Thrive Retirement Planning Podcast

Many Americans worry about how to reduce taxes in retirement and rightfully so. Taxes can eat away large amounts of your nest egg. Most Americans save a large portion of their nest egg in tax-deferred accounts such as 401(k)s, only to be surprised that the IRS will get a good portion. By understanding and avoiding the retirement tax gap, many families can save considerable tax during their retirement years. This savings can be applied toward vacations, travel, living expenses, and quality of life.

THE RETIREMENT TAX GAP

Each April Americans know it’s tax time and it generally isn’t an exciting time of year, especially for higher earning and higher net worth families. Many retirees mistakenly think they are minimizing their retirement taxes, but instead may be missing opportunities for considerable tax savings. I call this the tax gap.

The tax gap is the difference between what you are paying versus the smaller amount you could be paying. See, as Americans we don’t mind paying our fair share of tax, but what we do oppose is giving extra money to the government. If we’re going to donate, the last person we want to give to is Uncle Sam. After all, the government is known for good financial management.

Let’s be real conservative and say you saved $500 in tax each year for 20 years (ages 65-85). That’s $10,000 additional during retirement. What if this amount was $25,000? What if it was $50,000? What if it was $100,000 or more? What would you do with that money?

So who’s responsible to find this gap? Is it your accountant? While there are definitely some CPAs and accountants that are better than others, the reasons for the retirement tax gap is much bigger than how your accountant files your tax return. The problem is that there are two entirely different ways to view taxes: tax returns vs tax planning.

To illustrate, I’d suggest watching a video called the Power of Ten by the office of Charles and Ray Eames. It illustrates our relative size in the universe by starting from a man sitting on a blanket in a park. It then travels out via the power of 10, second by second until you see the entire United States, then earth, then sun, then solar system. It then goes from that same hand in the park and travels inside the cells of the hand by the power of 10. 

One view takes you closer and closer. The other view takes a broader approach. You’ve probably heard the statement that “you can’t see the forest for the trees,” meaning that you are simply too close to the situation. Both views give you a glimpse of reality and can be useful. 

But what does this have to do with taxes?

TAX RETURNS VS TAX PLANNING

When you or your tax professional prepare your returns you scrutinize the previous year, looking for all the legal and ethical ways to minimize your tax burden. This is like getting closer and closer looking at the cells in this man’s hand. Tax returns are a vital and important part of tax minimization. If you have a great accountant, hopefully they’ve been doing a great job for you.

But there is another way of looking at taxes that is much less common; it’s also one of the main reasons people find themselves in the tax gap and may be missing significant opportunities for tax savings. This perspective is found in tax planning - taking a five, ten, or even twenty year approach to minimizing retirement taxes. Tax planning will look at the big picture of all your retirement assets over your retirement timeline and incorporate strategies to proactively reduce taxes. Tax planning can help you know which assets to spend first during retirement. Planning can help you decide how to pass assets down to your heirs and avoid the costly fees and headaches of the probate process.

Put another way, filing a tax return looks back on the previous year while tax planning looks forward. Most people hire accountants to do tax returns for the previous year but few take the opportunity to do tax planning looking forward to future years. 

In my opinion, the best way to reduce taxes in retirement is to implement retirement tax planning strategies with your own team of financial professionals. First, I’ll discuss what I mean by tax planning strategies and then share what constitutes a tax reducing team.

TAX PLANNING STRATEGIES BRIDGE THE GAP

Tax efficient strategies in retirement can make a major difference in your confidence, clarity, and freedom. Additionally, putting tax strategies in place can potentially make a substantial difference in your quality of life. Our team at Thrive Retirement Planning has identified twenty-one different proactive approaches to reducing retirement taxes to put money back in your pocket.

For example, each retiree who has saved in tax-deferred accounts such as 401(k)s or IRAs will have RMDs when you turn 72. An RMD (Required Minimum Distribution) is a minimum amount the government forces you to take out of these accounts or you’ll pay a 50% penalty (ouch)!

There are tax-planning strategies that exist around RMDs such as pulling money out of tax-deferred accounts in low income years, maximizing current tax brackets, and using Roth IRAs.

Some additional examples of tax minimization strategies:

The Social Security stealth tax

Roth conversions

Knowing the three ways assets are taxed

Downsizing your home

Determining your retirement tax liability

Taking advantage of current tax rates

Cash value insurance for high net worth individuals

QCDs (Qualified Charitable Contributions)

Good comprehensive and forward-looking tax planning can make a significant impact on your quality of life and peace of mind.

Lastly, you’ll need to create your own tax reducing team that can work with you to implement these strategies.

CREATING YOUR TAX REDUCING TEAM

Generally speaking, your tax reducing team will consist of three people. The first is you. Without the desire to proactively address retirement taxes nothing will happen. The second is a holistic retirement planner who understands retirement tax strategies (we do this). The third is a good tax professional who is willing to coordinate with your retirement planner and understand your big picture. 

As you create your tax reducing team here are some summary points on why it is so vital to create a coordinated team approach and have the right members on your team:

Many accountants are focused on tax returns, not tax planning

Many accountants aren’t aware of the all the assets and strategies around them

Many accountants aren’t aware of your income plan

Many accountants aren’t aware of your desire to look forward and do tax planning

Many retirees aren’t aware that there is a retirement tax gap

Many retirees aren’t aware of the difference between tax returns and tax planning

Many retirees work with a financial advisor who doesn’t understand retirement tax strategies

Most retirees don’t have their financial advisor and accountant talking with each other.

Many do-it-yourself investors often don’t understand the bigger tax picture

Many financial professionals are focused on investments and aren't comprehensive

Many financial professionals have limited tools in their tools belt (i.e. insurance only)

Many financial advisors aren’t comprehensive or fiduciaries

CONCLUSION

The bottom line is that many Americans have an opportunity to reduce taxes in retirement. By understanding the retirement tax gap they can take a new perspective on their taxes and look forward and do tax planning instead of only being focused on their tax returns. As you and your tax reducing team implement tax reducing strategies, you’ll gain more confidence, clarity, and retirement freedom.

Do you have a plan to transition into retirement? Do you understand it? Are you confident in your plan? Learn more about how we help our clients replace their paycheck income, manage their investments, and minimize retirement taxes. Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass.

Many squander the chance to lead their families during retirement and lose massive opportunities for fulfillment and happiness. As you embrace your ability to lead your children and grandchildren during retirement, your family can have greater unity and your retirement years can take on much more significance.

Relationships with children and grandchildren can be some of the most powerful and important relationships we experience but can also cause some of the deepest wounds. No matter where your relationships currently reside with your loved ones, your retirement years give you a new chapter to level up those relationships that matter most.

Leadership in the workplace is often discussed and praised yet society rarely emphasizes leadership in the home. Often media and pop culture downplay the role of strong parents and grandparents, emphasizing dysfunction instead. 

The truth is that grandparents who retire enter a unique phase of life to influence and lead their families in unprecedented ways. Instead of letting your most important relationships evolve through chance, seize the possibility to unite your family, create incredible memories, and leave an intentional legacy embedded with the values that will help your family thrive for years to come. 

As you mold and shape retirement, here are five powerful strategies to help you lead your family during retirement:

UNITE YOUR FAMILY THROUGH VISION

“The greatest danger for most of us is not that our aim is too high, and we miss it, but that it is too low, and we reach it.”

-Michelangelo

"Leadership is the capacity to translate vision into reality.”

-Warren Bennis

Most businesses develop vision statements and know the significance of leading with vision. Where do we want to go? What are we trying to achieve? When do we want to get there? The professional business world is ripe with vision statements and goal setting. Somehow, this rarely translates into leadership in the home, especially during retirement.

I once heard a story of a single father, who was less than happy about his seventeen year old daughter’s choice in a boyfriend and was letting her know it. Instead of coming closer together, their relationship was being strained and he knew it. So what was he to do?

He decided to tackle the issue by finding something new and exciting that he knew his daughter was interested in. She had expressed interest in volunteering in third-world countries so the two of them scheduled a trip. 

This trip inspired her to see a bigger vision for her life and what she wanted to do after high school. She realized pretty quickly that her boyfriend didn’t match her vision for a greater future and they drifted apart.

One way to do this is to clearly articulate your family values and principles. One suggestion is to have a family dinner or barbecue. Get everyone together and take a few minutes to lead a discussion on what your family stands for. Look for consensus and something everyone can buy into. You could even pass out a sheet with twenty different values or statements and have family members circle what’s most important to them (i.e. hard work, integrity, growth, courage, faith, etc).  Identify at least five values and formalize them in some way. One way to make this more concrete way is to create a Family Vision Statement.

Whether your family vision is an informal discussion or formalized in an actual document, helping your family see a bigger vision can create unity and excitement.

DEVELOP AN INTENTIONAL CULTURE

“A nation’s culture resides in the hearts and in the soul of its people.”

-Mahatma Gandhi

Your family culture is what you do, how you do it, and how you treat each other. For example, what do you do during the holidays and Christmas season? What will you do for Thanksgiving? How often will you reach out to your children and grandchildren? What influence will you have on their life? How does your family handle conflict? What will you do for birthdays?

Four of our six children have now finished high school and are creating their own lives. As three of them have now left home my wife and I found that we weren’t connected nearly as often as we would like. We created a monthly family fireside where we regularly eat together and have meaningful discussion. 

At an even higher level, we met about a year ago as a family and asked specific questions about what our family culture would be like ten years in the future. We wanted to get everyone’s input. Our daughter-in-law was also included.

Here are the five questions we asked:

What is our family’s greatest strength?

What positive feelings or emotions do we want people to feel around our family?

What trips, events, and experiences do we want to have as a family?

We… (complete the sentence)

I will make this family better by… (complete the sentence)

This created an amazing opportunity to have everyone contribute and buy into the Woolston family future. We discussed how often we would get together once they all left home, what kind of grandparents we want to be (2nd grandchild is on the way), and amazing experiences we wanted to have together. There was a ton of excitement and buzz as we had an amazing brainstorming session. Best of all, it wasn’t just my vision or Christy’s (my wife). Our plan is to make this an ongoing discussion.

LEAD FROM THE FRONT

“A leader is one who knows the way, goes the way, and shows the way.”

-John Maxwell

A family vision and culture isn’t just inspirational or motivational, it’s something you are and are dedicated to becoming. Leading from the front means that you lead by example and are willing to do the tough things first, not waiting for everyone else to do them.

For example, if one of your core values in your family is learning and growth but you refuse to read a book, share something you’re learning, or are unwilling to change, you’re expecting everyone else to do the work.

Great leaders work in the trenches not in the clouds.

My parents, who are over seventy now, have an amazing work ethic and service mindset. No matter what is needed, they are always willing to help paint a room, fix some plumbing, or make some food if someone is sick. They always have a project and are making upgrades to their house and yard. When we were young, my siblings and I were always working in the garden, in the yard, or around the house. But none of us worked harder than my parents. They led from the front and my older sister and three younger brothers have all developed an amazing work ethic. They make a powerful couple and lead by action.

Our examples are much more powerful than what we say. It’s who we are. When we lead with vision and then back it up with our efforts, we can inspire and motivate those around us.

HAVE FUN AND CREATE AMAZING MEMORIES

“Enjoy life. There’s plenty of time to be dead.”

-Hans Christian Andersen

Getting the attention of young people can be one of the most difficult challenges we face, especially in the age of instant gratification and technology. When I was young, if someone mentioned hiking or going and doing something fun, I was all over it. I didn’t have the list of competing options that exist today such as movies, video games, cell phones, or social media.

Today we’re competing for attention at a whole new level.

I’d suggest planning amazing and fun experiences that are designed all around creating memories. 

Here are some ideas:

Take your grandkids to lunch for their birthday instead of a present

Invite your grandchildren over for a party or to stay the weekend

Take a vacation together

Invite your grown children to lunch one-on-one 

If your children and grandchildren don’t live near you, have a regular Zoom call

Go to the lake or mountains and go boating or exploring

Do a weekend getaway with a specific grandchild and plan the weekend together

Go see a concert or play together

Plan a family reunion

Take a road trip

Have a campfire and tell scary stories

When working with clients and making goals about estate and legacy planning, often the discussion can center around the money. While this is important and necessary, creating memories with those you love can be much more valuable and lasting.

LOVE THEM WHERE THEY ARE AT

“The best thing to hold onto in life is each other.”

-Audrey Hepburn

Early in my career, when my wife and I were just starting our family, I had the opportunity to ask over fifty individuals who had raised children (many of them were grandparents), what the secret to raising children was. Over and over again, the response was simply to love them, no matter their choices.

Candidly, at times I've tried to fix the people around me instead of loving them first. When I catch myself doing that I try to remind myself that fixing people (even with the best of intentions) comes from the lens of problem solving. People aren't a problem to solve but rather a person to love. When I lead with the lens of love, lifting or elevating them becomes a natural bi-product. I have a long way to go with this principle and am a work in progress but have found this concept to be powerful. 

How can you love your children and grandchildren where they are at? How can you show them? Do they know you’ll love them, no matter their choices? Have you told them? This principle will amplify any efforts you make toward leading your family during retirement.

LOVE THEM WHERE THEY ARE AT

As you retire you’ll enter a unique phase of life to influence and lead your children and grandchildren in unprecedented ways. Are you going to mold and shape the culture of your family or let it happen by chance? What does your family stand for? As you intentionally lead from the front you’ll get greater buy-in. Lastly, work toward creating memories and letting those close to you know how much you love them.

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Putting your finger on exactly what retirement will look like can be difficult. Often, people get blindsided when unexpected events derail their plans. Understanding the four specific stages of retirement can help you thrive and flourish, even in the midst of life’s curveballs. Seeing retirement as a journey instead of a destination can be a powerful mental model.

Here is the problem: Retirement isn’t an event but rather a new phase of life that has distinct stages that can be planned for. Each stage of retirement will bring new opportunities and challenges, both financially and emotionally. If you don’t become aware and plan for these various stages your retirement can be upended and you can be blind-sided.

BLIND-SIDED IN RETIREMENT

Do you remember the movie, Remember the Titans? It’s one of our family’s favorites and very well could be one of the best football movies of all time. The story is set in 1971 at TC Williams High School in Alexandria, Virginia. 

One of the main characters, Gerry Bertier, is an All-American football player who tragically gets in a car accident and becomes paralyzed. He was blind-sided. (In a story for another day, he goes on to become a Paralympian and become an inspiration to many.)

Just like Gerry Bertier was tragically injured and and his life derailed, many retirees have their retirement dreams derailed or even shattered.

Here are some examples of being blind-sided in retirement:

You lose 20% or more of your retirement investments right before you retire so you have to work longer or retire on less.

You learn that you claimed your Social Security incorrectly and it cost you more than $100,000. (See my free training on Social Security).

You take too much out of your investments early in retirement and run out of money.

You are unable to take vacations and travel because you don’t think you have the money.

You have a major health challenge and you become a burden on your children and don’t know how to pay for it.

Once you pass away, your spouse lives in poverty because proper planning wasn’t put in place.

You spend your whole life uniting your family, only to have the assets you leave behind divide your family members through legal battles.

Though life can be very unpredictable, retirement planning can help you avoid many of the reasons retirees are blind-sided. 

PLANNING FOR THE FOUR PHASES OF RETIREMENT

The journey of retirement can be divided into four phases. As you understand each stage, it can reduce your chance of being “surprised” during your retirement years. That isn’t to say that life won’t happen and throw you curveballs, but at least you can prepare for them. 

Each of these stages can be different years in length but for simplicity can be broken down into decades.

PRE-RETIREMENT - THE WORK AND SAVE YEARS (Ages 55-65)

As you approach retirement and see it on the horizon, it becomes much more of a focus and concern. Retirement can be an exciting stage of life but “Am I ready?” or “Will I be o.k.?” can be a common questions you ask yourself. The closer you get to the big day, the excitement and anxiety builds. Most people recognize that retirement is much more complex than they realized and they need answers.

Common questions and thoughts in the pre-retirement stage:

How much money do I have in my investment accounts?

Should I save more?

How much will I have when I retire?

How much will my Social Security be?

Do my current financial professionals have the skill set to help me prepare for retirement and then help me during retirement?

Do I need a financial advisor to help me?

When will I retire?

How much can I live on?

If I retire early, how will I pay for health insurance?

How will I replace my income

EARLY RETIREMENT - THE GO-GO YEARS (Ages 65-75)

This stage of retirement begins as you transition into retirement and continues as long as your health and desires allow you to stay active. As you begin retirement, you begin your Social Security, turn on pensions you may have, and draw from assets that you’ve saved for retirement. We call this the preservation and distribution phase.

This can potentially be the most exciting decade of your life as you have more freedom than ever before. Think about it, no job, no boss, sleeping in if you want, and no 9-5. You get to travel, spend time with grandchildren, and take on hobbies you may have never had time for. You may even choose to give back in the form of a charitable cause or start a part-time business on your terms. It’s vital that you seize these years of feeling good and make a financial plan that supports your vision.

Common questions and thoughts in the early-retirement stage:

Where do I want to go?

What will I do with my time?

How can I maintain my health?

How can I travel and see the world?

How do I create experiences and memories?

What new hobbies will I pick up?

How will I give back to my community?

Do I want to work part-time or start a small business?

MIDDLE RETIREMENT - THE SLOW-GO YEARS (Ages 75-85)

Middle retirement begins as you want to go places but you start getting a little tired. As a friend of mine said this week, “the used car just starts to wear down.” In this stage, you’ve settled into your retirement groove but you feel yourself slowing down. This phase of retirement can be amazing but is often less active than the go-go years.

LATE RETIREMENT - THE NO-GO YEARS (Age 85+)

Last time I checked, there was only way to get into this life and only one way to get out. Eventually, our bodies start to wear down. The no-go years are characterized by the fact that you want to go places but just aren’t able to. This period can bring its share of financial and emotional challenges, especially when health declines. Having a plan in place that can pay for health expenses such as nursing care or assisted living can be vital to your peace of mind.

CONCLUSION

Understanding exactly what retirement will look like before you experience it can be difficult. By understanding and planning for the four phases of retirement, you can limit the risk that you’ll be blindsided when unexpected events occur. During the work and save years, put retirement plans in place to transition successfully into retirement. After you retire, take advantage of the go-go years, when you want to enjoy your retirement freedom and you can! Recognize that the slow-go years will come, when you’ll choose not to be as active. Lastly, prepare and plan for the no-go years, when your health eventually declines.

Do you have a plan to transition into retirement? Do you understand it? Are you confident in your plan? Learn more about how we help our clients replace their paycheck income, manage their investments, and minimize retirement taxes. Do you have questions about when to take Social Security and how to maximize your benefit? Take our free online Social Security Masterclass.

There are three keys to thriving during retirement. Young people are remarkably good at looking into the future. But, many who approach retirement fall into the trap of looking back instead of forward. Our greater future is created when we focus on the future more than the past.

VPS (Vision + Planning + System) = Thriving

Key #1 - Vision

Understand where you are now (the current you) and look forward ten years into the future (the future you). What do you want life to be like? Who do you want to become? A key part of retirement planning is getting crystal clear on your retirement vision. Put this vision through three specific filters: 1) family, 2) finance, and 3) fulfillment.

Key #2 - What's Your Plan?

What's your plan to achieve your goals and vision with your family, finances, and fulfillment? There are eight key areas to consider: 1) income planning, 2) protection planning, 3) growth planning, 4) tax planning, 5) health care planning, 6) estate planning, 7) family and legacy planning, and 8) fulfillment planning.

Key #3 - What System Will You Use?

What system will you use to help your vision become a reality? Our system is called the Thrive By Design Retirement System™.