Knowledge is Power in Retirement!

Episode 21: Audio automatically transcribed by Sonix

Episode 21: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker1:
Any examples used are for illustrative purposes only, and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment, and is not a solicitation or recommendation of any investment strategy.

Speaker2:
Welcome to All Things Financial, the show that helps upgrade your financial literacy. Trey Peterson and Yellow C coots are retirement planning specialists here to provide a unique and conservative approach to managing your money. Now here are your hosts, Trey Peterson and Yellow say coots.

Speaker3:
Good morning. Welcome to the All Things financial podcast I'm Trey Peterson. Yeah. Let's say coots. And, uh, we're so excited. Today we talk about, uh, how the 2024 election could impact your Social Security, which as many people know for a lot of you, is significant. In fact, for over 50% of Americans, 50% of all of their income once they retire is going to come from Social Security and the other half pensions, 401 K's, etc.. So how could this election impact you? Yeah, let's say this, uh, this election could be an exciting one. What do you think about that?

Speaker4:
Yeah, I think that initially we were just, like, kind of getting ready for a boring election, you know, just coasting all the way to November. And so much has happened in the last few weeks, and it's anything but boring, that's for sure. I thought we agreed not to talk about politics. I thought we were going to skip that. No, no.

Speaker3:
No, I actually wanted an episode totally on politics. Yeah. Before we jump in, we just want to welcome you. So we're out of Burnsville, Minnesota. We have an office in Saint Louis Park and an office right here on 35 and Burnsville Parkway. As I look out at the highway and, uh, this is episode is at number 21. Yellow say.

Speaker4:
Yeah.

Speaker3:
So number.

Speaker4:
20 or 21.

Speaker3:
One and two. And, uh, it's on the screen 21. And I've been enjoying the process. The other thing I'm enjoying, and really what our goal is, is we want to create a content of life or, excuse me, a library of content so that we can better serve people. So that way when we run into people and they want to learn about estate planning, we can say, hey, episode 12 is on estate planning, or they want to learn about long term care or investments or whatever that is. We want to be a group that gives you the best education when it comes to planning for retirement. So, uh, if you are in the Burnsville area or you have access to zoom and you're anywhere in the country, we're licensed across the whole country. And if you've never had a second opinion by a retirement planning specialist, we'd love to do that for you. You can reach out to us at our emails triangle, the Lsag Wealth, or on our phone number at (612) 286-0580. And I think one of the things that makes us unique is that we have holistic planning. Sounds a little, uh, I don't know how you'd say it, but we're also a one stop shop. So whether it's estate planning or Social Security or Medicare or investments tax strategy, uh, we can help with all of those things. We have an expert in every area. So I think it's unique that we can help people with everything right here under one roof.

Speaker3:
But, uh, today we're going to talk about a handful of things. Let me go over those, because I always like to know what are we talking about. So number one, we're going to talk about inflation and give a demonstration where the interest rates are today and where they're likely to head by the end of the year. We're going to talk about the IRS ten year rule, how to finalize the finalized rules that could impact retirees and your beneficiaries. We're going to talk about do you have a stray 401 K or what we call as an orphan, 401 K? One of the things that we run into often is people out of job. Maybe it was for three years, five years, or maybe for a long time. And they entered into a new a new job And their company didn't force them to move or roll over that 401 K. And the funds have never been adjusted. Nobody's watching over it. There's inefficiencies that have been created. And so we're going to talk about if you have a stray or an orphan 401 K, what can you do with that to maximize and best steward those dollars? Uh, we're going to talk about how the election could impact Social Security, as we touched on earlier, and then national debt updates, which is always exciting because that number is now at $35 trillion. And we're going to talk about how that could impact you if you are in or nearing retirement.

Speaker5:
And now for some financial wisdom. It's time for the quote of the week.

Speaker3:
Uh, let's start off with the quote of the week, though some financial wisdom you have that there for us is.

Speaker4:
That, and I do have to be honest, uh, I'm going to do my best to fill up as much time with the first three bullet points so that we could skip the 2024 election impact. But, uh, the the financial wisdom, the quote of the week, uh, this week, it's it's actually from Benjamin Franklin. An investment in knowledge pays the best interest. I mean, these days, I don't know. You're competing with like 5% CD rates and treasury rates that are quite high too. So I don't know, Benjamin.

Speaker3:
Uh, all right, well, let's jump in. One of the things we're going to talk about is housing. So the Federal Reserve's monetary policy not expected to raise rates in July. What does that mean for us?

Speaker4:
Yeah. So there's actually, uh, there's a Reuters poll that came out and they have I think they have like 100 people who participate in it. And let me see if I can get the exact number here. Um, let's see here. Uh, yeah. So, um, the poll actually goes from July 17th to the 23rd yesterday, and they had, uh, over 100 people participate in 82 out of the 100. Uh, they're forecasting that the fed will keep the rates unchanged on the 31st of July. So, of course, the Federal Open Market Committee, they meet eight times each year, and that's when they have the opportunity to adjust rates. Right. So they're anticipating that rates will not go up. Um, but they do think that there's going to be at least two rate cuts this year. Uh, currently the, the federal, uh, the federal funds rate is currently at 5.33%. Um, it's on a 23 year high. And, uh, they're anticipating that that's going to come down to about 5 to 5.25% by the end of the year. Of course, that's all speculation. We don't know for sure what's going to happen. Uh, the same uh, the same poll showed that by by next year, this time next year, they're looking at potentially getting rates down to 3.75 or 4%.

Speaker4:
Do you believe it? I, I don't I you know, there's a lot of speculation. There's obviously a lot that goes into that. Um, you know, one of the things that, you know, we have we have a lot of friends that are in real estate. So I wanted to touch on that briefly. You're, you know, you invest in real estate. We both own, uh, own homes. Um, and one of the things that I wanted to talk about is just housing prices in general, like we've all felt, uh, inflation, it's all affected us. You know, you talk about different topics that, you know, you can point to somebody who wants information on estate planning or Medicare and you can say, hey, listen to episode five or episode eight, whatever that looks like. Almost every episode since we've started, we touch on inflation. It's a big topic. Um, I know some of our listeners may be a little bit, you know, over it at this point, but it's an important topic. You know, you look at median home prices, um, they're up 4.1% year over year. And one of the interesting things, the reason why I wanted to bring this up is, uh, according to the chief economist, uh, from the National Association of Realtors, Nar, uh, Lawrence Yun, um, they're actually looking at potentially seeing a shift from a seller's market to a buyer's market.

Speaker4:
So, uh, one of the things that we're noticing in real estate is homes are sitting on the market a little bit longer, right? Um, sellers aren't getting as many offers as they used to. And your sister is a real estate agent, and that's one of the things that she's mentioned as well. Um, you know, it's one of those things where, you know, a couple of years ago, nobody was even doing an appraisal, nobody was doing a home inspection and like to even have a chance. I remember when our office manager was looking for a house, I think it was two years ago. They just kind of gave up. Every offer they made was above asking price and none of them got accepted. So things are changing a little bit. I think that, you know, for the better. People are actually demanding some home inspections, as I mentioned, and some appraisals. So, you know, inventory, it's actually rising on a national basis. What are your thoughts on that?

Speaker3:
Well, I think what's so funny is, you know, we laugh at not having an inspection done. And the home that my wife and I were in, we didn't have an inspection done. I made an offer and I never, I never actually had walked into the house. So as crazy as it is, I did it. Yeah. But when you look, you know, I think long term, I had an uncle that was super successful. And I'll never forget growing up. He'd always say when it came to real estate location, location, location. And so, you know, well, I think real estate obviously is a whole is up. One of the things that that I've always taught is where you buy matters. I think that, you know, one of the questions that you and I are getting, I always say, especially from friends and even, you know, employees, is is now a good time to buy a house? And I think younger people don't realize that interest rates, while they're higher, they're not historically high. And so, you know, my personal opinion is home ownership is one of the greatest assets for for most people. And I know there there are studies that even show, you know, there's a group of millionaires that they don't buy a home, they rent and they invest the difference. But when I when I look at things, you know, uh, with, with where interest rates are and with home prices also being high, it seems like something's got to give it it it appears like home prices are going to, are going to have to come down At the same time, I think it's a short term thing. I think long term housing is always going to go up.

Speaker4:
Yeah. So right now the median single family home price in the United States is $432,000. Um, that's quite high. And, you know, the thing is, in all four major US regions, uh, sales have declined most recently in terms of, uh, uh, in terms of June, actually, June year over year. Um, but have you heard of the term the mortgage lock in effect? You know, we it goes by, you know, any number of different names, but something that, that we're noticing is, you know, when I bought my house in 2019, I think my initial interest rate was maybe like 3.75. And, uh, within a year and a half, I think I refinanced and I'm at like 2.75 at this point. So the mortgage lock in effect, uh, that's actually expected to continue for a few more years. And basically what that is, is I don't have an incentive to move right now. Like I'm paying 2.75%. It almost feels like it's free money, like I'm borrowing at 2.75. If I were to get another mortgage today, probably best case scenario, maybe 6.5%, 7% like that's if I have, you know, a perfect credit score and all the other factors lined up nicely. Uh, but chances are it's probably north of 7%. So it's it's really difficult for people to move. And that's kind of what's, what's making this an unusual market for real estate.

Speaker3:
Yeah. Well it makes sense, right. If you're especially you look at middle class and below middle class, if you're already tight on your finances, you know, why would you why would you move to give up more money for interest? You're not going to get a better home. You know, one of the things that that I also look at is, um, right now, you and I were just talking about this, but right now, let me pull this up right now. Um, one of the things that we're seeing is people that have moved. So you and I, oftentimes we have clients that come in and they go, hey, one of our goals, right, when we retire is we want to downsize. And I tell people, I go, hey, are you downsizing to save money? Or are you downsizing just because you want a smaller place? And I can't tell you how often people tell me they're downsizing because they want to reduce their cost. And I tell them, you're not going to reduce your cost based on the numbers that I'm seeing. And they'll go from a four bedroom house to a two bedroom townhome in between the HOA and the higher interest rates, they're spending the same amount and more. And what's what's interesting about it is a handful of them didn't believe me.

Speaker3:
And they get there and they go, hey, if I would have known this, I would have stayed in the bigger house. Yeah, yeah. So, you know, one of the things that, you know, that you and I, the group of people that we serve, are in and nearing retirement. So one of the things I'd encourage you to do is before you make an assumption that downsizing or rightsizing is going to reduce, you know, your your cost. I would have all the numbers, you know, I would have everything written out. I would look at the rate that you have versus the rates that you would have. You know, if you're paying cash, you know, I don't know how people do it. But we find that people will move into a beautiful, brand new townhome. And over the first three years, their HOA goes up 20%, 30%, 40%. So one of the things to look at is some of those associations. I know from conversations with clients that I've had, some of them have bylaws where they can't go out more than a certain percent each year. So those are just some of the things that I would consider from experience of working with some of the families that we serve.

Speaker4:
Yeah, I think we could probably fill a whole podcast episode just by talking about downsizing going awry. Um, it just it seems like a great idea, but there's so many factors that go into that. Uh, one thing that I found was interesting, uh, the Case-Shiller index, it actually, uh, it's like the leading measure of US residential real estate prices. So it tracks like the changes in valued residential real estate nationally. Uh, but what it shows is that prices have actually increased by 46% from January 20th 20 to 2024, and it's actually requiring first time homebuyers. They need to make twice as much as they did four years ago to afford a home, which is crazy, you know? So affordability, obviously that's a factor as well. Um, you know, so something to consider. I know that for many of our clients, obviously you're not a first time home buyer. And a lot of these, um, you know, really affect first time homebuyers that are looking for their, their initial home purchase. Um, you know, but for us, when it comes to downsizing, a lot of the same things apply to.

Speaker3:
Well and alongside that. So a lot of you have heard of Redfin before. So in March, uh, one of the things that they said is they said that you would have to make twice as much money to afford the same house as you did four years ago. Yeah, think about that. Especially people coming out of college, people that, uh, maybe that you're just starting a family. And now to buy the same home that your older sibling bought four years ago, you have to make twice as much to afford that house for it to make sense. So one of the things that, you know, that basically that article was saying is that in order for things to get back in order, we're going to have to have a recession. And if you look at where inflation is, you look at interest rates, it feels like it's around the corner.

Speaker4:
Yeah. Which is interesting. Right? Nobody wants a recession. But if you're talking in terms of home affordability, a recession might be what it takes today to get those prices down.

Speaker3:
Yeah, absolutely. And you know, we're I think we're coming into not knowing. So we know that as of right now, Trump's tax plan sunsets in 2025. We don't know if we're going to have a Kamala Harris president. We don't know if we're going to have a Donald Trump. And normally, you know, we're not looking at such extremes. But the reason I say that is, is depending upon, you know, what happens. I don't think it's if we have a recession, but it's when is it sooner or is it later? And, you know, in my opinion, when I look at this, it's almost would be healthier if we had it sooner than having it delayed by printing more money. Any thoughts on that?

Speaker4:
Yeah, definitely. You know, of course, you know, it's a it's common to talk about kicking the can down the road and delaying the inevitable. And sometimes maybe it's better to bite the bullet. Now, I don't know if there is a, you know, the possibility of a softer landing and that would be best case scenario. But yeah, it might be something that's inevitable. And maybe it's better to, to just, uh, to realize that that's coming anyways and, uh, just prepare for that. And for a lot of us, you know, when it comes to preparing for that, you know, we work with retirees. We're talking about preparing in terms of income, drawing from the correct places, um, making sure that your portfolio is set up in a way that you can weather that type of storm. So, you know, everybody, for the most part, if if the fed comes out, you know, during one of those eight meetings and they say that they're going to lower rates, probably that's going to have a positive impact on the market. Um, in fact, I think that, uh, stocks went up by about 2%, most recently whenever, um, the fed indicated that that we're going to, to, to to have, um, I think two cuts for this year. But what it did also is it pushed, uh, yields on the ten year Treasury down by about 25 basis points.

Speaker4:
So, you know, depending on how you've structured your plan, uh, in terms of income, you know, if you're relying on a lot of the rates that you see today in the money market funds, um, CDs or maybe various interest bearing investments or instruments, uh, that could really affect you. You know, I know everybody has a different plan for income and retirement. Trey mentioned that a lot of people, I think 50% rely on Social Security. Maybe you have pension income or maybe you've created your own pension, um, through the use of annuities. But some people, uh, for them, it's mostly just interest bearing investments. Uh, maybe maybe they're relying on dividends, right. Or or other forms of interest to fund their retirement. And that can really have an effect on on a portion of your income. Um, so, you know, if you're a saver, you don't necessarily want rates to come down because for the first time in a very long time, you're actually getting a decent rate of return. So of course it could affect a lot of people in retirement, especially as people in retirement tend to be more conservative and maybe they're more attracted to, you know, having a substantial amount of their income in treasuries or a money market fund.

Speaker3:
Yeah. Well, and they just interviewed 100 economists July 17th to the 23rd.

Speaker4:
I mentioned that a little bit, uh, in the beginning of the podcast too. So sorry to jump ahead on you.

Speaker3:
No, no, I'm glad you did. But I just want to hit on it. And, you know, 80% of them said they think that rates are likely to be in that 5% to 5.25. And I know you touched on it, but one of the things I've learned is repetition can be good. Yeah. And so the reason I say that is, you know, one of the things that even my younger brother, you know, he's 29 years old and he's like, do I buy a house? Do I keep renting? And, you know, one of the things that I look at historically is even when rates are high, buying a home pays off. You know, one of the challenges is most people aren't disciplined enough that if they're still renting to put the money away or invest. And so one of the things I like about home ownership is it forces younger people to invest in something that over time, obviously is going to accumulate. So it'll be interesting. But I did tell him, I said it may be worth waiting till the end of the year, even though my, uh, typical opinion would be just buy now and you can always, you know, you can always readjust your mortgage rate in the future. Um, okay, let's keep moving. So what are some of the other mistakes or things that we see coming with interest rates?

Speaker4:
Um, I don't know if there's a whole lot of mistakes, but one thing that I that I read recently too, is even if rates come down, uh, there's a lot of speculation that they may not necessarily come down on mortgage rates. Um, so depending on, you know, and we see this too, where sometimes, you know, whether we're dealing with insurance companies on the annuity side of things. Um, sometimes they adjust the rates, they adjust their caps, their spreads, their indexing strategies, or maybe the bonus that they offer or just how interest is calculated. And they do it before we've even seen a change, right before the before any, any big announcement is made. Um, they're trying to make projections. They're trying to be ahead of the curve. Right. If interest rates are going to go down and those investments are heavily depend on interest rates to stay high in order for them to perform, uh, sometimes these companies act preemptively, and they lower rates and make their products potentially less attractive. So looking at that, I think that might be one of the things to to be aware of, especially if you rely on that type of income in retirement.

Speaker3:
Yeah, absolutely. Uh, all right. So we had a caller listener call out, so I want to read this thing. This can be helpful. So higher than normal interest rates can lead to better rates of return and features offered by fixed index annuities. If you are looking for another reliable stream of income, one of the things that we look at today is the rates on safe money accounts. So somebody asked recently, hey, actually somebody came in yesterday saying they had, uh, gotten this series of 30 questions to run by your financial advisor. Yeah. And, uh, it was so funny because as I went through the questions, I was like, man, this question is them wanting you to ask to sell you this product. This question is wanting them, you to ask this to sell you this product. And the questions were not focused on how to help the client, but how the advisor could have an open door to selling different products. You know, that being said, one of the things that we do believe in is that you should have different income sources, you know, whether that's a pension or whether that's a self pension that you've created, because maybe you didn't have a pension through work, whether that's the stock market, whether that's knowing if stocks fall, do we have enough money in CDs, bonds, T-bills, annuities. But one of the things that you and I are seeing for the first time in our careers, so I've been in the financial world since 2000, January of 2012, so 12 years. And for the first time, one of the things that we're seeing is that because rates are high, we run into all these families that have purchased an annuity, whether it's a fixed index annuity or a variable annuity.

Speaker3:
And these contracts are designed to give people more guaranteed income in retirement. And one of the things that you and I have found is that the name of the game in retirement isn't just have assets, but it's to have good guaranteed income. And so one of the things that we found over the last 18 months, maybe even 24 months, is that probably over half, maybe 70% of the annuities that we've reviewed that are at least three years old? When you purchased that product, that company was giving you the highest payment they could based on interest rates. But because insurance companies, when they purchase or go invest in money for you to purchase that annuity, they're buying in and locking that money in and do a ten year investment based on what rates are doing at that time. And so one of the things that we've been seeing is we've had dozens of families that are reviewing their variable annuities. We don't sell those, but we've often replaced those. They're no fee or low fee fixed index annuities. And we're seeing people increase their income by 5%, 10%, and even up to I think we've had a few people that have increased their income by 30 some percent because rates are better. So one of the things that I, I don't want to miss on this call, because it could be helpful for so many people, is if you have not had a second opinion on if the annuity you bought is still a good fit for you, or if it's still maximizing your dollars, now's a great time to review. Who's going to give me the most amount of money for this chunk of money? You know, say, what do you want to add to that conversation?

Speaker4:
Yeah. It's interesting. On variable annuities. Um, I'm not a big fan. I'm not even going to pretend. Um, and a lot of times when I describe some of the reasons why I don't like variable annuities, especially in a class setting, um, some of the feedback I get is, well, who in their right mind would have one of those? And sure enough, like sometimes the person who's saying that ends up having a variable annuity. Um, and the problem is it wasn't necessarily explained the way I'm explaining it. Right. I'm actually drawing some attention and trying to focus on some of the reasons why I would I, you know, maybe wouldn't want a variable annuity, but problems that are inherent within all variable annuities. Those are the things that I'm highlighting. And here's the challenge. Like you didn't necessarily buy it for income, but if you did buy it for income and you bought it during a time when interest rates were potentially low, sometimes the underlying investment, the thing that's actually used to support the annuity that determines the rate of return over the term of that contract, um, if you bought it when interest rates were incredibly low, right, like, let's say through March of 2020 to March of 2022, when they were basically at zero, if that's when you bought it, your annuity doesn't really have a chance to perform. And if you bought it for income, it's not a bad thing to consider replacing it. Sometimes, you know, we're we're loyal to, you know, maybe whoever helped us get into that product. Uh, sometimes, you know, it just, you know, making changes doesn't seem like, you know, not everybody's excited to do that.

Speaker4:
It's, uh. It's a process, right? It's a process. And the fear of maybe making another mistake. Especially if you think maybe you made a mistake to begin with. But today, whenever you give your money to an annuity company, they take that money and they invest in, you know, long term treasuries, potentially, maybe a ten year treasury, long term investments. And the rates that the insurance company is able to get is passed down to the consumer by way of spreads, caps, participation rates. And those are much stronger than they've been in a very, very, very long time. Right. Because rates are much higher. Uh, so if you can get more income, if you can get more guaranteed income, especially like immediately, we find that sometimes like somebody's been in a product, they've been letting it cook for five, 6 or 7 years. And just by making a change today in this environment, they can get more income immediately on day one. So we're looking at opportunities like that. Every time we assess an annuity, we're looking at it from every angle. Not everybody's looking to get an income stream. Annuities aren't uh, you know, initially they were designed for an income stream. You give an insurance company a chunk of money, and in exchange, they guarantee you income for life. Not all annuities are designed that way anymore. They're not there for that purpose alone. So making sure that you can have somebody who can assess what you have and compare it to what's available in the market today is really important.

Speaker3:
Yeah, absolutely. Well, I'll add this. You know, right now, one of the questions that we get a lot is, Trey, I bought this annuity. Do I still need it? So I recently met with a couple that they had them they had they had a good nest egg that about $3 million that they had saved for retirement between the IRAs and the 401 K and then the Roth accounts. And then they had a joint account and they had $1 million in a variable annuity, and they purchased it, you know, like 15 years ago, because their advisor had anticipated that in retirement they would need income, which probably at the time made a lot of sense. Well, they ended up saving a lot more than they thought because they made more money than they thought, and they ended up retiring with no debt. They've been retired for, I think he'd been retired for, uh, five years. She'd been retired for seven years. And one of the things that I showed them is that they were paying fees of 3.5% that were designed to give them income. It was like of an extra like $60,000 a year. And the thing that I pointed out is not only do they not need that income, but they haven't been using that income. So they're paying high fees for a rider that they no longer need.

Speaker3:
I just want to throw this out here. Out there is if you have an annuity, you should get a second opinion if it's been more than three years. Is this still a good fit for us and is this still the best product? One of the questions someone asked me the other day is they said, hey, uh, I don't think the product I'm in is one of the best, but I'm only four years in and it's a ten year commitment. And one of the things that you and I showed them was a way to get out without losing money, where they actually came out ahead. So I won't I won't get into the solution. But if you're listening today and you own any type of an annuity and it's more than three years old and you have not had a second opinion on it, you may be overpaying in fees or having your money invested in something that could be moved without a loss to something better. So I want to encourage you, if you have one, reach out to us. We'd love to do a complimentary appointment to say, do I still have my money in the right place? Am I still maximizing and stewarding the funds that I've worked so hard for the best that I can?

Speaker4:
The last thing I want to say on this a couple of years ago, if somebody had an annuity that was maybe sold inappropriately, or maybe for the wrong reasons, uh, we basically kind of had to look at the product and say, well, what are some of the other features? Like, you're not going to get performance. Okay. What's the income benefit? All right. Maybe the income benefit isn't great. Does it have a death benefit okay. Maybe the death benefit isn't all that great. Are there any long term care provisions? Right. So we're exploring all the different features. And really you didn't buy it for the death benefit. You didn't buy it for the long term care. Maybe you didn't buy it for the income features, but you just simply wanted to have accumulation and it's not performing. So you almost have to look at it and say, hey, well, you know what? Let's let's find the silver lining. Let's see if there's any redeeming qualities here. You know, you're stuck with basically, you know, mutual funds that are kind of wrapped in life insurance. You know, you're stuck with a death benefit. That's your only silver lining here today. It's not that we're taking credit for this today because of the interest rate environment. It's actually giving people a way to get out of something that maybe was, as I mentioned, inappropriately sold or maybe just not the best fit for them at the time. Interest rates have really created this opportunity and I would say if you have something, get it reviewed. You don't necessarily need to make a change, but look at all the available options to see if it makes sense to make one.

Speaker3:
Yeah, no. That's great. All right. Let's talk about the ten year rule. So the IRS mandates that most IRAs. So pre-tax accounts while there was a 401 K 403 b tsp Sep IRA Solo 401. Once those get rolled over and two what we call a rollover IRA or a traditional IRA that IRA once that goes to your beneficiaries those account, that account excuse me has to be empty within ten years. So there used to be something called the stretch IRA. What was the stretch IRA that meant if your kids yellow, say, or my kids received our retirement assets, they could stretch out that IRA over their lifetime, which I believe was somewhere right around 27 years. So what was nice about that is our beneficiaries had basically, by the time we passed the rest of their life to take money out as they needed, and they didn't have to pay taxes until they needed it. One of the things the government noticed is that they were having to delay taking any of this money. And if you think about it from their standpoint, they've allowed you and I and all of our listeners to put money into a 401 K, a 403 b, a tsp an IRA, right those dollars off in hopes that once that those dollars have accumulated, that they can now have a piece of the action. Well, what ended up happening is these people would pass their accounts down to their kids. And now these IRAs are 30, 40, 50, 60, 70 years old and the government hasn't been paid yet. So what they did is instead of doing the stretch IRA, they eliminated it and they put a time clock of only ten years on that. And what that means is that now you're required to take money out of that account, and it has to be emptied within ten years. What are some of the tax implications to the beneficiary?

Speaker4:
So the stretch IRA would actually, as you mentioned, what made it the stretch IRA as well is your children. So let's say you pass it on to your son or your daughter, but your son or daughter doesn't need the money, at least back in the day, let's say that they were still maybe they're at the height of their career, they're earning well and they don't want the IRA. They actually could sign a nine month waiver passing it on to their son or daughter. Your grandchild. Right. And that's what allowed it to be considered a multi-generational IRA or a stretch IRA. So when they eliminated that, one of the biggest things that that actually, I want to point out is this is on a non-spousal beneficiary. Because if you're a spouse, right, if you pass away, chances are you're not going to pass away together at the same time. So the first person to inherit your account is your spouse. And your spouse actually has a couple of options. Your spouse can inherit the account as an inherited IRA, and the reason why they might want to do that is if they haven't attained the age of 59.5, and most IRAs and most pre-tax accounts like an IRA or 401 K, if you take distributions prior to 59.5, there is a 10% penalty.

Speaker4:
The one exception is if it's an inherited IRA. So some spouses may want to have the availability of those funds. They want to be able to take distributions so they keep it as an inherited IRA. However, if you're over the age of 59, or maybe that's a that's irrelevant for you. You can just move it to your own IRA. There's a spousal there's automatic spousal IRA rollover. So if your spouse passes away, you can just combine those assets with your IRA as if it has always been your traditional IRA. So apart from that, it's really when the second one of you goes that you have to deal with the ten year rule When both of you pass away, eventually you're going to you're you're non-spousal beneficiaries are going to inherit that account. And that's where they have to deplete that account within ten years. And it's true on traditional IRAs, it's true on Roth IRAs. The tax implications are different. But both of those vehicles, they have to be depleted within ten years. So when this rule first came out, there wasn't a lot of clarity on how that needed to happen. Uh, and they've since clarified a lot of those things and have added some more rules to to help make it a little bit more complicated for all of us.

Speaker4:
But one of those rules is, uh, so if the person who owned the IRA, if that person has reached their required beginning date, in other words, that person has already started taking their RMDs, then the non-spousal beneficiary who inherits the account must also add a minimum continue taking RMDs. Uh, it's based on a different life expectancy table based on that person's, uh, date of birth. But that person needs to maintain those RMDs. In other words, the federal government doesn't want to lose out on revenue just because somebody inherited that account. And then within the 10th year, that account needs to be fully depleted on the 10th anniversary of that person's, uh, date of death, if you will. So that's when that account needs to be fully depleted. However, if the the the person who initially owned the account has not reached their required beginning date, then the inherent, then the person who inherits the the account does not need to take RMDs on any schedule. The account still needs to be depleted within ten years, but they can do it at their own discretion.

Speaker3:
Yeah. Good. Well, let's talk about how we can actually solve some of that IRA problem. So one of the ways to solve that, or at least solve a potential of it, a portion of it, a percentage of it is to plan an advance through something that we call the Roth conversion. Now, you say you and I know this, but if you went to ten workshops on retirement planning, probably the number one thing you're going to hear about at all ten is tax strategy. Because people in and nearing retirement are realizing that they've spent four decades, probably 3 or 4 decades, saving us as much as they can, hoping that money grows. And now their job is to protect that money that they save from the government. And so one of the ways to do that is something called a Roth conversion. Now, one of the things I want to state is, well, we're going to give out some good advice. Please don't run out and execute tax advice without having a CPA look it over. Yellow is not a CPA. I'm not a CPA. We work very closely with tax strategists, but you need a tax strategist to give a stamp of approval before you execute anything. Because we see a lot of mistakes from people that are trying to implement things that are good ideas, but maybe not a fit for them.

Speaker3:
So let me tell you what a Roth conversion is, and then let me tell you about who it's a good fit for and who it's not a good fit for. So what is a Roth conversion? There are two ways to add to a Roth account, and many of you have probably, uh, used one of them. So the first way to add money to a Roth is through a typical contribution. And let's say you can correct me, but I think right now the contribution in 2024 is like 7000 or 7500 with $1,000 catch up. Does that sound right? Yeah. And, uh, so, you know, basically, you can take money from checking savings, money that's already been taxed, added to your Roth account, where it would sit for a minimum of five years, depending on your age. And then once you pull that money out, not only are your annual contributions, but the growth are also tax free. Well, the second way to add to a Roth is through something called a Roth conversion. And that's actually where you take money out of your IRA, the pre-tax account, you pay taxes on it, and then you add it to the Roth.

Speaker3:
And the nice thing about a Roth conversion is that there's no limits to that conversion. Now, there are amounts that make sense, and there are amounts that are more than you should do. But as you pull money from an IRA to a Roth, which typically would start in retirement or once your income drops. Or maybe you have low sales and you're a business owner. But once you move money from the IRA to a Roth, now that money grows tax free for the rest of your life. And if you have a good strategy where you do this over three years, five years, seven years, typically from the day you retire until that age, 73 or 75, depending on your birth date, we're now able to reduce those required minimum distributions so that you don't have a mountain of taxes down the road, hopefully keeping you in a tax bracket that is lower than it would have been had we not done the conversion in the first place. We typically call that a tax bucket management or bracket management. Um, before I go into RMDs and how those work more in detail, anything you want to mention on the Roth conversion?

Speaker4:
Yeah. So the conversion, it's it's really it's an important way. It's it's important to know how those function. Because a lot of times the, the feedback we have is, well, I can't make contributions because I make too much money. Not only are contributions limited, as Trey said, to $7,000 with an additional $1,000 catch up provision. But if your income as a single person is above $161,000 and $240,000, if you're married. You actually can't meet contributions. You make too much, so conversions may be the only way to do that. And Trey, you mentioned like what are the opportunities? Like how do I find the opportunity for conversion? My income is too high. Right. Well, your income isn't necessarily high in every year, sometimes in the earlier years of retirement before both of you turn on your Social Security, if you're married or maybe your pension income, that might be the opportunity to do a Roth conversion. Trey, I think you mentioned if you're a business owner and your sales might be unusually low in a specific year, or maybe you have a lot of deductions that you're able to take advantage of. Um, you know, not only as a business owner, but maybe itemize deductions, even if you're not a business owner. Um, if you have high non-recurring medical bills, a lot of our clients that are approaching the age where those medical bills sometimes tend to accumulate, right? If those exceed 7.5% of your adjusted gross income, they can be added to your itemized deductions, and you might have one year where your itemized deductions actually exceed the standard deduction.

Speaker4:
And that might be your opportunity for a Roth conversion. Uh, the last thing I'll say and then we'll switch gears is, uh, I've mentioned this example before. It's a fantastic example. Uh, we had someone who came in, they gave about $10,000 to charity. They gave it every single year for, you know, since as long as they can remember, their intention was to continue giving $10,000 a year to charity. What we did is we moved $100,000 into a donor advised fund. From that fund, the client continues to give $10,000 a year to charity. The nice thing, though, is instead of getting a $10,000 itemized charitable contribution, they get to deduct $100,000 from their taxable income. The reason why they did that is because this client also did $100,000 Roth conversion. They converted the income. They introduced the income by converting and then the offset it with the donor advised fund contribution. So there's all types of all different types of strategies that may be effective, that may be suitable for you. Obviously everybody's situation is different. Not everybody gives charitably I understand that. And that's why we have a few additional examples and opportunities for those conversions. They're not for right for everyone, but there might be some great opportunities within your plan to do that.

Speaker3:
Well, in fact, we've actually met with a handful of couples or individuals whose advisor had them doing Roth conversions. And when we did it, and they shouldn't have been. Yeah. Thanks for taking the punch line. No, but they should have been. So the other thing, too, is there are strategies that are good strategies for a group of people, but you're implementing them and they actually don't benefit you. What's an example of those that RMDs excuse me, that Roth conversions are not going to benefit if you're expenses are at an amount where you need to draw down the equivalent, the same amount or more than the RMD. A Roth conversion would likely not make sense for you because you're going to need those dollars. It's typically for people that have more pre-tax dollars than they do monthly expenses over that year. And so one of the things I would say is make sure you're not executing something just to do something. I think, Yellen said. We both met with people that sometimes they do something just because they feel good about it and they actually which this is rare, but they would have been better not having done something obviously more of the time. We run into people that should be doing something that, you know, they don't, and they think doing nothing is better than doing something because they fear change. But we do run into people that are doing this and they shouldn't be. So go ahead.

Speaker4:
What percentage of of people do you think? Obviously this is anecdotal, but what percentage of people do you think actually should do or at some point should execute a Roth conversion. I know, I would know.

Speaker3:
I mean, I would say it depends. Right. So here's here's a better way of saying it. If you're able to live off your guaranteed income, Social Security and pensions, it's almost certain if you have a larger 401 K, what's a larger 401k and you're living off all guaranteed income sources and you have a nest egg that's a million or more, then you for sure probably have an RMD problem. When I say for sure, you should double check, it's likely. Now we also run into people that they have 300,000 in a 401 K, but they're they're going to live off checking savings in that joint account that they inherited or from the sale of a building forever. And they have an RMD problem. So I don't think it's based on an asset level. I would say it's based on are your expenses in retirement greater than your guaranteed income sources? And if they are, if they're not, excuse me. Then it's likely you have an RMD problem. Or if you're drawing down less than a certain percentage of the assets, maybe if you're drawing less than 4% of your pre-tax account, then you likely have an RMD problem. Do you have a better way to say it than that?

Speaker4:
No, that's a great way to say it. The only reason I brought it up that way is, uh, I feel like a number of people have said, hey, we've attended a seminar or a class on this topic, and and they made it seem like everybody needs to be doing this, like, what am I missing out on? Um, gosh, I don't know what the percentage is, but like, if I had to guess, I don't know, maybe 20 or 25% of people probably need to seriously give Roth conversions a look. Maybe that's even a little high. Uh, yeah. And the example that you gave. Yeah, I mean that that's a good reason to do a Roth conversion sometimes. Um, the people who want to do Roth conversions aren't necessarily doing them for their own benefit. They're doing it for their beneficiaries benefit, for sure. We talked about the ten year rule, even though a Roth IRA also needs to be depleted within ten years if you're a non-spousal beneficiary. Um, at least there's no tax implication for your beneficiary. They're not introducing taxable income when they do it. And that could be important. Right. Sometimes it's it's a priority to leave behind assets for your children or other beneficiaries. And you may not necessarily want them to be forced to introduce taxable income. So that could be a reason to that's a little bit outside of maybe what, you know, a spreadsheet would show for the immediate or potential benefit for you personally.

Speaker3:
Yeah. Couple other small things kind of as we start wrapping things up, one of the questions I get a lot is, hey, how would I know if I have an orphan 401 K? Trey, you mentioned some people have an old 401 K or a 403 B, and if I haven't gotten a statement in a long time, how would I find that? So if you may have an orphan 401 K and you want to discover if it's still out there, or maybe if you rolled it over and just forgot about it. Uh, the National Registry of Unclaimed Retirement Benefits and the National Association of Unclaimed Property Administrators can help you find any 401 that may be missing. And it is interesting because, you know, every year there's a couple of people that we run into. They go, hey, uh, we just got a letter from Social Security, or we just got a letter saying that there's a 401 K of 30,000 or 80,000 that we forgot about. Well, how nice is it when you find funds that you've forgotten about? Uh, that hasn't happened to me yet. Yeah. I don't know if that's happened to you. I typically know where my money is, but, uh, there's a lot of people that, you know, if you think over a 40 year career, a lot of times they do have what we call an orphan 401 K, and that's a way to find it. Uh, as people prepare for retirement, I just want to say a couple other things. One of the things that I would really encourage is, you know, yellow, say, between you and I, we teach, you know, like 60 financial classes a year. That's between our Social Security and Medicare class, our minimizing taxes class, our estate planning class, retirement planning A to Z.

Speaker3:
And one of the things that we see often is people will say, hey, I want to get a second opinion, but I'm not retiring for three years or five years or seven years, and they wait until they're six months or a year out from retirement. And one of the mistakes I think we see people make is they think there's nothing I need to do until that year before I retire. And if you and I had a perfect world, we'd be meeting with people three years, five years, seven years and ten years before retirement so that we could one, help them make sure that they have a plan. Number two, make sure that their investments are in what we would call efficient portfolios. And then number three, make sure that they are thinking about all of the things that they don't even know what to ask. So one of the things that our business coach, Keith Kraft, always says is who helps you think better about the things you're already thinking about. And most people don't have anybody. And that's part of why you and I love. And we're passionate about retirement planning because most people are doing it alone. Or if they have somebody, they have somebody that prepares taxes, not somebody that does tax strategy. They have a financial advisor that grows assets but doesn't specialize in retirement planning. And so one of the things I just encourage you, if you're listening and you haven't put together a retirement plan and you're within 3 to 7 years of retirement, don't wait until you're six months out, because there may be some course correction that over the next five years, could significantly impact how your investments grow and where the money is to maximize everything you've worked so hard for.

Speaker4:
I 100% agree with that. It's not that you need to put together a plan five years ago, five years before retirement, and you have to absolutely stick to that plan. What it does is it creates the conversation, it starts the conversation. And that's where you know, you're having conversations on these topics. And it's as you mentioned, you will probably have to course correct, but at least it's not your first time like looking into it. Right? You've already talked about Social Security. You've talked about the impact of this specific retirement date. And if life throws you a curve ball, at least you may be considered some of the other implications, and you're able to make those adjustments without having to panic. A lot of times people are like looking to make a decision and they're like a week away from retirement. And or maybe they're panicking because all of a sudden there's a financial emergency and they need to start drawing from an account that isn't set up in a way where it's it's a good idea to draw from that account today, right? Depending on what's happening in the market. So we want to make sure that, like, you know, the people who end up successfully retiring, I think are people who've had these conversations, who have started to look into it 3 to 5 years before actually retiring. Yeah.

Speaker3:
No, that's really well said. All right. Let me hit on some of the things, uh, what I would call for money moves that you will regret in ten years. I'm going to hit on these fast. Ready? Number one. Not saving enough for retirement. One of the things that you and I talked about all the time, you always say, is never give up free money. So we run into people so often that either they or maybe their spouse that has a lower earnings per year, they have a company that gives a 3 or 4 or 5 or 6% match, and one of them's not contributing. And I tell them all the time, at least contribute to the match, because otherwise you're giving up literally free money. And one of the rules of money is never give up free money. Not only are you giving up the free money, but you're giving up the compounding interest of that money, and it's very unlikely that you're going to miss 3 to 6% of your assets. Easy to adjust to that. Number two, and I'll let you hit the last two. But number two is overspending on housing. You know, one of the things that I just read, I just read this and I wish I had the the article that it said that one of the things that millionaires do well is they spend a smaller percentage of their take home pay on housing.

Speaker3:
So one of the mistakes that we see people make, especially people that struggle financially, is they have a large percentage of their take home pay tied up in either real estate or in car payments or credit card debt, especially those three things, because even if you get really good at managing your money, but you've got 40% of it going to your house and 25% of it going to two car payments, now you've got 65% of your take home pay going to your house and vehicles. And we haven't even talked about groceries, gas, insurance, all of those things. So one of the things that a lot of wealthy people do is they do a good job of not overcommitting their monthly dollars to things that they can't back out of or get out of. So I'm a big advocate. There's two ways to grow your assets. One is to focus on budgeting. And number two is just to focus on making more money. I actually prefer to make, uh, I like spending my energy on making more money. Um, but, you know, that's assuming that somebody has already walked in wisdom for not overspending on big things.

Speaker3:
You know, I don't know, for you, you always say before you go into number three and four. But one of the big mistakes we see people make, and it's really unfortunate, but they think that they've earned that brand new truck or that brand new vehicle. And literally right before retirement, they'll go buy a new car and they'll walk away with a car payment of $800 a month. And they've spent years without a car payment, or maybe something more reasonable, like 2 or 300 a month. And now they go to retire and they lose their income, uh, and lose, meaning they retire. And now they got to draw more in retirement, you know, 500 extra dollars per month from retirement means with taxes, they're going to pull an extra $9,000 a year, And they don't realize that over time. For some people, that's a retirement killer, meaning that they have to go back to work or they have to not take those vacations they wanted to take. So, uh, two big things. One, make sure you're saving enough for retirement. Number two, make sure you're not overspending, especially on big commitments like housing and vehicles.

Speaker4:
Uh, so the last two, uh, not having an emergency fund, um, gosh, we see this a lot. Uh, people don't have adequate liquidity. Uh, it's a really big deal, especially if you have an emergency that comes up. Like, the worst thing that could happen is if you're put in a position where you have to rely on credit card debt. And that's where a lot of people are left with. If they don't have an emergency fund, if they can't readily access the funds or the assets that they have because of, you know, depending on the investment vehicle and they're forced to take out more credit card debt. We know that credit card debt is at an all time high, revolving credit card debt all time high. And the average rate is north of 20%, right. So if you're getting credit card debt to help with those financial emergencies, what it ends up doing is it puts you in a position where you can't get out of it because you end up, uh, for, uh, this isn't true across the board, but a lot of times what we find is, you know, somebody initially introduces some credit card debt, and it isn't long before they have 2 or 3 credit cards that are all maxed out and they're in a position where they can't get out of it because the interest rate is so high that they're just barely making making enough to pay off the interest payments in some cases. So making sure that you have an emergency fund to deal with, some of those things that life might throw your way. Um, and then also don't ignore the high interest debt. Like prioritize that debt. Pay that debt down first if you have high interest loans. Uh, start considering making those payments, uh, prioritizing those payments specifically.

Speaker3:
Oh, that's a good example. Oh. Go ahead.

Speaker4:
Oh. Go ahead. Give us an example. Yeah.

Speaker3:
Well, I ran into a couple the other day and they were making double payments on their vehicle. And I said, what are the what's the interest rate on your vehicle? And, you know, they'd owned it for three years, but I think they did like a 6 or 7 year loan, which that's another topic. I typically wouldn't recommend anything over 60 months if you're borrowing money. And I'm not a fan of borrowing, you know, more than half. I like to put down half and then pay the rest off. But I know you, you do one payment. Clsa which is great too. But um, here they're making double payments on their vehicle, which we found out they didn't even know it had a 2.9% interest rate. While they had credit cards that were making the minimum payment that had like a 23% interest rate. And I was like, man, I was like, here you are knocking out a loan that's almost free money. And obviously it's not free, but it's almost free. And then the the credit cards that are at, you know, if you think, what is that eight times, almost eight times the rate they're making the minimum payment. So I know if you're listening, it sounds really simple. But, you know, one of the things we see is sometimes people make silly mistakes just because they're not getting a second opinion or having somebody review that. So one of the things that it's not necessarily a part of what we do, but we love to do this complimentary is if you're nearing retirement, and one of the things that's making you nervous is your debt, and you don't have a way to pay that down or a good strategy, come see Larry. We'd love to put together a strategy for you that makes sense, that actually builds momentum so that you get satisfaction while you knock out your debt and you pay things off in a specific order. Uh, Dave Ramsey calls it the snowball effect. And we can talk about how that could impact or help you. Uh, yeah. Let's say anything else that you want to say as we wrap up.

Speaker4:
One more quick example, and it's only because we've heard this one a few times. Um, you know, I'm just going to take a huge chunk out of my 401 K and pay off my mortgage right before retirement. Yeah. Um, gosh, you know, if especially when you're, you know, paying 2 or 3% for your, your interest rate on your mortgage, and if you take that 401 K distribution, we we had somebody I think it was a couple of years ago, they took 100 grand out of their 401 K to do that. And that 100,000, they were already in the 22% tax bracket. So now you had $100,000 between federal and state taxes. They're losing $0.30 on the dollar to make the 401 K distribution, so they could pay off a two and a half or 3% mortgage. Um, there's just another critical mistake where if you have somebody who's looking out for your best interest like that stuff is is the low hanging fruit, that's advice that anybody can, could give you to make sure that you avoid a pitfall like that.

Speaker3:
Yeah. So good. Well, I'll I'll end with this. Uh, if you've never had a second opinion on what I call your spend down plan, or maybe you've never had a first opinion. Yellows or I would love to sit down with you. We'd love to put together an analysis. Your first appointment would be what we call a discovery, which is gathering your projected retirement date. If you haven't retired your current living expenses, your social security income, pension income if you have it, laying out any debts that you have and putting together a spend down plan of where should you pull money from and in what order. It's so often we see people that, you know, they've got all these different investments and buckets of money, but they don't know where to pull from. And when their advisor tells them they're going to be okay, so they just start pulling from where it's the easiest man. One of the biggest mistakes you can make is not have a tax strategy. And that's something we can help you with. And I think what's nice you always say is, you know, I don't know the numbers, but exactly. But I would guess 80 some percent of the time that we do a tax analysis for people, there are things that they're missing or not taking advantage of, which means that 20% of the time or one out of five times, we're just confirming that you're already doing the right things. And sometimes there's a value in just knowing that you're not making mistakes. Um, so we'd be happy to help with that, too. Uh, thank you for listening to episode number 21. Yelena and I are really excited about the future of all things financial and creating a content of library or a library of content. If I can do this, anybody can do this. But creating a library of content so that whatever topic you have related to retirement planning, we can point you to an episode that hopefully would add value to you and all that you're working towards in retirement. Yeah. Let's say anything you want to close with.

Speaker4:
Yeah, this this podcast has been a tremendous success. We managed to avoid politics.

Speaker3:
So the next episode all on politics. Now we're getting have a great day. You can find everyone. Yeah. So you can find it. You could find us anywhere on YouTube, anywhere. There's a podcast search, all things financial. Have a great day.

Speaker2:
Thanks for listening to all things financial. You deserve to work with retirement planning specialists who care about your money, and take a unique approach to your financial and retirement needs. Visit all things financial.com and set an appointment today.

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