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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 questions about all things retirement. My name is Mike Decker. I'm a licensed financial adviser who can even file your taxes. Now that said, please remember this is just to show I'm not giving you financial advice. Everything you hear should be considered, well, informational.
Mike:With me is my esteemed colleague, Mr. David Franson. David, thanks for being here.
David:Yep. Glad to be here.
Mike:David's gonna read your questions, and I'm gonna do my best to answer them. You can text your questions in right now to (913) 363-1234. That number one more time. (913) 363-1234. Let's dive in.
David:Hey, Mike. I am 60 and plan to retire in five years. My 401 k is almost entirely equities. What moves should I
Mike:be making to prepare for retirement? So most of the assets are in equities. So let's assume SPY or VO or whatever. It's S and P 500. That's typically a popular one.
Mike:All of his assets are in equities in the four zero one k. What else is in the question?
David:Yeah. So he's 60. He wants to retire at 65. Everything's in a four zero one k, and it's almost entirely like stocks. Right?
David:Equities. Okay.
Mike:So once you turn 59, you can roll your funds out of the four zero one k and do something with it. Because he's now 59 or older, we don't have to be worried about the 10% penalty of taking income from an IRA account or a four zero one k account in that sense. So okay. We've got more investment options here, and really there's a couple of places that he could move the funds to. So the first one is and I wanna just kind of articulate some of the tools here, and then back up a little bit.
Mike:Yeah. But you could keep the funds where they are.
David:So just keep it in the four zero
Mike:one k. But look at the fees. Because if you can buy the same ETFs or mutual funds outside of your four zero one k and pay less in fees, that might be an option. You could roll the funds over to a traditional IRA. Traditional IRA maybe has less fees in the same or more investment options.
Mike:You gotta compare, like, does your four zero one k allow a limited amount? Can you do your own brokerage trading through it? That's a whole conversation. And then you could also entertain the self directed IRA option.
David:Okay.
Mike:So self directed IRA opens up different, like, physical assets. So that's where you could expand into the real estate market. You could expand into physical gold or silver, if that's something you wanna do. I think you can even can you do crypto yet on self directed IRAs? I don't know.
Mike:Do your own research on that. Sure. I mean, I know you could invest in ETFs or crypto and stuff, but a self directed IRA opens up a lot of different investment options. But I just wanna point out this this first part. Do you see how expansive your investment options are?
Mike:The tools that are available to you once you turn 59, and you can roll funds out of the four zero one k, which is inherently restrictive, and explore more options. Now more isn't necessarily better. It can be overwhelming. The idea of broad diversification, I think, is kind of silly by a little bit of everything. Pure diversification is no growth from a risk standpoint.
Mike:Right? Yeah. Because you bought everything, so you've got no risk. There's no return. You have to start to then give your money purpose.
Mike:Here's what I mean by that. Okay. Yeah. You've saved to be served. Your money is supposed to serve you.
Mike:That's its job. It's supposed to supply income for the rest of your life and help finance your lifestyle without the obligation of work. Where you put your money is the wrong first question. It is the third question. The first question is, can you afford to retire with the life that you want, and what does the plan look like?
Mike:So the first thing I would recommend, generally speaking, and this is just a good starting place that may or may not be right for you, but I think it's a nice idea to first start with a plan. Just put in how much you have saved up in totality, put in the income that you want, run a net income, so after tax, could you afford to take that, and run kind of a plan to age 100. I think Fidelity has software like this. I mean, there's lot of softwares out there that you could do Excel. You could you could explore an Excel if want by Microsoft Excel.
Mike:Yeah. And and just maybe do an effective tax rate. Just back of napkin, just a starting place. Could you afford to retire? And maybe you start with an arbitrary 6% average growth in your portfolio.
Mike:You don't know where the assets are gonna go, but you're just trying to take a ball of clay and start to bring shape to
David:it. Okay.
Mike:That's what we're trying to do. Now every part of your plan is going to affect the other parts of the plan. What I mean by that is if you're 60 years old, and you wanna retire at 65 in this example, and he were to file for Social Security at 65, 60 seven, or 70 years old, that's going to affect the amount of income you pull from your assets, which will also affect your estate planning, how much you're gonna pull from the portfolio, which will then would affect the state planning. The quantity amount and where it comes from might affect IRMAA, Medicare, because now you're crossed with 65 years old, which is when Medicare starts. Right.
Mike:So there's a lot of things to consider here. Yes. At 73, you're gonna have required minimum distributions start. That's where the IRS is saying, hey. We've let you defer taxes, but we still wanna start getting paid.
Mike:So you're gonna be required to pull distributions out, and if you're not prepared for that, then you might be forced to pay more in taxes, and then you put it into other investments, and then and those other investments, if you wanna touch that, those funds, you pay capital gains tax. I mean, so there's a whole slew of things to consider. So the question is, what moves should I be making to prepare for retirement? Yeah. Give some direction
David:Okay.
Mike:To where you wanna go. Let me give you a quick story. So I was a boy scout. Eagle scout, I think I got like 14 or 15 years old. Right?
Mike:It was really into this. It was a lot of fun. You know, snow caving, we'd we'd dig holes in the mountains. We'd go kayaking for 50 miles. I mean, it was the true boy scout experience.
Mike:There was one year we did a 50 mile canoe trip, and what was really interesting was we all had the same plan. We started from one part in the lake, and we would go to the other part of the lake. K. And there were really three methodologies. There was the inexperienced young scout like me and my buddy, and we just rode and rode and rode.
Mike:It was a very traditional canoe experience. Right? We knew our backstroke. We knew the j stroke to turn. We got all that, and we would just switch sides, and we kind of got there.
Mike:K? Then there was another crew. They were the powerhouse. They were the older scouts. They were very muscular and very strong, and they would paddle on both on one side, and then on the other, and then on the other, and then on the other.
Mike:You know how like those curly straws just wind? Uh-huh. You know, it was kinda like that. They were so inefficient. They got there first, but they were the ones that were dead tired every single time because they never went in a straight line.
Mike:We went in a straight line methodically. We also were weaker and smaller and younger, so we couldn't afford the brute strength, but they were trying to show off, and it they lost so much energy because of it.
David:Right.
Mike:And then there was the third group who picked up on the wind, And what they did is they opened up one of their packs. They basically made a sail. Really? They connected two canoes together and made like a catamaran or something like that out of their canoes, and they sat back and let the wind carry them most of the way, and they just kind of corrected course. I like that idea.
Mike:Anyway, here's my point. Okay? A plan is nothing more than a starting place and an ending point with roughly the idea of how you're gonna get there. The magic happens in retirement when you understand the strategies that are gonna bring you efficiencies. In retrospect, all of us would have rather connected two canoes together, and put a sail in there, and just sailed through this.
Mike:Right. So for this 60 year old, for this example, an idea would be, what are the tax strategies? What are the income strategies? What are the growth strategies that are gonna help you find efficiencies? Investments are not about brute force.
Mike:It's not about saying, I'm gonna just go all in on a couple of stocks, and just go high risk, high reward. That's how this works, and I'll just grit my teeth, and if it doesn't work out, I'll just tighten the budget and bear it, but by golly, I'm gonna make this thing work.
David:Okay.
Mike:There's a grace to financial planning, and it's not in the plan of starting and stopping. It's what are you going to do along the way? Let me give you another Boy Scout example since we're on the topic. One year we hiked Glacier National Park, 1 of the most incredible hikes I've ever done. 50 Yeah.
Mike:It was gorgeous. Right? We're in the middle of nowhere. Cell phone service, like none of that existed. We were truly out in the middle of nowhere.
Mike:We knew where we were gonna go, but we also knew that the days where we were gonna be climbing heavily, and those were shorter durations, maybe five mile day. And another day would be maybe 15 miles because it was mostly flat or downhill. We knew the terrain along the way. The same as within financial planning. You might have some years where you have a higher withdrawal rate because you're bridging certain gaps, and other years, you might have a lower withdrawal rate depending on how you structured your accounts, your products, your investments, your cash flow, and all of that.
Mike:Efficiency in the plan knowing that it's not the same along the way. So I'm trying to take this from two different angles, but it's not again, it's not about the plan. Oh, can you assume a 6% growth and take out some money and call it good? It's the strategies. Do you understand throughout the multiple years how you're gonna take your income and where is it gonna come from?
Mike:And should you do an IRA to Roth conversion that year? Should you not? And if you should, how much should that be without triggering taxable events? Should you, in some years, file married filing jointly, and other years do married filing separately to create additional tax efficiencies depending on where they're coming from and looking at the household income and taxation as a whole.
David:So when you say efficiency, how can we define what an inefficiency is? Like, how can we make that materialize in front of our eyes here?
Mike:Yeah. We are often deceived, might be too strong of a word, because I think the people explaining this believe what they're they're saying, that things like the zero tax bracket makes sense. Right. So the zero tax bracket sounds good in theory, but when you start with pretax dollars, it can be very expensive to get to. So in my simple example, I've said this before, but I'll say it again.
Mike:If you have a million dollars, and let's say the IRS simplifies the tax code and the states get rid of tax. K? Very simplified explanation here. But, you know, we're we're not all calculating heavily taxes, so indulge me for a second. Sure.
Mike:It comes out, you can just convert your million dollars to Roth and just pay 20% in taxes, or you could pay 15% for life, which would you do? If you convert it all a day, you'd pay 200,000 in taxes, leaving you 800,000 in Roth that can grow tax free and pay out tax free. No more taxes for life. All things being equal, same growth, and then the same net income, k, with the cost of living adjustment, all of that, you'd pay around 412,000 in taxes. So you would assume that getting to the zero tax back quickly is better.
Mike:It's not. Here's why. The person who paid more in taxes also had, let's see, 690,000 more dollars in their portfolio because they had a higher balance in their portfolio that grew at a faster rate because this is the seventh wonder of math, the compounding effect. Right. It's easier to grow a million dollars than 800,000.
Mike:So the person that took too big of a hit too fast never was able to recover.
David:They withdrew too much money at once, and so there was less money in the account to grow.
Mike:Yeah. So you might think, oh, I'm gonna save money on taxes, but what's the cost? What's the consequence of that? What's the detriment of that strategy? And I'm not even peppering in here the standard deduction, which a lot of people forget about when it comes to investments.
Mike:So if you convert, let's say, half of your IRA assets to Roth, and the rest of it you can take through your standard deduction, which is tax free basically, that's more efficient from an income standpoint. Yes. So these little details often go unnoticed. Many times CPAs are not giving investment advice, which they're not really supposed to, and so the right strategies aren't being discussed because they don't know to discuss them. Your four zero one k doesn't show up on your tax filing preparation forms.
Mike:And then the advisers aren't supposed to give tax advice because of some arbitrary disclosure that they've been given, so they kinda shy away from getting into the nitty gritty.
David:Right.
Mike:So these are the efficiencies that I would be looking at. How do you find the graceful balance within a plan so that you can get more out of your money while preserving principle, while maintaining flexibility, while still having enough growth potential in your overall portfolio, but having enough protection if the markets go down, you could sail through and take income from a principal protected source. How do you structure yourself so that you are maximizing utilization of the standard deduction? How do you, if you have itemized deductions, utilize and pile up those standardized deductions with in association with your income strategies, while maybe even considering things like the married, finally separate? Yeah.
Mike:That was a lot right there. My mind's going so fast, and I'm just hitting like the cliff notes here. Sure. But there are many times thousands, if not tens of thousands of dollars of efficiencies that people miss because they don't dive into these details. So for this person, if for an example, here is an idea.
Mike:Let's just kind of summarize all this.
David:Okay. Yeah.
Mike:You could start doing IRA to Roth conversions, but it depends on your income. Your income might be so high that you don't wanna do it, and maybe it's low enough that you could squeeze some in there. It depends on your situation, but you might consider doing that. If you are gonna file for Social Security at 70 years old, you might consider at least some life insurance just to bridge the gap that if you were to die prematurely, what's the the loss of income of one of the Social Security income streams? And you might do that through term life insurance or permanent life insurance, like indexed universal life, for example.
Mike:You're still young enough that you could qualify and have low cost of insurance depending on your health, maybe or maybe not. Depends. You might wanna look at starting since you're five years away from retirement, starting to fund your reservoir, so the protected part of your portfolio, so that if the markets were to crash, let's say two years before you retire, you can still retire on time because you've got enough built in protection that you can absorb the market gyrations and be able to still retire on time because you put the plan together. Maybe you guaranteed the first five years of your income. Maybe you did a CD ladder or a treasury ladder.
Mike:Maybe you bought an annuity that has what's called period certain, and will once you turn the income, you get equal payments for the first five years of retirement. And maybe you pepper that in with something. I mean, what is right for you is gonna be different than what is right for someone else. Maybe you put in some buffered ETFs in there instead of your bond funds because credit right now, in my opinion, credit being debt or bond funds, I don't think people are being compensated appropriately for them. They really don't.
Mike:In the future, that might make more sense, but I'm still not a huge fan of the risk people are taking for the debt that they're basically covering.
David:So you've given us some examples of what reservoirs are. Just a quick definition of the reservoir strategy. Mean, here
Mike:are your options. You've got high yield savings over money markets. You've got CDs, treasuries, bonds. If you hold them to maturity, they're only as good as back whoever backs the crediting of it. You've got fixed annuities, which are basically a CD from an insurance company.
Mike:It's the easy way to explain it. MYGAs, they're also known by. You've got your buffered ETF, structured notes, or fixed indexed annuities. As long as you don't transfer longevity risk to the insurance company, AKA turn on the lifetime income Mhmm. You could use a fixed indexed annuity kind of like a structured note or buffered ETF in some sense.
Mike:And if you have life insurance, you could utilize that as well if it's structured correctly. Usually, it's not based on my experience. But you've got all these options that can offer growth potential and no downside risk to help prepare for the next couple of years so that you can retire at 65. Because the worst would that could happen for this person, or I should say not the worst, but a unfortunate situation, would be that at age 64, the markets tanked. They kept all their assets in equities, and now they're done.
Mike:If all your assets are in equities, you are subject to flat market risk, which is a risk that we don't talk about, I think, enough, and that's that the equities market goes flat for a ten plus year period of time. That's rough. Happened in February, happened in 1965, happened in 1929, happened in nineteen o six, and there are many large institutions and research firms that are saying we could be in another flat market cycle. The damage of COVID and the hyperinflation, all that, I don't think we fully paid the piper on that. I think that there's a lot of things that still need to happen before we've finished physical physical therapy.
David:Okay.
Mike:And that's not saying that that's what Trump's doing. That's not saying what that's not what Powell's doing. It's just economics has a way of correcting itself. So five years away, at least ten years away is ideal, but five years away, you're preparing for your retirement. You're starting to take on less risk.
Mike:You're starting to get more deliberate about strategies. How are you saving? How do you wanna spend? How much do you wanna spend? What are your lifestyle and legacy goals?
Mike:But the time is now to really dive into those details because you're getting close, and you can't control the market. So if the market's misstep, if they misbehave Mhmm. They're not gonna pay the price. You're the one that's gonna pay that price. And that does not mean go out and buy a bunch of annuities for the lifetime income.
Mike:There are so many ways you could structure your income. I wrote a Kipling article, 10 ways you can take income in retirement. It just depends on what is right for you. So explore the options. Explore your lifestyle legacy potential.
Mike:Explore the benefits, detriments of these strategies, but start now because you're getting close and you've got a lot of risk. At least that's what it sounds like. 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.
Mike: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. 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.