How Does Retirement Impact Your Taxes?

How Does Retirement Impact Your Taxes?: Welcome to the Webinar (0:00)

Carson Johnson: Thanks for joining us today, we are very excited about this topic. When we were seeing the numbers and how many people registered, it seems to be a really popular topic and we hope that the information we provide today is really helpful in answering some common questions we get.

So to get started, a quick introduction for those that don’t know me, my name is Carson Johnson. I’m a Certified Financial Planner™ and Lead Advisor here Peterson Wealth.

Along with me is Alek Johnson, another one of our Certified Financial Planners™ and Lead Advisors.

Alek Johnson: Yeah, thanks Carson. Excited to be here with you all today. We’ve got a lot of information prepared for you and we’re just excited to dive in and get going here.

Carson Johnson: So a couple of housekeeping keeping items first that we want to go over, that we figure that today’s presentation will be about 30 minutes with a short Q&A afterwards. So if you’re on a time crunch, don’t worry, we’ll have this webinar being recorded so you can watch it at another time. So that email with the recording will be sent out tomorrow and so just be on the lookout for that.

Also, in Zoom, there is a Q&A feature. So if you have any questions throughout the presentation, feel free to use that. We have Daniel and Josh who are advisors here that can help answer any questions along the way.

And then at the end of the presentation feel free to fill out the survey. The purpose of the survey is to help us get better and as well as get some ideas for topics that you may want us to talk about in the future.

So with that introduction, let’s get started.

So our hope today and objectives that we can help you answer five common questions that retirees have as they prepare for and enter retirement.

Questions like how does retirement impact your taxes? Understand the taxation of different types of accounts, how Social Security is taxed, what are Roth conversions, and when you should consider them. And then understand some charitable giving strategies that are available to you in retirement.

So first, let’s talk about how does retirement impact your taxes?

How Does Retirement Impact Your Taxes? (2:06)

A key part of planning for retirement is first, a basic step, is determining how much of your income that you will need to cover your expenses.

Taxes can be one of the largest expenses in retirement and shouldn’t be overlooked. And there are some small changes that occur upon retirement. Things like no longer contributing to your retirement accounts like your 401(k), or not having to pay FICA taxes, Social Security, Medicare taxes.

But today we want to focus on some of the main items or common pain points for retirees as they retire.

If you think about it, while you’re working in your career, income generally comes from your employer with the exception of those that are self-employed or invest in real estate.

But when you retire, your income may come from a variety of sources. Things like Social Security, pensions, and your investment portfolio. And each may have its own taxation rules or may be taxed differently.

So understanding how your retirement income will be taxed well in advance can significantly make an impact on how long your assets last in retirement as well as minimizing taxes in your life and in your heirs.

So first, let’s talk about tax withholding and quarterly estimated payments for once you’re retired. Our federal tax system is a pay-as-you-go system. This means that taxes are paid throughout the year in the form of estimated payments or withholding.

And while you’re working, you have the option to make certain elections which withholds a certain amount of money from each paycheck that goes towards these towards your taxes.

But once you’re retired, that responsibility is placed squarely on your shoulders. And you have to make sure that the appropriate taxes are paid.

Retirees have complete control of this and how they withhold and how much goes towards the IRS or state, if you live in a state that has state income tax.

If you withhold more than you owe, then there is an overpayment which results in a tax refund. And an underpayment will result in owing a tax liability or a tax bill.

It’s a common misconception out there that people think that if you get a tax refund that it’s a gift from the government for filing your taxes, which certainly isn’t true.

In fact, tax refunds are just as simply a refund or return of your dollars that you’ve overpaid throughout the year. And so, it’s important that you remember that and the goal for many is to withhold enough to cover your liability while not withholding too much and using your funds ineffectively.

So that’s essentially the tax withholding piece.

The second method is estimated payments, which is a method used by people who do not work as employees or have income sources that do not have withholding as an option.

So this typically takes shape in the form of having a non-retirement investment account where they don’t have withholding as an option so they have to make those estimated payments.

Now many of you may be thinking, well if the timing of my tax payments doesn’t impact the amount of tax that I pay, then why don’t I just don’t withhold anything and just wait till the end of the year and pay my tax bill then?

Then I can use those funds that I would have used to pay for taxes and invest it or for other uses. Well first, you may want to keep that money set aside because you know you’re going to have to pay your taxes soon and you don’t want to invest and lose that money.

But second and most importantly, if you underpaid too much on federal taxes, then there may be an additional penalty that’s added to your tax bill. So although this may seem like a small adjustment for some of you, for some retirees it can be quite challenging and new because they’ve never really had to manage their tax withholdings. They just make their elections through their paycheck through their employer and it takes care of their tax withholdings.

So getting the withholding right so that you don’t over-withhold or under-withhold requires some work and requires some tax planning.

Next, let’s talk about tax deductions.

Understanding Tax Deduction (6:13)

In a very basic and simplistic explanation of how we are taxed, we take our total income minus tax deductions, which equals the amount of income that’s subject to tax.

Due to some recent changes, tax law changes, in 2018 and because of the very nature of retirement, I want to share a few ways it may impact retirees and how they take tax deductions.

So first, the IRS has a list of things that we can count when we itemize deductions. This may include your mortgage interest, charitable contributions, property taxes, state and local taxes, and a few more.

The IRS also has a standard deduction number that we can use. And if our itemized deductions don’t add up to be more than the standard deduction, then you will automatically take the standard deduction. In other words, taxpayers receive the greater of itemized deductions or the standard.

So let’s take a look at what the current standard deduction is. The standard deduction for a person that files a single return in 2023 is $13,850. For those that are married and file a joint return, the standard deduction is $27,700.

Table of Standard Tax Deductions for 2023

There’s also an additional deduction that is added per person if you are over the age of 65, which is $1,500 for those that are married and $1,850 for single filers.

Now a few minutes ago, I had mentioned that there were some changes made back in 2018. So what were they and how does it impact retirement?

Those changes ultimately doubled the standard deduction amount. So in 2018, the standard deduction for a single filer was $6,350, and for married filing jointly was $12,700. So you can see that the standard deduction has significantly jumped up, it’s doubled about.

And again to reiterate, or reiterate what I previously went over, this means that unless you have itemized deductions and excess of the standard deduction, you’ll simply just take the standard deduction.

In fact, according to some data from the IRS, about 90% of Americans now take the standard deduction because of these changes. This is particularly important for retirees that generously give to charities each year.

Many of you will not be itemizing deductions going forward which means you will not get a tax benefit from making charitable contributions. Later today, we’ll actually be talking about different ways you can get more out of your charitable giving so that you can maintain that tax benefit which Alek will go over.

Next, let’s talk about the taxation of different accounts.

How is Retirement Income Taxed? (8:52)

As you enter retirement, many often ask how will my retirement income be taxable, and what will my tax rate be once I retire?

These are excellent questions and as we understand that and with proper planning, retirees can end up having a better tax outcome.

So to help answer these questions, we’ve got to understand the basics of how different sources of income and different types of accounts are taxed.

Broadly speaking, you have three account types each with its own unique tax advantages. You have tax-deferred, tax-free, and taxable accounts. Tax-deferred accounts such as 401(k)s, 403(b)s, and traditional IRAs are funded with pre-tax dollars.

This means that by contributing to your 401(k) or to these accounts, it reduces taxes because the income that you put into these accounts are not reported. It’s not taxable.

Once you make those contributions then those savings grow over time and grow tax-deferred, meaning that you’re not taxed on any of the growth things like gains, interest, dividends. None of that is taxed while over the course of your life.

Now, unfortunately, you can’t leave your savings in these accounts forever. The IRS requires you to take RMDs, Required Minimum Distributions, starting at either 73 or 75 depending on your age. Those rules have recently changed with The SECURE Act 2.0. And if you have questions about that, we can tell you what those changes were.

Once money is distributed from these accounts they are 100% subject to tax based on your tax rate, and that’s an important part.

Now moving on to tax-free accounts, unlike tax-deferred accounts, contributions to Roth 401(k)s or Roth IRAs are made with after-tax dollars. So they won’t reduce your current taxable income as you make those contributions, but as you make those contributions and they grow, they also will grow tax-free. And when you withdraw money from these accounts, you won’t owe any taxes on that income which includes any of the growth or appreciation you’ve earned over the years.

Lastly is taxable accounts. Whether you have a bank account or an investment account, the taxation is actually similar. These accounts are funded with after-tax dollars and the flexibility these accounts provide is that you can sell investments, you can contribute to them, you can withdraw money at any time, and for any reason without penalty.

Any taxable investment income is taxed in the year that it is earned or received, and investments sold for a profit are subject to capital gains taxes.

So an easy way I like to think of it, as dividends and interests come into these accounts, your taxed. But then capital gains only applies when you buy an investment, it grows in value, and you pay capital gains taxes.

Generally with taxable accounts, the tax rate on this, on these types of earnings is at a lower rate than if you were withdrawing from a quote 401(k).

It doesn’t depend on your tax bracket, but generally that is the case.

As you prepare for retirement, it’s important to remember that retirees can’t and often won’t make good decisions about reducing taxes in retirement and without first mapping out and projecting a future income stream,

At Peterson Wealth Advisors we use our Perennial Income Model™, which is our approach to creating a retirement income stream to provide the organizational structure to recognize and benefit from major opportunities for tax planning to reduce taxes and ultimately maximize the retirement outcome.

So on the screen, I’ve shared with you a simple example of how this can be done with our approach, the Perennial Income Model. For those that are not familiar with this plan, this is an example of what that looks like. And I won’t go through all the details of how this works, so if you want to learn more about it, there are videos on our website. And actually tomorrow, the email that Everett sends out, he’ll include a link to that video to explain how this process works.

But the main thing to know about this plan is it tells retirees the amount of income they can reasonably expect in retirement, as well as how their investment portfolio should be structured because money that you will need in the beginning of retirement that you’re drawing for from income needs to be conservative while money that you may not tap into for 10, 20, 30 years from now needs to get a better return and keep up with inflation.

The plan is split up among six different segments, and each segment represents five years’ worth of retirement income.

So, let’s see how this would apply in a tax planning perspective. Let’s say a client has a taxable account, an IRA account, and a Roth IRA.

One way that you can structure this is by living off of the taxable account for segment one, which will have very little tax impact. You’re still taxed on dividends and interests, but you can keep your taxes fairly low in a taxable account.

Then this gives you an opportunity for the taxpayer, the retiree, to do things like Roth conversions, which we’ll talk about here shortly, which can help reduce the impact of Required Minimum Distributions once you start those at 73 or 75.

Then segments two through four, income will come from the IRA account and there are ways to also pull money out of those accounts tax-free if you do it in a certain way, and Alek will go over that here shortly as well.

And then lastly, if you do Roth conversions or have Roth IRA money, having it at the end of the plan allows you to maximize that tax-free money over time. You can see that this plan ends with $1,000,000 and all that $1,000,000 would be in a Roth account that is tax-free.

So if you needed to tap into that at the end of your plan for significant healthcare costs, or simply leaving an inheritance for your heirs, that money will be tax-free to help minimize taxes for you.

Now not everyone is married and in the same situation, and so every retiree’s tax planning is going to be unique and custom. There’s lots of ways you can do this and one other option you could do is maybe taking half of your income from taxable accounts or Roth accounts and half of it from IRA accounts.

And what that does is you can help manage your tax brackets and the amount of income that is taxed over the course of your retirement. So tax planning requires careful consideration of each aspect of your plan and being aware of how you draw your income and which accounts you have.

Okay, now let’s move on to talk about Social Security benefits. So today in many instances, more money can be saved by minimizing the tax on Social Security then strategizing on how to maximize your benefit.

Social Security is unique compared to other sources of income because it’s taxed differently. I won’t take time to go through every single detail of how it’s taxed, but I want to go over the most important items which is if your only income was Social Security, then your benefits would not be taxed. However, the IRS has a formula where the more money you make outside of Social Security, the more your Social Security benefits are taxed.

So for example, on your screen you can see how it’s broken down. If you are married filing jointly and you have combined income over $44,000, up to 85% of your Social Security benefits are taxable or are included in the tax formula. If you have income between $32,000 and the $44,000, up to 50% of your benefit is included or subject to tax.

I’ve also included how it works for those that are single filers as well, but you can see it’s based off of your other sources of income.

So the way to reduce tax on Social Security is to reduce the other sources of taxable income that you have.

So just to give you a few ideas on how to do this, first reduce other income with tax advantage investments. Now calling this conception that people have is municipal bonds. Although they may be tax-free or tax-exempt from a federal level, they are included in the taxation of Social Security.

But another way is you may want to invest in things called like Exchange Traded Funds which is just a fund that has better, that is more tax efficient than say mutual funds because mutual funds will often generate capital gains and other income that may increase your taxes.

Second, anticipate you’re Required Minimum Distributions. If you think that your RMDs may put you into a higher tax bracket, you may want to consider drawing down your IRA before you reach RMD age. And even better if you can do Roth conversions and getting that into that tax-free account, that can help reduce the impact of RMDs.

Next, maybe delaying Social Security. By delaying your Social Security benefits you reduce the number of years that your benefits are subject to tax. And if you coordinate that with either Roth conversions or other tax planning strategies, that can help enhance the tax outcome.

And then lastly, consider doing a Qualified Charitable Distribution. Alek will be going over this, but the QCDs are the best way that I know to reduce the tax on Social Security, significantly saving you money and also accomplishing your charitable giving goals.

What is a Roth Conversions? When Should I Consider one? (18:22)

Alek Johnson: Okay, thanks, Carson. That’s a lot of information that is very important I think for any retiree to be able to understand.

So another question that kind of regularly comes up during the retirement stage is that of Roth conversions.

And so I just want to take a few minutes and go through this strategy with you, like Carson mentioned.

So, what is a Roth conversion? Well, as Carson mentioned virtually all these retirement accounts are classified into one of two categories. And that is that they either contain pre-tax money or post-tax money.

So for most retirees, it is much more common to have retirement accounts that are in that pre-tax money column. So what a Roth conversion allows you to do is take a pre-tax retirement account and convert either all of it or just a portion of it to a post-tax Roth account.

Now keep in mind that just as the name suggests, any money in a pre-tax account has never actually been taxed before. And so, any amount that you choose to convert will become taxable to you in the year that conversion is performed.

So for this reason it’s very uncommon that you would be converting an entire account at once as it would likely just push you into a higher tax bracket and create a tax bill that’s unnecessarily large, right?

For example, if you were to convert $1,000,000 all at once from a traditional IRA to a Roth IRA, you’d be paying close to 40% in taxes.

So generally the advice that we give our clients as advisors is to convert enough to get the future benefits of a Roth conversion, but not too much that it pushes you up into the next federal tax bracket.

Now a common misconception is that it is better to pay taxes on the seed than on the harvest. Meaning it’s better to pay taxes now and let them grow tax-free than vice versa. The truth of this is it doesn’t really matter when you pay the taxes on the seed of the harvest if the tax rate is the same.

So that being said, what’s often more advantageous in your specific situation comes down to the amount of time that you have to invest but also what tax bracket you are in and when you’re in that tax bracket.

Now, knowing that the conversion is all taxable kind of begs the question well, why should I do a Roth conversion? How do I even know if it’s going to benefit me?

There are several situations and benefits where a Roth conversion can help you in the long run. So let’s just say situation number one, your current income is low now, so you’re in a lower tax bracket and you expect to be in a higher tax bracket again in the future. That would be an opportune time to do a Roth conversion, is you’re going to pay minimal taxes in the lower tax bracket compared to the higher tax bracket.

A second benefit is Carson showed in that quick example, most oftentimes we use those Roth accounts as the last place that we’re taking retirement income from. That being said, with those pre-tax accounts there’s those RMDs that need to be satisfied. And so it makes sense that we would be pulling your income from those accounts first.

Often, that’s going to lead the Roth IRA to just be growing in the background. Not only that but because we’re not using the Roth IRA for your short-term expenses, we can then invest it more aggressively so that it’s going to accelerate that tax-free growth that you’ll get.

Now, this can provide a benefit to you as Carson mentioned either later in retirement to have a source of tax-free income or to your heirs as any inheritance left in that Roth account is going to be tax-free to them as well.

And then lastly, another advantage of converting to a Roth is that those Roth accounts do not have any Required Minimum Distributions. So as Carson mentioned, once you hit age 73 or 75 now depending on when you’re born, the IRS requires you to take money out of that account so that they can get those taxes that they have been ever so patient waiting for.

For a lot of folks between their different income streams such as Social Security, pensions, maybe some rental income, really they don’t even need that money from those pre-tax accounts to cover their living expenses.

So what often will end up happening is that with an RMD, you are now going to end up paying on taxes on money that you’re not even using. And so if you’re account had been converted to a Roth first, you would not be required to take any of that money out and it can continue to grow tax-free.

Now I just want to give you a quick practical example here. So we’re just going to take up our make-believe Brother and Sister Reed here. They were just called to serve a mission in Columbia.

Now currently before they’re going on their mission, they’re spending about $10,000 a month as they like to travel, they like to have fun, they like to spend time with kids and grandkids, so on and so forth.

Now once they begin their mission, their expenses will drop drastically. Not only is moving to Columbia a lower cost of living but now they’re not doing a lot of those extracurricular activities. And so their income drops to that $4,500 a month.

So what’s happening is they’re needing to withdraw less so their total annual income is going from $120,000 a year to $54,000 a year.

Tax-wise, that means they’re going from the 22% bracket down into the 12% federal bracket. That’s a 10% gap there. Given their new situation, this is the perfect time to do a Roth conversion. They could convert just over $50,000 from their traditional IRAs into their Roth IRAs. Again, they only end up paying 12% on this conversion opposed to the 22% that they would have paid if they had done that free or post-mission.

Another key thing here is depending on the length of their mission, if they serve a two-year church mission, they could even be able to do that type of conversion twice.

So obviously the more long-term benefit of this is now you have $50,000-$100,000 invested aggressively that will continue to grow and grow tax-free. And that can turn into a pretty hefty amount rather quickly.

However, to illustrate just a near more near-term benefit, let’s imagine that once Brother and Sister Reed get home from their mission in Columbia, they want to celebrate just being reunited with kids and grandkids again. So they decided to take that same $50,000 they converted and now go on a trip to Disneyland.

They’re able to pay for that trip entirely tax-free while remaining in that 22% tax bracket. If no conversion had been done and the same trip had been taken, then the tax bill for that year would have been $5,000 higher. So you get an immediate $5,000 savings just in the following year when you get home from that mission.

That being said, missions as well as other scenarios can definitely be beneficial to do a Roth conversion.

Strategies for Tax Efficiency When Donating to Charities in Retirement (25:24)

All right, now speaking of charitable endeavors here, another tax strategy that comes into play during the retirement stage is that of how you’re going to donate to charity. So I just want to briefly go back to what Carson said just a couple of minutes ago regarding that standard deduction.

More and more people are taking the standard deduction nowadays which essentially eliminates the deduction that you get when you’re going to donate to charity.

Now that being said, there are still three strategic moves that you can make to be tax efficient when you donate to charity that I want to highlight with you today.

1. Donating Appreciated Assets to Charity

Strategy number one is donating appreciated assets to charity. Now donations and kind are essentially non-cash assets. So for those of you who know our founder Scott Peterson, there was a time back when he had hair that essentially all charitable donations were made in kind.

And so instead of using cash to pay tithing and other church obligations, essentially the members of the church will bring what they produce to the Bishop’s Storehouse. You know tithing was paid using eggs, milk, bales of hay, essentially what agricultural products they had.

The church as well as other charities around still accept certain donations and kind. Here’s my little play on words for you. So our ancestors would pay their tithes and offerings by donating apples. And today, we too can pay tithes and offerings by donating Apple. It’s just a little bit of a different kind of apple with Apple stock.

It is a very common practice to donate appreciated stock to charity which can definitely result in generous tax savings. Now all charities including the church, they know how to receive these donations in kind.

They can accept really almost all marketable securities such as stock, mutual funds, ETFs. Some will even accept gifts of real estate, life insurance policies, partnership interest. So there’s kind of a vast realm of what you can donate in kind. You should always check with your intended charity to see what they’ll accept. But as you can see, it’s a great strategy.

I just want to give you just a quick practical example of how that would look. So we’re going to take the Smiths. The Smiths want to donate to charity. If the Smiths, as you can see here, if they were to sell the Apple stock and donate the cash, they would end up paying that $5,000 in federal and state tax and end up donating that $20,000.

However, if they donate the Apple stock directly in kind, they can donate the full $25,000 and skip out on paying any of the tax.

Benefits of Donating Stock and Other Appreciating Assets to Charity

So here’s a couple of the benefits that the Smiths are going to receive for their donation. One, the charity is going to get an additional $5,000, or essentially a 20% greater donation than they would have if they liquidated.

The Smiths will not have to pay any tax on the gain of the stock. The Smiths also get to deduct $25,000 versus $20,000 as a charitable contribution.

And then what cash they would have been using to pay for the tithing with cash, they can instead use to invest in a more diversified stock of portfolio, portfolio stocks I should say.

Now, this strategy obviously saves you from paying the capital gains tax as you can see here illustrated. But if you don’t donate enough, you may still be taking that standard deduction.

However, there is a strategy where you may be able to combine your donations in one year to get a higher deduction where you can itemize, and then the next year revert to taking that higher standard deduction when you’re not making any charitable donations.

2. Bunching Donations

This is called bunching. And I just want to give you a quick glimpse of how bunching works. So again, let’s just take another example here, Mr. and Mrs. Miller. Now, the Millers regularly have $23,000 of deductions each year of which are about $10,000 are going to charity.

Bunching Donations

So as you can see on option one, with the $10,000, if they spread that out $10,000 and $10,000 over 2022 and 2023, their total deduction each year is only $23,000, which is under that standard deduction. And so by default, they’ll end up taking that standard deduction. And the combined two-year deduction at the bottom here, you’ll see that $53,600.

Where option two, the more tax savvy approach, instead of donating $10,000 in 2022 and 2023, they’re going to bunch that and combine it into 2022 where you can see, now in 2022 there are total deduction is $33,000 instead of $23,000.

This allows them to itemize as they are higher now than that standard deduction. And in 2023 they will revert back to taking that standard deduction.

At the very bottom here, you can see you have the total of $60,700. So that’s a $7,100 additional tax deduction swing.

Now one item that our clients bring up is okay, this seems like a really good strategy, but one, they either don’t want to get behind on their donations or they don’t feel comfortable paying their donations ahead of time. They’d rather be paying it in the year that they’re contributing.

This is where the second half of this strategy comes in, which is utilizing a Donor Advised Fund. So a Donor Advised Fund is not necessarily an investment, but rather just a tool which again may or may not be right for everyone, but we want to make sure you’re aware of it.

Donor Advised Funds

So Donor Advised Funds, or DAFs, they’ve been around for years and there’s a lot of them. They’ve become more and more popular, especially over the last decade, as you essentially have Fidelity, Vanguard, Charles Schwab, promoting them more.

What are Donor Advised Funds and How do they Work?

The best way to describe a Donor Advised Fund is that it is an account to hold your charitable contributions until you decide when and to what charity you want to ultimately donate to.

So to give you kind of the idea of how it works, the donor is going to make a charitable donation to the Donor Advised Fund. This can be done either in cash or better yet as we just talked about a donation and kind such as a share of stock.

The donor then receives this tax deduction back for the contribution in the year that the contribution was made. This could be a good planning tool for someone that has a higher income. Maybe their last year of retirement, or they’re selling a business and they know that in retirement they’ll have less of an income.

Now your donation is going to sit inside of this Donor Advised Fund in an investment account and it’s going to continue to grow for you until you decide where you want to give that to and when you want to gift it. So it’s kind of up to you on the timing of those when they go out to the charities.

Practical applications of the Donor Advised Fund

  1. With the DAF, essentially bunching of deductions becomes easier to do and charitable giving becomes much more flexible and easier to accomplish.
  2. A Donor Advised Fund helps the charitable donor get a tax deduction when it’s advantageous to the donor. Again, if you have a higher income year, it may make sense to donate more when you can get a bigger tax deduction.
  3. You essentially create a legacy for future generations. You can kind of think a missionary account for future grandchildren, anything like that.

Now this brings me to my last point on charitable giving, which is what you can see here is a Qualified Charitable Distribution or a QCD for short.

Qualified Charitable Distribution (QCD)

Now a QCD is a provision of the tax code that essentially just allows you to withdraw money from an IRA to be tax-free as long as that is paid directly to the qualified charity.

Now there are huge tax savings that can be realized by incorporating the use of these QCDs, but it’s not necessarily about by how much you donate to the charity, but by simply altering the way that you contribute to the charity.

So I just want to highlight a few perks here. The first is you didn’t have to pay income tax when you earned the money that you either put into your IRA or 401(k) throughout your working years.

Second, you didn’t have to pay taxes on the compound interest that your IRAs earned over the 30, 40-year working career that you had.

And then last, any money paid directly to a charity using a QCD from the IRA will not be taxed. So that’s triple tax savings, that’s definitely huge.

4 Benefits of Using a QCD

As Carson mentioned, it can potentially reduce the amount of Social Security benefit that’s going to be taxed.

Second, it can reduce the overall amount of income that is taxed.

Third, it’s going to enable you to get a tax benefit by making a charitable contribution. Now one thing I want to highlight here is with the standard deduction, when it comes to QCDs, whether you itemize or take the standard deduction, you will still get a tax benefit by doing a QCD.

So it doesn’t matter which one you take once you hit the QCD.

And then fourth, a Qualified Charitable Distribution counts towards satisfying those Required Minimum Distributions that you have to take out starting at again, age 73 or 75.

Now as beneficial as QCDs are, they’re unfortunately not available to all taxpayers and there are rules that govern these distributions that have to be followed pretty much to a “T”, or also be considered a taxable IRA distribution, which we don’t want to have happen.

The rules for using a QCD

  1. they’re only available to people older than age 70 and a half. Again, why Congress decided to throw the half in there, who knows but that’s kind of the age there.
  2. They’re available only when distributions are from an IRA account. So if you have a 401(k), a 403(b), any other type of retirement account other than an IRA, those are not QCD eligible. You would have to roll it into an IRA first.
  3. A QCD must be a direct transfer from an IRA to a tax-qualified charity. Meaning you cannot send yourself the money and then pay it to the church or the charity. It has to go directly to them from the IRA.
  4. There is a cap of a maximum of $100,000 of IRA money each year that is allowed to be transferred via QCD.

I really do believe that every person over age 70 and a half who has an IRA and that’s giving to charity regularly should consider making it through a QCD.

You or your tax professional, you can run a comparison just to see whether it makes sense to do it by cash or by using a QCD, and I think that you’ll find the tax savings will be significant.

Key Insights (36:20)

All right, well, I know that was a lot of information and kind of a short amount of time that Carson and I just gave you so we just want to kind of recap quickly with some key takeaways for you.

So number one, retirement may change the way a retiree manages their tax liability.

Number two, understanding how investment accounts are taxed can help you organize retirement plan and minimize taxes. Carson kind of gave us the big three-bucket approaches there.

Third, the amount of your Social Security that is taxable is based on your combined income.

Four, those Roth conversions can minimize taxes and retirement and for your heirs with proper planning.

And number five, charitable giving strategies can help maintain a tax benefit while accomplishing your charitable giving goals.

Question and Answer (37:11)

So, we have some time for some Q&A here just for a couple minutes, but before we get into that, I just want to thank you all for attending today. I’m going to turn it to Daniel to send over any questions that would be beneficial for the group to hear.

If you have any more like what you feel would be individual-type questions that pertain to your situation, please feel free to reach out to Carson, myself, or really any member here at Peterson wealth, and we’re happy to help.

And then as a quick reminder, there will also be a brief survey after the webinar that we’d really appreciate you filling out to give us any feedback that you have. So, Daniel?

Daniel Ruske: Awesome, well, we have had a handful of really good questions. I’d love to answer a couple of them in front of the group here.

Questions: Once RMDs are required, can they be satisfied by doing a Roth conversion?

Alek Johnson: It’s a great question. So the answer to that is no. Essentially what you have to do is with the RMD, you would have to take that and either put it in your checking account, put it in a trust account first, and then you can convert after that Required Minimum Distribution there. But you cannot use a Roth conversion to satisfy that Required Minimum Distribution.

Carson Johnson: Yeah, another way to think of it is the IRS says you have to do your RMD first before you do conversions. So it’s actually, it’s important to know that because that means Roth conversions might be ideal before you reach RMD rather than waiting to RMD because if that, if you’re doing the RMD, then doing a conversion on top of that’s just going to create extra taxable income.

Daniel Ruske: Awesome, so we have a couple more here and I’ll just remind everybody we do have a survey, we love your feedback, and so hang around just a couple more minutes.

Questions: What is the max amount per year that can be converted from pre-tax to Roth?

Alek Johnson: As far as the maximum, there is no max. Again, you can really convert if you wanted to your entire traditional IRA into a Roth IRA. But again, our advice is you want to make sure you reap the benefits of doing that conversion without pushing you into a higher tax bracket because if you were to convert an entire account, that’s going to likely just unnecessarily boost your tax bill for that year.

Daniel Ruske: Awesome, let’s do two more here.

Question: How we qualify for this 75-year-old Required Minimum Distribution?

Carson Johnson: Yeah, so if I understand correctly, the question is when you start Required Minimum Distributions, I believe. So just to reiterate, there was a new law passed in December, SECURE Act 2.0, and essentially it’s based off of your age now, your RMD start date.

And I believe if I remember right, for those that are born after 1960, the Required Minimum Distribution starts at 75. If you were born before then, it’ll be 73. If you’re starting your RMD then it’s that.

Daniel Ruske: So I’m looking at the cheat sheet you sent me earlier and you’re exactly right. 1960 or later, 75, everybody else, it’s if you started where you’re at or your 63 now.

Question: I can authorize Social Security Administration to withhold some of my benefit. Do pensions usually have the same option?

Carson Johnson: Yeah, so the answer is yes. A lot of times, pensions have withholding elections. So you can just contact your pension provider and ask them. And a lot of them, a lot of them have withholding as an option.

Daniel Ruske: Awesome, time for one more.

Question: I have a Roth IRA and I’m limited to $7,000 per year contribution. I thought I contribute once I stopped working. Can you do a Roth conversion after retirement?

Alek Johnson: The answer to that is yes. So in order to contribute, you are maxed out of that $6,000, $7,000 depending on your age there. However, after retirement, you can still convert no matter what your age.

Daniel Ruske: Awesome, well, that’s the last one. I’m going to take a screenshot of one other for David as it’s a little bit more specific. I’ll have you, Alek, get back to him in a moment.

Alek Johnson: Okay, perfect, sounds good. Well again, thank you so much for attending today. Again, if you have time to fill out that brief survey, that would be great.

Carson Johnson: And any other questions feel free to reach out. Okay,  thanks everyone.

How does the Perennial Income Model™ Offer You Protection?

The Perennial Income Model™ for Retirement: Welcome to the Webinar (0:00)

Scott Peterson: Well welcome, my name is Scott Peterson. I’m the managing partner of Peterson Wealth Advisors. It’s good to have all of you with us today. We appreciate the time that you’re willing to spend with us today.

I know we have a mixture of existing clients who are familiar with the Perennial Income Model™ as well as some non-clients that are wondering what this presentation is all about.

I can promise both the client as well as the non-client that you’ll all benefit from this presentation. Clients will be reminded of how their money is being invested and how the income is actually being created to support them in retirement.

And our non-clients will be introduced to a unique program, our proprietary retirement income plan we call the Perennial Income Model. It could possibly change the way you look at retirement and it’s a plan which could really enhance your retirement experience.

This webinar has been advertised as how the Perennial Income Model can protect you in the down market. It should have been advertised “How Does the Perennial Income Model Offer you Protection?” I wish to apologize to those who are attending this webinar thinking that we can show you how to never lose money in a down market.

To be clear, we’re not suggesting that your investments will be less susceptible to market fluctuations than if they weren’t in the PIM (Perennial Income Model). Okay, that’s not the kind of claim that we or anybody else can make, nevertheless the Perennial Income Model still offers a lot of protection in a lot of different ways and we’ll share those with you today.

The Perennial Income Model provides investing guidelines, distribution guidelines, and guidelines to assist in reducing taxes throughout retirement. That’s the kind of protection that we’ll be talking about.

So we also advertised this webinar to be hosted by Jeff Lindsay and myself. And as Jeff and I talked we thought it’d be a lot more interesting if we had more participants, so we’ve decided to have some of our colleagues join us in hopes that’ll make it a little bit more exciting.

We have a great team of advisors here and I want you to get to know all of them. So Jeff and I will be the only advisors on the Q&A at the end of the webinar.

A Plan for a Successful Retirement (3:10)

Okay, so retirees need to have a financial plan to follow in order to have a successful retirement. I really believe that this is true. We recognize that most retirees are going through retirement without having any type of formal plan at all. There’s no plan to create and maintain their retirement income.

Working without a plan is dangerous. And without a plan, fear and greed become our greatest influence. And emotionally driven investment decisions will never produce a good outcome. So you need a plan that is designed to address your family’s specific needs.

But before we go any further, I want to talk about what a plan isn’t – a product – because there’s a lot of that out there these days. And buying a product is not a substitute for a plan, okay.

Annuities: An expensive substitute for a retirement plan

Many of you’ve been hit up about buying annuities. We find annuities are a very expensive substitute for having a plan. They never keep up with inflation, they lock your money up for years, and they pay some of the highest commissions in the investment world.

The second thing that we find is a rule of thumb guidelines that are out there. Rule of thumb guidelines lacks specifics and may not address your individual income needs.

Retirement Rules-of-thumb: May not be the answer

There are unfortunately a lot of rule-of-thumb ideas that have been passed around for generations and are still with us today. Let me show a couple of them out there because I’m sure many of you have been exposed to this.

60/40 Rule: We have the 60/40 rule that you know if you put 60% of your money in stocks and 40% in bonds, well then you should be okay for retirement. Okay, well the 60/40 rule lacks specifics.

As far as when you should pull money out of stocks, when you should pull money out of bonds, how you should create your income. None of that’s available with the rule of thumb 60/40.

Withdraw 4%: We also have the rule of thumb withdrawal 4% per year guideline. Now it might work if you’re properly invested. Again, we’re lacking the specifics, you know, if all your money is sitting in an account that’s earning 3% and you’re pulling 4% out, well it’s obvious that you’re just going to lose money over your retirement and certainly not keep up with inflation.

Monte Carlo simulations: Another one of my favorite pet peeves is that of Monte Carlo simulations. So this is when you sit down with an advisor who says, well historically if you would have invested x amount of money this way and withdrawn x amount of money, you would have been successful x amount of the time, you know, 79% of the time.

Again, there’s no specifics, and it’s always looking in the past. If you would have done this, this is what it would have generated.

You know, you wouldn’t drive your car around town by looking exclusively through the rearview mirror. Why would you want to manage your investments that same way?

And then the last one that’s kind of more popular. It’s more accurate, but it’s kind of a scary way to live life, is using a guardrails suggestions.

Guardrails: a suggestion that you tie your withdrawal amounts from your retirement funds to the movement of the stock market Now, I can’t imagine basing my spending decisions throughout my retirement on the movements of the stock market.

And I can’t think of a worse way to spend retirement than feeling the need to watch the day-to-day movements of the stock market again to determine how much money I can spend.

I guess the point I’m trying to make is that the investment industry has not given the retiree any real good options when it comes to creating a stream of income to last throughout retirement.

The Perennial Income Model (6:53)

The Perennial Income Model, it’s not a product. It’s not a rule-of-thumb to follow and it certainly won’t require you to monitor every movement of the stock market.

It’s a methodology to follow that has been successfully designed to provide each of our clients with a tailor-made framework to follow to create the most reliable stream of inflation-adjusted income that’s designed to last throughout retirement.

The Perennial Income Model was born in 2007 and now provides income to hundreds of retired families across the United States. In the 16 years since its birth, this methodology has been tested and refined, and we think it should be the default method for generating income from almost all retirees.

So if you’re new to our webinars and have not had a chance to pick up your book, pick up our book Plan on Living. I want to direct you to our website when this webinar is over to get your complimentary copy. Therein you’ll find a more detailed description of the Perennial Income Model.

But for now, let me just give you a short history how the PIM came to be, which will in turn help you to understand how it works. Then we’ll demonstrate how the, excuse me, I keep using the word PIM, the Perennial Income Model helps us to protect our clients.

Okay, so I’ll give you a short history how this all happened. So prior to 2007, I was really frustrated with the whole investment process. I was managing money for a lot of retired families and they all depended upon me, and I recognized that the investment process was broken, this didn’t work.

So prior to 2007, I felt like I was expected to do the research and follow the right economists of which there’s thousands. Then accurately guess the future and invest my clients into the best investments and get them out of the markets at the right time.

Well, that’s a pretty impossible task. So after all, how do you successfully guess and invest in the future when unforeseen events such as pandemics and terrorist incidents get in the way?

Well, the simple answer is that you don’t. Investing by attempting to guess the future didn’t work out well in 2007 and I could tell you it doesn’t work out very well into 2023 either.

So I understood back then that the retiree had to have safe money to draw income from when the stock market dropped. But they also needed to be invested in stock-related investments, or in other words in equities, if they were going to keep up with inflation.

So it was a delicate balance. How do you strike that balance without having a well thought out plan? And as I looked around in 2007, no plan existed.

About this time, I came across a paper from a Nobel Prize-winning economist, William Sharp. He’s a Stanford guy, and in his paper, he introduced the concept of time segmented investing to provide retirement income.

So what he suggested that when a person retires, the retiree’s investment funds should be divided into 30 separate accounts. Each of these 30 accounts would then be responsible for providing income for a one-year period of time, each one year of a projected 30-year retirement.

So there’d be an account dedicated to providing income in year number one of retirement, a separate account dedicated to providing income of year number two of retirement, so on until 30 years’ worth of retirement would be covered.

So the value of such an approach of investing, it was obvious to me, you know money set aside to provide income in the first year retirement needed to be invested much differently than the money that you won’t need for 30 years.

So in my opinion, his relatively simple and straightforward academic approach to investment management for retirees beat all the market timing and future guessing of the markets methods that were used by myself and other advisors at that time.

Okay, so the money set aside in an account to provide income during the first year of retirement had to be absolutely safe and absolutely stable. That’s where you’re getting your monthly check from right?

So this money and year number one of retirement can be subject to market fluctuations. Neither fighting inflation or getting a large investment return is a concern of account number one, simply because of the shortness of its duration.

Safety and stability are paramount. First-year money should be held in ultra-conservative investments that are not subject to a lot of market volatility.

Now on the other end of the spectrum is the money that is designed to provide income during the 30th year of retirement. The objective of this account is to keep up with the erosion of purchasing due to the power due to inflation.

So the dollars within this account would have to be invested in inflation-fighting equities. Short-term volatility is expected but irrelevant in this account. This money won’t be needed for three decades. And speaking collectively, equities have never lost value and have always beaten inflation over time.

So the 30 separate accounts would be therefore started and being very conservatively invested and then they would get progressively more aggressive as the need for income from these accounts is pushed out over 20 and 30 years.

So by following this program of investing, the retiree’s short-term risk of markets volatility is dissolved and the long-term threat of inflation is managed.

Now as much as I like Dr. Sharp’s concept in theory, it wasn’t practical to implement. I certainly don’t want to create and manage 30 separate accounts for each of my clients. And my clients certainly didn’t want to have the mailman bring 30 separate statements in the mail as they watch their 30 separate accounts either.

So the hassle and the expense of this endeavor rendered this academically solid idea of time-segmenting retirement funds nearly impossible.

Okay, so not long after reading Sharp’s paper, I visited one of those Christmas tree farms where you cut down your own tree. Now at the tree farm, I walked by the saplings, I was with my children at the time, walked by the saplings, then the two-foot-tall trees and the various progressively larger pine trees until I arrived at the group of trees that had been prepared for people to harvest that year.

The smaller pine trees and their various stages of growth were there to provide future income for the Christmas tree farm. The Christmas tree farm had planned years in advance for his future income needs, and I thought at that time that the process of segmenting today’s investments to match future income needs is very similar to how this Christmas tree farm operates.

The farm had implemented a time-segmented approach of its own. And I remember thinking that day if the Christmas tree farm can figure this out, I should be able to do the same. There must be a way to transform the concept of time segmenting into a practical model of investment management.

So we went to work. And as I thought about this, I realized that all I really needed to do is to adjust the length of time for each account. If I change the time each account had to provide income, or from one year to five years.

So you see managing six accounts that provided income for a five-year segment of time versus the original one-year time frame was workable and followed the original objective that Sharp expressed.

So I therefore ended up with the accounts that covered the first five years of retirement. And a second account that covered years six through 10, and a third account that covered years 11 through 15, and so forth until we built this out over 30 years.

We call these five-year periods in our office, we call them segments. So once all the wrinkles of transitioning and academic idea into a workable methodology were ironed out, we launched our trademarked version of time segmentation, which we call the Perennial Income Model, or the PIM as I’ve been referring to.

So, let me share with you the Perennial Income Model again. This will be new to some of you but this is nice to go through it very quickly. And again, get our book, it will get into more details.

So here’s how it works out. You see that in the top right-hand corner, we’re starting with a million dollars. And in the bottom right hand, you see where the objective is to end with a million dollars, okay.

Retirement Income Planning: chart showing different retirement "buckets."

Also, this is just a 25-year period of time that we’re dealing with this for the sake of time and space, but anyway. So we’re going to divide the investment, the million-dollar investment portfolio into five different segments.

Each segment again is responsible for creating a five-year period of retirement. So segment one again, the first five years, segment two years six through 10, and so forth. Then we have a sixth segment that we call our Legacy segment.

The job of the Legacy segment is to basically start with, in this case, $136,000 as you see in that second to the, anyway on the right-hand side, not the second to the farthest right, that’s the Legacy segment.

Starting with $136,000 the objective through the miracle of compound interest is to have that grow to the original million dollars that we started with. Okay, so this is how it works.

I want you to notice a couple things though. Number one, we had to assume some kind of an interest rate. And you see we’re assuming very conservative interest rates.

Can you do better? I would hope so, we certainly do. But what good would be realized by using inflated numbers? You would only deceive yourself into taking higher income, but in the end, you’ll probably be disappointed.

So history tells us that these assumptions are very attainable. So if you disagree you can always choose more conservative assumptions in your own plan. But the idea is we want to underpromise and overperform.

And if you take a look at that, you know segment one, we’re showing a 1% interest rate. Well, we can get 4% in CDs right now. So obviously we can do better there. But I guess that the point I just want to make you understand is that we’re using very conservative assumptions.

Because we’re the only people that do this it’s not like I’m competing with the guy down the street, because I’m not, okay. So we just assume very conservative assumptions.

So number two, inflation-adjusted income stream. I want you to notice how this thing is built. Every five years you get a raise, okay, so an attempt to keep you up with inflation.

Okay, the total value column. You would think again that you’re in segment one, again we’re going to spend all of segment one which provides that income of $3,774. Okay, but that segment’s gone after five years.

Then you think segment two, we move on to that, where we start with $220,000. We’re going to have that grow just $256,000 and then we spend all of that in the second five-year period of time.

So you would think that the account value is going down, but in reality, as you can see, the account value, the total account value stays pretty stable because as we’re spending segment one and spending segment two, the other segments are growing for you.

And then its total distributions. Look at your total inflation-adjusted distribution during the 35 years. Okay, you see during the 20, yeah 30 years, I should say 25 years, excuse me.

You see you have $1,563,000 that has been distributed, and you still have the million dollars that you started with. That’s the objective.

Now people are going to ask, well can I pull more money out of this model? Well yes, certainly you would just leave less in the Legacy bucket.

So let’s transition over to the, let’s clean this up a little bit. I just want to tell you that when I teach education week every year, and when I show this slide at education week, this is when all the phones come out and the cameras come out, and they start taking pictures.

Retirement Income Planning - spreadsheet

And I feel like sometimes, they think that well, here’s a secret formula all I have to do is get this and I could create this on my own spreadsheet at home.

Okay, I got that, but I want to warn you of something, that there is more to this than the spreadsheet. As I show you this, I feel somewhat like the negligent adult that hands the keys to a new sports car to a 16-year-old boy and says here, here it is, this is all you need.

So I just want to warn you even though you may be very adept at creating spreadsheets or you’re able to put together a plan following the pattern exactly that I’ve provided, please don’t think that you’re done. I would say quite to the contrary, you’ve just begun.

You see a time-segmented distribution plan takes a couple of hours maybe to create and it takes 30 years of discipline to successfully implement.

Those who create a spreadsheet invest and then forget about their investments or abandon the plan will not have a successful outcome. Okay, when investor discipline fails the plan will fail.

So the essential step of harvesting a time-segmented program is really where the rubber meets the road, not in the creation of the spreadsheet. So I feel obligated to kind of explain what harvesting is about.

Simply stated, the process of harvesting in financial terms is when we transfer riskier more volatile investments into a conservative and less volatile portfolio once the target or the goal of each segment is reached.

Okay, so this is a very goal-based program. And once you understand that when we hit our target amounts, that’s those numbers in green, every segment has a responsibility of providing income. So we let the money grow within the segment whenever we hit those target amounts. At that point in time, we want to take risk off the table and change the more aggressive investments into more conservative investments. We reduce risk.

Harvesting adds order and discipline to the investment process which results in better investment returns. Less risk and less selling based upon emotions. Without harvesting, the time segmentation model becomes more aggressively invested as a retiree ages and gets into the latter segments of the plan.

So having 80 and 90 year old’s, with their money all invested in long-term aggressive equities does not make any sense at all. Unfortunately, that’s not how the program works. If the time-segmented plan is properly monitored and harvested the process of monitoring and harvesting are imperative to the success of this time-segmented distribution plan.

I want you to think with me for a second when we talk about harvesting what’s happened over the last 10 years. You know, we’ve been busy harvesting our client’s segments as they reach their goal over the last 10 years because the markets have been very, very kind to us.

And I can tell you now that our clients are very happy that we’ve been harvesting along the way. We basically took the money out of the more risky things into less aggressive less risky things as we met our goals.

Okay, and then one last thing before I turn it over to the other guys here. Now that you understand the basics of the PIM, I want to show you a real-life example.

Okay, this version shows an actual model that we constructed for one of our clients about a year ago. It incorporates the client’s Social Security income and pension into the mix.

So this is by the way a 30-year retirement versus the 25 I was showing you before. But we allow the program to solve or maximize the way to get the most amount of income they possibly can, incorporating against Social Security, pensions, and so forth.

But I will tell you this, the Perennial Income Model truly has withstood the test of time. It’s goal based, it provides a framework for investing, a framework for distributing the right amount of money from the right accounts. It provides a framework to manage risk and as you’ll soon see it provides an excellent tool to assist us in organizing and implementing tax-saving strategies.

Now in 2007, the initial goal of the Perennial Income Model was to provide a logical format for investing in generating inflation-adjusted income from your investments throughout retirement.

As I just demonstrated, we accomplished this goal by projecting a retiree’s income over multiple decades. And in the beginning, we did not fully anticipate all the accompanying benefits that would result from projecting the right retiree’s income over such a long time frame.

There are unique planning opportunities that have manifested themselves and our eyes have been opened to a number of benefits that we could not have foreseen before creating and using the Perennial Income Model.

As we have projected income streams for our clients throughout their respective retirements, we have found that the Perennial Income Model satisfies many roles for our retirees that few systems or investment programs provide.

We want to share with you some of the advantages that we have seen and some of the ways that actually the Perennial Income Model helps to protect our clients.

And so anyway, let me turn the time over to Carson.

Provides a Retirement Framework to Follow (24:46)

Carson Johnson: Thank you Scott, let me just share my screen again.

All right, thank you Scott. So yeah, to support what Scott said, the Perennial Income Model does serve as a protection in many ways and helps provide a framework for our clients to follow.

And so the four points that I want to make here really quickly is to show the four different ways the Perennial Income model serves as a guide for our clients.

First, it helps our clients know the right amount of money that should be distributed from their investments. As it comes to a retirement plan, it’s not just the income that comes from investments that’s part of a retirement plan.

As Scott mentioned there’s Social Security, there’s pensions, there’s rental income, that’s part of this and so it’s just figuring out what is the right amount that should come from the investment portion that you’ve built up and saved over the years.

Second, it provides a guide in maximizing your tax-efficient stream of income. It’s a really important part as part of the retirement plan.

Third, it’s coordinating your Social Security benefits as well as your spousal Social Security benefits.

And then lastly, it’s managing inflation and volatility risk. Now we’re going to stay high level on a lot of these different points because there could be a webinar on every single one of these guides, but we’ll want to go into some of the main points as it pertains to these four ways that it serves as a guide.

So the first thing is that the Perennial Income Model offers flexibility. Now one of the most important considerations an advisor should be advising their clients on is to determine whether clients have sufficient funds to make major purchases or sustain a lifestyle.

Now I can’t go into all the details on how that is done perfectly because everybody’s lifestyle is different, and we know that life happens. And retirees don’t always follow a 30-year plan exactly.

Every scenario is different and whether you need to take a large lump sum distribution from your retirement plan, or have irregular income, or if you’re wanting to have more income in the earlier years of your retirement.

Whatever the situation may be, the Perennial Income Model helps map out how each scenario will impact your income. If you don’t have a plan, then you’re simply guessing and helping that it works out.

The second point is to maximize tax efficiency. So seeing your income presented through the Perennial Income Model allows us to tax by not for year one of retirement, but years one through 30, or one through 25, however long your retirement plan is with the goal of minimizing taxes throughout your retirement.

So the first couple of steps that we do in order to create this retirement plan is first, is to maximize income. And how we do that is about knowing how much money you can pull from your accounts and how that will impact your income.

The second step is to know what accounts to pull this money from to minimize taxes. Jeff will actually be talking in a little bit more detail about this later in the webinar to specifically answer the questions: how much we can pull from our accounts and what accounts to pull from when drafting and creating your retirement plan?

The next thing, I’d like to make this analogy, is related to a junk drawer. And I don’t know if any of you relate to this, but in my house, there is a drawer in my home that we refer to as the junk drawer which contains all sorts of different things in there.

It contains scissors, it has batteries, it has rulers, pens, pencils, etc. And it’s the place that you go to find really any random object, but it’s unorganized.

And oftentimes when clients come to us for help, they come to us with a junk drawer full of investments. Now, I don’t say that in a way that is mean, saying that their investment accounts or investments are bad in any way, but just simply that they come to us with an unorganized drawer of investments.

And sometimes just a little bit of help and organizing those investment accounts can make a big difference as it pertains to taxes. The Perennial Income Model positions a retiree’s plan in a way to organize their tax-deferred, tax-free, and non-retirement investment portfolios into a single tax-efficient stream of income that is designed to minimize taxes.

The creation of every individualized Perennial Income Model will be different because every person’s situation is different. But it’s the way we organize that Perennial Income Model that fits into each client’s situation that matters.

And as I mentioned before, Jeff will run through some examples with you later in the webinar about how to do this from a tax perspective.

Lastly, the Perennial Income Model serves as a guide for our Social Security claiming decisions. Social Security is one of the few sources of income that adjusts for inflation and is typically a major portion of a retiree’s income.

For these reasons, your decision to claim Social Security is so important and how it coordinates with not just your benefit, but also if you have a spouse, their benefit as well.

So many may be wondering, how do I maximize Social Security? Should I postpone my benefits until age 70? How do I coordinate my benefit with my spouse?

Generally, to start off with whether you claim earlier or later, the breakeven point, or at the point which those two points claiming earlier later collide is in your early 80s.

But there’s one lesson that is far more important when it comes to Social Security, which is it’s not just about maximizing Social Security, but it’s about maximizing your total retirement income.

So a few questions here to think about as we go through this webinar today. What income will you live off between claiming and taking your Social Security? Is it worth liquidating a part of your 401k or IRA accounts to maximize Social Security? Is there a difference in age between you and your spouse and how does your spouse’s benefit coordinate with your own?

As I mentioned before, every situation in case is different. But the Perennial Income Model allows us to focus on total income, not maximizing Social Security.

Also, just a little note similar to the timing of Social Security, those with a pension can determine if they have an option to take a lump sum rather than a monthly pension benefit, is also an important consideration, and figuring out how that impacts your total income.

Also, pension options that have survivorship options, meaning if something were to happen to you, that pension, how that continues on to a spouse also plays a role in your total income throughout retirement.

And so those are four ways that are guides that the Perennial Income Model serves for our clients.

And now I’ll turn the time over here to Josh to talk about the next benefit.

Acts as a Behavior Modifier (32:50)

Josh Glenn: Awesome, thanks Carson.

Well, I’ll tell you what. I’m excited to talk about how the Perennial Income Model is a behavior modifier.

One of the biggest reasons that I decided to come and work at Peterson Wealth Advisors was because of the way the Perennial Income Model helps our clients to be at ease and make smart investment decisions.

To start, I want to say something that may catch you off guard, and it’s this. In theory, investing is easy. You buy something at one price, when it goes up in value you sell it. You buy low and you sell high.

Now I know what you’re thinking, and you may be thinking something that my wife thinks a lot, Josh you’re wrong. But there are a few things that you can do to be a successful investor.

One of the most important things you can do is to match your short-term money needs with short-term less aggressive investments. And your long-term money needs with long-term more aggressive investments.

If you can do that, you can be a very successful investor. So if it’s so easy, why don’t we all just have money oozing out our ears? And that’s because actually implementing this type of strategy can be more difficult.

Here are a few common reasons it can be difficult. Misinformation, distractions, and perhaps the biggest one, our own emotions.

Our emotions can cause us to get in our own way and make bad investment decisions. As humans, we actually naturally tend to be bad investors.

In general, we’re short-sighted, prone to panic, and we have more biases than we’re often aware of.

One of the biggest biases we have is loss aversion. Studies show that the fear of losing is a much more powerful emotion within us than the satisfaction of gaining. And everyone’s probably experienced this.

So in other words, we’re going to feel almost twice as much pain when we lose a hundred dollars, then the joy we’re going to feel when we make a hundred dollars, or if we won a hundred dollars, kind of interesting.

And this bias predisposes all of us to be bad investors. One bad experience in the stock market which may be self-inflicted, maybe we caused that, maybe we made a bad decision, can cause someone to shun the explosive growth of the stock market over a lifetime.

There are millions of people who have missed out on the unbelievable market gains because of fear of seeing their accounts experience a temporary loss.

On the flip side, when investors recognize the reason they own a specific investment, when they understand how the investment fits into their overall financial plan, and when they understand when the specific investment will be needed to provide future income, investors can become quite rational.

When the crash of 2008 to 2009 occurred, about half of our clients were in the Perennial Income Model, and half weren’t. The investors who had date-specific, dollar-specific structure that the Perennial Income Model provided, they made better decisions than those who didn’t.

They didn’t panic, they knew that they were holding, they knew why they were holding the volatile investments that went down. And they also knew that they had the money they needed. They also knew the money they needed in the short term was invested in more stable less risky investments.

The therapeutic organization of the Perennial Income Model is extremely important. The decision not to sell during a future market decline may end up being the most important investment decision you will ever make. And the Perennial Income Model makes that decision easier.

Let me show you specifically how the Perennial Income Model can modify behavior.

We know that getting the needed return while taking on the least amount of risk possible is a pillar to successful investing.

The two main types of risk that retirees face are volatility in the stock market and inflation. Volatility refers to the constant up and downshifts in the market. Inflation is the rising costs of goods and services which erodes your purchasing power.

If we assume a 3% inflation rate every year, a dollar’s worth of purchasing power today will only be worth 41 cents worth of goods or services 30 years from now. Kind of scary to think about.

These two risks are very prevalent to every retiree, but the Perennial Income Model helps solve both these risks. Let me show you how.

Using this example, we address volatility with the first two segments of the model by investing conservatively in short-term safer investments.

Retirement Income Planning - spreadsheet demonstrating how the Perennial Income Model accounts for market volatility and inflation.

We understand that your short-term money can’t be going up and down with the daily fluctuations in the market.

If you had all your money invested in stocks when you are drawing income, it would be horrifying to be forced to sell your positions at extreme discounts because you need money for living expenses.

You can see here in segments 1 and 2, we are only assuming a 1% and 3% growth rate as this is your conservative money. When the market is down, the world tells you to sell your holdings and salvage your portfolio.

The Perennial Income Model tells you to hold your positions and wait out the market as your income needs are protected.

We address inflation, the other major concern for retirees with the latter segment of the model. You can see we are assuming much higher growth rates for these volatile equities, and that’s because they’re traditionally higher-yielding investments, and they can be inflation.

This is the only way to maintain your purchasing power over a 30-year retirement. While your loss of version bias may tell you to avoid investing in stock, the Perennial Income Model and history tell us that we need to invest in equities to beat inflation.

Now I’m going to turn the time over to our next presenter.

Serves as a Guardian (40:15)

Austin Lee: Thank you Josh, I really appreciate that. I’m excited to be here as well today to explain how the Perennial Income Model protects us and serves as a guardian as we move forward in retirement.

First, the Perennial Income Model serves as a guardian in a way to protect us from our older selves. Studies show, and from experience, we understand that as we age our cognitive abilities decline which significantly impacts our ability to make financial decisions.

Even though you may have gone through and endured many bear markets in the past and not allowed yourself to panic or give in to the pundits of the day, you’ve been able to stay away from making rational decisions, but that doesn’t mean you’d be able to do the same as you age if you’re not following a plan.

We’ve repeatedly seen cognitively sharp newly retired 65-year old’s morph into less confident slower to comprehend 80- and 90-year-olds. Sooner or later, it will happen to all of us in one degree or another unfortunately.

But it’s a valuable benefit to create a plan and understand that plan while you’re younger and you are mentally at the top of your game.

An even greater advantage to the Perennial Income Model is the knowledge that you’ll have a plan that will stick with you throughout the balance of your life as your cognitive abilities erode.

The next thing that’s important to understand is that the Perennial Income Model serves as a guardian when our loved ones pass away.

If you are a steward over your finances, the one in charge who takes care of the family, it is critically important that you answer the question:

How will my spouse make prudent financial decisions when I slip away from this life?

The Perennial Income Model can answer that.

It’s a cruel reality that when a surviving spouse inherits the money that they have important and critical financial decisions to make shortly thereafter. And it’s difficult because they have situational depression and it’s very difficult to get through every day.

An experience tells us that there’s more fraud that happens shortly after the passing away of a spouse than any other group. This makes them very vulnerable and susceptible to these kinds of things.

We know of families where they’ve bought a new motor home for $100,000 and shortly after the passing away of a spouse the surviving spouse has sold it for $19,000 dollars.

We hear of other stories where homes and cabins are sold for hundreds of thousands of dollars less than their actual value because the surviving spouse has panicked and is not sure if they’ll have the money to take care of their needs and continue living their life as they had before.

But when a loved one passes away there’s definitely a document or two that needs to be signed to transfer the accounts over into their name.

But the benefit of the Perennial Income Model is that the surviving spouse will follow the same plan that the couple’s followed for years.

Nothing changes and they’ll continue to receive the income inflation adjusted for the remainder of their life.

This again is a screen print of a Perennial Income Model, and one of the lessons that we’ve learned that’s most important during these vulnerable times is to have a plan. It is so vital to put something in place now to protect ourselves from our future selves and to make sure that our loved ones will be taken care of when we pass away.

Perennial (retirement) Income Model

What a blessing it is to know that as we cognitively decline, we’ll be taken care of and will have an income plan in place.

From our experience, it’s amazing and it’s interesting to sit down face-to-face with individuals and clients to implement this. You know as markets go up and down, as life circumstances change, a properly implemented and executed Perennial Income Model provides tremendous reassurance and indescribable peace of mind that our clients have a plan.

In any change of events or major events that happen in your life, you can rest assured that the Perennial Income Model can provide an inflation-adjusted income plan throughout retirement in the remainder of your life.

I’ll now pass the time over to Daniel who will continue to explain some of the benefits of the Perennial Income Model.

Bad Luck Insurance Policy (45:18)

Daniel Ruske: Great, thank you Austin. I’ll be talking about how the Perennial Income Model can be a bad luck insurance policy and how it protects the retiree from an episode of a bad sequence of return.

As we have already discussed, every stock market correction is temporary. However, that knowledge is only helpful if you are well positioned and able to select which investments to liquidate during a correction.

For example, let me tell you about Mike. Mike is 60 years old and has carefully planned for his anticipated retirement. He’s had a great career and saved a million dollars in his retirement accounts.

Mike understands that it’s important to invest some of his assets and equities to keep up with inflation, but also have a portion and bonds to predict him against being forced to sell stocks during the loss.

After doing a little research, Mike has decided to go with a 60/40 balanced mutual fund. What this means is Mike has his money in a fund that has 60% in stocks and 40% in bonds.

The day finally came and Mike’s retired. He started taking a monthly distribution from his mutual fund, and each month he simply sells a few shares of his mutual fund to support his monthly living.

Each one of these shares holds a portion of stock and portion of bonds. For the first few months, Mike is very pleased with his investment choice as the market was doing well. He was very comfortable liquidating a proportional amount of 60% stocks and 40% bonds for his needed monthly income.

Unfortunately, after just four months, his worst fears came to pass. The stock market dropped by 50%. Unlike during his working years, Mike couldn’t just wait for the stock market to recover, but he had to withdraw a portion of his money every month from his mutual fund just to pay the bills.

As Mike went through his monthly stipend, he realized that he was liquidating a proportional amount of stocks and bonds each month from his balanced mutual fund.

This meant that he was systematically selling stocks at a loss every month that the stock market remained down.

Now, Mike is not alone. This exact scenario happens and will continue to happen to millions of new retirees every time the stock market corrects itself.

It’s true when we are no longer contributing and we begin taking withdrawals from our accounts that the temporary up and down of the market can have a much bigger impact our investments than when we are working and had time to just wait out the market correction.

Now to be clear, Mike’s mistake was not in being too aggressively invested. A 60/40, or 60% stock 40% bond portfolio can be a very reasonable allocation for any retiree.

Mike’s mistake was failing to have a segmented income plan that allowed him to only liquidate the least impacted non-stop portion of his portfolio to provide his monthly needed income during the market downturn.

Now to further illustrate this point, I want to share with you another hypothetical example of two investors.

We have Mr. Green and Mr. Red, obviously green shirt, red shirt. They both retire, they’re the exact same age at 65. They both have saved up the exact same amount of a million dollars for retirement.

Comparison of returns with the Perennial Income Model used for Retirement Income Planning

They both planned to take out the exact same 5% of their initial balance each year, which is $50,000. And over from their retirement over the next 25 years, they’re both going to average the exact same investment return of 6%.

The only difference between the two investors, is that Mr. Green experiences high returns toward the beginning of his retirement and Mr. Red experiences the same high returns, but toward the end of the 25-year retirement.

Though both average the same 6% return per year doing retirement, Mr. Green ends up with more than 2.5 million dollars to pass on to his heirs at death while Mr. Red runs out of money halfway through his retirement.

Every aspect of the retirement experience is identical except for the one thing, the sequence or the order of the investment returns.

Mr. Green experiences the positive returns at the beginning of his retirement and the string of negative returns toward the end. Mr. Red experiences the same thing exactly in reverse as shown.

Again, both investors average 6% over a 25-year retirement, but the sequence of returns is the only difference and we can see by the table just how big a difference the order of returns make.

The good news is that it is possible to set ourselves up to be successful no matter what the markets happen to do year by year. The Perennial Income Model is a bad luck insurance policy that can protect you from the pitfalls that Mr. Red experienced.

Now, as Scott said, we’re not suggesting that the Perennial Income Model will make it so your account balances never go down or never suffer temporarily, that will happen.

What we’re saying is that by following the Perennial Income Model, you would not be in a position to have to sell stocks at a loss during the next market correction.

Mr. Red’s losses are realized as he liquidates equities in the down years at a loss to cover his expenses. If Mr. Red were to have his portfolio organized according to the Perennial Income Model, he would not be in a position, we would have to liquidate those stocks and those years to provide income.

He would have a buffer of conservative investments to draw income from while giving the more aggressive part of the portfolio a chance to rebound when the stock market temporarily experiences the periods of turbulence.

The Perennial Income Model’s design is intended to give immediate income from safe low volatile investments and at the same time furnishes you with long-term inflation fighting equities and your portfolio, equities that will not be called upon to provide income for years down the road.

As you may remember, market corrections typically last for months, not many years. So even if you are the unluckiest person on the planet and your retirement coincides with the market crash, your long-term retirement plans will not be derived as long as you’re following the investment guidelines found within the Perennial Income Model.

Well now I’ll let Jeff take it from here.

Identifies Tax-Saving Opportunities (52:06)

Jeff Lindsay: Thank you, Daniel.

The Perennial Income Model helps us protect our clients by helping us identify tax savings opportunities.

It was Morgan Stanley who said you must pay taxes, but there is no law that says you got to leave a tip.

Tipping’s an interesting thing right now. I feel like I have to tip as a go through the drive through the Sodalicious, but we do draw the line at the IRS.

So we believe it’s the responsibility of every investor and every investment advisor to do all in their power to legally pay the least amount of taxes possible. Because every dollar saved in taxes can be used for another purpose that is important to you.

Retirees face a different mix of taxes and tax concerns than the non-retirees. So here are a few things that we have to think about for our retirees.

Required Minimum Distributions, it’s kind of this ticking time bomb that happens that it’s something that we have to, we’re going to have to pay taxes on at some point, so managing that correctly.

The potential of converting too much pre-tax dollars into a Roth IRA can create additional tax liability that we didn’t really need to have.

There are penalties on the Required Minimum Distribution if you don’t take out your Required Minimum Distribution that you should.

The IRS, or excuse me, Congress changed the rules on us a little bit this last year and move that penalty all the way down to 25%, it’s still significant.

Higher potential for higher Medicare premiums depending on how you work your income situation. Higher capital gains taxes, capital gains taxes are intertwined with the rest of your income and you could jump into a higher racket there.

Paying extra taxes on Social Security income, the calculation for what is taxable of your Social Security is quite complicated and also intermixed with the other different parts of your income.

So the Perennial Income Model facilitates good tax planning. Scott Peterson says, “We have found that by using the Perennial Income Model to plan and project future income streams, we can easily identify and organize tax-savings opportunities.”

But how does that work? The Perennial Income Model helps us to organize our income and our assets in a way that you can kind of see the whole picture all at once. You can map out your income from year to year that will allow you to forecast and plan for future years today. And it also protects a legacy so we can decide whether we want to pass on tax-free or taxable income onto our heirs.

There are a few strategies here that we can go over and opportunities that we have for retirees in managing our tax brackets. So, if you know what the tax brackets are, and you have different opportunities to take income from one source or another you can manage those brackets over time.

Qualified Charitable Distributions, we’ve talked a lot about those over the past while and if you, I won’t go into all the details about the Qualified Charitable Distributions now, but it’s a good opportunity to make charitable contributions without paying taxes on those distributions you make from your IRA.

Roth conversions are a great strategy if done at the right time and in the right situation. In some situations, Roth conversions make all the sense in the world and in other situations, it doesn’t make as much sense or getting too aggressive which Roth conversions can be a problem.

Managing Medicare premiums, this is definitely one that a lot of people, you haven’t really heard of it, and it could come back to bite you. Medicare premiums show up when you take too much income in any given year. But you don’t see the result of that until two years later.

So you start down on this what you think is a great strategy and then two years later all the sudden you have this jump in your Medicare’s premiums that you weren’t expecting.

And then the potential for tax-free Social Security income. If you manage your overall tax situation properly and your situation is just right, you can actually have a tax-free Social Security income there.

Let me go through if I could, just an overall situation. This is the same income model that we’ve been looking at throughout the presentation. But what I wanted to do is just show there’s several different opportunities that we have from a tax perspective looking at this.

Spreadsheet outlining the various opportunities for tax savings using the Perennial Income Model for Retirement Income Planning

This is a person who has $700,000 in non-IRA kind of investments and $800,000 in IRA investments. So you can see on the left side there, the overall income, the other income is low.

So this retiree, age starts at age 64, and you could make Roth IRA conversions for a few years. And if you’re even younger than 64 you may be able to make those Roth conversions a little bit higher before Medicare comes into play a 65.

So kind of timing that out in the right way, that opportunity you can see on the right side, the Legacy, we’re moving that money. It starts out as an IRA and then it can turn into a Roth IRA over time paying some taxes upfront.

Meanwhile, we’re taking out income from the non-IRA account for those first few years and not having to pay tax on both the Roth conversion and the IRA distributions as you go along.

The middle section shows Required Minimum Distributions. So if you manage the Roth conversion properly, you also have some IRA money left. If you haven’t converted your entire IRA, you have some of that IRA left to be able to make Roth, excuse me, to be able to make Required Minimum Distributions and use those Required Minimum Distributions to pay charitable contributions that you already were going to make anyway.

So these are just a few opportunities that we have and you can see being able to have the Perennial Income Model laid out in front of us gives us an opportunity to see all the different aspects of your life and we’re able to take that now and have a better tax result.

In any given year we’re not trying to save as much as we can in this year. It’s looking at an entire lifetime left that gives us an opportunity to say where should we pay taxes early on, later, in the middle somewhere, should we spread them out evenly. Should I take on some tax liability so that my children can then have an inheritance tax-free? Should I pass that on to them because their tax rates are actually lower will be lower than mine?

It’s kind of looking at all those different options and it gives us an opportunity to do that tax plan.

So in summary, the Perennial Income Model helps us to avoid the tax land mines that might come up and helps us look for special tax opportunities that we have really that are specific to retirees.

The Perennial Income Model in Review (1:00:09)

Scott Peterson: Hey Jeff, thank you. Thank all of you for your help. You know, I just want to tell you all of you that are listening today, and some of you are here listening from other states I understand. But our office is kind of situated between UVU and BYU.

And I think Utah Valley University has one of the best financial planning programs in the nation. And of course, you have BYU with a wealth of talent and great people there too.

So whenever we need new advisors, I have the opportunity to get on the phone and we call some of the professors and tell them that we want the best and the brightest, and anyway, that’s where these advisors that you’ve been listening to come from.

I think they’re the very best and I’m so pleased that they’re working with me in our company.

Hey Josh mentioned something earlier on, he said, you know back in 2007, the Perennial Income Model was born but it was, think with me, it was immediately tested in ’08 and ’09.

And what really kind of launched it I think is that time period because we recognized that, you know, and by the way, we’d only had about half of our clients we’d been able to convert over to the Perennial Income Model simply because of time.

And we noticed that those who had the Perennial Income Model did so much better than those that didn’t. And really, it’s because they had a plan to follow, they weren’t as anxious, they understood. So after 2008-2009, we decided that that’s the only way we’re going to manage money for our clients going forward.

So again, we’ve been through several corrections now, it works great, and we’ve been able to refine it and make it better as the years go on.

So in summary, we’ll be done with this in just a minute, I just want you to think with me that, the Perennial Income Model is goal specific. So it matches your current investments with your future income needs. You know what you own, you know why you own it, and you know when it will be needed for your future income.

It creates a framework for investing. Because you have a goal specific plan, you know specifically how you should be investing. You know exactly when you need to liquidate and when you need to turn your investments into income so you can invest with confidence.

We find that a plan is the antidote to panic. So a time-segmented plan aligned with the program to harvest gains reduces investment risk if the plan is followed. And I honestly don’t know how we would even go about determining how to invest a retiree’s money without having a plan like this.

The Perennial Income Model provides a framework for distributing. You will know how much you can and should be able to take out of your investments. But the plan not only helps with investment discipline, it also helps with distribution discipline.

It helps you to monitor your own behavior and allows you to spend with confidence.

The plan creates a framework to manage risk. You know your greatest short-term risk, again, is stock market volatility. Your greatest long-term risk is that of inflation.

So the time-segmented plan, the Perennial Income Model addresses both of these risks. So you’ll have less volatile investments to provide for immediate income needs and more aggressive higher earning investments to keep up with inflation over the long run.

And then the additional benefits that frankly we did not think of when we created the plan back in 2007, this works as Daniel talked about as a bad luck insurance policy

So some of you may be those people, or you know those people who have retired right before a financial crisis, right before a stock market crash. We found the Perennial Income Model is very helpful in helping you manage that, to navigate those dangerous waters.

But it also protects you from your older self, and it will leave your spouse with a plan to follow at death.

And Jeff just kind of stuck his toe in the water there when it comes to tax reduction strategies. There’s just so much that can be done so, much good that could be done from a planning perspective with the Perennial Income Model.

Anytime you map out your income over 30 years, you can easily identify things that could be done now to reduce your taxes today as well as, you know years, in advance.

So anyway, we wanted to introduce that to you and just remind you of the, I mean all these things combined together really help to protect our clients. And I think with it, protect our clients I think from maybe their biggest risk, themselves.

Okay, once you have a plan to follow and stick with it, you’ll do better than those that don’t. I just know that to be the case.

In 2007, we realized that we were giving something special when we kind of figured out the Perennial Income Model. And it has superseded every expectation and it has benefited now hundreds of retired families in ways that we could not have even imagined back then.

But it does all these things we talked about. It provides us framework for managing your finances throughout retirement. And anyway, I’m just thankful for it. I’m thankful for my advisors and for all of you that are clients.

And for those that aren’t clients, we’d love to introduce you in more depth to this. If you’re interested, please contact our office, get the book, and see if this makes sense to you.

Question and Answer (1:05:51)

Daniel Ruske: So Scott, we have a couple questions, are we ready for that?

Scott Peterson: Yeah, let’s do that.

Daniel Ruske: I’d love to do a few questions. And I guess we’ll do probably five or so minutes and then there’s a survey. And so we promise we won’t take too long if you don’t mind hanging in there and giving us some feedback on the presenters and also on what you might want to hear next time.

And so I’ll start with the questions for Scott you and Jeff. And I thought they were really good ones.

So the first one I have here is, let me find it again. Okay, after the first five years is over does the investment on the remaining segments change? For example, would the second segment be invested as Segment 1 was, or a more conservative investment? Reed would like to know that answer.

Scott Peterson: Jeff you want to answer it, or should I?

Jeff Lindsay: Sure, so after the first five years, it’s not necessarily based on the time as much as the harvesting that Scott was kind of talking about. So what we’re working towards is reaching those goals.

If you think back to the spreadsheet that we had up, those yellow boxes. Those are the goals we’re shooting for and we find that we actually hit those goals when the market is, you know, kind of hitting all-time highs which only makes sense.

But that’s the time when a lot of people are getting greedy and it’s also the time when we say, okay, we’ve hit our goal now we’re ready to become more conservative there even though it feels like no, I want to stay in the market at this point.

That’s the time to go ahead and get more conservative. Not necessarily at three years or five years or ten years, it’s when we hit our goals.

Scott Peterson: Yes, so I think the answer, yeah, let me add to that thank you Jeff. The answer is, you know, we have the programs that are developed to help us monitor our progress in every single segment.

And so we’re getting more conservative as we reach our goals whenever we reach those goals. Okay, and so it’s not just at the five-year mark, but we’re monitoring that every day. And our clients have access to seeing the same thing as far as how the different segments are progressing. I hope that answers the question.

Daniel Ruske: We’ve got a couple more here. Craig wants to know, how do you guys make money?

Scott Peterson: Right, I’ll take that. So we charge just a flat management fee that’s agreed upon right up front. So, you know exactly how much we will withdraw out of your account.

And this is going to be depending on the amount of money that we manage. It’s going to be in the probably one to one and a quarter percent range. Okay, and so that’s how it works out. But I want to reassure everybody, and I think this is very important for you to ask questions if you’re looking for an advisor, to ask this question.

Do you earn a commission? And the answer with us is no. I don’t even allow people to have licenses to earn commissions in our office. We’re strictly fee-based and so there will be this one percent or so fee that we’ll take out on an annual basis to manage your portfolios.

And I might add with all the tax planning we do, all the investment management we do following the Perennial Income Model, if we’re not one percent by all means if we’re not worth that then you should take your money someplace else or do it yourself. But I think we rarely lose a client because once they’re on board, they see the value that we offer.

Daniel Ruske: I’m going to do one more here, and then if more come through, I’ll let you know. But this question is, how often does your company review clients’ portfolios, and how often does the client need to meet with you to review the portfolios?

Scott Peterson: So here Jeff, I’ll jump on that one too if you don’t mind. We have a formal quarterly investment committee meeting, so that’s what we formally do. So we’re taking a look at every single investment within all the different portfolios that we manage.

But I might add, you say how often do we look at the portfolios? Well, because all of our clients have relatively the same portfolios, maybe they have a different mix, you know one’s maybe heavier on the equity side than the other.

But the portfolios we manage, we just say, how often we look at them. Well, we look at them every day because everybody has the same portfolios. That’s easy for us if we see something that’s not right within the portfolio.

If we need to make an adjustment then we can make an adjustment across the board for all of our clients at the same time. So I think we have a very efficient system of managing portfolios.

Jeff Lindsay: And if I can also just add quickly, we meet with our clients as often as they need to meet with us. It’s at least a couple of times a year, but that’s when we’re sitting down and looking at more planning opportunities and your particular situation about what’s going on.

The investments are being managed across the board in the background all the time. Yeah, kind of you like said.

Daniel Ruske: Awesome, yeah, I think the other questions I’ve typed out. So if you didn’t get your question answered, if there’s one you didn’t want to send in front of everybody, please email us and that’s all Scott.

Scott Peterson: Great, well let me just conclude that if you’re an existing client and you’d like to review your Perennial Income Model, please reach out to your advisors, or call the office.

And again, if you’re if you’d like to know more, please get the book and please maybe reach out to us. We’d love to maybe show this, show you how this could work in your behalf.

So anyway, thank you so much everybody for joining us today, and we look forward to talking to you all soon.

How The SECURE Act 2.0 Impacts Your Retirement

Welcome to the Webinar (0:00)

Alex Call: Thank you everybody for attending. We’re really looking forward to going over this with everybody. My name is Alex. I am a financial advisor here at Peterson Wealth. And Carson is also a financial advisor, and he will be helping us present.

So, before we jump in, we will be having a Q&A at the end. So, any questions that you have just feel free to put them in the chat or in the question part. And we do have Daniel and Josh manning those questions. So they’ll be able to help answer any of those, and any that they don’t get to, we will be answering in the webinar. And then also we will get back to you with an email or a phone call to make sure that all the questions are answered.

So with that being said, let’s just go ahead and jump right in.

What is The SECURE Act 2.0? (1:02)

So what I want to talk about first is really what is The SECURE Act 2.0. And so really it was part of the consolidated appropriation act of 2023, which was just a really big 1.7 trillion bill that was passed right at the end of the year. And this was a small part of that. And what it stands for, SECURE is for Setting Every Community Up for Retirement. And then the 2.0 part is because this is an extension of The SECURE Act that was passed in 2019.

And what’s the purpose of this act? I really think of it as there’s two purposes. One is encouragement. It’s to encourage people to contribute to their retirement plans. And along with that is access. It’s giving people greater access to retirement plans. And so it’s easier for them to make contributions and save for retirement.

~ Time to fix screen ~

So the purpose is encouragement and access. And so then the next thing is, what are we going to cover today? And so what I will tell you what we are not going to cover is that within this act there are hundreds of minor changes to retirement plans that have happened. Things that are not really going to affect anybody here and that will just be gradually implemented and changed to retirement plans over the upcoming years. We don’t want to talk about that.

What we want to cover are what we feel are really the five most impactful changes for current and soon-to-be retirees. And that’s going to be a combination of retirement catch-up contribution limits, QCDs, RMDs, Required Minimum Distributions. And we’ll go through all of these today.

Transferring a 529 Plan to a Roth IRA (3:37)

But the one that I want to go over first is one that has probably been receiving a little too much attention within the financial media that I have seen at least for what it actually is. And the reason why is because in theory, this sounds awesome.

And that has been able to transfer a 529 plan. And a 529 plan is an education savings account that you can contribute. It’s essentially a vehicle to help you save for college, for kids, grandkids, and so forth. And that you’re able to transfer that into a Roth IRA. It sounds awesome. But there’s a lot of rules and restrictions around it. And so, these rules are first, that the IRA receiving the funds, it must be in the name of the beneficiary of the 529 plan.

The next, the 529 plan, it must have been maintained for 15 years or longer. Meaning it has to have been opened for at least 15 years before you can make those transfers into a Roth IRA. Any contributions to the 529 plan within the last five years are ineligible to be moved to a Roth IRA. And then for the other ones, there’s a maximum lifetime limit of $35,000 that can be moved into an individual’s Roth IRA. There’s also an annual limit. And this annual limit is the contribution limit, that for a Roth IRA, just the normal contribution, limit less any regular contributions that have been made.

For example, today the Roth IRA contribution limit is $6,500. So, if I were to contribute if I were doing this for myself, and were to contribute $3,000 as regular contributions, then the most I could transfer from a 529 plan to a Roth IRA is $3,500. So the most combined is that $6,500 amount.

And then next, the Roth IRA earner, or owner, must have earned income the year of the transfer. Meaning if you’re retired, you’re not going to be able to transfer money from a 529 plan into your Roth IRA because you don’t have earned income because you’re not working anymore.

So those are the six rules. Now if we look at when can we use these, what’s a good time to use these and how does this actually be applicable?

So, the first one is what the intended purpose of it is. And that is for allowing money that was earmarked for educational purposes to be repurposed as retirement savings in the event those funds are not needed for education after all. So, you save money for your child’s education. They don’t use all of their money in their 529 plan whether it maybe they got scholarships, maybe they didn’t go to college, something like that. Now you can repurpose those funds into your Roth IRA, and that’s the intended purpose. But there’s another strategy that could be used for, what I think of it as Legacy Planning.

And essentially what this is, it is giving you the ability to help fund your grandkid’s retirement. And how this would work is the time a child is born, say a grandchild is born, you make a meaningful contribution to a 529 plan for their benefit. And then later, you know 15 years later, the child turns 15, 16 years old, and the account funds in the 529 plan could begin to be moved to a Roth IRA for the child’s benefit. Again, following all of those rules and the amount to the maximum IRA contribution each year and so forth.

And so with proper planning and continued annual transfers, until that $ 35,000 lifetime transfer limit is reached, this child’s, your grandkid’s Roth IRA when they turned 65, that could easily approach about roughly a million dollars. And so, it’s giving you the opportunity to really pre-fund your grandkid’s retirement. Those what I would say would be the two main purposes or strategies to be able to use this for.

So the next thing we want to talk about that Carson will dive into is Required Minimum Distributions.

Required Minimum Distribution Age Changes (8:48)

Carson Johnson: Thank you, Alex. So I’m excited to be here with everybody to talk about these important changes as it pertains to retirement. And specifically, Required Minimum Distributions is probably what many of you have already heard about that was going to change. And so there’s actually two main things about the RMDs that I wanted to talk about.

So first, the biggest change to Required Minimum Distributions is that the age at which you begin Required Minimum Distributions is being pushed back. So to make it a little easier for everybody, I created a table that summarizes those changes that were included in The SECURE Act 2.0.

So for those that were born in 1950 or earlier or those who have already started Required Minimum Distributions, because they reached the age 72, the old RMD age, their age will be age 72. Their Required Minimum Distributions will continue on. SECURE Act 2.0 did not impact those that were already taking Required Minimum Distributions. Those that are born between 1951 and 1959 will begin taking Required Minimum Distributions at age 73. And those born in 1960 or later will start Required Minimum Distributions at age 75.

Now, this is pretty simple, but I want to make a couple of important points here. First, like I mentioned, those who have already turned 72 in 2022 or earlier will continue to take their RMDs as planned. The SECURE Act does not impact those. Those turning 72 in this year will not be required to take their RMDs until 2024. So that they won’t have to take that until they’re age 73. And lastly, those starting in 2033, all Required Minimum Distributions will begin at age 75. So, some really important changes there. It’s a phased-in RMD change.

Now, how does this impact retirement? How does it impact those that are preparing for retirement? There is just a few points I want to make here on this. First, those that are planning on and living on all the Required Minimum Distribution or all of their IRA income, will have a very little impact with this. They’re living off of all the Required Minimum Distribution whether they take that, whether their RMD starts at 72 or 75, they’re going to be living on all of it. It’s going to have very little impact to them.

The RMD age change did not impact Qualified Charitable Distributions, the age at which you can begin that. It’s the tax strategy where you can pull money out of your IRA retirement accounts tax-free, as long as it goes to a qualified charity. That still can continue at age 70 and a half. So, the RMD changes did not impact that.

Ultimately, the biggest thing that this does is that it gives you more time for planning. Particularly, the one strategy in mind that this could be very beneficial is doing Roth conversions where you’re taking money out of your IRA, converting it into a Roth IRA so that it’s now tax-free, and can grow tax-free. And I can see this being beneficial because those that are actively doing these Roth conversions and instead of, you know, having to do conversions until age 72 or 73 may now have more years, a few more years to age 75 or 73, depending on your situation, to do these additional conversions. And that way you can take advantage of those lower tax brackets and better planning there.

Surviving Spouse – Required Minimum Distributions (12:36)

The next big change related to Required Minimum Distributions is it impacts surviving spouses. So before The SECURE Act 2.0, generally surviving spouses, so if a spouse has passed away, the surviving spouse would take their IRA account as their own. And once they start Required Minimum Distributions, it would be based on their age. With The SECURE Act 2.0, you still have that option where you can take your IRA and your deceased spouse’s IRA and roll it over into your own IRA and take RMDs based on your age.

But you also have the option, the surviving spouse, to take Required Minimum Distributions based on your deceased spouse’s age. And so you’re probably thinking, why is that important? It’s mainly important for those that apply where the deceased spouse here is much younger than you. Think about it this way. If your deceased spouse is 65 and you are at RMD age at 73 let’s say, you have the ability to rather than taking your RMD right away because you’ve reached your Required Minimum Distribution age. You may be able to delay that until your deceased spouse would have started Required Minimum Distributions and therefore give you more time again for Roth conversions, or any other tax, or financial planning strategies that you’re working on.

And so, this is a small change, but I think it does make a big impact when it comes to planning. So that’s the two major changes related to the Required Minimum Distributions. I’ll let Alex take over here and talk about how Qualified Charitable Distributions have slightly changed.

Qualified Charitable Distribution Changes (14:24)

Alex Call: So Qualified Charitable Distributions as many of you know, it’s one of our favorite tax planning strategies. As Carson highlighted, it’s the ability to put money, it’s a tax-free transfer, from your IRA to a qualified charity. The big thing here is that there’s really only one change that has happened, and it’s for the better. The annual amount that you can contribute as a QCD is now going to increase with inflation starting in 2024. So, before it capped out at $100,000 and now that will be inflation adjusted.

And so what this means is that we can still do QCDs at age 70 and a half. They still satisfy your Required Minimum Distribution. You’re still only able to do it out of an IRA. You’re not able to do QCDs out of a 401k. And probably most importantly is that it doesn’t look like this strategy is going anywhere. They’ve just improved it and made it better.

Catch-Up Contributions (15:38)

The next thing I want to talk about are catch-up contributions. So catch-up contributions are when you turn 50 years old, you are able to contribute more to your 401k, or IRA, or retirement plan. Allowing you to catch up your retirement contributions.

And so, there’s really three main changes that have happened here. The first one is that it is now with your IRA, it is that the catch-up amount for your IRA has been stuck at $1,000 for about the past 10 years. Well, now that $1,000 is going to be inflation adjusted.

The next is there’s going to be an extra catch-up contribution for people between the ages of 60 and 63. The amount on this, we’re not quite sure on. The language used in The Act, it’s a little confusing. And so, we are still waiting for Congress to share some additional information or some clarity on that. But just know that when you turn 60 to 63, you’ll be able to contribute an extra catch-up during that time.

The last one is what I call “rothification” of these catch-up contributions. And what that means is, if you are making over $145,000, then any catch-up contribution to your 401k has to go into a Roth 401k. You’re not able to make a contribution to a traditional 401k.

And so you may be thinking, well what happens if my plan does not offer a Roth if there is no Roth option within my plan? Well, unfortunately, you’re not able to make catch-up contributions if that’s the case. With that said though, a lot of these minor changes that we talked about earlier in The Act go towards making Roth plans more accessible and encouraging more people to set up Roth plans.

So what I would expect and really assume is many if not all 40lks, simple IRAs, and so forth moving forward, will have Roth options. It might take a year or two for the plans to implement, but I would assume that most if not all of them will begin to have Roth options as well.

And now I’m going to turn it over to Carson just so he can highlight a couple of things that were not covered in the plan or in The Act.

What was not covered in The SECURE Act 2.0 (18:36)

Carson Johnson: Thank you, Alex. So when it comes to legislation that’s passed like this. A lot of times many retirees and many, many people are concerned about current tax or financial planning strategies going away or being limited. And so we thought this would be helpful to include a few items that were not impacted, not changed by The SECURE Act 2.0.

The first of which was the elimination or restricting of Roth IRAs or Roth 401ks, that nothing has changed regarding those accounts. And including as part of that, the use of backdoor Roth conversions or mega backdoor Roth contributions, which is a more, a little more complex tax strategies have also not been impacted. So in that, it includes normal Roth conversions. There aren’t any provisions in The SECURE Act 2.0 that addressed those changes.

The age at which you can begin Qualified Charitable Distributions has not changed like Alex has mentioned. It continues to be age 70 and a half. And so, even if your RMD age is pushed back to 75, you’ll still be able to take advantage of this awesome tax strategy once you’ve reached that age.

And then lastly is the clarification on what’s called the 10-year rule that was originally created by the first SECURE Act. And it really only applies to those that inherited IRA accounts from non-spouses. Meaning if you inherited an account from an aunt or an uncle that was already taking Required Minimum Distributions, it was on the original understanding that you had 10 years to be able to pull that money out from that account. You had 10 years to pull all that account money out of that account.

But there might be some additional clarification where you might have to take some Required Minimum Distributions each year within that 10-year window or some other changes that they’re going to come out with. So that clarification has not come out yet. We’re expecting an answer, some additional insight on that later this year or even next year, the beginning of next year. And so we’ll be keeping an eye on that.

But those were some of the four main things that people were worried about that was going to change with this bill that actually was not covered and not changed.

So in summary, like Alex talked about, there is a lot of different things that the bill covered. There was about 4,000 different pages that was included in this bill, but we wanted to cover the most important things that pertains to retirement. We talked about how the 529 transfer rule works to Roth IRAs and how that can be used as a legacy planning tool. We talked about Required Minimum Distributions and how those ages have been pushed back as well as the additional changes for surviving spouses. We talked about the inflation adjustments to Qualified Charitable Distributions and how they will adjust each year for inflation as well as the retirement catch-up contributions. And ultimately what was covered and what was not covered in The SECURE Act 2.0.

So we want to leave you with a couple of questions here today. First, think about how will these changes affect my plan and how can I best plan going forward.

For clients of Peterson Wealth Advisors, reach out to your advisor if you have questions. Be rest assured your advisor will bring these changes up to you if it applies to your situation. But during your spring meeting, feel free to reach out or sooner to see how these changes might apply.

And those that aren’t clients of Peterson Wealth, but would like to know how these changes might impact your retirement and your situation, feel free to reach out to our office and schedule a free consultation. We’d be happy to meet with you and at least point you in the right direction.

So now we’ll leave the rest of the time for questions. We may not be able to get to everybody’s question today. But if we don’t, feel free to send an email to We will make sure that one of our Certified Financial Planners will reach out to you and answer your questions. But for now, we’ll leave the rest of the time for you and your questions that you may have.

Question and Answer (23:01)

Daniel Ruske: Oh, I didn’t mean to interrupt. Sorry, Alex. I have a question here that Greg wants to know the answer to, are you ready for it?

Alex Call: Yeah.

Daniel Ruske: So it says, is it only the extra catch-up amount that has to go into a Roth, or is it all catch-up contributions now?

Alex Call: It’s a great question and I appreciate that. To get that clarification, it is all catch-up contributions. So once you turn 50, if you’re doing the catch-up, that has to go into a Roth 401k.

Daniel Ruske: Awesome, and then we had some other questions that I know Carson answered by typing, but I’ll read them here for the class. It says, any moved funds from a 401k to an IRA so one can do a Qualified Charitable Distribution?

Carson Johnson: Yeah, so on that one, the answer is yes. So it’s important to remember with this Qualified Charitable Distribution strategy that you can only do that from an IRA retirement account. So QCDs are not eligible and 401k’s or 403b’s or other retirement plans are only eligible from an IRA, and it’s actually pretty easy. If you roll over money from your 401k, you can actually set up an IRA account at Fidelity, Schwab, Vanguard, or any of the major companies. And just roll it over so that money goes from your 401k to your IRA and to be able to do that strategy.

Daniel Ruske: Awesome. A couple more coming in that I think are good. How do you differentiate between a catch-up contribution and a regular contribution?

Alex Call: That’s a great question. We don’t really know how that’s actually going to be applied and that will likely be something that the 401k plan administrator, the one who manages the 401k, will have options and be able to help you differentiate between those two. Between what’s a catch-up and what’s the regular.

Carson Johnson: Generally though, if you haven’t reached your 401k contribution limit, your first contributions will be the 401k or will be the regular contributions. And then once you’ve reached that limit, then that’s when the catch-up contributions kick into place. But every plan is different. So it’s up to like Alex said, the plan administrator there.

Alex Call: Yeah, but Carson just again to reiterate that it will be having the first money in will always be the regular, and then it’s the last money. So let’s say the regulars $20,000 for the year and the catch-up is $4,000. Those numbers aren’t accurate. But for the first $20,000 it is the regular. And then the last $4,000 that you put in would be catch up.

Daniel Ruske: Very good. So Kevin has a question, here’s the question. And make sure to sort this out here. It says, when RMD start, first day of the month following the month turning the required age, or is it April the year following the year you turn the required age, say 73? I’ve heard different definitions of what the actual RMD is required to start.

Carson Johnson: Yeah, great question there. So with Required Minimum Distributions, how it works is generally your first one is due by December of that current calendar year. However, there’s an exception for your very first one. So The SECURE Act did not change this at all actually. So if you’re taking your very first Required Minimum Distribution, let’s say you’re turning 72 in this year, 2023. With the change to The SECURE Act 2.0, you don’t have to take it this year, you can take it in 2024. But because it’s your first RMD, you actually have the ability to wait to take your RMD until April of 2025.

And you can do that if you want. But then the danger with that is that if you wait till April 2025, you’ll have to take that RMD plus the RMD that’s due for 2025 by December of that same year. So essentially, you’re going to have two RMDs due in 2025, in that particular example.

Daniel Ruske: Very good, so I’ll do one last one if that’s okay. So Dave wants to know, it says, a QCD transfers funds to a charity but has no tax advantage in the year the funds transfer such as a donation to a Donor Advised Fund. Is that true?

Alex Call: So with that, to answer the question David, you’re not able to, you don’t get the charitable contribution deduction in that year. But what you are able to do is that the money that you take out of the IRA, instead of you paying taxes on it and then donating it to charity, it just goes directly to charity.

And so it’s a tax-free transfer. So a lot of what we have found is that for about the majority of our clients, that the QCD is more advantageous at 70 and a half than a Donor Advised Fund. But there are always exceptions with that. And for your case, or for anybody else’s, your advisor will be able to let you know if it makes sense to do a Donor Advised Fund instead of a QCD. But for the majority of people, we have found that the QCD is more beneficial.

And then I was going to do, just really quick, we had somebody ask us if we can notify you through email when we find out the details on the amount allowed on the extra catch-up contributions for those between 60 and 63? Absolutely, we’ll go ahead with that. We’ll put a note in that and we’ll send out more of a mass email to our email list for that.

And then Carson, we had one more. So do the Roth earning limits apply to the catch-up contributions now that catch-up needs to go into a Roth 401k?

Carson Johnson: Yeah, so on that, how I understand it, and Alex you can correct me here if I’m wrong, but when it comes to the actual amount that’s contributed that’s counted towards the limit is just your contribution that you make. The earnings that are on those contributions are going to apply to the catch-up contribution there.

Oh, on that one, so that’s a great question. So Alex asked, or talked about a lot of the catch-up contributions for 401k plans, retirement plans, and how if you exceed a certain dollar amount that those catch-up contributions have to go into a Roth 401k. That does not apply to catch-up contributions for IRA accounts.

So you can still earn more than the $145,000 limit and your catch-up contributions, your additional amount that you can make to IRAs, does not have to be Roth it can still be traditional IRA.

Alex Call: That’s good. Well, that’s all the questions that we have. Thank you very much everybody for attending. If you could there will be a really brief survey. If you could fill that out as soon as we end this that would be great. We’re always looking for input of how we can improve, and probably more importantly what it is that you want to learn about so that we can get you the information that you’re wanting to know about.

So, thank you again. And Carson thank you so much for helping.

Carson Johnson: Yeah, you’re welcome. Thanks guys.

How do Rising Rates Impact My Lump-Sum Pension

Welcome to the Webinar (0:00)

Mark Whitaker: Well, I think we’re here on the hour. So, we’ll just go ahead and get started. Today, we’re having this Lunch and Learn webinar at Peterson Wealth Advisors. And what I’m hoping today, everyone who’s attending can get a lot of good information. If you are close to retirement and you have a pension or maybe your spouse has a pension, and you’re trying to decide how can I make the best decisions in regards to my pension as I’m preparing for retirement? I’m hoping that from this webinar, you’ll get some good ideas and kind of some high-level thoughts about things that you should consider.

With today’s presentation, I’m thinking that it’ll take maybe 10, 15 minutes for us to get through some of the content that we’ve prepared. And then what I’m really hoping is that we can spend the remainder of, you know for another 15 or 20 minutes or so going over some of your questions.

So, as far as answering and asking questions, within Zoom you can use the Q&A feature. And as you put questions in there, what Carson and I will do is we’ll review those throughout the presentation and we’ll do our best to answer questions that we think are broadly applicable to those who are attending and that we think will have the most value for everybody overall.

If there’s a question that’s maybe a little too specific and we can’t give it a, you know, maybe the answer that it deserves, then what I would prefer to do is maybe you know put a pin in it and come back to that question, maybe follow up with you after the webinar to give you a really good answer to your question.

Also, today since we’re keeping the webinar a little bit shorter about 30 minutes, even if there’s a really good question, but maybe it kind of takes us off topic a little bit, we might have to maybe address that question another time.

So, a couple of housekeeping items that I like to go over. At the end of this webinar, you’ll receive an email with some helpful information. So, if you’d like to contact us to get more information about figuring out what’s the right decision to do with your pension, you can use the link there to schedule a consultation with one of our Certified Financial Planners™.

If you haven’t had a chance to read Scott Peterson’s book, ‘Plan on Living’, the revised edition that recently came out, there’s a link there as well that you can order one or forward to a friend.

In chapter 5 of that book, Scott goes into detail about how to maximize your pension. And so, if you haven’t had a chance to read that, or you know someone that would be helpful for, I encourage you to go ahead and go ahead and request a complimentary copy of that book.

As well, I’d like to let you know that in the upcoming weeks, we’ll have an additional webinar. So in the survey that will also be in that email, if you have any suggestions for us as the topics that you’d like to hear in the future, we love to hear your feedback.

As far as these webinars go, we really want to share information that’s most helpful. So, your feedback is very appreciated.

Jumping into today’s webinar, maybe a quick introduction, my name is Mark Whitaker, a Certified Financial Planner™, and we really specialize in helping retirees maximize their retirement from an income tax saving standpoint so that they can focus on what matters most in retirement.

Joining me today is one of our lead advisors Carson Johnson. He’s also a Certified Financial Planner™ and he’s been with us for a number of years. Before joining Peterson Wealth Advisors, Carson worked for the high-net-worth retirement group of Fidelity Investments. And in that role gained a lot of experience with dealing with retirement plans from companies, pension plans, 401k plans. So, he brings us some additional experience that’s relevant to today’s conversation.

So with that, a quick overview of what we will be addressing. Really quickly, we’re going to touch on just an overview of pension plans and then we’re going to jump right into how do inflation and rising interest rates impact the value of your pension or lump-sum pension option.

And then aside from that, you know, we want to talk about some of the benefits to choosing a lump-sum pension over just a level monthly payment. But then also, really just take a very honest look at you know, maybe are there situations where that doesn’t make sense? And you know, how would you evaluate what’s the best option for yourself?

And then like I said, from there we’ll open it up to questions and hopefully have a good conversation.

So with that, let’s go over pension options. So for today’s discussion as we talk about pensions, we’re going to be, I would say, most of what we’ve prepared today is most relevant to people who have a pension from a company.

So some of the information will be relevant if you have a government pension from your state, or from a school district, or from the federal government. But mostly I think this information will be most helpful if you have a pension from a company.

And to talk about pensions, I’m going to use the example here of our couple. And they’re going to, this is what we’re going to, we’ll use their, this kind of a backdrop to talk about, you know, how pensions work.

So for today’s webinar, we’ve got Sarah and Tom. And Sarah’s retired and she has the option, she can get a monthly payment of $2,000 a month for the rest of her life. It’s guaranteed, and with her pension, there’s no cost-of-living adjustments.

So she’s not getting, you know, like an annual adjustment for inflation like you might get while you’re working, or like you get with Social Security for example.

So what are some of the benefits and what are some of the things you should consider with a guaranteed monthly payment?

Well frankly, I think the number one benefit is that they’re guaranteed. Regardless of what’s happening in the economy or whatever’s happening in the market, you really don’t have to worry about that so much.

There are some little minor caveats there, but your income is guaranteed for the rest of your life no matter how long you live. And frankly, as far as longevity is concerned, I mean, I think that’s probably the biggest benefit.

Another, I’d say significant benefit of a guaranteed monthly pension is it protects. It can protect the retiree from making poor financial decisions from not having an investment plan and maybe squandering their retirement benefit through poor investment decisions. So, that’s another benefit of a guaranteed monthly pension.

Some of the downsides, if you have a pension that does not come with a cost-of-living adjustment, inflation has a significant impact on your pension and you really don’t have a way of keeping up with inflation.

If you’re interested in leaving money to your heirs, leaving money to your children, a monthly pension ends when you pass away. There’s other payment options that can extend for a period of time or for a spouse that often you can choose payment options with a survivor benefit, but you’re not really able to leave a legacy.

So if that’s something that’s important to you, whether it’s to help your children or grandchildren or to give to your church or to other charities, you really don’t have that option. I would say as well, if you choose a monthly pension, another downside here, not only are you unable to leave a legacy, but if you don’t live that long in retirement you may have worked for decades to earn a pension benefit.

And if you were to pass away, maybe five years into retirement, then you know that benefits gone, right? So that’s another potential downside to monthly payments.

And lastly, the loss of tax planning opportunities. It’s another significant thing to consider if you’re looking to choose a monthly payment.

So we’re going to jump right into what are the impacts of inflation on your monthly pension. And Carson, I’m going to go ahead and turn it over to you.

How Does Inflation Impact My Pension? (8:02)

Carson Johnson: Great, thanks Mark. So as we know when you enter retirement, there’s two main risks that retirees face, which one is related to investments which has to deal with more volatility or ups and downs in the market, but the other huge risk is inflation, which also applies to pensions.

As you can see from this chart, you can see if we have, for example, a pension that you start off with $1,520. And if you had the historical average inflation rate of 3% over a 25-year period of time, it decreases the purchasing power or the value of your pension to about $962, which is about a 34% haircut off of the original $1,520 the original pension that you started with.

So inflation is absolutely an important thing to consider when choosing a pension or even a lump-sum option, which we’ll talk about later today.

How do Rising Interest Rates Impact Lump-Sum Pensions? (9:06)

Mark Whitaker: Yeah absolutely, thank you Carson. And I think that’s pretty straightforward, it’s very intuitive. If I have a guaranteed monthly pension and every single year, you know even month to month like we’re experiencing right now, it costs more to buy something than every single year. That pension that I’m getting can buy less and less of the stuff that I want to get.

I had a bit of a surprise. My wife does most of the grocery shopping in our household and I went down to the grocery store to pick up some eggs. And on the way home we wanted to make some chocolate chip cookies and my wife said, “oh, but can you stop by and get some eggs?” Went to the grocery store and had some serious sticker shock remembering being able to get five dozen eggs before what that cost, maybe four or five six dollars and now looking and seeing it above $10 for eggs.

And so, you know with my young family we go through a lot of eggs. So with inflation, you can see that can have a significant impact on your quality of life if you don’t have a plan for that.

Now, let’s talk about rising interest rates. So with lump-sum pensions, or I should say with pension plans, you often have, I’m going to say kind of categorically two main kind of payment options.

One is to receive some guaranteed monthly income, and the second is you can trade in that guaranteed paycheck for the rest of your life, for a bucket of money, a lump-sum. Okay, so what’s interesting with pensions is that they guarantee the monthly income amount, but that lump-sum amount is actually variable, it can change and interest rates play a part in that.

So, the way that this is calculated is the company that you worked for will look at interest rates that are available in the market. And actually, the IRS determines what these rates are. They loosely approximate to the yield on a corporate bond.

And so, what happens is as interest rates go up, then the value of your lump-sum pension actually goes down. So for example, let’s say with Tom and Sarah, they have their guaranteed monthly income of $2,000 and they have the choice between retiring, let’s call it the end of 2022.

What we did is we went and looked at the IRS tables for the interest rates that are used to calculate lump-sum pensions. And based off of this number and some other factors, the lump-sum that they’d be entitled to would be about $424,000.

Now let’s say they waited to retire in 2023 and claimed the lump-sum pension at that time. Well because of the change in interest rates that have happened over the last year, the value of their lump-sum pension would have dropped by about $1,000,000, $99,000 and change actually. The reason for this, is that a retiree retiring in 2022, the interest rate that’s used to calculate that lump-sum pension is an interest rate from the previous year.

Usually, it’s an interest rate from 12 months ago or an average interest rate over the last 24 months. And because interest rates were so low in 2021 and 2020, that interest rate that’s used to calculate the lump-sum pension for a retiree today is a lower rate, meaning a larger lump-sum value.

Now, let’s say we fast forward to next year. If you were to retire next year, then those interest rates that are used are going to be based on interest rates that are happening right now. And as we’re all aware interest rates are much higher now than they were last year which would result in a smaller or lower value for your lump-sum pension.

This is essentially how an interest rate impacts your lump-sum pension value.

So, aside from inflation, or I should say aside from interest rate consideration, we want to just kind of briefly cover some of the advantages of lump-sum pensions in general.

Carson Johnson: Yeah, thank you Mark. So lump-sum pension, the decision to make or choose that lump-sum option is very important. There’s a lot of factors to think about when making that decision.

The first advantage of doing a lump-sum option is giving you the flexibility control over that money.

Like Mark said, I think he explained that perfectly, you know, if especially if in your situation you’re aware of that, of a health concern and where you might expect to pass away sooner than what an average of life expectancy. Then it allows you to roll that money over and you have those assets and it gives you the control and flexibility with those assets, what you want to do with them.

The second is the ability to keep up with inflation. Now, there are some pensions that do have a cost-of-living adjustment, and that does help with the inflation, that inflation concern. However, there are a lot of corporate pensions that don’t have those costs of living adjustments.

It doesn’t keep up with inflation and so by doing the lump-sum option you’re able to roll that money over and invest it in inflation, beating investments which we can talk about in more detail. Typically stocks have been the best investment that has been able to do that. And so it allows you to be able to control how inflation impacts you in retirement.

The third thing is saving in taxes. Now, this is a, there’s actually quite a few different ways this can impact you. But just some similar, some examples that you may want to think about.

Taxes, once you’ve chosen, let’s say you decide to go with the guaranteed monthly payment option, pension option. One of the things to keep in mind is once you select that option, there’s really for the most part no going back. You can’t change your pension in the future. Once you’ve selected it, that’s the option you’ve chosen.

And so you receive that monthly income, but what we’ve seen a lot of times in retirement is especially, and down the road where retirees may not be spending as much depending on the situation.

Now, there are health care costs that do tend to go up later on in retirement. But by choosing that lot, the monthly payment option, that is automatic income that shows up on your taxes whether you need that income or not.

And so if your situation changes where you want to maybe not take as much income, that’s not an option when you’re taking it as a monthly income stream.

Other tax strategies to consider, maybe doing Roth conversions where if you have the ability to take some of your IRA money, convert it which is just taxable to you, that might be limited too because you’re choosing a monthly income stream from your pension. Because you have that income, it’s going to be coming no matter what it might limit you to being able to do Roth conversions.

And then one last strategy to think about also is that once you turn age 70 and ½, there’s a strategy that you can do called Qualified Charitable Distributions, which allows you to pull money from an IRA and donate it to a qualified charity tax-free when it normally would have been a taxable event.

And so, you know by taking that monthly income from your pension that shows up on your taxes, that might limit the ability or the value ad that you get from doing those charitable donations as well, because you have this extra income that’s showing up on your taxes.

Any other thoughts there on taxes Mark, that you wanted to mention?

Mark Whitaker: No, I think you hit on the big ones and maybe I’ll just add one extra detail with, you mentioned making charitable contributions with your distributions from a, take a lump-sum pension, you can take money out of your retirement account without recognizing it as income.

There’s an additional tax benefit there where by doing a Qualified Charitable Distribution, it can also reduce the taxes that you pay on your Social Security benefit.

It can also impact your Medicare Part B premiums because it’s reducing the income number that’s used to calculate those other taxes you pay on those other benefits.

And so there’s this very high-level discussion about tax savings. But you’ll just have to take our word for it that the tax savings are significant with some of these strategies. So, you know, that’s all I would add to what you said Carson.

Carson Johnson: Perfect, and then the last thing which we’ve already hit on this is leaving a legacy. You know, there is some power to being able to have that control. Again kind of related to the first point, that control, that ability to control what your ultimate legacy that you leave behind for future heirs that follow you.

Should I Choose a Lump-Sum Pension? (18:37)

Mark Whitaker: Very good, well Carson, maybe we can jump now to just kind of generally, how do you know, maybe you can think of some of the reasons or some of the questions that a retiree might ask themselves whether or not they, let’s say if they have both options. They have a pension-guaranteed monthly income and they have a lump-sum option as well. What are some things that they can consider?

I’ve got some things that I want to talk about as far as having a clear retirement plan, but is there anything else that maybe you’d like to address?

Carson Johnson: Yeah, just I think there’s quite a few factors, but I think health status. Where are you with your current health or is there a history of family health concerns that runs in your family because that can be a determining factor whether you take the lump-sum option or not.

I think taxes, where are you going to fit in a tax bracket? Do you feel like you’ll need all the income from the pension to be able to manage your tax situation?

And then obviously, the current interest rate environment.

Mark Whitaker: Yeah, absolutely, thank you Carson. So, going off of what Carson talked about a minute ago with generally the potential benefits that you can have as a retiree by choosing a lump-sum pension.

There’s what’s implied in that, is that you have a plan. Okay, so we’re talking about potentially saving, you know, using tax planning strategies. We’re talking about leaving a legacy. The potential to earn a rate of return and in order to have an inflation-adjusted income, an income that increases over time.

The benefit potentially of having control and flexibility to decide when and how much income you take as your circumstances change over the course of your retirement.

What’s implied in that is that you actually have a plan, right?

And so, I guess I could just say if you don’t have a plan then taking a lump-sum is probably not a good idea, right? One of the benefits of a guaranteed monthly pension is it can protect you from making a poor decision like we talked about earlier.

So, without a plan, those potential benefits really go away.

So what I’ll go over here briefly is the framework that we use for retirees to help them really capture those benefits that we’ve discussed as they relate to a lump-sum pension.

And if this is a new concept or this is something that doesn’t look familiar to you, again I’ll reference you to our website. We’ve got some videos, other helpful information and you can of course schedule a consultation with a financial planner or request a copy of Scott Peterson’s book where he goes over this, our methodology in detail.

On the screen here what we have, this is what we call the Perennial Income Model. And really what this shows is how we manage investments to make sure that you have an income stream that adjusts for inflation over time that provides predictable and stable income that gives you the ability to have a legacy for your family or for your church or for other charities.

And also provides a framework so that we can do proper tax planning. You can map out your income over time and start looking at strategies that might make sense for your situation.

So, for this income plan here, what we’re showing is we have a retired couple let’s say they have a retirement portfolio of $1,000,000 and we’ll say that part of that is made up from, they were able to take the lump-sum pension.

So really what the objective here is to invest this to provide inflation-adjusted income over time. So the way that we do that is we look at various investment portfolios, each one of them designated for five years of a retiree’s lifetime. Each one of these portfolios is invested differently with a different planned rate of return. Income that’s going to be used or taken out early in retirement we use very conservative rates of return.

You can see here that 1% certainly isn’t keeping up with inflation, but that’s what we have to do to protect income that’s coming out in the next couple of months when someone’s about to retire.

But money that won’t be used for decades, we can take advantage of investing in equities, investing in the market, investing in real estate, and get that growth that’s needed in order to provide inflation-adjusted income and have the ability or the potential to leave a legacy for your family.

So, you can see that each month we’re sending out income and every fifth year you can see there’s an increase here in the amount of monthly income.

Now, you’d think that by sending in all this monthly income that the portfolio would be dropping significantly over time. But you can see that because the latter segments are invested in more growth-oriented investments. The portfolio has the potential and the ability to maintain its value over time and it’s really the objective.

So you can see that investing the initial portfolio of $1,000,000, the objective here is at the end of that 30 year, 25 year, that’s what this plan is, to still have $1,000,000.

But then also to have taken out about $1,500,000 in income over time. So maybe just to summarize this, in order to capture the benefits of a lump-sum pension, you really have to have a plan. You have to have a structure and a methodology that’s not just based on using your gut to decide how to invest. It really has to have a structure.

So just maybe, just to sum up, we’ve talked about pensions. We’ve talked about the impact of inflation and interest rates and some of the potential advantages of taking a lump-sum. But really, the key to capturing those benefits is to have a plan. Because without a plan, it frankly would be better to just take that guaranteed monthly income to avoid really making a poor financial decision with your with your lump-sum.

So that’s our presentation in a nutshell. We’ll open it up here for the next five or 10 minutes. We’ll go over some questions and we’ve had a few that have come in. But if you have a question about anything we’ve discussed today, feel free to use the question-and-answer feature and we’ll go from there.

Question and Answer (25:20)

Carson Johnson: Yeah, and maybe to get us started Mark while it looks like some are typing their questions out, I had a really great question from somebody, that if Mark, if you want to give your thoughts on this especially.

There’s some pension options that do partial lump-sums rather than a full lump-sum especially here in Utah. I know that Utah Retirement Systems is a common one that has the partial lump-sum option. So how does the interest rate environment affect the partial lump-sum option? And maybe you can, if you have any thoughts there Mark.

Mark Whitaker: I do, yeah great question. So, specifically where I’ve seen this, it’s actually a feature of some corporate plans as well. Well, you’re right, I see it a lot here in the state of Utah with the Utah Retirement Systems pension plan.

And with that plan, you can take a 12-month partial lump-sum or a 24-month partial lump-sum. And in short, the way that I’d say is that rising interest rates, my thought would be that yes, it would impact that lump-sum amount. It wouldn’t impact the payment amount.

But for example, if you were to estimate your retirement based on interest rates over the last year, then you could have your monthly income and a partial lump-sum that would be larger. And then the same given, all else being equal, that same retirement the next year that monthly income number would be the same. But that partial lump-sum would be lower because prevailing interest rates would have gone up by then. So those are my thoughts there.

Carson Johnson: Perfect, another question that came in was if I pass away does my pension pass on to my heirs? And if I may Mark, I’ll take that one.

So pensions have a variety of different payment options that you can choose from. The standard, typically what they call is the standard benefit, is a benefit that will last through your, you as the pension, the participant that is receiving the pension, will receive through the course of their lifetime.

But there are also other payment options that are available. So survivor payment options, which you can, sometimes they give you the option to have 100% of your benefit to continue on to your spouse or to another person.

And what it essentially does to your payment, or your benefit pension, is that it reduces your initial starting value of your pension because the pension plan knows that eventually, 100% of that will go to a spouse or an heir.

There’s also other payment options where 50% will pass on to your spouse or heir, 75%. So reviewing your different payment options is absolutely important when to start choosing your pension.

Mark Whitaker: Absolutely, yeah, I think that’s maybe the number one consideration is thinking about your family circumstances.

I have a good question that came in here from one of our attendees about, I think going over to the, I’m going to go back on the slide and we’re going to look at this income plan chart.

So, the question generally is, okay, so at the end of this retirement plan, it’s assumed you would have money invested aggressively. So what happens with a retirement income plan and when you go through a year like we’re experiencing right now in 2022 with the stock market being down, plus or minus 20% over the first half of the year, how would that affect somebody’s lump-sum pension?

And maybe I’ll just jump in and then Carson if you have any thoughts to add here, but you know, it’s almost cliche the saying but there’s no free lunch in investing right?

There’s nothing, you can’t just, if anybody promises you can make higher returns without any risk, then you should probably run away because that’s just how it works.

So, how does that work according to this plan? So, retirees kind of have these two competing needs, investment needs and retirement stability of cash flow for monthly income.

But also, the need to grow your portfolio over time so you can have ever greater monthly income to account for inflation. So, the way that we do this with investing is money that is set aside for the early years of retirement is invested very conservatively, right?

So, for example in the year like this, we have the stock market dropping down 20%. Well, you know, so what’s happening is, clients that have money invested in these latter segments.

It’s getting hit, it’s down 20%, 30% or you know, let’s take the financial crisis, you know down 30%, 40%. These portfolios are invested in the market and they’re down.

But that is the price that has to be paid in order to have those high returns over time that have the chance of overcoming inflation.

It doesn’t impact monthly cash flow because the money that’s invested that’s paying out today is invested conservatively. So, it’s a great question and really, I guess that’s the point of having a plan is you have to be invested in order to overcome inflation, but you have to have a plan to make sure that by so doing you don’t disrupt your current cash flow and retirement. Good question.

Carson Johnson: Perfect.

Mark Whitaker: This is a good follow-up question with this is a great question. So by year 21, now all of your money is invested aggressively. I’ll just put a pin in this, in the book we talk about in detail our process of managing this through time, and in Plan on Living, we discuss the principle of harvesting. So adjusting that risk over time through once you’ve hit your goals for a particular segment.

And in this explanation, this answer doesn’t do the question justice, but I’d encourage you to go to our website. There’s some videos, or request a copy of Plan on Living and that’ll give you a very detailed answer. Great questions.

Carson Johnson: Perfect, another great question Mark here, is the lump-sum amount essentially the net present value of monthly payments based on some actuarial estimate of life expectancy?

Mark Whitaker: I love it, the short answer is yes. And that’s why, so NPV, Net Present Value, you’re saying okay, what is the lump-sum that I would need today to provide a cash flow over time based on some variables. You know a certain duration of time that would be an important variable. The interest rates an important variable.

And so what companies do is, the IRS publishes these monthly interest rates. And so what your company does then is they look at those stated interest rates published by the IRS and then they calculate the life expectancy of the plan participant and so depending then on your gender, man or woman, that has an impact, how old you are when you retire, that has an impact.

And that overlaid with your monthly benefit guaranteed amount and the interest rate that’s available based on the IRS publications, that will determine that Net Present Value or that lump-sum amount. Yep, great question, a little more technical, but those are fun too.

Carson Johnson: Perfect, and then this one’s a little more related to Roth contributions, but the question is, I haven’t retired yet, but my tax person says I should put about $7,000 a year into a Roth IRA. Do you know why they might be saying that?

And if it’s okay Mark, I’ll hop on there and then you can jump in. So one of the biggest things with Roth IRAs is by contributing now and allowing that money to grow over time is tax-free.

And so time is your best friend. And so one of the things I could see your tax person saying is let’s get money into that now so that it grows tax-free over the course of your retirement.

Now, I think there’s other factors to consider there. One may be are you maxing out your current retirement plan contributions, whether to a 401k where you’re getting a match.

Some other consideration may be where are you at in the tax bracket because there might be some benefits and in doing pre-tax dollar contributions, depending on where you fall in the tax bracket rather than contributing to a Roth IRA.

And so there’s a few different factors to consider. We’d happy to go over your options with you, but that’s one big reason why Roth IRAs are advantageous.

Mark Whitaker: Yeah, great answer there. Maybe just touching on some other tax strategies as they relate to Roth accounts. Roth accounts are, they’re very powerful and a great thing to have when you’re in retirement.

One of the benefits, or I should say your tax person saying, should I or should I not make contributions to a Roth IRA, really to do that question justice, if you want the mathematical correct answer, really what has to be done is to look at your income today to calculate your taxes and then to map out your retirement income and compare where your tax brackets will be here, you know at the current state, and in the future.

And then that’s how you can get maybe a more precise answer as to whether or not you should make a Roth contribution or make pre-tax contributions.

And there’s a little more nuance to that because in retirement. You have things like Social Security income that’s taxed a little bit differently. You also have, and it’s not just black and white, if you have other portfolio sources, then that can determine what your actual taxable income is.

And so really to do a good job knowing whether or not you make a Roth contribution or not, you really have to lay that out and have that retirement plan. I guess I’ll say one of the things regarding Roth accounts as they relate to lump-sum pensions.

With a lump-sum pension, you have the ability to do what Carson mentioned earlier, which is doing a Roth conversion. And so let’s say that while you’re working, you’re in a very high tax bracket. Well in that case it would make sense to make contributions to your retirement plan on a pre-tax basis and get that tax deduction.

And then let’s say you shift into retirement and you can live off of other savings for a time.

We have a lot of clients that serve, that do missionary service in their retirement, and maybe don’t need as much income during that time. And those can be times when you can strategically do Roth conversion, meaning taking money out of pre-tax accounts and moving them into Roth accounts.

And because you need less income, you can do that at a lower tax rate. So there’s a lot of planning that can happen here and good stuff.

We’ve got maybe, let’s do one more question and we’ll call it quits for today and go from there.

Carson Johnson: Perfect, last question here, I think it’s really great too.

If I take a lump-sum option, what happens at that point? Does it go into a tax-deferred plan, the Roth IRA? How does that all work?

Mark Whitaker: Yeah, maybe I’ll just answer this briefly. When you take a lump-sum pension option, the standard answer is that the lump-sum amount will go from your defined benefit pension plan over into a traditional IRA account.

The reason for that is that it’s going from kind of a tax-sheltered pre-tax environment into another pre-tax-sheltered environment. So with that lump-sum transfer or that lump-sum rollover, there’s no taxes due at that time.

Now, if you wanted, you know from there you can convert to Roth and that sort of thing. But that’s not the default answer.

So, Carson, I think we’ll leave it there. We’re coming up on about 12, almost on 12:40. There will be a recording available for this webinar and that’ll come out in an email after today.

Like I said, there will be links to request a copy of Plan on Living or to schedule a time with us if you have questions and would like to continue the conversation.

We appreciate your feedback. It’s been a lot of fun to have this webinar with you all today. Let us know if there’s anything else that would be helpful you’d like to have us discuss in the future and have a great day.

How to Create a Retirement Budget

Welcome to the Webinar

Alex Call: Hey everybody, we’ll go ahead and get started, it’s about 12 o’clock.

And so as we get started today, I just want to let everybody know that Daniel, he is another advisor here at the firm. He’s going to be taking any questions that you have.

So while I’m presenting, go ahead and chat any questions that you have to him and he’ll get back to you and he’ll respond.

So before we get started with the ‘How to Create a Retirement Budget’ I just want to introduce myself, I’m Alex Call. I’m one of the Senior Advisors here at the firm and we’re just starting, this is going to be the first kind of virtual lunch and learn that we’re doing.

And these are different from the previous webinars that we’ve done in the past where these are just going to be shorter quicker topics that we have that don’t really justify a full hour-plus type of webinar.

And so I hope you like it and as always we love any feedback that you have. And at the end, you’ll actually be asked to take a survey to provide any of that feedback and for how it went and also for any future topics that you’d like to discuss as well.

So with that being said, let’s go ahead and jump right in.

So really the goal of the webinar, or the goal of the lunch and learn today is really going to be two different goals.

For those who currently have a budget and are very good at kind of itemizing, this is exactly what we spend, this is how it is, this is going to hopefully give you some insight into how and what expenses will change as you transition into retirement. Because it will be different during your working years and during retirement how that budget looks like.

And then the second goal is going to be for those who don’t really have a budget or aren’t good at making and creating budgets for themselves. This is to give you a framework of how to estimate what those expenses might be when it comes time to retire.

And so what we want to talk about first is the insight, it’s going to be broken into four categories: Healthcare, housing, hobbies, and taxes that we’ll talk briefly on.

And then as far as the framework goes, there’s two different types of methods when it comes to building a budget that we’ll talk about.

One is the top-down and one is the bottom-up. And it just depends, do you want to start with your budget to determine how much income you need or do you start with your income to determine what your budget is going to be?


So with that said, the first thing is Healthcare. And this is probably, this could be a topic in and of itself that could require multiple webinars when we talk about Medicare and what to do with health insurance if you retire before 65 before you’re eligible for Medicare.

So I just want to give, I’ll give you an idea of what you can expect when it comes to this. And so when it comes to pre-Medicare or if you retire pre-65, your Healthcare expenses will fall into, you know, most people what we see get on the Marketplace.

And for a lot of people, you get some type of subsidy once you retire and you’re on the Marketplace. And so let me just kind of take a step back and explain how that works.

When you apply for health insurance no longer through your employer, you go through the open Marketplace. And these are going to be plans that if you have no government subsidy, you’re going to be spending probably close to $1,000 for a very high deductible, pretty poor health insurance plan. And that’s $1,000 a month for the premium. And so that would be if there’s no subsidy.

What we found is that most people, not most, but many people get some type of subsidy when it comes to this. And right now as your income approaches about $100,000 to $150,000 you start to phase out of any type of government subsidy.

But if you’re income is right around that $100,000 and you might be getting, your insurance might be close to, you might not be paying anything for a monthly premium.

And so this is something that we’ll want to estimate what your income is going to be, just kind of get an idea to see what type of subsidy you would get before turning 65, before being on Medicare.

And then once you’re on Medicare, how this works is, I typically estimate about $200-$400 per person is what their Medicare health insurance is going to be per month. And more of what that premium will be.

And why the disparity, that $200 is going to start off on the low end, that’s going to be what you pay for Medicare Part B. Just to kind of get into Medicare you have to pay that, just about $200.

And then that $400 if you go on the more expensive end, that’s going to be if you want a supplement plan. And the supplement plan is just going to be kind of a, it just supplements your Medicare to make some of those copays and deductibles less expensive.

And so that’s where the low end $200, the high end $400, so I always think of if you’re a couple, estimate somewhere between $500 to $800 dollars a month in Healthcare expenses when you retire.


And so the next one I want to talk about is housing. So the first question is that a lot of people, not everybody, but many people when they retire they have their mortgage paid off.

And so that’s the first question you ask yourself is, will you have a mortgage? Because if you don’t, if it’s paid off, then obviously that’s going to impact your budget quite a bit.

And then also the next question is do you plan to downsize in retirement?

Let’s say you do have a mortgage, but you plan to sell your home that you raised your kids in and downsize into something that maybe is a little more manageable as far as yard work and there’s less taking care of it, there’s not as much to take care of.

And so these are just a couple of questions that you need to be asking yourself as you approach retirement. Where do you fall in here? Or will you continue to have a mortgage and it’s just going to continue to pay that? And if that’s the case, your housing expenses won’t change much.

And then just remember that even if you don’t have a mortgage, you will still be on the hook to pay insurance and property tax.


So after housing, next are hobbies, and this is what a lot of people are hoping to do when it comes to retirement is to have more hobbies. And the biggest one would be traveling and seeing the world but also traveling to see grandkids or to see family.

And so that is what we have found is that it’s usually a pretty good tick up in people’s expenses around travel when it comes time to retire.

Also, not just traveling but also other hobbies such as whether it’s golf or whether it’s different activities, now that you have more time, you may be putting more money into these types of hobbies.

And so, you don’t want to just kind of take a step back and just kind of think through how much it is that you’ll be spending on your hobbies when it comes time to retire.


Then the last one is going to be from a tax perspective. And this isn’t exact, this is kind of giving you a pretty good idea of kind of these ballpark figures of what you could expect your effective tax rate to be when you retire.

So just to take it to walk you through this chart, this is based on someone taking $40,000 a year from Social Security and then the rest of their annual income coming from whether it be pensions or IRA distributions.

So you can see here, and this is, I know some people are out of state, are not in Utah, but this is based on Utah state taxes. If you’re in a place like Nevada, Wyoming, you can just completely take out the state tax because you don’t have it.

But if you’re in a place like California, then this state tax would likely be a little bit more than what we’re showing here.

But just to give you an idea, if you make about $180,000 a year about $15,000 a month, you can see your state tax just under 5% in Utah, Federal 13%. So your total tax would be just under 18%, is what you’d be on the hook for taxes.

I know we can work with that to try to lower it, but this just gives you a pretty conservative idea of what that would be. And then just broken down, if you expect your income to be more about $120,000, then that total tax would be about 13%. Then comes $80,000, you’re effective tax rate would be about 8%.

And so your taxes are going to be less in retirement than they were during your working years most likely because you’re no longer paying into Social Security, you’re not paying into Medicare as well.

So those are just a couple insights and things to be thinking about when you’re thinking of okay, how am I going to be building out this? What expenses might be different or might change when it comes to retirement?

The next thing I want to talk about is more building out this budget, what’s that framework for this budget in retirement?

Rule of Thumb

Well during your working years, you may have seen this just kind of a rule of thumb, about a 50/30/20. And what that means is that this is your after-tax income that’s in your checking account. About 50% of that goes towards your fixed expenses, 30% towards your flex expenses, which we’ll talk about in just a second, and then 20% towards savings whether it be saving for your retirement or putting some money aside for an emergency fund.

And then when it comes to when you’re actually in retirement, we’ve seen it change like this, and this is assuming that you no longer have a mortgage, that your home is paid off.

And that’s where about 30% would go towards that fixed, 40% towards the flex, and then 30% towards the savings. And the savings again is a little bit different in retirement because you’re no longer saving for retirement with this money, but this is going to be saving for things like travel or other types of savings that you would like to do.

This is how we’ve seen it, just kind of a rule of thumb of what it breaks down to.

And so when it comes to what these effects fixed, flex, and savings looks like, the fixed, I think of the fix is this is the money that it’s the same amount every month to the same vendor.

And so I think of these expenses are tithes and charitable giving, utilities, health insurance, property tax, debt payments, things like that. This also could be considered any subscriptions that you have because it’s that set amount such as a Netflix or something along those lines.

And then the flex spending is going to be more your day-to-day lifestyle expenses. So there’s some of these that are non-discretionary, you have to buy groceries, you have to buy clothes and put gas in the car, but it’s variable. It changes from week to week and month to month.

And so the flex would come here. And sometimes what I like to do is break down you have the monthly number of okay, the flex spending it might be $3,000 a month that you have for this.

Well if you break that down into a monthly, into a weekly amount, that gives you about $700 a week to spend on this flex spending amount.

And then you have more of this savings. And the savings I think of it, it’s more of these we call them non-monthly expenses. And these are the expenses that we know pop up throughout the year, but not on a monthly basis.

And so this would be insurance premiums, home and car maintenance. These are necessary but they don’t happen monthly or exact. And then also ones that are a bit more fun, think of these big these big trips for travel like Christmas. You want to spend a lot of money on Christmas for kids, grandkids, and so forth.

And what we do here is we look at what’s the annual amount that you would be spending on these types of expenses and then dividing it by 12 to get the monthly amount that you would be spending.

And then recommend just putting that monthly savings into a separate checking account or savings account. And I know a lot of times now you have these sub-accounts as well that you can have in your savings to help you save for these specific types of expenses.

And that way as these expenses do come up, you can dip into these smaller savings accounts that you have.

So that’s a little overview of the fixed flex and savings and how we look at that.

Two Methods: Top-Down & Bottom-Up

And then the next is if we look at the two different types, we have the top-down and the bottom-up. And so the top-down is where we determine what income you have and then based on your income, is you build the budget around that.

And then you also have the bottom-up which is the inverse, meaning we start with your budget and then we determine what type of income you need to support that budget, to support that lifestyle.

And today I don’t want to get too much into determining the income. That’s not what we’re going to talk about today. If you would like to know more of what an estimated income would be in retirement, we’re more than happy to build out a Perennial Income Model scenario for you, or a retirement income estimate for you. We’d be happy to do that, just let Daniel know or send us an email after.

So let’s look at a couple different examples of this. So when it comes to the bottom-up you say okay, Rob and Cindy, they’re approaching retirement and they have built out an income. They know that their income will be about $10,000 a month. That’s what they can rely on.

And so of this, we know okay, well 13%, just about 13½% of that is going to go towards taxes. And so they have $8,670 a month to put towards their budget or to estimate what their expenses are going to be.

And that’s where they looked at their fixed expenses, their home is paid off. And so this is going to be their health insurance, utilities, property tax that they’re putting into an escrow account, and these are going to be their fixed expenses of $2,600 a month.

And then they have their flex spending. They want to have about $800 a week or just under $3,500 a month for all their day-to-day lifestyle expenses. And this may include some of these smaller trips to go visit the grandkids and things like that to spend money on the grandkids or go out to eat, and all the more the day-to-day living.

And then when it comes to savings, they put about $2,600 a year, or $2,600 a month towards savings. The necessary savings that they know these expenses that are going to pop up, they have about $6,000 a year which would translate into $500 a month.

And then for fun, they really want to go on a big trip every year so they estimate about $1,600 a month that they put into these savings for their big annual trip, about $19,000 a year that they can set aside for that.

So that’s the bottom-up example where you start with your income, you know what the income is, and then you build a budget based off of that. And then the next example is going to be the top-down. And this is where John and Amy, they want to say, thus is the lifestyle that we want. So we want to build the budget on the lifestyle that we want and then we’ll determine what type of income we need based off of that.

And so that’s where after taxes they need $10,000 a month and then you can see the based on their fixed flex and that savings amount. And this is the lifestyle that they hope to have in retirement.

And so if we add estimated taxes to that, $10,000 and this is again, it’s just an estimate, we don’t know for sure. It’s about 15% which is pretty conservative. That’ll give them, what they will need is about $11,800 a month. That’s the income that they will need to support their lifestyle when they retire.

And so that’s when we’re looking to build this out, I always want to say if you’re doing it this way where you just want to look at the lifestyle you want, I would say this flex spending number, take what you think that you want and then I would say add 10-20% as a buffer for that.

And that way you can help get a more realistic idea of what the income will be that you’ll need when it comes to retirement.

And then when we’re thinking about okay, well, how do we produce this income? Then this is where to determine to get to that type of income that you need. It’s going to be that balance where some people might look at it and we can build out that income scenario and be like oh, we can support $12,000 a month based off of our Social Security, any other income that’s coming in, and also our investments. We can support that, so we’re good.

Other people might look at this and be like well, you know, we want to retire right now and we can only have, this is the lifestyle we want in retirement, but the income that we can produce is only $9,000 a month.

So then you need to ask the question okay, what things are you willing to cut out from a lifestyle if you want to retire now to quit with the income that you can afford, verse maybe it makes sense to wait a couple more years and to wait a few more years so that your income in retirement will grow.

And there’s just that fine balance between trying to figure out time in retirement verse lifestyle in retirement and trying to find that balance.

So as a review, I wanted to go into the insights of the things that will likely change the most with your expenses in retirement, which are going to be the Healthcare, housing, hobbies, and taxes.

And then also just determining what type of framework you want to have to help build out that budget in retirement to really give an idea of what those expenses will be for you and that’s where you either start with your income and they determine what budget you need to have to support that will support that income or you start with your budget first and determine what type of income you will need to have to support that lifestyle.

Question and Answer

So thank you very much for watching this and going over it. And I’m just going to ask Daniel if there are any questions to have right now.

Daniel Ruske: Yeah, so I got a couple questions.

Alex Call: And also you can always just call in or send me an email as well if you have any questions.

Daniel Ruske: Can you hear me okay Alex?

Alex Call: Yeah Daniel, what was the question?

Daniel Ruske: Okay, maybe I don’t think you’re hearing me very clear. I’m going to put it in the chat and you can read it and then maybe answer it.

Alex Call: Sorry, Daniel. Sorry, sorry, I didn’t quite hear that.

Daniel Ruske: Okay Alex, let’s try again. If you can hear me, if not, it’s in the chat. But I think the audience can hear us. Just a second everybody, thanks.

Alex Call: Okay, thank you for your patience there as we got this, I have one question that talked about determining what retirement income might be and what was the recommendation.

So when it comes to determining what your retirement income is, if you’re familiar with the Perennial Income Model™ which is what we use to help people determine what type of income they have, that’s where we organize all of the different, we call it mailbox money that people have. The mailbox money meaning what’s the income that’s coming to you in retirement that’s going to come regardless of your investments.

So think of Pensions, rental properties, Social Security, and any other thing like that. And we take we add up all of those and then also look at your investments and then segment out your investments to help provide income for you in retirement.

And if that’s something that if you’re interested in, we’d be more than happy to set up a time and to build one of those out for you.

Another question, do you have any estimate of a range or average for medical expenses outside of Medicare premiums?

Yeah, so when it comes to outside of Medicare premiums, there will be certain deductibles that people have. And those deductibles range about probably about $3,000-$5,000 a year on the Medicare deductibles that people may have and also co-pays and things like that for doctor visits.

But some of that will also help determine whether or not you have a supplement plan. If you have a supplement plan those deductibles will likely decrease but it will be a higher monthly premium similar to what your insurance would be like today. Where if you have a higher premium, you’ll have a lower deductible.

So, I think that’s all the questions that we had, and so we’ll go ahead and oh, so does Medicare or the Medicare supplement cover vision or dental?

So how it works, you’ll have the Medicare supplement that likely does cover vision or dental depending on the one that you enroll in. You also have a Medicare Advantage plan that you can get, in where bundles that Medicare that is less expensive that would help with vision and dental that you could look into.

So Medicare itself does not but the supplemental plans, or the advantage plans could cover vision and dental.

And then I think this is a great question to end off of, is what is a comfortable retirement income to work toward? And that is it totally depends.

We have some people that say they want $20,000 a month and that’s a comfortable retirement income and other people that say they want $2,500 a month and that’s a comfortable retirement income. And so it’s very dependent on what you want and that’s the purpose of this webinar is to help you get an idea of what those expenses would be in retirement.

So, thank you again very much for coming out and please take that survey to let us know your thoughts. Bye.