Is $2M Enough to Retire at 40? | Making a Millionaire

20:31The Money Guy:Does any part of y 'all like twitch a little bit that some of the Roth and stuff is not getting maximized? Does that bother you at all? Yeah. Well, I guess that was a question I had for you is that I was nervous that the pro rata rule applied to us. So I didn't do any conversions. And especially with the tax bracket that we're in right now, I also wanted to be double safe. So I think for me, I see that tax-free number and I'd like it to be a lot higher. but I was just concerned about getting hit with a huge tax bill if I did something wrong. We'll walk you through that. Okay. So if this is what we have to work with$1.2 million, we really need that account to bridge us from age 40 to 60 because we can't technically get access to these other retirement accounts until 59 and a half.

21:15So we said, okay, well, how's this play out? If we're going to be withdrawing$8 ,500 a month, and we're going to grow that with inflation, you know, 85 today won't be the same as 85 10 years from now. How does that play out if we just think in linear terms? And again, you already mentioned Monte Carlo. Obviously, the way that you would want to do this is run it through the Monte Carlo simulation with a number of variables. But just conceptually, we want to show you sort of a linear illustration of how this looks. What you can see is if you have$1.2 million and you do have that high withdrawal rate that you've already acknowledged, right?

21:45If you're pulling out$8 ,500 a month, it's going to be like an eight and a half percent withdrawal rate on that 1.2. What actually ends up happening is that by age 52, the bridge account's empty. Okay. All right. Let me pause there for a moment. What do you guys think about that? How do you feel about that? I thought the number would be closer to like a, maybe like a 6 % drawdown, but even still that might just push us out a few more years. So I think we need to maybe not be so aggressive. I'm like, we're optimistic and be a little bit more conservative in our, because I don't want to be 52 and then be like, oh, Kenji, go back to streaming.

22:25You're kidding. That's the hard conversation.

22:27The Money Guy:Your instincts are spot on us. Because this assumption, we went, like Bo mentioned earlier, put on your 3D glasses. We've gone full doo-doo here. And the fact that this is assuming you're spending all of this and not actually putting any money in the background to offset this. We know that, and that's the part, But you're in conflict in the fact that you create this great income from something you love doing, but you are kind of the servant to content. By the way, we resent this. We love it as the greatest job in the world, but you, man, you do feel under the thumb that you have to keep creating because the machine gets mad if you don't create.

23:06The Money Guy:Oh, that's for sure the case. So you said something earlier is that I would love to do it because I want to, not because I have to. But it is still a big threshold decision if you ever dial down the quantity, because we know that our overlord algorithms, they don't like it when you dial down the content amount. But we can probably put some assumption that there's going to be something coming in. If this is the strategy that you guys wanted to perpetrate, you wanted to do this thing where we focus on this first boss, this first goal, this first hurdle first, what would be required to make it work?

23:41And we said, well, obviously the thing that would be required to make it work would be some sort of supplemental income. And so we just kind of did some reverse engineering to say, okay, how much income would Kenji need to be bringing in in order for this plan that you guys currently have in place to work? And the answer is$42.50 a month. And we said, again, to be conservative, let's just not even inflation adjust that. So even though our$8 ,500 monthly need is increasing with inflation, we just assume that every month from age 40 until 60, you could generate about$43 ,000,$42 ,000,$50 ,000 in income.

24:14Does that seem reasonable? Yeah, I think so for sure, especially since I think her stuff is going to start taking off a little bit as well. So it's going to be like even if mine goes down, I think she'll also offset some of that. But this, again, what we're trying to do is we're reverse engineering how to make your plan work. And if the plan that you have right now in place is the one you want to stick to, this would be a way to possibly make that work. Now, what it does do is it actually ends up depleting your entire taxable account. So when we get to age 60, so we just conquered first boss. When we get to the big boss, this is what you have to work with at that point.

24:54Again, assuming a 7.5 % rate of return. Your pre-tax, your tax-deferred assets will have grown to about$2.5 million, and your Roth assets will have grown to a little over a million bucks. So here you sit with like$3.5,$3.6 million. Give me some thoughts on that. How does that feel and sound? When I'm 60, that sounds great, right? I mean, I'm sure inflation-adjusted, it's not going to feel as much as it does now, right? But still, I mean, that feels and sounds like a comfortable number to me. I want you to bottle up and say, that feels nice and comfortable because we're going to come back and visit this.

25:27Oh, okay. No, no, no. I know. I just want you to, I just want you to, oh, man. Yeah. This seems like it's going to be great. We're bottling it up. We're going to shake it in the room. Yeah. This seems like it's going to be great. This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense?

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26:35I do want to be clear. What we've tried to lay out here is, okay, what would be required in order for the plan that you guys have in place to work? Now, we're going to have tons of people in the comments. We're going to have tons of people that are acknowledging, no, no, no, when you're part of fire, when you're part of fine, there are other strategies available than just the after-tax account. And so we'd be remiss if we didn't just briefly mention, yes, there are some different strategies you could carry out. You could, during this period from 40 to 60, you could do Roth conversion ladders, where essentially you convert some of your pre-tax assets into Roth assets to create basis that you could access.

27:07Now, there's going to be a tax cost to that. So it's going to cause the taxable account to wane even more quickly. But that is an option. The second option we could potentially look at is 72T distributions, which is a special part of the tax code where you can take substantially equal periodic payments from your retirement accounts if you structure them a certain way. So if you needed to create income from pre-tax accounts, technically you could do that and not have to pay the 10 % penalty. So that's an option. And the third option is you do have some Roth assets. And we know that when it comes to Roth, we can pull basis out penalty-free and tax-free.

27:42So again, if you depleted that aftertask account, there are some ways for you to do that. But all of those, everything that I just laid out kind of has you sort of pulling away from your second boss to conquer the first boss. This game's too hard. You know what I mean? Right? Like, so that's the, because when we think about this visually, you have this first goal, you have this first hurdle you want to make it over, getting to age 60. And we can celebrate that and be like, yes, we did it. We made it. But in our view, getting from 40 to 60 is not nearly as significant of a hurdle to have crossed over than getting from 60 to all the way through the rest of your life.

28:25You live to 90, 100, 100 plus, whatever that number may be for you guys, because it's likely going to be easier to go back to work between 40 and 60 if something goes, uh-oh. Between 60 and 100, it might be hard to go back. It may be hard Are you saying a 60-year-old couldn't be a 23-year-old? We can come up with a whole new thing.

28:44The Money Guy:Believe me, I'm closer to this 60, and I can tell you nobody wants to see me playing streaming. That's not where my income is going to come from. So we acknowledge there's this second goal we have to make sure that we appropriately account for. You've already laid out for us. You have this personality trait where when I have a goal, I get fixated and I want to solve that. And what we want to be careful of is you don't just solve the first goal of what I'm going to call your sabbatical or pre-retirement retirement at the cost of the second goal. Right. Of the bigger one. So let's talk a little bit about the second goal, the second boss we have to beat.

29:20We've already laid out for you what your retirement assets will do. They're starting with about, what, half a million dollars. And if they just grew at that 7.5%, by the time you get to age 60, it's going to be worth about$3.6 million. which sounds, remember I said bottle it up. It sounds great, sounds amazing, sounds awesome. If we were to then just assume 4 % withdrawal rate, reasonable withdrawal rate on that sum of dollars, and then we were to bring those dollars back into today's terms, we feel comfortable that$3.6 million for you guys at age 60 could generate about$70 ,000 a year. Okay.

29:56The Money Guy:You're seeing the problem. That's about the lifestyle we have now or maybe a little less. But I think I would want a little more comfort in traditional retirement. Well, what we laid out, remember, was that during your 40 to 60, you were living off of$8 ,500 a month. But y 'all had told us internally$7 ,000 a month or close to$85 ,000. Yeah, yeah. So we're still, even with y 'all's optimistic number because we felt like we wanted to be conservative, there's still a spread there of$15 ,000 a year. As you all know, life, do you want to go less or do you want to maybe have a little cushion, a margin?

30:32The Money Guy:Because there's no going back. There's no, like, once you cross this threshold and, you know, it's hard to get the water back up the hill. I mean, it's a big decision. That's totally fair. And I think, like, actually seeing it laid out. And, you know, we also want to be, I mean, I won't speak for Kenji. I'll let you speak. But I want to be really generous with our money, too. And so it's not necessarily about like just having all these luxurious things. It's like I want to give a lot too. I want more money for that as well to be able to be more generous. So, I mean, what does that number look like for you, Kenji?

31:06I mean, I could live in a shack as long as I have internet. He says as long as I have internet. I can live in a shack. He's like ready player one over here. I mean, I guess I want to, you know, I want to travel a bit more and stuff as well. So I would expect the difference between our yearly expenditures now and when we're older is I think it would be a bit more. Also, kids are curveballs. Yes, for sure.

31:31The Money Guy:Education, all the things, activities. I would probably lean more towards the conservative, that there's going to be things that are going to actually squeeze on that back pocket more than you're probably realizing. Maybe we want our annual cash flow closer. If it's like 85 now, we want it closer to 100 plus. Yeah. Yeah. And I think I probably, I'm sure you will both get to it, but I probably need to check those blind spots, start investing a little bit more in the traditional retirement accounts. So that's where we went with this. We said, okay, this, in our opinion, this does not get you there.

32:05But let's, again, reverse engineer. That's the beautiful thing about being able to plan. I love your numbers.

32:08The Money Guy:It's almost like we coordinated this. It's almost like we have a crystal ball ourselves because look at what we've done. We built it up to$102 ,000. That's what I meant to say. Not$100 ,000. That's right. That's right. So if we just reverse engineer and say that's the standard of living you would like to have,$102 ,000. So that way you're not essentially taking a pay cut when you go from first retirement to second retirement. You live the same lifestyle. In order to do that, we think the pot of assets you would actually need to grow to by age 60 would be closer to like$5.3 million. So$3.6 million is kind of what you're on track for.

32:41$5.3 million is what we're saying you should probably shoot for. Let me pause there for a moment. Does that sound daunting or difficult or something like, oh, man, that's like a whole lot more money. How are we going to do that? I mean, it sounds like a lot, but I realize or I understand that, you know, the compounding interest and stuff. 25 years. I tried to teach him. Oh, yeah. It sounds like a lot, but I guess from 3.6 to 5.3 maybe is not as much as we think.

33:10The Money Guy:It's a course correction. Yeah, yeah. Little decisions have big results. I don't know what that course correction looks like, but I know it's probably not as bad as your mind first. I thought it was a trick question, but I was like, it might not be as much as we think. Here's what we said. We said, okay, you know what? Let's not cause them to start eating beanie weenies. Let's have the same cash outflow. What if they were going to save the same amount of money, but we just wanted to save it a little bit differently? Optimize. Right now, you guys are saving$84 ,000 a year,$7 ,000 every month going into the Abtrax account.

33:41Well, if instead of doing that, what if we maximized our retirement opportunities available to us? And that is where you can talk about things like doing Roth contributions or maybe back to a Roth contributions, looking at a solo 401k, because that might be a great solution to have in place for you guys that would remove some of the pro rata rule stuff that you're concerned about. What if we could save$45 ,000 to the retirement account and still be saving$39 ,000 into the bridge account? So we're still saving over$3 ,000 a month into that after-tax account. So we're still growing it. At the same level of cash outflow, how would that change the plan?

34:18What concession would we have to make? Well, as we lay that out for you guys, instead of stopping at 40, if you could do that until age 43, What that then allows your retirement assets to do is go from 35 at 553 to by 43, when you actually start your coast, instead of starting your coast at 40, starting at 43, you have about a million and a half dollars in assets in retirement. If you let that million and a half dollars in assets in retirement grow to$5.3 million, you don't have to add anything else to it. You don't have to keep saving. It has you working for three additional years. That's only putting like the 3 ,000 something in the early retirement.

35:02But also three years. Because remember, if you work for an additional three years, that's three years that you're not having to live off the bridge account. That's three years that you're creating income. So when we actually look at how that plays from sort of like a bar chart standpoint, what you can see is instead of exiting at 40, you actually build your bridge account. it still gets to$1.2 million. Even though you're saving less, you're just doing it for three more years. You're still able to draw that down, $8 ,500 a month, assuming that you still have the supplemental income of$4 ,250 coming in.

35:37And then at age 60, you still have after-tax assets left over. Well, I'm going to be honest. This sounds a lot better than the other charts you showed me. I didn't realize. my initial personality trait was 3 ,000 in the early retirement thing isn't going to be nearly enough. It's going to take so, so much longer. And then when you're like, yeah, only three years.

35:59The Money Guy:But that's why it's important to actually do the planning is because it's back to that mentality, even on debt crusading, is that you're thinking, well, let's just do this and it'll all work out. And that's great. But you quickly find out this is the power of compounding interest. Those small little decisions do have huge results. Don't sleep on the little stuff is because we're using the same dollar amount of money. It's just different decision matrix. And that different decision matrix is going to lead you in a completely different direction. I love how optimized this is because I'm like very frugal by nature.

36:30So I'm all about value and optimizing. So I'm very shocked I haven't addressed this yet, but I feel good about that. There's a little bar at 60 as well. You can get a new string computer. It's not empty. This looks amazing. There's a number of different variables that you guys get to change. Like we showed the one where, okay, what if you save the same amount, but you just work a little bit longer? There's another scenario that we didn't model. This is homework for you guys to do. Hey, what if we just save more? If we still want to leave at 40, how much more would we need to save to be able to do that?

37:01You guys have done the hard work from poverty, from food stamps till now. You've made the hard decisions that put you in the driver's seat where you do get to pick and choose what your future looks like. You just have to make sure you finish the drill well. Don't exit too early without making sure that you have a plan that will actually get you to that great big beautiful tomorrow that you want. Oh, I don't want the tissue again. This feels, this is exactly what I was hoping for, like coming here and talking to you. And I'm so proud of like both of us of being able to build this together. And like, thank you for trusting me to help manage things.

37:41Of course, we always talk about it. But still, it's just the fact that this actually could be a reality and we're pretty close. And I love the optimizing. It's just, it's like overwhelming. I turn in the homework to the teacher, and the teacher is graded by her directors or whatever. This is good. This feels really good. The planning is not done. In our view, the planning for you guys has just started. We You wanted to lay out, because obviously you have an affinity for this. You've been doing your own money, Carlos. You've been doing your own analysis. What questions can we answer for you guys that'll be helpful as you go back to do your own planning?

38:18Where I get the most wary is taxes. And I don't want to make a mistake there. So we currently have a SEP IRA for him. These traditional retirement accounts, like which one do I choose? Like what's right for us? So let's look at your net worth statement again. Let's look at how your accounts are currently structured. So when we look at you guys right now, and Kenji, I'm going to just use your accounts. You have a traditional IRA that has$56 ,000 in it. You have a SEP IRA that has$74 ,000 in it. For your entity, for your enterprise, for the work you do, do you have any employees? No. It's just you, right?

38:49Just me, yeah. So that's how you're able to do a SEP contribution. And every year, you're able to contribute 20 % of your net operating profit, depending on how you're structured and how you pay yourself. You're able to make that contribution. One of the beautiful things is if you were to have a solo 401k, And these days, Solo 401ks and SEP IRAs aren't all that different. They still allow you to accomplish some of the same goals. But Solo 401ks don't just allow for an employer contribution. It also allows for employee contributions. So you can do salary deferrals up to$23 ,500 plus a profit sharing component.

39:23So you're able to save in a really healthy manner inside a Solo. But where it opens up additional planning is once you have that account open, and you can open it at any of the major custodians. You can open them at Fidelity or Vanguard or Charles Schwab, wherever you guys like to hold your assets. You can then consolidate some of his pre-tax accounts. You can move his traditional IRA into the solo 401k. You can move the SEP IRA into the solo 401k. Once you've done that, all of your pre-tax assets are now held inside a 401k account. There are no more outside IRA assets, so the pro rata rule for backdoor Roths does not apply anymore.

39:58So once you move those two accounts into the solo, then you can start doing backdoor Roths every single year. Put$7 ,000 in a traditional, after tax, don't take a deduction, convert it to Roth, do it again next year. Over and over and over and over. We're going to need this in writing. You guys should do this for a living. You're pretty good at this. That's exactly the kind of direction that I was looking for because I've been so paralyzed by fear of like, if I do something wrong, all of a sudden we're going to get this huge tax bill and we're in this higher income tax bracket, like I don't want to mess it up.

40:32So I've just left it. Just to like clarify. So you said that we can move his traditional IRA to the solo 401k, but then we could also move his Roth IRA somewhere. You wouldn't want to move his Roth. You wouldn't want to move that. You leave that alone. Okay. You leave the Roth alone because that's every year. So you're going to move his traditional. That's 56 ,000 into the solo. So his traditional will have$0 in it. Okay. You're going to move the SEP in there too. So that's going to have$0 in it. Every year, you're going to put$7 ,000 into that traditional. You're not going to take a tax deduction.

41:03It's going to be an after-tax contribution. And you're going to convert that into the Roth IRA. So it's going to move from the traditional account into the Roth IRA.

41:10The Money Guy:The pro rata rule exists because there's IRA assets. This structure that Beau was laying out removes all those traditional IRA assets out of your portfolio. So we're cleaning out that traditional IRA, and now we have a beautiful place to do conversions. That's right. That's exactly right. For your stuff that you are now ramping up, do you have any employees? No, just so. Are you generating income from it? Yes. So right now, you could also do the exact same thing with a solo 401k for yourself. So you could have a solo 401k for your business, and you could have one for your business, and you can implement both strategies in the same way to open up back to a Roths for both of you guys.

41:48The Money Guy:The only curveball you go run into, Emily, is your traditional IRA is a much bigger account. Yeah. And the only catch with Solos, realize these things were set up by the government to incentivize small business owners to set up retirement savings vehicles that was very similar to what Fortune 500 employees could have. The limitation is once they get over like$250 ,000, a lot of the tax filings, the$5 ,500 and other things they exempt you out of now start showing back up on the scene. It's not a deal breaker. It just means you have to actually now start complying with some of those things. So if you did this, you just want to make sure you're going in with your eyes fully open so that you stay compliant on all the processes.

42:27It's not hard. It's just a box you have to check. Yeah.

42:29The Money Guy:It's like most things. Remember what I always talk about on the show is we can tell you everything because building wealth is actually pretty simple. But that doesn't mean that complications don't just start showing up as the success shows up. You realize it is so hard for us to create content and data on a five-year, 20-year, 40-year because just so much of life is going to happen. What I get so excited about with you guys is if you were like a client of the firm, every year we update all these things and we course correct. So every one of those 1 % differences that we're changing the direction that are using creating huge results, We get to kind of in real time adjust that for you guys on your personal situation so everything is not maximized on a five-year basis, not on a 10-year, 20-year, but every year we figure out what tweaks we need to do to give you the best version.

43:23The Money Guy:So that way we can figure out, do y 'all need to save more or do we just need to change the structure of how we're funding this? That's the stuff you hear the excitement in both of our voices because that's where the magic stuff happens. It really is, is we take very successful people. You guys are super successful and we get to tweak it and get you the best version of it. And, you know, honestly, like I've been asking myself that is like, are we at a point now of wealth where maybe we should consider working with like a financial fiduciary or somebody to help? Because this is starting to get into like the hard mode of the game, right?

43:55Like you said, like more money, more problems or more complexity. And so I have been like talking to Kenji too. I'm like, you know, like there's a point at which my knowledge extends and like ends. And I think this could be an opportunity for like you're saying, like getting more of that real-time help of like course correcting. I don't want to just set it and forget it. And then 10, 20 years from now, I'm like, oh man, I wish I would have. Right, yeah, exactly. My favorite video game growing up was Contra.

44:22The Money Guy:They came out that if you went up, down, left, right, left, right, BA, they give you 30 lives. Do you realize it was a cheat code because it now allowed what I couldn't do in three lives, I could do in 30 lives. You realize you've only got one financial life. So if you don't, if you screw it up, you got the three. You don't even get the three. You get one. No cheat codes. So you don't know. We are the cheat codes. Because we are done. We are the up, down, up, down, left, right, left, right BA. It's because we give you, you know, because we've done this hundreds of times. We know where all the pitfalls are and all the struggles are.

44:59The Money Guy:So that's what I know you've been doing boss and all these other things. But I kept going, man, the Contra code has to come in here somewhere because that is the way this kind of works financially as well. I want to make the best play is what they say. The play that gives you the most chance to win. You can make the best play and still lose, right? Because that'll happen sometimes in life. But as long as you did what was going to, in theory, give you the best chances, then I'm happy. So as long as we get that plan settled in motion. There's actually a third boss, and it's not really a boss. Once you've beaten the game, then you get to do some pretty fun stuff.

45:37We thought a visual representation of this would get you excited. Once you get past the first hurdle, and then once you get past the second hurdle, then you get to actually do the stuff that you mentioned at the very beginning. Hey, I want to be generous. I want to leave a leg. I want to do other things. I need to make sure that I make decisions with my money so that I can solve the problems that I have. But once I've solved those problems, then I get to do what I want, when I want, how I want, and have the impact that I want to have. And that, when you get to that part of the journey, that's when the game gets really, really fun.

46:10Here's your homework. You ready, guys? Ready. Number one, we're going to give you copies of all this. Everything we've gone over, we're going to send to you. We want you to rework the assumptions. Work the assumptions based on what you feel comfortable with and do it in sort of a 3D fashion. The dream, which you've got down. The down to earth, which is probably even a little better than what we've laid out. and then the doo-doo, what we've kind of laid out, very conservative. We then want you to take this and either do it yourself or consider finding a professional to help because once you have the assumptions in, then you want to do the Monte Carlo test.

46:39We've all done linear straight line assumptions. What we'd really want to do is run a Monte Carlo simulation saying, okay, what's our probability success with this group of factors? Okay, what if we change this? How does our probability change? And continue to iterate through the process. As you're doing that, we want you to optimize. You guys should do some research around, hey, should we be doing solo 401ks? If we do solo 401ks, does that mean that we can then consolidate our IRA assets? If we then consolidate our IRA assets, does that mean that now we can start doing backdoor Roths and really starting to optimize?

47:12You guys are in a great spot. You are in the driver's seat. You had me nervous for a while. I was like, but wait, there's more. You guys are great. You're in an awesome, awesome spot. And I think there's a lot of people out there who are going to look to you guys and say, man, I want to be able to recreate and do what they've been able to do.

47:29The Money Guy:Bo, if others want to know how to do exactly what Emily and Kenji have done, where do they need to go? If you'd like to be a guest on Making a Millionaire, you can go to moneyguy.com slash apply. Or if you'd like to check out any of our free tools and resources, you can go to moneyguy.com slash resources. Thank you so much. I'm your host, Brian Preston, Mr. Bo Hanson. Money Guy team, out. Making a Millionaire is hosted by Brian Preston and Bo Hanson. Brian and Bo are partners at Abound Wealth Management. Abound Wealth Management is a registered investment advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with the securities laws and regulations.

48:07Abound Wealth Management does not render or offer to render personalized investment or tax advice through Making a Millionaire. The information provided is for informational purposes only, may not be suitable for all investors, and does not constitute financial, tax, investment, or legal advice. All investments involve a degree of risk, including the risk of loss. The guests featured on Making a Millionaire are not clients of Abound Wealth Management at the time of recording. Their participation should not be considered a testimonial or endorsement of Abound Wealth Management. Hear that? That's the sound of busy.

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