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Speaker 1: Tonight, if the stock market dropped by twenty percent? What

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Speaker 1: would you do? You're listening to Simply Money, presented by

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Speaker 1: all Worth Financial on bobspond Seller along with Brian James.

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Speaker 1: It's a simple question and not so much a simple answer.

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Speaker 1: We're not asking what you should do, not what your

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Speaker 1: advisor says you'd do, not even what you did in

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Speaker 1: twenty twenty. Let's say we're asking tonight, what would you

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Speaker 1: actually do if we got a twenty percent decline in

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Speaker 1: the stock market right now? Brian, this is an interesting question,

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Speaker 1: and we get a lot of different and interesting answers

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Speaker 1: when we interact with clients about this question.

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Speaker 2: Yeah, of course this drives a lot of financial planning

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Speaker 2: conversations because when we build a plan, that's usually the

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Speaker 2: one variable we just don't know. We don't get to

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Speaker 2: know what the market does, right, That's the mystery. We

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Speaker 2: have to build the plan around not knowing. So that

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Speaker 2: has a lot to do with understanding what somebody's stress

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Speaker 2: toleances and really understanding the their overall financial situation in

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Speaker 2: the first place, to figure out what they can tolerate,

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Speaker 2: not only what they can tolerate, what the plan can tolerate.

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Speaker 2: We had one in April of twenty twenty five when

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Speaker 2: there was an initial panic about the tariffs. But a

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Speaker 2: five million dollar portfolio, well that's down a million dollars.

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Speaker 2: That number, well, that screws with your head, even very

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Speaker 2: successful rational people. So we work with a lot of

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Speaker 2: families here in Cincinnati. These are executives at P and

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Speaker 2: G sentas fifth third business owners. Maybe you had a

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Speaker 2: liquidity event. Here's what's fascinating. That stress level that's rarely

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Speaker 2: proportional to the math. Somebody with eight hundred thousand dollars

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Speaker 2: invested may stay calm. Somebody with six million, they lose sleep.

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Speaker 2: One lost six digits, the other one lost seven. Because

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Speaker 2: once you've built that serious pile of money, it feels

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Speaker 2: like something to protect. You're not trying to get rich

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Speaker 2: anymore because you already are. You're trying not to mess

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Speaker 2: it up. That shift from accumulation to preservation, that's where

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Speaker 2: design flaws start to show up.

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Speaker 1: Yeah, Brian and I think a lot of times people

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Speaker 1: look at the Dow and they look at the amount

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Speaker 1: of points drop in the Dow and they get freaked

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Speaker 1: out about that. And then, let's face it, we're not

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Speaker 1: making light of it. You know, in your example of

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Speaker 1: five million dollars, you lose a million dollars on paper. Yeah,

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Speaker 1: it's going to get your attention, and it probably should.

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Speaker 1: What I tend to talk about all the time with

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Speaker 1: clients and I know you do something very similar, is

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Speaker 1: just hopefully illustrate the point that look there, there's there's

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Speaker 1: two factors here to how we should set a portfolio risk.

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Speaker 1: One is, as you've already alluded to, what is going

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Speaker 1: to be required to make the plan work, you know,

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Speaker 1: have a high probability of success of meeting all your

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Speaker 1: long term goals. And then second is the emotional risk tolerance.

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Speaker 1: And sometimes those two are not they do not work

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Speaker 1: in tandem. And that's where we've got to have a

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Speaker 1: little bit of a conversation to make sure people do

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Speaker 1: not lose sleep at night, because you know what I

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Speaker 1: always say is if a twenty percent market drop is

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Speaker 1: going to cause you to change your life or make

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Speaker 1: drastic decisions in the moment, you really don't have a

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Speaker 1: good plan in place. And if you have an advisor

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Speaker 1: at all, your advisor really isn't doing his or her job.

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Speaker 1: Because these are all guardrails and discussions that have been

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Speaker 1: should have been put in place ahead of time in

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Speaker 1: anticipation of events like this, because, as you've already alluded

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Speaker 1: to it, it's not a matter of if we're going

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Speaker 1: to get a decline like this, it's when, And they

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Speaker 1: happen all the time. They happen all the time. So

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Speaker 1: you got to make sure you've got a plan built

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Speaker 1: for this ahead of time so we don't get these

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Speaker 1: emotionally driven decisions that can really drastically, drastically impact your

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Speaker 1: plan and your life if handled incorrectly.

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Speaker 2: Yeah, that's one of the few guarantees we get to

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Speaker 2: give in this industry. I guarantee you're gonna lose money

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Speaker 2: at some point. It's gonna happen. It's just the way

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Speaker 2: it is. It also might rain tomorrow.

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Speaker 1: You know that.

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Speaker 2: That's just the way it is. And it's the point

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Speaker 2: is not to try to avoid it. Don't design something

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Speaker 2: that is purportedly intended to avoid those downturns that doesn't exist.

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Speaker 2: But there are a lot of people who exist who

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Speaker 2: will tell you that it does. You want to avoid that,

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Speaker 2: like the plague, but again, figure out what you actually need.

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Speaker 2: For example, if you've got somewhere between two and ten

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Speaker 2: million dollars. You probably don't really need twelve percent any

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Speaker 2: of returns anymore, so why continue to swing for the

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Speaker 2: fences when those downturns are going to hurt a heck

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Speaker 2: of a lot more than the upsides feel good. You'll

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Speaker 2: still need growth to fight off inflation and taxes, but

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Speaker 2: that doesn't mean you need to have the whole pile

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Speaker 2: dumped in the stock market. Now. That said, if you

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Speaker 2: truly understand the ups and downs and the volatility, and

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Speaker 2: you are of a mindset where you are stewarding assets

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Speaker 2: that are going to go for your family for generations,

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Speaker 2: then yeah, if you understand the ups and downs of

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Speaker 2: the market, then do it. There's nothing wrong with with

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Speaker 2: staying in a hardcore growth mode. But if you're somebody

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Speaker 2: who will feel a little skittish, you will feel irresponsible

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Speaker 2: if a major loss happens. Then leaving yourself completely exposed

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Speaker 2: to the stock market, well, that's a bad idea. You've

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Speaker 2: done that by choice. So figure out a better strategy,

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Speaker 2: and that doesn't have to mean burying in the backyard.

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Speaker 2: There are middle steps you can take, simply reallocating more

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Speaker 2: to fix income or more of a direct indexing approach.

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Speaker 2: Tax loss harvesting. There's plenty of things you can do

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Speaker 2: beyond just sitting there in the easy chair and watching

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Speaker 2: the market do whatever it wants to do to you.

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Speaker 2: At that range, if you've built that level of wealth,

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Speaker 2: you're no longer just on offense. You got to play

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Speaker 2: offense and defense. Right when you're in your twenties and

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Speaker 2: your thirties, swing for the fences, be aggressive with it.

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Speaker 2: But later, when you've built a pile that's worth protecting

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Speaker 2: and it's going to hurt a lot more when it

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Speaker 2: takes a step back, then it will feel good when

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Speaker 2: it goes up. However, lots of portfolios are still set

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Speaker 2: from the last time we ever talked about it. If

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Speaker 2: I'm sixty and I reset my portfolio at when I

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Speaker 2: was forty two, well that's time to go take another

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Speaker 2: look at it and make sure it still makes sense

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Speaker 2: for my life of this.

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Speaker 1: Yeah, Brian, speaking of swinging for the fences, you know

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Speaker 1: it comes down to where where does your monthly income,

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Speaker 1: Where's it going to come from? And make sure you

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Speaker 1: identify that and what I'm talking about here, and I've

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Speaker 1: heard you talk to clients about this and you do

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Speaker 1: a wonderful job of it. I've been in the room

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Speaker 1: watching you do it, and the phrases you user, which

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Speaker 1: I think are great ones, is we got to separate

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Speaker 1: streams of income from piles of money. You know a

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Speaker 1: lot of people that will just set a ninety percent

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Speaker 1: stock portfolio and just let it go that our phones

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Speaker 1: aren't ringing when the market goes down ten, twenty, thirty,

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Speaker 1: forty percent because they have streams of income in place,

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Speaker 1: a pension and social security that they live off of,

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Speaker 1: and they're not worried about it. They're not worried about

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Speaker 1: volatility because they don't ever intend to touch the money. Uh,

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Speaker 1: they'll just let it recover. They know it usually and

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Speaker 1: always does recover, and they're just worried about leaving that

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Speaker 1: those growth assets to kids with a stepped up cost basis.

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Speaker 1: That's that's an entirely different scenario than the one that

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Speaker 1: we deal with more predominantly now where people are coming

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Speaker 1: in because you know, let's face it, fixed income pensions

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Speaker 1: are quickly becoming a thing of the past. Now we're

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Speaker 1: dealing with people with piles of money, and those piles

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Speaker 1: of money have to be segregated. They've got to be

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Speaker 1: strategically allocated to make sure we deliver that income stream

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Speaker 1: from a mix of asset classes that are subject to volatility.

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Speaker 1: Volatility can be a good or a bad thing depending

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Speaker 1: on how everything is structured and arranged and managed. But

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Speaker 1: you know, it does make things more complex, and that's

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Speaker 1: why risk management is extremely important, because you know, I'm

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Speaker 1: a firm believer in you only need to get rich once.

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Speaker 1: You know, having losing a lot of money and then

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Speaker 1: having to get rich for a second or third time,

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Speaker 1: that is highly stressful and can really take the wind

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Speaker 1: out of people's sales. And we try to avoid those situations.

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Speaker 2: Yeah, and I would say a lot of people who

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Speaker 2: are facing this, you know, piles of money versus streams

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Speaker 2: of income retirement approach. We're probably raised by people who

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Speaker 2: only primarily had the streams of income approach. Yeah, you

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Speaker 2: know their parents. You know, people who are reaching retirement

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Speaker 2: age now, their parents probably retired with a pension and

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Speaker 2: a couple of Social Security checks in case of a marriage.

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Speaker 2: You know, nastag for sure. But now the pendulum has

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Speaker 2: swung the other way. It's all about piles of money

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Speaker 2: for one ks and those types of retirement portfolios. That's

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Speaker 2: been the soup of the day for since the late seventies,

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Speaker 2: which represents the long working career of the people who

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Speaker 2: are considering retirement now. So we have to think differently

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Speaker 2: about how do I manage a pile of money versus

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Speaker 2: simply accepting that pension check that comes in reliably every month.

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Speaker 2: It provides opportunity, right, So this has happened during the

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Speaker 2: greatest bull market in the history of the world, going

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Speaker 2: back to the last forty some years now. That is

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Speaker 2: definitely related. Of course, all those money flowing, all that

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Speaker 2: money flowing into retirement plans, that's gone right into the

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Speaker 2: stock market for the most part. So ironically one thing

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Speaker 2: begat the other. So we kind of chose this as

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Speaker 2: a society. That's it. It is a different mindset and

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Speaker 2: it leads to a lot of the questions that we

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Speaker 2: help clients through now. So you know, let's talk a

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Speaker 2: little bit about what that withdrawal strategy, because that's the difference.

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Speaker 2: I got to create a stream of income out of

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Speaker 2: this somehow. If you're retired or you're close to it,

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Speaker 2: the bigger risk isn't that drop that's going to happen.

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Speaker 2: We know this. We've seen it several times over just

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Speaker 2: over the past decade. It's a sequence of returns risk.

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Speaker 2: If you're pulling two hundred and fifty thousand dollars a

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Speaker 2: year from a six million dollar portfolio and that market

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Speaker 2: drops twenty percent early in retirement, well that order of

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Speaker 2: returns matters significantly. So just make sure ask yourself, do

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Speaker 2: I have two to three years worth of spending and

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Speaker 2: safer assets? If so, that means I've covered the downturn

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Speaker 2: and the ensuing upturn that we've always seen, and therefore

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Speaker 2: I won't have to dip into those assets that maybe

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Speaker 2: have taken that hit. Do I have my guardrails in place?

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Speaker 2: Could I adjust my withdrawals temporarily? This is where the

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Speaker 2: bucket comes in, right, So let's figure out what money

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Speaker 2: do I need now, cut one, two, three years from now?

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Speaker 2: What money do I need maybe in five or six years?

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Speaker 2: And what money doesn't really have a time limit on.

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Speaker 1: Yeah, another thing to discuss and approach, and we run

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Speaker 1: into this sometimes, Brian, is you know just what we'll

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Speaker 1: call emotional overexposure to risk. And here's what we mean there.

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Speaker 1: And you know, we talked to a lot of folks

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Speaker 1: that work for low companies where they have highly concentrated

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Speaker 1: stock positions. And these are wonderful companies, great stocks, They've

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Speaker 1: made people a ton of money. But you know the

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Speaker 1: reality is, if you're sitting with thirty forty fifty percent

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Speaker 1: of your net worth tied up in any one company,

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Speaker 1: I don't care how great it is, you are not

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Speaker 1: getting fairly compensated for the amount of risk that's embedded

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Speaker 1: in that portfolio if something really bad changes or just

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Speaker 1: volatility happens. And so you got to look at reasonable

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Speaker 1: ways to unwine that emotional risk from a tax standpoint

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Speaker 1: and just gradually get into a situation where we eliminate

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Speaker 1: that embedded financial risk in your portfolio because you just

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Speaker 1: can't let go of your company stock and because you're

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Speaker 1: loyal to the company and for good reason and all that,

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Speaker 1: but that's an emotional driven decision that is just putting

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Speaker 1: too much risk into your overall life. We got to

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Speaker 1: work through that, And Brian, I know you got a

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Speaker 1: couple other things we walk through with clients.

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Speaker 2: So what do we do before the drop right that

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Speaker 2: the time to think about it is before it actually happens.

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Speaker 2: That way, you can prepare yourself psychologically and emotionally for

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Speaker 2: what we know is coming. Because the cycle is the cycle.

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Speaker 2: The pendulum swings back and forth. Rebalance proactively when markets

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Speaker 2: hit highs, trim back, take some gains where they're available,

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Speaker 2: and reinvest those in some things that maybe haven't done

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Speaker 2: so well, because when the pendulum swings the other direction,

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Speaker 2: we will usually see that rotation into the assets that

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Speaker 2: have been less favored. You're not doing this because you're

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Speaker 2: predicting doom, but because risk drifts upward. The word risk

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Speaker 2: doesn't really it always has a negative connotation, but it

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Speaker 2: really just means volatility. Stuff goes up and down somewhat unpredictably.

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Speaker 2: That's risk. But risk also moves upward too, So the

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Speaker 2: more you have sometimes the riskier it can be because

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Speaker 2: it will feel a lot more impactful when it takes

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Speaker 2: a step back. Strategic loss harvesting, that's the thing. Direct

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Speaker 2: indexing is what we want to be looking at there.

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Speaker 2: That means that's the silver lining. We will take losses

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Speaker 2: from time to time, and the good thing is you

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Speaker 2: can take get some tax benefits out of it if

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Speaker 2: you've got a taxable account that might have experienced some losses. Also,

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Speaker 2: always always make sure you understand your spending flexibility and

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Speaker 2: know what's fixed. What does it take to keep your

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Speaker 2: ship afloat to begin with, and then know what's adjustable?

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Speaker 2: That knowledge alone keeps people from panicking. Just understanding your

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Speaker 2: own situation adds a lot of comfort to those bumpy

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Speaker 2: market times.

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Speaker 1: Here's the all Worth advice. If a twenty percent market

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Speaker 1: drop would dramatically change your behavior, your portfolio probably isn't

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Speaker 1: built for reality, your real life, and you've probably got

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Speaker 1: some work to do. You're listening to Simply Money presented

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Speaker 1: by all Worth Financial on fifty five KRC the talk station.

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Speaker 1: You're listening to Simply Money presented by all Worth Financial

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Speaker 1: on Bob Sponseller along with Brian James. If you can't

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Speaker 1: listen to Simply Money alive every night, subscribe and get

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Speaker 1: our daily podcasts. Just search Simply Money on the iHeart

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Speaker 1: app or or wherever you find your podcasts. Spending more in

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Speaker 1: retirement than maybe you planned? Do you need income instead

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Speaker 1: of reinvesting those dividends? What's the smartest tax move? We're

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Speaker 1: going to address all of that and more in our

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Speaker 1: Ask the Advisor segment straight Ahead at six forty three.

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Speaker 1: If we asked you how to explain your bond portfolio

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Speaker 1: and how it works. Could you do it? Most people can't.

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Speaker 1: Even very successful, very intelligent investors, engineers, executives, business owners,

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Speaker 1: they all struggle to really explain how bonds actually work.

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Speaker 1: They just know they're supposed to be the quote unquote

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Speaker 1: safe part of a portfolio. And we only need to

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Speaker 1: look back to twenty twenty two to realize that. You know,

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Speaker 1: in certain years, the safe part can go down to Brian,

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Speaker 1: this is an important topic to cover tonight. Let's let's

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Speaker 1: dig into some of the meat and potato.

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Speaker 2: Is here, all right? Well, so we had a situation

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Speaker 2: where starting from the early eighties, interest rates began to

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Speaker 2: drop and that just continued for about forty years now,

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Speaker 2: going back to the very beginning. To remember this was

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Speaker 2: when mortgages were in the fifteen sixteen percent range. So

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Speaker 2: we got we're a long, long, long, long way away

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Speaker 2: from that, but that's where we started from, and we

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Speaker 2: had a more natural relationship. When stocks fell, bonds often

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Speaker 2: went up. We had an inverse relationship there, and that's

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Speaker 2: why diversification was a lot more helpful. You know, back

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Speaker 2: in those days, that sixty to forty portfolio worked perfectly,

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Speaker 2: but then twenty twenty two hit stocks came down, and

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Speaker 2: bonds came down. Balanced portfolios were down double digits. Suddenly

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Speaker 2: people were looking at these five million dollar portfolios and going, wait,

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Speaker 2: I thought bonds were supposed to protect me. But here's

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Speaker 2: the problem. Bonds aren't quote unquote safe. They're sensitive, very

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Speaker 2: very sensitive to interest rates. And that was a time

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Speaker 2: and when we had we had interest rates hit the floor.

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Speaker 2: Remember the period before that where it was, you know,

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Speaker 2: all the cool kids were refinancing their mortgages three four

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Speaker 2: times a year because interest rates were down so low. Well,

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Speaker 2: we kind of hit a point where there just wasn't

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Speaker 2: any more ability for bond prices to behave normally because

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Speaker 2: they kept bumping along the bottom close to zero, and

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Speaker 2: it just didn't help at all.

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Speaker 1: Well, and and again going back longer term, I'm talking

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Speaker 1: about the late seventies, you know, looking at a line

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Speaker 1: all the way to the early twenties. I mean, we

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Speaker 1: people complain about five and a half percent mortgage rates.

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Speaker 1: I mean I don't have to remind people mortgage I know.

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Speaker 1: So So the point is, we did have a decades

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Speaker 1: long general decline in interst rates, and when the economy

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Speaker 1: occasionally hit a recession, you know, the fed step in,

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Speaker 1: steps in and lowers rates to you know, put a

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Speaker 1: floor into the economy and bonds recover. You know, in

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Speaker 1: twenty twenty two, as you pointed out, bonds were low,

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Speaker 1: and then we did have this thing called the pandemic

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Speaker 1: and trillions of dollars of money got injected into the

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Speaker 1: economy to keep it afloat, and that's why we had

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Speaker 1: the short term you know, nine plus percent inflation you know,

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Speaker 1: hit us and that needed to get unwound. And that's

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Speaker 1: what happened. You raise, you raise interest rates, and we

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Speaker 1: got seven interest rate rises in twenty twenty two, and

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Speaker 1: that is going to kill the bond market. You know,

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Speaker 1: things like that don't happen very often. But I think

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Speaker 1: I think structurally here there's not a whole lot of

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Speaker 1: room for interest rates to continue to come down. And

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Speaker 1: I think that's the point you were making. So we

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Speaker 1: have to we have to manage how these bond portfolios

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Speaker 1: are structured to not just count on at the long

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Speaker 1: end of the curve rates coming down and that being

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Speaker 1: the only cushion we have in our portfolio, because quite frankly,

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Speaker 1: that's probably not gonna work over the next five to

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Speaker 1: ten years.

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Speaker 2: Yeah, so let's let's talk about the role that bonds

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Speaker 2: play in a portfolio nowadays and the way that people

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Speaker 2: get access to them becau there' hidden risk in these things.

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Speaker 2: This often confuses people. Individual bond bonds and bond funds

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Speaker 2: are very very different animals. If you have an individual

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Speaker 2: bond and you hold it to maturity, you know exactly

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Speaker 2: what you're going to get and the date you're going

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Speaker 2: to get it. That's the point of an individual bond.

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Speaker 2: It's a loan to a government or a company that

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Speaker 2: will come do it a certain date. But if you

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Speaker 2: own a bond fund, all those things are inside of it,

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Speaker 2: but that fund itself does not have a maturity date.

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Speaker 2: It's constantly rolling bonds in and out, which means you

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Speaker 2: don't have a guaranteed return. It's not going to be

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Speaker 2: as volatile as the stock market or a stock based

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Speaker 2: fund that net asset value that moves every single day.

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Speaker 2: There's always duration in the mix. Many high network families

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Speaker 2: assume bond funds behave like CDs, but they don't. They

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Speaker 2: make it. They're very very different. Bonds still matter, though,

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Speaker 2: because stability is still much more reliable there than on

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Speaker 2: the equity markets. Income generation. That's important too for retirees.

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Speaker 2: Liquidity during times of market stress, you can get you

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Speaker 2: can get in and out of them a little less

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Speaker 2: painfully than the stock market frequently. Sequence of returns protection

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Speaker 2: that's extremely important in retirement.

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Speaker 1: Yeah, and going back to those bond funds, I mean, yeah,

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Speaker 1: if the bond the fund manager holds every bond in

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Speaker 1: that portfolio to maturity, yeah they're gonna get principle back.

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Speaker 1: But you know, when you're in a bond mutual fund,

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Speaker 1: you are mutually participating with all a whole bunch of

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Speaker 1: investors that might have completely different goals in liquidity needs

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Speaker 1: that that you do, and those bond fund managers have

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Speaker 1: to react to that. If people want their money cashing

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Speaker 1: out share, they got to go raise that money from somewhere.

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Speaker 1: And that's why laddered individual bond portfolios could make a

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Speaker 1: lot of sense for people that want a little more

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Speaker 1: certainty in their bond portfolio. One of the things you

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Speaker 1: know that I think is worth calling out here. In

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Speaker 1: an environment where, let's face it, people just search for

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Speaker 1: yield anyway they can get it, we got to constantly

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Speaker 1: remind people that going out on those high yield bonds

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Speaker 1: or certain you know things, even high dividend paying stocks

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Speaker 1: you can get whacked here because if a company lowers

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Speaker 1: their dividend yield, that that stock's gonna get whacked. And

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Speaker 1: how you bond funds how yal bonds in general can

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Speaker 1: often be just as volatile as stocks, So chasing yield,

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Speaker 1: you know, even though it's quote unquote a bond or

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Speaker 1: and it's paying a dividend yield is not nearly as

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Speaker 1: safe as some people think it is. Here's the all

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Speaker 1: Worth advice. Bonds aren't categorically safe. They are a strategic

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Speaker 1: part of your portfolio. And if you don't understand how

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Speaker 1: your portfolios work, sit down and have somebody help work

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Speaker 1: through that with you so you don't get some surprises

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Speaker 1: along the way. Ever, wonder whether you should contribute your

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Speaker 1: money to the after tax part of your four oh

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Speaker 1: one k what about the wrath portion? We're talking strategy

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Speaker 1: on how to allocate four oh one k contributions. Next,

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Speaker 1: you're listening to Simply Money, presented by all Worth Financial

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Speaker 1: on fifty five KRC the talk station. You're listening to

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Speaker 1: Simply Money even said to buy all Worth Financial. I'm

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Speaker 1: Bob Sponseller along with Brian James. If you've ever sat

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Speaker 1: through an HR benefits meeting and thought, man, I should

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Speaker 1: probably understand this better, You're in good company. Few decisions

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Speaker 1: inside your four to one k are more important than

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Speaker 1: how you contribute, not necessarily how much. How pre tax

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Speaker 1: wroth or after tax dollars each come with different rules

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Speaker 1: and very different long term tax treatment. Choosing between how

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Speaker 1: to contribute is less about right versus wrong, and more

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Speaker 1: about being strategic, Brian. Lot of moving parts here, a

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Speaker 1: lot of ways to bake the cake, so to speak.

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Speaker 1: So let's get into some of the decisions that we

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Speaker 1: have before us, because we do. The nice thing is

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Speaker 1: we do have options, We do have flexibility, but with

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Speaker 1: that can come from confusion and sometimes some analysis paralysis. Yep.

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Speaker 2: And I think what people get hung up a lot

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Speaker 2: on here is is how do I avoid taxes? I

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Speaker 2: don't want to pay taxes? Well, that's great, but that's

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Speaker 2: really not reality. You're not choosing weather to pay taxes.

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Speaker 2: You're choosing a win. So let's talk about Let's first

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Speaker 2: start with the structure that's been in place for decades. Now,

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Speaker 2: that's a tax break now, but taxes later. In twenty

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Speaker 2: twenty six, well, you can contribute up to twenty four thousand,

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Speaker 2: five hundred dollars to your four oh one K or

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Speaker 2: four h three B or other similar plans. If you're

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Speaker 2: over fifty, you can add up to another eight thousand

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Speaker 2: dollars in the form of the catchup. So that's a

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Speaker 2: total of thirty two thousand, five hundred dollars. So here's

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Speaker 2: how this works from a tax frame standpoint. You contribute

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Speaker 2: before those income taxes are applied, so it's the top

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Speaker 2: of your paste of not the bottom. Your investments grow

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Speaker 2: inside their tax deferred with raws and retirement are Those

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Speaker 2: are taxes ordinary income, so we don't know what the

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Speaker 2: percentage tax is going to be. It gets lumped onto

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Speaker 2: whatever your other income sources are in that year. You

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Speaker 2: might have Social Security pension, maybe there's rental income or whatever.

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Speaker 2: This is a certain flavor of income that is taxed

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Speaker 2: against whatever leaves that four oh one K and IRA

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Speaker 2: and lands in your pocket. And then eventually you'll hit

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Speaker 2: what are called required minimum distributions or rmds, and that'll

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Speaker 2: be either age seventy three or seventy five, depending on

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Speaker 2: when you were born. So here's an example. Let's say

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Speaker 2: let's say you earn one hundred thousand dollars here, that's

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Speaker 2: your salary. You're gonna put ten percent in or ten

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Speaker 2: thousand dollars pre tax. That's great, you got to keep

432
00:22:21,600 --> 00:22:24,200
Speaker 2: that ten thousand. It's squirreled away into a retirement account.

433
00:22:24,359 --> 00:22:27,400
Speaker 2: And bonus, you only got taxed on ninety thousand dollars

434
00:22:27,440 --> 00:22:29,840
Speaker 2: worth of income that ten. If it grows to one

435
00:22:29,880 --> 00:22:33,400
Speaker 2: hundred thousand by retirement, now the full hundred is taxable,

436
00:22:33,480 --> 00:22:36,600
Speaker 2: is ordinary income if you withdraw it completely. So those

437
00:22:36,640 --> 00:22:39,359
Speaker 2: pre tax contributions, they're often really appealing if you're in

438
00:22:39,400 --> 00:22:41,800
Speaker 2: a high tax bracket now and expect to be in

439
00:22:41,840 --> 00:22:44,760
Speaker 2: a lower one later. But just be careful if you

440
00:22:44,840 --> 00:22:47,199
Speaker 2: do that for decades upon decades, you'll probably wind up

441
00:22:47,240 --> 00:22:50,040
Speaker 2: with some significant required minimum distributions. There's a lot of

442
00:22:50,080 --> 00:22:51,679
Speaker 2: probably a lot of people listening to this right now

443
00:22:51,760 --> 00:22:53,760
Speaker 2: who are saying, yeah, that's been great, But now I

444
00:22:53,800 --> 00:22:56,760
Speaker 2: understand what a required minimum distribution is, and that looks

445
00:22:56,800 --> 00:22:59,560
Speaker 2: mathematically kind of spendye in terms of the taxes I'm

446
00:22:59,560 --> 00:23:01,680
Speaker 2: going to have to pay in my mid seventies. So

447
00:23:02,080 --> 00:23:04,280
Speaker 2: that leads us to another option, Bob.

448
00:23:05,680 --> 00:23:09,040
Speaker 1: The other option is to go WROTH, pay the taxes now,

449
00:23:09,680 --> 00:23:12,560
Speaker 1: get it out of the way, and then presumably you're

450
00:23:12,600 --> 00:23:15,399
Speaker 1: in a tax free situation later. And people love the

451
00:23:15,480 --> 00:23:18,760
Speaker 1: idea that, hey, let's take the pain now, never pay

452
00:23:18,840 --> 00:23:23,960
Speaker 1: taxes again, compounded tax free growth forever, and withdraws tax

453
00:23:24,000 --> 00:23:29,280
Speaker 1: free forever. No rmds, you know, during your lifetime once

454
00:23:29,320 --> 00:23:32,480
Speaker 1: that money is in that WROTH category. So in twenty

455
00:23:32,520 --> 00:23:35,960
Speaker 1: twenty six, the ROTH contribution limit is the same as

456
00:23:35,960 --> 00:23:39,840
Speaker 1: the pre tax limit. There's no difference. Now one important detail.

457
00:23:40,400 --> 00:23:45,040
Speaker 1: Employer matching contributions are almost always required to go into

458
00:23:45,080 --> 00:23:49,280
Speaker 1: the pre tax category. Even if your contributions go into WROTH.

459
00:23:49,840 --> 00:23:54,400
Speaker 1: Your plan administrator can confirm how your match is handled,

460
00:23:54,440 --> 00:23:57,560
Speaker 1: but that's usually the way it works. So, for example,

461
00:23:57,680 --> 00:24:00,480
Speaker 1: you earn that same one hundred thousand dollars and you

462
00:24:00,520 --> 00:24:04,320
Speaker 1: contribute ten thousand dollars as a ROTH contribution. Well, you're

463
00:24:04,440 --> 00:24:07,960
Speaker 1: fully taxed on that whole one hundred thousand dollars this year.

464
00:24:08,320 --> 00:24:11,040
Speaker 1: And if that ten thousand dollars grows to the same

465
00:24:11,040 --> 00:24:14,119
Speaker 1: one hundred thousand dollars that Brian just alluded to in

466
00:24:14,160 --> 00:24:16,240
Speaker 1: the prior example, and you would draw it after age

467
00:24:16,280 --> 00:24:18,879
Speaker 1: fifteen nine and a half, and you have at least

468
00:24:19,040 --> 00:24:22,080
Speaker 1: five years after your first WROTH contribution that the money's

469
00:24:22,119 --> 00:24:25,639
Speaker 1: been in there, you owe zero taxes on that withdrawal.

470
00:24:25,880 --> 00:24:28,600
Speaker 1: That is very appealing to a lot of people. WROTH

471
00:24:28,720 --> 00:24:32,520
Speaker 1: contributions often make sense if you expect to be in

472
00:24:32,560 --> 00:24:36,639
Speaker 1: a higher tax bracket later, or as some people believe,

473
00:24:36,840 --> 00:24:39,159
Speaker 1: tax rates eventually are going to go up, you know,

474
00:24:39,200 --> 00:24:41,920
Speaker 1: the marginal tax rates. So they want to get these

475
00:24:41,960 --> 00:24:45,360
Speaker 1: taxes out of the way now and not be exposed

476
00:24:45,400 --> 00:24:49,959
Speaker 1: to maybe future income tax rates. So again, going with WROTH,

477
00:24:50,119 --> 00:24:53,399
Speaker 1: even if you're a high income earner, you're essentially locking

478
00:24:53,480 --> 00:24:56,280
Speaker 1: in today's rate and saying, fine, I'll pay it now

479
00:24:56,520 --> 00:24:58,160
Speaker 1: and then I don't have to worry about it down

480
00:24:58,200 --> 00:24:58,560
Speaker 1: the road.

481
00:25:00,040 --> 00:25:04,320
Speaker 2: And that leads us to the third lesser known tax

482
00:25:04,320 --> 00:25:06,159
Speaker 2: flavor inside of a four h one K, and that

483
00:25:06,240 --> 00:25:09,760
Speaker 2: is after tax contributions. This is something that existed a

484
00:25:09,800 --> 00:25:11,760
Speaker 2: long time ago. Right every now and then we'll see

485
00:25:11,800 --> 00:25:14,159
Speaker 2: somebody roll over a four to oh one K that

486
00:25:14,280 --> 00:25:16,800
Speaker 2: has something called after tax contributions, and it goes back

487
00:25:16,920 --> 00:25:21,080
Speaker 2: decades to some some more obscure tax rules that don't exist. However,

488
00:25:21,280 --> 00:25:24,240
Speaker 2: this is now resurfaced in the form of a new

489
00:25:24,320 --> 00:25:26,879
Speaker 2: rule that at the end of the day allows you

490
00:25:26,920 --> 00:25:29,360
Speaker 2: to put away a totally total of all the sources

491
00:25:29,359 --> 00:25:32,200
Speaker 2: of up to maybe seventy two thousand dollars if your

492
00:25:32,280 --> 00:25:35,480
Speaker 2: plan allows it. So after tax. That sounds a little

493
00:25:35,480 --> 00:25:37,760
Speaker 2: bit like wroth. Right, Bob just got done explaining how

494
00:25:37,920 --> 00:25:40,399
Speaker 2: we pay taxes on these dollars and we can invest

495
00:25:40,400 --> 00:25:42,480
Speaker 2: them on the ROTH side and they'll never be taxed again.

496
00:25:43,240 --> 00:25:45,840
Speaker 2: But that's not quite what this is. After tax contributions

497
00:25:46,200 --> 00:25:49,920
Speaker 2: go in again after tax. Of course, you're not deducting these.

498
00:25:50,400 --> 00:25:54,560
Speaker 2: The growth that occurs is happens on the pre tax side, right,

499
00:25:54,600 --> 00:25:57,280
Speaker 2: So that's bad. If you just make an after tax

500
00:25:57,320 --> 00:25:59,520
Speaker 2: contribution and then ignore it, well you've made a mistake.

501
00:25:59,520 --> 00:26:01,800
Speaker 2: Now you're taxing yourself two times with the least favorable

502
00:26:01,800 --> 00:26:04,159
Speaker 2: taxes we have. There's a second step you need to

503
00:26:04,160 --> 00:26:07,560
Speaker 2: follow here, if again, if your plan allows it. IRS

504
00:26:07,640 --> 00:26:11,880
Speaker 2: regulations changed in twenty fifteen to allow after tax contributions

505
00:26:12,119 --> 00:26:15,040
Speaker 2: to be rolled over into a WROTH situation. That can

506
00:26:15,080 --> 00:26:17,000
Speaker 2: be either the Wroth four O one K itself if

507
00:26:17,000 --> 00:26:20,520
Speaker 2: your plan allows it, or outside into some wroth ira anywhere.

508
00:26:20,640 --> 00:26:23,480
Speaker 2: So the idea here is you make these after tax contributions,

509
00:26:23,520 --> 00:26:25,160
Speaker 2: and again that can push your limit all the way

510
00:26:25,200 --> 00:26:27,159
Speaker 2: up to seventy two thousand dollars, believe it or not,

511
00:26:27,720 --> 00:26:30,880
Speaker 2: and then as quickly as possible roll those after tax

512
00:26:30,960 --> 00:26:34,160
Speaker 2: contributions to some wroth situation and then get them invested.

513
00:26:34,800 --> 00:26:37,320
Speaker 2: And again, literally you could be putting seventy two thousand

514
00:26:37,359 --> 00:26:40,439
Speaker 2: dollars away and the can grow tax free forever. Now

515
00:26:40,480 --> 00:26:43,840
Speaker 2: that's seventy two That includes all sources. It includes the

516
00:26:43,880 --> 00:26:46,840
Speaker 2: standard twenty four thousand, five hundred or thirty two five

517
00:26:46,920 --> 00:26:49,320
Speaker 2: that that we just got done talking about. Everybody can

518
00:26:49,320 --> 00:26:53,120
Speaker 2: do that. Your employer may put profit sharing or matches

519
00:26:53,240 --> 00:26:54,840
Speaker 2: or things like that in there as well, so that

520
00:26:54,880 --> 00:26:57,399
Speaker 2: gets added up. And then anything between the sum of

521
00:26:57,440 --> 00:27:00,199
Speaker 2: those two items and seventy two thousand dollars can be

522
00:27:00,240 --> 00:27:03,080
Speaker 2: done as after tax contributions. So see if your plan

523
00:27:03,119 --> 00:27:05,000
Speaker 2: allows it, it may allow you to build up a

524
00:27:05,080 --> 00:27:07,520
Speaker 2: really really solid pile of wrath money in the future

525
00:27:07,680 --> 00:27:08,680
Speaker 2: with some hoop jumping.

526
00:27:09,560 --> 00:27:11,760
Speaker 1: A lot of things to consider here. Here's the all

527
00:27:11,760 --> 00:27:16,919
Speaker 1: Worth advice. Saving consistently is the foundation. Saving strategically is

528
00:27:16,960 --> 00:27:21,800
Speaker 1: where the real advantage begins. Are your upcoming rmds bigger

529
00:27:21,800 --> 00:27:24,480
Speaker 1: than you expected, Plus, how do you know if you're

530
00:27:24,560 --> 00:27:28,760
Speaker 1: really ready to retire when healthcare costs are the wild card.

531
00:27:29,040 --> 00:27:31,840
Speaker 1: We'll tackle those questions and more coming up next. You're

532
00:27:31,880 --> 00:27:34,600
Speaker 1: listening to Simply Money presented by all Worth Financial on

533
00:27:34,640 --> 00:27:43,040
Speaker 1: fifty five KRC, the talk station. You're listening to Simply

534
00:27:43,080 --> 00:27:46,120
Speaker 1: Money presented by all Worth Financial on Bob Sponsller along

535
00:27:46,160 --> 00:27:48,480
Speaker 1: with Brian James. Do you have a financial question you'd

536
00:27:48,520 --> 00:27:51,000
Speaker 1: like for us to answer? There is a red button

537
00:27:51,000 --> 00:27:53,240
Speaker 1: you can click while you're listening to the show. If

538
00:27:53,280 --> 00:27:56,199
Speaker 1: you are listening on the iHeart app, simply record your

539
00:27:56,280 --> 00:27:59,720
Speaker 1: question and it will come straight to us. We'll start

540
00:27:59,760 --> 00:28:02,840
Speaker 1: off night with Rick in Addison. He says, we've got

541
00:28:02,920 --> 00:28:06,720
Speaker 1: roughly six hundred thousand dollars sitting in a brokerage account,

542
00:28:06,720 --> 00:28:10,080
Speaker 1: and I'm not sure how aggressively that should be invested

543
00:28:10,160 --> 00:28:13,560
Speaker 1: now that retirement is just a few years away. Do

544
00:28:13,680 --> 00:28:17,000
Speaker 1: we treat that money differently? Brian, and I'm presuming he's

545
00:28:17,000 --> 00:28:19,520
Speaker 1: talking about differently than maybe how his four oh one

546
00:28:19,600 --> 00:28:21,320
Speaker 1: k is being invested.

547
00:28:21,480 --> 00:28:24,200
Speaker 2: Right, So so okay, So so if retirement is only

548
00:28:24,240 --> 00:28:26,040
Speaker 2: a few years away, well, I think the key question

549
00:28:26,119 --> 00:28:28,879
Speaker 2: isn't how aggressive should we make this account. It's what

550
00:28:29,240 --> 00:28:32,240
Speaker 2: job does this specific pile of six hundred thousand dollars

551
00:28:32,280 --> 00:28:32,639
Speaker 2: need to do?

552
00:28:33,080 --> 00:28:33,199
Speaker 1: Well?

553
00:28:33,280 --> 00:28:35,960
Speaker 2: First step is define its purpose. So in most of

554
00:28:36,000 --> 00:28:39,520
Speaker 2: these pre retirement plans are taxable brokerge assets become that

555
00:28:39,640 --> 00:28:43,320
Speaker 2: bridge asset. That's probably, you know, any taxable account probably

556
00:28:43,320 --> 00:28:45,040
Speaker 2: what you're going to want to tap into first. If

557
00:28:45,080 --> 00:28:47,840
Speaker 2: you happen to have an abundance of cash, because you know,

558
00:28:47,840 --> 00:28:49,400
Speaker 2: you might have built up. Maybe you're in a stage

559
00:28:49,400 --> 00:28:51,840
Speaker 2: where you don't need as much in the emergency fund.

560
00:28:52,000 --> 00:28:54,120
Speaker 2: Perhaps you were living off twelve months while the kids

561
00:28:54,120 --> 00:28:55,640
Speaker 2: were in the nest, but now they're up and out

562
00:28:55,840 --> 00:28:57,520
Speaker 2: and they're on their own and the mortgage is paid off,

563
00:28:57,520 --> 00:28:59,760
Speaker 2: you may not have as much need for emergency funds.

564
00:28:59,760 --> 00:29:01,960
Speaker 2: Maybe you can drop down to a six month pile,

565
00:29:02,040 --> 00:29:04,440
Speaker 2: and then you could that means you can spend that cash.

566
00:29:04,560 --> 00:29:06,600
Speaker 2: That's the most efficient money to spend it all because

567
00:29:06,600 --> 00:29:10,240
Speaker 2: you're not generating any kind of taxable activity there. And

568
00:29:10,280 --> 00:29:13,160
Speaker 2: then if you have a taxable investment account, that might

569
00:29:13,200 --> 00:29:15,720
Speaker 2: be the second place you hit. And what we're trying

570
00:29:15,720 --> 00:29:18,640
Speaker 2: to do is keep you in a low tax bracket

571
00:29:19,040 --> 00:29:21,400
Speaker 2: in those first few years, so years one through three

572
00:29:21,440 --> 00:29:23,560
Speaker 2: of these expected withdrawals, You're you're going to want to

573
00:29:23,560 --> 00:29:27,520
Speaker 2: rely on very stable assets, high quality short term bonds, cash, treasury,

574
00:29:27,520 --> 00:29:30,240
Speaker 2: money markets, those kinds of things years four through ten,

575
00:29:30,280 --> 00:29:33,880
Speaker 2: your more conservative balance type of portfolios. Beyond ten years,

576
00:29:34,200 --> 00:29:36,560
Speaker 2: those are the buckets of money that you've been focused

577
00:29:36,600 --> 00:29:38,800
Speaker 2: on for so long, right, that's the growth stuff. That's

578
00:29:38,840 --> 00:29:40,880
Speaker 2: the stuff you want out there growing for a long time.

579
00:29:41,200 --> 00:29:43,000
Speaker 2: So you know, if you're planning on saying pulling out

580
00:29:43,000 --> 00:29:46,240
Speaker 2: eighty thousand dollars a year from investments in early retirement,

581
00:29:46,560 --> 00:29:49,080
Speaker 2: that says maybe two hundred and forty thousand dollars could

582
00:29:49,080 --> 00:29:53,080
Speaker 2: be can positioned conservatively to protect against sequence of returns risk.

583
00:29:53,160 --> 00:29:55,600
Speaker 2: That's I retire today and the market punches me in

584
00:29:55,640 --> 00:29:58,120
Speaker 2: the mouth tomorrow. Let's make sure we've got cash set

585
00:29:58,160 --> 00:30:00,440
Speaker 2: aside as Bob and I as always say to make

586
00:30:00,480 --> 00:30:02,400
Speaker 2: sure that we can cover those needs. That's the way

587
00:30:02,400 --> 00:30:05,920
Speaker 2: to be thinking about those particular assets. Gary and for Thomas.

588
00:30:05,920 --> 00:30:08,040
Speaker 2: Gary says they're spending more in the first year of

589
00:30:08,080 --> 00:30:10,960
Speaker 2: retirement than we projected. Well, that's a shocker. When's the

590
00:30:11,040 --> 00:30:12,880
Speaker 2: last time we ever heard that? How long do you

591
00:30:13,000 --> 00:30:15,560
Speaker 2: let that ride before deciding it's a problem.

592
00:30:16,040 --> 00:30:19,320
Speaker 1: Well, this is a topic that comes off up often,

593
00:30:19,360 --> 00:30:22,400
Speaker 1: and it should and I appreciate you bring and bringing

594
00:30:22,440 --> 00:30:25,240
Speaker 1: it to our attention. Gary. Here's what we see happen.

595
00:30:25,280 --> 00:30:29,280
Speaker 1: A lot people retire and that now they've got time

596
00:30:29,720 --> 00:30:32,120
Speaker 1: to do some of these things that they've been wanting

597
00:30:32,160 --> 00:30:36,040
Speaker 1: to do for years. Maybe celebrate that retirement by taking

598
00:30:36,080 --> 00:30:40,600
Speaker 1: a cruise or an expensive family vacation, or maybe now

599
00:30:40,600 --> 00:30:43,360
Speaker 1: that you have time to kind of play subcontractor and

600
00:30:43,440 --> 00:30:48,400
Speaker 1: actually manage the proper remodeling of a kitchen, let's say,

601
00:30:48,720 --> 00:30:50,560
Speaker 1: you know we're going to spend money on that. So

602
00:30:50,600 --> 00:30:53,320
Speaker 1: I think the important thing to do in your financial plan,

603
00:30:53,600 --> 00:30:56,160
Speaker 1: and we do this all the time, is we segregate

604
00:30:56,280 --> 00:31:00,400
Speaker 1: out the different spending goals. What are we spending and

605
00:31:00,440 --> 00:31:02,800
Speaker 1: when are we going to be spending it. And there's

606
00:31:02,840 --> 00:31:05,800
Speaker 1: nothing wrong with spending a little money in the first

607
00:31:05,840 --> 00:31:08,000
Speaker 1: few years of retirement for those kind of things that

608
00:31:08,080 --> 00:31:10,520
Speaker 1: I just mentioned, but you need to model those things

609
00:31:10,560 --> 00:31:14,200
Speaker 1: out and see how it impacts the long term financial plan.

610
00:31:15,000 --> 00:31:17,720
Speaker 1: Healthcare is another thing. We tend to segregate that out

611
00:31:17,840 --> 00:31:21,960
Speaker 1: as a separate category because healthcare over time has had

612
00:31:22,000 --> 00:31:26,040
Speaker 1: a tendency and probably will continue, those costs will continue

613
00:31:26,080 --> 00:31:30,520
Speaker 1: to rise at higher than the CPI or regular inflation rate.

614
00:31:30,600 --> 00:31:33,160
Speaker 1: So the important thing is to look at what you're

615
00:31:33,200 --> 00:31:36,440
Speaker 1: planning to spend and for how long those spending goals

616
00:31:36,480 --> 00:31:39,840
Speaker 1: are going to happen. That usually when we sit down

617
00:31:39,920 --> 00:31:43,320
Speaker 1: and run people through that scenario, that gives people a

618
00:31:43,360 --> 00:31:46,360
Speaker 1: peace of mind to say, hey, it's okay to do

619
00:31:46,440 --> 00:31:49,120
Speaker 1: some of these things that we've always wanted to do

620
00:31:50,240 --> 00:31:53,560
Speaker 1: in the first few years of retirement without blowing up

621
00:31:53,640 --> 00:31:56,480
Speaker 1: our plan. What we can't afford to do is just

622
00:31:56,600 --> 00:32:00,880
Speaker 1: let this lifestyle creep on everything, you know, spending rise,

623
00:32:00,960 --> 00:32:04,680
Speaker 1: and then put ourselves into jeopardy long term. All right.

624
00:32:04,720 --> 00:32:08,480
Speaker 1: Brian Emily in Loveland says, we've always reinvested our dividends.

625
00:32:08,560 --> 00:32:11,440
Speaker 1: Now that we're retired, should we let those pay the

626
00:32:11,560 --> 00:32:16,080
Speaker 1: bills instead of selling shares of the underlying you know,

627
00:32:16,200 --> 00:32:17,120
Speaker 1: stocks or funds.

628
00:32:17,480 --> 00:32:18,760
Speaker 2: Yeah, and this is this is one of the most

629
00:32:18,800 --> 00:32:22,720
Speaker 2: common mindset shifts that have to happen in retirement. It's

630
00:32:22,760 --> 00:32:25,280
Speaker 2: really important to separate the psychology from the math here.

631
00:32:25,320 --> 00:32:27,680
Speaker 2: First off, understand make sure you know that understand that

632
00:32:27,760 --> 00:32:30,360
Speaker 2: dividends are not extra return, right. It doesn't really matter

633
00:32:30,360 --> 00:32:32,680
Speaker 2: whether you spend them or spend the principle. You know,

634
00:32:32,880 --> 00:32:34,240
Speaker 2: I think a lot of people get hung up on

635
00:32:34,280 --> 00:32:36,200
Speaker 2: the notion that I want to I want to put

636
00:32:36,240 --> 00:32:38,680
Speaker 2: something away and leave my principle alone and only spend

637
00:32:38,680 --> 00:32:41,200
Speaker 2: the dividends. That way, my principle would be protected. Well,

638
00:32:41,360 --> 00:32:43,840
Speaker 2: the fact that you're looking for something that has dividends

639
00:32:43,840 --> 00:32:47,000
Speaker 2: to begin with, you are choosing to sacrifice the principle.

640
00:32:47,040 --> 00:32:49,200
Speaker 2: The stock market underneath that that goes up and down

641
00:32:49,400 --> 00:32:52,440
Speaker 2: no matter what you do. So yeah, you could define that, well,

642
00:32:52,440 --> 00:32:54,920
Speaker 2: our principle is intact, We've never spent the principle, only

643
00:32:54,960 --> 00:32:57,040
Speaker 2: the dividends. Well, the principle is wandering up and down

644
00:32:57,040 --> 00:32:59,280
Speaker 2: anyway because it's invested in the stock market, So you're

645
00:32:59,320 --> 00:33:04,240
Speaker 2: not necessary really protecting anything more. I don't really find it, particularly, honestly,

646
00:33:04,280 --> 00:33:06,360
Speaker 2: all that valuable to say I'm only going to spend

647
00:33:06,360 --> 00:33:09,480
Speaker 2: the dividends. You know, they're they're especially when when most

648
00:33:09,520 --> 00:33:11,960
Speaker 2: people have their assets coming out of iras. It really

649
00:33:11,960 --> 00:33:14,000
Speaker 2: makes no difference. You've got a pile of money. You're

650
00:33:14,000 --> 00:33:16,360
Speaker 2: not affecting the taxes at all by choosing one source

651
00:33:16,400 --> 00:33:19,520
Speaker 2: of income versus the other. Uh, the taxation happens as

652
00:33:19,560 --> 00:33:22,280
Speaker 2: soon as the any dollar, no matter its flavor, crosses

653
00:33:22,320 --> 00:33:24,719
Speaker 2: the line and lands in your checking account, so you know,

654
00:33:24,760 --> 00:33:26,479
Speaker 2: make sure. But if you're going to pursue this, make

655
00:33:26,480 --> 00:33:29,000
Speaker 2: sure that dividend max matches your spending need. If the

656
00:33:29,040 --> 00:33:31,280
Speaker 2: portfolio is only yielding two and a half three percent,

657
00:33:31,440 --> 00:33:33,640
Speaker 2: you need four, Well, dividends aren't going to cut it anyway.

658
00:33:33,760 --> 00:33:35,480
Speaker 2: You're still going to have to sell those shares. And

659
00:33:35,520 --> 00:33:37,520
Speaker 2: this isn't a failure. Don't think of it like that.

660
00:33:38,040 --> 00:33:40,200
Speaker 2: This is not the sixties and seventies, where you could

661
00:33:40,200 --> 00:33:42,760
Speaker 2: maybe get a more reliable four to five percent dividend

662
00:33:43,560 --> 00:33:47,320
Speaker 2: from from a still balanced portfolio. We have changed in

663
00:33:47,360 --> 00:33:50,240
Speaker 2: this country to focus much more on on the growth,

664
00:33:50,640 --> 00:33:53,160
Speaker 2: raise the value of something versus have it spit out

665
00:33:53,440 --> 00:33:57,320
Speaker 2: dividend income. CEO's boards are are incentive to raise the

666
00:33:57,360 --> 00:34:00,920
Speaker 2: share price, not the dividend nowadays. So that's why the

667
00:34:00,920 --> 00:34:03,240
Speaker 2: dividends are lower now than they used to be from

668
00:34:03,280 --> 00:34:05,479
Speaker 2: what you might be hearing from people who retired ahead

669
00:34:05,480 --> 00:34:08,120
Speaker 2: of you. So just understand the difference between what you

670
00:34:08,160 --> 00:34:10,640
Speaker 2: can count of out of dividend income and what you

671
00:34:10,719 --> 00:34:12,640
Speaker 2: might need to pay your bills. You may have to

672
00:34:12,960 --> 00:34:15,600
Speaker 2: sell shares anyway, and that's not a bad thing necessarily.

673
00:34:16,920 --> 00:34:19,440
Speaker 1: Coming up next, I've got my two cents and on

674
00:34:20,040 --> 00:34:24,560
Speaker 1: this whole four oh one K contribution decision, and that

675
00:34:24,640 --> 00:34:28,240
Speaker 1: has to do with what how charitably inclined you really

676
00:34:28,320 --> 00:34:32,359
Speaker 1: are and whether charitable planning should be a part of

677
00:34:32,400 --> 00:34:36,880
Speaker 1: your retirement strategy in helping to make decisions on where

678
00:34:36,920 --> 00:34:39,640
Speaker 1: to put your four oh one k money. Now you're

679
00:34:39,640 --> 00:34:42,080
Speaker 1: listening to Simply Money presented by all Worth Financial on

680
00:34:42,160 --> 00:34:50,560
Speaker 1: fifty five KRC the talk station. You're listening to Simply

681
00:34:50,560 --> 00:34:53,520
Speaker 1: Money presented by all Worth Financial on Bob Spondseller along

682
00:34:53,520 --> 00:34:57,080
Speaker 1: with Brian James. Well, Brian, let's collaborate on this one

683
00:34:57,120 --> 00:34:58,680
Speaker 1: a little bit. I want to spend a few more

684
00:34:58,719 --> 00:35:02,200
Speaker 1: minutes on this four one K contribution topic, you know.

685
00:35:02,320 --> 00:35:05,560
Speaker 1: And I'm I'm drawing on a situation I'm working through

686
00:35:05,640 --> 00:35:07,840
Speaker 1: right now, and it's a fun one to work on.

687
00:35:09,400 --> 00:35:12,160
Speaker 1: This is a husband and wife. The wife's actually a CPA.

688
00:35:12,360 --> 00:35:16,120
Speaker 1: The husband is in his peak earning years and he's

689
00:35:16,160 --> 00:35:20,680
Speaker 1: ready to retire in let's say three years, and they're

690
00:35:20,760 --> 00:35:23,160
Speaker 1: they're they're right now putting all the four to one

691
00:35:23,239 --> 00:35:26,799
Speaker 1: K contributions into ROTH. They've been really aggressive in that

692
00:35:27,080 --> 00:35:29,879
Speaker 1: in that area, doing a lot of WROTH conversions. Now

693
00:35:30,200 --> 00:35:33,759
Speaker 1: they've been believers in, hey pay the taxes now, and

694
00:35:33,960 --> 00:35:37,640
Speaker 1: I'm running different scenarios for them, saying, hey, maybe for

695
00:35:37,719 --> 00:35:41,000
Speaker 1: the next two to three years here, because he's got

696
00:35:41,040 --> 00:35:45,279
Speaker 1: some restricted stock and he's already earning a high salary,

697
00:35:45,760 --> 00:35:49,799
Speaker 1: maybe we want to save some taxes now. Uh. One

698
00:35:49,800 --> 00:35:52,400
Speaker 1: of the things that's coming up in that conversation because

699
00:35:52,440 --> 00:35:55,439
Speaker 1: I already know these people are very charitably inclined. They're

700
00:35:55,480 --> 00:35:59,040
Speaker 1: regular Tithers, and charitable giving is a big part of

701
00:35:59,080 --> 00:36:02,200
Speaker 1: what they do, you know, as a family. So one

702
00:36:02,280 --> 00:36:05,480
Speaker 1: thing that I'm introducing here to the conversation, and thanks

703
00:36:05,520 --> 00:36:09,680
Speaker 1: to the miracle of financial planning and tax planning software,

704
00:36:10,040 --> 00:36:13,320
Speaker 1: we can run these scenarios out based on a client's

705
00:36:13,400 --> 00:36:16,880
Speaker 1: individual goals. And what I'm talking about here is we

706
00:36:16,960 --> 00:36:19,480
Speaker 1: do need to factor in if we already know we're

707
00:36:19,480 --> 00:36:24,920
Speaker 1: going to be charitably inclined, this whole qualified charitable distribution strategy,

708
00:36:25,360 --> 00:36:28,120
Speaker 1: because a lot of times people that just force money

709
00:36:28,160 --> 00:36:31,560
Speaker 1: into these roth you know, four to oh one k's,

710
00:36:31,560 --> 00:36:34,759
Speaker 1: I want to pay the taxes now. They forget that

711
00:36:34,960 --> 00:36:37,560
Speaker 1: once you're age seven and a half, you know, up

712
00:36:37,560 --> 00:36:40,080
Speaker 1: to one hundred thousand dollars a year. You can shovel

713
00:36:40,160 --> 00:36:43,399
Speaker 1: money to charities and pay no taxes, and I think

714
00:36:43,440 --> 00:36:46,000
Speaker 1: that can change the game here in terms of some

715
00:36:46,040 --> 00:36:49,040
Speaker 1: of the decisions you make now, and the result can

716
00:36:49,120 --> 00:36:51,919
Speaker 1: be not only do we defer and not pay any

717
00:36:51,960 --> 00:36:55,280
Speaker 1: taxes on the money going in, meaning a pre tax

718
00:36:55,320 --> 00:36:59,919
Speaker 1: contribution if handled properly, you never pay the taxes. If

719
00:37:00,120 --> 00:37:02,320
Speaker 1: some of this money is going to be going to charity,

720
00:37:02,400 --> 00:37:05,040
Speaker 1: so it's just one other thing to factor in here

721
00:37:05,360 --> 00:37:07,520
Speaker 1: as you build your long term financial plan.

722
00:37:07,680 --> 00:37:10,439
Speaker 2: Yeah, I think those are huge opportunities, especially as you're

723
00:37:10,480 --> 00:37:13,080
Speaker 2: already if you're already doing this right, If you're not

724
00:37:13,160 --> 00:37:16,160
Speaker 2: charitably inclined and you haven't been making charitable contributions, this

725
00:37:16,200 --> 00:37:17,960
Speaker 2: isn't really going to help you. Doesn't mean don't make

726
00:37:18,000 --> 00:37:19,840
Speaker 2: charitable contributions, but it's not really going to help you

727
00:37:19,880 --> 00:37:22,360
Speaker 2: because it's just an expense you're not currently occurring. But

728
00:37:22,440 --> 00:37:25,560
Speaker 2: if you are charitably inclined and you're making these contributions,

729
00:37:25,560 --> 00:37:27,560
Speaker 2: then that's part of your budget now, and you can

730
00:37:27,600 --> 00:37:30,520
Speaker 2: do it in a much more tax efficient manner by

731
00:37:30,600 --> 00:37:33,640
Speaker 2: using these qualified charitable deductions. When you were turn ad

732
00:37:33,719 --> 00:37:36,839
Speaker 2: seventy and a half to offset your rm ds, as

733
00:37:36,880 --> 00:37:40,560
Speaker 2: well as using donor advice funds, using other assets these

734
00:37:40,600 --> 00:37:43,520
Speaker 2: types of things. But again so if you are charitably

735
00:37:43,520 --> 00:37:46,360
Speaker 2: inclined and you have assets spread out a lot across

736
00:37:46,360 --> 00:37:49,440
Speaker 2: a lot of different tax treatments, make sure you understand

737
00:37:49,520 --> 00:37:52,640
Speaker 2: what the impact is. If you're writing checks in that situation,

738
00:37:52,960 --> 00:37:56,160
Speaker 2: you are missing a massive bust load of opportunities. You

739
00:37:56,200 --> 00:37:58,759
Speaker 2: want to be thinking much more about currently. If you

740
00:37:58,760 --> 00:38:00,680
Speaker 2: are pre R and DA, you want to be thinking

741
00:38:00,680 --> 00:38:04,839
Speaker 2: more about donating appreciated securities. Find something in your portfolio

742
00:38:05,080 --> 00:38:07,520
Speaker 2: that you would have to pay taxes on if you liquidated,

743
00:38:07,600 --> 00:38:10,680
Speaker 2: but don't liquidate it right. Send the shares. These charities

744
00:38:10,680 --> 00:38:12,520
Speaker 2: you're working with know very well how to do this.

745
00:38:12,600 --> 00:38:14,600
Speaker 2: They all have broker's accounts out there. They're going to

746
00:38:14,600 --> 00:38:16,400
Speaker 2: give you something called a DTC number, and then you

747
00:38:16,480 --> 00:38:19,120
Speaker 2: just instruct your custodian to send those shares to that

748
00:38:19,200 --> 00:38:21,719
Speaker 2: DTC number. You avoid the capital gains when you hit

749
00:38:21,760 --> 00:38:24,320
Speaker 2: IRA RMD as now you got even bigger opportunities with

750
00:38:24,400 --> 00:38:25,680
Speaker 2: qualified charitable deductions.

751
00:38:26,480 --> 00:38:28,920
Speaker 1: Thanks for listening tonight. You've been listening to Simply Money,

752
00:38:28,920 --> 00:38:31,880
Speaker 1: presented by all Worth Financial on fifty five KRC, the

753
00:38:32,280 --> 00:38:32,799
Speaker 1: talk station