Your Retirement Questions Answered about Roth Conversions, Social Security, and More

Should you take Social Security early with the hope of your accounts lasting longer? Should you withdraw from cash and defer your retirement accounts? What about those hidden costs that sometimes come with Roth conversions? Are they too expensive and do they possibly make the Roth conversion not worth it? These are all great questions that we’ve received over the past couple of weeks and we’re going to respond to them plus more in today’s video. So this is what we’ve decided to do once a month we’re going to post a response video to your comments now We’re looking for the best comments that we think the most amount of people will benefit from. If you think you have a comment that could provide value to all the thousands of people who watch these videos make sure to post it down below and I’ll take the time to respond to it. So we’re covering two videos today.

The first one is I’m 60 with 2 million, how much can I spend in retirement without running out of money now? We posted the video six days ago and we have 16,000 views already.

Is it better to withdraw from cash until almost depleted?

Our first comment comes from blue-collar budgets who posted six days ago and he says ”Is it better to withdraw from cash until almost depleted?” To provide some context He’s asking, is it better to let our retirement accounts defer and to generate retirement income in the beginning years? Withdraw from that cash until it’s almost depleted. So this is what we talk about when we discuss step two of the retirement success plan. Which is income planning, now that ties into step three tax planning those two are done simultaneously but we have to know approximately how much income you need, so we can start to determine the best places to generate that income from so the types of financial tools we’re going to use But also the accounts we’re going to withdraw that from and that ties directly into tax planning. So the answer to this question really is a function of many things. It’s how much do you have? How much do you spend? How long do you expect to live and need that money? What are the goals for that money when you’re gone? Are you giving to charity? Is it going to go to the family? That can tie in to an extent of where we’re withdrawing the income from as well but we need to have that type of visibility and then be able to project out and look at a sensitivity analysis of possible outcomes and then have a conversation with you about the considerations the benefits of taking different paths. This is exactly what we talked about though in a lot of the Roth conversion videos here. For most of the people that we sit with to do retirement income and tax planning, it typically makes more sense to defer the retirement accounts and use the cash to live off of. Also to do Roth conversions and pay those taxes typically is going to put people into a better position to have more assets over time and pay less money in taxes. It’s not a one-size-fits-all plan having the custom analysis and then having someone to be there with you and guide you as things change as the years progress is what income and tax planning is all about. Now a couple more tidbits here. So one, it’s not always just about the math and just about the numbers. It’s really who you are What do you want those numbers the money that you’ve saved? What do you want that to do for you? How do we bring that all together? It’s a balance between the math and the analysis, but also who you are and what you want your retirement to be like is very important. Another tidbit we typically see the higher your spending level is relative to your asset base the less beneficial Roth conversions can potentially be. Now again, that’s not a one-size-fits-all. It’s just typically what we see when we do these types of analyses so keep that in mind but if you are spending less the general rule of thumb here or the guiding principle is, if I’m spending less that means my accounts theoretically could grow more. So that tax infestation that you have inside your retirement account again theoretically could become a much bigger problem as time goes on and then you’re forced to start to distribute money and you have all types of negative domino effects that could impact your retirement your taxes your income and how much money goes to those that you love and care about.

Can taking social security income early help to offset negative monthly cashflow?

Okay, we have a twofer from blue-collar budgets the next question he asks can taking social security income early help to offset negative monthly cash flow and will that allow your cash investment accounts to last longer? Again, we speak in generalities here because your situation is different from your neighbors and so forth. One thing that I believe often gets overlooked is while, yes if you take social security early, you have more income coming in and therefore you have to withdraw less from your retirement account, so most people think that well that’s going to help my accounts last longer. The problem is inflation. So as time goes on and the purchasing power of your dollars erode you have to typically withdraw more from your account.

Even when you get into your 70s and 80s and you think you may be spending less, inflation is what we call the silent killer. When you have to withdraw more later in life because the purchasing power of your dollars has eroded, typically when you look at the comparative difference between taking Social Security early and if you had deferred it to maybe full retirement age, there’s a big gap there. While you save more money in the beginning years in your investment accounts, that gap typically has to be withdrawn later in life and then you run the risk of really deteriorating your account values while also having a much smaller guaranteed lifetime income. Ultimately this comes down to your longevity, your health care needs later in life, how long you expect to spend money of course, and how much during your go-go or the slow-go years. Main principle here is while taking Social Security earlier typically will protect your account values to the extent that you’re withdrawing less, that gap from taking Social Security early to if you deferred until full retirement age, what we see typically is that has to be made up later. You have to pull more from your accounts to keep up with inflation, medical costs, et cetera. You can get into a pretty bad spiral effect there, a negative spiraling effect in regard to your account balances later in life. Blue Collar has some other questions here that I’m not going to get into, but what this is and what we talk about with the Retirement Success Plan is having visibility into the future. In this video I used a good analogy, I think it was good and I got a comment that said it was good here, about a river. If you go down a river for the very first time, you don’t know where the bends are, you don’t know where the rapids are, you could possibly get into some pretty serious danger if you’re unfamiliar with the terrain. Now if you have a guide that’s traveled that river thousands of times they can help prepare you, make sure that you’re on the left side versus the right side, make sure you have the right equipment, make sure you’re making good decisions as different events along the course of that travel as they unfold. That’s really what having a retirement plan with something that gives you visibility into the potential outcomes in the future regarding your decisions today, that’s what’s really powerful. That’s what we’re trying to do here at Oak Harvest Financial Group and with all these videos is to help you understand the impact of these decisions, the possible impact, and then help be that guide as time goes on so we can do the analysis and then have a conversation based on knowing who you are, what’s important to you, and explain how going this direction or this direction, the pros, the cons, how it could benefit you, but also what you should know and what you should be aware of.

Can you include IRMA and RMD distributions?

Next question is about IRMA. I-R-M-A-A. It’s an acronym. It stands for Income Related Monthly Adjustment Amount. If you’ve modified adjusted gross income, it’s your AGI from your 1040 with some calculations. Typically, you’re going to add back in your tax-free income. That’s the one that gets most people in retirement. If you’re modified adjusted gross income hits certain levels, you have a hidden tax. What Gary says is, can you include IRMA and RMD distributions? The additional IRMA expense made looking at Roth conversion much more expensive. Here’s the thing with doing Roth conversions. If you do the conversion that increases your modified adjusted gross income, the IRS goes back two years to look at your modified adjusted gross income to determine if you have an extra tax called IRMA on your Medicare premiums today. If you’re 65, they’re going to look back at your tax return from age 63. If your income, modified adjusted gross income was high enough, you could pay more because of IRMA taxes for your Medicare premiums for Part B and Part D. It can be pretty substantial. If you have a really high income because the tiers are progressive, it could cost you maybe $8,000, $10,000 more per year just for Medicare premiums. The question really becomes, if I don’t do these Roth conversions, will I be in those brackets permanently? Now, what’s important to know, if you go into IRMA today, it’s only a one-time occurrence based on what your modified adjusted gross income was two years ago. Now, what’s important is that if you don’t do Roth conversions, what will your modified adjusted gross income be permanently in the future? Because Social Security is a permanent income as long as you and your spouse are living. You require minimum distributions. That’s an increasing percentage that you are forced to distribute out of that retirement account, which for many of you means your modified adjusted gross income could be increasing throughout your 70s and 80s. You have to have visibility into what your modified adjusted gross income will be, because sometimes if you don’t do those Roth conversions now and go into the IRMA brackets for this one year, you may be in those IRMA brackets for 10 years, for 15, for 20 years. I have to ask you, do you think those taxes will be higher in 15 years than they are today? I don’t know. I don’t have a crystal ball, but I do know that we’re adding more than or

we’re spending more than $2 billion a day right now just on interest for the national debt. We’re adding over $800 million per hour to the national debt. I don’t know if taxes will be higher, but I know this is an unsustainable rate of debt accumulation. Spending more than $2 billion a day just on interest? It’s crazy. For me personally, I don’t mind going into the IRMA brackets for one year, having a higher tax, if I know I’m removing that risk permanently from my future retirement. Okay, a lot of great comments so far. I’m going to try to shorten my answers a little bit.

Is there simulation that shows what it could look like if Social Security randomly changes (reduces)?

Mike says, another great video. Who has a simulation to where Social Security random changes could reduce, especially for people with high value in their 401k, like this test case? Mike, it just so happens that one of our financial planning software has a feature where it asks us, what are you afraid of? Great recession loss? How could that impact your portfolio, inflation, and Social Security cuts? Now, let me be very clear about this. The government has money in the trust fund to cover benefits for a certain number of years. I want to say it’s through 2032. Medicare is in worse financial condition than Social Security. Currently, this is how it is, Social Security is a transfer payment system where employees pay FICO wages, and employers also. That transfers almost directly to people receiving Social Security benefits. In 2032, I believe it is, those payments are only enough to cover about 75% of the liability. Now, I haven’t looked at those numbers in about six months to 12 months, but it’s something like that. A lot of people are concerned about Social Security cuts. I’m personally not concerned for most of you entering retirement. Where I am concerned is if you have, just like IRMA, I could envision a scenario where there’s means testing based on your modified adjusted gross income. If it’s $100,000 or $200,000 or $500,000, I don’t know what that limit could be. It is one of the proposals on the table from the government right now in regard to how they fix the Social Security gap and create more solvency long term. There’s a series of several proposals. They meet, I believe it’s once a year. They do the research, they present them to Congress, and then Congress does absolutely nothing. It is a concern, but for one, it could lean towards, maybe we consider Roth conversions, because when you distribute money from Roth later in life, that tax-free income does not add to your modified adjusted gross income, whereas tax-free income from municipal bonds will increase your modified adjusted gross income. Getting a little bit off track here, but this is a hypothetical test case, a different one, with different parameters, where the probability of success comes in at 91%. If we had someone’s plan input into here, and the government started talking about particular reductions to Social Security, and we had concerns that they would be impacted, this is part of what we can do. This 25% reduction in Social Security drops the plan success rate to 83%. Now what does that tell us? Okay, we need to get to work to make some adjustments to bring this number back up. We increase the Social Security reduction to 50%. Now we’re down to 73%, so we need to start planning. We need to figure some things out.

Are you factoring in health care costs from 60 to 65 before Medicare kicks in?

BulletSponge64 says, are you factoring in health care costs from 60 to 65 before Medicare kicks in? We’re doing it one of two ways. One, we’ll put the healthcare cost module in there, and it takes into account the average healthcare costs for someone age 60 in this country, and that includes the average cost for health insurance premiums, as well as out-of-pocket costs like copays and deductibles, prescriptions, et cetera. For your average 60-year-old couple, that can be somewhere around $22,000 to $28,000 per year. You’re looking at maybe $1,800 a month to $2,000 a month, roughly, for just health insurance premiums. Now you’re looking at out-of-pocket costs on top of that. Step four of the Retirement Success Plan is healthcare planning, and it’s specifically focused on two areas. One is those retiring prior to age 65, because we do have some options. Remember, Modified Adjusted Gross Income we talked about with IRMA? Modified Adjusted Gross Income also impacts your ability to qualify for a subsidy, and that can help reduce your health insurance premiums. Depending on what state you live, the calculation can get a bit tricky. We have a client in New York where certain things, IRA contributions if I remember correctly, do not reduce Modified Adjusted Gross Income, whereas at the federal level, they do. I’d have to go back and research some of that, but I believe that was the situation we ran into recently. Understand, financial planning, tax planning can impact healthcare planning. That’s why we have it as step four of the Retirement Success Plan, and that’s why you should be looking at this as part of a comprehensive retirement plan. The second area, by the way, we focus on with step four is the long-term care side of things. Long-term care is a big expense. It’s a big concern for many of you

so we have that discussion. If it’s something you want to address, you can either be self-insured, we can look at products in the marketplace, or we can develop strategies based on who you are and what’s important to you.

With those asset and spending needs, why wouldn’t you just put that into a 30-year treasury yielding currently 4.99% and not have the uncertainty of the market?

Okay, Michael Stewart, 6371, and I love this question. With those asset and spending needs, why wouldn’t you just put that into a 30-year treasury yielding currently 4.99% and not have the uncertainty of the market? I really love this question because when we take a very simple approach to looking at this, we have $2 million. If I can make 5% over 30 years fully guaranteed from the United States government, why wouldn’t I do that? That’s $100,000 a year of income, and I don’t think I need more than that $100,000, especially with Social Security. First, when we look at allocation, step one of the retirement success plan, something like that, if you have enough money, could make sense as an ingredient in the broader recipe. Here’s the concern. One, we have tremendous interest rate risk, so the market value of that bond over that 30-year-period could fluctuate tremendously. The longer the duration of your bond portfolio of your individual bonds or of your individual bonds, the more sensitive the changes in value are to the changes in the interest rate environment. I just did a simple calculation here. Let’s say we were making 5% on $1 million, so we were getting $50,000. In 30 years, because of inflation, and assume inflation is just 3% over the next 30 years. It’s an unknown. We have no idea. That $50,000 in 30 years will only buy about $20,000 of goods and services in today’s money, meaning your purchasing power of that $50,000 payment erodes over time. Each year you’re getting less and less and less. Now, to keep the number the same, let’s look at the $1 million that you invested to generate that $50,000 income payment in 30 years because while you’ll get that $1 million back, you have no growth whatsoever. You’ve generated an income that has been reducing in value or has been eroded due to inflation risk. Your actual principle has eroded as well. The present value of that $1 million in 30 years at 3% average inflation is only $411,000. If you do that, you’re getting a decreasing income with respect to inflation, as well as a decreasing principle when you look at the impact of inflation on it. Now let’s assume inflation is 4%. Now you’re getting back only $300,000 in today’s value, or what we call the real value of that money. Okay, last comment on this video, then we’re going to switch over to the video where we talk about trust. We have a couple of really good questions there.

Comment: “People, your odds of living to age 80 are 30%. You need to know that before listening to people.”

The Deer King 5350 says, people, your odds of living to age 80 are 30%. Now, I don’t know if that number is true or not, but that’s what the Deer King says. You need to know that before listening to people. By people, I’m pretty sure he means me. Chuck Norris says, are you willing to take the chance that you are not in that 30%? What if you are? Broke at 81, does not sound like fun. Live your best life while planning for a longer one is the mindset I choose. I love that comment. He summed it up better than I could ever say. Thank you very much, Chuck.

Then EDHCB9359, my sister likes to say, what if you don’t live that long? I always answer, yes, but what if I do? Onto the second video, and that is want to lose more than 50% of your retirement savings? Don’t watch this video. We posted it 13 days ago, has just under 6,000 views. This one is all about trust. I wanted to help you understand some of the different types of trusts that are out there and help you be better armed with information if you’re going to go talk to an attorney or if you’re thinking about adding a trust to your retirement plan. Trust and estate planning are step five of the retirement success plan. Now, it’s very important to have the certified financial planner professional, the attorney, and also the CPA have them all on the same page. They should be working together.

What about annuities? Can we retitle annuities to a trust?

First comment here, awesome info from user dash multiple letters. Thank you. What about annuities? Can we retitle annuities to a trust? For all of these answers, speak to a qualified professional, speak to an attorney. I am not an attorney. Nothing I say here should be considered legal advice. Generally speaking, there is no need to retitle an annuity to a trust because, in many respects, an annuity is a trust in and of itself. Now, when I say that

it has plenty characteristics of a trust, and a lot of times they’re much better than a trust without the cost or the complication, meaning annuities can be protected from creditors. Annuities bypass probate. Annuities can typically be structured to receive or to provide your beneficiaries a stream of income if that’s important to you. In many ways, annuities are very similar to a trust. The one reason why you don’t typically want to retitle an annuity into a trust, meaning the trust you create now owns that annuity, is because you’ll lose your tax deferral in that annuity most often. Now, again, talk to an attorney, but if you retitle the annuity into the trust, that annuity is no longer tax deferred. You’ll most likely have to pay taxes annually as you earn interest in your contract.

The benefit of trusts when it comes to divorce

ChessDad182 says what could cause you to lose more than 50% of your retirement savings. Another thing comes to mind, hey, but I’m not saying it. This ties into one of the reasons why a trust could be beneficial for you as part of your estate plan. When this money passes on to your kids, if you just pass it on to them outright, even if it’s in a retirement account, because inherited IRAs don’t have the same creditor protection as traditional IRAs or rollover IRAs, or your 401k, which falls under the ERISA rules. When your kids inherit money, if your child gets a divorce in the future, half of your life savings that goes to that child possibly could go to their future ex-spouse. I think ChessDad is talking about divorce here. What we’re talking about, one of the benefits or possible benefits is to protect your hard-earned money that goes to your kids from going to their potential ex-spouse in the future.

If assets in a trust have income, does it pay taxes?

Mr. Rick says, if assets in a trust have income, does it pay taxes? Okay, so this gets into a very complicated area of the tax code. Couple things here. You want to make sure you work with a qualified attorney and also a qualified CPA. Now most CPAs can do the research and understand the taxation around trusts, even if they don’t necessarily work with them. Personally, I want specialists who deal with different aspects of my finances, my health, and different areas. I don’t like generalists trying to all of a sudden learn and become a specialist on my dime. That’s just my opinion. Now when it comes to attorneys, very important here, I think this is very important. You don’t typically want your business attorney doing your estate plan because of how the language in these trusts is drafted, one of the tiniest mistakes can blow the entire thing up. To answer your question about trust taxation, you have simple trusts and you have complex trusts. Most trusts, like your revocable living trust, what we call a grantor trust, an intentionally defective grantor trusts, a lot of these trusts are designed with the proper language to have the income that’s generated from assets in that trust to flow through to your personal tax return. If it is a complex trust, that means it is taxed at trust tax rates. Whatever income is generated, you hop into the top marginal tax bracket. I think it’s after like $13,000 or $15,000 of income. It’s very small. You almost immediately jump into the top marginal tax rates. We don’t provide tax advice. We don’t provide legal advice, obviously, we’re planners. My best advice is if you have assets in a trust, you want to talk to qualified people who are specialized in this particular area, and then everyone on that financial planning team should be working together so everyone understands how to best benefit you. Okay, a couple other here.

What is this obsession with everyone wanting to leave money to family? Just leave them an education, and die penniless.

Goya says, what is this obsession with everyone wanting to leave money to family? Just leave them an education, and die penniless. In reality, it’s pretty hard to die with no money because you have to know exactly when you’re going to die. If you’re going to have money left over, you should plan so it is protected to those people that you love. If you maybe have pensions and annuities and Social Security income, blow everything else if that’s your choice because you’ll still have those guaranteed streams of lifetime income. Maybe that’s an option.

I only have cats. I’m guessing this video about trusts isn’t for me.

Okay, Rodding Board’s last comment here says, trust, I only have cats. I’m guessing this isn’t for me. Maybe that’s not necessarily true. There have been many stories of celebrities, especially leaving money in trust to take care of their cats. Michael Jackson left, I think, $15 million to his chimpanzee. If you have animals and you want to make sure that they’re taken care of, and you want to leave a certain amount of money for their benefit, really, you will probably need to trust. It’s one of the best tools that you could use in the sense that if you just leave money outright to your friends or a family member, there’s no guarantee that they don’t take the animal to the vet, get it euthanized, and then blow your inheritance. I’m not saying they’ll do that, but one of the reasons, is if you have cats, if you really want them to be taken care of, you might want to consider a trust to make sure they’re taken care of when you’re gone.


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