transcript

Speech-to-text transcription can look a little quirky. Please excuse any grammar or spelling errors.

Episode #639 - What Should I Be Doing When I Am Two Years From Retirement?

INTRODUCTION AND OVERVIEW OF UPCOMING TOPICS

Roger: Mike emailed in and said he's retiring in two years and wanted to know what he should be doing differently between now and retirement. And his questions were framed, well, I'll read them to you. Should I do something different with our money during these last two years? What should we do with our 457, our 401k when we retire? Should we leave them there? Should we draw on them or something else? All very good questions that are actually putting the cart before the horse in terms of how they're framed, and we're going to try to answer Mike's question and so much more today on the show.

Roger: Welcome to the show dedicated to helping you not just survive retirement, but to have the confidence to lean in and rock it because you're asking the right questions and doing the work to create a great life. My name is Roger Whitney. I'm a practicing retirement planner with over 35 years experience, co-founder of Retire Agile, which I'm excited to say because we just changed the name of our firm after our merger with Tanya and our new website is up today, retireagile.com. It took a lot of work to bring our brands together. We're excited about the focus and the team that we have, check it out at retireagile.com. We're actually accepting clients, hasn't been that way in a long time, which is gonna be great. So today we're gonna talk about Mike's question and try to answer that. We're also gonna have a retirement toolkit and talk about inflation and get to a number of your questions. So without further ado, let's get this party started.

RETIREMENT TOOLKIT

WHY INFLATION POSES A SIGNIFICANT RISK TO RETIREES

Roger: Recently, Jamie Dimon was interviewed and he mentioned the five risks that he is thinking about for the economy and for his firm, JP Morgan. And one of them was inflation. Inflation risk was one that he highlighted because we've had a big rise in oil prices because of what's going on in Iran and oil prices can lead to inflation and that could lead to higher interest rates and that could hurt the economy. So for today's retirement toolkit, I want to revisit and do some basics of what is inflation and what is inflation risk when it comes to your retirement planning? Because this is a key risk. If we think of financial risks, there are two big ones. One is sequence of return risks, which I believe we talked about before. And the other one is inflation risk.

WHAT IS INFLATION AND HOW IS IT MEASURED

Roger: So what is inflation and what is inflation risk? Inflation is the rate at which the cost of goods and services rise over time. So if you think about it in simple terms, if you pay $2 for a cup of coffee last year and $2.10 this year, that's inflation. The cost went up and there's a variety of reasons why this happens. Now the key measure of inflation from an economic standpoint is something called the CPI, which is the Consumer Price Index, and that is basically a basket of goods that the government tracks to gauge what goods are going up in price and which ones are going down. Now it gets much more complicated than that because they've changed how CPI is calculated. We don't need to put our geek hat on for that. But the key thing for you to understand is that when we hear an inflation number, generally they're quoting what CPI or the Consumer Price Index has gone up by because that's the main benchmark that we track inflation.

CAUSES OF INFLATION: DEMAND, SUPPLY CONSTRAINTS, AND RISING COSTS

Roger: Now what causes inflation? Well, a lot of things can cause inflation. Too much money floating around that chases opportunities. So if there's a lot of money in the economic system, that money has to find a home so it can drive up prices. Another thing that causes inflation is high demand. Old supply and demand, if there's limited supply and we have demand go up, that means people are going to be bidding higher for those consumer goods or those services. And then if we have constrained supply because of disruptions or there just isn't enough manufacturing or something, then the price of those goods will go up higher than normal, assuming there's demand because there's only so many things somebody can get.

Roger: When I think about long term care costs right now, that is an area where there's an increasing demand because we have people getting older, the baby boomers. And we also have a constrained supply of facilities that people can go to to have long-term care or assisted living. So we have a mismatch, and that causes prices to go up, a la inflation, higher than normal. And then rising production costs and all sorts of things. So those are the causes. Inflation is not a bad thing. It's actually good in moderation. So that's in a high level what inflation is.

HISTORICAL INFLATION RATES AND WHAT THEY MEAN FOR YOUR PLANNING

Roger: What has the cost of goods gone up by over time? Well, generally in retirement planning, we put an inflation number or assumption in our models to simulate that the cost of goods are going to go up over time. So what inflation assumptions should we use? Well, in our practice, we use the historical rate of inflation. From 1926 to 2024, the annual inflation rate has averaged about 2.96% per year, meaning that the cost of goods and services generally go up by about 3% a year. Now that's for an extremely long period, but there are seasons of inflation. A 3% inflation rate, and I'm just going to round it for simplicity, that's what we use in long-term financial models, but that doesn't mean what the inflation rate is going to be for you because different seasons depending on when you retire are going to have different inflation rates.

Roger: So as an example, in the aughts from 2000 to 2010, inflation was 2.56%, below average inflation. But if you retired in 1970, from 1970 to 1979 the inflation rate was 7%. And if we can compress that and look just since 2020, right around COVID, inflation has been 4.18%. So that means if you had retired in 2020 and you were spending say $8,500 a month in 2020, by 2024 that would be about $10,000. That would be that 4.18% inflation.

HOW TO CHOOSE A REALISTIC INFLATION ASSUMPTION IN YOUR PLAN

Roger: So the next question is what inflation number should you use in your retirement planning? Well, it's likely if you're using software, there will be an embedded assumption of an inflation rate and you could have the ability to change that to your preference. I would suggest that you don't. My suggestion would be that you use the long term inflation rate of 2.96% that gets updated once a year and let that be the default assumption. The fact that you may go through seasons of high inflation and low inflation, you don't want to try to guess what inflation is going to be in the future. That's just predicting the future. It just adds more noise to the data that we're using. I don't think there's any benefit of doing that whatsoever.

Roger: Because what will happen is, let's say that we use this 2.96% inflation rate that's embedded in the software, and then a year from now when you're reassessing your plan you experienced a 5% inflation. That doesn't mean you have to change the inflation rate, but what you would do is change the actual spending that you're experiencing. And by doing that it would reset your spending assumptions and then use the default inflation rate as the assumption going forward. That's, I think, a healthier way of doing this than trying to manage what the actual inflation rate is. So that is what inflation is. And this is one reason that we have to manage for inflation, because if you're 60 years old and you're going to live say 30 years, the value of that dollar you have in spending is going to go down. It's going to erode over time because the cost of goods are going to be rising. That's why you can't just typically have all cash or all bonds, they're horrible hedges against inflation and they lose purchasing power.

STRATEGIES TO HEDGE AGAINST INFLATION

Roger: Well, one way you manage inflation risk is you don't want to get too conservative investment-wise too early because inflation is a long term risk that we don't notice moment by moment. And all of a sudden you realize you don't have enough money to make ends meet anymore. So we don't want to get too conservative because we're living so long. A lot of the old heuristic rules of how much should you have in stocks versus bonds, your age minus 100, don't do that because you have a much longer timeframe that you're going to be living.

Roger: So inflation is primarily a long-term risk and we need to think about it. Don't get too conservative too early. And that means you're going to likely need to have more equities than traditionally people thought about, because equities, I remember being at a presentation with Jeremy Siegel, the famous professor from Wharton School, brilliant man, he's looked at data going back hundreds of years and he states very bluntly: equities are a perfect inflation hedge. Because you own shares of companies and as the cost of goods rise, they're going to pass that on to consumers ultimately, and so they're going to be able to adjust for that over time. So equities are going to need to be a decent part of your portfolio to manage inflation risk.

Roger: A third tactic you can do to manage inflation risk is to delay Social Security because it builds a larger base of guaranteed income that is inflation adjusted. And it also acts as longevity insurance because Social Security doesn't stop just because you hit 100 or 110. So delaying your Social Security to get that higher base that will be inflation adjusted forever is a real tactic. And if you're overfunded, then we can get into Social Security optimization. But this is really one reason why you hear this from almost every financial planner: you really want to delay if you can.

Roger: A fourth tactic is spending flexibility. We're going to have our base grade life, and then we're going to have our discretionary wants. But when you're going through a season of high inflation, having some flexibility in your spending can help you manage that season. So for example, let's assume that travel gets crazy expensive because the dollar is going down and international travel costs are sky high. Well, if you have some spending flexibility, you can go on the shoulder seasons, the off seasons. Maybe you don't do that first class ticket. Maybe you take a domestic flight during that season. The more flexibility you have in your spending, the more you can manage inflation risk.

Roger: My running joke about this recent bout of inflation is that whenever we get steak, Shauna doesn't bring home fillet anymore. She brings home something a lot less expensive that to me doesn't taste near as good. And that's spending flexibility. You don't buy the high-end bike, you buy the low-end bike, you buy a used bike, you just like the bike you have, that flexibility can really go a long way. So in a nutshell, that is what inflation is and some tactics for managing inflation risk in retirement planning. With all that said, let's get to Rocking Retirement in the Wild and then we'll get to our title question.

ROCKIN' RETIREMENT IN THE WILD

JIM'S STORY: DIVERSITY IN RETIREMENT ACTIVITIES AND THE IMPORTANCE OF ADAPTABILITY

Roger: Now it's time for a Rocking Retirement in the Wild story. These are stories from people just like you that listen to the show, giving a little insight into what they're doing to create a great life in retirement. This one comes from Jim and it's related to diversity in retirement activity.

Roger: Jim says: Hey, thanks for all that you provide Roger. I've listened since 2020 and your guidance and advice on how to retire have made a big difference. I retired at age 58, that's last July. I've had some advice from other new retirees and those close to retirement. Everyone talks about asset diversification, but I'm also suggesting diversification in what you plan to do in retirement.

Roger: Jim says he's been healthy and active with retirement activities planned based on his health, and was looking forward to more biking, hiking, kayaking, and golf. He also planned travel with family and friends. Well, a couple months ago, before retirement, Jim had a minor back injury. He'd never had issues before except ones that resolved on their own. However, after a few months he wasn't recovering, so he sought medical attention. Things continued to get worse and he wasn't able to do any of the activities he was planning for.

Roger: Now the good news is that he's recovering. He was originally misdiagnosed, which caused his problems to get even worse. His dreams of physical activities and travel were drifting away and he was frustrated and really depressed. He was lost without the ability to be physically active and scared that it would be a permanent condition. He now realizes that he needs to find some non-physical things to do in retirement, both for balance and as a safety net for future health issues. He never had problems like this before, so he never thought that he would. He hopes his experience can provide some perspective for others so they aren't caught off guard.

Roger: Jim, I'm glad that you're recovering and you make a wonderful point. Whatever state we're in, we think will be permanent. You were in an active state, and so you just planned to always be in an active state in terms of the goals you had for retirement. And it's interesting, Jim, that when you were at your low, the pain getting worse, you made a comment like, this could be permanent now, this could be it for me. Our ability to have some agility to pivot so we don't tie our identities up in, say, physical activity gym, is a great tool to make sure that we don't find ourselves in quicksand because of life just happening to us. Jim, I'm so happy that you're recovering, that you processed this in a healthy way, and that you're realizing you need some diversity there. Bravo, and thank you so much for sharing that story here on the show because other people have gone through the same thing and you're going to be helping them. Thank you so much, buddy.

PRACTICAL PLANNING SEGMENT

MIKE'S QUESTION REFRAMED: FOCUS ON DESIGNING YOUR RETIREMENT LIFE FIRST, NOT ACCOUNT TACTICS

Roger: Now it's time to get to our title question from Mike. He's age 60, his wife is age 55, and they're going to retire in two years. He emailed in, gave me some facts, and wanted to know: should I be saving in different places? What do I do with my 457 or my 401k when I retire? Do I keep them there? Do I move them? All very logical questions that are rattling around in our mind, and they're important questions to answer, but we have to ask them at the right time.

Roger: So I would propose right now, Mike, that in order to get good answers to these questions, we really need to step back to more of a root question and get those answered first. Because if you answer the question around the cause of things rather than the symptoms, you're going to come up with better solutions. Just a suggestion to all of us: when we have a question or a problem, it makes sense to take a little moment and define the problem you're actually trying to solve. Because if you jump into solving mode, it's easy to be solving the wrong problems or answering the wrong questions. So I think a better question for you, Mike, is: what do I want my life to look like and how does my money need to support that life? That's how we're going to go about giving you a framework for figuring out what you want and what you need to be doing over these next two years.

ROGER REVIEWS MIKE'S FACTS

Roger: Let me get Mike's facts on the record and then we'll go to the framework. Mike is age 60. His wife is 55. They're going to retire in two years. They have after-tax financial capital of $40,000 in bank accounts and investments. They have a 457 plan of $750,000 and a 401k of about $1.4 million. Mike's wife has a pension of $650 a month. Mike has a pension of $1,200 a month or a $180,000 lump sum option. They own a home worth about $815,000 and owe about $350,000 on it. Their current income is about $320,000 a year and they're saving 20% to their retirement plans. So those are the fact sets.

THE IMPORTANCE OF BUILDING A FEASIBLE PLAN OF RECORD, ESTIMATING EXPENSES, AND CREATING A REALISTIC MONTHLY BUDGET FOR RETIREMENT

Roger: To answer your question and help you answer it, I think it's more important that we lay out a quick process because the answers to the questions you actually had become much easier if you start at the beginning. So first off, what we want to do is observe what you know and build a feasible plan of record, down and dirty. So what do we need to know? You're two years out from retirement, so we want to start getting a little bit more specific on numbers of what you and your wife want for your life. This isn't 10 years off where swags will do. We need higher fidelity to the numbers.

Roger: The first thing you want to know, Mike, is how much does it cost for your base great life? That's your every-month expense for housing, travel, basic eating out, entertainment, health care, food, all those things. What does it cost to live the life of Mike and wife on a monthly basis? Is it $10,000, $20,000, $15,000? We want to have higher fidelity to this number right now because you're only two years away. You're coming around the blind corner, so we don't want to just guess here.

Roger: One thing I see as a risk, especially early in retirement, is that we intuit our spending: I just spend $12,000 a month. But we're actually spending $15,000 or $16,000 a month because we don't know our numbers. And then that happens consistently, and now we're compounding in a direction that is not on plan. We fool ourselves in mental math. If you've ever looked at your credit card bill and thought, what, that's the balance, I didn't spend hardly anything, and then you look at the detail and there aren't any big expenses, there are just a heck of a lot of little ones. So right now, Mike, we want to know what that base great life costs and have some confidence in those numbers.

Roger: And then on top of that, we want to start to map out what your discretionary wants are. We want to travel for $10,000 a year because we'll have time. I want to buy a bicycle. We want to buy a camper. We want to give to our kids. Map out the timing of those extra spice-of-life goals with dollars. Now some of those you might have to swag because they're just guesses about the future, and they're discretionary, so that's OK.

CLARIFYING VALUES AND HOW THEY SHAPE YOUR RETIREMENT GOALS

Roger: Before we move on to your financial assets, Mike, I actually want to jump backwards in time before you get to your actual goals. You two have been married a while, you've lived life, and you probably have a lot of remnants of different seasons of life up until this point, different careers, different locations, maybe kids that have been born and raised. So you have a lot of experience, which is a good thing, but it's also a risk because it can limit the aperture of what you can see for your future. You can get trapped by how your life is organized right now. And in retirement, the world's your oyster. You can organize your life any way you want because you don't have to worry about commutes and all those other things.

Roger: So a good exercise to get to some of these goals with fresh eyes is to start with your values. A value is something we choose to care about, adventure, family, self-improvement. They're not universal, they're what is important to you. So I would actually start with you and your wife listing out your top 10 values and putting some context as to why they're important to you. Then each take three and write out what you actually mean by it as explicitly as you can.

Roger: Let's say family is one of your top values. Well, family to Mike might mean something totally different than what it means to me. For Roger, that means I want to be close to my kids geographically, I want to be able to financially help them when I see a need, and I want to be able to travel with them to create memories earlier than later. Those things are specific, and then ultimately goals come from that. The more explicit you can get on your big yeses, the easier it is to find goals that actually attach to living them out. And also the easier it is to say no to things that don't serve your values. So we want to get fidelity to this base great life and these discretionary wants before we go further.

INCOME SIDE OF THE PLAN: SOCIAL SECURITY, PENSIONS, AND TAX CONSIDERATIONS

Roger: Now that you've defined your first version of what you want in retirement, we need to figure out how we're going to pay for it. Social Security, I'm guessing the two of you are eligible. Download your most recent Social Security statements at ssa.gov and use that number in building out your feasible plan of record because that's going to be the most accurate number. And I would say don't think about optimization. Just assume you're going to do it at full retirement age. It's a green banana. You can deal with the actual decision later. So put in the most accurate Social Security estimate you have.

Roger: Next, you guys have pensions. Pensions are an odd thing, you don't pay much attention to them when you're young because they're in the future. Well, now is the time to understand your pensions more, Mike and wife, because when you make your decision on those pensions, that is irreversible and it could be consequential. So we want to understand the specifics. What is the benefit? What age does it start? Do you have the option to start it at different years? And if you do, how does that pension interact with time? Some pensions will increase every year you delay them. Some won't. So understand when it can start and what happens if you delay.

Roger: Understand the life payment options too, because there are a zillion of them nowadays. Mike, your pension of $1,200 a month, you could take it for your life only. But for joint life, it's likely going to be less, maybe $1,000 a month. You can do 10-year certain. Just start to get the data of the options you have. You don't have to decide now, but you want to understand the levers.

Roger: Now your assets. One thing that jumps out related to your investment assets, Mike, is that you don't have a lot in after-tax money. You have $40,000 relative to about two and a half million in a 457 and 401k. So you're very light in after-tax money. And what that means is that when you need money, you're likely going to have to draw from tax-deferred accounts, which means taxable income. So it's just an observation at this point. On the 457 plan, start to understand the rules of how those work because government 457s are a little bit different than non-government 457s.

ONCE THE PLAN IS FEASIBLE, START TESTING VERSIONS OF THE PLAN AND PLANNING YOUR PAYCHECK

Roger: If you're using software, now we can easily test for a feasible plan with the information you have, using Monte Carlo scenarios, et cetera. But we still haven't gotten to your questions, Mike. Once we know we're on a feasible plan that is focused on goals representing your big yeses that help fulfill the values you both want to live, now we can start to orient. If your plan is feasible, now we want to test against sequence of return and premature death, just to look for vulnerabilities.

Roger: Mike, now we can start to get to your questions. The way that we would do it in our process is to build version one of how you're actually going to create your paycheck. So once you've built all this out, whether in a spreadsheet or planning software, you can create a model of how you're going to create your paycheck for at least the first five years. You're going to make a cashflow statement, here's all my spending year by year, here's all my income year by year, here are my tax estimates, and then you're going to look at your investment assets and go through the exercise of identifying: if I need $200,000 this year, where am I going to get that money? And then you're going to map out exactly how you're going to get your paycheck for the first five years by account. And then that will lead you to how do I invest these accounts. So you can change your allocation to support the paycheck that supports the life and on back down to values.

401(K) AND 457 DECISIONS CAN WAIT, FOCUS ON POSITIONING ASSETS FOR INCOME FIRST

Roger: Now to your two specific questions on your 401k and your 457 plan, there are a little bit of green bananas right now. You're two years out. It's more important that you position them if they're going to fund your paycheck so the money is preserved and safe for your paycheck, than it is whether they stay in a 401k or 457. When you get close to retirement and have to actually make the decision, then you can figure out whether to move it to an IRA for simplicity or keep it in the 401k. Those are actually tactical questions that probably aren't near as important as everything we've talked about, and not near as important as adjusting your allocation to assure it's not going too fast into this major life change.

CONSIDER BUILDING AFTER-TAX SAVINGS NOW TO INCREASE FUTURE OPTIONALITY

Roger: Now your second question: where should you be redirecting money? Should you continue to save tax deferred or should you be directing some of that towards after-tax assets, cash, bank accounts, joint investment accounts, et cetera? This is a hard one because you're in a high tax bracket. You're at $320,000 a year as a joint couple, so you're close to the high end of the 24% bracket. If I were you, I might consider moderating my savings in tax deferred assets and building up some after-tax cash. Why? Because one thing you can't run math on easily is optionality. If you build up more after-tax savings, you'll have more optionality in how you get your income when you retire. And that might help you from a tax perspective, from an Affordable Care Act subsidy perspective, et cetera.

Roger: Because right now with only $40,000 in after-tax cash, if you have a big event, either good or bad, that you need to deal with, or you just have to have a paycheck, you're going to be pounding on that 401k and 457 plan and paying taxes, and you'll have no choice because you don't have anywhere else to get money. Some ways of doing that without slowing your retirement spending is maybe you take a year or two and moderate some of your normal spending to build up cash to get to this point of after-tax. But the good thing is because you've built this framework, all of these decisions become much more manageable. And then you can defer decisions that are green bananas, like Social Security or whether you move your 401k, so you can focus on the ones that are more important, like should I build up after-tax cash or how do I reallocate my 401k to fund my paycheck? Because I know I'm going to be hammering that sucker in two years. This will get you to much better decision-making. Hopefully that gave you some framing. All right, now let's go and answer some of your questions.

LISTENER QUESTIONS

LISTENER SHARES STORY ABOUT ROADSIDE CAFE

Roger: All right, now it's time to answer your questions. If you have a question for the show, you can go to askroger.me and type in a question or leave an audio question and we'll try to help you take a baby step on the show. Quick hint: if you leave an audio question, that's like a fast pass, we do our best to get those on the show first.

Roger: Our first question is actually not a question, it's just a comment from a listener. I didn't write down the name, but they were driving around Williamsburg, I believe, and they came across a cafe or coffee shop called something like Huzzah Coffee Shop. And they laughed and they said, I bet Roger would eat there. And they said, by the way, we do a lot of driving on the weekends visiting family, and that is where we usually listen to your podcast. Our two Yorkie Poo dogs, Hartley and Flossie, are great travelers and I think they know your voice. So I just want to say, howdy Hartley and Flossie! Ruff ruff. Hope you guys are doing well.

MICHAEL ASKS A QUESTION ABOUT ROTH CONVERSIONS IN A DOWN MARKET

Roger: My next question comes from Michael related to Roth conversions. Hello Roger, this is Michael from California, and I have a basic question that may be helpful to others. If I plan to retire early around age 60 and I have a plan and all looks financially sound, if in the next few years it is a down market but I had planned to do Roth conversions, I just wanted to confirm that converting a Roth may not imply locking in losses because it goes right back into another Roth. Just confirming that this is different than being forced to withdraw from my assets or investments in a down market, which locks in the losses. So I just want to make sure that even if it is a down market for a period of time when I had planned to do Roth conversions, it would still be wise to do that for purposes of taxation or for inheritance. Appreciate all that you do. Thank you.

Roger: Michael, you've got it spot on. Let's say you have $100,000 in an IRA and it's invested in equities, and that $100,000 loses 25% of its value. So now it's $75,000 and you decide, hey, it's down, I'm going to do a Roth conversion. You convert that IRA that's now worth $75,000 to a Roth IRA. What you do lock in, and this is a benefit, is the amount of taxable income related to that Roth conversion is the $75,000, the amount the monies were worth when you did the conversion. That's a good thing, because if you had done it a year ago when it was at $100,000, you would have had $25,000 more in taxable income.

Roger: You're not locking in a loss in the sense that if markets go back up, you go back up too, as long as you maintain the same investment position you had. Assuming that recovers over time, those things would go up just like any investment would. So yeah, you're not going to be left with cash and miss out if the markets go up. I think you're totally fine there.

STEVE ASKS HOW TO BETTER TIME ROTH CONVERSIONS TO AVOID TRIGGERING IRMAA MEDICARE SURCHARGES

Roger: Our next question comes from Steve on right-sizing Roth conversions to avoid IRMAA. IRMAA is the Medicare surcharge. Steve says: I'm a longtime listener while dog walking and I've learned so much to help my financial planning. I retired in 2027 and have been doing Roth conversions every year. I always do the conversions in December to get the best estimate of modified adjusted gross income so I can avoid the IRMAA surcharge on Medicare premiums. Unfortunately, I've guessed wrong more years than not, usually by only a few thousand dollars. I don't feel like I'm trying to cut it too close, but I keep getting on the wrong side of it and having IRMAA kick in. Can you offer some advice to us do-it-yourselfers on how to maximize Roth conversions and stay safe from dear old IRMAA?

Roger: For those of you that may not be familiar with IRMAA, once you are 63, Medicare is going to look at your modified adjusted gross income to determine whether you qualify for paying extra on Parts B and D in the form of an IRMAA surcharge. And the way IRMAA surcharges work is that if you're over a threshold by one dollar, so it's like a cliff, then you're going to be paying IRMAA two years hence for that number. So Steve has been trying to guide his Roth conversions so his modified adjusted gross income doesn't trigger one of those cliffs.

Roger: Steve, here is my suggestion. What are the things that would impact your estimate on your income being wrong? It's good that you're doing it in December, but there's imputed interest on bonds like Treasury bills that is taxable, but you don't actually see it paid out throughout the year. So a zero coupon Treasury bond could trigger additional income that you might not be aware of in your searches. Another is the distributions of dividends and capital gains in interest from mutual funds. They tend to happen very late in the year, usually in December. Some fund families will put out estimated capital gains distributions, but they're only estimated, they can change. Those things can pop up or you could just get your numbers wrong. There's a lot of different things working here that can really throw this off.

Roger: So what do you do about that? One is I would keep a bigger buffer on where you're at relative to the IRMAA bracket. Let me go to the IRMAA brackets from the 2026 important worksheet, you can find that in our reset resource center at rogerwhitney.com. So as an example assuming you're single, your first IRMAA cliff is at $109,000. If you're under $109,000 in modified adjusted gross income, you don't have any IRMAA payment. But if you're over by a dollar because of a miscalculation or something came in you didn't see, then you're going to pay an extra $81.20 a month for Part B and an extra $14.50 for Part D. That works out to about $1,148.40 extra for the year. So it's not insignificant, but it likely is not life-changing, it's an unforced error of sorts.

Roger: So what can you do, Steve? Well, one is you can simply increase the buffer below that $109,000 limit as an example. We tend to go with a $10,000 to $15,000 buffer below the IRMAA bracket we're focusing on, just to give us some room for all of these unforced errors and miscalculations and late data coming in. Yes, you're not optimizing it to the dollar, but I think that is asymmetric to the downside because IRMAA surcharges are cliffs and you get the whole IRMAA if you're $1 over, relative to the marginal benefit you might get if you get it exactly right.

Roger: The other thing you could consider: let's use that $109,000 number as an example. If your income is about $109,000 modified adjusted gross income for a single person, that puts you into the 24% bracket. The 24% bracket for a single person ranges from $105,000 to $201,000. So you're already in the 24% bracket doing a Roth conversion and paying 24% on the conversion. One other thing you can do is simply go bigger. You're already in the 24% bracket, you're already paying 24% on the conversion. So forget about it. Just eat IRMAA for one year, but rather than being a dollar over, go ahead and be $50,000 or $60,000 over. And that way you can go big in a certain year, have IRMAA for that year, and then avoid it in subsequent years. So one way is to compartmentalize these IRMAA brackets into one particular year, go big, bite the bullet, and then you won't have to deal with IRMAA and all this mental anguish of calculations over and over again. It's one decision that sets yourself up for easy street later on. So those are two suggestions I would consider.

SMART SPRINT

SMART SPRINT: BEFORE ACTING, ASK YOURSELF 'WHAT PROBLEM AM I ACTUALLY SOLVING?'

Roger: All right, with that, let's go set a Smart Sprint. On your marks, get set, and we're off to take a little baby step we can take in the next seven days to not just rock retirement, but rock life. All right, in the next seven days: if you have a question or a problem that comes up, or someone comes to you with a problem, before you get into solution mode, pause and ask yourself, what really is the problem here? What has to be true for this problem not to exist in the future? It's a great focusing question. That can help you really get to the root of a problem or an issue. Solve that so you never have to deal with it again. Because if you just get right into solution mode, you start solving symptoms. Define the problem more thoughtfully and the solutions that come out will be better.

ON THE BOOKSHELF

ROGER TALKS ABOUT HIS LOVE OF NOTEBOOKS AND SHARES BOOK RECOMMENDATIONS

Roger: So next week on the show, in addition to answering a lot of questions, we're going to answer the title question: how do I create a diversified portfolio? So check that out. Recently, what books? I'm almost finished with The Three Musketeers. I'll tell you one thing that I've been enjoying and I'm a little bit of an addict about: a really nice notebook. I like single-purpose notebooks where you just simply take one topic and that's where you keep all your thoughts on that topic. My favorite notebook right now is one made by Ugmonk, U-G-M-O-N-K. So if you're looking for a great notebook, you can check that out. We'll have a link to that in The Noodle.

Roger: We also have a book recommendation and this comes from a good friend of the show, Mike. He says: Hey Roger, I was listening to the podcast from last week and enjoy hearing about books people are reading. One of my favorite books this year is Theo of Golden by Alan Levi. It's such a great story that shows what can be accomplished by extending kindness to everyone we come into contact with. I really loved it, definitely a five out of five. Hope you enjoy your week of solitude. So if you're looking for a great book, check out Theo of Golden. Have a great week, folks.

The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All performance references are historical and do not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal, tax or financial advisor before making any decisions. This podcast may include testimonials and/or endorsements.