In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss what actually happens once a household crosses the $1 million mark in their 401k, and why hitting that number raises new questions instead of settling old ones. They walk through why the balance on your statement isn’t the number you actually get to spend, how required minimum distributions can sneak up on even careful savers, and why the investment strategy that built your nest egg isn’t the one that should carry you through retirement.

Listen in to learn about the tax traps that catch people off guard when withdrawing from a 401k, why Roth conversions deserve a serious look before required distributions kick in, how the three-bucket strategy protects your income from a bad market at exactly the wrong time, and what changes financially (and it’s not what you’d expect) when one spouse passes away.

In this episode, find out:

• Why a $1 million 401k balance is really closer to $650,000 to $700,000 after taxes, and how that mistake trips people up when withdrawing for big expenses
• How required minimum distributions work, and why waiting too long to touch a 401k can create a bigger tax problem later
• Why a Roth conversion strategy, done while both spouses are alive and filing jointly, can meaningfully reduce lifetime taxes
• What sequence of returns risk is, and how the three-bucket strategy (cash, safety and income, growth) protects retirement income from market downturns
• Why moving from a joint tax return to a single filer after a spouse passes away often raises your tax rate, even if your income barely changes

Tweetable Quotes:

“While you see the million on paper, really only about 650 to 700,000 of that’s actually yours.” — Murs Tariq

“How I take money out of a 401k has some things I’ve got to think through. So, I’ve got to think through my taxation. I’ve got to think through potential problems with IRMAA.” — Radon Stancil

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

So, Murs, we were talking about the fact that if we go back, you know, kind of the 10, 

15 years ago, we would have been just like, oh, my gosh, I can’t believe that we’ve got somebody 

That has a million dollars in their 401k. And today, for us in particular, 

it is extremely common. In fact, I would almost call it uncommon for somebody not to have at least 

a million dollars saved up between, let’s say, a household of 401k money. And so, I just thought it 

would be kind of an interesting conversation for us to have about, all right, you work 30, 

40 years. You just do your job. You put money in the 401k. The company matches it. 

And then all of a sudden, you see you’ve got a million dollars. And you go, my goodness, this is 

really good. This is awesome. And it is awesome. But. Now, 

all of a sudden, we’ve got some new problems, and I thought it would be good for us to kind of talk 

through some of those problems and some of those things. People, I think, in the past also thought, 

if I ever get to a million dollars, I’m going to be able to retire and live life the way I’m 

supposed to live it and not have any kind of problem. But what are some things that, as you look 

at people with the money, especially if it’s all in a tax-deferred status, what are some of the 

things that we need to think through when we’re thinking about a retirement plan? even though we’ve 

got a million dollars in our 401k right I think you hit the nail on the head there Radon, about you 

know go back years and years ago and if you hit that that high point of having a million in your 

401k you’re like everything should be awesome for my retirement. And the fact of the matter is, 

is the markets have been really good over the last five or six years. And so, people have really 

grown their money over the last five or six years to get to that million-dollar mark or surpass 

that tremendously. And so, you know, it’s one of these things where while it feels like a lot or it 

looks like a lot, I mean, there’s all the zeros behind a million, right? But at the end of the day, 

kind of this balance of, well, what do we want the money to be doing for us? And do we even 

understand all the elements it takes to retire properly? Not just I’ve got a million dollars and I 

heard this 4% rule. We talk about that all the time. The 4% rule would say, hey, 

I can pull $40,000 a year out of this thing, and I’ll be just fine. What the 4% rule doesn’t take 

into account is a financial plan that shows how much we actually need to live. It doesn’t really 

take into account inflation or future health care costs or how you guys spend or anything like 

That kind of rule of thumb is, in our opinion, not good enough. 

And so, I think it always comes back to this idea of starting off with building a plan. And it makes 

you do the work and it makes you think a little bit about what you want your retirement to look 

like. You know when you ask people. about how much they spend a lot of times they say i don’t know 

you know I’m putting into the 401k I’m paying off the bills I’m not building up any debt and 

so, things are working so why pay attention to it and I don’t disagree with that while you’re 

working but as you start to transition having the money is great but understanding how you’re going 

to use it is going to be just as important Because you could start to overspend and you don’t want 

to get in that place of where you’re trying to recover based on or you take more aggressive 

investments to try to recover your overspend or if you started off retirement on the wrong foot. 

I know we can go in so many different areas from what I’ve just said, but I mean, 

what are your thoughts around the million and what do we need to really be thinking about? Well, I 

agree. I think what we’ve got to think about is what we would, you call it a plan, but really kind 

of like, how am I going to take money out of it? You know, I had somebody call me up and they said, 

hey, I want to pay the house off. And I was like, okay, well, where are you thinking about to pull 

in the money? And they said, well, I’m going to pull it from my 401k. And I was, so I said, 

well, how much we’re going to need to pay the house off. And it was like a little over a hundred 

thousand dollars. But what they hadn’t thought about yet is if I’m going to net $100,000 out of a 

401k, I’ve got to take out maybe $140,000 or $150,000 because I’ve got to now pay taxes on that 

money. So how I take money out of a 401k has some things I’ve got to think through. 

So, I’ve got to think through my taxation. I’ve got to think through potential problems with IRMA, 

which could be surcharged on my Medicare premiums. So, all these things I’ve got to kind of think 

about. And then I’m going to have something that’s going to come and hit me whether I want to take 

the money out of the 401k or not, and that’s called required minimum distributions. So, an easy way 

to think about that, if I’m 65 years old and I’m not going to try to take out my money out of my 401k for the next 8 to 10 years, very likely it’s going to double. if I don’t take any money out of 

it. So now if I have a million, I have two. If I got two, I got four. And my requirement of 

distributions are about 4% roughly of my balance. And so that could create a problem. 

So, the other thing that we want to think through, and we spend a lot of time with this, Taylor on 

our team, who’s our director of financial planning and tax strategist. She basically is going to 

look and say, should I take some of the money from my 401k? IRA money that’s tax deferred and do a 

Roth conversion and get that money from the tax deferred tax in the future status to tax free 

growth. And think of the power of that. If I have a million dollars in a Roth IRA and it doubles to 

2 million, it’s all tax free to me and to my heirs. That’s a very, 

very big thing to think about. So, I think that taxes is an issue to consider, 

and we walk our clients through that every single year when it comes to the tax strategy. But I 

think one thing that’s important to think about too, Murs, is when I’m 30 and I’m putting money 

into a 401k, my investment strategy or the way I think about things is very different than if I am 

close to retirement. So how do you… explain to somebody maybe how they might want to start 

thinking about their overall investment strategy. And I know we talk about the three buckets, but 

if you could just kind of walk that through of what does that look like for a person that’s close 

to or in retirement? Yeah, it’s I’ll go back really quick to one thing you said, because it made me 

think of a conversation I just had with someone else, a potential client. 

And we’re talking about their 401k, and it was a sizable one. And they’re like, 

how did the taxes work on this? And I said, “Well, you know. you know, while let’s just imagine it 

was a million dollars, I kind of made up a number of sayings, you know, really, while you see the 

million on paper, really only about 650 to 700,000 of that’s actually yours. 

And they go, what? Hang on a second. And so just remembering how this vehicle does work, the tax 

deferred growth on it. And so, they were like, we need to fix that. We need to come up with ways to, 

you know, keep more of it in our pockets. And so that led to a really nice conversation. around 

conversion planning and just having a good withdrawal strategy. But to your point, to your question 

around, you know, as you’re younger, you’re younger, you can be more aggressive. Your sole focus is 

just building that nest egg. And then you get maybe five years out from retirement, you start to 

think, oh, this is becoming a reality. And maybe I shouldn’t be aggressive. Or what we would say 

is, you know, segmenting the money so that we can get really efficient with our withdrawal strategy 

is going to be tremendously beneficial. we’re actually starting to pull the money out because 

there’s this big thing that we want to be doing our best to avoid is, you know, the technical term 

in our world is called sequence of returns risk, which is basically saying that, hey, if you walk 

into retirement and you don’t have a good plan to avoid sequence of returns risk and say the 

markets fall 20 or 30 or 40 percent as you’re walking into retirement, you have a choice to make. 

Am I going to am I going to live the way that I plan on living and pulling that, you know, four or 

five thousand dollars a month out of it? Or am I going to give up on my lifestyle so that I can buy 

some time for the markets to recover? Most people are going to want to live, right? And so, they’re 

going to pull that money out of the portfolio regardless of what the markets are doing. And that’s 

where we have a really detrimental impact on the asset, right? Because I’m pulling at the rate 

of, say, it’s $4,000 a month. That’s $48,000 a year coming out of the account as it’s 

continuously losing money because of what the market is doing. When you have that… and you’re no 

longer putting money back in through work and contributions, well, it makes it really hard to 

recover from that because you’re not going to stop living. You’re going to keep pulling that $4 

,000 a month. And even if the markets do recover, you’re not going to get the full bang of that 

recover because you’re pulling money out. How we kind of combat that issue is we talk about the 

buckets all the time, a cash bucket, a safety and income bucket, and then the growth bucket. And so 

when we segment the money like that, if we want to be aggressive, we can still be aggressive 

because we’ve portioned out some money to be in that type of mentality for growth, for long-term 

growth. And then what the safety bucket really becomes is more of this element that’s going to 

provide us predictable cash flow. So that $4,000 a month, I want that coming from somewhere that’s 

not going to be subject to volatility in the stock market. I want it coming from a place that can 

make a decent return rate, but it cannot go down. If we have that now added into the picture, 

the formula, we’ve got the next 5 to 10 to 15 years of cash flow needs covered. 

And what that allows for is now that growth bucket, whether that’s in market-based investments or 

investments outside of the market, like private equity for better, longer-term growth, it really 

lets that bucket do its job and ride out some of the issues that you’re inherently going to see in 

a five to 10-year window. The markets over the last… Five years have been positive. 

For actually the last six years, it’s been positive five out of those six years. I think we’re on a 

really unique run. But in a 10-year window, you’re going to see some negative years. It’s just how 

this works. And so, the only way you kind of get through that is you’re not bugging it when the 

market’s down. if we have another place to draw from, all of a sudden, all these elements, 

these three buckets really start to work together very nicely. So that’s a big one, 

I think, when it comes to the investment strategy, making sure that’s going to align with, again, 

the financial plan and the withdrawal strategy. And then we start to talk about the taxation. And 

you mentioned the ability for Roth conversions. While we stick on tax, because one thing that 

Taylor talks about, and this kind of lines up a little bit with Roth conversions, Radon, is 

something that I think gets ignored at times is when we run out these financial plans, 

we’re looking at people living to age 90, 95, 100, whatever they want to see. And oftentimes 

there’s going to be one spouse that predeceases the other. And then this element of going from a 

joint. tax return and joint deductions to a single uh single filer uh is you want to talk a little 

bit about that and that that’s kind of an un a risk that goes under the radar sometimes yeah and 

this really does kind of set up for why you might want to look at doing some Roth conversions 

because what people don’t realize until they get there because you’re not really thinking so much 

about this is that when a spouse passes away, I then become a single filer, 

which means I am going to pay higher tax on those distributions than when I was a joint filer. 

And so really the opportunity that we want to look at from a Roth conversion perspective, 

if I’m going to do it, it’s better for me to do it. while I can do it as a joint filer versus a 

single because my rate is going to go up. And all of a sudden, my income’s not necessarily going to 

go down. The only thing that really adjusts in retirement for people is that if you’re married and 

both of you are alive, you’re both getting Social Security. The only thing that’s really going to 

change for most people is that whenever a spouse passes away, you go down to one Social Security 

out of the two, the highest of the two. So, your income’s not going to change considerably, but your 

tax rate will. And so that’s a big thing to consider. I think that’s an important one. 

And it’s a part of the overall plan that we do. And obviously, we don’t know when somebody’s 

going to pass away, but we know typically. If we just work off of life expectancy, we’ve usually 

got a number of years, many years to do it. But those years will just sneak up on us. 

And so, we want to make sure that we’re planning over those years to make sure that we have 

everything in play for the best tax scenario possible. One thing I just want to hit before we wrap 

this up, this wasn’t a really long conversation today. but is the estate planning part of things, 

is just to remember that when we leave money behind in a 401k IRA to a non-spouse, 

they’re going to be restricted and have to take the money out of there in 10 years. And that’s 

another reason to think about this idea of what the plan is going to look like. And again, 

some people say, look, I’ll let the kids worry about it. I’ve done everything I can for them. But 

there are strategies that we can do there even to help in that scenario. The nice thing is if we 

have our beneficiary designation set up correctly, and we always talk about having your primary 

beneficiary contingents and second contingents in place, which would be grandkids. There’s a 

lot of different things we can do there from a tax perspective because what we can do when we leave 

it behind, if we have all those beneficiaries listed correctly, then my children, 

if let’s say they’re making good income, could say I’m going to just not take the inheritance and 

I’m going to pass it on to the kids and let the kids take it out of their tax rate. 

possibly is going to be a much lower tax rate than my children, and that could be a very, very big 

tax benefit. But I guess the thing is, we would like to say this, is congratulations if you’ve got 

a 401k with a million dollars or more. That’s a great achievement, 

and congratulations. But our goal is not necessarily to say that let’s die with the biggest 401k. 

What we want to say is, how do I have a good, successful retirement? And I don’t have to worry so 

much about losing money. And I don’t have to worry so much about taxes. And the only way to do that 

is to have a good plan. Anything else on that, Murs, before we wrap this up? Nope, I totally 

agree. And that’s why we talk so heavily about the route to retirement, the risk optimization, 

optimizing our income, unified health care, tax planning, and then obviously the estate side if 

there’s money left over. Because at the end of the day, they’re all very interconnected. And if 

you’re not looking at all five of these areas together; you could be making some mistakes that 

you’re not even aware of. But yeah, I agree. Congrats to anyone that’s hit that milestone of a 

million dollars. or more in their nest egg, and it really just becomes now let’s get more efficient 

and more aware of some of the decisions we’ve got to make going forward. Yeah. So if you’ve got any 

questions about your own 401k, your own IRA, and you would like to have a conversation with us 

individually, just go to the website pomwealth.net and click on schedule a call and we’ll hop on a 

call and we’ll kind of talk it out with you and see if there’s anything that we could do to maybe 

make your situation a little bit, give you a little bit more peace of mind. That’s our goal is to 

have you where you’re living in a state of peace of mind. So, thank you very much for a nice 

conversation, Murs. We hope Everyone has a great week. We’ll talk to you again next Monday.