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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.
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. The 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. 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 it all. 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 mister David Fransen. Thanks for being here.
David:Yes. Hello. Thank you.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in by either texting us to (913) 363-1234. That's (913) 363-1234. Or email them to heymike@howtoretireontime.com. Let's begin.
David:Hey, Mike. Why do financial advisors always seem to give the same answer, which is it depends?
Mike:Yeah. It's not a cop out.
David:Okay.
Mike:I I can promise you that. It feels like one though, isn't it? Well, at at the beginning of the show, we say, like, this is not financial advice because financial advice is almost like there's a legality side of it. So I'm a fiduciary. I'm legally bound to do what's in your best interest.
Mike:How can I do that if I don't know your situation?
David:Yeah, it makes sense.
Mike:And so when you understand the complexities of financial planning, it's very easy to say something that will contradict another strategy. For example, right now, based on social security law, depending on what your taxable income is, 85% of your Social Security will be subject to your income tax, 50% will be subject to income tax, or zero will be subject to your income tax. It just depends on your tax situation. Some people are going to wanna get to the zero tax bracket or as close as possible. Some people, it may not be worth it.
Mike:You might pay so much in taxes. It takes such a hit to your portfolio that it's not worth the efficiency that you might get through Social Security tax efficiency.
David:Okay.
Mike:Another way to say that is some people have too much in their pretax accounts that to get to a zero tax bracket, they're gonna hurt their portfolio more than help it trying to get there.
David:I see.
Mike:For other people, they may be usually it's like around a million dollars or less if they have in their pretax. We might be able to get there and do it efficiently over a long enough period of time. Now, if someone can start with this at the age of 55 and pay out of pocket, we can get there faster. But if you're like 70 years old and you're trying to get there, you've got RMDs. So there's so many nuances that play into the factor of what is in your best interest.
Mike:That's why many times we'll say it depends. It's not a cop out. It's just understanding the complexities. Did that example help? Let me give you some other examples.
David:Yeah. Let's let's keep going on that, actually. Let's let's flesh it out more.
Mike:Yeah. So other examples would be like, well, here's an expression I've said over and over again. We gotta live within our emotional and economic limits.
David:Yeah.
Mike:So in my opinion, buying an annuity, a fixed indexed annuity, and turning on guaranteed lifetime for income is a financially not a good idea. Why is that? If we define insurance as is, it is transferring risk to an insurance company when the odds are in the favor of the insurance company. Right. That's how insurance companies work.
Mike:If you think you're going to get health insurance and you're going to get more out of it, then you paid in. You are sorely wrong. You've got to be the exception to the exception to the rule to get more out of your healthcare benefits. And people think, oh, I want to shop around plans. So I get a good rate.
Mike:It's like, well, hold on. You don't understand how insurance works. You typically pay more into insurance than you get out of it. And if you did get more out of it than you paid into it, your insurance would probably go. Yeah.
Mike:Whether it's you or it's the collective pool that you're associated with, like at work or so on. So no insurance is not in your favor. It's only in your favor if you're the exception to the rule. So how do annuities work? Annuities work when you pool together a bunch of people knowing that most of them are going to die off at a certain time so that the insurance company can walk away with a profit.
Mike:That's not a problem because we're defining it as it is. We're transferring longevity risk to an insurance company. And then the few people that live a long time that maybe benefit from it, that's fine. The insurance company can pay those who are the exception to the rule. Are you with me so far on term life insurance, you're transferring the, the idea that you're probably not going to die.
Mike:Permanent life insurance. It's all, it's all the same. You're transferring a risk to an insurance company. Okay. So with that said, and my, my very clear stance, I don't think anyone's ever questioned me on, do you like income for life retirement plans?
Mike:I don't think it's financially people's best interest. However, if we consider the fact that we need to live emotionally within our emotional and economic limits, if you can afford to buy an annuity turn on income stream and then have other assets on the side to offset inflation and prepare for tax inefficiencies, tax brackets change and things like that. And that's going to help you sleep better at night then by all means that can make sense. But do you see how it's there's an emotional element to this we have to consider? Right.
Mike:And so some people may want a small baseline income. Some people may want more control over their assets. Some people, maybe they have, let let's say, one person's got 2,000,000 and they wanna max out their income. There's nothing wrong with planning, a retirement plan so that you basically try to spend all of your money. I don't see anything wrong with that as long as you can manage that along the way.
Mike:But I also see the plan being very different if maybe you don't need to spend all that money and you're growing it for legacy purposes. So risk tolerance, which I define as emotional competence. Not like, are you are you emotionally smart or not? But like, what can you handle? What are you okay handling?
Mike:And what's appropriate for your time frame? Those things matter. The timelines, those things matter. Your plan, are you gonna front load your plan and travel like crazy for the first five years? Or are you pretty happy just at home with the other activities that you would like to do?
Mike:So when it comes to complexities of the plan, there are so many ways that you could adjust or tweak a plan to fit someone. I think just as a society though, we're kind of used to cookie cutter factory made that everyone fits one way or the other. Yeah. Into those kinds of situations. Mhmm.
Mike:Finance should be very customized. It should be very much tailored to the individual's needs while following certain rules.
David:Okay. And so therefore that answer that they give, it depends really is maybe justified then.
Mike:It depends means one of two things. The first one is I don't have enough information to give you an answer and there needs to be more dialogue or two. I don't know the answer and maybe they're hiding behind. I think it's mostly, I need to ask you more questions. One of my favorite things when people call in for that thirty minute call, they're telling me about their lifestyle and legacy goals.
Mike:I'll typically start by saying, walk me through your lifestyle and legacy plans. What is it that you want moving forward? And they'll explain what it is and I'll say, do you need that? Because there's a difference between wants and needs. And I ask, why is that?
Mike:Why is it that you want something to happen? Why is it that you need this, this legacy to be given at this point? Why is it that you want to maximize your income for these times? When you understand the why behind what the numbers need to be, it's so much easier to then understand the emotional element that needs to be happening. If you want to travel extensively for the first five years, let's say Very common thing people ask.
Mike:And you don't wanna be worried about the stock market. You've got low risk tolerance, but you wanna live the best life. Keeping all of your assets in a stock and bond fund portfolio, the traditional asset allocation model is probably not your cup of tea.
David:Okay.
Mike:Maybe you get specific and you do, like, a a five year SPIA. That's a single premium instant annuity. So it's a period certain. It's not lifetime income. It's just for five years, you're guaranteed that income.
Mike:And if you died in year two, someone else is gonna get it for year three or four or five.
David:Okay.
Mike:But there's no market volatility with that. It's guaranteed payments. Mhmm. Or maybe you do a CD ladder. That's another way you could structure this or a treasury ladder.
Mike:I mean, there's so many ways you can skin the cat. But do you see how we can solve the same problem in three different ways?
David:Right.
Mike:Now we're looking at tax efficiency. We're looking at the structure. And so that's why when I say it depends, there's multiple layers. There's risk. There's emotion.
Mike:There's taxes, there's healthcare preparation. There's there's all these different layers that need to be accounted for. Too often, we oversimplify plans. And let me give you a quick example of what you don't want to end up having.
David:Okay.
Mike:True story. A buddy of mine, she's a financial advisor up in Utah. Okay. And she was chatting with some colleagues, at like a little conference there. And so she tells me the story, but she basically says, how do you guys do tax planning?
Mike:Just kind of, you know, small talk. Right? And they say, oh, it's easy. We sell them an annuity and we figure out how much they need for taxes and their net income and, a little bit more. And we sell them that and we turn on lifetime income and the annuity takes care of their taxes, takes care of their income, kind of takes care of everything.
Mike:And she goes, well, how do you do tax planning? And they said, no, that's the plan we plan for how they're going to pay the tax.
David:Right.
Mike:And she goes, no tax planning is like how to minimize your tax. Uh-huh. It's like, well, hold on. As I've heard the story, I've, I've heard other people even say this. So you sell them an annuity, put them into a lifetime income stream where they've got no basically negotiating power on minimizing taxes, because once you turn the income, there's no iron or Roth conversion really in there.
Mike:So if tax rates go up, if inflation goes up, your income goes down, your net income specifically, that puts people in a tight spot. That's what we want to get away from. We want to get specific. We want to get detailed. We want growth.
Mike:We want flexibility. We want to be able to change the dynamics of it. So yeah, it depends is a good sign if someone says, as long as the dialogue afterwards ensues in a conversation about exploration and understanding. There's no such thing as a perfect investment product or strategy. So if you go all in on one or the other in any way, that should be a red flag.
Mike:We need to have plans prepared for if the markets go up or if the markets go down. If we are in a great growth market for the next ten years, or if the markets go flat for the next ten years. If we're gonna be able to take advantage of tax efficiency over the next five years during the Trump administration, if he gets it through Congress, that's still an if. Or if the tax rates go up, tax brackets go up in 2026 and we need to be prepared for that. What if tax rates go up?
Mike:The congressional budget office says taxes are expected to go up by 66% by 02/1931. There's a lot of ifs and strategic planning. And that it depends conversation is how do we solve for the future potential risks based on your lifestyle and legacy plan and all of that should be done completely custom to your vision of your future. 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.
Mike: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. 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.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.