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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 questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today by going to Amazon or go to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial advisor, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much discuss whatever's on your mind. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my colleague, mister David Franson. David, thanks for joining me.
David:Hello. Thank you. Glad to be here.
Mike:David's gonna be reading your questions, and I'll do my best to answer them. You can send your questions in at any time really during the week by texting them to 913-363-1234. Again, that number is 913-363-1234, or email them to hey mike at how to retire on time.com. Let's begin.
David:Hey, Mike. I'm struggling with understanding how to generate income from my 401 k. Can you break down your steps and strategies?
Mike:Okay. So the first thing is to not really look at the 401k and how to turn it into income. That's kinda like putting the cart before the horse. First, put a plan together. Forget about the investments and products and all of that for a second.
Mike:And just how much have you saved? How much do you want? And then put it into a nice broad based general overview as a starting point. Could you, in theory, generate enough income at first? Do the numbers work out?
Mike:That's the first thing. Put that plan together, and then you explore the strategies. So when you file for Social Security, if you file at 62 versus 70, how does that affect the plan? If you have most of your assets in pretax four one k and nothing else, how do you prepare for your RMDs all? So you need to explore the the, specifically, the tax strategies, but also health care strategies, Social Security optimization, and and go down the list.
Mike:Once you understand your plan and the strategies that you want to implement, then you can start to put together your portfolio. This is how you take that that lump of 4 one k, roll it into an IRA in theory, and then start to diversify your assets based on the objectives of the plan and the strategies that support the plan. At the end of the day, when and this is an income question, there's really 3 ways you're gonna generate income in retirement. So in your 401 k, you can buy an annuity, turn on income stream. K?
Mike:You'll be taxed as income for the rest of your life if it's pre tax dollars. Kind of like a pension would be taxed as income that's guaranteed for life, assuming that you did the lifetime income benefit. And you're at risk of inflationary risk, and you're at risk of taxes going up in this situation. If taxes go up, you would receive less income. So it's not guaranteed comfortable income for life.
Mike:It's just that dollar amount's guaranteed for life. You can also invest with your 41 k in a dividend based portfolio, whether it's a preferred stock, so stocks that pay a dividend or are expected to pay a dividend. They're not guaranteed to pay this dividend. Bonds can be a good dividend source. There's all sorts of sources that can provide a dividend in retirement for you.
Mike:Even, I would say, REITs, for example, they they kinda pay a dividend, they cash flow. DSTs, there's a number of investments, but it's really a group that has risk to the principal. The dividend sometimes is guaranteed, sometimes it's not guaranteed, but you're getting that. So you're preserving the principal. You're getting income.
Mike:It's not guaranteed income, but it's it's kind of nice. Right? Or you can take income off of your growth. So you invest your assets to grow. And let's say they're averaging 6% and you pull out 4%.
Mike:And these are very general rule of thumb terms here. But you can also just generate income from growth. Each one of those 3 very basic versions of a strategy that you could turn your 401k into have different benefits and detriments. Blending them together might be appropriate. I will admit my book, How to Retire on Time, was written to convince people or to argue against the lifetime income stream.
Mike:I do not believe it is financially in people's best interest. That's just my personal belief. I explained it in my book. But, you know, sometimes you need a certain amount guaranteed to sleep better at night. I get that.
Mike:That's fine. Then we're using insurance correctly. The dividend portfolio as or as interest rates go down, the dividend part might not be as competitive as you'd like it to be. And then you've got the growth. Growth allows you, in my opinion, to have more flexibility in the future.
Mike:You've got a more dynamic nature. And so blending growth with risk for long term growth and growth with protection really opens up, I think, a lot of options there. But that's that's kind of how it would work. So take the total amount in your 41 k, build a high level broad based plan first, then explore the strategies that you would want to implement to get more out of your hard earned money, and then start looking at investments and products that can generate that income, whether it's lifetime income through annuities. Again, I don't necessarily recommend it, but I want to acknowledge it.
Mike:Dividends, which are becoming less competitive in my opinion. And then growth, which isn't necessarily my bias. It just it's when you look at a 30 year retirement, a rigid plan, which I I think dividends and annuities are kind of they they kind of fall under that, may hurt in 10, 20 years. So I do think growth is an important part of every portfolio. So let me say it all this a little bit differently.
Mike:We don't know what the future has in store. But in retirement, you know, you need income. That's 1. 1 income. You're gonna need to prepare for 2 markets.
Mike:So the markets are gonna go up or they're gonna go down. What strategy will you implement for both of those situations? Because when markets go down, dividends can dry up. They're not guaranteed, which many people say, oh, these are tried and true dividend positions. Well, maybe.
Mike:Some aren't. So 2 markets, how do you draw income without accentuating losses when markets are down, and how do you draw income when markets are up? And then from a tax standpoint, there are 3 sources. You've got your pretax accounts like your IRAs. So you pull money out, you're gonna pay income tax.
Mike:You've got your tax free accounts like your Roth, so it can grow tax free and payout tax free. And then you've got your after tax, so you're subject to short term or long term capital gains, but it's not income tax. And how do you structure your portfolio to give you multiple options on how to draw income when the markets are up or down? You want income. Sure.
Mike:There's a target income. You've got 2 market situations, and you've got 3 tax buckets to draw from. Understanding how to build multiple strategies to support your quality of life based on that very basic framework is how you start to, in my opinion, turn a 401 k into a comprehensive plan. Do you have flexibility? Can you dynamically adjust along the way without accentuating losses?
Mike:Because and this is just my opinion. It's a very strong opinion. I can back a lot of it up with research. But the set it and forget it mentality, a great way to get less out of your money, whether it's for your income or for your estate, your legacy. Because simplicity does have a cost.
Mike:Oversimplified plans have a cost. If you wanna see how you can potentially get more out of your money, how to turn a 41 k into a retirement plan, or really just see how to better understand what to do when the markets are up or down and how to use 3 tax sources to create a tax efficient portfolio with tax efficient income and tax efficient planning, go to www.yourwealthanalysis.com today. That's www.yourwealthanalysis.com to request your analysis at no cost. We'll sit down. We'll have a nice conversation and really open your eyes to what could be done.
Mike:That's www.yourwealthanalysis.com. 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 podcast. 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.
Mike:Learn more about Your Wealth Analysis and what
Mike: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.