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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. I'm Michael Decker here with my associate David Franson. We're gonna be diving a lot of details today. We've got a lot of great content on really the the first thing we're talking about.
Mike:The 10 different ways you can take income, and why income is not what you spend. It's a tax conversation that so many people miss. There are so many mistakes that you don't really make, but can lead to significant drag on your portfolio, on your retirement, on your legacy, and so on. We're gonna be diving all of that into all of that today. So stay tuned.
Mike:We're doing it virtually here. I'm gonna put it the chat if you're joining us live, but you can go to retireontime.com/ask. That's www.retireontime.com/ask. And you can submit those questions anytime during the week and we're taking them. We're taking them live if you're on here on Zoom, you can also submit them in the chat as well.
Mike:Get that chat open. Let us know where you're calling from or where you're coming from. See people joining us live. For today, this is kind of fun. We always poll every time we do a show live.
Mike:I wanna know who we're talking with live because we're gonna be taking those questions with some favoritism. And looks like 57 of people are listening right now, watching our show, are already retired. So even though the show is how to retire on time, the follow-up question is how to stay retired. Yeah. That's anyone can just retire.
Mike:David, today, could just retire. You could just declare you're retired or you could call that unemployed. Yeah. The question is, can you sustain yourself? So anyway Yeah.
Mike:All that and more resources always available at retireontime.com. Books to download for free, audio books, tools, the kit, all of that is there. Alright. So in today's conversation, really what I wanna dive into is the inefficiencies that just plague a lot of retirees. K?
Mike:And here's here's the point. I just wrote this article, another article for Kiplinger. Yeah, I write for them a lot. And that is three words, which maybe four words, depending on how you you do cash flow. There's cash flow, there's income, and there's spending.
David:Okay.
Mike:And so if you ask someone, hey, you know, David, in retirement, what's your income gonna be? You might give me a number. Yeah. If I say, what's your cash flow? You might give me a number.
David:Yeah. Or I might not know what to say.
Mike:And that's okay. There's no dumb question. Yeah. And then if I say income, you're start or if I say spending, you might start saying, aren't those all kind of the same thing?
David:Right.
Mike:They're not.
David:Are they all under the same umbrella? Or are they just
Mike:So let's define them Yeah. Because it's gonna shape a very important conversation we're about to have, and that is the movement of your money matters. The IRS doesn't care if you spend it. But if money moves in a way that's favorable or unfavorable, they're keeping tabs.
David:Uh-huh.
Mike:They're they got a they got a close eye on these things. Alright. So so cash flow is the movement of money. Let's just define that.
David:Yeah. It makes sense. Like anything that's flowing is is movement, right, by sort of by definition.
Mike:And money is fluid. Mhmm. Money is very fluid. And what I mean by that is, your investments are fluid.
David:Mhmm.
Mike:You know, I I joke, last week we met, we were doing a plan together. This is roughly what the numbers are. They've moved. Okay? Dividends are fluid.
Mike:They pay more, they pay less. Right? Your relationship with your rentals and your tenants, Kind of fluid. You want the ideal long term tenant, but sometimes you don't actually. Because that long term tenant, you might develop a relationship with them, and you might stop increasing the rent as much as you may maybe you should.
Mike:And that slows down the your ability to keep up with inflation and and times and so on. But I digress. The point being is, your personal wealth is fluid. So we wanna be aware of the movement of the money. And just to do a simple kind of aside, money leaving your IRA versus money leaving your Roth, it's the same flow, but one flow triggers income tax.
David:Okay.
Mike:And the other just goes to your bank account to spend. Notice the difference. Alright. Income tax, spend. Yeah.
Mike:Yeah. Yep. Go out to dinner or something.
David:Yeah. I buy pay for my Netflix subscription. Yep. That's a spend.
Mike:So you've got the flow, you've got income, which is what's getting taxed. Adjusted gross income is the main, like, driver when it comes to, in my mind, when it comes to retirement planning, is knowing what your AGI is, your adjusted gross income. Cash flow may not generate income, but income's gonna get taxed.
David:Okay.
Mike:You ever hear that expression? A square is a rectangle, but rectangle's not always a square.
David:Maybe I just heard it for the first time.
Mike:And I'll I'll I'll move it this way. Okay? If it shows up on your tax statement, your ten forty, which is your tax review, or any of the other schedules within your tax review, that's income. Uh-huh. And if you're not gonna spend the income, why would you want the income?
David:Alright. Because then it's subject to tax.
Mike:Yeah. Alright. So let me just do a simple example. And by the way, I'm giving you some rough examples here. Put your questions in the chat, submit it retireontime.com/ask, and we can we can pull this apart a little bit.
Mike:But I'll use an example. Is a dividend in income stream? May or may not be.
David:Okay.
Mike:A dividend paid out in your IRA is not taxed unless the dividend is paid out and then you pull it out of the IRA. Notice the flow. The dividend stays in your IRA, it's not taxed. You can get reinvested. That flow is not taxed.
Mike:It's not really income because it's not taxed, it's a flow of you reinvesting their payout structure. A dividend that's paid out in your brokerage account is gonna show up on line three a or three b of your ten forty of your tax return. And that depends on how you've purchased that investment, and whether it's taxed as a qualified dividend, so it's long term capital gains, which is typically more efficient, or it's taxes ordinary income, which is typically less efficient. And here's where I'm going with this. There are a lot of people that grew their wealth by investing in dividends.
Mike:Every year, they received income on those dividends, reinvested it, had they just shifted a little bit. They could have gotten rid of a an annual tax drag. Because every time they get that pay Mhmm. It's income, they're paid, it's an unnecessary weight on the growth of a portfolio. Whereas you could have done something slightly more efficient and maybe done more growth with less dividends and so on.
Mike:Do you see where I'm going with this?
David:Yeah. Yeah. So the the the cash was flowing in that in that brokerage account. And but every time that flowed, right, the dividend paid that you have it's subject to tax.
Mike:Yeah. So Okay. So here's I gonna give you an embarrassing story on myself Oh. To really illustrate this.
David:Okay.
Mike:Okay. So my first triathlon was in Washington State. It was oh, where was it? Lake Ty, TYE.
David:T Y E. Okay.
Mike:Up in Washington State, just just out of out of Seattle. Alright. Here's how my sign up process went. My buddy Andrew says, hey, do wanna do a triathlon with me? I know you ride, you can run, like, this will be fun.
Mike:Right?
David:Mhmm.
Mike:I said, sure no problem. So I sign up, and then I forgot to train. Okay. Just got busy. Yeah.
Mike:Now there's a little bit of a habit here with me signing up for races that I don't really train appropriately. I always finish them.
David:Uh-huh.
Mike:Just a painful Uh-huh. So so I forgot to train. But I did know it was gonna be cold. The water was a little bit cooler than usual. Little bit extra glacier runoff and all that.
Mike:Mhmm. So I was encouraged to get a wet suit. So I went to the store, I said, great. Size me up. Get me the right wet suit.
Mike:All all should be well. So they did. And then they said, now go try this out before you race. Oh. You need to make sure with the water in it that it fits well.
Mike:Now I'm novice. I've never aggressively swam with a wet suit. I've done scuba diving with wet suits. I've never done swimming in a triathlon with a wet suit, which apparently is a very different experience. Yeah.
Mike:And so I said, yeah, no problem. You know, I'll you know if fits or doesn't fit. It fit it seemed to fit fine. Right? And that the race when I got the West, it was the next day.
Mike:So I don't really have time to like, be bothered with this testing and taking it back and all of this stuff. Like, the race was tomorrow.
David:Mhmm.
Mike:So we're we're there with bated breath. Right? We're all lined up at the shores of Lake Tai, and we only have to swim a quarter of a mile, which really isn't that bad.
David:Alright.
Mike:You know, the the horn goes off, and I I let the first guys go in because it's just like it's just ridiculous. Everyone's in the pool. You're not really swimming.
David:Melee, white water splashing. You're crawling over people for
Mike:the first little bit. So I get in there, and after like a minute or so of crawling over people, we kind of space out a little bit, we get our own like room to swim. I realized the wetsuit's way too small. And it starts choking me to where like, I can feel pressure on my neck, and I'm losing blood circulation to my head. That's not a good sign.
David:Nope. No.
Mike:So then I have this genius idea. If I unzip the back, then I'll have less pressure. So I unzip my back, which is fine, and I'm swimming, but I don't have a lot of motion in my arms. So I'm swimming, I'm swimming, I'm swimming, and I get exhausted because every stroke is like three times more effort than it normally would be. Uh-huh.
Mike:And then so I go to a backstroke. Now let me explain what just happened. I opened the back of my swims or my my my wet suit.
David:Yeah.
Mike:Now there's this open gap of like, it's like a wedge of resistance. Every stroke, I have two fins that are holding me back. Uh-huh. It was just a complete nightmare. Yeah.
Mike:And at one point, when I was halfway through the lifeguard, looks down, laughs and says, you gonna be okay? And I just think kept thinking that Nemo, quote, just keep swimming, just keep swimming. Uh-huh. I placed pretty okay overall, but I was like one of the last swimmers. I had to really catch up.
Mike:But the point being is, that's exactly what's happening when people don't pay attention to income. They think I'm spending this, taxes are just whatever Mhmm. And they don't understand cash flow is the flow of assets and the efficiencies thereof. The point being is, and if I'm to tie the story back into what we're talking about, too many people don't try on the wet suit in retirement. They don't understand the tax implications of what's gonna go on, and then when they retire, they get hit with all sorts of, oh, there's Irma this because they didn't look at their modified gross income and now they're paying an extra 80 to 200 to $400 a month in unnecessary health care taxes because they didn't prepare.
Mike:Or maybe they retired and they're thinking, oh, shoot, you know, I gotta do IRA Roth conversions. I'm 62 years old. I've got plenty of a head start. So let's get that going. And they're spending 30 or 40,000 more dollars than they need to every year in taxes to do these conversions that they really don't have to do.
Mike:Why would you spend extra money if you don't have to? It's like swimming, opening your wet suit, and creating an unnecessary drag for every single stroke you take. And these inefficiencies can lead to 7 figures in legacy. Yeah. How's that for for an opening here?
Mike:So the quick summary, and I wanna talk about Mike Kipling article, 10 ways to generate income in retirement. Notice the keyword is income. There's a tax drag that you need to be aware of. 10 ways you can take income in retirement. You need to understand the cash flow, the income, and how it shows up in your tax return, and what you are spending.
Mike:And you want your income to be close to spending, so you have less of a drag. You want your income to be as tax efficient as possible, not year by year, but year by year while also acknowledging the long term potential inefficiencies. And then cash flow is to be efficient.