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Welcome to personal finance for
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long-term investors, where we believe
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Benjamin Franklin's advice that an
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investment in knowledge pays the best
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interest both in finances [music] and in
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your life. Every episode teaches you
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personal finance and long-term investing
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in simple terms. Now, here's your host,
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Jesse Kramer. Welcome to Personal
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Finance for Long-Term Investors, episode
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127. My name is Jesse Kramer. By day, I
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work at a fiduciary wealth management
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firm helping clients nationwide. You can
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learn more at
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bestinterinterest.blog/work. [music]
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The link is in the show notes. And by
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night, I write the bestinest blog and I
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host this [music] podcast. I also put
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out a weekly email newsletter, which as
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of now uh just crossed 4,000 active
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weekly readers did the newsletter and
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and all those projects, the blog, the
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podcast, and the newsletter, help busy
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professionals and help retirees avoid
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financial mistakes and grow their wealth
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by simplifying their investing, their
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taxes, and their retirement planning.
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And today I'm going to focus this
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episode on the act of retirement itself
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in part today helped by the author of
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the book Retire today and that author is
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Jeremy Kyle. But first we'll do a quick
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review of the week. This one comes from
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CJ from NorCal Northern California. CJ
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says, "Must read for financial
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education." Maybe CJ means must listen,
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but you know what? I write a blog, too.
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So anyway, CJ says, "Jesse Kramer talks
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personal finance in an easy to
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understand, entertaining, and empathetic
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way that will get you thinking the right
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way about your money choices. From the
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teenager to the retiree, this should be
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near the top of everyone's podcast
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library." Well, thank you CJ very much
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and I would be happy to send you a
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Supersoft podcast t-shirt. Simply uh
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email me jessebinest.blog
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and we will get you hooked up with that.
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And before Jeremy Kyle joins us today to
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dive into some of his favorite
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retirement topics, I have a little
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monologue where I'm going to dive into
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some of my recent, you know, the little
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corners of the retirement planning world
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that I've been diving into. And the
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first one is from an article I recently
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wrote. And the article is called about
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that free steak dinner. We will include
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a link in the show notes. It was
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inspired by a a reader named C. And and
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the short version of C's story is that
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she went to a lovely free dinner uh
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sponsored by a financial investment
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company who would like to take her
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traditional IRA and convert it to a Roth
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IRA via something called a fixed indexed
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annuity. They would pay uh C a 17% bonus
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on her roughly $600,000 in traditional
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IRA and SE IRA and 401k and then over
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the course of 10 years they would
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convert that amount to Roth dollars
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keeping her income low enough to not
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trigger any sort of Irma increase and
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that's again their language to her and
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then as she understands it her only risk
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and this is again is her quoting the
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financial institution here her only risk
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is the opportunity cost of not
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maximizing market gains and so see thank
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me in advance for any insights she was
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willing to provide. Well, when I read
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what she had outlined, my my radar
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detector rapidly kind of wore to life,
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and I was getting ready to sound a loud
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red alert like they do on uh Star Trek:
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The Next Generation.
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>> Red alert. All hands stand battle
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stations.
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>> So, first, let's define this lackluster
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tool. What exactly is a fixed indexed
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annuity? A fixed index annuity, FIA, I
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I'll just call it a fixed index annuity.
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It's easier than probably saying FIA is
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an insurance product that promises two
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things. First, it promises you principal
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protection that your initial investment
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can't lose value due to market declines,
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but then [snorts] it also promises you
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some upside potential because the
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returns of the annuity are tied to a
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market index, say like the S&P 500, uh,
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but only partially tied. So, here's how
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it typically works. The insurance
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company, they take your premium, your
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initial investment if you will, and they
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invest it conservatively, mostly in
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bonds. Then they use some of the
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interest earned from the bonds to buy
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options, option products on a a market
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index like the S&P 500. If the index
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goes up, you get a portion of that gain
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through something that's called a cap or
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a participation rate. If the index goes
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down though, you earn zero. You don't
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lose money either, but you earn zero.
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So, it kind of sounds nice, at least the
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way I've described it so far. There's no
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real downside. There is some upside, but
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as you might guess and as you might know
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from my previous episodes and previous
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blog posts and everything I really do, I
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think there are way more reasons to
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dislike fixed index annuities. The first
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one, the very high opaque costs. The
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commissions paid to salespeople of these
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products are often in the 6 to 10% range
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upfront, hidden from the investor. those
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costs are just baked into the product's
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kind of internal mechanics, resulting
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in, of course, a lower crediting rate
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and slower growth for the client. So,
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for this fixed index annuity that the
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original reader C was considering, the
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$600,000 in principle that she would
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have put into the product upfront
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probably would have resulted in a $35 to
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$60,000 commission for the salesperson.
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And that fact alone ought to give us
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some pause. It makes me think of that
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famous Charlie Munger quote, "Show me
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the incentives and I will show you the
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outcome." If you're going to pay someone
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$50,000 to sell a product, they're
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really going to push that product
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probably whether it's a good fit for you
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or not. The second reason to dislike
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these products is just the complexity
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and the confusion. I think the jargon
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behind annuities is complicated, right?
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I've already used some of these words,
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cap rates, participation rates, spreads,
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reset periods, surrender charges, and
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and here's a quote from the annuity
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industry itself. One reason annuities
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can be confusing is that the language
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used is often complex and technical. The
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Alliance for Lifetime Income, that's a
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industry organization, learned that the
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current jargon makes most consumers feel
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confused and disengaged. In response,
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the Alliance for Lifetime Income,
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created a plain language annuities
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language glossery to help you better
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understand the beneficial retirement
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income option. In other words,
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everybody's confused by the language,
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including many professionals. the
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numbers and then the way those numbers
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interact. It's usually much more
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complicated than the jargon. And that's
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a problem, too. Every annuity uses its
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own verbiage in unique ways and then
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combines confusing semantics with
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actuarial math. It's nearly impossible
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for a lay person to fully understand
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what they're getting. It's often
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impossible for financial professionals
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to understand what some other person's
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annuity was. I think that complexity, it
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hides the fees and it hides the the
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limits, the upper limits of what these
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products can do. I've had to work with
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people looking to unwind these annuities
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and I I just simply detest how complex
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they are. I'd like to think that I can
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understand complex things and even I
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oftentimes struggle unless I really
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really really dive into the details to
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understand what is going on under the
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hood of these products. My third reason
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for disliking them, limited upside. The
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fact that a fixed index annuity is
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market linked is a misleading promise.
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If the market grows by 15% and your
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fixed index annuity has a 6% cap, well,
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you only see 6% of the 15% growth. Now,
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they're sold as market linked to make
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you think you're getting a real shake at
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the market growth. But over time, these
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products really lag behind market growth
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by a significant margin. The fourth
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reason to dislike them, liquidity traps.
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Most of them lock up your money for 7 to
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10 years before you can annuitize them
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and start to live off of an income
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stream. And if you want out early,
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you'll face some sort of heavy surrender
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penalty in addition to that 6 to 10%
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commission you paid up front. This
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inflexibility just it runs counter to
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sound investor centered financial
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planning. Fifth, I already referred to
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this one, the misaligned incentives,
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annuities are often sold, not bought nor
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advised. And because of those big
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commissions, many non-fiduciary
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salespeople pitch them aggressively to
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retirees seeking safety, sometimes
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overstating the returns of the product
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or understating the downsides. So, one
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thing I haven't even talked about yet,
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and now we're going to pivot back to C's
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specific question. What about that whole
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annuity plus Roth conversion thing she
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was mentioning, if you recall, she said
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she was sold the idea of a fixed index
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annuity in particular for using it as a
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vehicle for a Roth conversion. And there
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are some other sales language in there,
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too, which I'll address first. She was
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promised a 17% bonus. The bonus isn't
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free money. It's not even real money. It
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sounds amazing, of course, but that's
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the headline they use to hook people. A
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real 17% bonus would result in actual
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money sitting somewhere in an account.
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But this bonus that is often tied to
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annuity products, it is not a cash
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bonus. It's a contract value credit that
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only applies to income calculations
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after the 10-year holding period, not to
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the actual account value that you could
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walk away with today. That 17% bonus is
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therefore offset by lower caps on your
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returns over the next 10 years. Right?
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Your index growth gets throttled down.
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It's offset by longer surrender periods
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like the 10 plus year uh surrender
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periods that are very common or it's
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offset by reduced liquidity, right? You
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can't easily access your money without
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penalties over this long 7 8 10 year
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period. You've got really high annual
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fees going on at the same time too. That
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17% bonus pretty quickly gets eaten
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away. And like I said, besides, it's not
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a lump sum bonus. It's it's a uh a
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crediting bonus on the income that
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you'll collect a decade from now. My
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second issue that the 10-year Roth
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conversion plan certainly sounds smart,
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but it's also structured to benefit the
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annuity company, not the client, not the
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investor. A a gradual Roth conversion
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over time certainly can be a smart thing
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to do by spreading your tax payments out
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over time to avoid jumping into higher
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tax brackets or sure to avoid triggering
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Irma, but a fixed index annuity isn't
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needed to do that, right? You can hold
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investments in a simple lowcost IRA and
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still control the pace of your Roth
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conversions every year. They don't care
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about the Roth conversion. They care
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about locking your money into their
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product. That's why they suggest the
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10-year timeline, right? It's a trap,
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just like in Star Wars. It's a trap. It
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It's a trap that pays the agent a large
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commission and keeps you from easily
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changing course once you realize how
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limiting the contract is. Point number
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three, and this is one thing that C
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wrote to me where she said, "I think the
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only thing going on here, Jesse, the
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only risk is opportunity cost, and that
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is the sales line, but it's misleading
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because the real risks include liquidity
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risk, complexity risk, right? You may
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not understand how the product works
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until it's too late, return risk, of
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course, right? These fixed index
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annuities just lag simple 60/40
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portfolios by a lot every year. And then
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inflation risk, the returns might not
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even keep up with the cost of living."
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And the fourth issue is the the Roth
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angle. Again, it's a smoke screen. The
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sales pitch uses Roth conversions to
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sound like they're doing careful tax
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planning, but the fixed index annuity
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company isn't optimizing your taxes.
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They're selling a contract. A real tax
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planner could help you do the same Roth
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conversions without all the added costs
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or restrictions. So, the bottom line is
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that you can absolutely do a multi-year
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Roth conversion strategy. You just don't
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need a fixed index annuity to do it.
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Adding one into your retirement often
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makes things worse, not better. Again,
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annuities are sold. They're not bought.
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And so for some people, see, that steak
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dinner you attended might have been the
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most expensive free steak dinner of your
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lives. I know this might sound like
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scary fear-mongering, and yeah, I
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apologize for that, but I think it would
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be scarier if you said yes to buying one
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of these products. And last, uh, before
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Jeremy joins us, I'm going to read from
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another article, and the the the title
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of this article is pretty
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straightforward as to what the topic
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will be about. It's, "Are dividends and
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income part of my retirement withdrawal
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rate or my safe withdrawal rate?" And
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again, this comes from a question from
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Barry. Barry said, "Jesse, I'll need
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about $100,000 per year for my portfolio
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in retirement. I currently have $3
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million in my retirement portfolio. It's
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producing about $60,000 in income and
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dividends per year for me, meaning I
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only need to sell about $40,000 net of
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taxes of the principal value to fund the
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rest of my need." And again, listeners,
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that's $60,000 in income and dividends
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and then $40,000 in actual sales of the
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investments. And uh Barry says, "By my
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math, the $40,000 that I'll need to sell
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divided by the $3 million portfolio
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value, that's about 1.3%." In other
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words, his withdrawal rate is way less
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than the four 4% rule, right? It's 1.3%,
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not 4%. Barry says, "Am I thinking about
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this correctly?" So, we we are going to
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answer this question. We are going to
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let Barry know if he's thinking about
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this correctly. I won't bury the lead.
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He's not actually thinking about it
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correctly. And so, we'll point out why.
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But before answering Barry's question,
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we have to ensure we're all on the same
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playing field. So, first, the 4% rule.
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If you're not familiar with the
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nitty-gritty details of the 4% rule, uh,
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I've got some excellent primers that we
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will link in the show notes for you.
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Some stuff about the basics, what the 4%
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rule is based on, uh, why many people
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are using the 4% rule wrong. We talk
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about is the 4% rule too risky. We talk
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about all the conservatism that's built
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into the 4% rule and why actually, uh,
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you know, many retirees, if you, uh,
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look at historical back tests, could get
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away with four and a half, five, five
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and a half, six% withdrawal rates,
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something like that. So, I won't dive
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too much into that topic right now. It's
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just worth understanding what the 4%
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rule is if you're not familiar. What's
00:12:40
more interesting and getting really to
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the point of today's question, let's
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talk about where investment returns come
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from. No, this isn't the kind of
00:12:46
question that children ask their parents
00:12:48
and involve storks, we need to discuss
00:12:50
where investment returns come from.
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Where does the growth come from? If you
00:12:54
own stocks, if you own bonds, if you own
00:12:55
real estate or anything else, how does
00:12:57
that return on investment end up in your
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pocket? The answer of course is
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different for each investment class, but
00:13:02
most investments provide their return to
00:13:04
investors via two separate mechanisms.
00:13:06
The first mechanism is that they
00:13:08
regularly return some sort of cash flow
00:13:10
to their investors. It could be interest
00:13:13
from a bond. Could be a dividend from a
00:13:15
stock, which is really like profit from
00:13:17
a stock, right? I should say interest
00:13:19
from a bond is because you lent someone
00:13:21
your money and now they're paying you
00:13:22
interest. A dividend from a stock is
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because you own a company. that
00:13:26
company's making profits and they give
00:13:28
you some of those profits as an owner.
00:13:30
If you own real estate, you might be
00:13:32
charging rent and you're collecting some
00:13:33
of that rent, you know, net of any
00:13:35
expenses as the owner of the real
00:13:37
estate. So the point is that investments
00:13:39
oftent times return cash to their owners
00:13:42
in some way. But then the second
00:13:43
mechanism is that the investment itself
00:13:46
appreciates in value over time. This
00:13:48
could be a stock, a company increasing
00:13:50
in price over time as the underlying
00:13:52
company grows and becomes more
00:13:53
profitable. It could be the building you
00:13:55
own, the real estate you own growing in
00:13:57
value due to capital improvements or due
00:13:59
to increased demand in its local market.
00:14:01
In the bond world, it could just be a
00:14:03
bond value going up because global
00:14:05
interest rates decrease. And now all of
00:14:07
a sudden, your bond, which is paying a
00:14:09
higher interest rate, becomes more
00:14:11
valuable to investors. So for a typical
00:14:14
retirement portfolio, portfolio growth
00:14:16
equals dividends plus interest plus
00:14:19
capital appreciation. So dividends and
00:14:21
interest are are kind of one thing.
00:14:23
That's the cash flow back to you. And
00:14:24
then capital appreciation is the second
00:14:26
thing. It's the value of your assets
00:14:28
actually going up over time. So when
00:14:30
someone says, you know, a 60/40
00:14:31
portfolio grows at 9% per year on
00:14:34
average, what they're actually saying is
00:14:36
that 9% equals average dividends plus
00:14:39
average interest plus average capital
00:14:41
appreciation over time. So, getting back
00:14:43
to Barry's question, do dividends and
00:14:45
income count toward that 4% rule, the 4%
00:14:48
annual withdrawal rate or whatever rule
00:14:51
you want to use, 4%, 5%, 6%. The answer
00:14:54
is yes. If dividends and income are
00:14:56
leaving your portfolio, they are part of
00:14:58
your withdrawal rate. If you extract 2%
00:15:01
of your portfolio via income and
00:15:03
dividends and then another 1.3% via
00:15:05
selling assets, which is kind of what
00:15:07
Barry outlined in his math above, then
00:15:09
Barry's withdrawal rate is 3.3%. It's
00:15:12
the sum of the dividends and income,
00:15:14
which was 2% plus 1.3%, which was
00:15:17
selling assets for capital gains. Those
00:15:19
dividends and income, they are not free
00:15:21
money. Don't need to get into that topic
00:15:23
right now. Some of you might have heard
00:15:25
me talk about it before. You might have
00:15:26
heard other people talk about it before,
00:15:28
but dividends and income are not free
00:15:30
money. They are one of the key
00:15:31
components of your overall portfolio
00:15:33
return. And if you weren't extracting
00:15:35
those dollars via dividends and income,
00:15:37
you'd reinvest them or the companies
00:15:39
would reinvest them on your behalf and
00:15:41
and compound those dollars over time.
00:15:43
Believing that dividends are are free is
00:15:45
one of the biggest misconceptions in
00:15:47
especially DIY investing. I think very
00:15:50
few professional investors think that
00:15:52
dividends are free. They know better.
00:15:54
But I think there is an interesting
00:15:56
clutch of DIY investors on the internet
00:15:59
who uh are really convinced that
00:16:01
dividends are free. Very interesting. So
00:16:03
that really is the answer to Barry's
00:16:04
question. You know, I know Barry was
00:16:06
quoting the 4% rule. And as many of you
00:16:08
know, the the 4% rule, any withdrawal
00:16:11
rule, it's just a rule of thumb. It's a
00:16:12
starting point. It's a good way to do
00:16:14
some back of the napkin math, but it
00:16:15
does become pretty limited. You need to
00:16:17
go deeper. And so, Barry, I would
00:16:19
recommend you try to do maybe a
00:16:20
long-term cash flow model to analyze
00:16:22
your portfolio's planned withdrawal
00:16:24
sequence over time, including, of
00:16:26
course, income or dividends from your
00:16:28
taxable account. That withdrawal
00:16:29
sequence, it's likely to be lumpy,
00:16:31
right? It's not going to be constant.
00:16:33
It's not going to be 3.3% every year.
00:16:35
It'll change for sure once you start
00:16:37
collecting social security. It'll change
00:16:39
again when you hit RMD age. Some years
00:16:41
are probably going to include Roth
00:16:42
conversions or or the realization of 0%
00:16:46
capital gains or something like that.
00:16:47
You should do your best to try to plan
00:16:49
that out all ahead of time. And starting
00:16:50
your retirement without taking that
00:16:52
detailed step is probably a risky move.
00:16:54
So, if you haven't taken it yet, there's
00:16:56
no better time to start than right now.
00:16:57
Thank you very much for that question,
00:16:59
Barry. Here's a quick ad and then we'll
00:17:01
get back to the show. Every January we
00:17:03
make the same promises. Eat better, work
00:17:05
out, read more books, and of course,
00:17:07
something about money. You know, this
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and fill out the short form. Let's make
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better finances the resolution that
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actually sticks this year. And with
00:17:35
that, let's bring Jeremy Kyle onto the
00:17:37
show. Jeremy is a certified financial
00:17:38
planner and chartered financial analyst.
00:17:40
He works with clients from uh from his
00:17:43
home near Milwaukee, Wisconsin. He hosts
00:17:45
the Mr. Retirement YouTube channel and
00:17:47
he hosts a podcast called Retirement
00:17:49
Revealed. He also recently published a
00:17:52
book called Retire Today. Jeremy, you
00:17:54
could say, likes Retirement and I'm glad
00:17:56
he's here to share with us today.
00:18:02
>> [music]
00:18:04
>> Jeremy, you know, you you've built a
00:18:05
career around helping people step
00:18:08
confidently into their retirement. So,
00:18:10
when you zoom way out, maybe we can
00:18:12
start there. We zoomed way out. Here's
00:18:14
just a a a maybe this is a softball
00:18:16
question or maybe this is actually a
00:18:17
hard question. I could see it going both
00:18:19
ways. What do you think people
00:18:21
misunderstand the most about the
00:18:23
retirement decision itself? The biggest
00:18:26
misunderstanding with retirement is how
00:18:28
long you might actually be in
00:18:30
retirement. And there's two parts of
00:18:31
that equation. That's why I call it the
00:18:33
retirement longevity number. It's not
00:18:35
just life expectancy, but how long you
00:18:37
might be in retirement. And there's the
00:18:40
beginning, there's the end of your
00:18:41
retirement. At the beginning, if you ask
00:18:43
a 55year-old when might you retire or
00:18:46
when you planning to retire, they'll
00:18:47
tell you 65. But if you ask a 65year-old
00:18:51
when did you retire, they'll tell you
00:18:53
62. Most people retire three years
00:18:56
earlier on average. Which is why I
00:18:59
encourage you to be ready to retire
00:19:01
three years earlier.
00:19:03
>> Whatever your number is in your
00:19:04
spreadsheet of I'm going to retire at
00:19:05
this date, subtract three. That's your
00:19:08
target so that you'll be ready to retire
00:19:11
in case you're like the average American
00:19:12
who retires early. Or maybe you do the
00:19:15
math, you get there and you say, "Why am
00:19:16
I stick around for 3 years?" So that's
00:19:18
the beginning part of retirement. But
00:19:20
there's a lot of misunderstandings on
00:19:22
the end of retirement. your life
00:19:23
expectancy. How long might you expect to
00:19:27
retire? It's tough. I can't blame you
00:19:29
for getting it wrong, but chances are
00:19:31
you're getting your life expectancy
00:19:32
wrong. One part of it is when you read
00:19:35
the news articles about how long people
00:19:37
live, you're going to read 78.
00:19:39
>> Yeah.
00:19:40
>> 78 is the average life expectancy in
00:19:42
America for a newborn child. If you are
00:19:46
planning to retire, you're a lot closer
00:19:48
to 65 than you are to zero. And you need
00:19:52
to plan for your retirement based on
00:19:54
being 60 years old, 55 years old, 65
00:19:57
years old, whatever it is. And your life
00:20:00
expectancy is a lot closer to 85 than it
00:20:02
is to 78. But who cares what the
00:20:05
averages are? Go out, get your own
00:20:07
personal longevity estimate place called
00:20:10
longevity illustrator.org.
00:20:12
Free site. And I am such a huge fan
00:20:15
because you can get your own
00:20:16
personalized longevity estimate and then
00:20:20
you're almost there. You're almost there
00:20:21
because you need to understand what life
00:20:23
expectancy means. It's the median. It's
00:20:25
just the halfway point. Half the time
00:20:27
you'll die before that. Half the time
00:20:29
you'll die after that. You'll live
00:20:31
longer than that number. And so you want
00:20:34
to get an accurate number, but you also
00:20:36
want to consider what happens on both
00:20:37
sides of that line. What happens to you
00:20:40
and your spouse and your finances if you
00:20:43
die before you hit that number? What
00:20:45
happens to you, your spouse, your
00:20:47
finances if you happen to make it past
00:20:49
that number? So, get an accurate
00:20:51
estimate, but understand what happens on
00:20:54
both sides of that. I've got a couple
00:20:56
interesting follow-up questions. That
00:20:58
was two you you sparked two really
00:20:59
interesting thoughts for me. So, the
00:21:01
first one, let's go back to the the
00:21:02
pre-retire who you said, you know, the
00:21:05
average retiree ends up retiring three
00:21:08
years earlier than what they once
00:21:10
predicted they would retire at. So, the
00:21:13
question that naturally came to my mind,
00:21:15
it's kind of a two-parter, is when does
00:21:17
that change occur? So, you said, you
00:21:18
know, a 55-year-old will say 65, but
00:21:21
then by the time they're 65, the answer
00:21:22
actually ended up being 62. So, it's
00:21:24
kind of when does that change end up
00:21:26
occurring for people? I'm putting my
00:21:28
shoes my my myself in the listener's
00:21:29
shoes right now. But then also, what are
00:21:32
those biggest approximate causes that
00:21:34
lead that average retiree to pull back
00:21:37
their retirement date by 3 years? That's
00:21:39
a great question and I'm going to make
00:21:42
some assumptions. I'm going to assume
00:21:43
it's between 59 12 and 62. At 59 12, you
00:21:48
know that your IRA and 401ks are
00:21:50
available and that's very tempting where
00:21:52
you start thinking, do I really want to
00:21:54
put up with this anymore? you can get
00:21:55
the money out without a penalty. So,
00:21:57
that's a big trigger.
00:21:58
>> 62 is another big trigger because
00:22:00
>> do I want to put up with this anymore? I
00:22:02
can just quit and get paid to not work
00:22:04
by social security. So, I think those
00:22:06
two are big ages kind of in between.
00:22:08
That's a big turning point. So, there's
00:22:10
a bit of the the retirement I call it a
00:22:12
retirement age trigger.
00:22:14
>> Like you don't you're retiring, you're
00:22:16
doing something because it's just kind
00:22:17
of a a number that the government gave
00:22:19
you or your company gave you, but
00:22:20
there's still a trigger and a lot of
00:22:22
people come with that. Sometimes it's
00:22:24
your health. Often times it's your
00:22:26
parents' health. If you're 60 years old,
00:22:28
your parents are 85 to 90. They start
00:22:31
needing your help or your grandkids are
00:22:35
just born, they're 5 years old, you need
00:22:38
to somebody needs to get them to the the
00:22:40
bus stop, right? There's a lot of
00:22:42
triggers that are family related.
00:22:43
Everyone kind of thinks, "Oh, I might
00:22:45
have to retire early because of my own
00:22:47
health." It's usually somebody else's
00:22:49
health or you're taking care of the
00:22:51
grandkids or you got a new boss that's
00:22:53
younger than your son and you think I
00:22:55
can get social security and I don't have
00:22:57
to put up with this.
00:22:58
>> That's really interesting. Well, let's
00:23:00
pivot then to the on the tail side of
00:23:02
retirement. You said it was it was
00:23:03
longevityestimator.org.
00:23:06
>> longevity illustrator.org. It's put out
00:23:08
by the Society of Actuaries. There's no
00:23:11
one more qualified in the world to tell
00:23:13
you how long you might live than the
00:23:15
Society of Actuaries.
00:23:17
That's okay. We'll we'll make sure we
00:23:18
include that link in the show notes. And
00:23:20
just for the the listener who maybe
00:23:22
wants to check it out but but hasn't
00:23:24
checked it out yet, what kind of
00:23:26
questions do they ask you? And then in
00:23:29
your experience, I mean, I think you did
00:23:31
a good job of explaining. They still
00:23:33
present you with a median outcome,
00:23:35
right? They don't have a crystal ball,
00:23:37
but I'm I'm really interested to
00:23:38
understand kind of how accurate their
00:23:40
medium projected longevity ends up
00:23:43
being. This is the number one most
00:23:45
important number to your retirement
00:23:46
planning uh is your longevity, how long
00:23:48
you might live. So, take five minutes to
00:23:50
understand it ahead of time. You're
00:23:52
making million-dollar decisions here.
00:23:54
Learn about your longevity ahead of
00:23:56
time. What they do, they only ask four
00:23:58
questions. They ask your age. They ask
00:24:01
your gender. They ask if you are a
00:24:02
smoker or not a smoker. And they ask
00:24:05
your general health. Are you average
00:24:06
health, excellent health, or poor
00:24:09
health? And you might think that's four.
00:24:11
Come on. Yeah. And so I had Dale Hall,
00:24:13
the uh head researcher for the Society
00:24:16
of Actuaries on my podcast, Retire Today
00:24:18
podcast. And I asked him that. He said,
00:24:20
"Well, we need to combine being accurate
00:24:24
with also people going through and doing
00:24:27
it. And how much precision do you really
00:24:29
need?" Right? If I ask you four
00:24:31
questions and I get you 95% of the way
00:24:33
there or ask you a 100 questions and you
00:24:36
don't even bother doing it, which one's
00:24:38
a better deal? And a lot of times all
00:24:41
these other factors about, you know,
00:24:42
family health, your own health, you have
00:24:44
a good idea and just answer it. Am I
00:24:46
average health? Am I excellent health?
00:24:48
Am I poor health? That's going to get
00:24:49
you most way there. And those are the
00:24:51
most important factors. Your age, your
00:24:53
gender, are you a smoker or not? And
00:24:55
just your overall level of health. So
00:24:57
they get very specific just off of those
00:25:00
and they'll give you the median. More
00:25:02
importantly, they'll give you the whole
00:25:03
probabilities. A lot of people come to
00:25:05
my office and they're asking me about
00:25:06
social security and what's the break
00:25:08
even age and what are the odds I'll make
00:25:10
it to the break even age. I said let's
00:25:12
go here and let's find the odds that
00:25:14
you'll make it to the break even age. So
00:25:16
you can go through and say oh the odds
00:25:17
are 72%.
00:25:19
>> So is that a number you want to make? Do
00:25:21
you want to take those odds? Those are
00:25:22
pretty good odds. If you walk into
00:25:23
casino you will take those odds.
00:25:25
>> But also they do something called joint
00:25:27
life expectancy. If there's two of you,
00:25:30
it's harder for two people to die than
00:25:32
one person to die. Or kind of the
00:25:34
inverse of that, it's on average, if
00:25:36
there's two of you, one of you might
00:25:38
make it not there. You'll be die below
00:25:40
average. One of you will live longer
00:25:43
than average. And you can't just look at
00:25:45
your own individual life expectancy.
00:25:48
You've got to look at the life
00:25:49
expectancy of the couple. You got to
00:25:50
look at the life expectancy of the
00:25:52
person that's likely to make it above
00:25:55
average. So, it's that joint life
00:25:56
expectancy is a huge thing to look at
00:25:58
when you're a couple.
00:26:00
>> Yeah, totally totally agree with that.
00:26:01
That's really interesting. The the the
00:26:03
four questions are really powerful and I
00:26:05
think it it illustrates to me for
00:26:08
example, I know the one question was
00:26:09
about smoking. I I know if that's one of
00:26:11
their top four questions obviously that
00:26:14
smoking that binary option must play a
00:26:17
really large must have a really large
00:26:19
influence in the outcome of how long you
00:26:21
live. And the other thing you made me
00:26:23
think of, Jeremy, is that quite
00:26:24
understandably, I think people, we have
00:26:27
a hard time with what I would call
00:26:28
conditional probabilities. And you
00:26:30
brought it up earlier. I I liked your
00:26:32
example with um you know, you look it up
00:26:34
in the newspaper, you see an article,
00:26:35
the average person lives to 78, right?
00:26:37
That's the average newborn. But once
00:26:39
you're already listening to this podcast
00:26:41
today and you're 55, the question should
00:26:43
be, what's the average age that you uh
00:26:46
live to conditional upon the fact that
00:26:49
you're already 55 years old? Maybe I'm
00:26:51
phrasing that in a way that a
00:26:52
statistician wouldn't appreciate, but
00:26:54
the point is that all these
00:26:56
probabilities that retirees have to deal
00:26:58
with. You've already avoided some of the
00:27:01
negative outcomes. So, it's really, you
00:27:02
know, how long will you live conditional
00:27:04
upon the fact that you're not a smoker,
00:27:07
that you happen to be a woman, that
00:27:08
you're already 58 years old, and you're
00:27:10
in great health. That is a really
00:27:12
important and fundamentally different
00:27:13
question than just how long does the
00:27:15
average person live? So, I I I really
00:27:17
like the fact, and I think that's really
00:27:18
unique take that you have. It's kind of
00:27:21
simple in a way like once you hear it,
00:27:22
but right I think there's so many voices
00:27:24
in this space that simply are not asking
00:27:27
that fundamental basic question and it
00:27:30
takes you five minutes to get there. And
00:27:32
speaking of probabilities, here's
00:27:34
another thing that people get wrong with
00:27:36
life expectancy. They talk about their
00:27:38
own life expectancy as if it's their
00:27:40
death certainty. Like people don't say,
00:27:43
"I might live to 80 or I've got a 50%
00:27:46
odds of getting to age 82." They say,
00:27:48
"I'm going to die at 80. I won't make it
00:27:51
into my 70s." No, that's not correct.
00:27:53
I'm a math guy. I like looking at stuff.
00:27:55
I looked at another math longevity
00:27:58
table. It's from the Social Security
00:28:00
Administration. Nobody else in America
00:28:02
knows more about Americans dying and
00:28:05
living than Social Security because
00:28:07
they're paying out or not paying you
00:28:08
out, right? And if you look at their
00:28:10
chart and you're 55, 60, 65 years old,
00:28:14
whatever the number is, and you look at
00:28:16
your life expectancy, I'm 62 years old.
00:28:19
My life expectancy is 87. And the odds
00:28:22
that you actually die at 87, 4%.
00:28:25
>> 4%.
00:28:26
>> You have less than 4% chance of actually
00:28:28
dying at your life expectancy. You have
00:28:31
a near certainty of not dying at your
00:28:34
life expectancy. So get the number
00:28:36
correct and then think about what is the
00:28:39
near certainty that I won't actually
00:28:41
live to that number and make your
00:28:43
decisions based on that. That's so
00:28:45
funny. That's so interesting. Well, I
00:28:47
guess speaking of those conditional
00:28:48
decisions, Jeremy and and you already
00:28:50
did mention social security. I really
00:28:51
liked your take on the on the spousal
00:28:53
decision about or or maybe the fact that
00:28:55
you know one spouse is likely going at
00:28:57
least one spouse is going to live a long
00:28:59
time. that might play into the social
00:29:01
security decision at all. But I don't
00:29:03
want to lead the witness here. I mean,
00:29:05
what is your take on social security
00:29:08
claiming strategies for lack of a better
00:29:10
term? Yeah. So, two parts of social
00:29:12
security is one, you ought to learn the
00:29:14
math and actually do the math. And when
00:29:16
you look at social security, especially
00:29:18
if there's two of you, if there's two of
00:29:19
you,
00:29:20
>> your benefits grow by roughly 8% per
00:29:22
year by waiting. But if there's two of
00:29:25
you, one of your numbers is bigger. and
00:29:27
8% on a bigger number is a bigger
00:29:30
number. Your default thought is you
00:29:33
probably want to take that bigger number
00:29:35
and wait a little bit longer than you
00:29:37
expected and you probably want to take
00:29:38
that smaller benefit and maybe take it a
00:29:41
little bit earlier than you expected
00:29:42
because it matters a little bit less.
00:29:44
It's a smaller number and the rules of
00:29:47
social security, the survivorship is
00:29:50
going to show up to be the higher
00:29:52
number. the survivorship option. If
00:29:54
there's two social securities, one of
00:29:56
them is going to go away. It's a smaller
00:29:58
one. So, you got a smaller number that
00:30:00
doesn't grow as much, that doesn't last
00:30:02
as long. Feel okay taking that a little
00:30:05
bit earlier than perhaps you wanted or
00:30:07
plan to, but then the bigger one is a
00:30:10
bigger number and it's a bigger deal for
00:30:12
a longer time. Probably wait a little
00:30:14
bit longer on there. So, that's kind of
00:30:16
a just a quick thought on it. But if you
00:30:18
want one thing to say, how should I
00:30:20
approach and make my social security
00:30:22
decision, forget the probabilities I
00:30:24
talked about earlier, forget about the
00:30:27
break even calculator that you already
00:30:28
have in your spreadsheet right now. I
00:30:30
want you to think of social security in
00:30:32
terms of its official name. The official
00:30:35
name for social security is the old age
00:30:38
survivor insurance program. It's there
00:30:41
to help you in your old age. It's there
00:30:43
to help your survivor. It's there to be
00:30:46
insurance in case you live longer than
00:30:48
you expected or inflation came in higher
00:30:50
than expected or your market returns
00:30:52
weren't as much as expected. So when
00:30:55
you're looking at your social security
00:30:56
and thinking of it of how does this help
00:30:58
me in my old age? How does this help my
00:31:01
survivor? How does this help the
00:31:03
insurance aspect of my retirement and
00:31:05
things in case things don't go as well?
00:31:07
That's how you approach social security.
00:31:09
>> Got it. And that that makes sense. And
00:31:11
and going back to the the spousal
00:31:13
decision-making, just to make sure that
00:31:15
I'm following along and and the
00:31:16
listeners are following along. The way
00:31:17
I've heard it described before, let's
00:31:19
think of this imaginary couple with two
00:31:21
different benefits, one larger benefit,
00:31:23
one smaller benefit. I I think the way
00:31:25
I've heard it described is you know that
00:31:27
when the first spouse dies, no matter
00:31:30
what, the smaller benefit is going to
00:31:32
drop away and the larger benefit is
00:31:34
going to continue on with the surviving
00:31:36
spouse. And it really doesn't matter.
00:31:38
You know, it's either the larger spouse
00:31:40
dies first and the smaller spouse
00:31:43
inherits that survivor benefit or the
00:31:46
smaller spouse dies first and okay, the
00:31:48
larger spouse now continues that. So,
00:31:50
you just know either way, the larger
00:31:52
benefit is going to outlive the smaller
00:31:54
benefit and you'd rather just wait to
00:31:56
let the larger benefit grow and grow and
00:31:58
grow a little bit extra. I mean, is that
00:32:00
the underlying logic?
00:32:01
>> That's exactly it. You should you should
00:32:03
become a financial adviser.
00:32:04
>> Yes. Right. Right. I should start a
00:32:05
podcast. Well, I mean, thinking about
00:32:07
the way that these different, you know,
00:32:09
we've talked about social security, but
00:32:11
we know there are all these different
00:32:13
aspects of retirement planning and
00:32:16
holistic planning, I found, can feel
00:32:19
overwhelming to people. There are tax
00:32:21
consideration, there's income planning
00:32:23
in retirement, how should that affect my
00:32:25
portfolio? Do I need to think about
00:32:27
estate planning? And sometimes in the
00:32:29
early conversations with people, it's
00:32:32
almost like, I know I've got eight
00:32:34
different things I ought to be concerned
00:32:35
about. I don't know which one I should
00:32:36
start with. So, how do you tend to
00:32:38
sequence your conversations so that your
00:32:40
clients or just people that you're
00:32:42
talking to don't feel totally
00:32:44
overwhelmed and they have a a specific
00:32:46
order to approach these retirement
00:32:48
planning problems. Yeah, that's exactly
00:32:50
it. You want to take a comprehensive
00:32:52
look at your finances. You want somebody
00:32:54
that takes a comprehensive look at your
00:32:56
finances, but you want to do it in the
00:32:58
right order. It's kind of like you want
00:32:59
to make the first decision because it
00:33:01
informs the second decision and on down
00:33:03
the line. And you know what you're
00:33:04
referencing is the five steps I put in
00:33:06
my book. I've got my book retire today.
00:33:08
I call it create your retirement master
00:33:09
plan in five simple steps. One, because
00:33:12
there's five steps. It's what I've done
00:33:14
for 22 years as a financial adviser to
00:33:16
help you create your retirement master
00:33:18
plan. But the order I take them in, you
00:33:20
might be surprised. A lot of people
00:33:22
start with an order where way down the
00:33:24
line in my opinion. The first thing I
00:33:26
think you ought to do when you're
00:33:27
looking at your retirement is figure out
00:33:29
how much is it you're going to spend in
00:33:31
retirement which is a bit of how much
00:33:33
like what am I going to spend every
00:33:34
month or every year but it's also the
00:33:36
how long that we have already talked
00:33:38
about and a lot of people hit retirement
00:33:41
and they're almost afraid to do some
00:33:42
retirement planning because they feel
00:33:44
like I've got to do a budget and they
00:33:47
hate doing budgets so they just put that
00:33:49
off which means they put off the
00:33:50
retirement planning. I tell you don't do
00:33:52
a budget. The only thing you have to do
00:33:53
to figure out how much you might spend
00:33:55
in retirement is to look at is to look
00:33:58
at how much you are spending today. And
00:34:00
the easiest way to do that is look at
00:34:02
your paycheck. Whatever shows up in your
00:34:04
take-home pay into your checking
00:34:07
account, usually what goes into your
00:34:08
checking gets spent. You might make
00:34:11
150,000 for your salary, but if it's
00:34:14
only 3,000 every paycheck times 26
00:34:18
paychecks, it's $78,000 a year that
00:34:20
you're spending on what I call your
00:34:21
lifestyle spending amount because you're
00:34:24
it's coming in and you're spending that
00:34:26
money on whatever it is you do. And
00:34:28
that's great. Go do what you want to do.
00:34:30
What's interesting though about your
00:34:31
paycheck is it already took out your tax
00:34:33
cost. It already took out your health
00:34:35
insurance cost. So that's the next two
00:34:37
things you put into your budget. You
00:34:39
don't have to go out and build a budget
00:34:41
from the ground up. Just look at what's
00:34:42
my take-home pay, that's my lifestyle
00:34:44
spending amount. Then let me put into my
00:34:47
planning what's my likely health
00:34:48
insurance costs, what's my likely tax
00:34:51
cost. You've taken care of most of it
00:34:53
just right there. That's the first step
00:34:54
is to look at the the spending. Not let
00:34:57
me look at the investments. That's on
00:34:58
down the line. And I suppose I mean does
00:35:00
it matter after that point kind of
00:35:03
what's next? Now I don't you know we
00:35:05
don't have to go into every bit of
00:35:06
minutiae and detail. So, we start with
00:35:09
spending. I like the fact that your own
00:35:10
paycheck kind of back you into a a rough
00:35:13
outline of what your spending is, but
00:35:16
where do conversations go from there? Or
00:35:18
is it just a case- by case basis? And it
00:35:20
depends on what's going on in the
00:35:21
individual circumstances. The next step,
00:35:23
step two, is what is it you make? Just
00:35:26
because you stop working doesn't mean
00:35:28
you stop making money. You might be
00:35:30
making money in retirement from a
00:35:32
pension, from real estate, from some
00:35:34
annuity that you've already purchased
00:35:36
before. And definitely you'll have
00:35:38
income from social security. A lot of
00:35:41
these, especially with the social
00:35:42
security and the pension, you got these
00:35:44
one-time decisions that affect the rest
00:35:46
of your life.
00:35:47
>> So, it takes some time here to figure
00:35:49
out what is it that I need to do with my
00:35:52
decisions to help set me up for the
00:35:54
whole lifetime. That's the second step.
00:35:56
The third step is I know how much I
00:35:58
need. I know what's coming in from the
00:36:00
consistent lifetime income. How do I
00:36:03
keep more of my money? Step three is
00:36:05
keep. How do I project out and plan for
00:36:09
the times that I have a lower tax
00:36:11
situation and the times I have a higher
00:36:13
tax situation? And the way to do tax
00:36:15
planning in retirement is to kind of
00:36:16
even those out. If you see here's a year
00:36:19
down the road where I'm going to have a
00:36:20
high tax situation, I want to avoid
00:36:23
income showing up that year. But if I
00:36:25
have years down the road, often just
00:36:27
after retirement and before you turn on
00:36:29
social security, if I have a projected
00:36:31
lower income, lower tax rate situation,
00:36:34
you want income to show up at the lower
00:36:36
tax rate, usually through Roth
00:36:38
conversions. So the step three is the
00:36:39
tax planning, how to keep more of that.
00:36:42
Step four is finally to invest your
00:36:45
money. Most people think it's step one.
00:36:47
Most people think a financial advisor
00:36:48
job is step one to go invest your money.
00:36:51
You don't know what you're investing for
00:36:52
until you figure out the first three
00:36:54
parts of it. And the biggest thing you
00:36:55
want to think of with investing is when
00:36:58
do I need the money? It's not about
00:36:59
picking the perfect stock and bond. It's
00:37:01
about having the money available when
00:37:03
you need it. And if you need the money
00:37:04
in the short term, you need short-term
00:37:06
money. If you need it available in the
00:37:08
long term, you need long-term
00:37:10
investments. The thing that's
00:37:12
interesting with retirement, why I think
00:37:13
it's so scary, you spent your whole
00:37:15
career saying, "Invest for the long run.
00:37:18
It's down the road." And then you got
00:37:20
down the road and now you got the
00:37:21
shortterm. You got the short run and you
00:37:24
need some short run money, but a lot of
00:37:25
times you think that's all you need. No,
00:37:27
you still have a long ways away. You
00:37:29
need long-term money. You need
00:37:30
short-term money. You need the right mix
00:37:32
there. That's what you focus on in step
00:37:34
four. And then you get to the fifth
00:37:35
step, which is what is it you leave
00:37:37
behind? Some people leave behind their
00:37:39
money. Some people leave behind their
00:37:41
mess. And I'm guessing you'd rather
00:37:43
leave behind money to the next
00:37:45
generation versus leave behind a mess.
00:37:47
So step five is looking at it's a bit of
00:37:50
what's the amount you might leave
00:37:52
behind, but it's also what are the
00:37:54
things you've done to prepare the next
00:37:57
generation either the documents or the
00:37:58
the ways that you've set them up so that
00:38:01
you've kind of taken the risk off the
00:38:02
table and make sure that things are
00:38:04
going to turn out right even when they
00:38:06
don't happen to be all right.
00:38:08
Interesting. I like the five-step
00:38:09
process. I mean, it's it's very clean
00:38:11
and it's easy to remember. And I think
00:38:12
as humans, we're kind of naturally
00:38:14
aligned to we we like when things go in
00:38:17
order. And hey, five is an easy round
00:38:19
number to keep track of.
00:38:21
>> Here's a quick ad, and then we'll get
00:38:22
back to the show. Did you know my
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written blog, The Best Interest, was
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00:38:29
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00:38:37
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00:38:42
read them all at bestinterest.blog.
00:38:45
Again, the web address is
00:38:47
bestinterest.blog.
00:38:49
Check it out. I think I heard you,
00:38:51
Jeremy. I I want to say it was on
00:38:53
another podcast, although I'm not at
00:38:55
this point. I can't quite remember, but
00:38:56
I think I heard you say that tax
00:38:59
planning, so it was step three, it was
00:39:00
that keep step is the place where most
00:39:04
maybe you said where most retirees leave
00:39:06
the most money on the table or something
00:39:08
along those lines. So, I kind of wanted
00:39:10
to zoom in on that one. I mean, whether
00:39:12
it's a a single mistake that you just
00:39:15
see happening over and over again or
00:39:17
whether it's just a a lack of knowledge
00:39:19
and a series of just, you know, missed
00:39:21
opportunities that you see. I mean,
00:39:23
what's going on there that makes tax
00:39:24
planning so important, but yet also so
00:39:27
often overlooked? Yeah, your tax
00:39:30
planning is often overlooked because you
00:39:31
spent 35 years working not really having
00:39:35
much chance to actually affect your
00:39:37
taxes, right? If you're a W2 employee,
00:39:39
you don't own a business and you're
00:39:40
worried about that stuff. But if you're
00:39:41
a W2 employee, you get your W2, you give
00:39:44
it to your tax person, it's kind of too
00:39:46
late, and you didn't really have too
00:39:48
much you can actually do about it. But
00:39:50
you hit retirement, you have so much
00:39:52
more opportunity to actually affect your
00:39:55
taxes. And that's where the power comes
00:39:57
in of your tax planning where you get
00:40:00
the choice of when do you take your
00:40:02
money out and what type of money do you
00:40:05
take out, right? You could take money
00:40:06
out in December or January. It's two
00:40:08
different tax years. That's two
00:40:09
different tax situations. Or you've got
00:40:12
your brokerage account, your savings
00:40:14
account, your traditional account, your
00:40:15
Roth account. [clears throat]
00:40:16
That's four different types of money
00:40:19
with four different types of tax
00:40:21
situations. So when you plan out and
00:40:24
look ahead and say when do I want my
00:40:27
money to show up to me? When do I want
00:40:29
my money to show up on the tax return?
00:40:32
Which account am I going to take money
00:40:33
from? You can make positive changes to
00:40:37
your tax situation as in it'll be lower
00:40:39
in the long run. That's your projection.
00:40:42
And I often see a 20% projected lower
00:40:46
tax burden over your whole lifetime. And
00:40:49
if you want to depress yourself one day,
00:40:51
project out your entire level of taxes
00:40:54
you'll pay over your lifetime. You might
00:40:57
be sorely surprised. It's probably a
00:40:58
million dollars.
00:40:59
>> It's a lot of money that you are likely
00:41:01
to pay in taxes over your lifetime. And
00:41:04
if all it takes is a little bit of
00:41:05
planning and kind of forethought to say,
00:41:07
"Oh, I'm going to pay taxes when it's
00:41:09
lower. I'm gonna avoid taxes when it's
00:41:11
higher and you might get a 20% tax
00:41:14
savings. It It seems well well worth it
00:41:16
to me.
00:41:16
>> Definitely. One of my go-to phrases
00:41:18
there is that we all have an obligation
00:41:21
to to pay taxes or, you know, by law we
00:41:23
all have to pay taxes, but we also all
00:41:25
have, you know, a right to not pay any
00:41:27
more taxes than we otherwise have to.
00:41:29
And that's one of those foundational
00:41:31
ideas behind tax planning that really
00:41:32
resonates with me. I mean, speaking of
00:41:35
tax planning, Roth conversions, just to
00:41:37
talk a little more about those, I think
00:41:39
sometimes Roth conversions are talked
00:41:41
about like they're magic. Oh, and
00:41:44
really, I mean, it's pretty nuts and
00:41:45
bolts. How would you help someone
00:41:47
listening right now simply just figure
00:41:49
out if they're a good candidate for a
00:41:51
Roth conversion, whether it's today or
00:41:54
at some point in their future
00:41:55
retirement? I mean, how does someone
00:41:56
know if they're a good fit or if
00:41:58
actually it's just kind of not going to
00:41:59
work out for them? Well, everyone should
00:42:01
consider a Roth conversion. And what you
00:42:04
do is you project out what your tax
00:42:06
situation is going to be like. For me, I
00:42:09
have software that projects out every
00:42:11
tax return from here until the end of
00:42:12
time. I imagine you have software like
00:42:15
that as well, too. Chances are, if
00:42:16
you're a do-it-yourself individual, you
00:42:18
don't have access to that tax software.
00:42:20
But consider the kind of before and
00:42:22
after situations when your taxes are
00:42:24
likely to change before you're retired
00:42:27
and after you're retired, before you
00:42:29
turn on social security, after you turn
00:42:30
on social security, before your RMDs,
00:42:34
after your RMDs start. And one that's
00:42:36
often overlooked is if there's two of
00:42:38
you while you're a married filing joint
00:42:40
versus a survivor, a single tax return.
00:42:44
So that's eight before and after, as I
00:42:46
just said right there. take a little
00:42:48
time, maybe project out eight tax
00:42:50
returns and say, "Wait a second. There's
00:42:52
some times here where I'm in the 12% tax
00:42:54
bracket. There's some times there I'm in
00:42:56
the 24% tax bracket. What can I do to
00:43:00
try to pay taxes in the 12% lower tax
00:43:02
bracket to avoid the taxes in the higher
00:43:04
tax bracket? And often the way to do it,
00:43:06
the probably the best way to do that is
00:43:08
to do a Roth conversion. is to
00:43:10
intentionally pay taxes on purpose on
00:43:12
your traditional IRA by converting it
00:43:15
over to the Roth IRA so that that growth
00:43:17
now is tax-free and there's no RMD then
00:43:20
on the Roth IRA where you're not being
00:43:22
forced out to do that. So that's how you
00:43:25
look at it ahead. But the biggest
00:43:27
mistake people make when it comes to tax
00:43:29
planning is just thinking they don't
00:43:31
have the control. You do have the
00:43:33
control. take some time, put some uh pen
00:43:36
to paper, get out the spreadsheet, and
00:43:38
project out these different times, find
00:43:40
your low tax situations, try to pay
00:43:42
taxes then. Yeah, it totally lines with
00:43:46
my understanding. And uh cuz I think the
00:43:48
the funny situation that I thankfully
00:43:50
haven't run into much, Jeremy, but it's
00:43:52
come in a couple times from from
00:43:53
listener emails or reader emails is
00:43:56
people who say, "You know what? I I
00:43:59
haven't really figured out, they might
00:44:00
not even know this, that they haven't
00:44:01
figured out their long-term kind of tax
00:44:04
bracket projections yet." Here they go.
00:44:08
And they say to themselves, "I've heard
00:44:09
Roth conversions are good. I happen to
00:44:11
be 15 years old or 52 years old. I'm a
00:44:13
VP at some big company. I'm making
00:44:15
$400,000 a year." and I'm doing a whole
00:44:17
bunch of Roth conversions and I sit
00:44:19
there and [laughter] oh no, you're in
00:44:21
like the 32 or 35% tax bracket and odds
00:44:24
are if you're making Roth conversions in
00:44:26
that tax bracket, it's probably not
00:44:28
ideal for you. And just like you ended
00:44:31
on, I mean, the whole point is to
00:44:32
identify your lowest future tax years
00:44:34
between now and the end of time and to
00:44:37
consider stuffing those years with with
00:44:39
Roth conversions. People get convinced
00:44:41
that Roth conversions are magic and they
00:44:43
want the magic. So, they don't really
00:44:44
think about their tax situation, but uh
00:44:46
I don't know if that resonates at all
00:44:48
with you.
00:44:48
>> Yeah, you've got to think about your tax
00:44:50
situation because you want to project
00:44:51
out pay the taxes at the lowest time.
00:44:53
Figure out when it's best to pay the
00:44:54
taxes, that 52-year-old example there.
00:44:57
If they happen to do a withholding from
00:44:59
their traditional account, that's a 10%
00:45:02
tax penalty on the withholding because
00:45:04
they're below 59 and a half. So, you got
00:45:05
to figure out where you're going to pay
00:45:06
the taxes from. But a lot of people
00:45:08
think of the the binary of do I do tax
00:45:12
uh Roth conversions or not? And really
00:45:14
the answer is should I consider it? Yes.
00:45:17
Then the answer becomes well how much
00:45:19
and for how long and when? And so I had
00:45:22
a couple came into my office a few years
00:45:24
back and they kept getting hammered with
00:45:26
the Irma and the Medicare extra taxes.
00:45:29
And so I projected things out and said,
00:45:30
"Well, with your required minimum
00:45:32
distribution levels, you're just hitting
00:45:34
this one level just over and over again.
00:45:36
But if you happen to use up the entire
00:45:38
24% tax bracket, you will jump to the
00:45:42
next Medicare cost. It's going to cost
00:45:44
you extra Medicare for a couple years.
00:45:46
You're going to pay the taxes now at
00:45:49
24%. But hey, you're projected to always
00:45:52
be in the 24%, which at the time was
00:45:54
projected to go up even higher.
00:45:56
>> And so we did the math and said if you
00:45:57
just happen to take this, it was a
00:45:59
$600,000 account. if you convert it over
00:46:02
the next three years, 200,000 per year,
00:46:05
you'll save in the long run. It made a
00:46:07
lot of sense. This was late in the year,
00:46:09
December. I helped them do the Roth
00:46:11
conversion. I said, "We'll do the next
00:46:13
one in January, right?" Only four weeks
00:46:15
later. So, I called her and said, "It's
00:46:17
time to do the second of the three." And
00:46:19
she said, "Don't worry about it. No
00:46:20
need. It's already been done."
00:46:22
>> So, what do you mean? Our plan was to do
00:46:24
three years in a row. She said, "Yeah,
00:46:26
but you said it was a good idea, so I
00:46:28
just did the whole thing. I figured just
00:46:29
rip the band-aid off. It's not going to
00:46:31
matter anyways. No.
00:46:33
>> And by then it was too late. And I said,
00:46:34
"Well,
00:46:35
>> all right. Well, thanks for letting me
00:46:36
know." And I thought, I wonder how much
00:46:37
it did matter to her cuz she did not
00:46:40
stay in the 24% tax bracket for 3 years.
00:46:43
She jumped into the 32% tax bracket and
00:46:46
then the 35% tax bracket for that
00:46:48
particular year. I did the math. It was
00:46:50
$23,000 of extra taxes because she said,
00:46:53
"It doesn't matter. Let me just take
00:46:55
care of all of it." She follow what you
00:46:57
said. A lot of people think the Roth
00:46:58
conversion is a magic magic pill. You
00:47:00
got to plan some things out ahead of
00:47:02
time.
00:47:02
>> Yeah, that's a very painful way to rip
00:47:04
off the ba the band-aid. 20 $23,000
00:47:07
worth of tax pain.
00:47:08
>> Extra taxes. Yes. Exactly.
00:47:10
>> Right. Right. Extra taxes. Well, let's
00:47:12
pivot. I' I've got an interesting kind
00:47:14
of emotional question for you again. I
00:47:16
think that from my vantage point, there
00:47:19
are some big emotional hurdles that
00:47:21
people face, especially in either the
00:47:24
last few years leading into retirement
00:47:26
or sometimes the first few years at the
00:47:29
start of retirement. So, I'm just
00:47:30
wondering in your experience, what are
00:47:32
some of those really notable emotional
00:47:35
hurdles that that stick out to you that
00:47:36
that people face in that retirement
00:47:39
transition phase?
00:47:40
>> Yeah, I'd say there's two emotional
00:47:42
hurdles I see in there. One is people
00:47:45
think, "Have I have I done enough? Like
00:47:47
am I really going to be okay?" You know,
00:47:49
I've never done this before. A lot of
00:47:51
people say to me, I don't know what I
00:47:53
don't know. Like I'd hate to retire and
00:47:56
then realize I made a mistake and it's
00:47:58
too late to fix it. So that's why like
00:47:59
let me guide you through the process
00:48:01
that I've guided hundreds of people
00:48:02
before. So you feel a lot more confident
00:48:04
in your money when you know more about
00:48:06
your money. And that extra confidence
00:48:08
actually helps you make better money
00:48:10
decisions itself. So you want to have a
00:48:12
process. That's a a mistake, an
00:48:14
emotional, right? If you there's a lot
00:48:17
to worry about if you don't know what to
00:48:18
do, but if you know what to do
00:48:21
addressing each worry along the way. The
00:48:23
other thing people are concerned about
00:48:26
is I've been spending I've spent 35
00:48:29
years saving into my account statements.
00:48:33
I've spent 35 years adding to them. How
00:48:36
am I supposed to start taking the money
00:48:38
out? I'm a saver and that's a good
00:48:40
thing. and you want me to become a
00:48:41
spender and that's absolutely evil. So
00:48:44
there's this huge identity people put
00:48:46
into their minds about I am a saver and
00:48:49
I cannot become a spender. And my
00:48:51
encouragement there is you're not a
00:48:53
saver. You're not currently a saver. You
00:48:56
started out planning. You're a planner.
00:48:59
You've been planning towards retirement.
00:49:01
The tool, the tactic you were using was
00:49:04
saving, but you're still a planner. And
00:49:07
now it's time to use the next tool which
00:49:09
is spending. And so if you can think of
00:49:11
yourself of I'm a planner, not a spender
00:49:14
or a saver, you can continue on saying
00:49:17
I'm just always been planning. I'm still
00:49:19
planning. It's just I'm using a
00:49:21
different tool. But that's I hear that a
00:49:22
lot of I'm a saver. I can't become a
00:49:26
spender. And try to disassociate your
00:49:29
identity with those two words and add
00:49:31
back in the word that you've always
00:49:33
been. you're a planner and just because
00:49:34
you're taking money out of your
00:49:35
accounts, it still means you're a
00:49:37
planner.
00:49:37
>> I really like that. I, you know, it's
00:49:39
just a slight pivot, a slight pivot to
00:49:42
being a planner. I think that does, it
00:49:45
resonates with me. You can probably tell
00:49:47
by the way I'm stuttering over my words.
00:49:48
I would wager that resonates with a lot
00:49:51
of people out there, too, because it is
00:49:53
it's kind of like two sides of the same
00:49:55
coin, right? The saving and the spending
00:49:57
are two sides of that planning coin. I'm
00:50:00
curious, do you find any any sort of
00:50:02
issues? I shouldn't say issues, but in
00:50:04
your conversations with clients once
00:50:07
people are a year or two or five years
00:50:09
into retirement, do they ever come back
00:50:11
to you and say, "Boy, retirement isn't
00:50:13
really what I thought it would be." And
00:50:15
if they do come back to you and say
00:50:16
that, I mean, what are the usual reasons
00:50:18
why? That is interesting. If uh in the
00:50:20
financial advisor space in the
00:50:22
retirement researching space, that's a
00:50:24
big hot topic of you want to retire to
00:50:26
something instead of from something and
00:50:28
you want to have a a phase retirement
00:50:30
and you you want to change your identity
00:50:32
from being this worker person to being
00:50:34
whoever it is you want to be out there.
00:50:36
And I agree with that for a lot of
00:50:40
people. I just don't see it.
00:50:42
>> I just I really don't see it. The people
00:50:43
that come to me, they're not doctors and
00:50:46
lawyers and business owners. There are
00:50:48
people that have worked for the same
00:50:49
company, a public company with a pension
00:50:52
for 35 years. They've been looking
00:50:55
forward to collecting that pension.
00:50:56
They've been looking forward to spending
00:50:57
the time with their grandkids. They've
00:50:59
got this list of things they want to do.
00:51:01
And they retire. They love it. And they
00:51:04
tell me, "I wish I done it earlier." And
00:51:06
they also say, "How did I have any time
00:51:07
to do anything when I was working? I'm
00:51:09
not working and I'm still busy as ever."
00:51:12
So, it's this interesting thing. It's
00:51:14
like a a certain persona that happens to
00:51:18
be the persona that a lot of uh
00:51:19
adviserss and retirement researchers and
00:51:22
academics are in. I don't see that
00:51:24
outside of that. That's really
00:51:25
interesting. I I like that perspective
00:51:27
too. And uh I can admit I think both my
00:51:30
parents are very much in your court or
00:51:32
in the court of maybe your clients,
00:51:34
Jeremy, where um they both were public
00:51:36
school teachers. And I know especially
00:51:38
having some conversations with my dad,
00:51:39
he couldn't wait to retire. It's not
00:51:41
like he didn't like work, but he knew
00:51:43
exactly what he wanted to do with his
00:51:44
free time, and he never looked back. And
00:51:46
I he's just, you know, happy as a pig
00:51:48
and slop with with what he's spending
00:51:49
his time on in retirement. So, it really
00:51:51
is maybe, you know, to each their own,
00:51:53
and um there's a spectrum of outcomes
00:51:55
there. You know, Jeremy, you've shared
00:51:57
so much with us today from kind of your
00:51:59
real retirement focus, retirement
00:52:00
expertise, and I know you've mentioned
00:52:03
podcasting, I think YouTube, and your
00:52:05
book. Let's talk real quick. If someone
00:52:07
wants to follow up, if they want to
00:52:08
start consuming your content on a
00:52:09
regular basis, maybe they want to order
00:52:11
a copy of the book, where can they go to
00:52:13
check out the rest of your work? Yeah,
00:52:15
you're listening on the podcast now. Go
00:52:16
out and check out my podcast, Retire
00:52:18
Today, which is also the same name as my
00:52:21
book. The book is Retire Today, Create
00:52:22
Your Retirement Master Plan in Five
00:52:24
Simple Steps. You can find that
00:52:26
anywhere, but you can also go directly
00:52:28
to jeremyle.com, je.com.
00:52:34
If you're a video person, check me out
00:52:36
on YouTube. I'm Mr. Retirement on
00:52:39
YouTube. So, Mr. Retirement is what you
00:52:41
would type in to find me there. That is
00:52:44
an awesome screen name, Mr. Retirement.
00:52:46
Well, Jeremy Kyle, Mr. Retirement, thank
00:52:48
you so much for joining us on Personal
00:52:50
Finance for Long-Term Investors. Thanks
00:52:52
for having me on.
00:52:53
>> Thanks for tuning in to this episode of
00:52:55
Personal Finance for Long-Term
00:52:56
Investors. If you have a question for
00:52:58
Jesse to answer on a future episode,
00:53:00
send him an email over at his blog, The
00:53:03
Bestin Interest. His email address is
00:53:05
00:53:07
[music]
00:53:07
Again, that's jessevestinterest.blog.
00:53:11
Did you enjoy the show? Subscribe, rate,
00:53:13
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00:53:15
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00:53:20
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00:53:22
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00:53:24
for Long-Term Investors. Personal
00:53:27
Finance for Long-Term Investors is a
00:53:28
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00:53:31
entertainment. It should not be taken as
00:53:33
financial advice and it's not
00:53:34
prescriptive of your financial
00:53:36
situation.
