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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 you've heard hundreds of times. Instead, we're gonna dive into that nitty gritty. So as always, text your questions to (913) 363-1234 anytime during the week, and we'll feature them on the show. Just remember, not financial advice.
Mike:This is an educational show. David, what do we got today?
David:Hey, Mike. Which should be done first? Social Security optimization or tax minimization planning?
David:Chicken or egg here?
Mike:Or No. I'm No? I was trying to think of a prices right quote.
David:Like Bob Barker prices right or Drew Carey prices right?
Mike:Either. Okay. So the the answer is taxes first.
David:Okay.
Mike:And the reason is you don't wanna jump over dimes to pick up pennies. So if you look at Social Security as an isolated optimization strategy, as in how can I get the most out of Social Security, you may significantly hurt or lower the amount of money you're getting from other resources?
David:Okay.
Mike:So for example, if you have a significant amount of your assets in pretax accounts
David:Four zero one k, IRA?
Mike:IRA. Yep. Anything that if you take it out, you're gonna pay taxes. Okay? And you're going to, based on projections, run into issues with your RMD.
Mike:Required minimum distribution. Happens all the time. People run into the problems. And let's say you know that's coming, but you still wanna get the most out of Social Security, so you're gonna file at 62 or 63 years old.
David:Okay. So that's filing early.
Mike:You're filing early. That's a part of your adjusted gross income. Let's say 85% of Social Security is a part of your adjusted gross income at that point.
David:Okay.
Mike:All of that money is now taking up room where you could more strategically take money out of your IRA either as income or as an IRA to Roth conversion. Because RMDs are only as difficult or only as tricky as the amount of money that's still in the IRA. So if you delayed Social Security, let's say, a couple of years, that opens up more room to either spend or convert your IRA assets to Roth or just spend it.
David:Oh, okay.
Mike:Which then allows you to lower the amount, which then would allow your RMDs to potentially be a part of your income. That was a lot. Let me break down each step. Okay? Okay.
Mike:Let's say that your taxable income each year is a 150,000. Alright. And for easy math, let's say your combined Social Security, if you filed at 62 in a month, is 50,000. So a 150,000 is your total target taxable adjusted gross income. That's all of your taxes you're gonna take out.
Mike:And 50,000 of that is now your Social Security benefit for the household, two people.
David:Alright.
Mike:That means you've got a $100,000 that's leaving your IRA each year when you're 62, 63, or 64 years old, 65, and so on and so forth. Whereas you could delay your Social Security, that 50,000, and delay it till 67 or 70 years old. Okay? And now you're taking out a 150,000 from your IRA. You're paying the same taxes, but you're getting more out at a faster rate so that alleviates the burden so that when RMD start, maybe your RMD is and I'm just throwing out a number.
Mike:Let's say your RMD you can do enough IRA to Roth conversions so that your IRA balance lowers enough that your RMD is, let's say, 30,000.
David:Okay.
Mike:Well, guess what your standard deduction is? 30,000. So now you've got a higher Social Security benefit that's being taxed efficiently because only up to 85% is subject to tax, plus your RMD, all you need to take out from your IRAs at that point is your standard deduction. So that's basically tax free, and then the rest of your income comes from Roth.
David:Okay.
Mike:There are many moving parts when it comes to your tax planning. The last thing you wanna do is to arbitrarily give yourself something that's gonna give you resistance to your goals, something that's going to get in the way, something that's gonna push up your tax rates. Because tax planning really, in my opinion, is not about just moving funds over as quickly as you can. It's not even about tax brackets. Everyone, especially all the CPAs who just heard that gasped.
Mike:It's not about tax brackets. That's what we're told. That's the indoctrination. We've been manipulated to think it's all about tax brackets. Well, why?
Mike:Why not look at it from an effective tax rate? The total amount of taxes you've paid versus the total taxable events that that have occurred. That seems more appropriate to me because what if you're in the middle of a bracket, but your modified adjusted gross income pushes a certain limit that then helps your IRMA or keep your Medicare charges under a certain level here? What if you're let's see. 150,000 modified adjusted gross income, you get an extra $6,000.
Mike:Oh, but that's not a tax bracket. It's about 200,000 or so for the 22% tax bracket. Or it's like it's all these nuances that people get hung up on. They want a simple singular thought process and ignore all of the other factors. That's not how it works.
Mike:And here's the reality. If you go a couple of dollars into a new tax bracket, it doesn't really change your overall tax situation that much. You don't wanna what's an expression? You're very articulate with expressions, where you're looking at the micro, like, data point and you forget the entire picture.
David:Maybe you're looking beyond the mark or you can't see the forest for the trees.
Mike:I feel like there's a camel expression. Oh. I don't know. Anyway Straw that broke the camel's back. No.
Mike:But that's a good one.
David:A rich man can't get into I let's see. I don't know. I'm I'm going through
Mike:just gonna go the Yeah. There's something there.
David:A camel has a better chance getting through the eye of a needle than a rich
Mike:man in heaven. I don't know.
David:Yeah. We we've exhausted all of our idioms and sayings here.
Mike:But the point being is don't get hung up on tax brackets. Look at your effective tax rate. And here's my point. Do you do your tax withholdings in January saying, okay. Well, this first month, every dollar I spend, only 10% of this is going to federal taxes.
Mike:And then in February, you're going, well, this is 12%. So, you know, 12%, a little bit more. And then by the end of the year, you're going, well, you know, 22%. So Mhmm. That's not how anyone does their taxes.
Mike:I don't know a single person actually counts that way. I'm sure someone there exists. Yeah. There's someone out there for everything.
David:Yeah.
Mike:But the point being is that's not how you do your taxes. You're focused on your effective tax rate. How much do you have to pay? And so if you go a couple of dollars over, it might not be the end of the world. People are manipulated by this next dollar tax situation, which I get, but it's just the next tax dollar.
David:Yeah. Everything under that dollar stays in that in that bracket, in that bucket. Your whole thing doesn't It's get progressive. Yeah. It's progressive.
David:Your whole income isn't in the 22% bracket. Right? You graduate up. Yeah. Is that right?
David:Yeah. So we shouldn't lose sight of that is what you're saying.
Mike:Yeah. If you go $10,000 into the twenty four percent tax bracket or in the 30 whatever it is in the future tax bracket, it's not the end of the world for arguments sake. Optimistically. Yeah. They gotta come up with a better expression than that.
Mike:What could be a problem in the future Yeah. Is if your RMDs are pushing you into a higher tax bracket than the income you already want, and taxes were to have gone, sound like a Shakespeare thing. Oh. Were to have gone, hidden to Yeah. It is.
Mike:Were they if they went up in the future. Yeah. So we don't know what future tax rates are in the future. There's currently no sunset to current tax brackets, but the tax code is written in pencil. So mindfully, at a effective tax rate that you're comfortable with, doing IRA to Roth conversions, figuring out the long term tax strategy, because taxes will likely be your largest expense in retirement, health care is the next, Then you can start to see how does my Social Security fit in for my lifestyle and legacy goals.
Mike:And maybe filing early makes sense. Maybe filing later makes sense. Maybe having one spouse file earlier and one spouse filing later for a spousal survivorship makes sense. But the point is you start with your biggest problems first. And if you think that Social Security benefits are going away, let me give you your prescription.
David:Alright.
Mike:Okay? Yeah. Not a doctor. Whatever news source you're watching, watch the opposite news source. I've actually told many clients this.
Mike:If you're left leaning, watch left and right news sources. If you're right leaning, watch right and left news sources. I'm not trying to convert you to the other side of the aisle. Right. I want you to see how much sales there is in the news.
Mike:The news wins when they give you fear, when they keep you compelled to keep watching because you're scared to death. Clickbait isn't really clickbait anymore. It's now rage bait. They want you to get upset. They want you to get angry.
Mike:And on a biological level, by the way, when they get you angry you know what this does? This is a bit of a rabbit hole. Alright. Let's go down it. When you get angry or in a flooded state, fight, flight, freeze, or faint.
Mike:Oh, you know, it's the crazy uncle or aunts at Thanksgiving that no one wants to hear that's very political, and they're just just rage all over, whatever. They're upset all the time, and they have something to complain about. They're constantly on Facebook just complaining about stuff. What's really going on is there could be an addiction, not like its traditional definition, but this need to self medicate, get a little psychological here, based on norepinephrine or adrenaline and cortisol are the two big drugs that when we feel pain, our body produces it, and you can have an addictive like behavior to it. So if the news, if other media outlets can get you angry, you're going to experience these drugs that your body produces, which then gets you more in there.
Mike:Watch it more. Stay tuned longer. Click on more of their articles. There's a reason why they do it, in my opinion. That's my get out of jail free card.
David:Yeah.
Mike:But the point being is if you're very fearful of the markets, of trade wars, of inflation, of politics, of whatever it is, consider for a moment that maybe that's not the full picture, and you're being sold a story on either side of the aisle, and then that allows you to maybe see a little bit more clearly, maybe see a little bit more objectively. Because when everyone says, oh, Social Security is going bankrupt, there's usually a political angle or a marketing angle to that statement. Social Security, 80 plus percent of it is paid for by last year's taxes. Maybe there's a slight reduction. Maybe.
Mike:There are so many ways. If you read the laws and how they could fix Social Security, there are many ways they can save it. It's just no politician yet has wanted to really do that because it would be difficult politically speaking. Is it going away? Well, the largest voting bloc is the retiree.
Mike:Yeah. It's not going away. But the point being is don't file early out of fear. Look at the taxes, your bigger potential issue, then look at your health care, the second biggest potential issue, and then see how Social Security supports your overall objectives. At the end of the day, if I had to to kind of summarize this, the question is, how do you get the most out of your money?
Mike:And that requires a more comprehensive position with more strategies looked at and watching how they all connect and work together so that you're able to enjoy your lifestyle and legacy goals so you can accomplish the purpose of the money. Your entire life, you worked for something. Do you wanna be a good steward over that and get the most out of it, or do you wanna just put it in cash, live off the dividend because it's safe? That's not a healthy relationship. No.
Mike:That's not a healthy relationship with money. So what is right for you? That's a very important conversation, but it does require a more comprehensive discussion. 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, go to ww.yourwealthanalysis.com today to learn more and get started.