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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.
The devil's in the details, and there's so much opportunity if you start asking the right questions. Welcome to the Retire On Time podcast. I'm Mike Decker here with David Franson from Kedric Wealth. We're gonna be answering your retirement questions. This show is all about you and not oversimplified advice.
Mike:We wanna get into the nitty gritty here. We wanna give you context and clarity, not confusion and more questions, if that makes any sense. Text your questions to (913) 363-1234. We'll feature them on the show. And remember, this show is not financial advice.
Mike:David, what do we got today?
David:Hey, Mike. What would you do in your final ten working years presumably to, like, prepare for retirement? So 50 years old or so. Okay.
David:So you're around 50. Fifty fifty five. You wanna you wanna retire around early sixties.
Mike:So the first thing I would wanna do is establish how much income do I think I'm going to need in today's dollars. And the reason why is if you understand that number, you can start to then shape where are you going to fund your money in different pockets. So for example
David:k.
Mike:If you know you want to, let's say, have, I don't know, $80,000 or less
David:Okay.
Mike:When you retire. Well, the standard deduction, let's say it's about 30,000. I know it's more than that today, but in the future, things could change. So your 80,000 goes to 50,000 for taxable income. We're getting close to the federal poverty level for income taxes.
Mike:And so if we understand that maybe from 60 to 65 years old, if we're gonna retire at 60 years old, and that's the income that we want, we have an opportunity to manipulate your income taxes for those first five years to then potentially get lower Affordable Care Act credits
David:Oh, okay.
Mike:Or subsidies and so on. Yes. So if that were the case, then I would wanna make sure that I've saved enough in my brokerage account so I could use long term capital gains for those few years. And we wanna use those because? Long term capital gains is gonna be taxed at either 0% or 15% or 20%.
Mike:So let's say you put in, I don't know, a 100,000 in there and it grows to 200,000 arbitrarily. Easy math. K? So that means every position you sell, half of it is gonna be taxed as long term capital gains, and half of it's gonna be taxed as a a basis, as in it's not taxed.
David:Okay.
Mike:K? So if you need $50,000 of income and 25% of it is taxed, well, your standard deduction just took out of it is tax free. You look broke.
David:Oh.
Mike:You qualify for all the subsidies.
David:Oh, right.
Mike:Most of the subsidies because it's technically off of modified adjusted gross income, but you're getting closer to a very tax advantageous advantageous situation. That might be a strategy you want, but unless you save in the right tax buckets, pretax, after tax, or tax free, think of your IRA, your Roth, or your brokerage account Mhmm. You wouldn't know to save for those in those different buckets. You you might just opt into, well, I don't wanna pay taxes right now, and we'll figure it out in the later, and you just put everything in the the pretax amount.
David:Might
Mike:be a missed opportunity. Now maybe the income, I mean, you could argue that, I don't know, 50,000 of taxable income, it's in the lowest tack or lower tax brackets. That's not that bad of a gig anyway. Mhmm. So maybe I'm splitting hairs.
Mike:Maybe you want $200,000 of income Okay. Each year, then that long term capital gain strategy for the first five years might be even more important
David:Okay.
Mike:Because there's more savings. I mean, there's a lot that could be done there.
David:Uh-huh.
Mike:Another example is if you keep saving into your pretax at 55 and you've already grown your IRA or your four zero one k exponentially, you could run into RMD issues. And if you look at tax brackets now and your income right now, maybe it makes sense to pay taxes and put it into the Roth so there's no future RMD issues in the Roth.
David:And define an RMD issue. What's an RMD issue?
Mike:RMD issues, based on my definition, are when your required minimum distribution is greater than the income that you need in retirement.
David:Okay.
Mike:So if you need a $100,000 of of income in retirement Mhmm. And 40,000 comes out from your Social Security because you're 75 years old and you're taking out you have to take out Social Security at that point. Yeah. So you need $60,000 more. Right?
Mike:Yeah. Well, what if your RMD is a $100,000? $40,000 is just getting taxed, and then you have to do something with it so you could reinvest it. But if you then if you if you take out a $100,000 as your RMD. Mhmm.
Mike:60,000 you spend, 40,000 you then put into a brokerage account. Well, that brokerage account, if you get a dividend from it, increases your tax bill. And you might say, well, Mike, you should grateful for the dividend. That's just more money. No.
Mike:You're getting taxed on money you didn't have to be taxed on. You could have gotten ahead of it and had the money go to Roth and then invested it and not had to pay that tax for the rest of your life. It's a it's a unnecessary headwind. So before 50 years old or before your last ten years Mhmm. You're hitting it hard and just saving as best as you can with the highest dollar amount.
Mike:Then before you retire the last ten years, you're fine tuning where the money is going to the different buckets and then the investments and products within those buckets so that you're able to be very tax efficient, that you can manipulate your taxes for health care purposes so that you know you have liquidity access to everything that you might need.
David:Okay.
Mike:If you retire at 55 years old, you don't wanna roll over your four zero one k. There's this thing called the rule of 55. So let's say you're 45 years old to 55 years old Mhmm. And you wanna retire at 55 years old, arbitrarily, that's the date you picked. Well, great.
Mike:When you retire, keep your money in the four zero one k. You can take out IRA funds through the rule of 55 and not pay the additional 10% penalty.
David:Yes. Because you can't take it out until you're 59 technically.
Mike:Right? Technically. But if you live in the 401 K, you can take it out earlier. Ah. Now, you might say, well, Mike, why don't we just put put money in the brokerage account?
Mike:You could do that too, which is better in your situation. Maybe you've already accumulated too much in your IRA, and if you've accumulated too much in your IRA, then you'd wanna start spending it down deliberately based on the 10 to 12% tax bracket from 55 on, and then do the rest from long term capital gains. Maybe you blend it that way. Do you see how there are so many ways you could finesse your plan Mhmm. And have different seasons of income strategies based on the tools that are available to you.
Mike:And one of the tools is how much money is in each bucket.
David:Yeah. Okay.
Mike:But you can't do that if you don't plan ahead. Let me give you another one.
David:Alright.
Mike:Life insurance, some people want. Uh-huh. Some people want to file for Social Security at 70 years old. And so they they they want the higher benefit, and that can make sense for especially people with longevity. But if one spouse were to die before 70, they've lost that income stream.
Mike:Now they get half the Social Security. When I say half, not literally half. It's that you've got two spouses. If one spouse goes away, then you get the higher the two benefits, but there's still one less income stream.
David:Okay.
Mike:That makes sense?
David:Yeah. Yeah. So, yeah, if if if spouse a made less money and and so therefore, they their monthly Social Security benefit is less. If spouse b had a higher
Mike:The surviving spouse gets the higher benefit.
David:Okay. Yes.
Mike:But you still get one less income stream.
David:Yeah. Instead of two income streams, it's it's one even though it it's the higher of the two, but it's
Mike:still It's still loss.
David:Two is better than one. Right?
Mike:And so you might want a small life insurance policy to bridge the gap, and maybe you don't. You might want to manipulate a life insurance policy just because you're concerned about tax law Mhmm. And you want to use an IUL later on to then absorb the taxes. This is a this is okay. This is this is technical, but let me walk you through a strategy some people use.
David:Okay. Let's do it.
Mike:So some people will say with life insurance, look, bond funds make two or 3% year over year anyway. Mhmm. I can probably get around that or maybe slightly better through the cash value growth of a life insurance policy if it's funded correctly. That is a true statement. Your cash value could grow at maybe more than four or 5% overall after the funding than it would like a bond fund.
Mike:And life insurance or cash value like an IUL may not go down. Mhmm. Right? Just the fees. And the first ten years or the first five years, especially, the fees are terrible.
Mike:Then the next five years, they're not as bad. Then after ten years, if you fund the policy correctly, then it's a wonderful bond fund alternative that has the death benefit. And if the policy is structured correctly, the cash value should be able to pay for the death benefit and continue to grow overall, not in every year
David:Okay.
Mike:But overall. So you're kinda killing a couple birds with one stone. It's not gonna grow like the stock market, but it could be a good replacement for part of your bond funds, give you a death benefit, help hedge against your your life insurance needs or your health care needs, chronic illness, and all of that, that all makes sense. But you wanna start funding it earlier on. You don't wanna become a a 65, seven year old and then start funding the policy.
Mike:It's too expensive. Don't the time doesn't make sense.
David:Because you need that time to get through all the bad fees or the expensive fees. Yeah.
Mike:Yeah. IUL's front load fees. So it's that doesn't make it bad. It there's a death benefit. The insurance companies are taking on a risk.
Mike:Mhmm. They're going to get compensated for that risk. Mhmm. But if you fund it, let's say, over five years, and then you drop the death benefit so it's enough that it covers the risk you wanna cover, then the the cost of insurance is lower because you dropped the risk to the insurance company by dropping the death benefit Mhmm. Then the cash value has some reasonable growth potential.
Mike:You might want that as a part of your your plan later on, and here's why. If you're if you fund it from fifty to sixty years old, let's say, and people look. Just watch this a couple of times if I lose you at any point. That this is a lot. Yeah.
Mike:Or transcribe it, put it AI, and have it explained to you in a different way. I don't care. But if you fund over ten years and now the death benefit's low, the cost of insurance is very low, and you've got this cash value that's indexed, so it's got upside potential but no downside risk except for the fees. Mhmm. If there are fees, there's always fees.
Mike:You're gonna pay those fees regardless. Then let's say you're 67 years old now. Okay? And you're doing IRA to Roth conversions. Instead of doing an IRA to Roth conversion and paying out of that conversion, so you're paying from your IRA the taxes
David:Oh, yeah.
Mike:Or you're doing an IRA to Roth conversion and you pay the taxes out of your brokerage account, you could borrow against your life insurance policy cash and pay the taxes. Because when you borrow against life insurance, you're not actually taking cash out of the policy, you're borrowing against it. So if the cash value, the gross cash value, so like the the total amount that's in there
David:Mhmm.
Mike:Grows at a greater rate than the loan Mhmm. That you took out. So if the cash value grows at let's say five or 6% and the loans like three or 4% Yeah. You're making money on money you spent.
David:Oh, right.
Mike:This is called positive arbitrage. Mhmm. And it's not a guarantee. Markets go down, you're still paying the loan. You've leveraged your life insurance policy to some extent.
Mike:So that's why you have to understand how to manage it. You have to understand, you know, you don't wanna get greedy with this sort of thing, but that might be something that you want to do to help absorb the tax burdens thinking ten years from now that this is a potentially more efficient way to do your IRA to Roth conversions. And that is a true statement. It is a potentially more efficient way if you fund everything correctly.
David:Yeah. I mean, how can you know you're funding everything or setting everything up correctly?
Mike:It's the the rule of thumb is if you keep your fees extremely low
David:Uh-huh.
Mike:And you know a start and stop date of the funding Okay. That's the the the big takeaway. Alright. As a a quick tell, the higher your death benefit, the more the insurance agent's commissions will be. So it's counterintuitive, or it's it's a conflict of interest to wanna have the lowest death benefit possible.
Mike:But that's how you lower your fees. Right. So but that's that's something that's that gets very much more advanced than your typical retirement prep strategy. It's something you need to have enough foresight to entertain, and it's not right for everyone. Some people may prefer a different approach and a different kind of algorithm or or equation on how to get what they want.
Mike:That's okay. There's more than one way to to skin the cat, as they say.
David:Mhmm.
Mike:I will admit, in today's environment, I'm concerned about a flat market. In that, when money leaves the American economy like it is right now, international's doing well, and money's just going overseas. It's leaving like crazy. That has only happened a few times in the history of our country. It happened in the late twenties, nineteen twenties, early thirties.
Mike:Can you think of the Great Depression? Mhmm. That was a rough economic time.
David:Mhmm.
Mike:Can you
David:say the least? Yeah.
Mike:Yeah. That was a flat market cycle. In the mid sixties, we entered into another flat market cycle. What was happening? There were credit issues.
Mike:There were inflationary issues. Money was leaving The United States. It was another flat market. For over ten years, the equities market did not make money. It did not grow.
Mike:And we gloss over these broad understandings or broad patterns. 2008, money was leaving the American economy. So why is that important? Because indexed products make money when the markets go up, they don't lose money when the markets go down. So it is one of the best hedges Okay.
Mike:Against a flat market cycle. Yeah. Yet, it's like it's it's this invisible risk that people don't even look for. So if we continue to have money leave the economy, we're going to be kind of like how you feel after a race. You're just exhausted.
Mike:Yeah. You're not gonna keep racing. You're gonna take a break. Right. It's almost like the economy has to digest its growth while it's also all of its money's been leaving, so it's not gonna be able to recover as well.
Mike:And so we're kind of a tinderbox. Markets go down. Wouldn't you want products that can't lose money, but also participate in the upside Mhmm. To hedge against this to be kinda like a stair stepping forward? Sure.
Mike:That's what buffered ETFs can do. They're not prince they're not all principal protected. Most of them aren't protected. You need the max buffers to to even consider most of the protection, but buffered ETFs are a great hedge against a flat market cycle. Indexed annuities are a great hedge against a flat market cycle.
Mike:And indexed universal life insurance is a great hedge against a flat market cycle. So you gotta think outside the box, but the point being is when it when it comes to ten years Yeah. Or before or even five years
David:Okay.
Mike:Ask what you want in retirement, what's the income that you want Okay. Then build the plan around that, and then understand how much needs to be funded and where, and then what products are you gonna fund and when will you fund them.
David:So okay.
Mike:Ten years from now if you're if you're ten years away from retirement, I would not buy a fixed indexed annuity.
David:Because? Too early. Okay.
Mike:I think that's when, like, you're five years away.
David:Okay. Okay. Yeah. Because it's it just doesn't have enough you you can you need some more growth? You you you could withstand some more risk Yeah.
David:When you're ten years versus five?
Mike:Yeah. Okay. That's my opinion. I would I would lean more towards like buffered ETFs if you're ten years away. If you're five years away, could be great.
David:Okay. Yes. So the the basic checklist then, I'm I'm doing I'm gonna retire in in ten years. Is this when I start trying to figure out what I need in for income in retirement?
Mike:Yeah. How much income do you need? What do want your retirement to look like? Uh-huh. How much are you saving?
Mike:What's the current trajectory? Are the strategies you wanna implement? What are the risks that could get in the way of your being able to retire when you want? And then start picking the investments and products that you need now, and start to slowly shift the portfolio each year. So ten years away, it's one version.
Mike:Nine years, it's slightly different. Eight years, it's slightly different. Uh-huh. And you're not doing a target date fund.
David:Okay.
Mike:Those just mean the older you get, the more bond funds that are in there. Yeah. Yeah. Yeah. It's not a strategy.
Mike:It's a strategy. Yeah. I don't think it's a good strategy. I think it's a simplified strategy.
David:Some oversimplified for the like, you're casting a wide net. Here, just put your money in this.
Mike:Yeah. Your your needs are probably different than someone else's needs. Yeah. It's usually how it goes. So what's right for you?
Mike:Right. So there are I think people, generally speaking, they they they say finance is easy. You put in the market and you forget about it, and so they they don't ask more questions.
David:And
Mike:if you ask more questions, you'll realize there are many more strategies that you could implement now to better position yourself for the ten years before retirement and then when you retire.
David:So should I put money in a Roth at ten years before I retire? Yeah. Okay. Probably All of it or some?
Mike:Well, that's the thing, actually. So there's been enough people that were making 300,000. They're the top income earners, like airline pilots, for example. They're making great money. Uh-huh.
Mike:But they only need like 120,000 to live off of.
David:Okay.
Mike:So they should keep going to the the IRA and deferring taxes because their taxes will likely go down when they retire. There's always an exception to the rule, but the idea is you're proactively understanding today and five years and ten years from now, and where do you fund, how do you fund, and what investments or products are in those different tax accounts, whether it's IRA, Roth, or brokerage account. The devil's in the details, and there's so much opportunity if you start asking the right questions. And I'm not withholding these questions. I've I've basically shared most of the questions here is when do you wanna retire, how do you take the money out, Are we in a flat market, up market, or down market?
Mike:What risks are you willing to take? What risks are you not willing to take? What's the income out? What are the tax brackets in there? What are the health care concerns that are there?
Mike:Mhmm. How do you manipulate the tax return so that you're able to then spend the least amount of money possible to get the highest quality insurance possible? These are this these are the questions that you gotta start asking and then understand how do you play the game. Don't think about a strategy to implement over the next thirty years. Think about in this year, what's the strategy?
Mike:The next year, what's the strategy? And so on. That's all the time we've got for today's show. If you enjoyed the show, don't forget to tell a friend, leave a rating, or subscribe to us wherever you get your podcasts or on YouTube. As always, go to retireontime.com to get the resources by the book, join a workshop, or much more.
Mike:Don't forget our many planners that are available to you, publicly available. Just go to retireontime.com for that and much more. Thank you for spending your time, your most precious asset with us today. We'll see you in the next show.