I Have $1 Million and I’m Retiring In a Recession, How Do I Keep My Retirement Portfolio Safe?
A recession is looming, and you’re wondering, will my retirement be safe? How do I save my retirement income from taxes and rising healthcare costs? Retiring in a recession is difficult, in this video, Troy Sharpe discusses some strategies to keep your retirement portfolio safe from the impacts of a recession.
Recessions and Retirement:
Mark Elliot: Welcome to the Retirement Income Show with Troy Sharpe, the CEO, and founder of Oak Harvest Financial Group. We’re going to talk today about retiring in a recession. Now, the president has said, “Hey, it might be a slight recession.”
President Joe Biden: I don’t think there will be a recession. If it is, it’ll be a very slight recession. That is, we’ll move down slightly.
Mark Elliot: I don’t know if that differs when we’re planning for retirement, whether it’s a real recession or a slight recession, but it is I think, a nerve-wracking time for people that are getting close to retirement or even maybe just started retirement, because there is that sequence of returns risk that you talk about all the time, that if you retire in a great market, then retirement’s really pretty easy. It’s those first few years of retirement if the markets go the wrong way and all of your money’s sitting in the market, you’ve got some problems and then you throw in a recession. That’s a lot of question marks, I would think.
Troy Sharpe: Yes, it creates a ton of not only question marks, but it also creates opportunity. Retiring in a recession, I think everyone understands that it’s much, much more difficult than retiring in a bull market. Anyone who’s retired over really the past, let’s call it 12 years coming out of the ’08 market meltdown because of the subprime mortgage crisis. If you retired in ’09 or 2010 or 11, or any of those years, you retired at one of the best times historically speaking to ever retire, because the market averaged over that 10-year period, somewhere around about 15%. We’re talking about the S&P 500 here somewhere in that range.
When you retire, and the market’s averaging 15%, it makes portfolio withdrawals not that big of a concern in regards to you can make a lot of mistakes and still end up being okay. Now, those people who retired the decade before coming out of the dot-com bubble burst, that was an entirely different decade, so if you retired in 2000, you had a lost decade. Essentially, the market lost somewhere around about negative 1% per year. 2001, ’02, the market is down, finally starts to rebound, gain some solid footing. 2008 comes, and of course, the bottom falls out again, and then the recovery takes about four or five years there.
That was a very difficult time to retire. That’s where in those types of environments, you have to have a strategy, you have to be very intelligent regarding what you’re doing with your tax opportunities, and also where you’re taking your income from and how much income that you’re taking. We’re big believers in a dynamic spending plan here at Oak Harvest Financial Group. We want our clients to spend more money in retirement, not less so you can pass on 3 million or 4 million or 2 million, whatever that number is.
When we talk about the retirement success plan, it all starts with having a discussion with you about what success means in retirement. As that process goes along, we have to take into consideration the environment that we’re in. As I spoke to the prior years, if you retired five years ago, or six years ago, or three years ago, we were in the middle of a bull market.
If you had certain legacy goals or charitable goals, or you wanted to gift to your children or grandchildren, help pay for college in an environment where the Fed is reducing interest rates and the government is essentially printing money to support the economy, then you can be a bit more aggressive if you’re comfortable and willing to take that risk if things turn against you because odds are pretty good when we have soft monetary policy, meaning the Federal Reserve is lowering interest rates, we had had zero interest rate policy for some time.
The markets tend to perform well, growth stocks better than value stocks in that environment, but you can make more mistakes and still get away with it, but you can also, some people choose to be a bit more aggressive at that point because the odds are in their favor. In a recessionary environment like we’re currently in now, where the exact opposite monetary policy is taking place, we have to be a bit more defensive, but we also have to be, again, more strategic when it comes to not just trying to protect the portfolio against losses, but withdrawing income, how much income we take.
That’s where the dynamic spending plan comes in. I’m going to touch on in a minute, the tax opportunities. You have a lot of different tax opportunities in this type of environment, but you have to be aware of them. Then you have to, of course, know the appropriate amounts to take advantage of. Healthcare is a big one. When you look at the cost of healthcare, out-of-pocket cost, prescriptions, copays, deductibles, long-term care increasing five to 10% a year on average. When you look at those costs across the country, losing money in a recession, taking money out of your accounts in a recession typically is going to mean you have less money down the road, which could jeopardize that healthcare or long-term plan. Then finally, the estate side of things. A lot of things you can do in a recession with estate planning as well. All of that is what we call the retirement success plan. It starts with having a conversation with you. How do you define success in retirement? We believe all that money that you’ve worked for and accumulated, it’s designed to do a couple of things.
One, provide security for you and your family, first and foremost. You can’t take it with you so let’s figure out how much can we spend, live the lifestyle we want to live without the fear of running out of money in 20 years or 15 years, or 30 years. Also having enough left for healthcare. The tax side of things, when we look at your account being down– Let me put some math to it. When your account’s down, let’s say you have $1,000,000 and you wanted to convert $100,00 to a Roth IRA, put it into the tax-free account.
When you take money from the IRA, you move it over to the Roth, you pay taxes today, but that money is now in a tax-free environment. All interest, all growth forever will be 100% tax-free. Now, if your accounts are down, let’s say they drop from 1,000,000 to 800,000. We can still move that $100,000 over to the Roth IRA, but now you’ve moved a larger percentage of your retirement account over to Roth. It’s still the same tax liability, it’s still the same amount of money in that tax-free environment.
If we expect the market to rebound, which we do, it’s just a matter of if and when, historically speaking, that 100,000 when it rebounds, now it’s growing back in this tax-free environment but more importantly, you’ve converted a larger percentage of your overall IRA, you’ve started to take care of that tax infested nightmare.
Why is it a tax-infested nightmare? Your retirement account, your 401(k)? It’s because if you follow the conventional wisdom advice, and you let that account defer, defer, defer while you spend down your other money, oftentimes it grows to such a number when you hit 72 and you’re forced to start distributing money from that account, it causes a tax domino effect.
It can bump you into higher Medicare brackets. It can bump you into what’s called net investment income tax brackets, where you’re paying an additional 3.8% on your capital gains. There’s this whole domino effect that takes place once what’s called Modified Adjusted Gross Income, which is essentially your adjusted gross income. You add back any tax-free interest and a few other items there. For most of you, you add back your municipal bond interest.
Then what happens is if that number is larger because you’re forced to take money out of the IRA, all of a sudden it creates this domino effect where you’re paying higher Medicare premiums potentially, you’re paying more tax on your investment gains, on your dividends, on your interest from investment accounts. It creates this entire effect. We really need a tax plan. In a recession like this, a larger percentage of that overall account can start to move out. That has two effects. One, you get more money into the Roth IRA assuming the market’s going to rebound because otherwise when it rebounded, if you left that 100,000 in the IRA, it’s just going to grow and now it’s going to be 120 or 130, 140 down the road.
Now your RMDs, it’s 72 and beyond are going to be much larger. It also does a second thing here. It reduces your future required minimum distributions because that money is no longer in your retirement account. It’s in that tax-free Roth, and there are no required minimum distributions from the Roth. Now, I talked about legacy planning because that’s step five of our retirement success process. Let’s say it’s important to you that your children get a step ahead in life and you don’t want to bounce your last check. We have plenty of clients that do and that’s plenty okay.
We need to build a plan around that, whatever your desire is. You’re also helping the legacy plan when you’re doing these Roth conversions in a recessionary environment because both of those accounts, your traditional IRA and your Roth IRA, they have to be fully distributed in 10 years once you pass away and those kids inherit it. The Roth IRA, when your kids distribute that money, they can let it grow tax-free for an additional 10 years, taking out what they need and never pay taxes on a single dollar of interest gained in that account or at all.
The IRS has recently provided guidance that says not only do your kids have to fully distribute your retirement account in 10 years, but they also have to take required minimum distributions. Think about your kids. Maybe you have a son and he’s married and they’re both working, or maybe one spouse is working, has a really good job. Now all of a sudden you leave a $1,000,000 retirement account, or a $2,000,000 retirement account. They have to take all that money out. That income distributed from the inherited IRA goes on top of their working income, their earnings, plus maybe any other income they have from rental real estate or side jobs or whatever income. Now all of a sudden, they’re getting bumped into that 30, 40, maybe taxes are a lot higher in 15, 20 years, maybe 50%, 60%. When you’re doing these tax strategies, especially in a recessionary environment, because we believe markets are going to come back, we ask our clients to believe one thing, and that’s capital markets work long term. Short term, there is volatility and there is fluctuation, but we believe capital markets work over the long time.
The stock market follows corporate earnings. The stock market is nothing more than a discounting mechanism for future earning expectations for corporations, essentially taking into current earnings plus the growth rate, future revenues, et cetera, and calculating that into– or discounting it, I should say, into a present value. One thing we have to be aware of is there are opportunities and when we’re in this environment, it is gloom and doom and it doesn’t feel good, and you turn on the news and everyone’s trying to scare that, you know what?
The truth is, if we have a plan and we take advantage of the opportunities that are available to us while sticking to that plan, our opinion is we’re going to come out ahead over the long run because we had a plan, we stuck to that plan, we took advantage of the opportunities that were presented, and because of that, the plan should end up being better in the long run. I’m Troy Sharpe. This is the Retirement Income Show.
The phone number to sit down, have a conversation is 1-800-822-6434. No cost for the consultation, we’re simply going to get to know you, what’s important to you, and we’re really going to start to define what retirement success means for you. Is it making sure that you have enough? Do you want more income in the beginning years of retirement when you’re more active and healthy and expect to travel? Is healthcare and long-term care, is that important to you? Do we need to work that into your plan, into our process?
Estate planning, making sure that your wishes after you’re gone come true. That’s part of the planning. We typically take care of that in the first year of the relationship, working with your attorneys, or we have a list of attorneys that we work with. All of this stuff we do in a very structured, very detail-oriented process. We call it the Retirement Success Plan. To get that process started, to get going on your very own customized retirement success plan, pick up the phone, give us a call, it’s 1-800-822-6434. You’re going to leave a message if you’re listening to this on the weekends.
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Mark Elliot: This is the Retirement Income Show with Troy Sharpe, the CEO and Founder of Oak Harvest Financial Group. Our topic today, Retiring in a Recession, we’re just getting started, we got a lot more to get to. Stay with us. Investment advisory services offered through Oak Harvest Financial Group, LLC, Oak Harvests Financial Group is an independent financial services firm that helps people create retirement strategies using a variety of insurance and investment products.
Investing involves risk, including the loss of principle, any references to protection benefits, or lifetime income generally referred to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Oak Harvest Financial Group, LLC, is not permitted to offer and no statement made during this show shall constitute tax or legal advice. You should speak to a qualified professional before making any decisions about your personal situation. We are not affiliated with the US government or any governmental agency. This radio show is a paid placement.
