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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.
So it's about planning first. And notice there's no products. There's no risk here. Do the numbers work out? Then you explore the strategies that you want.
Mike:Do you wanna take more income for the first couple of years? Do you wanna do more tax planning for these years? Do you want to look at social security file this year or that year? It's the strategies. Because if you look at the strategies second, you've got a lot of flexibility on looking at how do you get more out of your money.
Mike:Mhmm. Then you pick the right investments and products, which may be buffered ETFs, which may be index annuities. Amiga is a CD from insurance company, basically. Mhmm. A CD, treasuries, or tips or normal treasuries, Or bonds.
Mike:You could do real estate, preferred stock, which people can't get on their own. Like there's so many different tools in the toolbox. But when people walk up to me and say, hey, I buy this investment, this stock? Should I buy an index annuity? Should I buy some real estate?
Mike:Should I be a landlord now? I don't know.
David:Alright.
Mike:What does your plan say first? What are the strategies second? And what are the investments or products third? Let me give you a quick example. Real estate's a great investment.
Mike:Most financial advisors won't admit that, because if you buy a rental property, they can't make 1% on your asset.
David:Right.
Mike:That's a tell. Yeah. But, if you think about it, if you have real estate experience and you buy some rental real estate, that can be a great investment. And then a couple of years, you might plan on doing a ten thirty one exchange to a Delaware statutory trust and maintain your real estate. That could be a really good thing.
Mike:Mhmm. Maybe it's for you, maybe it's not for you. I'm personally not one to wanna be a landlord. Many people do. But if you put your real estate, let's say in a self directed IRA, you've got some landlord restrictions, you can't do anything on that property.
Mike:And if you have RMDs on your real estate, you're not gonna sell 4% of your real estate to qualify for an RMD, so you're gonna take it from somewhere So there might be some tax issues because you put illiquid assets into long term situations. Right? And you're probably not gonna do a $500,000 IRA to Roth conversion to convert your entire property from one year from your IRA to your Roth that year. That's a huge tax issue. So do you see how you can have some great investments and products, but you have to look at it from an income standpoint, from a tax standpoint, from a social security optimization standpoint, from a legacy standpoint.
Mike:Like there are layers. You have to evaluate for every decision. This is why the plan always comes first. Yeah. Strategy second, portfolio third.
David:Okay.
Mike:Alright. And if you want more information about this, by the way, we talk about in the books. How to retire on time, you can get for free. For all those who are on live with us or listening to us, How to Retire On Time is a free book, free download or audio book. You can get it on retireontime.com.
Mike:The DIY annuity guide. It's coming out soon. So stay with bated breath. If you're on the newsletter, you get these announcements. We've got how to prepare to retire on time.
Mike:I'm very excited about this. Okay. This is the non financial side of retirement planning. What I mean by that is, just because you can afford to retire doesn't mean you should. I know I'm talking to probably half of you right now that you enjoy your work.
Mike:You don't wanna retire but all your friends are pressuring you to retire because it's what they did. Pause. Pump those brakes. Yeah. You want to prepare to retire correctly so that you don't have remorse.
Mike:That you don't feel sad, lonely, and depressed in retirement. It should be a correct transition. What we did is we took a neuroscience standpoint and said, how do we create an environment that gives you healthy levels of oxytocin, serotonin, and dopamine, so that you move into another phase of life that's full of happiness, joy, and well-being. Yeah. Really fun book.
Mike:Also how to invest like a jellyfish. That's a really fun one. Especially for the market conditions I think we're going into. That's a very important book to read. How to retire from rentals for those who have rental properties and are done being a landlord.
Mike:And then the bear market protocols coming out here really soon. That's how to make a bear market or a market crash into an opportunity. As long as you're prepared for it before it happens, then you might actually be looking forward to the next crash. Who's to say? Alright.
Mike:David, we got questions here. What's the what's the first question we've got? We're just taking your questions for the rest of the the time.
David:Yeah. So this comes from Linda. Thank you, Linda, for submitting this. What are the things I need to consider when deciding which accounts to withdraw from in retirement? This is really insightful.
Mike:So it's about potential opportunities. Let me give you one example, okay? What you first have is you have three buckets. So, and real quick by the way. Well, you've got three buckets.
David:Okay.
Mike:Yeah. So you've got your IRA assets. Yep. From a tax standpoint, got acknowledged. You've got your IRA assets.
Mike:You've got your non qualified assets. Think of it like a brokerage account. So you're gonna pay capital gains on that. Okay. And then you've got your Roth accounts.
Mike:So you're after tax qualified. So qualified means, it's gonna grow without any capital gains. When you pay it out, if it's pre tax, you pay taxes. If it's after tax, you pay no tax. So those are retirement accounts.
Mike:And in the middle, you've got your brokerage accounts. Those are subject to capital gains. Okay? The long term capital gains bracket is its own unique thing versus ordinary income. But if you blend them together, you create inefficiencies.
Mike:So if you are 61 years old.
David:Okay. Alright.
Mike:61 years old. You might consider if you have brokerage funds only wanting to take money from your long term capital gains.
David:So if I'm 61 and I'm retired or retiring?
Mike:If you're retiring and the reason is, let's say you're married finally jointly. Mhmm. You have around a 100,000 of gains that you can realize at the 0% tax bracket.
David:Mhmm.
Mike:So you might sell some of your Apple stock, some of your Navidia stocks, some of your Microsoft stock. You know those those favorite Amazon stock, those favorite companies Yeah. That you worked for your whole life. But you're selling them basically tax free for a couple of years. And this does a couple of things.
Mike:One, is you're paying less in taxes, basically nothing in taxes. What does that do? That leaves more money in your portfolio to compound over time, which could lead to 6 to 7 figures in legacy if you have legacy intentions. The second thing is you would qualify for the affordable care subsidies that are still in play. Right.
Mike:So not only are you saving 20 to 30,000 maybe in ordinary income tax because you're within long term capital gains, But you might save 10 to 20,000 in affordable care act subsidies or premiums because they're subsidized. That's a pretty good situation. Now maybe you decide to take out, I don't know, $2,530,000 in IRA assets and cancel it out with the long term capital gains. Or no, I'm sorry. That you cancel out your standard deduction.
David:Okay.
Mike:Because that cancels out the rest as long term capital gains. That's extremely tax efficient. So that's an idea of segmenting withdrawals by years and opportunities. Because you're not really gonna benefit that much once you're 65 or older from that kind of situation. But if you're pre 65, you might.
Mike:Because you're paying premiums for health care.
David:Alright. After 65, you've got Medicare and
Mike:it's Yeah. And so different people will say, well I got to work till 65 because I need health care. Well how much is a year of your life Really? And if we could, let's say, structure your payments for a couple of years in a way that you're not paying really for health care because we've heavily subsidized it, making the government think that you're dirt poor. Mhmm.
Mike:Then you're not paying for health care really. Right. Very very little and you've got years more of your life. Now the caveat to this is if you've saved too much in your IRA, you might not want to do this because later in life you might have RMD issues. Now maybe you have RMD issues, maybe you don't.
Mike:But notice the complexity of your withdrawal strategy earlier is gonna have a consequence later for better for worse.
David:Yeah. How do you define an RMD issue? What what issue?
Mike:Yeah. So an RMD, if a required minimum distribution, that's the amount that you're required every year at a certain point that you have to take out of your IRA assets. Mhmm. If that is equal to or less than the income you already want retirement, that's a non issue. You already were planning on taking income.
Mike:Yeah. If the RMD is $5,000 more than the income you already want, it's a rounding error. If your RMD is $200,000 more than the income you already want, that's a tax issue. Then you have to ask yourself, where's this money supposed to go to? Are you wanting to spend it on yourself?
Mike:And if so, do we need to increase your spending? Do we need like, what are we doing there? Or is it for legacy purposes? And in that case situation, maybe we need to do more IRA to Roth conversions and skip the brokerage strategy earlier on because there's more tax resistance later in the plan. Yeah.
Mike:Every action has an equal opposite reaction in your plan. That's why you have to do the plan first and the strategy second. Because you don't wanna lock in something that gets in the way of what you need to accomplish.
David:So the real kind of the base basic issue for RMDs is that you might be getting more income than you need or want.
Mike:And it's being taxed. Yeah. And you need to consider the widow tax. So the surviving spouse and the single tax bracket.
David:Oh, right.
Mike:The taxes might go up astronomically. So they're getting less money. So that's another part of the equation. But you see how the withdrawals are going to help support certain goals. Mhmm.
Mike:Here's another one. Let's say the couples already giving away a lot of money to the church.
David:Okay.
Mike:They don't really have an RMD issue then because they're already planning on giving their tides to a church or donations to a charity. So when their RMD starts, maybe it's $50,000 over, but they were already planning on donating at least $50,000 that year. That's a qualified charitable distribution. You just pay it, doesn't upset your taxes, all is well. Oh, yeah.
Mike:So the withdrawal strategy is dependent on what you want your money to do for you. And then what you want your money to do for you is gonna be dependent on the strategies you implement. There's a buffet of options here. And everyone's combinations are different.
David:Yeah. I love buffets.
Mike:Yeah. They're great. Especially Indian buffets. Yes. Yeah.
Mike:Get that curry.
David:It sounds good right now too at noon central.
Mike:Yeah. So Yeah. But that's that's when people say, oh, well, should I buy an annuity? Well, hold on. If you buy an annuity and turned on at 62, 63 years old, you have all these brokerage funds and there's no RMD issue later on, you just gave yourself a tax issue.
Mike:You missed the opportunity because you built a plan around a product and you didn't start with the plan first. If you're, hey, let's do this 4% rule, keep everything at risk. Okay. Then if the markets go down like that that's now you could delay your retirement because you took up too much risk. You see how it's the plan means you live the life that you want.
Mike:The strategies help you get the most out of your money, and the products give you the highest probability of success based on what's available to you. Yeah. That's what it looks like for withdrawal strategies. That's what it looks like for proper retirement planning. That's what it looks like in my opinion, and you see it more with a flat fee advisor that's not incentivized to keep your money in a stock bond fund portfolio that charges one to 2% or you should buy a bunch of annuities, turn them on and then you have no risk.
Mike:It's like, well, hold on. Yeah. What are the tax implications? What's the longevity risk? What's the legacy goals?
Mike:I'll give you one last example and then we'll go to the next question. So met a guy out of Georgia. Really nice guy. Does not have longevity. Okay.
Mike:He said, should I be aggressive with my IRA to Roth conversions? I said, well, okay. You said you have no longevity. Like you expect to pass in your early eighties. Maybe that's longevity for some people, but for him he felt like he wasn't gonna live that long.
David:Okay.
Mike:Got five kids. Okay. Got a couple million dollars. Okay. What are the kids tax brackets?
Mike:He said, they're not high incomeers like they they work hard. But you know, they're not high incomeers. Maybe 6 figures tops. Okay. So what we determined was, if he doesn't do a lot of IRA to Roth conversions and if his RMDs are greater than he needs because he already had a pension social security which paid for everything that he needed.
David:Okay.
Mike:He was growing more money in the IRA because he wasn't paying taxes because his bracket was higher than his kid's bracket. So he just said the heck with it. If I pay an RMD, I pay some taxes, I'm gonna stick in the brokerage account, the kids are getting it anyway. Mhmm. And so he just grew the money as much as as much as he could.
Mike:Because it was going to the kids and then the kids had ten years at a lower tax bracket to then slowly drain the assets. Oh. Context is everything and everyone is different. Mhmm. So it's good to read online the different strategies that are available to you, but it's also good to slow down and say, well, how does it all blend together for me?
David:Alright. Yeah. Ask these questions.
Mike:Yep. Submit your questions. Retireontime.com slash ask or in the chat here.