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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire On Time, a show that answers your retirement questions. We're here to move past that oversimplified advice and get into the nitty gritty. As always, text your questions to (913) 363-1234. Again, (913) 363-1234. And remember, this show is just a show.
Mike:It's not financial advice, so make sure you do your research. David, what do we got today?
David:Hey, Mike. Which is more important, portfolio growth or tax minimization?
Mike:Notice the paradoxical balance. Finance is very paradoxical.
David:Okay. Yeah. What do you mean by that?
Mike:You can have two seemingly contradictory objectives, when brought together, can create a genuine strength.
David:Okay.
Mike:So if you want lower taxes, don't spend money, take the lowest income possible in your retirement, and just kick that tax can down the road as long as you can. Right. That doesn't sound very fun. Yeah. And then growth, when I first started in the business, whether it was a qualified account or if it was a nonqualified account, like a brokerage account, It was, hey, we're gonna trade this and grow it as much as you can, and forget about the tax ramifications, because the reality is you should be thanking us for paying taxes because you've grown your money.
Mike:Very, very ignorant. So let's break this down a little bit. Okay? And I wanna I wanna do a little bit of a confession. This isn't like a hidden secret here, at least in our office with people we talk about, but it's a confession because it goes against everything I was taught to believe as I was brought up in the industry.
David:Okay.
Mike:The confession is the amount of work, in my opinion, it takes to run a proper portfolio is a lot less work than I think people realize. And let me explain that.
David:Okay.
Mike:Let's say we've got a 100 clients versus a thousand clients. So there's a different volume. It's the same amount of work to manage the portfolio. Whether it's one person, whether it's a team of people, it's the same amount of work to manage the portfolio, because it's infinitely applicable to all of the different clients. A 100 clients versus a thousand clients.
David:Okay.
Mike:With me so far?
David:Okay. Yes. Same amount of work to maintain the portfolio for either Because they're
Mike:all in the same portfolio or portfolios.
David:Okay.
Mike:Now every single client has a different tax situation. So in my opinion, as I've evolved over my career and had this enlightenment or awakening, it was a very rude awakening, most of our job, most of our time here at least at Kedrick Wealth is spent on tax planning, not growth. Notice how that's like people think they're paying us, paying the adviser to grow your assets. And most people are paying a percentage of assets, this participation award, 1% of your assets, because that's but it's the same amount of work for them. They're probably not doing a custom portfolio for every single client.
Mike:There's no way that could be done well.
David:Right.
Mike:No way.
David:Well, there's not enough time in the day to research each person's preferences or risk Yeah.
Mike:Average portfolio for someone today, not just in retirement, but in general, it might be like 150,000.
David:Okay.
Mike:So not much money every year. A $151,500 to, like, what, manage someone's portfolio full time with a custom? Either you're you're not doing the appropriate amount of research, and you're just winging it, or you're losing money, and you can't sustain a life. You can't earn enough money for a living. So everyone has to go into certain portfolios.
Mike:Growth is very, very important. But when people come to the year and they say, well, hey. What's the fee really get me? Usually, it's, okay. What's the net of fee performance?
Mike:And that's an important metric. If you were to do a buy and hold portfolio that you manage yourself versus an adviser who's managing it for you, could the adviser get a better performance? We don't wanna promise performance, but do you believe their time, their due diligence, their systems, their algorithms, their models, whatever they're doing, could that do better for you Netafiz than on your own? That is a fair question.
David:Yeah.
Mike:But in my mind, the performance is such an insignificant comparison compared to the amount of money they're able to save in taxes, or in the growth of tax efficiency in making sure you're putting the right investments for tax efficiency or in retirement, how to take your money out tax efficiently. Mhmm. So for example, it might be like, let's have our portfolios or our you know, you're gonna take a little bit from here, little bit there, a little bit there. And when you're taking your income and you pay taxes, you have to pay taxes. That's just what it is.
Mike:Yeah. Well, for us, it's like, okay. Next year, based on the growth of the portfolio, we're gonna take x amount of money from here. We're gonna delay your Social Security one more year, and we're only gonna take it from these positions. They've grown a lot, but you need about a 100,000, a 150,000 or so.
Mike:If we take it out just from these two positions, that's gonna help better diversify your portfolio, because you had some inherited stocks. When I say inherited stocks, I mean like your pet stocks, your Amazon, you work for Amazon, your Microsoft, you work for Microsoft. So you've got, you're distorted into one position or a couple of positions. Right. We're gonna take all your income from these two sources, and you basically have tax free income next year.
Mike:So we're gonna delay your Social Security one more year. We're gonna delay your IRA to Roth conversions one more year, and they're all gonna be able to continue to grow, and now you don't pay any more taxes. The ripple effect of just that one year, you didn't pay any taxes. You've got more assets that are staying in your IRA. It's easier to grow more money when there's more dollars in the account, because let's say 6% of a million dollars has more dollars than in your account than 6% of 800,000.
Mike:Your Social Security continues to grow. That doesn't get in the way of the tax efficiency of long term capital gains. Tax planning is the biggest part of financial management, in my opinion. When you're paying your adviser, that money you're paying, whether it's, I don't know, 1%, well, it's $10,000 a year. Yeah.
Mike:If you're not getting the extensive tax plan on how to get more of your money through taxes, what are you paying them for? Sure. Because at the end of the day, there's kind of a fixed cost of managing a portfolio in my opinion based on what I've seen other advisers do.
David:That fixed cost is what just how much does it cost to research what positions this
Mike:team is with? Their salary? And maybe they're commission based. Okay. Well, how much money do you really need to do the job?
Mike:Uh-huh. Could you find a quant to pay them a fixed salary and do the same amount of work? Here's an example. Let's say you've got a million dollars, and you're currently paying your adviser $10,000 a year.
David:Okay.
Mike:So $10,000 a year. What if you had you and nine other friends, so there's 10 of you, and you all got together and say, well, what if we just paid someone a $100,000 a year, and they just did research, and we all just took their research and did it ourselves? What if you took your $10,000 a year, and you just paid a couple of subscriptions at $2,000 a year, and you took that research to manage it on your own? You could easily cut out advisers with the amount of research that's available to you. The reality is, in my opinion, yes, I'm very proud of our models.
Mike:I'm very proud of the research we do internally and independently on how to manage money. Very proud of that. But when I look at the fee that people pay us, I think it's more about the tax planning, the tax management, the tax filing, the tax minimization. It's the understanding of bringing the investment advice, the insurance advice, and the tax advice under one umbrella. Taxes, I think, is the biggest part of the conversation.
Mike:And when people say, well, we're gonna pay you, you know, x amount of money a month at the flat subscription rate that we do to get more of your money. Usually, it's like it's less money than their 1%, which that's a good situation. But it's like, okay. Well, this fee, great. You paid x amount of money a year for it, and we just saved you $10.20, $30,000 at least in taxes.
Mike:Everyone's situation is gonna be different. Some people might not have as much savings. Some people might be more. But I think the taxes, if you're gonna pay for a service, if you're gonna pay for an adviser, that is what you should be paying for and more focused on than anything else, is the tax efficiency. Yeah.
Mike:And the problem is many CPAs are really just glorified tax preparers. Uh-huh. They're not giving you investment advice because they can't. Right. They're not like you.
David:So to the answer to the question, we might lean towards tax minimization being more important than just portfolio growth.
Mike:Yeah. I mean, Warren Buffett's model is the most honest model I think that's out there. They're not an ETF. They're not a mutual fund, really. They're a holding company.
Mike:Warren Buff and his research, he's had a flat salary every year. They're just trying to grow their wealth. Uh-huh. It's a very different fee structure if you really dive into it. Right.
Mike:So I think there needs to be a change in how financial advisers that work with individuals are charging fees. That's my personal belief. I understand expense ratios because the volume they have to move assets. That that is complicated. Expense ratios on a percentage, that makes all the sense in the world.
Mike:When you were talking to an adviser, you've got an independent practice, and then they got their models. You just have to kind of ask them questions. Yeah. I think it's very good. I'm biased in this to work with a professional who's gonna ask questions you may not know to ask as long as they have the additional scope of not just investments, not just growing your wealth, not just trying to create more money, not trying to help you get rich, but also the insurance and the taxes.
Mike:If it's not that cohesive conversation, then I would ask questions. Mhmm. We'll leave it at that. I don't wanna disparage anyone. We'll just leave it at that.
Mike:So if you're not getting this kind of tax advice, if you're not getting in-depth conversations on how to pull your money out each year tax efficiently, if you're not able to dynamically adjust things based on the tax consequences as well as the investment growth. You wanna grow your money. You wanna grow your assets. You want that flexibility. You want that all makes sense.
Mike:But if you're not having that kind of conversation, and it should be in my opinion at least twice a year, I would encourage you to explore other options and let Kedrick Wealth be one of them. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcasts. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist.
Mike:Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to www.yourwealthanalysis.com today to learn more and get started.