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Retire Eyes Wide Open: Season 1 Episode 9

REWO S1E9: Advanced Planning Concepts

Advanced retirement planning strategies can help optimize your plan. Scot Landborg, host of the weekly podcast, Retire Eyes Wide Open, shares his top advanced planning concepts. They include the restricted application, the backdoor ROTH, charitable strategy and more.

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Welcome to Episode 9 of Retire Eyes Wide Open. I’m Scot Landborg. On today’s episode: advanced planning concepts. When you’re entering retirement what are the top advanced planning concepts you need to be considering? And how can they help potential optimize your retirement picture?

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 advanced strategies for retirement.

Buckle up. This is Retire Eyes Eide Open!

Money Monologue:

Today…advanced planning concepts. What are the top advanced retirement planning concepts and strategies that you need to be aware of to make sure you have your eyes open in retirement? We’ll go through our top tips today.

Many of our shows deal with digging into one topic or another. Today, we’re taking more or a shotgun approach. We’ll talk briefly about a number of the advanced strategies that you need to consider and in future episodes we’ll dig a little bit deeper, but today, in our first season of our show, that you know some of the most critical and advanced planning strategies and concepts that can help you in your retirement.

What are some of the top advanced planning concepts?

  1. Restricted application for social security.
    A lot of people don’t know what this strategy is. We call it the double-dip strategy. The take more, take now, and take more later strategy. What does it mean? Well, if you’re born before 1954, you can turn on a spousal social security on your spouse. Your spouse, of course, will have needed to turn on their social security. What that allows you to do is collect spousal benefits from full retirement age to 70. Then at 70, you’ll switch to your own full retirement benefit. What are the benefits of using that strategy? The benefits are that if you use the restricted application, the amount of money that you’ll get from your social security at age 70 is the exact same as if you waited until the age of 70. In other words, you’ll have that maximum social security amount. But the advantage, and the reason why people utilize it is it allows you to take that free spousal benefit from those 4 years from full retirement age 70. So it can be a lot more money in your pocket for retirement income. If you are eligible for a restricted application, you need to look at it.I was meeting with someone recently.They didn’t now they were eligible. Did you now that the restricted application is not just a strategy that can be used with your spouse? It can also be an ex-spouse. Maybe you’re divorced. I met with someone recently who fit this exact description. She was divorced. Her husband was older than her. Her husband had turned on his social security. She was full retirement age, 67. She was able to take a spousal social security benefit off of her ex-spouse from 67 to 70. She was able to get that free spousal benefit without touching her own benefit. At age 70, she switches to her own benefit and gets a maximum social security benefit. If you’re eligible, man you better take a look at it because people born after 1954 are no longer eligible for the strategy. It was one of the rules that was changed in the 2015 Bipartisan Budget Act that made some big changes to social security. So if you’re born before 1954, if you and your spouse have your own social security benefit, if one of you at least has their birthday before 1954, then you maybe need to consider utilizing the strategy to maximize your retirement income.
  2. Keep taxes low on your retirement income.
    This is huge. You want to look very carefully at how much you’re going to pay in taxes on your retirement income because the rules change. When you work, you’re not aware of it because all of your income is subject to tax. But when you’re done working, when you’re retired, you have choices on where you pull your income from and your social security is taxed a little bit differently. If you’re a married couple, there’s a certain threshold that you can in other income so that your social security is not taxable at all. There’s another threshold where it’s 50% taxable, another where it’s 85% taxable. Be aware of those thresholds when you’re considering your retirement income sources. How do you stay under those thresholds? Well, don’t pull money from your IRA’s. You can pull money from trust accounts.You can pull money from cash. You can pull money from brokerage accounts that maybe you have some bonds that have very little appreciation. There are other sources you can look to to optimize your retirement income picture and looking at your retirement income picture is a critical component in income planning in your retirement. It’s not what you make, it’s what you keep and if you pay everything that you make, if you pay too much of it to Uncle Sam then you’re not going to keep enough of it in your pocket. So make sure tax strategy is a part of your advanced planning process.
  3. Use annuities for RMDs or tax-advantaged income.
    Now there’s a lot of people out there that don’t like annuities. I understand why.There’s a lot of bad annuities out there. You have to be careful to not have too much money in an annuity. They can be appropriate for some people. Two of the advanced planning concepts where we see them appropriate is: 1) Inside of an IRA. They can be very RMD friendly. If you have an income benefit writer from an annuity, your RMD is going to be calculated every year based on account value not on the benefit value. In certain annuities, that account value may drop over time even though your income stay very high. What it can do is take pressure off the rest of your portfolio by giving you more income on that portion of your assets. It means maybe that you can take less in withdrawals from the rest of your portfolio to meet your required minimum distribution withdrawals. In case you don’t know what an RMD is, it means any IRA, 401k, retirement plan…you need to start taking money out at 70 ½. You’re required to start pulling money out.It starts at about 3.5% a year and it increases every single year. So make sure you’re thinking about some strategies to manage those required minimum distributions. Annuities can also be used to create some tax advantaged income if structured appropriately. Not inside of an IRA – that’s not what I’m talking about. I’m talking about using an annuity with cash money. Some of that income stream may be tax advantaged if done appropriately and you want to make sure you look at that, again, to make your entire income picture a little more tax advantaged.
  4. Pre-fund charitable gifts.
    Maybe you and your spouse, you’re working full time, your high income earners, you give money to your church or charity - by making a contribution you get a certain tax deduction. Now why do you give to charity? You give because it’s a cause you believe in. You give because of the tax deduction. But it sure is a nice perk.It sure is a nice benefit. Well what if you could prefund some of your charitable gifts in the years that you actually need a tax deduction. You can! You can do it through a Donor Advised Fund or your own Family Foundation. You can take advantage and prefund some of your charitable gifts in the years that you actually need a tax deduction. In your working years, you may be in a higher bracket than in retirement.In retirement, often your home is paid off or you’ve reduced your housing expenses. Maybe your expenses are different in retirement than they are now. Maybe you’re taking income from tax advantaged sources. Prefunding some of your charitable gifts could make a lot of sense from a financial perspective to save you more money in taxes in the long run.
  5. Understand the new depreciation rules.
    There’s a new tax bill in town. Donald Trump and a Republican Congress passed new tax legislation last that takes effect from an investment perspective. If you own any investment real estate at all, you need to understand how the new depreciation rules apply to you. They’re very tax advantaged for real estate owners and investors. It used to be that you could accelerate depreciation over the first couple years instead of taking it, let’s say, over 30 plus years. Now, it’s not just on new construction that you’ll get a bonus on depreciation, but all newly acquired properties. And more than just bonused appreciation, instead of taking that depreciation over two years, you can get a big pile of it in the first year. Why is that important? It’ important because those tax deductions can lead to more tax advantaged income in retirement. Be aware of those rule if you own any real estate or property.
  6. Backdoor ROTH IRA.This is a big one. If you work as a defense contractor, then this may be a strategy for you. If you’re max funding your retirement plan, this might be a strategy for you. If you’re earning a bunch of money and you’re putting money into your traditional 401k, you’re putting away 24k a year, if you over contribute, you’re going to have to check with your planned document. Check with your HR department to see if they allow you to over contribute to your 401k. Because some plans, some programs, especially at some big defense programs like BOEING, they’ll allow you to over contribute to the plan. It allows you to put after tax money into the plan. Why does that matter? Well it allows you at retirement to roll those funds, roll what you initially contributed to those after tax dollars to roll it to a ROTH IRA. Very cool feature. I recently helped a BOEING Engineer and he rolled over 200k from their after tax bucket to a ROTH IRA. Didn’t pay anything extra in taxes. So this is a really critical component that you need to be aware of. See if it’s allowed in your 401k plan at work.
  7. Allocate your assets by tax classification. A lot of people forget about this. A lot of people don’t think about it. But if you have IRAs, if you have ROTHs, if you have a trust account, they should not be allocated the same way. Period.If they are, if they are invested the same way, someone doesn’t know what they’re doing.Your ROTH IRA should likely be the most aggressive asset in your portfolio because it grows tax free and you can pull it out tax free. Your trust account is best designed for more buy and hold investing. You want to buy the S&P 500. You want to buy individual stock and hold on to it for20 years. It’s best positioned inside a trust account or a non-qualified account because if one of you passes away, you get a step up in basis and pay no tax when you sell at that point. IRAs and ROTH IRAs are better positioned as actively managed strategies. Make sure you understand the tax classification when you’re investing. I had someone come to me recently.They had a municipal bond inside of an IRA. They had a tax free bond inside of an IRA. It doesn’t do them any good because an IRA trumps everything.The entire account is taxable. It doesn’t matter if you have a tax free bond inside of it. The entire proceeds of that fund is taxable. So be sure to understand the tax classification of where you’re investing.
  8. Re-evaluate your estate plan.Looking at your estate plan documents is important. Probably half of you listening don’t have an estate plan at all. That’s something you need to get fixed and something you need to get remedied right away to make sure you have control and not the government as far as what happens to your money. Something more—if you had your estate plan updated 5, 10, 15 years ago, you need to make sure it was written appropriately. I recently met with someone, we looked at the language of the trust and they had some credit sheltering language in the trust that was a little concerning. With the new rules and regulations, it’s just not something you may need. New exclusion for estate plans is over $10 million per person. It used to be 1 or 2 million per person and the credit sheltering was a much more critical component. Now, not quite as important with a $10 million exclusion and it can create a lot of headaches and hassle if you have that credit sheltering in place. Make sure you talked to your estate planning attorney to make sure your estate plan is updated.
  9. Real estate opportunity zones.This is another new regulation in the new Trump tax code that you need to be aware of. If you own property in certain areas of the country, you’d be surprised where opportunity zones are. There’s a whole bunch of them in Santa Ana, California. Some in Huntington Beach. Some in Newport. They’re really all over the state and country.There are all of these established opportunity zones. If you owned a property there for 10 years and sell it as an investment property, you’ll pay no taxes. Very interesting opportunity. It’s also a very interesting opportunity to take some of your assets that maybe are very highly appreciated to buy property. For example, if you own an individual stock, you bought it for maybe $1 million and now it’s worth $3 million. You’ve got a lot of gain in it and you don’t want to sell it to pay capital gains tax. Under the opportunity zones rules, you could sell that position, defer the tax to buy a piece of property directly.When you go to sell it, you have to pay the tax when you sell the property, but you can defer the tax on the sale of the individual stock. Worth looking into and exploring a little bit more.

Those are our top advanced planning strategies. I packed a lot into today’s session. If you want to talk more about any of those individual strategies, because they’re pretty complicated and pretty complex, I encourage you to go to our website and click on “Schedule a Consult”. I’m happy to sit down with you one-on-one and talk about how some of these strategies might be able to help you and your overall financial picture. And that’s the money monologue.

Money Rundown:

Our Money Rundown segment is where we cover the week’s news. There are 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 – Election News – split decision. Democrats successfully took the house and Republicans expanded margins in the Senate as Wall Street rallied.

What does that mean for you? It’s good news when the market does well, right? Any time you see the market go up, you’ve got to be happy about that. It doesn’t matter to me what your political beliefs are, what your political background is, which party you like or which candidates you like, everyone is happy when they see the market go higher. I think the market went higher because it was essentially status quo. It was essentially what the market expected to happen. Not a lot of big surprises and not a lot of big changes that are going to happen inside of a divided government. I think it’s interesting how many people make investment decisions based on elections. In the future we’re going to do a whole episode on elections. But for now, I think it’s very interesting how much people think elections affect the markets. There is some impact but it’s only one of many different sources of information that you need to look at if you’re making decisions about when and where to invest. There’s a lot of other criteria to think about that is just as important as US mid-term elections.

Story #2 – Under Armour under increased scrutiny after they changed a long standing policy of allowing executives to expense visits to strip clubs.

Really? Think about the companies that you’re investing in and their culture. We live in this digital age and there are no secrets anymore. If you’re going to invest in a company or a stock make sure you understand the corporate culture of the business. I can’t believe that Under Armour would have this type of policy this late in the game with everything that’s been going on with the “me too” movement and everything that’s going on in our culture today, they just finally, this year, started to take action on it. Regardless of what company you’re dealing with, when we see headlines about companies every single day, you want to make sure you’ve got a decent picture on their culture. What is their culture and is it going to bode well for making money in their business in the future.

Story #3 – Corporate earnings might be slowing with over half of S&P 500 companies reporting earnings. Earnings are up 24% from the same period last year. 2019 earnings are set to rise by only 6%.

What does that mean for you? I would expect corporate earnings to slow this next year because they were so meteoric the year before. You can’t expect 24% growth on earnings year after year. I think 6% is pretty healthy if they maintain the earnings that they’ve already locked in. It doesn’t necessarily mean that GDP is going to slow dramatically. It doesn’t mean that companies are less healthy. It means the rate that they’re growing, of course they’re going to grow more when they get a big massive tax cut. Of course that’s going to happen and I think the market already has that priced in. I wouldn’t be so concerned with growth slowing. I think there are still a lot of things in this economy that continue to move the economy higher and continue to be positive for US companies.

And that’s our money rundown for the week.

Best Thing I Saw This Week:

And now for the best thing I saw this week. Just a quick reminder, the best thing I saw this week isn’t necessarily the best, it’s the most interesting and the most thought provoking.

Wall Street Journal this week had a full page on retiring at 40. It highlights a woman at 38 who wants to be done working at 40 years old. To get there she is willing to live in a 400 sq ft apartment. She pays $0 for cable as she freeloads Netflix logins and visits the library. She pays $75 per month for groceries and sets aside $3 for a 5 pound bag of oatmeal. Oh and she has $2 million saved. Does that sound like the life you want to live?

Not me! I’m all for living the life you want and if you want to radically change your life and your work, more power to you. But retire at 40? If you retire at 40 you better have sold an internet company or an app and retire rich. No one wants to retire on just enough or retire on a little! You have to keep living your life! And it can be expensive.

But a couple of observations:

  • Retirement is not an end all destination.

This is a problem I see with people of all ages.40, 50, 70.They live their life one way and think once they retire everything changes.That’s not a way to live!Live the life you want now!Put the things in your life today that you want to happen.Maybe cut back on work a bit and develop some good hobbies or habits. I see plenty of unhappy retires that thought it was going to be all bliss.They take a year’s worth of vacations and they wonder what’s next.It’s the journey, not the destination.That doesn’t change in retirement. Of course, retirement can bring more freedom, more fulfillment.But don’t sacrifice everything to get there.

  • What is your purpose and how are you making a contribution?

That’s the question you should be asking. It takes time to answer. Don’t wait until retirement to find what it means to you.

  • A scarcity mindset rarely wins and rarely makes many friends.

Saving and being thrifty is one thing… but $3 for a 5 pound bag of oatmeal is a little extreme. I had a thrifty client that literally pulled food out of the trash to save money and it drove her partner insane. Improve you skills, work a little harder, make a little more and enjoy life AND enjoy your retirement. A scarcity mindset-- living on a little just so you can get to retirement and you’re going to live on a little in retirement sure doesn’t sound like a lot of fun to me. It’s going to fit for some people. Some people that type of lifestyle works.

  • Age 40-60 can be your peak earning years.

Retire at 40? I’m sorry but most careers take decades to master. Are you telling me at the peak of your productive capacity you are going to just stop? A lot of people make their max earning money from 40-60. It took them all the way to 40 to make real money. Maybe the answer isn’t retiring at 40 but finding more meaningful work? Do something that makes you feel alive and that gives you purpose.

  • Some of the happiest clients that I work with never totally stop working. They keep doing something even part time.

One of the happiest couples I ever met—they’re in their 70’s—have a restaurant business. Now they’re not active in the restaurant anymore. Other people are managing it for them. But it’s their pride and joy. Figuring out what you want to do in retirement is just as important as getting to retirement. What are you going to do? How are you going to spend your time? Are you going to pick up a hobby? Are you going to pick up a part time job? Are you going to continue in your career or maybe a different career that you maybe didn’t think about?

  • You better enjoy the RIDE! 

Enjoy the ride! None of us are guaranteed anything. We’re not guaranteed tomorrow or next week or next year. Are you going to live off a $3 oatmeal bag for 10 or 20 years to hope that you get to retire and never have to work again? That is not a lofty goal. That is not what we should be going after. Get the most out of every day. Get the most out of every month. Get the most out of every single year. Don’t just be looking down the road and be sacrificing everything for it. Get the most out of today. Of course you still need to plan for retirement. You need to be reasonable about putting money aside, but just planning for tomorrow could be a big mistake.

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

Scot Strategy Segment:

Earlier in the show we talk about some advanced planning strategies. Here are a few more:

  1. Look into different investment philosophies.
    If you want to talk about advanced planning strategies, that’s a good place to start. Buy and hold is the prevailing investment philosophy but there are others that are out there. Momentum. Alfa. Beta. Individual stock investing. Volatility management. There’s any number of investment philosophies and make sure you really take the time to explore those to make sure your portfolio is really ready for what’s to come.
  2. Understand step up in basis rule.
    What does that mean? It means understand taxes and how it impacts what you buy and sell in your retirement picture. If you own an individual stock or an exchange traded fund, in a trust account, in an individual account, in a non-IRA account…if you own that stock and you pass away, your heirs are going to get a step up in basis. They can sell it and pay no tax at all. Understand that. It also applies to real estate. You own a piece of property. Either you or your spouse passes away, you can sell it and pay no taxes. When both of you pass, your kids can sell it and pay no tax. Understand the step up in basis rule and how it applies.
  3. Think about taxes from a 30 year view.
    Often people think about taxes from one year to the next. But when you’re approaching retirement, you need to start thinking about it from the longer term. Once you reach age 70, your social security’s turned on, your pension’s turned on—now you’re taking minimum distributions from your investments. Your taxes might be higher in retirement than they are right now. Or from the moment you retire once you turn 70, might be the time to take some extra withdrawals—to look into some ROTH conversions. Understand that for some people, their tax picture is better in retirement but for people with significant assets, your tax picture might get worse in retirement. Especially if you have big IRAs or 401ks.
  4. Re-evaluate your conservative money.
    Understand that bonds have been a very challenging place to be. On the year, down over 4% over the past 4 years, haven’t really made you much money. Are there better places to put that money? Are there better places to put that conservative money? Maybe an active bond manager? Maybe individual bonds? Maybe CDS? CD rates have been coming up. Maybe fixed or indexed annuities? There’s a whole long list of other conservative options that you need to explore.
  5. If you don’t understand it – don’t do it!
    I’ve talked about a lot of advanced planning strategies and we can talk more about them one-on-one. If that’s something you want to do, go to our website and click on “Schedule a Consult”. I’d be happy to talk to you one-on-one about any of these strategies and your retirement income picture. Most important thing—if you don’t understand it, don’t do it! Don’t invest in it. Don’t utilize it. Take the time to do the research. Do the homework. Make sure you’re going into retirement with your eyes wide open and that you understand as much as you can about these advanced planning strategies for retirement.

And that’s our Scot Strategy Segment for the week.

Listener Questions:

Now for our Listener Questions. If you want some your questions answered on our show, go to our website and click “Submit a Question”. We’ll do our best to get your question answered during the show.

Joining us is today our producer, Angela, who has some questions from some of our listeners. Angela, take it away!

[Angela] Thanks so much, Scot. Our first question is from Lois in Rancho Santa Margarita, CA.

Hi Scot. I wanted to do the restricted application but my birthday is February 3rd 1954. Do I qualify and if not what can I do about it?

Lois, thanks so much for the question. Because you’re born in 1954, you do not qualify for a restricted application. But look at your husband or look at a spouse. Maybe they qualify. You could turn on your benefit and they qualify for the restricted application. Also, understand that the restricted application principles still apply. That principle is, if one of you can wait and defer your benefit and get that higher benefit amount, it’s for both of your lives. Not just one of you. So make sure you’re thinking about different ways to take your social security and how to maximize and optimize your benefits.

[Angela] Our next question is Aaron in Escondido, CA

I’ve heard terrible things about annuities. Why would I ever want to consider one?

Aaron, thanks for the question. I’ve heard this before. There’s someone out there in the news that says they’d rather die and go to hell than buy an annuity. It’s a question I’ve heard many times before. There are good annuities and there are terrible ones. Even the best tools can be misused if you have too much in an annuity. I think what’s most important is to understand a couple of the different annuity concepts and see if they fit for you. Looked at a fixed annuity. Look at an indexed. Look at a variable. See if they fit for you. And if they don’t, discard them. You can just use managed accounts. There’s no problem with that. But they can be appropriate for certain people. We did a full episode on annuities, that I’d encourage you to go to our website and look at it. We talk about who they’re for and who they’re really not for and give some clarity that I think would be really helpful.

[Angela] Final question is Carol in Yorba Linda, CA.

What’s wrong with just wanting to retiree and play golf everyday and travel? Sounds like a pretty good retirement to me, Scot.

Carol, thanks for the question. There’s nothing wrong with golfing every day. There’s nothing wrong with traveling. There’s nothing wrong with having a retirement filled with leisure and filled with fun. More power to you. If that is what your retirement is filled with and it’s good for you and it works for you, then God bless you on your way and I’m happy for you. I would venture to say that you have other things in your life that bring you purpose and bring you value. Maybe it’s family. Maybe it’s friends. Maybe it’s those relationships that you have. Right? It doesn’t have to be work. It doesn’t have to be being productive in retirement but for some people that stuff is important. I think it’s important for people to understand that golfing every day and the travel isn’t enough. They need some other things in their life. Some other areas of fulfillment to really have the retirement that they’re going to love and enjoy. I encourage people—it’s a journey. It’s experience. Do the best you can on that journey to help maximize your retirement lifestyle.

That’s our show for this week. If you want your questions answered during the show. Go to our website and click on “Ask a Question”.

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We’ll see you next week where I’ll show you more how to retire with your eyes with open.

Don’t go into retirement with your eyes closed, go in with your eyes wide open. I’m Scot Landborg. See you next week.

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