The 4 Retirement Decisions That May Be Costing You 100’s of 1,000’s of Dollars

 

Troy Sharpe: The purpose of this channel is to help you stay more connected to your money, help you understand the complexities that are involved with retirement planning. Today I’m going to talk to you about the four things that we see time and time again that could be costing you potentially hundreds of thousands of dollars.
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Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner professional, and host of The Retirement Income Show. When we talk about all the decisions that go into retirement planning, first, they’re all interrelated, they all compound on one another over time just like compound interest. If you invest X amount today, it earns this rate of return, it should be worth this later in life. Same thing in retirement when it comes to decision-making. If we make a good decision and a good decision, and another good decision, all of these good decisions compound into us having more wealth at the end of the road.

I want to talk to you about the four things that I often see people making bad decisions about, and if you make the bad decision, understand, it’s not just costing you money today, it’s costing you money over the course of your retirement. Just a quick second to remind you to subscribe to the channel and hit that bell icon so you can be notified when we’re going to upload more powerful retirement content to help you keep more connected to your money, and also comment down below, we love to see the comments.

Number one, not having the appropriate investment allocation for your goals, for your retirement, for what you’re trying to accomplish. First and foremost, as you know if you watch this channel, bonds are unlikely to provide any real rate of return moving forward when we account for inflation, that’s what the real return is. A lot of this general information out there you shouldn’t be following, it doesn’t apply to you. They don’t know your dreams, your vision, your income needs, what you want to do as far as where the money goes to, so we’ve developed what we call the Oak

Harvest Retirement Process Process. This is what clients or prospective clients receive when they work with us.

The first part, of course, is having an investment allocation, so I want to show you the power of making a decision in just one year, or excuse me, we’re actually going to look at over a two-year period. We’ve seen this a lot over the past couple of years. People come in and they say, “Troy, I’m very nervous about the presidential election. I’m nervous about the Coronavirus. I’m nervous about what the Federal Reserve is doing. I’m nervous about the amount of debt that we have. I’m nervous about this, I’m nervous about that.”

It’s very understandable because, in retirement, it’s an emotional attachment that we have to our money primarily caused by the fact that we’re no longer receiving income, we’re not in the saving or accumulating phase anymore we’re in the distributing phase. That means all the income we’re ever going to earn most likely has stopped. Now all of the assets that we have, we have to start taking the money out. When we have political events here in the country or geopolitical events around the globe or certain tax changes or administrative changes as far as different decisions that a new administration may make versus an old administration, all of these things can create fear and instill uncertainty in how we believe we should be invested.

We saw this a lot over the past couple of years and this is just the one example I’m going to go through. A $1 million portfolio that has 40% in stocks versus 60% in stocks, versus 75% in stocks.

Now, a general practitioner, if you have a relationship with one of these big-box firms, a big brokerage firm, that’s the one where they have 20,000 advisors across the country, understand that your advisor has a boss who has a boss who has a boss who has a boss and so on up the chain.

Many of you are in management or many of you own companies, you understand that the only way to control what everyone down the chain is doing is to have rigid systems, processes and procedures, and then systems in check to make sure those people are being held accountable to making sure they follow the those. If you say you’re conservative or medium conservative, you’re going into a big box portfolio. If you say you’re conservative, you’re probably going to have 20%, 30%, maybe 40% in stocks at most, but with a dynamic investment portfolio or a dynamic allocation, it’s a conversation we should be having each year.

Yes, you’re conservative but if the Federal Reserve, for example, a couple of years ago during COVID started putting trillions of dollars into the marketplace, and I mean literally trillions of dollars, people were going back to work, we expected some type of treatment or some type of vaccine to come about and the economy to reopen, those are different economic and also monetary circumstances. It behooves you to have a conversation and say, you know what? I’m 58, I’m 52, I’m 59, I’m 64, I do believe in the long-term growth of the markets although I am a conservative investor.

If we live by our fears and keep the investment portfolio very conservative because there’s a presidential election upcoming or the midterms are next year and I don’t know who’s going to win Congress, or the Coronavirus is still going on. What if there’s another variant that comes out? All of these things can lead to emotional decision making which costs the typical client if they’re doing it themselves a lot of money over time.
40% in stocks versus 60% versus 75% on a million-dollar portfolio, a 40% allocation means $400,000 in stocks. $600,00, $750,000, pretty clear here. Now, over the past couple of years with the markets done, I’m going to just roughly say about 40% gain in the market. If we had 40% in versus 60% or 75%, the gain that we would’ve made in the portfolio was $160,000 versus $240,000, versus $300,000. That’s over a couple year period. It’s a massive difference for a portfolio worth $1 million. What is the actual cost to you? Well, this is our baseline so there’s no cost, but the difference in gain is $80,000 between having 40% versus %60 versus 75%, the cost is $140,000.

Now, the average person is going to say, you know what? I still made $160,000. I’m pretty happy and I’m okay. As a retirement planner, as a financial guy, I don’t look at what the gain or loss was in any certain year. We have to understand that money has a time value. Meaning, money today is worth a lot more than money in the future. When we look at, or we extrapolate out the time value of this money, because if we made $80,000 more, that $80,000 is going to be invested. This $140,000, it’s going to be invested.

Yes, we made less in this scenario, but we made a whole lot less than we actually think because when we look at the $80,000 that you could have made if you had an allocation based on the monetary and economic circumstances, and we didn’t allow fear to creep into the invest allocation decision, that $80,000 that we would’ve made if we were simply 60% stocks instead of 40% earning 7% over 20 years is really $309,000. If you were 75% stock because of all that support that’s in the market, that’s $140,000 that you missed out in this year compared to your 40/60 portfolio versus if you were 75/25. That $140,000 over the next 20 years, you really cost yourself $540,000.

Now, when you talk about, am I going to run out of money? Do I have enough? How am I going to pay for healthcare expenses? These big questions that we answer in retirement but putting a plan together. This is your healthcare fund and this is just one decision that you made in one year. Now, imagine if you make good decisions year after year after year after year. Now, of course, the market’s not always gonna go up 40% in a two-year period, but that’s not the point. You also have tax decisions to make.

Number two, making the wrong tax decision. Here we have a Roth Conversion Strategy. I’m not going to go into the details because I don’t want this to be a 40-minute video, but this says about $1.75 million in the total portfolio, around the age of 60 and living to about 90. Looking at a tax strategy versus no tax strategy, we see first and foremost, this would be one of the top-ranked strategies. This would be targeting for this hypothetical example, going up to the 24% bracket, moving money out of that tax-infested IRA, putting it into the Roth.

Over time, when we have an apples-to-apples comparison, first and foremost, they do have a large spending need in this particular scenario, but the ending value $874,000 versus no tax strategy, $490,000. Total taxes paid, $485,000 versus $1.187 million. Now, if taxes go up in the future, this tax paid in this scenario will be a lot larger. Meaning, the disparity between having a tax plan and not having a tax plan will be a lot greater. Number two is not having a tax plan. Well, guess what? Part of the Oak Harvest Retirement Process Process, we have not only an investment plan that’s connected to your goals, that’s connected to what’s important to you, but that investment plan is tied into an income and a tax plan.

Number three thing is income strategy. Where are we taking our income from? When are we taking Social Security? We’ve seen with the tax plan here, this is hundreds of thousands of dollars. For some of you, it might be $200,000 on the tax side, $400,000, $600,000, $800,000, maybe over a million dollars. It is substantial. Number three, scenario that could possibly be costing you hundreds of thousands of dollars, and as you start to see, it adds up to possibly a lot more than hundreds of thousands when you have the proper investment portfolio combined with the proper tax plan and proper income strategy.

We’re going to look at just Social Security here. This is a Social Security analysis. A lot of times when people retire younger, we see them taking Social Security sooner than they should. Now, everyone’s situation is different. If you’ve heard me say this once, you’ve heard me say it a thousand times. Retirement decisions are like a set of dominoes. You knock over one or you make one decision, it has a cascading impact across all the other facets of your retirement; whether that’s account balances, how much income you’ll have today or tomorrow, how much taxes you’re paying today or tomorrow, how much is left to pass on, possibly estate taxes, a lot of different areas. Every decision matters. That’s why you want to compound good decisions year after year after year.

Looking at on the right side here, we have an early election of Social Security, 62 years old, versus if both spouses defer it. Now, again, everyone’s circumstance is different, I’m just trying to convey what the possible value is in the crossover points and what you should be aware. Making the wrong decision if you have longevity if you have an income plan that makes sense to defer it out this long, look to see what this is.

If you take it early, by the way, at full retirement age, in this example, the husband here has about $3,100 a month in Social Security. It is around max Social Security. The spouse had no Social Security, so she is receiving half of those benefits. I’ll actually show you those numbers in a minute, and this is deferred out till age 70 for both of them. First thing to point out, if we take it early, look at this, this is a lot of money. It’s $324,000 we will have received before Social Security clicks on here.

Then, for the rest of our lives, because this is an increasing guaranteed lifetime income stream, if we just look at year one of when we turn this on, it’s 43 versus or plus 1700, which is $6,000 a month, verses 24 and 11 about let’s call it $3,500 a month. Which scenario now has much more security? Yes, we’ve had to pull down $300,000 of our savings, of our investments. If you only have a couple hundred thousand dollars saved, maybe this isn’t an option. Once you get into that 1, 2, 3, 4, 5 million range and your good health, which one provides more security from an income standpoint?

Even if you have less money saved, this is a good point, I don’t want to go too far down this rabbit hole, but there is nothing more secure than having a very good guaranteed lifetime income stream in retirement. I’d much rather have $6,000 a month guaranteed for life than $3,500. Wouldn’t you? That way, no matter what the market’s doing, no matter what’s going on elsewhere, you have this income coming in. It’s a guaranteed lifetime income. As you can see, it’s an inflation-adjusted income. By the time we get to about 80, 81, now we are at this breakeven point where we have received more from deferring out here than we would have if we took it at 62.

From there, now look, our Social Security is up to about $7,000 a month versus $4,100 a month here. $358,000 more you will have received, not to mention, you will have taken less out of your portfolio in these back years because you have $7,000 thousand a month versus $4,000 a month in this scenario. We’re taking more out here, but also keep in mind that we’re taking less out back here.

Everyone’s situation is different. My point here is, your Social Security is part of your income plan. The other part of your income plan is which buckets are we taking the income from? That has an impact too. The Oak Harvest Retirement Process Process. There’s a reason why it’s investment planning, income planning, tax planning is the first three steps. Done right, these can potentially save you hundreds of thousands of dollars over time.

Number four, estate planning. Many people aren’t even exactly sure what an estate plan is. Truth of the matter is estate planning is very complex. You need someone who specializes in this area. Now, it is a financial planning deal, but you need attorneys to draft the documents. You need attorneys to help coordinate with the financial planner so that everyone’s on the same page.

That’s what we’re doing here at Oak Harvest Financial Group to make sure that the attorneys are working with the financial advisors. What is an estate plan? First and foremost, in its simple terms, it’s your basic documents. You want to make sure you have a living will, a power of attorney, health directives. These are basic papers that’ll help to determine, not only what happens to your estate, but what happens to you if you becoming incapacitated, give your wife for example, or your spouse else access to your accounts if you do become incapacitated, and also directs what happens in the probate process, not to mention, of course, who receives what percentage of your estate.

Now, it gets more complex when you have more money. If we have an estate today for about $3 million, one of the concepts I want to get across here is understand that, and some of you are in states where you have inheritance tax as well which is a whole other can of worms, but not only do you have to worry about income taxes, if you even care about what happens to your money when you’re gone, many of you you want to bounce your last check, and I get that and that’s okay.

We encourage you to spend as much of your money with your kids and grandkids while you’re living to have those memories because those memories are invaluable and they will last way beyond when you’re here, but for a lot of you you’re going to have money left when you passed. Once we start to get into this $3, $4, $5, $6, $7, $8 million range, now you have to worry about overtime estate taxes.

Your IRAs when they pass to the next generation, your children have 10 years to take them out and they’ll pay income tax but you also have estate taxes that could be on top of that. If you’re in a state with inheritance tax, you could have inheritance tax as well. Now, there are some deductions and other things in there but high level, an estate plan wants to do these things. It wants to minimize taxes, possibly provide you control from beyond the grave, but also asset protection, not only during your life but also after your life. There are a lot of options here. Again, this is part of the retirement or the Oak Harvest Retirement Process Process estate planning.

Do we have a trust? What type of trust? Do you have a family-limited partnership? There are multiple ways to structure a family-limited partnership. Trusts, for example. A lot of times we’ll need multiple trusts. What can a trust do? Well, one is you get money outside of your estate, That’s what this line here is. Any money in your estate possibly will be subject to estate taxes and possibly inheritance taxes.

During our life, we need a plan to get these things out of our estate but we also want to maintain control so if we want to live off the income or we need money to do what we want to do, we need to have access to this, but at the same time, we want to get it out of the estate. As this all grows over time, we have access, we have control, but we’ve also separated what is taxed at the federal estate tax level or inheritance tax, and what is not. A proper plan gets this in place.

Now, why is a trust important? Let’s say you have a son or a daughter and they’re married and you pass that money on to them. You say, “You know what, I don’t care.” $1.5 million goes to your son, $1.5 million goes to your daughter. They start co-mingling those funds, paying their bills, paying off their mortgage. A few years later, they get divorced. Do you want half of your money going to your ex-son-in-law or ex-daughter-in-law future? No, of course, not. Part of the estate plan is we want to protect against those things. We want your money to stay in your family.

Asset protection. In Texas, IRAs are protected, normal IRAs and 401(k)s, against creditors and also lawsuits but inherited IRAs are not. The state laws are different across the country but an inherited IRA doesn’t receive the same, and this is a federal thing, doesn’t receive the same asset protection. If we have a proper trust with the proper language setup, it still has to be distributed from a 10-year standpoint because of the SECURE Act but we can still now provide creditor protection, we can provide asset protection, we can prevent against a divorce in the future of your children taking half of your savings.

All of these tools can be used and others but understand that estate planning, improperly done, or what we see often is an estate plan put in place but never formally executed, meaning the accounts have not been transferred into the proper documents or they haven’t been operated properly over time. Again, that’s why we’re doing this in-house here. The financial advisor can speak with the CPA, can speak with the attorney, and all of this is part of the Oak Harvest Retirement Process Process, you don’t have to worry about.

A lot of stuff we covered here but obviously depending on how much money you have, this could be hundreds of thousands if not millions. You add that to the portfolio allocation, the income plan, and the tax plan that’s a lot of different things, and these are some of the mistakes that we often see being made costing you or potentially you hundreds of thousands of dollars if not more.

In summary, number one was the investment plan. Number two, tax plan. If you don’t have a tax plan, you’re probably missing out on hundreds of thousands of dollars. Number three was Social Security. We did a comparative analysis here looking at Social Security at different ages. Your situation is unique, okay, but understand taking it early versus later could cost you hundreds of thousands of dollars. It is a significant source of income. Number four, an estate plan. Not having the proper estate plan in place could cost you not just hundreds of thousands of dollars but millions of dollars.

It’s not just having the proper estate plan, it’s making sure you fund those tools whether they’re trusts or family limited partnerships, or other entities. We need to get those assets retitled, we need to use them correctly over time. Again, as I showed you here, we need to create asset protection in the future for your kids and grandchildren. If they get divorced, if they get into an accident, if something happens and they’re liable, we don’t want half of your money that you just had no estate plan, you just gave it to them out, going away unless you don’t care. Then, if you don’t care, that’s on you.

Those are the four things. We want to tie them all together. That is what the Oak Harvest Retirement Process Process is. If you like this video, comment down below, subscribe to the channel. If you hit that little bell icon, you’ll be notified when we upload new content but this is what we’re going to continue to do is deliver you powerful information to help you stay more connected to your money.