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BRIAN: Welcome to Safer Retirement Radio, where you get the transparency you deserve. With over 35 years of experience in finance and investing, we help you stay up to date on market news and retirement strategies. I’m Brian James Decker, owner and founder of Decker Retirement Planning, and host of Safer Retirement Radio. With me is my co-host and one of the advisors here at Decker Retirement Planning, Clayton Bradshaw.
CLAYTON: ‘Kay, welcome back. We’re excited to be here today. So, last week we finished the conversation where we were talking about the distribution plan.
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CLAYTON: We talked about the risk bucket, and the two-sided models, and how those models helped keep our client accounts positive through the first quarter of 2020. So today, now, I think the question that some folks were wondering after last time is “Okay, so I’ve made my decision, I’ve got the numbers, I know what income I’m gonna get. Now what? How do I implement it? What do we do?” So today we want to cover some of the things that you need to be aware of when you’re implementing a plan, because it’s not as simple as just hitting a button, and everything’s set; there’s a lot that goes into it.
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CLAYTON: So, we want to talk about any potential costs to be aware of. It’s a big puzzle: you’ve gotta make sure that all the pieces fit together really well. So, we’re gonna be talking about making sure that everything is maximized for tax efficiency, that your RMDs are taken care of. And we’ll go into this today, because there’s a lot, and so it’s not something that you just set it and forget it: it requires some on-going service. And that’s one of the things that we do offer here at Decker Retirement Planning, is a Servicing Team to help maintain these plans on an on-going basis.
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CLAYTON: Once our clients come onboard, we want to take of them like family, throughout the rest of their lives, throughout the rest of that planning process. And so, we’re really proud of our Servicing Team. So, Brian, why don’t you kick us off, and start talking about some of those costs and other things that you need to be aware of when you’re putting a plan together?
BRIAN: ‘Kay, good. So, we have five finalization checks that we make to the plan. One is, we want to make sure that the income is going to be enough for you, net of fees, for the rest of your life. That easily is the most important, right?
CLAYTON: Yep.
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BRIAN: Second, we want to make sure that risk minimization is in place. Typically, clients come to us with 60-plus percent of their money at risk, and we typically have ‘em 20 to 25 percent of their money at risk. So that’s number two.
CLAYTON: Yep.
BRIAN: Third, is we want to make sure that we’re optimizing the returns on each part of their buckets; are they getting the highest return possible from their cash? From their three to five-year investment? From their seven to 10-year investment? From their tax-free investments? And from their risk manager?
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BRIAN: So, separately, we want, one at a time, to have a discussion, and make sure that each one of those buckets is optimized for performance. Number four is tax minimization. So, on tax minimization, that’s gonna be important to make sure that as tax rates go up, which, I think we both are on the same page… You expect that, right?
CLAYTON: Yep.
BRIAN: I think that’s a no-brainer, actually. As tax rates go up, we want to make sure that the two biggest tax-saving strategies are in place.
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BRIAN: The index universal life tax-free income that we typically are seeing six-plus percent, net of fee, tax-free returns coming into clients to age 85 and 90. We also want required minimum distributions to be coming in on a logical basis, so that we are minimizing the required minimum distributions by taking taxable money from their qualified accounts, like IRAs, and funding either part of the IUL, or doing Roth conversions.
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CLAYTON: Right. So, real quick, I’m just gonna jump in. We used a couple of acronyms, so “IUL:” “index universal life,” is what that stands for. And we can talk about that as part of the tax strategy, but “RMDs” or “required minimum distributions,” that’s the big one, that some folks know it’s coming, but they don’t always know what that means. So, we can, if we’ve got some time, we’ll touch on that a little bit more. But just know when we say “RMDs” we’re talking “required minimum distributions.”
BRIAN: So, this year, no one has to take an RMD because of the CARES Act, right?
CLAYTON: Yep.
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BRIAN: But there’s a right and wrong way, in our opinion, to take the required minimum distribution. If we have qualified money coming back to you, post 72 years old, your RMD should be part of your regular income.
CLAYTON: Right, instead of taking it out, only to have to re-invest it, and then get taxed on the growth on a non-qualified account, again.
BRIAN: That’s the wrong way.
CLAYTON: Right.
BRIAN: Now you’re paying more taxes than you should if you do it that way.
CLAYTON: Correct.
BRIAN: The right way is for RMDs is to have it come as part of your taxable income, anyhow.
CLAYTON: Yeah, and just use it to cover your retirement expenses.
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BRIAN: Correct. So now let’s spend a couple minutes on Roth conversions. So, I’ll throw you a hanging curve.
CLAYTON: [LAUGH] ‘Kay.
BRIAN: If you give us 250 thousand in an IRA-and our managers are so good-and 15 years later that 250 is 1.5 million, are you happy?
CLAYTON: Well, sure.
BRIAN: [LAUGH] Tax-wise you’re not.
CLAYTON: Right. I know that was a hanging curve.
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CLAYTON: So, obviously, when you’re dealing with taxable income, the point you’re trying to make here is that you’d rather pay tax on that lower amount, on the 250, than pay tax on the higher amount, the one-and-a-half million. Because your percentage probably is gonna go up between now and then, plus 20 percent of 250 is a lot less than 20 percent of 1.5.
BRIAN: Correct. So, in both cases, the rates expect to go higher, and the amount has gone higher, and it is poor tax planning if you’re not proactive in taking some of this money every year-depending on your age, of course, and your health.
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CLAYTON: Right.
BRIAN: But, we want to make sure that the way that you take your Roth conversions, takes into consideration if you’re single, or married filing jointly… we’d want to look at those brackets and see where your gross income is, take out the standard deduction, and see where you are, so that we’re not raising your brackets.
CLAYTON: Right. And it’s a different approach from what a lot of folks will see when they go in and talk to, like, a CPA or somebody that’s doing their taxes for the year, ‘cause they’re just gonna focus on just the individual year…
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CLAYTON: …and they’re gonna do, I assume, everything right-that’s part of their job-but it’s looking on a one-year time horizon. When we look at tax minimization, we’re looking at a 20 to 30-year time horizon, and you’ve got a lot more wiggle-room with stuff like that.
BRIAN: I’m really glad that you brought that up, Clayton. So, the job of the CPA is to minimize your taxes.
CLAYTON: Right.
BRIAN: Taking Roth conversions doesn’t do that. Roth conversions is, like you said, being proactive, and paying taxes now, so that you don’t have to pay higher taxes later.
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BRIAN: I don’t know why it is, but two things: one is, it seems to be a battle with the family CPA to do Roth conversions, number one. Number two, the CPA is always thinking that after retirement, their brackets, their taxable income, is gonna drop. And that rarely is the case with our clients.
CLAYTON: Right.
BRIAN: So, the CPA doesn’t have the information we do about their future income not going down.
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BRIAN: So, he or she, the CPA, is making a logical conclusion that “wait,” but in the five years that you wait, if you do, that IRA is gonna go up. And so, we just want to take wise, measured steps, and be proactive, and paying taxes now on money, so that in the future, that growth is tax-free. Those three things that are beautiful about a Roth: it grows tax-free, it distributes income back to you tax-free, and it passes to beneficiaries tax-free.
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BRIAN: So those are the four things that we do. There’s one more check that we have when it comes to finalizing the plan. And, objectively, people should have liquidity. Subjectively, is how much?
CLAYTON: Right.
BRIAN: Everyone’s a little different.
CLAYTON: And so, when you say “liquidity,” you’re just talking access to funds that are available to you that day, or next day, right?
BRIAN: Right. Some people, liquidity’s not a big deal. Some people, it is a very big deal.
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BRIAN: So, we want to make sure that we do that liquidity check to make sure, mathematically, we add up the total dollar amount, and a percentage amount of the portfolio that’s next day liquid, no penalty. Those are the five things that we recommend that be in place before you finalize and fund your plan. Now you mentioned fees, too.
CLAYTON: Yeah. So real quick. On the plan-and the point of all of this is to make sure not only that your income is maximized and optimized in retirement, but also that you are minimizing your taxes; that you are getting to enjoy what you worked for…
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CLAYTON: …that you’re not just turning around and giving it all away in retirement or giving it back to whoever you got it from. Giving it back to the government, right? So those are the things that we want to consider when putting a plan together, because we want to make sure that in doing this, you can have a safer retirement, you can enjoy doing those things that you want to do in retirement, and stress less about “Oh, I’ve got to meet with this person this year, or this person this month to get this taken care of.” We do our annual reviews with our clients. We make sure that on an annual basis all the accounts are updated, everything looks good, and if they need help during that time, we can take care of what they need to regarding their plan.
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CLAYTON: But it typically just works on an annual basis that we can do this. For the clients we have, they can stress less in retirement because of it.
BRIAN: Right. So, your point is: once you have a plan, you need to maintain it, update it.
CLAYTON: Yeah.
BRIAN: Just like your car. You don’t just buy a car and never see a service station again. You’ve gotta update it, you gotta maintain it, you’ve got to take care of it. So, your plan is the same. As the markets change, your plan’s gonna change, and your income is gonna change. The tax rates are gonna change.
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BRIAN: We’ve got to make sure we stay on top of it with regular servicing that’s typically done. What about fees?
CLAYTON: So, with fees… I’ve had some folks come in, and they’ve shared a story or two about the time that they went in and they were unaware of certain costs and fees that had been incurred in putting their plan together. And we want to make sure that when folks come in, all transparency is given on anything that’s out there. And so, we just want to talk about some of the potential fees or costs that people can run into whenever they’re dealing with-just investments in general.
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CLAYTON: So, Brian if you want to kind of run down the list of what people can typically expect, or what they should be aware of, or watch out for, I think that’d be helpful.
BRIAN: Yeah, this is good. So, there’s three fees in funding your plan. One is any transfer fees. So, if you’re gonna fund your plan with transfers from Edward Jones, or transfers from Schwab, Fidelity, Vanguard-those transfers usually they’ll charge about 50 bucks per account to transfer in. What we do is we reimburse the charges for those transfers. We don’t feel comfortable having you pay that to fund your account, so we reimburse the transfer fees.
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BRIAN: The second used to be a factor, not so much anymore, and that’s transaction fees. So, if there’s transaction fees to fund your account, we reimburse those, too. But be aware that transfer fees and transaction fees are fees to fund your account. The third fee is to make sure to estimate any capital gains in funding your account. I’ll just state the obvious: there’s no capital gains in cash. There are very little capital gains in the typical mutual funds, especially bond funds.
CLAYTON: Right.
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BRIAN: Because every year they settle up with the 1099 on how much money’s been settled for interest, dividends, short- and long-term capital gains, and your basis is going up over the years. If you have a low-basis stock, which is tech-lingo for…
CLAYTON: Let’s say you bought Apple 30 years ago.
BRIAN: Right, and you’ve got a 10-dollar basis, and the stock is-what is Apple? I don’t even know.
CLAYTON: Like, 467 today.
BRIAN: Okay.
CLAYTON: Cause they just crossed the two trillion-dollar mark, for capitalization, today.
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BRIAN: Wow. So, yeah, if you’re going to sell a stock, and incur a capital gain, two things: proactively, we hope you take those gains before capital gains go higher. And it looks like that they will, so that’s number one.
CLAYTON: And we bring this up, again… So, we’ve got offices on the West Coast: San Francisco, as well as in the Greater Seattle area, and because of that, we do deal with a lot of folks that got in early to some of these bigger companies, right? The Silicon Valley, our office there, that we see this a lot.
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CLAYTON: Seattle, I mean, I remember hearing one of our planners up there had met with a guy who sat a few desks down from Bill Gates, early on. And so, we do run into that kind of stuff. And so, anybody who’s just “Oh, I bought a couple hundred shares of XYZ company stock 20 years ago,” or whatever, capital gains can affect you pretty heavily.
BRIAN: Correct. And, you know what’s sad? Is when people say that they don’t want to pay the taxes on that.
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BRIAN: I’ll interpret what that means: that means that they won’t ever use those assets, and they’ll just transfer to the kids, and the kids get a stepped-up basis, so, voila, they get inherited wealth from the parents, which is fine, but it’s not fine if it’s at the detriment of your income. If you want seven or eight thousand a month, and you’re not getting that-that doesn’t sound like a lot for someone who has a low basis-but if you’re jeopardizing your income because you don’t want to pay capital gains, that doesn’t make sense to us.
CLAYTON: Right.
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BRIAN: So, we talked about the cost of funding your plan. We want to make sure that we estimate your capital gains, set those funds aside, fund your plan, pay your taxes, and you’re good. The other costs that are important, is to know what the costs are of your existing plan compared to the plan that you’re funding.
CLAYTON: This is a good one.
BRIAN: This is good for us.
CLAYTON: Glad you brought this up. Yeah.
BRIAN: Yeah, do you want to take that one?
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CLAYTON: So, one thing to consider is we never want anyone to let the, as you say Brian, let the fee tail wag the dog, right? You want make sure that you’re comparing apples to apples when it comes to fees, and so when folks come over to us with the way that the accounts are managed, I mean, the fee that we do charge is only on 25 percent of money, in the cases for most of our clients. And that drastically reduces the fee that they are paying. I mean, typically, what do you see are kind of the average costs for someone?
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BRIAN: Well, I just did the calculation this morning. So, it’s 34 basis points. 0.34 percent. Now normal mutual funds are charging well over one percent on their equity and about .7, .6 on their bond funds. They average around 90 basis points. So, we’re typically seeing a two-thirds reduction in fees when clients fund their plan with us. That’s what we typically see.
CLAYTON: Right.
BRIAN: That’s a big deal.
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CLAYTON: Yeah. For somebody that’s paying that much, to be able to save that, and actually being able to benefit from that extra growth for themselves, is huge.
BRIAN: Yeah.
CLAYTON: So, like I said, last time we talked about the funding sheet, or, sorry, we talked about the distribution plan. We talked about the buckets. We talked about the risk bucket. Today we’ve talked about making sure that everything funds together. And we do all of this on what we call a funding sheet. So, again, just like our plan is a one-page document where you can see your income, how much tax you’re paying, you can see where your funds are all laid out…
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CLAYTON: …we have a sheet on our end that helps us know how all these puzzle pieces fit together. And it gives pretty clear instruction on, “All right, here’s where your funds are, here’s how they fit into all the buckets,” so you can make sure that everything is being tracked every step of the way, so you know how the taxes apply, where the liquidity is. It’s amazing how all of it fits together.
BRIAN: I left out one important thing on the tax minimization strategy, and that is how we fund it with that funding sheet. So, you have qualified and non-qualified money.
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BRIAN: Qualified money is IRA money, pre-tax; these accounts have yet to pay tax. Non-qualified money is you’ve already paid tax on this money. So, what we do, in funding your plan, is we take the non-qualified money and put it in the front of the plan. So, the first 10 years of income coming from your plan, is already tax money. That means that yes, you are pulling money from your portfolio, but it’s not taxable for the most part. That gives a 10-year window for us to focus on Roth conversions on the risk bucket.
CLAYTON: Which is on the back end of the plan.
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BRIAN: Correct. So, that is very, very important, as far as tax planning. And the Roth conversion, alone, typically we see six-figures in tax savings on that strategy, by itself. And when you throw into that the IUL, the index universal life that we talked about, where you’re getting seven-plus percent, tax-free, net of fees, that’s pretty powerful. Those two alone, plus the tax planning and the placing of the qualified/non-qualified, allow our clients to pay a lot less in tax.
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CLAYTON: Right. So for our listeners again, if anybody’s interested in seeing what the plan would look like, what the funding sheet would look like for you, understanding a little bit more about your costs, or anything on your current statements, we’d be happy to talk with you about it. Our number-you can get a hold of us-833-707-3030. We can just do a free 15-minute call just to answer a couple questions and see how the stuff that we’ve talked about today applies to your situation. No commitment, it’s just a matter of making sure you’ve got all the information, and if it looks like something can work out, great, we’d love to see if we can work with you. If not, we hope that you’re better off for the information that we’ve shared.
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CLAYTON: We also hope that you check out our website. We’ve got a lot of great resources on there. We’ve got a couple of books that you can download. Obviously, you can listen to more of our podcast episodes on there. We’ve got some great articles; we hope you subscribe to our newsletter. I know there’s a bunch of different things, but I just want to let you know we do put out quite a bit of great content for those that are looking to just bolster their knowledge of investing and retirement planning in general. But again, don’t hesitate to reach out to us if you do have specific questions. 833-707-3030. We look forward to talking with you next week. Thanks for being here with us today.
