رونوشت 🔗
WEBVTT
00:00:00.160 --> 00:00:01.360
What is going on, everyone?
00:00:01.439 --> 00:00:07.040
Welcome back to my podcast called Financial Planning for Those Retiring in Five to Ten Years.
00:00:07.200 --> 00:00:08.640
My name is Colin Hayes.
00:00:08.720 --> 00:00:09.519
I am your host.
00:00:09.679 --> 00:00:15.199
And in this episode, I want to talk about a married couple that I recently started working with.
00:00:15.359 --> 00:00:19.760
Their names are John and Sarah, and they are both 55 years old.
00:00:20.000 --> 00:00:23.920
They came to my office with a question that I hear all the time.
00:00:24.239 --> 00:00:28.079
Are we actually on track to retire?
00:00:28.320 --> 00:00:31.199
We are five to ten years out until we want to retire.
00:00:31.359 --> 00:00:32.479
Are we on track?
00:00:32.719 --> 00:00:35.840
And this is a common question that I get asked.
00:00:36.000 --> 00:00:40.960
Just so you know, I have changed their names and some circumstances to protect their privacy.
00:00:41.280 --> 00:00:42.399
But here's the thing.
00:00:44.799 --> 00:00:47.840
They have saved consistently throughout their careers.
00:00:48.000 --> 00:00:49.359
They had good incomes.
00:00:49.520 --> 00:00:53.759
They had nearly two million dollars saved for retirement.
00:00:54.000 --> 00:00:58.799
Now, you might be listening to this and you might have more than two million, you might have less than two million.
00:00:58.960 --> 00:01:06.560
The amount doesn't matter as much as I want to talk you through what exactly financial planning looks like for this couple.
00:01:06.799 --> 00:01:10.480
From the outside looking in, most people would assume they are set.
00:01:10.560 --> 00:01:16.000
You have two million dollars saved, your house is gonna be paid off before you retire, you're gonna be set.
00:01:16.400 --> 00:01:21.599
But here's the thing they did not know how much money they could spend in retirement.
00:01:21.760 --> 00:01:25.359
They didn't know if they were paying more taxes than necessary.
00:01:25.439 --> 00:01:28.319
They were voluntarily overpaying in taxes.
00:01:28.480 --> 00:01:33.920
And they definitely didn't know what would happen if the market declined right after they retired.
00:01:34.079 --> 00:01:38.719
So they came into my office, we sat down, and we didn't talk about investments.
00:01:38.799 --> 00:01:42.799
I didn't immediately say, hey, you should buy this product, you should put your money here.
00:01:43.040 --> 00:01:46.239
The first conversation wasn't about rates of returns.
00:01:46.480 --> 00:01:50.719
It wasn't about the different funds or ETFs or mutual funds that they owned.
00:01:50.959 --> 00:01:53.439
Instead, the focus was on their goals.
00:01:53.599 --> 00:01:55.599
What does retirement look like for them?
00:01:55.760 --> 00:01:58.640
What do they envision their retirement to be?
00:01:58.799 --> 00:02:01.519
How much would you want to spend each year in retirement?
00:02:01.680 --> 00:02:02.719
Do you want to travel?
00:02:02.799 --> 00:02:03.920
What do you prioritize?
00:02:04.000 --> 00:02:05.359
Do you want to buy a second home?
00:02:05.519 --> 00:02:07.599
Do you want to downsize in your current home?
00:02:07.760 --> 00:02:09.680
Do you want to help your children someday?
00:02:09.840 --> 00:02:14.800
Do you maybe want to continue working but not full-time, part-time, more of a passion project?
00:02:15.039 --> 00:02:20.560
Because before I can build a financial plan, I need to know what we're planning for.
00:02:20.719 --> 00:02:27.039
Before I can recommend an investment portfolio, I need to understand what you are planning for.
00:02:27.280 --> 00:02:32.240
Without knowing the destination, it's pretty much impossible to build the roadmap.
00:02:32.400 --> 00:02:35.280
So we sat down and had that conversation.
00:02:35.840 --> 00:02:38.400
Then I gathered all the information.
00:02:38.560 --> 00:02:51.280
Their 401k statements, their IRA statements, their Roth IRA statements, their brokerage account statements, their bank account statements and values, their social security estimates, their estate planning documents, their tax returns, what's left on their mortgage.
00:02:51.520 --> 00:02:55.280
Anything with a dollar sign, I tell my clients, I can help them with.
00:02:55.520 --> 00:02:57.439
So I gathered information.
00:02:57.599 --> 00:03:02.240
Once I had John and Sarah's information, all their accounts, I gathered the information.
00:03:02.479 --> 00:03:05.759
Then I went to work and started building their retirement plan.
00:03:05.919 --> 00:03:10.800
Not just some random projection that said you have this much, you can spend 4% and you're done.
00:03:11.120 --> 00:03:12.960
No, a real plan.
00:03:13.439 --> 00:03:15.680
I modeled different retirement ages.
00:03:15.919 --> 00:03:20.400
If they retired at 62, 66, 70, what does that look like?
00:03:20.639 --> 00:03:21.919
Different spending levels.
00:03:22.080 --> 00:03:25.840
If they retired earlier, how much could they spend without running out of money?
00:03:26.080 --> 00:03:32.240
If they wanted to work part-time, could they retire from their full-time job and spend a little bit more?
00:03:32.479 --> 00:03:34.879
What if we had a higher than expected inflation?
00:03:35.039 --> 00:03:40.560
What if inflation is 3.5%, 4% versus the average around 2.5%?
00:03:41.199 --> 00:03:44.639
What happens if we get poor market returns early in retirement?
00:03:44.800 --> 00:03:45.680
How do we plan for that?
00:03:45.840 --> 00:03:49.599
What happens if they want to retire before 65%, before they get on Medicare?
00:03:49.759 --> 00:03:52.719
How do we plan for healthcare costs and can we afford to do that?
00:03:52.960 --> 00:03:54.080
What about longevity?
00:03:54.400 --> 00:03:57.680
John and Sarah talked about their family and their family health and longevity.
00:03:58.000 --> 00:04:05.680
Let's bake that into the plan so we're not just guessing, we can make an educated guess on
Load full transcript
their longevity of life.
00:04:05.840 --> 00:04:13.840
The goal is not to predict the future, the goal is to understand how different situations can affect their retirement.
00:04:14.080 --> 00:04:16.079
So we built their retirement plan.
00:04:16.240 --> 00:04:27.279
We did all these different scenarios that they wanted to look at that I put together, we sat down, we talked through them, and we helped them understand and get clarity and confidence in their retirement plan.
00:04:27.519 --> 00:04:31.839
But as I was going through this, I found a tax problem.
00:04:32.079 --> 00:04:37.519
A tax problem that, like I said at the beginning, on paper, everything looked right.
00:04:38.160 --> 00:04:40.959
But they didn't know they had this tax problem.
00:04:41.680 --> 00:04:48.399
As I reviewed everything, almost every dollar that they have saved was in pre-tax accounts.
00:04:48.639 --> 00:04:52.319
Think traditional IRAs or traditional 401ks.
00:04:52.560 --> 00:05:02.079
Now that's not necessarily a bad thing, but eventually, with pre-tax accounts, the IRS, Uncle Sam, he's gonna want his share.
00:05:02.399 --> 00:05:15.759
If nothing changed with their plan, required minimum distributions starting at 75 would eventually force them to start withdrawing money from those accounts more than they needed.
00:05:15.920 --> 00:05:22.240
And because they had saved so much in pre-tax accounts, those future withdrawals could become fairly large.
00:05:22.399 --> 00:05:26.560
And large RMDs can create a chain reaction.
00:05:26.800 --> 00:05:43.920
They can push you into higher tax brackets, they can cause more of your Social Security benefits to become taxable, they can potentially increase your Medicare premiums with Irma, and they can also reduce the flexibility that you have when deciding where your retirement income comes from.
00:05:44.160 --> 00:05:47.040
This is something they had never thought about.
00:05:47.199 --> 00:05:53.279
While on paper everything looked good, there was a blind spot they didn't know they had.
00:05:53.439 --> 00:05:58.079
This is where planning in John and Sarah's case became really valuable.
00:05:58.399 --> 00:06:02.959
We talked through their scenarios and they decided they wanted to retire at 62.
00:06:03.279 --> 00:06:06.800
But they weren't planning to claim Social Security immediately.
00:06:06.959 --> 00:06:15.600
We talked about when they wanted to claim Social Security, when the breakeven analysis was, when it made sense for their plan, and it made sense to not take it yet at 62.
00:06:15.920 --> 00:06:19.600
And RMDs don't start until their mid-70s.
00:06:19.759 --> 00:06:22.639
So this created a window of opportunity.
00:06:23.120 --> 00:06:32.240
For several years after retirement, their taxable income would likely be much lower than it had been during their working years, right?
00:06:32.399 --> 00:06:37.839
They went from working, full-time jobs, had good income, retirement, their income's gonna drop.
00:06:37.920 --> 00:06:40.480
Their taxable income is gonna be lower.
00:06:40.720 --> 00:06:49.920
Those years before claiming Social Security, before withdrawing out of IRAs, before RMDs, can be an ideal time to consider Roth conversions.
00:06:50.079 --> 00:06:56.319
The goal here is not to avoid taxes, it's to be intentional about when you pay them.
00:06:56.639 --> 00:07:00.560
Sometimes, in this case, we have low taxable income.
00:07:00.639 --> 00:07:14.399
Can we fill up our 10, 12, 22% bracket potentially with Roth conversions, pay a little bit of tax today, but over the course of your retirement pay less taxes, cumulative taxes?
00:07:14.560 --> 00:07:30.160
Tax planning within financial planning is not about lowering your taxes in the current year, it's about looking at your lifetime tax bill to what can you do to potentially lower your taxes, your cumulative taxes over your retirement?
00:07:30.399 --> 00:07:32.560
So I modeled different scenarios.
00:07:32.800 --> 00:07:35.600
What happens if they did no Roth conversions?
00:07:35.839 --> 00:07:39.600
What would their expected lifetime tax bill be?
00:07:39.839 --> 00:07:48.399
What happens if they converted a portion of their large IRA, their large pre-tax accounts each year until they claim Social Security?
00:07:48.560 --> 00:07:50.800
How does that impact their future RMDs?
00:07:50.879 --> 00:07:54.720
How does that affect their cumulative lifetime tax?
00:07:55.279 --> 00:08:00.480
Now, I will say a lot of people love Roth conversions and you might see these all over social media.
00:08:00.639 --> 00:08:03.839
And truth be told, it really depends on the situation.
00:08:04.000 --> 00:08:14.639
That is why when I see clients like John and Sarah who have majority of their assets saved in pre-tax accounts, I want to build out these scenarios and just show them the trade-offs.
00:08:14.800 --> 00:08:23.759
Instead of just guessing or instead of saying no, there's no option, I just want to show them the options, help them make an informed decision about their money.
00:08:24.000 --> 00:08:27.920
So that is a tax problem that we found that they didn't know they had.
00:08:28.240 --> 00:08:36.480
As John and Sarah go from working, earning income to now living off their portfolio, we had to put together an income strategy.
00:08:36.720 --> 00:08:39.919
Where will their retirement paycheck actually come from?
00:08:40.159 --> 00:08:43.360
And which accounts should they withdraw from first?
00:08:43.679 --> 00:08:49.919
Obviously, if they have a lot of their money in pre-tax and they do no Roth conversions, there's not many account types to pull from.
00:08:50.000 --> 00:08:51.200
It's all mostly pre-tax.
00:08:51.360 --> 00:08:57.679
But in your scenario, you might have a balance of pre-tax accounts, Roth accounts, and taxable brokerage accounts.
00:08:57.840 --> 00:09:02.080
How do you balance in what order should you withdraw from those accounts?
00:09:02.159 --> 00:09:04.399
Because
all those accounts are taxed differently.
00:09:04.559 --> 00:09:10.399
How do you create income for retirement while also keeping your taxes under control?
00:09:10.720 --> 00:09:15.120
These income decisions are not just about having enough money.
00:09:15.279 --> 00:09:17.200
It's about using it efficiently.
00:09:17.279 --> 00:09:20.480
How do we efficiently withdraw our money for retirement?
00:09:20.639 --> 00:09:23.919
I know I mentioned this earlier, but we looked at their social security options.
00:09:24.159 --> 00:09:25.679
When should they both claim?
00:09:25.919 --> 00:09:27.440
Should one of them claim early?
00:09:27.600 --> 00:09:28.879
Should they both claim early?
00:09:29.120 --> 00:09:30.639
Should they both wait until 70?
00:09:30.799 --> 00:09:31.759
Should one claim early?
00:09:31.919 --> 00:09:32.720
One delay.
00:09:32.960 --> 00:09:40.159
In this case, John was the higher earner, so it made sense for him to delay as long as possible because of survivor benefits.
00:09:40.240 --> 00:09:44.720
The surviving spouse will receive the higher of the two Social Security paychecks.
00:09:44.879 --> 00:09:46.399
So John had the higher benefit.
00:09:46.480 --> 00:09:52.000
It made sense for him to delay while we could be flexible when we claimed Sarah's Social Security.
00:09:52.159 --> 00:09:54.480
But there isn't just one answer that works for everyone.
00:09:54.720 --> 00:10:02.240
By modeling different strategies, they could see how each decision would affect their long-term retirement plan.
00:10:02.559 --> 00:10:12.879
And finally, if you can tell, this is the last thing I talk about where you might experience where it's the first thing talked about in other meetings with advisors, we talked about investments finally.
00:10:13.440 --> 00:10:16.240
We didn't start with them, we ended with them.
00:10:16.559 --> 00:10:22.399
Because investments are just one tool inside of a much bigger financial plan.
00:10:22.960 --> 00:10:32.240
Once I understood their retirement goals, their tax strategy and situation, their income strategy, their social security strategy.
00:10:32.720 --> 00:10:41.679
After I understood those things, then we talked about whether their investment allocation that they currently have supported their plan.
00:10:41.840 --> 00:10:47.279
And if it didn't, what do we need to do to make sure that the investment allocation supports their plan?
00:10:47.440 --> 00:10:51.120
Sometimes people are taking far too much risk than they need to be taking.
00:10:51.360 --> 00:10:57.840
Sometimes people are being way too conservative and unknowingly limiting their retirement options.
00:10:58.320 --> 00:11:04.320
The investment strategy should support the financial plan, not drive it.
00:11:04.720 --> 00:11:09.200
This is why I always say your investments are not your financial plan.
00:11:09.519 --> 00:11:10.399
I've heard that before.
00:11:10.639 --> 00:11:12.799
My financial plan, I have a financial plan.
00:11:13.039 --> 00:11:15.120
I have these five mutual funds.
00:11:15.200 --> 00:11:16.879
That's my financial plan.
00:11:17.120 --> 00:11:19.519
But a financial plan is not just your investments.
00:11:19.759 --> 00:11:21.919
A financial plan coordinates everything.
00:11:22.159 --> 00:11:33.440
Your investments, your taxes, your retirement income, your estate plan, your social security strategy, healthcare planning, all working together towards one goal.
00:11:33.600 --> 00:11:35.120
Your dream retirement.
00:11:35.279 --> 00:11:43.279
So if you're in your 50s and retirement is five to ten years away, these are the exact conversations that you should be having.
00:11:43.519 --> 00:11:54.240
Because many of these planning opportunities that I talked about today and in other episodes, like Roth conversions, tax efficient withdrawal strategies, Social Security planning, they need time to work.
00:11:54.320 --> 00:11:56.399
So you can't wait until you retire.
00:11:56.559 --> 00:12:00.480
You need to start planning while you still have time, while you still have options.
00:12:00.639 --> 00:12:07.440
So if this sounds like the type of relationship you want to have with a financial planner, I would love to have a conversation with you.
00:12:07.679 --> 00:12:19.840
Whether you're five years away, ten years away, or just starting to think about retirement, having a conversation and getting a plan in place today can give you more clarity and confidence about tomorrow.
00:12:20.080 --> 00:12:24.000
Thank you so much for listening and I'll see you in the next episode.
00:12:24.320 --> 00:12:27.600
This is a hypothetical situation based on real life examples.
00:12:27.759 --> 00:12:29.759
Names and circumstances have been changed.
00:12:29.919 --> 00:12:37.919
The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual.
00:12:38.080 --> 00:12:46.240
To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.