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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 on Amazon or by going 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 adviser, 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 to 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 Fransen. David, thanks for being here.
David:Yes. Thank you for having me.
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 them to 913-363-1234, or you can email them to hey mike@howtoretireontime.com. Let's begin.
David:Hey, Mike. When do you start doing tax planning?
Mike:The second you start paying taxes. Alright. Consider for a moment how little you cared about tax planning on your first job. Mhmm.
David:Yeah. I'm I'm I'm being transported back to the nineties right now.
Mike:No. What was your first job?
David:Walmart. Yeah. I was a cashier at Walmart.
Mike:No way. Yes. I was a cashier for Target.
David:Oh, really?
Mike:Yeah. The the rivalry, I guess, begins.
David:Yes. So the only thing that I was concerned about then was, like, where am I gonna cash my check? And, the answer was the grocery store next door.
Mike:Did they talk to you about a 401 k? No. Never. So Target I'm not saying that Target is better than Walmart, but the the manager said, alright. So you're gonna put money in your 401 k?
Mike:And I was like, no. Why? How did I do that? Well, for your retirement, but it's it's so far away. So I was an idiot back then, and I just took all the money, which I think most kids are like, well, hey, I'm barely making any money.
Mike:I need to save for college. I need to save for other things. And so maybe that makes sense. But let's say now you're 25 years old. Okay.
Mike:Let's say you've finished school. Maybe you're 27. You're a late bloomer finishing calls, whatever it is. Yeah. And you're looking at your income.
Mike:Your income growth potential would be much greater in the future than it is in that moment. That's the idea. Right? You gain skills, you gain experience, and you get paid more. Yeah.
Mike:Hopefully, that's your trajectory. So when you're first starting out, your tax planning is put it all in the Roth. Put as much in there because your overall income, you're paying less taxes ideally or you'd assume when you're at the beginning of your career. And then somewhere along the line, maybe in your late thirties, early forties, you start switching over to contributing to your pretax. Maybe 5050 pretax after tax.
Mike:And then when you get to your fifties, you start dialing in. Okay. What's the potential tax problem in the future? What what are the efficiencies here? How can I dial in a lower effective tax rate so that you can maximize your growth, maximize that kind of landing, you you or Pirates of the Caribbean?
David:Sure. Yeah.
Mike:The very first scene, Jack Sparrow goes, from the sinking ship to the dock and just walks off.
David:Oh, yeah. Yeah. I I recall that.
Mike:Such a funny scene. Yes. But that's kind of what you should be looking at from a retirement transition standpoint. How do you transition into retirement so that most of your tax planning has been done so that you're walking into retirement tax efficiently? So many people don't realize they can be doing IRA to Roth conversions whenever they want.
Mike:Mhmm. So they have this great amount of money that's in their brokerage account that they won't touch, and they have a ton of their money in their pretax account and nothing in their Roth. And they're like, well, I can only contribute so much to my Roth, and they make up a bunch of excuses. Why not start taking in your fifties or even late forties? A large chunk of the pretax dollars that are qualified there, they're not subject to capital gains and move them over to a Roth and just pay money out of your brokerage account.
David:Mhmm.
Mike:Your qualified account or Roth is much more valuable, in my opinion, than any brokerage account or pretax account. It's the icon. It's it's everything you want in a Roth. It grows tax free and it pays out tax free. The question is, how do you get the most amount of money to the Roth?
Mike:That's one side of tax planning. Another side of it is you can use alternative investment strategies, not in alternative investments, but like alternative strategies, like cash value life insurance can be used to take care of your you know, when you're working your forties, you probably want some sort of term or death benefit based life insurance. But what if you could have a death benefit life insurance that has a cash value that also grows tax free, can't go backwards, and you can borrow against tax free. It's like a Roth that's principal protected. It's not going to get you rich.
Mike:Right. But it could outpace your bond funds. The cash value could, and you could do all sorts of things with it. So this is where the complexities of planning come into play. If you're a real estate agent, you need to understand the options that are there.
Mike:Are you going to sell your real estate properties for cash, pay the taxes, and then put it in something else? Or are you going to 1031 into a like a Delaware statutory trust so that you defer all the taxes, you maintain your cash flow, you maintain the ability to appreciate the value of the real estate investment, fractional real estate holdings. Right? So what's your exit strategy? If you're gonna pay your taxes upfront, just sell the property, pay the taxes.
Mike:How do you prepare for that? You can look into other things like oil and gas partnerships. You can look into using it in cash value life insurance to absorb the taxes and hopefully through positive arbitrage. Basically, how it works, you could structure it to slowly liquidate and have more. Here's the point.
Mike:I'm going down a really deep rabbit hole here. I apologize. But can you can you get a sense? There are so many things you could do. Yeah.
Mike:But if you don't plan ahead, if you don't methodically spread out these tax strategies, it can be difficult. So many people come to the offices here and they say, alright, I'm retiring. Let's do our tax planning. And I'm going, if you only come into our office 5 to 7 to 10 years ago, we could have been more effective in the strategy, in the preparation of your tax minimization than saying, well, I'm retired. I've got an issue.
Mike:Let's solve it. Yeah. We can still solve it. Yeah. It's not the end of the world.
Mike:It's just not as ideal as starting earlier on. And I'm not sitting there saying, well, you should have come in earlier. I'm not gonna guilt anyone in anything. It's great you came in. Yeah.
Mike:But the ideal situation is that you start as early as you can working with someone even if it's like a little coaching here or a little coaching there. I had a a 30 year old kid come. I shouldn't say kid. I'm in my thirties, but a 30 year old, which is kind of young for someone to come into our offices. Yeah.
Mike:We did 1 hour of tax planning and the amount of benefit he's gonna get for the rest of his life from that one hour we spent together will pay huge dividends.
David:Yeah. You know, a lot of people, myself included, were just not like planners or our brains just aren't wired to sort of plan ahead. So how can we how can those of us out there listening sort of overcome that and transition into more of a look down the road and be more of a planner?
Mike:That's a great question. I don't know. This is a behavioral question. And really, what we're asking people to do is to do something that's probably more painful than just kicking the can down the road. It's very easy to kick the can down
David:the road.
Mike:We as humans are hardwired to avoid anything uncomfortable, anything painful, anything difficult. Life's already difficult enough as it is. Life is tough. Yeah. So why would anyone want to add one more thing to the list?
Mike:I mean, really, that's that's what and when we boil it down, there are 3 things we care about. It's our health, our wealth, and our self. So do we have good health or not? Do we have enough money to live the life we want? And do we have enough mental health?
Mike:If that's the right way to put it? We're not overly stressed. We're not overly, you know, losing sleep or whatever it is. That's what we want. So the people I have found to be the most successful in life or as I saw on a box, I love this hashtag adulting.
David:Oh, Oh, yeah.
Mike:The people that are really adults. Uh-huh. And that that's not meant to be condescending in any way. But the people who master being an adult in my mind are the ones that recognize, hey, this is not comfortable. It's not convenient, but I see the long term benefits.
Mike:Why does someone go to the gym and inflict pain upon themselves to have a longer life, more health, less risk of falling or whatever it might be? Why does someone eat healthy when they could just gorge themselves with whatever food they want? Because it gives them more happiness, joy, well-being, health, stability, clarity. Put the adjective you want in there over
David:the long
Mike:term period of time. There is no coaxing people into doing this. Tax planning is something you have to want to do and go out of your way to do it. That's just it. I think of the CPAs.
Mike:Hey, CPA, Please do my tax return. Great. Here it is. Here's the hourly rate. Would you like to do tax planning?
Mike:Well, how much is it gonna cost? Will we charge you an hourly rate? Well, can you guarantee that I can save money and not pay as much? No. I can't.
Mike:Everyone's different. So why would I pay you on to do something that you can't guarantee me result well? Do you want a professional look at this or you wanna ask chat g p t? Yeah. Well, chat g p t gets it wrong, but you wouldn't know that.
Mike:And then you go down this this issue, series of issues here. Tax planning makes a huge difference. The 0 tax bracket is not in your best interest, but just defaulting and kicking the can down the road and funding your 401 k and saying I'll figure it out later also can hurt you. The amount of tax efficiency that you have in the future is huge because those who don't do it are subject to tax risk so that the taxes could go up. They're subject to legislative risk.
Mike:They could technically just close the door on Roth and just say no more. We we only pretax is allowed at this point. They could do that. So honor everything that's in the Roth. But the tax code written in pencil, they can change it.
Mike:I mean, they could change anything. These are things to be concerned about. Tax planning, it starts the second you start paying taxes, and it's a lifelong endeavor. You're listening to how to retire on time. That's all the time we've got for the show today.
Mike: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. 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 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.