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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
But there's this kind of in between category called real estate. Uh-huh. So you could do some preferred stock in real estate, or you're gonna get a nice set dividend. Right? It has risk, but like it's this in between kind of diversify outside the market, but it still has some risk, but it has some stability and it's this beautiful thing that can be a nice complement to a portfolio.
David:So you're giving somebody your money and then you're getting like a set dividend and your money is getting invested in a property?
Mike:Yeah. So REITs used to be the thing. So REIT is a real estate investment trust.
David:Okay.
Mike:You put it in there, it's illiquid basically. The REIT, the trust is gonna go heavy into the real estate properties, and then you're getting the cash flow from the properties. Now because it's illiquid, more money goes to the properties. If it were liquid, like a publicly traded REIT, they'd have to keep a lot of cash on hand in case you wanted to redeem or pull your money out. So the illiquid REITs do pay better, but there's a lot of ones that are just old and they need a lot of maintenance.
Mike:They don't pay out as well. So people have shifted. The big companies have shifted to preferred stock.
David:Mhmm.
Mike:Where you might buy in and your share price doesn't increase, but you're gonna get a payout of like, let's say arbitrarily 8%.
David:Okay.
Mike:I'm not quoting any sort of investment to product. Okay. Just saying arbitrarily, you might get like 8%. That accounts for the appreciation of the property values in that portfolio plus, you know, some cash flow and so on. And you might get that for a couple of
David:years. Alright.
Mike:But usually they're callable, which means it might say, oh, you can hold it for like five years, but maybe things shift and we're gonna give you your money back and then end it early because interest rate shift or something like that, like that could happen. So it's not a contract in that sense. There's just there's some risks associated, but the idea is, you know, hey, you're bringing more stability into your portfolio. It's outside the stock market. It's a diversified portfolio, and you're a share owner of this this company that owns these real estate properties.
Mike:Yeah. And maybe they don't call it, and maybe you keep it keeps paying for a long term period of time. It's just you can't like they can force you to sell it.
David:Okay.
Mike:That's the caveat you need to understand with it.
David:Okay.
Mike:And so just understand the nuance of these sorts of things. But those are different ways you could lower your risk. Okay. The one thing you don't wanna do is try to time the market. Notice how everything is exposed to some sort of growth.
Mike:And there's usually a spectrum that people have some in fixed, some in index, and some in long term growth. What you don't wanna do is go in cash, wait for the markets to crash and then go all in because you might be waiting a little bit longer than you thought. Mhmm. And I've seen this even from the pros. So Yes.
Mike:Anyway, something to consider. One last thing though is as you're picking these investments, like if you're going to real estate, or if you have non qualified assets. So your brokerage funds.
David:Okay.
Mike:And these, you know the transfer on death, the TODs and all of that. Yeah. Self managed accounts, not IRAs, not Roths. You might consider buffered ETFs for those assets or like real estate because there might be some tax benefits associated with it. Oh, okay.
Mike:Annuities are gonna taxes ordinary income on the growth. So if you wanted indexed annuities, you might go to IRA assets instead. If you cash value life insurance has to be paid by brokerage funds. So there's there's a whole tax layer also on the investments or products you might want. You don't wanna create tax inefficiencies because you wanted the product to be forced in your portfolio.
Mike:Mhmm. So there we go. Alright. Do another question on your side? I know we're getting questions on both sides here.
Mike:I've got one from Cat if you got one on your side.
David:I let's go to you. I'm I'm I need another one so
Mike:Okay. So here's one from Kat. Now we we have two different feeds coming in. So we're we're covering our grounds. Generally, what would you suggest from a couple with almost everything?
Mike:I'm not gonna quote your amount. We'll keep it we'll keep it private here. But a certain amount in tax qualified plans, four zero one k, the COG, with respect to withdrawals and tax efficiencies. We haven't done Roth because earned too much the last five years or so, but now within one year retirements. Okay.
Mike:So the easy comparison, Kat, and everyone that's in this situation is if your current salaried income is higher than the income you want in retirement, you probably should not do IRA to Roth conversions. If your income is roughly the same as the income you want in retirement, you may want to do IRA to Roth conversions. And May is key because it's not about how much you have, it's about how much you want is income. So we have some people that have many millions of dollars, and all of it's for legacy purposes. They don't really need it.
Mike:They could literally live off of the accidental dividends of a portfolio. So that's the situation we say, look, you're not going to spend this anyway. So let's just get this train going. Yeah. For other people, they want to spend it and the RMD is already built in to the income they already want.
Mike:So if they don't do IRA to Roth conversions, then they're keeping more money in their portfolio. The gold standard of all of this is what is the effective tax rate while you're working? Get rid of the FICA tax for a second. What's the effective tax rate while you're working? What's the effective tax rate of retirement with IRA to Roth conversions?
Mike:In chapter, I think it's 10 of the book. How to retire on time. I talk about this. I call it the max tax strategy.
David:Okay.
Mike:So, what you want to consider for a moment is the effective tax rate, which is the unifying standard of tax planning. Why? Tax brackets, the percentages are gonna change, and the thresholds are gonna change. At the end of the day, how much did you pull out of your IRA, and what percentage of that went to taxes? That's your effective tax rate.
Mike:And so if you target an effective tax rate for the next twenty years, then you start to understand not just tax brackets and certain thresholds, but how to string this along in such a way that you have a constant that you can predict. And by doing so, then you can start to say, you know, maybe we're gonna target an effective tax rate, and I'm gonna give an arbitrary number. We're gonna do from 65 to 70 or 70 65 to 75 of 20%. We're gonna take our income, we're gonna pay the taxes, and whatever's left over is what's going to Roth. But we're gonna target that effective tax rate.
Mike:That's now your guiding light. And then at 75 years old, then you go, alright, let's pull it back to 15%, and we're gonna live off of things more efficiently. Mhmm. And then you've got a little asterisk that in 2031, if the tax laws change, that you will adjust your thresholds based on your effective tax rate. You wanna have a plan and then you wanna have two backup plans.
David:Oh, yeah.
Mike:But generally speaking, your income is significantly higher than what you're gonna retire into, which is very common, don't feel FOMO. Yeah. Wait. It makes no sense to get a head start if you're paying 32¢ for every dollar you convert, when if you just wait one year and retire, and you're paying 24 percent or 22% for every dollar you convert. Right.
Mike:And notice I quoted tax brackets, I get that. I'm trying to keep it simple here. It really boils down to effective tax rates, and segmenting the withdrawal rates. Kat, I'm curious, how old are you? I know I'm not supposed to say that, but in retirement planning you can say those You kinds of
David:get a pass.
Mike:If you want to put in the chat, how old are you? I can give you a little more context, see which a lot of fun. So while you're putting that in the chat, let's go to our next question here. I'm gonna just answer this one. Actually, That's slightly different.
Mike:So we'll we'll do it. 58 years old, still working. I've always been doing pre tax catch up. Should I be doing something different? Maybe.
Mike:If you're pre if you're earning more money, and this is the same the same concept. If you're earning more money than the income you want in retirement Mhmm. Then you should be doing pre tax. If you're earning this roughly the amount that you want to receive in retirement, then you might consider putting it to Roth.
David:Okay.
Mike:Because it all boils down to the effective tax rate. In retirement? In retirement and before retirement. That's your guiding light. That's it.
Mike:So again, it is I know people like, oh, Roths, we can convert. That's great. It's true. But how much money is leaving your account going to taxes and is it leaving your account faster than what it could be in the future? The tax laws are currently permanent.
Mike:That means there's no sunset. That means we don't be panicked about it. And for everyone that says, oh, well the debts getting out of hand. Yeah, but the debts an essential part of our economy. It's the spending we need to be considered of.
Mike:And if we get the spending under control, the debt will naturally solve itself. Because as long as corporate profits are in parity with also the GDP, the corporate profits are growing at the same rate of our debt. It's not as big of a deal as long as our spending gets under control. Focus on spending. Maybe you vote based on spending.
Mike:That's up to you. We don't talk too much about politics. Alright. So Kat is sorry. Well, no one knows your last name.
Mike:So both still working. One is sixty six and the other is seventy. So if you're waiting one more year and you wanna enjoy your retirement, let's say you're gonna do a normal withdrawal rate and you're gonna enjoy your retirement. Maybe someone's left over. There's no really aggressive legacy intentions here.
Mike:I don't see a huge red flag with it. I'd say work one more. Get your plan in order. And by the way, if you don't have your plan in order, if haven't gone through the process with us, go to retireontime.com and click that button that says talk to a planner. That allows you to put together your one time plan, whether you're five years away, one year away.
Mike:That's how you answer the questions in your own specific situation. And the first two appointments are free. We have a thirty minute call, and Kat for you and anyone else on here, thirty minute call, just tell us what you want. Tell us what you want from what you want in retirement and what you want from a financial professional. Just give us your list.
Mike:Then we do the first two appointments, no cost. You're gonna see the first version of your plan, you're gonna see the efficiencies, and you're gonna answer conversations like this. Okay. If you work and do pre tax contributions and then you start your conversions, here's what it would look like. Here's the tax efficiencies, Here's the tax efficiencies.
Mike:This is kind of the direction we'd wanna go. And then at the end of the second visit, you can say, yeah, let's keep going and do a one time plan. Let's keep going and we'll do the one time plan and then go to our subscription model, which we're gonna be announcing here really soon. Or we'll do the one time plan and then we'll become a private client because we only charge $600 a month. Like, for people like Kat, that's like point four percent.
Mike:Fees instead of one to 2%. Right. Because you saved more you get a deal. Yeah. Because we're flat fee advisors.
Mike:So anyway, most of retirement planning in my opinion, is withdrawal sequencing and tax planning. Because we don't actually make you money, the market makes you money. And if you follow a system, it's not that hard to manage money in the market. Because you have a system, you're not going off of a sentiment. Mhmm.
Mike:But to have that system, you've got to put the plan together first, then you explore the strategies, your system, and then you make sure you get the right tools in the toolbox so that right now, while the markets are up, you're good for the good, the bad, and the ugly. So appreciate you all being here so much. This has been a lot of fun. We'll be here every time, same place, same time next week. Always go to retireontime.com for books, for resources.
Mike:We've got tools available. You can buy our retirement planning kit, which is a lot of fun. We'll mail you our whole kit, the workbook and everything as well. And then last but not least, submit your questions. Retireontime.com/ ask.
Mike:Yeah. We'll see you next time.