Welcome to how to retire on time, the show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today on Amazon or by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to finance, your money, all of the above, we can pretty much talk about it all. Now that said, please remember this is just a show everything you hear should be considered informational, as in not financial advice.

If you want financial advice, you can request your wealth analysis from my team by going to www.yourwealthanalysis.com. With me in the studio today is David Franson. David, thanks for being here.

Yep. Glad to be here.

David's gonna read your questions, and I'm gonna do my best to answer them. You can text your questions in to (913) 363-1234, or you can email us at heyMike@howtoretireontime.com. Let's begin.

Hey, Mike. I'm 47 years old and finally have extra cash flow to start saving. Where should I start?

Yeah. The first thing is to go where the free money is. Okay. And that's just maximize your Roth conversion.

Okay. Just get as much in there as possible. Now you might say, well, Mike, what about taxes in the future and all that? Well, you want good problems to have, and tax problems mean you've done well for yourself. A lot of people are concerned about the next tax bracket.

Oh, I don't wanna get in the next tax bracket or the 22, 20 four percent tax bracket. It's such a close range that I would say maximize your IRA Roth conversion, and if you're able to put all of it into an after tax four zero one k, four zero three b, whatever the the plan is, if you can go after tax, which is the equivalent of Roth up to the max of the 24% tax bracket, I say do it all day long. Mhmm. I know taxes might go up in the future, might go down in the future, but that's kind of a nice general average of what we see historically for effective tax rates and income needs in retirement. So don't worry about paying a little bit more in taxes now.

We don't know the future. Yeah. It could go down, but also could go up, and we don't wanna bank on the unknowns. We don't wanna try and read the tea leaves. It's just a very simple and deliberate way to go about it.

And so there's Roth contributions, and there's IRA to Roth conversions. Is there a limit on and I know for contributing to a Roth, depending on your age, is it $7,000 you can contribute?

Depends on your age. There's catch up provisions and all of that, and they change every year. So because this is recorded and goes to a podcast, just Google current IRA contributions Sure. Which are independent of your work. You have your four zero one k, your deferred compensation plans, those are four zero one k's.

Yeah.

Those are independent of your Roth contributions, so you can contribute to a Roth.

Uh-huh.

And then you can also be adding to your four zero one k pretax or after tax.

Okay.

After tax means you pay the FICA tax, you pay the income tax, and then it goes into a four zero one k plan that sits there and grows, hopefully, And then when you roll it over, it rolls over into a Roth later on when you separate employment from that person, or you retire, or you pass the age of 59. The pretax part of it would roll over or become an IRA. Mhmm. And so the contributions to your four zero one k, there's often employer contributions, that's the free money. Maximize that first, then if you can tap into the Roth contributions.

Okay.

Roth contributions, you're not supposed to touch for five years. There's some rules around that, on the limits and all that, but getting as much money into a retirement account really sets you up for success in retirement. It's nice that you're not supposed to touch it until 59, that kind of helps, you know, not spend it on a vacation that you need to prepare for retirement.

Yeah. Yeah.

Alright. Now the other thing I want to highlight here is four zero one k's are kind of restrictive on what you can and can't invest in.

Oh, okay.

So as you separate employment, I recommend most times that you don't roll it over into your new four zero one k, roll it over into something else, like an IRA or a Roth, that you could you could do a self directed IRA, a self directed IRA Roth, pabble into some alternative real estate investments if you're a qualified or accredited investor.

Okay.

You could just invest in the market, buy a low cost ETF and grow that thing, and not pay the administrative costs of a four zero one k. You could work with an independent adviser that might have a more deliberate strategy and not the restrictions. So there's benefits of just rolling over your four zero one k into something every time you separate employment.

Mhmm.

But, yeah, the retirement accounts are huge. They're beneficial. Now the caveat is that you can't touch them. Yeah. So I know we've talked about life insurance or cash value life insurance.

Once you've maxed out kind of that free money, that contribution if your employer is allowing it, I think starting to put some money into permanent life insurance is helpful, and the reason is we we've all been taught have a couple thousand dollars or whatever, you 10,000, 20 thousand, whatever it is in a savings account just for emergencies.

Emergency fund, sure yeah.

Well, why would you want to have all that money in a high yield savings account at best, or need let's say 4%, whatever the rates are.

Yeah, yeah.

They used to be like 2%, when you would put it to a life insurance policy that net of fees should be growing higher than a bond fund, that you can borrow against tax free in case of an emergency.

Oh, tell me more.

Yeah. Well, there's detriments to it. Oh, yeah. Darn it. Running my parade.

Yeah. But if if you're funneling money into an emergency fund, and you have the liquidity and a life insurance policy, I've known many people that they've had a life event.

Okay.

And they had their emergency cash, but they also were able to borrow from their life insurance policy as well in that time of emergency, and it helped them handle these unexpected costs.

Okay.

So it's it's again, it's being more holistic about your approach where you're saving money. It's being able to handle unexpected expenses, costs, and turbulence before the age of 59. You don't wanna have to tap into your Roth IRA or your IRA and pay that additional 10% penalty Right. Because you you had life happen to you. Yeah.

So this is kind of the how do you hedge against the problems before retirement so you don't lose your retirement before you retire. What was the question again?

Oh, yeah. So this person and I promise I didn't write this question. They're 47 years old. I turn 47 next month, listeners. And I finally have some extra cash flow to start saving.

Where should I start?

Yeah. So funnel the money into qualified accounts so you can grow the things tax efficiently, because retirement accounts don't have to deal with capital gains. Focus on the after tax, so you don't pay tax when you spend his income in retirement, but then also be very deliberate about the life insurance to hedge against loss and other risks that you may not know exist or plan on. And then the last thing I would say is put together an idea of the plan. What do you want moving forward?

And I say this a little sheepishly, but do you want to retire in your fifties or sixties? If they're asking this question, they probably aren't gonna save a retirement in three years. It takes time to prepare for retirement. But let let's say you're 30 years old, and your intention is to retire at 55 years old or 50 years old. You can't put all your money into retirement accounts, not touch it at 59, because you need cash flow at 50 years old.

That's right.

You don't want to only take income from life insurance, because that's risky. That may be an aspect of it all, but life insurance has its own detriments. So maybe you are focusing on buying high quality stocks or high quality indexes and growing it in your brokerage account, so that from 50 years old to 60 years old, your income is set up to really be a non qualified or a brokerage account income that gets you through those years in phase one. Uh-huh. So that when you hit phase two at 60 years old, then you're developing other assets, or other income plans and other ways to handle it.

So think about your retirement, the phases, the timelines, and then where does the money need to go to get what you want. Last but not least, I do think it's very beneficial to have assets in non qualified accounts, not retirement accounts

Okay.

And not life insurance accounts, because if let's say you can't contribute and get the match to your four zero one k in an after tax account, You can only do the pretax contributions, which is really common.

Yeah.

Well, when you separate employment, you can do IRA to Roth conversions. So you take your funds, you've moved on to another job, you roll over to an IRA, you can do IRA to Roth conversions whenever you want. You just have to pay out of pocket in your savings account or your non qualified account the taxes Uh-huh. To avoid the penalty.

Okay.

So when people do IRA Roth conversions, lose the conversion, and the conversion will also take care of the penalty. You can't do that. There's a 10% penalty. So what you need to do is you need to have money on the side to pay the taxes, which keeps more money in qualified accounts, which puts more money to your Roth. So it's a different way to basically get money to your Roth.

Okay.

I think Roths are the best thing for retirement preparation. I think having cash value on the side and investments is the second best thing, but I would say that's tied with having enough life insurance, because too many times I've had people come to the office saying we were getting close to retirement, but so and so died or lost their job or became disabled, and now we don't know how to bridge the gap. We we can't control life, so we do have to hedge some risks. Yeah. You don't need to buy a lot of life insurance.

Term is cheap. There's a lot of ways to slice the pie, but just understand what's your plan, what are the strategies, and what are the efficiencies to get And

so you said what the Roth was like the best to, like, prepare for retirement. Why is that?

So it grows tax free, which means you can buy and sell as much as you want actively or passively, but when you sell it, you're not gonna pay capital gains tax. And then when you take it out, you're not going to pay income tax on it either. So basically, you're just done with taxes altogether. So I'm writing an article for Kiplinger. It's been actually a couple of weeks in the making.

I gotta get this right. But we proved that if a 16 year old, they worked and were able to put $7,000 in a Roth at age 16, 17, and 18 years old Okay. And they just invested in the market, that they're gonna have probably close to a million dollars in today's dollars adjusted for inflation in retirement. Woah. With no tax consequence.

That that makes all these other things tax efficient, so you're getting more out of your money. Okay. So there's a compounding effect of less money in now for more money later, and you're not paying taxes on a higher dollar amount. What's $7,000 on income tax bracket? It's the lowest tax bracket.

A million dollars? It's the highest tax bracket. Oh, right. And so it's all these little things, and I appreciate the person that wants to be deliberate, whether they're 20, 30, 40, 50 years old, they're starting to say, I can't just blindly put money into accounts and figure it out later. What you're doing is you're you're unintentionally creating more problems to have to solve later on, when they could be solved at a cheaper tax rate, so you have more efficiency later on.

Why do financial advisors exist? It's not just to pick out a portfolio of ETFs or whatever and invest in them. That's honestly the easiest part of our job. From a comprehensive holistic financial perspective, the job is to be strategic about where the money is going, how things are moving, and how you need to shift things around to hedge against risk, and to get more out of the money. It's strategy.

It's like a CPA on steroids. That's that's in my mind really what it is. 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.

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