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Retire Eyes Wide Open: Season 1 Episode 3

REWO S1E3: Why Tax Strategy is Critical in Retirement

Scot Landborg, host of the weekly podcast Retire Eyes Wide Open talks about tax strategy and why it’s a critical component in retirement plan optimization. Scot talks about the week’s news in the Money Rundown and our Scot Strategy and Listener Questions are all about taxes and your retirement.

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Welcome to Episode 3 of Retire Eyes Wide Open. I’m Scot Landborg. On today’s episode we’re going to talk about tax strategy and how it’s a critical component in retirement plan optimization. It’s often overlooked, often neglected. But not today!

We’ll review the week’s news in the Money Rundown.

We’ll talk about the best thing I saw this week.

And our Scot Strategy Segment and Listener questions are all about taxes and your retirement. We’ll show you why, if you’re tax and financial professionals aren’t talking why someone isn’t doing their job. This is Retire Eyes Wide Open.

Welcome to Retire Eyes Wide Open. Don’t go into retirement with your eyes closed, go into it with your eyes wide open. If your financial advisor and tax advisor aren’t talking, someone isn’t doing their job. There are two systems in this country. One for the informed and one for the uninformed. You can’t turn back the clock. You can only get better for the future. You’ll look back at this moment 20 years from now, and you want to know that you did everything you could to position your financial life. The world is changing and so is retirement.

Hi, my name is Scot Landborg and I’m here to help you retire with your eyes wide open. That means having the information you need and the clarity you deserve. It means understanding and interpreting the world as it changes. It means knowing about investments, taxes, social security and estate planning and how they’re all connected. And probably most important, it’s about living your best retirement life. The good life. You know, I meet with thousands of retirees. I see people doing it right. I see people doing it wrong. People that are happy. People that are depressed. I see people that are informed and people that are uninformed. And I’m going to show you how to retire with your eyes wide open.

Money Monologue:

If your financial advisor and tax advisor are not talking someone isn’t doing their job. It’s a phrase you’ll hear me repeat over and over again. It’s in the opening of our show every week. Because it’s just that important. You’ve been conditioned to believe your financial advisor is siloed. That they’re isolated. That they help you just with your stocks and bonds and money market funds, maybe with an annuity. I have news for you. An advisor needs to do much more if they are worth anything at all. Being a good advisor requires building a plan. First an income plan. Where is your income going to come from in retirement? And for a good advisor, it’s more than just using the rule of 4%.

The ruled of 4% is a commonly used financial planning concept which states that you’re likely will have enough money for the rest of your life if you don’t withdraw more than 4% from your investments. The 4% rule originated from financial advisor, William Bengen, and was based on his study in 1994 of historical returns. At that time, no historical case existed in which a 4% withdrawal rate exhausted a portfolio in less than 33 years. This was 1994. The problem is the rule is outdated! It’s 24 years old. It’s based on data that does not take into account record low interest rates for a sustained period of time. It does not account for the recession of 2001 or the great recession of 2008. Two of the biggest market disruptions of our life-time. It doesn’t account for it.

T Rowe Price recently published a piece on withdrawal rates. For someone with a 60/40 stock to bond allocation and someone that wants to have 30 years of retirement income, they have an 80% chance that their money will last at a 4% withdrawal rate. I don’t know about you, but a 20% chance you might run out of money is not very comforting and not how I would define success. Reducing your withdrawal rate to 3% increases your success rate to 96% and raising to a 5% withdrawal rate only gives you a 56% chance of your money lasting. Almost a 50% chance of running out of money.

So, the role of a financial professional is not just earning 1-2% more on your investments but it’s making the case that they can help you better manage risk. That they can help close the gap through income planning to decrease the likelihood of running out of money.

The next most important skill for an advisor in helping you with your retirement money is in helping navigate the tax code with your withdrawal strategy. A 3% or 4% or 5% withdrawal rate equally across all investments is lazy and a poorly planned distribution strategy. You need to think about the tax consequences of turning on various income sources. And there is a window of time from the moment you stop working until the day you turn 70 that provides the greatest window for tax optimization planning. Why? Because before 70 you have a choice on when you turn on your income from your retirement accounts. After 70, you’re forced to take required minimum distributions. At 70 your social security is all turned on. You are likely at peak income in your retirement.

It is important that both you and your advisor understand the tax involved in pulling income from different sources. The first thing to look at is your income needs and your social security benefit. Can you keep your taxable income low enough to keep your social security from being taxed or maybe just 50% of it being taxed? Do you need to keep your taxable income low to qualify for lower cost medical until 65? Do you want to keep your taxable income lower to position yourself for ROTH conversions?

These are all important considerations. And it’s a reason why tax planning becomes much more critical the closer you get to retirement. You should make sure that every November or December, your financial and tax advisor get on the phone together and talk strategy. If you are in a high tax bracket, where can potential deductions be found? If in a low tax bracket, should we explore harvesting tax or converting to ROTH? This is something we do with our clients every year.

An example of the important conversation-- I called one of my clients on the east coast for our annual tax strategy call and she told me she didn’t need it. She was a corporate attorney used to making $300k-$400k per year. She told me that she had lost her job the year prior and tried to start her own business, but it had failed and she had little income to show for it. How could tax planning help her? In collaboration with her CPA, we were able to covert over $70k from an IRA to a ROTH and it only cost her $1k in taxes.

I had someone else come in to meet with me, filled with pride. He came into my office, strolled in. He boasted he had $1 million in his 401k and paid no taxes last year. He said he didn’t need any tax planning because he didn’t pay any taxes. I let him know he missed a huge opportunity. He could have concerted some of that 401k money to a ROTH IRA and paid very little in taxes. He wasn’t cocky anymore.

If your financial advisor isn’t looking at your tax every year, he or she just doesn’t have the full picture or understand tax optimization of a financial plan. Tax optimization of your income plan could mean thousands more in your pocket for retirement. Maybe you save a couple thousand a year in taxes. Maybe you move $10k per year from IRA to ROTH. Doesn’t sound like a lot but, over 10 years that’s $100k over 20 years $200k. That’s not including potential growth. Over time it really adds up.

Having that tax-free bucket of money is something you and your kids are going to be very happy to have later in life. It’s not just what you make, it’s what you keep, and Uncle Sam has both hands in your

pockets trying to get as much as he can. Do everything in your power to resist. Keep more of your hard-earned money and position your retirement portfolio to avoid tax drag.

That’s our money monologue for the week.

Money Rundown:

Our Money Rundown segment is where we cover the week’s news. There’s a lot of media sources out there that are going to help give you updated information about the economy and the markets.

My job is to help summarize and synthesize – help pick out a few stories that are most important for you, as a retiree or investor.

Story #1 – Apple.

Apple stock topped $1 trillion in market valuation in early August. Apple became first US company ever to meet that mark. The company stock value grew higher after a strong third quarter earnings report.

What does that mean for you? Another hot stock in the news. Do you own apple? Did you buy more?

Last week I reminded people of the risk and reward of owning individual stocks as Facebook had dropped over 20% in a day. And people that have owned apple have had to hold through challenging times and through volatility. That being said, individual stocks can have an important role in your overall wealth building. If you like a stock like Apple – then own it. If your advisor is telling you to sell it, ask why.

Individual stocks are great to own inside a ROTH IRA where they can grow tax free and be withdrawn tax free. It’s also a place to have some of your more aggressive positions, a ROTH IRA, which individual stocks can be more aggressive. They can be more volatile. They are also great inside of a joint account as a long term buy and hold where if you or a spouse pass away you get a step up in basis. Know where they fit in your portfolio.

Also, don’t have too much exposure to any one position no matter how much money you’ve made or how much you believe in the company. More than 10% in one company is risky.

Apple is the darling today, but things can change quickly. I’ve had many miserable people in my office. Miserable because they own too much of stock that hasn’t grown or one that’s down and they don’t know what to do.

Don’t be emotional in your stock buying. Try to be objective. Do your homework. Know their place in your portfolio. And have an exit strategy. A “sell” discipline.

Story #2
The trade war with China.

As President Trump continues with trade war rhetoric, the Chinese market has seemed to get the short end of the stick. One of the Chinese stock indexes being down 25% from the high on the year.

What does that mean for you?

More and more people are asking me about the potential trade war escalation and how it might impact them and their portfolios. I think you need to be careful about owning emerging markets and international markets right now. While the S&P 500 is up over 5% on the year – emerging markets are down over 10% and international down around 5%.

My personal opinion is that Trump is spouting more rhetoric when it comes to trade than substance. To keep rustbelt states and the American worker on his side politically he needs to appear strong on trade. Trump is a negotiator and he has other strong free-traders in his party that he needs to keep happy too. Once the rhetoric quiets down, or once deals are re-negotiated it’s possible these markets may see some recovery.

Until then, be careful you don’t get bit. And you have to think about the international portion of your portfolio with a longer-term view.

Story # 3

Social Security--

Did you know that according to a newly published social security report just 3.7% of American seniors wait until 70 to begin claiming their monthly social security benefits? Wow – that’s shocking. Especially as people are living longer and longer.

Before making a decision about taking your benefits you need to look at your other income sources. You need to run longevity calculations. Need to understand that when considering benefits for you and a spouse that higher deferred income amounts we be there for both of your lives. The lower social security amount goes away when one of you pass. All the more important to have a higher benefit.

Also, you benefit gets inflation adjustments so having a higher number can make a big difference in the long run. Bottom line, I think a higher percentage of people should be waiting to take their social security because we’re living so much longer and if you do the math, it can result in tens of thousands, even hundreds of thousands of more money in your pocket for retirement. None of us have a crystal ball. None of us know how long we’re going to live, but we want to make sure we collect the highest amount. But it’s important to consider those nuances in social security.

And that’s our Money Rundown for the week.

Best Thing I Saw This Week:
John from ESI Money wrote an article for Business Insider titled:

“I retired at 52 with a $3 million net worth — here are the 10 things that surprised me”

It’s a story of someone that retired right. That’s really living a full life every day. Some people when they retire – they get bored – not this guy. He talks of being busier in retirement than he was before. But now busy doing the things he wants to do. He’s living an active retirement. And I think it has to be inspiration to anyone watching.

SO, what he been doing that’s been working?

He’s gotten healthier by hiring a personal trainer. Now he has the time to stay in the physical shape he’s always wanted to be in. But during his working life just have the time to stay in shape like he wanted to. At 52 he still has kids in the house. He uses his extra time to take his daughter to the movies every Tuesday for discount movie night. Maybe that’s something you want to do once per month with the grandkids. He started writing a blog and writing about areas of interest, making a contribution.

I recently met with a retiree, a full time retired airline pilot. He was bored out his mind. He ended up going back to work part time and now is bringing in some extra money and is making just enough of a work contribution where he feels better about his retirement and his retirement picture.

I have another client that is spending his extra time rebuilding an antique airplane. Another retired college professor that decided to run for city council in his spare time just for something to do. The point? There are a million ways to retire and enjoy your retirement. The more you can be active the better. Get out there and try something new. Learn a new language. Take a college class. Pick up a new hobby. Do the things you’ve always wanted to do. Retirement is easy for some people and a big adjustment for others. Embrace the challenge. It can really be some the best most exciting years of your life.

And that’s the best thing I saw this week.

Scot Strategy Segment:

Earlier in the show, we talked about why having your financial advisor and tax advisor talking is so important. In our scot strategy segment today, we’ll talk about our top tips for tax optimization of your retirement.

1. Understand the tax consequence on your social security income. If you’re married and looking at your taxable income for the year and it’s under $32k, guess what? You’re going to pay no income tax on your social security at all. Let me repeat that. If you’re married and filing jointly and your joint income is under $32k, no taxes at all on your social security income. Now in getting to that number you’re going to calculate all of your income, including your social security. Your social security income, you’re actually going to cut in half so it all doesn’t count against you when factoring in what your total income number is going to be. If your total income is under $44k, only 50% of your social security income is going to be taxable. If you want to be tax efficient about your income and income plan, you need to understand how the taxes on your social security income are calculated.

2. Get Money into a ROTH IRA even if only $10k per year. Do whatever it takes. Contribute. Convert when it makes sense. Even if you’re in a higher bracket it may make sense to put a little bit of money into a ROTH or convert a little bit of money to a ROTH. Maybe it makes sense from the day you retire to the day you turn 70. Maybe you’re in a lower tax bracket then. But if you can start putting that money aside, it really starts to add up over time. Especially when you consider that growth potential of that asset. You want your ROTH to be the most aggressive asset in your portfolio so likely you have the potential to grow that asset faster than you have anything else. If you think about how much time you have in retirement-- it could be 10 years, it could be 20 years, it could even be 40 years. And so converting a little bit of money each year, put a much larger tax nest egg in your plan.

3. Know that cash is king and your joint or trust account is not far behind. When we meet with people and talk about where their income is going to come from in retirement, if you have cash,

or if you have a trust or joint account, you need to look very closely as to when you’re going to pull income from those assets. Because if you do it smart, you can keep that taxable income at a level where you make your social security income more tax efficient. Now you and your spouse, maybe you’re both working and used to make a bunch of money, when you retire, often you live on less. One of the reasons you may live on less is that maybe your mortgage is paid off. I’m surprised every day when I meet with people and we do projections and look at numbers, if a person doesn’t have a mortgage to pay for, how much money do you really need to make a month? You may be in a lower tax bracket than you think. And if you can use your cash to supplement your income plan, your cash—you’ve already paid taxes on it, so to use it to fund your income in retirement doesn’t count against you from an income tax standpoint. Look also at your trust account. Look at your joint account. Maybe you have positions that haven’t grown very much. Some of your bond holdings probably haven’t grown very much over the past 3 or 4 years. You can tap those assets without having to pay much in taxes. And by tapping those assets, you can make your entire picture more tax efficient.

4. Charitably help yourself. What do I mean by that? If you’re charitably minded, if you give to charity—church, synagogue, the veterans, the hurricane relief fund, why do you do it? You do it because it’s a cause you believe in. You don’t do it for the tax deduction, but sure is a nice perk. It sure is a nice benefit. Well I would challenge you, if you want to tax optimize your overall portfolio, think about using your charitable deductions in a more succinct and efficient way. Let’s say you give $10k a year to charity, you and your spouse are both working full time, you’re in the highest tax bracket possible. You give that $10k contribution, for every $10k, you may be saving $3-4k in taxes. When you retire, if we do some good tax strategy and we get that tax bracket much lower—your mortgage is paid off, your income is tax efficient, maybe that same $10k contribution you’re only saving $1,500 in taxes. Wouldn’t it have been better if you could have tax optimized your charitable giving? Well you can! There are things called a Donor Advised Fund or a Family Foundation. You can pre-fund some of your charitable gifts and take the deduction in the year that you need it. I just helped someone with this recently. It’s the last year that they’re working but they had a huge tax bill this year. They’re actually going to pre-fund some of their charitable gifts. They’re going to put money in a charitable trust where they get the deduction today but can use the money for charity at some point in the future.

5. Use real estate effectively. This is a big one. If you down property, the tax rules under this new tax bill from president Trump have really changed the game. You need to look at accelerated depreciation. Look at opportunity zones. Look at how 1031 rules have changed. Look at using real estate as an activity for different deductions. Real estate can be powerful at helping you tax optimize your financial plan.

6. Think about being a contractor in retirement or starting a travel business. I joke with my wife when I retire, I want to be a food and travel critic. Why do I mention that? A lot of people when they retire, some will go from working full time to not working at all. But many will keep doing some side work. Maybe some side projects as a contractor. What that does, is the income you receive as a contractor can be very tax efficient. If you’re used to being a W2 worker, you’re not used to getting all the deductions that you may be able to qualify for as a contractor. Maybe you could write off your home office. Maybe you could write off your internet, your cable, your cell phone. There’s things you can write off with travel and entertainment. Being a contractor, searching for business that you may not have been able to deduct before. And maybe some of those things would have already been things you would be spending on in the first place. Having a second job, even as a contractor or a food and wine critic can have its benefits from a tax perspective and should be looked at very closely when looking at tax optimizing your overall plan.

That’s our Scot Strategy Segment for the week.

Listener Questions:

If you want your questions answered during the show, shoot us an email. Go to or you can visit our website and click “Send a Question”. We’d be happy to get your question answered during the show.

Joining us is our producer, Angela.

Angela, thanks so much for joining us and what kinds of questions do we have from some of our listeners this week.

[Angela]. Thanks so much, Scot. And for our questions this week, the first one comes from Jessica in Placentia, CA.

Why wouldn’t I just turn on my social security income at 62? What if the benefits change or go away in the future. Doesn’t social security have a funding problem?

[Scot] Jessica, thank you so much for your question. First, let me say that the issue and topic of social security is complicated. There’s a lot of moving parts. In fact, we have an entire seminar dedicated to the topic of social security. If it’s an event that you’d like to attend and you’re in Placentia, CA, we do them all across Southern California, especially in the Fall and the Spring and we’d love for you to come to an event. Go to our website and click on “Attend an Event” for one of our upcoming seminar. But to answer some of your questions firsts, why wouldn’t I turn on my social security at 62? That’s a really big question. If you are still working and you make over $17k per year, for every $2 you make, social security is going to penalize you $1. So if you work in Southern California, and you turn on that social security benefit at 62 and you’re still working, likely you’re not going to receive any of the benefit anyway. If you wait, however, you’re going to have a higher income from social security for the rest of your life. You’re getting a discount of about 75% by taking it at 62. If you wait until full retirement age, you’re going to have significantly more money for the rest of not only your life, but the rest of your potential spouse’s life. Both of you are impacted by that decision, and if you’re working and you’re 62 it’s a stupid move to turn on your social security. You asked about if the benefits are going to change or go away in the future. They might change in the future. I don’t think they’re going anywhere. They’re not going away. This government is just used to printing money. We’ve got a $21 trillion deficit. They’re not going to pull away benefits they’re just going to print more money. So I wouldn’t be worried about social security going away. I would be worried that your dollar might not be worth as much. They might do something to the benefits. They’re going to push out when you can pull your benefits. They may alter, potentially, the inflation adjustments. Who knows how they may change things in the future. But I think if you’re already 62, you should be pretty safe. Most changes that politicians are making associated with social security are affecting the young generations and you should be okay.

[Angela] And our next question is from Mark in Costa Mesa, CA.

My tax person and financial person have never talked before. Is that a fireable offense? My financial guy has made me a lot of money in the market and my tax guy is a personal friend. So I don’t really want to fire either of them.

[Scot] Well, Mark, thank you so much for your email. It’s so difficult making decisions about your advisor when they are a personal friend. Always challenging. But if it isn’t a personal friend, you’ve got to hold them accountable. You can be nice to them because they are your friend, but this is business, this is your retirement, this is your entire financial life ahead of you. You’ve got to hold them to the same standard that you would hold anybody else. Is it a fireable offense that they haven’t talked before? No, I don’t think so. Not fireable. But I think it becomes much more important when you’re getting close to retirement or when you’re in retirement and it’s absolutely crucial that they do speak every single year. What is fireable, is if you tell them that you want them to talk and they don’t talk, that would be fireable. It’s critical that they talk. It’s critical that they are on the same page as far as your income plan is concerned. And if they have no desire to talk, they don’t really understand the big picture of retirement planning and of tax planning of the retiree and you should get a second opinion. Your financial guy has made you a lot of money. Great. Everybody’s made money. Any idiot has made money over the past 9 years in this market. That is not the criteria that you’re going to be judging your advisor. The question is, how are they preparing you for risk. How are they preparing you for this stage of your financial life? How are they thinking through where you’re pulling income from and when and how to tax optimize what you’re doing? Those are the questions you need to be asking. Where people get in trouble as in investor is they rely too heavily on past performance, their advisor, this stock or that stock has done well and so they keep it. They keep it too long until it’s spoiled. And it’s not something they enjoy talking about anymore.

[Angela] And our final question comes from Joe in Long Beach, CA.

I want to sell some of my company stock, but will I have to pay taxes? I have about 50% of my money in the stock. It pays a nice dividend and I was planning on living off that in retirement. How do I sell some of the stock without paying taxes? Where can I invest to earn what I’m earning as a dividend?

[Scot] Well let me say, Joe, if you have 50% of your money in company stock. That is a significant retirement risk. It’s a huge red flag because something can happen to that stock. Something can happen to that position. I don’t care how high up you are in the company, you can’t know everything that’s going on in the market, what’s going on with your competitors, what’s going on with other divisions inside the company and risk that your money is put in by having that amount of money in that one stock or that one position. Doesn’t mean you need to sell all of it. But you need to think long term how you’re going to manage your risk and minimize that risk. You say it pays a nice dividend. That’s good but there are other stocks that pay nice dividends. There are other investments that can give you dividend-like income. There are investments with guarantees or guaranteed benefit writers out there that may be worth exploring. There’s a whole world of financial tools out there and I think the most important thing is to just get educated on what those options are. If you want to sit down one-on-one and talk about some of those top strategies, I’d be happy to do it. Joe, if you want to get together one-on-one, go to our website and click on the link “Schedule a Consult”. You’ll get together with me one-on-one. We’ll talk about where you are, your specific financial picture, your income plan, how you’re going to pay for your retirement income goals. We’ll talk about some of the other solutions out there that might be able to help you with what you’re doing. If you’ve got 50% of your money in individual stock, you’re taking a ton of risk. You need to look at ways to manage that risk--different strategies to help diversify your overall portfolio. It’s difficult. You may need to sell some of those positions and pay some tax. It’s difficult to do but in the long run, you’re putting yourself in a more secure position.

That’s the end of our listener questions for the week. Angela, thanks so much for joining us. Again, if you want your questions answered during the show, go to our website and click the button “Ask a Question”.

You can also follow us on Facebook, subscribe to our podcast on iTunes. I want to thank all of you so much for listening. Stay tuned next week as I continue to discuss how to retire with your eyes wide open. Don’t go into retirement with your eyes closed. Retire with your eyes wide open! I’m Scot Landborg and we’ll see you next week.

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