The Fiscal Blueprint: Retirement Built Right w/ Financial Coach Jeff Montgomery

On this week's episode of the Fiscal Blueprint podcast, we continue our conversation on RMD's (required minimum distributions.) Is it time to finally get rid of them altogether? Well, a recent article in Investment News explored this possibility and there are definitely some compelling arguments for this idea. Who knows if it will it ever happen but, it is absolutely worth discussing!

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to advise clients. So, unless you're a client I can't give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that's only common sense.

Practical Planning segment: Last week we had a good discussion about avoiding mistakes made when confronting RMD's.

1. One mistake we talked about was when folks postponed their first RMD, they have to take two the following year. And next year in 2022 the tables are changing. So, you would have to calculate and use the proper table to determine the RMD from the first year you postponed it, 2021.
2. We talked about completing a Roth conversion after your required beginning date or RMD date and we mention that the IRS is pretty strict about this and that you have to take your RMD first, prior to any conversion.
3. And of course, we talked about the potential of a missed RMD and how to correct that with form 5329. Otherwise, it is a 50% penalty the most egregious penalty in the entire tax code.

And after that show I read an article that I thought was interesting, it was in "investment news" and it was titled "Congress, stop the madness and eliminate RMDS".

It was written by Mr. Ed Slott which I have mentioned numerous times on the podcast. He is probably my go-to resource for all things regarding IRAs and therefore RMDS.

He really seems to have his finger on the pulse of all things regarding IRA accounts. In fact, he was the first one that I heard speak about the elimination of the stretch IRA. Sure enough, in 2020, Congress eliminated the stretch IRA for most non-spouse beneficiaries of retirement accounts.

This provision was passed through the SECURE ACT and it really flew under the radar all of 2020 because of the pandemic!

So, in Ed's article again dated May 13th, 2021, he starts to talk about what some are calling the secure act 2.0. this is potential future legislation that's titled securing a stronger retirement act.

I have yet to see all the proposed changes in this legislation and of course, nothing has passed at this moment in time, however, there is one proposal that is talking about raising the required minimum distribution age from 72 to 75 over a 10 yr. period.

Sounds great on the surface, right? But Ed had some interesting points that I think are worth discussing.

Let's first talk about the process of calculating and requesting your RMD: the reason I want to talk about this is because I think it will shed some light on his argument of just waiving RMD's altogether.

We have already mentioned that many mistakes are made by seniors when it's time to collect RMDS. And if the age keeps changing all the time period there is more opportunity for mistakes to be made. Therefore, more chance for penalties to be assessed.

The typical process of collecting your RMD:

1. First, you have to find your December 31st value of your IRA.
2. Go to the correct table (remember there are 3 tables so you have to make sure you use the correct one)
3. Apply the correct factor listed based on your age. Now for inherited IRA's the correct factor can get confusing because the starting factor is based on your age when you first inherited the IRA and then you subtract 1 from that. (this is before 2020. If you're a typical non-spouse beneficiary, the new rule is the 10-year rule we spoke about last week).
4. Withhold the correct amount of taxes from the withdraw or you will deal with paying the taxes at a later date when you file the return
5. DON'T FORGET; if you have more than one IRA you have to add up all the IRA's and other retirement accounts like 401k's, 403b's, etc.

It's quite easy to make a mistake especially if you have multiple IRA accounts!

So, in the article, Ed begins talking about statistics the Treasury Department said only about 20% of those who are subject to RMDS take the minimum amount, which means that the remaining 80% take more than the minimum amount simply because they need the funds. Delaying the RMD's to age 75 would only help the 20% that do not need the money.

Now last year because of the pandemic RMD's were waived. But again, this only helped the 20% who did not need the money. Most people still took money out of their IRA because they need it to live on.

So, he goes on to say that the new secure act 2.0 proposal would delay the start of RMD's to 75, leaving fewer years for the 20% to use those funds in retirement. But remember the 80% are unaffected by this because they withdraw the funds anyway. This goes against the secure act rationale that these funds should be used in retirement, since raising the RMD age means more of the funds will pass to beneficiaries.

And this is where I think they're going with this. Again, when your IRA passes to non-spouse beneficiaries they now must withdraw that money within 10 years unless there is some exemption applied. So that would cause a bunch of income into those years which translates to higher revenue for the government.

Also, there's an argument to be made that delaying RMD's would mean people would take larger RMD's when they do begin, also resulting in potential higher tax bills. Putting off RMD's to later years may result in higher overall taxes than if RMD's were spread over more years.

We already talked about all the potential mistakes that could be made and also the fact that all the table numbers are changing next year. This area is ripe for mistakes and therefore the assessment of missed RMDS and missed RMD penalties.

So, the article goes on to say, "stop the madness", get rid of lifetime RMD's altogether!

So, looking at the statistics it really does beg the question of why bother with lifetime RMD's at all anymore?

They are completely unnecessary especially since the secure act set an end date for when retirement funds will have to be withdrawn after death, this is called the 10-year rule! Why not just eliminate lifetime RMD's and all the problems and worries that come with them? The government is still going to get their tax money and now there is an end date, so they know that once a person passes an IRA to their non-spouse beneficiaries, they're going to get all their tax money within 10 years.

That would also harmonize the RMD rules with Roth IRA's raise, which have no RMD's.

Eliminating lifetime RMD's will have close to a zero-revenue effect and more likely result in increased tax revenue since 80% of the people will be taking what would have been the minimum or more anyway because they need the funds to live on. Why make them worry about what amount to withdraw, going through their IRA statements, and making all the calculations we discussed earlier?

Let them take what they need when they need it. It might just be that they end up withdrawing more than the minimum, therefore, increasing revenue for the government.

Another interesting idea he brings up in the article is that if there are no required distributions, that may mean more Roth conversions. And when a Roth conversion is done the taxes are paid in that year! So again, the government loves Roth conversions because they're getting tax money now.

Eliminating RMD's may increase Roth conversions!

Yes, the government loves Roth's. As a matter of fact, in the proposal, they talk about encouraging more Roth contributions and creating Roth options for Sep erase and simple IRA's, which are not available currently with a Roth option.

Ed says it's clear that Congress loves Roth IRA's they really want full "Rothification" because of the revenue it brings in when tax deductions are not claimed for contributions to retirement accounts.

Yes, he goes on to say that if Congress likes Roth IRA so much, eliminate ING the lifetime RMD's would open the door to more Roth conversions currently required minimum distributions cannot be converted to Roth IR A's, we talked about that earlier period but if there were no RMDS, all IRA funds could be converted. By the way that's what happened last year when the RMD's were waived. Many people did Roth conversions in lieu of taking their RMD. So, 2020 was a test case for this idea.

So just to wrap up this podcast I agree with Ed! There is no longer any need for lifetime RMD's. It causes confusion, headache, and potentially a 50% penalty for seniors who make a mistake. So, this really is a win-win.

Will Congress listen to this logic? I'm not so sure.

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

On today's show, we are going to go over some common misconceptions and mistakes folks make when it comes to taking their RMD's from their IRAs.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you're a client I can't give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.

(0:30) Practical Planning segment: We have a subject that's near and dear to Joani's heart: Required Minimum Distribution's, otherwise known as RMD's!

This show was triggered by a listener's question that came in a few weeks ago and this particular listener was getting pretty creative with some tax planning and postponing their RMDs. Let's the question below:

(2:00) Listener Question: I have an idea I have been thinking about and could you tell me if this works or not. I have turned 72 this year in 2021 and I know, based on the Secure ACT, I will have to take an RMD this year. However, I also know I am allowed to postpone my first RMD until April 1st of 2022. I was thinking about postponing my 1st RMD until that date and complete a Roth conversion this year in 2021? I did not want to do anything until I got some advice first. What say you?

Here's the short answer: No, that will not work. Why?

• Can you do a Roth conversion after 72? YES! However, the first funds out of an IRA are always the RMD. You cannot roll over an RMD into a Roth IRA.
• If you tried to do this it would be considered an excess contribution into the Roth.

So that question got me thinking about other folks out there with the same or similar questions and some common mistakes we see with RMD's.

(7:45) One potential mistake I could see happening related to this first question when postponing your first RMD. In the previous example, let's say you postpone your first RMD in 2021, what happens in 2022? You must take 2 RMD's for that year, correct?

Well, guess what? It's not highly publicized yet but they are changing the RMD tables next year.

These new tables are effective for RMDs beginning on January 1, 2022. The old tables will still apply for 2021 and no RMDs were required for 2020 due to the (CARES) Act.

The tables were last updated in 2002 so the IRS reviewed the mortality tables and has essentially changed them which allows slightly lower RMD's.

(10:20) The Uniform Lifetime Table is the most commonly used table. It is used to determine lifetime RMDs to most plan participants over the age of 72; including when a spousal beneficiary is a sole designated beneficiary but who is not over 10 years younger than the account owner or when the spouse is not the sole designated beneficiary.

The Uniform Lifetime Table is also used to calculate distributions required for an individual who has inherited a tax-deferred retirement account from their spouse and has selected to transfer the account into their own name.

The Joint and Last Survivor Table is only used to determine RMDs to plan participants over the age of 72 when a spouse is a sole designated beneficiary and who is over 10 years younger than the account owner.

(13:00) The Single Life Table after the SECURE Act will be used by a newly defined class of beneficiaries called Eligible Designated Beneficiaries. Eligible designated beneficiaries are defined as spouses, disabled or chronically ill individuals, minor children of the account owner/participant, or someone who is no more than 10 years younger than the account owner/participant.

Otherwise, in this example, it is the NEW 10 YEAR RULE.

Also, why we are here let's clear up a recent IRS mistake in Publication 590. The writer or writers of the recently released draft of publication 590 misinterpreted the 10-year rule in the SECURE ACT. The writer said a non-spouse beneficiary would have to use the Single Life table and then have the entire amount withdrawn by year 10.

This was incorrect! They are now on record saying the publication was wrong and the actual example they gave (I think on page 12) was incorrect.

There are NO RMD's for 9 years and 364 days and the entire account must be withdrawn!

(18:45) And that brings us to the next potential mistake that could be made:

If you missed an RMD and are charged the 50% penalty it is not cumulative (It doesn't compound on itself) except when the RMD equals the entire IRA. So, when is that ever the case? The 10-year rule. But could this happen? Could you owe more than the actual IRA? No, but they would take the whole IRA.

What about Roth IRAs? Fix a missed RMD; file form 5329. But use the correct form from the tax year you missed the RMD. You may have to file an amended return as well.

(22:20) How about using an "in-kind" transfer to satisfy the RMD instead of just a simple distribution. How does that work?

This one is interesting, and we don't often run into this. However, it is possible to use an 'in-kind' transfer to satisfy an RMD. Basically, you are transferring the investment shares to another account that equal the amount of the RMD.

You're not escaping the taxes. It will still be reported as a distribution with a 1099 R, but you have moved the actual shares into a personal brokerage account (typically at the same custodian.)

So now those shares are in a personal account that is hopefully growing and earning dividends each year. However, it is also a taxable account so you would owe taxes each year on those dividends and possible capital gains.

But where the mistake could be made is what do you use as your cost basis on those shares that transferred to the Personal Brokerage account?

• The value of those shares on the day it was transferred in kind. Not what you originally bought those shares for in the IRA account.
• So really your cost basis is the amount reported on the 1099R you received from the IRA account.

(25:50) Coachable Segment:

Check and then double-check your RMD's with your advisor and/or your custodian. If you have a question, always ask!

Why? Because the IRS says it is up to you to take the correct RMD. It is not up to your custodian or Advisor. They can tell you how much is required to be taken out of the account they manage but what if you have other IRA accounts that they don't know about?

It is ultimately up to you to take out the correct amount.

From our experience (although the IRS is portrayed as EVIL) if you have made a good faith attempt and simply made an error or your custodian made an error, they are usually pretty lenient and will waive the penalty if corrected when discovered.

Again, you may have to file an amended return and send in form 5329.

Final Disclaimer: "We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

On today's show, we are going to discuss the 6 Retirement Killers to avoid at all costs!

(0:25) Practical Planning Segment:

From my experience, the number one concern for most folks when it comes to financial planning is outliving their money in retirement. Along with that, many folks are concerned about the costs of long-term care and paying for increasing health care expenses in general.

Soon-to-be retirees often express that they are worried about running out of money before they run out of life! A lot of these folks are also 'winging it' without a plan for their retirement, which brings me to retirement killer number one….

(1:20) #1 Not having a plan! Not having a plan means not having a written income plan that lays out where your money is going to come from during retirement.

We often talk about basic living expenses or minimum dignity needs: Food, Healthcare, Housing, Utilities, and Transportation.

What if we had a plan (that was adjusted for inflation, of course) that had one bucket of money dedicated to meeting those minimum dignity needs and is guaranteed. Things like social security, pensions, or specific annuity products would be considered *guaranteed.*

Then, another bucket within that plan would be considered the 'fun money bucket. The money that aligns our core values with our goals, the one where we really get to live!

Overall, developing an income plan that meets your minimum needs AND meets your goals for how you want to enjoy life during retirement, should be priority number one!

(3:50) #2 Using the wrong Investment Assumptions.

Making a plan only works when you have accurate assumptions! I'm talking about correct inflation rates, assumed investment returns, and so much more. The success of your plan depends on the accuracy of everything that gets input, so make sure you are being honest and logical with every aspect of your plan.

One thing to pay attention to in particular is your risk tolerance, (check out our risk questionnaire here) After doing this, we are able to design an efficient portfolio that meets your specific risk tolerance. Ensuring your risk tolerance is aligned with your plan and strategy is extremely important.

Also, see if your advisor can stress test your portfolio by running a variety of different market scenarios to see what effect it could have on your plan. This could help your peace of mind tremendously.

(6:15) #3 Taking Too Much Risk with Investments

On the same note, don't forget to protect what you already have. So many people can get caught up in the latest investing trend i.e. bitcoin, dogecoin, cryptocurrency, and other speculative investments. This is really interesting stuff, but not to risk your nest egg on. If you want to go to the wall street casino, open up a small trading account just for fun, but don't risk your life savings on it.

(8:00) #4 Not Enjoying The Things You Care About

One of the things that I notice with some of my clients who are retired is that folks are afraid to spend their hard-earned money. There's something about them not having a paycheck anymore that mentally puts them into preservation mode!

This takes us back to #1… if you have a good income plan, then this should give you permission to spend that money in the fun bucket and enjoy your life to the fullest!

(9:50) #5 Giving Too Much Money To The Kids

I've seen this retirement killer in different forms, personal loans, co-signing on mortgages, student loans, etc. I understand that folks want to help out their kids, but make sure you aren't overextending yourself or sacrificing your own financial well-being while doing so.

(11:00) #6 Blindly Believing Your Financial Professionals When They Say You Are Going To Be Okay

Make sure you see the analysis behind this statement! Ask questions and ask for demonstrations, proof that you are indeed going to be okay.

We do something within our office called a Monte Carlo analysis, where we run a client's portfolio/plan through 1000 different market scenarios over the course of their life expectancy and see what the probability of success is.

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

On today's show, we are going to discuss the difference between a rollover and a transfer, and if you think that's a boring topic, you might be right.,

However, it is an extremely important topic because if you do it wrong, the IRS can levy some large tax penalties. Let's deconstruct the difference between rollovers and transfers.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you are a client, I cannot give you advice because I do not know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that's just common sense.

(0:45) Practical Planning Segment: In today's episode we are going to "deconstruct" the difference between a rollover and a transfer. And this is something that we deal with almost every week in our office.

Seriously though, there are some important differences to understand from the client's point of view. Regarding a transfer versus a rollover.

So as usual, let's just start with a basic understanding of retirement accounts.

When distributions are taken from tax-deferred retirement accounts, ordinary income taxes are due. However, sometimes funds may simply need to be moved from one retirement account to another – perhaps because an employee is retiring or switching jobs and chooses to move their 401(k) from their old employer to another 401(k), or an IRA account, or because a client wishes to work with a new financial advisor and chooses to move all of their accounts over to the new advisor's firm.

Whatever the reason, there are specific rules for different types of money movement that folks should understand to make sure their accounts are protected from unnecessary taxable distributions.

Now, if you are working with a reputable firm that does this quite often and is familiar with the differences between rollovers and transfers, then the financial advisor's firm will do all this for you, and you should not have a thing to worry about. However, you need to make sure you have a basic understanding and ask good questions.

(4:40) There are two categories of money movement between retirement accounts:

Indirect and Direct transactions.

(4:50) Indirect Rollovers:

For an Indirect Rollover, the account owner withdraws funds to be moved from the originating account and takes actual custody of the funds. The full amount of funds withdrawn must be deposited into the target account within 60 days. This is commonly referred to as a 60-day rollover.

The 60-day clock starts when you take possession of the check. NOT when the custodian actually sent the funds, or the funds left the account. Beware of mail delays!

One caveat for Indirect Rollovers from employer-sponsored retirement plans is that there is generally a mandatory 20% withholding for Federal income taxes that the plan sponsor makes directly to the IRS, with the balance of the funds sent to the account owner. This means that, in order to avoid the tax withholding itself to be considered a taxable distribution from the account, the employee must 'make up' for the withheld amount by depositing funds from another source into the target account within the 60-day Indirect Rollover window.

(8:20) Important note: This 20% mandatory withholding does NOT apply to IRA accounts, including IRA-based employer plans such as SIMPLE IRAs and SEP IRAs.

Taxpayers are also limited to one Indirect Rollover between IRA's or Roth IRA's accounts every 365 days; any additional attempted Indirect Rollovers would be considered an account contribution and can potentially result in a 6% excess contribution penalty annually until corrected.

To reiterate: 20% Mandatory Withholding Applies to Indirect Rollovers Distributed from Employer-Sponsored Retirement Plans only!

(10:30) Direct Rollovers:

In addition to Indirect Rollovers, there are two types of "Direct" methods to move funds between accounts: Direct Rollovers and Direct Transfers.

Direct Rollovers move funds between two retirement accounts, but unlike an Indirect Rollover, the funds are never in the account holder's custody, nor is there any mandatory tax withholding.

For Direct Rollovers, funds are moved from the trustee of one account directly to the trustee of the second account.

Important distinction: each account is a different type of accounts, e.g., 401(k) to IRA or vice versa). Direct Rollovers also have no time limit in which the transaction must take place (i.e.: no 60-day rollover) and there is no limit to how many Direct Rollovers can be done in a given year.

While Direct Rollovers are not taxable events, they are reportable events and as such, are reported on Form 1099-R. You should receive a 1099-R reporting the direct rollover.

(15:40) Direct Transfers:

Similar to Direct Rollovers, Direct Transfers are made directly between the trustees of each account and don't involve the account holder ever having custody of the funds being transferred.

What distinguishes a Direct Transfer from a Direct Rollover, though, is that the accounts in a Transfer must be 'like' accounts (e.g., IRA to IRA, 401(k) to 401(k), etc.).

Similar to Rollovers (including both Direct and Indirect), Transfers are not taxable events BUT unlike rollovers, they are not reportable events and thus do not require submission of any forms to the IRS. NO 1099 is issued because the accounts are like for like.

Ultimately, the key point is that each of the various ways funds can move between retirement accounts has its own distinct set of rules and requirements.

Direct Rollovers are generally preferable over Indirect Rollovers, as they are subject to neither the 60-day time limit nor the 20% mandatory withholding but do require to be reported to the IRS.

On the other hand, Transfers do not need to be reported to the IRS and are used when an individual simply needs to change custodians or consolidate accounts involving the same kind of account.

So, in our coachable segment today we are going to run through an example of a fictional client named Andrew. Let's take a look at a common mistake we have seen folks make without the help of an experienced firm.

(17:30) Coachable Segment:

Example #1: Andrew is a 50-year-old participant in a former employer's 401(k) plan. Recently, Andrew decided to roll his $200,000 401(k) balance to an IRA, and without fully understanding the impact of his decision, he requested a complete distribution of his 401(k), via check, made payable to him, personally.

When Andrew's check arrives in the mail, it will not be for the $200,000 balance he has in his 401(k), but rather, for only $200,000 – $40,000 (20% of the balance being withheld) = $160,000. At the same time, Andrew's check is sent, the plan will also send $200,000 x 20% = $40,000 to the IRS as withholdings for Federal income taxes.

If Andrew wants to avoid a tax bill, he will have to come up with $40,000 of from another source, on top of the $160,000 he receives from the plan, in order to get $200,000 of cumulative retirement money back into an eligible retirement plan within the 60-day rollover window. Because if $200,000 left the original retirement account, then $200,000 must appear in the new retirement account to be fully treated as a rollover… even if Andrew, personally, did not receive the entire $200,000 distribution!

Thus, if instead Andrew only rolls over 100% of the money he received from the plan – the $160,000 check – then the $40,000 sent to the IRS for withholdings will, itself, be treated as a distribution, and Andrew will owe Federal income tax on that $40,000 amount (plus a 10% early distribution penalty, unless an exception were to apply).

In either case, to the extent the amounts withheld create (or increase) an overpayment of Andrew's Federal income tax (because the withholding is mostly or entirely unnecessary if a rollover actually does occur), that overpayment would be recoverable by Andrew as a refund once he has filed his Federal income tax return at the end of the year.

So, in this example, what would be a better way to do this? Send it directly. It would be considered a direct rollover because it's not a like-for-like account. It's a 401k to an IRA. The full 200k would transfer or a check made out to the new custodian of the IRA (not in the name of Andrew) And a 1099 R would be issued reporting a non-taxable direct rollover.

If it were already an IRA and Not a 401k it would be a direct transfer and no 1099 issued (not reportable)

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

Welcome to episode 48 of the fiscal blueprint podcast! Today we are going to talk about the Ins and outs of Roth conversions and answer a few questions such as: What is the purpose of a Roth conversion? How does it benefit you? And what are the pros and cons of completing a Roth conversion?

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you are a client, I cannot give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial advisor.

Today we are talking about Roth conversions and ins and outs of this especially important strategy!

We are approaching that time of year, tax time! And many people that exercised Roth conversions last year may not realize that there are taxes due on that strategy so before folks rush out an implement a Roth conversion this year, we are going to talk about how to properly conduct a Roth conversion and the long-term goal of the strategy.

One of the biggest things that Joani wants to address is that Roth Conversions can only be done within the year. I.e., if you wanted to make a conversion in 2020, you could only do so between Jan 1st and Dec 31st; it's not like contributions where you have until April 15th of the following year.

(1:56) Conversion vs contribution- If you had earned income last year, and you still want to make a contribution for the 2020 tax year, you can do that! You have until April 15th. However, a conversion, would have had to complete that by 12/31/2020.

So, let's just start with the basics: and talk about the differences between a Traditional IRA and a Roth IRA; and then get into the mechanics of completing a Roth conversion.

(3:12) You must have earned income in order to contribute to a traditional IRA. There are limits to what you can contribute, typically its $6,000, unless you are over 50 in which case you can contribute up to $7,000. It is important to note that these contributions are PRE-TAX!

Remember, anyone can make a contribution no matter what your income is, what your age is, where you work, you just have to have earned income! There are some nuances on whether you get a tax deduction for these contributions so make sure you check into that.

A Roth contribution is never tax deductible. However, when you go to take out money from your Roth, so long as you've followed all the rules, that money will be tax free, even the interest and earnings.

(5:00) Many people talk about a Roth Conversion: where you convert money from a traditional IRA into a Roth IRA. The conversion will be taxable, so why do that?

Well, the answer is, if you think taxes are going to go up in the future, wouldn't you rather pay them now while the rates are lower?

Right now, we are in the lowest tax environment since the inception of the tax code. The top marginal tax bracket right now is 37%. So, there is certainly room for it to increase.

And what happens with a traditional IRA at age 72? You are required to take money out, regardless. (RMD's)

The IRS looks at your IRA as income! That's why they make you take these RMD's, it's time to pay the piper!

The idea here is if we think tax rates are going to increase in the future, then converting now and paying taxes now while they are lower could make sense because you could be paying more money in the future. PLUS, the Roth IRA is also going to grow tax free AND the government is never going to force you to take money out because they are not getting any tax 'income' from your Roth.

(9:00) Now, regarding the mechanics of actually completing a Roth conversion. It is rather simple.

And for the purpose of this podcast, we are going to talk about Direct Transfer's from. One account to the other. Now, technically you could do the same thing with a 60-day rollover where you receive the funds and then you have 60 days to put those back into a Roth IRA account or back into your traditional IRA account. And you can complete one of those per year, according to IRS guidelines. There is no limitation on the number of direct transfers you can complete on a per year basis because it is technically not a 60-day rollover.

So, the simplest way to do it is to contact the custodian or your financial advisor to complete the process. You would simply request a transfer from your Traditional IRA to your Roth IRA in the amount that you choose to convert.

(11:50) What are some things to watch out for?

#1 Taxes- Just remember to have money saved away for taxes, because you will receive a 1099 for the amount you took out of your IRA, and you will be on the hook for taxes due on that amount.

#2 If you are of RMD age (over 72) You must take your RMD prior to converting funds from your traditional IRA to your Roth IRA.

#3 NOTE: if you make too much money, you cannot CONTRIBUTE to a Roth IRA. HOWEVER, there is no income restriction for CONVERSIONS.

*ALWAYS check with your accountant and financial advisor when considering and conversions or contributions. Make sure you are fully aware of the tax consequences! *

(14:15) Some disadvantages:

#1- Medicare high income surcharge- In 2021, the standard premium for Medicare Part B, which covers doctor visits and outpatient services, is $148.50. But if a Roth conversion increases your modified adjusted gross income above a certain amount, you could pay much more than that.

PS your Medicare part B payments are based on ax returns from 2 years prior!

#2- Social Security Benefits- The additional income from a Roth conversion could increase the portion of Social Security benefits that are subject to federal income taxes.

#3- Taxes on investment income/ capital gains taxes- because a Roth conversion will increase your taxable income, taxes on your investment income could go up, too.

Our tax code is full of these little 'gotchas!'

(20:00) some other items:

~If you think that long term, tax rates are going to increase by even 1%, then it may make sense to do a conversion.

~After the Secure Act was passed last year, the new rule is that if you leave a traditional IRA to a non-spouse beneficiary, the stretch IRA was eliminated. So, the more you leave to a Roth IRA, the better because taxes are not a factor!

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it is not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

We haven't done a show focused on the economy in a while; and it looks like the 'double dip' recession that so many people feared didn't come to fruition in the fourth quarter of 2020… and it doesn't look likely to occur in early 2021 either. On today's episode, we are going to go through some key indicators of the economy, look at how we performed in the fourth quarter, and what may happen in 2021.

We are going to focus heavily on data and statistics today, and dive into key indicators of economic health.

Click Here for a link to the full article.

EPISODE 46: 2021 Q&A- The Biden Tax Proposal, RMD's, Market Outlook, more!

2021 is off to a start! It seems like we are picking up right where we left off in 2020. Although we have political turmoil setting the stage for 2021. As of this podcast, the markets are shrugging off all of this drama.

However, I'm sure many of you listening are worried about what the future holds not only for the country but also for your finances.

So on today's show, we're going to go through some common questions that we have been receiving in our office. Hopefully, we can alleviate some of the concerns and put folks' minds at ease a bit.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you are a client, I can't give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that's just common sense.

(0:50) Practical Planning Segment:

Welcome to the show, Nicholas Craven, CFP®. Nick tells us a little bit about himself and the process of becoming a CFP® professional, and what it means for the firm.

(3:50) Question #1: Now that the democratic party controls the executive and legislative branches of government, what does the future hold for taxes?

It is true that President Biden has slender majorities in the House and Senate so the slender majorities may limit some dramatic policy changes which require 60 votes, but tax policy is likely to change in some significant ways.

Congress can use some special budget procedures to pass tax hikes without needing 60 Senate votes. It is a process called budget reconciliation and has been used by President Clinton, President Bush, President Obama, and president trump to pass the tax cuts of 2017

(6:00) Likely changes are the following:

• increasing the top tax rate on regular income back to 39.6%. It was lowered to 37% with the Trump tax cuts.
• Secondly, the corporate tax rate will probably go to 28% from the current 21%. Neither of these moves will help the economy grow but it's important to note that the US had a top personal tax rate of 39.6 and a corporate tax rate of 35% from 1993 to 2000 and then again from 2013 to 2017 with no recession during those times
• The limit on state and local tax deductions may actually increase from the current $10,000 limit to at least the $20,000 limit. This is the popular SALT deduction that was very controversial from the trump tax cuts. So, this could help things a bit.
• The Biden campaign proposed eliminating the step-up in basis at death for inherited assets. My personal feeling is this is very unlikely to pass. It would be an accounting nightmare. It would force people to sell assets that they may not want to sell just to pay taxes. So, my personal feeling is this is not going to happen.
• We do however expect the estate tax exemption to fall from the current 11.6 million down to around 6:00 or 7 million as an exemption amount.
• Another possible change may come in the capital gains tax rate. The current top capital gains tax rate is 20%. Biden has proposed capital gains be taxed at ordinary income rates so for those in the top brackets that would be 39.6% because that would be raised as well. Slender majorities should make this virtually impossible. I would instead look for a tax rate hike to 24% from the current 20% at present. In capital gains
• The one big proposal that will likely fail is applying the Social Security tax to earned income above 400,000. Changes to Social Security benefits cannot be done through budget reconciliation and raising the tax probably won't have the 60 Senate votes needed to break a filibuster.

(15:00) Also, we have received questions about when these potential tax hikes could take place? Some investors fear that they could be retroactive to January 1st, 2021. Our current feeling is that with unemployment rates still high and recovery slowed by the resurgence of COVID-19, we think they will more likely be delayed until January 1st of 2022.

We will be addressing the tax environment on more podcasts as we find out more information moving forward.

(17:00) Question #2: I skipped my RMD in 2020 because I could as part of the Cares Act. Will I be allowed to do this again in 2021? And If not Is there anything I need to do regarding my RMD in 2021? Will our custodian automatically restart my RMD's for me?

It's a little too early to tell if they will allow an RMD to be skipped again. I will say that they are going to most likely pass some type of additional bill regarding stimulus a $2000 per month payments. It could be attached to that bill. But that would be speculation only

Regarding the last of the question, you should definitely check with the custodian to see if they automatically restart the required minimum distribution. Most custodians have initiated an automatic restart for 2021. But it is good to check. Just as a reminder you have all the way through the end of the year to satisfy the required minimum distribution. So, it's only January of 2021 right now so you have plenty of time to get this in order.

(19:40) Question #3: Should we make changes considering the onslaught of taxes, estate penalties, and expected decline in stock market with the democratic control? Several members of our family are putting their funds into bonds and "getting out" before the crash.

So, we addressed a lot of the tax concerns in the first question. But let's talk about the second part which really is relying on a huge assumption. And I find this assumption quite common and the facts do not bear it.

The assumption is that the stock market crash is under Democratic control. It's actually the opposite. In your recent coaching class that we put out to our clients, you demonstrated how the stock market performs during Democratic presidents, Democratic controlled Senate, and Democratic controlled House of reps. The data you provided goes all the way back to 1926.

The facts are the facts, the numbers do not lie. That's why I like finance so much because the numbers are there, and the numbers tell the story. It is simply not the case that the market drops during Democratic controlled executive branch and the legislative branch. As a matter of fact, if you really got into the numbers it outperforms.

But as I have mentioned before the market has way too many components and variables to make any correlation with who is in office. Does it have some impact over the short term? Of course, it can over the short term but those are usually quick and dramatic changes which often course correct very quickly as well.

The fact is when you have an extremely well-diversified portfolio owning many different companies in the thousands, over many different asset classes, and not 100% in stocks with some fixed income as well, the fact is that these companies do not operate in a vacuum and do not keep doing the same things when things change, they adapt, and they survive, and they maintain their bottom line.

And by the way, looking at 2021 we're not saying that it could be a dramatic year for stocks and stocks are going to increase greatly, that would be speculating in gamboling, we just don't know. When you look at the fact that most likely there will be another stimulus package, there may be a very large stimulus bill, it's a very slim majority in the Senate and the house, combined with a massive vaccine rollout. 2021 could be an epic year for stocks I emphasize could be we're not making any predictions here

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

Early Retirement, doesn't it sound great?

On last week's show we began to lay out the 6 steps you should consider before pulling the trigger on early retirement. We also looked at some specific risks that will challenge your notion of retiring early, but if you prepare properly, you just might be able to pull it off!

So how do you do it? How do you bridge that income gap between your original retirement date and your NEWLY revised EARLY retirement date? Stick around because that is what we will be taking about on today's podcast.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you are a client, I can't give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser………….right? that's only common sense.

(0:55) Practical Planning segment: Continuing our discussion on income ideas for retiring early we need to find a way to bridge the gap between our original retirement date and our new, early retirement date.

Last week, we talked some specific risks we have to think about when confronting an early retirement, things like market risk, sequence of returns risk, inflation, and longevity. But when it comes right down to it… we need income! That is what it's really all about whether you retire early, on time, or later! It all boils down to income, and where that will come from.

So, hopefully you have looked at those 6 steps that we discussed last week, and you calculated your retirement income needs. AKA, you did a budget! Click Here For a Link to the Budget Worksheet!

Maybe you discovered some areas where you can save quite a bit, you can cut some expenses and if retiring early you may actually need to cut some expenses in order to handle the longevity risk we talked about earlier.

So, you have completed a budget, you have calculated your net worth, listed those amounts by account type account type, and you've calculated your level of Social Security for both you and if married, your spouse.

(4:15) Example: If we're looking at an early retirement, let's say age 55, that is way earlier than you can start Social Security. The earliest you can start Social Security is age 62. We need to find a way to at least bridge an income gap until you can turn on your Social Security.

Now, I am not saying that it makes sense to turn on Social Security at age 62. That is a very individual decision that takes a lot of thought and calculations as to when is the best time to start Social Security.

In this example of retiring early at age 55 and you need income, what are the options to supply that income? Let's make a further assumption that you have no additional savings except tax deferred income. 401ks, T IRA's, maybe a Roth IRA (tax free for qualified distributions)

(6:00) Options:

1. W/D and pay tax and penalty……. Obviously not a good idea but it is an option. So, what's a better option than that?
2. Traditional IRA: 72t distribution. Withdraw from your IRA account without the 10% penalty! How do you do that?
3. 401k Rule of 55.

Bear in mind that both of these tactics have eligibility requirements and limitations, income taxes are due on all withdrawals. You're only avoiding the early withdrawal penalty charged by the IRS of 10%.

If the pandemic is the reason that you are retiring early, another option we need to discuss is that the pandemic will not last forever. If you use one or more bridge income strategies now, you might consider going back to work in a few years to help reboot your nest egg. You can always retire again later on!

(11:15) Example: Now let's run through an example where your original retirement date might have been 65, 66, or 67. But let's say you've decided to retire early at age 62, which means you are or may be eligible for Social Security.

There are a couple of lesser-known Social Security provisions that can help an early retiree who just needs to bridge some income to get the assets in order. This may be particularly useful if you're expecting an influx of money from let's say, an inheritance.

1. if you need to withdraw Social Security before your full retirement age, you can start receiving checks and then change your mind later. However, you have only up to one year to halt your benefits, at which point you must then repay all the monies received.
   1. You may do this only once in your lifetime, but the good news is, the benefit continues to accrue until you apply it again.
2. Social Security start and suspend: if you don't qualify to stop benefits because you've been drawing on them for more than a year, there is another option.
   1. Once you reach full retirement age, you may voluntarily request to suspend Social Security payouts until up to age 70
   2. many folks thought this provision was eliminated in 2015 however at full retirement age you can still suspend benefits and began collecting them later
   3. by doing this your benefits earn delayed retirement credits at the current level of 8% simple interest per year
   4. this might be a good option if your portfolio starts providing a high level of income that renders your Social Security benefits unnecessary.
   5. Be sure to keep paying your Medicare premiums, remember Medicare at age 65 is tide to Social Security regarding the Part B payments. So, if you suspend your Social Security payments don't forget to pay your Part B
   6. also be aware that if your spouse's benefit is partly derived or fully derived from your benefit then suspending your benefit suspends all benefits

(16:20) A few other possible income sources:

(16:30) Pension income: the key factor to consider with a traditional pension is

1. does it stop or reduce benefits paid to your spouse in the event of your death?
2. Whether married or not how important is control and leaving a legacy behind to loved ones
   1. If so, you may want to carefully weigh the value of a regular payouts from the pension versus a lump sum roll over to an IRA, if you have the choice.
   2. The benefit to the rollover option is you now have control of the funds and can set up beneficiary designations and pass on a legacy. You of course also have full control on investment options and income options as well

(18:10) Annuity income: a fixed annuity offers another guaranteed source of income it's actually an insurance contract that you purchase with a lump sum premium oftentimes, and all the guarantees for income and death benefits are backed by the issuing insurance company. Much like a life insurance policy this is often called income insurance.

(19:00) Variable Income sources: The earlier you retire, the greater you need for a growth component within your portfolio. Should you and or your spouse live for many decades, your income will be exposed to a variety of challenges that we discussed earlier. Fixed income will not keep pace with increases in the cost-of-living overtime: AKA inflation.

You may experience significant health and or long-term care expenses. You could simply run out of money and be stuck with nothing but Social Security.

The good news is that the longer you live, the longer your growth-oriented investments have time to earn more money and smooth out periods of market volatility. It's also important to recognize that after significant market drops such as the ones we experienced with COVID-19, the stock market has a strong history of recovery. If you retire early you don't want to be fully out of the market and miss out on those gains.

People who can consider retiring early, before they qualify for Social Security benefits, generally have significant assets accumulated in an investment portfolio. However, it may not be enough to last a retirement that will significantly be longer because they retired earlier

This means you need to be strategic and positioning invested assets to provide both income and capital appreciation. Financial independence generally indicates that you have enough assets to produce income that meets or exceeds the amount of income you earned while working. Therefore, even if you are ready to retire with $1,000,000 portfolio, you don't want to take all that money out of the market and stick it in a bank account. By taking small distributions to cover your needs the rest has a chance to keep growing.

The key is to minimize the risk exposure of those invested assets!

(22:00) Coachable Segment: If retiring early is still going to be exceedingly difficult, then the real solution is to pare back your lifestyle!

You may want to consider downsizing to a smaller house or condominium to reduce ongoing utility, tax, maintenance, and insurance expenses.

You might consider combining households with an adult child, using your assets to build on a 'mother-in-law suite' to his or her house or at a granny flat in the backyard. While you may not be able to leave your child a large inheritance, this could help add to the real estate value of his or her home

If you have plenty of assets now but worry about running out in the future, you may want to consider moving to a life plan community. This would enable you to consolidate expenses such as living, utilities, dining, household maintenance, health, and long-term care all under one fee. This can help you estimate your lifetime expenses from the outset

Here is the key principle to remember: most people draw retirement income from several different sources.

By diversifying your portfolio across fixed income sources, guaranteed income sources, and long-term growth opportunities, within your comfort level for risk, you may be able to retire early while still growing your nest egg for latter stages of retirement.

Just as it's a good idea to diversify your investments, it's equally important to diversify your retirement income sources. This may help reduce your tax liability and the risk of your income source is drying up.

Remember retirement may last for 20 years or more, so spend a lot of time up front working with an advisor to develop your plan. This is even more critical if you decide to retire early.

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

There have been so many interesting articles floating around lately on how the COVID-19 pandemic as affected retirement. Some of these statistics are absolutely astonishing!

Recent research has found that millions of Americans who lost their jobs during the early months of the pandemic have decided to call a quits early. (Market Watch article in May of 2020.)

Before COVID-19 came along, people over the age of 55 represented 25% of the American workforce. There were more workers over the age of 55 than under 30. In the course of just a few months, that ratio reversed!

In this 2 part series were going to layout some ideas for Retiring Early and discuss 6 steps to consider, just to get started and wrap your head around this idea of Retiring before you originally planned!

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you're a client I can't give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that's just common sense.

(1:20) Practical Planning segment: We talked about how the ratio has basically reversed…where older Americans are retiring early, and now younger Americans make up more of the workforce. the direct result of COVID-19

Even if the younger workers had hours reduced or maybe have been laid off, they are seeking and plan to resume work in the future. The future is not so rosy for mature workers. We don't know what the normal on-site work environment will be like a year from now.

• Will we still be social distancing for example,
• have the vaccines worked and things are 100% back to normal.
• Are restaurants and theaters open again at full capacity?
• I presume the answer may be somewhere in between.

Those over 55 may not want to take chances with their health and they have been saving for decades. They're not about to miss an opportunity to enjoy retirement just to work out a few more years in an unsafe environment. So, they are thinking about retiring early!

(4:30) Unfortunately, not everyone is in a position to retire right now, at least not the way they originally planned. However, if you find yourself considering early retirement what are some of the steps you should consider to get started.

1. Calculate your annual retirement income needs. In other words, do a budget
2. calculate your net worth based on current assets and liabilities
3. (6:20) check out your SS and if you have a spouse their level of SS based on different ages that you can begin drawing on them.
   1. link to watch a replay of our Social Security webinar
4. estimate how much savings you need to have for the latter stages of retirement such as the cost for health care and long-term care assistance
5. consider what portion of your portfolio you need to keep invested for long term growth
6. consider your appetite for various forms of risk

(8:15) We have identified 4 forms of risk you need to discuss:

• (8:35) Market Risk
  • Can you tolerate day to day market volatility throughout retirement?
  • Riskalyze as a very good tool: Go to our website and take the risk assessment

• (10:35) Sequence of Returns Risk
  • How will a drop in the market shortly before retirement or right when you retire impact you?
  • Example: We will include a table in the show notes to show you the impact of sequence of returns risk on your money lasting.
• (13:50) Inflation Risk
  • Can you live on a fixed income with no raise from the next 30 to 40 years?
  • The answer to that question of course it depends on your assets but remember if you retire early, the money has to last much longer.
  • Inflation is real and it is a silent income killer. It sneaks up on all of us without even realizing is there.
  • Inflation Calculator:
  • https://www.usinflationcalculator.com
• (16:00) Longevity Risk
  • What are the chances you might outlive your assets?
  • I can imagine some of the life tables from the insurance industry and Social Security may change based on COVID-19 19. I don't know that for sure, but we'll see what kind of effects this has on overall morbidity
  • But statistics prior to COVID-19 show that we were living much longer. For example, if you're a married couple and reached the age of 65 there's a 60% chance that one of you will reach the age of 90.
  • This must be planned for.

(17:35) Coachable Segment: What I simply want you guys to do today is go through those six 'get started' items. And write them down.

1. Number one calculate your annual income needs do a budget!
2. Calculate your net worth assets and liabilities hopefully that would be easy for most of you
3. go to ssa.gov and pull your most recent Social Security statements for both you and if you're married your spouse.
4. Estimate how much savings you need for later stages of retirement. The best way to do this it's just assume the average stay in a nursing home or long-term care facility. Is about 2 1/2 to three years. At the current rate of let's say 10,000 per month, you'll be able to figure out how much you will need for LTC. Don't forget to account for inflation!
5. Number five and six combined is go to the website and take the quick risk questionnaire and determine your risk number. This will give you a really good idea of what kind of risk you can tolerate and how much of your portfolio can be invested for long term growth to fight inflation.

On our next episode we will give you ideas on how to create "bridge income" This is income you need to bridge that gap between retiring later vs retiring early! Unfortunately, that may mean tapping assets that will reduce your nest egg. However, there are ways to avoid depleting assets, or at least eliminating early withdraw fees attached to some retirement accounts.

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."

What is the definition of a characteristic? "a feature or quality belonging to a person, place, or thing,"

On today's show, we cover the TOP 3 CHARACTERISTICS OF MONEY and how we can capture all 3 in a comprehensive plan. When you think of retirement and how we can prepare for it, we like to prioritize these 3 things: Safety, Growth, and Liquidity.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you are a client, I can't give you advice because I don't know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser… right? That's just common sense.

(1:00) Practical planning segment: In my mind, there are 3 main characteristics of money: Safety, Growth, and Liquidity. We have weaved them into other podcasts covering different subjects so we figured we would dedicate a podcast to this subject entirely. In any investment product out there, you will only get 2 out of 3 of these characteristics, at most. In our opinion, it is impossible to get all three characteristics in one product or investment. If someone is promising safety, growth, and full liquidity with your money, then it's probably too good to be true.

(2:15) Safety- When you think about safety, you typically might think they want some type of guarantee or is my money safe from market declines? Typically, people are looking at market risk when they think of safety. Remember, Risk and return are related. So, when we want to achieve safety, we typically must sacrifice something to guarantee that safety. Typically, growth potential would be sacrificed.

An example: Bank Savings account (safety, liquidity, but no growth)

There is no one size fits all solution or perfect investment product out there. I recommend that folks seek Fiduciary advice where the pros and cons or various solutions are thoroughly explained. Also, consider building a plan to capture all 3 characteristics appropriately and monitor and make changes accordingly.

Let's go through a mental exercise to explain this. Imagine that you're walking along a mountain path and all of sudden you come across this huge GAP in the trail, a large crevice. A RISK TAKER would probably jump across, someone who is more risk averse would probably turn around and find another way. Now, a risk manager would find a solution. I.e. a way to build a bridge, or a safety net.

Is there a cost of safety? Is there any risk to safety??? Yes, opportunity cost and inflation risk.

Additionally, I recommend 3 to 6 months saved (in a savings account, immediately accessible) as an emergency fund for any unforeseen events that may lead you to needing money as quickly as possible. Also, everyone is different when it comes to how much is in their emergency fund. It depends on a myriad of different things like job security, health, personal comfort level, etc.

(10:20) Liquidity consists of having immediate and quick access with no penalties.

To explain this, here are a few examples of Illiquidity: Fixed Annuity or Long-Term Jumbo CD's; (some growth, safety, but limited liquidity)

Questions to ask yourself: How much access (Amount) do you need quickly? Is a 3-month emergency fund enough for you?

(12:30) Growth would consist of positive returns that at least keep up with and ideally, exceed inflation. Like I mentioned before, growth is associated with some level of risk. An example: Stock/bond portfolio (growth, liquidity, no safety)

There is no guarantee (or safety) with a stock/bond portfolio. Even bonds! Some folks think they are completely safe, but they can default too.

So, when we are looking at building a plan we ask, 'how much risk is acceptable to take with a portion of my overall retirement plan?' The answer varies from person to person, from family to family, etc. It really depends; everyone has a different risk tolerance.

The benefit of using a portion of one's overall plan allocated towards a portfolio of stocks and bonds is that you increase your expected rate of return overall. For the folks that lean more toward risk, they may allocate more to this area.

(14:20) To recap, there is no one size fits all solution or perfect investment product out there where you can capture all 3 characteristics, but you can usually capture 2 out of 3. Let's go back through the examples.

• In a bank account, we can get safety and liquidity, but we don't get growth.
• In a CD, or a Fixed Annuity, we can get safety and some growth, but sacrifice liquidity.
• In a market portfolio we can get growth, generally liquidity, but sacrifice safety based on various levels of risk tolerance.

(15:15) Where does Real Estate fit in? It's an interesting asset class.

There is a good argument that it's a growth asset, over time. When it comes to safety, some folks might argue that it is a safe asset, but I do not think that is the case and the 2008 market can probably prove that. Real Estate is local, and it has fully rebounded

As far as liquidity goes, it's definitely not liquid. You can't just pick up the phone and cash out quickly. Even in a hot market like we're in now, locally at least, it still takes time to go to settlement.

So, I would argue that you only get 1 out of 3: growth. The growth is slightly risky, and it's not liquid, which could add to the risk because let's say you did need money tied up in an investment property. You would have to price it aggressively for it to sell quickly, thus cutting into the growth component.

(17:00) Conclusion: There is no one size fits all solution or perfect investment product out there I recommend that folks seek Fiduciary advice where the pros and cons or various solutions are thoroughly explained. Also, consider building a plan to capture all 3 characteristics appropriately and monitor and make changes accordingly.

Final Disclaimer:

"We appreciate you joining us today for this episode of The Fiscal Blueprint.

Fiduciary Disclaimer

Remember it's not about the money but about your life!

Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!

"Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment."