Subscribe
Share
Share
Embed
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.
IRA Roth conversions are an important part of it, Scott. I I do agree with that, but I think some people go too aggressively and they don't realize that when you pay too much in taxes upfront to get to a more tax free situation later, You actually you're you're dwindling down your assets. You're taking income and you're paying taxes. So you're getting hit on two layers.
David:Yeah.
Mike:Plus if you have an ongoing advisory fees, you're getting hit three different times. I mean, when I point out, example, if someone follows the 4% rule, it's really the 5% rule, and one out of every $5 that leaves your account goes to your advisor. Now you you add on IRA to Roth conversions, it's like all this extra money is now going to the government, like, that's a huge burden on your portfolio. It slows down growth. You're it's harder to grow less money.
Mike:So I think some people try to look smart by saying, hey, and I don't know this person's individual, but but saying, hey, we're gonna get you there so that you never have to pay Irma again. You never have to, you know, your social security is optimized, all these things. It's like, well hold on. The most efficient tax bracket's the 10% bracket. What if you just pay the 10% bracket for life?
Mike:And then you have the standard deduction and the 10% bracket. That's a way better deal. And when you just run the numbers, you can clearly see like that's a seven figure for most people that I work with. Difference. Wow.
Mike:By just taking a step back and being more methodical instead of rushing to it. Anyway, just some thoughts. Alright. Next one here is, did I correctly hear that most people should convert qualified plans all at once to try and pay it off? Kat, you did not hear that.
Mike:That was a little bit of sarcasm here. And let me give you an example. K? Let's say you've got a million dollars. K?
Mike:And I'm going to simplify it. Let me give you the the idea here. The let's say the government simplifies the tax code. Okay? This is hypothetical.
Mike:This is not real. I'm trying to teach a principle here. IRS simplifies the tax code and says, you you've your million dollars in an IRA, you can convert it all today at 20%. That's it. Okay?
Mike:Done. Boom. Everything else is tax free for the rest of your life. Or, you could pay 15% for life, which would you do? Well, the reality is, if you take a million dollars, you convert it all 20%, you're done.
Mike:You have $800,000 left over. You pay the government 200,000, you're good to go. If you compare that to the same net income, 15% for life, trying to make things simple here because tax planning can get complicated. This is a simple analogy. You'd pay the government through a normal twenty five, thirty years or so.
Mike:I forget the exact time frame, but twenty five, let's say, years of retirement, you'd pay the government $412,000. You'd paid the government twice as much in taxes. Yeah. But because you maintained the higher dollar amount, and slowly paid taxes, the compounding effect of your portfolio growth was exponential. In other words, you would have ended up in this analogy.
Mike:You would have ended up with 700 more 700,000 more dollars, roughly. I think it was 690,000 to be exact. Right. Of more money going to your inheritance, going to your legacy, going to your kids.
David:Because you you had 800 was your principal to start off. That was your basis, right, to grow from there?
Mike:Yeah. So 10% of 800,000 is less money going into your portfolio than 10% of a million dollars going into your portfolio.
David:Right.
Mike:Right. Has a significant impact for the rest of your life. And people don't fully, I think, appreciate the effects of compounding interest when it comes to IRA to Roth conversions, because they're trying to get out of taxes.
David:Yeah.
Mike:And the reality is the lower tax brackets don't really change that much. It's the 32% or higher brackets that change a lot. And oh, there's twenty two and twenty four percent today. Yeah, there is. It was 25% before.
Mike:It's not a significant difference. A little bit, and it does matter. But if you really wanna do proper tax planning, you're targeting an effective tax rate from today and for the rest of your life, not managing tax brackets. Because if you manage based on just tax brackets alone, it's okay to use tax brackets to guide you. But if you do that alone, you're subject to whatever the tax brackets are in the future, and you may be painting yourself into a corner.
Mike:So Kat, hopefully that helps answer your question there. Everyone is different. This is not blanket statement advice. We're teaching principles here. Concepts that you need to talk about.
Mike:Yeah. I I would have loved to have titled my book, How to Stay Retired. I don't think that would be compliant. Mhmm. Because that's promissory.
Mike:And anyone that promises you an outcome
David:Mhmm.
Mike:Don't don't don't work with them. You can't guarantee everything in life. But yeah, I I'd I'd love to write that book. I don't think regulars would like a a book titled that though.
David:So But to that point, I've heard people over the years I've worked with you say, well, that book's not for me because it's How to Retire on Time. And I'm already retired, so I don't need to bother reading it. How do
Mike:you respond to that? Did you retire right? Did you retire with the correct mechanisms? Most people we work with retired, and then realized they don't really have a plan. They retired, and this is a common one.
Mike:They retired, they put enough money for two years of of incoming cash that they're living off of, and they're spending the next two years trying to figure out if this will work or not. Which is a very scary thing to do because what if it doesn't? What if you got it wrong? Now you gotta go back to the workforce.
David:Mhmm.
Mike:So ideally, you wanna start really reading the book five years before retirement and start putting your plan together because there's some really cool things that we can line up from a tax efficiency standpoint, from a savings standpoint. Many people don't or shouldn't be saving as much as they are in their four zero one k. They should be putting money elsewhere. But they don't know the strategies. And so it's kind of sad because I I could have said something how we met five years ago, but I didn't.
Mike:We didn't meet. So we just have to blow by some of the strategies that could have saved people a lot of money.
David:Right.
Mike:It's just these little things really do matter. So alright. And then let's see. Will annuity payments convert from IRA or converted from an IRA be used to fulfill RMD requirements? So annuities that are turned on as income are self fulfilling, to put it simply.
Mike:So because it's a lifetime contract. Mhmm. And the cash value is being drained faster than the payments are, they they always will satisfy themselves. If you buy an indexed annuity though, and use it for a bond fund alternative like a cash growth vehicle, then you'll need to take the the RMD out of it. Kinda like you'd have to take it from your brokerage account or any other place as well.
Mike:So there's a difference. But yeah, lifetime income stream itself fulfills from the distribution.
David:Because you're receiving money out of it.
Mike:But you have to make sure that you're there's enough coming to you because you could have too much elsewhere and still have an RMD. So it gets a slightly nuanced with it, but that that is something that that does factor in.
David:Okay.
Mike:But lifetime income should never do it. And what's kind of cool, they're they're now allowing annuities where you can convert IRA to Roth with lifetime income already kind of intact. So that's where it's kinda nice to buy a couple of annuities.
David:Okay. Yeah.
Mike:Buy a couple of them and you can do a conversion here then turn on the income stream or so on. You just wanna be you don't wanna look at the next year or say, I'm gonna turn these on and close my eyes. That's not what you want. What you want is to know what your options are. In life, can I get philosophical with you?
David:I mean, it's we've done it before.
Mike:In life, and especially in finance, you want to be proactive on what you can control, and be prepared to react on what you cannot control. See too many people are proactive in growth, have everything I I I don't say this lightly. They have basically everything in the S and P 500. So when the markets go down, they have no way to react. The only thing they can really do is lock in losses, which hurts them, or stop retirement.
Mike:Go back or, you know, go back to work or or live less or whatever it is
David:Right.
Mike:And wait for it to recover. That's painting yourself into a corner. You are not prepared to react. And like I talk about in chapter four of the book, if you have reserves, and I'm gonna go through this really quickly, but this is what it talks about. This book, the bear market protocol, the DIY annuity guide, the how to prepare to retire on time, soon to be out, how to invest like a jellyfish, all these books.
Mike:They teach this principle. If you have some reserves and the markets go down, those reserves should not have lost money, which means you can take income without accentuating losses. Which means you could also, if you wanted to, you could also buy the dip. Mhmm. Or you could take other assets like ETFs that have lost money, convert it over from IRA to Roth, so you you instead of selling it, you can do more conversions at the same tax bill as long as you pay your taxes out of that that reserves.
Mike:You have options. So the down market becomes an opportunity, not a painful reaction. And this is not talked about enough. Mhmm.