Tag: Retirement planning
Retirement Planning for Singles
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
Retirement is a big deal for anybody, and that's especially true for single people who may be retiring with just one income and who may have built up a nest egg solely off their own savings. So, we know that single people can and do retire comfortably. In fact, one quarter of people over age 60 are living alone in their household, and that number is slightly higher for women, and that's, of course, due to women's longevity. So what we're going to talk about here is retirement for single people. First, we'll go over some averages to give you a rough idea of what the landscape looks like for single people, then we'll get into how much money you might need as you go into retirement, then we'll talk about some tips that can help improve the chances of retiring comfortably.
Let's start with the average retirement income for single people. So it's $42,000 on average for an individual in retirement, and that comes from the US Census Bureau. The median is a little bit lower at $27,000. So a friendly reminder of how this works: The median is the middle, so if you line up all of the survey results, people telling you what their income is, for example, that arrow points at the middle observation, which would give us the median down at the bottom.
But if we go to the average, that is going to get skewed by, in this case, wealthy people, for example, they have a very high income. When it comes to Social Security, the average is about $1,500 a month or $18,000 per year.Your level depends, of course on your earnings, if you had higher earnings during your working years, then you tend to potentially have a bigger benefit than that, and it could be lower, and then of course, your claiming age is also an important thing. If you claim early at age 62, you get a reduced benefit. That's likely to bring down the amount you get. Next, we have pensions, some people get an income from a job they worked at. That might be in the public sector as a teacher, a firefighter, that sort of thing, or even in the private sector, you could have a pension from your job, and those incomes just are all over the board, it could be high, it could be low, but these are different sources of income that people might have in retirement.
This is just a friendly reminder that this is just one video and it may cover some interesting information, but it's not specific to you so I hope you'll do a lot more research, hopefully check with some professionals and get some individualized advice, and that way you can improve the chances of things going well for you. So now let's talk about how much you might need as you go into retirement. Unfortunately, there's no single answer on what you need because it depends.
So the first step is to figure out what sort of income you're going to need, and I've got other videos on that, I'll put links in the description to get you some more information, but you can look at replacing a portion of your income, or you can just say, I want X amount of dollars per year, or you can go with other approaches, but first we need to know how much income you are hoping for. Next, we tally up your income sources, so that might be some guaranteed income that comes in from Social Security, for example, or from your pension at your workplace, but that forms a base of income and that might or might not cover what you need. But it gives us a base and then if we need to fill that in, we can supplement withdrawals from your retirement savings, so that might be out of your IRA, your 401, 403, these accounts that you have built up over time can provide supplemental income to help fill the gap between that guaranteed income you get and the amount you actually want to spend. There are a number of ways to figure out how much to withdraw and to set up different strategies, there might be bucking strategies, there might be withdrawal strategies like the 4% rule.
Or if you don't like that, make it the 3% rule to be safer, or take out more if you think that's not enough and you're selling yourself short. Ultimately, there are a number of ways to approach this, so you just pick one that works well for you, and again, I can point you to some resources on figuring that out. And finally, you will want to look at taxes and inflation, so during your retirement years, it's reasonable to assume that prices may increase on many of the things you buy, so we want your income to be able to increase as well, Social Security typically does rise, but maybe not at the same rate as the things you're buying, so your withdrawals may need to account for that. Plus we've got taxes. You typically will owe taxes if you're taking distributions or you're taking withdrawals from pre tax retirement accounts. If you have a pension that might be taxable as well. We just want to look at all of these things and figure out what your ultimate money left over to spend each month is going to be.
For an over simplified example, let's just look at Jane Doe. She's 60 years old, she's single, she wants to retire in about five years, she makes about 80,000 a year and has 700,000. A lot of people retire with less than that, a lot of people retire with more. I'm going to bring up my financial planning software that I use with clients, and we'll just go over kind of why there's no single answer on how much you need. Now, if you can tell me exactly how long you'll live and what the markets will do and what inflation will look like, we can tell you exactly what you'll need. But there are a lot of unknowns, so a lot of times we start with a probability of success and I'll go over what that means, and then we look at little tweaks and how different changes might affect that probability of success, so working an extra year might bring her from…
Let's say 75% to 84% likely to succeed. Now, success and failure are pretty complicated. They don't necessarily mean that you go completely broke, but you may need to make some adjustments, so let's talk about what does the success mean? We, again, cannot predict the future, so we say, Let's look back and say, You get dealt 1,000 hands. You're playing a game of cards and you get 1,000 hands. Some of those are good and some of those are bad, so the very good ones tend to be up here, near the top. And you actually end up with a lot of money left over. Some of them are not as good and you end up running out of money early. The median is, again, that one that's right in the middle when we line them up in order for best to worst. And so you might say, you're probably not going to get the best, you're probably not going to get the worst, although anything is possible.
So that's how we go with this likelihood of success. Now, maybe she doesn't want to work an extra year, so we can look at different ways of accomplishing things here. By the way, we've built in some long term care in case she does get sick and needs that at the end of life. She's looking to spend about 4,000 a month, that's after some health care costs that are going to inflate each year, and she's saving a decent amount in some 401K and taxable accounts.
Let's say she goes ahead and maxes out that Roth, is it going to make a big difference? Not really, 'cause she only has five years left. So what we do here is we start looking at all of these different variables and playing with the pieces and figuring out what does it take to make her successful at her retirement, or at least successful enough that she's comfortable making that transition. So here are some tips to improve your chances.
The first is to plan for long term care. If you're living on your own, you don't have somebody in the house who can help you do things, and it's arguable if even a couple is capable of managing this on their own… I mean, if you think about a couple, is one of the people physically able to move the other person around and do they have the skills to provide health care, and the time and the energy, frankly, to provide all that type of care? So it's important for everybody, but it's especially important for single people to plan for this care.
So you can look at getting insurance, you can look at budgeting for some costs, like we showed you in the software, you might want to budget for a much bigger number if you go into memory care or something like that with 24 hour supervision, it can get really expensive quickly. And you can explore different living arrangements, maybe doing things with friends or certain communities that might be a good fit for you. Next is to avoid leaving money on the table so if you were previously married and your spouse passed away or you've been divorced, you may be eligible for benefits. That's maybe from Social Security, you can potentially get a survivor's benefit, or if you were married for at least 10 years and you've been divorced, you can potentially get spousal benefits on your ex spouse's work record.
It's just important to explore all of these to see if there are any resources available for you. Next is to make a plan, and I am of course biased as a financial planner, but I think it is really helpful to go through the process, and the main goal isn't to get a big document that tells you what your financial plan is. Instead, really, the benefit is going through that process and learning a lot about your finances as you do it, and in that process, you get an idea of what the risks are, how you're doing, you might get confidence and clarity on whether or not you can go ahead and retire, if you should do certain things or not.
It's just a very valuable process for a lot of people, but I'll leave that for you to decide. If you found this video helpful, please leave a quick thumbs up. That gives me feedback that this is something you might enjoy more of, so thanks for watching and take care..
Read MoreWhy Some Retirees Succeed and Others Live in Worry – 5 Retirement Truths
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
I want to share one of the most valuable pieces of retirement advice that I've ever heard if you're thinking about your retirement and you're wondering if you're doing the right thing or think that you should be doing something different or if you're just worried about all the things going on right now whether it's the economy or the markets or the value of your accounts be sure to watch this video because I'm going to share the retirement truths that every retiree goes through and it's these things right here we're going to cover today and every retiree goes through it and it they experience this in retirement so it's going to go over this and then also what to expect in retirement and then how to give yourself the best chances of maintaining your lifestyle in retirement as well now the negative of these retirement truths that we're going to look at is that many of them lead to increased uncertainty or worry about your retirement one of our goals though as we're thinking about it is really the opposite of uncertainty or worry in retirement it really should be more about confidence right the next years really all the way up until you pass away wait these are the the magic ears these could be the best years of your life and I know that because there's an actual study a research study uh proving this so let me pull that up really quick and show you the results and I'll link to it below people were asked to score their life satisfaction from zero to ten where 10 is the best possible life and then zero is the worst possible life and this is really just the average score by age and I thought it was encouraging to see that life satisfaction tends to increase as you can see as we get older and then it tends to Trail off as we get older but really the area the the period of time we want to focus on is that this is the magic time and we know this to be true as well because we've helped hundreds of pre-retirees move into retirement with confidence and excitement and these were the people who were coming to us that were feeling somewhat unsure or not 100 confident with their money plan and our firm streamline Financial has been around for 24 years and we've made it through quite a few bad Market periods with our clients and by the way if I haven't met you yet I'm Dave zoller and I own streamline Financial with Tim and Luke and Sean and if you're working with an advisor now that's mainly focused on investments and investment planning but doesn't talk about these key retirement strategies like the tax efficient withdrawal planning and income planning or just tax reduction overall feel free to reach out to us through the website now we don't always have time but I'll get back to you either way so let's get into this first truth in retirement it will be common to have that thought of maybe I should be be making a change or should I be doing something different it'll be normal to feel this way in retirement especially when you see the news or you're listening to friends talk about their finances there's this feeling or this thought of really making us doubt our current plan which causes some people to make more emotional decisions instead of making smart financial decisions and a good way to avoid this is really to avoid this feeling is by having an understanding of your plan which really leads to more confidence with what you're doing and having a plan for both the good times and also the bad Mark of times so that you know that you're prepared for either one of those and I'll give you some ways to achieve this coming up in this video now on to the second thing that comes up in retirement that we just have to be prepared for is we need to expect bear markets right you've most likely lived through a lot of them already and really in retirement though they feel a little bit different usually worse but because of the frequency creating a plan with bear markets in mind and really big Corrections built into the plan is a smart thing to do that way you don't have to worry when they eventually come now if you're not sure how to model out these various what-if scenarios or bad Market scenarios for your plan then you may want to talk to a cfp or check out my favorite retirement income planner below this video you should see a link to it it's one of the best consumer facing planners that I've seen and it doesn't cost thousands of dollars like the ones that we use for our clients the next thing to bring up is for pre-retirees who are close to stopping their wage especially if that's during bad markets they may think should I work a little bit longer maybe just one more year to kind of make it through this this difficult period we actually had a client call us up about five months ago and uh no she was five months into retirement and she said something like it seems like so much bad news is out there and what's going on with the markets I'm wondering if I it would have been better if I should have just kept working so we reviewed her plan and because we built in to her plan this expectation of bad markets everything looked great and and really the only reason to keep working would be if she really enjoyed this sort of work that she was doing and it brought her some some purpose but she didn't so it was great it was great confirmation that she was still on the right track so if this sounds like you take a look at another video I recorded I'm gonna either link on this screen or it'll be below and it gives a few real examples of what working an extra year might look like in a financial plan the next thing to know is that no one really knows what's going to happen next it seems like everybody has a prediction on TV or YouTube or at the dinner table with family or with friends and no one really knows what is definitely going to happen we know this uh in a logical way because you know there's that saying if you put 10 economists in the room together and they come up they need to come up with a conclusion they'll come up with 12 of different answers when they walk out knowing that it's important to prepare your investment plan for that four economic Seasons that we may go through in the future since we don't know which one we're going to go through next so just as as an example you've seen it before the four economic seasons are higher than expected economic growth or lower than expected economic growth and then higher than expected inflation or lower than expected inflation and there's asset classes that can do well in each one of those now again we don't know which way we're headed but having asset classes and each one of those potential Seasons that could be beneficial now that's just my opinion and really it's for all of this talk to your own Financial professionals before doing anything like this now on to the next one which really has more to do with human psychology than investment strategy and then after that I'll share the the really the most helpful piece of advice that I've heard related to retirement planning but if you'd like this so far please click on the the like button and and maybe this video can help somebody else going through the same things that that you're looking forward to so the next truth is in retirement we may have a tendency to compare ourselves to others the grass is always greener on the other side of the fence really throughout life that's we've got that tendency to compare it to others but it can harm us in retirement too if we do a video on this channel that mentions a dollar amount as an example we don't want that to really make you feel better or feel worse about your current situation because you know we help high net worth families at streamline Financial we sometimes mention big numbers but we don't want it to be about the numbers we really want to communicate just the principles and the strategies that can can really be applied to to anybody's finances and there's always going to be people with more than us and then there's always going to be people with less than us and the one who wins is the one who's content and at peace most at peace with their current situation you know that saying if I want to be able to practice being content with a little and I want to be able to practice being content with a lot and and you know healthy competition that's okay but comparing ourselves to someone else because uh you know if it causes us a feel of lack or less than that can hurt our retirement plans because that leads really back to that first point that we talked about in uh in this list of feeling like we should be doing something different for example if we see a guy on the internet and he's investing a certain way or he's deciding he's changing up his entire strategy um because of what's happening with the economy then that may cause us to feel like we should be doing something different and then start to increase the emotional level of uh of our decision making instead of staying to strictly logical or financial levels but again it's a normal feeling to feel that worry or fear or anxiety um with what's happening during during current periods but one of the most helpful pieces of advice that I've heard that we can apply to retirement planning is really the difference between those two words fear and anxiety knowing the difference between those two is actually very very helpful as we're planning retirement and talking about money that is if we want to feel better about what we're doing right now when we think about fear and anxiety we might think of them as being the same thing but actually they're completely different things and let me just pull up these two definitions if I can really quickly fear is a caution over a real and present danger and then anxiety is a worry over an imagined future danger now fear if we've got something right in front of us then it's obviously a very helpful tool for us as humans anxiety though is not always a helpful tool as as we're trying to process things partly because these anxieties there's nothing we can do to control or influence them you may have seen this drawing from Carl Richards before about things that matter and then things I can control here's a place to focus and then another way to look at it is we actually sent this to clients not too long ago on a video of what you can't control and what you can control so we can't control the markets and inflation and what they're doing with interest rates or what's happening in the news or the world or tax laws or the elections but a lot of these things actually do relate to things that we can control for instance you know markets are inflation or interest rates your portfolio allocation you can control that you can control when to pay taxes when it's related to in investing you know as we're talking about Roth conversions or the the costs the tax cost tax drag on some of the portfolio and not to get too nerdy about these things but two of the biggest things that we've seen is this idea of not controlling the news but what we can control is news consumption we've seen a big shift with uh some people who instead of someone who wants to consume the news they switch from TV news to reading news where you have a little bit more control of what's coming at you versus TV is just the next thing is coming at you if you know what I mean I don't know if that's if I if I'm explaining that the right way but back to the this video all the things that we mentioned before earlier here um a lot of these can be anxiety-inducing things as well right the severity of a bear Market or not being able to predict what's going to happen next in the world or comparing ourselves and doubting our plan or thinking that we don't have as much as as we wish we had when it comes to to money or the you know what if this happens and what if this happens how is that going to impact my plan and that can lead that sort of thinking can lead to paralysis and really no action being taken but what if you had a plan that was built in to show those different what-if scenarios so instead of the unknown future danger you're able to get more concrete scenarios in the plan as a result that's what I would recommend once you get get it out in the open then it becomes a lot less scary we both know that so either find a great certified financial planner who can show you that and show you the what-if scenarios or check out the the DIY planner or a different planner that helps you put in those what-if scenarios as well so it becomes less scary so don't forget anxiety is it can be the thief of Dreams it takes you away from enjoying the the present moment and it stops you from even taking the right action to make things better in the future because it really just makes you only focused on on the negative as you're you're moving through life that video that I mentioned earlier is called why delaying retirement might not be a good idea if you're pre-retirement and you're thinking you want to work a little bit longer because of what's going on take a look at that one coming up next or below and then I'll see you in the next video take care foreign [Music]
Read MoreYour Tell-All Guide to Saving for Retirement
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
I'm Britt, the co-founder of Dow Janes, andÂ
every single week I have someone asked me  how they can start saving for retirementÂ
or how much they need or if it's too late  to start saving. Today, I'm going to share myÂ
top tips for starting to save for retirement.  And don't worry; it's easier than you think.
If you want more ideas for saving, investing,  and making the most of your money,Â
don't forget to hit the subscribe button  and the bell so you don't miss any newÂ
videos. And if you liked this video,  definitely give it a thumbs up.
All right. So, there are some misconceptions  about retirement saving that I want to address.Â
First, one thing people often ask us is how much  do I need for retirement? What's the magic number?Â
And the truth is it varies widely.
It depends on  where you want to live or what lifestyle youÂ
want to have or when you want to retire. Are  you trying to retire at 40 or at 70?0.
If you take anything away from today, I want  you to just start saving 20% of your pre-taxÂ
income for your retirement, and you'll be fine.  To learn more though, keep listening.
Okay. So how do you start saving for  retirement? What you do is you follow the roadmapÂ
steps. You make sure you're doing things in the  right order. So we have a whole nother videoÂ
on the roadmap steps, but just to recap,  the first thing you want to do is make sureÂ
you're spending less than you make each month.
 The second thing is to pay off anyÂ
high-interest rate debt you have, which is  anything with an interest rate over 7%, thenÂ
you want to build up an emergency fund.
And  then once you have those three things in place,Â
you're ready to start saving for retirement.  So, to do that, you're going to find your monthlyÂ
savings number. You can use a simple retirement  calculator to figure out how much you want to haveÂ
in retirement. I'll link to one in the description  below. What you'll do is you'll add in yourÂ
current savings, anything you've already saved  for retirement already, anything you expect to getÂ
from social security, and then you'll adjust the  savings amount to see exactly how much you needÂ
to save each month to be on track, to meet your  retirement goals. It's a super easy calculator,Â
you just enter the numbers. It'll spit out exactly  what you need to do, and that number, that savingsÂ
amount, that's going to be your monthly goal.
 So, if you don't already have an account,Â
you'll open up a retirement account,  and that's where you'll begin to transfer thatÂ
savings amount to that account each month.
 Where should you save your money? There areÂ
different types of retirement accounts.
So,  if your employer offers matching, then you'llÂ
want to open a 401(k) or 403(b). In addition,  you can open a Roth IRA or a traditional IRA.Â
IRA stands for Individual Retirement Account.  If you're self-employed, you can also open a SEPÂ
IRA. So for the Roth traditional or SEP IRAs,  you can open those at any brokerage placesÂ
like Vanguard, Charles Schwab, Fidelity,  or with a robo-advisor like Wealthfront orÂ
Betterment. Any of those places offer retirement  accounts. So, it's super easy to get started.Â
Then if your employer offers 401(k) matching,  you definitely want to advantage of that.
So, what is 401(k) matching? It's when you  save money for your retirement and your companyÂ
contributes the same amount that you save.  They'll often match up to a certain amountÂ
or a certain percentage of your salary.
 So, if your company matches 4% of yourÂ
salary and you make $5,000 per month,  you could contribute $200 per month towards yourÂ
retirement, and your company would contribute an  additional $200 per month.
So you basically getÂ
$200 in retirement money for free each month.
 It's a way for companies to incentivizeÂ
their employees to save for retirement.  So, if your employer offers this, definitely takeÂ
advantage of it. It's the easiest free money out  there. And make sure you're contributing theÂ
maximum amount that they're willing to match.
 Okay. The next thing you'll do, if your employerÂ
doesn't offer matching, or if you're, um, if  you've already maxed that out, the next thingÂ
you want to do is max out your contribution to  your Roth or your traditional IRA. So, each year,Â
the IRS limits the amount that you're allowed to  contribute. In 2021, the amount is $6,000.
If you're over 50, you have an extra bonus. You  can contribute $7,000. So, try to contribute theÂ
maximum amount to those accounts each year. So,  max out your 401(k) to where your company matchesÂ
max out your Roth or your traditional IRA. If  you're self-employed, you could also contribute toÂ
your SEP IRA. If you're a great saver and you're  saving more than those amounts, you can openÂ
your own brokerage account.
So, a non-retirement  account, and save the money there. You can useÂ
that money for whatever you want, but you can  know that you're saving that for retirement.
Once you've saved the money in those accounts,  what you're going to do is invest that savings. SoÂ
for the easiest and simplest way to get invested,  you'll invest in target date funds. TheseÂ
are pre-made portfolios that allocate your  money to a mix of stocks and bonds thatÂ
are appropriate based on your age.
 If you want to invest in index funds yourself,Â
or if you're picking a fund that your employer  offers, then you can use these rules of thumb.Â
Generally, you want your portfolio to be invested  in the percentage of stocks that is equal toÂ
120 minus your age.
So if you're 20 or younger,  you want to have 100% of your portfolioÂ
in stocks. If you're 30, you want 90%Â Â in stocks, for example. And just a quickÂ
note that if you invest in target date funds,  that will do that for you. The allocationÂ
changes the allocation of stocks and bonds  changes over time as you get older.
One quick thing to know is that you  actually don't need to take your money, yourÂ
retirement money, out the year that you retire.  You can leave it invested while you're inÂ
retirement and just take out what you need,  which means you actually have more timeÂ
than you think for your money to grow.
 So, hopefully that gives you some peace of mind.Â
If you're getting started later in the game,  if you're wondering how much you should beÂ
saving in retirement savings each month,  we have a couple of rules of thumb for you.
AndÂ
the bottom line is the sooner you start saving for  retirement, the less you actually have to save,Â
because if you start sooner and you invest that  money, it will grow and it will grow over a longerÂ
period of time. If you're starting later in life,  you have to save more because it has lessÂ
time to grow. So, if you're in your twenties,  you can save 15% of your pre-tax income eachÂ
month and you'll be set. If you're starting  in your thirties, you want to save 20% of yourÂ
pre-tax income. If you don't have anything saved  and you're just starting to save for retirement inÂ
your forties or your fifties, you'll need to save  even more since you're starting later and yourÂ
money has less time to grow. If this is you, watch  out for our next video on how to start savingÂ
for retirement if you're in your fifties.
 All right, the sooner you start saving forÂ
retirement, the easier it is.
So, here's a recap  of the steps: One, follow our wealth buildingÂ
roadmap, so you know what to do in what order.  Two, find your monthly savings. Number three, openÂ
a retirement account. Four, take advantage of free  money. Five, max out your contributions. Six,Â
invest your retirement savings, and seven,  contribute to your retirement savings eachÂ
month. If you want to learn more about how  to build your wealth and invest your retirementÂ
savings, then definitely check out our webinar,  Think Like an Investor. The link's in the commentÂ
below.
All right. Thanks for watching..
Read More2 Retirement Tax Planning Strategies To Save THOUSANDS In Your Retirement Portfolio!
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
how would you like to save hundreds of thousands of dollars potentially in taxes in retirement well these two strategies I'm going to go through today when combined together have the potential to do just that now if you don't qualify for net unrealized appreciation because you don't have company stock inside your 401k you can still qualify for zero percent taxes on your long-term capital gains and dividends so when we combine these strategies together it creates a very powerful tax and income planning tool that you can use for your retirement [Music] foreign as you can tell I'm pretty excited about this video because we're going to discuss two tax planning strategies the net unrealized appreciation which I've not yet done a video on the YouTube channel about and also the zero percent taxation for long-term capital gains and dividends and you're going to want to stick around until the end of the video where I incorporate these two strategies into a real life financial planning case now unless you've searched net unrealized appreciation to find this video there's a pretty good chance you've never heard of net unrealized appreciation so in its most basic form it's when you have company stock that's been issued inside your 401k you have the option of rolling that money outside of your 401k not into an IRA but rolling it out only paying income tax on the basis that's been distributed and potentially pay long-term capital gains tax on the appreciation so that appreciation from where it was issued to where it is whenever you roll it out and retire or sever from service or become 59 and a half that's what's called your net unrealized appreciation we're here in Houston Texas where we have a lot of client clients that worked at Exxon Mobil or Chevron or some of the other big oil and gas companies we also have clients from all over the country that work for other companies that can take advantage of this net unrealized depreciation strategy so I'm going to use Exxon because we come across this plan a lot we're very familiar with the Exxon retirement plan and I want to illustrate how this concept works and there's some nuances here and there's also some financial planning considerations and of course tax ramifications that we're going to go through but if I worked at Exxon let's say from 1995 to 2020 and as part of my compensation I receive shares of stock each year over the course of my employment so these numbers are not historically accurate but I want to convey the the principle here so in the beginning years if Exxon was trading at twenty dollars and I received a hundred shares and then next year maybe I received them at 22 dollars per share and twenty five dollars per share and over time as I've received more shares as part of my compensation package the value has typically increases the price at which you were issued those shares in the year you received them is what's called your cost basis so if we do this Nua rollout that's the amount that you'll have to pay income taxes on but it's a really cool opportunity here because over time most stocks appreciate in value Exxon today is at a hundred and sixteen dollars per share so the concept of Nua is if I was issued stock at twenty dollars a share and I keep it in the IRA and now it's at 116 dollars a share that's a massive amount of capital appreciation and if I roll it to an IRA and distribute it at that point or at some point in the future I'm going to income taxes and that can can lead to a pretty big tax liability now we're down the road when I need income but if stocks appreciate it over time we typically have a mixed cost basis when it comes to the amount of shares that we've received from the company so first thing to know here and first thing to ask your company is do you guys provide a breakdown of the cost basis on an annual reporting period or do you take the average cost basis so we come across some companies here that they will provide you the information of the exact cost basis and the amount of shares that you've received in each year in that case we can really cherry pick which shares we want to roll out and really take advantage of this strategy because typically we're going to take the lower cost basis ones some companies don't allow you to cherry pick based on the lower basis shares that were issued they calculate an average cost basis for all the shares issued so this is not nearly as advantageous as being able to cherry pick sometimes it can still make sense especially if it's an older 401k or if it's a stock that has really really appreciated since those shares were issued in the average cost basis is down so this video my primary purpose is to help educate you around the financial planning considerations of the Nua rollout so I'm not going to cover all the rules and reg surrounding it I'll do that in a later video though but a couple things you should know this becomes an opportunity whenever you sever from service or typically when you're entering retirement there are some other qualifications but we'll cover those later now if you sever from service prior to age 55 you will be subject to a 10 penalty on the amount you distribute so just be aware that if you're under the age of 55 you've severed from service you have company stock inside your 401k that that 10 penalty for early distribution still applies we have Exxon this 401K here so the total value is about 1.5 million in this hypothetical example the shares the tote in totality the shares have been issued over the course of the working career equals about a six hundred thousand dollar cost basis so I'm going to use the example here where we can cherry pick the individual shares so the next question becomes which shares should I consider doing the Nua rollout because I don't have to roll all six hundred thousand basis out in the real world typically this 1.5 million of fair market value may also be comprised of mutual funds such as growth funds income Etc within the 401K for the purpose of this example Exxon stock is valued at 1.5 million dollars the cost basis of those Exxon shares within the 401K is 600 000.
Just want to point out in the real world typically everyone does not have all their money invested in their company stock but I've I've absolutely seen that over the years so the question becomes which shares do we want to take advantage of the annual rollout with the general rule of thumb is the lower cost basis Shares are more attractive and that's determined by the the value of the stock today anything above 50 percent cost basis to fair market value typically we don't want to consider for Nua now there are some extenuating circumstances sometimes with financial planning considerations that it may make sense but when we do the math and we extrapolate out looking at the value that you would have in the ira versus paying taxes on the basis now annual taxation for growth dividends Etc the Breakeven point isn't that attractive when we look at these shares that are above 50 percent cost basis to fair market value I personally like to see them around 20 or 30 percent really tops so whenever you have shares that are 10 15 20 25 cost basis to fair market value those are typically very attractive opportunities and in some situations Thirty thirty five forty percent could possibly make sense it just depends on the overall financial plan that you're putting together in other circumstances so this is a tax analysis so you may want to reach out to your CPA for help or assistance in doing this or your financial advisor if they're qualified and skilled enough to help you make these determinations I want to run through some numbers now so let's assume for whatever reason this person decides to do the whole Nua rollout so just so we understand the how this functionally works the 600 000 rolls out of the 401K into a non-ira account income tax is due on that six hundred thousand dollars you're probably looking at about a 27 28 maybe 30 percent effective tax rate we'll go with 30.
So 100 eighty thousand dollars of income taxes would be due on the basis being rolled out but in this scenario you're not just rolling out 600 000 That's the basis you're actually rolling 1.5 million dollars out of the 401K and only paying income tax on the basis now if you sell it immediately the net unrealized appreciation is the difference between the basis and the fair market value so you have nine hundred thousand dollars of gain there so if you sell that nine hundred thousand you're looking at the more preferential long-term capital gains tax that would be a pretty big tax still so the question becomes the are what planning considerations should we hold on to this stock do we feel comfortable having this much in one company what is our other wealth what if we break it out over a few years so this is what we're really going to dive into now I just want you to understand how this actually works in regards to the functionality okay let's cover how this actually works so we take the Exxon stock the basis is 600 000 but the full value is 1.5 million so if in this example we decide we want to do it all we would roll the full 1.5 million out of the 401K it will go into a non-ira account but you only owe income taxes on the basis the 600 000.
If you sell the stock immediately you will owe long-term capital gains tax which is a more preferential rate than income taxes at this level of income on the difference between the basis and the fair market value or nine hundred thousand there but you don't have to sell it right away if you don't sell it right away and then you sell it six months later you'll be subject to short-term capital gains tax because you're holding period rules take take into a place or taken to effect if you don't sell it immediately but if you wait 12 months after the distribution date 12 months in one day then you qualify for long-term capital gains tax treatment so some of the financial planning considerations are now what are the income taxes due what is my income and tax plan year one year two year three of retirement how does this fit into that overall tax and income plan and how do we optimize how do we reduce the total taxes we pay while maximizing the value that we retain if we have to pay income taxes on six hundred thousand dollars you're looking at an effective tax rate there of about 27 28 maybe 30 percent so 30 on 600 is a hundred and eighty Grand so you'd write that check to Uncle Sam and you would have 1.5 million outside of the 401K in the more preferential tax environment of long-term capital gains and dividends now you would have annual taxation on these dividends so that's something else we need to consider and we also need to consider future tax rates and make assumptions with what do we think income tax rates are going to be in the future long-term capital gains and dividend rates all of these things go into the analysis but for now this is the logistics of how it works we roll it all out pay income taxes on the basis we can either sell it immediately and pay long-term capital gains on the differential or we can hold it and if we hold it past the distribution date sell it within 12 months short-term capital gains sell it post 12 months long-term capital gains okay so I want to dive deeper into the two options we have just high level so option A is We Roll everything to the IRA we do not take advantage of the Nua rollout eligibility things that we have to consider here is future tax rates rmds other income sources and the secure act now this is not an exhaustive list this is just some of the big ones we have to take and consider future tax rates because when everything is inside that tax infested Ira when you distribute it in the future you have to pay income taxes you've given up the ability to take advantage of long-term capital gains and dividend taxes which are typically a preferential rate rmds Force distributions from your retirement account and when added with other income we oftentimes see people who did not plan for this have 150 200 250 even more of income because of required minimum distributions and their other income so when doing this analysis we have to extrapolate out and look at these factors to help make the decision today secure act I threw this in here because it forces distribution of your retirement accounts if they go to a non-spouse beneficiary that's more than 10 years younger than you full distribution of the retirement account within 10 years so if you have kids and it's important to leave this money to your children if they have income and they're working and now your retirement account has to be fully distributed within 10 years that could be a massive amount of income going on top of their income which now 30 40 50 60 potentially of your retirement account has gone to Uncle Sam if you live in a state with income taxes that could be an issue as well inheritance taxes so a lot of issues here rolling everything into the IRA you can be hit with um pretty big income taxes down the road option b is we do take advantage of the Nua rollout either wholly or in a partial Nua rollout how that works is we would take the shares that we do decide to take advantage of this strategy and we roll them into the non-ira account some things to consider there is that what are long-term capital gain rates now what are they possibly going to be in the future but also we have annual taxation of the dividends and if we're buying and selling inside that account whatever we do not roll into the non-ira account with the strategy the rest of the funds from your 401k go into the IRA and then of course whatever's left here we have the same considerations that I went through over here so now there are financial planning considerations here let's say I was at 35 cost basis to fair market value so I'm kind of right there where mathematically it may not make sense but how much non-qualified money do I have how much essentially I'm saying how much do you have outside of your retirement accounts because if you're entering retirement and all that money is inside that tax infested 401K then you don't have any ability to manipulate what goes on your 1040 your tax return by manipulate I mean we determine which accounts were withdrawing income from to manage our taxable income that we report to the IRS if we pull from our non-qualified accounts think your bank account well you don't have to report that so if you need a hundred thousand a year we pull 50 from your bank and 50 from your IRA you get your 100 000 but only fifty thousand goes on the tax return that's how we can manipulate that so how much non-qualified money do you have if you don't have much we may want to consider doing a little bit higher Nua rollout because even mathematically it may not make sense when we just compare that decision in isolation to do or not to do the Nua rollout but when we now look at the other benefits that we're receiving such as the ability to do Roth conversions the ability to manipulate what goes on our 1040 the ability to possibly qualify for a health care subsidy if you retire before the age of 65 by managing the reportable or taxable income that's reportable we can qualify for a subsidy so this is why we're so big on financial planning because as you can see it's not just about Investment Management in retirement that's important absolutely but when we tie in financial planning with Investment Management we can create some really optimal scenarios where we're creating a ton of value and helping you have more income pay less tax and ultimately have more value throughout the course of your retirement okay this is the part that I mentioned in the beginning of the video where we're going to tie into kind of a real world plan planning case so we laid the groundwork for what Nua is and some of the considerations that you have to make in order to determine if it makes sense for you to do the Nua rollout so what I want to point out here is the tax and income plan for retirement years one two and three for someone who takes advantage of the Nua rollout because the question becomes when do we sell that stock if we have 30 40 50 percent of our entire net worth in our company stock it's pretty risky to hold on to that position just so we don't pay more in taxes so here's where we're going to tie the financial planning considerations of the real world application and decisions we have to make on the Nua rollout with years one two and three of someone just entering retirement one of the big risks is if we roll it out the company's stock and we decide not to sell it because we don't want to pay the long-term capital gains immediately if we hold on to that that concentrated Equity position we have increased our risk now there are investment strategies that can be used such as buying a put option or what we call an Equity caller but I want to just talk about the tax and income plan here so in this scenario client rolls out the annual way so they have a large concentrated Equity position and they've paid income tax on the basis but do not want to sell the company stock yet so as part of the tax and income plan what I want to show you is we could break this up so year two year three and even year four possibly depending on the size of the concentrated Equity position Company stock where zero percent taxes essentially so we have total income here of a hundred and twenty thousand so what this is the tax and income strategy where we're generating income year two of retirement not year one because in year one you've done the the Nua rollout you have a big tax liability from paying income taxes on the cost basis of that company stock so here's your two so year two the the tax and income strategy is don't take anything out of the 401K no Roth conversions we're going to sell the company stock that we previously rolled out take advantage of Nua and we can have a hundred and twenty thousand dollars of income here as long as it's all capital gains and dividends your total tax liability 458 dollars now what I've done here is assumed twenty thousand dollars of dividends because if you have company stock and you roll it out it probably paid some dividends so 20K there and a hundred thousand of long-term capital gains we're realizing we're recognizing so this is darn near zero percent on a hundred and twenty thousand dollars of retirement income and we're divesting from that company stock now again some risk management strategies we could have an equity caller or put option helping to support downside volatility of that concentrated position but just taxing in complaining wise I want to show you how how this can work out so here now I've added 125 000 of long-term capital gains with twenty thousand dollars of dividends total AGI 145 000 the total tax 4208 on 145k of income 2.9 percent so again we've divested so maybe this is year two of retirement or year three we've divested from the company stock we've reduced our risk we've provided the income that we needed for retirement and we've done so in a way that's tax advantaged same thing goes on now I wanted to point this one out because I've here I've thrown in the same 20 000 of dividends 125 000 of long-term capital gains so we're selling the stock again but now we also take advantage of a twenty thousand dollar Ira distribution so this is which accounts do we pull income from in retirement how do we generate income what's the tax plan total AGI comes up to 165 the total tax is 7208 but here's the cool part the IRS ordering rules for how you pay tax on income based on where that income is generated the distribution from the IRA is actually tax-free but what happens is when you take money out of the IRA it brings some of those long-term capital gains into taxation so I did a video not too long ago where we talked about adjustments and Social Security and IRA distributions and wealth conversion taxes the tax code is filled with these where if we we take one more dollar of income it brings one other item into now a taxable State such as Social Security or long-term capital gains or dividends so just just be aware of that I guess 165 000 of income seven thousand two hundred and eight dollars in income taxes representing a four point four percent tax rate so now one two three four years into retirement we've divested the uh concentrated stock risk we provided income and a very tax advantaged manner we still have that Ira with a lot of money in it to deal with but once this is done we would probably at that point start down the Roth conversion path now every situation is different but hopefully these topics and ideas and and considerations when it comes to risk management income planning tax planning and retirement will help you have a better retirement if you want to learn in more detail how to potentially pay zero percent in long-term capital gains and on your dividends click this video right here I did a couple years ago where we do a deeper dive into the special tax advantage [Music] thank you
Read MoreRetirement Planning for Singles
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
Retirement is a big deal for anybody, and that's especially true for single people who may be retiring with just one income and who may have built up a nest egg solely off their own savings. So, we know that single people can and do retire comfortably. In fact, one quarter of people over age 60 are living alone in their household, and that number is slightly higher for women, and that's, of course, due to women's longevity. So what we're going to talk about here is retirement for single people. First, we'll go over some averages to give you a rough idea of what the landscape looks like for single people, then we'll get into how much money you might need as you go into retirement, then we'll talk about some tips that can help improve the chances of retiring comfortably. Let's start with the average retirement income for single people. So it's $42,000 on average for an individual in retirement, and that comes from the US Census Bureau. The median is a little bit lower at $27,000.
So a friendly reminder of how this works: The median is the middle, so if you line up all of the survey results, people telling you what their income is, for example, that arrow points at the middle observation, which would give us the median down at the bottom. But if we go to the average, that is going to get skewed by, in this case, wealthy people, for example, they have a very high income. When it comes to Social Security, the average is about $1,500 a month or $18,000 per year.Your level depends, of course on your earnings, if you had higher earnings during your working years, then you tend to potentially have a bigger benefit than that, and it could be lower, and then of course, your claiming age is also an important thing. If you claim early at age 62, you get a reduced benefit. That's likely to bring down the amount you get.
Next, we have pensions, some people get an income from a job they worked at. That might be in the public sector as a teacher, a firefighter, that sort of thing, or even in the private sector, you could have a pension from your job, and those incomes just are all over the board, it could be high, it could be low, but these are different sources of income that people might have in retirement. This is just a friendly reminder that this is just one video and it may cover some interesting information, but it's not specific to you so I hope you'll do a lot more research, hopefully check with some professionals and get some individualized advice, and that way you can improve the chances of things going well for you.
So now let's talk about how much you might need as you go into retirement. Unfortunately, there's no single answer on what you need because it depends. So the first step is to figure out what sort of income you're going to need, and I've got other videos on that, I'll put links in the description to get you some more information, but you can look at replacing a portion of your income, or you can just say, I want X amount of dollars per year, or you can go with other approaches, but first we need to know how much income you are hoping for. Next, we tally up your income sources, so that might be some guaranteed income that comes in from Social Security, for example, or from your pension at your workplace, but that forms a base of income and that might or might not cover what you need. But it gives us a base and then if we need to fill that in, we can supplement withdrawals from your retirement savings, so that might be out of your IRA, your 401, 403, these accounts that you have built up over time can provide supplemental income to help fill the gap between that guaranteed income you get and the amount you actually want to spend.
There are a number of ways to figure out how much to withdraw and to set up different strategies, there might be bucking strategies, there might be withdrawal strategies like the 4% rule. Or if you don't like that, make it the 3% rule to be safer, or take out more if you think that's not enough and you're selling yourself short. Ultimately, there are a number of ways to approach this, so you just pick one that works well for you, and again, I can point you to some resources on figuring that out. And finally, you will want to look at taxes and inflation, so during your retirement years, it's reasonable to assume that prices may increase on many of the things you buy, so we want your income to be able to increase as well, Social Security typically does rise, but maybe not at the same rate as the things you're buying, so your withdrawals may need to account for that.
Plus we've got taxes. You typically will owe taxes if you're taking distributions or you're taking withdrawals from pre tax retirement accounts. If you have a pension that might be taxable as well. We just want to look at all of these things and figure out what your ultimate money left over to spend each month is going to be. For an over simplified example, let's just look at Jane Doe.
She's 60 years old, she's single, she wants to retire in about five years, she makes about 80,000 a year and has 700,000. A lot of people retire with less than that, a lot of people retire with more. I'm going to bring up my financial planning software that I use with clients, and we'll just go over kind of why there's no single answer on how much you need. Now, if you can tell me exactly how long you'll live and what the markets will do and what inflation will look like, we can tell you exactly what you'll need. But there are a lot of unknowns, so a lot of times we start with a probability of success and I'll go over what that means, and then we look at little tweaks and how different changes might affect that probability of success, so working an extra year might bring her from…
Let's say 75% to 84% likely to succeed. Now, success and failure are pretty complicated. They don't necessarily mean that you go completely broke, but you may need to make some adjustments, so let's talk about what does the success mean? We, again, cannot predict the future, so we say, Let's look back and say, You get dealt 1,000 hands. You're playing a game of cards and you get 1,000 hands. Some of those are good and some of those are bad, so the very good ones tend to be up here, near the top. And you actually end up with a lot of money left over. Some of them are not as good and you end up running out of money early. The median is, again, that one that's right in the middle when we line them up in order for best to worst.
And so you might say, you're probably not going to get the best, you're probably not going to get the worst, although anything is possible. So that's how we go with this likelihood of success. Now, maybe she doesn't want to work an extra year, so we can look at different ways of accomplishing things here. By the way, we've built in some long term care in case she does get sick and needs that at the end of life. She's looking to spend about 4,000 a month, that's after some health care costs that are going to inflate each year, and she's saving a decent amount in some 401K and taxable accounts. Let's say she goes ahead and maxes out that Roth, is it going to make a big difference? Not really, 'cause she only has five years left. So what we do here is we start looking at all of these different variables and playing with the pieces and figuring out what does it take to make her successful at her retirement, or at least successful enough that she's comfortable making that transition.
So here are some tips to improve your chances. The first is to plan for long term care. If you're living on your own, you don't have somebody in the house who can help you do things, and it's arguable if even a couple is capable of managing this on their own… I mean, if you think about a couple, is one of the people physically able to move the other person around and do they have the skills to provide health care, and the time and the energy, frankly, to provide all that type of care? So it's important for everybody, but it's especially important for single people to plan for this care. So you can look at getting insurance, you can look at budgeting for some costs, like we showed you in the software, you might want to budget for a much bigger number if you go into memory care or something like that with 24 hour supervision, it can get really expensive quickly.
And you can explore different living arrangements, maybe doing things with friends or certain communities that might be a good fit for you. Next is to avoid leaving money on the table so if you were previously married and your spouse passed away or you've been divorced, you may be eligible for benefits. That's maybe from Social Security, you can potentially get a survivor's benefit, or if you were married for at least 10 years and you've been divorced, you can potentially get spousal benefits on your ex spouse's work record. It's just important to explore all of these to see if there are any resources available for you.
Next is to make a plan, and I am of course biased as a financial planner, but I think it is really helpful to go through the process, and the main goal isn't to get a big document that tells you what your financial plan is. Instead, really, the benefit is going through that process and learning a lot about your finances as you do it, and in that process, you get an idea of what the risks are, how you're doing, you might get confidence and clarity on whether or not you can go ahead and retire, if you should do certain things or not. It's just a very valuable process for a lot of people, but I'll leave that for you to decide. If you found this video helpful, please leave a quick thumbs up. That gives me feedback that this is something you might enjoy more of, so thanks for watching and take care..
Read MoreWhy This Investment System Can Help Retirees Worry Less About Their Retirement Plan
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
I want to share an investment system for retirees to hopefully assist you as you're thinking about and planning for your retirement we're also going to look at how to prepare your retirement for the multiple potential potential economic Seasons that we may be headed into so we want to look at the multiple seasons and then the Easy System that's going to help lower taxes and then lower risk as well now if I haven't met you yet I'm Dave zoller and we help people plan for and Implement these retirement strategies really for a select number of people at streamline Financial that's our retirement planning firm but because we can't help everyone we want to share this with you as well so if you like retirement specific videos about one per week be sure to subscribe so in order to create a proper investment plan in system we want to make sure that we build out the retirement income plan first because without the income plan it's much harder to design the right investment strategy it's kind of like without the income plan it's like you're guessing at well 60 40 portfolio sounds good or you know May maybe this amount in the conservative bucket sounds reasonable you already know and and you feel that as you get close to retirement that goal of just more money isn't the the end-all goal that we should really be aiming for for retirement it's more about sustainability and certainty and then really the certainty of income and possibly less risk than before the last 30 years uh the things that you did to be successful with the financial side are going to look different than the next 20 or 30 years now if you need help defining the the income plan a little bit then look at the DIY retirement course below this video now once you do Define your goals for retirement and then the income needed to achieve those goals then creating the investment system becomes a lot easier and within the investment plan we really know that we can only control three things in all three things we actually want to minimize through this investment system the first thing we can minimize or reduce is how much tax you pay when investing we had a a client who was not a client of streamline Financial but of a tax firm coming to the the CPA firm in March to pick up his tax return and he was completely surprised that he had sixty thousand dollars of extra income on his tax return that he had to pay tax on right away before April 15th and it was due to the capital gains being recognized and other distributions within his investment account and he said but I didn't sell anything and the account didn't even go up that much last year and I got to pay tax on it but he was already in the highest tax bracket paying about close to 37 percent on short-term capital gains and dividends and interest so that was an unpleasant surprise and we see it happen more often than it should but this can really be avoided and here's two ways we can control tax so that we don't have to have that happen and really just control tax and pay less of it is the goal and I'll keep this at a high level but it'll get the the point across number one is the kinds of Investments that you own some are maybe funds or ETFs or individual uh equities or things like that the funds and ETFs they could pass on capital gains and and distributions to you each year without you even doing anything without you selling or or buying but it happens within the fund a lot of times now we would use funds and ETFs that are considered tax efficient so that our clients they can decide when to recognize gains rather than letting the fund company decide now the second way is by using a strategy that's called tlh each year there's many many fluctuations or big fluctuations that happen in an investment account and the strategy that we call tlh that allows our clients that's tax loss harvesting it allows them to sell an investment that may be down for part of the year and then move it into a very similar investment right away so that the investment strategy stays the same and they can actually take a write-off on that loss on their taxes that year now there's some rules around this again we're going high level but it offsets uh you know for that one client who are not a client but who had the big sixty thousand dollars of income he could have been offsetting those capital gains by doing tlh or tax loss harvesting that strategy has really saved hundreds and thousands of of dollars for clients over a period of years so on to the next thing that we can control in our investment plan and that's cost this one's easier but many advisors they don't do it because it ends up paying them less now since we're certified financial planner professionals we do follow the fiduciary standard and we're obligated to do what's best for our clients so tell me this if you had two Investments and they had the exact same strategy the same Returns the same risk and the same tax efficiency would you rather want the one that costs 0.05 percent per year or the one that costs 12 times more at point six percent well I know that answer is obvious and we'd go with a lower cost funds if it was all the same low-cost funds and ETFs that's how we can really help reduce the cost or that's how you can help reduce the cost in your investment plan because every basis point or part of a percentage that's saved in cost it's added to your return each year and this adds up to a lot over time now the last thing that we want to minimize and control is risk and we already talked about the flaws of investing solely based on on risk tolerance and when it comes to risk a lot of people think that term risk tolerance you know how much risk can we on a scale of one to ten where are we on the the risk factor but there's another way to look at risk in your investment strategy and like King Solomon we believe that there's a season for everything or like the if it was the bird song There's a season for everything and we also believe that there's four different seasons in investing and depending on what season we're in some Investments perform better than others and the Four Seasons are pull it up right now it's higher than expected inflation which we might be feeling but there's also a season that can be lower than expected or deflation and then there's higher than expected economic growth or lower than expected economic growth and the goal is reduce the risk in investing by making sure that we're prepared for each and every one of those potential Seasons because there are individual asset classes that tend to do well during each one of those seasons and we don't know nobody knows what's really going to happen you know people would would speculate and say oh it's going to be this or this or whatever might happen but we don't know for sure that's why we want to make sure we just have the asset classes in the right spots so that the income plan doesn't get impacted so the investment system combined with the income system clients don't have to worry about the movements in the market because they know they've got enough to weather any potential season I hope this has been helpful for you so far as you're thinking about your retirement if it was please subscribe or like this video so that hopefully other people can be helped as well and then I'll see you in the next one take care thank you
Read MoreAre Gold IRA Investments Taxable?
Jason 0 Comments Retire Wealthy Retirement Planning
Are gold IRA investments taxable?
No! Thankfully, when you use a self-directed IRA to buy gold, so long as you're holding
it at a US depository, when you sell the gold, all gains will
flow back to your IRA with no tax. In addition to diversification,
the advantage of generating tax-free returns from your gold IRA investment
is what makes it so popular.
The Ultimate Retirement Plan | Wade Pfau | Ep 63
Jason 0 Comments Retire Wealthy Retirement Planning Tips for Retiree's
[Music] welcome to the market call show where we discuss what's happening in the markets and the impact on your Investments tune in every Thursday on Apple podcast Google play Spotify or wherever you listen to podcasts hi Wade how are you doing I'm doing great thanks for having me on the show you know I'm so happy to have you here if you're in the retirement income planning business or if you're a financial advisor or a money manager somehow managing money in the space for retirement income planning everybody has heard your name you've been around in this field for a long time and as I was looking through your uh resume from various sources it's like okay well what are we going to exclude you know there's because there's so many things that you have done but I thought I would just kind of just fill in for viewers that don't know you a little bit about you um you know you're an active researcher and educator about retirement income strategies you know you do a lot of speaking I know you're going to be speaking here in Denver uh pretty soon uh you are a professor are you still a professor of retirement income at the American College of financial services I am currently yes and the director of Retirement Research for McLean asset management and in-stream uh you did your PhD in economics from Princeton and you did interestingly you did a dissertation on Social Security reform which we hopefully we'll talk a little bit about later uh you're also a fellow CFA Charter holder like myself um and you've got lots of AD you know accolades and some great books in particular one that I really like that you've done is a retirement planning guidebook uh 2021 uh and then you have that safety first retirement planning how much can I spend in retirement etc etc you've done some stuff on reverse mortgages The Unwanted stepchild that actually is a useful tool for many people yet not quite known by many so uh with that said I I was just curious tell me a little bit about your background where did you grow up so uh well I was born outside of Detroit I lived there until I was 15 moved to Iowa after that my my mother is originally from Southwest Iowa so I graduated high school in Des Moines Iowa and then went to the University of Iowa after that so pretty much midwesterner lived a number of different places afterwards including New Jersey Pennsylvania Tokyo Japan for 10 years and then now I live in Texas you live in Texas now yeah actually these pictures behind me and all are all the places I've lived over the years so it's so so you so you grew up in Detroit mostly it sounds like but moved all traveled a lot um how did you go from you know studying what did you study Finance initially when you were in college in undergrad economics and finance economics okay so how did you go from economics and finance to just being so focused it seems like you're focused on retirement income planning well yeah I mean uh financial planning as an academic field is still pretty new and even I entered the PHD program uh in 1999 and actually Texas Tech University started the First Financial Planning PhD program in the year 2000 so it wasn't even an option at that time but academic economics is very mathematical and theoretical and I was always looking for ways to apply to more real world type activities and that's ultimately how I made my way into financial planning indirectly you mentioned the my dissertation on Social Security reform that was testing how in the early 2000s there was a proposal to create personal retirement accounts to carve out part of the Social Security tax and put that into like a 401k style account and I was simulating how that might perform and ultimately that's the same sort of thing I've made my career on at this point which is just writing computer programs to test how different retirement strategies perform in looking for ways to get more efficiency out of one's asset base for retirement now that was during the bush 2 Administration if I remember correctly wasn't it and so and uh what were your findings in that what was your general thesis or not thesis but your general conclusion well at the time what I determined was that it could be made to work but it wasn't obviously a better approach and now in hindsight I realize more and more that there's so little in the way of protected lifetime income that carving out more of Social Security which is that inflation-adjusted protected lifetime income and exposing that to the market as well uh probably would lead to worse outcomes for many people than we do need some risk-fooled income and so now that traditional pensions are going away Social Security is one of the last holdouts and so it probably wouldn't be the best idea to private or not privatize but uh create personal the defined contribution 401K style accounts out of those Social Security contributions very interesting and we'll we'll touch a little bit more I have a lot a few questions on Social Security uh in general um you know from a macro perspective and also a micro perspective personally for uh people so um one of the things that I really like about what you've done is that you kind of take more of a approach that I'm kind of used to like more of an asset liability management approach when you think about funding ratios rather than the traditional way that you hear financial planners talk about it I really like your overall framework and one of the things that I I think is very helpful is your retirement income style protocol your resubm Matrix can you explain a little bit uh to the viewers about your ideas there and and what how that helps an individual determine their overall approach to how they should tackle their retirement income plan yeah absolutely and that's really one of the the confusing aspects of retirement income is there are different strategies that people can use and unfortunately just there's a lot of disagreement and arguments about one strategy is better than all the others and and by what I mean by that is you have What I Call Total return which is just a you build an Investment Portfolio and you take distributions from it throughout retirement you have different bucketing or time segmentation strategies and then you also have strategies that will focus more on having protected lifetime income through annuities or other tools to cover your Basics before you start investing on top of that and they're all viable strategies at the end of the day and that's an important point that Advocates of Investments only don't appreciate how powerful the risk pooling that annuities can do to offer more income how that is competitive with anything that the stock market might do and so people really have options about what they're most comfortable with and that's what the retirement income style awareness is about developing a questionnaire to help guide people in the direction as a starting point which of these different retirement strategies resonates best with your personal Outlook and preferences you may not ultimately choose the the strategy coming out of that but at least it gives you a starting point to say okay it seems like I might look here first as a way to build my retirement strategy and ultimately if that helps me connect to a strategy that resonates and that I can stick with through thick and thin in retirement that can help give a better outcome because they're all viable strategies but where a strategy doesn't work is if you're not comfortable with it and you don't stick with it and you you bail on it during a market downturn or something like that that that's what the retirement income style awareness is really designed to do is just provide that initial talking point on which kind of approach might work best for me to to think about as a starting point yeah I like that because what it's doing is it's basically more holistically looking at how you would can solve the problem and typically you'll find advisory firms that will will overweight if you will one over the other they're like I'm a Time segment guy or I I hate annuities it's all Total return annuities are a scam or uh you know I will never buy an annuity or uh you know Etc et cetera and risk pooling is is something that's really important but it's also very complicated and I think that's why a lot of people have shunned annuities and annuities have changed a lot over the years um and you know coming from my background you know which is more of a total return approach that's great if you have a lot of money but in in other cases you know I think that you can you can you can look at the problem from a optimal way of doing it or you can look at the problem from a way that's actually going to get implemented and work and what I like about Risa is it's practical pretty much all the stuff that you're doing is practical it's not completely theoretical one problem though with that is that you can have somebody who has a safety first for example mindset but their situation is such that if they have a Safety First with 100 of their Capital that they're very unlikely to be successful can you can you expound a little bit upon how you would think about that in terms of giving advice to people in that scenario yeah so that scenario is probably more they do have a safety first mindset but they've been pigeonholed into a total return strategy but they're ultimately not comfortable with the stock market and therefore maybe most of their Holdings are in cash or in bonds which doesn't support a whole lot of spending power and that's you kind of there's three basic ways you could fund a retirement spending goal the first is just with bonds or with cash not really offering much yield on top of that and then to try to spend more than that the um the probability base perspective is invest in the stock market and the stock should outperform bonds and that should allow you to spend more throughout retirement the safety first approach is more now let's build a floor of protected lifetime income that then brings in with an annuity the the risk pooling the the support to the long-lived helps provide more spending power than bonds alone as well and people have that option and it's when the safety first person gets pushed into a total returns probability based strategy and just doesn't invest in the stock market they're ultimately left with bonds which which is the least efficient way to fund a retirement spending goal over an unknown lifetime very true and you know I guess a lot of people did take that approach probably when I first got in this business 20 over 20 years ago there was a lot of people that were doing that who were retired back where the municipal bonds were paying it was it was conducive the market was conducive for that we had high interest rates that were in the long-term secular decline so you had capital appreciation from those bonds he also had reasonably good uh tax-free interest yields that were working for people and inflation was falling um and so now we potentially could be in the opposite inflation Rising who knows how yields are going to work themselves out but um it when you're looking at this um you you bring up this concept of some of the retirement risks and and you have like these uh longevity sequence of returns spending shocks Etc of of the risks that you're seeing out there which one would you say has had the largest impact negative impact on people that they really need to solve for you know longevity sequence of returns spending shocks and surprises well longevity in a way it's the overarching risk of retirement and it's misnamed because it's a good thing it's if you live a long time it's just as an economist will point out that the longer you live the more expensive your retirement becomes just because every year you live you have to fund your expenses for that year so the cost of retirement grows with the length of retirement and then it's when you live a long time not only is there that issue that you're having to fund your budget but then there's just more time for all those other types of risks to become a problem as well with the macroeconomic environment with changing public policy with inflation even a lower inflation rate still is slowly eating away at the purchasing power of assets and then the spending shocks are things like big Health Care bills helping adult family members having to support a long-term care need to to pay for care due to declining cognitive or physical abilities and so forth and so so it's really that longevity is if you don't have longevity there's not really time for the other risk to disrupt your retirement too much and that's why longevity usually gets listed as the primary risk of retirement interesting I hadn't thought about that so a lot of the other risks are kind of correlated to the longevity element um so so really tackling that that that could be one of the biggest parts of all the surrounding risks around that you you talk a little bit in your book a retirement planning guidebook you talk about quantifying goals and assessing preparedness and I I had mentioned before that I like that you're taking your approach more like a Alm or asset liability management type of of an approach which basically that's what it is um and uh and I don't think the average person thinks about it that way they tend to think about it as like I have so much money and I'll be able to with draw so much from it sometimes there's unrealistic expectations about it but one of the common things that I've seen is that most people are not spending the time they need to do on budgeting really to actually even come up with a number or help come up with a number of what your present value of assets need to be to be prepared do you have any kind of practical tips for people and their advisors on how they can actually think about and execute a good budget not only just you know come up with one but actually implement it well now that technology can really help with that and so if people are comfortable with some of the the different websites or software that Aggregates all of your different expenses different credit cards and so forth into one Excel spreadsheet that's a very easy way to to start budgeting now for people who mostly pay in cash that can be a lot more complicated these days I don't use a lot of cash so I just simply when in the rare case that I have an ATM withdrawal I'll just kind of call that a household expense for that time period and not worry about breaking that down much more but uh when you start having those credit cards or debit card type expenses now the the software may not categorize them in the way you desire and so I usually try to not more frequently than once a month but maybe once a month once a quarter download the expenses while I can still remember well enough if I have to change some of these categories and so forth to then be able to keep track of all my expenses and know exactly then pretty much to the scent almost what I spent that year and then to start thinking about well were there any anomalies of course there's always going to be anomalies and to make sure you budget in that sort of thing but that really once you have a few years of expenses down and once you think about bigger Big Ticket items like car purchases and things that can really give you a foundation to start projecting ahead at what your expenses may be in the future as well and then then you have a way to start thinking about well how much do I need to fund those expenses and that's the whole idea of that asset liability matching do I have the resources necessary to fund your expenses are just your liabilities and do you have the resources to be able to fund that with a level of confidence that you feel comfortable with hmm interesting so I I had a meeting with a client actually who was forced into early retirement and a former engineer and keeps meticulous records has for years and uh he gave us the actual numbers for the last three years and I I figured out what the compounded rate was and it was a lot higher than the inflation rate reported by the bl by the government so um I I think there's some disconnect there between you know how we model and reality um you know uh when you look at financial planning software and you look at the assumptions that are the number of assumptions that are involved in the financial software and you know even if you're not taking Point estimates if you're doing Monte Carlo or whatever stochastic process it's very difficult to come up with a robust plan so I'd like I'd like for you to give me some and I know this is kind of a big general question do you have any general tips to people who are doing this modeling on how and for and for clients actually for for individuals and how they can make their retirement more robust to be able to deal with all the changes that can happen in the world like you said public policy changes Market changes Etc yeah you will have to revisit things over time and and as you get new information about your spending make revisions to the budgeting but uh it's still just a matter of when you're like round up your expenses or be conservative with some of your projections there's some categories that are challenging as well like healthcare and when someone switches to MediCare at age 65 that could lead to an entirely different set of health care expenses and with all your expenses on Health Care in the past you might have to completely upend that and and and do a reset there so it is challenging but if you're trying to build in conservative projections the default is usually whatever you believe your expenses will be you just adjust that for inflation every year and most people don't really do that they tend their expenses don't tend to necessarily keep up with inflation over time now that can get complicated but the way I describe it in the retirement planning guidebook is you'll have one particular budget through ajd and then you'll have another lower expense budget after ajd but also building in what if there's a long-term care event and so forth how much additional Reserve assets would I like to have set aside for out-of-pocket expenses that sort of thing and then it's not going to be perfect and it's going to need revised over time but I think you can start to get fairly confident like I've sort of done these exercises I'm still far away from the retirement date and of course I may be wrong but I I think at this point I have a sense of what my expenditures will be or what they can be at least uh over the longer term Horizon of course subject to new technologies new inventions everything else that can happen uh that would change your expenses but at least roughly speaking I think you can start to figure these things out yeah um I guess I'm coming from a practitioner who's been doing it for you know 25 years and seeing the the the conventional wisdom by the best experts at each point in time and looking at how people have actually fared without advice and what I've found consistently is that changes in in particular with government policy has led to uh sub-optimal choices for people who are trying to optimize to the typical cfp advice so and let me let me uh back that up a little bit with with uh some some examples um education planning what was optimal has changed in my career probably four or five times um let me just put it this way I I have put more emphasis in tax diversification and diversification and stuff in how you do things now because what if you if you over optimize in these scenarios it's sub-optimal does that make sense right if like if you designed everything to handle one particular public policy and then it changes on you like right now Roth IRAs or Roth accounts are incredibly attractive to have Assets in but something could change it could just be not that they might necessarily ever tax a Roth distribution but they could add a required minimum distributions or they could count it in the modified adjusted gross income measures used to calculate taxes on Social Security benefits or to calculate higher medicare premiums and so forth and so if something like that happened and you'd been doing all these Roth conversions to get everything into the Roth account yeah that would be overdoing it and subjecting you to that particular risk so I do think tax diversification is is quite important so that you still have flexibility and options because the the uncertainty is the rules will change and we see that every couple of years we just in late December 2022 secure act 2.2.0 came out and that has changed a number of different public policy matters related to retirement income it's gonna and that will continue to happen over time so so be flexible and part of that is just not overdoing things making sure you stay Diversified with with how you're approaching planning yeah in today's environment what we see a lot is is people that have taken the advice of Max 401K uh you'll get a lot of tax deferred and and what's happening is is they're coming to retirement with a large very large 401K plans and things like that and then they just get nailed in taxes and in fact I'm finding a lot of people pay more taxes when they're retired than they did in some cases than when they were not retired um and uh and and it becomes an issue it becomes a real issue then they have estate planning issues and things like that so um uh I just I'm glad that you said that about the the tax diversification I think more than ever especially given our our current you know country's economic condition there's a lot there's we're going to have lots of changes and they could be very large changes uh in particular if you considered quote unquote rich um so I'm sorry I put my little uh two cents in there but getting back to your book uh you have this concept of the retirement income optimization map um again going back to the assets and liabilities and all of that and when you're you when you're you talk about optimizing that's that's why I brought up the the concept of optimizing I I think there's optimizing within ranges one of the concepts that I've kind of looked at and you talked about you talk about different people's retirement styles um one of the issues that you can look at is like matching the duration of your expected liabilities up for a certain period of time so let's say you have a certain percentage of your portfolios in a total return portfolio and then and then another percent that you're you're cash matching or your duration matching matching for one to five years or whatever uh I think some people call that time segmentation you can call it many different things if forget about psychology and how somebody feels if you are just a rational investor a rational person what would you say the optimal length of time is on average for somebody retiring 65 say to cash match or to duration match uh you know their near-term expenses at one year is it five years is it 10 years I know that's a a loaded question but if you forget about forget about psychology and just go pure rational mm-hmm well pure rational the the total return investing approach which has less emphasis on trying to duration match uh can work and also if you then use a an income protection or wrist wrap type strategy you you have that income floor in place that is lifetime so it's already kind of duration matched to your liability so time segmentation is certainly a viable strategy in terms of my personal preferences it's my least favorite strategy so the whole behavioral point about time segmentation is if I have five years of expenses in in cash or other fixed income assets I don't have to worry about a market downturn because I feel confident that the market will recover within five years and I'll be fine and that that story that's a behavioral story and it just doesn't resonate with me personally I I can understand it resonates with others but it doesn't resonate with me personally and therefore I don't necessarily think about what sort of like front end buffer you need in place too to somehow be rational or optimal also that's where something like a reverse mortgage can fit in in a really interesting manner because if you set up the growing line of credit on a reverse mortgage that can be the the type of contingency fund that you can draw from so that you don't necessarily need to have as much cash or other assets sitting on the sidelines to fulfill that role so I would look more at some other of course you need some some cash but I tend to say less rather than more and maybe look at some other options as well about how to have that liquid contingency fund that's great so so basically the in in the guaranteed income sources plus plus reverse mortgage could uh provide a buffer provide a floor so that you could have uh less cash and and you're generally getting a higher expected rate of return on the annuity than fixed income securities and your at at least at the present time a reverse mortgage line of credit grows at a faster rate than the cash which can be used tax-free when you need the money uh so you can see that Evolution that Carol davinsky is one of the famous planners and researchers in this area and in the 1980s he talked about the five-year Mantra which was have five years of expenses in cash now cash you create drag on you're not able to get as high of potential returns with the money you have in cash so he gradually lowered that down to two years in cash and then when he came across reverse mortgages and in subsequent research and and descriptions he talked about having six months of cash alongside a reverse mortgage growing line of credit so I think that's an example of I I think something like that sounds pretty reasonable that's that's that's that's really helpful so and I want to Circle back to reverse mortgages here but before we do if you don't mind I'd like to talk a little bit more about social security uh so we're kind of getting into the realm of the the guaranteed side of things not the total return side of things um or or I more more knowable income sources um I was just looking at the kind of the statistics right now total debt in the United States is really huge um we're running very large deficits project to be like 2 trillion we have a Pago system right now in Social Security and even if we taxed it's been argued by many people even if we taxed every billionaire 100 that would barely make a dent in our current situation so we have huge unfunded liabilities off balance sheet uh type unfunded liabilities how can we really expect Social Security to keep up with inflation and will it be there for quote unquote you know what I'm saying well it will need reforms it's very unlikely to Simply disappear for my own personal planning I I assume I'll get 75 percent of my presently legislated benefits but for people who are younger as well further away from their their 60s uh the social security statement they receive assumes the zero percent average wage growth as well as zero percent inflation and the reality is there's probably going to be a positive real wage growth over time so you're presently legislative benefit could be a lot higher than what your social security statement is implying and therefore when you offset a benefit cut with the uh the wage growth that can be expected over time you may not have that much less in terms of what you're going to plug into your financial plan but yeah I certainly we don't know how the reforms will shake out but if nothing is done sometime in the 2030s Congress would have to legislate a benefit cut and to keep the system so that enough payroll contributions are coming in to cover exist current benefits that cut would have to be somewhere in the ballpark of 20 to 25 percent so I just simply assume I'll get 75 percent of my presently legislated benefit as part of my financial plan is is it fee Is it feasible feasible to actually get Social Security in a funded situation or is it gonna is it most likely going to stay Pago in your if you had a crystal ball oh it yeah it's always been pay-as-you-go and right so the buildup of the trust fund was an effort to just build up some reserves in anticipation of the changing demographics where there's more and more retirees relative to the workers paying contributions uh they try to keep Social Security funded over the 75-year time Horizon and so it's never permanently funded but yeah with a 25 20 to 25 percent benefit cut that would be sufficient to get the system to be expected funding funded fully over the subsequent 75-year time Horizon that's that's really helpful um thinking about it that way in terms of just potentially a 25 less is a reasonable way to look at it I think um the that part of it's not so hard what's harder to understand or to get a grasp on is whether or not that's going to be what that means in real terms for for a retiree um if we continue on a certain path and inflation is is in a different scenario in the future how how do you think about scenario when or inflation when you're when you would set up a plan or a retirement plan what how would you what kind of what kind of uh of Monte Carlos if you will would you put on on your inflation expectation so I do well I tend to just try to think of everything in today's dollars so that the inflation's factored out of it but I the way I think about long-term inflation is the markets tell us what they expect inflation to be if you just look at the difference between a treasury bond and then a tips treasury inflation protected security with the same maturity uh the difference between those two is what the markets expect inflation to be in if they thought it would be different they would invest in one or the other to get that aligned inflation is coming down now and even over the next five years at this point markets are only factoring in an average inflation rate of about 2.1 to 2.3 percent so it seems like markets really expect inflation to come over to come under control even over 30 years right now the markets are building in about a 2.3 percent average inflation rate which is below historical numbers and in terms of if I'm building a Monte Carlo simulation right now I'd to be a little more conservative there I'd base it around a two and a half percent inflation rate with historical volatility and inflation is around four percent so so you're basically an average of 2.4 or 2.5 and then uh standard deviation is like four basically okay so uh that that sounds reasonable um I I guess what is interesting about that is I guess if you assume that we have typical real rates of return for different asset classes that that all works itself out if you put it in present value terms um but if that's not the case and and it should stay that way ultimately it should stay that way but you could have major moves in markets in people's uh time Horizon when they retire which leads us to sequence of returns conversation uh when people retire you can have these you can have these big shifts in markets things things are rough right when somebody retires uh we uh remember I told you about that engineer we had a conversation with forced into early retirement right when the market topped uh the good news is is he had two types of annuities that worked out perfectly for him in the sequence return can you explain sequence return risk for listeners and and what it means and how to you know strategies to mitigate that a little bit more and just one quick last comment on the inflation too like if you thought when I said these low inflation numbers that that's ridiculous inflation would be much higher well then you'd benefit from investing in tips because they'll provide you a real yield plus whatever inflation ends up being and so they'll perform better if inflation is higher and they've already discounted that that was one of the best performing uh fixed income markets uh in the last couple years so but anyhow but but yeah a sequence of returns risks so that's it whenever you have cash flows going in or out of a portfolio the order of returns matters and it's when you start spending in retirement that it matters a lot more so it's like the market could do fine on average over the next 30 Years but if the market goes down at the start of my retirement I'm not having to sell more and more shares to meet my spending needs and sell a bigger percentage of what's left to meet my spending needs such that when the market subsequently recovers my portfolio doesn't get to enjoy that recovery and so it can dig a hole for the portfolio and the the average return could be pretty high but if you get a bad sequence of market returns right at the start of retirement it can really disrupt that retirement and lead to an implied much lower average rate of return than what the overall markets were doing over your retirement Horizon yeah so and in terms of actually uh let's say you're coming up on retirement so this is a common scenario you're retiring in 10 years or five years what should an investor be thinking about doing to transition from that accumulation to distribution phase to kind of mitigate that sequence of return risk so when people start thinking about retirement I think that's where the first step take that retirement income style awareness to get a sense of what sort of retirement strategy might work for you because that's where you then have um different options if you're more of a total return investor that's the whole logic of the target date fund and so forth is just start lowering your stock allocation but still investing in a diversified portfolio as part of that transition into retirement if your time segmentation the easiest way to think about the transition is instead of holding those Bond mutual funds you start exchanging those in for holding individual bonds to maturity like if I'm 10 years before retirement every year for the next 10 years I could start buying a 10-year bond and then when I get to my retirement date I have the next 10 years of expenses covered through these maturing bonds if you have more of an income protection or risk draft strategy the the options would then to be thinking about well if I have an income gap I'm trying to fill where after I account for Social Security or any pensions I'd really like to have more reliable income to meet some basic expenses well you could start looking at purchasing annuities that would turn on income around your projected retirement date as a way to have that transition into retirement and so they're all viable options and it's just a matter of taking the the route that you feel most comfortable with very good that's really really helpful um now I I guess at least is a little bit into the what I would call the traditionally unloved unwanted stepchildren annuities and reverse mortgages uh you know they've gotten a bad a bad rap for so long but they're so useful in in as tools I would say probably the reverse mortgage is the least understood and uh and and one very helpful um tool I think maybe because of just the history of them and how they used to be structured versus how they're structured now um can you give me a sense about how to think about reverse mortgages for people is it only for people who are you know can barely get their their plan together with their assets or or does this also work for people who have a cushion but they should still do a reverse mortgage more yeah I mean the conventional wisdom a lot of times is that the reverse mortgage is a last resort consideration after everything else has failed and maybe then just a way to Kick the Can down the road a little bit but ultimately that retirement wasn't necessarily sustainable since about 2012 that really the focus of the kind of research retirement planning financial planning type research was looking at how reverse mortgages can be used as part of a responsible retirement plan and so it's not that a lot of advisors may just think the reverse mortgage is only for someone who's run out of options but but that's really not the idea it's we have different assets and it's back to that real map the retirement income optimization how do we position those assets to fund our goals and the reverse mortgage provides a lot of flexibility about how to incorporate our home equity asset to help fund our retirement plan and it can lead to a lot more efficient outcomes than just simply say leaving the home sitting on the sidelines and saying well I've got the home if I have long-term care needs I'll sell my home to fund the long-term care something like that otherwise I'll just leave the home as a legacy asset for my beneficiaries there's much more efficient ways to incorporate home equity into a retirement plan and that's what the whole discussion around reverse mortgages is how can I I use a reverse mortgage to help build a more efficient retirement plan and not as a last resort but as part of a responsible well-funded retirement plan it's just another Diversified tool to a source of source of of assets that you can use that's not just sitting there I just had a conversation with a client yesterday that is about to retire in a few years and uh that is exactly what he said that other property that I have in that other State uh I'm just gonna keep that as a that'll be my I'll sell it if I need to you know there was a conversation about health care contingency and um uh long-term care and things like that and that was his rationale um and and in discussions with clients there has been a a ton of resistance you've been really good at putting out information that shows why it makes sense to have it as a potential use so can you explain a little bit about the the line of credit portion of it and how that how use how that could be advantageous yeah and it really it goes back to this idea of sequence of returns risk and if you look at a reverse mortgage in isolation it may look expensive or whatever else but it's how does it fit into the plan and by reducing pressure on the Investments it can help lay the foundation for a better outcome and the the growing line of credit is one of the most misunderstood aspects of the reverse mortgage and I think it was partly unintentional and it may sound too good to be true in a way it probably is and we saw in in October 2017 the government put some limitations on the growing line of credits so it was incredibly powerful before then it still quite powerful not as powerful as before for new uh anyone who opened a reverse mortgage before October 2017 was protected to have those Provisions in place for the entire life alone but if you wait and then after October 2017 you still have the growing line of credit it's not as powerful but but the idea is I believe the government assumed people would open reverse mortgages because they want to tap into the funds but financial planners realized with the variable rate not with a fixed rate but with a variable rate home equity conversion mortgage you do have to keep a minimal loan balance of say 50 to 100 dollars but otherwise the rest can be left as a line of credit and that line of credit grows at the same way the loan balance would grow and so you can understand why if you borrow money the what the loan balance will grow over time well it just happens to be the case that the kind of neat planning trick is if you open the reverse mortgage and 99 of it is in the line of credit the line of credit is growing over time at the same rate that the loan balance would have been growing and ultimately this improves the odds dramatically of having a lot more access to funds over time if you open it sooner and let the line of credit grow versus just waiting to open it at the time you might actually want to start spending from it yeah how has it been limited uh limited versus the way it used to be what what are the limitations well they increased the initial mortgage insurance premium which is not directly to the line of credit but then every every so often used to be more frequently we're now getting overdue at this point with it's been over five years but they revised the tables that determine the principal limit factors of what percentage of the home value can you borrow and so as part of that 2017 change they uh lowered the the borrowing percentages and also they lowered I mean this this part's a good thing but they lowered the ongoing mortgage insurance premium that would cause the loan balance to grow at a slower rate but it also in turn caused the line of credit to grow at a slower rate so it before that change I was running simulations where if you opened a reverse mortgage at age 62 there was like a 50 chance that within 20 years the line of credit could be worth more than the home and that's no longer the case it's still there's still a probability that the line of credit could grow to be worth more than the home but it's not nearly as dramatic as what I was Finding before the rule change that's very interesting because the line of credit growth rate is tied to interest rates and home prices have somewhat of an inverse relationship to interest rates to some degree but it's basically positively skewed so it's not it's hard to know but uh uh but yeah that's that is a great planning tip and it's interesting because we have had a lot of friction with this discussion with uh clients uh mentioning to them because they just have it in their head that I'm going to lose my home and I'm going to there's all these things that can go wrong and then you have to explain it's a big education process and of course they are required to do education as well no we don't sell reverse mortgages but we always you know if we if we you know we mention it to people as a source and you know having it there makes a lot of sense uh and and the same thing with the annuities um you know I have a love hate relationship with annuities but I'm becoming to love them more and let me tell you why before it was all commission driven you know and we're fiduciaries we don't do commission stuff now with the Advent of finally the insurance companies have really gotten to the point where there's at least enough of them now doing products that make sense with the guarantees I mean there was always companies out for a long time there's companies out there like Americas Etc that had just pure plain vanilla uh va's variable annuities that had just lowered your expenses and maybe eliminated a surrender or something but the guarantees is where the real there were folks too much on tax deferral and not enough on guarantees what were the guarantees is really really what we're really looking for here uh and the only way you could even get them you guarantees would be if you did a commissionable product so we'd be handing you know we would be referring people to Insurance guys who were selling commissionable products and then sometimes you don't know what's going to happen after that happens uh with that client so now thank God we have uh we're in a scenario now where the where the financial industry has finally caught up to what needed to happen with annuities yeah the only annuities yeah yeah the only annuities and there's it still has a lot more to be done it's it's you shouldn't be overlooked and I think what happens one of the reasons that I think they're so helpful uh for people is that risk tolerance is time variant people say their risk tolerance is X and then as soon as you have a market decline then their risk tolerance is all all of a sudden why which is more conservative and and uh these annuities can help people psychologically overcome that right you can always look to something that is either staying equal or growing and you can also have growing income streams during the Gap we see that a lot there's a gap between uh when they get Social Security and when they retire and it kind of fills that Gap and it's funny when I was when I was I actually had my assistant who's also a CPA excuse about my financial planning system I had to read this book first and she uh she said it sounded like like you uh were like in the room with him uh because there's so much stuff in here that you and I agree with it's amazing uh before not even knowing you so and I think it might have to do more with the approach of taking things more from uh your academic background and your CFA background it gives you a different perspective than what kind of the traditional financial planners had who had come more from a sales background and now what's happening is is we have uh the whole industry is now moving in the I think moving in the right direction and I think you've been a big uh reason why that's happening so I I really want to thank you for that all your work is really making a difference I want to talk a little bit about Medicare if we can and health insurance this is probably one of the most the hardest part is the medical the medical discussions in some ways um people don't want to think about long-term care people don't want to think about health costs I was looking at some of the statistics you know long-term care statistics is how much it costs it's a big number how would you how would you model the contingency planning you know for let's just start with long-term care how would you model that would you model it as a present value number or would you try to put it as a as something that's over time how how would you how do you approach that yeah actually so I did try to make the retirement planning guidebook as comprehensive as possible and and so I as part of that developed a long-term care calculator and the the basic logic of it is develop a scenario that you would feel comfortable that if you could fund that scenario uh you'll feel like okay things things will work out whether that's three years in a nursing home whatever the case may be but develop that scenario where you're saying okay at age 90 I will spend the next three years in a nursing home right now in the United States the average cost for a semi-private room in a nursing home is a little bit under a hundred thousand dollars I'll say in today's dollars a hundred thousand dollars a year but then I'm gonna plug in the the math gets complicated but you've got what's the inflation rate in long-term care what's the overall inflation rate and then back to this whole idea of the asset liability matching like what's the investment return discount rate you're comfortable assuming as well and also recognizing that if I do go into a nursing home I don't have to also fund my entire budget of a like if I thought I was going to spend 80 000 a year well I'm not going to be going on any sort of trips I don't have to go to restaurants or anything uh a lot of my other expenses would reduce not not 100 but they would reduce so plug it in what I think is a reasonable reduction to the rest of my budget and then you get calculated a present value of here's how much money I'd have to have set aside as a reserve asset to feel comfortable that I would be able to fund this long-term care need and and be able to have a successful retirement and for people who are worried about and who may be paying out of pocket for long-term care that could be several hundred thousand dollars to be blunted on average that's what it comes out to I actually had a coffee with a gentleman and he said uh what is it just tell me what the number is I said well it depends on your age he says no just tell me what the number I said it's roughly about 300 000 roughly on average it could be more it could be less uh you know uh okay and and there's there's there's different ways you can fund it right you can do long-term care insurance uh traditional Standalone you could do um you know life insurance policies that have embedded features you could do if you can't like qualify for um you know you know get a policy you can maybe get it embedded in an annuity of some sort you can sell fund um so it's not an easy thing that you can uh solve it with a quick answer um but but it's important to have in a plan and I and I like the fact that that uh you've emphasized that a lot in your work um it's just it's just great that that people are thinking about it from that perspective I want to switch gears a little bit um and talk a little bit about tax efficiency uh you know taxes are such a huge part of the impact of a plan and there's so many different angles to it and and the tax rules change so much um I'll tell you one of the challenges that I have asset location the concept of balancing you know where you put a certain asset according to us is tax efficiency versus keeping an asset allocation in line right up you know operationally keeping it in line with the objectives and then as money is being spent taking it from the right place it's a challenge even with excellent software and then sometimes I'm finding that it doesn't actually work out as planned so can you can you give me some practical tips on how to deal with asset location well the the basic logic of asset location but yeah I mean in practice it gets incredibly complicated as you're spending from these accounts to think about also rebalancing and making sure you're keeping the right asset allocation between stocks and bonds and the NASA location is where do you keep these things but generally just is a basic guideline your taxable brokerage accounts of course you want some cash there for your liquidity but otherwise that's your most tax efficient stock Investments so if you own stock index funds and so forth the on a relative basis they're most likely to be best off in your taxable account because a lot more of their returns will be those long-term capital gains that get the preferential tax treatment then with like your tax deferred IRAs and 401ks that's more of a place where less tax efficiency so bonds and so forth maybe lower returning type asset classes and then for your Roth accounts the Roth IRA and so forth that's where less tax efficient but higher expected return type asset classes could go the Emerging Market funds and small cap value and that sort of thing and that does also work with distribution ordering as well because the Roth will be what you tend to spend last and so also having these uh riskier asset classes that may have more growth prospects over the long term that can be a good place to set them aside since you're not likely to be spending from those accounts until later in retirement okay yeah it I think for a lot of people it's a little bit of a daunting thing and in practice it can be with contingencies and things like that can be hard to to do correctly and keep managed and I know there's good news is there's good software now that that helps with that um as far as tax efficiency the other you mentioned the order of withdrawals I mean traditionally you know you have the you know your traditional order of withdrawal that you would you would uh do in in the past a lot a lot of recommendations has been you know you want to take from your taxable accounts first right let those tax-free tax deferred accounts grow and then and then you start taking from those other sources but you make a really good point that that's not always the best thing to draw that taxable account down too fast can you expand upon that a little bit well the yeah the the basic tax efficient distribution is spent down taxable assets than tax deferred like IRAs and then tax exempt like Roth against last but you you can do better and so the the better approach is to have a blend of taxable and tax deferred until the taxable account depletes and then a blend of tax deferred and tax exempt after that and as part of that blend you can do rock conversions to in the short term pay higher taxes if that can better position you to pay less taxes over the long term and to have a higher Legacy value from assets over the long term yeah and then getting more specific than that it's there's no you really got to run the the individual numbers on a case-by-case basis but generally there's the opportunities to sustain your assets for much longer by having a more tax efficient distribution strategy that digs into that taxable plus tax deferred and then later tax deferred plus tax exempt exactly and and that's why it's important while you when you're an accumulation phase make sure you have some tax diversification if you can yeah have Assets in all those different types of accounts yeah so that you're not nailed so bad uh later on uh and then there's a lot of complexities that can happen with happen that we see quite a bit with concentrated stock positions and things like that which is probably outside the scope what we're talking about today so um and lastly here last last topic here non-financial aspects of retirement this is a huge huge huge thing uh it's funny it was the last towards the end of your book and I'm glad that you talked about it uh because uh there's I can't tell you how many times um you know you see people think that they're going to be happy sitting on the beach and then they they do that and they're miserable uh or or spouses that wind up hating each other for some reason can you tell can you give us some ideas about um like what should people be doing like say they're five years into retiring or ten years into retirement retirement What should people be thinking about doing to kind of get their their overall lifestyle satisfactory when they actually do retire yeah and and that's this is in some ways more important than any other Financial stuff because with the finances it's easier to adapt but work does so many things in a person's life it's not just that it provides a salary and you need a way to replace all the other aspects of work such as structure to the day camaraderie feeling part of a team feeling like you're creating value for a society all these different aspects that you need to be able to replace with something that gives you motivation to wake up in the morning in retirement and so to say simply it's not the best starting scenario if you retire because you hate your job you want to be able not to retire away from something but to be able to retire to something you want to have and it gives you purpose and passion and meaning to give you the motivation to wake up and and have something be active each day because in all too many cases people just they start doing passive things like watching too much television or surfing the internet too much and that can lead to a really miserable and unsatisfactory retirement wow that's huge that's interesting have something to retire to so uh and and start figuring that out sooner rather than later right not don't wait till the very end and go yeah what am I doing uh and sitting there staring at your wife or your husband yeah that's the idea that there's all these things you you want to get done but you just think well when I retire then I'll have more time to do it well if it's something you've been holding off on doing for the past 40 years it's not likely that just having more time in retirement is what you need you may just simply either not be interested if it's a hobby like oh I want to go back to playing the guitar or something if you're waiting for retirement to do that sort of thing there you go that retiring may not be enough and then people might start feeling bad that you no longer have the excuse and that's where if that sort of bad feeling compounds it can create a spiral like a downward spiral where people just become less engaged and less positive and it can even impact Health which then in turn makes it harder to be engaged and involved and and can lead to downward spirals it's really important to try to avoid that and as part of that not waiting for retirement to to consider all these other aspects of your life outside of work but making sure you're nurturing relationships and having hobbies and having things outside of work so that it will then be easier to transition into the retirement yeah that's great so is there anything as we close here is there anything that you're really excited about that you're working on right now that you want to share or is there at all right now I am just trying to get the updates done for the retirement planning guidebook and where we're doing the best we can to build out that retirement income Styles ideas uh something that people can benefit from and uh the other main research area is with the tax planning as well that I think this will be a Hot Topic and I've already done a lot of work in that area but it is such a complicated area that just trying to push forward as well about like Roth conversion strategies and and how to best Implement those in a most of the work in that area just assumes a fixed rate of return and with the reality of not fixed rates of Returns on your Investment Portfolio that also dramatically complicates some of those tax planning decisions so I'm continuing to push ahead in those areas interesting so more stochastic modeling in your future yes stochastic modeling and now you're probably going to be uh that Technology's got to be in there somewhere too any plans uh that you want to announce or share with new technology that you're going to be coming out with or software programs or anything like that or I mean I just have this Vision in my head if I were you I'd be doing something like that but I mean I'm just saying yeah don't Envision creating tax planning software but uh the retirement income style awareness that's where I'm putting on my efforts in terms of having software and that's an easier problem than the tax planning problem definitely yeah there's a lot of changes always yeah you'll be coding to your uh blue in the face all your staff would be so uh the uh it's interesting I I I'm actually going to be diving into that that profiling software that you have um I had a conversation yesterday about that so that's very good so where would people uh would you like people to send you see learn more about you um anything that you're up to oh yeah uh so my website retirementresearcher.com all one word retirement researcher and if you go there you can sign up every Saturday morning we send out an email with different articles and things and then my retirement planning guidebook is on Amazon or any other major book retailer and also I do have a podcast as well they're retire with style podcast with Alex mergia who's my a co-co-researcher and and co-founder of the retirement income style awareness excellent all right Wade thank you so much appreciate you coming on it's been a pleasure thank you the information in this podcast is informational and General in nature and does not take into consideration the listeners personal circumstances therefore it is not intended to be a substitute for specific individualized Financial legal or tax advice to determine which strategies or Investments may be suitable for you consult the appropriate qualified professional prior to making a final decision wealthnet Investments is a registered investment advisor advisory services are only offered to clients or prospective clients where wealthnet Investments and as representatives are properly licensed or exempt from licensure [Music] foreign
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