Asset Architects LLC
John R. McGonagle Jr. CFP®,CRPC®, is the owner of Asset Architects LLC located in Northville, MI.
John was born and raised in Plymouth Michigan a small Midwest town. He has six brothers and sisters, he's right in the middle. Both his parents worked hard and instilled a work ethic in him that is still drives him today.
After high school John attended, Eastern Michigan University business school, but the pull to own his own business was strong and at the age of 21 his parents remortgaged their home to allow him to buy into a local business. John worked long hard hours and was able to pay off that note in eleven months.
Owning his own business introduced John to the realities of running a business (not just theory you learn in school). One of those realities was paying taxes, it quickly became apparent that earning money was only part of the game. He needed to learn how to hang on to it. This led him to learning what people with money did with their money and how to make it grow.
Keeping a long term perspective. Some of the best things John has done in his life have been long term commitments. He has been married to his wife for 36 years and have a commercial property they've owned for 37 years, both were good decisions.
John and his wife have two children, his son graduated from University of Michigan and his daughter graduated from Indiana University. They are very proud of them both.
John made a decision to make investing and Investment Advisory a full time avocation in 1983.
Along the way, John has acquired his CFP® and CRPC®, Series 7, Series 63, Series 24, Series 65, Life and Health and 31 years of experience (another long term commitment).
Over the years John and his wife have invested in annuities, life insurance, more real estate, managed money, stocks and bonds. He truly practice what he preaches to his clients.
To better understand the answer below, lets review the rules for applying for Social Security Benefits.
The rules for File and Suspend changed in 2016. If you did not apply and suspend prior to April 29, 2016 for your benefits, the new rules for file and suspend will require you to stop all benefits associated with that persons earning record. In other words, when you suspend your benefits, you must also suspend spousal benefits.
Your wife can only apply for her spousal benefits after you have applied for your own benefits. Keep in mind that the spousal benefit does NOT qualify for the delayed retirement credits that your primary benefits do. The max spousal benefit is 50% of the Full Retirement Age benefit.
You should work with a Financial Planner to maximize your retirement benefits. Waiting until age 70 is not always the best solution. You need to factor in both of your life expectancy to pick the optimal application date. You need to understand at what age will you will benefit by delaying your benefits
Let me give you an example:
You have a full retirement benefit of $2,000 and your spouse would have a spousal benefit of $1,000. I will use and inflation rate of 1.5% for Social Security Benefit and 8% Delayed Retirement Credit.
If you both applied at 66, you would receive at total of $146,395 prior to age 70 ($36,000 per year plus inflation). If you delay until You receive $8,650 more per year and your wife’s benefit would be the same.
If you divide $146,395 by $8,650 you get 16.92 years to your breakeven. You would have to live to age 87 to breakeven.
I think you could benefit from a complete retirement plan to make sure you make the best decision for you and your wife. Have a great retirement.
Congratulations on your upcoming retirement. The question you ask is a good one and could be answered several different ways. A few pieces of information you did not include would be, what do you think your life expectancy will be, any major expenses in the next five years, does your budget include cost of medical insurance, does your pension have cost of living adjustments and when do you plan to apply for Social Security.
With what you shared in your question, here is what I would do. Pay off the Mortgage of $85,000 with $20,000 from savings and $65,000 from 401K. Look to do the withdrawals from the 401K in two different years to spread the tax liability. That would leave you with more that a year of expenses in the savings and the $2,200 per month excess cash flow to replenish savings without touching your 401K after paying off the mortgage until you are subject to RMD’s. With the very low interest rates on savings and your low tax rate, this seems to be the better choice.
Something you need to think long and hard about is, what will be your application strategy for your Social Security. Not knowing if you are married, divorced, widowed and what your primary insurance amount (PIA) is it is hard to give advice. What I do know is Social Security will represent between 25% and 40% of retirement income and should not be applied for without a plan structured to get you the maximum benefit. DO NOT rely on the Social Security Employees to guide you thru this process.
When giving Financial Planning advice to a client, it is based on several assumptions. A lot of those assumptions in your question are missing.
Here are a few off the top of my head. Do you quality to participate in a 401(k), does it have a match, does your employer’s plan have a 401(k) Roth option, your age, tax bracket, anticipated future tax brackets, expected retirement age, retirement income goal, life expectancy, sources of income in retirement, rate of return now and in retirement, do you think taxes are going up in the future, and inflation rate?
A simple way to approach your decision is purely mathematical.
I’ll use the following assumptions.
Age 45, rate of return 5%, current tax bracket 25%, and retirement tax bracket 15%
Traditional IRA Deposit = $1,000
Roth IRA Deposit (after tax) = $750
If both accounts grow at 5%, the values at full retirement age (67) would be $3,071.52 (traditional IRA) and $2,303.64 (Roth IRA). If you withdraw the entire traditional IRA and pay 15% tax rate, the net would be $2,610.80. The net balance will always be more from the traditional IRA with the above assumptions.
So, let me give some advice based on my experience in planning for my client’s income stream in retirement.
Taxes will be one of the largest expenses in retirement. The more options you have the better. You stated in your question that contributions to a traditional IRA are tax-free. They are tax deferred and you pay those taxes in retirement.
Unlike income taxes prior to retirement, the calculation is far more complex. In addition to the regular tax brackets, you have thresholds for when your Social Security becomes taxable. RMDs, if not properly planned for, can push you into the bracket, and Medicare premiums are now based on reported income two years prior.
In most cases, I’m able to design a withdrawal strategy that includes a recommendation for the client to systematically convert a portion of their qualified accounts to a Roth IRA. This is done to maximize their tax capacity within each tax bracket to give them the ability to control the taxable amount of future income. The goal is to reduce the overall tax liability over the retirement timeline and possibly their Medicare premium.
If done properly, this will result in a lower overall tax liability in retirement and make your retirement assets last longer.
Now would be a great time to start a partnership with a qualified financial planner to help you with this question. They can tailor a plan to match your assumptions and expectations of the future.
The bible verse, “A fool and his money is soon parted” comes to mind when I read this question. I would do neither. You need to give careful consideration to the impact of this decision. Don’t be in a hurry.
Financial Planning is more than taxes, rates of return, investment options, and debt reduction. It’s about understanding the person the advisor is giving the advice to.
This windfall sounds like it could be a life changing event. Think about what this change should be for you.
Then interview multiple Advisors and ask them how best you can achieve the outcome you desire.
Make sure you do your homework on the advisor. Ask for a copy of their ADV and their CRD Number.
Here are some links to do a background check on the Advisors you interview.
Certified Financial Planner http://cfp.net/utility/verify-an-individual-s-cfp-certification-and-background
Registered Investment Advisor http://www.adviserinfo.sec.gov/IAPD/IAPDFirmSummary.aspx?
Best of luck with this opportunity.
FDIC insurance is provided Banks and only covers deposit products (CD, Savings). FDIC insurance protects you from Bank failure.
All bank that provide investment securities thru a brokerage department are required to give the disclaimer "Not FDIC Insured" so the investor is not given the impression FDIC covers the investment.
Brokerage accounts are covered by SPIC and protects the investor from Brokerage failure.
Neither FDIC or SPIC coverage is designed to guarantee the principal amount invested.
You need to sit down with the Broker that your employer is using to establish this account and have the investment options reviewed so you can select the type of investment that best suits your risk tolerances. The good news is that your employer is matching a portion of the investment and that will give you an immediate return on your investment.
Best of Luck with this new account.