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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 you can 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 adviser, 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, not financial advice. With me in the studio today is my colleague, mister David Frandsen. David, thank you for being here.
David:Hello. Thank you.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. Now you can send your questions in two ways. One way is by texting us to 913-363-1234. That's 913-363-1234, or email us your questions to hey mike at how to retire on time.com. Let's begin.
David:Hey, Mike. How do you create a retirement plan out of a 401 k?
Mike:Oh, yeah. Yeah. This is a very common situation. So you've you've got a 401 k or a 403b or a 457 or whatever the employer contribution plan is it grows it grows it grows and then one day you want to retire so how do you take this lump of money and put it into a plan I mean that's that's really what this is
David:And if we're we're it's funny that we're expected to just kind of like, oh, I've been an engineer or a or a baker or whatever my whole life, and now suddenly, here you go. Here's time to retire. Now you have to do this thing that you've never studied or been taught or or whatever. Right?
Mike:Yeah. So I wanna address this transition first on a psychological or an emotional level. We are most comfortable with what we are familiar with. Understand there is going to be a bias in any transition, especially when it comes to your finances. So what do you invest in in your 401 k?
Mike:Mutual funds, ETFs. That's I mean, that's basically what it is. Mhmm. You got some some growth. You got some value.
Mike:You got all these fancy terms of mutual funds in there, and you put money in there. You you get dollar cost average. Right? You're slowly adding to these funds over time, and it grows till one day you retire. It's kind of like an autopilot strategy that restricts you from being able to take anything out.
Mike:Right? Because you put funny money into a 401 k. You can't take it out without a penalty, and there's certain situations where there's some exceptions. But, basically, it's it's intended to restrict you so that you have money in retirement. Great.
Mike:An autopilot way to grow assets.
David:In theory, sounds good.
Mike:But what what happens when you need it to do more than just grow? So notice it's grow, grow, grow, grow, grow, and then when you retire, you now need income tax efficiency. You've got to coordinate the different assets and different asset classes or different products. I mean, it becomes much more complicated when you add additional responsibility to a portfolio. You really need to understand that nothing does everything well, and that what got you here won't get you to where you wanna go.
Mike:So with that, here is basically the process of how to take a lump of money and convert it into a plan. Now I wanna give you the industry favorite. Okay.
David:Alright.
Mike:The industry favorite says, alright. How much you're gonna get at Social Security when you retire? Great. How much more do you need to be able to retire? Great.
Mike:Here's an annuity. Buy it. Turn on the income when you retire. You're good. You know, wash your hands.
Mike:You're good to go. Yeah. The, and this is a true story. Asked someone. Said, how do you guys do tax planning?
Mike:Just met them as a new adviser. This was in a different state. And they said, well, you know, we we sell them an annuity, and we just make sure their income's a little bit more than what they need. So it takes care of tax planning, takes care of RMDs. It just kind of solves everything.
Mike:I about just just fell out of my chair when I heard that. Such oversimplification. The difference between an efficient portfolio and an inefficient portfolio could be a couple percent each year. A couple percent growth each year can be a huge deal, especially when you look at 10, 20, 30 years. Here's how I believe it should be done.
Mike:You first build the lifestyle plan. How do you want your life to look the day you retire? In that year, what's the income look like? What's the annual net of tax or after tax amount that you want that year to spend? Include vacations.
Mike:Include paying off debt. Whatever it is. What does that look like? And in year 2, what does that look like? And so on and so forth.
Mike:Then, once you have that outline, and I typically like to go to age 100 because even though life expectancy is around 86, 87 years old or so, with the medical advances and artificial intelligence accelerating medical advances, people may be living longer than expected.
David:Mhmm.
Mike:So assuming that you're going to maintain your quality of life until today's standard age of death, I I think we're gonna live longer than we even understand, which could be a good thing. Some people say, oh, no. Please don't. Yeah. That's up to every individual.
Mike:But you you have you have an extension of the runway, and you calculated that based on the total dollar amounts. And you're only looking at dollar amounts, the total amount that's in the pretax bucket. So when you pull income out of it, you're gonna be taxed the qualified after tax bucket, so it grows tax free, distributes tax free. That's your Roth account or after tax in your 401 k. And then you have your non qualified account, the amount that grows.
Mike:But when it grows and you you sell it, it pays capital gains. Right? You really got those 3 buckets. You wanna look at that, look at the income that you want, and run a, a nice lifestyle plan, and then you look at the legacy and make sure that you're leaving the legacy that you want. Some people say I want to leave leave a $1,000,000 to my kids or whatever the number is.
Mike:Other people say I didn't get anything, and I don't I don't want them to get anything. Whatever we have left over is going to charity. They need to earn it. You know, whatever your idea is, whatever your philosophy is, you are planning around that. Then notice we are not talking about investments or products.
Mike:Then you start looking at the efficiencies. I cannot stress this enough. We'll take social security as the first example. Social security affects your income, your taxes, and your legacy based on when you file. Even though social security, if you file early, you might be taking it at a discount.
Mike:It may help preserve your portfolio. It may hurt your tax planning. It may help the legacy. When you file, social security has a ripple effect on all other aspects of retirement. So once you put your plan together, you've got your lifestyle and legacy plan nicely articulated, Then you start optimizing.
Mike:Well, what would it look like if I took social security at 62? What about 67? What about 70? How does that affect the other parts of the plan? What if I were to do IRA to Roth conversions for through these years?
Mike:How does that affect my plan? What do my required minimum distributions look like when I get to that point? Is it more than the portfolio income that I need? Is it less? If tax were to go up, what would it look like?
Mike:Do you see how we're diving into the efficiencies here? Yeah. We're looking at how to create efficiencies throughout the entire plan before we even talk product. If someone wants to talk product about with you in the first visit or even the second visit, I'd be a little hesitant.
David:Mhmm. Red flag.
Mike:How do they know what's right for you?
David:Yeah.
Mike:You've gotta know where you're going before you can talk about how to get there.
David:Right.
Mike:So the second part is the efficiencies. Then the third part is then you start breaking down a portfolio by objectives, diversification by objective. It's not a, oh, 6040, we're gonna outgrow our problems. It's saying, okay. How much do you need in income the 1st year?
Mike:Got it. You wanna retire in 2 years from now? K. The market may crash that year. That's too short of a time horizon to take risks.
Mike:So maybe we do a 2 year treasury that year. Are you good with that? Yeah. Okay. Or no.
Mike:I don't want okay. Here are your other options. Here are the benefits. Here are the detriments. How are we gonna solve for income in that year?
Mike:Then you've got year 2. How are we gonna solve for income that year? And 3 and 4 and 5 and 10 and and so on. When you understand each year how to take income without accentuating losses, regardless of if the market is up or down, it is liberating.
David:I could see that.
Mike:Yeah. A lot of people don't go to that that degree of detail. If you know that this portion of the portfolio you don't need to touch for 10 years, it's liberating. If you know, hey, we're gonna do tax minimization, and we're gonna focus on an effective tax rate as opposed to playing the tax brackets, which do change, you're creating efficiencies. So many times, we've taken what sounds like smart advice and actually followed oversimplified advice instead of getting into the details.
Mike:And these details can make a significant difference overall in your your quality of life. You don't wanna chase the wrong markers. So and that that's the point of taking a plan, planning the efficiencies, and then building the portfolio around the plan. There's no such thing as a perfect investment product or strategy. We've got to plan around income that you want.
Mike:And if the markets are gonna go up or down or stay flat for 10 plus years, we need to be prepared for that. We need to understand how to optimize your income stream, social security. If you've got a pension, pension versus lump sum, which risk do you wanna take between the 2? It's okay either way. It's just do you know which risks you're taking?
Mike:Do you know the tax ramifications, the income ramifications, the legacy ramifications? If you're a landlord, how long do you wanna be a landlord? When do you want the landlord exit to happen? How does that look? What's the tax ramifications?
Mike:Do you defer taxes? Do you just sell it, eat the taxes? You go through the efficiencies, and then you build the portfolio. It has to be that way, or else you do not have enough context to give financial advice on investments or products, in my opinion. Too often, we fill out suitability questionnaires that say, alright, here's your 6040 or 8020 or whatever portfolio with these mutual funds and in ETFs and and just put it on autopilot.
Mike:Notice the continuation of familiar territory here. You did the portfolio and you will keep doing the portfolio, or you panic and you did the portfolio and you lock up all of your assets into income streams that are irrevocable, that may not keep up with inflation, that may not have enough liquidity for a life event, that may hinder your ability to handle tax planning. All of this, plan efficient portfolios, is based on the idea that you are growth focused, you recognize the markets go up and down, and you're looking through efficiencies. I don't think I could say it any other way. And and this process intends to get 2, 3% at least more each year through efficiencies, which really can make a huge difference overall.
Mike:If you have a 401 k and you're within 10 years of retirement or you've already retired and realized, gosh, I don't know if I have that much detail on my plan. I wanna I wanna take a closer look. Here's what you're gonna do. You're gonna go to either the website, www.yourwealthanalysis.com, and request your wealth analysis at no cost. Or you can text right now keyword analysis to 913-363-1234, that's analysis, to 913-363-1234.
Mike:Request your wealth analysis at no cost. Here's what's gonna happen. You're gonna put in some basic information. You're then gonna schedule a 30 minute call with me. I will be taking for today's show, I will be taking all the calls pending my availability for the next 2 weeks.
Mike:I'll be taking all the calls personally. I'm gonna understand or seek to understand your lifestyle and legacy expectations and a little bit more about you. Then I will run your analysis, and we'll go from there. Run your analysis, we'll review it, spend 60 minutes or so together. Maybe we'll send another 60 minutes.
Mike:Doesn't cost you anything, but the amount of clarity you can get from this is incredible. Text analysis, keyword analysis to 913-363-1234, or go to your wealth analysis dot com for more information. 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.
Mike: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. Go to www.yourwealthanalysis.com today to learn more and get started.