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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, the 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 digitally for free on retireontime.com, or you can go to Amazon and buy a paper copy. 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 preparer, which means when it comes to financial topics, we can talk about it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational, educational, as in not financial advice. If you want financial advice, you can request your wealth analysis from me and my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thanks for being here.
David:Yep. Glad to be here.
Mike:David's gonna
Mike:read your questions, and I will do my best to answer them. You can text your questions in at any time during the week by texting (913) 363-1234. Again, that's (913) 363-1234, or you can email us at heyMike@howtoretireontime.com. Let's begin. Hey,
David:Hey Mike, How do you turn your 401(k) into a retirement plan?
Mike:This is an interesting question that's extremely common. And the reason is we assume things should stay where they are. Okay?
David:In what way? What do you mean by that?
Mike:Like, if your assets are in your four zero one k, they kind of stay there, your four zero one k kinda helps you figure out how to then maintain it, and distribute your assets from it. Okay. Whether that's right or wrong, I don't know if I would agree with that assumptive sentiment.
David:Okay.
Mike:Here's why. Four zero one k's are a wonderful vehicle that you can save your money for retirement, but they are inherently kind of bloated, in my opinion. Bloated potentially with fees. Maybe there's an adviser associated with it, but like they're more on just maintaining the plan, vetting different investments as selections. It's not the same kind of relationship.
David:Right? Yeah. In in my past, in my working past, there's one adviser of the entire four zero one k plan, and that could be hundreds of people. Right? Yeah.
David:He may not have the time, he or she may not have the time to talk about your personal situation.
Mike:Wait. They're not gonna talk to you about your tax situation. Oh, no. They're not gonna talk to you about any insurance risk if you wanna handle that. They're not gonna help you plan the gap between when you retire and Medicare and how to address.
Mike:There are so many other things about this that the four zero one k support system may not be appropriate or enough in that situation. Now there's a lot of wonderful four zero one k plans. I mean, think about any Fidelity, Vanguard, Tia Kref. You've got TSP. These are wonderful companies.
Mike:They support the four zero one k's, and it is a huge burden. But there comes a time where you gotta cut the cord.
David:Yeah. By cutting cord, you mean like just pulling your assets out and moving it
Mike:to something else? To be more deliberate about it. Okay. K. So I don't know what the statistic would be, but let's say on average in a four zero one k, in your basic four zero one k, maybe there's like 10 to 50 different mutual funds.
Mike:How many mutual funds are available on Schwab or Fidelity or Vanguard outside of the four zero one k? It's an astronomical number. How many stocks are available there? Could you put IRA assets into, I don't know, let's say a self directed IRA and buy up some real estate and have that as a part of your or buy up some gold or so there are so many other options outside the four zero one k. The four zero one k is intended to help you grow your assets while you're working, and it's tied to work.
Mike:So there's kind of a company benefit of keeping you around for that four zero one k plan. But once you retire, you gotta start looking at your options, and this is where the question comes in. The reason why I know this question exists is because many times people will come to me and say, alright, I wanna plan my retirement. I wanna manage the assets myself. No problem there.
Mike:But I wanna keep the assets in the four zero one k. That's kinda like saying, hey, can you teach me how to fix a car, but I only am gonna use a hammer and a screwdriver? That may not work. No lift. No I I don't know how to fix a car.
Mike:All the other tools that you see, my brother-in-law, he's a mechanic for Toyota, and he has all sorts of tools for different things. So if you wanna restrict someone, that's a very difficult thing. And look, TSPs are wonderful. K? But they are very restrictive on what you can invest in.
Mike:So you need to understand there is an inherent potential problem if you from a menu standpoint, you're only working with so many things. Right. So here's a football analogy. Can you win many football games if you had five plays? At some point, the other team's probably gonna figure it out.
David:You'd be very predictable. Yeah.
Mike:Now I'm not saying mister market's trying to get you, but you get the idea. Uh-huh. So the question is, okay, once you want to retire, how do you turn your four zero one k into a retirement plan? Well, the first thing is to leave it in your four zero one k. Don't move it.
David:Okay.
Mike:And the reason is, if you're gonna retire before 59, let's say you retire at 50 years old, or 55 years old, or 56 years old, you may need to keep some of your assets in the four zero one k because of the rule of 55. The rule of 55 is an IRS code that says if you retire after 55 years old and you keep assets in your four zero one k, you can pull funds out under certain situations, certain amounts, some nuance with this, but you can pull it out without the 10% penalty. You're just gonna pay taxes on it. K? You need to make sure you keep those funds in there in case that's your situation.
Mike:Now if you're past 60 years old, then maybe it's not that big of a deal if you roll it over or not. So that's the first line. You just figure out how much money you have in your pretax part of your four zero one k and your after tax part of your four zero one k. Take those numbers, the total amounts, and then run a plan, a simple simulation that says, okay. If I were to retire today or in two years or whatever the time frame is, whenever you want to retire, if you were to retire there, let's assume maybe a 6% growth on the portfolio.
Mike:Why 6%? Is that the right amount? It's a good starting point. I think the average portfolio grows at 6.1% if you look at like a stock bond fund portfolio. So it's just middle of the road simple.
David:And that 6% is over like how many years is that?
Mike:In perpetuity. It's a nice starting point.
David:Okay. Yeah.
Mike:Some people will lower it. Some people will increase it. It depends on what the portfolio actually is, but again, it's a starting point. You don't want to build a plan around a portfolio. You wanna build your portfolio around the plan.
Mike:So you figure out when do you wanna retire, how many assets are there if they grown at, let's say, 6%, and then you start playing with your income. For example, you're 60 years old, you got a million dollars in your 04/2001 k, great. Put a million dollars into a plan, 6% growth, and now you're gonna take out income from retirement, and you had to take out the gross amount from your four zero one k, You gotta incorporate taxes, and now you're looking at your net annual income. Then you're starting to line up other aspects like your Social Security. But do you see how we're taking a blank page, and we're adding to it, and then we're adjusting accordingly.
Mike:Sure. There's an example in the Social Security. If you retire at 60 years old, let's say you want to travel. Most people do when they retire because that's their healthiest year in retirement, typically at least. So the first couple of years, you might have a high withdrawal rate.
Mike:Let's say you've got three or four years of a high withdrawal rate, and then you wanna start Social Security. There's no problem with that, but you need to be aware of the higher withdrawal rate is higher risk. How do you plan around that? If you can put it into plan form, then you can identify, okay, these are a few years of higher risk withdrawals. Maybe you decide to do a CD or a fixed annuity, also known as a a MIGA multi year guaranteed annuity.
Mike:Basically, a CD from an insurance company, and you just ladder out or bonds. Bonds work too. You ladder out saying, okay. In one year, I need this much to spend. So I'm gonna put x amount of money now into this investment or product.
Mike:It's gonna grow at a fixed guaranteed rate, and it will pay out this amount no matter what the market's doing. No market risk in that situation.
David:Yeah. You have some certain numbers that you can plan around.
Mike:You got certainty. Yeah. And you gotta shop these around. Like a CD, you can get four and a half percent. I think today, four and a half percent.
Mike:You can also get point 4%. So you have to shop around for all these different investments and products. The greater the rate is, the more risk you're taking. So be very careful. Do your research, but you can start to take your plan as it's formulating, and then pick investments or products to build the portfolio to support the plan.
Mike:Now let's say you don't like taking higher withdrawals for the first couple of years. Maybe you take your Social Security earlier on, so it's less burden from the portfolio. So you retire at 62 years old. You start your income at 62. There's less income from the portfolio.
Mike:So, yeah, there's less burden on
David:the portfolio because you have an alternate income source from Social Security. Yeah. So you're not having to take as much from the portfolio.
Mike:Let's say your Social Security at 62 years old is 25,000.
David:Okay.
Mike:So you can either take 25,000 from your Social Security benefits as if you turn that on, or you can delay your Social Security for a higher benefit, But all things being equal, the same amount of income you're trying to target
David:Yeah.
Mike:You'll then have to take 25,000 more from your portfolio. Uh-huh. That's probably a higher withdrawal rate, which means you're taking on more risk because if the markets go down that year and you have a high withdrawal rate, you're accentuating those losses even more. So you've gotta build this plan first, then you explore the efficiencies, and then you explore what the portfolio should look like. This is how you take that lump of money you've saved up in your 04/2001 k Yeah.
Mike:And you're directing it to where it needs to go. But the plan needs to dictate first what you're doing, then you explore strategies. And let's talk about that in just a second. Okay. And then you pick out, okay.
Mike:Well, maybe I need x amount of my portfolio or a certain dollar amount for income in this year and that year, and we're gonna put these CDs or these bonds in there for that purpose. K. What's left in this year? Maybe we're gonna do a structured note or a buffered ETF, just some more upside, but it's protected in that sense. This is the nuance of turning a lump of money into an actionable plan that you can execute, and it really doesn't matter then if the markets go up or down, because you've put plans in for both situations.
Mike:And so
David:we've said the word plan many times so far. When should we start planning? Like, what age is appropriate?
Mike:Yeah. So five years away from when you wanna retire, I think is a more appropriate time to really get detailed. Ten years away from your ideal retirement is a good time if you wanna start being more tax proactive. Okay. Here's what I mean by tax proactive.
Mike:There's too much variation, too many variables when it comes to, okay, ten years from now, what's gonna happen in the markets? I mean, all sorts of things can happen. But you can start to say, okay, I'm funding maybe too much in the pretax, and there's going to be a tax issue in retirement. Maybe based on today's tax rates, I get the matching and focus more on the after tax part of a four one k or the IRA. Maybe I want to file for Social Security at 70 years old, but I'm 50 years old now.
Mike:So from 60 and and you're gonna retire at 60 years old. So 60 to 70, there's a ten year gap of potential missed benefits. If you were to pass between 50 and 70 years old, that's a lot of money you could miss out. Maybe you want a small life insurance policy, whether it's term, whether it's permanent life. There's a number of ways you could structure this so that in case the unfortunate happens, knowing that the odds are not probable, you're probably gonna live, but you just wanna take that risk away from you, you can transfer that early death risk to an insurance company, and you could do that through term life insurance.
Mike:They gotta shop around. Hopefully, you're healthy. You could do it through permanent life insurance to where after ten years, the cash value should be paying for the death benefit yourself. And if you don't use it, you can then drop the death benefit and be more cash efficient with it. Remember, insurance is not an investment.
Mike:Not an investment. But this is where the nuance comes into play. So if you're 50 years old and wanna be proactive about what you're funding and why you're funding it, then you've got more room to be more deliberate, more specific, more efficient. But if you just say, I just put the money in the four zero one k. I don't wanna be bothered by it.
Mike:I get why people don't wanna do their planning early on in life.
David:Yeah. You could still be in the throes of like lots of kids at home when you're 50, right? I mean, depending on when you started.
Mike:This is my issue with social media. I went on social media just the other day actually. It's been months since I've logged on
David:the social fast, and you're like, I'm gonna dive in and
Mike:I just can't stand it, because social media is just a bunch of people telling you all the things you should do. And life is busy, and you're never gonna do all the things that you should do. Mhmm. So this this whole stupid conversation of all these finance professionals, you need to put a plan together. You really this is one of the my favorite statistics.
Mike:Did you know more people are going to spend more time planning their vacation this year than putting their plan together? Yeah. Because it's fun to go on vacation. It is? Yeah.
Mike:Because they're funding. They're saving enough. So do they really need to be that detailed about it when retirement's ten years away? No. Let's give some people some grace.
Mike:Mhmm. Most working professionals in a stressful career with a high skill set are working still crazy hours. Life is stressful. Kids, you wanna spend time with your kids. Would you rather go see your kid play the local high school basketball game or whatever, or sit down and crunch numbers with a financial plan.
Mike:I mean, it's obvious what we'd prefer to do. Time is limited, so I get why people don't wanna do it. But at some point, you know, that five year mark, that's when, okay, let's start getting a little bit more serious. If you wanna touch base ten years before, you can be more deliberate, but, you know, spending your time, so it has to be worth it to you. But, yeah, let's give some people some grace.
Mike:As long as they're saving money, that's a good sign. That's a good indicator. You don't need to be brilliant to become wealthy. You just need to be disciplined.
David:Speaking of that, is there a specific percentage or dollar amount? And this might be hard to answer.
Mike:Yeah. The amount you should save is based on the balance of how much you wanna enjoy your life today, and how much you need to fund for the future. So no, I don't like the everyone should save 10% or 15%. Those are nice benchmarks. But I know people who started saving early on in life, and if they just keep doing what they're doing, they don't really need to save anymore.
Mike:And in the past, I know that the word save is sometimes Someone likes to save. Yeah. When you put money into the stock market for future purpose, you're buying additional time that you have control over in the future. See, that that sounds better. That's what you're doing.
Mike:Yeah. Because, yeah, saving for what? Oh, I'm saving to have no. You're investing so you have more control over your time in the future. That's what you're doing.
Mike:You're buying time. It's fun to buy stuff. We like to buy stuff.
David:Yeah. So if I go into it knowing I'm buying my future, it just goes down better.
Mike:So I wanna talk real quick about efficiencies though in the April. This is often missed. Okay? So at least today, 73 years old is when you're gonna have required minimum distributions. What is that?
Mike:Or RMDs as they're
David:known. RMDs.
Mike:So RMDs are when the government says, hey. You've put money into a deferred account, retirement account, like your four zero one k, and you're not paying capital gains, and it's growing tax free, which is great. But when you take the funds out, you're gonna pay taxes. You have to pay income taxes. Well, how do you get around that?
Mike:You don't. You don't get around it. Well, how the wealthy do it? They don't. Yeah.
Mike:K? They might facilitate income in different ways, but you have taken income, deferred the income taxes, and put into a retirement account. You're going to pay taxes when it comes out. Now I know there are some fancy mechanisms, maybe we could talk about a different time, on how to offset paying the taxes, but there's high risk to that. It's very nuanced.
Mike:But for all intents and purposes, you're gonna pay taxes taking this out. And the government says at around 73 years old, we wanna force you to take the funds out. So you're going to pay taxes. No problem. I still think it's a sweet deal that we all got.
Mike:But at 73 years old, you're gonna take some out. At 74, you're gonna be forced to take a higher percentage out. 75, a higher percentage out, and the percentage gets bigger and bigger. The problem is many times I've seen people have too much in their pretax accounts, and they're growing it, which is great, but then they're forced into higher tax brackets when RMD start. Okay.
Mike:And so part of this planning is how much should you fund in pretax or after tax? And then the other part of it is if you were to retire, will you, based on your income projections and and all the assumptions of the plan, will you run into RMD issues? In my mind, having filed tax returns and seen a lot of these problems is you want to line up so that your RMD, if possible, is roughly the amount of your standard deduction. Why is that? Because I would rather take an RMD and pay no taxes than convert IRA assets to Roth assets, and pay 20 some percent in the effective tax rate.
Mike:Oh, right. Do you see how that's more tax efficient to get it free? Yes. Because we have the standard deduction. And if you take your requirement on distribution free, and you did some IRA to Roth conversions beforehand, so you brought balance into the situation, then maybe you've got some of your income from your RMD when you're in your seventies with the standard deduction, and maybe you've got some Roth income, which is tax free, and maybe you've got some Social Security income, and maybe that becomes free, whether Trump passes this law or gets it through congress.
Mike:Maybe he doesn't, but on current tax regulation, Social Security, it's 50% of your Social Security if it's under certain tax thresholds. 0%, fifty %, or 85% would be subject to tax. If you structured this correctly with the standard deduction, even if no laws change on Social Security, you still could get your Social Security tax free. This is the planning that you have to do. This is how you take a four zero one k, and you roll it over into an actual plan that's income efficient, tax efficient.
Mike:It's flexible, so you can adjust based on the nuances of your life and how things just change over time. It's how to build, in my opinion, a properly constructed plan with a bunch of strategies for efficiency so you can get potentially more out of your money, and then you can understand what does the portfolio look like to support all of the above. 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 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.