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Category: Podcast

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 imaginedfinancialsecurity.com 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.

 

03:03

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 imaginefinancialsecurity.com 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.

 

05:59

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.

 

09:38

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.

 

12:11

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.

 

14:58

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.

 

17:53

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.

Summary

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 imaginefinancialsecurity.com. 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!

03:14

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.

06:01

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.

 

09:20

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.

Summary

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 [email protected]. 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.

Episode 4: Maximizing Social Security Benefits for Retirement

 

Maximizing Social Security in Retirement

Maximizing Social Security Benefits for Retirement

Kevin Lao 00:12

Hey everybody welcome to the Planning for Retirement Podcast. I’m Kevin Lao, your host. Social Security is a big topic nowadays especially because people are living longer and pensions are pretty much going by the wayside. And I oftentimes get the question from clients you know… Kevin, when should I take Social Security to maximize my benefit? And so I decided to do this podcast today to address that question but also to challenge the traditional method of thinking with regards to claiming Social Security benefits. And so I hope everyone finds this helpful today. If you like what you hear, please subscribe to our podcast. And be sure to tune in for more episodes to come. So let’s dive in.

Is Social Security In Trouble?

So I hear a lot of things about people talking about Social Security being bankrupt by the time 2041 comes around. And you know I definitely understand that concern you know there’s a projection that’s been done, where if there’s no changes that happen, so security is set to run a deficit by that year. But you know obviously what’s going to happen is they’re going to change the way benefits are paid, they may means test it, they might change the ages in which you can start drawing Social Security, they also very likely might raise taxes to pay for the Social Security deficits. So there’s a lot of things that are likely to be done well before 2041. But the reality is social Security represents 40% of all retirement income for individuals aged 65 and older. So it’s naturally a very important part of the plan when I am working with clients to figure out you know what is the proper funding strategy and using social security?

There is no RIGHT or WRONG answer, because we don’t know the exact life expectancy

So what I will first say is there’s no right answer to this. And you know I typically joke with clients and say if you have a crystal ball and tell me exactly when you’re going to pass away I can tell you exactly when to don’t [phonetic 02:08] draw Social Security. And you know if you look at life expectancies, and you know, people living longer and you look at maybe your own genetics, your own health, the natural breakeven point that people think about is… Well Kevin, if I delay Social Security, what is the point in which I will breakeven? Meaning I will be receiving more in cumulative benefits than if I were to draw Social Security at my full retirement age? So I’ll answer that question. But what just for those of you that don’t know social security, your full retirement age will vary between age 65 and 67, it depends on when your year of birth is. And you can look that up by doing a Google search or going on the IRS website or social security.gov, ssa.gov. You can early… you can draw Social Security early at 62. And then you can also delay Social Security until 67. So if you take it at 62, your benefits probably going to be about 35 to 40% lower per month. And if you were to take it at your full retirement age and if you delay it until 70… your benefit increases about 8% per year after you hit full retirement age. So for example, if your full retirement age is 66 and you delay it until 70… you can increase your Social Security benefit by 8% a year for roughly four years, and essentially at 70… You will receive your maximum Social Security benefit possible.

What’s the break even for delaying Social Security?

03:41

So again, the natural inclination is for people to think about taking Social Security at 70 in lieu of full retirement age or of course, early retirement age. And the reason is because many financial professionals are pundits on the media, they talk about delaying until 70 because you’re going to get the most bang for your buck. So the breakeven point that I was referring to earlier usually happens around 82 to 83. So if you retire at 66, and you decide to say… hey you know what, I’m going to delay my Social Security until 70. By the time you hit 82, 83, you would have received more and cumulative benefits by delaying it until 70 than if you were to take it at your full retirement age. So again, I go back to the crystal ball, if you think… hey you know I’m very likely to live longer than 82 or 83. I have longevity in my family. I’m healthy, I keep in shape, you know, by all means. That is one method of thinking is to say… Hey, your maximum benefit lifetime is going to be recognized by deferring Social Security until 70. So that addresses the first. Again, this is the… what I would call the traditional method of thinking when it comes to drawing Social Security. But there are two other things to think about when drawing Social Security at your full retirement age or early or late and I want to address that next…

Consider longevity in your family history

Alright, the second thing I want you to consider outside of longevity when deciding on when to take Social Security is your required withdrawal rate from your investments. So what I mean by that is if you retire at let’s say 65, and you would like to not take Social Security, you’re more than likely going to have to take some sort of withdrawal from your retirement accounts whether that be a 401k or an IRA or an investment portfolio unless you have a really nice pension that’s going to take care of most of your expenses. But if you’re like most people that I talked to, they don’t have a pension or the pensions may be really small. And they’re going to need to take some money out of their investments, whether it’s retirement or non-retirement accounts to meet their living expenses.

How does delaying Social Security impact your safe rate of withdrawal in retirement?

05:51

So what you need to do is figure out how much income you need to maintain a standard of living that you’re comfortable with. And you’re going to need to figure out how much you need to withdraw from your portfolio in order to meet that need. And again, if you’re not taking Social Security, most if not all, of your income is going to be coming from your investment portfolio. And so if you’re required to withdrawal rate by delaying Social Security is let’s say 7% a year or 8% a year or 9% a year, it’s going to be very difficult to maintain that rate of return in your investment portfolio to meet that required withdrawal rate. So in essence, what’s going to happen in those early years in retirement is you’re going to be depleting your principal early on, which I would argue is a big risk for clients that are… are planning to live in long retirement or long life in retirement simply for the fact that you’re going to deplete your liquidity over time. And if you need that liquidity down the road for health care expenses or long term care costs, which are rising at an extremely rapid rate that’s something you really… really want to consider again, the impact of delaying that Social Security.

Let’s say your withdrawal rate is much lower even by delaying your Social Security let’s say it’s only 3% or 4% a year then by all means certainly consider delaying that social security payment because your required withdrawal rate is within what I would call a safe withdrawal rate, anything less than maybe 4.5%, 5% if you’re a little bit more aggressive. But 4, 4.5% is a safe withdrawal rate. So again, think about your required rate of withdrawal. And if it’s unacceptable, meaning it’s outside of that safe withdrawal rate, you might want to consider taking Social Security upon your retirement whether that’s at 62 or 64 or 65 or your full retirement age, take that Social Security because ultimately what that’s going to do, it’s going to reduce your required withdrawal rate from the portfolio to preserve those assets long return.

 

Especially if you are concerned about your health or longevity, you may not think you’re going to live longer than 82 or 83… you can always pass your portfolio on to your beneficiaries. You can’t pass security on to your beneficiaries. Now I know there’s rules if you’re married you know your spouse can take either their benefit or your benefit but I’m talking about an inheritance can be achieved through your investment portfolio cannot be achieved through passing on a Social Security benefit. So hopefully that is helpful in helping you make that decision of do you take it on time? Do you wait until seven years you take it early? Because many times people think well if I delay it till 70… I’m going to maximize my benefit. And ultimately they don’t realize their burn rate on the portfolio is going to severely deplete their assets over time, which can then impact your legacy goals as well as liquidity on their balance sheet to pay for those unexpected expenses in their old age.

Will you ever rely on Social Security?

08:58

Another thing to consider when making this decision is whether or not you need social security at all for income. So what I mean by that is if you are retired and you do have a pension or investment income or real estate income and it turns out your required withdrawal rate is 0% from Social Security. So, so many people will think that… hey you know what the natural reaction is to delay social security because they don’t need the income. So might as well get the best bang for your buck or the highest bang for your buck by deferring it until 70. Now I do want to challenge that method of thinking because the alternative to delaying it until 70 is actually taking Social Security on time or even early and using that income not for your expenses but to invest in the market long term.

Claim Social Security and invest it!

So by doing so, the benefit there is you actually build up this liquidity on your balance sheet that otherwise wouldn’t be there because you’re not taking social security income… you don’t have that surplus cash flow coming into the picture. So you’re building up this liquidity on your balance sheet to either a, use to pass this on as a legacy to your to the next generation or your beneficiaries or b, use for unexpected expenses you know like medical costs or long term care expenses or c, just use for return you know whether it’s travel or big ticket items that come up like home renovations or maybe it’s a major purchase like a boat or a second home or rental home. So I did a calculation on this one. And I wanted to see… well, if someone took social security let’s say at 65 and they retired at 65 and they took that income and just simply invested it at let’s say 5% a year. And another situation they took it at 70 and invested at 5% a year, what would the difference be in the portfolio? what I found is that the break-even point happens somewhere around 91 or 92 meaning that you would have to live at least until 92 to have a larger investment portfolio by taking such security at 70 and reinvesting that cash flow every single month earning 5% a year versus if you took it at 65. So in other words, for about 25 years, you’re much better off taking it at 65. And investing the difference because you’re going to have more assets on your balance sheet to use for unexpected expenses or pass on a legacy if you don’t make it until 91 or 92 like a lot of people. So again take this into consideration even if you don’t need so security don’t automatically think… hey, I’m going to delay it until 70. Because what you could do is take the Social Security now put it away, get it diversified, invested for the long haul, and use this as an asset and leverage on your balance sheet for the long term.

Summary

I hope you all learned something today and feel better prepared for the social security decision. Remember, there are many tax investment and planning considerations unique to each situation so please consult your own advisors before moving forward. I have a financial planning firm here in Florida and we can help with this. We serve clients here locally and also remotely across the country. So if you’re interested in speaking with me about your situation, you can contact me directly at [email protected] or you can go to our website and book a meeting at www.imaginedfinancialsecurity.com. Thanks everyone for tuning in. Until next time…

 

Episode 3: Four Stress Tests For A Bulletproof Retirement Plan

 

How to stress test your retirement plan

Kevin Lao 00:11

Hello everyone and welcome to the Planning for Retirement Podcast. I am your host, Kevin Lao and today we’re going to be talking about how to stress test your retirement plan.

What is a retirement stress test?

Now most people think about stress tests when they’re going to the doctor, they’re getting hooked up to some monitors, putting a treadmill and doing a little bit of exercise. And you know ultimately, the doctor was monitoring your blood pressure, your heart rate, your fatigue level, all sorts of things. Really, their goal is to see how your heart performs or responds with a little bit of stress. And I like to take that same concept into my financial planning practice to see how my clients’ portfolios or retirement plans or other long term objectives respond with a little bit of stress. And the reason I do this probably is obvious. But really the idea is that we’re planning for a 15, 20, 30 or even a 40 year window, and things are inevitably going to happen. We just don’t know what those things are. And we don’t know when they’re going to happen exactly. So what I like to do because people worry and they are concerned about different things. And I like to flush those things out in the financial planning process to see what’s keeping up keeping them up at night. And ultimately stress test those scenarios to make sure that their long term objectives are still holding up, and still have a high probability of achieving them with a little bit of stress.

The four retirement stress tests that you must consider!

So there are a lot of different stress tests that I’ve run in my career. But what I found is that there are four major stress tests that I put all my clients through. And if they can pass these four stress tests, they are sleeping really, really well at night. They’re enjoying retirement, they’re freed up to spend their own money in retirement, which is an interesting thing. But people that are retired, they have this concern of running out of money. And so there’s always this fear of… you’re spending too much because you don’t know how long you’re going to live or what’s going to happen. So I found that people are enjoying lives more in retirement by stress testing these scenarios up front. So without further ado, the four stress tests has that I run for all of my clients to make sure that they have a bulletproof plan are number 1, Great Recession loss. Number 2, long term care costs. Number 3, prolonged low returns. And number 4, living longer than expected.

 

So we’re going to dive into each of these in a little bit more detail. I hope everyone finds this helpful. I hope you take something away from it. You can all always reach out to me directly you can email me at [email protected]. You can also go to my website and contact me there www.imaginefinancialsecurity.com. You can also subscribe to our podcasts that’s always very helpful. And you can be informed of new episodes that drop etcetera, etcetera. But always love to hear from you to let me know what you think. And if you have any questions as it relates to your situation, always happy to answer and be a resource. So let’s dive in.

Great Recession Stress Test

03:12

Alright, we’re going to start with talking about the Great Recession loss test. Some may call it the bear market tests. And you know a bear market is quantified as a 20% drop in the stock market from its previous high. I like to use the Great Recession loss test because it is the biggest drop in the stock market that I’ve seen in my lifetime. Not bigger than the Great Depression, which was an 86% drop from previous highs and the 1920s, 1929. So that is extreme. But in 2007 or 2009 from its peak, the market dropped about 56%. And it took about 49 months for the market to get back to that previous high that it hit in 2007. A normal bear market will last on average about 22 months. And typically you know they happen every five years. So they’re fairly common. So I want to make sure that if my client goes through one of these types of bear markets and if it’s as extreme or close to the Great Recession… I want to make sure that they’re prepared and we have a plan and we have a high probability of achieving ultimately that retirement income goals or other legacy goals that they might have.

 

So how do we do this? Okay, so the first thing is prioritizing the objectives into needs, wants and wishes. This is important because obviously if we go through a serious recession or a depression you know my clients may not be buying boats or taking their bucket list travel… you know they might be but they’re probably not they can probably make some of those cuts. So we would quantify those as maybe wants or wishes, whereas you know your basics like food, healthcare, water, shelter, those types of things are needs. So we want to make sure that we have three categories of objectives: needs, wants and wishes. And this is all part of the process upfront. Once we have this quantified, we run it through a simulation to see what is the probability of success and achieving those goals if we go through a great recession in their life expectancy.

 

So what’s cool about this is if clients pass the test and great you know there’s not a whole lot of changes we need to make if they fail the tests or if some of their objectives need to be cut out… we can then make decisions on what should be done you know whether that’s changing the investment strategy or saving more before retirement or if they’re already retired, maybe it’s reducing expenses or working you know doing consulting part time. There are a number of different things that we can do. The biggest controllable is obviously the investment strategy.

 

05:58

So with this, what I like to make sure happens is that we have a significant amount of non-correlated assets to stocks in the portfolio. So typically you know clients would refer to this as bonds you know I would call it fixed income or other alternatives. And it’s crazy. I recently saw an article from a major publication that said, bonds are terrible investments, which is insane because you know that’s a very blanket statement, and you’re talking to a audience that is all different ages. So yes… bonds may be terrible for some but they’re amazing for my clients that are approaching or in retirement because they serve as that hedge if the stock market does go through a great recession type of scenario. So let’s say for example, the stock market dips 20% or more or like in 2007, 2009 it dropped 56%. If 100% of our portfolio was in stocks, we would have to liquidate stocks to generate income right… so we’d be selling stocks at a loss.

 

Now, you’ve probably heard the notion you want to be buying low and selling high not selling low. So in order to alleviate this concern, we need to make sure we have a certain dollar amount in the Fixed Income Cash or alternative asset classes to make sure that if we go through a bear market or recession like 2007 2009, where it took 49 months to recover… we have enough in those asset classes so we don’t have to sell stocks low. So if I’m using that benchmark of 49 months of full recovery that’s roughly 4 years of income that we would want to have in fixed income types of investments that we can pull from in those types of bear markets or recessions. What this does is that alleviates the pressure on doing anything within stock… the stock side of the portfolio, let those asset classes recover because historically speaking, stocks do come back and they do perform way better than bonds. I do agree with that. But it allows us to put less pressure on those equity investments, allow them to recover and still generate that income that my clients need to enjoy their lifestyle and have that peace of mind.

 

So again, hopefully the takeaway here is let’s see if the portfolio holds up. And the goals hold up if we go through a bear market scenario like a great recession. And then secondly, let’s make sure we have a well thought out investment strategy to ensure that we have other asset classes in the portfolio that are non-correlated to stocks. So we can weather those storms when we go through them because on average these happen every five years. If we have a 30 year retirement, you’re going to be lucky enough to live through about six of those bear markets.

Long-term Care Stress Test

08:40

Our next we’re going to talk about long term care costs. And this is a topic that has been pretty much at the forefront for my clients since I’ve been in the business and it’s only gotten more prevalent as people are living longer. You know and one thing I saw… a study that was done on life expectancy, which I thought really was staggering to me is that someone who is 65 today has almost a 70% chance of needing some type of long term care services in their lifetime. And what’s even more staggering is that 20% of those aged 65 or older who would need long term care will need it longer than 5 years. And if you think about the cost of long term care, the fact that Medicare does not pay for long term care. It’s concerning for most people and you know, as a practitioner you know doing… we’re specializing in retirement planning. It’s something I need to assume every single person I work with has a long term care plan.

 

I’m not saying they need to own insurance but I need to make sure they have a plan. And what I’ve found is the best way to start that planning discussion is to stress test to see how their retirement goals how their other long term objectives how their investment portfolio holds up. If we put one or even both individuals if they’re married through a long term care stress test. Now how we do this is challenging because you might need care for a year, you might need care for 10 years if it’s something that’s more cognitive like dementia. And it’s obviously impossible to run all of those scenarios. So what I do is I take the average, for women it’s 3.7 years of care for men it’s 2.2 years of care. And I multiply that by the average cost of a private nursing home, which right now is about $105,000 per year in today’s dollars. So someone’s 65 you know that’s today’s dollars, we want to build in a reasonable rate of inflation for 5 maybe 6%, depending on the state and depending on the type of care we’re going to stress test is a prudent inflation rate for this type of service. And so if we’re looking out 15, 20, or even 30 years down the road in doing the stress test… the numbers are going to be quite staggering.

 

And you know personally… I think there’s probably some sort of bubble that’s going to burst with long term care costs going up the way they have been over the last couple of decades. And I think technology and the industry will evolve to help alleviate some of that inflation. But for now, it’s quite staggering. So once we run through the stress test… I will then share with my client if they have a high degree of success and self-insuring and this assumes they don’t have any long term care insurance. And if they have a high degree of success, self-insuring you know they really have one of two options, they could self-insure, meaning use their own assets whether that’s investment portfolios 401ks, IRAs, individual stocks or bonds, mutual funds whatever it might be, they can use their own assets to self-insure or they can decide to buy insurance to hedge their portfolio. And what I mean by that is instead of liquidating investments that are going to generate potentially 5, 6, 7 8% a year in returns, they simply buy insurance so that if they ever need care… they can keep those assets on their balance sheet to essentially work for them and for future generations or maybe their spouse, and essentially allow the insurance to pay the costs of long term care. So or they can do a combination of you know and that’s what I see a lot of people do is they’ll get some insurance but then they’ll self-insure for the rest.

 

12:27

And you know there’s no magic number but I think the stress tests will give us an idea of… Hey, are you successful self-insuring? And if so, we have some options. If you’re not successful then really, there’s one of two things. Number 1, we can change the goals. Meaning you can work longer, you can spend less, you could change your investment strategy, you could do consulting, or work part time, or you can buy some insurance to hedge against this risk. And you know from my experience, you know if you are in your 50s or 60s or even your 40s you know long term care insurance is relatively affordable. But the older you get… you know once you get into your mid to late 60s or 70s, it gets more expensive. So you know in those scenarios… you know you’re going to want to look through many different carriers. And you’re going to want to work with an agent that can look at many different carriers to see what is the best fit for you based on your age and health profile. And there’s a lot of different flavors of insurance. You know there’s hybrid policies, there’s pay as you go, there’s one lump sum payment policy.

 

So there’s a lot of flavors out there. I don’t personally sell insurance you know as a fee only planner… I work with my clients to give advice on these policies. But ultimately what I will do is I will work with my clients with their insurance broker to come up with the best solution. And you know, ultimately, what I found is that having a decision is probably the most important thing because I’ve had people brush it off and not doing it… do anything. And ultimately they leave it to their loved ones whether it’s their spouse or children to make the decision or even find out if they have insurance or not. And so another key takeaway is once you have a plan for paying for your care, is making sure your financial powers of attorney, making sure you’re your healthcare powers of attorney, making sure they are aware of what that plan is. So if God forbid something happened tomorrow, they know where to go. They know what assets to utilize to pay for your medical costs and things of that nature. And they’re not scrambling at the last minute. So again, stress test the plan, see if you’re successful with a long term care event, if you need insurance or if you want insurance, there are a lot of different flavors you can go and making sure you’re consulting with the right individuals, the right advisors is extremely important in my experience, and then obviously let the loved ones know let the people know your friends or family. What your decision is on that front so they can essentially follow suit. When or if something were to happen.

Prolonged Low Returns Stress Test

15:05

Alright, the third stress test we’re going to talk about is prolonged low returns in the stock market. And I’m not going to go into too much detail because I think it’s pretty obvious what it is we’re going to assume lower than expected returns in the portfolio over the next 10, 20 or 30 years, and see how the portfolio reacts. You know, the goals react. But I think why we do this is relevant and I think it’s a few pieces of data that I want the listeners to… to know about is important. If you look over the last 10 years… okay let’s take the S&P 500 [phonetic 15:38], which is a benchmark for U.S large cap stocks. The S&P 500 over the last 10 years from 2011 to 2020 has returned 11.96% per year. So we’ll call it 12% a year. If we look over a longer period of time let’s say 50 years the S&P 500 has returned 6.8% per year.

 

So essentially over the last 10 years the markets outperformed 5% per year. So you know there was there was a lot of factors there. And you know if you think about the Great Recession, 2007 and 2009, we were just coming out of that in 2011. You know, so that’s a factor. You know anytime you come out of recession, the stock market booms… you know we had quantitative easing… we had prolonged low interest rates. So there’s not a lot of places to go for yield naturally, people invest in stocks to get yield and low interest rate environments. But if we believe in the law of averages and looking at the idea that the market is cyclical you know… I’m going to venture that we could experience some lower expected… lower than expected returns over the next 10, 20 or 30 years. So if we believe that it’s prudent to stress test how the portfolio is going to react to those types of scenarios. And you know the way we do this, if a client has a more aggressive appetite, meaning they have a higher exposure in stocks in their portfolio and their strategy… I would argue that we would want a stress test closer to 1.5 or 2% per year less in returns over the duration of the life expectancy. The client’s more balanced if they’re more conservative, they have a higher percentage in fixed income with a portfolio. We could probably lean more towards 1% per year less from a return standpoint.

 

But you’d be surprised at the results you know if you are a… you know on the edge of being successful or if you’re on the verge of being unsuccessful versus successful. You know it’s one of those things that you’d want to know. And if we enter that scenario of being in a lower than expected return type of market for a 10 or 15 year period you know it’s probably good to know like… hey, what can I reasonably expect from an income standpoint? And more importantly, from a goal standpoint, you know what do I need to prioritize as my needs versus wants versus wishes.

 

18:02

So I hope that’s helpful. And again, this is one of those things that I think everybody should do especially not even just the folks approaching retirement especially those folks that are 20 years away from retirement or even 30 years away. Because you know in that scenario, we’re assuming a… let’s say a 20 year or a 30 year savings rate window as well as another 30 or 40 year retirement phase. So the return that you build into the analysis, which will then determine how much you need to save for retirement is extremely important. Because you know if we assume a 7 or 8% return every year but we’re only getting 5 or 6 you know that makes a big difference in terms of how much you to need save. And then much rather those younger clients that are that have the time to be more aggressive on savings as opposed to having that false sense of security. So again, this exercise is not only important for those that are in that retirement age but if you have kids or if you’re listening and you’re in your 30s or in your 40s you know think about using a more conservative targeted return in your model to see what kind of savings rate you need to come up with to get to that targeted… targeted goal that you set forth in your plans.

Longevity Stress Test

19:24

Alright the final stress test we’re going to talk about is longevity risk or living longer than expected. Now obviously nobody has a crystal ball. And as a financial planner, I have to look at statistics when I’m dealing with clients whether it be individuals or couples you know as we approach potentially a 20 or 30 year retirement window or even longer. And one statistic that always jumps out to me is that a 60 year old female, a nonsmoker, has a 30% chance to live until 94 and a 20% chance to live until 96 and actually a 10% chance to live until a 100. So if that 60 year old retires at let’s say 65 and they live until, let’s say 96, which there’s a 20% chance… that’s a 31 year retirement window we’re planning for. So that’s a lot… a lot of variables can change there you know inflation, interest rate changes, tax law changes, other legislation changes, rates of return, etc. Another thing to think about is that males or females live longer than males. And if you look at that same 60 year old and let’s consider this to be a male, also, nonsmoker has a 30% chance to live until 92 instead of 94, a 20% chance to live until 94. And then a 10% chance to live until 96. So if you look at that scenario you know two healthy individuals… you know that are approaching retirement, there’s a pretty good likelihood that the female is going to outlive the male. And you know if you ever go to a nursing home or a long term care facility… you know majority of them are women.

 

And so oftentimes what happens you know, if you’ve ever had personal experience in dealing with a loved one… you know that needs care is that if the male of the household needs care. Oftentimes, their spouse is still living and is able to help with some of the care at home. And if that male were to pre deceased, the female… then the female’s left to their own devices to get care at their end of life. And so oftentimes, the female is relying on some sort of professional help whether that be in home or in a nursing home etc. So the first issue that I deal with when we’re talking about longevity risk is sort of piggybacking off the long term care planning that we talked about a few segments ago is we need to make sure that there is a long term care plan for the surviving spouse in most cases, the female. And so oftentimes, if we’re deciding on who to buy insurance for long term care… I will oftentimes and if there’s a decision you know whether it be budget or other factors or maybe health, oftentimes, I will advocate for the female be the one to buy the insurance because they’re much more likely to rely on professional care. So they’re not a burden on their other loved ones whether it be children or grandchildren. So that’s the first thing.

 

The second thing we always have to address is with longevity risk is providing some kind of guaranteed income that my clients can never outlive. And you know… so the first source of this and the largest source of this type of guaranteed income, and I’m using quote to [unintelligible 22:34] quotes when I’m talking about guarantee is Social Security. And you know the reason I’m using [unintelligible 22:39] on this one is because you know right now, it provides for roughly 40% of all income received by individuals 65 and older. And actually I looked at a report recently, and it said that Social Security represents approximately 20% of the entire federal budget. So it’s a big number. And other estimates… I’ve seen other studies that I’ve seen done for Social Security estimates is that by 2041 if nothing changed, there’s going to be a deficit in funding Social Security, which is not a surprise you know. So for those that are you know 60 to 65, are in their 70s or 80s already collecting Social Security, they’re very close to it… they’re not as much of a concern. But the clients that are maybe in their 40s or 50s definitely more of a concern there of… hey, is Social Security going to be there at the same capacity when I get to retirement than it currently stands? And there’s a there’s obviously a big question mark to that.

 

And so many times you know when we’re dealing with this type of scenario, we’re looking for their privately funded sources to provide that guaranteed income. And you know the natural… the natural answer for guaranteed lifetime income is to purchase some kind of privately sold annuity. And so annuities by design are meant to provide that guaranteed lifetime income that one can never outlive.

 

23:52

So essentially you’re putting that longevity risk on the insurance company. The bet is that you outlive what the insurance company how long they think you’re going to live. So you know they have their actuary tables, and they run all the statistical model you know based on your age and your gender and they figure out… okay you know what… I think this client is going to live until certain age and if you live past that, and then you pass that breakeven point and you’ve made out ahead, if you pass away earlier or prior to that obviously the insurance company, quote-unquote [phonetic 24:29], wins. But there’s definitely something to be said, for that peace of mind where you know a client is entering retirement with no concerns about that income source ever going away… you know unless the insurance company obviously goes belly up, which is a different conversation.

 

So you know the caution I would throw out there is that these are oftentimes sold sort of as a you know… I would call it a fear-mongering type of solution you know where, you know, folks that are entering retirement, they’re obviously concerned about market volatility, they’re concerned about income. And so oftentimes these are pushed by you know… the insurance agents that purchase these annuities. And the question is do you buy one? Do you not buy one? If you want to buy one how much of it do you purchase? And frankly you know my personal experience with this is that these annuity products in these contracts are very complex. And so with that obviously… I’m biased given I am a fee only planner, I don’t sell annuity products. I always recommend clients that are looking at purchasing some type of annuity product to consult with a fee only practitioner to get that second set of eyes when you’re working with your insurance agent to figure out what makes sense, what type of flavor of the annuity makes sense. And then ultimately, how much of your money should be put into that type of product.

 

So just personally within my practice… I like a scenario, if my clients have a certain amount of fixed expenses that they never want you know they never want to be concerned about meeting… okay and let’s say Social Security makes up 50% of those expenses. And then the rest is made up of all of their other investments you know there’ll be a 401k plan or an IRA or other stock portfolio. And that scenario, we might look at back backing into how much they would need to put into that annuity to get that other 50% for their fixed expenses. Okay… so that’s kind of a very simplistic way to say that we want guaranteed income sources to fund most of the guaranteed expenses that my clients have.

 

Now, if my client has a Social Security Plan you know for them or them and their spouse, and they also have a pension you know whether it be through military or federal government or private pension… I may not really even consider an annuity in that case you know because we may have most of the fixed expenses being met by those fiscal fixed income sources. But that’s a real simple way to sort of figure out okay… hey, here’s my fixed expenses, how much do I need to back into putting into this type of annuity to get those the fixed expenses met by fixed income?

 

Now another caution I would throw out there aside from the complexity is that interest rates are historically low. You know the 10 year treasury… I mean was next to nothing you know just within the last few months and frankly, interest rates have been historically low really since [unintelligible 27:16] you know since the Great Recession… you know they had a lot of several series of rate cuts, and they’ve stayed like that for a long period of time. What’s happened is that these insurance companies, the models that they ran, to assume the longevity piece of the pie as well as what they could earn on their general portfolio to pay out the income sources, their way lower than expected. And so the result of that now is that these annuity rates are extremely low. And so it’s very important to look at those types of products and kind of look under the hood to make sure that the annuity is what you think it is because many times it’ll be dressed up you know it’ll say a certain thing. But really, if you look at the fine print, it’s really going to be performing a different way and have liquidity restrictions or substantial upfront costs. So again I get… I’m biased but always consult with a fee only practitioner that understands these types of products but does not actually earning a commission from recommending that particular solution.

Summary

28:14

So we’ve talked about the long term care planning, we’ve talked about that risk there addressing later in life expenses for the surviving spouse, we’ve talked about guaranteed income. What I will say about guaranteed income and the final note here you know before I close out this segment is that we can replicate a very well designed portfolio we can replicate the guaranteed income sources that my clients need to get that fit that extra 50% to get to their fixed expenses with a well-designed investment portfolio. And you know… I say that obviously you know, there’s volatility involved, there’s always risk involved. But for my experience… I am a big fan of using the endowment model. And the endowment model you know essentially being the notion of creating a really well diversified portfolio and creating a targeted withdrawal rate on that portfolio to where you have an extremely low risk of ever dipping into principle or at the very least outliving your assets.

 

And I and I’m definitely more of a fan of that type of strategy really for two reasons: Number 1, you maintain all of that liquidity on your balance sheet. And so whereas the annuity once you give that money out to the insurance company you know that’s a, you know that’s gone… you know that’s an irrevocable decision, the insurance company has your money. And then secondly, it’s very… it’s essentially impossible to leave those assets to the next generation you know so that is important to you and not only to maintain liquidity for those long term care expenses down the road or to leave those assets to let’s say… kids or grandkids you know the annuity oftentimes provides a lot of limitations there. So for that reason… Again, if we’re well discipline, we can design a strategic investment policy statement. Again, consult with a practitioner that understands income when it comes to investing portfolios that’s very different than accumulating assets. You know again… I always lean towards that route because it gives my clients flexibility. It keeps the assets on their balance sheet for the emergencies. And then ultimately, they’re able to leave those assets for legacy whether it’s to their family or to charity.

 

So I hope that’s helpful to get an understanding of how we’re addressing those longevity risks… how our clients are alleviate some of the concerns around social security? How our clients are using the longevity statistics when it comes to planning for things like long term care expenses? And then ultimately how to create that replicate that guaranteed income streams like Social Security have with your own assets?

 

30:54

I hope everyone enjoyed this episode and hope you have some takeaways that you can apply to your own situation. If you would like help stress testing your retirement plan and want to speak to me, you can reach me directly at [email protected]. You can also go to my website at www.imaginefinancialsecurity.com. There’s a book now link that goes directly to my calendar. So you can book a 30 minute free consultation, always happy to have those discussions and see how we can help you directly and I can assure you that if you can pass these four stress tests. You will be sleeping better at night and you will retire with a high degree of confidence and have that financial peace of mind that you will never have to be have to go back to work or be forced to go back to work which is there’s a lot to be said for that. So until next time… signing off. My name is Kevin Lau, your host of Planning for Retirement and hope everyone enjoys the rest of your day.

Episode 2: The Tax Trap of Traditional 401ks and IRAs

The 401k IRA Tax Trap

The Tax Trap of Traditional 401ks and IRAs

 

Kevin Lao 00:12

What’s going on everybody? This is the Planning for Retirement Podcast. My name is Kevin Lao and I am your host.

What is the tax trap?

So today’s topics are twofold. The first thing I wanted to address is; what I like to call the Tax Trap of 401ks and Traditional IRAs. So I don’t think people address this enough prior to them retiring. And this is the notion of being tax efficient prior to getting into retirement and control it on acquisition. So having seen this go down for years and years and years being in business, I thought it’d be beneficial to do an episode specifically relates to falling into that tax trap and how to avoid it well before you turn retirement age. So that would be number one.

The SECURE Act

Number two is the Secure Act. And for those of you that don’t know, the Secure Act was legislation that was passed to reform retirement. And I don’t think many people really understand the ramifications of the Secure Act. It was largely swept under the rug obviously for good reasons because of Coronavirus in 2020 so it did not get much publicity after March of 2020. So, I thought I’d be good to revisit this topic because it is going to drastically change the way retirement [unintelligible 01:32] for future generations. And for those of you that are retirement age that are thinking about leaving your retirement account 401k IRA [unintelligible 01:42] children or grandchildren, you need to hear what I have to say.

 

For those of you that are younger, let’s say you’re in your 30s, 40s and 50s and your parents or grandparents are retirement age, and they plan on leaving a 401k or IRA to you, you should also understand the ramifications because this could absolutely screw up your tax situation.

 

So these are the topics we’re going to address today. And I’m also going to talk about some strategies to offset some of these concerns that my clients are putting into play and hopefully it’s beneficial for everybody. Let’s dive in!!

How does the tax trap occur?

All right so why our traditional 401k’s and traditional IRAs, why do they lead to a tax trap at retirement. So I want to clarify something when I am referring to a traditional 401 K and IRA plan I am referring to those that are flooded with before tax dollars. And what that leads to is tax deferral in those plans and then when you go to make those withdrawals in retirement, then they are taxed at ordinary income rates, whatever they might be in the future and that is the key.

 

When you think about taxation now relative to where they might be in the future. I’m not going to make a bold prediction here because I think a lot of people feel the same way I do. I’m going to suggest that taxes are likely to be higher in the future than they are today.

 

03:09

 

And if you think about, right now, we are at a $27 trillion deficits in the US, and that’s not shrinking. It’s growing. And you think about some of the government liabilities that are not funded like Social Security, Medicare, Medic-aid, you think about in 2008 we had massive bailouts and then in 2020 and likely in 2021, we add more bailouts. And you know, that causes concern for someone who is, let’s say, 15, 20, 30 years out from retirement age because if you are deferring taxes at potentially lower rate today, and you’re enjoying market growth for the next 10, 15, 20, 30 years, you’re growing this massive tax liability that Uncle Sam it’s just licking his chops. So therein lies the tax trap. And, you know, again, I refer to these that are funded by pretax dollars I’m not saying 401ks are bad because frankly 401ks are a great thing. You know they are forced savings plans that employers offer. They oftentimes give you matching contributions, essentially free money. So absolutely take advantage of this programs for your employer, do the max contribution possible.

Diversify your tax buckets!

But what I want you to think about is how can you diversify your tax situation.

 

So if taxes are higher in the future, you’re not stuck with only one pocket drop. And one of the ways to do this and think about this is looking at Roth 401ks and Roth IRAs. So literally the opposite of a traditional 401k or IRA plan these are funded with after tax dollars, and these enjoy tax free growth. So regardless of what tax rates are in the future, it does not matter. You’ve already paid taxes on the contributions and as it stands right now, the IRAs code allows you to withdraw those funds as long as it’s for qualified purposes, i.e. retirement, they can be withdrawn tax free so you know, when I’m planning with clients, I am all about tax diversification, I’m all about being strategic and I understand that, you know, we can’t predict the future. We don’t know exactly what tax rates are going to be in 5, 10, 15, 20 years throughout their retirement years. But if we have diversification we can be strategic based on who is in office essentially. Because one thing is guaranteed regardless of whose administration we’re going to try to change taxes. They might raise taxes and might slash taxes and might raise taxes for some, slash taxes for others. So regardless of what they do if we have some money in tax deferred and some money tax free, then we can be strategic. So for periods of times and very high taxes, and we don’t want to touch your tax deferred programs we can draw from tax rates.

 

 

06:00

 

If we’re appear [phonetic] to have time of very low taxes, you might be more okay with drawing your taxable funds. And so you can’t do that if you don’t have diversification. So I think the takeaway here is when you’re contributing to these retirement plans, be strategic and consultant with advisor, a tax advisor, a fiduciary financial planner, they can point you in the right direction to see what your options are in your plan. And also, hopefully they understand your situation that can give you the best guidance possible for you to make the right decision for yourself.

Required Minimum Distributions (RMDs)

Again, don’t fall into the tax trap because what it leads to is, folks when it gets to retirement is a lot of surprise and I’ll give you an example. Required Minimum Distributions kicked in at age 72 and at age 72 now the rule is you have to take out a certain percentage every single year for the duration of your life expectancy.

 

And right now the IRAs tables they are kind of outdated I would anticipate them updating these at some point in the not so distant future. But every year that percentage that you are forced to withdraw goes up and up and up. And so income from Social Security or let’s say you’re consulting or working part time, or maybe you have some investment income, and maybe even need this income from your 401 K plan or IRA. Well the IRAs as it stated right now at age 72. You’re forced to take those withdrawals whether you need it for income or not. And again, this leads to a tax situation where you know, let’s say you have a $2 million 401k plan and let’s say your percent that you’re forced to withdraw in the given years, let’s say 5%. Well, that’s $100,000 that you have to add to your taxable income if that is a traditional 401k or IRA plan that you may or may not be and the result is it might push you into a higher tax bracket, it might actually put you into a different Medicare [unintelligible 08:02] premium which I should pay more Medicare costs. So there’s a lot of ramifications that people really think about before they get to their retirement age so I urge you to plan early and often, think about taxes. Well before you get to retirement age so you can get smart and strategic when you’re going to make those withdrawals.

SECURE Act, explained

All right, let’s talk about the Secure Act. So the Secure Act, it stands for setting every community up for retirement enhancement act. And in my opinion, this is probably the most substantial overall when it comes to retirement, planning, since I have been in a business 2008. There’s a lot of good to it, it’s made it more cost effective for small businesses to offer retirement plan, it allows lot of these small companies to join together essentially as a union and get discounted rates [phonetic 08:59] because then these providers look at them as one entity as opposed to several sets. So that’s a positive.

 

 

09:05

 

It also increased Required Minimum Distribution age from 70 and a half to 72. So just a little bit more time to deferred Required Minimum Distribution age until they are forced to draw upon them. It allows penalty free withdrawals upto $10,000 for 529 plans to repay student loans. So if you get 529 plan or you have one set up for your children or let’s say someone set up 529 plan for you that you never just use in college you can use those up to $10,000 to repay student loans, so that is nice. It’s a little bit more diversification when it comes to retirement plans, etc., etc. And there are some other things as well. So there’s a lot of positive because in order to pay for it, this is estimated this cost was legislations estimated 10s of billions of dollars and the way they are going to pay for this is by eliminating the stretch IRA essentially allows for a non-spouse [phonetic 10:15]. Let’s say a child, an initial owner of an IRA or 401k plan who passes away that allows for them to withdraw those distributions [unintelligible 10:28].

 

Now that’s a big deal because we talked a little bit about Required Minimum Distributions a moment ago where someone with 2 million dollars maybe force [phonetic 10:36] to take a 5 percent. Well, I’m going to give you another example, who is 90 years old, they are forced to take out roughly 8.27% per year for that year from their retirement account. Let’s say they were to pass away, pre Secure Act and they were to leave those dollars to someone who’s let’s say, 55 year old. Well, for the 55 year old son or daughter instead of having to take out 8.27% of the account they are only required based on their life expectancy to take out 3.38% of the o they got tax savings. I mean that is that is more than 50% of what they would essentially have to pay if their parents unintelligible 11:28] drawn retirement account, so in essence allows that non spouse beneficiary in this case in child to stretch out this tax deferral stretch out that retirement throughout their life expectancy, well, as secure act very fine. They eliminated the stretch IRA and essentially it forces these non-spousal beneficiaries and there are some exceptions so please consult with your tax advisor, your attorney, your financial planner, to understand the Secure Act there are some exceptions, but in general common beneficiary like a child or grandchild, they will be forced to withdraw all of the proceeds of that account within 10 years. It doesn’t matter the schedule, they can take it all out in year one, which would be a really big tax bill. They take it out and they can spread it out over 10 years. The IRS doesn’t really. They just want to make sure that all of the money is out of that retirement account.

The inherited IRA rule changes

12:27

 

So why is this significant? Well, instead of that 55 year old beneficiary taking out 3.38% that year given their life expectancy, and let’s say that account is a million dollars that is roughly 33,000 that would have to take out. Let’s say they were had to have that same [phonetic 12:44] million dollar account inherited and let’s say they want to spread out that tax burden evenly across 10 years. Well, if you look at simple math, they would have to take out $100. So instead of recognizing 33,000 as income, now they’re recognizing 100,000 income. Now obviously, as the account grows, let’s say it’s 2 million, 3 million the tax burden become bigger and bigger. And what I hear from a lot of my clients who have children that are in the 30s and 40s and 50s is that may make way more than my clients ever did during the working years and I think that is just the byproduct of the United States being a great nation, wealthy nation. But many times the children and grandchildren are much better off financially from an income standpoint as they are predecessor and so why that’s so important because they may already be in very high tax. And they may be in a really complex situation, they may live in a state with high taxes i.e. California.

 

So if you are leaving those retirement accounts to one of those types of beneficiaries, it could seriously impact the taxation of those accounts. And I am having this conversation left and right every single with clients that have retirement accounts that they saved into 20, 30, 40 years. They worked in extremely [unintelligible 14:04] And now they are in the situation with 70 or 75 or even 80 years old, and there’s not much you can do, you know, other than some small planning, you know conversions, which we’ll talk about in a second, but there’s not a whole lot you can do to alleviate that tax.

 

So there’s a conversation that you have to be had with your advisors, your financial advisors mistake, you got to make sure that you’re not going to screw over the next generation because I’ve never heard any of my clients say they want to give the IRAs more money than they have to. And you know this is the perfect example and this provision was slipped in and a lot of people don’t understand it. And so please be aware of how this will impact your situation and I am happy to have this conversation with you. If you have questions by your personal situation then you can email me on my website at www.imaginefinancialsecurity.com.

 

I’m happy to dive into the details of your situation to see how this impacts you and your beneficiaries.

 

15:08

 

All right, so with all that being said, why don’t we break down three different strategies that my clients are putting into play in light of some of these tax concerns in the future? And also with the secure act now fully in play as of 2020 and I’m going to categorize them into beginner, intermediate and advanced.

How to avoid the tax trap of 401ks and IRAs?

Beginner I would put into play for someone who is younger, maybe they have at least 5, 10 or 15, better yet 20 more years of working and accumulating retirement accounts. And simply looking at the idea of instead of maximizing all of their contributions before tax, looking at Roth 401ks and Roth 403 B plans or even Roth IRAs, and we’re checking with your HR department and seeing if those plans are available, these after tax plans. And if so deciding whether or not it makes sense for you to put these dollars in on the post-tax basis in [unintelligible 16:05] before tax. Now, you don’t have to go all in one way or the other. You know, I have a lot of clients that split contribution some do pretax, maybe 50% and then the other 50% after taxes into the Roth. You can do whatever you’d like and you know, the scenario where you may want to leverage more on the tax deferred side is a scenario where you live in a high tax state now and you plan to retire in a low or no income state tax… States* That was a lot.

 

So an example would be somebody’s working in New York and they plan to retire Florida, which is where I live now. And we have a lot of those types of clients and in those scenarios if they’re already a high income, and there’s obviously heavy state taxes there and they’re retiring in the next couple of years, maybe 3 or 4 or 5 years down the road. It may be beneficial to do some before tax or leverage a little bit more before tax and therefore once they retire and residents of Florida or Tennessee or any other state income free tax state then take distributions and pay the taxes.

 

Now, other folks who are again concerned about tax rates going up, they may just wanted leverage more on the tax free side of the Roth side. And, you know, obviously there are some restrictions, you know, some folks may not have the ability to use Roth 401 K or 403 B plan some plan don’t offer them for whatever reason, and other folks maybe phase out of Roth IRAs and there is an income limitation. But once you make a certain amount you can longer contribute to a Roth IRA directly.

 

You know, there are some loopholes around that which I’m not going to get into those types of tax planning strategies on this episode. But there are some loopholes, just search backdoor Roth IRA. That’s a way to contribute to a Roth even though you’re above that Roth hiring threshold, but again, you got to be careful with it. You need to make sure you’re aware of the aggregation rule that can really, really mess up on a tax standpoint. So please consult your tax advisers before you make any of those decisions and I’m not getting any tax advice here.

 

18:08

 

All right, so we’ve addressed beginner which is simply contributing more to the Roth side when you are working.

 

Intermediate; someone who has been working for a longer period of time, let’s say they’re in their 40s 50s or 60s they are approaching retirement sooner rather than someone that is in the 20s or 30s, they may have accumulated a decent size, next [unintelligible 18:41] a 401 K’s or IRAs already. Now these folks may benefit from doing what’s called Roth conversions. So a Roth conversion the way that works is you take dollars that are already in an IRA and you convert them pay the taxes now and convert them to a Roth to enjoy that tax free growth going forward.

 

Now, obviously the downside you have to have the cash to pay the taxes, the taxes can’t just come out of the account because you will be charged penalties presumable if you are younger than 59 year and a half. So you got to have some cash on hand to pay the tax but the benefit is you can get those dollars in growing tax free for the next 15, 20, 30 plus years and enjoy all of that tax free growth. And again, avoid those Required Minimum Distributions, that those are the type of plans have in place at age 72. Now this is a great tool that I have utilized a lot of clients in the past. You want to make sure that when you’re doing this that you’re not putting yourself into a tax un-favorable situation. So for example, someone who’s aged 65 and they are in Medicare and you’re doing Roth conversions. You may not want to put them in a threshold or a tax bracket or they are paying more Medicare costs. That’s something you want to be aware of. You may not want to push into different tax brackets so there is definitely a sweet spot for you. So you definitely want to make sure if you consult your advisors in terms of what is best for you and if this strategy makes sense.

 

But again, I’ve reviewed this many, many times with clients and for some it makes sense and for some it’s not. And you know it all depends on situation that is why you want to consult your advisor before making any decision. However, crunching the numbers and looking at the analysis long term for many of those clients where it makes sense, it could save not only them 1000s of dollars in taxes in retirement, but also their beneficiaries, you know, especially because in light of the Secure Act and stretch IRA elimination.

 

All right last category, the advanced. Now this one I would characterize for folks that have accumulated a pretty substantial network, maybe in retirement accounts, or combination of retirement accounts and elsewhere. And you’re looking at the notion of buying a life insurance policy to essentially pay those taxes that will be due upon their passing within those retirement accounts. Let’s say hypothetically someone has a $4 million IRA, and they plan it leaving it to their doctor. But $4 million will have to be liquidated within 10 years assuming they are not an exempt beneficiary.

 

So let’s say hypothetically, they wanted to withdraw those funds in equal installments over 10 years. So for simple math purposes 400 k dollar. So they would have to they would have to pay taxes on that $400,000 annually, you know, which I would have heard that they may do 100,000 or so plus or minus depending on with your tax situation is per year on taxes. So over the course of the next 10 years, they’re going to have to pay about a million dollars in taxes if you take 100,000 times 10 If you follow me. So the idea of buying life insurance is that the individual that wants to maximize these dollars to the beneficiaries versus the IRS, they decided by a permanent life insurance policy for a million dollars. And over the course of their lifetime they may pay a fraction of a million dollars in premiums for the benefit of those dollars, going tax free to that beneficiary and help alleviate that tax burden on there.

 

 

22:26

 

Now, there’s a lot of nuances involved. When it goes into buying permanent life insurance. There’s a lot of flavors, there is universal policy, hybrid policies. There’s joint and survivor policies, traditional whole life. So you want to make sure you’re consulting with some seasoned professionals when it comes to doing this. I always recommend coordinating with your financial planner, your insurance agent and even your estate planner to make sure that this strategy A makes sense and B that you’re designing the policy properly.

 

Given my background, I have an extensive background in insurance. This is a conversation I am very comfortable with having with our tax advisers and with my state attorneys clients. So if you have questions on this, don’t hesitate to reach out to directly on the website, www.imaginefinancialsecurity.com. So I hope that helps.

Summary

So the three areas; again, beginner, intermediate and advanced. I think that many people that are working can take advantage of Roth contributions very, very easily. In terms of the right percentage going where or how much you speak towards Roth, it’s going to depend on your situation personally. So again, please consult someone you trusts on this matter, Roth conversions or IRA conversions into rock.

 

Again, a great tool for some and for some it’s not a great tool. But again, it’s a way that you can add more dollars into that tax free bucket and protect it from that Secure Act tax penalty and also enjoy the tax free growth without the Required Minimum Distributions and advanced life insurance planning which again is a great tool assuming the client is healthy. That’s another nuance as well you have to be healthy and qualify for life insurance and many people that are in their 60s or 70s maybe they have in preexisting condition resistant condition or it’s just cost prohibitive. So again, there’s a lot of you know what if scenarios to see if that type of planning makes sense. But I hope you liked today’s episode. I hope you enjoyed it and I hope you subscribe to our podcast if you like it what will bring it to the table. You can do that by hitting the subscribe button to whatever platform you’re using, whether it’s Spotify, iTunes, etc. You can also just go to our website directly all over the podcast and blog post we are going to listed there on the in sites tab www.imaginefinancialsecurity.com. You can also contact me directly via email if you have specific questions that you want to address or if there is topics that you want me to bring to the table in these podcast. This is what this is for. I do this for fun because I’d like to talk about financial planning strategies and I like to help people regardless if they are client of mine or not. And I hope everybody enjoyed it. Look forward to next go run. Cheers!!

 

Episode 1: Introduction to “The Planning for Retirement” Podcast

I started this podcast as a unique way to deliver informative content to friends, family, clients and prospective clients.  The strategies and concepts are developed based on frequent challenges or questions I come across in my personal practice.  However, this should not be misconstrued as investment or tax advice, and you should consider your own unique circumstances before making any changes. 

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