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.
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. Now that said, remember, this is just a show. It should not be considered financial advice.
Mike:As always, text your questions to (913) 363-1234, and we'll feature them on the show. Let's begin. Alright. So the question today reads, hey, Mike, aside from IRA to Roth conversions, what else should I do in my year end planning? That's a thoughtful question because I think a lot of times we oversimplify this idea of, oh, it's the year end, let's do some IRA to Roth conversions, call it good.
Mike:Oh, let's do some Roth contributions if you qualify, and call it good. And that's just kind of it's it's like the autopilot. It's generally a good idea, but it's not necessarily always a good idea. I'm not a mechanic, but it seems to be like a wasteful endeavor if you were to get your oil changed every thousand miles. Pretty sure you're supposed to do it a little bit longer than that.
Mike:So the the point being is, if you take a step back and really look at your overall financial situation, then you might be able to have a better, more holistic conversation about how to potentially get more out of your money. So here's just a couple of ideas you can consider. First off, you've got lifestyle adjustments. Alright? So if you're getting close to retirement, if you're like 64 years old, 63 years old, your lifestyle adjustments will probably affect your Medicare, the surcharges.
Mike:Your lifestyle adjustments, buying a new house, that might create a taxable issue. There are significant adjustments that may help you prepare for retirement, but have somewhat of a consequence on your overall situation. So at the end of the day, what's your what's the purpose of your money? If time's your most precious commodity, then how does your money serve you? I think that's really a fundamental question here.
Mike:Then you can start to say, okay, how does my life need to shift in preparation for retirement? And those aren't just financial questions. It's also more existential or purpose driven of, okay, once this vacuum, this void in my life of, let's call it work is gone, what gives me purpose? That's a very deep question. When the kids leave the home, if you are a stay at home parent, mother or father, that creates a void in your life.
Mike:How are you going to fill it? Retirement is no different, and if you don't fill it, you may end up sad, lonely, depressed. So as a general exercise, as you're approaching retirement, or if you're in retirement, give yourself first an analysis of what's going to give you purpose. What's gonna help support your happiness, joy, and well-being, and then how do your financials support that endeavor? I think too often, we opt in of saying, this is my plan, this is my budget, and that's it, and I'm gonna plan my life around it.
Mike:True retirement planning, in my opinion, is dynamic, as in it can adjust based on your needs, because your needs will evolve. So that's the first part of it when it comes to year end planning, is do some introspective planning. K? Take a look at the mirror, I guess. I don't know.
Mike:Not a not a therapist. But the next part then is look at your income sources or your cash flow. So cash flow is not income. Cash flow is the movement of your money. So if you're still working, are you putting enough into your savings?
Mike:What if you're putting too much in your savings, and you could actually spend more money? You could take a couple more trips because you've already done a good job saving for your retirement. These are conversations that you also need to have because what's the purpose of your money? And if you go too far in one direction or the other, so saving too much, not enough, maybe you're spending too much time at work, or or whatever it might be, you could be missing out on important parts of life. So that's the second part of it.
Mike:Then you get into the tax bucket planning. This is huge. Let's say you are retired, or you're going to retire next year. Where is your income going to come from? If you take all of your income from an IRA account, let's say that's not necessarily a bad thing, then, okay, you're gonna be taking ordinary income.
Mike:Ordinary income tax. Right? You're gonna look at your adjusted gross income. You're gonna look at your modified adjusted gross income, maybe even your provisional income, and just understand how do these IRA distributions affect your overall situation, and then challenge that thought process. Take a step back and say, well, what if I'm 62 years old?
Mike:What if I'm 55 years old? And you're to then fill in the next step, x y z. So what if, for example, you are 62 years old. Okay. So you're not on Medicare yet, and you were to take your income next year from your brokerage account and not your IRA.
Mike:Let's say RMDs aren't necessarily an issue. Let's say you don't need to do aggressive IRA to Roth conversions. And what if you only took it from a brokerage account, some stocks you've held for a long term period of time? And what if the first 96,000 or so of the gains came tax free, plus the basis? You're paying very little in taxes at that point, all things being equal, and we're not acknowledging your dividends and interest and all these other things, but you're paying very little income tax at that point.
Mike:Plus, you're letting your other assets, your retirement accounts, which are very precious when it comes to retirement and tax efficiency, that allows them to continue to grow. And if they do continue to grow, then you might have more money overall, and then you can manipulate your incoming later years, so that through the standard deduction, through your distributions, and so on, that you're able to potentially get more out of your money. See, the idea is if you're able to change up your income sources year over year, you may find several thousands of dollars of taxes that you didn't actually have to pay because you understood how taxes were calculated. This is so commonly missed in the retirement planning space, and here's my point. Ordinary income is taxed first.
Mike:That's what enters the bracket, 10%, 12%, 22%, and so on. After that, your long term capital gains and short term capital gains, that's what comes in afterwards. So long term capital gains starts where the other taxes end. That makes the tax inefficient. You're missing out on this huge window potentially of paying zero taxes.
Mike:Why wouldn't you slow down for a second and ask yourself, okay. Well, hey, if we were to take our income next year from these sources, does it help us de risk ourselves from being too exposed to whatever the stock is? The common ones, you know, I worked for Microsoft my whole life, or Amazon my whole life. I've worked Nvidia. You put a lot into Nvidia, now it just grew exponentially.
Mike:Now you gotta derisk it as it maybe sells some of the shares, lock in those gains. It's a way that you can kill two birds with one stone. You're providing the income that you need, you're doing it very tax efficiently, and you're adjusting your portfolio at the same time to be more properly diversified instead of too much in one place. Hopefully, makes sense. Then as you're starting to source the income strategies, not just forever for the, you know, the next ten years, but just acknowledging the next year's tax efficient income strategy and the sources therein, then what if you looked at the potential ramifications of your modified adjusted gross income and your provisional tax income?
Mike:So let me break that down real quick. Your adjusted gross income is just basically your simple tax calculation. How many taxable events happened, and what's your calculated income, and then great, how much you can pay in taxes. That's it's the simple version of tax. Then you've got your modified adjusted gross income.
Mike:So your municipal bonds, for example, the interest you got from that that's allegedly tax exempt. Well, it kind of is, but it's still calculated into your modified adjusted gross income calculation. That calculation affects various other potential pitfalls. So your health care premiums, your IRMAA surcharge could be affected by your modified adjusted gross income. K?
Mike:It affects other things you may not expect. The new Trump deduction, whether you're single and filing your taxes single, or you are a household married filing jointly, your modified adjusted gross income exceeds a certain point, you could be missing out on thousands of dollars, was it 6,000 or 12,000, depending on your situation, potentially of deductions, of getting rid of taxable events. That's huge. So what if you can manipulate your income sources to then keep your modified adjusted gross income, not just your adjusted gross income within a certain threshold to then get even more out of your money? And then you have the provisional income.
Mike:The provisional income calculates your Social Security. Now those who have more money, you're probably not gonna get out of paying 85% in Social Security, but hey, at least it's not a 100%. But for those who could and be would be closer to Social Security being tax free, or maybe 50% of it's taxed, you've got to watch your provisional income. Your provisional income is not just how much did you pay in taxes. It's a specific calculation that, yes, does include your tax exempt interest and other different taxable situations that can jump up your income.
Mike:Because if you go $1 over on provisional income, then you have a huge tax bill. When I say huge, I'm talking, I don't know, anywhere from 2,000 to $7,000, somewhere in that ballpark. Still not fun. Not the end of the world, but not fun. Now part of the year end review is also health care.
Mike:Be mindful of health care as the landscape is shifting drastically, and I don't think this shift's gonna happen anytime soon. Reality is we're living longer than we ever have before, and we're getting sicker sooner. So we've been sicker longer than ever before. Health care is getting fundamentally more expensive, and if you understand insurance, it's not a scam, it's not theft. I know there's a lot of people out there that get very upset.
Mike:And yes, there have been some really shady things that have happened with insurance companies. I don't wanna disregard that. But if all things are honest, insurance only works when you pay more into it than you got out of it. Healthcare is insurance. And so when you understand that, and you understand the cost of insurance are going up, your health care expenses are expected to go up.
Mike:So take a moment and ask yourself, are you paying too much? Are you paying too little? Are you getting the right kind of coverage? Is the right plan still the same plan? If you're on Medicare, should you keep the same plan?
Mike:Should you adjust the same plan? A lot of advantaged people might want to go to a gap or supplemental plan, but once you've already started, you you may get denied. Has your health increased or decreased? And yes, your health can increase in retirement. Are you looking at other ways that you can extend your health, lower your sickness or proneness to illness, so that you can live a longer healthier life.
Mike:Yes, diet and exercise, as boring as it might say, may actually be a wonderful new year's goal to help lower your health care costs in retirement. That's another wonderful part of your end plan, think should be acknowledged. I have met people that say, I don't care about my health. I wanna eat what I want. I don't wanna exercise.
Mike:I'm gonna live my life. No problem. Just make sure in your year end planning, you're aware of your current health, and what could happen next year. And then the last thing is the portfolio adjustments. Sometimes you just wanna make adjustments to your portfolio, whether it's a rebalance or something else.
Mike:Look at performance, look at how the market is shifting, and so on, so that you can kind of just make the needed adjustments. Do you need more protection? Do you have too much protection? Should you lower your protection within your portfolio? Should you put more allocated towards bond funds?
Mike:Maybe a little too much is in bond funds, and you wanna pull back a little bit. Are you too heavily focused in the S and P 500 or AI stocks or defense stocks or whatever the popular in vogue kind of investment is right now? And is the landscape changing? There are many many articles being published right now about how the landscape is changing. Are you aware of that?
Mike:Are you joining the adjustments So that you can kind of reallocate and adjust things. No one knows the future of the markets. So you don't wanna go all in on one thing or the other, but it may make sense. You know, that's the beautiful finesse of of a portfolio and how it's managed is to make subtle adjustments along the way, so that you're prepared for the good, the bad, and the ugly. I think that's kind of the the general high level part of it, and if you haven't noticed, it's really hard to do this kind of planning, unless the singular place that you're working with can give you investment advice, planning advice, tax advice, and insurance advice.
Mike:And I'm not just talking about life insurance. There's life insurance. There's health care insurance. There's a number of other types of insurances that may need to be acknowledged. Be mindful of that, and you've really got one of two options.
Mike:Take your different parties and force them to get into the same room and plan for you, or work with someone that has it all in the same shop. Whatever it is, don't just default into, well, how much do we do from an IRA to a Roth conversion? That's oversimple. You might not even need to do an IRA to Roth conversion at this point, because if your income is baked in, then you might be set. The point is, take a step back, ask more questions, and really look about how one thing affects the other, because it all works together.
Mike: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. 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.
Mike: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.