "Hey, that's the best subsidy you could get." Now, if she goes above $70,000, she might not qualify for any subsidy. So, in this scenario, you could say, "Hey, what if we didn't have any subsidies anymore because we only the only place we had to pull money from was the IRA." That's a problem. So, yes, she's going to pay more taxes. You can see that $90,000 comes out to about a 10% effective tax rate right there, total tax being paid at $9,500 bucks. But on top of that, now you got to think about what is the increase in the total premiums being paid there? Now, I'm not going to show you what that is, but all I know is that it would increase. It would go up. By how much? That depends on the plans you're choosing and everything. Uh there's a little nuance around that, but all I know is that it would increase your premiums on your health insurance.
So, the question is, what if we saved differently right now over the next five years leading up to age 60 to change this potentially? Is that possible? So, let's look at that. What I want to do is I want to go back and I want to go back to this screen here. And I said, "What if instead of maxing out our 401k, what if we simply contributed up to the 4% match?" So, we put 4%, the company puts 4%, and right now the system is assuming that everything beyond that is being saved into the taxable brokerage account, okay? So, what we've got is we look at the retirement details, we can look at uh I'm sorry, if we go back to cash flows, we can look at accounts and we can see under the current plan, you see the taxable account. This is the little bit of money going in every single year that's extra cash flow she's not spending, it's being saved here. So, this is with her maxing out the 401k, you see that number going up pretty quickly, but this one's kind of going up, but not really. All right.
Now, if we switch over to the 401k match plan where we're only contributing up to the match, then what we do is we have lower amount of money increasing here in the 401k, but you can see that the taxable brokerage account has a lot more going up over time. So much so that she might have $252,000 saved in that by age 60 at retirement. Okay, so let's look at this and what happens here is if you might notice once we get to 60, we keep going. We've got upwards of 4 years, 3 to 4 years here of brokerage account money to live on before it's all the way depleted. Now, if I go back on my current plan, you'll see this runs out at 61. See that? So, two extra years of are created a potential taxable income if we start saving as much possible now to that account compared to maxing it all out in the 401k.
So, how does that translate to to the tax side of things and the premium side of things on the health insurance? Well, to be fair, here's what I want to show you. Under the current plan here and we'll just choose next year 2027, the first full clean year. 2027, what we can see is that, you know, $100,000, that's the amount of income she would have because the $30-something thousand dollars she's saving in the 401k doesn't really fall onto this at all, but you would see that her total tax to be paid by maxing out her 401k is about $13 grand, $13.7. Right, so if we change this to say what if we only match the 401k 4% in, you can see the income number went up by $28,000, almost $29,000. But also, her total tax bill went up by about six $6,300 as well. Right, so $6,000 worth of taxes to get $20,000 over into $28,000, $30,000 dollars over into the brokerage account. So, there's a price to pay to get the money into the brokerage account. I fully acknowledge that, but what's the benefit? Let's zoom out. Let's go back down the line here and say what if we go out to that 2032 number. Let's start with 2031 first. Remember here we had no taxes to pay in 2031 even under the first scenario where we were maxing out the 401k, but under the 401k match when we're only putting the 4% in, the rest is going to brokerage, we can see we pay no tax here in 2031. 2032, we pay no tax again. Okay. Now, 2033, we pay no tax again. 2034, now we start paying some taxes. See, we've got to start taking money out here in 2024 up to that to fill up the rest of it beyond the brokerage account. But what you'll notice is even in 2034, I forget what age she would be. I think it was 63 or 64, we're still at $33,000 of total gross income. Now, that's under the $40,000 assumption of that's what she would need to be under to get the full subsidies, right? So, because of the fact that we're able to have more brokerage account money that we're pulling from and it takes longer to to wind all of that down, what we can do is we can actually extend out how long she's going to qualify for the subsidy. So, yes, we paid more tax on the front end to save that way while she's working, but what's the benefit on the back end? Perhaps she's able to recoup all that money by having those lower premiums for that many more years when she is to that point in retirement.
Now, what if I keep going here? I go to 2035, this will be the first full year under the 401k match that she you know, if she's only putting up to the match in the 401k that she would have no brokerage, no cash. All that would have to come from the traditional IRA or 401k and you can see in this scenario, you know, if we're still under 65, I think she is at this point, she's going to have higher premiums and her tax bills obviously going up. Now, what that does is it extends out when she'll have to start paying taxes like you saw, so she'll pay less taxes before 65, but also keep more of those premiums at those lower rates because higher subsidies would be qualified for.
Now, to make this go even further, I want to tell you a little trick. When we go back to how you derive or how you pull your income from your accounts, yes, we can start and just say pull all of it from taxable first and wind that all the way down to zero and then we go to the IRA. But instead, what if we used an income stacking approach where we take a certain amount of money from a particular account and then we add on top of that from the other accounts. So, what I want to do is show you what if we pulled what if we did the 401k match like I just showed you in that last scenario and then between ages 60 and 65, those first 5 years, what if we pulled $16,000 per year out of the IRA and then everything else needed above that would come from the brokerage accounts.
Now, look at look at the cash flows are really quickly again. I want to show you the difference here. Go to accounts. Under the 401k match, which we I think this is the better option for her instead of maxing out 401k, get as much into the brokerage, but still get the match on the 401k. That's what we just looked at. We can see that we run out of taxable account money in 2033. Now, if we pull $16,000 per year out of her IRA from 60 to 65 and we do the 401k match strategy I just mentioned, click on that there. Now, we extend out how much she has in that brokerage account for another year or two, right? So, we went from running out here to running out here. So, a full 12 months, a full year is actually extended to it by taking that $16,000 out of the IRA from ages 60 through 65. Okay.
Now, why $16,000? Well, if you look on the important numbers data sheet, you'll see that at least here in 2026, the standard deduction is about $16,000, slightly more than $16,000 for the single filer. Okay, so if we use that number as a minimum baseline, it will likely increase before she ever gets to age 60 to 65. So, it would be much higher than that. That's how I'm getting that number. So, for sure we can pay no tax on the $16,000 IRA distribution because the standard deduction at a minimum is covering it. Okay.
Now, if we go to the tax tab, I can show you this even more because if we say details and we go out to 2031 just as an example, we're using the 401k match and then also this distribution of $16,000. That shows up right here, okay? $16,000 shows up right there and that's going to be the same thing year after year, 2031 and then 2032 again and then 2033 again. So, what you'll notice here if I go back to 2031, you'll notice that she's able to pull $16,000 from a taxable source, meaning it would be taxed as income, but her tax bill is only $331 for the full year. Now, why is that? Well, if you look, we've got some taxable interest, we've got some ordinary dividends, we've got qualified dividends and then we've got capital gains within the brokerage account. Those capital gains are taxed at 0% again. I'm not going to belabor it, but you can look at the other videos I've done on tax gain harvesting. But what you'll notice is her total taxable income is $37,000 if you add all that up. Her standard deduction is projected to be at this point higher than $16,000 being $18,000. Okay. Whenever you do that, you say, "Well, our taxable income is $19 grand. How is it How's our tax on that? It should be the 10% bracket." How's our tax only $331? Well, the majority of that $19,000 is actually long-term capital gains or qualified dividends, which is going to be at that 0% capital gain bracket. Okay, so that's how she can have this much money, right, coming in, pull a little bit from the IRA, stack the rest from the brokerage account on top of that to meet her income and expense obligations and her needs, but also what you'll notice is her total modified adjusted gross income is still less than $40,000. So, she's getting money out of the IRA tax-free, still qualifying for the subsidies and getting to pay no tax on the actual capital gains in the brokerage. That's a good recipe for success.
Now, the beautiful part here is that this goes beyond just 1 year. Do it again in 2032. Look at this. Same thing, actually lower taxes the following year. Okay. Let's worry about 2033. Again, right? $16,000. Our income still below the $40,000 mark that we set just kind of as a number. 2034, again, $16,000. No tax. 2035, okay, look. We pull a little bit more out of the the IRA, $16,000 plus a little bit, but again, we're using that brokerage account on top of that. 2036 will probably the first year yeah, 2036. But by 2036 if I'm not mistaken, she would be 60 65 and on Medicare. Let me check real quick here. 2036, yeah, look at that. So, we made it to Medicare without paying any premiums on health insurance because of where she saved, 401k match, right? Put the 4% in, put the rest in the brokerage. We are pulling money out of the IRA up to a certain amount using the standard deduction to our advantage over those first few years of retirement. We're staying under that still and by doing all of that, the benefit is that you're not actually hurting yourself from a retirement perspective. See, if you look here, we can see that we've got this option chosen. We started over here on the right with the current plan, 85% a million or so dollars left over. Now, we're doing it this way where we're contributing up to the match. We're taking putting more money into the brokerage account for that flexibility before 65 and we're using this strategic IRA distribution before 65 as well. Click on that. Look, you dropped one percentage point in chance of success and a little bit money at the end of life is still there, but at the end of the day, you're saving a lot more money on those premiums and taxes before age 65.
Now, if we want to increase this number, what we can do is say what if she got really diligent on this and intentional and said, "What if we lowered our spending before retirement of these next 5 years? What if instead of $4,000 a month here on retire our normal spending monthly, what if we lowered it to $3,500 per month?" If we refresh this, we can see that by doing all the things we've done up to this point and saving just $500 more per month, $6,000 a year, we increase that chance of success higher. We're back to the same level in terms of ending portfolio value. If she wanted to get really crazy, she could lower it by $1,000 a month, right? And that would increase it even further. And so now we're talking.
So, the whole point of showing you all of this is from the get-go, she could retire, okay? 85% chance of success. Just put the money in the 401k. Easy. Max it out. Get every Get the match on it, whatever. That's fine and it's not a terrible strategy, but the idea here is what if you could do it better? So, what if we just matched on the 401k, put 4% in, so you get your 4% match. Everything else overflows into the brokerage. Yes, we know we're going to pay a little bit more money on taxes along the way, but we're going to make up that in folds on the back end by saving on health insurance premiums and no tax payment in the future. And also, if we want, what we can do is we can lower our spending now, bear down just a bit to increase that chance of success, potentially even uh move that retirement up a year if we really wanted to. So, she has a lot of options.
So, hopefully by watching this, you've noticed that can you retire is one question, but how do you retire is a completely separate question and how you save in these last few years leading up to retirement is so important. And if this is the type of stuff that you're looking for from your retirement planner or that you need help with, feel free to apply to work with us here at Rivertree using the link in the description below. Happy to have a conversation to see if we're a good fit. Otherwise, I hope you have a great rest of your day. We'll see you in the next video. >> [music]