Personal Finance

I'm about to turn 50 and make $1 million a year—how can I maximize my portfolio's value?

John Seetoo

Published: January 3, 2025 8:13 am

24/7 Wall Street Key Points

• Managing large nest eggs to legally avoid early withdrawal penalties and confiscatory taxes can be just as daunting as the saving and scrimping part.
• Implementing the tax saving estate management strategies can take 5 or more years of execution to ensure success.
• Is your 401(k) optimized for your retirement plans? Take this quiz to see.  (Sponsored)

The F.I.R.E. (Financial Independence Retire Early) strategy has become popular with forward-thinking Gen-X and Millennials. By resisting the instant gratification marketing onslaught, they have avoided the frivolous spending of their peers to sock away significant savings for themselves and their families. Much of these funds are in tax deferred retirement accounts, such as IRAs, 401-Ks, and HSAs. 

The US tax code system, however, is still operating in 20th century mode, and there remain significant penalties for withdrawals prior to age 59 ½. Therefore, F.I.R.E. adherents need to be cognizant of alternative strategies to minimize taxes when managing their nest eggs. Maximizing the value of a portfolio so that the owner can not only enjoy early retirement, but pass it on to his or her children without undue taxation involves preparation and proactive steps to be taken years in advance. 

Navigating To Avoid the Tax Traps

A F.I.R.E. practicing Reddit poster approaching age 50 recently sought advice on managing a $10 million+ net worth portfolio he and his wife have amassed for prospective retirement in the next year or so. Impressively knowledgeable about the obstacles and tax traps that lay before  him, he has already identified specific problem spots that he has formulated strategies to address, but is open to exploring other options. His financial profile is as follows:

• Married, wife is also nearing 50, with 2 kids.
• $1 million annual salary plus passive dividend income from investments.
• Annual expenses are under $120,000.
• Anticipating $120,000 average annual spending for the next 30 years.
• Possibility of spending up to $250,000 for a handful of years (likely for travel or special events like a child’s wedding).

The $10 million+ net worth is composed of:

• $4 million traditional 401-K and IRA accounts.
• $500,000 in Roth IRA and Roth 401-K accounts
• Modest pension and a subsidized private health care eligibility option.
• Balance of wealth is in index funds, US Treasury securities, and money market accounts.

Separate from the $10 million+ net worth is their house (fully paid) and $400,000 in 529 accounts for kids’ college funds. 

The poster has identified and requested advice, specifically, on these issues:

• At age 50, he and his wife will still be 9.5 years away from avoiding the early withdrawal 10% IRS tax penalty on the traditional 401-K and IRA accounts. Additionally, his highest tax bracket status would not reduce until after retirement commences. 
• The subsidized private health care option has to be compared to the Obamacare ACA available plans to assess the best selection to take during retirement.
• He is concerned about the Income Related Monthly Adjustment Amount (IRMAA) Medicare Part B and D surcharge premiums, which vary according to trailing 2 years’ prior adjusted gross income.  These may become significant once he and his wife qualify  for Medicare.
• Wishes to leave $2.5 million as a legacy for the kids and family, but does not want them dependent on those funds.

Planning – Sun Tzu Style

Sun Tzu is perhaps the greatest military strategist in history. In addition to wartime, his Art of War has been a treatise on strategy used throughout the business and financial worlds, since the principles apply to human nature and interactions, regardless of the underlying premise.  Sun Tzu’s quote: “Plan for what is difficult while it is easy; do what is great while it is small.” is accurately borne out by the poster’s inquiries, and will likely be continued in the steps he and his wife decide to take from the strategies below:

• Start a Roth conversion ladder for the $4 million in standard IRA and 401-K accounts. This will allow for larger sums to grow tax-free for when full retirement is underway. Reduce the conversion amounts when the pension and social security income distributions commence as needed to stay in the desired tax bracket.  New 2025 guidelines would allow for $500,000 conversions that would be in the 21% bracket after calculating the married couple deduction and Medicare tax. The poster’s other holdings and passive income should be sufficient to cover the 5-year wait period on converted funds access. 
• Make sure TOD (Transferable On Death) and POD (Payable On Death) forms are signed to ensure that all assets intended to go to his wife, children, or other family members get a market rate cost basis adjustment at the time of the poster’s demise.
• In order to prevent the legacy money from becoming a crutch for the kids and other family members, a revocable trust is a tool to consider using. It can make incremental payments in accordance to the poster’s wishes for years after his demise. 
• While the poster does not specify the index fund holdings, one respondent suggested a combination of Vanguard Total Stock Market Index (NYSE: VTI), SPDR Bloomberg 3-12 month T-Bill ETF (NYSE: BILS), and SPDR S&P ETF Trust (NYSE: SPY). The respondent has $8 million in BILS and receives $250,000 annually, so he suggests a combination of growth and income that can leave the Roth and other retirement accounts to grow for as long as possible untouched. 

This article is written for informational purposes only. A financial retirement professional should be consulted for more comprehensive advice.