I’m 65 With $850K What Does My Tax Plan Look Like In Retirement

Troy Sharpe: In today’s video, we’re going to look at a 65 and a 62-year-old, still working, they have about $850,000 in savings and they’re ready to retire. They just have the big question. Do I have enough? Can I retire? How do I pay less tax? We’re going to lift the curtain and see how we do the tax planning for this couple. How we develop an income plan, look at Social Security and help bring it together from a comprehensive perspective.

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Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, Certified Financial Planner, Certified Tax Specialist, and also the host of the Retirement Income Show. We’re going to look at the hypothetical example that I went through today. It’s fairly similar to a lot of people that we see that come through, give us a call and they say, “Troy, can you help me retire? Where does my income come from? How do I pay less tax?” These are the big questions that we answer through the planning process. I want to make a distinction that if you have 500,000, if you have 2 million or 4 million, whatever that number is that you’ve saved for retirement, the principles are the same. The numbers and the analysis that’s required, of course, that’s different. The skill that’s needed to put the different pieces of the retirement puzzle together, of course, they vary with your particular circumstances, but the purpose of these videos is just to help you understand some of the concepts.

Many of you will never call us, will never reach out to us, but you want to apply this or you want to take it to your advisor, or you want someone to help you or figure it out yourself. The concepts are the same. I’m trying to raise awareness of the things you need to be aware of to have a better, more prosperous retirement. That means generally having more income, which means more security, paying less tax, which means more security, and making sure that your family’s taken care of.

Some of the basic parameters, 65 and 62. They are still working, $127,000 of combined income. Social Security at full retirement age is 30,00 and 24,000 for husband and wife. I received a lot of comments recently telling me that these Social Security numbers are too high, that no one has this level of Social Security income. I responded to some of them, but combined household wages, they’re 65 and 62. Yes, this is real Social Security numbers. These are not exaggerated. A lot of the questions were, “Troy, you have to make a maximum amount of income in order to have that level of Social Security.” No, you really don’t. You just have to have consistent income in a middle-class job for a long period of time, and you will come darn near close to maxing out your Social Security benefits. You’ll definitely be in this $30,000 range.

Now, the maximum right now for Social Security at full retirement age is around 3,100 a month. That would be about 37,000, 38,000, 39,000 in that range for maximum. This is very common. They have a spending goal of $80,000 a year to clarify the spending goal means Social Security and their investments will be used to generate that total amount needed to spend for retirement.

Then 850,000 in total investment assets. Most of this is in a retirement account, which, again, is a very common thing that we see. Too many people in my opinion have too much money stuffed away into these tax-infested retirement accounts, which there are benefits. You definitely want to have money in IRAs, but just be aware leading into retirement, we not only want a diversified portfolio, but we want our tax buckets diversified so when we start to withdraw income in retirement, we can manage what goes on our tax return. You can’t do that if all of your money is inside of a retirement account. In this scenario, most of their money was in retirement accounts, which is a very common thing that we see.

We’re going to jump right into it because I want to spend a decent amount of time on Social Security and tax planning today. This is the simulation on those original parameters we just went through. This is what it looks like. 62%. Now, I know I’m going to get comments that say, “Troy, their Social Security covers a large portion of that spending. Why is it coming in at 62?” First off, 62% means in 620 of these scenarios, as you can see here, for example, this simulation, it’s a positive one. It’s a positive outcome. They pass away with $2 million. In this one, they pass away with 710.

It’s not impossible to pull this off, but in this scenario, they run out of money. In 2044, they have 400,000 and you see where it goes into the bottom here, the red lines, that’s the year where they run out of money. It’s important to note here that it’s inflation. I talk about this all the time. I usually start the videos out showing that chart, that if you have the spending goal today, you need a lot more income than that throughout retirement, in order to maintain that purchasing power because inflation puts you into a position where you have to pull more out to maintain that same purchasing power today. If you want 80,000 today, in 20 years, you’re going to have to pull out somewhere around $150,000 to have that same purchasing power as 80,000 does today.

62%, not an ideal number, this was when they originally came to see us. We of course want to do the first three steps of the Oak Harvest Retirement Process process. That’s risk management and investments, then income planning and tax planning. Going to focus on income planning and tax planning today. We’re going to jump right into the results, not a lot of the theories or planning assumptions or different things we did to get to these numbers. I’m just going to show you the results.

2021/2022 Roth conversions, 68,000, 63,000. We did a $70,000 conversion. Close enough, it works out, I’ll show you in another planning software what those numbers look like. Did 63,000 or will do 63,000 next year. Then they are in retirement and the Roth conversions jump 118, 200, 162.

We’re getting that money out of that tax-infested retirement account and I’m going to show you the benefits of doing so as we go through this. Before we get to those benefits, we want to look at the overtime tentative- I say tentative because things change, but over time tentative income strategy. With having the different tax buckets, where are we taking the income from?

As of now, and this of course could change based on growth rates in the account, tax policy, income needs, unexpected expenses, vacations, all these things, right now, these are the Roth conversions. Once the Roth conversions are complete, you see we’re taking income to live off from two different places. Social Security is not shown on this chart, but it’s also being taken. Here from the taxable account, we’re using this money to pay the taxes on the Roth conversions. Ideally, we always use non-IRA money, we call it non-qualified money, to pay the taxes on these Roth conversions. This is just showing the distribution of where income is coming from. Tentative again because we do this every single year, the numbers will be different next year, but it’s an outline.

Here’s a really important thing when it comes to retirement planning. It’s crucial to have perspective, context of the decisions you’re making today, how they impact everything in the future, but the only thing you have to do is make a decision for what’s best for you to do right now or this year. Then we go through the analysis again next year. We sit down, we look at the numbers, we look at the pros and the cons, nothing is ever clear-cut typically, but we do the analysis, we do the research, and ultimately you make the decision.

Paying taxes, tax-deferred accounts. Now, look, we don’t ever get the tax-deferred accounts fully converted. There’s a reason for that, but we’re taking Roth withdrawals from these years because there are no more monies from here. We’re targeting specific tax brackets here along with Social Security. Then we see down the road, we’re receiving Social Security, again, not shown on this chart, I’ll show it to you in a minute, but these are the withdrawals from the tax-deferred accounts. These are the withdrawals from the Roth IRA accounts and these are just leftover monies that were deposited into the non-qualified account, but this is the distribution plan moving forward. Tentatively again.

Now I want to get into Social Security, but also the opportunity cost of doing Roth conversions. We know that when we do conversions, we pay the taxes today because we think taxes could be higher in the future. We want to mitigate that tax risk and we also want to obviously have more money in tax-free buckets to either pass on to the next generation or just have more flexibility. Go ahead and buy the government out of those retirement accounts because that partner in your retirement accounts, Uncle Sam, they can change the ownership percentage that they have of your accounts.

If you and I go into a business relationship together and we agree that you have 70% ownership and I have 30%, well, that’s the terms of the deal. The government can change the terms of the deal over time and this is why most people want to look at Roth conversions because those tax rates or the percentage of your retirement account that you owe to the government, can change.

Here’s the opportunity cost. This is comparing- the blue line is the account balances over time, doing the Roth conversions with a different Social Security strategy as well, this is very important. The green line are the account balances over time not doing any Roth conversions. The opportunity cost, first and foremost, when we do conversions we have to write the government a cheque. We send it to the IRS, that’s less money in our account to earn interest, there is a cost to that.

Meanwhile, the green line doing no conversions, don’t think there isn’t any cost to not doing conversions. One of the biggest costs is the uncertainty of the future tax environment. It’s important to have the context here. When you get to the required minimum distribution age, when you’re forced to start taking money out, that can not only put you into higher income tax brackets, different tiers, but it can also throw you into higher Medicare premium brackets, possibly taxes on your net investment income, and many other taxes that could be introduced into the future based on what your modified adjusted gross income is.

We’ll get into that here in a second, but there’s absolutely a cost to not doing conversions. The cost may not be borne by you. It may be borne by your children or grandchildren. Some of you probably don’t care what the kids inherit. You’ve done enough for them, or you just don’t care. Others of you absolutely do. You want to give your kids or grandkids the best opportunity and you want the money to go to them in a tax-efficient manner.

Now we’re going to look at the Social Security strategy and the impact that it had on their account balances, if they continue to do things they wanted to do when they came to see us, versus what we recommended, changing on the Social Security strategy, as well as doing the Roth conversions and how those two parts of the Oak Harvest Retirement Process process, the income planning, and the tax planning, how they work together to provide more security for the family.

Here’s the Oak Harvest recommendation, the Oak Harvest plan. Here’s the base strategy. This is continuing to do things the way they were going to do. First, I’m going to look at Social Security. They said, “You know what? We’re going to retire. I’m going to take my Social Security,” and this may very well be you. That’s okay. My only purpose with these videos is to help you understand how, when you tip that domino over, what is the ramification of everything else down the road. These videos, again, provide context and understanding.

He would take his Social Security. She would take hers. A few years later, if they didn’t do any conversions, they could pay very little taxes over the next few years versus what we recommended, deferring the Social Security, doing the Roth conversions, paying more taxes. We see here at the end of 2025, 950,000 versus 1.1 million. They absolutely have more money in their accounts by not doing conversions.

If we go five years out– We don’t even have to go five years after. You see it immediately over here, Social Security has turned down for him at 70. For her, it’s 70. Now they have $80,000 of Social Security income. This is a guaranteed lifetime income that will be there for as long as they’re alive. Total taxes, zero. Look at that. You could have $80,000 of Social Security income and pay zero in taxes. Most of you probably weren’t aware. That would not be possible if they took Social Security earlier and they had this big IRA account balance, not doing the conversions. We see here, one, if we look at age 75, 80,000 of Social Security versus 58, so that’s $22,000 more per year of income.

They’re also paying 5,000-6,000 less per year in taxes. We’ll come down here. 7,800, age 80. I think I was at 75, but the same thing. Not only they have more income, but paying a significant amount less in annual taxes. This equates to an additional $22,000, 25,000, $27,000 per year of additional savings. Now, of course, if you’re unhealthy, you don’t think you’re going to live a long time, take Social Security, go for it. That’s for you to decide. I’m just wanting to show you what is the benefit of deferring Social Security. In this particular case, they had longevity. They were in good health. They expected to live a long time.

We do look at the task comparison running out over here. They’re virtually in the 0% tax bracket forever. Here’s the cool thing. Not only did paying these taxes for these five years here, not only did they buy Uncle Sam out of the retirement account for the most part, but they also bought Uncle Sam out of their Social Security taxation. That’s pretty cool. Down here in the late 80s, now we see taxes are starting to go up 10, 11, 12, 13, 14, 15, 17 versus over here. Now at age 90,$100,000 in Social Security versus 72. It’s $28,000 of more income plus $15,000 in taxes compared to 700. That’s $43,000 of the net increase in income because of the planning we did up here.

Now, what are you going to do with that money? You’re 90 years old. Well, one, many of you will live to 90 and beyond, but two, one of the biggest areas of inflation in this country for people in retirement is healthcare expenses. Do you think you’d be more secure with an extra $47,000 a year to help pay for healthcare expenses? Maybe it’s long-term care or maybe it’s some health care, that’s for you to decide. Again, the purpose of the video is just to show you with their expected longevity, making these different decisions versus what they were going to do, not only provides more guaranteed income, much less tax, which means much more discretionary income for healthcare expenses later in life.

Look at the account balances. 2.7 in at 94 versus 1.5. He’s 94, he’s 91. You’re not going to live that long? Fine. Let’s look at 85. 1.8 million versus 1.37 million. A lot of times we take Social Security early because we want to preserve our assets. It’s often very short-term thinking because the way to preserve your assets is to actually defer Social Security for many of you, not all of you, let me be very clear. This is a particular analysis for these people’s particular circumstances. If you spend a different amount of money, if you have a different amount of money, if you’re investing, risk tolerance is different, all of this can change.

Please, this is not blanket advice. Again, I’m trying to introduce you to the concepts so you understand how these different dominoes interact with one another because when you make a decision in retirement and you tip that over, it interacts with everything else.

All right. Now I told you in the beginning of this video, I was going to lift the hood or lift the curtain and show you a little bit more about what we do for clients with tax planning. Before you call us and say you want this done, we do not do this on a transactional basis. We are not a transactional firm. We require relationships with people because as time goes on, all of these things change. Quite simply we just simply want relationships with people because that’s how we do the very best job we can.

This is one of the software that I’ve never shown on the YouTube channel before that we use for behind-the-scenes tax planning. First and foremost, what we do is we’ve uploaded the 2020 tax return here. This is the actual tax return, and now what we’ve done is we’ve copied all those numbers over to 2021. Here’s what we can do. It’s the current tax law, or we can look at the most recent proposals coming out of Congress to see how those proposals can impact the tax planning that we’re doing today.

Now, these are just proposals until we actually have something in writing and it’s passed and signed by the President. We won’t know what exactly it is, but it does give us some insight into planning. First and foremost, here is their wages from 2020, now increased income for this year. We’ve made that adjustment, some interest dividends, et cetera. Here on the Roth conversion, zero. Before we met these people, 70,000, if you go back to that last software, that’s the conversion that we did.

Capital gains entered here, total taxable or total income jumps up to 198 from 120. The increase in income along with the Roth conversion, standard deduction, he’s now 65. That gets an increase to last year’s standard deduction. Taxable income, 95 last year, 172 this year. Now, we couldn’t enter any different variables into any of these scenarios that we want and we can expand these rows to create more areas where we can input data.

I just want to show you a couple of things. First and foremost, if we do this Roth conversion, keep in mind the other software we were looking at, which bracket do we target? We look at all these different scenarios and say, “Okay, for this spending goal, for this asset balance, for this age, for all of these variables, it made sense to target that $70,000 Roth conversion for that family.” If we went higher than that, we would’ve went into the next tax bracket. This one just confirms for us ordinary income, the next change in the effective rate happens at 2,000 more dollars, but also Medicare premiums, another $23,000 in what’s called modified adjusted gross income, then you enter into a different Medicare tier. Long-term capital gains, they could have 50,000 in long-term gains before the effective rate goes from 15% to 18.8% because of the net investment income tax.

Briefly, I want to show you this chart because I’m a visual person, and I know a lot of you are visual as well. This kind of shows us how much more ordinary income that we can have. This is looking at the baseline ordinary income of 170, taxable at 172. This is with the Roth conversion of 70,000, but let’s say someone wanted to be real aggressive in this scenario.

We can look here and say, “Okay, how much more can you take out of the retirement account before we get out of this bracket and into the next bracket?” You see here, it’s about 159,000, 160,000 before we jump up into the 32% bracket, these dotted lines here, these are different Medicare tiers.

This is the annual cost per spouse increase to the Medicare premiums if we cross over on our modified adjusted gross income, those dotted lines, as far as the amount of total income. Now you have this little dot right here, this little spike, I’m not going to spend a lot of time here. This is where net investment income kicks in. Because of their investment income, the dividends, and the capital gains, net investment income kicks in whenever your modified adjusted gross income- you add back what’s called any above the line deductions and any tax-free interest that you have, you add that back in and you pay tax on the lesser of the amount of income in your modified adjusted gross income that is above that threshold or the amount of investment income that you have. It’s the lesser of those two.

In this particular example, if they take out a little bit more income here, it bumps them into this net investment income threshold, not a big deal here. This is just a little bit, but sometimes when we look at this, it could be very well a lot more. Capital gains down here, just to visually kind of show this chart. If we have more capital gains, if they sold stock, for example, in this instance, they could sell up to have about 45,000 in capital gains, before we jump into this next tier of everything being taxed at 18.8, instead of 15%. Most people believe there are only two capital gains rates; 15% and 20%. The truth is there’s four. You can pay 0% on your capital gains. If you’re married, filing jointly, and have taxable income beneath about $81,000, you pay 0% on your capital gains and your dividends. You could pay 15%. You could pay 18.8% or you pay 23.8%. There are more than just two capital gains rates.

I mentioned above the line deduction. I just want to show you what those are really quick. Educator expenses, business expenses, HSA deduction, HSA health savings account. If you have a high deductible health plan, the HSA is one of the best accounts to ever be invented. Please contribute the max to your HSA. Living expenses, self-employed plans, IRA deductions. These are above-the-line deductions. That means it reduces your gross income before you get to your standard deduction. This section here is for itemized deduction. If we were trying to see, does it make sense to itemize versus take that standard deduction? We just simply input all these right here. There is going to be a massive change. It looks like the salt cap is being lifted. It’s a massive tax break for people who have multiple properties or very, very expensive homes up to $72,000, it looks like, of state and local taxes will be able to be deducted with the new tax provisions that are going to affect.

For example, mortgage interest, property taxes would go here. Sales tax was part of this calculation as well. We can put all these things in here. Obviously, it will tell us whether we should take the standard or the itemized. Qualified business income. If you own a business, this is a huge potential deduction. Last but not least, we just want to look at a tax summary of everything that we’ve went through so far.

Key figure. With the Roth conversion, total income jumps up to 198, no itemized deductions. They take 26,450. Taxable income 172, total tax 29,318. Married, filing jointly, marginal rate is 22%. Average rate of return 14.7%. Average rate of return is different from what you may be familiar with as far as the effective rate of return. Effective is when you take your total tax paid divided by your total taxable income. Average rate takes your total tax paid, divided by your total income before any above the line deductions are reduced, reduce that total income. A little bit different number, but it’s looking at total income before any deductions to get to your average tax rate.

Over here now, I want to talk a little bit about this safe harbor. This is important because if you’ve ever received a penalty for underpaying your taxes, you can pay– There’s a couple of different rules for this, but for this family, 32,251, it’s 110% of the previous year’s tax liability. 32,251 will avoid any tax penalties. Very clearly this identifies which bracket we’re in. We’re up to the 22% bracket, just barely making it in. We may go a little bit below, maybe 66, 68 on that conversion to create some room. These are all the different modified adjusted gross income tiers. This is a real quick snapshot of all the different things that the tax code has that you can qualify for based on where your modified adjusted gross income is.

A couple of last things, Medicare Part B and D premiums. Notice it says for 2023 because 2023 Medicare premiums are based on your 2021 tax return. If we do the conversion, we’re going to fall into this bracket, we’re going to pay an extra 59 per month and an extra $12 a month for Part B and Part D respectively. Don’t lose sight of the bigger picture here. Yes, we’ll pay higher Medicare premiums for one year doing the Roth conversion, but again, this is going to help us out long term.

Any capital gains, a lot of times well, clients, when we scan their tax return in or prospective clients that are going through the process to become clients, we’ll scan the tax return in and we’ll see a lot of losses over here. That’s quickly identified that we can use as part of the tax planning process as well. In summary, when we looked at where this family was when they first came to see us, everything was coming in at over here at 62%. Based on what we went through today, which was changing the Social Security strategy, starting the Roth conversion strategy, few other things in here I didn’t get a chance to go through on the video, but if we come over here now to look at all the recommendations that have been made, jumps up from 62% to 97%.

Again, income planning, tax planning, this is why the Oak Harvest Retirement Process process I feel is so important because it’s more than just investments. That’s a big part of it, but we need to look at the rest of the picture to help people feel more secure about how much they’ve saved, providing income, paying less tax, and making sure their family is okay. I meant to keep this video to about 15 minutes today, but again, I get into this and I’m passionate about this stuff and they sometimes go long.

I do appreciate you watching. Please share this video with a friend or family member. If you have questions or comments, please put them down below. Reach out to us if you want to talk to us, and of course, subscribe to the channel. Hit that thumbs-up button. If you don’t like it, hit the thumbs-down button, but we look forward to seeing you on the next video.