- (00:59) Tax Reform: House vs Senate
- (07:10) Tax Reform: Use These Tax Deductions Now, They May Be Gone in 2018
- (18:33) Tax Reform: Roth Recharacterizations – and Big Al’s Secret Man Crush
- (30:15) Work Until 70? Walter Updegrave Takes on Suze Orman
- (46:10) 20 Retirement Stats That Will Blow You Away
“A couple of things that you really might want to consider between now and year end, because if this does get through the Senate, if it passes, if President Trump signs it, then there’s some things that you want to do in the next month, to take advantage of the current tax law.” – Big Al Clopine, CPA
Recharacterizing your Roth conversion, getting that knee replacement, meeting with every client you have all across the country and more: Today on this Thanksgiving episode of Your Money Your Wealth, Joe and Big Al cover many things you might want to do right away, before tax laws potentially change in a big way come January 1st. Also, Suze Orman thinks everyone should work until they’re 70 – we’ll find out what Walter Updegrave from RealDealRetirement.com and Money Magazine thinks about that, and we’ve got 20 retirement stats that will blow you away. Plus, Big Al reveals his secret man crush, and the fellas discuss how they enjoy the music of John Denver. Now, here are Joe Anderson, CFP and Big Al Clopine, CPA.
:59 – Tax Reform: House vs Senate
JA: Alan, we have some more news on tax reform.
AC: Well, Joe that we do, because the House Republicans passed their tax reform bill. So if you haven’t been paying attention, here’s a little review on November 2nd, the House came up with a tax bill that would change a lot of things. Starting in 2018. Doesn’t really impact 2017 with a few minor exceptions, but mostly for 2018. So they passed their bill. 227 votes in favor, 205 votes against. But that doesn’t mean it’s tax like it. That just means the House passed their version. Now the Senate, by the way, has their own version which is similar but different. And should they pass that one is that once more iffy because there’s only 52 Republicans and they need to have 50 sign off on it. In all likelihood, there will be no Democrats agreeing with it. And there’s already at least one Republican who’s come out publicly and said I’m not supporting it. So they can only lose maybe two more.
JA: Are those votes public record, that you know who voted for what, or is it just the numbers? Is it a secret ballot?
AC: I assume it’s public, but I don’t know for sure, and I do not have it here. But I do know that it was not 100% Republicans in the House that wanted to pass this, and the ones that had trouble with this were in California, New York, New Jersey, because one of the basic principles in this tax reform act, is that you can no longer deduct your state and local tax. Meaning that, in California, we have such a high tax rate, it’s 9.3% for a lot of people, and if you’re in the highest bracket, it’s actually 13.3%. So with that high of a tax, there’s a little mitigating factor that you can deduct that tax against your federal taxable income to reduce the federal tax that you pay. And there is some justification, Joe, because it’s kind of like, well, you’re paying taxes twice on the same dollars, so maybe you ought to get some benefit. And then there’s states like Nevada that don’t have any state tax. Anyway, this tax really is kind of unfair if you’re trying to do fairness, compared to what we had before, I guess, in terms of people that live in high tax states are really not going to see near as much benefit from this tax act as other states.
JA: So after Thanksgiving we’ll probably see what goes on with the Senate.
AC: Yes so let’s say the Senate approves their version, which is, like I say, it’s a lot more iffy, because they can only lose two Republican votes. If they lose three Republican votes it’s dead. So then they have to go back to the drawing board and try to get those other three on board. But then sometimes, when they do that, then they upset other Republicans for different things. Because they’re not in a 100% alignment. But let’s just say it passes, Joe, the Senate. So now we have a Senate bill and a House bill. Those two need to be reconciled into a single bill, and then both House and Senate need to prove that one. And then, if that happens, then President Trump can sign it, and then its new tax law. And again, this would be effective 2018.
JA: The only thing that I heard that would be retroactive to 2017 is the mortgage deduction. So right now, you can write off about $1.1 million of debt.
AC: Yeah. In other words, THE first $1.1 million that you borrow, you can write off the interest expense on that.
JA: And then that’s going down to $500,000 on any new home purchases or financing that was done after December 2nd. Anything else that would be retroactive to 2017 that you’ve that read?
AC: That is the only thing that I’ve seen that would be retroactive. Because that’s based upon the date that it was first announced, which is November 2nd.
JA: So if you want to buy a house… cross your fingers?
AC: Cross your fingers and Joe, just as a as a quick review, if you haven’t really been paying attention. The house, they want to they want to take our current structure from seven brackets to four. And the brackets they want to have is 12%, 25%, 35%, and 39.6. So 39.6 is the same rate as what we had before. They want to just about double the standard deduction. Single $12,000, married $24,000. So less people are going to itemize their deductions, but they want to get rid of exemptions. Because right now, it’s a little over $4,000 per person in your family. So that would be gone under this this new tax act, and then there’s a whole lot of itemized deductions that get taken away, like medical deductions go away, state local tax deduction goes away, unreimbursed employee expenses go away. Casualty losses go away, mortgage interest is, less of it’s deductible because they only let you borrow $500,000. And if you happen to borrow a million, then only half of the interest that you pay is deductible, they do a pro rata allocation.
JA: Right. But if you had a million dollar loan prior to November 2nd, you can still write that off.
AC: Yes. So that gets grandfathered in.
JA: So stay tuned.
There are a lot of tax strategies that may no longer be available come January 1. How is this massive tax reform going to affect your business, and your personal tax situation? If you haven’t already started end of year tax planning, time is running out. Call Pure Financial Advisors at 888-994-6257 and make an appointment for FREE personalized tax assessment. That’s 888-994-6257. We’re down to the final weeks – find out how your current tax strategy may be changing as 2017 ends, and how you can make the most of the tax deductions that are still available. Call Pure Financial at 888-994-6257. 888-994-6257.
7:10 – Tax Reform: Use These Tax Deductions Now, They May Be Gone in 2018
JA: We are on the cusp of 2018. So we just talked a little bit about tax reform, and there are some certain steps you might want to take into consideration before year end.
AC: Yeah because Joe, as we were talking about, the House voted and approved their bill for tax reform – and by the way, the last major tax reform was 1986. So we’re about three decades ago. That was under Ronald Reagan. So this is another pretty big major change. And I will tell you one thing, most of the provisions start in 2018, and this does not scrap the old tax code. This just changes it. I think that’s important to know, because a lot of the old tax rules still have to be there. This kind of sits on top of it, if you will. This is kind of another wrapper, that you put on top of the tax code. So to actually completely rewrite the tax code would be a monumental undertaking, that would be pretty difficult. I suppose not impossible. But I want to tell you a couple of things that you really might want to consider between now and year end, because if this does get through the Senate, if it passes, if President Trump signs it, then there’s some things that you want to do in the next month, to take advantage of the current tax law. So here’s a few of them: One is, if you have any medical deductions or medical expenses, that you have an opportunity to incur and pay for in December versus January.
JA: Get that knee surgery done now. Book it.
AC: Book it, because it may not be deductible in January.
JA: You need a new hip? Git er done.
AC: Do it. Yeah. (laughs)
JA: You got some dental work? All right here you do.
AC: You thought you’re going to visit the kids for your holiday? (laughs)
JA: So your holiday is going to be in a hospital bed. I want to get your hips replaced, the knee that you’ve been thinking about getting for all those years. Now’s the time to do it. (laughs)
AC: Here’s another one which is this. Your state taxes. Since state taxes would not be deductible next year, you might want to make sure, first of all, all your state taxes for the current year you have paid by December 31st. You might even want to prepay some of next year’s tax. Of course, the problem with that is, then you’ll end up with a state tax refund, which is taxable on next year’s return. So you’re going to want to have your accountant help you figure out whether that’s a great idea to overpay your state taxes. But at least to get a tax deduction for this year, depends upon your tax bracket.
JA: So let me ask you a question. So let’s say my state tax is $20,000. Hypothetically speaking. And that state tax is due with my federal return on April 15th. So I pay the Franchise Tax Board, if you live in California, or whatever state that you live in, and then you pay the IRS your federal tax. So if I pay it in 2018 for my 2017 year, and then they change the tax law, saying, “that $20,000 that you just paid the Franchise Tax Board, now on my next return I will not be able to deduct that.”
AC: That’s correct, because it was paid in 2018 when it’s not deductible.
JA: Even though it was for 2017. So you’re saying, hey, don’t wait until April to pay that thing. Pay it before December 31st, so then you can write it off on your taxes while it’s still law.
AC: That’s right. Of course there are caveats, Joe, because a state tax payment is not deductible for alternative minimum tax purposes.
JA: So if you’re in Alt-Min you’re screwed.
AC: Yeah kind of. So you have to kind of do that calculation as well. Same thing goes with property taxes, because under the new law, you can deduct $10,000 of property taxes. Well what if your property taxes in California, not that unusual, have it be more than $10,000? $20,000 or more? Maybe you want to prepay some of that. Get that actually in 2017 while it’s still deductible. Certainly you’d want to pay what’s due in December, and then you’d want to pay what’s due in April of the following year, maybe even pay more than that.
JA: So let’s say $20,000 and I’ve withheld taxes along the way. So this is for individuals that potentially might have a tax bill that’s due because I didn’t withhold enough. So if any other taxes that I would owe when I do my taxes next year, let’s say, my total taxes is $20,000. But when I do my taxes, you’re my CPA, you say, “Joe, you owe another $4,000 to the state of California.” So with that, I want to pay that before the end of the year or else it blows me up. But now, if I do a guesstimate, and say I’m going to just throw ten grand, I’m just going to pay them $10,000,” and I pay $5,000 extra. So I get the full deduction, but I paid too much to the state. Next year that $5,000 overpayment to the state is now going to be taxable income to me the following year.
AC: That’s right. And that’s where it gets really tricky. Let’s say state taxes are no longer deductible, then the state tax refund will never be taxable. But there will be a carry over year there. Because if you paid too much for 2017, if you get a refund, it would be income in 2018. So you got to be careful of that. Your property taxes though, you pay too much there, I don’t know, maybe you get a refund from your county?
JA: Yeah, good luck on that.
AC: Yeah. Or maybe they just apply it to the next year, but at least you get a tax deduction. But here’s another one Joe, which is unreimbursed employee expenses. And if you’re in sales, and your company does not reimburse your travel and entertainment, gosh, you want to get all those expenses into 2017, so you can at least take a deduction. Because in 2018 that’s no longer deductible.
JA: All right so just do a massive road trip. Get in the car, hit all those clients that you haven’t seen, in the next six weeks, and rack up a bunch of unreimbursed employee expenses. So the holidays? Forget about it you’re working. You’re either in the hospital or you’re on the road. (laughs)
AC: So here’s another one, and this is probably only if you’re selling your residence, it’s already in escrow, and now you’re trying to decide should I have the residence close in 2017 or 2018? If you’ve got the ability to manipulate, because 2017, current law is you have to have lived in the home two out of the last five years to get a $250,000 exclusion from your gain, or $500,000 if you’re married. So that simply means, you’re married, the first $500,000 of gain, you bought the home for $100,000, now it’s worth a million. OK, you got a $900,000 gain. The first $500,000 of gain is tax free. $900,000 minus $500,000. So you only pay tax on $400,000. And you lived in the home two years. Well if it closes on January 2nd of 2018 and this passes, now you have to live in the home five out of the last eight years. And so, you would pay taxes on the full $900,000. So if you are looking to sell, or you’re already selling, but sometimes people say, “well, maybe I should close my home sale in January.”
JA: Yeah. Or let’s say you’re thinking about selling. You like, “I don’t know, maybe we just kind of wait till next year.” I don’t know. Who knows what’s going to happen with tax law? But if you’ve only lived there two out of the last five and you want to get the 121 tax exclusion of 250 or $500,000, that might be motivation for some people to say, “I’m going to pull the trigger. There’s some good gain here then I’ve accumulated over the last several years.” Or you’re going to have to live in it five out of the last eight.
AC: Right. To get that exclusion. Another one, Joe, which has not gotten a lot of press, but under the Senate bill – so this is different than the House bill. But if it passes, it’s going to have to reconcile with the House bill. In the Senate bill, you can no longer specifically allocate a share of stock when you sell it. In other words, right now you buy all kinds of shares of Apple over time. And now you want to sell some of it, because you want to kind of rebalance your portfolio, and you’ve got too much in Apple. So what you can do right now is you can say, “the shares that I paid the most for, I want to sell those, because they have the lowest gain.”
JA: Yeah, you look at your basis. You can say, “this block of shares is the one I want to sell,” the one that’s going to have either the most gain or least gain, depending on your taxable income, it’s a great tax strategy we use all the time.
AC: Right. So the IRS is saying that you have to do first in, first out (FIFO). So in other words the first one you bought, when you do sell some, is the first one you sell. Now if you bought a stock and it keeps going up, up, up, up, what that means then is, then you’re going to have to sell those early shares that have lots of gain.
JA: So how on earth are they going to track that, when most people don’t even know what their basis is, let alone first in first out?
AC: So they’re going to rely on the brokerage.
JA: Is it first in first out or last in first out? FIFO or LIFO?
AC: They want to change it to FIFO, first in first out. And first in first out, stocks on average go up. And so that’s forcing you to sell your early shares with higher gain. So that’s what that’s doing. So you may want to rebalance and change your portfolio before December 31st because of that.
JA: Or if you’re looking at, not a full rebalance, maybe just take a deeper dive into the portfolio. And this is only for assets that are outside of retirement accounts.
AC: That’s true. Yeah right.
JA: So if you only have retirement accounts, IRAs, 401(k)S and the like that’s in a wrapper of a retirement account, it’s all going to be taxed at ordinary income coming out anyway, so it doesn’t necessarily matter. There’s no sense to keep track of basis. But as your brokerage account’s subject to capital gains tax, and to mitigate some of that cap gains tax is where you look at block shares to say, “these are the shares I want to sell, given whatever gain they have in them.” Sometimes we look, if someone is in a low tax bracket, because there’s no capital gains tax in the 15%, so you might want to use the ones with the highest gains. Because you have room in that bracket, you sell the highest gains there’s no tax on it. Next year, you’re going to be in a little bit higher tax bracket, and then you have a little bit higher basis, the next time you sell around, and so your tax buy it’s going to be easier to swallow.
AC: Well that’s right, and I know it sounds weird, but sometimes creating a tax loss or selling to rebalance and not having a lot of gains, sometimes you want to tax loss harvest, sometimes you want to tax gain harvest. Because in the lowest two brackets right now, the 10% and 15% bracket, when you have a long term capital gain, the tax rate is zero. So that’s a pretty good rate.
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18:33 – Tax Reform: Roth Recharacterizations – and Big Al’s Secret Man Crush
AC: So Joe, we’re talking about this new House bill that actually was passed on November 16th. And that’s a new tax bill that dramatically changes our tax law. But before you get too excited, the Senate has to pass their own version of the bill, which may be even more difficult than the House. And if they do, then the two chambers have to get together and reconcile the differences, and then they both have to approve a combined bill if you will. However, be that as it may, if this thing does go through, there’s some things that you really want to do right now, Joe, and one of them is to consider your Roth conversion strategy. And if you’ve listened to our show for any length, you’ll know that we’re big believers in creating tax free income in retirement. And one of the best ways to do that is to do what’s called a Roth conversion. So you actually take some money out of your IRA, and you directly send it to a Roth IRA. So that’s called a conversion. Roth IRA is a retirement account, still. You do pay taxes on what you convert, but all future growth and income and principal is tax free for you, your spouse, your kids, grandkids, whoever inherits it, tax free forever. So that’s why this is such a great tool. Right now you can do the Roth conversion – by the way, you can still do the Roth conversion next year under current law, but here’s what you cannot do next year, 2018, under this law, is you can’t do what’s called a recharacterization. Recharacterization simply means that when you do the Roth conversion, you can change your mind after the fact. If you do a Roth conversion today, you can change your mind all the way until October 15th of 2018. Other words, you can do the conversion now, and then you do your tax return, you might even want to extend the tax return, so you have to file by October 15th. At that point you can say, “I think I converted too much. I got into too high of a tax bracket. I want to pull some or all of that back to the IRA. I don’t want to pay the tax.” So you’re allowed to do that. And that’s a pretty nice strategy. Think about it this way. What if you do a Roth conversion right now, and whatever you invest in goes down in value, and then it’s like by October, it’s like, “well I converted $50,000 that’s only worth $40,000 right now. Do I really want to pay tax on 50 grand when my account is worth 40?” The answer is No. So you can re characterize it. That’s available this year. Under the House bill that was just passed on Thursday, that is no longer available. The Roth conversions are a one way street. So if you haven’t done a Roth conversion yet, this would be an ideal year to take a look and see if you’re a good candidate for it, because we know that you have the ability to still do the recharacterization for this tax year. Next year, maybe, maybe not, depending upon a few of the new tax passes.
JA: I’m going to put myself out there Alan. I would say everyone that can do it should do it. Because you can always recharacterize it. Who cares, if you don’t want to keep it. And what we’ve done with people in very high tax brackets is that you do a Roth conversion, and then you put it into an asset class that historically gives you a high expected rate of return, that are a lot more volatile than let’s say blue chip stocks. Maybe you might go with smaller companies, value-type companies. You go emerging markets. Emerging market, small value. Talk about volatile. But some years, they’re up 20, 30%, some years they’re down 60%. Because you’re probably going to hold, in a globally diversified portfolio, you will hold – in our company any way, you will hold an asset class like that. So I don’t want you to add more risk to your portfolio. But you look at your entire portfolio and say, “OK, well which asset do I own, that I believe will give me the highest expected rate of return, the highest probability.” Then you take that asset class and you put that into a Roth IRA. $10,000 $50,000, I don’t care. Now it’s in a Roth IRA. And then you wait and see how it performs over the next 6, 8, 10 months. And if it performs, you keep it, who cares what the tax is, because now all of that growth that you just did, is all yours tax free. Then you rebalance. And if it goes down in value, well then you characterize it, you put it right back into the IRA or retirement account like it never happened. So this is maybe your last chance to do this – undo, redo. Just kidding. I don’t want to keep it.
AC: It’s such a big strategy, and I would say this Joe. The clients that we’ve had where we’ve done this the last couple of years, even the ones that were in higher tax brackets than they wanted to be in because of the conversion, they actually kept their conversions because their accounts were up 20%, 25%, 30% hypothetically. Well, and the reason is because certain asset classes like emerging markets and small and value companies have done pretty well the last couple of years. Now that’s not to say it’s going to happen again. And Joe, as you said it, it’s like we don’t want you to take any more risk. These asset classes would be in your IRA anyway. You’re just temporarily moving into the Roth to see.
JA: You’re just parking it in another garage. You take the Corvette that goes really fast and you park it in another garage. And if the tornado hits, you file a claim and get your Corvette back. (laughs)
AC: Yeah we undo it. That’s quite an analysis. (laughs) But that’s what available right now.
JA: I think too, for all of you stock pickers out there. So if you have the golden goose, you’ve done your research. And if you listen to our show you know that we believe that stock picking is very difficult to do, and there’s a very high probability of that not really working out very well long term. But I know a lot of you have a different opinion on that, and that’s great. So if you believe that you have a particular security that is significantly under priced, that you believe that this company is a gem, it’s just waiting to find its way. Well, put that stock into a Roth IRA and see what happens. Convert it. Because this could be the last year. Because next year it might be irrevocable. We still can do conversions, which is great, but you might not be able to kind of get creative with your strategy.
AC: The other strategy related to that, Joe, is for people that are in a low enough tax bracket, they might want to do two Roth IRAs and maybe do one Roth IRA, Roth conversion, in a real safe investment like government CDs, the other one in equities, stocks? And now it’s like you see which one does better over the next 8 to 10, 11 months, and you keep that one. The one that doesn’t do as well you put that back. The recharacterization. That’s available through December 31st. It may not be available next year.
JA: So check it out, see if it makes sense for you. I would imagine most of it does make sense to take a look at. Andre, do you have a Roth IRA set up yet? How long have you been helping producing this radio podcast? It’s been several years. You spend more money on hair product than he does on… but he’s got great hair. Look at that fro.
AC: Can’t deny that. In his defense, usually Deb is here. So he only pops in about once every other month.
JA: I don’t care. It’s been at least five years. If he would’ve just saved $100 a month for the last five years. He would have several thousand dollars tax free in a Roth IRA.
AC: That’s right, and he would be ahead of the average.
JA: And guess what. He could buy a lot more hair product.
AC: (laughs) Tax free.
JA: He’s going to have to sell some of those locks for his retirement. He’s gonna have to put that stuff in a bag.
AC: Well that’s why he uses the hair products. That’s his retirement plan. (laughs)
JA: (laughs) Right. We got Walter Updegrave coming up buc.
AC: Yeah we do. And I guess Suze Orman wrote a column recently, basically saying that you shouldn’t retire until you’re 70.
JA: Are you a big fan of Suze Orman?
AC: Not particularly but a lot of people watch her. Anyway, Walter Updegrave, he commented on the article, and he said here is why she is wrong. So I’m kind of interested to see what he has to say.
JA: If there’s a financial person, who would be the person you respect the most that’s in the public?
AC: For me? Joe Anderson. (laughs)
JA: Oh, thank you very much. I don’t care for Suze Orman.
AC: Yeah, besides Joe Anderson, I would say Michael Kitces, I think he’s a real bright guy.
JA: Yeah. Kitches? Kitces? What about Wade Pfau?
AC: Very bright guy. Yeah. He’s another one. I think I like Scott Hanson. I think I would trust him.
JA: Wow. Man Crush. Big Al’s got a man crush on Scott Hansen from Hanson McLain. (laughs)
AC: (laughs) Well you asked.
JA: If there was one guy I could go on a nice hike, spend some quality time with… if there’s one person in the world that you get to have dinner with, who would it be. Dead or alive. Um, Scott Hanson. (laughs)
AC: By the way, he’s a financial advisor in Sacramento. Love that guy. (laughs)
JA: If you would cheat on your wife with one person in the world what would it be? (laughs)
AC: Scott Hanson. Yeah of course. (laughs) But I guess this group of financial planners I am involved with, does these crazy hikes every year. We’re going to do a one day 22 mile hike in Alaska next summer. Scott’s going to go on a hike with us. I may get to hike side by side with Scott Hanson. (laughs)
JA: (laughs) You’re gonna untie his boot, maybe he trips so you can help save his life.
AC: I’ll be able to talk with him for 12 hours in a row. He won’t be able to get away. (laughs)
JA: He’s like, “oh my God, Big Al.”
AC: “Clopine, I thought you were normal until I went on this hike with you.”
JA: Oh goodness gracious. But Updegrave, I forget, what his website? Hot Damn Retirement? (laughs)
AC: (laughs) It’s called RealDealRetirement.com.
JA: I knew it was something snazzy there. RealDealRetirement.com.
AC: What did you say, did you say Hot Damn Retirement?
JA: Hot Damn Let’s Retire Dot Com? (laughs)
AC: Anyway, I guess he’s the editor for that website. He was the editor for the Money section of Money Magazine for years. People would write in questions and he would answer them.
JA: He’s a real smart guy.
AC: He’s a pretty bright guy. So I’m kind of looking forward to talking with him.
JA: Yeah he understands the retirement landscape fairly well. Some of the tidbits and things that you have to do.
AC: I wonder if he’d want to go on a hike with me? Wouldn’t that be something? (laughs)
JA: (laughs) That would be something special.
That conversation about Al’s man crush has me wondering about that latest review of Your Money Your Wealth on iTunes that mentions Joe and Big Al’s chemistry… Anyway, Have you done a Roth conversion or recharacterization, contributed to a Roth IRA, funded a Solo 401(k) if you’re a small business owner, looked tax loss harvesting or tax gain opportunities – or had that surgery or met with those clients?? Now is the time to call 888-994-6257 and find out if any of these last minute tax strategies and deductions are available to you. Get an end of year tax assessment and make sure you’re taking advantage of current law. 2017 is about to be in the rear view mirror, and with it, potentially a lot of current tax breaks. Call 888-994-6257 to get an end of year tax assessment ASAP.
30:15 – Work Until 70? Walter Updegrave Takes on Suze Orman
JA: Big Al, it’s that time of the show again.
AC: That it is, yet another great guess.
JA: Yeah, we got Walter Updegrave he’s been on the show once before. Is the Real Deal Retirement. You’ve been on RealDealRetirement.com?
AC: I have.
JA: You’ve been reading, studying? Is he your go-to fact checker now?
AC: As a matter of fact, I was on it yesterday. How about that? And I know Walter, you’ve written for Money Magazine for several years, decades actually. So thank you very much for joining the show.
WU: Oh my pleasure. You know, I was wondering what that uptick in traffic was that I noticed yesterday. That must’ve been you, Al.
AC: (laughs) I think it was, doubled your people hitting on it.
WU: (laughs) It increased it by a very minuscule amount. My traffic is so hot.
AC: (laughs) I like to think I make a difference, but maybe not in this case. So anyway, you wrote this article. Suze Orman actually, you kind of responded to a column that she wrote, where she said, “you shouldn’t retire until you’re 70,” and then you decided to write an article as to why she was wrong – although I will say a couple of things, you did applaud her for trying to get people to work longer, which I think is a good thing. But why don’t we jump right in. What are what are some of the problems with that concept?
WU: Sure. First I just want to say, I wasn’t looking to pick on Suze Orman.
JA: Oh come on Walter. That’s okay.
AC: It’s OK.
WU: But when I read her original article, and when she said – and this is the quote from the article – “70 is the new retirement age, not a month or year before,” I thought, “wait a minute, there’s no room for ambiguity.” And then later she says 70 or later. And I thought to myself, this just doesn’t make sense. You can’t make these kind of blanket assertions as if everybody needs to hew to this one standard. And so that’s what led me to respond in an article. And I did want to give her credit, she brought up some valid points. Your your money has to last very long. Many people live into their 90s, so if you’re retiring in your 60’s, you’re talking about 30 years that your money has to last. So I think it was very good that she brought that point up. And she also makes some points that Social Security, about taking that later sooner. Although, I don’t think that 70 is necessarily the age everybody should wait for. But in general, I think it’s good to think about postponing it. So I tried to give her credit for bringing those things up, but the whole idea that there is this one age, 70 or otherwise, that everybody should shoot for in retiring just doesn’t make sense. it’s pretty simple, it really kind of comes down to there are so many different situations that people have. Some people have jobs that they find really interesting, and they’re satisfying, and they will stay on them as long as they can, and they may want to work past 70. That’s great for them, nothing wrong with that. Other people may have jobs that they kind of see as a drudge and they don’t really like, and they don’t want to stay any longer than they have to.
And there are a lot of situations where somebody might decide that, even though they probably should stay a few more years, try to build a little bit larger nest egg, for whatever reason they can’t take it, either physically or they just are really dissatisfied with the job . So I can see someone like that saying, “I’m going to retire a little earlier, and maybe it means I have to take my standard of living down a couple notches.” So there are just all sorts of things, all sorts of individual, subjective personal decisions that go into deciding when to retire. And so a blanket statement of 70 just makes no sense to me.
AC: Yeah I think that’s a good point because Joe and I are financial planners, and you’re a financial journalist, and so we have jobs – as long as we still have our mind, and we can speak and communicate, we have the ability to keep on working, but not all jobs are like that. There are some jobs that require a lot of physical exertion, activity, and you may or may not be able to do that until you’re age 70.
JA: Yeah but that’s only the minority though. I think I’m kind of torn here, Walter, because I agree that most people should delay. And I think, when you look at Suze Orman, and the audience said that she is probably catering to, most people haven’t saved. Statistics show that most people do not necessarily have enough money. And I think by just putting a blanket statement of saying retiring at 70 might help people just to put it in their minds, where they can’t retire at 62, because they only have $50,000 saved, and they’re spending $40,000 a year. A lot of times they don’t have the simple arithmetic skills just to kind of put two and two together to figure out exactly how to create the income. So we might be giving some people the benefit of the doubt.
WU: Well I agree. In the article I say there are certain things, questions that you need to look at before you decide to retire. Starting with you have enough saved to fund an acceptable lifestyle. And so you should go through a process of what kind of income will I get from Social Security? Do I have any pensions? How much money do I hage saved? What can I reasonably expect to get from that, in terms of withdrawals, or buy an annuity, something like that. And then, look at what your your expenses are likely to be. If you go through that analysis and you find that you’re not close – and I think people need to go through that analysis for retirement at least a decade ahead And so if you go that’s where the mouth is. You may very well gee I would like to retire at whatever age 60 to 65 or whatever. And so if you go through that sort of analysis, you may very well find, gee, I would like to retire at whatever age, 62, 65, or whatever. And you realize that that’s just not feasible. So then you come up with a plan to make it more likely that you will be able to do that. But for example, just saying 70, what about somebody, there are people, I’m not saying te majority, but there are a lot of people, and there’s been some interesting studies on this, where they asked people how prepared they are for retirement. What they find is that people err on both sides. Some people think they are in great shape when they’re not even close, there are other people who think they are not prepared, where in fact they actually do have the financial wherewithal to retire. So for somebody, let’s say, who really wants to retire, but thinks, oh gee, I may not have enough, I may work until 70, where in fact they could retire at 66. Think of it, that’s four years of them doing something, or foregoing the benefit of retirement when they might have had it. So I agree that for a lot of people, the idea is that they maybe need to get themselves in the frame of mind and they have to work a few extra years. But that should be based on some sort of actual analysis, not some sort of statement.
JA: Well whatever Suze Orman says is gospel! (laughs) But no you bring up a good point, Walter, and I think most people feel that way, in my experience of about 20 years of helping people in retirement, the ones that have a lot of money worry more. And they’re thinking, “man, I accumulated this wealth, but I still don’t feel that I have enough,” because they’re more or less savers. They’re not necessarily spenders. And you’re absolutely right. Some people that we’ve helped or talked to or whatever. They have plenty of assets, but they feel worried that they don’t necessarily have enough, and then the next day you have someone that comes in that doesn’t nearly have enough, that is content that the they do. So yeah, there’s a disconnect there. And we’ve also had people on this program, all the FIRE individuals, financial independence / retire early, where they’re saving like 90% of their income, and they want to retire at age 40. So I guess that the spectrum goes all over the place. So I agree with you, and I guess I’m getting all fired up for nothing.
WU: I think that’s a valid point, because I think also, you’re right, I get a lot of feedback from people who want to retire early. For a lot of people, that’s a dream, that’s something they want to do, and a lot of people really do work to make that a reality. And that’s great if you can pull it off. It requires a lot of savings, so the average person is going to have a very difficult time doing that. But there are people who commit themselves to it. And I think even those people, sometimes they need to go through a process like, “OK, I’m going to retire at 50. What am I gonna do those next 40 years? Will I have something to occupy me, to make that time worthwhile and meaningful and not just sort of a period of marking time.” A retirement isn’t just a very long vacation, you’re going to be spending a lot of years in it. So I think even those people, need to sort of do some preparation, as I and I’m sure others call lifestyle planning. How are you going to spend actual days in retirement? What’s going to keep you busy when you don’t have sort of the structure of the mind to find a job to put some backbone to your day, or structure. So I think that all of these things, that’s what makes makes retirement planning both difficult and interesting, because it’s not just an equation, it’s not just an algorithm. There are different things you can change – you can cut back the way we’re gonna live. Maybe you don’t do as much traveling, or whatever as you thought. Or you find ways to reduce your expenses. There are all sorts of little work arounds that you can do. And that’s what makes it such an individual decision. But as you say, I think it all has to start, at least in the beginning, with where do I stand financially, because we want to be realistic about the resources that you have, and what kind of income they can produce.
AC: And I think the other thing, and you brought this up in your article, is the Employee Benefit Research Institute. Each year they do a Retirement Confidence Survey, and in 2017, they found out almost half are retirees leave the workforce earlier than planned. And that’s been sort of a consistent number year after year, and that’s because they have health problems. Or maybe the company got downsized, they lost their job, or maybe they’re taking care of a spouse, or even parent, or whoever. So if that’s true, that means half of us don’t really have any control, necessarily, over when we retire.
WU: Yes I agree. And also to Suze’s credit, she had cited a similar statistic from, I think it was a TransAmerica Center study that talked about 30% of people having health issues. So you’re right, somewhere up around half the people may wind up being sort of involuntarily retired. One of the things that I also find kind of interesting, I like the idea of people being realistic about how long they may have to work. And for some people, it may very well be until 70. There is a certain way though that this kind of mindset could backfire a little bit, and that’s this: If people say, “there’s no doubt I’m going to have to work until 70,” in a certain sense that may take pressure of people in saving, because they figure they have longer, more time to do it. And so maybe they don’t have to save quite as much. I also think the same dynamic sometimes works with people – you see always surveys of people who are going to work in retirement. It’s usually somewhere around 80% of people say they’re going to work part time in retirement. And then you look at the Employee Benefit Research Institute. Also within that study that you mentioned, they have another question, where they ask how many retirees actually do work part time. And the figure is more like 20%. So there’s a little bit of a disconnect. So I think that in some cases, sometimes people may use this idea, I’m going to work part time or I’m going to stay in the workforce longer, as possibly an excuse to maybe not save as much as they should, because they think they have more time. So, I think that you need to be careful about your expectations, and what you’re basing your savings plan on.
JA: You said that very nicely, Walter, because that is so true. I’m going to retire, or quit this job, but I’m going to consult next year, and I’m probably making $200,000 a year. Al and I look at each other, and it’s like, “Are you crazy? if you could consult at $200,000 a year and work 20 hours a week?” I think people live in fantasy land. And you’re right, it’s just an excuse for them not necessarily to save and then they continue to push it out. And you brought a really good point of, hey this age 70, it’s just going to procrastinate even further what they should be taking care of today.
WU: Yes, and that’s not to say that working in retirement can’t be a good thing. It can be good to produce some extra income, it can keep you socially engaged. I think the people who are planning on that, one of the things they certainly ought to do is go to a couple of websites RetiredBrains.com, RetirementJobs.com and just sort of look at the kind of jobs they might be able to get there and see what they’re going to pay. Because it’s very difficult for most people in retirement, to earn anything close to what they were earning earlier in their careers. And so again, it kind of comes down to expectations. It’s great make plans and have things that you want to do, but to the extent that before you retire, you can research them. What kind of jobs do I actually get, what do they pay, or somebody is thinking, I’m going to move to an area of the country where the living costs are lower. OK. Go to those places, take some vacations in those areas. Visit them a few times and find out, do you really like living there. So don’t just think that you’re going to do something, actually do a little bit of research, and see if it’ll actually pan out.
JA: We’re talking to Walter Updegrave, he had a great article check out his website. It’s RealDealRetirement.com. Hey Walter, I know you’re busy. Thank you so much for spending a couple of minutes with us. I want to wish you a very Happy Thanksgiving, and happy holidays.
WU: OK. Thanks a lot Joe, Al. Same to you guys.
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46:10 – 20 Retirement Stats That Will Blow You Away
JA: Alan I got 20 retirement stats that will blow you away.
AC: (laughs) Oh, are you going to do the list this time?
JA: No. We’re just going to go through a couple of them.
AC: Am I going to be blown away or are these kind of normal, regular stuff?
JA: I guarantee I will not be blown away on any of these stats. But I’ll throw some numbers out there and then you can see, Because we’ve gone through… god, we’re pretty close today. I feel like I’m gonna kiss you or something!
AC: (laughs) Yeah. I know, right? We need a lot more separation. I mean, I like you and all, but…
JA: It’s like we’re singing a duet with one mic.
AC: It’s brotherly love today. (laughs)
JA: 72,000. That number. Does that mean anything to you? 72,000.
AC: No. Enlighten me.
JA: OK. Well Americans are living longer than they used to be. It’s estimated that America is home to about 72,000 centarians (editor’s note: Centenarians.) People aged 100 and older. What’s a 70….?
AC: … Septatarian? I don’t know. Something like that. (editor’s note: septuagenarian.) I know octatarian – is that 80? (editor’s note: octogenarian.)
JA: Could be.
AC: And I don’t know about 90. (editor’s note: nonagenarian)
JA: How about this. You’ll probably get this one: $275,000.
AC: That would be the cost of medical expense for a married couple at age 65.
JA: Wow. Look at Big Al. Health care can cost more than you think, according to Fidelity Investments. A 65 year old couple retiring today will spend, on average, a total of $275,000 of out-of-pocket expense on health care. That’s just the co-pays. And deductibles.
AC: Yeah. And the supplemental insurance and everything else that the insurance didn’t cover. And that doesn’t need even include long term care, does it.
JA: That does not. We’ve talked about this a million times too, you know where I’m going with this.
AC: I do, but it’s a new day, let’s say it again. (laughs)
JA: (laughs) But here, you see $275,000. What’s the first thing that will come to most people’s minds?
AC: Well you think I don’t have it, so I’m screwed.
JA: I only have $275,000 total.
AC: And I got to use that for food and rent and utilities. So I don’t get medical.
JA: So yeah, I’m going to just eat what I can and then die.
AC: So how should we look at this?
JA: Well $275,000. So what they’re doing is, 65 through 85, probably, maybe a little bit longer life expectancy. So let’s just say a 20-25 year retirement. So you take $275,000, divided into 20. That’s the annual expense per year for a couple.
AC: So $27,000, we’ll say whatever, $13,000 per person, and maybe it’s closer to 10. In some cases we’ve seen $5,000 per person, $10,000 for a couple.
JA: And that’s average. So some people are really sick, and they need a lot more care. While other people are healthy, so you take an average it’s going to cost $100,00 on average, per year ,for out-of-pocket health care costs.
AC: Yeah. So you just have to have the income to support that, you don’t need a lump sum of $275,000, but the way that’s always worded is exactly how we think. It’s like well, you’re right, I only have $200,000, so I guess I’m not getting any medical. Well you have income, from Social Security, maybe from a pension, maybe from your portfolio. That’s how you cover these things.
JA: You got a calculator on you?
AC: On my phone I got a calculator app.
JA: OK. So let’s do this. So let’s say the average Social Security benefit is what, $1,300 per person? So let’s $2,600.
AC: You mean for a couple? Yeah. Multiply that by 12. $31,200.
JA: Then multiply that by 25.
AC: Oh, I was going to do the present value. OK. Let’s make it simple. So that’s $780,000 that you’re going to be receiving.
JA: Exactly. You will be receiving $800,000 in Social Security benefits. Average.
AC: So some of that needs to go to medical.
JA: But do they ever say that?
AC: No. Never.
JA: Never. No, they say Social Security benefits the average is only $1,200 per month, blah blah blah. But when they talk about the health care, no, it’s going to cost you $275,000.
AC: Yeah. And I don’t have it. I got 100 grand in my 401(k).
JA: Exactly. (laughs) Anyway, see, I’m sure a lot of you are feeling much better about your retirement.
AC: You know what, Joe. Now we can relax for Thanksgiving.
JA: This is supposed to be an evergreen show, Al.
AC: Evergreen? What does that mean.
JA: That we could play the show in July.
AC: Oh, anytime.
JA: Anytime. So we can’t mention Christmas, Hanukah or Thanksgiving.
AC: We can live radio. I know this goes out to podcasts but who cares? Happy Thanksgiving. (laughs)
JA: (laughs) Look at the rebellion. Alright. Let’s see. 10%. I’m sure you know exactly what I’m talking about here. (laughs)
AC: 10%, let’s see, is that the penalty when you take money out of your IRA before 59 and a half?
JA: Yes. It can mean a lot of things. But in 2014, a Mass Mutual survey found that 10% of retirees were surprised to find themselves lonely, bored, with a lost sense of purpose, and/or depressed in retirement. 90% are pretty stoked.
AC: Yeah it’s like this is pretty cool. I should have done this a long time ago.
JA: Yeah. But 10% of you, life sucks.
AC: (laughs) So which are you?
JA: (laughs) I don’t know, I’m probably the 10 percenter.
AC: Well, I guess that’s why you’re trying to get more balance. You’re playing a lot more golf now. Which I applaud. How’s the golf game going?
JA: It’s not bad. It could be a lot better. But it’s early. You want do you want a couple more here?
AC: Sure, I like this.
JA: 72%. What do you think that means?
AC: 72%. No idea.
JA: That same survey that we just talked about with Mass Mutual found that 72% of retired respondents reported feeling quite happy or extremely happy in retirement. OK so, I don’t know, there’s a little disconnect.
AC: Where’s the other 15%? (laughs) They’re not sure.
JA: I don’t know, some days are diamonds, some days are stone. That’s a John Denver reference for you. You like John Denver?
AC: Yeah I do like John Denver. Yeah. I have the two album set called An Evening with John Denver, a great two album set. Of course now it’s not even CDs anymore, you just download it on iTunes, or you go to Spotify and there it is.
JA: OK. Here’s something else for you. 21% Fidelity reports that fully a fifth of workers don’t seem to be contributing enough to their 401(k) accounts to get all of the matching funds offered by their employer. That’s a shame. Since matching funds are free money. So they’re not fully funding and their 401(k) plans to get the match.
AC: Even to the match. And what I don’t know, because they don’t have that in front of me, probably doesn’t even say: does that include only people that are contributing? And so there’s a whole bunch of people that aren’t contributing anything.
JA: Correct. So there’s only a fifth of workers that are contributing, that are taking advantage of the full match. So then here’s the ones that we hear quite a bit. The amount saved for retirement. And let me just see if I can find where this is.
AC: You mean like this is the average amount save for retirement?
JA: Yeah. So less than $1,000. What percentage do you think is less than $1000?
AC: I’m going to say 50%.
JA: Wow. Al. 26%.
AC: (laughs) OK, It’s not as bad as I thought.
JA: $1,000 to $10,000 – 16%. So if you take 26 and 16 that’s a pretty high number.
AC: Yes so we’re almost 40% between those two. So $10,000 or less, it’s about 40% of the people.
JA: 42% is below $10,000. $10,000 to $25,000 is 12%. So if I look at 26, 16, and 12, that’s a big number that’s under $25,000.
AC: That’s more than half. And by the way, if you’ve saved $25,000 that’s going to give you, what, about $1,000 of income a year, give or take.
JA: $250,000 or more, 14% of people have saved $250,000 or more. 14:14. So the majority are under $25,000 that have saved. So that’s not looking all that great. Not looking all that great. And let’s see. I’ll wrap it up with one more. 4%.
AC: 4%. So that would be in the distribution amount recommended for a 65 year old as to how much money to be able to pull out of his investment portfolio.
JA: Yeah, the 4% rule can help you plan for retirement. It suggests that your money might last about 30 years, if you withdraw just 4% in the first year and adjust that for inflation. The rule has some significant flaws, but it’s still helpful as a rough guide. So we use that rule to look at, specifically I guess, how much of a nest egg that you need to give you a guide.
AC: Yeah, kind of work it backwards.
JA: So if I want to spend $40,000 per year, how much money should I have. OK, well you need to at least have a million dollars. But then once you start taking distributions from the account, it’s not like OK, just pull 4% out. Now it’s going to be dependent on a lot of different things.
Hey hopefully this helped. We had a great time on the show for Big Al Clopine, I’m Joe Anderson. We’ll be back again next week. Happy Thanksgiving week. We’ll see you next time. Show’s called Your Money, Your Wealth.
To recap today’s show: Tax reform may affect you hugely, so finding out how before the end of the year is important. And working until you’re 70 might be the best idea, or it might not, and it’s not up to Suze Orman OR Walter Updegrave to decide that for you – but getting a professional opinion on your personal situation BEFORE you make the decision is a great idea. Call 888-994-6257 to get help before you make any major financial decisions. And septuagenarians, octogenarians, nonagenarians and centenarians. That’s all I’m gonna say about that.
Special thanks to our guest, Walter Updegrave. Read more from Walter at RealDealRetirement.com
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