Category: Podcast

Ep. 13 – Planning for Healthcare Costs in Retirement – Medicare Considerations

(transcription) - Planning for Healthcare Costs in Retirement - Medicare Considerations (featuring Ari Parker, Lead Medicare Advisor @ Chapter)

Kevin Lao (KL):

Hello everyone, and welcome to the planning for retirement podcast, where we help educate people on how retirement works. I’m Kevin Lao, your host. I’m also the lead financial planner at imagine financial security. Imagine financial security is an independent financial planning and investment firm based in Florida.

However, this information is for educational purposes only and should not be used as investment legal or tax advice.

This is episode number 13, called planning for healthcare costs in retirement. Hope you enjoy the show. And if you like what you hear, leave us a five star review and make sure to subscribe or follow and stay up to date on all of our latest episodes.

I’m very excited today to be joined by Ari Parker. Ari is the head Medicare advisor of Chapter, and is one of the country’s leading Medicare experts. He’s helped thousands of Americans sign up for Medicare, breaking it down into simple bite size pieces. I like that simple.  His work has been featured in Forbes, CNBC, CBS money, watch market watch Huffington post, and many other publications.

He’s a graduate of Stanford law school. He trains and leads Chapter’s team of 30 plus licensed Medicare advisors and lives in Phoenix with his wife and two dogs. His book is coming out in September.
“It’s not that complicated” is the title of the book, the three Medicare decisions to protect your health and money.

Their website is ask and Ari’s email is Ari@Ask Ari. Thank you so much for joining today. Appreciate it.

Ari Parker (AP):

Pleasure to be with you, Kevin.


So I am excited to have you on mainly because my firm, obviously being in Florida, I specialize in retirement planning and oftentimes healthcare and Medicare questions come about.

And I’ve been doing this for 14 years now and I still feel like Medicare confuses me. How do you feel about that?


Absolutely. It can be very confusing. People aren’t sure which enrollment deadlines apply to them, whether they need to sign up for it or not.

This is why I wrote a book on it. And it’s something that our team helps people with every day.


Love it. Love it. Well, for this episode I reached out to you earlier this week.  I like to do episodes based on real life questions that I field from my clients.  This one, I’m gonna call them Jack and Diane.  Jack is 66. Diane is 57. Okay. Their daughter just had twins. I can relate, I’ve been there.

We had twins a couple of years ago, understandably so it takes a village to raise twins. So now they want to sell their house here in Northeast Florida and move closer to their daughter. Um, so instead of Jack working a few more years and getting Diane closer to that age, 65, that magical age, 65 of Medicare eligibility, and also his age 70, which would be the full social security benefit.

They’re wondering, Hey, you know what if Jack retired tomorrow and they moved closer to their daughter to be near their twins?  Now the decisions are what do they do with healthcare, right? I mean, we’ve got Diane who’s eight years away from turning 65 and being Medicare eligible.

And then we’ve got the decision for Jack and he needs to then enter into this world of complexity of Medicare, which hopefully you can break that down. So what I thought we would do is maybe start with the Medicare decisions, and then we can transition into Diane’s decisions around healthcare pre-Medicare.  So why don’t we just start with the basics of Medicare?

Let’s pretend I’m Jack, what would you say to me?

Basics of Medicare


I’d like to summarize.  Jack is 66 years old and has retired. Diane is 57 years old, but isn’t working.




It is very likely that Jack should enroll in Medicare.  Jack by virtue of having retired from a large group employer, which is defined as 20 employees or more has a special enrollment period to start Medicare, that enrollment period lasts eight months.

Jack probably doesn’t want a gap in his coverage. So it’s important to do it sooner than later. You don’t wanna wait until the end of the eight month period. You don’t wanna miss that period either because then you’re in a whole world of pain.


You get slapped with penalties, right?


Yes. I’m happy to get into the penalties, but it is very likely that Jack should enroll in Medicare. It’s a five minute process. He can do it online through his portal. And then yep. Happy to get into what Medicare covers.


It’s very easy to enroll in Medicare. But you hear all of these questions like, okay, what you do with original Medicare versus Medicare advantage? I think I read a trend recently that the number of people buying Medicare advantage plans has been going up by roughly 34% per year which is substantial.

So it’s gaining traction. Why don’t we talk about the differences between traditional Medicare versus the Medicare advantage route?

Medicare Original vs. Medicare Advantage


Original Medicare has two parts, part a is hospital insurance, which covers you when you’re inpatient. It also covers hospice care, skilled nursing facilities. It means you’re inpatient.

Part B is outpatient coverage. It’s visits to the doctor to specialists, ambulance services, durable medical equipment, even outpatient surgery, all covered under Medicare part B. For Jack because he’s paid federal income taxes for at least 10 years. Part a hospital is premium free. There’s a charge for part B.

However, that charge will be $170 and 10 cents per month for 2022 and might go up for next year. We don’t know yet those numbers will be released in the fall.  But there’s a charge for part B and most Americans pay $170 and 10 cents. Mm-hmm what Jack will get in return is 80% of his medical services covered.

He’ll owe the other 20% out of pocket with no cap. My mom just had a knee replacement, $40,000 procedure. Original Medicare picked up $32,000. If she hadn’t had any additional coverage, she would’ve owed eight, $8,000 out of pocket, plus all the pre-op post-op physical therapy.  Which is why you would then think about that.


They call this medigap coverage, right? The supplemental coverage, correct?


Exactly. There’s only two types of additional coverage (or Medicare advantage. Medigap sits on top of original Medicare and covers the 20% remainder. Here, we’re talking about plan letters like plan F plan G, or plan N.

Those are the three most common types. And what those do is preserve the flexibility of original Medicare. There’s no PPO or HMO restriction. You can see any doctor who accepts, accepts Medicare nationwide. If you live in St. Augustine, but wanna see a doctor in Houston, it’s no problem. You can go and see that doctor as long as they accept original Medicare.

So it’s really flexible for someone who likes to travel or has a second home outside Florida, for example.  Also importantly, the Mayo clinic accepts Medigap, which is a very important consideration for people who live in Florida.

On the other hand, you have Medicare advantage.

Medicare advantage is managed care. These are also known as all in one plans or part C.  William Shatner talks about it on television, Jimmy Walker, they’re advertised heavily and they’re going be advertised even more heavily as the fall approaches. Now, what people like about these plans is it comes with additional benefits like prescription drug, coverage, vision, dental, hearing, transportation benefits.

What people like less about it is that it’s managed care and here there’s prior authorization that’s there’s restrictions. And so it, it’s just important to understand the trade offs involved in the decision between Medigap and Medicare advantage.


So the advantage, just to clarify for the listeners, the advantage would be replacing the original Medicare route.

Plus that supplement, and there’s some advantages to that in terms of additional benefits. I’ve also heard some advantages in terms of simplicity. But there also could be some disadvantages, that managed care piece that you mentioned.

So with Medicare advantage, you might actually have to go see a primary doctor before going to get a major procedure done or getting an MRI done or knee replacement, things like that. Is that what you’re saying?


Exactly. What people really like about Medigap is the flexibility. You can see any doctor nationwide who accepts Medicare.

You don’t have to ask for permission, you don’t need a referral. It also has coverage outside of the United States. In fact, I had a client who was vacationing in Paris and suffered a heart attack. They had Medigap plan G and their plan G has 80% coverage abroad for the first 60 days.

You’re outside the United States. Now the great news, it was a $35,000 hospital bill from the heart attack, but he recouped 80% of the cost because he had coverage. And so it’s a big decision to make, and it really depends on your lifestyle factors, which is something you can be useful to discuss with an independent advisor.

There’s no charge to work with one now.  And the industry is set up that way. It’s great. You get the same price, whether you work with an independent advisor, as you would, if you call the carrier.


I went through the same situation being pre-Medicare and launching my own business.   I had to go out and buy my own insurance.

It was nice to work with someone who’s an expert.  My premiums are the same, but I can get someone to give me advice on those little things that I would’ve never thought about.


And you have a dedicated point of contact it’s not as if you call the carrier you wait for customer service to answer, and then you get a different customer service representative every time.

No one likes that experience.  Instead, when you work with an independent advisor like chapter, we’re an example of one, then you get a dedicated contact and that is your person who will help you troubleshoot any issues that come.

Medicare decisions if you travel or are a snowbird


You mentioned an interesting point about travel.  It seems like if I’m working with someone or you’re someone who is big into traveling, whether it’s domestically or, or overseas, or perhaps you’re a snowbird.  Maybe you live six months minus a day in Maine or New York or New Jersey, and then the other six months plus a day in Florida.

You might have a little bit more flexibility in the networks with the original Medicare, right?   Rather then going with the Medicare advantage coverage there’s is that correct?


There’s no network restriction with original Medicare.  So if you wanna preserve the flexibility of original Medicare, then you ought to strongly consider a Medigap plan.

If you’re comfortable with managed care restrictions and you’re not planning to travel too far away from your home. Then a Medicare advantage plan might work really well.


Now Medigap has a higher premium than Medicare advantage plans, right?


Cost depend on where you live, they can cost anywhere from $90 to about $185.

And if you live in New York, it’s a lot more expensive than that.  But in Florida’s around 175 to $185 per. Medicare advantage plans on the other hand have a very low premium, in fact, many plans have a $0 premium, but there are trade offs.


And the trade offs from what I understand, it’s more like your traditional health insurance with the deductibles and copays and things like that.

So if you’re, if you’re going to the doctor a lot that original Medicare, even though the premiums are higher, that actually might be more advantageous because you’re saving money on a much lower deductible. Right?  I think the deductible is $300 per year or something like that?


You, you got it.

The, the deductible is exceptionally low. The deductible for original Medicare is $233 for 2022.


Is that per individual or per couple? It’s probably per individual, right?


There’s no Medicare family plan. It’s individual.

Many advantage plans have a $0 deductible, but as you mentioned, it’s pay as you go insurance similar to work provided coverage. For example, if you go see a specialist you’re going to owe a copay and your doctor needs to be in network. If your doctor’s out of network, then you might have co-insurance or the visit might not be covered at all.


Okay. So if you’re like my wife that loves to just go to doctors and do a lot of things, you might wanna go with original Medicare. Right?  You’re not going to have those copays and things out of pocket along the way, like you would with advantage.


That’s exactly the type of conversation we’d have with someone in a 15 minute introductory call, we would talk through how often they go to the doctor or the types of doctors they see, because it goes doctor by doctor.  And Kevin, it’s even as granular as choosing a doctor based on the location where they practice.

One location might be in network with a plan. But the other location that the doctor practices out of might be out of network.


So that’s an important thing.  You can almost back into it, like if you have doctors that you’re a big fan of, and you’re making this healthcare decision, see if they are in network obviously.

I think with original Medicare, I think I heard this stat that 98% of, of practices actually allow for original Medicare, right? Whereas advantage the percentage is much lower. So, if you’re gonna go that route with the lower premium and things like that, you might just wanna make sure that the doctors that you really are in network, right?

Medicare Open Enrollment Planning Opportunities


Exactly people who don’t go to the doctor very often tend to be quite happy with a Medicare advantage plan. As long as the doctors that they do see are in network with the plan. Now here’s the rub. This changes every single year. The plans themselves change, the doctors you see change, the care that you need changes, and your prescriptions change too.

And a lot of the reason people like Medicare advantage is because it’s all in one. Many of the plans include prescription drug coverage as well. So it’s really important to shop all your options every year. The time to do that is coming up. That window is October 15th to December 7th, October 15th is when you can shop all options available to you for 2023.


That’s for advantage, original or both?  Do they both have the same open enrollment?


The, the saying is if, if you go Medigap, you typically marry your Medigap and date your drug plan.  You wanna review your prescription drug plan every single year, because there are savings to capture here.  Now it’s good to review your Medigap plan every few years, but really it’s set it and forget it.

Keep paying your premiums. You know exactly what you’re paying for. You’re paying for it to cover the other 20% that Medicare otherwise wouldn’t. On the advantage side, it’s really important to review your options and the time to do that is in the fall. So you should, if you go the Medigap route, you should review your prescription drug coverage.

Every fall. If you go the Medicare advantage route, you should review your coverage every fall. If you’re on original Medicare and didn’t get Medigap or Medicare advantage when you first signed up, then the fall is also an opportunity for you to choose a Medicare advantage plan or to change or adjust your prescription drug plan.


Interesting.  So that actually brings up another question I had. At one point, I heard that if you start with a certain type of insurance and then later decide to change that, potentially you might have some medical underwriting or some sort of health questionnaire.   And if something changed with your health, that might impact your insurance.

Am I misremembering that?


You’re bringing up something that’s really important, which is that in the state of Florida, you have a one time open enrollment opportunity, a one time golden ticket to get a Medigap plan with no underwriting. That is no question about your health history.

If you miss that window, unless a Medigap protection applies, you have to answer questions about your health history, and people get dinged all the time.  Let’s say they’re on three medications for high blood pressure, for example. A carrier is going to look really closely at that.  Same thing with type two diabetes, or an issue with your back or your kidneys or your liver, your heart.   Those are all things a carrier would want to know about.

If you miss your open enrollment period, which is the six months after you start Medicare part B.  And it’s good to act early here. It’s actually good to do it even before your Medicare begins, because you want to secure that one time opportunity to get a Medigap plan without answering questions about your health history.


So this is, this is within six months of starting B, right?  And the trigger of starting B is turning age 65, or if you’re still working, you can delay that decision for B and just do it when you retire. If you have employer healthcare coverage, right?

So it might even be like age 68 or 67. Like in this case, Jack would be 66, right?


That’s right.  There are three ways to start. The first is by way of turning 65.  The second is by way of a special enrollment period. And here that would be Jack. Jack is coming off work provided coverage. His employer is 20 employees or more.  Jack has a special enrollment period to sign up for Medicare. The third way is through the general enrollment period, which is January 1st to March 31st, but the general enrollment period is really only if you made a mistake, it means that you should have signed up for Medicare already and you waited too long.

Now, if you have a disability or if you have end stage renal failure, for example, then you get Medicare. But that those are special circumstances. And if that applies to you, happy to be a resource here, you can reach out to me by email

Special Enrollment for Medicare and Medical Underwriting


So this is super important, that special enrollment period without medical underwriting.  I think some people, especially clients that I’ve talked to in the past, they say “Hey, you know what, Kevin, I’m healthy now.  I’m not going to the doctor very much. I can get away with an advantage plan. Maybe keep my premiums low.”

But then later on, if they decide to switch to original because maybe their health changes, maybe there’s a recent diagnosis that’s not favorable.

That’s a problem. You’re making a bet. Yeah. That your good health will continue.  And so, what would happen? I mean let’s say Jack hypothetically started with advantage and then later on wanted to switch to original and something did change with his health.

Could they just exclude him or would his premiums be higher? Or how would that work?


There’s no underwriting for a Medicare advantage plan.

For context, what Kevin is talking about here is if Jack wanted to go from a Medicare advantage plan to a Medigap.  And Jack’s health history declines.  In 46 states, Jack unfortunately would have to answer questions about his health history. Now, hopefully his health hasn’t declined that much and a carrier would still accept him.

The carriers ask different questions about your health history, and it varies state by state. And so interesting here, we had to build a database to sort through all the complexity.  It would be worth exploring whether Jack qualifies for a Medigap protection, because if he’s moving for example, and let’s say he moves to Maine, Maine is a guaranteed issue state.

What that means is that Jack can get a Medigap plan. 


But that’s why talking to someone like you is helpful because you’ve got to know the rules.


Exactly. I mean, the rules are changing. The rules vary by state.


Could one spouse start with original and the other spouse choose advantage? I mean, they’re sort of independent of one another, right?


Yeah. We see this all the time, especially with couples in Florida where there’s a lot of competition, Florida has a very rich Medicare advantage market.

There’s a lot, especially south Florida, has a lot of competition across carriers. And it’s growing in north Florida too, but that just goes to show you that it’s important to shop all your options every year because the options are changing.

Usually they make the same decision. If one is on a Medigap plan, they both go Medigap. If one, doesn’t go to the doctor at all, then they might do great on a Medicare advantage plan while the spouse might go to the doctor a lot and instead would prefer to be on Medigap, it’s individual coverage.


Yeah. I could see that being my wife and I, when we’re Medicare eligible, my wife is gonna go original. I might go advantage, but we’ll see what happens at that point.


I see that with my spouse too. 

Avoid penalties!


Now you mentioned the special enrollment. I wanted to bring this up. I was reading something recently about.

If you’re 65 and you’re still working.  You don’t have to enroll in Medicare, right. As long as your company has 20 or more employees. Right?  But if your company has fewer than 20, you have to enroll. Is that right?


Yes. You must. In order to avoid penalty.


What’s the thought, what’s the thinking there?

What’s the rationale around, requiring that 20.


The rationale is that for small employers and small employer is defined as 19 or fewer employees, then Medicare is supposed to be your primary insurance.

You can remain on the company plan, but the company plan pays secondary to Medicare. So in effect, what that means is if you work for a small employer, 19 or fewer employees, then what will happen is your work provided insurer can start denying claims for the ones that Medicare should have covered as primary insurer.

So Medicare as primary insurer is supposed to pick up 80% of the coverage. If you didn’t start Medicare, then there’s no one on the hook for the 80%.   The small group employer insurance could deny claims.


I’ve had a few people over the years that turned 65 and they say, “Hey, I don’t need to worry about enrolling in Medicare” because that’s maybe what they’ve read or heard from a friend.  But I’ve had a few of those people work for small businesses and they must enroll.

Otherwise you get hit with some penalties when you do go to enroll later on.


Yes, you get hit with penalties and it’s also dangerous because then your insurance can deny claims where Medicare should have been paying as primary.  And of course, since you haven’t started Medicare, you have no one to cover those primary obligations.

What are the total costs for original Medicare vs. Medicare Advantage?


So before we transition to what to do with Diane’s coverage, all in premiums if you went original Medicare Par A plus Part B plus Part D and the Medigap coverage, what’s a price range?


First, we have to start with what they owe for Medicare part B. Do Jack and Dianne earn less than $182,000.



Medicare part B premium with no IRMAA, which is income related monthly adjustment amount. So let’s assume a standard premium. Okay. The standard premium for part B is $170 and 10 cents.

And it’s non-negotiable unless you qualify for Medicaid, which is for the low income. So regardless of whether they go Medigap or Medicare advantage, they owe the $170.10.

Now if Jack starts taking social security, the $170 and 10 cents per month will be deducted from his social security.

If he hasn’t started, then he’ll be invoiced on a quarterly basis.

In terms of Medigap, if Jack lives in Florida will range anywhere from 120 to $185, depending on whether he chooses plan N or plan G.  Then Jack would need a standalone prescription drug plan unless he has prescription coverage, at least as good as what Medicare provides. And there are separate late enrollment penalties here.

So it’s really important to not miss the enrollment period to sign up for a drug. Drug plans typically costs anywhere from 10 to $25 per month, depending on the prescriptions one takes. So Jack’s cost picture if he goes Medigap is $170 and 10 cents, plus 120 to $185 per month for Medigap plus 10 to $25 for the standalone prescription drug plan.


So like $310ish to 370ish. Per month. All in for original Medicare and then out of pocket after that.  The only Medicare related expense Jack would see would be the $233 charge for the annual deductible.

How does your income affect Medicare premiums?

You brought up a good point about the 170 or less of adjusted gross income.  I’m sorry, 182,000 or less. Your part B premium, for those of you that don’t know, this is based on your income, your adjusted gross income.

And so there is a, a premium range. Okay. So, um, hypothetically, if you were the next premium band up, which is 182,000 to 228,000, your part B premium goes up by about $700 per year. For single filers that premium band would be 91,000 to 114,000, your premiums go up by about $700 per year.

The next band up for singles 114 to 142. And then for married filing joint, it’s 228 to 284. And the premiums are basically double than what they were on that first band. So this is a big part for me as the numbers guy, I like to help try to mitigate as much as possible my client’s taxable income in retirement. There are several ways to do it, but, income tax free withdrawals are the primary way.  And so those are Roth distributions, distributions from things like health savings accounts or life insurance, even non-qualified annuities, reverse mortgages could be another option or real estate income.

So by reducing taxable income in retirement, you could also in essence, reduce what you pay in Medicare premiums, which could also help alleviate that pressure on drawing your assets down too quickly during those retirement years. But thanks for breaking down the premiums for original.

What about advantage?

You hear the premiums are much lower, but what are some ballpark ranges of what you can expect for premiums?


Sure. Jack would owe $170.10 for Medicare part B. And then there are advantage plans as low as $0 premium. These plans would also likely come with prescription drug coverage wrapped in.

We would need to make sure that Jack’s prescriptions are covered affordably. What matters here is the name of the medication. Whether Jack can tolerate a generic or has to go brand name.  The dosage and the pharmacy that Jack likes to go to each of these factors influence price. And so it’s actually a really complicated equation.

What’s also important is making sure that the additional benefits appeal to Jack and that they meet his lifestyle needs, but there are great $0 Medicare advantage plans that would be available if Jack decides to go that route. And here Jack would need to, in exchange for that $0 premium, accept the network restriction.


Got it. So researching those doctors, looking at the prescriptions that he may or may not be taking and backing into the decision that way. But it sounds like your premium could be 50% less, right?


Yes. It would be 50% less. There are some things to consider. First there’s co-pays when you go to the doctor. Costs if Jack sees specialists.  The bill’s going to rack up if he sees those specialists more than once per month. So if he goes to see a specialist twice per month, then the copays will start to add up.

Also importantly, Jack needs to make sure that if one of the doctors is out of network, let’s say Jack would need to accept the consequences, which is that the carrier could deny coverage in that case. Or there might be onerous co-insurance requirements.


Okay. And that’s something I assume you can run some numbers, right?

Some hypotheticals based on how much they’re going to see certain specialists or how many times they anticipate going to see the doctor, and prescriptions. And then you can do a cost benefit analysis.


It’s important to shop. It’s important for Jack to shop all his options every year because the plans change.


So let’s talk about Diane a little bit.  So she’s got eight years until she gets to 65. So we’ve got some time, what are her options?

One thing we talked about was Cobra for her.  I mean, could she get on Cobra to continue on the group plan or does she just have to go straight to the private market, which would be the exchange?


Diane can Cobra for up to 36 months as a result of Jack’s retirement.

So that’s an option for her. That’s one option. Another option would be to look at the affordable care act exchange. There are generous federal subsidies right now, depending on Jack and Diane’s earnings. Diane might qualify for some of the subsidies and could find a lower cost plan that might be more comprehensive then Jack’s former employers work provided CORBA.


Okay, so she can use Cobra. He cannot use Cobra because Medicare needs to take over as the primary. So he’s gotta go Medicare.

She has the option of whether it be Cobra or individual insurance through the exchange,   I think those subsidies just got extended through 2025.  Yes, the subsidies were extended under the inflation reduction act, which passed Congress last month.  And it’s cool because, you know, on the, um, and I did these calculators too, when I was doing my own coverage for my family.

You could go in there and type in a hypothetical income that you think you’re gonna earn for the year. And they’ll actually quote you what those subsidies might be per month.  And so that’s another benefit of having a tax free income in retirement, right? Because if, if you retire before 65 or before your Medicare eligible and you lose group health insurance.  If you can keep your income or your taxable income low enough, you can potentially qualify for a lot of subsidies and keep those premiums down until you turn 65. Right?


That’s right.

We’re Medicare experts. Only Medicare.  But yeah, so for Diane, she’s got those two options. She could Cobra, she can look at the exchange.  Compare the two and see which one’s more comprehensive and which is more cost effective as well.


Well, this is great, Ari. I don’t know if there’s anything else we missed that you think the listeners should know about?  I think you, you covered a lot of good stuff but any final thoughts.


Yeah. The fall is coming fast which means only one thing, annual enrollment period. It’s time. If you’re Medicare eligible to shop all of your options. Unfortunately over 70% of people won’t do it, but there’s huge cost savings to capture here. It’s helpful.

If you use an independent advisor to assess all your options, chapter is an example of one, and you can visit us at our website at


That’s awesome. I mean, I think that’s a huge benefit. And, and I, as you know, the reason I met you, I have several clients that use chapter and that know you personally and love the service.  And you can kind of take over that responsibility because you know, when they think of fall, they’re not thinking of Medicare open enrollment, they’re thinking of, traveling to the mountains to see the foliage.  Or kick off for their favorite football team. They’re thinking of spending time with their grandchildren.

Well thank you so much a for joining and helping clarify this complex topic and making it simple.  I’m also excited to check out your book in September.

It’s not that complicated, so I love the title. If you guys have questions directly and want to reach out to Ari, his email is  Thank you everybody for tuning into today’s episode, I heard hope you learn something valuable and we appreciate all of you and hope that you follow us and give us a subscribe and make sure you continue to tune in.

Until next time, this is Kevin Lao signing off.

Episode 12: Should I pay off my mortgage early?

(transcription) Should I pay off my mortgage early?

Kevin Lao 0:17
Hello, everyone, and welcome to the planning for retirement podcast where we help educate people on how retirement works. I’m Kevin Lao your host, I’m also the lead financial planner at Imagine financial security. Imagine financial security is an independent financial planning and investment management firm based in Florida. However, this information is for educational purposes only and should not be used as investment, legal or tax advice. This is episode number 12. Should I pay off my mortgage early? I hope you enjoy the show. And if you like what you hear, leave us five stars, it really helps and make sure to subscribe or follow to stay up to date on all of our latest episodes.

So this is such an important question and one I get all the time for not just folks that are approaching retirement, but younger folks that just took out their first mortgage and they’re trying to figure out, you know, should they pay it off in 30 years?

Should they pay it off early? And this particular question was was fielded because my client was speaking to a work colleague that’s several years of senior to her. And they recommended that she take $500 a month and apply it towards principle every month, and that would essentially pay down the mortgage after 20 years instead of 30. I mean, that sounds great on paper, I mean, after 20 years, you have no mortgage and free cash flow that you can do whatever you want with. You can invest all of that free cash flow at that point in time. But what is the opportunity cost to not investing that $500 a month, let’s say in a side fund? And so that’s really what we’re going to be addressing today. And really, the concept of paying down your mortgage early or not, comes down to three things. Number one is your personal risk tolerance. And number two is your ability to generate a certain rate of return in that side fund. And then number three is liquidity concerns. Okay, so we’re gonna address all three of these. So the first thing to talk about is risk tolerance. The first challenge of investing that into a side fund versus paying down the mortgage early is that the side fund is generally not going to be a guaranteed rate of return. Even if you look at CDs, or Treasury rates,. Yes, certainly interest rates have come up a little bit, but where are you going to get a four and a half percent, or even a 5% guaranteed rate of return? Nowhere, it doesn’t exist at this point in time. And so paying down the mortgage, just for the simple fact that it’s a guaranteed rate of return of four and a half percent. And that might be aligned with your risk tolerance. In this case, maybe you do pay down that mortgage, over 20 years, because four and a half percent is a pretty damn good rate of return on guaranteed money. Okay? Now, let’s say we take that out of the equation, we understand that the money in the side fund is not going to have a guaranteed rate of return of four and a half or 5%. But let’s say you’re okay with that. You say, Hey, I understand diversification, I understand how investing in stocks work or mutual funds or ETFs. And I am confident I can get a five or six or even 7% rate of return in the side fund over time. What happens to that side fund over 20 years or 30 years or 40 years? Okay, and so that’s what I did for her I crunched the numbers, I just pulled up Excel and I literally just took the the mortgage calculator amortization schedule from And I plugged everything into Excel. And we calculated after 20 years that mortgage would be fully paid off if she applied that $500 of additional additional principal every single month for that 20 years. Okay, then I ran the second scenario. So let’s call a client a, let’s call client a the one that pays the mortgage down in 20 years, okay, and let’s call client b be the one who pays the mortgage off over 30 years, which is the scheduled amortization. And they invest that $500 a month into let’s call it a side fund. And I ran three different scenarios, let’s say you earn 5% or 6% or 7%, what is the difference over the duration of your life expectancy. So the first thing we found out is that after 20 years, client a has paid off the mortgage but client B has enough in their side fund to pay off the remaining principal if they wanted to, assuming a 5% return! And so this goes back into what I mentioned earlier about liquidity. Your house is not technically liquid. Sure you can tap into it via a cash out refinance which would then reset a new amortization schedule or you could do a HELOC, but that’s also debt against your property. And so it’s not technically a liquid asset whereas the side fund if you set it up properly, it is 100% liquid, you can tap into it at any point in time. Now, of course, if you’re investing that money into a 401 k or a 403 B plan, there’s penalties if you tap it before 59 and a half, but you might not really care about that. On your balance sheet, you have enough saved and invested assuming a 5% rate of return, that equals the remaining principal on your mortgage. In my opinion, client B is winning here, because they have money on their balance sheet that’s 100% liquid. And if they felt like it, they could pay off the mortgage just like client a did. Now, after 20 years, what happens to client A is they have 100% of that principal and interest payment to invest in the side fund. So now they begin their side fund after 20 years as opposed to on day one. So then I tracked after 20 years, what happens to the side fund of client B versus the new side fund of client A. Assuming a 5% rate of return, assuming we stay disciplined, and we’re investing those payments every single month. For client B, it’s that $500 per month of excess principal that they weren’t applying against the mortgage. And now for client A, it’s roughly $31,000 per year that they’re now applying to the side fund. Well, after another 10 years, once the mortgage is fully paid off for client B, client B still has 10% more (just over $40,000) in their side fund, then client A. So if you look at it mathematically a 5% rate of return for someone that’s reasonably aggressive, maybe a balanced investor, they mathematically have more money in their side fund, then did client A even after client a paid off the mortgage, and then reinvested all of those payments into that side fund. Now, what happens when you do 6%, or even 7%? Well, now the multiples go up even higher, instead of having 40,000 more, client B has over $200,000 more in that side fund than client a assuming a 7% rate of return. And if you look at the s&p 500, historically speaking, just over nine and a half percent annually over the course of the last 30 years. I mean, who knows a lot of people think returns are going to be lower over the next decade or two, no one has a crystal ball on this. But I think 7% is a reasonable return for someone who’s fairly aggressive. And so again, it goes back to the first point of risk tolerance. Are you comfortable with taking on some more risk? And are you comfortable with understanding that comparing this to paying down your mortgage is not apples to apples. Paying off your mortgage is a guaranteed rate of return of whatever the interest rate is. Whereas if you invest in the side fund, you might get six, you might get five, you might get seven, but you might not. Maybe we go through a period of time over the next 10 or 20 years, like the lost decade of 2000 to 2010. No one has a crystal ball on this. But if you understand that, you know what your appetite for risk is, and you apply that principle to paying off the mortgage or not, it’ll help make a decision that is best for you. Now, how you invest that side fund, there’s also many factors there. Are you disciplined with the investments? Are you investing in a very well diversified portfolio? Or are you trying to hit homeruns by investing in let’s say, digital assets, or, one or two concentrated positions or stocks that you really, really think you like. Because if those don’t pan out, that negates the entire purpose, because the likelihood of you earning that 7% over the course of the 20 or 30 years, is lower than if you’re well diversified, well disciplined, and well positioned to capture the market returns, as opposed to swinging for the fences. And the last thing is liquidity. All along the way, as you’re investing into that side fund, that money is liquid on your balance sheet, if you had an emergency pop up, let’s say it’s a major medical expense or you lost your job, you could tap into that side fund, whereas during emergencies, you might not be able to tap into the home equity. Maybe you lost your job. How are you going to take out the HELOC or do a cash out refinance? No bank is going to give you a loan. Or what if you have a major medical bill? It might take 30 to 60 days to underwrite your home equity line of credit or do the cash out refinance. So having that side fund that is liquid right away on day one is a huge benefit to that client B who is investing into the side fund versus paying off their mortgage sooner. Personally if you want to know I am client b. I like to leverage the bank’s money, I like to stretch out the debt as long as possible just given how low interest rates ar. The first home I purchased in 2016 had a three and a half percent rate. This home that we just purchased has a 3% mortgage, so I’m confident I can get a five, six or 7%. And that’s a much higher multiple than comparing it to what my interest rate is on my mortgage. But I understand the risk there on the side fund, I understand it’s not guaranteed. And I also understand that I have much more liquidity in that side fund than I do in my home. Now, as interest rates continue to go up the argument to paying off that mortgage early pendulum is beginning to swing in that favor, especially if rates go up to maybe 6%. Then, your appetite for risk needs to be fairly high to to accommodate that higher return in that side fund.

Now, with all of that being said, I talk to clients all the time that are approaching retirement, and they’ve had this goal of being debt free in retirement for many, many years! 15, 20 or even 30 years! Using math to convince them to invest more on their balance sheet versus paying down the mortgage by the time they retire is completely irrelevant to them. Because the qualitative factor of owing nothing to anybody is that much more important than how much they have on their balance sheet. So if that is you, pay off that mortgage by the time you retire, get aggressive, figure out that amortization schedule that lines up with your anticipated retirement date. And don’t feel badly about losing out on those opportunity costs. Because the psychological benefit and that peace of mind you’re going to have by checking that box off of being debt free in retirement is that much more meaningful for you.

Thanks, everybody, for tuning into this episode of the planning for retirement podcast. I hope you learned something valuable. We really appreciate your support and following our podcast journey. If you have any feedback on the show, or even if you have questions that you want answered on the show, send me an email at Just write in the subject line “podcast” and who knows, maybe your question will be answered on the next episode. Until next time, this is Kevin Lao signing off.

Episode 11: What is tax planning vs. tax preparation?

What is tax planning vs tax preparation?

What is Tax Planning vs. Tax Prepartion


Kevin Geddings 0:21
Six minutes now after 11 o’clock, we’re live from St. Augustine, we hope that you’re having a good day so far. Kevin Lao joins me here live in the studio. And of course, he is an expert when it comes to financial planning and the like, Kevin, how are you doing?

Kevin Lao 0:36
I’m doing well, Kevin, thank you for having me. As always, yes,

Kevin Geddings 0:39
Imagine financial security, just imagine it if you can. I know a lot of our listeners are a little nervous these days, you know, they made the really bad mistake of looking at their January 30. Second quarter, you know, IRA statements that rolled in in the second week of July, you should never have opened those,

Kevin Lao 0:57
you know, a lot of clients, and people are telling me that they’ve been throwing their statements in the fire pit. So maybe that’s a good solution.

Kevin Geddings 1:03
Kevin has been doing this work for a long, long time. And he’s based right here in Northeast Florida. He’s worked with people from all over the country. And we’re going to talk today about tax planning versus tax preparation. And I know what you’re thinking, hey, it’s July, what? Why are we talking about taxes? You don’t do that until the end of the year or April? But no, there’s a reason why you would want to talk about tax planning now, right, Kevin?

Kevin Lao 1:25
Yeah, this is, first of all, please don’t take this as tax advice. Everyone has their own unique situation. But you know, there’s two different schools of thought you have tax preparation, and you have tax planning. And, a lot of people think tax preparation is tax planning. What that means is, in March or April, you gather your 1099s and your W2s and you throw them at your accountant last minute and make them work to death until they file your returns and figure out how much you owe. Or if you have a refund. And there’sonly a few things that you can actually do to impact your tax liability at that point in time. Whereas tax planning is proactive, where you’re not even just looking at the current year in terms of your tax projections and opportunities to reduce your taxable income now, but you’re looking years into the future, to look for opportunities to mitigate your tax exposure, particularly in your retirement years.

Kevin Geddings 2:17
Yeah, there are specific things you can do. And it’s amazing, so many people don’t do these things. I know, you may be thinking, well, you know, the government or somebody can give you some advice or guidance is really on you, or it’s on us individually to figure out a way to minimize, you know, our tax risk.

Kevin Lao 2:35
And it’s a boring topic, I was telling one of my neighbors, I was like, Hey, I’m gonna jump on the radio and talk about tax planning. He’s like, that sounds exciting. It’s not exciting for most people. And so that’s one of the main reasons they hire a firm, it’s not just for investment management, but it’s for this tax planning concept. And one of the basic things that pretty much everyone can do that’s contributing to, let’s say, a 401 K plan or an IRA, and they’re still in the accumulation phase, as to whether, weigh the pros and cons of whether or not you’re doing a traditional 401K or an IRA contribution versus a Roth 401 k or IRA contribution. And the basic concept of it is, do you think taxes are going to be higher or lower for you in the future? If you think taxes are going to be higher for you in the future, whether it’s because your income is going to be higher in the future, or you think potentially the government’s going to raise taxes in the future. Remember, at the end of 2025, the tax cuts and Jobs Act is sunsetting. So tax brackets, in general, unless they change, things are going to go up for most people. So if you’re in the camp, Hey, you think tax rates are probably going up over time, you may want to consider doing a heavier dosage of Roth contributions, whether it be in a Roth IRA or Roth 401 K. And you know, you’ve got to be careful with this. Because once you enroll in a 401 K plan with your company, the default for 99% of companies out there is in the traditional 401 K plan. And so you need to look and see your options. Can you do a Roth 401 K contribution or 403 B contribution or Roth TSP, if you work for, you know, military or government. And so this is a an easy sort of analysis to figure out, those Roth versus traditional contributions for retirement.

Kevin Geddings 4:07
Hey, if you’re just hopping in the vehicle, that’s the voice of Kevin Lao. And of course, he is the principal at imagine financial security that’s located right here in Northeast Florida. And they work with individuals just like you and me, and he will help you get to a better place in terms of your retirement. We’re all worried, Kevin, about running out of retirement savings, you know, outliving our retirement, but you help people with that all the time.

Kevin Lao 4:31
Yeah, I mean, that’s, that’s the number one concern, they don’t want to be a burden on their loved ones. You know, and a big a big part of that is health care. And, Fidelity does a study every year. Right now, a 65 year old couple is expected to spend $300,000 on health care costs alone during retirement, and that’s not even including long term care costs. That’s a totally different issue. One of the things that I’m a big proponent of, if you have five or 10, or even more years of working, is whether or not you can qualify for a Health Savings Account better known as an HSA. I wrote a blog post about this on my website, I believe this is the most tax efficient vehicle you can utilize to save for retirement. It is a triple tax benefit, tax deductible contributions, tax free Growth and Tax Free distributions, as long as those distributions are used for healthcare related expenses. Now, the trick is, don’t get super aggressive spending those HSA contributions during your working years. Do the best you can to pay out of pocket for a lot of those healthcare costs. Because what you can do is you can turn around and invest that HSA take advantage of the market being down invest that HSA to let that grow for the next 15-20 years of tax free growth. So you can actually pay for those health care costs that Fidelity mentioned in retirement.

Kevin Geddings 5:48
So you can actually take HSA funds and invest those in the market. Yeah,

Kevin Lao 5:52
Most of the time, once you hit $1,000 in savings. There are limits, once you’ve contributed more than $1,000, then you can start to invest the surplus, so you have to keep a certain amount of cash, and then you can invest a certain amount. For me, I invest every dollar that I can in the HSA and I do my best to never touch the HSA. You can touch it before 59 and a half for health care related expenses. So, if you have an emergency medical event that happens, by all means you need to consider this as an option. But if you can let those continue grow tax free, it’s the most efficient vehicle you can utilize to save for retirement because it can be also used to pay for those long term care costs that I mentioned, it could also be used to pay for long term care insurance premiums tax free. So there’s a lot of benefits that you can utilize with the HSA, once you get to retirement.

Kevin Geddings 6:34
Wow. And there’s no cap in terms of how big that HSA account can become?

Kevin Lao 6:39
There is no cap on how big it can become, there is a cap on how much you can contribute. So for 2022 for if you’re single $3,650 If you’re married filing jointly $7,300 per year in annual contributions. So think about that. $7,300, over a 10 year period, you just contributed $73,000 into a tax free health care plan that hopefully you’ve invested wisely. And hopefully that doubles a couple of times over the next 20 years. And all of a sudden now you have 210 $220,000 in an HSA.

Kevin Geddings 7:10
These health savings accounts, Kevin Lao. I mean, sometimes you’ll see little ads at your bank, are there other ways? I mean, how would you recommend setting up these accounts and can they be set up through an investment account approach? Or how does that normally work?

Kevin Lao 7:26
Ya know, there are a lot of different carriers The first qualification to use an HSA is you have to have a high deductible health plan. If you don’t have a high deductible health plan, you can’t qualify for an HSA. And there’s some rules around that. So, just do a Google search and say, Hey, do I qualify for an HSA? But if you’re with an employer, a lot of times, they’ll say, hey, this type of health program, you can utilize an HSA, this one, you cannot. For military service, or government, if you’re on TRICARE, those cannot qualify as high deductible health care plans. So you cannot use an HSA if you’re military tricare. But if you’re civilian, and you’re working for an employer that has different healthcare options, go to them and say, hey, which which of these offers a high deductible plan with an HSA and which of them are kind of your traditional health care programs. And they usually partner wit a broker to set up the actual HSA account.

Kevin Geddings 8:17
moving funds into an HSA a health savings account, that’s just part one aspect of tax planning that Kevin Lao can help you with, once again tax planning is taking advantage of all the legal vehicles that are out there that will reduce your tax exposure, right?

Kevin Lao 8:33
Absolutely. Yes, I mean, a big one right now, we were talking a lot about this off air, with the markets down, we’re officially in a bear market since last time I was on the show. Which is basically measured by a 20% drop from a previous high. So many people out there might have some losses, some embedded losses in their investment accounts. And a lot of times, like we talked about, people are kind of throwing away their statements, they’re burying their head in the sand, but these losses can be utilized to offset potential capital gains or income in the future. And so the strategy is better known as tax loss harvesting, it has to be done inside of a taxable account, it cannot be done in an IRA, whether it be a Roth or even a 401K plan, it has to be in a non qualified account. But if you recognize the loss, meaning you sell that investment at a loss, now you actually have a Realized loss. And so let’s say you sold an investment at a loss for $50,000, that loss can be utilized to offset capital gains, whether it be this year or in future years, or reduce your taxable income, up to $3,000 per tax year. And the best part is, there’s no limitations on how many years you can carry that forward. So if you’re recognizing a lot of these losses, while the markets down, you can sell these investments at a loss, and we’ll talk about reinvesting that in a second and utilize those losses for many, many years to come. Now, the key is to avoid the wash sale rule. And so what that means is you cannot sell an investment and then turn around within 30 days and buy the same investment, or a substantially identical investment. Okay? So if you buy an individual stock, it’s pretty simple. You can’t sell Apple and buy Apple in the next 30 days. Otherwise, it’s a wash sale rule, it’s the same investment. But let’s say you have a mutual fund, like fidelity s&p 500 fun if you sell that, and bought, let’s say, the Vanguard s&p 500 fund, that might be a substantially identical investment. So you’ve got to be careful with that wash sale rule. The rule is within 30 days, you can’t turn around and buy an identical or the same security within 30 days otherwise, the tax loss harvest doesn’t work.

Kevin Geddings 10:36
Hey, we’re talking about tax planning versus just tax prep. And obviously Kevin Lao knows his stuff. Imagine financial security that’s imagine financial security located right here in Northeast Florida, you can always reach him at cleverly enough, or call the office number 904-323-2069 That number again, 904-323-2069. We’re gonna put all of Kevin’s information up on our social media platforms as well at WSOS radio on Facebook and Instagram. We’ll be right back.

Kevin Geddings 12:10
The Beatles here on 103.9. We had to play tax man because while we’re talking about tax planning versus tax preparation with Kevin Lao, he, of course is the principal at Imagine financial security, imagine financial security located right here in our part of the world. And he helps individuals, with all sorts of financial issues mostly focused on trying to get you ready for retirement. That could be retirement for you in the next 10 or 15 years. Or maybe you’re one of these, you know, super successful 20 Somethings that wants to retire like Kevin at age 40.

Kevin Lao 12:39
I wish. Having three kids under three, I think I’ve got a little ways to go. But yeah, that’s a good point. Early retirees is definitely a hot topic and it’s not necessarily retiring, and then not doing anything. It’s retiring from your day job, and then at 45 or 50, doing a passion project and having that financial independence to do so. So I think we talk a lot about the FIRE movement, financial independence to retire early. So it’s gaining a lot of traction.

Kevin Geddings 13:09
If you know somebody who’s in that situation, or you’re in that situation, I would encourage you to reach out to Kevin. Today though, we’re talking about tax planning, some various aspects of it. In the last segment, we talked about health savings accounts and how they can be a very interesting vehicle that can be more than you think. The way I was thinking of it before Kevin stopped by today, which is, well just a pool of money that you set aside tax free, and then you spend it down on your eyeglasses and things like that. But it can actually be a much more creative vehicle than that. So he has a great blog posts at his website, that you can read about his thinking on health savings accounts. We were talking about, obviously, tax loss harvesting, with a lot of investments that have taken a hit here in 2022. There’s some benefits there. Let’s talk about one of the old school things even baby boomers out there, we’ve been told all of our lives, hey, you make a charitable contribution, give some money to the Salvation Army and you get to write that off your taxes.

Kevin Lao 14:03
Absolutely. This is probably one of the one of the topics that is that is misunderstood by just about everybody. They think they’re donating to charity, and they’re getting a tax deduction for it. But studies have shown that nine out of 10 taxpayers since the tax cuts and Jobs Act Act went into effect in 2017. Nine out of 10 taxpayers are taking the standard deduction. So it doesn’t matter what you’re doing with charitable donations. It’s technically not making a difference from a tax standpoint, because the standard deduction was multiplied by two with that legislation, which is, set the roll off at the end of 2025. But for now, most people are not itemizing deductions, and therefore those charitable donations don’t matter. Except for $600 for a couple and then $300 For a single if you’re if you’re doing the standard deduction and you’re doing charitable donations, you can take $300 If you’re a single filer and $600, if you’re married and actually reduce your taxable income, but everything above that is not dedutible if you’re taking the standard deduction.

Kevin Geddings 14:59
So I would imagine people that worked with you. And some of our listeners have some significant retirement savings. If they want to make charitable contributions, you can give them some advice, right?

Kevin Lao 15:08
Yes, one of the big ones, one of my favorite strategies is called a QCD, or qualified charitable distribution. Okay, so this is for individuals that are over 70 and 1/2 that have Ira plans, they can donate up to 100,000 dollars per year from their IRA to a charity. And this works extremely well, when you turn 72, and you’re taking required minimum distributions. The amount you have to take out per the IRS rules based on your life expectancy table. So if you’re taking out, let’s say, $50,000, because the IRS makes you, and normally you give, let’s say, $10,000, to charity, okay, well, you can take $10,000 from that required minimum distribution and donate it straight to charity. And that is never included in your ordinary income. Okay, so it’s better than a tax deduction. So don’t even worry if you’re itemizing, or taking a standard deduction that is not included in your ordinary income. So now, it looks like your distribution was only $40,000, not $50,000. So for folks that have, let’s say, Social Security income coming in, or they have maybe a pension from the military, or government, maybe they don’t need all of the required minimum distributions, and they’re sitting there complaining, oh, the IRS, they make me take out all this money. And if they’re charitably inclined, or maybe they just want to reduce their taxable income, they can start to do those QCDs each and every year and have a QCD plan is what I like to call it. Especially if it’s going to reduce your tax bracket. And that’s another thing, we can get into all day long, but tax brackets also impact what you pay for Medicare premiums, and QCDs work extremely well coincided with both of those two topics.

Kevin Geddings 16:41
It just strikes me, Kevin, there’s so many folks that don’t know this stuff, because the government doesn’t say, Hey, here’s a little pamphlet where we’re gonna explain how we’re going to nail you on taxes, you really have to go out there and search and find on your own.

Kevin Lao 16:54
Yes, all this information is online. That’s like the nice thing about the internet, you can do Google searches all day long, and read about QCDs and required minimum distributions or charitable donations. I think the value that my clients find, in working with someone like my firm, or other financial planners out there is that we can get that information that you can find yourself and apply it to what is relevant to your situation, and maximize those rules in your favor based on your circumstances and your financial situation.

Kevin Geddings 17:27
Well, what you do with people is you work with them in a tailored way, right? Because it sounds cliche, but the reality is, we are all different. Even if you have the same amount of money, you have half a million or a million in assets, or 2 million, or what have you, how you want to utilize those funds in retirement is greatly different from person to person.

Kevin Lao 17:45
That’s why that’s one of the reasons why we named our firm what it is, I like to have people imagine what financial security means to them, it means different things to different people. You know, one other thing real quick if we have time to talk about is the donor advised fund which is also the acronym d A F, donor advised fund. And so if you’re not 72, if you’re not taking those required minimum distributions yet, what you can do is you can make these contributions to a donor advised fund, which think of it as like your own personal charity. So if you’re charitably inclined and you typically make, let’s say five, or six, or even 10,000 dollars per year to a certain charity, but you’re not getting a tax deduction for it because you’re taking the standard deduction. It doesn’t really matter how much you donate to charity, you’re already getting that standard deduction, what you can do is we call it bunching, bunching those contributions. So in one year, make a larger donation into this DAF, this is still your account. But the nice thing is, let’s say you put in $50,000, which might be five years worth of donations, now you can deduct those contributions, because it’s above that standard deduction. And then what you can do with that DAF is completely up to you from there. It has to be used for charitable donations going forward. So you can’t donate it to, you know, little Johnny’s college fund, or pay yourself a salary, it has to be a legitimate 501 C3 organization. And you can start to make donations from that donor advised fund on a tax free basis. And the cool thing is similar to the HSA, like we talked about, you can also invest that donor advised fund in a diversified pool of funds. So you can set that account up with fidelity or Schwab or Vanguard or whatever it might be. Get that invested according to a plan that works for you and your risk tolerance. And you can actually potentially have more money to give to charity over time. And it’s also kind of a multigenerational tool. I see clients utilize it teaching their kids to be charitably minded, those types of things. And again, you can actually take the deduction for those contributions because of the bunching rule.

Kevin Geddings 19:43
And that’s the voice of Kevin Lao. If you just hopped in the vehicle, and we’re taking a little break from the music we’re gonna get back to the songs are here in just a second. And we’re talking about tax planning versus tax preparation, what can be done to minimize your tax risk, regardless of the income that you have or whatever your assets are? Kevin works with individuals on the He’s issues and on investment issues overall to make sure that you have the retirement that you always wanted. So we’ll be right back. Talk to me about Medicare planning.

Kevin Lao 20:17
Yeah. So Medicare planning is an interesting one. When you turn 65, you’re going to enroll in Medicare, and you’ve been paying into the system for your entire career. Your employer takes out a certain percentage of your paycheck to pay into the Medicare system, what a lot of people don’t realize is that your premium for Part B is dependent on your modified adjusted gross income. Okay, and so based on that modified adjusted gross income, you might pay what’s called an Irma penalty, okay. And so, if you look at if you look at different things, like your Social Security, or a pension that you might have, or perhaps it’s required minimum distributions, once you add all that up, you need to see, hey, is your premium going to be higher for Medicare, and that also coincides with those Roth conversions to potentially pay a little bit more tax now to not only save in tax your tax brackets going forward, but also to reduce what you might pay for your Medicare premiums? Once you’re 65 or older.

Kevin Geddings 21:15
if you have any questions about tax planning, or just investing in general and getting ready for a secure retirement, you can get in touch with Kevin Lao by going to the website. That’s So Kevin Lao, we see all these ads on television all the time for life insurance, that you can be 70 years old, and be a diabetic with one of your arms falling off, and you can still get a term life insurance, you know, but you help people with these issues, right, figuring out whether life insurance is a good investment or not?

Kevin Lao 21:47
I know a little bit too much about life insurance and long term care insurance. But it’s a topic that’s super important. And I think it’s one that’s often misunderstood by by the consumer. But the basic idea around life insurance in retirement is, if you have a goal to leave a legacy to your children, or a charity, or maybe you have an estate tax issue, life insurance could be one of the most efficient tools you can utilize to pass on to the next generation, because it’s income tax free to those beneficiaries. Whereas if you think about your 401 K, or an IRA plan, those are going to be taxed to your beneficiaries, assuming those traditional contributions are tax deferred contributions. And, think about the secure Act, which is another piece of legislation that passed at the end of 2019. It’s made the rules on on passing those 401 ks and IRAs to the next generation, extremely tax inefficient. So, if your kids are working at Google, or some big tech company or Amazon, they’re making way more money than you ever made, you need to think about that, what is their tax situation going to be if they inherited your IRA tomorrow? So life insurance can be a good solution to offset some of those tax liabilities upon the inheritance of those 401Ks and IRAs. And again, it’s it’s one of those things, the earlier you do the life insurance planning, the more cost effective it can be. And so I work with my clients in terms of shopping carriers with them, looking at all of the different landscapes, all these different contracts, and help them understand what they currently have and what they might potentially need. Because these contracts are extremely complicated. I think the insurance companies, they like to make things complicated, but that’s one thing I can help my clients is like looking at their current life insurance, looking at their current long term care, does it make sense to refresh and upgrade based on what the markets doing now, and based on what their long term goals might be?

Kevin Geddings 23:41
Yeah, well, it’s a great vehicle. There’s all these different vehicles that are out there, whether it’s health savings accounts that we were talking about earlier, you know, obviously taken advantage of some of the investment losses that many of us have experienced, since the beginning of 2022, charitable donations, how those can be structured with donor advised funds, all that stuff. I know if it all sounds like a foreign language to you, that’s okay. Because it’s not a foreign language to Kevin. That’s what he does all day long, and he actually enjoys it. It’s fun. You can tell. I enjoy getting to spend time with Kevin on the radio because not everybody loves what they do. But he actually loves what he does.

Kevin Lao 24:18
I you know it’s fun. I mean, helping people plan for retirement. It’s an exciting time in people’s lives. But it’s also very unnerving, because there’s a lot of uncertainty, a lot of unknowns. The media likes to play on fear. So people read things and they say, hey, does this apply to me? Does this not apply to me? So I think I think my clients really appreciate an objective third party that’s not affiliated with the media, telling them what what is relevant for them and what they need to be concerned about.

Kevin Geddings 24:43
I highly recommend working with Kevin once again, That’s The phone number 904-323-2069. As promised, here’s the phone number 904-323-2069. You’ll get a sense of Kevin In his bio, his thinking on a variety of financial issues, if you check out the website, that’s where you may want to start. Kevin LAO. Thank you very much for coming by. We learned a lot.


Episode 10 – Six Reasons to Take Advantage of Roth Conversions

Are you approaching retirement with the bulk of your next egg in tax deferred 401ks or IRAs? With so much uncertainty on where tax rates might head in the future, you might be wondering, “Should I take advantage of Roth conversions?” They are not for everybody, but in the right situation you could end up saving thousands, or even hundreds of thousands of dollars, in taxes during your lifetime. Additionally, your heirs will also benefit from a more tax efficient inheritance. I hope you enjoy this episode, which includes my interview with Kevin Geddings at WSOS 103.9 in St. Augustine!

Episode 9: The 5 Most Common Estate Planning Mistakes

Kevin Lao  00:00

[music] hey, everybody and welcome to the Planning for Retirement Podcast where we help people plan for retirement. My name is Kevin Lao and I’m your host. Just a quick disclaimer, I have my own registered investment advisory firm. It’s Imagined Financial Security. We’re registered here in Florida. But this information is for educational purposes only and should not be used as investment, legal or, tax advice.


If you do have questions about how to work with my firm, you can go to my website at So, today’s episode nine, the 5 Most Common Estate Planning Mistakes, I’ve seen a lot of them over the years, being in the business and I’ve been thinking about doing this episode for a long time, because Estate Planning is a conversation I have with just about everybody, and it’s not a fun conversation because we’re talking about death, disability in capacity.


So, no one wants to address Estate Planning and it’s no surprise that only 1/3 of American adults have an Estate Plan in place. But one thing I always hear from any client is, that they don’t want to be a burden on their loved ones. I’ve put together this episode, and hopefully you find this helpful. These are easy to address, easy to fix. But I always recommend talking to a licensed attorney that can actually help you create and execute your documents properly.


So, the first most common mistake is probably, obvious for most and that’s simply not having an Estate Plan.

So, if you’re one of the 2/3 of adult Americans, you’re obviously in the majority, and you may not have an Estate Plan, that’s ok. It’s very easy to set up your basic will, your basic power of attorney, which is someone that can make financial decisions, if you’re incapacitated, a living will which is essentially, if you are in a vegetative state.


Who’s going to make that decision? What are your wishes in that situation or, a power of attorney for health care, which is someone that can also make healthcare decisions on your behalf, if you’re unable to? Those are the primary documents that most Estate Plans will incorporate. You may need a trust, you may not need a trust and that’s again, up for a licensed attorney, someone that can review your situation and give you some advice on that.


Many people think that if their situation is fairly simple, they may not need a trust and that’s may be true. But you might need a trust for variety of reasons, which we’ll cover here in a minute. So, number one, simply getting an Estate Plan done is, really the first battle.

We get into mistake number two, which is not properly executing those Estate Planning documents.

Again, I’m guilty of this too, my wife and I, we did our first Estate Plan before we had children. So, it was all about who’s going to receive our assets, if something happened to both of us? Who’s going to take care of our dogs? At the time, we had three dogs in our household.


So, there were there was some complexity but not a lot. Since then we had three children and we finally updated our state plan about a year ago. It felt pretty good, frankly, to get it done. To make sure everything was directed to our beneficiaries, making sure that we had guardianship for our kids. If something were to happen to both of us.



We had someone named that would take care of our kids and also to manage the assets for them. But not properly executing your documents is, super common because it takes a little bit of heavy lifting. If you set up a will or, set up a trust, you are going to have to go in and look at all of your accounts whether you have 401K’s, IRAs, life insurance, annuities, bank accounts, investment accounts, and you might need to make some changes on those beneficiary designations.


So, there are two types of assets in this world, assets that can pass outside of the probate process by having a beneficiary, and then assets that will pass through probate if proper beneficiaries are designated or, if there are no investment beneficiary designation, eligibility. So, let’s start with accounts that can be passed outside of probate.


Most commonly those would be retirement accounts like a 401K, 403B, life insurance contracts, annuity contracts, even assets that are not held inside of retirement accounts like, joint bank accounts or, individual bank accounts or, joint or, individually held investment brokerage accounts. All of those have the option to name a primary beneficiary and most of the time a secondary or, contingent beneficiary. And then for bank accounts the alternative, the name for it is a TOD or, a POD, which is transfer on death or, payable on death.


So, once you’ve reviewed all of your accounts and you have an Estate Plan in place, most of the time your attorney will tell you, hey, here’s who you should name as primary based on your wishes. Here’s who you should name as the contingent beneficiary based on your wishes and you have to do that for every single account that you have. Again, this is up to you, your attorney is not going to do this for you. You’ve got to contact those institutions, get those beneficiary designations updated.


I’ve seen scenarios where clients have been divorced for 20 years, and their ex-wife or, ex-husband is still the primary beneficiary on their 401k. Especially, if you’ve moved around from company to company, a bunch of different retirement accounts or, you have several life insurance policies, one with work, one outside of work, one that your grandmother took out for you when you were a baby, look at all those beneficiary designations. Make sure they are up to date and then make sure you have a contingent beneficiary if that option is available.


Now, the second part to this mistake of, not properly executing is, if you have a trust, making sure that the assets that should be held in trust are titled to the trust. So again, some heavy lifting involved, especially, if you’re moving a property inside of a living trust or, an investment brokerage account inside of a living trust. If you’re naming a trust as a primary or, contingent beneficiary of those accounts that we just talked about, all of that needs to be done by the individual client.



Again, if paperwork might be involved, you might need to get on the phone with customer service and jump through some hoops. But it’s worth it in the end, because your documents aren’t really going to do anything unless you have the proper beneficiary designations and the assets are titled with the right ownership.


So again, those are all scenarios that you can easily review, take a look at, making sure that they’re all up to date, and review them once every year, two years, three years. I mean, if your situation isn’t really changing a lot, you may not need to review them every year. But definitely every couple of years, every three years, you probably want to review those beneficiary designations and make sure that they’re titled properly.


Third most common mistake is thinking a living trust or, a trust in general, is just for ultra-high net worth people.

I hear this all the time, hey, Kevin, I don’t need a trust. I don’t have over 11 and a half million dollars, which is the current exemption for estate tax purposes. Maybe they have $5 million or, $6 million and they might have other concerns in terms of inheritance for their children or, grandchildren or, they might be concerned about divorce of the one of their kids and assets being split to that son-in-law or, daughter-in-law that they’re not a huge fan of to begin with.


Maybe there’s a creditor protection concern or, spendthrift concerns are a child with special needs that may need care for the rest of their life. Therefore a trust could make a lot of sense in solving those issues in terms of inheriting assets outright. So, all of those reasons are reasons to own a trust, whether it be a living trust or, an irrevocable trust or, a testamentary trust or, if you have minor children that’s another one.


My wife and I, we have three kids that are under 18. If something were to happen to both of us, we have guardianship named and we also have a trust that would be set up to be managed for our boys, until they are of age and that is designated inside of the trust.


So, think of a trust as essentially another entity that will help you execute your wishes and manage the assets properly for your beneficiaries, if there are concerns about them inheriting assets outright or, if you just want to make sure that those assets stay in the family and aren’t subject to divorce proceedings or, creditor protection concerns those types of things.


Another reason I have a trust is, to simply avoid probate. Probate is expensive. It can cost anywhere from two to 3% of your estate. So, if you have an estate that’s $2 million, I mean, that could easily cost you a 30, 40 $50,000 to go through the probate process, and setting up a trust might cost you three or $4,000.



So, this is a big reason why a lot of people will go through the process to setting up a living trust, even if there aren’t a lot of the concerns that I just mentioned. They love their son-in-law or, daughter-in-law or, their kids are totally able to manage a large inheritance. They may still want to set up a trust. So it’s passed outside of the probate process to avoid the cost of probate and also the public record of probate. It keeps that privacy involved.


The assets may still stay in trust for a lot of those concerns that we just talked about. But that beneficiary their son or, daughter or, whoever that beneficiary is, can still access the assets for whatever purpose that they want to access those funds for, if they’re able to manage it themselves. You also have the ability to set up a corporate trustee.


This is an area that I see is, definitely becoming more common where, maybe there’s several children involved, and one of them is just completely off the rails. Not able to manage assets. There’s a lot of concern, if there was a big windfall of a million or, $2 million that’s passed on to one of the children, they may want to have a trust set up for that beneficiary, and not have that person as the trustee into, in terms of making the financial decisions, when you’re no longer here.


So, you may want to consider a corporate trustee, which is a trust company or, a bank or, financial institution, can serve as a corporate trustee, to ensure the wishes of the trust are executed on that beneficiary’s behalf if you have concerns of the management of those assets.


Special needs trusts and other things as well, having a corporate trustee. I see a lot of times will fit in those situations, because the siblings of that special needs child may not be available. Maybe they’re, a neurosurgeon or, they’re deployed overseas, and they’re just not available to make those financial decisions for their brother or, sister. So a corporate trustee can also be put in place, in lieu of an individual, if you have a trust setup.


There’re a lot of benefits of trust. I’m talking a lot about trust, because I’m a big fan of them, just for the simplicity of the execution of your wishes, and all of the benefits of trust provides, whether it’s a living trust or, a testamentary trust. Again, consult your attorney, see if that makes sense in your financial plan and if it does, make sure that it’s properly executed on the back end.


All right, number four, is leaving tax inefficient assets to beneficiaries.

So, what does that mean? There are certain assets that when they’re passed on to the next generation, are going to be heavily taxed, and then there are some assets that are not going to be taxed at all that are super tax efficient to leave to beneficiaries.


The big one I’ll highlight here is, for traditional 401k is, traditional IRAs that used to have the benefit of what’s called a stretch IRA, when they’re inherited by a non-spousal beneficiary, like a son or, daughter or, a grandchild. Those are no longer available for most beneficiaries. Ok, there are some exceptions to the rule.



I did a Podcast on this recently, maybe episode three or two. It’s called the Tax Trap of Traditional 401Ks and IRAs. So, look at that, I talked more about this in detail but generally speaking, there could be a scenario where, you have several accounts and certain accounts you may want to designate for retirement income, and spend those down during your lifetime.


Then there are other assets that you may want to protect and preserve, to leave those, to the next generation, given the tax efficiency of those, how those assets are passed on? A lot of that’s going to be dependent on your tax situation in retirement, if you’re in a high tax bracket or, low tax bracket, where you think taxes might go in the future? And then also, what tax bracket is your beneficiary in?


Are they in a really high tax bracket or, a really low tax bracket? And that will drive a lot of those decisions that you’re going to want to make as you approach retirement, and then go through retirement, in terms of spending on your assets.


Number five, last but not least is, just simply not informing key decision makers with important information.

I mentioned earlier, not being a burden on loved ones is important to just about, everyone I talked to. What I find is, that sometimes, you’ll get an Estate Plan done, and you may not tell your brother-in-law that they’re the executor or, you may just mentioned in passing, hey, something happened. Would you be able to manage the trust or, manage the financial affairs?


But they really don’t understand or, know what that means, what’s involved? And I’ve seen a lot of scenarios where a big mess is left to a family member, to clean up and take care of it. So, I think, being transparent with the key decision makers, that are going to help execute your estate, whether it’s a trust or, being the executor of your will, I believe is super important, and then making getting things organized in a way that’s easy for those individuals to execute on.


So, if you have tons of accounts all over the place, does that make sense? Do you want to simplify your balance sheet a little bit? I create a two page document for all of my clients just to simply say, hey, here’s a list of our assets. Here’s a list of our liabilities. Here’s a list of insurance. Where are those accounts held? Who’s a point of contact that you can reach out to? Here’s even a phone number that you can call, and giving that out to my clients powers of attorney or, executors or, trustees.



I find that as super valuable just to make sure that process is easy for those individuals that are going to execute on your plan. Hope you found this helpful. That’s it for today. Be sure to subscribe if you like what you heard, that way you can stay up to date on new episodes. Again, I always love to hear from you if you have any questions about your personal situation that you want to talk about. You can just visit my website at and schedule a call with me.

Episode 8: What to do when stocks are volatile?

Strategies for navigating stock market volatility

What to do when stocks are volatile


Kevin  00:12

Hello everyone and welcome to the Planning for Retirement Podcast. My name is Kevin Lao and I am your host. Just a quick background on me, I’m a CFP been in the business for almost 14 years and I have my own firm serving clients all over the US. We’re based here in St. Augustine, Florida. My firm is Imagine Financial Security. But this Podcast is to educate you on the strategies we put in place every day to help our clients plan for retirement and achieve financial independence.


If you have any questions about working with me one-on-one or, even had feedback on our Podcast, I always love to hear from you. And you can visit my website at and contact me that way. Also, be sure to subscribe and leave us a review on iTunes, if you’d like what you hear.


This episode on January 24th 2022 is episode number eight. It is called what to do when markets are volatile? Before we jump in just a quick disclaimer, this should not be construed as investment, legal or, tax advice. And you should consider your own unique circumstances and consult your advisers before making any changes. So, let’s dive in.


All right, as I mentioned it is Monday, January 24th, it’s the evening. My three boys are now sleeping. So, I have some quiet time to record this episode, which I’ve been looking forward too. We’ve been in some ballot of volatility over the last four to five months really starting with the Delta variant in the third quarter.


The markets got a little bit spooked. Of course, with the recent variant Omicron in the fourth quarter of 2021 and we’re officially in correction territory with the NASDAQ intraday today was down 17% from its previous high. The S&P 500 was minus 10% and some change from its previous high.

Correction vs bear market

We’re definitely in correction territory with both of those and the small caps in the US, are actually in bear market territory. So bear market, just to define this, is a drop of 20% or, more from previous market highs. So, many times I’ve clients or, prospects, they come to me and ask what should they do? What should their strategy be?


So, really to simplify things, there are three things you can do. You can sell something. You can buy something or, you can do nothing.

And I hear many talking heads in our industry, even advisors, co-workers, friends, family, I hear a lot of people talk about number three, which is do nothing. Bury your head in the sand, just let the dust settle and just don’t look at your statements, and then wait a year.


This is great for people who don’t know what to do because making a mistake is, you certainly want to avoid selling something at the wrong time and making that big mistake.

So, doing nothing is certainly better than making a big mistake.

But the real answer, the one the pros practice, and the one my firm employs is, to do a little bit of both. You sell some things and you buy others.



Now, what to sell and what to buy is, much more of a complex question. I’ll go into what our process looks like, in just a moment. But first of all, I just want to talk about what’s going on in the markets now? We’ve had record high inflation. We’ve had for many months, really since June, we have had interest rates spike at the beginning of the year, so far in 2021. So, the concern, there is large purchases like, homes and cars are becoming less affordable.


It also impacts the ability for businesses to borrow money, which has been a very easy thing to do for businesses, for many years, really since 2010. So, that’s going to become a little bit more difficult. A little bit more expensive, which will impact the growth and then ultimately, number three, which is really related to the first two is, this concern of slowing growth in 2022 and 2023.


Really, with the reopening from the global shutdown in 2020 towards the end of 2020 and 2021, we’ve been experiencing a rapid expansion because we were experiencing the reopening from the lock downs. Naturally, the pace of growth is going to slow and so, investors are certainly concerned with that, and ultimately concerned with stock prices not being aligned with their valuations.


So, those three things are really contributing to the stock markets being volatile and what I will say is, volatile markets are normal. They’re healthy. If stocks had no volatility, they would not provide the upside potential, they have provided for decades. We’ve all heard the notion of risk and reward.


Well, if there’s no risk involved, there’s no reward involved. I tell my clients and friends, and family and people I talk to is, embrace the volatility. This is an opportunistic period of time in the markets, and we’ll talk about here in just a second. So what do I mean by opportunistic?


Let me throw out a quick statistic that really jumped out to me. This was done by Hartford Funds I believe, and I’ve been looking at this study year after year, and I think they update this almost every year. We talked about bear markets being minus 20% drop a bull market, conversely, as a 20%, increase in prices from previous lows.



So, listen to this, more than half or, 56%, of the S&P 500, its best performing days in the last 20 years have occurred, while we are in a bear market.

Again, we’re not in a bear market for the S&P or, NASDAQ yet, but I’m just talking about volatile markets in general. When things are bad, we tend to have some of the best performing days in the market. Actually, here’s another one. I’ll follow up on that.


Another 32% of the best days in the market took place, in the first two months of a bull market.

So, if you really add those two up which probably, isn’t fair to do, but let’s say 88% or, north of 80%, of the best days in the S&P 500, over the last 20 years have occurred, while we were in a bear market. Ok. Now, you could argue. You know, a large part of that was 2008-2009, with the worst recession since the Great Depression. We were in a really deep recession, a deep bear markets.


Of course, there were a lot of good trading days during that period of time, but you really look at 2020 as another example, that was the other bear market we’ve had over the last 15 or, so years. There was some great opportunity in March, April, May, June, July of 2020, where if you didn’t take advantage of it, it hurt your recovery.


If you sat it out, there’s no way you would have made back what you’d lost at the beginning of 2020. But the important note is, that when things are bad people tend to run. People tend to get scared and that’s when opportunity arises. Ok, valuations become more attractive, stock prices are lower than they were previously and so investors that have been sitting on the sidelines, opportunistic investors, are now buying in, now getting into the market.


It’s like the quote I love from Warren Buffett is, be fearful when others are greedy and greedy when others are fearful.

I love that quote and I think it really applies to the process I employ for my clients.


Another interesting statistic I want to throw out there is that, bear markets last 10 months on average, but bull markets last three years. So, this really goes hand in hand with a lot of the advice people give around, just wait it out, don’t make any moves. You just buy and hold.


Don’t make any rash decisions because on average, bull markets tend to last longer than bear markets. If you did nothing, you probably did just fine over the course of a long period of time. Ok. But how do we become opportunistic? How do we really take action during periods of volatility?


This is really what the answer that people are looking for when they come to me during these periods. Ok. What my clients are looking for in an advisor during volatile markets?

So, the answer is simple. We manage to each investment policy statement. Ok, let me repeat that, we manage to each individual investment policy statement.

So, what’s an investment policy statement?



A simple way, a simple definition is, it’s a written document that designates a certain percentage to be allocated for each asset class. Ok. How do you create an investment policy statement?

So, the equation in my mind is very simple. It’s your financial goals, combined with your risk tolerance or, risk capacity. Minus your financial resources equals your investment policy statement.


Some examples of asset classes would be, let’s say, large cap US growth stocks or, International stocks or, US bonds or, Real Estate, just to name a few. A well-designed investment policy statement will have asset classes that move in different directions during different periods of each economic cycle. Meaning they’re well diversified from one another.


So, as the market shifts, the percentage you own and each designated asset classes, you then have the opportunity to sell at a premium or, buy at a discount relative to your IPS or, your investment policy statement. Ok. If you have no starting point, it’s never going to make sense mathematically of, when to buy and when to sell?


Whereas, if you have an investment policy statement, and you have a certain percentage that’s supposed to be allocated towards international stocks, and a certain percentage that’s supposed to be allocated to US growth stocks, ok, and that percentage has shifted, based on fundamentals of the economy and stock prices. That’s going to give you the answer of what do you buy and what do you sell?


Let me give you a quick example. Let’s look at the recent bear market we had. Ok. Again, I’m not predicting we’re going to enter a bear market right now. I’m just talking about bear markets, because typically people start to pay attention when their accounts dropping by 20%. Even now, people are starting to look its headlines, are being made because the NASDAQ was down intraday today at over 4%.


So, if you’re like, oh, should I be doing something? The last bear market we had was February, March of 2020. Ok, this was the beginning of the Pandemic sell-off. It was short-lived in early, in August. We had recovered all of the losses from the bear market and stocks have been on a rally ever since. But stocks dropped 35% in a six-week period.


Bonds, on the other hand, were up close to 7% during that same time horizon. Ok, so why is this? I mean, interest rates were low, relatively speaking. Ok. So, how could they return 7% in a two month period? Well, it’s because when people are selling out of stocks, because they’re fearful or, they’re concerned about what’s going on in the economy?



They have to buy something. I mean, yes, you could go to cash. But a lot of these individuals, a lot of these investors are going to flight to safety. So, US Treasuries, Municipal bonds, Corporate bonds, they’re flighting to safety. So, bonds spiked because of prices going up. People wanted safe investments paying a coupon rate of, one and a half or, two and a half percent, just because they were concerned with stock prices dropping 35% over a six-week period.


Ok, let’s say for simplicity purposes, we had an investment policy statement, based on your financial goals, based on your risk tolerance, based on your time horizon, based on your financial resources. We said, hey, you know what? Let’s use half of your portfolio to be in the stock market. Obviously, diversified within stocks, US stocks, International stocks, large stocks, small stocks, mid-sized stocks, and the other 50% would be in fixed income also, diversified US bonds, International bonds, high quality investment grade versus Junk bonds, high yield.


So, in the first few months of 2020, stocks were down 35% and bonds were up 7%. So, as it relates to your investment policy statement, ok, we are now, under exposed and stocks, and over exposed to bonds simply by the drastic difference in performance during that time. Instead of reacting to headlines, which is very tough to do, I promise you, ok, you wouldn’t believe the phone calls, I was receiving from clients during 2020, at the height of COVID when stocks in a single day, were going down 11 to 12 and 13%.


Ok, the calls that we were feeling were concerning, ok, but we had to stay disciplined, ok, and if we’re now, underweight and stocks, ok, and overweight and bonds, mathematically speaking, as a relates to your investment policy statement, and that 50-50 designation, we had the asset class. By simple way of math, we have to then trim off some of the gains from bonds so, sell at a premium, and purchase stocks at hopefully, discounted prices.


Now, hindsight is 2020 we know how that worked out. But in practice, this is literally the discipline that goes into this, ok. So, we’re not reacting to headlines. We’re not trying to time the market, ok. We’re simply looking at a financial goal, a time horizon, and an investment policy statement related to a certain account, and we’re going to buy some things and we’re going to sell others.


Now, within stocks, we’re going to have different percentages allocated to different segments of the market. Ok, within bonds, same thing. Okay, so I’m just using a very high level simple example of half in stocks and half in bonds. Once we made that move, I know Hindsight is 2020, but stocks went on a tear for the next four months because we had repositioned and loaded up in stocks during the bottom March, April of 2020, and we had that recovery over the next four months, we recovered much faster than, if we had did nothing.



Ok, the same thing held true in 2021. So, fast forward, ok, we’re looking at it and said, hey, we had a massive run in 2020, and even into 2021. So, that same 50-50 portfolio, we’re now overweight in stocks, and we’re underweight in bonds. As painful as this might be, especially, when we’re going through a significant bull market, we need to buy discipline.


Trim off some of the gains from stocks, not bail out of stocks, but trim off some of the gains, to get it back to that targeted 50% that we want to have in the portfolio and purchase fixed income albeit, it’s not going to generate a ton of interest. Given interest rates are super low, but it’s there for that stability. We’re not overweight, when stocks take the next tumble, which we talked about happens every four years on average for a bear market.


Now, that we’re going into this ballot of volatility, third quarter of 2021, fourth quarter of 2021, first quarter of 2022, if we had followed this discipline, follow this process, we’re not going to be experiencing as much of a dip, as we had, if we had done nothing.

Ok, this also is beautiful because it works well when you’re retired, and you’re actually, drawing income from the portfolio.


So, my clients that are— let’s say, a client needs $5,000 a month from the portfolio. We need to raise cash somewhere by liquidating a certain asset class. Every single month, when we go into the portfolio, we look at the Investment Policy Statement and figure out what we’re under? What we’re over weighted?

And that drives our decisions on what we’re liquidating to generate income from the portfolio.


Again, it works in the accumulation phase. It works in the income distribution phase, and for those of you that are younger listening to this, and let’s say, you don’t even have fixed income in the portfolio, where you might have cash. You might have cash that you’ve been waiting to invest, that you haven’t put to work yet. This is dry powder. It’s an opportunistic time to deploy that cash strategically, to buy equities at potentially discounted prices and especially,


If your time horizon is 10 or, 15-20 years, you don’t need to even time it perfectly, and you shouldn’t even try to time it perfectly because conceivably, if capital markets continue at the trajectory, they’ve been going over the net, over the last 100 years plus, you’re going to be much better off than just leaving that money in cash. I promise you that especially with inflation.



So, those of you that are long ways away from retirement, there are strategies you can deploy, instead of selling off fixed income. If you’re closer to retirement, it’s a perfect time to look at what are you overweight in? What are you underweight in? What is your investment policy statement look like? What should it look like? Should it be updated, based on your time horizon, based on your financial goals and circumstances changing? For those of you in retirement don’t panic.


Hopefully, you have a process in place where a certain dollar amount for income each year is, going to be generated from asset classes that are immune to stocks. Ok, in summary, if you don’t know what to do don’t make a knee jerk reaction but at the same time, don’t just sit idle and do nothing. Ok, create an Investment Policy Statement for each account. Ok, that you have follow the Investment Policy Statement, implement it with a discipline process. Don’t act on emotion.


Ok, if you want to consult with an advisor, consult with a fiduciary, go to Go to Fee Only network. Go to XY Planning. If you want to consult with me one-on-one, I’m happy to talk. You can get on my website at but I hope you find this helpful and can apply during periods of volatility moving forward. Be smart, review your situation, make sure you’re taking the appropriate steps for your own strategy and your own unique circumstances.


Ok, again, hope you enjoy today’s episode. Be sure to subscribe. Leave a review on iTunes like, I mentioned if you liked what you heard, and I really appreciate all of you, and appreciate you tuning into today’s episode. Until next time, have a great one.


Episode 7: Retirement Income Withdrawal Strategies


Retirement Income Withdrawal Strategies

Retirement Income Withdrawal Strategies


Kevin Lao  00:12

Hello everyone and welcome to the Planning for Retirement Podcast. My name is Kevin Lao. I am your host. My real job is running a Financial Planning firm in Florida. We serve clients all over the US remotely. But this Podcast is to educate you on the strategies we put in place every day to help our clients plan for retirement and achieve financial independence. The name of my firm is Imagined Financial Security.


So, if you have any questions about working with me one-on-one or, even a feedback on our Podcast, I always love to hear from you. So, you can simply visit my website at and contact me that way. Also, be sure to subscribe so you can stay up to date on our newest episodes. This is episode number seven, called Retirement Income Withdrawal Strategies.


Before we jump in just a quick disclaimer, this should not be construed as investment advice, legal or, tax advice and you should consider your own unique circumstances, and consult your advisers before making any changes. These strategies come from my 13 plus years in the Financial Planning Profession, but are constantly evolving and changing as the business evolves.


Three Primary Retirement Income Withdrawal Strategies

All right, with that being said, why don’t we dive in? So, there are three primary withdrawal strategies. You have the Systematic Withdrawal Strategy. You have the Bucket Strategy, and you have the Flooring Approach. You don’t have to stay in one lane. You can combine different strategies into your own unique strategy. But I’m going to hit the high points on each of these and talk about the pros, and cons and who might be a good fit for one versus the other.

Start your retirement income plan EARLY! 

But before we jump into that, what I will say, for all of you folks that are, let’s say five or, 10 years or, longer away from retirement, you need to start planning early. Ok, but the biggest issue I see a lot of the times, I have clients come to me. They’re right on the brink of retirement. They’re like, hey Kevin, I’ve heard good things. I I’m retiring in a month and they want to create a retirement income plan. There’s not a lot of change we can make happen in order to maximize the efficiency of their plan.


However, someone who’s five years away or, 10 years away, can diversify taxes. They can diversify the different buckets they are using. They can diversify the different investments that can use for income and retirement. So, the earlier you begin this process and this journey of retirement income, the better off you’re going to be when you actually pull the trigger and retire. Ok,


All right, so with that being said, let’s jump into the Systematic Withdrawal Strategy. Now, this is probably the most common strategy that most people have heard of. A lot of folks have heard of the 4% rule and for those of you that don’t know, the 4% rule, it’s an academic study that’s been tested years and decades.


Essentially, what it says is, choosing a well thought out diversified investment strategy and then once you retire, simply withdrawing 4% a year from your portfolio. You have a very low probability of ever outliving your assets. In fact, you have a very high probability of leaving assets to the next generation. Ok.

Systematic Withdrawal for Retirement Income


There are different variances of the 4% rule or, the Systematic Withdrawal Strategy, meaning you can say, I’m going to do 4%, but I’m going to build inflation each year. Meaning you adjust that dollar amount you’re taking out for inflation or, maybe instead of 4%, you choose 5% or, even 6% depending on your risk level. Ok,

Guardrail Withdrawal Strategy

Another strategy is choosing a % and adjust based on what the market does. For example, let’s say you chose 5%, and the market’s not performing well, then you may drop that to four or, 3% temporarily and wait for the market to recover. Conversely, if the markets doing well and you started five, maybe you even take six or, 7% out those years and take a nice vacation or, gift to charity or, whatever you want to do with it.


So, the idea is that there are different percentages that you can come up with in terms of the right withdrawal rate, and I actually did a Podcast on this, as episode number five, and so, check that out. But the idea around Systematic Withdrawals is once you’ve created an a well thought out portfolio of investments, ok, that another key is a well thought out portfolio of investments that are not correlated to one another. Meaning, you have investments that are moving in different directions at different times. Ok,


I’ll give you really high level example, let’s say 50% of your portfolio should be in equities and 50% should be in bonds or, fixed income. If we think back to 2008, 2009, equities dropped anywhere from 40 to 70%, depending on what market you’re looking into?


Ok, well bonds in 2008 during the Great Recession returned close to 6% a year. Ok, many of you have probably heard the notion of buying low and selling high because we had this well thought out investment strategy. Now granted, we have different segments of equities. We have different segments of fixed income. But just from a macro perspective, equities were down in no 809, fixed income was up. We don’t want to sell the losers. Ok,


So, let’s say we needed 10,000 a month from your portfolio. Well, a Systematic Withdrawal Strategy would create a process where we’d be selling $10,000 a month from your fixed income, as investments of your portfolio and letting the equities recover. In fact, we might actually sell a little bit more so we can actually buy up equities at a discounted price. But that’s a different story.


Now, fast forward a year later, in 2009, equities actually performed closer to 25 to 35%. Fixed income still defined, still perform close to 6%. But we want to sell the winners not the losers. So, equities were up at a far greater percentage than fixed income. So, in 2009, we actually might have a process to sell 10,000 a month from the equity portions of the portfolio. Ok,



The idea is, create the percentage of withdrawal rate that works within your financial plan, your risk tolerance and your investment strategy, and then create a well thought out portfolio so you can take the right investments at the right time, and not sell the wrong thing at the wrong time.


Now, this is great for clients that are comfortable with a little bit of risk in the market. They can stick to a process. Stay disciplined during the ups and downs, which I found is very difficult many times. Especially, once clients retire because they’re not working anymore. They can add more to their portfolio. They don’t have time to recover and they may have a desire for liquidity, and leaving assets to their heirs. Ok,


Now, the downside is, its labor intensive. I mean, if you’re taking a distribution every month, there’s going to be a selling decision every single month. You want to frankly, time it right. You don’t want to wait until the wrong time to sell an investment, if we can liquidate something while it’s appreciating really quickly. Ok, so it’s very labor intensive and if you have 12 distributions a year, if you multiply by over 30 years, that’s 360 decisions of selling that you’re going to be making throughout retirement.


Many times I have clients that are very well qualified to manage their own assets. They come to me and say, Kevin, you know what? I want to go sailing. I want to play golf. I want to spend time with my grandkids. I want to volunteer. I don’t want to do this on an ongoing basis. So, you take care of it. That’s a big burden of their shoulders.


Additionally, if you’re the decision maker, and you’re doing it yourself, if something were happen to you, who will be the one to step in and replace you? Are they qualified? Do they understand your goals and your strategy or, your risk tolerance, right? So, this is another reason why clients oftentimes hire someone like myself, a fiduciary an investment advisor to help them with the income distribution process for these Systematic Withdrawals. Ok,

Bucket Strategy for Retirement Income Withdrawals

All right, let’s move on to strategy number two. Now, there’s a lot of similarities from one and two those systematic will draw bucket. Ok, so I’m going to start with the Bucket Strategy and how it differs? But then we’re going to tie it together and explain how there’s a lot of similarities as well?



So, the Bucket Strategy, instead of looking at your assets as one portfolio, one investment strategy, one asset allocation, we are going to look at the different assets on the balance sheet, and actually come up with different investment strategies based on the time horizon in which those assets will be used for income. Let me explain that.


Let’s say, there are three accounts that you have on your balance sheet. Let’s say one is a traditional 401K or, IRA. Ok, so that would be a tax-deferred asset. Let’s say, you also have cash and a brokerage account, you know, investments that are not in a retirement account. But let’s say, you also have a Roth account or, Roth IRA or, Roth 401K, the most tax efficient asset you have on your balance sheet is the Roth account. All of these assets, all of the growth on these accounts are going to grow tax-free. Ok,



So, the idea is that we want to continue, to leverage the tax-free growth in the Roth accounts. So, we don’t want to tap those for a while. We don’t want to take them early. When I want to take them up you know, initially, we want to let those continue to cook and compound tax-free as long as possible.


Therefore, this account might be the most aggressive account on your balance sheet. Ok, so again, we want to have one overarching asset allocation and then we want to break up sub-asset allocations based on the time horizon of each bucket. Again, the Roth would be long-term assets, most aggressive, ok. Then one step down or, one notch down would be your traditional IRA or, 401K.


Now, these accounts would be subject to required minimum distributions at 72 and you’re going to have to start drawing these in retirement anyways. You might still take out a little bit of risk. Maybe retire to 60 or, 65 so you might have seven to 10 years or, 12 years until you’re taking RMDs or, requirement of distributions. We still might take on a little bit of risk, but not as much as the Roth accounts. Ok,


This would be in the middle of your risk tolerance, and then the most conservative bucket you might have would be your Taxable Brokerage Account. This would be an account. You have some cost basis in. You could take advantage of capital gains and capital losses. If you’re strategic there that’s a whole different conversation. So, this account might actually be the most conservative bucket, knowing that you’re going to be tapping into a lot of these assets at the very beginning of your retirement. Ok,


Again, we’d have one overarching asset allocation, and then we’d have sub-asset allocations in each bucket, and bucket based on the time horizons, ok. Now, the similarity to the Systematic Withdrawal is, distributions are still going to have a process of selling winners, not the losers, ok. So, if you’re tapping into that Taxable Brokerage Account, we’re going to want to make sure, we’re tapping the right investments at the right time and not selling at the wrong time. Ok,

Re-balancing is important for all strategies, but especially the bucket strategy.

Now, a big differentiator is that it’s, you’ve got to have a little bit of a process over time to rebalance those longer term accounts, because what’s going to happen is, if you’re just liquidating the shorter term accounts, the brokerage or, even the IRA, all of a sudden, then later in retirement, you’re going to become probably, more conservative as you get older, because you have less appetite for volatility. And all of a sudden, your Roth accounts super aggressive, and now you’re all in equities, right.


So, having a more of a process ongoing with the Bucket Strategy is, prudent to maintain your asset allocation and your risk tolerance. For very similar reasons as the Systematic Withdrawal, it’s great for folks that are comfortable with a little bit of risk. Liquidity is important. They may have a desire to leave a legacy. But



The big benefit of the Bucket Strategy is, more of a behavioral finance component because if we go through some volatility in the Systematic Withdrawal, your overarching portfolio is going to be moving with that type of investment strategy that risk tolerance. Whereas, the Bucket Strategy counts that you’re tapping into currently for retirement, are going to be much less volatile, much less subjected to that risk.


So psychologically, you know short term yes. We’re going through some bad times. Maybe it’s a recession or, just a bear market or, a correction. Well, your most of your equities, your growth assets are in those Roth accounts or, those traditional IRA accounts that we’re not going to be tapping for a long time anyways. Now, we already talked about the downside of it being the labor intensive, with a Systematic Withdrawal really, very similar in terms of the downsides of the Bucket Strategy.


You know its labor intensive. You’ve got to have a system and process in place that contingency plan is critical as well. If something were happen to you, you know your plan. You know, what your power of attorney or, your successor trustee. You know, if you have a trust, do they understand your plan. Ok,


So, lots to consider with a Systematic Withdrawal and the Bucket Strategy, and oftentimes, what I see personally, in my practice, is that we’ll use a combination of these two, right. We’ll create different investment strategies based on the time horizon of withdrawals, and then we’ll create a system for withdrawals on each of those accounts, based on which one we’re tapping for income that year. The final approach is the Flooring Approach.

Flooring Approach for Retirement Income

In general, most people should have Social Security as a floor for income essentially, a guaranteed annuity provided by the government. Ok, now, some folks might have a pension, whether they work for the state or, military so they might be lucky enough to get a pension. Many of us do not have a pension. The income gap that we’re going to be solving for is going to be either created from withdrawals from investments or, creating from an annuity income stream or, a private annuity.


For those of you that don’t know what a private annuity is? It’s essentially a pension that you create with your own assets. Let’s say, you had a 500,000 IRA, and you want to turn that into an annuity, you would go to an insurance company and say, hey, here’s 500,000. How much are you going to pay me for the rest of my life just like Social Security?


They would quote you for monthly income that you’re guaranteed to never outlive, and that’s the benefit to it. It’s very simple. There’s no maintenance involved. You’re basically, delegating the investment process to the insurance company which hopefully is stable and financially secure, and they’re going to guarantee you a check for as long as you live.


So, if you have longevity in your family, maybe your parents lived a long life, your grandparents lived a long life, and you keep you’re an Iron Man or, you keep in really good shape. You might live 30 or, 40 years in retirement, an annuity could solve for that longevity risk that you might have. Ok,



It’s also great for folks that are very anxious with market swings. So, for those first few strategies, you’re going to have to be comfortable with a little bit of risk. But I had definitely run into people that literally, they wouldn’t be able to sleep at night. If they know their portfolio is subject to volatility in retirement, ok. It’s just a behavioral finance issue.


The idea of a guarantee checks that’s not going to be subject to stock market swings or, changes in the economy. It’s very comforting for certain folks. So, this is a great profile for someone who could be a great fit for this Flooring Approach. Now, the downside is the lack of liquidity on these accounts, so you couldn’t get at that $500,000 Ira, if you turn that into an annuity. Ok,


You couldn’t call the insurance company and say, what I changed my mind, I want to tap into my principal. Most of these contracts do not offer this. Additionally, there’s inflation concern because we’re in a relatively high inflation environment, at least currently, and expect it to at least be in the near term. Oftentimes, these annuity payments are not going to keep pace with inflation very well, and may not increase at all each year, maybe a static, a dollar amount that you’re getting for life.


If you live 30 years, you can imagine how that’s going to impact your buying power every month or, every year that goes by with your monthly income. The final downside would be legacy.


If there’s not a big concern of leaving a legacy to the next generation, an annuity could be a great tool. However, if it is important to you, and you do want to leave assets to let’s say, your children or, grandchildren, many of times these contracts are going to stop after you pass away or, if you’re married, your spouse passes away. Ok,


So hopefully, this is helpful. Again, these three approaches can be combined, ok. Oftentimes, what I see is, let’s say, client needs 70,000 of fixed expenses, and let’s say, Social Security takes care of 35,000 of that so, we might want to say, that 70,000 is your essential needs for cash-flow, and maybe your spending a little bit more above that for things like, travel or gifting.


What we might do is say, hey, let’s take a portion of your assets and turn that into a guaranteed life annuity to get you very close. If not at that 70,000 a year number between Social Security and your annuity, and then the remaining assets for your other discretionary expenses like, travel or, gifting or, home renovations, we can use from your investments, and psychologically that sometimes works.


So, this combination of the Flooring Approach with a Systematic Withdrawal with a Bucket Approach is very common. But again, plan early. Don’t wait until you’re about to retire, to create these different buckets. Create these different opportunities and avenues in which to draw income from.


So, the earlier you can start this process, the better, a big part of my planning for younger clients, that are in their 40s and 50s is to create the right savings rate for each of these buckets, to set up optimization from a tax standpoint, so we can be strategic. And once you get to retirement, based on who’s in office or, what the legislation looks like? What the tax code looks like? We can create a plan that works for that environment and then navigate the changing environment throughout retirement.



So again, hope you all found this helpful. Again, if you have any questions about your situation or, want to talk one-on-one or, are you interested about working with me one-on-one personally, just go to my website, and again, subscribe, and continue to listen to our Podcasts. We always appreciate you. Until next time, thanks everybody.


Episode 6: 4 Tax Strategies As We Approach Year End


4 Tax Strategies to consider before the year ends

4 Tax Strategies As We Approach Year End


Kevin Lao  00:12

Hello, everybody, and welcome to the Planning for Retirement Podcast. My name is Kevin Lao. I am your host. I’m also the Director of Financial Strategies at my firm. Imagine Financial Security. We provide Financial Planning Services for those all over the US remotely, and also in Florida locally. If you’re interested to learn more about my firm, you can go to my website and very excited to bring this episode today on 4 Tax Strategies as we approach the year end.


Just a quick disclosure, this is not tax advice or, investment advice. So, please consult your own attorney, financial planner or, CPA to see what strategy is most relevant for you. But I do want to hit on these topics today. As we approach the year end, not all of them have to be done by the year end, some do. But some we have until April of next year before tax time.


So just wanted to bring these up as many of you are thinking about the holidays and spending time with family. We are thinking about how to save our clients and taxes? So, without further ado, I’m going to introduce the four concepts we’re going to discuss today and we will dive in.

The Four Tax Strategies to Consider Before the End of the Year

So, first one is Maximizing Retirement Contributions. Second is Health Savings Account contributions or, HSA contributions. Third is Tax Loss Harvesting and fourth will be broken into two sections. The first is Charitable Donations using a Donor Advised Fund and then 4B would be Charitable Donations using a Qualified Charitable Distribution, also known as a QCD.

Max out retirement contributions!

So, why don’t we start with Retirement Contributions? This is an obvious one. So things like 401K’s, 403B’s, 457B plans, even regular IRAs or, Roth IRAs, taking advantage of the maximum contribution or, the maximum you can contribute to these plans. I bring this up because I can’t tell you how many times I talked to folks that say yes, I’m maxing my 401 K plan.


I look at their pay stub and I look at their year-to-date contributions. And they are maxing the amount of their employer will match. Which oftentimes might be 3% or, 6% but they’re not maximizing their contribution, which for 2021 is 19,500 if you’re under 50. If you’re 50 or older, you can put in a catch-up contribution of 6500 for a total of $26,000 per year.


Yes, we’re in December, we’ve got probably two pay periods left to make contributions. You might have a year-end bonus. So, those are opportunities, you can essentially try to backload those contributions into your 401K or, 403B plan or, 457 plan to try to get either at the max contribution or, close to the max contribution, ok.



Now, if you don’t have a year and bonus, if you’re just getting your buy weekly pay-checks. Let’s say you’ve got some money sitting in savings, not really earning a lot of interest, maybe 0.01% interest. You might want to consider, hey, live on that savings for a month, ok. And instead of getting your pay-check deposit into your bank account, try to contribute either all or, most of your pay-check into those retirement plans.


So try to backload and try to get closer to that maximum contribution, ok. It might be painful from a cash flow standpoint, but you’re going to take advantage of utilizing that savings, that’s not doing anything for you, and getting in into those retirement plans that are growing tax advantage, ok, don’t just think Tax Strategies being Tax Deductions.


If you have Roth options like Roth 401K’s or, Roth 403 B’s or, if you can qualify for a Roth IRA, strongly consider that. I think we’ve been trained to deferred taxes and I see many people run into what I call the Tax Trap in Retirement. They turned 72. They have all this money saved in their qualified retirement plans and they’re having to take all these distributions out, even though they don’t need it for income.


Therefore, pushing them in a higher Tax Bracket maybe paying more for Medicare premiums so, strongly consider. Does it make sense for you to use a Traditional Retirement Plan or, a Roth Retirement Plan or, a combination thereof?


No one says you have to do 100% of one versus the other. You can use combinations of both to essentially create some tax diversification on your balance sheet. But the key is, try to get as much money as you can, before you’re in on those 401K, 403B plans and then prior to April filing taxes for next year. You leverage those traditional IRA contributions or, Roth contributions, ok.

Max out HSA contributions!

All right, HSAs or, Health Savings Accounts probably, one of my favorite tools to utilize for retirement planning, and actually just wrote a blog, post on this today actually, and so if you want to read that and to learn more details about HSAs and how to utilize them? You can go to my website and go to my blog.


Let me just explain what an HSA is briefly? And HSA is essentially an account that you’re eligible for. If you use a high Deductible Health plan, ok, so High Deductible Health plan, essentially your Deductible is going to be a little bit higher than a regular Health Care plan, ok, but you can contribute to an HSA. And you can contribute $3,600 If you’re an individual and 2021 or, 7200.


If you’re in a Family plan, and you could recognize a tax deduction for those contributions so, in my opinion, for many people, if you’re using one of these high Deductible Plans, and you’re relatively healthy, that tax deduction that you can take advantage of by contributing to an HSA. Oftentimes either washes or, put you in a more Beneficial Tax Situation than having a lower deductible.



Obviously, you can’t predict Health Care costs. You might be paying a little bit more out of pocket in that year. But the true benefit is, you’re getting this money into this account. You’re getting the Tax Deduction for these contributions. What you can do is, you could reimburse yourself for Health Care costs. Either that you recognize throughout the year or, in future years, ok,


The growth on these assets, which you can invest in a basket of securities, like ETFs or, Mutual Funds, the growth on those assets are tax-free and the distributions are tax-free as long as you’re using it for Qualified Health Care expenses. Now, the definition of Qualified Health Care expenses is quite broad. Just do a Google search and you’ll see IRS resources, and other HSA resources in terms of what constitutes as a Qualified Health Care expense. It’s very broad. So, even dealt dental vision, routine check-ups, and surgeries.


So, the true power in these vehicles, in my opinion is, yes, you get the tax deduction today. You can use it to reimburse yourself today. But the true benefit is, if you can let that money compound long-term, ok. Particularly, to let that continue, to grow for Retirement Planning, maybe, you’re letting this thing compound for 10 years of contributions here, and you’re investing it in a well-diversified strategy and you’re growing those assets over time tax free.


You can build up a substantial nest egg to utilize in retirement, to help pay for health care expenses which is estimated in todays until 2021, a 65 year old couple is going to spend $300,000 in retirement on health care costs,


Why not spend it from tax-free buckets as opposed to— let’s say, a traditional 401K or, a traditional IRA, and you have to pay taxes on those distributions, ok. The best part about this is there’s no income phase out. Unlike other traditional IRAs or, Roth IRAs, there’s no phase out for income. So, you can get that deduction and contribute to it regardless, of what that adjusted gross income is?


Just a quick side note, a little bit different than an FSA. Many people have FSA or, flexible spending accounts available. FSA is needed to be emptied by the end of the year. So, just a quick side note, if you have an FSA, make sure you’re taking advantage of those distributions and reimbursing yourself for any healthcare expenses or, go to the doctor and do some things that you were putting off, and take advantage of those dollars in the FSA that you haven’t spent yet, ok.

Tax Loss Harvesting

We talked Retirement Contributions. We talked about HSA contributions. Now, let’s talk about Tax Loss Harvesting. It’s a somewhat complex concept, but let me try to simplify it. When you invest in a security whether it’s a Stock Bond, Mutual Fund and ETF, and these are outside of a retirement account, ok.


So, Retirement Accounts, you get the benefits of tax deferral, and if you sell anything in those, you’re not going to trigger any taxes unless you take a distribution, ok. A non-retirement account or, a non-qualified account, you could still buy those securities individually or, jointly hold them in that account, and you will either have a gain or, a loss, but you’re not going to pay any taxes until you sell that investment.


Unless there’s interest or, dividends that kick off. You’ll get a 1099 each and every year but from a capital gain or, loss standpoint, once you sell something, then you recognize that gain or, loss, ok. Let’s say you invested $10,000 and now it’s your investment is $20,000. Let’s say you sold that investment and you held that instrument more than a year. You would pay a long-term capital gain.



If you held it less than a year you would pay a short-term capital gain. Short-term capital gains you’re taxed at your regular income bracket. Whereas a capital gain you’re either in 0%, 15% or, 20% capital gains bracket depending on what your income is. But generally speaking, you’re probably in a lower tax bracket with your long-term capital gains, than you are with your regular ordinary income.


Ok, there’s definitely a benefit of utilizing these instruments outside of retirement accounts because they’re liquid. You don’t have to wait till you’re 59 and a half and to tap into those dollars. Allows you for more contributions over and above those Max contribution accounts on your 401K or, IRAs, ok.


So, throughout the year, you might have experienced some assets that grew in value, but you also might experience some assets that lost in value if you have a well-diversified portfolio. Not everything is going up at the same rate, and some might be non-correlated to one another. If you have losses in your portfolio, you might consider actually, selling that investment at a loss to take advantage of that for tax purposes.


What you do with that loss? Let’s say, you had a $10,000 loss on a different investment and you sold it, and then you had a $10,000 gain on another investment that you sold, that would essentially wash out that that gain, and you would not have any taxes due. Now, let’s say you didn’t have any gains and you just sold something at a loss that $10,000 where you can recognize up to $3,000 as a tax deduction today, and then carry forward the rest of those that loss in future tax returns.


Ok, and in order to maintain that same exposure, and that and that investment, let’s say that investment made sense for your long-term goals. So, you wanted them to continue that exposure, you might consider selling that one, and replacing it with not the same one, but something that’s very similar has similar exposure into maybe a sector or, an area of the market that you want exposure to base on your financial plan.


It’s a great strategy to take advantage of not even just at the year end, but throughout the year. Markets aren’t just volatile in December. They’re volatile throughout the year. In times, like in the third quarter when the Delta variant first rear to ted or, now it’s the Omicron, there’s sell-offs in the market in different areas, and we’re constantly looking for opportunities, for clients that have taxable accounts, to actually recognize some of those losses for tax purposes, to either offset gains or, reduce taxable income and carry forward any losses in the future as well.



Again, make sure you’re talking with a professional this one. There’s a little bit complexity to different rules around, what a wash sale might be? So, you really got to consult with your financial planner or, advisors before you make any decisions with your investment portfolio.

Charitable Donations!

Ok, fourth and final strategy, Charitable Donations. This is the time of year to be charitable, and so many people are thinking about the causes that are important to them. But they also might be thinking, hey, I want to donate to these causes but I also want to recognize some tax benefits. So, I’m breaking this down into two parts.


First would be Donor Advised Funds, and then the second is going to be Qualified Charitable Distribution. Donor advised fund, what is a Donor Advised Fund? It’s essentially an account that you can contribute to most financial institutions offer these and you can contribute really, any dollar amount or, even contributed securities into a Donor Advised Fund. It’s essentially a charity. Ok, that can then benefit as many charities as you’d like.


So, if you had, let’s say, a few $1,000 sitting around, you could either donate it directly to charity or, you could donate it to a Donor Advised Fund, and actually, invest those dollars in a basket of securities for future growth, and either donate to charity or, charities that year or, in years, in the future.


Here’s why this is beneficial from a tax standpoint is. Yes, if you had $10,000 you could donate it directly to charity or, you could donate it to a Donor Advised Fund. It doesn’t make a difference. However, if you are taking a standard deduction, which for 2021, if you’re single, it’s 12,550. If you’re married it’s 25,100.


If you donate to charity, and that donation does not put you above the standard deduction, meaning you’re not itemizing your deductions, that doesn’t really do anything for you from a tax standpoint. You’re not actually getting a tax deduction for it, because you already had the standard deduction that everybody else takes advantage of, ok. That takes the standard deduction.

Donor Advised Fund (DAF)

So, the Donor Advised Fund essentially allows you to front load contributions into this Donor Advised Fund to take a tax deduction now, and contribute to that charity or, charities in the future. Ok, so let me explain how that would work?


Let’s say you normally contribute $5,000 each year, but 5000 hours doesn’t put you above the standard deduction limits, so therefore, you’re not taking it. You’re actually not technically taking a deduction for it. What you might do is say, hey, you know what? I’m going to do this for the next decade.


Ok, I’m charitably minded. I’ve got some cash sitting around maybe, you sold a business or, a property or, you had a great year and you had a great income year, and you’re sitting in some savings. Maybe you take $50,000, which is 10 donations over the course of 10 years of 5000 hours per year, 50,000 and put it into the Donor Advised Fund.



That will for sure put you over this standard deduction limit, right, give you that tax deduction today, ok. Allow you to essentially either turn around or, write a check for $5000 to that one charity, you’re going to donate to this year, and then the remaining 45,000, you can invest and actually have future growth.


Ok, if you obviously invest wisely, there’s no guarantee of future growth. But you could have future growth on that account, to even give more than $45,000 into the future to that charity or, charities. It’s also not limited to one charity. Like I said, the Donor Advised Fund can benefit as many charities as you’d like, as long as it’s a qualified 501 C3. You can’t gift to like a private foundation or, your grandchildren’s college education.


It’s got to go to a Qualified Charity, but essentially creates a lot of flexibility and allowing you to really front load those donations in a tax year. You might want to get that deduction, when normally wouldn’t have received that deduction, but also allows you to maintain control so you can give to that charity over a period of time, and actually, still invest those dollars and maintain control of those dollars for charitable purposes.


Now, I say control, technically, it’s an irrevocable contribution. You can’t say, hey, you know what, just kidding. I want to take it back and use it for buying a boat. You can’t do that. It’s got to be Charitable Fund. It’s got to go to Qualified 501 C3 organizations and if it does, you get Tax-Free Growth and Tax-Free Distributions on that Donor Advised Fund, ok.


A great tool to utilize, if you charitably minded, you’ve got some cash sitting around. Maybe you’re in a tax year or, you want to get a deduction but just writing a check to one charity is not going to move the needle for your itemized deduction purposes. So, consider the Donor Advised Fund.

Qualified Charitable Distribution (QCD)

Second strategy, Qualified Charitable Distribution. This is for those that are 72 or, older and your RMD age are Required Minimum Distribution age. So, for those of you that don’t know, when you turn 72, the IRS says, hey, you have to take a certain percentage, out of all your qualified plans. Your IRA’s, 401K’s, 403B’s, 457s, really anything that’s not a Roth IRA, it pretty much has a required minimum distribution.


Well, let’s say that $10,000 doesn’t similar example as the Donor Advised Fund. Let’s say it didn’t put them over or, doesn’t put them over that standard deduction limit. So, donating $10,000 is not going to itemize their deductions. Therefore, that 10,000 is not going to move the needle to reduce their taxable income.


So, the nice thing about the Qualified Charitable Distribution is you can donate up to 100% or, $100,000, of your Required Minimum Distribution, if you donate it directly to charity. Ok, so let’s use the example, someone is charitably minded, let’s say normally, they have to take $50,000 out for the Required Minimum Distribution, but they normally give $10,000 to charity.



Well, if it’s coming from a Qualified Charitable Distribution, instead of taking that $50,000, for your RMD, you say, hey, go to your financial institution. Say, hey, you know what? Give me $40,000 and then the other 10,000 that I need to satisfy for this year. Donate that directly to a charity or, charities. You can name as many as you’d like.


So essentially, what that does, it satisfies your Required Minimum Distribution but that amount that you donate to charity is not included in your adjusted gross income. So, it’s essentially better than taking a tax deduction, because it doesn’t push you into a potentially a higher tax bracket and potentially could even save— it might even keep you on a lower Medicare premium schedule, ok.


It doesn’t matter if you itemize your deductions or, take the standard deduction, you would have had to take that $50,000 that Require Minimum Distribution regardless, and if you’re charitably minded, donate it directly from your IRA. And again, it has to come from a traditional IRA. It can’t come from a 401K plan or, a 403b. So, if you have this goal, you might even consider, if you’re eligible to roll those funds into a traditional IRA, and then turn around and do that QCD or, Qualified Charitable Distribution. Again, that has to be done before calendar year end.


So hopefully, this was helpful. Again, we talked about Retirement Contributions. We talked about HSAs. We talked about Tax Loss Harvesting. We talked about Charitable Donations via the Donor Advised Fund, as well as the Qualified Charitable Distribution. I hope everyone found this helpful. If you have any questions or, if you if you’re curious about, how to work with my firm again?


Go to my website There’s plenty of information there and how to get in touch with us. But again, hope you found it helpful. And subscribe to us if you like what you heard. Give us a five star review, if you like what you heard, and I always like to hear your feedback. Until next time, and hope everyone has a wonderful holiday season. Take care.



Episode 5: What is a safe rate of withdrawal in retirement?


What is a safe withdrawal rate in retirement?

What is a safe rate of withdrawal in retirement

Kevin Lao 00:12

Hello everybody and welcome to the Planning for Retirement Podcast. I’m Kevin Lao [phonetic 00:15]. I’m your host. I’m also the owner of Imagine Financial Security, a fee [phonetic 00:22] only financial planning firm based here in Jacksonville and St. Augustine, Florida. Just a quick note, this is not intended to be financial advice so please consult your own advisors or financial planning needs before making any decisions on your own.

But today’s topic is super exciting for me personally because it’s super relevant especially today. But it is creating a safe withdrawal strategy or a safe withdrawal rate during retirement. And so the reason this is exciting for me is because typically folks I work with are planning for retirement or they’re recently retired and they’re trying to navigate a 20 or even 30 plus year retirement plan adjusted for inflation, which is a big concern for just about everybody now. Given the recent news, June of this year 2021, where the rate of inflation over the last 12 months has been 5.4%, the highest it’s been since August of 2008.

The 4% Rule

So naturally, people will do a little bit of research on their own, and they’ll find the 4% rule. But the problem and this is… I think a fine guideline. But the problem with it is that everybody has unique objectives. Everybody has a unique risk tolerance for their investment strategy. So the 4% rule should not be followed by everybody. And in fact if you follow the 4% rule over the last 10 years, your net worth is probably grown, which is fine if that’s your goal during retirement. But some people want to enjoy retirement, they want to spend in retirement, they want to travel, they want to gift to their grandkids, they want to pay for their college, they want to enjoy their lifestyle, they want to… they don’t want to feel like they’re just living you know paycheck to paycheck. So to speak in retirement years, they want to enjoy what they’ve accumulated. And what I’ve found is that many folks are very concerned about outliving their assets, and therefore, they kind of tighten up their spending in retirement. And so one of the things that I like to do for all of my clients is, once we’ve matched up their financial objectives and their risk tolerance and their financial goals, coming up with the rate of withdrawal [phonetic 02:25] that’s comfortable for them.

And ultimately that helps free them up to spend what they’ve worked hard to accumulate, and enjoy retirement, be happier in retirement, sleep better at night and so that’s what I’m all about. So what I’ve done is I’ve created a formula that should be followed… I think by just about everybody and every financial advisor out there. And certainly at our firm, we follow this formula. And the formula is very simple.

Our safe withdrawal rate formula

It’s financial goals plus risk tolerance minus income sources minus risk intolerance equals your rate of withdrawal. I’m going to repeat that again. Its financial goals minus income sources minus risk tolerance minus your income sources equals rate of withdrawal.

It starts with your retirement goals!


So I like this, because it starts with financial goals. And that’s what we’re all about here. Given we are a financial planning firm. First, we always start with the financial plan and the financial objectives. And so what I find is that people typically have three categories that they fall into as they retire and that’s replacing their income but preserving their principal. And this could be just for emergency purposes you know for health care costs down the road or long term care. Maybe they want to preserve a little bit you know to leave to their children or grandchildren. Maybe that’s not their primary goal. But it’d be nice to do that. But they like the security of preserving principal. But they want to say a nice withdrawal rate that still can replace their income, their pre-retirement income. So that’s the first category people typically fall into.

The second category is maximizing the wealth transfer or the legacy goal but still replacing income. Now, these are folks that… Yes, they want to replace their income but they also want to potentially grow their assets if possible over time to leave behind to their kids or grandkids maybe even a charity. So that’s another category… the second category that I find people fall into. The third category, which is really fun [laughter] in terms of working with these clients, is maximize spending and leave zero or bounce your last check so leave nothing behind. And this is obviously a little unnerving as a planner because we have to have an assumed end of plan dates meaning a certain age where they’re no longer living, and if they live past that date. We’re kind of screwed because we assume that they’re going to have zero at that point in time… so a little bit unnerving. It’s certainly something we have to kind of leave a little bit of a buffer for. But I typically find you know folks also fall into this category as well. And sometimes there’s a combination of these three categories but these financial goals are going to drive the random withdrawal.

Do you want to maximize your intergenerational wealth goals…or maximize retirement spending?

So for folks that want to maximize the legacy wealth [phonetic 05:13] transfer, their rate of withdrawal might be a little bit smaller or lower than someone who wants to maximize their spending and leave zero behind. So if we’re going to use the benchmark of 4% let’s say someone who wants to maximize the legacy and what’s left behind, they may want to err [unintelligible 05:30] at 4% or maybe even 3% a year in terms of the rate of withdrawal versus someone who wants to maximize their spending might be even closer to 5, 6, 7 or 8% a year, on average throughout the duration of retirement. Now obviously for those folks over time, what’s going to happen is your right of withdrawal is going to go up because you’re going to have fewer years to live. And so if you’re only taking a percentage of your portfolio for a year… you’re probably not going to burn through all your assets by the time you pass away.


So as you get older your right of withdrawal is going to go up obviously take into consideration, you want to have a buffer for the unexpected. But again, the financial goals are going to drive significantly the rate of withdrawal impact. But it’s not the only thing like we talked about. The second thing is the risk tolerance. Now someone who’s more conservative or concerned about market volatility is probably going to have a lower targeted withdrawal rate based on their financial objectives. Now, let’s use an example. Let’s say they want to preserve principal, okay, and they are very conservative with their investment strategy. They don’t want to see a lot of market fluctuations. And now that they have retired or they’re very close to retirement, the estimated return on a very conservative portfolio is less than 4% a year just because again, we’re now in this prolonged interest rate, low interest rate environment.

You know… yes, Powell has announced that interest rates could tick up now before 2023. But still, we’re in a very low interest rate environment, the 10 year sits right now at about 1.4% so there’s not a lot of places to get yield. So those folks that are very conservative, might only be getting 3 to 3.5% a year on average returns. So in order to preserve the principle, they should only be taking 3 to 3.5% a year as a rate of withdrawal. Conversely, as someone is more comfortable with taking risks you know maybe they’re more comfortable being in an equity position to the portfolio, maybe closer to a balanced portfolio or a 60, 40 blend, which is a very popular mix for my clients that are retired at drawing income, the estimated returns there, might be closer to 5% a year. So for those folks that want to preserve principle but are comfortable with being a little bit more aggressive in their accounts, they might be closer to that 5% a year in terms of rate of withdrawal.

Other income sources play a role…

So again, the financial goals work in conjunction with the risk tolerance in order to create that ideal withdrawal rate. Now the third part of the equation like I mentioned, let’s not forget about it, is the income sources. If you have Social Security coming in maybe also a nice pension whether it be from the military or the government or a company you work for a long period of time, you may not need a lot of money from the portfolio. So therefore you have more flexibility to figure out you know do you give this money during lifetime? Do you do some Roth conversion strategies to be more tax efficient in your legacy wealth transfer down the road? But this is a key component when figuring out the rate of withdrawal because for those folks that don’t have a pension maybe they just have social security and then their investment assets, they might need to rely a little bit more heavily on their investment portfolio to replace their income.

Okay so in essence that also might drive your risk tolerance in retirement. If you are relying solely on your investment portfolio and Social Security, you may not be very comfortable with a lot of market volatility in your investments and therefore that will drive your rate of withdrawal. On the flip side, if you have a nice pension, social security, and that’s covering a lot of your expenses… you may not be as concerned about short term volatility and therefore you might be more comfortable with taking on a little bit more risk in the portfolio.



Okay. And that will help potentially with that legacy wealth transfer goal that you might have, or charitable goal that you might have. Which brings me to another point I was reading an article the other day, beginning of July sometime and, the headline was at the end of this year, the first… at the end of this year’s first quarter… I’m sorry… Americans aged 70 and above had a net worth of nearly $35 trillion dollars according to the Federal Reserve data. $35 trillion of net worth for Americans ages 70 and over. There is no way Americans 70 and older are going to spend all of that money for the next however many years they live.

Okay, so there’s going to be this massive wealth transfer from now until they the baby boomers start to leave these assets to the next generation. I talked about this in an earlier podcast, the tax trap of these traditional 401ks [phonetic 09:35] and IRAs and the way they’re going to be treated now that the inherited IRAs are now going by the wayside, and there’s going to be a significant tax penalty leaving these assets behind. What I will tell you is if you have a goal to maximize your legacy transfer, and you are in this category of… you’ve accumulated more than you’ve needed for retirement, you’ve done a good job saving and investing. Be smart now from a tax standpoint… okay, a lot of the tax reform that was put in force in 2017 you know coming off the books in 2025… be smart for the next 3, 4, 5 years and do strategies with your tax plan or with your advisor to convert some of these assets into more tax efficient strategies because you know tax rates are not going down. Let’s put it that way. You know that’s… I don’t think that’s a bold prediction there. So be smart with those assets that you’ve accumulated especially in these retirement accounts… these qualified retirement accounts, 401ks, 403bs, IRAs, before tax reform rolls off the books. And frankly it could change earlier you know there’s already about you know changing those tax you know tax rates earlier than 2025.


So be smart now but again, let’s recap. Financial goals plus risk tolerance minus income sources equals a safe rate of withdrawal. I hope this is helpful for everybody. I’m happy to talk to anyone who has questions about their own situation or you know… wants to you know run something by me you can always contact me directly at If you like this podcast, please subscribe. Maybe even leave a review only if it’s five stars, and hopefully you can tune in for more episodes to come. Thanks, everybody.