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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 retirement questions. Say goodbye to the oversimplified advice that you've heard hundreds of times. This show is all about the nitty gritty. As always, this is just a show, not financial advice, but you can text your questions to (913) 363-1234, and we'll feature them right here. David, what do we got today?
David:Hey, Mike. When creating a plan, what do you focus on first?
Mike:So let me give you the answer that most people would expect me to give. Okay. Income. It's what everyone starts with. Well, how do I generate income?
Mike:And that's a funny thing when you think about it. Okay. Well, I've worked, now I wanna stop working. So how much income can I generate with reasonable amount of risk? And that will be it.
Mike:And then I'll I'll build my life around that.
David:Oh, yeah. Like, so this is how much income I have, and so based on that number, that's now what I can do.
Mike:Yeah. It feels very I don't know.
David:It feels like limiting. Right? It's like, I'm tied to this number here.
Mike:Well, it assumes that you win by not working. And there's plenty of research out there that suggests that we kind of need to work. We're built to work. Not necessarily work for a paycheck, but we're built to learn. We're built to grow.
Mike:We're built to do things.
David:Do something.
Mike:We're creative people. And if you don't think you're creative, engineer, attorney, you know, people that typically, oh, I'm not a creative type. You're creating solutions. You're engaged in critical thought. So when people say, well, what's the process?
Mike:How do we solve income? How much income can I have? Everyone focuses on income. I would take a very different route. And my planning process, for what it's worth, is it seems like it's just completely pack words.
Mike:Alright. Unconventional. Yeah. Like everything else that we do here. Yeah.
Mike:So the first step in my mind is designing your lifestyle, your purpose. What's going to give you purpose? Let's say work takes up 75% of your time. Your work has given you all sorts of endorphins or, you know, maybe stress. Maybe you hate your job fine.
Mike:A lot of people kind of like their job, at least enough to be willing to stick it out a few more years.
David:Mhmm.
Mike:A lot of people enjoy when they close that deal, when they are going to work with their team, you know, their camaraderie and so
David:on. Mhmm.
Mike:And if you look at this from a neurological standpoint, your work is providing you three different levels of endorphins or chemicals. Your body produces these. It's serotonin, oxytocin, and dopamine. So oxytocin, the happy drug. Right?
Mike:Your body produces oxytocin in just moments of happiness, joy. You're in a good environment. You're making things happen. Serotonin, well, I'm not a neuroscientist, but dopamine's the more common one. Dopamine being, you know, you you accomplish something, and you get that hit dopamine.
David:You
Mike:feel great. Right? Yeah. So what happens is when you retire, you stop achieving things. You stop putting yourself on the line or having that difficult task.
Mike:You're losing those friendships from work, or you might not see them as much. And so you get a reduction of serotonin, oxytocin, and dopamine, and then you have this emptiness inside. It's not emptiness of busyness. It's an emptiness of the drugs that make up the sense of purpose. Uh-huh.
Mike:And so many people, after the excitement of the honeymoon years of retirement, the travel, and so on, they end up feeling left empty.
David:Yeah. What's that next thing that's going to get the reaction. Right?
Mike:What do you do? Garden? And I don't know. Well, let's bring that up in just a second. Okay.
Mike:Okay. Don't let me forget about gardening or lawn maintenance or those other cliches. But Yeah. What typically I see happens is that once people lose that sense of happiness or perceived happiness, I would call pseudo happiness when you first retire, then they end up starting to try and live their life vicariously through other people who just retire. Oh, we've done all those things, but we wanna go with you on your trips and your stuff.
Mike:Well, why? You've already done it. Yeah. But like but you're gonna love it so much, and we wanna be there for when you love it. And it's almost like this addiction to that first hit.
Mike:And we are talking about drugs. I don't think that's an inappropriate analogy. So why do you design your life by purpose first? It's because how are you going to have a general sense of happiness, joy, and well-being? What's the purpose of retiring if you're gonna end up being sad, lonely, and depressed?
Mike:Even if you're married, you can still feel lonely. So what are you gonna do with all that time? There's a vacuum. It has to be deliberately filled in. For some people that might be community service.
Mike:For some people that might be helping out with the family, but you're not the new babysitter.
David:Oh, right.
Mike:If your family requires you to do something, that might be an imbalance of power. Now you start to present your family because they're kind of controlling your time. It's basically a job you're not getting paid for.
David:Mhmm.
Mike:And oh, I love the grandkids. Yeah. That's fine. But you lost your freedom.
David:Right. You have to be the one in control. If you're choosing to be with the grandkids a lot to help out, then fine. Yeah. But you don't wanna be like a hostage.
Mike:Yeah. Hey, mom. Hey, dad. Hey, grandpa. Yeah.
Mike:Would you come over Friday night so we can go on a date night? Yes. That's a negotiation. You could say no. Yeah.
Mike:There's a very healthy balance with that. So what's going to give you a sense of purpose? Well, we're not gonna get existential here, but if you look at those three drugs your body produces Mhmm. They're healthy drugs. Mhmm.
Mike:K. I know dopamine gets hijacked often when you have an addiction, and addictions are very real. We'll use a lighter one, social media addiction. Yeah. You know, each time you're scrolling, you get a subtle hit of dopamine, you're hijacking your brain.
Mike:So you wanna get rid of these sorts of things. So how do you create those things? You brought up gardening. Yeah. Gardening could be a wonderful activity that gives you purpose, and it could be an absolute waste of time that leads you sad, lonely, and depressed.
Mike:And the difference is how you approach it.
David:Okay.
Mike:So if you are gardening just weeding and just keeping it clean because you feel like you need to keep it clean.
David:No. That's probably a
Mike:That's no bueno. Yeah. Okay. But if you are looking let's say you there's a mosquito problem, and you're now doing research to figure out, okay, well, you know, which plants I'm not a herbologist or a gardener, but I think oh, what's the the fluffy one that kind of some people think it smells great. I forget.
Mike:Anyway, there's a plant that apparently if you plant it, it reduces the mosquito population, and I think it it's rather nice. Yeah. I think it smells nice. My wife thinks it smells terrible, but whatever. So you could put those in there, and you're you see how you're researching something with a goal in mind?
David:You have a purpose
Mike:here. You're critically thinking that, well, if I put them over here, it could solve these issues. You need to be anxiously engaged in something. Mhmm. And a garden may fill up some of your time.
Mike:Maybe you garden and you create a small business out of your garden because you are now creating flowers and you sell them at the local farmer's market, not because you need the money, but it gives you a sense of I did this and here was the outcome. Yeah. The same as with golf. I've helped many people retire that ended up on the golf course, basically drunk, just wasting their life away. I've met other people that said, I've always wanted to take up golf.
Mike:They got a golfing pro involved. They got lessons. They went out there. They were always trying to see, how can I get one stroke off on this hole or the back nine, or how can I get two strokes off? How can I put a backspin?
Mike:I have no idea how to do that. But they're they're YouTubing. They're learning. They're testing. That challenge that you create allows you to then figure out and let me say it this way.
Mike:That challenge that you create gives you dopamine when you get that win, a general sense of oxytocin and serotonin because you're progressing in life.
David:Mhmm.
Mike:Notice how we've just covered a bunch of things that have nothing to do with finance. Yeah. That's true. Now how you've designed your life, whether that's charity and philanthropic work, maybe it's helping the kids sometimes, Maybe it's you get a part time job, but it's something you really, really like. Defining how you're going to spend your time so that you have an enjoyable, healthy outcome is the first part of it, and then you can back in the numbers and say, okay.
Mike:Well, here's roughly the income that I would need. Now you don't solve for income yet. What you do is you put together a plan, a general plan with a rough estimated tax rate there. Here's your total assets. You're not talking about investments.
Mike:You're not talking about products. You're just saying, generally speaking, do the projections work out okay? If the answer is yes, then great. You can retire. Everything else is one plus one is two.
David:Okay.
Mike:And when I say one plus one is two, it's real simple. You first, once you have your plan set up, then you've got to break your plan or your assets into three categories. You've got your pretax category. That's the IRAs, the Roths. You pull money out.
Mike:You're beginning to taxed as ordinary income. Then you've got your brokerage account. So it's not subject to ordinary income tax. It's subject to capital gains tax. So you take income out.
Mike:You're paying long term capital gains if you held it long enough.
David:Okay.
Mike:And then you've got your after tax or your tax free accounts, your Roths, for example. K? Grows tax free. There's no capital gains. You pull money out.
Mike:You're not taxed on ordinary income. It's a good situation. Now that you've divided up the three groups, then you run projections on, will RMDs required minimum distributions be an issue? And if they are an issue, what's your tax strategy look like for spending income, charitable gifting, if you have charitable intent? Because maybe your charitable intent makes it so RMDs aren't an issue.
David:Yeah. What would make an RMD an issue?
Mike:An RMD, in my opinion, is an issue when the required minimum distribution is greater than the income you need in retirement.
David:So you're you're being asked by the government, hey. You gotta take this income, but you don't really need it because you have income from other places.
Mike:Don't need that I've met people that have $4.05, $67,000,000 in their IRA. Mhmm. And they're going, yeah. I only need like 70,000 a year. Okay.
Mike:Well, how do you solve these problems? And so it's not just IRA to Roth conversions. It's understanding holistically which tax strategies will you be implementing, and how does that shift around? You've gotta consider, for example, if you retire at 60 years old, are you gonna be aggressive in the IRA to Roth conversions? And if you are, will you do them very aggressively at 60, 61, and 62?
Mike:And then 63 and 64, you start layering off that because you don't want Irma to be an issue. Irma is the surcharge. Maybe you're okay with Irma being the surcharge. Maybe you're gonna take the thirds approach. So every third year, you have a larger tax event.
Mike:So an IRA to Roth conversion because you've got wanna kinda manage Irma a little bit. There there's all sorts of things that can be done, but notice we're not talking about investments or products. Yeah. We have an overarching plan. We know the numbers work out.
Mike:One plus one is two. Now we're looking for efficiencies, and we are looking at the tax side first.
David:Right.
Mike:Why is taxes before Social Security? Well, David, thank you for asking.
David:I ask great questions on the show.
Mike:Yeah. If you file early, you could be getting in the way of IRA to Roth conversions, because there's no RMD on Social Security. Right? It's ordinary income. Yes.
Mike:That's taxed at a partial rate up to 85% of it. So maybe you need to delay your Social Security for your tax planning purposes. Maybe it's not. Maybe you wanna file earlier because you wanna preserve your portfolio. And maybe not at 62 because there's a drop off during the ages of 62 and 63.
Mike:Maybe it's at 64 is the earliest you file because that's kind of your sweet spot. Or maybe it's 67 because you're wanting to max out your benefit, but you don't wanna go past that because the spousal benefit doesn't increase past 67 years old or full
David:retirement Considerations here, it Maybe sounds
Mike:you wanna have one spouse earlier, one spouse later, because the higher benefits. So that's when then after you understand your tax planning needs, you then start to do social security optimization planning. Yeah. This is like the opposite of what you hear all the time on on articles. The income first, tax planning.
Mike:Here's your Social Security optimization report based on your longevity, you should file here ignoring all the other ramifications.
David:Yeah. It seems like we out in this space, there's a lot of emphasis on, well, you gotta hit this number. If you're at least at this number, you're great, or you gotta be in this range. We're not considering that number, it sounds like.
Mike:Lot of unintended consequences. Yeah. So it's like, you ever put together those massive puzzles? Like the thousand piece puzzles? I don't, but
David:they are in my home. My my wife likes to do those. Yes.
Mike:You know how you put together the outside first?
David:Yeah. There's always like the picture frame.
Mike:Yeah. That's like what planning is.
David:Okay.
Mike:You first wanna put your constraints together. First off, does the planning work out? Does one plus one equal two for you? Mhmm. Then you figure out your taxes.
Mike:Then you figure out your Social Security. Then you figure out your health care. Oh. Now this is interesting. So with health care, you may want to not take IRA distributions for the first couple of years, because maybe there are subsidies.
Mike:Maybe there aren't subsidies. Maybe there's a reason to be poor. Maybe there's not a reason to look poor on your tax return.
David:Oh, right. Right.
Mike:Will IRMA be an issue? Health care planning is is gonna be important. Okay?
David:Yeah. So health care after 65 is fairly simple. Right? It's Medicare. Am I right on that?
Mike:Well, you you know better than that. It's not simple. You've got Medicare. You've got Medigap. You've got Advantage Plans.
Mike:It's what's right for you is what's different for someone else. Don't read an article that says everyone should do x y z. That article is selling you something.
David:Yeah. I guess what I'm saying is, after 65,
Mike:it's It's easier to plan for.
David:It's easy because I'm doing Medicare. But then once you get into Medicare, it's like, oh, which one? I have lots of choices. But pre 65, then are you still working? Do you still have some health care through an employer, a COBRA Yeah.
David:Affordable Care Act?
Mike:Yeah. Then once you've figured all of that out, then you can start looking at your income planning. And the reason is based on all of the prerequisites you have, there are some investments in some products that may or may not be suitable for you at that point. So instead of walking in some random office, maybe they took you to a nice steak dinner, and told you that annuities are gonna save your life. Yeah.
Mike:Thank goodness that you went to this nice steakhouse to be pitched this annuity that you're gonna buy, and it's gonna pay you some great rate.
David:Mhmm.
Mike:Forget about inflation risk. Forget about all these other risks, tax risks, and so on. Guaranteed income for life, which for some people makes sense, some people it doesn't. But based on your tax planning needs, it's really hard to convert, and I'm being facetious here, a guarantee for life income stream slowly from IRA to Roth. Maybe within fifteen years, you want your income to be coming from a Roth.
Mike:So buying an annuity and then turning on lifetime income may actually get in the way of all of your other objectives. Maybe some buffer details would be more appropriate at least for the near term. And if you really want the lifetime income, maybe later on you end up buying it because you've done enough conversions at that point. I mean, for everyone listening or watching on YouTube Yeah. I wrote the book, how to retire on time, as an argument against the guaranteed lifetime income.
Mike:I recognize it has its place. I recognize that some people just sleep better at night having some of their assets guaranteed, but it's not an investment. It's a contract with an insurance company where they're gonna give you lifetime payments as long as you live, and the odds are in their favor for it to be financially better for them than you.
David:And that's okay. Right? We shouldn't be like angry about that, or should we?
Mike:People like to get angry over all sorts Are of you upset that you didn't die after you bought term life insurance? Right. People get angry because they either sold something that wasn't true, so an idea, oh, this thing's gonna get you rich. That's not gonna happen. Or this thing solves all of your issues.
Mike:There's always a detriment or many detriments. So yeah. And then once you've got all of that wrapped up, then you can do estate planning and so on. But that's in my opinion, the order, the sequence is first figure out what what do you want life to look like? A life that's gonna give you purpose, activities, and we didn't talk about the romantic relationships.
Mike:We didn't talk about family. We didn't talk much about family or friends. We didn't talk about fitness, the spiritual side of things. There's so much that needs to be addressed, which we do talk about in the workbook, the retire on time workbook, which you can go to retireontime.com and purchase. But all of these things matter.
Mike:It's design your lifestyle first. Forget about money. What's your lifestyle look like? Then does one plus one equal two? Does the plan work out?
Mike:Then taxes, then Social Security, then health care, then you can start looking for the right income. And there's over 10 ways. I've got a Kipling article on this. Over 10 ways you can take income in retirement, and guess what? They all actually work.
David:Alright. Like that.
Mike:So they all have their own different unique benefits and detriments, but they all can support a wonderful retirement. The question is which one's right for you? 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.