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

On this episode of the Fiscal Blueprint we are going to continue our discussion on Health Care Before Medicare and were going to get into some detail on one particular option today! Trust me...you don't want to miss this episode because we are going to cover the ACA or what is commonly referred to as Obama Care.

We are going to talk about:

• How it all works
• What has changed since the law was first passed?
• How do the states differ in the way they apply the law?
• What are premium tax credits anyway and will you qualify?
• Are there planning opportunities do think about if you are retiring early?

So, lets gets busy!.......................But first we must go to our disclaimer.

(1:00) Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you're a client I can't give you advice because I don't know you. 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.

(2:00) Practical Planning Segment: This is the second episode in our series Healthcare Before Medicare and we have a lot of ground to cover on our topic today which is the ACA or affordable care act. The whole point of this series is to help the listeners out there figure out how to afford medical insurance before Medicare kicks in. If you have ever considered early retirement this is an important series for you to listen to since the healthcare system in the United States can be extremely confusing.

The ACA is a mess! But it's a mess that you need to consider. When I say it's a mess, I mean a political mess! We have no idea what the future holds for this program and there have been a few changes since the law was passed.

Let's start with a little history of the program: https://www.ehealthinsurance.com/resources/affordable-care-act/history-timeline-affordable-care-act-aca

• Affordable Care Act was signed into law by President Obama on March 23, 2010.
• January 2011: A Florida judge rules that elements of the Affordable Care Act are unconstitutional.
• November 14, 2011: The US Supreme Court agrees to hear arguments in the Obamacare case brought by 26 states and the National Federation of Independent Business. It argues that elements of the Affordable Care Act are unconstitutional.
• June 28, 2012: The US Supreme Court upholds the major provisions of the Affordable Care Act.
• November 6, 2012: President Obama is re-elected, effectively ensuring the ACA will survive.
• July 2, 2013: The White House agrees to a one-year delay for large businesses to provide workers with affordable health care.
• October 1, 2013: Healthcare.gov, the federal exchange serving 36 states, experiences technical difficulties and eventually goes offline before reopening on December 2, 2013.
• December 20, 2017: GOP's tax bill passes. The tax penalty associated with the individual mandate isrepealed. The IRS will stop charging the tax penalty for not having a qualifying health insurance plan beginning this year in 2019, effectively and possibly killing the program.

There is a lot of other things that happened from 2010 to 2019 and ehealthinsurance.com has a great chronological timeline of every major event regarding the ACA.

(7:50) What are some of the challenges facing the ACA?

The ACA is a challenge to plan for since no one knows what the future of the health exchanges will look like. This brings up so many questions when one tries to plan for the future.

There are plenty of ways to improve the program, but unfortunately, no one knows what the politicians and insurance companies will choose to do with the program.

The different health insurance companies involved in ACA either drop off or raise their rates sky high each year. There is no clarity as to the future of the program, and no one is quite sure as to what will happen in the next year or two.

The average cost of an ACA premium is a staggering $1000 or more a month.

I will say this! Even with the political turmoil that surrounds it, the website is actually pretty good. I was pleasantly surprised with the amount of good information and the ease of navigating the Federal web site.

Yes, the federal website. Some states have created their own exchange and website rather than use the federal exchange and the federal website. So, I'm talking about the federal website which is: www.healthcare.gov

(10:20) Basics of the ACA:

Well first, The ACA is set up differently in each state. All the plans have gold, silver, and bronze categories. The ACA covers young adult kids up to age 26 and chronically ill people or those with pre-existing conditions can't be denied. The cost of premiums depends on a person's modified adjusted gross income, or MAGI.

Also, Insurance Companies can't raise premiums without approval of their respective state government, and they must spend 80% of the premiums that they are paid on medical services. (this mandate is most likely to make sure insurance companies aren't spending all their money on advertising and ensures that they provide the services they are set up to provide.)

The ACA also covers mental health treatment, lab tests, out of patient care, emergency services, hospitalization. You can see it is robust with what it promises. However, with all of those features and services there comes a cost…

How does the ACA work? The ACA was created to help people that couldn't afford health insurance be able to afford it. This is why 85% of ACA users have some sort of subsidy or advanced premium tax credit.

The amount a person pays for coverage depends on how much they make. Take for example a random couple aged 60 that lives in Cape Coral Florida and makes $100k annually…………. they would pay $2174 per month for a bronze plan and $3159 per month for a Silver plan! Wow!!!!

Reduce that income to $65k and they would qualify for a premium tax credit of $2318 per month bringing those same plans down to $0.00 for bronze and $204 per month for Silver. Now both of those plans have high deductibles of $12,000 per year. There are other silver plans with lower deductibles and higher monthly premiums. But still with that subsidy you can see how your MAGI really effects your HCV costs prior to Medicare age.

This is where an income plan and your sources of income really come into play if you are retiring early and some well thought out strategic planning can save thousands of dollars per month for many years prior to Medicare age.

The ACA setup what they call premium tax credits or a subsidy, based on income levels.

So, a married couple in Florida, for example, makes $1 dollar over those amounts they don't qualify for a tax credit. If you go online and play with the calculator on healthcare.gov you will see if you plug in 65,841 instead of 65,840 you get NO tax credit or subsidy…. ZERO! We'll run some numbers and do some comparisons

Income can be no more than 400% of the federal poverty level in order to receive subsidy. As of 2019, income for a single household could be no more than $48,560 and if married no more than $65,840 in order to receive a subsidy.

(17:35) How they determine what is income and what is not? They look at MAGI to determine the amount of the subsidy.

MAGI= Wages + Tips + Self Employment Income + Unemployment Comp + Social Security + SS disability + Retirement and Pension income, including withdrawals from IRA's + Alimony + Investment income + Capital Gains + Rental Income

Deductions from MAGI = Alimony payments, IRA contributions, educational expenses, student loan interest, tuition costs

Most folks have the bulk of their nest egg is tax-deferred accounts, so this is important to consider when planning for retirement because those withdrawals could potentially affect the amount of subsidy you receive. This is yet another reason why having assets in that 'tax free' bucket is important. You could spend that money down prior to age 65 in order to preserve those tax deferred accounts and manage your MAGI

This does come with a catch-22, because all growth within a Roth for example, is tax free. So, we generally think of these assets as being one of the last ones we should draw from in order to let it grow (tax free.)

(21:20) Example of a 60-year-old couple living in Sussex County Delaware compared to that same couple in Maryland. We will run the numbers with an income of 75k, 65k, and then 50k. So, stick with me here on these numbers and we'll place a table in the show notes for the listeners to check out.

Hypothetical Married Couple Filing Jointly 2019

Delaware Tax Credit

Maryland Tax Credit

60-Year-old Married Couple ($50,000 income / Year)

Estimated financial help: $2,497 per month ($29,962 per year) as a premium tax credit. This covers 86% of the monthly costs. Your cost for a silver plan: $411 per month ($4,930 per year) in premiums (which equals 9.86% of your household income). The most you have to pay for a silver plan: 9.86% of income for the second-lowest cost silver plan Without financial help, your silver plan would cost: $2,908 per month ($34,892 per year)

Estimated financial help: $2,534 per month ($30,411 per year) as a premium tax credit. This covers 86% of the monthly costs. Your cost for a silver plan: $411 per month ($4,930 per year) in premiums (which equals 9.86% of your household income). The most you must pay for a silver plan: 9.86% of income for the second-lowest cost silver plan Without financial help, your silver plan would cost: $2,945 per month ($35,341 per year)

60-Year-old Married Couple ($65,000 income / Year)

Estimated financial help: $2,374 per month ($28,483 per year) as a premium tax credit. This covers 82% of the monthly costs. Your cost for a silver plan: $534 per month ($6,409 per year) in premiums (which equals 9.86% of your household income). The most you must pay for a silver plan: 9.86% of income for the second-lowest cost silver plan Without financial help, your silver plan would cost: $2,908 per month ($34,892 per year)

Estimated financial help: $2,411 per month ($28,932 per year) as a premium tax credit. This covers 82% of the monthly costs. Your cost for a silver plan: $534 per month ($6,409 per year) in premiums (which equals 9.86% of your household income). The most you must pay for a silver plan: 9.86% of income for the second-lowest cost silver plan Without financial help, your silver plan would cost: $2,945 per month ($35,341 per year)

60-Year-old Married Couple ($75,000 income / Year)

Estimated financial help: $0 per month ($0 per year) as a premium tax credit. This covers 0% of the monthly costs. Your cost for a silver plan: $2,908 per month ($34,892 per year) in premiums (which equals 46.52% of your household income). The most you must pay for a silver plan: No maximum Without financial help, your silver plan would cost: $2,908 per month ($34,892 per year)

Estimated financial help: $0 per month ($0 per year) as a premium tax credit. This covers 0% of the monthly costs. Your cost for a silver plan: $2,945 per month ($35,341 per year) in premiums (which equals 47.12% of your household income). The most you must pay for a silver plan: No maximum Without financial help, your silver plan would cost: $2,945 per month ($35,341 per year)

So again, do you think if you are close to those numbers some strategic income planning might make sense?!?!?!?

Having the ability to manage your income sources and dip into the income tax buckets like a qualifying tax-free Roth IRA for simply a savings vehicle that doesn't produce a lot of taxable income can save you thousands per year just in ACA tax credits alone.

(26:00) How do you enroll in the ACA and how are the premium tax credits handled? There are general enrollment periods and special enrollment periods. For 2020 plans….

• Open Enrollment Period runs from November 1, 2019 to December 15, 2019.
• Plans sold during Open Enrollment start January 1, 2020.

Special enrollment periods are exceptions if you went through any of the following major life changes: you got married, had a baby, got divorced, adopted a child…. Then you have 60 days to enroll. If you have change in residence moving to a new home in a new zip code, or if you lost health insurance (i.e. lost your job & benefits, company no longer offers benefits,) this may also trigger a special enrollment period of 60 days.

If this is an option that you think makes sense to you then you simply go to your States Healthcare exchange online or the if your State did not set up an exchange you go to healthcare.gov and begin the application process. By the way if you're not sure if your state has an exchange just start with healthcare.gov and they will point you to the right direction if your State has their own exchange.

(28:15) What about the tax credits how do you apply for them?

Well you'll have a choice………..When you enroll in Marketplace insurance, you can choose to have the Marketplace compute an estimated credit that is paid to your insurance company to lower what you pay for your monthly premiums (advance payments of the premium tax credit, or APTC).

Or, you can choose to get all the benefit of the credit when you file your tax return for the year. If you choose to have advance payments of the premium tax credit made on your behalf, you will reconcile the amount paid in advance with the actual credit you compute when you file your tax return. Either way, you will complete Form 8962, Premium Tax Credit (PTC) and attach it to your tax return for the year.

The credit is "refundable" because, if the amount of the credit is more than the amount of your tax liability, you will receive the difference as a refund. If you owe no tax, you can get the full amount of the credit as a refund. However, if advance credit payments were made to your insurance company and your actual allowable credit on your return is less than your advance credit payments, the difference, subject to certain repayment caps, will be subtracted from your refund or added to your balance due.

(31:00) Coachable Segment:

Look there are a lot of moving parts and everything I just went over is subject to change next year. We just don't know what the future holds in regards to HealthCare.

Last week I asked everyone to do a budget………well? Did you do it? If not, please send us an email to request our budget worksheet and start knocking this one exercise out. You may find some extra money to start funding some tax-free accounts like the Roth IRA that could be a huge benefit in more ways than one when it comes to future income planning.

Having that Tax-Free Bucket to grab some income from if you need it can save you a lot of money as we just found out in this episode. So please do that budget and find that extra money and be intentional about your planning! Don't just let it happen because it might not!!! Life gets in the way.

Be Proactive and Be intentional……. I know you can do it!!!!!

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!!!

Today we are going to discuss Healthcare before Medicare and the challenges and opportunities that arise when retiring before Medicare age. I have wanted to tackle this subject on the podcast for some time now. Although it's not the most exciting topic I think it is extremely important! The topic is our Health Care in retirement.

And………I'm not just talking about Medicare. We will go over Medicare in this 1st episode but I am also going to discuss HEALTHCARE BEFORE MEDICARE.

What happens if you retire early……? before you can collect Medicare? Or what if you are covered by a spouses HC plan and they lose their job and you've already retired before the AGE OF 65?

What will be YOUR BRIDGE TO MEDICARE?

I'm no Health insurance expert! With that being said I think we can cover a large amount of information over the next 4 episodes in a way that can clarify some of your options NOT ONLY when it's time to start Medicare but also if you find yourself looking for healthcare before Medicare. Which is quite common.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you're a client I can't give you advice because I don't know you. 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.

(1:30) Practical Planning Segment

So welcome to our brand-new series (which could be 3 parts……. maybe 4) titled, Healthcare Before Medicare and I'm joined my co-host Joani Gursky………hello Joani!

(3:15) Joani and I have noticed a recent trend in our office and that trend is people are often retiring a bit earlier than they have in the past. Now this is just a general observation base on the folks we work with and what we have noticed in our practice over the last few years.

We don't have any hard statistics that say people are retiring earlier we are just noticing it because of the unique challenges that come with early retirement and the planning opportunities that arise especially when it comes to healthcare.

We did find a fairly recent study from Fidelity in conjunction with the Stanford Center on Longevity,1 that showed people retire an average of 4 years sooner than they had originally planned.

So, there is a little data backing up our personal observation.

It's great if you can retire early! But how many folks have thought about how things will change from both an income standpoint and an expense standpoint??? I think most people realize and look at the fact that their income will obviously change drastically……. or at least the source of the income will change drastically.

But many people, talking from our experience only, have only scratched the surface of how their expense's change in retirement……….and mainly around our topic today of HC before MC.

(6:30) So, let's start by defining what we consider retiring early. Basically, we are talking about retiring before the age of 65 which is the start of your eligibility for Medicare. However, if you only retire a year or so before turning age 65 then your strategy for healthcare will be quite different then if you are retiring in your 50's or early 60's and have to cover 5 maybe 10 years of HC expenses.

That could be substantial!........ and right about the time you may start to experience some health-related issues because of your age!

Exactly, so in this series we are going to focus on those early retirees. The one's that retire in their 50's or early 60's.

So, a lot of things happen at once when you retire early right? What do you think is the biggest adjustment?

(8:30) The most obvious change is that you no longer have that steady income each month and that could be a HUGE adjustment!

Correct! ……Now maybe you have a pension, but often a pension won't start when you retire that early.

You also have to assess whether you are eligible to start SS. Remember the earliest is age 62 and if you get a PT job or a job offer you can't refuse you have to be careful about your earnings while collecting SS before your full retirement age.

(10:30) You have Keep an eye on your expenses. Most people think you'll spend less in retirement but honestly you may have a lot of time to fill. Additional hobbies (golf, bowling, happy hours) cost money. Additional travel must be paid for.

And the biggest potential additional expense is healthcare to bridge that gap prior to Medicare. So, let's do just a brief review on this first episode of the HC options you have if you retire early way before Medicare eligibility…. okay

(12:00) We came up with 6 or 7 options and the first one you have on the list is COBRA.

• COBRA coverage. The Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, allows you to continue your current health care coverage for a certain amount of time, but you may be required to pay the full cost of your health coverage plus an additional 2% charge.

While you are working, your employer will typically cover a significant portion of the cost of your coverage, reducing the cost for active employees, but that is rarely the case for those who continue coverage through COBRA.

For an employee covered under a qualifying event, COBRA coverage can last for 18 months from the date you elect coverage. But its expensive because you are paying the full cost of coverage with no help from your past employer.

But if you like your current plan and you are within 18 months of turning 65 and signing up for Medicare, this could be a viable option over the short term.

(13:50) Next, you may be covered under a Spouse's plan.

If your spouse is employed and has health coverage, you may be able to get covered on their employer's plan—and this may be your best and most cost-effective option. If your spouse is already retired and has retiree medical insurance coverage, you may be able to be added to that coverage as well.

(14:50) 3rd option is the public marketplace of HEALTHCARE.GOV commonly referred to Obama Care.

Yes………The marketplace was established by the Affordable Care Act and provides plan options available to anyone who is not yet eligible for Medicare.

So, we are going to get into this option in some detail on the next podcast but the main component that is beneficial under this option is that

• You cannot be denied coverage for any reason, including a pre-existing condition.

This was often a significant issue for those contemplating early retirement because affordable health insurance coverage was hard to find and obtain, particularly for those with pre-existing medical conditions. Costs for these plans can vary widely, but some people qualify for government-provided subsidies through premium tax credits that can make the coverage more affordable.

We are going to run some examples on the next podcast on the costs of these plans and they vary widely based on your State and more importantly your sources and amounts of income when retiring early.

(17:45) 4th option as of right now, you can still purchase Private insurance.

To obtain coverage, you can also look to your local health insurance agent, trade or professional associations, and other so-called "private exchanges" that offer plans from multiple carriers. You may have more plan options available to you through these outlets than the public marketplace but note that government-funded premium tax credits cannot be applied to these plans.

(19:00) What about the Medi-Share programs out there?

Correct……. There are also alternative Medi-Share programs out there as well. A simple web search for the word Medi-Share you will find 2 or 3 different Medi-Share plans out there.

Now these are not technically called insurance plans. They are really sharing plans where you share in the cost of the other participants HC costs. We'll spend some time discussing these plans in some detail on an upcoming episode.

(20:40) How about just simply part-time for a large company primarily for the health insurance.

Yes, this is a viable option for some. And we run into folks that one spouse or both are working PT just for the HC. But you must be careful if you are eligible for SS and collecting (age 62 for example) you must really watch how much you earn before the earnings restrictions start applying if collecting early.

(21:45) One other option:

And I guess there is another possible option and that is to simply go uninsured or some folks call that self-insured. This………Could be dangerous financially speaking if there was a serious accident or some other catastrophic illness.

Okay so those are the main options that we are going to discuss over the next few episodes. And we will explore some of the options in detail to hopefully shed some light on the very confusing and ever-changing HC landscape!

Before we wrap up today shows let's go do a quick coaching segment

(23:00) Coachable Segment:

It's simple! I want you to Do a Budget! If you are close to retirement and starting to wrap your head around HC options and costs ………………the first step is to do a BUDGET!!!!!

Even if you are not yet retired! DO A BUDGET!!!! You'll be amazed where the money goes once you do this exercise. There are so many benefits to doing a budget:

• It Gives you control over your money – A budget is a way of being intentional about the way you spend and save your money. ...
• It Keeps you focused on your money goals – You avoid spending unnecessarily on items and services that do not contribute to attaining your financial goals.
• Enables you to save for expected and unexpected costs – Budgeting allows you to plan to set aside money for emergency costs.
• Enables you to communicate with your significant others about money – If you share your money with your spouse, family, or anyone, a budget can communicate how you use money as a group. This promotes teamwork on working for common financial goals and prevents conflict on how money is used. Creating a budget in tandem with your spouse will avoid conflicts and resolve personal differences on how your money is spent. Budgeting teaches family members spending responsibility and accountability.
• Provides you with an early warning for potential problems – When you budget and take a "big picture" view, you will see potential money problems in advance, and be able to make adjustments before the problem appears.
• Helps you determine if you can take on debt and how much – Taking debt is not necessarily a bad thing if the debt is necessary or you can afford it. Budgeting shows you how much a debt load you can realistically take without being stressed or if taking the debt load is worth it.
• Enables you to produce extra money – In budgeting, you get to identify and eliminate unnecessary spending like late fees, penalties and interests. These seemingly small saving can add up over time.

AND… we are here to help you! Instead of you trying to remember every single line item you spend money on each month we have a very concise and thorough tracking tool to keep a budget.

It's the MFS budget worksheet and we will send it to you for free.

1. Simply send us an email to [email protected] and put a reference in the subject line requesting the budget sheet. Something simple like "PLEASE send me a budget sheet I need to get organized!!!"

And while you're at, it why don't you jot down a few questions you might have regarding this shows subject. I will try my best to address those questions on the upcoming episodes.

Stay tuned for some further discussion on some of the options for Healthcare Before Medicare on our next show!

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!!!

Welcome to episode #20 of the fiscal blueprint. Today we are going to continue our Q&A session with two questions that on the surface don't appear to be related but actually are… because of the human brain!

The 1st question has to do with Scams on seniors, the second has to do with expected market returns.

But first…

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you're a client I can't give you advice because I don't know you. 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.

(1:50) Practical Planning Segment: Our first question came from a client during an annual review I recently conducted, and I thought it was a great topic to cover and we may do an entire 4-part series on this question.

The question was I received a phone call from the SS administration recently which stated that my social security was being suspended and that I faced legal action if I failed to call the phone number provided?

From the NCOA which stands for the National Council of Aging……this is the number one scam of 2019: Beware of Social Security spoofing calls

There's been a significant uptick in fraudulent telephone calls from people claiming to represent the Social Security Administration (SSA). In them, unknown callers threaten victims that they face arrest or other legal action if they fail to call a provided phone number or press the number indicated in the message to address the issue. Sometimes the scammers switch tactics and say that they want to help an individual activate a suspended Social Security number. They may even "spoof" the actual Social Security hotline number to appear on the recipient's phone: 1-800-772-1213.

If you receive one of these calls, hang up. Know that Social Security rarely contacts persons by phone unless you have ongoing business with them that you initiated, and they never make threats about arrest or legal action.

Report suspicious calls to the SSA Office of the Inspector General by calling 1-800-269-0271 or submitting a report on the OIG website!

(7:00) More Scams to be aware of: Watch for a new twist on the old grandparent scam: The grandparent scam has been around for several years. In this approach, a person calls an older adult pretending to be a grandchild who's been involved in an accident or legal trouble and needs money immediately.

Recently, the Federal Trade Commission (FTC) found that instead of using wire transfer or gift cards, an increasing number of older adults are mailing cash to these fraudsters, with a median individual loss of $9,000. According to reports, the scammers often ask seniors to divide the bills into envelopes and place them between the pages of a magazine, then send them using various carriers, including UPS, FedEx, and the U.S. Postal Service.

The FTC warns that if you or a loved one receives one of these calls, don't act right away. Call that grandchild back on a correct phone number and verify their whereabouts. If you've mailed cash, report it right away to the Postal Service or shipping company you used. Some people have been able to stop delivery by acting quickly and giving a tracking number. Be sure to also file a complaint to the FTC at FTC.gov/complaint.

(10:00) Medicare/health insurance scams: Every U.S. citizen or permanent resident over age 65 qualifies for Medicare, so there is rarely any need for a scam artist to research what private health insurance company older people have in order to scam them out of some money.

In these types of scams, perpetrators may pose as a Medicare representative to get older people to give them their personal information, or they will provide bogus services for elderly people at makeshift mobile clinics, then use the personal information they provide to bill Medicare and pocket the money.

(11:20) The Bottom Line: Never respond with personal information without confirming that it is a reputable source. When in doubt, just don't do it. Remember, Social Security Admin, Medicare, IRS, etc. are never going to personally call you and request personal info or threaten you with legal action.

Also, there are tons of spam/phishing emails out there that may look like they are from a reputable company. You might even have an account with a particular custodian, and they'll actually have the logo of the custodian. Never click on an attachment within these emails.

Remember, custodians that we deal with will never send you your monthly statements via email in an attachment. They will however, send you an email saying your statement is available to be viewed online, and direct you to login to the actual website.

(13:40) Question #2: WHY ISNT MY PORTFOLIO ACHIEVING THE EXPECTED RATE OF RETURN ITS SUPPOSED TO?

How can your expectations lead you down a path of some potentially destructive behavior?

Expected rate of return is another way of saying the historic average of those portfolio asset classes. Now, we all know that past performance is not an indication of future results.

Check out this article called the "Uncommon Average" to help answer this question: https://us.dimensional.com/perspectives/the-uncommon-average

Let's look at calendar year returns for the S&P 500 Index since 1926. S&P 500 Index had a return within the historical average of 10%, plus or minus 2 percentage points, in only six of the past 93 calendar years. In most years, the index's return was outside of the range—often above or below by a wide margin—with no obvious pattern. For investors, the data highlight the importance of looking beyond average returns and being aware of the range of potential outcomes.

Despite the year-to-year volatility, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus. If you look at the historical frequency of positive returns over rolling periods of one, five, and 10 years in the US market. The data show that, while positive performance is never assured, investors' odds improve over longer time horizons.

While some investors might find it easy to stay the course in years with above average returns, periods of disappointing results may test an investor's faith in equity markets. Being aware of the range of potential outcomes can help investors remain disciplined, which in the long term can increase the odds of a successful investment experience. What can help investors endure the ups and downs? While there is no silver bullet, understanding how markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk tolerances and investment goals is also valuable. By thoughtfully considering these and other issues, investors may be better prepared to stay focused on their long-term goals during different market environments.

So as a final word……………… keep those questions coming in; 3 ways to get questions to us:

#1 Record a question directly from our podcast page. You'll see an orange button that says start recording. Click that button and you can record your voice and send in a question. Make sure you give us permission to play your question on the next podcast.

#2 Send us an email directly to [email protected]

#3 give us a call to 855-97-coach ….which is 855-972-6224

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!!!

(1:00) Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you're a client I can't give you advice because I don't know you. 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.

(3:15) Practical Planning Segment: First question today came via a phone call; We will protect the anonymity of the caller and simply call him 'Bob.' Bob had a question that comes up often about saving for a minor. He specifically asked: what are his options to set up an account for his one-year old grandson? How does all that work?

My first question is always: what is the goal for the money? College, grand parental gifting, or simply just want to figure out the best way to give the child a good start in life. The answer to this question will guide what type of account to use.

(5:30) College- it may make sense to set up a 529 college saving plan for the minor. But there are some pros and cons. Briefly…. because we could spend an entire show on 529 plans, I will go over some of the pros and some of the cons.

529 plans are named for Section 529 of the federal tax code but are sponsored by the states and operated by financial services companies. Money deposited into a 529 savings plan can be invested and if used properly, no taxes are payable on any of the earnings or withdrawals. "Used properly" means that the withdrawals are spent on certain "qualified" higher education expenses such as tuition, fees, room and board, books and supplies and a few other expenses incurred at a qualified university

(7:00) The Pros:

Tax-free withdrawals: A major benefit these plans have is the tax-free nature of withdrawals used for college expenses.

Adult control: The owner of the plan is usually a parent of the student named as beneficiary. The owner controls the account. Junior will not be able to empty the account to buy a sports car on the way to campus. Parental ownership is also better when it comes time to apply for financial aid because parental assets are treated differently than student assets.

Geographic freedom: You can use the savings plan of any state regardless of which state you live in or in which state the student attends college.

Family flexibility: If the beneficiary does not attend college or use all the funds in the plan, the beneficiary can be changed to a family member of the beneficiary. There is no deadline as to when money in a 529 savings plan must be used. If there are funds remaining, it should be possible to avoid tax and penalties by continuing the plan and using the funds for a new beneficiary. This flexibility is important because not using the money for higher education results in high rates of tax. Because "family member" is defined quite broadly, the potential for a 529 savings plan to be used for more than one student or even more than one generation is significant.

Flexible gifting plus gift/estate tax advantages: Anyone can open a 529 savings plan and the plan can accept contributions from anyone. This makes these plans handy for families who have multiple members wanting to contribute. Those who wish to make larger contributions of $15,000 or more in a year can utilize the 529 plan's unique five-year gifting feature which allows up to $75,000 (five years' worth of gifts) to be made in one year without gift taxes.

(14:00) The Cons:

Taxes and penalties: If you do withdraw earnings that are not used for qualified expenses at a qualified institution, the earnings are taxable plus a 10% penalty applies. To avoid this, you should keep records of exactly what was spent on college and be careful not to withdraw more than needed during the tax year. Some states have "recapture" rules. If you take a state income tax deduction and subsequently transfer the funds to a better plan in a different state, the state in which the deduction was taken can reclaim those deductions.

Limited investment flexibility: In some ways, 529 plans resemble a typical 401(k) plan. You are limited to the investment options within the plan. In the better plans, these options are low cost and sufficient in number to build a good mix of investments. However, unlike a 401(k) in which you can usually make changes whenever you like, the frequency of changes to the selections in a given 529 plan are limited. If an additional change is desired, you would need to move the funds to another state's plan. Bottom line: Shop around for the best plans!!

What was also a PRO by some may considered a CON: The amount you can contribute has its limits. 15k per year or the 5 yr gifting feature mentioned earlier. IF you're a Grandparent that wants to contribute more than those amounts, you cannot.

(19:10) Another option to consider for minors are UGMA's or UTMAs; Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are custodial accounts that adults can set up for minor recipients. They effectively serve as a trust that holds the assets during the recipient's childhood.

Depending on what state you're living in the actual definition of a minor can vary since the "age of majority" will be different depending on the state. In some states you become an adult at the age of 18, others the age is 21.

With a custodial account of just about any type the adult will control the account until the minor reaches adulthood, at which time the account legally becomes theirs and they can do with it as they see fit.

A few important things to consider with these types of accounts:

• This is an irrevocable transfer. Once you deposit funds into a custodial account under either of these laws, you cannot access or withdraw the money.
• It becomes the property of the minor recipient. The recipient also cannot access the money until they come of age.
• You cannot specify a purpose for the account after the recipient comes of age. The money becomes theirs free of all encumbrances and conditions.
• The custodian can also withdraw funds to cover expenses related to the welfare or education of the minor recipient. You can name yourself custodian of the account, although that does not change the irrevocable nature of the transfer

(22:00) Tax Implications of UGMA vs. UTMA Accounts

UGMA and UTMA accounts are not tax-deferred assets. All gains on investment properties are taxed as normal, and the creator of the account may choose to pay these capital gains taxes on behalf of the recipient.

The parent or guardian may have to file a tax return on behalf of the minor and/or dependent child if the returns on the UGMA or UTMA account exceed the IRS' income threshold.

There are potentially some tax benefits to UGMA and UTMA accounts though. The details of the recipient's dependency status and income define how the assets in UGMA and UTMA accounts are taxed.

However, in many — if not most — cases, any returns in the account are taxed at the recipient's tax threshold. Since the recipient is a child, this can translate to significant tax savings compared to if those gains were taxed at the parent's (presumably much higher) income bracket.

(23:40) The Bottom Line

UGMA and UTMA accounts are types of custodial accounts, which allow an adult to store and protect assets for a minor until he or she reaches the age of majority. There are potentially some tax-related upsides to UGMA and UTMA accounts, but remember that these are not tax-deferred assets like some other types of college savings vehicles.

(24:40) NEXT QUESTION! The Roth IRA 5 Year Rules: https://www.rothira.com/roth-ira-5-year-rule

(26:50) The Basics Before reviewing the 5-year rules, there are three basic guidelines for the withdrawal of funds from a Roth IRA that you need to keep in mind:

1. At age 59½ you may withdraw both contributions and earnings with no penalty, provided your Roth IRA has been open for at least 5 tax years.
2. If you are under 59½, you can withdraw contributions with no penalty.
3. Exemptions allow you to withdraw funds before the age of 59½ with no penalty. These exemptions include a first-time home purchase, college expenses and several others.

The use of the term "tax years" above with regard to 5 year rules means that the clock starts ticking January 1 of the tax year when the first contribution was made. A Roth IRA contribution for 2018 can be made on April 15, 2019, for example, but it counts as if it were made on Jan. 1, 2018. In this case, you could begin withdrawing funds without penalty on Jan. 1, 2023—not April 15, 2024.

(29:50) Rule One

The first Roth IRA 5-year rule is used to determine if the earnings (interest) from your regular Roth IRA are tax-free. To be tax-free, the earnings must be withdrawn:

• On or after the date on which you turn 59½; after the original IRA owner dies (if you are a beneficiary); or for a qualified first-time home purchase.
• At least 5 tax years after the first contribution to any Roth IRA you own.

The second bullet raises an important point: The 5 year clock starts with your first contribution to any Roth IRA—not necessarily the one from which you are withdrawing funds. The clock rule also applies to conversions from a traditional IRA to a Roth IRA. (Rollovers from one Roth IRA to another do not reset the 5 year clock.)

Once you satisfy the 5 year requirement for a single Roth IRA, you're done. Any subsequent Roth IRA is considered held for 5 years.

(32:20) Rule Two: Roth Conversions

The second Roth IRA 5-year rule determines whether distribution of principal from the conversion of a traditional IRA to a Roth IRA is penalty free. (You pay taxes upon conversion.) As with contributions, the 5-year rule for Roth conversions uses tax years but the conversion must occur by Dec. 31 of the year in which the conversion occurs.

Each conversion has its own 5-year period, but IRS rules stipulate that the oldest conversions are withdrawn first. The order of withdrawals for Roth IRAs are contributions first, followed by conversions and then earnings. If you are under the age of 59½ and take a distribution within 5 years of the conversion, you will pay a 10 percent penalty unless you qualify for an exemption.

(36:15) Rule Three: For Beneficiaries

Since death is an exception, when a Roth IRA owner dies, beneficiaries who take a distribution will not pay a penalty—no matter whether the distribution is principal or earnings (interest).

Death does not, however, eliminate the 5 tax-year rule for earnings to be tax free. If you, as a beneficiary, take a distribution from an inherited Roth IRA that was not held for 5 tax years, the earnings will be subject to tax.

Thanks to the withdrawal order mentioned under Rule Two, you may owe no taxes since earnings are the last part of the IRA to be distributed.

It's always wise to seek advice from a trusted financial adviser before withdrawing funds, converting from one type of IRA to another or beginning the process of taking a distribution from an inherited IRA.

(37:45) So as a final word……………… keep those questions coming in; 3 ways to get questions to us:

#1 Record a question directly from our podcast page. You'll see an orange button that says start recording. Click that button and you can record your voice and send in a question. Make sure you give us permission to play your question on the next podcast.

#2 Send us an email directly to [email protected]. Again that's [email protected]

#3 give us a call to 855-97-coach …..which is 855-972-6224

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!!!

Episode 18: Q&A- RMD's, Taxes in Delaware, Social Security & More!

So today we are going to answer some listener questions on a variety of topics. We will try to get to 2 or 3 questions on today's show. I personally love the Q&A shows because we can get into a variety of topics like SS, taxes in retirement, investment planning, lifestyle questions………….

(2:00) If you have a question, there are multiple ways to get them over to us to be answered on a future show.

#1 Record a question directly from our podcast page. You'll see an orange button that says start recording. Click that button and you can record your voice and send in a question. Make sure you give us permission to play your question on the next podcast.

#2 Send us an email directly to [email protected]. Again that's [email protected]

#3 give us a call to 855-97-coach …..which is 855-972-6224

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you're a client I can't give you advice because I don't know you. 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.

(3:00) Practical Planning Segment: So last week we gave out a little teaser with the next question on our Q& A show. The question was about RMD's at age 70 ½ and whether you would be penalized if you do not take it.

When you have an IRA do you have to take money from it at age 70 or be penalized?

Yes. Current law requires that an initial RMD must be taken not later than the April 1 of the year following the year the retiree turns age 70 ½ (hopefully that will soon be age 72). At first sight, this seems to allow a deferral of one year, but it also means that the retiree must take two distributions in that first year. From a tax standpoint, it is generally better to spread the RMDs out.

There are potential changes afoot in the retirement arena, and some of those changes could be potentially beneficial for a lot of retirees. On March 29, the House Ways and Means Committee unveiled HR 1994, or the SECURE (Setting Every Community Up for Retirement Enhancement) Act. This is a bipartisan bill, co-sponsored by Rep Ron Kind (D-Wi), ranking member Kevin Brady (R-Tx) and Mike Kelly, (R-Pa). On April 1, the Senate, in a similar move, introduced a companion bipartisan bill, RESA (the Retirement Enhancement and Savings Act).

There are three possible changes to IRAs that will create planning opportunities:

Link to article: https://www.forbes.com/sites/leonlabrecque/2019/04/09/bigger-iras-proposed-new-tax-law-may-let-you-build-a-bigger-ira-in-retirement/#163df0c8d3eb

Required Minimum Distributions (RMD) at age 72 instead of 70 ½. This would constitute a significant change in the IRA rules. Current legislation mandates a Required Minimum distribution or RMD from an IRA after attaining age 70 ½. The regulations provide that an IRA owner must take a distribution no later than the April 1 of the year after the year they turn age 70 ½, and every year thereafter. An IRA owner can take the RMD any time during the year. IRA owners 70 ½ and over may also use their RMD to fund charitable contributions.

The House version of the Bill moves the RMD starting age to age 72, which will allow retirees to have more discretion in when to take their RMD and to delay it if they so desire. We looked at a $1M IRA. Under the current rules, they would begin RMD in the year they attained 70 ½. If they made 7% on their IRA investments and took their RMD at year-end, they would have a significantly larger IRA throughout retirement, primarily due to accumulating IRA assets for an additional period of time.

Thus, our retiree, by delaying RMD from age 70 ½ to age 72, will see around an additional $78,000 in actual RMDs to age 95 and have a balance at age 95 that would be about $81,000 larger. Note this proposed rule does not stop the retiree from making earlier distributions. Our retiree could choose to take distributions earlier.

Second significant change: IRA contributions after age 70 ½. Another change that the proposals (both versions) include is allowing individuals to make contributions to traditional IRAs after age 70 ½. The House and Senate have recognized that many people continue to work after retirement and prohibiting them from contributing to a traditional (deductible) IRA is contrary to retirement safety. The law has allowed post-70 ½ contributions to a Roth IRA. You must have earned income to make a contribution to an IRA although the rule is that both spouses can make a contribution even if only one works. The current law allows a married 72-year-old couple in which at least one spouse had earned income of $15,000 to contribute $14,000 to Roth IRAs. If the proposed changes are enacted, they could also contribute to a traditional IRA and prospectively deduct their contributions.

The third significant change entails a massive shift in naming IRA beneficiaries. Most notably, this proposed change will eliminate the 'stretch' IRA distribution rules for non-spouse beneficiaries. This will have a considerable effect on family wealth planning (estate planning) and that deserves our full attention.

Change is afoot; a long-awaited and welcome change. Instead of partisan arguments, we're seeing collaboration and cooperation from both sides of the aisle in both houses. I'm encouraged by the effort of our Representatives to improve the lives and futures of real, everyday people. Stay tuned

(20:45) Next question…

This one comes from a listener in Delaware……… Are withdrawals from an IRA subject to Delaware State Income tax?

Link to Article: https://smartasset.com/retirement/delaware-retirement-taxes#delaware

Is Delaware tax-friendly for retirees?

Yes. It is one of just four states with no sales tax at the state or local level. It has the fourth lowest property tax rates of any state. It does not tax Social Security income. Delaware does not have an estate or inheritance tax. It provides a deduction of up to $12,500 on income from pensions or retirement savings accounts.

Is Social Security taxable in Delaware?

No. Delaware fully exempts all Social Security income from its state income tax. (P.S. Neither does Maryland)

Are other forms of retirement income taxable in Delaware?

Yes, but they are also eligible for a deduction. The deduction varies depending on the age of the taxpayer. For taxpayers less than 60 years old, the deduction is $2,000 per person. For taxpayers age 60 or older, the deduction is $12,500.

The deduction applies to the combined total of all retirement income from pensions and retirement accounts like a 401(k) or an IRA. If you are 65 or older and have $12,500 or less in income from these sources, you will not pay income tax on them.

Any retirement income in excess of the deduction will be included with other sources of income as part of your taxable income, to which Delaware's state tax rates apply. The table below shows income tax rates in Delaware.

How high are property taxes in Delaware?

Delaware's average effective property tax rate is a mere 0.55%. That means a homeowner could expect to pay $550 in taxes for every $100,000 in home value.

Housing costs in Delaware are far lower than those of most other states in the Mid-Atlantic but still about 8% higher than the national average. The median home value in the state is around $230,000.

What is the Delaware senior school property tax credit?

The senior school property tax credit is a form of property tax relief for seniors in Delaware. To qualify, you must be age 65 or older and own a home in the state as your primary residence. The credit is equal to 50% of school property taxes, up to a maximum of $400 per year.

(26:30) The next question involves whether or a not a widow can collect on her deceased husband social security. The callers husband passed away when the caller was 50 years old. Her late husband had begun taking ss prior to passing away. The caller remarried 2 years after his passing. She is now 60 yrs old and still married to her 2nd husband. She wants to know if she is eligible for SS spousal benefits from her late husband.

If she was eligible, it would be a survivor benefit, not a spousal benefit. There is a difference. Normally, she would be eligible, but she got remarried. If she did not get remarried, then yes, she would be eligible for a survivor benefit.

Link to Article: https://smartasset.com/life-insurance/social-security-death-benefits

After a worker eligible for primary Social Security benefits dies, a few classes of protected individuals are entitled to claim auxiliary survivor benefits (equal to 100% of the deceased's benefits). The folks with this kind of Social Security eligibility include:

• Surviving spouses (a.k.a. widows and widowers) married for at least 10 years, who can start collecting reduced benefits when they turn 60 and full survivor benefits at full retirement age. (as long as you have not remarried)
• Surviving divorced spouses married for at least 10 years, who can collect reduced benefits from age 62 and full benefits at their full retirement age, provided they don't remarry
• Dependent parents, if the worker's financial support made up at least half of their support
• Minor children up to age 18, or up to age 19 if still in secondary school
• Adult children if disabled before age 22
• The mother or father of the deceased's children (including an ex-spouse), who is caring for the deceased's minor children, can claim Social Security death benefits until the children reach age 16

What if I remarry?

If you wait until age 60 to remarry (or age 50 if you are disabled), your new civil status won't affect your eligibility for survivor benefits. Again, lots of people leave money on the table by making big life decisions without consulting the Social Security cut-offs.

If for some reason, this caller ended up getting divorced, then she would be entitled to her deceased spouses SS survivor benefit. Don't get any ideas here!

So as a final word……………… keep those questions coming in! 3 ways to get questions to us:

1. Record a question directly from our podcast page. You'll see an orange button that says start recording. Click that button and you can record your voice and send in a question. Make sure you give us permission to play your question on the next podcast.
2. Send us an email directly to [email protected]. Again that's [email protected]
3. Give us a call to 855-97-COACH …..which is 855-972-6224

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.

Episode 17: Q&A- High Frequency Trading & More!

Today we are going to answer some listener questions on a variety of topics. We will try to get to 2 or 3 questions on today's show. I personally love the Q&A shows because we can get into a variety of topics like Social Security, taxes in retirement, investment planning, lifestyle questions, etc.

If you have a question, there are multiple ways to get them over to us to be answered on a future show.

1. Record a question directly from our podcast page. You'll see an orange button that says start recording. Click that button and you can record your voice and send in a question. Make sure you give us permission to play your question on the next podcast.
2. Send us an email directly to [email protected].
3. Give us a call to 855-97-coach …..which is 855-972-6224

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you're a client I can't give you advice because I don't know you. 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.

(4:00) Practical Planning Segment:

Our first question is an audio question! This listener is a local right here in Maryland. What's interesting about this audio question, which we will play in a second, is that we received a very similar question via email. (Play Audio Question)

"What is your opinion on how high frequency trading affects the efficient market frontier and the volatility of the markets?"

Now here's the question we received via email from a Delaware resident:

(5:00) Why are computer trading algorithms so sensitive to the slightest positive or negative news item that they make the markets rise or fall dramatically in one single day? How does this affect portfolios?

These are both really good questions and I remember a few years back on a 60 minutes episode a gentleman by the name of Michael Lewis wrote a book called flash boys about the subject. It caused a lot of stir but he also got quite a bit of pushback on his conclusions.

Some argued that Lewis' book is more "fiction than fact," claiming Lewis never really understood HFT (High Frequency Trader) and the fact he never actually cited any interviews from an HFT trader. So, it appears it was written as one sided.

So, what the real story? Well lets first explain what it is and then examine if it's something we should worry about.

(7:20) High-frequency trading or HFT is a program trading platform that uses powerful computers to transact a large number of orders in fractions of a second. It uses complex algorithms to analyze multiple markets and execute orders based on market conditions.

Article from May 2017 in seeking alpha from Konstantin Fedorov:

"Some are against HFTs, but there are also some who support them, saying that HFTs add liquidity and make the markets more efficient. It is a debatable topic, but both of them have their valid points." Click here to read the full article!

Those who support HFTs have the following arguments:

1) Liquidity- it may be stated that HFT algorithms add a big share of liquidity to the markets mostly by passive market-making strategies. Market-making strategies minimize spread between buy and sell prices and also increase depth of the secondary market. In addition, big volumes cause transaction costs to decrease which is beneficial for all market participants.

2) Fair price valuation/volatility: Efficiency! HFTs require high volatility to earn their returns. From this perspective, they simply decrease deviation of an asset from its medium (or trend). This fact is very attractive for long-term investors because for them it lessens the risk of acquiring (or selling) an asset at a bad price. Efficiency of the markets increases with faster valuation and fairer prices caused by HFTs. Therefore, better price-making is certainly beneficial for capital markets and potential investors.

3) New techniques, new opportunities- A wide range of fundamentally different strategies came to the markets with HFT algorithms. Some people believe that such variety is providing flexibility and sustainability of the markets in general. HFTs can provide real-time response to market changes.

_________________________________________________________

(13:10) On the other hand, there are many people who disagree with the positive image of HFTs. In their view, HFTs cause uncertainty and can bring a catastrophe to the whole financial institution system. The most common claims are:

1) Flash Crash Risk- On 6th May of 2010, a major financial catastrophe occurred, also known as the Flash Crash. Popular American indexes collapsed for a couple of minutes. This event was caused mostly by HFTs, and therefore, created a negative public opinion towards them. Many people have realized since the Flash Crash that such extreme speeds can be dangerous for normal market functioning.

2) Market manipulations and fake liquidity- There is the practice of front-running large trading orders from institutional investors. HFTs can track big institutional orders. Then they usually try to absorb liquidity before big investors. The final step is to close HFTs' positions counter to big investors. The prices for institutional investors at the end are much higher.

3) Maintenance costs- HFTs' algorithms require a large amount of processing powers and all exchanges have to constantly update their equipment, cables and structure of working in order to be able to handle this increasing flow of HFTs' orders. At the end, it can increase costs for all market participants.

(18:00) My conclusion; it depends on what type of investor you are.

If you are a long-term investor that believes in market efficiency, establishing a risk/return target, and rebalancing back to your original target once maybe twice a year when needed, the net effect of HFT is positive. Why? Because it contributes to the efficiency of the market by providing liquidity and driving transactions cost down.

If you are a day trader or stock picker (which by the way is not investing), you may find yourself on the wrong side of the trade and because you are not a long-term investor, you're a gambler.

Please don't kid yourself that you are investing your money if you are trading individual stocks. There's is a huge difference between investing and stock picking. People that stock pick are speculating and gambling……not investing!

I cannot emphasize this enough. And can you tell, I feel very strongly about it.

(20:30) Next question…

Is there a formula for withdrawals from your accounts in retirement? A formula for determining how much one can remove per year and not blow it all?

There are all sorts of formulas and strategies for withdrawing your retirement funds, but I think the most popular one most people have probably heard about is the 4% rule. We'll get into that rule or (guideline) in a little bit but first let's talk about the factors that could affect the frequency and amount of withdraws.

Lifestyle; the way you live and the lifestyle you want to maintain. Here we talk about 2 things: #1 is our basic needs requirements. (I've heard it described as a minimum dignity floor). What do we need to meet and live at a minimum dignity level, food, shelter, healthcare?

#2 Dreams/Wishlist; This is where we really "live"! This is what we retired for! Not all retirement years are going to be the same. I often talk about and you'll hear that retirement could last 30 years. From my experience working with retirees…. not all 30 years are the same. The first 10 to 15 years are described as the go-go years……… next decade is the slow-go years……………and the 3rd decade is the wont-go years.

Health/Longevity; how healthy are you and do you have a history of longevity. None of us know exactly when that day will come but from a health and family history standpoint can provide some clues. Females on average live longer than men aby about 5 years. So, looking at a withdraw rate with the understanding ladies tend to live longer is another factor that should be factored into to any plan. Retirement plans are much more important for women in my opinion. Many men that never bother to create a plan will never find out that it didn't work. Of course, when talking about health you cannot dismiss healthcare costs later in life especially regarding any type of LTC. A LTC event can drastically accelerate your withdraws.

Risk tolerance; risk tolerance cannot be underestimated here. Risk is a doubled edged sword. I think we all know with risk come return……….no free lunch. There is no such thing as a "safe" investment where you can earn high returns with no risk. It just doesn't exist….no matter what that junk email or fraudulent phone call you receive with someone promising high returns unrelated to risk.

You know the email we all have gotten saying a Nigerian Prince has just left us 3 million….now that's pretty obvious but I have seen others that promise high double digit return if just follow what's in the newsletter…by the way the newsletter cost $2500/yr! So what are they really selling!?!?

So our options are to take zero risk or lets say little risk………..like an FDIC insured bank account . So, we are giving up growth of our assets. We might get a little growth but typically we are lagging inflation. So, our real return especially after taxes can be negative when we subtract inflation and taxes. If we are withdrawing to "Live our lifestyle" you will see the account balance deplete over time

On the other end of the scale is 100% equities or stocks. Let's further say at the extreme end is having all your money in one stock. Now that crazy right? That's speculating and gambling. high risk……. lose it all like WorldCom, Enron, lucent….etc. Of course, it could also go up astronomically. That's a gamble that most folks do not want to take in retirement.

So, a better way is to develop an investment and income plan.

1. This starts with identifying your very own personal risk tolerance. We have many ways to help someone understand their own personal risk tolerance.
2. Choose an investment philosophy that does not involve speculating and gambling by stock picking and trying to time the market…….
3. Rebalance and stay disciplined throughout

(26:00) Side note on identifying risk tolerance; from my experience a client's risk tolerance can change by the day or even worse by the minute. When markets are volatile people emotions, perceptions, and instincts often get in the way and they can make harmful portfolio decisions in a split second!!!

This is why I think an investment advisor that is a true fiduciary and a "coach" really adds value! I consider it my job to coach and try my hardest to make sure a client's emotions, instincts, and perception of what's going on don't get in the way of their overall goal.

Now, I'm not always successful……. a recent client comes to mind that felt uneasy about the last quarter of 2018. Even though we had a long term view of 6 to 9 years and designed a portfolio to meet those expectations………..sometimes those emotions take over to such an extreme level and in a split second they cash out a portfolio……instead of following a rebalancing approach and staying disciplined for life. That decision cost them a signicant return in this 1st quarter of 2019

US equities measured by the s&p are up 13%, international is up roughly 10% in the 1st quarter.

(31:00) Other income sources; The final factor (I'm sure there are others to consider as well) are your other income sources and whether or not they are "guaranteed." I.e. pensions and social security. These two cannot be underestimated as part of your over withdraw strategy and income plan.

These may be the bedrock of your plan and may possibly be the income sources that meet that minimum dignity floor we mentioned earlier. I won't get into the health of SS because we have talked about that on past shows. I will say, the latest report from the trustees showed an improvement in the SS system. Especially the disability part.

Now back to the listeners question, and is there a formula for w/ds?

Well I think after that going over all those factors you can begin to see that there really is no "one size fits all" formula because every one of those factors will be different for each person.

Now you will hear about certain formulas like the 4% rule. That rule or should be better stated as a guideline not a rule. It states that a retiree invested in a balanced portfolio mix…. like 50/50 or 60 /40 bonds may w/d 4% per year and have the account last approximately 33 years

This rule seeks to provide a steady income stream to the retiree while also maintaining an account balance that keeps income flowing through retirement. The 4% rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976.

Before the early 1990s, experts generally considered 5% to be a safe amount for retirees to withdraw each year. Skeptical of whether this amount was sufficient, financial advisor William Bengen conducted an exhaustive study of historical returns in 1994, focusing heavily on the severe market downturns of the 1930s and early 1970s. Bengen concluded that, even during untenable markets, no historical case existed in which a four percent annual withdrawal exhausted a retirement portfolio in less than 33 years.

The original rule also accounted for inflation……stating that you could increase those withdraws each year

The Bottom Line: Retired financial advisor Bill Bengen's 4% rule for retirement withdrawals has been a staple of the financial planning world for over 20 years. It remains, along with several other withdrawal strategies, a solid starting point for determining the level of withdraws that a retiree's portfolio can support

Article on the 4% rule: https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/

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!!!

Episode 16: Taxes in Retirement (Continued)

In this 4-part series on taxes in retirement we have been highlighting the concepts of Author David McKnight's bestselling book titled "The Power of Zero" and his follow-up book "Look before you LIRP"

On this week's show, we are going to finish up our discussion on the life insurance retirement plan (LIRP.) So far, we have made the case that there's only one LIRP that is best suited to help you potentially get to a 0% tax bracket in retirement.

There are other life insurance policies that have some compelling features, but when it comes to planning for a 0% tax rate in retirement, nothing compares to the IUL.

Our discussion in this series is regarding a lower or even possibly a 0% tax rate in retirement. We're sharing ideas on how you could potentially achieve that, but it takes a lot of planning and not all L I RP's are created equal!

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you're a client I can't give you advice because I don't know you. 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.

(2:30) Practical Planning Segment: As usual I am joined by my co-host, Joani Gursky!

Last week we started our discussion on the life insurance retirement plan and explained the basics of how they work and what to look for when you're out shopping for a L IRP. Remember, this is a long-term arrangement and is not something to take lightly or rush into. The author, David McKnight refers to a life insurance retirement plan as a marriage and he says I quote, "nobody wants to get married only to find out years into the relationship that their spouse is not as advertised."

So even after all those considerations that we talked about last week there are still items that separate good LIRP's from bad ones. The first one being guaranteed 0% loans. Remember, this is how we are actually taking income from these policies. So, this may be one of the single most important components in your L IRP.

As we discussed last week, all loans from your life insurance policy are tax free that's the nature of a loan. Right? When you borrow money from a bank for example, you're not charged income taxes on that loan. That's the same concept with the LIRP.

All loans are tax-free but not all loans are cost free. When you take a loan from your LIRP, the insurance company takes money out of your growth account and deposits it into a collateral loan account and actually credits you a stated rate of interest

So it's collateral. At the same time, they actually cut you a check from their own coffers and charge you a stated rate of interest at the same rate that they charge you. That's how we get to tax-free and cost free.

Does that make sense?

So that keeps it very simple and zero cost. Having said this there's only few companies that guarantee these two numbers to always be equal. Some companies will guarantee the difference to be very small. This is where it makes sense to closely examine the loan provision of the policy before making a long-term commitment.

(7:40)The next important quality that separates a good LIRP from a bad one is having a stable index cap rate.

Have you ever heard of a credit card company that offers a "teaser rate"? They might offer you some really low introductory rate that will increase dramatically the following year. This is often called a teaser rate. Be very careful when looking at rates!

Well, the same type of caution should be exercised when looking at the index caps on the LIRP. Most 'A' rated insurance companies offer caps in the range of 12% to 15% per year. Cap rates in this range allow you to participate in the upward movement of the stock market while the same time enjoying downside protection.

Additionally, you'll want to look at the history of how the company has changed their rates overtime. You don't want to company that has a history of starting out with a high cap rate only to decrease that cap rate dramatically in the following years. This would of course affect the results and the returns on your LIRP.

(10:20) The next important quality that separates a good LIRP from a bad one is that the insurance company is financially stable.

You want to make sure that you have a financially stable company that is going to offer you a LIRP. Be very careful, you may find a LIRP that has all the positive attributes we've discussed previously, but they may be offered by a company that is financially unstable. On the other hand, there are many financially stable companies out there that offer the LIRP with all the attributes we've discussed.

So how do we judge whether a life insurance company is truly financially stable? There are four main organizations that rate life insurance companies: Moody's, Standard & Poor's, a.m. best, and Fitch. Each one of these companies has a different method to assign their ratings. For example, an A+ rating from a.m. best is the second-best rating but with standard and poor's and Fitch an A+ rating is the fifth best rating.

There are also independent ranking services that will average all the rankings of all the companies rated by the organizations mentioned earlier. Comdex averages the rankings of all the companies. And they'll rank them from 1 to 100. It's critical you limit your search to LIRP companies that have a COMDEX rating of 80 or better, in our opinion.

(13:40) The next important quality that separates a good LIRP from a bad one is having an over loan protection rider.

Historically, the one thing that could get you in trouble with a LIRP in the future is if you run out of money in the policy, it could lapse, and all those withdrawals would be declared as taxable.

In general, if you don't have at least one dollar left in your growth account when you die, it will come due in one year. That sounds really scary. Now IUL's are impervious to market loss but that alone does not guarantee protection against this pitfall.

Within the last 10 years, some insurance companies have responded to this possibility by adding a very powerful provision to the policy called an over loan protection rider. The rider simply says that if the insured has held the policy long enough (let's say 10 years) and the cash value falls low enough due to excessive withdrawals/loans and the insurance company will give you an option of activating the over loan protection feature.

.

When this happens, the insurance company reduces the death benefit to a point where the remaining cash value within the policy pays the policy up in full. At this point, you no longer have the ability to take money out, but you avoid ever having to get a huge tax bill for effectively outliving your LIRP.

The net effect of this rider is to completely neutralize the single greatest danger in your LIRP.

(16:00) Okay, so those 4 items, along with the characteristics we mentioned last week, are the most important things to look for when you're creating your LIRP laundry list! Now let's switch gears a bit and talk a few of the myths regarding IUL policies and LIRP's:

• Number one: be wary of overly optimistic IUL illustrations. When an advisor gives you a recommendation for an IUL, they're legally required to show you an illustration. That illustration will have to be signed by both you and the adviser. Some critics suggest that the rates of return shown on these illustrations are too high and unrealistic.
  • Most highly rated insurance companies will verify these rates of return for well over 15 years. Some critics will say that 15 years is not enough. So, insurance companies also conduct back testing, and some go back to 20, 25, 30 or even 40 years. What I've noticed with the illustrations is that a highly regarded insurance company does not illustrate the actual historic rate of return. They actually illustrate something far less.
  • Although they cannot guarantee that that rate of return will be maintained but comparing it to a 25-year average they are actually illustrated much lower than the 25-year average.
• Number two: flexible index caps should have you thinking twice about IUL.
  • And we talked about this earlier that most companies give caps somewhere in the range of 12 to 15%. But they do reserve the right to lower these caps. Therefore, it is good to get an historic history of how the company has changed the past.
  • But it's interesting to note that even in the wake of the financial crisis of OA and 09 some are you well companies only lowered there by 1%. The bottom line is: make sure you look for a company that has a great history of maintaining caps
• Number three: avoid IUL's because of nonguaranteed insurance expenses.
  • On every illustration you will find a guaranteed column listed. This guaranteed column shows the highest possible expenses of the policy along with the lowest possible rate of return. It makes the illustration look rather dire because it fails every time. Could the worst-case scenario happen? Maybe. Is it likely to happen? Probably not.
  • The reason is simple: People have the right to move their policies. They could shop around, and they could do a tax free 1035 exchange into a different company and an entirely different policy for this reason most highly regarded insurance companies do not mess with the insurance rates that often.
• Number four: IUL's have high fees. Well we addressed this earlier let's talk about it a bit more
  • Just because a financial guru on some website says the IUL has high fees doesn't make it so when fees are averaged out over the policyholder's lifetime the typical IUL policy is very cost-effective way to build tax-free wealth while at the same time providing death benefit and long-term-care protection. Again, you must compare it to an alternative plan.
• Number five: you risk a huge tax bill should you're IUL run out of money before you die.
  • As is the case with most myths this want has a small amount of truth but is shrouded in mostly false statements. The truth is the IRS does require that any life insurance policy have at least one dollar of cash value at the time of death or it loses its tax-free protection
  • If you violate this role you risk receiving a 1099 on all the game in the cash value above the cost basis. This would be a nightmare scenario.
  • However, there are several ways to ensure that this never happens. I've mentioned numerous times in this podcast that this may be considered as part of an overall plan. This should not be your only plan. And this may not make sense for some folks at all.
  • Secondly any good well regarded IUL policy is going to have an overload protection rider which would protect the policy from lapsing and running out of cash value.
  • This criticism is much more relevant to Variable LIRPs that are tied to the stock market where combinations of market downturns and ill manage distributions send policies into a death spiral. We mentioned variable life insurance policies on last week show as variations of the LIRP to avoid!

(26:30) Closing Segment: Establishing a plan to tackle the uncertainty of future tax rates takes a lot of thought!

In this series we discussed the unfunded obligations of our federal government that most likely can only be met by a raise in taxes. I guess the other option would be to decrease expenses but that doesn't seem to ever be on the table.

We also discussed the fact that in retirement many of your tax deductions are gone, many of our clients have already paid off their existing mortgage so there's no mortgage interest adoption, the kids have moved out of the house so there's no child tax credits, they're no longer working so they're not investing in their IRA accounts any longer so there's no tax deductions they're. Some of those tax deductions during your working years could've amounted to 50 or 60 K per year. Oftentimes, when you're retired, you're only left with the standard deduction.

We also explored the history of tax rates and discovered that we are currently in one of the lowest tax rate environments since the beginning of the tax code. In other words, tax rates have a lot of room to go higher. We just don't know the future of tax rates, so it makes sense to have a plan in place and be proactive.

We then discussed an understanding of how our money is taxed and we talked about organizing our assets into three tax buckets, Bucket number one was the bucket that is taxed now. You receive a 1099 every year. Bucket number two was the taxed later bucket or tax-deferred bucket 401(k), IRAs, all that money will be taxed in the future at some time. And bucket number three was the tax-free bucket which we discussed as a Roth IRA account and the LIRP.

When creating a plan to tackle potentially higher tax rates in the future, you want to be proactive and explore the idea of tax diversification. This can give you the ability to choose which bucket to take distributions from in a very tax effective manner. The alternative is being forced to take distributions out of the tax later bucket therefore incurring a huge tax burden in the future depending upon the size of that bucket.

You may have some time to start building the tax-free bucket and possibly shift some assets from the tax-deferred bucket to the tax-free bucket prior to age 70 ½ when the IRS comes calling.

(30:30) Being proactive in tax planning takes a lot of thought, it takes a lot of conversations with a qualified adviser and it requires taking action! I encourage folks to start thinking about this, especially those listening that are in their early 50s and early 60s because you have time to do some of this proactive tax planning before hitting that magic age of 70 ½.

Okay so that's it for this series: taxes in retirement- the power of zero! Feel free to email us with any questions you may have about this topic… I would love to answer those on a future Q&A show.

Speaking of Q&A shows… that will be our next series so we highly encourage any and all questions you can email those questions directly to me to [email protected] you can also give us a call at 855-97-COACH. We can answer any and all retirement questions about taxes, Social Security, investment management, long-term-care, you name it!

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.

Episode 15: Taxes in Retirement- Look Before You LIRP!

In this 4-part series on taxes in retirement we have been highlighting the concepts of Author David McKnight's best-selling book titled "The Power of Zero." If you read that book, many of you were probably the least familiar with the LIRP.

The LIRP is a retirement tool that merits a thorough screening. It's often sold as an end all, be all perfect retirement tool. For some it works well and for others it makes no sense whatsoever (in my humble opinion.)

On todays show, we're going to do a deep dive on this retirement tool, explain the basics, go over some of the things to look for and some of the things to avoid when thinking about adding this as part of your overall retirement income strategy.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you're a client I can't give you advice because I don't know you. 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.

(2:00) Practical Planning Segment: Today we are taking a deeper look at the retirement planning tool commonly referred to the LIRP, which stands for the Life Insurance Retirement Plan.

As a follow up to the book titled The Power of Zero, the author David McKnight wrote, "Look before you LIRP." Again, I think he did a really good job of explaining this tool and highlighting the pros and cons of these products and what to really look for before you purchase one of these. McKnight talks about that if you decide the LIRP makes sense for your retirement income plan you must really think of this a long-term arrangement! In the book he actually compares this to a marriage!"

Just like a marriage, you shouldn't rush into it blindly or haphazardly. The LIRP is a long-term proposition so in short you must do your due diligence and LOOK before you LIRP!

(4:00) Let's go over some of the pros of the LIRP:

1. No pre-59 ½ penalties like IRAs and ROTH IRAS. Unlike other retirement plans there are no penalties if you take money out before you reach age 59 ½
2. No 1099's. The money in the LIRP's accumulation account doesn't get taxed as it grows like funds in the 1st tax bucket would.
3. Distributions are not reportable as income if done properly. If you take money out of your LIRP the right way, it's not reportable as income. Distributions are tax free and it they also don't count as part of the provisional income or what they now call "combined income."
4. No contribution limits. Unlike the ROTH IRA, the LIRP has no contribution limits. The IRS only requires the amount of the contributions be tied to the amount of the death benefit.
5. No Income limits. As mentioned in the last show, the ROTH IRA has income limits for contributions. If your MAGI is too high you are not allowed to contribute to a Roth.

On the surface, it may sound like the perfect retirement tool. However, as I mentioned many times, it may make sense a part of an overall income plan along with your 401k or IRA, the Roth IRA, ROTH IRA conversions… all working together in retirement to get close to a zero percent tax bracket!

(10:30) Some important things to look for IF someone thinks adding this tool makes sense as part of their plan:

1. Safe and Productive growth; not enough for the LIRP to be safe. Savings accounts are safe, but they are a terrible way to fund retirement. You're looking for a plan that can guarantee against market loss while at the same time delivering growth to provide tax free income withdrawals at a later date.
2. Low fees; what every you pay the life insurance company in fees obviously does not help your tax-free retirement. It's very important your LIRP has low fees.
3. Tax free and cost-free distributions; every LIRP allows you top take out distributions tax free, but some bad ones charge you for those distributions. So, the good ones have both tax free and cost-free withdrawals.
4. Cost free LTC rider; The really good LIRPs also have a cost-free rider to help pay for LTC costs if needed later in life. Of course, they have a DB payable at death, but this would be a benefit that could be used while living IF NEEDED

(13:30) Now that you have your list you can start looking at all the options available. The main differentiating characteristics of LIRPS is how the accumulation (growth of the account) grows over time. There are essentially 3 different options:

1. Your CV grows with the investment portfolio of the insurance company; the insurance co assumes 100% of the risk. With that in mind, insurance companies are usually inherently conservative, and the growth rates are pretty low.
2. The Stock Market; In variable cash value LIRP's, you invest your money in sub-accounts which are essentially mutual funds inside the life insurance policy, and you assume 100% of the risk.
3. Index; your accumulation account is linked to the growth of an index (SP500). You participate in the growth up to a cap; the insurance company guarantees against loss.

(18:00) All 3 options have one or more of the essential qualities, all 3 may help you get to the 0% tax bracket. But only ONE has all 4 of the essential characteristics I mentioned earlier. It is called indexed universal life or IUL for short. There are many companies that offer these but within each of these, there are other important things to consider. Such as:

• The financial stability of the company; make sure you work with a financially stable insurance co. 'A-plus' rated or above when we look for these that make sense for some clients.
• A stable index cap rate; look for a history of the insurance company keeping the cap rates stable.
• Guaranteed 0% loan withdraws; I mentioned earlier as cost-free withdrawals.
• Some type of overloan protection rider included in the policy; You have to have some money remaining in your growth account when you die. If you don't, you run the risk of the policy lapsing and all your withdrawals becoming taxable. So, the good ones have protection against this ever happening.

(21:30) Let's go over the basics of how a LIRP can work as part of your overall income plan; the basic idea is you are using life insurance for funding tax free income withdrawals in the future rather than using life insurance for the death benefit. You are essentially turning the traditional idea of life insurance on its head.

Your goal is to grow the cash value of the policy as much as possible in a safe and productive way, keeping fees low by purchasing as little life insurance as possible.

I mentioned earlier the IRS requires you to buy a certain amount if Life Insurance based on the amount of your premium payments. A minimum Death Benefit (DB) if you will. You can't fund a life insurance policy with a zero Death Benefit, the IRS will not allow that.

On the flip side, the higher the Death Benefit, the higher the fees in the policy. The DB is what the insurance charges fees for and the higher it is the more fees you pay. Remember, one of the characteristics of the ideal LIRP is low fees, so we need to keep the DB as low as possible.

(24:00) The amount of the DB will be determined by how much you want to put into the LIRP each year. There is no contribution limit. So, when you initially set up the LIRP you designate how much you want to invest each year. The Insurance company will then determine the minimum DB required by IRS guidelines.

Full disclosure… I personally have a LIRP as part of my overall plan and many of our clients have them as well.

1. The first step in examining this as an option is to decide how much you want to invest on a monthly or yearly basis and for how long.
2. Step 2 is to run an illustration from a variety of 'A' rated insurance companies that offer a LIRP with all the characteristics we identified earlier. The illustration will give us growth and income projections based on historical index rates. The illustrations are based on historical returns since it is tied to the performance of an index (like the S&P.)
3. Based on the growth account projections which are directly related to the amount you invested each year and for how long you invest before you take w/ds, the illustration will show you the yearly amount of w/ds at your desired age. This may be at retirement or later on. (In my case I will start my w/ds at age 70 ½ to correspond with my RMD w/ds at that age.)

(31:30) If all goes well with the plan, then you can possibly create 4 tax free streams of income:

• Limit the size of tax later bucket to keep withdraws under standard deduction size at that time
• Limit the size of the taxed now bucket to emergency funds only
• Create the tax-free bucket with a Roth Ira conversion strategy before age 70 ½ by conversions and/or contributions and Create tax free income with the funding of a LIRP
• If the previous streams of retirement income are all tax free then (unless congress changes the rules) then the final part, SS income, should be tax free as well.

Next week we will go over some of the popular myths regarding LIRPS and well finish up our conversation of doing your best to create a tax-free retirement!

(35:30) Coaching segment: This week's coaching segment is to order the book by David McKnight titled LOOK before your LIRP. (https://www.lookbeforeyoulirp.com/)

I want you to read the book and come up with some questions for a future show on the LIRP. Our next series after we finish up next week's episode will be another Q&A series; here are a few ways to send us your questions!

1. Simply email them to Jeff personally at [email protected].
2. Go to our podcast website at www.fiscalblueprint.com and record your question directly through the orange button that says record now. You can record your question and it will be sent directly to us.
3. You can of course also give us a call at 855-97-COACH and speak with Kristen and she will take down your question and pass it along.

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."

Episode 14: Taxes in Retirement & The Power of Zero (continued)

We are picking up on where we left off on last week's show! Did you do your homework? Did you pull out a piece of paper and draw the 3 tax buckets, label them properly, and start to count your assets? If you didn't, don't worry, we'll do a quick review!

We have a lot to cover today so let's get right to the disclaimer and start the show.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you're a client I can't give you advice because I don't know you. 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.

(2:30) Practical Planning Segment: Today we are going to explain how our money is currently taxed by breaking it down into 3 different tax buckets! Here is a quick rundown of the 3 different buckets:

1. Bucket 1 is money/accounts that is taxed NOW. Money that you get a 1099 on each year because you have to pay taxes on interest and dividends and capital gains in the year you earned them. Ex savings accounts, personal brokerage accounts.
2. Bucket 2 is the "tax later" bucket. This is your tax deferred accounts. IRA , 401k, 403b, 457b, etc
3. Bucket 3 is the tax-free bucket. This would be Roth IRA, Roth 401k, and specially design Cash Value life insurance plans.

I think it makes tremendous sense to be proactive in tax planning rather than reactive in tax planning. Most of us are reactive by doing a basic record keeping process, looking for deductions for the previous year and maybe doing some planning for the upcoming year.

What we want to encourage is to start thinking in terms of 5 yr, 10 yrs, 15 years into the future. Proactive tax planning! Think about what could happen in the future with tax rates and develop some very simple planning techniques that may (in certain circumstances) get to a zero percent tax bracket. Getting into the zero percent tax bracket is not something that happens by accident!

First, let's talk about the TAXED NOW BUCKET! This is the bucket that we get that little gift each year from the custodian called the 1099.

For example, if a $100k CD, grows 2%, you have a taxable event. ($580 off the top.) All of this unfettered taxation, of course, begs the question that "if all these INVESTMENTS ARE 100% TAXABLE WHY HAVE THEM AT ALL?"

(8:30) Whether or not your SS gets taxed depends on your other sources of income. You'll see that if we have too much in this bucket, earning from dividends or capital gains is part of the calculation to determine whether you will pay federal taxes on your SS. The provisional income calculation, also known as combined income, is as follows:

One-half of your social security

+ Any distributions from the tax-deferred bucket

+ Any 1099 or interest income

+ Pensions

+ Any rental income and/or wages

+ Any interest from municipal bonds

If Married: If provisional income is more than $32,000, 50% of SS is taxable. If more than $44,000, 85% is taxable.

If Single: If provisional income is more than $25,000, 50% of SS is taxable. If more than $34,000, 85% is taxable.

This bucket is mainly used for emergency funds and liquidity. However, this bucket can also have some unintended tax consequences. Having too much in this bucket can actually cause and trigger taxes on social security payments, so we have to be careful with how much we have in this bucket.

(12:15) Now, let's take a look at the TAXED LATER BUCKET. This is the bucket you are probably most familiar with. Chances are you've been contributing to this your entire working life!

• 401k's
• IRA's, SEPs, Simple's
• 403B's
• 457B's

Money goes into to this pre-tax or tax deductible and when it eventually comes out, it's all taxable.

The first complicating factor with this bucket is the Required Minimum Distribution. Most of our clients have saved significantly into 401k or IRA plans over the years. Once you reach 70 ½, you are forced to begin taking withdrawals. The process for calculating these withdrawals is relatively straightforward. Each year, you take the ending balance for the prior year and divide it by a factor representing your remaining life expectancy.

No big deal, right? Well, if you've done a good job of saving into your IRA, your minimum distributions plus your Social Security may be more than you actually need to sustain the lifestyle you want to live. If that's the case, it's likely you will be paying more taxes on the back end than you could be. With the right planning and by being proactive, this may be able to be avoided to some degree.

(17:00) Most people think their tax bracket will be lower in retirement because they are not working any longer! This is a very reasonable assumption. HOWEVER, it's high time we put that claim under the microscope. We already talked about:

• The government has huge underfunded liabilities
• Tax rates are at all-time lows – Could they go higher? Of course.
• Deductions- mortgage interest, kids, retirement plan contributions, charitable donations, etc. may all be gone in retirement

It all comes down to exemptions and deductions! Even if tax rates stay the same in the future, you could still end up paying higher taxes! If you believe tax rates will be 1% higher in the future it makes sense to limit your contributions to this bucket

(19:30) Is there ever a scenario where you want money in these accounts?

• Yes! First, it's always good to get free money! If your employer matches your contributions, always maximize that.
• Second, there are legal ways to take money out of your 401k and IRA in retirement without paying ay taxes at all!

Depending on your other income…. If the money that comes out of this bucket, prior to collecting SS is below the standard deduction (currently MFJ standard deduction is $12,200 each or $24,400 total)

(21:30) Now let's take a look at the TAX-FREE BUCKET. If you're like most Americans, the lion's share of your wealth accumulated in the first two buckets! Investments in this bucket must be truly tax free and not counted as provisional income!

A Roth IRA Meets both of the litmus tests: As long as you are 59 ½ and meet the 5 year rule; free from all taxes! Also, it is not counted in the "Nasty Gotcha" provisional income calculation.

So, take note of our country's fiscal condition, ask yourself where tax rates are going to go when you retire, factor in the reality that you will have very few deductions in retirement. If you have even the slightest notion that tax rates could be higher, then you'll have more money to spend in retirement if you contribute to a Roth!

(24:00) You must have earned income to contribute to a Roth. However, if you make too much money, you may not be able to contribute to a Roth: Contribution limits 2019: If under age 50 $6,000. If over age 50, $7,000.

There are income restrictions for contributing to a Roth. Yes, there are what is called phase out for Roth contributions based in your Modified Adjusted Gross Income (MAGI) calculation: Take AGI and add IRA contributions, ½ self employment tax, any student loan interest and tuition deductions. These limits are the following:

Married Joint: $193K phaseout, >$203K (MAGI) then you cannot contribute to a Roth

Single, HOH: $122K phaseout, >$137K (MAGI) then you cannot contribute to a Roth

So what if your MAGI is too high and you aren't allowed to contribute to a Roth. WELL, there is a way, and it is called a back door Roth conversion, not to be confused with a contribution.

There is a difference between a conversion and a contribution. There are income limitations to contributions, but there are no income limitations on a conversion, and you don't have to be working. Here is an example:

(28:00) Married couple, filing jointly, MAGI is over $203k. Note: You can always contribute to a traditional IRA if you have earned income, but the question is, are these contributions tax deductible? They may or may not be depending on your Adjusted Gross Income. (If your AGI is over $123k, nondeductible) Now, with a backdoor Roth IRA, you can open up a non-deductible traditional IRA and contribute $7,000 into it, assuming you are over the age of 50. You can then immediately convert it into a Roth IRA. As long as the Roth IRA is opened for 5 years and you are over 59 ½ the earnings within the Roth IRA will also be tax-free.

Let's explain a traditional IRA conversion:

1. Any money converted from a traditional IRA if funded with pretax contributions to a Roth IRA will be taxable in the year of the conversion
2. Be careful not to convert too much. Tax planning window:
   1. Low rates now
   2. Have 5 or 10 years or more before age 70 ½ when RMD are due
3. Possibly fill up your tax bracket before going into a higher tax bracket.

Back Door Roth conversion; Be careful about a few gotchas!

1. Watch out for the prorata rule!
2. Watch out if you are already collecting SS. A conversion could cause SS to be taxable.

Next week, we will discuss the 2nd vehicle that meets both litmus test by creating tax free income and not being counted as provisional income, is commonly referred to as a LIRP. That acronym stands for Life Insurance Retirement Plan.

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."

Episode 13: Taxes in Retirement & The Power of Zero

"The hardest thing to understand in the world is the income tax" Albert Einstein

I think you might be surprised at the person who is credited with that quote. Any guesses?

Well, it's someone who is arguably considered to be one of the smartest people to ever have walked the planet with an IQ of over 160 points…………………that's right Albert Einstein!

In our latest series we are going to tackle the subject: Taxes in Retirement……………….and we are going to explore the possibilities of achieving a zero percent tax bracket!

What do you think? Do you think its possible to achieve or get close to a zero percent tax bracket?

If you have some time to prepare and plan properly……. be intentional and proactive prior to the age when the government makes you take money out of your tax deferred accounts ………….age 70 ½, it could be possible!

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.

Practical planning segment: I'm joined today by our co-host Joani Gursky. How excited are you to talk about taxes today?

Seriously though, I think that the subject of taxes in retirement and being proactive in your tax planning……….before you are forced to make some tough choices (like RMDs), is a financial planning topic largely ignored in the industry.

And at the same time it may be one of the most important planning topics for those in their 50's and 60's to consider prior to that magic age of 70 ½ when distributions are required to be withdrawn from your tax deferred accounts………..even if you don't need the money!

Joani and how often do we have a client that doesn't not need their full RMD, wishes they didn't have to take, but is forced to take or be threatened with a 50% penalty?

Now you might ask " well Jeff, shouldn't my CPA do my tax planning?" My response to that is of course they should! And most CPAs are really good at short term tax planning. Meaning that they look at what just occurred in the past year and record all your income and deductions, compare it to your standard deduction and maybe, just maybe, tell you some ideas to lower your tax bill for the following year.

Joani: my guess is there are very few that do proactive tax planning for 5 or 10 years into the future.

Some really good CPAs will mention it but very few actually do it with their clients. I think that this is where you need a financial advisor to explore some ideas that you can then take back to your CPA for confirmation as to whether they think it makes sense to initiate a pro-active tax plan for retirement.

How can you create a proactive tax plan that far into the future when you have no idea what the tax rates will be 5 or 10 years into the future? Let's look at some facts regarding some SIMPLE MATH!

Starting with Social Security: When SS was signed into law in 1935, there were 42 workers to every 1 retiree. The earliest age at that time you could start collecting benefits was age 65. The average life expectancy at that time was 62 years. So, the average time to collect back then was roughly 2 years.

Fast forward to today… the picture is quite different. The workers to retiree's ratio is now only 2.8 to 1. The earliest filing age is 62 not 65 as it was back in the 30's. The reality is if you start at 62, on average, you'll keep collecting until age 85. In fact, octogenarians are the fastest growing segment of our population. The average time to collect benefits today is 23 years!

Some other interesting facts to consider when thinking about future tax rates!

• In 2018, Social Security broke the 1 trillion mark for the 1st time in history!
• Medicare, Medicaid, — together cost another $1 trillion.
• 62 cents of every tax dollar is spent on 3 things; SS, Medicare, Medicaid, and
• interest on the National Debt costs us another 363 billion
• The rest of the budget is all discretionary spending

The total budget was 4.4 trillion……guess how much we bring in through taxes? Do you think its more or less?

So you can see we have a simple MATH problem! We spend far more than we take in and the budget deficit grows each and every year. Eventually something must give right? Either more taxes or less spending… or both!

Now let's take a look at the tax side of the equation. Under the 2018 tax cut and jobs act the current top marginal tax rate is 37%. Its one of the lowest top marginal tax rates in our countries history since the beginning of the tax code.

Now let's look at where we have been in the past: In the 1940's, the top marginal tax rate was 94% and $200k and above was the highest tax bracket. Ronald Reagan made $100K per movie so, he only did two movies per year because anything over that he would only made 6 cents on the dollar. He never worked more than 6 months per year. Mathematically it didn't make sense.

By the 70's; things hadn't improved that much and 70% was the top marginal tax rate

By the 80's, we got down to 50%. How bad are taxes today? Usually I get an Answer of "as bad as they have ever been!" In reality, they are close to as good as theyve ever been!

Joani: the point is there is a lot of room to go higher just based on where we have been in the past!

That's correct. We are already seeing politicians (not naming and names) touting all sorts of taxes: 70% income tax rates, wealth tax on all wealth, 77% death tax rates. When we are thinking about being intentional in our decision making and planning appropriately, we simply have to look at the math and come to the conclusion taxes will most likely be much higher in the future! When? Nobody knows… but it could be sooner rather than later.

So we have this planning window, right now! To take advantage of some of the lowest tax rates in history get as close to a zero percent tax bracket as possible!

IF, let's say, TAX RATES DOUBLE! If certain politicians get their wish and the top rate goes to 70% what do you think happens to all the other tax rates below the top?

Joani; they go up as well……………

Of course they do! So if tax rates double in let's say 5 yrs, 10 yrs, 20 yrs………..if you are in the 0% tax bracket in retirement then two times zero is still zero!

Joani: So what's the first step in starting the planning process?

The 1st step is getting a basic understanding of how your money is taxed in retirement. We do this with THE 3 TAX BUCKETS.

1. Bucket 1 is money/accounts that is taxed NOW. Money that you get a 1099 on each year because you have to pay taxes on interest and dividends and capital gains in the year you earned them. Ex: savings accounts, personal brokerage accounts
2. Bucket 2 is the "taxed later" bucket. This is your tax deferred accounts. IRA , 401k, 403b, 457b, etc
3. Bucket 3 is the tax-free bucket. This would be Roth IRA, Roth 401k, and uniquely designed CV life insurance plans.

Coachable Segment: It's pretty simple! I want you to grab a piece of paper and at the top draw a picture of 3 buckets. Label bucket 1 the taxed now bucket, 2 the tax later bucket, and 3 the tax-free bucket.

I then want you to start adding up all your accounts one by one an allocate them to the correct bucket. Example, savings account or personal brokerage account is in the taxed now bucket. IRA's are in the tax later bucket. Roth IRA's are in the tax-free bucket.

Once that's completed, put it on your desk and wait for next week's show……….

We will go into much more depth on how these buckets can help and hurt you later in retirement!

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."