The Biden administration is proposing changes and, in this post, we’ll look at what they might mean for your retirement. The first one is only going to impact people who have assets totaling over a million dollars. But the second proposal, in my opinion, is going to impact everyone. It’s going to affect how much tax you pay when you withdraw from your IRA and 401k.
How Much Tax Will You Pay On Your Estate?
The first proposed change has to do with how much tax you could pay on your estate. When you pass away, there’s really only three places that you can leave your money:
Most of the people that I talk to prefer to leave more money to the first two than to the last one. I’m sure you feel the same way. And as I said before, this will impact those who have more than a million in assets when they pass away, because the Estate Tax Exemption Limit that I’m hearing mentioned by the Biden Administration could be changed from the current limit of around $11 million, down to just $3.5 million. If you think you’ll never have that amount of money, remember that if you’re in your fifties or sixties, with $1 million at 7 percent growth rate for the next 20 years, that gets close to about $4 million. And that does not include your house value or other real estate, or any of the other assets you have. The estate tax calculation includes all of these things.
So, what does that $3.5 million exemption mean?
If this proposed change is approved, and you are an individual with an estate over $3.5 million, anything over that amount could be taxed by the federal government. For example, if you pass away with $4.5 million in assets, the million dollars that’s over the exemption amount could be taxed at 40 percent or $400,000 extra going to the government. Note that this does not even include what your state’s estate tax might be. That’s a whole different calculation. But just from this example, you can see that it could mean some big, big dollars.
There are ways to get around taxation, but, first, if you’re serious about estate planning, don’t take this video as advice. I am not an estate planning attorney. I just help people and have talked with some estate planning attorneys around this area. So, if you’re interested, I recommend finding one and discussing these strategies with that individual. But here are a few quick ideas to have in your back pocket when you do talk with an attorney. The first one has to do with paying less to the government by getting more to charity. And then the second one has to do with paying less to the government, by getting more to your heirs. And as you can tell, the main goal here is giving less to the government, if you can.
Giving More to Charity
When you give money to charity, it’s not included in your estate. Many people will designate charities as one of the beneficiaries on their accounts. When you do this, money going to a charity should be excluded from your estate tax calculation when you die. Another option is to set up a donor-advised fund as a beneficiary. This account can be set up to grant out certain dollar amounts or percentages of that donor-advised fund value even after you pass away. It’s a nice way to continue to support smaller organizations that you care about who might not be able to handle a big lump sum payment all at once.
Giving More to Heirs
While you’re alive, you can manage where your money goes. And, you can see the benefit and the blessings that you can give to the charities. You can see first-hand the impact that your donation makes on those charities. When you give to your family members, or friends, you can see the blessing and the impact of that gift. Why not have two parties enjoy that––the receiver, and then also you, the giver. We know that when you do give, you actually feel better if you can see a change happening.
I have clients who are actors and they’ve done pretty well for themselves. Some of them have a lot of friends who are struggling actors. And this past year has been so difficult for a lot of actors because of no work. So my clients have been secretly helping those who really struggled this past year. And it’s been giving my clients a lot of joy to see the impact that they’re making on other people.
How Much Tax Will You Pay on Your Pre-Tax Accounts?
This proposed change from the Biden administration has to do with the amount that you might have to pay on the withdrawals from your 401ks IRAs, and any pre-tax accounts that you have in your retirement plan. In my opinion, you don’t have to be a millionaire for this to impact you. It just might sting a big more if you do have over a million saved. One traditional withdrawal strategy says: defer your IRA and 401k withdrawals as long as you can, because it’s all tax-deferred growth. And I could see the reasoning of why you’d want to defer that.
But when we model out these specific withdrawal strategies and tax plans for our clients, we find that waiting to take money from pre-tax accounts could be causing them to pay more tax than necessary over their lifetime. Often by waiting to take pre-tax money until they get to the Required Minimum Distribution age*, they’re moved to a higher tax bracket. This means that they’re paying more tax than what they were expecting in their seventies. The way around this is to design a retirement income plan. At Streamline, we run a retirement income system that gets the investment plan, income plan, and tax plan all working together. We’ve seen that it often makes sense to withdraw more money from pre-tax accounts first and then pay the tax now versus waiting to pay it later.
But again, don’t take that advice and just implement it based on this post because I don’t know your specific situation. Sit down with someone and model out your specific scenarios to see which one allows you to pay the least amount of tax.
What About Biden’s Tax Changes Right Now?
The Administration has proposed raising rates tax rates on people with incomes of around more than $400,000. But the question we’re asking is: do we really think that tax brackets are going to be the same five or 10 years from now? Now I don’t have a crystal ball, but I do know that we’re at historically low tax rates right now. And when we look at history, it moves in cyclical nature. I don’t want to make any big assumptions; that’s why we model out a bunch of different scenarios, whether its tax rates going up, saying the same, or going down. To see a visual example of what we do for our clients, click here to see a video illustrating several different scenarios.
* The Requirement Minimum Distribution age right now is 70 years old. At this age, you are required to withdraw from your pre-tax monies.
There’s one common mistake that people make when using a financial advisor. If you know what it is ahead of time, you’ll know:
what to look out for when you’re talking to advisors;
how to get the maximum benefit when working with an advisor; and
whether or not you found the right one.
Or, maybe you’re evaluating whether you need an advisor or not. This post will give you a clear picture on the value that they can provide and if the cost is going to be worth it to you.
Finally, if you already know that you’re looking for an advisor, this will help you find your ideal fit.
A First Meeting Reveals The #1 Mistake
Recently I was in a first meeting with a 60-year-old couple. They had seen a few of our videos and were thinking about retirement so they reached out. Most of the time on this first call alone, people get more clarity and they find out the next steps that they need to take to improve their financial life. I thought it was a great discussion. At end of the call, I asked how they were feeling? And they were quite honest and told me they were kind of embarrassed that they hadn’t been paying close attention to their financial life or plan for retirement. They had over a million dollars saved, but the husband felt like he was making wrong decisions when it came to a retirement. And there were a few decisions where he let emotions take over and it negatively impacted the plan.
As a side note, be aware that every financial decision is made up multiple parts. One is the financial side and the other is the emotional. As you get closer to retirement, that emotional part of money decisions, gets stronger and stronger. This is something to be aware of as you get closer to your retirement date.
Now, back to our couple: there was some embarrassment because they didn’t think they had made good decisions. And also some embarrassment because they felt like they should know more about the financial world, whether it was the main risks that they need to plan for, or the different types of investments they should have, or the right withdrawal strategy. They just didn’t understand it all. They were embarrassed because they felt like they didn’t know as much about their money or about their own retirement as they should. And they were feeling a little bit of intimidation too. This is common.
Advisors know more about the financial world than most of their clients. That make sense. But clients often hand over control to those advisors to implement their strategies and plans. Then the clients are trusting that it’s working out without ever really understanding the plan. A lot of people are okay with this, but I wouldn’t recommend doing it. I recommend finding an advisor who is able to clearly communicate and simplify the plan so that you can actually understand. When you understand the investments and understand the plan, that gives you more confidence that you’re doing the right things and not just taking a blind-trust approach.
You’re the CEO. You don’t have to be the CFO too.
When you’re starting a relationship with a new advisor, or even if you already have one, you can keep this in mind. Remember that this is your money. You’ve earned it. And now you’re the steward of it; you’re the manager of it. This doesn’t mean that you have to go to school and study the financial world all day. You can hire counsel to be the guide, but just remember to be confident because you’re the CEO. And you’re just going to try to find a CFO, a chief financial officer. You’re still the leader in your life. In a business, the CEO does trust the CFO with the financial side of things. But it’s up to the CFO to succinctly communicate these most important things to the CEO.
If you’re currently in the process of interviewing advisors, go to the meeting feeling confident, remembering it’s your money and this is how you’re managing it. You don’t know everything about the financial world. Frankly, you don’t want to know; you probably don’t care to study economics or markets all day and make decisions by yourself. It’s probably not fun for you. You have certain skills and abilities that you’re good at and finance doesn’t have to be one of them. Especially if you’re close to retirement and you’re starting to think about spending your time on the things you enjoy and less on the things you don’t enjoy as much.
What To Say To Your New Advisor
To help lessen that feeling of embarrassment about not knowing everything about money, here’s what to say to a new advisor to make sure that you’re on the same page:
I’m good at what I do, but I need someone to help me navigate this financial part of my life. I’d like you to anticipate and plan for some of the risks that I might face and create a plan that I can understand.
By sharing this up front, the advisor knows where you’re coming from. And if you still feel embarrassment or intimidation when you’re talking with an advisor, maybe it’s not a good fit. You need to feel comfortable and calm and good about this relationship.
Another Common Mistake
I received an email recently from a couple who were not clients of ours. They sent me a big financial plan from an another advisor who they had just met with and were seeking a second opinion. They connected with this advisor mainly because he was at a big firm––the kind of firm on TV commercials during sports games. So they sent me the plan and they wanted my opinion about if it would be good for their situation. I looked through it, and I noticed that the majority of the recommendations were to buy new insurance products and annuities. With these kind of products, the advisor usually gets paid a pretty big commission.
Now, if this was discussed with the clients and it was understood, maybe this could be the right path for them. But when I told them they were actually surprised. They were moving forward with the plan because they were feeling a little intimidated. They were just trusting that this first advisor was giving them good counsel. But when I asked if they knew how the advisor got paid, they didn’t know. And that’s another big mistake: not knowing how your financial advisor gets paid.
At Streamline, we work on a fee-only basis, not commissions, because we believe this is in the best interest of our clients. We don’t want to be a travel agent who creates and sells a vacation plan. We actually prefer to be the tour guide who goes on the vacation with the clients.
When you think about it, the financial industry is kind of like a foreign country where you don’t speak the language. But a tour guide who does speak that language can be a huge help. What if there’s a detour or the bus gets a flat? A local guide can more easily take care of the unexpected things that pop up while you’re on vacation, because they’re familiar with the area. That’s kind of how we see our jobs too. And if you think you’d benefit from talking with a financial guide, please reach out to me.
Warren Buffett is one of the greatest investors of all time. In this post, I’m going to see how we can use some of his advice to help plan a successful retirement.
“I do know that when I am 60, I should be attempting to achieve different personal goals than those which had priority at age 20.”
When you get closer to retirement age, you’re going to have to start withdrawing money from your savings and investments. Your goals are different than when you were in the middle of the savings or accumulation stage in your thirties and forties. Because time is shorter to when you’re going to start making withdrawals, make sure that you have some portion of your assets invested conservatively. At Streamline, we manage this by first creating an income plan for our clients. Then the income plan informs how we invest so that the plan will be successful. We don’t have to participate in or worry about the market fluctuations.
“Never ask a barber if you need a haircut.”
And for the same reason, you shouldn’t ask an insurance salesman if you need insurance. Be aware that most of the advisors that we come in contact with are really salespeople in disguise. One way to find out if they’re acting in your best interest, is to ask how they get paid. This is a common question to ask in the first meeting when you’re initially getting to know someone. Think twice about working with an advisor who gets paid a commission for recommending mutual funds, annuities, or other insurance products. Find an advisor who works on a fee-only basis, or a retainer model instead.
“What the wise do in the beginning, fools do in the end.”
Chasing the latest hot investment has burned a lot of people that come to Streamline looking for help. And after getting burned a few times, they figured out to just do the things that work. Now, the hard part about doing the things that work is that it’s boring. And the financial media doesn’t want to talk about boring things. If everyone used tried and true methods for successful retirement, financial channels would be out of business.
The good news is that the game the financial media plays, or the game of the guy hitting the buttons on what stock to buy or sell, or when to be in cash, or when to be invested, that game is not one that you need to play. You can competently ignore the commotion, knowing that you have a plan that works in both good and bad markets. That’s really the ideal goal: ignore the noise and just focus on the thing that works. It’s about having the income you need each month without having to worry about what’s happening in the market, while still achieving some growth to outpace inflation.
There are three big financial mistakes that we see a lot of retirees make. In this post, I want to share these mistakes with you. Then I’ll let you know how to avoid unnecessary worry about the success of your plan. The good news is that you can avoid these mistakes and it doesn’t have to take much extra work. Just being aware is the first step.
As you start to plan for retirement, you’re making a big transition from the saving stage to a withdrawal stage. And that alone is a big adjustment. It can be hard to get used to withdrawing money from these accounts where you had been saving for the last 30 or 40 years. With that in mind, let’s jump into the mistakes that we see when new retirees are setting up withdrawal plans.
Following Rule-of-Thumb Assumptions
The 4-Percent Rule
This can be a great way to get an idea of what’s reasonable and sustainable and how much you can withdraw. But when you get serious about planning, this is not the best way to plan your withdrawal strategy.
If you assume 4 percent is coming out, what happens if there are a few bad market years? When you retire, the amount that you were assuming you’d take out, based on 4 percent, could actually be quite a bit higher. The dollar amount stays the same, but if there’s a market dip, the withdrawal percentage is going to increase. Now, the 4-percent rule does say that it’s supposed to account for market fluctuations, but we’ve actually seen retirees who are planning on retiring based on this rule and decide to work a few extra years during a bad market because of the worry that it brought.
This is actually related to another mistake that I’m going to bring up later, so stay tuned. But those who prepare for retirement using a bucket approach, or by assigning a purpose to each account, are much more confident in their plan, even during scary markets.
The Order Of Withdrawals
The rule of thumb says to take from your non-retirement accounts first. Then start Social Security when you’re not working any more, whether you’re under your full retirement age or not. And then the assumption is, don’t spend your IRA or your 401k money until you need to. Whether that’s when you need the money or when you get to the Required Minimum Distribution age, which is 72, currently. When we run the withdrawal models for our clients, we almost always see that following this order leads to paying higher taxes over the span of the rest of their life. There are ways around paying more tax than necessary in retirement. That’s why the tax plan is such a key part when we’re planning for our clients.
Waiting Too Long To Start Withdrawals
Like I said above, it’s common for people to believe that they should use their non-retirement and Social Security before the pre-tax money like 401ks and IRAs. And I understand that if you’ve got tax-deferred money, it seems to make sense. Why not keep it in the tax-deferred account so you don’t have to pay tax on it right now?
The issue is that you could be setting yourself up for more taxes over the rest of your life. When we model this out for our clients, depending on how much they have in IRAs or pre-tax monies, many of them are actually moving to higher tax brackets in their seventies because of the Required Minimum Distribution. It doesn’t seem right. But because the RMD amounts are going up as you get older, the amount people have withdraw goes up and the amount they have to pay on taxes goes up, shooting them into higher tax brackets. It also affects Medicare premiums because how much you pay with Medicare has to do with how much taxable income you have.
What if you don’t need the money from your IRAs because expenses are low? Talk to your retirement planner about Roth conversions. That could be a good way to reduce future tax bills. There are really a lot of factors here when it comes to the retirement plan. If your advisor is only talking about investments with you, and they’re not looking at all these different scenarios and models and they don’t specialize in retirement, please reach out to me. I’d be happy to talk with you.
Not Planning For Unexpected Withdrawals
Imagine that you’re planning on using a 4 percent withdrawal rule. What happens if the unexpected comes up? The unexpected expense, or worse, a series of unexpected expenses over a couple of years, can really put a dent in your withdrawal plan. In this scenario, the advice is to think about marking a certain amount that is set aside from your withdrawal plan, kind of like a retirement income insurance plan. It’s just there; it’s conservative monies that are available. If the unexpected comes up, you’ve got the withdrawal plan working, and then you’ve got this side fund. That’s one way to think about it. One strategy that actually has this built in is the Three-Bucket Strategy, which could be helpful as you’re starting to talk with financial professionals and see if it could make sense for you. Click here to see a video that explains the Three-Bucket Strategy further.
In this post we’re going to look at the first step to take when you’re planning your retirement. If you’re already retired, don’t worry, it’s not too late for you to do this too.
The first step to take when creating your plan is something that you’ve probably heard of. However, not many people put that much emphasis on this, or sometimes they skip right over it. And interestingly, most advisors skip it too because if you don’t take this step, your financial plan can usually still work perfectly.
But, if you’ve seen any of our other videos or talked to one of our advisors, then you know that we at Streamline care as much about the non-financial side of your retirement as we do about the financial side. We know you need both working together in order to live a fulfilled next stage of life, one full of joy and purpose and passion. Just focusing on the money piece of your retirement plan isn’t going to get you there.
The most successful retirees that we’ve seen took the time to get clear on their why.
They took the time to think about: why are we even retiring in the first place?
Is it because of I’m a certain age?
Because it’s the social norm that says I’m supposed to do it at this time?
Is there something I want to do more of?
Am I running away from something that I dislike?
Or am I running towards something that I enjoy more and want to have more time allocated to?
Getting clear on your why can help you find the answer to that almost impossible question: how much is enough? When you know your why, planning for retirement becomes a lot less daunting because you have a clear target that you’re aiming for. Then you can implement the retirement plan and the investment strategies that will give you the greatest chance of reaching that target.
A Story About Susan
Susan called me up one day and she was looking for a second opinion. She was 58 at the time, and she had just received a plan from another advisor that said she and her husband had to work until they were 70 if they want their plan to be successful. If they wanted to continue their lifestyle, then they would have to work another 12 years. But the advisor didn’t take the time to listen to Susan and her husband’s story and figure out their why. He didn’t find out what’s most important to them. What he did (which is pretty common in retirement planning) was take the numbers and the data, then he told her what’s possible with those numbers.
Just because that’s the way 99 percent of advisors create a financial plan, doesn’t mean it’s the best way. And it certainly doesn’t mean it’s the best way for you. What I’ve seen the best advisors do is listen to their client’s stories. First, by asking questions that the client maybe never thought about, getting really clear on what’s most important and where they want to be. And then fitting the numbers into their story rather than letting the numbers go first. If this advisor found Susan’s why first, he would have found out that the most important factors to their successful retirement would be proximity to their kids and their faith. Those are two of their main values that we uncovered.
Next, Susan and I walked through the Streamline System and we worked around those top two values. Their kids were in South Carolina and in the original plan, they had budgeted for four annual trips. They lived in Illinois and then they were going to go down to South Carolina four times a year. So we began looking at some of the what if scenarios of different expenses and costs and different ideas that they could apply in retirement. We weren’t making any decisions. We were just exploring and discussing the different options. What Susan and her husband really wanted to do was be together with their grandchildren more than four times a year, especially while those kids were under 10 years old. If they listened to the original financial advisor and followed that financial plan, this never would have been possible.
Letting Why Chart The Course
But once we discovered their why, we took them through a series of crucial questions to help design that ideal future that they were looking for. A few of the questions were things like: is your current home your forever home? They decided they loved it, but without their kids and grandkids, it wasn’t the same.
And would you really want to commit to South Carolina? They didn’t know; they couldn’t answer that right now. So we decided not to commit. What they decided to do instead was rent a condo in South Carolina for a year, take it for a test drive. They’d keep their Illinois home and not make too many big transitions. While this meant spending more money initially, it was for a short term only, with the knowledge that within five years they would have to make a decision.
In order to afford the condo in South Carolina while maintaining their Illinois home, they made a few adjustments to their planned living expenses, like club dues and entertainment in downtown Chicago. With this plan in mind, Susan and her husband retired from work two years later; 10 years before the original advisor’s plan. They started renting in South Carolina. After a year, they were ready to commit. They sold the Illinois house. They bought in South Carolina and they’ve never been happier. They’re close to their family. They’re creating a new community within their church and they’re doing great.
Your Next Steps
Now, what are the next steps for you? Bring this conversation up to your financial planner. Get clear on your why and make sure you incorporate it in your plan. Really, make sure you start with that.