Most people want to pay the least amount of tax possible over their lifetime. There are a lot of different strategies to do so. Some tax-saving strategies are better than others based on individual situations, but there is one strategy that you don’t hear about often that could be worth exploring.
How This Less-Used Tax Strategy Saving a Client 50K in Taxes
Seven years ago, we had a 20-minute phone call with a 60-year-old client. She asked if we could review her mom’s tax return and her investment allocation after tax season. The mom was working with a different advisor but our client just wanted to get a second opinion on it. We found that our client’s mom was taking required minimum distributions of about 30K per year, and she had a lot of write-offs due to high medical expenses, and she was giving charitably, which really lowered her taxable income. Because she was in an assisted living facility, these expenses actually lowered her taxes to zero.
We did a tax projection for the mom, and we realized that she could take another 40K out of her IRA and still pay zero tax each year. The mom didn’t need the money, and one of her goals was to pass some of her assets on to her daughter, our client. When we looked at the client’s tax projections over the next few years, we realized that if she was to inherit this money, she would pay quite a bit more tax on the money that she inherited.
We shared our findings with our client and her mom; we showed them this zero-tax strategy, and then we showed them the alternative pay-more tax strategy. As you can probably guess, it didn’t take long to come to a conclusion on what they wanted to do. Here’s what we did to really solve this for them…
The mom started to increase what she was taking out of the IRA and it just went to another account of the mom.
She just took a distribution on that individual IRA, and paid zero tax on it.
It then went to another account and stayed invested.
Neither the mom nor daughter needed the money right away, but it was still there in case a medical expense came up.
When the mom passed away a few years later, she had taken out an additional 200K from her IRA that she paid zero tax on.
If that money stayed in the IRA and her daughter inherited it, she would’ve had to pay another 50K in taxes because she would be forced to take out money each year for the next 10 years, at least from that inherited IRA.
Should You Be Looking Into a Multi-Generational Tax Strategy?
The tax strategy we see in this scenario is that it may be beneficial to think about multi-generational planning. You don’t need to be an uber-wealthy person to benefit from this. If you’re already helping your parents with finances or you think that they might be open to it, maybe start a conversation or watch this video together and see where it leads you.
Once you start involving the family in some of these planning techniques, it can really open up more options. We’ve often heard from clients how labor-intensive and time-intensive it is for them to organize the financial affairs after a parent passes away, and that’s the last thing you want to be worrying about during that time. Take a look at our family planner, it’s a great resource to get you started.
Benefit of Multi-Generational Tax-Planning
Tax planning is really important, not just for the short term. There could be a real benefit to this family tax and estate planning idea. One small change or the implementation of a simple strategy could make quite a difference in how much can be saved. If you’re thinking about your own finances or maybe your parents’ finances, feel free to reach out to us.
The date that you start Social Security can really impact the success of your and your spouse’s retirement plan. Not every married couple understands the extent this could affect their overall financial plan. Oftentimes, mistiming their Social Security ends in costly mistakes.
Most couples obviously aren’t doing this on purpose. It’s just that the information on what to do isn’t always clear. They unknowingly make decisions that have big implications for themselves and for their spouse in the future.
In the video above, Dave Zoller shares what you need to know to avoid these costly mistakes and how to maximize your family benefit.
Jane and Paul’s Story of Delaying Social Security Benefits
Married couples thinking through their optimal income strategy for their retirement plan typically have a Social Security strategy in mind.
Social Security planning is one of those age-specific strategies that our team at Streamline Planning helps clients think through and plan for. But it’s not a one-and-done solution.
A lot of people think that once they determine a Social Security plan, it’s set for the rest of their life. But there are a lot of changing factors to consider,
How long are you really going to work?
Is anything going to change over the next few years?
What type of accounts do you have and what is available for withdrawal?
For example, this couple (we’ll call them Paul and Jane) are nine years apart. Paul is 67 and Jane is 58. The husband was planning to stop working this year and starting Social Security as supplemental income. Yes, the traditional planning technique would make sense here. Paul is 67 -at full retirement age. But when we ran the scenario, as you can see in the video above, his income plan looked good, but it brought up an important discussion.
In this post, I’ll point it out some of the potential issues I noticed, so you don’t start planning your retirement in a way that could cause an issue in the future. Then I’ll walk through the actual numbers of this sample retirement plan, something that’s not in the article, just so you can get an idea of what this would actually look like and how you might get into trouble if you use this rule-of-thumb planning technique.
Again, this is my opinion, and it’s not advice. So please consult with your own wealth management team before making any decisions.
As we often do with our clients, we had to look farther into the future. We mapped out a scenario where Paul passes away at 84, and Jane is still 75. She’s got a good family track record of living a long time, and Paul, not so much. That doesn’t mean it’s definitely gonna happen, but just looking at the odds, it seems that’s a scenario we should plan for.
When we mapped out this scenario, the Social Security benefit would actually decrease by $1,800 (and that’s using just today’s values). That decrease happens because Paul’s receiving about $3,000 a month.
If he were to start Social Security now or this year, Jane is receiving or scheduled to receive $1,800 per month. If Paul passes away, Jane will be able to step up her benefit to what Paul’s was ($3,000). But that $1,800 that Jane was taking goes away. Essentially reducing her total family benefit, from $4,800 down to $3,000, a 37% decrease.
Does Delaying Social Security Maximize your Benefits?
So the question becomes- should Paul delay his benefit and instead use his other accounts? An IRA or taxable account could be used to supplement his income. That way he can continue to get an increase in Social Security.
In this example, Paul passes away at 84, and Jane is 75. What if he’s able to delay Social Security till age 70? In the chart below, you can see the increased green bars that pop up, and this is for the benefit of Jane. So if they’re planning together as a couple, this could make a lot of sense for them.
For Paul and Jane, if he waits to claim his benefit and draw from investment accounts first, then his benefit could increase to $3,900 per month. And again, things could change for this plan and for this couple, because life changes. But this prepares them to maximize future benefits for Jane, if Paul were to pass away.
Common Scenarios to Delay Social Security Benefits
There are a lot of factors that go into these kinds of decisions. Having the ability to map out these scenarios and arrive at the best possible decision is a real benefit to retirees.
First, remember that delaying to 67 (or really to any age) means you’re not receiving quite a bit of money from Social Security. For Paul, specifically in this example, he’s not receiving over 100K for those three or so years where he’s delaying it. That is a lot of money, but it could be worth it if your spouse is going to live longer than you are.
A few other scenarios when it could make sense:
Couples who have available funds in accounts other than Social Security funds
Couples who have a significant gap in age
Couples where at least one of them has a history of living a long time
If you’re thinking about planning for Social Security in this way, we recommend meeting with your own financial professional before making a decision. If you’re getting to the point where you’re going to start using Social Security benefits and need help figuring out the tax impact, the withdrawal, income, and the investment strategy in retirement, feel free to reach out to us.
How to Take Portfolio Withdrawals in a Down Market
When markets go down, it’s also hard to watch the value in our accounts go down. It can even cause some to second guess if they’re doing the right thing. But if we spend just a few minutes preparing our portfolio for scenarios like this, we’ll have a much smoother ride and more confidence with our retirement plan.
But if we keep managing our portfolios the same way we did the last 30 or 40 years, and we don’t start designing the income withdrawal strategy, that could open us up to a lot more retirement risks that could and should be avoided.
So in this video, I’ll go over a simple way to prepare to take withdrawals in a market downturn. My name’s Dave Zoller, and I’m a co-owner of Streamline Financial with Tim, Luke, and Sean, and we get to help a lot of people design their ideal retirement. If you’ve been working with an advisor for some time and you’re starting to realize that retirement has a whole new set of planning strategies but maybe it’s not their specialty, you’re welcome to reach out to us or schedule a free call with me.
Segment your Investments into a Conservative and Growth Bucket
To keep it simple, think about using the “bucket approach” by segmenting your different investments into a conservative and growth bucket. Take the pre-tax accounts like your IRA’s and 401k’s, then separate all the individual holdings into two categories – conservative and growth. If you’re not sure if they’re conservative or growth, here’s a free tool to help you do this pretty quickly.
Historically, assets that could fit into the conservative bucket have been cash or money markets or certain types of fixed income. The main purpose is for times when the stock market is down, it’s great to have investments in asset classes that are not down as much (like stocks). It’s much easier to use those conservative assets that aren’t down as much for income.
What we don’t want to do is be forced to sell an investment or fund that’s down the most. Instead, let those investments in the growth bucket stay invested and give it a chance to grow to where it once was.
Determine Your Income Plan
You’ll also want to consider how many years of income you need (or want) in that conservative bucket…
Do you like having a year’s worth of cash available for expenses coming up?
Or maybe three to four years’ worth of income?
Another way we help clients figure out what the right amount to have in the conservative bucket is by first figuring out their income plan. This is really their entire financial life and retirement plan in one visual so that we know what rate of return we need for the plan to be successful.
It allows us to model out many different scenarios, like higher than expected inflation, changes in expenses, or Roth conversion strategies. It shows us the result before we actually make the decision or before it happens. This really guides us to what we need in conservative assets, in that conservative bucket.
One mistake that we see people make quite often is putting in more than what’s needed into the conservative bucket – they end up losing more to inflation than they really should be.
How to Identify Your Conservative and Growth Investments
Using Portfolio Visualizer, and following along in the video above, you can start plugging in your asset percentages you can model different scenarios for your portfolio. This isn’t recommended allocations, it’s just to get an idea of what are the conservative assets vs. growth assets at a high level.
There’s a lot that goes into designing these allocations that are the right fit for your retirement plan, but this can give you an idea and help in deciding how to take withdrawals during market corrections or down markets. If you like retirement-specific videos like this, subscribe so that I see you in the next one.
Retirement is really a great period of life. And because we specialize in retirement planning here at Streamline, we know a lot of retired people. For some, they use this period of life as a way to simplify and declutter. It’s a natural progression when you get to that point. We’ve seen time and time again, people who are newly retired start to simplify life, which is really good.
But in this post, I’m going to share five things clients say are the most important things to own to make retirement even better. Some of these things are an added expense, and I know in retirement we have a tendency to want to save more and be frugal with expenses. But I believe these could be worth it and could actually give you more in return than what it costs to have them.
Health Club Membership
Having a membership to a health club might be expensive, but this can be one of the most important things that you own, if you use it. Prior to retirement, it might have been harder to get to the gym because of work and a busy schedule. But now, using some of that newly granted free time for fitness can pay big dividends. I know a few clients who’ve said that they feel better now in their mid-sixties than they did in their early fifties, directly because they made exercise a habit in retirement. And doing this one thing can really improve all other areas of retirement and of life; we’ve seen the studies behind that.
If you’re looking for adventure or excitement in retirement, this is not essential, but it’s fun. It’s something my family has been using recently; so it’s not just for retirees, but I think you’d really get a kick out of it. It’s called The Adventure Challenge Book. We’ve been enjoying the family edition, but they also have one for couples and one for singles, as well as a few other versions. Each page has a new mini adventure that you scratch off. You don’t know what it is until you scratch it off and then you complete it right at that moment. As a family, we’ve been enjoying it a lot, so, I wanted to share it with you. And again, not essential for retirement, but it just could be a fun thing to, to spice up a weekend if you’re wondering what to do.
Your Own Car
The number of cars they own is something that many couples decide to cut in half in retirement. They think when they retire, they won’t be commuting to their jobs anymore and won’t use their cars as much. They try to simplify and go down to one. But I would think before you do that because having a car really offers freedom and flexibility. You can get up and go when you want to and you don’t have to plan around your partner’s schedule. It can work, to have just one car, but at least for the first few years, think about keeping two and maintaining your freedom and flexibility.
This is something that most people have before retirement, but once they get to retirement, they get rid of it. I can see the rationale behind not having an emergency fund in retirement because you’re starting to take withdrawals and maybe you’ve set up your bucket strategy. But, it still it makes sense to have an emergency fund separate from your retirement income strategy.
The emergency fund is really just for the unexpected, the unplanned things. Whereas your retirement income plan is planned out for the regular expenses that are going to be occurring, if an emergency does happen, it’s less likely to impact your plan if you’ve got that set-aside money in the emergency fund. So having three to six months of expenses set aside is still a good idea in retirement.
Enroll in College
This last point is also related to fitness, but it’s not physical fitness, it’s more mental fitness. Many local colleges, or you can find an online college, offer classes specifically for seniors at a very affordable rate. Curiosity really is the fountain of youth and, and staying challenged after your career is important for a healthy brain. So, finding the courses or topics that interest you could be a good idea. You might even meet people who are interested in the same in things as you and start to increase social ties to other people.
When I talk to clients after a year of retirement, I get one of two answers. Some say it’s going great and they’re really enjoying an amazing stage of life. Others say it kind of stinks. They thought they’d be having a lot more fun with their free time. That they’d be enjoying it but really, they’re bored and it doesn’t feel right.
I’m not sharing this to scare you, but because I really want you to think about your retirement. If you’re going to make it the best stage of your life, you’re going to have to think about it. Now, we both know that retirement isn’t just figuring out the money side of things. That’s important, but it’s actually easier to figure out the money side than the non-financial things. At Streamline, we have been doing this for 22 years and have it, we believe, down to a science. We know that once we start monitoring and running the income system and the investment system, it brings a lot of peace of mind for clients.
But why are some clients–who don’t have to worry about the money side of things anymore–happy, and some are unhappy?
In this post, I’m going to share seven things that I’m seeing in people who are successful and happy retirees. These are things that they are doing to enjoy retirement and live their life to the fullest.
Make a Non-financial Retirement Plan
The happiest retirees take dedicated time before their retirement date to think through how they want to spend their time. Maybe you’re thinking, I’ll just do whatever I want. I’ve got freedom now and that’s all that really matters to me. But be careful.
There are five stages of retirement and the third one is actually kind of a let-down stage. It’s when many people fall into a slight depression. The honeymoon phase of retirement is over and they’re starting to feel like they don’t have direction or purpose in life. This happens because work used to be their main source of purpose and meaning for the day or for their week. Also, work was the main source of social activity and now connections are less a part of their lives.
Here’s the good news: some people get to retirement and because they spent a little time on the financial-planning side of things, they continue to increase their contentment level and their happiness levels. That’s what I want for you! So here are a few questions to think about:
What can you do in retirement that you can’t do now?
What are the top three most important things in your life right now?
This second question will help you get clear on your values. Once your values are clear, money decisions actually become easier. We have seen this first hand. I wrote a short guidebook on how to find your purpose in retirement. Click here to access it.
Set Up Power of Attorney and a Trust or Will
This sounds boring, but if you can do it, you will have less burden on your mind. You can sleep better at night because you removed the worry of the unexpected. Removing burden from our clients’ shoulders is one of the core motivators behind what we do at Streamline. Having your Power of Attorney set for medical and property, and the rights wills and trusts set up for your financial situation, allows you to know that if something unexpected happens, your financial life will still continue to run appropriately.
You might be thinking that when you die you don’t really care what happens next. But what if you’re still alive but unable to act on your own behalf? Within the last year I have seen three clients decline mentally to the point where they are not able to manage their own affairs. Having the trusts and POAs set up make it easier on their family. So, consider talking to an attorney and seeing what makes the most sense for you.
Make Health a Priority
Did you know that the Freshman 15 isn’t just about students who gain 15 pounds in their first year of college? When you retire, you might have less structured meal times. You might be less physically active than when you were up and moving around for work. And you might have more time for social things, which is good, except that social events are usually centered around eating and drinking.
The journals of gerontology (the study of aging) also show that many retirees consume food in response to losing personal identity. This is a very common thing that can happen. Have a plan to stay active, pick up a new athletic activity, or just be aware of what you’re eating. It sounds simple but retirement is a major life change. It’s actually the best time to create some new habits. So, why not create habits around staying healthy so that you have more of a chance of being free from disease and ailments in the future.
One thing my dad did when he retired was get a fitness tracker that he wears on his wrist. It’s kind of gamifying the exercise experience for him and he’s been enjoying it a lot.
Be Generous with Your Time, Money, and Skills
In retirement, you now have the most time you’ve ever had. You have the most money you’ve ever had. And you have the most wisdom you ever had. Now this may not be true for everyone, but it is for most people in retirement. And if it is true for you, then you’re a pretty valuable person and you can be generous with your time, money, and skills. One of the best ways I’ve seen retirees find fulfillment and purpose in life after work is to discover or rediscover their unique strengths, and then use those strengths to help other people.
The reason this is so important is because if you can practice generosity, you have the power to change someone’s life. You’ve seen the studies, I’m sure, about when you give, you’re actually happier and I believe it’s true. It’s an easy equation of give = happy to test out and see if it’s true for you too.
Another reason is that when you watch and read the news, it’s not hard to think that the world is kind of a messed up place. I’m an optimist and I try to focus on being grateful for the things in my life, but sometimes when I look at the world, it does look messy. The cool thing is that when you start giving your time, money, and skills to help others, something happens. Pockets of good appear in the world. I believe that being generous with what you have can actually make the world a better place. And even if the whole world doesn’t change, you might change the world for just one person by your generosity.
If you don’t know your skills, Strengths Finder is a great, short assessment that can help you find out your unique strengths, or rediscover them after retirement.
Outsource Things You Don’t Want To Do
Wouldn’t it be nice if you could spend the majority of your time on things that you actually want to do? I was working with a new client recently and he added a new expense in retirement. His whole adult life he did the landscaping, he cleaned the windows, he did the gutters in the fall, and all these other household things. It wasn’t until retirement that he decided he didn’t want to do those things anymore. We looked at his retirement plan and added in a few extra expenses to outsource house cleaning and maintenance. This did have an impact on his plan, and there was a projected amount that was lost over the next 30 years or so, but it did not hurt his plan at all. Seeing that projection gave him the peace of mind to cross yard work off his list of chores.
This same guy didn’t love keeping up with retirement planning strategies and tax law changes and what’s happening in the economy and abroad. He didn’t want to spend time thinking about it. It made him more stressed when he did and it wasn’t enjoyable. So, he outsourced it to us. This client remained the CEO of this own life, but outsourced the CFO position to our wealth management firm. He sees the cost of hiring us as an investment because he’s getting a return on that money since we’re using strategies that he wouldn’t have to add alpha and tax savings to his plan. Plus, he has his time back, which is even more valuable.
We all know the science behind relationships being the key to health and happiness, so I won’t spend a lot of time going into it. But here’s another question to stop and consider:
Who do I desire to build a stronger connection with? Why?
Continue to Grow
Happy retirees who retire well continue to grow in retirement. A friend of mine was struggling recently. He was trying to find what he should be doing in life–what was his purpose? He knew that he wanted to feel different, but he just couldn’t get out of this funk that he was in. Here’s how he did it: at the end of each day, he answered the following questions:
What did I make progress on today that made today better than yesterday?
What can I make progress on tomorrow that will make tomorrow better than today?
He said doing this has made a big impact on his life. My challenge for you is to take two minutes before bed tonight and answer these questions, looking back on the day that just happened and forward to tomorrow. Try this for five nights in a row. I did this last week and I’m not joking when I say it was one of the best weeks I’ve had all year. Maybe it was a coincidence and things just happened last week that really stood out. Maybe not, but it would be fun it you tried it and see what happens.