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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 that oversimplified advice you've heard hundreds of times. This show is all about getting into the nitty gritty because that's really where the the true magic happens. Now that said, remember, it's just a show. It's not financial advice, so do your research.
Mike:Heck, come in for the planning process that we offer one time plans that really dive into the details that you need to explore your how to get more out of your money, your lifestyle, your legacy potential, like a true proper plan. As always, go to retireontime.com, download the book, the workbook, the resources, all of it's available for you for free at retireontime.com. Last but not least, before we get started, I do wanna highlight that Tuesday at 06:30, we've got a workshop. The Retire On Time workshop. You can go to retireontime.com/workshop to RSVP.
Mike:Doesn't cost you a dime, but it explores the proper planning process, which we believe is plan first, strategy second, how do you get more out of your money, and then you figure out the right investments or products for you, not your neighbor. Go to retireontime.com/workshop to RSVP to that today. Alright. Let's dive into our content. Our subject matter.
Mike:So I like to start first off with kind of the temperature of the room of the crowd, and the big thing I think that people are concerned about are taxes going up. I think that's interesting. So I'll I'll try and weave that into our conversation today. Let's see. The other one's running out of money, a market crash, inflation, Social Security.
Mike:I guess we've got a wide a wide panel here of people and their concerns. So we're gonna get we're gonna get that going. Alright. Here's what I wanna talk about today. So let's talk this is so critical for for today's conversation, and I really wanna dive into it.
Mike:And and that's just the the bills that you're paying without even knowing. That's it. The bills you're paying now David, if a utility bill pops up, you know what it is, right?
David:Yeah, I get the notification, the email, whatever, and then I lament, oh, that's more than I want to pay. But yeah, I get it and I see it and I know I got to pay that.
Mike:Okay. If the bill goes up, do you notice?
David:I always know it because I pay attention. Does it bug you? It does bug me, yeah.
Mike:So are you the dad that's always fending off the thermostat?
David:Well, I'm in control. That's my domain, yeah, I'm very protective of the thermostat.
Mike:Okay. Now what if you're entering retirement and you had no way to measure what your utility bill was going to be, you had no way to strategize that, like it was happening and there was nothing you knew about it. Like it was complete unawareness. That's what most people are entering into retirement, is with that kind of mindset. And this is called the Dunning Kruger effect.
Mike:The Dunning Kruger effect suggests that people will overestimate their abilities or their confidence because they don't know what they don't know. It's impossible to solve on your own. The only way to solve it is by inherently just a retake, a mulligan, which we can't do in time, and you know, the taxes are paid every single year. That's a problem. If we were to expand that just a little bit, there was a study done, I believe by Nationwide, that said six out of 10 retirees wish they could go back and change their tax planning strategy or have a tax planning strategy.
Mike:Now most people in this room are concerned about taxes going up. I'm concerned that most people are going to turn that concern into an inaccurate or an inefficient plan. Here's what I mean by this. I'm gonna pull up I did a couple of plans, I won't necessarily share them, but I'm gonna just I'm gonna talk through them here. This is the point of the planning process.
Mike:Okay? But when I look at when I look at different plans, when I look at different analyses, when I look at different things that are happening here, let's say let's say you're you're retiring, you got a million dollars in IRA, and you got 500,000. Okay, of brokerage funds. Nothing made it to the Roth. You just never got there, and that's okay.
Mike:That's a very normal thing by the way. And you're gonna take about $8,000 of income, you're 60 years old, and you're gonna take Social Security at 67 years old. I don't want too many variables for this analogy. Okay? Not a bad situation overall if you think about it.
Mike:Like, you can retire, maybe 8,000 after tax is a comfortable situation for you, maybe you're happy with that. That's up for you to decide. Now let's say you do the normal strategy. The normal strategy would suggest, hey, we're concerned about RMDs. So RMDs, know, it's kind of a big deal.
Mike:We're going to we're going to slowly spend down the IRA assets. Social Security kicks on. There's less pressure on the portfolio. All is well. Eventually, we will spend down our IRAs, and then we have our our brokerage account that's left over.
Mike:And that's easy. You know Warren Buffett says, I pay less in taxes than my assistant. Yeah. And he's talking about long term capital gains. That's kind of a good deal if you think about it.
David:Right?
Mike:So in that situation, if you just defaulted and did nothing, you might end up with at age 95, like a $500,000 left over. You lived a happy life. You made it. And for some people, just checking the box off saying I made it is enough. For others, especially those who are maybe concerned about taxes, they might say, well, hold on.
Mike:Taxes are going up. And I know it used to be a 25 or 26 or whatever percent bracket. Right now we have the 2224%, and historically, that actually is a lower bracket overall. Historically, the standard deduction is higher overall. 1012% bracket are lower than usual for the lower tax brackets.
Mike:But my fear is people rush into the conversions. So here's a classic example. Let me know in the chat if if you're thinking about this, just for fun. So what you do is you you max out the million dollar or not million dollars. Yeah.
Mike:Your million dollars of IRAs, and you're gonna convert 200,000 every year for five years, and then a little extra because the account should grow. And you're going to be smart about it, and you're going to pay the taxes out of your brokerage account because you want the most amount of money going into your Roth. Okay. Are you with me so far?
David:Yeah, and we're being smart about that. Why? Because if we paid the taxes out of the Roth, that's just less money in the account to grow, is
Mike:that Yeah. More money in the Roth, that's better. Alright. We like Roths. Yeah.
Mike:So then when you consider that as as the example, you're gonna pay, well, 15% in federal taxes, roughly speaking. Okay? Plus the long term capital gains because everything you have to sell to pay those taxes is going to get taxes long term capital gains. So, you've got a $215,000 tax bill. Not the end of the world, but you're 60 years old, and you did that.
Mike:So, not only are you paying the full amount in Affordable Care Act insurance premiums, Not only are you paying all the taxes, you got standard deduction, and then you got all the 10, the 12, and the 22% bracket, and you're well into the 22% bracket, but long term capital gains are also going to get taxed at 15%. You're checking off all the boxes. You're maxing out your bill. You've you have gone to the restaurant, and you've ordered all of the expensive stuff. Right.
Mike:And you forgot your coupons at home. Oh. And the problem with this is, had they actually done no tax planning and just done the other version, they would have ended up with more money. See, in this example, everything does go to Roth, and they're bragging to their friends about, oh, we went to the zero tax bracket. Our Social Security isn't taxed.
Mike:Our Roth isn't taxed. It's growing tax free. We have opted into the tax free retirement because they read a book about this, and that book was selling a product. Everything the same. So correct tax assumptions, correct tax calculations, they actually end up with $0 at 95.
Mike:'94 is the is the year they run out of money.
David:Wow.
Mike:That's a $500,000 difference because they did tax planning without context.
David:And so what what was it the 08/2008 or the
Mike:I didn't I didn't tell you this before we we sat down for today. I mean, did you expect me to to go there?
David:No. And I'm thinking, did their 500,000 go? The person in the first example had like 500,000 left of 95. Because
Mike:it's harder to grow less money. And if you are maxing out brackets, but you have a certain amount of money, and you are accelerating the money that leaves your account going to the government because you got to pay taxes, that actually hurts some people. Not everyone. Some people need to, you know, step on the gas and do more, but others need to do a lot less. And this is the problem with advice online.
Mike:Most advice is geared for high net worth individuals. 3,000,000, 5,000,000, 10,000,000. And I love working with those clients. Yes. Their tax planning is significantly more complicated, is a lot more aggressive.
Mike:We're trying to get in front of a lot of these issues. But for the 2,000,000 and under, wonderful clients love working with those clients. Their tax planning is fundamentally different. And when you say, Well, you know, tax brackets are going up. Yeah, but you know what's not going to go up a lot?
Mike:The lowest tax brackets. The ten and twelve percent, maybe they're up to 15%. Is that the end of the world? No. Yeah.
Mike:Probably not. You know what's not probably gonna go away? The standard deduction. But the couple that went quickly to the 0% bracket, they lost a lifetime of coupons taking money out at 10 or 12% or 15%. They paid the 22% bill.
Mike:For a lifetime, they have opted out on Social Security. It was already tax free kind of anyway. They've opted out on the idea of the standard deduction. They cannot redeem these coupons anymore. That's hundreds of thousands of dollars of inefficiencies because they took blanket statement advice, asked their AI, their AI self validated the thing that they thought they wanted, and they went along with that plan.
Mike:Goodness. Put in the comments if you got questions or want clarity on here. Let me finish up the thought. Okay. One of the questions that I think is not asked enough when it comes to retirement planning is where do you want your extra money to go to?
David:It's a
Mike:very low probability that you're gonna have that notebook moment where you both die at the same time exactly as planned on the day that you planned it, and you had control of the markets. There's gonna be a little bit leftover at the very least. Right? That's kind of a normal situation.
David:Okay.
Mike:So are your kids high income earners or not? If they are, then you compare your tax situation with theirs, and maybe you do want to get slightly more aggressive with IRA to Roth conversions, not like in the previous example, but generally speaking. If they're lower income earners, it doesn't hurt to pass some pre tax dollars so that they can take it out under their tax brackets.
David:Oh, okay.
Mike:This is not talked about a lot. You were going to say?
David:I was just going to say, so if you have a bunch of money in a Roth and you pass and then your high net worth kids, they inherit that Roth, and then they can receive distributions or spend out of it tax free.
Mike:Tax free.
David:Okay. Yeah. I gotcha. And then it won't affect their situation. If they're high income earners, then they have their own tax situation to sort out.
Mike:It's controlling what you can control, and you wanna control what you know.
David:Oh, yes.
Mike:So if your kids are high income earners, they'll probably still be high income earners when you pass. Yeah. So, controlling when, not if, because it's gonna get taxed, but when and under what conditions are you okay with. That's a very thoughtful question. So, here's in my mind a very different approach, often not discussed online, because now this is nuance.
Mike:Yeah. And this is not right for you necessarily. This is just a case study for a couple that may or may not be in a similar situation to you. But don't the expression is don't get your neighbor's retirement plan, you want to get your retirement plan. Yeah.
Mike:So, let's assume you're 60 years old. Okay. Great. What are we gonna do? Well, what if we took 40,000 to $60,000 out of your IRA?
Mike:Most of it tax free because the standard deduction. Oh, yeah. And then the rest of it's like the 10%, 12% bracket probably let's say we felt the 10% bracket. That's a really good deal. Okay?
Mike:And we don't spend it as income. All of that is IRA to Roth conversions. Mhmm. That's it. Okay?
Mike:Now, if you just slowly convert in this situation, IRA to Roth conversions, well where's the income going to come from? It's called long term capital gains. You need a 100,000 or so of income. Great. If 99,000, 98,000 of it comes from gains or less.
Mike:And in this situation, let's say let's say half of the stocks you'd sell from your brokerage account that's worth $500,000, half of it is gains, half of it is growth, you can provide all of your income tax free. 0% bracket because the IRA to Roth was under the standard deduction and the 10% bracket, very little tax there, plenty of room to deliberately start to bring down or to spend the brokerage account funds. Yeah. Those IRA to Roth conversions, not at the 22 bracket, but at the free or 10% bracket. That's very efficient.
Mike:Right. And you can do this for year after year after year after year until the brokerage account is done, or you filed for Social Security, and maybe that got in the way, maybe it didn't. Social Security is taxed as ordinary income in its own calculation. So let's say we do that. Well, that wasn't just a tax savings.
Mike:We reduce the taxes. That means more money stays into the account.
David:Mhmm.
Mike:Right? Because less got paid in taxes. That's more money that's compounding, but we did something else. We acknowledged the Affordable Care Act conundrum, and we probably lowered their premiums from about $30,000 to like $9,000 That's $21,000 of additional savings that stays in the plan, or is more money for you to spend.
David:Yeah, because those premiums depend on what your income is, right? Yeah. Your adjusted gross income.
Mike:So, in understanding the fine tuning of how all of this works, let me see if I can do a quick back of napkin calculation. That's 30,000 for five years of savings in just taxes. And we did that in two minutes.
David:Yeah. How about that? Go us.
Mike:That's a lot of money. If you look at the long term projections of something like this, your estate's $1,500,000 It's passed to the kids. Same starting portfolio. Same net income. But understanding the multiple layers and levers goes from one plan where they did the quote unquote right advice online of doing conversions, and they run out of money at 95, to your typical plan where they're ending up at $500,000 all pre tax that goes to, you know, the kids or not pre tax, that'd be brokerage account.
Mike:That's kind of tax free. Or doing proper planning where it's three times, or no, three times zero, that's a hard calculation, but it's 1,500,000. That's a big difference. And the problem is most people don't know the bills they're paying. They just expect, Oh, well this is the way things are.
Mike:I'm not the ultra wealthy, so I can't utilize those fancy tax strategies. I don't have the CPA. I'm not doing the islets and the cruts and the crats and, you know, the foundations and all of this fancy stuff. You don't need the fancy stuff. A proper comprehensive written plan is what you need.
David:And then that plan will tell you, hey, in this group of years, the ages, whatever, 60 to 62, age is 70 to 72, this is where you take your money from. And then from this age, this is where you take your money from. From this It's recipe. Yeah. Okay.
Mike:Yeah. If you can follow a recipe, you can follow a retirement plan. It's laid out. But you know what's interesting? If we were selling a product first, how that would ruin this whole thing.
David:Right.
Mike:So, we were to sell a product first, let's take the example of the stock bond fund portfolio charging you 1%. Well, that's 1% in fees. So, one out of every $5 is leaving your account going to your advisor. That's kind of a problem.
David:That's a bill you're paying you may not remember.
Mike:Yeah. Yeah. Well, it's so quiet. It's just 1%.
David:Yeah. That's such a tiny percent.
Mike:Yeah, it's such a tiny percent. But no, it's one out of every $5 leaving your account goes to your advisor. Your life savings. That's a lot of money. Yeah.
Mike:But in addition to that, if we're looking at this from a comprehensive standpoint, There's no tax planning on that side. What do you take? Well, we're gonna take 4% a little bit from your IRA, a little bit from your Roth. Okay. Well, that's 40,000 from here, and 20,000 from here, and all that.
Mike:Like, how much do you convert after that? Well, we're gonna give you 40,000. We're gonna do conversions on top of that. It muddies the water because the idea is let's keep as much money in the portfolio, charge you 1%, I'll manage the money in the market, and call it good. Yeah.
Mike:Who really wants to do tax planning in a way where you are taking very specific investments and you know when they're gonna invest in them and when you're gonna sell them? That takes detail, and it gets in the way of just keep it simple, put it in the market, things will work itself out, and we'll rebalance once in a while. Mhmm. The other one is the annuity pitch. Okay.
Mike:So you got $1,500,000. Let's say we put two thirds of your account into a lifetime income stream. Okay? So million dollars, you'll probably get 77.2% or so of so you get 70,000 in change. Guaranteed for life.
Mike:Well, that's inefficient because if you run these calculations and you understand kind of the nuance here, you're about 30,000 short, but you can take that from your remaining accounts. That's fine. But then when Social Security starts, you don't need 70,000. Oh, right. You need 55,000.
Mike:Yes. Now you're being forced to spend and maybe you want to be forced to spend more money or maybe you want more flexibility later on. It's a damned if you do, damned if you don't situation, but hey, let's sell the product. Here's the income. Now 70,000.
Mike:You've got no more room for effective IRA to Roth conversions. You've got no more room for effective tax planning. You sold the product first. That product got in the way of a lot of different things.
David:Yeah. Because that product, you're taking income and now you're probably having to pay taxes on that. Right?
Mike:You've locked in taxes for life. Yeah. And had you just understood the sequencing? Maybe maybe the annuity was right for you. Maybe the stock bond fund portfolio was right for you.
Mike:But when you start with a plan, that's just the rough projections. What does the money need to do for you? Then you start exploring the strategies. What are the risks? There's over 60 risks in retirement that you need to consider.
Mike:What are the risks? Which ones concern you? Which ones don't? Let's find problems. And once you identify all of the problems you solve, then you then you order them, which ones matter most, which ones matter the least, and then you start putting together the strategies you want to implement.
Mike:Yes. How do you want to take income? How do you want to take income over these years versus over those years? And so on and so forth. Once you have those guidelines, the portfolio is really easy.
Mike:It's not 60% in bond funds, and 40 or 60% stocks, 40% bond funds, or fiftyfifty.
David:Mhmm.
Mike:It's not, here's a tactical rebalance risk can rebalance every year and things will just naturally work themselves out. That's ridiculous. It's, hey, we're maybe we're going to ladder out some income for the next five years, and we're going use CDs, treasuries, and MYGAs. Grows at a fixed rate, pays out. There's a higher withdrawal from the portfolio.
Mike:There's more pressure on the portfolio. We want to do it this way. And as we take that money out in these years, in this way, here's the tax consequences, and now we're controlling that narrative. That's a very different situation. Yeah.
Mike:But too often, the industry wants to sell you the product first, tell you then what limited strategies you have available to you, and then call that a plan. It's backwards.
David:Sounds like it.
Mike:We're talking about this tonight. If you haven't RSVPed to our workshop, the Retire On Time workshop, we're going through this in great detail tonight, 06:30 central time. Just put in the comments workshop if you want us to send you that invite. Alright. All the time we've got for today's show.
Mike:If you enjoyed the show, thanks for tuning the podcast. Don't forget to subscribe, leave a rating, and as always, tell your friends, the larger the subscribers are, the better the content can be that fuels your preparation for retirement. We'll see you in the next show.