Have you spent years saving for retirement, but don’t know if just socking money away is enough to maintain your lifestyle once you retire? There are some must-do’s that go beyond funding your 401(k). Financial professionals Joe Anderson and Alan Clopine discuss tax-smart moves, withdrawal strategies, and asset allocation strategies that can boost your retirement savings by thousands of dollars. They break down the must-do moves by your tax bracket to help you maximize your investments. The duo also guides you on how to plan for your legacy with everything from wills and trusts to healthcare directives. Financial planning must-do’s is a must-see to build your personal wealth.
Watch Financial Planning Must-Do’s Before You Retire Part 1
(01:30) Financial Planning Must-Do’s
- Portfolio Review
- Retirement Tax Planning Strategy
- Develop a Withdrawal Strategy
- Plan for your Legacy
(02:30) Must-Do: Understand Asset Classes
- Real Estate
(04:30) Must-Do: Implement Asset Allocation
- Investment Goals
- Evaluate Required Rate of Return
- Risk Tolerance
- Time Horizon
- Rebalance & Monitor
(8:00) Must-Do: Crunch The Numbers
- Estimate Annual Expenses
- Add Up Sources of Income
- Calculate the Gap
(10:30) Tax Diversification
(14:00) Must-Do: Be Tax-Smart
- Max Out Roth
- Roth Conversion
- Max Out Employer Match
- Avoid Early Withdrawal Penalty
- Split savings: Tax-deferred & Roth
- Max Out Employer Match
- HSA (invest funds vs. cash)
- Consider Charitable Strategies
- Asset Location Strategies
- Tax Deductible Retirement Contributions
(18:30) Must-Do: Tools for Withdrawal Strategies
- 4% Rule
- Minimize Mandatory Distributions
- Convert to Roth: Asset Allocation
- Incorporate Charitable Giving (IRA)
(21:00) Must-Do: Estate Plan Checklist
- Wills & Trusts
- Healthcare Directives
- Medical & Financial Powers of Attorney
- Beneficiary Forms
(22:00) Ask the Experts
(23:30) Pure Takeaway
- Develop Your Retirement Vision
- Crunch the Numbers
- Develop A Retirement Budget
- Get Out of Debt
- Budget For The Unexpected
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Joe: The strategies you use to accumulate wealth need to change as you approach retirement. Do you know what those strategies are? Stick around, folks. We got another wonderful show. Show’s called Your Money, Your Wealth®. Joe Anderson here, President of Pure Financial Advisors. And of course, this show wouldn’t be the show without the big man, Big Al Clopine.
Al: Good morning, Joseph.
Joe: Good morning, Big Al. How are you, sir?
Al: Doing fantastic.
Joe: When you look at retirement, folks, you have to think of the must dos in regards to creating the retirement income. This could save you tens, if not hundreds of thousands of dollars. Taxes, withdrawal strategies, your overall portfolio, health care, the list goes on and on and on, and we’re going to break everything down today. That’s the financial focus. For those of you that are doing sophisticated tax planning strategies, you can add another potential 2% rate of return. If I have a 2% compounded return higher than the average Joe, no pun intended, this is hundreds of thousands of dollars over your lifetime. This is a generic graph. Let’s get into the details on how we do this. Let’s bring in the big man, Big Al Clopine.
Al: There are some must dos in retirement, so let’s talk about them. Today, we’re going to get into the portfolio review. What kind of portfolio should you have in retirement? It might be a little bit different than what you accumulated in the first place. How you keep your money is not necessarily how you earn your money in the first place. Second thing we want to talk about is a tax planning strategy, because if you can minimize taxes in retirement, your money can be stretched a lot further. You do want to develop a withdrawal strategy, and that just simply means, where are my assets? In tax deferred, taxable, tax free accounts? How do you figure out what to pull from each account? And then finally, planning your legacy, wills, trust, estates. We’re going to get into all that stuff. And this is stuff that you kind of need to know to be able to retire successfully. These definitely are some things you’ve got to do.
Joe: It’s just checking the boxes like we do every week. And when you approach retirement, you have to first start with a portfolio review. We look at your portfolios. You’re 65 years old and your portfolio looks like you should be in a 35 year old’s portfolio, or vice versa. So, it’s making sure you understand simple asset classes. What is cash, stocks, bonds, things like that? Let’s start there.
Al: Let’s start with that. So what is cash? Cash is just simply the money in the bank. Very, very simple. One of the things we know about cash is it’s safe, but it doesn’t necessarily keep up with taxes and inflation. In fact, it’s almost a guaranteed loss. But you should have some cash in your portfolio because you need an emergency fund. And whatever your withdrawal strategy is, you’ll need to access those funds. Bonds, of course, are an alternative to cash. You get a little bit better rate of return. They have a little bit of an inverse relationship with the stock market. So as the stock market goes down, bonds tend to go up. That’s not always, but that’s kind of a general rule. Stocks, of course, tend to do pretty well over the long term, but they’re more volatile. And real estate. For those of you that enjoy investment real estate, that can be a good part of your portfolio creating some additional fixed income, Joe.
Joe: Let me show you a quick example here of stocks, bonds and cash. If I’m looking at the red, that’s stock, this is about a 30 year average of the overall stock market, right around 10%. Pretty good. The bond market, 7.4% over a 30 year period. You try to get that today, forget about it. It’s almost negative. Then I look at cash. Remember cash back in the 70s? You can get a CD for like 4% or 5%. That’s not the case today. But if I look over a 30 year time period, we see these rates of return. Now you have to take away taxes. If you don’t have a tax strategy it’s just going to eat away at your overall return. And then you put inflation in the mix, cash and bonds are not necessarily doing anything, and your overall stock portfolio is getting 4%. So if you’re looking at your assumptions of saying, “Hey, if the market does 10%, I think my portfolio’s going to do something like 8%.” Well, you’ve got to think again. You have to get a strategy in place to beat inflation and also to beat taxes.
Al: And Joe, let’s talk about some things you’ve got to consider when building your portfolio. And right off the bat, what we would say is consider your investment goals. What are you trying to accomplish? How much are you trying to spend from your portfolio? Because a lot of folks get this backwards. They think, “Well, what’s my rate of return? How much can I earn? What’s the maximum I can earn?” And a better question is, “What do I need? What sort of cash flow do I need from my portfolio?” And then you can start to work backwards and figure out exactly what you should be invested to get that rate of return.
Joe: There’s two rules of thumb here. There’s risk tolerance, what’s your sleep factor? It’s like, “Oh, I don’t want to see my portfolio move at all.” So that’s kind of your tolerance for risk. But then you also have to look at what rate of return you actually need to generate to accomplish your goals. So if I’m scared if I see my portfolio go down 5%, then you have to be in a very conservative portfolio and that portfolio might not get you to your goals, depending on how much money that you have and how much money that you’re spending. So you have to look at both, in a sense. I got to have my sleep factor so I don’t freak out and sell and do stupid things. But I also want to make sure that if I have those portfolios, they’re going to get me there.
Al: And a lot of people, they don’t realize when they retire, maybe at age 62 or 65, they may live another 20, 25 years. And so you need some growth in your portfolio. It’s not really about going from a growth strategy to just a fixed income strategy. Because we’re living so much longer, your money may need to last for 20 years, 25 years, 30 years, which means you’re going to have to have some growth. Maybe a little bit more conservative than what you’ve done in the past. But make sure you don’t go all safety, and we see that mistake often. We see the other one too, which is there’s no safety and all growth.
Joe: People that are behind they’re like, “Oh, I got to get caught up. So let’s just go all in. The market’s been great over the last 10 years and I really need a higher expected rate of return. So I want all stocks. Bonds, won’t pay me anything anyway.” And then once you get into retirement, I need to live off of this. So I’m staring at it all day. And if it goes down 5% or 10%, guess what you do? You freak out, you sell. Well, that’s no good, either. Then you’re thinking, well, I need to spend every last dime, but your time horizon, as Al said, most of you might be in your retirement years longer than your living years. So you have to have growth in the portfolio, like we showed, to outpace taxes and inflation. Then you got to monitor this thing. It’s not set it and forget it. For the most case, as you’re accumulating wealth, that works really well. For people that are tinkering with their portfolios every day, it’s probably the worst thing that you can do. But as you’re retiring, as you’re taking money out, you have to make sure that you’re rebalancing, selling, buying–sell high, buy low. Most people do the opposite. Let’s buy high. And then all of a sudden when it goes down, let’s sell. No, let’s not do that. Make sure that you’re monitoring it to keep pace of what your goals are because people’s lives change all the time. You might spend a lot one year, very little the next.
Al: Set parameters. If growth stocks outperform others, sell a little bit to get back to where you should be. That forces you to sell high. If something else hasn’t done as well, reinvest it. It forces you to buy low. You have a disciplined strategy. This is what you need to do as far as the monitoring part.
Joe: And if you need help with this, guess what? We got the answers for you. Go to yourmoneyyourwealth.com, click on our special offer this week. It’s our DIY retirement guide. Do it yourself. If you want to do this stuff yourself, by all means, we’ll give you the guide to do it.
Most of you might not be equipped. I’m kidding. All of you can do this. Just get our guide. Go to yourmoneyyourwealth.com, click on that DIY retirement guide. Got to take a break! Show’s called Your Money, Your Wealth®. We’re just getting started, folks.
Joe: Show’s called Your Money, Your Wealth®. We’re talking must do’s as you approach retirement. A lot of things to consider, a lot of strategies that you want to make sure that you implement. Before we get to the meat, let’s get to the potatoes. True/False.
Al: “You’re diversified if you have investments across multiple brokerage accounts.” Joe, true or false?
Joe: A lot of people think that’s true.
Al: I would agree.
Joe: And it is true to some degree. It’s like, I don’t want to give you all my money, Al. I’m going to give you a little bit, I’m going to give Charles Schwab a little bit, I’m going to give Merrill Lynch a little bit, I’m going to do this just in case either the brokers blow up or in case the brokerage house blows up. But listen, if you own Microsoft at Schwab and at Fidelity, it doesn’t matter if Fidelity or Schwab goes broke. You own Microsoft. You’ve got to worry about if Microsoft goes broke. But if you’re diversifying brokers, that’s another bad move, in my opinion. I would stick with one person that you like unless they’re specifically investing in a certain asset class. Then, of course, you want to diversify. But a good financial advisor should understand your overall situation because sometimes, especially when we get into taxes, if you’re managing the money some way and another advisor is managing it another way, there could be a lot of overlap. There could be a lot of higher fees. There could be tax inefficiencies, a lot of things.
Al: Well, I think that’s true. And we just talked about that last segment, which is if you can tax manage appropriately, then you can end up with more return in your pocket, which means your portfolio can grow that much more. That’s an important thing. If you’re trying to tax-loss harvest or your financial planner is trying to do that, or in distributions, where do you pull the money from? If you’ve got multiple advisors, it’s very difficult to do that. Let’s talk about taxes.
Joe: So there’s a couple of different areas where you can invest tax free. That’s pretty good. Then there’s a taxable account, and then we have a tax deferred account. So tax deferred accounts would be your 401(k)s, IRAs, 403(b)s, things like that, TSP. Depending on what you have, you have a tax deduction when you go in, save a couple of bucks in tax, it grows 100% tax deferred. And then when you pull those dollars out, then that’s when the taxes are owed. Taxable accounts, this is a capital account that’s taxed at a capital gains rate, so it’s a lower rate than tax deferred. Tax deferred is taxed at ordinary income. This is a capital gains rate. Starts at 0% then it goes all the way up to 20%. The best is tax free. You don’t get a deduction going in, but every dollar that comes out is 100% tax free. So you might be thinking, how do I save money and tax long term? If I want to save tax today, then you could put money here, save a few bucks and then it compounds tax deferred. And potentially you could put yourself in a bigger tax problem later. So we call this diversification. How diversified are you from a tax strategy? How much money do you have in your retirement accounts versus your Roth accounts versus maybe a brokerage account or non-taxable account? Huge tax savings potentially, depending on when you start withdrawing the money. Because if all of your money is sitting here. and you’re pulling those dollars out, it’s taxed just like ordinary income. It’s taxed like your paycheck, I should say. If I’m replicating my paycheck in retirement and all of my money is taxed exactly how my paycheck is taxed today, how am I going to be in a lower tax bracket? How many of you believe that tax rates potentially could go up? If you think so, you might want to start diversifying, getting money out of here, potentially moving up here. If you have dollars here, understanding tax-loss harvesting, tax-gain harvesting, there’s so many different strategies in regards to where you keep your money. But most of you don’t even know what percentage that you have or even thought about diversifying from a tax perspective. People diversify from their brokers. But they’re losing their shirt, or their assets, by not being tax savvy.
Al: Well, that’s right, Joe. And the Roth IRA is a really good example. This is relatively new. 1997. So it hasn’t been around that long, and it was 2010 that allowed us all to be able to convert from our IRA or 401(k) to Roth. Yes, you pay tax on conversion, but then all future growth and principal income is tax free for you, or if you pass away, for your spouse, or if the two of you pass away, for your kids. It’s a great way to go, and it’s a great way to save money throughout your retirement. So let’s talk about what you should do in different tax brackets. Starting out with the lowest brackets being 0%, 10% and 12%. In this case, one of the things that you really might want to consider, instead of putting money into your regular 401(k) or regular IRA, why not get money into the Roth? Because your tax bracket is not that high. The benefit of the deduction is really not that great. Likewise, you’re a really good candidate to take money that you already have in an IRA and a 401(k) and convert that to a Roth IRA because you’re not paying that high of taxes because you’re in a low bracket. And Joe, another thing would be maxing out your 401(k) account. Another thing that you might consider is whether you should go Roth or whether you should go deductible 401(k), or maybe you should split it. Because right now you’re in kind of a middle bracket. And then the real answer depends upon how it’s going to look in retirement. If you’re going to be in a high bracket in retirement, then stick to Roth at this point. Or vice versa. If you’re going to be in a much lower bracket, go ahead and take that deduction now because you may be in a lower bracket later.
Joe: Couple of things to consider too, Al. Let’s say, middle brackets. We’re talking 22% to 24%. For those of you that are on the cusp of the 24% tax bracket, you probably want to go tax deferred. Get that tax deduction until you fall into the 22% tax bracket and then you would go all Roth. So understanding what tax bracket that you’re in and how much money that you’re saving is also going to determine this type of strategy. It’s not a guessing game. It’s not like, “Oh, let’s just cut it in half, 50/50.” Well, sure. But you could be a little bit more sophisticated here to say, “Where do I fall? What bracket am I in? What bracket do I think I’m going to be in? And where do I believe tax brackets are going to go? What is more valuable to me? A tax deduction today, or tax free in the future, or taxable in the future, or no deduction today and 100% tax free?” We don’t know. We don’t know you. You’ve got to take a look at this stuff to make sure that you’re doing things appropriately. HSA investments, that’s another good way to save money in taxes and then get some tax free growth coming out of it.
Al: It is, if you qualify. You have to have a high deductible health insurance plan. Let’s also talk about if you’re in a higher tax bracket. Well, this might favor a tax deductible 401(k) as opposed to a Roth 401(k), but not always. It’s really not that simple because everyone’s situation is a little bit different. But if you’re in a higher bracket, you do want to consider more charitable strategies or more tax deductions in terms of things that you can do. If you have rental properties or businesses, there’s certain things you can do. But for all of us that are charitably inclined, there are ways to give it to charity. You don’t even have to give cash, you can give appreciated stock, get a full deduction, and not pay the tax on that stock. So just consider these kinds of things when you’re in the highest of tax brackets.
Joe: And then there’s also, I’m in the highest tax bracket, I don’t qualify for a Roth IRA that we’ve just talked about. Not so fast. You can always do a conversion. So, Al and I just talked to someone yesterday that’s in the highest tax bracket, but looking at their overall situation, they’re going to continue to be in the highest tax bracket. So does it make sense to get the deduction? Probably not, because their brackets are only probably going to go higher. So these are rules of thumb in a sense, and this is Your Money, Your Wealth®, not rules of thumb. The rule of thumb is to watch our show. Go to yourmoneyyourwealth.com, click on our special offer. If you want to do this stuff yourself, go for it. DIY retirement guide, do it yourself retirement guide. Go to yourmoneyyourwealth.com, click on that special offer. It’s our gift to you.
Joe: Hey, welcome back to the show. Show’s called Your Money, Your Wealth®. Joe Anderson here and Big Al Clopine. We’re talking about the must dos in regards to your retirement. If you’re just joining us, welcome. You can go to our website, yourmoneyyourwealth.com. Our special gift today is our do it yourself retirement guide, DIY retirement guide. Go to yourmoneyyourwealth.com, click on the special offer and there you go. You’re off and running. Let’s see how you did on the true false question, folks.
Al: “Since municipal bonds are free from federal income tax, they won’t ever affect the taxation of your Social Security benefits.” Joe, true or false?
Joe: Is this like a question for the CERTIFIED FINANCIAL PLANNER™ exam?
Al: Yes. You remember that one?
Joe: That’s a complicated question for most people. I wonder what people did at home there.
Al: Do you know the answer?
Joe: I do know. It does affect the taxation.
Al: It does, because it’s Social Security. The taxation is dependent upon provisional income, which is basically all your income plus half of your Social Security, plus your tax free interest. So that’s included. So it could impact how much of your Social Security is taxed because there’s different levels. In some cases, there’s no taxation. In other cases, half of your Social Security is taxed. Other cases, 85% of your Social Security is subject to taxation.
Joe: We’re going to talk about depreciation schedules.
Al: I do want to talk about distribution plans.
Joe: Yeah. If someone has the right distribution plan, you can save a lot of money in overall taxes. Because we’ve talked about this a little earlier. If all of your money is sitting in a retirement account then you really don’t have a distribution plan from a tax perspective. Then it’s all looking at investments. What assets are you selling and buying? Well, once you have a coordinated strategy of, “OK, what am I looking at here in regards to tax, in regards to how am I going to create the income?” Then you have something, then you can see your money really stretch. We talk about the 4% rule, and Al, this is a good rule to get started. Take the amount of money that you have, times it by 4% and that’s roughly going to be your income for that year.
Al: And it’s a good starting point. That percentage doesn’t necessarily work for everyone, but at least it’s a good place to start. The younger you retire, the lower you want that percentage. Maybe if you’re in your 50s, maybe you’d look at a 3% or even a 2.5% distribution rate. If you’re in your 70s when you retire, you might even go up to 5%. These are just rules of thumb because you don’t want to run out of money. But it’s more than just that. It’s also where you have your money in different types of tax pools. If it’s all in a retirement account, then all of that’s going to be subject to taxable income, ordinary income. If you’ve got some in a Roth and some in a taxable account subject to capital gains, you can actually do a lot better. One of the things people always try to do, they try to minimize their required minimum distributions because at age 72, you have to start taking money out.
Joe: I wouldn’t say most, I would say people that have money in them.
Al: That’s true. If you don’t have money it doesn’t really matter.
Joe: Because to be totally honest with you, most people don’t have a ton of money in their overall retirement accounts, and the RMD really doesn’t matter. Where it matters, is there are people that have accumulated a lot of money in a retirement account and then they have other assets that they’re living off of and then the compounding effects of the tax deferral really catches up on them. And it’s like, “Wow, now I’m 72, now it’s mandatory for me to take dollars out of the overall account,” and it just spikes you potentially into another tax bracket. So figuring out ideas and strategies on how to mitigate some of that tax burden is key.
Al: And here’s where, if you can convert some of your dollars to Roth, you’ll have a lower minimum distribution. Also, if you got a lot of money in an IRA and you don’t necessarily need all of it, you might consider gifting directly to charity once you’re 70.5. That’s called a qualified charitable distribution. So that can be a way to keep it off your tax return, keep from paying the higher tax rates.
Joe: Yeah, the _CRD_ is very interesting. So if you’re giving to charity, maybe you’re giving cash to charity, but then you’re still taking the RMD and paying tax on it. Well, here you can give money directly from your retirement account to a charity, and it doesn’t even show up on your tax return. It’s a tax free withdrawal. And here’s another thing, Al. When we die.
Al: It’s always a fun topic.
Joe: Let’s wrap this show up when we’re dead.
Al: Some things you’ve got to consider, that all of us have to consider is we know we’re not going to live forever. So you’re going to have to look at wills and trust. For some of you, wills are just fine, others of you may want trusts. The main benefit of a trust is you avoid probate, you avoid the court system, your assets get distributed how you want to in a much quicker fashion. But whether you have wills or trusts, you should have health care directives, financial powers of attorney, those sorts of things. Because if something happens to you while you’re living, then you may need someone else to step in. And finally, beneficiary forms. Everyone forgets to think about that. They have additional kids or grandkids or they get divorced and all kinds of things can happen.
Joe: That’s one of the most important estate planning, on that whole thing. Most of us have a retirement account. Double check your beneficiary forms. Just double check it, because if you want your retirement account to go someplace different than what the form says, that will trump everything. If you have a will and trust that says, I want everything to go to Big Al and then if I pass and my money goes somewhere else, it’s going to go somewhere else. Even though my legal trust document said it wanted to go another place, so check that beneficiary form. Let’s go to Ask the Experts.
Al: Matt in Del Mar, “I’m worried about the capital gain rates going up, what should I do to offset the coming increase?” Great question, Matt. There’s discussion in the Biden administration of increasing capital gain rates, but these are only for people that have incomes of more than $1 million. If that’s your case, you might want to look at some charitable strategies. You might want to take some capital gains now before the rates potentially change. You might look at tax-loss harvesting. A lot of things you can do.
Joe: So what’s the must do’s? What do we gotta do? First of all, take a look at your portfolio itself. Is it set up appropriately to create the income that you need long term? You’ve got to look at your time frames. You’ve got to look at your risk tolerance, but then you have to also look at what expected rate of return that you need that might have a little bit of a differential in regard to your appetite for risk. Taxes play a key role in creating your income stretching the overall dollars. Then you’re looking at how do I withdraw the dollars from the accounts that I have? And then, God forbid, if you were to die prematurely, making sure that you have an estate plan or for those of you that are really planning for a legacy, get that dialed in now. Go to our website yourmoneyyourwealth.com. All of this is on there. It’s our DIY retirement guide, DIY retirement guide. Click on this special offer and it’s yours for free. That’s it for us, for Big Al Clopine, I’m Joe Anderson. Have a wonderful weekend, everyone.