Taxes in Retirement: What You Need to Know

Episode 1: Audio automatically transcribed by Sonix

Episode 1: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Producer:
Welcome to All Things Financial, the show that upgrades your financial knowledge and helps you make smart and informed decisions with your hard-earned money. Trey Peterson and Yelisey Kuts are wealth advisors and financial educators here to provide you with practical tips and solid strategies when it comes to managing your money. And now, here are your hosts, Trey Peterson and Yelisey Kuts.

Trey Peterson:
Welcome to All Things Financial podcast. I'm Trey Peterson and my business partner, Yelisey Kuts, and we're so excited for this podcast because one of the things that we're really passionate about is helping people win with money and retire once and retire well, so today we're going to cover two big topics. We're going to cover taxes and retirement and Social Security. Yelisey. Say what do you want to start off with?

Yelisey Kuts:
Well, I think maybe just, uh, a little bit of background. You know, you and I have talked about starting a podcast like this for a long time. Uh, you know, we've been kicking ourselves that it's taken this long. But part of that is we want to be able to create a product or create, uh, information and content that is, is something that maybe people don't get readily in other places. And, and we really want to put a lot of intention behind this. We want to make sure that we're giving people good information. And as you know, like we're we're both passionate about saving people money in retirement, helping people come up with good solutions that matches their intentions and what they want in retirement. So, um, I think this is awesome for us to kind of bring what we do on a daily basis in front of our clients and make it available for anyone who's interested.

Trey Peterson:
Absolutely. You know what? What we really love about what we do, we teach, uh, handful of financial classes a year. And what I love most about it is we have a room full of people that are hungry for information, that they're preparing for retirement. They're in they're nearing retirement, and they don't want to make any of the costly mistakes that we all see so many people make. And really, the goal of this podcast is to add value to your life. How do we make sure that when you start preparing for retirement, when it comes to Social Security, Medicare, estate planning, uh, your spend down plan, which investments do you pull from? In what order? How do we make sure that you get it right the first time, so that you pay every dollar you owe, but not a dollar more in taxes? And that's something that we're both passionate about. So we're excited to get started today. We're excited to share some of the information that we've learned in our eight plus years in the industry. And, uh, I think we've got some great topics today.

Producer:
And now for some financial wisdom, it's time for the quote of the week.

Yelisey Kuts:
Quote of the week, I should say. And, uh, it's from Milton Friedman. He's actually from the Chicago School of Economics. And, uh, he says inflation is the one form of taxation that can be imposed without legislation. What are your thoughts on that? Well, I think one of the things that we've been seeing since Covid is significant inflation. You look in, you know, 20, 20, 21, 22, you know, two out of three of those years, inflation was over 8%. And I think it's significant. I think it's significant because YOLO says, you know, will CPI issue uh, was over 8%. Cpi, which stands for elderly, was over 14% a couple of those years, which means inflation is hitting people preparing for retirement harder than everybody else. Right. And that's actually a good distinction to make. So, uh, the Bureau of Labor Statistics, that's who measures inflation. They track goods and services throughout the economy. And it's it's based on an average right, on 80,000 goods and services. Right. Um, you know, some of those things might be, you know, the cost of chicken, the cost of chicken is probably going to be weighted a little bit more heavily than the cost of tofu. But what they're trying to do is they're trying to capture how Americans spend their money. And the best way they can do it is by looking at urban consumers, just like you said, CPI, you the you standing for urban and they want to track the spending habits.

Trey Peterson:
And really where it comes down to, uh, an issue for us is, you know, on a day to day basis, we're working with retirees, and retirees don't have the same spending habits as urban consumers in many cases. So in a very real way, we have, uh, inflation. That really affects how Social Security is adjusted every year, Social Security, every single year in October, uh, there's an adjustment, a cost of living adjustment. And it's actually based on something called CPI, W for wage earners or clerical clerical workers. Um, and there's a lot of huge differences between that. And a lot of times people coming into our office are saying, hey, inflation is going up by x number or X percentage. Uh, but I have to spend a little bit more than that based on my spending habits. Why is it that my Social Security benefit is only going up by a certain percentage, where we know that we're spending more than that? So there's been a huge push for, for, uh, CPI, those that are elderly, not to offend anybody, but it just simply means anyone over the age of 62. And a very real example of that is healthcare costs, right? Spending when it's related to healthcare, CPI on average it's like 5.5%, right? But CPI shows an 11% spending on healthcare related expenses. So what does that mean for you retirees, people who are in the nearing retirement just on average? It's no secret we're going to spend more on healthcare related costs and CPI at least CPI w as it's used for social security.

Yelisey Kuts:
In many cases it's just inadequate. It doesn't take into account actual spending for those that are in and nearing retirement. So we want to make sure that, you know, obviously inflation is hitting everybody, right. Everybody's affected by it. And one of the things Trey and I were just talking about is, uh, what does that look like? And how are Americans actually able to, to, to pay for the cost. Right. The cost of inflation, how are they coping with it? And unfortunately, one of the things we've seen is credit card debt. It's at an all time high, right. Savings at an all time low vehicle. Uh, repayment is at a is uh, the deficiency is surging in that area as well. So Americans are struggling to pay for it. And one of the things we keep seeing is, uh, you know, depending on on what mainstream media sources you follow is, you know, we've we've added so many jobs to our economy. Our economy is doing great. But in reality, a lot of the jobs that we've seen are for people who've already had jobs, right? They're getting a second or third job to help pay for the cost of inflation. They're giving up their leisure to do it. And it's actually, you know, it's actually not a sign of a healthy economy, at least from what we see on a daily basis.

Trey Peterson:
A lot of the numbers support. Well, I think, practically speaking, you know, one of the things that I've found is that when we're sitting down with clients and the families that we need to serve, I would say the last two and a half to three years out of the last, you know, eight plus years that we've been together, 12 years in the industry, the amount of clients we have that are significantly increasing their distributions because all of a sudden that 3000 from the IRA, plus their Social security and the pension is no longer covering their expenses, and they're not just increasing it by 2 or 3% like we've seen in the past. You know, they're increasing it by ten and 15% because of the things they're purchasing and they're falling behind. Some of the other things that we see practically is, you know, the decisions our clients are making in not downsizing their home because their mortgage is at less than 3%. They want to get a house that's half the size. Rates are over seven and a half, right. And now they spend more money to have a house that's half the size. And it just doesn't make sense. So one of the things that we're definitely seeing is not just the challenges at the grocery store, but even a lot of these big decisions of downsizing their home or upgrading their vehicle in the first year of retirement like they've planned for for, you know, 20 plus years right now, you know, and obviously, you know, when it comes to people that are just approaching retirement, sometimes they want to downsize or, or change their, their home situation.

Trey Peterson:
But for the most part, retirees aren't spending a whole lot on housing, right? For a lot of them, it's just not something that happens as much as in the earlier years of of life. Um, but one thing that that is interesting, we we actually just got a number from Fox business, right? According to Fox business, 8.7 million Americans, it's a record high. Hold multiple jobs today to make ends meet. Right. Just something that supports that, right? It just shows that inflation isn't something that most Americans are can get by just by doing what they've always done. Right. Most people just have the job. Maybe they have the specific career that they're in, and it's really just had a huge effect on them. And one thing that we've noticed, you know, in the planning process over the years, we've had a lot of people come in and say, hey, and this is something that Trey has dealt with many times, right? They come in and they say, hey, this is my mortgage. Just for the sake of peace of mind. Should I pay it off? I'm only at 3%. That's my interest rate. That's all I need to pay. But it just would feel so nice entering and approaching retirement, not having that weight of the mortgage, right? Not having to deal with that.

Trey Peterson:
And a lot of times, you know, the answer is like, hey, you know what? If it creates the peace of mind that you're looking for, pay off the mortgage? But how has the advice changed today, where interest rates are as high as they are and a 3% mortgage or a 2.65 in some cases we've seen like that. That almost sounds like free money, right? Yeah, yeah. I mean, when we sit down with people today, it's so much different than it was 12 to 18 months ago because the conversation was your mortgage is at three or less. If you keep that money in the market, we're going to continue to average depending on your risk level six seven, eight, nine, 10%. So here you're making money on your money to keep your mortgage. And we still had people pay the mortgage off because the peace of mind was worth more than the money they were making in the market today, it's not the same thing. You know, people are not pulling out a big chunk of cash to pay the house off because, um, I shouldn't say it this way. Instead of paying taking a big chunk of money out to pay the house off, uh, what they're looking at is what? These rates at 8%. How can they not get out faster? Or how can they, uh, make, you know, basically 8% in the market in the last couple of years? You know, it's been volatile.

Trey Peterson:
If you look at 2021, the market's been great. 22 is pretty challenging. So people are making different decisions. You know, definitely based on inflation and what the market is doing. And we're coming into a big year if you want to talk about that. Yeah I think that'd be great. Yeah. Obviously, you know, we have an election year coming up. Um, but also, you know, we're looking at at Jerome Powell, we're looking to see what what is the Fed Reserve, what are they indicating going forward. And really that just it affects so much. I mean, it depends on you know, obviously for retirees it might affect you differently. But anyone at any stage of life. Right. So if you're somebody who's saving money right for you, maybe if you don't have some of these expenditures that we're talking about, maybe for you. Uh, it's it's actually kind of a once in a lifetime opportunity. You're looking to to put money in a CD, maybe a money market mutual fund, and maybe you're looking at Treasury bonds and and you haven't seen rates like this in a very, very long time. So for you, maybe that's positive. But the question is what happens when the Fed Reserve begins to pull back and reduce those interest rates? Now there's a big argument to be made. How much can they reduce it? Right. We still have to contend with inflation.

Trey Peterson:
But how does that change the opportunities that you have available to you, uh, when it comes to your investments right. Because if the rates start going down, or we saw earlier in the year when they signaled that inflation was finally under control, that potentially we're going to look at some rate cuts with the Federal Open Market Committee's coming up in 2024. Right. The market rebounded. The market went up. Right. So you don't want to be able to you don't want to put yourself in a situation where rates are finally going back down and you're buying back into the market, and the market is hitting all time highs, right? You don't want to put yourself in a position where the investment opportunity that you could have had, right, is no longer available because you're buying high instead of low. So obviously, you know, there's there's this this there's this thought. And this is something that Milton Friedman and others have have been talking about for a very long time. Uh, that 2%. Right. This objective, 2% of inflation that that's what greases the wheels of the economy. But if you're a saver, you're you're thinking to yourself, hey, 2% over a ten year period, that means that I've lost 20% on the value of my savings. So you know, we're inflation is not going away. In fact, one of the things that Jerome Powell said was, hey, possibly we're looking at getting inflation down to 3% rather than the objective two.

Trey Peterson:
That's 50% more, right, 50% more than the objective that's been told to us for all these years. So inflation is not going away. It's going to be around. The question is, to what extent is it going to affect you, and how have you positioned yourself to make sure you're either taking advantage of of the the higher interest rate environment, or you're protecting yourself when the interest rates do go down and you're in a position where you can take advantage of the returns from the market. Well, and yeah, let's say I actually think this is a great time to let people know, hey, if you are noticing that what's worked in the past hasn't been working the last couple of years, and you want a second opinion, or on if your investments are still in the right spot for you. If maybe that annuity that you bought 15 years ago still fits your, uh, exact spend down situation, one of the things that I'd encourage you to do is give us a call. We do a complimentary free second opinion. You can reach us at 612860580. We do a complimentary analysis. And really what we do is we build out a blueprint to show you of what things in your plan are in alignment and what things are out of alignment. And one of the things that we're seeing is more and more people are noticing that that 60 over 40 portfolio that's always worked, 60% equities, 40% bonds, that is not been successful the last five years.

Trey Peterson:
And you have all these big brokers and financial groups that have done nothing other than say, this is what's always worked. It's going to keep working. And you've got, you know, 30, 40, 50% of your money sitting in bonds and bond funds in 2022 were down 13 to 15%. So on 40 to 50% of retirees money, uh, they're not making anything. In fact, the safe stuff was down 13 to 15% last year and an average of 10% over the last five years. One of the things that we can help with in that analysis is show you some financial vehicles that have either had no losses the last five years, or some of them have actually had a positive net 1 to 3% return versus your bonds at -2% return. What is a 3% difference? Make on 40 or 50% of your money over five years. It's pretty significant if you have questions on a better investment vehicle than just bonds, I'd encourage you to give us a call so that we can show you how you can have a better safe money and a better safe money vehicle to take advantage of some of the rates that we're seeing, uh, that are outperforming bonds. Now, you know, obviously, we spent a lot of time on inflation and some of the implications when it comes to your portfolio and some of the investments that are available to you.

Trey Peterson:
But to kind of segue into our next topic. They're very related. Uh, taxation. Right. Inflation, obviously, you know, that that is something that, you know, if you weren't aware of how that affects you. Uh, you know, five years ago, you certainly are today. Right? Everyone's affected, whether it's at the grocery store, at the pump or wherever. Right. Everyone is aware of how that might affect you and some, some of the implications there. But what about taxation? Right. For a lot of us, you know, and, you know, sometimes people come in and they feel like it's just overwhelming. There's just so much to know. Right. And and when we look at that, we're not only looking at the investments in your portfolio, the portfolio composition that you have, but sometimes there's just unique differences between people. And we often emphasize whenever you sit down with somebody, whenever you're you're going in for a consultation, kind of like the one that we offer. You know, the biggest thing that we find is it's not just, you know, finding somebody who's really, really good at, at at certain aspects of retirement planning, right? Because we have people coming in all the time. And, you know, they're giving us they're sharing some of the things that their advisors told them. And we're kind of scratching our heads and we're saying, hey, that sounds like good advice, but it doesn't really apply to someone in or nearing retirement, you know, advice like, hang in there and be long terme.

Trey Peterson:
Right. That's great advice, right? That who could argue with hang in there and be long Terme. Uh who could argue with it's only a paper loss you haven't lost until you've sold. And we hear these things all the time. We're like, hey, that's great advice for a 30 year old, right? It might actually be good advice for someone who's in retirement who actually has no need to touch their assets. Right. We have some some of our clients. They simply want to pass everything on for them. Between Social Security and the money they have coming in from a pension there, that more than meets their needs and they don't even have to touch their retirement savings. Right? That might be good advice for somebody in that situation. But for most people, you have to be strategic. You actually have to answer some of the difficult questions of where do I draw from first, what are the tax implications? Is it possible that I'm leaving behind significantly less by pulling money in this way versus a different way? So we want to make sure that we're having these conversations. Obviously we spent a lot of time with inflation, but I sit down with folks all the time. And one thing that I'll notice is, you know, I'm sitting down with one family and they have a very similar amount of income. I'm sitting down with another family.

Trey Peterson:
They have about the same. Right. But they're paying a lot more in federal income taxes, or they're not being strategic and they're not taking advantages of things that, you know, maybe you want to call it a loophole, but, you know, things that are available to them in the tax code that they could take advantage of, they could drastically change their situation. And Trey mentioned like just fees alone, right? How much money you would save on 3%, 3%, right on 50% of your portfolio over a number of years? It might not seem like a lot in the first year. The dollar amount may not be huge, but that savings it compounds, right? So we want to make sure that we're aware of that. Especially I think one of the most important things, the most the biggest consideration that a lot of people have to make when it comes to turning on their Social Security, their pensions, their retirement savings, how it all works together is taxation. I think that has the most bearing on your decisions in those areas. I think to one of the things you know, that we do well at Guardian is we understand that somebody that's preparing for retirement doesn't want to be the middle person between their tax preparer, their financial advisor, maybe someone that's giving them a tax advice. They want a holistic plan and they want it all done under one roof. One of the things that does make Guardian and All Things Financially unique is we have CPAs on staff, we have Medicare specialists on staff, we have Social Security experts on staff, we have fiduciary financial advisors that are there to do what's in your best interest.

Trey Peterson:
We have insurance agents. So one of the things a lot of people don't understand is that they need to one, get a second opinion. If you believe that your guy or your gal is doing the best for you, do you have enough confidence to challenge it and to see if that is the best? One of the things I love about our business model is every week I tell people, hey, your guy's doing a great job on your investments. What have the conversations been around? Tax planning? What have the conversations been around your spend down plan? Hey, it looks like when you at age 75, you're going to have a significant required minimum distribution because you have all these pre-tax dollars. What is your five, 7 or 10 year plan to make sure that you're not paying more in taxes than you need to? Yeah. Let's say one of the things that you and I talk about all the time is we live in the greatest country in America. We're blessed to pay our taxes, but we don't want to leave a tip on the table. We want to pay every dollar we owe, but we want to take advantage of every loophole. And that's why I'm passionate about what we do, the families that we get to serve.

Trey Peterson:
You guys have worked so hard for decades, 20, 30, 40 years. And what we want to help you with is make sure that when you start drawing on these assets. That you pay every dollar you owe, but not a dollar more. And almost every class that we teach and, you know, I think last year, uh, we taught over 60 financial classes between Social Security and Medicare, estate planning, retirement planning, A to Z, and that our taxes in retirement class. And I would say that most of those classes, people would come up and they'd say, hey, I'm six months or I'm two years preparing for retirement. What are the number 1 or 2 things that I need to do that I haven't thought about? And in my opinion, that not the top two things are? Number one is do you have a spend down plan? Do you know that when your paycheck stops, where is your paycheck going to come from? Are you turning on Social Security right away? Are you living off checking and savings? Are you pulling from your retirement accounts, your Roth accounts? Your brokerage accounts? Are you selling the CD that's at your credit union to live the first six months or a year in retirement? And one of the things that you need is a spend down plan to make sure that you're not just pulling money from where it's the easiest to get it, but you're doing it in the most tax efficient way.

Trey Peterson:
Last week, I sat down with a gentleman that we've served for 4 or 5 years, and I was able to show him that if he went after his income based on the plan that our CPA Matt, built out, that his money would last seven more years. Or the other way to look at it is he would give a couple hundred thousand more dollars to his kids, uh, just by pulling from the right place in the right order. So the number one thing is you need to spend down plan. And number two, you need a tax strategist. A lot of people have a financial advisor and they have a tax preparer, but they don't have a tax strategist. And the difference is somebody that prepares your taxes is going to tell you what you should have done last year. A tax strategist is going to say, here's what we're going to do this year and next year. And the following year, so that in five years and ten years and 25 years, we're keeping more of your money for you and your kids or your beneficiaries and giving less to Uncle Sam. Yeah. And one of the things that I've just found really surprising in our industry, there's a lot of things that are surprising. But one of the things specifically on CPAs is, you know, we've we've kind of heard for a long time that most CPAs, whenever they accumulate, let's say 500 clients like they're they're maxed out at that point.

Trey Peterson:
But and we've actually we've had a few relationships that were kind of at that point and they truly are maxed out. Like they can't take on too many more clients. But one of the things that makes it possible is they're cranking out these returns in 15 minutes, right? They're not doing any forward thinking planning, they're not really making projections, and they can't write. You know, if you're if you're a CPA and you're looking to build your book of business, um, you know, it's actually it's a long road. A lot of the guys that we met with the first couple of years are difficult, right? They're struggling to pay the bills and, and meet all their expenses that they have in building their book of business. And they're looking for clients that really aren't going to be too much trouble by too much trouble. It's somebody who has a simple return where they could just put together their their ten, 40 and 15 minutes and be done. And really what we find is, you know, for most people, maybe there's a period of your life where that that's perfectly adequate. But for most people they need a little bit more attention to that and that little bit of attention. We often say, just like, you know, it's not about, you know, making a huge thing that just changes your life overnight, but making enough small, good decisions that add up to something big over a period of time, like a lot of that can be accomplished in when it comes to tax planning, right? So we really spend a lot of time on that.

Trey Peterson:
Not only do our does our tax team spend a lot of time, uh, Trey and I personally spend a lot of time in that area with many of our clients helping them plan in terms of taxation, something that I'm passionate about. Um, it's it's a huge thing. It's a game changer in many cases, especially when when it comes to extending the longevity of your dollars in retirement and beyond. If you're looking to pass on a legacy. Well, I think one of the things that you're talking about, too, is a lot of people don't realize that the same advisor that's helped you accumulate and grow your assets is not necessarily the same advisor that you need throughout the stages of retirement. And a big piece of that is I ask people all the time, would you say that your financial advisor works with everybody college kids, couples getting started, new families, people in their 40s, people about to retire. If they do, that's great. They're great at helping you accumulate assets. But in this season of life where now you're shifting from doing the same thing the last 40 years, saving as much as you can, hoping your advisor grows those assets, the 401 K grows those assets, and now all of a sudden you need to spend down plan.

Trey Peterson:
You need a little bit of preservation. You need to make sure that you're pulling on those assets in a way that you're not eliminating any of the health insurance credits that we can talk about in a little bit here. So the reason I say that is, do you have an advisor who's a generalist, or do you have a retirement planning specialist? And one of the things that we found through our what I call our blueprint of success, uh, is we're able to show people that while their advisor has done a great job, there are pieces and things that they now need that they've never needed before, and they're not going to get them where they're at. I've even had a few clients that when they partnered with us and they had the conversation with their advisor, hey, we need tax strategy, we need Social Security, we need Medicare, we need an estate plan. Their advisor said, hey, those things are great. We don't do those things here. And one of the things that we found is when you have all of those things working together holistically under one roof, you don't have to be that middle person that's trying to communicate with your CPA what your advisor said. All of it's being handled behind the scenes for you. So I just want to encourage you. You might have a great relationship with your advisor, but do you have a tax advisor? Do you have a social security expert? Do you have a Medicare specialist? And are these people working together on your behalf? Yeah.

Trey Peterson:
No, that's a very good point. And you know, for I keep mentioning this, you know, it's going to be a different and unique answer for everybody. There is no one glove fits all. But most of us have a variety of assets. Right. Maybe some of us have tax exempt assets like a Roth IRA. Maybe we have pre-tax accounts, maybe we have accounts that you know, where your cost basis is very low and you have a significant gain on some of those investments that you that you have. Have you considered, you know, in those earlier years of retirement, maybe not turning on Social Security the way like 70% of people do, right? They just simply replace their income. Once it's lost, you retire and you have an income void. So you turn on your Social Security, right? Maybe there's an age gap between you and your spouse. Maybe your spouse plans on working for 5 or 10 more years, and you have all that additional income coming in, and now you're now. Not only are you getting a reduction on your Social Security for taking it early, but you're also paying more in taxes because of your spouse's income. So in those earlier years of retirement, we often call those the critical years of retirement. What are you doing in those earlier years? Right.

Trey Peterson:
If your income is low, potentially you could be living off of your pre-tax dollars. You could be taking advantage of Roth conversions, potentially, if you have gains on some of those non-qualified or after tax assets, you could be selling some of those positions and not paying anything in federal income taxes. There's a lot of different opportunities that are available, and sometimes people just pull from the account where it's most convenient, like turning on your Social Security because it's convenient, right? That's what everybody does. Turn it on as soon as you can, or you just pull from whatever account is convenient. And really, convenience can be quite costly. And we talk about that in every single one of our meetings. We really we put together a tax map, right? A distribution strategy for everyone who comes in, because we want to make sure we're drawing from the right places. And some of this, frankly, it's kind of the low hanging fruit. But unfortunately in our industry, we find that a lot of advisors simply want the easy way out, right? The easy way out in terms of kind of like the CPAs who simply want to prepare the returns in 15 minutes and move on with their day. Right. Yeah, well, I think, you know, having a financial adviser is the very similar to hiring an attorney, hiring a real estate agent. I actually like the real estate agent approach, because if you go to sell your home, what everybody knows is real estate agents charge somewhere between five, five and a half and 6%.

Trey Peterson:
Most of them are at six. A lot of times what happens is, uh, the real estate agent who's representing the home, right? They take three, and then the agent that brings the client takes two and a half to three. But here's what I tell everybody. If all real estate agents basically get paid the same, you should find the best one that you can, because you're not paying more for additional skills and excellence. You're paying that person anyways. And I think financial services is the same thing. If I asked you to make a list of everything that your advisor does for you for the fee that you pay one as we found, probably eight out of ten people don't know what their fees are. They've been told that they're somewhere around 1%. And we found that most of the time they're somewhere around one and a half to 2.5% just by pulling back the curtain. And we've had a lot of the families that we serve say, no one's ever done this for us before. So two things that I'd say is one is, do you know what your fees are? And then two is, do you know what you're getting for those fees, in my opinion, for anybody on here to pay 1% to an advisor that's just picking funds. Now that you've accumulated after 40 years, for a lot of you, that's five is $30,000 a year.

Trey Peterson:
And all they're doing is rebalancing your portfolio and calling you three, four times a year. In my opinion, they are not earning their money. One of the things that we do for people is we show you for the same 1 to 1.25%. At Guardian Wealth Strategies, we're going to not just manage your funds, do your tax strategy, walk you through the best Social Security approach, set up your health insurance and Medicare, offer you to sit down with our attorney for estate planning. Uh, we're going to do all of that at that 1%. The only two things that there's ever a fee outside of that is if we prepare your taxes, there's a small fee for that, just like you'd pay anywhere else. And if you put together a plan, if we put together an estate plan, there is a cost for that. But there's all these services that we do at 1%. And almost every week I have a couple say, I can't believe I pay the same with you or less. And I was never getting access to all these other services. So there's a lot of you, you've got a great advisor. It's been a great relationship and that's where you should be. But there's a good percentage of you that we're no longer in the best place for you. And don't forget, this is a business decision, not a personal decision.

Trey Peterson:
If your advisor is a friend, they'll still come to your birthday party after you move on to make a better decision on that. So, uh, the next topic we have is taxation on our Social Security benefits. And I just want to run through this one quickly. It's a big one that I think affects a lot of people. Um, you know, just to kind of break it down and simplify it. For some people, your entire Social Security benefit is tax free, totally tax free. And in fact, Minnesota used to be one of 13 states that taxes it on the state level. And I have bad news. We're still among the 13 states that tax it on a state level. The difference is there is some good news there. There is a little bit of good news. So if your income as a single person, your adjusted gross income is below 78,000 if you're single and a hundred thousand if you're married, then you actually don't have any state taxes on your Social Security, right? So it's it's a step in the right direction. It's maybe not what everyone was hoping for. Uh, but it's a step in the right direction, right? They've been teasing us with doing away with taxation for a very, very long time. So it's some progress. Uh, on the federal level, some of you will pay nothing in federal income taxes. Your entire Social Security benefit could be tax free. Meanwhile, others 85% of your Social Security could get drawn back in, could be added to your other taxable income.

Trey Peterson:
And really, a good way to remember that is your other taxable income determines how much of your Social Security is taxable, right. We're not going to get into the weeds on that. But oh go ahead. Let's just say part of what you're talking about too, which is we talk about this so often, is that the name of the game in in retirement isn't to make as much money as you can, or I should say gross as much as you can. The name of the game is how do I keep as much as I can? And one of the things I think we do a good job of spending time with people on is showing them that your Social Security is one of the levers that you have for creating more tax free income in retirement. So while a lot of people, like you said earlier, say they think that Social Security is synonymous with retirement, I retire, my paycheck stops now, I turn Social Security on. That's not the case for everybody. For many of you, you're laying one of your benefits. For those of you that are married can have a big impact on longevity of assets and creating more tax free income in retirement. And if you only write down one thing from today's podcast, when you reach out to us for that second opinion, let us know that your primary goal is to find out how to create more tax free income in retirement.

Trey Peterson:
That's one of the areas, I think, that we're great at helping people and man, people love knowing that there's a strategy to this. It's not just going at it out of convenience like you talked about earlier. So if you're someone that has not had a conversation with your tax preparer or your financial advisor around RMDs, planning for RMDs, uh, your spend down plan, where to pull from and when, and you're within three years of retiring. Now is the time to start that conversation. And that's something that we can help with. We're not scared to tell you if your advisor is already doing a great job and we can improve things, man, we're happy to tell you that. But if things can be improved, or if we can even show you 1 or 2 things that can positively impact your retirement plan, it's going to be the best 60 to 75 minutes that you invest this. And speaking of RMDs, we encourage people all the time. Don't wait until 72 to start planning for your RMDs. Now, obviously, RMDs have changed, right? They've changed a lot over the last few years. Secure act 2.0 has pushed out RMD age to 73. It used to be 72 70.5 before that. And really a lot of times people have so much anxiety but they do nothing about it. They don't make any forward thinking decisions.

Trey Peterson:
Right. They're not thinking to themselves in their 60s that, hey, eventually I have to start drawing money from my pre-tax accounts, right? All those accounts where you've never paid any taxes, right? You've deferred your compensation, you've put money away, you've been diligent, and you have so much saved up. And your IRAs, your 401, your 403 B, maybe all the employer sponsored plans that allow you to defer your income and pay nothing in taxes on any of it. Well, eventually you have to start pulling money out of those accounts. And what we find is a lot of times people don't want the money, right? They don't need it. They've been retired for five years. They know where the money's coming from. They're able to meet their expenses. Their standard of living is covered. Right. And for them, introducing more income through the RMD means that they've put themselves in a higher tax bracket, sometimes forever. Right. They're always going to be now in the 22% bracket or 24, whatever it is. Right. So now they're in a higher tax bracket. Maybe for them it means they have so much additional income that they can't control that. Now they have to pay more for their Medicare Part B premiums, or maybe 85% of their Social Security will always be taxable from this point forward. Right. There's a lot of things. Maybe you're giving up tax credits. So there's a lot of things that RMDs represent for people that sometimes are negative.

Trey Peterson:
And they don't have to be negative if it's used correctly. If you plan properly, you can implement RMDs. You can integrate that entire process into the planning process that we have. Right. And it can just be something that we can look forward to. We just simply we're switching where we're pulling the money from in some cases. Right? We're we're managing our tax brackets. We're doing the due diligence ahead of time in our early years of retirement in our 60s, and we're making sure that we're mitigating that RMD, and we're not putting ourselves in a situation that most of us would rather not be in, in terms of taxation. The final thing I'll say on this is, you know, we're not we're not spending a whole lot of time on Medicare on this, but Medicare is kind of that one hidden tax that a lot of times people don't, don't realize is is out there, right. It doesn't show up on your 1040. It's not something you're going to discuss with your CPA. It's not something that really is. In many of our conversations with our retirement planning specialists, whoever's helping us with our investments. But Medicare is one of those things that's it's, you know, for a lack of a better time, it kind of creeps up on you, right? It sneaks up on you because Medicare is based on the amount that you pay for your Medicare. Part B premium is income based, right? It's means tested.

Trey Peterson:
It's based on how much income you had and not only how much income you had this year or last year. It's based on the income from two years ago. So how much income did you have two years ago determines how much you pay for your Medicare Part B premium? And for a lot of time, for a lot of folks, you know, sometimes your income goes up randomly one year in retirement, maybe you sell a piece of property, or you have an investment that comes to you and your income is unusually high in a very specific year. Maybe it's one occurrence that happens and then two years later, your Medicare Part B premiums are higher if you're married for both you and your spouse. We've had some folks that their Medicare Part B premium is twice the amount of the base premium for part B because of income that they have an influx of income sometimes related to RMD, sometimes to a one time occurrence. But it's just something that we have to be aware of. It's kind of one of those things that we refer to as just a hidden tax in retirement, right? Because taxes aren't just what happens on your 1040. We often tell people taxes are any cost that increases as your income increases. So imagine introducing additional income and then having a cost on the back end. Even if it's not taxation, it sure feels like taxation, right? So just you know, in terms of defining taxation, I like that definition a little bit more.

Producer:
When, uh.

Trey Peterson:
We're we're kind of just wrapping up here, but I want to talk about two things. One is something sexy. So one of the things that you're going to find if you go to ten different dinner seminars and we know, you know, if you're over 60 years old, you could have a steak on somebody every single night. We actually don't teach classes at restaurants. Um, I'm not against it. I just always feel like if someone's buying me a steak, they're selling me a high commission product. And, uh, being a fee based model that doesn't fit what we do, we're all education. But the reason I say that is, is there's a lot of financial advisors that are out talking about Roth conversions. And one of the things that I think is sexy is people don't want to pay taxes. People want to pay the least amount they can. But one of the things that we see is we see financial advisors with no tax professionals, with no CPAs executing these conversions to keep their clients to impress their clients, and rather than adding value and improving their situation, they're doing it incorrectly and costing their clients thousands of dollars. The reason I say that is one of our goals, as you listen into our podcast, is that not only do we add value by helping you improve and add things, we want to help you skip so many of the mistakes that we see so many people make.

Trey Peterson:
So when it comes to Roth conversions, I want to encourage you don't implement something with someone that's put this together without a CPA, that's put it together without years of experience. Because when it comes to tax strategy, it's not about just getting it done. It's about doing it correctly year over year to maximize your benefit. And the thing I'll close with that, I'll hand it off to you. You always say is, you know, if you're someone that knows you need to do something about taxes and you've got a tax preparer, or maybe it's simple, so you do it yourself, but you never sat down with a tax advisor. I want to encourage you to take advantage of our complimentary tax analysis. Uh, give us a call. We'd love to set it up. It's complimentary. The only way that we ever charge you for anything is if we can show you the amount of value we can add and the taxes we can save you to show you that the cost way is way below the value and the money that we can save you. I think the last thing I'll say is, you know, don't forget to do all the things right.

Trey Peterson:
Subscribe. Hit like, uh, follow us on social media. We, uh, we're going to continue to produce content like this. We want to educate our listeners. We're not you know, we're not looking to keep the information in-house. Right? Sometimes people are coming in and and they ask us, hey, how can you possibly provide so much information without charging anything? Right? And we found that if we provide value, if we can give enough value to people, whether or not they work with us, they might already be in a good situation, but they end up referring people we end up working with. We end up providing value in any number of ways. And sometimes it's not, you know, uh, because we're managing their assets. Right? Sometimes we're helping folks with Medicare, maybe making decisions, good decisions on Social Security or tax planning. So there's a variety of ways we can help them. It's not always, uh, in the same specific way. And we're happy to provide as much information as possible for folks to feel comfortable. And like I said, even if we don't end up working with you, we're happy to help you along the way along your retirement journey. And, uh, you know, one of our biggest goals is to help folks retire once and retire.

Producer:
Well, thanks for listening to All Things Financial. You deserve to work with experienced wealth advisors and financial educators who always put your needs first. Visit ATF Podcast.com to schedule your free, no obligation consultation with us today. That's ATF Podcast.com.

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