Don't Do Any Roth Conversions Before You Ask Yourself THIS

I often hear someone say "How much and when should I convert my assets to Roth?" when in reality the question should be "How can I live my ideal retirement and minimize taxes along the way?"

Two very different questions.

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Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Chapters

• 0:00 Understanding Early Retirement and Financial Independence
• 3:21 Work, Retirement, and Recreational Employment

Transcript

Speaker 1: 0:00

My pet peeve is when people go like this. I think I could get away with spending 8,000 a month in retirement. I could get away with only one trip in retirement internationally. Retirement is not about getting away with anything, and I will be the first person to tell someone I really want you to work two more years so you can actually spend what you want the rest of your life, and I'll be the next person to say why the heck are you working? You told me you did not want to die with $10 million, so what are you doing? I will be both of those people and I joke that I'm the meanest advisor. I'm not actually mean. I just want to make sure you don't run the risk of running out. And you also are not mad at me. When you're 80, with $10 million going, hey, why didn't I spend more along the way if I was in a fine spot to do so? So today's episode is about me going over the biggest risk that people make when I really see it and this is on a consistent basis that is not should I do Roth or pre-tax or any? Hey, umbrella insurance? To what level of a policy do I need? I have plenty of episodes going into specifics on that Today is the number one biggest thing that I see people struggle with and I'm going to explain it in just a second for you guys which is understanding when to optimize and when not to, because this is a common, common mistake.

Speaker 1: 1:19

Now, if you don't already know, my name is Ari Talbleeb. I am the host of the Early Retirement Podcast. If you're listening on the podcast app great, I'm going to continue to put all these episodes out there. If you're watching on YouTube right now, you can see on my screen the most recent review that I'm going to go over right now. Now, this was a day before my birthday. My birthday is July 24th. So this person says this is IggyDad68. I enjoy Ari's approach to the topics he covers and, as someone in his mid-50s, I think this is one of the best timely and informative sources for those of us focused on an early retirement. Thank you very much, iggydad68, for that question review.

Speaker 1: 1:57

Should I say Now this content that I make? I try to be very intentional. I'm not making content on hey, here's the best new credit card of 2024, or here's how you should use these points and use this credit card that stuff people like making content on. I just don't. I don't think it holds as much weight. I want to make content on very specific topics like Roth conversions, on withdrawal strategy, on healthcare, on making sure that you retire early with confidence.

Speaker 1: 2:27

Now, what is early? That is a common question I receive. There's no real definition to what is early. Some people know of the FIRE movement. Now, the FIRE movement I do not like. The FIRE movement stands for Financial Independence Retire Early.

Speaker 1: 2:42

I don't believe in that movement because there are a lot of people not most of you, but a lot of people that are in their 30s or 40s that are working really stressful jobs sometimes two of them to try to save as much as humanly possible to retire at 40, and now they sacrifice their health. They don't know what they're going to do in retirement. I don't subscribe to that. I believe in this other definition I made up. Says financial independence, not retire early, but recreational employment. Most people don't want to do nothing. They want to do something. They just want it to be fulfilling and they want to do it on their own terms. So what do I mean by retire early? Traditionally, anyone from 50 to 65, that goes.

Speaker 1: 3:21

I don't know if I want to work forever and if there's a day that I no longer want to work, I don't want to have to. That's what I care about. I love what I do. I don't see any instance where I would ever stop. But I want to know if business changed or, you know, media outlets changed or whatever it is. I don't feel like, oh my gosh, I have to go work a job I don't want to, so that's all. Recreational employment is Now.

Speaker 1: 3:44

Here's a pro tip most of you might not know Most of my clients don't actually retire early. The minute I tell them they can, they go out really good to know I'm going to keep working and it turns out actually kind of like my job. I just was stressed, thinking I had to be here, and now I can ask my boss questions that I otherwise wouldn't have asked, because I was worried that if I got fired I, you know, wouldn't have to go get another job. Now that I know I'm here on my own terms, that feels different. So the point here in early retirement, everything I'm going to go through on today's episode, I don't want you to over optimize. Now it's a. It's a tough balance because I joke with people and say my nickname is optimized, because it is. You can see here, this is one of the coolest gifts I've received. It says anti-cookie cutter jar. Love the pod Because I don't believe in cookie cutter approaches. This is one of the top three gifts I've ever received. And when people say, oh, I think my risk tolerance is a 2 out of 10 or an 8 out of 10, I go, hey, that's not going to help you retire. Whether you're a two today or an eight tomorrow, that's not giving you the confidence. So when I'm talking to people about retirement planning and when it makes sense, I'm naturally a conservative planner. It's just who I am. So what I want to make sure we're doing is we are certainly optimizing. I do not want you to pay more taxes than necessary. But at the same time, I see a lot of people do the following, and this is why I'm doing this episode right now. This is the number one reason. Number one thing should I say that people struggle with? Now I'm doing this episode right now because I just got out of a client meeting where I was discussing it with them and they came to the meeting and I actually let's see, I actually have an example that I wanted to show because the timing of this was just interesting, so bear with me for two seconds. I try to pull up stuff on the fly and try to make this as authentic as I can sometimes, so if I don't see it in two seconds, I will let you know. Oh no, I got it right here, okay. So I'm going to put a screenshot of this. My editor is awesome and he makes my life really easy. So here I'm going to put this on my screen, but I'm going to explain it right now. So this is a comment on a recent video from 31 minutes ago you can see it right here from Linda Pipkins 4592. And it's a really dangerous question that she's asking. She doesn't know it's dangerous, but she says this when is the best time to perform Roth conversions for a couple who is 64 and 60, with a pre-tax retirement value of 2.5 million? Also, how much per year? So what she's saying is not she doesn't think it's a dangerous question. She's saying look, we're 64, we're 60. Most of our money is pre-tax, I imagine. Should we do conversions? When should we do it? Just help us out a little bit. So she's not thinking she's doing any harm, but the harm is. Let's assume I just answered her question. Okay, this would be the equivalent of doing the following Me going to a doctor and going look, my knee really hurts. I can tell I need surgery. I can just tell, okay, okay, so just where should we operate, is it? Do we go out the back? Do we go from the front? Now some of you are like, okay, well, we can tell you're not in the medical world because no one says out the back, okay, you can make fun of me. But my point here is she's already saying we're doing conversions. This is no brainer, so like, let's just talk about where we can do the incision. What we, what I'd to do with her if I could speak with her, is say how much would you love to spend? Not what you'd get away with, and she might go I'd love to spend $10,000. And spending more than $10,000 does not add to my quality of life and I'm already there, so let's get to it. How much conversion should I do? And that's when I say how much would you like to gift to children or, you know, charities? And she'd go. I already included that in my 10,000 a month. I'd say great, awesome. How much would you if? Dream world once again. How many trips would you like to take and any cars you'd like to purchase? And just talk to me. Dream world, you have $20 trillion. What would you do? And she goes Ari, to be honest, I already accounted for all of that. That's in my 10,000 a month. I'd say great. Now let's start discussing Roth conversions. Because a Roth conversion is you intentionally going happy to pay a little bit in taxes today because if I don't in the future I'm going to get whacked by a huge tax bill. So I like Roth conversions. They add value. But too many people come and they hit right to the Roth conversions. I'd want to go to this person and go great, how much would you love to spend? And she might go. You know I put 10,000 a month in my plan, but if you told me that I could be okay by spending 12,000 a month, you know I'd find a way to spend another 24,000 a year. We'd fly first class, we would do some of these different things. I'd say well, the point in life is not to maximize or optimize Roth conversions. The point in life is to optimize your life and, in light of that, be really intentional with tax strategy. And sometimes I'll tell someone even if you spent everything you tried to spend. We're going to have to do conversions because of how significant your RMDs are going to be, because you also have a pension and rental income and Social Security. Other times I'll say, look, I want to do conversions if we're going to get crushed by taxes, but I don't want you to save the most in taxes over your life. I'd rather you spend more and enjoy it, and so I actually don't want you to do conversions to this degree. So don't head right to the hey, should I be doing charitable giving and should I buy a home and like, should I do conversions? All the financial stuff should come after you've really dreamed out big what would you love to do, not what you could get away with. So that's the number one thing. I see People go look, I think I could spend 8,000 a month in retirement. I think we'd be okay. I'd rather you not be okay and I'd rather tell this person let me give you an option. You can work six more months. We can do a Roth conversion at this time. We can do five other things. Which of these options resonates most with you? Let's use my surgery example. I didn't have to get surgery recently and I was about to get surgery and then my brother asked the question and I sent email to most of you on this. If you're on my email list and if you're not, just shoot me a note and I'll add that to you. I'll add you to it, ari, at rootfinancialpartnerscom. But the point here is my brother said hey, so I'm in LA, I flew to Philly for this operation. And my brother said, hey, if we lived right next door, what would you do? And he said I'd try one more injection. And my brother's like well, that's our call to make. Well, you're about to just operate on us. And he was going to operate on me and he's the best doctor and I wanted him to operate. But I didn't injection instead because I made the call and he was being nice. He's like look, what if this doesn't work In three weeks? You have to fly back out and can't work as much I go hey, I get that, but that's my call to make. Same thing here with this person, this person here, linda Pipkin, 4592,. She gets to decide do I want to work another year? Do I want to travel more? Would I rather? Sometimes I'll tell someone look, I'll tell someone. Look, you're saying you don't love your job right now, but you're still working. You don't have to keep working, and by you continuing to work and add to your 401k, you're just adding to a future tax burden. So I'd rather you retire earlier. Do more conversions than we initially discussed. I will go both ways, but the point here is this person's already skipping to surgery and you don't want to do that. So that's the biggest thing, biggest mistake I see. So I really want you to dream big Now. I have a list here of master goals, of things to think about, milestones, all these things that most people overlook. So if you want this, you can see it on my screen right now. You can also get this inside of my early retirement academy. All of these checklists, these are the things that I would encourage you to really start going through before the Roth conversion stuff. Do you need help deciding when you want to retire? Do you want to slow down and work part-time? Do you feel confident about how much you could spend? When are you going to collect social security? Let's assume you did stop working tomorrow. What would you spend your time doing? This is going to make sure there's nothing you overlook, and some people, for example, come to me and they want to do a conversion and instead I'll recommend they buy that second home they really would love. And they come to me years later going I was about to do a $2 million Roth conversion over the next five years and now I'm way happier with this home. So don't let the tax tail wag the life dog, which is what I see oftentimes. So all of these academies, all these resources, a quicker podcast episode today. But this is important because a lot of you guys want to go right to the optimization, which is important. But don't let that once again wag the life dog, which is the whole premise of why we're doing this so that you're sleeping better at night. We want you to make a lot of money and we want you to sleep really well at night. So don't get too lost in the figures here. So hopefully, this podcast was helpful and I'll see you guys next time. If, once again, you're looking for a custom strategy, you can, of course, reach out to us at Root. We do have a wait list at the moment. At the same time, I've got that academy. So if you want to start playing around with the tools, get access to all these checklists, go ahead and check that out in the description of this episode. Thank you for listening to another episode of the Early Retirement Show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcastcom. That's earlyretirementpodcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.