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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. We're here to move past that oversimplified advice that you've heard hundreds of times. Instead, we're gonna get into the nitty gritty. As always, text your questions to (913) 363-1234. And remember, this is just a show, not investment advice.
Mike:Do your research. David, what do we got today?
David:Hey, Mike. Once you buy an annuity, is it better to take it when you retire or wait so the income amount gets bigger?
Mike:Yeah. That's a very thoughtful question. So very analytical person. And this isn't just with annuities. And don't turn on that annuity, by the way, whoever submits this question.
Mike:Mhmm. There's layers to this question that need to be discussed. But first off, let's look at this from a higher level. What are they asking? Well, basically, whether it's an annuity, whether it's your Social Security, or some pensions, if you start the payout or the payments later, it's typically a higher dollar amount.
Mike:And so some people might say, well, I'm going to live a longer time. They've got longevity in their life. They've got reason to believe that a higher payout would do better for them, and so they kind of delay these payments. Other people might say, well, I can reinvest the money, so I might as well take as much as I can out now. Some people say, well, I don't have longevity.
Mike:I do want that guaranteed income, and so they might structure it that way. But here's what gets me. We don't know what the future has in store, even your own health. I've known many healthy people that just out of the blue died. So make sure that you're not trying to play God with your longevity, but acknowledge both sides of it.
Mike:Humans have an adverse reaction to loss, and we distort loss over gain. We are more likely to want to avoid pain than to gain something. Mhmm. So just understand there's a distorted position that all humans inherently have. Now with that said, where's the break even?
Mike:If you were to delay one, two, three years, how much money would you not get, and then when would that be recouped? That's the simple calculation. And you could just put in some basic numbers and ask an AI to do that calculation for you Mhmm. And it'll be done in seconds. Now here's the other part.
Mike:What are your other assets doing?
David:Okay.
Mike:So for example, if you turn on Social Security, a pension, or an annuity, assuming it's was funded by an IRA, and usually they are, all of those are taxed as ordinary income. What if you have assets in a brokerage account? What if you have a highly appreciated stock? Let's say you worked for Microsoft for most of your life, and you've got 20% of your portfolio in Microsoft. Well, that's a risky over allocated position.
Mike:Uh-huh. Microsoft's a great company. I don't think they're going anytime soon, but by way of example, maybe all of 20% shouldn't be in one company. So what if you delayed one or two years from your payments so that you could take your Microsoft stock and sell it down under long term capital gains?
David:Okay.
Mike:Many people don't realize this. Long term capital gains around the first $96,000 of gains is taxed at 0%. So if the first year or two, you're not paying taxes as you're lowering your exposure to that position, that's a pretty good deal. But it only works well if you get rid of the ordinary income or delay the ordinary income until a later time. Because if you take on, let's say, a $50,000 pension or your 40,000 is a social security, whatever it is, that eats into your 0% long term capital gains bracket.
Mike:Because long term capital gains starts where ordinary income ends.
David:Oh, yes.
Mike:Now think about it this way. So let's say you're going to take out a 100,000 of gains from a specific stock.
David:Okay. K. I've held I've held it for a long time. This is a long term.
Mike:I've held it for a long time. So you sell a 100,000 of gains, not including the basis, so you're gonna get a 150,000, whatever the the total amount is.
David:Okay.
Mike:That 100,000 starts where the ordinary income ends. So let's say you've also got 40,000 of income. Mhmm. That means 40 thousand's ordinary income. So you've got 60 of the 100,000 that's tax free, roughly speaking, and then the 40,000 that crossed the zero percent tax bracket threshold, that's taxed at 15%.
David:Okay.
Mike:Why are you paying taxes on things that you you could just delay some of these income streams. Yeah. Take more from your assets, get your portfolio more properly aligned, get a higher taxable income or not. Let me say it this way. If you take income from one place, you leave income resources from another place.
Mike:So your Social Security or pension, you could take those on at a later date. It's a higher amount, but you were able to take more from your assets tax efficiently. Sometimes that makes sense. Sometimes it doesn't. So when people only look at a breakeven analysis, they're missing other potential strategies that could get in the way.
Mike:Now let's say that someone was looking at this from an IRA standpoint. So you've got your IRAs pretax. You're gonna pay tax on the distributions. Mhmm. And you've got this brokerage account with one stock that's a lot of your money.
Mike:Well, you might think, well, I need to get my IRA to Roth conversions done. Well, what if you just delayed it two years, took income tax free? You have got more money in your IRA that's able to grow at a greater rate, and then you're still able to coordinate your IRA to Roth conversions and your income with the standard deduction with all these other I mean, there's there's just things to be aware of. Mhmm. Now I've oversimplified the tax calculation because you do have the standard deduction.
Mike:You do have your modified adjusted gross income, which matters. And if you're 65 or older, you also have the standard deduction, which could matter. These are thousands of dollars here and thousands of dollars there that account for a larger or smaller tax bill. Right. So the question is great in that, yes, it may make sense based on your expected longevity to maybe wait a day or two, look at the breakeven.
Mike:But also look at your entire portfolio, and are there other tax strategies that you want to implement that may get in the way of you turning on your income?
David:Because you might have all these different income potential income sources that are all taxed differently. And so what combination can we find the most tax efficient? Yep. Just be thoughtful about it.
Mike:Lifetime income is not a very flexible income source. So what do you do? Yeah. Well, I'll tell you what you do. Grit your
David:teeth and just pay the taxes.
Mike:No. You do planning. Okay. Look at the details. The details matter.
Mike:Yeah. I mean, I guess, I'm almost hesitant to even say this, maybe you could take your annuity and say, hey. We don't want distributions. Maybe the annuity company will negotiate and say, no. Just put the funds into your IRA, and maybe you could like break it up a year.
Mike:I don't even know if that's possible, and if the insurance company would even be willing to do something like that. Right. So don't put yourself into a position where you're saying, well, I wish I would have, and then fill in the blank. Be proactive about not just when to turn on income, not when to coordinate the income sources, but look at the tax consequences as well. Because if you're paying $10.20, $30,000 less in taxes in one year, that compounds over time.
Mike:Yes. That's more money, more dollars in your accounts. And if you have more money in your accounts, then they have a better chance of growth. So be mindful of the holistic side or the more comprehensive side of your planning and strategies that could be done. Remember, you don't win by buying products and holding them and just forgetting about it.
Mike:You win by strategies, and strategies require your ability to be dynamic and adjust along the way. 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 podcasts. 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.
Mike: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.