This live Q&A session covers essential retirement planning strategies including: (1) Reverse mortgage balance management - paying down balances is optional but can convert funds to a growing line of credit; (2) Tax planning - effective marginal tax rate targets (12% for assets under $3M, 24-32% for $5-10M) and smoothing income to avoid tax inefficiencies; (3) Safe withdrawal rates - approximately 4.7% for a 30-year TIPS ladder, with 40-60% stock allocations providing similar sustainable rates; (4) Social Security claiming strategies - older spouses should delay to age 70 for survivor benefits; (5) Widow's penalty - single filers face higher taxes, making Roth conversions beneficial for surviving spouses; (6) Tax loss harvesting - can be implemented with representative samples of 20-40 stocks to mimic index returns while harvesting losses.
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quite yet. So, this is just a bit of a filler. We'll get started here in just a moment. Just as soon as we can confirm we actually are live is getting his last minute typing in there.
>> No, that's not me.
>> Oh, okay.
>> All right. Uh I I think we're probably going to be live, huh? Um >> and live from Alexandria and Dallas where >> Wade and Alex on >> the YouTube live edition of the Retire with Style podcast. So, thanks everyone for joining. Welcome. Uh we had quite a few questions that came in advance and I do see in the public chat we have access to that and there are already questions coming in live as well. Alex, uh we kind of talked about prioritizing the the questions that are coming in live from participants today. So, shall we get started?
>> Yeah, as long as we can answer them.
>> Yeah, that's right. We these are we haven't seen these ones before. We we did see the ones that came in advance, but uh the first question looks like it's coming from Stephen. Um someone who has a heckham, which is a home equity conversion mortgage, a reverse mortgage with $160,000 balance. Also considerable IRA assets. Interest is acrewing on the heckum.
Uh I guess 65% stocks, probably 35% bonds IRA grows with the market bond portfolio. Should we pay down the heckham to maintain a smaller balance?
Well, that's a question in so within my research, it's something I look at.
Generally speaking, the benefit of paying down the heckham balance is you move those funds back over into the line of credit and then your future growth reflects more growth of line of credit instead of loan balance. That being said though, I find it's generally not at all necessary to pay down the balance. Uh you can benefit like even in my research, I put in rules that if you're getting closer to to later in retirement andor if the loan balance is getting close to the value of the home, you do benefit from that non-reourse loan aspect where you're not on the hook to pay back more than 95% of the appraised value of the home. So if you're in that kind of scenario, you may not want to pay back the loan balance. If you have a smaller loan balance relative to the home value and you are thinking strategically you could benefit from having more line of credit in the future and you've been seeing good growth in your investment portfolio then yes it is an option to uh pay down that loan balance voluntarily to convert those funds into the the growing line of credit. Uh but again, it's not at all necessary. And I do see some further notes. 70 years old, hoping to stay in the house for at least 10 more years.
I'd say there's really no single one answer to that question. It's not necessary. Uh but if you'd prefer having that loan balance lower, more line of credit accessible to you, it's definitely an option available.
>> Okay. And wait, I'll hit the the next question.
It says, uh, I hope to retire in, sorry, the crow went up. I hope to retire in three years at age 67.
950K in my 401k. Is there a reason to start moving money now out of the 401k and start creating my retirement buckets? Question mark. And then taxable or non I assume accounts to put the money in.
>> Uhhuh. Mhm.
>> But you the buckets don't refer specifically to like the I guess you could talk about buckets as like a taxable account, tax deferred account, tax exempt account, but usually it's more based on the the time horizon for the spending, short-term spending bucket, medium-term spending bucket, long-term spending bucket. So, you don't really just distribute funds from your 401k into a taxable account for the purpose of building up a taxable account.
Usually, the conversation around this is, do I want to do a Roth conversion?
Do I want to move some of those funds in the 401k into a Roth 401k or roll over to an IRA and then move funds into a Roth IRA?
That's certainly uh an option to consider.
We would definitely need more information than just the IRA balance to be able to speak definitively on the matter. Uh how much other income sources do you have? Do you also have a taxable account balance? Do you have a Roth IRA yet? Because you do need to have at least one open for five years before you can take a qualified distribution from it. But if this question simply I want to start thinking about building buckets for my retirement income. That is is a distinct question from tax planning around that 401k. And you can effectively create your short-term, medium-term, and long-term buckets all inside of the 401k if that's the the appropriate direction to take. Another angle I thought maybe when I was reading it you could take or somebody may be thinking about it and I'm curious what your intuition is on this is well you know do they want to take money out of the 401k pay like income taxes on it and then reinvest it in a taxable account and then in the future pay 15% on that or I would I would think intuitively it just be better to leave it in the IRA and not you know not pay income on it you know by taking it to another account, >> right? Yeah. Generally speaking, when we talk about tax distributions, like ordering of distributions, you want to spend taxable assets before tax deferred assets. So, there wouldn't really be any benefit from intentionally distributing from an a tax deferred account to build up a taxable account.
There might be some special use case where that can make sense, but I I think 99% of the time you'd find that that would not be a better approach to take.
>> Okay. And real quick, this is a question for our producers Bri and uh Amber on the on the chat that we're getting on Riverside. We're using Riverside and not not directly on YouTube live. It's streaming to YouTube live. the questions. There's a as I hover over there's a there's a a field that says show on stream. I just want to make sure. Can people watching YouTube live see the questions coming in or do we have to click show on stream for them to see the question?
>> That might just print the question on the screen so people can move [laughter] along with us.
>> Oh, let let me try one just to see how that works.
>> All right. Here's another question from Christine.
>> Yeah.
>> Oh, yeah. Oh, how cool is that? You don't know how how much time this saves us. We were getting some questions that were like paragraphs long. So, okay. Uh, let me show it on screen one more time.
Uh, where did it go? Okay, here we go.
>> Hover your mouse to see it again.
>> All right. In early retirement age 56, how do you arrive at a target EMR considering desire to avoid large RMDs required minimum distributions later on?
So the target EMR is the big question.
Um there is some software out there that mainly accessible to financial advisors who can help you find those target EMRs.
Uh those are generally that software is not directly available to consumers. But Kovsum is the software that originally developed these ideas. I know that holistic plan now offers something similar within their software. Uh but that being said, this isn't always accessible. I've written my own programs to do this. That's why I'm able to show in my books and so forth how to find an optimal EMR target. But in real life, that's not always easy. So, I tend to speak about this more as rules of thumb that if you've got less than about $3 million of assets, you might find that just targeting the a 12% EMR can work out reasonably well in many cases.
>> Discuss what an EMR is for folks so we don't get into acronym soup. Yeah, we're talking about the tax planning conversation. This is the effective marginal tax rate. This is I what target what effective marginal tax rate target should I have in mind where I'm willing to voluntarily pay taxes by doing Roth conversion thing and things as long as the over it's the overall tax rate. It's not just federal income tax brackets and state income tax brackets, but how would generating more income also impact the taxation of Social Security, Medicare premium search charges, the phase out of below the line tax deductions, affordable care act subsidies, if I'm using the Affordable Care Act, uh the stacking of preferential income on top of ordinary income, and I think I've hit the main highlights there. Uh how does that all work together? What kind of overall tax rate am I willing to pay?
And that's where my answer was. You need precise software to really be able to analyze this carefully. And that's generally not available, but I think 12% can be a pretty good rule of thumb for folks with up to around $3 million of investment assets. And then it goes up from there. If you've got, you know,5 to$10 million, you might find that either 24% or 32% are reasonable targets. And again, that doesn't mean filling up tax brackets. That's managing effective marginal tax rates which can be quite different and that's where a lot of the simplified tax planning software that is available to consumers does not really look at this question accurately and does not provide uh useful information to to users. So this is one of these questions where it'd be great if more better software was available to consumers. Uh at this point there isn't a lot available. So you that's where I rely more on rules of thumbs as suggestions for how to think about that. Okay. And here's uh the statement I made and it's a good point.
I was tack what I'm going to put up here. I was tackling it more from a investment gain standpoint over time.
You know, tax deferral, not not not taking a hit to begin with. But here, wait. This is from Michael Alex. There wouldn't be any benefit from distributing from a tax deferred account to a taxable account. What about smoothing distributions and taxes?
I think that's related to the question we were just answering.
>> Well, yeah, everything's about smoothing. That's the the whole tax planning conversation is around the progressive tax system in the US is based on your annual income. And so it generally doesn't make sense to have a really high taxable income one year and then a really low taxable income the next year because with a really low taxable income, you may not even be filling your standard deduction. That can be very tax inefficient. it generally works better to smooth the amount of taxable income over time and that's where the tax planning comes in where I am trying to smooth that with respect to I'm managing an effective marginal tax rate target if I'm willing to pay taxes at an effective marginal rate of up to 12% I look for opportunities to do that if I'm otherwise not I still have capacity to to pay more taxes at that lower rate or I also use blending techniques where maybe if I'm following the conventional wisdom and it's telling me to just keep spending from my taxable account or keep spending from my tax deferred account and that would push me above my effective marginal tax rate target, I might halt the brakes on that and cover the rest of the distribution from the Roth IRA or from some other non- tax income source so that I don't have to pay a higher than necessary tax rate. So smoothing is a very important part of any sort of tax planning strategy.
Wait. Yeah, I I was taking it from the standpoint of just growth, compounded growth that is not touched, but I agree with what you're saying from that from that point of view.
Uh here's one now. Let me go back up.
Uh >> yeah, Poo had a question on Yeah. Yeah.
Yeah. Yeah. All right, Piglet. Uh here we go. Oh, sorry, wrong wrong share.
[laughter] I guess I just have to hit this one. I know this is a tough question to generalize and everyone's case is unique, but here's the question. With the current market, sorry, the thing's curled. With the current market situation, what is the safe withdrawal rate? Would retail like a plus or minus 0.25%.
I I do like to base that on where interest rates are. And if you build a 30-year TIPS ladder, not that that's what people are doing in actuality, but with current interest rates, if you build a 30-year TIPS ladder right now, uh the safe withdrawal rate would be about 4.7%.
And that's assuming a 30-year retirement, a desire for inflation adjusted spending, no flexibility for that spending, that the TIPS ladder supports that fixed inflation adjusted spending over time. no investment management fees, no tax issues. That are the at least that's your gross spending numbers. But, you know, if you're going to press me to say what's the safe withdrawal rate, I'll say 4.7% because that's what a 30-year tips ladder can provide. But, you can definitely adjust to that based on all the different considerations that like in the retirement planning guide book, chapter 4, I talk about all the assumptions behind the 4% rule, how changing those assumptions would impact the results.
And a big one is just simply having some flexibility for your spending. can allow for a higher distribution rate to begin with. But then there's other things like if there's investment fees or if you're planning for 40 years instead of 30 years, you might want to take a haircut off of the the 4.7% number as well.
>> Okay. Now, how do you feel? Just a little bit of a take of that. This is my own question. How do you feel when [clears throat] when you read those yearly sort of books like uh not books articles like Morning Star all of a sudden this year will say the safe withdrawal rate is XYZ and I would say your answer of 4.7 sounds on the higher side of what I would read from something coming out of Morning Star or Vanguard or something like that. But >> yeah, so those would be based on the Monte Carlo simulations. And if you build in an investment management fee and or if you want a high enough probability of success, you start to see numbers that can be less than what you would get from a 30-year TIPS ladder. So their numbers could be less than 4.7%.
It's just a different take. And I used to do those kinds of studies as well.
But at the end of the day, I don't think that's really how people are thinking about retirement distributions. As much as you know, we talk about the funded ratio. I think that's a much more interesting starting point because cash, you don't need a constant inflation adjusted distribution from a portfolio.
No >> taxes will make that impossible. Uh you'll have income sources that come and go over time. Your expenses will fluctuate over time.
>> Your ability to spend will change.
>> Yeah. Yeah. And so it's just those kinds of studies help you calibrate what's feasible, but I don't think they really work as uh actual retirement income strategies.
>> Uh what's And you could just set the funded ratio and things like that. I want folks to understand the the reasoning behind this and it all starts with tips. Really, why tips? Why are you looking at tips and not like the 10year a 30-year TIPS as opposed to the 10 year or something like that? Well, it's it's more the the average yield coming out of a 30-year TIPS ladder because if I want 30 years of inflation adjusted spending, I could build a 30-year TIPS ladder with a tips maturing each year for the next 30 years. And using the interest on tips as well as the maturing face values of those tips, I could figure out exactly how to spend down a portfolio over the next 30 years with inflation [clears throat] adjusted spending and with having nothing left at the end of the 30 years.
>> So that's where the the 30-year tips ladder comes into play. And I think you're also uh at least implicitly stating at the risk-free rate, you know, since it's a government bond in and of itself.
So there's no >> right, >> there's no worry about standard deviation, you know, that you would find in a simulation. It's just straight up here it is.
>> You have longevity risk because if you live longer than 30 years, you're in trouble if you build a 30-year TIPS ladder. But otherwise, it's the lowest risk way to get a 30-year inflation adjusted uh income.
>> Yeah. And I would I would counter to that [clears throat] two points that that's a risk that you find in say withdrawal rate as well >> since those studies are only based on I don't know 25 30 years anyways. And the other piece is as you alluded to earlier, people will change their habits. If you see that year 25 the ladder may need to extend or whatever, you'll make necessary adjustments to do so.
>> Yeah. In real life, you could not put all of your investment [clears throat] into the 30-year TIPS ladder because you would need to set aside something to manage the inflation risk. Another kind of strategy that gets discussed is you build like a a 20-year TIPS ladder and then buy a deferred income annuity to cover years 21 and later. And that that helps to manage the longevity risk as well. But the inflation risk with that one though.
>> Or instead of transferring money out of the IRA, you turn it into a CQAC.
>> Yeah. Yeah. UAC is a the deferred income annuity that gets the special tax benefits inside an IRA.
>> Okay. Uh here's the next one from Beach Girl Forever. Oh, I like that one.
[laughter] Uh that's a cool title. Uh, when we retired next year, we would like to sell a rental property that we've had for 25 years, purchased for 100 grand, selling for 800K.
Hang on, let me show it again.
>> After adding a duplex to the property, are there any taxes?
>> Uh, the question continues. That's where they can only put so much in.
>> Okay. All right. Are there any taxes?
>> Yeah, we This is a real estate tax question. That's not really our wheelhouse.
>> Yeah. Oh, from the recapture stuff.
Yeah, you're right. Uh, and we're doing this live, so we'll we'll get an answer for Beach Girl, but yeah, I don't feel comfortable answering off the cup when we're talking about depreciation recapture strategies and things like that. Do you?
No, I'm not conversent on the the fine points of rental properties and managing tax strategies around them.
>> Beach girl, the tide is out right now.
We we have to wait till the tide comes back in for us to give that as proper treatment, but we we it's here. It's archived. We'll get to it. How's that?
>> Yeah, we can revisit that in a later episode. Yeah, >> there's going to this will be there's going to be too many questions to handle in the live session today. So, we'll come back to >> Yeah. And we'll we'll archive all these questions and we'll get to them in in podcast episodes. All righty.
Uh let me see here.
I was looking at more of a 60.
>> Yeah, Poo is just saying, you know, the I said 4.7% for a 30-year TIPS ladder.
Well, what about a 6040 portfolio?
it's I think effectively going to be in the same sort of ballpark. And it also depends on whether there assumptions you're making about is 30 years the right time horizon, what are the investment fees, what are the assumptions you're making about future stock and bond returns and so forth. So I think just linking that to the you can get a different number than the 4.7% from a tips ladder, but whether it's going to be more or less just depends on what additional assumptions you're going to bake into that. So I still think even for a 6040 portfolio 4.7 would be a reasonable starting point.
Let me let me take that to what we were discussing before we went live. Wade is we have a backlog of questions and one of the interesting points and we may revisit it by answering that question later on but what is your take on this sustainable withdrawal rates and the differences between let's just go to an extreme a 40 a 3070 portfolio versus an 8020 portfolio like running the gamut.
>> Are there significant differences from a sustainable withdrawal rate? Right. That so you're referencing one of the questions that came in advance. Should we just read that one if we can find it?
>> Uh let me see here.
>> Yeah, let's do it because it's an >> it's an interesting question here. Where are the >> We have a whole list of questions that came in advance. Where is that one?
>> Here it is.
>> Oh, there it's row 11 for that one.
>> Okay. All right. So, I'll just read it.
And this is similar to the the sustainable withdrawal questions that that Pu was getting at here. I'm I'm resetting my asset allocation and was wondering if a 4060 stock tobond portfolio would not keep up with inflation over time. When I run back tests, it seems a 4060 is not significantly different than a 6040.
Sure, slightly lower return, but with less volatility and much lower maximum draw down. I was originally going to move to 50/50 but thought maybe less volatility is a good thing as I we age.
Just curious to get your thoughts on in general how much these percentages matter as long as there is some equity component to mitigate inflation.
>> Yeah. So this is something that goes back to early work that Bill Ben did when he was doing those studies about the 4% rule in the 1990s.
what he had effectively found and and this is something you see time and again in subsequent when people look at this his conclusion was that the safe max the highest sustainable withdrawal rate in the worst case historical scenario was about the same right around 4% for anywhere from 35% stocks to 80% stocks.
If you went less than 35% stocks the the safe max dropped a little bit and it dropped a lot as you got closer to 0% stocks down to 2.4% 4% for no no stocks, but it was above 4% anywhere from 35 to 80% stocks and then it tailed off slightly with higher than 80% stocks. So this question is getting at the same sort of theme that yeah, in terms of the sustainable safe withdrawal rate, you're probably not going to see that much difference between 40% stocks and 60% stocks. The difference just rate relates to that's assessing the worst case scenarios or assessing the scenario calibrated to having that high probability of success. On average, the higher the stock allocation, the the more those assets would grow and you would on average not run out of money.
You would the higher the stock allocation, the higher the legacy at the end of retirement. So, it really is just that trade-off. If you're not comfortable with the volatility, you're not as worried about having that big legacy at the end of retirement. You just really want to be able to sleep better at night. Yeah. The historical data and other kind of studies would show that, you know, a 40% stock allocation will give you about the safe same safe withdrawal rate as a 60% stock allocation. So, you've got that flexibility there for for how you want to approach it.
Okay, we'll go to the next one. And I'm curious if the t tax maps software that we have on retirement researcher can help out simply because this isn't I wouldn't call that like professional grade software, but it's professional quality in terms of you get what you get. It's just we don't offer it to advisers. We actually it goes straight to consumers. But here's the question.
uh how can I develop a blending strategy without professional software? I hear a lot about aggressive Roth conversions, but also points of views that a conversion needs 10 years to pay out and pay out break even is I think uh the same kind of word he's going for >> or retirement research academy we have a powerful tax planning software it's called the tax map calculator and it helps you make decisions in a single year about what to do but one of the inputs is what effective marginal tax rate target do you want to have like what is your effective marginal tax rate target. It can't solve the effective marginal tax rate target for you. But if you put in your target, it will provide guidance on what to do. So that's why the when the earlier question was how do I find the best effective marginal tax rate target map calculator is a single year telling you how to how to approach things if you know your effective marginal tax rate target. but it doesn't solve what's the best effective marginal tax rate target for you to use. That's where the distinction comes into play. But but with that most recent question, just figuring out how much Roth conversion should I do this year when I know what effective marginal tax rate target I want to use, it can be very helpful to help guide that by by letting you be aware of all the other tax planning implications between the Affordable Care Act, which is in the software, uh, Social Security taxation, Medicare sir charges, premium search charges, the stacking of long-term capital gains, and qualified dividends on ordinary ary income and the phase out of all the the new below the line deductions that phase out with income including that new age 65 plus bonus deduction that was [clears throat] initiated last year. What a a question for folks uh because they could be they could be thinking it and the obvious answer is you know when you pay less taxes that's when you found it but how would you go about finding the marginal tax bracket you want that's optimal like how do you know okay this is the or do you say I'm going to continue running trial and errors of 30 of these I mean not 30 of all the brackets and see which one seems to give me the best number >> so I wrote my own software to do this which it's yeah, you put in all the options you're you're going to look at like should I target 10, 11, 12, 13, 14 all the way up to, you know, 35, whatever numbers you want to put in. The more options you have, the longer it takes, >> but it then just does the analysis with each effective marginal tax rate target and then it determines which one gives you the highest legacy at the end of retirement and that your optimal target.
>> But you're showing off.
>> Yeah. How does >> how does I just have to write my own software and you know how how would you >> how would how would a lay person like figure out okay this is the the optimal one or this is as good as it kind of gets here >> that was the original question and the answer is you'd have to find an adviser who uses kovasum andor >> potentially holista plan who could run that analysis for you because there really isn't a direct to consumer option trial and error just constantly.
>> You could also use Maxify the Larry Cotov software all that does have pretty good tax planning but any of the other cons direct to consumer softwares other than Maxify that advertise we do Roth conversions uh might be really not helping you and even hurting your because they have some weird assumptions with how they do things. Now we mentioned tax maps and Christine and thank you Christine do you know beachgo [laughter] uh Christine mentioned tax maps I mean our tax maps things won't get you there to find the optimal one they'll just do it for that particular year >> yeah our tax map calculator helps you decide on a Roth conversion decision for this year given that you enter your target for the effective marginal tax rate but the earlier question was how do you find the target for your effective marginal tax rate and that's a much more difficult question.
>> I was hoping there was some law of reciprocations.
>> I don't know what [laughter] >> All right, never mind.
>> Both out.
>> No, Bob used that term all the time. I just can't off top of my head. I can't think of it right now.
>> Okay.
>> Okay. Uh on that note, okay, let's go let's go into some questions here that we have. We we've got tons of questions that people had sent in that they want us to cover. So I will be the first to fire here. D uh Wade, can you please compare the trade-offs between a manual bond ladder and a managed bond fund? I read an article from Vanguard praising the positives of a bond fund over the negatives of a bond ladder. I would love to hear your reasons why a bond ladder is better. I'm gonna cut and paste this into the chat. That way people can read it as well.
>> Okay. And >> yeah, specifically the the Vanguard article that's being referenced is not talking about a retirement income bond ladder. They're talking about a good oldfashioned accumulationbased bond ladder where when a bond matures, you roll it over and buy a new bond. And the article is just pointing out that a bond fund can can do that more easily and cost-effectively and with more diversification because if you manage the dur the bond fund has a duration, you know, the average maturity of the bonds that can be matched to whatever bond ladder that you're rolling over every year and it can just be easier to do that with a bond fund. So that's where we have to make the distinction when we're talking about retirement income. A retirement income bond ladder is different from an accumulationbased bond ladder. An accumulationbased bond ladder when the bond matures you just buy a new bond rolled over. So if I have a 10-year bond ladder when that bond matures that I buy a new 10-year bond to replenish so I maintain my 10-year bond ladder. A retirement income bond ladder when the bond matures that's your spending. So it's duration matched. It provides the the matching duration to the the spending. And if I want to spend $10,000 10 years from now, if I buy a bond that has a maturing face value of $10,000 in 10 years, I know I'll get $10,000 in 10 years and I can meet that expense without any sort of interest rate risk. So that's a retirement income bond ladder. And it's much harder to replicate what a retirement income bond ladder can do with bond funds. It's not technically impossible, but it's a lot harder. it is a lot easier to just use a bond fund in lie of a a rolling accumulationbased bond letter. And I think that the Vanguard article was just kind of making that point. It wasn't even considering the retirement income implications. So that would be my answer is when we talk about retirement income bond ladders, we're talking about something different. We're talking about meeting expenses with assets matched to those expenses.
And that can be a powerful way to to manage a spending need in retirement.
>> Okay. Uh this is another question here.
Uh and it's Wow, this is a Pooh is a hardcore because it's usually the other way that we hear this question. Uh but is there a way to get a more detailed version of WDE's book, the older version? So I suspect they they like that. You know how you always, you know, with a new book in the podcast series, you were saying how you you've like reduced, I don't know, 150 pages of it to get a little bit more to the meat of the sandwich of the story. Who likes the details? And I'm sure many folks do.
>> Could they have access to is there still way to access the older versions, editions of your book? Yeah. So, the third edition of the retirement planning guide book came out the start of this year, and it's a 100 pages shorter than the the 2025 update from the second edition. But I really didn't cut out any significant details. Although, if you're really if you still want to see the 2025 update to the second edition and the first edition, they're all available on Amazon still if you just search for Wade Foul retirement planning guide book.
Hopefully the third edition shows up first and we've gotten past the issue of people accidentally buying an older edition. But if you just scroll down through the options, you should still find the second and first editions available for sale at a a discounted price. You can still get access to those older books. It's not hard to do that. I just don't want anyone to accidentally buy one of those older editions because I I do think the third edition is much better.
>> All righty. Uh looking for thoughts on younger spouses, five years differences with similar but higher PIA and S and social security claiming strategies.
>> Oh, you better address.
>> Say it again.
>> You better define PIA. Let's see if you can do it.
>> You're gonna put me on the spot like that.
>> Oh, go ahead. Oh, sorry. You should finish the question.
>> Hang on. Let me Google this real quick.
Real quick. Real quick. [laughter] No. Uh, hang on. Let me Where's the question?
>> Yeah. Looking for thoughts on younger spouses with a So, there's a five-year age difference, but they they have similar primary insurance amounts. Their PIA >> mean PIA.
>> No, their social security claiming strategies.
>> Has this been addressed on any specific episode? We have tons of episodes on on this, but Wade, go ahead.
>> Yeah. Yeah. So, the scenario again, it's they have about the same primary insurance amount. So, one we don't really talk about. One of them is a high earnner, the other is a low earner. They have about the same primary insurance amounts. The issue here is one spouse is five years younger than the other.
>> Uh and so yeah, we can talk about that.
I actually ran it through open >> just because PIA it's still not even obvious what that means. That's just like the monthly benefit you're going to get.
>> Yeah. If you if you claim at your full retirement, >> you'll get your primary insurance amount as your monthly benefit at full retirement age. If you delay past full retirement age, you'll get credits to increase. So your benefit at age 70, if your full retirement age is 67, you'll get 1.24 times your primary insurance amount. If you claimed at 62, you'd get 70% of your primary insurance amount.
Okay? So they have about the same primary insurance amount, but one spouse is 5 years older. So I ran a scenario like that through opensocial securitycurity.com.
It's soft that is software freely available to consumers. Mike Piper developed that. It's it's a great resource. And yeah, basically the story here is the the older person should still think about claiming at 70 because their benefits the most likely to become the a survivor benefit which would allow that higher age 70 benefit to apply for the joint lifetime of the individuals. the younger person has more flexibility if they're not as worried about longevity risk and so forth because the younger person's benefit well they they have the same primary insurance amount but one of them whoever dies first the uh person who delayed till 70 that benefit becomes available to them both. So the younger person, their benefit may not last for as long since eventually they could gain access to the survivor benefit from the older spouse. So the older spouse delayed to 70. The younger spouse, there's more options, more flexibility. If they're not as worried about longevity, they could claim as early as 62. Uh but if they're worried they might both live to an advanced age, like they mo both might live into their 90s, a possibility they might both delay to age 70. It's it's just the older person pretty strong case delayed till 70. The younger person has more flexibility anywhere from 62 to 70.
>> It's just the longer they both live, the more benefit there would be from them both waiting till closer to age 70.
Okay.
I am 39 years old. This one's from Timothy. I am 39 years old. When I lay out my balance sheet of assets and liabilities with regards to the future, I feel scared, including the estimated benefits of social security from my annual statement. I worry that social security will become unreliable and possibly not even exist by retirement age in 25 to 30 years. You discussed the timetable of partial insolveny in the past and how it needs adjustment to its formulas or else it will fail to 70 to 80% funded. Can you please comment on how certain a young or middle-aged person can feel about social security actually being enforced and reliable three decades in the future?
How can we safely factor estimated social security benefits into an asset liability matching in 20 to 30 years?
Thank you.
>> Okay. Yeah. And so the issue is there's currently a trust fund for social security because of demographics. Social security was pay as you go, which just meant the incoming payroll taxes from current workers cover the benefits to to current beneficiaries, retirees and any other beneficiaries.
But because people are living longer and the baby boomer generation is creating a lot of retirees and their fertility rates are down. So there's fewer workers in the future to pay payroll taxes.
There's a trust fund developed to help anticipate that. That trust fund is expected to deplete in the early 2030s.
It adjusts each year based on the new social security trustees report.
And when the depletion happens, the projection is that payroll taxes from workers will cover over the long term, you know, 75 to 80% of the promised benefits. So if Congress does not take any sort of action, the worst case kind of scenario we're looking at is they do have to take some action, but if they legislate a 20 to 25% benefit cut as a way to get Social Security into balance, you would be looking at a lower Social Security benefit. So the the question is kind of like you know how worried should I be about that? I think it's reasonable to build that sort of analysis into your planning. But I would also note like if you're 39 years old, your social security statement that's telling you what your primary insurance amount is might really already reflect the the reductions because the social security statements assume future inflation is zero and it assumes future real wage well future wage growth is zero. So you're kind of locked into prices and wages staying the same in the future.
Historically, and it seems reasonably reasonable to expect in the future, wages grow about 1% faster than inflation every year. And that matters up until your early 60s. So if you just think, you know, you've got another 20 years where if wages exceed inflation by 1% a year, your real benefit will be about 20 to 25% larger than what your social security statement shows. So then if you take a a 25 20 to 25% haircut on that, actually the primary insurance amount on your social security statement is like the reduced number if they actually reduce benefits in the future.
So you may not really need to make any haircuts to what you see on your social security statement. And hopefully that will help you feel better about the situation. You don't necessarily have to take a haircut off of what the social security statement shows. That would just be as you get closer to your early 60s, you might have to take a haircut off of what your statement shows because you have less time for real wage growth to make up any difference in the benefit cut. So, in essence, what you're saying is, yes, this is a real concern that there's potential uh reductions in social security benefits in the future, but if you're young right now, you don't really have to worry about it because the estimate you're getting on your payouts for social security when you retire are are severely understated because it's taking into account zero inflation and uh what was the zero wage growth?
>> Yeah, zero wage growth. So >> your benefits are adjusted your average index monthly earnings they adjust for the wage growth. And so if real wage growth is positive, you see a real growth in your future benefit above inflation. And that's what could offset any benefit reduction with respect to what you see in your statement. But if you're older, it's a different kettle of fish. And I'll answer and you said it but I'll I'll bring in that other question that we had that was similar since we're on this vein that you can then address which is my question concerns planning assumptions around future social security benefits since social security trust fund will be depleted within the next few years. In our particular situation my spouse will claim social security benefits at full retirement age at six of 67 in 2030. So he'll get a PIA out of that right way.
Since I was the higher earnner, I will claim at 70 in 2035. For planning purposes, I am assuming that both of our benefits will be cut by 25% when the Social Security trust fund runs out.
I'll also mention that our projected future benefits in parenthesis without any cuts are on the high side, most likely in the 90th percentile. To my mind, this means we might be subject to a larger reduction than people with lower benefits, depending on how Congress decides to address the funding gap. My goal in planning is to be reasonably conservative, but not too conservative. What are your thoughts, Goldilocks?
>> Yeah. So, this is talking about the cutting 25% when the trust fund runs out. And I think that's a reasonably conservative assumption for them to use. uh they're making yeah a couple further points that it's your earnings stop getting indexed for the the wage growth after age I'm pretty sure it's 60 but it might possibly be 62 and someone's going to definitely correct either 60 or 62 they stop indexing the the wages for um wage growth so that's where this issue I was talking about if you're 40 uh your benefit might be a lot larger than what the statement shows but if you're already like 60 that's not going to be the case So that's where you would want to actually apply a benefit reduction if you kind of want to plan for that scenario. And so I think a 25% reduction is reasonable.
They're also hinting at they they're on the higher side of his earnings and they're worried maybe the benefit cuts.
We have no idea what this reform will eventually look like, but if it becomes a progressive type of benefit cut, the uh higher wage earners benefits could be cut by more than the lower wage earners benefits just with the way they adjust the formulas for calculating that. So they you might worry that if you're you have very high benefits, they could be cut by more than 25%.
I I don't know that I necessarily would want to build that into my assumptions.
So I do think 25% seems like a reasonably conservative assumption for them for them to use in their scenario that they described.
Okay, let me go to the next one here.
In episode 207, a commenter asked about Roth conversions in the situation where RMDs were not they would remain in the 22nd% tax bracket. I am in a similar situation. However, that pushed me into the Roth conversion side.
However, what pushed me into the Roth conversion side was when I did future modeling with me passing away at age 80 rather than both of us passing away at 100. as a single person having to make those RMD distributions, it it really made a difference. You often talk about thinking about a surviving spouse when it comes to delaying social security. A similar issue, at least for taxes, occurs for Roth conversions.
>> Yes, this is known as the widow's penalty, and it's definitely a consideration for tax planning. The widow's penalty is the idea that single filers get hit a lot harder with the retirement taxation than those who are married filing jointly. So when you're still married filing jointly, you know, at some point when somebody passes away, the following year that surviving widow widowerower has to start filing as a single filer and their tax bills could go up because a lot of the tax brack well their first like the their their investment income's not really going to change just because somebody passed away. They're still going to have pretty comparable required minimum distributions.
uh the investment income being kicked off of the portfolio and so forth. Uh they may lose a social security benefit and other pensions. So they may have less income. Their expenses might drop a little bit, but their taxable income is probably not going to change all that much. And but the tax brackets applied to it are likely to be cut in half. The Medicare Irma search charge thresholds get cut in half. the the odds of having to face that social security tax torpedo when you're already in the 22% income tax bracket go up. The tax bill for a single filer could be higher than the tax bill for married filing jointly. And for that reason, it this is one of the things we talk about where if it's kind of it's not clear whether or not to do Roth conversions, well, there's a few reasons why you might want to consider doing Roth conversions anyway. One is to help protect that surviving spouse.
Another is if you're worried tax rates could increase in the future. And there were some other questions we got about that idea as well. Yeah, if you're worried tax rates might go up in the future. Tax rates are relatively low from a historical perspective. Now, you might want to take advantage of that.
And I feel like there was some other reason too. at least the the surviving spouse and the the potential for future tax rate increases in the future are both reasons why you might want to go ahead and think about things like Roth conversions. Even if as married filing jointly, you might not really expect a lower tax rate being applied to your situation in the future.
>> Okay. Wait. And and William had commented [clears throat] on the social security stuff and you may want to people always are asking what what can be done. So I I'll put it up here.
Uh oh, sorry, wrong one. Let me show this one instead. The current social security actual deficit is about 4% of taxable payroll. Congress has many options to address this deficit.
>> Right.
>> Just what's your hot take on that? I I I I agree with him, but you know, you're the star.
fire away.
>> One way to address the deficit is to have an immediate payroll in tax increase of about 4%.
Uh yeah, and ultimately we're just talking about like kind of worst case scenario from the perspective of benefits. If all the reform goes into benefit cuts, you're looking at 20 to 25%. But if ultimately the reform package is a mix of tax increases and benefit cuts, which historically has been the case, the benefit cuts may be nowhere near 25%. Maybe they're just slight reductions or maybe for the higher income folks there is that larger reduction but then there's very little to no reduction for lower income type individuals. Uh but yeah, payroll taxes could go up. They could raise the cap on taxable earnings. There's all kinds of different reform options available and it wasn't really intending to address them all but just trying to answer the earlier question. But yeah, um that 25% benefit cut is like if kind of the extreme case if all the reform goes into reducing benefits rather than raising taxes.
Okay. And we have here beach girl with another question. I'll put it up.
>> And that's only the first half of the question.
>> Yeah. We were sold a variable annuity when we were 30. Now it's we're 62. We It appreciated from 100. Let me do it again. From 100 to 340 fees are three and a half%.
Expenses fully covered by rental income pension at 68 social security thinking of withdrawing from var variable annuity as a bridge to social security. all traditional accounts already covered converted to Roth.
>> Okay. And yeah, with you being on the line here that I'm hope if the fees are three and a half% I hope that includes a guaranteed lifetime withdrawal benefit as part of that in which case you might want to think about whether it's worthwhile to turn on the guaranteed lifetime withdrawal benefit if the fees are that high without any guaranteed lifetime withdrawal benefit.
you probably do want to think about kind of reducing [snorts] the role of that variable annuity in your plan. Whether that means to use it as the income bridge for social security as you're you're stating. Yeah, that could be an option or if so you you mentioned having the pension and the social security.
This gets kind of the whole conversation around if you have a retirement income style that's looking for reliable income to cover your basic expenses.
Do you have an income gap after the pension and social security? If there's still an income gap, you might want to add reliable income. And there you do have the option. What are the the annuitization features of that variable annuity? Does that variable annuity have a guaranteed lifetime withdrawal benefit? And then if so, comparing that to other annuities available on the market. And yes, you could do a 1035 exchange, not just to another variable annuity to real, but to really any any type of annuity. And if you're looking for like the highest guaranteed lifetime income at this point, you're more likely to find that on the fixed annuity side than the variable annuity side. But yeah, it's if you want more reliable income, don't just immediately think you have to get out of that variable annuity. Uh looking at at the conversion options as a possibility. If you don't necessarily need more reliable lifetime income, then you building that social security delay bridge with it does seem like a reasonable option as well.
Oh, and so beach girls following up. It does include a GAWA. So guarant is that an accumulation?
I don't know that I've specifically seen the GAWA acronym before, but that's probably a variation of something. I don't know if that's an accumulation benefit that will guarantee like the principal or some growth of the account.
In which case, the fact that it's appreciated from 100,000 to 340,000 means you you probably don't need to pay for the GA. Well, for an accumulation benefit anymore, you're probably so much higher than the what the accumulation benefit guarantees that you're very likely to to fall below that and no income gap after pensions and social security. So, so yeah, I guess >> guaranteed on Oh, so it is Wade. You're right.
>> Or that's a no guaranteed annual withdrawal amount.
That may not be. So, now we I need to see fine print about what that means. Is that it for an annuization table or it it may not be a guaranteed lifetime withdrawal benefit?
Uh have to to look at the details of the the contract.
But yeah, I mean I think you're we can't say a whole lot specifically other than I think you're kind of thinking about it the right way here. If you don't need more reliable income, potentially using that to build a social security bridge does sound like a reasonable option.
Okay.
Uh, next one here is here. I'll do it here.
IRS refunded me $8,600 for overpayment for t of taxes. I paid the exact amount using IRS direct pay for a Roth conversion. I use Turboax online for my 2025 taxes. How do I find out if IRS made an error?
>> Yeah. Um, you may want to actually speak to a like an accountant because we're not going to be able to really speculate. There's not any way for us to figure out with these details if where the problem came into play. But yeah, if the IRS thinks you overpaid on taxes and you think you didn't overpay on taxes, you wouldn't want that to come back and haunt you later. So, probably going beyond just the the do-it-yourself tools you have with the the Turboax and so forth, speaking to an accountant is probably a better option than just figuring it out on your own at this point.
It's possible the IRS made an error, but they might have. Maybe they're doing it right. So, I can't can't say too much about that particular issue.
>> Yeah, but what are the odds the government institution actually makes errors and stuff?
>> Especially when it comes to thinking someone overpaid their taxes.
>> All right. Uh, this is a general question. I'll start it off. How do you think about what to sell in a taxable account?
Well, rule number one is you sell what is going to go down next. [laughter] You know, >> before it goes down, >> right, before it goes down. Wait, anything to add to that? No. Uh I I other than, you know, anything that has to do with forecasting what you think is going to happen next and that's what you sell like, you know, things are over or frothy or whatever. I I would try to disabuse yourself from that because I think that's a tough game to play. I would really take it down to basics from the standpoint of what is your asset allocation and with regards to that what is overweight and underweight and adjust accordingly. I wouldn't let the taxes uh the tax tail wag the dog here from that perspective. I would keep things in line with what the allocation is and make sure that it's maintaining that that uh discipline simply because the financial plan, you know, is based from that. Uh and don't forget what Wade said about allocation differences in terms of 35 uh 65 versus 7525, you know, things like that. it it doesn't make a whole hell of a lot of difference once you're taking withdrawals, not necessarily from the standpoint of overall growth and the like, but if you're already taking distributions, which is the purpose of the portfolio, I feel, and I say I in quotations, you should probably less concerned about what's going to be the one that's going to be the highest performing as opposed to which is the one that's going to maintain my distribution. And really, it's it's a matter of maintaining the asset allocation with within that account. And that's how I would go about doing it as strategically and robotically as possible.
>> Michael added that the asset allocation is on target. So that does then speak to just the tax considerations. And that's kind of getting into the tax map calculator. Like if if you can realize capital gains at a 0% effective marginal rate because you don't have a lot of other ordinary income and you don't have a lot of long-term capital gains yet, you might want to sell some of the shares with a lower basis to generate more long-term capital gains. But if you are at a point where you do need to work to keep taxes lower, then you're looking at shares with a higher cost basis to generate less capital gains for taxation purposes. Now, if this person is asking the question from the standpoint of which asset class to sell irregardless of that like I I want to sell should I sell the REITs instead of the small cap value?
I don't I don't have a particular opinion on that. Do you >> what could you say that again? I was reading one of the other questions. Oh.
Uh, maybe this person is asking too from the Michael is asking from the point of view of okay, I get all of that, but should I sell once I determine I need to sell something, should I sell REITs versus small cap value, you know, that kind of getting into the asset allocation minutia of which one?
>> Yeah, for that you could just do kind of proportionally to keep your targeted asset allocation. The the selling decision can be part of the rebalancing.
What do I need to do to rebalance? and then selling shares to move to the right asset allocation. But if you're already at the right asset allocation and there's no tax considerations, yeah, it would just be selling proportionally from different asset classes to maintain your targeted asset allocation, >> which is what he was saying because he followed it up by Michael followed it up by saying that allocation is our target, but something must be sold. Anything sold will be at 15% tax rate, I assume.
But but that's only for the gains, not the basis.
>> Oh, yeah. Yeah. Yeah. Yeah. Yeah. That's a good point that you said earlier.
>> And so I'm asking which individual stocks or stock funds. I look >> Oh, but you're saying you're already out of the 0% threshold. So >> yeah. And and again, Wade, my take would be I I don't think it matters the absent of forecasting, which we don't do. Like I can't tell you, hey, Nvidia's been on a tear and so why don't you sell that one now? If you're looking for that answer, that's just not something we do.
We're we're sort of agnostic to to that type of forecast. And I would say proportionally as as best you can, going back to Wade's last response.
Okay. And then there's a question from Puh. So, my dad signed a life insurance policy, an annuity for my sister who's 20 years old. I want to get out of it.
He signed it in 2024. Is there a way to get out of it without losing money? So, if it's an annuity might have a surrender charge schedule where you do have to wait. Well, yeah, we need to know more details about the features. Now, life insurance policy with annuity in parenthesis. Um maybe it is more like a life insurance policy in which case it's probably not going to be able possible to get out of it without losing money because a lot of times if the the cash value like the surrender value takes a long time to start building up.
So the answer is it may not be possible to get out of it without losing money. But we don't have any further details to really be able to analyze this question uh on a on our live basis here.
>> Yeah. But what you can do is maybe explain to the audience what does that mean by there could be a surrender charge and why would you get penalized if you sell an annuity within a certain number of years?
>> Yeah. So, if it was an annuity, more specifically, it's to to pay the commission to the agent selling the contract. They they'll create a surrender charge schedule where like if I decided I wanted to get out of the contract within the first few years, I may be looking at a 5 to 10% penalty on the surrender value. Like, if if the contract value is $100,000 and I surrender the contract, I might only get $95,000 back. But after we get past the surrender period, you don't have that issue anymore and then you would get the full kind of contract value back if you decide to get out of the contract. That's generally how annuities work, but life insurance is different. And I'm assuming we're talking about it must be permanent life insurance rather than term life insurance. term life insurance, you just can can stop paying premiums and you don't get your previous premiums refunded because it already paid for the insurance protection from the past that you you made it through that. Uh but if there's a cash value and it's permanent life insurance, you can surrender the contract. It's just a lot of permanent life insurance, it can take 10 years or more before the cash value buildup will exceed the premiums put into the contract. And in that regard, it's going to be a lot harder to to end the contract without losing any money.
Okay. Uh Wade, then I've got a question here from Maggie and it's let me post it on the chat.
Where'd it go? Okay, here it is. Give me a second.
What are the implications on financial matters when a spouse dies, taxes, spending, etc.?
So, we're talking about the death of a spouse and financial matters. So there's all kinds of of course emotional matters we're not specifically addressing but on the financial side we did talk about the tax situation already that yeah in the the following year the surviving spouse has to file as a singlepayer instead of married filing jointly and that can lead to a bigger tax bill. It can lead to, you know, getting into higher tax brackets quicker, um, more quickly, getting into having 85% of social security taxed, um, getting into Medicare premium search charges quicker. The RMDs don't necessarily change unless there's a big age difference between spouses and you can take advantage of some of those rules. But in general, the RMDs may not change all that much, but the the tax implications of those RMDs can change quite a bit. Now, in terms of spending, um, single people usually spend less than than married people. One person tends to spend less than two people, but it's not like half. There's a lot of fixed expenses.
And so, when economists look at this, they might say like a a couple will spend 1.6 times as much as a single person. You know, you still have to have a refrigerator and everything. You you get savings. You only buy one meal at the restaurant instead of two. So there are some savings, but expenses won't drop in half by any means. And the more fixed expenses you have, maybe that 1.6 number isn't quite right. You you can generally expect some reduction in expenses.
You you also can expect some reduction in income, less social security if there were any other pensions and things that go away. Uh so there's those are the the general financial imple uh implications to be thinking about.
>> Okay. Here's another question by Mark.
Let me put it on. Join late but heard discussion about widow torpedo. We are retired. If we expect to be in the same tax bracket after RMDs begin, should I be thinking about Roth conversions now to hedge an early death?
Yes. Um well that's definitely. So, in my retirement planning guide book, you when I talk about the tax planning conversation, I do have a section on further reasons to consider Roth conversions and things uh in addition to all the general when tax rates going to be higher or lower. And that widow's penalty is one of the strong considerations. Yes, to help support a surviving spouse, you may want to be thinking about Roth conversions to to reduce the RMD demands on that surviving spouse when they're going to be facing higher tax rates on those RMDs.
So, yes, planning ahead for a surviving spouse is a strong argument in favor of considering things like required minimum distributions.
>> Okay.
And we have here, let me put another one here. I am 60 years old here. Let me copy it and I'll put it in the thing. This is from Eric.
I'll read it since I know it gives you a preview there. I am a 60-year-old lifelong indexer. In fact, I have never owned an individual stock. I occasionally hear comments about the benefits of owning individual stocks for tax harvesting opportunities.
I have a general understanding of why over time with a broad index fund you you expect only gains even though within that index there are bound to be some losers. If you owned a basket of stocks directly you would be able to harvest the tax harvest the losers. Obviously, owning an entire broad index yourself is un is in feasible. But if you expect the same principle may apply if you hold a basket of 20 to 40 individual stocks, but you would expect the same principle to apply with 20 to 40 stocks. Is this strategy only worth pursuing for the very wealthy?
I'll kick this off a little bit. Wait, there are a couple of points. I'll try to get as many as the spirit moves me at the time. And there's a couple of things to consider. And so for Eric, what I would start off with is a tax loss harvesting strategy, which we implement at at MLAN Asset Management. It's it's it's it's very valuable strategy for a couple of reasons and financial planning reasons as well. But at ultimately within a tax loss harvesting strategy, you're you're effectively at least the way it's with an indexing approach, you're trying to mimic an index, be it the S&P 500, the Russell 2000, or something along those lines. You don't need to own the 500 stocks to do so. You just need a good representative sample such as like I'm going to have enough stocks that you know let's say the basket of pharmaceutical companies within the S&P 500 is Merc Fizer Astroenica Eli Liy let's just use four for right now right and most likely the way those stocks move als syn synrasies of the individ you know of certain things they're going to move more or less in tandem and so effectively doing Merc and Eli Liy, you're going to be expected to get the same effect as you know owning Merc, Eli Liy, Fizer and Astroenica, right? But there'll be a difference and that's what's known as tracking error. And so if you do tax loss harvesting absent of owning 500 individual stocks and you want a representative sample of let's say 30 stocks, that may give you a tracking error to the index of 3%. So, in any given year, right off the bat, you're going to have to accept the fact that the S&P returns 10%. You may get a 13% anywhere between a 13% return and 7% return over time because it's tracking error. You hope that that's a wash, right? And so, I say that to answer the question of yes, you don't need 500 individual stocks. You just need a basket that's a representative of the index that you are tracking, right? So that's one thing you have to be comfortable with tracking error. The other piece is over time all stocks go up. Obviously stocks that go down get out of the index and they won't be part of the S&P 500 anymore.
But those stocks that are in the index and the like will go up over time. So the benefits of tax loss harvesting individual things you know dissipate let's say after five years or so. And some studies will show that the the benefits the tax the extra tax alpha you get from harvesting losses is runs between 0.4% a year plus or minus but it it goes less and less as the years go on because overall stocks even go up. So absent of putting in cash vintages where you can throw in more more cash to then buy greater representation and then have more opportunity sets to harvest losses, they will go up. So it it can stop after a while and then you're left with owning a basket of 80 stocks and you then have to manage that from a tracking error perspective. Now there's plenty of separately managed accounts that go directly to consumer that can help you with that manage that can help you with that and those could be worthwhile.
Where I I think is beneficial is actually for financial planning purposes. If let's say you know that you have a huge gain coming in five years, right? and you're tracking the S&P 500 and you just put a million dollars fresh in the S&P 500 after five years, it's conceivable that you have harvested $200,000 in losses that can be applied then to gains later on, right? And for those of you that may be wondering, what does that mean?
Harvest losses and the like. Uh let's let's go back to the pharmaceutical example. I own Merc, Fizer, Astroenica, Eli Liy. So I own four stocks. Obviously four is not enough but let's for purposes of this let's say I own four stock. I only buy Merc and Fizer right now and that's going to be my representative sample of the pharmaceutical industry. So my pharmaceutical index you know obviously that would be part of a larger S&P 500 but for the purposes of this explanation um for tax loss harvesting this is what happens. something happens with uh some law about the way prescription drugs are going to be priced, right? Uh and that makes all the stocks go down, right? And they're all going to be hit similarly, right? So let's say they all take a 10% hit, right? And it was whatever you know, so you sell Merc. So you sell, you have Merc, Fizer, Eli Lilly, and Astroenica. You sell Eli Liy and Astroenica, right? and you turn around that moment and you buy another two stocks. So you've booked the loss on on those two stocks, but then you pick up another two stocks that maintain that representative sample within a tracking error that you like. And so by booking that loss and that minute you buy another set of stocks, you still have effectively [cough and clears throat] the tracking that you want for the indexes that you're that you're trying to mimic, right? And so you're still in the market and you haven't sold and you're able to book the loss. It's from an optic standpoint. As long as you follow certain guidelines like you don't reby it within 30 days or you buy something that you can't reby the same thing immediately, you should be in good shape. Obviously talk talk to a tax person and the like, but that's something that technology has helped folks implement more and more on a greater level. I'm sure a lot of the brokerages that you have right now, I mean, they like to call them uh for tax loss harvesting, you'll see direct indexing as the term that they use, right? A direct index is tracking the S&P 500 with individual stocks. And what they should be doing internally is selling losers and buying another represent representative sample of what those losers were were representing to make sure that you're still invested.
So, is this strategy only worth pursuing for the very wealthy? No. It's something that can be done now at scale, but it really is important to do from a financial planning perspective because you bring in financial planning scenarios like you need to offset gains in the future and so you want to start harvesting losses now. It's a pretty good strategy that then you can use to offset those losses. But even if you don't do that, [clears throat] you you you know, let's say you're harvesting losses, harvesting losses, and a certain point you're going to take distributions from a portfolio.
Well, when you take distributions, you're actually from a total return perspective, you're actually selling a blend of gains and losses most likely.
But if you stick only to the gains, then you can apply the harvested losses that you have to it. And so that gives you a nice little after tax bump on what you could distribute. Wade, did I answer that clearly or >> I think so. Yeah, that was a pretty thorough answer.
>> All right, that's that's my take on it, Wade. No, I don't really have much to add on that. It's it's a lot of work, but and that's why a lot of times people don't try to do that on as a do-it-yourselfer, but yeah, it's a way to potentially get a little tax boost to your investment strategy.
>> Yeah, like I said, it could be done at scale with certain technologies right now and and it should be part for the course for any wealth advisor. If they're not doing it, I don't know what to say other than, you know, things I shouldn't say on a YouTube live session.
So, I'll leave it at that.
>> Okay.
>> Okay. And I can >> do another question here. Um, so my question is whether and this is from Sharon. Uh my question is whether you should continue to reinvest dividends in an IRA account in the deaccumulation phase or the distribution retirement income phase.
And for that one, so I maybe we need a little more context like probably yeah, there's no reason to switch to not reinvest dividends in your IRA in the retirement distribution phase. I I guess the the thinking might be well if I and let me post this question. That's what I'm trying to do at the same time.
If I want distributions to cover my my spending in retirement, maybe I just don't reinvest the dividends and then I can distribute them from the IRA. But if I stop reinvesting the dividends automatically, that won't automatically distribute them from the IRA. In the IRA, you don't have to worry about the the tax implications of buying and selling. I don't see any reason why you would turn off reinvest dividends. It's just when you want a distribution, you sell some shares and take the distribution from the IRA. You don't have to worry about turning off the reinvest dividends and then going in and having to reinvest those yourselves or distribute exactly what the distribution was.
I unless it's some sort of behavioral thing of I just want to spend the dividends, so I'll turn off reinvesting and then I'll take those as distributions. Guess you could do that for behavioral reasons, but in general terms, because you don't have to worry about the tax implications of buying and selling shares, it's only when you distribute from the IRA where you have to pay the taxes. I'd say keep the reinvest dividends on and then just sell shares and take distributions when you actually want to take a distribution. I think that would be easier overall.
>> Yeah, agree.
>> Okay.
And we've got a lot more questions here.
So here's one and maybe you can Oh. Oh. So yeah, coming in the the chat.
So does the answer to that question change in a taxable brokerage account?
Ye. Yeah, it could potentially change.
And and actually just I turned off the reinvest dividends personally in my own taxable brokerage account just I go and reinvest them myself. It's something, you know, four times a year there's a quarterly distribution. That way I can maintain better control over how many shares and partial shares and things that I have. U but yeah, if you're going to need that money for spending in a taxable brokerage account, you could create more tax troubles for yourself by automatically reinvesting dividends that you're then going to have to go and sell in a couple months and realize short-term capital gains on that and whatnot. So yeah, I think in a taxable brokerage environment, the justification for turning off the dividend reinvestment, automatic dividend reinvestment is probably stronger than than it would be in an IRA account.
>> And and to follow up on your point, Wade, that's how we do that's what we do as well from a taxable account simply because it it's actually it's pretty practical. And what I mean by that is the the the cash comes in and then we we use it to rebalance and so it helps with rebalancing accounts because we don't need it it avoids needing to sell maybe a share of something to move it somewhere else because if we have a ca cash coming in from dividends on a quarterly basis then it just just makes rebalancing a lot easier. also from folks taking distributions. We don't try to match dividends or anything like that, but in a taxable account, it it's it's it's just another way of of doing it efficiently where if we know if someone's going to take making it up, $50,000 on a quarterly on a quarterly basis as part of a sustainable withdrawal rate and we know I don't know $14,000 are coming in on a quarterly basis from dividends, it it just helps with the planning a lot better. less things that we have to trade out since cash is going to be in the account around that time anyways.
>> Yeah. Yeah. Since in an IRA you don't have to worry about the tax implications of rebalancing, but in a taxable brokerage account you do have to worry about the tax implications of rebalancing. Yeah, that's a great point.
Just turning off the automatic dividend reinvestment makes it easier to to rebalance.
>> Now, human nature make may make you realize, my goodness, I have a lot of cash here. You know what? daddy needs a new pair of shoes, you know, that kind of thing. That's what you have to disabuse yourself from, >> right? Don't just think that's now spending money automatically if it otherwise shouldn't be. But also, don't forget to to go in and manually reinvest your dividends, or else you will over time build up a larger and larger cash holding in your brokerage account.
>> Yeah. And if you're the type of person that is not going to be as diligent about that, then reinvest the dividends to make sure that it's at least invested. But the the better approach is to not and you know move the move the pieces around accordingly as you see fit on a quarterly basis.
>> Okay. And let me add another question here and and we'll go maybe about eight more minutes with this particular episode, but this question, >> it's about HSA. So, I want to start taking distributions from my HSA account now that I'm over the age 65 requirement.
Uh, this question is from Susie. I'll read the whole question, but then I want to come back to this statement because I'm not sure if there's a correct understanding about it. But, okay. I want to start taking distributions for my HSA account now that I'm over the age 65 requirement. Can I use my prior year's monthly HSA health insurance premiums and now my Medicare monthly premiums as an eligible medical expense?
If yes, would my monthly Medicare supplement premiums also apply?
So, first of all, the the age 65 requirement, that's if you're under 65 and you take a HSA distribution for a non-qualified medical expense, there's a 20% penalty plus you pay income tax on that. It's ordinary income. It's like an IRA distribution, but pay income tax plus a 20% penalty. after age 65, you if it's a non-qualified medical expense, you still pay income tax on it, but there's no uh 20% penalty.
But that doesn't impact whenever you have qualified medical expenses, you can take that out at any point. So the statement like now that I'm over 65, it's okay to start taking distributions to fund qualified medical expenses. Now, you could do that at any age. I just want to be clear about that. Uh then getting to the rest of the question, yeah, if you have evidence that you had the HSA in place at the time you were paying health insurance premiums, you you don't have to take the HSA distribution the same year. You can save that paperwork and now you can take those funds out of the HSA matched up against your previous health insurance premiums in years that you had an HSA in place.
You can't go back pre the the existence of that HSA. But since you had an HSA in place, you can apply past health insurance premiums as covered expenses to get qualified distributions from the HSA. You can also do that for the Medicare Part B uh part C or Medicare Advantage and Part D premiums. Uh but there is an anomaly, so it's good that you ask this additional part. It just seems like you're not allowed to treat Medicare Medigap premiums or Medicare supplement premiums as a qualified medical expense for the HSA.
So, no, you cannot do it for the Medicare supplements, but yes, in terms of that being a qualified medical expense, but yes, your part B, part B, and then part C if you use Medicare Advantage, uh those premiums all count as qualified medical expenses to deduct from your HSA without tax or penalty.
>> Okay.
Uh since we only have a couple more, we've got we're going to have to take some of these questions and turn them into a podcast. So we many podcasts and we'll do that. Wade, uh since a flood of questions came in right before we we had started, they were emailed in. Oh, here's here's here's one here's a couple of live ones we can hit. Uh I'll just put it on. Is 40% cash in a million dollar investment account too much for a 69y old? I have income with social security and only withdraw about $15. I'm gonna just think it's 15,000 >> probably >> per year or yeah because it's not going to be $150,000, you know, here and I'll put it on the stream.
>> And right so what we're saying here there's $400,000 of cash and I guess framing this is like what's an appropriate cash buffer? Like how many years of spending do you want covered?
Well, with social security kicking in, your other distribution needs from the investments are 15,000 a year. That's a lot of years.
That's almost like 25 more than 25 years of a cash buffer.
Yes. Generally speaking, if there are other reasons you might want to have cash, but if it's simply I want to have a few years of expenses covered with cash, $400,000 is way more than you would need to cover an annual $15,000 distribution. Now, if it was $150,000 distribution, then 40% in cash would cover more than two less than three years.
>> It's 15,000. He followed up with 15,000.
>> Okay. So yeah, in terms of having a cash buffer to cover upcoming expenses, you would not need that much. You know, even if you want to be conservative and have 10 years of expenses in a cash buffer, then we're talking about like $150,000.
>> And that's probably already a conservative type of number.
>> And this doesn't even factor in what the other part of the allocation is.
Potentially the other part could be 100% bonds weight. And he's considering cash a different asset class than like government bonds. And so I mean the other way to answer this Mike is you have to do what you feel comfortable with and what lets you sleep at night regardless of what anyone says including ourselves. I mean if if we tell you hey look you're good you have more than enough but you're tossing and turning then it's sometimes just not worth it.
And so it what it's what makes you feel comfortable. If you did it simply if you have that much simply because you didn't know and you're thinking okay this is what I think makes sense then the answer that way gave you is is 100% on the money which is yeah that that that's a lot. You don't need that much. But if if you can't sleep no amount of magnesium will do the trick. So, it just is what it is at that point.
>> And you might take the RISA, too, because this might be a case where >> and that's a retirement income style awareness that Alex and I developed and it's a freely available for you to to get your RISA report.
Uh, this might be a case where you're you kind of been pushed into a total returns strategy even though if you're income protection or something else that might not be right for you. And so the way you're trying to balance not having the right retirement income style for your your personal needs is you have a high cash holding. it it that that's actually a great point uh in in terms of the RISA because you may be in a total return strategy right now and not aware that there's many ways to do this effectively and it strikes me right now just based on the questioning that [clears throat] excuse me yeah you potentially are something other than a total return person and you you may have a significantly better outcome both from a volatility perspective and from a net worth perspective if you had if if that 40% cash was in contractual income paying paying out, you know, paying certain amount out per year, right? Way just from a portfolio efficiency standpoint, not even from a sleep at night factor, you know, this doesn't seem like the optimal way to go about it from a money at the end of the day point of view.
>> Yeah. I mean, if if your retirement income has more like income protection, you could carve out much less than $400,000 of that cash in most cases to purchase protected lifetime income where you wouldn't even have to worry about ever outliving those funds. And then you you've got some surplus. The rest of the $400,000 is now discretionary wealth for for anything. And and not only that, if if he said because he follow up saying the rest of it is all in stocks and ETFs, I would counter the efficient frontier is not necessarily, you know, stocks, ETFs, and cash, but rather, you know, ETFs and contractual income.
And now when you say stocks, all of a sudden now there's a little bit of a chuckle and hide piece where you're at this extreme of cash, but then I I I don't know what you mean by stocks, but maybe you could be just, you know, play money and here are some stocks that I want to see if this hits or you it may be that, you know, if the 60% is in five stocks and two mutual funds, then the risk profile changes completely.
you don't have like something in the middle. You know, if you're like very conservative with cash and very aggressive with stocks, I wouldn't take that to be that, oh, that's like a 50/50 then from a risk standpoint.
Yeah. Depending on the stocks, it may very well not be >> that kind of barbell approach.
>> Yeah, exactly. I don't think you can barbell risk that way.
>> Yeah. Yeah.
>> And then maybe one last question for today, and it's an easy one because it's actually a followup from Susie. Uh, can Medicare Irma search charges also apply as eligible medical expenses for HSA distributions? And I'm pretty sure the answer is yes, that that would be part of just you have a higher part B and part D premium or if you're using Medicare Advantage, you still have to pay those part B part D premiums as well as charges. And yeah, I'm pretty sure those can also count as eligible HS qualified medical distributions for the purpose of an HSA. And then that way that money does not those distributions do not go into your adjusted gross income and therefore can't trigger even higher IMAC charges for you in the future.
>> And that's a wrap.
>> All right. Well, yeah, we'll wrap up here. Thanks everyone for joining us for our YouTube live. Uh, I think we did get through most of the questions except that real estate one. We'll follow up in terms of the live chat and we do still have a backlog of questions that came in advance of today's session. So, we'll we'll continue to record a few more podcast episodes, not live editions, but we'll make sure to to cover the rest of those questions that came in in the next few episodes after this as well.
>> So, thanks everyone.
>> We've got about 24 more questions just in the in the can alone. So yeah, please uh check in with Retire with Style, our weekly podcast. We will be hitting these questions and just checking the boxes.
So we look forward to to answering them.
And if you have any more that you think of even afterwards or whatever, feel free to put it in the comments or email us at info retirementresearcher.com.
Is that our email, Briana?
>> Say community. Yeah, that's right.
community at retirement.com and just send them in and we we keep an archive of all of these and we like to batch them and then knock them out like we're doing right now. So, appreciate the time everyone.
>> Yep. Take care. Thanks everyone.
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