EP 25 -Retirement Planning by Life Stage: Roth Conversions, Protection & Income

Chris Brumlow: Welcome to On Course Financial, Charting Your Financial Future. This is the podcast for people who want clarity and confidence in their financial decisions. I'm Chris Brumlow. I'm a partner with the BAB Group. I'm a financial professional and an investment advisor representative, as well as retirement planning specialist. The BAB Group is a proactive accounting and wealth management firm. focusing on individuals and small business owners to provide holistic advice when it comes to navigating their financial futures. We help those individuals and business owners understand their numbers, connect them to real decisions, and use them to plan for the future, not just react to the past. In our podcast, this is where we talk about the real intersection of business, taxes, retirement, and life planning. Each week, we focus on helping small business owners and individuals make clearer more confident financial decisions without hype and without the guesswork. Here's a question that stops almost every new client that I sit down with. everything you own, the Roth account, the annuity, your 401k, a friend's recommendation, the life insurance policy you bought in your 20s, which one is actually doing its job right now? And most of the time, nobody's ever asked that. And here's what I've learned after years of doing this. The biggest planning failures that I see almost are never about chasing, or almost never about choosing a bad tool. They're about choosing a good tool at the wrong stage of life. A perfectly good strategy positioned five or ten years too early or too late can cost a household real money and flexibility when it matters the most. Today I want to walk through the framework that we use. At the BAB Group to answer that question. Where does each tool belong? And when does it actually get positioned? Because the tool itself is rarely the problem. Timing is. Welcome back to On Course Financial: Charting Your Financial Future. I'm Chris Brumlow, partner and investment advisor representative at the BAB Group, where we work with individuals, families, and small business owners across Georgia and Florida integrating tax planning, accounting, and wealth management. All under one roof. My goal in this show is simple, to give you the same planning logic that we use with our clients minus the jargon, so you can make competent decisions instead of reacting ones. Today's episode is about sequencing, not which tools exist. Most people can name half of them already, but when each tool is supposed to show up in the plan, and what happens when it shows up at the wrong time. I think about retirement in three stages. Accumulation, the decades where you're earning savings and building, pre-retirement, roughly the five to fifteen years before you stop working, where the structure of your plan actually gets built, and the retirement itself, where every decision that you made in those first two stages either pays off or gets exposed. Nearly every tool we're going to talk about, Roth strategies, market versus protected money, annuities, life insurance, even something like a properly designed cash value policy, has a right stage. And here's the part that trips up a lot of people. Most of that structure has to be built in stage two pre retirement in order to actually work in stage three. If you wait too long until retirement to start building, then you've waited too long. In the accumulation years, the default move is Roth. Roth four hundred one K, Roth IRA. And it's if your income is above limits of backdoor Roth done annually. If your employer plan allows after tax contributions in a plan and in plan conversions, that's a mega backdoor Roth opportunity. Most people never use it. You're paying tax now at a rate you know instead of gambling on a rate that you don't know about in the future. That's about as close to a free launch as as this business gets. What you're generally not doing at this stage is converting your existing pre-tax money to Roth. Your bracket, so to speak, in your p pre-peak earning years is usually too high. And there's no lower income window to convert into unless something unusual happens, like a sabbatical business loss year or a gap between jobs. On the investment side, this is growth weighted. broadly diversified portfolio. Contributions are your shock absorbers. In a down market, it's a buying opportunity, not a crisis. And because you're not withdrawing it. And this is where I flag one habit worth starting early, asset allocation. Your highest growth holdings belong inside the Roth because that's the account where the growth is never taxed again. As for annuities and long-term care insurance, largely it's not applicable yet. Sequence of return risk requires withdrawals and you're not taking any. What is AppQL is disability coverage and term life insurance. Size to protect your income and your family and bought while you're insurable. That last point matters more than people realize. Health is the one variable that can permanently close every insurance door later. And it is never cheaper to buy that protection than it is right now. If you're going to buy term, buy convertible term. gives you the option to move to permanent coverage later without new underwriting, even if you never use it. One more habit worth naming here, because I see it consistently. Concentration. Employer stock, RSUs, stock options, a growing business interest, all these carry the same risk wearing different clothes. It's easy to overlook it because it doesn't feel like risk when the stock is going up. It feels like risk in the year it isn't. Now Pre-retirement. This is where the structure gets built. This is the stage I want to spend the most time on because it's the one people skip. Sometimes it's five to ten years before your actual target retirement date. And these three things need to happen. First, you need to model your Roth conversion window. And that's the window that runs from your retirement date to the earlier of two things, the start of required minimum distributions or the start of Social Security. It's a limited window and it has to be designed. advantage, not discovered after the fact. For households carrying large pre-tax balances, the comparison that matters is your tax rate today versus your projected tax rate once RMDs begin. And for a lot of our clients, that future rate is higher, not lower than what they're paying now. Second, you need to build what I call the protected sleeve, the portion of your portfolio that's immune to market downturns at the moment you retire. We typically size that to cover what I call the fragile decade, roughly five years before retirement and five years after. This money comes out of your fixed income allocation, not your growth allocation. It's a bond substitute, not an equity substitute. This is where properly positioned fixed indexed annuities can serve two jobs at once. It replaces part of your bond allocation with no downside from market loss. And its annual free withdrawal provisions can become the funding source for your Roth conversions. So you're not selling growth assets in a down year just to pay the conversions tax bill. Picture two households doing the exact same conversion schedule. One funds it by selling equities. The market drops the first year. That household either breaks the schedule or sells at a loss. The other funds from a principally protected source. The schedule doesn't care what the market did. That contrasts the whole argument for positioning of this tool here before the fragile decade rather than during it. That third, and this is the one that families put off the longest. This is your long-term care decision window. Your health in your mid-50s to mid-sixties is usually good enough to qualify, and you're still far enough out that the premium is worth paying. There are three honest paths. Traditional long-term care insurance, which gets you the most benefit per premium dollar but carries a rate risk increase. A hybrid life and long-term care policy which costs more but pays a benefit either way, or a deliberate self-insurance plan where you actually build enough dollars to cover it. And the fourth one is we'll figure it out later, and that's usually the worst. If you're a high earner already maximizing and maxing out your account for your match, your HSA and your RAW, ten or more years of runway and stable cash flow. This is also where properly designed cash value life insurance policies can enter the plan. Max funded, minimum death benefit, never a modified endowment contract, funded all the way to completion. That design discipline isn't optional. A policy like that that gets abandoned in year four is a bad outcome, not a flexible one. Now you need to execute what you've built. By the time you've entered retirement, the conversion window is open and it's genuinely time limited. You need to convert every year up to the bracket ceiling set by your lifetime tax projection, not just the top of your lowest bracket out of health. Three forces push most households to convert more aggressively than it feels comfortable with. Required minimum distribution, stacking on top of Social Security, Medicare surcharge thresholds, and Those act like a cliff rather than ramps. And the fact that the surviving spouse files as a single filer at much smaller brackets with much roughly the same income, your portfolio now runs two allocations instead of one. An income floor and a growth sleeve. Managed to different jobs. The operating discipline and the down market is simple to say and hard to do. Draw from the protected sleeve and let the gross sleeve recover. And refill the protected and refill the protected sleeve only after up years, never after down years. That one habit is the mechanism that actually defeats sequence of return risks. And if you've built an income guarantee earlier, this is where it fills the gap between your essential expenses and what Social Security and any other pension, if you have it, cover. If you build cash value and a life insurance policy correctly, it becomes something of genuine use and it's the distinct source of tax-free income that doesn't count towards provisional income or push you across a Medicare threshold. We use it as a bracket management valve, drawing from it in specific years when one more dollar of taxable income would cost more than it's worth. So here are the takeaways. Three things I want you to take away from today. One, the question isn't. Is this a good tool? It's is this the right stage for this tool? Two, nearly all of your retirement structure has to be built in the five to ten years before you retire, not during retirement itself. And three, if nobody has ever walked you through when each piece of your plan is supposed to be put into place and activate, that's a conversation worth having before you need the answer, not after. If you're not sure whether your accounts, your insurance, your investments are actually sequenced correctly for where you are right now, that's exactly the kind of review we do here at the BAB Group. You can reach out to us and schedule a consultation, and we'd love to sit down with you and see how your plan is designed to hold up. Just a quick reminder, the information shared in these podcasts are for educational purposes only and isn't specific financial or tax advice. Everyone's situation is different. Good financial planning isn't about predicting the future. It's about creating flexibility. If today's episode raised some questions about your own situation, that's not a problem to avoid. It's an invitation to think more clearly. You can learn more or explore additional resources at our website, the BAB Group at b-a-b-c-f-o . com or simply continue the conversation by tuning in next week. I appreciate you sharing and we'll see you next time.