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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.
First question. I'll take this one. Okay. What are the different ways you plan for the widow tax?
David:Yeah. What is the widow tax?
Mike:The widow tax is the surviving spouse's increase in taxes and expenses that isn't properly accounted for in many retirement plans.
David:Okay.
Mike:So let's let's just indulge for a second.
David:Yeah. Okay?
Mike:So you're married?
David:Yep.
Mike:You like your wife? I do. She's a neat lady?
David:I'm not afraid to say it. Yeah.
Mike:I can give you with certainty that one of you will die before the other. Yeah. Probably. So let's say that you die first. Okay.
Mike:Because we don't wanna throw her under the bus.
David:No. No. I'll I'll take
Mike:the Yeah. Throw you under bus. That's how you die. Yeah. So right.
Mike:So so then your bride is now under the single tax situation.
David:Oh, So we were married and filed jointly.
Mike:Right now you've got that tax benefit. Yeah. When when you go as an individual, now it's it's individual tax bracket, which means she's much more restrictive. But her lifestyle is most likely to be very similar to the lifestyle you both have. Because the only difference is that you might pile buy a little bit more food.
David:Mhmm.
Mike:But you still have the Netflix subscription, and the Apple Plus subscription, and Disney Plus subscription. Right. You still have, you know, auto insurance, maybe a little bit less, maybe sell one of the cars, maybe you don't. I don't know. Yeah.
Mike:But there are still lifestyle expenses that are gonna stay roughly the same. And so now she's needs the same or similar income, but is gonna get taxed more heavily. Yes. Also, one social security is gonna go away. So she's gonna receive less income, which means that puts more pressure on the portfolio.
Mike:And let's say most of your assets are in an IRA and that you didn't get ahead of the IRA to Roth conversions. That means then your RMDs could additionally push up into the higher tax bracket as well, which then puts more burden on the portfolio or just sends more money to the government arbitrarily. And those are just a couple of the problems. Not to mention Irma. Irma basically gets cut in half, the threshold.
Mike:Right. It's not only is she getting taxed more in income, she's also getting taxed more for health care costs. She's also having more pressure on the portfolio to bridge the gap because she has to replace the lost income from social security. And the list just goes on and on and on. Right.
Mike:And then at the end of her life, let's say she doesn't wanna be a burden on the kids. So she probably took care of you when you were dying.
David:Mhmm.
Mike:Now who's gonna take care of her? The additional costs for health care, helpers, expenses, long term care, all of that is even more pressure on the portfolio. Right. The surviving spouse, more often than not, based on what I've seen, is set up for failure in retirement. And the problem, if I'm to be sexist, is usually men have the plan and the women defer the plan to the man, and too many times I mean, everyone has good intentions in their late fifties, early sixties, but I've also had to work with the 70 year old, the 80 year old who walks in the office says, look, I heard you on the radio.
Mike:Look, I read your book. Look, I'm trying to sort all of this. I won't work my current adviser because that was a boys club, and it can't stand him. Mhmm. But I need to figure out how this all works.
Mike:And this is while they are grieving.
David:Oh yeah. I mean, have
Mike:a general rule here. If we're not talking to both spouses, we don't wanna do business with you for this very reason. If both spouses do not have a voice in the planning process, there is a problem. You don't need to know everything, but there needs to be a relationship. We need to understand who you are, both of you, to plan for this.
Mike:Now let's talk about strategies. Okay.
David:Yeah. Because you've painted a semi bleak picture here that seems a little overwhelming, so It was terrible.
Mike:Yeah. It's absolutely horrible. Yeah. And and you do see second marriages that almost like there is love.
David:Yeah.
Mike:There is love. But it's also partly financially helpful to marry someone and split costs.
David:Oh, right.
Mike:Yeah. That is a normal thing to also see whether people admit to it
David:or I see. Yeah.
Mike:A lot of lot of confessions. Like a priest. I get all sorts of confessions in Or the retirees that wanna be divorced, but they can't afford it because the the divorcee tax. Oh, right. That's another real thing.
Mike:So
David:anyway So yeah. What strategies can we do to overcome everything you just laid out?
Mike:So the first one is, look at health. Look at your longevity. If your if one spouse is not going to make it very far, and that's a normal conversation by the way, you might get more aggressive with your IRA to Roth conversions. Why? Simple.
Mike:Because if most of your assets are an IRA and one spouse passes, you have a lot less room to take income or to do anything.
David:Right.
Mike:So even though some people might say, well, we're gonna max out the 24% bracket, and you might end up at like a 24 20% effective tax rate, you might wanna push the thirty second bracket. I know the CPAs are gonna think I'm crazy for saying this. But if you look at the effective tax rate now of going into higher brackets versus the effective tax rate later when a spouse passes, and the corner that you may have painted yourself into, that ends up being a more sobering conversation. Yeah. It's the what if on the comparison.
Mike:Yeah. In my opinion, health care costs are probably gonna keep going up. Tax brackets will probably keep going up. Yep. Trump did something that was kind of out of left field.
Mike:First off, he got elected again, and then he passed this massive tax bill that was supposed to expire. Getting more aggressive earlier on may be something you as a couple want to address. Maybe you don't. It's okay. This is why the planning process is so important.
Mike:Then you've got to consider social security optimization because people say, well, I'm not gonna live that long. That's fine. But what if one of you do? Having a spouse delay their benefit as long as it makes sense, not both filing at 62 or one at 62 and 67, but one actually waiting until 70 years old
David:Okay.
Mike:Gives the surviving spouse a more tax efficient income stream. Because social security based on current tax law is not fully taxable. So though you are increasing your risk, let's say if you both died soon, you didn't get as much out of the Social Security, the trade is the surviving spouse has more tax efficient income later in life, which helps you get through the nuance of the widow tax. Mhmm.
David:Yeah. So is it that the the surviving spouse will then receive the greater of the two benefits of the two spouses? Yeah. And so if one spouse holds off and then therefore the monthly benefit is higher, they would get that. Yep.
David:Okay. Makes
Mike:sense. And this is not for everyone. There's always exceptions to rule in planning. That's why you don't listen to a radio show and put your plan together and call it good. You see a professional.
Mike:AI is not a professional. AI is great for research. Yeah. But there's also confirmation bias in there. And you want someone that's gonna push against your thoughts and challenge your opinions to see is that what is right.
Mike:It's what is right, not who is right. Now David, wanna pause real quick and just ask you something here. If your retirement had a leak, okay? So let's say money was quietly draining out through fees or tax inefficiencies, Maybe the social security time was gonna put an unnecessary burden on the plan for one way or the other. Maybe you're just paying more in health care premiums because you didn't know how to optimize all of this.
Mike:I mean, honestly, how would you know? And how would your AI even know? You have to have the right questions to ask. It's a whole problem. And the truth is, these leaks, they're often silent.
Mike:Many people miss them. So here's what I wanna do. Everyone right now in Kansas City area, they're listening in right now. We're gonna offer you something real real cool. Look, if you're within five years of retirement and you've saved at least $500,000 or more, I would invite you to book your retirement leak test.
Mike:It's a 47 inspection on your retirement. Two visits with my team won't cost you a dime. The first visit is gonna be finding the leaks. The second visit, we're gonna show you how to plug them. You walk out with that leak report.
Mike:Every leak that we found, dollars, all of it right in your lap. It costs you nothing. There's no obligation. We're doing this because we are genuinely concerned about some of the stuff that we've seen lately and the risks and the market conditions that are out there. So we're gonna be offering this report at no cost.
Mike:The report is yours to keep regardless of if you work with us from that point on or not. Now if you decide you wanna work with us, we can we can do a one time written plan that we teach you how to fish. We're gonna teach you how to fish step by step, plug in the different leaks so you can manage your plan on your own and potentially save yourself a lot of money and fees. I mean, heck, you got a million dollars in retirement. That's like $10,000 in fees.
Mike:You could be saving your saving for that. That's a leak unto itself. Now if you want maybe a little bit more help, we also have ongoing services at a flat fee, but it's okay either way. The point is we wanna help you find the leaks, plug them up, and then if you wanna keep talking, give you a plan that's kinda like a recipe. If you can follow recipe, you can follow the plan even if you don't have a financial background.
Mike:That's it. Nice and simple. Now fair warning. Some of you may have one of the biggest leaks is that advisor fee. So if you're open to a nice conversation about finding leaks in your system, trying to get more out of your money, here you go.
Mike:We've only got room for five this week. That's it. So in order to get the leak test, the retirement leak test, here's what you gotta do. What you're is you're gonna text radio to (913) 363-1234. Text radio right now to (913) 363-1234.
Mike:That's keyword radio. (913) 363-1234. And then what we'll do is we'll text you back. If you're one of the five, we'll give you a link to schedule the thirty minute call. Just gotta schedule the call within the next two weeks.
Mike:Very limited times, but we do have some slots open for us right now. Text radio to (913) 363-1234. The first five people to text us. You'll get those two sessions, no cost, no obligation. We're gonna help raise your awareness towards your retirement preparation.
Mike:Again, you must have 500,000 or more to qualify for this specific offer, But let's let's find the leaks. Let's expose them. Let's have some fun plugging them up and help you get more out of your money and be better prepared for your retirement. Then you've also got, so not only do have to consider the Social Security timing of it to extend one of the Social Security's potentially. Right.
Mike:IRA to Roth conversions, be more aggressive earlier on.
David:Because the Roth is income that's tax free, right? Mhmm. Yep. Okay.
Mike:Then you also need to consider long term care. Now this is a funny thing. Okay. We're licensed to sell long term care insurance. I've only had, if I remember right, three to five people actually ask for an illustration.
Mike:Actually go through the process, all of them were denied. Because? Because they knew they were unhealthy. They knew they were probably going to use it. And so you have to have an honest long term care conversation about how are you going to pay for future expenses for the both of you or for the surviving spouse without disrupting taxes.
Mike:Roth can grow and act as a long term care bucket because long term care doesn't pay for everything anyway. It's just a multiplier of whatever you put in there. That means that maybe you grow Roth funds and if you have additional medical expenses and you're already pushing the tax brackets, you can alleviate yourself and take a little bit from Roth. Things like that are honest strategies. There are other ones like you could you could do IUL's is kind of a hybrid one, but you wanna start earlier or younger and be healthy enough to even have that makes sense.
Mike:You don't buy life insurance unless you also want a death benefit. So there's that caveat to annuities. There's a lot of people that have these annuities. They have an income doubler, which is kind of a nice feature. But the income doubler, a lot of people don't realize this runs out when the cash runs out.
Mike:So if you're 80 years old, there's no more cash left in the policy. There's no income doubler, that's not long term care. That's just a feature that allows them to make an income stream look a little bit better. It's not good or bad, it just is. And then and then the last part is, family history is a very important part of this.
Mike:When you turn 65, you can get Medigap plans or supplemental plans that allow you you can't get denied, but cover additional insurance. Maybe the spouse that has survivorship or longevity risk gets more insurance. Maybe that's a conversation you have because you cannot be denied and that may help bridge certain gaps. Again, these are supposed to be slow, thoughtful, methodical conversations about how are you going to handle the additional expenses later on in life. Yeah.
Mike:But it's and it's not tax brackets. It's not just it's what do taxes look like now? What do they look like later? What's the effective tax rate? And if you pushed it a little bit now, does that alleviate burdens later?
Mike:Because what's the worst that happens if you're wrong? You still converted assets. You still prepared for health care costs. You still prepared for a reasonable benefit for social security. You still did the planning.
Mike:So you win either way. But you've set up the surviving spouse for success either way. Like it's just a better spot. So Yeah. These are the slow down.
Mike:Don't jump into a quick cookie cutter plan. This is having a more comprehensive conversation. So hopefully, that answers that question.